Inside the Market’s roundup of some of today’s key analyst actions
Expecting economic growth to continue and the trade uncertainty between Canada and the United States to subside in 2019 and 2020, Industrial Alliance Securities analyst Nav Malik predicts a positive outlook for the freight industry with demand and pricing remaining firm.
Also seeing the trucking industry as fragment, Mr. Malik sees the potential for acquisitions, leading him to initiate coverage of TFI International Inc. (TFII-T) with a “strong buy” rating and Titanium Transportation Group Inc. (TTR-X) with a “buy” rating in a research report released Monday.
"Positive industry trends have led to above-average growth in freight volumes and rates," said Mr. Malik. "Freight volumes have been rising by approximately 5-7 per cent year-over-year since the end of 2016. Solid economic growth, an increased share of the overall freight market, and rising e-commerce activity have driven the growth in for-hire trucking volumes over the past few years.
"Limited trucking capacity has provided carriers with pricing power. Freight rates have increased by approximately 11-16 per cent in just the last two years, more than offsetting rising labour and equipment costs for carriers. Driver shortages and more stringent monitoring of hours of service (HOS) regulations have limited capacity, putting upward pressure on rates."
Calling it a “favourable” industry backdrop, Mr. Malik set a target price of $60 for shares of Montreal-based TFI International. The average target on the Street is currently $53.11, according to Bloomberg data.
"TFII is a large, diversified transportation company with multiple opportunities for growth," he said. "TFII has been the most active consolidator in the Canadian trucking industry, which we believe will continue going forward. In addition, TFII's focus on improving operational efficiency, particularly in its U.S. truckload (TL) segment, has led to impressive results in 2018 year-to-date (operating income up 77 per cent year-to-date, EBITDA up 32 per cent). We are forecasting continued growth going forward (2019 estimated operating income growth of 21 per cent)."
Mr. Malik gave Titanium Transportation, based in Bolton, Ont., a $2.50 target, versus the average of $3.
“TTR is a small cap company that offers compelling growth potential,” he said. “Founded in 2002 as a logistics broker, TTR has subsequently grown into a major trucking and logistics provider serving eastern Canada and the northeastern U.S.. Following two challenging years, financial performance in 2018 has been very strong (operating income up 474 per cent, EBITDA up 86 per cent) and we are forecasting continued growth going forward (2019 estimated operating income growth of 20 per cent).”
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BlackBerry Ltd. (BB-N, BB-T)'s US$1.4-billion acquisition of Cylance Inc., a California cybersecurity company, fits “well” with a renewed emphasis on its cybersecurity strategy, according to CIBC World Markets analyst Todd Coupland, who upgraded the stock to “outperformer” from “neutral.”
“Management’s three growth vectors are: securing vehicles with QNX, securing devices for the Enterprise of Things, and managing and securing the end points with its new platform Spark,” said Mr. Coupland. "Cylance will operate as a standalone business and add to Blackberry’s EoT and Spark platform over time. These vectors will play out in the coming years. At the same time, management expects Enterprise Solutions to maximize cash flow as regulated industries add features and functions.
“BlackBerry’s growth profile has improved with the acquisition of Cylance. The near-term growth vector is QNX, as EoT and Spark will take more time to mature. QNX had good momentum in Q2. Its improved visibility was again highlighted for the second half of fiscal 2019. We expect QNX’s design wins in ADAS and the digital cockpit to support double-digit revenue growth into next year.”
Mr. Coupland maintained a target of US$14 for BlackBerry shares, exceeding the average of US$11.24.
“In our view, Blackberry’s share price has pulled back to a level that makes the risk-reward positive, providing significant upside for a trade,” he said.
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Seeing “slower, costlier” growth ahead for Premium Brands Holdings Corp. (PBH-T), CIBC World Markets analyst John Zamparo lowered its stock to “neutral” from “outperformer.”
“Our previous investment thesis on PBH was predicated mainly on two key underpinnings: incredible organic growth and ongoing M&A activity,” he said. "Q3 results revealed much softer organic growth than in recent quarters. Management is confident this is merely a deferral, and we concede this is probably true, but this unpredictability is incrementally negative, and it is worth noting that investments (introductory price concessions) are now required at times in order to drive top line growth.
“On M&A, the company confirmed it still expects to execute tuck-in deals, but 3.6 times net debt/forward EBITDA - combined with an unexpected announcement of a buyback - limits larger scale moves. Moreover, we believe investors may continue to use M&A announcements as selling opportunities.”
Mr. Zamparo dropped his target to $82 from $126, which is below the average of $98.70.
“There are many elements of PBH that are attractive, but ultimately, this is a stock that has underachieved consensus EBITDA estimates for five quarters, with slower revenue growth than we previously believed, facing higher costs of capital with a somewhat overextended balance sheet combined with less investor interest in consumer roll-up stories," he said. "In our view, a move to the sidelines is prudent as similar buying opportunities will be present as investors gain more clarity on margins and organic growth in 2019.”
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Citi analyst J.B. Lowe upgraded his rating for Precision Drilling Corp. (PD-T), believing its risk/reward is currently “skewed to the upside” regardless of the outcome of its bidding war with Ensign Energy Services Inc. (ESI-T) over smaller rival Trinidad Drilling Ltd. (TDG-T)
"PD’s planned acquisition of Trinidad Drilling has also provided an overhang on the shares, but we believe clarity on this issue will be a positive catalyst, in all three scenarios we contemplate (PD raising its offer; TDG shareholders voting for a competing deal with Ensign; or the PD deal going through)," said Mr. Lowe.
Moving Precision Drilling stock to "buy" from "neutral," he also emphasized that rig contractor "discipline [is] reshaping the industry."
"After nearly two years at a Neutral rating, we feel the price is finally right for investors to jump in to PD shares, and we upgrade to Buy," the analyst said. "PD, along with the rest of the N. American land rig industry, has remained remarkably disciplined on adding new supply to the market. Industry dynamics are therefore positive, with rising demand for super spec rigs being met with steady rig upgrades, but importantly, no new rigs being built and added to the supply stack.
"PD has shifted to a focus on FCF [free cash flow] generation and debt repayment, which we believe should reflect positively on the share price as FCF accelerates in 2019 and 2020. We also believe investor concerns over PD’s debt load (46-per-cent net debt-to-cap, 4.8 times net debt-to EBITDA as of 3q 18) should be alleviated in the coming years. PD has guided to debt repayment of $300-500-million over a three –to-four year period (with $140-million repaid over the last four quarters)."
Mr. Lowe raised his target for its stock to $5 from $3.50. The average is $5.91.
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At the same time, Mr. Lowe also raised his rating for Select Energy Services Inc. (WTTR-N) to “buy” from “neutral” with a target of US$15, up from US$14 though below the average on the Street of US$17.35.
“WTTR’s FCF generation ability has been obscured by the 2017 merger with Rockwater, but we expect FCF to meaningfully expand in 2019 and 2020,” he said. “Additionally, concerns over water recycling in the Permian have been overblown and are more than baked into the shares at current levels.”
Mr. Lowe also initiated coverage of Houston-based Nine Energy Services Inc. (NINE-N) with a “buy” rating and US$40 target. The average is $42.
“NINE is poised to benefit from an upswing in completions activity as E&P’s refresh budgets early next year,” he said. “We prefer NINE’s relatively less capital-intensive business lines than pressure pumping or sand, which should enable it to generate higher through-cycle margins and ROIC [return on invested capital] than peers.”
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“It’s time to buy” IPL Plastics Inc. (IPLP-T), according to BMO Nesbitt Burns analyst Mark Wilde, who said he would be an “aggressive buyer at current levels” and upgraded his rating to “outperform” from “market perform.”
“A bottom-of-the sector valuation, solid growth trajectory and an easing in resin costs have created a very attractive combination in IPL Plastics,” said Mr. Wilde.
He maintained a $13 target. The average target on the Street is now $14.83.
“IPL is currently trading at 6.0 times on 2019 EV/EBITDA - 1.5-4.0 times below most other packagers,” said Mr. Wilde. “We think this situation is unlikely to persist, especially given IPL’s above-average growth profile and benefit from an easing in resin costs.”
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Kinross Gold Corp. (K-T, KGC-N) is “fundamentally undervalued relative to its peers,” according to Beacon Securities analyst Jacob Willoughby, who initiated coverage of its stock with a “buy” rating.
"Kinross is an extremely well-managed middle tier gold producer with steady-state production of roughly 2.5 million ounce of gold equivalent at cash costs of approximately $730 per ounce and now has a 25 year operating history," he said. "It has also met or exceeded its own guidance for 6 consecutive years, which is a testament to its strong management. Its financial strength is as good as it has ever been with over $2.0 -billion of liquidity, no debt maturing before 2021, and a net debt to EBITDA ratio of 1.2 times. It has repaid over $1.0-billion of debt over the past 6 years and should have over $1 billion in cash by year end. Kinross could conceivably have the wherewithal to be debt free in five years. Roughly three quarters of the company’s production comes from large, long-life mines that Kinross owns 100 per cent of. Kinross has several low-risk brownfield development projects at or near existing operations that will allow it to maintain its production levels for 5 to possibly 10 years from now.
"Nearly every major peer has a higher EV/EBITDA multiple, which we believe is not sustainable and presents a buying opportunity for investors at this time."
Mr. Willoughby set a target price for Kinross shares of $6.50. The average is $5.25.
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Raymond James analyst Farooq Hamed raised his target price for shares of Ero Copper Corp. (ERO-T) following a recent tour of the Vancouver-based company’s MCSA Complex in Brazil.
“We came away with the view that the current drill program and recent discoveries (Pilar West Limb and Vermelhos East) should translate to significant reserve/resource growth and an extended mine life in the near-term while results from the airborne survey completed in August could provide the foundation for continued growth in reserves and resources for the coming years,” he said. “Further with available mill capacity, we believe ERO has a low capex runway to further production growth through increased mining rates as it continues to develop at its existing sites.”
Expecting its 2019 exploration program to exceed 2018 results based on "multiple paths to growth," Mr. Hamed hiked his target to $14 from $12, which exceeds the consensus of $13.79.
He maintained an "outperform" rating for the stock.
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In other analyst actions:
Bank of America Merrill Lynch upgraded the recommendation on Cameco Corp. (CCO-T, CCJ-N) to “buy” from “underperform” with a target of $20, jumping from $10.50. The average on the Street is $17.85.
Scotia Capital analyst Orest Wowkodaw downgraded Titan Mining Corp. (TI-T) to “sector perform” from “sector outperform” with a target of $1.40, down from $1.50. The average is $1.73.
BMO Nesbitt Burns analyst Troy Maclean downgraded Agellan Commercial Real Estate Investment Trust (ACR-UN-T) to “market perform” from “outperform” and lowered his target to $14.25 from $14.75. The average is $14.40.
Bank of America Merrill Lynch downgraded Pan American Silver Corp. (PAAS-T) to “underperform” from “neutral” with a $13 target (unchanged), which falls beneath the average of $17.36.
Scotia Capital analyst Trevor Turnbull downgraded Guyana Goldfields Inc. (GUY-T) to “sector underperform” from “sector perform” and lowered his target to $1 from $3. The average is $3.01.