Inside the Market’s roundup of some of today’s key analyst actions
Pointing to a “macro maelstrom” resulting in a “rapid deterioration” in the global methanol outlook, Raymond James analyst Steve Hansen lowered his rating for Methanex Corp. (MEOH-Q, MX-T) to “market perform” from “outperform” on Monday.
“After a healthy winter rally induced by a string of global outages, spot methanol prices have more recently been sideswiped by the combined impact of oil’s precipitous collapse (price war) and the evolving COVID-19 pandemic,” said Mr. Hansen. “For context, global spot prices hae retraced 25 per cent over the past 5 weeks, with China dipping below the US$200/mt threshold (to US$180/mt) for the first time since Dec. 2008. Global contract values have similarly followed, including a large step-down last week across all three regions.”
In a research note released before the bell, Mr. Hansen analyzed several pricing/capex scenarios in attempt to grasp how Methanex will fare given the current pricing environment.
“Net take: given the pressures foreseen, we expect the company will take additional defensive action to protect its balance sheet, including the temporary shelving of its G3 construction process,” he said. “While not ‘essential’, such a move would allow the company to comfortably weather the impending storm.”
Mr. Hansen lowered his 2020 earnings per share projection for Methanex to a loss of US$1.14 from a profit of US$1.27 previously. His 2021 slid to a 76 US cent loss from a US$2.30 gain.
He also dropped his target for its shares to US$22 from US$48. The average on the Street is US$24.62, according to Thomson Reuters Eikon data.
“Like most equities, Methanex shares have reacted violently (downward) to the recent macro maelstrom, leaving its valuation perched near cycle lows — an attribute that likely appeals to long-term, value-orientated (& strategic) investors,” said Mr. Hansen. “While our own value-bias is strongly piqued, our near-term concern over oil’s prospects keeps us tactically cautious, hence our decision to downgrade until visibility improves.”
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Industrial Alliance Securities analyst Brad Sturges lowered his rating for Cominar Real Estate Investment Trust (CUF.UN-T) after it withdrew its 2020 guidance on Friday after the bell due to “the growing economic and operating impact of the COVID-19 pandemic.”
Citing the negative near-term impact on the Quebec City-based REIT’s same property net operating income (SP-NOI) outlook, “particularly as it relates to the REIT’s shopping centre properties due to the ownership of enclosed malls that have greater proportion of discretionary retail tenants,” Mr. Struges moved Cominar to “hold” from “buy" on Monday before the bell.
"Like many Canadian landlords, Cominar has received inbound rent deferral requests to start in April from various tenants," he said. "Cominar notes that it expects COVID-19 to have a greater negative impact on its retail shopping centre portfolio (35 per cent of the REIT’s Q4/19 SP-NOI). To offset this impact, Cominar has reduced its construction workforce, and is reviewing other cost deferrals and/or reductions such as tax, energy, maintenance, and staffing."
“Cominar’s previous 2020 organic growth forecast was up 2 per cent to 3 per cent year-over-year (YoY), which assumed further strength YoY in its industrial and office segments, combined with relatively stable contribution from its retail shopping centres YoY. Although the global healthcare crisis continues to rapidly evolve and the potential near-term and longer-term impacts remain unclear, we have initially reduced our 2020 SP-NOI growth expectations to 0 per cent to up 1 per cent YoY, as higher in-place rents psf YoY are now forecasted to be partly offset by lower average physical occupancy rates YoY.”
Mr. Sturges lowered his target for Cominar units to $12.25 from $16.50. The average on the Street is $15.28.
“The COVID-19 virus pandemic could have a negative near-term impact on Cominar’s SP-NOI outlook, particularly as it relates to the REIT’s enclosed shopping centres,” he said. “However, on a medium-term basis, we believe that Cominar could still benefit from its urban exposure, future rent growth in its Montreal and Quebec City industrial facility portfolio, and by unlocking further value at the REIT’s trophy asset in downtown Montreal, Gare Centrale.”
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In a separate research note, Mr. Sturges trimmed his target for units of Nexus Real Estate Investment Trust (NXR.UN-X) after announcing last week it has entered into lease agreements with two new tenants for 60,000 square feet of space previously occupied by an industrial tenant at its Richmond, B.C. property.
“In total, Nexus’ sports mall redevelopment project in Richmond, BC, could generate NAV [net asset value] accretion of 25 cents per unit in the next couple of years, when including the REIT’s new expansion plans,” he said. “Nexus is well positioned to withstand any negative near-term COVID-19 virus impact due to its below-average financial leverage and 2020 estimated FD AFFO [fully diluted funds from operations] payout ratios versus its small capitalization commercial REIT peers.”
Keeping a “strong buy” rating, he lowered his target to $2.30 from $2.50. The average is $2.37.
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BMO Nesbitt Burns analyst Ben Pham raised his rating for a group of TSX-listed utility stocks on Monday, emphasizing their assets are an essential service and provide “resiliency to the COVID-19 pandemic.”
His moves were:
* Emera Inc. (EMA-T) to “outperform” from “market perform” with a target of $59, down from $61. Average: $62.42.
“We are upgrading Emera ... and designate it as a Top Idea as we shift our relative investment preference to utilities over pipelines within Canadian Energy Infrastructure,” he said.
“In particular, we flag: (i) 95-per-cent-plus regulated utility assets that are essential service, providing resiliency to the COVID-19 pandemic; (ii) the attractive 8-per-cent rate base CAGR that supports 4-5-per-cent dividend growth; and (iii) the company’s strong liquidity position, recently bolstered by the Maine utility sale.”
* Fortis Inc. (FTS-T) to “outperform” from “market perform” with a $55 target, sliding from $57. Average: $58.24.
“·We are upgrading Fortis ... and designate it as a Top 3 Best Idea,” he said
* Hydro One Ltd. (H-T) to “outperform” from “market perform” with a $27 target, down from $29. The average on the Street is $27.54.
* Atco Ltd. (ACO-X-T) to “outperform” from “market perform” with a $45 target, down from $52. Average: $49.
“·ATCO shares have underperformed utility peers given its high Alberta exposure,” he said. “We believe the market has overreacted as its Alberta utility segments have proven to be highly resilient from past downturns and the company has fully shed its Alberta power and frac spread exposure.”
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Following the release of in-line fourth-quarter results and “encouraging” outlook, Desjardins Securities analyst Frederic Tremblay raised his rating for Lassonde Industries Inc. (LAS.A-T), emphasizing its “resilient model and compelling valuation.”
"Management has seen an increase in demand for its products in the retail channel as consumers stock up amid COVID-19 concerns," said Mr. Tremblay. "We see a high likelihood that the opposite trend will materialize in the foodservice channel but note that Lassonde’s sales mix (87-per-cent retail, 13-per-cent foodservice) implies a positive net impact on volume in the near term."
"Even after consumer spending habits normalize (ie the stock-up mentality ends), we view food and beverage as an attractive category during economic downturns. Lassonde is a leading player in fruit juices and specialty foods which has proven its status as a recession-resilient play in the past."
With “positive volume growth outlook and benefits from past selling price increases,” Mr. Tremblay also sees Lassonde’s cost environment becoming environment, which he thinks will help its U.S. business “turn the corner in 2020 in a competitive market.”
Moving the Rougemont, Que.-based company to “buy” from hold," he maintained a $180 target. The average is currently $167.50.
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A series of firms initiated coverage of GFL Environmental Inc. (GFL-N, GFL-T) on Monday after coming off research restriction following its initial public offering.
The Vaughan, Ont.-based waste-management company made its debut on the Toronto Stock Exchange and the New York Stock Exchange on March 3.
- Scotia Capital gave it a “sector outperform” rating and US$23 target.
- RBC Dominion Securities pegged it an “outperform” and US$19 target.
- JP Morgan started with an “overweight” rating and US$19 target.
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Though he “significantly” cut his 2020 forecast in response to the impact of the spread of COVID-19, Industrial Alliance Securities analyst Neil Linsdell raised his rating for DIRTT Environmental Solutions Ltd. (DRT-T/DRTT-Q) due to its “rapid” share price decline.
"DIRTT generally delivers on projects within weeks of an order being finalized, and typically does not manage any appreciable backlog," he said. "So, as we have watched the slowdowns and shutdowns grow in Canada through March, and have more recently started to see shutdowns in parts of the U.S., we expect Q1 results to be only slightly lower than our previous estimates. However, we have a hard time imagining a lot of new orders coming in through at least the beginning of Q2. On the expense side, approximately 80 per cent of COGS is variable, and we expect DIRTT to be aggressive in managing that aspect, plus we expect a similar drop off in SG&A expenses such as travel and entertaining for the immediate future."
“While the severity and extent of this global pandemic is still uncertain, we can imagine that when we finally pass through it, we will likely see an increased focus on preparedness in the healthcare industry, which might further favour DIRTT’s solutions, specifically in the modular concept and the ability to quickly re-task space. Additionally, we could see a lot of other companies re-evaluating the high-density, open-concept work environment, and re-visiting flexible solutions such as DIRTT’s.”
Mr. Linsdell slashed his 2020 earnings per share projection to a 36-cent loss from a 6-cent loss previously. Pointing to the need to be "cautious" moving forward, he lowered his 2021 and 2022 projections to losses of 7 cents and 3 cents, respectively, from a 5-cent loss and nill.
At the same time, he raised his rating to “hold” from “sell” with a target price of $1.40, down from $2. The average is $2.98.
“The selloff has brought the share price down to our revised target, and as such, we are upgrading to Hold (from Sell),” said Mr. Linsdell. “We remind investors though that 2020 will likely be a very difficult year for DIRTT. In addition to the challenges that first led us to downgrade our rating to Sell in September 2019 (with the stock now down 80 per cent from that point), a challenging 2020 will mean that each quarterly financial release will highlight just how far business has fallen. As we have highlighted ... there will be opportunities in the year(s) ahead. For now, we still consider this a ‘show me’ story.”
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Scotia Capital analyst Scott Macdonald lowered his rating for a pair of miners on Monday as COVID-19 “wreaks havoc on the diamond industry.”
He cut Mountain Province Diamonds Inc. (MPVD-T) to “sector underperform” from “sector perform” with a 15-cent target, down from $1.75. The average is $1.92.
Mr. Macdonald also lowered Lucara Diamond Corp. (LUC-T) to “sector perform” from “sector outperform” with a 50-cent target, falling from $1.25 and below the $1.49 average.
“Government-mandated lockdowns and travel restrictions in virtually all of the diamond industry’s key downstream and midstream markets have effectively brought the sector’s sales channels to a standstill and companies are struggling to sell their product at a reasonable price,” he said. "Though neither company’s mine-site operations have been disrupted to date, as single-asset companies, the downside risk is considerable.
“We believe LUC is reasonably well-positioned to weather the storm given its clean balance sheet but MPVD is not so fortunate and a painful capital restructuring now looks more likely. ... Overall, we believe the near-term risk-reward profile of the sector has shifted sharply to the downside hence we are moving our ratings down.”
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With COVID-19 having weighed on its operations, RBC Dominion Securities analyst Wes Golladay lowered both Marriott International Inc. (MAR-Q) and Hilton Worldwide Holdings Inc. (HIL-N) to “sector perform” ratings from “outperform" on Monday.
However, Mr. Golladay reaffirmed he remains "longterm bullish" on global travel, expecting tourism to grow faster than GDP growth.
“We are incrementally concerned that some owners will struggle to deal with the sharp decline in lodging demand due to COVID-19,” he said. “The combination of limited credit availability and a record decline in RevPAR growth over at least the near term will likely meaningfully impact hotel owners. There is limited information regarding the financial health of the ownership community, but the lodging REITs provide a glimpse into the financial strain that the industry is facing. We are encouraged by the stimulus bill, which should help portions of the ownership community. However, depressed profitability and valuation for the existing owners should limit demand for development starts and we would expect some of the existing under-construction projects to be delayed.”
Mr. Golladay dropped his 2020 earnings per share projections for Marriott to 54 US cents from US$1.66. His 2021 estimate fell to US$1.44 from US$1.83.
"We view MAR as one of the top-tier lodging companies but lower our rating to Sector Perform, as limited visibility for RevPAR growth and incremental financial stress for owners will likely lead to less robust signings/net unit growth, which we view as the key long-term driver of MAR’s growth," he said."
"We are also encouraged by MAR’s efforts to reduce program and service charges that are reimbursed by owners (highlighted on MAR’s special call on March 19). However, depressed profitability and valuation for the existing owners should limit demand for development starts, and we would expect some of the existing under-construction projects to be delayed."
His target for Marriott shares slide to US$97 from US$148. The average is US$117.81.
At the same time, Mr. Golladay lowered his 2020 and 2021 EPS estimates for Hilton to 58 US cents and US$1.04, respectively, from US$1.11 and US$1.27.
"We model RevPAR declining 47 per cent in 2020 and rebounding 70 per cent in 2021, which equates to negative 10 per cent versus 2019," he said. "We expect the economy will take time to recover, with certain industries under pressure, and consumer sentiment will likely remain below average over the near-term. However, HLT’s portfolio is skewed toward the limited service segment, which we expect to perform better over the near term. We model net unit growth of 2.6 per cent, 5.4 per cent, and 4.9 per cent in ’20, ’21, and ’22."
His target fell to US$78 from US$105. The average is US$98.14.
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Raymond James analyst Michael Glen slashed his financial forecast for Magna International Inc. (MGA-N, MG-T) and Martinrea International Inc. (MRE-T) in response to shutdowns among North American and European original equipment manufacturers (OEMs) and “some lingering demand destruction” through the second half of the year.
“We believe it is important to stress that while looking at the financial crisis (2008-2009) will provide investors an important gauge regarding what to expect from a sales and margin perspective with the auto parts companies, we would note an important caveat: auto production did not grind close to an absolute halt during the financial crisis as it has now,” he said. “And while we have seen headlines regarding the potential commencement of production incoming weeks, are inclination is to model exceptionally conservative in the short-term, and look for growth to commence more in 2021.”
Based on that view, Mr. Glen is now forecasting a first-quarter sales decline for Magna of 21 per cent with his second, third and fourth quarters falling 50 per cent, 25 per cent and 10 per cent, respectively.
“We have also factored in fairly conservative operating deleverage on the EBIT line, but acknowledge this is going to be extremely difficult to calculate and will be heavily dependent on how quickly the company adjusts its cost structure to adapt to lower production/closures,” he said
Mr. Glen dropped his 2020 and 2021 earnings per share expectations to US$1.44 and US$4.77, respectively, from US$6.19 and US$7.02.
Keeping a "market perform" rating, he lowered his target to US$36 from US$60. The average on the Street is US$54.24.
“Under our new forecast, which we view as conservative, we see adjusted total debt to EBITDA expanding to 2.2 times at the end of 2020 (net debt/EBITDA = 1.6 times), before reversing trend,” the analyst said. “Importantly, we absolutely see the company with adequate liquidity and access to capital to work through our current forecast. That said, we will continue to closely monitor some definitive start dates for production in both North America and Europe, while also monitoring production levels post.”
For Martinrea, his sales projection for the first quarter slid by 22 per cent with the second though fourth quarters down 49 per cent, 27 per cent and 8.5 per cent, respectively.
With an “outperform” rating, he target dipped to $11 from $16. The average is $13.79.
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National Bank Financial analyst Maxim Sytchev lowered his second and third-quarter financial estimates for the Industrial Products sector to account to COVID-19-related construction slowdowns and exposure to plummeting oil prices.
"While our coverage universe is predominantly driven by government spending, project interruptions are a reality as most localities are enforcing social distancing measures," he said. "As a result, this remains a very fluid situation and we could be further honing the estimates as the situation progresses. Our approach assumes the peak of negative impact in Q2/20 with spillover drag onto Q3/20. Q4/20 numbers are relatively unchanged except for oil-heavy businesses/geographies.
Mr. Sytchev made the following changes:
- Stantec Inc. (STN-T, “outperform”) to $44.50 from $46. Average: $46.20.
- Toromont Industries Ltd. (TIH-T, “outperform”) to $76 from $82. Average: $74.43.
- Finning International Inc. (FTT-T, “outperform”) to $23 from $24. Average: $23.33.
- SNC-Lavalin Group Inc. (SNC-T, “outperform”) to $40.50 from $42. Average: $37.71.
- Aecon Group Inc. (ARE-T, “outperform”) to $22.50 from $24. Average: $25.11.
- North American Energy Partners Inc. (NOA-T, “outperform”) to $16 from $20.50. Average: $22.58.
- AutoCanada Inc. (ACQ-T, “sector perform”) to $6 from $9. Average: $12.51.
“Although we are not downplaying the economic fallout due to social/industrial activities grinding to a halt globally, we also want to remind that our coverage universe falls mostly under the ‘essential businesses’ basket,” said Mr. Sytchev. “Many entities are remaining operational (E&Cs, healthcare manufacturing, steel producers) and are actively engaging government agencies (such as FEMA) and private healthcare providers to combat the virus spread (building/transforming facilities into/upgrading hospitals, providing temporary work camps, etc.). For the projects that do get impacted by the broader shutdown, many contracts also include Force Majeure clauses which provide time and compensation relief; i.e., revenue and EBITDA generation will be negatively impacted from project suspensions, but costs should be recoverable.”
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In other analyst actions:
* Credit Suisse analyst Andrew Kuske lowered Acadian Timber Corp. (ADN-T) to “neutral” from “outperform” with a $15 target, down from $20. The average is $18.
“With unprecedented restrictions across much of North America, near-term demand looks challenged – even in the event of increased stimulus," said Mr. Kuske. "An eventual normalization of economic activity in several quarters (our core view) looks to significantly benefit stocks like Mercer International (MERC) and Norbord ... Given MERC’s China sales exposure, the country’s impact on pulp markets and the return of economic activity, we see the stock as a pro-cyclical play with notable leverage to pulp prices as the market turns. Across much of the sector, there is more proactive market series of capacity curtailments which is positive, but there are near-term risks. Accordingly, we downgrade Acadian Timber.”
* TD Securities analyst Craig Hutchison raised Trilogy Metals Inc. (TMQ-T) to “speculative buy” from “hold” with a target of $3, down from $3.75. The average is $3.90.
* BMO Nesbitt Burns analyst Daniel Salmon upgraded Alphabet Inc. (GOOGL-Q, GOOG-Q) to “outperform” from “market perform” with a US$1,400 target. The average on the Street is US$1,549.62.
"To upgrade one of the most consensus 'high quality' stocks in the market after a historic sell-off should elicit a fair amount of 'yeah, so what?'," said Mr. Salmon. "And GOOGL is only moving slightly, from among our top Market Performs to still-pretty-far-down our Outperform pecking order (DIS, AMZN, NFLX remain on top).
“But we expect our mega-caps to be popular upon rebound, and we think there are important relative fundamental differences that nudge GOOGL into Outperform territory, and thus the focus of this note is relative tactical positioning vs. FB and AMZN.”
* Noble Capital analyst Mark Reichman initiated coverage of Ely Gold Royalties Inc. (ELY-X) with an “outperform” rating and $1 target.
“Ely Gold differentiates itself among junior royalty companies with its royalty generation program,” said Mr. Reichman. "While many of its competitors focus on purchasing royalties on exploration and development stage projects, Ely Gold is developing projects to generate a revenue stream with its property sale portfolio. The company stakes and acquires properties that are sold to third-party mining companies on a 100-per-cent basis typically under four-year option-purchase agreements. Ely Gold retains a royalty interest. The company’s optioned properties will produce royalties if the option to purchase is exercised and the property eventually goes into production. If the mining companies make all the payments and the sale is closed, Ely Gold retains the royalty. If they don’t make the payments, Ely gets the property back. With the receipt of annual option payments under the agreements, capital is available to purchase producing or near-term producing royalties. This approach has enabled Ely Gold to aggressively grow its portfolio with minimal dilution to shareholders. The company is well positioned to generate additional income through option and sale transactions and management has a proven track record of maximizing the value of its properties through claims consolidation using its extensive proprietary database.
David Leeder