Inside the Market’s roundup of some of today’s key analyst actions
The fallout from COVID-19 is likely to have a “severe” impact on Bombardier Inc.'s (BBD.B-T) operational results, said Desjardins Securities analyst Benoit Poirier, who expects it to push potential divestitures forward.
Accordingly, awaiting better visibility on the pandemic’s impact on its refinancing strategy, he lowered his rating for Bombardier shares to “hold” from “buy,” and calling it “an unfortunate and painful reminder of the adverse impact of a leveraged balance sheet.”
“While we see long-term value assuming that BBD is able to proceed with all three divestitures, we believe risk related to closing the transactions and refinancing risks are too high in the short term,” he said.
In the near term, Mr. Poirier thinks the Montreal-based company’s top priority should be cash preservation. He’s now projecting free cash flow generation of negative US$682-million in 2020, down from negative US$83-million previously and below the consensus on the Street of negative US$456-million.
He called Bombardier's financial situation "fragile," seeing a deterioration in credit conditions making it difficult to refinance debt in the short term. He said its financial commitments "appeared unsustainable in the long term and a debt restructuring might be necessary in the next 12 months."
“Assuming no divestiture of BT but including successful divestiture of the CRJ program and aerostructures businesses, we forecast leverage peaking at 9.3 times in 2020 before decreasing to 5.0 times in in 2022, which will negatively impact BBD’s ability to renew upcoming debt maturities,” he said. “Assuming the high end of the range for pro forma net debt of US$2.3–2.8-billion following the sale of BT and US$700-million of total FCF usage in 2020 (neutral in 2021), we now derive net debt of US$3.1-billion (up from US$2.5-billion previously) at the end of 2021 (net of US$500-million of RVG payments).”
“Our current forecast assumes EBITDA of US$626-million for BA in 2020 and US$880-million in 2021 (net of corporate costs), although this does not consider potential upward adjustments of up to US$440-million dependent on BT’s future performance. As a result, we expect BA to end 2021 with net debt/EBITDA of 3.5 times, which is still elevated, in our view. For 2022, while it is still early, our current forecast assumes FCF of US$100-million and EBITDA of US$999-million (net of corporate costs), resulting in a net debt/EBITDA of 3.0 times. Our scenario analysis confirms our view that BBD’s is in a precarious financial position even if all divestitures are successfully completed.”
After reducing his estimates to reflect the impact of COVID-19, Mr. Poirier dropped his target for Bombardier shares to $1 from $2.75. The average on the Street is 77 cents.
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Even though Pason Systems Inc.'s (PSI-T) first-quarter financial results met his expectations, Industrial Alliance Securities analyst Elias Foscolos downgraded its stock on Monday, citing both lower expectations for U.S. and International drilling and a reduction in his operating margins projection to “more appropriately reflect our expectations for PSI’s cost structure.”
In response to Canadian land rig counts falling beyond 2016 lows in April to an average of 32, the firm decreased its second-quarter forecast to 43 from 50. It's projecting a steeper drop south of the border to the mid-300s from 4000 previously.
With that view, Mr. Foscolos sees the Calgary-based company’s reduction to its quarterly dividend (of 74 per cent to 5 cents from 19 cents) and 2020 capital expenditures (to $10-million from $25-million) as “prudent” measures that should “better ensure survivability.”
However, he warned "it could be a long road."
“These actions reflect medium-term expectations for free cash flow (FCF). On the call, the Company indicated that it will likely run FCF-negative in the near term, and intends to fund shortfalls with the balance sheet,” he said. "PSI also believes that the bottom of the drilling market will not occur until Q4/20.
"In 2015/2016, PSI was able to optimize its cost structure. As such, there isn’t as much that can be rationalized this time around while still maintaining scale for medium-term expectations, and we will most likely see increased operating leverage through the current downturn."
With the drilling assumption reduction and adjustments to his margin forecast "to assume greater operating leverage," Mr. Foscolos lowered his operating income before depreciation and amortization projections for 2020 and 2021 by 45 per cent and 53 per cent, respectively. That led to a drop in his operating income to negative $2-million and negative $7-million.
Based on those changes, he dropped his target for Pason shares to $7 from $8.50, prompting him to drop the stock to “hold” from “speculative buy.” The average on the Street is $8.42.
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Expecting “strong” free cash flow generation, Raymond James analyst Brian MacArthur raised his rating for Centerra Gold Inc. (CG-T) to “outperform” from “market perform” in the wake of the release of first-quarter result that met his forecast.
“Centerra operates 3 cornerstone assets — Mt Milligan, Kumtor, and Öksüt — which offer investors exposure to gold and copper, while generating solid CF. CG also has a flexible balance sheet. In addition, the company owns 3 molybdenum assets, which offer optionality on molybdenum prices and may be sold to surface value.”
Mr. MacArthur increased his target to $16 from $14.50. The average on the Street is $14.34 .
Elsewhere, Scotia Capital analyst Trevor Turnbull raised Centerra to “sector outperform” from “sector perform” with a $16 target.
“We are upgrading Centerra to Sector Outperform given its demonstrated free cash flow and the further inflection anticipated by the addition of Öksüt,” said Mr. Turnbull. “The company generated $77 million in free cash flow during the period and we forecast approximately $180 million this year. Centerra also declared its second $0.04 quarterly dividend this year.”
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Goeasy Ltd. (GSY-T) “should provide significant potential upside in an economic recovery,” said Desjardins Securities analyst Gary Ho.
He thinks the Mississauga-based consumer lending company is likely to report "decent" first-quarter results on Wednesday after the bell, expecting "strong" January and February loan growth to be offset by "tighter credit underwriting/higher credit floors intentionally implemented by management in March."
Mr. Ho is projecting earnings per share of $1.53, which exceeds the consensus projection on the Street by 7 cents.
He’s also expect management to update its three-year outlook to address the impact of COVID-19, noting: “Looking out, we have: (1) increased our net charge-offs by 200 basis points (versus 4Q19) to peak at 15.3 per cent in 3Q20. We note that during the oil crash in 2015/16, net charge-offs increased by 250 basis points for GSY’s Alberta portfolio. We are also comforted by its loan protection insurance program covering roughly two-thirds of clients (insurance makes six monthly payments in the event of unemployment); (2) reduced loan origination expectations leading to a loan portfolio of $1.2-billion by 2020 and $1.3-billion by 2021. As a result, our revenue growth forecast has been reduced to 7.6 per cent in 2020; and (3) due to lower originations, GSY has sufficient capital to fund growth out to the end of 2021 (vs mid-2021 previously).”
Mr. Ho lowered his 2020 and 2021 EPS projections to $4.75 and $6.69, respectively, from $6.81 and $8.34.
Keeping a “buy” rating, he slashed his target to $54 from $85. The average is $63.17.
“Our investment thesis is predicated on: (1) GSY’s loan protection insurance program provides a safety net for clients to weather this pandemic storm over the near term, covering two-thirds of customers; (2) solid management team able to maneuver through short-term industry challenges and take advantage of opportunities; and (3) with scale, the business could generate a mid-20-per-cent ROE [return on equity],” he said.
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Restaurant Brands International Inc. (QSR-N, QSR-T) is likely to see “a choppier path on the road to recovery” in the near term, said RBC Dominion Securities analyst Christopher Carril following Friday’s release of “mixed” first-quarter results.
“QSR reported current comp sales for Tim Hortons down in the high 30-per-cent range; Burger King down in the teens percentage range; and Popeyes returning to pre-COVID levels,” the analyst said. "However, impact from store closures is excluded from these most recent trends. As is the case with other brands/companies, many of QSR’s current store closures are outside of North America, including: APAC 20-per-cent closed (10-per-cent of global consolidated store footprint); EMEA 60-per-cent closed (20 per cent of stores); and LA&C 50-per-cent closed (10 per cent of stores). At the brand level, BK makes up the vast majority of the store base outside of NA (w/ nearly 60 per cent of the brand’s footprint outside NA), so trends for BK global are impacted more versus what is noted above.
"Looking ahead, we expect a longer recovery for Tims given its morning daypart exposure, balanced by improvement in BK (likely value-driven) and Popeyes (which we think plays well to increasing mix across fast food toward dinner business and shareable items/orders)."
Mr. Carril lowered his 2020 and 2021 earnings per share projection to US$1.99 and US$2.72, respectively from US$2.06 and US$2.86.
"A drag on 1Q profitability was an advertising fund revenue and expense timing mismatch, which should reverse at some point and could potentially provide a meaningful tailwind to profits," he said. "Organic adjusted EBITDA for 1Q declined 10 per cent —driven in large part by TH sales declines, creating further deleverage associated with the brand's supply chain business — with the drag from the ad fund mismatch 4 per cent. Finally, while free cash flow was down 20 per cent year-over-year in the 1Q, QSR's cash on hand is $3-billion and the company continues to pay a dividend (declared [Friday] morning)."
Keeping an “outperform” rating, he trimmed his target to US$57 from US$58. The average on the Street is US$62.85.
“Despite above average global system sales growth and accelerating comp growth at Burger King and Popeyes, QSR’s valuation remains in line with the global ‘all-franchised’ restaurant peer group average, driven in large part by continued weakness at Tim Hortons (responsible for 50 per cent of total op. profit),” said Mr. Carril. “While TH sales improvement remains the primary catalyst for QSR shares, we see the combination of near best-in-class unit growth (5 per cent plus), current momentum at BK/PLK, significant scale and potential to add brands in the future as key positives for a stock that remains attractively valued, in our view.”
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Toromont Industries Ltd.'s (TIH-T) first-quarter results gave “a glimpse of pain to come,” said Canaccord Genuity analyst Yuri Lynk.
On April 30, the Toronto-based heavy equipment deal reported adjusted earnings per share of 42 cents, down 4 per cent year-over-year and below the projections of both Mr. Lynk and the Street (46 cents and 49 cents, respectively). Revenue rose 2 per cent year-over-year to $715-million, exceeding the analyst’s forecast ($695-million) but below the consensus ($732-million).
"In our preview, we discussed the risk that reduced activity on construction and mine sites could hurt the quarter and that is what happened," said Mr. Lynk. "Through February, product support and rental revenues were trending 5 per cent year-over-year and 7 per cent year-over-year higher, respectively, before contractions in March largely offset this growth. While Toromont's businesses have been deemed essential services, management noted the company was not immune to the economic impact of the COVID-19 pandemic."
“We are taking our Q2/2020 EPS estimate to 26 cents from 79 cents. Management noted industry sales were down 30 per cent in March, which was really only impacted in the back half of the month by COVID-19 induced shutdowns. This trend continued into April. However, in the last week, management has seen some improvements in rental bookings, technician demand, and machine hours logged from certain customers; this is not a widespread trend.”
However, Mr. Lynk said Toromont ended the quarter in a “very strong” financial position, noting its net debt-to-total capitalization ratio stands is 18 per cent.
Maintaining a "buy" rating, he raised his target to $71 from $66. The average is $71.29.
“While the COVID-19 pandemic is likely to result in a dramatic contraction in business this quarter, Toromont is well positioned to endure and thrive when demand returns,” he said. “This is a company with a demonstrated track record of generating ROIC [return on invested capital] of more than 20 per cent while posting class-leading EPS/DPS growth,” he said. “Toromont benefits from a large installed base of equipment (essentially, its addressable market), is a leader in telematics and connected machines, and should be a direct beneficiary of any infrastructure-laden stimulus that may be forthcoming.”
Meanwhile, Scotia Capital's Michael Doumet increased his target to $63 from $61 with a "sector perform" rating (unchanged).
"In this market, investors are (naturally) paying for companies whose earnings could recover quickly post-COVID," said Mr. Doumet. "Toromont falls in that category, in our opinion: we believe the long-term fundamentals in Ontario and Quebec and the reopening experience will show that construction can recover reasonably fast. That said, we anticipate buying opportunities (at lower levels) as we expect strong earnings headwinds in upcoming quarters and lingering margin pressure (from pricing and lower rental absorption) for several quarters beyond that."
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In a research report titled “Rethinking Retail REITs Over The Course of COVID-19,” BMO Nesbitt Burns analys Jenny Ma lowered a series of stocks to “market perform” ratings from “outperform” previously, pointing to three factors: “comparatively lower visibility of cash flow; 2) higher exposure to small businesses; and, 3) higher exposure to challenged tenants and enclosed malls.”
Her moves were:
- SmartCentres Real Estate Investment Trust (SRU.UN-T) with a $23 target, down from $29. The average on the Street is $27.78.
- RioCan Real Estate Investment Trust (REI.UN-T) with an $18.50 target, sliding from $24. Average: $22.78.
- First Capital Real Estate Investment Trust (FCR.UN-T) with a $15.50 target, falling from $20. Average: $19.06.
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In other analyst actions:
* TD Securities analyst Tim James lowered CAE Inc. (CAE-T) to “hold” from “buy” with a $23 target. The average on the Street is $26.20.
* Scotia Capital’s Orest Wowkodaw raised his target for Cameco Corp. (CCO-T) to $16.50 from $15 with a “sector outperform” rating. The average on the Street is $14.08.
"We believe the fundamental outlook for the uranium market has significantly improved on the back of renewed supplier discipline efforts by CCO and others," he said. "We are reiterating our Sector Outperform rating on CCO shares based on upward uranium price momentum, the company's well-positioned balance sheet, and the defensive nature of uranium as a commodity during the current COVID-19 pandemic. We note that CCO is the best-performing large cap Canadian 'energy' equity on a year-to-date basis."
* Mr. Wowkodaw also raised his target price for Uranium Participation Corp. (U-T) to $6.25 from $5 with a “sector outperform” rating. The average is $5.51.
“We rate UPC shares Sector Outperform based on valuation and our expectation of higher uranium spot prices ahead. With the uranium market now in substantial deficit and Cameco required to purchase significant quantities of spot material, we anticipate upward pressure on U3O8 prices over the next 12-24 months,” he said.