Inside the Market’s roundup of some of today’s key analyst actions
Goldcorp Inc. (GG-N, G-T) shareholders are likely to face an “uncertain future” if Newmont Mining Corp. (NEM-N) decides not to pursue its US$10-billion friendly transaction to acquire the Vancouver-based miner, according to RBC Dominion Securities analyst Stephen Walker, emphasizing its management team’s decision to sell the company rather than pursue its turnaround strategy.
In the wake of Barrick Gold Corp.’s (ABX-T, ABX-N) hostile US$17.8-billion takeover bid for Newmont, Mr. Walker lowered his rating for Goldcorp shares to “sector perform” from “outperform” on Tuesday, citing “uncertainty surrounding strategic and operating outlook.”
The downgrade came after Mr. Walker lowered his valuation for Goldcorp on a standalone basis.
“Incorporating the potential NEM break fee ($650-million or 75 cents per share) which would be received should it not complete the proposed takeover of GG, and estimate revisions post year-end reporting, our standalone NAV [net asset value] increases by 7 per cent to $8.64 per share,” he said. “Our 3-year forward average EBITDA estimate decreases by 3 per cent to $2.0-billion ($2.32 per share), while our 3-year average FCF [free cash flow] estimate increases by 31 per cent to $860-million (99 cents per share), as we remove the development of the $1-billion Century project from our base case financial estimates (capex previously assumed over 2020–23). We continue to include the project in our NAV based on our discounted cash flow model. We also delay the start of construction of the $300-million Coffee project by one year to late 2020."
Mr. Walker also lowered his target price for Goldcorp shares to US$13 from US$15. The current analyst average target price on the Street is US$12.38, according to Bloomberg data.
“Our standalone Goldcorp price target … based on a price-to-NAV multiple of 1.3 times (was 1.4 times) and a 3-year forward average enterprise value-to-EBITDA multiple of 7.5 times (was 9.0 times) to reflect a discount related to an uncertain strategic outlook and execution risk after downgrades to 2018 and 2019 guidance, with updated longer-term guidance not yet released,” he said. “Goldcorp’s valuation relative to NA Senior Gold peers supports our revised Sector Perform rating (lowered from Outperform), including implied all-in return to our 12-month price target of 18 per cent, essentially in line with the peer average implied return of 19 per cent.”
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Expecting more than half of its end markets to “peak” in 2019, UBS analyst Steven Fisher downgraded Caterpillar Inc. (CAT-N) by two levels on Tuesday, expecting increase pressure on revenue and margins in 2020 with diminishing demand.
“We believe 55 per cent of CAT’s end markets will peak in 2019, pressuring revenue and margins in 2020 as demand declines,” said Mr. Fisher. “We expect 2020 EPS to decline 8 per cent year-over-year, as continued growth in mining and buybacks will not be enough to offset headwinds in construction and oil & gas, in our view.”
The analyst emphasized concerns with the company’s construction business, which he projects will face an 8-per-cent decline in sales and 100 basis point margin compression in 2020 due to lower demand in North America, China and Europe, the Middle East and Africa (EMEA). The consensus on the Street is currently flat sales and a 30 basis point decline.
Believing “continued growth in mining and buybacks will not be enough to offset headwinds in construction and oil & gas,” Mr. Fisher lowered his earnings estimates for both 2020 and 2021 and stated declines were not priced into the stock. He expects “downward earnings revisions to pressure the stock over the next 12 months.”
Moving the stock to “sell” from “buy,” his target fell to US$125 from US$154. The average is currently US$148.61.
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Raymond James analyst Frederic Bastien said SNC-Lavalin Group Inc. (SNC-T) is writing “a script with Oscar potential,” however he’ll “consider buying the movie rights instead.”
“We believe SNC-Lavalin will struggle to win projects and attract new fundamental investors for as long as its legal troubles persist,” he said.”It doesn't help that the E&C behemoth, once revered for its global leadership and pristine balance sheet, was forced to cut is dividend on Friday because a fractured relationship between Canada and Saudi, execution challenges in Latin America, and a stretched working capital position are hurting its 2019 prospects. With little to inspire us in the short term—not even the sale of a Highway 407 stake as a potential catalyst—we maintain our Market Perform recommendation on the stock. SNC's valuation may well defy logic, but we see nothing changing that until the E&C business can stand on its own two feet.”
Mr. Bastien said there were few surprises in the company’s fourth-quarter financial results, which were released Friday, however increased leverage compelled the Board to cut its dividend.
“Although SNC's net debt position of $1.7-billion as at Dec. 31, 2018 equated to 2.9 times adjusted EBITDA (as per its amended credit terms), further working capital draws have likely pushed these respective metrics closer to $2.0-billion and 3.3 times since,” he said. “This, at least, is what the fine print from the second profit warning leads us to conclude. Throw some political interference and credit agency downgrades in the mix and the result is a reduction in the company's quarterly dividend from almost 29 cents per share to 10 cents per share (for estimated savings of roughly $131-million). Regardless of the position SNC took on this during the 4Q18 call, the cut suggests to us a partial sale of Highway 407 may not be imminent after all.”
He also said it’s “hard to imagine how SNC will ever get invited to negotiate a DPA [deferred prosecution agreement],” adding: “With the well broadcasted claims that the Prime Minister's Office (PMO) exerted pressure last fall on then Attorney General Wilson-Raybould to drop the criminal charges against SNC (after the DPP confirmed it would prosecute the firm), everyone and their mother seem to have an opinion on the subject. It probably matters little to the Conservative and NDP parties that SNC long ago cleaned up its act and embraced a world-class ethics and compliance framework; the scandal lends itself well to campaign-time propaganda.”
Mr. Avalos kept a “market perform” rating for the stock, but his target fell to $43 from $45. The average is $45.08.
“Since we struggle to pin a valuation on SNC's Canadian and Saudi operations, we opted to write them down to zero and only consider the Nuclear and EPDM segments to derive a target of $11.19 for the E&C business (down from $13.39 previously),” he said. “We then add $31.54 for SNC Capital to derive a new target of $43.00 target price for the stock.”
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Though he sees a “slow and steady recovery still underway,” Raymond James analyst Ken Avalos lowered his target price for shares of Boardwalk Real Estate Investment Trust (BEI.UN-T) following fourth-quarter results that fell short of expectations on the Street and weaker-than-anticipated guidance.
On Feb. 21, the Calgary-based REIT’s funds from operations for the quarter of 54 cents met Mr. Avalos’s projection but fell 4 cents shy of the consensus. The analyst pointed to a lower net operating margin of 50.8 per cent, down 0.6 per cent year-over-year, as the main reason for the miss.
With the results, Boardwalk released 2019 guidance that Mr. Avalos called “achievable,” however he noted it “tempers expectations.”
Same property NOI is expecting to be in the range of a 4-9-per-cent increase with adjusted FFO between $1.88-$2.03. That led the Street to lower the consensus FFO per unit projection by 6 cents to $2.43, while Mr. Avalos’s estimate remains 2 cents higher.
“All of these fall in-line with our own expectations for how 2019 will play out and should be achievable barring any setback in the Alberta economy,” the analyst said.
Keeping an “outperform” rating for Boardwalk units, his target dropped to $48 from $52. The average is currently $48.79.
“The recovery in the Alberta economy remains underway, though lumpy,” he said. “Investors should not expect a linear recovery in cash flow but the directional trend is positive and likely to stay so for the near to intermediate term. With units trading at a sizable discount to private market value, replacement cost, peers and our NAV, and a sizable short position still in place, we like the entry point for patient investors.”
Elsewhere, Desjardins Securities’ Michael Markidis said he’s “tempering” his outlook through 2020, leading him to lower his target to $46 from $49 with a “hold” rating.
Mr. Markidis said: “Generally speaking, the revenue recovery is tracking in line with our expectations; however, we continue to have concerns with respect to the operating expense inflation which BEI is experiencing.”
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Target Corp.’s (TGT-N) management is “saying and doing the right things to stay relevant to the consumer” and pick up market share in a struggling retail sector, said Citi analyst Paul Lejuez upon assuming coverage of the stock.
“But staying relevant comes at a price that we believe is likely to continue to weigh on margins for the foreseeable future,” he said. “We believe the risk/reward is balanced at current levels.”
Mr. Lejuez has a US$78 for Target shares, which sits below the consensus of US$81.05.
“We assume comps +2-3 per cent and EBIT margins approximately flat over the next 5-years,” the analyst said. “While we expect the company to maintain comp momentum, we do not expect trends to be as strong as F18. We also expect continued investments to keep the company from achieving much EBIT margin improvement.”
At the same time, Mr. Lejuez assumed coverage of Children’s Place Inc. (PLCE-Q) with a “neutral” rating, which is lower than the firm’s previous “buy” rating. His target also fell to US$97 from US$130, which falls well below the average of US$134.86.
“The company has a great opportunity to capture share but we also see pressures that represent risks to the story," he said. “We can envision a scenario where the stock has 20-per-cent-plus upside from here, but the same is true on the downside, with fairly equal probabilities. We believe the risk/reward is balanced all things considered.”
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Citing execution concerns after “weak” fourth-quarter financial results, CIBC World Markets analyst Oscar Cabrera downgraded Trevali Mining Corp. (TV-T) to “neutral” from “outperform.”
“Despite TV’s high leverage to a recovering zinc price (a 30.8-per-cent change to 2019 estimated EBITDA of $151-million, with a 10-per-cent change in zinc price), we are concerned with TV’s operating execution under a challenging macro environment," he said. "This and the announced departure of TV’s CEO, Dr. Mark Cruise, contributed to the de-rating of TV shares, in our view.”
Mr. Cabrera’s target moved to 50 cents from $1, and now sits below the average of 72 cents.
“While TV’s organic growth strategy, through exploration, is important to improve limited reserves at its operating assets (average mine life 7.8 years), operating execution (i.e., lower costs, meeting guidance) is the main near-term catalyst for TV shares, in our view,” he said. “Also, the arrival of a new CEO with a clear capital allocation strategy (growth vs. returns to shareholders), including a realistic (i.e., achievable) development project schedule could support share appreciation.”
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In other analyst actions:
National Bank Financial analyst John Sclodnick downgraded Equinox Gold Corp. (EQX-X) to “sector perform” from “outperform” with a target of $1.50, down from $1.90. The average on the Street is $2.09.