Inside the Market’s roundup of some of today’s key analyst actions
A $750-million investment from Brookfield Renewable Partners LP (BEP.UN-T; BEP-N) should provide “immediate comfort” for TransAlta Corp. (TA-T; TAC-N) investors, said Industrial Alliance Securities analyst Jeremy Rosenfield.
Shares of the Calgary-based utility jumped 3.9 per cent on Monday in the wake of the premarket announcement of the strategic alliance.
“The tie-up with BEP provides several expected benefits. In the near term, the deal provides a capital injection to support CTG conversions, debt repayment, growth, and share buybacks,” said Mr. Rosenfield. “In terms of valuation, the deal provides proof-of-concept for the stand-alone valuation of TA’s hydro assets. Meanwhile, in the future, the deal also opens an avenue for operational improvement of those assets amid a changing market (via the joint operating committee), and could open the door for further strategic developments at TA and RNW (growth, asset sales, or more).”
Believing the investment sets a value for TransAlta’s hydro assets at almost $2.3-billion and calling the move a “counter-punch to recent shareholder activism,” Mr. Rosenfield upgraded his rating for TransAlta shares to “speculative buy” from “hold.”
“Recall that certain U.S. hedge funds (Mangrove, Cove Key, Bluescape) had previously filed securities notices (March 15) indicating (1) that they had acquired 10 per cent of the common shares of TA, and (2) they had earlier signed a cooperation agreement to cooperate on voting and other issues,” he said. “The funds indicated that they believed TA’s common shares to be undervalued, and that the Company could create significantly more value for shareholders through improved ‘execution and focus,’ including ‘… through operational and cost excellence, asset optimization, capital allocation and broader strategic initiatives.’ In our view, the BEP/TA agreement represents a strong response to the shareholder activism, indicating that TA and its board are willing to consider strategic options to maximize shareholder value.
“However, in our mind, we cannot help but wonder what took so long; we also question as to whether this is enough to surface full and fair value for investors. In our view, there are several additional steps that could be taken to surface further value within TA, including (1) further capital allocation to share buybacks (above the initial $250-million allocation), (2) accelerated asset transfers to RNW (and potentially a partial/full sell-down of TA’s interest in RNW to monetize that value), (3) full monetization of the hydro assets, which could ultimately lead to (4) a sale/privatization of TA’s remaining thermal assets.”
Mr. Rosenfield raised his target for TransAlta shares to $12 from $9. The average on the Street is currently $9.83, according to Bloomberg data.
“TA offers investors (1) a balanced mix of contracted and merchant power exposure, (2) improving balance sheet and cash flow fundamentals, and (3) long-term upside to rising Alberta power prices,” he said. “Ultimately, we see BEP’s strategic investment as a vote of confidence in the future value of TA’s hydro assets, even if this value remains partially obscured by the structural weaknesses of TA’s thermal assets, and by political/market uncertainty in Alberta (reasons for our Speculative qualifier). Over time, the value of TA’s hydro and renewable assets (RNW) are expected to improve, which bodes well for the stock’s valuation, regardless of valuation methodology.
He maintained a “buy” rating and US$36 target for Brookfield Renewable, which exceeds the average target of US$32.18.
“BEP continues to offer investors (1) a high-quality global renewable power investment platform (ownership interests in more than 17GW of installed capacity), (2) a high degree of contracted cash flows (65-90 per cent plus through 2023), (3) a long-term organic and M&A-based growth strategy (360MW under development, and more than 7GW of prospects), and (4) attractive income characteristics (7-per-cent yield, more than 90 per cent 2019 estimated FFO payout, and a 5-9 per cent per year dividend growth target),” said the analyst. “The proposed investment in TA represents a textbook example of how the Company continues to create long-term value for shareholders via its diversified power infrastructure platform. Although the initial investment in TA is relatively minor, it provides long-term potential upside from the hydro asset investment option, and strategic optionality for further investments in the future.”
Elsewhere, TD Securities’ John Mould raised TransAlta to “buy” from “hold” with a $51 target, rising from $38.
RBC Dominion Securities analyst Robert Kwan raised his target for TransAlta shares to $11 from $9 with a “sector perform” rating (unchanged).
Mr. Kwan said: “We positively view the transaction with Brookfield that provides a measure of clarity for the value of Alberta hydro while also providing support for the share price via Brookfield’s open market purchase commitment as well as cash from the Brookfield investment that TransAlta has allocated to share buybacks. Further, we believe the transaction with Brookfield, a well-regarded investor, demonstrates confidence in TransAlta’s outlook.”
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Raymond James analyst Ben Cherniavsky called Wajax Corp.’s (WJX-T) fourth-quarter financial results “a certain setback” after they fell short of his expectations “by nearly every measure.”
On March 21, the Mississauga-based industrial products and services provider reported quarterly adjusted earnings per share of 41 cents, falling well short of both the projections of both Mr. Cherniavsky (69 cents) and the consensus on the Street (62 cents). Revenue of $390-million missed his estimate by $48-million (or 11 per cent).
“Frankly, we saw so many problems with Wajax's 4Q18 results that it is hard to know where to start,” said Mr. Cherniavsky. “In some respects, the stock's 17-per-cent decline on Friday (vs. a 1-per-cent decline for the TSX) says it all: this quarter marked a major setback to the ‘One Wajax’ strategy. For us it also represented a substantiation of some of the risks we noted about that narrative in our Oct. 29-18 comment. For example, in that report we expressed concerns about the company's efforts to gain market share through aggressive pricing, a tactic that effected gross margin erosion last quarter. We also warned about the complexities of managing conflicting brands in the same product categories, which has since manifested itself into some related supply problems in forestry. Finally, we expressed considerable doubt about the company's 2020 financial goals, which management acknowledged on Friday would not likely be met. Add slowing growth in end markets, increased leverage and an over-statement of past earnings to the equation and we see no reason to alter our cautionary thesis or change our recommendation on this stock.”
Maintaining a “market perform” rating for Wajax shares, he dropped his target to $17 from $26.50. The average is now $20.40.
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In the wake of Friday’s announcement that Onex Corp. (ONEX-T) has entered into a definitive agreement to acquire it, Desjardins Securities analyst Gary Ho lowered Gluskin Sheff + Associates Inc. (GS-T) to “hold” from “buy.”
“At $14.25 per share, we estimate the transaction to be valued at 6.6 times our FY20 consolidated EBITDA (base plus performance fee EBITDA),” he said. “We believe this is the proper way to look at GS (as opposed to looking at base EBITDA only) since its fees model enables the company to generate significant performance fees and special dividends. For reference, over the past 8.5 years, GS has paid out $14.89 per share in dividends—just over 50 per cent of which is from performance fees/special dividends. The transaction also implies an EV/AUM [enterprise value to assets under management] of 5.1 per cent, below the five-year average of 6.6 per cent, a period which includes challenges with resolving the co-founder arbitration case and dealing with key PM departures. Both of these are now resolved, not to mention that GS is coming off peak G&A expenses in the last two years (mostly IT-driven) and there are a few million in savings looking out over the next 12–24 months (not fully baked into estimates, in our view.”
Mr. Ho raised his target for Gluskin shares to $14.25 from $12 to reflect the deal. The average on the Street is $14.25.
“We would recommend holding the stock given (1) the deal price at $14.25, (2) next quarterly dividend of 25 cents (to be declared in May), and (3) we would not rule out a possible competing bid,” he said.
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In the wake of its highly publicized “It’s show time” event on Monday at which it revealed a series of new services offerings, including its video streaming and news subscription services, Canaccord Genuity analyst T. Michael Walkley thinks Apple Inc. (AAPL-Q) has found ways to “further monetize” its 1.4-billion device user base.
“We believe today’s announcements support Apple’s ecosystem approach including an install base which now exceeds 1.4 billion devices globally to drive strong ongoing services revenue growth, and we expect the higher-margin services revenue growth to continue outpacing total company growth,” he said. “With sales trends for the latest lineup of iPhones showing signs of stabilization, we anticipate modest unit growth in calendar 2020 following a 12-per-cent unit decline in C’19 based on an increasing installed base driving stable to slightly higher iPhone sales. We maintain our belief Apple can expand its leading market share of the premium-tier smartphone market and the more than 700 million iPhone installed base (excluding refurbished iPhones, over 900 million including refurbished iPhones) at the end of 2018 will grow to 750 million (excluding refurbished iPhones) exiting C2019. This impressive installed base should drive strong iPhone replacement sales, services sales growth, and overall earnings, as well as cash flow generation to fund strong long-term capital returns.”
With the announcement, Mr. Walkley raised his fiscal 2019 revenue and earnings per share projections modestly to US$253.830-billion and US$11.36, respectively, from US$253.715-billion and US$11.35. His 2020 estimates increased to US$269.357-billion and US$13.09 from US$266.218-billion and US$12.88.
“Coming off a strong Services quarter growing 19-per-cent year-over-year with 63-per-cent margins, we believe the new offerings will incrementally support double digit Services revenue growth towards its target of doubling revenue from 2016 to 2020 and achieving over 500 million subscribers by 2020,” he said. “Apple News+, Apple TV Channels, Apple TV+, and Apple Card join the App Store, Apple Music, Apple Care, iTunes/iCloud and Apple Pay as the company’s growing portfolio of Services is monetized against their install base, and increases the company’s business mix towards high margin, recurring services revenue products. Based on today’s announcements, with products launches through this fall, we have increased our Services segment growth rates for C’19/C’20 from 15 per cent/15 per cent to 17 per cent/23 per cent, with over $59-billion in Services revenue estimated for C’20.”
With a “buy” rating, he raised his target for Apple shares to US$230 from US$185. The average is US$187.95.
“While the smartphone market is slowing to low single digits annual growth, Apple’s dominant profits of the world’s largest consumer electronics market is likely to continue,” said Mr. Walkley. “This combined with strong cash returns and a growing share of higher margin businesses in Services and Other Products lead us to reiterate our BUY rating."
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Investors should benefit from greater economies of scale stemming from Summit Industrial Income REIT’s (SMU-UN-T) move to internalize its asset and property management business, according to Desjardins Securities analyst Michael Markidis.
On Monday, the Brampton-based trust announced the $95-million move, which will be voted on by unit holders at its annual meeting on May 8.
“Any way you look at it, the $95-million internalization payment is a big number,” said Mr. Markidis. “It is just shy of the $98–125-million range that we put forth on a potential change of control in mid-February. SMU paid $13.7-million of total fees to Sigma in 2018. Including $0.5-million of annual contractual fee revenue to be earned from JV partners, we see a TTM [trailing 12-month] gross fee multiple of 6.7 times. The pro forma gross fee multiple is highly dependent on assumptions with respect to the incentive and other transaction-related fees (acquisition, leasing, etc); we think a range of 6–8 times is reasonable.
“SMU notes that the transaction should drive immediate AFFO/unit accretion of 2.8 per cent. We find this disclosure interesting given that SMU does not show how AFFO is calculated within its quarterly MD&A. Regardless, provided that the internalization proceeds, SMU’s earnings growth profile should be enhanced, given the elimination of the asset management (25 basis points of historical cost), acquisition (50–100bps of the acquisition price; capitalized to historical cost) and incentive fees (15 per cent of AFFO/unit in excess of 52.5 cents in 2019; subject to 1.5-per-cent annual increases).”
Maintaining a “hold” rating, the analyst raised his target to $12 from $11.50. The average is $11.68.
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Though he emphasized “robust” growth drivers are still present, Canaccord Genuity analyst Camilo Lyon expects lululemon athletica inc. (LULU-Q) to remain in a “holding pattern” until its Investor day on April 24.
Ahead of Wednesday’s release of its fourth-quarter results, Mr. Lyon said: " Despite having already positively preannounced Q4 back in January, LULU could still manage to a comp/EPS beat, we believe. We are projecting comps of 16.1% and EPS of $1.74, in line with consensus and at the high end of the pre-announced range of $1.72-$1.74. As seen by the pre-announcement, LULU experienced a very robust holiday season as an on-trend product assortment drove robust traffic both in stores and online. From a product perspective, core franchises in women’s like the Wunder Under likely performed exceedingly well, along with men’s and outerwear, which benefited from favorable weather in November and January. Furthermore, the company has course corrected in Europe. We are projecting gross margin expansion of 76bps with opportunity for upside, benefiting from strong full-price selling and a higher mix of outerwear. Overall, we expect a solid Q4 print."
Mr. Lyon kept a “buy” rating and US$163 target, exceeding the average of US$161.43.
“The set-up into Q4 earnings coupled with its analyst day next month reminds us of Foot Locker (FL-N, “buy” rating),” he said. “While FL reported stellar Q4 results, elements of its 2019 guidance were underwhelming. Since its report March 1, FL’s stock has been flat to down slightly. For LULU, we believe initial ‘19 guidance could entail [mid-single digit] comps and mid-teens EPS growth while incorporating a more conservative outlook for Q1 (a quarter that historically sees a seasonal comp deceleration from Q4). That said, the looming question is, what targets will it outline at its analyst day? – a question that could keep the stock in check in the immediate term until the 24th. Despite the information vacuum for the next month, the long-term story remains healthy and one that is well positioned for continued global share gains. We reiterate our BUY, particularly on any interim weakness.”
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In other analyst actions:
Veritas Investment Research analyst Nigel D’Souza downgraded Bank of Montreal (BMO-T) to “sell” from “buy” and dropped his target to $95 from $102. The average is $107.44.
Eight Capital initiated coverage of Green Growth Brands Inc. (GGB-CN) with a “buy” rating and $8.50 target, which matches the consensus.
GMP Securities analyst Taro Kiley cut Jadestone Energy Inc. (JSE-X) to “hold” from “buy” with a target of 89 cents. The average target is $1.53.
National Bank Financial initiated coverage of Pan American Silver Corp. (PAAS-T) with a “sector perform” rating and $23 target, which falls 8 cents below the consensus.