Inside the Market’s roundup of some of today’s key analyst actions
Analysts say Suncor Energy Inc.’s (SU-T) move to sell its wind and solar assets to Canadian Utilities Ltd. for $730-million should be a mild positive for the energy producer’s stock.
The transaction was announced after markets closed on Wednesday.
“Overall, we view the event as positive, though it is in line with SU’s previously communicated strategy to seek divestment of the renewable power assets while focusing its emission reduction strategies on its core upstream and downstream assets,” said ATB Capital Markets analyst Patrick J. O’Rourke in a note to clients.
“At $730-million, the proceeds represent a mostly immaterial ~1% of the current enterprise value for SU, but it will likely be seen as at least a modest win, with our estimated replacement value for 252 MW of installed wind capacity at $590-million (based on the current upper end of the EIA’s cost range for onshore wind installations) and the balance of the proceeds attributable to a future potential pipeline of 1,500 MW that SU was unlikely to pursue itself. The transaction reinforces a commitment to a rationalization of non-core assets and positive execution in unlocking of ‘sum-of-parts’ value at time when investors are likely weighing the potential range of outcomes for the retail business, while it accelerates the march towards SU’s $9-billion debt target,” he said.
Mr. O’Rourke reaffirmed a “sector perform” rating and C$50 price target on Suncor.
Likewise, analysts believe the transaction is favourable for Canadian Utilities Ltd. (CU-T).
RBC analyst Maurice Choy raised his price target on Canadian Utilities by $1 to C$43 while reaffirming a “sector perform” rating.
“Whilst the acquisition may come as a surprise to some investors, we view the transaction as a continuation of CU’s evolution towards owning a cleaner generation fleet (particularly post monetizing its Canadian fossil fuelled-based generation assets in 2019),” the RBC analyst said in a note. “With much of the market’s recent focus being on Puerto Rico and the ongoing rate application in Alberta, the reinforcement of CU’s energy transition strategy (especially with the scale of future renewables growth made available via the development pipeline in this transaction) will likely be welcomed by pockets of its investor base.”
BMO Capital Markets Ben Pham raised his price target on Canadian Utilities to C$39 from C$38 and maintained a “market perform” rating. “While the acquisition of renewable power assets from Suncor is only modestly accretive, it accelerates growth in this energy transition platform and has built-in upside potential,” Mr. Pham said.
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National Bank Financial analyst Matt Kornack initiated coverage on Dream Residential REIT (DRR-U-T), a recently created multi-family real estate investment trust, with an “outperform” rating and US$10.50 price target.
Its assets consist of 16 garden-style properties in the U.S totaling 3,432 rental units concentrated in three markets: Dallas-Fort Worth, Greater Oklahoma City, and Greater Cincinnati. Its target demographic consists of middle income earners with incomes of between $40,000 to $120,000 who have been priced out of homeownership.
Mr. Kornack listed a number of things he likes about the REIT, including its conservative balance sheet with a sustainable payout ratio, demographic tailwinds, and the lack of rent controls in the markets it operates in.
“DRR’s conservative capital structure, coupled with its low sustainable payout ratio and internally funded maintenance capex profile, assists the REIT in conserving cash; thus, facilitating reinvestment in value-add initiatives,” Mr. Kornack said in a note to clients.
“The price of homeownership and replacement values in DRR’s primary markets has increased, impacting housing decisions for middle income households. DRR offers a low-cost alternative for this growing cohort of the population with counter-cyclical attributes in tougher economic times,” he added. “The REIT has the flexibility to mark rents to market on an annual basis, allowing for the efficient capture of inflation.”
He also notes that DRR is managed externally with a team that has extensive experience in real estate transactions and operations. “With over 100 in-house employees, the REIT is offered a level of expertise and services that wouldn’t otherwise be available to an entity of its size,” the analyst said.
The average analyst price target is US$12.17.
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CIBC Capital Markets analyst John Zamparo has tempered his expectations for mattress retailer Sleep Country Canada Holdings Inc (ZZZ-T) due to lower housing sales and expectations of more cautious consumer behaviour.
He cut his target price to C$29 from C$35. But he maintained an “outperformer” rating, believing that these negative dynamics are already priced into the stock, which trades at only 7.5 times estimated 2023 earnings per share.
“We believe that several industry metrics indicate a softer second half of the year than previously expected. Housing activity continues to cool, and though rapid interest rate moves haven’t done much to hurt disposable income, we believe consumer confidence - in particular, the desire to replace big-ticket home items - will surely be negatively impacted,” Mr. Zamparo said in a note to clients.
“We see limited catalysts this year, but believe the stock will appeal to value investors with longer timelines,” he added while trimming his 2023 earnings per share estimates.
The average analyst price target is C$35.50.
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CIBC Capital Markets analyst Mark Petrie expects to hear lots of positive commentary when Aritzia Inc (ATZ-T) hosts its first Investor Day on Oct. 27.
“We expect the company to highlight its long runway of growth potential in the U.S. and its plans for the continued building of brand awareness, SKU [stock keeping units] expansion and omnichannel capabilities,” he said in a note.” We expect new three-year financial targets to be introduced, and while macro uncertainty clearly looms, we believe double-digit revenue growth, margin expansion and robust free cash flow are achievable.”
Given its exposure to a higher-end consumer, he believes Aritzia is somewhat insulated from the impact of elevated inflation and halted government supports. “Further, inventory levels are elevated across industries, and supply-chain issues continue to present a challenge for retailers. Again, we do not believe ATZ is immune, though we believe its significant use of expedited freight gives it a lever to reduce costs, and its strong demand and relevance with consumers will limit markdown risk,” Mr. Petrie added.
He raised his price target on the stock to C$59 from C$48 as he rolled forward his valuation estimates on the company into fiscal 2024. His “outperformer” rating remains.
The average analyst price target is C$57.28.
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National Bank Financial analyst Jaeme Gloyn cut his price target on IGM Financial Inc (IGM-T) following the company releasing weaker-than-expected assets under management data amid tough equity markets. But he said his long-term view is unchanged and reiterated an “outperform” rating.
The company’s Assets under Management and Advisement (AUM&A) of $238.1 billion in the third quarter was down 1.6% from the previous quarter and below his $254.9 billion forecast due to negative investment returns across all platforms and a second quarter of outflows at Mackenzie Financial. Net outflows of $341 million were also below his $552 million net inflow forecast.
“Overall, we understand there might be some short-term noise in AUM given the geopolitical/market backdrop; however, we maintain our positive outlook as i) investment returns will recover over time; and ii) IGM’s growth strategies will prevail longer term,” he said.
The analyst trimmed his earnings estimates for the company and cut his price target to C$45 from C$48.
The average analyst price target is C$42.43.
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Oppenheimer upgraded Verizon Communications Inc. (VZ-N) to “outperform” from “perform” and introduced a US$50 price target.
“After almost two years, we’re getting constructive on Verizon again,” said analyst Timothy Horan. “The catalyst is what we anticipate will be gradual stabilization-to-growth of its subscriber base, although near-term trends could remain volatile, on: 1) improving network quality; 2) effective customer segmentation; and 3) successful bundling of its burgeoning fixed wireless access service. ... Also supportive is expected strong free cash flow growth of 15% per year, as VZ has passed peak investment and leverage. Lastly, the price is right after years of underperformance—7.5x estimated 2023 price to earnings, 55% discount to the market multiple, with an attractive 6.6% dividend yield, nearly quadruple the S&P, with manageable 50% payout.”
The average analyst price target is US$51.23.
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Goldman Sachs upgraded Pinterest Inc. (PINS-N) to “buy” and raised its price target to US$31 from US$24. It cited improved user growth and engagement trends in the short and medium term and the potential for upside to revenue growth and operating margin estimates over the next couple of years.
The average analyst target is US$26.13.
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In other analyst actions:
Dye & Durham Ltd (DND-T): CIBC raises target price to C$33 from C$30
Southern Energy Corp (SOU-X): Haywood Securities starts with buy rating and a price target of C$2.50
Caterpillar Inc (CAT-N): JP Morgan raises target price to US$220 from US$205
eBay Inc (EBAY-Q): Jefferies cuts target price to US$42 from US$52
Redfin Corp (RDFN-Q): Jefferies cuts target price to US$6.5 from US$12
Zillow Group Inc (ZG-Q): Jefferies cuts target price to $40 from $50
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