Tuesday’s analyst upgrades and downgrades

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Inside the Market's roundup of some of today's key analyst actions

It's the "end of the line" for Twin Butte Energy Ltd. (TBE-T), said Canaccord Genuity analyst Dennis Fong.

On Monday, the company's debt holders voted overwhelmingly against a takeover bid by Hong Kong-based Reignwood Resources Holding Pte. Ltd.‎, leaving the Canadian oil and gas producer's financial future in doubt.

In reaction to concerns about the solvency of the company going forward, Mr. Fong downgraded the stock to "sell" from "hold."

"The failure of the approval of the arrangement terminates the forbearance period provided by Twin Butte's senior lenders under the previously announced forbearance agreement," he said. "The company's lenders are now entitled to exercise any rights or remedies, including the repayment of the company's outstanding bank debt and enforcing security by appointing a receiver to liquidate the company's assets and manage Twin Butte's affairs. Management intends to engage in proactive discussions with its lenders in this regard."

"While we still believe there is upside for a potential acquirer which has the appropriate liquidity to capitalize the assets, we struggle with providing the company any incremental upside given its current liquidity and solvency position. We have removed any of the value within our NAV [net asset value] for risked upside and amended our view of the company's ability to meet its capital spending plans (as outlined within the AIF and the P+P reserves)."

Mr. Fong dropped his target price for the stock to nil from 6 cents to represent his "perceived value of the common equity without the support of the foreign buyer." The analyst consensus price target is 28 cents, according to Thomson Reuters.

"We had expected the premium associated with the corporate sale would provide existing security holders the opportunity to realize a portion of our associated risked upside NAV of the company in what has been a volatile and challenging commodity price environment," the analyst said. "With the rejection of the arrangement, we now have concerns over the solvency of the company and recommend investors sell any remaining common equity as we see little value above the bank debt in a blowdown scenario of reserves on strip pricing."

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CIBC World Markets analyst Cosmos Chiu said the share price for Coeur Mining Inc. (CDE-N) has "clearly" had a very good run thus far in 2016, rising 452 per cent.

Even with that bump, he said multiples still remain "reasonable" at 2017 and 2018 estimated price to cash flow of 11.6 times and 9.6 times, respectively, in comparison to peers at 12.9 times and 12.8 times.

Accordingly, he upgraded his rating for the gold and silver producer to "sector performer" from "sector underperformer."

"The thesis for the Coeur Mining story has changed," he said.

Following the completion of at-the-market financing with proceeds of $75-million and the repayment of a term loan of $99-million, Mr. Chiu estimates Coeur now has $155-million in cash and debt of $416-million. The company's debt-to-EBITDA ratio has declined to 2.9 times from 5.9 times a year ago.

Alongside a stronger balance sheet, Mr. Chiu emphasized a declining cost profile, with all-in sustaining costs of $16.09 per ounce in 2016, $15.47 in 2017 and $15.33 in 2018.

"In Q3/16 (on July 26), Coeur Mining satisfied the minimum ounce obligation on the Franco-Nevada royalty, and the new terms for the royalty come into effect," he said. "The new royalty covers 50 per cent of the life-of-mine gold production from Palmarejo (excluding Paramount properties) at a delivery price to Franco-Nevada of $800/oz (or spot if less). From the perspective of Coeur Mining, the cash outflow will decrease from greater-than $40-million per annum to  greater-than $20-million per annum (at spot gold)."

"Coeur Mining was FCF [free cash flow] negative in H1/16 at $22.6-million, but with that said, a big reason for the negative FCF was the cash outflow related to the old Franco royalty. With the new Franco royalty now in place, CIBC estimates FCF of $61.7-million for H2/16, and $128.1-million for the full year 2017."

Mr. Chiu raised his target price for the stock to $14.50 from $9.50. Consensus is $15.31.

"Focusing on silver and gold production, Coeur Mining shares continue to trade at reasonable multiples compared to its peers, and offers investors with leverage to silver and gold prices," he said.

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Despite believing Lululemon Athletica Inc. (LULU-Q) will post "solid" second-quarter financial results on Thursday, Canaccord Genuity analyst Camilo Lyon believes the stock's risk/reward "appears to be tilting downward."

Mr. Lyon expects the Vancouver-based designer, distributor and retailer of technical athletic apparel to report stronger-than-anticipated comparable same-store sales, citing "robust growth in bottoms stemming from the pant wall relaunch that began in 3Q15 continues to be the key driver of overall comps." Accordingly, he raised his comp and earnings per share projections for the quarter to 9 per cent and 41 cents (U.S.), respectively, from 5 per cent and 39 cents.

"Our updated comp estimate is based on three factors," he said. "First, we believe the outsized comp contribution from women's bottoms (approximately 35 per cent of mix) continued into Q2, likely adding 700-800 basis points to overall comps. Second, we believe tops, which comp'd positive in Q1, continued the positive comp momentum in Q2 driven by an expanded bra assortment. Third, while men's is facing a tough up 31-per-cent% comparison, we believe new silhouettes in the seamless collection and continued strength in pants likely resulted in +HSD-LDD category comps."

He added: "In what has been well telegraphed, Q2 by all accounts should be the quarter in which we see the positive inflection in gross margins that LULU has been working toward for the past couple of years. To that point, we are projecting gross margin expansion of 170 bps (versus guidance of 120bps), as benefits from reduced air freight, improved logistics/duty/FOB [freight on board] costs, and other efficiencies from a more disciplined go-to-market process come together. We are modeling 136 bps of SG&A deleverage and expect inventory growth to be below sales growth this quarter going forward. Overall, we expect LULU to deliver a strong Q2 margin quarter, as expected."

Mr. Lyon expects the company's full-year EPS guidance to remain $2.05-$2.15, if the quarterly results meet expectations. He cited "difficult bottoms comparisons LULU faces and the high expectations for the new tank wall launch to carry the comp momentum pants has been contributing."

"All that said, we are becoming weary of the 2H16 set up for LULU, which faces very difficult bottoms comparisons, a tank wall relaunch that will be driven by fit variation rather than technical innovation (which may not receive the same reception the new pant wall has), a well-understood gross margin recapture opportunity, and a 33x P/E multiple that leaves little room for error," he said.

" For Q3, we expect the company to guide to +MSD comps and an EPS range that brackets the current Street estimate of 44 cents. Separately, while we applaud the strides LULU is making in recapturing its gross margin this year, we believe most if not all of that opportunity is already reflected in estimates (and the stock) and thus see comps as the key driver of upward earnings surprises. With tough compares mounting, and a stock that has benefited solely from multiple expansion, we remain at hold."

With his "hold" rating, he maintained a target price for the stock of $70. Consensus is $73.21.

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Expecting a dividend increase in conjunction improved commodity prices, Accountability Research analyst Harriet Li raised her financial estimates and target price for Silver Wheaton  Corp. (SLW-T, SLW-N).

"We continue to view the company favourably given its portfolio of diversified, high-quality, low-cost and long-life assets," said Ms. Li. "The improved production profile following the recent Salobo transaction and the rebound in precious metals pricing supports near-term dividend growth, which is linked to Silver Wheaton's operating cash flows. However, the CRA dispute remains a source of uncertainty for the company."

Based on a brighter commodity price forecast, Ms. Li raised her 2016 and 2017 earnings per share projections to 71 cents and 95 cents, respectively, from 65 cents and 71 cents.

"With Silver Wheaton's dividend policy linked directly to cash flows (20 per cent of operating cash flow), we expect the improved commodity pricing outlook and increased production profile resulting from the recent Salobo transaction to lead to a rise in dividends over the near-term," she said.

Ms. Li maintained her "buy" rating for the stock and increased her target to $43 from $28. The analyst average is $43.76.

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NYX Gaming Group Ltd. (NYX-X) has "more room to run," said Cantor Fitzgerald analyst Ralph Garcea in reaction to the company's second-quarter financial results.

On Monday, NYX reported revenues of $35.2-million, topping both Mr. Garcea's projection ($29-million) and the consensus ($32.8-million). Earnings before interest, taxes, depreciation and amortization of $10.5-million also beat expectations ($10.3-million and $8.4-million, respectively).

"NYX grew top-line 230 per cent year over year with 28-per-cent organic growth," said Mr. Garcea. "We believe NYX is starting to see the synergies across OGS [open gaming system], OPS [open platform system], and Openbet (only 6 weeks in the quarter), with EBITDA margins just shy of the 30-per-cent mark. We see continued margin expansion going forward with professional services revenues continuing to be robust ($11.9-million versus $1.45-million quarter over quarter). Openbet contributed $16.5-million in the quarter. Integration and synergy realisation of Openbet is 'slightly ahead of expectation.'

"NYX is transitioning its business focus to an operational excellence/integration approach vs M&A – ``it's time to execute. We believe the strong results are just scratching the surface with more EBITDA margin power. We expect margins to tick higher sequentially in the coming quarters. OGS and OPS signed 11 new agreements in the quarter and NYX studios released 26 new games – NYX has 38 games on the PokerStars network available for play. OGS and OPS were meaningful to the EBITDA beat, with margins coming in the quarter at 29.9 per cent versus 23.8 per cent year over year (gross margins were 87.3 per cent versus 85 per cent year over year). NYX's top 10 customers accounted for approximately 54 per cent of revenue."

Mr. Garcea called the recent £270-million acquisition of OpenBet, a British business-to-business sportsbook and digital gaming company, "transformational" and noted it more than doubles the company's total addressable market.

"OpenBet is the platform/service provider to every leading UK bookmaker," he said. "We expect the recent mergers of Paddy Power/Betfair (closed) and Ladbrokes/Gala Coral (pending) to provide ample opportunities to cross-sell content onto much larger betting platforms."

Mr. Garcea maintained his "buy" rating for the stock, but he lowered his target to $5 from $6.50 to account for the potential dilution of preferred shares, which he said he omitted previously. Consensus is $5.19.

"NYX appears to be recovering from being in a prolonged oversold position for most of July – awaiting the close of the financing and potential dilution," he said. "Near-term resistance lies at $2.25 and $2.49."

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In other analyst actions:

Algold Resources Ltd. (ALG-X) was rated new "speculative buy" at Paradigm Capital by analyst Don Blyth with a 12-month target price of 70 cents. The analyst average is also 70 cents, according to Bloomberg.

High Arctic Energy Services Inc. (HWO-T) was raised to "outperform" from "sector outperform" by Alta Corp Capital analyst Aaron Macneil with a target price of $5 (unchanged). The average is $5.63.

BHP Billiton Ltd. (BHP-N) was raised to "buy" from "hold" by Argus Research analyst Stephen Biggar with a target price of $40 (U.S.) per share. The average is $34.58.

Seaport Global Securities analyst Mike Kelly downgraded Marathon Oil Corp. (MRO-N) to "neutral" from "buy." He kept his target price of $17 (U.S.). The average is $18.17.

SunTrust Robinson Humphrey analyst John C. Rizzuto upgraded VMware Inc. (VMW-N) to "buy" from "neutral." Mr. Rizzuto raised his target to $92 (U.S.) from $64. The average is $74.38.

Rosenblatt Securities analyst Kirk Adams downgraded Autodesk Inc. (ADSK-Q) to "sell" from "neutral." He kept his target of $54 (U.S.). The average is $66.13.

Sandler O'Neill & Partners LP analyst Timothy O'Brien downgraded Pacific Continental Corp. (PCBK-Q) to "hold" from "buy." He kept his target of $17.50 (U.S.), versus the average of $18.