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Some of Aphria's medical marijuana plants grow in their greenhouse in Leamington, Ont., on May 26, 2014.GEOFF ROBINS/The Globe and Mail

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

Village Farms International Inc.'s (VFF-T) experience as one of North America's largest greenhouse growers of premium quality tomatoes will service it well as it transitions into cannabis production, said Echelon Wealth Partners analyst Russell Stanley.

"We believe that dried cannabis will become more commoditized over time, which will require producers to become exceptional at delivering low cost and/or unique, high value products," he said. "While a number of companies are positioning themselves as low-cost producers, few in this space have real experience in large-scale, low-cost agricultural production. VFF management has a unique, long track record in the produce market, where the Company has had to battle for margins, particularly in recent years. From a low-cost production experience perspective, VFF has been playing 'playoff hockey' for years now, while others are still learning to skate. We think this positions the company well for success in the cannabis space."

Though shares of Vancouver-based Village Farms have jumped significantly since the June 6 announcement of a definitive agreement to form a joint venture with Emerald Health Therapeutics Inc. for large-scale, high-quality, low-cost cannabis production, Mr. Stanley feels the company's stock still has room to run, initiating coverage with a "speculative buy" rating.

According to the terms of the agreement, Village Farms will contribute a 1.1-million-square foot greenhouse facility in Delta, B.C., which will be converted to a cannabis production facility for the non-therapeutic adult-use market with an estimated annual output of 18,750 kilograms.

"We understand that VFF management evaluated a number of LPs as potential partners, and following rigorous analysis, determined that EMH would be the best fit," said Mr. Stanley. "VFF management expects to eventually be able to generate revenue of 10-15 times the level currently generated by its Canadian vegetable production, with EBITDA margins of 50 per cent or more on production costs of less than $1.00 per gram. Management stressed its continued commitment to the existing produce business, noting that success of the cannabis business could finance further expansion of the produce operations through consolidation opportunities.

"While the stock's response to the JV announcement was positive (up 14 per cent in the following month), the share price improvement has accelerated over the past three months. While the entire cannabis space has performed very well (an adjusted average 3-month return of 92 per cent amongst the 30 issuers we track), VFF has more than doubled that with a 210-per-cent return, making it one of the best performing stocks in the space. We attribute the group performance to improving certainty with respect to provincial-level plans for legalizing the recreational market, with VFF's outperformance likely driven by growing awareness of the Company's strengths in high-tech/efficiency greenhouse production."

Mr. Stanley also emphasized recent M&A activity with the sector should validates the cannabis market opportunities available to investors.

"Constellation Brands' (STZ-N) recent $245-million investment in Canopy Growth Corporation (WEED-T, "sell" rating and $13 target) is a major validation of the opportunity in cannabis, and we believe other entrants from the alcohol, tobacco, pharmaceutical, and consumer products markets are likely," he said. "The recent hostile takeover bid by Aurora Cannabis (ACB-T) for CanniMed Therapeutics (CMED-T, "speculative buy" and $24 target), which meanwhile plans to acquire Newstrike Resources (HIP-X), represents the potential beginning of intense M&A activity in the space, with strong share price performance giving many cannabis companies the currency to be aggressive."

Currently the only analyst covering the stock, according to Bloomberg, Mr. Stanley set a price target of $8.75 for Village Farms shares.

"While the cannabis JV has garnered most of the attention of late, we cannot lose site of the fact that VFF is one of the largest vertically integrated greenhouse growers of produce, particularly tomatoes, in North America," the analyst said. "The company's four Texas facilities, as well as the Delta 1 and Delta 2 facilities will continue their focus on the incumbent produce business, though the JV has the option of leasing or buying the Delta 1 and 2 facilities. While the cannabis JV should dominate in terms of EBITDA contribution, the company has consistently indicated that it remains committed to its existing produce business. Even if the Delta 1 and Delta 2 facilities are eventually converted to cannabis production at some point, we do not expect the company to pursue cannabis production in the U.S. until/unless it becomes federally legal."


Canaccord Genuity analyst Matt Bottomley raised his target price for shares of MedReleaf Corp. (LEAF-T) in reaction to the news of its supply deal with Shoppers Drug Mart.

On Thursday, the Markham, Ont.-based company announced it has entered into an agreement to become a medical cannabis supplier for Shoppers, subject to Health Canada's approval of the chain's application to be a licensed producer . MedReleaf will supply Shoppers with MedReleaf branded medical cannabis products, which are expected to be sold online.

"Management believes that its continued focus on cultivating and producing consistent, high-quality product has helped it secure the largest pharmacy chain in Canada as a partner and it will act as a premium supplier to the pharmacy as the medical segment of the industry continue to develop," said Mr. Bottomley. "Now the second supplier secured by Shoppers (after Aphria (APH-T)), we believe this agreement moderately de-risks MedReleaf's medical opportunity, and as a result we are increasing our target.

"As we have previously stated, along with crown corporations that will likely distribute a majority of the recreational volumes in Canada, we believe pharmacy chains could play a large role in medical distribution over the long term, and MedReleaf is one of only two Licensed Producers (LPs) that have secured a blue-chip partner in this segment of the industry."

Mr. Bottomley called MedReleaf an industry leader on several fronts, pointing to four principle reasons: "(1) having likely the second-highest market share among LPs; (2) operating at one of the larger built capacities; (3) a leading assortment of product offerings; (4) being one of only a few GMP licensed producers in Canada; and (5) as one of the lowest-cost producers among indoor cultivators in Ontario."

Maintaining a "speculative buy" rating for the stock, he raised his target price to $21.50 from $20. The analyst average is $19.64.

"MedReleaf currently trades at 13.5 times its two-year forward enterprise value-to-EBITDA, a discount to the large cap peer-group average of 16.2 times," said Mr. Bottomley. "However, we believe the company's focus on quality, low-cost indoor production, and now a supply agreement with the largest pharmacy chain in the country should justify a multiple that is in line with, and perhaps at a slight premium to this group. As a result, we would continue to be buyers of MedReleaf at current levels."


Mr. Bottomley lowered his fiscal 2018 projections for The Hydropothecary Corp. (THCX-X) following first-quarter financial results that fell short of his expectations.

On Thursday prior to market open, the Gatineau, Que.-based medical marijuana producer reported revenues for the quarter of $1.1-million, below Mr. Bottomley's $2.2-million expectation which he attributes to the lingering impact of a third-quarter 2017 voluntary stop-sale related to pesticide contamination.

Its net loss was $1.9-million or 3 cents per share for the quarter, compared to a loss of $430,300 or a penny per share last year. Analysts were expecting a loss of 2 cents in the latest quarter.

"Heading into the new fiscal year as the company continues to ramp up its capacity, we expected sales volumes to rebound above pre-contamination levels," the analyst said. "However, the 121 kilograms of product sold during the quarter is still 12 per cent below its peak FQ3/17 levels, resulting in a top-line miss for the quarter versus our estimates. As a result, adjusted EBITDA of a $2.6-million loss was also shy of our $0.5-million loss estimate.

"Looking ahead, we believe the company is trending in the right direction. With its FQ1/18 release, management estimated a cash cost of 89 cents per gram of inventory produced to date, which is competitive with the lowest-cost producers in the industry today. Further, the company's recently announced fully funded one million sq. ft. expansion facility is on par with some of the largest expansion plans in the industry. We believe that if management is successful in achieving its forecasted 108,000 kg capacity along its expected timelines, it could benefit from a significant first mover advantage in the space as recreational volumes come on line next year."

Based on the lower-than-expected revenue for the quarter, Mr. Bottomley dropped his fiscal 2018 estimate to $24.82-million from $29.7-million. His earnings per share projection fell by a penny to 2 cents.

Mr. Bottomley maintained a $5.25 target for the stock with a "speculative buy" rating (unchanged). The Street's average is $6.35.

"Hydropothecary announced that it acquired 78 acres of land adjacent to its existing Gatineau facility where it plans to construct a one million square foot greenhouse," he said. "With 25,000 kg already under construction, management estimates that it will be able to achieve a total capacity of ~108,000 kg upon completion of the new facility.

"In our view, the market is starting to see a saturation of 'planned' capacity as the number of Licensed Producers (LPs) continues to increase. However, we believe Hydropothecary is one of only a dozen or so producers able to potentially achieve significant scale by the end of 2018. If management is successful in achieving its forecast capacity and construction timelines, we believe the company could benefit from a significant first mover advantage in the space as recreational volumes come on line next year."

Elsewhere, GMP analyst Martin Landry initiated coverage of the stock with a "buy" rating and $7 target.


BMO Nesbitt Burns analyst Ryan Thompson lowered his rating for First Majestic Silver Corp. (FR-T) after its reserve update for its Del Toro, La Parrilla, and San Martin failed to meet his expectations.

"2016 year-end reserve tonnage for the three assets that were refreshed decreased 4 per cent while silver grades decreased 15 per cent," said Mr. Thompson. "Inferred resource tonnage decreased 38 per cent with silver grades broadly unchanged. We note that the updated reserves are effective as of Dec. 31, 2016, and do not incorporate FR's more aggressive 2017 drill campaign (or 2017 mining depletion). Upon updating our modeling assumptions, we are reducing our target price to $7.50 and downgrading to Underperform [from "market perform"]."

His target dropped to $7.50 from $9. The average is $14.33.

"We recommend investors take advantage of FR's recent share price strength and sell on the back of this negative reserve/resource update," he said. "We estimate that shares are trading at 13.6 times price-to-2018 estimated cash flow per share and 3.2 times price-to-net present value, a premium to medium and small producer silver peers, which trade at 10 times price-to-2018 cash flow per share and 1.7 times price-to-net present value. We see potential for FR to grow into its P/NPV multiple when it updates reserves/ resources in March 2018, which justifies our multiples of 2.0 times P/NPV and 11 times 2018E CFPS used to derive our $7.50 target price."


Leon's Furniture Ltd. (LNF-T) remains in "fighting form" despite a difficult retail environment, according to Desjardins Securities analyst Keith Howlett, who initiated coverage of the stock with a "buy" rating.

"Leon's is battle-tested against some of the best retailers in the world, including Home Depot, Lowe's, IKEA, JYSK, Best Buy and HomeSense, as well as strong regional players such as Brault & Martineau," said Mr. Howlett. "The former No. 1, Sears Canada, has been vanquished from the playing field. The Brick acquisition has been fully and successfully integrated. Recent headwinds such as the economic downturn in Alberta and the Prairie provinces, and the sales contraction of the consumer electronics category, have abated. The final 'sales dividend' from the failure of Sears Canada will be obtained in 2018. Management is focused on capturing the online opportunity and mitigating the threat."

Mr. Howlett said Leon's has "carefully, methodically and successfully" integrated The Brick since acquired the chain for approximately $700-million in 2012, "establishing itself as the largest multi-line retailer of furniture and home furnishings, mattresses, major appliances and consumer electronics in Canada."

"The acquisition and integration of The Brick was the primary driver behind Leon's EPS increasing to an estimated $1.24 in 2017 from 67 cents in 2012 (five-year compound annual growth rate of 13 per cent)," he said. "The debt associated with the acquisition has been reduced, with net debt (excluding the in-the-money convertible debentures) to 2017 forecast EBITDA of 1 times. Reflecting the board of directors' confidence in the state of the business, the dividend in 2017 was increased by 20 per cent to 48 cents annually (paid quarterly).

"In late January 2018, Leon's largest national competitor (although shrinking fast), Sears Canada, will cease operations. This will end a turbulent period of intense competition during which major players sought to take advantage of Sears Canada's weakness, and Sears Canada fought back. This has been a multi-year battle. We expect the exit of Sears Canada will be modestly beneficial to both sales and margins. Our view is that 2Q18 and 3Q18 results will provide a reasonable indication of the quantum of financial benefit to Leon's. We are expecting the benefits of Sears Canada's exit to be widely dispersed among the major players in each separate product category. Leon's franchised stores (under both the Leon's banner and The Brick banner) in smaller communities are likely to obtain the most benefit."

Mr. Howlett also expects Leon's to benefit from the improving economic conditions in Western Canada, particularly Alberta, moving forward. He's projecting high single-digit earnings per share growth in both 2018 and 2019.

"Leon's is the market leader in its segment, but faces significant competitors in each product line and geography," he said. "The overall market appears to be growing modestly. The benefit of the demise of Sears Canada will be widely dispersed across many players, but as Sears Canada's largest direct competitor, Leon's sales should experience a visible lift in 2018. We will be seeking validation of this in 2Q18 and 3Q18 reported results. The product lines that Leon's sells to consumers have a mix of gross margin rates, with furniture and mattresses in the 45–55-per-cent range, and major appliances and consumer electronics in the 15–28-per-cent range. Leon's blended gross margin in the low 40s reflects this mix, and also includes Leon's high-margin revenues from franchising, extended warranties and insurance, as well as its lower-margin, high-volume wholesale sales of major appliances to builders and property managers."

Mr. Howlett set a target price of $21 for Leon's shares.

"The current market price is an attractive entry point, in our view," he said.

The other two analysts covering the stock currently are: CIBC World Markets' Matt Bank ("neutral" and $21 target) and BMO Nesbitt Burns' Stephen MacLeod ("market perform" and $20).


Fortress Paper Ltd. (FTP-T) is now a pure-play dissolving pulp (DP) producer following the $28-million sale of their security paper segment division, said Raymond James analyst Daryl Swetlishoff, emphasizing the company now has capital to deploy toward acquisitions and future initiatives.

On Thursday, Vancouver-based Fortress announced its wholly owned subsidiary, Fortress Security Papers AG, has entered into and completed a share purchase agreement with the Swiss National Bank and Orell Füssli Holding AG for its security paper products business.

"We highlight that the company had previously entered into a sale leaseback for the land and buildings of the security paper business in June 2016 for $59-million," said Mr. Swetlishoff. "The transaction results in a multiple of 3.7 times last 12-month EBITDA, and 5-6 times 2018 EBITDA (following the cancellation of 30 per cent of the order book for 2018.

"As the company highlighted on Nov-17, Fortress received notice from a large customer of the security paper segment, that they would be cancelling their orders for 4Q17 and 2018. These orders accounted for 16 per cent and 30 per cent of the order book for Landqart for 2017 and 2018 respectively. We expect this resulted in talks with the Swiss National Bank to sell the security paper segment, as to not interrupt the normal course of business for the country's currency distribution."

Mr. Swetlishoff said he expects DP prices to rise in 2018, leading him to raise his target for Fortress shares to $6 from $4.50 with an "outperform" rating.

He's the sole analyst currently covering the stock, according to Bloomberg.

"We would expect news over the coming quarters regarding deployment of this capital which could be a potential catalyst for the stock," he said. " In addition we look for operational consistency at the company's FSC mill in Quebec as driving share price performance. With DP pricing an area of strength lately, we note that Fortress remains highly levered to changes in the commodity with a $25 (U.S.) per metric ton move in the price resulting in a $1.00 per share impact to our theoretical target price."


In other analyst actions:

Echelon Wealth Partners analyst Stephane Boire initiated coverage of Invesque Inc. (HLP.U-T) with a "buy" rating and target price of $9.50. The average is $9.75.

"We believe the strength of senior living and healthcare real estate fundamentals combined with HLP's current valuation levels make HLP a buying opportunity for investors with a mid- to long-term investment horizon," said Mr. Boire.

Cormark Securities analyst Kyle McPhee upgraded GreenSpace Brands Inc. (JTR-X) to "buy" from "speculative buy" with a $2 target, up from $1.90. The average is $2.20.

Scotia Capital analyst Cameron Bean downgraded Birchcliff Energy Ltd. (BIR-T) to "sector outperform" from "focus stock" with a $8 target, down from $10. The average target on the Street is $7.98.

Mr. Bean upgraded Paramount Resources Ltd. (POU-T) to "sector outperform" from "sector perform" and lowered his target by a loonie to $27. The average is $27.45.

Compass Point Research & Trading LLC analyst William Ryan upgraded Capital One Financial Corp. (COF-N) to "buy" from "neutral" and hiked his target to $122 (U.S.) from $96. The consensus is $101.10.