Inside the Market's roundup of some of today's key analyst actions
Asanko Gold Inc.'s (AKG-T) investment appeal has diminished and risks have "significantly" increased, said Canaccord Genuity analyst Rahul Paul.
Though he believes further fundamental downside may be limited, Mr. Paul downgraded his rating for the Vancouver-based mining company to "hold" from "buy."
He made the change in reaction to disclosures made at a Nov. 9 site visit presentation that point to a weaker-than-expected 2018.
"Key challenges were previously known, but the impact appears more significant (and longer-term) than we had expected," said Mr. Paul. "These include (1) unstable ground in the oxides at Nkran (explaining the reduced pit-slope angles, higher waste stripping) and (2) overestimation of oxide/saprolite ore at Akwaisiso (approximately 1.3 million tons of oxide ore now classified as fresh/hard ore). In fact, these were the primary reasons for the disappointing FY17 performance, but it now appears that the impact may be more significant and continue beyond 2017. Our reduced operating/financial forecasts (2018-20E) reflect the higher waste stripping at Nkran and lower oxide ore contribution.
"Esaase [is] now harder to fund, reducing Asanko's investment appeal. Neither of the issues alone should materially impact our longer-term outlook. However, the combined impact of oxide ore losses, extra waste stripping at Nkran, limitations of the plant (which now has to process more fresh/hard ore), a constrained balance sheet and challenging market conditions will make it harder to fund the overland conveyor (which we consider essential to develop Esaase). Without Esaase (58 per cent of global reserves), we believe Asanko's investment appeal is significantly lower."
Though Asanko shares are down approximately 75 per cent year-to-date and have underperformed in comparison to the S&P/TSX Gold Index, Mr. Paul lowered his target price even further to $1 from $2.50. The analyst consensus price target is currently $2.54, according to Thomson Reuters data.
"Based on our revised forward-curve based forecasts, we believe that the current share price could be supported by remaining reserves at Nkran alone (we now assume no further upside beyond Nkran reserves and estimated plant throughput of 4.5 million tons per annum)," he said. "In addition, our revised forecasts suggest that the company should be able to repay the Red Kite Debt Facility through internal cash flows while maintaining a cash balance over $50-million.
"But risks appear significantly higher considering a greater reliance on Nkran to feed the plant and the uncertainty surrounding the mine plan. In addition, the levered balance sheet provides limited flexibility to handle a material gold price decline and/or further unforeseen issues with Nkran and/or the plant. Upside potential from Esaase and P10M remains, although these opportunities may now be out-of-the-money options, contingent on a higher gold price and/or additional financing. Additional oxide discoveries (near the plant) and/or ongoing efforts to optimize the P5M plan could improve the outlook. However, the several disappointments to date could make it harder to reassure investors regarding the potential upside from current levels. We believe a more cautious approach is prudent at this stage."
Wal-Mart Stores Inc. (WMT-N) looks fairly valued moving forward "after a powerful run," said Goldman Sachs analyst Matthew Fassler.
Believing the U.S. retail giant's "progress in growing earnings while investing in its business has been recognized by the market as the stock's multiple has surged" he downgraded his rating to "neutral" from "buy."
"WMT has solidified its transition to a winner in today's tricky retail climate by stabilizing share trends and growing earnings, all while investing in next-generation channels and technologies," the analyst said. "We have viewed it as well-positioned based on its mix of store locations (outside major metros), categories (overweight grocery), and customers (lower-/middle-income), all of which place it outside the sphere of those most vulnerable to ecommerce. It is now delivering on the promise of this positioning, holding share against broader retail – and gaining share versus most grocers and apparel retailers; returning to productivity loop dynamics (on a global basis, though not in the U.S.) and, improving its working capital efficiency."
"At the same time, the firm is investing against ecommerce capabilities, most notably in grocery, where it is ramping its in-store/in-lot pickup option (at no charge), and embracing new technologies that drive efficiency and enhance the customer experience (computer vision to track in-stores, pickup towers. We raise our forecasts … to acknowledge the financial expression of this progress."
While raising his financial estimates, Mr. Fassler said "something just as remarkable transpired with WMT's stock," noting it has risen 41 per cent in price year-to-date versus a 15-per-cent jump in the S&P 500, 6-per-cent increase in the S&P 500 Staples Index and a 5-per-cent decline in the retail-focus XRT Index.
"We understand the drivers of the surge ... most notably that WMT was a major index component that was underweighted by many active managers." the firm said. "This remained the case as of recent filings, though we think that the move since the Sept. 30 snapshot captured by recent form 13s could, at least in part, reflect more participation by underweight mutual funds. The imperative to eliminate underweights in a 'story that is working' may not involve much price sensitivity, especially against retail and packaged good counterparts struggling with disruption and anemic economic growth."
He raised his 12-month target price for Wal-Mart shares to $100 from $91. The analyst average is $99.45.
"While the business is progressing, it is not quite transforming," Mr. Fassler said. "WMT is already the largest retailer in the U.S. - and the world - and progress in its revenue growth rate is measured in tenths of percentage points; it is investing in potentially dilutive efforts to drive ecommerce capabilities and market share; and it is long much brick and mortar real estate and store-based inventory when each of those assets is being devalued by share shifts toward ecommerce. Its U.S. ecommerce business is roughly 3 per cent of total sales, not a standout ratio, which speaks to the notion that it is quite sheltered from ecommerce but refutes the notion that is evolving into Amazon, per se.
"Looking at other large-cap consumer firms that have experienced a renaissance of sorts, we find that its numbers and transformational dynamics do not quite live up to those evidence at, for instance, MCD, which posted faster earnings growth and truly transformed through a refranchising effort."
Having reached a "fear out of missing out" (FOMO) moment, National Bank Securities analyst Maxim Sytchev upgraded his rating for Ritchie Bros. Auctioneers Inc. (RBA-N, RBA-T)
"While we concede that we could be a bit early on our call, it appears that most of the bad news is already impounded in the market's expectations," said Mr. Sytchev.
He raised the Vancouver-based company to "outperform" from "sector perform."
"Avoiding linear thinking on dislocated stories is not easy to do because we have to make a mental leap that the current dire state of affairs (macro and/or micro) is not a permanent shift," the analyst said. "RBA investment thesis reminds us of SNC in 2012 and Stantec/Finning in 2016 (for different reasons). In those instances, strong balance sheets and macro improvements helped shift the sentiment, over time, into a more positive state, propelling the shares higher as a result. RBA's share price is now sitting BELOW the levels of Q2/16 disappointment when the company's discussion around the competitive dynamic spooked the market (only to more than reverse on the back of IronPlanet (IP) transaction that would have alleviated the competition concerns).
"Material Q3/17 miss due to combined RBA/IP cost structure, lack of equipment availability and questions around capital allocation therefore present an interesting opportunity where a value argument can be made on the shares for the first time in years, whereby they trade at TROUGH multiple on TROUGH EPS. This is a FOMO moment for us. We do believe that equipment cycle will turn, freeing up the used market in H1/18E. The shares typically react strongly to gross auction proceeds and we want to be AHEAD of this inflection point."
Mr. Sytchev said he does think the stock is currently in distressed valuation territory but "likely closer to the bottom."
He noted: "Importantly, buying at similar levels on some metrics has proven to be a profitable trade in the past, especially when using the dividend yield as the trigger. More specifically, buying shares at peaking dividend yield in March 2009, Aug 2010, Oct 2011, Oct 2013, Jan 2016 would have yielded relative median returns (34.3 per cent/37.2 per cent respectively) over the coming 6-12 months that are very attractive in currently generally fairly valued market. Using EV/EBITDA and P/E metrics as a trigger point is more challenging because of the fluctuating nature of EBITDA and earnings; that being said, the forward multiples are now below the long-term median on materially reduced forward expectations. Current price to book multiple of 3.8x is below the long-term median of 4.4x, again highlighting investors' aversion towards the name. The counterargument on book value however is potential goodwill write-down on IronPlanet transaction if the macro story does not pick-up over the coming 12-15 months."
After increasing his 2018 earnings per share projection to $1.22 (U.S.) from $1.13 based on a "loosening" of the used equipment market, which he called a major catalyst, he raised his target for the stock to $30.50 (U.S.) from $28. The average is $26.22.
Mosaic Capital Corp.'s (M-X) "increasingly complicated" capital structure necessitates a "pause to re-evaluate," said AltaCorp Capital analyst Chris Murray.
He downgraded the Calgary-based investment company to "sector perform" from "outperform."
On Nov. 14, Mosaic reported third-quarter adjusted fully diluted earnings per share of 7 cents, topping Mr. Murray's projection by a penny. Revenue of $95.7-million was slightly below his expectation ($100.5-million).
"The company continues to pursue its acquisition strategy designed to build a diversified portfolio, targeting mid-market companies generating $10-million in EBITDA or less," the analyst said. "The company also expects year-over-year gain in contribution from 'several' of its legacy portfolio companies. While performance of certain Western Canadian portfolio companies remain below historical levels, management indicated that recovery in the Western Canadian economic activity has seen improvement in profit contribution from these companies. Additionally, improvement in weather-impacted operating conditions in eastern Canada has positively influenced the company's construction related business."
Based on the results, Mr. Murray raised his 2017 EPS projection to a 38-cent loss from a 46-cent loss. His 2018 estimate rose to a 31-cent profit from 16 cents.
However, he lowered his target for the stock to $8 from $10. The average target is $8.94.
"We believe the increasing complexity of the company's capital structure could pose problems in the future as it continues to seek growth, particularly as certain of the operating companies have shown some challenges," he said. "While we see some opportunity for improvement, the various debt, preferred and derivative components of the company's capital structure are weighing on the equity component, potentially increasing volatility and risks."
Ahead of what he expects to be a "gradual" streamlining of its portfolio beginning in 2018, Desjardins Securities analyst Michael Markidis lowered his target price for units of H&R Real Estate Investment Trust (HR.UN-T).
On Nov. 13, the Toronto-based REIT reported third-quarter financial results that largely met Mr. Markidis's expectations. It also announced a plan to sell all 79 of its wholly-owned U.S. retail properties and, with its partners, its 12 remaining U.S. industrial properties. It values the properties at approximately $900-million (U.S.).
The analyst called its plans for capital recycling a "key theme," noting: "Although there might be some debt prepayment penalties, capital gains tax should be managed via 1031 exchanges as disposition proceeds are plowed into the expansion of the Lantower residential platform."
He said it's "exciting times" at its Lantower Residential subsidiary, calling it "an exciting platform with runway for further growth."
"Although this business is still in its infancy, we believe that management has made great strides in building out this platform," said Mr. Markidis. "In U.S. dollar terms, same-property NOI [net operating income] increased 5.4 per cent in 3Q17 (6.1-per-cent year-to-date). "The portfolio continues to expand, with the acquisition of Seneca at Cypress Creek ($79-million U.S., $175,000 per suite) subsequent to quarter-end and another three properties under contract that are likely to close prior to year-end.
"In addition to growing the asset base, HR has also been moving to internalize the property management of this business, which was initially handled exclusively by third-party entities. Six properties have been internalized thus far and another five will be transitioned within the next 60 days; as a result, 70 per cent of the portfolio should be operated by HR's management platform by the end of this year (assuming closing of the properties under contract). Management has communicated its intention to utilize the majority of capital that will be repatriated from the U.S. retail and industrial dispositions to fund further expansion of the Lantower asset base, primarily via acquisitions. All else equal, this initiative could potentially grow this segment to 15 per cent of total assets from 6 per cent at the end of 3Q17."
After "tweaks" to his net asset value estimate, Mr. Markidis lowered his target for the REIT to $24 from $25, maintaining a "buy" rating. The analyst consensus target is currently $24.73.
Though he expects near-term iron ore price fluctuations to provide headwinds, RBC Dominion Securities analyst Tyler Broda sees "significant" medium-term upside for Vale S.A. (VALE-N) through both "rapid" deleveraging and "increasingly compelling exposure to positive structural trends" in the iron market.
Accordingly, he raised his rating for the Brazil-based miner to "outperform" from "sector perform."
"The winter pollution curbs and weakening Chinese growth expectations are likely to place iron ore under some pressure in the very near-term," said Mr. Broda. "This said, the structural Chinese supply side reforms are pushing significant advantage towards Vale - our analysis suggests higher grade premia and pellet prices are likely to drive significant earnings upgrades as Vale delivers on its final phase of growth. The pellet market in particular looks increasingly attractive and is a segment where Vale dominates the seaborne trade (consensus 55mt coming). We remain structurally more positive on iron ore prices ($65 per ton long-term) than consensus, as higher Chinese steel utilization rates drive higher margins and allow for higher iron ore prices, and especially for higher quality materials, where Vale is once again best in class."
Mr. Broda believes the Street is likely undervaluing the high margin iron ore business, noting: "There is significant consternation around the outlook for iron ore and we understand this, however, with expansion capex falling away post S11-D the market may be over appreciating the risk to these cash flows. We have invented an alternate structure as a thought experiment which would create a $10 per ton listed iron ore royalty that would not be exposed to price fluctuations. We would value this 'Iron Bond' at $44-billion based on a 6-per-cent 2018FCFY [free cash flow yield]. This in itself would account for 60 per cent of the current overall enterprise value (EV) of Vale. By selling down 25 per cent of this, Vale could cut its net debt in half and would diversify the residual cash flows. The iron bond would still work in a $45 per ton environment. We calculate that if the market priced this 'structure' inline with our estimates this could provide a 26-per-cent uplift to value (beyond our current 47-per-cent 12 month target upside)."
The analyst raised his target price for Vale shares to $14.50 (U.S.) from $11. The analyst consensus price target is $11.35.
In other analyst actions:
Citing increased comfort with its 2018 outlook and calling its earnings has been "somewhat de-risked," Guggenheim Securities analyst Emmanuel Rosner upgraded General Motors Co. (GM-N) to "buy" from "neutral" with a target price of $52 (U.S.), up from $48. The average target on the Street is $46.83.
Piper Jaffray analyst Troy Jensen raised his rating for 3D Systems Corp. (DDD-N) to "neutral" from "underweight" with an unchanged target of $10 (U.S.). The analyst average is $9.68.
Believing "much of the bad news is behind," Verizon Communications Inc. (VZ-N) was raised to "outperform" from "market perform" by Wells Fargo analyst Jennifer Fritzsche, who raised her target for the stock to $50 (U.S.) from $48. The average is $50.55.