Monday’s analyst upgrades and downgrades

Share

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

RBC Dominion Securities analyst Stephen Walker expects shares of First Quantum Minerals Ltd. (FM-T) to re-rate higher as its Cobre Panama copper project ramps up over the next 12-18 months.

Projecting a copper production compound annual growth rate of 22.4 per cent from 2017 through 2019 with "significant" growth in free cash flow, Mr. Walker said First Quantum offers investors with the best leverage to production growth in his coverage universe.

That led him to upgrade his rating for the Toronto-based company to "outperform" from "sector perform."

"First Quantum is a copper growth story and with the ramp up of Cobre Panama in late 2018, we forecast copper production to grow from 569,000 tons in 2017 to 853,000 tons in 2019, for a 2-year CAGR of 22.4 per cent," said Mr. Walker, the firm's Head of Global Mining Research. "With free cash flow growth in 2019 we expect excess capital to pay down debt and make investments in existing mines & greenfield opportunities like Taca Taca.

"The company has an expertise in building and operating base metal mines … We forecast continued production improvement at Sentinel, and expect steady production from Kansanshi and Las Cruces, and declining production at Cayeli and Guelb Moghrein as these mines mature. Cobre Panama's physical construction is currently 63 per cent completed with wet commissioning expected in early Q3/18 and initial concentrate production in late Q4/18. We forecast 50,000 tons of metal in concentrate production in 2018, followed by production of 253,000 tons and 293,000 tons of copper in 2019 and 2020 respectively."

Mr. Walker believes First Quantim will reap the benefits of production growth as well as his expectations of a "strengthening copper market" with the completion of Cobre Panama. He's projecting "significant" free cash flow generation and deleveraging alongside "modest" cash flow in 2018, which he estimates will grow to $1.935-billion, $2.474-billion and $2.882-billion from 2019 to 2021, respectively, based on his copper assumptions of $3.00 per pound, $3.25 and $3.50.

"Even with our current copper price assumptions 20 per cent lower ($2.40/lb, $2.60/lb & $2.80/lb) the company generates material free cash flow over these three years," the analyst said. "Similarly, with respect to key debt covenant of Net Debt to EBITDA the company has sufficient financial flexibility through the ramp up of Cobre Panama.

"We have also run sensitivity of the cash position at $2.25, $2.50, $2.75 and $3.00/lb flat copper prices and First Quantum has a positive cash balance, without drawing on any credit facilities, at a flat $2.50/lb copper price."

Mr. Walker raised his 2018 and 2019 earnings per share projections for the company to 79 cents and $1.78, respectively, from 60 cents and $1.31.

His target price for First Quantum shares rose to $21 from $15. The analyst average price target is $19.09, according to Bloomberg data.

"When we measure First Quantum versus its peers using EBITDA growth and NAV @8%, FM has the most compelling valuation compared to our other North American base metal mining names under coverage," he said. "With 2017 to 2019 production CAGR of 22.4 per cent, the company has superior growth compared to its copper producing peers."

=====

TORC Oil & Gas Ltd. (TOG-T) offers investors light oil exposure into 2018 "with all the right fixings," said Raymond James analyst Jeremy McCrea.

"As Canadian Par prices hold in above $70 per barrel, we think it's hard for investors not to like most light oil-weighted names right now" he said. "What should make TORC more favourable than others, in our view, is the low risk exposure of the business – with a highly regarded management track record, some of the most profitable well economics in the basin with its Mississippian conventional wells, top tier balance sheet and reasonable growth at 5 per cent (excluding dividend returns). Although we would argue in prior years the valuation for the name was relatively expensive, at current prices, we think investors looking for oil-weighted torque with less risk should find TORC rather attractive."

In a research note released Monday, Mr. McCrea initiated coverage of Calgary-based TORC with an "outperform" rating.

Mr. McCrea said the company's "steady" pace of development with "little" infrastructure requirements should allow it to keep profitability high for the foreseeable future, citing its "low" production decline profile (23 per cent) and 850-plus identified drilling locations, which he said have "above-average" well economics.

"On a go-forward basis and consistent with management commentary, investors should keep an eye on future growth from the unconventional Midale and Torquay along with potential acquisitions," he said. "Encouragingly, when discussing potential acquisitions, quality of new inventory (relative to current locations) and the competitive advantage that can be applied to new assets are a refreshing change from accretive growth goals. With the capital allocation and corporate strategy in the right mind frame, we think investors should only be asking themselves about valuation."

Mr. McCrea set a price target of $7.50 for TOTC shares. The average is currently $8.39.

"Given the consistency in well results and low level of debt, we believe investors should be willing to pay $975 mln in potential future upside for TORC's acreage in SE Saskatchewan and Cardium in addition to the PDP [proved developed producing] blowdown (all discounted back at 10 per cent)," he said. "As such, we calculate a NAV of $7.50 per share and believe investors should be comfortable buying the shares under this price."

=====

Despite reporting second-quarter 2018 financial results that met his expectations, Beacon Securities analyst Gabriel Leung downgraded Tecsys Inc. (TCS-T), saying he's "taking a breather as we await catalysts."

On Friday, the Montreal-based technology company reported revenue and earnings before interest, taxes, depreciation and amortization of $18.1-million and $2.2-million, respectively. Both were increases from the same period a year ago ($16.5-million and $935,000).

"The company noted that its complex distribution business achieved solid growth in terms of both new contract and base account sales," said Mr. Leung. "However, its healthcare business continued to be constrained in the quarter by uncertainty around U.S. healthcare legislation. That said, it did sign orders in the healthcare vertical in early fiscal Q3.

"Gross margins were 52 per cent versus our 50-per-cent [estimate]. Meanwhile operating expenses were in-line with expectations at $7.8-million, which included a $391,000 one-time severance in sales and marketing and $310,000 of refundable and non-refundable R&D and ebusiness tax credits.

"Bottom-line, we believe Tecsys remains a great long-term fundamental play, particularly given its dominance in healthcare," he said. "We believe this organic story could now potentially be enhanced through acquisitions."

"That said with the stock now trading above our $15.00 target, which is based on 17 times fiscal 2019 EV/EBITDA, we are compelled to lower our rating to Hold (was Buy) pending the deployment of cash for acquisitions or a meaningful pick up in the healthcare business over the near-term."

Mr. Leung  raised his target for the stock to $15 from $13.50. The average is $17.50.

=====

Expressing incremental confidence in its guidance for next year, RBC Dominion Securities analyst Robert Wetenhall raised Owens Corning Inc. (OC-N) to a "top pick" rating, expecting double-digit EBITDA growth, "robust" free cash flow generation and multiple expansion.

Mr. Wetenhall said he sees the stock continuing to rise in price even with its "strong" year-to-date performance. It was up just over 70 per cent heading into Monday's trading session.

"OC is a diversified building products company that manufactures fiberglass composites, insulation, and roofing shingles," he said. "Structural changes to the portfolio during the past five years have produced incrementally stronger operating margin performance. Improving demand across the portfolio driven by strength in both residential and commercial markets, stronger execution, and an accretive M&A program have collectively driven profitable growth that we believe will continue in the next few years. Strong earnings growth coupled with the company's $1.8-billion NOL [net operating loss] has also resulted in robust FCF generation which has been used to fund accretive M&A activity. We think the virtuous circle created by structural improvements that have created sustainable competitive advantages in the markets in which OC operates positions the company to generate strong earnings growth that we believe will be augmented by cyclical tailwinds."

Upgrading the stock from "outperform," Mr. Wetenhall hiked his target to $112 (U.S.) from $100. The average on the Street is currently $89.58.

"OC trades at a FY18E TEV/EBITDA multiple of 8.25 times consistent with a low quality cyclical business," he said. "We think structural changes driven by industry consolidation in composites and roofing as well as limited industry capacity in residential insulation warrant a 10.0 times valuation multiple that is consistent with the peer group average but still a discount of 10 per cent to 20 per cent to FBHS, MAS, & MHK."

=====

Raymond James analyst Chris Cox raised his target price for shares of Suncor Energy Inc. (SU-T, SU-N) following recent investor meetings with its management.

"We continue to believe Suncor represents the 'gold standard' among integrated producers, both in Canada and globally," he said.

Mr. Cox emphasized management's confidence in its improvements in operational execution and cost structure, which he believes is positioning it well to "execute on an attractive cash return story for investors."

"One of the key highlights from our road trip was a high level of confidence by Management regarding the ramp-up of Fort Hills and opportunities to further improve operational performance at Syncrude," he said. "Despite the strong operational execution Suncor has exhibited with its base oil sands operations in recent years, we believe investors remain somewhat skeptical on both mining operations, and expect these concerns to be alleviated as 2018 progresses."

"With the Fort Hills and Hebron projects driving the growth story in 2018, investors are beginning to look ahead to the next phase of growth for Suncor. Management provided rough guidance of $1.0–$1.5 bln of annual growth capex over the next few years. While this will result in a modest 2–3-per-cent AGR in production post-2019, we note that many of these projects are expected to come with attractive margin improvements, especially with respect to lowering the cost structure of the business; this should allow cash flow growth to outpace production growth."

After raising his 2017 and 2018 revenue and earnings projections for Suncor, Mr. Cox raised his target for its stock to $52 from $47. The average is $49.11.

"We continue to see an attractive cash return story playing out here with Suncor," he said. "The company already boasts one of the most attractive break-even profiles across the global oil and gas sector, with the free cash flow profile improving materially once the Fort Hills and Hebron projects ramp-up. Further improvements to the cost structure should facilitate continued dividend growth for investors beyond the increases that we expect over the near-term, while still allowing the company to fund sustaining capital and the dividend form operating cash flow at US$40/bbl or lower. Finally, with an integrated asset base that almost fully insulates the company from volatility in heavy oil differentials, and with negligible volumes of natural gas in the portfolio, we see Suncor as one of only a few quality producers within the Canadian energy market that can shield investors from the negative effects of the two key macro trends we see weighing on the broader Canadian E&P sector – structurally weaker heavy oil differentials and AECO pricing.

"All told, Suncor remains one of the most attractive risk-reward opportunities in the large cap energy sector and a core holding in our view."

=====

Though he believes Blue Apron Holdings Inc. (APRN-N) is "tackling" a potential very large market opportunity, RBC Dominion Securities analyst Mark Mahaney believes the U.S. meal kit company will face a near-term headwind from its operational and fundamental visibility.

In reaction to its announcement on Thursday after market close that co-founder Matt Salzberg has stepped down from his role as President and CEO with Chief Financial Officer Brad Dickerson taking over, Mr. Mahaney downgraded the company's stock to "sector perform" from "outperform."

"We start off by acknowledging that our Outperform call since July 24 at $6.55 has been wrong," the analyst said. "We have been arguably overly patient with the company as it attempts to conduct a very challenging execution against a potentially very large market opportunity. Brad Dickerson may very well prove to be a successful CEO, but at the margin we view the management change as implying less visibility and certainty into APRN's fundamentals. Frankly, the level of operational, fundamental and management volatility since its IPO is the most we have witnessed among any Internet stock…hence the downgrade. Our new price target is $4 which is 0.6 times P/S on our 2019 revenue estimates of $1.1-billion. For context, the stock is currently trading at 0.6 times our 2018 revenue estimate of $960-million."

"While the stock is trading low, we believe the valuation is fair at current levels given the near-term visibility and operational headwinds."

His target fell to $4 from $6. The average is $5.03.

=====

Anticipating its liquids production will exceed expectations, BMO Dominion Securities analyst Ray Kwan upgraded Tamarack Valley Energy Ltd. (TVE-T) to "outperform" from "market perform."

"The strong well results as well as the higher oil cuts versus prior years at Veteran (Viking) lead us to believe that the company is within reach of achieving its 60-62-per-cent liquids (52-per-cent oil) weighting by year-end," the analyst said. "For 2018, we suspect that this could be higher, driven by the fact that management will pause its liquids-rich gas activity at Alder Flats/Wilson Creek (Mannville/Cardium), given the poor gas outlook in Western Canada."

"Assuming Tamarack's activity will be all focused at Wilson Creek and Veteran for 2018, we estimate that its liquids production can increase by 28 per cent year over year, representing nearly 65 per cent of production. This compares to the Street consensus of 59-60-per-cent liquids for 2018. Notably, Tamarack's Wilson Creek type curves liquids weighting assumes IP365 of between 78 per cent and 84 [er cent, while its Veteran Viking type well assumes an IP365 liquids weighting of 89 per cent."

After raising fourth-quarter and 2018 estimates due to higher forecast liquids weighting, Mr. Kwan raised his target for Tamarack Valley shares to $4.25 from $3.50. The average is $3.95.

"At 3.5 times 2018 estimated EV/EBITDA (strip), we think the valuation is attractive, even relative to its historical valuation, which has been near the bottom end of its peer group," he said.

=====

Mackie Research Capital analyst Greg McLeish initiated coverage of Doja Cannabis Company Ltd. (DOJA-CN) with a "speculative buy" rating.

"DOJA's strategy is to become a supplier of high-quality dried marijuana and cannabis oils for discerning medical and recreational consumers," he said. "Management believes that its growing facility is ideally suited for this purpose and is currently cultivating marijuana strains it feels will be appealing to its customers. High-quality buds can command a price premium of approximately 150 per cent ($15.00 per gram versus $6.00/g) and this is the market the company is looking to target."

Currently the lone analyst covering the stock, according to Bloomberg, Mr. McLeish set a price target of $2 for Doja shares.

"Canada is developing a world class cannabis industry and companies operating in the sector are just in the early stages of growth," said Mr. McLeish. "As a result, historical trading patterns are not a good proxy for establishing appropriate valuation multiples. In determining our valuation multiples, we focused on Health Canada licensed producers that will operate in both the medical and recreational marijuana markets. These companies have been trading between 10– 15-times forward 2020 EV/EBITDA estimates. Industry dynamics are very compelling and, once these companies achieve economies of scale and improve operational efficiencies, they should be able to generate EBITDA margins in excess of 30 per cent. Additionally, Constellation Brands (STZ-N) recently made a $245-million investment (9.9 per cent) in Canopy Growth (WEED-T) and we believe that this could be the beginning of an investment trend whereby other multinational players (alcohol, tobacco and pharma) will look to position themselves in the Canadian cannabis space.

"We forecast that the majority of companies operating in the cannabis sector will not experience material revenue or earnings growth until at least 2019 or 2020. As a result, we value companies based on our financial projections through 2020. However, investing in the cannabis sector is not for the faint of heart since companies operating in the sector will most likely experience both regulatory and operational challenges. Given the speculative nature of this investment, we have applied an 11 times EV/EBITDA multiple and a discount rate of 30 per cent to account for these risks."

=====

Projecting gross merchandise volume to growth in 2018 and believing the Street's current GMV expectations are too low, BMO Nesbitt Burns analyst Daniel Salmon upgraded eBay Inc. (EBAY-Q) to "outperform" from "market perform."

"We believe the company's new marketing campaign as well as several ongoing initiatives (eBay Guaranteed, Grouped Listings, investments in structured data/machine learning, etc.) should support accelerating Marketplace GMV growth," said Mr. Salmon. "We expect eBay's U.S. Marketplace GMV to get a benefit from increased exports to Europe, driven by the weakening of the U.S dollar. We also see the company's cross border trade business in China and Gmarket/Internet Auction businesses in South Korea supporting our international GMV estimates."

He increased his target to $45 (U.S.) from $40. The average is $39.81.

"While we expect increased sales and marketing expenses to weigh on margins in 2018, we believe a faster-than-expected rollout of Promoted Listings and accelerating revenue growth should support a higher multiple and see margins going higher in 2019," said Mr. Salmon.

=====

In other analyst actions:

TD Securities analyst Aaron MacNeil initiated coverage of Total Energy Services Inc. (TOT-T) with a "hold" rating and $18 target. The average target on the Street is $18.42.

GMP analyst Michael P Dunn upgraded MEG Energy Corp. (MEG-T) to "buy" from "hold" and raised his target by a loonie to $7. The consensus is $6.

Citi downgraded Teck Resources Ltd. (TECK.B-T) to "neutral" from "buy."

Credit Suisse analyst Anita Soni downgraded Lundin Mining Corp. (LUN-T) to "neutral" from "outperform" with a target of $8.75, down from $11.50. The average is $9.36.

National Bank of Canada (NA-T) was lowered to "neutral" from "buy" by Eight Capital analyst Stephen Theriault. His target rose by a loonie to $67, which is above the consensus target of $65.77.

Scotia Capital analyst Orest Wowkodaw upgraded Uranium Participation Corp. (U-T) to "sector perform" from "sector underperform" with a target of $5, up from $3.50. The average on the Street is $4.72.

PI Financial analyst Gary Sidhu initiated coverage of INV Metals Inc. (INV-T) with a "buy" rating and $2.05 target. The average target is $1.89.