Inside the Market's roundup of some of today's key analyst actions
Noting the Toronto-based miner has underperformed the VanEck Vectors Gold Miners ETF (GDX) by 14 per cent over the last four months, Mr. Walker upgraded his rating for Barrick shares to "outperform" from "sector perform."
"This underperformance likely reflects the expected declining production profile, higher than expected long-term AISC [all-in sustained cost] guidance, and the overhang from the Acacia/Tanzania dispute," the analyst said. "However, we believe much of the downside risk is priced in and the current share price decline is overdone."
In mid-February, Barrick raised its long-term AISC guidance to US$750-875 per ounce, well above Mr. Walker's "aspirational" target of US$700, while it projected an eighth consecutive annual decline in production.
"We forecast attributable gold production of 4.73 million ounces at $799 per ounce AISC in 2018, declining to 4.19 million ounces at $801 per ounce AISC in 2020, within company guidance ranges," he said. "ABX's production is expected to be the weakest in Q1/18 and improve sequentially over 2018. We forecast operating margins to generate FCF for the ongoing deleveraging and development projects. After the $5-billion debt target is achieved, from 2019 to 2022 at gold price scenarios of $1,200 and $1,300 per ounce, we estimate $300-million to $560-million per year of average net free cash flow after dividends and estimate cash flow breakeven at $1,100 per ounce."
Mr. Walker believes the impact of both the cost guidance increase and decline in production is now priced into its shares and relative valuation, creating an opportunity for investors.
With his rating change, he lowered his target price for Barrick shares to US$16 from US$17. The analyst average target price is currently US$16.04, according to Bloomberg data.
"Our NAV [net asset value] declined by 10 per cent to $9.93 per share and our 3-year sustaining CF [cash flow] declined by 7 per cent to $1.46 per share (excluding attributable ACA cash flows)," said Mr. Walker. "Our price target is $16 (was $17), based on unchanged multiples of 1.4 times NAV and 15.0 times enterprise value-to-adjusted CF, in line with the average for the senior gold producers. ABX is trading at 1.19 times our NAV@7% and 12.0 times 3-year EV/sustaining CF, versus the other NA Senior gold producers at 1.41 times and 11.6 times, respectively. The company has attractive FCF yield, P/NAV and P/CF metrics versus its peers. The 36-per-cent implied all-in return to our price target is above our average 2 per cent for peers, supporting our Outperform rating."
Seeing signs of a turnaround following stronger-than-expected fourth-quarter results, BMO Nesbitt Burns analyst Peter Sklar upgraded Cara Operations Ltd. (CARA-T) to "outperform" from "market perform."
"We believe that after a year of soft same restaurant sales (SRS) and earnings, the company appears to be in the early stages of a turnaround amidst operational improvements and a more favourable macroeconomic backdrop," said Mr. Sklar.
On Thursday after market close, the Vaughan, Ont.-based restaurant operator reported normalized diluted earnings per share of 51 cents, exceeding Mr. Sklar's projection by 5 cents. SRS growth of 2.5 per cent also topped his expectation (1.3 per cent), which he attributed to a weak performance a year earlier though he expects the trend to continue.
"While the company was late in implementing a digital strategy, we note that several initiatives have been launched and appear to be gaining momentum," said the analyst. "The Swiss Chalet banner now has a mobile app and other banners are expected to follow. Currently, 500 restaurants in the Cara network are available on online aggregators such as Uber Eats. Cara has established a social media presence and also deployed its customer relationship management platform last year. Cara renovated 92 restaurants in 2017, or 7 per cent of the network, which is a solid rate of remodels as the company continues to upgrade its locations and re-position the banners.
"We also believe the Canadian consumer's economic profile is strengthening, particularly in Western Canada, which has been an area of underperformance for Cara. As Western Canada continues its economic recovery, we consider there should be notable upside for Cara's restaurants in the region."
Mr. Sklar raised his target to $30 from $27. The average is $29.39.
Believing its shares are currently fairly valued compared to its senior gold peers and present a modest relative return to his target price, Mr. Walker downgraded his rating for Newmont Mining Corp. (NEM-N) to "underperform" from "sector perform."
"Over the last five years management has established Newmont as one of the preeminent global gold miners, with steady operating results, a stable five-year production outlook, and a predictable return of capital," he said. "The stable long-term outlook has contributed to the recent relative strength in Newmont's share price performance versus its peers, having outperformed the GDX by 10 per cent over the last six months. However, we see alternative investments in the Senior gold producer space that offer investors growth or a valuation re-rating higher."
His target price for Newmont shares fell to US$43 from US$45. The average is US$43.72.
"After updating our forecasts, our NAV [net asset value] declined by 8 per cent to $21.73 per share as we brought our long-term production forecasts more in line with the midpoint of guidance ranges, with slightly higher AISC costs," he said. "Our $43 price target (was $45) at flat $1,300 per ounce gold is based on unchanged valuation multiples of 1.6 times NAV@7% and 16 times EV/3-year forward adjusted CF. On our numbers, Newmont is trading at 1.74 times NAV and 11.8 times forward EV/adjusted CF, a premium to the peers at 1.28 times and 11.6 times, respectively.
"The 16-per-cent implied all-in return to our $43 price target is below our average return of 33 per cent for peers. We also believe that gold producers become 'Value Traps' as they approach 5 million ounces in annual production given that it is difficult to identify material new projects (i.e., 400–500,000 ounces annual production) that can generate attractive returns. As such, we maintain our Senior sector leading target multiples for Newmont."
Cominar Real Estate Investment Trust's (CUF.UN-T) recent strategic initiatives and improved corporate governance should be viewed positively by investors, said Industrial Alliance Securities analyst Brad Sturges.
"Cominar is anticipated to provide further clarity about its near-term strategic initiatives in the coming months, including details regarding the second phase of non-core asset sales. We believe further strategic announcements could act as a positive catalyst for the REIT's units in the next 12 months," said Mr. Sturges.
He raised his rating for the Quebec City-based REIT to "buy" from "hold," citing the following factors:
- A discounted valuation to its estimated net asset value (NAV) as well as to its Canadian diversified commercial REIT peers;
- Enhanced corporate governance practices, stemming from a "significant" modernization initiative launched in 2017, and greater capital markets and Canadian commercial real estate board expertise;
- The expectation for a stronger balance sheet over the next 12 months, "benefiting from a more prudent 71-per-cent annualized AFFO [adjusted funds from operations] payout ratio";
- The potential for a price-to-AFFO multiple expansion over time, which he believes can be driven by "improving longer-term organic and NAV per unit growth prospects."
Mr. Sturges said Cominar went "back to its roots" with the $1.14-billion sale of non-core assets in Ontario and Atlantic and Eastern Canada to Slate Acquisitions Inc., announced in early January. Its focus now rests the Quebec commercial real estate market in which the analyst said it has created a "strong" operating track record and a competitive position,
"The REIT's senior management team and board of trustees have extensive real estate asset and property management experience in the province," he said. "Cominar's commercial property footprint has positioned the REIT as the largest landlord in the province, providing it with local property market knowledge and leasing relationships across all commercial property segments in Quebec. The REIT's presence in Quebec creates significant economies of scale, which helps minimize operating and overhead costs.
"With over 50 per cent of its core commercial asset portfolio in Montreal, Cominar expects to participated in the growth of Canada's second largest city as major infrastructure projects, such as the Reseau Express Metropolitain (REM), drive NOI [net operating income] growth and provide value-add intensification opportunities in the REIT's existing Montreal portfolio over time. Also, the REIT expects its Quebec City commercial property portfolio could provide both cash flow stability and growth opportunities, with a high office and industrial portfolio occupancy rate at 95.5 per cent. Like Montreal, Quebec City stands to further prosper as it refines its urban development strategy and mass transit orientation."
Mr. Sturges raised his target price for units of Cominar to $14.50, or 6 cents less than the consensus, from $14.
Peyto Exploration & Development Corp. (PEY-T) is "trapped in a weak market," said BMO Nesbitt Burns analyst Randy Ollenberger, downgrading his rating for its stock to "market perform" from "outperform" after lowering his financial expectations for 2018 and 2019.
"Peyto's shares have underperformed over the past year due in part to the weakness in western Canadian natural gas prices, which have decoupled from U.S. natural gas prices," he said. "The price spread between Henry Hub and AECO has expanded from its historical trading range of $0.50-1.00/Mcf to $1.00-2.50/Mcf. Similarly the differential between the AECO price point and Station 2 in British Columbia has also expanded and has been materially more volatile.
"In our opinion, the reason for the increase in basis spreads for western Canadian natural gas is primarily excess supply. Western Canadian natural gas production has grown from approximately 13.7 bcf/d in 2012 to 15.5 Bcf/d in 2017 without any appreciable change in pipeline capacity exiting western Canada. We forecast western Canada production to increase to roughly 16 Bcf/d in 2019 and 16.7 Bcf/d in 2020 based on the current growth plans of western Canadian producers. The growth in production is expected to be driven by companies pursuing liquids-rich plays in the Montney, only partially offset by a decline in dry gas production. Based on our supply forecast, we believe that available natural gas supply will exceed market and pipeline capacity, and this could place additional downward pressure on western Canadian natural gas prices through 2019. "
In reaction to his updated commodity price outlook, Mr. Ollenberger lowered his 2018 cash flow per share estimate to $3.33 from $3.34. His 2019 projection declined to $2.44 from $2.53.
His target for Peyto shares fell to $12 from $15. The average on the Street is $15.27.
"We believe that a higher valuation multiple could be warranted by the company's above-average ROCE performance," he said. "We expect the company to remain focused on returns on capital rather than growth, which translates to below-average growth in cash flow and production ... Our $12 target price implies an expansion in the company's 2019 estimated EV/EBITDA multiple to 7.1 times."
In reaction to its fourth-quarter fiscal 2017 financial results, released Thursday, Canaccord Genuity analyst Dennis Fong raised his rating for Calgary-based Freehold Royalties Ltd. (FRU-T) to "buy" from "hold."
He said: "Our concerns when we initiated coverage of Freehold revolved around several main themes: 1. Declining organic royalty production and reliance on inorganic opportunities to grow production; 2. Blend of working interest and royalty production warrants a discount from other royalty companies. 3. Concerns around activity levels given commodity price and size of GORR [gross overriding royalty] portfolio;
"Looking at the company today, we believe the above concerns have been addressed."
In justifying his upgrade, Mr. Fong pointed to a quartet of factors:
- Its organic royalty growth potential.
He noted his primary concern previously was its falling organic royalty production per share and that it need to acquire new assets to "backfill production and show growth. From our estimates, the company has for the first time in the past six years shown per share organic royalty production growth. Management has recently been more aggressively seeking out leasing opportunities with associated drilling activity. We expect this has now helped reverse the trend of organic royalty production decline and help backstop an upward multiple re-rate."
- "The path towards a more pure play royalty company."
He expects Freehold to continue to divest of lower netback working interest production, adding: "The company currently has 1,072 Boe/d [barrels of oil equivalent per day] (56-pe-cent liquids) of working interest production. We estimate that the company could see up to $20-million for the sale of a portion of these assets which would contribute towards debt repayment."
- Freehold's low payout brings the potential for an additional dividend increase this year.
- Valuation support.
He said: "Freehold continues to trade at a substantive discount to PrairieSky, but while we acknowledge the difference in royalty acreage quality (PSK has a considerably larger fee title land base), we view the growing organic royalty production, continued sell-down of non-royalty assets and increased activity levels as justifying a trend towards a more comparable royalty co. multiple."
Mr. Fong kept a target price of $16 for Freehold shares. The average is currently $17.20.
In other analyst actions:
Scotia Capital analyst Pammi Bir upgraded WPT Industrial Real Estate Investment Trust (WIR.U-T) to "sector outperform" from "sector perform" with a target of $14.50, up from $13.50. The average is $14.34.
National Bank Financial analyst Tal Woolley downgraded American Hotel Income Properties REIT LP (HOT.UN-T) to "sector perform" from "outperform" with a target of $9, down from $11.50. The average is $10.36.
Cormark Securities analyst Jason Zhang downgraded Xtreme Drilling Corp. (XDC-T) to "market perform" from "buy" with a target of $2.75. The average is $2.50.