Thursday’s analyst upgrades and downgrades

Share

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

The near-term headwinds facing Eldorado Gold Corp. (EGO-N, ELD-T) are "too great to ignore" and will make it impossible for its shares to outperform peers until they are resolved, said RBC Dominion Securities analyst Dan Rollins.

Accordingly, he downgraded his rating for the Vancouver-based company to "sector perform" from "outperform."

Mr. Rollins said the decision by Greece's Ministry of Energy and Environment to seek arbitration to settle its dispute with Eldorado over its Hellas Gold project increases political risk at a time in which he perceives the overall political environment to be improving slowly.

"It remains to be seen if arbitration is a way for the Government to more effectively deal with permitting/investment disputes, a way to appease anti-mining factions within the current coalition government, or reflects a more hard-line stance against Eldorado's investment in the country," he said. "Recall, 40 per cent of the company's estimated asset value is linked to Greece."

He also pointed to issues related to Kisladag mine in Turkey, noting: "Challenges at Kisladag have created another reason for caution given slower than expected recoveries have led 2017 production guidance at Kisladag to be downgraded (180-210,000 ounces versus 230-245,000 ounces). While Eldorado expects production to be deferred to 2018 (320-335,000 ounces versus 285,000 ounces), it is imperative Eldorado demonstrate its flagship asset is back on track (33 per cent of asset value)."

Mr. Rollins lowered his adjusted earnings per share projection for 2017 to 5 cents (U.S.) from 9 cents to reflect the Kisladag production issue. His 2018 estimate rose to 13 cents from 11 cents.

"We believe investment managers will take an equal/underweight view on Eldorado until clarity is provided and challenges resolved," he said. "We believe many investors will look to less riskier producers to provide exposure to precious metals. Our view is predicated on the current investment environment where many investors are focused on shorter term investment horizons and have become more risk adverse in nature."

The analyst's target price for the stock now sits at $3.50 (U.S.), down from $3.75. The analyst consensus price target is $5, according to Thomson Reuters data.

"We lower our price target on Eldorado … given higher discount rates (up 2 per cent) on Greek assets to better reflect elevated geopolitical risk/uncertainty," he said. "We now apply a discount rate of 10 per cent on Olympias and Stratoni and a discount rate of 12 per cent on Skouries reflecting additional development risk. Changes to our near-term forecasts reflect updated commodity price forecasts and deferral of production at Kisladag from 2017 to 2018."

Elsewhere, CIBC World Markets analyst Cosmos Chiu also downgraded the stock due to the 18-per-cent production cut at Kisladag, calling it "both unexpected and disappointing."

Moving the stock to "underperformer" from "neutral," his target fell to $3 from $3.50.

=====

Desjardins Securities analyst Gary Ho said AGF Management Ltd. (AGF.B-T) continues to deliver on fund performance.

On Wednesday, the Toronto-based diversified global asset management company reported second-quarter financial results that Mr. Ho deemed "slightly positive."

Adjusted earnings per share of 15 cents beat the projections of both Mr. Ho and the Street by a penny, while wealth management earnings before interest, taxes, depreciation and amortization of $18.8-million fell slightly below the analyst's $19.6-million estimate due to higher expenses.

"In terms of positives, AGF recorded continued improved retail net flows ($107-million versus our -$162-million estimate and $282-million in 2Q FY16) on the back of 30-per-cent growth in gross sales and a 7-per-cent decline in gross redemptions, with momentum carrying into June—the IIROC channel and strategic partners were notable contributors," said Mr. Ho. "Fund performance rebounded, with 53 per cent of [assets under management] above median on a 3-year basis (vs 37 per cent at 1Q FY17). S&W AUM grew 3.7 per cent quarter over quarter to 19.3-billion pounds and dividends from S&W may increase in 4Q; recognition of this investment should be an additional catalyst. Lastly, the alternative build-out is a focus, with a goal of hitting $5-billion in AUM in 3–5 years ($1-billion currently)."

Based on the results, Mr. Ho raised his 2017 EPS projection by 2 cents to 58 cents, despite a drop in his EBITDA estimate (to $73.9-million from $77.4-million).

He maintained a "buy" rating for the stock and raised his target to $7.50 from $7.25. Consensus is $7.

"We foresee a few near/medium-term positive catalysts: (1) improving fund performance leading to 60-per-cent of AUM above median over 3 years; (2) net retail flows improving relative to industry; (3) investors recognizing a proper valuation of S&W; (4) restoring management's credibility; and (5) all of these factors leading to better sentiment and valuation," said Mr. Ho. "The shares also offer an attractive 4.7-per-cent dividend yield."

Meanwhile, CIBC World Markets analyst Paul Holden raised his target to $6 from $5.50 with an "underperformer" rating (unchanged).

"Although the institutional pipeline ended FQ1 positive (up $53-million), net sales were effectively flat in FQ2," said Mr. Holden. "The current pipeline is positive but we are not expecting significant growth for the upcoming quarter. AGFiQ saw its AUM increase by nearly $100-million over the quarter but this was primarily due to internal allocations. While it was a good quarter overall for AGF, business updates from other initiatives reinforce our view that growth from other channels is unlikely to act as a significant near-term catalyst."

=====

Cameco Corp. (CCO-T, CCJ-N) sits a strong position to benefit from the long-term recovery in uranium prices, according to RBC Dominion Securities analyst Andrew Wong.

Believing operational efficiencies support improved free cash flow and dividends in the near term, Mr. Wong initiated coverage of the company with an "outperform" rating.

"In the near term, we believe uranium prices are near floor levels, but they may be relatively range-bound in 2017–18 as the market remains in over-supply and contracts provide coverage for both producers and utilities," he said. "We expect uranium prices to gradually recover starting in 2019 and accelerate starting in 2022. We see several indicators pointing to higher prices: 1) current market prices are well below the cost curve and even the lowest-cost producers rely on long-dated contracts to remain profitable; 2) long-dated contracts signed when uranium prices were higher are expected to expire starting in 2020 and new contracts would require significantly higher prices; 3) new mine supply may be required to meet future demand and require incentive price of at least $50–70 per pound."

Mr. Wong said Cameco has "significant" free cash flow potential with near-term downside support, expecting a recovery in uranium prices will contribute to a higher FCF yield of greater than 10 per cent starting in 2020.

"In the near term, we forecast 4–6-per-cent FCF yield in 2017–19 which equates to $200–300-million and comfortably covers current dividend payments of $160-million," he said. "If uranium prices persisted at $20 per pound, Cameco could still generate at least $200-million FCF through 2021."

He added: "We view Cameco's recent curtailment of higher-cost production as a primary driver of FCF improvements starting in 2017, while the expiration of higher-priced purchase obligations should extend cost improvements through 2020. Overall, we forecast that uranium segment cash COGS will decline to $27 per pound in 2018, from $32 per pound in 2016. … Cameco's contract portfolio provides downside protection that has allowed the company to realize prices well above current market levels. We expect that coverage will start to expire in parallel with significantly higher prices starting in 2021–22, which we believe is well timed to provide Cameco greater market exposure when we expect prices to improve."

Mr. Wong said he has "strong conviction" that price recovery will lift the value of Cameco shares, adding: "We view the strong upside potential as compelling for a patient long-term investor despite uncertainty on timing. We believe Cameco offers an attractive upside/downside profile—our upside scenario valuation of $23 per share, 84-per-cent return versus our downside scenario valuation of $8 per share, negative 36-per-cent return."

The analyst set a price target of $16 for the stock. Consensus is $15.73.

=====

Mr. Wong said he expects shares of Uranium Participation Corp. (U-T) to remain range-bound in the near term.

Though he believes there is long-term upside, he initiated coverage of the Toronto-based company with a "sector perform" rating.

"We believe UPC provides investors the most readily accessible means to gain exposure to the uranium spot price with very limited company-specific risks," he said. "Looking back over the last 12 years since the start of UPC, we note that the company's share price and equity value have an excellent track record of being a strong proxy for uranium spot prices. Currently, UPC holds approximately 15 million pounds U3O8 [Triuranium octoxide], which accounts for 99 per cent of its net asset value. In particular, we focus on the UPC implied uranium price, which has shown a very high correlation to the historical spot uranium price."

Mr. Wong noted the primary drivers of valuation for UPC have proven to be uranium spot prices and changes to the Canadian dollar to U.S. greenback exchange rate.

"We estimate that a plus or minus $5 (U.S.) per pound change in the U3O8 spot price equals a rise of drop of 81 cents per share change in valuation," he said. "We estimate that a 5-cent change in CAD$ per US$ equals a 16 cents per share change in valuation."

He set a price target of $3.90 for UPC share. Consensus is $5.40.

"We think a good entry point would be when UPC shares are trading at an implied discount to the spot uranium price and there is strong conviction on higher uranium prices," he said. "We believe that uranium prices will remain relatively range-bound in 2017–18 at $20–25 per pound while UPC shares currently trade at an implied premium of 17 per cent, and we therefore see limited near-term upside. However, we believe the shares have a favourable long-term upside vs. downside reward profile, as uranium prices have likely reached floor levels. Longer-term, we expect an eventual recovery in uranium prices starting in 2019 to help drive UPC share price higher."

=====

Calling it a "rapidly growing independent asset manager with a burgeoning global platform," CIBC World Markets analyst Marco Giurleo initiated coverage of Fiera Capital Corp. (FSZ-T) with an "outperformer" rating.

"Fiera Capital is on the fast track to becoming a global asset manager with $200-billion in assets under management," he said. "Over the past seven years, management has successfully integrated 13 acquisitions, creating a strong suite of products as well as a platform with a coveted global distribution network. Our Outperformer rating is underpinned by three key factors: 1) a robust acquisition pipeline with the execution prowess to back it up; 2) a clear path towards EBITDA margin expansion; and, 3) an attractive valuation."

He set a price target of $17.50. Consensus is $16.14.

"Fiera Capital currently trades at 9.8 times our 2018 EPS estimate (10.0 times consensus), which is at the low end of its historical range and an 11-per-cent discount to traditional asset management peers," said Mr. Giurleo. "We believe the discount on both a historical and relative basis has been driven by EBITDA margin compression resulting from the firm's U.S. expansion strategy as well as by regulatory headwinds in the mutual fund industry."

At the same time, Mr. Giurleo assumed coverage of Gluskin Sheff + Associates Inc. (GS-T) with an "outperformer" rating, up from a previous "neutral" stance from the firm.

"While there is a long list of reasons to own the shares of Gluskin Sheff, the number one reason not to own the shares of late has been the significant perceived risk surrounding the pending outcome of the arbitration with the co-founders (arbitrator decision expected sometime before the end of July)," he said. "So why get in ahead of the arbitrator's decision? Despite the perceived risk, our valuation analysis indicates that the shares are already largely pricing in the worst possible arbitration outcome (a possible $185-million outlay).

"Bottom line, our Outperformer rating is underpinned by: 1) an enticing risk/reward profile of the shares (12-per-cent downside versus upside of 39 per cent in our base case and 55 per cent in our bull case); 2) an opportunity to buy a strong business at trough valuations (34-per-cent discount to traditional asset management peers); and, 3) a compelling base dividend yield of 6.5 per cent with a potential special dividend kicker, resulting in a total estimated yield of 12.3 per cent."

His target for the stock is $19.50. Consensus is $19.14.

"Since the arbitration with the co-founders was announced in March 2016, shares of Gluskin Sheff have retraced 25 per cent and currently trade at a trough multiple of 5.8 times forward EV/EBITDA, over one full standard deviation below the 10-year historical average of 7.3 times," the analyst said. "In the two years that preceded the arbitration announcement, shares of Gluskin Sheff traded at an average multiple of 8.1 times. Assuming the multiple contraction since the arbitration announcement has related principally to the arbitration overhang implies that the market has already priced in $5.00 per share of potential downside, which exceeds the maximum potential after-tax arbitration liability of $4.16 per share (or $130-million after-tax).

"That being said, we acknowledge that an adverse arbitration outcome could result in further multiple compression and an acceleration in fund outflows. Accordingly, our bear-case scenario reflects further multiple compression to 5.4 times (a level unseen since the financial crisis)."

=====

Spectra7 Microsystems Inc. (SEV-T) is "plugging into the data centre growth opportunity," said Canaccord Genuity analyst Taylor Arnold.

He initiated coverage of the Markham, Ont.-based consumer connectivity company with a "speculative buy" rating.

"The company is positioned as a key supplier in the virtual reality (VR) market and while we are excited by the near-term potential of VR, we view data centre interconnects (DCI) as the more significant and viable long-term opportunity," said Mr. Arnold. "In our view, Spectra7's solution has advantages that are difficult to ignore and management's experience in this vertical provides us with confidence on execution. … While we are positive on the competitive advantages of the company's technology our rating reflects the operational risks of entering the data centre vertical, the downside to our target if this opportunity does not materialize, and the potential for future dilutive financing."

He set a price target of 75 cents. Consensus is 59 cents.

"The semiconductor industry has experienced a wave of consolidation over the past several years as strategic and financial buyers have targeted companies with unique technology and exposure to high growth trends or end-markets," the analyst said. "We have summarized the valuation metrics across a broad range of semiconductor transactions over the past three years and believe this supports our current valuation of Spectra7 and the potential upside beyond that. Our 75-cent target price implies an enterprise value of $97.2-million and equates to a 2018 estimate enterprise value/sales multiple of 5.4 times. While this is slightly ahead of recent transactions, we highlight that our 2018E revenue estimates include only a small contribution from the DCI market. As DCI revenue growth fully ramps up in 2019E, our target would imply an EV/Sales multiple of 3.0 times, which lines up favourably against recent activity and, in our view, highlights the upside to our target if the DCI opportunity materializes faster than we have forecasted. Spectra7's technology and exposure to high-growth markets could position the company as a potential acquisition target for larger strategic buyers looking for greater exposure to the data centre or VR/AR/MR verticals. In our view, the range of possible acquirers may also extend beyond Spectra7's core markets and could attract larger companies looking to repurpose the technology for opportunities in automotive or IoT which both require analog signal conditioning."

========

In other analyst actions:

TD Securities analyst Greg Barnes upgraded Kinross Gold Corp. (K-T) to "action list buy" from "buy" without a specified target. The consensus target is $6.12, according to Bloomberg data.

Laurentian Bank Securities analyst Todd Kepler initiated coverage of Paramount Resources Ltd. (POU-T) with a "buy" rating and $29 target. The average is $23.73.

Scotia Capital analyst Patrick Bryden downgraded Baytex Energy Corp. (BTE-T) to "sector perform" from "sector outperform" and lowered his target to $5 from $7.75. The average is $5.33.

BMO Nesbitt Burns analyst Peter Sklar upgraded Empire Co. Ltd. (EMP.A-T) to "outperform" from "market perform" and raised his target to $25 from $19. The average is $22.55.

Oppenheimer analyst Rupesh Parikh downgraded Whole Foods Market Inc. (WFM-Q) to "perform" from "outperform" without a specified target. The average is $41.53 (U.S.).

RBC Dominion Securities analyst Steven Arthur downgraded Sandvine Corp. (SVC-T) to "sector perform" from "outperform" with a target of $4.15, up from $4.10. The average is $4.08.

Major Drilling Group International Inc. (MDI-T) was raised to "neutral" from " by Eight Capital analyst Jacques Wortman with a $8.75 target. The average is $9.