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Inside the Market's roundup of some of today's key analyst actions
General Electric Co.'s (GE-N) turnaround is likely to be much more protracted than previously anticipated, according to RBC Dominion Securities analyst Deane Dray.
He believes the company's plan, revealed Monday, fell short of the "sweeping" reset of its business model and portfolio that may had anticipated. Accordingly, Mr. Dray sees few reasons to believe its stock bottom is here, leading him to downgrade his rating to "sector perform" from "outperform."
"We attribute the sharply negative stock reaction to the Nov. 13 unveiling of new CEO John Flannery's turnaround plan to a number of disappointments and unsettling disclosures," said Mr. Dray. "The bottom line is that Mr. Flannery's plan fell short of the sweeping reset that investors were looking for after the five-month wait. In our view, there were very little new or bold ideas among the divestiture targets announced and no meaningful changes to the business model or quality of earnings. Instead, we believe the market was caught by surprise by the magnitude of the missteps and secular challenges at Power, as well as the systemic cash flow shortfalls. Particularly damaging, in our view, was the admission that GE had been paying out a dividend above its industrial free cash flow for a number of years, and that GE Capital would not be paying a dividend to the parent in 2018. The 50-per-cent annual dividend cut was mostly as expected, but still a painful reminder of the company's cash flow woes. Finally, the commentary about 2019 did not instill much confidence regarding an earnings recovery, suggesting to us that the turnaround is likely to be more protracted than previously thought.
"At an implied 18.5 times price-to-earnings on reset 2018 EPS, we believe the stock is simply not attractive enough here to support a more positive rating."
GE shares dipped 7.2 per cent on Monday in reaction to its announcement at its annual investor day that it will narrow its focus to power, healthcare and aviation business. As well as a cut to annual dividend (to 48 cents from 96 cents), the company set an earnings target between $1.00 and $1.07 per share for next year, a drop from its earlier forecast of $2.
Mr. Dray believes the disclosures made point to "deeper" structural problems that he anticipated. Though he originally thought Monday's announcement could act as a turnaround, he now sees "increased execution risk over the near-term and a concern that this protracted recovery might get sidelined by an eventual economic slowdown beyond 2018."
He added: "Even with the shares having significantly underperformed this year, it is hard to see anything better than a Sector Perform return potential, and risk-reward looks balanced."
Based on the disclosure, Mr. Dray lowered his 2018 earnings per share projection to $1.03 from $1.02. His 2019 estimate fell to $1.20 from $1.40.
With his rating downgrade, he also lowered his target price for the stock to $20 from $25. The analyst average is $22.80, according to Bloomberg data.
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Believing headwinds are coming, Raymond James analyst Chris Thompson lowered his rating for Asanko Gold Inc. (AKG-T) following a visit to its mine in Ghana last week.
"Pit development and preparation at Akwasiso and Dynamite Hill are in-line with expectations, as are modifications to the plant to satisfy 5 Mtpa (million tons per annum) of fresh and oxide ore treatment. Notable takeaways include potential for near-term adjustments to grade, mine plan, Capex and 2018 production outlook (vs. our expectations)," said Mr. Thompson. "The prospectivity of AKG's new Maradani project (10 km from the plant) was also reviewed.
"Whilst we continue to take a holistic view in valuing AKG, recognizing management's ability to adapt its business to shifting operating parameters (which it has done well), we see a likelihood of adjustments to the mine plan from the June feasibility study (negative in our view) weighing heavily on the stock in the near-term. As such, potential for a near-term market re-rating in AKG's stock price has diminished in our view, hence our re-rating."
His target for Asanko shares fell to $3 from $3.50. The analyst average target is $2.25.
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Franco-Nevada Corp.'s (FNV-T) growth profile is being to show signs of contribution, according to RBC Dominion Securities analyst Stephen Walker.
Citing the expectations for near-term free cash flow growth, Mr. Walker raised his target for the Toronto-based company.
"Our earnings per share/cash flow per share and free cash flow estimates for Franco-Nevada grow progressively over the next three years as the company benefits from forecast precious metal and O&G revenue growth," he said. "Long-life reserves should provide a base for future opportunistic acquisitions and dividend increases."
"FNV expects 2017 GEOs [gold equivalent ounces] at the high end of the 470–500,000 guidance range and O&G revenue at the high end of the $35–45-million range at $50 per barrel. WTI. We forecast GEOs to grow from 500,000 in 2017 to 520,000 and 570,000 in 2018 and 2019 respectively, as the Cobre Panama stream begins to contribute, and energy revenues to grow from $43-million in 2017 to $67-million in 2019 at $50 per barrel WTI. At spot prices, precious metals contribute at least 86 per cent of our revenue estimates over the next 5 years, in line with FNV's long-term goal of greater-than 80 per cent."
Mr. Walker also said the company's "strong" balance sheet positions it for both further opportunities and dividend increases.
"As of Q3/17 Franco-Nevada's liquidity position was $1.9-billion including $1.1-billion available on the line of credit and a $250-million accordion feature, with $617M earmarked for outstanding Cobre Panama capital commitments and announced oil & gas acquisition agreements," the analyst said. "With declining Cobre Panama capital commitments in 2018, given our forecast FCF we believe FNV is well positioned to pursue additional acquisitions and we see potential for a significant increase in the dividend payout."
Mr. Walker raised his 2017, 2018 and 2019 EPS projections for Franco-Nevada to $1.04, $1.23 and $1.40, respectively, from 96 cents, $1.15 and $1.25.
Maintaining an "outperform" rating for its stock, he hiked his target price to $116 from $110. The average target is $112.07.
"We believe FNV's diversified, long-life portfolio supports its premium multiple," he said. "Pro forma recent energy acquisitions FNV has a portfolio of 341 royalties and streams on mining and energy assets, including 109 assets that are currently producing. Cobre Panama is the largest single asset in our valuation at 11 per cent of NAV, and the top five assets each contribute an average of 9 per cent of our NAV. FNV's portfolio is less concentrated relative to its peers, with 75 per cent of our FNV NAV coming from the largest 15 assets, versus Royal Gold Inc. (RGLD-Q) and Wheaton Precious Metals Corp. (WPM-T) whose top 4 and 5 assets contribute 75 per cent of RBC NAVs, respectively. We estimate that the assets underlying FNV's mining portfolio have a production-weighted average reserve life of 15.4 years (above the estimated average of 10 years for senior gold producers and relatively in line with the royalty/streaming peers' average of 15.5 years) and an average M&I resource life of over 20 years. We would note that FNV's portfolio includes 232 non-producing royalty/streaming assets that offer revenue potential in the future."
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Though MedReleaf Corp. (LEAF-T) reported second-quarter 2018 revenue and adjusted EBITDA that fell below his expectations, Canaccord Genuity analyst Michael Bottomley hiked his target price for the cannabis company's stock based on recreational de-risking.
"With the number of de-risking events beginning to stockpile (i.e., Constellation Brands entrance as a highly capitalized strategic player in the industry, increased clarity over provincial distribution frameworks, and the recently announced federal plan for LP taxation), we have reduced our recreational discount rate from 15 per cent to 13 per cent," he said. "In addition, with only four LPs currently trading at valuations greater-than $1-billion, we believe MedReleaf could be one of a limited number of candidates able to attract a large strategic partner at this time.
"[It possesses] a leading existing footprint. Between its two Ontario-based facilities, we believe MedReleaf currently has one of the largest built (and producing) capacities in the industry at close to 14,000 kilograms of annual output potential."
On Monday, the Markham, Ont.-based company reported quarterly revenue of $9.8-million (1,051 kilograms sold), which was lower than Mr. Bottomley's estimate of $11.5-million (1,353 kilograms). He attributed the miss to continued headwinds stemming from Veterans Affairs Canada's reimbursement cap, which was implemented in late 2016.
"Although sales to non-Veterans increased by 11 per cent for the quarter, the net impact of this lingering issue was higher than what we had already baked into our estimates, and the company reported an overall quarter-over-quarter top-line decline of 6.1 per cent," the analyst said. "Going forward, management expressed that the revenue and volume drag brought on by the VAC reimbursement cap is now fully normalized into its operating results. We expect financial results in the back half of the fiscal year to begin to reaccelerate from the rather flat top line as of late as the company adds to its medical patient base and continues with its sizable capacity expansion at its Bradford facility. Although FQ2 was admittedly lighter than we had anticipated, the company was able to achieve an average price of $9.34 per gram (well above our estimate of $8.52), which represents an impressive 19.9-per-cent premium to the pricing achieved by its peer group. Further, as the company continues to ramp up its oil production, its extract sales comprised 18 per cent of the top line for the quarter at a price just shy of $14.00 per equivalent gram of cannabis. Going forward, we believe extract sales will push adjusted product contribution higher as it begins to outpace sales of dried bud."
Overall, the company reported adjusted EBITDA of $0.7-million, lower than Mr. Bottomley's projection of $1.2-million. A loss of 2 cents per share was a penny below his expectations.
Mr. Bottomley lowered his 2018 EPS projection to a 1-cent profit from 4 cents. His 2019 estimate rose to 36 cents from 34 cents.
With a "speculative buy" rating (unchanged), his target rose to $20 from $15. The average is $16.33.
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Though Premier Gold Mines Ltd. (PG-T) had a "solid" third-quarter beat, tougher times lie ahead, said Beacon Securities Ltd analyst Michael Curran, downgrading the stock to "hold" from "buy."
On Nov. 8, Premier, based in Thunder Bay, reported quarterly attributable gold production of 26,677 ounces, missing the analyst's 29,000 ounce projection. However, total cash costs of $646 (U.S.) per ounce and all-in sustaining costs of $782 per ounce exceeding his expectations ($800 and $950, respectively).
"We view Premier Gold Mines as having an attractive portfolio of producing and advanced development projects," said Mr. Curran. "With a single operating mine (Mercedes in Mexico), we think PG shares will struggle to deliver positive newsflow in 2018 as it advances several projects towards production decisions over the next few years. While several projects are likely to be successfully developed into new mines, we believe most will require several years to become cashflow-generating operations."
His target fell to $4.35, down from $5. The consensus is $4.48.
"With open pit mining expected to finish shortly at South Arturo, we look for significantly lower cash flows to Premier Gold in 2018 and 2019," said Mr. Curran. "While we still believe other company assets have good potential to become profitable mining operations in the medium term (3-5 years), we expect 2018 to be a challenging year for materially positive newsflow."
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Wells Fargo Securities analyst Bonnie Herzog thinks Coca-Cola Co. (KO-N) may hint at a move into alcoholic beverages during its annual investor day on Thursday.
Ms. Herzog said she expects the company to "expand on CEO [James] Quincey's recent commentary to: grow and incubate high-growth brands in the U.S. through its Venturing & Emerging Brands unit (VEB); build and nurture small brands internationally, similar to what it has achieved with success in the U.S. with VEB and through local partnerships; expand into other premium segments such as adult craft beverages."
Believing it should be a core holding in 2018 and believing the market is "underestimating upside potential," Ms. Herzog upgraded the stock to "outperform" from "market perform."
"We continue to believe Coca-Cola's best-in-class distribution and strong brand portfolio will allow it to retain its premium valuation and believe that investments in productivity and marketing today will pay off in years to come," said Ms. Herzog. "We think Coca-Cola can support roughly 5 to 6 percent organic revenue growth over the next several years, ahead of current consensus estimates."
Her target rose to $51 (U.S.) from $45. The average on the Street is $47.71.
"With a new reinvigorated management team, and renewed focus on accelerating top-line growth while maintaining discipline around costs, we believe Coca-Cola's next chapter of growth is around the corner," she said.
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In other analyst actions:
Scotia Capital analyst Vladislav Vlad upgraded ShawCor Ltd. (SCL-T) to "sector perform" from "sector underperform" with a target of $32. The average on the Street is $33.86.
Echelon Wealth Partners Inc. analyst Ralph Garcea downgraded Absolute Software Corp. (ABT-T) to "hold" from "buy" and lowered his target by a loonie to $9. The average is $8.46.
Scotia Capital analyst Ian Grundy downgraded Sierra Metals Inc. (SMT-T) to "sector perform" from "sector outperform" and lowered his target to $3.60 from $4.25. The average is $4.03.
Global Mining Research Pty Ltd analyst David Cotterell downgraded Nevsun Resources Ltd. (NSU-T) to "hold" from "buy" with a $3.10 target, which is a loonie below the consensus.
David Leeder