Tuesday’s analyst upgrades and downgrades

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

Few companies can compete with PrairieSky Royalty Ltd.'s (PSK-T) unique business model over the long term, according to Raymond James analyst Jeremy McCrea, citing its 14.7 million acres of fee and gross overriding royalty (GORR) lands.

"With a cash balance and royalty interest in some of the most active/emerging plays in Canada (Viking, Duvernay), the company deserves a premium multiple," said Mr. McCrea in a research note reacting to Monday's release of its fourth-quarter financial results.

"As such, investors have questioned our Market Perform rating at the moment. For us, it comes down to the size of the valuation premium and what investors are currently paying for the undrilled land base (and the pace of which it is being back-filled given the updated reserve figures). Nevertheless, for long-term investors, we believe emerging plays in the Duvernay, Clearwater and AB Viking (and other areas management is keeping quiet) should ultimately prevail in expediting the pace of value creation; however near-term, we would like to see more data points on these emerging plays for now.

On Monday, Calgary-based PrairieSky reported quarterly funds from operations were $81.1-million, exceeding the mean estimate on the Street of just under $77-million. Cash flow per share of 34 cents topped Mr. McCrea's expectation by 8 cents.

However, the analyst emphasized a 13-per-cent drop in Proved Developed Producing (PDP) net asset value year over year, which led to a negative 17-per-cent three-year compound annual growth rate.

"A combination of engineer pricing declines and $321-million in Exploration and Evaluation acquisitions ($215-million related to Lindberg, $55-million related to GORR's with emerging oil plays (including Clearwater) and $35-million on other non-producing land/seismic) all contribute to the negative growth and profitability," said Mr. McCrea. "In future years, we should see the benefit of this spending."

Keeping a "market perform" rating for PrairieSky shares, his target fell by a loonie to $30. The average target on the Street is $34.35, according to Bloomberg data.

Meanwhile, Canaccord Genuity analyst Dennis Fong also dropped his target by a dollar to $35 with a "buy" rating (unchanged).

"We continue to view PrairieSky as a company with long-term per-share growth potential, a pristine balance sheet, and a focus on shareholder return through an increasing dividend complemented by share buybacks and inorganic growth opportunities," said Mr. Fong.

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Echelon Wealth Partners analyst Russell Stanley raised his target price for shares of MedReleaf Corp. (LEAF-T) in response to the acquisition of existing greenhouse infrastructure that possesses production capacity of up to 105,000 kilograms of cannabis.

On Monday, the Markham-based company announced it has entered into agreements to acquire 1 million square feet of existing greenhouse infrastructure on a 69-acre property in Exeter, Ont., and 95 acres of adjacent land for $21.5-million in cash and 225,083 common shares. MedReleaf expects the first harvest could occur before the end of the calendar year.

"While the Company has demonstrated strength in indoor production, [Monday] morning's transaction contemplates an expansion into greenhouse cultivation," said Mr. Stanley. "This is a continuation of a trend within the industry, where several producers that 'started life' as indoor producers have (or are planning to) add substantial greenhouse production. This includes Canopy Growth Corporation (WEED-T, "sell", $22 per share target), CannTrust (TRST-CN, "speculative buy, $18.50/share), CanniMed Therapeutics (CMED-T, "tender") and Emblem (EMC-X, "speculative buy, $2.50/share). Moreover, we understand that much of MedReleaf's core growing personnel already have significant greenhouse growing experience, so we expect this expansion to be well managed. We expect the bulk of the greenhouse output to go into extract production."

Though he did not change his forward estimates for the company based on the deal, Mr. Stanley said the announcement warrants a multiple bump, leading him to raised his target to $32.50 per share from $30, which is above the $28.18 average on the Street, according to Bloomberg data.

He maintained a "speculative buy" rating for the stock.

"The broad peer group average now trades at approximately 15.4 times enterprise value-to-calendar 2019 estimated EBITDA, based on consensus estimates," he said. "However, the sub-group of the three largest issuers by market capitalization trades an average of 28.3 times. We attribute that 84-per-cent premium to the broader investor audience larger issuers have, as well as potentially stronger appeal to strategic investors. Today's announcement contemplates a larger scale project than we had assumed, and the additional land acquired gives LEAF significant optionality. We are therefore increasing our valuation multiple to 18.5 times EV/C2019E EBITDA from 17.0 times. This represents a reasonable 20-per-cent premium to the broad group average, and a very conservative 35-per-cent discount to the average for the larger issuers."

Elsewhere, Canaccord Genuity analyst Matt Bottomley raised his target by a loonie to $31 with a "speculative buy" rating (unchanged).

Mr. Bottomley said: "As the company is already one of the leading producers in Canada in terms of its market share and production run-rate, we have long-held the view that MedReleaf has the market position and balance sheet to source additional capacity when needed. As a result, our current estimates already incorporate significant capex and capacity expansion over the medium to long term for the company to maintain its leading position. However, given this increased clarity, we have tapered down our discount rates for our medical, rec and international valuations by 50 basis points."

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Desjardins Securities analyst Michael Markidis said he sees several positives within the fourth-quarter financial results for Boardwalk Real Estate Investment Trust (BEI.UN-T).

However, he said the good news is now "appropriately" priced in to units of the Calgary-based REIT following a 9.1-per-cent jump on Monday.

"The era of sequential erosion in quarterly revenue appears to have finally run its course," said Mr. Markidis. "Operating capex is also expected to decline materially this year. These are positive developments, in our view."

Before market open, Boardwalk reported funds from operations per unit for the quarter of 53 cents, easily exceeding both the consensus projection and Mr. Markidis's 47-cent estimate.

"This puts an end to the string of seven consecutive quarters of material (5–20 per cent) FFO misses experienced from 1Q16–3Q17, and should be a positive for investor confidence in management's initial 2018 FFO/unit guidance range of $2.15–2.35, in our view," he said.

"Investors should be focused on sequential revenue improvement. Same-property NOI was down 6.2 per cent (a 1.0-per-cent drop in revenue, 5.4-per-cent rise in opex) in 4Q17, bringing the full-year erosion to 15.8 per cent (a 5.3-per-cent decline in revenue, 10.1-per-cent increase in opex). Year-over-year comparisons may remain lacklustre in 1H18. More importantly, in our mind, is the future trajectory of sequential revenue, which was positive (0.9 per cent) for the first time since mid-2015."

He called the REIT decision to drop its capex budget for 2018 by 30 per cent "reassuring," believing it should alleviate investor concern. He added that lower capital intensity, a reduced distribution and stronger operating outlook will drive an improved financial profile.

That led him to raise his 2018 and 2019 FFO per unit projections to $2.27 and $2.69, respectively, from $2.13 and $2.59.

Keeping a "hold" rating, he raised his target for the REIT's units to $48 from $45. The average target is $44.95.

Elsewhere, Canaccord Genuity's Mark Rothschild increased his target to $44 from $42.50 with a "hold" rating.

Mr. Rothschild said: "Supported by a stabilizing economy in Western Canada, fundamentals in Boardwalk's core markets appear to be recovering. As a result, we expect cash flow to recover over the next two years."

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Despite a slowdown in the Canadian market, Precision Drilling Corp. (PDS-N, PD-T) sits in a "solid" position on both sides of the border as well as internationally, according to Credit Suisse analyst James Wicklund.

"PDS is a land drilling rig contractor, with operations in North America and select international locations, with additional and developing capabilities, operated with a Canadian mindset, which has many positive attributes, which includes a penchant for pursuing technology in all things," he said. "Land rig demand and rates in the U.S. have moved up and are expected to continue. Canadian activity is proving softer than expected owing to low natural gas prices. International is expected to be fairly stable this year. PDS has a number of high-end rigs and owing to the designs, can upgrade rigs at a very favorable cost, resulting in plans to upgrade 10-20 rigs this year at a capital cost that didn't spook investors.

In research note wrapping up the company's fourth-quarter results, released on Feb. 15, Mr. Wicklund said investor focus should center on its U.S. operations as well as the "deploying additional capacity, rapid deployment of new technologies, and managing both to reduce a pushed-out, but still looming, debt load."

He added: "Solid progress is being made on all fronts management can influence. There is risk in the debt and leverage opportunity in the equity. Balancing the two, based on our above consensus 2019 estimates, we see the stock as fairly valued at present."

He lowered his 2018 EBITDA projection to US$370-million from US$399-million and introduced a 2019 estimate to US$478-million. Both sit above the consensus on the Street.

With a  "neutral" rating, he raised his target to US$3.40 from US$3. Consensus is US$4.31.

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Baird analyst David Tarantino upgraded Chipotle Mexican Grill Inc. (CMG-N) to "outperform" from "neutral," expecting to see better sales and traffic momentum in the next 1-2 years following the appointment of new Chief Executive Officer Brian Niccol.

"We view Niccol as an extremely talented leader whose expertise in brand management brings a valuable skill set that is complementary to the existing team," said the analyst. "We know Niccol quite well, and we have been impressed with his track record of success in driving good sales performance during his past leadership roles."

Mr. Tarantino believes if Chipotle displays "tangible turnaround progress over the course of the year, its shares have "plenty of room to run." That led him to raise his target for the stock to US$400 from US$315. The average is $304.42.

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Winnebago Industries Inc. (WGO-N) benefits from several industry tailwinds, including an "ongoing post-recession replacement cycle, aging population, and renewed popularity among millennials," said BMO Nesbitt Burns analyst Gerrick Johnson, raising his rating to "outperform" from "market perform."

"The RV boom is about to enter its 9th year and we expect the market to continue to grow at a 10-per-cent rate," he said. "We believe Winnebago can grow sales and earnings faster than the competition owing to operational improvement, accretion from Grand Design, and enhanced product offering, and emerging trade-up cycle from first-time buyers, and lower corporate taxes. Trading at just 10 times our fiscal 2019 EPS estimate of $4.35 we think shares are significantly undervalued."

Mr. Johnson's target rose to US$60 from US$58. Consensus is US$49.43.