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

After raising his gold price forecast based on “extreme fiscal and monetary policy,” Industrial Alliance Securities analyst George Topping said he thinks several equities will continue to reach new heights.

“The top 10 gold equities by market cap total just US$170-billion or 15 per cent of Apple’s (AAPL-Q) market cap and even the annual physical gold market is just US$260-billion,” he said. “With so much money chasing so few shares, certain stocks, such as senior producers and royalty companies, will continue to set all-time highs.”

Mr. Topping increased his 2020 gold price assumption to US$1,700 per ounce from US$1,600 previously. His 2021 and 2022 projections jumped to US$1,900 and US$2,100, respectively, from US$1,650 and US$1,750.

“We had previously built in a full gold cycle into our price deck but have increased our cyclical top and brought forward our cycle peak one year due to the extreme monetary and fiscal stimulus response by governments and central bankers across the world in response to the pandemic,” the analyst said."What will be left in the pandemic’s wake is debased currencies, continued interest rate suppression, and inflation with hard assets like gold increasing in paper currency terms. Our annualized gold prices now average US$1,700/oz this year and then rise to an average of US$2,100/oz by 2022 (cycle peak) before falling back down to our new long-term average of US$1,600/oz."

With those changes, Mr. Topping raised his target prices for a pair of gold royalty companies:

  • Franco-Nevada Corp. (FNV-T, “buy”) to $230 from $180. The average is $162.93.
  • Wheaton Precious Metals Corp. (WPM-T “buy”) to $69 from $55. Average: $47.93.

“We have changed our valuation method on royalty companies to a 50:50 blend of NAV [net asset value] and peak gold (2022) cash flow (from avg. 2020-2024 cash flow previously). The market will continue to reward the safer picks in the gold sector with higher multiples,” said Mr. Topping. “We have moved generalist favourite, Franco-Nevada, to a 1.7 times NAV multiple (from 1.2 times previously). While the energy (16 per cent of FNV’s NAV) market has collapsed, investors have ignored the temporary setback for FNV as higher gold prices still mean record cash flows for the company. Wheaton, less diversified, is not far behind FNV and should close the valuation gap as investors look for another quality, yet cheaper option in the royalty space. Osisko Gold Royalties has to resolve its Cariboo funding before it sees investors embrace a valuation multiple increase but remains undervalued.”

Mr. Topping also increased his target for Wesdome Gold Mines Ltd. (WDO-T, “strong buy”) to $13.60 from $13.40. The average is $11.43.

“Wesdome remains our top pick on the junior side and has started running higher again on CAD gold prices,” he said. “Given the funds flow preference for seniors, we are taking a more conservative stance for our remaining juniors by introducing a 0.9 times NAV multiple (from 1.0 times previously). This negates the effects of our revised price deck.”


Canaccord Genuity analyst Raveel Afzaal thinks Diversified Royalty Corp.'s (DIV-T) share price “appears bottomed up,” however he thinks visibility on a rebound “remains low,” prompting him to downgrade his rating to “speculative buy” from “buy.”

On Thursday, the Oakville, Ont.-based company revealed a preliminary first-quarter royalty forecast of $8.4-million, falling short of Mr. Afzaal's $10.2-million projection.

"The COVID-19 induced economic slow-down during the month of March resulted in royalties from Mr. Lube, Sutton and Mr. Mikes coming in below our forecasts. The results of Nurse Next Door (recorded as financial income), Oxford Learning were relatively in line and Air Miles was modestly ahead of our expectations," he said.

In response to the announcement, Mr. Afzaal lowered his 2020 forecast to $33-million from $41-million.

"The company owns royalties in capital light and well established franchise businesses with minimum or no debt outside of obligations to DIV," the analyst said. "Hence, we believe the risk of these franchises (excluding Mr. Mikes) going out of businesses is low. That said, some of the franchisee may permanently shut down operations due to financial hardship brought about by this unfortunate situation. This could delay the recovery of some of the portfolio companies and their ability to sustainably pay royalties to DIV. To factor in this risk offset by attractive valuation, we are revising our recommendation."

He maintained a $3.75 target for Diversified shares. The average on the Street is $3.66.


Citing a slower-than-expected growth outlook stemming from the COVID-19 pandemic, Raymond James analyst Steve Hansen lowered Vancouver-based Enwave Corp. (ENW-X) to “market perform” from "outperform.

“In a world where nervous consumers have been eager to stock-up on shelf-stable foodstuffs, we believe Nutradried (ND) has likely benefited from strong Moon Cheese sales via its existing grocery partners in recent months,” he said. "At the same time, cheese prices have plunged nearly 40 per cent from their 4Q19 peak owing to sharply lower restaurant/hospitality demand, a pattern that should help enhance margins going forward, in our view.

“Unfortunately, we also believe the evolving COVID-19 crisis has likely impaired ND’s ability to bring on new distribution partners — a key element of the firm’s 2020 growth plan — thus forcing us to push our growth assumptions several quarters to the right. Coupled with no news on Costco’s 2020 Most-Valuable-Member (MVM) program and the recent (temporary) closure of marquee customers like Starbucks, we have taken down our 2020 revenue/earnings estimates accordingly.”

Mr. Hansen also thinks shelter-in-place rules will force Enwave to defer planned machine installations from its backlog, projecting the work to be pushed back into the second half of 2020.

“Perhaps more importantly, we also expect new order flow will be more challenged given the weak economic backdrop,” he said.

The analyst trimmed his target for Enwave shares to $1.20 from $2. The average on the Street is $2.11.

“Fortunately, we take solid comfort in the company’s rock solid balance sheet that includes $16.5-million in cash (ending Dec-31) and zero long-term debt," he said. "Coupled with other levers available to management (i.e. cost containment,working capital management), we view ENW as well positioned to ride out the current storm. We will continue to monitor accordingly.”


Though he feels Choice Properties Real Estate Investment Trust (CHP.UN-T) is “better positioned to withstand the short-term impacts of COVID-19 than other retail-focused peers,” Desjardins Securities analyst Michael Markidis expects a rise in overall portfolio vacancies to “linger” through 2021.

On Wednesday after the bell, the Toronto-based REIT announced it has received 86 per cent of the contractual rents for the month as of April 22.

“The balance comprises (1) 60-day deferral arrangements (4 per cent), which must be repaid within 12 months, and (2) other small and large tenants that have withheld payment (10 per cent),” the analyst said. “These figures compare favourably with what has recently been reported by other Canadian retail REIT peers. In our view, this reflects (1) the diversity inherent in CHP’s portfolio (20 per cent of NOI [net operating income] is derived from office and industrial), and (2) the defensive attributes of the retail segment (more than 75 per cent is leased to either grocery stores, pharmacies or other necessity-based tenants).”

However, pointing to the “unique” impacts of COVID-19, Mr. Markidis said he expects Choice’s NOI to “experience atypical volatility over the next several quarters.”

“More important, in our view, is the medium- to long-term effect COVID-19 may have on NOI and cap rates,” he added.

After lowering his financial expectations for 2020 and 2021, Mr. Markidis trimmed his target for Choice units by a loonie to $14, keeping a “hold” rating. The average on the Street is $13.44.

“Reflecting a robust liquidity position, conservative capital structure and reasonable payout, we see limited risk to the current distribution,” he said.


In other analyst actions:

* TD Securities analyst Aaron Bilkoski lowered Tourmaline Oil Corp. (TOU-T) to “buy” from “action list buy” with a $15.50 target, up from $14. The average on the Street is $17.02.

* Mr. Bilkoski also cut Peyto Exploration & Development Corp. (PEY-T) to “reduce” from “hold” with a $1.90 target, up from $1.15. The average is $2.34.

* He lowered Bonterra Energy Corp. (BNE-T) to “reduce” from “hold” with a 90-cent target. The average is $1.62.

* Raymond James analyst Frederic Bastien trimmed his target for FirstService Corp. (FSV-Q, FSV-T) to US$100 from US$105 with an “outperform” rating. The average on the Street is US$94.50.

“FSV posted solid results for 1Q20, but offered a 2Q20 guidance that was more cautious than the one we formulated ... Although all of the company’s operations have been deemed essential in the context of the COVID-19 pandemic, the various ‘stay-at-home’ and social distancing measures are adversely impacting their ability to do work on residential and commercial premises,” he said. "The good news is that management is observing no hesitation from the part of customers. This has led to an uptick in leads and new contract wins recently, and has given us confidence FirstService can quickly return to work, stay nimble in a fluid marketplace, and capitalize on revenue opportunities.

“Over the longer run, we believe the firm remains poised to consolidate North America’s highly fragmented property services market and deliver above-average shareholder returns. FSV owns more defensive businesses than ever, and while that won’t spare FSV from the widespread economic disruption that is upon us, they should hold it in relatively good stead.”

* BMO Nesbitt Burns initiated coverage of Torex Gold Resources Inc. (TXG-T) with an “outperform” rating and $29 target. The average on the Street is $23.91.

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