Friday’s analyst upgrades and downgrades

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

Desjardins Securities analyst Maher Yaghi is taking a more bullish stance on Quebecor Inc. (QBR.B-T), citing its “attractive” valuations and seeing a lower potential downside from the COVID-19 pandemic.

Following Thursday's release of quarterly results that largely fell in line with expectations, he raised his rating for its stock to "buy" from "hold."

"On the [earnings] call, management indicated that through cost-saving measures, but mostly through delays in capex, it continues to expect FCF [free cash flow] production in 2020 to be similar to pre-pandemic expectations," said Mr. Yaghi. "This strategy to delay capex is similar to the strategy used by Rogers, Shaw, Cogeco Cable and, to some extent TELUS, to cope with the downside created by COVID-19. We believe it is prudent to be proactive and protect the FCF line early on as it is still not clear how long the economy will remain in the doldrums.

"Looking forward, we believe financial flexibility will be key to dealing with the protracted nature of this crisis. To that effect, while Québecor’s leverage is within the average of other companies in the sector, the company does have better-than-average flexibility due to its small dividend and the low requirement to deploy FTTH networks in its territory."

Mr. Yaghi lowered his earnings per share projections for both 2020 and 2021 to $2.04 and $2.62, respectively, from $2.20 and $2.69, expecting revenue to be affected by job losses stemming from the pandemic and companies becoming “increasingly mindful” of their expenses and working capital management.

"We believe the longer the crisis, the more likely that people and businesses will have to make decisions about their telecom bills to protect their own liquidity situation," he said.

Mr. Yaghi maintained a $34.50 target for Quebecor shares. The current average target on the Street is $35.42.

“While the economy is still reeling from COVID-19, QBR’s valuation vs peers has significantly declined and the stock is now trading with a 1 times EV/EBITDA discount in relation to its large-cap peers vs in line a few months ago,” the analyst said. “We believe this divergence offers an attractive relative risk/reward ratio and, hence, we are upgrading our rating.”

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A group of equity analysts upgraded their ratings for Aurora Cannabis Inc. (ACB-T, ACB-N) in response to the release of its third-quarter earnings report after the bell on Thursday.

Though he characterized the results as "mixed" with sales exceeding his expectations but earnings before interest, taxes, depreciation and amortization falling short, Desjardins Securities analyst John Chu raised his rating to "buy" from "hold," believing the Edmonton-based company is "pulling out all the stops to get to positive EBITDA."

“The message from the company was pretty clear — regardless of how sales may materialize in this post-COVID-19 environment, it is ready to pull as many cost-related levers (‘… cost reductions and efficiencies in COGS and SG&A, if necessary.’) toward its goal of reaching positive EBITDA by 1Q (recall, this is also one of the covenants imposed by its lenders, hence the urgency),” said Mr. Chu. “Thus, with the progress on the operating cost savings thus far and given its current run rate ($50-million in 4Q), we believe the company will cut to the bone if necessary to generate modestly positive EBITDA in 1Q FY20 (ending September). How deep it needs to cut and the impact it could have on driving future sales growth remains to be seen.”

Mr. Chu said headwinds stemming from the COVID-19 pandemic have forced Aurora to focus on market share, rather than revenue targets, in the near term.

“We believe Aurora is ranked #1 in Ontario in market share based on the quantity of chocolates offered," he said. "Aurora’s product mix offerings include confectionery treats, vapes and a variety of brands/flavours of dried flower cannabis, and it now has enough data to focus on certain SKUs to ramp up production.”

However, despite pandemic-related disruptions, Mr. Chu maintained his sales outlook, attributing the quarterly sales beat to customer stockpiling and seeing April sales returning to "normal" pre-COVID-19 levels.

“Hence, our forecast that sales will decline in 4Q," the analyst said. “While we believe the company has demonstrated an ability to reduce its opex and appears on target to reach its goal of $40–45-million per quarter exiting 1Q FY21, we have reduced our gross margin assumption to reflect a considerably higher-than-expected product mix shift toward its lower-priced Daily Special value brand. We expect the company to reach EBITDA positive by 1Q FY21 (we had modelled a modest negative previously), but we have reduced our EBITDA outlook as our more conservative gross margin outlook more than offsets our assumption of lower operating expenses.”

In response to recent share price depreciation and Monday’s reserve stock split, he hiked his target to $19 from $3.25. The average on the Street is $18.15.

Elsewhere, Piper Sandler analyst Michael Lavery upgraded Aurora to “neutral” from “underweight” and cut his target to US$10 from US$12.

AltaCorp Capital's David Kideckel raised his target to $10.40 from $2.50 with a "sector perform" rating (unchanged).

Mr. Kideckel said: “We view the results as mixed. We believe Aurora is regaining share in the Canadian cannabis market even as the Company executes cost-cutting measures. Since announcing its Business Transformation Plan on February 6, 2020 (here), Aurora reduced SG&A expenses and turned its focus to core cannabis segments, which we believe may position the Company positively over the long-term. However, we view significant near-term uncertainty in the Canadian cannabis market, intensified by the COVID-19 crisis. We believe this environment, which is beyond management’s control, may thwart Aurora’s efforts to profitability. As such, we maintain our neutral stance on the stock.”

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RBC Dominion Securities analyst Josh Wolfson lowered his rating for Wheaton Precious Metals Corp. (WPM-N, WPM-T) to “sector perform” from “outperform” in response to an expansion in its valuation, “both relative to the past and the precious metals sector overall.”

“In 2020, WPM has outperformed precious metals prices (WPM up 46 per cent vs. GLD up 13 per cent), the large cap royalty group (FNV up 37 per cent, RGLD up 5 per cent), and the gold equities index (GDX up 16 per cent), yielding a sizable expansion of both the company’s relative and absolute valuation,” he said.

“At spot gold prices, WPM shares now trade at 2.9 times NAV [net asset value] and a 3.3 per cent/3.4 per cent FCF/EV [free cash flow to enterprise value] in 2020/21, largely in line with the large cap royalty group average, but well above the producer group. Today, we calculate the large cap precious metals royalty group provides limited investment appeal at current spot gold prices, trading at 2.9 times NAV and 2.6 per cent/3.4 per cent FCF/EV in 2020/21, compared to senior precious metals producers at 1.6 times and 4.0 per cent/5.3 per cent.”

Mr. Wolfson now thinks Wheaton has been "appropriately" rewarded for its stable FCF outlook as well as its lower relative fundamental leverage to higher prices.

“At current spot gold prices of $1,718/oz, we forecast WPM has the ability to generate a 3.5-per-cent sustainable FCF yield (27-29 times EBITDA) in upcoming years, before capital reinvestment,” the analyst said. “We believe these multiples appropriately reward WPM for its high-quality, long-duration asset base, but further multiple expansion potential from current levels is questionable. In our view, additional positive price performance is contingent upon favourable capital reinvestment, which is unpredictable, or the continued momentum of precious metals prices, which would be a positive financial development for WPM, but less than that of its producer peers, who are also less-valued than WPM today. For a 10-per-cent change in gold/silver prices, we calculate WPM’s NAV would increase by 15 per cent (royalty/producer average of 11 per cent/22 per cent), while the company maintains EBITDA leverage of 13 per cent (royalty/ producer average of 11 per cent/17 per cent).”

Seeing its financial liquidity remaining “favourable” and it remaining “well-positioned to reduce leverage and fund new potential transaction opportunities,” Mr. Wolfson increased his target to US$35 per share from US$31. The average is US$42.48.

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In a separate note, Mr. Wolfson upgraded his rating for Denver-based Royal Gold Inc. (RGLD-Q) to “sector perform” from “underperform,” seeing “improved underlying operating clarity” as well as a contraction of its valuation versus senior royalty peers.

“In 2020, operator updates across RGLD’s portfolio have outlined a corporate production profile with significantly greater visibility,” he said. “As a result of these updates, we now view RGLD’s production profile as being stable until 2025-26, versus prior expectations for production declines emerging as early as 2021-22. These changes are the culmination of negative mine plan revisions previously reported at Mount Milligan and Rainy River (combined 31 per cent of EBITDA), constructive outlook updates at Penasquito (9 per cent of EBITDA), and recent incremental details at Cortez (10 per cent of EBITDA) that confirm high growth in late-2020. In our view, RGLD’s improved visibility has the potential to provide the company with greater capital allocation discretion.”

Seeing its financial position "strengthening" and its strategy "undisturbed," Mr. Wolfson hiked his target to US$115 from US$90. The average on the Street is US$126.08.

“We consider the company our preferred royalty company today on a relative valuation basis — RGLD is now trading more in line with its historical valuation, supporting our SP rating, while its royalty peers are trading at a sizable premium to historical averages and the valuation of the producer group,” he said.

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In other analyst actions:

* Seeing it “built to survive,” Industrial Alliance Securities analyst Elias Foscolos raised his rating for CES Energy Solutions Corp. (CEU-T) to “speculative buy” from “hold” after the release of “strong” first-quarter results that “far” exceeded his expectations.

“Although not indicative of the outlook, the results, particularly in the US, provide some confidence in CEU’s ability to execute in a relatively suppressed industry environment," he said. “We are lowering our estimates in conjunction with lower rig count assumptions, but we are maintaining our $1.50 target and upgrading to Speculative Buy ... We are confident in CEU’s balance sheet and ability to manage cash flow through the downturn.”

His target of $1.50 sits below the current consensus target on the Street of $1.81.

* CIBC World Markets analyst Scott Fromson lowered Neo Performance Materials Inc. (NEO-T) to “neutral” from “outperformer” with a target of $9, falling from $11. The average is currently $10.75

Mr. Fromson said: "As expected, COVID-19 had a negative impact on automotive-leveraged businesses (40-45 per cent of revenues). The long-term outlook remains strong, as NEO’s growth drivers are investable themes: rising EV penetration, ongoing vehicle electrification, more stringent environmental regulations, and increasing industrial automation. However, we believe a protracted COVID-19 aftermath will keep a ceiling on the NEO share price through our 12- to 18-month price target horizon. We also see headline risk as China provides most of NEO’s rare earths raw materials and is home to three major facilities (plus a smaller magnets facility, out of 11 total).

* Expecting a significant decline in revenue in both North America and Europe due to restrained international tourism through the end of 2020, BoA analyst Robert Ohmes lowered Canada Goose Holdings Inc. (GOOS-T, GOOS-N) to “underperform” from “neutral” with a $21 target, falling from $34. The current average is $36.05.

Mr. Ohmes said: “Signs of a maturing N. America market may be further pressured by a tough wholesale environment given GOOS’s mall-based footprint (Neiman Marcus, Nordstrom, Bloomingdales, etc.). In addition, we see traffic headwinds given GOOS’s highly productive small store format (est. 4,000-5,000 avg. sq. ft.) as social distancing guidelines likely limit occupancy.”

* Stifel analyst Chris O’Cull raised Restaurant Brands International Inc. (QSR-N, QSR-T) to “buy” from “hold” with a target of US$62, rising from US$53. The average on the Street is US$63.85.

* RBC Dominion Securities analyst Melissa Oliphant raised Osisko Gold Royalties Ltd. (OR-T) to “outperform” from “sector perform” with a $15 target, up from $13.50. The average is $16.68.

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