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

Mosaic Capital Corp. (M-X) represents an “intriguing” yield play for investors seeking “stability through diversification,” according to Industrial Alliance Securities analyst Dylan Steuart.

He initiated coverage of the Calgary-based investment company with a “speculative buy” rating.

“Historically, efforts have been focused on Western Canada. However, since a new direction was undertaken in 2016 an Eastward push has diversified the geographic exposure significantly,” said Mr. Steuart. “Mosaic made four acquisitions from August 2016 to November 2017, for total expenditures of nearly $100-million. Management estimates that 45 per cent of Mosaic’s revenues are now driven from Eastern Canada on a run-rate basis.”

Mr. Steuart said a $150-million investment from Fairfax Financial Holdings Ltd. (FFH-T), announced in late 2016, has brought stability to Mosaic, noting proceeds from the partnerships have been used to replace “much more” expensive early funding. He projects annual savings of $5.6-million.

Believing the sustainability of its 7.2-per-cent dividend yield “looks to continue to improve,” the analyst set a price target of $7, exceeding the current average on the Street of $6.33, according to Bloomberg data.

“Mosaic is currently trading at 9.0 times on a 2019 estimated EV/EBITDA basis, a premium to its peers (7.4 times), reflecting the company’s mature and diverse investment portfolio,” he said. “Historically, peers have traded at an 11.7 times average EV/EBITDA on a trailing basis. Applying a 10.5 times multiple to our 2019 EBITDA estimate of $28.2-milion provides a target equity value of $7 per share.

“The current 7.2-per-cent dividend yield is ahead of the peer average (6.2 per cent) and looks to be increasingly sustainable given recent funding cost improvements and diversification of the portfolio. We estimate the payout ratio to continue to decline, forecasting an 80-per-cent payout for 2018 and a 60-per-cent payout ratio for 2019, improved from a 101-per-cent payout ratio in 2017.”


Industrial Alliance Securities analyst Jeremy Rosenfield upgraded his rating for Emera Inc. (EMA-T) after a visit to its Tampa Electric’s Big Bend Power Station in Florida.

On May 24, TE, a wholly owned subsidiary of Halifax-based Emera, announced a US$853-million investment to modernize Big Bend. That news follows a September announcement of a US$850-million plan to add 600 megawatts of solar capacity at the utility.

“The Big Bend Modernization, along with previously announced solar investments … are two key components of EMA’s growth plan,” said Mr. Rosenfield. “From a broader perspective, organic rate base investment at TE is the single largest component of EMA’s current capital investment forecast plan (we estimate more-than $5-billion out of $9-billion over 2018-22), and the primary driver of EMA’s medium-term earnings and EPS growth (7-9-per-cent growth, CAGR 2018-2022 estimates).”

“Some investors have expressed concern with EMA’s balance sheet leverage, its capital-heavy growth outlook, and uncertainty over internally generated cash flow. For its part, management continues to communicate that external capital requirements remain manageable over the 2018-20 timeframe, and the balance sheet will be back to target in 2020.”

Mr. Rosenfield raised his rating for Emera shares to “strong buy” from “buy” with a target of $55 (unchanged). The average target on the Street is $48.38.

“At the current time, investors are not rewarding EMA for locked-in organic growth (EMA trades at 14 times 2019 estimated price-to-earnings versus 15 times for its peer group average),” he said. “We believe that as the company executes its organic growth strategy, and demonstrates future earnings and cash flow growth, investors will reward EMA with a higher valuation multiple.”

“We view EMA as a stable utility and power growth play, with (1) a diversified mix of regulated and non-regulated investments (greater-than 85 per cent of adjusted earnings from regulated utilities, (2) strong forecast EPS [earnings per share] growth (7-9 per cent per year CAGR 2017-2020, driven by organic rate base investments, (3) attractive income characteristics (5-per-cent yield, 75-85-per-cent EPS payout, 8 per cent per year dividend growth through 2020, and (4) attractive relative valuation (14 times FY2 estimated P/E, a low point not seen since 2004).


Calling it his “first choice for leverage to the gold price,” Cantor Fitzgerald analyst Matthew O’Keefe initiated coverage of First Mining Gold Corp. (FF-T) with a “buy” rating.

“First Mining has a large portfolio of advanced gold projects in Canada with resources totaling 11.9 Moz,” said Mr. O’Keefe. “Its flagship Springpole project is advancing through feasibility while exploration at its Goldlund project has significant upside potential. In addition to significant leverage to the gold price, we expect FF stock to rerate higher as it passes development milestones and on continuing exploration results.”

The analyst set a target price of $1.30 per share, which sits in-line with the current consensus.

“While the gold price has been relatively strong over the last few years it has recently been range-bound between US$1280 and US$1350 per ounce,” said Mr. O’Keefe. “Despite this the precious metals equities, in particular the smaller-cap exploration and development stage companies have been dramatic underperformers. As measured via the GDXJ Index relative to the gold price exploration and development stage precious metals equities are trading at 0.025 times the current gold price, modestly above trough levels of 0.015 times, and approximately 90 per cent below peak levels of 0.13 times. We remain bullish on gold and as the price rises, the junior golds should outperform. With a large resource across several projects, we see FF as having significant leverage to a gold price rise making now an excellent entry point to buy the stock.”


BMO Nesbitt Burns analyst Joel Jackson initiated coverage of Nemaska Lithium Inc. (NMX-T) with an “outperform” rating.

“Despite concerns over mid-term lithium prices, the risk/reward on lithium developer Nemaska is compelling considering prospects for NMX’s innovative conversion process,” he said.

“Nemaska’s potential position at the low end of the lithium hydroxide cost curve could provide insulation from industry pressures if NMX delivers on expected hydroxide costs at US$3k/t versus incumbents at US$5-8k/t. This could result in $3 upside.”

His target is $1.50, sitting below the $2 consensus.


In other analyst actions:

TD Securities analyst Lennox Gibbs downgraded Valeant Pharmaceuticals International Inc. (VRX-N, VRX-T) to “hold” from “buy” with a target price of US$24 (unchanged). The average target on the Street is US$21.27.

Scotia Capital analyst Orest Wowkodaw reinstated coverage of Nevada Copper Corp. (NCU-T) with a “sector outperform” rating and target of $1.15, which is 2 cents higher than the consensus.

National Bank Financial analyst Cameron Doerksen downgraded BRP Inc. (DOO-T) to “sector perform” from “outperform,” maintaining a $66 target. The average target among analysts covering the stock is $61.32.

BMO Nesbitt Burns analyst Andrew Mikitchook downgraded Dalradian Resources Inc. (DNA-T) to “market perform” from “speculative outperform” with a target of $1.47, down from $2.75. The average is $1.82.

Scotia Capital analyst Patricia Baker resumed coverage of Gildan Activewear Inc. (GIL-N, GIL-T) with a “sector perform” rating and US$32 target, which is 76 US cents less than the consensus.

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