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

CIBC World Market analyst John Zamparo continues to see U.S. federal legalization as the most important driver of cannabis stocks moving forward.

However, he is now “less convinced” meaningful reform will emerge in 2021, blaming the slow pace of change on the “unique” legislative system south of border.

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“The prospects for near-term U.S. legalization (which we define as next twelve months) have worsened, in our opinion,” said Mr. Zamparo in a research report released Friday. “Consensus from 60 senators (on any subject) is increasingly unattainable, while select Democratic senators have begun to reveal reluctance to legalize. Furthermore, President Biden has shown, at best, tepid support for legalization. Senator Schumer’s bill is expected to be released shortly, but we do not expect federal reform in 2021. Ongoing state-level reform is, we believe, the most important driver for change in 2022, and we believe this topic will be relevant for the 2022 midterm elections.”

Ahead of any changes, the analyst said profitability is growing among U.S. cannabis companies, however Canadian firms have begun to stagnate.

“A handful of Canadian cannabis names are profitable whereas American counterparts offer 20-40-per-cent EBITDA margins,” he said. “Meanwhile, valuations still reflect investor accessibility (4 times consensus 2022 estimated sales for U.S. vs. 9 times for Canada). This may not normalize until U.S. firms can list on larger exchanges, but the divergence in profitability is difficult to ignore. If U.S. banking and trading reform occurs, significant capital would almost surely flow to the U.S. "

Having witnessed an acceleration of M&A recently, Mr. Zamparo expects further activity to come, particularly in Canada, “where synergy potential is material.”

“We expect buyers will target those with popular brands or medical sales, and see HEXO, ACB and OGI as potential acquirors,” he added

With its shares up 33 per cent since the close of its merger with Aphria, which he said is over 30 per cent above the sector on average, Mr. Zamparo said investors have “appropriately recognized” Tilray Inc. (TLRY-T, TLRY-Q) as Canada’s market leader.

At this point, he sees upside for Tilray shares as “limited,” leading him to downgrade his rating for the Nanaimo, B.C.-based company to “neutral” from “outperformer” with a US$25 target, topping the US$18.98 average on the Street, according to Refinitiv data.

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“Valuations within the cannabis industry have proven incredibly volatile in its brief history, and this pattern of rapidly changing sentiment among investors could continue; COVID-19 could generate reduced retail store access for consumers, particularly in Tilray’s largest markets, and generally adds uncertainty to operations and valuation; Tilray’s market share could fall sharply for any number of reasons; the company’s recent voluntary recall of certain vaping SKUs (and vaping concerns more broadly) could reduce consumer interest in the company’s brands; Canada’s cannabis industry could grow far slower than we anticipate, leading to even less interest among investors in the space; the company may incur asset write-downs of its European (Nuuvera) or Latin American investments; or international medical sales may not materialize as expected,” he said.

Keeping a “neutral” rating, Mr. Zamparo raised his target for Organigram Holdings Inc. (OGI-T) to $3.75 from $3.25 to “reflect near-term momentum from improved trends at the retail level.” The average is $3.91.

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In response to recent price depreciation and after reconsidering the catalysts likely to create tailwinds ahead, Credit Suisse analyst Andrew Kuske upgraded Brookfield Business Partners LP (BBU-N, BBU.UN-T) to “outperform” from a “neutral” recommendation on Friday.

“Over the last two months or so, Brookfield Business Partners LP (BBU) delivered absolute and relative outperformance on a number of metrics peaking at US$48.42 with BBU/BBUun up 29 per cent/22 per cent year-to-date vs. SPX/TSX up 13 per cent/12 per cent,” he said. “With about a 10-per-cent pullback and a reconsideration of the catalysts ahead, we believe a more favourable risk/reward balance exists and, as a result, upgrade the stock ....

“In terms of ;what’s different’ beyond valuation, we are closer in time to large scale monetizations and the continued possibility of meaningful deployments. Clearly, these events lack the certainty of timing, but the scale of an economic recovery also favours BBU exposure, in our view. From our past downgrade, these factors looked to be mispriced to the upside and now look inappropriately discounted.”

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Mr. Kuske sees “meaningful monetizations” ahead for Brookfield from several sources.

“A lot of focus exists on Clarios with news sources highlighting a US$20-billion value versus the US$13-billion of EV acquired in 2019,” he said. “On reasonable estimates, the high-single digit deal multiple would have expanded to low-double digits on EV/EBITDA on the numbers in media stories. Not as large, but still a big monetization could come from Westinghouse Electric that already returned BBU meaningful capital with dividends and EBITDA growth. Greenergy could benefit from enthusiasm for parts of the business.”

He maintained a target of US$52. The average is US$55.

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Though he thinks Transat AT Inc.’s (TRZ-T) long-term strategy focused on fleet transformation “makes sense,” Desjardins Securities analyst Benoit Poirier said he would “prefer to remain on the side lines until proof of execution.”

On Thursday, new CEO Annick Guérard outlined the Montreal-based tour operator’s plans under the assumption that revenue will not return to pre-pandemic levels until 2023. Mr. Poirier continues to expect Transat to burn cash in its fiscal 2022, projecting $64-million versus $374-million in its current year, before turning positive in 2023.

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“For 2021, TRZ is looking to stabilize the business and position it for recovery,” said Mr. Poirier in a note. “The company also disclosed its strategic plan for future years, highlighting its desire to: (1) refocus airline operations and redefine the network to solidify its exposure in eastern Canada and Montréal; (2) forge alliances to strengthen the network; (3) simplify the structure by discontinuing the hotel division to reduce costs; and (4) further streamline the fleet around two types of Airbus aircraft (A321 and A330). On that latter part, management highlighted significant cost-saving potential coming from the fleet initiative, including lower training costs (due to cockpit communality between both aircraft), lower maintenance costs (stemming from the younger fleet) and lower fuel consumption (more efficient aircraft). Management is also looking to expand into new markets (eg cross-border market with the U.S.) to maximize the utilization of its fleet. Longer-term, management is confident that a refocused organization should generate stronger profitability than before the pandemic. That being said, management highlighted that FY22 would also be transitory while revenue gradually recovers.”

Though he trimmed his revenue and earnings expectations for 2021, Mr. Poirier increased his target for Transat shares to $5.25 from $4.50, keeping a “hold” recommendation, based on his sum-of-the-parts valuation. The average on the Street is $4.

“With respect to the potential sale of the corporation, TRZ reiterated that discussions with Pierre Karl Péladeau are ongoing despite recent comments in the media suggesting otherwise,” he said. “Recall that TRZ received an unsolicited proposal from Mr Péladeau’s investment firm Gestion MTRHP for C$5.00/share. We believe the fact that discussions are still ongoing has supported the stock in recent days. At this point, we believe it is reasonable to remove the potential offer from Mr Péladeau given the delay and uncertainty surrounding negotiations and evaluate TRZ on a standalone basis.”

Elsewhere, Scotia Capital analyst Konark Gupta raised his target to $5.25 from $4, reiterating a “sector perform” rating, while TD Securities’ Tim James increased his target to $3.50 from $3 with a “reduce” recommendation.

“Although we believe that Transat A.T. remains a strong brand for international leisure travel for Canadians, we believe that the impact of the pandemic, the company’s enterprise value relative to long-term EBITDA potential, the tenuous state of the recovery, and the elimination of a formal takeover offer for the company justify a REDUCE recommendation,” Mr. James said.

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ATB Capital Markets analyst Kenric Tyghe thinks the expected improvement in Jushi Holdings Inc.’s (JUSH-CN) footprint and competitive position through 2022 are not properly exhibited in its current valuation.

In a research report released Friday, he initiated coverage of the Boca Raton, Fla.-based multi-state cannabis operator with an “outperform” recommendation, seeing it “well-positioned” in its core markets of Pennsylvania, Illinois, Virginia, and Massachusetts and seeing “attractive” optionality in its developing markets of California, Nevada and Ohio.

In particularly, Mr. Tyghe emphasized its strong presence in Pennsylvania, where it will operate a capped-out 18 retail locations by the end of the year with support from an expanded 190,000 square foot facility by the second quarter of 2022. He called the state “one of the most attractive and highest growth medical markets in the union, the kicker is the state’s expected legalization of adult-use in 2022.”

“Jushi’s retail footprint operates under the BEYOND/HELLO banner, which continues to roll out across core markets and gain traction with consumers due in part to its relentless focus on the customer experience,” he said. “The BEYOND/HELLO mission is largely focused on delivering the best consumer and patient experience through a fully integrated online platform as well as its brick-and-mortar locations. BEYOND/HELLO’s approach of educating both its team and consumers, through its Cannabis & Me site and diligent in-store interactions, resulted in a 244.0-per-cent increase in web traffic between April and December 2020. The Company’s very appealing and engaging dispensaries are supported by its award-winning private-label brands The Bank and The Lab, Nira & Nira+, Sēchē, and Tasteology (a high-quality, THC-infused edible brand.”

Mr. Tyghe set a target of $13 for Jushi shares, exceeding the current average of $12.77.

“With Jushi’s operations concentrated in catalyst-heavy states, and our expectations of continued strong execution and scaling benefits supporting an attractive ramp of its margin profile, we believe that our Outperform rating is well-supported,” he said. “We expect revenue growth of 195.5per cent in 2021 to $238.7-million for adjusted EBITDA of $44.3-million.”

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Touting its “solid production base with significant upside in Western Australia,” Scotia Capital analyst Ovais Habib initiated coverage of Karora Resources Inc. (KRR-T) with a “sector outperform” recommendation on Friday.

“In June 2019, Karora acquired the Higginsville operations from Westgold Resources (WGX-ASX, not covered) to gain access to a 1.4 Mtpa processing plant for Higginsville and Beta Hunt ore, in addition to a sizable land package in the prolific Western Australian Goldfields area, home to a number of multi-million-ounce gold deposits. The company plans to use this production base as a stepping stone to further grow organically into a profitable mid-tier gold producer. We model 2021 gold production of 111,000 ounces at an all-in sustaining cost (AISC) of US$1,001 per ounce, ramping up to 126,000 ounces in 2022E with the Spargos Reward deposit coming online later in 2021.”

In justifying his rating, Mr. Habib pointed to three factors: its “solid technical expertise and the track record of Karora’s management and operating team”; potential upside from near mine and regional exploration success n a Tier 1 jurisdiction, “which could be quickly converted to production with the potential expansion of the Higginsville mill” and the presence of “numerous value-enhancing catalysts that we expect over the next 12 months.”

Seeing its current price as “a good entry point to invest in a well-managed gold producer,” he set a target of $5.75 per share, which falls below the $6.26 average.

“Our target multiples of 1.1 times P/NAV and 8.0 times P/CF represent a slight premium to our peer target multiples (average of 1.1 times and 6.0 times P/CF) as we believe that a premium is warranted, in our view, given Karora’s location of operations in a Tier 1 jurisdiction, exploration upside, and strong production growth profile of 27 per cent over the next three years (2020 versus 2023), which does not factor in any upside from the forthcoming multi-year consolidated growth plan that we expect in late Q2/21,” the analyst said. “As the company continues to execute on its organic growth and exploration plans, we expect further production growth and a commensurate higher share price re-rating. The current market valuation of Karora primarily reflects the value of its existing operations, in our view, but we believe there is considerable exploration upside, with near-term potential catalysts not currently being reflected.”

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In other analyst actions:

* In a research report titled Screening for idiosyncratic, mean reversion and value ideas in a strong oil price environment, Goldman Sachs analyst Neil Mehta upgraded Canadian Natural Resources Ltd. (CNQ-T) to “buy” from “neutral” with a $44 target, up from $38. The average is $47.95.

* Scotia Capital analyst Phil Hardie increased his Power Corporation of Canada (POW-T) by $1 to $45 with a “sector perform” rating. The average is $41.63.

“We continue to believe that holding Power Corp (POW) shares offer investors better value and embedded optionality than owning its underlying publicly-traded holdings,” said Mr. Hardie. “POW shares have significantly outperformed the S&P/TSX Composite and S&P/TSX Financial Services indices through 2021. This has been driven by not only solid performance across its publicly-traded subsidiaries but also by the value crystalization from a number of its private holdings and the narrowing of its NAV discount. Despite these factors, we continue to see upside given potential for NAV accretion and tightening discount, and see POW as attractive for investors with a mid-to longer-term investment horizon.”

* Following in-line fourth-quarter results, Desjardins Securities analyst Kevin Krishnaratne cut his target for mdf commerce inc. (MDF-T) to $19 from $21 with a “buy” rating. The average is $17.08.

“MDF ended year one of its five-year strategic plan with 4Q revenue up 16 per cent year-over-year, with particular strength in key growth areas e-commerce and U.S. strategic sourcing,” he said. “Given momentum in the space, MDF is not slowing down the pace of investment, which is expected to temporarily place some pressure on profits. We agree with management’s strategy to invest in people (highly skilled tech talent), strengthen its tech platform and pursue M&A.”

* BMO Nesbitt Burns analyst Andrew Mikitchook hiked his Ivanhoe Mines Ltd. (IVN-T) target to $15 from $10 with an “outperform” recommendation. The average is $10.50.

“Ivanhoe’s transition to a copper producer from Phase 1 of the high-grade Kamoa-Kakula mine is off to a good start with first production delivered on May 25,” he said. “Looking ahead the company’s two main catalysts are the ramp-up of Phase 1 to design capacity over the next months and delivery of the Phase 2 expansion in Q3 2022. ... We raise our target to $15 (from $10) as we apply a 12-month forward-looking multiple justified for an expanding world-class producer.”

* National Bank Financial analyst Maxim Sytchev raised his North American Construction Group Ltd. (NOA-T) to $24 from $23, exceeding the $21 average, with an “outperform” rating.

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