Inside the Market’s roundup of some of today’s key analyst actions
Though industry sales numbers have been “somewhat underwhelming” following the first months since the legalization of adult-use cannabis in Canada, Desjardins Securities analyst John Chu said “the hype remains strong and for good reason as investors start looking at the market opportunity from a global perspective — which is huge — rather than simply a Canadian one.”
In a research report released Frifay, Mr. Chu initiated coverage of Aurora Cannabis Inc. (ACB-T), Canopy Growth Corp. (WEED-T) and HEXO Corp. (HEXO-T), emphasizing the potential stemming from an investing perspective that stretches beyond the Canadian border, pointing to the interest of major consumer packaged goods (CPG) companies and U.S. retailers, while also acknowledging the valuation difficulties investors are grappling with.
“To be perfectly blunt (pardon the pun), industry valuations are pretty crazy right now,” said the analyst. “This reminds us of valuations for high flyers such as Amazon, Apple and Google, with EV/NTM EBITDA [enteprise value to next-12-month EBITDA] valuations starting off in the 30–50+ range before taking a few years (3–4) to settle into their longer-term valuation range. We expect a similar path for the cannabis sector. Unfortunately, relative valuations are not a key consideration for investors as catalysts and milestones appear to be more important factors driving stock prices but we expect the sector to get there soon.”
"Make no mistake, investors should expect more growing pains for the sector as well as for individual companies. Production delays, quality-control issues, packaging delays, and distribution and logistical headaches are expected to continue to plague the sector in the near term; retail store rollouts, edibles legislation and other regulatory-related hiccups could remain problematic as governments try to sort things out on their end. We do expect all of this to be ironed out soon enough."
Believing it stands out with the most upside potential and a "cheap" current valuation, Mr. Chu initiated coverage of Gatineau, Que.-based HEXO with a "buy" rating and $14 target. The average target on the Street is currently $10.29, according to Thomson Reuters Eikon data.
"Despite its smaller size (capacity and market cap), HEXO joined the elite ranks quickly with the single largest supply deal with any province (Quebec) as well as its Molson Coors Canada JV, and is one of only a handful of companies with supply agreements with seven or more provinces in Canada," he said. "HEXO, with its track record for award-winning products and recognition for innovative products, should be a force to be reckoned with in the recreational segment."
Believing it is "emerging as the gold standard in the industry," Mr. Chu also gave Aurora Cannabis a "buy" rating with a $16.50 target, which exceeds the current consensus target of $13.91.
"Aurora Cannabis Inc. is uniquely positioned to dominate the domestic medical market and, in turn, the international medical market," he said. "We believe it has the size, quality standards, technology and established medical brand and patient data which it can leverage overseas, where it has the broadest reach geographically of any LP. Once the company establishes a foothold internationally on the medical side, this should position it very well when/if the international market legalizes recreational use. Aurora is no slouch on the recreational side as it has the second highest market share thus far at 13 per cent. The company’s best practices philosophy, together with the addition of activist shareholder Nelson Peltz as a strategic advisor, should eventually lead to a partnership with a major CPG player."
Though he called Canopy Growth the "leader of the packer," Mr. Chu gave it a "hold" rating and $74 target. The average on the Street is $76.08.
“Canopy is the industry leader,” he said. “It has size, scale, a major JV partner, a war chest to grow the company and a lot of interesting initiatives across a variety of different market verticals. Overall, it is one of the most well-rounded players to address both the medical and recreational markets as well as the U.S. and international markets. However, because of the number of balls it is juggling and the high costs associated with these projects, the path to profitability is likely longer than for some of its peers. Canopy also appears fairly valued at current levels with limited near-term major milestones to meet, mostly because it has already reached most milestones.”
Following Bombardier Inc.'s (BBD-B-T) preliminary release of “weak” first-quarter results and reduced fiscal 2019 guidance on Thursday, Raymond James analyst Steve Hansen downgraded its stock, seeing a “development that clearly elevates the firm’s near-term risk profile.”
“While short-term Aerospace issues appear largely timing-related, legacy Transportation contracts are seemingly more problematic and underpin management’s full-year guidance revision,” he said. “In this context, while we continue to admire the firm’s multi-year turnaround strategy, we believe it prudent to step to the sidelines until better visibility emerges.”
Moving the stock to “market perform” from “outperform,” Mr. Hansen dropped his target to $3.50 from $5.25. The average on the Street is $4.06.
Elsewhere, though he acknowledges “challenges remain” for the Montreal-based company, Desjardins Securities analyst Benoit Poirier thinks it possesses the “flexibility to execute its turnaround plan.”
"[On Thursday], BBD pre-released weaker-than-expected 1Q19 results due to a slower production ramp-up at BT and unfavourable FX conditions," he said. "Management also revised its 2019 guidance to include the production challenges at BT and the earlier-than-expected closing of the Q400 divestiture. In the meantime, BBD reiterated its guidance for BBA and the aerostructures division. Overall, while we are disappointed by the update."
Maintaining a “buy” rating, he dropped his target price for Bombardier shares to $4.50 from $5.
“Bottom line, we maintain our bullish stance on the name as we continue to believe in management’s ability to deliver on its 2020 turnaround plan,” he said. “The recent refinancing of 2020–21 maturities provides enough flexibility to overcome the challenges at BT. We continue to see value in BBD’s shares (82-per-cent upside potential to our target price).”
Though she maintains a “favourable long-term view” on CGI Inc. (GIB.A-T), CIBC World Markets analyst Stephanie Price downgraded its stock to “neutral” from “outperform,” based on its current price ahead of the May 1 release of its quarterly results.
“We see less near-term upside to CGI’s multiple as it currently trades at a healthy premium to its IT Services peers (18 times calendar 2020 estimates versus peers at 15 times),” said Ms. Price. "We believe current expectations already factor in the solid market environment and assume an improving organic growth rate.
“CGI typically trades at roughly a four-turn discount to Accenture, in line with its current range. While we believe this discount will eventually narrow, we expect this will be driven by a longer-term improvement in CGI’s revenue growth, with Accenture seeing local currency growth of 9.5 per cent in CQ4 versus CGI at 4.5 per cent.”
Ms. Price raised her target for the stock to $100 from $92, which exceeds the consensus of $93.15.
RBC Dominion Securities analyst Stephen Walker downgraded Yamana Gold Inc. (AUY-N, YRI-T) in reaction to the sale of its Chapada mine in Brazil to Lundin Mining Corp. in a deal that could eventually top US$1-billion.
Though he said the deal improves Yamana's balance sheet, Mr. Walker lowered its stock to "sector perform" from "outperform" after his net asset value and financial estimate projections for the company dropped "sharply."
"The sale of Chapada has investors and us puzzled given that management viewed the mine as a core asset with growth potential, albeit with its significant copper component," the analyst said. "The Chapada sale for $800-million, and $225-million in potential contingent payments that we do not incorporate, was well below our estimate of $1.48-billion likely due to significantly greater capital required to develop the copper-gold resources. Our production forecast for Yamana declines by 10 per cent to the 1.0 million ounces AuE range and our EBITDA contribution by 30 per cent.
"The sale of Chapada allows Yamana to reduce debt, double its dividend to 4 cents per share, and allocate capital to its other operating gold mines. Capital allocation priorities appear to be developing the underground potential at Canadian Malartic (50-per-cent AUY/ 50-per-cent AEM), optimizing Cerro Moro, and ongoing sustaining capital commitments at El Peñón and Jacobina."
Billing 2019 as a "key" year for Yamana, given the expectation of improved free cash flow as its Cerro Moro mine ramps up, Mr. Walker lowered his operating FCF projection to US$50-million or 5 US cents per share from US$70-million or 8 US cents per share. His cash flow per share projections for 2019 and 2020 fell to 47 US cents and 48 US cents, respectively, from 56 US cents and 66 US cents.
Believing the improved financial risks stemming from the deal fail to offset declining estimates, he lowered his rating for the stock and dropped his target price to US$2.50 from US$3. The average on the Street is US$3.58.
“In our view, the improvement in balance sheet fails to offset the decline in operating free cash flow and raises uncertainty around management strategy given that Chapada had been viewed as a core asset until recently,” said Mr. Walker. “As well, we believe that the sale of Chapada has resulted in heightened risk of further M&A to potentially replace the decline in production, while in our view the possible sale of Agua Rica (in part or whole) or the Leagold holding would be welcomed by investors in continuing the delevering of the balance sheet. Yamana outlined its criteria for consideration of potential M&A, which include assets within the Americas producing more than 130,000 ounces and with an after-tax IRR of 15 per cent.”
"Celestica's adjusted Q1 results and Q2 outlook were well below expectations," he said. "The miss was due to losing money in the semiconductor business and lower communications demand. We expect both markets to remain weak throughout 2019 causing headwinds to earnings."
“The implication from these weaker results is a lower EPS outlook for all of 2019. Celestica’s plan to improve its mix of business by growing ATS and high-grading the CCS portfolio remains well on track. However, these benefits are not likely to turn into positive earnings leverage until 2020.”
Mr. Coupland dropped his target to US$8.50 from US$11.50. The consensus on the Street is US$8.64.
"[Thursday's] steep sell-off (5 per cent) in Methanex's shares is overdone, in our view, and thus presents an attractive entry point for long-term, value-orientated shareholders," he said.
After Methanex management guided second-quarter EBITDA to be “sequentially lower,” Mr. Hansen shrunk his 2019 and 2020 earnings per share projections to US$4.41 and US$6.18, respectively, from US$4.94 and US$6.25.
He maintained an "outperform" rating and US$80 target. The average on the Street is US$62.57.
"We continue to recommend that investors accumulate MX shares based upon our constructive view on improving methanol fundamentals, the company’s robust associated free cash flow profile, and the stock’s attractive valuation," said Mr. Hansen.
Elsewhere, RBC Dominion Securities analyst Nelson Ng reduced his target to US$70 from US$75 with a "sector perform" rating.
Mr. Ng said: "Although management guided towards a weaker Q2, the additional MTO facilities coming online later this year and potential G3 development could drive some upside later in the year. We have reduced our PT to $70 (from $75) to reflect our lower financial forecast, but believe there is good upside for investors who are bullish on the global economy."
With West Fraser Timber Co. Ltd.'s (WFT-T) shares trading at multi-year lows, Raymond James analyst Daryl Swetlishoff thinks deep value investors will be “rewarded” during the second half of 2019.
On Thursday, the Vancouver-based company reported first-quarter adjusted EBITDA of $78-million, falling short of Mr. Hansen's $118-million forecast and the consensus expectation on the Street of $20-million. The miss came largely from lower-than-anticipated results from its Pulp & Paper Segment.
With the miss and the company's announcement of further production curtailments, Mr. Swetlishoff dropped his 2019 earnings per share estimate to $5.39 from $5.80.
He kept a "strong buy" rating and $80 target, which exceeds the consensus of $78.67.
“We rate West Fraser Strong Buy, given our constructive longer term view of lumber markets, driving earnings growth and the positive impact on valuation,” he said. “While the lack of investor enthusiasm has trended downwards with lumber pricing, recent curtailment announcements by industry participants has provided life to commodity pricing and share prices. ... We continue to expect better end user takeaways to coincide with improved building weather, although given lower than expected demand generation from China (and increasing inventories), we expect it will take time for commodity markets to find a balance.”
In other analyst actions:
Citing a less compelling valuation, National Bank Financial analyst Cameron Doerksen cut CAE Inc. (CAE-T) to “sector perform” from “outperform” with a target of $32.50, rising from $30. The average is $30.61.
GMP analyst Ian Gillies downgraded Mullen Group Ltd. (MTL-T) to “reduce” from “hold” with a target of $9.25, down from $12. The average is $14.35.