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

Canopy Growth Corp. (WEED-T) remains “under pressure” following an “another underwhelming” quarter and facing a longer path to profitability, according to Canaccord Genuity analyst Matt Bottomley, leading him to make “substantial” downward revisions to his financial estimates for the cannabis producer.

After the bell on Wednesday, Canopy reported net revenue for the quarter of $90.5-million, well below Mr. Bottomley's $112-million projection as recreational cannabis sales drop from 11.4 per cent from the previous quarter.

"Although the company saw a significant uptick in its dried cannabis sales, the overall decrease was driven by a very surprising shift in its oils/ softgels sales mix," the analyst said. "The company noted that after selling $36.5-million of recreational oil products last quarter, provincial buyers have become saturated with these types of products (which we understand only comprise 5-10 per cent of end user sales). As a result, the company wound down its rec oil sales in FQ1, which came in at nominal $0.2-million, inclusive of a $8-million (gross) sales allowance for future anticipated returns.

“Consistent with the prior quarter, Canopy once again posted a rather soft adj. gross margin, which declined quarter-over-quaerer by 130 bps to 14.6 per cent due to continued costs incurred on facilities not yet in operation and under-utilized capacity as the company continues to ramp up its infrastructure. Although sales and margins came down sequentially, with cash opex also coming in more than $10-million lower quarter-over-quarter, the company saw modest improvement in its Adj. EBITDA loss, which came in at a loss of $92.1-million, a $5.7-million improvement and generally in line with our expectations.”

With the results and in the wake of Thursday's conference call with management in which they acknowledged profitability remains three to five years away, Mr. Bottomley lowered his 2020 and 2021 revenue projections to $716-million and $1.128-billion, respectively, from $927-million and $1.318-billion. His adjusted earnings per share estimates fell to lossess of $4.26 and 56 cents from profits of 46 cents and 95 cents.

That led him to drop his target for Canopy shares to $60 from $70, keeping a “speculative buy” rating. The average target on the Street is $65.34, according to Thomson Reuters Eikon data.

Meanwhile, Cormark Securities analyst Jesse Pytlak downgraded the stock to “market perform” from “buy” with a target of $48, down from $55.

Desjardins Securities analyst John Chu lowered his target to $46 from $59 with a “hold” rating, pointing to “continued near-term uncertainty and recent share price volatility.”

“The uncertainty regarding near-term sales and margins suggests ongoing pressure on the stock. Should the stock drift into the low C$30s, we believe that could represent an attractive entry point,” he said.

CIBC World Markets' John Zamparo moved his target to $50 from $80.

Mr. Zamparo said: “Canopy Growth has a long-term focus on becoming a globally dominant medical cannabis company. But in the meantime, its Canadian recreational performance has stagnated the past two quarters, as competitors’ cultivation assets have come online. We suspect Canopy will be better prepared than others for derivative products (Q1 production was industry-leading) in 2020, and its international and U.S. initiatives are compelling, as is the focus on disrupting established industries through patents and clinical trials. However, patience will be required as the company ramps to its $1-billion revenue run-rate by Q4/F20 and defers profitability until F2022. Balance sheet strength, the backing of Constellation, and exposure to U.S. CBD and international ambitions all support our Outperformer rating.”


Following “light” second-quarter results that fell short of his expectations, Desjardins Securities analyst Michael Markidis lowered his rating for H&R Real Estate Investment Trust (HR.UN-T) to “hold” from “buy.”

"The change in our view takes into account (1) HR’s below-average organic growth profile, and (2) elevated operating and redevelopment capital intensity," he said. "In a low-rate world, HR’s 6.0-per-cent dividend yield should remain attractive to income-oriented investors. From a catalyst perspective, we believe a key risk to our call is the potential sale of a partial interest in The Bow, particularly if the proceeds were used to repurchase stock."

On Tuesday, the Toronto-based REIT reported funds from operations per unit for the quarter of 42 cents, falling 3 cents below the analyst's projections. Its operating performance metrics also missed his expectations.

With the results, Mr. Markidis lowered his FFO per unit projections for 2019 and 2020 to $1.77 and $1.83, respectively, from $1.83 and $1.89.

He lowered his target for H&R units to $24 from $25. The average is $25.28.


With its stock “softening” following the announcement of a CEO succession plan and the potential for third-quarter weakness, Desjardins Securities analyst David Newman sees an opportunity to move back to a “buy” rating for Boyd Group Income Fund (BYD-UN-T), prompting him to raise the Winnipeg-based auto body and glass repair company from “hold.”

“We view BYD as a resilient quality compounder and a recession-resistant name with strong cash flow, M&A and organic growth opportunities as well as high returns on capital, backstopped by a highly disciplined management team,” he said.

Though concerns lingering about the competitive moat it faces in the coming quarters, as seen through a slowing U.S. vehicle miles traveled growth and a decline in collision repair claims, Mr. Newman thinks Boyd should be able to post above-average growth " given the company’s continued investment in technology, technicians and certifications, as well as growing scale and preferred access to insurers through their DRPs (and performance-based agreements), which serves as a barrier to entry for independent operators."

“Longer-term, BYD appears to be on track to exceed its plan of doubling revenue over the five-year period ending in 2020 (15-per-cent implied annual growth rate),” he said. “The acquisition of single shops, small to midsized MSOs and potentially large MSOs (especially for new regions) forms a key part of the projection, along with organic growth and new store development.”

Also seeing a seamless CEO transition from Brock Bulbuck to Tim O’Day, Mr. Newman raised his target to $195 from $190. The average on the Street is $194.08.


The finalization of its strategic agreement with the Kyrgyz Republic removes an overhang for Centerra Gold Inc. (CG-T), according to Credit Suisse analyst Fahad Tariq.

Saying he's more constructive on the miner, he raised his rating to "outperform" from "neutral."

“Though some additional payments were needed to get the deal done (US$10-million this year, plus effectively an additional 0.4-per-cent royalty), the resolution with the government lifts a major overhang on the stock (including concerns about potential restrictions for Kumtor) and lowers operational risk,” the analyst said. “Recall that though Centerra is looking to increasingly diversify outside of the Kyrgyz Republic with Oksut (Turkey) and Kemess (Canada), 75 per cent of 2019 estimated production is still from Kumtor, which means a successful resolution with the Kyrgyz Republic is significant.”

Mr. Tariq increased his target to $14 from $11.50. The average is $12.59.

“Generally tracking gold price oscillations, CG has traded sideways for several years before recently rallying, nearly doubling year-to-date,” he said. “Despite the sharp upward movement of the stock, we still see potential for higher prices due to: (i) torque to rising gold prices; (ii) re-rating potential due to finalization of Strategic Agreement as required payments are made (following “Second Completion Date” in Q3/19); (iii) production growth from Oksut coming online in January 2020 (currently 64-per-cent complete); (iv) improved throughput at Mt. Milligan (though there remain some concerns around Q1/20 production levels due to potential water availability issues if dry weather persists); and (v) growing FCF and potential to re-rate higher as leverage further declines.”


Largo Resources Ltd. (LGO-T) is a “low-cost vanadium producer positioned for a recovery,” according to Andrew Wong.

Calling its Maracas Menchen mine in Brazil a “top tier” asset and touting its strong financial position with several upcoming catalysts, Mr. Wong initiated coverage of the Toronto-based mining company with an “outperform” rating.

Though the vanadium markets remains in deficit, Mr. Wong expects prices to stabilize in the second half of the year as investors are drawn down, niobium substitutions declines and Chinese rebar standards are “gradually enforced.”

"We forecast prices to improve moderately to US$8/lb through 2021, with long-term prices at US$10/lb reflecting incentive pricing as the market deficit widens starting in 2023," he said.

The analyst also expects Largo to gain a financial boost in May of 2020 when its sales contract with Glencore expires, allowing for the opportunity to realize higher prices.

“We view Largo’s steady, low-cost production as especially important due to the volatility in vanadium prices, allowing the company to capture price upside in a bullish market while still generating solid cash flow through a market downturn,” he said. “Our scenario analysis provides several key takeaways: 1) Largo has an asymmetric upside/downside return profile with our upside scenario providing 340-per-cent return vs. our downside scenario at a 34-per-cent drop, compared to current share price; 2) our upside scenario is based on a not overly unrealistic expectation that Chinese regulators reinforce rebar standards and prices return to the 2017/18 average level; 3) our downside scenario still yields 7 -per-cent FCF yield in 2020; and 4) even in our extreme downside case, with prices below almost the entire cost curve, Largo remains FCF positive. Note we refer to FCF and FCF yield after normalizing for working capital impact form Glencore contract adjustments.”

Mr. Wong set a target for Largo shares of $3.50, which exceeds the current consensus of $2.50.


With its weaker-than-anticipated first-quarter 2020 results, “reality sets in” for CAE Inc. (CAE-T), said Raymond James analyst Ben Cherniavsky.

On Wednesday before the bell, the Montreal-based flight simulator manufacturer reported earnings per share of 24 cents, which fell five cents short of the analyst's expectation and four cents below the consensus estimate. The miss was due largely to a significant gap in the performance of its Defense segment.

“When CAE reported its F4Q19 results last May, we provided a ‘reality check’ on the market’s exuberant response to what we described as a ‘low quality’ earnings beat ,” said Mr. Cherniavsky. “For F1Q20, which CAE reported [Wednesday], it looks like reality has set in with lagging results that triggered a 5-per-cent drop in CAE’s share price (vs. TSX at down 2 per cent). We recognize that quarterly results can be volatile (especially under recently adopted IFRS 15*) and that three months do not make a trend. However, in our view, the company’s most recent performance is much more consistent with what we have come to expect in the past. In particular, F1Q20 featured two recurring issues that have kept us on the sidelines with this stock for a long time.

"To be clear, our interpretation of ‘reality’ for CAE is not one in which the company’s fundamentals are inherently flawed or the market for simulated flight training is structurally impaired. Rather, we simply believe that the company’s insatiable desire to grow revenue has required copious amounts of capital that has not earned a sufficient return to justify the stock’s increasingly rich valuation. Similarly, we believe the markets that CAE serves are increasingly competitive, which in has in turn prevented any material operating leverage from transpiring as the company aggressively ramps its top line growth. With both of these key issues being, once again, manifest in F1Q20 results we have no reason to alter our investment thesis or neutral rating on CAE’s stock.”

Keeping a “market perform” rating, Mr. Cherniavsky lowered his target to $34 from $35. The average is $36.


In other analyst actions:

CIBC World Markets analyst Christopher Couprie raised Extendicare Inc. (EXE-T) to “outperformer” from “neutral” with a target of $9.50, rising from $8.50. The average on the Street is $8.63.

“By the end of 2020, NOI margins at ParaMed (Extendicare’s home health business) should recover, owing to reduced IT spend, the exit from BC, and improved volume growth,” he said. “Q2/19 offered a first look at stabilizing margins, with an ex-BC margin of over 10 per cent (excluding impact of Good Friday). Growth t high-margin SGP and Extendicare Assist, the presence of an activist investor, a solid balance sheet, low cap rate sensitivity, and a 17-per-cent discount to NAV all further help support our thesis.”

CIBC’s Mark Jarvi cut Just Energy Group Inc. (JE-T) to “underperformer” from “neutral” with a $2 target, falling from $5.50. The average is $5.34.

“Fundamentals are worse than we envisioned prior to the poor FQ1/20 results,” said Mr. Jarvi. “Selling costs are elevated, RCE count is lower than assumed, RCEs are contracting with no offset in higher margins, leverage is higher and solvency is a real issue. These same weaker fundamentals ratchet down potential takeout values (strategic review remains ongoing). While we recognize media reports suggest JE has received indicative offers (possibly above the recent trading range), we do not have any conviction on a successful outcome. Rather we believe it is more prudent to assume downside scenarios that could include a failed sales process, weakened credibility, no yield support (assume the dividend is gone for good) and financial liquidity pressures.”

BMO Nesbitt Burns cut Mogo Finance Technology Inc. (MOGO-T) to “market perform” from “outperform” with a $3.50 target, down from $7 and below the consensus of $9.40.

Bank of America Merrill Lynch raised Nutrien Ltd. (NTR-N, NTR-T) to “neutral” from “underperform”

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