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

Hexo Corp.'s (HEXO-T) announcement that it plans to cut 200 jobs “reveals a situation more challenging than previously contemplated,” according to CIBC World Markets analyst John Zamparo.

Seeing “ongoing worrisome signs,” he lowered his rating for the Gatineau, Que.-based company to “underperformer” from “neutral” on Friday.

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“There were, in our opinion, three primary reasons why investors have in the past been bullish on HEXO stock,” said Mr. Zamparo. "First, Truss, the JV with Molson Coors Canada, provided the backing of an attractive CPG partner. Second, the company’s balance sheet (we estimate $230-million in net cash following yesterday’s deal) was stronger than peers. And third, and most importantly, is the company’s Quebec purchase contract, which was touted as a take-or-pay offering in which volumes were guaranteed for three years.

“In June, management indicated it would be short-sighted to enforce this contract for an immediate gain. Whether or not this is the right move is debatable, but without the contract, HEXO is relatively undifferentiated versus peers, in our view. [Thursday’s] announcement of job cuts indicates to us that the company has not been able to capture meaningful share outside its home province, and we do not believe investors will wait until Quebec’s lack of retail footprint has been addressed. Furthermore, [Wednesday’s] curiously timed and structured convertible debt deal acts as another question mark, in our opinion.”

The analyst lowered his target for Hexo shares by a loonie to $3. The average target on the Street is $5.98, according to Thomson Reuters Eikon data.

“Compressed margins, lower Quebec market share (and a less attractive Quebec contract), management credibility issues, and a capital raise all serve as reasons to believe that both operations and sentiment could worsen from here.,” he said.


After releasing “solid” third-quarter results, Mullen Group Ltd. (MTL-T) was raised to “outperform” from “market perform” by BMO Nesbitt Burns analyst Michael Mazar on Friday.

"Our upgrade is based on a combination of trough valuation, improving profitability metrics, solid free cash flow, and an attractive, sustainable yield," he said.

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Mr. Mazar maintained an $11 target, which falls 96 cents short of the consensus.


Teck Resources Ltd. (TECK.B-T, TECK-N) “remains a value story waiting for a better macro outlook,” said RBC Dominion Securities’ Sam Crittenden.

The analyst lowered his financial estimates and target price for shares of the Vancouver-based company following Thursday's release of its third-quarter results, which exceeded expectations on the Street.

Concurrently, Teck revealed a plan to cut 500 full-time jobs as part of a plan to trim $500-million in spending by the end of 2020. In a release, president and CEO Don Lindsay said: “Current global economic uncertainties are having a significant negative effect on the prices for our products, particularly steelmaking coal.”

Though Mr. Crittenden said he's seeing signs of price stability in met coal at around $150 per ton, he expects slowing steel demand to remain a headwind.

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“We have lowered our coal production estimate and increased capex at Neptune for 2020 following Q3 results,” the analyst said. “This is offset somewhat by capital and operating cost savings as a result of Teck’s proposed $500-million cost reduction program. Teck notes that $350-million of this are immediate cost savings while $150-million would be a deferral of sustaining capex. The result of these changes drops our NAVPS [net asset value per share] to $32.93 from $40.18 (using $150/t long term coal and an 8-per-cent discount rate).”

With those changes, his price target for Teck shares dipped to $35 from $41. The average on the Street is $34.02.

Mr. Crittenden kept an "outperform" rating.

"Teck continues to trade at a discount to global diversified peers and its historic levels," he said. "We believe the shares can re-rate by executing the Company's strategy and if we see some stability in commodity prices and a more positive outlook for global growth."

Meanwhile, Raymond James analyst Brian MacArthur reduced his target for Teck shares to $33 from $39.

He said: “We believe Teck offers good exposure to coal, copper, and zinc, and is able to convert EBITDA from its Canadian operations efficiently given its large Canadian tax pools. Given Teck’s long life, low jurisdictional risk, diversified asset base, and expected strong cash flow, we rate the shares Outperform."

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In a separate note, Mr. Crittenden said Lundin Mining Corp.'s (LUN-T) “solid” third-quarter results support his “positive” outlook, emphasizing production growth at its Candelaria copper mine in Chile.

"We believe FCF [free cash flow] can turn positive next quarter and into 2020 and these inflections have historically lead to out-performance by mining companies," the analyst said.

He added: “Candelaria copper production was up 21 per cent quarter-over-quarter to 41 tons (50 per cent of total copper production) as the mine returned to the high grade ore in the bottom of the pit (after recovering from the pitwall slide in 2017). We expect production to grow by 19 per cent in 2020 versus 2019 due to higher grades, increased underground production, a new mine fleet, and mill optimizations, and a further 6 per cent in 2021. We expect cash costs to decline to $1.35 per pound by 2021 from $1.73 per pound in 2019.”

He maintained an “outperform” rating and $9 target for Lundin shares. The average is $8.68.

"The stock is currently trading at a discount to peers at 4.3 times 2020 estimated EBITDA versus peers at 5.3 times and at 0.70 times P/NAV [price to net asset value] versus peers at 0.83 times," said Mr. Crittenden. "We believe Lundin can reduce the discount to peers by delivering on production targets and cost targets."

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The impact of unlimited data plans remains “top of mind” ahead of the Nov. 9 of Telus Corp.'s (T-T) third-quarter results, said Canaccord Genuity analyst Aravinda Galappatthige.

“We expect TELUS to report 3-per-cent consolidated EBITDA growth (ex IFRS16 impact, the sale of TELUS Garden, and the donation),” he said. "In a similar fashion to [Rogers Communications], our main focus in the quarter will be on the impact of unlimited data plans on wireless ARPU [average revenue per user] and service revenue. While wireline is expected to post another solid growth quarter (5-per-cent revenue growth), we expect wireless service revenue will be modest at 1.3 per cent driven largely by 3-per-cent mobile phone subscriber growth and a 1.5-per-cent decline in ARPU.

"In our view, TELUS will likely have a flatter j-curve than RCI reported and, as a result, will likely not suffer revenue and EBITDA pressure to the same degree. The flip side of this is that T is likely converting its subscriber base to unlimited at a slower pace, which may lead to a relatively more prolonged period of pricing pressure."

Pointing to his expectation of near-term wireless challenges due to market activity and regulatory risk, Mr. Galappatthige lowered his target for Telus shares by a loonie to $49 with a “hold” rating (unchanged). The average target is currently $53.37.

“While we continue to appreciate T’s potential for FCF growth over the medium-term, our concerns around the wireless competitive market temper our enthusiasm on the name,” the analyst said. “We have lowered our wireless estimates modestly on T, which has driven the slight decrease in our target.”

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Seeing pressures building in its ability to reach its full-year delivery guidance, AltaCorp Capital analyst Chris Murray lowered his estimates for NFI Group Inc. (NFI-T) ahead of its third-quarter results.

"Production and supply chain issues have been impacting performance and we believe it likely that deliveries are further delayed with additional negative margin impacts to clear the delivery backlog," said Mr. Murray. "While we still forecast a very significant step up in Q4 deliveries, we continue to expect the Company to fall shy of full-year delivery guidance and would not be surprised to see further downward revisions with the quarter. Ultimately, we see the Company moving past the operational issues, normalizing production processes and inventory levels, and neutralizing year-to-date working capital investments as we move into 2020. The other core item this quarter will be again building on the understanding of how the Alexander Dennis (ADL) acquisition, completed in May, will change revenue mix and margins in both manufacturing and aftermarket segments."

Mr. Murray is now projecting quarterly EBITDA of $77.9, which remains above the consensus of $77.4-million.

Pointing to “the shift in production, which anticipates lower absorption and additional costs to reduce production backlog and additional disclosures surrounding ADL where we now anticipate lower margins,” his 2019 and 2020 EBITDA estimates also slid to $322.6-million and $393.8-million, respectively, from $333.6-million and $432.1-million.

Keeping an “outperform” rating, his target for NFI shares fell to $43 from $46. The average is $38.71.


The recent selloff in Badger Daylighting Ltd. (BAD-T) shares ahead of the Nov. 4 release of its third-quarter results is “overdone,” according to Canaccord Genuity analyst Yuri Lynk.

“Badger shares have declined 21 per cent since the company reported a Q2/2019 weather-related EPS miss on Aug. 6 with selling accelerating since late September on no news,” he said. “We view this as a good opportunity to add to Badger positions but not because we view Q3/2019 as a catalyst. Rather, we believe Badger’s current valuation affords investors with a longer-term investment horizon the opportunity to acquire shares well below their intrinsic value. Despite the underwhelming Q2/2019 print, this is still a company we believe can increase its U.S. business (79 per cent of revenue) by a factor of four over the next five years and enjoys a substantial size and scale advantage versus its competitors.”

Mr. Lynk thinks a trio of perceived overhangs - the lingering impact of the second quarter's adverse weather, short-term disruptions from the implementation of its enterprise resource planning (ERP) system and concerns over elevated days sales outstanding (DSOs) - are unlikely to have a significant impact on Badger's long-term earnings power.

For the quarter, Mr. Lynk is projecting 12-per-cent year-over-year earnings per share growth (to 78 cents) on 7-per-cent EBITDA growth (to $55-million). Both fall in line with the consensus on the Street.

“In Q3/2019, Badger laid-out $26 million to repurchase 599,000 shares, a material increase from the 136,700 repurchased the prior quarter,” he said. “For a management team that has proven to be excellent stewards of capital it would be odd for them, in our view, to be aggressively repurchasing stock through to the last day of Sept. only print a disappointing quarter.”

He kept a “buy” rating and $54 target, which exceeds the consensus by 46 cents.


Canadian energy exploration & production companies bring a "lot of pain but plenty to gain," according to Raymond James' Chris Cox and Jeremy McCrea.

In a research report released Friday, the analysts resumed coverage of 13 operators and updated the firm's commodity price assumptions.

For WTI, the firm's 2019 assumption fell by 1 per cent to US$56.35 per barrel (from US$57.16). Their 2020 estimate dropped 7 per cent to US$52.18 from US$55.87.

Conversely, its natural gas assumptions for 2019 and 2020 rise by 2 per cent to US$2.66 per thousand cubic feet and US$2.52, respectively, from US$2.61 and US$2.49.

"One of the more significant changes within our updated framework is an increased focus on sustaining capital across the sector," the analyst said. "We believe a more rigorous evaluation of sustaining capital allows us to more accurately assess two critical factors when investing within the sector - profitability and defining the low cost producers. By explicitly bringing sustaining capital into our analytical framework we believe we are more accurately incorporating the capital intensity of the various businesses into our benchmarking across the sector. Differentiation within the E&P sector has always historically been principally driven by margin, rather than growth, and our new emphasis on sustaining capital provides a more accurate depiction of the true margin profile of our respective companies under coverage.

"Building off this analysis, we have also put a much heavier emphasis on risk assessment to guide our recommendations. While there are many factors that have driven long-term underperformance of the energy sector, a key contributing aspect is that the E&P business model is inherently one with a relatively asymmetric risk profile to the downside. Furthermore, we believe differences in risk profiles between companies play a significant role in shaping relative valuations within the sector."

Based on changes to their framework, the analysts lowered their rating for four stocks. Those are:

Baytex Energy Corp. (BTE-T) to “market perform” from “outperform” with a $2 target, down from $3. The average is $3.30.

Bonterra Energy Corp. (BNE-T) to “market perform” from “outperform” with a $4 target, down from $8. Average: $6.84.

Encana Corp. (ECA-T) to “market perform” from “outperform” with a $5 target, down from $10. Average: $10.50.

Tamarack Valley Energy Ltd. (TVE-T) to “outperform” from “strong buy” with a $3.25 target, down from $3.50. Average: $3.61.


In other analyst actions:

In a third-quarter earnings preview for Canadian infrastructure stocks, Credit Suisse analyst Andrew Kuske downgraded Emera Inc. (EMA-T) to “underperform” from “neutral,” expressing concern about “storm related damages, a potentially building M&A overhang and stock performance.”

Seeing stable long-term growth, Cowen and Company analyst Ken Cacciatore initiated coverage of Bausch Health Companies Inc. (BHC-N, BHC-T) with an “outperform” rating and US$35 target. The average is US$29.86.

“Despite multiple exclusivity losses & divestments, the current management has successfully transformed & slowly strengthened Bausch’s portfolio,” he said.

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