Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Frederic Tremblay expects the soon-to-be-released maiden resource estimate for Patriot Battery Metals Inc.’s (PMET-X) 100-per-cent-owned Corvette hard rock lithium project in Quebec’s James Bay region to “demonstrate the massive scale of the deposit,” which he thinks could be “sector-leading.”
In a research report titled A Corvette with major horsepower, he initiated coverage of the Vancouver-based company with a “buy” recommendation, believing a “a strong resource out of the gate may only scratch the surface of Corvette’s potential.”
“The CV5 pegmatite cluster at Corvette appears on its way to delivering a five‐star initial resource with significant scale — targeting a maiden resource estimate this July,” said Mr. Tremblay. “We eagerly await the imminent release of an initial mineral resource estimate on CV5, a pegmatite cluster with a 3.7-kilometre strike length which has shown positive drill results, including the high‐grade Nova zone. We estimate a spectacular resource of 138.4mt (averaging 1.15-per-cent Li2O) for CV5 and envision that a resource of this scale can drive sizeable spodumene concentrate production and profitability/cash flow generation (we assume first production in 2029 and a 33‐year minelife). Based on our forecasts, the maiden resource estimate for CV5 expected in July 2023 should position Corvette as the largest hard rock lithium deposit in North America and confirm Patriot’s potential meaningful contribution to the domestic battery supply chain.
“Corvette’s journey does not end at CV5—resource expansion potential supported by continued drilling and surface exploration. While CV5 should provide a strong resource number out of the gate, it may only scratch the surface of Corvette’s potential. In addition to continued drilling at certain clusters (including CV5), we note that: (1) half of the clusters on the property identified to date have yet to be drill‐tested; and (2) Patriot intends to perform surface exploration activities across 20 kilometres of prospective lithium pegmatite trend on the property.”
The analyst thinks “potential bumps in the road look relatively small and manageable,” citing the property’s proximity to existing roads and powerlines as well as the mining‐friendly status of the region.
“Patriot had a cash position of $19.3-million and no debt at the end of 2022,” he said. “This was supplemented by a $50-million flow‐through equity offering completed in March 2023. In addition, we estimate that in‐the‐money warrants could bring an incremental $16-million in 2023. As we think about the ongoing advancement of exploration and technical studies, as well as the multi‐year path to first production of spodumene concentrate, we note that: (1) Patriot has historically relied on equity offerings; and (2) future partnerships, debt and/or government support are other potential sources of funds.”
Predicting “subsequent resource expansion potential should make for a pleasant ride,” Mr. Tremblay set a Street-high target of $21 per share. The average is currently $18.18.
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After “another strong” quarterly beat that topped expectations, High Tide Inc. (HITI-X) “remains a standout in the Canadian cannabis industry,” according to Echelon Partners analyst Andrew Semple.
“It is one of a few cannabis companies in Canada to sustain growing positive EBITDA while maintaining clear growth drivers ahead (near-to-medium term from the ongoing deployment of the discount club model and long-term from the expansion into the German/American markets upon possible legalization),” he said. “High Tide remains our highest conviction investment idea in Canadian cannabis. We note the potential for additional upside to our forecast as High Tide could potentially draw down additional debt to reaccelerated growth, and with further updates to the discount club model progress.”
After the bell on Wednesday, the Calgary-based company reported second-quarter revenue of $118.1-million, up 45.8 per cent year-over-year and above the estimates of both Mr. Semple ($116.9-million) and the Street ($116.4-million). Adjusted EBITDA jumped 174.3 per cent to $6.6-million, also exceeded projections ($5.1-million and $5.3-million, respectively).
“High Tide has now beat revenue estimates for seven consecutive quarters and reported its 13th straight quarter of positive adj. EBITDA,” the analyst said. “The Company’s unique discount club retail strategy continued to bear fruit, with national market share of retail sales growing from 3.6 per cent to approximately 8.3 per cent since implementation (with management reporting 9.5-per-cent share outside of Quebec, which does not permit privately owned retailers).
“High Tide maintained robust organic growth led by its discount club retail strategy, with same store-sales growth reported at up 30 per cent year-over-year (compared to est. industry average roughly flat year-over-year). We previously noted that the prior quarter may have been the peak for SSS-growth as High Tide laps easier comparisons to pre-discount club quarters, though High Tide maintains an ongoing healthy organic growth profile with reported adjusted SSS growth of 5 per cent quarter-over-quarter (adjusted for fewer days in FQ223 period, 18-20 per cent annualized by our calculations).”
With High Tide reiterating its target of achieving positive free cash flow by the end of calendar 2023 despite “challenging market conditions for the broader Canadian cannabis industry,” Mr. Semple emphasize it will lower its reliance on unpredictable capital markets, “allowing High Tide to sustain its growth even if market conditions remain volatile.”
“This is expected to be achieved by increasing SSS, upward momentum in gross margins in Canadian bricks-and-mortar sales, and strong cost controls,” he said. “Additionally, the Company plans to roll out more white-label SKUs of its Cabana Cannabis Co. brand through the course of the year, which should be additive to gross margins. With $22.5-million of cash on hand after raising debt and equity capital in 2022, and expectations to achieve positive FCF before the end of calendar year 2023, we believe that High Tide is well capitalized to sustain its organic and acquisitive growth in years ahead and capitalize on tough market conditions where other smaller groups may struggle to sustain operations.”
Reiterating his “speculative buy” recommendation, Mr. Semple trimmed his Street-high target by $1 to $9 based on “challenging equity market conditions for the cannabis industry” and a lower discounted cash flow valuation after trimming his “longer-term forecasts with slower new store growth for High Tide this year.” The average is $6.50.
“However, our near-term estimates continue to rise, and we believe F2023 will show accelerated progress towards the earnings ramp up we expect to continue across FH223 and F2024,” he said.
Elsewhere, ATB Capital Markets’ Frederico Gomes reaffirmed his “outperform” rating and $6 target.
“HITI remains our top pick in Canadian cannabis following strong Q2/FY23 results,” he said. “Daily same-store sales increased by 5 per cent quarter-over-quarter, and retail gross margin expanded by 60 basis points quarter-over-quarter to 24.0 per cent, supported by consolidation in the Canadian retail market. As the competitive environment improves, we believe HITI will continue to report sequential same-store sales growth and brick-and-mortar margin expansion. The Company is prudently managing costs, and a 7-per-cent quarter-over-quarter reduction in SG&A drove record adj. EBITDA of $6.6-million in Q2/FY23. Management reiterated guidance that HITI would become FCF positive by the end of calendar 2023; we think the guidance is achievable as early as next quarter, as the Company would have generated $1.7-million in FCF in Q2/FY23 if not for $4.1-million invested in working capital. We expect new store openings to accelerate in H2/23 and 2024 as HITI funds growth through excess cash generated from its operations. The stock trades at 4.8 times NTMe [next 12-month estimated] EV/EBITDA, a discount of 56 per cent to LPs (most of which are adj. EBITDA negative). We think HITI offers the best risk-reward in the space due to its consistent execution, leadership position in retail, proximity to FCF generation, and clear growth outlook.”
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Gatineau, Que.-based cannabis company Hexo Corp. (HEXO-T) continues to suffer through operational declines as its acquisition by Tilray Brands Inc. (TLRY-T) nears completion, according to Canaccord Genuity analyst Matt Bottomley.
“Overall, FQ3 represented another period of sharp sequential declines in the company’s Canadian adult-use segment resulting in material (albeit non-cash) write-offs on HEXO’s balance sheet,” he said.
On Wednesday, Hexo reported total revenue of $21.6-million, down 10.7 per cent from the second quarter and well below Mr. Bottomley’s $26.1-million estimate. Adjusted EBITDA fell to a loss of $3.93-million from a loss of $2.41-million in the previous quarter and also short of the analyst’s projection (a loss of $1.76-million).
“Top-line pressure was most notable in the company’s Canadian adult-use segment, which declined by 24 per cent vs. FQ2 (to $16.1-million),” he said. “Management pointed to lower sales in Alberta, supply distributions in Quebec and a deceleration of its efforts in smaller markets such as Saskatchewan and Alberta as primary drivers for the decline. However, although lower margin in nature, these declines were partially offset by a more than 2 times increase in its B2B wholesales during the quarter, which increased to $4.0-million.
“Below the top line, ignoring non-cash fair value adjustments and $12.1-million in inventory write-offs, HEXO realized gross profit of $4.3-million, representing a margin of 20 per cent compared to 25 per cent in the prior quarter. The lower sequential contribution was largely a function of increased B2B wholesales as well as a higher sales mix of lower-margin SKUs, including extraction-grade flower. As a result, although operating expense remained relatively stable, the company reported an adj. EBITDA loss of ($3.9-million) compared to a loss of ($2.4-million) in FQ2.”
At a special meeting held on Wednesday, shareholders approved the acquisition by Tilray, which will see each Hexo share worth 0.4352 shares of the combined company.
Keeping a “hold” rating, Mr. Bottomley cut his target to $1 from $1.50 based on the exchange ratio. The average is $1.49.
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In other analyst actions:
* TD Cowen’s Michael Nedelcovych downgraded Bausch Health Companies Inc. (BHC-N, BHC-T) to “market perform” from “outperform” with a US$12 target, down from US$35 but above the US$8.50 average.
* Ahead of its June 21 earnings release, CIBC’s Nik Priebe lowered his AGF Management Ltd. (AGF.B-T) target to $8.50, below the $9.14 average on the Street, from $9 with a “neutral” rating.
“Our earnings estimate is based on the expectation for a moderation of SG&A expenses and a “middle-of-the-road” quarter for the contribution from fair value adjustments and other income. It remains a challenging environment for the industry from an asset-gathering standpoint, but AGF’s relative investment performance has improved over the past year and the company has been punching above its weight in the retail channel,” said Mr. Priebe.
* CIBC’s John Zamparo reduced his Aurora Cannabis Inc. (ACB-T) target to $1 from $1.75 with a “neutral” rating, while TD Cowen’s Vivien Azer trimmed her target to $1 from $1.30 with a “market perform” rating. The average on the Street is $1.42.
“We are maintaining our Neutral rating on Aurora Cannabis while reducing our price target ... to reflect lower sales forecasts and even more restrained sentiment for cannabis stocks,” said Mr. Zamparo. “Aurora’s incremental $40-million in planned cost cuts will be necessary to achieve true profitability, which is ultimately required to attract investors. Aurora trades at just 0.7 times sales and 11 times EBITDA (on NTM figures). While this compares favourably to peers, we expect valuation will not be given credit until positive FCF is attained, which isn’t expected until late C2024.”
* CIBC’s Kevin Chiang cut his targets for Canadian National Railway Co. (CNR-T) to $183 from $185 and Canadian Pacific Kansas City Ltd. (CP-T) to $123 from $125, keeping “outperformer” ratings for both. The averages are $166.14 and $118.45, respectively.
“We have adjusted our estimates for CN and CP lower to reflect the softer freight environment but remain positive on their ability to deliver above industry average EPS growth,” he said.
* BMO’s Devin Dodge bumped his Finning International Inc. (FTT-T) target to $48 from $47, exceeding the $44 average, with an “outperform” rating.
* Canaccord Genuity’s Robert Young trimmed his Haivision Systems Inc. (HAI-T) target to $4.75 from $5, keeping a “buy” rating. The average is $4.88.
“Haivision reported a strong FQ2 with a beat on revenue and adj. EBITDA,” said Mr. Young. “Product revenue growth of 20 per cent year-over-year was primarily driven by strength across combined Aviwest bonded 5G cellular + Makito deployments and momentum in Command 360. Haivision also saw steady demand for live sports and events contribution. Management reiterated its revenue guide of $130-135-million for F2023 with adj. EBITDA margin guide of ‘double-digits’ for the full fiscal year. Haivision expects H2 margins to see recovery as front-loaded opex in H1 and impact from cost efficiencies become visible. Management also reiterated its long-term target of adj. EBITDA margins of 20 per cent through GM expansion to low 70 per cent over time and disciplined opex although current elevated levels of opex and likelihood of continuing investment in R&D and Cloud go-to-market suggest this will not come easy or fast. Management noted there was no update on Evertz’ expression of interest so the ball is in Evertz’ court to evaluate options. We now view the likelihood of a transaction to be lower. Haivision’s strong quarter and reasonable valuation keeps us BUY rated with a lower $4.75 price target.”
* BMO’s Ben Pham lowered his target for Northland Power Inc. (NPI-T) to $42 from $45 with an “outperform” rating. The average is $40.77.
* Stifel’s Stephen Soock raised his Reunion Gold Corp. (RGD-X) target to 75 cents from 60 cents with a “buy” rating. The average is 88 cents.
“Reunion Gold released its maiden resource estimate for Oko West property in Guyana,” he said. “The release returned 37 per cent higher resources than we modeled. Following a technical presentation from the company on the resource estimate, we are increasing our modeled mineable base to 4.96Moz (up 60 per cent vs previous estimate).”
David Leeder