Inside the Market’s roundup of some of today’s key analyst actions
Citi analyst Alexander Hacking raised his financial estimates for Barrick Gold Corp. (GOLD-N, ABX-T) and Newmont Corp. (NEM-N, NGT-T) on Monday to match current bullish market sentiment and the firm’s expectation for higher gold price, noting the “rich get richer.”
“Barrick and Newmont have both strongly outperformed the broader GDX gold miners index,” he said in a research note. “This appears mostly driven by generalist money returning to the sector and preferring the largest, most diversified names. Note: this may encourage more mid-cap M&A.
“More broadly, both NEM and GOLD continue to unwind a ‘lost decade’ from 2005-15 where stock returns were exceptionally disappointing versus the gold price.”
Mr. Hacking cautioned that valuations are not inexpensive currently, however he said: “The history of gold stocks says they will trade higher with the gold price & Citi’s global commodity team is bullish ($2,000/oz in 2H21).”
Keeping a “neutral” rating for Barrick, Mr. Hacking raised his target to US$27 from US$19. The average on the Street is US$29.55.
He maintained a “buy” rating for Newmont with a US$70 target, down from US$74. The average is US$73.17.
“Newmont remains marginally cheaper on our NAV models, but its close,” the analyst said. “We see both companies in mostly good shape, with more similarities than differences. Investor preference may come down to management style and future capital allocation. NEM seems happier to return capital and resembling a ‘Rio Tinto for gold.’ GOLD may have bigger ambitions.”
Seeing the COVID-19 pandemic having an “outsized impact” on its business, Raymond James analyst Rahul Sarugaser downgraded Organigram Holdings Inc. (OGI-T, OGI-Q) ahead of the mid-July release of its third-quarter financial results.
"OGI was one of the more proactive Canadian LPs to make and announce operational adjustments due to the COVID-19 pandemic, which came in the form of temporary workforce layoffs and reduced overall production," he said.
“Based on our channel checks, it appears that the operational changes resulted in a slower-than-anticipated roll out of OGI’s deep value brand, Trailer Park Buds. We’ve seen from several other producers—including Aurora Cannabis, Canopy Growth, HEXO Corp. — that this deep value segment (cannabis flower retailing for less than $5 per gram) was critical to driving outperforming sales (or underperforming sales, in the case of CGC) in their 2Q20 results. OGI appeared to be slow to this game, which we anticipate will result in weak overall revenue in its upcoming 3Q20 earnings. This said, we anticipate underperforming cannabis flower sales to be somewhat mitigated by revenue from its strong cannabis chocolate market share.”
For the quarter, Mr. Sarugaser is projecting revenue of $19.4-million, down from $23.2-million in the second quarter. He's expecting the company's EBITDA loss to grow from $1.1-million to $2.6-million.
Mr. Sarugaser lowered the Moncton-based company to "market perform" from "outperform" with a $5 target, down from $6.50. The average on the Street is $4.66.
“We continue to have confidence in the company’s management team, and hence, OGI’s long-term (i.e. 2021 onward) prospects,” he said.
Reaffirming his “underlying confidence in its equity-aligned game plan,” RBC Dominion Securities analyst Greg Pardy increased his financial projections for Canadian Natural Resources Ltd. (CNQ-T, CNQ-N) following an “upbeat” recent discussion with President Tim McKay that “highlighted the company’s operating momentum and confidence in its outlook.”
“We believe that CNQ will distinguish itself by emerging from the COVID-19 pandemic with its dividend policy intact,” said Mr. Pardy.
“CNQ remains our favorite producer for 2020 and is on both our Global Top 30 and Best Energy Ideas lists.”
The analyst sees the Calgary-based company making progress on its annual goal of $745-million in operating cost reductions, and sees another $90-million in G&A savings.
“These dynamics should begin to surface when the company reports its second-quarter results,” he said. “More important is the fact that CNQ anticipates 60–70 per cent of these operating cost savings to be sustainable in nature (under futures).”
“CNQ is enjoying good operating momentum with respect to its production rates and costs. The company’s oil sands mining segment (Horizon + AOSP) ran at full rates in the second quarter, excluding May, where planned pigging activities at Horizon were successfully completed. During the April–May time frame, CNQ dialed back its thermal and heavy oil production in connection with depressed oil prices. Amid strengthened benchmark oil prices (and differentials), almost all of this production has since been restored. The company remains focused on adding its previously announced circa 60 million cubic feet per day of natural gas production at a cost of less than $3,000 per barrel of oil equivalent per day.”
Also seeing its liquidity in “good shape,” Mr. Pardy raised his 2021 earnings and cash flow per share projections to 51 cents and $5.48, respectively, from 21 cents and $5.16.
Keeping an “outperform” rating, he increased his target to $30 from $27. The average on the Street is $29.48.
“At current levels, CNQ is trading at debt-adjusted cash flow multiples of 11.9 times (vs. 6.3 times for our North American peer group) in 2020 and 6.9 times (vs. peers at 5.2 times) in 2021. In our view, CNQ should command a premium cash flow multiple vs. our peer group given its long-life, low-decline portfolio and continued focus on shareholder distributions,” he said.
Industrial Alliance Securities analyst Elias Foscolos thinks Pembina Pipeline Corp. (PPL-T) is likely revisiting its capital plans and assessing the long-term economics for deferred projects following a series of liquidity “enhancements” following the first quarter.
“Prior to Q1 reporting, PPL went on the defensive in response to COVID-19 and the resultant decline in commodity prices and Western Canadian production, putting most of its secure growth program on hold,” he said. “PPL has also expressed that it does not intend to grow the dividend this year beyond the 1-cent per share increase associated with the Kinder Morgan Canada acquisition. Despite all the uncertainty, PPL has maintained its 2020 EBITDA guidance at $3.4-billion plus/minues $150-million but does expect to be toward the low end.
“PPL’s liquidity position is strong, and post Q1/20,the Company has announced a new $800-million revolving credit facility with an initial two-year term, and a twotranche $500-million note offering with maturities in 2026 and 2050.”
Mr. Foscolos thinks a pipeline project, potentially Peace Phase VII or VII and X, is likely to be resurrected “given the favourable longterm supply-push and demand-pull fundamentals for pipeline egress and fee-for-service contracting.”
However, he thinks its Propane Dehydrogenation/Polypropylene (PDH/PP) complex, which he said “represents the lion’s share of deferred spending,” is likely to be cancelled later this year, seeing the project carrying “the greatest amount of reactivation uncertainty.”
Seeing the expected resumption of spending on pipeline projects, he raised his target for Pembina shares by a loonie to $37, maintaining a “hold” rating. The average on the Street is $38.95.
Following weaker-than-anticipated third-quarter results, highlighted by “significant” pressure on its television and radio segments, Desjardins Securities analyst Maher Yaghi lowered his estimates and target price for Corus Entertainment Inc. (CJR.B-T), emphasizing he’s “still waiting for a better entry point.”
"Trends remained weak in 3Q as advertisers continue to be shell-shocked by pressure on their businesses," said Mr. Yaghi. "It is important to note that as it currently stands, the company may not be able to benefit as much from government support in 4Q FY20 as it did in 3Q FY20, and, hence, pressure on profitability could increase."
Mr. Yaghi said he expects a "gradual" improvement in advertising spending as the economy reopens following the COVID-19 pandemic, however he thinks radio and TV will "remain" sluggish."
“We applaud management for the significant efforts to lower costs, deploy more tailored advertising options for clients and continue to improve its roster of new shows,” he said. “However, without an improvement in advertising trends and with expected continued pressure on TV subscribers, we anticipate results are likely to remain weak in the short to medium term.”
Mr. Yaghi's adjusted EBITDA estimates for 2020 and 2021 fell to $494-million and $490-million, respectively, from $551-million and $532-million.
With a “hold” rating (unchanged), he cut his target for Corus shares to $4 from $4.50. The average on the Street is $4.76.
“Visibility in the advertising market was already limited and the COVID-19 outbreak has now brought it to new lows,” the analyst said. “Moreover, the current situation has also made the cost side less predictable, even though we believe expenses should be lower in the months to come. Until we get a handle on the magnitude of the decline in advertising, we prefer to wait on the sidelines as we believe the business could be quite exposed to the impact of COVID-19.”
Elsewhere, Canaccord Genuity analyst Aravinda Galappatthige lowered by his target for Corus shares to $5.50 from $6.50 with a "buy" rating (unchanged).
Mr. Galappatthige said: “Despite a recovery during the latter weeks in the month of May as some of the previously cancelled campaigns returned, there is still low visibility around Q4 tracking and the Q1/21 outlook, from a TV ads perspective. From comments on the call, we know June is tracking behind on a year-over-year basis. Given the lack of visibility owing to economic uncertainty in an array of sectors, the delayed upfronts, resumption of sports programming, etc., the final Q4 and Q1/21 results (TV ad declines) might still range from down 10 per cent to down 25 per cent, which creates a fair degree of uncertainty. On the positive side, the cancellation of the Olympics and the potential rerouting of some of the pre-committed ad dollars offers the prospect of an upside surprise. With this in mind, we believe that management updates over the next couple of months during investor meetings/conferences will be crucial. We believe the prospect of a return to some form of stabilizing advertising trends, call it negative 5 per cent to negative 8-per-cent levels, holds significant upside for the stock given that current valuations seemingly imply a longer period of high double-digit ad declines.”
Skeena Resources Ltd. (SKE-X) is “restoring a past-producer to former glory in [a] top-quality postcode,” according to Hannam Partners analyst Roger Bell.
He initiated coverage of the Vancouver-based junior mining exploration company, which possesses assets in the Golden Triangle region of Northwest British Columbia, on Monday.
“The company’s main focus is on developing the past-producing Eskay Creek project, once the highest-grade gold mine in the world, on which Skeena agreed an option to acquire from Barrick Gold in 2017,” said Mr. Bell. “Since closure of the historic underground mine in 2008, the C$ gold price has appreciated by 160 per cent while transformational new hydroelectric capacity has been installed in close proximity to the mine site. This has allowed Skeena to reintroduce Eskay as an open-pit operation. Evaluation of historical data and new drilling has confirmed that significant tonnages of high-grade mineralization remain, and a Preliminary Economic Assessment (PEA) completed in Nov. 19 - based on a US$1,325/oz gold price - showed a compelling NPV5% of C$638-million and IRR of 51 per cent, producing an average of 236 thousand ounces per annum gold and 5.8 million ouncses per annual silver over a 9-year life.”
Mr. Bell called Eskay Creek a “significant, high-grade resource with upside potential,” and he thinks consolidation of ownership is likely to drive re-rating of Skeena shares in 2020.
“Skeena has spent $20-million on exploration at Eskay Creek to date, fulfilling a spending requirement of $3.5-million under its purchase option with Barrick,” the analyst said. “The company has until the end of 2020 to exercise the option with a further payment of $10-million due to Barrick, who would retain a 1-per-cent net smelter return (NSR) royalty. A further $7.7-million will be posted by Skeena to cover the environmental rehabilitation bond. Skeena is also aiming to negotiate the waiving of Barrick’s ‘back-in’ option over Eskay, giving the company unencumbered ownership of the asset. We note that Skeena currently trades at an EV/Resource (M,I&I) of $36 per ounce AuEq, a 59-per-cent discount to the median comparable of $89/oz AuEq; in our view, a resolution of the Eskay Creek ownership structure in 2020 should be a catalyst to drive a re-rating vs peers.”
Without a specified rating, Mr. Bell set a target of $4.16 for Skeena shares. The average on the Street is $4.10.
“We see Skeena as offering undervalued exposure to a sizeable, high-margin, fast-payback brownfield asset in a tier-1 mining jurisdiction, in a structurally bullish gold price environment,” he said.
Citi analyst Jazon Bazinet thinks “streaming saving the music industry,” but he sees slower growth ahead.
“After 15 years of topline contraction, streaming helped the record labels post five years of topline growth,” he said. “We expect growth to continue.”
“We looked at four metrics to assess future rate of growth: 1) US inflation-adjusted per capita outlays on music; 2) Global sequential changes in paid net adds; 3) Hours of ad-supported music per paid gross add; 4) industry’s steady-state subs based on Spotify’s gross adds and churn. All metrics suggest growth will continue, but at a more modest pace.”
In a research report released Monday, Mr. Bazinet initiated coverage of both Spotify Technology SA (SPOT-N) and Warner Music Group Corp. (WMG-Q) with “neutral” ratings, seeing neither offering a compelling risk-reward profile for investors.
“Firms that can show topline growth – particularly in a recession – are scarce. As such, investors have placed a large premium on both Warner and Spotify. As such, we don’t find either stock particularly compelling at prevailing multiples. We’d prefer to wait for growth to moderate. At that juncture, we suspect both equities will offer investors a better risk-reward profile. Outside the US, we have a more constructive view on Sony, Vivendi and Tencent Music.”
He set a target of US$270 for Spotify shares, which exceeds the consensus target of US$188.96.
Mr. Bazinet set a US$33 target for Warner Music, topping the consensus of US$32.33.
“It’s interesting to us that the market gives Spotify a higher valuation than Warner,” he said. “We suspect Spotify is viewed as a cleaner digital story (without the headwinds of physical sales) or the relative drag from other slower growing areas of Warner’s business (like Performance and Synch royalties).
“But, both firms command relatively healthy multiples. We suspect that reflects investor’s enthusiasm for each firm’s topline growth. We suspect growth will remain relatively healthy for a few years. But, we do see slower growth in the not too distant future.”
Mr. Bazinet was one of several analysts to initiated coverage of Warner Music after coming off a post-IPO research restriction.
RBC Dominion Securities’ Kutgun Maral set an “outperform” rating and US$40 target.
Mr. Maral: “The music entertainment industry has successfully transitioned away from legacy revenue streams to now thrive in an increasingly streaming-centric ecosystem. Secular tailwinds and a track record of execution underpin our conviction in the sustainability of WMG’s attractive financial profile going forward.”
Several equity analysts initiated coverage of ZoomInfo Technologies Inc. (ZI-Q) on Monday.
The Massachusetts-based subscription-based software as a service company began trading on June 4.
RBC Dominion Securities’ Alex Zukin set a “sector perform” rating and US$50 target.
“We see ZI as having leading depth and breadth of data, strong technology, and a strong GTM, resulting in both strong growth and strong margin, but see the current price as reflecting the company’s strengths,” he said.
Canaccord Genuity’s David Hynes Jr. gave it a “hold” rating and US$50 target.
“ZoomInfo’s numbers speak for themselves – this is an efficient growth engine operating at scale,” he said. “When you dig a layer deeper, these numbers are a manifestation of the fact that: (a) the firm is selling a product that sales organizations need and, more importantly, delivers hard-dollar ROI; (b) ZoomInfo’s competitive moat is in the breadth and quality of its data as well as the automation and intelligence embedded into collection processes; and (c) this is a huge market, with ZoomInfo’s TAM penetration at roughly 2 per cent, and the firm is seeing a favorable mix shift toward larger, more sticky customer relationships. This combination is powerful, which has not been lost on investors that have pushed the stock to valuation extremes .... As such, we think the prudent move for now is to wait for a better entry point, which often comes with lock-up expirations or the passage of time. We’ve run this playbook with many ‘hot’ IPOs before, and while there will almost surely be a time to buy ZI, we believe the correct rating for now is HOLD.”
In other analyst actions:
Stifel analyst Justin Keywood initiated coverage of CareRX Corp. (CRRX-T) with a “buy” rating and $8 target, exceeding the consensus on the Street of $7.67.
“CareRx (previously Centric Health) is the largest pharmacy service provider for seniors in Canada, serving over 50k beds, with a 12-per-cent market share in long term care and retirement homes,” he said. “We see an opportunity for CareRx to almost double its market share organically, with 45k beds up for RFP in the next 12-18 months, underpinned by the secular trend of an aging population. Our discussions with customers revealed CareRx’s competitive advantages, including exceptional service that positions the company to win more share. We also believe that CareRx will continue to be acquisitive, which combined with organic wins, could take market share close to 40 per cent, with margin expansion resulting from larger scale. These characteristics could make the company a compelling takeout target down the road, in our view.
“Overall, there is a lot to like about this undervalued Canadian pharmacy play, trading at 8 times EBITDA vs. peers at 12 times and with strong management to execute.”