Inside the Market’s roundup of some of today’s key analyst actions
Though he continues to expect a delay in the launch of the iPhone 12 until “later than many were hoping for,” Citi analyst Jim Suva raised his financial expectations for Apple Inc. (AAPL-Q) on Monday based on expected gains for its Wearables segment with the release of its latest Apple Watch.
“Our revenues and EPS estimates are higher for the Wearables segment underpinned by continued demand strength in consumer spending on technology gadgets, especially those that enable improved productivity (work from home) and improved ability to track one’s health/fitness,” he said in a research note released Monday.
“Key selling features of the newly launched Apple Watch Series 6 are the ability to measure oxygen levels (adding to an array of health tracking features in prior generations), along with faster performance and brighter displays relative to their predecessors. Also includes a Family Setup feature where parents can pair multiple watches with their iPhone to stay connected with their children or older parents who don’t have iPhones. Previously, watches were paired one-on-one with single phones. Series 6 starting price at $399 (similar to Series 5) while an entry level Apple SE model launched at $279 and Apple Series 3 models remain at $199. Apple continues to make inroads into health care devices market which we view as a positive move for attracting and engaging their users to their products, given the importance of such features by individuals.”
Noting previous versions of the iPhone were available in September, Mr. Suva now expects the new iPhone 12 5G phones to be available in mid-to-late October or early November, citing the impact of the COVID-19 on a temporary slowdown in R&D, testing and supply chain “challenges.” However, he emphasized it will be released “in plenty of time for the Christmas holiday season.”
“From an ASP perspective, we are expecting Apple to stick to their current starting prices of $699, $799, $999, and $1099,” he said.
“We are estimating 59 million units of iPhone 12 in the December quarter and 91 million in the first two quarters of availability. While smart phone prices are expensive we do view them as an essential part of life for work productivity and personal entertainment.”
Based on gains to its Wearables segment, Mr. Suva raised his 2020, 2021 and 2022 earnings per share projections to US$3.29, US$3.92 and US$4.45, respectively, from US$3.27, US$3.88 and US$4.33.
Keeping a “buy” rating for Apple shares, his target increased to US$125 from US$112.50. The average target on the Street is currently US$118.39.
“While smartphone growth remains tempered near term, wearables, services revenue growth and installed base growth are positives,” he said. “The full product + software + service package is what makes Apple unique as others do not control this. We see Apple shares as attractive given the revenue diversification, unique product + service set and potential for strong cash flow generation and shareholder returns.”
RBC Dominion Securities analyst Alex Zukin sees Oracle Corp.'s (ORCL-N) minority investment and acquisition of TikTok Global are potential catalysts for its share appreciation, prompting him to raise his rating to “outperform” from “sector perform.”
“Oracle has confirmed a 12.5-per-cent interest in TikTok Global and announced that TikTok will become an Oracle Cloud Infrastructure (OCI) customer,” he said. "We view the deal as a meaningful positive for Oracle. We believe the 12.5-per-cent minority investment, which Bloomberg reported [Sunday] night may be valued at $60-billion (implying $7.5-billion investment from Oracle) is a wise use of capital for what may be the defining social media asset of a generation.
“Our analysis suggests that depending on the valuation at which Oracle invests, there could be as much as 12-per-cent upside in market value to Oracle over the next 12 months. Furthermore, we see the deal as a shot in the arm for OCI, which coupled with recent reference customers (Zoom, 8x8, etc.), is highly strategic, as it has the ability to accelerate growth in a segment that is important for the future of Oracle. According to our interpretation of Garner’s report (Market Share: Enterprise Public Cloud Services, Worldwide, 2019. July 29, 2020. By Colleen Graham, Terilyn Palanca, Neha Gupta, et al), there is an incremental $200-billion in potential market expansion over the next four years in the IaaS/PaaS space. If Oracle were to win just 5 per cent of this incremental opportunity, total revenue growth would be mid-high single digits, something Oracle has not seen over the last decade. In addition, Walmart’s partnership and potential to create a Social Commerce business on top of TikTok may ultimately provide greater value to users, advertisers, and investors.”
Based on that view, Mr. Zukin lowered his share repurchase estimates and increased his expectations for OCI estimates, assuming TikTok and other new customers will bring to fiscal 2023 revenue of greater than US$1-billion. That lead him to raise his 2023 earnings per share projection to US$4.75 from US$4.73.
With his upgrade, he also increased his target for Oracle shares to US$68 from US$60. The average on the Street is US$62.63.
“With social media assets trading at an average revenue multiple of 6.6 times enterprise value to calendar 202 estimated revenue today, and assuming that this trading multiple holds over the next year, when TikTok presumably lists as a public stock in approximately one year, this implies a potential valuation of $100-$157-billion,” he said. “However, we believe the asset would likely garner a premium valuation, and consider a scenario where it gets a FY+3 EV/S [enterprise value to sales] multiple of 10 times in an IPO scenario next year, which would imply an EV of roughly $150-billion and $232B in our Base and Bull Case scenarios, respectively. While we do not yet know the valuation at which Oracle is investing in the asset, any valuation below this range, in theory, should be value-accretive to Oracle shareholders. We see as much as a low double digit percent increase to the fair value of ORCL shares, without assuming any re-rating in core ORCL.”
Kinross Gold Corp.'s (KGC-N, K-T) three-year operating outlook “highlights growth opportunities,” according to Raymond James analyst Farooq Hamed, who sees increased production and free cash flow “on the horizon.”
“KGC provided a high-level three-year operating outlook highlighted by 20-per-cent production growth 2023/2020 with production expected to grow to 2.9 million GEO by 2023 from 2.4 million GEO in 2020,” he said. “By comparison, we were modeling a flat to slightly declining production profile over the same period. We were particularly impressed by KGC’s indication that the growth should come primarily from existing projects and includes expected mine life extensions at Kupol and Chirano and that the growth is based on mine planning at a gold price of $1,200 per ounce implying an expectation for healthy margins all else being equal or conversely, a sustainable strategy and margin of safety should commodity prices retrace.”
After the bell on Thursday, the Toronto-based miner also declared a quarterly dividend of 3 US cents per share, which Mr. Hamed said puts its yield in-line with other senior producers.
“Further, it demonstrates management’s confidence in its free cash flow prospects for the foreseeable future,” he said.
Keeping an “outperform” rating for Kinross shares, he raised his target to US$12 from US$10.50. The average is US$11.40.
Strong lumber market fundamentals, driven by rapid increase in prices, are likely to support pellet production efficiency for Pinnacle Renewable Energy Inc. (PL-T), said ATB Capital Markets analyst Nate Heywood.
“With the early impacts on construction development from COVID-19 resulting in sawmill curtailments, we expect the dramatic rise in lumber prices have increased sawmill production,” he said. “Pinnacle is a beneficiary from the improved sawmill activity as it provides a good source of high-quality wood fibre and reduces the Company’s reliance on trucking in inefficient harvest residual wood fibre (fallen tress, bark, etc.). Note that Pinnacle procures sawmill residuals under long-term contracts, which implies supply costs have remain unchanged through this shift in lumber fundamentals. As result of strong sawmill residual supply, we expect production costs to decrease to $141 per metric ton in Q3/20, below Q2/20 results of $155 per metric ton when sawmill residuals accounted for only 74 per cent of the feedstock mix, compared to 81 per cent in Q1/20.”
Mr. Heywood said Pinnacle has “successfully managed” to deliver “strong results,” despite facing “its fair share of headwinds.”
“In consideration of Q3/20, the Company has provided insight on a third-party silo collapse, rail interruptions, and hurricanes; however, these headwinds have provided only modest impacts to the Company’s production in Q3/20,” he said.
“We expect production volumes to remain strong in H2/20, as Entwistle utilization, additional efficiency initiatives, and increase to sawmill residuals are expected to support production levels. With its Q2/20 results, management commented that it had realized strong production quarter-to-date in Q3/20, with some weeks providing record output.”
Maintaining an “outperform” rating for Pinnacle shares, he increased his target to $8 from $7. The average is $8.50.
“Pinnacle is pursuing high-return production facilities in North America that are strategically positioned with adequate wood fibre supply agreements," said Mr. Heywood. "Historically, the Company has been able to deploy capital at a 4-6 times EBITDA range. In the near term, we expect Pinnacle to successfully construct the High Level and Demopolis Facilities and diversify its supply basins away from B.C. As of Q2/20, the company has a $6.8-billion contract backlog with an average maturity of 9 years and long-term take-or-pay contracts accounting for 99 per cent of pellet production through 2026. Given our estimates, Pinnacle has a 2020 estimated EV/EBITDA multiple of 9.9 times below the peer average of 11.1 times, which we forecast will compress to 7.0 times by 2022 as new projects are placed in service.”
Haywood Securities analyst Darrell Bishop initiated coverage of Calgary-based Spartan Delta Corp. (SDE-X) with “Top Pick” status, seeing it poised to benefit from sector consolidation.
“Spartan is aiming to repeat history for a fourth time, previously building and exiting three Spartan branded entities for an average return of 368 per cent,” he said. “The management team has returned predominantly intact, and due to the previous successes, carries a premium brand and a coveted access to capital. Recapped in November 2019, and effectively launched in June 2020 following the close of its first acquisition, Spartan is primed to take advantage of undercapitalized and undervalued opportunities through consolidation. With the landscape primed for consolidation, and access to capital for most limited, we are encouraged by the potential for Spartan to add above average returns for shareholders from current levels as the team executes its strategy.”
Mr. Bishop said a trio of recent transactions - Conoco-Kelt Exploration, Canadian Natural Resources-Painted Pony, Whitecap Resources-NAL Resources - show "the consolidation theme has begun.
“With oil prices somewhat stagnant on demand concerns, lenders purported to begin tightening the reigns into year-end ahead of reserve reviews, equity markets closed for most and few options for many to control financial issues, we would anticipate Spartan likely to execute on its next acquisition (asset or corporate) in the coming months within its core operating area," he said. "Over the next 2-3 years the company targets growth to over 100,000 barrels of oil equivalent per day,” he said.
Seeing “creative deals and a pristine balance sheet” helping “backstop the strategy” for Spartan, he set a “buy” rating and $5 target. The average is $5.25.
“With oil prices (and energy equities) relatively weaker on demand concerns of late, we recommend investors look to accumulate shares in what we anticipate being a uniquely acquisitive, value adding vehicle over the next 24-36 months," the analyst said. "The stock is currently trading at an unwarranted discount to peers, predominantly attributed to trading liquidity. With four-month hold paper having recently come free trading (Sept 9th; $2.00/sh) we see potential for some stock to trade hands while existing shareholders support increasing value to help facilitate the execution of accretive strategic acquisitions. Based on the demonstrated success of previous Spartan franchises, a market landscape primed for consolidation, premium access to capital, and a core asset base of free cash flowing assets at current prices, we see an attractive risk/reward for valuation to move higher.”
He made the comment in a research note reviewing a recent call with Executive Chairman Peter Marrone and President and CEO Daniel Racine, which he said touched on “its favourable financial positioning, upcoming prospective Malartic updates, and expected mine life extension over time from exploration success.”
“Following a 5-year deleveraging period, Yamana’s net debt to EBITDA has declined to less than 1.0 times today, a material improvement from peak levels of greater than 3.0 times,” said Mr. Wolfson. "With AUY now entering a period of high FCF generation (RBC estimates $400-million/$685-million in 2020/21 at spot), the company is positioned to deliver further dividend growth.
“Over the past year, AUY has increased its dividend from $0.02 per share to $0.07 per share, Representing a payment of $70 per ounce of production, while management noted room for upside and a potential future floor distribution of $100 per ounce. To insulate investors from dividend and liquidity risk, AUY is seeking to maintain a cash reserve to cover dividends for a 3-year period. AUY expects to increase its $225-million cash balance in upcoming quarters and noted modest debt repayment of $190-million in 2022. Management outlined a $100 per ounce change in gold would impact EBITDA by $100-million and free cash flow by $70-million.”
Mr. Wolfson also sees an upcoming resource update for the Malartic mine in Quebec, co-owned with Agnico Eagle Mines Ltd., in the fourth quarter and a preliminary economic assessment in 2021 as representing “a meaningful catalyst for long-term production visibility.”
He kept a “sector perform” rating and US$7.50 target for Yamana shares. The average is US$7.09.
PI Financial analyst Chris Thompson raised his valuation and target price for shares of SSR Mining Inc. (SSRM-T) after its updated 2020 guidance, released following the successful completion of the merger with Alacer Gold Corp., exceeded his expectation, emphasizing its “costs impress.”
“With the addition of the Çöpler Oxide and Sulphide projects, we now expect production (on a post-close 100-per-cent basis) to grow from 476,000 ounces gold equivalent in 2020E to 800,000 ounces in 2021, with costs (on a post-close AISC basis) dropping from US$1,215 per ounce gold equivalent in 2020 to US$860 oer ounce in 2021,” he said. “We note our estimates only include 15 days of attributable production and costs in Q3/20 for Çöpler, and do not reflect any production or costs prior to September 16, 2020. We note the expected delivery of an updated technical report for Çöpler in Q4/20, which should provide visibility on the updated life of mine production and cost schedule.”
Keeping a “buy” rating for SSR shares, Mr. Thompson increased his target to $36.50 from $35. The average on the Street is $37.50.
“We see SSRM trading at a 1.0 times adjusted P/NAV [price to net asset value] multiple versus intermediate gold producer peers trading in a wide range but averaging at 1.1 times NAV multiple,” he said. “As such, we see SSRM trading at a discount to peers which reflects potential for a re-rating as the ASR assets are successfully integrated and the combined company’s FCF generation potential is demonstrated.”
In other analyst actions:
Mr. Bennett also raised Tilray Inc. (TLRY-Q) to “hold” from “underperform” with a US$5.60 price target. The average is US$8.15.
* CIBC World Markets analyst Robert Bek “meaningfully” increased his target for Spin Master Corp. (TOY-T) shares to $33 from $27 with a “neutral” rating (unchanged). The average is $29.80.
“Consumer behavior continues to demonstrate demand for toys/games, which combined with material progress fixing Spin Master’s distribution center issues, leads us to a more bullish outlook for optics and valuation, especially into fiscal 2021,” he said. “Our Neutral rating is solely a function of a total return forecast of less than 15 per cent. Our EBITDA estimates are unchanged, however, positive management tone leaves room for upside to Street estimates heading into FY21, in our opinion. We now argue for a tighter valuation discount versus Hasbro, increasing our FY21 EV/EBITDA target multiple to 10.0 times from 8.0 times. Our bullish thesis continues to argue for a return to above-industry growth over the medium term. Clearing the hurdle of supply chain uncertainty, with a still-vibrant toy market in FY20, provides more visibility into this TOY potential into FY21 and beyond.”