Inside the Market’s roundup of some of today’s key analyst actions
The trade dispute with the United States is likely to slow demand for Apple Inc.'s (AAPL-Q) iPhones in China, according to Citi analyst Jim Suva, who believe residents are poised to shift their purchasing preferences to domestic brands.
“Our independent due diligence now shows a less favorable brand image desire for iPhone and this has very recently deteriorated,” said Mr. Suva. “We are materially lowering our sales and EPS estimates below consensus as China represents 18 per cent of Apple sales which we believe could be cut in half. Within China Apple has 12-per-cent unit share (exiting Dec 2018 and 10-per-cent market share for FY18) and we believe these unit shipments could be cut in half. We remain optimistic on Apple services with Apple Arcade to launch in 2H 2019.”
Mr. Suva’s earnings per share forecast for fiscal 2019, 2020 and 2021 fell to US$11.18, US$11.49 and US$13.28, respectively, from US$11.91, US$11.57 and US$13.28.
“Some may feel Apple could offset some of this negative impact with some share grab back outside of China to divert dollar spend away towards other brands given Android operating system suspension worries,” he said. “Huawei ships almost 50 per cent of their phones outside of China and has a strong presence in Western Europe and other parts of APAC. For those who embrace this view we would conservatively assume Apple could be a beneficiary and grab 5 per cent of the potential unit sale. Net net that would trim iPhone units by 3-4 million in 2HFY19E and by 9-10 million in FY20E. However we believe other Android smartphone makers would take this share rather than Apple.”
He added: “We believe the iPhone lineup for September 2019 is likely to have relatively muted hardware enhancements with updated camera being the most significant with triple cameras on the most expensive version. We continue to believe more significant enhancements in iOS and services lineup which we believe will be a driver of overall Apple revenues and profits going forward. Citi’s Asia team believes price pressures to exacerbate on most component vendors owing to limited spec migration.”
Maintaining a “buy” rating for Apple shares, Mr. Suva dropped his target to US$205 from US$220. The average on the Street is US$212.22, according to Bloomberg data.
“We note Apple stock has already pulled back -15 per cent in the past 30 days compared to the S&P500 down 5 per cent and is trading at 15x NTM PE on consensus and 16 times NTM PE [next 12-month price-to-earnings] our materially below consensus forecast,” said the analyst. “So we don’t see multiple compression but rather see risk that consensus is simply too high. Based on our updated below consensus we find the shares attractive and maintain our Buy rating but lower our target price to $205 from $220 and believe in the months ahead consensus will likely recalibrate lower closer to our below consensus estimates.”
=====
Home Capital Group Inc. (HCG-T) has emerged from its 2017 difficulties on “strong footing” with sufficient liquidity and reduced exposure to demand deposits, said M Partners analyst Andrew Hood.
“Following a period of trading at a steep discount to book, we believe it is only a matter of time before Home Capital Group either re-rates closer to its book value or gets bought out by a larger entity,” he said. “Since the liquidity event in 2017, Home Capital has obtained a new management team, maintained its credit quality, improved return on equity and grown mortgage originations at a faster pace than the market. Yet fearful investors still appear to view the Company as a sinking ship, which is providing a margin of safety that is rare for high-quality businesses.”
“Despite its recovery, HCG continues to trade at historical lows of 0.6 times on a P/B [price-to-book] basis.”
In a research report released Monday, Mr. Hood initiated coverage of the Toronto-based company with a “buy” rating.
“Mortgage originations have grown amidst a tough market and new regulations, with the Company capturing market share over the past year,” he said. "Management has emphasized a focus on broker relationships rather than price competition, which is vital for improving net interest margins (NIMs) and maintaining high-quality loans. We believe HCG can continue to originate above the average growth rate.
“HCG’s net interest margin has stabilized at 2 per cent. Short-term pressure in deposit rates indicates limited downside on NIM, with potential for normalization towards 2.25 per cent or more in the medium-term.”
Mr. Hood set a target for Home Capital shares of $25. The average is $19.75.
“Home Capital Group has traded at a steep discount to peers, and below its book value, since 2017,” he said. "We believe this discount is no longer warranted, and as ROE grows we anticipate a re-rating in the market. Even at its current ROE, the P/B is lower than justified based on the historical relationship between P/B and ROE. We expect book value to continue to rise, with the share price compounded by a re-rating on the P/B multiple.
“If shares continue to trade below book value, we believe there is opportunity for a strategic buyer to purchase the Company at a substantial discount. Looking at precedent transactions, a transaction would likely create significant value for existing shareholders.”
=====
In response to a “strong” start to the year, Raymond James’ Tara Hassan added Roxgold Inc. (ROXG-T) to the firm’s “Analyst Current Favourites” list.
Ms. Hassan said the Toronto-based miner is “well positioned to outperform peers due to its discounted valuation, upcoming catalysts, potential for increased operating and free cash flow and heightened takeover potential in what appears to be an improving M&A market.”
“Roxgold recently delivered a strong 1Q19 with estimates beating RJL and consensus estimates on the back of higher production and lower costs than expected,” she said. “With a stronger than expected 1Q19 and development set up in-line with the Company’s 18 month plan, we believe that Roxgold is well positioned to deliver on 2019 guidance of 145-155 koz in 2019. This would mark the third year in a row that the Company has met or exceeded it original guidance, a rarity amongst its peers. We expect stronger production in 2H19 as Bagassi South enters stoping production with Roxgold guiding for 60 per cent of production to be delivered in the later half of the year.”
Ms. Hassan has an “outperform” rating for the stock with a $2.15 target. The average on the Street is $1.69.
“Although Roxgold has outperformed peers over the last month (up 15 per cent vs. a 1-per-cent average decline for junior producers) and now trades in-line on NAV (0.75 times), it continues to trade at a P/CF discount (2.8 times 2019 P/CF vs. peers at 6 times),” she said. “This comes despite Roxgold set to deliver free cash flow at the top end of the peer group, having one of the best balance sheets in its group, and positioned to deliver another leg of growth. We believe this valuation disconnect could make Roxgold a target for an acquirer.”
=====
Following meetings with Gibson Energy Inc. (GEI-T) chief financial officer Sean Brown last week, Desjardins Securities analyst Justin Bouchard said “our conviction on the name is unwavering.”
“The company is primarily focused on building out its infrastructure assets (and continuing to high-grade its cash flows in the process),” he said. “The marketing division has been an unexpected (and welcome) source of funding and we continue to view the U.S. assets as a low-cost/low-risk foray into the Permian which, if proven out, could be another growth platform in the coming years. Given the strategic positioning of its asset base and the optionality inherent in its businesses, GEI has an extremely attractive organic growth runway under various commodity price scenarios.”
Mr. Bouchard maintained a “buy” rating for Gibson Energy shares with a $26 target, which exceeds the consensus of $25.04.
======
Emphasizing its “rapid” expansion strategy following the release of better-than-anticipated quarterly results, AltaCorp Capital analyst David Kideckel increased his target price for shares of Fire & Flower Inc. (FAF-X).
On Friday, the Edmonton-based cannabis retailer reported revenue for its fourth quarter of $10.5-million, exceeding the analyst’s forecast of $7.9-million. An EBITDA loss of $3.6-million also topped Mr. Kideckel’s projection (a $5.7-million loss).
“F&F provided an updated timeline with respect to their store roll-out plans. Based on the updated timeline, F&F expects to operate 45 stores by the end of April 2020 (compared to their previous guidance of 45 stores by the end of January 2020),” he said. "F&F expects to have 65 stores by the end of October 2020 (compared to their previous guidance of 65 stores by the end of July 2020). F&F provided further guidance beyond F2020 and expects to operate 135 stores by the end of F2021. To date, management continues to demonstrate their ability to execute on their rapid expansion strategy and currently operates a total of 17 licenced cannabis stores across the country compared to the 13 since our initiation. Based on what we have seen to date, we are confident in management’s ability to execute on this timeline and as a result, we have revised the store roll-out assumptions underlying our model
"We have revised our estimates in light of the positive financial results reported by the Company during this quarter which include incremental revenues generated through wholesale and data monetization, improvements to near-term operating expense spending, quicker ramp-up in retail sales, updated store roll-out timelines and an increase in cash outlay relating to retail store acquisitions
Keeping a "speculative buy" rating, Mr. Kideckel, currently the lone analyst covering the stock, moved his target to $2.80 from $2.50.
=====
Detour Gold Corp. (DGC-T) is “on the right track, but work still [needs] to be done” at its Detour Lake mine in Northern Ontario, said Laurentian Bank Securities analyst Barry Allan following a site tour late last week.
“Following several Board and Management changes, DGC has started to outline a few key areas where improvements can be made, all which should result in decreasing costs and increasing efficiencies,” he said.
“At the mine level, mining rates continue to trend in the right direction, having reached 296,000 tpd in Q1/19 (vs. 250,000 tpd in Q1/18). One area of focus continues to be equipment availability. For example, the two rope shovels (which have the potential to do 100,000tpd) had average availability of 69 per cent over the course of 2018. We believe that with proper training and improved maintenance planning, that this could lead to availability of at least 80 per cent.”
He added: “In summary, DGC has begun to outline areas of focus, with changes over the last few months yielding positive results. Although there are still several changes to be implemented, and several quarters over which to implement them, we believe that the company is on the right track.”
Calling Detour a “solid operating asset that is undervalued,” Mr. Allan maintained a “buy” rating and $20 target, which tops the consensus of $16.15.
“Our thesis on DGC remains intact – it is a solid operating asset that, after a high level of re-investment in 2019 and 2020, becomes a huge cash cow,” he said. “In Q1/19 DGC generated free cash flow of $69.2 million after $40.4 million of reinvestment, which exceeded our forecast due to a higher level of operating cash flow.”
David Leeder