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

Seeing a “longer path to positive EBITDA,” Desjardins Securities analyst John Chu significantly reduced his target price for shares of Canopy Growth Corp. (WEED-T) in the wake of weaker-than-anticipated fourth-quarter sales and earnings.

On Thursday after the bell, the producer reported a 4-per-cent decline in recreational cannabis sales for the quarter, which Mr. Chu said was notable given the 2-per-cent industry-wide increase. An adjusted EBITDA loss of $97.7-million also fell short of the expectation on the Street (a $67-million loss), due largely to higher-than-expected expenses and a lower gross margin.

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"We believe several factors will continue to keep costs high and, likely, increasing: (1) edibles legalization; (2) costs related to its retail strategy (ie more stores in Alberta and Ontario); (3) U.S. hemp strategy and CBD product launch; (4) international expansion; (5) ongoing staff buildout; and (6) R&D expansion," said the analyst.

"We increased our sales outlook on the back of higher ‘other revenue’ but our cannabis-related revenue is relatively unchanged. Our EBITDA outlook has been revised downward to reflect our S&M, G&A and R&D costs rising from a higher base (4Q), driven by ongoing aggressive expansion initiatives. Gross margin ramp-up is also expected to be slower than expected. Hence, we do not see the company being EBITDA-positive until FY22 (FY21 previously)."

His EBITDA forecast for 2020 plummeted to a $369-million loss from a $64-million loss previously. His 2021 expectation is now a $162.6-million loss, falling from a $277-million profit.

Keeping a "hold" rating, Mr. Chu dropped his target to $63 from $74. The average on the Street is $71.96, according to Bloomberg data.


Shopify Inc. (SHOP-N, SHOP-T) is “priced to perfection,” said Roth Capital Partners analyst Darren Aftahi.

However, following recent share price appreciation that has seen the stock jump by almost 175 per cent since a December low, he lowered his rating for the Ottawa-based tech company to “neutral” from “buy.”

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“We remain positive on its underlying business prospects,” said Mr. Aftahi, who thinks “everything is more than priced in" at its current valuation.

He raised his target to US$300 from US$275. The average is currently US$304.47,


Indus Holdings Inc. (INDS-CN) is “checking all the boxes for success,” according to Beacon Securities analyst Doug Cooper.

In a research report released Monday, Mr. Cooper initiated coverage of the Salinas, Cal.-based cannabis company with a "buy" rating.

"California is already, by far, the largest cannabis market in the world with 2018 sales of $2.5-billion," he said. "However, this represents only $65 per capita versus more mature states at $250. As it matures and siphons dollars from the illicit market, we believe California will equal or surpass such per capita spend and be a $10+ billion market. Indus is already a leading player in this market and we would expect it both to grow as the number of dispensaries grows and as it sells more product to each dispensary. Such strong organic growth may be augmented through targeted M&A in neighboring states such as Nevada that represent excellent cross marketing/cross branding opportunities. Despite the size and importance of the California market, the major MSOs do not have a material presence there, albeit that is changing through recent M&A activity. We believe Indus’ infrastructure and valuation (less than 20 per cent that of a recent industry take-out of a similar size), make it a compelling proposition for industry players.

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"Given we believe that cannabis will evolve into a traditional CPG product, it is important for companies to have such a leadership team who “have done it before”. Indus has deep CPG experience including founder Rob Weakley from the hospitality sector but also Joe Bayern (President) who was CEO of VOSS Water with prior leadership experience at Cadbury-Schweppes and Snapple. Furthermore, Mark Russ (VP Sales) was EVP and GM of Red Bull’s important western business unit (10 states). Such a team understands the importance of brands and the strategies to secure shelf space for them, which is the key to drive brand awareness and loyalty."

Mr. Cooper emphasized that "balance sheet matters," noting Indus already posesses $30-million in cash (or 20 per cent of its current market cap), and, more importantly, he also has the necessary production infrastructure in place.

"We believe such infrastructure could support well north of $200 million in revenue without much more material investment and will result in strong operating leverage," he said.

Also emphasizing its current attractive valuation, Mr. Cooper, who is the lone analyst on the Street currently covering the stock, set a target of $22.50.

"With the stock at such depressed levels, we do not believe the market is reflecting an overly optimistic outlook about its growth opportunities," said Mr. Cooper. "Hence the opportunity which translates to an excellent risk-return proposition for investors."


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Azarga Uranium Corp. (AZZ-T) is “poised for success” in the United States, said Haywood Securities analyst Colin Healey, who initiated coverage of Colorado-based company with a “buy” rating.

Mr. Healey called Azarga’s Dewey Burdock in-situ recovery uranium project in South Dakota “among the highest grade undeveloped ISR uranium project in the U.S., and well above some existing producers” and believes it’s “poised to deliver stock-catalyzing news flow in 2019.”

"The U.S. Department of Commerce has carried out an investigation of the domestic uranium supply chain as it pertains to national security under Section 232 of the U.S. Trade Expansion Act of 1962," he said. "The results and recommendations of that investigation were delivered to the White House in April of 2019. The President now has until mid-July 2019 to make a decision based on those recommendations and we believe this is likely to result in some type of incentive for domestic uranium suppliers in the form of tariffs or import quotas, which will lead to higher realized prices for uranium in the U.S. Azarga is a development stage company with a significant U.S. asset base including the advanced-stage Dewey Burdock ISR uranium project in South Dakota, which is one of the highest-grade undeveloped ISR projects in the country.

“The Company delivered an updated NI 43-101 resource for [Dewey Burdock] in Q4/18 in which Meas. & Ind. Resources grew 97 per cent (ISR-amenable all-categories resource up 47 per cent). The resource update is a prelude to the anticipated update to the Preliminary Economic Assessment (PEA) of the project expected this summer. We expect the additional resources to contribute favourably to project economics and act as a catalyst for the stock. The current (2015) PEA demonstrated attractive economics with relatively small initial financial outlay (US$27-million), suggesting a post-tax NPV8% of US$113-million and a post-tax IRR of 57 per cent (at US$65/lb uranium, and 35-per-cent federal tax rate. The applicable federal tax rate has since reduced to 21 per cent, which is not reflected in the existing PEA.)”

Recommending investors accumulate shares in Azarga ahead of the U.S. president's decision and seeing a "path to clearing" the NRC licensing phase for Dewey Burdock, Mr. Healey set a target of 50 cents.

"Weak tape for uranium warrants taking a steady accumulation/scaling-in entry approach," he said. "However, we do recommend having exposure ahead of the ... catalysts as they could drive a breakout in the stock price."

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Raymond James analyst Brenna Phelan raised her earnings forecast for Alaris Royalty Corp. (AD-T) in reaction to Friday’s announcement of a $70-million investment to new Canadian partner Amur Financial Group.

“Trends in some key earnings coverage ratios have kept us on the sidelines on Alaris recently,” she said. “Furthermore, our EBITDA growth forecasts were constrained by covenants which somewhat limited the pace of capital deployment we were modelling. [Friday’s] announcement that Alaris has deployed $70-million into a new partner - quickly putting to work its recently raised $100-million convertible debentures - gives us better visibility into net capital deployment and moves our EBITDA estimates higher. Offsetting the better EBITDA outlook from here is some uncertainty about redemptions to come near-term (we think a mid-sized partner) and some lingering concern about coverage ratios of some larger investments.”

Ms. Phelan hiked her 2019 and 2020 EBITDA projections to $98-million and $108-million, respectively, from $97-million and $104-million. Her adjusted earnings per share estimates increased to $1.87 and $2.02 from $1.85 and $1.98.

Maintaining a “market perform” rating, Ms. Phelan’s target for Alaris shares rose by a loonie to $19.50. The average on the Street is $21.22.

“Our new $19.50 target price is based on 9.5 times (up from 9 times) our 4-per-cent higher 2020 EBITDA forecast, a modest premium to its one-year average of 9 times, reflective of more capital put to work, and what may prove conservative forecasts if the Amur common equity investment does pay dividends,” she said. “This more constructive view is balanced against the residual credit and housing market risk inherent in Amur’s business model, the ongoing risk associated with coverage ratios at Providence and BCC and lack of visibility into redeployment options following potentially nearterm redemptions.”

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When it reports on Wednesday, RBC Dominion Securities analyst Paul Treiber expects BlackBerry Ltd.'s (BB-N, BB-T) first-quarter revenue results to beat the Street.

“Q1/FY20 is BlackBerry’s first full quarter with Cylance,” he said. “We believe the quarter may be a nearterm catalyst for the stock, as Street revenue estimates appear conservative. Specifically, we see upside to Street estimates on Cylance and ESS revenue.”

Mr. Treiber is projecting non-GAAP revenue to rise 24 per cent year-over-year (up 1 per cent organic) to US$268-million, exceeding the Street’s view of US$265-million. Excluding Cylance, he expects software & services revenue to grow 10 per cent from the same period a year ago, but falling from 14 per cent in the last quarter due to lower IP revenue.

He’s estimated an adjusted earnings per share loss of 1 cents, which falls below the Street’s 0-cent expectation.

Mr. Treiber maintained a “sector perform” rating and US$10 target. The average target is US$10.56.

“We believe BlackBerry is trading near fair value,” he said. "BlackBerry is currently trading at 3.7 times FTM EV/S [forward 12-month enterprise value to sales], up from 3.1 times in December, and below enterprise security peers at 4.2 times and its 2-year historical average (4.6 times). In our view, we need to see significantly stronger growth in several of BlackBerry’s core businesses (ESS, BTS, Cylance) to justify upside for the stock. Moreover, we believe there is low visibility to several of BlackBerry’s emerging growth opportunities, such as Radar and its EoT platform. Possible catalysts for the stock include new design win announcements, IP licensing upside, upwards valuation re-rating of cybersecurity assets, and accelerating revenue growth at Cylance.

“BlackBerry has rallied after 8 of its last 12 quarters. However, the stock has faded the rally in the week after the quarter in all but 3 of its last 12 quarters. We believe a similar pattern may occur after Q1 results, as we expect Q1 revenue slightly above the Street, but we believe long-term fundamentals would remain unchanged. Specifically, we believe BlackBerry is likely to reiterate its FY20 guidance for 8-10-per-cent organic growth and 25-30-per-cent growth at Cylance, which would suggest Q1 upside is attributable to conservative Street estimates.”


In other analyst actions:

TD Securities analyst Aaron MacNeil upgraded Mullen Group Ltd. (MTL-T) to “buy” from “hold” with a target price of $13.50. The average on the Street is $13.11.

Seaport Global Securities analyst Michael Urban initiated coverage of Tervita Corp. (TEV-T) with a “buy” and $9 target, which falls 3 cents below the consensus.

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