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

Bank of America Merrill Lynch did a double downgrade of Hexo Corp. to the equivalent of a sell rating in the wake of the company announcing late Friday the departure of its chief financial officer.

Analyst Christopher Carey cut his rating on Hexo to “underperform” from “buy” and reduced his price target to a Street-low $4 from $9. The average target on the Street is $10.01.

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“Put simply: a departure that is so abrupt, from a person with CFO experience at other public companies, is concerning, and in our view will leave investors guessing ‘what don’t we know?’ for some time,” Bloomberg News cited Mr. Carey as saying in a research note.

Hexo said that Michael Monahan, former CFO of Nutrisystem Inc., had resigned effective immediately. Mr. Monahan joined Hexo in late May. Mr. Monahan, in the company’s statement Friday, said the job required him to spend more time in Canada than he expected and this wasn’t possible given his family’s needs.

“It is difficult to know exact expectations established when Monahan joined the company,” Mr. Carey said. “However, we think it’s reasonable to assume the corporate finance organization was less developed than what Monahan had realized, perhaps indicating there remains much work to professionalizing said organization than what he (or the Street) fully appreciated.”


Citi analyst Prashant Rao sees an improved outlook for Canadian integrated oil companies in 2020.

In a research report released Monday, Mr. Rao said recent data points and channel checks have led him to "firm" his view for Canadian oil patch production growth next year "at reasonably contained price differentials."

"There is sufficient egress capacity for barrels out of Western Canada through end-2020, but additional pipeline capacity is needed in 2021 to allow further Canadian upstream production growth," he said.

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“That given this sufficient egress, Canadian heavy crude differentials should remain relatively stable, around US$15/bbl for WCS (Hardisty) vs Maya (GC), through end-2020 – the point at which we believe incremental production will need to push past our view for a 650 mbpd [thousand barrels per day] ceiling for crude-by-rail.”

Despite that stance, Mr. Rao emphasized equity valuations in the sector “show greater dispersion,” noting: “[Cenovus Energy Inc.’s] ability to generate FFO at sub-$60 WTI is overly discounted in shares (6.5 times EV/DACF, 12-per-cent-plus FCF yield), whereas [Imperial Oil Ltd.] (9.5 times EV/DACF, 5.5-per-cent FCF yield) asks for greater longer-term confidence.”

Mr. Rao upgraded his rating for Cenovus Energy Inc. (CVE-T) to “buy” from “neutral” with a target of $15, rising from $13. The average on the Street is $14.93.

“Given our improved outlook, CVE’s upstream truly seems on sale (implied 6 times cash on 20 times 2022 estimated reserve life),” he said. “At last week’s investor day, we think CVE hit on all the needed points to clear an upward path: 1) capital discipline and ability to generate ample FFO to cover sustaining capex and dividend even at US$45 WTI; 2) continued line of sight to sub-$5-billion (Canadian) net debt; and, 3) preparing for an eventual monetization of COP’s shares in CVE, which in our view continues to prove too large of an overhang.”

At the same time, he downgraded Imperial Oil Ltd. (IMO-T) to “sell” from “neutral” with a $30 target, down from $36. The average is $39.14.

“In contrast to CVE, we see IMO’s 9-times EV/DACF trading multiple as more than fully valuing the production ramp and FFO generation we see over the next 2+ years,” said Mr. Rao. “We remained sidelined on shares until now, as we continued to give mostly full credit for Aspen in 2022+. However, our sense in recent months is that longer-term CF growth centered on larger, longer-tailed projects should carry greater risk in the Great White North; accordingly, we are removing partial credit for Aspen in our valuation, which drives our target price 10 per cent below current trading levels.”

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Mr. Rao also reduced his target for Suncor Energy Inc. (SU-T, “buy”) to $47 from $55. The average is $54.52.

“We are adjusting our estimates and lowering our target to $47 based on our updated upstream commodity price and more conservative refining margin assumptions,” he said.

He maintained a “neutral” rating and $9.50 target for Husky Energy Inc. (HSE-T). The average is $13.62.


Desjardins Securities analyst Michael Markidis said his confidence in Cominar Real Estate Investment Trust’s (CUF.UN-T) future “has never been stronger” following its Investor Day event in Toronto last week.

Declaring "this is not your father's Cominar," Mr. Markidis was impressed with the REIT's strategic plan and new financial objectives, including growing both net asset value and funds from operations per unit by 15 per cent over the next 36 months.

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“The presentations were very detailed and covered virtually all aspects of the business,” he said. “Distilling it down, we note the following: (1) management is targeting 15-per-cent growth in NAV and FFO/unit over the next 36 months; (2) capex intensity should continue to moderate; (3) the disposition program is evolving; (4) balance sheet optimization—there is further work to be done; (5) significant upside is embedded within the industrial portfolio; (6) our understanding of the retail portfolio has been enhanced; and (7) residential intensification — more than 9,000 suites could be built out on 10 different properties.”

“In addition to terminating its longstanding relationship with Groupe Dallaire in 2018, CUF recently implemented numerous changes that have significantly enhanced the board of trustees and the senior management team. Several of these individuals presented at the investor day. Based on our experience, alignment and enthusiasm have never been stronger.”

Pointing to a "brighter" outlook, Mr. Markidis raised his FFO per unit estimates for 2020 and 2021 to $1.12 and $1.18, respectively, from $1.10 and $1.11.

Keeping a “hold” rating, his target increased to $14 from $13.50. The average on the Street is $14.06.

“We firmly believe that a multi-year period of value erosion is now over,” the analyst said. “Successful execution of the strategic plan could result in a growth profile that exceeds our current expectation.”

Elsewhere, CIBC World Markets’ Sumayya Syed raised her target to $14.50 from $14 with an “outperformer” rating (unchanged).

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“While the strategic assessment has concluded, the outlined targets entail a continuation of the momentum and execution that the REIT has delivered the past few quarters," she said. “We believe the key pieces (i.e., strategy and people) are in place to achieve said goals, and market fundamentals remain supportive.”


The risk/reward proposition for Uber Technologies Inc. (UBER-N) has “tilted favourably,” according to Citi analyst Itay Michaeli.

In a research note released late Sunday, he raised his rating for the ride sharing company to "buy" from "neutral," pointing to a trio of factors.

1. Its third-quarter results “offer a window to shift sentiment more favourably.”

Mr. Michaeli said: "Uber shares have been impacted by a number of overhangs from AB5 to the IPO lock-up. Though these overhangs will likely persist, we believe Q3 results provide a window to refocus the story on Rides fundamentals, particularly now that high-level AB5-risk scenarios/timelines appear better understood. With H2 revenue growth expected to accelerate, we think Q3 results could swing sentiment more favorably. At our Sept Tech conference, we felt that management conveyed a positive tone, and we also sensed some potential conservatism on H2 adj.-EBITDA. Finally, we think that if Uber directly discloses Rides vs. Eats contribution results, this too could help sentiment."

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2. Uber’s sum-of-the-parts valuation is “difficult to ignore.”

Mr. Michaeli: “An improving Rides backdrop might encourage greater use of SoP valuation, which we now utilize as our primary framework. We value Rides at $31-32/share, suggesting that Uber’s current valuation ascribes no value for Eats, Other Bets and minority holdings. Additionally, our Rides valuation still largely contemplates a ‘Rideshare 1.0’ TAM [total addressable market], excluding future benefits from AVs including a much larger addressable market and more favorable economics.”

3. Potential stemming from long-term network mobility opportunities.

Mr. Michaeli: "Ultimately, we think the terminal value of the Rides business was always predicated on a different business construct than today’s, mainly an AV-network. If anything, we think Uber’s relative AV position has improved this year. Also potentially overlooked are the benefits from next-gen vehicles (EVs, new ADAS platforms), which could further unlock the Rides profit pool while offering new opportunities to address current industry issues."

The analyst adjusted his 2019, 2020 and 2021 earnings per share projections to losses of US$1.92, US$1.81 and 92 US cents, respectively, from US$4.90, US$2.89 and US$2.33.

He maintained a US$45 target for Uber shares. The average is currently US$49.59.


MediPharm Labs Corp. (LABS-T) is poised to benefit from the “gradual” shift from dried flower to cannabis extract products, especially with expected legalization of derivative products in what is being dubbed Cannabis 2.0, said AltaCorp Capital analyst David Kideckel.

He initiated coverage of the Barrie, Ont.-based cannabis extraction services provider with an "outperform" rating.

"LABS focuses on private label and white label services," he said. "In our view, these are attractive high-margin and high-growth product segments that expose the Company to a wide range of products and clients. Further, we believe LABS’ focus on these segments will allow it to differentiate itself and leverage its capabilities underpinned by technology, expertise, and scale.

"Our bullish view on LABS is supported by the Company’s execution and international growth opportunities. To date, LABS has secured several private label and white label agreements, including for export into Australia and Germany. Pending licensing conditions, LABS can utilize its Australian facility as an export hub into Asia-Pacific, and its Canadian facility for export into Europe, Latin America, the Caribbean, and Africa. As the cannabis regulatory outlook improves in different jurisdictions and the international cannabis industry matures, we view LABS’ footprint and expansion strategy as key to achieving its long-term success."

Mr. Kideckel said MediPharm’s early profitability “validates” its business strategy, noting it possesses the largest trailing 12-month revenue among its peers.

“The Company also achieved positive adjusted EBITDA and operating cash flow before working capital changes over the last two quarters," the analyst said. "In our view, these results demonstrate the Company’s early successes in the still-nascent cannabis industry and validate its execution and business strategy to date.”

He set a target price for MediPharm shares of $7.50, which falls short of the consensus target of $8.29.


Citing its “balanced risk/reward trade-off and near-term valuation pricing in recent positive momentum,” RBC Dominion Securities analyst Daniel Perlin initiated coverage of FleetCor Technologies Inc. (FLT-N) with a “sector perform” rating, believing the global business payments company is “getting its growth mojo back.”

"FLT’s mid-term growth algorithm of 15-20-per-cent cash EPS growth is largely consistent with its average growth since 2015 of 20 per cent," said Mr. Perlin. "We believe FLT should return to 15-per-cent cash EPS growth in FY20, (up from 12 per cent in FY19e) driven by: 1) it’s 'Beyond' strategy, 2) positive mix shift to faster growing B2B payments, and 3) dry power available for additional M&A opportunities.

"Near term we believe Street estimates for fuel growth could prove slightly aggressive (Street appears to be embedding 11-12-per-cent category growth vs. guidance/RBCe of 8-10 per cent, when adjusting for divestitures & reclassifications), the stock trades at the high end of its valuation range, and our upside vs. downside scenario is mostly balanced."

He set a target of US$324, exceeding the average on the Street of US$314.39.


After institutional meetings with several of its executives last week, Desjardins Securities analyst Benoit Poirier said he remains bullish on Aecon Group Inc. (ARE-T), due to its “strong operational track record, solid balance sheet, robust backlog and growth opportunities across a diversified range of sectors.”

He said Aecon continues to reiterate its pipeline of opportunities "remains robust" and is currently pursuing over $30-billion in projects despite finishing the second quarter with a "solid" backlog of $6.8-billion.

Mr. Poirier also believes the company’s “robust financial and market position in Canada allow management to be opportunistic” as it eyes potential entry into the U.S. market.

“Management is exploring opportunities both organically and through M&A (no transformative transaction) to expand in its core areas of expertise in the U.S.,” he said. “Over time, we believe investors would benefit from a prudent entry into the US as it would diversify the business and expand the addressable market in a region with robust fundamentals.”

The analyst maintained a “buy” rating and $24 target for Aecon shares. The average on the Street is $25.14.

“Overall, we continue to like ARE for its strong fundamentals and growth potential, both in Canada and the U.S.,” said Mr. Poirier. “We recommend investors buy the shares.”


SmileDirectClub Inc.'s (SDC-Q) high top-line growth is not currently reflected in its valuation, said Citi analyst Stephanie Demko, who initiated coverage of the Nashville-based direct-to-consumer medtech company with a “buy” rating.

“SmileDirectClub was founded on the principle of improving consumer access and convenience to orthodontics by using a telehealth approach to clear aligners,” the analyst said. “This unique vertically integrated, direct-to-consumer approach allows SDC to solve for an underserved segment of the orthodontics market, fueling top quartile growth with built in margin expansion. Despite an enviable financial profile, SDC trades solely in line with lower-growth peers; we attribute the valuation disconnect to short-term execution missteps and see a unique opportunity at the current entry point.”

One of several analysts to initiate coverage on Monday following a restriction period following its Sept. 12 market debut, Ms. Demko set a target of US$19 per share.

“At 4.3 times 2020 estimated EV/Sales, SDC trades at a 10-per-cent discount to peer Align Technology (ALGN) despite a similar clear aligner offering and a faster top line growth profile (40 per cent plus vs. ALGN’s 20 per cent)," said Ms. Demko. "Compared to high-growth HCIT peers, this discount widens to 31 per cent. Given the premium that high growth names tend to command in our space, we view this disconnect as a unique investment opportunity. Our $19 price target applies a 6-times multiple to our calendar 2020 estimated revenue estimate, representing a half turn discount to fast-growing HCIT peers and solely a one turn premium to clear aligner peers.”

Elsewhere, Credit Suisse's Erin Wilson Wright initiated coverage with an "outperform" rating and US$18 target.

Ms. Wright said: “As a leading provider of teledentistry services and manufacturer of clear aligner solutions in the direct-to-consumer (DTC) orthodontic market, SDC is disrupting the traditional delivery of orthodontic services by improving accessibility and affordability. SDC is highly levered to a rapidly expanding and largely underserved DTC market, with further market penetration driven by its superior marketing efforts, an expanding SmileShop footprint, innovation, SmilePay financing, as well as geographic expansion, supporting strong top-line growth (estimated 47-per-cent CAGR 2018-2023), ahead of traditional peers, with inherent margin leverage thereon, turning a profit in 2020.”


In other analyst actions:

Echelon Wealth Partners analyst Doug Loe downgraded Burnaby, B.C.-based Arbutus Biopharma (ABUS-Q) to “sell” from “hold” with a US$1 target, down from US$4. The average on the Street is US$1.67.

Mr. Low said: “We advise caution on ABUS valuation until we have clear visibility on what infectious disease assets Arbutus will advance into seminal Phase II/III testing.”

National Bank Financial analyst John Sclodnick raised Equinox Gold Corp. (EQX-X) to “outperform” from “sector perform.”

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