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

Laurentian Bank Securities analyst Chris Blake raised his rating for Canopy Growth Corp. (WEED-T) on Thursday, expecting to see improved asset utilization and greater operating efficiencies though its plan to permanently close two B.C. greenhouse facilities and stopping a move to bring another online in Ontario.

In response to the announcement, made Wednesday after the bell, he moved the Smiths Falls, Ont.-based company to “buy” from “hold.”

"While a difficult to decision to make, we believe it is a prudent and smart strategic decision to take in light of current industry oversupply conditions brought on by the longer than expected roll-out of retail stores particularly in the provinces of Ontario and Quebec," said Mr. Blake. "We estimate these facilities accounted for roughly 50% of the company’s total property footprint (or 3 million square ft.) and likely less in terms of total production capacity. As such, while not disclosed, capacity utilization levels should improve. Furthermore, on a geographic basis, we estimate Ontario based facilities will now account for 65 per cent of total indoor/greenhouse production capacity versus 35 per cent previously. This is important as it should provide greater operating efficiencies since the vast majority of post-harvest production/extraction activities are conducted at the company’s flagship facility in Smith Falls, Ontario."

The analyst maintained a $29 target for Canopy shares. The average on the Street is $32.27, according to Thomson Reuters Eikon data.


Seeing its fourth-quarter results as “disappointing” and emphasizing its declining EBITDA can’t solely be attributed to the impact of the spread of COVID-19, D.A. Davidson analyst Linda Bolton Weiser lowered her rating for Spin Master Corp. (TOY-T) to “underperform” from “buy” on Thursday.

“We had expected modest sales growth and EBITDA margin expansion in 2020 after TOY said last week they would quickly try to get back to an EBITDA margin of 18-19 per cent,” the analyst said. “Instead, guidance is for a mid-single digit sales decline, before COVID-19, and flat EBITDA margin of 13.8 per cent. Such a poor outlook is surprising given that Hatchimals sales are now de minimis and plans are in place to fix the supply chain. We are also concerned with the nearly zero free cash flow.”

Based on the Toronto-based company's after-market release, Ms. Wesier lowered her 2020 and 2021 earnings per share projections to 73 cents and 90 cents, respectively, from $1.20 and $1.50.

“About 60 per cent of TOY’s products are manufactured in China, where production is not yet back to full capacity,” she said. “Guidance is for 2020 gross product sales to decline in the mid-single digits, excluding any supply chain and other disruptions resulting from coronavirus, or toward the higher end of the mid-single digit range including the virus impacts. We had expected net sales up 5 per cent year-over-year in 2020, about in line with consensus. TOY expects 2Q20 shipments to be particularly impacted. TOY estimates 30-32 per cent of gross product sales in 1H20 and 68-70 per cent in 2H20. EBITDA margin is expected to be in line with the 13.8 per cent in 2019; we had expected 16.4 per cent and consensus was 16.8 per cent.”

With that reduction, she cut her target price for Spin Master shares to $20 from $41. The current average on the Street is $36.89.

Elsewhere, National Bank Financial analyst Adam Shine cut Spin Master to “sector perform” from “outperform” with a $26 target, falling from $40.


Though its fourth-quarter results fell in-line with his expectations, Desjardins Securities analyst Justin Bouchard lowered his rating for Athabasca Oil Corp. (ATH-T) on Thursday, seeing a “challenging” macro backdrop and emphasizing its “sensitivity” to extended low oil prices.

On Wednesday, the Calgary-based energy company reported cash flow per share of 4 cents, a penny below the expectation on the Street. Funds from operations of $21.5-million exceeded Mr. Bouchard's $20.3-billion projection.

“ATH generated $15-million in FCF [free cash flow] in 2019 but the 2020 commodity outlook does not look as encouraging,” the analyst said. "The good thing is that the company has 12.5 mbbl/d hedged at US$55.00/bbl WTI and 14.5 mbbl/d hedged at US$18.25/bbl WTI–WCS for 2020, in addition to 8.0 mbbl/d in apportionment protection and 7.2 mbbl/d in ramping commitment on Keystone.

“Nevertheless, we still see ATH burning through $75-million of cash this year (after capex), which is why we believe the $254-million cash cushion is crucial for navigating the challenging commodity price environment and helping the company absorb cash flow shocks. Given the ongoing uncertainty, we think the market would favour maintaining liquidity and exercising discipline on the capex front (the February 2022 maturity on the US$450-million notes further underlines the importance of maintaining optionality).”

Moving Athabasca shares to “hold” from “buy,” Mr. Bouchard also trimmed his target to 50 cents from $1. The average on the Street is 82 cents.

“The macro backdrop is immensely challenging, with ATH stretched thin at the prevailing strip,” he said. “While we like the company’s built-in optionality, our concern is that the business model needs at least US$55–60/bbl WTI to generate an adequate FCF yield.”

Meanwhile, TD Securities’ Menno Hulshof cut Athabasca to “hold” from “buy” with a 75-target target, down from 85 cents.

Raymond James analyst Chris Cox lowered his target to 50 cents from 75 cents with a “market perform” rating (unchanged).

Mr. Cox said: “Athabasca’s 4Q19 results were largely uneventful, with the company pre-releasing operational performance prior to the quarter. The key highlight in our view was the updated 5-year plan in the Duvernay, with the partners pursuing an activity level aimed to be self-funding in the current pricing environment; while we were not expecting an elevated pace of activity in the play, we believe the market will nevertheless be encouraged by a lower pace of development, especially with the company no longer relying on carried capital to support its investment in the play beyond 2020.”


Though its in-line fourth-quarter 2020 results displayed “a little slower” organic growth, Raymond James analyst Steven Li sees Descartes Systems Group Inc. (DSGX-Q, DSG-T) “well positioned to benefit from the dynamic global environment and the Amazon effect.”

“Unlike other businesses, an increasingly dynamic environment (trade wars, changing tariffs and duties, Brexit, adding new borders etc.) can be a boon for DSG,” he said. “With complexity comes increasing reliance on DSG to assist in managing global logistic networks. Similarly, the explosion of ecommerce is putting the onus on businesses to deliver products cost effectively and quickly to businesses and consumers. Customers are now accustomed to shorter delivery times and real-time visibility on the status of their orders. As such, there is increasing value in supply chain participants being able to connect with multiple parties on a single platform. DSG remains a great way to play these changes in the global trade landscape.”

Also seeing Descartes better position to handle the impact of COVID-19 “than most,” he raised his target for its shares to US$42 from US$40 with a “market perform” rating (unchanged). The average on the Street is US$44.96.

Meanwhile, Laurentian Bank Securities' Nick Agostino increased his target to US$41 from US$38 with a "hold" rating (unchanged).

Mr. Agostino said: “DSG noted it observed a slowdown in volume active (approximately 50 per cent of its recurring revenue stream) in China in February related to seasonality, holidays and the Coronavirus, and we believe the virus may have a similar effect on volumes in other countries as it continues to spread. The good news is that DSG noted volume activity began to recover entering March, as Chinese employees returned to work, port activity picked up and the government made a concerted effort to tackle the virus. While the virus may impact 1H/F21 activity, we believe its effect may be short lived. On M&A DSG noted a strong acquisition pipeline and a view that the virus may impact target valuations (we concur), affording the company some attractive value-add opportunities during F2021 as it continues to be patient. We note 6 months have passed between the last 2 deals, and we need to see this accelerate or deal sizes increase to support valuations.”


The outlook for both TransAlta Corp. (TA-T, TAC-N) and TransAlta Renewables Inc. (RNW-T) “remains healthy,” according to Industrial Alliance Securities analyst Naji Baydoun.

On Wednesday before market open, TranAlta reported fourth-quarter results that exceeed Mr. Baydoun’s projections a week after TransAlta Renewables released in-line earnings.

Both also released 2020 guidance that met the analyst's expectations.

“TA continued to make progress on its coal-to-gas (CTG) conversion strategy in Q4/19 with the purchase of two turbines to underpin a planned Sundance unit 5 (Sun5) repowering in 2023,” he said. "Furthermore, TA expects to deliver its first CTG project later this year (Sun6), and continues to advance work on other planned conversions.

“Meanwhile, in January 2020, RNW announced that its renewable power projects, Big Level and Antrim, reached commercial operations in December 2019. We note that further drop-down transactions are likely to come in 2020 (potentially Windrise wind, and Kaybob South #3).”

With the results, Mr. Baydoun raised his target for TransAlta Renewables to $17 per share from $15, keeping a “hold” rating. The average on the Street is $16.61.

“RNW offers investors (1) an 2.4GW net portfolio of gas & renewable infrastructure assets, (2) an attractive dividend (5.5-per-cent yield, longterm 80-per-cent CAFD [cash available for distribution] payout), and (3) potential longer-term growth via future acquisitions,” he said. “RNW continues to execute on its growth strategy, and we see potential upside to long-term growth as TA’s renewables development pipeline continues to expand. Therefore, we believe that the shares warrant a higher valuation, and we are increasing our price target to reflect 14 times FY21 estimated P/FCF [price to-free cash flow] (up from 13 times previously). However, we would continue to wait for a better entry point and/or further strategic initiatives before accumulating the shares further.”

He maintained a “buy” rating and $12 target for TranAlta, which matches the current average on the Street.

“TA offers investors (1) a balanced mix of contracted and merchant power exposure, (2) improving balance sheet and cash flow fundamentals, and (3) long-term upside to rising Alberta power prices," the analyst said. "With Brookfield’s strategic investment agreement in place, CTG conversions on tap, and additional cash for growth and/or buybacks, we believe that TA will be able to surface additional value for shareholders over the medium term.”


Aecon Group Inc. (ARE-T) sits “ideally positioned as leading contractor of choice in Canada,” said Desjardins Securities analyst Benoit Poirier following “another strong quarter supported by the robust backlog.”

On Tuesday after the bell, the Toronto-based company reported better-than-expected fourth-quarter results, including an EBITDA beat for the seventh consecutive quarter. It also reiterated its "favourable" outlook for 2020, which Mr. Poirier emphasized calls for both revenue and margin expansion.

“In 4Q19, ARE generated solid FCF [free cash flow] of $274-million, mainly due to a favourable working capital reversal,” he said. “This strong performance enabled ARE to maintain a solid balance sheet; long-term debt (including convertibles) to EBITDA ended 2019 at 1.8 times.”

“The robust backlog and pipeline of opportunities (over $40-billion in project pursuits), in addition to ongoing concessions projects, should lead to revenue and adjusted EBITDA growth. We now forecast revenue of $3.7-billion (up 6 per cent year-over-year) and adjusted EBITDA of $253-million (margin of 6.9 per cent).”

With the release, Mr. Poirier raised his 2020 and 2021 earnings per share projections to $1.16 and $1.25, respectively, from $1.05 and $1.19.

That led him to increase his target for Aecon shares to $27 from $25, keeping a “buy” rating. The average on the Street is currently $26.

“Since the beginning of 2019, ARE’s stock has lagged the TSX (down 9 per cent versus a 16-per-cent rise) despite the robust operational results delivered over the past four quarters,” the analyst said. “Over this period, ARE has delivered revenue growth of 13 per cent and adjusted EBITDA growth of 23 per cent, maintained its backlog at a net record level of $6.8-billion without winning any major contracts, delivered FCF of $179-million (reported number was $123-million), increase its quarterly dividend by 10 per cent and realized two tuck-in acquisitions. At this point, we do not see any reason to justify the underperformance of its shares. ARE has a market-leading position in the growing infrastructure market in Canada, a strong operational track record and a unique portfolio of long-term concessions proving financial stability. Consequently, we believe the current valuation gap versus U.S. peers —4.9 times EV/FY2 discount implied by construction division after excluding the value of the Bermuda Airport concession—is unwarranted and more than compensates investors for construction risk, in our view.”

Elsewhere, TD Securities’ Michael Tupholme lowered his target to $23 from $25 with a “buy” rating.

Mr. Tupholme said: “ARE’s near-record backlog, diverse end-market exposure, new-award prospects, and an expected improvement in revenues and margins over our forecast period support our positive view on the company. We view ARE’s valuation and dividend yield as attractive and see meaningful upside potential for the stock if the company is successful in delivering on our expectations.”


Despite the release of in-line fourth-quarter results and “conservative” 2020 guidance, Canaccord Genuity analyst Dennis Fong said he continues to see relative value in Freehold Royalties Ltd. (FRU-T).

“Freehold reported Q4/19 results that were in line with our estimates and consensus,” he said. “Highlights of the quarter included organic royalty production growth, the drilling of 186 gross (4.5 net) wells in the quarter 181 (6.1 net) vs. Q3/19, the issuance of 24 leases associated with unleased mineral title lands and 2020 royalty production guidance of 9,750 to 10,250 Boe/d, which is below our estimate of 10,500 Boe/d. Notwithstanding the recent pullback in oil price, we continue to believe the company’s guidance is conservative and have maintained our expectations for production this year.”

After lowering his 2020 cash flow per share estimates, Mr. Fong trimmed his target by a loonie to $11 with a “buy” rating. The average is $10.50.


In the wake of a “modest” fourth-quarter beat, Raymond James’ Chris Cox sees Tourmaline Oil Corp. (TOU-T) “uniquely positioned at the bottom of the cycle.”

“In a market where investors will likely migrate to more defensive names, Tourmaline stands out from the peer group with respect to the company’s capacity to generate free cash flow at the bottom of the cycle, alongside a top-tier balance sheet,” the analyst said. "Augmenting the upside we see from the organic opportunities, we also maintain a constructive outlook with respect to the company’s consolidation strategy, with potential catalysts over the near-term as the company further lays out the strategy for the spin-out of Topaz and announces an independent management team.

“Suffice to say, if the current pricing environment holds, the list of potential buyers vs. sellers is likely to prove highly advantageous for Tourmaline’s consolidation strategy, offering additional upside at the bottom of the cycle. From a risk-reward standpoint, Tourmaline remains our Best Pick name in the Canadian E&P sector.”

After trimming his 2020 and 2021 cash flow per share projections, Mr. Cox reduced his target for Tourmaline shares by a loonie to $19. The average is $20.59.

He kept an “outperform” rating.


In other analyst actions:

Scotia Capital analyst Patricia Baker raised Gildan Activewear Inc. (GIL-N, GIL-T) to “sector outperform” from “sector perform” with a US$31 target. The averge on the Street is US$31.48.

CIBC analyst Hamir Patel upgraded Norbord Inc. (OSB-T, OSB-N) to “outperformer” from “neutral” with a $50 target, rising from $45. The average is $49.29.

Mr. Patel also raised West Fraser Timber Co Ltd. (WFT-T) to “outperformer” from “neutral” with a $66 target, down from $68. The average is $71.83.

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