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

A pair of equity analysts on the Street downgraded Ag Growth International Inc.'s (AFN-T) following Wednesday’s release of in-line fourth-quarter financial results, expecting COVID-19 to create significant near-term uncertainty.

In a research note released before the bell on Thursday, Desjardins Securities analyst David Newman said the spread of the virus is likely to stretch the company’s balance sheet metrics as it works to “rightsize its cost structure amid top-line challenges."

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"While it should be able to navigate the potential balance sheet headwinds, we estimate it will be tight based on our revised forecast, which implies the company should remain prudent on capital decisions and consider a cut to its dividend," he said.

Mr. Newman lowered his rating for the Winnipeg-based company to “hold” from “buy” after reducing his financial projections for both 2020 and 2021.

"While agriculture is an essential industry, it will be challenged by: (1) volatile commodity prices (weak confidence); (2) potential supply chain challenges (inputs, congestion, access to global markets); (3) delays in customer capital decisions; (4) production shutdowns, with AGI having temporarily closed its plants in Italy, India, France and Brazil; and (5) potential disruptions in North America," the analyst said.

"The impact could be material if the shutdowns last more than four weeks. Some silver linings include: (1) improved growing conditions; (2) lower input (steel) and financing costs; (3) a weak Canadian dollar (translation); (4) government support (eg $5-billion credit aid in Canada); and (5) AGI’s strong international backlogs."

Though he noted the company’s flexibility to adjust his cost structure, Mr. Newman emphasized its balance sheet remains a focus.

"While AGI recently tapped the debt markets ($85-million bond issuance in January) and negotiated improved terms and conditions to its credit facility (extended to March 2025), we believe it could come close to its revised senior debt leverage ratio covenant (maximum of 3.75 times; well onside today at 2.65 times) by the end of 2020," he said. "We believe the company will be compelled to rein in its opex and capex, as well as consider a cut to its dividend (approximately 14-per-cent yield)."

With his reduced financial expectations for 2020 and 2021, Mr. Newman sliced his target for Ag Growth shares to $28 from $57.50. The average on the Street is currently $43.57, according to Thomson Reuters Eikon data.

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Elsewhere, Raymond James analyst Steve Hansen moved the stock to “market perform” from “outperform,” citing its “above-average leverage profile and uncertain outlook associated with the evolving COVID crisis.”

“The rapid emergence of COVID is also expected to weigh heavily (impact unknown), with AGI [Wednesday] announcing a 2-3 week closure of its international plants in Italy, India, France, and Brazil (30 per cent of sales). North America shutdowns may also emerge. Not knowing the extent of the crisis, management has notably moved to monthly dividend approvals, suggesting a possible cut should the crisis persist.”

Mr. Hansen cut his target in half to $30.

“Our downgrade is a reluctant one, with AGI now trading at the lower depths of its range and healthy upside to target remaining,” he said. “That said, with leverage currently elevated, we’re mindful that an extended crisis could create added strain.”


Industrial Alliance Securities analyst Elias Foscolos expects a drop in oil prices to impact the spending of Computer Modelling Group Ltd.'s (CMG-T) clients.

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According, he lowered his rating for the Calgary-based company, which produces reservoir simulation software for the oil and gas industry, to "speculative buy" from "buy" after reducing his fiscal 2020 and 2021 financial forecasts.

"Lower energy consumption associated with the COVID-19 pandemic-induced economic shutdown is resulting in a decrease in oil demand at the same time when the market share war between Saudi Arabia and Russia is resulting in an increased potential supply of oil," Mr. Foscolos said. "The resulting low oil prices, which may last for a protracted period, will force CMG’s customer base to reduce spending. Lessening the blow is the fact that most of CMG’s clients categorize software spending as an 'operating' cost, as it is considered a recurring cost as opposed to a 'capital' cost."

Mr. Foscolos expects some licensing to drop off, however he did note that a weaker Canadian dollar is likely to be a tailwind for the company.

"We believe spending on well simulation software will be one of the least affected components of capital budgets for E&Ps as it is a relatively minimal investment (compared to drilling) that supports efficiency, which becomes increasingly important at this time," he said. "In the last downturn in F2016/F2017 total software sales declined by 8 per cent."

Mr. Foscolos dropped his revenue estimates by 19 per cent in 2020 and 13 per cent in 2020. He's also estimating a free cash flow shortfall of $8-million in fiscal 2021 after its current dividend payment, leading him to suggest a dividend reduction would be "prudent."

“We do not see an immediate need for CMG to reduce its dividend as there is a cash balance,” he said. “However, a ‘moderate’ (up to 50 per cent) reduction would better preserve the balance sheet and ensure survivability. Furthermore, a reduction would also permit CMG to re-implement an issuer bid and return cash to shareholders in another manner should it choose to.”

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Waiting for the company’s " response to the current macro situation," Mr. Foscolos lowered his target for CMG shares to $6 from $7.75. The average is currently $7.21.


With the expectation negative investment returns will result in weak industry flows for “at least a year and possibly longer,” CIBC World Markets analyst Paul Holden downgraded AGF Management Ltd. (AGF.B-T) to “neutral” from “outperformer.”

"We assume that AUM [assets under management] declines by 18 per cent in FQ2/20 and that it takes six quarters of positive performance for markets to recover," he said. "This results in our average AUM forecast for fiscal 2020 declining by 15 per cent and our F2021 forecast by 23 per cent."

"AGF funds look to be performing well on a relative basis, which means AGF might fair better than other independent fund families, but it does not change that negative one-year returns normally result in redemptions and a challenging proposition for new sales. We assume that AGF will be hit with $2.4-billion of net redemptions in F2020 (AGF disclosed redemption notices of $760-million in FQ2 and $550-million in FQ3) and that flows improve to negative $0.7-billion in F2021. This compares to net redemptions of $1.8-billion in F2010 (the year preceding the last bear market) and a trailing five-year average of $0.8-billion."

With that view, Mr. Holden dropped his 2020 and 2021 revemue projections by 8 per cent and 16 per cent, respectively, while his EBITDA estimates slid 12 per cent and 26 per cent.

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Mr. Holden also sees "a degree of deal risk" with its pending merger with Smith & Williamson Holdings, expecting a regulatory delay to "end up biting."

With his estimates coming down “significantly,” the analyst dropped his target for AGF shares to $6 from $8.50. The average is $4.25.


Given its “sizeable” market share, Norbord Inc.'s (OSB-T, OSB-N) responses to the COVID-19 crisis is likely to have “meaningful impact” on the Oriented Strand Board industry, said Raymond James analyst Daryl Swetlishoff.

After the bell on Wednesday, the Toronto-based company has commenced reduced production across its North American OSB mills, resulting in an initial 25-per-cent drop in capacity. It warned "additional operating adjustments may be necessary."

“Norbord is the largest global OSB producer, and with its planned reduction in North American production capacity by 25 per cent, this equates to nearly 7 per cent of U.S. total capacity,” he said. “We expect other producers could follow Norbord’s curtailments, resulting in further capacity reductions. We expect uncertainty to persist as long as the COVID-19 pandemic is ongoing, however, with price erosion expected for OSB markets. Longer term, we remain constructive on OSB fundamentals, and with Norbord’s ability to hunker down in times of uncertainty we are confident the company will weather the storm.”

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At the same time, it cut its 2020 capital spending budget to US$75-million from US$100-million, which Mr. Swetlishoff thinks will provide much-needed flexibility.

Keeping a “strong buy” rating for the stock, he cut his target to $44 from $54. The average is $43.75.

“With demand uncertainty during the COVID-19 pandemic, we see the steps taken by Norbord as pragmatic,” he said. “The company ended 2019 with US$272-million in liquidity, and given the reduction in 2020 capex, we highlight that the variable dividend could be the next lever to be pulled. With the stock trading at multi-year lows, we see value in shares that are trading at levels last seen in 2015.”


Citi analyst Jason Bazinet lowered his financial expectations for Facebook Inc. (FB-Q) to reflect a decline in digital advertising spending resulting from the impact of COVID-19.

"Despite improving user engagement metrics, we believe that the global spread of COVID-19 and the ensuing economic disruption will have a material impact on top-line growth for Facebook in 2020-2021," he said.

Mr. Bazinet lowered his 2020 revenue expectation by 10 per cent to US$77.3-billion from US$86.3-billion, which represents growth of 9 per cent from 2019 (down from 22 per cent. Though he expects a "moderate" recovery in 2021, he lowered his projection by 14 per cent to US$88.8-billion from US$103.3-billion for annual growth of 15 per cent (from 20 per cent).

"We believe that the adverse impact on Facebook advertising could be more severe than on Alphabet due the larger SMB (small and medium business) client base. As a result of these top-line changes, our 2020 EPS estimate is now $8.30 (vs. our prior estimate of $9.33), and our 2021 EPS is now $9.14 (vs. our prior estimate of $10.94)," the analyst said.

Maintaining a “buy” rating for Facebook shares, Mr. Bazinet cut his target to US$195 from US$240. The average on the Street is US$235.57.

“We believe that Facebook’s continued execution, its scale, and the sophistication of its ad platform and products should contribute to continued robust revenue growth,” he said.


Canaccord Genuity analyst Derek Dley is expecting Dollarama Inc. (DOL-T) to report in-line third-quarter financial results on April 1 before the bell.

However, he acknowledged investor focus will be largely on the retailer’s fiscal 2021 guidance.

"Management previously noted that fiscal 2019 was relatively easier to comp, with 2.7-per-cent same-store sales growth, implying expectations for F2021 may be more muted than expected," he said.

Mr. Dley is also expecting an update on the impact of COVID-19, noting: “While it is difficult to forecast the sales impact related to COVID-19, we have reduced our new store opening assumptions during the front half of fiscal 2021. We now expect Dollarama to open 60 new stores in F2021, compared to 65 previously, with new store openings being weighted toward the back end of the year. Currently we are forecasting 2.5-per-cent same-store sales growth for fiscal 2021, which is below the lower end of the company’s historical range of 4.0-5.0 per cent.”

For the quarter, Mr. Dley is projecting revenue of $1.07-billion, up 1 per cent year-over-year. His EBITDA expectation of $322-million exceeds the Street's projection of $320-million, an represents a jump of $48-million from the previous year due largely to the impact of IFRS 16. His earnings per share estimate of 54 cents is flat year-over-year.

Keeping a "hold" rating, Mr. Dley trimmed his target to $43 from $45. The average is $47.04.

“While we still believe in Dollarama’s longterm growth profile, a result of its lack of meaningful competition, industry-leading profitability and free cash flow generation, and healthy ROIC [return on invested capital], we believe the softer near-term outlook is likely to leave the stock range-bound over the coming quarters,” he said.


Though he lowered his financial expectations for North American Construction Group Ltd. (NOA-T) to adjust for “tougher times,” Canaccord Genuity analyst Yuri Lynk recommends value investors jump in at current levels.

“Despite the lower oil price environment, we still view NACG as being very well positioned,” he said.

Keeping a “buy” rating, he cut his target to $20 from $25. The average is $22.58.


In other analyst actions:

Evercore ISI initiated coverage of Canadian Pacific Railway Ltd. (CP-N, CP-T) with an “outperform” rating and US$268 target. The average on the Street is US$275.68.

The firm also initiated coverage of Canadian National Railway Co. (CNI-N, CNR-T) with an “in line” rating and US$81 target. The average is US$90.39.

TD Securities analyst Mario Mendonca upgraded Canadian Western Bank (CWB-T) to “buy” from “hold” with “buy” with a $28 target, down from $34. The average is $28.36.

RBC Dominion Securities lowered MAV Beauty Brands Inc. (MAV-T) to “sector perform” from “outperform” with a $2.50 target, down from $3. The average is $4.92.


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