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

Desjardins Securities analyst David Newman sees Premium Brands Holdings Corp. (PBH-T) possessing a “resilient” business model and “many” long-term opportunities.

However, in a research note released before the bell, he lowered his rating for the Richmond, B.C.-based company to "hold" from "buy" in response to a recent "strong bounce" in its share price.

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“Overall, we believe PBH’s diversification into both retail and foodservice has created an ‘all-weather’ business model that should be resilient through economic cycles,” he said. “Specialty Foods (SF), which serves chains and large-format retailers (eg Walmart, Costco) as well as independent and specialty retailers (eg independent grocery and general stores, c-stores, gas bars and ethnic food retailers), tends to be more resilient in a recessionary environment, or in this case, a global pandemic. It also enjoys higher margins than foodservice on average. Meanwhile, Premium Food Distribution (PFD), which serves foodservice operators and distributors, captures the upside of an economic boom, during which more consumer spending is allocated to restaurants and premium processed foods. Clearly, amid a pandemic and the associated restaurant closures, this segment should be more negatively affected. However, PBH is a larger player in retail versus foodservice.”

In order to reflect a "more subdued" outlook for the year, particularly with PFD, before a recovery in 2021, Mr. Newman reduced his 2020 EBITDA estimate to $265-million from $331-million. That led to an adjusted earnings per share drop to $2.38 from $3.65.

His 2021 EBITDA and EPS proections slid to $361-million and $4.20, respectively, from $399-million and $4.86.

"Recall that PBH’s 2020 EBITDA guidance calls for $320–345-million (including its preliminary estimate of ASF-related issues) on revenue of $3.975–4.075-billion, for an implied EBITDA margin of 8.1–8.5 per cent," the analyst said. "Excluding ASF-related issues, EBITDA guidance would have been $335–360-million for an implied EBITDA margin of 8.4–8.8 per cent. Management has not revised or withdrawn its guidance in light of COVID-19/recession, but we believe it will be compelled to adjust when it has a better sense of the potential outcomes. We are expecting PBH to emerge from the pandemic a stronger company (pent-up consumer demand, ready-to-go facilities and workforce, more robust M&A pipeline and strong liquidity war chest)."

With those estimate changes, Mr. Newman trimmed his target price for PBH shares to $87 from $90. The average target on the Street is $91, according to Thomson Reuters Eikon data.

“While PBH should emerge from the pandemic a stronger company (pent-up consumer demand, ready-to-go facilities and workforce, more robust M&A pipeline and strong liquidity war chest), it has rallied hard off recent lows (bear market rally),” he said.

“The forecast should be negatively impacted by significant challenges in PBH’s restaurant and foodservice and c-store channels (QSR sandwich business, PFD with most restaurants closed at this juncture, lower c-store foot traffic, seafood (exports and cruise lines), partially offset by a surge in retail amid stay-at-home hoarding (at higher margin).”

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Canaccord Genuity analyst Dalton Baretto is remaining "cautious" on industrial commodities over the next two quarters, despite a recent "rebound in sentiment."

"We believe the Chinese shutdown and the spread to the Western world are largely priced into markets, as are the anticipated impacts of the stimulus measures announced to date and the relative strengthening of the US$," said Mr. Baretto. "We also believe that the rash of anticipated negative economic data for Q1 and Q2 is largely priced in right now. As such, over the next six months, we will be watching for secondary effects, including but by no means limited to: Whether inventory build-ups at various points in the disparate metals supply chains (concentrates for copper and zinc, raw steel products for coking coal and iron ore) will drag on prices; Whether the current economic curtailment in the Western world turns into a credit crisis despite the best efforts of monetary and fiscal policy; Whether the current economic curtailment in the Western world translates into factory shutdowns in China, and Whether we see a relapse in the infection rate in China or elsewhere.

"We believe there is a reasonably high probability of at least two of the above occurring. In addition, we fear potential negative impacts from other 'unknown unknowns.'"

In a research report wrapping up a stress test he conducted on base metal producers’ balance sheets, Mr. Baretto moved both Trevali Mining Corp. (TV-T) and Titan Mining Corp. (TI-T) to “under review” ratings from “hold” previously.

“Both companies are fourth quartile zinc producers, and under our current price deck will remain cash flow negative for the foreseeable future,” he said. “In addition, funding alternatives for both companies going forward remain unclear to us, and as such we are suspending our rating and target price until we have a better line of sight to each company’s future as a going concern.”

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Mr. Baretto also lowered his target prices for other stocks in his coverage universe, including his top picks. They are:

Ero Copper Corp. (ERO-T, “buy”) to $20 from $27.50. The average on the Street is $19.93.

“We believe the market has not fully appreciated the impact of the decline in the BRL [Brazilian Real] on ERO’s financials,” he said. “With 97 per cent of the company’s operating costs denominated in the local currency, we believe margins have actually improved despite the decline in the copper price. In addition, regional exploration upside is essentially priced out of the stock at the current price, and we look forward to the company’s quarterly exploration updates as key catalysts.”

Lundin Mining Corp. (LUN-T, “buy”) to $8 from $9.50. Average: $8.80.

“We continue to like LUN for its unrivalled combination of growth, risk and valuation," the analyst said. "We note that none of LUN’s operations have been curtailed due to COVID-19, and we believe the company’s strong balance sheet permits management to be opportunistic in this environment.”

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Citi analyst Jim Suva dropped his rating for Xerox Corp. (XRX-N) by two levels on Thursday upon resuming coverage of the stock following a research restriction associated with its unsuccessful attempt to acquire HP Inc. (HPQ-N).

“The global environment has dramatically changed since November 2019 due to the COVID-19 outbreak which is dramatically impacting the purchasing behavior by both corporations and consumers,” said Mr. Suva, moving Xerox to “sell” from a “buy” rating. He kept a “neutral” rating for HP shares.

"The reason we are more cautious on Xerox is we believe COVID-19 will hurt the office copier market significantly more than other sectors and HP’s personal computing and home printing will benefit from COVID-19 due to the shift to work-from-home. Yes we believe this is a structural change that causes office copiers to be less used and replaced less frequently as near term priorities are shifted to ensuring employees can work remotely and over the longer term employees print less and work more remotely."

Mr. Suva said he sees "significant" risk to Xerox's sales and earnings per share expectations from COVID-19. For 2020, his sales projection now sits 8 per cent below the consensus on the Street and his EPS projection is 29 per cent lower (US$2.20 versus US$3.08).

"We see a sharp and elongated drop in demand for office copiers and usage of office copiers," he said. "Yes we are impressed with Xerox’s innovations in the 3D Print market, security printing, software enhancements, artificial intelligence via the use of bots and other new markets, but those efforts are immaterial to the total company for the foreseeable future. We do not believe private equity will have interest to acquire the company, and Xerox’s response to the situation will be more restructuring and cost cutting which will not solve the situation."

With his "sell" rating, Mr. Suva dropped his target for Xerox shares to US$13 from US$36. The average on the Street is US$36.25.

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“Though impressed with its various innovations not directly related to printing we believe those efforts are still immaterial to revenues for the foreseeable future,” he said. “We do not believe private equity will have interest in acquiring the company and believe that Xerox’s response to the COVID demand situation will be more restructuring and cost cutting, which would not solve the situation. While we do not believe the company is at risk for cash flow generation which is $1-billion per year to meet debt payments of $100-million per year we believe stock buybacks will be curtailed as the company allocates more money into R&D and restructuring efforts.”

Keeping a "neutral" rating for HP, his target slid to US$16 from US$20. The average is US$20.88.

“While COVID-19 indeed places large uncertainty and business complications we note a near-term benefit to HP Inc from working adults and students needing additional compute and printing devices at home,” said Mr. Suva. “This will help HP Inc in the 1H of this calendar year but thereafter become a headwind. We also note the unsuccessful hostile takeover by Xerox has accelerated HP Inc’s cost reduction and increased capital deployment program which will help the stock but this is fully built into expectations.”

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Though COVID-19 has “meaningfully pressured” Starbucks Corp.'s (SBUX-Q) business, Citi’s Wendy Nicholson thinks it will “bounce back in a big way over time.”

The analyst said she's "optimistic" Starbucks will return to growth next year, projecting 16-per-cent revenue growth and a 32-per-cent jump in earnings per share in fiscal 2021.

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"Since Jan. 1, 2020, SBUX has fallen 22 per cent, slightly more than the S&P 500," she said. "During this time, the consensus EPS forecast for FY20 for SBUX has fallen 20 per cet. SBUX is now trading at 22 times our CY21 EPS forecast, or at a 25-per-cent premium to the market. This is well below SBUX’s historical relative valuation of a 60-per-cent premium. Over the longer term, we expect SBUX to grow its top and bottom lines faster than any of PG, KO, KDP, or PEP, and as a result, we feel comfortable arguing that SBUX’s best-in-class growth deserves a premium multiple relative to those other names."

In a research note released Wednesday after the bell, Ms. Nicholson assumed coverage of Starbucks with a "buy" rating. She set a target of US$82, down from US$105 previously at the firm, which assumes returns to trading at a 50-per-cent premium to the market.

She said: "There are three primary reasons we rate the stock a Buy: 1) Continued Solid Trends in U.S. Business: We remain confident in SBUX's ability to deliver continued strong results in its domestic business, driven by new product innovation, traffic growth, and the continued benefit of technological innovation. 2) Ongoing International Growth: We see a long runway for growth at SBUX in international markets, particularly in the China / Asia Pacific region. 3) Channel Development Taking SBUX to Another Level: SBUX Channel Development segment represents an attractive opportunity for the company to leverage the success of the Starbucks retail store model and make the brand available throughout multiple channels (supermarkets, airports, offices, cafeterias, vending machines, restaurants, etc.) domestically and internationally."

In a separate note, Ms. Nicholson assumed coverage of cereal maker Post Holdings Inc. (POST-N) with a “buy” rating and US$112 target, down from US$120 but above the consensus of US$111.83.

"We expect that POST’s RTE cereal, refrigerated retail and protein shake businesses (which together represent 76 per cent of EBITDA) have likely performed well since the outbreak of COVID-19, as consumers have pantry-stocked shelf-stable items to eat at home," she said. "However, we expect that POST’s foodservice business (24 per cent of EBITDA) has likely come under significant pressure in recent weeks. On balance, we are cautiously optimistic that POST will still be able to meet its target for EBITDA in FY20 of $1.2-billion."

"We consider POST’s portfolio repositioning in recent years to have been successful (as it has diversified its “business such that the U.S. RTE cereal business has declined as a percentage of its EBITDA). Owing to this, POST has been a good stock, having outperformed the market in three of the last five years, and trading at an average 54-per-cent premium to the market. However, given fears about the potential impact of COVID-19 on the business in the near-term (which we believe are over-blown), POST is currently trading at a 17 times our FY21 EPS estimate, or at a 10-per-cent discount to the market. Given our confidence that POST will weather the COVID-19 storm just fine, we believe that POST should now trade at a 20-per-cent premium to the market. This leads us to our $112 target price, which represents 27-per-cent ETR from its current price.”

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After an “enormous” fourth-quarter earnings beat, Canaccord Genuity analyst Derek Dley sees Trulieve Cannabis Corp. (TRUL-CN) “showing no signs of slowing down.”

On Wednesday before the bell, Trulieve reported revenue of $80-million, up 13 per cent from the previous quarter and above Mr. Dley's forecast of $79-million. EBITDA of $45-million also blew past the analyst's expectation ($32-million).

"Looking ahead to 2020, Trulieve reiterated its previous revenue and EBITDA guidance of $380-400-million and $140-160-million, respectively," he said. "Management appears confident in its ability to navigate the near-term uncertainty related to COVID-19. As well, management expects to increase its dispensary count in Florida to 68 by the end of 2020, implying opening an average of just over two stores a month from the end of 2019. Importantly, regulators in the state are proceeding with site inspections as planned despite COVID-19 concerns, allowing Trulieve to continue to build on its leading presence in the state.

“Trulieve ended the year with $92-million in cash, leaving it well positioned to navigate near-term COVID-19-related uncertainty. The company also is well positioned to capitalize on accretive acquisition opportunities, in our view. This, coupled with our expectation that the company will be free cash flow positive throughout 2020, provides Trulieve with a flexible capital position, and reinforces our view that Trulieve is uniquely well positioned within the cannabis space.”

Maintaining a “speculative buy” rating, Mr. Dley hiked his target to $35 from $27. The average is currently $26.68.

“Given Trulieve’s healthy financial position, access to capital, and best-in-class profitability metrics, we believe the stock is attractive for investors looking for cannabis exposure to a high-quality operator with a proven ability to generate strong EBITDA and profitability,” he said. " With Trulieve currently trading at 7.2 times our 2020 EBITDA estimate, and given Trulieve’s dominant and growing position in the attractive Florida market, we believe the shares are undervalued at current levels."

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After raising his uranium price forecast based on further supply cuts, Raymond James analyst Brian MacArthur raised his financial expectations for Cameco Corp. (CCO-T, CCJ-N).

"In response to COVID-19, Kazatomprom announced that it is reducing operating activities at all uranium mines for 3 months and has lowered its 2020 expected uranium production volumes by 4000 tU (close to 10 mln lbs of U3O8). This supply reduction is in addition to Cameco's announcement on March 24, 2020 to temporarily suspend the Cigar Lake mine and the McClean Lake mill. Further, on March 28, 2020, Namibia announced a partial lockdown of certain regions which could impact production at Husab and Rossing. Given the concentrated nature of the uranium market, we believe that the recent supply disruptions increase uncertainty and highlight security of supply issues for utilities. As a result, we are increasing our uranium price forecast from $27/lb to $30/lb in 2020 and from $39/lb to $40/lb in 2021."

Keeping an "outperform" rating for Cameco shares, Mr. MacArthur's target rose to $14.50 from $13. The average on the Street is $14.08.

“We believe Cameco provides investors with lower-risk exposure to the uranium market given its diversification of low-cost mines,” he said. “These mines are supported by a portfolio of long-term contracts that provide some downside protection in periods of depressed spot uranium prices while maintaining optionality to higher uranium prices. In addition, the company has multiple operations curtailed that can be brought back should uranium prices increase. Although the September 2018 tax court decision applies only to the 2003, 2005, and 2006 tax years, we view it as a positive for the company given we believe it will be relevant in determining the outcome for subsequent years and reduces risk related to the CRA dispute.”

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In other analyst actions:

* BMO Nesbitt Burns analyst Jenny Ma downgraded Morguard Real Estate Investment Trust (MRT.UN-T) to “underperform” from “market perform” with a $3.50 target, down from $8. The average is $9.04.

“We are downgrading Morguard REIT units to Underperform (from Market Perform) for three reasons: 1) Its substantial weighting toward malls; 2) Weakness in the Calgary office portfolio; and, 3) A high risk of a distribution cut,” she said.

“We are reducing our NAV estimate and target price for Morguard REIT, based on revisions to our earnings forecast and a higher cap rate assumption due to the impact of the COVID-19 virus.”

* BMO’s Ray Ray initiated coverage of Golden Star Resources Ltd. (GSC-T) with a “market perform” rating and $4.25 target, which falls below the $5.21 average.

Mr. Ray said: "Golden Star’s transformation to a relatively high-grade, underground operation over the last few years has delivered mixed results.

·"While the company’s Wassa operation has emerged as a potentially top-tier asset, the Prestea operation has continued to underperform, which has been an overhang on the share price."

* Scotia Capital analyst Benoit Laprade lowered Superior Plus Corp. (SPB-T) to “sector perform” from “sector outperform” with an $11 target, falling from $14. The average on the Street is $12.38.

* Berenberg initiated coverage of Asanko Gold Inc. (AKG-T) with a “buy” rating and $1.70 target. The average is $2.10.

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