Inside the Market’s roundup of some of today’s key analyst actions
Aurora Cannabis Inc.'s (ACB-T) entry into the U.S. hemp-derived CBD market adds another growth catalyst as it approaches positive EBITDA, said Desjardins Securities analyst John Chu.
After the bell on Wednesday, the Edmonton-based company announced the acquisition of Reliva LLC in a $40-million all-share transaction.
"Not only does Reliva have production assets in the U.S. and an existing broad distribution network, it also has an established product portfolio, including top-selling gummies and topicals," the analyst said. "This appears to be a modest, low-risk and low-cost entry into the U.S. to address what is expected to be a very fast-growing sector with an estimated market potential of over US$10-billion by 2024."
Mr. Chu thinks Aurora could leverage Reliva’s products, distribution network and U.S. assets if cannabis becomes federally legal south of the south of the border.
Keeping a “buy” rating, he raised his target for Aurora shares to $22 from $19. The average on the Street is $13.46.
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Canaccord Genuity analyst David Hynes applauded Shopify Inc.'s (SHOP-N, SHOP-T) ability to “handle a once-in-a-lifetime surge in demand and still not miss a beat in terms of innovation.”
He raised his target for the Ottawa-based e-commerce firm's shares in response to its Reunite virtual event on Wednesday, which included unveiling its plans to offer deposit accounts and payment cards to small-business owners.
“The firm’s product roadmap is guided by the simple mission of making merchants’ lives easier, and Shopify’s Reunite virtual event highlighted many of the latest developments,” said Mr. Hynes. “The big splash was the firm’s introduction of Shopify Balance, a business banking account and card built purposefully for the independent, small business entrepreneur. While full plans for the product and the financial ramifications are yet to be discussed, with an initial pool of 1M+ merchants to target, perhaps two-fifths of which are logical adopters, this is another significant expansion of the monetization opportunity.”
Keeping a "hold" rating for its shares, he hiked his target to US$700 from US$650. The average target is US$723.20.
“Our issue with SHOP, and the basis for our recent downgrade to HOLD, is almost entirely valuation (the stock is currently trading at 33 times enterprise value-to-revenue on calendar 2021 estimates). We started a year ago, at about a $40-billion market cap, saying that SHOP had all the makings of a $100-billion-plus company at some point in the next half decade. It seemed bold at the time as very few cloud software companies have reached that milestone. Yet here we sit, less than twelve months later, with SHOP valued at more than $90-billion. COVID has accelerated several significant digital trends, but it feels like we’ve pulled forward 4-plus years of value creation in the last two months with SHOP. This is an excellent company with a long runway ahead, but we simply think that the passage of time or a pullback will give us the chance to buy the stock cheaper.”
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Calling its “significant” stock underperformance a “trading anomaly” and seeing its “heavily discounted” valuation “more akin to the financial crisis,” Raymond James analyst Michael Glen upgraded K-Bro Linen Inc. (KBL-T) to “strong buy” from “outperform.”
“With the onset of the COVID crisis, KBL stock corrected significantly, and what we would consider to be in-step with the overall market (i.e. up to the March 23 trough KBL stock was down 40.5 per cent year-to-date versus the S&PTSX small cap index down 46.3 per cent),” he said. "However, since the market bottom on March 23, KBL stock has materially underperformed, down (yes, down) an additional 3.5 per cent versus the S&P TSX Small Cap Index up 48.4 per cent (and the S&P TSX up 33.6 per cent).
“Now, we understand that investors will attribute this lag to the company’s exposure to hotel/hospitality industry laundry volumes (which represented 45 per cent of 2019 sales), but struggle with the disconnect we currently see versus the relative performance of large U.S. hotel stocks (which incidentally represent KBL’s largest customers in Canada). In particular, since the March 23 trough, Marriot International (MARUS) stock is up 32 per cent, Hyatt Hotels (H-US) up 14 per cent, and Hilton Worldwide (HLT-US) up 23 per cent. In fact, on a year-to-date basis, each of these hotel stocks has now outperformed K-Bro.”
Mr. Glen emphasized almost 55 per cent of K-Bro's business skews to "a very stable and consistent Canadian healthcare operation focused on processing linens for regional hospital authorities."
He maintained a $37 target for the Edmonton-based company’s shares. The average on the Street is $33.50.
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On the heels of “weak” first-quarter results that fell short of his expectations, Laurentian Bank Securities analyst Yashwant Sankpal downgraded BTB Real Estate Investment Trust (BTB.UN-T), expecting the impact of COVID-19 to “hit harder.”
"While BTB was seeing a good leasing momentum and SP-NOI growth over the last couple of quarters, the below average rent collection in the months of April and May, after the COVID-19 shutdown, has raised questions over the resiliency of BTB’s cash flow," he said. "Given the uncertainty around the extent of the shutdown and the damage the shutdown has caused so far to small businesses, we believe that BTB’s portfolio could see higher vacancy losses/bankruptcies in the coming quarters."
Moving the Montreal-based REIT to “hold" from “buy,” he trimmed his target to $3.25 from $5. The current average is $4.
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Citi analyst Jason Bazinet raised his subscriber forecast and target price for shares for Netflix Inc. (NFLX-Q) to account for the impact of the stay-at-home trend stemming from the COVID-19 pandemic, calling it a “tactical tailwind.”
"In our view, the current environment may impact Netflix in two ways," he said. "First, we suspect net adds are apt to be decoupled from content spending for the next few quarters. Second, in the economic recession that’s likely to follow the pandemic, U.S. cord cutting will likely accelerate. This may be a positive for Netflix because it gives the firm more pricing power (as cord cutters view Netflix as their primary pay TV experience rather than a complement to pay TV)."
Mr. Bazinet now projects Netflix to add 27 million net subscribers in 2021, rising from a previous forecast of 24 million. In 2022, he's now expecting 22 million net adds, up from 21 million. That led him to raise his target equity value per subscriber to US$850 from US$740, which is near the high end of its range fetched in the last five years.
Keeping a “neutral” rating, his target price for Netflix shares jumped to US$450 from US$350. The average on the Street is US$452.79.
"Over the last several years, there’s been a close relationship between Netflix’s content spending and net adds. Pre-COVID-19, the Street modeled robust net adds, but muted growth in content spending," he said. "This divergence – and the potential for consensus net adds to fall or content spend to rise – is one of the reasons we’ve remained Neutral on NFLX’s equity.
“Following our update, we maintain our Neutral rating on Netflix. While the firm has made significant progress in reshaping the video ecosystem and garnering a substantial subscriber base, we continue to believe Netflix faces potential challenges in generating material operating leverage with its cash content spending. Furthermore, at current levels, valuation leaves little room for error, in our view.”
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The Canadian REIT market sell-off may provide an opportunity for Slate Office REIT (SOT.UN-T) to “reset after spending much of 2019 in the penalty box with investors due to its distribution rate reduction last year,” according to Industrial Alliance Securities analyst Brad Sturges.
"SOT’s current unit price is severely disconnected to its underlying real estate value, providing an attractive entry point," he said. "For now, SOT is focused on improving its liquidity and balance sheet."
On May 13, the Toronto-based REIT reported first-quarter results that fell in line with expectations. Fully diluted funds from operations per unit of 18 cents fell 1 cent from the same period a year ago, while same-property rental income slipped 3 per cent.
Mr. Sturges also noted April and May rent collection matches historical patterns with very few deferrals thus far.
"SOT has attractive exposure to the GTA suburban office real estate market (approximately 38 per cent of NOI)," said Mr. Sturges. "SOT has a strategic foothold in the ‘427 Corridor’ near Toronto Pearson International Airport, and is also uniquely positioned with downtown Chicago office asset exposure (20 per cent of NOI). SOT’s suburban GTA office real estate portfolio may benefit from very tight leasing conditions in Toronto’s central business district (CBD) office market. Since the start of 2014, office rents psf in the office suburban markets of the GTA and the CBD of Halifax, Nova Scotia, have been relatively stable over the past five years."
In response to the quarterly results, changes to his SP-NOI, interest cost and hotel revenue assumptions as well as future acquisition activity, Mr. Sturges trimmed his 2020 and 2021 adjusted FFO per unit projections to 51 cents and 53 cents, respectively, from 54 cents and 57 cents.
Keeping a “buy” rating, he reduced his target for Slate units to $5.50 from $6.25. The average is $4.79.
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Canaccord Genuity analyst Tom Gallo said Rupert Resources Ltd.'s (RUP-X) “gritty exploration work in a down market” has paid off with discovery with “an exciting new discovery."
In a research note released Thursday, Mr. Gallo initiated coverage of the Toronto-based miner with a "speculative buy” rating, touting the potential of its past-producing Pahtavaara Gold Mine in Lapland, Finland.
“In the middle of last year, the two-plus years of gritty, unglamorous exploration work paid off, as the company commissioned a 15-kilometre drill program at a new target area known as Area 1,” he said. “Recent drill results point to what we view to be an exciting new discovery, with hole 120042 intersecting 1.8 grams per ton gold over 137.2-metre near surface.”
Mr. Gallo noted the Pahtavaara project is located 50 kilometres from Agnico Eagle Mines Ltd.’s (AEM-T) Kittila mine, which is Europe’s largest gold mine, and added Finland is ranked No. 2 by the Fraser Institute for its mining friendly nature.
In February, Agnico took an 9.9-per-cent equity stake in Rupert with the potential to raise its stake to almost 15 per cent.
“In our view, Agnico’s investment offers validation to the project," he said. “It is in both companies’ best interests to prudently advance this project toward outlining a large resource base through discovery. Clearly, as we see it, Agnico would be the natural acquirer should the project continue to advance positively.”
Currently the lone analyst on the Street covering the stock, according to Refinitiv, Mr. Gallo set a $2.10 target for Rupert shares.
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CIBC World Markets analyst Bryce Adams initiated coverage of mining companies with "outperformer" ratings on Thursday.
He set a $5 target for shares of O3 Mining Inc. (OIII-X). The average on the Street is $4.09.
“O3 Mining was created as a spin-out of Osisko Mining’s non-core assets, as its flagship project, Windfall, quickly advanced,” the analyst said. " Since the spin-out, management has been transactional, with a focus on growing its position in the Val d’Or region. O3 Mining is well seeded with5Moz gold in global resources.
“We expect the successful Osisko model to repeat, and for the Osisko group to lend its experience and technical expertise to O3 Mining, the next chapter of Canadian growth under the Osisko banner. We believe the combination of a strong management team, premium location, and significant, but undervalued resource offers compelling investor appeal.”
Mr. Wilson set a $1.50 target for shares of Orezone Gold Corp. (ORE-X), which exceeds the consensus by a penny.
“Orezone’s Bomboré (Burkina Faso) is a permitted project, expected to be put into construction once COVID-19 disruptions have eased and a financing package has been announced,” he said. “In production, the asset is expected to produce 117,000 ounces of gold annually over a 14-year mine life at $719/oz AISC, firmly in the top quartile of the cost curve.”
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In other analyst actions:
* In response to the premarket release of its fourth-quarter 2020 results, National Bank Financial analyst Richard Tse raised his target for shares of Lightspeed POS Inc. (LSPD-T) to $40 from $30, maintaining an “outperform” rating. The average on the Street is $29.27.
"Overall, while the outlook is undoubtedly challenged under the current backdrop, Lightspeed has been able to sustain the business at a level that’s better than most originally thought (including us)," he said. "In our opinion, that shows its ability to respond and pivot the business quickly – to modules like e-Commerce and
Delivery under the current environment. All that was accompanied by promising metrics. In our view, much of that momentum should be sustainable on the other side of the current health crisis as merchants will more than likely look to future-proof their Point-of-Sale/Omnichannel systems. That said, we think it’s also important to point out that despite those positive datapoints, the next few quarters have the potential to be volatile, as evidenced by the Company maintaining withdrawn guidance given the risk in churn, ability to add new merchants and a potential uptick in business failures.
“In our view, that’s why we think investors will need to take a longer-term view through that potential short-term volatility. If you can accept that potential volatility, we’d be buyers of the stock, even off the big upward move.”
* Scotia Capital analyst Robert Hope lowered Keyera Corp. (KEY-T) to “sector perform” from “sector outperform” with a $25 target. The average on the Street is $25.44.
* Paradigm Capital analyst Don MacLean initiated coverage of Galway Metals Inc. (GWM-X) with a “speculative buy” rating and $1 target.
“We believe Galway has an exceptional discovery unfolding at its Clarence Stream project. The C$54-million market cap strongly suggests the market has yet to grasp this,” he said. “Five high-quality zones have been identified to date — open pit mineable at over 2.5 gpT, we think. The upside potential to expand these zones, especially the three most recent, is excellent, but it looks like GWM is just scratching the surface of a 65-kilometre trend with many untested targets. It is easy to get lost in the details. We try to convey the essence, hopefully demonstrating why Galway is a top exploration pick.”
David Leeder