Inside the Market’s roundup of some of today’s key analyst actions
Though its first-quarter outlook was “light,” RBC Dominion Securities analyst Kate Fitzsimons thinks Canada Goose Holdings Inc.'s (GOOS-T, GOOS-N) brand momentum can continue to building through to the “all-important” winter season.
Before the bell on Wednesday, the luxury apparel maker said it expected a negligible level of revenue in the quarter due to the COVID-19 pandemic. It's aiming to reduce expenses and investments in the first quarter by about $90-million.
Noting the quarter normally brings less than 10 per cent of annual sales, Ms. Fitzsimons thinks the outlook should not come as surprise to investors.
"We were encouraged that the brand is seeing green shoots in mainland China (traffic still down year-over-year owing to seasonality, strong conversion) and its ecommerce business seeing strong engagement and higher year-over-year," the analyst said. "That said, with the bulk of GOOS sales/ earnings generated in fall and holiday, those gains importantly bode well for building momentum ahead of the key winter season."
She added: “Typically, GOOS enters a fiscal year with 80-per-cent visibility to its wholesale order book (44 per cent of FY20 sales). While the team called out its order books as being down slightly year-over-year, this year is ‘less about the order book’ with the view that wholesale should sequentially improve from 1Q’s bottom. The fact that wholesale was down 24 per cent in 4Q reflecting accelerating, reduced shipments suggests GOOS’s wholesale inventories are reasonably clean, as wholesalers work through current levels. Whereas in prior years, GOOS saw earlier wholesale shipments/shifts, this year, the trajectory of wholesale is likely to be pushed further to the winter season. We model wholesale down 85 per cent, down 35 per cent, 0 per cent, up 10 per cent from 1Q-4Q.”
Ms. Fitzsimons actually raised her first-quarter earnings per share projection to a loss of 35 cents from a 42-cent deficit previously. Her full-year projection is now 5 cents, rising from a penny.
Keeping an “outperform” rating, she hiked her target for Canada Goose shares to $47 from $35. The average target on the Street is $38.72.
“We remain buyers as GOOS’s strong brand, estimated 30 per cent digital exposure, limited store base, and strong liquidity are key assets, with category seasonality a buffer as the seasonally light June quarter bears the brunt of COVID-19 disruptions,” she said. “Further, we see FY21 as likely to see an even greater margin buffer from an inevitable acceleration to Direct and away from wholesale.”
Elsewhere, Credit Suisse's Michael Binetti trimmed his target to $40 from $43, keeping an "outperform" rating.
Mr. Binetti said: “GOOS’ F4Q update laid out what we believe were realistically cautious expectations for FY21 (like expectations for negligible revenues in F1Q with shipments to wholesale completely stopped and clarity that wholesale order books are negative for the upcoming winter). The brand continues to make decisions for the health of the brand (like shutting down manufacturing to slow new inventories). China growth didn’t sound to be restarting as fast as luxury peers, and we have concerns that the margin profile could still surprise to the downside (with negative revenues spread across an increasingly internally owned supply chain). But in the end, this will come down to the consumer appetite for $1,000+ jackets this winter, and we think GOOS showed that it’s continuing to err on the side of managing quality.”
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Calling it one of his top ideas for the remainder of 2020, Scotia Capital analyst Ben Isaacson raised Methanex Corp. (MEOH-Q, MX-T) to “sector outperform” from “sector perform.”
“While it’s been painful watching Methanex get away from us over the last couple of weeks, we couldn’t upgrade the stock with confidence until the company secured additional financing flexibility under its credit facilities,” he said. "With [Wednesday’s] package of covenant relief measures announced, coupled with ample liquidity, and an improving supply/demand methanol backdrop, the outlook for the stock continues to improve.
“Accordingly, we’ve upgraded the stock to a Sector Outperform. We have written several times that Methanex is the best way to play a COVID-19 / oil recovery story. As investors well know, the sensitivity to methanol price changes is profound, with FCF increasing by about $1/sh for every $25/mt realized methanol price change.”
Mr. Isaacson increased his target to US$31 from US$19. The average on the Street is US$20.
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Canadian forest product companies are "emerging from the COVID fog on better footing than expected," said Raymond James analyst Daryl Swetlishoff.
In a research note released Thursday, he said the March sell-off, which saw stocks drop 48 per cent (versus a 34-per-cent decline in the TSX, as “overdone,” considering the group’s “solid” financial liquidity and the presence of limited near-term debt maturities.
“Since, the average forest product stock has returned an impressive 50 per cent (TSX up 37 per cent),” said Mr. Swetlishoff. "While up in-line with WSPF futures, we highlight that the rally in building materials share prices has lagged SYP lumber and OSB. As such, we are adjusting target multiples to the midpoint of the historic 5-year ranges, resulting in higher target prices. Largely due to downtime and repair & renovation demand, market players are reporting strong takeaway and increasing order files. U.S. housing starts were down 30 per cent in April, although builders are reporting ‘less bad’ current conditions as state economies re-open.
“We expect building materials pricing to continue higher through Jun-2020 and share prices to follow with expected upward earnings revisions. Looking into 3Q20, uncertainty grows with potential for increased production rates during the seasonally slower summer period. We expect greater market certainty in the early fall, especially in regard to the housing market, and council investors with 6-12 month time horizons to opportunistically add to positions, while nimble investors with a shorter investing time frame may need patience.”
Mr. Swetlishoff raised his target prices for five of the 10 stocks in his coverage universe. They were:
- Canfor Corp. (CFP-T, “outperform”) to $14 from $10. The average on the Street is $11.58..
- Interfor Corp. (IFP-T, “outperform”) to $13.50 from $9.50. Average: $11.92.
- Norbord Inc. (OSB-T, “outperform”) to $36 from $25.50. Average: $31.25.
- Western Forest Products Inc. (WEF-T, “outperform”) to $1.15 from $1.05. Average: $1.02.
- West Fraser Timber Co. Ltd. (WFT-T, “outperform”) to $53 from $40. Average: $48.
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Industrial Alliance Securities analyst George Topping sees Moneta Porcupine Mines Inc. (ME-T) as “undervalued,” pointing to its “desirable location in an existing camp with many underutilized mills” and record gold prices."
Accordingly, he initiated coverage of the gold exploration company, which owns six projects in the Timmins mining camp, with a "buy" rating.
"Though recent drilling results, searching for open-pittable and UG material, haven’t been great (year-to-date average 1.6 grams per ton uncut over 7.7 metres at an average depth of 320-metre core length), the company has enough resources to get going," he said.
"We ran rough numbers on either a tolling operation or an owned mill scenario and returned figures supporting Moneta expanding its current resource multiple of just US$17 per ounce towards a US$70-100/oz range when it gets to toll or own mill production, respectively."
Mr. Topping emphasized insiders continue to buy into the Timmins, Ont.-based company, noting "renowned" gold investor Eric Sprott recently increased his stake and now holds 9 per cent of its shares.
"Year-to-date, insiders and major shareholders have added 2.7 million shares through the public market, which to us is a bullish signal," he said.
Also noting gold funds flow is shifting to smaller cap juniors, Mr. Topping set a target of 35 cents per share. The average on the Street is 40 cents.
“Comparing Golden Highway and Moneta to other gold explorers (in Canada and the U.S.) that we cover, we see that Moneta lags far behind on an enterprise value per ounce basis due to its lower grades and earlier stage,” he said. “As the resource grows and/or is upgraded via infill, Moneta will undergo a multiple expansion. We await the PEA on the project before we assign our own metrics to a potential mining plan. However, we see a scenario where the Company could secure toll treatment, or preferably, buy a nearby mill.”
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The worst is likely behind The Descartes Systems Group Inc. (DSGX-Q, DSG-T), said RBC Dominion Securities analyst Paul Treiber after hosting virtual meetings with its executive team for investors.
“The global transition to work from home may help raise adoption of Descartes’ solutions as more companies move away from manual processes for logistics to automated electronic ones,” he said. “Descartes’ e-commerce solutions (10 per cent of revenue) and trade content (estimated 20 per cent of revenue) are both seeing stronger demand amidst COVID-19-related disruptions to retail and trade/tariffs, respectively.”
“Revenue declined 5 per cent in April on a run-rate basis. The slowdown primarily reflects lower transaction volumes at airlines and retailers closed under government mandates, which offset stronger demand in other segments (e-commerce, trade content). Retail reopenings and re-purposing of passenger to cargo flights may help lift volumes going forward. Management does not appear to be concerned regarding potential customer bankruptcies, given low customer concentration (largest is 1.5 per cent of revenue) and indifference to specific channels.”
Mr. Treiber said the Waterloo, Ont.-based tech firm is managed "conservatively" with a focus on recurring revenue, profitability and free cash flow.
“In light of the 5-per-cent reduction in revenue in April, Descartes implemented a 5-per-cent reduction in headcount,” the analyst said. “The restructuring saves $6-7-million costs per annum (7-8 per cent of revenue). Eliminated positions appear to be low-hanging fruit and wouldn’t impair the future health of the company. Given likely continued operating leverage and economies of scale, we believe that upside to Descartes’ 35-40-per-cent adj. EBITDA margin target is likely over time.”
Seeing M&A as a potential catalyst, he increased his target for Descartes shares to US$57 from US$50. The average on the Street is US$45.04.
“While the company experienced a modest slowdown in transactions in the near term, profitability and cashflow are likely to remain resilient,” said Mr. Treiber. “Over the long term, Descartes appears likely to benefit structurally from e-commerce and the shift away from manual to electronic logistics processes.”
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Seeing it positioned for further “significant change,” Raymond James analyst Farooq Hamed initiated coverage of Calibre Mining Corp. (CXB-T) with a “strong buy” rating.
"In 2019 CXB underwent a transformational change by acquiring the El Limon and La Libertadmines, effectively turning the company into a gold producer from an exploration/development company," he said. "Now, we believe CXB is on the cusp of another significant change as it is in the early stages of transitioning the two separate standalone mines into an integrated complex (the hub & spoke strategy) which we believe gives CXB the potential to grow production significantly from its existing resource and infrastructure base without the need for significant amounts of additional capital."
Mr. Hamed emphasized the presence of three potential value drivers: the transition of its Nicaragua mines through the hub and spoke strategy; expanding exploration possibilities at both El Limon and La Libertad concessions, seeing “significant” potential for resource growth; and the potential to unlock future value through joint ventures.
He set a target of $2.25 per share, which exceeds the consensus of $2.05.
“With a significant percentage of shares outstanding being held by B2Gold and other large holding blocks, we estimate CXB’s free float to be 35-40 per cent of shares outstanding which does create a share liquidity overhang, in our opinion,” said Mr. Hamed. “We would view improving share liquidity as a key driver of higher market multiples for CXB.”
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Seeing a “compelling” risk/reward proposition for investors, Citi analyst Jason Bazinet upgraded SeaWorld Entertainment Inc. (SEAS-N) to “buy” from “neutral” with an eye toward 2022.
"We expect ongoing challenges in a post-COVID environment and model 2022 attendance 5 per cent below 2019 levels," he said. "The company’s strategic efforts to promote its season pass has helped grow in-park spend, particularly in 2018 and 2019. While we expect this trend to continue, we model 2022 revenues below 2018 levels, with Adj. EBITDA margins near the mid-point of the past 10-years."
“SeaWorld has historically fetched between 8 and 10 times EV-EBITDA. Running sensitivities, if we assume 2022 attendance is 20 per cent below 2019 levels, Adj. EBITDA margins of 26 per cent (near the low-end of historical range) and apply an 8 times multiple (low-end of historical range), we get a target price of $10, or $8 downside from current. We see many more cases for upside to current prices, including better revenue, higher EBITDA margins and higher multiples. Our high case of $36, or $18 upside, assumes Adj. EBITDA of $425 million (still below 2019 levels) and a 10 times EV-EBITDA multiple.”
Mr. Bazinet now projects 2020 adjusted earnings per share of a loss of US$2.64, up from a US$3.79 deficit. His 2021 estimate slipped to a 10-US-cent loss from a 47-US-cent profit, while his 2022 forecast rose to 80 US cents from 60 US cents.
His target for Sea World shares jumped to US$24 from US$9. The average on the Street is US$17.17.
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In other analyst actions:
* TD Securities analyst Mario Mendonca lowered National Bank of Canada (NA-T) to “hold” from “buy” with a $63 target. The average is $61.30.
* BMO Nesbitt Burns analyst David Round lowered Gran Tierra Energy Inc. (GTE-T) to “market perform” from “outperform” with a 50-cent target. The average is $1.65.
"Gran Tierra has never lacked potential but the last few years have been challenging and, in our view, the current price environment is at the very least extending the time frame over which we would expect Gran Tierra to realise a lot of that potential," he said.
“Confirmation of liquidity is paramount and [Tuesday]'s update was important in that regard although the reduced headroom doesn’t leave much room to maneuver and, despite trading at distressed levels, we question whether the stock will outperform until there is greater medium-term funding clarity.”
* Echelon Wealth Partners analyst Ryan Walker initiated coverage of Osino Resources Corp. (OSI-X) with a “speculative buy” rating and $2.05 target. The average is $2.28.
"An investment in OSI affords investors exposure to an emerging potentially large gold resource (we see potential for a maiden resource of 1.5-2.0Moz) in geopolitically stable Namibia, said Mr. Walker. “Osino’s flagship Karibib project’s situation in an established mining region (proximal to two producing mines) and strategic district-scale land package (anchored by an emerging potentially large resource) are especially attractive amid an ongoing wave of sector consolidation and lack of recent sizeable quality discoveries.”
David Leeder