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

Though its share price has doubled thus far in 2020, RBC Dominion Securities analyst Mark Mahaney thinks the market continues to underappreciate Shopify Inc.‘s (SHOP-N, SHOP-T) earnings power, leading him to establish a new Street-high target price for its stock on Thursday.

“We see Shopify as a Structural Winner post COVID-19,” he said. “We anticipate more sustainable premium revenue growth for longer than previously expected, with near-term upside to Street SHOP estimates from International and new services like Fulfillment. Shopify’s TAM [total addressable market] is also larger than many investors perceive. In the long-term, more than 20-per-cent steady state operating margins are possible.”

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In a research note released Thursday, Mr. Mahaney said the Street has not properly accounted for three factors impacting the Ottawa-based company’s potential growth: its TAM; take rate potential and “material” opportunities to expand its operating margins.

“Based on Census data, U.S. Online Retail sales accelerated for the 4th consecutive month to 31-per-cent year-over-year growth in May,” he said. “In our view, consumer buying patterns have changed permanently, effectively pulling forward several key assumptions in our SHOP DCF, especially Online Penetration. SHOP is increasingly addressing a $16-trillion Global (ex-China) Retail market, and applying a ‘light-marketplace’ 5-per-cent Take Rate generates an $800-billion TAM, against which SHOP’s penetration is less than 1 per cent.”

“We see 30-40 basis points of near-term Take Rate expansion on Merchant Solutions Revenue driven by increased Payments adoption and another 100-110 bps of long-term expansion driven by increased usage of VASs like Capital, Shipping and SFN (Shopify Fulfilment Network). While Shopify doesn’t operate a marketplace, we believe comparing Take Rates with Online Marketplaces is a useful exercise. Including Subscription Revenue, SHOP’s Total Effective Take Rate was 2.6 per cent in 2019 – a significant discount to the 15-per-cent marketplace group median. In our view, Amazon’s MCF (MultiChannel Fulfilment) is the most comparable service to SFN, and we believe MCF’s 5-15-per-cent take rate provides a reasonable long-term bogey. Assuming an 8-per-cent Fulfillment take rate and a 5.5-per-cent attach rate on Shopify’s U.S. GMV, we see SFN generating $1.5-billion in cumulative revenue over the next 5 years.”

Despite acknowledging Shopify’s current valuation at 28 times enterprise value to sales is a “significant risk,” Mr. Mahaney thinks it deserves a premium “given it has the fastest revenue growth on the largest base vs. our 13 highest-growth comps.”

With an “outperform” rating (unchanged), he raised his target for Shopify shares to US$1,000 from US$825. The average target on the Street is US$740.13.

“Shopify is benefiting from (and in many cases, powering) several key trends: i) the shift in retail to D2C [direct to consumer], ii) the consumerization of enterprise IT, iii) traction with larger merchants, and iv) increasing adoption of value added services,” he said. “Each one of these tailwinds are important to our Long Thesis on Shopify and drive many of the key assumptions in our DCF.”

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“Encouraged” by the economics of its Pine Point Project in the Northwest Territories following a “positive” preliminary economic assessment, Haywood Securities analyst Pierre Vaillancourt sees further room for Osisko Metals Inc. (OM-X) to enhance the project with further optimization.

Accordingly, he raised his rating for Osisko shares to "buy" from "hold."

"Despite the higher capex and relatively short mine life, we are confident the company can continue to optimize Pine Point while adding resources," said Mr. Vaillancourt. "Ultimately, we believe Pine Point could become a top tier zinc-lead development project. We recognize the timeline to production is long, but that interest in the project from smelters, corporates and investors will continue to grow now that there is a positive mine plan."

Emphasizing the project’s long-term potential, he increased his target to 75 cents from 60 cents. The current average is $1.

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WSP Global Inc.‘s (WSP-T) recent $502-million equity issuance is “opportunistic financing” that provides financial flexibility to further pursue a potential combination with AECOM (ACM-N), said Desjardins Securities analyst Benoit Poirier.

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In a research note released Thursday upon resuming coverage of the Montreal-based professional services firm, Mr. Poirier said he prefers a “merger of equals” to a pure takeover, emphasizing the value that would be created by a deal and that a combination “makes sense strategically and financially.”

In early April, it was reported the two companies ceded discussions on a potential deal due to the impact of the COVID-19 pandemic.

“Our extensive analysis of ACM’s Professional Services business reinforces our view that a combination with WSP would make sense given the complementary nature of their respective businesses,” he said. “Based on our analysis, we believe a merger of equals is preferable to a pure takeover of ACM by WSP. In a merger scenario, we derive EPS accretion of 31 per cent and 43 per cent, respectively, based on our 2021 and 2022 estimates. We derive a value of $115–122/share based on our merger-of-equals analysis.”

“We support an eventual combination for the following reasons: (1) potential value creation would be significant in the long term; (2) opportunity to expand into strategic end markets; (3) ability to build scale in key international markets to improve profitability; and (4) better position the combined entity to emerge stronger from the pandemic.”

Mr. Poirier does not expect a deal until the pandemic passes, and, however, he said “stars are aligned for a potential combination in the medium term.”

“Despite WSP’s recent financing, we expect management to maintain its disciplined approach,” he said. “Nevertheless, we believe the necessary conditions for a potential merger between WSP and ACM are in place given the restructuring undertaken by ACM since 2018.”

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Though he trimmed his 2020 and 2021 adjusted earnings per share projections for WSP, Mr. Poirier reiterated a “buy” rating and $95 target for its shares. The average on the Street is $97.09.

“With more than 120 acquisitions since its IPO in 2006, WSP has a robust M&A track record and we remain confident in its ability to unlock shareholder value in the long term even if a combination with ACM does not occur,” the analyst said.

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Seeing an improved outlook for gold, Desjardins Securities analyst David Stewart raised his financial expectations and target price for shares of Ascot Resources Ltd. (AOT-T) upon resuming coverage following a recently closed $25-million equity financing.

“With its financing now closed, Ascot has some breathing room to focus on other areas of project advancement, such as ordering long-lead items, including the ball and SAG mills,” he said. “Now that the feasibility study has been filed, other prospective capital providers will be able to conduct more due diligence on the Premier project. We expect a more comprehensive project financing package to be announced in late 3Q/early 4Q. We still view the timeline to production by 1H22 as achievable, which would make Ascot one of Canada’s next new gold producers.”

In response to the firm’s late May increase in its gold price deck, Mr. Stewart raised his fiscal 2022 and 2023 earnings per share expectations to 16 US cents and 25 US cents, respectively, from 12 US cents and 23 US cents.

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Keeping a “buy” rating for Ascot shares, he also raised his target to $1.60 from $1.40. The average is currently $1.80.

“We continue to believe that Ascot not only has one of the most attractive gold projects in Canada, but is also one of the most attractively priced equities among its peer group,” he said. “The shares are trading at 0.4 times NAV [net asset value] versus peers at 0.6 times on average. As the company progresses through permitting, financing and construction milestones, we expect a significant re-rating.”

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Brookfield Infrastructure Partners LP (BIP-N, BIP.UN-T) is positioning itself for a “swoosh” recovery in the economy following the COVID-19 pandemic, said Citi analyst Ryan Levine upon resuming coverage of the stock.

“BIP has taken a view that the economic slowdown will not likely be over quickly and the economic recovery is going to look more like a swoosh than a V, U or W,” he said. “In our view, BIP had not done enough due diligence to pull the trigger to pick up large businesses in the initial market sell off but stands ready for any second wave in summer or fall 2020.”

“During the market selloff in March, BIP bought non-controlling stakes in several public companies with a focus on utility, transportation, and energy deals in North America, Europe, and pockets of Asia. Energy was not necessarily at the top of the list. As of the last earning call, these investments totaled $450-million ($220-million for BIP’s share) but during the spring rally, BIP sold most of its public market positions. Each of the investments were in companies that it would have an interested in acquiring the entire business at the right price.”

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After updaying his estimates to reflect the last several quarter financial results, recent acquisitions, asset sales, and capital market transactions, Mr. Levine raised his target for Brookfield to US$41 from US$36.57, keeping a “neutral” rating. The average on the Street is US$47.38.

“We rate Brookfield Infrastructure Partners (BIP) Neutral. BIP’s risk-averse (long-term contracts) and diversified business model (across industries & geographic locations) offer a stable cash flow stream with solid distribution growth. Despite our view on the stability and growth of BIP’s cash flow stream, the shares appear appropriately valued,” he said.

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Though the oilfield services sector has become accustom to extreme volatility, Canaccord Genuity analyst John Bereznicki thinks the past few weeks have been "notable."

"Through the first 10 days of June, several of the larger companies in our OFS coverage universe (including PD, ESI, SES, TEV and TOT) rallied more than 50 per cent," he said. "While some of these gains have subsequently been returned, many domestic oilfield equities nonetheless remain well above their year-to-date (COVID-19) lows."

"In our view, this recent equity surge has been driven almost entirely by multiple expansion as consensus estimates generally trended down coming out of the Q1/20 earnings season. ... Our basket of domestic OFS equities now trades at a median of 8.5 times EV/EBITDA based on [forward 12-month] consensus estimates, up from a low of 5.5 times in April as global oil prices troughed."

In reaction to the rapid share price increases, Mr. Bereznicki made a number of target price adjustments to stocks in his coverage universe. They are:

  • Ensign Energy Services Inc. (ESI-T, “hold”) to $1.25 from 90 cents. The average on the Street is 71 cents.
  • Mullen Group Ltd. (MTL-T, “hold”) to $7.50 from $6. Average: $8.40.
  • Precision Drilling Corp. (PD-T, “hold”) to $1.25 from 90 cents. Average: $1.07.
  • Secure Energy Services Inc. (SES-T, “hold”) to $2 from $1.25. Average: $2.48.
  • Trican Well Service Ltd. (TCW-T, “hold”) to $1 from 90 cents. Average: 86 cents.
  • Tervita Corp. (TEV-T, “hold”) to $4.50 from $4. Average: $4.85.
  • Total Energy Services Inc. (TOT-T, “hold”) to $3 from $2.50. Average: $3.28.

“Notwithstanding investors’ seemingly new-found appetite for OFS equities, we remain cognizant of the fact fundamentals in the field are extremely challenging and real balance sheet risks exist,” said Mr. Bereznicki. “We continue to view MTL, SES, TOT and CEU as best positioned to manage a protracted downturn from a leverage perspective. Conversely, we believe CFW and SHLE face the greatest balance sheet risk over the near to medium term.”

“Without stronger WTI strip pricing and more positive signals from the high yield debt market, we believe further equity upside potential comes with increasingly higher risk. Put another way, we believe OFS equites now reflect a recovery by 2022, with growing headwinds to the downside. While we are raising many of our target prices primarily to reflect sector multiple expansion, there are no changes to any of our recommendations as we remain largely on the sidelines from an investment perspective.”

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Expecting its momentum to accelerate as the impact of the COVID-19 pandemic subsides and brings increased demand for electric vehicle adoption, Jefferies analyst Phillipe Houchois raised his target for Tesla Inc. (TSLA-Q) shares to a Street-high US$1,200 from US$650 previously. The average on the Street is US$658.72.

“We see Covid-19 as an accelerator of the transition to EVs and renewables, from consumers and public policy,” said Mr. Houchois, who maintained a “buy” rating for the stock.

“Tesla remains significantly ahead of peers in product range, capacity and technology. Near term, EV friendly incentives in the EU and lower priced Model 3 support H2 volume, making Tesla more resilient than peers.”

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In other analyst actions:

Cormark Securities initiated coverage of Lightspeed POS Inc. (LSPD-T) with a “buy” rating and $39 target. The average on the Street is $40.

TD Securities started Ballard Power Systems Inc. (BLDP-Q, BLDP-T) with a “hold” rating and US$14 target. The average target on the Street is US$10.87.

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