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

Constellation Brands Inc.’s (STZ-N) $5-billion bet on Canopy Growth Corp. (WEED-T) is a “transformational industry event,” according to Canaccord Genuity analyst Matt Bottomley.

In reaction to Wednesday’s announcement that the U.S. alcohol giant will investing $5-billion in the Canadian marijuana producer, Mr. Bottomley upgraded his rating for Canopy to “speculative buy” from “hold.”

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“We believe this represents a transformational event for Canopy (and the industry as a whole) in the form of a substantial commitment from an established, international partner that is a top tier producer/distributor of alcohol worldwide.,” he said. “More importantly, even prior to this deal, we believe Canopy had a top-three presence on the global cannabis stage in the 11 countries where it has secured exposure. With $5-billion slated to hit the balance sheet later in October, we believe Canopy is now second to none with its ability to expand this platform even further; with 12 times more cash than its largest Canadian competitors at this time. As a result, we believe the company is substantially better suited to execute on a global first mover advantage with the capital and strategic leverage provided by Constellation.”

Predicting a “landgrab for blue-chip international assets” in the coming years, the analyst feels Canopy now possesses “the currency (both in its stock with one of the higher relative valuations) and with almost as much cash on hand as has been raised in the entire Canadian cannabis industry to date.”

"We have significantly increased our forecasted global market opportunity set, while decreasing our discount rate by 200 basis points to account for Constellation as a strategic global partner," he said. "Although a large impact to our valuation, we still discount these opportunities at an elevated 15-per-cent discount rate while taking an overall 50-per-cent haircut to probability adjust for the many unknows in the global cannabis market. Although we admit this analysis is highly subjective in nature, we believe the deployment of potentially $5-billion into global opportunities could have tremendous upside given the nascent stage and high growth profile expected in many of these markets."

Mr. Bottomley hiked his target price for Canopy Growth shares to $50 from $34. The average target on the Street is $45.17, according to Thomson Reuters Eikon data.

“Although, Canopy trades at 29.1 times its 2020 EV/EBITDA (a sizable premium to its peers at 19.1 times), we believe its deal with Constellation and ability to potentially break away from the pack internationally (with a loaded balance sheet and a substantial commitment from an established, international partner) finally justifies this premium,” he said. “Admittedly, Canopy still remains the most expensive stock in the industry, but we would now be buyers of WEED at current levels in advance of it deploying what will likely be a material amount of capital into international, high growth endeavors.”

Elsewhere, Echelon Wealth Partners analyst Russell Stanley maintained his “sell” rating for Canopy, calling its current valuation “challenging.” He raised his target to $34.50 from $30.

"We view the transaction as a very strong endorsement for Canopy, and the industry as whole, as it confirms that cannabis is truly a global business opportunity," said Mr. Stanley. "We attribute the recent softness in the cannabis sector to a more cautious outlook for the Canadian market, to the exclusion of opportunities outside of Canada. We view the Canopy/Constellation news as further proof that a global market opportunity awaits, and that top-tier Canadian-listed companies are well positioned to participate given their significant head start and superior access to capital."

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Expressing concern about its above-average heavy oil exposure as well as a “moderate” production growth profile and higher leverage, Canaccord Genuity’s Dennis Fong lowered Cenovus Energy Inc. (CVE-T, CVE-N) to “hold” from “buy.”

The analyst said Cenovus currently has the highest exposure to wide heavy oil differentials in the energy stock. He estimates 68 per cent of Cenovus' 2019 heavy oil production is exposed to differentials, versus 57 per cent for its peers, and every US$1 per barrel move in the WCS-WTI different impacts cash flow by 3 per cent, adding: "There is also limited cash flow upside given the contingent payments to ConocoPhillips for the next four years."

"Given our negative thesis on heavy oil, we expect Cenovus could continue using dynamic storage which could drive higher variability in production and opex and in turn volatility in the share price," he said.

Mr. Fong lowered his target price for Cenovus shares to $15 from $18. The average target is currently $16.93.

"Cenovus trades at an attractive free cash flow yield of 12 per cent versus the large-cap group at 10 per cent; however, we believe capital allocation will focus more on de-leveraging than on immediately returning cash to shareholders," he said. "Cenovus is the most levered with a 2019 estimated D/CF [debt-to-cash flow] of 2.0 times versus the large-cap group at 0.9 times. We believe the company’s true target is between 1.0 times to 1.5 times on a D/CF basis before looking at restarting oil sands growth and returning cash flow to shareholders. This suggests that the focus on returning cash to shareholders could start in late 2019 or early 2020, and we would focus on companies with more immediate focus on returning cash flow to shareholders in the near term."

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Beacon Research analyst Doug Cooper feels it is now clear High Liner Foods Inc. (HLF-T) “significantly” overpaid for Rubicon Resources LLC, believing the added leverage from that transaction is “now acting as an anchor, not allowing for opportunities even if they happened to come about (eg. Pinnacle Foods recently sold to Con Agra who may be interested in divesting its seafood assets).”

Downgrading High Liner stock to “hold” from “buy,” Mr. Cooper said the company’s weaker-than-expected second-quarter results, released Tuesday, can be attributed to the acquisition.

The Lunenburg, N.S.-based company reported revenue of $245.3-million and EBITDA of $12.1-million for the quarter, versus $232.4-million and $15.3-million a year ago.

“While revenue was up $13-million, Rubicon added $17.4-million, which implies the ‘base’ business (in the U.S.) fell by $4.4-million,” said the analyst. “In terms of EBITDA, it fell by $3.2-million of which Rubicon’s contribution was $0.3-million. We do not expect 2H18 to be much better given that Rubicon has lost its largest account.”

Mr. Cooper lowered his revenue and EBITDA forecast for 2018 to $1.07-billion and $62-million, respectively, from $1.09-billion and $73-million.

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Accordingly, he dropped his target for the stock to $7.50 from $12.50. The average is $9.58.

“The focus … will be on fixing its problems, most notably in the U.S.,” said Mr. Cooper. “While Canada has been relatively steady, U.S. margins were down 100 basis points y/y in Q2 after being down 140 basis points in Q1. And FY17, in fact, was lower than FY16. In our view, this trend must be reversed before significant investor interest returns to the company. It remains to be seen if tariffs on Chinese processed seafood (even if the raw material is from another country and was just processed in China) exported to the U.S. will exacerbate HLF’s U.S. issues.”


Following a “strong start out of the gate” in the public markets, Industrial Alliance Securities analyst Brad Sturges raised his rating for BSR Real Estate Investment Trust (HOM.U-T), citing its current “compelling” valuation and strong second-quarter results.

On Aug. 13, the Toronto-based REIT, which began trading on the TSX in late May, reported funds from operations for the period from May 18 to June 30 of 9.3 cents per unit, exceeding the initial public offering forecast of 8.6 cents as well as Mr. Sturges’s forecast of 8.2 cents. Partial period second-quarter rental income beat the IPO forecast by 10.1 per cent, due largely to higher average occupancy (94.0 per cent) and a 2.8-per-cent rise in average monthly rents.

“We believe there could be several near-term positive catalysts to narrow BSR’s discount valuation, including: 1) additional positive earnings surprise relative to its IPO forecast; 2) the privatization of Pure Multi; 3) execution of its acquisition strategy in targeted U.S. Sunbelt apartment property markets; and 4) completion of possible capital recycling activities that enhance the REIT’s overall portfolio quality,” said Mr. Sturges.

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“At current levels, BSR units’ yield 5.4 per cent and trade at 11.7 times 2019 estimated FFO versus 17.6 times for its Canadian-listed apartment REIT peers, 20 per cent below our estimated NAV [net asset value] of $11.50 (employing a 6.25-per-cent annual cash NOI cap rate).”

The analyst emphasized that BSR’s Class B garden-style multifamily portfolio south of the border provides investors with “attractive” exposure to the improving U.S. apartment property sector. He expects the REIT to benefit from “favourable” multifamily demand fundamentals in the U.S. Sunbelt, supported by “compelling” demographic, population and job growth.

"The REIT may generate solid same-property revenue growth that is mainly driven by rising AMRs year-over-year and improving average occupancies year-over-year," he said. "Currently, we expect BSR to generate same-property rental income growth year-over-year of 3 per cent to 4 per cent in the next 12 months."

Moving BSR to "strong buy" from "buy," he maintained a target price of U$11. The average target on the Street is US$10.59.

"At current levels, BSR's units offer an intriguing entry point due to its discount valuation to its underlying real estate value and to its North American multi-residential REIT/REOC peers," said Mr. Sturges.


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Canaccord Genuity analyst Derek Dley downgraded LXRandC, Inc. (LXR-T) following weaker-than-anticipated second-quarter results and expressed concern over increased financial uncertainty following a potential breach in covenant on its credit facility.

On Wednesday, the vintage handbag retailer reported quarterly revenue of $9.9-million, up 39 per cent year-over-year due largely to the addition of 58 new stores. It missed Mr. Dley's $14.1-million projection.

With the results, the company's board of directors announced it has formed a special committee of independent directors to evaluate strategic and financing alternatives moving forward to "unlock the value of LXRandCo's unique omnichannel platform."

"Q2/18 was another challenging quarter for LXR, with the near-term impact of the updated strategic plan being felt to its fullest extent," he said. "While the company opened 16 stores, the planned closures of 32 stores resulted in softer-than-expected revenue for the quarter. The company planned on realizing the vast majority of the noise from the strategic shift in Q2/18 in order to present the potential of the company’s new strategic plan in Q3/18. As such, LXR incurred above normal store closure and outsized inventory shrinkage expenses during the quarter.

"Additionally, prior to the company’s release of quarterly results, LXR announced its intentions to restate its historic financial results, which will occur in the coming months. LXR believes this restatement has the potential to put the company in breach of its financial covenants on its credit facility. As well, with $9.3-million drawn on its facility at the end of Q2/18, the company is overdrawn on the revolver, resulting in a payment of $0.7-million in Q3/18 to avoid being in default. As such, the company commented that it is at its maximum draw limit based on the terms of the borrowing agreement. Following the credit facility payment in Q3/18, we estimate LXR maintains a cash position of approximately $4.1-million. While we will be looking for improvements in profitability and cash flow in subsequent quarters, the increased uncertainty of the company’s financial position, as well as the unexpected decline in sales per square foot and weakening North American brick-and-mortar retail environment gives us reason to be cautious in the near-to-medium term.”

Mr. Dley dropped his target price for the company's shares to 45 cents from $3. The average is 73 cents.

"We are increasing our WACC [weighted average cost of capital] to reflect the increased uncertainty in the company’s financial position while decreasing our estimates to reflect the declining sales trends in the business,” he said. “Both of these factors compel us to move to the sidelines.”


The “discipline and effective execution” displayed by Metro Inc. (MRU-T) in the third quarter is “noteworthy” given the state of the grocery industry, said Raymond James analyst Kenric Tyghe.

On Wednesday before market open, the company reported adjusted earnings per share of 75 cents, missing the 78-cent expectation from the Street due largely to gross margin compression, which Mr. Tyghe attributed to Jean Coutu results.

Revenue of $4.636-billion, however, exceeded expectations ($4.582-billion) with food same-store sales growth of 2.0 per cent and pharmacy of 1.8 per cent in what Mr. Tyghe called “a very tough environment.”

“We continue to believe that internal food inflation will accelerate (albeit off a very low base) through our forecast window, as the cumulative effects of key headwinds (tariffs, transportation, wages), necessitate a broader reset (more rational tone) of market dynamics,” he said. “While ecommerce initiatives continue to gain traction in Quebec (and the planned launch in Ontario in F2019E is tracking to plan), the reality is that online grocery adoption is moving ever faster and Metro, in our opinion, risks leaving money on the table if it doesn’t further accelerate current plans.”

Based on the results, Mr. Tyghe lowered his fiscal 2018, 2019 and 2020 EPS projections to $2.51, $2.84 and $3.19, respectively, from $2.62, $2.95 and $3.22.

He kept an “outperform” rating for Metro shares and dropped his target by a loonie to $46. Consensus is $45.64.

“The gross margin performance and largely synergy driven SG&A opportunity are supportive of our continued positive bias,” he said.


CIBC World Markets analyst Jon Morrison initiated coverage of Tervita Corp. (TEV-T) with an “outperformer” rating and $13.50 target.

“Although Tervita has experienced a number of headwinds since the company privatized in 2007, the tides are turning and we believe better days are on the horizon for the platform,” he said. "Specifically, we view the trifecta of: 1) the corporate restructuring that took place in 2016; 2) the appointment of a new board/management team over H1/17; and 3) the recent merger with Newalta, as laying the ground work for the company to show positive rates of change and demonstrate improving financial results and ROIC. "

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