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

ATB Capital Markets analyst Frederico Gomes thinks Hexo Corp.’s (HEXO-T) weaker-than-anticipated third-quarter financial results and amended agreement for its strategic deal with Tilray Brands Inc. (TLRY-T) should be seen by investors as a “signaling a deterioration of operations and higher dilution to shareholders.”

“Previously, our thesis reflected the execution of HEXO’s operational turnaround plan following the restructuring of its debt. However, given the negative Q3/FY22 results, the withdrawal of guidance amid senior management changes, a deteriorating macro environment, and the revision of the agreements, we are materially reducing our estimates,” he said.

Accordingly, Mr. Gomes downgraded Hexo to “underperform” from “sector perform” previously.

On Wednesday, shares of the Gatineau, Que.-based company fell 3.6 per cent to a new low after reporting quarterly revenue of $45.6-million and an EBITDA loss of $18.3-million. Both fell short of both Mr. Gomes’s forecast ($51.3-million and a loss of $4.4-million) as well as the Street’s estimates ($52.2-million and a loss of $3.6-million).

“According to management, the significant reduction in quarter-over-quarter adjusted EBITDA results was driven by the consolidated adjusted gross margin and the impact of a $3.6-million Health Canada cannabis fee, which the Company recognizes annually, in its Q3/FY22 results,” said Mr. Gomes. “In the previous quarter, adj. EBITDA was lifted by superior gross margin. In our view, HEXO’s operating performance has continued to be negatively impacted by intense competition and margin pressure in Canada and the distraction from the Company’s restructuring, ultimately leading to market share erosion and compressed margins from deteriorating operating efficiency. One-time items stemming from the Company’s turnaround, inventory rationalization, and further shareholder dilution added further noise to the result.”

It also announced amended terms for its deal with Tilray, a Leamington, Ont.-based peer poised to acquire 100 per cent of the remaining US$185-million balance on a note issued by Hexo and HT Investments MA LLC. The conversion rate has been reduced to 40 cents from 85 cents, which would allow Tilray to have the right to convert 50 per cent of its outstanding non-diluted shares of Hexo.

“We have reduced our estimates to incorporate the weak Q3/FY22 results and an uncertain and challenging outlook given HEXO’s management transition, the withdrawal of guidance, a deteriorating macro environment, and competitive pressures in the Canadian cannabis market,” said Mr. Gomes. “These factors also have led us to increase our discount rate to 15 per cent (from 14 per cent) to reflect a higher cost of capital, volatility, and riskiness of cash flows. Our price target reduction is driven by our lower estimates, higher discount rate, and increased dilution from the amended agreements.”

Mr. Gomes cut his target for Hexo shares to 15 cents from 80 cents. The average on the Street is 58 cents, according to Refinitiv data.

Elsewhere, seeing the results as “another step backwards” and believing its “turnaround prospects continue to falter,” Canaccord Genuity’s Matt Bottomley lowered Hexo to “hold” from “speculative buy” with a 25-cent target, down from $1.

“Although Tilray’s strategic arrangement with HEXO is set to close next month, with adult-use sales continuing to see steep declines, and the potential for meaningful dilution to hit the books via the utilization of its Standby Equity Line to fund its losses (given HEXOs depressed share price), we have made meaningful updates to our financial model,” he said.

CIBC World Markets’ John Zamparo reduced his target to 20 cents from 70 cents with an “underperformer” rating.


With oil and gas prices continuing to rise “materially,” National Bank Financial analysts Travis Wood and Dan Payne reiterated their bullish stance on the Canadian energy sector, expecting outperformance to continue.

In a research report released Thursday, they said they remain constructive on both crude oil and natural gas supply/demand fundamentals, raising their 2022 price forecast for WTI by 12 per cent to US$106.25 per barrel and Brent by 10 per cent to US$109.25. Their 2023 estimates rose by 4 per cent each to US$93.75 and US$98.50. For NYMEX, their projections jumped 38 per cent and 45 per cent, respectively to US$6.75 and US$5.80 per thousand cubic feet.

That led them to hike their 2022 and 2023 total cash flow estimates are up by 21 per cent and 15 per cent, respectively, driving an increase of 16-per-cent on average to target prices for stocks in their coverage universe.

“Energy, and more specifically the E&P group, continues to lead the pack in the S&P/TSX Composite Index as the top-performing sector, with our entire coverage hitting 52-week highs in recent weeks (and a handful even hitting all-time highs),” they said. “Given how tight supply fundamentals are, we believe this relative outperformance is sustainable, even as we consider the prospect of an inflationary/rising rate environment, acknowledging that energy has historically outperformed during inflationary periods. Even with the recent market sell-off, the setup remains compelling, with our coverage group now trading, on average, at 3.1 times 2023 estimated EV/DACF [enterprise value to debt-adjusted cash flow] (and a FCF yield of more than 20 per cent).”

For senior/integrated companies, their target changes were:

  • Canadian Natural Resources Ltd. (CNQ-T, “outperform”) to $115 from $110. The average is $91.81.
  • Cenovus Energy Inc. (CVE-T, “outperform”) to $41 from $35. Average: $29.42.
  • Imperial Oil Ltd. (IMO-T, “sector perform”) to $93 from $80. Average: $69.39.
  • Suncor Energy Inc. (SU-T, “sector perform”) to $73 from $54. Average: $55.37.

For large and mid-cap companies, their changes include:

  • Advantage Energy Ltd. (AAV-T, “outperform”) to $15 from $12.50. Average: $13.79.
  • ARC Resources Ltd. (ARX-T, “outperform”) to $32 from $24. Average: $24.39.
  • Birchcliff Energy Ltd. (BIR-T, “outperform”) to $15 from $12.50. Average: $13.46.
  • Baytex Energy Corp. (BTE-T, “outperform”) to $10.50 from $9.50. Average: $8.89.
  • Crescent Point Energy Corp. (CPG-T, “outperform”) to $23 from $20. Average: $14.68.
  • Enerplus Corp. (ERF-T, “outperform”) to US$29 from US$24. Average: $24.43 (Canadian).
  • Freehold Royalties Ltd. (FRU-T, “outperform”) to $22 from $19.50. Average: $20.14.
  • Kelt Exploration Ltd. (KEL-T, “outperform”) to $11 from $10. Average: $10.15.
  • Nuvista Energy Ltd. (NVA-T, “sector perform”) to $19 from $14.50. Average: $15.96.
  • Ovintiv Inc. (OVV-T, “outperform”) to US$115 from US$90. Average: US$67.
  • Peyto Exploration & Development Corp. (PEY-T, “outperform”) to $23 from $18. Average: $18.25.
  • Pipestone Energy Corp. (PIPE-T, “sector perform”) to $7.50 from $7. Average: $7.33.
  • Paramount Resources Ltd. (POU-T, “outperform”) to $50 from $45.50. Average: $43.75.
  • Prairiesky Royalty Ltd. (PSK-T, “sector perform”) to $27 from $24. Average: $22.90.
  • Spartan Delta Corp. (SDE-T, “outperform”) to $22.50 from $18. Average: $18.20.
  • Tourmaline Oil Corp. (TOU-T, “outperform”) to $95 from $75. Average: $83.12.
  • Topaz Energy Corp. (TPZ-T, “outperform”) to $32 from $27.50. Average: $28.67.
  • Vermilion Energy Inc. (VET-T, “outperform”) to $52 from $53. Average: $36.54.
  • Whitecap Resources Inc. (WCP-T, “outperform”) to $20 from $17.50. Average: $15.02.

Take your pick of the litter, but our preferred names remain CPG, CVE, HWX, TVE and WCP for oil exposure, and ARX, BIR, SDE and TOU for gas exposure,” he said.


IA Capital Markets analyst Neehal Upadhyaya sees a “compelling risk-reward profile” and “great entry point” for shares of Plurilock Security Inc. (PLUR-X).

Accordingly, he initiated coverage of the Vancouver-based cybersecurity solutions provider with a “buy” recommendation on Thursday.

“PLUR’s proprietary endpoint authentication solutions allow organizations to validate the security of their endpoints,” said Mr. Upadhyaya. “In an increasing shift to remote working, companies are facing new and more complex cybersecurity threats as endpoints and communications are no longer protected by a physical barrier and through on-premise storage. PLUR’s solutions can help companies continuously verify the authenticity of their users by developing a user profile based on how an individual types, clicks, and moves their mouse, amongst other things. Through this user profile and using artificial intelligence (AI) and machine learning (ML), PLUR’s products can identify threats and unauthenticated use on its endpoints in a matter of minutes.”

The analyst thinks Plurilock’s strategy of acquiring Value Added Resellers (VARs) alongside develOping its own proprietary products, allowing it to increase top-line growth by more than 70 times from 2020 to 2021 alone, should lead to further growth and provide “a lucrative cross-selling opportunity.”

“PLUR now has a robust sales team available with direct access to 300 Tier 1 clients (assuming PLUR’s CloudCodes acquisition closes) to which it can cross-sell its own higher-margin cybersecurity products,” he said. “We expect this unique cross-selling opportunity to fuel the revenue growth of the Company’s Technology division by 200 per cent-plus in both 2022 and 2023.”

Seeing it trading at a “significant” discount to peers, Mr. Upadhyaya set a target of 65 cents for Plurilock shares. The current average is 83 cents.

“PLUR is trading at just 0.1 times our 2023 revenue estimate, well below its North American Cybersecurity Comps at 7.3 times and its IT Solution Providers/VAR comps at 0.6 times, and the overall peer group average of 3.5 times,” he said. “Although we do not expect the Company to trade anywhere near its Cybersecurity Comps right now due to its revenue mix being 99-per-cent Solutions division and just 1 per cent of the top line coming from the Technology division, we believe PLUR is still significantly undervalued. Considering just its VAR peers, PLUR is being undervalued by 67 per cent. We expect that the majority of the difference is due to the superior margin and profitability profiles of PLUR’s competitors, however, we see PLUR as a hybrid company with greater growth potential due to its proprietary and unique cybersecurity products.”


While he sees it “uniquely positioned to weather turbulent markets,” Desjardins Securities analyst Gary Ho reduced his expectations for AGF Management Ltd.’s (AGF.B-T) second-quarter ahead of its June 22 release.

He’s now estimating earnings per share of 12 cents, down from a previous 15-cent projection and a penny below the consensus on the Street. It’s a drop of 6 cents from the previous quarter.

“Given weaker industry net flows (IFIC reported industry long-term fund net redemptions of $3.7-billion in April and March combined, with May data expected to be soft due to continued market volatility), we lowered our expectations for the quarter (up $253-million previously),” said Mr. Ho. “That said, we believe AGF is punching above its weight, capturing market share. AGF reported May 2022 AUM [assets under management] of $40.3-billion (down 4 per cent from 1Q AUM of $42.0-billion).”

Mr. Ho also reduced his full-year 2022 and 2023 EPS estimates to 81 cents and $1.14, respectively, from 96 cents and $1.30.

Keeping a “buy” rating, he cut lowered his target for AGF shares to $9 from $10.75. The average on the Street is $8.07.

“We foresee a few near- or medium-term positive catalysts: (1) retail net flows trending at or above industry; (2) redeployment of capital for organic growth, to seed new private alt strategies and for share buybacks; (3) growth in fees/earnings from its private alt platform; (4) execution on SG&A cost reduction to improve EBITDA and EBITDA margins; and (5) DSC ban benefiting FCF and EPS,” he said.

Elsewhere, CIBC World Markets’ Nik Priebe lowered his target for to $7.25 from $8.50, maintaining a “neutral” rating.


Echelon Partners analyst Rob Goff called Converge Technology Solutions Corp.’s (CTS-T) acqusIition strategy a “master class” following its deal for three Germany-based organizations.

On Wednesday, the Toronto-based software-enabled IT & Cloud Solutions provider announced a definitive agreement to acquire Gesellschaft für digitale Bildung (GfdB), Institut für moderne Bildung (IfmB) and DEQSTER for approximately $33.7-million up front. It’s the company’s 32nd announced acquisition.

“CTS continues to execute on-strategy, accretive acquisitions as it builds scale,” said Mr. Goff. “Our copy/paste/accrete/repeat description continues to apply. With scale, we could see the Company secure debt financing in excess of $400-million with a comfortable debt:EBITDA of approximately 2.0 times Q422 annualized EBITDA. We look for further acquisitions including a UK platform acquisition prior to Q422 when it will likely narrow its focus to on deal integrations and organic growth. We believe completion of the next round of acquisitions will confirm CTS’s ability to establish a scaled European franchise on an accretive basis using internal financing.”

Keeping a “speculative buy” rating, he cut his target to $12 from $14.50 to “reflect current macroeconomic conditions affecting the cost of capital.” The average is $12.06.

“Where its public market value versus private market value spread narrows as its cost of equity increases, acquisition economics moderate,” he said. “Fortunately, CTS has reached a scale with the financial flexibility to finance acquisitions through internal FCF and debt where the latter represents a lower cost of capital that counters the higher cost of equity. While the market conditions remain tough, we see absolute valuation support considering our 2023 FCF at $0.89 per share values CTS shares at a compelling 14.7-per-cent FCF yield.”


Believing “significant” medium-term risks can be resolved, Citi analyst Charles Armitage raised his rating for Boeing Co. (BA-N) to “buy” from “neutral,” seeing near-term catalysts as “positive.”

“We believe 787 deliveries will resume shortly,” he said. “Similarly, last year, the Chinese authorities agreed what modifications and training are required to return the 737MAX to commercial service. However, prolonged lockdowns in China have limited the demand for capacity. As restrictions are lifted, we expect the 737MAX to return to commercial service. However, we expect both 787 deliveries and 737MAX return to service will occur at some stage (just not sure when). Therefore, we see these events as incrementally positive, rather than a step change in risk.”

“If the 737MAX, 777X (both of reasonable concern to us) and the 787 (of less concern) programs achieve our forecast levels of production and profitability, we estimate fair value to be $209 per share (our new target price), implying 70-per-cent upside. If the 737MAX and 777X only achieve our downside case, we estimate value to be $116 per share, marginally below the current share price. And, if all three programs go badly, we see value at about $84 per share, approximately 30 per cent below the current price.”

His new target of US$209, down from US$219, is below the US$223.43 average on the Street.

“We believe Boeing offers significant value to investors as the market has become increasingly concerned about the outlook for its commercial aircraft programs,” said Mr. Armitage. “While we acknowledge there are questions as to whether reasonable levels of profitability and market share will be achieved, we also feel that this potentially misses a valuable investment opportunity.”


In other analyst actions:

* CIBC World Markets’ Stephanie Price cut his Dye & Durham Ltd. (DND-T) target to $30 from $50, below the $42.50 average, with an “outperformer” rating.

* Canaccord Genuity’s Robert Young reduced his Haivision Systems Inc. (HAI-T) target to $8 from $11 with a “buy” rating. The average is $9.25.

“Haivision reported in-line FQ2 results with revenue modestly ahead and EBITDA in line with Street estimates,” he said. “Management noted headwinds from higher component costs and wages, which will likely pressure margins in the near term. It also noted weakness in the Enterprise vertical despite recent strength in Broadcast and Defense recovery relative to last quarter. As a result, Haivision now expects F22 revenue of $123-127-million and EBITDA margins of 8-11 per cent, which are below our previous estimates of $127.8-million and 11.5-per-cent margin, respectively. In our view, Haivision has managed to contain pressure on its gross margin despite not passing through higher component costs, and we expect AVIWEST and CineMassive (MCS) integrations, including elimination of duplicate costs, could partially offset this pressure. Management expects M&A to remain muted in the near term as it digests its two recent acquisitions along with a recent unannounced tuck-in in France, Dazzl, which appears to be a cloud video acqui-hire. We expect pressure on margins to persist, offset by continuing strength in broadcast and defense.”

* Following the completion of the previously announced sale of its Russian assets, Jefferies’ Christopher LaFemina reduced his Kinross Gold Corp. (KGC-N, K-T) target to US$4.50 from US$5 with a “hold” rating, while Canaccord Genuity’s Carey MacRury lowered his target by $1 (Canadian) to $11 with a “buy” rating. The average is US$7.37.

“In our view, the closing of the transaction is an important step for Kinross that severs any ties or obligations in Russia going forward. We note that the company’s production profile is now weighted 75 per cent to North and South America, and we see the company’s valuation at 0.41 times NAV as overly discounted relative to its senior peers at 0.81 times NAV,” said Mr. MacRury.

Follow David Leeder on Twitter: @daveleederOpens in a new window

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