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

The dismissal of co-CEO and chairman Bruce Linton is a “blow” to Canopy Growth Corp. (WEED-T), according to Desjardins Securities analyst John Chu, who expects Wednesday’s move to create near-term uncertainty in terms of both the company’s leadership and direction.

Mr Linton was generally viewed as a trailblazer and visionary, and was the face of the company. The company does have a deep management team but we still view Mr. Linton’s departure as a meaningful loss,” said Mr. Chu.

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With the move, the analyst lowered his forward enterprise value-to-EBITDA multiple (for fiscal 2023) to 28 times from 30 times to “reflect the increased uncertainty.”

That led him to trim his target price for Canopy shares to $59 from $63 with a “hold” rating (unchanged). The average target on the Street is currently $69.02, according to Bloomberg data.

“The uncertainty surrounding the company’s leadership and strategic direction likely puts pressure on the stock in the near term,” he said.


Despite trimming his financial estimates ahead of the expected late July release of its second-quarter financial results, Industrial Alliance Securities analyst Elias Foscolos raised his rating for shares of Secure Energy Services Inc. (SES-T) on Thursday in reaction to recent price weakness.

“With SES’s strong balance sheet, year-over-year EBITDA growth projected for Q2/19, a more stable EBITDA profile from its MI segment, and over 2 million shares repurchased in the quarter, we believe the company represents a compelling investment,” he said.

In late April, the Calgary-based company released first-quarter results that largely fell in-line with Mr. Foscolos’s expectations, including an increasing proportion of revenue earned by its midstream infrastructure segment. According to his calculations, it now contributes 85 per cent of the company’s EBITDA, leading him to say the company’s business has “transformed.”

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“This is compared to 2014, when the segment (formerly Processing, Recovery, and Disposal) was 59 per cent of EBITDA,” the analyst said. “The result is that SES now has more high-margin, recurring revenue that is not tied to the drill bit.”

However, Mr. Foscolos lowered his operating income expectations for fiscal 2019 and 2020 as a result of lower projected rig counts and margin assumptions. That led to a 6-per-cent and 4-per-cent decline in his EBITDA projections, respectively.

Moving the stock to “strong buy” from “buy,” he lowered his target to $10 from $10.25. The average on the Street is $10.92.


Despite possessing “strong” fundamentals, Canaccord Genuity analyst Derek Dley expects Alimentation Couche-Tard Inc. (ATD.B-T) to report softer-than-expected fourth-quarter financial results on July 9.

Mr. Dley is projecting earnings per share for the Quebec-based convenience store operator of 50 cents for the quarter, which falls 7 cents below the consensus forecast on the Street and 9 cents below the result during the same period a year ago.

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Though he’s expecting same-store merchandise growth to continue, driven largely by strong sales of tobacco-related products, Mr. Dley expects fuel margins to contract “slightly.”

“Our weighted-average fuel margin calculator suggests a U.S. fuel margin for the quarter of 15.8 cents per gallon, slightly below the company’s Q4/F18 average of 17.3 cents per gallon and well below Q3/F19’s record high U.S. fuel margin of 29.4 cents per gallon,” he said. “Additionally, we are forecasting a 1.0-per-cent increase in same-site fuel volumes in the U.S., as well as a 0.5-per-cent decrease in same-site fuel volumes in Canada and Europe due to increased competition.”

Mr. Dley lowered his full-year EPS estimates “to reflect our weighted-average fuel margin calculation, as well as our interest and depreciation assumptions, which we believe were too conservative." For fiscal 2019 and 2020, he’s estimating EPS of $3.29 and $3.06, respectively, from $3.42 and $3.38.

Despite that drop, he raised his target price for the company’s shares to $82 from $78, which remains below the consensus of $84.63.

He maintained a “buy” rating.

“In our view, Couche-Tard offers investors an attractive combination of both organic and acquisitive growth, which coupled with management’s track record, and opportunities abroad, will allow the company to capitalize on accretive growth opportunities," said Mr. Dley.

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Upon resuming coverage of the stock, Desjardins Securities analyst Maher Yaghi raised his target for shares of TeraGo Inc. (TGO-T), believing a recent $8.9-million bought deal offering provides additional flexibility for the Thornhill, Ont.-based telecom provider.

“While the stock was offered at a discount of 14 per cent (at $11.00) vs the prior closing price, we highlight that it was up more than 20 per cent between the time ISED [Innovation, Science and Economic Development Canada] unveiled certain rules for upcoming spectrum allocation and the announcement of the bought deal,” he said. "ISED’s decision to allow flexible use of high-frequency bands and the expectation of a millimetre wave auction to be held in 2021 boosted TGO’s stock value as they provide the company with more options regarding the use of spectrum.

“Overall, we believe this financing is opportunistic as it improves TGO’s financial flexibility and potentially puts it in a better negotiating position if it becomes a serious takeover candidate.”

After nudging up his earnings expectations for the next two fiscal years, Mr. Yaghi increased his target to $9.50 from $7. The average on the Street is $11.50.

He kept a “hold” rating.

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“ISED’s millimetre wave announcement on June 5 helped drive TGO shares higher on the perception of increased odds of a takeout; it also enabled TGO to issue equity to fund technical trials related to 5G fixed wireless. While on a fundamental basis we see downside in the stock at these levels and while further upcoming government decisions could affect valuation, we maintain our Hold rating given a possible takeout of TGO by a wireless incumbent as 5G deployment nears.”

He added: “TGO operates within a very competitive environment. Management’s focus on offering new products to larger clients could help top-line growth; however, it will likely take a few quarters before these efforts impact results. Potential upside to our target could come from the company’s spectrum holdings, which could increase in value depending on how important wireless incumbents believe this spectrum might be to a launch of 5G services.”


Industrial Alliance Securities analyst Elias Foscolos expects Enerflex Ltd. (EFX-T) to “play it safe” over the next few quarters, believing recent executive changes have caused “some uncertainty.”

“Enerflex’s share price (whether we agree with this or not) has historically shared a loose correlation with Engineered Systems backlog,” he said. “At the end of Q1/19, EFX’s share price was reflective of backlog. However, this was before the Company actually released the data with its financial results on May 2, after which the share price dropped 6 per cent. We are forecasting bookings to stabilize between $250-350-million in Q2/19 and for backlog to slightly decline. Commentary on the call indicated that the pipeline of opportunities remains strong, but bookings for the year would likely be back-end loaded.”

Mr. Foscolos pointed to three uncertainties that are currently affecting the company’s share prices and cause him to “temper” his outlook.

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1. Though bookings have improved, it hasn’t been enough to “move” the stock.

“Enerflex’s quarterly bookings have always been hard to estimate," he said."However, since the departure of Blair Goertzen and James Harbilas, we have decided to sharpen our pencils. Upon further investigation, bookings demonstrate a rough correlation with the trailing quarter’s price for WTI crude. As can be seen, Q1/19 bookings were an outlier, with unusually slow bookings relative to Q4/18 oil prices. Enerflex cited capacity constraints and large backlog causing difficulty meeting customer delivery windows, and project delays as issues causing this slowdown. Although WTI declined in Q1/19, we are anticipating an uptick in bookings in Q2/19. Our forecast is for bookings of $250-350-million in Q2/19. We believe that the market would need to see bookings upwards of $400-million before moving the stock, which we view as unlikely in Q2/19.”

2. The impact of management changes, including the retirement of former president and chief executive officer Blair Goertzen.

3. The belief acquisitions are “on the back burner."

“Although we did not reduce our near-term estimates with the departure of [former executive vice-president and chief financial officer James Harbilas], we do believe that the likelihood of an acquisition has declined with the new management team," said the analyst. "We believe the Board will favour conservatism and organic growth of recurring revenue streams while the Company grows into its new management team.”

Based on those issues, Mr. Foscolos was compelled to lower his target for the stock to $23 from $24.50. The average is $23.61.

“Given the 37-per-cent projected total return resulting from our revised target, we are electing to maintain our Buy recommendation for this geographically diversified, low leverage stock,” he said.


Following the Wednesday’s release of “soft” quarterly results, Haywood Securities analyst Daniel Rosenberg said the transition to Software as a Service (SAAS) revenue remains a “near-term drag” on Tecsys Inc. (TCS-T).

The Montreal-based company reported fourth-quarter revenue of $23.2-million, up 23 per cent year-over-year but below the projections of both Mr. Rosenberg ($24.7-million) and the Street ($24.4-million).

However, the company saw its backlog grow to a record $76.6-million.

“Tecsys now has five quarters in a row of increasing backlog which is a strong indicator of growth in FY20 and FY21,” said the analyst. "SaaS based bookings represented 60 per cent of software bookings compared to 4 per cent in Q4FY18.

“While Tecsys is seeing strong growth in its SaaS bookings, it is leading to near-term pressure on financials. Management estimates a $1.5M impact in Q4 alone. The shift to SaaS will lead to improved economics in the long-term.”

Pointing to the SaaS transition and slower-than-anticipated cross-selling opportunities for recent acquisitions, Mr. Rosenberg lowered his revenue and EBITDA estimates for fiscal 2020 to $99.7-million and $5.7-million, respectively, from $105.6-million and $10.6-million.

Keeping a “buy” rating for the stock, he dropped his target to $18 from $20. The average is $17.50.

“We like Tecsys due to its record backlog, increasing scale, healthy balance sheet, and experienced management team. We also like the recent acquisitions, which provide new platforms for growth into Europe and broaden its product offering.”

Elsewhere, Echelon Wealth analyst Amr Ezzat lowered his target to $17 from $19 with a “buy” rating (unchanged).

Mr. Ezzat said: “While the P&L is once again pressured by the Company’s effort to steer the business towards a subscription model (ie, less up-front perpetual license payments), operationally the Company continues to showcase very strong momentum. The additions of PCSYS into the Company’s P&L and a full-quarter contribution of OrderDynamics positively impacted revenues but the latter put a damper on earnings. While we acknowledge that the transition to SaaS has impacted revenues more severely and rapidly than we had anticipated, the business fundamentals are strong as ever with the Company achieving a third consecutive quarter of record bookings. We remain fans of the acquisitions of PCSYS and OrderDynamics. Both are sound strategic moves that greatly enhance TECSYS’ addressable market and growth profile going forward. We are reiterating our Buy rating. Our DCF-derived target price moves to $17.00/shr from $19.00/shr on short-term P&L pressure as the Company transitions the business to SaaS. We believe a much more aggressive return profile is possible beyond our 12-month target price should the Company successfully complete its transition.”

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