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

Seeing its risk-reward proposition “more balanced” with strong metal prices and following a recent equity raise, RBC Dominion Securities analyst Mark Mihaljevic raised his rating for New Gold Inc. (NGD-A, NGD-T) on Thursday.

Moving the Toronto-based miner to “sector perform” from “underperform,” Mr. Mihaljevic thinks New Gold’s financial position has improved “markedly."

“We now assume the company only requires a modest draw on its revolver in H2 to fund its 2019 capital program ($150-million previously) and no longer model any additional equity capital being raised (US$200-million previously),” he said. “We expect the company to provide an update on its long-term debt refinancing strategy in early-2020 following release of life-of-mine plans at Rainy River and New Afton. While the balance sheet has improved, the financial position remains highly levered with 2019 estimated net debt-to-EBITDA of 3 times and we believe ongoing deleveraging would benefit the company’s fundamental positioning.”

“The company has started to deliver somewhat stronger operational results, primarily driven by ramp-up of the plant at Rainy River. That being said, there is still significant uncertainty around the long-term outlook at both Rainy River and New Afton, ahead of updated mine plans.”

Mr. Mihaljevic increased his target price for New Gold shares to US$1.30 from US$1. The average on the Street is currently US$1.27, according to Bloomberg data.


With its fundamentals remaining “strong despite some stumbles,” Mr. Mihaljevic raised his rating for Pan American Silver Corp. (PAAS-Q, PAAS-T) to “outperform” from “sector perform,” calling it “one of the highest-quality silver producers globally.”

“Pan American remains a well-run precious metals company which we believe should be a core holding for investors,” he said. “The company continues to deliver steady operational results and we expect a stronger H2 driving a rebound in FCF [free cash flow], which should support deleveraging of its balance sheet and ongoing capital returns. While COSE/Joaquin were delayed, the projects are relatively minor contributors to our valuation. The other factor differentiating Pan American’s fundamentals from peers is its diversification across operations, jurisdictions, and commodities.”

“We downgraded Pan American in late 2018 given risk around the Tahoe acquisition. With the market largely discounting Escobal and the company demonstrating better than expected results from Shahuindo and Timmins, we believe risks have moderated. At Shahuindo, Pan American has encountered higher grades, which appears to be driven by cross-cutting structures not fully captured by historical drilling. At Timmins, productivity gains from the Bell Creek shaft have been realized more quickly than expected and the operation is benefiting from record CAD gold prices.”

Believing the “significant” optionality of its portfolio is “largely underappreciated,” Mr. Mihaljevic hiked his target to US$23 from US$17 to reflect “our updated silver and gold price forecasts, rolling forward EBITDA forecasts by a quarter, and modestly higher assumed value for the company’s development pipeline at stronger metals prices.” The average on the Street is US$19.83.

“While valuing optionality in a portfolio can be challenging, we believe the market has largely discounted opportunities in the company’s pipeline," he said. "The most impactful could be restart of Escobal, and while a restart date is unclear, we believe investors should not underestimate its inherent value. While still early-stage, the skarn discovery at La Colorada could further transform the company’s flagship asset. Its Navidad project has potential to be another world-class silver project, even if Argentina is a challenging jurisdiction. La Arena II offers a large-scale copper-gold project, which could be monetized in a stronger base metals environment.”


On Thursday, Mr. Mihaljevic also lowered his ratings for the following equities:

Kirkland Lake Gold Ltd. (KL-T) to “sector perform” from “outperform” with a target of $72, rising from $54. The average is $62.99.

Torex Gold Resources Inc. (TXG-T) to “sector perform” from “outperform” with a $24 target, up from $19. The average is $22.13.

TMAC Resources Inc. (TMR-T) to “sector perform” from “outperform” with a $7 target, falling from $6 and below the $8.39 target.


In the wake of a sharp drop that has seen its share price slide by almost 50 per cent since early March, BMO Nesbitt Burns analyst Tamy Chen raised her rating for Cronos Group Inc. (CRON-T, CRON-Q) to “market perform” from “underperform," seeing it now trading largely in line with valuations of other large cannabis producers.

Ms. Chen cautioned that she remains neutral on the stock, believing Cronos ’production and recreational sales volumes are behind some of its key peers. She also pointed to significant uncertainty in timing of value-added product rollouts and initial investments to make these products could pressure margins.

The analyst lowered her target to $16 from $17, which falls below the current consensus of $19.64.


Canaccord Genuity analyst Raveel Afzaal expects investors to greet Goodfood Market Corp.'s (FOOD-T) fourth-quarter financials with a “muted” reaction, calling the expected early November report a “non-event" following Wednesday’s release of net customer addition results.

Instead, he thinks the focus remains squarely on its ability to attract new customers in the first quarter of fiscal 2020.

“We expect robust net customer adds in Q1/F20 as it is seasonally the strongest quarter for the company,” he said. “Second, website results indicate a considerable lead over HelloFresh, which we view as a leading and very positive indicator of continued strong growth momentum for Goodfood. We expect Q1/ F20 net adds to increase confidence in our net revenue forecast of $240-million for F2020 (from $190-million current annualized run-rate estimate) with upside potential.”

The Montreal-based meal kit company said it gained 11,000 customers during the quarter, exceeding Mr. Afzaal’s “conservative” forecast of nil.

“We understand almost 50 per cent of the net customer adds relate to recently launched breakfast offering,” the analyst said. “The company ended the year with 200k customers, representing sharp growth over 89k customers in F2018.”

“We believe the majority of customers were added near the end of the quarter as it ramped up its ‘back-to-school’ marketing campaigns. Further, we expect lower revenues from customers which have signed up exclusively for the breakfast meal plan.”

Though he lowered his EBITDA forecast for the quarter to a loss of $4.4-million from a $4.8-million loss to account for declining gross customer add and customer churn assumptions, Mr. Afzaal thinks the potential for “strong” first-quarter growth and a positive sector sentiment could drive the company’s share price higher.

With a “speculative buy” rating (unchanged), he lowered his target to $3.75 from $4.50. The average on the Street is $4.39.

“We believe the market will likely not award Goodfood a multiple higher than that for HelloFresh until it is able to complement its strong revenue growth with a meaningfully positive EBITDA trajectory,” he said. “However, once it has achieved profitability (expected in F2021), Goodfood could trade at a premium due to a higher growth rate and lower CAC. Accounting for this, we have lowered our EV/2020 Sales multiple from 1.1 times to 0.9 times, which results in our TP declining.”


With margins kicking “into high gear,” Descartes Systems Group Inc. (DSGX-Q, DSG-T) delivered again with its second-quarter results, said Canaccord Genuity analyst David Hynes.

“We took away several important observations from Descartes’ solid FQ2 results: (1) the firm has yet to see any material slowdown in the volume of trade transactions on its GLN [Global Logistics Network], and in fact, several of the firm’s trade data content assets have benefited from ongoing trade volatility; (2) EBITDA outperformance continues to impress, growing 32 per cent year-over-year in the quarter, which is being driven in large part by the incremental high margins with which the early 2019 acquisition of Visual Compliance is now contributing; and (3) we expect that the firm’s active M&A strategy will continue, exemplified by three tuckin acquisitions since May, as Descartes remains well capitalized following a $245-million secondary in June and management remains quite upbeat about the pipeline,” said Mr. Hynes.

The analyst maintained a “buy” rating and US$44 target for the Waterloo, Ont.-based tech company’s stock. The average is currently US$41.67.

“DSGX has pulled back a bit, but it still isn’t what we’d consider a bargain at 28 times EV/FCF [enterprise value to free cash flow] on calendar 2020 estimates,” he said. “In an expensive space that today still favors growth, we think it’s a good idea to diversify a bit and own a name like Descartes, which is built to generate consistent cash flow. In our view, consistency – in both communications and execution – is key to sustaining a premium valuation, and on that basis, this team gets high marks. We don’t see this changing, which is why we think you can continue to own DSGX.”

Elsewhere, Laurentian Bank Securities analyst Nick Agostino raised his target to US$38 from US$37 with a “hold” rating.

Mr. Agostino said: “Global trade winds are fostering an active business market for DSG denoted by healthy transaction activity, and growing demand for global trade data and customs/regulatory data. As well increased customer service delivery requirements are fueling an active ecommerce/omni-channel market. This level of activity is strengthening DSG’s business outlook, which is reflected in their financial performance consistency. Our only concern at this time relates to the growing number of carriers going out of business in North America due to demand volatility. Any continued softness in this segment could dampen DSG’s organic growth, and place greater emphasis on the rate of M&A activity, else impact results.”


Credit Suisse analyst Lauren Silberman said she has “increased confidence in the trajectory of the turnaround” for Papa John’s International Inc. (PZZA-Q) following the appointment of former Arby’s president Rob Lynch as its chief executive officer last week.

That led her to raise her rating for the fast food chain to “outperform” from “neutral.”

“We expect Lynch will leverage his experience with the Arby’s turnaround to develop a strategy for PZZA, including a focus on improving franchisee relationships and profitability, enhancing the marketing strategy, increasing the pipeline of new menu innovation and leveraging data analytics to drive decisions,” said Ms. Silberman. “We believe Papa John’s new leadership team can help reignite franchisee and investor sentiment as the brand moves farther away from the media scandals, and anticipate both franchisees and investors will give Lynch time to develop and implement a new strategy.

“When we initiated on PZZA with a Neutral on 6/25, we were cautious on the outlook behind ongoing consumer challenges, lack of effective value messaging, limited visibility into the marketing strategy, reduced efficacy from quality positioning and a struggling franchisee base. We now expect new management to leverage a similar playbook to Arby’s, offering increased visibility into a potential turnaround strategy. We anticipate PZZA will work to change the brand narrative through a unified marketing message to highlight its quality positioning with new menu innovation, increase its use of social media and develop a more engaging personality, which should also help improve consumer perceptions. Early focus on franchisee profitability through top-line initiatives and cost savings opportunities, and increased utilization of data analytics should support improved franchisee relationships and franchisee buy-in."

After increasing her earnings expectations for fiscal 2020 and 2021, Ms. Silberman hiked her target to US$56 from US$45. The average is currently US$58.11.


M Partners analyst Paul Piotrowski initiated coverage of Slang Worldwide Inc. (SLNG-CN), a Toronto-based branded cannabis consumer packaged goods, with a “buy” rating on Thursday.

“We believe SLANG’s strong brand portfolio, differentiated capital light business model and widespread distribution position the Company to succeed in the growing worldwide legal cannabis market,” he said.

Mr. Piotrowski set a $2 target. The current average target is $2.13.

“The Company currently trades at 1.6 times 2020 revenue vs. peers at 1.8 times, and 7.2 times 2020 EBITDA vs. peers at 10.4 times,” he said. “Shares coming out of lock-up, the accelerated warrant expiry and a general pull-back in cannabis have put pressure on the share price; however we believe selling at these levels is unwarranted and presents an attractive entry point for investors. At current valuations, SLANG presents a very exciting opportunity to gain exposure to one of the best-selling cannabis brand portfolios in the U.S., with a growing international presence.”

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