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

Raymond James analyst Steven Li said he’s “moving to the sidelines” on Baylin Technologies Inc. (BYL-T) after the Toronto-based global wireless technology management company announced weaker-than-anticipated preliminary third-quarter financial results after the bell on Thursday.

Blaming “challenging industry dynamics” that have hurt demand from several of its primary customers, Baylin said it expects revenues of $35-$37-million, missing the $41.9-million expectation on the Street. The gap was due largely to weakness in its Infrastructure Group, which it said has sustained a “softening in its business with its tier one telco customers experiencing a delay and/or reduction in capital expenditures until 2020 as well as a postponement of a significant base station project.”

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Earnings before interest, taxes, depreciation and amortization are now projected to be $1-$1.5-million, versus a consensus forecast of $6.2-million.

“We have been highlighting unfavourable carrier capex dynamics for BYL the past 3-4 quarters and it does not look like its improving," said Mr. Li. "BYL preannounced lower than expected 3Q19 revenue and EBITDA. They did announce a large contract win that starts to ramp in 2Q20. However, between now and then, we expect EBITDA production to be depressed which leaves little margin for error for our EBITDA covenant calculations.”

Waiting to see “a bit more visibility on small cell carrier capex bouncing back,” Mr. Li lowered his rating for Baylin shares to “market perform” from “outperform” with a target of $2.80, falling from $5.75. The average target on the Street is $4.37, according to Bloomberg data.

“This new level of EBITDA guide ($1-million-$1.5-million) could be problematic,” he said. “While we expect BYL to improve EBITDA in 4Q19 and 1Q20, we are not expecting a significant jump in EBITDA until 2Q20 when the large MIMO contract starts to ramp. As a result, while we still show BYL remains onside on covenants, we believe it gets tight in 1Q20 especially as we expect BYL to consume cash in 2H19 (as they build the Vietnam factory). This leaves little margin for error.”

Elsewhere, Cormark Securities’ Gavin Fairweather downgraded Baylin to “market perform” from “buy” with a $2.60, down from $4.75.


Cenovus Energy Inc. (CVE-T) is the “comeback kid,” said RBC Dominion Securities’ Greg Pardy.

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In a research note released Thursday, the equity analyst said the Calgary-based company’s “operating momentum and velocity of change from a balance sheet deleveraging perspective have become unmistakable.”

“This has been no accident,” he added. “Under the stewardship of its new leadership team — notably Alex Pourbaix, CEO, and Jon McKenzie, CFO, Cenovus has prioritized debt reduction and market access — and made hay amid Alberta’s mandated production curtailments.”

Mr. Pardy applauded Cenovus’ ability to “substantially” achieve its $7-billion net debt target, noting a $5-billion target is in sights alongside a similar capital program in 2020. He also looks at crude-by-rail “as an enduring component of its egress strategy,” pointing to a ramp-up in volumes by the end of 2019.

“In our minds, the next legs of the Cenovus story revolve around (1) enhanced resiliency, and (2) unlocking shareholder returns,” he said. "Enhanced resiliency has everything to do with balance sheet strength and cash flow volatility mitigation towards heavy oil differentials in a no-curtailment world. We think Cenovus’ contemplated 180,000 bbl/d Diluent Recovery Unit could be a strategically sound step aimed at reducing its annual condensate blending requirements by as much as 60,000 bbl/d.

“In our view, Cenovus is unlikely to swallow the entire COP block, should it become available, but appears well heeled to repurchase anywhere from one-third to one-half with free cash flow after dividends in 2020, depending on oil prices. ConocoPhillips has indicated that it is not a long term shareholder of Cenovus, but is also in no rush to sell these shares.”

Citing a “reinforced confidence in the company’s game plan,” Mr. Pardy hiked his target for Cenovus shares to $17 from $14 and reaffirmed an “outperform” rating. The average on the Street is $14.94.

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“With consistent execution, a fortified balance sheet, enhanced resiliency, competitive shareholder returns and alleviation of the COP block, we believe that Cenovus’ relative cash flow multiple could further narrow the gap on its North American integrated peer group,” he said. “Every multiple point change in Cenovus’ 2020 estimated valuation would equate to a share price movement of $2.80, predicated on our base outlook.”


Vancouver-based Enthusiast Gaming Holdings Inc. (EGLX-X) is a “rare pure-play esports investment opportunity.” according to Canaccord Genuity analyst Robert Young.

Believing the digital media company focused on the video game community is “well positioned to capitalize on the long-tailed growth opportunity” in the North American esports market, which he projects to expand at a 34-per-cent compound annual growth rate to US$2.1-billion in 2023, Mr. Young initiated coverage of the stock with a “speculative buy” rating.

He said the company, a combined entity resulting from the merger of a pair of “established” brands in Enthusiast Gaming Properties and Luminosity Gaming, is likely to “leverage international relationships with brands, digital advertisers, and esports industry stakeholders to accelerate its operational and financial objectives.”

Though diversification across several “high-growth verticals within the space,” Mr. Young said it “offers an authentic and broad-based esports platform, creating a unique sponsorship opportunity for customers.”

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“Enthusiast Holdings is increasingly seen as a consolidator with growing scale in a fragmented space,” said the analyst. “We believe that planned investments in direct sales have the potential to unlock significant value from the company’s established and growing community of engaged users. As well, a foray into a recurring subscription model via the acquisition of The Sims Resource provides access to a predictable source of high-margin revenue and a template for an expanded subscription model across the broader business.”

“We model the business exiting 2019 with $21.4-million of cash on the balance sheet. We expect this will allow Enthusiast Holdings to act opportunistically on M&A opportunities without dilution. We currently model the company burning $1M-3-million per quarter in operating and investing activity over the next two years, although the company can flex its marketing spend and capital investment as appropriate to manage growth.”

Currently the lone analyst on the Street covering the stock, Mr. Young set a target price of $3.60 for Enthusiast Gaming shares.

“Our target price of $3.60 is derived using a DCF analysis (15.0-per-cent WACC, 4.0-per-cent TGR) and implies 9.0 times our 2020 estimated enterprise value-to-sales estimate of $35.7-million,” he said. “The company currently trades at 5.4 times. The most relevant peers are all privately owned; public comps in the media and gaming space average in the range of 2.7 times to 5.0 times 2020 estimated EV /Sales. We believe EGLX deserves a premium for its outsized growth potential and esports/video gaming focus.”


A group of equity analysts raised their target prices for shares of Northland Power Inc. (NPI-T) on Thursday after coming off restrictions in the wake of the $1.05-billion acquisition of Energia de Boyaca (EBSA), a regulated utility in Colombia.

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On Wednesday, the Toronto-based utility announced the closing of a bought deal offering of 14,289,000 shares at $24.25 for gross proceeds of $346.5-million, which are intended to fund the deal.

Raymond James’ David Quezada called the acquisition “an intriguing foray into a new geographical region.”

“As the company has indicated in the past, Latin America will represent a potential source of future generation projects and we see EBSA as a platform to drive future opportunities,” he said. “As other IPPs participating in Latin America have noted (Atlantica Yield) local relationships are key to sourcing early stage development projects. Accordingly, while we believe this acquisition stands alone on its financial merits we see the true value of it in the longer term strategic benefits it can bring. We anticipate a key to this deal will be EBSA’s grandfathered regulatory rights that allow for vertical integration and corresponding potential to participate in all segments of the country’s electricity sector. Equally important, EBSA has a long tenured management team (16 years on average) which we expect mitigates the challenge of moving into a new business segment for NPI (note: under the regulated utility model synergies related to reduced headcount do not lift earnings). As an important long term ancillary benefit we also believe this acquisition will reduce NPI’s exposure to re-contracting or merchant power price.”

Maintaining a “strong buy” rating, Mr. Quezada hiked his target to $32 from $30.50. The average on the Street is $28.40.

“Our bullish stance on Northland has been predicated in the company’s ambitious moves into power (and now utility) markets globally,” he said. “In light of the new normal with respect to returns on contracted power investments, we believe this entrepreneurial spirit is necessary to drive attractive returns above an IPPs cost of capital. As we have highlighted in the past, we believe the spread between Northland’s project returns and cost of capital is among the widest within the Canadian IPP space. Thus, we believe this acquisition is emblematic of Northland’s approach to expanding the business.”

Elsewhere, Industrial Alliance Securities analyst Jeremy Rosenfield raised his target by a loonie to $32 with a “strong buy” rating (unchanged).

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Mr. Rosenfield said: “NPI offers investors an attractive mix of (1) stable cash flows from contracted power assets (~2GW net in operation, 11-year weighted average contract term), (2) healthy FCF/share growth (6-8 per cent per/year, CAGR 2018-23 estimated, excluding the Taiwan offshore wind projects), (3) longer-term potential upside (Taiwan and organic development activity), and (4) an attractive dividend profile (5-per-cent yield, 50-70-per-cent FCF payout over 2018-23E). The acquisition of EBSA is expected to provide support to NPI’s growth outlook, with some immediate benefits from incremental cash flow diversification.”

Raising his target to $29 from $28.50 with a “buy” rating, Desjardins Securities’ Bill Cabel said: “We believe the upside potential from the offshore wind projects, coupled with a solid operating base, provides an attractive opportunity at current levels. Further, value should be unlocked as the DeBu and Hai Long 2A, 2B and 3 offshore wind projects are derisked and as NPI continues to push its development work forward, in our view.”


Voti Detection Inc. (VOTI-X) “radiates with growth potential," said Haywood Securities analyst Daniel Rosenberg.

Emphasizing the Montreal-based small-cap technology company, which focuses on the development and modernization of X-ray screening platforms and detection software, is “competing and winning against large global peers,” Mr. Rosenberg initiated coverage of the stock with a “buy” rating.

“With sales having grown from $4-million in FY16 to $23-million in FY18 and guidance for 25-per-cent revenue growth into FY19, the Company continues to see strong traction with its solutions in market," he said. "Compared to market growth estimated at 6-7 per cent, VOTI’s organic growth rate is meaningfully outperforming. VOTI has secured several marquee customers through competitive bidding processes against much larger peers – Notable customer wins include: Amazon, Tiffany’s, Carnival Cruise Line, the U.S. Air Force, Madison Square Garden and other.”

“Uptake of VOTI’s products stems from significant investment in R&D leading to the development of its proprietary 3D PerspectiveTM technology. It allows for a superior image quality, helping to improve public safety by enabling operators to better detect threats. Along with feature rich software applications built on top of its BioSans operating system, VOTI’s offering is driving significant customer value at a competitive price point.”

Seeing a large market opportunity and emphasizing the company’s guidance for 25-per-cent growth in fiscal 2019, he set a target price of $3.75 per share. The average is $3.88.

“VOTI is in the early days of establishing itself as a leader in the threat detection market,” he said. “The Company is seeing strong traction from its differentiated technology with marquee customers. Impressive revenue growth combined with improving margins make VOTI an attractive investment opportunity at current levels.”


In other analyst actions:

Seeing it well positioned to capture “a significant share of the alternative meat market," Barclays analyst Benjamin Theurer initiated coverage of Beyond Meat Inc. (BYND-Q) with an “overweight" rating and US$185 target, which implies a potential 20-per-cent rise from its closing price on Wednesday. The average on the Street is US$148.83.

Editor’s note: An earlier version of this story incorrectly identified Daniel Rosenberg's firm. He is an analyst at Haywood Securities. This version has been updated.

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