Inside the Market’s roundup of some of today’s key analyst actions
Wheaton Precious Metals Corp. (WPM-T) is “like an ETF, only much better,” said Industrial Alliance Securities’ George Topping following Analyst Day in Toronto on Wednesday.
“Since its inception 15 years ago, Wheaton has invested $9-billion into streaming contracts generating $6-billion in cash flow to date and an average annualized after-tax return of 17.5 per cent,” said Mr. Topping. “What particularly stands out to us is the value add in a precious metals streamer like Wheaton versus passive ETFs and physical bullion. WPM (up 990 per cent) has outperformed gold (up 255 per cent) and silver (up 145 per cent) with lower management expense ratio (G&A) costs and a 1-per-cent dividend to boot.”
Mr. Topping said Wheaton’s 75-per-cent gold stream on Vale SA’s (VALE-N) Salobo mine remains its cornerstore assets, and emphasized that “as Vale grows so will Wheaton.”
“The Salobo III expansion is planned to increase throughput to 36 million tons per annum (currently 24 Mtpa) starting in H1/22,” he said. “Wheaton’s 42.4-per-cent cobalt stream on Vale’s Voisey Bay mine goes into effect in 2021 and since most of the world’s cobalt is sourced from DR Congo, Voisey Bay cobalt may even garner a premium to market once the stream kicks in. Overall, the pipeline is strong with Wheaton’s current attributable reserves lasting more than 30 years with another 30 years or more in resources.”
Noting it still trades behind peer Franco-Nevada Corp. (FNV-T) and it is “well positioned to outperform,” Mr. Topping maintained a “buy” rating and $49 target. The average on the Street is $43.67.
“Wheaton has about equal weighting in both gold and silver. The relatively high silver exposure has been a tailwind given the outperformance of the metal. While being less diversified (2 assets, Salobo and Peñasquito, account for 56 per cent of NAV) hurts when a key mine suffers a blockade or strike, the stock is cheap relative to peer Franco-Nevada. We estimate GEOs will grow 8 per cent by 2022 to 750,000 ounces as more contribution from the pyrite leach project at Peñasquito comes in and the Voisey Bay stream starts in 2021.”
Elsewhere, CIBC World Markets’ Cosmos Chiu said the event showcased a “streamlined” business model. He kept an “outperformer” rating and US$33 target.
Mr. Chiu said: “The company demonstrated a clear focus on ESG and stakeholder engagement, and management sounded clear and confident in WPM’s corporate strategy moving forward. We continue to recommend the company as it closes its current P/NAV discount to peers (WPM trades at 1.8 times P/NAV vs the peer group at 2.3 times), and also highlight its 42-per-cent revenue exposure to silver (2019-2023) as an additional driver of potential upside.”
Raymond James raised its precious metals price forecasts on Thursday, pointing to a “strong set-up for the metals as a result of heightened geopolitical tensions, continued likelihood of further rate cuts, weak economic data in key regions, and in the case of palladium, supply constraints.”
The firm’s 2019 average gold price forecast increased to US$1,403 per ounce (from $1,353/oz), while its 2020/21 gold price forecasts rose to US$1,500/oz and US$1,450/oz (from US$1,400/oz) and its long-term forecast jumped to US$1,400/oz (from US$1,350/oz).
At the same time, its 2019 silver forecast increased to US$16.49/oz (from US$15.49/oz) with a long-term price of US$17.50/oz (from US$17.00/oz).
“An expectation for further rate cuts, coupled with heightened geopolitical tensions and weak economic data from a number of key regions are key elements for our forecasts,” the firm said. “We caution that there may be continued volatility in both metals in response to headlines and economic data, but recommend using these occasions as buying opportunities. Of note, we expect that news relating to a US-China trade deal and further U.S. interest rate cuts will be key points of interest for the precious metals. While an economic slowdown could curtail palladium demand and give prices a reason to pause, the physical market remains very tight which should support prices. With palladium autocatalyst demand set to mark new highs in 2019 and 2020 and limited supply expected, it is forecasted by Metals Focus that above ground inventories will drop to 12 months of cover, half of what it was at the start of the decade with some concern that above ground stocks and producer inventory releases will not be able to sustain the current market.”
With the changes, the firm’s equity analyst raised their target prices for the majority of precious metals producers in their coverage universe.
They also made a trio of rating changes.
Pointing to the expectation of a “strong” second half of 2019 and “attractive” relative valuations, Farooq Hamed upgraded OceanaGold Corp. (OGC-T) to “strong buy” from “outperform” with a $5.75, rising from $5.50 and above the $5.02 consensus.
Tara Hassan raised Endeavour Mining Corp. (EDV-T) to “strong buy” from “outperform” with a $37 target, up from $34 and exceeding the consensus of $33.19.
At the same time, Brian MacArthur lowered Coeur Mining Inc. (CDE-N) to “market perform” from “outperform” due to valuation concerns. He raised his target to US$6.25 from US$5.50, versus a US$6.62 consensus.
Pointing to both its recent share price appreciation and a rise in copper prices, BMO Nesbitt Burns analyst Jackie Przybylowski cut First Quantum Minerals Ltd. (FM-T) to “market perform” from “outperform.”
Though she did not make any changes to the company’s operating assumptions, Ms. Przybylowski expressed concern about the “leveraged copper name” in a weaker global economy.
“We continue to assume FM is not acquired,” she said. “Sspeculation of a FM acquisition is not new. However, at this time, we have yet to see compelling evidence that acquisition is imminent. Without an acquisition premium, we view FM as fully valued at current prices.”
On the heels of a run that has seen the stock jump almost 50 per cent from an August low, she lowered her target to $11.50 from $15, which falls below the $15.20 average.
AGF Management Ltd.'s (AGF.B-T) “prudent use of capital should translate into shareholder value,” said Desjardins Securities analyst Gary Ho in the wake of Wednesday’s release of quarterly results he deemed “net neutral.”
The Toronto-based asset manager reported adjusted earnings per share of 18 cents, exceeding Mr. Ho’s projection by 3 cents and the consensus expectation on the Street by 4 cents. However, earnings before interest, taxes, depreciation and amortization (EBITDA) fell short of his expectation ($17.2-million versus $18.4-million), due largely to lower management fees.
“The S&W cash proceeds will likely be used for debt repayment and buybacks near-term as management pivots to growing its alternatives business over time," he said. "AGF trades at an attractive 2.8 times forward EBITDA and we could see a re-rating of the stock after the transaction closes.”
With the results, he raised his 2019 and 2020 EPS estimates to 47 cents and 53 cents, respectively, from 45 cents and 51 cents.
Calling it his preferred name in the sector, he maintained a “buy” rating and $8.50 target. The average on the Street is $7.29.
“We foresee a few near- or medium-term positive catalysts: (1) management paying down debt and buying back stock from S&W proceeds; (2) growth in fees/earnings from its alts platform to become a more meaningful part of AGF; (3) execution on SG&A cost reduction to improve EBITDA and EBITDA margins; and (4) all of these factors leading to better sentiment and valuation,” said Mr. Ho.
RBC Dominion Securities analyst Joseph Spak thinks Tesla Inc.'s (TSLA-Q) deliveries in the third quarter are likely to come in better than initially expecting, leading him to raise his estimates to 97,200 vehicles from 86,300.
“Versus prior expectations, Europe looks to be coming in stronger, particularly the Netherlands with launch of M3 RHD in UK help,” he said. “Geographically, we forecast 55k total units in U.S., Canada 5k, Europe 25k, China 9.5k, with remainder RoW. We are not adjusting our 4Q19 estimate at this time but this brings our 2019 total delivery forecast to 350k versus 360-400 guide. Outer-year delivery forecasts unchanged.”
Based on the change, Mr. Spak lowered his non-GAAP earnings per share estimate for the quarter to a loss of 49 US cents from a 91-US-cent loss, noting he now falls closer inline with the consensus on the Street.
He maintained an “underperform” rating and US$190 target for Tesla shares. The average is currently US$271.18.
“We believe expectations for 3Q19 deliveries have come up, but a print of more than 100k (which TSLA needs to average over 2H19 to hit low-end of guidance) should be well received when deliveries are reported within the first 3 days of October,” the analyst said. “Like last quarter, we are more focused on the 3Q19 financial report which may again show tension between volume and profit. And this is the crux of the problem we see for Tesla as a growth stock (with a hyper growth valuation). Unit growth would be positioned as evidence of strong demand which bulls might use to justify valuation. But this quarter, unit growth benefited from 1) introduction of new markets (e.g. selling quarters of pent-up demand for RHD M3′s in a few months) which certainly helps the quarter but isn’t indicative of sustainable demand, and 2) price reductions/lower priced variants that hurt margins/cash flow. Finally, we’d highlight that 97.2k deliveries would be a record delivery quarter. Yet, we forecast automotive revenue down 13 per cent year-over-year and down 1 per cent quarter-over-quarter (despite higher sequential reg. credits assumption). Ultimately, the quarter reaction will likely come down to a conflict between ‘growth’ and cash flow. We believe the market will increasingly place greater focus on profitability and will also reassess the long-term assumptions needed to justify a higher stock price.”
Elsewhere, Credit Suisse analyst Dan Levy also pointed to potential delivery upside. He maintained an “underperform” rating and US$190 target.
Mr. Levy said: “Our currently published estimate of 84k is below cons. 96k, and also below the 100k pace necessary through the end of the year to meet 2019 delivery guidance. While TSLA would likely need yet another strong third month of the quarter to meet consensus, nevertheless, it would not surprise us to see TSLA put up the volumes in Sep. That said, even if it meets consensus on deliveries, the question into 3Q EPS will be around margins + how the stock reacts with likely the first negative year-over-year revenue growth quarter since 2012.”
Calian Group Ltd. (CGY-T) has a “well-defined M&A playbook in place to execute large transactions,” said Desjardins Securities analyst Benoit Poirier following meetings last week with the Ottawa-based firm’s top executives.
“While management remains confident that the company can grow organically across all divisions, it is continuing to actively look for accretive M&A opportunities," he said. "Over the last three years, management has implemented a robust M&A strategy (eight acquisitions) and is ready to leverage the pristine balance sheet to execute on larger transactions.”
Mr. Poirier said Calian is eyeing “larger” acquisitions with $60-$100-million in revenue, following a period of eight acquisitions over the last three years that have expanded its service offerings and diversified its customer base.
“Management reiterated its criteria for potential targets: (1) strong financials with healthy margins (ie not a ‘fix me up’), (2) complementarity of services offering, (3) customer diversification, and (4) similar culture. CGY will continue to focus on enhancing its current capabilities and deepening its expertise in its five service lines as opposed to adding unrelated growth vectors,” he said. “Management is open to pursuing multiple acquisitions simultaneously, although it does not intend to realize more than one acquisition per service line at a time, depending on the size. Overall, we believe management has the capability to pursue its strategy and create value for shareholders.”
Also saying Calian has made “good” progress on a large satellite ground system contract awarded in May, 2018, which he calls a “key growth driver,” Mr. Poirier maintained a “buy” rating and $40 target. The average target on the Street is $39.
“We continue to like CGY for its robust acquisitive and organic growth profile,” he said. “On the M&A front, our discussions with management give us further confidence in its capability to pursue larger transactions and create value for shareholders. We recommend investors buy the shares.”
Touting its “winfinite possibilities,” Haywood Securities analyst Douglas Ibbitson initiated coverage of Versus Systems Inc. (VS-CN), a Vancouver-based tech company that is developing a business-to-business software platform that allows video game publishers and developers to offer prize-based games, with a “buy” rating.
“We believe that the company’s partnership with HP has the potential to significantly increase the current user base and number of sessions, driving revenue growth in 2020,” he said. “Furthermore, we believe the partnership validates the Winfinite platform which could lead to new partnership announcements. As we currently only model announced partnerships, this would represent upside to our estimates. We believe that fiscal year 2020 is the best representation of the Company’s near-term earnings potential and basis for our valuation.”
Currently the lone analyst on the Street covering the stock, Mr. Ibbitson set a target of 55 cents per share.
In other analyst actions:
Goldman Sachs analyst Neil Mehta downgraded Imperial Oil Ltd. (IMO-T) to “neutral” from “buy” with a target of $39, rising from $37. The average on the Street is $38.95.
Goldman Sachs’ Emily Chieng upgraded Cenovus Energy Inc. (CVE-N, CVE-T) to “buy” from “neutral” with a US$12 target, exceeding the consensus of US$11.56.
Scotiabank analyst Benoit Laprade upgraded Canfor Pulp Products Inc. (CFX-T) to “sector outperform” from “sector perform” with a $12 target, which falls short of the $13.17 consensus.