Tuesday’s analyst upgrades and downgrades

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

Amid escalating concerns over North American construction activity due to the fallout from the spread of COVID-19, Raymond James analyst Steve Hansen lowered his rating for CanWel Building Materials Group Ltd. (CWX-T), seeing increased likelihood of a dividend cut.

“While we continue to expect CWX will post healthy 1Q20 results given the solid macro backdrop through Jan/Feb,2Q20 appears increasingly at risk given the broad-based slowdown in construction activity stemming from the widespread ‘shelter-in-place’ directives,” he said. “To be clear, these directives are far from uniform, with residential construction activity protected in several regions and disallowed in others. That said, even in those regions where construction remains ongoing, we understand manpower and permitting delays continue to hamper (impede) progress. While we’re encouraged that many provinces/states have recently issued staged re-opening plans, our concern is that consumer-related demand remains highly uncertain.”

Mr. Hansen also noted a drop in lumber and building materials prices with the slowdown, which he said is a pattern that's historically exerted pressure on CanWel's gross margin.

“While many of the industry’s largest LBMproducers have already announced downtime to help re-balance (support) the market, our Forestry team doesn’t foresee a material pick-up in prices before 4Q20,” he said.

“Notwithstanding the macro pressures foreseen, several levers in CWX’s business model will help it manages the temporary weakness, in our view, including: 1) an emphasis on reducing inventories/working capital; 2) targeted headcount reductions; & 3) deferring any/all growth capex. We will look for additional details on the upcoming quarter.”

Mr. Hansen lowered his 2020 and 2021 earnings per share projections to 6 cents and 25 cents, respectively, from 31 cents and 35 cents.

“Unfortunately, the aforementioned pressures are expected to constrain CWX’s near-term EBITDA/FCF and drive the firm’s associated FY20 payout ratio north of 160 per cent, a threshold that raises the likelihood of an accompanying dividend cut, in our view,” the analyst said. “While difficult to quantify, we currently assume a50% dividend reduction, but wouldn’t rule out an alternative 75-per-cent scenario, with both striking us as prudent long-term actions that would protect the company’s balance sheet and bolster its long-term financial flexibility. Importantly, with the stock’s current yield perched at 17.6 per cent, we believe a 50-per-cent-or-more dividend cut to be priced in.”

Moving the stock to “market perform” from “outperform,” he trimmed his target for CanWel shares by a loonie to $4. The average on the Street is $4.21.

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Microbix Biosystems Inc. (MBX-T) is “poised to gain global attention as a result of the COVID-19 pandemic where increased testing and the need for quality control will increase the demand for MBX’s expertise to develop controls to test for the SARS-CoV-2 virus,” said Industrial Alliance Securities analyst Chelsea Stellick.

Seeing "ample" upside in the Mississauga-based infectious disease specialist, Ms. Stellick initiated coverage with a "speculative buy" rating, citing its "growth strategy in the antigen business layered with larger-scale projects that would be extremely profitable for the company."

“For over 30 years, Microbix has offered an expansive library of royalty-free bacteria, host cells, and viruses to over 100 leading international diagnostic companies for infectious disease testing,” said Ms. Stellick in a research report released Tuesday. “The company grows, purifies, and inactivates bacteria and viruses as a key ingredient for immunoassays to establish the presence of human antibodies. MBX is also a global leader in quality assessment and proficiency testing products used in diagnostic laboratories to meet quality objectives and requirements. Additionally, the company also has optionality in a partnered asset, Kinlytic urokinase, a clot-busting drug that has previously treated four million patients with life-threatening pulmonary embolism and clot obstructed intravenous catheters.”

Ms. Stellick said demand for its quality assessment products (QAPS) beyond COVID-19 provides "meaningful" upside."

“As regulatory bodies become more stringent on quality control programs in diagnostic laboratories, MBX’s quality assessment products (QAPs) are in higher demand,” she said. “The REDx family of controls for the Human papillomavirus (HPV) presents an opportunity for MBX in the US$447-million market for HPV diagnostic testing. At extremely favourable margins (more than 70 per cent), the QAPs product line is expected to grow sales in North America, Europe, and Asia-Pacific.”

Currently the lone analyst on the Street covering the stock, she set a target price of 50 cents per share.

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On the heels of the release of “very strong” first-quarter financial results, Acumen Capital analyst Jim Byrne raised his financial projections for Richards Packaging Income Fund (RPI.UN-T), expecting momentum to continue through the year.

On Monday, Mississauga-based Richards reported adjusted EBITDA of $19.3-million for the quarter, up from $11.8-million a year ago and above Mr. Byrne’s $13.4-million estimate. Revenue of $108.9-million rose from $81.9-million and also topped his forecast ($90.5-million).

"The company has seen very strong demand from new customers and continues to see positive impacts as a result of demand for pumps and sprayers for hand sanitizers," the analyst said.

“Management indicated that April revenues are trending up double-digits compared to last year’s levels, as healthcare packaging has been driven by increased demand associated with efforts to combat the viral outbreak. RPI remains one of the very few companies that has seen its revenues climb and prospects improve over the course of 2020.”

Mr. Byrne raised his 2020 and 2021 EBITDA estimates by 17 per cent and 12.7 per cent, respectively, to $51.7-million and $54.8-million.

Maintaining his “buy” rating, he hiked his target for Richards to $58 from $50.

“We believe the units are attractively valued given the company’s strong balance sheet, low payout ratio, and unique position in the healthcare packaging segment,” he said. “RPI is one of the few companies that has seen strong revenue growth during the pandemic, and we believe the units should be a core holding in investors’ portfolios.”

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Though he sees Pretium Resources Inc.'s (PVG-N, PVG-T) updated plan for its Bluejack mine in northwestern British Columbia as “more conservative and seems achievable,” Citi analyst Alexander Hacking warned that it’s “still tricky to assess” due to its “variable geology.”

In reaction to the lower grade estimates in its latest technical report, released Monday with its quarterly results, Mr. Hacking lowered his 2020 and 2021 EBITDA projections to US$269-million and US$399-million, respectively, from US$538-million and US$645-million. His earnings per share estimates slid to 50 US cents and US$1.03 from US$1.58 and US$1.95.

Keeping a "neutral" rating for the Vancouver-based company, he dropped his target to US$9 from US$13. The average is US$12.68.

“Brucejack is an attractive project with high grades, low costs and exploration upside in a favorable jurisdiction. The company is generating FCF and should move to a net cash position in 2021," the analyst said. "Yet, geological risk is higher-than-average given a significant variability in mineralization. The stock does not currently offer enough discount to justify a Buy rating, in our view. The main upside risk is on exploration and finding additional high grade resources to extend LOM.”

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Despite trading at a “significant” discount to net asset value, Canaccord Genuity analyst Scott Chan said he’s adopting a “more conservative” evaluation approach toward Fairfax India Holdings Corp. (FIH.U-T).

"In Q1/20, Fairfax India's (FIH) BVPS [book value per share] decreased 15 per cent quarter-over-quarter to US$14.37 (from US$16.89)," he said. "This mainly reflected public investments declining 33 per cent (in line with S&P BSE Sensex Index), private companies’ markdown of 6 per cent, and negative FX translation. The private portfolio (larger proportion of NAV) was marked down significantly less than public markets (e.g. Bangalore International Airport)."

Keeping a “buy” rating, Mr. Chan cut his target to US$13 from US$18.75. The average on the Street is US$16.58.

“We believe FIH shares remain relatively attractive, trading currently at price-to-book of more than 0.5 per cent, vs. a historical premium to NAV of less than 10 per cent,” he said. “FIH has $220-million of cash on hand and $50-million of unused credit facility to support new investments and its NCIB.”

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DraftKings Inc. (DKNG-Q) has a “long runway for growth” as Americans increasingly embrace legalized sports betting, according to Canaccord Genuity analyst Michael Graham.

“Online gambling in countries with more permissive regulatory mindsets has experienced dramatic growth to levels that far outstrip ‘in person’ wagering,” he said. “For example, in the UK, online sports betting is 2.5 times larger than the in-person variety, with betting activity per player nearly 5 times larger. Three years ago in the U.S., sports betting was illegal outside of casinos. New Jersey led the way in 2018 by legalizing online sports betting (OSB), and to date eight states covering 13.6 per cent of the U.S. population have legalized OSB in some form; we see this expanding to 65 per cent by 2026. While cessation of sports competitions due to COVID-19 has likely stalled the business significantly in the short term, we think DraftKings’ entrenched competitive position and “digital disruptor” status position the company well for long-term growth in this dynamic market.”

In a research report released Tuesday, Mr. Graham initiated coverage of the stock, which began trading on April 24 following a reverse merger with Diamond Eagle Acquisition Corp., with a “buy” rating.

“DraftKings and SBTech were recently acquired by Diamond Eagle Acquisition Corporation (DEAC) and merged into a new DraftKings,”said Mr. Graham. “The transaction results in a well-funded (more than $500-million cash) public company which bears the hallmarks of a classic Internet disruptor: large market to be made larger by an Internet-enabled better way of doing things, network effects (more players = more liquidity = more & bigger bet types = more engagement); company built to iterate on technology quickly while investing heavily in marketing with an eye on customer LTV; limited set of capable competitors (we think DraftKings will easily outrun casino operators, and the path to complying with myriad and sometimes idiosyncratic state legalization processes is a competitive barrier).”

Mr. Graham expects the impact brought by COVID-19, which has forced the closure of the professional sports world, to be a “severe but temporary.” However, his forecast assumes a return to action gradually through the summer.

He set a target price of US$25 per share, which exceeds the consensus by US$1.

“Our $25 price target is based on 12.5 times our 2021 revenue estimate of $680-million,” he said. “We recognize this is a premium multiple, which we think is warranted due to: (1) it is the current 2020 multiple carried forward to next year; (2) growth rate is high; (3) state legalizations provide a strong tailwind; (4) likely conservative estimates.”

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In other analyst actions:

* BMO Nesbitt Burns analyst Randy Ollenberger raised Advantage Oil & Gas Ltd. (AAV-T) to “outperform” from “market perform” with a $3.50 target, up from $2 and above the $2.98 average.

"Advantage has consistently achieved one of the lowest cost structures among its peers. The company also has a strong balance sheet and solid track record of execution," he said.

“We believe that Advantage is well positioned to weather the weaker commodity price environment in 2020 as well as benefit from stronger natural gas prices in 2021.”

* Cowen analyst Ken Cacciatore initiated coverage of Aurinia Pharmaceuticals Inc. (AUP-T) with an “outperform” rating and $30 target. The average on the Street is $31.77.

* RBC Dominion Securities analyst Mark Mihaljevic raised his target for Alacer Gold Corp. (ASR-T) to $8 from $7 with an “outperform” rating (unchanged). The average is $8.48.

"We believe Alacer’s shares can continue to outperform peers as the company: (1) demonstrates the potential of the Sulfides expansion project; (2) unlocks the value of the regional Oxide deposits; and (3) continues to generate positive free cash flow, with a potential capital return starting later this year," said Mr. Mihaljevic.

* Following the release of in-line first quarter results, Echelon Wealth Partners analyst Frederic Blondeau trimmed his target for Morguard North American Residential REIT (MRG.UN-T) to $19 from $21, maintaining a “hold” rating. The average is $19.20.

“We believe it is still early to judge REITs operating environment, while Q220 financial results should give us a better picture of the mid to long-term impacts of the pandemic,” said Mr. Blondeau. “Generally speaking, we remain on the conservative side.”