Inside the Market’s roundup of some of today’s key analyst actions
First Quantum Minerals Ltd.'s (FM-T) updated technical report for its Kansanshi Operations located in Zambia “sheds light on [an] attractive S3 project,” said Scotia Capital’s Orest Wowkodaw.
The Toronto-based miner said it now expects to expand the sulfide ore processing facility at mine by 25 million tonnes per annum (mtpa) to 52 mtpa. It also estimates total capital required for the S3 expansion project is expected to be approximately $650-million to be spent over approximately two years starting in the second half of 2023.
The analyst said the report displayed both “significantly improved” reserves and mine plan, leading him to “materially” increased his 12% NAVPS [net asset value per share] projection for the copper-gold mine by 59 per cent (to $2.5-billion). That led to a 14-per-cent increase in his corporate NAVPS estimate (to $14.59).
“While investors may be weary of the company investing additional capital in Zambia given recent fiscal instability, the S3 project could reinvigorate potential minority interest divestment opportunities based on the relatively attractive economics,” said Mr. Wowkodaw. “Overall, we view the update as positive for the shares.”
The analyst maintained his “sector outperform” rating for First Quantum shares, citing its “strong” growth profile, copper leverage and “attractive” valuation.
He raised his target to $15 from $14. The average on the Street is $15.85, according to Refinitiv data.
Elsewhere, Canaccord Genuity analyst Dalton Baretto called the report “very positive,” leading him to raise his target to $18 from $17.50 with a “buy” rating.
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Though he acknowledged there is pent-up demand for used cars, National Bank Financial analyst Maxim Sytchev said he’s “skeptical about structurally better financial results” for AutoCanada Inc. (ACQ-T) following the COVID-19 pandemic, emphasizing unemployment levels haven’t properly been accounted for.
“Despite generally missing the numbers (and often by a large margin), ACQ shares have continued to rally on promises of better times ahead. While investors can agree (or disagree) with such a response, based on the last five precedents, the momentum was relatively short-lived,” he said.
“So the big question is whether this time is different as the shares now sit near a 52-week high. While some have adopted a stance that a V-shape rebound is taking place, the embedded risks in the economy and company-specific challenges (despite, of course, a much better balance sheet) should not be ignored. According to our numbers, the current share price is already imputing an optimistic scenario (see sensitivity math in the following sections); any risk-off sentiment (a second COVID wave, U.S. / China diplomatic tensions, expiration of government support for workers, etc.) could, in our view, quickly wipe out the recent gains.”
Mr. Sytchev also warned that “at some point absolute valuation has to matter,” leading him to lower his rating for the Edmonton-based company to “underperform” from “sector perform” with a $14 target (unchanged). The average on the Street is $18.51.
“Even when using our “optimistic” scenario analysis at 7.0 times EV/EBITDA (slightly above better performing U.S. peers and its own five-year historical average of 6.4 times), the shares appear to be fully valued,”he said. “When calibrating for the risks lurking in the larger economy, punctuated by worsening consumer income / balance sheets, we believe the quantum of the recent bounce in the stock is not entirely justified. For the bulls, (projected) improving margin dynamic and repaired balance sheet open up the potential for M&A down the road. With the shares having crested above what we view as reasonable levels, we are downgrading the shares.”
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PHX Energy Services Corp. (PHX-T) is “an innovative directional driller positioned for recovery,” said ATB Capital Markets analyst Tim Monacello.
Seeing it “defensively positioned” for exposure to a rebound in North American drilling activity, he initiated coverage of the Calgary-based company with a “sector perform” rating, emphasizing its “moderate upside” as well as “relatively low fundamental downside risk based on its low capital intensity, low operating leverage, and low debt.”
“We are encouraged by PHX’s recent success in key U.S. markets through the adoption of its high-performance suite of technologies and its notably strong and blue-chip customer base,” said Mr. Monachello. "We believe this success has positioned PHX among the top directional drilling players in North America, despite its relatively small size compared with its large integrated competitors, and will result in a more defensive activity profile than more commoditized players. This defensive profile is complemented by PHX’s low leverage (no bank or term debt at end of Q2/20) and its largely variable cost structure. We believe these features of PHX’s business make it among the most fundamentally defensive energy services companies within the realm of North American D&C-oriented players. That said ... PHX shares have shown a higher degree of beta exposure to the commodity cycle than the Cdn OFS Index through the current cycle – we attribute this largely to PHX’s low trading liquidity, which we believe has resulted in more share price volatility for PHX than larger companies with more liquid stocks.
Mr. Monachello sees North American drilling and completion activity currently at “unsustainably low” levels and expects a rebound in the coming quarters. However, he warned that the timing and scaled of “sustained and meaningful” activity recovery remains “tenuous” and his forecasts “suggest PHX’s quarterly results have yet to bottom.”
“Further, for a sustained rebound in drilling activity to materialize, we believe there needs to be a much better view toward a normalization in global crude demand through better assurances that COVID-19-related demand destruction will not retrench,” he added. “Further, we believe as a precursor to a sustained recovery, shut-in production across North America must be largely placed back online and DUC well inventories must be drawn down significantly.”
Emphasizing the primary risk to PHX remains the timing of U.S. activity recovery, Mr. Monachello set a $2 target for its shares, noting upside “could remain limited until forward visibility improves”. The average on the Street is $1.54.
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Amex Exploration Inc. (AMX-X) is "a company to keep an eye on,” according to Canaccord Genuity analyst Tom Gallo.
In a research report released Tuesday, he called the Montreal-based junior gold exploration company’s wholly owned Perron project located 110 kilometers north of Rouyn Noranda, Que., “an exciting new discovery gaining momentum in a gold market that is heating up.”
“With a large drill program underway, we expect Amex could report potentially impactful drill results from its high-grade Perron project,” said Mr. Gallo. "We view the company as well located, well funded, and poised for a initial resource update during the first half of 2021. We expect Amex to delineate 1.56 million ounces, which we use as part of our conceptual mine model feeding our base-case valuation.
“With additional discoveries yet to be uncovered at depth, Amex could push even further ahead. With a 1,963-per-cent increase in its stock price since its 2018 announcement of high-grade gold mineralization in Normatel, Quebec, in the famed Abitibi Greenstone Belt, Amex is now benefiting from continued momentum from good-quality drill intercepts in a gold market that is paying for such results.”
Mr. Gallo pointed to four reasons to own Amex: “its wholly owned property package, which has been yielding high-grade gold intercepts for over a year and a half;” a “cash-up” balance sheet and “sound” share structure; location in " mining-friendly and talent-heavy" Quebec and unrealized exploration potential.
He initiated coverage with a “speculative buy” rating and $4.50 target, matching the current consensus on the Street.
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Newcore Gold Ltd. (NCAU-X) “provides investors exposure to a proven team, attractive valuation, and considerable exploration potential,” said Raymond James analyst Craig Stanley.
He initiated coverage of the Vancouver-based company, which is focused on advancing its 100-per-cent-owned Enchi Gold Project in Ghana, with a “strong buy” rating.
“We believe Enchi provides tremendous exploration potential based on three factors: The first is the known shallow, oxide resources that are open both down dip and along strike,” he said. “The second is the regional near-surface potential, in which over 25 targets have been identified, but only six having been drill tested. The numerous deposits at Chirano occur at regular intervals along a strike length of 11 kilometres. The third is the depth potential. Drilling at Enchi has averaged 125 metres from surface and has not gone deeper than 200 metres. However, most of the resources and reserves of mines on the Bibiani Shear Zone are below 200-metre depth. For example, both Chirano (200,000-plus ounces in 2019) and Bibiani started as open pit mines but eventually added underground operations. At Chirano, the discovery of Akwaaba Deeps below an existing open pit led to an expansion of the mill in 2008 from 2 to 3.5 million tons per annum. The 2010 Paboase underground discovery came from intercepts between 330 and 800 metre depth. At Bibiani, mining activity extended to 800 metres below surface.”
Mr. Stanley set a target of $1.60 per share. The current average on the Street is $1.68.
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Converge Technology Solutions Corp. (CTS-X) has “significant” growth potential as it aims to consolidate the fragmented Information Technology Solution Providers market, said Laurentian Bank Securities analyst Furaz Ahmad.
Seeing acquisitions as a key driver of growth moving forward, he initiated coverage of Toronto-based company with a “buy” rating.
“Converge’s acquisition playbook consists of acquiring regional ITSPs who are undercapitalized and lack scale,” he said. "Over the last three years Converge has completed 12 acquisitions, with management looking to acquire $400-million of revenue annually going forward by acquiring 4-6 companies per year. The company has a pipeline of approximately 150 companies that they have reviewed as potential acquisition targets, so there is a long runway for M&A-led growth. We estimate Converge has the capacity to acquire $800-million of revenue in 2021, owing to its acquisition funding structure, as acquisitions are funded with debt and working capital, without the need for equity.
“Organic growth is also strong, benefitting from long-term trends that are expected to act as a tailwind for future growth. Management expects the company to grow organically at 10 per cent annually over the next several years as there are numerous organic growth opportunities available to the company.”
Though he warned Converge’s balance sheet is currently highly levered due to debt-funded acquisitions, Mr. Ahmad expects deleveraging over the next couple of years.
Seeing its valuation as “attractive,” he set a $3.75 target for its shares. The average on the Street is $2.96.
“Our $3.75 price target is based on a target valuation multiple of 5.5 times the average of 2021/2022 EV/EBITDA, which is at a discount to the overall peer group,” he said. “We believe that a discount valuation vs. the peer group is warranted for now in light of Converge’s elevated debt levels, and lower than average EBITDA margins. We expect the valuation multiple to increase over time as debt levels decline and EBITDA margins increase to the high-single digits.”
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With outdoor recreation “booming” during the COVID-19 pandemic, Citi analyst Shawn Collins initiated coverage of a pair of U.S. companies he expects to outperform their markets on Tuesday.
“With COVID-19 limiting or shutting down many seasonal activities, consumers are realizing the great outdoors is still open,” he said in a research report. "Outdoor recreation enables social-distancing, is used in non-urban environments, and does not require travel by plane.
“Dealer sales of Polaris off-road vehicles and Brunswick marine engines & boats have jumped materially in 2Q20. Polaris reported that North American retail sales were up 57 per cent in 2Q (vs. down 8 per cent in 1Q as the Pandemic began). Brunswick reported that U.S. marine retail sales were up 18 per cent in June (vs. down 7 per cent in 1Q) and marine engine sales were up 32 per cent in June (and up 13 per cent for 2Q). Both North American Powersports retail sales and U.S. marine retail sales are expected to be up low single digits or more for 2020.”
“Encouraged” by the outlook for off-road vehicles sector and pointing to its “strong” financial track record and “modest” valuation" Mr. Collins initiated coverage of Minnesota-based Polaris Industries Inc. (PII-N) with a “buy” rating.
“Polaris is the global leader in powersports, which includes Off-Road vehicles (No. 1 market share player; 60 per cent of Revenue), snowmobiles (#2), and motorcycles (#2). Polaris also manufactures pontoon boats (#1),” he said. “We believe PII represents a solid buying opportunity as we anticipate continued strong demand for ORV/Snow products in 2020 and thru 2021.”
Mr. Collins set a target of US$120 per share. The average on the Street is $116.67.
“We are encouraged by 1) the favorable backdrop for outdoor recreation products, especially ORVs, 2) the tight inventory set-up (down 47 per cent year-over-year) as a result of the COVID production shutdown and subsequent surge in demand (wholesale production now must catch up to retail demand), 3) the continued success of Indian motorcycle, 4) PII’s strong financial track record,” the analyst said.
Mr. Collins initiated coverage of Illinois-based Brunswick Corp. (BC-N) with a “neutral” rating, taking a “wait and see approach” and expressing a preference for Polaris after a head-to-head analysis.
“Brunswick is the leading manufacturer of marine engines (No. 1 market share; 40 per cent of Revenue), boats (world leader in powerboats), and marine parts & accessories,” he said. “Brunswick is the undisputed leader in recreational boating, with its advance engine design, overall technology and innovation. Yet, we are taking an initial wait and see approach with BC given we are less bullish on the recreational boating sector overall (than powersports). In addition, we want to see BC continue to execute on its new strategic realignment and move beyond recent restructuring (significant) charges and an adjusted P&L.”
He set a target of US$70 per share, falling below the average target on the Street of US$79.50.
“We are mindful of the following: 1) Global Recession – the discretionary demand for outdoor recreation products would be negatively impacted; 2) Fixed Cost Model – operating leverage works both ways at any manufacturing business (margins fell more than Revenue fell during the GFC), 3) International Trade Policy – Polaris imports raw materials for production purposes and higher tariffs increases its input prices, and 4) Dealer Network – dealers are independent operators and their financial health is essential for product distribution,” he said.
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Mind Medicine Inc. (MMED-NE) “boasts the broadest clinical development pipeline among for-profit companies” aiming to develop psychedelic medicines to treat ADHD, anxiety, cluster headaches and substance abuse, said Canaccord Genuity analyst Tania Gonsalves.
Accordingly, she sees it as a potentially “attractive” partner for a multinational pharmaceutical company looking, leading her to initiate coverage with a “speculative buy” rating.
“It is exclusively pursuing the rigorous clinical path of development,” said Ms. Gonsalves. “This process is expensive, time-consuming and fraught with failure, but by choosing this path, MMED has, in our view, differentiated itself as one of the few legitimate companies in the space.”
“Lead drug 18-MC is a non-substitute treatment for opioid use disorder (OUD). With opioids having been declared a public health emergency, we expect 18-MC’s path to market to be expedited. MMED’s collaboration with the Liechti Lab at University Hospital Basel provides it access to one of the richest libraries of human psychedelics data. This has supported the buildout of MMED’s pipeline to six psychedelic programs; the broadest we know of across all for-profit companies.”
The analyst called Mind Medicine “catalyst rich, capital poor,” expecting the need to raise equity over find a partner to help fund development in the near future.
“The two nearest-term value inflections we see that could attract a partner are the completion of the Phase 2a trials for anxiety and opioid withdrawal next year,” she said. “For now, we model three equity raises of $20-million, $30-million and $40-million in Q1/21, Q1/22, and Q1/23, respectively, at an issue price that is 10% below yesterday’s close. Potential near-term catalysts include a successful capital infusion (via equity raise or partner), a positive readout of 18-MC’s Phase 1b trial (Q3/20E) and the LSD Phase 2 anxiety trial (Q2/21E) and receipt of BTD for 18-MC.”
Ms. Gonsalves set a target of $1.75 per share. The average is $1.88.
“Considering MMED’s significant capital requirements to take its programs to fruition and the fact that almost all of our price target hinges on drug approval, a binary event, we initiate with a SPECULATIVE BUY rating,” she said.
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Scotia Capital analyst Phil Hardie raised his target for shares of Power Corporation of Canada (POW-T) after analyzing the impact of subsidiary Great-West Lifeco Inc.'s (GWO-T) US$2.35-billion deal to buy the retirement business of Massachusetts Mutual Life Insurance Co..
“From a Power Corp perspective, the transaction provides another concrete example of the Power Group’s drive to create value across three key levers of value creation: 1) operating companies organic levers, 2) operating companies M&A levers, and 3) holding company levers. Power Corp’s discount has narrowed over the past few months but remains stubbornly wide despite a series of actions taken by management that demonstrate its drive to enhance shareholder value,” said Mr. Power.
Keeping a “sector perform” rating for Power shares, he increased his target to $32 from $30.50. The average on the Street is $28.43.
“Given what we view as significant upside potential, steeply discount valuation, and attractive dividend yield, Power Corp remains on our radar but given a potentially extended investment horizon, we are maintaining our SP rating,” he said.
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In other analyst actions:
LodeRock Research analyst Greg MacDonald initiated coverage of London, Ont.-based Versabank (VB-T) in a research report released Tuesday.
“VersaBank is a midsized Canadian schedule 1 commercial bank which leverages proprietary technology rather than branches to facilitate loands and deposits,” he said. "To differntiate this report, we interviewed VersaBank’s key partners to better understand the bank’s business model. We found that the technology’s speed, flexibility and risk management benefits create sustainable stickiness and pricing power for the bank, something we think is under-appreciated by the market.
“Our investment thesis for this stock is that the technology model allows for higher than average double-digit EPS growth but with a risk profile that is at or below average for sched-1 banks. We see potential for 20-per-cent-plus upside to the stock in the next year based on existing estimates and total 50-80-per-cent upside in the medium term if the bank executes on M&A growth. Finally, investors get a free option on cyber security subsidiary DRT. Given the upside relative to risk profile, we are constructive on VB.”
David Leeder