Tuesday’s analyst upgrades and downgrades

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

Despite “lingering implications” from operational interruptions due to the COVID-19 pandemic, RBC Dominion Securities' mining and materials equity team is forecasting record third-quarter financial results for North American precious metals producers and royalty companies.

“In 2Q, coverage production declined by 9 per cent and fully loaded costs increased by 19 per cent to $1,463 per ounce,” the firm said in a research report. "The impact of more stable operations in 3Q is forecast to yield a rebound in production by 14 per cent. However, spending deferral from 1H could mute the potential for cost declines — RBC forecasts fully loaded costs declining 5 per cent to $1,395 per ounce, overwhelmingly influenced by a catch up in capital spending (24 per cent quarter-over-quarter).

“Earnings comparability could again be a challenge due to COVID-19 costs and adjustments, although financial results are expected to be undeniably constructive. The combination of volume and cost improvements, quarterly average gold prices rising 12 per cent to $1,910 per ounce, and sharply higher by-product metal prices (silver up 49 per cent, copper up 21 per cent, zinc up 19 per cent, lead up 12 per cent) is forecast to generate record quarterly net free cash flow for the sector. RBC EPS estimates are above consensus for 18 of 28 producer and royalty companies, and overall EPS are above current consensus expectations by a median 9 per cent.”

Analyst Josh Wolfson made several target price adjustments to stocks in his coverage universe on Tuesday.

Among senior producers, he made the following changes:

Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “sector perform”) to US$88 from US$85. The average on the Street is US$88.69.

“We expect meaningful operational improvements quarter-over-quarter, in line with guidance for 480-500,000 ounces per quarter in 3Q and 4Q,” he said. “This outlook reflects the ramp-ups in Nunavut and LaRonde, and the resolution of a majority of COVID-19 related impacts. Agnico is positioned to meet, and could exceed, the upper end of production guidance. Key updates include exploration results at Malartic underground and the status of ramp-ups at Amaruq, Meliadine, and LaRonde. AEM could seek to revisit its dividend policy in 2H20.”

Barrick Gold Corp. (GOLD-N/ABX-T, “outperform”) to US$33 from US$34. Average: US$33.61.

“Improved production and costs are expected quarter-over-quarter, reflecting greater consistency in operations post major COVID-19 related impacts and an improvement at Pueblo Viejo, following 2Q maintenance,” he said.

Kirkland Lake Gold Ltd. (KL-N/KL-T, “outperform”) to US$64 from US$63. Average: US$59.

“Improved quarter-over-quarter results are expected as operations return to normal conditions following COVID19 related impacts in 2Q,” he said. “2Q results will also reflect high cash inflows of $185-million from KL’s Holt transaction with Newmont and its Osisko Mining share sale (less share repurchases).”

Newmont Corp. (NEM-N/NGT-T, “sector perform”) to US$76 from US$81. Average: US$78.04.

“We expect a stronger quarter from Newmont, following heightened 2Q disruptions related to COVID-19 events, and in line with 2H material guided improvements,” he said.

He also made a trio of changes to intermediate producers:

• Alamos Gold Inc. (AGI-N/AGI-T, “sector perform”) to US$10 from US$11. Average: US$12.38.
• B2Gold Corp. (BTG-N/BTO-T, “sector perform”) to US$8.25 from US$8. Average: US$8.50.
• Yamana Gold Inc. (AUY-N/AUY-T, “sector perform”) to US$7 from US$7.25. Average: US$7.28.

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Citing a supportive regulatory backdrop and a “long runway” of organic growth in Ontario, Raymond James analyst David Quezada raised his rating for Hydro One Ltd. (H-T) to “outperform” from “market perform.”

“With bond rates continuing to hover at all time lows, we believe material valuation upside remains in regulated utilities like Hydro One," he said. "Further, we see a lengthy runway of capital deployment in Ontario providing longer term upside to rate base growth, which — when coupled with a supportive regulatory backdrop and lack of exposure to COVID-19 — supports our move to Outperform.”

In a research note released Tuesday, Mr. Quezada raised his adjusted earnings per share projection for 2020 by 2 cents to $1.45 and his 2021 estimate by 4 cents to $1.52, emphasizing potential gains in Ontario moving forward.

“With roughly 30 per cent of the company’s utility assets in Ontario approaching end of useful life, we believe it is noteworthy that Hydro One’s current pace of capex ($10-billion over 5 years) is not sufficient to offset the aging of this infrastructure,” the analyst said. “As such, we see upside to the current pace of capex which already equates to a solid 5-per-cent rate base growth rate out to 2022. While the company has managed to maintain grid reliability though the use of technology, training and improved processes, we believe this aging infrastructure implies a durable long-term growth runway. Further, larger projects like the Leamington Area Transmission Reinforcement (currently underway) and the potential Ring of Fire transmission project, are examples of attractive large scale projects the company can also pursue. As contracts for early renewable power projects in Ontario (priced at multiples of market power prices) begin to roll off in coming years, we see headroom for increased investment in the Ontario grid.”

Mr. Quezada acknowledged that Hydro One’s “strong” track record in cost reductions is “a well known element of the story,” however he said it " bears reiterating that the company has delivered strong productivity and cost savings in recent years."

“In fact, between 2016-2019 Hydro One delivered $452-million in productivity savings,” he said. “This has come by reducing the maintenance fleet by 10 per cent using telematics, the optimal cycle protocol for vegetation management, move to mobile, and strategic sourcing. We understand strategic sourcing is expected to provide further savings going forward as Hydro One continues to target cost savings sufficient to offset inflation. Importantly, we believe these cost reductions, while also contributing to Hydro One’s bottom line via the incentive rate making mechanism, also provide headroom for capital investment in later years. Finally, we also highlight the company’s strong progress on customer satisfaction with 2019 Dx segment satisfaction improving to 86 per cent from 77 per cent in 2018 while Tx satisfaction was down slightly year-over-year but still strong at 87 per cent.”

Though Hydro One stock has outperformed thus far in 2020, he noted a discount to its North American peers continues to exist. He raised his target to $32 from $28, exceeding the current consensus of $29.14.

“Despite the stock having moved 16 per cent higher year-to-date, ahead of the Canadian regulated utility average up 7 per cent (and the TSX down 4 per cent) it is currently trading at a 2021E P/E of 19 times — a discount to NA peers at an average of 21x times," the analyst said. "This comes despite solid EPS growth of 4-7 per cent per company guidance, which, although roughly in line with the NA average, comes with significantly less uncertainty. We believe this, coupled with strong ESG standing, potential LDC [local distribution companies] M&A and pure play T&D [transmission and distribution] footprint, represents a compelling combination.”

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Calling it “a misunderstood and underappreciated story,” Echelon Capital Markets analyst Amr Ezzat ascribed “Top Pick” status to MDF Commerce Inc. (MDF-T) on Tuesday.

He said the Montreal-based tech firm’s September decision to adopt a change its name from Mediagrif Interactive Technologies Inc. marks “a significant change to its operations and business that we feel many investors fail to recognize.”

Mr. Ezzat emphasized a significant shift in the sources of revenue over the last three years, noting e-commerce has moved from contributing very little to almost 30 per cent while consumer marketplace platforms has dropped from 30 per cent to less than 4 per cent during that time.

“The business dynamics and fundamentals are simply not the same,” he said.

“Dissecting historical results unveils that the core business never really struggled, and this despite a significant lack of investment: Looking at the company from an outside-in perspective, it does indeed appear that the company was struggling with very low growth, but excluding the consumer segment performance (recall, now less than 4 per cent of sales), we estimate MDF’s core business was actually growing at a CAGR [compound annual growth rate] of 7.6 per cent, and this despite a significant lack of investment over the years. The company has already begun to deliver on growth. Last quarter’s headline year-over-year growth of 1.5 per cent actually reflects very strong momentum: excluding the now-divested LesPac platform from last year’s comparable figures, we estimate MDF delivered 13.9-per-cent top line growth year-over-year, a significant shift from the company’s historical anemic growth. This is by no means a one-off quarter; we expect continued momentum going forward as the company on-boards major new clients. Namely, the company’s deferred revenues (a leading indicator for future sales) were up 25.8 per cent year-over-year and 7.3 per cent sequentially.”

Keeping a “buy” rating for MDF shares, Mr. Ezzat hiked his target to $15 from $11. The average on the Street is $11.38.

“While our ‘off-consensus’ target price is not so 'off-consensus’ anymore (since our last note on August 13, the median consensus target price is up 25 per cent), we are taking this opportunity to assess in a more detailed manner the company’s evolved business model and in turn the impact of this transformation on its valuation. Spoiler alert: the business has metamorphosed into a double-digit high visibility growth operation," he said.

"We have long argued that the divestment of the company’s consumer platforms would improve business sustainability, shifting the focus away from a more competitive and less predictable segment to one with (i) high visibility and (ii) healthy growth, both of which warrant a multiple re-rating. This process was admittedly longer (and more painful) than we had anticipated, but with the transformation now in the rear-view mirror, and more visibility provided on a segmented basis, we are introducing a formal sum-of- the-parts (‘SOTP’) valuation, and revising our target price to $15.00 per share from $11.00 per share. Our revised target price provides for 65.2-per-cent upside from current levels and continues to imply a significant multiple discount to publicly traded comparables (3.2 times revenues based on our $15.00 per share target versus Canadian high visibility IT comps' median 6.5 times). We expect the valuation gap to dissipate with continued execution. "

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Separately, Mr. Ezzat maintained “Top Pick” status for Photon Control Inc. (PHO-T), calling recent weakness in its share price “unjustified” and creating an “attractive” entry point for investors.

“The company’s cautious tone and the stock’s outperformance leading up to last quarter (up 26 per cent in the 5 trading sessions leading up to the results) made for a classic ‘buy the rumour, sell the news’ phenomenon, and the stock continued to show weakness in recent weeks in sympathy with the US Department of Commerce restricting WFE exports to China-based foundry SMIC,” he said. "While the sanctions will impact SMIC (and shift market share away to SMIC’s competitors), we argue that Photon is an arms dealer, and is ultimately agnostic as to who wins foundry market share war.

“On a more macro level, we continue to constructive on industry dynamics and expect e-commerce, gaming, and video streaming, to drive additional data center capacity requirements benefiting Photon. Our $2.75 per share price target implies 60.7-per-cent return from current levels.”

Calling its valuation “too compelling to ignore,” Mr. Ezzat maintained a “buy” rating and $2.75 target for shares of the B.C.-based optical sensor designer and manufacturer for semiconductor equipment manufacturers. The average on the Street is $2.83.

“We believe Photon’s balance sheet strength together with its leverage to an economic upcycle constitute attractive risk-reward characteristics,” he said. "Despite the strong stock performance since our late 2015 initiation, valuation remains exceptionally attractive with earnings growth keeping pace with stock performance. Specifically, we forecast the Company to grow sales by 71.8 per cent in 2020 (recall, 2019 was the bottom of the cycle) and by 7.5 per cent in 2021.

“We expect the company to generate $0.12 per share and $0.13 per share of free cash flow in 2020 and 2021, respectively, versus a stock price of $1.40 per share ($1.01 per share, ex-cash), implying FCF yields of 12 per cent/13 per cent for 2020/2021. We believe these to be exceptional metrics by any standard.”

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In a research note titled “Why now more than ever is the time to buy this Top Pick,” Canaccord Genuity analyst Tom Gallo said Calibre Mining Corp.'s (CXB-T) upcoming operational results “should be strong which ought to help propel the stock forward following an industrywide pullback.”

Though the Vancouver-based miner’s stock is up 94 per cent year-to-date, he expects it to continue to outperform, reaffirming his “Top Pick” call in the junior producer category and suggests “that now (ahead of results) is an excellent entry point.”

“Based on numbers provided by Calibre in early August, the company had a very strong July having produced nearly 16,000 ounces of gold,” said Mr. Gallo. “We have ratcheted back both August and September out of conservatism but still model 44,000 ounces for Q3/20. Prior to the Covid-19 interrupted year, the company had guided 140-150,000 ounces. (a 4-quarter run rate at our assumed Q3 production rate well exceeds the top end showing the company is capable of edging toward the 200,000 ounces per annum mark.”

Also feeling the recent preliminary economic assessment for its Libertad complex in Nicaragua “just scratched the surface” of its potential, Mr. Gallo increased his target for Caibre shares to $4 from $3.20, keeping a “buy” rating. The average on the Street is $2.79.

“We believe, as our title suggests that right now presents one of the best entry points we see for the next 12 months. We anticipate a strong Q3 to re-jumpstart the stock following an industry wide pull back over the previous month or so,” he said. “Calibre’s impactful (+80k) drill program and successful approach to its Hub and Spoke philosophy (already moving ore from El Limon and brining Pavon online soon) should translate into value creation in the near term.”

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In a separate note, Mr. Gallo touted the potential of K92 Mining Inc.'s (KNT-X) the Kora deposit at the Kainantu gold mine in Papua New Guinea, calling it “one of the best ore bodies we’ve ever seen.”

“Consistent, high-grade mineralization has been the norm for Kora and Kora north since late 2017. We expect the mine could continue to outperform the resource grade,” he said. “Kora link and other, smaller, non-resource constrained veins or stringers have and could continue to provide grade especially as the tonnage is pushed. Dilution in this case is not zero grade from what we observed on site last year. Couple that with continuity (i.e. a surface expression mining levels below and drill holes well below the bottom workings) and you’re left with a world class mineral system in the infancy of extraction.”

Maintaining a “buy” rating for K92 shares, he hiked his target to $12.50 from $8.75. The average is $9.73.

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In a research report previewing its third-quarter financial results, Desjardins Securities analyst David Newman kept his above-consensus expectations for Ag Growth International Inc. (AFN-T), saying “record harvests should leave bins overflowing.”

"For 3Q20, we are maintaining our adjusted EBITDA forecast of $42-million (versus consensus of $41-million), driven by: (1) favourable weather conditions across North America, which continue to support this year’s bountiful harvest with record yields; (2) improving farmer sentiment, backed by the increase in crop prices and solid export demand, offset by still weak ethanol consumption (although even corn prices have recovered); (3) stable but subdued Commercial North America; and (4) strength in Brazil, which is at an inflection point in terms of sales and market share, as well as India, given good crops and supportive government buying programs.

“While AGI could potentially post better-than-expected results, given a record harvest across North America and strength in Brazil, India and elsewhere, we are being conservative given the impact of COVID-19 on commercial project decisions by international customers and the recently disclosed commercial bin failure at the Fibreco terminal in North Vancouver on September 11. We have not factored the bin failure into our model as it is still being investigated by the company. The bin is part of a unique line of 35 bins that AGI sold for $19.1-million in revenue and $2–4-million in EBITDA, by our estimate. We believe it could rework and repurpose/resell the bins to mitigate the impact.”

Mr. Newman increased his adjusted free cash flow per share projections for 2020 and 2021 to $3.06 and $4.93, respectively, from $2.98 and $4.85. His adjusted EBITDA estimates rose to $147-million and $175-million from $145-million and $172-million.

Keeping a “buy” rating for Ag Growth shares, he bumped up his target to $41 from $40. The average on the Street is $40.86.

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Seeing a “blue-chip opportunity,” RBC Dominion Securities analyst Michael Eisen upgraded U.S. defence contractor Northrop Grumman Corp. (NOC-N) to “outperform” from “sector perform” in the wake of receiving a US$13.3-billion contract with the U.S. Air Force to develop the Ground Based Strategic Deterrent (GBSD) intercontinental ballistic missile.

“GBSD was the largest known catalyst heading into 2H'20,” he said. “Our sense had been that a multibilliondollar award was already assumed in guidance, estimates, and priced into valuation. As a result, we viewed this critical award for the company as positioning the stock for asymmetric risk to the downside. Now that this risk has passed, we view potential upside from new business wins as well as the risk associated with both major production ramps and budget pressure to be more balanced and better aligned with defense norms. The company’s solid balance sheet, with fiscal 2021 estimated net leverage of 1.1 times, provides ample flexibility for funding operations, deploying capital to shareholders, and potential opportunistic tuck-in M&A. Our forecast assumes $2.2-billion of share repurchases and $2.2-billion of dividends paid out through FY'22.”

Mr. Eisen said Northrop’s valuation is becoming “compelling” after it shares slid 1 per cent in the third quarter, versus an 8.5-per-cent gain for the S&P 500. On a free cash flow and earnings per share basis, it sits below its peer group.

“With a long track record of generating double-digit ROIC [return on invested capital] annually, we believe the company’s HSD [high single-digit] EPS growth potential and strong balance sheet position this trend to continue.”

With his upgrade, Mr. Eisen maintained a target price of US$391 per share. The average is currently US$395.63.

“The combination of the recent GBSD initial contract award, which should level set expectations, and the stock’s 3Q underperformance sets up a compelling risk/reward profile for this blue-chip defense pure play, in our view,” he said.

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In other analyst actions:

• BofA analyst Ebrahim Poonawala downgraded Toronto-Dominion Bank (TD-T) to “underperform” from “neutral.” He said: “The upcoming U.S. presidential elections, which could lead to a change in the corporate tax regime, poses an above-average risk to TD, given that it derives 32 per cent of earnings, including TD Ameritrade, from the U.S.”
• Viewing its current valuation as “significantly discounted” relative to his forecast, Mr. Poonawala upgraded Bank of Nova Scotia (BNS-T) to “buy” from “neutral” with a $68 target. The average on the Street is $62.50.
• Mr. Poonawala also raised Bank of Montreal (BMO-T) to “neutral” from “underperform” with an $88 target, exceeding the $84.66 consensus.
• Canaccord Genuity analyst Anthony Petrucci raised Vermilion Energy Inc. (VET-T) to “speculative buy” from “hold” with a $5 target, down from $6.50 and below the $7.45 consensus.
• KeyBanc analyst Josh Beck raised his target for Shopify Inc. (SHOP-N/SHOP-T, “overweight”) to US$1,250 from US$1,150. The average is US$1,107.94.
• Barclays analyst Raimo Lenschow initiated coverage of Lightspeed POS Inc. (LSPD-N, LSPD-T) with an “overweight” rating and US$40 price target. The average is US$47.67.
• Scotia Capital analyst Konark Gupta raised his target for Andlauer Healthcare Group Inc. (AND-T, “sector perform”) to $42.50 from $40. The average is $42.15.
• CIBC World Markets Robert Bek lowered his target for Cineplex Inc. (CGX-T, “neutral”) to $6 from $10. The current average is $11.38. Mr. Bek said: “While 2021 now contains a ridiculously long and strong slate of big movie releases, implying sizable recovery potential, that requires the virus to recede materially in early 2021, which is a questionable investment thesis at this point. Beyond FCF leakage and liquidity concerns, virus-driven closures and delays increase structural risk concerns, as direct-to-consumer options will begin to drive studio strategies. We have built more conservatism into FY20 and FY21 EBITDA estimates, and have further decreased our target multiple for non-theatrical assets to better account for higher risks for those assets. We stay at Neutral, and advise the stock only for those investors who have a strong view on a quick virus recovery between now and March 2021.”
• Benenberg analyst Jonathan Guy increased his target for Endeavour Mining Corp. (EDV-T, “buy”) to $51 from $45. The average target on the Street are $48.42.
• Mr. Guy also bumped his target for Galiano Gold Inc. (GAU-T, “buy”) to $3 from $2.60. The average is $2.59.
• Berenberg’s Richard Hatch raised his target for Lucara Diamond Corp. (LUC-T, “hold”) to 70 cents from 60 cents. The average is 81 cents
• National Bank Financial analyst Rupert Merer hiked his target for Northland Power Inc. (NPI-T, “sector perform”) to $43 from $39. The average is $39.09.
• PI Financial started IBI Group Inc. (IBG-T) with a “buy” rating and $9.25 target. The average is $8.38.