Inside the Market’s roundup of some of today’s key analyst actions
Industrial Alliance Securities analyst Puneet Singh thinks Osisko Gold Royalties Ltd. (OR-T) is “too cheap to ignore,” believing a royalty company in a bull market should not trade at a discount to its net asset value.
In a research report released Tuesday, he raised the firm’s rating for its stock to “strong buy” from “buy” upon assuming coverage and named it his top pick in the royalty sub-sector.
Mr. Singh thinks Osisko shares are set to rerate with the spin out of its Cariboo gold project in British Columbia, though he did caution that better messaging from the company is necessary.
“In October, OR announced it would be spinning out its Cariboo development asset (and other smaller assets) into a new vehicle (Osisko Development Corp., ODV-V, Not Rated) and will in return start as the majority shareholder (88 per cent) of the new company,” he said. “We note, OR acquired Cariboo for $338-million (or US$60 per ounce on the then +4Moz resource). The pro-forma structure of the Newco values OR’s stake at $748-million. Over time, as Cariboo becomes further de-risked, we would expect OR to realize value through a take-out or by selling its shares.”
“We think there may be some uncertainty amongst investors given that OR still holds a large equity position in ODV and is helping some of its smaller private royalty/streams (Renard, Amulsar) recover. But better messaging with the new corporate structure should unlock value.”
Mr. Singh hiked the firm’s target for Osisko shares to $24 from $20. The current average on the Street is $20.80.
“The message from investors was clear, they wanted OR to be a strict royalty company and the creation of ODV was designed to do that,” he said. “While the deal included some smaller assets, we point out that OR’s equity stake in ODV is already worth more than Cariboo’s acquisition price. However, OR shares haven’t reacted as well as they should have on the transaction news. Compared to its peers, Osisko has the largest portion of NAV in low-risk jurisdictions (more 80 per cent NAV in Canada and the U.S.) and the best growth next year (30 per cent) and per annum (22 per cent) over the next five years.”
On Tuesday, Mr. Singh also assumed coverage of Wheaton Precious Metals Corp. (WPM-T) and Franco-Nevada Corp. (FNV-T) with “buy” ratings, expecting all three to be active on the deal front in the current bull market environment.
“FNV and WPM have both stated there are deals being shopped in the US$500-million-US$1-billion range,” he said. "FNV, OR, and WPM will all hit record cash flows (increased dividends are likely) next year with rising precious metals prices and growing GEO production. Overall, as the bull market matures, we would expect funds flow to move down capitalization (as it has from producers to juniors in the broader gold market) to those with higher long-term growth.
“Royalty companies have proven to generate long-term value throughout the ups and downs of the gold price cycle. Since investors put preference on long-term growth, our valuation technique uses a 50:50 mix of P/NAV and P/2022 estimated CFPS (as opposed to the normal one-year forward outlook).”
Mr. Singh sees Franco-Nevada as his “go-to recommended name for those looking for low risk gold exposure.”
“Franco-Nevada has not only led the royalty sector but has also led the mining sector in generating consistent value over time,” he said. “The company has sustainably increased its dividend every year for 13 straight years now and its growth trajectory indicates it will continue to do so into the future. Year-over-year GEO growth of 25 per cent for a company of FNV’s size is substantial. As gold runs higher and more generalists enter the sector, FNV will continue to benefit and receive higher multiples.”
He maintained a target of $250 for Franco-Nevada shares. The average on the Street is $210.67.
Calling it his recommended pick for those looking for silver exposure, Mr. Singh kept a $90 target for shares of Wheaton Precious Metals, which tops the $84.34 average.
“Silver prices outperformed gold 2:1 during the last cycle, and were starting to do the same this time around before the recent consolidation in precious metals prices,” he said. “While Wheaton’s portfolio is less diversified (60 per cent of NAV in top three assets), the peer leading exposure to silver will continue to drive funds flow.”
Village Farms International Inc. (VFF-Q, VFF-T) has “cemented its position as Canada’s premier supplier of quality, high-volume cannabis” with the closing of its acquisition of Pure Sunfarms, said Raymond James analyst Rahul Sarugaser.
That led him to upgrade his rating for Vancouver-based company to “strong buy” from “outperform.”
“We think VFF’s timing is perfect,” said Mr. Sarugaser. “We believe the Canadian cannabis selloff is overdone for strong operators like VFF. We view VFF’s massive TX-based greenhouse footprint as a free upside option on an increasingly-probable, federally-lawful U.S. CBD and/or cannabis opportunity. And, importantly, we are observing VFF materially outperforming its peers in month-over-month cannabis sales.”
He kept a US$20 target for Village Farms shares. The average on the Street is US$13.
“With its 100-per-cent ownership of PSF, soon-to-be consolidated VFF+PSF revenue, rapid growth in market share, and consistent EBITDA+ performance, we see VFF’s current share price as a compelling value buy: we raise our rating,” said Mr. Sarugaser.
In a research note titled A pandemic-safe Eurotrip, Desjardins Securities analyst Kyle Stanley initiated coverage of European Residential Real Estate Investment Trust (ERE.UN-T) with a “buy” rating, seeing its current 21-per-cent discount to net asset value as “unwarranted and should narrow as its underlying growth profile is demonstrated.”
He emphasized the importance of its relationship with parent company Canadian Apartment Properties REIT (CAR.UN-T), which holds a 66-per-cent ownership interest. He thinks it benefits from CAPREIT’s European operational expertise to manage its portfolio, which its centred on a 5,865-suite multifamily portfolio located in the Netherlands.
“The tight Dutch rental market, which is plagued by undersupply, should continue to yield healthy rent growth; we believe ERES can generate 4–4.5-per-cent annual top-line growth,” said Mr. Stanley. “Moreover, we expect it to continue consolidating the highly fragmented apartment market, taking advantage of the desirable investment spread dynamic in Europe (200–350 basis points spread between acquisition cap rates and financing costs).”
“The REIT’s favourable yield/payout dynamic (4.0 per cent/70 per cent), NOI growth potential and efficient capex profile (forecast EUR0.7-million funding surplus in 2022) should lead to 7–8-per-cent compound annual NAV growth through 2022.”
Mr. Stanley set a target of $5 per unit, which falls 6 cents below the current consensus.
“Our positive investment bias is predicated on (1) ERES’s positioning in a robust Dutch rental market with significant opportunity for consolidation, (2) the potential for high single-digit NAV growth over the forecast period, and (3) the high degree of alignment with and support from external asset manager CAPREIT,” he said. “At current levels, investors gain access to a portfolio of high-quality apartment assets offering unique geographic diversification at an attractive valuation.”
Touting its successful history of acquisitions and the quality of its product portfolio, Industrial Alliance Securities analyst Chelsea Stellick initiated coverage of HLS Therapeutics Inc. (HLS-T) with a “buy” rating on Tuesday
“HLS has a strong portfolio of three commercial-stage assets, including Vascepa, which has blockbuster potential,” she said. “Additionally, HLS has three more promising assets in the pipeline that are under review and if approved will launch in H1/21. These near-term events provide clear visibility to the Company’s growth potential in the next few years.”
Ms. Stellick called Vascepa a “blockbuster” product and expects it to add value immediately.
“HLS launched Vascepa in February 2020 after obtaining the exclusive commercial rights to the product in Canada from Amarin (AMRN-Q, Not Rated),” she said. “It is the first and only Health Canada approved medication for reducing the risk of cardiovascular events such as cardiovascular death, non-fatal myocardial infarction, non-fatal stroke, coronary revascularization, or hospitalization for unstable angina. HLS expects Canadian sales of Vascepa to reach between $275-325-million per year with upside potential.”
Seeing the potential for further dividend boosts as Vascepa helps sales growth, she set a target of $32 per share. The current average on the Street is $32.06.
Gibson Energy Inc. (GEI-T) is “well positioned for longer-term upside,” according to Industrial Alliance Securities analyst Elias Foscolos.
Despite reporting third-quarter results after the bell on Monday that fell below expectations on the Street, Mr. Foscolos raised his rating for Gibson shares to “buy” from “hold.”
“Thee way we look at GEI’s upside is multifold,” he said. “If Keystone XL is cancelled, demand for heavy oil tankage may decrease but demand for an expanded DRU increases. If demand for heavy oil increases(due to lower global supplies) and differentials narrow, more tankage at Hardisty will be required. If not, Marketing should outperform on wider oil price differentials.”
Mr. Foscolos lowered his target by a loonie to $23, falling short of the average of $25.74.
“After adjusting for one-time costs, we calculated GEI’s Q3 adjusted EBITDA as inline with our estimate and consensus,” he said. “Any way we look at it, GEI is operationally hedged to fully profit from increased demand for heavy Canadian oil. Despite reducing our target price ... upside is now compelling. We expect that a year from now, patient investors will be rewarded. As a result, we are increasing our rating.”
Elsewhere, Canaccord Genuity analyst John Bereznicki trimmed his target to $27 from $29 with a “buy” rating (unchanged).
Seeing an improved outlook “on the back of a material reduction in leverage and the acceleration of restructuring efforts through the COVID-19 pandemic,” Acumen Capital analyst Trevor Reynolds initiated coverage of AutoCanada Inc. (ACQ-T) with a “buy” rating.
“In August 2018 new management led by Chairman Paul Antony and President Michael Rawluk (CFO Mike Borys joined in August 2019) introduced a revised go forward plan to re-position the company for top and bottom line growth through a reduction in leverage and improvements to higher margin business lines,” he said. “ACQ’s $180-million reduction in debt over the past two years has been achieved through a combination of sale lease backs, working capital management, and a general improvement in operations. In our view ACQ appears well positioned to resume M&A activity moving forward on the back of decreased leverage, improved Canadian operations, and a stronger than expected market for vehicle sales through the COVID19 pandemic.”
Mr. Reynolds emphasized how “attractive” the Canadian automotive market has proven, logging continuous annual growth in the the number of cars sold despite “volatile” conditions.
In justifying his rating, he also pointed to the Edmonton-based company’s growth initiatives.
“While M&A remains key, ACQ is working on numerous organic growth initiatives to increase high margin Financing & Insurance (F&I) along with Parts Service & Collission Repair (PS&CR) revenue,” he said. “As a result of concentrated efforts ACQ has effectively increased used vehicle sales driving stronger F&I and PS&CR contributions. ACQ entered a strategic partnership with DealerMine CRM in early 2019 to establish a dedicated business development center (BDC) which centralized service work appointment bookings in Canada. With the system now in place we expect an increase in service bay occupancy across the network moving forward. ACQ is also working to expand F&I through RightRide which offers credit challenged customers financing products for used vehicles. RightRide currently operates seven locations, four within dealerships and three standalone locations, and are expanding their exposure to the $6-billion sub prime market. Lastly, ACQ annnounced plans earlier this year to develop an online sales platform, similar to Carvana in the U.S., which would likely make them first to market in Canada.”
Mr. Reynolds set a target of $26 per share. The average on the Street is $21.26.
“We acknowledge there are risks inherent in the traditional dealership model as a result of economic conditions, COVID19, the transition to electric vehicles (less maintenance), ride-sharing programs, online sales, and direct from factory sales (Tesla),” the analyst said. “That said, we believe ACQ is well positioned to be a leader in the automotive sales market moving forward.”
Calling it a “high-grade, bonanza potential growth story,” Echelon Partners analyst Gabriel Gonzalez initiated coverage of Halifax-based Silver Tiger Metals Inc. (SLVR-X) with a “speculative buy” rating on Tuesday.
“The Company is drilling its 100-per-cent owned El Tigre silver-gold project in northern Mexico, which currently hosts an 84 million ounces silver equivalent (1.0 million ounces gold equivalent) resource,” he said. “We see significant resource expansion and share appreciation potential over the next 12 months as the Company drills the property’s Protectora and Fundadora-area northern vein extensions which in 2017 returned as much as 2,749 grams per ton silver equivalent.”
Pointing to a “supportive” macro outlook for its drilling program, Mr. Gonzalez set a target of $1.30 per share, matching the consensus.
“SLVR currently trades at $1.00 per ounce mainly based on the lower-grade El Tigre bulk gold resource; if SLVR’s drill program at the Fundadora-area northern vein extension successfully expands high-grade mineralization, we believe SLVR should re-rate to a higher EV/oz value,” he said. “Our $1.30/shr price target assumes a doubling of the current Fundadora-area resource plus additional gold-halo type mineralization and regional resource discovery on an expanded drill program, for a total resource of 142Moz AgEq (a 70-per-cent increase to the current resource estimate, at a combined EV/oz value of $1.76/oz AgEq).”
In other analyst actions:
* TD Securities analyst Graham Ryding raised Atrium Mortgage Investment Corp. (AI-T) to “buy” from “hold” with a $12 target, rising from $11.50. The average on the Street is $12.80.
* TD’s Cherilyn Radbourne lowered Rocky Mountain Dealerships Inc. (RME-T) to “tender” from “buy”
* Scotia Capital analyst Konark Gupta cut his target for Air Canada (AC-T, “sector outperform”) to $21 from $24. The average on the Street is $21.36.
* Scotia’s Paul Steep raised his target for Constellation Software Inc. (CSU-T) to $1,700 from $1,600 with a "sector outperform” rating, while BMO Nesbitt Burns' Thanos Moschopoulos increased his target to $1,650 from $1,600 with an “outperform” rating. The average is $1,759.59.
“We remain Outperform on Constellation and have raised our estimates and target price following unexpectedly strong Q3/20 results, which demonstrated a return to year-over-year organic recurring revenue growth and solid margins,” said Mr. Moschopoulos.
“We also suspect that CSU has been paying lower-than-expected purchase multiples on recent acquisitions, contributing to a revenue beat.”
* Mr. Steep lowered his target for shares of CGI Inc. (GIB.A-T, “sector outperform”) to $101 from $102, exceeding the $100.96 average.
* Scotia’s George Doumet raised his target for Park Lawn Corp. (PLC-T, “sector outperform”) to $33 from $32. The average is $33.88.
* Credit Suisse analyst Fahad Tariq increased his target for Hudbay Minerals Inc. (HBM-T, “outperform”) to $7.75 from $6.50. The average is $7.22.
* RBC Dominion Securities analyst Geoffrey Kwan increased his target for Genworth MI Canada Inc. (MIC-T, “sector perform”) to $43.50 from $36. The average is $42.40.
* Cormark Securities initiated coverage of Topaz Energy Corp. (TPZ-T) with a “buy” rating and $15.50 target.