Inside the Market’s roundup of some of today’s key analyst actions
In response to rapid rise that has seen its share price over double since the U.S. election last week, Desjardins Securities' John Chu downgraded Aurora Cannabis Inc. (ACB-T) to “hold” from “buy” on Tuesday.
“We believe the stock is ahead of itself, given the Republicans are expected to maintain their Senate majority,” the analyst said.
On Monday, the Edmonton-based company reported first-quarter 2021 financial results that largely fell in line with Mr. Chu’s expectations.
“Aurora appears on pace to reach positive EBITDA by 2Q, and plans to: (1) grow market share in profitable categories (ie premium/ super premium); (2) enhance medical market share (in Canada and internationally); and (3) build Reliva’s brands in the U.S. CBD market,” he said. “Aurora is at the beginning of its transformation, planning to outsource and control its inventory build. It continues to lose market share, which is a concern.”
Though he thinks Aurora is making progress in its transformation to gain share in the premium and super premium market segments, Mr. Chu lowered his forecast for the company to reflect “continued weak” recreational sales.
“We have reduced our gross margin outlook modestly to reflect potential pricing pressure and increased competition in the premium/super premium segment,” he said. “As a partial offset, we have lowered our opex forecast.”
“Management stated the company had an encouraging early vape launch and that it plans to launch and focus on San Rafael vapes and higher-quality Whistler vapes. The focus is on driving sales for San Rafael, Whistler and Aurora-branded products in key categories including vapes, pre-rolls, edibles and concentrates. We suspect it should take some time to transition to the new focus on the premium/super-premium segments, although no timelines were provided. The company is looking at new formats and packaging, which will take some time to figure out. Management stated that it does not expect competition between its strategies for the value and premium segments.”
After dropping his sales and earnings expectations through 2023, Mr. Chu lowered his target for Aurora shares to $13 from $14. The average target on the Street is $10.52, according to Refinitiv data.
Elsewhere, CIBC’s John Zamparo hiked his target for Aurora shares to $15 from $12 with a “neutral” rating.
“Aurora has been a market favourite since Tuesday’s U.S. elections, up 134 per cent since last week versus peers at 23 per cent,” said Mr. Zamparo. “However, we don’t envision a simple U.S. entry upon federal legalization, owing to ACB’s balance sheet ($512-million net debt as at FQ1). We also do not expect legalization to be a swift exercise, unless both of Georgia’s senate seats turn blue in January’s run-offs. While we find the stock’s surge difficult to justify, we recognize that the market may reward liquid Canadian cannabis stocks with U.S. listings that do eventually have U.S. ambitions, a trend which could have staying power. Meanwhile, ACB’s operations could be turning a corner, and we now expect the company to generate positive EBITDA in FQ2, in line with management’s outlook. A lift in sector valuations leads to a new price target.”
Canaccord Genuity’s Matt Bottomley increased his target to $11 from $8.50, keeping a “hold” rating.
“We note the Canadian LP universe has seen significant valuation appreciation (with ACB up 120 per cent since the day of the US election),” Mr. Bottomley said. “Although we believe a democratic White House makes the prospects of a potential LP entry into the U.S. directionally more attractive, we believe the recent move in public company valuations is largely overdone (with significant uncertainty and unknowns still at play with U.S. access likely longer-term optionality at best).”
Cowen and Co.'s Vivien Azer moved her target to $20 from $17 with a “market perform” recommendation.
In a separate note, Mr. Bottomley hiked his target for Canopy Growth Corp. (WEED-T) shares to $25 from $21 with a “hold” rating after its quarterly beat. The average is $24.48.
H.C. Wainwright & Co. analyst Amit Dayal downgraded his rating for Ballard Power Systems Inc. (BLDP-Q, BLDP-T) on Tuesday, seeing the expectations for its near-term performance “somewhat tempered relative to the longer-term growth expectations built into the stock.”
“Disruptions from COVID-19 and the manner in which EV and FCEV subsidy programs have been rolling out in China have been overhangs on sales momentum picking up,” said Mr. Dayal, moving the Burnaby, B.C.-based company to “neutral” from “buy.”
“We believe production ramping at the Weichai JV plant is likely to be partly dependent on regulatory policy framework for new energy vehicles in China. The company is also facing near-term margin pressure as higher level of fixed cost overheads, from recent capital investments, are not being effectively absorbed at current volume levels.”
With those headwinds, Mr. Dayal trimmed his 2020 revenue and gross margin expectations to US$107.6-million and 20.2 per cent, respectively, from US$117.9-million and 22.2 per cent, previously. His 2021 revenue and gross margin expectations to US$132.8-million and 21.1 per cent from US$156.8-million and 24.0 peer cent.
“We view the next few quarters as a period of operational consolidation where management continues to prepare for the execution ramp ahead,” said Mr. Dayal.
He did, however, note that multiple long-term drivers remain in place, citing both fundamental and macro factors.
“The company’s opportunity set has diversified beyond trucks and buses to include marine, trains, and potentially passenger vehicles,” said Mr. Dayal. “Similarly, the company’s recent agreement with Audi, expanding its ability to the FCgen proton exchange membrane (PEM) fuel cell stack in all applications (including trucks and cars), in our opinion, gives the company more control over commercializing the technology that has been developed over the last decade. In addition, the company’s balance sheet with approximately$394M in cash and no debt remains very strong. We believe this balance sheet may be leveraged for M&A, as early as within the next six to nine months, potentially providing a boost to revenues and portfolio expansion. We also believe that the regulatory environment for Ballard in North America, China, and Europe continues to remain positive and should provide a tailwind to future growth.”
He did not specify a target price for the stock. The average target for Ballard’s TSX-listed shares is $30.67.
Martintea International Inc.'s (MRE-T) stock is “disconnected from fundamentals,” according to Raymond James analyst Michael Glen.
Ahead of the release of its third-quarter financial results on Wednesday after the bell, he raised his rating for the Vaughan, Ont.-based auto parts manufacturer to “strong buy” from “outperform.”
“While we recognize that these type of Buy in front of the quarter type calls are viewed by investors as perhaps too risky, we believe this situation is just too compelling to ignore, and we are strongly encouraging investors to add to their positions before the print on Wednesday,” he said. "The lagging nature of the stock (I.e. MRE down 23 per cent year-to-date vs. the TSX down 3 per cent, and MG-T up 9 per cent), has been exceptionally frustrating to watch, and all signals that we watch and follow point to a very strong quarterly performance.
“In particular, we point to two recent and very tangible data points, namely the recent 3Q report from Martine’s largest customer, General Motors (we estimate GM is 25 per cent of MRE sales) on November 5, and the 3Q report from Canadian peer Magna International on November 6 (GM is also Magna’s largest customer at 15 per cent of sales). Both earnings spoke to a strong recovery and performance in North America, with robust markets for truck, SUV, CUV. These represent large and meaningful categories for Martinrea, and with the operational turnaround work that the company pursued during the pandemic related shutdowns, we fully anticipate a strong pick-up on margin during 3Q20.”
Mr. Glen pointed a mid-September discussion with Martinrea’s management that led him to believe North American production volumes were continuing to grow and now sit near levels seen prior to the outbreak of the COVID-19 pandemic.
“Over and above rebounding production, MRE was also highlighting a positive mix tailwind, with truck/ SUV volumes driving the recovery,” he said. “Specific reference was also made to volumes on GM’s T1XX platform, which will become MRE’s largest platform when fully launched (2021), with the current market environment seeing strong customer demand and low dealer inventories.”
The analyst raised his quarterly earnings per share projection to 49 cents, which is at the high end of the company’s guidance of 40-50 cents.
“We note an extremely high correlation between Magna and Martinrea EPS over the past 5 years (i.e. 1Q15-4Q19). Based on this correlation and Magna’s $1.95 adjusted EPS reported Friday, if this relationship holds true for 3Q20, we calculate that we could see MRE adjusted EPS in the $0.65-$0.70 range,” he said.
Mr. Glen maintained a target price of $16 per share. The average on the Street is $15.21.
In justifying his view, Mr. Michaeli pointed to “the combination of expected above-market revenue growth, steady margin expansion, increasing exposure to secular trends (EV/AV), and a strong balance sheet/FCF profile.”
He raised his financial expectations for the Vaughan, Ontario-based auto parts manufacturer, citing its “strong” incremental margins in the second half of the year and viewing his previous margin estimates for both 2021 and 2022 as “conservative.”
Keeping a “buy” rating for Magna shares, he also raised his target to US$69 from US$65. The average on the Street is US$66.92.
Elsewhere, Raymond James' Michael Glen hiked his target for Magna shares to US$61.50 from US$52, keeping a “market perform” rating.
Mr. Glen said: “While we maintain our Market Perform rating on Magna, we would acknowledge that the company has clearly demonstrated a very strong performance as volumes in the industry have recovered. Additionally, we believe that Magna remains very well-positioned moving forward, with a number of tailwinds continuing to support consumer demand for light vehicles, namely: 1. U.S. SAAR hovering in the 16.2-16.3 million range (i.e. September/October volumes per Wards); 2. low inventory levels (per Wards October 2020 U.S. inventory levels were at 2.8 million units, 22 per cent lower than October 2019 levels); 3. a continued positive mix skew towards truck/CUV/SUV (i.e., 76 per cent of October sales) versus passenger car, we see a favourable backdrop for Magna through 4Q20. That said, we would continue to recommend investors remain patient for a more opportunistic entry point on the name.”
Brookfield Infrastructure Partners LP (BIP-N, BIP-UN-T) is “surviving and thriving,” according to RBC Dominion Securities analyst Robert Kwan, emphasizing its quarterly results were “another demonstration of resiliency” as the recovery for its business impacted by the COVID-19 pandemic continues.
“We believe that BIP is well-positioned to thrive in the current environment given its strong liquidity, attractive expected returns for certain acquisition targets, robust valuations for low-risk mature assets (i.e., the types of assets BIP is looking to monetize) and the potential to issue BIPC shares at a significant premium to the underlying LP units,” said Mr. Kwan.
He said Brookfield Infrastructure Corp.'s (BIPC-T) premium valuation provides the ability to “drive potentially significant value per unit for BIP’s limited partnership unitholders.”
“We see multiple avenues to increase value, including financing an acquisition using BIPC shares at a premium (and LP unitholders realizing a proportionate benefit), or BIP accretively reducing its total unit/share count by issuing BIPC shares to buyback BIP units (which either retains more cash for investment and/or could result in a higher dividend per share),” the analyst said.
Mr. Kwan also sees BIP “well-positioned to finance any attractive acquisitions given its solid liquidity, more capital likely on the way (i.e., the asset sales program underway), access to the private funds' capital, and the ability to use BIPC shares either as a currency or an issuance to raise cash.”
Keeping an “outperform” rating for BIP shares, he raised his target to US$57 from US$51. The average on the Street is US$53.38.
“While optimization could take various forms, our analysis indicates that there could be an up to $9/unit uplift in BIP’s valuation by utilizing BIPC’s premium. Incorporating 50 per cent of that value and our 2022 forecast results in a new sum-of-the-parts valuation range of $53.00-62.00 per unit,” said Mr. Kwan.
Elsewhere, CIBC World Markets' Robert Catellier raised his target to US$52 from US$50 with an “outperformer” rating, while Raymond James' Frederic Bastien increased his target to US$60 from US$50 with an “outperform” recommendation.
“Highly resilient cash flows through COVID-19 have further cemented Brookfield Infrastructure’s status as an investment for all seasons, in our opinion,” he said. “Most operations have provided largely uninterrupted service through the pandemic, while the more GDP sensitive businesses have fully recovered (or very close to) from the impact of worldwide lockdowns. With the investments in Reliance Jio and Cheniere Energy Partners now contributing to results, organic growth set to reaccelerate and management’s intentions to actively recycle capital from mature assets into higher-return opportunities, we expect BIP to lead its industry in cash flow growth next year.”
Pollard Banknote Ltd. (PBL-T) is “firing on all cylinders,” said Canaccord Genuity analyst Robert Young, who thinks its “strong” third-quarter results underscore “the resiliency” of its products in the “in the face of COVID-19.”
After the bell on Monday, the Winnipeg-based lottery ticket provider reported revenue and EBITDA of $116.7-million and $24.5-million, respectively. for the quarter. Both exceeded Mr. Young’s expectations ($102.4-million and $15.5-million)
“The strength was broad based and evident in the instant ticket business, the charitable gaming business, and, in particular, the iLottery business, which goes to market through the NeoPollard JV,” he said. “Record adjusted EBITDA of $24.5-million or 21-per-cent margin (19.2 per cent removing benefit assistance) benefitted from cost containment activities and iLottery shift from a drag to a benefit. Overall, the quarter benefitted from a resilient product and strong execution.”
After raising his revenue and earnings estimates for 2020 and 2021, he hiked his target for Pollard shares to $25 from $21 with a “buy” rating (unchanged). The average is $24.33.
Seeing a “compelling” risk-reward opportunity for investors, Paradigm Capital analyst Lauren McConnell initiated coverage of Argonaut Gold Inc. (AR-T) with a “buy” rating on Tuesday.
“We believe Argonaut (AR) is unique, offering a solid production base with significant upside through its development projects,” she said. “There are few undeveloped deposits capable of producing 150Koz+ per year (first five years) with a 15+ year mine life and excellent infrastructure, and the supply decreases exponentially when a filter limits the search to ‘safe jurisdictions’. AR’s Magino project has all of those attributes and more. We believe the fully permitted and funded development plan is an intelligent option with a robust IRR (28 per cent), in a good jurisdiction (Ontario), and significant upside through exploration and expansion potential. Its second development asset, Cerro del Gallo (Mexico), would dovetail nicely, in our opinion, and boost production further. AR’s current market valuation primarily reflects the value of its existing operations, in our view, but we believe a significant re-rating will occur over the next year or two as the development assets move closer to first production; in addition, there is considerable exploration upside, with near-term potential catalysts not currently being reflected.”
Ms. McConnell set a target for $6.50 per share, exceeding the consensus of $4.94.
ATB Capital Markets' Chris Murray said the earnings report and update were overshadowed by Pfizer Inc.'s COVID-19 vaccine news, however he emphasized the importance of that news on the airline.
“Coupled with several testing protocols under development, which may reduce the need to quarantine a full 14-days underway, which could include additional jurisdictions including Ontario and major EU states and the UK, we believe we are moving closer to the end of the pandemic and the beginning of the recovery phase,” he said.
Mr. Murray moved his target for Air Canada to $27.50 from $26. The average on the Street is $21.82.
Others making changes included:
* Scotia’s Konark Gupta to $24 from $21 with a “sector outperform” rating
“While cash burn trends in Q3 and guidance for Q4 were better than expected, we believe the stock reacted to Pfizer’s announcement that its COVID-19 vaccine candidate may be 90 per cent effective,” said Mr. Gupta. “However, from a fundamental standpoint, our key takeaways from the quarter were positive, including improving cash burn trends, significant capex cuts, and potential to grow the cargo business through entry into the dedicated freighter market. Our target increases ... driven largely by an $1-billion net debt beat in 2H, along with a modest increase in our earnings outlook. There could be further upside risk to our estimates from a faster-than-expected rebound in air travel and/or growth in cargo revenue as AC potentially spreads its wings. That said, we won’t be surprised by continued volatility in the stock as the airline sector is broadly seen as a vaccine play by most investors and vaccine sentiment can swing around. We maintain our Sector Outperform rating, reflecting stock’s attractive valuation vs. its U.S. peers and pending air travel recovery.”
* CIBC World Markets analyst Kevin Chiang to $25 from $21 with an “outperformer” rating
“The developments over the past 24 hours also reinforce our long-term positive view on AC. Its liquidity position ($8.2-billion currently), low leverage ratio entering 2020, current market positioning, and strong operating culture gave us the high level of confidence that the airline would successfully weather the storm,” said Mr. Chiang. “So while demand trends remain challenged over the near term, AC looks positioned well for this marathon.”
* TD Securities' Tim James to $30 from $26 with a “buy” rating
* Cowen and Co analyst Helane Becker to $20 from $17 with a “market perform” rating.
In other analyst actions:
* CIBC’s Kevin Chiang cut his target for Bombardier Inc. (BBD.B-T) to 40 cents from 45 cents, matching the consensus. He maintained a “neutral” rating.
* Scotia Capital analyst Phil Hardie raised his target for Power Corporation of Canada (POW-T, “sector perform”) to $34 from $32.50. The average is $29.34.
“We believe that owning POW offers better value, a greater level of embedded optionality and likely a more favourable risk-reward than simply holding its underlying subsidiaries,” said Mr. Hardie.
“We believe the current discount is unjustifiably wide. Key factors likely to tighten the discount include: (1) enhanced growth profile of POW’s publicly trading operating subsidiaries, (2) accelerated development of its alternative investment platforms to drive material fee-generation along with successful monetization of investments to demonstrate and crystallize the intrinsic value of the platform, (3) deployment of excess capital through share buybacks, and (4) continued enhancement of shareholder communication.”
* Scotia’s Trevor Turnbull raised his target for Lundin Gold Inc. (LUG-T, “sector outperform”) to $17.50 from $15. The average is $16.38.
“In our opinion, Lundin Gold is not only compelling as a well running, low-cost operation, but it offers strong growth with its new mill upgrade plans for next year. We are awaiting details on the conference call, but we are incorporating the expanded scenario using our estimates of $25 million capex and 4,100 tpd (tonnes per day) going forward,” said Mr. Turnbull.
* After “solid” third-quarter results, Desjardins Securities analyst Michael Markidis raised his target for Choice Properties REIT (CHP.UN-T) to $14 from $13.50, which is the current consensus, with a “hold” rating.
“The 2-per-cent improvement in our 2021 FFO outlook reflects better-than-expected collections and occupancy while our newly introduced 2022 FFO estimate implies 4-per-cent year-over-year growth,” he said. “CHP’s elevated rent collection, ranking it among the highest of the commercial peers, indicates that operations are normalizing, enabling it to refocus on capital recycling and asset management, in our view.”
* CIBC’s Dean Wilkinson cut his target for InterRent REIT (IIP.UN-T) to $14.50 from $16 with a “neutral” rating, while Canaccord Genuity’s Mark Rothschild lowered his target to $15.75 from $16.50 with a “buy” recommendation. The current average is $16.16.
“We believe that a premium multiple is justified to reflect InterRent’s ability to drive sector-leading internal growth,” said Mr. Rothschild. “While operating performance has taken a hit with the slowdown in immigration and a lack of foreign students, this is likely to bounce back in 2021.”
* Noting" promising updates in vaccine development offer a clearer (and earlier) path to recovery," CIBC’s Robert Bek raised his target for Cineplex Inc. (CGX-T, “neutral”) to $8 from $6. The average is $11.
“While the film slate for the second half of 2021 now contains a long and strong list of big movie releases, implying a sizeable recovery potential, the Cineplex story had become a function of virus spread severity, translated into theatre closures and movie-slate delays,” he said. “We continue to use FY22 EBITDA estimates in our NAV model, which we haven’t changed. However, the promising success of a newly developed vaccine should reduce risks for the company’s execution out to FY22. As such, we have increased the target multiple for our theatrical assets by 0.5 times. While the arrival of highly efficient vaccine eases some medium-term risks for the company, we remain on watch for increases in structural risks as direct-to-consumer options could begin to drive studio strategies if the pandemic lingers into the spring without a vaccine.”
* National Bank Financial analyst Zachary Evershed raised his target for Hardwoods Distribution Inc. (HDI-T) to $35 from $29.50 with an “outperform” rating, while CIBC’s Hamir Patel increased his target to $31 from $28 with an “outperformer” recommendation. Canaccord Genuity’s Yuri Lynk hiked his target to $30 from $23 with a “buy” rating. The average is $31.24.
“As the largest distributor of architectural building products in North America, HDI is well positioned to benefit from the housing sector’s favourable macro drivers. Additionally, with just 1.3 turns of leverage and a track record of successful integration, HDI boasts latent acquisition upside potential,” said Mr. Lynk.
* CIBC’s Jamie Kubik raised his target for Seven Generations Energy Ltd. (VII-T) to $6.50 from $6 with an “outperformer” rating, while Raymond James' Chris Cox bumped up his target by a loonie to $6.50 with an “outperform” rating. The average is $6.63.
“A relatively in-line quarter, with the key highlight being the release of the 2021 budget,” said Mr. Cox. “Overall, we are encouraged by the guidance into next year, pointing to a continued improvement in the company’s cost structure and highlighted by a break-even price of US$35/bbl WTI; this ranks in the top-quartile among oil-weighted names that we cover. The improved cost structure and commitment to free cash flow generation should also provide investors with improved line-of sight to the company’s deleveraging efforts.”
* Laurentian Bank Securities analyst Furaz Ahmad increased his target for Converge Technology Solutions Corp. (CTS-X) to $4 from $3.75 with a “buy” rating, while Raymond James' Steven Li bumped his target to $3.75 from $3.50 with an “outperform” recommendation. The average is $3.34.
“With balance sheet concerns all but gone and ROIC starting to break-out, we believe Converge is just getting started and its current discounted valuation spells opportunity,” said Mr. Li.
* Scotia Capital’s Himanshu Gupta raised his target for Granite REIT (GRT.UN-T) to $87 from $82 with a “sector outperform” rating, exceeding the $84.21 average.
“Our AFFO [adjusted funds from operations] estimates point to a superior growth profile and imply CAGR [compound annual growth rate] of 10.2 per cent (2019-2021) and 9.1 per cent (2020-2022). A best-in-class balance sheet points to a superior risk profile as well,” he said.