Inside the Market’s roundup of some of today’s key analyst actions
Just eight days after he downgraded Aurora Cannabis Inc. (ACB-T) in response to strong share price appreciation following the U.S. presidential election, ATB Capital Markets analyst David Kideckel reversed course on Tuesday and upgraded the Edmonton-based company “sector perform” from “underperform,” citing both its valuation and balance sheet strength.
“We believe that Aurora Cannabis is trading below its intrinsic value after the recent correction in its stock price,” he said. “Our investment thesis on Aurora is driven by three factors: (i) Aurora’s ability to grow its revenue in-line with the overall Canadian cannabis industry, (ii) Aurora management’s focus on profitability, (iii) Aurora' strong capital position. Following the raise, we estimate Aurora’s cash position to be $476-million. We believe that having a strong cash position is one of Aurora’s key advantages in this market scenario.”
Mr. Kideckel emphasized Aurora remains one of the top three Canadian companies in terms of recreational cannabis sales, despite losing market share over the last two quarters.
“Moreover, the Company is the leader in Canadian medical cannabis sales,” he added. “In our view, Aurora’s renewed CPG go-to-market approach may enable the Company to expand its market share over the midto-long-term. Given our view on the potential growth of the Canadian cannabis industry, we believe that Aurora’s long-term sales growth outlook is positive.”
“We are encouraged by Aurora management’s focus on profitability. Management has reiterated its guidance to turning adjusted EBITDA positive over the next quarter (Q2/FY21), which compares to our cautious estimate for ACB turning adjusted EBITDA positive in FY2022. We note that management is increasingly focused on positive free cash flow generation as it optimizes the Company’s asset-base and moves to a more asset-light, variable cost structure (as opposed to a capital-heavy, fixed cost-structure which requires more capital investments).”
Mr. Kideckel maintained a $10.50 target for Aurora shares, which sits 1 cent below the average on the Street.
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TerrAscend Corp. (TER-CN) is an emerging leader in the U.S. cannabis industry, according to Echelon Capital Markets analyst Andrew Semple, emphasizing its “top-notch assets in best-in-class markets.”
He initiated coverage of Mississauga-based company with a “speculative buy” rating.
“It boasts the largest market share of Consumer-Packaged Goods sales in Pennsylvania, serving all 98 operating dispensaries, including 3 of its own highly productive dispensaries,” said Mr. Semple. “It is one of 12 medical licensees in New Jersey, where voters recently passed adult-use legalization. TerrAscend is likely to have the highest proportional exposure to New Jersey of all publicly traded cannabis companies, making TerrAscend the investment of choice to participate in this up-and-coming adult-use market. TerrAscend also generates some of the highest margins in the cannabis industry, with Q320 preliminary results showing an EBITDA margin of 35 per cent. Led by a capable management team and backed by key strategic partners, we believe TerrAscend represents an excellent wager to participate in America’s most attractive cannabis markets and the long-term upside potential within the broader U.S. cannabis industry.”
Mr. Semple noted TerrAscend features industry “heavyweight” Canopy Growth Corp. (WEED-T) as well as Canopy Rivers Inc. (RIV-T) as key strategic investors. The related companies own 38.9 million shares and 20.4 million warrants and have also investing $94-million in debt securities.
“We also highlight that the company has received substantial investment from JW Asset Management, an investment firm controlled by TerrAscend’s Chairman Jason Wild,” he said. “Mr. Wild and JW Asset Management own 44 per cent of the outstanding equity (excluding exchangeable shares) and have made significant contributions to the company’s previous equity financings. We view the strong participation by strategic and financial backers as indicative of confidence in TerrAscend to execute on its growth plans, as well as suggesting strong support behind the company’s future capital raising initiatives.”
Also touting its “under-levered” balance sheet with its capacity to add debt and fresh capital as needed, Mr. Semple set financial projections that sit above the average on the Street, noting he’s bullish on its abilities to “quickly ramp” revenues in New Jersey’s medical cannabis market.
Seeing “plenty” of upside potential to its valuation, Mr. Semple gave TerrAscend a $12 per share target, which implies upside of almost 19 per cent. The average on the Street is $10.55.
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Citing continued de-risking and improved visibility, Canaccord Genuity analyst Ken Herbert raised his rating for Maxar Technologies Ltd. (MAXR-N, MAXR-T) to “buy” from “hold” on Tuesday.
“We believe the recent pull-back due to delay risks around the Space Infrastructure segment create an opportunity to own a vertically integrated space company with strong positions in both commercial and government markets at an attractive valuation,” he said. “We believe the long-term growth in earth observation will support new capacity (Legion satellites), and the technical capabilities of the current offering ensure continued leading share in the government market, even with increased competition, in our view. While MAXR faces timing risks (space investing defines long cycle), we believe that as U.S. investors reacquaint themselves with the stock, the peer valuation discount will continue to close.”
Though Mr. Herbert trimmed his EBITA expectations for the Colorado-based company, once known as MacDonald, Dettwiler and Associates Ltd., to align with management’s guidance, he said Maxar’s story “has been risk reduction and improved execution.”
“The company has lowered its leverage, increased visibility on its top line, and should be well positioned to execute on its growth strategy when it launches the first of its WorldView Legion satellites in 2021,” he said. "While EBITDA is likely flat into 2021, we believe the pieces remain in place for the expected increase in 2022-2023.
“The company has indicated that it expects EBITDA margins to normalize at 44 per cent in the Earth Intelligence (EI) segment and at 10 per cent in its Space Infrastructure (SI) segment. Our current model assumes these levels in 2022-2023, with much of the upside in Earth Intelligence coming from the increased capacity from the Legion 3-6 satellites, as well as other incremental revenue opportunities. As margins mature, the key catalysts for the stock will revolve around top-line expansion, de-leveraging, and contract wins.”
Despite recent share price strength, Mr. Herbert continues to see an attractive valuation, raising his target for Maxar shares to US$36 from US$28. The average is US$25.44.
“MAXR also benefits from being a pure-play space stock,” he said. “We don’t expect the multiple to approach those of concept space stocks, but we do believe a steady re-rating will occur as it executes on the Legion satellite launches and is successful with the EnhancedView contract opportunity.”
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Raymond James analyst Rahul Sarugaser thinks Auxly Cannabis Group Inc. (XLY-X) suffered through a “tough” third quarter, seeing “its market share plateau and landing itself in a relatively poor cash position with persistently high SG&A, and continued dilution from convertible debt.”
Accordingly, he lowered his rating for the Toronto-based company to “market perform” from “outperform” ahead of the release of its earnings report in tje coming weeks.
Mr. Sarugaser said the opportunity to expand has “been hard to come by” in an overcrowded market, despite 25-per-cent growth in the Canadian adult-use cannabis market in the third quarter.
“Bellwethers such as Canopy Growth and Aphria saw increasing revenue commensurate with a flat market share, while Aurora Cannabis (ACB-NASDAQ, not covered) saw its share decline,” he said. "Among the top 10 LPs, only Village Farms truly captured market share from its peers last quarter.
“Our channel checks reveal that XLY saw modest revenue growth (estimate $9.7-million), commensurate with a slight decline in national market share (2.8 per cent to 2.6 per cent). We expect the introduction of XLY’s deep value brand Back Forty and the launch of a few premium cannabis SKUs will support XLY’s revenue and market share growth in future quarters, but we estimate their impact being negligible during 3Q20.”
The analyst thinks Auxly may begin to see the benefits its large Sunens greenhouse, which began to harvest in September. He sees it reducing reliance on streaming partners and expanding its margins.
Though he trimmed his revenue and earnings expectations for 2020 and 2021, he maintained a 40-cent target for Auxly shares. The average is 48 cents.
“From the time of our analysis of XLY’s 2Q20 results—in which we reiterated our conviction that the company was well set up, with its focus on C2.0 and with support from its heavyweight partner, IMB — we maintained belief in our 40 cent target, even when the stock was under serious pressure (low of 13 cents in late Sep.)," he said. The stock has since run up to our TP, and now, with the headwinds of plateauing market share—a short-term issue, we suspect—combined with the company’s weak cash position driven, in part, by persistently high SG&A and compounded by continued dilution from its convertible debt, we lower our rating to Market Perform. We now await clarity on XLY’s strategy to expand its market share, reduce SG&A, remain liquid without egregious dilution, and on the outcomes of IMB’s strategic review.”
Separately, Mr. Sarugaser raised his target for shares of Cronos Group Inc. (CRON-Q, CRON-T) to US$11 from US$10 based on its focus on U.S. CBD products and moderating Canadian revenue, keeping an “outperform” rating. The average on the Street is US$7.31.
“CRON clearly has its eye on the U.S. as its primary market,” he said. “CRON added the Happy Dance brand, a mass-market prestige (”mass-tige") line of products, which is among the first mass-market targeted brands that we’ve seen backed by a balance sheet strong enough to build it. We estimate Happy Dance achieving a 5-per-cent market share of our estimated $12-billion U.S. CBD market in 2025. Lord Jones — CRON’s existing luxury CBD brand — we estimate capturing a 0.5-per-cent market share in 2025. As such, we estimate CRON’s U.S. CBD product portfolio driving estimated revenues of $7.9-million and $20.2-million in 2021 and 2022, growing materially to $730-million in 2025."
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After better-than-anticipated third-quarter financial results, Neo Performance Materials Inc. (NEO-T) “still screams value,” according to Canaccord Genuity analyst Yuri Lynk.
On Monday before the bell, the Toronto-based chemical manufacturing company reported EBITDA of $5.7-million, down 55 per cent year-over-year but exceeding the forecasts of both Mr. Lynk ($2.5-million) and the Street ($4-million). Revenue fell 24 per cent to $77.9-million, but also topped projections.
“Results came in ahead of our expectations supported by recovering customer demand across the supply chain, especially in the automotive segment, and various cost-cutting initiatives,” said Mr. Lynk. “We believe Neo enjoys a wide competitive moat and exposure to global mega-trends such as the electrification of automobiles, tighter air, GHG, and wastewater emission standards, and industrial automation. In our view, financial results put in a bottom in Q2/2020, and we expect growing EBITDA through 2022. With $75-million of net cash, a heavily discounted valuation multiple, and a 3.4-per-cent dividend yield, Neo should appeal to classic value investors.”
Mr. Lynk raised his target for Neo shares to $14 from $11. The current average is $12.92.
Elsewhere, Scotia’s Mark Neville increased his target for to $15 from $14 with a “sector outperform” rating, , while Raymond James' Frederic Bastien hiked his target to $12 from $10 with a “market perform” recommendation.
“What seems apparent to us, however, is that the path towards normalized levels of profitability may take a little longer than initially contemplated," said Mr. Bastien. “We still believe, largely on the strength on the company’s innovative business model, balance sheet and management team, that the future remains bright for NEO. We’re just not interested in chasing the stock’s recent run higher.”
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Raymond James analyst Craig Stanley does not expect a competing bid to emerge for Endeavour Gold Inc.'s (EDV-T) $2.44-billion proposed acquisition of Teranga Gold Corp. (TGZ-T).
“In our Nov. 10 report on Teranga’s 3Q20 results, we noted the combination would further solidify Endeavour as West Africa’s leading gold producer,” he said. “However a low premium offer would leave too much value on the table, in our opinion, given Teranga’s significant free cash flow growth with Massawa ramping up, as well as a bigger and better updated mine plan for Wahngion in the near future, no economic study as of yet at Golden Hill, and exploration potential in Cote d’Ivoire.”
“Nevertheless, we believe a competing bid is unlikely. First, Tablo Corp. and Barrick, Teranga’s largest shareholders who together control 33 per cent, are supportive. Second, only a handful of producers are big enough to offer a higher bid and would involve these companies increasing their exposure to West Africa. Third, Endeavour is the most sensible acquirer given the synergies and West African experience. At best, minority shareholders may be able to extract a slightly higher bid and/or a cash component.”
Based on that view, he lowered Teranga to “market perform” from “strong buy” with a target of $16.50, down from $21.75. The average is $20.08.
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Thor Explorations Ltd. (THX-X) enjoys a first-mover advantage in Nigeria, according to Paradigm Capital analyst Don Blyth, who sees the Vancouver-based company as “undervalued owing to market unfamiliarity and risk-aversion” to the African nation, which is not known for gold mining.
“This should change when the [Segilola] mine is up and running and producing healthy cash flows,” said Mr. Blyth, who initiated coverage with a “speculative buy” rating.
“Normally, as a company de-risks its development project by completing a Feasibility Study, then financing the project and commencing construction we would expect to see a substantial valuation lift as the market recognizes the transition from developer to producer,” he added. “Yet THX is still trading, in our opinion, at a multiple more akin to its less de-risked development peers. We suspect this is mostly owing to the unfamiliarity of Nigeria for gold mining investment (exacerbated by the recent political/social unrest). Thor has not suffered any business interruptions and is still on track and on budget with its development. We believe when Thor successfully demonstrates the viability of the gold mining business in Nigeria, combined with a high-margin operation that will produce very healthy cash flows, the market will adjust to recognize the accomplishments.”
Also calling its Douta project in Senegal “overshadowed” and a “hidden gem,” he set a target of 60 cents.
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In other analyst actions:
* Scotia Capital initiated coverage of BBTV Holdings Inc. (BBTV-T) with a “sector outperform” rating and $19 target.
* Desjardins Securities analyst Michael Markidis raised his target for Crombie Real Estate Investment Trust (CRR.UN-T) to $15.50 from $14.50 with a “buy” recommendation. The average is $15.09.
“Occupancy has remained relatively stable and collections improved materially,” he said. “Increasing contributions from the development pipeline and a return to normalcy should drive meaningful earnings growth in 2022.”
* Scotia’s Konark Gupta raised his target for Exchange Income Corp. (EIF-T) to $38 from $32 with a “sector perform” rating. The average is $40.95.
* CIBC World Markets analyst John Zamparo raised his target for Alcanna Inc. (CLIQ-T) to $7.25 from $6.75 with an “outperformer” rating. The average is $6.87.
“Alcanna’s favourable positioning during the pandemic showed no signs of slowing down in Q3, and we suspect Q4 will be no different,” said Mr. Zamparo. “We believe investors are right to question how long this environment will continue, and the recent vaccine developments likely mean sales growth will moderate or even decline by H2/2021. But in the interim the company plans to introduce new customers to its Wine and Beyond stores, and post-vaccine, will likely continue to dominate the Alberta discount market, and should generate meaningful FCF until then. With multiple examples of improved capital allocation, ongoing improvements to fundamental performance and the potential catalyst of a reinstated dividend or initiation of a share buyback (and no concerns of an upcoming equity raise), we remain bullish on the stock.”
* National Bank Financial analyst Vishal Shreedhar raised his target for Alimentation Couche-Tard Inc. (ATD.B-T) to $53 from $52 with an “outperform” rating. The average is $53.
* Industrial Alliance Securities lowered his target for Tervita Corp. (TEV-T) to $3.25 from $4.50 with a “speculative buy” rating. The average is $4.22.
“TEV’s offering of Second Lien notes is not only more expensive but also larger than we anticipated, having negative implications for free cash flow and the cost of capital. Building these factors into our model, we are lowering our target price for TEV,” he said. “With the First Lien notes set to go current in December, TEV had to refinance at an inopportune time. We still believe TEV can generate FCF, and extending the maturity of its debt to 2025 provides time to focus on deleveraging through the recovery of the cycle.”
* TD Securities analyst Craig Hutchison raised his target for Turquoise Hill Resources Ltd. (TRQ-T) to $21 from $17.50 with a “speculative buy” rating. The average is $16.02.
* TD Securities’ Derek Lessard resumed coverage of Dorel Industries Inc. (DII.B-T) with a “tender” rating and $14.50 target, matching the consensus.
* Scotia’s Himanshu Gupta raised his target for Storagevault Canada Inc. (SVI-X) to $4.50 from $4 with a “sector outperform” recommendation. The average target is $4.18.
* Laurentian Bank Securities analyst Yashwant Sankpal increased his target for Firm Capital Property Trust (FCD.UN-X) to $6.50 from $6 with a “buy” rating. The average is $6.08.
“FCD has been steadily growing its portfolio while keeping its payout ratio and leverage in check, despite being a relatively small REIT," said Mr. Sankpal. "FCD’s strategy of investing along with seasoned real estate operators on an opportunistic basis is working well and producing relatively predictable cash flows even during the pandemic. The REIT is also using the current depressed unit price environment to reduce its cost of capital by buying units at discount valuations, a tool very few REITs use in their capital allocation strategy. As a result we like FCD at a 23-per-cent discount to NAV and an 8.8-per-cent distribution yield.”
David Leeder