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

Raymond James analyst Andrew Bradford lowered his rating for shares of Ensign Energy Services Inc. (ESI-T) in response to amendments to the terms of its $37-million convertible debenture issue.

Before the bell on Monday, the Calgary-based company reduced the conversion price to $1.75 from $7. It also extended the maturity by 15 months and increased the interest rate to 7.75 per cent from $7.

“These changed terms increase the debenture’s embedded option value by approximately $8-million,” said Mr. Bradford. " This amount represents the ex ante value that is effectively transferred from shareholders of Ensign to the holders of the convertible debentures and is roughly equal to $0.05 per share. This is the amount by which we have reduced our target. Given the $1.18 share price, the return to target is sufficiently narrow that we are reducing our rating.”

Moving Ensign to “market perform” from “outperform,” he trimmed his target to $1.20 from $1.25. The average on the Street is $1.55, according to Refintiv data.


Emphasizing its “extremely low” cost of goods and “uniquely strong” medical ecosystem, Raymond James analyst Rahul Sarugaser initiated coverage of Aleafia Health Inc. (AH-T) with an “outperform” recommendation.

“Unique to the Canadian cannabis sector, AH is an all-encompassing cannabis ecosystem comprising: best-in-class cultivation and manufacturing facilities that produce a broad suite of innovative cannabis products at very low cost (especially its outdoor-grown products); a large medical cannabis clinic network; and, a unified e-commerce and same-day delivery service network,” he said. “This ecosystem creates an enviable captive market for AH, and was instrumental in securing an exclusive agreement with Unifor — Canada’s largest private sector union — to support medical cannabis coverage of its 315k member families.”

In a research report released Tuesday, Mr. Sarugaser said the fourth quarter of 2020 represented a “pivot point” for the Vaughan, Ont. as it “saw ramping revenue from its burgeoning adult-use cannabis vertical, organic growth of medical cannabis revenue, capped off with bumper revenue from LP-LP sales.”

The quarter also saw the closing of its Unifor deal, which the analysts expects will begin generating revenue in the second half of 2021.

“Large unions like Unifor are attracted by AH’s high-touch, clinically-supervised medical cannabis program, wherein plan members can receive a customized wellness regime, virtual physician consultation, medical authorization, and insurance-covered products delivered to their door, all in one business day,” said Mr. Sarugaser. “We expect Unifor will not be the last union or large employer AH allies with.

“On top of all this, AH is materially scaling its adult-use business through the launch of a broad new product suite — 31 new SKUs since Oct. 2020 — under a collection of curated brands, and into new provincial markets. In our view, the ascendance of AH’s adult-use business is at its very start.”

The analyst set a target of $1 per share. The current average on the Street is $1.17.


After the release of in-line fourth-quarter 2020 financial results, Desjardins Securities analyst Kyle Stanley sees Automotive Properties Real Estate Investment Trust (APR.UN-T) “well-positioned to take advantage of consolidation opportunities that emerge in 2021,” possessing acquisition capacity of $150-million or more.

On March 23, the Toronto-based REIT reported funds from operations of 23 cents, matching Mr. Stanley’s forecast, with same-property cash net operating income growth 1.2 per cent year-over-year.

“Contractual rent collections remained robust, totalling 100 per cent during the quarter (2 per cent of rent was subject to a deferral agreement which has now concluded),” the analyst said. “The balance of the tenant deferral at year-end was $2.3-million, which APR expects to fully recapture by the end of 2021.”

Though his funds from operations fell “modestly” to reflect dilution following the early March acquisition of a Lexus dealership in Laval, Que., Mr. Stanley raised his target for the REIT’s units by $1 to $12.25, keeping a “buy” recommendation. The average target on the Street is $12.05.

“As expected, there was near-term potential for cap rate compression toward pre-pandemic levels as the risk of deteriorating rent collections abated,” he said. “APR booked a $27-million (57 cents per unit) FV gain on investment properties in 4Q, reflecting a 20 basis points contraction in the IFRS cap rate to 6.7 per cent (recall it expanded its cap rate by a total of 30 bps in 2Q and 3Q). Our spot NAV goes to $11.10 (from $10.40) after incorporating the 4Q results and reducing our utilized cap rate by 30 bps to 6.5 per cent.”


With the extensions of both its credit facility and senior notes allowing for increased spending in 2021, Obsidian Energy Ltd. (OBE-T) may draw the attention of investors again, according to Raymond James analyst Jeremy McCrea.

“In September 2019, Obsidian announced it would pursue strategic alternatives,” he said in a research note. “Unfortunately, with Covid concerns coming shortly thereafter, investor interest and concerns on leverage have been a constant concern. Despite very strong Cardium well results, legacy restructuring issues and a tangle of historical arrangements in place have continued to keep leverage levels high.

“Combined with a higher ARO liability than many of its peers and an ongoing take-over bid for Bonterra, we believe many investors have sought to remain sidelined for now. Nevertheless, with the bank facility and senior notes extended a full 18 months, the ability to increase spending plans, the bid for Bonterra dropped, and lastly, higher oil prices, OBE might start to have bullish investors re-look at the name.”

Seeing Obsidian “setting themselves up for a stronger 2021” through its increased spending, Mr. McCrea raised his target for its shares to $2 from $1.90, keeping a “market perform” rating. The average is $1.33.


Though its quarterly results fell below his expectations, Desjardins Securities analyst David Stewart still thinks 2021 will be “a year of compelling growth” for K92 Mining Inc. (KNT-T).

Before the bell on Monday, the Vancouver-based company reported record quarterly revenue of US$48-million, falling short of the analyst’s US$52-million estimate. Adjusted earnings per share of 5 US cents also missed his projection (8 US cents).

“Given production was pre-reported, the variance was attributable to higher operating costs,” said Mr. Stewart. “Cash flow was fairly strong in the quarter, and we expect this to improve as we enter the latter half of 2021. Despite some pandemic-related setbacks in 1Q21, we believe the organic growth profile for K92 remains intact as the company continues aggressively drilling near-mine veins and targets the Stage 3 expansion feasibility study later this year.”

Mr. Stewart cautioned that a “softer” first-quarter is expected, noting: “The company recently announced an interruption in stoping operations due to an incident with an underground loader. This ultimately resulted in mining from four high-grade stopes being delayed into 2Q21 and the plant treating more lower-grade (likely greater-than 10gpt Au, if that can be called lower-grade) stockpile material in the current quarter.”

Despite narrowly raising his net asset value per share estimate, he maintained a target of $12.65 with a “buy” rating. The average target on the Street is $11.64.

“We believe K92 is one of the most compelling organic growth stories in the sector; with FCF expected to fund future expansions and exploration upside as robust as ever, the stock offers an attractive entry point at current valuations, in our view,” the analyst said.

Elsewhere, Canaccord Genuity analyst Tom Gallo decreased his target to $12.50 from $12.75 with a “buy” rating.


2020 “proved to be a critical year as it relates to the evolution” of Fronsac Real Estate Investment Trust (FRO.UN-X), said Canaccord Genuity analyst Brendon Abrams.

On Friday, the Pointe-Claire, Que.-based REIT reported in-line fourth-quarter results, which the analyst said “continued to reflect the resilience of its portfolio, highlighted by near 100-per-cent rent collections and a 99-per-cent occupancy rate.”

Concurrently, it closed the $45-million acquisition of six free-standing grocery store properties.

“This represented the REIT’s largest quarterly acquisition total since its inception, while also materially increasing its exposure to the stable grocery sector and strong credit covenants of Loblaw and Metro,” said Mr. Abrams. “In addition, the REIT announced a 17-per-cent increase in its distribution (effective January 2021), marking its ninth consecutive annual increase and reinforcing its commitment toward returning capital to unitholders.”

“[In 2020], the REIT executed several key strategic initiatives, including raising over $40 million in growth capital, closing on nearly $70 million of acquisitions, and securing a new joint venture partner (Benny&Co.) to pursue select development opportunities. As a result, the REIT’s portfolio now features significantly greater scale (up 65 per cent year-over-year), enhanced geographic diversification (30 per cent of pro forma revenue to be derived outside of Quebec), and greater exposure to tenants in the grocery and QSR sector.”

With the results, Mr. Abrams said his outlook “remains positive” and he narrowly increased his adjusted funds from operations estimates for 2021 and 2022.

He kept a “buy” recommendation and $7.75 target for Fronsac units. The average is currently $8.

“We believe the REIT is well positioned to grow cash flow per unit through accretive acquisitions, while its valuation multiple should expand as Fronsac further grows its portfolio and gains greater awareness among investors,” the analyst said.

Meanwhile, Laurentian Bank Securities’ Yashwant Sankpal kept a “buy” rating and $7.75 target for Fronsac.

“Fronsac offers exposure to well-located, single-tenant, retail properties located in secondary markets of Quebec,” said Mr. Sankpal. “Because of the long-term, management-free nature of its leases, FRO’s cash flow is quite steady. Most importantly, FRO has been growing its FFO/unit at a CAGR of 20 per cent since 2011 thanks to its approach of disciplined acquisitions and cost control. FRO has also increased its distribution nine times since 2012. The REIT has a long runway to continue doing such accretive investments as this real estate sub-sector is huge and fragmented. As a result, we think FRO is a must investment for long-term growth REIT investors.”


In other analyst actions:

* BMO Nesbitt Burns analyst Brian Quast raised Calibre Mining Corp. (CXB-T) to “outperform” from “market perform” with a $2.50 target, which falls below the $3.17 average.

“CXB reported updated mineral reserves and resources as of FYE2020, which features significantly higher reserves at both Limon and Libertad. With the company’s previously limited reserve base being a key concern for investors, Calibre had telegraphed these results well and the figures are broadly in line with our expectations,” he said.

* BMO’s Jackie Przybylowski increased her Teck Resources Ltd. (TECK.B-T) target to $31 from $27. with a “market perform” recommendation. The average is $30.94.

* TD Securities analyst Tim James downgraded AirBoss of American Corp. (BOS-T) to “hold” from “buy” with a $44 target. The average on the Street is $45.70.

* TD’s Bentley Cross raised his target for Trilogy International Partners Inc. (TRL-T) to $2.25 from $1.90, maintaining a “buy” recommendation. The average is $2.55.

* Morgan Stanley analyst Devin McDermott upgraded Ovintiv Inc. (OVV-N, OVV-T) to “overweight” from “equal-weight” with a US$35 target, up from US$32 and exceeding the US$25.59 average on the Street.

* Scotia Capital analyst Orest Wowkodaw raised his target for Hudbay Minerals Inc. (HBM-T) to $12.50 from $12, keeping a “sector outperform” rating. The average on the Street is $12.20.

* JP Morgan analyst Richard Sunderland cut his Algonquin Power & Utilities Corp. (AQN-T) target by a loonie to $21, falling below the $21.29 consensus.

* National Bank Financial analyst Don DeMarco initiated coverage of Aya Gold & Silver Inc. (AYA-T) with an “outperform” rating and $7.50 target, exceeding the $7 average.

* H.C. Wainwright analyst Heiko Ihle bumped up his Western Copper and Gold Corp. (WRN-N, WRN-T) target to US$2.50 from US$2.25, which is the current consensus. He maintained a “buy” rating.

* Canaccord Genuity analyst Kevin MacKenzie trimmed his target for Sabina Gold & Silver Corp. (SBB-T) to $3.75 from $4 with a “speculative buy” rating. The average is $4.10.

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