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

Canaccord Genuity raised its oil price forecasts in its “Canadian Energy Weekly” research note released Tuesday.

The firm’s WTI forecast for 2018 rose to US$65 per barrel from US$60, while its Brent forecast increased to US$70 per barrel from US$65. Their long-term prices increased to US$65 (from US$60) and US$70 (from US$65), respectively.

“Notwithstanding the recent narrowing in the WCS-WTI basis, we believe this is temporary given the downtime associated with the Syncrude oil sands mine,” the firm said. “We expect the differential to remain wide through 2019 until ENB’s Line 3 replacement is brought online in late-2019 (or early-2020). We have widened our WCS-WTI basis to US$21.56 /bbl in 2018 and US$21.00/bbl in 2019. Even in an environment with efficient crude-by-rail transportation of heavy volumes, we expect that the differential will continue to be wider than historical norms and in line with strip pricing.

“Our new estimates reflect the recent strength in oil prices, yet still maintain some conservatism relative to the 2018 futures strip (currently at US$67.85/bbl WTI). We have also adjusted our CAD/USD FX assumption to $1.30 (from $1.29). The net effect of the higher oil price and weakness in the Canadian dollar leads to a bump in our cash flow and NAV estimates for light oil weighted companies, despite the widening of the near-term differential to WTI.”

At the same time, the firm lowered its expected AECO natural gas price assumption for 2019 to $1.69 per thousand cubic feet from $1.77, leading analyst Anthony Petrucci to downgrade Iron Bridge Resources Inc. (IBR-T) to “hold” from “speculative buy” with a target of 80 cents, falling from 90 cents. The average on the Street is 83 cents, according to Thomson Reuters Eikon data.

“We continue to believe IBR offers significant upside potential in the long term,” Mr. Petrucci said.

With its price deck changes, the firm’s analysts adjusted their target prices for stocks in the sector.

Dennis Fong made the following adjustments to senior producers:

Canadian Natural Resources Inc. (m/investing/markets/stocks/CNQ-T/" title="" class="">CNQ-T, “buy”) to $60 from $54. Average: $56.49.

Cenovus Energy Inc. (CVE-T, “buy”) to $18 from $16. Average: $16.24.

Encana Corp. (ECA-N, “buy”) to US$19 from US$16. Average: US$16.66.

Husky Energy Inc. (HSE-T, “hold”) to $23 from $20.50. Average: $21.55.

Imperial Oil Ltd. (IMO-T, “hold”) to $50 from $45. Average: $43.52.

Suncor Energy Inc. (SU-T, “buy”) to $64 from $58. Average: $58.65.


CIBC World Markets analyst Stephanie Price upgraded Constellation Software Inc. (CSU-T) after a recent lunch with Brian Miller, chief financial officer of rival Tyler Technologies Inc. (TYL-N), led her to reassess her assumptions about its public sector business, which accounts for almost 70 per cent of annual revenue.

“We realized that the government market is very sticky, with software typically replaced at end of life (Miller suggested the average age of a solution Tyler replaces is 20 years),” said Ms. Price. “The public sector software market itself is growing organically in the high single digits. Constellation has been growing below this on a consolidated basis, with strength in certain sectors (transit/utilities) offset primarily by expected attrition from its 2013 Quadramed acquisition. Recently, this attrition appears to have stabilized, with Constellation seeing improving organic growth in its public sector business over the past several quarters.

“Constellation has seen stronger revenue, EBITDA and cash flow growth than Tylerover the past five and 10 years; however, Constellation is now trading at a record discount to Tyler (which recently purchased data-as-a-service company Socrata). We believe the record discount is unwarranted and that the stock should trade more in line with its 10-year delta.“

Moving Constellation to “outperformer” from “neutral,” Ms. Price raised her target to $1,300 from $900. The average is $1,008.61.

“Looking at Constellation’s collection of public sector businesses, we also reassessed whether a peer multiple basis is the right way to look at a company with almost 200 different business units,” the analyst said. “If Constellation is viewed as a private equity firm, a DCF valuation taking into account future capital deployment could be viewed as a more appropriate valuation measure. We created a DCF that takes into consideration the rate of capital deployed on acquisitions. We assumed 80-per-cent FCF is initially deployed on acquisitions declining 10 per cent per year over 10 years as it becomes challenging to deploy an increasing level of FCF. Underpinning this, we assume 4-per-cent organic growth rate. Over the 10-year period we forecast 25-per-cent margins increasing 50 bps per year. This leads to a valuation of $1,272 per share.”


Orla Mining Ltd. (OLA-X) provides investors with exposure to a pair of low-capital, high-return projects, according to Desjardins Securities analyst Raj Ray, who believes its Camino Rojo project in Zacatecas, Mexico, and Cerro Quema in Los Santos, Panam,a “exhibit lower technical and jurisdictional risk overall.”

Mr. Ray initiated coverage of the Vancouver-based development-stage company with a “buy” rating.

“Technical work completed on both projects to date indicates the potential for strong economics driven by relatively low capital and short build-time heap leach operations that rank among the top quartile heap-leachable assets on a strip-adjusted, recovered-grade basis,” said Mr. Ray. “The Camino Rojo project is the company’s current priority and management is working on an arrangement with Fresnillo plc, whose neighbouring claim would otherwise limit the final pit size. The Camino Rojo project is economic regardless, but a reasonable agreement with Fresnillo would add significant value. Additionally, both the Camino Rojo and Cerro Quema projects have exhibited genuine potential for larger-scale sulphide ore development which, if proven, could be a game changer for the company.”

Also touting its “strong” management team and shareholder base, led by Goldcorp Inc. and Franco-Nevada Corp. chairman Pierre Lassonde, acting as a “industry-savvy endorsement,” Mr. Ray set a target price of $2 for Orla shares. The average target is currently $2.54.

“Although Orla trades slightly above the average developer multiple on P/NAV [price to net asset value], the company is steeply discounted on an EV/resources basis, thus highlighting the large existing resource base, where the company has potential to unlock significant value (especially related to the sulphide ore development),” the analyst said.


Citing an attractive risk-return profile, featuring a 34-per-cent potential return, Beacon Securities analyst Gabriel Leung raised his rating for Firan Technology Group Corp. (FTG-T) to “buy” from “hold” ahead of the release of its second-quarter results on Thursday before market open.

For the quarter, Mr. Leung is projecting revenues and EBITDA of $26.0-million and $2.3-million, respectively. Both fall in line with the consensus on the Street.

“Recall that during its last quarterly conference call, the company noted that it had booked $40-million in the quarter, helping to take backlog to a record high of $50-million. Consequently, the company anticipated achieving revenues of $25–40-million for fiscal Q2,” said Mr. Leung.

”So with consensus revenues at $26-million, we believe the (revenue) bar has been set relatively low. At the time, the company also reiterated that it expected to hit $2-million in quarterly EBITDA accretion from ongoing cost savings initiatives.

Mr. Leung maintained a $3 target for Firan shares. Consensus is $4.33.

“Bottom-line, we believe there is a good risk-return trade with Firan given the current valuation (7.5 times fiscal 2018 estimated EV/EBITD8A versus comps at 10 times) and given the data points, which were provided by management last quarter, which, if accurate, suggest that expectations for fiscal Q2 are very reasonable (i.e. there’s a good probability for an upside surprise, which could be a positive stock catalyst),” he said.


In a separate note, Mr. Ray lowered his target price for shares of Troilus Gold Corp. (TLG-X) upon reinstating coverage following the recent completion of $15.76-million in flow-through financing and in the wake of a recent visit to its gold and copper Troilus Mine in Quebec.

“The Troilus project’s location in the Nord-du-Québec administrative region has its advantages,” he said. “In addition to infrastructure and other support, the Quebec government has created two funds dedicated to investments in mining companies through Investissement Québec, the investment arm of the Government of Québec, alongside measures to reduce governmental fees paid by explorationstage companies. The Troilus projects also benefits from ease of access and availability of key onsite infrastructure (including tailings area, high-voltage sub-station, etc), which potentially reduces capital requirements and the development timeline vis-à-vis other development projects.

“A significant impediment faced by many low-grade, bulk-tonnage underground operations like the Troilus project is the amount of pre-production work and capital required. This creates an extended timeline without cash flows, which can significantly increase the risk of the project and diminish the rate of return. In this respect, Troilus’s management has some flexibility that lends itself to a strategic and phased ramp-up. These include promising near-surface and underground exploration targets, multiple near-surface satellite deposits and the possibility of an accelerated start-up from the underground aided by ramping down from the bottom of the existing pit. Based on our phased-development approach, we estimate the after-tax IRR [internal rate of return] of the project to be 18 per cent at a long-term gold price of US$1,300/oz.”

Maintaining a “buy” target for the Toronto-based company’s shares, his target fell to $3 from $3.50. The average target among analysts currently covering the stock is $3.69.

“Timing is key for the Troilus project,” said Mr. Ray. “Alongside strategic benefits accruing as a result of the scarcity of junior gold producers and near-term executable projects in Canada, there now exists much improved technical know-how for the development of low-grade, bulk-tonnage underground operations, thereby clearing a path forward for Troilus.”


Raymond James analyst Andrew Bradford called Precision Drilling Corp.’s (PD-T, PDS-N) “strong” free cash flow generation “the enduring story” following Monday’s announcement it has been awarded a contract to supply and operate a new-build rig in Kuwait.

“Improving results (plus what we expect will be a tax recovery) has enabled Precision to increase its capital budget and expand its footprint in Kuwait while simultaneously paying off $75-million in debt and grow cash balances in the quarter,” he said.

The capital cost to build the ST-3000 drilling rig in Kuwait is expected to be US$60-million with approximately US$10-million expected to be spent in 2018 and the remainder in 2019. It comes under a five-year take-or-pay contract with an optional one-year extension.

The Calgary-based company currently has five active rigs in the country.

“At a five-year payout, the US$60-million rig implies annual EBITDA contribution of US$12-million or daymargins/EBITDA per day of US$32,800,” said Mr. Bradford. “At our target 6.5 times EBITDA, the Kuwait rig will add an estimated 8 cents per share in value (undiscounted) at today’s exchange rate.

“Along with the announced international contract Precision provided an operational update. PD currently has 54 rigs active in Canada and has line of sight to 60 rigs by mid-August. Industry data suggest that PD had 29 rigs active in Canada in 2Q, up from 26 rigs in 2Q last year. The overall Canadian rig count was lower year-over-year resulting in a sizable step up in PD’s Canadian market share year-over-year – from 22 per cent in 2Q17 to 27 per cent in 2Q18. PD noted that its current active rig count and the line of sight to 60 rigs by mid-August are also tracking above PD’s 2017 rig count.”

Maintaining a “strong buy” rating for Precision Drilling shares, Mr. Bradford raised his target price to $7.25 from $5.75. The average is $5.91.


If successful, RBC Dominion Securities analyst Joseph Spak thinks GM Cruise could be worth “nearly as much” as General Motors Co. (GM-N) itself.

In a research note released Tuesday assessing the possibilities stemming from its autonomous vehicle unit, Mr. Spak said the US$2.25-billion investment recently made by Japan’s SoftBank Group Corp. provides “validation” for the endeavour.

“The announcement is notable for a few reasons: 1) It provides GM the capital needed to help the company reach AV commercialization at scale in early 2019. 2) It affords GM increased capital allocation flexibility. 3) It provides some outside validation of Cruise’s technology, efforts, progress and opportunity. 4) It helps unlock GM share price value as the GM stake in Cruise alone is now worth $9.2-billion ($7 per share),” the analyst said. “It’s also worth noting that SoftBank is perhaps the world’s leading transportation network company (TNC) investor with investments in Uber, Didi, Ola, Grab among others and has an underlying investment theme centered around data and the Internet of Things. Thus we see potential for Cruise to scale across SoftBank’s TNC investments and look for means to monetize vehicle data.

“SoftBank’s investment provided a current valuation ($11.5-billion), but clearly they believe the opportunity is much larger. Cruise looks to want to run their own TNC (for now). Assuming they get the tech right, our scenario shows a fleet of 800k vehicles driving 58 billion miles by 2030 (0.4-per-cent share of global miles traveled). At $0.55/mile we see $17-billion of EBITDA. Our DCF (11 times exit multiple) values Cruise TNC at $43-billion. Note however, because in this model Cruise is ‘buying,’ operating and maintaining the vehicles and still in growth mode, capex constrains FCF.”

Keeping an “outperform” rating for GM shares, Mr. Spak increased his target to US$53 from US$52. The average is US$49.44.

“Lessons from RBC’s Imagine 2025 report include technology changes fast, management needs to think nimbly and adapt business models,” he said. “As a leading provider of autonomous technology, what if Cruise licensed its tech, adopting a higher-margin, asset light model? This is a model RBC’s Internet Analyst Mark Mahaney believes Waymo may take. Perhaps a less likely path for Cruise, but worth considering as the model is powerful. Assuming 15-per-cent share, 2030 FCF is $17-billion, model justifies higher exit multiple (15 times) yielding a more than $100-billion valuation.”


Beacon Securities analyst Jacob Willoughby expects Rio2 Ltd. (RIO-X) to “strive to build a mid-tier precious metals company through organic growth and acquisitions with a focus in the Americas”

He initiate coverage of Toronto-based company with a “buy” rating.

“The team that delivered the overwhelming success of Rio Alto Mining is back at it again in a new vehicle called Rio2 Limited. Rio2 Limited, led by Alex Black and team have proven to capital markets that they are experts when it comes to open pit, heap leach oxide gold deposits in Latin America. They have excellent experience at all levels of the mining life cycle including acquiring, engineering, building, operating, expanding and executing accretive M&A transactions. They’ve also been very successful at mine site exploration that has added substantial amounts of ounces into mine plans. Last time around with Rio Alto it all started in Peru. This time around it will start in Chile with the 5 million ounce 100% owned Cerro Maricunga deposit.

“We like companies that have demonstrated that they have the ability to design, engineer, build, commission and expand mines as well as acquire strategic projects to add value without diluting shareholders.”

The lone analyst on the Street currently covering the stock, Mr. Willoughby set a target price of $1.75 per share.


In the wake of an 80-per-cent rally since the appointment of chief executive officer Brian Niccol in mid-February, Mizuho analyst Jeremy Scott downgraded Chipotle Mexican Grill Inc. (" title="" class="">CMG-N) to “underperform” from “neutral.”

“We’re certainly not downplaying Niccol’s impressive track record in his three years leading Taco Bell, where much of his success can be attributed to his embrace of experimentation,” said Mr. Scott. “However, a ramp in innovation will likely raise concerns around long-term margins due to incremental investment in labor, training, marketing and technology upgrades.”

The analyst raised his target to US$330 from US$300. That remains below the consensus of US$413.39.

“While it is our view that Niccol is the best choice to lead Chipotle from here, in the absence of clear catalysts that can justify significant earnings upside, we’re compelled to recommend investors reduce their risk,” said Mr. Scott.

“We believe the stock currently prices in an aggressive recovery in both comps and margins.”


In other analyst actions:

TD Securities analyst Linda Ezergailis resumed coverage of AltaGas Ltd. (ALA-T) with a “buy” rating and a target of $32, falling from $37. The average is $29.16.

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