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

Vermilion Energy Inc.’s (VET-T) expansion into British Columbia’s Montney Formation through its $477-million acquisition of Leucrotta Exploration Inc. (LXE-X) should be seen as a positive move, according to ATB Capital Markets analyst Patrick O’Rourke.

Though he noted some investors who are focused on Vermilion’s diversified European commodity price exposure may be “hesitant” on the deal, he said it “adds significant high-quality inventory ... and a development plan that can be self funded within cash flow.”

“Further, throughout [Monday’s] management Call, VET reiterated that it will look to maintain/grow its European production weighting and strongly suggested the Company is looking at further acquisitions in Europe,” said Mr. O’Rourke. “We see this as a high-quality and opportunistic acquisition, while VET remains solidly focused on continuing to offer differentiated European commodity price exposure.”

Shares of Calgary-based Vermilion slid 6.9 per cent on Monday following the premarket announcement of the deal, which sees it also acquire a 12.5-per-cent equity stake of newly created ExploreCo for $14-million. It estimates the Leucrotta assets will produce approximately 13,000 barrels of oil equivalent per day in 2023, with anticipated capacity growing to 28,000 boe/d.

After increasing his revenue and cash flow projections for 2023, Mr. O’Rourke raised his target for Vermilion shares to $31 from $24, reiterating a “sector perform” rating. The average on the Street is $29.46.

“Commodity diversification, low declines and free cash flow generation are central to our thesis in Vermilion,” he said. “Investors are exposed to a bundle of commodities that are generally not otherwise available to the Canadian large cap producer investor, with a demonstrated track record of about half the volatility (and risk) in the revenue line per boe relative to its Canadian peers.”

Elsewhere, others making Vermilion target changes include:

* Stifel’s Cody Kwong to $33.50 from $34 with a “hold” rating.

“The initial market reaction has been underwhelming with perception of a generous purchase price, well license concerns on the Blueberry River First Nation land (in B.C), achievement of its net debt target pushed back, and 18 months of investment before meaningful FCF will be observed,” he said. “Vermilion is looking beyond these short term nuances and believe they have identified a 28,000 boe/d property with 20+ years of drilling inventory while generating FCF of over $200-million per year.”

* Raymond James’ Jeremy McCrea to $35 from $38 with an “outperform” rating.

“There are two types of companies in the E&P sector; those that are playing offense and those playing defense,” he said. “Both can be wining strategies but in the ‘buyers market’ that still exists today, operators who take advantage of the valuation disconnect may find themselves further ahead five years from now. The acquisition of Leucrotta Exploration Inc. (VET’s 2nd significant acquisition in as little of four months) shows that VET is redefining its long-term runway and establishing footholds in plays that will provide 20+ years of quality inventory. Although headline metrics are expensive, as the share price reaction on Monday suggested, a deeper assessment of the potential upside reveals more to this acquisition than the press release puts forward. More details on the acquisition are disclosed within.”

Concurrently, Mr. O’Rourke moved his recommendation for Leucrotta to “tender” from “sector perform” with a $2 target, up from $1.40 and above the $1.90 average.

“The market clearly viewed these announcements positively and appears to have largely priced in a successful closing of the acquisition, with LXE closing up 50.0 per cent in the following trading session at $1.92 per share,” he said. “Further, in our view, the proposed sale provides an acceleration of value for LXE shareholders, while the newly created ExploreCo will provide the opportunity for LXE shareholders to participate in further exploration upside on the prior LXE land base.”

Others making Leucrotta adjustments include:

* Stifel’s Robert Fitzmartyn to $2.10 from $1.50 with a “buy” rating.

“Liquidity in the stock is enticing a price in the market at a discount to the deemed value of the ExploreCo. We suggest investors accumulate stock at current levels and tender to the offer,” he said.

* Acumen Capital’s Trevor Reynolds to $2 from $1.65 with a “tender” rating (from “buy” previously).

“We view the deal as a win for both companies as VET is better capitalized to develop the Montney today, while $80-million in cash will allow the ExploreCo to delineate and develop a material land position at Two Rivers,” he said.


While “remaining positive” on its long-term growth potential, Desjardins Securities analyst Chris Li cut his forecast for Saputo Inc. (SAP-T) to reflect current market challenges.

“We have lowered our 4Q FY22 and FY23 estimates to reflect the following: (1) rising milk costs in Australia following recent milk price increases (3‒4 per cent) by competitor Fonterra (FSF, NZX, not rated); 2) rising cost inflation (energy, commodities, etc) due to the Russia/Ukraine conflict; (3) unfavourable U.S. market factors (mainly negative milkcheese spread); and (4) Omicron-related labour challenges in the US. Russia accounts for less than 1 per cent of total tonnage for SAP and the impact is expected to be immaterial,” he said. “SAP is working to implement additional price increases to cover the higher costs.”

With that view, Mr. Li lowered his fourth-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) estimate to $274-million from $307-million and below the consensus of $319-million. His earnings per share projection slid to 23 cents from 29 cents, also under the Street’s estimate of 31 cents.

“While management continues to expect FY23 (CY22) EBITDA to recover to the FY21 level, we are more conservative and have trimmed our FY23 EBITDA by 5 per cent to $1.410-billion (vs $1.471-billion in FY21),” he added. “The pressure point continues to be from the U.S., where we expect EBITDA to be 15 per cent below the FY21 level, mainly due to rising cost pressures (energy, commodities, etc), ongoing labour challenges and unfavourable market factors.”

Maintaining a “buy” recommendation but acknowledging “patience is required,” Mr. Li cut his target for Saputo shares to $35 from $37. The average is $36.31.

“While it is disappointing that the recovery is delayed once again due to factors that are largely out of the company’s control, we remain positive on the longer-term growth potential supported by benefits from the strategic plan that are largely within the company’s control and are skewed toward the final two years,” he said. “This implies attractive mid-teens EBITDA growth in FY24 and FY25.”


In response to “another standout” quarter, sustained phosphate price momentum and “robust” new guidance outlook, Raymond James analyst Steve Hansen upgraded Itafos Inc. (IFOS-X) to “strong buy” from an “outperform” recommendation previously.

“Coupled with several strategic initiatives (‘levers’) designed to de-risk the platform and surface additional value (i.e. divest non-core assets), we believe the outlook is catalyst-rich with attractive upside,” he said.

Last week, the Houston-based fertilizer producer reported adjusted EBITDA for its fourth quarter of 2021 of $47.9-million, up 898.1 per cent year-over-year and well above Mr. Hansen’s $30-million estimate.

“While 2021 was an impressive period of accelerating momentum for Itafos, we believe 2022 is setting up as a banner year,” the analyst said. “Make no mistake, robust crop fundamentals and geopolitically charged S-D fundamentals have set the stage for robust phosphate pricing and a dramatic surge in associated earnings/free cash flow. Beyond this outsized P&L impact, however, we also point to several strategic opportunities (levers) that suggest the outlook is ‘catalyst rich’, including: 1) a clear path to extending Conda’s mine life via final permitting at Husky 1/North Dry Ridge (target: 4Q22); 2) the opportunity to consolidate & refinance its debt obligations at more attractive/flexible terms; and 3) clarity with respect to divesting the firm’s non-core assets in Brazil (Arraias, Araxa) and Guinea-Bissau (Farim). Coupled with the firm’s heavily discounted valuation, these attributes support our decision to upgrade to SB1.”

His target for Itafos shares rose by $1 to $5, matching the consensus on the Street.


Following its release of in-line fourth-quarter results after the bell on Monday, Scotia Capital analyst Jeff Fan thinks the outlook Enthusiast Gaming Holdings Inc. (EGLX-T) in fiscal 2022 remains “robust.”

“We expect revenue growth momentum to remain strong in 2022 at 30-per-cent year-over-year growth (22-per-cent organic),” he said. “Excluding acquisition in Q4/21 and the impact of foreign currency, revenue grew by 25 per cent. Management expects this momentum will continue in 2022. Adding $14-million from acquisitions, we estimate total revenue growth of 30 per cent. The key organic media and content revenue drivers are higher direct sales, higher revenue/impressions (RPM) at Omnia, more partner sites and higher web RPM. The higher subscription revenue is higher paid subscribers and M&A. We estimate direct sales will increase from $22-million to $42-million in 2022.

“We expect higher gross margin in 2022 driven by growth from higher-margin revenue. In 2021, proforma revenue grew $40-million, of which 54 per cent was from higher-margin revenue streams such as direct sales ($18-million) and subscription revenue ($3-million). This led to gross profit flow-through of 38 per cent (incremental gross profit relative to incremental revenue year-over-year), which was well above EGLX’s total gross margin of 23 per cent. We estimate 50 per cent of the revenue growth in 2022 will come from these two revenue sources and result in gross margin of greater than 25 per cent. Over the long-term, we forecast gross margin of 50 per cent and EBITDA margin of 20 per cent.”

Mr. Fan now thinks next important milestone for the integrated gaming entertainment company is to achieve operating leverage at the EBITDA level. He does not expect it to reach the breakeven level in 2022, but now sees the potential to reach that milestone in 2023, noting: “Management has demonstrated a good track record at the gross margin level.”

Maintaining a “sector outperform” rating, he reduced his target to $8 from $8.25. The average is $8.48.


Acknowledging Taiga Motors Corp. (TAIG-T) is almost one year behind the original business plan it revealed when preparing to go public a year ago, National Bank Financial analyst Cameron Doerksen thinks there’s still value in the stock at its current price.

The Montreal-based electric off-road vehicle manufacturer dropped 7.6 per cent on Monday following the premarket release of its fourth-quarter results.

However, Mr. Doerksen emphasized its results are not “overly relevant” given it is an early stage company.

“We note that the company ended Q4 with cash of $87-million, which was slightly lower than our forecast for $93-million,” he said. “Taiga also has a $50-million commitment from governments to help fund the company’s mass production facility, so we believe the company has sufficient financial resources to ramp production.”

Mr. Doerksen thinks consumer interest “still looks good,” though he noted production ramp has been “severely impacted” by supply chain issues, particularly semi-conductors.

“Taiga made its first customer snowmobile delivery on March 18th, which is a key milestone for the company,” he said. “However, due to limited chip supply and other supply chain challenges, as well as internal manufacturing processes, the production ramp in 2022 will be slow. Taiga has also pushed out the commissioning of its mass production facility by about a year to early 2024. In light of the slower than previously forecasted production ramp, we have lowered our unit delivery forecasts.”

After reducing his financial estimates, the analyst cut his target for Taiga shares to $12 from $16 with an “outperform” rating. The average on the Street is $10.50.

“We keep our Outperform rating noting that the current enterprise value of Taiga is only $109 million, which we believe does not reflect the fact that the company has two EV powersports products in or near production (snowmobile and PWC),” Mr. Doerksen said.

“We now assume that production of a future off-road EV side-by-side as well as third-party drivetrains will only begin in 2024 once the company’s mass production plant is fully operational.”

Elsewhere, Canaccord Genuity’s Derek Dley dropped his target to $9 from $22 with a “buy” rating.

“While the semiconductor shortage has led to a challenging operational backdrop for Taiga, leading to a more muted outlook for near-term growth, we remain optimistic on the company’s long-term competitive positioning in the electric powersports space,” said Mr. Dley.

“We believe Taiga offers exposure to a unique area of the electrification market and believe the powersports industry will exhibit healthy growth over the coming years. Taiga currently trades at an inexpensive valuation of 1.6 times our 2023 revenue estimate, versus internal combustion engine (ICE) powersports peers at 1.2 times and electric vehicle producers at 4.1 times their respective 2023 revenue estimates. With a healthy balance sheet, first-mover advantage, and a management team well aligned with shareholders, we believe Taiga is undervalued at current levels.”


Following Monday’s announcement of a series of actions to boost output at his flagship mine in Red Lake, Ont., Stifel analyst Alex Terentiew raised Pure Gold Mining Inc. (PGM-X) to “speculative buy” from “hold.”

“While the new management team is aiming to be in a positive FCF position by the end of 2022 on the back of several operational initiatives aimed primarily at increasing grades and reducing costs, the company noted that it will require approximately $50-million in external financing to achieve this, with a portion of the financing required within the next 30 days,” he said. “While 1H, 2022 gold production guidance of 15-20,000 ounces is below our prior 25,000-ounce forecast, primarily driven by lower than expected grades, we have conservatively raised our modeled costs, lowered production, removed all expansion upside and added $60-million in equity financings to our estimates. Although the stock’s performance has been very disappointing lately, we view today’s news as an opportunity to reset expectations.”

Mr. Terentiew expects the new management team of the Vancouver-based company to to “execute a complete overhaul of operations and planning, essentially giving the mine and its operating team a fresh start.”

He added: “We have updated our estimates to reflect guidance as we reduced production, incrementally increased our long-term costs, and removed all expansion upside (we continue to believe that an expansion is possible, but the viability of the mine needs to be proven first). We now anticipate 2022 production of 35,000 ounces. ... Pure Gold has commenced on several operational improvement initiatives aimed at increasing throughput and grades while reducing costs, which include faster sill development, increasing definition drilling, improving fleet maintenance, upgrading ventilation and installation of an accommodation camp. Should the company be able to execute on its above plans, we see potential for the much anticipated turnaround in 2023.”

He trimmed his target for Pure Gold shares to 70 cents from $1.20. The current average is $1.26.


In other analyst actions.

* RBC Dominion Securities analyst Paul Quinn initiated coverage of Greenfirst Forest Products Inc. (GFP-X) with an “outperform” recommendation and $3 target.

“Having completed the acquisition of the Rayonier Advanced Materials sawmill and newsprint assets in Eastern Canada, GreenFirst Forest Products will look to optimize its assets, reduce cash production costs, and increase production,” he said. “Given several low-cost potential optimization initiatives, we think that GreenFirst is well positioned to create shareholder value over the coming years. Record lumber pricing doesn’t hurt either.”

“We think GreenFirst’s premium to other lumber producers is fair given: 1) the potential to drive operational improvements leading to EBITDA growth; and 2) the company’s favourable geographical positioning in Eastern Canada (vs. anything in BC).”

* Calling it a “Bakken starter kit set up for consolidation,” RBC’s Luke Davis initiated coverage of Petroshale Inc. (PSH-X) with a “sector perform” rating and $1 target, below the $1.28 average.

“PetroShale’s largest differentiator is management pedigree with the new team experienced operating in the Williston Basin,” he said. “We believe the company’s asset base is situated among the highest quality portion of the Bakken trend in North Dakota, though fragmentation, limited trading liquidity, and relative positioning keep us on the sidelines. A scale enhancing acquisition in the core operating area has the potential to address our key concerns.”

“Following recapitalization, management has repositioned the asset base as a platform for regional consolidation with the majority of the company’s growth potential likely to be M&A driven with management noting long-term ambitions to grow the business to 40-50 kboe/d. We have confidence in the team’s ability to identify optimization opportunities and take advantage of regional fragmentation; however, we believe the current market may be challenging given widening bid-ask spreads alongside highly volatile oil pricing.”

* Scotia Capital’s Cameron Bean increased his Advantage Energy Ltd. (AAV-T) target to $13 from $12.50 with a “sector outperform” rating, while Raymond James’ Jeremy McCrea bumped his target up by $1 to $13 with an “outperform” rating. The average is $10.29.

“With the investment in Entropy finalized, AAV is now set to chart a path where its two distinct business verticals are independently funded,” said Mr. McCrea. “This sets up a unique investment proposition for investors, who, by investing in AAV would, get both an attractively-valued E&P business that is executing a FCF + growth strategy and a unique and well-capitalized CCS operator with a deep pipeline of investment opportunities. At this time we will begin incorporating the value of AAV’s Entropy stake in our valuation at a 75-per-cent risk-factor, placing a discount on the valuation given liquidity constraint.”

* TD Securities’ Aaron MacNeil cut Anaergia Inc. (ANRG-T) target to $35 from $40 with a “speculative buy” rating, while BMO’s John Gibson lowered his target to $25 from $35 with an “outperform” recommendation. The average is $27.33.

* JP Morgan’s Tien-Tsin Huang raised his target for Nuvei Corp. (NVEI-Q, NVEI-T) to US$83 from US$65 with an “overweight” rating. The average is US$106.13.

* Seeing “Vastly improved core economics” for contract drillers, Raymond James’ Andrew Bradford hiked his Precision Drilling Corp. (PD-T) target to $115 from $62.50, keeping an “outperform” rating. The average is $92.56.

* Scotia’s Himanshu Gupta raised his Pro Real Estate Investment Trust (PRV.UN-T) target to $7.75 from $7.25, below the $7.96 average, with a “sector perform” rating.

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