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

Cowen analyst Vivien Azer initiated coverage of a pair of Canadian cannabis companies on Tuesday.

Believing its well-positioned to benefit from the early days of the country’s adult use market, Ms. Azer gave Aurora Cannabis Inc. (ACB-T) an “outperform” rating, emphasizing its impressive 20-per-cent market share to date.

“The company’s large cultivation footprint, capable of producing over 575,000 kg, provides ACB with the necessary infrastructure to weather early storms in adult use while continuing to grow higher-value revenues in the medical market," she said.

Her target for Aurora shares is $14, exceeding the average on the Street of $12.69.

Liking its story “as an asset-light, global low-cost producer,” Ms. Azer initiated coverage of Cronos Group Inc. (CRON-T) with a “market perform” rating and $29 target, which also tops the consensus of $19.36.

“Valuation prevents us from taking a more constructive position at this time,” she said.


Canadian Natural Resources Ltd. (CNQ-T) represents an “attractive buying opportunity” ahead of the March 7 release of its fourth-quarter financial results, according to RBC Dominion Securities analyst Greg Pardy.

“Our recent meeting with Canadian Natural Resources’ President, Tim McKay, emphasized the company’s niche focus on western Canada and the importance of shareholder returns in the form of ongoing dividend growth and share buybacks,” said Mr. Pardy. “On the shareholder distribution front, we estimate that CNQ will boost its common share dividend by 12.5 per cent (to an annualized rate of $1.51 per share) when it releases its fourth-quarter results. Also factored into our 2019 outlook are share repurchases of $1.5-billion.

“Tactically, CNQ remains focused on securing tidewater prices for its oil production. Accordingly, the company has made capacity commitments on both proposed large-diameter export pipeline projects: 175,000 barrels of oil per day (bbl/d) on the Keystone XL Line; and 75,000 bbl/d on the Trans Mountain Expansion. CNQ is not averse to adding refining capacity to its portfolio, but the location (potentially Midwest or Gulf Coast), configuration (conversion capacity), and price tag would all need to fit the bill.”

For the quarter, Mr. Pardy is projecting cash flow per share of 87 cents, which sits 6 cents below the consensus on the Street, based on production of 1.07 million barrels oil equivalent per day.

He maintained an “outperform” rating and $45 target for CNQ shares. The average target is currently $45.03.

“The company’s low-decline, long-life portfolio rolls up into an attractive 2019 combination of approximately $5.3-billion of free cash flow (before dividends), an improving balance sheet, upwards of $1.5-billion of share repurchases, and dividend growth that we conservatively peg at 12.5 per cent,” said the analyst. “A US$1 change in WCS impacts CNQ’s cash flow by about $90 million (1 per cent).”


On the heels of Monday’s release of its fourth-quarter financial results, Raymond James analyst Kurt Molnar raised his rating for Crew Energy Inc. (CR-T) to “outperform” from “market perform.”

“The combination of strong recent well results, the concentration of capex early in the calendar year and the backstopping of that aggressive capital with a non-core asset sale gives us reason to upgrade the stock,” said Mr. Molnar in a research note released Tuesday.

After market close, the Calgary-based oil and gas exploration, development and production company reported net income for the quarter of $18.8-million, or 12 cents per share, rising from $2.3-million, or 2 cents, during the same period a year ago.

“At the same time new operational information has been provided along with some new information on capital expenditures and non-core asset sales,” said Mr. Molnar. “At the margin, all this new information is good news/constructive and perhaps supports some of the relative strength in the shares in recent days.

“Crew highlighted IP25 data on three new ultra condensate rich (“UCR”) wells with average production of 1,528 barrels of oil equivalent per day (Boed) per well consisting of an average 3.6 million cubic feet per day (mmcfd), 776 barrels per day (b/d) of condensate and 153 b/d of NGL. Impressive wells obviously that take on even more relevance given the following information. The Company noted that $60-$70-million of the $95-$105-million of planned 2019 capex will occur in 1Q19 where that heavy level of spending will be facilitated by $17.5-million of non-core asset sales that occurred in 1Q19 involving assets with no production or cash flow. The bulk of this capital will be concentrated in the UCR with up to 8 new UCR wells to be tied-in and on production by May. As per prior guidance, cash flow is expected to largely cover the current $95-$105-million capital program for 2019."

Mr. Molnar raised his target price for Crew shares to $1.75 from $1.60, pointing to the company’s non-core asset sale and an update to his sum-of-parts valuation. The average on the Street is $1.83.

Elsewhere, Eight Capital analyst Ian Macqueen upgraded Crew to “buy” from “neutral” with a target of $1.75, rising from $1.15.


Though he called its fourth-quarter results “sufficiently positive,” Echelon Wealth Partners analyst Douglas Loe downgraded Extendicare Inc. (EXE-T) to “hold” from “buy.”

“While Extendicare continues to generate sufficiently robust AFFO [adjusted funds from operations] to fund current dividend policy and has in all quarters since FQ415 (when payout ratio transiently spiked up to 109 per cent), we do expect pending FQ119 financial data to be seasonally soft for both nursing home operations and home healthcare operations and we thus believe that a transient shift to a HOLD rating from BUY is reasonable, at least until we have improved visibility on home healthcare operating margin trajectory,” he said.

Mr. Loe lowered his target for the stock to $7.75 from $9, noting his investment thesis assumes “home healthcare margin can improve by F2020 on enhanced service volumes that could emerge once division-wide enterprise software upgrade is fully-implemented across the organization. F2019 EBITDA is expected to be negatively impacted by $2.8M just on this IT project alone.”

The average on the Street is now $7.69.

“We stand by our view that EXE can comfortably fund current annual dividend of 48 cents per share and so at current price levels, annual yield of 6.6 per cent remains attractive for longer-term investors and we would be more aggressive buyers of EXE if shares trade at or below $7.00 during our forecast period,” he said. “At current levels, our revised PT still corresponds to total annual return of 12.7 per cent, and while a return to that level is certainly within shouting distance of BUY territory as we define our ratings hierarchy, we stand by our view that EXE shares are likely to trade sideways until home healthcare operating margins improve and until all growth capex costs required to implement margin-enabling IT infrastructure are fully incurred.”


After “steady” fourth-quarter results, Chartwell Retirement Residences (CSH.UN-T) sits “well positioned” to meet the growing demand for seniors’ housing development, according to Canaccord Genuity analyst Brendon Abrams, who believes its core markets do not appear to be currently oversupplied.

“Chartwell has a large pipeline of development projects totaling 1,638 suites that should be a key source of NAV [net asset value] and cash flow growth going forward,” he said. “Currently, Chartwell has six projects under construction, totaling 871 suites with an additional 767 suites in pre-development. In addition to the REIT’s own development pipeline, Chartwell has access to an additional 2,744 suites through its partnership with Quebec-based developer Batimo.

“We like this growth through development strategy as these projects, once completed, will add high-quality ‘new generation’ properties to Chartwell’s portfolio at more attractive returns compared to the acquisition of finished product. We do note that construction costs have increased (though not specific to Chartwell or seniors’ housing), which are having some negative impact on industry returns.”

On Friday, the Mississauga-based company reported same-property net operating income growth of 2.2 per cent and a 0.4-per-cent improvement in average total occupancy (to 90.9 per cent).

“Operating performance was particularly strong from the longterm care portfolio, up 8.9 per cent year-over-year during the quarter, primarily due to higher preferred accommodation revenues,” said the analyst. “While FFO per unit was down slightly in the quarter, this was largely due to non-recurring items, and we expect cash flow growth to resume in 2019.”

“Chartwell has been successful in balancing the growth of its portfolio, maintaining a conservative balance sheet, and returning capital to unitholders through higher distributions. With Q4/18 results, the REIT announced a 2-per-cent increase in its annual distribution to 60 cents per unit, effective for the March 31, 2019 distribution. Pro forma, Chartwell’s payout ratio remains conservative at 66 per cent of our 2019 AFFO estimate.”

Maintaining a “buy” rating for Chartwell stock, Mr. Abrams lowered his target to $17.25 from $17.50 after adjusting his NAV estimate. The average is $16.65.

“Our outlook following the quarter remains unchanged as we continue to believe that Chartwell presents an attractive opportunity to invest in the seniors’ housing industry through Canada’s largest retirement home owner/operator,” he said. “The REIT’s size, high-quality assets, and market position make Chartwell a compelling investment for investors looking to capitalize on the long-term demographic trends driving demand growth in the sector”


Seeing a lack of near-term catalysts, Credit Suisse analyst Robert Spingarn lowered his target price for shares of Maxar Technologies Ltd. (MAXR-N, MAXR-T) to a new low on the Street.

“We attribute much of this latest sell-off to last Thursday’s surprise announcement that the company would retain its challenged GEO business, as management believes the segment generates more value with them than with a different owner,” he said. “We had been skeptical of GEO’s value proposition to a prospective buyer and remain so now - without new orders in backlog, we nevertheless do not understand how the economics of the business have become more attractive since the company announced its strategic review nine months ago. Given that the segment has already been restructured several times over the past few years, it appears there is not much room for additional cost optimization. Moreover, even if other SSL business can offset losses, the segment seems unlikely to generate positive returns on a standalone basis

“The GEO cash drag is expected to deepen on greater retention and restructuring costs, while capex ramps up for the heaviest year of the Worldview Legion (WVL) build. Overall, mgmt. does not expect to be free cash breakeven in 2019, even after including $183-million in insurance proceeds.”

Though he thinks the company’s 2019 guidance “looks optimistic,” Mr. Spingarn dropped his target to US$3.93 from US$5.88 after shrinking his earnings estimates through 2021. The average target on the Street is US$9.99.

“We appreciate that the Imagery segment provides a unique and valuable service, and that MDA is likely to win a number of upcoming awards,” said Mr. Spingarn, keeping an “underperform” rating for the stock. “However, we do not expect significant multiple expansion until WVL launches and MDA’s contracts start to ramp in earnest.“


Franco-Nevada Corp.’s (FNV-T, FNV-N) recent share price “underperformance” has brought a buying opportunity for investors, according to Paradigm Capital analyst Lauren McConnell.

“We are fans of the royalty business model and believe Franco is the best of the large (over $3-billion) Royalty companies,” said Ms. McConnell in a research note reviewing a recent meeting with company president Paul Brink.

She pointed to a pair of factors in explaining the recent share price performance of Franco-Nevada, which has seen its stock rise 5 per cent over the last three months versus 26 per cent for its peers.

1. A recent guidance miss.

Ms. McConnell: “On Feb 7., along with its dividend release, FNV announced that production for 2018 would fall short of original guidance of 460–490,000 gold equivalent ounces (GEOs) to be in the range of 445–450,000 GEOs. This shortfall was owing primarily to a pit wall failure at Lundin Mining’s (LUN-T, $9.00 target, ‘buy’ rating) Candelaria mine which caused the mill to be supplemented from the low-grade stockpile. While this was disappointing, we note that the mine still produced more in 2018 than FNV had projected in its acquisition model and that reserves at the end of 2017 were double what it had estimated when it made the stream acquisition in 2014.”

2. The market taking a cautious approach to the start-up of its Cobre Panama project.

Ms. McConnell: “We have often cautioned clients on start-ups as there are commonly teething problems when a mine first begins producing. FNV completed a detail review of Cobre Panama in December 2018 and found no pressing issues. Wet commissioning of the processing plant is currently underway with first concentrate expected by the end of this month. We note, that planned throughput at full production is now expected to be 47 per cent higher than when FNV acquired the stream in 2012. We discussed Law 9, which was used as the framework to approve the mining contract between the government and the previous owner, and in September 2018 was ruled by the Supreme Court of Panama as unconstitutional. What is important is that the Ministry of Commerce & Industry considers the mining concession contract in effect. This could still lead to First Quantum (FM-T, $22 target, ‘buy’) having to pay higher taxes and royalty rates in future years, but Franco’s stream is not expected to be affected.”

Maintaining a “buy” rating for Franco-Nevada, she hiked her target to $120 from $100. The average is currently $108.25.


Citing “heightened” execution risk, CIBC World Markets analyst Cosmos Chiu downgraded Fortuna Silver Mines Inc. (FVI-T) to “neutral” from “outperform” with a target of $6.25, down from $7.50 and below the consensus of $7.05.

“After the announcement of the 6 month delay in the start-up of Lindero in late-February, and ahead of the release of financials in mid-March, we have taken the opportunity to update our model,” he said. "Our NAV decreases by 4 per cent, and 2019 estimated CFPS is down 54 per cent. At deck, FVI shares currently trade at 0.9 times P/NAV and 9 times P/CF, a slight discount to the silver group at 1.2 times P/NAV and 10 timesP/CF. As we enter a seasonally weaker period for precious metals, we see no compelling near-term catalyst to stimulate a re-rate of FVI shares.

“We believe the hiccups at Lindero have changed the thesis of the story. On one hand, the start-up of Lindero will decrease FVI’s silver exposure to 35 per cent, and some investors looking for silver exposure will turn to more “pure-play” names, including PAAS. On the other hand, as an intermediate precious metals producer, we see investors turning to companies that have had a better recent track record on execution, including SSR Mining and Kirkland Lake Gold.”


A pair of equity analysts downgraded Delphi Energy Corp. (DEE-T) on Tuesday.

AltaCorp Capital’s Patrick O’Rourke moved the stock to “speculative buy” from “outperform” with a 90-cent target, which tops the consensus by 12 cents.

“We are adjusting our rating (adding ‘speculative’) to reflect the current volatile market conditions, with the stock now trading below the $1/share level for a prolonged time period,” he said.

Beacon Securities’s Kirk Wilson lowered it to “hold” from “buy” with a 50-cent target, down from $1.20.


In other analyst actions:

Goldman Sachs analyst Brian Singer reinstated coverage of Encana Corp. (ECA-T) with a “buy” rating and $9, which sits 81 cents lower than the average on the Street.

GMP initiated coverage of Questor Technology Inc. (QST-X) with a “buy” recommendation and $7.25 target. The average is currently $5.35.

Morgan Stanley analyst Piyush Sood initiated coverage of Stelco Holdings Inc. (STLC-T) with an “equal-weight” rating and $20 target. The average is $22.80.

With a file from Bloomberg news

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