Inside the Market’s roundup of some of today’s key analyst actions
Though investors weren’t impressed with OrganiGram Holdings Inc.'s (OGI-X) second-quarter results, leading to a 10.2-per-cent drop in share price on Monday, Canaccord Genuity analyst Matt Bottomley said the earnings release exceeded his expectations, pointing to “an impressive start out of the gate in the Canadian recreational market.”
The Moncton-based producer reported gross revenue of $33.5-million, exceeding the analyst’s $29.7-million projection.
“We note that of all Licensed Producers (LPs) that have reported a full contribution of recreational sales, OrganiGram currently has a top-three penetration into the Canadian domestic market; keeping pace with LPs with significantly higher valuations,” said Mr. Bottomley. "In FQ2, the company once again reported one of the lowest production cost bases in the industry, with a cash cost of 65 cents per gram of cannabis cultivated. Combined with its top-line beat and disciplined opex, adjusted EBITDA for the quarter of $13.3-million also came in ahead of our $9.2-million forecast. As a result, OGI is currently the most profitable LP in the Canadian industry.
“Looking ahead, the company is actively preparing for the introduction of additional derivative products into the Canadian market (expected in CQ4/19) and management indicated they are currently focusing on vaporizer pen technologies and edibles, including chocolate and confectionary products. We note that as of the end of FQ2, OrganiGram had an inventory balance of $95-million, with $30-million in the form of packaged (or ready to be packaged) dried bud and another $48-million of biomass ready for extraction in anticipation of additional products entering the market later this year.”
Mr. Bottomley raised his revenue expectations for 2019 and 2020 to $152-million and $249-million, respectively, from $151-million and $217-million. His EBITDA forecast increased to $57.7-million and $95.4-million from $55.3-million and $81.8-million.
With a "speculative buy" rating, his target for OrganiGram shares increased to $10.50 from $8.50. The average on the Street is $11.32.
“With a continued impressive launch into the Canadian recreational market and one of only three LPs in the space with purchase order in every province, we are increasing our longer-term recreational market share assumption for OGI to 9 per cent (up from 7 per cent), resulting in an increase to our target price to $10.50,” said Mr. Bottomley.
"OGI currently trades at 12.1 times our revised calendar 2020 EV/EBITDA [enterprise value to earnings before interest, taxes, deprecation and amortization], a discount to its peer group of mid-cap LPs at 13.9 times. However, given that OGI continues to outperform this group and that the large cap names trade at 38 times, we believe OGI has further upside to rerate, and we would remain buyers of OGI at current levels, particularly after Monday’s weakness."
Lundin Mining Corp. (LUN-T) is following through on its strategy with its agreement to buy Yamana Gold Inc.’s (YRI-T) Chapada mine in Brazil in a deal that could eventually exceed US$1-billion, according to RBC Dominion Securities analyst Sam Crittenden.
“We like the acquisition of Chapada and note that it ticks all of the boxes for what Lundin communicated it is looking for in an asset,” he said. “The mine has a 28-year life with opportunities for expanding production and currently sits in the second quartile of the cost curve with C1 cash costs of $1.00 per pound. With Chapada, Lundin increases its copper exposure and adds an asset in a mining-friendly jurisdiction. We estimate that copper will represent 66-per-cent of Lundin’s EBITDA in 2020 (up from 63 per cent prior to Chapada acquisition).”
Believing the "price is right" and Lundin's balance sheet remains strong, Mr. Crittenden raised his target for Lundin shares by a loonie to $9 with an "outperform" rating (unchanged). The average is $8.70.
"With the Chapada acquisition announced, we believe the M&A overhang is gone and the shares could re-rate toward peers and Lundin’s historical averages," he said.
"Lundin shares are trading at a discount to peers at 3.2 times 2020 estimated EV/EBITDA versus peers at 7.5 times and 0.6-times P/NAV vs. peers at 0.9 times. We believe there was an overhang on the shares due to M&A uncertainty and also with the ramp-up of production at Candelaria following the pit wall slide in October 2017. We believe the shares can rerate toward peers and historical averages now that the growth plans are more clear."
Elsewhere, Industrial Alliance Securities analyst George Topping maintained a "buy" rating and $9 target.
Mr. Topping said: "The market is very happy with a reasonably sized transaction that while not transformational, is accretive, and easy to absorb. Adding Chapada to the mix will boost production to 670Mlbs Cu pa post 2020 and should remove any acquisition overhang that was plaguing the stock. With ZEP at Neves bearing fruit next year and Candelaria set to return to normal ops in the back end of this year, Lundin is positioned for growth."
After an “eventful” start to 2019, Minto Apartment Real Estate Investment Trust (MI-UN-T) is “ticking all the right boxes,” said Desjardins Securities analyst Michael Markidis upon resuming covergae following its $173-million equity financing.
"MI has been active on the acquisition front thus far in 2019, committing to/closing on transactions for interests in three apartment properties in Calgary, Montreal and Toronto encompassing 1,612 suites for an aggregate purchase price of $273-million ($301,000/suite)," he said. "We are encouraged by the pace of capital deployment and management’s ability to deliver on the communicated strategy, which includes: (1) entering the Montreal multifamily market and establishing immediate scale, and (2) sourcing an acquisition from the Minto Group pipeline. Moreover, the REIT will enhance its fee income profile as it will serve as asset and property manager on the 50-per-cent interest of Rockhill and LYM that it does not own."
For the financing, Minto issued 8.8 million units at $19.60 each, increasing its float and equity cap by 56 per cent and 24 per cent, respectively. Its ownership interest declined to 46 per cent from 57 per cent.
"Net proceeds will be used to partially fund $209-million of new acquisitions and reduce amounts drawn on the credit facility," said Mr. Markidis. "Altogether, MI (1) has significantly increased its public market float, (2) will bolster its asset base through the pending addition of two urban properties in Montreal and Toronto, and (3) has demonstrated the benefits of the strategic relationship with its parent and largest unitholder."
Mr. Markidis maintained a "buy" rating and $21.50 target for Minto units. The average on the Street is $22.03.
Citing its current valuation and the belief that the Street’s subscriber projections “seem conservative,” Deutsche Bank analyst Bryan Kraft raised Netflix Inc. (NFLX-Q) to “buy” from “hold.”
“Platform status brings network effects not available to peers and competitors,” he said. “Specifically, this is making Netflix even more of a go-to destination when consumers want to watch something, and it means having Netflix is becoming more of a cultural necessity for people around the world.
“It also makes Netflix a magnet for talent. And it means that consumers stay captive within the Netflix walled garden for significant amounts of time. Aside from pay TV, which is losing audience share, there are no other competing platforms that approach Netflix’s reach.”
Seeing a “risk/reward profile [which] is attractive,” Mr. Kraft hiked his target to US$400 from US$360. The average is US$390.69.
“The company now trades at 7.9 times enterprise value/2019 sales, versus in excess of 10 times sales last summer, when we lowered our rating to Hold based on valuation,” he said. “Our $400 12-month PT implies 7.3 times 2020 estimated sales, in line with the 3-year median multiple, and below the median multiple over the past 1 and 2 years (9.0 times and 7.9 times, respectively). We see growth in revenue taking Netflix to $400 over the next 12 months even with de-rating as valuation shifts from 2019 to 2020 estimates.”
Mr. Viswanathan pointed to DowDuPont’s plan to focus on its specialty division, which faces macro headwinds, and, at the same time, continuing its restructuring with the spin-off of Corteva Agriscience, its agricultural division, in June.
"The downgrade is based on the following: 1) Fundamental economic macro concerns, particularly Europe and China; 2) Continued weakness in the Agriculture segment after the March floods in the Midwestern region of the U.S.; and 3) Separation cost from the Dow spin and Corteva spin in June 2019," he said. "We believe DWDP is fairly priced at the current levels based on the remaining two divisions."
He dropped his target for DowDuPont shares to US$40 from US$61. The average on the Street is US$42.08.
“We see upside in DWDP with potential for further divestitures,” the analyst said. “However, we believe further spins are unlikely over the next 12-18 months and therefore await improved market conditions. In Ags, we believe there are better names to play the long crop prices since we prefer to see some evidence of strong track record as a standalone company.”
In a separate note, Mr. Viswanathan said the new Dow Inc. (DOW-N) “accepts its fate as the ultimate commodity cash machine.”
He initiated coverage with a "top pick" rating.
"We believe the DOW story will follow a similar narrative to LYB [LyondellBasell Industries NV] as DOW embraces its commodity chemical roots," he said. "We see nearly 17-per-cent upside in DOW shares driven by six major themes: 1) DOW’s 54-per-cent EBITDA exposure to trough PE conditions; 2) DOW realizing benefits from de-bottlenecking of several facilities; 3) Low cost feed advantage; 4) A potential global cyclical upturn in ethylene; 5) Low capex spend as no large-scale M&A or greenfield expansion; and 6) Impressive Value Return to shareholders."
Mr. Viswanathan set a target price of US$68 for Dow shares. The average is currently US$62.89.
“Per IHSM, NA integrated PE [polyethlylene] margins have fallen 15-20 cpp since their peak in 2014 to 20-25 cpp today,” he said. “While the fall has been slow, this has kept the industry cautious from making new investment on capacity additions for 2021+, and much of the announced capacity is now being delayed until margin recovers. As each new world-scale facility takes 4-5 years to build, we expect limited capacity in the USGC area will help the cycle trend back up in 12-18 months. We believe this could help PE margins recover back to 40-45 cpp peak levels. As a result, we believe investors will reap the most benefit when they buy at the bottom of the PE cycle.”
Remaining "positive" on gold prices for the remainder of 2019, Credit Suisse analyst Fahad Tariq initiated coverage of five intermediate producers on Tuesday.
"We continue to believe gold miners will operate against a backdrop of higher gold prices year-over-year in 2019, and we (conservatively) estimate an average gold price of US$1,280 per ouncez in 2019," he said. "Gold is being supported by ongoing geopolitical issues (US-China trade war and Brexit, among others), concerns around slowing global economic growth and recession fears, and a more dovish U.S. Federal Reserve (no rate hikes in 2019)."
"Consistent with our broader coverage, we base our evaluation of the intermediate producers more heavily on valuation and reserve/production growth potential. Having a strong organic growth profile prevents the need for risky and often costly M&A in our view. We prefer companies that have a good operational track record (meeting or exceeding annual guidance) and a good track record of adding reserves. Our valuation methodology is a 50/50 blend of NAV and FY19/20 adjusted cash flow from operations."
Mr. Tariq initiated coverage of the following stocks:
Endeavour Mining Corp. (EDV-T) with an “outperform” rating and $32 target. Average: $29.53.
Centerra Gold Inc. (CG-T) with a “neutral” rating and $8 target. Average: $8.68.
Mr. Mehta said Cenovus shares have outperformed since being added to the firm’s “sell” list in September of 2018, pointing to improvements to its leverage outlook, free cash ﬂow generation and a more constructive commodity price environment, particularly for Canadian heavy crude.
“We believe that there is potential for CVE to sign further rail contracts or expand capacity at its Bruderheim rail terminal, which could further minimize exposure to widening WTI-WCS differentials," he said.
Believing it possesses the best risk-reward profile in the Canadian real estate sector, Laurentian Bank Securities analyst Yashwant Sankpal initiated coverage of Extendicare Inc. (EXE-T) with a “buy” rating, believing its current valuation “is a result of EXE’s poor operating performance in the past, and a general lack of a clear understanding of EXE’s business.”
“The market seems to be 1) assuming that EXE will not perform any better under the new management team, and 2) over-blowing the margin issues of EXE’s Home Care division,” he said. " As a result, the market is overlooking the stability of EXE’s overall business and cash flow, its liquid, under-levered balance sheet and the discount valuation at which this company — one of the largest Seniors Care platforms in Canada — is trading. ... There is no material business or balance sheet risk in this investment."
Mr. Sankpal set a target of $10 per share, which exceeds the current average of $7.80.
In other analyst actions:
BMO Nesbitt Burns resumed coverage of Power Corp. of Canada (POW-T) with an “outperform” rating and $34 target. The average is $32.21.
The firm also resumed coverage of Power Financial Corp. (PWF-T) with a “market perform” rating and $33 target, which sits 29 cents below the consensus.
With files from Reuters