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

MedReleaf Corp. (LEAF-T) is a “premium” cannabis company with a tracking record of being a leading operator, according to Beacon Securities analyst Vahan Ajamian, who believes it’s poised for success in a legal recreational market that is likely to “dwarf” the medicinal market.

Initiating coverage of the Markham, Ont.-based company with a “buy” rating, Mr. Ajamian said he views MedReleaf as possessing one of the “premium” management teams in the sector, and added “the fact that its products also sell at a premium price relative to its peers is not a coincidence.”

“We calculate that it is currently the second-largest in Canada by cannabis sales, yet fourth-largest by market cap,” he said. “The company has recently launched three recreational cannabis brands and has a global reach to be a major player as more markets open up. MedReleaf has already announced key distribution agreements with the SAQ and Shoppers Drug Mart.”

Mr. Ajamian said a pair of potentially limiting factors from a fundamental perspective have recently been eliminated, which he said makes it a good time to invest in the company’s stock.

“When the company first listed about a year ago, we were concerned with the significant exposure it had to the veterans market, given the volume/price caps announced to the program,” he said. “While it had a plan to grow the rest of its business, we were of the view that we may be in a situation where its existing veteran business was in decline while its other business grew – resulting in revenue likely being flat for a year in a market exhibiting exponential growth. The company reported five straight quarters (September 2016 to September 2017) where revenue remained within a tight band ($9.8-million to $10.4-million). However, last quarter revenue broke out to $11.4-million and with its Bradford facility now live, we can see the path towards meaningful revenue growth (and investor enthusiasm).

“The second concern we previously had was regarding the company’s capacity – which totalled ‘only’ 35,000 kg across its first two facilities (Markham and Bradford). This concern has also been addressed by the company’s purchase of a greenhouse in Exeter. Following its conversion, the company forecasts having annual capacity of 140,000 kilograms.”

In reaction to The Globe and Mail’s report last week that Aurora Cannabis Inc. (ACB-T) has submitted a friendly offer for the company, Mr. Ajamian projects MedReleaf could garner as much as $31 per share in a potential takeover.

“Aurora currently trades at an enterprise value-to-fiscal 2021 estimated EBITDA multiple of 10.9 times on consensus estimates (i.e., 12 months ending June 2021),” he said. “Therefore, we speculate that it could be willing to pay a multiple as high as 10.5 times for MedReleaf and still have it be accretive.

“Applying an EV/EBITDA multiple of 10.5 times our EBITDA forecast for MedReleaf for the 12 months ending June 2021 ($337.3-million) results in an EV of $3.5-billion. Adjusting for in the money stock options, this translates to a takeout price of $31.00 (rounded). This would represent a 39-per-cent premium to MedReleaf’s last closing price prior to the Globe and Mail article suggesting that it was for sale. Also, it is just below the all-time high price ever for a share of MedReleaf of $31.25 per share.”

Mr. Ajamian set a $29 target for MedReleaf shares. The average target on the Street is currently $29.25, according to Bloomberg data.

“Now that it is on the path to revenue growth and with a potential imminent takeout, we recommend investors acquire shares of MedReleaf,” he said.


With the completion of its $6.4-billion acquisition of Canadian Real Estate Investment Trust, Choice Properties Real Estate Investment Trust (CHP.UN-T) now owns a “a high-quality, bond-like portfolio,” according to Canaccord Genuity analyst Mark Rothschild.

“[The portfolio] is anchored by a strong tenant in Loblaws (the Choice portfolio), along with a diversified, quality portfolio of retail, office and industrial assets, with material exposure to Alberta and Ontario (the CREIT portfolio),” he said. “We believe that the combined REIT has greater opportunity for growth through development and redevelopment, while balancing the more stable Choice portfolio and the more diversified CREIT portfolio.”

After dropping coverage of CREIT, Mr. Rothschild initiated coverage of Choice with a “buy” rating.

With the deal, which was officially completed on May 4, the combined entity’s portfolio now consists of 754 properties comprising approximately 69 million square feet of gross leasable area. Mr. Rothschild expects Choice to retain both the office and industrial portfolios, though he emphasized it will be “heavily exposed” to retail properties, which account for 78 per cent of net operating income versus 14 per cent for industrial assets and 8 per cent for office properties.

He also expects to see a concerted expansion into residential development.

“We have historically viewed Choice as a bond proxy given its longer lease terms, a portfolio which is essentially fully occupied (99-per-cent occupancy) and anchored by a stable, high-credit tenant in Loblaws (88 per cent of base rent as of Q1/18),” said Mr. Rothschild. “Investors took little risk with regard to distributions over an extended time period, although the upside was modest. While these factors remain, many of the assets in the CREIT portfolio carry shorter term leases and therefore provide the opportunity for greater growth through increasing rental rates. In the near term, there could be some weakness in the CREIT portfolio as it has exposure to the Calgary office market which has been soft.

“Over the long term, as investing in development and land intensification become more meaningful, cash flow and NAV growth should increase.”

He set a target price of $12.75 per unit. The average on the Street is currently $12.92, according to Bloomberg data.


Brookfield Business Partners L.P. (BBU-N, BBU.UN-T) is an “attractive long-term principal investing story with valuation upside driven mostly by capital appreciation rather than dividends,” said RBC Dominion Securities analyst Geoffrey Kwan in the wake of its release of largely in-line first-quarter results.

On Monday, Brookfield reported earnings before interest, taxes, depreciation and amortization (EBITDA) of US$191-million, narrowly missing Mr. Kwan’s US$203-million forecast. He did not see any “major positive/negative variances within BBU’s verticals” from the previous quarter.

“We believe investors should not focus on a specific quarter’s financial metrics, as they can vary significantly quarter-to-quarter and year-over-year, which makes accurately forecasting a specific quarter’s financial results difficult,” said Mr. Kwan. “The reasons for this primarily reflect: (1) the nature of BBU’s financial disclosure; (2) BBU makes new investments and monetizations fairly often; and (3) many of BBU’s investments are cyclical and/or were purchased during periods of financial difficulty for the acquired company, which can lead to significant changes in financial results in a given quarter. Consequently, we think investors should focus on normalized trends in financial performance and also commentary regarding financial performance at BBU’s various investments.”

Maintaining an “outperform” rating, Mr. Kwan increased his target to US$41 from US$39. The average is $41.

Mr. Kwan said: “Why we rate BBU Outperform: 1) BBU’s broad investment scope helps facilitate faster NAV growth vs. its peers in our view; 2) the company’s diversified portfolio limits downside risk should there be negative developments at any individual company, industry group or geography; and 3) BBU has a strong investment track record and directly benefits from BAM’s very experienced private equity management and investment team. As such, we continue to like the long-term growth potential for BBU’s units and believe it has potential to be a core holding within our coverage universe.”


Credit Suisse analyst Anita Soni raised her rating for New Gold Inc. (NGD-A, NGD-T) to “neutral” from “underperform” based on valuation.

“We believe that investors have now begun to price in a slower ramp-up and higher costs at Rainy River, in-line with our long held view,” said Ms. Soni. “For the next two to three months, we do not see further derating catalysts. However, we believe that once the mill has ramped up, filling the mill at higher grade will be the next challenge.”

Her target fell to US$2.70 from US$3. The average is US$3.48.


McEwen Mining Inc. (MUX-N, MUX-T) is a “well-diversified” gold producer positioned for growth, said Euro Pacific Capital analyst Bhakti Pavani, who initiated coverage of the Toronto-based company with a “buy” rating.

“The company’s asset portfolio is well-balanced and includes three producing mines, three-advanced stage exploration projects, and a long-term porphyry copper project,” said Ms. Pavani. “Currently, the company is focused on incorporating the Black Fox Complex acquisition (acquired in 4Q:17) and advancing the Gold Bar project to production. The production from Black Fox (48,000 oz of gold) and Gold Bar (62,000 oz of gold) should significantly increase MUX’s production in 2019 and beyond, in our opinion.

“In addition to a diverse producing asset portfolio, the Company holds 100-per-cent interest in several key exploration assets including Lexam VG Gold in Canada, the El Gallo II silver project in Mexico, and Los Azules, a porphyry copper deposit in Argentina. We like to note that some of these projects can be quickly advanced to production over the next three to four years. MUX has a very strong management team, led by a highly experienced and well-reputed CEO, Mr. Robert McEwen, who is also the largest shareholder of the company. Mr. McEwen is the ex-founder and former Chairman and CEO of Goldcorp Inc., one of the largest gold producers in the world. Under his leadership, the company has not only compiled a solid and well-balanced portfolio of producing and advanced-stage exploration assets but also managed to grow both production and revenue despite a subdued gold market.”

Ms. Pavani set a price target of US$2.85 per share, while the average on the Street is US$3.54.


Calfrac Well Services Ltd. (CFW-T) received its first “sell” rating from the Street on Tuesday when Piper Jaffray analyst John Daniel lowered his recommendation based on valuation.

The Calgary-based company is currently covered by 17 equity analysts, according to Bloomberg, with 10 having the equivalent of a buy rating and five with a neutral rating. One analyst is currently on restriction.

Though Mr. Daniel expects Calfrac’s balance sheet to improve with time, he sees its recovery to be more subdued than expected.

He has a Street-low $5 target for its shares. The average is $8.58.


BMO Nesbitt Burns analyst Ray Kwan downgraded Seven Generations Energy Ltd. (VII-T) to “market perform” from “outperform.”

“Overall, we appreciate management’s candor on the past operational misses and its drive to address some of these shortcomings through operational/management adjustments,” he said. “In our view, 7G is doing its best to “right the ship.’”

“ Still, the company will require a number of quarters of better execution to regain confidence in the marketplace. Accordingly, we are resetting our expectations and downgrading 7G.”

Mr. Kwan maintained a $21.50 target, which is below the average of $23.63.


In other analyst actions:

GMP analyst Ian Gillies downgraded Ensign Energy Services Inc. (ESI-T) to “reduce” from “hold” with a target of $5, down from $7.25. The average is currently $7.57.

RBC Dominion Securities analyst Michael Smith upgraded Agellan Commercial Real Estate Investment Trust (ACR.UN-T) to “outperform” from “sector perform” with a target price of $13.50, up from $12.50 and higher than the consensus of $12.71.

National Bank Financial analyst Shane Nagle initiated coverage of Titan Mining Corp. (TI-T) with an “outperform” rating and $2 target, which is 5 cents more than the consensus.

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