Inside the Market’s roundup of some of today’s key analyst actions
Though he’s “waiting for a better hand before stepping into the action,” Desjardins Securities analyst Maher Yaghi raised his rating for The Stars Group Inc. (TSGI-T, TSG-Q) to “buy” from “hold.”
On Monday, investors punished the Toronto-based gaming and online gambling company following the premarket release of largely in-line quarterly results and a reduction in its full-year guidance, sending its share price plummeting by 18.75 per cent.
Mr. Yaghi called the drop "excessive."
"Indeed, the company was already targeting the low end of the guided range and management had already announced that the updated guidance would include the initial investment required for U.S. betting operations," he said. "While we acknowledge this venture comes with risk, we believe the current share price attributes no value to this opportunity even though the company has expertise in the betting segment.
"We also see a path to improvement for the poker business, which currently faces regulatory challenges in certain jurisdictions. Indeed, the company sees signs of improvement in these markets and will lap challenges starting in 4Q, which should provide a tailwind for both poker and online gaming."
Before the bell, Stars Group reported adjusted EBITDA for the quarter of US$237-million, meeting the Street's expectations. Adjusted for lobbying costs, the result was $233-million.
Based on the first half of the year and the expectation for investment in U.S. betting, the company reduced its guidance. It now expects revenue in the range of US$2.5-billion to US$2.575-billion, falling from US$2.64-billion and US$2.765-billion. The company's adjusted earnings per share guidance dipped to US$1.68 to US$1.83 from US$1.87 to US$2.11.
"The reduction in guidance to more achievable levels and the drop in the share price over the last few months are compelling reasons to upgrade our recommendation," said Mr. Yaghi. "While leverage remains elevated, we believe TSGI’s FCF generation (11-per-cent FCF yield) is strong and, barring any M&A, leverage should decline meaningfully over the next few quarters."
In reaction to those changes, Mr. Yaghi also lowered his adjusted earnings per share expectations for fiscal 2019 and 2020 to $1.80 and $2.06, respectively, from $1.86 and $2.18.
His target price for Stars Group shares fell to $31 from $35. The average on the Street is $34.22.
“The recent pullback in the stock beyond [Monday’s] 19-per-cent decline is notable,” he said. “Also, our valuation method is not aggressive, and we do not include a long-term value for the U.S. betting venture, but we do include costs related to these operations over our forecast horizon. Moreover, management’s commitment to debt reduction provides us with more confidence in TSGI’s prospects. For these reasons, and with the stock trading at 8 times next year’s EBITDA, we are upgrading our rating.”
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In a research report previewing third-quarter earnings season for Canadian banks, CIBC World Markets analyst Robert Sedran raised Laurentian Bank of Canada (LB-T) to “neutral” from “underperformer."
“Our call on that bank had been based on a shocking and almost unprecedented erosion in EPS that nevertheless did not hold back the shares, which have actually outperformed so far this year," he said. "So why change the rating now? Three reasons. First, with the combination of reducing balance sheet liquidity and falling GIC rates for broker-reliant institutions, the net interest margin may actually outperform the larger banks. Second, it appears that asset growth has reached an infection point with OSFI data no longer showing contraction. And third, while it is far from cheap on a P/E basis, at roughly 0.85 times book value, if earnings are now moving in the right direction, the valuation may have some support on a P/BV basis. We still see higher execution risk, but will monitor that from a Neutral rating.”
Mr. Sedran increased his target for Laurentian shares to $49 from $43. The average on the Street is $42.73.
On the sector, as a whole, he said: “We do not expect Q3 results to resolve the conflict between the pessimism and optimism surrounding the macroeconomic environment. If anything, we expect this conflict to be on full display as we see growth that is neither as strong nor as easily achieved as that of the last couple of years. But we do expect to see growth, coming in at an average 6 per cent quarter-over-quarter and year-over-year for the Big Six, the best of a lacklustre year so far. With a more dovish Fed signalling potential for a less robust top-line outlook in the U.S., we think geographic footprint matters less than operating momentum. As such, our call on Outperformer-rated TD will need outperformance in Canada as well.”
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Despite its in-line second-quarter results exhibiting improved earnings visibility and an “attractive” growth outlook, BMO Nesbitt Burns analyst Ben Pham downgraded Emera Inc. (EMA-T) to “market perform” from “outperform.”
"With EMA shares delivering total return of 47 per cent over last 12 months (vs. the utility index at 23 per cent) and the P/E at upper end of historical range (20 times vs. 11.5-21 times), we believe the risk/reward is more balanced at current levels," he said.
Mr. Pham raised his target to $55 from $54, citing “the recent decline in interest rates benefiting utility valuations.” The average is $56.54.
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Raymond James analyst Frederic Bastien said his positive outlook for Black Diamond Group Ltd. (BDI-T) was reinforced by last week’s release of in-line second-quarter results, which saw “improvements across the board.”
That led him to raise his rating for the Calgary-based modular space solutions and workforce accommodation company to "strong buy" from "outperform."
“We are convinced much better days lie ahead for BDI shareholders as Workforce Solutions (WFS) improves utilization rates with rental contracts in California and along the Coastal Gaslink pipeline, and as Modular Space Solutions (MSS) continues to scale up outside Alberta,” he said. “Since very little of this seems priced into the stock, at 0.44 times tangible book value presently, we are moving our recommendation.”
On Aug. 8, Black Diamond reported quarterly adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $10-million, exceeding the consensus expectation on the Street by $1-million.
“There were no significant variances to our segmented projections either, and all expense items below the EBITDA line more or less matched our estimates,” said Mr. Bastien. “Importantly, BDI’s strategy to reallocate invested capital from underutilized assets to asset types in greater demand continues to pay off. Two-third of consolidated revenue is now generated from outside of Western Canada’s oil patch, and nearly all key operating metrics are tracking better than a year ago.”
Mr. Bastien maintained a target price of $3 per share, which falls 19 cents shy of the consensus.
“Our $3.00 target is based on a forward EV/EBITDA multiple of 6.0 times our pre-IFRS 16 estimate, versus five-year averages of 6.8 times and 8.3 times for BDI and select modular space and workforce solutions providers, respectively. Although we believe Black Diamond’s smaller capitalization and higher concentration risk warrant this steep discount, we expect it to narrow as MSS gains scale and effects more stable and predictable cash flow growth for the entire company.”
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With the potential to grow to US$60-billion annually with a regular user base rising to 30 million, the legal U.S. cannabis market will “emerge as a major consumer goods category over the coming years, and will have an impact on spending, product development, and strategy in related consumer categories such as alcohol, tobacco, wellness and nutraceuticals, pharmaceuticals, beverages, and packaged foods,” said Echelon Wealth Partners analyst Matthew Pallotta.
“The U.S. market is by far the largest and most critical market for businesses looking to build a CPG brand in the cannabis industry, and no doubt represents the most significant financial opportunity of any cannabis market in the world,” he said. "It would seem apparent, in our view, that these strategic partners are backstopping their investees with billions in capital specifically to attack this market when they are able to.
“The Canadian and international markets are simply not big enough to absorb this kind of investment. In Canada in particular, excess capital has already been invested in cultivation and production, to the point where it is widely accepted that the market will face a situation of severe oversupply in the near future, current supply issues notwithstanding. Most major Canadian Operators have already fully financed their investments in Canadian cannabis infrastructure."
In a research report released Tuesday, Mr. Pallotta initiated coverage of a group of Multi-State Operators (MSOs), which he thinks are the “most attractive means for investors to gain exposure to the U.S. cannabis opportunity" and seeing them as "attractive on an absolute and relative valuation basis compared to Canadian peers.
“As a group, large cap MSOs are discounted on a relative basis compared to their large cap Canadian peers on all metrics, including forward consensus sales, run rate sales, and forward consensus EBITDA,” he said. “We acknowledge that several fundamental factors are the cause of this discount, including, amongst others, i) higher cost of capital and lesser liquidity in shares due to being barred from listing on major exchanges; ii) excessive tax burdens borne by US operators due to the application of Section 280E; and iii) greater risk and uncertainty from a regulatory perspective. .... MSOs justify, and will continue to command, valuation premiums relative to smaller, single-state and regional operators.”
Deeming it his top pick in the U.S. cannabis sector, Green Thumb Industries Inc. (GTTI-CN) is “ready to rise,” said Mr. Pallotta, initiating coverage with a “buy” rating and $24 target. The average target on the Street is $27.22.
"GTI has established its wholesale and retail businesses as being amongst the best operated of any of the MSOs we have studied," the analyst said. "The stock receives the only Buy rating in our coverage universe at this time, in part due to its industry leading portfolio of assets and licenses, management team’s track record of capital allocation and highly accretive M&A deals, and strong balance sheet with additional access to non-dilutive capital to pursue growth projects."
Mr. Pallotta said a recent selloff has brought the stock to "bargain levels."
"GTI’s stock finds itself at levels 49 per cent lower than its recent peak in April 2019 in light of the most recent selloff in US cannabis issuers," he said. "The stock’s current level implies a 119-per-cent discount to our estimate of intrinsic value based on our DCF model – a level of discount we believe warrants consideration for any investor looking for exposure to the US cannabis sector. We also note the Company is trading at a discount to the peer group average on a price to Adjusted Book Value of Equity basis (2.9 times vs. 3.7 times average), which in our view is not justified.
"We believe there is a strong case for the business to trade at a considerable premium to the peer group average, and on par with the leading multiples paid for MSOs in the peer group. We also note the 3.7-times average for the peer group represents a depressed level in light of the recent sell off, as the average ranged between 5 times to 6 times just a few months ago."
Calling its operations “first class” and believing its positioned to be a leader in the U.S. cannabis space, Mr. Pallotta gave Cresco Labs Inc. (CL-CN) a “speculative buy” rating and $15 target. The average on the Street is $21.25.
"Cresco Labs’ comprehensive brand portfolio, national market presence, and operational excellence make this Company one of the premier businesses in the U.S. cannabis space," he said. "The Company is in the process of closing four significant transactions to acquire operations in Florida, New York, California and Massachusetts, which will expand its reach into a total of 11 states. Our model forecasts assume that all of these transactions will be closed by Q419, and that the Company will obtain the necessary financing to do so. Closing of these acquisitions will establish Cresco as one of the largest cannabis operators in the U.S.."
Mr. Pallotta said the recent selloff in U.S. cannabis assets "appears to make for a timely entry point" into Cresco.
“Cresco’s shares last traded at our target price in late May, just over two months ago,” he said. “Commensurate with our bullish stance on the US cannabis sector more generally, we view the sharp pullback in the Company’s stock, along with that of its US MSO peers, to be an opportune time to establish a position in what we view to be one of the best US cannabis operators in the industry. At these levels, we view Cresco Labs as a compelling investment opportunity.”
He added: "Even with our more conservative forecasts, our estimate of intrinsic value implies the business is undervalued, with 48-per-cent upside to our target price. Our target price would make Cresco Labs the most valuable business under our coverage universe, and its current valuation places it as the second most valuable amongst all U.S. MSOs. Our model suggests potential upside to our target price from regulatory and tax reforms for U.S. cannabis companies of approximately 40 per cent."
Believing it’s current undervalued versus competitors due to its “attractive” portfolio of licenses and “strong” balance sheet, Mr. Pallotta gave Columbia Care Inc. (CCHW-NE) a “speculative buy” rating and $11.50 target. The average is $15.75.
"We view Columbia Care’s approach to the cannabis market as differentiated from competitors," he said. "We characterize Columbia Care’s medical cannabis-centric strategy more accurately as a 'health and wellness focus' with an agnostic view as to which channel to serve its patients and customers through. Columbia Care, like its MSO peers, is highly active in both the medical and adult-use channels, but approaches both with an aim to differentiate the consumer experience by focusing on health and wellness, patient outcomes, and education.
“The Company has undertaken key strategic initiatives to differentiate its consumer experience, including being the first cannabis company to introduce a credit card (‘Columbia National Credit Card’) for use in its dispensaries and for home delivery, in markets where permitted, and is in the process of deploying a licensed pharmacist at its dispensary locations nationally.”
Mr. Pallotta thinks iAnthus Capital Holdings Inc. (IAN-CN) presents a “value play” with the U.S. cannabis space.
"By far the most compelling aspect of our thesis on the business is the relative valuation, as the Company is trading at a steep discount to its peers on all metrics," he said. "The business is also trading at the largest discount to our estimate of intrinsic value (based on our DCF model) of any of the companies in our coverage universe. We feel the recent selloff in the stock has been overdone, and the current valuation suggests investors buying today would be receiving the legacy iAnthus business essentially for free, based on the value of the consideration paid for MPX Bioceutical at the time of the closing of the acquisition in February 2019. Our 12-month target price implies upside of 170 per cent from current level."
He set a “speculative buy” rating and $10 target. The average is $11.44.
“iAnthus is one of the most deeply discounted issuers in our tracking group of large cap US MSOs,” he said. “We note its 1.6 times price to Adjusted Book Value of Equity at current levels, relative to the MSO peer group average at 3.7 times. This metric, in our view, highlights the stock’s meaningful discount, and attractive valuation on both a relative and absolute basis. The stock trades at 11.5 times our estimated 2020 EBITDA ($48.5-million) and 2.1 times our estimated 2020 sales ($271.6-million), despite our estimates being more conservative than the consensus. Our model suggests potential upside to our target price from regulatory and tax reforms for U.S. cannabis companies of more than 30 per cent.”
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Following a second quarter that was “poor” financially and fell short of production expectations, Laurentian Bank Securities analyst Barry Allan downgraded Americas Silver Corp. (USA-T) to “hold” from “buy,” citing an “excellent” share price performance during the period.
“We do continue to see good growth in quarterly performance for the next 12-months, but much of this growth expectation has become baked into the current share price,” he said. “More importantly, by the end of 2019, USA should transition from being a producer of zinc, lead and silver, to also being a significant producer of gold (40 per cent of estimated revenue).”
Mr. Allan dropped his target to $5.10 from $5.40, which falls below the $4.88 consensus.
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Echelon Wealth Partners analyst Douglas Loe said he’s “clearly disappointed” about Stryker Corp.'s (SYK-N) US$51.7-million acquisition acquisition of Quebec-based TSO3 Inc. (TOS-T), calling the bid “not just modest in comparison to value implied by our prior price target, but also modest in comparison to TOS’ price levels exhibited just a quarter ago.”
Moving TSO3 shares to "tender" from "buy" in the wake of Monday's announcement, Mr. Loe added: "When considering TSO3’s T12M VP4 unit sales trajectory (which now includes FQ219 data), and the firm’s likely requirement for a new capital infusion as early as FH120 if current VP4 sales trajectory continued, we believe the Stryker bid is a reasonable expectation for achievable share value in the medium term and we thus recommend that TOS shareholders tender to the offer. At a closing share price of $0.425, TOS’ share value is already quite close to acquisition bid value."
He removed his target for the stock, which was previously $1.25. The average is 90 cents.
“Though the Stryker offer is clearly below our previous PT, it does seem reasonable to us within the context of TSO3’s recent revenue/EBITDA performance and when considering that TSO3’s flagship technology has long benefited from all of the positive FDA regulatory regard that we expected to drive sales, and actual sales performance has not caught up to the technology in this circumstance," the analyst said. "Although it is difficult to predict with certainty if any alternative offers could be forthcoming, our best guess is that interest in the firm has been widely solicited across multiple hospital sterilization equipment and endoscope reprocessing firms, many of which are aware of VP4 through prior alliances (3M Healthcare (MMM-N) and Getinge AB, specifically). Accordingly, while we readily observe that TOS shares have traded higher than bid value as recently as throughout most of FQ119, the market was not aware of how VP4 unit sales traction was evolving during FQ418-FQ219 as we know now, and share value has responded accordingly. Any new offer would of course need to factor in the magnitude of the US$3.1-million termination fee that is factored into Stryker’s offer as well. Taking all factors described above into consideration, we believe we are justified in shifting our rating.”
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In a separate note, Mr. Loe lowered Centric Health Corp. (CHH-T) to “hold” from “buy” in reaction to the sale of its discontinued Surgical & Medical Centers operations for $35-million to Kensington Capital Advisors.
“We have mixed views on the formal divestiture of surgical operations [Monday], not because we are surprised that discontinued operations were eventually sold (which tends to happen to discontinued operations), but because the cash proceeds generated while solid were at the low end of a valuation range we had previously described, and thus leaving behind what is still a sizable pro forma debt level that ongoing long-term care pharmacy operations will not need to fund,” he said.
“But that said, it was abundantly clear that surgical operations were exhibiting clear sequential EBITDA decline since generating strong FQ218 EBITDA of $2.2-million, subsequently reporting FQ318 EBITDA of $1.5-million, FQ418 EBITDA of $1.3-million, and then FQ119 EBITDA of $0.8-million (transition to IFRS 16 lifted as-reported EBITDA to $1.2-million). And while it is conceivable that FQ219 surgical EBITDA when reported will reverse the trend in what is usually a seasonally strong financial period for this division, it seems reasonable to assume that recent quarterly EBITDA trend negatively impacted the EBITDA multiple that could be credibly ascribed to surgical operations on divestiture.”
Mr. Loe lowered his target for Centric shares to 20 cents from 40 cents. The average is 58 cents.
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In other analyst actions:
TD Securities analyst Sean Steuart cut Canfor Corp. (CFP-T) to “hold” from “buy” with a $16 target, down from $12.50. The average is $15.92
Mr. Steuart raised Canfor Pulp Products Inc. (CFX-T) to “buy” from “hold” with a $13 target, rising from $11. The average is $13.70.
TD’s Tim James cut Transat AT Inc. (TRZ-T) to “tender” from “hold” with a $18 target, up from $13.50. The average is $14.64.
RBC Dominion Securities cut Pure Multi-Family REIT LP (RUF-UN-T) to “sector perform” from “outperform.
National Bank Financial analyst Vishal Shreedhar cut Roots Corp. (ROOT-T) to “sector perform” from “outperform” with a target of $4.25, falling from $5. The average is $5.28.
David Leeder