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

Though he remains “constructive” on Canadian National Railway Co. (CNI-N, CNR-T) shares for the next 12 months, Citi analyst Christian Wetherbee sees the likelihood of near-term pressure due to a likely 2019 guidance cut to levels below the Street’s expectations, despite long-term drivers remaining intact.

"The longer-term guidance drivers CN laid out at its June 2019 investor day appear largely intact, as intermodal growth from Prince Rupert and Halifax and the ongoing ramp up of crude by rail (albeit slower than predicted) and Canadian coal should help push revenue growth ahead of peers and toward the company’s C$1.3-C$2.4-billion growth target through 2022," he said. "That said, the CBR and coal ramp ups have been slower than expected and the company acknowledged that guidance is underpinned by a supportive economic backdrop, which is less certain in the current environment. While still in the early innings of the targets, we believe it’s smart to assume the lower end of the ranges due to economic uncertainty and slower starts to CBR and coal initiatives."

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Mr. Wetherbee made the comments after hosting investor meetings with CN’s vice-president of financial planning, Janet Drysdale, and vice-president of investor relations, Paul Butcher, in Europe last week.

"Overall the takeaway was somewhat bifurcated, with a solid and attractive long-term story driven by better volume growth potential vs. most peers and technology leadership, somewhat offset by the reality of near-term volume weakness which is likely to pressure earnings power," he said.

Though he said CN’s volume premium remains, he sees growth “slipping.”

"It appears CN’s updated mid-single digit RTM [revenue ton mile] growth target for 2019 is at risk," the analyst said. "RTMs were up 3 per cent in 1H and 3Q is trending flat to slightly negative, requiring a steep 4Q ramp up to hit the target. As such, we expect this guidance to be reduced on the 3Q call, likely to flat-to-low single-digit growth. Interestingly, CN’s volume weakness has been driven by a slower crude ramp up, slower coal growth from its newest customer, and lumber, all of which seem less driven by economic weakness. We also believe low double-digit EPS growth is now at risk, with a potential cut coming with 3Q results."

Accounting for weaker volume, Mr. Wetherbee lowered his third-quarter EPS projection to $1.58 from $1.72, which now sits below the consensus on the Street. He pointed to lower revenue assumptions from flat to slightly negative RTM. His fourth-quarter 2019 and full-year 2020 estimates also declined to $1.53 and $6.70, respectively, from $1.65 and $7.

He maintained a “buy” raring and US$103 target for CN shares. The average on the Street is US$97.35.

Elsewhere, despite seeing CN favourably over the long term, Stephens analyst Justin Long downgraded its stock to “equal-weight” from “overweight,” believing its near-term set-up “has become more challenging."

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Mr. Long pointed to “recent volume under-performance, a tough 4Q19 volume comp and a more mature [precision scheduled railroading] model that could make it tougher to drive significant cost cuts.”

Seeing “near-term fundamental challenges,” he thinks CN’s risk-reward proposition has become “balanced” at current valuations.

He sliced his target to US$97 from US$100.


Citing its “strong financial outlook with capital discipline,” RBC Dominion Securities analyst Mark Mihaljevic initiated coverage of North American Palladium Ltd. (PDL-T) with an “outperform” rating, seeing its free cash flow, returns and margins “well ahead of peers.”

“We believe North American Palladium (NAP) offers investors strong financial fundamentals with the highest free cash flow yield in the North American precious metals space, amongst the highest returns on invested capital and equity in the sector, and above average margins,” said Mr. Mihaljevic in a research note released Tuesday.

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“Located in Ontario, a geopolitically stable and mining-friendly jurisdiction, we believe Lac des Iles (LDI) holds the potential for future resource/reserve growth given a number of prospective targets in the company’s exploration portfolio. We also consider NAP to be uniquely positioned as the only publicly-traded pure palladium producer.”

The analyst expects “positive” financial momentum from the Toronto-based miner as it reaps the benefits of record palladium prices, while, at the same time, it delivers “modest” production growth and “steady” operating and capital costs.

Mr. Mihaljevic is projecting free cash flow growth from only $10-million in 2017 to $180-million in 2019 with an average of $260-million from 2020 through 2022.

“At our forecast prices, this equates to an average free cash flow yield of 19 per cent from 2019-21E which is the highest in our North American precious metals coverage universe,” he said. “This compares to the single asset peers at 14 per cent and the broader universe at 9 per cent.”

“The company’s strong outlook also sees NAP deliver one of the highest return on invested capital in the precious metals space at 24 per cent, based on our estimates. This is well ahead of the single-asset producer average of 6 per cent and broader sector average of 6 per cent. We also see a similar trend with return of equity with the company’s ROE of 25 per cent comparing favorably to the single-asset peers at 9 per cent and sector at 7 per cent.”

Mr. Mihaljevic also emphasized that NAP is likely to benefit from the current deficit in the palladium market, which will support “strong” near-term pricing, adding: “In the near term, we remain constructive on palladium prices as we expect the current market deficit to persist through 2021. We also believe market tightness in 2018 and year-to-date 2019 has embedded a wider structural deficit as above-ground stocks have continued to be drawn down. Longer term, we are currently more cautious as we forecast an eventual re-balancing of the market as supply and demand gradually respond to current prices, with the market and value chains in vehicle OEMs eventually arbitraging out the pricing differences between palladium and platinum via substitution.”

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He set a target of $26 per share, which exceeds the current consensus of $22.43.

“We initiate coverage of North American Palladium with an Outperform rating given the company’s positive financial outlook, demonstrated capital returns through regular and special dividends, and unique exposure to palladium,” he said.


The 4.5-per-cent drop in share price suffered by EnWave Corp. (ENW-X) on Monday represents an intriguing buying opportunity for investors, according to Industrial Alliance Securities analyst Neil Linsdell.

The Delta, B.C.-based advanced technology company fell as much as 11 per cent after announcing before the bell Bonduelle Group, a long-time royalty partner, has delayed an anticipated purchase of a 400kW REV machine.

"As a reminder, Bonduelle, a long-time royalty partner, after almost five years of development, recently launched its award-winning InFlavor dehydrofrozen vegetable product line," said Mr. Linsdell. "In order for Bonduelle to retain North American exclusivity over dehydrofrozen vegetables, the company was expected to purchase a 400kW REV machine before September 30, which would have been the largest unit purchased by any customer. Bonduelle remains a committed partner and will continue to use the 120kW quantaREV unit currently operating at Bonduelle’s plant in Sainte-Martine, Quebec (paying an undisclosed royalty to EnWave), in order to build market demand for the InFlavor product line. With the delay, EnWave can now offer the technology to other manufacturers in that space on a non-exclusive basis, however, we would expect the Bonduelle contract to return to an exclusive basis at some point if EnWave has not contracted another non-exclusive license in that segment before Bonduelle sufficiently advances in its product roll-out to justify the purchase of the larger unit."

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Though he called the delay “disappointing,” Mr. Linsdell thinks it will not have a significant impact on the long-term opportunities for Bonduelle, “or any of the other (even more lucrative) partnerships with multiple cannabis companies that continue to develop in the short term.”

He added: “The commissioning of cannabis drying units over the next few quarters, and subsequent royalty payments, combined with further deepening of the Costco (COST-Q, Not Rated) relationship and increasing shipments of MoonCheese, bode well for EnWave.”

He maintained a “buy” rating and $2.75 target price for shares of EnWave. The average target is currently $2.67.


Citing “more comfort” in the growth of its business, including cannabis-related endeavours, Bank of America Merrill Lynch analyst Christopher Carey raised his rating for Scotts Miracle-Gro Co. (SMG-N) to “neutral" from “underperform.”

"With a recovery in California’s cannabis market and policy developments which could support a broadening of the U.S. cannabis space in 2020, said Mr. Carey, who said he’s “becoming more comfortable” with the unit’s growth prospects.

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Ahead of the release of its fourth-quarter results on Nov. 6, he thinks an underperform rating is no longer appropriate, emphasizing the stock’s “defensive positioning” and a “skittish” U.S. stock market.

He raised his target to US$108 from a Street-low of US$96. The average on the Street is US$115.


Flower One Holdings Inc. (FONE-CN) appears poised to become the dominant cannabis wholesale producer in Nevada, according to Canaccord Genuity analyst Kimberly Hedlin, who pointed to its “large-scale, high-tech cannabis production and focus on building market share through branding partnerships.”

“We see Nevada as a high-growth, culturally influential market (where branding presence is a must) and estimate a retail market of $0.9-billion by 2021,” she said. “Owing to Flower One’s differentiated branding strategy and scale, we expect the company to achieve relatively high wholesale margins and market share. We also see the potential for geographic expansion and believe an emerging trend toward specialization bodes well for the company, particularly as access to capital becomes constrained.”

Believing its “cost disruptive" production, which includes “industry-leading” design elements and large-scale capacity, as well as its first-mover advantage is likely to deter competitors, Ms. Hedlin initiated coverage of the Toronto-based company with a “speculative buy” rating.

“We also see Nevada as a culturally influential market where a branding presence is a must for top brands,” she said. "Additionally, we see a growing trend in the cannabis industry toward specialization, which we believe bodes well for Flower One.

“We are initiating coverage with a SPECULATIVE BUY rating given our belief that the company should achieve outsized margins and market share through its disruptive cost model, seed-to-shelf solutions for branding partners, and scale leadership in the Nevada market. Moreover, we see an opportunity to replicate the company’s strategy outside of Nevada, which could provide incremental upside to our target price.”

She set a target price of $3.50 per share, which falls short of the current consensus of $4.75.

“Following Flower One’s RTO in September 2018, the company’s share price has outperformed the Horizons ETF index, reaching a high of $3.50,” said Ms. Hedlin. "The stock saw a significant initial run-up following its $30-million equipment lease financing deal and continued to climb higher following its $57.5-million convertible debenture offering in March 2019. In our view, these transactions increased confidence surrounding execution relating to the Las Vegas greenhouse.

“We expect the recent stock performance is a function of current market sentiment. However, with revenues and business development opportunities expected to rapidly accelerate, we believe the current stock price provides an attractive entry point.”


Haywood Securities analyst Daniel Rosenberg upgraded Well Health Technologies Corp. (WELL-X) following the announcement of the consolidation of its EMR assets and a new partnership with McMaster University’s Department of Family Medicine on Monday.

“The announcements underscore WELL’s strategy toward becoming a leading provider of digital health solutions,” said Mr. Rosenberg. “WELL recently announced the acquisition of OSCARwest, which is the third out of three OSCAR charter members located in BC. There are four charter members in Ontario (WELL has already acquired one) and we expect the shopping spree to continue given a well-funded balance sheet. Shares have come down from 52-week highs of $1.87 and recent strategic initiatives position the Company for continued rapid growth. We included the recently announced OSCARwest acquisition into our forecast along with an increase in our EMR M&A assumptions.”

Moving the stock to “buy” from “hold,” he raised his target to $2 from $1.80, which matches the current consensus.


In other analyst actions:

CIBC World Markets analyst Mark Jarvi downgraded Pinnacle Renewable Energy Inc. (PL-T) to “neutral” from “outperformer” with an $11 target, down from $14. The average on the Street is $13.46.

Elsewhere, BMO Nesbitt Burns’ Jonathan Lamers cut Pinnacle to “market perform” from “outperform” with a target of $10.50, down from $14.

“Sawmill curtailments across the B.C. forest products industry represent a significant headwind that is having a greater impact on Pinnacle’s margins and volumes versus our prior assumptions,” said Mr. Lamers.

“It is difficult to see the stock outperforming in the context of this continuing headwind.”


TD Securities analyst Jonathan Kelcher downgraded Allied Properties Real Estate Investment Trust (AP.UN-T) to “hold” from “buy.” He raised his target to $57 from $55. The average is $53.25

Mr. Kelcher also downgraded InterRent Real Estate Investment Trust (IIP.UN-T) to “hold” from “buy” with a $17.50 target, up from $16.50 and above the consensus of $15.83.

He also lowered StorageVault Canada Inc. (SVI-X) to “hold” from “buy” with a $3.50 target (unchanged), which tops the average by 6 cents.

RBC Dominion Securities analyst Sam Crittenden downgraded Labrador Iron Ore Royalty Corp. (LIF-T) to “sector perform” from “outperform” and lowered his target to $27 from $29. The average is $32.

GMP analyst Robert Fagan initiated coverage of TerrAscend Corp. (TER-CN) with a “buy” rating and $9 target. The average is $15.

With files from Bloomberg News

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