Inside the Market’s roundup of some of today’s key analyst actions
In the wake of the release of weaker-than-anticipated third-quarter financial results on Monday after the bell, Raymond James analyst Daryl Swetlishoff thinks West Fraser Timber Co Ltd. (WFT-T) sits poised to benefit from lumber price gains.
The Vancouver-based company reported adjusted EBITDA for the quarter of $11-million, which fell well short of both Mr. Swetlishoff’s $16-million projection and the $28-million consensus on the Street. He attributed the miss, in large part, to the performance of its Lumber segment, which improved from the second quarter but missed the analyst’s expectation.
“Over the past 10 months, 12 B.C. sawmills have announced permanent curtailments totaling over 2 billion board feet, representing 5 per cent of North American lumber capacity,” he said. "We expect these volume reductions to reduce on the ground inventories during 4Q19. Following a disappointing 1H19, U.S. housing activity appears to be normalizing with distributors reportedly expecting 2-3 per cent higher end use demand in 2020. The timing coincides with the normal seasonal pattern in lumber prices (trough in October and peaking in Spring).
“With the bulk of mill closure announcements occurring between May-July of this year, we expect a material drop in lumber shipments imminently. As such, the seasonal trade could be further amplified given the expected drop in supply, which coupled with at least normal home building conditions, could turn the year of choppy trading into a very tight market. We peg BC average variable cost (AVC) at US$420 per thousand board feet (mfbm). Given the market dynamics, we have conviction that spot pricing moves up to at least AVC which we expect to support 30-40 per cent higher equity share values.”
Keeping a “strong buy” rating, Mr. Swetlishoff lowered his target for West Fraser shares to $76 from $80 after reducing his pulp segment estimates for 2020. The average on the Street is currently $64.50.
“We rate West Fraser Strong Buy given our constructive longer term view of lumber markets, driving earnings growth and the positive impact on valuation,” he said. “In the wake of an unprecedented round of sawmill curtailments North American lumber shipments are poised to decline. At the same time, U.S. housing activity levels have normalized following 6+ months of interest rate easing. We expect these factors plus seasonal tailwinds to allow benchmark lumber pricing to melt up to at least B.C. AVC. As such, we expect West Fraser to perform well during this period, given the high correlation to lumber prices.”
Seeing headwinds for Canadian heavy oil producers from the coming International Maritime Organization clean-fuel rules, Morgan Stanley analyst Benny Wong downgraded a pair energy stocks on Tuesday.
Mr. Wong thinks the changes, known as IMO 2020, will provide a tailwind for U.S. refiners while leading him to taking a more defensive stance on the risk of widening Canadian heavy crude spreads.
He lowered Cenovus Energy Inc. (CVE-T) to “underweight” from “equal- weight” with a $13 target, which falls short of the consensus of $15.20.
Mr. Wong also cut MEG Energy Corp. (MEG-T) to “underweight” from “overweight” with a target price of $5 per share. The average is $7.38.
At the same time, the analyst raised Husky Energy Inc. (HSE-T) to “equal-weight” from “underweight,” citing its lack of exposure to light-heavy crude spreads and its integrated structure.
His target for Husky remains $11. The average on the Street is $12.39.
Believing Canadian cannabis companies are finding it increasingly difficult to raise capital, Piper Jaffray analyst Michael Lavery lowered his target for several producers on Tuesday.
His changes included:
Tilray Inc. (TLRY-Q, “overweight”) to US$31 from US$72. The average on the Street is US$34.79.
Ahead of the release of its third-quarter results on Nov. 4, Raymond James analyst Brena Phelan raised her target price for shares of goeasy Ltd. (GSY-T), believing its new customer acquisition channels are “making loan and earnings growth look easy.”
“The last two months have been busy for goeasy, featuring press releases that the easyfinancial loan portfolio had reached $1-billion (Aug. 15), an equity investment and strategic relationship with point-of-sale financing platform Paybright (Sept. 5), and most recently a pilot program for a loan referral agreement with MOGO (MOGO-T), a financial health focused fintech (Oct.8),” she said.
“goeasy is a uniquely high-growth story, catering to an underserved market with significant demand and little competition, and executing with effective and reliable credit adjudication and underwriting. Based on recent key partnerships and milestones announced by the company, we think that 2021 loan growth guidance looks very much achievable. Our forecasts assume that net charge-offs begin to trend down next year due to a gradual evolution of the loan book to lower-risk loans and that the operating leverage inherent in the store network continues to drive margins higher. Taken together, new 2021 estimates reflect a continuation of 20 per cent plus EPS growth and a 26-per-cent ROE.”
Though Ms. Phelan trimmed third-quarter earnings per share projection by 9 cents to $1.40, her fourth-quarter expectation rose by 1 cent to $1.52. At the same time, she raised her 2020 estimate to $6.99 from $6.71 and introduced a 2021 projection of $8.42.
“Ultimately, we consider goeasy’s ability to adjudicate and underwrite non-prime credit to maximize its risk-adjusted return to be its most important competitive advantage,” she said. “Accordingly, the massive population of potential borrowers made available by these partnerships, at a cost below what goeasy currently spends in advertising and onboarding, represent a significant lifetime customer value opportunity. They also reinforce management’s long-term strategic thinking.”
Keeping an “outperform” rating for goeasy shares, her target jumped to $73 from $64. The average on the Street is $72.
“Our new $73.00 target price is based on 9.5 times the average of our 2020 and 2021 EPS estimates - appropriate, in our view, for a growth company like this,” said Ms. Phelan. “We see 9.5 times as not at all stretched given the company’s growth, ROE and consistent and predictable track record of credit losses. Our 9.5-times target multiple is just above goeasy’s current and 6-month average multiple of 9 times, reflective of a more diverse and lower credit risk profile loan book and strong execution.”
Orla Mining Ltd.'s (OLA-T) financing announcement for the development of its Camino Rojo Oxide Gold Project in Zacatecas, Mexico is "an important milestone and demonstrates management’s considerable progress towards de-risking the project,” according to CIBC World Markets analyst Bryce Adams, leading him to upgrade its stock to “outperformer” from “neutral.”
On Monday, the Vancouver-based company said it has entered into a commitment letter for a secured project finance facility of up to US$125-million with Trinity Capital Corp. and will include a syndicate of lenders led by Pierre Lassonde, Agnico Eagle Mines Ltd. and Trinity.
Pointing to progress on its key asset, Mr. Adams raised his rating and his target to $2.20 from $1.85. The average on the Street is $2.53.
“Camino Rojo regional exploration and sulphides, as well as results from Cerro Quema, (Panama) provide further optionality that can support valuation. For now, CROP remains a clear focus and value driver for the stock,” he said.
Knight Therapeutics Inc.'s (GUD-T) $369-million acquisition of Latin American oncology drug specialist Grupo Biotoscana Investments transforms it into a “truly global player with a high quality LATAM footprint," said Canaccord Genuity analyst Tania Gonsalves.
Shares of the Montreal-based pharmaceutical company jumped almost 14 per cent on Monday in the wake of the deal’s announcement, which Ms. Gonsalves called “a transaction shareholders have been patiently waiting for over the last five years.”
“Notably, this is a market that should provide a healthy level of future growth compared to Canada in addition to regional synergies from product license bundling,” the analyst added.
With a “buy” rating (unchanged), Ms. Gonsalves raised her target to $10 from $8.50. The average on the Street is $10.15.
“We see no reason to expect a slowdown in [Grupo Biotoscana’s] historic revenue and adjusted EBITDA growth of 20 per cent plus,” she said. “Nonetheless, we would prefer to wait for at least the private transaction to close before incorporating GBT’s numbers into our forecast. For now, we simply increase our P/B valuation multiple from 1.15 times to 1.35 times, taking into account that now almost 60 per cent of GUD’s shareholder equity will be invested in either loans, investment funds or the specialty pharma business. This yields our new price target of $10.00 per share. We maintain our BUY rating.”
Elsewhere, Bloom Burton & Co analyst David Martin upgraded Knight shares to “buy” from “accumulate” with a $10.50 target.
Mr. Martin said: “Based on the visible metrics, GBT appears to be a value accretive acquisition with strategic opportunities for Knight to license innovative medicines for multiple markets in the future. However, we currently have low visibility into risks associated with the Latin American market and GBT’s product portfolio dynamics, and as a result, we are forecasting 6-per-cent organic growth (market rate) for GBT until a track record under Knight’s ownership is established.
"With Knight back in the business of selling drugs (in a big way) and with a GUD platform to strategically expand the Americas (ex-U.S.) opportunity.”
In other analyst actions:
RBC Dominion Securities analyst Pammi Bir cut Dream Global Real Estate Investment Trust (DRG.UN-T) to “sector perform” from “outperform” with a target of $16.79. The average is $16.88.
TD Securities analyst Paul Bilenki initiated coverage of IPL Plastics Inc. (IPLP-T) with a “buy” rating and $11 itarget, which falls short of the average of $13.50.
Scotiabank analyst Himanshu Gupta initiated coverage of European Residential Real Estate Investment Trust (ERE.UN-X) with a “sector outperform" rating and $5.25 target. The average is $5.10.
Beacon Securities analyst Russell Stanley initiated coverage of Ayr Strategies Inc. (AYR.A-CN) with a “buy” rating and $31 target. The average is $24.44.
With a file from Bloomberg News