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

Citing continued uncertainty about its growth potential, Scotia Capital analyst Orest Wowkodaw downgraded Hudbay Minerals Inc. (HBM-T) on Tuesday following the release of largely in-line third-quarter financial results and a reaffirmation of its full-year guidance.

After the bell on Monday, the Toronto-based miner reported an adjusted loss for the quarter of 8 cents, matching the consensus expectation on the Street and 4 cents better than Mr. Wowkodaw’s expectation. Adjusted cash earnings before interest, taxes, depreciation and amortization (EBITDA) of $79-million exceeded the Street’s forecast by $1-million and fell $4-million short of the analyst’s estimate.

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Though Mr. Wowkodaw called Hudbay’s operational performance “solid" with its Constancia copper project in Peru topping his projections, he did lower his growth expectations further.

“Given the significant uncertainty with respect to the future development timing of both Rosemont and the Pampacancha satellite deposit in Peru, we have further pushed back our expectations for start-up to 2026 and 2021, or by 1 year each respectively,” he said. “The delay in Peru negatively impacted our 2020 and 2021 Au production estimates along with our 2021 Cu forecast.”

After reducing his EBITDA projection for 2019, 2020 and 2021 by an average of 9 per cent, Mr. Wowkodaw lowered Hudbay shares to “sector perform” from “sector outperform” with a target of $5.25, down from $5.75. The average target on the Street is $7.17, according to Bloomberg data.

“While we view the Q3 update as neutral, the ongoing uncertainty with respect to the company’s growth initiatives represents a significant overhang on the shares in our view,” he said.


Seeing no positive catalysts on the near-term horizon and “more pain likely yet to come,” Raymond James analyst Ben Cherniavsky downgraded Cervus Equipment Corp. (CERV-T) to “market perform” from “outperform" following last week’s release of weaker-than-anticipated quarterly results.

“Cervus served itself a healthy dose of medicine in 3Q19, liquidating used Ag inventories and taking a related write-down on its remaining stock of equipment,” said Mr. Cherniavsky. "As a result, new machine sales plummeted, OEM incentives dried up, and margins took a big hit. In turn, earnings fell into the red. We see this as a painful but necessary step towards right-sizing the company, strengthening the balance sheet and de-risking the situation for investors going forward. Much like drinking Buckley’s cough syrup: It tastes awful. And it works. That said, we struggle to give the company too much credit for dealing with a problem it helped create in the first place.

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“Yes, Canada’s ag market has been severely disrupted by geo-political events that were hard for anyone to see coming, but, in our view, this event has simply exposed an inventory glut that has been festering for a very long time. Indeed, for years, market share-obsessed OEMs and dealers have been accused of stuffing the ag market with more iron than it could reasonably absorb (does a farmer really need to trade in a brand new less than 500-hour tractor every year?). As a result, this glut has the potential to be a structural problem that will take more time to resolve. The good news is that crises can create opportunities for new leaders - such as Cervus’ recently-appointed CEO - to seize. The other perversely good news is that Cervus’ stock is now so severely depressed that all this bad news might be already priced-in.”

On Thursday after the bell, the Calgary-based company reported a loss of 10 cents per share for its third quarter, missing the analyst’s expectation of an 18-cent profit and the Street’s forecast of a 33-cent gain.

“Consistent with last quarter, difficult conditions in Canada’s ag market continues to weigh on financial results,” said Mr. Cherniavsky. “Relative to our estimates, soft equipment sales and gross profit margins led to lower-than-expected gross profit ($6.7-million below our estimate). This translated to net income $4.6-million below forecast.”

“Despite difficult macro conditions, Cervus balance sheet remains in relatively good shape. Net debt to capital (56 per cent) is flat quarter-over-quarter and Cervus continues to make progress selling down its used inventory levels. We expect this to be another central topic in Cervus’ upcoming investor day.”

In reaction to the results, Mr. Cherniavsky lowered his 2019 EPS estimate to a 32-cent loss from a 30-cent profit. His 2020 expectation is now a 25-cent profit, slipping from 50 cents.

With the downgrade, he lowered his target for Cervus shares to $9 from $12, which falls below the average of $10.30.

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Following the release of weaker-than-anticipated preliminary fourth-quarter results, AltaCorp Capital analyst David Kideckel made significant reductions to his financial estimates for Organigram Holdings Inc. (OGI-T) to account for “near to medium-term headwinds affecting the Canadian cannabis industry.”

“HEXO’s Q4/19 results have indicated issues related to softening market demand and increasing pricing pressure being faced by Canadian LPs,” he said. “OGI’s Q4/19 preliminary results confirm these softening market conditions. We believe that the near term demand for dried flower is lower than previously anticipated, mainly driven by a slower than expected build-out of retail infrastructure in Canada. Over the near to mid-term, we believe that the growth in the quantity of cannabis sold will be lower than previously expected. Furthermore, the pricing pressure caused by a mismatch between supply and demand may lead to a lower average net selling price per dried flower equivalent. Given the lower than expected quantity of cannabis sold and the lower net selling price, we reduced our revenue and gross margin estimates for OGI.”

On Monday, Organigram reported revenue of $16.3-million, missing both Mr. Kideckel's $39.1-million projection and the $27.9-million consensus on the Street. Adjusted EBITDA of a $1.6-million loss also fell well short of expectations (profits of $12.1-million and $7.4-million, respectively).

Lower market demand and pricing pressures are causing "significant" headwinds, according to the analyst.

“Management highlighted that lack of retail infrastructure and the slow roll-out of stores in Ontario, as well as increased industry supply impacted OGI’s Q4/19 sales,” said Mr. Kideckel. "During the quarter, the Company recorded product returns and price adjustments largely due to slower selling SKUs sold to the Ontario Cannabis Store (OCS). On a positive note, OGI noted that it has maintained a significant market-share in the recreational cannabis market, and that it has continued to report sequential improvement in the cost of cultivation per gram and overall harvested volume

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“GI stated that, at this point in Q1/20 (ending November 30, 2019), the Company has shipped more sales when compared to the same point in time in Q4/19. However, management did not provide any further guidance. We note that the Company remains on track to launch cannabis-infused chocolates in calendar Q1/20, and expects to launch its cannabis-infused beverages in calendar Q2/20. In our view, the introduction of cannabis derivative products into the Canadian market, as well as the rollout of cannabis retail stores, especially in Ontario, could provide a significant tailwind for OGI over the long-term. However, we cautiously expect difficult market conditions to remain through FY2020 (ending August 31, 2020).”

Ahead of the Nov. 25 release of its full results, Mr. Kideckel reduced his revemue estimates based on lower demand and the preliminary results. His gross margin expectations also shrunk.

His revenue estimates for 2019 and 2020 fell to $80-million and $117-million, respectively, from $103-million and $222-million. His adjusted EBITDA forecasts dipped to $27-million and $17-million, respectively, from $39-million and $63-million.

“We believe that the launch of cannabis derivative products in the Canadian market marks an inflection point for LPs," he said. "In our view, the ability to launch differentiated products by developing IP around brands, formulations, and unique technologies will determine the long-term winners in the sector. We believe that companies with a sustainable competitive advantage will generate robust free cash flows through superior margins and will be able to command a premium valuation multiple. In that context, despite near to mid-term headwinds, our long-term investment thesis on OGI remains unchanged.

“We believe that OGI is on the right track to capture a significant portion of the Canadian cannabis market, as the Company has maintained a keen focus on developing innovative products ahead of the launch of derivatives."

Keeping an “outperform” rating for Organigram shares, Mr. Kideckel reduced his target to $6.50 from $13.15. The average on the Street is $9.66.

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Elsewhere, BMO Nesbitt Burns analyst Tamy Chen cut the stock to “market perform” from “speculative outperform” with a $4 target, down from $6.

“We previously considered the company to be a relatively stronger operator,” she said. "We now believe Organigram is also experiencing the challenges that have impacted some of its peers.”

Beacon Securities’ Russell Stanley moved his target to $5 from $15, keeping a “buy” rating.

Mr. Stanley said: “The headwinds observed by OGI - limited retail channels in Canada’s largest province plus oversupply for some products - are strikingly similar to those described by HEXO Corp. (HEXO-T) last month, and we expect similar comments from other LPs this earnings season. While we have reduced our target price, we believe that OGI will be one of the few to weather the storm. The Q4/19 forecast aside, OGI is one of few companies with a track record for delivering strong EBITDA margins, and importantly, it has established sales relationships with all 10 Canadian provinces. We therefore expect OGI to eventually benefit from the coming rationalization of producers, and we reiterate our Buy rating.”


Lundin Mining Corp.'s (LUN-T) recent acquisition of the Chapada copper-gold mine in Brazil is “clever” and “strategic fit,” said Industrial Alliance Securities analyst George Topping, who said its low cost expansion potential is “clear” following a recent site visit.

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“The $800-million acquisition replaced low yielding cash with a hard asset mine with an IRR [internal rate of return] of 13 per cent per annum by our estimates – a good IRR given the mine is already built with low risk expansion potential,” he said.

Mr. Topping said he expects incremental expansion to the mine in near term, but he sees a "major" expansion in the future.

“LUN’s preference will be to build out the expansion ‘in one go’ rather than phased smaller expansions. This is the more capital efficient method and any increase on the current 24 million tons per annum has to be large enough to be meaningful to the group and drive unit costs lower. Depending on the resources added through exploration, Lundin may look at twinning the plant to reach 48 Mtpa. The timeline on this would still be at least 7 years away, with 2 years of exploration and studies followed by a 2-year EIA and then 2.5 years of construction. The scale and timeline will depend on the exploration results but clearly it will be significantly more than the 32 Mtpa expansion planned by capital constrained Yamana.”

Keeping a “buy” rating, the analyst raised his target to $10.20 from $9.60. The average is $8.71.

“Adding Chapada, Lundin will produce 650 million pounds copper per annum and 170,000 ounces of gold p.a. from 2020," he said. "With ZEP [Zinc Expansion Project] at Neves bearing fruit next year and Candelaria returning to normal ops last quarter, Lundin is positioned for growth through Chapada. Modelling Chapada at a mid-case place holding 40 million tons per annum from 2027, we increase our target.”


K-Bro Linen Inc. (KBL-T) is a “stable operator with meaningful growth options," said Raymond James analyst Michael Glen.

In a research report released Tuesday, he initiated coverage of the Edmonton-based company with an “outperform" rating.

Mr. Glen said he sees three areas for potential upside as the company completes its “ambitious” 5-year, $200-million capital spending program: “further efficiency gains” in its Canadian business; a “significantly” improved free-cash profile and the potential for consolidation in the U.K. laundry market.

“K-Bro’s capital investments in Canada ($140-million of the $200-million deployed), were geared towards operational gains, improving customer service and lowering costs,” the analyst said. "Relative to older commercial laundry plants, the primary efficiency gains are as follows: (1) 30-per-cent gain in labour productivity; (2) 30-per-cent reduction in water; and (3) 20-per-cent reduction in energy / natural gas. Such investments, coupled with the very large, long-term contracts that support each targeted facility, make it extremely difficult for any regional incumbent to compete with K-Bro on both pricing and service.

“In terms of M&A, in late 2017 K-Bro entered the UK commercial laundry market with £35-million ($59.3-million) acquisition of Fishers Topco. At the time of acquisition, the Fishers business generated £5.1-million in EBITDA, implying a headline multiple of just under 7 times EBITDA. As mentioned above, we anticipate K-Bro will continue to deploy capital in the UK market to scale the operation, and the UK appears to offer a relatively robust group of regional peers / competitors that could serve as potential transactions.”

Pointing to its leading market position in its areas of operation, he set a target price of $45 per share. The average on the Street is $47.43.


CIBC World Markets analyst Oscar Cabrera lowered Nexa Resources S.A. (NEXA-N, NEXA-T) to “neutral” from “outperformer” after resuming coverage of the stock following a research restriction.

Mr. Cabrera said: “We expect Zinc supply-demand fundamentals to remain under pressure due to continuing trade disputes (i.e., galvanized steel on automotive/construction in China and Europe) and high Zn concentrate availability, partially offset by an easing bottleneck in China’s Zn smelting capacity. We continue to believe NEXA offers an attractive combination of strong free cash flow generation with its growth pipeline (avg. FCF yield 10 per cent per year 2020-2023, part of NEXA’s high capex period), assets in relatively low-risk jurisdictions, a strong balance sheet, and above-average dividend yield (6.4 per cent) vs. Zn peers (1.4 per cent). However, we believe potential future returns are well balanced with largely range bound zinc prices in the current macro.”

He reduced his target to US$11 from US$14. The current consensus is US$11.21.


Chartwell Retirement Residences’ (CSH-UN-T) valuation “has started to look a lot more interesting,” said Scotia Capital analyst Himanshu Gupta upon assuming coverage.

“CSH units have underperformed in 2019 (price return of 3 per cent vs. sector at 18 per cent) due to new-supply concerns," he said. "New supply under construction (within 5 km of CSH property) is expected to be 5 per cent of total inventory (as per CBRE) in the top 15 CSH markets (80 per cent of total NOI). This is meaningful relative to 2-per-cent annual supply growth in Canada in the last 10 years. While management expects the impact to moderate in 2020 and beyond, we would wait for occupancy to rebound. That said, we do believe valuation has become a lot more interesting. CSH is trading at a 6-per-cent discount to NAVPU [net asset value per unit] (vs. 5-per-cent average historical premium). We believe a 5-per-cent premium is warranted to reflect (i) national operating platform in an industry that lacks national players; (ii) significant operating leverage as occupancy normalizes; (iii) upside from development program; (iv) potential cap rate compression (lower bond yields + investments from U.S. players); and (v) our NTM [next 12-month] NAVPU growth forecast of 5 per cent.”

Mr. Gupta has a “sector perform” rating and $15.75 target, which falls below the $16.07 consensus.


In other analyst actions:

* Seeing African Swine Fever as a lingering headwind that is likely to continue to hurt margins and sales in the near and medium term, RBC Dominion Securities analyst Sabahat Khan downgraded Premium Brands Holdings Corp. (PBH-T) to “sector perform” from “outperform” with an $88 target, down from $102 and below the consensus of $90.11.

* Cormark Securities analyst Richard Gray raised Barrick Gold Corp. (ABX-T) to “buy” from “market perform” with a target of $30, rising from $28 and above the consensus on the Street of $26.57.

* TD Securities analyst Sean Steuart cut Brookfield Renewable Partners LP (BEP-N, BEP-UN-T) to “hold” from “buy” with a target of US$45, rising from US$43. The average target is US$41.53.

* SRH AlsterResearch analyst Karsten Rahlf initiated coverage of EnWave Corp. (ENW-X) with a “buy” rating and $2.60 target, which falls 5 cents below the consensus.

* Alliance Global Partners analyst Bhakti Pavai lowered Silvercorp Metals Inc. (SVM-N, SVM-T) to “neutral” from “buy” with a target of US$4.35, up from US$4.25. The average is US$4.40.

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