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

Kirkland Lake Gold Ltd.'s (KL-T) proposed $4.9-billion acquisition of Detour Gold Corp. (DGC-T) is “a head scratcher,” according to Canaccord Genuity analyst Tom Gallo.

Believing Detour adds an “aspect of operational uncertainty” and decreases its margins, Mr. Gallo lowered his rating for Kirkland Lake shares to “hold” from “buy."

He was one of three equity analysts on the Street to lower the Toronto-based miner on Tuesday.

“In addition to operational turbulence in the past, margins remain tight at Detour and will significantly increase Kirkland Lake’s consolidated cash costs and all-in sustaining costs (AISC) in the near term,” he said. “Based on [Canaccord] analyst Carey MacRury’s model, Detour’s cash costs average US$729 per ounce from 2020 to 2025. This is significantly higher than the $342 per ounce we model for Kirkland Lake over the same period of time.”

From the deal, announced Monday before the bell, Mr. Gallo does a pair of positives for Kirkland - “steady” long-term production results and continued low geopolitical risk.

“Detour adds approximately 600,000 ounces per year to Kirkland’s production profile,” he said. "This keeps production well above 1 million ounces per year into 2025 even if the company fails to find additional productive ounces at Fosterville. In total, the acquisition increases Kirkland’s reserve base by 269 per cent to 21.2 million ounces.

“This transaction will also result in three of the company’s four operating assets to be located in Canada, with its remaining operation and near-term development project (Northern Territory) in Australia. Both countries have extremely low geopolitical risks and we believe this has contributed to Kirkland’s premium in the past and will continue to drive trading near the top of the peer range in the future.”

However, pointing to “operational uncertainty and increased cost profile that Detour will add to Kirkland’s typically stable, high margin operations,” Mr. Gallo lowered his target for Kirkland shares to $55 from $67. The average on the Street is $63.15, according to Bloomberg data.

“We believe this deal will reduce the trading premium that Kirkland Lake has garnered since the discovery of the Swan Zone at Fosterville and expect the stock to trade more in line with peers going forward,” he said.

Elsewhere, CIBC World Markets analyst Cosmos Chiu lowered Kirkland Lake to “neutral” from “outperformer” with a $60 target, down from $73.

“This transaction was unexpected, as it takes the portfolio beyond KL’s current focus in high-grade underground mines,” said Mr. Chiu. “Long-term, we see the merits of this acquisition, by adding a third cornerstone mine to the asset base and potentially creating a Canadian champion. However, the acquisition adds to the near-term risk profile of the company, and it is for this reason that we are downgrading KL shares.”

National Bank Financial’s Mike Parkin dropped it to “underperform” from “sector perform” with a $50 target, slipping from $66.


Concurrently, three analysts also lowered Detour Gold Corp. (DGC-T) on Tuesday.

Canaccord’s Carey MacRury downgraded it to “hold” from “buy," seeing a limited return to his revised price target.

“We suspect the probability of a competing bid is low with very few other global producers with the size or valuation to outbid Kirkland in an accretive manner,” he said.

Mr. MacRury’s target slid from $30 to $24 to reflect the proposed share ratio of the deal. The average is $25.63.

Elsewhere, National Bank Financial’s Mike Parkin downgraded Detour to “underperform” from “outperform” with a $21.72 target, down from $27.

Cormark’s Richard Gray moved it to “market perform” from “buy” with a $28 target (unchanged).


Toronto-Dominion Bank (TD-T) shareholders are poised to benefit from the “synergies, scale, best-in-class services and organic growth prospects” stemming from Charles Schwab Corp.'s (SCHW-N) US$26-billion acquisition of TD Ameritrade Holding Corp. (AMTD-Q), said Canaccord Genuity analyst Scott Chan.

If the proposed deal comes to fruition, TD, which owned an equity interest of 42.7 per cent in Ameritrade, would hold a 13.4-per-cent stake in Schwab, which it would be eligible to sell as early as 2021.

“Management sees considerable value-generating opportunities from earnings accretion and potential for multiple expansion,” said Mr. Chan. “The bank expects the deal to be slightly dilutive in the 1st year of closing and modestly EPS accretive after integration is completed, targeting 4 cents and more than 7 cents per share in years 2/3 respectively. TD expects to recognize a material revaluation gain on closing, which will cause ROE [return on equity] dilution from a larger shareholder equity base. However, the company guides towards a relatively net neutral capital impact (e.g. CET 1 ratio) as the large gain should be relatively offset by a higher underlying carrying value. The bank will retain two seats on SCHW’s Board of Directors and will be subject to a standard lock-up duration of 8 months. After this period, the firm’s ability to source funds from its SCHW stake could provide additional flexibility for capital deployment to scale up their U.S. Retail/Wealth operations if the opportunity presents itself.”

Maintaining a “buy” rating for TD shares, Mr. Chan hiked his target to $81 from $79. The average on the Street is $80.33.

“Our revised target price reflects a higher target multiple premium vs. the Group at 10 per cent (from 7 per cent) that reflects earnings accretion expected beyond our forecasted period (F2020) and potentially higher equity value through SCHW’s premium valuation and synergy targets,” he said. “That said, we have modestly lowered our NTM EPS estimate to reflect slight adj. earnings dilution upon the first year after close (expected 2H/20).”


Citi analyst William Katz upgraded TD Ameritrade Holding Corp. (AMTD-Q) to “neutral” from “sell” after adjusting his valuation methodology based on the details of the proposed transaction.

“We revise our merger model, which bridges effective calendar 2024 stand-alone EPS estimates for SCHW and AMTD and layers in expense and revenue synergies,” he said. “Our prior merger model front-loaded the synergies into 2021 for expediency as we expected the stock to trade on this basis initially. However, with the notion that SCHW likely exits year 3 at full run rate of savings and gets the full phase-in of revenue cross sell in year 4, we rolled our math against 2024. On this basis, we get to 18-per-cent accretion, vs. the 15 per cent to 20 per cent guided by management in year 3 – we assume year-end 2020 close. The 15 per cent to 20 per cent is somewhat apples to oranges given the fully synergized pacing, and hence our focus on 2024.”

Mr. Katz raised his target for TD Ameritrade shares to US$53 from US$31. The average is currently US$42.61.

At the same time, he increased his Charles Schwab Corp. (SCHW-N) target to US$49 from US$40, maintaining a “neutral” rating. The average is US$45.17.


Paradigm Capital analyst Corey Hammill hopes Organigram Holdings Inc. (OGI-T) hit a revenue bottom with its lower-than-expected fourth-quarter results.

On Monday before the bell, the Moncton-based cannabis producer reported revenue of $16.3-million, falling from $24.8-million in the previous quarter. EBITDA fell to a loss of $7.9-million from a profit of $3.7-million. The results were due in large part to product returns and price adjustments.

“Organigram reported Q4 results characterized by weaker-than-expected revenue, resulting in large part from a slow industry-wide retail build-out, specifically in Ontario, which has caused excess inventory in channel,” the analyst said. “Costs were higher than expected for a handful of reasons, including product mix, increasing staffing levels and a write-down of old packaging materials. These factors conspired to produce a quarter that was well below initial expectations. The near-term outlook is for improved revenue and stronger margins. The company estimates its market share in Canada is 10 per cent, which should directly benefit from the expected increase in retail store locations in Ontario in the coming months. Cost of cultivation remained impressive, at 64 cents per gram cash cost and 94 cents per gram ‘all-in.’ Plant yield rebounded in Q4 after an unfavourable experiment in Q3. Despite a cash burn in Q4, Organigram continues to have a meaningful cash balance of $50-million and access to significant debt funding so it can be flexible in the current volatile market while having sufficient liquidity to fund operations and planned expansion.”

Though he expects “significant” growth to come in fiscal 2020 from Cannabis 2.0 sales and increased brick-and-mortar retail, Mr. Hammill sliced his target for Organigram shares to $5.25 from $8.50, pointing to both management commentary about modest first-quarter gains and the uncertainty that exists in the industry." The average target on the Street is $7.86.

“In the race to determine to the likely long-term winners, OGI is still a fundamentally compelling story due to its innovative cultivation methodologies (yielding high-quality flower for less than $1 per gram all-in) and its national distribution footprint (as one of only three LPs that have secured agreements with all 10 provinces),” said Mr. Hammill, who maintained a “buy” rating.

“There’s no doubt that the industry has changed, but while others are now forced to focus on survival, OGI’s capital and cost structure allows them to push onward and carry its traditional market leadership into Cannabis 2.0.”

Meanwhile, Haywood Securities analyst Neal Gilmer lowered his target to $7.50 from $8 with a “buy” rating (unchanged).

Mr. Gilmer said: “The Q4/19 results are disappointing, but overall in 2019 the Company posted strong operating fundamentals compared to many of its Canadian peers. In our view this supports our outlook for continued positive annual operating metrics in 2020.”


Believing its top-line growth is “unlikely to get a structural lift from the recently proposed revitalization plan,” BMO Nesbitt Burns analyst Amit Sharma lowered Molson Coors Brewing Co. (TAP-N) to “market perform” from “outperform.”

Pointing to its “persistently low” valuation, he reduced his target to US$55 from US$62. The average is US$56.17.


Cowen analyst Andrew Charles upgraded Chipotle Mexican Grill Inc. (CMG-N) to “outperform” from “market perform” and called it one of the firm’s best ideas for 2020, expecting same-store sales to exceed the Street’s forecast for 2020 and beyond.

“We see upside to comps and EPS from digital sales growth, increasing consumer demand for food transparency, and a growing ad budget and loyalty program," said Mr. Charles. “Further, we argue the new Chipotlane drive-thru format permissions the brand to grow faster in 2021 and beyond, and provides greater certainty to double the store count to 5,000 ultimate U.S. locations, if not more.”

Mr. Charles thinks the fast food company is well positioned to reclaim its historical peak of US$2.5-million average unit volume in 2021, faster than estimated, and hit about $3-million in 2024.

He hiked his target by 21 per cent to US$970 from US$800, topping the consensus of US$840.64.

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