Inside the Market’s roundup of some of today’s key analyst actions
AltaCorp Capital analyst Tim Monachello sees improving fortunes for Canadian oilfield services companies early in 2020.
"Over the first four weeks of January, Canadian rig activity is roughly 15 per cent higher year-over-year ... despite announced E&P budgets suggesting roughly 5-10 per cent lower spending in 2020 vs. 2019," he said. "In general, our conversations suggest most Canadian energy services providers are expecting activity to be at least flat from 2019 levels, with some expecting recent year-over-year industry activity gains to persist. We note that our analysis suggests that year-over-year activity gains in January have been most concentrated in shallow delineation activity in the heavy oil/oil sands regions and shallow developments in the Viking region where service intensities are significantly below regions like the Montney and Duvernay where activity is up 5 per cent and down 3 per cent respectively year-over-year."
In a research note previewing fourth-quarter earnings season in the sector, Mr. Monachello said he expects U.S. results to be weighed down by a continued sequential decline in field activity, noting the a decline in rig count average of 11 per cent from the third quarter.
“We believe a secular focus on capital conservation drove E&Ps to work within cash flow budgets, and early budget exhaustion drove U.S. field activity down,” he said. “As a result, we believe U.S. drilling and completions oriented service lines are likely to report amongst their lowest post-downturn results in Q4/19 as field activity levels declined roughly 8 per cent from early October (roughly 830) to recent bottoms in early January (roughly 760). Since then, U.S. field activity has paced roughly 2 per cent higher (773 active land rigs at January 24, 2020), but remains under pressure.”
“While we are expecting in-line results for both CEU and AKT in Q4, we understand both have seen significant market share expansion in the US market to begin 2020 which should be constructive for their 2020 outlooks,” said Mr. Monachello. “For CEU, we understand it had been running roughly 118 U.S. drilling fluids jobs over recent weeks, up from roughly 100 to exit 2019 and representing a new market share high-water mark at roughly 15 per cent. For AKT, we understand that following the repositioning of its U.S. fleet around the Permian and Rockies region and the transfer of one additional rig from Canada to the Permian, AKT is now running 15 rigs in the US, up from 9 rigs on average in H2/19. We believe strong 2020 outlook commentary from both CEU and AKT could drive outperformance.”
He has an “outperform” rating and $2 target for shares of CES. The average on the Street is $3.54.
For Akita, he also has an “outperform” rating with a $2.25 target, which exceeds the $1.88 consensus.
“By-and-large we believe weak field activity levels in Q4 are anticipated by the market and have largely been priced into stocks as budget exhaustion and capital discipline weighed heavily on service providers," the analyst said. "As such, outside of large scale beats and misses, we expect the market to primarily focus on forward-looking commentary for signals of how recent commodity price volatility could impact 2020 activity levels. We also believe investors will likely focus heavily on bookings and the pace of project awards as a leading indicator which could dictate equity performance.”
Believing a recent sell-off brings a buying opportunity for investors, CIBC World Markets analyst Raphael de Souza raised Ero Copper Corp. (ERO-T) to “outperformer” from “neutral” after coming away impressed from a recent site visit to its flagship Vale do Curaçá project in Brazil.
“Our visit increased our confidence in management’s approach to developing MCSA’s large land package and highlighted the strength of ERO’s team at site,” he said.
“While the strong operational execution is appealing, we continue to see exploration as the main driver for ERO’s stock price.”
His $23 target falls 25 cents short of the consensus.
In the wake of the completion of its latest equity financing, which he thinks should provide enough to fully commercialize its TULSA-PRO system for prostate treatment, and an update to his recurring revenue model, Mr. Sarugaser raised his rating for the Mississauga-based medical equipment manufacturer to "strong buy" from "outperform."
“Our projections [are] for PRN installing 10, 22, and 38 TULSA-PRO units in 2020, 2021, and 2022, respectively. These units, we estimate, will have average utilization rates increasing from 74, to 90, to 106 annual patients per device during those same years, driving revenues of $11.1-million, $27.2-million, and $63.4-million, respectively,” he said. “Given that we anticipate PRN generating $5.4-million in fiscal 2019, we recognize that $11.1 mln in 2020 appears relatively modest. These light 2020 revenues we see as a function of PRN substituting short-term capital equipment revenue with massive, long-term recurring revenue. We view this as a deft strategy enacted by PRN’s veteran management.
”We noted previously that medical device companies in early stages of rapid commercial ramp-up programs generally garner valuations of 10-20 times revenue, implying, according to our math, that PRN could be valued at $600-million to $1.2-billion just two years from today."
The analyst hiked his target for Profound shares to $45 from $35. The average is $28.97.
“we remind you that PRN’s CEO, Dr. Arun Menawat, and CFO, Mr. Aaron Davidson, previously worked together at Novadaq technologies (NVDQ), growing the company from a small, Toronto-based start-up to a billion dollar Nasdaq-listed company, which was eventually sold to Stryker (SYK) for 20 times sales (US$700-million),” he said.
“This seasoned management team, indeed, has been there, done that. We have deep confidence in management’s capacity to execute the deft plan they have set out for PRN. For all these reasons, we have selected PRN as our 2020 Best Pick.”
Echelon Partners analyst Amr Ezzat thinks secular industry tailwinds provide VOTI Detection Inc. (VOTI-X) with "an exceptional running room of top line and earnings growth.”
He initiated coverage of a Montreal-based technology company that develops X-ray security systems based on 3D technology with a "speculative buy" rating.
“The X-ray screening market is forecasted to grow at an 5-per-cent CAGR [compound annual growth rate] over the next five years supported by increased global focus on safety and security,” said Mr. Ezzat. “X-ray screening systems remain the preferred choice and solution when it comes to non-intrusive inspection and optimal throughput reducing the threat of substitutes. We expect VOTI to continue to showcase strong momentum. Namely, we forecast top line growing at an 18.5-per-cent CAGR through fiscal 2023, driven by strong unit sales growth and minimal increases in ASPs. Our gross profit margins grow from 32.0 per cent in F2018 to 37.5 per cent in F2023 driven by increased service revenues. The margin expansion, together with the healthier top line growth, enable gross profits to grow at a 20.5-per-cent CAGR through our forecast period. Adjusted EBITDA margins grow from negative 3.4-per-cent in F2019 to 9.5 per cent in F2023, benefiting from the aforementioned shift in revenue mix and from operating leverage.”
Mr. Ezzat believes VOTI’s “marquee” roster of clients is proof is “best-in-class” product, noting recent deployments and wins include Amazon’s (AMZN-Q) North American fulfillment centres, the U.S. Air Force, Ports America, Carnival Cruise Lines and Winnipeg’s Bell MTS Place.
Calling its valuation levels “attractive,” Mr. Ezzat set a $3 target for its stock. Consensus is $3.50.
“We believe using an EBITDA multiple on short-term earnings estimates significantly (and incorrectly) undervalues VOTI’s shares as it gives no recognition to the Company’s margin expansion, and in turn, its best-in-class earnings growth profile,” he said. “To properly assess VOTI’s value, we believe a longer-term approach is warranted.”
Though BTIG analyst Thomas Shrader thinks IMV Inc.'s (IMV-T) DPX technology “flies in the face of much of modern immunology” and “remains curious,” he said its early results “leave little doubt” about its potential.
“IMV is a clinical-stage biotechnology company focused on developing the DPX technology to generate powerful and prolonged antitumor responses to both solid and hematological tumor patients,” he said. “The lead program is focused on the validated TAA survivin applied to OC [ovarian cancer] and DLBCL [diffuse large B-cell lymphoma]. Data to date are from smallish trials somewhat clouded by combination regimen but clearly suggest overall anti-tumor efficacy. Importantly, OC monotherapy data are due in early 2020 that could both de-risk the current clinical programs and support the DPX platform for the delivery of other TAAs and neoantigens in anti-tumor therapeutics.”
In a research report released Tuesday, he initiated coverage of the Dartmouth, N.S.-based clinical stage biopharmaceutical company with a “buy” rating, saying he finds it “reassuring” that U.S. giant Merck & Co. Inc. (MRK-N) has forged a partnership in both DLBC and the solid tumor basket trial.
He set a target price of $8 per share. The average on the Street is $10.22.
“The upcoming data release in ovarian cancer looks like the key inflection point in the story. These data are expected in 1Q20 (likely February) and are expected to greatly change the risk profile of the IMV story," he said. "Additional data from the DLBCL trial and the solid tumor basket trial (ASCO targeted) are expected in 2020. Positive readouts also have the potential to demonstrate the applicability of the low-COGS DPX platform to deliver many other TAAs [tumor-associated antigens] and neoantigen.”
JPMorgan analyst Ken Goldman cut Beyond Meat Inc. (BYND-Q) to “neutral” from “overweight” on Tuesday, believing it’s time to head to the sidelines as good news is now “baked in” to its share price following a 65-per-cent jump in January.
Despite the downgrade, Mr. Goldman said he remains confident about the plant-based meat producer's growth story, believing it can be a global leader and reach over US$2-billion in sales within ten years.
“We continue to believe Street estimates for 2020-21 are too conservative, but with only 7 per cent upside to our Dec-2020 price target, we no longer see a compelling valuation argument,” he said.
Mr. Goldman reduced his target to US$134 from US$138. The average on the Street is US$106.88.
MKM Partners analyst Bill Kirk cut Hexo Corp. (HEXO-T) to “neutral” from “buy” with a target of $1.50, down from $5. The average on the Street is $2.60.
Mr. Kirk said the failure to pay suppliers adds uncertainty that cannot be offset by its strong Original Stash brand sales and new Quebec retail stores.
Maintaining a bullish view on the technology sector ahead of its earnings season, Paradigm Capital analyst Kevin Krishnaratne raised his estimates and target prices for several companies in his coverage universe.
His changes were;
Absolute Software Corp. (ABT-T, “buy”) to $10 from $9. The average on the Street is $9.67.
“Following several quarters in 2019 that demonstrated positive momentum in Enterprise growing 10 per cent and better-than-expected margin trends, we upgraded ABT to a Buy in mid-August, and the stock is up 25 per cent since," he said. "We see further upside and raise our target to $10.00 as we continue to remain bullish on both the company and the cybersecurity industry overall.”
AcuityAds Holdings Inc. (AT-T, “buy”) to $3.50 from $3.25. Average: $3.33.
Converge Technology Solutions Corp. (CTS-X, “buy”)to $2.50 from $2. Average: $2.
Kinaxis Inc. (KXS-T, “buy”) to $125 from $105. Average: $110.25
“Although Kinaxis was up more than 50 per cent in 2019, this followed a disappointing end to 2018 which saw shares drop from $100 in August to $65.90 to end the year, as downward revisions to 2018 guidance related to ‘deal slippage’ in November, together with a general SaaS sell-off, pressured the stock," the analyst said. "The good news is that the slipped deals were ultimately booked, and results through 2019 indicated an accelerating pace of SaaS growth, with our forecast calling for 22 per cent versus 18 per cent in 2018. Last year also saw a number of new customer wins (notable deals include Novartis, Honda, Lenovo, British American Tobacco), new strategic partners (including Ernst & Young), and new innovations, including the announcements of major products, such as Application Packaging (Q4/19 release), Embedded Algorithms (Q1/20 release), and Visualization Tools (Q1/20 release). KXS shares have had a good start to the year, up 8 per cent year-to-date, and we see momentum in the name continuing ahead of the company’s Q4 release and 2020 guidance expected in February.”
Photon Control Inc. (PHO-T, “buy”) to $1.85 from $1.65. Average: $1.70.
Seven Aces Ltd. (ACES-X, “buy”) to $2.75 from $1.80. Average: $2.07.
“Shopify was by far the standout Canadian tech stock outperformer of 2019, with the stock up 187 per cent,” he said. “Momentum in shares has continued into 2020 with SHOP up 13 per cent year-to-date. In 2019, the company continued to post quarterly beats, more meaningfully grew its Plus and International businesses, and introduced plans to launch the Shopify Fulfillment Network (SFN) in an effort to help merchants level the playing field with Amazon and its fast delivery times across the continental U.S. Shopify also made its largest acquisition ever for Boston-based Six River Systems, a robotics company founded by the team that started Kiva Systems, which Amazon subsequently acquired in 2012 and now forms the base of the e-commerce giant’s warehouse robotics services. While valuation remains the top question for the stock in 2020 (currently trading at 18.0 times our updated 2021 revenue estimates), we remain bullish on the company’s prospects and recommend SHOP as a core holding, advising investors to be aggressive on meaningful pullbacks.”
Seeing potential upside to the Street’s expectations for its third-quarter results, which are scheduled for a Feb. 14 release, BMO Nesbitt Burns analyst Tamy Chen raised Canopy Growth Corp. (WEED-T) to “outperform” from “market perform” with a target of $40, rising from $25 and above the average on the Street of $29.64.
“Even a modest beat in FQ3/20 results could begin to shift investor sentiment on the stock," said Ms. Chen, who thinks its Canopy’s value-priced brands are taking market share from higher-priced products and its overall product mix is now better aligned with demand following inventory writedowns in previous quarters.
With files from Bloomberg News