Inside the Market’s roundup of some of today’s key analyst actions
The Canadian telecom sector is a " constructive place to hide for investors," according to RBC Dominion Securities analyst Drew McReynolds, who sees "relatively manageable direct COVID-19 impacts."
"Compared to other interest-sensitive sectors within the S&P/TSX Composite (banks, utilities and REITs), we believe Canadian telecom stocks currently rank well on relative earnings resilience and valuation," said Mr. McReynolds in a research note released Wednesday. "In addition to the sector’s reasonable leverage and defensive and dividend-paying characteristics in an exceptionally low interest rate environment, we see relatively manageable direct COVID-19 impacts. Our stock selections (unchanged) continue to focus mainly on risk-adjusted NAV [net asset value] growth, relative valuation and company-specific catalysts. In our view, risk-adjusted NAV growth favours TELUS and the regional operators Quebecor and Shaw, while relative valuation favours Rogers."
Mr. McReynolds did update his forecast for the sector, which now sit a the low-end of 2020 guidance ranges after attempting to "directionally factor in a relatively short-lived Canadian recession."
"There is no question that the direct and indirect COVID-19 impacts will remain a highly uncertain and fluid situation for weeks to come," he said. "For this first recalibration of our forecasts, we attempt to factor in a relatively short-lived Canadian recession for the remainder of 2020 with economic growth returning/normalizing beginning in 2021 (consistent with RBC Economics). The three key areas of revision to our forecasts are: (i) lower wireless revenue growth on reduced subscriber and ARPU [average revenue per user] growth; (ii) lower wireline revenue growth on reduced business market, telephony and television revenues; and (iii) lower media revenue growth on reduced advertising. Our 2020 forecasts are below the low-end of guidance ranges for the companies that provide 2020 guidance. As each company gains visibility on direct and indirect COVIS-19 impacts, we do expect 2020 guidance to ultimately be revised lower."
Citing an "elevated uncertainty around COVID-19," Mr. McReynolds said he's "taking the rare step of lowering our target EV/EBITDA multiples by 0.5 times." That led to lower target prices for stocks in the sector.
"Should pending economic headwinds in 2020-2021 due to direct and indirect COVID-19 impacts be comparable to the 2008-2009 period, a further trimming of target multiples on these revised estimates (i.e., before further earnings revisions) could be required," he said.
His changes were:
- BCE Inc. (BCE-T, “sector perform”) to $58 from $64. The average on the Street is $61.46.
- Rogers Communications Inc. (RCI.B-T, “outperform”) to $66 from $72. Average: $71.43.
- Shaw Communications Inc. (SJR.B-T, “outperform”) to $25 from $29. Average: $29.50
- Telus Corp. (T-T, “outperform”) to $51 from $57. Average: $29.02.
- Quebecor Inc. (QBR.B-T, “outperform”) to $34 from $38. Average: $36.58.
- Cogeco Communications Inc. (CCA-T, “sector perform”) to $106. from $112. Average: $117.
“Telecom valuations point to a buying opportunity - absent a 2008-2009 style recession,” he said.
“Our new estimates and target multiples attempt to balance what should be reasonably resilient Canadian telecom revenues during a relatively short-lived Canadian recession in 2020, against the backdrop of an exceptionally low interest rate environment. Should the economic data through Q2/20 and Q3/20 begin to notably deteriorate versus current expectations prior to gaining improved visibility on the COVID-19 trajectory, we could see another gap down in share prices, with the market likely fearing a more severe recession scenario. Under our downside scenario which factors in multiple compression comparable to 2008-2009, we would see a further pullback on average of 15 per cent, (with the exception of Shaw which is through its downside scenario)."
On Tuesday, the Gatineau, Que.-based company announced a delay in the release of its full second-quarter results due to “certain exceptional circumstances” and it also expects to report a “significant” impairment charge of as much as $280-million in the quarter.
In response, Mr. Kideckel lowered his rating for its stock to "underperform" from "sector perform."
“We believe that HEXO is facing a storm of negative conditions which add significant uncertainty to its outlook and may thwart the Company’s ability to execute its business strategy in the near-to-medium term,” the analyst said. “These negative conditions include headwinds associated with a poor cannabis retail infrastructure in Canada, oversupply in the cannabis market, lack of derivative product available in market yet, and overall negative economic conditions caused by the Covid-19 pandemic. For instance, we believe that the Covid-19 pandemic may lead to the temporary closure of cannabis retail stores across Canada, which would depress sales over the near-term and worsen the demand and supply imbalance in the Canadian cannabis market, ultimately leading to higher cash burn rates to keep cannabis operations ongoing. We note that HEXO is not the only LP impacted by this and that there is no credible data available to fully comprehend what kind of impact Covid-19 will have on retail sales, if any. We note that HEXO’s strategy for cannabis derivative products is based on a national portfolio launch, which we believe would lead to improvement in margins and revenue growth. However, given current market conditions, this revenue and margin improvement may not happen over the near-term, which adds risk and uncertainty to the Company’s outlook.”
In the release, Hexo did report certain financial results for the quarter. That included net revenue of $17-million, which represented a rise of the 17-per-cent from the first quarter and exceeded Mr. Kideckel's $15-million projection.
It also announced the completion of a strategic review of its cultivation assets. Pointing to "excess of cultivation capacity in the market and estimated forecast demand for cannabis products, as result of slower than expected market development," the company plans to sell its Niagara Facility.
"We have revised our estimates based on Q2/FY20 select results, delayed timing of the launch of HEXO’s derivative products, and our revised expectations given current market conditions," said Mr. Kideckel. "We have reduced our revenue and gross margin estimates to factor these headwinds. We have also reduced our estimates for the Truss JV due to a slower rollout of HEXO’s cannabis-infused beverages. We note that, to date and to our knowledge, the Truss JV has not launched any beverages into the Canadian market, yet."
With those changes, Mr. Kideckel dropped his target price for Hexo shares to $1.20 from $3.15. The average is $2.02.
Meanwhile, Laurentian Bank Securities' Chris Blake lowered Hexo to "speculative buy" from "buy" with a $1.20 target, down from $3.25.
“While still early days, we would also note the potential risk that retail cannabis stores could close following COVID-19 safety related measures which could significantly disrupt industry sales volumes (Canopy Growth is set to close 23 stores effective yesterday evening) and further delays in awarding government licenses resulting in greater operating losses and further strain on cash balances on the company as well as the industry,” said Mr. Blake. “HEXO has applied for a sales license for its beverage facility in Belleville.”
Raymond James analyst Johann Rodrigues thinks Canadian real estate investment trusts are likely to outperform the broader market in 2020, despite also feeling the impact of the spread of COVID-19.
“While the Canadian REITs have held in better than most, they have been far from immune, plummeting 22 per cent in March (vs down 24 per cent for the broader TSX)," he said. "Canada slashed rates by 50 basis points last week, the U.S. cut theirs to zero over the weekend. In a matter of 15 days, BBB spreads have gapped out to levels unseen since early 2016 and today sit at 260 bp (well above a 20-year average of 180 bp). Similarly, the Canadian REIT Implied Cap Rate to 10-Year Spread now sits at the third-widest it has ever been (523 bp vs 20-year average of 370bp). The pandemic has the world on lockdown and the markets melting.”
In a research note released Wednesday, Mr. Rodrigues said he’s hopeful the pandemic will last less than six months, and provided this view of the market: “Possibly too optimistic a scenario, if we hit the mark where daily recoveries [exceed] new cases before mid-summer, there will likely not have been any material impact to cash flows for any of the REITs. The Office/Retail REITs will likely have come out on top, with only lost parking revenue to show for it. Multi-Family will have likely underperformed those asset classes - it is only a matter of time before buildings start entering quarantine, which could spook the stocks. The spring leasing season would be pushed back, perhaps weakening 1H20 results. Stay away from Senior Care (though the best buy-low opportunities will be found here once we are through the pandemic). On the plus side, there are plenty of interest savings to be had.”
However, if it lasts long, he said: “If people are forced to stay home and lose income (or worse, jobs), bad debt could rise in the Multi-Family space, though marginally (it peaked at 1.5 per cent during the GFC). Government assistance may mitigate this risk. Vacancy could creep up as the spring leasing season could be non-existent, though rent growth should still remain positive given the supply imbalance. A drop in turnover is the most likely outcome, though the positive is reduced R&M costs. Should the panic continue into September, there could be reduced demand from international students though exposure for most is more than 5 per cent. If the pandemic lasts through year-end,immigration forecasts may be revised downwards, cutting apartment rent growth expectations. As for Retail, at 6 months, small/local tenants will be hurting from cash crunches and could ask for breaks in rent, though REITs have not been quick to grant deferrals/discounts in the past. A number of tenants could also begin to circle bankruptcy. Office (Class I/CBD), to us, still comes out with relatively unscathed cash flows, though prolonged periods of working from home could lead to companies re-evaluating their space needs. At the margin, office leasing will likely slow.”
In the note, Mr. Rodrigues did make significant reductions to target prices for stocks in his coverage universe.
He also upgraded Choice Properties REIT (CHP.UN-T) to “market perform” from “outperform” with a $14 target, down $15.25. The average on the Street is $14.83.
His target price changes included:
- Allied Properties REIT (AP.UN-T, “outperform”) to $45 from $60. Average: $57.32.
- Boardwalk REIT (BEI.UN-T, “outperform”) to $27.75 from $53. Average: $49.63.
- Canadian Apartment Properties REIT (CAR.UN-T, “outperform”) to $55.50 from $60. Average: $60.87.
- H&R Real Estate Investment Trust (HR.UN-T, “outperform”) to $14 from $23. Average: $22.69.
- RioCan Real Estate Investment REIT (REI.UN-T, “outperform”) to $21 from $30. Average: $28.03.
Mr. Rodrigues advises investors to: “Stick with strong balance sheets, long-term leases, and organic growth. Plenty of yield to be found, do not stretch for the double-digit payers with less than 100-per-cent payouts. Allied Properties, with its sector-best balance sheet, is the top REIT for downside protection, in our opinion. We are also upgrading Choice Properties, as their combination of long-term leases, solid balance sheet, and minimal exposure to local retailers (that could be going concern candidates) makes it another top downside protection candidate. First Capital and RioCan are also mostly large,national players that can withstand a steep decline in sales without facing bankruptcy concerns. InterRent, CAP REIT and StorageVault should also hold in quite well, all with solid balance sheets and sector-best organic growth prospects.”
Canaccord Genuity analyst Brendon Abrams thinks the market pullback has brought an “attractive opportunity” with Northview Apartment REIT (NVU-UN-T).
On Feb. 20, Starlight Investments and KingSett Capital announced plans to buy Calgary-based Northview Apartment REIT for $4.8-billion in an all-cash deal.
“Notwithstanding the dramatic ongoing events related to COVID-19, we continue to expect the proposed privatization of the REIT by Starlight and KingSett to be completed as planned,” said Mr. Abrams.
“From our understanding, the most notable remaining condition of the deal relates to approval from Northview’s lenders, including CMHC, which we do not expect to impede the completion of the transaction.”
Mr. Abrams raised his rating for Northview to “hold” from “buy” with a $36.25 target, reflecting the sale price. The average is $34.60.
“Based on our target price (unchanged) of $36.25, our forecast represents a total return of approximately 27 per cent (assuming six monthly distributions),” the analyst said. “On an annualized basis, this equates to a total return of 55 per cent, assuming a close of September 30. In the context of the current market uncertainty, we view this as a very attractive opportunity.”
"Yearning for the good ol' days of 2016," Raymond James analyst Andrew Bradford reassessed the risks facing oilfield service companies in a research note released Wednesday.
“Last week WTI crude was extremely volatile, with more than 10-per-cent intraday moves in the low-US$30s,” he said. "Since then, WTI has drifted into the high US$20s, and isn’t giving much of an indication that it’s found a new range just yet. Nonetheless, since volatility has settled somewhat, we are pulling the trigger on new estimates based on the Mar-16 futures strip prices. The rate of downward adjustment to OFS demand will be rapid.
“Because there is no certainty over the duration of this downturn, investors should look hard at our 2021 numbers which in most cases are below our 2020 estimates.”
With his lowered expectations, Mr. Bradford reduced his target price for stocks in his coverage universe. He also made a trio of rating changes.
Questor Technology Inc. (QST-X) to “outperform” from “market perform” with a $3 target, down from $5.25. The average on the Street is $6.11.
“For most of the build out in QST’s rental fleet, the company appeared to have a growth trajectory that was free from the ebbs and flows of North American oilfield activity,” the analyst said. “We suspect that comes to an end in 2020. We do not have a historical precedent for how the rental segment will perform under a sharp drop in activity - QST did not have a significant rental fleet in 2014. Under our lower rig count, we are assuming (1) QST will not apply growth capital to the segment, (2) face lower utilization in Colorado which is more closely tied to drilling and completion activity and (3) face pricing pressure across its fleet. Questor has a strong balance sheet, we expect it to end 2020 with $13-million in cash, and should be able to easily weather this market and grow cash on its balance sheet in 2020 and 2021 as growth capital goes to zero.”
Strad Inc. (SDY-T) to “outperform” from “market perform” with a $2.10 target, down from $2.39. Average: $2.60.
“The market has clearly begun to significantly discount the probability that the proposed go-private transaction materializes,” said Mr. Bradford. “To the best of our understanding, the funding for the transaction remains in place, but we expect the buyer group might be looking at the posttransaction debt metrics in closer detail. We fully expect equipment rentals will be a nil contributor, but SDY’s weighting in this segment is very low. Matting will face pricing pressure, though we can’t pretend to have insight to COVID impacts on matting pricing. We can say that Trans Mountain and Costal Gas Link pipelines in particular, continue to move ahead. SDY has yet to disclose if they have pending work from these projects, but we strongly suspect that pricing will be impacted regardless of who wins the work.”
Conversely, he lowered Secure Energy Services Inc. (SES-T) to “outperform” from “strong buy” with a $2.15 target, down from $7. The average is $5.80.
“Our initial assessment is that SES EBITDA will drop to $111-million in 2020 and $101-million in 2021, down from $180-million in 2019,” he said. “SES has substantially higher weighting in production-oriented services than in 2014/15. Total debt was $505-million at year-end, and we expect this to remain roughly static through 2020, absent any changes in discretionary spending. SES has not yet elected to scale back on some of the discretionary components of its $80-million capital program - we expect at least $10-million is on the table. SES is also planning to maintain its dividend, subject to conditions, etc. We think investors should expect a dividend cut - likely by summer - and this is what we’ve modeled. Based on this assumption, SES debt would decline through 2020 and 2021 with year-end ratios of 4.7 times and 4.6 times net debt/EBITDA - though our modeling predicts 5.2 times in 1Q21, which may require no more than a quick conversation with its lending group.”
In reaction the announcement after the bell on Tuesday of the temporary closure of its three casinos in Alberta and suspension of its dividend due to the impact of COVID-19, Acumen Capital analyst Trevor Reynolds lowered his rating for Gamehost Inc. (GH-T) to “hold” from “buy.”
Mr. Reynolds expects the Red Deer-based company's hotels in Calgary and Grande Prairie, which will remain open, to run at break-even revenue levels in the near term.
“Management’s near term focus through a shut down that will last an indeterminant amount of time is to cut costs wherever necessary which is something they have been extremely proficient with in the past,” he said.
The analyst lowered his estimates for the company, emphasizing “there are significant unknowns in terms of how long the closures will last, and what the longer-term economic impacts of current economic events will be.”
"We note that our estimates are a moving target, and we error on the side of caution with the assumption that no revenue is received from gaming or food/beverage for the second quarter of 2020," he said. "Beyond the second quarter we maintain a cautious outlook on the revenue ramp up given uncertainty as to how consumer behaviour will be impacted by the current market environment. We assume that market conditions return to a somewhat normal level in 2021."
With the downgrade, Mr. Reynolds cut his target to $6.50 per share from $10, which is the current consensus.
CIBC World Markets analyst Robert Catellier thinks the Energy Infrastructure sector’s investment proposition “continues to offer opportunities using a disciplined and patient approach.”
“It shouldn’t come as a surprise that the energy midstream complex has sold off after the market priced in the realities of a US$30 WTI oil market environment,” he said. “With the oversupply of crude driven by the OPEC+ price war between Saudi Arabia and Russia, and demand shock from the spread of COVID-19, the market may be supressed for some time.”
“Our stance on sector positioning is that investors can start allocating capital to the sector selectively. Even with an expectation of a permanent re-rating of trading multiples, the names provide a fair investment proposition on a trading multiple basis, and attractive dividend yields, with further upside should the energy market return to normal. The caveat to this is if there is a deterioration of financial liquidity, which would hit this capital-intensive industry hard.”
After adjusting his valuation model for the sector, Mr. Catellier lowered his target prices for stocks in his coverage universe.
He also made a pair of rating changes:
Mr. Catellier lowered Inter Pipeline Ltd. (IPL-T) to “underperformer” from “neutral” and cut his target to $11 from $22. The average is $22.25.
“We believe dividends in the sector are safe, with the possible exception of those for IPL," he said. "Market volatility reduces the probability of a sale of its bulk liquid storage business, prompting us to reduce our rating.”
At the same time, he upgraded Gibson Energy Inc. (GEI-T) to "outperformer" from "neutral" with a $20 target, down from $29 and below the $29.60 the consensus.
“Given the significant declines that have already occurred, our ratings are largely unaffected,” he said. “The pecking order depends on an investor’s risk appetite and desire to play offense or defense. In times of market turmoil, relative market performance tends to follow relative credit rating for the sector. Companies with non-investment-grade credit ratings could see their share price performance struggle – almost irrespective of valuation. For this reason, for those investors looking more towards capital preservation, we would favor larger-cap entities that operate more as common carriers, such as TRP, ENB, and PPL. In this context, while smaller cap and with a BBB-Stable credit rating, investors could also consider ALA for its 60-per-cent utility rating and strong hedge position for 2020.”
“Supply and demand shocks may be too much” for AMC Entertainment Holdings Inc. (AMC-N), said Citi analyst Jazon Bazinet.
As the entertainment industry continues to struggle to adapt to a COVID-19-driven slowdown, he lowered his rating for the Kansas-based company, which is the largest movie theater chain in the world, to "sell" from "buy."
“Given the shuttering of movie theaters in the U.S. and many European countries, we expect a significant impact on AMC’s operations," said Mr. Bazinet. "We model a complete shutdown in 2Q20 ($0 revenue), both in the U.S. and International markets, with a modest recovery starting in 3Q20,” said Mr. Bazinet. “We now model 2020 Adj. EBITDA of a loss of $437-million, down from [a profit of] $755-million previously. 2021 Adj. EBITDA of $697-million (from $782-million previously).”
"Even before COVID-19, investors were concerned about the 2020 Box Office and AMC’s ability to deleverage. These concerns have only been amplified in recent weeks. While AMC ended 2019 with $600-million of liquidity (cash + revolver capacity), we expect the company to require $450-million of additional liquidity. Given AMC’s highly levered balance sheet and near complete shutdown of operations, access to additional capital will likely be challenging."
Mr. Bazinet dropped his target for AMC shares to US$1 from US$12. The average is currently US$10.14.
Citing the “uncertainty” surrounding its theatre closings and the impact of the coronavirus on Cineworld’s takeover attempt, Echelon Wealth Partners analyst Rob Goff moved Cineplex Inc. (CGX-T) to “under review” from “tender”
"Markets have clearly moved to reflect a strong probability that the deal would be rejected given the current environment markets," said Mr. Goff. "That view would first anticipate an extended review period. Nonetheless, markets saw further declines in response to CGX announcing that the period of review for the transaction by ICA has been extended through the end of March with the provision that further extensions may be warranted. Most will likely look for a further extension. With the move to close its theatres, and in light of the rapid equity declines, we share the clear message of the market that the ICA could reject the offer. In such case, the regulator would more likely reject the deal on the concern towards Cineworld’s financial ability to execute on the deal’s benefits package as an owner/operator of the Cineplex chain.
"In this regard, the length of theatre closures and the measures of government relief apply to Cineplex but also to Cineworld where its financial wherewithal to fulfill commitments is a key factor. The extension period could afford the government a deeper perspective on the financial implications of the theatre closures on Cineworld’s financial wherewithal to fulfill its deal benefits considerations."
Mr. Goff did not disclose a target price for Cineplex shares. The average is currently $34.
“Looking at Cineplex’s prospective cash drain with its theatres closed introduces many variables where we don’t have full clarity,” he said. “Where its theatre closings were mandated it will save on employee compensation. It has the ability to put in place temporary labour reductions across both its full-time and many part-time positions in an efficient manor. The Company could also see rent concessions or deferments. Cineplex doesn’t own its theatres with its head-office arguably its largest real estate asset. However, within the agreement, sales of assets or divestitures require the approval of Cineworld. We do not believe the debt ceiling is the primary hurdle for the transaction. We view the issue of Cineworld’s ability to fulfill its net benefits commitments as a key hurdle in passing the net benefits test.”
A group of equity analysts lowered their financial projections and target price for shares of Celestica Inc. (CLS-N, CLS-T) in response to its announcement late Tuesday that it is withdrawing previously disclosed financial guidance for the first quarter of 2020 as a result of the uncertainty surrounding COVID-19, including “its duration, and its business impact.”
RBC Dominion Securities' Paul Treiber lowered his target to US$6 from US$9, keeping a "sector perform" rating. The average target on the Street is US$8.46.
"The normalization of Celestica’s manufacturing and the broader supply chain is dependent on the reduction in government-mandated work stoppages, which would likely stem from containment of COVID-19 cases in geographies where Celestica has a manufacturing presence," he said. "At this point, visibility on the timing of COVID-19 containment is low. A single positive data point is that Celestica indicated that its employee attendance rate in China now exceeds 90 per cent, which suggests that the disruption in China may be starting to diminish. Our financial estimate revision assumes the bulk of supply disruption in Q1 and Q2, and then modest demand reduction subsequently."
Canaccord Genuity's Robert Young moved his target to US$4 from US$9 with a "hold" rating (unchanged).
"We are cautious on exposure to other geographies, particularly Thailand, which shares a border with Malaysia, and generated 34 per cent of 2019 revenues," he said. "While the disruption to the supply chain in China should inevitably pose a shock to Q1, we expect China has seen manufacturing begin to recover given indications from peers. We expect supply chain disruption and further COVID-19 headwinds outside of China to bleed into Q2."
“For longer-term investors, we believe the current stock price is an excellent entry point. That said, the current level of uncertainty is too high for a positive 12- month recommendation, and so we remain neutral through this period of uncertainty.”
The Hershey Co. (HSY-N) is “seeking resilience in a tough time,” said Credit Suisse analyst Robert Moscow, who raised his rating for its stock believing its business has proven its ability to thrive during “all types of social and economic backdrops.”
"Management agrees with our view that demand for Hershey products during Easter will remain high during the COVID-19 crisis," he said. "We also expect the increase in impulse purchase occasions at grocery stores to offset declines in alternative channels. For context, Hershey’s organic sales grew 4.7 per cent per year during the last recessionary period of 2008-2010.
Possessing a "very strong" balance sheet, Hershey's investments have strengthened its competitive advantages, said Mr. Moskow.
“Hershey has made investments in capacity, media development, late-stage customization and ERP systems to improve its flexibility and visibility,” he said. “Since 2017, Hershey’s ranking in Advantage’s survey of retailer customers has advanced to 4 from 15 in supply chain effectiveness and to 1 from 12 in customer service. It has developed stronger e-commerce and category management capabilities than its confectionery peers.”
Mr. Moskow has a US$160 target for the stock, which exceeds the US$150.88 consensus.
“At a price-to-earnings of 22 times, the stock is now trading above its 10-year average of 20 times, but we believe it will re-approach the 24-times P/E multiple that it enjoyed at the start of the year as it flexes its competitive advantages,” he said.
In other analyst actions:
* Scotia Capital analyst Orest Wowkodaw is “moving to the sidelines again as risks escalate” for Hudbay Minerals Inc. (HBM-T), leading him to downgrade its stock to “sector perform” from “sector outperform” with a $3.50 target, down from $5.The average is xxx.
Mr. Wowkodaw said: “We are lowering our investment rating on HBM shares to Sector Perform (from Sector Outperform) based on escalating risks associated with materially lower spot Cu-Zn prices and new operational risks in Peru associated with COVID-19. We note that Peru has issued a Supreme Decree and declared a National Emergency in its efforts to contain the COVID-19 pandemic which has led to several mines announcing temporary closures. We believe HBM may inevitably have to follow suit and idle its flagship Constancia Cu-Au mine (59 per cent of our asset level 8-per-cent NAVPS). Given the heightened risk environment, we are reducing our 12-month target.”
Ms. Jakusconek said: “We think generalist investors will begin to seek out more safe-haven investments during this uncertain time, particularly in gold, which we believe will be supported by recent global stimulus measures (despite the recent sell-off). We believe investors will initially be attracted to liquid, high-quality gold names with lower operating and financial risk. We expect ABX will be a favoured gold name among generalist investors seeking liquidity, a lower company risk profile, and a relatively attractive valuation. We plan to review our overall gold coverage group valuations in the near term.”
* Bullish on gold prices, CIBC’s Anita Soni raised New Gold Inc. (NGD-N, NGD-T) to “neutral” from “underperformer” based on its recent share price performance. Her target rose to 65 US cents from 60 US cents. The current average is US$1.03.
Ms. Soni said: “With the sell-off in the commodity and the equity over the last two weeks, NGD had moved below our price target, hitting a low of 40 cents per share near the open on March 16. [Tuesday] the stock closed at 62 cents per share, up over 50 per cent, demonstrating its leverage to gold, as gold moved off its lows of $1,471/oz as firmer hands re-enter the space. NGD currently trades at 1.1 times P/NAV (in line with our revised multiple of 1.1 times, up from 1.0 times on higher leverage and Canadian dollar exposure) vs. peers at 0.7 times. While still at a premium vs. peers in our view, NGD’s valuation is not sufficiently expensive to continue to justify an Underperformer rating. Positively NGD, structured a deal with OTPP to alleviate near-term liquidity issues."
* Though he called the reduction in its capital budget and divdend “prudent,” Industrial Alliance Securities’ Elias Foscolos lowered Enerflex Ltd. (EFX-T) to “hold” from “speculative buy.”
“EFX’s reduced capital budget and dividend, while prudent, signals a challenged outlook, particularly given the historical stability of the Company’s dividend,” he said. " However, we believe the conservative approach to capital allocation will allow EFX to maintain cash flow in a low industry spending environment. We project positive FCF after working capital adjustments in 2020, and EFX has a relatively healthy balance sheet. We have lowered our estimates, translating into a $1.00 target price reduction to $6.50. As the stock has traded up [Wednesday], compressing upside, we are moving to a Hold."
* Reacting to “massive” share price depreciation, Scotia Capital analyst Trevor Turnbull raised Hecla Mining Corp. (HL-N) to “sector perform” from “sector underperform” with a US$2 target (unchanged). The average is $3.35.
Mr. Turnbull said: “We would like to see greater free cash flow generation before considering a further upgrade. On a price to valuation basis we do not find Hecla overly expensive, but neither is it compelling at these levels. There is minor growth in silver output with the Lucky Friday mine ramping up again following the successful resolution of its long-standing labour dispute. However, this is more of an offset than a net gain when lower gold production is factored in as Nevada and San Sebastian wind down.”
* Scotia Capital analyst Patrick Bryden lowered Cardinal Energy Ltd. (CJ-T) to “sector underperform” from “sector perform” with a 50-cent target, dropping from $3.25. The average is $2.38.