Inside the Market’s roundup of some of today’s key analyst actions
Amid "signs of stabilization," Citi analyst Prashant Rao thinks Canadian large-cap oil producers took "prudent" steps to conserve cash during the downturn, including reducing negative netback production, suspending dividends and buybacks, reducing capex and boosting liquidity.
"Our covered companies assume a U-shaped recovery in allocating capital," he said. "Downstream demand has partly recovered, and the Upstream should pace this. Storage appears sufficient in light of production cuts and ample egress capacity. While we maintain a modest preference for more integrated operators, oil price is recovering, potentially tipping us towards more Upstream exposure ahead."
Citing both the firm’s commodity price forecasts as well as operational assumptions, Mr. Rao raised his second-quarter funds from operations and earnings per share projections by an average 38 per cent and 21 per cent, respectively. His full-year 2020 estimates rose by 21 per cent and 10 per cent.
With those changes, Mr. Rao increased his target prices for stocks in his coverage universe. His changes are:
* Suncor Energy Inc. (SU-T, “buy”) to $31 from $28. The average on the Street is $29.25.
"SU's strong balance sheet and integrated model should help it withstand the ongoing trough in the Canadian oil cycle, while its portfolio is well-levered to the gradual recovery ahead," he said. "Lowering dividends to preserve cash is unnecessary but prudent."
* Cenovus Energy Inc. (CVE-T, “buy”) to $9 from $7. Average: $6.19.
"CVE's superior oil sands SAGD assets are disproportionately discounted in the equity's valuation," he said. "CVE is capable of curtailing over 100mbpd of production if needed, and the company's low operating cost model should generate substantial FFO once the industry recovers."
* Imperial Oil Ltd. (IMO-T, “neutral”) to $23 from $21. Average: $21.78.
"IMO's strong balance sheet and low capex requirements should allow it to generate meaningful cash flows and maintain dividends during this downturn," he said. "Current risk/reward is balanced if not starting to lean towards the upside."
After reducing his earnings expectations for Husky Energy Inc. (HSE-T), Mr. Rao maintained a “neutral” rating and $4 target, which falls 7 cents below the average.
“HSE’s portfolio offers long-term growth in its thermal heavy oil and Asia-Pacific oil and gas projects, however, the company’s historical operational issues have raised some concerns amid the current downturn,” he said.
RBC Dominion Securities analyst Robert Kwan said he has a “greater level of confidence” in his positive investment thesis on TC Energy Corp. (TRP-T, TRP-N) following recent virtual meetings with Chief Financial Officer Don Marchand.
“TC Energy noted that despite weaker energy prices and COVID-19, Q2/20 volumes across its key businesses have been resilient, which combined with the long-term contracted and regulated nature of the assets should result in relatively stable earnings and cash flow,” he said. “One segment of note that we expect to come under pressure is the Marketlink portion of Keystone (i.e., Cushing to the Gulf), which is a pre-build for Keystone XL with shorterterm contracts; however, this is only 1-2 per cent of our 2020 EBITDA forecast.”
Mr. Kwan thinks “headlines and sentiment” toward the company’s Keystone XL pipeline remain a “key risks in our view rather than anything value related.”
“We do not believe that there is any meaningful value in the share price related to Keystone XL based on the share price weakness following recent court decisions and commentary from the Biden campaign related to the Presidential Permit,” the analyst said. “Given the structure of the transaction with the Alberta government, we believe that TC Energy has done a good job protecting shareholder value through the 2020 U.S. election with the ability to assess the path forward following the election results. Given the commercial arrangements, we see attractive potential upside value in the range of $5-6 per share if KXL is ultimately placed into service.”
Maintaining an "outperform" rating and $81 target for TC Energy shares, Mr. Kwan sees a "'utility like' business that is trading at a price-to-earnings of 14 times next year's estimated EPS versus most Canadian regulated utility stocks at 17-18 times."
The average target on the Street is $71.43.
Expecting its biosynthesis partnership with Ginkgo Bioworks to begin to yield material revenues within 12-18 months, Raymond James analyst Rahul Sarugaser upgraded Cronos Group Inc. (CRON-Q, CRON-T) to “outperform” from “market perform.”
“We estimated the global market for products derived by cannabinoid biosynthesis growing from $10-billion in 2025 to $115-billion by 2040,” he said. “By using a discounted cash flow analysis (10-per-cent discount, 2-per-cent terminal rates) of the estimated EBITDA yielded $1.3-billion in 2025, growing to $15.2-billion in 2040 — from these revenues, we calculate a present value of the global cannabinoid biosynthesis opportunity at $40-billion.
“From this $40-billion global cannabinoid biosynthesis opportunity, we undertook a probability-adjusted calculation of the opportunity attributable to CRON, estimating its current value at US$1.54-billion, or US$4.10 per share. Adding this value to our DCF analysis (10-per-cent discount, 2-per-cent terminal rates) of CRON’s revenues — unchanged from our previous estimates — we derive a per hare value of $10.09, which we round to $10.00.”
Mr. Sarugaser increased his target for Cronos shares to US$10 from US$6.50. The average is US$7.31.
Canaccord Genuity analyst Matt Bottomley trimmed his financial expectations and target price for shares of Aurora Cannabis Inc. (ACB-T) in response to Tuesday’s update to its business transformation plan, noting " sizable layoffs and impairments [are] in the pipeline.”
The Edmonton-based producer announced the immediate reduction of 25 per cent of its corporate staff and a 30-per-cent cut to production staff over the next two quarters. It also introduced plans to close fix facilities.
“As a result of ... facility rationalizations and excess inventory of cannabis trim, Aurora expects to record up to $60-million in impairments related to these facilities when it reports FQ4/20 results in September in addition to $140-million of inventory write-downs (with $56-million of this balance related to previous non-cash FV adjustments),” said Mr. Bottomley. “Recall, ACB already booked $1-billion in impairments back in FQ2/20 related to its international infrastructure.
“We believe this provides further support that: a) The Canadian sector its saturated with cultivation capacity; and b) inventory channels (particularly for unsaleable trim) continued to be oversupplied vs. current demand. The company noted that it believes reigning in its underutilized infrastructure will ultimately help Aurora reach its longer-term margin/profitability targets.”
Mr. Bottomley cut his revenue projections for 2020 and 2021 to $318.6-million and $474-million, respectively, from $335.1-million and $514.9-million. He trimmed his earnings per share share estimates by a penny each to losses of $1.43 and 3 cents, respectively.
Maintaining a “hold” rating, he dropped his target for Aurora shares to $21 from $24. The average on the Street is $15.60.
“On the back of Tuesday’s corporate updates, although we believe the rightsizing of Aurora’s operations is a crucial step in the company’s path to profitability, with more than $1.2-billion of announced write-offs so far in the first six months of 2020 (or 25 per cent of the book value of ACB’s net assets), a high degree of uncertainty still clouds this name,” he said. “As a result, we have lowered our pricing assumptions for dried bud and added a 100 basis points premium to our adult-use valuation for execution risk. As a result, we are lowering our PT.”
Elsewhere, Stifel analyst Andrew Carter raised Aurora to “hold” from “sell” after raising its fourth-quarter revenue estimate to $75-million from $67-million based on a strong performance in its Canadian Consumer segment. His target rose to $17.50 from $6.20.
Calling its Cangrejos project in Ecuador “an attractive development option,” Raymond James analyst Farooq Hamed initiated coverage of Lumina Gold Corp. (LUM-X) with an “outperform” rating on Wednesday.
“The wholly owned Cangrejos project hosts a total resource of over 17 million ounces of gold and over 2 billion pounds of copper supporting a long mine life with significant annual gold and copper production at low operating costs,” he said. “Further, with the deposits near surface and the project close to infrastructure and a deep water port, we view development risk as low in comparison to other large projects. As part of our analysis, we compared the recent Cangrejos PEA to other large, development-stage precious metals projects with Cangrejos ranking in the top quartile in terms of annual production and mine life and in the bottom half in terms of capital intensity and LOM AISC [life-of-mine all-in sustaining costs].
"In addition to strong project characteristics, we believe LUM is well positioned to benefit from the experience of its key principals who have a successful track record of creating value for shareholders from other companies in the Lumina Group portfolio."
Seeing its valuation at a discount to comparable peers, Mr. Hamed set a target of $1.60 per share, which exceeds the consensus by 2 cents.
Evertz Technologies Ltd. (ET-T) preannouncement of “soft” fourth-quarter revenues was a “negative but not entirely unexpected,” said Canaccord Genuity analyst Robert Young.
“The absence of sports and live events is a near-term and temporary headwind, in our view,” he said. “We continue to model positive EBITDA through the pandemic and highlight the company’s consistent positive profitability in past market dislocations. As conditions return to normal, we believe strong demand for Evertz’s cloud offering and IP leadership will drive competitive wins.”
On Tuesday, the Burlington, Ont.-based broadcast engineering company said it expects revenue to land in the $90-95-million range, below Mr. Young’s already reduced $115.8-million. That led him to further cut his forecast to the lower end of management’s guidance.
Evertz also warned of a dividend reduction when it releases its quarterly results on June 30, a move Mr. Young called “tactical.”
“Ultimately, Evertz is controlled by insiders, and therefore the board is able to reduce or suspend its dividend to build cash for other opportunities,” he said. “A cut or pause would end a long track record of stable dividend payments. We believe this would disappoint yield-oriented investors and put selling pressure on the stock.”
Mr. Young said he’s maintaining a “buy” rating for its stock, but he said he has “less conviction.” His target for its shares slid to $15 from $18. The average on the Street is $15.25.
“These are regulated deposits taking institutions that lend to individuals that are unable to obtain a prime mortgage at one of the large banks,” he said. “Similar to some other industries, the mortgage lending industry has been materially impacted by the pandemic. Both stocks have rebounded off their lows from late March and are trading just below book value. Until the outlook improves, we advise investors to remain on the sidelines. In our view, both lenders are well run and have excellent relationships with the mortgage broker community and have ample access to funding.”
In other analyst actions:
* National Bank Financial analyst Travis Wood raised Canadian Natural Resources Ltd. (CNQ-T) to “outperform” from “sector perform” with a $39 target, up from $25. The average on the Street is $28.90.
* Mr. Wood cut Freehold Royalties Ltd. (FRU-T) to “sector perform” from “outperform” with a $4.25 target, sliding from $4.50 and below the $5.94 average.
* Upon assuming coverage of the stock, Scotia Capital analyst Michael Doumet upgraded Horizon North Logistics Inc. (HNL-T) to “sector outperform” from “sector perform” with a $1 target, which exceeds the consensus by 6 cents.
“We see a lot of merit in Horizon’s recent acquisition of Dexterra,” he said. “‘New Horizon’ is less resource-reliant, less levered, more FCF-generative, and has an enhanced growth profile – all of which offer significant value creation opportunities.”
* Tudor Pickering analyst Matthew Taylor raised Inter Pipeline Ltd. (IPL-T) to “hold” from “sell”
* Cantor Fitzgerald analyst Matthew O’Keefe initiated coverage of Rio2 Ltd. (RIO-X) with a “buy” rating and $1.20 target. The average on the Street is $1.11.
“The Company is advancing its low-cost, 85 koz/year Fenix Gold Project located in Chile to production. Alex Black, President and CEO, leads his proven executive and technical team that successfully built Rio Alto Mining from a similar base and later sold it for $1.2-billion. Rio2 is well positioned to repeat the Rio Alto success by building a low cost, heap leach gold project with significant expansion upside in a top jurisdiction. The stock remains undervalued relative to peers.”