Inside the Market’s roundup of some of today’s key analyst actions
Canaccord Genuity analyst Anthony Petrucci thinks the risk/reward proposition for natural gas weighted stocks “appears extremely compelling at current levels.”
“While natural gas pricing got up off the mat in Canada in 2020, the upward move through 2021 has been much more extreme,” he said. “After five years of averaging close to $2.00 per thousand cubic feet, the spot price Monday closed at over $4.50/mcf, with winter gas pricing on the strip north of $5.00/mcf. Strong demand in Canada and throughout North America (and record external flows through LNG), combined with a very limited supply response, have domestic pricing poised to continue to show strength, in our view. A look over to Europe, where natural gas prices are now topping US$20/mcf provides a jarring example (albeit extreme) for the potential of natural gas pricing when the supply/demand balance fails to normalize.”
In a research report released Wednesday, he analyzed the sensitivity of exploration & production (E&P) companies in his coverage universe to natural gas pricing, leading him to conclude “life at $3.50/mcf is pretty good.”
“Despite share price strength in 2021, valuations remain at favourable levels at $3.50/mcf AECO,” said Mr. Petrucci. “On average, gas-weighted stocks in our coverage universe are trading at just 2.7 times EV/DACF [enterprise value to debt-adjusted cash flow], with an average D/CF of 0.8 times. Additionally, most gas-weighted equities are trading at just a fraction of their NAV. We highlight both ARX and KEL as names with both below-average cash flow multiples and negligible debt levels. We also highlight TOU as the largest natural gas producer in Canada, trading at an attractive 3.1 times, again with limited debt.
“Even at $2.50/mcf, we do not view natural gas weighted stocks as overvalued, with most trading between 3.0 times to 4.0 times EV/DACF. Importantly, balance sheets remain fairly resilient at these levels, with D/CF averaging just 1.0x. We also note that NAV support remains robust at that level, as strength in the oil price mutes the impact of lower gas prices. For those investors looking for gas exposure, but are wary of a correction, we recommend royalty player TPZ, and those with a healthy liquids weightings, including ARX and KEL.”
Mr. Petrucci made a series of target price adjustments to stocks he covers. They are:
- ARC Resources Ltd. (ARX-T, “buy”) to $16 from $15. The average on the Street is $14.35.
- Birchcliff Energy Ltd. (BIR-T, “buy”) to $8 from $6.50. Average: $6.96.
- Kelt Exploration Ltd. (KEL-T, “buy”) to $5.50 from $4.75. Average: $5.23.
- Nuvista Energy Ltd. (NVA-T, “hold”) to $4.50 from $4. Average: $5.09.
- Peyto Exploration & Development Corp. (PEY-T, “buy”) to $10.50 from $9.50. Average: $9.71.
- Pine Cliff Energy Ltd. (PNE-T, “speculative buy”) to 70 cents from 55 cents. Average: 61 cents.
- Tourmaline Oil Corp. (TOU-T, “buy”) to $47.50 from $40. Average: $47.30
“For exposure, it is hard to look past Tourmaline, given its scale, track record and reasonable valuation. We recommend PEY and BIR for those looking for a bit more torque, while ARX, KEL, CR and TPZ provide more balanced exposure given their higher liquids weightings or royalty/infrastructure assets. At over 90% natural gas by production, PNE offers the greatest exposure to rising natural gas prices,” he said.
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Expecting “the buoyant methanol price backdrop” to persist through the second half of the year, Raymond James analyst Steve Hansen projects Methanex Corp. (MEOH-Q, MX-T) to “generate healthy excess free cash flow that could ultimately re-ignite its buyback as early as 1Q22.”
“Global methanol markets remain extraordinarily tight, with regional spot prices recently breaching new cycle highs owing to solid demand, persistent supply interruptions/delays, and surging global feedstock costs (China coal, Euro gas),” he said. “As a consequence, global inventories remain low and spot/contract prices are currently trading at levels not witnessed since 1H14 and 1H18.
“Despite these buoyant conditions, Methanex shares continue to languish by comparison, trading 50-55 per cent lower than these prior periods when contract methanol traded at similar levels. . We argue this unique disconnect presents a compelling opportunity for value-conscious investors, particularly as the outlook for methanol prices remains firm, and the probability of a renewed NCIB quickly advances.”
Keeping an “outperform” recommendation, Mr. Hansen raised his target to US$57 from US$55 after increased his financial projections. The current average on the Street is US$45.85.
“We point to the fact that: 1) Methanex is currently trading at a below-average multiple of EBITDA; and 2) the company is also trading at a very deep discount vs. history with respect to its capacity base,” he added.
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Tidewater Renewables Ltd. (LCFS-T) is a “pure-play renewable fuels platform with an early mover advantage that has catalyst-rich valuation qualities, including an immense growth portfolio and positive regulatory exposure,” according to ATB Capital Markets analyst Nate Heywood.
He initiated coverage of the Calgary-based company, a wholly owned subsidiary of Tidewater Midstream and Infrastructure Ltd. that began trading on the Toronto Stock Exchange on Aug. 18, with an “outperform” recommendation on Wednesday, expressing confidence in its “project execution and the ability to secure future growth initiatives.”
“TWR is focused on positioning for the energy transition by providing local access to renewable fuels that align with regulatory objectives and support Canada’s efforts to reduce carbon intensity (CI),” said Mr. Heywood. “The Renewable Diesel and Renewable Hydrogen Complex represents the flagship asset and will be the first of its kind in Canada, providing a first-mover advantage for securing feedstock and government support. With growth at the forefront and line of sight on free cash flow (FCF) generation, TWR provides exposure to Environmental, Social, and Governance (ESG) momentum without losing sight of attractive return profiles.”
Projecting its EBITDA to quadruple by 2023 to $148-million (from $18-million in 2021), the analyst sees “plenty” of catalysts ahead, noting: “First, reaching development milestones on time and budget should lend support for future cash flows and investment return profiles, especially with the renewable diesel investment. The aforementioned growth pipeline could attract investor interest as the scale and ability to develop new product lines should synergistically add value, especially with potential marketing opportunities. As management works to secure feedstocks, any announcements around long-term agreements ahead of ISD could provide further clarity on renewable diesel economics. Finally, an improved regulatory environment or more beneficial fuel standard policies should be monitored closely given the potential margin lift or demand increases.”
Calling it a “a new pure play in renewable fuel with growth on the mind,” Mr. Heywood set a target of $22 per share, exceeding the consensus of $20.63.
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After “mixed” second-quarter results that featured lower-than-anticipated retail cannabis sales, Echelon Capital Markets analyst Andrew Semple thinks Fire & Flower Holdings Corp.’s (FAF-T) digital platform is becoming “an increasingly important component to the upside thesis.”
Before the bell on Tuesday, the Toronto-based company reported revenue of $43.3-million, down 1.8 per cent quarter-over-quarter and missing the $46.2-million estimate of both Mr. Semple and the Street. He attributed the decline to both the impact of unexpectedly long COVID-19 lockdowns and the emergence of “aggressive” pricing strategies by peers that weighed on a recovery.
Conversely, Fire & Flower’s Hifyre platform “continued to surpass expectations on the pace of commercialization,” registering record sales of $3.7-million.
“We made meaningful revisions to our retail segment revenue and gross margin forecasts impacting FH221 and 2022,” Mr. Semple said. “Our updated view is that the retail industry in Canada will face several quarters of lower retail margins as some of the industry’s larger participants pursue aggressive pricing strategies to expand market share. Fire & Flower will be responding appropriately to these market developments, though is unlikely to pursue the extent of broad price discounting employed by peers. We expect these market conditions to weigh on the pace of the Company’s retail sales growth and somewhat on the margin profile, though Fire & Flower’s retail margins are expected to remain well above peers.”
“We foresee a return to growth in retail sales in FH221 driven by new store openings and a modest tailwind from stores reopening from COVID-19 lockdowns. Deeper and broader availability of cannabis 2.0 product formats should continue to support adoption of the legal cannabis market, while also supporting retailer margins. The Company’s strong pace of commercializing its digital ecosystem (now approaching $15-million in annualized revenues) is becoming a key contributor to expanding profitability. Recently announced acquisitions of PotGuide (private) and Wikileaf (WIKI-CSE) also offer opportunities for the Hifyre team to continue to advance growth in high-margin, recurring revenues, while also providing unique digital-led opportunities to expand the Company’s retail cannabis sales.”
Reiterating his “speculative buy” rating, Mr. Semple cut his target for the company’s shares to $1.75 from $1.90 to account for lower expected contributions from the its retail cannabis segment. The average on the Street is $1.83.
Elsewhere, Stifel analyst Justin Keywood cut his target to $1.85 from $2 with a “buy” rating.
“Despite the challenging backdrop, FAF is pivoting the business to focus more on its technology leadership as demonstrated in Q2 with expanding gross margins. FAF also recently acquired two U.S. websites that are being converted to an ordering platform. There are several moving parts to the technology transition underway but we ultimately see more value created,” said Mr. Keywood.
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JP Morgan analyst Phil Gresh adjusted his target prices for a group of Canadian energy companies on Wednesday.
He cut the following stocks:
- Canadian Natural Resources Ltd. (CNQ-T, “overweight”) to $54 from $59. The average on the Street is $55.24.
- MEG Energy Corp. (MEG-T, “neutral”) to $11 from $11.40. Average: $11.69.
- Suncor Energy Inc. (SU-T, “neutral”) to $29 from $31. Average: $35.39.
Conversely, Mr. Gresh increased his target for Cenovus Energy Inc. (CVE-T, “overweight”) to $15.50 from $15. The average is currently $15.91.
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Despite “light” third-quarter revenue and EBITDA results, Desjardins Securities analyst Kevin Krishnaratne sees Haivision Systems Inc. (HAI-T) “well-positioned to capitalize on remote video and security trends.”
After the bell on Tuesday, the Montreal-based video streaming technology company reported revenue of $20.7-million, missing the analyst’s $23.7-million estimate. Adjusted EBITDA of $3.4-million fell in line with his expectations.
“Although HAI’s 3Q featured strong U.S.-based revenue growth (up 6 per cent year-over-year as reported, up 16 per cent year-over-year constant currency), management noted softness in U.S. defense, a slowdown in enterprise and shifts in programmatic spend into 4Q/1Q,” said Mr. Krishnaratne. “HAI therefore slightly reduced its organic revenue outlook for FY21. Importantly, the outlook largely reflects spending delays, not cancellations.”
The analyst “modestly” reduced his estimates for the remainder of 2021 and 2022, but noted he’s “leaving room for upside” as “enterprise spending rebounds (potentially spring) and with new SaaS initiatives such as Hub (June 8 launch) and Connect (50+ clients testing, eight new logos added, full transition by CY21).”
Keeping a “buy” rating for its shares, Mr. Krishnaratne cut his target to $12.50 from $13.25, falling below the $13.50 average.
Elsewhere, Canaccord Genuity analyst Robert Young trimmed his target to $13 from $14.50 with a “buy” recommendation.
“Management has contained opex, which appears to preserve opportunity for EBITDA margin expansion,” he said. “Full year revenue guidance of $95-million ... was below our model, reflecting the impact of a broader slowdown in spend across enterprise on the back of Covid resurgence/Delta variant spread and US government pause given Afghanistan dynamics, offset by strong ISR demand internationally. The impact extends to CineMassive. We remain confident in our positive view on Haivision shares despite the macro headwind.”
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Canaccord Genuity analyst Doug Taylor admits he’s been “looking for reasons to get more constructive” on Blackline Safety Corp. (BLN-T), given a recent pullback in its shares and announcement of several large deals.
However, in the wake of Tuesday’s release of weaker-than-anticipated third-quarter results, he was forced to make “another reset” to his near-term reacceleration and EBITDA loss projections for the Calgary-based connected safety technology firm.
“We have reduced our revenue expectations for Q4 and F2022, reflecting a more conservative revenue growth forecast acknowledging ongoing COVID impacts. Additionally, we have lowered margins, in part reflecting heightened supply chain costs,” he said.
Before the bell on Tuesday, Blackline reported revenue of $12.7-million, up 35 per cent year-over-year but below the estimates of both Mr. Taylor ($16.1-million) and the Street ($14.8-million). An adjusted EBITDA loss of $4.6-million also missed the analyst’s projection (a $2.4-million loss).
“We have decreased our revenue expectations for Q4 and F2022, reflecting a more conservative revenue growth forecast acknowledging ongoing COVID impacts. Additionally, we have lowered margins, in part reflecting heightened supply chain costs,” he said.
Keeping a “hold” rating for its shares, Mr. Taylor cut his target to $8.25 from $10 and said it “makes it challenging for us to upgrade the shares.” The average is $11.81.
“We continue to recommend that investors look for firm evidence of a further inflection in revenue growth (recurring revenue in particular) and stabilization/improvement in cash burn metrics before adding to positions in Blackline,” he said.
Elsewhere, National Bank’s John Shao cut his target to $10 from $12, keeping an “outperform” recommendation.
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In other analyst actions:
* After hosting virtual marketing meetings with institutional investors, Laurentian Bank Securities analyst Nick Agostino raised his Docebo Inc. (DCBO-T) target to $125 from $105 with a “buy” rating.
“We believe DCBO is demonstrating to the market that it is not a pandemic-centric story, and its use case looks set to grow well after the pandemic despite losing a number of hospitality and travel focused customers during the onset of COVID-19,” he said.
* Stifel analyst Martin Landry raised his target for Guru Organic Energy Corp. (GURU-T) to $24 from $21, exceeding the $22.17 average, with a “buy” rating.
“GURU continues to be one of our preferred names under coverage given the long runway for growth we see for the company, its differentiated positioning, and its healthy balance sheet,” he said.
* Stifel’s Stephen Soock increased his target for MAG Silver Corp. (MAG-T) to $30.50 from $29, topping the $29.64 average, with a “buy” rating.
* TD Securities analyst Greg Barnes raised his Cameco Corp. (CCO-T) target to $35 from $25 with a “hold” rating. The average is $27.43.
* TD’s Craig Hutchison increased his targets for Denison Mines Corp. (DML-T) to $2.40 from $1.65 with a “hold” rating and Nexgen Energy Ltd. (NXE-T) to $10 from $7 with a “speculative buy” recommendation. The averages are $2.29 and $7.22.
* National Bank Financial analyst Endri Leno initiated coverage of H2O Innovation Inc. (HEO-X) with an “outperform” rating and $3.25 target. The average on the Street is $3.56.
* Eight Capital initiated coverage of Field Trip Health Ltd. (FTRP-T) with a “buy” rating and targets of $10.20. The average target on the Street is $16.24.
* Eight Capital also became the first firm on the Street to initiate coverage of Numinus Wellness Inc. (NUMI-X), giving it a “buy” rating and $1.10 target.
* Cormark Securities analyst Stefan Ioannou raised his Rupert Resources Ltd. (RUP-X) to $8 from $7 with a “buy” rating, while Eight Capital’s Mitch Vandererydt increased his target to $8.45 from $7 also with a “buy” recommendation. The average is $8.24.
* ATB Capital Markets analyst Waqar Syed increased his Trican Well Service Ltd. (TCW-T) target to $3.75 from $3.50, exceeding the $3.45 average, with an “outperform” rating.
David Leeder