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

Aurora Cannabis Inc.’s (ACB-T) move to build a 1.2-million square foot greenhouse in Medicine Hat goes a long way toward de-risking its international strategy, according to Canaccord Genuity analyst Neil Maruoka.

On Tuesday, Vancouver-based Aurora unveiled plans for its high-tech Aurora Sun facility, which will be built on newly acquired 71 acres of land in the Alberta city. Aurora estimates its total capacity will increase to over 430,000 kilograms per year from its current funded capacity of 280,000 kilograms.

“This facility is expected to have the capacity to produce 150,000 kilograms of cannabis per year at total cash costs of less than $1.00 per gram,” said Mr. Maruoka. “Initial production is expected in the first half of 2019, with the entire build-out complete in the second half of next year. With synergies from the ongoing construction of Aurora Sky, we estimate total construction costs to be more than $150-million. When complete, Aurora Sun is expected to bring Aurora’s total production capacity to over 430,000 kilograms, positioning the company as a leader in both scale and global reach. And, while we believe that Canadian demand is likely to be saturated in the longer term, we note that significant production from Aurora Sun is earmarked for international markets. With an increased cultivation footprint, we believe that Aurora has incrementally.”

He added: “We believe Aurora has positioned itself as a leading global supplier of cannabis. A substantial portion of the production from Aurora Sun will be earmarked for international markets, which incrementally derisks the company’s international strategy, in our view. As such, we have modestly lowered the discount rate in our model for the company’s international opportunities from 18 per cent to 17 per cent.”

Mr. Maruoka downgraded Aurora shares on March 16 based on valuation concerns. However, following a recent depreciation in price, the annualized return to his target price now sits at 30 per cent. That led the analyst to upgrade the stock to “speculative buy” from “hold” on Wednesday.

Based on the Aurora Sun plans, his sum-of-the-parts valuation for Aurora increased “modestly” from $10.87 to $10.68 per share. That led him to raise his target for its shares to $11 from $10.50, which remains below the average target on the Street of $12.17, according to Bloomberg data.

“Aurora’s stock trades at 21.1 times our two-year forward EBITDA forecast,” said Mr. Maruoka. “This compares to the average for larger peers of 16.7 times, and Canopy’s multiple (our HOLD-rated stock amongst this group) of 23.7 times.”


Expressing confidence its plan to start intermediating its own payments and seeing the potential for significant advertising growth, Morgan Stanley analyst Brian Nowak upgraded eBay Inc. (EBAY-Q) by two levels to “overweight” from “underweight.”

“We expect EBAY to start intermediating its own payments (pulling away from PayPal) in ’18 as management stated on its 4Q:17 conference call, with a planned full transition in mid-2020,” said Mr. Nowa. “We are bullish about this initiative as we’ve seen other leading platforms … observe higher user conversion/spend from.”

“As a payment intermediator, EBAY will be responsible for collecting funds from buyers and instructing payment processors to disburse funds to merchants, which is currently done by PayPal. EBAY acting as both marketplace and payment intermediator could simplify and reduce costs for merchants, who would pay a single fee to EBAY.”

Mr. Nowak thinks the company’s move away from PayPal should drive faster growth in gross merchandise value, and add 20 per cent to the company’s earnings before interest and taxes. He sees the initiative giving it the ability to expand its buyer base, projecting a significant expansion in its listings ad business.

“We are also bullish EBAY’s promoted listings ad business, as our analysis of AMZN/ETSY’s ad businesses speaks to how quickly e-commerce platforms can scale ad monetization,” he said. “AMZN/ETSY’s ad businesses have grown at 80-per-cent/50-per-cent CAGRs over the last four years, now adding 100 basis points/280 basis points to overall effective ‘take rate.’ We believe EBAY began to scale its promoted listings business in a meaningful way for the first time in 2017...and our base case assumes it grows at a 110-per-cent 2017-20 CAGR (adding a total of 40 basis points to ‘take rate’). This, too, may prove conservative, but even this implies EBAY’s ad business reaches $450-million of 2020 high-margin incremental revenue.”

He raised his target price to a Street-high US$58 from US$36, versus the average of US$49.21.


OTR Global downgraded Facebook Inc. (FB-Q) to “mixed” from “positive” in reaction to a moderation in advertisement spending growth year over year.

The firm said first-quarter ad spending has risen 19 per cent to 24 per cent year-over- year, compared to growth of 25 per cent to 30 per cent in the fourth quarter.


Desjardins Securities analyst Raj Ray said his first-quarter expectations for Canadian intermediate and junior gold producers are “relatively softer” and sees backend-loaded production in 2018.

“From a gold price perspective, 1Q18 has seen a positive start to the year with the quarterly average of US$1,330 per ounce being the second highest in more than four years (after 3Q16’s average of US$1,335 per ounce),” said Mr. Ray in a research note previewing Q1 earnings, which was released late Tuesday.

“However, gold equities continue to markedly underperform their leverage due to the lack of funds flow, with the GDX and GDXJ gold ETFs down 5 per cent and 6 per cent, respectively in 1Q18 despite a 4-per-cent quarter-over-quarter improvement in the gold price. With gold producers expected to start reporting financial results beginning the week of April 23, we do not expect 1Q18 results to provide much of a boost to gold equities in 2Q18.”

Mr. Ray increased his gold price forecast for 2018 to US$1,325 per ounce from US$1,290 per ounce. He maintained a long-term gold price estimate of US$1,300.

“Based on the updated gold price, companies with the best FCF potential in 2018 are Oceana (US$155-million, 8.3-per-cent yield), Kirkland Lake (US$87-million, 2.6-per-cent yield) and Atlantic (C$70-million, 12.7-per-cent yield),” he said.

“Gold producers under coverage with strong catalysts in the near term include: SEMAFO—start-up and commissioning of Boungou; Golden Star—Prestea Underground ramp-up although the recently announced Wassa Underground resource update should provide a big boost; and Kirkland Lake— start of production from the high-grade Swan Zone at Fosterville in 2H18.”

With the changes to his price deck, Mr. Ray made several target price adjustments to stocks in his coverage universe. They were:

Atlantic Gold Corp. (AGB-X, “buy”) to $2.50 from $2.40. Average: $2.56.

Kirkland Lake Gold Ltd. (KL-T, “buy”) to $27 from $26. Average: $20.26.

OceanaGold Corp. (OGC-T, “buy”) to $5 from $5.50. Average: $4.78

TMAC Resources Inc. (TMR-T, “hold”) to $11 from $12.25. Average: $11.43.


In the wake of another disappointing and “volatile” quarter, Cineplex Inc. (CGX -T) could be seen as an “attractive” takeover target for either a Canadian telecom provider or private equity firm, said Echelon Wealth Partners analyst Rob Goff in a research note Wednesday.

“Potential buyers would arguably look at its FCF [free cash flow] generation, where maintenance capex is sub 3 per cent of revenues,” said Mr. Goff, who believes its dominance in Canada would make it “difficult” for an international buyer.

Ahead of the scheduled release of its first-quarter financial results on May 2, Mr. Goff reduced his revenue and EBITDA projections for the period to $400.9-million and $56.9-million, respectively, from $413.7-million and $63.4-million. He noted that the consensus on the Street has dropped over the past month to $407.1-million and $60.5-million from $414.8-million and $64-million.

“Q118 represented a tough start with the N. American and Canadian box office down 2.0 per cent and 4.7 per cent respectively,” said the analyst. “The quarter saw volatile monthly performance with Box Office Mojo reporting N. American declines of 16.3 per cent for January before an impressive 50.9-per-cent gain for February that in turn led into a disappointing March decline of 48.5 per cent. We have since seen a strong April with last week’s figures showing 18-per-cen year-over-year growth. The year-to-date performance reflects a box office subjected to greater volatility about marquee hits with an overall challenge to show year-over-year gains on a full year basis. The recent experience has led to a series of progressively tougher calibrations on a go forward basis that has seen both growth rates lowered and valuations compressed.

“Looking ahead, given flat to nominal declines in attendance, nominal box office/patron yield gains and higher concession sales per patron and we can see theatre revenue growth of 2 per cent annually. The outlook turns more bullish when considering that CGX looks to invest $350-$400-million in growth initiatives over the next four years, where the IRR is 25-per-cent-plus and the outlook turns positive. CGX highlighted that maintenance capex is roughly $30-million (2.5-per-cent capex intensity) annually, against its full year 2017 capex at $150-million. Cineplex’s peers support the potential for higher IRRs on growth initiatives. With its after-tax cost of debt at just 3.8 per cent (WACC 5.7 per cent), we are encouraged by the Company’s more aggressive investment profile.”

Maintaining a “buy” rating for Cineplex shares, Mr. Goff lowered his target to $40 from $42, which was a high on the Street. The average is $38.65.

“While the 52-week high of $54.81 reflected significantly different expectations, we note that the shares have been flat over the past three months with expectations significantly recalibrated,” he said. “Our full year revisions with this note were relatively minor beyond the Q118 reduction as expectations for Q218 and the rest of the year reflect improved box office performance. In particular, we see a favourable Q318 year-over-year performance measured against Q317 where August suffered from 9 new releases against 11 the prior year and this year’s expectations are for 12. We see valuation support with the pre-dividend FCF yield is 7.5 per cent or 13 per cent on FCF using maintenance capex, we see fundamental value. We put Cineplex’s growth capex at roughly $2 per share or 6 per cent of its share price.”


Algonquin Power & Utilities Corp.’s (AQN-T, AQN-N) decision to increase its stake in Atlantica Yield plc is a “solid idea,” according to Desjardins Securities analyst Bill Cabel, who expects both cash flow and its dividend to grow.

On Tuesday, Oakville-based Algonquin announced it has entered into an agreement with an entity related to Seville-based Abengoa S.A. to purchase an additional 16.5-per-cent equity interest in Atlantica Yield plc for a total price of US$345-million, based on a price of US$20.90 per share. With the deal, Algonquin agreed with a group of institutional investors to issue and sell approximately 37.5 million common shares at a price of $11.85 per share, for gross proceeds of approximately $445-million.

Algonquin already held an indirect 25-per-cent equity interest in Atlantica.

“In summary, through the following two separate transactions with ABG, AQN has now invested US$953-million in AY for a total 41.47-per-cent ownership interest,” said Mr. Cabel. “AQN’s average cost per share is US$21.93 per share, above [Tuesday’s] closing price of US$20.25. We believe that once the portfolio hits its run rate and dropdowns occur, the share price should appreciate.”

“We believe the AY investment presents the opportunity for AQN to free up capital by using leverage. We estimate that at the CAFD midpoint of management’s annual portfolio run rate (which ranges from US$200–215-million) and an 80-per-cent payout ratio, the shares will generate more than $85-million (Canadian) in annual dividends to AQN. Given that the cash flow is already levered at the AY level, we are not sure how much additional leverage can be applied at the AQN level; however, at 1–2 times cash flows, this would imply $85–170-million in debt that could possibly be deployed into AAGES development projects.”

Maintaining a “buy” rating for Algonquin shares, Mr. Cabel raised his target to $15.75 from $15.50, which exceeds the consensus target of $15.16.

“Overall, we remain big fans of AQN’s international development strategy and while we had expected it to build up its position in AY over time through dropdowns, we believe acquiring this stake at a 8.5 times EV/2018 EBITDA multiple is a solid deal for AQN,” he said. “We continue to believe the acquisition provides AQN with solid international operating renewables assets and is a relatively low-risk way to benefit from ABG’s international development expertise.”

Elsewhere, Raymond James’ David Quezada called the deal’s valuation “attractive,” noting: “At a purchase price of $20.90 we peg this additional 16.5-per-cent stake in Atlantica as coming at CAFD yield of 8.8 per cent, based on consensus estimates, which compares favourably to recent transactions in the US YieldCo space at CAFD yields in the 7.0-7.5-per-cent range. Viewed another way, this additional stake equates to a 9.4 times consensus EV/EBITDA, below the 9.7 times AQN paid for the initial 25 per cent The US$345-million purchase price is to be financed by a C$445-million equity offering (37.5 million shares at $11.85) placed directly to certain institutional holders which, as indicated in the release, largely satisfies the 2018 common equity requirement of AQN’s 2018 capital plan. The transaction is expected to close in 2Q18/3Q18.”

Mr. Quezada kept a “strong buy” rating and $16.75 target.


DA Davidson analyst Andrew Burns downgraded Callaway Golf Co. (ELY-N), citing unfavourable spring weather, limited visibility on market share growth and muted earnings potential.

Moving the California-based company to “neutral” from “buy,” Mr. Burns’s target remains US$19, exceeding the consensus by US$1.


In other analyst actions:

AltaCorp Capital analyst Tim Monachello initiated coverage of CES Energy Solutions Corp. (CEU-T) with an “outperform” rating and target of $8.30, which sits below the average target among analysts covering the stock of $9.

GMP analyst Ian Gillies downgraded AltaGas Ltd. (ALA-T) to “hold” from “buy” with an unchanged target of $29, which is 55 cents more than the consensus.

Mr. Gillies also lowered Gibson Energy Inc. (GEI-T) to “hold” from “buy” with a target of $19, falling from $19.50. The average is $19.33.

Haywood Securities Inc. initiated coverage of Filo Mining Corp. (FIL-X) with a “buy” rating and $4.60 target, which is 3 cents above the consensus.

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