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

Canadian cannabis companies should act quickly to gain a presence in the U.S. market ahead of the likely legalization in 2021, said Bank of America Merrill Lynch equity analyst Christopher Carey upon initiating coverage of the sector in a research report released Wednesday.

"There are over 50 publicly traded Canadian cannabis licensed producers, far too many for a cannabis market the size of Canada’s, in our view,” he said. Meanwhile, “the U.S. has the largest cannabis market globally.”

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"We believe there is a view that laws will inevitably change. In theory, then, it would behoove Canadian cannabis companies to invest ahead of that law change.”

Mr. Carey initiated coverage of HEXO Corp. (HEXO-T) with a “buy” rating on Wednesday, calling the Gatineau, Que.-based producer his “top pick in cannabis.”

Pointing to its compelling relative valuation as well as its innovation-driven approach, future potential partnerships and de-risked supply, Mr. Carey set a target price of $10 per share. The average target on the Street is $11.14, according to Bloomberg data.

He also gave Canopy Growth Corp. (WEED-T) a “buy” rating, believing it’s well-positioned to be a long-term leader globally in the sector.

Emphasizing its large cultivation capacity as well as the impact of its investment from Constellation Brands Inc., he set a $70 target for Canopy shares, which falls just below the $72.56 consensus.

The analyst also initiated coverage of Aurora Cannabis Inc. (ACB-T) with a “buy” rating.

He thinks Aurora is “positioning itself as one of few truly global companies in the cannabis sector,” and he sees its scale as especially attractive, due to its low-cost production model, protecting margins even in an oversupplied market, and ability to serve a global market, where there is an undersupply of legal cannabis.

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Mr. Carey’s target for Aurora is $15, exceeding the $13.25 consensus.

Though he called it a “compelling fundamental story,” Mr. Carey set an “underperform” rating for Cronos Group Inc. (CRON-T), saying he’s “unable to get comfortable” with its valuation.

He set a $17 target, which falls short of the $20.65 consensus.

“For Cronos, we expect attractive long-term growth and margins, while also giving credit for the cash from Altria," he said. "Despite this, the stock still screens the most expensive in our coverage. A key risk to our rating is that Cronos deploys its recently injected capital for deals in geographies or categories the market deems attractive. Otherwise, we don’t see a case for near-term upside,”


The investor narrative on Tesla Inc. (TSLA-Q) “remains incredibly negative,” according to Baird analyst Ben Kallo, who trimmed his target price for its stock on Wednesday after lowering his full-year total delivery projection.

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“While we acknowledge it may take several quarters for this to shift, we continue to believe sentiment will improve over time as the company proves it can be self-supportive, which should drive sustained share appreciation,” he said.

Pointing to a slower-than-anticipated ramp-up for its much-hyped Model 3 and moderating demands for its Model S and X vehicles, Mr. Kallo now forecasts total vehicle deliveries of 361,000 for 2019, which sits toward the bottom of the company’s guidance of 360,000 to 400,000 units.

“Q1 deliveries were not sufficient to improve negative sentiment and investors will likely focus on Q1 cash balance, which might disappoint following the convert repayment and working capital headwinds,” he said. “While we are recalibrating our expectations, we continue to expect shares will outperform over time as TSLA introduces innovative products, increases profitability, and generates free cash flow. ”

Maintaining an “outperform” rating for Tesla shares, his target dipped to US$400 from US$465. The average on the Street is US$309.27.

“We continue to view Tesla as a major disruptor, and think new product introductions, production ramps and further development of innovative technologies will drive growth,” Mr. Kallo said.


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CIBC World Markets analyst Trevor Bolland said a “major” transformation over the last several years has “substantially changed” his outlook for Athabasca Oil Corp. (ATH-T), leading him to a more “constructive” view.

He initiated coverage of the stock with an “outperformer” rating.

“Despite our cautious stance on exposure to the Canadian SMID-cap E&P subsector due to ongoing market access issues facing the industry, we view Athabasca as uniquely positioned given its exposure to a low-decline and low-sustaining-cost thermal business that is accompanied by a high-quality liquids-rich natural gas business,” he said. “The company is also in a position to generate free cash flow for the first time. Combined with an influx of cash from its recent midstream monetization, it is in the enviable position of having excess cash to allocate to growth, share buybacks and/or debt reduction. It is important to note, however, that, despite our overall positive view, Athabasca’s cash flow sensitivity to changes in oil prices is among the highest in our coverage universe, and this leverage to rising oil prices naturally cuts both ways.”

He set a target of $1.35. The consensus on the Street is currently $1.53.

“Athabasca is trading at a deeply discounted 2019/2020 estimated EV/DACF [enterprise value to debt-adjusted cash flow] multiple of 2.7 times/3.3 times on strip pricing versus its SMID-cap oil sands peers at 4.5 times/5.9 times and the broader Canadian oil-weighted SMID-cap space at 3.9 times/4.2 times,” said Mr. Bolland. “However, given Athabasca’s comparatively low leverage, its low decline rate and modest sustaining capital requirements in its thermal segment and the peer-leading netbacks generated by its light oil segment, we believe the company is deserving of a more in-line multiple as the Street begins to recognize and properly value these enduring qualities.”


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HudBay Minerals Inc. (HBM-T) has “delivered on several key catalysts this year driving strong share price performance alongside rising commodity prices,” said RBC Dominion Securities analyst Sam Crittenden in a research note following a tour of the company’s Lalor mine and New Britannia mill in Manitoba.

“The Lalor mine has reached nameplate capacity following several improvements, there is a clear plan to ramp up production in the gold zone, and there are several promising exploration targets to extend the current 10-year reserve life,” said Mr. Crittenden.

“We believe the mine is poised to sustain the current production and unit costs could decline with higher production.”

On the Britannia facility, he said: “In February, Hudbay released a new mine plan to ramp up production in the gold-copper zone and refurbish the New Britannia mill to increase gold recoveries. We believe this plan makes sense and that the timeline to deliver it by 2022 is reasonable. The key mill components appear to be in good shape although there is always a risk of surprises when restarting a mill; this one last produced in 2005. Hudbay believes that its capital estimate of U$95-million is achievable, and detailed engineering and estimates are expected in Q1/2020.”

The analyst maintained a “sector perform” and $10 target for HudBay shares, which falls short of the $11.45 average.

“We believe a lot of this good news could already be reflected in the share price,” he said.

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Shifting to a more neutral stance due to the absence of visible near-term catalysts, TD Securities analyst Sean Steuart downgraded Western Forest Products Inc. (WEF-T) to “hold” from “buy.”

With “more conservative” lumber price expectations and higher British Columbia Coast fibre cost projections, Mr. Steuart lowered his earnings forecast for the Vancouver-based company.

His target for Western shares dipped to $2 from $2.25, which falls below the $2.35 consensus.


North American Construction Group Ltd. (NOA-T) sits in a “uniquely strong position despite all the headwinds facing the Canadian energy industry today,” said CIBC World Markets analyst Daine Biluk, who initiated coverage of the Acheson, Alta.-based company with an “outperformer” rating.

“The company is generating among the best margins over its history, holds an unprecedented $1.6-billion of backlog and just finished a year where it was able to generate 19-per-cent ROE [return on equity] and has a line of sight to deliver 25-30-per-cent ROEs in the next couple of years,” he said. “And although the stock has been an eight bagger off the market bottom in 2016 and is up 150 per cent since the start of 2018, we foresee upside from here on the back of the company executing on its backlog and growing other service lines outside its core oil sands business.

“At a superficial level NACG operates in a low-barrier-to-entry, highly commoditized business that faces ongoing cyclicality and is subject to regular commodity price volatility. And given that the company derives the bulk of its activity from some of the most demanding clients in the oil sands, it would be logical to assume that NACG is likely plagued by modest operating margins and full-cycle returns.”

Mr. Biluk added: “In reality, however, the company has demonstrated significant and ongoing improvements in operating results and completed a number of attractive acquisitions over this period that demonstrate the value of a high-quality and pragmatic management team that takes advantage of industry cycles. Further, we believe the platform is acutely focused on: 1) maximizing shareholder returns; 2) building an enduring platform to operate throughout cycles; and, 3) conducting every decision with an overwhelming level of pragmatism.”

He set a $23 target for the stock, exceeding the $21.83 average.

“NACG trades at 4.0 times 2020 estimated EV/EBITDA, 3.0 times 2020 estimated CFPS and 8.3 times 2020 estimated EPS, which we believe represent significant value for a company generating healthy ROE metrics and with solid visibility towards future activity given its current backlog that is nearly 4 times the revenue NACG generated in 2018,” the analyst said.


In other analyst actions:

Veritas Investment Research analyst Dimitry Khmelnitsky reinstated coverage of SNC-Lavalin Group Inc. (SNC-T) with a “sell” rating and $33 target. The average on the Street is $43.62.

GMP analyst Steven Butler downgraded Yamana Gold Inc. (YRI-T) to “hold” from “buy” and lowered his target to $3.50 from $4.60. The average is $4.20.

National Bank Financial analyst Jaeme Gloyn cut Alaris Royalty Corp. (AD-T) to “sector perform” from “outperform” with a target of $18, falling from $21.50. The average is currently $22.61.

With files from Reuters

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