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

Following a “soft” second quarter and a drop in its guidance for maple products, Desjardins Securities analyst Frederic Tremblay downgraded his rating for Rogers Sugar Inc. (RSI-T).

On Tuesday, the Vancouver-based company reported quarterly adjusted EBITDA of $21.2-million, falling short of both Mr. Tremblay’s forecast of $26.1-million and consensus of $25.0-million.

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“Following a solid 1Q FY18, sugar deliveries were down 5,500 metric ton (MT) year over year in 2Q (we were looking for an addition of 3,400MT), which contributed to the segment’s lower-than-expected profitability,” said Mr. Tremblay. “In maple, revenue and adjusted EBITDA both missed expectations.”

With the results, management also announced it now projects EBITDA from its maple products segment of $19.9-million for fiscal 2018, down from $22.9-million, and $21.1-million for 2019, falling from $25.6-million.

“While we continue to see a sound strategic rationale to RSI’s entry into the maple syrup market in FY17, it is now becoming clear that the integration of the LBMT and Decacer acquisitions is more challenging than anticipated,” said Mr. Tremblay.

After lowering his earnings expectations for both years, Mr. Tremblay dropped Rogers Sugar shares to “hold” from “buy” and his target price to $6 from $7.50. The average on the Street is $6.25.

Elsewhere, BMO Nesbitt Burns analyst Stephen MacLeod downgraded his rating to “market perform” from “outperform” with a target of $6.26, falling from $7.


Despite a “strong” start to 2018, Laurentian Bank Securities analyst Elizabeth Johnston lowered DIRTT Environmental Solutions Ltd. (DRT-T) to “hold” from “buy” based on its current valuation.

“As we have previously written, longer term we believe that the growth opportunity for DIRTT is intact and that investments made in 2017 (and 2016) position the company for continued growth in revenue and EBITDA,” said Ms. Johnston. “The Q1/18 results demonstrated that stronger gross margin and EBITDA margin are achievable, however we caution that variability from quarter to quarter is still expected to occur. As a result, we have left our estimates largely unchanged given that the outlook for revenue and the EBITDA margin guidance have not materially changed. Furthermore, the ongoing search for a permanent CEO and CFO continues to be an overhang on the shares, specifically with respect to the strategic direction.”

On Monday, Calgary-based DIRTT reported first-quarter revenue of $80.7-million, up 24 per cent year over year and exceeding both the expectations of both Ms. Johnston and the Street.

Adjusted EBITDA of $12.7-million also topped estimates and was driven by a stronger gross margin.

Ms. Johnston kept a $6.50 target for DIRTT shares. The average on the Street is currently $6.93.

“Recall that with the Q4/17 results, we had decreased our target price multiple in order to reflect the ongoing uncertainty with respect to the company’s strategy as well as execution risk,” she said. “Although the quarter’s results were positive and there has been some progress in terms of advancing the company towards permanent leadership (i.e. the two new board members, who have also joined a search committee), we believe that there remains meaningful uncertainty with respect to the direction of the company, along with limited financial guidance, and therefore given the stock price appreciation we move to a Hold rating.”


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Beacon Securities analyst Doug Cooper upgraded CRH Medical Corp. (CRH-T) to “buy” from “hold” in the wake of “strong” first-quarter results, which he expects should reassure investors concerned with its margins.

Vancouver-based CRH reported quaterly EBITDA of $8.3-million, exceeding Mr. Cooper’s estimate of $6-million. Revenue of $24.7-million met expectations.

“With its first quarter in the books post re-imbursement cuts, we believe investors now have the information they need to model the company with better confidence, which will result in a higher valuation multiple – one more in-line with industry peers at 12 times enterprise value-to-EBITDA,” he said. “We have slightly lowered our rev/case estimate to $350 (from $360) but modeled higher segment margins. As such, we are lowering our FY18 revenue to $101-million (from $104-million) but raising our shareholder EBITDA forecast to $31-million (from $26.6-million). For FY19, we are introducing rev/sh. EBITDA of $100.7-million/$35-millio based on rev/case of $350.00.”

Mr. Cooper raised his target to US$5 from US$2.75. The average is US$4.98.

“Based on that FY19 EBITDA forecast, the stock is trading at 8 times EV/EBITDA – well below its peer group average,” he said. “With greater visibility on margins, we believe this is very cheap.”


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UBS analyst Ross Fowler initiated coverage of Canadian regulated utility stocks with a “balanced” view, believing the Bank of Canada rate hike cycle likely provided a backdrop which could make it tougher for outperformance.

“CRUs are currently 12-per-cent undervalued to Canadian corporate bond yields,” he said. “The valuation gap has closed from 40-per-cent undervalued since September 2016. It is important however that 82 per cent of this relative valuation move has been due to higher corporate bond rates and not related to lower dividend yields driven by higher stock prices. If the valuation gap continues to close, we expect that trend to continue and stock performance to struggle as rates move higher. The BoC rate hike cycle will also likely provide a backdrop that could make it harder for CRUs to outperform.”

“After a 17-per-cent correction versus the TSX since June 2017, CRU’s are 4-per-cent expensive to a buy signal. While this limits downside from current levels we see limited catalysts to resolve the valuation gap during an ongoing rate hike cycle by the Bank of Canada. Relative performance of Canadian Regulated Utilities (CRUs) is contra to TSX absolute performance within and for a full year after the end of rate hike cycles. Performance is thus dependent upon whether the rate-hike cycle precursors a recession. Until the economic picture clarifies we expect the anticipation of further hikes to limit upside.”

Mr. Fowler gave Fortis Inc. (FTS-T) a “buy” rating and a target of $48, which is currently 8 cents more than the consensus.

“We view Fortis Inc. as a utility growth compounding story with solid 6.4-per-cent DPS and 5.3-per-cent EPS growth through 2022 with little downside risk to that case,” he said. “We see opportunities to raise and extend the capital backlog across the company’s extensive geography. While we are neutral overall on the Canadian Regulated Utility sector we favour Fortis’s 64-per-cent U.S. exposure in line with our more positive bias on U.S. regulated utilities.”

He also gave a “buy” rating to Atco Ltd. (ACO.X-T) with a $47 target, exceeding the consensus of $41.90.

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“We view ATCO Ltd. as undervalued to normalized utility performance against performance based rate-making metrics, after the 2018 reset year, with some rebound growth at the non-regulated global Structures & Logistics business,” he said. “At current levels either the market is fairly valuing the utility segment and implying no value for the Structures & Logistics business, or fairly valuing Structures & Logistics and implying valuation of the utility at a 13-per-cent discount.”

He gave a “neutral” rating to Emera Inc. (EMA-T) with a target of $42, which is lower than the average of $48.58.

“We see Emera as a solid utility compounding growth story with 5.1-per-cent earnings per share growth and 6% dividend per share growth through 2022,” said Mr. Fowler. “Emera enjoys a 2nd quartile regulatory ranking driven by the Florida utilities to go along with the 2nd quartile earnings growth profile. If management can fill in capex where backwardated in 2020-2022 we would see upside to our base case and the stock. However, we see fewer apparent capital opportunities of significant scale across Emera’s geographies at this time. Shares traded significantly lower post year-end earnings related to concerns, which we share, around cash flow pressures resultant from U.S. tax reform changes, and equity need to achieve the target capital structure of 55-per-cent debt by 2020.”

He also gave a “neutral” and $35 target to Canadian Utilities Ltd. (CU-T). The average is $38.26.

“We see the shares as trading at fair value versus Alberta regulation, with growth opportunities for capital deployment and rate headroom more closely tied to the commodity sensitive economies of Alberta, Australia, and Mexico,” said the analyst.

Mr. Fowler initiated coverage of Hydro One Ltd. (H-T) with a “sell” rating and $19 target, which is $5 less than the average on the Street.

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“We are negative on Hydro One Ltd’s shares as even if the election rhetoric does not equate to reality in governance, that there is potential for a feedback loop through to regulation,” he said “We also struggle with the potential accretion of the AVA merger, post US tax reform changes that removed jurisdictional tax advantages and make leveraged deals more difficult. Increasing interest rates have also likely slightly raised the ultimate cost of funding. Liberal Premier Kathleen Wynne oversaw the Ontario government’s privatization of a 60-per-cent stake in Hydro One Ltd. This has become an issue in the June 7 election. The Progressive Conservative party is currently ahead in the polls, and party leader Doug Ford has indicated he would fire Hydro One Ltd’s Board and CEO if elected. This may be rhetoric, but there is a process for Board replacement under the governance agreement agreed to at the time of the IPO.”

He also gave a “sell” rating to Caribbean Utilities Co. Ltd. (CUP.U-T) with a $12.50 average, which is 50 cents lower than the consensus.

“We see shares as trading at a 2-per-cent valuation premium premised upon 2nd quartile regulation, 1st quartile growth, and 5-per-cent liquidity discount given the $430-million market cap and 60-per-cent ownership by Fortis Inc,” said Mr. Fowler. “Given a tourism and finance sector driven economy means that for a utility volume growth and capital growth opportunities are atypically cyclical. If rate hike precursor better economic conditions it could benefit CUC longer term. We don’t see an argument for shares to be undervalued to corporate bonds or shares as a bond proxy to the U.S. or Canada and exclude that 10% premium from our valuation analysis.”


Jefferies analyst Christopher LaFemina initiated coverage of Alcoa Corp. (AA-N) with a “buy” rating, citing its free cash flow growth and further improvements to its balance sheet and under the belief predictable capital returns should lead to a higher valuation.

Mr. LaFemina said Alcoa offers investors free embedded call option on alumina and aluminum prices as well as a free option on low-cost organic growth.

His target for the stock is US$65, exceeding the consensus of US$63.93.


Revival Gold Inc.’s (RVG-X) Beartrack gold mine in Idaho is an “attractive brownfield project in a favourable jurisdiction,” said Echelon Wealth Partners analyst Gabriel Gonzalez, who initiated coverage of the stock with a “speculative buy” rating.

In September of 2017, Toronto-based Revival acquired a 100-per-cent interest in Meridian Beartrack Co., owner of the Beartrack, from Meridian Gold Co., a subsidiary of Yamana Gold Inc.

Last year, Revival completed confirmatory drilling at Beartrack, a former producing gold mine between 1995 and 2005, and expects a resource estimate by the second quarter of the current fiscal year.

“We believe that with the work Revival expects to complete in 2018, visibility on a preliminary potential production scenario could begin to take shape in 12 to 18 months, driving potentially increased interest from investors and from mining companies contemplating acquisitions in mining friendly jurisdictions to grow their production profile,” said Mr. Gonzalez.

He set a price target of $1.70 for Revival shares.

“We believe that a re-rating from the Company’s current US$11/oz value could materialize in the next 12 months with the upcoming Q218 NI 43-101 resource estimate, metallurgical studies, and by ongoing drilling to demonstrate Beartrack’s potential resource expansion,” said Mr. Gonzalez. “Further exploration and development may provide visibility on a +3Moz resource, which could further increase the Company’s value.”


Following a recent tour of its B.C. Tweed greenhouse facilities, Canaccord Genuity analyst Neil Maruoka raised his target price for shares of Canopy Growth Corp. (WEED-T).

“We came away from the site visit very impressed by the scale of cultivation and the speed at which the company has been able to ramp production so soon after receiving cultivation licenses for both greenhouses,” he said. “We believe these facilities firmly position Canopy as the largest cannabis producer globally with more than 2.4 million sq. ft. of production, and on track to exceed 5.6 million sq. ft. of domestic growing capacity. In less than two months, Canopy has been able to plant approximately 30 acres (1.2 million sq. ft.) of cannabis, which should allow the company to build inventory ahead of the legalization of recreational cannabis in Canada. We believe availability of supply is a critical factor in securing provincial supply commitments, and Canopy has participated in all tender processes announced so far.”

Mr. Maruoka kept a “hold” rating for Canopy shares and raised his target by a loonie to $27.50. The average target among analysts currently covering the stock is $35.56.

“With industry-leading global scale through these facilities, we believe that Canopy has incrementally de-risked its domestic and international strategies. We have therefore modestly lowered the discount rate in our Canadian medical DCF (from 9 per cent to 8 per cent) and our international NPV (from 18 per cent to 17 per cent). As a result of these changes, we are increasing our target price for Canopy … However, despite the share price pullback off January highs, we remain cautious on Canopy based on valuation.”


Initiating coverage with an “outperform” rating, Raymond James analyst Steve Hansen thinks Itafos (IFOS-X) is “uniquely positioned as a pure-play, integrated phosphate producer with a robust growth pipeline of strategically advantaged assets.”

Calling its recent $67-million acquisition of Nutrien Ltd.’s Conda Phosphate complex in Idaho “truly transformational,” Mr. Hansen added: “We believe the company has deftly capitalized on recent industry events to assemble a diverse, high-quality portfolio of strategic assets that boast solid baseline cash flow, riskmitigating contracts, attractive end-markets, and robust long-term growth.”

He set a target of $3.90 for its shares.


In other analyst actions:

AltaCorp Capital analyst Nicholas Lupick downgraded Pengrowth Energy Corp. (PGF-T) to “underperform” from “sector perform” with a $1 target, which is 3 cents more than the average.

TD Securities analyst Aaron Bilkoski upgraded PrairieSky Royalty Ltd. (PSK-T) to “buy” from “hold” with a target of $32 (unchanged). The average is 26 cents more.

TD’s Damir Gunja initiated coverage of Transcontinental Inc. (TCL.A-T) with a “buy” rating and $32 target. The average is $30.67.

Jefferies analyst Christopher Lafemina initiated coverage of Sierra Metals Inc. (SMT-T) with a “hold” rating and $3.50 target, which is below the $4.99 average.

GMP initiated coverage of Clean TeQ Holdings Ltd. (CLQ-T) with a “buy” rating and $2 target, which is 4 cents higher than the consensus.

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