Inside the Market’s roundup of some of today’s key analyst actions
Yamana Gold Inc. (AUY-N, YRI-T) is taking “the initial steps in regaining the market’s confidence,” said RBC Dominion Securities analyst Stephen Walker in reaction to Tuesday’s release of “solid” second-quarter financial results.
“In our view, Yamana is on track to rebuilding the market’s confidence post-Chapada sale with an improved balance sheet, operational momentum, and increasing free cash flow generation,” he said. "With the company now on stronger financial footing, we expect Yamana to focus on various organic growth opportunities. In particular, we expect the two-phased expansion at Jacobina and optimization at Cerro Moro to be prioritized following the sale of Chapada.
“Over the medium term, we anticipate the advancement of the Odyssey and East Malartic deposits at Canadian Malartic, and longer term, we believe the open pit Agua Rica project (56.25-per-cent AUY) could continue to advance with potential to be eventually monetized due to the large capital outlay and sizeable copper component relative to gold.”
Mr. Walker said the quarterly report displayed “strong” operational results, driven by gold sales that exceeded his projection by 10 per cent and aided by the sale of precipitate inventory at Cerro Moro and lower costs at both Cerro Moro and Jacobina.
“With Yamana on a stronger financial footing, we expect investors to focus on the advancement of organic opportunities. Capital allocation priorities include: (1) maximizing the underground potential at Jacobina; (2) optimizing Cerro Moro after the initial ramp-up; (3) underground development opportunities at Canadian Malartic (50-per-cent AUY/50-per-cent AEM); (4) advancing and potentially monetizing Agua Rica; and (5) ongoing exploration/sustaining capital commitments at El Peñón and Minera Florida,” he said.
With a “sector perform” rating, Mr. Walker increased his target for Yamana shares to US$3.50 from US$3. The average on the Street is US$3.21.
Desjardins Securities analyst Doug Young expects Canada’s Big Six banks to average year-over-year cash earnings-per-share growth of 5 per cent in the third quarter, driven by domestic net interest margin expansion, “decent” loan growth, “stable” NIX ratios and share buybacks.
“We expect the focus to be on moderating expense growth in 2H FY19,” said the analyst. “And we wonder whether the group can hit medium-term EPS growth targets in FY19 (mid- to high single digits). We have tweaked our estimates and target prices but maintained our ratings. Lastly, Canadian bank stocks are up 10-per-cent year-to-date on average (vs 15 per cent for the S&P/TSX) and the group trades below historical average forward P/E multiples, which makes sense given where we stand in the economic cycle.”
In a research report previewing the sector’s third-quarter earnings season, which begins on Aug. 21, Mr. Young made several target price changes to stocks in his coverage universe.
He lowered his target for the following stocks:
Bank of Nova Scotia (BNS-T, “buy”) to $80 from $81. Average: $77.27.
Canadian Western Bank (CWB-T, “hold”) to $33 from $34. Average: $31.62.
Bank of Montreal (BMO-T, “hold”) to $105 from $108. Average: $107.53.
Canadian Imperial Bank of Commerce (CM-T, “hold”) to $115 from $118. Average: $114.81.
Mr. Young maintained his targets for:
Royal Bank of Canada (RY-T, “buy”) at $111. Average: $110.44.
Toronto-Dominion Bank (TD-T, “buy”) at $83. Average: $83.40.
National Bank of Canada (NA-T, “hold”) at $64. Average: $65.46.
He raised his target for Laurentian Bank of Canada (LB-T, “hold”) to $44 from $43, which exceeds the consensus of $42.73.
On the sector as a whole, Mr. Young said: “Canadian bank stock prices decreased 2.7 per cent on average during 3Q FY19, outperforming the Canadian lifeco average, but underperforming the U.S. bank index, U.S. lifeco average and S&P/TSX. LB was the best performing Canadian bank (7.0 per cent) while CM underperformed (down 8.0 per cent).
“The Big 6 Canadian banks are trading below their 20-year historical average P/4QF EPS multiples. There are some tailwinds for the Canadian banks over the near term: (1) a constructive economic backdrop, with low unemployment; (2) a benign credit environment for now; (3) comfortable CET1 ratios; and (4) a focus on managing expenses—which is important as loan growth slows. In addition, the banks have been able to effectively manage a number of headwinds over the past few years, such as a decline in oil prices and new regulatory capital rules. However, we also acknowledge that there are numerous risks on the horizon, such as operating in the late stages of the economic cycle, volatility in the equity markets, potential for increased volatility in provisions for credit losses (PCLs) under IFRS 9 and the high level of household debt in Canada. That said, relative to other investment alternatives in Canada, we believe bank valuations are still reasonable.”
Seeing valuation upside of 20 per cent, CIBC World Markets analyst Dean Wilkinson initiated coverage of Brookfield Property Partners LP (BPY-Q, BPY-UN-T) with an “outperformer” rating and US$25 target. The average is US$23.45.
“In our view, BPY units offer one of the most compelling risk/reward profiles within our coverage universe, reflecting an above-average growth runway, a (sustainable) above-average yield, and valuation optionality," he said. "With sector-leading liquidity, we believe that BPY is a core holding.”
In reaction to the release of its fourth-quarter financial update on Tuesday, Desjardins Securities analyst John Chu thinks Aurora Cannabis Inc. (ACB-T) is likely to post a “modest” loss in the quarter.
The Edmonton-based producer now expects new revenue of $100-$107-million, missing both Mr. Chu’s previous $119-million forecast and the $111-million expectation on the Street.
“On the EBITDA front, the company stated that it ‘continues to track toward positive adjusted EBITDA, and in particular adjusted EBITDA from cannabis operations,’” the analyst said. “We interpret this to mean that the company is close, but not yet ready, to posting positive EBITDA for 4Q, which is in line with our expectations and the Street; we were forecasting a modest EBITDA loss of $0.2-million vs consensus at a loss of $3-million.”
“We are lowering our net sales forecast to $106-million from $119-million to reflect slightly lower recreational sales volumes by 1,600 kilograms (to 11,800 kg from 13,400 kg) and changing the recreational sales volume mix to be more weighted toward lower-margin dry flower vs oil. The lower sales volumes and the shift in the product mix drives our gross margin down slightly (to 56.5 per cent from 59.0 per cent) and our adjusted EBITDA forecast moves to a loss of $2.5-million from a loss of $0.2-million."
Despite the reductions, Mr. Chu kept a “buy” rating and $16.50 target for Aurora shares. The average target on the Street is $12.98.
“The company continues to show good sales momentum, albeit slightly lower than we had projected previously,” he said. “The higher production volumes should imply good sales growth for the upcoming quarters, although the path to positive EBITDA may be a bit behind schedule.”
Pointing to a series of lingering issues, Citi analyst Itay Michaeli reduced his earnings expectations for Tesla Inc.'s (TSLA-Q) 2019 through 2021 fiscal years in reaction to its recently released second-quarter results.
“As we see it, the financial side of the Tesla story currently faces three problems: (1) Despite stronger volume, Tesla’s auto gross margins remain less-than 20 per cent, and that’s with Model 3 ASPs holding-in fairly well ($50k); (2) Tesla appears to be containing opex and capex to the point where earnings quality can be called into question; (3) At the Q2 auto gross margin level (ex. credits), all-else-equal we estimate that even if Tesla were to reach a 500k annual delivery level, auto gross margins might only reach the low-20s range,” said Mr. Michaeli. "Even with tight cost controls, that would likely be sufficient for only a low/mid-single digit EBIT margin. That’s why ‘full self-drive’ (FSD) features (smart summon, traffic lights, stop-signs, urban automated driving) now become more important to the margin/profitability story.
“The one piece of relatively better news (vs. a few months ago) is that Tesla’s FCF/cash position appears somewhat sturdier—granted partially thanks to low capex—but the risk of a confidence ‘spiral’ seems to have lessened for now. That’s reflected in our unchanged price target.”
For the third quarter, Mr. Michaeli now projects a 33 US cent loss per share, falling from a 7 US cent loss. He expects a fourth-quarter profit of 25 US cents, rising from 22 US cents.
However, for the full fiscal 2019 year, he’s estimating a loss of US$3.96 per share, rising from a US$3.05 deficit. For 2020, he’s projecting a gain of US$2.29 per share, down from US$3.71
“So what could Tesla do going forward? First, as mentioned a successful FSD rollout could provide a boost to margins and potentially vehicle demand. Second, we think there would be merit for Tesla to launch a pre-AV peer-to-peer shared network to provide consumers with a lower cost-of-ownership option (which could also accrue to ASPs) while spreading vehicle awareness/usage. Otherwise, the near-term outlook still appears challenged by: (2) U.S. federal tax credit phase-out potentially becoming a headwind into 2020; (3) Outside of FSD, there doesn’t appear to be an imminent vehicle refresh catalyst."
He maintained his “sell” rating and US $191 target. The average is US$253.44.
Expecting a “robust” 2020 for fertilizer demand, CIBC World Markets analyst Jacob Bout upgraded Mosaic Co. (MOS-N) to “outperformer” from “neutral” on the heels of a “massive” sell-off following the release of its second-quarter results.
“With the combined impact of the resolution of Brazil tailings dam issues (note Q3/19 will have some residual earnings impact), realization of synergies ($275-million of net annual synergies expected in 2019), and slightly higher 2020 phosphate prices, we expect Fertilizantes EBITDA levels to increase to $510-million vs. $350-million in 2019,” he said. “The Tapira mine (resumed operations at 60 per cent in July) and the Araxá mine are expected to resume full operations in August (recall, the Catalão mine resumed operations in May).”
Mr. Bout lowered his target to US$27 from US$28 due to “slightly" lower phosphate price assumptions. The average on the Street is US$31.26.
With another “solid” quarter, Detour Gold Corp. (DGC-T) continues to "demonstrate positive operating momentum,” said Canaccord Genuity analyst Carey MacRury, pointing to record gold recovery that exceeded the company’s guidance and improving mill throughput despite two planned maintenance shutdowns in the quarter.
“Mill performance to date, adjusting for the shutdowns, suggests that DGC could be close to achieving the targeted 63,000 tons per date rate in H2/19 and above our conservative longer-term forecast of 60,000 tpd,” said Mr. MacRury. "In addition, the company has continued to experience strong positive block model reconciliation since early 2018, that while difficult to ascertain the longer term benefit, provides the company with another tailwind.
“Finally, management, under new CEO Mick McMullen, has a number of cost/productivity initiatives underway that we believe could represent upside to our forecasts including optimizing the mine plan on a discounted cash flow basis as compared to the 2018 LOM plan which was done on an undiscounted basis.”
On July 30, the Toronto-based miner reported second-quarter production of 150,079 ounces at cash costs of $793 per ounce, both exceeding Mr. MacRury’s estimates (143,771 ounces at $834 per ounce).
“As a result of a strong H1, Detour now expects to be at the high-end of its 570-605,000 ounce production guidance range and at the low end of its AISC guidance range of between $1,175-$1,250 per ounce,” he said. “We note that H1/19 production is tracking ahead of the top end of the guidance range and costs are tracking below the low end. We now forecast 2019 production of 608,000 ounces at an AISC of $1,131 per ounce, which represents relatively flat production (H2 vs. H1) but 7-per-cent higher AISC in H2 ($1,170 per ounce in H2 vs. $1,093 in H1) primarily reflecting higher expected spending on the tailings facility.”
Maintaining a “buy” rating for Detour shares, Mr. MacRury hiked his target to $26 from $22.50. The average on the Street is $22.27.
“We have increased our target multiples to reflect Detour’s positive operating momentum following another strong quarter and potential upside to our forecasts from both continued positive block model reconciliation and ongoing cost/productivity initiatives,” he said.
In other analyst actions:
Roth Capital Partners analyst Scott Fortune initiated coverage of MediPharm Labs Corp. (LABS-T) with a “buy” rating and $9 target, exceeding the current average of $7.75.
Clarus Securities analyst Nana Sangmuah upgraded K92 Mining Inc. (KNT-X) to “buy” from “speculative buy” with a $4.25 target, rising from $2.60 and above the $3.25 consensus.