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

Believing a “return to growth has not materialized,” CIBC World Markets analyst Todd Coupland lowered his rating for shares of BlackBerry Ltd. (BB-N, BB-T) following Tuesday’s release of disappointing second-quarter results, recommending investors wait for a “more attractive” entry point.

“BlackBerry reported Q2 results and a F2020 forecast below expectations. Enterprise Software and Services [ESS] is suffering from sales staff turnover and competition, and is not expected to recover for six to twelve months,” he said.

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Before the bell on Tuesday, the Waterloo, Ont.-based company reported a decline in ESS revenue to US$78-million, well below the Street’s expectation of US$93-million. It also reduced its total revenue guidance to 23-25 per cent year-over-year from 23-27 per cent previously.

Though Mr. Coupland did note upside to its licensing revenue, he said that gain did not offset the slowdown in ESS revenue.

“While customers might be waiting for new products, the salesforce reorganization is expected to delay market adoption for six to twelve months,” he said. "ESS is also seeing greater competition from Microsoft. Cylance revenue (while in line with expectations) was flat with the prior quarter, and is showing lower growth than certain peers. Investments in its sales team are also taking place, with a goal of moving up the growth rate. Our view is the management changes and time to educate the new sales force will delay a return to growth.

“We are now less confident in our forecast for growth and are in line with the broader investment community, which remains skeptical.”

Moving the stock to “neutral” from “outperformer," he dropped his target to US$6.50 from $13. The average on the Street is US$7.89, according to Bloomberg data.

Elsewhere, RBC Dominion Securities analyst Paul Treiber said headwinds facing its ESS segment add a “new challenge” to BlackBerry’s turnaround.

“BlackBerry’s underlying Q2 fundamentals were below expectations, as ESS revenue declined mid-teens year-over-year and Cylance revenue was flat sequentially,” he said. “Competitive pressure has intensified in BlackBerry’s ESS business, which has increased customer churn in BlackBerry’s nonregulated customer base. Looking forward, the contraction in ESS revenue, unless abated, increases the challenge of upselling new products into BlackBerry’s install base.”

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“The company is facing significant competitive pressure as Microsoft effectively gives away competing software, which is bundled into ELAs,” he said. “BlackBerry believes that its regulated customer base (30 per cent of ESS revenue) is stable and anticipates new products and a sales re-organization would help stabilize non-regulated revenue. Largely on lower ESS revenue ($346-million vs. $392-million prior), we now expect $1.123-billion FY20 total revenue, down from $1.145-billion prior.”

With a “sector perform” rating, Mr. Treiber cut his target price for BlackBerry shares to US$7.50 from US$9.

In a research note titled What’s Ailing ESS, Raymond James analyst Steven Li lowered his target for BlackBerry to US$9.50 from US$10.50 with a “market perform” rating (unchanged).

Mr. Li said: “The ongoing spotty Enterprise Software (ESS) performance has held us back for some time and this quarter ESS was even worse (down 16 per cent year-over-year). Management expects ESS softness to continue for a couple more quarters before returning to more normal growth rates. Cylance was also a little slower than expected. Revenue guidance reflects these new developments and we have adjusted our forecasts and target price lower.”

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“Waiting for a better entry point,” CIBC World Markets analyst Bryce Adams initiated coverage of Torex Gold Resources Inc. (TXG-T) with a “neutral” rating on Wednesday.

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“Torex’s high-grade ELG complex (in Mexico) is expected to generate a top-quartile FCF yield, but we believe current trading levels provide a modest risk/reward trade-off, with a return to target of 14-per-cent offset by an elevated risk profile," he said. “In the recent gold rally, since June 1, Torex has outperformed peers, up 38 per cent versus the GDX, up 27 per cent.”

Citing a “slightly elevated” risk profile," Mr. Adams sees Torerx as “fairly valued.”

He set a target of $20.50 per share. The average is currently $22.42.

“In our view, Torex has takeout potential for the high-quality merits of the asset, but we temper our expectations on account of the asset’s higher-risk profile," said Mr. Adams. "Conversely, given the investment in Muckahi, Torex could be an acquirer of underground assets that lend themselves to the application of Muckahi technology.”

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Despite seeing signs of a “definitive improvement in activity and pricing,” RBC Dominion Securities analyst Kurt Hallead said the pace of recovery for U.S. offshore drillers has been “slower than initially anticipated.”

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Acknowledging the duration of contracts and magnitude of day-rate improvement for ultra deepwater drillships has been less than he expected when upgrading the group in August of 2018, he now sees a longer timeline for most companies in the industry to become free cash flow positive.

Mr. Hallead now recommends investors focus on oil service stocks that generate consistent FCF results and possess strong capital structures.

With this revised view, the analyst downgraded the following stocks:

Transocean Ltd. (RIG-N) to “sector perform” from “outperform” with a US$9 target, down from US$17. Average: US$8.55.

Analyst: “We are adjusting our 2020/21 EBITDA estimates to $1,265/1,733mn from $1,220/1,671mn primarily driven by adjustments in utilization and pricing through the remainder of 2020 and a ripple effect into 2021. Street estimates are $1,110/1,365mn for 2020/21.”

Diamond Offshore Drilling Inc. (DO-N) to “sector perform” from “outperform” with a US$10 target, falling from US$11. Average: US$7.60.

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Analyst: “DO has the least capital structure risk and the greatest contract visibility in our coverage. DO is the only company that has contracted all of its UDW ships until 2022 and beyond.”

Noble Corporation PLC (NE-N) to “sector perform” from “outperform” with a US$3 target, falling from US$9. Average: US$2.24.

Analyst: “We believe the wall of worry relating to debt maturities will continue thereby limiting upside optionality.”

Valaris PLC (VAL-N) to “sector perform” from “outperform” with a US$9 target, falling from US$13. Average: US$11.50.

Analyst: “Our baseline assumption is that VAL will be able to refinance its nearterm maturity and avert filing for Chapter 11 but the wall of worry relating to debt maturities will likely continue, thereby limiting upside optionality.”

At the same time, RBC lowered its U.S. land rig count in both 2019 and 2020 to a 9-per-cent drop, versus its previous forecast of a decline of 5 per cent and increase of 5 per cent, respectively. It also introduced a 2021 estimate of a 4-per-cent increase.

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“We are taking a more selective approach to the land drilling sector by focusing on the companies with the most financial flexibility, strongest capital structures and best FCF profiles,” said Mr. Hallead.

With that change, he downgraded a pair of stocks:

Nabors Industries Ltd. (NBR-N) to “sector perform” from “outperform” with a US$3.50 target, falling from US$9. Average: US$3.27.

Analyst: “Given the decline in our U.S. land rig forecast along with the relatively higher debt load for NBR, we rate the company a Sector Perform.”

Independence Contract Drilling Inc. (ICD-N) to “sector perform” from “outperform” with a target of US$2, down from US$4. Average: US$2.70.

Analyst: "Predicated on our rig count and day-rate progression through 2020E, ICD’s growth prospects will be constrained given nominal FCF generation, relatively low valuation and limited if any access to external capital (equity or debt).

“Overall, we believe ICD has a solid management team with a sound strategy and high-quality assets. This should put ICD in a good position to garner the attention of a broad swath of investors when land drilling activity re-accelerates.”

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Though the recently completed drilling program at its highly anticipated Casino Project in the Yukon shows the potential for the deposit, H.C. Wainwright analyst Heiko Ihle lowered his target price for Western Copper and Gold Corp. (WRN-T) in response to the expectation that first production at the mine is now 2024, calling the new timeline “more realistic.”

“We emphasize the significance of high-grade gold intercepts given the prevailing porphyry- style mineralization at the Casino deposit amid the lesser grades generally associated with such an orebody,” he said. “The results are also notable as they present a later phase of alteration relative to the earlier porphyry phase. We highlight that drilling undertaken during 1994 and between 2008 – 2012 returned similar high-grade intercepts that are believed to be related to the same structural features in which the aforementioned assay from hole DH19-21 is associated. Future drilling should provide incremental clarity on the geometry and key characteristics of these structures as these intercepts have become less anomalous than previously thought.”

In the wake of the release of the results on Tuesday, which returned 55.1 grams per tonne gold over 2.97 metres at a depth of 147.98 metres, Mr. Ihle emphasized the “unique” characteristics of Casino relative to other Canadian porphyry systems.

“While typical Canadian copper-porphyry deposits often display significant glacial erosion that can remove zones of enriched copper, Casino’s copper blanket remains intact,” he said. "In short,the Casino deposit contains a 100 m thick zone hosting re-deposited secondary copper, due to a sequence of historic weathering events. This in turn has generated a stratigraphically shallow area with twice the level of copper grades seen in the primary mineralization area.

“The gradational feature of the Casino deposit has created a scenario in which shallow higher-grade ore is easily accessible. In turn this portion of the deposit is expected to be the primary mining focus during the first four years of mine life should the project see production. In conclusion, we therefore believe that the copper and gold content related to porphyry mineralization provides robust economics over an extended mine life, while a secondary form of mineralization could provide a high-grade mining stage at Casino given recent drilling results.”

Maintaining a “buy” rating, Mr. Ihle cut his target for shares of the Vancouver-based company to $1.75 from $2.50. The average is $2.15.

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After recent meetings with company executives, RBC Dominion Securities analyst Greg Pardy reaffirmed Suncor Energy Inc. (SU-T, SU-N) as his “favourite" stock and kept it on the firm’s “Global Top 30” and “Best Energy Ideas” lists.

“Suncor Energy’s integrated model continues to demonstrate its ability to generate — and distribute — free cash flow throughout the cycle," said Mr. Pardy after “broad” talks with chief financial officer Alister Cowan and vice-president of investor relations Trevor Bell.

Calling it “best in breed,” he kept an “outperform” rating and $50 target, which falls short of the $52.89 consensus.

“In our view, Suncor Energy remains Canada’s energy producer of choice given its integrated model, defined upstream growth, capital discipline, free cash flow generation, strong balance sheet, and demonstrated track record of shareholder distributions in the form of buybacks and dividend growth.”

“At current levels, Suncor is trading at a debt-adjusted cash flow multiple of 6.0 times in 2019 estimates (in-line with our global integrated peer group), and 5.6 times in 2020 (in-line). We believe Suncor should trade at a premium, given its free cash flow generation, strong balance sheet, and consistent shareholder distributions via dividends and share repurchases.”

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