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

“The worst looks over” for Canopy Growth Corp. (CGC-N, WEED-T), according to Bank of America Merrill Lynch equity analyst Christopher Carey.

With its U.S.-listed shares down more than 70 per cent from an April peak, Mr. Carey thinks the cannabis producer’s valuation is now more “reasonable," though he acknowledged it will “remain a debate” among investors.

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He thinks Street estimates now appear “achievable (even beatable) for maybe the first time in Canopy’s history as a public company,” and said the company’s channel inventory is getting leaner.

"A bear case based on multiple compression and to a certain extent cash burn (despite still years of cash) seems less robust now,” said Mr. Carey.

Though he said “things are by no means perfect” and Canopy “remains a show-me story with much to prove,” he raised his rating for its stock to “buy” from “neutral” with a target price of US$19. The average target on the Street is US$21.76, according to Bloomberg data.


Citing heightened risks following weaker-than-anticipated third-quarter financial results and “in light of current Canadian market conditions,” Canaccord Genuity analyst Kimberly Hedlin downgraded VIVO Cannabis Inc. (VIVO-X) to “hold” from “speculative buy.”

“While VIVO’s quarter had some noteworthy high points (including industry-leading pricing and expected EU-GMP certification in early 2020), a deeper dive into the company’s earnings has caused some concern surrounding the balance sheet,” said Ms. Hedlin. “While we don’t anticipate significant capital investments in 2020, we believe VIVO needs to outperform our revised estimates in order to repay $38-million in convertible debentures with cash on hand in 13-15 months. As the company ramps up sales of 2.0 products in Canada and medical products in Europe, we believe this could be a challenge over the next couple quarters.”

Pointing to sales thus far in the year, Ms. Hedlin lowered her Canadian revenue expectations for the Napanee, Ont.-based company to $24.5-million in 2019 and $51.5-million in 2020, which are reductions of 9 per cent and 13 per cent, respectively, and reflect market shares of 2.0 per cent and 2.2 per cent.

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“We have increased our average COGS [cost of goods sold] assumptions given that, to date, the company’s adjusted production costs remain above our estimates,” she said. “Additionally, we expect incremental costs to persist through H1/20 as the company launches new products, optimizes new equipment and processes, and prepares to sell into Europe. Overall, relatively small reductions to our long-term gross margins (which declined into the 58-60-per-cent range) had the greatest impact on our SOTP [sum-of-the-parts] valuation.”

“Based on our updated estimates, we expect VIVO to start to generate positive operating cash flows in H2/20. However, even with a limited capital forecast of $3-4-million in 2020, we estimate that VIVO will end the year with a $6-7-million financing gap to repay $34.5-million in convertible debentures that mature February 28, 2021. While this is still quite manageable, we believe it increases the odds of a dilutive financing.”

With reductions to her revenue and earnings estimates, Ms. Hedlin lowered her target for VIVO shares to 30 cents, which is the current consensus, from 50 cents.

“While we believe the company could surprise to the upside with higher recreational volumes, gross margins and/or international sales, we are moving to the sidelines as we await execution on the company’s strategic priorities,” the analyst said.


Though Curaleaf Holdings Inc.'s (CURA-CN) quarterly results exceeding his expectations, Canaccord Genuity analyst Matt Bottomley thinks its balance sheet “needs a tune-up.”

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“With US$91-million of cash on its balance sheet (and US$75-million required to close its acquisition of Grassroots in Q1/20), Curaleaf will very likely require a near-term capital injection to ensure its growth objectives for 2020 are met,” he said. “Given the depressed nature of U.S. cannabis equities across the board, we believe the anticipation of a near-term raise is likely keeping investors on the sidelines and that a near-term announcement to fully fund its 2020 objectives (particularly with debt) could be the next major catalyst for the stock.”

For the quarter, the Massachusetts-based company reported total managed revenues of US$73.2-million, up 32.8 per cent from the second quarter and above Mr. Bottomley’s US$72.4-million estimate.

“The sizable sequential increase was a function of overall organic growth in many of Curaleaf’s key markets, including new store openings in FL and higher wholesale penetration in MA, and the closing of assets in AZ and MD,” the analyst said. “When factoring in acquisitions still yet to close (namely Select and Grassroots), total pro forma revenue for the period was C$129.0-million, a quarter-over-quarter increase of 16.3 per cent and a beat to our forecast of C$126.5-million. As a result, Curaleaf continues to have the largest pro forma revenue run-rate in the industry, which now sits at an impressive US$516-million.”

Mr. Bottomley maintained a “speculative buy” rating and $16 target for Curaleaf shares. The average on the Street is $16.88.

Elsewhere, Haywood Securities’ Neal Gilmer kept a “buy” rating and $12.75 target.

Mr. Gilmer said: “We continue to favour the U.S. cannabis market and believe that Curaleaf’s Q3 results underscore the growth opportunity for the company. Despite the overall headwinds in the sector, we are encouraged by management commentary, both on its organic and acquisition growth into 2020. In addition, following a brief impact due to negative vape related headlines, management indicated that there has been a rebound in sales.”

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TC Energy Corp.'s (TRP-T, TRP-N) core growth outlook “remains healthy,” said Industrial Alliance Securities analyst Jeremy Rosenfield following its Investor Day event on Tuesday.

"From a high-level perspective, management reiterated that the company remains focused on self-funded organic growth in low-risk oil & gas pipelines (i.e., regulated/contracted) and contracted power assets," the analyst said. "TRP’s overall 2019 investor day messaging remains consistent with prior communications: The company continues to see strong demand for its services driven by robust underlying market fundamentals, presenting investment opportunities across its businesses."

Mr. Rosenfield said the Calgary-based company reaffirmed the elements of its core $30-billion secured growth portfolio, and said secured projects are likely to drive EBITDA of more than $10-billion by 2022.

"TRP also reaffirmed the entirety of its $21-billion in longer-term infrastructure projects (including US$8-billion associated with KXL, although that cost estimate remains stale)," he said. "The development pipeline could provide additional longer-term upside to the growth outlook, and could represent a catalyst for the stock, although hurdles remain in place at this time."

"TRP management spent considerable time emphasizing that the company will remain true to its history, focused on investing in low-risk energy infrastructure, with a preference toward expansion opportunities of existing assets. TRP continues to see strong supply/demand fundamentals, which is expected to support $4.0-5.0-billion per year of organic growth capital investment across the business, driving sustainable mid- single-digit organic growth on a self-funded basis.

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Maintaining a “buy” rating for TC Energy shares, Mr. Rosenfield raised his target price to $72 from $70. The average on the Street is $70.92.

“TRP offers investors a combination of (1) stable earnings and cash flows (95-per-cent regulated/contracted EBITDA), with an emphasis on gas infrastructure assets (70 per cent of EBITDA), (2) sustainable organic growth (5-7 per cent per year DCF/share growth, CAGR 2018-23E), driven by more than $30-billion of secured investment (2019-23), (3) significant potential upside from more than $20-billion of longer-term development (e.g., KXL), and (4) attractive income characteristics (4.5-per-cent yield and 8-10 per cent per year DPS growth through 2021, 5-7 per cent per year thereafter),” he said.


Seeing potential upside stemming from its Chapada copper-gold mine in Brazil, Paradigm Capital analyst David Davidson increased his target price for shares of Lundin Mining Corp. (LUN-T).

“After touring the Chapada site, we were left with a positive impression of a well-run asset,” he said. “Significant takeaways include a change to the mine sequence to target higher copper grades, improving recovery with a finer grind and improving throughput by addressing bottlenecks, all of which resulted in an upward revision to our estimates.”

Seeing “several potential upside opportunities” at the mine, Mr. Davidson increased his net asset value per share estimate, leading to a raise in his target price by a loonie to $10.50. The average on the Street is $8.82.

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He kept a “buy” rating.

“While increasing throughput and recovery at Chapada comprised the bulk of the increase in our valuation, we also extended the mine life at Zinkgruvan by including resources that we expect to be converted into reserves,” the analyst said. “Our positive outlook on LUN stems from the company’s risk-managed growth profile bolstered by the company’s long-life assets with low geopolitical risk.”


In other analyst actions:

GMP analyst David Stewart cut Alacer Gold Corp. (ASR-T) to “hold” from “buy” with a $7 target, rising from $6.70. The average is currently $7.03.

Scotia Capital analyst Udhay Gill initiated coverage of Alithya Group Inc. (ALYA-T) with a “sector perform” rating and target of $4.25. The average on the Street is $4.81.

GMP analyst Justin Keywood initiated coverage of Greenbrook TMS Inc. (GTMS-T) with a “buy” rating and $3 target, which falls short of the current $4 consensus.

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