Inside the Market’s roundup of some of today’s key analyst actions
Whitecap Resources Inc. (WCP-T) offers investors an “extremely attractive” blend of above-average production growth and dividend yield, said Industrial Alliance Securities analyst Michael Charlton, who added that combination has attracted a “substantial” retail and instiutional following.
He initiated coverage of the Calgary-based company with a “buy” rating.
“With a recent payout ratio of 20 per cent, we view the company’s dividend as more than sustainable at these levels, with opportunities for growth,” said Mr. Charlton.
“Further enhancing the stock’s attractiveness, in our view, is its strong light oil weighting. Weighted approximately 86 per cent to oil and liquids, we note that total liquids production accounts for 98 per cent of forecast revenues, which is even more attractive heading into a strong oil market. The effect of increases on oil prices is presented in management’s sensitivity analysis ... Liquids weighted production drives Whitecap’s strong realized prices of $55 per barrel of oil equivalent, compared to the [Industrial Alliance] coverage universe’s average realized price of $33/boe, more than double our universe average of $14.93/boe. Furthermore, we believe that Whitecap’s capital efficiency of $18,128 per flowing barrel is attractive despite being slightly above our universe average of $16,073 due to the fact that it is adding oily barrels and not gas weighted barrels. We believe that the future of Whitecap looks promising as the company has plenty of potential well locations in inventory across six core plays to keep drilling for years at the current pace of development, is financially flexible with a debt to cash flow ratio of less than 2.0 times and a bank line that is 60-per-cent undrawn, leaving ample financial liquidity to either ramp up drilling operations or make another acquisition, should the appropriate opportunity present itself.”
Mr. Charlton set a target price of $13 per share. The average target price on the Street is currently $13.28, according to Thomson Reuters Eikon data.
“We believe that given the company’s track record of growth, it has the ability to continue executing its Viking development plans, which will drive production and cash flow growth and allow for reinvestment into the Cardium and Duvernay,” he said.
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Osisko Metals Inc. (OM-X) presents investors with a “unique value proposition,” according to Canaccord Genuity analyst Kevin MacKenzie, who initiated coverage of the stock with a “speculative buy” rating, viewing it as an emerging zinc producer over the medium term.
“We believe this provides the company with a unique value proposition, in contrast to its peer group which is largely positioning for a takeout.,” said Mr. MacKenzie.” While we highlight Arizona Mining (AZ-T) and Tinka Resources (TK-X) as potential nearterm M&A candidates, we do not expect to see a significantly broader or pervasive acquisition trend among zinc explorers/developers this commodity cycle, given (1) the limited number of potential acquirers, (2) required acquisition thresholds, (3) a backlog of idle production, and (4) established project pipelines. As such, we view Osisko Metals as uniquely positioned to capitalize on its own exploration/development success by advancing projects through to production, independent of the M&A environment, and to a large part, the stage of the commodity cycle. We believe this value proposition is supported by the projects’ established infrastructure, historical resource base, safe jurisdictions, and in the case of Pine Point, the proof of concept demonstrated by historical production.”
Mr. MacKenzie said the Montreal-based company’s recent $34-million acquisition of the Pine Point project, previously operated by Cominco Ltd. in the Northwest Territories, represents a “significant development in expediting the company’s long-term goal of becoming one of Canada’s next leading base metal producers.” Based on his projections, he called the project’s economics “attractive.”
The company’s other focus lies with the Bathurst Mining Camp in New Brunswick in which it has acquired over 63,000 hectares in New Brunswick.
“The company is working to upgrade and expand a host of smaller known deposits, with the longer-term goal of establishing a centralized milling facility to process feed from a number of satellite deposits. We see OM as well positioned to execute on this strategy, given management’s combined greater-than 100 years of experience exploring, developing and operating within the camp.”
He added: “A true hallmark of an Osisko Group company, Osisko Metals has budgeted an aggressive 100,000m of drilling for 2018. The focus of this drilling, split evenly between Pine Point and Bathurst, will be on historical resource confirmation/ expansion and discovery. We note that Osisko Group executives form a large contingent of the Osisko Metals board, with Osisko Gold Royalties and Osisko Mining together holding an 11.5-per-cent equity position.”
The analyst set a $1 target for Osisko Metals shares, which is 3 cents below the consensus.
“We highlight the results of ongoing expansion/ discovery drilling (Pine Point and Bathurst), and the release of the Pine Point resource update in Q4/18 as potential near-term catalysts,” he said.
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Both Andrew Peller Ltd. (ADW.A-T) and Brick Brewing Ltd. (BRB-T) stand to be biggest winners from a Progressive Conservative victory in the Ontario election, said Laurentian Bank Securities analyst John Chu in a research note released Wednesday.
If PC leader Doug Ford’s pledge to expand alcohol sales to corner stores and grocery stores, Mr. Chu thinks wine will come out “the biggest winner” given its lower current retail outlet base, believing the number of new wine licenses issues “could be huge.” He projects an eight-fold increase in outlets selling wine and a six-fold rise for beer vendors.
“More outlets could lead to a more complicated and costly distribution system, which may preclude smaller wine/beer players from participating in,” the analyst said. “We also note that smaller players are not likely to have the production capacity to keep the shelves regularly stocked, which should put the big players such as ADW and BRB in a much better position to take advantage of these new potential retail outlets. We also suspect smaller retail outlets may prefer to stock more popular brands given limited shelf space, which should benefit ADW (No. 2 domestic wine player in Canada) and BRB (4th largest brewer in Ontario). Of course, not all potential outlets will apply or qualify for an alcohol license, and this may not increase overall industry sales but we suspect bigger players such as ADW and BRB should benefit from increased exposure at these new outlets, possibly at the expense of the big mainstream players (e.g. beer) and more likely from the smaller players.“
Mr. Chu reiterated his “buy” rating for both Andrew Peller and Brick.
He has an $18.25 target for ADW shares, which is 17 cents higher than the consensus.
His target for Brick remains $4.75, which falls 6 cents short of the Street’s average.
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Raymond James analyst Kurt Molnar thinks Iron Bridge Resources Inc. (IBR-T) should look favourably at the all-cash acquisition offer made by Velvet Energy Ltd. as he believes appetite for issuance of new equity is “modest.”
On Tuesday, Calgary-based Velvet Energy announced its intention to acquire all issues and outstanding shares of Iron Bridge at 75 cents each. The offer values Iron Bridge at approximately $120-million.
Later, Iron Bridge rejected the deal, calling it “flawed” and feeling it “significantly undervalues” the company.
“We have detailed our operational and financial concerns for Iron Bridge shareholders in the past,” said Mr. Molnar. “In particular, the Iron Bridge well data has seemingly lagged offset operators like Velvet and Hammerhead, and most importantly, we think Iron Bridge well results to date have raised material doubts as to whether they were achieving positive returns on invested capital. High watercuts, less than expected oil leverage and high cash costs have been a problem that has contributed to faster than expected consumption of Iron Bridge’s financial resources.
“Our current modeling suggests that Iron Bridge would need some combination of new equity or ramped up debt to continue to pursue a growth agenda in 2018.”
Maintaining a “market perform” rating for Iron Bridge, Mr. Molnar raised his target to the offer price of 75 cents from 55 cents. The average is now 83 cents.
“There are other offset operators to Iron Bridge that we think the company may try to engage as competing bidders but we have modest insight into their potential interest in a competing bid for Iron Bridge or their access to the financial means to compete with Velvet,” he said.
Meanwhile, Canaccord Genuity’s Anthony Petrucci moved his target to 90 cents from 75 cents, keeping a “speculative buy” rating.
“In our previous target of $0.75 we had given limited value (15 per cent) to the company’s undeveloped land position, given the market’s unwillingness to pay for resource potential,” he said. “We believe in a takeout scenario, some resource value may be recognized, and as such have modestly increased our attributed value of the unbooked upside to 20 per cent of the unrisked value. This increases our C-NAV to $1.00 (from 85 cents), and our target to $0.90 (from $0.75), which remains a 0.9 times multiple of our C-NAV.”
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The 10-per-cent sell-off in Nordstrom Inc. (JWN-N) since the May 21 release of its first-quarter results is overdone and creates a compelling entry point to own the retailer’s stock, said Deutsche Bank analyst Paul Trussell.
Seeing modest upside to estimates as the company’s initiatives gain traction, Mr. Trussell raised his rating to “buy” from “hold” and increased his target to US$55 from US$52. The average is US$50.69.
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CIBC World Markets analyst Scott Fromson sees “signs of progress” from AirBoss of America Corp. (BOS-T) in the successful execution of its growth strategy, leading him to raise both his financial estimates and target price for its stock.
“When we initiated coverage of AirBoss in October 2017, we viewed the company as having a good set of growth opportunities across business lines, but facing certain challenges,” said Mr. Fromson. “In the past six months, we believe AirBoss has made significant steps to accelerate its growth strategy, including changes in management, sales and production processes. This better positions the company to address its main challenges of filling excess production capacity and stabilizing the organic growth profile.”
Calling the Newmarket, Ont.-based manufacturing company’s first-quarter results, released on May 9, “good,” Mr. Fromson added: “AirBoss produced what we called a “No Surprises” Q1/18 and the stock reacted well. Since reporting, we have had the opportunity to revisit AirBoss, including one-on-one discussions with a range of senior management and a refresh of our model. Our more positive view is supported by a number of changes AirBoss has made over the past six months: 1) hiring a new COO/President of Rubber Solutions: 28-year industry veteran Chris Bitsakakis; 2) rejuvenating the management team below the C-suite level by hiring a number of rubber industry executives; 3) re-energizing the sales strategy, including a new process to execute on opportunities with existing, former and new customers; 4) implementing a marginenhancing continuous-improvement operating system modeled on that of Toyota (to increase safety, quality, delivery timeliness and productivity); and, 5) re-focusing development on new, higher value-add products, building on vertical integration, R&D capabilities and long-standing customer relationships.”
Keeping a “neutral” rating for its AirBoss shares, the analyst raised his target to $13 from $10. The average is $15.25.
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Morgan Stanley analyst Benny Wong raised MEG Energy Corp. (MEG-T) to “overweight” from “equal-weight” with a target of $13, which exceeds the $9.21 average.
“We believe MEG is the best call option on sustainably higher oil prices amongst North American E&P stocks given its significant leverage,” he said. “A $10/bbl increase in oil prices lifts MEG’s cash flows and NAV by 45 per cent and over 100 per cent, respectively (compared to 18 per cent and 43 per cent for peers). MEG’s 33-per-cent production growth to 2020 is fully funded, and with its break-even expected to fall to US$46 WTI, this sets the company up for free cash flow for the first time since the company has been public. At strip, we estimate the company will generate $520 MM of FCF over 2019-20 and trades at a FCF yield of 9 per cent (at 31 per cent with the full aforementioned IMO 2020 effects). Finally, MEG also provides additional upside optionality: 1) through technology with its proprietary eMVAPEX enhanced development which can lower development and operating costs, and 2) as the increasingly constructive macro takes hold, and with eventual clarity on Canadian crude takeaway, consolidation in the oil sands could pick up again and result in a premium being reflected in MEG’s share price.”
David Leeder