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Expansion work at Cenovus's Christina Lake operations in northern Alberta.


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

Citing a "disproportionately large pullback in its shares and relative value," TD Securities analyst Menno Hulshof upgraded Cenovus Energy Inc. (CVE-T, CVE-N).

Moving it to "buy" from "hold," Mr. Hulshof called the energy company a "chronic underperformer" in the year to date, creating a "compelling" entry point for investors.

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"CVE shares are down a-difficult-to-justify 17 per cent year to date (peers and S&P/TSX Capped Energy Index (XEG-T) down 7 per cent and 11 per cent, respectively)," he said. "Although the rollout of an updated commodity deck precipitated in a $1.00 target price cut to $21.00, our revised 26% target return still reflects ample upside. Overall, the near-term risk/reward profile for CVE shares is skewed to the upside, in our view."

Noting its premium multiple has "evaporated," he added: "Although CVE has historically traded at a premium to its peers, it is now trading in line. Excluding Husky Energy (HSE-T), which is heavily discounted versus the group, CVE is now trading at a 0.8-times discount based on consensus enterprise value/EBITDA, and a 1.6-times discount on our 2017 estimates."

Mr. Hulsof said Cenovus' business "effectively treads water" at spot WTI prices, but its balance sheet is "pristine."

"Per its own disclosures, CVE requires $45-$50 (U.S.) per barrel WTI to fully fund sustaining capital, corporate costs, and the dividend; we calculate $48/ bbl, which is roughly in line with guidance and [Thursday] night's WTI closing price," he said. "Although long-term growth is somewhat concerning given the WTI forward curve, we highlight: 1) a pristine balance sheet (2017E net debt/total cap of 13 per cent versus its peers at 24 per cent), and 2) sharp cost structure improvements that, in our view, are redefining SAGD supply costs."

His target fell by a loonie to $21. Consensus is $22.45.

At the same time, Mr. Hulsof downgraded MEG Energy Corp. (MEG-T) to "hold" from "buy" as he waits for an "improved line of sign for deleveraging" and signs of improving WTI oil price fundamentals.

"MEG's first debt tranche is not due until 2023," he said. "Therefore, although it can wait patiently for an improvement in fundamentals, most investors likely require line-of-sight to material deleveraging over an 18–24-month period, in our view. We could be wrong on the timing of the 'right-sizing' of the balance sheet in two ways:

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"1.The current WTI strip is wrong: Debt repayment will not occur organically based on current strip prices and only at a slow rate based on our revised 2017/2018 WTI oil price assumptions of $54.75/bbl and $60/bbl, respectively. On our updated price deck, we estimate a funding deficit of $289-million for 2017 (before its equity issuance) and a surplus of $241-million for 2018. In the context of net debt of $5-billion, the impact on its leverage metrics is inconsequential.

"2. Monetization initiatives could shore up more capital than expected: The sale of its 50-per-cent stake in the Access pipeline has been in the works for some time. However, we believe that it is unlikely that MEG can attract an offer high enough to justify selling it at this time (based on the Devon (DVN-N) transaction metrics). Although the sale of a Christina Lake GORR is more likely given the high-quality nature of the asset, there are limits to how much MEG would want to burden the project with such an instrument, in our view. Assuming a thumb-in-the-air $1-billion GORR transaction, our pro forma year-end 2017 net debt estimate would only fall to $3.7-billion from $4.7-billion, while net debt/total cap would fall to 54 per cent from 60 per cent."

Mr. Hulsof said oil price torque is a key tenet of his bull thesis, adding: "however, pending initial signs of a material improvement in oil price fundamentals (i.e., line-of-sight to deleveraging through free cash flow generation), we believe that a HOLD rating is more appropriate."

His target fell to $8.50 from $11. Consensus is $9.

The rating changes came in conjunction with an update to TD's commodity price deck.

"While our MARKET OVERWEIGHT sector stance has not been the right call year-to-date, we are electing to maintain an Overweight view given the significant underperformance of the Canadian energy space relative to the commodity and its U.S. peers (on a US$-adjusted basis)," the firm said. "More specifically, the S&P/TSX Capped Energy Index is down 3.5 per cent (US$-adj.) since the U.S. election versus the U.S. index which is flat. While sentiment in the Canadian energy complex may certainly be weaker than several months ago, we are still of the view that Canadian energy stocks are not only fundamentally stronger than they have been for most of the past two years, but also trade at lower valuations than they have historically — particularly relative to the U.S.-based peers."

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After a "light" fourth quarter, Raymond James analyst Steve Hansen downgraded his rating for AGT Food and Ingredients Inc. (AGT-T) based on margin pressures.

On Wednesday, the Regina-based processor and splitter of pulse crops reported quarterly earnings before interest, taxes, depreciation and amortization of $34.7-million, missing the projections of both Mr. Hansen ($38-million) and the Street ($38.2-million). Though the company saw a "very healthy" rise in volume of 14 per cent year over year, versus Mr. Hansen's expectation of a 6-per-cent rise, the earnings miss came largely from weaker-than-anticipated margins.

"The bulk of this pressure was attributable to weaker pulse prices during the quarter owing to increased global supplies (better crops in India, Turkey, Australia, NA) as well as the late Canadian harvest which shortened AGT's shipping window and resulted in an increase in late shipment discounts," said Mr. Hansen.

"Despite the margin challenges in 4Q, we note that pulse prices have started to recover and that the recent logistics challenges are also now largely behind the company, providing us with more confidence that AGT should see meaningful margin recovery in 1Q17," he said. "That said, we deem it prudent at this juncture to modestly reduce our near-term estimates on account of recent market volatility and some potential carryover impact."

Mr. Hansen emphasized management's confidence in a favourable resolution to Canada's pulse fumigation dispute with India, which maintains imported crops must undergo treatment using methyl bromide. Canada, the United States and most EU countries have banned the MB. On March 31, Canada's exemption from India's policy is set to end.

"Consistent with prior commentary, management reiterated their confidence in a favourable resolution to Canada's pulse fumigation dispute with India," the analyst said. "Specifically, management believe that a temporary waiver will be granted by early April, with a more permanent solution likely to follow once India has had the time to fully review the case presented by the Canadian government. Now despite this being consistent with our own view, we note that this issue does introduce some additional uncertainty given the importance of India to the global pulse market and the potential disruption to existing trade flows that would result from Canada not receiving another exemption."

Based on the quarterly results and concern over the "Fumigation Fandango," Mr. Hansen lowered his earnings per share projections for 2017 and 2018 to $2.59 and $3.15, respectively, from $2.91 and $3.27. His revenue estimates fell to $2.215-billion for both years from $2.276-billion.

His rating dropped to "outperform" from "strong buy" and his target for AGT stock is now $42, down from $46. The analyst consensus price target is $42.38, according to Thomson Reuters.

"While AGT deserves credit for continuing to execute on its key strategic initiatives (i.e. bulk handling/export, ingredients), we are mindful that weaker-than-expected margins in Q4 add one more (unwelcome) layer of uncertainty during an already turbulent time (i.e. amidst the ongoing 'Fumigation Fandango," he said.

Elsewhere, CIBC World Markets analyst Jacob Bout lowered his target to $39 from $42 "to reflect the durum vomitoxin outbreak and lower pulse pricing." He kept an "outperformer" rating.

"AGT is not the same Canadian-centric company focused on pulse processing and distribution that it was 5+ years ago," he said. "AGT is well positioned to capitalize on Australia's huge lentil harvest as well as mitigate any slippage in Canada if the fumigation issue is not resolved. The Turkish Arbel location has access to developing markets that are large consumers and importers of pulses. Food Ingredients & Packaged Foods made up 8 per cent of EBITDA in 2013 versus [approximately] 30 per cent in 2016. The Bulk Distribution business is evolving with AGT's recent investments, and we expect it to be a significant contributor to earnings longer term (though H1/17 may see some weakness due to the Durum vomitoxin issue)."


Credit Suisse analyst Michael Nemeroff expects continued momentum from Adobe Systems Inc.'s (ADBE-Q) "highly profitable" Creative Cloud business to result in higher-than-anticipated operating cash flows over the next few years.

Accordingly, he upgraded the San Jose-based software company to "outperform" from "neutral."

Mr. Nemeroff is forecasting 2018 operating cash flow of $3.219-billion (U.S.), implying a compound annual growth rate from 2015 to 2018 of more than 30 per cent. He'd previously been expecting a CAGR of close to 25 per cent.

"We've been on the sidelines on ADBE primarily due to valuation (its shares trade at a 2017 enterprise value/sales multiple of 8.5 times, a 75-per-cent premium to the overall group average of 4.8 times) despite our positive assessment of ADBE's broad stack of digital media and digital marketing assets, large market opportunity, and a highly-skilled management team," he said. "However, as OCF/FCF [operating cash flow to free cash flow] become increasingly more important to valuation (see our 2017 Software Outlook), we believe investors will increasingly gravitate towards subscription software vendors that demonstrate growth AND prospects for strong cash flows."

"We recently attended the Adobe Summit digital marketing conference, during which mgmt highlighted a new go-to-market strategy with Adobe Experience Cloud (comprised of Adobe Marketing Cloud, Advertising Cloud, and Analytics Cloud), its competitive differentiation highlighting the large breadth of digital marketing solutions, and a further extension of its partnership with MSFT (not currently covered) that would offer joint solutions specifically designed to help enterprises transform their customer experiences by leveraging assets, technologies, and data from both companies with Adobe Sensei, an artificial intelligence solution."

Mr. Nemeroff raised his 2017 and 2018 revenue estimates to $7.161-billion and $8.518-billion, respectively, from $7.159-billion and $8.498-billion. His earnings per share projections moved to $3.92 and $4.90 from $3.91 and $4.82.

His target price for the stock rose to $150 from $125. Consensus is $140.09.

"To be sure, ADBE currently trades at a 2017 EV/OCF and EV/FCF multiple of 23.0 times and 25.0 times, a discount to similar growing SaaS [Software as a service] peers average of 29. timesx and 45.6 times, respectively," the analyst said. "As such, we increase our target price … which implies a 2018 EV/OCF and EV/FCF multiple of 22.5 times and 24.6 times."


BMO Nesbitt Burns analyst Alex Terenetiew upgraded Nevsun Resources Ltd. (NSU-T) to "outperform" from "market perform" based on an "attractive" relative valuation versus its peers.

On Thursday, Nevsun, a base metals mining company based in Vancouver, released a resource update that Mr. Terentiew said possessed "encouraging" data points.

"At the Harena underground (UG) deposit (39 per cent of Bisha's total contained zinc), estimated zinc recoveries have improved from 72 per cent to 85 per cent based on new metallurgical testing," he said. "While no update was provided on the Bisha open pit recoveries, we view Harena's number as encouraging, given that Nevsun is targeting to make a decision by year end on whether or not to pursue an UG mining option. If further studies confirm these UG recovery expectations, pursuing an UG development option in the future looks increasingly possible, potentially providing upside to our forecasts.

"Asheli is small in tonnage, but higher in both copper and Zn grade. At only 2.4 million tons of inferred resources, we are unsure if it's large enough to be developed, but its grades of 1.9 per cent Cu and 8.6 per cent Zn are higher than grades at both Bisha and Harena, so with drilling on-going, an increase in its size and some clarity on metallurgy could make it an attractive and economic deposit."

At the same time, Mr. Terentiew said he's modelling conservative long-term recoveries for both zinc and copper.

"Although Nevsun anticipates improving metal recoveries over the course of 2017, we have adjusted down our assumed long-term (2018 forward) Zn and Cu recoveries to 75 per cent for both metals, down from our previous forecasts of 82 per cent (Zn) and 81 per cent (Cu)," the analyst said. "In February, Nevsun noted that it expects recoveries to average 70 per cent for Zn and 60 per cent for Cu during periods when a bulk concentrate is being produced, and 75 per cent when a salable Cu concentrate is produced in the Cu circuit. While the 75-per-cent target for 2017 is below Nevsun's original (and yet to be updated) longer-term targets of 83.5 per cent for Zn and 85 per cent for Cu, we believe it's prudent to conservatively assume recoveries of 75 per cent are achieved long term, until higher levels can be proven. We anticipate new recovery expectations will be provided in May/June with the updated reserve estimate.

"If mining incorporates production from the underground longer term, our recovery forecasts may prove to be conservative. As we expect the Harena underground deposit to be the main source of underground ore (Asheli and Bisha could provide additional material), combined with Nevsun's expectation that recoveries at Harena have improved to 85 per cent from 72 per cent, our 75-per-cent recovery forecast would likely prove to be conservative. However, as a scoping study incorporating the underground into the Bisha mine plan has not yet been completed and hence associated capital and operating costs are not known, we do not model any underground production in our forecasts."

Accordingly, he lowered his cash flow forecasts for the company "to reflect more conservative estimates, enhancing our confidence in our operational expectations."

His target price for the stock fell to $4.25 from $4.50. Consensus is $3.97.


In other analyst actions:

Needham & Co analyst Laura Martin downgraded Apple Inc. (AAPL-Q) to "buy" from "strong buy," with a target of $165 (U.S.), up from $150. The analyst average is $149.90, according to Bloomberg.

Pengrowth Energy Corp. (PGF-T) was raised to "speculative buy" from "hold" at Canaccord Genuity by analyst Dennis Fong. His target fell to $2 from $2.25, versus the average of $1.89.

Under Armour Inc. (UAA-N) was raised to "buy" from "hold" at Jefferies by analyst Randal Konik. He raised his target to $27 from $19. The average is $20.57.


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David Leeder is a content editor in the Report on Business. He was previously Deputy Sports Editor and Weekend Digital Editor at The Globe.  He holds an undergraduate degree from McMaster University and a graduate degree from Ryerson University. More


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