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Monday’s analyst upgrades and downgrades

A Blackberry Q10 smartphone is seen in front of a displayed stock graph in this photo illustration taken in Zenica, Bosnia and Herzegovina, in this May 22, 2015, file photo.

DADO RUVIC/REUTERS

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

BlackBerry Ltd.'s (BBRY-Q, BB-T) turnaround is complete, according to RBC Dominion Securities analyst Paul Treiber.

Believing its focus now shifts to the growth of its software business, Mr. Treiber removed the "speculative risk" qualifier from his "sector performer" rating for the Waterloo, Ont.-based tech company following better-than-anticipated fourth-quarter 2017 financial results.

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"The risks with BlackBerry's turnaround appear to have diminished," he said. "The company is no longer dependent on SAF-related cashflow, and the liability from hardware has been largely eliminated."

On Friday, BlackBerry reported quarterly non-GAAP revenue of $297-million (U.S.), a drop of 1 per cent from the previous quarter and a 39-per-cent decline year over year. However, the result topped the Street's projection of $289-million and Mr. Treiber's estimate of $276-million. He attributed the beat to higher-than-anticipated revenue from its Mobility Solutions segment.

Adjusted earnings before interest, taxes, depreciation and amortization of $42-million was also higher than the Street's expectation ($30-million). Adjusted earnings per share of 4 cents topped the projection of both Mr. Treiber and the Street of nil.

"Q4 segmented Software & Services revenue rose 1 per cent quarter over quarter to $166-million non-GAAP, below our $180-million estimate and the Street at $184-million," said Mr. Treiber. "Segmented software revenue is up only 7 per cent year over year. BlackBerry disclosed $193-million 'company total' software and services revenue, which includes $27-million professional services recognized in Mobility Solutions. While professional services is potentially a leading indicator of future software growth, we put more emphasis on Q4 segmented Software & Services revenue because it provides insight on momentum in BlackBerry's recurring enterprise software, automotive/QNX, and Radar/IoT revenue."

"Opex declined 8 per cent quarter over quarter to $183-million Q4, below our estimate of $190-million. The decrease reflects the shift of 400 handset-related employees in Mobility Solutions to Ford (we estimate $10-million per quarter opex savings). The move reduces the exit liability from hardware. Additionally, BlackBerry is no longer dependent on SAF revenue as a lifeline; SAF revenue declined 27 per cent quarter quarter to $49-million (down 66 per cent year over year), which was in line with our estimate of $50-million. Our outlook calls for SAF to decline to just 11 per cent of total revenue FY18."

At the same time, BlackBerry's view for 2018 meets the Street's expectations, said Mr. Treiber.

"BlackBerry sees software revenue up 13–15 per cent for fiscal 2018 and is comfortable with Street estimates for FY18 revenue and adjusted EPS," the analyst said. "Incremental growth drivers include sustained professional services, initial handset licensing, and some contribution from Radar/IoT."

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"Emerging software opportunities difficult to value. Automotive appears a large potential opportunity (4–5 times current business) as BlackBerry moves from infotainment to telematics, ADAS [advanced driver assistance systems], and connected vehicle portals. The Ford agreement is a tangible sign that BlackBerry is becoming more strategic with automakers. CEO John Chen believes agreements are 'likely' with other automakers. However, QNX is still relatively small (estimated $100-million revenue FY17) and Radar has nominal revenue currently; pending better visibility, we believe it is too difficult for investors to accurately value these opportunities."

In reaction to the results and guidance, Mr. Treiber adjusted his 2018 revenue and EPS projections to $978-million and 2 cents, respectively, from $965-million and 3 cents. For 2019, his estimates moved to $968-million and 10 cents from $1.029-billion and 7 cents.

His target price for the stock rose to $8 from $7.50. The analyst consensus price target is $8, according to Thomson Reuters.

Elsewhere, Canaccord Genuity analyst T. Michael Walkley also raised his target price to $8 (from $7) with a "hold" rating.

"BlackBerry reported better than expected Q4/ F'17 revenue of $297-million versus our $271-million estimate due to a better than expected combination of professional services revenue and slightly higher than expected device sales," said Mr. Walkley. "Professional services revenue relates to the implementation of software subscription/licenses revenue and was $27-million in Q4/F'17. We expect a greater level of sustained professional services revenue with the business model transition towards recurring revenue software subscriptions. Following BlackBerry's three licensing agreements for mobile devices, we expect an initial licensing ramp from the Indonesia JV with potential for volumes to ramp towards the end of FY18 primarily from Southeast Asia. For FY18, management expects software and services revenue growth of 10-15 per cent with a target towards the higher end of the range or 13-15 per cent. This growth is off the base of $687-million from FY17 or the combination of software subscription/license revenue and professional services related to the implementation of these products. Following the restructuring, we expect ongoing costs related to software development for mobility solutions, and we continue to expect device sales to end in Q3/FY18."

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Canaccord Genuity analyst Dalton Baretto was disappointed with the updated feasibility study for HudBay Minerals Inc.'s (HBM-T, HBM-N) Rosemont asset in Arizona.

Released on March 30, Mr. Baretto said the Rosemont update shows the impact of "strained economics," featuring a shorter mine line with higher development costs and all-in sustaining costs.

"The plan has been optimized to pull forward higher grades (and thereby recoveries) earlier in the mine life," the analyst said. "As such, average annual copper production over the first 10 years is expected to be 127,00 tons, with average AISC of $1.59 per pound. HBM projects overall capex at $1.92-billion, versus our previous estimate of $1.65-billion. The higher project cost has been attributes to various elements, including design features to appease the regulators (e.g. all infrastructure must be covered, with no line of sight to the other side of the ridge), as well as higher pre-stripping requirements and higher labour costs. We also believe that the capex estimate contains a significant element of conservatism."

Based on the study, Mr. Baretto's new valuation for HudBay's attributable share of Rosemont is $478-million, or $2.69 per share, which represents a 48-per-cent decline from his previous estimate of $928-million ($5.99 per share).

"Our $476-million valuation compares to the $500-million HBM paid to acquire the Rosemont project," he said. "We note that our valuation for Rosemont would be $712-million if discounted to the start of construction (instead of today), in line with HBM's valuation of $719-million. Based on the revised study and discussions with the regulators HBM believes it is likely that they will have the federal permits in hand sometime this year. However, the company does not intend to begin significant construction activity without a clear line of sight to $3.00 per pound copper. We forecast construction to begin in 2020, with production beginning in 2023. HBM expects to fund Rosemont through the existing SLW stream, JV contributions, equipment financing, and operating cash flow. Our revised estimates support this assertion."

However, Mr. Baretto said he's "intrigued by the possibilities" of both its Lalor mine and New Britannia mill in Manitoba.

"The Lalor study as currently published only reflects Phase 1 of a two-phase optimization process," he said. "As such, we do not believe it is representative of what the ultimate production profile of the complex looks like, and so despite the decisions that still need to be made around Phase 2, we have updated our estimates to reflect what we believe the ultimate production profile could look like based on the information available to date. We assume New Britannia and associated infrastructure will be operational by early 2019, and designed a mine plan around this which has had a positive impact on our overall Manitoba valuation. We now value the Manitoba business $1.16-billion ($6.52 per share), a 27-per-cent increase from our previous valuation of $913-million ($5.14 per share)."

Based on the results of the update, Mr. Baretto's 2017 and 2018 EBITDA projections fell to $516.8-million and $569.6-million, respectively, from $521.5-million and $609.7-million.

He kept a "buy" rating for the stock and lowered his target price by a loonie to $11. Consensus is $8.90.

"While the Rosemont feasibility update was disappointing, we are encouraged by the possibilities offered by New Britannia and the implied cash flows over the near to medium term," he said. "We continue to like HBM for its leverage to copper and zinc prices as well as its relatively inexpensive near-term valuation. We reiterate our buy rating, but … are reducing our target price to $11 per share. We note that our revised target still offers 26-per-cent upside to the current share price."

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Atco Ltd. (ACO.X-T) stock has "significantly" outperformed its peers this year, leading BMO Nesbitt Burns analyst Ben Pham to downgrade it to "underperform" from "market perform."

"ATCO shares have performed well this year with strong Q4/16 results and a 15-per-cent dividend increase in January," said Mr. Pham. "Prospective growth opportunities have also gained momentum and improved sentiment towards Alberta-exposed companies have helped boosted the shares. As a result, the stock is up [approximately] 16 per cent year to date 2017, a material outperformance relative to peers, the S&P/TSX Utilities Index return of 6 per cent, and the broader Canadian market return of 2 per cent."

Mr. Pham expects the near-term earnings growth for Atco, a Calgary-based infrastructure solutions company, to moderate. He did indicate, however, that growth opportunities will likely be available in the longer term.

"Super-normal growth in Alberta-regulated utility has driven strong earnings and cash flow growth over the past few years," the analyst said. "Whether the same set of assets can sustain that performance or not may determine the magnitude of earnings growth over the next few years. Though growth is still available and the company has limited direct commodity price exposure (mainly via Alberta power), with earnings largely generated in Alberta, ATCO cannot escape the indirect impacts of the recent commodity downturn. This dynamic could set ATCO on a more modest growth pace relative to the past, in our opinion. More specifically, gas pipeline infrastructure spending in Alberta remains robust on growing consumption of gas and need for modernization, but electric transmission has slowed down dramatically; ATCO was investing $1.3-billion in wires transmission per annum from 2012-2014 leading to abnormal 32-per-cent rate base growth, but capital spending requirements are now $400-million per annum. ATCO Structures and the Alberta merchant power assets are performing below their earnings capability, but that dynamic could persist at least through late decade given the slowdown in energy-related project activity. A decline in realized ROEs will also compound these issues in the near term. ATCO historically has earned 11-14-per-cent regulated equity returns on success in cost savings and efficiencies, well above the mid-8-per-cent allowed level. Given management's strong track record, we believe outperformance should continue but we anticipate a downward trajectory on returns through late decade especially upon re-basing of Alberta distribution assets into the second generation of performance-based regulation. Given ATCO's high regulated exposure (81 per cent of earnings) and $12-billion in rate base in Alberta, even a modest change in Alberta-regulated returns could materially impact ATCO earnings: every 50 bps in ROE [return on equity] is about 12 cents EPS (or 4 per cent)."

"Luckily, ATCO has a significant inventory of prospective growth opportunities that could emerge over the longer term. We previously highlighted ATCO's proposed cogeneration plant associated with a proposed polypropylene facility In the Industrial Heartland that could represent a $500-million-plus capital investment. Further, Alberta's goals to significantly add renewables to the power system by 2030 is directionally positive for large-scale hydro projects like ATCO's 1,800MW Slave River facility and for conversions of coal power facilities to natural gas such as the Battle River 5 plant. We are also still optimistic on the need for the Mexico Tula Cogeneration project on increased gas consumption needs, though we believe ATCO will be more careful in the country given recent significant cost overruns with the Tula pipeline. All of these opportunities are possibilities but are merely speculative at this point or are too early in the development stage to reflect in the current valuation and shares."

Mr. Pham's target for the stock remains $46. The analyst average price target is $48.60, according to Bloomberg.

"Following the latest run-up in share price, the stock now trades at a 15.5-times P/E [price-to-earnings] multiple and a discount to NAV [net asset value] of  7 per cent," he said. "This is a significant improvement from beginning of 2016 levels of 11.7x forward P/E and a discount to NAV of 22 per cent. It is not unusual to see companies trade at higher valuations relative to historical norms due to change in business mix and/or improved growth prospects. For example, Boralex has experienced a structural improvement in market valuation multiple on higher contracted exposure (98 per cent from 50 per cent), improved trading liquidity, and enhanced growth prospects. Similarly, TransCanada experienced a boost in sentiment following last year's blockbuster Columbia Pipeline acquisition that accelerated dividend growth while reducing direct commodity price exposure. Going back to ATCO, we believe the business mix has improved (i.e., higher regulated exposure), warranting improved relative valuation, but we think this is partially offset by lower growth expectations relative to peers. Given the relative forward P/E and low discount to NAV, we believe the stock is fully valued at current levels or at least have limited relative upside potential from here."

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Industrial Alliance analyst Elias Foscolos downgraded Badger Daylighting Ltd. (BAD-T) in the wake of recent "strong" price movement.

Lowering the stock to "hold" from "buy," Mr. Foscolos said: "We believe that the 9-per-cent increase in Badger's share price since we upgraded our rating to Buy [on March 21] post release of the Q4/16 results represents full capitalization given the current macro outlook. In our view, the next catalytic event for Badger will be the release of its Q1/17 results in mid-May, at which time we believe a modest dividend increase will also be announced."

He added: "Badger's stock generally moves post the release of quarterly results, with the next release expected in mid-May. At that time, we also believe a dividend increase of 10 per cent is likely to be announced. A dividend increase of 10 per cent will likely not broaden its investor base as the stock is yielding 1.1 per cent."

His target price remains $35.  The average target is $35.60.

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Air Canada (AC-T) should be bought ahead of its investor day in September, said Canaccord Genuity analyst Doug Taylor.

"Our buy rating on AC is grounded in the view that as more attention is focused on the company shifting from the expansion phase to the harvest phase of its cycle, the valuation has room for further expansion," he said. "In the coming years we expect free cash flow growth, deleveraging and ongoing improvement in the general sentiment for the airline industry as it demonstrates rational, shareholder friendly behaviour. We believe these items will be an emphasis at the investor day in September which could be a catalyst for the stock."

Mr. Taylor said it looks like "business as usual" for Air Canada outside the Pacific market after hosting Kathleen Murphy, the company's executive vice-president and chief financial officer, for a series of recent investor meetings in Western Canada.

"U.S. network peers have generally trimmed unit revenue expectations in recent months and declines in the oil price would suggest the return to positive year-over-year comps could get pushed out further," he said. "Air Canada has said it sees most of the geographies as performing to, or slightly better than, expectations. The exception is the pacific market which has been thrown into overcapacity as new entrant Hong Kong Airlines and other Chinese players ramp capacity (alongside Air Canada)."

Based on his findings, Mr. Taylor raised his 2017 capacity growth forecast to 12.4 per cent from 12.2 per cent year over year, while his adjusted cost per available seat mile (CASM) estimate is now 4.4 per cent (up 0.1 per cent). Meanwhile, his revenue per available seat mile (RASM) projection is a year-over-year decline of 6.7 per cent (versus a 6.3-per-cent drop).

"We believe Air Canada will continue to lag its U.S. peers and WestJet on the unit revenue performance in large part because of its unique growth strategy and fleet evolution," he said. "Given the recent updates from its peers, we have lowered our expectations to be more conservative."

His 2017 and 2018 earnings per share projections fell to $2.55 and $3.23, respectively, from $2.62 and $3.32.

He kept a "buy" rating and $16 target. Consensus is $16.27.

"We have trimmed our estimates for the quarter modestly on the back of a softer-than-anticipated unit revenue environment reported by U.S. peers, offsetting lower fuel prices," said Mr. Taylor. "We continue to believe Air Canada's valuation has room for significant upside as the company shifts from a growth focus to a more balanced capital allocation in the coming years. We believe this shift will return to focus as we work through typically frontend loaded aircraft investments and approach the company's investor day in September."

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Citing an "improved" valuation, CIBC World Markets analyst Yashwant Sankpal lowered his rating for Extendicare Inc. (EXE-T) to "neutral" from "outperformer."

"We continue to believe EXE has strong organic growth potential, including an exceptional pipeline of development opportunities among the best of its Canadian peers (LTC redevelopment projects, expansion in the private and public home care sectors, RH acquisitions, etc.) and the liquidity needed to execute on this pipeline," said Mr. Sankpal. "However, the total return to our unchanged price target implies a return to target in line with the average of our senior housing coverage and the average total return of our coverage universe."

Mr. Sankpal's target price for the stock remains $11. Consensus is $10.13.

"EXE has had a phenomenal run over the last nine months, with the stock price increasing more than 35 per cent, and is now trading close to our $11.00 price target," he said. "During this period, EXE's P/NAV [price to net asset value] has improved from 85 per cent to the current 90 per cent."

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Calling its Horne 5 project "an overlooked" gold development, BMO Nesbitt Burns analyst Andrew Mikitchook initiated coverage of Falco Resources Ltd. (FPC-X) with an "outperform" rating.

"Falco Resources' 100-per-cent-owned Horne 5 deposit, located in Quebec, is one of the few 200,000 ounce-plus per year gold development assets in North America, and is fast tracking toward a construction decision and targeting potential commercial production in 2021," he said. "The Horne 5 PEA (2016) showed average gold production of 236,000 ounces (Peak of 274,000 ounces per year) at a low US$427/oz by-product AISC due to significant by-products with a capex of $905-million. The company is preparing to deliver a feasibility study in Q2 to define reserves and initiate the permitting process as well as pre construction activities. With the appointment of Osisko-related management in 2014 and 2015, Falco gained a team with a track record of engineering, permitting, financing, and construction with recent success at the Malartic mine 67 kilometres to the east of the Horne 5 project. In our opinion, navigating community relations in Quebec to gain social license and support for development is among the team's key strengths. While the Horne 5 project is within Rouyn-Noranda city limits, its location within an industrial part of the town and smaller footprint should be a simpler challenge than the partial town relocation managed for Canadian Malartic."

Called its current valuation "compelling" while waiting for "derisking," Mr. Mikitchook set a price target of $1.90. The average is $1.83.

"We have chosen a 0.6 times P/NAV [price-to-net asset value] target-setting multiple to reflect development risks, primarily in terms of scale and financing the Horne 5 project," he said. "This multiple would be toward the lower end used in the BMO coverage universe for advanced projects at or approaching a feasibility stage. We would look to increase our target-setting multiple as Falco delivers a feasibility study in Q2 and secures financing to carry out dewatering and headframe construction, which are expected to start in Q4/17."

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In other analyst actions:

TD Securities analyst Mario Mendonca downgraded Royal Bank of Canada (RY-T, RY-N) to "hold" from "buy" with a target price of $105. The analyst average is $100.95, according to Bloomberg.

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About the Author
Globe Investor Content Editor

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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