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Tuesday's analyst upgrades and downgrades

While some investors caution marijuana is a highly speculative market, others are confident there’s a lot of money yet to be made.

Blair Gable/Reuters

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

Canopy Growth Corp. (WEED-T) has both speed and size working to its advantage as it strives to become a dominant cannabis supplier in both value and premium product markets, according to Echelon Wealth analyst Russell Stanley.

Calling it an "attractive" investment at its current levels, Mr. Stanley initiated coverage of the stock with a "speculative buy" rating.

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The analyst emphasized Canopy's "tradition of market leadership" in justifying his rating, noting: "Canopy was the first licensed producer (LP) of cannabis to be publicly traded, the first to obtain a TSX listing, and the first to complete an acquisition on the scale of its recent purchase of Mettrum Health ($363-million in stock and options). The joint company's currently licensed capacity of 18,100 kilograms (representing annual revenue potential of $145-million at $8 per gram, ex-Bennett Road North), combined with significant expansions underway, positions the Company well to entrench its leadership position in the cannabis market while it is still in its 'early innings' of development. Canopy has a branding agreement with recording artist Snoop Dogg on an exclusive basis in Canada, which should support significant sales growth once the recreational market is legalized. WEED has also established an incubator to develop clinically ready whole-plant cannabis drug formulations and dose delivery systems. Finally, Canopy is an early mover in establishing beachheads internationally. It was the first Canadian LP to export to Germany, and it also has early-stage ventures in Brazil and Australia."

Mr. Stanley also believes the company's portfolio and scale supports its growth strategy, with its Mettrum Health acquisition provided additional production capacity and "filled the 'space between' Canopy's existing brands with Mettrum's natural health-and-wellness focus."

"Canopy's growth strategy includes continued market share expansion in Canada, moving up the value-chain by adding higher value cannabis-based products, and expanding internationally," he said. "On a pro forma basis, we estimate that Canopy has net cash of $105.9-million, which should facilitate further organic capacity expansion and acquisition activity." He suggested, in line with Colorado's experience, the cannabis sales market could reach $11-billion relatively quickly.

"Canada's medical market has grown faster than many anticipated, and the forthcoming recreational market could quickly surpass the medical market in size," he said. "Based on data from Colorado's Department of Revenue, total cannabis sales topped $1.3-billion in 2016, up 32 per cent year over year, with recreational revenue now 2 times that of medical market sales. Should Canada follow a similar growth path, our cannabis market could top $11-billion in sales in year 3 of a legalized recreational market. We also believe the opportunity for development of cannabinoid-based pharmaceuticals is significant, with $30-billion spent annually on drugs in Canada."

Mr. Stanley set revenue projections for 2017 through 2021 of $40.4-million, $130.4-million, $278.7-million, $464-million and $556.6-million. His earnings before interest, taxes, depreciation and amortization estimates were losses of $14.2-million in 2017 and $6-million in 2018, followed by profits of $32-million, $90.5-million and $144.7-million, respectively.

"For a company with this market capitalization, we believe WEED is underfollowed," he said. "Moreover, the range of revenue and EBITDA estimates published by our peers is considerable. As of writing, current revenue estimates for F2019 range from $209-546-million (median $274-million), with EBITDA estimates ranging from $3-97-million (the median is reported as $28-million, although that is based on one estimate with two other estimates excluded as outliers – including all estimates, it would be closer to $43-million). Looking further out, EBITDA estimates for F2020 range from $42-67-million (median $54-million), while for F2021 the estimates range from $104-138M. We note that for both F2020 and F2021, the number of estimates published is limited (two analysts in both cases). We believe this wide range of estimates reflects differing opinions as to Canopy's pace of capacity expansion, as well as the timing of the legalization of the recreational market."

He set a price target of $14 for the stock. The analyst consensus is $10.78, according to Thomson Reuters.

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"We view WEED as the market leader in several ways, and our Speculative Buy rating reflects the significant growth assumptions behind our estimates, rather than its competitive positioning," the analyst said.

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Though growth is "still on the horizon" for Painted Pony Petroleum Ltd. (PPY-T), investors should be prepared for a slower pace of development, said Raymond James analyst Jeremy McCrea.

"Last week, Six Flags unveiled the first rollercoasters with virtual reality headsets with much fanfare for enthusiasts," said Mr. McCrea. "These rides produce a range of emotions from fear, anticipation and agony waiting in line and ultimately the calm and excitement that comes at the end. Unfortunately, the roller coaster ride Painted Pony investors are on is likely not nearly as fun given the volatility in gas prices while leverage levels increase, despite some of the highest growth in the sector for a second year in a row.

"The largest pushback we hear on PPY is the company's increasing leverage levels with the take-or-pay agreements increasing again later this year on Oct. 01 (at 270 million cubic feet per day; 45,000 barrels of oil equivalent per day). As such, we believe one of the most important items discussed in the 4Q press release was management's focus on the balance sheet first, with growth second. We have reduced our capex assumption for 2017, down 20 per cent to $250-million, putting debt-to-cash flow at 1.7 times. With 65 per cent of the company's production hedged at $2.65 per thousand cubic feet [mcf] (and only 13 per cent of production tied to Station 2 pricing), investors should have comfort they won't lose their lunch on this roller coaster ride and ultimately enjoy the ride after all the ups, downs and corkscrews afflicting Canadian gas names today."

On Monday, the Calgary-based company released is reserve report, announcing proved developed producing (PDP) expenses fell to $4.15 per barrel of oil equivalent and 70 cents per thousand cubic feet from $7.75 and $1.29, respectively, a year ago. Mr. McCrea said the drop-in costs "reflects PPY's rapid pace of development to fill the Townsend facility."

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"PPY reported a PDP net asset value per share of $4.16 per share, an increase of 60 per cent year-over-year and a three year growth rate of 25 per cent," he said. "The PDP NAV/sh improvement reflects PPY's rapid growth rate in 2016 which saw it drill a significant number of wells, with total capital spending increasing from $107-million in 2015 to $204-million last year."

"With a cash netback of $6.54/boe (which includes lease expenses in the second half of year), PPY posted a recycle ratio of 1.6 times. Looking forward, we estimate a cash netback in 2017 of $9.75/boe (which includes a full year of lease expenses), which would be sufficient to keep PPY's PDP recycle ratio on the right side of 1.0 times."

With the report, Painted Pony also announced fourth-quarter results that largely met expectations. Cash flow per share of 26 cents topped the consensus projection by a penny, while production of 36,700 boe/d was narrowly ahead of the Street's estimate of 36,550 boe/d.

To reflect a slower pace of development, Mr. McCrea lowered his target price for the stock to $12.50 from $14 with an "outperform" rating. Consensus is $9.30.

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Ahead of the release of its fourth-quarter financial results on Thursday, Canaccord Genuity analyst Derek Dley lowered his target price for Parkland Fuel Corp. (PKI-T)

Mr. Dley is projecting earnings before interest, taxes, depreciation and amortization (EBITDA) of $39-million for the Red Deer, Alta.-based company's Retail division, a significant jump from the $29-million result for the same period a year ago.

"We believe Pioneer continued to deliver double digit convenience store sales growth, along with strong volume growth during the quarter," the analyst said. "While we do expect overall volumes sold in Western Canada to be soft, given the economic weakness in Alberta, we believe Eastern Canada should offset this, and are forecasting 2.0 per cent same-site volume growth at Retail."

At the same time, Mr. Dley is estimating EBITDA of $25-million for its Wholesale division, a drop of $7-million year over year.

"We believe the positive momentum recently demonstrated from Parkland's fuel trading business is likely to continue into 2017, as the company has added incremental distribution capacity in Quebec through the acquisition of Propane Nord-Ouest," he said. "However, we expect near-term momentum to be offset by lower diesel margins from reduced economic activity in Western Canada in Q4/16. Furthermore, once Parkland closes the acquisition of CST assets from Couche-Tard, this incremental scale in Eastern Canada should also open up further fuel arbitrage opportunities, in our view."

On the heels of its recent acquisitions, particularly its $965-million deal for a majority of Texas-based CST Brands Inc.'s Canadian business, Mr. Dley said he expects the company to slow its pace of consolidation in the near term, noting CST Brands' net debt-to-EBITDA multiple is 3.5 times "at the high end" of Parkland's 2.0-3.5 times range.

"Furthermore, Parkland has a strong history of acquisition integration, and synergy generation (having improved profitability by 20 per cent at its recent acquisitions), therefore recent, and future, acquisition activity should reward shareholders, in our view," he said. "We believe the CST acquisition remains on track to close by the end of Q2."

He kept his "buy" rating for the stock and dropped his target to $32 from $33. Consensus is $24.42.

"Our target represents 12.6 times our revised 2017 EBITDA estimate of $365-million, which we note does not include incremental acquisitions, given the uncertainty of timing and scale," said Mr. Dley. "We are comfortable assigning Parkland a premium valuation given its strong growth profile, robust acquisition pipeline, healthy balance sheet and stable 4-per-cent yield."

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Though he cited its "attractive" valuation and the potential for near-term re-rating relative to its peers, RBC Dominion Securities analyst Dan Rollins lowered his target price for Yamana Gold Inc. (AUY-N, YRI-T) in reaction to its fourth-quarter and full year 2016 results.

On Feb. 16, Yamana, based in Toronto, announced reserves at its assets in production/construction declined 9 per cent to 12.6 million ounces at 0.50 grams per ton (g/t) from 13.8 million ounces at 0.56 g/t. Mr. Rollins said the primary causes of the drop were depletion (1.3 million ounces) and its mine plan revisions for its El Penon mine in northern Chile.

"The revised mine plan at El Penon reflects both the impact of narrower vein systems and the company's desire for a more sustainable operation, one which requires less investment in underground development and provides greater time for exploration success to take hold," said Mr. Rollins. "Although the reduced throughput will lead to lower production, Yamana expects to significantly reduce the amount of sustaining capital required given narrower vein systems are located close to existing infrastructure.

"Based on throughput of 1.0-1.1 million tons per annum (1.4 Mtpa previously) and a 28-per-cent decline in reserve base, we expect annual gold and silver production to average 145,000 ounces and 4.5 million ounces over a period of 10 years at sustaining costs of $850 per ounce and $11.50 per ounce. We had previously forecast 215,000 ounces at $950 per ounce and 6.5 million ounces at $11.75 per ounce over 9 years. As a result, our estimated value for El Penon has declined 19 per cent to 58 cents per share from 73 per share."

He added: "After incorporating lower guided production and higher guided costs in 2017, revised outlook at El Penon and year-end tweaks to our model, we now expect annual gold production to average 1.268 million ounces at a coproduct all-in sustaining cash cost of $890 per ounce through 2019 (excluding any contribution from Brio) versus 1.346 million ounces at $875 per ounce previously. As a result of changes to our model, our NAV [net asset value] estimate has fallen 10 per cent."

With an "outperform" rating, Mr. Rollins lowered his target price for the stock to $3.75 (U.S.) from $4.50 to reflect "downward revisions to our near-term sustaining free cash flow forecasts and lower NAV estimate." Consensus is $4.56.

"While we acknowledge the markets' frustration with Yamana following disappointing operational guidance and year-end reserves, we expect Yamana's shares to gradually re-rate as confidence in free cash flow improves with the start-up of Cerro Moro next year and exploration success is parlayed into reserve/resource growth," he said.

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Dream Global Real Estate Investment Trust's (DRG.UN-T) funds from operations growth should impress in 2017, said Desjardins Securities analyst Michael Markidis.

On Feb. 22, the Toronto-based REIT reported fourth-quarter results that largely met analyst expectations.

"A contribution from substantial refinancing activity completed in 3Q was a tailwind," said Mr. Markidis. "Leasing success over the past year boosted year-end committed occupancy to 90.0 per cent, a 250 basis points year-over-year improvement."

"Non-core asset sales are a key part of the strategy. 4Q dispositions included $57-million of non-core assets, bringing the full-year figure to $103-million. Proceeds were reinvested into higher-quality office properties, including $151-million of 4Q acquisitions ($215-million full year). Management is targeting a further $70–75-million of asset sales in 2017."

Mr. Markidis emphasized the fact that Deutsche Post AG is Dream's largest tenant, accounting for 18.9 per cent of gross rental income at the end of 2016. DP's interest includes leases on 83 properties, representing 13 per cent of GRI, that are set to expire on June 30, 2018.

The analyst pointed to successful renewals of those leases as a potential catalyst for the stock.

"Its footprint has gone through several rounds of pruning over the past several years on the back of the exercise of 2012/14/16 termination options on certain properties," he said. "With respect to the 2018s, discussions with the tenant have commenced, and management seems confident that DP will renew a significant proportion of the expiring space. Additional colour could accompany DRG's 1Q results in May."

Mr. Markidis raised his target to $10 from $9.50, maintaining his "hold" rating. Consensus is $7.54.

"DRG has built an impressive portfolio of high-quality office properties in major cities in Germany and Austria. Beyond simply managing the business, management has recently implemented several initiatives (Frankfurt listing, investment-grade credit rating) to enhance its public market valuation and access to capital," the analyst said. "At 11.3 times 2017 FFO, valuation screens attractively vs peers. In light of the REIT's elevated leverage and payout, we believe its units are appropriately valued at current levels."

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In other analyst actions:

First Solar Inc. (FSLR-Q) was rated new "sell" at Axiom Capital by analyst Gordon Johnson with a target of $21 (U.S.). The analyst average target price is $34.67, according to Bloomberg.

TripAdvisor Inc. (TRIP-Q) was downgraded to "underperform" from "hold" at Needham & Co. by analyst Laura Martin. She did not specify a target price. The average target is $47.67 (U.S.).

United States Steel Corp. (X-N) was raised to "outperform" from "market perform" at Cowen by analyst Novid Rassouli with a target of $60 (U.S.), up from $36. The average is $38.79.

Editor's note: An earlier version of this story incorrectly stated the EBITDA result for Parkland Fuel's Retail division in 2015. It has been updated

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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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