Tuesday's analyst upgrades and downgrades

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

Echelon Wealth analyst Russell Stanley trimmed his estimates for Canopy Growth Corp. (WEED-T) following mixed second-quarter financial results and what he expects to be a slower pace of growth.

On Monday, the Smiths Falls, Ont.-based company reported total revenue for the quarter of $15.9-million, below Mr. Stanley's projection of $16.6-million. That miss was due largely to lower-than-anticipated cannabis sales ($14.6-million versus his $16.1-million estimate).

"While OPEX was higher than expected – in both dollar terms and as margin of revenue – gross profit (adjusted for fair value gains) was stronger than we had predicted," he said. "The result was an adjusted EBITDA loss of approximately $5.1-million, which is narrower than the $5.8-million we had forecast. On a net basis, we view the results of the quarter as neutral. Revenue was negatively impacted by the need to 'reboot' the Mettrum grow operations, as well as the consolidation of the Company's online ordering systems into a singular platform. We still expect sequential improvement in Q218, but have trimmed our revenue and adjusted EBITDA expectations to better reflect the likely pace of improvement."

He added: "During [Monday] morning's conference call, the Company indicated it has broken the 60,000+ registered patient threshold. Moreover, the facility in Saskatchewan has begun cultivating, and the facility in Quebec is now awaiting its pre-cultivation license inspection from Health Canada. Finally, management noted that its new gel capsule products are selling very well, and we expect that to support price and margin improvement in coming quarters."

After changes to his financial estimates, Mr. Stanley is now projecting fiscal 2018 revenue of $116-million and an adjusted EBITDA loss of $9.5-million. Both falling from his previous forecast of $128-million and a loss of $4.8-million, respectively.

With a "speculative buy" rating for the stock, Mr. Stanley  lowered his target price to $10.50 from $14, though he said: "We continue to believe WEED warrants a premium multiple to its peers given its market leadership in a number of respect." The analyst consensus price target is $12.43, according to Thomson Reuters data.

"We continue to value WEED using an enterprise value/EBITDA approach based on our EBITDA estimates for calendar 2020," the analyst said. "Our C2020 EBITDA estimate is calculated as 75 per cent of our F2020 estimate, add 25 per cent of our F2021 estimate. This produced a weighted EBITDA estimate of $122-million. Since we originally launched coverage of WEED, the adjusted group average EV/EBITDA multiple for 2019 (based on consensus expectations) has fallen by approximately 5.5 times. While our valuation for WEED is based on C2020 instead of C2019, we feel it prudent to adjust our valuation multiple accordingly. We are therefore reducing our valuation multiple for WEED from 18 times to 15 times, to reflect broader multiple compression we have seen in the space. On that basis, we are reducing our 12-month target price."

Elsewhere, Canaccord Genuity analyst Neil Maruoka maintained a "buy" rating and $9.50 target for Canopy Growth stock.

Mr. Maruoka said: "Importantly, Canopy provided increased clarity on its quarterly cash costs, suggesting that production costs were trending lower and competitive with peers in FQ1, likely driven by a higher proportion of cultivation from its Tweed Farms greenhouse facility. Although we believe Canopy may well emerge as the leader of the Canadian cannabis industry, the company currently trades at 12.0 times its funded capacity, at the high end of peers averaging 6.9 times. Although its dominant market position may justify a premium, we believe our target price of $9.50 continues to support current trading levels and we are therefore maintaining our HOLD recommendation."

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Canaccord Genuity analyst Dennis Fong raised his target price for shares of Husky Energy Inc. (HSE-T) in reaction to its $435-million (U.S.) acquisition of a refinery in Wisconsin.

On Monday, the Calgary-based company announced it has entered into definitive agreements for the Superior Refinery, a 50,000-barrel-a-day-capacity facility located in Superior, Wis., from Calumet Specialty Products Partners. The deal is expected to close in the fourth quarter.

"Husky intends to become a balanced integrated producer and capture the full value from its heavy oil production," said Mr. Fong. "The Superior Refinery increases existing Husky storage assets in Superior, enhances market access with total U.S. refining capacity increasing to 275,000 barrels per day and offers direct connectivity to the company's Hardisty, Alberta terminal via the Enbridge Mainline, allowing for further heavy/light oil differential margin capture. The acquisition adds immediate asphalt production, accelerating the company's asphalt strategy to capitalize on growing demand associated with increasing infrastructure spending across North America and will provide additional capacity once flexibility projects are completed in 2018 which is expected to improve profitability in 2019 and beyond. Husky will defer the Lloydminster asphalt capacity expansion decision to post-2020 depending on heavy oil production growth."

With the deal, Mr. Fong raised his cash flow per share projection for 2017 to $2.71 (from $2.69) with his 2018 estimate moving to $2.73 (from $2.43).

"We have made changes to our estimates to incorporate the effects of the recent quarter, timing of first production at the BD field and the Superior acquisition; the culmination of these changes drove an increase of 12 per cent in 2018 CFPS to $2.73 (from $2.43)," he said. "Pro forma the acquisition we estimate 2017 net debt-to-cash flow of 1.4 times debt to cash flow. The acquisition is expected to add further downstream integration and immediate free cash flow. We now estimate a 2018 payout ratio of 101 per cent, which suggests a dividend could be reinstated around year-end if crude prices show some resilience."

Mr. Fong kept a "hold" rating for Husky's stock, raising his target price to $15.50 from $14.50. The analyst consensus target is $16.61.

Meanwhile, though he called the refinery "a very good fit," TD Securities analyst Menno Hulshof maintained a "hold" rating for Husky stock with a $17 target.

"HSE paid [approximately] 4.0 times EBITDA based on its 2017 EBITDA forecast of $110-million U.S., falling to 3.4 times based on its 2018 forecast of $130-million (reflects Lloydminster feedstock synergies)," he said. "Either way, the metrics compare favorably to our 2017 EV/EBITDA estimate of 8.5 times for U.S. pure-play refiners (notwithstanding a lower-than-average complexity of 8.9 versus the group at 12.0)."

Macquarie analyst Brian Bagnell said the acquisition was "consistent with strategy" and raised his target for the stock to $15 from $14.50 with a "neutral" rating (unchanged).

Mr. Bagnell said: "On strip pricing, Husky trades at 6.5 times 2018 enterprise value/debt-adjusted cash flow, below North American Large Cap peers at 8.0 times, which suggests relative value within the space; however, the company's FCF has largely been dedicated to the West White Rose expansion, which doesn't provide near-term growth and reduces visibility for returns to shareholders. We view Husky as a safer name within our universe, but see limited near-term catalysts to pique investor interest."

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Raymond James analysts Brian MacArthur and Farooq Hamed believe investors need a portfolio of equities to gain exposure to the mining industry given its "high risk" nature.

"In our view, the ideal basic material equity investment would be a company with significant exposure to our preferred commodities, profitable growth in those commodities, appropriate financial structure, high-quality/long-life assets, good exploration optionality, a record of valuation creation independent of the commodity price, assets in lower risk jurisdictions and the potential for consolidation; all at a reasonable valuation," they said.

"Unfortunately, companies having all of these characteristics are rare and, when/if they exist, the market is efficient in pricing them. Therefore, our preferred companies are ones that have the best combination of these attributes for the best relative valuation at any time. Furthermore, as we believe, the market/investors attribute greater importance to different characteristics at different points in the cycle; not all attributes may be weighted equally and this can influence our preferred selections. Also, relative valuation changes and so too will our preferred stocks. Consequently, our picks at any time reflect the best combination of the above characteristics versus value."

In a research report released Wednesday, the analysts initiated coverage on a group of North American basic material companies.

The analysts gave the following stocks "outperform" ratings:

Altius Minerals Corp. (ALS-T) with a $13 target. Consensus is $15.

Arizona Mining Inc. (AZ-T) with a $4 target. Consensus: $3.96.

First Quantum Minerals Ltd. (FM-T) with a $16 target. Consensus: $16.64.

Hudbay Minerals Inc. (HBM-T, HBM-N) with a $11.50 target. Consensus: $11.21.

Teck Resources Ltd. (TECK.B-T, TECK-N) with a $33 target. Consensus: $33.07.

Trevali Mining Corp. (TV-T) with a $1.80 target. Consensus: $1.99.

Cameco Corp. (CCO-T, CCI-N) with a $15 target. Consensus: $14.86.

NexGen Energy Ltd. (NXE-T) with a $4.75 target. Consensus: $5.28.

The analysts gave "market perform" ratings to the following stocks:

Freeport-McMoRan Inc. (FCX-N) with a $15 (U.S.) target. Consensus: $14.76.

Lundin Mining Corp. (LUN-T) with a $10 (Canadian) target. Consensus: $9.55.

Nevsun Resources Ltd. (NSU-T) with a $3.50 target. Consensus: $4.37.

"Our preferred stocks currently reflect companies with exposure to our preferred commodities (zinc and copper) and growth and improving balance sheets," said Mr. MacArthur and Mr. Hamed.

"First Quantum, Hudbay and Trevali meet these criteria. We also include Teck given its long life, diversified asset base including copper and zinc, our expectation of strong cash flow generation and the ongoing deleveraging of the balance sheet. For development plays, we have included Ivanhoe Mines given the size of its Kamoa/Kakula copper discovery in the Congo and its exposure to zinc through the Kipushi project. However, we note its higher jurisdictional risk given the location of its assets and higher execution risk given financing and construction requirements. We also include Arizona Mining given the size of its Taylor deposit and exposure to zinc and NexGen (even though uranium is not currently in favour) given we believe the Arrow deposit is a major discovery that could have favourable economics even in a challenging uranium market. Again we note Arizona and NexGen have higher execution risk given the early stages of their projects."

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H&R Real Estate Investment Trust (HR.UN-T) is "performing well operationally," said Desjardins Securities analyst Michael Markidis following the release of in-line second-quarter results.

"Continued absorption of the former Target space as well as a pick-up in small-shop leasing velocity should more than offset the potential negative impact from Sears in the near term," he said.

On Aug. 10, the Toronto-based REIT reported funds from operations per unit, excluding one-time items, of 46 cents, a penny above Mr. Markidis's expectations. Same-property net operating income grew 2.6 per cent.

"Capital recycling, JV partnerships, acquisitions, development, leasing and debt reduction have driven an improvement in HR's platform over the past few years, in our view. However, it seems as though this stock just 'don't get no respect,'" he said.

Mr. Markidis noted HR is down 7 per cent thus far in calendar 2017, compared to a 1-per-cent decline for the S&P/TSX Capped REIT Index.

"HR is trading at an 11.1 times multiple to consensus [forward 12 month funds from operations] one-and-a-half turns lower than the simple average since the beginning of 2010," he said. "Looking at BVPU, the stock is trading at a 13-per-cent discount, or 600 basis points wider than the simple average dating back to early 2013.

"On the Aug. 11 conference call, HR's President and CEO Tom Hofstedter not only expressed his disappointment with the trading price, but also revealed that management and the board have embarked on a fulsome review of the REIT's capital structure. Given the diversity of the REIT's asset base (both in terms of geography and property type), we expect this process could drag on for several months."

Due largely to a lower greenback-to-loonie exchange rate, Mr. Markidis lowered his FFO per unit projections for 2017 and 2018 to $1.81 and $1.83, respectively, from $1.84 and $1.89. He also introduced a 2019 estimate of $1.87.

With a "buy" rating, his target for units of H&R fell to $25 from $26. Consensus is $24.94.

"In light of (1) continued negative investor sentiment toward the retail sector, which represents 35 per cent of the fair value of HR's portfolio, and (2) the tendency of the market to assign lower multiples to diversified REITs (vs pure plays), we are now basing our target on a 1 times NAV versus the 5-per-cent% premium that we previously employed. On the back of this change, our target moves to $25 from $26."

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The management of Andrew Peller Ltd. (ADW.A-T) has "set the stage" for it to enter a new phase of growth, according to Acumen Capital analyst Brian Pow.

He initiated coverage of the Grimsby, Ont.-based company with a "buy" rating.

"ADW responded to competitive pressures in the industry by completing a series of strategic acquisitions that increased its scale and product portfolio from 1994 to 2011," said Mr. Pow. "Following this series of acquisitions, ADW shifted its focus to organic growth, margin expansion, and the appointment of key executives with experience in consumer-packaged goods … We believe that this has created a cultural shift within the Company that positions ADW well for further growth, particularly as the retail and regulatory landscape shifts."

"Management expects the Wayne Gretzky brand to become ADW's second largest VQA brand in FY/18 (up from fourth in FY/17). This is due to strong sales from the Wayne Gretzky Estate Winery & Distillery in Niagara-on-the-Lake, Ontario, as well as the Wayne Gretzky Red Cask whisky exceeding sales expectations. Management has indicated that the premium Wayne Gretzky Ice Cask whisky and Wayne Gretzky cream liquor will be released in late-2017 … With likely catalysts from potential acquisitions. While ADW has a dominant position in English Canada, the Company has not been able to establish a competitive position in Quebec. This is due, in part, to unique barriers to entry that have made it difficult for ADW to establish a position. We see ADW pursuing acquisitions that would increase its footprint in English Canada or establish a competitive position in Quebec."

Mr. Pow pointed to a quartet of catalysts for it growth:

- stronger-than-expected organic growth, forecasting annual revenue growth of 3 per cent.

- "opportunities from a changing retail and regulatory landscape" which include grocery store sales

- The ability to expand its position in English Canada and grow in Quebec through acquisitions

- It's "well positioned" for a dividend increase.

He set a price target of $13.50 per share.

"For reference, we include a peer group consisting of soft drink and alcoholic beverage companies. For soft drinks, we include Lassonde Industries (LAS.A-T) as it is Canadian with a dominant position in its industry and a dual share class structure similar to ADW," said Mr. Pow. "For alcoholic beverages, we include a basket of Canadian and international wine, beer and spirit companies with a dominant position in their respective industry. ADW is trading at a discount to the peer group on both FY/18E EV/EBITDA and P/E. We believe that ADW's scalable business model, brand recognition, significant barriers to entry, and balance sheet strength will allow it to trade in line with the peer group."

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Expecting "sizeable" growth in its U.S. segment, Industrial Alliance Securities analyst Elias Foscolos raised his target price for shares of Badger Daylighting Ltd. (BAD-T).

On Monday before market open, the Calgary-based provider of non-destructive excavating services reported second-quarter revenue of $123-million, a jump of 21 per cent from the previous quarter and "significantly" exceeding Mr. Foscolos's projection of $107-million. The beat was due almost entirely to its U.S. segment, which saw revenue rose 21 per cent to $88-million, topping his expectation of $72-million. He attributed the result to increased activity in the infrastructure and construction markets.

Canadian revenue of $35-million was in line with expectations.

"As late as 2014, Canadian revenue contributed over 50 per cent of total revenue. U.S. revenue started to overshadow it starting in 2015 and we expect it to continue to do so," said Mr. Foscolos.

"The US segment has been the largest contributor to BAD's financial performance since Q4/14, largely due to the Canadian segment being negatively affected by the weakness in the oil and gas industry. Although U.S. revenue dipped in Q1/17, which has been a trend for Badger, it more than rebounded in Q2/17 to $88-million. …  Additionally, there was a sequential increase in Badger's U.S. margins. We believe that this is largely due to BAD's expansion of its geographical footprint in the U.S. with higher margins as a result of lower competition, new customer adoption, and growing revenue from existing customers. We see a sizable growth in this segment in the near term."

The company's quarterly adjusted EBITDA of $33-million was an increase of 31 per cent year over year and 65 per cent from the first quarter. It also topped Mr. Foscolos's estimate ($21-million).

"Badger's Canadian segment has faced considerable headwinds since the end of 2014 due to weakness in the oil and gas industry. However, the improvement in drilling activities has been a tailwind for its Canadian margins as its revenue remained relatively steady on a quarter-over-quarter basis," he said.

"Management indicates that the demand in oil and gas and non-oil and gas customers has shown improvements in western Canada. However, Eastern Canada continues to remain competitive and price sensitive. Margins, however, bounced back compared to the Q1/17 results. Therefore, we continue to remain cautious in our outlook for this segment in the near term."

With the results, Mr. Foscolos raised his 2017 and 2018 revenue estimates to $504-million and $567-million, respectively, from $455-million and $493-million. His EBITDA projections rose to $128-million and $156-million from $102-milion and $134-million, while his earnings per share expectations are now $1.06 and $1.93 (from 93 cents and $1.58.).

Keeping a "buy" rating for the stock, Mr. Foscolos increased his target price to $36 from $29.50. Consensus is $32.

Elsewhere, Acumen Caputal analyst Brian Pow bumped his target to $36.75 from $36.50 with a "buy" rating.

"With a strong quarter in the books and a motivated management team, we look for continued strengthening of RPT [revenue per truck] and EBITDA margins in the coming quarters," said Mr. Pow. "We see the potential for Badger to achieve its goal of doubling its U.S. business in the next 3-5 years."

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Raymond James analyst Frederic Bastien added WSP Global Inc. (WSP-T) to the firm's "Canadian Analyst Current Favourites" list, replacing Bird Construction Inc. (BDT-T).

"We are adding WSP Global back to Raymond James' list of Analyst Current Favourites after the firm announced what we view as another nifty transaction," said Mr. Bastien. "With its offer to buy all outstanding shares of Opus International Consultants, New Zealand's largest engineering company, WSP is inching closer to its goal of becoming a 45,000- employee firm by the end of 2018. The proposed deal should enable WSP to not only enhance its Australian and New Zealand activities in a big way, but also strengthen its expertise in two key target markets: (i) water-related infrastructure, and (ii) asset development and management. We also expect WSP to leverage its customer base and strong international brand equity to significantly bolster Opus' positioning and growth outside New Zealand. Based on its proven roll-up model, diversified business model and unmatched expertise in transportation, we continue to believe WSP should be at the core of every infrastructure investment portfolio. Also supporting our recommendation is WSP's valuation, which looks attractive versus other pure-play engineering firms globally."

He has an "outperform" rating and $60 target for shares of WSP. Consensus is $55.

Mr. Bastien cited "solid share price appreciation that has followed management's encouraging 2Q17 commentary" as the reason for dropping Bird.

He has an "outperform" rating and $11 target on Bird shares. Consensus is $10.50.

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Liquidity concerns overshadow the earnings of GoGold Resources Inc. (GGD-T), according to Cantor Fitzgerald analyst Rob Chang.

He downgraded the Halifax-based mining company to "sell" from "hold" and dropped his target to 35 cents from $1.70. Consensus is $1.83.

"We are concerned by the fact that the company's own internal projections show continued breaches through fiscal 2018," said Mr. Chang. "Due to the quality of Parral, we believe GoGold will be able to find a means to refinance the line of credit. However it is unclear as to what avenues will be used to arrive at that result. What we do recognize is that the market will penalize GGD for the situation it is currently in and a sell off in the name should be expected. As such we are revising our recommendation to Sell and lowering our valuation multiple form 1.0 times to 0.2 times to reflect the distressed status of the company."

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BMO Nesbitt Burns analyst Andrew Breichmanas initiated coverage of Leagold Mining Corp. (LMC-T) with an "outperform" rating and target price of $5.45. Consensus is $7.75.

"Leagold is a new mid-tier gold producer operating the Los Filos mine in Mexico," he said. "The company is led by an experienced management team seeking to deliver operational improvements, develop organic growth projects, and pursue further acquisitions. Our $5.45 target price and Outperform rating are underpinned by value derived from near-term optimization programs, de-risking of development plans, and narrowing of the current discount relative to peers."

Mr. Breichmanas added: "The stock offers attractive value relative to peers, opportunities to deliver near-term operational improvements, and potential to advance organic growth projects. Los Filos provides a solid foundation for management to optimize operations and pursue its strategy of creating a multi-mine intermediate gold producer focused in Latin America."

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Beacon Securities analyst Doug Cooper initiated coverage of Ottawa-based  Avivagen Inc. (VIV-X) with a "buy" rating and $3 target price.

"Two factors are converging to place Avivagen   in the cross-hairs of what we believe to be an unstoppable trend, namely the complete removal of antibiotics from livestock feed," said Mr. Cooper. "Surprisingly, almost 80 per cent of antibiotics are used, not for human therapeutic purposes, but rather for addition into livestock feed, primarily to promote growth. This realization has prompted both a backlash among consumers (led by Millennials who want to consume more natural food) as well as a warning by the scientific community concerning the creation of "superbugs" and their potential catastrophic consequences on human health. In fact, the European Union (EU) officially banned the use of antibiotics in animal feed as of January 1, 2006. We believe it is only a question of time (and that time is short) before all countries follow suit. The question then becomes what alternatives do farmers have, given that they have the same goal of accelerating animal growth and minimizing sickness? While there are natural alternatives such as probiotics, their efficacy and consistency have proven not to be ideal.

"However, Avivagen has developed a natural, patented technology (beta carotene base), originally conceptualized at the Natural Research Council of Canada (NRC), that has, through multiple trials, proven efficacy in terms of enabling weight gain in livestock that is on par, or in fact, better than antibiotics. From its first commercial approvals in the Philippines, Taiwan and Thailand, we believe the company is on the cusp of commercial partnership agreements in the United States and China – two markets that together represent 36 per cent of the $460-billion (U.S.) feed industry. If and when such agreements were to be announced, we believe the market's expectation of Avivagen's future revenue and cash flow streams would undergo a dramatic re-valuation. At a current market cap of $30-million, we do not believe there is any such expectations built into the current stock price. As such, we believe the shares represent an excellent risk-return proposition."

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In other analyst actions:

RBC Dominion Securities analyst Tyler Broda downgraded Rio Tinto plc (RIO-LSE) to "outperform" from "top pick" with a target of 4,200 (GBp).

"We continue to like RIO, especially for its specific commodity leverage to Chinese supply-side reforms," he said. "After the $3-billion dividend/buyback has been announced (which was ahead of our estimates) we move our rating to Outperform, also reflective of an increasingly positive relative view on Anglo American and Glencore. We still see 30-per-cent 12-month implied upside and continue to remain very positive on the sector and the iron ore market."