Tuesday’s analyst upgrades and downgrades

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

Tamarack Valley Energy Ltd. (TVE-T) is "delivering on all fronts," according to Canaccord Genuity analyst Anthony Petrucci.

Believing its performance in 2017 proves its discounted valuation is "unwarranted," Mr. Petrucci upgraded his rating for the company's stock to "buy" from "hold."

"In 2017, TVE managed to meet/exceed aggressive production growth targets, while at the same time materially increase its oil weighting," he said. "This was accomplished through significantly improved well results in both the Cardium and the Viking, which have served to both better our capital efficiency assumptions, and to increase our corporate netback estimates. These, combined with our improved outlook on oil pricing, suggest to us TVE has the ability to show continued growth in production within cash flow in 2018, and is the basis for our target increase. We anticipate TVE will release its 2018 budget within the next couple of weeks."

Mr. Petrucci pointed to the company's production performance following its acquisition of Spur Resources Ltd., which closed in January of 2017. Prior to the deal, it was producing 17,000 barrels of oil equivalent per day. It reached over 20,500 boe/d by the third quarter, an increase of 15 per cent. Its liquids weighting increased to 59 per cent from 54 per cent.

"Improved well results have lowered our capital efficiency assumptions for TVE, and have also bumped our liquids weighting expectations," he said.

"Control of key infrastructure will allow TVE to reduce opex in 2018 by 3-5 per cent and accelerate their facility expansion at Veteran Viking. This will facilitate improved well results, cost efficiency, and reduced opex. Additionally, the company plans to drill a Viking disposal well that will inject into under pressured areas of the asset to create pressure support, while further reducing transport costs."

Mr. Petrucci said Tamarack Valley now has one of the most attractive valuations in the sector at 4.9 times 2018 estimated enterprise value to debt-adjusted cash flow (versus its peers at 6.8 times). He also said it has one of the best balance sheets (at 1.0 times debt-to-cash flow).

" In addition, we anticipate the company will again show top-quartile growth in 2018 (17 per cent)," he said.

He raised his target for its stock to $4 from $3.50. The average target on the Street is currently $3.95, according to Bloomberg data.

"TVE has historically traded at a discount to midcap quality peers, and with the strong 2017 performance, we believe the discount is unwarranted," the analyst said. "With the improved capital efficiencies and netbacks, and production now over 20,000 boe/d, we believe TVE should trade more in line with quality light oil peers."

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Citing the prospect of flat to lower methanol prices, CIBC World Markets analyst Jacob Bout downgraded his rating Methanex Corp. (MEOH-Q, MX-T)

"Environmental restrictions in China (strong boiler demand and limited gas-based supply) have supported surging methanol prices (S.E. Asian spot up 40 per cent in four months)," he said. "But with MTO economics on the brink of affordability, China taking measures to temporarily restore coal availability, and the imminent start-up of the 1.8Mt OCI facility in H1/18, we think prices will ease from current levels. We forecast methanol prices to still be significantly higher than 2016 levels, but flat to down from Q4/17 levels. We like MEOH's FCF generation ability and think the company can implement further 10-per-cent NCIBs (perhaps as two separate 5-per-cent+5-per-cent bids) in 2018 as well as 2019."

Mr. Bout suggests near-term methanol prices may have peaked, adding: "Measures by China to increase coal availability now should eventually allow demand for methanol in boilers (which has driven price increases) to slow. Also, a slowdown in MTO demand will add pressure on China methanol pricing, especially as restarted operations in Southeast Asia and the Middle East enable coastal China inventories to heal. In Western markets, after sharp gains in contract prices for January (U.S.) and Q1/18 (Europe), we think that it will be difficult to secure significant near-term future contract price increases with the anticipated drop in methanol prices in China. Though we expect prices to ease from current levels, we continue to like the long-term methanol market fundamentals and see prices still meaningfully higher than 2016 level."

Moving the stock to "neutral" from "outperform" largely on valuation, Mr. Bout raised his target price for the stock to $67 (U.S.) from $61 based on better realized methanol price assumptions. The average target is $61.87.

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It has been a "strong" two-year run for Rocky Mountain Dealerships Inc. (RME-T), according to CIBC World Markets analyst Jacob Bout.

Up 130 per cent since the start of 2016, Mr. Bout pointed to "the cost turnaround story and more recently the Canadian ag-equipment cycle turning" as key catalysts.

However, he's not sure what will drive further gains, leading him to downgrade his rating for its stock to "neutral" from "outperform."

"What we are currently struggling with is what will drive the next era of growth for RME," said Mr. Bout. "While we continue to think the outlook for Canadian agriculture is robust and expect equipment sales to be up 5-10 per cent once again in 2018, the next leg of growth will likely be from M&A. We are concerned about RME finding the 'right' acquisition at a reasonable valuation. The most logical acquisition would be in the Northwest U.S., but we suspect that target acquisition multiples would be elevated."

He increased his target to $15, which is the consensus on the Street, from $13.50.

"RME has done a commendable job reducing its cost structure over the past few years," the analyst said. "Revenue/employee currently stands at just under 1.2 times, which is at the higher end versus historical. This does suggest that the company should benefit from operating leverage, but also that there is little room for further reduction in the employee base. With little room to cut out costs further, and potential pressure from lower OEM incentives, higher cost of equipment (offset by some equipment price escalation), and keeping more inventory (if the U.S. market heats up), we expect only a modest improvement in margins moving forward. We forecast EBITDA margins of 4.5 per cent in 2018 and 5.0 per cent in 2019 (versus 3.9 per cent in 2017)."

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2018 should be a "very good year" for Ag Growth International Inc. (AFN-T), said Laurentian Bank Securities analyst John Chu.

"Following a year of mixed results (Q4/16 beat, Q1/17 beat, Q3/17 miss) the company exits 2017 with rising U.S. sales, record international backlog and quoting activity and a healthy, although, possibly peaking Canadian market," said Mr. Chu. "The Brazil operations are ramping up and should start to be profitable H2/18. The company should also get a tailwind from a lower U.S. corporate tax rate. As such, we believe this sets the stage for what should be a robust 2018. In all, most key regions are either improving (U.S., international/Brazil) or remain healthy (Canada), which bodes well for 2018."

In a research report released Tuesday, Mr. Chu said the Canadian market, which he projects to produce 35 per cent of the company's 2018 sales, remains "healthy," though he did caution that it could be "topping out soon."

"The Canadian farm economy remains healthy, with Prairie farm cash receipts at a record level in 2016," he said. "Farm Credit Canada is forecasting 2017 cash receipts at near-record levels (down a modest 1.5 per cent from 2016) and 2018 to be at similar levels (down 1 per cent year over year). Cash receipts for western grains and oilseeds for 2017 and 2018 would be the 2nd and 3rd highest levels on record, which would suggest a continued healthy farm environment.

"We note that AFN's organic Canada sales do correlate directionally with Prairie cash receipts, although, usually with a one year lag. With FCC forecasting a modest downtick in Prairie cash receipts in 2017 and 2018, we could start to see AFN's Canada sales start to decline as early as 2018 but we believe given the health of the farm market and the fact we have not reached the record levels of 2014 yet, it is more likely to take place in 2019 or 2020. We do forecast organic Canada sales growth to slow from 13 per cent year over year in 2016 to 8.1 per cent in 2017, 5.5 per cent in 2018 and 2.5 per cent for 2019 to reflect a market that is topping out."

He expects U.S. sales, approximately 45 per cent of its 2018 total, to be "robust," citing a market recovery and the benefits of the early stages of sales replacement cycle. He also predicts the international market (20 per cent of sales) should also see continued momentum.

Mr. Chu raised his 2018 and 2019 earnings per share projections by 8 cents to $3.15 and $3.95, respectively.

Maintaining a "buy" rating for Ag Growth shares, his target rose to $65 from $63. The average target on the Street is $64.25, according to Bloomberg data.

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Cobalt 27 Capital Corp. (KBLT-X) is a "unique" pure-play investment opportunity given the scarcity of other cobalt leveraged alternatives, said BMO Nesbitt Burns analyst Andrew Mikitchook.

He initiated coverage of the Toronto-based company with an "outperform" rating.

"Cobalt is a key ingredient in lithium ion batteries forming an integral component of established high performance battery chemistries with no viable substitute," the analyst said. "BMO's base case electric vehicle penetration rate forecast of 10 per cent by 2025 implies global consumption of larger proportions of current cobalt production, which we expect will continue to drive elevated cobalt prices.

"Cobalt 27 holds physical cobalt metal stored in bonded LME warehouses at low overhead costs including storage, insurance, and G&A, and trades at a 1.4-times premium to its current net asset value based on market interest in cobalt and other battery metals. Quarterly earnings will largely consist of mark-to-market changes to assets based on spot prices for cobalt as well as foreign exchange."

Mr. Mikitchook said the company's core cobalt strategy of possessing the physical metal may prove beneficial given the strong current demand, which provides pricing support.

"Cobalt 27's holdings likely represent one of the largest above ground inventories of refined cobalt (excluding Chinese strategic stockpiles) but represents only about 2-3 per cent of yearly global mine production," he said. "The company intends to further leverage its cobalt exposure through the acquisition of new or existing streams and royalties from production or development assets. Seven royalty agreements on early stage exploration projects have been finalized as a first step. Management is pursuing streaming agreements with one or more existing producers for execution within the next year. If secured, a revenue generating streaming agreement would markedly increase the company's leverage to cobalt as well as possibly support cobalt linked dividends.

"Due to the scarcity of cobalt resources including stockpiles, Cobalt 27 could potentially be considered a takeover target for a downstream operator eager for immediate access to physical cobalt, especially under expected supply/demand deficits in 2019/2020."

Expecting the stock to maintain its premium trading multiples, Mr. Mikitchook set a price target of $16 for its shares. The average target is $13.33.

"We expect continued interested in the electric vehicle and battery theme to support strong cobalt prices with Cobalt 27 remaining a unique vehicle for investors to gain exposure to cobalt markets," he said.

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Raymond James analyst Andrew Bradford downgraded his rating for Horizon North Logistics Inc. (HNL-T), expressing concern over its modular construction business and anticipating fluctuations in its earning following the completion of its acquisition of Moose Haven Lodge in Janvier, Alta. for $14-million.

"HNL's modular systems backlog stood at $32-million just prior to Christmas. The project with Vancouver Affordable Housing is progressing slower than we had anticipated," said Mr. Bradford. "We estimate modest sequential revenue growth, but still no EBITDA contribution in 4Q17. HNL believes it has 'line of sight' on an additional $148.5-million in projects, which would be highly constructive vis-à-vis our estimated EBITDA. However our view is that investors can minimize their risk by waiting to observe the early signs of progression toward this higher bookings run-rate."

On Monday, Horizon North announced the completion of the Moose Haven acquisition.

However, Mr. Bradford expressed concern over the Lodge's current occupancy, which he estimated to be around 40 per cent. He said the price paid would "roughly" be in line with the lodge's replacement cost, which he said is "is considerably above current market pricing."

"The Lodge is an element of the $14-million acquisition – not the entirety of the acquisition," he said. "In addition to the Lodge, HNL now has an operating partnership with Janvier Aboriginal Services Corp, though which HNL will be participating in current and future catering contracts. These contracts serve primarily producer-owned camps in the area. While we don't have a precise read on the number of beds the current contracts serve, we expect that the catering component of this acquisition will contribution more than the lodge. In our view, HNL is correct in identifying the southern oil sands region as the more likely region within the oil sands to benefit from incremental capital. Investors should expect a fair degree of variability in revenues from this area as the baseload of occupancy will move higher and lower with turnaround schedules."

Mr. Bradford dropped his earnings before interest, taxes, depreciation and amortization (EBITDA) projections for 2018 and 2019 to $42-million and $48-million, respectively, from $60-million and $58-million.

With a rating of "market perform" (previously "outperform"), his target for the company's stock fell to $1.60 from $2.15. The average target is currently $2.01

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Raymond James analyst Steve Hansen expects global pulse markets to remain "challenged" in the first half of 2018, leading him to lower his financial expectations for AGT Food and Ingredients Inc. (AGT-T).

"Global pulse markets [are] still reeling from the collective impact of multiple headwinds, including excess supply, weak/deteriorating prices, and recent trade policies that have crippled global trade," he said. "While India's most recent tariff announcement [on chickpeas and lentils] can only be perceived as one more 'blow' to the sector, we're mindful that export/trade volumes were already impaired, suggesting to us the incremental near-term impact is likely modest. Still, absent a major crop event this year (i.e. weak Indian yields), we believe this additional headwind raises questions about the pace of any recovery in 2018."

Mr. Hansen said "sharply" lower lentils prices reflect the current market challenges, noting Canadian green and red lentils are currently trading 50 per cent and 38 per cent below their prices at this point in 2017, respectively.

"Canadian export data further reflects these same macro challenges," he said. "For instance, October's lentil exports uncharacteristically declined 12 per cent sequentially from September to 154 kmt (down 63 per cent year over year), defying the traditional surge that normally sees October exports reach their highest level of the year. November exports were equally uninspiring, in our view, falling 64 per cent year over year. For the current crop year (starting August 1), Canadian lentil exports are notably down 54 per cent year over year, and reside 40 per cent lower vs. the 5 year average. Not surprisingly, various industry groups that follow this data have recently started lowering their full year export estimates."

Mr. Hansen dropped his 2017 and 2018 earnings per share projections to 30 cents and $1.21, respectively, from 32 cents and $1.47.

With a "market perform" rating (unchanged), his target fell by a loonie to $21. The average is $26.75.

"On a more positive note, we expect AGT's Packaged Foods & Ingredients (PFI) business will start to show incremental improvements during 1H18 as prior headwinds fade — providing a welcome measure of downside support while we wait for pulse fundamentals to recover," he said.

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In other analyst actions:

UBS analyst Thomas Wadewitz upgraded FedEx Corp. (FDX-N) to "buy" from "neutral" with a target of $302 (U.S.), rising from $264. The average is $273.31.

Scotia Capital analyst Trevor Turnbull downgraded SSR Mining Inc. (SSRM-Q, SSRM-T) to "sector perform" from "sector outperform" and lowered his target by $1 (U.S.) to $12. The average target is $12.81.

Cormark Securities analyst Richard Gray initiated coverage of Orla Mining Ltd. (OLA-X) with a "buy" rating and $3.10 target. The average is $2.40.

Cowen analyst George Mihalos upgraded PayPal Holdings Inc. (PYPL-Q) to "outperform" from "market perform" and hiked his target to $88 (U.S.) from $67. The average on the Street is $82.42.

Goldman Sachs analyst Brian Lee initiated coverage of Canadian Solar Inc. (CSIQ-Q) with a "neutral" rating and $19 (U.S.) target, which is below the consensus target of $20.06.

Susquehanna Financial analyst Sam Poser downgraded Under Armour Inc. (UAA-N) to "negative" from "neutral" with a $11 (U.S.) target. The average is $13.21.

Sandler O'Neill & Partners analyst R Scott Siefers upgraded Wells Fargo & Co. (WFC-N) to "buy" from "hold."