Inside the Market’s roundup of some of today’s key analyst actions
Calling it “a small cap hidden gem in the utility & power sector,” Industrial Alliance Securities analyst Jeremy Rosenfield thinks AltaGas Canada Inc.'s (ACI-T) “large valuation gap appears unwarranted,” leading him to upgrade his rating for its stock on Monday.
"We believe that ACI trades at a relative discount to larger cap regulated utility peers (e.g., almost 14 times FY2E P/E compared with 17 times for peers, on average)," he said. "In addition, we believe that ACI’s high-quality renewable power assets are relatively undervalued compared to recent market precedents (i.e., they could be worth $12.00/share, standalone, based on recent precedents)."
Mr. Rosenfield made the move in response to recent investor meetings with the Calgary-based company, which led him to tout its growth outlook and longer-term upside.
“ACI’s five-year $330-million capital investment plan (2019-23E) is expected to drive 4-6-per-cent average annual organic rate base growth within its regulated utility segment; we expect this to translate into commensurate 4-6-per-cent average annual EPS [earnings per share] and FFO [funds from operations] growth, and similar dividend growth over the forecast period (2019-23),” said Mr. Rosenfield.
"ACI highlighted progress toward the eventual reactivation of existing capacity on the PNG gas system, associated with potential increased natural gas transportation out of the Montney region and into Kitimat and Price Rupert to serve smallscale natural gas export terminals. Regulatory filings (expected shortly) could lead to binding agreements, underpinning a potentially material investment for ACI relative to current rate base. We expect further updates over the course of the year."
Moving the stock to "buy" from "hold," Mr. Rosenfield hiked his target to $24 from $18. The average on the Street is currently $21.90, according to Thomson Reuters Eikon data.
"Overall, we continue to view ACI as a defensive Canadian small cap utility and power play, with (1) a unique mix of regulated utility and contracted renewable power assets, (2) healthy EPS and FFO/share growth (4-6 per cent per year, CAGR 2018-23), (3) attractive income characteristics (4.5-per-cent yield, 65-75-per-cent EPS payout), and (4) additional potential upside from PNG reactivation/expansion opportunities in the future. With the attractive upside to our revised price target, we are upgrading ACI," he said.
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A pair of equity analysts raised their ratings for Centerra Gold Inc. (CG-T) on Monday after recent tours of the company’s Kumtor mine in the Kyrgyz Republic and the Oksut project in Turkey.
Raymond James’ Brian MacArthur moved the stock to “outperform” from “market perform,” emphasizing the Kumtor trip highlighted potential upside.
"The current LOM [life-of-mine] plan forecasts production ending in 2026 with production dropping substantially from the annual level of about 500,000 ounces post 2023," said Mr. MacArthur. "However, in 2018, CG started an exploration program, which has been extended this year, to target extensions to the Central pit which we believe should increase resources and could ultimately lead to another pushback on the Central Pit. In addition, CG is considering adding 2 tower mills and 2 leaching tanks for under $20-million which could improve recoveries by about 2 per cent. Finally, there is the potential to maintain current throughput of about 18,000 tpd which is higher than the most recent technical reports. We believe the combination of higher throughput, additional resources and higher recoveries could sustain production around 500,000 ounces through 2025 and extend mine life. As a result, we have increased our value for Kumtor."
He added: "While we expect CG to generate strong cash flow and it has good growth, it does have higher jurisdictional risk with Kumtor being about 40 per cent of NAV. CG continues to work with the Kyrgyz Republic to satisfy the conditions precedent to completion of the comprehensive settlement agreement entered into on Sept. 11, 2017 and has further extended the longstop date for satisfaction of all such conditions to July 31, 2019."
Mr. McArthur raised his target to $10 from $9, which is the current average on the Street.
“Centerra operates 2 cornerstone assets—Mt Milligan & Kumtor — which offer investors exposure to gold and copper, while generating solid CF,” he said. “Centerra also has a flexible balance sheet to support its robust project pipeline (Öksüt, Kemess, Hardrock) led by Öksüt which could increase production meaningfully in 2020E. In addition, the company owns 3 molybdenum assets, which offer optionality on molybdenum prices and may be sold to surface value. Further, Centerra trades at a discount to the intermediate peer group.”
Elsewhere, CIBC World Markets’ Bryce Adams upgraded it to “outperformer” from “neutral” with a $10.50 target, rising from $9.
“Centerra shares have outperformed the GDX year-to-date, but we still see upside and, as such, we are upgrading CG,” he said. "Following site visits to both Kumtor and Öksüt over the past week that resulted in positive revisions to our NAV estimates, as well as Mount Milligan now operating at 55 ktpd, we have increased our price target to $10.50 from C$9.00, representing a return to target of 36 per cent from Friday’s closing price.
“We continue to see geopolitical risk in Kyrgyzstan but view the Strategic Agreement extension of only two months as a slight positive read-through. We expect valuation to continue to re-rate given upside potential at Kumtor and further de-risking of Öksüt. Mt Milligan remains a show-me story, but with water permits in hand and the mill now processing 55ktpd we see potential for the asset to gain some positive momentum. Lastly, potential for dividend reinstatement (roughly $40-million per year) exists, if and when the agreement with the Kyrgyz government is finalized.”
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As Teck Resources Ltd. (TECK.B-T) “continues to execute of their strategy,” RBC Dominion Securities analyst Sam Crittenden thinks its shares can re-rate, particularly of macro sentiment brightens.
"The fundamentals for both the company and its key commodities remain solid; however, fears over global growth seem to be keeping the incremental buyers on the sidelines for now," said Mr. Crittenden in a research note released Monday
Believing the Vancouver-based metals and mining company is turning “strong” free cash flow into shareholder returns, he said: "We forecast $2.3-billion of FCF in 2020 and $1.7-billion in 2021 implying a yield of 15 per cent and 10 per cent. This would be sufficient to match the type of total payouts made by peers. We understand Teck’s reluctance to increase the base dividend given the commodity volatility; however, as these discretionary buybacks become more regular, it can help demonstrate their commitment to capital returns.
“While providing copper growth: With the $2.5-billion project debt and $1.5B contributed by Sumitomo, Teck’s remaining equity contribution is $700-million to the QB2 $4.7-billion capex. This provides Teck with meaningful copper growth without a significant equity investment. It also provides a more balanced EBITDA split by 2023. Teck could also look to advance or monetize Zafranal or San Nicolas this year following updated economic studies. We value Zafranal at $672-million and San Nicolas at $322-million and a transaction could crystallize this value.”
Mr. Crittenden maintained an "outperform" rating and $45 target for Teck shares. The average is currently $40.62.
"Teck is trading at 3.8 times 2020 EBITDA which is a discount to global diversified peers at 5.6 times 2020 EBITDA," the analyst said. "We believe this is because investors may be more focused on iron ore vs. met coal and a size/ liquidity premium but also because of strong shareholder returns. The diversified miners are focused on value over volume and returning meaningful capital to investors (average dividend yield 6 per cent). Teck's $600-million buyback and not proceeding with the Mackenzie Redcap expansion show they are committed to followig a similar script which can help drive a better multiple, in our view."
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Waste Management Inc. (WM-N) is “uniquely positioned to capitalize on evolving trends,” said RBC Dominion Securities Derek Spronck, who raised his rating for the large-cap stock to “outperform” from “sector perform.”
"What sets Waste Management apart from its peers is its industry leading scale," he said. "At the New York Investor Day [on Thursday], we heard how management was leveraging this scale and vertically integrated asset base to deliver: 1) industry leading organic growth rates; 2) corporate partnership opportunities and growing brand equity; 3) investments in more novel technologies and potential first mover advantages; and 4) out-sized acquisitions and/or investments in new product categories. Accordingly, we see WM's scale as a key investment differentiation and part of the long-term value proposition for investors.
"At its core, Waste Management is focused on industry basics, or extracting value out of the waste stream and turning it into sustainable free cash flow. However, management is positioning the company to capitalize on evolving trends - both from an industry and societal perspective. Management is focusing investments and expansion in high growth urban markets leading to industry leading organic growth rates. Management is also focused on sustainability efforts through investments in near-zero emission fleets, next-gen recycling facilities, and renewable energy plants - which are attracting a younger (and lower cost) workforce, growing national partnerships, and increased brand equity."
Mr. Spronck pointed to the Houston-based company's "first mover advantage" through digital innovations, usage of compressed natural gas (CNG) vehicles and lab and venture capital investments.
Calling it an "industry titan," he raised his target for the stock to US$125 from US$113. The average is US$116.09.
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Though its weaker-than-anticipated third-quarter results prompted him to lower his target price for its shares, Haywood Securities analyst Neal Gilmer recommends accumulating Harvest One Cannabis Inc. (HVT-X) stock at its current level.
On May 30, the Vancouver-based company reported revenue of $3-million for the quarter, down 19 per cent from the second quarter and missing Mr. Gilmer's $4.8-million projection.
"The Company reported declining sales quarter-over-quarter, primarily driven by a drop off in its consumer segment and a lack of sales from Satipharm," he said. "Revenues from United Greeneries were marginally lower than last quarter as the Company shipped product for extraction, reducing the overall supply of available product."
He added: "Harvest One reported a disappointing quarter of revenue growth and looks to build off this base with a rebound in the current quarter, its fiscal Q4. We are revising our estimates lower based on the results in Q3/19 and a more conservative approach for subsequent quarters."
Maintaining a "buy" rating, Mr. Gilmer moved his target to $1.25 from $1.30. The average is $1.63.
“We reiterate our Buy recommendation as Harvest One continues to trade at a discount to the peer group,” he said. “In our view, following this quarter below expectations, the Company is positioned to demonstrate growth through the balance of calendar 2019.”
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Seeing its “positioned well for Canadian cannabis legalization 2.0 in the derivatives market,” AltaCorp Capital analyst David Kideckel initiated coverage of OrganiGram Holdings Inc. (OGI-X) with an “outperform” rating.
“We believe OGI has taken all the right steps to prepare for the highly anticipated, cannabis-derivative product segment. OGI has been purposefully stockpiling inventory for extraction and has formed partnerships with both The Green Solution (TGS) (private) and Canada’s Smartest Kitchen (CSK) (private), ensuring that the Company is positioned well for product development and formulation (e.g. vapes, chocolate edibles, etc.). OGI‘s partnership with Valens GroWorks (VGW-CN, “outperform” rating, $7.75 target) will support their extraction needs, ensuring that they are prepared to deliver product to the market as soon as regulations permit. Beyond these partnerships, OGI has also developed their own shelf stable, thermally stable, water-soluble, and tasteless cannabinoid nano-emulsion formulation. With this technology, OGI is actively seeking a global strategic partner for distribution, and product development.”
He set a $13.30 target, which exceeds the consensus of $11.86.
“The Company boasts industry leading adj. gross margins at 60 per cent and has been EBITDA positive since Q4/F18 which in our view, sets them apart from many of their competitors,” said Mr. Kideckel. “In our view, OGI is one of the premier names in the Canadian cannabis sector and will continue to demonstrate operational excellence as we shift towards the next phase of Canadian cannabis legalization, in the derivatives market.”
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In other analyst actions:
Eight Capital initiated coverage of Ianthus Capital Holdings Inc. (IAN-CN) with a “buy” rating and $12 target. The average on the Street is $12.14.
The firm also initiated coverage of Cresco Labs Inc. (CL-CN) with a “buy” rating and $20 target, which falls 25 cents short of the consensus, and Cannex Capital Holdings Inc. (CNNX-CN) with a “buy” rating and $3 target, which is lower than the $4.13 average.
David Leeder