Inside the Market’s roundup of some of today’s key analyst actions
Management at CannTrust Holdings Inc. (TRST-T) has “lost credibility” in the wake of its scandal last week, according to Mackie Research Capital Corp.
Analyst Greg McLeish terminated coverage of the Canadian cannabis company after its stock dropped sharply last week. CannTrust announced on Thursday that it was halting all sales after Health Canada issued it a non-compliance order for growing cannabis in unlicensed rooms at its Pelham, Ont. Greenhouse between October 2018 and March.
“We believe that Health Canada must make an example of CannTrust following its failed Health Canada audit. If Health Canada does not come down hard on the company it will set a bad precedent for other ‘law abiding’ industry participants,” McLeish said in a note.
He added that Mackie has concerns about the company’s financial accounting. “The growing in unlicensed rooms took place from October 2018 to March 2019 and on May 14, the company reported its Q1/19 financial results. This now raises several questions. Did this unlicensed product show up in inventory or biological assets or was it even accounted for at all? If it did show up, why didn’t senior management identify a potential problem?” McLeish said.
“Some of the cannabis grown by CannTrust in unlicensed rooms had already been shipped to provinces across the country. As a result, the Ontario Cannabis Store (OCS) and the Alberta Gaming and Liquor Commission (AGLC) have pulled products from their sites. Additionally, On July 11, Danish cannabis firm Stenocare announced it would quarantine more batches of cannabis oil from its partner CannTrust. Stenocare said it would now quarantine five batches of the oil, up from just one on July 10.”
Mackie previously lowered CannTrust to “market perform” on April 2.
While technology companies tend to attract high valuations before they “fade, crash and burn,” Canaccord Genuity believes “the time is right for Slack” Technologies Inc (WORK-N).
Analyst Richard Davis initiated the software company with a price target of US$40 and a “buy” rating. The median price target is US$43.
“The days when ‘you’ve got mail’ elicited joy have long since devolved to, ‘when will I have time to read those 50,000 unread emails.’ The rise of communications – mobile, real-time, contextual and team focused – has arrived. Slack has the most advanced, easiest to use, and most integrated to other applications real-time chat engine in the market,” he said in a note.
“The hard thing to determine when enough firms have crashed on the rocks is what it will take for a company to rise up and win the market, thereby closing the door to competitors. In our view, to achieve this you need sufficient (1) user socialization for the software, (2) foundational technological infrastructure on which the company can scale, (3) compelling and easy to understand functionality from the vendor, and (4) a management team that understands scaling, go-to-market and can adjust to inevitable twists and turns,” Davis said, adding that he believes Slack checks these boxes.
“Fast growth, high gross margins, and an efficient go-to-market motion. There is little arguing the fact that Slack sports the financial metrics that warrant a premium valuation – 82 per cent trailing growth in F2019, gross margins in the 86 to 88 per cent range, and subscription revenue gains that have averaged 1.2-1.4x prior year S&M [sales and marketing]. Slack sees an enterprise customer payback period of less than 18 months, and net dollar retention came in at 138 per cent in the firm’s most recent quarter. With a relatively short operating history, it’s hard to precisely capture LTV:CAC [lifetime value to customer acquisition cost] ratios. That said, with high gross margins and a clearly sticky product, we’re quite confident that this will grow to be a plus 30 per cent FCF [free cash flow] margin business with scale.”
Shopify Inc. (SHOP-T) will benefit from its “new game changing features,” according to Mackie Research Capital Corporation.
Analyst Nikhil Thadani raised the company’s price target to US$360 from US$280 and maintained its “buy” rating. The median analyst rating is US$ 409.89.
“Newly announced features were received enthusiastically by investors and partners we spoke with, as we expected following Q1 results last month. Notable new features include, Shopify Fulfillment Network, which will provide U.S. merchants with a network of distributed fulfillment centers (seven initially), and will help merchants ensure faster delivery, lower shipping costs and likely lower merchants’ working capital needs. This feature will likely begin to scale in 2021- 2023, <$20-million capital expenditures in 2019 (costs already reflected in existing management guidance), over the build phase (~five years), costs could reach ~$1-billion and are expected to be offset via fulfillment revenue. Initially, fulfillment is expected to be offered in the USA, but we suspect, could be expanded to additional geographies in the future,” he said.
He added that investors seem to be the most bullish on the fulfillment solutions: “While initially targeted to merchants shipping about 10-10K orders per day, we expect this feature to be expanded over time. Merchants are expected to benefit via faster and cheaper shipping from fulfillment centers, as well as eliminating merchant friction of physically shipping products. Shopify machine learning algorithms can also help reduce merchants’ inventory costs/working capital by better managing stock keeping and inventory replenishment. We believe, SHOP could benefit through Q3 via better than expected merchant adds ahead of the seasonally strong Q4 as a result of new announcements. Medium to long term, new features, aid international expansion and a reduction in merchant friction, which is a tailwind for GMV [gross merchandise value].”
Desjardins is confident that Canadian National Railway (CNR-T) and Canadian Pacific Railway Ltd. (CP-T) will meet 2019 guidance, but is noticing some signs of softening due to a stronger loonie, weaker economic trade conditions and trade tensions.
Analyst Benoit Poirier raised his price target for Canadian Pacific to $319 from $313 and maintained Canadian National at $128 as well as “hold” ratings on both. The median analyst ratings are $329 and $125, respectively.
“We expect pricing power to remain at the high end of the 3.0 to 4.0 per cent range in the short term. We still expect both railroads to achieve low-double-digit growth in adjusted fully diluted EPS, which implies strong performance in 2Q19 and beyond. While the Canadian dollar is still a tailwind in 2Q19, a stronger loonie could eventually weigh on both CN and CP,” he said in a note.
“Crude-by-rail (CBR) activity increased significantly in 2Q19 vs 1Q19 on the back of pipeline capacity issues and favourable oil differentials. While there are still uncertainties with CBR, the Alberta government is currently in talks with some oil producers on the possibility of transferring the terms of its CBR contract to them. This could unlock further CBR activity, in our view, and is not reflected in our numbers.”
Canadian Pacific reports second quarter results on July 16 and Canadian National reports July 23.
CIBC raised its price target on Ero Copper Corp. (ERO-T) based on positive exploration results.
Analyst Raphael de Souza increased the miner’s price target to $25 from $17 and maintained its “neutral” rating, “mainly due to a revised copper grade profile for the Vermelhos mine, following the company’s most recent exploration results.” The Street median is $19.38.
“We acknowledge that ERO's stock appreciation has beaten our expectations since our initiation of coverage in April 2019, but we continue to believe that valuation risk is well balanced with potential future share appreciation. We highlight that better-than-expected new technical reports for the Curaçá Valley property and NX Gold (expected for Q4/19), as well as further exploration success, are the key near/mid-term positive catalysts for the stock,” de Souza said in a note.
“The premium to [copper] peers recognizes the exploration potential at the Curaçá Valley property, a healthy balance sheet and ERO’s above-average return on invested capital (ROIC). We expect ERO to report earnings per share and earnings before interest, tax, depreciation and amortization (EBITDA) of $0.20 per share and about $36.1-million, respectively, largely in line with consensus of $0.21 and about $37-million, for the quarter.”
“We estimate ERO trades at a ~41 per cent to ~43 per cent premium to the [copper] peer average of 0.7x [price to net asset value] and 2020E [enterprise value]/EBITDA of 6.6x, respectively. ERO’s above-average profitability and successful operating execution could support such premium valuations, but in our view, potential future returns are currently well balanced with risks of a premium valuation.”
Ero reports quarterly results on Aug. 8.
In other analyst actions:
Franco-Nevada Corp: CIBC raises target price to C$125 from C$120
Osisko Gold Royalties Ltd: CIBC raises target price to C$18.5 from C$18
Transcontinental Inc: National Bank of Canada cuts rating to sector perform from outperform
Stefanie Marotta