Inside the Market’s roundup of some of today’s key analyst actions
Though permitting delays with its development projects in Turkey continue to bring uncertainty to its growth potential, Alamos Gold Inc. (AGI-T, AGI-N) is currently “undervalued to the core,” said Desjardins Securities Josh Wolfson.
After a review of his relative coverage rankings, Mr. Wolfson raised his rating for the Toronto-based intermediate gold producer to “buy” from “hold.”
“We highlight expected positive FCF [free cash flow] inflection in 2018, anticipated improvements in the company’s core operating asset base, favourable financial positioning, growth potential not currently reflected in valuation and the company’s discounted valuation relative to historical ranges,” he said.
“With Island Gold’s acquisition in 4Q17, Alamos has emerged as a Canadian-focused operator (68 per cent of NAV [net asset value] in Canada) with three core mines. From this core asset base, we forecast the potential for a multiyear improvement in operations, supported by Island (production growth, higher-grade reserves upside, declining capital), Y-D (throughput improvement, declining capital) and Mulatos (high-grade satellite development). As a result, and excluding permitting-contingent capital spending, we calculate Alamos is capable of generating US$70-million in annual FCF at spot in 2018–20, representing a 3.5-per-cent FCF/EV [free cash flow to enterprise value] yield (vs peers -0.2 per cent) vs historical corporate cash consumption.”
With its quarterly earnings release on May 1, Alamos announced it does not expect to receive a GSM (Business Opening and Operation) permit for its Kirazlı project in Turkey until after the country’s parliamentary and presidential elections scheduled for June 24.
That delay draws questions about the progress of the company’s growth, according to Mr. Wolfson, who added: “With the advancement of Alamos’ portfolio of Turkey development projects (16 per cent of NAV), corporate production has the potential to increase to greater-than 600,000 ounces from greater than 500,000 ounces; however, permitting delays represent an ongoing uncertainty. Nonetheless, fully excluding these projects, AGI trades at a P/NAV of 1.02x at spot gold vs the group average of 1.04 times. Including Turkey, AGI trades at 0.86 times, a 17-per-cent discount to the group average, vs its trailing two-year historical average discount of 5 per cent.”
Mr. Wolfson maintained a target price of $8.50 for Alamos shares. The average target on the Street is currently $11.45, according to Thomson Reuters Eikon data.
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In a separate report, Mr. Wolfson lowered his rating for IAMGOLD Corp. (IMG-T) to “hold” from “buy” in reaction to an update to its outlook for its Essakane project in Burkina Faso as well as an updated view of its organic growth prospects and relative valuation.
“On June 5, IMG issued an initial heap leach PFS [pre-feasibility study] for its Essakane project,” said the analyst. “Project reserves have increased by 1.3 million ounces (vs 3.4 million ounces previously), combined CIL/HL [carbon-in-leach/heap leach] production has increased to 480,000 ounces (vs greater than 400,000 ounces previously) and minelife has been extended by three years (previously eight years, as of 2016). While the project provides incremental growth, lower-than-expected returns have reduced our target NAV by 7 per cent.”
“In our view, IMG’s short-term growth outlook is attractive, supported by the development of highmargin Saramacca production and the advancement of Westwood throughput. Interim growth is also available from the development of Essakane’s heap leach project and Côté Gold, where both will deliver feasibility studies in 1H19 and potential construction decisions thereafter. Although combined required project capital of US$860-million can be funded internally (IMG cash and equivalents of US$831-million at 1Q18), we now view both projects as potentially delivering lower returns and an increase to risk.”
Mr. Wolfson kept a target price of $7.50 for IAMGOLD shares, which is below the consensus of $9.60.
“At spot gold, our updated IMG outlook largely outlines net cash consumption through 2021, but potentially high growth thereafter,” he said. “In conjunction with this long-dated growth, our updated view of growth prospects and an expansion of IMG’s relative valuation, we believe IMG’s shares are valued appropriately relative to peers. Today, IMG shares at spot gold trade at a P/NAV of 1.37 times, a 32-per-cent premium to peers, in comparison to its two-year trailing average discount of 15 per cent.”
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Investors should buy Polaris Infrastructure Inc. (PIF-T) based on its current weakness, said Echelon Wealth Partners analyst Russell Stanley in a research note.
“As of writing, the stock is off 10 per cent on approximately 3 times normal volume,” said Mr. Stanley, reiterating his “Top Pick” rating for the Toronto-based renewable energy company.
“With no company-specific news, we believe the decline may be attributable to concerns around continuing political unrest in Nicaragua. However, the unrest has been ongoing since approximately mid-April, and while media reporting of the situation may have intensified, we have seen no ‘new’ news or developments that explain today’s share price decline. Possible catalysts include an easing of the unrest, M&A developments, updates on the Casita Project, and improved financial results.”
Despite the unrest, Mr. Stanley emphasized that the San Jacinto power project continues to produce at near power purchase agreement ceiling levels, noting: “The project was producing at approximately 72.3 mega watt gross, equivalent to approximately 67.3MW net of the 5MW parasitic load (the energy required to run the project). All power production up to 72MW is sold under a power purchase agreement that extends through January 2029. The agreement is USD denominated, and contemplates annual price increases. For Q118, the Company realized almost $127/MWh of power produced. Receivables collection times have historically been very stable, ranging from 68 to 78 days over the past two years. We believe these factors give PIF a very high level of revenue visibility, and with EBITDA margins of 84 per cent, almost all of every incremental $1 in revenue translates to EBITDA.”
Emphasizing Polaris is now trading at a “steep” discount to its M&A multiple, Mr. Stanley has a “speculative buy” rating and $29 target for Polaris shares. The average is $27.83.
“PIF now trades at just 4.8 times enterprise value to 2019 estimated EBITDA based on our estimates,” he said. “This is a 48-per-cent discount to the 10.5x multiple at which its closest comparable (US Geothermal) was acquired (by Ormat Technologies, ORA-N).”
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Believing its entertainment segment will weigh on its performance going forward, Jefferies analyst John Janedis lowered AT&T Inc. (s://www.theglobeandmail.com/investing/markets/stocks/T-N/" title="" class="">T-N) to “hold” from “buy.”
“We are downgrading the stock … largely on concerns related to the entertainment segment as cord shaving and spin downs continue to pressure margins,” he said.
Mr. Janedis added: “On the Time Warner front, we assume the deal will get approved, which could benefit the stock in the short term. However, we also think there’s risk that programming investment at both HBO and Turner will need to move higher given increased over-the-top competition, which could cap upside to the $1.5-billion of expected cost synergies.”
The analyst’s target fell to US$35 from US$40. The average target is currently US$37.61.
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Raymond James analyst Jeremy McCrea believes there is “some meaningful upside” to the share price of Tamarack Valley Energy Ltd. (TVE-T) when investors better understand the results from its Viking wells in Alberta.
“A year ago, Tamarack seemed to be one of the most ‘out of favour’ names from our discussions with investors,” he said. “Today, it’s one of the best performing E&P name this year (up 50 per cent versus XEG: up 2 per cent) – how quickly things can change. The challenge facing investors now is looking at TVE’s price chart and whether the valuation has run ahead of itself. Although some of the ‘easy money’ has been made, given how recent Alberta Viking well results are coming in (versus what we believe are investor’s predisposition views to Saskatchewan Viking now), we think there’s still a healthy level of share price appreciation to come.”
Keeping an “outperform” rating, Mr. McCrea’s target increased to $5.25 from $4.75. The average target is $4.98.
“Investors can measure valuation in multiple ways,” he said. “Nevertheless, at 4.1 times EV/DACF [enterprise value to debt-adjusted cash flow] or our alternative way to view valuation by the premium investors are paying above PDP value (i.e., undrilled land value), the name remains inexpensive. Based on TVE’s capex, and expected valuation creation, TVE looks to back-fill this undrilled land value much quicker than many other oil-weighted names still.”
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In an update to Credit Suisse’s “Top Investment Ideas in Canada” list, analyst Andrew Kuske adjusted his picks for infrastructure stocks.
The list focuses on the top three stock picks over the next 6-12 months from each of the firm’s research analysts.
Mr. Kuske removed Enbridge Inc. (ENB-T), previously his No. 2 pick, from his list, moving Emera Inc. (EMA-T) to that spot and adding Gibson Energy Inc. (GEI-T) as his No. 3 pick.
“Gibson Energy is undergoing a fundamental business transformation under the new management team,” he said. “A greater focus on more traditional infrastructure assets and divestitures of more activity sensitive businesses should help translate into a higher multiple. The company also has favourable near-term tailwinds arising from WCS differentials, increased need for crude by rail access and greater terminal needs in the western Canadian basin. Fundamental business positives are supported by the potential for GEI to be an acquisition target for those with excess balance sheet capacity and a reinvention need.”
Mr. Kuske has an “outperform” rating and $20 target for Gibson shares. The average is $19.29.
He also rates Emera and “outperform” with a $48 target, exceeding the consensus of $47.67.
“We believe the growth outlook for Emera’s Florida business is under-appreciated by the market,” the analyst said. “In June, EMA will host an investor day in Tampa Bay to help showcase the asset potential in that State. Simply, EMA possesses robust growth from effectively regulated solar in Florida combined with repowering efforts at TECO’s coal-fired facilities. From our perspective, Florida is the critical part of the asset base, but news flow related to Nalcor’s Muskrat Falls and power prices in New England can provide some positive tailwinds at certain points in time.”
Mr. Kuske’s top pick in the sector remains TransCanada Corp. (TRP-T), which he rates an “outperform” with a $70 target (versus a $67.25 consensus).
He said: “We believe TransCanada Corp. is very well positioned for ongoing growth across its asset base. Some of the catalysts include: (1) ongoing expansion and extension of the NGTL system; (2) the potential for contracts to support the return to service for the Canadian Mainline natural gas pipeline; (3) news flow associated with the ongoing legal processes for the Keystone XL pipeline; and, (4) gradual clarity around TRP’s outlook for the US Master Limited Partnership, TC Pipelines LP, which on a longer-term basis may be rolled into the parent.”
David Leeder