Inside the Market’s roundup of some of today’s key analyst actions
Pan American Silver Corp.’s (PAAS-Q, PAAS-T) US$1.1-billion deal to acquire Tahoe Resources Inc. (THO-T, TAHO-N) significantly increases its risk profile, according to RBC Dominion Securities analyst Mark Mihaljevic.
Though he thinks gaining Tahoe’s Escobal silver mine could prove to be a “world-class addition,” Mr. Mihaljevic downgraded his rating for Vancouver-based Pan American to “sector perform” from “outperform.”
In July of 2017, the Supreme Court of Guatemala suspended Tahoe’s licence at Escobal, citing a lack of consultation with local Indigenous groups.
“In our view, Tahoe’s Escobal mine has the potential to be a world-class silver mine given its production profile (20 million ounces per year), cost structure (mine-site all-in sustaining costs below $10 per ounce), and reserve life (15 years),” he said. “However, the asset brings significant social and geopolitical risks to the company. We expect Pan American to exercise a prudent approach to building community and government relations, which should increase the potential for success, although it is likely to see slower progress.”
Mr. Mihaljevic sees the acquisition as accretive if the restart of Escobal can be “amicably” negotiated in the near term, adding: “Based on our assumed mid-2020 restart, we find the deal accretive to 2019-21 operating, sustaining and free cash flow per share by 38 per cent, 28 per cent and 22 per cent, respectively. Our NAVPS [net asset value per share] estimate also increases by 6 per cent, given the acquisition of Escobal at a discount to its potential value as well as corporate synergies.”
The analyst lowered his target for Pan American shares to US$17 from US$19. The average on the Street is US$17.92, according to Bloomberg data.
“We see a low probability of a competing offer for Tahoe given the premium paid, friendly nature of the deal, and elevated risks at Escobal,” he said. “We believe Pan American could now look to rationalize/upgrade its portfolio through non-core asset sales, which could include Tahoe’s gold assets (most likely Timmins West/Bell Creek and La Arena) and Pan American’s shorter life or higher-cost mines (San Vicente the primary candidate).”
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Loblaw Companies Ltd. (L-T) continues to deliver “in the face of major headwinds,” said Desjardins Securities analyst Keith Howlett, seeing it set to exceed its objective of flat adjusted net earnings in 2018.
“Loblaw management is executing against its plan of delivering positive same-store sales growth, stable gross margin and lower SGA expense rate while investing prudently in the future,” he said following Wednesday’s release of better-than-anticipated third-quarter financial results.
“EPS growth will be augmented by share buybacks. Management’s control of the operating levers of the business is higher than at any time we can recall, even during the years of high profit growth prior to 2005. New technology tools and greater process discipline are enabling this outcome. Management is also moving the organization away from square footage growth toward ‘customer growth’ (personalization). Robotics, artificial intelligence and process re-engineering are being deployed to lower SGA expense rate.”
Mr. Howlett raised his 2018 and 2019 earnings per share projections to $4.55 and $4.19, respectively, from $4.38 and $4.04.
He maintained a “buy” rating for the stock, increasing his target to $66 from $62. The average is now $65.42.
“Loblaw has simplified its structure with the spin-out of Choice REIT,” he said. “Valuation will be a beneficiary of transparency. Going forward, growing the number of customers and share of wallet (personalization), not growing square footage growth, will be the key metric. Loblaw has an edge with its 15 million PC Plus loyalty members.”
Meanwhile, CIBC World Markets' Mark Petrie bumped his target up by a loonie to $70 with an “outperformer” rating.
Mr. Petrie said: “Loblaw’s Q3 results were generally in line with expectations, reflecting a solid performance amidst a challenging environment. We continue to favour Loblaw’s diversity of assets - segments, formats, geographies, owned brands, data - and what we believe is improving execution.”
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Though Computer Modelling Group Ltd. (CMG-T) saw margins rebound in the second quarter of its 2019 fiscal year with increased perpetual sales and lower expenses, Echelon Wealth Partners analyst Amr Ezzat thinks the recent drop in oil prices will create a “challenging” contract renewal season and place pressure on sales in fiscal 2020.
Accordingly, Mr. Ezzat lowered Computer Modelling Group, a Calgary-based company that produces reservoir simulation software for the oil and gas industry, to “hold” from “buy.”
“While we remain fans of CMG, we see no significant catalysts in site and a challenging environment going forward,” he said.
Mr. Ezzat reduced his target for its stock to $8.50 from $11, which is 3 cents below the consensus.
“With 90 per cent of sales coming from a recurring revenue base, CMG leverages investors to unique defensive characteristics in declining commodity price markets and to secular growth trends supporting high single-digit top line and double-digit earnings growth in rising commodity price markets,” he said. “The strength of the product/brand is evidenced in the fact that CMG is successfully displacing oil service bellwethers and gaining market share. CMG is a great refuge for investors seeking a more defensive name (in the short run), while keeping leverage to the secular growth in secondary/tertiary oil production.”
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Linking Cineplex Inc.’s (CGX-T) lower-than-anticipated third-quarter financial results to a decline in automobile sales in Canada, Raymond James analyst Kenric Tyghe lowered his target price for the company’s stock, predicting a difficult end to the fiscal year.
On Wednesday before market open, Cineplex reported quarterly EBITDA of $55.5-million, adjusted for a $2.1-million non-recurring cost within its Player One Amusement Group subsidiary. The Street had expected $62.4-million. The gap was due largely to “materially weaker” revenue from its Cinema Media segment.
“Despite solid box office growth (aka a film slate that resonated), which typically is supportive of advertisers directing incremental dollars to the platform, Cinema Media revenues decreased 26 per cent,” said Mr. Tyghe. “While we understand why weakness in advertising would spook investors, this does not appear to reflect a smaller share of adspend, but rather a shrinking in quarter of dollars spent in key verticals (oddly enough, when advertising across all media platforms is proving ineffectual in stemming declines in vehicle sales in quarter – there comes a point when you cut spend).
“Vehicle sales in Canada fell 7.4 per cent in September (which followed decreases of 1.6% in August and 3.6% in July). When automakers are typically one of your biggest advertisers, the impact of this dynamic is material, and was compounded by reduced government spending. We believe that the timing shift was real, and would expect that once major advertisers have reworked their messaging, they will be back in force in cinemas which provides an attractive (given what appears to be a solid film slate) and captive channel to reach consumers. We remain buyers of Cineplex.”
Though box office is up 28.6 per cent thus far in the fourth quarter, on the heels of a “record breaking” October, Mr. Tyghe lowered his earnings per share projection for the quarter to 48 cents from 56 cents, expecting a “tough” December. His EPS estimates for 2018, 2019 and 2020 fell to $1.26, $1.49 and $1.58, respectively, from $1.50, $1.63 and $1.79.
Maintaining an “outperform” rating for the stock, his target dropped to $34 from $38. The average is $35.40.
Elsewhere, Echelon Wealth analyst Rob Goff lowered his target to $38 from $40, keeping a “buy” rating.
Mr. Goff said: “Our bullish target valuations and in turn PT (median PT $35.59) reflect greater confidence that forecasts will be met or bettered along with the consideration that Cineplex should be considered as a potential takeover candidate for a Canadian telecom provider (branding, theScene membership, relationships with studios, FCF yield/low capex intensity).”
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Despite reporting third-quarter financial results that fell short of his expectations, Canaccord Genuity analyst Matt Bottomley increased his target price for shares of Cronos Group Inc. (CRON-T) with recreational marijuana sales “officially out of the gate” and citing a growing number of strategic and international initiatives secured by the Toronto-based company.
“We believe Cronos has continued to demonstrate a strong differentiated approach through a number of its strategic initiatives,” he said. “More recently, the company announced a partnership with Ginkgo Bioworks, which aims to produce targeted cultured cannabinoids though fermentation processes; a 50/50 venture in Columbia that will develop, cultivate, manufacture and export cannabis-based medical and consumer products in LATAM; and a sponsored research agreement with Israeli based Technion to explore the use of cannabinoids for skincare/skin disorders.”
On Tuesday, Cronos reported revenue for the quarter of $3.8-million, missing Mr. Bottomley’s $4.7-million projection and representing a “modest” increase of 10.8 per cent from the previous quarter. Operating expenses of $5.4-million fell slightly below the analyst’s $5.5-million estimate, while EBITDA of a loss of $3.3-million was slightly higher than his expectation of a $2.4-million loss.
“Although Q3/18 came in a bit light, we do not believe quarterly earnings will be overly meaningful until full recreational contributions come online next quarter,” he said.
Maintaining a “hold” rating for its shares, Mr. Bottomley increased his target to $9 from $7.50 after raising his revenue and EBITDA estimates for fiscal 2019 and 2020. The average is $10.25.
“Cronos currently trades at 22.1 times its calendar 2020 enterprise value-to-EBITDA compared to its most direct peers at 10.5 times and the large-cap LPs (with greater invested capital, production capacity, and international reach) at 18.8 times,” he said. “Although we believe a premium valuation to its direct peer groups is warranted, we believe CRON’s valuation is somewhat stretched at current levels and we maintain our HOLD recommendation.”
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“Another blowout quarter” from Canada Goose Holdings Inc. (GOOS-T) reflects “the massive global growth opportunity that remains in front of the brand,” said CIBC World Markets analyst Mark Petrie.
In the wake of stronger-than-anticipated second-quarter results, Mr. Petrie said awareness for the company continues to grow, and he thinks it is “is deftly balancing explosive growth with exclusivity and brand building.”
“Revenue growth of 34 per cent in Q2 easily exceeded our 15-per -cent forecast and nearly matched the growth in Q2 last year,” he said. "Canada has slowed, but acceleration in the U.S. and Rest of World more than offset, which we view as a healthier and more sustainable growth composition. We believe the U.S and Asia in particular both hold big potential for Goose. The first formal presence in China is in its earliest days, and we expect it will be a key driver of growth in Q3, F2020, and beyond.
“The acquisition of bootmaker Baffin represents a small investment but lays the foundation for future expansion of the assortment, and the extension of the Canada Goose brand. Even before it grows, we estimate it adds 7 per cent to LTM [last 12-month] revenue, albeit at lower margins.”
With an “outperformer” rating (unchanged), Mr. Petrie hiked his target to a Street-high $104 from $95. The average is $91.75.
Elsewhere, Credit Suisse's Michael Binetti increased his target to $100 from $88 with an "outperform" rating.
Mr. Binetti said: “Among ongoing macro-driven volatility for softlines names, GOOS has an increasingly rare combo of: 1) Top-line momentum: Huge F2Q beat (revenues up 34 per cent vs Street’s estimate of 15 per cent) & new sources of growth ahead (China launch, long-term footwear opportunity bolstered by recent Baffin acquisition); 2) Conservative guidance: Raised FY19 guide implies wholesale revs flat in 2H vs up 17 per cent in 1H, DTC revs implied 47 per cent in 2H vs 158 per cent in 1H despite a full qtr’s contribution from 5 new stores; 3) Significant margin upside: We’re forecasting 27.3-per-cent EBITDA margins this year-meaning GOOS will surpass its 26-per-cent target 2 years early. For reference, by the time Moncler reached the equivalent of $1-billion in revs, it had 33.5-per-cent EBITDA margins on a similar wholesale/retail mix. While we expect GOOS is being conservative as it starts major investments to launch China, we see no reason why EBITDA margins can’t approach Moncler at 33.5 per cent (or higher) over time as initial China investments start to lever.”
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In other analyst actions:
National Bank Financial analyst Leon Aghazarian downgraded Uni-Select Inc. (UNS-T) to “sector perform” from “outperform” with a $25 target, falling from $26.50 and 83 cents lower than the consensus.
Macquarie’s Michael Glen lowered Uni-Select to “neutral” from “outperform” with a $25 target.
Mr. Aghazarian also downgraded Boyd Group Income Fund (BYD.UN-T) to “sector perform” from “outperform” and lowered his target to $125 from $130. The average is $131.71.
Canaccord Genuity analyst Mark Rothschild downgraded Agellan Commercial Real Estate Investment Trust (ACR.UN-T) to “hold” from “buy” with a target of $14.25 from $14.80. The average is $14.50.
BMO Nesbitt Securities analyst Tim Casey upgraded Aimia Inc. (AIM-T) to “market perform” from “underperform” with a $4.25 target. The average is $4.61.
David Leeder