Inside the Market’s roundup of some of today’s key analyst actions
Though “bloodied but unbowed,” Wesdome Gold Mines Ltd. (WDO-T) is staging a valuation comeback, according to Industrial Alliance Securities analyst George Topping.
In reaction to recent insider buying and its “uneventful” June 11 annual meeting, he upgraded his rating for the Toronto-based company to “strong buy” from “buy.”
“The Eagle River mine continues to report high-grade exploration results and is generating sufficient cash flow to fund corporate and exploration expenses,” said Mr. Topping. “As management is successfully adding a new high-grade resource to the Kiena mine and mill, the share price will become increasingly attractive to the market and, in particular, the industry.”
Expecting inflation and negative real interest rates to drive gold prices higher, Mr. Topping maintained his target price for Wesdome shares of $5. The average target on the Street is currently $4.13, according to Bloomberg data.
“With two large gold deposits that could be developed at higher gold prices, Wesdome’s value is very sensitive to gold prices,” he said. “The Eagle River mine should be able to generate sufficient cash flow to cover costs in all buy the direct of gold price/C$ environments.”
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Expecting Barrick Gold Corp. (ABX-N, ABX-T) to continue to underperform its peers, Morgan Stanley analyst Piyush Sood suggested investors may look into rotating into the stock.
However, expecting its share price to fall further through the end of the calendar year, Mr. Sood downgraded his rating for the stock to “underweight” from “equalweight,” expressing a preference for Newmont Mining Corp. (markets/stocks/NEM-N/" title="" class="">NEM-N), which he raised to “overweight” from “equalweight.”
“With gold prices nearly unchanged this year, NEM is up 3 per cent, while ABX is down 9 per cent,” the analyst said. “Some investors may think ABX now looks cheap, but we disagree and expect ABX’s underperformance to widen through the year. Ahead of a final agreement between ABX and the government of Tanzania, we are downgrading ABX.”
“While the absolute upside and downside in NEM and ABX (4 per cent and negative 9 per cent, respectively) are small, we think this relative pairing is more important, especially when considering Morgan Stanley’s view for sideways gold prices in the coming months. Also, if gold prices were to weaken, we would expect more downside in ABX.”
Continuing to see risk in Barrick’s assets in Tanzania as it works toward a final licensing agreement with the country’s government, Mr. Sood lowered his target for Barrick shares to US$12 from US$14. The average on the Street is US$15.49.
“Barrick’s production from existing mines declines by 1/3 into 2022, and growth projects start up only from 2021,” said Mr. Sood. “ABX’s projects are relatively large and higher capex, with some key projects expected to deliver just over 15-per-cent IRR. ABX has spent the last few years repairing its balance sheet, as opposed to investing/delivering new projects. ABX’s net debt to EBITDA at the end of 2017 was 1.1 times, and a focus on debt takes capital away from shareholder returns/growth. ABX’s reserves will support 10 years of production at 2018 levels. Lastly, transformative M&A and/or startup of a very big greenfield project may be a bigger risk for ABX given its weaker organic growth pipeline.”
At the same time, emphasizing its “stronger execution, steadier production profile, deeper and relatively de-risked project pipeline, better reserve life, and lower leverage,” Mr. Sood raised his target for Newmont to US$40 from US$37. The average target for its shares is US$44.26.
“While Newmont’s production from existing mines declines by 1/4 into 2022, growth projects start offsetting these declines as early as this year. NEM has built a track record of successful project delivery,” he said. “The IRR for NEM’s six current projects averages more than 25 per cent, while invested capital remains relatively low, typically less than $300 mn per project. Management will likely approve more projects this year. NEM’s reserves support a respectable 13 years of production at 2018 levels. The company has nearly no leverage, with net debt to EBITDA at the end of 2017 of 0.3 times. Lastly, we think NEM’s strong organic pipeline mitigates the risk of large M&A.”
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BMO Nesbitt Burns analyst Stephen MacLeod thinks Aritzia Inc. (ATZ-T) can generate annual earnings per share growth of 20 per cent over the next three years by leveraging solid brand awareness in Canada, growing recognition south of the border and its trendy products.
Believing its wide range of proprietary brands gives it the ability to stay relevant and appeal to a diverse range of customers, he initiated coverage of the Vancouver-based women’s fashion company with an “outperform” rating and $19 target, which meets the consensus on the Street.
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Superior Plus Corp.’s (SPB-T) $1.17-billion acquisition of NGL Energy Partners’ U.S. retail propane distribution business should position it as one of the largest retail distributors in North America and create a growth platform for accretive expansion opportunities, said Desjardins Securities analyst David Newman.
“The acquisition will add significant scale to SPB’s existing network and capabilities in the U.S. Northeast and extend its footprint into the U.S. Southeast,” said Mr. Newman in a research note upon resuming coverage of the stock following its $400-million equity issuance used to fund the deal.
“SPB will become the second-largest retail propane distributor in North America and fourth-largest in the US. We believe the acquisition will serve as a viable growth platform for SPB to continue to consolidate the highly fragmented residential propane distribution market in the U.S., with a robust pipeline of opportunities.”
Mr. Newman raised his 2018 and 2019 EBITDA projections to $375-million and $461-million, respectively, from $338-million and $340-million.
Maintaining a “buy” rating for its shares, he increased his target by a loonie to $16. The average target is $14.61.
“With an increasing shift toward propane assets, we believe investors may begin to ascribe more of a pure-play multiple to SPB’s valuation; we would note SPB’s energy distribution and residential service peers have historically traded at a premium to its chemical company peers,” he said. “As a result of the transaction, we have increased our target price.”
“SPB offers a combination of attractive yield (5.8 per cent) and stable cash flows, with the acquired NGL Propane platform expected to drive further consolidation of the US propane market, along with subsequent synergies and organic growth.”
Elsewhere, Raymond James’ Steve Hansen did not change his “outperform” rating or $15 target.
Mr. Hansen said: “We regard Superior’s pending acquisition of NGL’s Retail Propane business as a bold, platform-enhancing deal that not only bolsters the firm’s scale and diversity across key end-markets, but also helps solidify the firm’s long-term growth prospects. While the transaction admittedly comes with a sizeable dose of incremental leverage, we believe it is manageable and take comfort in the firm’s: 1) proven integration track record; 2) solid/predictable FCF; and 3) prudent balance sheet management over time. We elaborate on our supporting arguments herein.”
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Seeing “potential positives” in the uranium market, Raymond James analyst Brian MacArthur increased his target price for shares of Cameco Corp. (CCO-T, CCJ-N).
“Recently, industry sources have reported that Yellow Cake, a company created to purchase and store uranium oxide, announced its intention for an IPO. If successful as planned, the IPO could create demand for about 8 million lbs of uranium,” he said. “In addition, Kazakhstan recently announced that it could cut production in conjunction with its IPO which has received final approval. Further, as a result of shutting McArthur River production, Cameco has indicated they will have to purchase U3O8 (we estimate 6-8 million pounds) to meet its 2018 contractual obligations. We believe these actions could have a positive impact on the uranium price.
“In addition, there are also two other ongoing political issues that could impact the uranium market. First, US producers have submitted a Petition to the U.S. Department of Commerce (DOC) for Relief under Section 232 of the Trade Expansion Act of 1962 from imports of uranium products that threaten National Security. Effectively the petition is designed to require higher levels of U.S. uranium production (currently state-owned and state-subsidized enterprises in Russia, Kazakhstan, and Uzbekistan now fulfill nearly 40 per cent of U.S. demand, while domestic production fulfills less than 5%, and could grow with the end of the Russian suspension agreement). If the petition is successful, given U.S. production is higher cost, uranium prices may have to rise. Second, Russia is contemplating a ban on trade of nuclear fuel products with U.S. utilities, which could impact uranium trade.”
With an “outperform” rating, Mr. MacArthur’s target for Cameco shares moved to $15.50 from $13.50. The average target is $14.66.
“We believe Cameco provides investors with lower-risk exposure to the uranium market given its diversification of low-cost mines,” he said. “These mines are supported by a portfolio of long-term contracts that provide some downside protection in periods of depressed spot uranium prices while maintaining optionality to higher uranium prices. In addition, the company has multiple operations curtailed that can be brought back with minimal capital should uranium prices increase. While we acknowledge the CRA dispute as a risk, given Cameco’s high-quality assets and contract portfolio, we rate the shares Outperform.”
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Despite beating the Street’s first-quarter EBITDA expectation by a “wide margin,” Citi analyst Jason Bazinet downgraded SeaWorld Entertainment Inc. (SEAS-N) to “sell” from “neutral.”
“In late 2017, SeaWorld’s short interest peaked at 50 per cent of the float (the most shorted stock in our coverage universe),” he said. “Following the better 1Q18 results, short interest fell to about 33 per cent of the float. As a result, SeaWorld’s two-year forward EBITDA multiple is now at 9.7 times 2019 EV-EBITDA, the richest multiple SeaWorld has fetched since just after the IPO in 2013.”
Mr. Bazinet maintained a target price of US$15 for SeaWorld shares, falling short of the consensus of US$17.60.
“With a forward EV-EBITDA multiple at multi-year highs, investors may believe SeaWorld troubles are behind it,” said the analyst. “But, we have three concerns: 1) FX pressure (from a stronger U.S. dollar) may lead to international attendance weakness, 2) Continued competition from rival ‘destination’ parks may pressure attendance, and 3) Increasing LIBOR may push up interest costs. Collectively, these three risks may result is a poor risk-reward profile for the equity.”
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Citing its relative outperformance versus its peers, AltaCorp Capital analyst Nicholas Lupick downgraded Suncor Energy Inc. (SU-T, SU-N) to “sector perform” from “outperform” with a $53 target, which falls below the consensus of $56.89.
“Suncor continues to impress with its growth assets progressing to meet or exceed our expectations and has contributed to its share price outperformance relative to peers in the past 6 months of trading,” he said. “As a result of the shares meeting our price target, as well as the stock outperformance vs large cap peers year-to-date, we are changing our rating ... We reiterate that the company offers investors an opportunity to gain energy exposure via its highly profitable and defensive model which should deliver free cash flow growth for years to come .”
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In other analyst actions:
Canaccord Genuity analyst Dalton Baretto upgraded Ivanhoe Mines Ltd. (IVN-T) to “buy” from “speculative buy” with a target of $8.25, rising from $7. The average on the Street is $7.02.
GMP analyst Anoop Prihar downgraded Cobalt 27 Capital Corp. (KBLT-X) to “reduce” from “buy.”
Cormark Securities initiated coverage of MedMen Enterprises Inc. (MMEN-CN) with a “buy” rating and $6 target.
With files from Bloomberg News
David Leeder