Inside the Market’s roundup of some of today’s key analyst actions
With methanol prices having been “sideswiped” by the recent rout in the oil market, Raymond James analyst Steve Hansen said it’s time for a “commensurate reset” of regional contract prices and Street estimates, leading him to lower his financial projections for Methanex Corp. (MEOH-Q, MX-T).
“Indeed, while spot methanol proved incredibly resilient through the first 9/10 months of 2018, Brent’s 29-per-cent correction over the past seven weeks has already ushered in a hard/swift correction in spot values (China spot down 28 per cent over the same period) as downstream demand across key China applications has waned (MTO, gasoline blending),” he said. “Coastal inventories have also risen in tandem.
“We have made modest downward revisions to our price deck as we’ve long assumed a healthy fade to our forward price outlook. Still given the magnitude of the recent downdraft, we’ve elected to take our metrics one step lower this morning to build in some additional conservatism. Still, despite these revisions, we continue to highlight Methanex’s robust FCF outlook, boasting a 16.9-per-cent FCF yield on our revised 2020 estimates. We also highlight that Methanex shares are down only 11.5 per cent year-to-date (versus. TSX Energy Composite: down 25 per cent), a strong relative performance versus most energy-related equities.”
Mr. Hansen lowered his 2018 and 2019 earnings per share projections for Methanex to US$7.44 and US$5.76, respectively, from US$7.72 and US$6.81. He also introduced his 2020 estimate of US$6.59.
In response to those adjustments, his target price for Methanex shares fell to US$80 from US$90. The average on the Street is currently US$75.07, according to Bloomberg data.
Even with the reductions, the analyst said he sees “significant” long-term value for Methanex shares at current levels. He maintained an “outperform” rating for the stock.
“Despite our suggestion that Methanex will soon face a flurry of earnings revisions to the downside, we take comfort in the fact that Methanex shares have already corrected sharply alongside Brent/spot methanol, retracing 32 per cent off their recent October highs (vs. TSX Energy Composite: off 25 per cent) largely in-line with the underlying key drivers,” said Mr. Hansen. “Moreover, as we demonstrate herein, our scenario analysis suggests the stock is already pricing in an overly pessimistic outlook, seemingly assuming that Brent drops to US$50.00/bbl and treads water for all of 2019/2020 … Conversely, we see significant upside from current levels based upon both our Base & Bull Case scenarios.”
Elsewhere, RBC Dominion Securities’ Nelson Ng lowered his target to US$80 from US$83 with a “sector perform” rating.
Mr. Ng said: “In the coming week, we expect that Methanex will post its December reference pricing for North America and Asia Pacific. Given the recent volatility observed in the regional spot markets (as reported by IHS), we expect that the reference prices to decrease for December, particularly in Asia.”
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Despite enduring a “rough” 2018 in which the sector has returned negative 25 per cent and underperformed the S&P/TSX by 17 per cent, Industrial Alliance analyst Elias Foscolos thinks there remains “enormous upside” in the Canadian energy services sector.
“WCS crude oil continues to suffer from supply takeaway capacity constraints in the WCSB, hitting a low this month of $17.77 per barrel (a $56.77 discount to WTI), below previous 2016 lows,” he said. “While many of the stocks in the sector are heavily reliant on Canadian E&P CAPEX and drilling activity, others with more diversified product and geographic markets have also been affected.
“With Q3/18 earnings concluding a few weeks ago, we have elected to revisit both our financial estimates for 2019 and our valuation methodology. We have concluded that our estimates based on reduced drilling activity in Canada and a modest increase in the U.S. remain intact but the potential for a downward revision is possible if WCS-WTI spreads do not narrow by Christmas.”
With his review, Mr. Foscolos downgraded his rating for Secure Energy Services Inc. (SES-T) to “buy” from “strong buy” based on “relative price strength.” His target fell to $10.25 from $12.50. The average target is $11.70.
“The outlook for SES looks strong with the Kindersley-Kerrobert pipeline and receipt terminal to begin contributing incremental EBITDA in Q4/18, and the company continuing to make expansions in key resource basins and capacity additions at existing facilities,” said the analyst.
He raised his rating for Shawcor Ltd. (SCL-T) to “strong buy” from “buy” based on recent price weakness. His target for the stock is $26.50, falling from $29.50 and below the average of $30.30.
“Headwinds in the completions industry and a lack of major project revenue caused us to temper our outlook into H1/19,” he said.
Mr. Foscolos also lowered his target price for eight companies in the sector. His changes are:
CES Energy Solutions Corp. (CEU-T, “strong buy”) to $5 from $6. Average: $6.13.
Computer Modelling Group Ltd. (CMG-T, “buy”) to $8.25 from $8.75. Average: $8.45.
High Arctic Energy Services Inc. (HWO-T, “buy”) to $4.50 from $5. Average: $4.50.
Mullen Group Ltd. (MTL-T, “strong buy”) to $16.75 from $17.25. Average: $16.39.
Strad Energy Services Ltd. (SDY-T, “buy”) to $2.30 from $2.60. Average: $2.27.
Source Energy Services Ltd. (SHLE-T, “buy”) to $2.75 from $3.75. Average: $3.98.
Step Energy Services Ltd. (STEP-T, “buy”) to $7.75 from $9.25. Average: $7.64.
'Tervita Corp. (TEV-T, “buy”) to $12.75 from $13.50. Average: $12.82.
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Raymond James analyst David Novak raised his target price for shares of Zymeworks Inc. (ZYME-N, ZYME-T) following its announcement of a new strategic collaboration with BeiGene Ltd. (BGNE-Q).
On Monday, the Vancouver-based clinical-stage biopharmaceutical company announced it will work with Beijing-based BeiGene for the clinical development and commercialization of Zymeworks’ investigational ZW25 and ZW49 HER2-targeted bispecific antibodies.
“ZYME will receive US$40-million upfront under the license and collaboration agreements for ZW25 and ZW49, and up to US$390-million in potential milestone payments,” said Mr. Novak. “Additionally, ZYME is eligible to receive tiered royalties in the high single digits, scaling up to 20 per cent, on future sales of ZW25 and ZW49 in the licensed territories. Under the R&D agreement for the Azymetric and EFECT platforms, ZYME will receive an upfront payment of US$20-million and up to US$702-million in milestone payments for up to three bispecific product candidates, with a royalty on future sales in-line with historical agreements (we believe high single digits). We believe that with this new inflow of non-dilutive capital ZYME is now well capitalized through 2020, a period of time where the company is expected to report on multiple clinical trial readouts, likely representing multiple, material value inflection points.”
Mr. Novak said the deal with BeiGene increases Zymeworks’ development resources by 20 times, adding: “With BeiGene, ZYME now has access to an experienced clinical development team of greater than 200 individuals, many of which are well versed in molecularly targeted IO therapeutics. At ZYME’s R&D day in October, the company outlined an aggressive clinical development plan for ZW25 and with these resources in hand, we believe these targets are unarguably achievable. Specifically, we believe the BeiGene partnership will enable an acceleration in patient recruitment, particularly for ZW25/49 in GI cancers, which are highly prevalent in China and other Asian countries. While ZYME will continue to lead the global development of ZW25 and ZW49 and retains full rights outside of the specified territories, BeiGene will offset Asian expenditures and will contribute clinical trial data to global development, providing significant insight into potential impacts arising from population heterogeneity and adding substantial robustness to ZYME’s eventual regulatory filings.”
With the deal, Mr. Novak’s earnings per share expectation for 2018 moved to a loss of 4 U.S. cents from a US$1.92 loss.
Maintaining an “outperform” rating, his target for Zymeworks shares increased to US$29 from US$27. The average target is US$25.31.
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Development and ramp-up risks at Atlantic Gold Corp.’s (AGB-X) Moose River Consolidated (MRC) operation are “largely behind us,” said Canaccord Genuity analyst Rahl Paul, pointing to “very strong” year-to-date operating results and “continued outperformance on most key metrics.”
Also citing “strong” third-quarter financial results, he raised his rating for the Vancouver-based company to “buy” from “speculative buy.”
“Year-to-date outperformance suggests that the MRC ramp-up is materially complete. The plant has averaged 5,742 tons per day year-to-date including 6,317 tpd in Q3/18, both above design capacity of 5,500 tpd,” said Mr. Paul. “Mining rates of 18,764 ktpd ytd (including 18,843 ktpd in Q3/18) are in line with FS plan but being accomplished using less equipment. Positive reconciliation with the resource model has resulted in a significantly lower strip ratio and more ore tonnage mined (with lower grade ore is stockpiled for later processing). This has helped maximize grade to the plant - head grades averaged 1.54 grams per ton in Q3/18, 7 per cemtt above Touquoy reserve grade. Recoveries and unit costs have also been tracking below budget.”
Mr. Paul said Atlantic is “well positioned” to exceed its fiscal 2018 guidance, and recent exploration results “suggest the potential to meaningfully extend mine life.”
He maintained a $3 target for its stock, which exceeds the average of $2.72.
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Canaccord Genuity analyst Derek Dley initiated coverage of Green Growth Brands Inc. (GGB-CN) with a “speculative buy” rating.
The Columbus, Ohio-based cannabis company began trading on the Canadian Securities Exchange on Nov. 13 following the completion of a reverse takeover with Xanthic Biopharma Inc.
"We like Green Growth Brands for its exposure to the high growth cannabidiol ("CBD") market, its strong retail focused management team, relationship with the Schottenstein family and their retail network, and exposure to the U.S. cannabis market through the company’s presence in Nevada," said Mr. Dley.
He set a target price of $5.50 for its shares.
“We believe the company is fully funded to achieve its 2020 EBITDA targets, and boasts a management team with a strong track record of retail success, which we believe will be key to gaining market share in the consumer-focused CBD market,” said Mr. Dley.
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In other analyst actions:
Macquarie analyst Brian Bagnell downgraded Encana Corp. (ECA-N, ECA-T) to “neutral” from “outperform” and cut his target to US$9 from US$18. The average on the Street is US$13.94.
Mr. Bagnell also downgraded MEG Energy Corp. (MEG-T) to “neutral” from “outperform” with a target of $8.75, falling from $12.50. The average is $11.32.
He raised on Imperial Oil Ltd. (IMO-T) to “neutral” from “underperform” with a target of $42, rising from $34 but below the average of US$47.16.
TD Securities analyst Damir Gunja upgraded Superior Plus Corp. (SPB-T) to “action list buy” from “buy” with a $16 target, which tops the consensus of $14.80.
Goldman Sachs analyst George Tong reinstated coverage of Thomson Reuters Corp. (TRI-T, TRI-N) with a “neutral” rating and target of $70.49 (unchanged). The average is $69.86
David Leeder