Inside the Market’s roundup of some of today’s key analyst actions
Gibson Energy Inc. (GEI-T) capped a “strong” year with “substantial outperformance” in the fourth quarter, said Desjardins Securities analyst Justin Bouchard.
On Tuesday, the Calgary-based integrated service provider reported adjusted EBITDA from continuing operations of $134-million, exceeding the $112-million projection of both Mr. Bouchard and the Street. The beat was due largely to the performance of its Wholesale business, which benefited from both higher sales prices and differential-advantaged feedstock costs.
“The real story, in our view, is the methodical expansion of the Infrastructure business,” said the analyst. “In the context of the Wholesale segment, any outperformance-derived windfall is being reinvested to grow the stable-cashflow Infrastructure business. So far, this strategy is proceeding as expected.”
Citing Gibson’s “favourable strategic positioning going into 2019 and the revised outlook provided by management,” Mr. Bouchard raised his target for Gibson shares to $26 from $24, keeping a “buy” rating. The average on the Street is $24.32, according to Bloomberg data.
“GEI continues to transition toward a stable-cash-flow business model with notable margin-based upside potential over the near term,” he said.
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Calling it a “first mover” in the cannabis oil extraction business, Mackie Research analyst Greg McLeish initiated coverage of MediPharm Labs Corp. (LABS-X) with a “buy” rating.
“MediPharm … was the first Canadian LP exclusively licensed for cannabis oil extraction under the ACMPR when it was awarded its oil production license in March 2018," he said. "If the Canadian market follows some of the trends seen in the U.S. where recreational marijuana is legal, products derived from cannabis oils should become a large and growing segment of the market. MediPharm has the capacity to enable its clients to be first movers in this high margin market segment and as a result, we believe its services will likely be highly sought after through our forecast periods."
"MediPharm intends to position itself as an agnostic service provider for all extraction needs in the industry. To date, the company has signed over 20 agreements with Canadian Licensed Producers, including 15 supply agreements, 6 processing agreements, and 5 sales agreements. The company has signed over $85-million in private label sales agreements that will be delivered over a 15-month period (starting December 2018). An 18-month contract with globally-recognized Canopy Growth is a testament to the company’s quality of operations."
Mr. McLeish emphasized the possibilities available to the Barrie, Ont.-based company through international expansion, pointing to its recent growth in Australia.
"The company has made significant progress in international expansion with the development of MediPharm Labs Australia, which will service all of Australia and the Asia Pacific," he saud. "Construction of a facility in Victoria has already commenced and is expected to be complete in H2 2019 pending receipt of the appropriate licensing. In Australia, MediPharm has been working with 25 cultivators to provide supply inputs and secure private label agreements. The company recently signed a two year private sale agreement with AusCann, whereby MediPharm will supply AusCann with private-label cannabis oil over the period starting Feb. 20, 2019. The Australia facility is expected to act as an import/export hub for all of Asia Pacific, local regulations permitting."
Currently the lone analyst on the Street covering the stock, according to Bloomberg, Mr. McLeish set a target of $6 for MediPharm shares.
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Citi analyst Christian Wetherbee thinks the potential stemming from its shift to Precision Scheduled Railroading (PSR) should be enough the make Kansas City Southern’s (KSU-N) stock “work.”
“As the company begins to dribble incremental information into the market over the next several weeks and months, we think the potential for improvement can be a catalyst for shares in and of itself,” he said. “Our Base case calls for a multi-year runway to $157 (42-per-cent upside), while our Bull case yields $183 (65-per-cent upside) long-term, and we are capturing some of this upside by increasing our price target to $130. With downside relatively benign at $98, due to KCS’s lowest in class PE multiple, we think investors will be attracted to its solid risk/reward, even as skepticism on execution remains.”
Mr. Wetherbee projects the implementation of PSR could result in US$113-million in total cost saves, or almost 6 per cent of its total 2018 opex. That would lead to a reduction in the railway company's operating ratio by almost 4.2 per cent to 60 per cent.
"Despite concerns that its Mexico network could present challenges, we believe KCS can realize meaningful labor cost savings," the analyst said. "We expect labor to be the largest source of total savings, contributing 280 bps (67 per cent) of the total potential OR improvement and producing $76-million of total savings, while an additional $37-million from other areas contribute the remaining 140 bps (33 per cent). That said, we are not yet giving KCS full credit for our PSR cost savings estimates, as we believe management still has to overcome meaningful execution hurdles to hit our savings targets, and we continue to model a 60.9-per-cent OR in 2021."
Keeping a "buy" rating, Mr. Wetherbee raised his target to US$130 from US$115. The average is currently US$124.61.
"We think there is a path to $9 in 2021 EPS if KCS successfully implements PSR while still growing revenue," he said. "Our estimate assumes 6-per-cent average revenue growth, back-end weighted progress to a 60-per-cent OR by 2021, a steady decrease in capital intensity, and increasing leverage to 2.5 times targeted toward buybacks. We see $3-billion in cumulative cash available for buybacks (23 per cent of market cap). While $9 represents upside to our and consensus 2021 estimates, the compelling opportunity for the stock comes from multiple expansion. KCS’s multiple derated post Trump’s election and we believe PSR can provide a catalyst to close the gap with its peers, potentially driving meaningful upside."
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A series of recent exclusive brand agreements has lowered the forecast risk associated with Origin House, the registered business name of CannaRoyalty Corp. (OH-CN), according to Canaccord Genuity analyst Matt Bottomley.
“Over the past month, Origin House has been busy adding to its growing list of strategic brand partners (most recently with an exclusive distribution agreement with Henry’s Original) while the company continues to expand its reach throughout California,” said the analyst. "We believe securing distribution into California’s wide network of cannabis retailers will be critical to carving out meaningful market share in what is now the largest legal cannabis market in the world. In addition to its existing reach into almost 500 dispensaries from 5 manufacturing/distribution hubs, we believe Origin House’s growing list of exclusive partners will provide the company with valuable consumer insights into different brands and product categories as the market continues to develop. In addition, the company has also instituted a brand acceleration initiative where it provides capital to strategic partners to help them fund for growth in an increasingly competitive landscape where access to capital represents a significant bottleneck for many operators.
"Over the past five weeks, the company has signed exclusive California distribution agreements with Viola Brands, Utopia Cannabis, Humboldt’s Finest, Kurvana (one of the largest brands in all of California to date) and Henry’s Original. We believe the onboarding of theses brand partners provides moderate de-risking to our California estimates as Origin House continues to build out a presence in the state."
After "modestly" raised his 2019 and 2020 financial expectations for the Ottawa-based company, Mr. Bottomley raised his target to $12 from $10, maintaining a "speculative buy" rating. The average is $12.83.
“OH currently trades at 8.4 times its calendar 2020 EV/EBITDA, in line with the overall average of U.S. cannabis operators at 8.2 times,” he said. “However, given the company’s strong execution over the past few months and as potentially the leading California cannabis distributor, we believe a premium multiple is warranted at this time, and we would remain buyers of OH at current levels.”
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Following a “solid” operating performance in the fourth quarter, Desjardins Securities analyst Michael Markidis increased his target for units of Crombie Real Estate Investment Trust (CRR.UN-T).
“Excluding $0.5-million of lease termination income, CRR delivered year-over-year same-property NOI [net operating income] growth of 2.5 per cent in 4Q18,” he said. “Occupancy gains (total portfolio committed occupancy ended the year at 96.0 per cent versus 95.2 per cent at 4Q17) and land use intensification were likely the key drivers, given the very modest (3-per-cent leasing spread) achieved on renewal leasing throughout last year. Looking ahead, we note that CRR’s fourth largest tenant (the province of Nova Scotia), representing 1.1 per cent of annual minimum rent, expires this year. Management commentary suggests that the two parties are working through the final stages of a renewal. Execution on favourable terms is a potential catalyst, in our view.”
Maintaining a “hold” rating, Mr. Markidis bumped his target up by a loonie to $14.50. The consensus is 31 cents higher.
“Over the past 12–18 months, management has demonstrated its ability to fund development and acquisition programs without tapping the public market for equity or increasing financial leverage,” he said. “In fact, by our calculations, pro forma D/EBITDA is at the lowest level since early 2016. Continued execution through 2019 could lead to a re-rate of CRR’s trading multiple.”
David Leeder