A Tesla logo adorns a 'Model S' car in the dealership in Berlin, Germany, November 18, 2015.Hannibal Hanschke/Reuters
Inside the Market's roundup of some of today's key analyst actions
Analysts offered a mixed reaction to Osisko Gold Royalties Ltd.'s (OR-T) $1.13-billion acquisition of a precious metals portfolio from U.S. private equity firm Orion Mine Finance Group.
On Monday, Montreal-based Osisko announced it will pay Orion $675-million in cash and the remaining $450-million in its shares for the assets. The Caisse de dépôt et placement du Québec and the Fonds de solidarité FTQ will fund nearly 41 per cent, about $275-million, of the cash portion of the deal via a private placement of Osisko common shares.
Osisko's shares jumped 13.54 per cent in reaction to the deal.
In response, TD Securities analyst Carey Macrury downgraded Osisko to "hold" from "buy" with a target of $19, down $19.50. The analyst average price target is $18.45, according to Bloomberg data.
Meanwhile, Cormark Securities analyst Richard Gray upgraded his recommendation to "buy" from "market perform" and raised his target to $22.50 from $17.50.
Canaccord Genuity analyst Tony Lesiak bumped his target to $21.50 from $20, maintaining a "buy" rating.
Mr. Lesiak said: "We view the transaction as neutral to net asset value (NAV) on an un-risked basis and estimate OR paid approximately 0.93 times price/NAV, which is largely in line with where the company traded prior to the transaction. However, we view the transaction as dilutive on a risk-adjusted basis and believe the asset quality (Malartic diluted) has deteriorated somewhat, which would have been hard to avoid."
"Initial market reaction has been positive with OR closing a third of the pre-existing 26% valuation gap to larger peers FN and WPM. Assuming deal completion (highly probable in our opinion), the key valuation swing factors may include Casino, (a 21.7 per cent IRR based on a stale 2013 [preliminary economic assessment] with a [preliminary feasibility study] due in the coming weeks), to what degree Renard can improve large diamond recoveries (solve current breakage issue), and the ramp-up and stream buyback at Brucejack. The full de-risking of Casino could improve our valuation by 14 per cent. OR will be left with approximately $100-million in cash post the transaction."
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Pacific Crest analyst Brad Erickson thinks sales expectations for Tesla Inc.'s (TSLA-Q) upcoming Model 3 are too low.
"If the car is perceived as awesome, already low second half 2017 buy-side expectations will actually fall," he said. "Under this scenario, we believe downside risk from significant production shortfall would likely be minimal."
Mr. Erickson said sentiment toward the stock is "hitting the moon" after Tesla shares jumped 2.2 per cent on Monday, reaching an all-time high ahead of next month's release of the much-anticipated model. According to its guidance, the company expects output of 10,000 Model 3 vehicles per month by 2018.
Mr. Erickson's new target for Tesla stock is $439 (U.S.), a 26-per-cent advance on Monday's close of $347.32. The analyst average target price is currently $279.56.
Longer term, he expects investor sentiment to become more muted, suggesting profitability could underwhelm the Street.
He maintained a "sector weight" rating for the stock.
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Desjardins Securities analyst Justin Bouchard is not convinced Husky Energy Inc.'s (HSE-T) five-year strategic plan will "meaningfully improve" investor perception, particularly given the the lack of clarity surrounding its dividend policy.
Though he continues to view the company's free cash flow yield as "attractive," Mr. Bouchard said he no longer sees significant upside compared to its peers. Accordingly, he downgraded the stock to "buy" from "top pick."
On May 30, Calgary-based Husky unveiled its five-year plan at its Investor Day in Toronto, with the expectation of growing its funds from operations by a rate of 9 per cent annually. The initiatives include further cost structure reductions and "returns-focused" growth.
"HSE noted that it generates FCF at $35 (U.S.) per barrel WTI and plans to improve its resiliency at low oil prices even further through the development of $7-billion of growth capital projects, all of which meet its project hurdle of 10-per-cent-plus IRR [internal rate of return] at $45 (U.S.) per barrel WTI," said Mr. Bouchard. "While we believe HSE's continued focus on improving its positioning at low oil prices makes sense, its dividend policy is confusing. The disconnect, in our view, is that HSE is moving forward with an ambitious five-year growth capital plan, but has not yet reinstated its dividend, citing oil price uncertainty. However, that uncertainty is exactly why we believe HSE should be returning cash to shareholders while pursuing a more moderate capital program (because there is a higher probability its projects will end up being uneconomic)!"
"We continue to view HSE as relatively well-positioned; however, the differential between HSE and its peers is no longer as wide as it was in our FCF report published in late 2016, driven in part by a higher estimate of HSE's ARO [asset retirement obligations] expenses and capital efficiencies, which in turn results in a higher estimate of its 'true' sustaining capital (and thus a lower estimate for its FCF yield). Additionally, we believe the focus on growth at the expense of dividends is the antithesis of what a majority of Canadian large-cap energy investors are looking for."
Mr. Bouchard lowered his target price for the stock to $20 from $23. The analyst consensus price target is $18.53, according to Thomson Reuters data.
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Canaccord Genuity analyst Derek Dley raised his target price for shares of Dollarama Inc. (DOL-T) ahead of the release of its first-quarter fiscal 2018 financial results on Wednesday.
Mr. Dley is projecting the retailer's earnings before interest, taxes, depreciation and amortization (EBITDA) of $153-million, an increase of $19-million year over year. His earnings per share estimate is 80 cents, a jump of 12 cents and a penny ahead of the consensus expectation.
"We are forecasting same-store sales growth of 4.5 per cent, driven by a higher year-over-year average basket size, which has grown at an average of 4.9 per cent over the past seven years without a single negative quarter, along with 7.2-per-cent year-over-year square footage growth. We are forecasting gross margins as a percentage of revenue of 37.0 per cent, flat year over year.
"We expect SG&A as percentage of revenue, to amount to 15.7 per cent during Q1/F18, down 40 basis points year over year, as the company continues to leverage recent productivity initiatives such as the kronos labour management system and warehouse automation, on top of the scaling effect of same-store sales. Our EBITDA margin estimate of 21.3 per cent is effectively above last year at 20.9 per cent."
Mr. Dley pointed to two factors that are likely to support long-term earnings growth: the company's revised long-term store target of 1,700 stores in Canada, raised upward from 1,400 last quarter, and his expectation the company will initiate an additional 5 per cent normal-course issuer bid (NCIB) in the second half of 2018.
He raised his 2018 and 2019 EPS projections to $4.25 and $4.77, respectively, from $4.23 and $4.75.
With a "buy" rating (unchanged), his target for the stock increased to $140 from $122. Consensus is $126.44.
"We are comfortable increasing our target multiple, as Dollarama continues to execute on its store growth and margin expansion initiatives, in what has been a relatively cautious consumer spending environment," he said.
"In our view, Dollarama offers investors the most visible growth profile in our Consumer Products universe. Given the company's robust square footage growth, industry leading profitability, and substantial free cash flow generation, we believe Dollarama deserves to trade at a premium valuation."
Elsewhere, BMO Nesbitt Burns analyst Peter Sklar also raised his target, moving it to $141 from $122 with an "outperform" rating.
"We believe Dollarama can continue to experience success through offering its customers compelling value at increasingly higher price points," said Mr. Sklar. "Strong basket growth in recent quarters has evidenced the success of higher-priced items. We also believe that the projected growth in store count provides a significant runway (about 10 years) of continued unit growth. Lastly, we continue to be optimistic about the performance and growth potential of Dollar City, a chain of dollar stores in Central America. Although management has provided relatively limited updates on the project's performance, we believe it is performing well and presents a strong, international growth opportunity for Dollarama.
"Overall, due to strong basket growth, technology introductions into operations, sustainable long-term store count growth, and the growth potential from the project with Dollar City, we believe that Dollarama will continue to generate a high earnings growth rate over the next number of years."
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Norbord Inc. (OSB-T) is now CIBC World Markets analyst Hamir Patel's top pick in forestry.
He upgraded the Toronto-based company to "outperformer" from "neutral."
"While we do not always have enough conviction to declare a 'top pick' in our coverage universe, this distinction had previously belonged to Outperformer-rated Cascades since we became even more bullish on that name at the start of February in anticipation of a second containerboard price hike," said Mr. Patel. "However, with Cascades up 44 per cent over the last four months (versus 0.4-per-cent improvement in the TSX Composite over the same period), and up 88 per cent since the first containerboard hike was announced on Aug. 25 (versus 5.5 per cent in the TSX Composite), we no longer see sufficient upside in CAS over the next 12 months to warrant top pick status among our Outperformer names.
"Containerboard markets fundamentals certainly remain positive, and CAS could see further multiple expansion if producers go for a third price hike, we just do not believe producers could pull off another hike this fall so soon after the prior two increases. As such, that next pricing catalyst is likely only a realistic possibility in spring or fall 2018. At the same time, OCC prices (key containerboard input cost) in China appear to be rising again, which could take a bit of the upside out of the April containerboard price hike. By contrast, OSB prices will only be constrained by the level of housing demand growth given strong visibility of supply."
Mr. Patel increased his target price to $47 from $43. Consensus is $45.70.
"We have raised our 2018 enterprise value/EBITDA valuation multiple to 6.5 times (from 6.0 times), reflecting our increased confidence that we are unlikely to see any material 'surprise' capacity announcements outside of the pool of known idled mills, which we expect to re-start over the next few years," he said.
At the same time, Mr. Patel raised his rating for Western Forest Products Inc. (WEF-T) to "outperformer" from "neutral" following a tour of its three sawmills last week.
"We are raising our 2018 EV/EBITDA valuation multiple to 6.25 times(from 5.75 times), reflecting increased confidence in the return profile of Western's capital projects and the trajectory of cedar prices in a duty environment," he said. "We believe Street numbers on WEF may be too low if some forecasters are overestimating the duty cost by erroneously applying "duties on duties."
The analyst conceded his mid-cycle estimates for the Vancouver-based company may be too conservative, noting: "If the current trade dispute lasts for several years (the last one ran for five years), WEF could benefit from structurally higher margins when a new deal is signed as once cedar customers become accustomed to paying higher prices it is not clear why duties rolling off would necessarily translate into lower cedar prices given industry consolidation. We believe there could be additional upside to our forecast as we have taken a conservative approach with factoring in WEF's latest margin improvement initiatives. During its Q1 conference call, Western announced a new non-capital margin improvement program that is expected to positively impact annual EBITDA by $25-million when the program is completed next year."
Mr. Patel increased his target price for the stock to $2.75 from $2.50. Consensus is $2.59.
"We note that the company's non-core assets could drive further upside to our valuation as we are purely valuing the company's EBITDA with a LumberCo multiple while comparables for its non-core portfolio trade at higher multiples. We estimate Western's non-core assets to be worth$90-million-$100-million. The company considers these assets to be an additional source of liquidity and may choose to wait several years to completely divest the portfolio (to maximize value)."
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Though Real Matters Inc. (REAL-T) has the opportunity to capture a growing share of a "very large" market through its technology platform, BMO Nesbitt Burns analyst Thanos Moschopoulos sees near-term headwinds for the stock.
He initiated coverage of the Toronto-based tech company with a "market perform" rating.
"In its appraisal business, the company is ramping its volumes with a number of Tier 1 lenders, which should set the stage for accelerated market share gains over the coming quarters—while in its title and closing business, the company is about to launch a highly differentiated software platform that should allow it to provide a better mortgage closing experience," he said. "Sales cycles can be very long in this industry, given the nature of the customers in question; however, Real Matters has already done much of the heavy lifting in this regard, as demonstrated by the fact that it's already doing business with 60 of the top 100 U.S. mortgage lenders. In addition to these positives, the company is unusually profitable for a growth story—with adjusted EBITDA margins at 19 per cent of net revenue in FY2016, and with our forecasts calling for a mid-teens EBITDA margin in FY2018 (following a temporary dip in FY2017)."
Mr. Moschopoulos emphasized his rating for the stock is based largely on its current valuation and his focus on a 12-month horizon. He said there's "considerable" room for upside from its current price if it successfully achieves its targets for fiscal 2021.
"If we were to predominantly focus on these long-term targets — as many of the company's shareholders undoubtedly will— the stock's valuation seems potentially attractive, in our view," he said. "However, on a shorter term basis, and focusing instead on the stock's CY2018 valuation, we're apprehensive about the near-term risk related to two specific factors: 1) the current industry weakness that's being experienced in U.S. mortgage volumes, due to a drop-off in refinance activity; and 2) the timing risk associated with the roll out of Real Matters' next-generation title & closing platform."
"In our view, the stock's calendar year 2018 valuation doesn't provide sufficient margin for error should refinancing volumes drop at a quicker rate than expected, and/or fail to stabilize over the next four quarters (as is currently expected by the Mortgage Bankers Association), or should the rollout, and ramp, of the new title platform take longer than expected (as can often be the case with any new software, and any new business initiative). We'd like to get better comfort on both of these points prior to taking a more positive view of the stock."
He set a price target of $14. The average is $15.30.
"We've struggled to find good comps for Real Matters," the analyst said. "We can point to companies with similar service offerings, or that are in the real estate technology space. This would include Corelogic, Black Knight and Ellie Mae among others. However, we believe that Real Matters will be growing at a significantly faster pace than these companies in CY2018 and in subsequent years. While there are some SaaS [software as a service] companies outside of the real estate technology space that we might be able to point to, which have similar growth, we don't necessarily view the SaaS group as being all that relevant — in that Real Matters lacks the firm revenue visibility of a typical SaaS company. We believe that Canadian software comps are somewhat relevant, given that these would be some of the alternative options that Canadian technology investors would consider, as they decide where to allocate their incremental dollar of capital.
"Our conclusion is that Real Matters' CY2018 enterprise value/sales valuation can be justified in the context of this universe — with its high CY2018 expected growth rate offsetting the fact that it has lower margins, in the near term, and more quarterly revenue volatility than many of the comps — but in our view doesn't provide substantial room for multiple expansion."
At the same time, Canaccord Genuity analyst Robert Young initiated coverage with a "buy" rating and $16 target.
"We believe that Real Matters, a hosted network management software vendor with a focus on mortgage lenders, is emerging as an important player in the massive U.S. residential mortgage market," said Mr. Young. "Recent Tier-1 wins and the improved profile and transparency provided by its Initial Public Offering are likely to drive adoption among the company's conservative customers. We expect a 20-25-per-cent gross revenue CAGR [compound annual growth rate] over the next five years alongside EBITDA margin expansion as the company drives market share higher."
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In other analyst actions:
Macquarie analyst Paul Grigel upgraded Cabot Oil & Gas Corp. (COG-N) to "outperform" from "neutral" with a target of $26 (U.S.). The average is $29.14.
Argus Research Corp analyst John Staszak upgraded Dunkin' Brands Group Inc. (DNKN-Q) to "buy" from "hold" with a $68 (U.S.) target. The average is $56.22.