Inside the Market’s roundup of some of today’s key analyst actions
Pointing to its “industry leading” operating metrics and expanding portfolio of brand partners, Industrial Alliance Securities analyst Nav Malik initiated coverage of Flower One Holdings Inc. (FONE-CN) with a “buy” rating on Monday.
Mr. Malik said the Toronto-based company is well-positioned to be Nevada’s “pre-eminent” cannabis supplier with its flagship 400,000 square foot greenhouse and 55,000 square foot production facility.
"Flower One has reported impressive operating metrics to date, with an average yield of 38.3 grams per sf per harvest (or 230 grams per sf annually) at a cash cost of 45 cents per gram," he said. "These are industry leading metrics as we estimate yields for Canadian cannabis licensed producers (LPs) are 100 to 150 grams per sf, while costs even for 'low-cost' LPs are in the $1.00-1.50 per gram range."
"Flower One’s core strategy is to partner with top performing brands seeking to enter the Nevada market. The Company handles the entire production and distribution process, manufacturing finished packaged products that are supplied to Nevada’s dispensaries and delivery services. Flower One currently has a portfolio of 11 brand partners and will continue to expand its portfolio going forward."
The analyst said Flower One is now focused on both market penetration and revenue growth through the introduction of new brands under its partnership agreements, as well as through bulk wholesale flower and distillate sales. He's projecting revenue of $82-million in 2020 and $168-million in 2021, as well as EBITDA margins of 50 per cent.
He set a target price for the company’s shares of $4.50, which falls below the current consensus on the Street of $5.17.
“Flower One shares initially traded around $1.50 following its RTO in October 2018. The shares traded higher through April 2019, reaching approximately $3.50, as the Company made a number of positive announcements regarding new licensing and brand partnership agreements. Since April 2019, FONE shares have trended lower (currently below $2.00), despite the Company continuing to make steady progress with new licensing agreements and the completion of the NLV Greenhouse. We believe Flower One shares represent an attractive buying opportunity at current levels now that the conversion of the flagship greenhouse is complete and the Company focuses on increasing its penetration of the Nevada market.,” said Mr. Malik.
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Citing the “unknown and unknowable” following after an attack on Saudi Arabian crude oil processing facilities over the weekend, BMO Nesbitt Burns analyst Ray Kwan upgraded both Crescent Point Energy Corp. (CPG-T) and Seven Generations Energy Ltd. (VII-T) to “outperform” from “market perform.”
“Our upgrade is mostly a tactical trading call, but also rests on the [companies'] ability to accelerate share re-purchases over this short-term price spike, given its low leverage and no dividend payout,” he said.
"While it is unknown when Saudi Arabia’s production capability will be fully restored, we nevertheless think that a higher risk premium will be attributed to oil over the next 12 months, which should benefit condensate weighted producers.
Mr. Kwan’s target for Crescent Point rose to $8 from $6, which exceeds the consensus of $7.67.
His target for Seven Generations increased to $11 from $8. The average is $13.04.
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In the wake of last week’s release of lower-than-anticipated fourth-quarter results, Stifel analyst Andrew Carter lowered his rating for Aurora Cannabis Inc. (ACB-T), believing they point to a “less robust in-market performance and difficulty to continue positioning for the larger global opportunity.”
"The headlines were bad, the details were worse,” he said.
“We believe Aurora’s financing efforts will be challenged against the backdrop of overwhelmingly negative investor sentiment towards the sector, damaged credibility, and limited catalysts near-term to drive enthusiasm for the shares."
Believing the Edmonton-based company will be “challenged in its ability to continue investing aggressively especially to establish a U.S. position," Mr. Carter dropped the stock to “sell” from “hold” with a $5 target, falling from $7. The average on the Street is $11.38.
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Seeing a “tough year ahead for supplies and PCs," UBS analyst John Roy cut HP Inc. (HPQ-N) to “neutral” from “buy.”
“Visibility is low and macro remains uncertain,” said Mr. Roy.
On its printer-supply business over the next 18 months, the analyst said: “The industry is in a secular decline and the long-term growth depends on the ability to gain market share. We expect print supplies to remain under pressure due to secular trends, lack of consolidation, and competition from third party suppliers.”
He said "good times for PCs look to be ending,” expecting both mix and cost headwinds to create a weaker market in fiscal 2020.
His target dropped to US$20 from US$26, which falls 8 US cents below the average on the Street.
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After a period of outperformance, Buckingham analyst James Mitchell lowered JPMorgan Chase & Co. (JPM-N) to “neutral” from “buy.”
“No matter how you look at it, JPMorgan shares have trounced peers,” said Mr. Mitchell, noting the bank is now trading an all-time high while its peers are below their most recent highs by a median of 17 per cent.
His target remains US$122, which exceeds the consensus of US$119.50.
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Whitecap Resources Inc. (WCP-T) provides investors with “torque without undue risk," according to Raymond James analyst Jeremy McCrea following an attack on Saudi Arabian oil facilities on the weekend.
"As energy investors woke Saturday morning, the news of an attack on Saudi oil infrastructure and the productivity loss, in a single word, is unprecedented,” he said. "Various news feeds to regional exports continue to speculate on the length of time (and amount/quality) of production that will be impacted, including OPEC spare capacity, world storage levels and other political ramifications. As additional information comes out over the coming week on the extent of damage, two items most experts can likely agree on: 1) crude prices will be more volatile; and 2) the geopolitical’premium’ embedded in crude prices is likely to be higher for the near-term. For energy investors,the knee-jerk reaction will be to ‘buy’ the low margin, high leveraged names. Although we wouldn’t necessarily disagree, we don’t believe investors need to take on the added risk in these type of names quite yet given current valuations today across the broader sector.
“As we’ve discussed previously, one of the largest contributing factors to share price performance (i.e., 80 per cent) is a change in the ‘multiple’ - reflecting investor sentiment and effectively the perceived future upside/sustainability of a company over and above its cash flow. Near-term,higher leverage names may get a quarterly boost from an oil price spike but the sustainability of that cash flow may be short lived (especially depending on news later this week). With many higher leverage names typically having less superior growth and return metrics we find, a much likely higher price for crude and confidence that crude prices will stay elevated will be required.”
In a research note released Monday, Mr. McCrea thinks investors should consider Whitecap given the jump in crude prices, pointing to its valuation and return on capital, believing it “consistently shows some of the best well economics among its neighboring peers.”
The analyst also emphasized “leveraged names [are] not necessarily the best outperforming stocks," noting: “Low margin/high leveraged names may see the most torque to underlying cashflow but may not necessarily be the best performing stocks. With much of a company’s valuation based on future potential (growth, future inventory), near-term price spikes can sometimes only result in minor quarterly debt adjustments. More often, under leveraged names will 1) have less bank required hedges in place and 2) give management slightly more confidence to spend within funds flow (thus capex/growth increase). ... In periods where WTI prices increased, underleveraged names perform as well if not greater still than overleveraged names.”
He maintained a “strong buy” rating and $6.50 target for Whitecap shares. The average on the Street is $7.29.
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CIBC World Markets analyst Stephanie Price thinks competitive-related concerns for Kinaxis Inc. (KXS-T) are “overblown” and thinks little has actually changed, suggesting the Ottawa-based software company’s ability to gain market share may have improved.
“With Kinaxis’ subscription revenue growth and EBITDA margins in line with SaaS peer averages, we regard Kinaxis as undervalued relative to peers,” said Ms. Price.
She said the biggest takeaway from a recent survey of the industry undertaken by CIBC is the stability, noting: "Nearly all of our survey participants use at least one of the big three providers (SAP, Oracle and JDA), with Kinaxis ranking fourth in terms of market share (12 per cent).
“Kinaxis is viewed within the market as having an innovative road map and native SaaS solution, with 60 per cent of respondents noting an improvement in Kinaxis’ ability to scale its business and gain market share over the past year. The automotive industry and Asian region saw the most improvement in sentiment.”
Ms. Price said Kinaxis proved to be the leading independent provider cited in the survey with other cloud competitors battling for a “very fragmented” market share.
Maintaining an “outperformer” rating for its stock, she raised her target to $95 from $89, believing it is undervalued in comparison to SaaS peers. The average is $94.91.
“Our survey results suggest that market acceptance of Kinaxis’ product is growing, with industry participants appearing underwhelmed by the offerings of larger incumbents," said the analyst. "With many respondents noting they were using multiple supply chain software providers, we see an opportunity for Kinaxis to continue to grow sales and for the delta between Kinaxis and SaaS peers to continue to narrow over time.”
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In other analyst actions:
Eight Capital analyst Craig Stanley upgraded Osisko Mining Inc. (OSK-T) to “buy” from “neutral" with a target of $4.50, rising from $2.60 and above the consensus of $4.40.
With files from Bloomberg
David Leeder