Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst John Sclodnick lowered his rating for Equinox Gold Corp. (EQX-T) on Wednesday in response to the suspension of activities at its flagship Los Filos mine in Guerrero, Mexico, due to illegal blockades by a group of unionized employees and members of the Xochipala community.
On Monday, the Vancouver-based miner said it is working to “achieve a long-term solution that will allow the mine to operate effectively” amid a payment dispute, which it claims is “in excess of their contractual agreements.”
“We are taking a conservative approach and assuming that the blockade will remain in place through 3Q,” said Mr. Sclodnick. “This timeframe is relatively in line with the last blockade by another ejido, which lasted from Sept. 4 to Dec. 23, 2020. Due to this, the mine was ramping up production through 1Q21 and we expect it would have been hitting its stride with consistent stacking of ore to the leach pad while developing the higher-grade Guadalupe open pit and Bermejal underground deposit; this was expected to boost production into the back half of the year and 2022 while driving down costs with the completion of stripping work.
“This update pushes back the estimated access to the high-grade ore, and we see residual impacts from the lack of stacking of new ore on 1Q22 production. We also pushed back our estimated construction dates for the CIL plant, where we were previously too bullish, and this impacted our 2023 estimates.”
Mr. Sclodnick dropped his production, earnings and cash flow per share projections through 2023, and he expects the Street’s estimates to also decline.
Accordingly, until he sees “greater clarity” on the resumption of operations, he moved Equinox to a “hold” rating from “buy” and cut his target for its shares by $1 to $13. The average is $17.52.
“On a consensus EV/FY1 EBITDA basis, the stock is trading at 5.0 times (6.8 times on our updated estimates), a 10-per-cent premium to peers at 4.5 times; this is above the average differential over the last two years, which was a 10-per-cent discount,” the analyst said. “In the near term, we believe the stock will close the gap and trade down toward the peer average, although we also believe that once the blockade is removed and some of the growth profile is derisked as it comes online, permits are secured or construction is advanced, the stock will ultimately deserve to fetch a premium multiple. However, due to uncertainty with regard to when its flagship asset in Los Filos — which represents 40 per cent of our NAV — will resume operations, we believe the stock will remain under pressure.”
Elsewhere, BMO Nesbitt Burns analyst Ryan Thomson reduced his target to $18.50 from $20 with an “outperform” rating.
“Currently, it is not possible to predict the length of the blockade, so for now we are trimming 10 days of production from our Q2 estimates,” said Mr. Thompson. “We have left our Q3/Q4 assumptions unchanged, but will refine our estimates as the situation evolves. In our view, shares of EQX were already discounted prior to [Tuesday’s] news, so we are not overly surprised to see the stock only underperform modestly To reflect the uncertainty surrounding the operation, we are reducing our multiple for Los Filos to 0.8 times from 1.5 times, which lowers our blended company NAV multiple to 1.1 times from 1.3 times.”
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Barclays analyst John Aiken thinks AGF Management Ltd.’s (AGF.B-T) retail flow improvement is “hard to ignore,” prompting him to upgrade it to “equal weight” from a “underweight” recommendation on Wednesday.
“AGF’s sales success and strong balance sheet, combined with the anticipated boost in earnings and cash flow that would follow the ban of deferred sales charge (DSC) fund sales and the elimination of upfront commission payments, necessitates an upgrade,” he said.
“AGF’s annualized organic growth rate surpassed 8 per cent last quarter and, while we expect this growth to moderate over the next few years, in our view, AGF has turned the corner on sales and will continue to benefit from higher consumer savings rates and equity market momentum coming out of the pandemic.”
Mr. Aiken thinks the ban on deferred sales charge mutual funds is likely to boost both AGF’s cash flow and earnings in 2022 and beyond as it will no longer be paying advisors upfront DSC commissions.
“The additional cash flow will help boost an already strong balance sheet and provide additional resources to invest in growth initiatives, particularly in the private alternative space that AGF has highlighted as a priority for future growth,” the analyst said.
After increasing his estimates to reflect that DSC change, Mr. Aiken raised his target for AGF shares to $8 from $7. The average is $8.46.
“AGF’s management has highlighted a goal of reaching $5 billion in private alternative assets by the end of 2022,” he said. “While AGF remains far from this goal, it is not insurmountable and through proper capital deployment this can be achieved ahead of schedule. AGF’s strong balance sheet provides flexibility and opportunities for capital deployment, which could provide long-term investors with upside. That said, earnings growth beyond 2023 remains dependent on capital deployment and AGF’s ability to sustain sales levels.”
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Credit Suisse analyst Fahad Tariq thinks the recent sell-off in Kinross Gold Corp. (KGC-N, K-T) shares is “overdone.”
Accordingly, citing its valuation following a steep drop after a fire at its Tasiast mine in Mauritania temporarily suspended milling operations, Mr. Tariq raised his rating to “outperform” from “neutral.”
“While we appreciate that year-to-date the company has faced two major operational hurdles – the Round Mountain pit wall instability and Tasiast fire – we think the impact is mainly limited to 2021, with 2022/23 still looking like strong production years,” he said. “There could also be upside from a potentially earlier restart of the Tasiast mill vs. the current (somewhat conservative) year-end timeline. In 2022, we expect the company to offset Round Mountain’s lost Phase W ounces with other ore sources, and expect higher grade ounces to be pulled forward at Tasiast. In the past week, KGC’s market cap has declined $1.47-billion, while we estimate the Round Mountain and Tasiast combined EBITDA impact is $400-million. We also see the stock being supported by buybacks, which could be accelerated in the near-term.”
Mr. Tariq said the incident at Tasiast, which led Kinross to cut its 2021 production guidance on Monday, “could have been much worse” from both a financial and operational perspective, and he believes the market “continues to price in a worse scenario.”
“We think management is being somewhat conservative with the year-end timeline to restart the Tasiast mill (they cited 90-per-cent confidence in the year-end timeline), with the mill potentially restarting in 3-4 months.,” he said. “The critical path item is fabricating and installing a new trommel screen. The $50-million repair estimate and lost profits may also be partially recovered through insurance (claims process is underway). Overall, we think the production impact (approximately 230,000 ounces) will be limited to 2021, with the potential to have a strong start to 2022 with higher grade stockpiles, and no change to the 24k expansion timeline (still mid-2023).”
Mr. Tariq raised his target for Kinross shares to US$8 from US$7.50. The average is US$10.18.
Elsewhere, others making target adjustments include:
* Stifel’s Ingrid Rico to $14.25 from $14.50 with a “buy” rating.
* TD Securities’ Greg Barnes to US$11 from US$11.50 with a “buy” rating
* BMO Nesbitt Burns’ Jackie Przybylowski to US$11.50 from US$13 with an “outperform” rating.
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IA Capital Markets analyst Puneet Singh expects a tighter lithium market in the near term with prices trending higher as more supply appears.
In a research report starting coverage of the sub-sector released Wednesday, he emphasized the potential for increases relies heavily on the adoption of electric vehicles, and predicts demand will slowly grow globally beyond China’s current dominance.
“The market was oversupplied in 2018, but through curtailments at many Australian assets due to low lithium prices and also because no new mines came on-line last year, the market achieved balance,” he said. “Brine deposits in the lithium triangle of Chile/Argentina and hard-rock projects in Australia dominate supply. Chinese companies are increasingly forming JVs with operators and developers in efforts to corner the market and be long-term downstream suppliers to auto manufacturers. Producers have begun work on additional capacity, and longer term (2025+), more supply could be brought on as the market necessitates. Political conditions in key producing countries such as Chile may potentially be a supply bottleneck
“In the early part of the last decade, EVs (passenger EVs, commercial EVs, electric buses, etc.) accounted for 20 per cent of demand. Last year, EV demand was 30 per cent of overall demand and by 2025 we expect EVs to account for 60 per cent of overall lithium demand with passenger EVs alone accounting for 40 per cent of the demand. Tesla (TSLA-Q, Not Rated) is no longer the dominant player and other automakers are introducing EV models in droves. Battery technology is also improving such that average range, a hiccup for consumer adoption previously, is increasing as efficiency and energy density of batteries are increasing along with it. In our assumptions, we presume passenger EV lithium demand to grow at an average 35 per cent (higher growth in 2021/22) growth rate per annum to 2025 and sales to account for 16 per cent of the total passenger vehicle market by then (2020: 4%). China has been a first mover, but we would expect the EU/US to catch up as countries incentivize automakers and consumers to adopt EVs to meet their climate goals.”
Mr. Singh called the lithium equity market “niche,” however he said it’s seen an increased funds flow over the past year, pushing some stocks to all-time highs. After a slowdown in prices thus far in 2021, he now sees an enticing entry point for investors “as lithium prices are signaling robust demand.”
In conjunction with the report, he initiated coverage of a pair of lithium project developers that are “edging” toward production.
Mr. Singh gave Lithium Americas Corp. (LAC-T), which is advancing both the Cauchari-Olaroz project in Argentina (at the construction stage) and the Thacker Pass project in Nevada (at the pre-feasibility stage), a “speculative buy” recommendation, seeing it “undervalued” given the scale of endeavours.
“LAC’s share price has been correcting since its high, and recent protests at Thacker Pass following its Record of Decision approval haven’t helped,” he said. “We’ve delayed Thacker Pass’ start on the off chance it gets caught up in the courts. Either way, we fully expect LAC to recover/re-rate as Cauchari-Olaroz starts production.”
He set a target for Lithium Americas of $24 per share. The current average is $25.71.
Mr. Singh called Neo Lithium Corp.’s (NLC-X) Tres Quebradas project in the Lithium Triangle of Argentina as “world class” and said a September 2020 investment by Chinese battery manufacturer Contemporary Amperex Technology, which now owns an 8-per-cent stake on the company, was a “giant endorsement” of itsnpotential on many metrics.
Accordingly, he set a “buy” recommendation for Toronto-based developer.
“The 3Q project is the third highest-grade project in the world and has amongst the lowest impurities,” the analyst said. “This combination puts 3Q on the lower end of the global cost curve for lithium mines. Pilot scale ponds (running since 2018) and processing have yielded 99.891-per-cent battery grade lithium.”
“Given the size of the resource and Neo Lithium’s recent new discovery, we believe the current mine plan and our initial target price are conservative. Our rough numbers on a potential expansion to 40ktpa LCE show NLC could be worth double our initial target. We expect the Company to re-rate higher as a construction decision is approved, funding is secured for the project, and 3Q heads into production (iA estimate: 2023).”
Mr. Singh set a $5 target, which falls 77 cents below the average.
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Seeing higher rates as a catalyst for Canadian banks, CIBC World Markets analyst Paul Holden adjusted his target for a group of stocks in his coverage universe on Wednesday.
“The interest rate market is pricing in a number of rate increases before the end of 2023, but this does not appear to be captured in consensus estimates or fully baked into P/E multiples,” he said. “We believe there is 3%-5-per-cent upside for the sector, broadly based on higher rates. TD is a positive outlier as the same rate assumptions (+100bps) suggests EPS upside of 12 per cent or more. We remain positive on total return potential for the Canadian banking sector and would highlight TD as a top pick, partly for rate optionality and also for capital optionality.”
His increases were:
Bank of Montreal (BMO-T, “outperformer”) to $138 from $136. The average on the Street is $136.34.
Bank of Nova Scotia (BNS-T, “outperformer”) to $92 from $91. Average: $87.85.
Canadian Western Bank (CWB-T, “outperformer”) to $42 from $41. Average: $39.88.
Mr. Holden cut his target for these:
Royal Bank of Canada (RY-T, “neutral”) to $131 from $133. Average: $136.95.
Toronto-Dominion Bank (TD-T, “outperformer”) to $95 from $97. Average: $93.75.
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BMO Nesbitt Burns analyst Ben Pham reaffirmed his “Top Pick” designation for AltaGas Ltd. (ALA-T) after hosting virtual investor meetings with chief financial officer officer James Harbilas, seeing its “de-leveraging journey remains on track” and the presence of a “visible (yet underappreciated) path to above-average growth in regulated utility and now also midstream.”
“With oil prices at US$70 per barrel investor inquiries on ALA’s midstream business segment have quickly turned from ‘how resilient are cash flows?’ to ‘what is the upside potential?’,” Mr. Pham said. “In short, ALA is not only delivering above average 8-per-cent growth in its utility segment (rate base growth and closing the ROE gap), a similar growth rate is also becoming available in midstream. The key drivers include: (i) higher utilization on existing capacity; (ii) robust frac spreads; (iii) $30-million of Petrogas synergies by year end; (iv) greenfield projects esp. as Canadian West Coast LNG is commissioned middle part of the decade; and (v) opportunistic M&A.”
“Management believes it is on track to reduce debt/EBITDA to less than 5 times vs. 5.6 times in 2020 (10.1 times in 2018) supported by rising cash flows supplemented by asset sales similar to the U.S. Storage deal earlier this year. We believe the relatively high leverage has been a key concern for investors and as ALA continues to work this down, we believe further value could be unlocked. Potential further non-core asset sales could include MVP, Blythe power, and the retail energy biz.”
Mr. Pham thinks “significant upside remains” for AltaGas, leading him to raise his target for its shares by $2 to $29 with an “outperform” rating. The average is $26.17.
“We believe management did an excellent job articulating the growth opportunity ahead – in which we see a continued transformational shift in both earnings power and valuation (currently at 16 times P/E vs. utility at 18 times and midstream at 15 times),” he said. “While the ALA shares have turned in a significant performance, up approximately 41 per cent year-to-date, outperforming the utility and pipeline indices by 36 per cent and 13 per cent respectively, we believe there are still legs to this multi-year transformation and as such, we continue to see the ALA shares as one of the most compelling investments in our coverage universe today.”
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With the close of U.S. public offering for gross proceeds of US$57.5-million, AcuityAds Holdings Inc. (AT-T, ATY-Q) now possesses a “sizable war chest for M&A” in an industry ripe for change, said Canaccord Genuity analyst Aravinda Galappatthige, who also emphasized its option of using leverage for a bigger target.
“With [last 12 month] adjusted EBITDA tracking toward $20-million, this suggests an acquisition capacity of $150-million or higher, depending of course on the profitability levels of the targets,” he said.
Mr. Galappatthige said the Demand Side Platform (DSP) landscape remains “highly fragmented” and “a fertile backdrop for consolidation,” which he expects to accelerate as brands and advertisers trim the number of DSPs used.
“While there has been no recent update, we know from a 2018 report from eMarketer that during 2016-2018 the average number of DSPs used by U.S. advertisers shrunk from seven to four,” he said. “We suspect this narrowing out continues to occur, leading to further consolidation. Ultimately, this means more of the US$80-billion (gross, we estimate $12-15-billion net) U.S. programmatic market will likely be concentrated among the larger players. Together with the potential boost from illumin, we believe this paves the way for AcuityAds to grow in size significantly as it ticks up the DSP rankings.”
“Broadly speaking, we believe the company’s approach would be to acquire other Ad-tech entities (we suspect mostly other independent DSPs), primarily for the revenue/customer base. Management has stated in the past that the current infrastructure can support a revenue base 3-5x greater than it is today. Thus, a large proportion of the opex base of an acquiree would be redundant, translating to substantial synergies. Hence, we expect to see fairly attractive post synergy valuations for AT’s acquisitions. We also note that management has been quite disciplined in its approach thus far with respect to M&A. The recent cooling in valuations for Ad-tech names in the public markets, following its zenith in Q1/21, should also assist management in negotiating reasonable valuations in the private markets.”
To reflect share dilution, he cut his target for AcuityAds shares by $1 to $20, reaffirming a “buy” rating. The average is $20.38.
“In addition to M&A we will continue to track indications/announcements around key account wins, particularly blue-chip accounts on illumin, which would signal the level and nature of adoption by the broader market. We expect to see a near doubling in illumin revenues in Q2 (over Q1),” he said.
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Enthusiast Gaming Holdings Inc. (EGLX-Q, EGLX-T) is “building the home for Generation Z and Millennial gamers,” according to H.C. Wainwright & Co. analyst Scott Buck, who sees it “positioned for revenue acceleration and margin expansion.”
“The company’s owned and operated digital media platform includes more than 100 gaming related websites and more than1,000 YouTube channels. This significant portfolio of digital properties is coupled with gaming and live event content creating a flywheel in which the company can monetize its digital assets,” he said.
In a research report released Wednesday, Mr. Buck initiated coverage of the Toronto-based company with a “buy” rating, expecting its revenue accelerate through next year as it works to improve monetization of digital properties.
“This includes improved advertising revenue performance through increased direct advertising sales as well as potential opportunities to repackage and sell content to third parties including OTT providers,” he said. “In addition, growth in the company’s subscription business should also provide a high margin stream of recurring revenue, expected to grow at mid to high-double digits and improve visibility. We are currently modeling organic revenue growth of 26.7 per cent in 2022. Additional acquisitions could drive incremental revenue upside to our model.”
In justifying his bullish stance, Mr. Buck pointed to several factors including: a favourable secular backdrop that was accelerated by the pandemic; success in integrating acquisitions with “more on the horizon” and a balance sheet that has been strengthened through two recent capital raises, which he sees reducing the near-term threat of further share dilution.
He set a target of US$10 per share. The current average is $12.25 (Canadian).
“While EGLX shares have declined from an April 2021 high of $8.88, we believe meaningful revenue growth in both 2021 and 2022, expanding gross margins, additional M&A and ultimately positive EBITDA as early as 2022 should help drive new investor interest and push EGLX shares towards, and potentially beyond, our $10.00 price target,” the analyst said.
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In other analyst actions:
* Though he continues to view its NexGen’s Rook I project as “one of the best development-stage uranium projects globally,” RBC Dominion Securities analyst Andrew Wong cut Nexgen Energy Ltd. (NXE-T) to “sector perform” from “outperform” with a $6 target, falling below the average by 41 cents, seeing it as close to fully valued.
“We have also pushed back the Rook I start date to 2027 and lowered initial production rates to mitigate potential market risk from the project starting up before the uranium market enters a significant deficit in the late-2020s,” said Mr. Wong.
* CIBC World Markets analyst Mark Petrie raised his Aritzia Inc. (ATZ-T) target to $42 from $40 with an “outperformer” rating. The average is $38.13.
“We remain bullish on Aritzia’s opportunities to drive growth beyond new stores and e-commerce improvements including new product launches and doubling its SKU count. ATZ’s recent acquisition of Reigning Champ, though small, presents an incremental growth opportunity in menswear. We increase Q1/F22 estimates largely to reflect stronger-than-expected web traffic,” said Mr. Petrie.
* CIBC’s Scott Fromson increased his Allied Properties Real Estate Investment Trust (AP.UN-T) target to $49 from $47, exceeding the $47.21 average, with an “outperformer” recommendation.
“We believe positive investor sentiment for office will continue to grow as fundamentals stabilize in concert with higher office return rates and vaccination progress. Allied should be a major Canadian beneficiary of “return-to-office”, reflecting its strong growth strategy and advantageous property portfolio positioning,” he said.
* CIBC’s Dean Wilkinson raised his target for Summit Industrial Income REIT (SMU.UN-T) to $18 from $16.50 with a “neutral” rating. The average is $17.69.
* Morgan Stanley analyst Ioannis Masvoulas raised his First Quantum Minerals Ltd. (FM-T) target to $30 from $28 with an “overweight” recommendation. The current average is $33.96.
* Mr. Masvoulas cut his target for Lundin Mining Corp. (LUN-T) to $12 from $13.30, keeping an “equalweight” rating. The average is $15.40.
* After two acquisitions within its Montney core regions for $10.1-million, Stifel’s Cody Kwong increased his target for Spartan Delta Corp. (SDE-X) to $7.75 from $7.50 with a “buy” rating. The average is $7.46.
David Leeder