Inside the Market's roundup of some of today's key analyst actions
The merger of Alio Gold Inc. (ALO-T) and Rye Patch Gold Corp. (RPM-X) makes sense, according to Raymond James analyst Tara Hassan, who cautions time will be required before benefits are seen.
On Monday, Vancouver-based Alio announced an agreement to acquire Rye Patch in an all-equity deal worth about $128-million.
"Although the addition of production from the Florida Canyon ('FC') project in Nevada enhances Alio's near-term cash flow, the offsetting share dilution has led to decreased per share metrics, driving our target price reduction," said Ms. Hassan. "While there are benefits of the transaction, and we see longer term value in Alio's new portfolio, we expect an overhang relating to the transaction, weaker 1H18 operating results (relative to 2H18), and continued Guerrero risks will continue to weigh on Alio's share price in the near term. However, with Alio significantly underperforming its global junior producing peers since our rating revision in late November (by 43 per cent), it is now trading well below peer group and we see limited further downside if it can execute at FC."
Accordingly, Ms. Hassan upgraded her rating for Alio to "market perform" from "underperform."
"Ahead of a planned 2H18 mine plan update for FC, we have incorporated the 1Q17 PEA in our valuation with some minor variations," she said. "This delivers increased annual production and decreased AISC [all-in sustaining costs] for Alio in the near-term, however given ramp-up issues at FC in 2017, we expect investors may look for demonstrated operational improvements over a number of quarters before rewarding an increased market re-rating."
Her target for Alio shares fell to $5 from $7.25. The average among analysts currently covering the stock is $5.44.
"Alio is now trading well below the peer group (0.40 times net asset value and 3.6 times 2018 price-to-cash flow on pro-forma basis versus global peers at 0.75 times NAV and 5.6 times2018 P/CF)," said Ms. Hassan. "We expect the underperformance to continue in the near-term given limited catalysts in 1H18 and the potential trading overhang post the close of the acquisition. We highlight the potential for a market re-rating later in 2018 if Alio delivers positive results from its operations and AP underground program."
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Canaccord Genuity analyst Derek Dley upgraded his rating for AutoCanada Inc. (ACQ-T) in reaction to its $110-million acquisition of Grossinger Auto Group in Illinois.
"In our view, this transaction adds a new growth avenue to AutoCanada, as we had previously assumed the company would remain focused on consolidating the Canadian market," said Mr. Dley. "Pro-forma the transaction, AutoCanada boasts a portfolio comprising 68 dealerships across 27 brands operating in 8 provinces within Canada, and now, the United States.
"AutoCanada's acquisition of Grossinger not only extends the company's presence into the U.S. for the first time, but also adds four new brands to the AutoCanada portfolio – Toyota, Honda, Lincoln and Volvo. Upon closing of the transaction, AutoCanada will acquire 14 dealerships in Illinois, with 8 located in Chicago and 6 in the neighbouring metropolitan area of Bloomington-Normal."
Mr. Dley projects Grossinger generates almost $18-million in annual earnings before interest, taxes, depreciation and amortization (EBITDA). That led him to a transaction value of 6.1 times EBITDA, versus his AutoCanada's valuation at Thursday's close of 6.5 times his 2018 EBITDA estimate.
He estimates the acquisition is 15 cents accretive to his 2019 earnings per share estimate, or almost 7 per cent.
"We estimate Grossinger was generating EBITDA margins in the 3.5-per-cent range, as margins in the U.S. tend to be slightly lower, particularly on the gross margin line," he said. "AutoCanada believes it has the ability to increase margins over time, through applying its best practice initiatives, such as increasing the F&I business, improving new and used car gross margins, etc.
"We expect that, pro-forma the transaction, AutoCanada's leverage excluding floorplan financing will increase to approximately 2.4 times NTM [next 12-month] EBITDA from 2.0 times. The company recently commented that it would be comfortable leveraging up to 3.5 times should incremental accretive acquisition opportunities arise."
He raised his 2018 EPS estimate for the Edmonton-based company to $2.02 from $1.96, while his 2019 expectation rose to $2.25 from $2.10.
Moving AutoCanada to "buy" from "hold," Mr. Dley increased his target price for its shares to $27 from $25. The average on the Street is $28.20.
"Given AutoCanada has now added an additional avenue for growth to its acquisition strategy, we are comfortable increasing our target price and rating as we believe the company's growth profile is set to accelerate," he said.
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Coeur Mining Inc. (CDE-N) offers investors exposure to a diversified portfolio of mines with low jurisdictional risk as well as good share liquidity, according to Raymond James analyst Brian MacArthur.
He initiated coverage of the Chicago-based company with an "outperform" rating.
"Over the past few years, management has undertaken a major restructuring of its assets, acquiring the Wharf mine in 2015 from Goldcorp, Paramount Gold and Silver Corp. in 2015, the Silvertip mine in 2017 from JDS, restructuring the Palmarejo royalty/stream with Franco Nevada in 2014, increasing exploration budgets and most recently announcing a new PEA on the Rochester mine using HPGR technology which, the company believes, could substantially improve the economics of the project," he said.
"It remains a large silver producer but also has meaningful exposure to gold, zinc and lead. It has a flexible balance sheet and as of Dec. 31, 2017 had $220-million in working capital including $192-million in cash and $381-million in long-term debt with no significant debt repayment required until 2021. It also has $370-million in U.S. NOLs which help shelter federal tax and could be used in future transactions. With the recent startup of Silvertip, we expect 2019 silver equivalent production to grow about 8 per cent and more importantly, cash flow to grow by about 50 per cent and free cash flow greater than 100 per cent. Longer-term optionality exists given the exploration budget and the potential HPGR project at Rochester, which if approved, could extend mine life, reduce costs, and meaningfully increase NPV."
Despite its improved asset base and the expectation for free cash flow (FCF) growth in 2019, Mr. MacArthur does expect first-quarter 2018 FCF to be negative, pointing to a "substantial" portion of the Silvertip capex being allocated toward bringing the mine, located in norther British Columbia, into production. The company also faces a "significant" tax payment for historical earnings in Mexico.
Mr. MacArthur set a price target of US$9.50 for Coeur shares, which sits below the consensus of $10.50.
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Though she believes the long-term revenue opportunity and growth outlook remains intact for DIRTT Environmental Solutions Ltd. (DRT-T), Laurentian Bank Securities analyst Elizabeth Johnston lowered her target price for its share following weaker-than-anticipated fourth-quarter 2017 financial results.
On Wednesday after market close, Calgary-based DIRTT reported revenue for the quarter of $74.3-million, a drop of 5 per cent year over year and below the expectations of both Ms. Johnston and the Street. Adjusted EBITDA of a $1-million loss also missed expectations, and was due largely to higher expenses.
"Given the internal investments made in 2017 (and 2016), we believe that the company is positioned for continued growth both in terms of revenue and EBITDA," said Ms. Johnston. "In terms of the guidance for adjusted EBITDA margin discussed on the quarterly call, we believe that the low end (of the 13-15-per-cent range) is achievable, particularly in light of the plan to scale back the annual Connext event and reduce spending on an annual basis. However, we remain cautious with respect to the execution of these changes along with the potential for additional restructuring costs. We note that searches are still underway for permanent CEO and CFO."
Her target for DIRTT shares fell by a loonie to $6.50 to "reflect the ongoing uncertainty with respect to the company's strategy as well as execution risk." The average target is currently $6.93.
Elsewhere, Raymond James analyst David Quezada dropped his target to $7.50 from $8 with an "outperform" rating.
Mr. Quezada said: "Despite challenging 4Q17 results and uncertainty related to the company's management transition, activist shareholder and strategic consultant review, we continue to believe in DIRTT's value proposition and 2018 earnings growth."
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BRP Inc. (DOO-T) ended the year in "pole position," said Desjardins Securities analyst Benoit Poirier, who expects further growth opportunities ahead.
On Wednesday, the recreational vehicle manufacturer reported better-than-anticipated fourth-quarter fiscal 2018 results. Revenue of $1.263-billion topped the expectations of both Mr. Poirier ($1.215-billion) and the Street ($1.243-billion), despite representing a 3-per-cent drop year over year. Fully diluted earnings per share of 96 cents also exceeded projections (90 cents and 92 cents, respectively),
"The company's guidance was stronger than expected, and we have high confidence in management's ability to deliver," said Mr. Poirier. "BRP expects the distribution of FY19 EBITDA to look similar vs FY18 'new GAAP' due to the higher volumes sold of SSVs [side-by-side vehicles] and snowmobiles, as well as the introduction of the new Spyder (Project S). FY19 normalized EPS guidance includes the repurchase of 0.6–1.7 million shares, which incrementally contributes to the higher net income forecast. BRP also provided capex guidance of $315–330-million (we had expected $286-million), which reflects the company's recent decision to expand its capex envelope by $100-million in order to increase production capacity and meet demand for its products. BRP also maintained a high R&D envelope for FY19 as management sees attractive returns on these investments. We believe the investments are key for BRP to gain further market share and to ensure its long-term growth prospects, which should more than offset the negative impact on FCF in the near term."
Based on the guidance, Mr. Poirier raised his fiscal 2019 EPS expectation to $2.72 from $2.64.
His target for BRP shares jumped to $58 from $54 with a "buy" rating (unchanged).
"Overall, we maintain our positive stance on BRP due to its strong momentum in the market and solid market fundamentals," he said. "The company's robust balance sheet should enable it to look at cash-deployment opportunities, such as M&A (it is considering spending more than $500-million on acquisitions) or share buybacks. We see sizeable upside potential for the stock at current levels, given the compelling 5–7-per-cent FCF yield. We expect BRP to outperform peers in FY19 and believe the stock is attractive vs peers, trading at an EV/FY1 EBITDA multiple of 9.4x versus an average of 12.2 times for its closest peers."
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In other analyst actions:
TD Securities analyst Bentley Cross downgraded Trilogy International Partners Inc. (TRL-T) to "hold" from "buy" with a target of $6, falling from $7. The average on the Street is $7.50.
David Leeder