Analysts from Euro Pacific Canada revealed their top picks for 2015 recently, and innovation was a major theme. Of the firm’s eight top picks, six came from the innovation sectors. The firm has graciously allowed us to share them with the readers of Cantech Letter.
Noting that the TSX was weighed on heavily by the mining and metals sector, which was down 21.7% on the year after a 24.9% decline in 2013, Euro Pacific points out that its tech-heavy focus has played out well of late, as the TSX’s IT Index gained 35.9% in 2014 after a 34.9% gain in 2013. “Euro Pacific’s commitment to the Canadian Healthcare and Technology sectors has been a clear win,” notes the report.
So where do Euro Pacific Canada analyst see upside from here? The report says the firm “…continues to see the Technology and Healthcare/Life Sciences as leading sectors, where Canadians are recognized leaders.”
To the picks….
Analyst Doug Loe has two top picks, Neptune Technologies & Bioressources (TSX:NTB) and and TSO3 (TSX:TOS).
Loe has a “Buy” rating and one-year target of $7.50 on Neptune, implying a return of 233% at the time of publication.
Quebec-based Neptune Technologies & Bioressources is a manufacturer and seller of Neptune Krill Oil (NKO), which is a proprietary omega-3 phospholipid ester formulation sold into nutraceutical & medical markets.
Neptune rose to prominence on the increasing popularity of krill oil as a nutritional supplement and fell when, on November 8, 2012 an explosion at its plant in Sherbrooke killed three people, injuring eighteen more and destroyed the company’s entire inventory. The company became subsequently mired in red ink and a class action lawsuit that was ultimately dismissed.
Loe says he thinks a retooled Neptune will rise in a market in which the wind is at its back.
“Emerging signals from industry lobbyists and from business development initiatives by Neptune’s larger peers that the omega-3 market could improve overall in 2015,” he said. “Our views on the overall omega-3 nutritional supplement market remain positive, and for omega-3 phospholipid ester formulations to grow market share within the category.”
The analyst says he expects strong sequential revenue growth from Neptune in fiscal 2015 and 2016.
Loe has a “Buy” rating and $3.75 one-year target price on TSO3 (TSX:TOS), implying a return of 176% at the time of publication.
Quebec City-based TSO3 is a creator of low-temperature hospital sterilization equipment. Its ozone-based Sterizone VP4 platform has been granted valuable regulatory approvals in North America, and the company has commercial partnerships pending for it.
Loe says that after an “extremely protracted review” the regulatory risk is now “virtually eliminated” for VP4 in key markets in North America and Europe. He thinks the hospital sterilization market worldwide will fast see value in VP4, and notes that the low temperature segment is the fastest growing part of the sterilization market.
Loe, who thinks TSO3 will rise from under a million in revenue in fiscal 2014 to $17.51-million in fiscal 2015 and $41.58-million the following year says there is precedent to such a sharp topline spike.
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“Although our sales ramp may seem aggressive for an entrepreneurial medtech firm with no prior history of manufacturing low-temperature sterilizers to that scale, we believe annual market demand is at least that high or even higher, and cumulative systems sold that year would be consistent with timelines taken by Advanced Sterilization Products (ASP, since acquired by J&J) to grow its installed base to 5,000 from 1992-2001, back when ETO systems were still the dominant platform and when daily throughput for sterilizing reprocessed medical devices was not as high as it is now. We expect an increase in the demand for surgical procedures for geriatric diseases (ophthalmology, orthopedic, and urology procedures, to name three) to drive requirements for sterilized surgical equipment in those and other markets.”
Wanted Technologies (TSXV:WAN) is Andrej Krneta’s top pick for 2015. The Euro Pacific Canada analyst has a “Buy” rating and $1.80 one-year price target on Wanted, implying a return of 25% at the time of publication.
Quebec-based Wanted Wanted Technologies supplies business intelligence solutions to the talent marketplace. The company’s Wanted Analytics platform delivers real-time labour intelligence to staffing agencies, the media, financial institutions and governments.
Krneta notes that a contract lost in June of last year left Wanted without 13% of its topline. But the analyst says this was the result of the company’s improving abilities in direct sales, and that this mitigates the downside. He thinks he risks associated with this particular loss of revenue are overstated.
The analyst says Wanted Technologies is leveraging its assets to transition its business to a model that is more lucrative.
“A unique asset (10Y of data), rise of predictive analytics, and adoption of quant-tools in HR saw the corporate market emerge as the key driver,” said Krneta. “Yet, the ongoing shift from reselling data to directly serving corporates goes beyond leveraging a pocket of strength. We see the transition: (i) reverse the structural risks that kept buyers at bay in C2014, and (ii) open a second channel by partnering with suppliers of complementary technology.”
Computer Modelling Group (TSX:CMG) is Amr Ezzat’s top pick. The analyst has a “Buy” rating and $15.00 one-year target price, implying a return of 40.3% at the time of publication.
Calgary-based Computer Modelling Group is a world leader in reservoir simulation software. The company’s product helps increase the recovery of hyrdrocarbons for more than 550 clients in 58 countries.
Ezzat says the recent downturn in oil prices won’t affect CMG as much as some casual observers might think.
“We view the recent pullback in the stock as an opportunity to consolidate a position in a best-of-breed business,” says the analyst. “With a 75%+ recurring revenue base, CMG leverages investors to secular growth trends while providing exceptional defensive characteristics. We expect CMG’s high free cash flow generation will enable the Company to grow annual dividends at low double digits. We note that CMG has a low correlation to oil prices (+0.25 over the last four years); it is thus a great refuge for investors seeking a more defensive name (in the short run), while keeping leverage to the secular growth in secondary/tertiary oil production.”
Despite a more than 55% pullback in the price of oil, Ezzat is forecasting year-over-year revenue growth of 10.3% and 16.3% for CMG’s next two quarters.
For the second year in a row, DHX Media (TSX:DHX.B) is a top pick of Rob Goff. The analyst has a one-year target of $11.50 on the stock, implying a return of 25.9% at the time of publication. But the analyst, also has second pick, Espial Group (TSX:ESP). Goff has a “Buy” rating on Espial and a one-year target of $4.30, implying a return of 181% at the time of publication.
Halifax-based DHX produces and distributes children’s and family entertainment, boasting a library of more than 9000 half-hours of production including titles such as Yo Gabba Gabba!, Caillou, and Inspector Gadget. The company is the largest supplier of children’s programming to Netflix.
Despite delivering a return of more than 73% in 2014, Goff says he remains “resolutely bullish” on DHX Media> he explains that the company has exhibited “consistent discipline and success with its acquisition strategy,” and that its increasing scale means it can add synergies to its operations.
Goff says DHX is positioned extremely well to benefit from the growth in demand for content that is being led by Over-the-Top services such as Netflix.
“We see a prolonged battle for content across the traditional broadcasters, premium broadcasters, and OTT providers,” he said. “We expect that large content owners such as DHX will outperform smaller peers who lack access to the buyers and new digital platforms.”
Goff’s second top pick, Espial Group (TSX:ESP), has taken off of late, after announcing it had signed a contract with a has signed a contract with a Tier 1 European Cable Operator, but the analyst sees much more upside.
Ottawa-based Espial provides standards-based solutions for set-top box IPTV delivery and Smart TV browsers. The company’s IPT solutions work on the RDK and HTML5 standards, and its Smart TV browser has secured partnerships with leading chipset manufacturers and content providers.
Goff notes that investors have been disappointed by the lack of client wins from Espial, and says he has been disappointed by the pace of RDK adoption, but he thinks this can be chalked up to the pace of the industry rather than anything company specific.
Goff points out that the adoption of IPTV is still in its infancy, and that Espial has plenty of runway.
“Research and Markets estimates that over a sample of 97 countries, the number of homes paying for IPTV service will grow to approximately 167M by the end of 2018, up from approximately 69M at the end of 2012,” he notes. “This suggests that IPTV penetration will surpass the 10% milestone at that point, double the 2012 penetration level and be up from the 1% level seen in 2008. Over the same period, revenue generated from IPTV services is expected to grow to over $21B by 2018 from $12B in 2012 and under $3B in 2008.”
Disclosure: Cantech Letter’s Nick Waddell owns shares of Espial Group.