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The MTS building in downtown Winnipeg. (Joe Bryksa/Canadian Press)
The MTS building in downtown Winnipeg. (Joe Bryksa/Canadian Press)

Analysts upgrade MTS as takeover speculation grows Add to ...

Inside the Market’s roundup of some of today’s key analyst actions. This post will be updated with more analyst commentary during the trading day.

Manitoba Telecom Services Inc.’s sale of its Allstream division sets the stage for an eventual takeover of the Winnipeg-based company by either Bell or Telus, making this an opportune time to buy MTS shares, said RBC Dominion Securities analyst Drew McReynolds.

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He upgraded Manitoba Telecom to an “outperform” rating from “sector perform.” Similarly, Canaccord Genuity analyst Dvai Ghose upgraded the company today, but to a “hold” rating from a “sell.”

“We believe a sale of Allstream opens the door for an eventual takeout by Bell or Telus, which by our analysis in this report could be done on a free cash flow accretive basis while generating a meaningful takeout premium for Manitoba Tel investors,” Mr. McReynolds said in a research note. “Regardless of the timing and likelihood of any transaction, we believe Manitoba Telecom will now be viewed as a logical takeout candidate, providing a boost to valuation.”

Mr. Ghose, however, is more cautious about prospects for a takeover, believing that Bell is the only likely buyer. Under Canadian law, telecoms must be controlled by Canadians, and that leaves a pretty limited slate of suitors.

“We believe that Rogers and Shaw would be prevented from acquiring MTS for competitive reasons and that Telus is not seeking low growth acquisitions with limited wireless exposure,” he said. “Bell may be the only buyer of the incumbent asset.”

Meanwhile, Mr. Ghose expressed disappointment that MTS will be keeping Allstream’s historic pension deficit of $210-million under the $520-million sale to Egyptian billionaire Naguib Sawiris announced last week. “Even after contributing $170-million into combined MTS and Allstream pension plans, MTS is still expected to have a $400-million pension solvency deficit. While MTS is not expected to incur further pension solvency payments until 2016, under current conditions, it may require $60-million to $80-million of annual solvency funding from 2016.”

Still, he cited a number of positive outcomes that should result from MTS’s sale of Allstream, including a reduction in pension risk, a boost to free cash flow, and less chance that the dividend will be cut - as well as much better odds that MTS will be eventually taken over.

Pierre Blouin, chief executive of MTS, said Friday that there is no plan to sell MTS.

Target: Mr. McReynolds raised his price target to $37 from $33; Mr. Ghose increased his target to $35 from $29. The average price target among analysts is $34.70, according to Bloomberg data.

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Canaccord Genuity analyst Mario Mendonca upgraded National Bank of Canada to a “buy” rating in the wake of the company’s better-than-expected fiscal second-quarter earnings last week.

National Bank, which also hiked its dividend and announced a boost in its share buyback program, reported core earnings per share of $2.08, up 6 per cent from a year earlier and well above the consensus estimate of $1.97.

“After delivering very weak NIM (net interest margin) performance in domestic retail throughout most of the year, National’s quarter-over-quarter P&C (personal and commercial) NIM performance (down 1 basis point) was solid,” Mr. Mendonca said in a research note.

Mr. Mendonca, who previously rated the stock as a “hold,” cited the bank’s relative valuation to peers and an improved outlook on capital for the upgrade.

Target: Mr. Mendonca raised his price target by $1 to $89. BMO Nesbitt Burns analyst John Reucassel also raised his price target by $1 to $83 but reiterated a “market perform” rating. The average target is $82.93.

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Desjardins Securities analyst Benoit Poirier upgraded Héroux-Devtek Inc. to “buy” from “hold,” believing the stock is trading at an attractive level after falling more than 10 per cent so far this year.

The aerospace repair company’s fiscal fourth-quarter results last week were below expectations, but Mr. Poirier notes that the commercial aircraft sector is robust, even as the military sector continues to be soft.

He notes that management has clearly signalled it plans to pursue merger and acquisition opportunities in coming months, which should further add to shareholder value.

“In light of the ample growth opportunities and near-term catalysts, we believe the stock is undervalued,” she said.

Target: Mr. Poirier raised his price target to $11 from $10.50. The average target is $9.43.

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Counsel Corp. announced today that its residential mortgage lending business, Street Capital, has received regulatory approvals to issue National Housing Act Mortgage Back Securities and be a seller under the Canada Mortgage Bond program.

“Although the approval news has no material impact on our earnings forecast, access to a securitization program does enhance their liquidity strategy by providing additional funding capacity for future originations and renewals, while diversifying away from solely institutional buyers,” said M Partners analyst Patrick Ruiz. “We expect securitization will grow to be an important component of the company’s placement mix going-forward.”

Target: Mr. Ruiz maintained a “buy” recommendation and $2.40 price target. The average target is $2.37.

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Cascades Inc.’s startup in mid-July of the Greenpac mill in Niagara Falls, NY, “should prove to be transformative” for the forestry company, given that it is a state-of-the-art asset with the potential to make a substantial contribution to earnings, commented Desjardins Securities analyst Pierre Lacroix.

“In light of rising prices and stable input costs, we believe Cascades’ timing could not have been better,” he said.

Target: Mr. Lacroix reiterated a “buy” rating and $6 price target.  The average target is $5.79.

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For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @ eyeonequities

Follow on Twitter: @eyeonequities

 

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