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The oil pipeline and tank storage facilities at the Husky Energy oil terminal in Hardisty, Alta., June 20, 2007.Larry MacDougal/The Canadian Press

Inside the Market's roundup of some of today's key analyst actions

Canaccord Genuity analyst Dalton Baretto has assumed coverage of four base metals producers.

At the same time, Mr. Baretto's view on the trajectory of commodity prices was "reset." He said it is now based on Canaccord's interpretation of supply and demand dynamics rather than forward curves.

"We anticipate zinc pricing to improve first, followed by metallurgical coal, copper and finally nickel," he said.

Mr. Baretto called Lundin Mining Corp. (LUN-T) "the value investment" with a "buy" rating and a target price of $7. The analyst consensus price target is $5.61, according to Thomson Reuters.

"LUN is our top pick for its growing zinc exposure, stable copper production profile through 2019, positive FCF [free cash flow] generation, strong balance sheet and NAV [net asset value] accretion over the next 12 months," he said. "We note LUN's attractive trading multiples compared to its peers, which we believe are reflective of the company's current lack of financial and operating leverage and growth. As such, we believe the ultimate outcome of the current strategic review process at Tenke could be a significant catalyst for the shares."

First Quantum Minerals Ltd. (FM-T) is "the growth story," according to the analyst. He kept a "buy" rating and $11.75 target. Consensus is $10.73.

"FM is the only company in our coverage universe with a growing copper production profile, with copper production poised to increase by a substantial 75 per cent by 2019 due to Sentinel and Cobre Panama ramping up," he said. "As such, FM also offers the most leverage to what we believe will be a rising copper price environment in the medium term. The growth profile is reflected in FM's valuation – FM is currently our most expensive name on estimated near-term metrics, but cheapest on a NAV basis."

Mr. Baretto said investors should "think zinc" with HudBay Minerals Inc. (HBM-T), giving it a "buy" rating and $7.50 target. Consensus is $7.57.

"HBM is our preferred vehicle to obtain zinc exposure within our current coverage universe – the company offers the most leverage to a rising zinc price on both estimated near-term and long-term metrics," he said. "We forecast zinc to contribute [approximately] 25 per cent of the company's revenue between now and the end of the decade. In addition, we believe that HBM is relatively inexpensive versus its peers on a near-term basis, but fully valued on a NAV basis."

Mr. Baretto also said Teck Resources Ltd. (TCK.B-T) has "coal-fired momentum." He kept a "hold" rating and $16.50 target, compared to a $14.48 consensus.

"While we like TCK for its scale as well as leverage to met coal, copper and zinc prices, at the current share price we note that TCK trades far outside its historical trading ranges on both estimated near-term and long-term metrics," he said. "In addition, the company's copper business is declining (with growth options that appear marginally economic on our current copper deck), and the foray into energy with Fort Hills seems destined for mediocre returns based on our current oil price forecasts."

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Desjardins Securities analyst Kristopher Zack raised his target price for Encana Corp. (ECA-N, ECA-T) in reaction to its "solid" second-quarter results.

On July 21, Encana reported cash flow per share of 21 cents (U.S.) and core asset production of 268,300 barrels of oil equivalent per day. Both results met Mr. Zack's expectations.

"The 2016 capital budget was expanded by $0.2-billion," he said. "While this represents only a 20-per-cent increase, it is expected to result in 50 per cent more wells drilled and completed, a testament to the improved efficiencies. Production guidance remains unchanged as the contribution from additional spending offsets the impact of the Gordondale sale; however, we view this as a positive development as the company effectively swaps for higher netback volumes, with the Permian set to receive the lion's share of the additional capital."

He emphasized the company is now focusing on cash flow growth in order to improve its debt ratio.

"Total disposition proceeds of [approximately $1.1-billion are expected to be received by the end of July; this is below the initially announced $1.4-billion, largely due to a sizeable purchase price adjustment associated with the lengthy period in closing the DJ Basin sale," the analyst said. "In the absence of retiring additional long-term debt—a less attractive option in the current environment — the focus shifts back to supporting cash flow growth at compelling reinvestment efficiencies with shorter payback periods. While ECA will retain some cash on the balance sheet, we expect that further dispositions are possible to concentrate the asset base and improve returns through leverage to the extensive inventory of opportunities in the four core areas."

He added: "We have adjusted our model to reflect the revised capex program and improved cost guidance. The company now plans to spend $1.1–1.2b this year, a $200-million expansion from the prior budget, utilizing disposition proceeds to offset sold volumes through higher organic growth. We view this as a prudent strategy for the company to capitalize on recent capital efficiency improvements, in addition to continuing to focus the asset base in the four core areas. Meanwhile, ECA has also continued to demonstrate progress in improving its cost structure — in particular, negotiating a reduction in firm transportation costs on the REX system as well as negotiating with TransCanada for more favourable terms on the Canadian Mainline."

Mr. Zack maintained his "hold" rating but raised his target price to $8.50 (U.S.) from $8 to reflect an increased 2017 cash flow projection. Consensus is $10.04.

"While we view the quarter positively and continue to highlight the company's progress in reducing costs and enhancing the focus of the asset base, the total return potential to our revised target is fairly limited at current levels," he said.

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BMO Nesbitt Burns analyst Randy Ollenberger raised his target price for Husky Energy Inc. (HSE-T) to reflect a more bullish view of its business segment and progress in its Liwan Gas Project dispute with China's CNOOC Ltd.

On Friday, Husky reported second-quarter results which met expectations.

An adjusted operating loss of 10 cents per share was less than Mr. Ollenberger's projection of a 20-cent loss and the 21-cent consensus "due to better downstream performance and an unexpected deferred tax recovery in the corporate segment." Operating cash flow of 46 cents per share fell below the analyst and consensus forecast of 48 cents, due partially to higher expenses and royalty costs.

In reaction to the results, Mr. Ollenberger moved his 2016 earnings estimate to a 74-cents-per-share loss from 92 cents. His 2017 forecast moved to a 14-cent loss from a 20-cent loss.

He kept his "market perform" rating and increased his  target price to $18 from $16. Consensus is $19.19.

"Husky strengthened its balance sheet through reduced capital spending and asset divestitures, making it one of the strongest among its peers," the analyst said. "However, we believe that share price upside could be limited until the Liwan contract dispute is resolved and the dividend reinstated. At current prices the shares are trading at a 2017 estimated EV/EBITDA multiple of 5.1x versus a Canadian peer average of 9.2x. We believe that a lower multiple is warranted by the lower returns and free cash flow, absence of a dividend and the uncertainty associated with Liwan."

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The "weak" third-quarter results for Mainstreet Equity Corp. (MEQ-T) highlight the challenges of the Alberta rental apartment market, said Canaccord Genuity analyst Jenny Ma.

The Calgary-based real estate company reported a 7-per-cent decline in funds from operations year over year (to 63 cents from 68 cents). The result fell below both Ms. Ma's projection of 72 cents and the 70-cent consensus forecast.

Same-property net operating income fell 11 per cent from 2015.

"The primary driver was weakening fundamentals in Alberta," the analyst said. "Same-property revenue decreased by 5.7 per cent, due to increased vacancy, increased use of rental incentives, and higher bad debt expense. Same-property operating expenses increased by 6.2 per cent, due to higher property tax, security, advertising and promotion, and repairs and maintenance expenses."

She added: "We are reducing our estimates following FQ3/16 results which were well below our expectations and a sustained negative outlook for apartment fundamentals in Alberta. Mainstreet's vacancy has increased and rental rates have declined, and we do not expect any improvement in the near term as market fundamentals remain weak with persistent downside risk. Of note, we are modifying our calculation of FFO and AFFO for Mainstreet Equity Corp. We now no longer add back the amortization of deferred financing costs to FFO and AFFO, which is consistent with Mainstreet's reported FFO, and with the rest of our real estate coverage universe. This change in methodology results in a decline in our FFO and AFFO per diluted share estimates of 23 cents for fiscal 2016 and 25 cents for fiscal 2017."

Maintaining a "hold" rating for the stock, Ms. Ma's target dropped to $36 from $40. Consensus is $41.58.

"The outlook for the Alberta economy remains weak, and we expect investors to remain cautious towards REITs/REOCs with significant exposure to Alberta," she said. "Our new target price implies a forecast total return of 3.8 per cent."

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Transforce Inc.'s (TFI-T) margins appear set to rise, according to BMO Nesbitt Burns analyst Fadi Chamoun.

However, he said the transportation and logistics services company's valuation is not currently compelling.

On July 21, Transforce reported adjusted second-quarter earnings before interest, taxes, depreciations and amortization of $118-million, a decline of 14 per cent year over year. Excluding gains from asset sales, Mr. Chamoun said he estimates core EBITDA was $113-million, a decline of 7 per cent, and below his $119-million forecast.

"Owing to challenging market conditions for many of TFI's businesses, organic revenues remained under pressure (down 5 per cent year over year)," the analyst said. "However, operating margins in the P&C [package and courier] and LTL [less-than-truckload] segments increased as a result of TFI's efforts to improve productivity and efficiency over the last several years. In particular, P&C margin approached TFI's long-held target of 10 per cent for this business and management expects this to be sustainable going forward."

Mr. Chamoun lowered his 2016 EBITDA estimate by $1-million to $439-million. His 2017 forecast rose to $472-million from $459-million due to higher P&C margin assumptions.

"We suspect operating margins in many of TFI's businesses may have troughed and results could be set to improve as volumes recover," he said. "We believe TFI continues to have significant leverage to an improving freight demand environment, particularly in Canada where it generates about two-thirds of its revenues. However, visibility into a pickup in demand remains limited and we believe the valuation does not provide a sufficient margin of safety should volume growth not materialize. Moreover, we believe TFI's focus on expanding its U.S. truckload operations via a sizeable acquisition elevates the risk profile of the company given the more cyclical nature of the U.S. trucking sector (relative to Canada) and current industry conditions south of the border. In addition, we suspect the potential transaction could push up TFI's already high financial leverage level of 2.2 times debt/EBITDA."

He increased his target to $25 from $23 with a "market perform" rating (unchanged). Consensus is $26.18.

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Citi analyst Jim Suva upgraded Hewlett Packard Enterprise Co. (HPE-N) to "buy" from "neutral," citing under-appreciated free cash flow generation.

"While there are many moving parts to the business with divestitures, accelerated restructuring and separation payments in FY2016/FY2017, we believe investors are underappreciating the FCF generation and net cash improvement for HPE in 2H16 and 2017 (post the spinoff)," the analyst said. "We estimate the normalized FCF (excluding restructuring and separation payments) of the core HPE business (excluding Services) will be closer to $3-billion. With an improved FCF conversion profile, we believe HPE could double their dividend payouts (from $0.22 to $0.46) post the Services spin off. We expect further details on this at the company's upcoming Analyst Day in early October. Management has indicated that while acquisitions remain a viable strategy, the size of the acquisitions would likely hover around the $2-$3-billion range (similar to the Aruba acquisition) and unlikely to be large like the Autonomy acquisition ($11-$12-billion).

Mr. Suva raised his target to $25 (U.S.) from $20. The analyst average is $20, according to Bloomberg.

"Enterprise demand has fared better than expected thus far (IBM, SAP, STX, MSFT with Azure topping expectations)," he said. "Currency likely a mixed bag for HPE given modest appreciation in yen offset by pound and euro depreciation. The risk in 2H is margin expansion in enterprise group (which has been pressured YTD given higher concentration of server demand for cloud data centers though management has indicated improved opex efficiency and revenue mix). We are modestly tweaking our estimates for higher revenues partially offset by slight margin pressures from higher cloud related revenues."

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In a research note previewing earnings season for Canadian infrastructure companies, Credit Suisse analyst Andrew Kuske raised his target prices for many stocks to reflect a "persistently low interest rate environment."

"With the Canadian 10-year bond yield hovering around 100 basis points, we revisited past yield spread valuation work," said Mr. Kuske. "One conclusion is spread relationships at extreme nominal rate levels are less relevant than absolute dividend/distribution levels along with growth being more critical. A downward moving yield curve looks to benefit those with high absolute yields and spreads versus lower yield and negative spread stocks. With limited downward movement in potential yields, a greater focus on growth from the underlying business fundamentals should take hold."

On the quarter as a whole, he said: "A degree of messiness should be expected in the results season after the Alberta wildfires' direct and indirect impacts. Acquisition related noisiness should begin to subside with only FTS-ITC going through the closing process. Deals highlight the sector's capital market openness along with the reinvention potential which are positives. By way of contrast, in our view, Alberta's ongoing power market uncertainty continues to offer a poor risk-adjusted return relationship for the near-term."

His changes were:

  • Brookfield Renewable Partners LP (BEP.UN-T, neutral) to $44 from $40. Consensus is $45.86.
  • Canadian Utilities Ltd. (CU-T, neutral) to $42 from $38. Consensus is $39.50.
  • Emera Inc. (EMA-T, outperform) to $58 from $54. Consensus is $53.33.
  • Enbridge Inc. (ENB-T, neutral) to $58 from $54. Consensus is $57.71.
  • Enbridge Income Funds Holdings Inc. (ENF-T, neutral) to $34 from $32. Consensus is $34.92.
  • Fortis Inc. (FTS-T, neutral) to $46 from $42. Consensus is $47.13.
  • Hydro One Ltd. (H-T, neutral) to $26 from $24. Consensus is $24.96.
  • Pembina Pipeline Corp. (PPL-T, neutral) to $44 from $40. Consensus is $42.97.
  • TransCanada Corp. (TRP-T, outperform) to $70 from $64. Consensus is $61.63.

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In other analyst actions:

GMP analyst Ian Parkinson upgraded Detour Gold Corp. (DGC-T) to "buy" from "hold" and raised his target price to $37 from $25.25. The analyst average target price is $40.09.

Mr. Parkinson downgraded Taseko Mines Ltd. (TKO-T) to "hold" from "buy." He lowered his target to 90 cents from $1. The average is 82 cents.

Macquarie analyst Robert Summers upgraded Whole Foods Markets Inc. (WFM-Q) to "outperform" from "neutral" with a target of $38 (U.S.), rising from $28. The average is $30.95.

Independent Research GmbH analyst Markus Friebel downgraded AT&T Inc. (T-N) to "sell" from "hold" and lowered his target to $36 (U.S.) from $41. The average is $43.40.

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