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Eye on Equities

Canaccord has "exceptional" risk-reward profile: CIBC Add to ...

Canaccord Financial Inc. shares offer “an exceptional risk/reward” profile at current levels, argues CIBC World Markets Inc. analyst Paul Holden, who sees considerable upside once demand for investment banking services returns to more historical levels.

“We do not know precisely when equity underwritings will recover, but we have a high level of conviction that they will and when they do, it will be significant and material, similar to the recovery seen in 2009,” he said.

In the meantime, Canaccord has healthy working capital and no big concerns over debt.

“With Canaccord trading at 0.9 times book value and 52 per cent below its 52-week high, we believe this is an excellent time to take a long position in the stock,” he said.

He estimates that there is a downside risk that the stock could fall 22 per cent, but his forecasts suggest a possible upside of close to 80 per cent above current levels.

Upside: Mr. Holden initiated coverage with a “sector outperformer” rating and $14 price target.

Related: Griffiths Energy cancels ambitious IPO plan

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Erratic financial performance of late has made North American Energy Partners a ‘show me’ story for investors, according to Raymond James Ltd. analyst Ben Cherniavsky. The company’s latest quarterly results have not altered his view.

Higher-than-expected revenues of $284.6-million were offset by disappointing gross margins of 7 per cent. This was due to a number of factors, including slow project start-ups and deferrals and lower-than expected equipment utilization.

The company’s pipeline segment produced the weakest results, with a loss of $2.9-million, due to planning changes made by clients on two large diameter projects in British Columbia and northern Alberta. Mr. Cherniavsky notes that the division’s spotty track record has caused management to examine their options, including a possible sale.

“More imminently, the focus will be to de-risk the related unit-rate contracts and selectively secure more profitable time and material contracts,” he says.

Downside: Mr. Cherniavsky cut his price target by $1.75 to $6.25 (Canadian) and maintained his “market perform” rating.

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A 50 per cent rise in Contrans Group Inc.’s stock since the fourth quarter of 2011 has prompted CIBC World Markets Inc. analyst Kevin Chiang to downgrade the freight service provider’s stock.

However, Mr. Chiang says that given Contrans Group’s free cash flow generation and lower capital expenditure in 2012, he sees a dividend hike in the company’s future. “At CSS' current annual dividend of 40 cents per share, we are forecasting a free cash flow payout ratio of 42 per cent this year,” he says. “We believe a dividend increase has been well telegraphed.”

Downside: Mr. Chiang now rates the stock as a “sector performer,” down from “sector outperformer.” He maintained his $9.50 (Canadian) price target.

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A recent meeting with the management of Major Drilling Group International Inc. has Beacon Securities Ltd. analyst Michael Mills bullish on the company’s 2012 outlook.

Describing the drilling market as “the strongest we’ve seen,” he said the global surge in demand is leading to improved contract pricing and expanding margins. An improved labour situation has helped Major Drilling Group to increase the productivity per rig, and per shift, and rig utilization rates are increasing.

Upside: Mr. Mills maintained his “buy” rating while raising his 12-month price target $3 to $23 (Canadian).

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Construction engineering firm IBI Group Inc. is through the worst of the economic downturn and is now seeing accelerating growth, CIBC World Markets Inc. analyst Paul Lechem said after attending a number of meetings with company executives. IBI entered the downturn in 2008 heavily dependent on the residential sector, but has since refocused on public sector work, especially health care and education.

“Management is now seeing solid demand across Canada, areas of strength in the U.S., and increasing demand internationally, with significant growth opportunities in China, Eastern Europe, Brazil and Australia,” he said.

Upside: Mr. Lechem reiterated his “sector outperformer” rating but trimmed his price target by 25 cents to $16.50.

Follow us on Twitter: @eyeonequities, @JodyJodyWhite

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