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Analysts wary as fund redemptions, new tax issue plague AGF

Once again, AGF is set to report that more money is flowing out of the firm than into it.

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

Shares in AGF Management Ltd. sold off heavily on Wednesday after the fund company revealed net redemptions that were slightly worse from last year, despite a more positive tone in equity markets.

AGF also disclosed a tax issue that could end up hurting the company, already under pressure to generate better sales of its funds. It received a proposal letter from the Canada Revenue Agency relating to the transfer of income between a Canadian and foreign subsidiary, which could result in notices of reassessments for taxes that had been paid over a three-year period. AGF strongly disagrees with the CRA position.

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CIBC World Markets analyst Paul Holden believes the selloff in shares on Wednesday adequately factors in risks of the possible extra tax burden. But he wasn't terribly impressed with the latest quarter, noting the negative trends in net retail redemptions and the lack of improvement in fund returns during the quarter.

While plans are in place to improve these issues, "we have to view Q1 as somewhat of a setback in terms of progress," said Mr. Holden.

Canaccord Genuity analyst Scott Chan, meanwhile, didn't sound hopeful for a quick turnaround. "AGF does not screen well towards our stock selection themes, particularly with assets under management growth visibility (higher than expected redemptions remain worrisome). Fund performance has generally lagged peers year-to-date, and our sales outlook for the remaining of the year remains weak. The CRA review creates another overhang to the stock," said Mr. Chan.

Target: CIBC maintained a $12.50 price target and "sector performer" rating. Canaccord Genuity cut its price target by 50 cents to $11.50 and maintained a "hold" rating. The average price target among analysts is $11.20, according to Bloomberg data.


Canadians' growing appetite to purchase new vehicles is benefiting AutoCanada Inc., which reported a 17 per cent jump in new car sales in the fourth quarter.

Canaccord Genuity analyst Derek Dley expects the auto dealership chain to continue to benefit from this trend as it increasingly focuses on sales of new automobiles.

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"As AutoCanada continues to sell a greater proportion of new cars, we expect increased revenue from the high-margin finance and insurance division, which should support gross profit growth, in our view," Mr. Dley said.

He also thinks the company will benefit from robust acquisition opportunities. It's targeting six to seven new dealerships this year, well ahead of its earlier guidance for one new dealership annually.

"We believe AutoCanada is well positioned to capitalize on a strong market for new car sales. Meanwhile, as original equipment manufacturers continue to embrace public ownership, we believe AutoCanada stands to be one of the major beneficiaries," he said.

Target: Mr. Dley raised his price target to $22 from $19.50 and maintained a "buy" rating. The average target among analysts is $21.80.


Canaccord Genuity analyst Michael Graham is feeling more confident about the outlook for Internet real estate listing firm Zillow Inc. after the company held its first analyst day.

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Management forecast continued momentum from an improving housing market and early benefits from brand advertising, while disclosing that its unique web users in March rose significantly to 50 million. Chief financial officer Chad Cohen also introduced a new longer-term EBITDA margin target of 40 per cent to 45 per cent on about $500-million in revenue, up from earlier guidance of 30 per cent to 35 per cent EBITDA on $250-million in revenues.

"The stock may collect at current levels after a strong run on housing market strength, but we leave this event more confident in Zillow's opportunity, strategy and ability to execute," said Mr. Graham.

Target: Mr. Graham raised his price target to $60 (U.S.) from $45. The average Street target is $57.67.


HNZ Group Inc. reported a soft fourth quarter, as revenues at the helicopter transportation services company declined 12 per cent from last year as a key contract expired with Ornge emergency medical services in Ontario and another contract was terminated in Afghanistan.

But Desjardins Securities analyst Benoit Poirier reiterated his "buy" rating, noting that management is confident the company will continue to generate revenue in Afghanistan in 2013 and 2014, and sees strong potential for future growth in Asia.

"We continue to believe there are several catalysts ahead, including (1) growth opportunities in Asia by way of HNZ's expanded geographic reach, (2) a potential acquisition as the company benefits from a strong balance sheet (we forecast the company will be debt free in 2014), and (3) a long-term opportunity to get back the Ornge business (about $30m/year of revenue historically)," Mr. Poirier said in a note.

Target: Mr. Poirier sliced his target to $30 from $37. The average price target is $27.25.


RBC Dominion Securities analyst Nelson Ng believes the market overreacted this week to news that DBRS downgraded the credit rating of Innergex Renewable Energy Inc.

DBRS was concerned with the company's debt levels and questioned the sustainability of the dividend, given a high payout ratio and a growth in capital expenditures.

Mr. Ng notes that the payout ratio – the amount of earnings paid out in dividends – may exceed 100 per cent in 2013, but it should come down to below 95 per cent in 2014 after new projects come online. "We believe the payout ratio will continue to decline as additional projects are commissioned in 2015/16," he said.

However, he sees a little less upside for the stock over the next year because a planned equity offering will dilute the value of shares.

Target: Mr. Ng cut his price target to $11 from $12 and reiterated a "sector perform" rating. The average price target is $11.23.


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

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