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

In the wake of better-than-anticipated third-quarter financial results, RBC Dominion Securities analyst Greg Pardy upgraded his rating for Encana Corp. (ECA-N, ECA-T).

Mr. Pardy said the results reinforced his confidence in the company's ability to achieve its goal of delivering high margin oil and condensate growth from 2016 to 2021, moving his rating to "outperform" from "sector perform."

"We recently signaled that we would add Encana on weakness—and are putting those words into action by upgrading the stock to outperform, particularly given its recent pullback and potential one-year return of 33 per cent vis-à-vis our $13 target price," he said.

On Thursday, the Calgary-based company reported operating earnings per share of 4 cents (U.S.), ahead of projection of Mr. Pardy (and the consensus) of a 2-cent loss. Cash flow per share of 29 cents also topped his expectation (25 cents) and the Street (23 cents).

It reaffirmed its full-year mid-point production guidance of 350,000 barrels of oil equivalent per day (including 125,000 bbl/d of oil & liquids) as well as its $1.15-billion capital program, and reduced its operating cost outlook by 2 per cent to $3.95/boe.

"Encana has framed a preliminary 2017 capital spending program of $1.4-$1.8 billion, which brackets our $1.75-billion estimate," said Mr. Pardy. "About 97 per cent of Encana's 2017 capital program has been allocated toward its Big Four plays, and over one-half of its investment next year has been earmarked for the Permian ($0.85-$1.0-billion), with $200-$300-million (16 per cent) set aside for the Montney."

"Encana's recent decision to raise $1.15-billion of common equity was timely and served to prefund its 2017 capital program and improve its balance sheet leverage and liquidity. Under our base outlook ($56 WTI), Encana's 2017 average net debt-to-trailing cash stands at 2.7 times (versus peers at 3.2 times), and on a futures basis, at 3.7 times ($49 WTI). Liquidity wise, Encana is completely undrawn on its $4.- billion revolving credit facility (committed to July 2020), which is subject only to a 60-per-cent debt-to-adjusted capitalization covenant."

Mr. Pardy maintained his target price for the stock of $13 (U.S.). The analyst average is $12.58, according to Bloomberg.

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Despite reporting third-quarter results that met expectations, Accountability Research analyst David Donovan downgraded BCE Inc. (BCE-T, BCE-N) to "sell" based on valuation concerns.

On Thursday, BCE reported adjusted earnings per share of 91 cents, a drop of 2.2 per cent year over year but "roughly" in line with analyst projections. Consolidated revenue was up 1.2 per cent from the previous year, which Mr. Donovan attributed largely to growth in the wireless division.

"The company reported solid Q3/16 results, however after a period of strong performance the stock appears expense relative to its peers," he said. "Furthermore, while the company pays an attractive dividend, we believe BCE's dividend payout ratio is higher than the company suggests, raising our doubts about the ability of the company to provide continued dividend growth. While BCE remains a quality company, we believe investors would be better served by switching to a different name in the sector."

Mr. Donovan's target for the stock fell to $53 from $57. The average is $62.32.

"Currently, BCE trades at 8.8 times and 8.5 times 2016 and 2017 estimated enterprse value-to-EBITDA, " he said. "These levels are similar to Rogers, and much higher than TELUS. BCE also looks expensive on a price-to-earnings basis. BCE pays the highest dividend yield of 4.6 per cent among the Canadian telco incumbents, but also has by far the highest payout ratio in the group.

"We believe that BCE's shares are currently expensive relative to its peers. Our target price is based on a 7.6x EV multiple on 2017E consolidated EBITDA, which can be segmented into 8.5x for the wireless segment, 7.0x for the wireline segment, and 8.0x for the media segment. While BCE remains a quality company, we believe investors would be better served by switching to a different name in the sector."

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The recent sell-off in RioCan Real Estate Investment Trust (REI.UN-T) has brought an opportunity for investors, said Canaccord Genuity analyst Mark Rothschild.

He raised his rating for the REIT to "buy" from "hold."

"Primarily reflecting overall weakness in the REIT market, RioCan REIT's unit price has declined 15 per cent since the 52-week high reached on July 6," said Mr. Rothschild. "The REIT now trades at a 3.8-per-cent discount to NAV [net asset value], which in our view, represents an attractive entry point. While retail fundamentals remain mixed, RioCan's operating performance has improved and internal growth has turned positive. We expect this trend to continue, albeit at a modest pace. In our view, RioCan's units should trade at a premium to NAV to reflect its large and high quality portfolio, dominant position in the Canadian retail market, and extensive development pipeline. Our target price of $29.50 (based on an approximate 10-per-cent premium to our NAV estimate) implies a forecast total return of 20.0 per cent."

On Thursday, RioCan reported third-quarter funds from operations per unit of 40 cents, down 8 per cent (from 44 cents) from a year ago while in line with expectations. Mr. Rothschild said the decline was "entirely" due to the sale of its U.S. portfolio, which closed at the end of May, as proceeds were allocated toward reducing leverage (falling to 39.6 per cent from 46.1 per cent a year ago).

"After a soft 2015, RioCan's operating performance has improved and internal growth was positive for the second consecutive quarter," he said. "For Q3/16, RioCan achieved same-store net operating income (NOI) growth of 1.1 per cent. The increase was mostly driven by renewals at higher rates, rent-steps on existing leases, and higher percentage rent. While internal growth is trending in the right direction, we believe that the leasing environment remains competitive, particularly in certain retail segments such as fashion. That said, management has indicated that internal growth should be positive for the next few quarters, and we expect this to accelerate in 2017.

"Overall, we expect RioCan's internal growth profile to be improved following the sale of its U.S. portfolio. While commentary from RioCan's management team is more focused on the advantage of the reduction in leverage, we believe that the true positive outcome from the sale is that the U.S. portfolio was materially lower quality than RioCan's Canadian assets."

He added: "One of the main reasons we have a positive view of the U.S. portfolio sale is that it allows the REIT to focus on its higher quality Canadian portfolio and growing its dominant position in the Canadian marketplace. Recently, the REIT has been active in expanding the Canadian portfolio, with $1.2-billion of net acquisitions completed over the past 12 months. Over the next few years, we expect leverage to rise slightly as the REIT redeploys capital from the U.S. portfolio sale to fund development expenditures, as well as further acquisitions. Management has indicated a target leverage range of 38-42 per cent, compared to 39.6 per cent currently."

Mr. Rothschild did lower his target to $29.50 per unit from $30.50. The analyst consensus is $29.93, according to Thomson Reuters.

Elsewhere, CIBC World Markets analyst Alex Avery upgraded the stock to "sector outperformer" from "sector performer" with a target of $29.50 (unchanged) to reflect "prospects for attractive FFO growth, a discount to NAV, and the REIT's profile as a S&P/TSX 60 Index candidate."

Mr. Avery said: "After four quarters of several moving parts (U.S. sale, Target closures, dissolution of JVs, deleveraging, re-leveraging), RioCan has a clear path to FFO and NAV growth. Despite a competitive retailing environment, we expect FFO growth to be driven by occupancy improvement, recent acquisitions, and refinancing of the $1-billion. of debt maturing through 2018."

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Raymond James analyst Andrew Bradford upgraded Secure Energy Services Inc. (SES-T), noting the stock has "dropped back considerably" with crude prices over the last four weeks and sits at the bottom of its 2016 trading range.

Accordingly, he raised his rating to "strong buy" from "outperform."

On Thursday after market close, Secure reported third-quarter earnings before interest, taxes, depreciation and amortization of $27-million, above both Mr. Bradford's estimate of $26-million and the consensus of $25-million.

"In a quarter where the balance of results have landed on the 'miss' side of the ledger, we expect the market will react favorably to these results," he said. "In addition, SES's decision to increase 2016 capital spending by $15-million – most of which is designed to expand capacity within its existing facilities – is an encouraging signal of rising demand from its customer base."

Mr. Bradford said Secure's revenue was roughly equivalent to the first-quarter result, a rare feat during this earnings season.

"To be sure, the Alida facility acquisition in June and the JV acquisitions in July contributed to a Q3 Q1 increase in [Processing, Recovery and Disposal] revenue," he said. "Drilling and Production Services revenue was down 24 per cent from Q1, but to keep this in context, contract drilling rig revenues from those who have reported so far are down 43 per cent from Q1."

"SES's cost structure is noticeably reduced across all three operating divisions and at the corporate level. As such EBITDA margins are up year over year across all three divisions by an average of 267 basis points, even though revenues are down across all three divisions by an average of 34 per cent. Secure is of the view that it still has room to drive higher operating and cost efficiencies over the coming quarters."

Mr. Bradford kept his $12 target for the stock. Consensus is $11.50.

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CI Financial Corp. (CIX-T) is displaying earnings resilience with signs of better institutional flow visibility for next year, according to Canaccord Genuity analyst Scott Chan.

Following the release of its third-quarter financial results on Thursday, Mr. Chan upgraded the stock to "buy" from "hold."

Mr. Chan said: "We are more positive on CIX stock due to: (1) better EPS outlook; (2) institutional flows expected to normalize; (3) slightly improved retail traction (i.e. 55 per cent of assets under management in top two quartiles year to date); (4) low leverage to pursue further acquisitions; (5) near record free cash flow of $160-million (up 8 per cent year over year) supporting aggressive share buybacks; and (6) discounted valuation (relative to historical and global peer averages)."

The company reported earnings per share of 51 cents, up 7 per cent from the second quarter and flat year over year, topping both the projection of Mr. Chan (and the Street) by a penny.

Calling it a "nice beat," he added: "The EPS resiliency reflected institutional losses having minimal impact to its bottom line, and strong cost control (SG&A up 3 per cent year over year excluding First Asset). Relative to our estimates, management fees were higher (i.e. reflecting segment mix), with a slight offset on higher trailer fees."

"YTD, CI's net outflows have been dominated by large institutional legacy sub-advisory accounts. Every quarter this year has been hit by a material mandate loss, which we haven't seen from them before. In our view, most of the mandate losses relate to institutions bringing management inhouse, and a portion likely due to fund performance. CI stated their institutional pipeline is full with 20 mandates on shorts lists, primarily focused on Canadian Equity, Fixed Income, and Target date products. Shortly, CI will also be launching a Global Private Real Estate fund, sub-advised by CBRE Global Investors. In Q4, CI reported $2.3-billion in institutional mandates to be redeemed before year-end. We expect the EPS impact to be minimal (management stated $0.01 EPS impact) as the announced Grant Samuel Funds Management (GSFM) acquisition (expected modest EPS accretion) should more than offset the loss accounts."

Mr. Chan did not change his $27 price target for the stock. Consensus is $28.70.

"YTD, CIX stock has significantly underperformed, returning negative 16 per cent vs. AGF.b (up 3 per cent), IGM (up 6 per cent), and S&P/TSX Composite (up 15 per cent)," the analyst said. "Currently, CIX shares trade at price-to-earnings (2017 estimate) multiple of 11.8x, well below its historical average of 15.7x, and S&P/TSX Composite at 17.7x. We think a clearer path to EPS growth (and we don't model acquisitions) could help narrow CIX's significant valuation discount."

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Canaccord Genuity analyst Robert Young downgraded Halogen Software Inc. (HGN-T), citing a reduced outlook and "some uncertainty on the timeframe to reverse the declining growth trend."

Saying Halogen's third-quarter results "cut both ways," he moved his rating to "hold" from "buy."

"On one hand, Halogen is delivering on its promise of improved profitability with its second quarter of positive net income and better than expected EBITDA," said Mr. Young. "Halogen significantly raised its 2016 EBITDA margin guidance to [approximately] 10 per cent of revenue from 6 per cent. Moreover, it expects to see EBITDA margin increase to 11-13 per cent in 2017. On the other hand, Halogen reduced its recurring revenue guidance for 2016 and warned that growth in 2017 was likely to slow to 'mid-single digits.' Increased churn in a large and underpenetrated but more competitive market is the culprit. While we have confidence in the management team and believe the company has prudently increased its focus on profitability to offset the top-line weakness, we expect this to leave Halogen in the midst of a transition year in 2017."

On Thursday, with its results, Halogen reduced its full-year 2016 revenue guidance to $71.8-$72.0-million from $72.6-$73-million, compared to Mr. Young's projection of $72.7-million. Recurring revenue dropped to $66.4-$66.6-million from $66.7-$67.1-million, versus the analyst's estimate of $67-million. EBITA guidance rose, moving to $7-7.5-million from $4-$5, which Mr. Young noted was "well above expectations."

"Halogen reported continued weakness in professional services revenue, which is a function of lower new customer wins, down 28 per cent year over year and 18 per cent quarter over quarter," the analyst said. "Additionally customer churn has been increasing, particularly among smaller and older customers, and has led to weakened dollar retention. This has been driven by competitive factors. Halogen emphasized the need to improve its overall customer retention metrics, and has provided additional disclosure on a quarterly basis of its dollar retention rate; which since 2012 has been above 100 per cent. However, in Q4/F16 this figure is expected to dip below 100 per cent as smaller customers drop off and amid lower than expected upsells of seats and modules to existing customers. Both of these factors are expected to impact revenue in F2016 and F2017."

He added: "Halogen also provided some preliminary guidance for F2017 as it is seeing churn and slower new customer additions weigh on top line growth, well below consensus expectations ... Halogen is taking steps to address these factors but believes it will take most of F2017 to see the results. Despite seeing good demand in the market, total revenue growth is now expected to be in the 'mid-single digits' for F2017 which we believe is 4-6 per cent with recurring revenue growth slightly ahead of this level. This is a marked change from our original estimates and consensus of total revenue growth of 12-13 per cent. EBITDA margins are expected to be in the range of 11-13 per cent, well above our estimate and consensus of 7 per cent."

Mr. Young reduced his target price to $10 from $11.50. Consensus is $13.73.

" Halogen trades below the peer average for its growth profile," he said. "The regressions show a trend-line valuation of 1.5-2.5x for a business model with 4-6-per-cent growth and 8-11-per-cent FCF [free cash flow] margins. Halogen software continues to have strong retention for the mid-market with a strong product addressing a large and unpenetrated market with few direct competitors."

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In other analyst actions:

Credit Suisse analyst Christopher Parkinson downgraded Agrium Inc. (AGU-N, AGU-T) to "neutral" from "outperform" while maintaining a target price of $88 (U.S.) for the stock. Consensus is $99.19. He said: "Following weaker-than-expected 3Q earnings, we are adjusting our numbers to reflect persistent headwinds in the Wholesale segment and a slight moderation in Retail driven by our expectation that corn acres will likely fall to 90 million in 2017 (versus 94.5 million in '16); a slight rise in high value cotton acres will be a minor offset. Weather issues in Canada are also presenting NT challenges in both key segments and may deprive AGU of some business in nutrients and crop protection. We adjust our '17/'18 estimates to $5.45 (from $5.60) and $6.10 (from $6.25), respectively. While we maintain a favorable view of AGU relative to other fertilizer names, we believe this is fully priced at current levels."

Mr. Parkinson upgraded FMC Corp. (FMC-N) to "outperform" from "neutral" and raised his target to $57 (U.S.) from $48. Consensus is $52.25. He said: "Despite our sheer reluctance to upgrade following a 10-per-cent jump in a stock, we simply want to be clear that any pullback in FMC shares will be an attractive buying opportunity, especially if emerging market agriculture improves; we aren't trying to be 'cute.' While we have always been constructive on FMC's '2018 Thesis,' we previously believed that 2016 ag headwinds would mute the stock. We still have modest concerns over the next ~2 quarters, but it appears offsets from enhanced distribution channels, dynamic pricing models and upside from lithium will offset our concerns."

Saputo Inc. (SAP-T) was downgraded to "hold" from "buy" by TD Securities analyst Michael Van Aelst, who raised his target to $49 from $45. The average is $48.33.

Kinross Gold Corp. (K-T) was raised to "buy" from "market perform" by Cormark analyst Richard Gray. He maintained a price target of $8 for the stock, versus the average of $7.46.

Western Energy Services Corp. (WRG-T) was raised to "speculative buy" from "sector perform" by Alta Corp analyst Aaron MacNeil with a target of $3 (unchanged). The average is $3.38.

NeuLion Inc. (NLN-T) was downgraded to "market perform" from "buy" at Cormark Securities by analyst David McFadgen. His target price fell to $1 from $1.45 per share. The average is $1.42.

Fitbit Inc. (FIT-N) was lowered to "equal-weight" from "overweight" by Barclays analyst Matthew McClintock. He dropped his target to $10 (U.S.) from $24. The average is $10.75. He said: "While we continue to believe in the company's products and longer term strategy, the underlying variability of its financial model and lack of visibility into new products have forced us to appropriately reflect this risk within our rating."

BMO Nesbitt Burns analyst Daniel Salmon downgraded MDC Partners Inc. (MDCA-Q) to "market perform" from "outperform" and dropped his target to $5 (U.S.) from $23. Consensus is $19.16. Mr. Salmon said: "We were wrong to believe MDCA could thread a tight needle in 3Q; while organic growth and working capital improved, management has suspended the dividend, undertaken a restructuring, and hired an advisor to examine "financial and capital structure strategy." We believe many investors were prepared for a dividend cut, but we expect outright suspension to drive significant shareholder turnover. However, it is the hiring of an advisor (and the justified questions about potential equity dilution, etc.) that leads us to Market Perform as any potential fundamental recovery is overshadowed near-term."

Akorn Inc.
(AKRX-Q) was downgraded to "sector perform" from "outperform" by RBC Dominion Securities analyst Randall Stanicky, who lowered his target to $24 (U.S.) from $37. Consensus is $36.50. Mr. Stanicky said: "We entered 3Q looking for better clarity around FDA manufacturing concerns and 2017 outlook. We leave with greater concerns around both and are lowering forecasts materially. While we're clearly late given yesterday's move, we see AKRX as range-bound until P&L visibility improves."

HCP Inc. (HCP-N) was raised to "sector perform" from "underperform" by RBC Dominion Securities analyst Michael Carroll. He lowered his target to $30 (U.S.) from $35. Consensus is $32.42. "We believe the spin-off of the HCR ManorCare portfolio and the [Brookdale Senior Living] transactions solves our biggest concerns on the name," he said. "Management and the portfolio are now positioned to drive growth and create value for shareholders."

RBC Dominion Securities analyst Steven Cahall raised his rating for Lions Gate Entertainment Corp. (LGF-N) to "outperform" from "sector perform" and raised his target to $31 (U.S.) from $24. Consensus is $26.41. Mr. Cahall said: "We're approaching the event horizon of the Starz acquisition and we think the market has not appreciated the significant cash synergies. LGF is significantly undervalued on a [discounted cash flow] basis."

BMO Nesbitt Burns analyst Charles Sebaski raised his rating for Marsh & McLennan Companies Inc. (MMC-N) to "outperform" from "market perform" and raised his target to $76 (U.S.) from $75. Consensus is $69.88. Mr. Sebaski said: "We believe the recent pullback in MMC shares offer a compelling entry point for investors to build a position in a best-in-class name with an implied 20-per-cent total return over the next year. Marsh is a franchise name in the insurance/business services space; however, it is trading in line with the broader market despite a business model that has and, we believe, will continue to produce superior results. We expect top-line growth of 4.4 per cent, EPS growth of 11.2 per cent, and margin expansion of 70 basis points for 2017."

Mr. Sebaski downgraded Brown & Brown Inc. (BRO-N) to "underperform" from "market perform" and lowered his target to $37 (U.S.) from $39. Consensus is $37.67. "We expect margin pressures and lack of capital management to continue to hold back EPS growth at Brown to the mid-single digits in 2017 and 2018," he said. "This level is below the rest of our covered brokers and offers less of a distinction to the broader market for which our valuations are based."

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