Friday’s analyst upgrades and downgrades

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

Telus Corp. (T-T, TU-N) is entering an inflection period, according to RBC Dominion Securities analyst Drew McReynolds.

Believing key performance metrics, sentiment, competitive positioning and net asset value (NAV growth) is primed for multi-year improvement, Mr. McReynolds upgraded the company's stock to "outperform" from "sector perform."

"With the passage of time, we have been slowly warming up again to the TELUS story," he said. "Beginning in 2018, we believe TELUS is entering an important inflection period whereby capex intensity eases, FCF [free cash flow] improves, the dividend payout ratio falls below 100 per cent, leverage declines into the upper-end of the 2.0-2.5-times target range and NAV growth re-accelerates - all while delivering 7-10-per-cent annual dividend growth. Although not a new TELUS narrative, to us, visibility has substantially improved on this set-up over the past three months reflecting line-of-sight on the X1 impact, a better growth versus profitability balance in Western Canada and renewed TELUS momentum."

Mr. McReynolds made the rating move in the wake of the release of the Vancouver-based company's third-quarter financial results on Thursday, which largely met with his expectations.

In justifying the upgrade, he said: "Despite in-line Q3/17 results, the following was incremental to us this quarter: (i) 2018 capex guidance of $2.850-billion with management confirming that 2017 capex guidance of $3.0-billion will in fact represent the peak both in terms of capex intensity and absolute dollars; (ii) a FTTH coverage target of two-thirds the FTTN/Optik footprint by 2019, up from 50 per cent in Q1/18; and (iii) a potential step-down in capex in 2020 driven in part by 5G; Although a few years away, we expect attractive post-blanket build FTTH economics for TELUS along with what we believe is clear leadership in 5G 'preparedness' (capex, wireless-wireline integration, fibre backhaul, a head start on potential 5G IoT/M2M use-cases with TELUS Health) to increasingly drive investor sentiment and relative valuation.

"Some potential tailwinds [exist] that we are not relying on but would further boost NAV growth. We have confidence in TELUS' ability to sustain greater-than 4-per-cent EBITDA growth, which we believe is a level required to support capital return and balance sheet targets. Upon nearing completion of its FTTH build, we believe the TELUS asset mix (wireless, FTTH, TELUS Health, TELUS International, no media) will rank as the most attractive within the group. Potential tailwinds that we are not relying on could include: (i) a stronger than anticipated recovery in Alberta; (ii) a greater than expected contribution from TELUS Health and/or TELUS International; and (iii) new service offerings."

Mr. McReynolds raised his target price for Telus shares to $51 from $47. The analyst average target price is currently $50.10, according to Bloomberg data.

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Manulife Financial Corp.'s (MFC-T) current valuation "carries greater risk of disappointment," said Veritas Investment Research Co analyst Taso Georgopoulos.

Though he was impressed by its quarterly results, Mr. Georgopoulos downgraded his rating for Manulife shares to "sell" from "buy."

"Manulife Financial (MFC) delivered another strong quarter with core earnings coming in better than expected, despite a provision for catastrophic losses," he said. "The company's business in Asia continues to be the growth engine with a strong performance on both the insurance and wealth fronts and funds flow again building off of Manulife's extensive distribution network there. The U.S. business was boosted by strong fund flows within wealth and favorable policyholder experience.

" We note that Manulife has managed to post four consecutive quarters above its long-term average Core ROE, which may well continue into Q4, however the stock is now priced for this to continue.  Core ROE, of course, is management's adjusted number and investors will have far more detail on sustainability at year-end."

He lowered his target price for the stock by a loonie to $26. The average target is $29.84.

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Desjardins Securities analyst Maher Yaghi does not believe Québecor Inc. (QBR.B-T) has the scale to generate similar wireless margins to its peers.

He does not see a "fundamental" reason why its stock should trade at a premium in the sector. Accordingly, Mr. Yaghi said he'd prefer to look for a better entry point "before rejoining the bullish crowd," leading him to downgraded his rating to "hold" from "buy."

"Over the last two years, we had not shied away from naming QBR as one of our top picks in the sector," said Mr. Yaghi. "The combination of cheap valuation, wireless upside and strong operational control were top of mind. As we stand today, two of those qualities are still present. However, for the stock to outperform peers, QBR must begin to trade at a premium to wireless incumbents. Hence, we prefer to err on the side of caution until we see a better entry point on improved valuation."

"QBR's share price has increased 32 per cent year-to-date on a total return basis, eclipsing the industry's performance of 17 per cent over the same period, which could make QBR's stock less attractive to some investors. However, we note that the EV/EBITDA (FY2) valuation discount to its Canadian cableco peers has actually widened to 0.4 times (from 0.1 times) between the publication of our 2017 outlook on Dec. 21, 2016, and today, which suggests that EBITDA growth has also outperformed peers. We still believe that a significant part of the more recent upside was created by investor anticipation of either a Caisse buyback or convertible debenture redemption."

On Thursday, the Montreal-based media company reported third-quarter revenue of $1.03-billion, meeting the expectations of both Mr. Yaghi and the Street. Adjusted EBITDA was $421-million, beating both the consensus estimate ($412-million) and the analyst's expectation ($414-million).

During the quarter, Québecor added 37,000 wireless subscribers , exceeding the consensus estimate of 35,400 while in line with Mr. Yaghi's projection. However, wireless average revenue per user growth slowed. ARPU of $35.34 was below the analyst's expectation ($55.61) and represented an increase of just 1.4 per cent year over year (versus recent growth of 5-6 per cent).

"We believe that the CRTC decision on Unlimited Music had a negative impact on this quarter's performance," said Mr. Yaghi. "The company estimates the negative impact on ARPU was 86 cents, which is due to increased data buckets given to clients in order to mitigate the negative impact of the Unlimited Music decision. These increased buckets likely reduced the frequency of data overages, therefore affecting ARPU for the quarter. Adjusting for this event, ARPU growth would have been 3.0 per cent yoy, which is still slower than our previous expectation. We believe two trends have negatively impacted ARPU growth in the quarter. First, QBR has focused on the BYOD segment of the wireless market for a while now. These plans come with higher margins for the carrier, but they do affect ARPU. The second reason is that QBR has grown its ARPU much faster than the industry since the launch of the iPhone at Vidéotron in 2014, and overall ARPU is beginning to close in on the average ARPU incumbents achieve in the province of Québec of about $55–60. Following the results, we have decreased our ARPU growth slightly over our forecast horizon, but still see decent growth in QBR's wireless service down the road."

He added: "As it relates to our EV/EBITDA valuation, we have decided to value the wireless segment on a different multiple vs the rest of the cable business due to the large difference in growth profiles between the two operations. We are now applying a 13.0 times multiple on wireless operations (we apply 8.0 times for wireless incumbents) and an 8.0 times multiple on cable. The 5-times multiple spread is to normalize the differential in wireless EBITDA growth."

However, based on the overall results, Mr. Yaghi raised his 2017 and 2018 earnings per share projections to $2.92 and $3.26, respectively, from $2.75 and $3.02.

His target for the stock rose to $54 from $48. The average is $53.64.

" While we continue to view QBR as very well-positioned to continue to post good EBITDA growth rates supported by wireless, our new target price is the equivalent of an 8 times EBITDA multiple on our 2018 estimates, which is in line with peers," he said.

Elsewhere, TD Securities analyst Vince Valentini downgraded the stock to "buy" from "action list buy" with a target of $56, up from $54.

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RBC Dominion Securities analyst Shailender Randhawa sees funding for the second phase expansion of Pengrowth Energy Corp.'s (PGF-T) Lindbergh thermal property as a "tall order."

That skepticism led him to downgrade his rating for the company's stock "until visibility improves" despite third-quarter financial results that largely met his expectations.

Mr. Randhawa moved the Calgary-based company to "underperform" from "sector perform."

"Pengrowth pointed to preliminary 2018 guidance targets of $50- to $60-million capex (RBC estimate: $50-million) and targeted annual volumes between 22,500 to 24,500 barrels of oil equivalent per day (RBC: 23,500 boe/d)," he said. "At mid-point volumes, we peg estimated 2018 cash generation at $58-million at our price deck and $72-million at strip ($56 U.S. per barrel). Given a two year project horizon, circa $600-million capital costs, and $330-million of credit capacity, we think funding Lindbergh without fresh capital is a tall order."

The analyst raised his target price for Pengrowth shares to $1.15 from $1.10. Consensus is 92 cents.

"We think a premium valuation is unwarranted given the lack of funding visibility," he said. "Pengrowth trades at estimated 2017 and 2018 enterprise value to debt-adjusted cash flow (EV/DACF) multiples of 8.9 times and 9.8 times, excluding realized hedges, vs. oil-weighted peers at 7.6 times and 6.8 times. Pengrowth's target price to net asset value (P/NAV) multiple of 1.0 times compares to oil-weighted peers at 1.0 times at RBC's price deck."

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Citing unrecognized upside in its Duvernay Shale basin operations, Raymond James analyst Jeremy McCrea raised his rating for Raging River Exploration Inc. (RRX-T) to "outperform" from "market perform."

"Over the last year, we have been critical of RRX's valuation in the context of what we saw as limited Viking inventory of Tier 6 locations or better," said Mr. McCrea. "When we began taking the average well brought on production, at $55 per barrel, we calculated a quick payout ~12-15 months however found that the production levels after payout were quite low and believed the profit from these wells were not as high as the valuation dictated. With oil prices closer to $70 (Canadian) per barrel today, the profitability of these wells is much greater and we don't believe the run-up in RRX's share price has completely reflected how much the current strip has moved over the last few months.

"In addition to our upgrade today, one of the arguments we have always made in terms of multiple expansion relates to what investors are paying for undrilled acreage (EV-PDP reserve value) and the reasons why land value should appreciate. In the case of RRX's Duvernay, we don't believe the market has assigned much value across its 370 sections but as we approach results in early January, we think speculation (more than anything) will likely take hold, especially as strong crown land sale bonuses continue to come in. Ultimately it is too early for us to speculate on results however we suspect management would like to show a strong well result to start (i.e., will ensure any IP rate has been free of any clean-up fluid). Overall, with a quality management team, little leverage and an emerging new play (with potential size and scope), the lead-up can typically be quite rewarding for investors, especially with successful results and a supportive macro environment."

Mr. McCrea hiked his target for Raging River shares by a loonie to $9.50. Consensus is $10.03.

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Cascades Inc. (CAS-T) is likely to face continued challenges with its tissue segment through 2018, said Desjardins Securities analyst Keith Howlett, leading him to downgrade his rating for its stock to "hold" from "buy."

On Thursday, the Kingsey Falls, Que.-based company reported third-quarter adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $106-million, missing the estimates of both Mr. Howlett and the Street ($125-million and $126-million) "significantly." He pointed to the tissue segment as the primary reason for the shortfall, noting it "experienced a confluence of headwinds."

"While our longer-term outlook on Cascades is unchanged, the magnitude of the near-term challenges in the tissue segment has caused us to reduce our rating," he said. "The tissue business is seasonally strongest in 3Q and weakest in 1Q and 4Q. The weak sales and EBITDA performance in 3Q17 sets the stage for weak tissue results over the next two quarters, subject to unforeseen industry output price increases, declines in input prices or a decline in the Canadian dollar. It is positive that an industry price increase in the retail segment in Canada becomes effective in November. Cascades' tissue business is, however, 75 per cent in the U.S..

"The containerboard segment is benefiting from the recent sharp fall in OCC input prices. Considerable uncertainty remains as to the level of exports of OCC to China in 2018. Demand from China is the swing factor driving pricing in the OCC market."

Citing the near-term challenges, Mr. Howlett lowered his 2017 EBITDA and EPS projections to $368-million and 59 cents, respectively, from $404-million and 80 cents. His 2018 estimates fell to $469-million and 99 cents from $524-million and $1.33.

His target for Cascades shares fell to $15 from $18. Consensus is $18.83.

"Our long-term view is unchanged," said Mr. Howlett. "Management has placed Cascades on the right track for sustained creation of value, and positive results are already in evidence. The process of modernizing the asset base, however, is still ongoing. It is possible that some rationalization and modernization of tissue segment capacity may be required. A shorter-term issue is that the state-of-the-art tissue converting facility in Oregon continues to need more new customers to fill its capacity. Until we have better visibility on the duration of the challenges facing the tissue segment, we are reducing our rating."

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Pine Cliff Energy Ltd. (PNE-T) is "wearing AECO volatility like a boss," said Industrial Alliance Securities analyst Michael Charlton.

In reaction to "decent" third-quarter financial results despite a lack of steadiness in natural gas prices, Mr. Charlton raised his rating for the Calgary-based company to "speculative buy" from "hold." "We believe Pine Cliff offers investors an excellent opportunity to play the natural gas market with exponential upside as prices rebound and an excellent investment vehicle for those seeking a contrarian acquisition focused investment in the down cycles run by a top tier team with an excellent track record for delivering exceptional long-term returns to investors," he said. "We anticipate that Pine Cliff will continue to grow through accretive acquisitions of additional long life reserves that would support the potential of a future dividend model as the Company's cash flows continue to exceed its capital requirements to maintain production."

On Wednesday, Pine Cliff reported quarterly production averaging 21,863 barrels of oil equivalent per day), which is in line with Mr. Charlton's estimate of 21,976 boe/d.

"We were pleasantly surprised to see Pine Cliff perform reasonably well generating $2.5-million in cash flow despite an extremely challenging gas price environment," the analyst said. "It was impressive that Pine Cliff realized prices of $1.63 per 1,000 cubic feet (Mcf) as AECO daily pricing averaged just $1.46/mcf in the quarter and the company was able to hold production essentially flat, conducting workovers and reactivating standing wells. With the recent rebound in AECO prices to $2.50/mcf, Q4/17 could be much more fruitful as Pine Cliff's cash flow is highly sensitive to small changes in commodity prices, where just a 10-cent change in AECO pricing impacts cash flow by $4.2-million."

Mr. Charlton increased his target price for Pine Cliff shares to 80 cents from 60 cents. Consensus is 87 cents.

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Mackie Research Capital analyst André Uddin expects Cipher Pharmaceuticals Inc.'s (CPH-T) new Chief Executive Office and President, Robert Tessarolo, to "re-invigorate" its growth.

"Cipher has undergone several strategic transformations, but with a new CEO in place, management is now focused on building its Canadian business," he said. " In May 2017, under the new CEO, the company made a key strategic decision to sell all of its U.S. commercial assets to the EPI Group for $14-million (U.S.), thus returning to profitability. Cipher currently has seven commercialized products, three of which are in the U.S. and are marketed by pharmaceutical partners. In Canada, the focus has been in dermatology, but management is now looking to expand into multiple new therapeutic areas including: dermatology, gastrointestinal (GI), women's health, central nervous system (CNS), urology, immunology, ophthalmology, cardiology, hepatology and respiratory. We expect CPH to use its cash flows from existing products sales and royalties to fund new Canadian product acquisitions and forge new licensing deals.

He initiated coverage of the Mississauga-based company with a "buy" rating and $7.10 target. Consensus is $7.21.

"We view CPH as a decent GARP [Growth At A Reasonable Price] play and expect the stock to trade at a premium to those of Canadian specialty pharmas that lack growth and are loaded with debt," said Mr. Uddin.

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Though he still sees limited growth against its premium valuation, RBC Dominion Securities analyst Randall Stanicky raised his rating for Perrigo Company PLC (PRGO-N), expecting earnings per share momentum to provide near-term support for the stock.

"We cannot justify upside against what are still potential 2018 concerns including Rx pressure, more limited CHCA [Consumer Healthcare Americas] growth and comping of cost cuts that have been helping support P&L," said Mr. Stanicky, moving Perrigo to "sector perform" from "underperform."

"But again, our history with PRGO is that when we see P&L momentum and upward revision the stock can trade at perceived premium valuations and over the near-term that may remain the case. The other unknown is potential for accretive capital deployment which is again becoming a potential source of upside given prior de-lever efforts."

He raised his target for Perrigo shares to $84 (U.S.) from $64. Consensus is $83.87.

"Stable long-term outlook but near-term uncertainty around strategic outlook and moderating growth could lead to pressure on valuation," the analyst said. "The company's segments across brand OTC, store brand, and Rx pharma add diversification, but we see headwinds across each segment that management will need to manage through."

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AltaCorp Capital analyst Thomas Matthews lowered his rating for Bellatrix Exploration Ltd. (BXE-T), wanting clarity on its capex, reserves and pricing through the end of the year.

"Overall, Bellatrix has been able to execute on the things that it can control – getting production online and reducing leverage via asset sales," said Mr. Matthews, following the release of the company's third-quarter results, which feature a production beat but cash flow miss.

"With the revisions to our NAV the total falls under our Outperform rating threshold and we are going to step to the sidelines as we await an official 2018 budget, a new reserve report at year-end, and potentially further improvements to AECO pricing. Bellatrix could be a name to own once again, however we require clarity on the above mentioned items before we can feel comfortable with the PDP growth going forward."

Moving the stock to "sector perform" from "outperform," his target for the stock fell to $3.85 from $4.20. Consensus is $4.13.

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In other analyst actions:

TD Securities analyst Linda Ezergailis upgraded TransCanada Corp. (TRP-T) to "action list buy" from "buy" with an $81 target, rising from $79. The average on the Street is $71.99.

J.P. Morgan analyst Nishant Mani initiated coverage of Air Canada (AC-T) with a "neutral" rating and $29 target. The average target on the Street is $32.74.

Mr. Mani also initiated coverage of WestJet Airlines Ltd. (WJA-T) with a "neutral" and target price of $27. The average is $27.66.

Macquarie analyst Michael Siperco upgraded Kinross Gold Corp. (K-T) to "outperform" from "neutral" and raised his target by a loonie to $7. The average is $6.82.

Paradigm Capital Inc analyst Daniel Kim downgraded Quarterhill Inc. (QTRH-T) to "hold" from "buy" with a target of $2.50, down from $2.75. The average is $2.83.

CIBC World Markets analyst Jon Morrison downgraded Trinidad Drilling Ltd. (TDG-T) to "neutral" from "sector outperform" with a target of $2.25, down from $2.50. The average is $2.59. Meanwhile, GMP analyst Ian B Gillies downgraded the stock to "reduce" from "hold" with a target of $1.50, down from $2.25.

Cormark Securities Inc. analyst Kyle McPhee downgraded Clearwater Seafoods Inc. (CLR-T) to "buy" from "top pick" with a target price drop to $11.50 from $15.50. The average target is $11.33.

TD Securities analyst Bentley Cross downgraded Trilogy International Partners Inc. (TRL-T) to "hold" from "buy" and lowered his target to $7 from $9.50. The average is currently $9.38.

Cormark Securities Inc. analyst Jesse Pytlak downgraded McCoy Global Inc. (MCB-T) to "market perform" from "speculative buy" with a target of $2.10, falling from $2.30. The consensus is $2.17.

National Bank Financial analyst Greg Colman upgraded High Arctic Energy Services Inc. (HWO-T) to "sector outperform" from "outperform" with a $5.25 target, down from $6. The average is $5.94.

TD Securities analyst Damir Gunja downgraded Just Energy Group Inc.  (JE-T) to "hold" from "buy" with a target price of $6.50, dropping from $9.50. The average is $8.42.

CIBC World Markets analyst Robert Catellier downgraded Gibson Energy Inc. (GEI-T) to "sector underperform" from "neutral" and dropped his target for the stock to $16 from $19. The average on the Street is $19.73.

National Bank Financial analyst Matt Kornack lowered his rating for Dream Office Real Estate Investment Trust (D.UN-T) to "sector perform" from "outperform" with a $22 target. The average is $22.33.

Raymond James analyst Jeremy McCrea upgraded Obsidian Energy Ltd. (OBE-T) to "outperform" from "market perform" and raised his target to $2 from $1.75. The average target is $1.62.

National Bank Financial analyst Richard Tse lowered Mediagrif Interactive Technologies Inc. (MDF-T) to "sector perform" from "outperform" with a target of $14, falling from $20. The consensus is $15.90.

Clarus Securities analyst Stephen Kammermayer upgraded Essential Energy Services Ltd. (ESN-T) to "buy" from "speculative buy" with a target of $1.30. The average is $1.13.

TD Securities analyst Vince Valentini upgraded Comcast Corp. (CMCSA-Q) to "action list buy" from "buy" with a target of $51 (U.S.). The consensus is $45.46.

Sandler O'Neill & Partners, LP analyst John Barnidge downgraded MetLife Inc. (MET-N) to "hold" from "buy" with a target of $57, down from $60. The average is $56.23.