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File photo of the oil pipeline and tank storage facilities at the Husky Energy oil terminal in Hardisty, Alta.The Canadian Press

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

TD Securities analysts downgraded four energy companies and raised their rating for another on Friday in conjunction with an update to their commodity price assumptions.

The firm lowered its long-term WTI oil price assumption to $65 (U.S.) per barrel from $70, which led to a 17-per-cent decline in 2018 cash flow per share estimates, an 18-per-cent drop in net asset value projections and a 17-per-cent hit to target prices for companies in their coverage universe.

"This is a material reduction given the high level of oil sands exposure within our coverage universe and the associated impact to project NPVs," the firm said in a research note. "Recall that supply costs for brownfield SAGD [Steam Assisted Gravity Drainage] oil sands expansions generally start at $65 (U.S.) per barrel, assuming no material sunk capital (for mining, they are even higher). We have also taken the opportunity to drop our 2017 WTI price to $49 per barrel (from $55) and 2018 WTI price to $55 per barrel (from $60).

"Since our WCS heavy differential assumptions are effectively unchanged, the reduction in our forecast WTI prices is a direct hit to operating margins. Corporate NAVs for companies with material oil sands (or heavy oil) exposure (the integrateds), Athabasca Oil (ATH-T), BlackPearl Resources (PXX-T), MEG Energy (MEG-T), Pengrowth (PGF-T), and Northern Blizzard (NBZ-T) are down 8-39 per cent on the back of this downward adjustment."

The firm admitted its "overweight" stance for the sector has been incorrect thus far in 2017, though it maintained the rating given the underperformance of Canadian companies versus its U.S. peers.

"More specifically, the S&P/TSX Capped Energy Index is down 19 per cent (U.S. dollar adjusted)," the firm said. "Year to date while the U.S. index is down 16 per cent. While sentiment in the Canadian energy complex seems the most pessimistic it has been since Q1/16, we are still of the view that Canadian energy stocks are not only fundamentally stronger over the past two years (see our 2017 Outlook Hey Crude, Don't Let Me Down), but also trade at lower valuations than they have historically— particularly relative to the US-based peers (see our Cross Border Barometer). In light of the material pullback in WTI oil prices since the beginning of the year (we entered 2017 at ~US$57/bbl but have since traded down to $45 per barrel), the adjustments to our financial estimates and target prices by association were overwhelmingly negative and material."

TD lowered its ratings for the following companies:

Aanalyst Menno Hulshof downgraded Cenovus Energy Inc. (CVE-T) to "hold" from "buy" with a target of $11.50, down from $15.50. The average is $15.13, according to Bloomberg data.

"While downgrading to HOLD (from Buy) was a difficult call given the massive underperformance since the $17.7-billion acquisition of the ConocoPhillips (COP-N) assets was first announced (down 45 per cent vs. the XEG, down 16 per cent), we believe there is too much near to mid-term uncertainty to recommend buying the stock today," said Mr. Hulshof. "Key 'unknowns' at this time include a) the timing and scope of asset sales considering its year-end target of $4-5-billion (and what this could mean for the pace of deleveraging), and b) who the next President and CEO will be (and potential implications for the 5-year plan rolled out at its investor day). Lastly, we highlight that despite the sharp pullback in its shares, it is still trading in line with its peers on strip 2018 EV/DACF [enterprise value to debt-adjusted cash flow]."

Mr. Hulshof downgraded Husky Energy Inc. (HSE-T) to "hold" from "buy" and lowered his target by a loonie to $18. The average is $17.97.

"HSE's total return of 5 per cent over the past 12 months makes it the number two performing integrated after Suncor Energy Inc. (SU-T, total return of 16 per cent)," he said. "Year-to-date, its integrated peers generated an average total return of negative 22 per cent vs. HSE at negative 6 per cent. In light of this, HSE's consensus EV/EBITDA discount to its integrated peers has shrunk to 2.3 times—this is closing in on the 5-year average discount of 1.9 times. Further, we're struggling to identify the necessary catalysts required to further bridge the multiple gap. Reinstatement of the dividend is the obvious one but will likely require $53-55 (U.S.) per barrel WTI oil prices on a sustained basis, in our view. We believe the downside on HSE shares is very limited at these levels (based on our NAV work and relative multiples) but also believe that outperformance is unlikely over the coming months and quarters. However, given the modest target return of 18 per cent, we are downgrading."

Analyst Aaron Bilkoski downgraded Northern Blizzard Resources Inc. (NBZ-T) to "hold" from "buy" with a $3.25 target, down from $4.25. The average is $3.42.

"Our downgrade is predicated on a reduced target price, driven by downside torque of its lower-than-average margin oil business," he said. "Aside from valuation, the company is currently in a state of transition with a new majority shareholder, undetermined future management and a yet-to-be articulated corporate strategy."

Mr. Bilkoski lowered Pine Cliff Energy Ltd. (PNE-T) to "hold" from "buy" with an 85-cent target, down from $1.05. The average is $1.13.

"We are reducing our rating on Pine Cliff to HOLD (from Buy) to reflect a modest 12-month total return under our reduced gas price forecast," the analyst said. "Without the benefit of liquids production and higher costs than Montney/Deep Basin natural gas pure-plays, its cash flow is subject to more pronounced margin compression."

At the same time, Mr. Hulshof upgraded Encana Corp. (ECA-T) to "buy" from "hold." His target fell to $14.92 from $15.22. The average is $17.26.

"We downgraded ECA to Hold back in January 2017," he said. "Its shares are down 38 per cent since that time versus the XEG and its peers which are down 18 per cent and 26 per cent, respectively. Although some of this weakness is likely explained by relative torque, we also highlight 1) the Green Party and NDP joining forces in B.C. and the potential for increasing Montney regulatory headwinds, and 2) the potential for permanently shutting in Deep Panuke (although not material to margins or the investment thesis). Pending further clarity, we believe these risks are now appropriately reflected in its shares. It now once again trades at a discount to its US peers based on 2018 consensus EV/EBITDA multiples (5.4 times versus its peers at 6.4 times). Further ECA now also believes it can deliver on all facets on its 5-year plan at $50 per barrel WTI (vs. US$55/bbl previously)."

Elsewhere, Scotia Capital analyst Jason Bouvier upgraded Encana Corp. to "sector perform" from "sector underperform" based on an improved relative valuation. His target is $11 (U.S.).


On the heels of stronger-than-expected fourth-quarter financial results, BMO Nesbitt Burns analyst Paul Sklar said Empire Company Ltd. (EMP.A-T) has further turnaround initiatives to come.

Mr. Sklar upgraded the grocery company, which runs several chains including Sobeys, Safeway, IGA, Foodland and FreshCo, to "outperform" from "market perform."

On Wednesday, Stellarton, N.S.-based Empire reported adjusted earnings per share of 18 cents, exceeding Mr. Sklar's projection of a 3-cent loss and the consensus expectation of a 12-cent profit. The beat was due largely to better-than-anticipated same-store sales, which fell 1.6 per cent versus the analyst's expectation of a 6.0-per-cent drop.

"While Empire's cost structure for the quarter was in line with our expectations, SSS was much stronger than we thought was achievable," the analyst said. "Empire reported deflation of 1.9 per cent, which was in line with Metro's result for the same period, but was surprisingly better than Loblaw's deflation of 3.9 per cent. We suspect that under the new management, Empire's various banners (particularly Safeway) have scaled back aggressive price investment and promotion, which likely was not resonating with consumers. Concurrently, Empire had positive tonnage growth for the first time in 17 quarters. During the same period, Metro and Loblaw generated tonnage of 2.3 per cent and 1.8 per cent, respectively. With the strong tonnage from Metro and Loblaw, and given the modest volume growth in the industry, we had assumed that the tonnage gains at these two grocers were largely at the expense of Empire. It is a bit of a mystery as to how all three could aggregate such a large tonnage gain, as we know that Costco is also generating strong comps and tonnage. The implication appears to be that Empire has essentially stabilized tonnage trends (the company sent three strong management/merchant persons to Safeway) and Walmart may be losing share."

Mr. Sklar raised his full-year fiscal 2018 and 2019 EPS projections to 68 cents and 99 cents, respectively, from 44 cents and 90 cents.

He also raised his target price for the stock to $25 from $19. The analyst consensus price target is $22.55, according to Thomson Reuters data.

Mr. Sklar said: "Our upgrade took into account the following considerations: (i) the company reported a much improved comp in the quarter even before the relaunching of the brand positioning/promise of its major banners (Sobeys and Safeway) that will likely occur in calendar 2018; (ii) as Empire begins to realize cost savings from its transformation plan (i.e., organizational restructuring and cost reduction), some of the savings will be invested back into the banners' price position, which will further enhance comp performance; and, (iii) while we believe that management's goal for $500 million of cost savings from the three-year transformation plan is an aggressive target, even our more reserved assumptions (we are assuming only $250 million of savings) would still result in sufficient earnings growth to support our target return."


Kirkland Lake Gold (KL-T) is less expensive than other medium-sized gold producers, according to BMO Nesbitt Burns analyst Brian Quast.

He upgraded the stock to "outperform" from "market perform" as part of the firm's third-quarter mining update report, which was released Thursday, citing a blend of its net present value (NPV) multiple and 2018 cash flow per share multiple.

"Kirkland Lake had a spectacular Q1/17, with Fosterville delivering exceptional results, in particular," the analyst said. "Fosterville guidance is now set at 200-225,000 ounces Au (previous 140-145,000 oz) at cash costs of $310-330 per ounce (previous $467-484/oz). This new guidance, as of Q1/17, is predicated on the grade encountered during Q1/17: 11.1 grams per ton Au continuing for the remainder of 2017. … The Cosmo mine is entering a period of suspension, beginning June 30, 2017. The purpose of the suspension is to allow for an aggressive resource definition exploration program. The mine will be maintained in a state of preparation to allow for a smooth resumption of operations once the exploration program is complete. It is a measure of how good Fosterville's Q1/17 was that aggregate 2017 guidance could be raised, despite the decision to suspend production at Cosmo."

"Company-wide production guidance now stands at 530-570,000 ounces at cash costs of $475-525 and AISC [all-in sustaining cost] of $850-900. Over the past few months, Kirkland Lake has also initiated a normal course issuer bid, repaid $57-million of convertible debentures, added to management, and is about to pay its inaugural dividend."

Mr. Quast raised his target for the stock to $15.25 from $12.75. Consensus is $13.59.

"Kirkland Lake currently trades at 1.6 times NPV and 5.0 times 2018 estimated CFPS, trading roughly in line with peers, which trade at 1.5 times NPV and 6.4 times 2018E CFPS," he said. "We set our target price using a 50-50 blend of 1.8 times NPV and 7 times 2018E CFPS. With operations exclusively in Tier I mining jurisdictions (Canada and Australia), and a recent track record of operational excellence, we predict that Kirkland Lake will continue its ascent into being one of the premium medium-sized producers."


Credit Suisse analyst Anita Soni downgraded Eldorado Gold Corp. (ELD-T, EGO-N), citing production issues at its Kisladag operation in Turkey and uncertainty surrounding its Greek assets.

"We are revising our long term recovery rate assumptions for Kisladag, and our value for Olympus and Skouries until we gain more clarity on the nature of the arbitration issue in Greece (given the lack of clarification on the issue since it was first announced on June 9)," said Ms. Soni. "We have revised our OpCFa [operating cash flow] multiple to 15 times from 23 times and our NAV multiple to 1.2 times from 1.3 times to reflect the uncertainty around the Greek assets and Kisladag production."

Her rating fell to "neutral" from "outperform" with a target of $3.25 (U.S.), down from $5.25. The average target is $4.34.


Ritchie Bros. Auctioneers Inc. (RBA-N, RBA-T) is "high quality, but at a price," according to National Bank Financial analyst Maxim Sytchev.

"Ritchie Bros. is the largest industrial equipment auctioneer globally with pro-forma (IronPlanet) gross auction proceeds exceeding $5.3-billion per annum annum (resulting top line is $730-million)," he said. "Online auction sales ($3-billion) represent 57 per cent of the company's assets sold, making RBA a top 50 business-to-business e-commerce company, globally. The firm also remains one of the very few secular growth stories as, over the last 61 years, RBA has only known three years of negative y/y change in equipment proceeds (1992, 2008 and 2009; however, 2017E will likely be another negative data point due to very tough 2016 comps). There is also a counter-cyclical revenue dynamic, explaining RBA's premium valuation."

In a research report released Thursday, Mr. Sytchev initiated coverage of the Burnaby, B.C.-based company's stock with a "sector perform."

He touted RBA's business model, calling it "great." However, he noted the company currently sits at an "appropriate point" in the business cycle.

"We really like the company's business model (40-per-cent EBITDA margin / 17-per-cent return on equity on 2018) and do believe that RBA rightfully deserves to be a part of the industrial portfolio, but only at a given point of the equipment de-stocking / re-stocking cycle," he said. "Over the coming nine months difficult GAP comps will not be offset by improved equipment pricing. With lead times starting to extend for some equipment items (parts, specifically), the availability of recent/gently used equipment will continue to shrink (hence impacting RBA's GAP metrics)."

He set a price target for the stock of $31.50 (U.S.). Consensus is currently $34.40.

"When combining: 1) lacklustre WTI momentum; 2) tough GAP comps (even though the market appears to better capture / model this dynamic); 3) more attractive relative valuation in other industrial names; and 4) uncertainty around being able to move the auction model (even with IronPlanet in the fold – the company's recent $758-million M&A) as a channel beyond the current 1.2% addressable market, we believe that a more opportune entry point is required in order to justify a more constructive stance in the short term," Mr. Sytchev said.


Coach Inc. (COH-N) is "bolstering its swag bag" with its $2.4-billion (U.S.) acquisition of Kate Spade & Co. (KATE-N), according to Canaccord Genuity analyst Camilo Lyon.

"While COH's revival over the past two years has been well executed, the transformation taking place in its portfolio with the acquisition of Kate Spade creates a new accessories/lifestyle platform that it can leverage globally," said Mr. Lyon. "We view the KATE acquisition as transformative both from a financial and portfolio evolution perspective. First, we expect KATE to be accretive to COH EPS by 9 per cent, 17 per cent, and 15 per cent over the next three years yielding 2020 EPS of $3.22. Next, the addition of KATE bolsters COH's portfolio of brands in a way that is complimentary to the overall business with significant market share capture potential and little threat of cannibalization. As such, we believe COH should trade more closely to its European luxury portfolio peers that carry average P/E multiples of 22 times and EBITDA multiples of 12 times. With the Coach brand on solid footing and KATE providing an added growth vehicle to the portfolio, COH is well positioned to deliver outsized performance over the next three years."

Calling the acquisition a "game changer," Mr. Lyon initiated coverage of the New York-based luxury retailer with a "buy" rating.

"Without question, the Kate Spade acquisition is transformational in many ways, most notably in the sense that it affords COH significant opportunities for cost synergies while also gaining share of a consumer that it does not actively reach," he said. "The key attributes of the deal include (1) only 10-per-cent customer overlap between the two brands; (2) the opportunity to leverage the KATE brand internationally using COH's infrastructure as only 18 per cent of KATE sales come from abroad; (3) expertise in supply chain that will lead to scale benefits; (4) greater efficiencies in IR and corporate functions coupled with removal of duplicative corporate overhead costs. Overall, we expect COH to professionalize KATE for maximum productivity and efficiency gains."

Mr. Lyon said Coach could be engaged in further deals in the near term "as it evolves its portfolio to include other modern luxury assets." He said Jimmy Choo would make "strong strategic logic."

The analyst set a price target for the stock of $59 (U.S.). Consensus is $49.60.


In other analyst actions:

Canadian Tire Corporation Ltd. (CTC.A-T) was upgraded to "buy" from "neutral" by Eight Capital analyst Tal Woolley with a target of $165. The analyst average target is $176.86, according to Bloomberg data.

Mr. Woolley downgraded Gildan Activewear Inc. (GIL-T) to "neutral" from "buy" with a target of $42.81, down from $43.96. The average is $43.32.

Citing a continued supply glut for uranium, Bank of America Merrill Lynch analyst PT Luther downgraded Cameco Corp. (CCO-T) to "underperform" from "neutral" and cut his target to $12 from $15. The average is $15.

TD Securities analyst Graham Ryding downgraded Home Capital Group Inc. (HCG-T) to "hold" from "speculative buy" and lowered his target by a dollar to $20. The average is $18.53.

Needham & Co analyst Kevin Caliendo upgraded Walgreens Boots Alliance Inc. (WBA-Q) to "buy" from "hold" with a target of $94 (U.S.). The average is $91.72.