Monday's analyst upgrades and downgrades

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

Raymond James analyst Chris Thompson upgraded his rating for OceanaGold Corp. (OGC-T) following a recent site visit to its Haile development in South Carolina.

"Overall, observations made on the visit provide enough comfort to layer an underground operating component to our modelled mine plan for Haile," said Mr. Thompson. "The addition of production from underground ore sources adds production growth at Haile (commencing mid-2018), which adds metal price leverage to our valuation. Our modelling adjustments (underground, capex) are slightly accretive to our net asset value (NAV) estimate for Haile and OGC. This and OGC's valuation at spot gold (approximately $1,270 per ounce), prompts our re-rating."

Moving his rating to "outperform" from "market perform," Mr. Thompson said the "Oceana Way" is benefiting the Haile development. He noted Haile is on track for first gold in late 2016 with commercial production likely to commence in the first quarter of 2017.

"Ultimately, we see OGC deploying an operating plan designed around a higher gold price (say, a $1,200/oz pit shell versus $950/oz currently being adopted from Romarco's operating plan)," the analyst said. "As such, we see adjustments in the open pit mine plan and consideration being directed at a tradeoff analysis between higher waste to ore strip and the emergence of an underground mine plan. We have adjusted our modelled production plan for Haile to incorporate an underground operating component (in addition to the open pit operating plan), supported by the exploration potential we see at depth. We see underground production commencing in mid-2018 (18 months after the tabling of an economic assessment, anticipated in second half of 2016). We model a conceptual 2.5 million tonnes grading 4.5 grams per tonne (g/t) sourced from underground ore sources (initially the Horseshoe deposit), milled at [approximately] 2,000 tonnes per day (in addition to the 7,000 tpd mill rate for open pit ore). We estimate $50-million in additional Capex to fund plant modifications and pre-production underground development."

Mr. Thompson raised his NAV projection to $2.91 from $2.88. His cash flow per share estimates for 2016 and 2017 fell to 34 cents and 50 cents from 38 cents and 52 cents, respectively.

He maintained a price target of $3.70. The analyst consensus price target is $3.49, according to Thompson Reuters.

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Recent signs of deterioration in Canada's housing markets are causing Raymond James analyst Steve Hansen to take a "temporary pause" on CanWel Building Materials Group Ltd. (CWX-T).

Though he said he admires the company's cross-border growth strategy, solid execution and "healthy upside" leverage to its pricing, he moved his rating to "market perform" from "outperform."

"To be fair, many of CWX's largest regional markets (California, Ontario, B.C., Maritimes) continue to perform well, and the warm pattern benefiting 4Q15 carried into Jan/Feb, collectively pointing toward a solid 1Q16 outlook; however, we are increasingly mindful of the deteriorating outlook for select markets such as Alberta and Saskatchewan, where activity levels have only recently started to retreat in response to oil's precipitous decline," he said. "CMHC's latest forecast largely echoes these concerns, in our view, calling for a 4.7-per-cent decline in Canadian 2016 housing starts, with Alberta expected to decline [about] 20 [per cent]. Against this backdrop, while we expect CWX to weather this storm well, we feel it is prudent to temporarily move to the sidelines until the full impact of these concerns are better understood."

CanWel reported fourth-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) of $5.1-million, beating Mr. Hansen's estimate of $4.8-million and in line with the consensus projection of $5.3-million. It was an increase of 80.4 per cent year over year, and attributable to better-than-forecast revenue, according to Mr. Hansen.

Revenues rose 23.3 per cent year over year. Mr. Hansen said: "[Revenues were] bolstered by the firm's recent CCI acquisition, a continued updraft in the California housing market, and atypically warm weather supporting sustained winter construction in key Canadian markets (i.e. Ontario). Moreover, while our weighted basket of [lumber and building materials or LBM] prices fell 10.3 per cent year over year in U.S. dollar terms, we note that sharp drop in the Canadian dollar helped effect a 10.5-per-cent year-over-year increase in Canadian-dollar terms."

Mr. Hansen lowered his 2016 earnings per share, EBITDA and revenue projections to 44 cents, $41-million and $931.2-million from 52 cents, $44.1-million and $942.2-million, respectively.

He also lowered his price target for the stock to $5.50 from $6. Consensus is $6.29.

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Milestone Apartments Real Estate Investment Trust (MST.UN-T) represents the best GARP (growth at a reasonable price) story among Canadian REITs, according to Desjardins Securities analyst Michael Markidis.

On Thursday, Milestone reported fourth-quarter 2015 funds from operations (FFO) per unit of 28 cents (U.S.), topping Mr. Markidis's estimate of 27 cents and an increase of 12 per cent year over year.

"Portfolio metrics were strong across all segments, reflecting favourable apartment fundamentals and MST's mid-market focus," the analyst said.

He added the company's organic growth "continues to impress," with same property net operating income (NOI) rising 12.2 per cent in the quarter with the full-year result at 8.2 per cent.

"Thematically, average rent increases and stable occupancy continue to drive the top line, while operating expense inflation remains relatively subdued," he said.

In reaction to the results, Mr. Markidis raised his 2016 FFO per unit projection by 3 cents to $1.16. He introduced his 2017 estimate of $1.21, which represents approximately 4-per-cent year-over-year growth.

"Our NAV estimate increases to $19.80 Canadian (from $19.20), reflecting a higher NOI run rate, minor strengthening in our FX assumption (Canadian/U.S. dollar rate of $1.33 Cdn.) and compression in our cap rate (to 6.3 per cent from 6.4 per cent previously), offset by the dilution stemming from the equity offering associated with the Landmark transaction," he said.

Noting Milestone has the lowest payout in his coverage universe, he said: "there is ample room for future distribution growth."

"For 2016, MST amended its annual distribution to 55 cents (U.S.) from 65 cents (Canadian)," he said. "Based on our numbers, the new distribution represents a 53-per-cent adjusted FFO payout ratio. Barring the unforeseen, we believe MST will be in a position to reward investors with a 5-per-cent-plus distribution hike for 2017."

Maintaining his "buy' rating, he  raised his 12-month target price to $19.25 from $18.50. Consensus is $18.16.

"Despite the recent run-up (an increase of 10 per cent year to date), the stock trades at 16 times EBITDA and 11.5–12.0 times our 2017 AFFO," Mr. Markidis said. "These metrics represent a material discount to Canadian multi-family peers. Index inclusion (possibly in the upcoming March rebalance) and continued execution should ultimately narrow the gap."

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Canyon Services Group Inc. (FRC-T) is the "best of a bad bunch," according to BMO Nesbitt Burns analyst Michael Mazar.

On Thursday, the Calgary-based company reported an adjusted fourth-quarter loss of 9 cents per share, below both Mr. Mazar's estimate of a 6-cent loss and the consensus of 8 cents. Its revenue of $94-million met expectations, while gross margins of 14.6 per cent fell below Mr. Mazar's projection of 19.2 per cent.  Canyon also suspended its dividend, which Mr. Mazar projects will save $8-million annually.

"FRC has executed its plan to transition some of the workforce to a variable pay structure from the traditional fixed salary model," he said. "While it is too early to fully evaluate the success of this initiative, we expect the impact on margins to be positive and view the concept as innovative and at least worth trying in the current environment. Roughly 74 per cent of the company's total workforce is now on variable pay versus only 10 per cent at the beginning of 2015."

Mr. Mazar moved his 2016 projections to a loss of 45 cents per share from a loss of 12 cents. His 2017 estimate fell to a loss of 31 cents from a 5-cent loss.

"While we continue to believe it's too early for investors to add to the high-beta pumping names, in our view, FRC offers a better risk/reward profile than the other two due to its superior balance sheet," he said. "We also could see a scenario in which FRC is able to use its balance sheet to make counter-cyclical acquisitions as impaired competitors put equipment up for sale, which could be a positive catalyst for FRC shares. Management has done a good job of structurally improving the company during this downturn with initiatives like variable compensation and the addition of continuous frac pumps which, coupled with the potential for discounted equipment purchases, could allow FRC to emerge from the downturn in a significantly better position than it was previously."

Maintaining his "market perform" rating, he raised his target price to $5 from $4.50. Consensus is $5.57.

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The all-share acquisition of TrueGold Mining Inc. (TGM-X) by Endeavour Mining Corp. (EDV-T) is "potentially" positive in the long term but has near-term ramp-up risks, according to Canaccord Genuity analyst Rahul Paul.

Under the friendly deal, Endeavour is offering to exchange 0.044 of a common share for each True Gold share.

Endeavour will gain True Gold's 90-per-cent interest in the Karma mine in Burkina Faso, which will increase its annual production profile by 110,000-120,000 ounces at an all-in sustaining cost (AISC) of $700 per ounce.

Noting the deal brings the addition of "another relatively low-cost operation" to its portfolio, Mr. Paul said: "The added cash injection from La Mancha's anti-dilution right ($61-million to maintain its 30-per-cent ownership) further improves Endeavour's balance sheet, likely eliminating the need to further draw from the $350-million credit facility to fund Hounde's development. On the other hand, we believe the acquisition of an asset about to commence production means that Endeavour could be taking on some start-up/ramp-up risk (particularly since the TGM feasibility study assumed a very quick ramp-up in the first year). Furthermore, we believe the gold stream on Karma reduces the project's appeal, especially during the first five years of production (the guaranteed 100,000 oz delivery period) - although we believe the burden may be more manageable in a diversified producer such as Endeavour."

"Our forecasts for Karma are based on the feasibility study, although we assume a slower ramp-up to full production by 2017 (further guidance may be provided following close of the transaction) and include the potential production from North Kao in our profile (based on the 2014 PEA). We estimate a 20-per-cent increase in average consolidated production and a 2-per-cent decrease in both average consolidated cash operating costs and AISC (estimated 2016-2020). We estimate that the acquisition would be net asset value (NAV) neutral under our current price deck - we see the potential for greater accretion pending a quicker ramp-up and/or further reserve resource growth through exploration."

Maintaining his "buy" rating for the stock, he lowered his target price to $14 from $15.50. Consensus is $12.84.

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In other analyst actions:

AvalonBay Communities Inc (AVB-N) was downgraded to "market perform" from "outperform" at BMO Capital Markets by equity analyst John Kim. The target price is $190 (U.S.) per share.

Dunkin' Brands Group Inc (DNKN-Q) was downgraded to "neutral" from "buy" at Guggenheim Securities by equity analyst Matthew Difrisco.

Endeavour Silver Corp (EDR-T) was raised to "hold" from "reduce" at TD Securities by equity analyst Daniel Earle. The 12-month target price is $3 (Canadian) per share.

First Majestic Silver Corp (FR-T) was raised to "buy" from "hold" at TD Securities by equity analyst Daniel Earle. The 12-month target price is $9 (Canadian) per share.

General Growth Properties Inc (GGP-N) was raised to "buy" from "hold" at Evercore ISI by equity analyst Steve Sakwa. The target price is $31 (U.S.) per share.

Helen of Troy Ltd (HELE-Q) was rated new "buy" at Jefferies by equity analyst Trevor Young. The 12-month target price is $114 (U.S.) per share.

MEDNAX Inc (MD-N) was downgraded to "neutral" from "positive" at Susquehanna by equity analyst Chris Rigg. The 12-month target price is $70 (U.S.) per share.

Simon Property Group Inc (SPG-N) was raised to "buy" from "hold" at Evercore ISI by equity analyst Steve Sakwa. The target price is $213 (U.S.) per share.

True Gold Mining Inc (TGM-T) was downgraded to "sector perform" from "outperform" at RBC Capital by equity analyst Dan Rollins. The 12-month target price is 50 cents (Canadian) per share.

UDR Inc (UDR-N) was raised to "outperform" from "market perform" at BMO Capital Markets by equity analyst John Kim. The target price is $40 (U.S.) per share.

With files from Bloomberg News