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Monday’s analyst upgrades and downgrades

A Methanex methanol plant in Chile.


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

Though methanol prices are "on the move" and no longer trailing behind other energy benchmarks, Raymond James analyst Steve Hansen downgraded Methanex Corp. (MEOH-Q, MX-T).

Based on a 24-per-cent "surge" in share price over the past two weeks, compared to a 1-per-cent gain by the S&P/TSX Composite, Mr. Hansen lowered his rating to "outperform" from "strong buy."

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"To the surprise of many investors, global methanol prices have 'come to life' in recent weeks after a lethargic summer that (frustratingly) saw methanol demonstrably lag versus crude oil and most other energy-related benchmarks," he said. "But lag no more. North American spot prices, have surged 25 per cent over the past 6 weeks on account of several planned/unplanned outages that have transitioned the market from balanced to tight, a move that's allowed contract values (& MEOH's share price) to step higher in tandem. While it might be tempting to believe that fading supply disruptions will see prices retrace, we're not convinced. Rather, we believe that a robust demand growth profile paired with only modest supply additions and a rising oil backdrop point toward solid macro underpinnings — a thesis further supported by escalating supply constraints through a typically volatile fall/winter period."

Mr. Hansen also predicted "attractive" long-term fundamentals that should support higher methanol prices over time. Those factors included an increase in global demand over the next five years at a 7-10 per cent compound annual growth rate as well as "relatively sparse" new supplies on the horizon, which he said suggests "a potential imbalance (deficit) materializing over the medium-term horizon."

He raised his target price for the stock to $40 (U.S.) from $37, citing "the demonstrable upturn in global methanol prices over the past six weeks, the commensurate cash flow visibility it provides, and our broader view this upturn still has legs/upside given the sector's positive macro underpinnings."

The analyst consensus price target is $37.73, according to Thomson Reuters.


Following a site visit to its Juanicipio joint venture in Zacatecas, Mexico, Canaccord Genuity analyst Eric Zaunschreb upgraded MAG Silver Corp. (MAG-T) to "speculative buy" from "hold."

"Fresnillo plc, the operator, continues to do a superb job, driving a decline to 3.2 kilometres from the portal, recently achieving advancement rates exceeding 150 metres per month," he said. "The decline itself is fully concrete lined and floored suggesting lower operating and maintenance costs. We maintain our view of commencement of production in mid-2018."

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"Confidence in increased throughput stems from Fresnillo's experience at the adjacent Saucito operation and stronger appreciation of exploration upside and the partners' newfound aggression to exploit it. The current expanded drill program should contribute to a robust resource update in early 2017. We see considerable additional upside tracing mineralization in the dilatant zone to the east and west, testing evidence of a new boiling zone and potential skarn mineralization to depth, tracing veins across the border from Saucito to the east and new greenfield targets to the west."

Mr. Zaunschreb noted the company's current shares trade at 0.83 times net asset value (5 per cent) versus 0.42 times for exploration and development companies in his coverage universe and 0.82 times for small- and mid-cap producers. He said the premium is "reflective of project quality, low associated risk, fully funded status and strong exploration potential."

He raised his target price for the stock to $24 from $22.50. The consensus is $22.97.

"We believe that investors should gain exposure, taking advantage of autumnal weakness on uncertainty surrounding the outcome of the US Presidential election and eventual Fed rate rise," Mr. Zaunschreb said.


Fiera Capital Corp.'s (FSZ-T) £40.7-million offer to acquire Charlemagne Capital Ltd. is an emerging markets deal "that packs a big punch," according to Desjardins Securities analyst Gary Ho.

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Charlemagne is a London-based asset manager with $2.2-billion (U.S.) in assets under management. Fiera will pay a purchase price of 11 pence per share and a special dividend of 3 pence per share.

Mr. Ho said the price represents 1.9 per cent of AUM, which is in line with an average of 1.7 per cent in previous transactions. He did emphasize average management fees are higher than in past deals.

"There are several reasons why we like this transaction," said Mr. Ho. "First, emerging markets are out of favour now, so arguably FSZ is buying at a lower multiple. There is significant torque to this business — back in 2007, Charlemagne managed $6.5-billion at its peak and generated $70.6-million in operating profits, not to mention F/X is more favourable now versus 2007. Second, this is on strategy with management's plans to add an EM strategy. Third, it gives FSZ a local presence to serve clients outside of North America. Fourth, funds performance has been solid. Lastly, the transaction is financially accretive to our 2017 adjusted EPS and EBITDA. That said, we would have preferred a few more details around management lock-up agreements but we are comforted by FSZ's M&A track record. Its pro forma leverage of 3.55 times is high but management is confident it can reduce this by 0.2–0.4x over the short term."

In reaction to the deal, Mr. Ho raised his 2017 earnings before interest, taxes, depreciation and amortization projection to $134-million (Canadian) from $129-million. His adjusted fully diluted earnings per share estimate rose to $1.40 from $136.

He kept his "buy" rating for the stock and $15 target price, which is also the consensus.

Mr. Ho said: "Our positive view is based on several catalysts: (1) we believe M&A will be a key driver in achieving Fiera's $200-billion AUM target—management has shown an ability to acquire accretively and integrate successfully; (2) it has grown revenue organically by 10 per cent annually over the past three years; (3) we believe Fiera is in the early innings of penetrating the U.S. institutional segment; (4) we foresee margin expansion to 40 per cent over the next few years; (5) Fiera's business model is largely insulated from regulatory concerns facing its peers; and (6) Fiera has a history of steady dividend increases."


The proposed deal between NXP Semiconductors NV (NXPI-Q) and Qualcomm Inc. (QCOM-Q) makes sense but creates some risk, said RBC Dominion Securities analyst Amit Daryanani.

According to a report late last week in the Wall Street Journal, Qualcomm is in talks to acquire NXP in a deal valued at close to $30-billion (U.S.).

"Given QCOM's large cash balance at nearly $30-billion, we think that a transformative acquisition is a definite possibility and could be a good use of the largest cash balance in the semiconductor industry," said Mr. Daryanani. "Qualcomm announced on Dec. 15, 2015 it had conducted a thorough review regarding strategic alternatives and decided against splitting the company. We think the next logical step would be to take a more aggressive stance on M&A. Put simply, QCOM returns 75 per cent of annual free cash flow FCF to shareholders, and that implies that total net-cash position continues to increase for the company.

"However, with QCOM's largest acquisition to date being $3-billion for Atheros in 2011 and $2.2-billion for CSR in 2015, investors may question whether large-scale integration is within QCOM's core competencies. While capital allocation has historically been heavily tilted toward stock repurchases and dividends, we believe that Qualcomm has the opportunity going forward to conduct a transformative all-cash acquisition to address its SAM targets. We note the accretion appears attractive and include a pro-forma model for a potential NXPI integration."

Mr. Daryanani said the acquisition of NXPI could generate at least 20 per cent accretion to 2018 earnings per share

"In response to various media articles discussing the QCOM for NXPI transaction, we assess a frequent question we have received: 'How much can QCOM pay for NXPI?,'" he said. "We think the likely upper end of the valuation framework would be $120-130 assuming 1) QCOM wants to keep leverage at [approximately] 2 times net-debt to EBITDA, 2) there are modest COGS synergies (sub 5 per cent) and reasonable OPEX synergies (5-10 per cent), 3) QCOM is able to fund the transaction with minimal equity and use offshore cash to fund the deal and 4) there are no tax implications that arise from the transaction. While QCOM can certainly elect to pay a larger premium, we suspect that would come in the form of QCOM equity issuance, which would impede the accretion analysis."

Mr. Dayanani maintained his "sector performer" rating for Qualcomm stock. He raised his target price to $70 (U.S.) from $59 "to reflect the increased potential for a more diversified and higher EPS/FCF generating asset post such a transformative deal." The analyst average target price is $63.96, according to Bloomberg.

He said: "While NXPI transaction is certainly much larger vs. what investors had contemplated we think it offers QCOM with several unique assets to further enable diversity away from their greater-than 90-per-cent mobility exposure. 1) NXPI provides an attractive way to play secular semiconductor content growth in automotive and offers a platform for building assets towards autonomous vehicle centric solutions, 2) Attractive MCU assets broads end-market diversity, strong FCF and foundation for [Internet of Things] and 3) NFC/Mobile – Provides a differentiated and attractive offering for mobility customers and potential to further integrate this with core QCOM assets."


Citi analyst Ashwin Shirvaikar downgraded Cognizant Technology Solutions Corp. (CTSH-Q) after it said it was conducting an internal investigation into possible violations of U.S. anti-corrupt practices laws related to payments in India.

With the Friday disclosure, George Cobourn, the company's president, resigned.

Mr. Shirvaikar moved his rating for the IT services provider to "neutral" from "buy."

"Our downgrade is not related to the fundamentals of the company – we continue to believe they are making appropriate investments to transform the company for long-term success in the midst of near-term challenges that had hurt the stock to begin with – this was clear from our just-concluded NDR with CTSH," he said. "So while we acknowledge that the valuation is attractive, we also recognize that the stock is likely 'uninvestable' to many investors now due to the combination of near-term factors that serve as an overhang."

The analyst reduced his target price for the stock to $55 from $68. The average is $66.19.

"It is too early to know more specifics but the possible violations appear to be quite serious, especially given the resignation of CTSH's former President," he said. "Under the FCPA criminal investigation, our quick check shows that the DOJ is able to fine small amounts for each anti-bribery violation and slightly higher if there is an accounting violation (not known at this stage), but these are perviolation fines and the scope is not known at this point."


In other analyst actions:

Seven Generations Energy Ltd. (VII-T) was downgraded to "buy" from "top pick" by Cormark Securities analyst Amir Arif. His 12-month target price increased to $36 per share from $33. The average is $35.46.

Paramount Resources Ltd. (POU-T) was raised to "top pick" from "buy" at Cormark by Mr. Arif. His target price of $21 did not change. The average is $15.75.

Element Financial Corp. (EFN-T) was downgraded to "buy" from "top pick" at Cormark by analyst Jeff Fenwick. The 12-month target price is $17.50 per share, down from $23. The average is $19.34.

ECN Capital Corp. (ECN-T) was rated new "top pick" at Cormark Securities by Mr. Fenwick. The 12-month target price is $5.50 per share. The stock was rated a new "outperform" at RBC by analyst Geoffrey Kwan with a 12-month target price of $4.25 per share.

High Liner Foods Inc. (HLF-T) was cut to "sector perform" from "sector outperformer" by Scotiabank analyst George Doumet. His target of $26 did not change. The average is $26.67.

Alembic Global Advisors analyst James Sullivan upgraded Chesapeake Energy Corp. (CHK-N) to "overweight" from "neutral." His target increased to $9 (U.S.) from $6, versus the average of $6.58.

Société Générale analyst Edward Muztafago upgraded Halliburton Co. (HAL-N) to "buy" from "hold." He raised his target to $55 (U.S.) from $50. The average is $51.20.

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