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SNC Lavalin offices in downtown Montreal,Quebec.

Mario Beauregard

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

SNC-Lavalin Group Inc. (SNC-T) is currently "looking better than it has in years from both an operational and risk-reward standpoint," said Raymond James analyst Frederic Bastien.

He suggests investors should "pounce" at the chance of acquiring shares in the Montreal-based engineering and construction company, "especially before a deferred prosecution agreement (DPA) is reached and the fund flow floodgates open."

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"We see SNC as a solid defensive bet since its Oil & Gas (O&G) and Mining & Metallurgy (M&M) segments are both exposed to escalating commodity prices," said Mr. Bastien. "The E&C firm should also be well positioned in a rising rate environment given its investment-grade credit rating and lender-friendly asset base, as well as Highway 407's natural inflation hedge and long-term debt financing. Moreover, there is already a large spread to peers baked into SNC's valuation, which we view as a healthy cushion to any series of unfortunate macro events."

Mr. Bastien said the company's contract to lead construction on the new $4-billion Champlain Bridge in Montreal is "dovetailing nicely" into its project to build, operate and maintain the city's REM light-rail network

"We still expect the massive bridge project to be commissioned on time (and at no extra cost to SNC) now that the construction schedule has been accelerated to make up for delays caused by a labour strike and contested bridge weight limits," he said. "Conveniently, the Champlain work will wrap up just as the nearby REM project is scheduled to ramp up, allowing SNC and partner Dragados to move project managers and supervisors seamlessly between jobs. We understand the use of state-of-the-art BIM technology gave SNC's consortium a head start on the LRT project, and that Atkins' contribution late in the bidding phase helped seal the deal. We know the newly acquired division will further prove its worth on REM by performing jobs that would have otherwise been outsourced."

Also touting its "front of the pack" position digitally and the potential for success in its M&M segment, Mr. Bastien hiked his target to $67 from $66 with an unchanged "outperform" rating. The average among analysts currently covering the stock is $69.45.

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Believing its current valuation looks "stretched," BMO Nesbitt Burns analyst Nikolaus Priebe downgraded Sprott Inc. (SII-T) to "underperform" from "market perform."

"Since last fall, Sprott shares have increased 60 per cent. The primary catalyst appears to be a report published by a subscription-based research firm highlighting Sprott as its top pick," said Mr. Priebe. "While we recognize recent efforts to expand business lines, divest underperforming assets, and shift towards passive strategies have been constructive changes, we are concerned that recent enthusiasm might have caused investors to get out over their skis on Sprott. We estimate that the company's base business is now being valued at 13.1 times EBITDA, significantly above peers at 6-9 times. As a result, we are downgrading Sprott to Underperform."

On Friday, the Toronto-based asset manager reported fourth-quarter adjusted base earnings before interest, taxes, depreciation and amortization (EBITDA) of $7.5-million, exceeding the analyst's projection of $6.2-million.

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However, Mr. Priebe said the result reflects a "noisy" quarter, noting:  "The adjusted number was positively impacted by a $3.6-million gain on long-term investments, which was largely related to the company's investment in Tradewinds and the value of its co-investment in the private lending fund. This was partly offset by a higher compensation accrual owing to a new long-term incentive program ($1.5-million). Normalizing for these items results in adjusted base EBITDA of $5.4-million."

Mr. Priebe maintained a $2.75 target, which sits below the average target on the Street of $2.94.

"To be clear, our downgrade is related to valuation and not based on a view that fundamentals are deteriorating," he said. "On the contrary, we view recent actions to expand business lines, divest underperforming assets, and shift towards passive strategies as a constructive step in the repositioning of the company ….  We value the company using a sum-of-the-parts approach to more adequately capture the value of proprietary investments and the private-lending LP. Our target price is derived by applying an EV/EBITDA multiple on base earnings, and adding value for Sprott's lending business, performance fees, and proprietary investments. By using this approach and working backwards, we are able to infer the multiple that investors are assigning to Sprott's base business based on the current share price.

"When comparing Sprott's market-implied enterprise value-to-EBITDA multiple to peers, it becomes evident that the company is valued at a significant premium to the broader group. Using our assumptions, Sprott's base business is being valued at a multiple 42 per cent higher than its closest peer (Fiera Capital). For this reason, we believe that the company's valuation has become stretched and may lag the broader peer group over the next twelve months."

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Village Farms International Inc.(VFF-T) reached a major milestone on Friday, which completed its transition from a "tomato company" to a "cannabis company" on schedule, according to Beacon Securities analyst Vahan Ajamian.

After market close, Pure Sunfarms, the 50-50 joint venture between Village Farms and Emerald Health Therapeutics Inc. (EMH-X) received its cultivation license for D3, its 1.1 million square foot greenhouse in Delta, B.C. Management expects to begin commercial production prior to July 1.

"With Emerald already propagating plants which can now be transferred to D3, the timeline to sales authorization is reduced compared to a company doing it alone," said Mr. Ajamian." We are forecasting Pure Sunfarms' revenue to commence in Q3/FY18.

"Now that it has obtained its cultivation license, the Board of Directors of Pure Sunfarms is able to exercise its option to acquire D2 (1.1 million sq. ft.) and/or D1 (2.6 million sq. ft. – largest greenhouse in North America). The conversion cost for D2 is estimated at $50-million (down from $55-million for D3 – lower security standards now, such as no more vaults needed). While Emerald's required contribution for D2 has not been disclosed, we note that MedReleaf Corp. (LEAF-T) just acquired a 1 million sq. ft. greenhouse for $26-million. Assuming Emerald contributes $26-million, $24-millionwould be remaining for the two partners to contribute equally (i.e, only $12-million cash for Village Farms). This figure can be further reduced by cash flow generated by D3 and the potential to obtain debt at the Pure Sunfarms level (Farm Credit Canada already provides debt to Village Farms). There is also the possibility that Pure Sunfarms acquires D1 and generates one large summer harvest, before it can secure the power required for supplemental lighting."

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Maintaining a "buy" rating for Village Farms shares, Mr. Ajamian raised his target to $12 from $11. The analyst average is currently $9.88.

"Village Farms' shares trade at an enterprise value-to-2020 estimated EBITDA multiple of 8.1 times and an EV/2021 EBITDA multiple of 1.7 times, representing a significant discount to its peers," he said. "Should Pure Sunfarms exercise its right to acquire and convert D2, we our calculations peg an implied value for Village Farms' shares a year out of $18.00."

Elsewhere, Echelon Wealth Partners analyst Russell Stanley hiked his target to $13 from $8.75 with a "speculative buy" rating.

"We had previously reflected only the first quadrant of the Delta 3 conversion in our model, leading to annualized capacity of 18,750 kilograms," said Mr. Stanley. "We now assume that the JV will be able to internally fund the conversion of the first three quadrants, taking annualized capacity to 56,250 kilograms. There is the possibility that conversion of the 4th quadrant could also be internally financed, but for now we are excluding it from our model. This drives an increase in our volume production/sales estimates. Slightly offsetting this, we are reducing our realized pricing assumption to $4.00 per gram from $5.00 per gram, to more conservatively reflect wholesale pricing levels. This pricing assumption reflects only dried cannabis, although as management reiterated in this morning's press release, it will focus on product development and marketing this year with a view to developing a vertically integrated business, just as it already has in produce. On a net basis, these changes drive the increase in our F2019E EBITDA estimate from US$24.8-million to US$33.5-million. In isolation, this would justify an increase in our 12-month target to approximately $12.00 per share."

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A fourth-quarter 2017 earnings beat and "solid" first-quarter guidance support a continued turnaround for Martinrea International Inc. (MRE-T), said BMO Nesbitt Burns analyst Peter Sklar.

On March 1 after market close, Martinrea, a Vaughan, Ont.-based automotive parts manufacturer, reported adjusted diluted earnings per share for the quarter of 50 cents, topping Mr. Sklar's expectation by 2 cents and the Street by 3 cents.

The company's management also provided first-quarter guidance in the range of 59 to 63 cents per share, which also exceeded the analyst's forecast (52 cents) and the consensus (54 cents).

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"Overall, we consider Q4/17 results and Q1/18 guidance to be a positive development as the company continues to execute a successful turnaround strategy, which it is achieving through operational improvements and the roll-off of legacy contracts that were not priced to achieve hurdle rates," said Mr. Sklar.

Maintaining an "outperform" rating for Martinrea shares, he hiked his target to $18 from $14.50. The average on the Street is $19.

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Echelon Wealth Partners analyst Gabriel Gonzalez added Maple Gold Mines Ltd. (MGM-X) to his "Watch List," citing overlooked bulk tonnage potential at its Douay project in Quebec.

"The company's ongoing work is aimed at demonstrating Douay's potential as a multi-million-ounce bulk tonnage deposit, similar to other large-scale mines in the region, such as Canadian Malartic," said Mr. Gonzalez.

"The company's new management, which was put in place starting mid-2017, is re-examining Douay as a large alkaline intrusive related gold system, whereas prior management's (as Aurvista Gold) work was not specifically guided by this same model. Maple's work in 2018 will focus on expanding potential higher-grade resource area structures, which by increasing the pit grade, could continue to widen the pit to encompass surrounding resource zones and create a unified bulk tonnage super pit."

He has not set a target price for the company's stock, however he did say it trades at a "steep" enterprise value per ounce discount.

"MGM is currently trading at US$11.20 per ounce, compared to the Junior exploration/development average of US$31.00/oz," he said. "Although bulk tonnage deposits can typically trade at a discounted EV/oz, Maple's current discount could be a favourable entry point given the potential to find further high-grade gold structures and zones at Douay to support its bulk tonnage potential, and demonstrate the property's untapped exploration upside potential."

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Sleep Country Canada Holdings Inc.'s (ZZZ-T) "solid" fourth-quarter 2017 financial results "woke" its stock up, said BMO Nesbitt Burns analyst Stephen MacLeod.

On March 1, the Toronto-based mattress retailer reported adjusted earnings per share of 42 cents, exceeding  the consensus projection of 33 cents. Same-store sales growth of 9.3 per cent also topped the Street's expectation (6.5 per cent).

"The strong top line was driven by second-half-weighted ad spend, and margin growth reflects leveraging investments that weighed on Q3," said Mr. MacLeod. "Double-digit ad spend (accessories refresh, ecommerce, tactical advertising) are expected to drive the top line and target market share gain opportunities."

"Double-digit ad spend growth expected for 2018 (the 'gas pedal' for top-line growth), with a goal of refreshing accessories marketing materials - weighted to H1/18. Targeted advertising will be aimed at 'aggressively' capturing market share in light of the Sears Canada (Restricted) bankruptcy. Recall, ad spend can be lumpy, so should be assessed on a full-year, not quarterly, basis."

Mr. MacLeod raised his 2018 and 2019 EPS projections by a penny each to $1.82 and $2.08, respectively.

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His target rose by a loonie to $42, which is 7 cents higher than the consensus.

 "We rate Sleep Country shares Outperform, based on the company's established history of success, strong competitive position, and brand awareness in Canada, along with the positive fundamental backdrop of the mattress industry," he said. "Share gain opportunities remain plentiful, and ZZZ's omnichannel platform can broaden consumer reach."

Elsewhere, Laurentian Bank Securities analyst Elizabeth Johnston bumped her target to $41 from $40 with a "buy" rating (unchanged).

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In other analyst actions:

Cormark Securities Inc. analyst Jeff Fenwick downgraded ECN Capital Corp. (ECN-T) to "buy" from "top pick" and lowered his target to $4.50 from $4.75, which sits below the consensus of $4.77.

National Bank Financial analyst Adam Shine downgraded TVA Group Inc. (TVA.B-T) to "sector perform" from "outperform" and lowered his target by a loonie to $4. The average is $5.13.

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Scotia Capital analyst Vladislav Vlad upgraded Newalta Corp. (NAL-T) to "sector outperform" from "sector perform" with a target of $2.50, up from $1.50. The average is $1.56.

Cormark Securities Inc. analyst Jeff Fenwick upgraded Chesswood Group Ltd. (CHW-T) to "buy" from "market perform" with a target of $12.50, down from $13. The average is $13.67.

RBC Dominion Securities analyst Michael Harvey downgraded Bonavista Energy Corp. (BNP-T) to "sector perform" from "outperform" and dropped his target to $2 from $3. The average is $2.24.

Cowen analyst Charles Neivert upgraded Mosaic Co. (MOS-N) to "outperform" from "market perform" with a target of US$32, rising from US$25. The average is $28.89.

Deutsche Bank upgraded Africa Oil Corp. (AOI-T) to "hold" from "sell."

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