Thursday’s analyst upgrades and downgrades

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

In a research report entitled "All Signs Point to Up," BMO Nesbitt Burns analysts said they believe the tailwinds that have driven gold and silver prices up by 20 per cent thus far in 2016 are likely to continue through the medium term and support their targets of $1,400 (U.S.) per ounce of gold and $22.50 per ounce of silver."
 
"The more constructive view is predicated on uncertainty in the global economy persisting through the remainder of this year, driving incremental 'safe haven' demand," the report said. "We focus a lot on China for commodities, and in our view the excess capacity built up over the last 10 years continues to be a drag on global industry and prices. In other words, what's bad for base metals demand is good for gold (and silver).

"Gold prices also continue to be driven largely by Fed rate hike expectations. We believe gold prices are already pricing in very little probability of a rate hike through July, so the question is whether the Fed lifts rates by year end. If the probability of a Fed rate hike by November/December continues to decline, this should remain supportive for gold prices."

In the report, the analyst upgraded and downgraded several equities. Their target prices for the stocks rose by an average of 24 per cent.

"Given the strong equity performance in 2015 (GDX +83 per cent and GDXJ +95 per cent) we suggested in our Q1/16 update, 'Spring Into Growth, But Summer Better Than Others,' that investors take profits," they said. "Our thesis was predicated on a seasonal correction in precious metal prices combined with the negative impact of a Q2/16 rate hike by the U.S. Fed. Good advice, but maybe a bit early given that equities have increased on average a further 36 per cent since mid-March.

"With higher gold and silver prices we have seen a migration in investor interest towards those companies that have underperformed year to date. A word of caution for investors: the underperformance of a number of these equities is often company-specific rather than metal price dependant."

The analysts upgraded the following stocks:

- Detour Gold Corp. (DGC-T) to "outperform" from "market perform" with a $37.25 target from $26.75. Consensus is $28.47.

BMO's Brian Quast: "With a long mine life and a production profile expected to improve over the coming years, Detour performs well with our revised target price methodology. Rolling from using 2016 estimated CFPS [cash flow per share] to 2017 CFPS and raising our 2017 gold price estimate has a positive impact on our target price. Also, utilizing 1.5 times NPV [net present value] (5-per-cent discount rate, BMO price estimates) as a part of our target price calculation has a very positive impact on our target price for this long-lived mine."

- OceanaGold Corp. (OGC-T) to "market perform" from "underperform" with a target of $5.50 from $3.75. Consensus is $4.07.

BMO's Brian Quast: "While we still have some reservations on the commissioning at Haile … the effect of a higher gold price and some cash flow from Haile in 2017 increases our target price … even after discounting our NPV multiple slightly (compared to peers) to reflect some uncertainty around the construction at Haile."

- Pan American Silver Corp. (PAAS-Q, PAA-T) to "outperform" from "market perform" with a $19 (U.S.) target from $11.50. Consensus is $12.89.

BMO's Jessica Fung: "Whether using spot price deck or BMO's higher price forecasts, PAAS is forecast to deliver the strongest EBITDA/share growth within BMO's silver universe. This is mainly due to the commissioning of long-term expansions at La Colorada and Dolores in 2017 and 2018, which have been consuming much of PAAS's cash flow over the last four years. Further, PAAS is in a net cash position ($185-million at end-2015) and we believe management has made prudent decisions in recent quarters, including cutting the dividend payout from $41-million in 2015 to $8-million in 2016 and spinning out royalty assets to which the market was attributing zero value."

- Silver Wheaton Corp. (SLW-N, SLW-T) to "outperform" from "market perform" with a target of $24 (U.S.) from $19.50. Consensus is $23.23.

BMO's Andrew Kalp: "In the context of an environment where silver outperforms gold, we expect shares of SLW to deliver superior price performance relative to more gold-weighted peers. For investors concerned with the ever-present discussion regarding the CRA, our valuation applies a $1.3-billion, or $2.77/share discount to the NPV 5 per cent for SLW. We are of the view that investors are increasingly imputing a CRA discount to SLW and that the company continues to screen attractively despite the discount. As a lower-risk investment opportunity, we expect SLW will become increasingly attractive to generalist investors re-entering the sector and seeking exposure to silver."

- Yamana Gold Inc. (AUY-N, YRI-T) to "outperform" from "market perform" with a target of $5.50 (U.S.) from $4.50. Consensus is $4.57.

BMO's Andrew Kalp: "AUY is one of the top-performing senior gold producers year to date, outperforming the GDX by 61 per cent and gold bullion by 114 per cent. In the context of forecast higher metal prices in the near to medium term, we expect AUY to continue to deliver superior performance relative to peers due to i) peer-leading free cash flow leverage in a rising metal price environment, ii) sufficient liquidity to meet management debt reduction targets through organic free cash flow generation, iii) potential monetization of the Brio Gold assets, which are expected to display improved economics at current spot prices, and iv) valuation upside, with AUY trading at a significant discount to the peer group."

- Couer Mining Inc. (CDE-N) to "outperform" from "market perform" with a target of $11 (U.S.) from $8. Consensus is $7.63.

BMO's Jessica Fung: "Our upgrade of CDE reflects the company's relative financial leverage and valuation in a rising price environment, as well as operating improvements demonstrated over the last few quarters. CDE's net debt/equity remains the highest of the group, which provides financial leverage in a rising price environment (with the risk being that the reverse is also true). Though CDE's share prices have risen 201 per cent year to date, likely due to the company's leverage, we also estimate that the market has yet to fully price in the improvements to operating margins that the company has demonstrated over the last two years, with "sustaining margins" (our calculation of all-in sustaining costs or AISC/revenue) improving from 3 per cent in 2014 to 20 per cent in 2016E."

He downgraded the following stocks:

- Agnico Eagle Mines Ltd. (AEM-N, AEM-T) to "market perform" from "outperform" with a $47.50 (U.S.) target (unchanged). Consensus is $43.95.

BMO's Andrew Kalp: "Since mid-January, the company's share price has increased 55 per cent and its P/NPV [price to net present value] multiple (using a 0-per-cent discount rate and spot metal prices) has increased approximately 20 per cent. AEM currently trades at a 2.6x P/NPV multiple using a 5-per-cent discount rate and BMO metal price assumptions, reflecting a significant premium to senior gold peers at 2.2x. AEM was an early mover as the gold price began to recover through H2/15 based on the company's execution and realistic growth strategy. In our view, a move towards increased leverage to rising precious metal prices and execution risk is expected to temper AEM share price appreciation relative to peers over the near to medium term. AEM remains an exploration-geared senior gold miner with success at anyone of a number of brown and greenfield projects providing future catalysts that could change our view

- Fortuna Silver Mines Inc. (FVI-T) to "market perform" from "outperform" with a $8 target from $6.75. Consensus is $7.78.

BMO's Jessica Fung: "Our downgrade of FVI is purely due to valuation. FVI has been one of the best-performing stocks in the recent silver sector rally (up 183 per cent year to date versus BMO silver universe up 132 per cent), which we believe was due to a combination of growing silver leverage at San Jose and a high-quality profile (net cash position, good operating margins, diligent management team). At this point, given our revised expectations for stronger precious metal prices through the rest of the year, we believe other names with greater financial and operational leverage could outperform. We continue to view FVI as a more defensive pick given the quality of the balance sheet and decreasing risk profile as the San Jose expansion nears completion by June-end, and note that in a declining silver price scenario FVI could outperform the sector (though we expect all silver names would trade down if silver prices were to collapse)."

- Franco Nevada Corp. (FNV-T, FNV-N) with a target of $90 (unchanged) . Consensus is $83.65.

BMO's Andrew Kalp: "NV shares have been one of the primary recipients of increased interest in gold equities, rising 26 per cent over the last 12 months. Even factoring in revised metal price assumption, FNV remains at the top end of historical P/NPV 5 per cent and one-year forward P/CF multiples. While we continue to advocate FNV as a core defensive equity within a precious metal portfolio owing to the company's high-quality and well-diversified portfolio of royalty/streaming assets and debt-free balance sheet, a move towards increased leverage to rising precious metal prices and execution risk is expected to temper FNV share price appreciation relative to peers over the near to medium term. However, further accretive streaming/royalty transactions or a weakening in the outlook for metal prices may change our view."

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In the wake of "solid" first-quarter results, Desjardins Securities analyst Benoit Poirier upgraded HNZ Group Inc. (HNZ.A-T)

Touting the Quebec-based company's improving near-term outlook, "pristine" balance sheet and "attractive" valuation, Mr. Poirier moved his rating to "buy" from "hold."

On Wednesday, HNZ, an international provider of helicopter transportation and related support services, reported adjusted earnings per share of 2 cents, excluding non-recurring items. The result topped Mr. Poirier's projection of a 12-cent loss and the 14-cent consensus estimate. He pointed to strong margins with adjusted EBITDA of $5.1-million (10.6-per-cent margin) topping his forecast ($2.4-million, 5.1 per cent) and the consensus ($2.1-million, 4.8 per cent). Consolidated revenue of $46-million was an increase of 26 per cent year over year and in line with the analyst's projection ($47-million) and the consensus ($44-million).

Mr. Poirier said higher revenues across all three of the company's main divisions (offshore, onshore and ancillary) led to a top line increase of 26 per cent. He said the company reaped the rewards of "ongoing offshore support activity related to Shell Canada in Halifax (expected to end in 3Q16), contract gains in Southeast Asia and the addition of Norsk (acquired on June 2, 2015)."

"Despite the ongoing industry weakness impacting volumes and pricing, management turned more positive and now expects a slight improvement in near-term market conditions," said Mr. Poirier. "In our view, this is likely supported by (1) recent contract wins (notably in Southeast Asia), (2) benefits from cost-cutting initiatives, (3) higher commodity prices, and (4) more favourable competitive landscape due to CHC's bankruptcy. In the mid-term, we believe HNZ's pristine financial position also offers room for accretive M&A."

Mr. Poirier added: "While we still expect revenues and EBITDA to remain mostly unchanged in 2017 on a year-over-year basis, HNZ should nevertheless generate decent FCF [free cash flow] (we expect $21.2-million in 2016 and $23.1-million in 2017). Recall that HNZ recently mentioned its plan to leverage its strong balance sheet to make strategic and opportunistic acquisitions/investments in the future, although these opportunities need to be cash flow positive immediately."

The analyst raised his target price for the stock by a loonie to $15. The analyst consensus price target is $13.13, according to Thomson Reuters.

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The first-quarter results for IBI Group Inc. (IBG-T) provided a "nice upside surprise," according to Canaccord Genuity analyst Yuri Lynk.

He upgraded his rating for the Toronto-based provider of professional services to "buy" from "hold."

"The company remains a solid turnaround story that's well positioned to benefit from rising infrastructure spending in Canada, the U.S. and abroad," the analyst said. "Following another strong quarter and a 10-per-cent pullback in the stock since March 11, the 19-per-cent upside implied by our target price supports a buy rating."

The company's quarterly revenue of $89-million topped Mr. Lynk's expectation by 9 per cent and represented a 14-per-cent improvement year over year. He said the top line benefited from "best in class" organic growth of 11 per cent. EBITDA rose 42 per cent from the same quarter in 2015 to $9.2-million, due largely to a stronger top line, gross margin improvement and lower expenses.

Mr. Lynk did note that the company maintained its revenue guidance for 2016 of $355-million, despite the "strong" start to the year.

"We note the revenue tailwinds provided by the weaker Canadian dollar in Q1/16 shift to headwinds if current FX rates hold," he said. "Nevertheless, guidance implies 7-per-cent year-over-year revenue growth for the balance of the year, which is impressive."

"We forecast $38.4-million of EBITDA in 2016, implying relatively flat margins year over year, $41.1-million in 2017, and we introduce our 2018 estimate of $42.5-million. We do see the potential for IBI to exceed this forecast as utilization rates could drive higher than anticipated operating leverage but we prefer to remain conservative at this point."

Mr. Lynk raised his target price to $4.50 from $4.25. Consensus is $4.65.

"IBI trades at 7.4 times 2016 EBITDA compared to a group of North American comps at 9.5 times," he said. "We view this discount as appropriate given IBI's shares are much less liquid and it has more debt than its peers."

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Alta Corp Capital analyst Patrick O'Rourke downgraded Tamarack Valley Energy Ltd. (TVE-T) to "sector perform" from "outperform" on valuation following the release of its first-quarter results.

The Calgary-based oil and natural gas exploration and production company reported quarterly production of 9,582 barrels of oil equivalent per day (boe/d), a decline of 386 boe/d from the previous quarter but an increase of 1,490 boe/d year over year. The result was in line with Mr. O'Rourke's projection of 9,389 boe/d and the consensus of 9,509 boe/d.

Funds from operations of $11.1-million fell below the analyst's projection of $13.3-million based on lower realized pricing.

"We continue to be highly impressed by management's operational and capital discipline, while the balance sheet/liquidity remains in solid shape," said Mr. O'Rourke. "The reduction in our rating is purely a function of valuation at this point in time, with the stock having been the very best performer amongst our intermediate group over the past 12 months (clear market recognition of management's skill to date). A defined use of proceeds from the most recent financing, accretive acquisition, or demonstrated success with the move to two-mile Cardium wells are three near-term catalysts that would have the potential to materially increase our view of valuation and again see us increase our target to sector outperform."

He maintained his $4 target. Consensus is $4.57.

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The "solid" first-quarter performance for First Capital Realty Inc. (FCR-T) reflects its high-quality portfolio, said CIBC World Markets analyst Alex Avery.

The Toronto-based company reported quarterly fully diluted funds from operations of 27 cents, an increase of 2 cents from the same period in 2015 and a cent better than Mr. Avery's projection. Total occupancy fell to 95 per cent from 95.6 per cent in the previous year, due largely to the closure of two Target stores.

"First Capital's grocery- and drug-anchored retail portfolio delivered solid operating and financial results, extending a long track record of consistent performance, including positive SP-NOI [same-property net operating income] growth in every quarter over the past four years …and consistently strong leasing spreads," said Mr. Avery. "The company's well-defined and rigorously adhered to strategy of focusing on very defensive, well-located, staples oriented retail properties, and active approach to managing and investing in its portfolio provide excellent prospects for continued steady and reliable growth.

"Notably, due to the timing of a transitional vacancy and particularly strong results in Q2/15, Q2/16 same-property NOI growth is expected to be uncharacteristically weak, and not reflective of the longer-term trend in the company's portfolio. We expect continued strong leasing spreads and SP-NOI growth over the next several years, with management estimating market rents for its portfolio in the range of $23.00 to $25.00 per square foot, well above current in-place rent of $19.02 per sq.ft."

He maintained his "sector performer" rating, "reflecting the company's very high portfolio of assets in urban locations and robust development pipeline, balanced with a fair valuation."

His target price increased to $22.50 from $21. Consensus is $21.72.

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In other analyst actions:

Atlatsa Resources Corp. (ATL-T) was downgraded to "underweight" from "neutral" at JPMorgan by equity analyst Abhishek Tiwari. The target price is 3 cents (Canadian) per share.

H&R Real Estate Investment Trust (HR.UN-T) was downgraded to "hold" from "buy" at TD Securities by equity analyst Sam Damiani. The 12-month target price is $22 (Canadian) per share.

Janus Capital Group Inc. (JNS-N) was downgraded to "market perform" from "outperform" at Wells Fargo by equity analyst Christopher Harris.

Paladin Energy Ltd. (PDN-T) was downgraded to "underperform" from "market perform" at BMO Capital Markets by equity analyst Edward Sterck. The target price is 15 cents (Canadian) per share.

Pason Systems Inc. (PSI-T) was raised to "Hold" from "Sell" at Industrial Alliance by equity analyst Elias Foscolos. The 12-month target price is $14.25 (Canadian) per share.

Schlumberger Ltd. (SLB-N) was downgraded to "sector outperform" from "focus list" at Scotia Howard Weil by equity analyst William Sanchez. The target price is $80 (U.S.) per share.

St. Jude Medical Inc. (STJ-N) was downgraded to "neutral" from "buy" at UBS by equity analyst Matt Miksic. The 12-month target price is $80 (U.S.) per share.

Temple Hotels Inc. (TPH-T) was raised to "speculative buy" from "hold" at Laurentian Bank by equity analyst Nelson Mah. The 12-month target price is $1.50 (Canadian) per share.

With files from Bloomberg News