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Pipelines at Canadian Natural Resources Primrose Lake oil sands project are seen near Cold Lake, Alberta August 8, 2013.Dan Riedlhuber/Reuters

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

With the expansion of its Horizon oil sands project on track, Canadian Natural Resources Ltd. (CNQ-T, CNQ-N) offers investors "the best of both worlds," according to RBC Dominion Securities analyst Greg Pardy, pointing to free cash flow generation in 2017 and beyond, organic upstream production growth and torque to rising oil prices.

Mr. Pardy upgraded his rating for the stock to "top pick" from "outperform."

"CNQ's open house in Toronto emphasized its evolution towards a long-life-low-decline portfolio, showcased the horsepower of its conventional oil and natural gas assets, and pointed towards an 8-per-cent production CAGR [compound annual growth rate] (2016-19) in a $60 (U.S.)/barrel WTI world—its planning price," he said. "Adding some flare to its question & answer session, CNQ revealed its 20x20 Horizon target—$20/bbl operating costs by 2020."

Mr. Pardy said he was impressed by the company's "stanch adherence towards balance—across its portfolio, and when it comes to the allocation of what should be abundant free cash flow in the future."

"CNQ reiterated that free cash flow will initially be prioritized for its balance sheet, given the importance of improving its leverage ratios and maintaining its investment grade credit rating," the analyst said. "Ultimately, CNQ's free cash flow will be balanced amongst shareholder distributions, organic resource development, and potentially opportunistic acquisitions. We peg the company's 2015-18 dividend CAGR at 3 per cent to 6 per cent to $1.00-$1.10 per share in 2018."

He also said the company "conveyed confidence and preparedness" in its ability to execute its 2B expansion at Horizon. That project is currently 95-per-cent complete and projected to contribute 45,000 barrels a day.

"This expansion should reduce Horizon's operating costs from $26.55/bbl in the first-quarter of 2016 to $25/bbl," he said. "The Phase 3 (80,000 bbl/d) expansion in 2017 should reduce Horizon's operating costs to sub-$25/bbl as the overall facility achieves optimized capacity of 250,000-262,000 bbl/d. This dynamic should enable CNQ to occupy the fairway as the low cost producer of light sweet synthetic oil. Down the road, CNQ will look to pursue 30,000- 50,000 bbl/d debottlenecking phases at Horizon."

Mr. Pardy maintained his one-year price target of $45 for the stock. The analyst consensus price target is $41.81, according to Thomson Reuters.

"Our price target … reflects an equal weighting toward a multiple of 1.0x our estimated NAV [net asset value] of $43.83 per share and an implied 2018 estimated debt-adjusted cash flow multiple of 7.0x at mid-cycle commodity prices and results in a top pick rating," he said. "The above-average multiples we have chosen vs. peers reflects CNQ's superior execution capability, production growth visibility, and potential free cash flow generation in 2018 and beyond."


Investors' dismissal of Transcontinental Inc. (TCL.A-T, TCL.B-T) given the perception of a "a terminally ill print industry" is not only an "overly pessimistic view, but also an exceedingly simplistic view," said CIBC World Markets analyst Robert Bek.

Emphasizing that stance "fails to take into account the strong transformation taking place at Transcontinental," Mr. Bek upgraded his rating for the company's stock to "sector outperformer" from "sector performer."

"In a stock market where cash (and specifically, free cash) is king and in which investors remain fixated on yield, we find it odd that these same investors continue to dismiss one of the few names in the Canadian media space that checks off both these boxes," said Mr. Bek. "Trading at an industry leading 17.8-per-cent FCF [free cash flow] yield, and offering an attractive 4.3-per-cent dividend yield, Transcontinental (TCL) remains a largely overlooked name."

"Backed by a strong management team, the company has set upon a path to take control of its own destiny and build for the future, by investing mature printing FCF into the flexible pack."

Mr. Bek said he expects the company to "effectively" manage the declines from its legacy print business, building a new "leg" in flexible packaging. He believes it can build a packaging division "to size and scale, effectively crossing over on revenues with print in early 2019 to become a 'packaging' company."

"TCL is not the first, and won't be the last, company to pursue a business transformation," the analyst said. "However, unlike other transformation stories, where debt played a big role in helping companies buy their way into adjacent industries (Cott Corporation and their 5.0x peak net-debt-to-EBITDA leverage ratio comes to mind) thereby adding an additional element of risk for equity holders, it is important to note that TCL is going about this transition in a much more measured way. Management been on record in stating that the company plans to maintain leverage at 2.0x (or near 2.0x) net-debt-to-EBITDA through the transition. Given that we are forecasting net-debt-to-EBITDA to exit 2016E at 0.5x, there is ample dry powder here for the company to execute its M&A strategy.

"Moreover, say what you will about TCL's core business, the legacy assets at TCL continue to churn out solid FCF ($223-million in fiscal 2015, and $256-million in 2016 by our estimates). So as long as this continues to be the case, management should be able to support its M&A strategy, without comprising the balance sheet, or other capital initiatives (i.e., the commitment to its dividend)."

Mr. Bek left his target price for the stock unchanged at $22. Consensus is $19.51.

"Given the mature nature of TCL's core business, many (if not most) investors have long stopped following the situation closely, regarding TCL's FCF as low quality, and the shares as un-investable," he said. "It is clear from client discussions that this negative bias has kept many investors from looking into the transformation (or even hearing about it), or considering the possibilities on successful execution. To us, this further supports our sector putperformer rating, as an under-followed non-resource stock in the Canadian market is extremely rare. Additionally, the good story we see on this transformation is a bonus."


Intrigued by the potential of its "world-class" Juanicipio project in Mexico, Canaccord Genuity analyst Eric Zaunscherb initiated coverage of MAG Silver Corp. (MAG-T, MVG-A) with a "speculative buy" rating.

Mr. Zaunscherb said MAG discovered "one of the best undeveloped silver projects globally based on grade and scale in the Fresnillo district, Mexico." The company owns a 44-per-cent stake of the Juanicipio project in a joint venture with Fresnillo plc, the world's largest primary silver producer.

"In our view, the story of Juanicipio's discovery, David and Goliath struggles, a further discovery with imminent results, and ultimate development is operatic in scope," he said.

The analyst said he sees production and positive cash flow to commence in 2018, forecasting average silver sales  of 20.1 Moz/a [million ounces annually] over the first seven years with cash cost of $3.04 (U.S.) per ounce and all-in sustaining  costs (AISC) of $2.49/oz.

"A very important discovery was made at depth at Juanicipio in 2015 and results from 2016 follow-up drilling are expected in July," said Mr. Zaunscherb. "The results could confirm what the market, to some extent, is already paying for: visibility toward a second mining unit at depth and a profound change in the way the district is viewed from an exploration perspective."

Mr. Zaunscherb set a target of $20.50 for the stock. Consensus is $17.14.

"MAG Silver is currently trading at 0.85x our NAV(5%) [net asset value] as compared to the mean of 0.50x for exploration and development companies under coverage and the mean of 0.89x for small- to mid-cap producers under coverage," he said. "In our view, this reflects world-class quality, fully funded status, confidence in Fresnillo's operatorship, exploration anticipation and the prospect of consolidation."


BMO Nesbitt Burns analyst Andrew Kaip initiated coverage of Sandstorm Gold Ltd. (SAND-A, SSL-T) with a "market perform" rating.

"Over the past 12 months, SAND has improved its overall risk profile through a series of transactions focused on improving asset and counterparty quality," said Mr. Kaip. "Following this portfolio rebalancing, we forecast over 90 per cent of royalty/stream EBITDA coming from senior and mid-tier operators versus 12 per cent in 2013. This diversification strategy looks to have succeeded, with shares of SAND outperforming against peers over the last 12 months (SAND up 30 per cent versus royalty/streaming peer average up 15 per cent)."

The analyst pointed to a trio of near-term risk factors that could limit the stock's upside:

  • Legacy counterparty risks, “underscored by the loss of a flagship stream at Aurizona in 2015, and continued exposure to capital constrained junior mine.”
  • Lower transitional capacity compared to its peers, pointing to a total liquidity of $51-million.
  • Potential financing risks as it upgraded its portfolio.

Mr. Kaip set a price target of $4.50 (U.S.). Consensus is $5.67.

"In our view, shares of SAND have re-rated and further share price appreciation will require further acquisition or initiation of a dividend, both of which would require external financing," he said.


Beacon Securities analyst Kirk Wilson upgraded Delphi Energy Corp. (DEE-T) after the closing of its $60-million debt financing.

With the risk of the company defaulting on its bank line "essentially" removed, Mr. Wilson raised his rating to "buy" from "speculative buy."

"The closing of the financing gives Delphi a total of $145-million of debt capacity, comprised of the term notes above and an $85-million senior credit facility," he said. "The company expects to maintain 20 per cent to  25 per cent of undrawn room on the bank line throughout 2016. This should provide investors with confidence that DEE can implement its second half 2016 drilling program without material risk of going offside with its lenders. Depending on timing of bringing wells on late this year, we look for DEE to exit 2016 with 9,200 boe/d [barrels of oil equivalent per day]."

Mr. Wilson maintained his price target of $1.60. Consensus is $1.37.


The disconnect between the recent share price performance and a constructive outlook for FedEx Corp. (FDX-N) presents investors with a buying opportunity, said Credit Suisse analyst Allison Landry.

Ahead of the release of its 2017 fiscal year guidance and potential synergy targets for newly acquired TNT Express N.V. next week, Ms. Landry raised her target price for the stock to $189 (U.S.) from $189. Consensus is $178.80.

"In spite of a number of perceived risks from investors (ranging from general macro to the TNT integration), we remain constructive on FDX and believe that the set-up for the stock heading into next week's print (during which the company will issue its FY17 guidance, and potentially unveil synergy targets for TNT) appears favorable," the analyst said. "With reasonable buy-side expectations for the fiscal 2017 guidance range, a self-help story that in our view will shift to Ground from Express, and an attractive risk/reward profile, we think the stage could be set for shares to inflect positively - particular after the stock is little changed from where it was post fiscal Q3 earnings.

"Indeed, based on our analysis, we think the combination of the recently implemented additional handling surcharge for non-conveyable packages at Ground, as well as the carryover impact from the remaining run-rate profit improvement at Express could contribute approximately 6 per cent to EBIT growth in FY17. For reference, our current EBIT growth rate assumption (exclusive of any impact from TNT) is 8 per cent, while the Street is a little more optimistic at 10 per cent (although the estimate is potentially skewed by some analysts including TNT and others not). We acknowledge that there are many puts and takes beyond these two items, but nonetheless think it is a useful starting point."

Ms. Landry cited three conclusions from Credit Suisse's proprietary sentiment survey on the company: guidance expectations "appear reasonable"; sentiment on the stock is "neutral to slightly bearish"; and perceived risks are varied with no dominant concern despite broader macro weakness.

She maintained a "market perform" rating for the stock.

"While FDX's shares performed well post 3Q16 earnings in March, when it took a step-up in response to a strong set of earnings, we note that stock performance has been lacklustre since then," said Ms. Landry. "A combination of broader macro concerns, rising fuel prices and investor concerns surrounding risks from the TNT acquisition have all weighed on the stock. However, given that investor expectations for FY17 guidance appear fairly reasonable, and that FDX should continue to drive operational improvements in its Express and Ground segments, we view the disconnect between the recent share price performance and our constructive outlook on FDX as a buying opportunity heading into the print. In fact, FDX's stock performance this year stands in sharp contrast to last year, when the shares ran up sharply prior to earnings, and set the stock up for a 'sell the news' event."


Citi analyst Mark May sees a "more compelling" risk/reward for shares of Yahoo! Inc. (YHOO-Q).

Upgrading his rating to "buy" from "neutral," Mr. May pointed to six factors:

-Credible news reports and management commentary about the auction process for its core business, pointing to the second (of three) rounds of bidding bringing bids of between $3.5-$4-billion and $5-billion.

-His valuation analysis points to upside potential of 15 per cent or higher from current levels.

-The presence of known near-term catalysts, including the auction result.

-A recent positive outlook provided by Alibaba's management team is a "positive."

-Neither its share price or implied valued has risen "significantly" since a late March downgrade.

-Alibaba and its affiliates' agreement with Softbank to repurchase 32.4 million shares from Softbank "suggests to us a more credible path of future monetization of Yahoo!'s stake in BABA, and of YJ [Yahoo! Japan]."

He raised his target price for the stock to $43 (U.S.) from $38. Consensus is $40.79.

"We believe at current levels YHOO's price implies a 30-35-per-cent discount to the underlying market values for the company's stakes in BABA and YJ and a $2-4-billion value for Yahoo!," said Mr. May. "We believe upside from here will be driven by: 1) a sale/monetization of Yahoo! for more than the $2-4-billion implied; and 2) a reduction in the 10-15 –per-cent conglomerate (aka complexity) discount that is typical of these types of entities, as the company simplifies its corporate structure."


In other analyst actions:

Canaccord Genuity analyst Rahul Paul upgraded Primero Mining Corp.  (P-T, PP-N) to "buy" from "hold" and raised his target price to $4 from $2.50. The average is $3.49.

LinkedIn Corp. (LNKD-N) was downgraded to "neutral" from "buy" by Nomura's Anthony Diclemente with a target of $196 (U.S.) from $180. The average is $186.61. It was also lowered to "neutral" from "buy" by UBS' Eric Sheridan with a $196 target (from $175).

Dominion Resources Inc. (D-N) was lowered to "neutral" from "overweight" by JPMorgan analyst Chris Turnure with a target of $81 (U.S.), up from $76. The average is $77.79.

Editor's note: In an earlier version of this story, BMO Nesbitt Burns analyst Andrew Kaip's target price for Sandstorm Gold Ltd. was incorrectly listed as $4.69 (U.S.) It is, in fact, $4.50. It has been updated.