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

In a research report previewing earnings for the energy infrastructure sector, CIBC World Markets analyst Robert Catellier said he's "cautiously optimistic" for improved activity levels, advocating a growth at a reasonable price (GARP) approach for 2017.

"Notwithstanding a gradual recovery in commodity prices, recent pipeline approvals and clarity on the future of the Alberta power market, energy infrastructure multiples remained relatively flat in Q4/16, which we attribute largely to uncertainty over the timing of FOMC decisions, and elevated regulatory and policy risks related to pipeline approvals," he said.

"Overall, we expect gradually improving industry activity levels to be supported by the recovery in crude prices, driven by OPEC and Russia supply cuts. Rising, export-led demand is normalizing storage levels, reinforcing gas and NGL prices. We see this supporting improving capital spending plans and dividend guidance as commodity prices start to reflect the asymmetric risk profile. We favour midstream companies with exposure to commodity prices and operations in the most economic basins."

Mr. Catellier raised his rating for Gibson Energy Inc. (GEI-T) to "neutral" from "underperform" and increased his target price for the stock to $19 from $17. The analyst average target is $19.55, according to Bloomberg.

"While the continued commodity price recovery and increase in rig count activity are encouraging signs, the sustained rise in activity that we look for to support a recovery in earnings has not yet materialized, outside of select basins," he said. "We forecast adjusted EBITDA of $90.4-million compared to our previous estimate of $90.8-million (consensus of $91.0 million) and $101.0-million a year ago. Despite continued expectations for year-over-year declines, trends are improving from recent cyclical lows."

"While we remain cautious that commodity price and producer activity headwinds will persist into 2017, we think the current environment is materially more supportive for the company's Logistics and Wholesale segments. In addition to continued, albeit gradual, improvement in activity levels, our 2018 estimates benefit from capital deployments from the company's growth program. While its capital plan appears conservative, the company has a strategic position at Edmonton and Hardisty which can be leveraged to secure new projects in a recovering environment."

On the sector, as a whole, Mr. Catellier said: "Improving economic indicators aside, we view the current interest environment as contained so consider volatility in yields as a trading opportunity for rate-sensitive utilities and IPPs. We also expect Canadian monetary policy to lag the U.S., supporting companies with U.S. dollar-based operations or U.S. dollar-priced commodity exposure. The market has overreacted to the impact of potentially lower U.S. taxes on utilities, in our view. As well, we expect regulatory and policy risks to remain elevated. Presidential actions to advance infrastructure projects of national interest may ease the permitting environment in the U.S. but we recommend caution as uncertainties remain relating to timelines, economics, and the impact of public opposition, suggesting positive investment decisions are not forgone conclusions."


ARC Resources Ltd. (ARX-T) should get a pass for a slight fourth-quarter miss, said TD Securities analyst Menno Hulshof.

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He upgraded his rating for the stock to "buy" from "hold."

On Wednesday, the Calgary-based company reported quarterly production of 117,611 barrels of oil equivalent per day, falling below the consensus projection of 120,400 boe/d. Cash flow per share of 53 cents was 4 cents lower than estimates.

"The waters were arguably muddied by the closing of the $700-million sale of 8,800 boe/d of noncore southeast Saskatchewan assets to Spartan Energy (SPE-T) during the quarter," said Mr. Hulshof. "The good news is that despite this transaction, ARX still managed to hit its 2016 production guidance range. Its non-core portfolio has been whittled down to 6,000 boe/d. Although we believe that these assets may also ultimately get sold, ARX is a price-setter given the under-levered nature of its balance sheet."

"With the balance sheet back in check, and then some (2017 estimate debt-to-cash flow of 0.6 times versus. peers at 1.3 times), ARX not surprisingly is getting more aggressive on spending. It increased 2017 capex guidance to $750-million from $665-million previously, and 13 per cent higher than the P+P FDC forecast for 2017. This additional capital has been earmarked for a host of activities, including increased drilling activity and Sunrise Phase II front-end engineering and design work. Sunrise Phase II is the newest sanctioned project and is now the third major project in the queue to backstop the next leg of Montney growth (mid-2019 on-stream date). The Sunrise facility expansion will add an incremental 60 million cubic feet equivalent per day of capacity and an additional 60 million cubic feet equivalent per day of repatriated production currently running through a third-party facility, which will bring the total capacity at Sunrise to 180 million cubic feet equivalent per day. The increased 2017 capex is also expected to accelerate the on-stream dates for both Parkland/Tower Phase III (on-stream late- 2018) and Sunrise Phase II — both already have long-term marketing contracts in place."

Mr. Hulshof's target for the stock remains $24. The analyst average target price is $27, according to Bloomberg.

Elsewhere, the stock was raised to "outperform" from "sector perform" at National Bank by analyst Travis Wood. His target price is $28 (unchanged).


Mediagrif Interactive Technologies Inc.'s (MDF-T) third-quarter 2017 financial results were "underwhelming," according to Desjardins Securities analyst Maher Yaghi, who is waiting for organic growth to resume.

Accordingly, he downgraded the Longueuil, Que.-based tech company to "hold" from "buy."

"Mediagrif is going through a transition period as revenue from previously stable assets are adjusting to new competitive pressures," said Mr. Yaghi. "While the recent acquisition of ASC [Advanced Software Concepts Inc.] is beginning to generate measurable revenue, organic growth is likely to take several quarters to turn positive again. We continue to like the company's long-term prospects; however, without additional catalysts, we believe the stock is likely to trade sideways in the short term."

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On Tuesday, Mediagrif reported a 4-per-cent increase of revenue to $19.3-million, below Mr. Yaghi's projection of $20.8-million and the consensus of $20.5-million. He noted the company benefited from currency tailwinds from its U.S. operations, which added $0.4-million in revenue. The acquisition of ASC provided $1.2-million in revenue.

"However, excluding the recent acquisition and currency fluctuations, organic growth was down approximately 4.7 per cent," the analyst said. "This compares with a decline of about 1.4 per cent last quarter. The acceleration of falling organic revenue was essentially due to declines at Jobboom and LesPAC. We expect organic revenue to stabilize in several quarters as the revenue decline, especially at Jobboom, is due to management's decision to reduce the price of its offering to stay relevant given the higher competitive intensity. Overall, the company has a strong balance sheet to continue its build-and-buy strategy; however, we believe given the current pressure on the business, it will likely take a few more quarters before organic growth turns positive. In the meantime, we expect the shares to trade sideways."

Mr. Yaghi said the company is in the midst of a transition period that could affect margins for the next several quarters. He said it faces challenges from both Jobboom and LesPAC, which he called "important segments" of its business. Both experienced revenue decline of $0.6-million year over year.

"With regard to Jobboom, in 1Q FY17 the company implemented significant price cuts to better cope with competition," he said. "We believe the revenue generated by this unit could be under pressure until the company laps this policy change in 1Q FY18, since many contracts with clients last 12 months. Similar changes were also implemented at LesPAC in the beginning of FY17. While these changes will likely hurt the company's financial prospects in the short term, we believe they are sound since its competitors are offering similar services at a generally lower price and are also well known by the public.

"Moreover, the company has increased its marketing spending in recent quarters in order to boost sales, a decision that would also affect margins in the short term, in our view."

Mr. Yaghi lowered his earnings per share projections for fiscal 2017 and 2018 to $1.10 and $1.19, respectively, from $1.19 and $1.33.

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His target price for the stock fell to $19.50 from $21. The analyst consensus price target is $21.35.

"MDF trades at an attractive free cash flow yield of 10.1 per cent with FCF [free cash flow] production estimated at $25.6-million in the next four quarters, which combined with low net debt to EBITDA of 0.8x provides management with a good opportunity to generate shareholder value," he said. "While MDF has not repurchased shares since the beginning of FY17, we currently forecast that the company will buy back $3-million of its stock by the end of FY17. Despite this expected buyback, we still forecast the company ending its FY17 reporting period at 0.7 times net debt to EBITDA, providing it with all the flexibility it needs to conduct its build-and-buy strategy."

He added: "While valuation is attractive, the stock is likely to trade sideways for several quarters until organic revenue growth stabilizes. We would reevaluate our view if revenue growth resumes or visibility on additional M&A improves."


Softening project flow was evident in the fourth quarter for Mullen Group Ltd. (MTL-T), said Canaccord Genuity analyst John Bereznicki.

In reaction to weaker-than-expected financial results, released Wednesday, Mr. Bereznicki downgraded his rating for the Okotoks, Alta.-based trucking and logistics services provider to "hold" from "buy."

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Mullen reported revenue of $257.7-million, below Mr. Bereznicki's forecast of $266.5-million. He attributed the miss to both pricing pressure and weak demand in its oilfield services (OFS) segment.

"This was compounded by an unfavourable shift in revenue mix, which contributed to a consolidated Q4/16 gross margin of 28 per cent (approximately 400 basis points below our estimate)," he said. "As a result, Mullen fell well short of our Q4/16 EBITDA estimate of $52.6-million and a consensus view of $54-million. Mullen also booked an FX loss in Q4/16, which drove 8 cents in negative EPS variance relative to our 15-cent estimate."

Mr. Bereznicki said the OFS revenue miss was driven "by weak demand for specialized hauling, major pipeline projects and oil sands dewatering services."

"This drove a shift in revenue mix toward lower margin services and generated a negative EBITDA variance of $5.4-million in Q4/16," he said. "While Mullen expects to benefit from a strengthening WCSB rig count and modest pricing gains, the company cautions that it may 'underperform' in the first half of 2017 as the completion of several major oil sands projects create a headwind."

"Mullen exited 2016 with net debt of $425.4-million (in line), or a modest 1.9 times 2017 estimate EBITDA. Mullen completed two tuck-in acquisitions in Q4/16 and remains committed to its previously announced 2017 capital budget of $250million. Mullen is retaining its monthly cash dividend of 3 cents per share, which reflects a payout of 33 per cent on our 2017 estimates."

Based on the results, Mr. Bereznicki lowered his 2017 and 2018 earnings per share projections to 78 cents and $1.16, respectively, from 91 cents and $1.28.

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His target price for the stock fell to $20 from $23 "to reflect a more protracted recovery." Consensus is $21.73.


Though the fourth-quarter results for Intact Financial Corp. (IFC-T) were "mixed," BMO Nesbitt Burns analyst Tom MacKinnon said the "thesis remains intact."

On Wednesday, Intact reporting operating earnings per share of $1.58, below the projections of both Mr. MacKinnon ($1.80) and the consensus ($1.75). Its combined ratio was 92.5 per cent, compared to the analyst's expectation of 90.7 per cent. He pointed to "exceptionally large" industry pool auto claims (four times higher than the same quarter in the previous year) as the chief rationale for the miss as well as "unfavourable" auto reserve development.

"Apart from these unsustainable items, better-than-expected results in personal property (underlying CR at 76 per cent was 11 pts better than expected as ongoing profitability measures coming in better than expected, markets are expected to remain firm with mid- to uppersingle-digit growth as companies adjust to changing weather patterns), were offset by weaker-than-expected results in personal auto, excluding the impact from pools, on higher weather-driven claims frequency (underlying CR ex the impact from pools was 99.4 per cent versus our 96.9-per-cent estimate)," he said.

"We look for a 3.6 point underlying combined ratio improvement in 2017 in personal auto, conservatively slightly less than management's 5 point guide. With respect to personal auto management claims that it already has 5 points of loss ratio improvement baked into the portfolio for 2017 comprised of 3-4 points through rate increases (3 per cent in Ontario approved in Q3/16, 4 per cent in Q4/16, plus 8-per-cent rate hikes in Alberta in Q2, and recent approval for 4 per cent) and the delayed impact of reforms, and a further 2 points from improvement in claims actions/management and tighter risk selection."

With an "outperform" rating for the stock, Mr. MacKinnon raised his target by a loonie to $104. Consensus is $101.87.

"IFC boasts a 'best-in-class' management team and industry-leading 17-per-cent market share," he said. "Investment in growth initiatives, including branding, digital leadership, and product innovation, are expected to support strong top-line growth. The potential for an accretive acquisition in the highly fragmented Canadian market, where 15-20-per-cent market share is expected to change hands, is an additional catalyst."


Plaza Retail REIT (PLZ.UN-T) is the "masters of 'roll-up-your-sleeves retail,'" said Canaccord Genuity analyst Jenny Ma.

She initiated coverage of the Fredericton-based open-ended real estate investment trust with a "hold" rating.

"As a publicly traded entity for nearly 18 years, Plaza Retail REIT is a well-established owner, operator, and redeveloper/developer of retail real estate, primarily located in Atlantic Canada, Ontario, and Quebec," said Ms. Ma. In our view, Plaza Retail REIT's ability to identify and successfully undertake accretive redevelopment and development opportunities sets it apart from most other Canadian retail REITs. Plaza maintains a deep pipeline of redevelopment/development opportunities that should provide for ample growth over the next several years. To that end, we are forecasting continued growth, on a per unit basis, in net asset value (NAV), cash flow, and distributions. As a fully internalized REIT, the value created from redevelopment/development is retained and accrued to unitholders, and the completed projects augment Plaza's retail portfolio that is geared towards a more defensive tenant mix that focuses on basic and staple goods and services. With insiders owning a 21-per-cent interest in the REIT, we believe management's interests are well-aligned with those of unitholders and management is motivated to continue to grow the REIT in a thoughtful and accretive manner.

"Notwithstanding some challenges in the retail landscape including the rise of ecommerce and a highly levered Canadian consumer, we are confident that Plaza's focus on its core 'convenience, value, and specialty' retail tenant base should be comparatively more defensive and stable."

Touting its "entrepreneurial" management with a "proven track record of value creation and growth," Ms. Ma called Plaza "nimble and adaptive" in a changing retail environment. She noted Plaza "rarely acquires stabilized income-producing properties" like its peers.

"Instead, management targets acquiring properties that are under-managed and 'need work', which Plaza is confident in undertaking," she said. "Plaza maintains a deep pipeline of redevelopment/development opportunities. Presently, there are 29 projects in the pipeline at various stages. These projects are a key growth driver for the REIT, and represent investment (at Plaza's interest) of $90-100 million, or equating to 16-per-cent of the portfolio by area."

She added: "Plaza has consistently achieved per unit cash flow growth which has underpinned 14 consecutive years of distribution increases (CAGR of 9 per cent), a track record which is virtually unparalleled in the Canadian REIT sector. We are forecasting AFFO [adjusted funds from operations] per unit growth of 11 per cent for 2017 and 5 per cent for 2018."

Ms. Ma set a price target of $5.25 per unit. Consensus is $5.29.

"Our target price combined with Plaza's annual distribution of 27 cents per unit (5.3-per-cent current yield), equates to a 12-month forecast total return of 8.0 per cent," the analyst said. "Notwithstanding Plaza's admirable track record of value creation and ample future redevelopment/development opportunities, we are of the view that its units are fairly valued at current levels."


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In other analyst actions:

ATS Automation Tooling Systems Inc. (ATA-T) was downgraded to "market perform" from "buy" by Cormark Securities analyst David Tyerman. He raised his target by a loonie to $13. The average is $13.92.

Meanwhile, Daniel Kim at Paradigm Capital upgraded his rating for ATS to "hold" from "sell" with a $13 target, up from $8.

Home Capital Group Inc. (HCG-T) was downgraded to "underperform" from "sector perform" at National Bank by analyst Jaeme Gloyn. His target fell to $27 from $29, while the average is $30.02.

Milestone Apartments Real Estate Investment Trust (MST.UN-T) was downgraded to "sector perform" from "sector outperform" at Scotia by analyst Mario Saric. His target remains $21.50 per share, while the average is $21.77.

Viacom Inc. (VIAB-Q) was raised to "outperform" from "market perform" at Wells Fargo by analyst Marci Ryvicker without a specified target. The average is $42.66 (U.S.).

D.A. Davidson & Co analyst Steven Chercover upgraded Louisiana-Pacific Corp. (LPX-N) to "buy" from "neutral" with a target of $27 (U.S.), up from $20. The average is $23.59.

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