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Lundin produces copper, zinc, nickel and lead from mines in Europe, Africa and the United States.STAFF/Reuters

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

Expecting to see an improved performance from its U.S. segment in its third-quarter financial results, Raymond James analyst Brenna Phelan raised her rating for Intact Financial Corp. (IFC-T).

Calling it "a best-in-class operator with meaningful scale that affords it a sustainable competitive advantage in its home market," Ms. Phelan moved the Toronto-based company to "outperform" from "market perform" ahead of the scheduled Nov. 8 release of its quarterly earnings.

"We view its acquisition of U.S. specialty lines insurer OneBeacon, which closed Sept. 28, as a positive in terms of providing a foothold for growth (both organic and inorganic) in the U.S. market, and diversification of its business mix, particularly given recent string of elevated catastrophe losses in its home market," she said. "To this point, our enthusiasm for this acquisition and the synergistic and acquisition opportunities it affords has been offset by concerns around performance in the material Personal Auto segment."

"We view the OneBeacon acquisition favorably in terms of earnings diversification, acquisition opportunities, product cross-sell and upside from synergies. We view Intact's past successes in integrating major acquisitions as one of its key strengths and expect that there may be upside to synergy estimates."

Ms. Phelan is projecting adjusted earnings per share for the quarter of $1.54, a penny higher than the Street and a rise of 52 per cent year over year. She's also expecting top-line growth of 4 per cent and 4-per-cent rise in its consolidated combined ratio from the previous year as well as "steady investment income and a strong contribution from distribution income."

"The key driver of our year-over-year EPS growth forecast is improved underwriting income, as 3Q16 results included $166-million of pre-announced catastrophe losses from weather events," she said. "We also look for growth in net premiums earned of 3 per cent and 4 per cent quarter over quarter and year over year, respectively helped by ongoing strength in Personal Property and building momentum in Personal Auto. We are forecasting year-over-year growth in Distribution income of 15 per cent, consistent with guidance for greater-than 15 per cent in 2017. We expect net investment gains will normalize in the quarter after gains on currency hedging derivatives for OneBeacon were elevated in 2Q17."

Ms. Phelan raised her 2018 full-year EPS projection "modestly" to $7.54 from $7.45 in order to "reflect a combination of small changes to Expense Ratios across Intact's four Canadian businesses to be more reflective of recent trends, modestly higher investment income and some improvement in our forecasts for OneBeacon's combined ratios, as we believe best practices from Intact's high-performing Canadian specialty lines business can be implemented at OneBeacon."

Her target price for the stock jumped to $110 from $104. Consensus is $105.53.

"Intact's valuation multiples on a price-to-earnings and a price-to-book have increased over the past year relative to recent history, and we expect that both will remain higher in their historical ranges over our forecast period to reflect: 1) Intact's larger size and greater diversity subsequent to the OneBeacon acquisition; 2) optimism regarding Intact's skill as an integrator and synergies therefrom; and 3) upside to EPS growth forecasts as the company takes best practices from each specialty lines business," said Ms. Phelan.


Canadian airlines have a "low margin for error," said Macquarie analyst Konark Gupta in a research note released Thursday.

"We maintain our neutral view on the sector as 'medium-term' risks that drove our July downgrade remain in place," he said. "In particular, we see risk to demand and cost outlook heading into 2018 due to Macquarie's below-consensus views on the Canadian GDP and CAD, while upcoming competition could impact RASM. Fuel outlook appears stable. Meanwhile, [Air Canada] and [WestJet] have been hitting new all-time and 52-week highs, respectively, on strong demand trends and CAD tailwind. They could continue to outperform in the immediate term on potential earnings beat. Within the sector, we continue to prefer AC over WJA based on their domestic exposures, leverage outlook, and WJA's labour and ROIC [return on invested capital] risks."

Previewing the companies' second half of the 2017 fiscal year, Mr. Gupta said he's "more aggressive" than the Street in terms of near-term estimates, particularly revenue.

"However, we currently see downside risk to 2018 consensus on costs but there could also be downside risk to revenue estimates if our risk thesis plays out in 2018 (GDP, CAD and competition)," he said. "Our 2018 EBITDAR estimate for AC is 4 per cent below consensus and 2018E EPS for WJA is similar to consensus."

He raised his target price for Air Canada (AC-T) shares to $28 from $22.50 with an unchanged "neutral" rating. Consensus is $31.

Mr. Gupta said the increase was "driven by higher estimates on CAD revision and EV [enterprise value] multiple expansion to 4.25 times (was 4.0 times) on better deleveraging visibility provided at the investor day. EV multiple could expand to 4.5 times in the absence of macro and industry risks with incremental upside potential to 5.0 times if the loyalty program provides margin tailwind. At 4.5 times on our 2018E, AC would be worth $31.00, with upside risk from any sale/leaseback. Based on investor day targets, we see longer-term upside scenarios of $34-54 in 2-3 years, again not reflecting any sale/leaseback."

The analyst's target for WestJet Airlines Ltd. (WJA-T) increased by a loonie to $25, versus a consensus of $27.35. He maintained an "underperform" rating on its stock.

"Although WJA has stronger margins and could grow faster than AC over 2018/19, we maintain our 4.3 times EV multiple to reflect several concerns," said Mr. Gupta. "One, WJA is highly skewed to domestic Canada, which makes it more vulnerable to macro and competitive risks. Further, WJA is going through an elevated capex cycle, which should maintain pressure on FCF and result in a worse leverage ratio vs AC for the first time. Finally, recent successful pilot unionization creates an overhang as re-negotiation results have yet to come and more groups could unionize. Pending WJA's long-term targets (investor day on Dec 6), we lack visibility on upside risk at current levels."


Industrial Alliance Securities analyst George Topping raised his forecast for copper in a research report on base metals released Thursday.

"We remain bullish on copper, particularly in the longer term once the near-term supply is absorbed. Copper is the main beneficiary of environmental trends," he said.

Mr. Topping's fourth-quarter 2017 copper price projection moved to $3.15 per pound from $2.60, while his long-term forecast jumped to $3.50 from $3.25.

His long-term zinc and nickel forecasts remain $1.30 and $8 per pound, respectively, though he did raised his fourth-quarter projections to $1.40 and $5.30, respectively, from $1.25 and $5.

With those changes, his target price for three stocks in his coverage universe increased. They are:

- First Quantum Minerals Ltd. (FM-T, "hold") to $18.64 from $16.95. Consensus is $17.55.

"First Quantum remains a hold due to Cobre Panama start-up risks," he said. "First Quantum is essentially hedged into late 2018 due to its $6.5-billion debt load. We expect that management will high-grade its mines and defer costs to maximize short-term cash flow. We have increased our estimated 2018 CFPS [cash flow per share] to $1.90 from $1.71."

- Lundin Mining Corp. (LUN-T, "strong buy") to $13.06 from $11.51. Consensus: $10.01.

"Lundin's value is less sensitive to copper prices, as only 64 per cent of our modelled revenue comes from copper sales, but the major cash flow generating Candelaria mine boosts 2018 CFPS from $0.82 to $1.00," he said.

- HudBay Minerals Inc. (HBM-T, "buy") to $13.26 from $12.98. Consensus: $11.86.

"Hudbay's recent $242-million equity issue was dilutive to CFPS and NPV [net present value]," he said. "However, the higher long-term copper price boosts the Rosemont and Constancia projects NAVs and increases the target price."


Expecting a stronger-than-anticipated pulp market, RBC Dominion Securities analyst Paul Quinn upgraded Mercer International Inc. (MERC-Q, MERC.U-T) to "outperform" from "sector perform."

"Given the anticipated capacity increases on the horizon, no one expected pulp prices to be where they are today," said Mr. Quinn. "However, a few delays and production curtailments plus a ramp-up in Chinese pulp purchases have significantly changed our outlook. In addition, China's recent recovered paper ban has led to an increase in pulp demand for its use as a substitute."

"Demand for Pulp imports in China remains solid, as suppliers are looking at another round of price hikes in November. The pulp shortage in China and the subsequent price surge (up $100/mt in October alone) largely resulted from the Chinese government's restrictions on recovered paper imports. We believe that demand for import pulp will remain solid until restrictions on recovered paper imports are loosened (expected before year-end)."

Mr. Quinn increased his price forecast for Northern Bleached Softwood Kraft, the benchmark grade of pulp, for 2017 by $25 (U.S.) to $1,090. His 2018 estimate rose $50 to $1,025, while his 2018 projection is up $75 to $1,050 in 2019.

He also raised Vancouver-based Mercer's 2017 and 2018 adjusted diluted earnings per share projections to $1.02 and 98 cents, respectively, from 92 cents and 84 cents.

His target for the stock jumped to $15 (U.S.) from $12. Consensus is $14.17.

"Our upgrade and increased price target reflect our higher financial forecasts attributable to a better than expected pulp market and improved operation efficiency," said Mr. Quinn. "Even the company's newly acquired sawmill is outperforming expectations."

In a research note previewing third-quarter financial results for Canadian forestry companies, CIBC World Markets analyst Hamir Patel raised his target for Mercer to $17 (U.S.) from $15 with an "outperformer" rating (unchanged).

"MERC remains our preferred name in pulp with its advanced biorefinery strategy and well-timed expansion into the European lumber market (just in time to take advantage of higher SPF prices in the U.S. caused by duties on Canadian imports)," said Mr. Patel. "While we expect recent capacity additions to lead to weaker pulp prices next year, energy and chemical sales (4-per-cent -plus CAGR over 2010- 2016) can often represent 50 per cent of Mercer's EBITDA. At the same time, the company has an ongoing NAFTA claim (as an American company) where a decision is due any day now. We believe Mercer has a good case and could very well receive a substantial one-time payout from Canada (though the upside is likely lower than the $250-million in its claim)."

Mr. Patel also raised his target prices for following stocks:

  • Canfor Corp. (CFP-T, “neutral”) to $25 from $21. Consensus: $23.38.
  • Canfor Pulp Products Inc. (CFX-T, “neutral”) to $15 from $13. Consensus: $13.35.
  • Conifex  Timber Inc. (CFF-T, “neutral”) to $5 from $4.50. Consensus: $5.06.
  • Domtar Corp. (UFS-N/UFS-T, “neutral”) to $47 (U.S.) from $44. Consensus: $42.36.
  • Interfor Corp. (IFP-T, “outperformer”) to $25 from $23. Consensus: $23.92.
  • Norbord Inc. (OSB-T, “neutral”) to $54 from $53. Consensus: $49.98.
  • Resolute Forest Products Inc. (RFP-T, “neutral”) to $6.75 from $5.75. Consensus: $9.82.
  • West Fraser Timber Co Ltd. (WFT-T, “neutral”) to $75 from $67. Consensus: $71.

"Heading into reporting season, we prefer exposure to Interfor (given an expected beat and attractive valuation in light of recent precedents) and Mercer (strong rebound in profitability expected and NAFTA case decision likely soon)," the analyst said. "Canfor/Canfor Pulp kick off reporting on Friday evening, and while we expect CFX to miss, we are expecting CFP to deliver a beat supported by strong lumber realizations as the company was only modestly affected by the forest fires, its Southern platform is more heavily weighted towards wider grades (which experienced more modest quarter-over-quarter declines than 2x4) and we suspect the Street may overestimate duty costs in the quarter as producers likely timed more shipments into the 'gap period.'"


Citing near-term "challenges" and "signs of weakness" overseas, Goldman analyst Lindsay Drucker Mann downgraded Nike Inc. (NKE-N) to "neutral" from "buy."

"The drivers of domestic pressure will take some time to work through, exacerbated by persistent excess inventory sitting at Nike's brick and mortar retail partners and the high visibility this markdown product gets as it is funneled online via and other platforms," said Ms. Mann.

"Near-term dynamics are challenging … with an inventory overhang in the US hampering Nike's ability to 'reset' the market."

Ms. Mann also pointed to slower sales growth in North America and troubling sales trend in Asia.

"International has been a critical growth engine, driving about half of Nike's revenue growth over the last decade, and with substantial opportunity ahead," the analyst said. "Nike's business has cooled in key regions, with signs of deceleration in China giving us particular pause."

Her target for the stock remains $54 (U.S.). The analyst average target is $58.83.


Raymond James analyst Chris Cox raised his target price for shares of Encana Corp. (ECA-N, ECA-T) in reaction to takeaways from its investor day in New York on Wednesday.

"On the whole, the overarching theme from this year's Investor Day, in our view, was redirecting investor focus toward the ability of the company to deliver on its growth plans profitably and on a sustainable basis," said Mr. Cox. "The combination of falling leverage, improving returns on capital and a self-funded outlook is unique among North American E&Ps, and is a characteristic to the investment proposition of the Encana story that we suspect will reverberate going forward. As a testament to the dramatic improvement the company has realized, we see the narrative beginning to shift over the course of 2018 toward potential uses of free cash flow, not just whether the company can self-fund its already attractive growth profile, and we believe this dynamic is only beginning to be appreciated by the market."

Mr. Cox believes operational execution provides upside for the company's plan.

"Relative to the initial 5-year plan outlined at last year's Investor Day, the updated plan saw an improved outlook on virtually every single metric, despite a planning assumption that is $5 (U.S.) per barrel lower," he said. "Key to this improvement is the strong operational momentum that has been on display throughout the year. Investors have already seen material improvements in the type curves across the portfolio; impressively, results to-date are actually tracking above these updated type curves. We see continued improvements into next year, especially as the company brings on new infrastructure in the Montney, moves to more pad development in the Permian and deploys enhanced completions designs across the broader drilling program."

"While improved operational execution is the focus of improving confidence in the 5-year plan, the company has also taken a number of steps to further de-risk the outlook. Of particular focus is the funding outlook, which now sees the company fully funding capex next year from cash flow, while generating excess free cash flow from 2019 onwards. While recent volatility in AECO has been a particular focus for investors, an active hedging program combined with considerable firm service on egress options exiting Western Canada ensures that only 4 per cent of expected revenue next year is tied to AECO prices. From a cost standpoint, Encana now has the majority of its service needs for next year's program locked up, providing greater certainty on availability and price. Furthermore, with a number of legacy drilling contracts set to expire, we see the potential for a reset on drilling rates to help offset any further inflationary pressures."

With an unchanged "strong buy" rating, his target jumped to $16 (U.S.) from $15. The analyst average target is $13.87, according to Bloomberg data.

Elsewhere, BMO Nesbitt Burns analyst Randy Ollenberger raised his target to $14 (U.S.) from $12 with an "outperform" rating.

Mr. Ollenberger said: "Encana has embarked upon an aggressive growth strategy that aims to grow high-margin production in the Permian and Montney. If the company is able to achieve its margin and production growth targets on time and on budget, we believe the company's valuation multiple should expand."


In other analyst actions:

Veritas Investment Research Co analyst Dan Fong downgraded Bombardier Inc. (BBD.B-T) to "sell" from "buy" with a $2.60 target, down from $3. The average is $2.98.

National Bank Financial analyst Adam Shine upgraded Corus Entertainment Inc. (CJR.B-T) to "outperform" from "sector perform" with a target price of $13, up from $12.50. The average is $14.16.

Haywood Securities Inc. analyst Pierre Vaillancourt upgraded Copper Mountain Mining Corp. (CMMC-T) to "buy" from "hold" and raised his target to $2 from $1.10. The analyst average is $1.57.

Mr. Vaillancourt downgraded Capstone Mining Corp. (CS-T) to "hold" from "buy" and bumped his target to $1.75 from $1.50. The consensus average is $1.82.

HC Wainwright & Co LLC analyst Heiko Ihle initiated coverage of Northern Dynasty Minerals Ltd. (NDM-T) with a recommendation of "buy" and $3.12. The average is $3.66.

Paradigm Capital Inc initiated coverage of Fronsac Real Estate Investment Trust (GAZ.UN-X) with a "buy" rating.

GMP analyst Deepak Kaushal initiated coverage of Kew Media Group Inc. (KEW-T) with a "buy" rating and $14 target. The average is $13.57.

UBS analyst Christopher John Belfiore downgraded WW Grainger Inc. (GWW-N) to "sell" from "neutral" and hiked his target to $195 (U.S.) from $170. The average is $186.56.

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