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Thursday’s analyst upgrades and downgrades

A Metro supermarket is seen Wednesday, Sept. 27, 2017 in Ste. Marthe-sur-le-Lac, Que.

Ryan Remiorz/THE CANADIAN PRESS

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

Recent strategic and management changes have provided Dream Industrial Real Estate Investment Trust (DIR.UN-T) with new avenues for growth, according to Desjardins Securities analyst Michael Markidis.

Touting the REIT's current affordability, he raised his rating to "buy" from "hold" upon resuming coverage following its recent $113-million equity issuance.

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"DIR's total return (10 per cent year-to-date) has marginally outpaced that of the S&P/TSX Capped REIT index (9 per cent) but is notably behind returns for the other industrial REITs in our coverage universe," said Mr. Markidis. "In our view, the DIR story has become more appealing over the past several months. As the market becomes more fully aware of these changes, we believe the valuation disconnect vs peers should narrow."

In justifying his move, Mr. Markidis pointed to four factors:

1. "Improving" operation performance, emphasizing the REIT's "strong" leasing activity over the first three quarters of 2017. In-place occupancy has risen to 95.6 per cent in the third quarter from 93.8 per cent in the fourth quarter of 2016.

"We believe operating performance will continue to improve in 2018," he said. "Tenant demand seems to have returned in Calgary and Edmonton, as availability in both of these markets has trended downward over the past two quarters. Strong market fundamentals in the Greater Toronto Area and Montreal should continue to support performance in Ontario and Québec, which collectively represent 45 per cent of NOI. Finally, market availability in Halifax, where the majority of DIR's Eastern Canada properties are located, seems to have finally stopped expanding after a 3+ year run (commenced in mid-2013)."

2. Mr. Markidis believes new chief executive officer Brian Pauls, who officially takes the position on Jan. 1, adds "tangible credibility" to Dream's U.S. expansion strategy.

"I appears that Mr. Pauls is already having an impact on DIR's business," said the analyst. "He participated in the 3Q17 conference call hosted on Nov. 8, and, perhaps more importantly, we believe he played an integral role in sourcing/negotiating the yet-to-be-completed portfolio of four properties in Memphis, Charlotte and Orlando for $103-million."

3. A "sound" capital structure.

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"Pro forma forward 12 month (FTM) debt/EBITDA of 7.9 times is slightly better than the middle of the 6.8–10.6x range for most commercial peers in our coverage universe," said Mr. Markidis. "Based on our revised forecast, which does not contemplate acquisitions beyond what has already been announced, we see an FFO [funds from operations] payout ratio of 77 per cent next year."

4. Its current valuation.

"DIR trades at a 16-per-cent discount to our $10.40 net asset value (derived via a 6.75-per-cent cap rate) and at 14.5 times our forward EBITDA estimate," the analyst said. "Both of these metrics are at the low end of the ranges for commercial REITs under coverage. To be clear, we are not suggesting that this name is deserving of a valuation premium; however, we certainly believe there is a case to be made for some degree of marginal expansion, particularly if the organic growth profile remains positive and/or capex and leasing costs remain flat or begin to trend down."

Mr. Markidis maintained a target price of $9.50 per unit. The analyst average target is currently $9.25, according to Thomson Reuters data.

On Wednesday, National Bank Financial analyst Matt Kornack resumed coverage with a rating of "sector perform," down from "sector outperform," with a target of $8.25, falling from $9.25.

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BMO Nesbitt Burns analyst Stephen MacLeod views Premium Brands Holdings Corp.'s (PBH-T) acquisitions of Buddy's Kitchen Inc. and Raybern Foods "positively," believing they both "complement and enhance" growth opportunities.

On Wednesday, Vancouver-based Premium Brands announced deals for Minnesota-based Buddy's and California-based Raybern (acquired from TSG Consumer Partners) as well as a 50-per-cent stake in Dan Francisco's Shaw Bakers.  The total purchase price was $156.5-million (U.S.).

"On a combined basis, Buddy's, Raybern's, and Shaw have annual sales of $115-million," said Mr. MacLeod. "We estimate an acquisition multiple of 9-10 times (above 5-8-times historical average), reflective of above-average margins (we estimate 14-15 per cent) and top-line growth rates (above PBH's 6-8-per-cent target), as well as the strategic value.

"Buddy's is a leading manufacturer of sandwiches and other prepared meal solutions, with a focus on the airline and c-store channels. Buddy's provides PBH with a new line of products, a flexible production platform with excess capacity (153,000 sf across two facilities in Minnesota), and improved access to the U.S. c-store and airline channels. PBH's SK Food Group business can leverage Buddy's innovation, and Buddy's can leverage SK to grow with bigger c-store customers. Raybern's is a leading manufacturer of branded specialty sandwiches for the U.S. retail market, with a 146,000 sf facility in Mississippi; its products include a wide variety of frozen and refrigerated sandwiches and wraps. Raybern's has the number one selling Philly Cheesesteak sandwich in the U.S., and provides further access to the U.S. retail channel (opportunity for SK to offer breakfast sandwich products at retail)."

With the deals, Mr. MacLeod bumped up his 2017 earnings per share estimate to $3.23 from $3.21. His 2018 projection rose to $4.39 from $4.13.

Maintaining an "outperform" rating for Premium Brands shares, he raised his target to $118 from $107. The average target on the Street is $113.06.

"We see opportunities for SK Food to leverage Buddy's Kitchen and Raybern Foods to drive further growth, and vice-versa," said Mr. MacLeod. "We estimate EBITDA margins above the Specialty Foods segment average, and forecast."

Elsewhere, Cormark Securities analyst upgraded the stock to "buy" from "market perform" with a target of $125, rising from $104.

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Metro Inc. (MRU-T) shares could remain in a "holding pattern" as investors await the closing of the acquisition of Jean Coutu Group Inc., according to Desjardins Securities analyst Keith Howlett, who expects the deal to be finalized in April or May of 2018.

"We do expect some useful data points before then, particularly on the performance of Pro Doc under the new Québec regulatory framework, and on the performance of the new distribution centre of Jean Coutu Group," he said. "Our view has been that Metro is acquiring PJC just as results begin to head upward. With respect to food retailing, we will learn whether inflation is sustained, and whether Metro successfully offsets the impact of minimum wage increases in Ontario. Management's track record is stellar."

On Wednesday before market open, the Montreal-based company reported fourth-quarter 2017 financial results that met Mr. Howlett's "modest" expectations.

Diluted earnings per share rose by 10 per cent to 66 cents (from 60 cents a year ago), which Mr. Howlett attributed largely to an extra week of the results during the quarter (13 versus 12) and a lower share count. The result met the projections of both the analyst and the consensus.

Same-store sales increased 0.4 per cent, beating his estimate of 0.3 per cent.

"The company's internally measured food basket inflation was 0.3 per cent, marking an end to three consecutive quarters of deflation," said Mr. Howlett. "While the return to inflation is positive, management also expressed the view that competition had intensified. Loblaw recently noted that some pockets of the country were experiencing heightened competition. Square footage additions by Costco were the most notable of 2017, and were skewed to Ontario. The impact may have taken longer to be felt than we expected. Costco appears to be shifting back to its normal pace of store openings."

Mr. Howlett lowered his 2018 EPS projection for the company to $2.48 from $2.79 to reflect the sale of shares in the Alimentation CoucheTard and the pending acquisition of Jean Coutu Group.

He maintained a "buy" rating and $50 target for the Metro shares. The analyst average is $46.

"Metro will report its 1Q FY18 (ending late December) and its 2Q FY18 (ending early March) results before the acquisition of Jean Coutu Group closes," said Mr. Howlett. "Of particular interest will be evidence of sustained food price inflation and improving same-store sales growth. We will also be seeking verification that improvements in operating efficiency, adjustments to store opening hours and other measures have offset the pressure of increased minimum wages in Ontario."

Meanwhile, Raymond James analyst Kenric Tyghe raised his 2018 and 2019 EPS estimates to $2.81 and $3.18, respectively, from $2.68 and $3.18.

He maintained a target for the stock of $48 and an "outperform" rating.

"In terms of 2018E, some of the cost-reduction initiatives (beyond technology) that we expected would prove necessary in the industry given the step change in minimum wage, such as reduced hours and fewer 24-hour stores, are clearly on the table," said Mr. Tyghe. "While ecommerce initiatives are tracking to plan, with 7-stores (versus 3-stores prior) offering click and collect (and home delivery covering 60 per cent of the population of Quebec), we believe that pace at which competitor offerings are evolving justifies a further acceleration of the pace Metro's ecommerce ramp. We have revised our estimates to reflect an expected closing of the PJC transaction during F3Q18E."

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Up 59 per cent year-to-date, People Corp. (PEO-X) remains one of Acumen Capital analyst Brian Pow's top performers of 2017, which he attributes to the market acknowledging its "strong" competitive position.

Mr. Pow raised his target for the Winnipeg-based company's stock after resuming coverage in the wake of a $25.3-million bought deal financing to help fund the $16.1-million acquisition of Assurances Dalbec Ltée, a provider of employee benefit plans for small and medium-sized companies in Quebec.

The analyst expects the acquisition to be immediately accretive to earnings.

Maintaining a "buy" rating for People stock, his target increased to $8.75 from $8.25. The average target is $7.83.

"[People] has posted growth that is well ahead of the single digit guidance that Management has referred to in the past," he said. "The next catalyst for PEO will be positive Q4/FY17 results and further acquisitions as the Company continues its rollup strategy."

Elsewhere, Laurentian Bank Securities analyst Marc Chabin raised his target to $9 from $7.80 with a "buy" rating (unchanged).

"The acquisition of Dalbec seems consistent with the company's previous targets," said Mr. Chabin. "As Dalbec is a TPA [Third Party Administrator] business, we expect the EBITDA margins to be approximately 25 per cent and that the business was acquired in PEO's stated range of 5 times to 7 times EBITDA. For the purposes of our forecasting, we have estimated an initial contribution to EBITDA of $2-million in the next twelve months from this acquisition. We will also add that this acquisition gives PEO additional exposure to Quebec and that Dalbec also offers a small group benefits product, similar to Sirius, which will be rolled out across PEO's national platform."

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Laurentian Bank Securities analyst Elizabeth Johnston's target price for shares of MTY Food Group Inc. (MTY-T) fell in response to a drop in her 2018 EBITDA expectation.

On Wednesday, the Montreal-based company restated its financial results for fiscal 2016 and the first three quarters of 2017 after determining revenue and expenses related to the breakage of Kahala gift cards that resulted following its Kahala Brands acquisition, which closed in July of 2017, were incorrect. MTY announced the breakage will result in a favorable adjustment of revenue in the fourth quarter of 2017 of $3.4-million.

"Looking ahead into F2018, revenue and EBITDA are anticipated to be negatively impacted while gift card sales (post-Kahala) continue to ramp up; U.S. segment revenue (as a percentage of sales) is anticipated to return to more normalized levels in F2019," Ms. Johnston said. "We look for additional commentary to understand the timing of this restatement; financials to be filed within 45 days."

"We have decreased our forecast for U.S. segment revenue, to reflect the lower expected EBITDA in F2018, partially offset by the inclusion of the recent acquisitions of The Counter Custom Burgers/Built Custom Burgers ($81-million U.S. in system sales; estimated $30-million purchase price) which we had not previously included in our forecast given the small relative size of the transaction. Note that our valuation takes into account the gift card liability on the balance sheet, which we anticipate will increase post-restatement."

With a "hold" rating (unchanged), her target declined to $46 from $48. The average target is $51.46.

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In other analyst actions:

Believing 2018 is "fraught with risks," HSBC analyst Botir Sharipov downgraded Goldcorp Inc. (GG-N, G-T) to "hold" from "buy" with a target of $14.80, falling from $17.30. The average target on the Street is $17.72.

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About the Author
Globe Investor Content Editor

David Leeder is a content editor in the Report on Business. He was previously Deputy Sports Editor and Weekend Digital Editor at The Globe.  He holds an undergraduate degree from McMaster University and a graduate degree from Ryerson University. More

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