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File photo of CN Rail

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

A trio of analysts downgraded their ratings for Freshii Inc. (FRII-T) in reaction to the company's profit forecast reduction.

On Monday, the Toronto-based restaurant operator released a revised outlook, including a drop in its expectation for system-wide sales growth to between $275-million (U.S.) and $285-million by the end of fiscal 2019, down from between $355-million and $365-million. It also expects 90 and 95 net new openings for fiscal 2017, falling from a previous target of between 150 and 160 net openings including closures.

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CIBC World Markets analyst Mark Petrie downgraded the company's stock to "neutral" from "outperform" and lowered his target price for its shares to $9 from $14.

"Disappointing 2Q results and confusing communication had already crippled credibility with investors, and this clearly compounds the issue," he said.

RBC Dominion Securities analyst Sabahat Khan lowered Freshii to "sector perform" from "outperform" with a target of $8, down from $12. The analyst average price target is $11.68, according to Bloomberg data.

"We believe FRII's trading multiple prior to the guidance revisions already reflected a degree of uncertainty in the company's ability to meet its previous targets," said Mr. Khan. "The guidance revision is likely to exacerbate investor concerns."

Cowen analyst Andrew Charles moved the stock to "market perform" from "outperform" with a target of $7, down from $14.

Meanwhile, Canaccord Genuity analyst Derek Dley kept a "buy" rating for the stock, lowering his target to $11 from $14.

"While disappointing, the lower-than-anticipated net new store openings primarily relate to a relationship with a specific retailer, Target, and a more conservative forecasting method to account for MFA [master franchise agreement] partner stores," he said. "While we believe Freshii remains an earlystage growth story, hiccups such as this are likely to challenge the near-term share performance."

"In our view, despite this near-term store growth setback, Freshii's strong free cash flow generation, same-store sales and EBITDA growth potential, remain best-in-class."

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In a preview of third-quarter earnings season for Canadian railway companies, CIBC World Markets analyst Kevin Chiang sees a "more favourable" risk-reward proposition for Canadian Pacific Railway Ltd. (CP-T),  citing "increasing confidence that a volume growth story is materializing."

"While we expect CN's volume growth to decelerate as it begins to lap tougher comps, we continue to expect above industry average growth reflecting its unmatched network reach," said Mr. Chiang. "CP on the other hand is poised to continue to build on its volume growth momentum, which should bridge its valuation gap relative to its peers. With increasing confidence that a volume growth story is materializing, CP provides both earnings and valuation upside."

"We expect more constructive volume commentary during Q3 earnings season from the rails, especially with greater clarity on the grain harvest (not as bad as initially thought) and expectations of a tailwind from this year's peak shipping season. This is supportive of rail multiples."


Ahead of the scheduled release of its earnings on Oct. 17, Mr. Chiang raised his target price for CP shares to $233 from $222 with an "outperformer" rating. Consensus is $227.08.

His target for Canadian National Railway Co. (CNR-T), set to release its results on Oct. 24, fell by a loonie to $110 with a "neutral" rating. Consensus is $103.15.

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"The Kingsmen tried but could not save the quarter" for Cineplex Inc. (CGX-T), said Raymond James analyst Kenric Tyghe.

He lowered his financial estimates and target price for shares of the entertainment company in response to disappointing box-office results.

"While September box offices grosses are tracking to near record highs, the performance in September cannot offset a summer of disappointment at the box office (through August the box office was down 21.6 per cent)," said Mr. Tyghe. "The box office exited the last major weekend of the quarter down 14.8 per cent (a marked improved versus August) but well below our expectations of a 3.6-per-cent decrease for the quarter. We are revising our box office estimate to better reflect the performance in the quarter, and now expect Cineplex's box office revenues to decrease 13.2 per cent in 3Q17E."

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Mr. Tyghe's quarterly earnings before interest, taxes, depreciation and amortization ( EBITDA) estimate for the quarter dropped to $56.8-million from $65.7-million. His earnings per share expectation fell to 27 cents from 34 cents.

Overall, his 2017 EPS estimate is now $1.12, falling from $1.23. He also lowered his 2018 projection to $1.55 from $1.94.

Maintaining an "outperform" rating for the stock, his target fell to $46 from $52. The analyst consensus price target is $47.90.

"The impact of lowering our 3Q17E estimates, and revisions to our summer 2018E outlook, drive the 2018E EBITDA reduction (necessitating a target price change)," he said.

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In addition to a discount valuation, InPlay Oil Corp. (IPO-T) should be considered by investors due to its "low decline base Cardium production, strong technical team, inventory of Cardium development locations, and exploratory potential in the East Basin Duvernay light oil play," said Acumen Capital analyst Trevor Reynolds.

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He initiated coverage of Calgary-based company, formerly Anderson Energy Inc., with a "buy" recommendation.

"IPO is a growth oriented, Calgary based exploration and production company focused on increasing recovery factors from large OOIP Cardium pools with material upside potential created by a land position in the emerging East Basin Duvernay," said Mr. Reynolds. "The company has a robust inventory of relatively predictable, and repeatable Cardium locations in the heart of Pembina. Within the Cardium, IPO's focus has turned to the Willesden Green area where technology, and a revised horizontal placement into the bioturbated portion of the zone has resulted in a step change in well productivity. In addition to the Cardium, IPO also has exposure to the emerging East Basin Duvernay oil play in the Twining/Huxley area. IPO features a well-qualified, and technically oriented Management team which has proven to adapt to new technological innovation with a focus on maximizing efficiencies. The company's balance sheet is manageable while we believe the Cardium and East Basin Duvernay acreage positions presents an opportunity for investors in this name which trades at a discounted valuation to the peer group.

"Management has a track record of providing production, CF and reserve growth on a per share basis from their time at Vero Energy. The team is led by President and CEO Mr. Douglas Bartole, who has surrounded himself with a technically oriented team focused on adapting to the most proven, up to date technology and drilling/completion techniques. The board is primarily independent and includes two members from JOG Capital Inc., who are significant holders of IPO through the company's time as a private. Management and the board (JOG & Sprott) collectively own over 45 per cent of the shares outstanding, resulting in a strong alignment of Board and shareholder interests. The IPO management team has worked closely together for several years in both a private and public company environment, and have an established track record of delivering cost-effective per share growth in reserves, production and cash-flow."

Mr. Reynolds said the company's shares traded at 3.2 times his 2018 cash flow forecast and 4.3 times 2018 enterprise value-to-debt-adjusted cash flow. He said that is "well below" the average of the rest of his coverage universe of 4.5 times and 5.8 times, respectively.

"While there hasn't been much appetite for small cap oil and gas stocks since the RTO [reverse takeover] of Anderson, we view the company's acreage in the Willesden Green and East Basin Duvernay as strategic," he said. "With Catalysts on the way in terms of drilling results in the company's two core areas, and some support finally being seen in the sector, we believe there is upside to the current stock price."

He set a price target for the stock of $2.40. Consensus is $2.38.

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CannaRoyalty Corp.'s (CRZ-CN) success rests in its ability to "carve value" out of the market stemming from the legalization of cannabis in California, according to Canaccord Genuity analyst Matt Bottomley.

The Ottawa-based company invests in both the Canadian and U.S. cannabis sector through equity, debt and royalty agreements.

"We believe CannaRoyalty has already secured an initial foothold into this market after receiving a $20-million purchase commitment from River Collective (one of the state's largest cannabis wholesalers), in addition to investing $5-million (U.S.) into an eight-year 1.75-per-cent gross stream on all of River's sales," said Mr. Bottomley. "We believe this agreement represents a critical first step for the company to begin establishing a name for itself in a market that we estimate will grow by more than five times in the years to come. Further, River's extensive network and reach into greater-than 500 dispensaries in California (which could represent as many as half of all active dispensaries in the state) could provide an excellent platform for CannaRoyalty to grow its portfolio of brands as we estimate River could reach a wholesale EBITDA potential of greater-than $130-million over the long term. However, as CannaRoyalty does not currently have control over the operations and strategic decisions of River, we believe this poses an execution risk to the company as a whole in the event that this relationship does not come to fruition as hoped, is terminated, or if River is consolidated into another company that utilizes its wholesale distribution channel for its own brands. Although we believe CannaRoyalty's relationship with River appears to be favourable in nature and could help leverage various CR brands into the California market at a relatively large scale, due to the lack of control, we prepared a Bear case scenario that we believe provides a valuation floor to the California opportunity."

The analyst said the California market drives his financial forecasts for CannaRoyalty. He currently projects revenue to grow at a compound annual growth rate (CAGR) of 46 per cent from $26-million in 2018 to $81.9-million by 2021.

"Further, we estimate that CannaRoyalty will become positive in its proportionate adjusted EBITDA and cash flow in the second half of 2018 with $20-million of pro forma cash to invest in additional cannabis opportunities," he said.

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Mr. Bottomley initiated coverage of the stock with a "speculative buy" rating and $3.75 target for share.

"Although its breadth of holdings can admittedly be difficult to grasp at first, in addition to its equity holdings, the company is already receiving payments through other debt financings, royalty streams and advisory services it has in place," he said. "One of the prominent risks facing the company (in our view) is that a majority of its invested capital is held in minority positions, or royalties with finite terms. However, we caution investors not to lose sight of the forest for the trees, as the company's exposure to the California market alone (set to be the largest legal market in the world) could be the primary reason to own this stock as CannaRoyalty represents one of the only public market vehicles to invest in this opportunity."

In a report released Sept. 6, analyst Vahan Ajamian from Beacon Securities initiated coverage with a "buy" rating and $3.75 target.

"While already sizeable at $6.7-billion (U.S.) last year, the North American legal cannabis sector is expected to post meaningful growth in each of the next few years, reaching $22.6-billion in 2021," said Mr. Ajamian. " Our opinion, investors in CannaRoyalty will be able to see this industry upside, without being exposed to just one growing operation, jurisdiction, product/niche and/or the risk of a possible eventual commoditization of flower."

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Though there's "still plenty of uncertainty" surrounding Boston Beer Co Inc. (SAM-N), Credit Suisse analyst Laurent Grandet sees "glimmers of hope."

He raised his rating for the craft brewer, best known for its Samuel Adams and Twisted Tea brands, to "neutral" from "underperform."

"We are upgrading Boston Beer to Neutral because, despite continued weakness in parts of the underlying business and significant uncertainty around the longer-term shape of the P&L, we now see a more balanced spread between potential upside and downside scenarios while market sentiment remains overly negative," he said.

After turning negative late in 2016, Mr. Grandet said there have been signs of improvement in the company's sales growth over the last few months. He pointed to the "very successful" launch of its Truly Spiked and Sparkling hard seltzer water products.

However, Mr. Grandet did admit he remains "cautious" about the company's business trajectory in 2018, noting the decline in Sam Adams both in retail and on-premise. He does not think that will improve before the middle of next year.

"We view the Samuel Adams brand as a victim of its own success in many ways," he said. "Sam Adams is well-recognized and respected in the United States as one of the early movers in the rise of craft beers. However, the number of craft options available to consumers has grown at a staggering pace and industry experts estimate there are now more than 4,000 independent craft brewers in the United States, with more opening every week. This dynamic has caused a natural squeeze for the brands that had the most commanding shares of the market."

He added: "We think the likelihood of a takeout goes higher as the Samuel Adams brand struggles to regain its footing in the highly competitive craft segment. Founder Jim Koch has been publicly vocal about his aversion to selling the company to a larger beer brewer, but we think eventually he could soften his stance on this if the relaunch is eventually unsuccessful. We now think there is a fair probability of SAM being acquired in the next 12-months, increasing significantly by this time next year if Samuel Adams is still suffering. We have previously suggested that SAM could make a good target for the likes of Molson Coors or even be a good candidate for a leveraged buyout (currently zero debt) that would take the company private and afford the new management the opportunity to turn the brands around away from the scrutiny of public markets investors."

Touting the continued success of Twisted Tea, Mr. Grandet raised his 2018 and 2019 earnings per share projections to $6.34 (U.S.) and $6.69 from $6.00 and $6.30, respectively.

"Market sentiment has become very negative with the majority of broker ratings being sell / underperform. We are raising our estimates above consensus because we think the sellside earnings are too low and don't give proper credit to the parts of the business that are performing well. However, we still recognize that there is significant uncertainty, especially related to Samuel Adams, so we hesitate to give the company more credit at this point."

His target for the stock rose $150 from $140. Consensus is $146.89.

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Though he expects the second half of 2017 to be "challenging" for Tegna Inc. (TGNA-N) given the "choppy" ad market, RBC Dominion Securities analyst Leo Kulp sees potential catalysts for 2018.

He initiated coverage of the Virginia-based broadcast, digital media and marketing services company with a "sector perform" rating.

"We believe TGNA is a well run company with innovative management and strong assets," said Mr. Kulp. "However, we see potential for downside to 2H17 estimates in the near-term due to continued softness in national spot advertising and the likely impact of Hurricane Harvey on TEGNA's Houston station. With the stock trading at a premium valuation (8.4 times 2017/18 estimated enterprise value/EBITDA vs. GTN 8 times, NXST at 7.7 times) likely reflecting M&A optionality, we don't see a lot of wiggle room nearterm although we do expect the recent $300-million buyback announcement to provide some ballast. As we head into 2018, we see a path to get more constructive on four factors: 1) Super Bowl and Olympics on NBC; 2) acceleration in management's growth initiatives; 3) potential upside to our political estimate; 4) potential upside to 2019 retrans estimates."

He set a price target of $14 (U.S.) for the stock. Consensus is $17.25.

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Cheniere Energy Inc. (LNG-A) is a defensive stock positioned for the long-term based on rising demand for liquefied natural gas, said BMO Nesbitt Burns analyst Danilo Juvane.

He initiated coverage of the Houston-based company with an "outperform" rating.

"Soon to be powered with a seven-train Gulf Coast liquefaction platform, Cheniere not only is uniquely positioned to become a major global supplier of LNG, but also possesses a streamlined cost structure to meet growing global demand for LNG," said Mr. Juvane. "With run-rate cash flows starting in 2021 we estimate $6-7 per share of DCF, easily supporting a 10-per-cent longterm annual dividend growth rate."

The analyst set a price target of $60 (U.S.). Consensus is $55.46.

"While our fundamental analysis suggests that the next major stock catalyst may occur in 2019 at the earliest, we see Cheniere's transition from a development into an operational company, providing the stock with a low-risk, pure-play way to participate in the growing theme of increasing global LNG demand."

Mr. Juvane also initiated coverage of Cheniere Energy Partners LP (CQP-A), a publicly traded master limited partner owned by Cheniere Energy Inc. with an "outperform" and $32 (U.S.) target. Consensus is $34.27.

"With its five liquefaction trains coming to fruition at the Sabine Pass terminal, we think Cheniere Partners offers an attractive, low-risk yield-plus-growth-value proposition, one of the best within the MLP sector," he said.

He gave Cheniere Energy Partners Holdings LLC (CQH-A) a "market perform" rating and $27 target. Consensus is $26.50.

"Given clear visibility to distribution growth at the underlying MLP, we forecast Cheniere Holdings' resultant dividend growth at a four-year CAGR of about 26 per cent through 2021 underpinned by contracted cash flows from the underlying," said Mr. Juvane.

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In other analyst actions:

Peters & Co Ltd analyst Cindy Mah downgraded Crescent Point Energy Corp. (CPG-T) to "sector perform" from "sector outperform." Ms. Mah lowered her target to $11.50 from $13. The analyst average target is $15.58.

Ms. Mah upgraded Encana Corp. (ECA-T) to "sector perform" from "sector underperform" with a target of $12.50, up from $10. The consensus target is $15.38.

Peters & Co Ltd analyst Tyler Reardon lowered Imperial Oil Ltd. (IMO-T) to "sector underperform" from "sector perform" with an unchanged $38 target. The average is $40.43.

Peters & Co Ltd analyst Dale Lewko downgraded Bonterra Energy Corp. (BNE-T) to "sector underperform" from "sector perform" with a $15 target. The average is $21.88.

Cormark Securities Inc. analyst Amir Arif upgraded Crew Energy Inc. (CR-T) to "top pick" from "buy" with a target of $6.50. The consensus target is $6.07.

Dundee Securities Corp analyst David Talbot initiated coverage of Cobalt 27 Capital Corp. (KBLT-X) with a "buy" rating and $10.90 target. The average target on the Street is $11.34.

TD Securities analyst Daryl Young initiated coverage of Boyd Group Income Fund (BYD.UN-T) with a "buy" rating and $110 target price. The consensus is $108.92.

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