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Slot machines owned by the Great Canadian Gaming Corp. at the River Rock Casino in Richmond, B.C. are seen in this file photo.

JOHN LEHMANN/The Globe and Mail

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

Though he dropped his price target for shares of Mullen Group Ltd. (MTL-T) based on the expectation of a lower 2018 outlook, Industrial Alliance Securities analyst Elias Foscolos expects the announcement of a "modest" dividend increase when it reveals its business plan and budget for the coming year after market close on Wednesday.

"Last year in December, Mullen provided guidance for revenue, dividends, and capital spending, but not for EBITDA," he said. "At that time, Mullen expressed that its Trucking and Logistics ('T&L') segment, excluding acquisitions, would account for 65 per cent of its total revenue and grow at the rate of GDP. MTL also approved a modest $25-million capital budget, which it later expanded to $50-million and elected to maintain its 36 cents per share annualized dividend.

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"Prior to the release of MTL's 2018 Outlook, we are predicting that the company will only re-affirm that the T&L segment will grow at the rate of GDP and consist of 65 per cent of total revenue. We expect no direct guidance for revenue or EBITDA, however, we do anticipate that the Company will release $50-million for its 2018 capital budget, based on the fact that MTL has only used 50 per cent of its 2017 capital budget of $50-million at the end of Q3/17."

Though Mr. Foscolos also predicted a dividend increase a year ago, he said Mullen Group, an Alberta-based long haul and local transportation services provider, took a "more conservative view." He's now projecting the company to raise its annual dividend to 48 cents per share from 36 cents.

"We believe 2018 has a significant amount of potential for a dividend increase, based on two facts," he said. "The first is that in the last quarter, MTL repaid a total of $135-million in debt, which carried an average interest rate of 5.8 per cent. This amounted to $7.8-million per year (pre-tax) and equated to 7 cents per share. If MTL channels those interest savings to its shareholders, we can expect a 7 cents per share increase from the interest savings alone. Additionally, we see both stability and opportunity in the energy sector. The stability is on the drilling front, with the average Canadian rig count being relatively consistent and we anticipate it being similar in 2018. We remain optimistic regarding the opportunity on the egress optionality, specifically, large projects being approved, like a west coast LNG plant and the Trans Mountain pipeline expansion. If these projects advance, MTL will directly benefit due to its large trucking fleet that would accommodate raw materials for these projects. The combination of interest savings and an improving outlook in the energy sector leads us to predict a modest increase in the dividend."

Ahead of the announcement, Mr. Foscolos dropped his 2018 adjusted earnings per share projection to 84 cents from 92 cents based on a lower revenue projection for its oilfield services segment.

He kept a "strong buy" rating for the stock, citing its current weakness, with a target of $19, down a loonie, which he said results in a potential return of 30 per cent. The analyst average target is currently $17.90.


Canaccord Genuity analyst Derek Dley named Great Canadian Gaming Corp. (GC-T), Cott Corp. (COT-N, BCB-T) and BRP Inc. (DOO-T) his top consumer picks for 2018.

Both Great Canadian Gaming and Cott are holdovers from his 2017 list, while BRP Inc. replaces Maple Leaf Foods Inc. (MFI-T).

"2017 was a strong year for our Consumer Products universe," said Mr. Dley in a research note released Monday. "Key themes which have emerged during 2017 and are likely to continue into 2018 include i) Canadians' increasing levels of debt to disposable income; ii) signs of an early recovery in Alberta; iii) further disruption of traditional brick and mortar retail by e-commerce; and iv) continued deployment of capital from companies under our coverage list towards acquisitions.

"Throughout 2017, Consumer Discretionary stocks outperformed Consumer Staples, largely due to strong performance from Dollarama (DOL-T, "buy" and $175.00 target price), BRP (DOO-T, "buy"  and $56.00 target price), Linamar (LNR-T, not rated), Magna (MG-T, not rated), and Restaurant Brands International (QSR-T, not rated).

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Mr. Dley's 2017 picks, which he refers to as his "Holiday Wishlist," generated an average total return of 49 per cent, compared to the S&P/TSX Capped Consumer Staples index at 7 per cent, and the S&P/TSX Capped Consumer Discretionary Index at 19 per cent.  BRP Inc., Cott Corp. and Maple Leaf Foods Inc. (MFI-T, "buy" and $38 target), posted 76 per cent, 69 per cent, and 28 per cent total returns, respectively.

The analyst has a "buy" rating and $29.48 target for Great Canadian shares. The average target is $36.60.

"In our view, Great Canadian should trade at a premium to regional casino operators, and more in line with Las Vegas based peers as the company operates in regions where new competition is limited, has demonstrated an improving margin profile over the last five years, generates material free cash flow, and is well positioned for growth from new gaming licenses in Ontario," said Mr. Dley. "Great Canadian currently trades at 7.5 times our 2018 EBITDA estimate versus peers at 9.0-11.0 times, and offers an inexpensive 2017 free cash flow yield of 8.2 per cent. Given our expectation for stable, yet improving results out of the company's British Columbia properties, and incremental growth from the recently developed Ontario properties, we believe Great Canadian is well positioned to generate meaningful free cash flow going forward."

Mr. Dley has a "buy" rating and $20 (U.S.) target on Cott shares. The average is $17.88.

"2017 was yet another transformational year for Cott," he said. "The company continued to shift towards higher margin, higher growth businesses, such as HOD water, and coffee and tea through the integration of Eden Springs and S&D Coffee. This shifting business profile was accelerated through the announced sale of its Traditional business in July 2017, with Cott now completely focused on higher growth categories."

"Cott currently trades at 11.4 times our 2018 EBITDA estimate of $310-million, below the peer average of 11.9 times. Additionally, Cott currently offers investors a 4.7-per-cent 2018 free cash flow yield, or a 6.1-per-cent 2019 free cash flow yield, which we view as attractive as the company continues to roll-up the fragmented HOD markets across North America and Europe, and pursue larger scale acquisitions in similarly attractive high-growth categories."

With a "buy" rating, his target for BRP is $56, compared to the average of $53.

"BRP exited 2017 with strong momentum in its SSV business segment, increasing sales by 30-per-cent-plus during Q3/F18," said Mr. Dley. "Given the company's commitment to launch a new SSV product every 6 months, we expect strong sales performance to continue into fiscal2019. The company recently announced plans to double manufacturing capacity at its Juarez II facility, as BRP continues to generate robust demand for its new SSV products."

"Despite BRP's robust growth profile, and recent market share gains, the company continues to trade at a discount to its major peer, Polaris Industries Inc. (PII-N), with BRP trading at 9.4 times our F2019 EBITDA estimate, vs Polaris at 11.6 times. As BRP continues to gain market share, through new product introductions, and improve its margin profile, we expect this discount to close."


Morneau Shepell Inc. (MSI-T) is enjoying "steady growth in a rising market," according to Laurentian Bank Securities analyst Marc Charbin.

He initiated coverage of the Toronto-based human resources consulting and technology company with a "buy" rating.

"We have found that the market size of MSI's two core services (pension administration and employee assistance programs) is $13-billion in North America and industry growth should continue to benefit from demand for outsourced solutions, particularly as they relate to SaaS [software as a service ] solutions, and increasing labour laws and employment regulation requiring outsourced solutions for complex and specialized tasks," said Mr. Charbin.

The analyst said Morneau Shepell has been able to achieve long-term, recurring revenue through its success in winning HR contacts, often featuring premium pricing, despite a "very competitive" environment. Given those contracts are often lengthy (up to 10 years in duration), he said the company sports a "highly visible" revenue profile.

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"MSI has delivered an average organic growth rate of 7.1 per cent since 2012," he said. "Organic growth has varied between 3.6 per cent (2016) and 9.7 per cent (2012 and 2014). We also estimate that M&A has added 12 per cent to current revenue over the past five years, albeit with a degree of dilution. We forecast an organic growth rate of 6.0 per cent going forward, and believe it's reasonable that acquisitions could add another 2.0 per cent to the revenue growth profile."

"While we believe MSI's growth profile should continue trending in-line with recent experience, we believe the same for its EBITDA margins. Morneau operates a highly capital and labour intensive business model, needing to invest heavily into systems and high-cost personnel with large contract wins. We forecast EBITDA margin to remain at 19 per cent, in-line with the 5-year average."

Also emphasizing its balance sheet "provides flexibility amid high payout ratio," Mr. Charbin set a price target of $25 for its shares. The average is $23.13.

"Given our view that MSI's growth is expected to moderate to 6.0-per-cent organic growth, in-line with the Company's peer group, we ascribe a 12.0 times enterprise value-to-EBITDA multiple to 2019 EV/EBITDA, consistent with peer group valuation," he said. "We note that the 10-year average valuation for this sector is between 9.3 times and 12.1 times EV/EBITDA, therefore current valuations may represent peak multiples."


Raymond James analyst Frederic Bastien expects Bird Construction Inc. (BDT-T) to be in "good stead" heading into 2017, citing a "strong" management team, "healthy" balance sheet, "preferred" status for design-build work and a growing backlog.

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Accordingly, Mr. Bastien added the Toronto-based company to the firm's Best Picks for 2018 list and raised his target price for its shares.

"Bird landed all three public-private partnerships it was vying for in 2017 and, by our count, made the shortlist for ten more design-build opportunities," he said. "These include the Hurontario, Trillium and Confederation LRT projects in Ontario, long-term care facilities on both ends of the country, as well as border crossings and police detachment bundles in select provinces. We are feeling good about these prospects because management pays more attention than ever to who it teams up with, targets only work that falls squarely within Bird's wheelhouse and now invests equity into projects. While this targeted approach does not guarantee success, it facilitates superior project returns."

"Demand from the commodity sector remains modest, but the good news is that Bird is bidding on progressively more jobs in Western Canada's mid-stream oil and gas market and in Quebec's iron ore belt. The firm has also been stringing together small contract wins in new verticals, including a design-build assignment for a client in Ontario's nuclear industry and mechanical process work for oil sands producers. On the business development front, management is positioning the contractor for lithium and gold related opportunities in Canada's North. We believe this should open up plenty of work to feed the Bird over time."

Mr. Bastien said the company's management has improved over the last 18 months through the additions of Chief Operating Officer Teri McKibbon and Chief Financial Officer Wayne Gingrich. He feels the current management team is now building Bird for long-term profitable growth.

With an "outperform" rating, he raised his target by a loonie to $12. The average targ et is $11.

"With improved visibility into our financial forecasts, we are raising our target 2018 enterprise value-to-EBITDA multiple from 5.5 times to 6.5 times," he said. "The latter is just above the contractors' 10-year average of 6.3 times, which is reasonable for a firm still working through cyclically-low earnings and considering today's higher market valuations."

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TORC Oil & Gas Ltd. (TOG-T) released a 2018 capital budget and initial production guidance on Monday after market that fell in line with the expectations of Raymond James analyst Jeremy McCrea.

"The budget is consistent with its objectives of maintaining an adjusted payout under 100 per cent, focusing on profitable light oil plays, and controlling its pace of decline. With the faster than expected pace of development in the unconventional Southeast Saskatchewan plays and the three asset acquisitions, our base PDP NAV plus risked upside has increased to $8.00 per share," he said.

Calgary-based TORC announced a capital budget of $165-million for the year, slightly exceeding the analyst's projection ($160-million). It plans to focus on light oil development projections with approximately 80 per cent of the capital allocated to drilling, completions and tie-ins.

"TORC plans to drill 13.5 net Torquay/Three Forks wells and 11.0 net unconventional Midale wells in 2018," said Mr. McCrea. "This is a noticeable increase in the pace of drilling into the unconventional SE Saskatchewan formations versus 2017 when TOG drilled just 14.6 net unconventional wells. TORC drilled 4.6 net unconventional Midale wells in the fourth quarter and the decision to accelerate drilling in the play suggests to us that TOG is encouraged by the play."

It also announced 2018 production guidance of 23,000 barrels of oil equivalent per day with an exit rate of 23,800 boe/d, which implies a 10.5-per-cent growth rate over its 2017 average production guidance of 20,800 boe/d.

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Mr. McCrea kept an "outperform" rating for TORC shares along with a $8 target, rising from $7.50. The average is $8.53.

Elsewhere, Desjardins Securities analyst Kristopher Zack kept a "buy" rating and $8.50 target.

"We continue to expect that the capex and the current dividend will be fully funded while maintaining a strong debt-to-cash flow of just 1.3 times," said Mr. Zack. "We continue to like the stock at current levels, noting that the disciplined and conservative strategy continues to deliver reliable operational results."

"We are maintaining our Buy recommendation, noting the current enterprise value to debt-adjusted cash flow of 6.3 times at [Monday's] strip is an attractive entry point, underscored by largely hedged exposure to improved light oil prices (vs weak AECO gas and wider WCS differentials) and solid sustainability metrics."


Saying its "all boxed up and ready to soar," CIBC World Markets analyst Hamir Patel upgraded Cascades Inc. (CAS-T) to "outperform" from "neutral"

"We had previously downgraded Cascades on Sept. 24 when the shares were trading at $16.25 due to the death of the fall containerboard hike and growing concerns at the time about a potential spike in OCC costs given evolving Chinese policies on recovered paper imports," he said. "With Cascades having underperformed the TSX composite by 22 per cent since [International Paper Co.] signaled the death of the fall hike on Sept. 22 (when it announced a white paper machine conversion), and CAS shares down 12 per cent since reporting disappointing Q3 results on Nov. 9, we see limited downside risks remaining."

After lowering his OCC (old corrugated containers) price forecast for 2018 through 2020, Mr. Patel raised his target price to $17 from $14. The average is $17.70.

"Cascades generates 60 per cent of its EBITDA from the best segment of the forestry products industry (containerboard), a market where the industry is running at over 97 per cent year-to-date (October = 101 per cent), demand is tracking 3 per cent  higher year-to-date, and the only confirmed capacity addition in 2018 (PCA Wallula) represents 1.0 per cent of existing supply," the analyst said. "At the same time, Cascades has dramatically simplified its business this year, through the consolidation of Greenpac, sale of its legacy investment in Boralex and advancement of the ONE Cascades initiative, a margin improvement program that has been a drag on earnings in 2017 but should start to bear fruit in 2018 (with full benefits apparent in 2019 earnings). Cascades is trading at only 5.4 times 2018 estimated enterprise value/EBITDA, a steep discount to its U.S. containerboard peers (8.3 times)."


In other analyst actions:

Scotia Capital analyst Phil Hardie upgraded IGM Financial Inc. (IGM-T) to "sector outperform" from "sector perform" with a target of $50, rising from $49, which is the current consensus on the Street.

Mr. Hardie also upgraded Guardian Capital Group Ltd. (GGG.A-T) to "sector outperform" from "sector perform" and raised his target by a loonie to $30. The average is $30.50.

J.P. Morgan analyst Paul Coster downgraded Canadian Solar Inc. (CSIQ-Q) to "underweight" from "neutral" with a $15 (U.S.) target. The average is $23.57.

GMP analyst Stacey McDonald upgraded Athabasca Oil Corp. (ATH-T) to "buy" from "hold" with a $1.65 target price, which is the consensus. His previous target was $1.50.

Goldman Sachs analyst Christopher David Merwin upgraded Activision Blizzard Inc. (ATVI-Q) to "buy" from "neutral." His target for Activision rose to $73 (U.S.) from $67, versus a consensus of $72.17.

J.P. Morgan analyst Sterling Auty downgraded Barracuda Networks Inc. (CUDA-N) to "neutral" from "overweight" with a target of $27.55 (U.S.), down from $35. The average target is $27.42.

Mr. Auty also downgraded Adobe Systems Inc. (ADBE-Q) to "neutral" from "overweight" with a target of $185 (U.S.), which is lower than the consensus of $186.20.

He also downgraded Synopsys Inc. (SNPS-Q) to "underweight" from "neutral" with a $87 (U.S.) target. The average is $103.

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