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Tuesday's analyst upgrades and downgrades

Cannabis seedlings at the new Aurora Cannabis facilty on Nov. 24, 2017.

Ryan Remiorz/THE CANADIAN PRESS

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

Superior Plus Corp. (SPB-T) is "fuelled up and ready to reignite growth," according to Desjardins Securities analyst David Newman.

Emphasizing what he deems a "strong" competitive moat and industry-leading positions, Mr. Newman initiated coverage of the Toronto-based propane distributor with a "buy" rating.

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"SPB holds a 44 per cent market share in propane distribution in Canada, with a growing footprint in the U.S." he said. "Its backward integration into supply portfolio management is a competitive advantage in terms of procurement and market intelligence. The company also holds leadership positions in a range of specialty chemicals, including sodium chlorate, sodium chlorite, chlor-alkali products and other related technology."

"SPB should benefit from improving caustic soda (tightening supply in China and Europe) and hydrochloric acid (improving oil & gas drilling activity) fundamentals, while sodium chlorate demand/pricing should remain solid, aided by competitor capacity removals (but offset by potentially higher electricity mill rates). Demand for caustic potash (KOH) is being driven by its use in fertilizers, runway de-icing (tougher 2017–18 winter conditions) and food (as a healthy alternative to salt)."

Mr. Newman thinks Superior Plus is well-positioned to take advantage of a recovering in the Western Canadian energy market through its recent $412-million acquisition of Canwest Propane from Gibson Energy Inc. as well as the demands of the current "frigid" winter. He add Superior Plus remains on the gun for further tuck-in deals in retail and wholesale propane and specialty chemical deals.

"The propane and refined fuel distribution business is a mature industry, implying limited organic growth opportunities," the analyst said. "The company believes it can effectively grow at 2 times the market, with targeted annual growth in the range of 3–5 per cent. In the propane business, its efforts involve: (1) the development of new products and services, backstopped by greater use of technology (eg online customer web portals, digital sensor solutions, call centres, etc) to enhance service and decommoditize its offerings; (2) an increased focus on the retail and wholesale markets in Canada, and residential and commercial markets in the U.S.; and (3) the development of propane autogas. In Specialty Chemicals, SPB would like to develop a more direct path to the end users of its products vs wholesale, and to further develop its export markets for sodium chlorate, supported by greater investment in its low-cost plants and the recent closure of two of its competitors' plants (5–10 per cent of industry capacity)."

Mr. Newman called SPB "a relatively safe, high-yielding investment," possessing a 6.2-per-cent dividend yield which he views as sustainable "given SPB's future growth prospects, stable cash flows and conservative payout ratio"

"Based on adjusted FCF [free cash flow], we estimate a distribution payout ratio of 57 per cent in 2018 and 54 per cent in 2019 versus an expected 64 per cent in 2017. SPB targets a payout ratio in the range of 40–60 per cent of AOCF [adjusted operating cash flow] less maintenance capex and repayment of finance lease obligations — a metric that parallels our payout on adjusted FCF. While the company has a relatively buoyant outlook and a conservative payout ratio, we do not anticipate any near-term dividend increases. Instead, we expect SPB will focus on integrating Canwest, investing in modest organic growth opportunities, pursuing small tuck-in acquisitions and deleveraging."

The analyst set a price target of $15 for Superior Plus shares. The analyst average target is currently $13.86.

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"We believe 9.5 times is a reasonable forward (2019) multiple to pay for a company poised to monetize a full tank of opportunities that include: (1) the recovery in western Canada's energy markets, which SPB should be able to effectively leverage with the recent acquisition of Canwest, (2) a sold-out position in sodium chlorate given strong demand, recently supported by the closure of two of its competitors' plants, and (3) the dramatic increase in caustic soda and HCl prices," he said. "In the near term, the company should benefit from higher propane and KOH volumes given tough winter conditions across North America in 2017–18."

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Ahead of the release of fourth-quarter results for Canadian infrastructure companies, Credit Suisse analyst Andrew Kuske is left questioning the perceived sector correction.

"For the year-to-date, our broadly defined infrastructure coverage universe delivered extremely weak performance – both absolute and compared to some infrastructure benchmarks," he said in a research note released Tuesday.

"We question the severity of the sector correction that, to us, seems to be underpinned by rotating funds flow. Clearly, there are a number of major issues into the earnings season including: (a) NAFTA risk (CAD focused); (b) cross-border tax concerns; and, (c) rising rate fears."

Mr. Kuske said the "most obvious" factor facing the sector is its "severely" weak share price performance.

"Most recently, the bias of Canadian infrastructure conversations have revolved around the significantly disappointing share price performance of many bellwether names – let alone a list of less prominent stocks," he said. "From our perspective, the macro reality of funds flow risk is the major issue negatively impacting performance. For much of the sector, the company fundamentals are largely intact and not necessarily meaningfully changed."

"One of the challenges with the Canadian Energy sector is the composition of companies in that GICS  [Global Industry Classification Standard ] category. The range of integrated players, producers to energy infrastructure is somewhat unique versus other markets – especially the U.S.. Moreover, the sheer size of Energy in the overall Canadian index creates another factor to consider with performance swings. Beyond these issues, we continue to believe North American Free Trade Agreement (NAFTA) related matters will weigh on the CAD along with certain sectors and can impede share price performance."

Despite the concern, Mr. Kuske upgraded his rating for a pair of stocks.

Believing "change is in the air," he raised Gibson Energy Inc. (GEI-T) to "outperform" from "neutral."

"Over the last week, GEI's shares declined by roughly 10 per cent which followed a rather successful investor day on Jan. 30," he said. "With that price decline and a series of future catalysts, we believe the riskreward relationship is compelling to upgrade the stock to Outperform from the prior Neutral rating.

"GEI looks to be positioned for a catalyst filled plan (with a series of asset sales) and a deliverable business plan with favourable near-term tailwinds. Ultimately, everything will come down to the new team's ability to execute the strategy as many of the external factors look to be in GEI's favour at this time. The company is set to release Q4 2017 results on March 5th and we forecast EPS of 5 cents per share which is similar to the Street's 5-cent view (the range of 1 cent to 8 cents of EPS). For EBITDA, we forecast $74-million which is less than the Street's $81-million ($74-million-$87-million range). Given the long-cycle nature of most of our coverage universe, we do not place undue emphasis on quarterly results."

His target for the Calgary-based company remains $20, which is 35 cents above the consensus on the Street.

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Mr. Kuske also upgraded Brookfield Renewable Partners LP (BEP.UN-T) to "outperform" from "neutral."

"On the back of roughly an 8-per-cent unit price decline in the last month, we believe Brookfield Renewable (BEP) offers a very interesting entry point for a high quality renewable power player with a uniquely global footprint," he said. " Following the close of the TerraForm deals (both Terraform Power (TERP) and TerraForm Global (GLBL)), we believe the Street focus should shift towards a predictable organic capital plan along with the potential for asset high-grading."

"Results are scheduled for Feb. 7 and we forecast FFO of 43 US cents per unit which is lower than the consensus 45 US cent view (36 US cents to 51 US cents range). With the short-term variability of most renewable power assets and long-cycle nature of most of our coverage universe, we do not place undue emphasis on quarterly results."

His unchanged target is $48, which sits well above the $44.19 average.

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CIBC World Markets analyst Paul Holden lowered his rating for Element Fleet Management Corp. (EFN-T), believing a 2018 earnings guidance reduction and customer attrition make "the lack of a takeout offer all that more sour."

On Monday, the Toronto-based fleet management company announced 2018 core earnings per share will decline 3 per cent to 5 per cent due to a decline in service units from the third quarter.

It also announced the immediate retirement of chief executive officer Bradley Nullmeyer, which Mr. Holden said "adds incremental risk to an already unstable story."

Moving the stock to "neutral" from "outperformer," Mr. Holden's target for the stock fell to $8.50 from $12. The average target among analysts covering the stock is $9.90.

Elsewhere, Raymond James analyst Brenna Phelan called the guidance reduction a "material negative." She was projecting "slow but steady" improvement through the year.

"After a tumultuous 2017 which featured a 24-per-cent share price decline (the TSX was up 6 per cent), split of operations into core and non-core and challenges in each of the businesses, Element's first news of 2018 was mixed, at best," said Ms. Phelan.

"Two fairly large customer losses in 4Q17 will result in the immediate reduction of service revenue, while pressure impact on net interest income will be more gradual. Our revised Core EPS forecasts feature a 6-per-cent decline in services revenue and a 2-per-cent increase in expenses versus 2017 estimates. The single biggest risk associated with this turnaround story is further customer attrition. We expect that charges referenced by management that will be taken in 1Q18E will relate to expenditures to retain key clients, which should mitigate some attrition risk. More detail on customer losses will be in focus when EFN reports March 15, 2018."

Conversely, Ms. Phelan said Mr. Nullmeyer's retirement should be seen as a "positive signal that real steps are being taken to address recent challenges in the business related to the integration of the GE business."

"We note, as highlighted by the company, that Element generates $400-million of free cash flow per year; more than sufficient to pay its dividends and address an inefficient capital structure," she said. "We expect convertible debentures to be repaid in 2019 and share buybacks in 2018."

Keeping an "outperform" rating for the stock, her target fell to $11 from $13.

"We expect weakness in the shares following these announcements, but with the strategic process and the overhang therefrom over, a CEO search underway and negative earnings expectations now absorbed, we expect valuation subsequent to this weakness to be compelling for a business with many positive attributes, despite a forecast 4-per-cent Core EPS decline in 2018," said Ms. Phelan. "We are revising our target price downward to $11.00. With 42-per-cent upside to our target price including a now compelling 3.8-per-cent dividend yield, we are maintaining an Outperform rating based on the revised risk/reward profile."

Elsewhere, Odlum Brown analyst Ben Sinclair also lowered the stock, dropping it to "hold" from "buy."

National Bank Financial analyst Jaeme Gloyn dropped it to "underperform" from "sector perform" with a $7 target, down from $10.50.

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Canaccord Genuity analyst Derek Dley raised his target price for shares of Liquor Stores N.A. Ltd. (LIQ-T) in reaction to Monday's announcement that Aurora Cannabis Inc. (ACB-T) has struck a deal to acquire up to a 40-per-cent stake in the Edmonton-based company.

Under the three-phase transaction, Aurora will make an initial $103.5-million cash investment in Liquor Stores through a private placement to own 19.9 per cent of its shares. It will then by capable of increasing its stake through subscription receipts and a pair of share purchase warrants.

"Upon closing of the initial investment in mid-February, Liquor Stores will hold a net cash position of $5-million leaving the company in an advantageous capital position," said Mr. Dley. "Liquor Stores plans to use the initial investment proceeds to launch a leading brand of cannabis retail outlets by converting a portion of its existing locations to cannabis retail outlets, as well as establishing new cannabis stores. Liquor Stores will also use a portion of the funds to accelerate its existing renovation strategy, which historically has generated an attractive 20-per-cent return on invested capital."

With the infusion of capital, Mr. Dley said Liquor Stores intends to open new cannabis retail stores as well as the conversion of underperforming liquor outlets.

"That said, it remains uncertain how many locations the company will be permitted to operate. We expect increased clarity as we move closer to the federal legalization of recreational cannabis, which is anticipated to occur in July 2018," he said. "Therefore, Liquor Stores is likely to utilize a portion of the private placement proceeds towards refreshing its existing network of liquor outlets, however this will be dependent upon the number of cannabis retail licenses awarded to Liquor Stores. While we believe the company now has the capital on its balance sheet to develop a 100 store network of cannabis retail outlets, it is uncertain how many licenses Liquor Stores will in fact be awarded."

Maintaining a "hold" rating for Liquor Store shares, Mr. Dley bumped his target by a loonie to $13, which is 63 cents below the average target on the Street.

"We have increased our target multiple to account for potential, although highly speculative, upside from the roll-out of cannabis retail outlets," he said. "Following the issuance of shares to Aurora Cannabis at an accretive $15.00 share price, Liquor Stores will now hold a net cash position. However, this is largely offset by the potential dilution to equity holders due to the increase in shares outstanding. Given the infancy of cannabis regulations in Western Canada coupled with our expectation for still challenging results in Alberta, we believe the shares are fairly valued in the absence of greater clarity related to cannabis retail."

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Despite a 14-per-cent rally in West Texas intermediate oil prices in the fourth quarter of 2017, the year ended on a "soft note" for Canadian oilfield services companies, according to Canaccord Genuity analyst John Bereznicki.

In a research note on the sector released Tuesday, he adjusted his target prices for several stocks ahead of earnings season.

"[Western Canadian Sedimentary Basin] activity ended on a soft note as some producers exhausted their 2017 budgets by early December amidst widening domestic oil price differentials and a challenging AECO backdrop," said Mr. Bereznicki. "While this drove only a modest 3 per cent sequential decline in the Q4/17 active rig count, we estimate WCSB completion activity was down more than 20 per cent over this same period.

"As many 2018 producer budgets were crafted several months ago, we believe investors will be focused on service provider outlooks for the balance of this year once the Q4/17 earnings season begins on Feb. 7. We also expect widening domestic oil price differentials and weak domestic natural gas fundamentals to remain recurrent themes through fourth quarter conference calls. For those companies with a significant U.S. presence, we believe management teams will likely provide a decidedly more upbeat outlook outside of Canada post break-up."

Mr. Bereznicki said his fourth-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) estimates now sit 2 per cent below the consensus. They are even lower for companies with WCSB completion exposure and "relatively high" fixed-cost structures.

"Conversely, we have greater confidence those with more variable cost structures and production exposure are better positioned to meet Q4/17 Street expectations," he said. "We have made some estimate and target price revisions, but there are no changes to our recommendations.

"We continue to favour companies that benefit from increasing frac intensity and hydrocarbon production growth in low cost basins. We also remain biased to those with exposure to attractive markets outside of Canada, strong organic growth drivers and the ability to pursue much-needed industry consolidation."

He lowered his targets for the following stocks:

- Ensign Energy Services Inc. (ESI-T, "hold") to $7.50 from $7.75. The average target is $8.06.

- McCoy Global Inc. (MCB-T, "hold") to $1.60 from $1.70. Average: $1.90

- Mullen Group Ltd. (MTL-T, "hold") to $16 from $17. Average: $17.02.

- Source Energy Services Ltd. (SHLE-T, "buy") to $11.50 from $12.50. Average: $13.85.

- Trican Well Service Ltd. (TCW-T, "buy") to $6 from $6.50. Average: $6.44

- Trinidad Drilling Ltd. (TDG-T, "hold") to $2 from $2.10. Average: $2.56.

He raised his target for:

- Calfrac Well Services Ltd. (CFW-T, "speculative buy") to $8.50 from $8. Average: $7.77.

- Precision Drilling Corp. (PD-T, "hold") to $4.75 from $4.50. Average: $5.45.

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Though he increased his target price for shares of Cronos Group Inc. (MJN-X) following the announcement of its 50/50 joint venture with Australia's NewSouthern Capital Pty Ltd., Canaccord Genuity analyst Matt Bottomley said he's remaining on the sidelines based on the medical marijuana company's current valuation.

On Monday, Toronto-based Cronos announced the launch of Cronos Australia Pty Ltd., a JV with NewSouthern and the grant of medicinal cannabis cultivation and research licenses.

"This marks the second international hub planned by the company (after announcing Cronos Israel in Sep/17) where its plans to focus producing pharmaceutical grade cannabis for medical patients in Australia, New Zealand, and South-East Asia," said Mr. Bottomley. "Cronos will provide its IP and branding to the JV as it aims to further increase its distribution networks as a growing number of countries plan to implement medical cannabis platforms internationally."

Mr. Bottomley acknowledged Cronos is "continuing to execute a differentiated strategy," but he emphasized the Australian venture will take several years to come to fruition.

"With international markets continuing to develop (along with Cronos' international strategy), we have elected to add incremental value into our SOTP [sum-of-the-parts] analysis to account for Cronos' increasing international reach," he said. "As a result, we have added in 15,000 kilograms of international sales into our long-term forecasts (to account for Germany, Israel export, and Australia optionality) that we believe are fully funded via Cronos' most recent equity raise. As part of our update, we have assumed only modest contribution over the next few years, with a higher ramp in our longer-term forecasts. We have assumed wholesale pricing at a premium to Canada (due to expected reimbursement in many international markets) and 40-per-cent EBITDA margins. As a result, our revised SOTP target increases to $5.98 per share."

Accordingly, his target rose to $6 from $4.15, which sits below the average on the Street of $7.40.

He maintained a "hold" rating.

"Although we continue to believe that Cronos has an attractive differentiated strategy versus many of its peers (including ownership of multiple LPs and an increasingly robust international strategy), the company currently trades at a two-year forward enterprise value-to-EBITDA multiple of 21.0 times, versus its peers at 14.0 times," the analyst said. "In our view, a premium is justified, but as the top four Canadian LPs by market cap (with greater invested capital, production capacity and strong international positioning) now trade at less-than 20.0 times their two-year fwd EV/ EBITDA, we would remain on the sidelines at current levels."

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In other analyst actions:

National Bank Financial analyst Cameron Doerksen upgraded WestJet Airlines Ltd. (WJA-T) to "outperform" from "sector perform" with a $30 target, which sits above the consensus of $28.06.

Mackie Research analyst Greg McLeish initiated coverage of CannTrust Holdings Inc. (TRST-CN) with a "buy" rating and $17.50 target. The average is $12.71.

Barclays analyst Paul Cheng upgraded Chevron Corp. (CVX-N) to "overweight" from "equal-weight" and raised his target to US$135 from US$130. The average target is US$133.83.

Mr. Cheng downgraded Exxon Mobil Corp. (XOM-N) to "underweight" from "overweight" with a US$84 target, falling from US$91. The average is US$87.43.

Needham analyst Rajvindra Gill upgraded Micron Technology Inc. (MU-Q) to "strong buy" from "buy" with an unchanged target of US$76. The average is US$58.96.

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