Wednesday's analyst upgrades and downgrades

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

Chinook Energy Inc. (CKE-T) is facing "very tough headwinds," said Raymond James analyst Kurt Molnar.

After the Calgary-based petroleum and natural gas production company missed expectations on both its first-quarter operational and financial results, Mr. Molnar downgraded his rating to "underperform" from "market perform."

"For a couple years now Chinook has enjoyed a positive working capital surplus and an undrawn bank line," the analyst said. "That has been a 'draw' for investors, but very low gas price realizations are eroding that relative strength and a high cash cost base is bringing further difficulty. While we estimate Chinook will be debt free still by the end of this year, we expect their debt capacity to shrink while their cash flow may remain very modest. In short we see the financial strength slipping away."

On Tuesday, Chinook reported production of 5,753 barrels of oil equivalent per day (boe/d), behind Mr. Molnar's forecast of 5,950 boe/d, while its negative cash flow of $2.9-million was also lower than the analyst's forecast of negative $0.3-million.

"While Chinook clearly cannot be blamed for very low NEBC gas prices, we note their cash costs (excluding royalties) of just under $19/boe for a 70-per-cent-plus gas levered stock is simply too high even in a more robust gas price environment," said Mr. Molnar. "We don't doubt Chinook is working to reduce this cash cost level but that is tough to do when capital spending is restricted."

"Chinook has 2 million boe of depletion to replace per annum at the same time they are limiting capex and trying to greatly reduce cash costs. Their financial strength gives them limited room to succeed in this effort, but in no way guarantees it. Combine all this with a stock market that is not keenly interested in small cap stocks and the company has some material challenges. A strong result from any non-core asset sale effort might greatly improve prospects but we need to wait to see such an event."

Mr. Molnar lowered his target price for the stock to 35 cents from 50 cents. The analyst average target price is 57 cents, according to Bloomberg.

Elsewhere, Industrial Alliance Securities analyst Michael Charlton reduced his rating for Chinook to "hold" from "buy," citing a reduced capital program and "shut in production awaiting higher Station 2 pricing." He maintained his 50-cent target.

"With $20-million in cash to fund near-term development, Chinook continues to move towards a pure Montney play, focused at its Birley/Umbach asset with additional Montney potential on selected acreage within the Montney trend," said Mr. Charlton. "We believe management is making the right decision to prudently manage its cash and capital programs to maintain a strong balance sheet and the flexibility to accelerate its drilling program in a higher commodity price environment with improved economics. Given the company's $93.9-million in future abandonment liabilities, we also believe the expedited disposal of several non-core properties would help further reduce Chinook's operating and G&A costs while simultaneously alleviating some of the future liabilities to focus on the exponential upside potential in the Montney."

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DHX Media Ltd. (DHX.B-T) has key pieces in place for the next phase of its growth, said RBC Dominion Securities analyst Drew McReynolds, who called it "a content play with plenty of runaway."

Mr. McReynolds said the recent pullback in DHX stock and a number of potential catalysts over the next 12 months brings investors a buying opportunity. Accordingly, he initiated coverage with an "outperform" rating.

"The proliferation of new digital services globally is significantly and likely permanently increasing the demand for content," the analyst said. "This environment stands in contrast to previous content cycles where shelf space was limited to linear broadcasting. The unique opportunities for DHX this cycle include 1) ramping up production and distribution to meet this structural step-up in demand for content, and 2) leveraging multiple direct-to-consumer and interactive digital platforms to maximize property exploitation, including merchandising and licensing (M&L) revenue. The unique risks for DHX are 1) an eventual oversupply of programming resulting in lower production activity and lower pricing, and 2) the substitution of linear broadcasting with new digital services."

He noted the company's revenues rose from $73-million to $246-million from 2012 through 2015 largely from organic growth and acquisitions. He added underlying revenue growth came from increases to production as well as distribution.

"We expect the next phase of growth to be driven by 1) sustaining current production levels (175-225 half hours per year) while maintaining pricing power and exploiting new content partnerships, under-penetrated territories and proliferating digital video services, 2) leveraging what has only recently become a true global distribution platform, and 3) increasing the scale and scope of M&L activities as only eight of DHX's 400 brands are currently being exploited," Mr. McReynolds said.

Mr. McReynolds said the company has a "very attractive" risk profile with the Canadian media sector "with almost pure play exposure to content."

He set a price target of $10. The analyst average is $10.07.

"Our outperform ranking on DHX reflects what we believe is attractive risk-adjusted total return potential within our Canadian media coverage," he said. Our price target of $10 is based on the average of 1) applying target EV/EBITDA [enterprise valuye to EBITDA] multiples of 12.5 times and 6.5x to our blended two-year forward adjusted EBITDA estimates ... for content and broadcasting, respectively, and 2) a discounted FCF [free cash flow] methodology that incorporates a WACC [weighted average cost of capital] and terminal multiple of 10.0 per cent and 10.0 times, respectively. We believe our valuation multiples balance DHX's higher earnings and FCF volatility with the company's superior growth and relative risk profile, the scarcity of the asset and option value in a takeout scenario."

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Exchange Income Corp. (EIF-T) is well-positioned to deliver further growth in 2016, said RBC Dominion Securities analyst Derek Spronck after the company released "strong" first-quarter earnings.

On Tuesday, the Winnipeg-based company reported quarterly EBITDA of $44-million, topping Mr. Spronck's projection by $1-million as well as the consensus of $38-million. He said the beat was largely based on better-than-expected top line growth of 25 per cent year over year.

The company also raised its dividend for the third time in the last 18 months, increasing it by 5 per cent to $2.01 annually per share.

"Investors were clearly happy with the dividend increase and EIF's strong Q1/16 results, which were well ahead of consensus across most metrics," the analyst said. "We believe it largely stems from what we see as increasing visibility as to the company's ability to generate sustainable earnings and FCF growth, in particular after now lapping easier comps. EIF's model of diversification continues to deliver sustainable earnings growth by creating essentially a natural hedge against a wide-range of economic backdrops. Accordingly, despite macro headwinds, EIF is set to post sustainable earnings growth through 2016, with what we see as both capital appreciation and additional dividend increases as a result."

He added: "Despite the cyclical challenges, including a widely variable Canadian dollar, regional economic differences, and low commodity prices, EIF was able to deliver another robust quarter. Management's diversification strategy appears to be paying off, with prior investments now being monetized. The increase in EBITDA (up 36 per cent year-over-year organically) was due to a number of factors, including strong performances by Regional One and Provincial Aerospace, which won a significant 5-year in-service support contract with a Middle East client in late 2015, and continued strength in the company's Legacy Airlines."

The analyst did not change his "outperform" rating, but he did raise his price target for the stock to $36 from $33. Consensus is $33.05.

"We believe a premium valuation multiple is warranted given EIF's strong anticipated earnings growth, attractive niche markets served, and diversification benefits of its subsidiary portfolio," said Mr. Spronck.

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CT Real Estate Investment Trust (CRT.UN-T) is "building on a rock solid base," said CIBC World Markets analyst Alex Avery, after it reported first-quarter results which met expectations.

"CT REIT continued to deliver predictable and reliable financial and operating results, reflecting its 96-per-cent-tenant Canadian Tire, consistent 99.9-per-cent occupancy, long lease term of 13 years and contractual rent growth, which all but eliminate variability in the REIT's performance," said Mr. Avery.

The Toronto-based REIT had fully diluted funds from operations (FFO) of 26 per unit, in line with both its 2015 result and Mr. Avery's projections. He said the result was driven by a "solid" 1.3-per-cent increase in same-property net operating income as well as acquisitions.

"Development and intensification investments are scale-appropriate to CRT's portfolio, with continued incremental investments, substantially (67 per cent) preleased to Canadian Tire," the analyst said. "We believe the REIT is highly capable of capitalizing on its development platform and preferential relationship with Canadian Tire to continue to make opportunistic investments. Third-party acquisitions and redevelopment opportunities, like the recent acquisition of the Sears distribution centre, add to the REIT's structural growth profile.

"We think the incredibly stable and predictable financial and operating performance profile of its assets, combined with the contractual growth of CT REIT warrants a premium valuation. With few recent market transactions representative of the REIT's portfolio profile (single tenant, 13-year average lease term, annual rent escalators), we place less emphasis on NAV [net asset value] in our valuation approach."

Mr. Avery maintained his "sector performer" rating and raised his target to $15.50 per unit from $14.75 "reflecting the growing appeal of the REIT's highly defensive, reliable financial and operating outlook."

The average is $14.81.

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Despite "weak" organic growth, WSP Global Inc. (WSP-T) reported "solid" first-quarter 2016 results, said Desjardins Securities analyst Benoit Poirier.

"WSP reported better-than-expected 1Q16 results, driven by strong revenue and decent margins. Management also reiterated its 2016 guidance, which we believe reflects realistic expectations in light of the uncertain macro environment," said Mr. Poirier. "Overall, we believe current levels are attractive for a company with a resilient business model, solid track record, and low oil and gas exposure. In addition, WSP's healthy balance sheet provides flexibility for mid-size M&A without an equity issue — a key catalyst, in our view."

WSP reported adjusted EBITDA of $92-million, topping the projections of both Mr. Poirier ($84-million) and the consensus ($88-million). Mr. Poirier pointed to higher-than-expected net revenue of $1.162-billion, ahead of his estimate ($1.123-billion) and the consensus ($1.087-billion). Adjusted earnings per share of 33 cents also exceeded both projections (22 cents and 32 cents, respectively).

"Adjusted EBITDA increased by $3.5-million (up 20 per cent year over year) due to the acquisitions of SPL, Levelton and MMM Group throughout 2015, offsetting the contraction in the western Canadian geomatics and oil and gas sectors (both are considered high-margin segments)," the analyst said. "However, the weakness in western Canada caused organic net revenue to decline 13.4 per cent year over year in 1Q despite positive organic growth reported for Ontario and Québec combined. WSP also mentioned that the integration of the MMM Group is progressing on plan, and management remains upbeat about its long-term outlook following the recent announcement of increased federal infrastructure spending. Nevertheless, as this infrastructure stimulus is not expected to impact 2016 results, WSP foresees the continued slowdown in western Canada (providing tough comps until at least 3Q16) to translate into negative to flat net organic revenue growth in Canada in 2016 (we expect a decline of 3.4 per cent)."

Mr. Poirier said the company possesses balance sheet flexibility for M&A activity without the need to raise equity.

"WSP ended 1Q16 with a 1.7-times net debt/EBITDA ratio (adjusted for acquisitions), providing room for additional M&A, as management qualifies the current pipeline as robust," he said. "However, while the company was reluctant in the past to leverage its balance sheet above 2.0- to 2.5-times net debt/EBITDA, WSP would now consider going up to 3.0-times net debt/EBITDA due to its global footprint and the resiliency of its business model, which diminishes risk. As a result, management estimates that it has $700–800-million dry powder for M&A."

The analyst did not change his "buy" rating, but he raised his target price to $48 from $46. Consensus is $45.36.

"We believe the 2016 guidance sets a base for realistic expectations given the uncertain global environment. Current levels also provide an attractive entry point for a company with a resilient business model and a compelling mix of organic growth from around the world. Investors should also consider WSP for its strong integration capabilities, excellent M&A track record, low oil and gas exposure."

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"Impressive" internal growth led Killam Apartment REIT (KMP.UN-T) to a 20-per-cent increase in funds from operations per unit in the first quarter, said Canaccord Genuity analyst Mark Rothschild.

On Tuesday, the Halifax-based REIT reported FFO of 18 cents, up from 15 cents in the same period of 2015 and 2 cents higher than both the consensus and Mr. Rothschild's projections.

"For Q1/16, same-property NOI jumped 8.0 per cent year over year, representing the fifth consecutive quarter of strong internal growth," said Mr. Rothschild. "Fundamentals in the REIT's core markets are sound, and we expect continued healthy internal growth through the remainder of 2016. However, we do not expect this pace of growth to continue and management guided to growth of up to 2 per cent for the remainder of the year, and 2 to 4 per cent for the full year 2016."

"Although the biggest driver of internal growth was on the expense side, we believe that the most encouraging data point is the continued high occupancy in Halifax. While there continues to be a high level of construction in the city, Killam has managed to improve occupancy in Halifax (36 per cent of net operating income). Stabilized apartment occupancy in the REIT's most important market increased 110 basis points to 96.3 per cent in Q1/16 from 95.2 per cent in the year-ago period."

Mr. Rothschild kept his "buy" rating for the REIT and raised his target to $13.25 per unit from $12. Consensus is $12.22.

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Accountability Research analyst Harriet Li downgraded Barrick Gold Corp. (ABX-T, ABX-N) based on share price appreciation.

"We continue to view the company favourably given its continued focus on high-quality production, cost reduction, the divestiture of underperforming and high-cost assets and its improving balance sheet, which will lead to improved earnings and stronger cash flows going forward," said Ms. Li, who moved her rating to "hold" from "buy." "With the company's Best-In-Class initiative, there is potential for further operational improvements and cost savings to be realized. On the deleveraging front, Barrick is targeting further debt reduction of $2-billion in fiscal 2016, following achievement of its debt reduction target of $3-billion last year."

In reaction to the release of the company's first-quarter 2016 financial results on April 26, Ms. Li raised her 2016 earnings per share to 54 cents from 39 cents. She said the increase was due largely to lower projected operating costs.

She also raised her target price to $24 from $13. Consensus is $20.80.

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Despite being in an industry with "strong" fundamentals, there is limited near-term upside to SeaWorld Entertainment Inc. (SEAS-N), said Credit Suisse analyst Benjamin Chaiken.

He downgraded the stock to "underperform" from "outperform."

"While we believe that the theme park sector in general offers investors a strong pure-play on the recovering low/middle-end consumer, along with substantial barriers to entry, expectations for SEAS are ahead of themselves heading into the 2016 season and we see downside to estimates and multiple compression as results fail to materialize," the analyst said. "Specifically, we believe as peer competition ramps, a lack of pricing power becomes evident, and costs savings miss expectations, SEAS turnaround thesis will lose traction."

Mr. Chaiken said the company's recently guidance reduction for 2016 came too late. He said he sees 18-per-cent potential downside in the stock based on increased competition and a lack of pricing power, both of which were not reflected in the guidance, as well as lower-than-expected cost savings.

"New management has taken many positive steps toward brand rehabilitations and cost savings; however, we do not believe longer-term initiatives will have a meaningful impact on 2016/2017 results," he said. "Given the number of positive headlines around SEAS, investors may be looking for an inflection point in 2016; however, we believe expectations do not properly factor the significant headwinds affecting its core market (Florida) and limited pricing power. Over time, we believe the brand rehabilitation strategy should be a net benefit to SEAS, but it will have to weather the storm over the next 12 to 24 months before the transformation takes hold.

"Although we have lapped a number of negative catalysts, we believe the SEAS turnaround may take longer than expected and faces significant headwinds over the next 12 to 24 months, including 1) increased competition from Disney and Universal, 2) limited pricing power, 3) difficulty obtaining cost-cutting goals and 4) extended valuation. In our view, consensus is not accurately reflecting the potential risks."

He dropped his price target to $15 (U.S.) from $24. Consensus is $20.55.

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In other analyst actions:

Absolute Software Corp. (ABT-T) was downgraded to "market perform" from "buy" at Cormark Securities by equity analyst Richard Tse. The 12-month target price is $7.50 (Canadian) per share.

Acadian Timber Corp. (ADN-T) was downgraded to "neutral" from "outperform" at Credit Suisse by equity analyst Andrew Kuske. The target price is $20 (Canadian) per share.

Arsenal Energy Inc. (AEI-T) was downgraded to "sell" from "hold" at Paradigm Capital by equity analyst Ian Macqueen. The 12-month target price is 75 cents (Canadian) per share.

Credit Acceptance Corp. (CACC-Q) was downgraded to "underperform" from "neutral" at Macquarie by equity analyst Vincent Caintic. The 12-month target price is $150 (U.S.) per share.

Discover Financial Services (DFS-N) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst Vincent Caintic. The 12-month target price is $59 (U.S.) per share.

Energen Corp. (EGN-N) was raised to "positive" from "neutral" at Susquehanna by equity analyst Biju Perincheril. The 12-month target price is $50 (U.S.) per share.

EOG Resources Inc. (EOG-N) was downgraded to "neutral" from "positive" at Susquehanna by equity analyst Biju Perincheril. The 12-month target price is $91 (U.S.) per share.

Fidelity National Information Services Inc. (FIS-N) was raised to "buy" from "neutral" at Sterne Agee CRT by equity analyst Moshe Katri. The 12-month target price is $85 (U.S.) per share.

Jazz Pharmaceuticals PLC (JAZZ-Q) was raised to "buy" from "neutral" at Mizuho Securities USA by equity analyst Irina Koffler. The 12-month target price is $193 (U.S.) per share.

Office Depot Inc. (ODP-N) was downgraded to "sell" from "neutral" at UBS by equity analyst Michael Lasser. The 12-month target price is $4 (U.S.) per share. It was downgraded to "hold" from "buy" at Jefferies by equity analyst Daniel Binder with a 12-month target price of $5.25 per share.

Ross Stores Inc. (ROST-Q) was downgraded to "underweight" from "neutral" at Piper Jaffray by equity analyst Neely Tamminga. The 12-month target price is $55 (U.S.) per share.

Staples Inc. (SPLS-Q) was downgraded to "hold" from "buy" at Jefferies by equity analyst Daniel Binder. The 12-month target price is $9 (U.S.) per share.

With files from Bloomberg News