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Wednesday's analyst upgrades and downgrades

Toronto-Dominion Bank (TD) logos are seen outside of a branch in Ottawa, Ontario, Canada, May 26, 2016.

© Chris Wattie / Reuters

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

Desjardins Securities analyst Kristopher Zack said he would buy Crescent Point Energy Corp. (CPG-T, CPG-N) in reaction to the recent sell-off, believing the risk of further acquisitions "has been more than discounted" into its current multiple.

On Tuesday, the company announced the closure of its previously announce bought-deal financing, in which they issued 33.7 million common shares at a price of $19.30 each for a total net proceeds of approximately $600-million.

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Mr. Zack said the equity will help reduce the downside balance sheet risk if oil prices do not improve.

"Our 2017 [cash flow per share] forecast decreases by 1 per cent as the higher share count is largely offset by lower interest charges and higher production," he said. "Based on current strip prices, our yearend 2017 [debt to cash flow] improves to 2.2 times, increasing to 2.8 times at $45 (U.S.) per barrel WTI, with the equity helping bridge the potential funding gap at lower oil prices, particularly as the hedge book begins to roll off in 2H17. At a high level, we also expect CPG to remain onside with its current debt covenants down to $42/bbl WTI through the end of 2018, and that is before factoring in potential cuts to capex that we would expect to emerge in a persistently soft oil price environment."

He added the potential for for acquisitions could impact the stock's near-term performance, noting: "While market concerns about additional tuck-in acquisitions seems to have been elevated with the recent equity issue, we believe the broad strategy has not changed materially and we expect the company will consider asset opportunities within core areas through the fall. While we believe the concerns have clearly been registered in the stock price at current levels, the market could be in a holding pattern in the very near term as M&A activity evolves through the fall."

Mr. Zack maintained a "buy" rating for the stock and lowered his 12-month target price to $24 from $26. The analyst consensus price target is $26.07, according to Thomson Reuters.

"We highlight that the stock is now trading at 7.0 times estimated 2017 debt-adjusted cash flow at the current strip, which is at the bottom end of the range compared with the company's oil-weighted dividend-paying peers," he said.

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BMO Nesbitt Burns analyst Bert Powell raised his target price for stock of WSP Global Inc. (WSP-T) after attending the company's analyst and investor day in Montreal on Tuesday.

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Reaffirming its outlook for 2016 as well as its strategic plan for 2018, Mr. Powell said the event highlighted the possibility for infrastructure opportunities. He said management "highlighted the strong alignment between expected infrastructure spending and WSP's core capabilities."

"WSP is looking to pursue more infrastructure projects in the coming years," he said. "Management believes that its core competencies in Transportation, Buildings, Infrastructure, and Environment position it to be a beneficiary of the expected global spending to catch up on the infrastructure deficit. Management highlighted infrastructure spending in Canada ($120-billion infrastructure spending program), U.S. ($305-billion U.S. FAST Act), Sweden (SEK 522 billion between 2014 and 2025 for infrastructure projects), U.K. (Infrastructure Plans to spend more than £100 billion by 2021), and Australia (greater-than A$50-billion infrastructure investments) as examples of investments. These are impressive large numbers, but we feel more granularity is needed to identify where the money will go. For example, Phase I of the infrastructure spend by the Federal government in Canada has a large water component. This can be a low margin business and may not be as big a fee opportunity as the headline number suggests."

He said the company has not felt the impact of Brexit yet, having secured near-term backlog. However, management did not rule out being negatively affected going forward.

"In the near term, activity in the U.S., U.K., Nordics, and Australia remain solid, while Asia remains flat due to a slowdown in China," said Mr. Powell. "Also, WSP expects the low oil & gas price environment to continue to impact activity in Canada and the Middle East. WSP will be looking to focus more on integration and optimization in those regions to manage costs."

Mr. Powell said WSP Canada Inc.'s new president and chief executive officer, Hugo Blasutta, is "more operationally focused." Mr. Blasutta was appointed to the position in late June.

"We believe he will bring a more operational-oriented management to the Canadian business and is focusing on process and project delivery improvement," the analyst said. "We would expect flat growth in 2017 in Canada, but better margins as the organization focuses on these process improvements and IT systems implementation.

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"Direct costs savings we noted on redundant real estate costs. The office footprint has become suboptimal given the acquisitions and WSP plans to consolidate space. Specifically, Calgary was highlighted. In Calgary, Mr. Blasutta expects to lower lease costs from $10-million to $4-million per year by early 2018. P3s [public private partnerships] will figure in WSP's future. WSP currently generates 15-per-cent of its net revenues from P3 projects and aims to increase it up to a third in upcoming years. P3s have low or zero margin upfront pursuit costs that need to have a high win-rate to absorb. WSP is comfortable keeping P3s to a third of the business and believes that with its resume it is increasingly being sought out as a partner by the best teams, thus increasing its chances of having a high win-rate."

In reaction to the meeting, Mr. Powell raised his 2016 and 2017 adjusted earnings per share projections to $2.25 and $2.60, respectively, from $2.30 and $2.70.

He maintained a "market perform" rating for the stock, while his target rose to $43 from $41.50. Consensus is $46.42.

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DealNet Capital Corp. (DLS-X) is an emerging leader in the consumer lending space, according to Canaccord Genuity analyst Scott Chan.

He initiated coverage of the Toronto-based specialty finance company with a "buy" rating.

"Dealnet is an emerging FinTech consumer lending company with considerable expertise and technology capabilities in its engagement platform which connects equipment manufacturers, dealers and customers who require financing," said Mr. Chan. "The company targets small and mid-sized dealers of HVAC (heating, ventilation, and air conditioning) equipment in a highly fragmented and underserved market. In addition, Dealnet purchased EcoHome Financial, which increased its distribution capabilities towards medium-sized equipment dealers and diversified its loan book towards home-improvement finance solutions (e.g., for doors, windows, waters heaters, roofing). For Q2/16, DLS reached a significant milestone with over $100-million in consumer finance receivables (up 21 per cent quarter over quarter). Currently, Dealnet has [greater-than] 300 dealers and plans to double that number by year-end. Continued traction in growing DLS's dealer network and adding manufacturers is the key for loan originations and future revenue growth. As Dealnet improves scale through its consumer-lending platform, we believe the firm has the capabilities and is on track to become a dominant player in the consumer financing market."

In justifying his rating, Mr. Chan said: "We rate DLS a buy for the following six reasons: (1) substantial direct addressable market, with HVAC market of greater-than $7.5-billion and home-improvement lending of greater-than $10.0-billion; (2) highly scalable consumer-lending platform with expected revenue growth of greater-than 100 per cent% in each of next two years, supported by expansion of the dealer network; (3) lower-cost funding facilities in place (i.e., securitization) that support our origination forecasts; (4) compelling lending economics, with net spread margin expectations of greater-than 4 per cent, with long duration portfolio (7.5 years) providing recurring cash flow streams; (5) focus on homeowners who are prime consumers (i.e., credit score of greater-than 700) with minimal provisions to date; and (6) experienced management team, with CEO Mike Hilmer (a 15-plus year veteran in the engagement industry) and Dr. Steven Small (co-founder of Newcourt Credit Group and Element Financial; Executive Chairman of Dealnet)."

He set a price target of 75 cents for the stock. Consensus is 82 cents.

Mr. Chan said: "We believe a premium valuation multiple is justified by: (1) rapid growth potential, supported by consumer lending; (2) high-quality portfolio mix for prime consumers (i.e., homeowners) with expectations of limited credit losses (net PCL rate assumption of 0.25 per cent); (3) funding in place to support origination growth with attractive net margin spread of greater-than 4 per cent; (4) greater-than 20-per-cent ROE business model characteristics; and (5) further potential accretive acquisition opportunities supported by an experienced and growth-oriented management team."

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Dundee Securities analyst Steve Theriault initiated coverage of the Canadian financial services sector by setting the following ratings and targets:

- Bank of Nova Scotia (BNS-T) with a "buy" rating and $78 target. The average is $72.91, according to Bloomberg.

- Toronto-Dominion Bank (TD-T) with a "buy" rating and $65 target. The average is $61.55.

- Sun Life Financial Inc. (SLF-T) with a "buy" rating and $48 target. The average is $45.66.

- Manulife Financial Corp. (MFC-T) with a "buy" rating and $22 target. The average is $20.60.

- Canadian Imperial Bank of Commerce (CM-T) with a "buy" rating and $123 target. The average is $107.57.

- National Bank of Canada (NA-T) with a "neutral" rating and $51 target. The average is $49.08.

- Bank of Montreal (BMO-T) with a "neutral" rating and $91 target. The average is $87.36.

- Royal Bank of Canada (RY-T) with a "neutral" rating and $87 target. The average is $84.10.

- Great-West Lifeco Inc. (GWO-T) with a "neutral" rating and $32 target. The average is $33.89.

Mr. Theriault installed CIBC as his top bank pick and MFC as his top life insurer.

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Amid mounting public scrutiny and tough U.S. Senate hearings over its fake account scandal, Wells Fargo & Co. (WFC-N) was downgraded to "neutral" from "overweight" by J.P. Morgan analyst Vivek Juneja.

Mr. Juneja predicted bank will be forced to "spend a lot more" on litigation as investigators look into past potential violations.

"We expect these will result in additional investigations which would likely pressure expenses and revenues and continued media scrutiny with an election year — there is significant uncertainty about how much some issues will cost and how long they will take," he said.

Mr. Juneja added: "This will likely result in a shift to greater earnings growth from areas such as investment banking which carry lower multiple. Impact on earnings is hard to determine because of uncertainty about likely total expenses - no comparable lawsuit as this matter is very different from the mortgage crisis."

Citing a "material institutional hit," he reduced his target to $48 (U.S.) from $53.50. The average is $51.90.

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CIBC World Markets analyst Paul Holden adjusted his financial estimates for TMX Group Ltd. (X-T) in reaction to its cost reduction measures.

On Tuesday after the market close, the stock exchange operator announced it intends to eliminate approximately 115 positions, 95 full-time staff and 20 consultants and contractors, resulting in a drop in compensation of benefits of $8-million to $10-million by the end of 2016.

Mr. Holden's 2016 and 2017 EBITDA projections increased to $370.5-million and $398.2-million, respectively, from $369.5-million and $385.7-million. His operating EPS estimates rose to $4.26 and $4.79 from $4.25 and $4.62.

Maintaining a "sector performer" rating for the stock, he raised his target for the stock to $66 from $63. The average is $62.50.

"TMX is in the process of transforming itself into a more focused and a more efficient organization under the leadership of Lou Eccleston," he said. "If it is successful this could result in a more sustainable growth outlook, and better valuation multiple for the stock. Matching Q2/16 revenue will be very market dependant.

"Nasdaq is entering Canada with the purchase of Chi-X, representing new competition in listings and derivatives. TMX has certain competitive advantages as the incumbent, but it will need to respond to the threat to maintain it monopoly like position in those businesses. We value TMX at 11 times 2017 estimated EBITDA, roughly in line with the historical average since the close of the Maple transaction in September 2012."

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In other analyst actions:

Longbow Research analyst Alton Stump initiated coverage Starbucks Corp. (SBUX-Q) with a "buy" rating, expecting same-store sales to rebound over the next 3-6 months. They set a target of $71. The average is $66.57.

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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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