Wednesday's analyst upgrades and downgrades

Share

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

The fundamentals for forest products stocks remain strong despite uncertainty weighing on them, according to Raymond James analyst Daryl Swetlishoff.

In a research note reviewing the fourth quarter for both building materials and pulp and paper companies, Mr. Swetlishoff called the results "humdrum," however he believes pending macro trends are "more interesting."

"We came away from the seventh annual Raymond James Forest Forum held on Jan. 12 with increased confidence in building materials fundamentals," the analyst said. "Despite this, much of our coverage list continues to trade near 6 month lows – reflecting market uncertainty related to the lumber trade file and capacity expansions in structural panels and pulp. As such, we see this as an opportune time for investors to dig into the issues and selectively add to positions."

In the report, Mr. Swetlishoff reduced his SPF (spruce-pine-fur] benchmark price estimates for 2017 and 2018 to $350 (U.S.) per thousand board feet (mfbm) and $385 per mfbm, respectively, from $365 and $400. He maintained his SYP (southern yellow pine) estimates of $440 per mfbm and $460 per mfbm, respectively.

"Given our incrementally bullish commodity outlook the result is target price inflation for lumber producers with an average 49-per-cent estimated return," he said. "While 2017 estimates go up with a higher assumed pulp price, 2018 estimates are largely flat resulting in largely unchanged pulp & paper targets (average 17-per-cent return)."

He added: "Looking past 4Q16 earnings we identify two important trends which we expect to accelerate following the imposition of U.S. export taxes on lumber (expected Apr. 24). We highlight that both have potential to drive earnings and share price valuations. First, Asian markets continue to grow, consuming increasing volumes of imported wood and pulp. While Canadian lumber producers reduced offshore shipments in 2016 we expect this trend to reverse in 2017 with (mainly Chinese) shipments offsetting both the impacts of U.S. lumber export taxes and global pulp capacity expansions. Second, with plentiful timber supply, U.S. South lumber segment profitability is running roughly double that of the BC interior region before any export taxes are applied. We see this fact coupled with de-levering balance sheets as leading to resumption of Canadian investments in the region with a corresponding lift in investor interest and trading multiples."

He made multiple target price changes to sector stocks. Those were:

• Acadian Timber Corp. (ADN-T, strong buy) to $23 from $22. Consensus is $19.60.
• Canfor Corp. (CFP-T, outperform) to $19 from $18. Consensus is $19.25.
• Conifex Timber Inc. (CFF-T, outperform) to $6 from $4. Consensus is $3.95.
• Interfor Corp. (IFP-T, strong buy) to $20 from $19. Consensus is $17.68.
• Norbord Inc. (OSB-T/OSB-N, strong buy) to $47 from $46. Consensus is $40.05.
• West Fraser Timber Co. Ltd. (WFT-T, outperform) to $55 from $51. Consensus is $54.29.
• Canfor Pulp Products Inc. (CFX-T, outperform) to$14.25 from $14. Consensus is $12.70.
• Fortress Paper Ltd. (FTP-T, outperform) to $9 from $8.50. Consensus is $8.50.
• Mercer International Inc. (MERC-Q/MERC.U-T, outperform) to $13 (U.S.) from $12.50. Consensus is $12.58.

"While weather issues and downtime combine to produce softer quarter-over-quarter numbers, for the most part we are generally in line with 4Q16 consensus," said Mr. Swetlishoff. "Our estimates do show stronger year-over-year results; however, despite demonstrably improved fundamentals, uncertainties associated with US market access and potential capacity expansions continue to weigh on forest stocks. We acknowledge near term news headline risk associated with the lumber dispute however, we expect stocks to respond positively to reduced uncertainty and higher pricing over our investment horizon. Hence we are constructive on building materials producers and highlight Strong Buy rated Interfor, Norbord and Acadian, as they offer leverage to improving markets with minimal exposure to trade issues. We continue to see solid value in pulp leveraged names, rating pulp producers Outperform across the board."

=====

BMO Nesbitt Burns analyst Brian Quast raised his rating for Richmont Mines Inc. (RIC-T, RIC-N) in reaction to its 2016 mineral reserves and resources update.

On Tuesday, the Rouyn-Noranda, Que.-based company announced reserves for its Island Gold mine in Northern Ontario increased to 752,000 ounces from 561,000 ounces in December of 2015, a rise of 34 per cent. Its grade at the venue rose to 9.17 grams per ton from 8.26 g/t.

"At Island Gold, 83 kilometres of exploration drilling was completed in 2016, identifying three new inferred resource blocks that contributed to a 30-per-cent increase in inferred ounces versus 2015," said Mr. Quast. "The bulk of the reserve increase was attributed to converting resources from the C Zone (which is part of the ongoing PEA) to reserves. Reserve grades were positively affected by the increased capping grade (increased to 225 g/t in the C zone) and the delineation of high-grade resource blocks. RIC assumes a $1,500 (Canadian) gold price for the 2016 reserve estimate versus $1,300 in 2015.

"In 2017, delineation drilling will focus on three main objectives: continue to convert resources to reserves located within the PEA area, primarily in the fourth mining horizon; further testing down plunge of the C Zone; and, further testing of the eastern and lateral extension area."

Mr. Quast said the update "positively affected" his valuation for Richmond by increasing the grade and extending the mine life at Island Gold.

Accordingly, he upgraded the stock to "market perform" from "underperform" and increased his target price to $11.50 from $8.75. The analyst consensus price target is $13.31, according to Thomson Reuters.

"The Island Gold mine has been performing well for RIC as grades continue to reconcile positively versus the block model," said Mr. Quast. "The company is undergoing an aggressive drill program that should help bolster reserves/resources."

Elsewhere, CIBC World Markets analyst Jeff Killeen raised his rating to "outperform" from "neutral" with a target of $15.50, up a loonie.

Desjardins Securities analyst Michael Parkin raised his target to $14.25 from $14 with a "buy" rating (unchanged).

"We continue to view Richmont favourably and continue to see good upside in the share price," said Mr. Parkin. "We should get 2017 guidance from Richmont next week; we see relatively low risk of this missing Street expectations given consensus is at 108,000 ounces versus our estimate of 110,900 ounces. We estimate Island represents 79 per cent of the total gold production; we base this on an assumed milling rate of 898 tonnes per day versus the 4Q16 average of 903 tpd at a grade of 8.7g/ t, 3 per cent below the new reserve grade. We look forward to the release of the updated PEA on Island in 2Q17, which should give colour on the potential expansion from 900 tpd today to 1,100 tpd by 2019."

====

Desjardins Securities analyst Michael Parkin lowered his target price for shares of Detour Gold Corp. (DGC-T) based on its fourth quarter financial results and an operational update for its exploration program.

On Monday, Detour said it is set to delay the development of its West Detour pit in its Northern Ontario mine due to a delay in the approval process. It now does not expect production before 2021.

"We continue to view Detour Lake as a cornerstone asset that any major would likely want to own and a potential foundation for Detour Gold to build from," said Mr. Parkin. "The delay of the West Detour pit is unfortunate, in our view, as we very much liked the operational flexibility it would have added in the medium term. The company is looking to potentially develop an alternative satellite pit called the North pit, but a permit process still has to be determined for it as well, which could require a federal review vs the generally quicker provincial process."

He added: "A major change to our model of Detour Lake is assessing what the future mine plan may look like after the company disclosed that it will have to delay the development of the West Detour pit and revert to a mine plan more similar to that released in 2014 vs the 2016 mine plan. The company expects to release its updated mine plan in March. From the conference call, we know to expect that the total mining rate would ramp to 120,000 tonnes per annum (ore plus waste) and maintain the mill at 23Mt per annum or 63,000 tpd. This implies a strip ratio of 4.2:1. We also know that the ability to proceed with the fines project is not possible in the near term as the low-grade stockpile (currently at 7,,000 tonnes at 0.65g/t at year-end 2016) is critical over the coming years to allow the mill to remain full. Based on our revised estimates, we see gold production peaking in 2019 and slipping modestly in 2020 and 2021."

The company reported gold production of 143,512 ounces in the fourth quarter, bringing total gold production to 537,765 ounces for the year. That result met its revised guidance of 525,000 to 545,000 ounces.

"The mining rate in 4Q16 averaged 227,000 tonnes per day, the lowest quarterly average of 2016, but this was impacted by poor shovel availability in November," the analyst said. "Ore mined was high sequentially thanks to a lower strip ratio. Gold production came in about 1% higher than expected thanks to a slightly higher mill throughput and grade."

Mr. Parkin's target for the stock declined to $21.50, down from $24.50. Consensus is $26.43.

"Overall, we continue to like the name and are maintaining our Buy rating, but due to what we view to be a higher-risk operational plan going forward, we are lowering our target," he said. "We look forward to gaining more information on the new mine plan in March."

=====

Genworth MI Canada Inc. (MIC-T) is likely to see earnings growth now that Alberta has stabilized, said CIBC World Markets analyst Paul Holden.

In a preview of the company's fourth-quarter financial results, scheduled to be released on Feb. 7 after markets close, Mr. Holden said he sees valuation upside for the Oakville, Ont.-based insurance company, noting "the stock has recovered nicely from recent low."

"Although we expect losses in Alberta to continue to climb higher in Q4/16 and Q1/17, we are not expecting the losses to increase at a worrisome rate," said Mr. Holden. "The delinquency rate in Alberta has moved up to 44 basis points, but has not spiked to the levels we had originally feared (50-60 bps). Meanwhile, the unemployment rate, although still elevated at 8.5 per cent, has also come down over the fourth quarter. Housing demand could also be turning a corner with total Q4 resale volumes registering their first year-over-year increase in two years. We assume a loss ratio of 28 per cent for the fourth quarter, up modestly from last quarter, and reflective of a moderating loss trend in Alberta."

With a stabilization in employment and housing in Alberta, Mr. Holden reduced his claims loss estimates for both the quarter and 2017. As well, his quarterly operating earnings per share projection rose to 98 cents from 95 cents, two cents higher than the consensus. His 2017 estimate jumped to $4.24 from $4.03, well above the Street's expectation of $3.90, which he called "too low."

Mr. Holden said he expects a rise in premium rates going forward, noting: "Genworth announced its new pricing grid for transactional insurance this January with new rates effective March 17. We estimate that the weighted average rate increase is 22 per cent, greater than the company's original guidance for 10 per cent to 15 per cent and our original assumption for 15 per cent. The price increase should provide close to a full offset to the expected decline in transactional insurance volumes (management expects transactional volumes to decline by 15 per cent to 25 per cent in 2017). We are now expecting transactional premiums written to be down by 2 per cent in 2017 (7 per cent previously). For portfolio insurance, the company expects volumes to be down 25 per cent -30 per cent but an expected rate increase of 2 times in 2017 should leave premiums written unchanged. We are assuming a 30-per-cent reduction in volumes of portfolio insurance for 2017 (unchanged) and a 2-times increase in the premium rate (up 50 per cent prior)."

With an "outperformer" rating, Mr. Holden's target rose to $37 from $35. Consensus is $35.07.

"Genworth is currently trading at 0.84 times price to book value, well off its low of 0.65 times, which it touched a year ago, and representing a modest discount to its historical average of 0.93 times," he said. "Looking at other financial comparables and their forward ROE [return on equity] expectations, Genworth trades below the regression line, which would plot its consensus 2017 estimated ROE of 9.5 per cent at roughly 1.15 times BV. Though it is not likely that the stock will trade at 1.0 times P/BV or above due to market concerns over housing risk, we do think it is possible for the stock to trade at 0.90-0.95 times P/BV."

=====

Apple Inc. (AAPL-Q) has reached "a new peak," according to BMO Nesbitt Burns analyst Tim Long.

On Tuesday after markets closed, the U.S. tech giant reported quarterly revenue and earnings per share of $78.4-billion (U.S.) and $3.36, respectively, versus Mr. Long's projections of $78.5-billion and $3.27 and the consensus expectations of $77.3-billion and $3.22.

"AAPL reported a mostly solid quarter, with above-consensus revenue and EPS above our/Street estimates," said Mr. Long. "March guidance is mixed, with a lower revenue outlook but in-line gross margins and better opex compared with our prior model. We believe weaker revenue guidance is primarily attributable to lower iPhone units. However, at 52 million units for the March quarter, our updated model still represents slight year-over-year growth. We believe the stock is quickly shifting to being driven by sentiment around the new iPhone refresh, expected in September 2017, though few facts are available at this stage.

"Services continue to impress, thanks to a number of new offerings and a growing installed base of new and used devices. Like-for-like revenues were up 21 per cent in the quarter, and management expects Services revenue to double over the next four years. The implied rate of growth is almost twice as high as what we had been assuming."

Based on the results, Mr. Long lowered his 2017 EPS estimate to $8.99 from $9.05, while he increased his 2018 projection to $10.15 from $9.89.

With an "outperform" rating (unchanged), he raised his target price for the stock to $142 from $135. The analyst average target price is $140.29, according to Bloomberg.

"We believe long-term revenue growth will be driven by iPhone upgrades off a growing installed base and a larger used iPhone base, as well as from switchers from mass-market Android phones," he said. "Additionally, we expect 9-10-per-cent Services revenue growth, supported by both new and used devices. "

Elsewhere, Canaccord Genuity analyst T. Michael Walkley raised his target to $142 from $140 with a "buy" rating.

Mr. Walkley said: "Given the Galaxy Note 7 issues and strong demand for the iPhone 7 Plus models, we believe Apple will continue extending its leading market share of the premium tier smartphone market installed base. We believe these trends enabled the iPhone installed base to exceed 570 million exiting calendar 2016, and this impressive installed base should drive strong future iPhone replacement sales and earnings, as well as cash flow generation to fund strong long-term capital returns. We anticipate a stronger upgrade cycle in fiscal 2018 with the 10-year anniversary iPhone 8 likely released in September 2017. Therefore, we maintain our bullish fiscal 2018 iPhone estimates given our belief a new form factor will drive very strong upgrade sales within the large and loyal iPhone consumer base."

Citi's Jim Suva bumped his target to $140 from $130 with a "buy" rating, saying: "This earnings report provided both short term and long term catalysts for the stock. Short term iPhone unit sales and average selling prices (ASPs) were stronger than expected with channel inventory on the low side of normal with margins and services surprising to the upside. Long term we see Applewood or Apple's push into India and other adjacent opportunities …. On Citi's estimates, Apple currently trades at 13-14 times (or 12 times excluding net cash) which is a 20-per-cent discount to the market. Our target price is based on a 12 times FY18 EPS (excluding cash) and we see upside not only from the upcoming iPhone 8 Supercycle in September 2017 but longer term Applewood and its Services business (which Apple expects to double in four years though we are not currently modeling to this)."

=====

In other analyst actions:

InterRent Real Estate Investment Trust (IIP.UN-T) was raised to "strong buy" from "buy" at Industrial Alliance by analyst Brad Sturges. His target remains $8.50 per share, while the analyst average target is $8.22, according to Bloomberg.

Wajax Corp. (WJX-T) was downgraded to "sector perform" from "sector outperform" by Scotia analyst Michael Doumet with a target of $24, up from $20. The average is $22.20.

Under Armour Inc. (UAA-N) was downgraded to "underperform" from "neutral" at Credit Suisse by analyst Christian Buss with a target of $17 (U.S.) per share, down from $29. The average is $21.48. It was also downgraded to "market perform" from "outperform" at FBR Capital Markets by Susan Anderson with a target of $20 (down from $39).