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Wednesday’s analyst upgrades and downgrades

Workers stack lead bars at the Wanyang smelting facility, a client of Silvercorp Metals Inc., in Jiyuan, Henan Province, China, on Monday, Sept. 26, 2011. The B.C. Securities Commission is not sanctioning investor John Carnes after allegations he manipulated the mining company’s stock.

Keith Bedford/Bloomberg

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

The current environment supports a "positive backdrop" for continue momentum in the precious metals sector driven by "by an extension of positive impetus since the beginning of the year," according to Raymond James analyst Chris Thompson.

"Whilst our long-term outlook for precious metals remains a constructive one, we believe ongoing strength in the stock market and the threat of a rate hike around the middle of 2017 are expected to weigh on prices, however," said Mr. Thompson in a research note previewing fourth-quarter earnings season for the sector. "Our thesis amongst gold and silver equities remains unchanged and we continue to recommend investors maintain exposure with core positions in top quality names, taking advantage of short-term opportunities created by valuation dislocations, potential upcoming catalysts and possible impending market re-ratings. While valuations are currently elevated since the pullback late last year, we recommend investors look for attractive entry points for our preferred names."

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Mr. Thompson raised his gold and silver price decks to $1,300 (U.S.) per ounce and $19 per ounce, respectively, from $1,250 and $18.

He downgraded his rating for both First Majestic Silver Corp. (FR-T, AG-N) and Silvercorp Metals Inc. (SVM-T) to "underperform" from "market perform" based on valuation. He also lowered his ratings based on the same rationale for MAG Silver Corp. (MAG-T, MAG-N) to "outperform" from "strong buy."

"We have increased our target prices for all companies (apart from THO) a reflection mostly of expanded valuation multiples being applied to companies primed to unlock near-term (one-year timeframe) growth (production, cash flow), unhindered by geopolitical uncertainty," he said.

Mr. Thompson's target price changes for gold producers were:

- Asanko Gold Inc. (AKG-T, outperform) to $5.25 from $4.75. The analyst consensus is $5.88, according to Thomson Reuters.

- B2Gold Corp. (BTO-T, outperform) to $5.30 from $4. Consensus is $5.14.

- Coeur Mining Inc. (CDE-N, outperform) to $12.60 (U.S.) from $11.75. Consensus is $12.53.

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- Endeavour Mining Corp. (EDV-T, outperform) to $31.25 (Canadian) from $24.50. Consensus is $29.79.

- Integra Gold Corp. (ICG-X, outperform) to $1.25 from $1.15. Consensus is $1.16.

- Mandalay Resources Corp. (MND-T, outperform) to 90 cents from 85 cents. Consensus is $1.17.

- OceanaGold Corp. (OGC-T, outperform) to $5.60 from $5. Consensus is $5.39.

- Orezone Gold Corp. (ORE-X, outperform) to 95 cents from 90 cents. Consensus is $1.30.

- Roxgold Inc. (ROG-X, outperform) to $1.95 from $1.75. Consensus is $2.17.

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- SEMAFO Inc. (SMF-T, outperform) to $5.50 from $5.25. Consensus is $6.19.

- Tahoe Resources Inc. (THO-T/TAHO-N, outperform) to $18.50 from $19. Consensus is $17.58.

- Victoria Gold Corp. (VIT-X, outperform) to 95 cents from 75 cents. Consensus is 93 cents.

For silver producers, his changes were:

- Bear Creek Mining Corp. (BCM-X, outperform) to $3.75 from $3.25. Consensus is $3.56.

- Endeavour Silver Corp. (EDR-T, market perform) to $5.50 from $4.75. Consensus is $5.78.

- First Majestic Silver Corp. (FR-T/AG-N, underperform) to $11.40 from $9. Consensus is $19.82.

- Fortuna Silver Mines Inc. (FVI-T/FSM-N, outperform) to $10.75 from $10.25. Consensus is $10.38.

- MAG Silver Corp. (MAG-T, outperform) to $23.50 from $19.50. Consensus is $22.98.

- Pan American Silver Corp. (PAAS-Q/PAAS-T, outperform) to $23 (U.S.) from $18. Consensus is $19.99.

- Silvercorp Metals Inc. (SVM-T, underperform) to $4.10 from $3.25. Consensus is $6.10.

"We continue to suggest gravitating towards names that offer strong execution records, limited geopolitical uncertainty, and underpinned by assets that can generate meaningful production growth and free cash flow at various prices," said Mr. Thompson. "We expect investor attention to be directed towards growth opportunities, although we suspect cash flow and capital allocation (specifically sustaining Capex which we expect to increase driven by reinvestment in minesite development) will continue to be a focal point.

"Our top picks include: BTO and EDV amongst the intermediate gold names; ROG amongst the junior gold names; VIT and ICG amongst the developer names; FVI and MAG amongst the silver."


Canaccord Genuity analyst Kevin Wright downgraded TIO Networks Corp. (TNC-X) in reaction to Tuesday's announcement that it has been sold to PayPal Holdings Inc. (PYPL-Q) in a $304-million all-cash deal.

Moving his rating for the Vancouver-based consumer payments processing firm's stock to "hold" from "buy," Mr. Wright said the valuation appears to be fair.

"PayPal's offer of $3.35 per share represents a 6.7-per-cent premium to TIO's closing price [on Tuesday] of $3.14," he said. "This equates to a valuation of 11.1 times our calendar 2018 estimated EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization], which is a slight premium to payment technology peers trading at 10.3 times. In our view, the valuation appears fair as it is a modest premium to our prior target multiple of 10.7 times."

Mr. Wright said the acquisition provides PayPal with "a valuable solution for the unbanked and underbanked markets along with a large network of more than 10,000 billers." He noted TIO's 14 million consumer bill pay accounts have generated over 70 million transactions.

"If the offer is approved by shareholders, the deal is expected to close in the second half of 2017," he said. "We highlight that the transaction is subject to approvals relating to TIO's money transmitter licenses acquired from Softgate. Recall that TIO's acquisition of Softgate Systems took approximately 9 months to close largely due to the approval to transfer these licenses. We suspect that PayPal has more resources at its disposal to secure the licenses in a timely manner than the smaller TIO Networks had at the time of its Softgate acquisition; nonetheless, regulatory delays could push the closing date towards the end of 2017."

Mr. Wright's target price for TIO shares moved to $3.35 from $3.25 to reflect the bid. The analyst consensus is $3.29.

"There is potential for a competing bid given TIO Networks' position as one of the largest providers of walk-in bill payment technology in North America, though timing is tight given an April shareholder vote on the transaction," he said.


RBC Dominion Securities analyst Benjamin Owens expects Enerflex Ltd. (EFX-T) to outperform the broader oil services index "on the back of accelerating demand trends for its natural gas processing and compression equipment in key end markets."

He initiated coverage of the Calgary-based energy company with an "outperform" rating.

"Rising backlog/bookings typically act as positive catalysts for the stock," said Mr. Owens. "Currently, bookings and backlog trends appear to be on the rise. After declining through most of 2015–16, EFX posted a very strong 3Q16 bookings number and has indicated that 4Q/1Q customer inquiries and bidding activity has remained solid. We think 2017 booking trends will remain supportive of EFX revenue growth over the next two years, driven primarily by a continuing infrastructure buildout in the Permian basin in the U.S. Much of the incremental drilling in the Permian is targeting the infrastructure-light Delaware basin. EFX project bookings accelerated in 2H16, with an estimated two-thirds headed for the U.S.—primarily the Permian. We expect near-term bookings trends to remain strong as Delaware activity accelerates. Additionally, we expect rising liquids-rich natural gas drilling activity across the rest of North America to help sustain and grow backlog/bookings.

"As EFX's backlog trends higher, this increases revenue visibility and backstops our growth forecasts. We expect rising bookings and backlog to act as potential positive catalysts in 2017–18."

Mr. Owens cited a trio of factors to explain his bullish view on the company: growing demand for new natural gas infrastructure in the U.S., led by the Permian basin; a global presence and levels of diversity "not seen among the majority of Canadian oilfield service companies within our coverage group" and the possibility of growing recurring revenue leading to a re-rating multiple versus its peers.

"Enerflex has targeted increasing its portion of revenues from the Service/Rental divisions to 40-per-cent-plus of total revenues over the long term," the analyst said. "These product lines represented 28 per cent of revenues in 2011, but this ratio has grown to 42 per cent in 2016 (estimated) following the Axip acquisition in 2014 and subsequent organic growth projects. We expect this ratio to remain above 40 per cent through 2018 despite growing revenues from the Engineered Systems segment. The acquired Axip footprint not only accelerated the rise in recurring revenues, it also provided a sizeable footprint for growth. More than 100,000 contract compression horsepower has been added in the last 15 months as a result of organic growth including projects in the Middle East and Latin America. These revenues are more stable and less dependent on new well drilling/investment, with the market also growing over time as the installed base of compression and related equipment grows.

"As recurring revenues grow as a percentage of the overall mix, we think investors will reward EFX with a higher multiple, as these services typically generate more stable revenue with higher margins, particularly rentals. EFX's contract compression peers (higher percentage of recurring revenues) trade at an average of a 1-times premium on a FY2 EV/EBITDA basis."

Mr. Owens set a price target of $22 for the stock. Consensus is $22.11.

"Enerflex is up 40 per cent (based on price at close on Feb. 10) since it began trading in June 2011, vs. the Canadian oilfield services index (STENRE) down 38 per cent and the OIH [VanEck Vectors Oil Services ETF] down 33 per cent over the same period," he said.

"Since re-emerging as a standalone public entity in 2011, Enerflex has shown a slow but steady approach to growing its dividend. While near-term free cash flow will likely be directed toward debt repayment, we see flexibility to potentially resume growing the dividend returning in 2018."


Tuesday's sell-off in shares of Capella Education Co. (CPLA-Q) brings an enticing opportunity for investors, said BMO Nesbitt Burns analyst Jeffrey Sibler.

The stock dropped 11.4 per cent in reaction to the Minneapolis-based company's fourth-quarter results and "mixed" guidance, leading Mr. Sibler to move his rating to "outperform" from "market perform."

"While we understand investor concern re: the limited margin expansion expected this year, we had been anticipating this given management's prior comments of expected continued investments for growth; in fact, we are actually raising our estimates today," he said. "As such, we suggest investors take advantage of [Tuesday's] weakness – a sell-off that we believe has adjusted both the stock's valuation and sell-side expectations to more reasonable levels."

He moved his target to $84 (U.S.) from $83. Consensus is $79.33.


"Solid" industry fundamentals should drive improvements in both operating leverage and margins for CAE Inc. (CAE-T, CAE-N), said Desjardins Securities analyst Benoit Poirier.

On Tuesday, the Quebec-based flight simulator and training services provider reported third-quarter 2017 adjusted earnings per share of 23 cents (26 cents before tax rate normalization), a cent below Mr. Poirier's projection and in line with the consensus estimate. Revenue of $683-million exceeded both the analyst's expectation ($669-million) and the consensus ($667-million).

"The 76-per-cent simulator utilization rate in 3Q was the highest quarterly figure since 2008, helping to bring civil EBIT margin to 17.4 per cent," said Mr. Poirier. "We believe this performance will give more confidence to the Street with regard to CAE's ability to leverage its existing network and generate higher civil margins going forward. Management also maintained a bullish outlook on the utilization rate, supported by continued passenger traffic growth and a strong level of activity on business aircraft. At this time, we expect civil EBIT margin to increase gradually from 17.4 per cent this year to 17.8 per cent in FY18."

"Civil book-to-bill ratio came at 0.9 times in 3Q, including orders for 12 FFS [full-flight simulators], which contributed to maintaining the division's backlog at $3.3-billion. Meanwhile, with the additional six FFS order announced in the quarter to date, CAE's FFS tally now stands at 39 year to date, and management is confident it can end FY17 north of 45 orders. This highlights the strength of industry fundamentals and CAE's value proposition, in our view."

Mr. Poirier also emphasized CAE's positive outlook, noting: "The company reported a solid 1.45x book-to-bill in 3Q, driven mainly by defence bookings. CAE also highlighted a current bidding pipeline north of $3-billion in defence contracts, supporting the strong outlook for its core businesses entering FY18. In the short term, management also maintained its positive view for FY17 (ending March 31), with year-over-year growth expected in all segments. However, the company reduced its outlook for Healthcare from 'double-digit' revenue growth to 'single-digit' revenue growth this year, in part due to the weak 3Q. That said, this does not change the division's potential in the long term, in our view."

Mr. Poirier maintained a "buy" rating for the stock and raised his target by a loonie to $23. Consensus is $20.57.

"We remain positive on CAE in light of the decent 3Q results, record backlog and solid underlying fundamentals," he said. "The company still trades at a sizeable discount (9.1x vs 11.0x) vs its closest defence competitors (LLL, LMT, NOC, RTN and COL) —this is unjustified, in our view, given CAE's stronger margin profile and market-leading position."

Elsewhere, TD Securities analyst Timothy James raised the stock to "buy" from "hold" and increased his target to $23 from $20.


Beacon Securities analyst Vahan Ajamian does not see any near-term catalysts for Yellow Pages Ltd. (Y-T) following its "Valentine's Day Massacre."

Shares of the Toronto-based company plummeted 25.4 per cent on Tuesday following the release of its fourth-quarter 2016 results.

"For the second quarter in a row, guidance-related factors overshadowed EBITDA which was essentially in line with our forecast," said Mr. Ajamian. "The company pointed to an unfavourable mix shift within digital, where revenue from owned and operated properties (ex. The YP website/app – gross margins of approximately 80 per cent) was slightly declining and revenue from lower margin services such as search engine marketing was growing faster than anticipated. While this was previously believed to be a longer-term trend which could be partially offset, it suddenly accelerated in the Q4/FY16 recontracting season. While the impact on consolidated revenue going forward is likely minimal, the company has in effect locked in lower margins. As a result, the company incurred a $600-million impairment charge on intangible assets – namely attributed to trademarks and noncompetition agreements (none of this charge is related to JUICE Mobile, which caused problems concurrent with the release of Q3/FY16 results).

"This mix shift is expected to meaningfully weigh on 2017 EBITDA. While management plans to address this with 'laser-like focus,' we are taking the view that it is likely a structural change. We (and clearly the Street) were quite surprised by this development."

Mr. Ajamian also expressed concern that management did not provide quantitative guidance for 2017.

"The only qualitative guidance provided was that: the customer count could grow in 2017; revenue should stabilize in 2017 with growth within reach for 2018; and that EBITDA is expected to stabilize 'in the short to mid-term post 2017' but 'not at the levels previously expected," he said.

"Given the above points, we have elected to take a hatchet to our forecasts."

Mr. Ajamian is projecting 2017 revenue of $770.2-million, down 5.8 per cent year over year, and EBITDA of $178.6-million, a decline of 24.1 per cent.

"The company seems to be saving all of its bullets for May 10," he said. "On that date we expect to see: the company's AGM; Q1/FY17 results; guidance for 2017; the results of its business strategy review; new product offerings and pricing designed to revitalize owned and operated revenue; plans regarding its cash and debt balance (can repay its $310-million in 9.25-per-cent senior secured notes at no penalty come June 1, 2017); and potential M&A approach."

Mr. Ajamian kept his "buy" rating for the stock, but he dropped his target to $16 from $26. Consensus is $25.50.

"After [Tuesday's] bloodbath, Yellow Pages' shares are trading at just 4.1 times this year's EBITDA – which we feel represents good value," he said. "The company's shares offer an 18.4-per-cent yield on our lowered 2017 free cash flow estimates (which shareholders may be able to access come June 1, 2017). Unfortunately, after putting together a string of solid quarterly results, management now finds itself having to regain the confidence of the investor community (as well as name a replacement CFO). We suspect 12 months from now current levels will have proven to be a good entry point."

Elsewhere, Canaccord Genuity analyst Aravinda Galappatthige maintained a "buy" rating with a target of $22, down from $28.

"We have cut our adjusted EBITDA estimate to $206-million in fiscal 2017 (from $224-million previously), following the cautious commentary coming from management with the Q4/17 result," he said. "In addition to the challenge of unfavourable product mix in digital (discussed in this note), considering the uncertainty around incremental investments the company is likely to announce, we are forced to take a conservative stance with our forecasts. Although Yellow has made progress in areas in like new customer acquisition and more recently succeeded in stabilising its digital audience, areas like sell through of other digital services (SEO, websites), mobile placement has been below expectations. Also, there is still considerable development that can be done to the YP platform with a view towards increasing engagement (e.g. user generated content), generating actions (e.g. booking appointments, getting a quote), etc. Finally, there is still a fair bit of work to be done to improve the perception around the Yellow brand and the value proposition to SMEs. Against that backdrop, we suspect the additional investments announced in May 2017 and beyond could be meaningful."


In other analyst actions:

Encana Corp. (ECA-N, ECA-T) was rated a new "overweight" at JPMorgan by equity analyst Gabriel Daoud Jr with a target of $16 (U.S.). The average is $14.48.

Electrovaya Inc. (EFL-T) was downgraded to "market perform" from "outperform" at FBR Capital Markets by analyst Carter Driscoll with a target of $2.25 (down from $3.50). The average is $2.25.

NAPEC Inc. (NPC-T) was rated a new "buy" at Cormark Securities by analyst Maggie Macdougall with a target of $1.35 per share. The average is $1.39.

ShawCor Ltd (SCL-T) was rated a new "sector perform" at RBC Capital by equity analyst Benjamin Owens with a target of $40. The average is $41.64.

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