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Marijuana grows at a MedReleaf facility in Markham, Ont., in January, 2016.

Nathan Denette/The Canadian Press

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

Though he does not expect Pembina Pipeline Corp. (PPL-T) to have a "flashy" 2018, Industrial Alliance Securities analyst Elias Foscolos thinks it will produce "steady" results and continue to grow both its EBITDA and adjusted funds from operations (AFFO) through 2019.

Accordingly, in a research note released Wednesday previewing fourth-quarter 2017 earnings season for the Canadian energy infrastructure and midstream sector, Mr. Foscolos upgraded his rating for the company's stock to "strong buy" from "buy."

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"We believe the beginning of 2018 will be centered around the [Veresen Inc.] integration, while the second half of 2018 will be focused on assessing the $20-billion of unsecured growth projects that PPL has in its repertoire," he said.

When Pembina reports its quarterly results on Feb. 22 after market close, Mr. Foscolos is expecting EBITDA of $550-million and 89 cents in AFFO, both of which are below the consensus projections of $562-million and $1.02.

"Pembina will continue to benefit from the rising NGL frac prices," he said. "We think the next major catalyst for PPL could be the approval from the U.S. Federal Energy Regulatory Commission regarding the US$10-billion Jordan Cove project, which could happen near the end of 2018. If the project is approved, this could lead PPL to a potential investment decision in 2019 and an in-service date of 2024."

His target for the stock fell by a loonie to $50, which is below the $51.19 the average on the Street.

At the same time, Mr. Foscolos also lowered his target prices for the five other companies in his coverage universe.

"Since the start of the year, the IM sector's stock prices have decline by 10 per cent, and as a result, sector coverage yield has now increased to 5.9 per cent," he said. "Despite the broad decrease in target prices, we believe the sector remains an attractive and compelling investment opportunity.

"We believe there are four major short-term factors influencing IM sector share performance, with two of these factors acting as headwinds and the other two factors providing tailwinds. The two headwind factors are: rising interest rates are making fixed income securities more attractive than in the past, and increased volatility as symbolized by last week's broad decline in equity prices. However, there are positive undertones for the IM space heading into Q4/17 results which include higher oil prices, the widening differentials in crude oil between Canadian crude oil price and West Texas Intermediate ('WTI') prices, providing additional cash arbitrage revenue for IM companies, who have wholesale/marketing divisions with higher NGL frac spreads, which will benefit IM companies with frac spread exposure."

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His changes are:

Gibson Energy Inc. (GEI-T, "buy") to $19 from $21. Average: $19.68.

Inter Pipeline Ltd. (IPL-T, "strong buy") to $31 from $33. Average: $29.94.

Keyera Corp. (KEY-T, "strong buy") to $40 from $42. Average: $41.91.

Superior Plus Corp. (SPB-T, "buy") to $13.50 from $14. Average: $13.95.

Tidewater Midstream & Infrastructure Ltd. (TWM-T, "strong buy") to $1.90 from $2.15. Average: $2.21.

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MedReleaf Corp.(LEAF-T) is "is continuing to check all the boxes" to maintain its leading position in the marijuana industry, said Canaccord Genuity analyst Matt Bottomley, citing both the introduction of its first recreation brand on Feb. 9 and the bolstering of its "already leading" medical product offerings.

On Tuesday, the Markham, Ont.-based company reported third-quarter revenue of $11.4-million (from the sale of 1,263 kilograms of cannabis products), meeting Mr. Bottomley's projection of $11.5-million (1,382 kilograms), and representing a sequential increase of 15.6 per cent.

"During the quarter, the company continued to see growth in its extract/oil products, which now account for 21 per cent of the company's top line," said Mr. Bottomley. "We reiterate our view that as extract sales continue to outpace dried bud, MedReleaf's margins should continue to see upward momentum."

MedReleaf reported operating costs for the period of $8.9-million, exceeding the analyst's $7.6-million projection and stemming from the expansion of its Bradford facility and business development, patient support and brand development expenses.

Based on that gap, adjusted earnings before interest, taxes, depreciation and amortization came in at a loss of $200,000, below Mr. Bottomley's estimate of a $1-million profit. Earnings per share were a 5-cent loss, which was 4 cents below the analyst's expectation.

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"Over the past week, MedReleaf made a number of announcements regarding its product offerings, including the launch of an oil-based softgel capsule and the introduction of its first recreational focused brand," he said. "The company received Health Canada's approval for its colour-coded oil-based softgel capsules. The company believes this will cater to medical patients that prefer more traditional administration methods (as opposed to smoking bud or applying liquid oil), while allowing them to visually differentiate based on indication. We believe this further adds to MedReleaf's already leading product offerings in the industry today.

"Late last week, MedReleaf unveiled the first of what is expected to be several recreational brands. Its first initiative is the brand 'San Rafael '71', which the company said was inspired by classic cannabis culture. As we await final legislation and regulations to be determined (including advertising), the brand will kick-off through a partnership with Amsterdam Brewing, which has launched a '4:20 Pale Ale.' While the product does not contain any cannabis, we believe MedReleaf has taken a proactive and creative step towards building a recreational brand identity and insignia in advance of the rec market coming on line this summer."

Mr. Bottomley updated his financial model for the company to incorporate its Bradford expansion, increases to his medical and recreational market share expectations as well as a "heightened" international contribution.

Though his 2018 and 2019 revenue, EBITDA and EPS projections declined slightly, he raised his 2020 projections to $357,355, $116,355 and 83 cents, respectively, from $317,355, $104,355 and 72 cents.

With the updates, Mr. Bottomley increased his target price for MedReleaf shares to $30 from $21.50. The analyst average target is $27.64, according to Thomson Reuters data.

"LEAF currently trades at 15.3 times its two-year forward enterprise value-to-EBITDA, versus its peers at 17.0 times," he said. "As one of the leading Canadian LPs in terms of market share, product offerings, and built capacity, we would remain buyers at current levels."

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Yangarra Resources Ltd. (YGR-T) exhibits "top of the class" reserve metrics, said Raymond James analyst Jeremy McCrea.

He raised his rating for the Calgary-based energy company to "strong buy" from "outperform" following Tuesday's release of its 2017 year-end oil and gas reserves.

"For investors who still 'doubt' the Cardium, the reserve report should finally give credibility to what we have been observing in GeoSCOUT and quarterly reports over this past year," said Mr. McCrea. "Not only did YGR's PDP NAV [proved Developed producing net asset value] per share increase 46 per cent year over year, the return on capital and profitability appears to rank among the best in the sector. Although YGR was one of the best performing names in 2017 ( up 158 per cent; XEG: down 13 per cent) year-to-date, however, the overall pessimism on Canadian energy has led to a pull-back (down 14 per cent YTD; XEG down 12 per cent). With 91 per cent of revenue expected to come from light oil/NGLs for 2018, the current differentials aren't affecting YGR nearly as much as other operators and as such, we think the pull-back is one of few opportunities investors might see this year."

Mr. McCrea has a $6 target for Yangarra shares. The average target is $6.59.

Elsewhere, Industrial Alliance Securities analyst Michael Charlton increased his target to $7 from $6.25 with a "buy" rating (unchanged).

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Mr. Charlton said: "While we were expecting substantial reserve additions from Yangarra given the success of its 2017 capital program and strong well performance so far, it is always reassuring to see the thesis come to fruition and exceed our expectations. With the previous release of Yangarra's preliminary 2018 budget of $90-million targeting the drilling of 22 wells, we believe the Company is well positioned to post another year of solid production, cash flow per share, and reserve growth in 2018."


RBC Dominion Securities analyst Stephen Walker continues to expect a positive re-rating of First Quantum Minerals Ltd. (FM-T) shares as its Cobre Panama copper development project ramps up.

He raised his target price for shares of the Toronto-based miner in reaction to Monday's release of its updated three-year guidance and announced expansion of the project, which he sees as a positive catalyst moving forward.

"Management announced the approved expansion, which increases mill throughput capacity from 74 million tons per annum to 85Mtpa by 2020 with the installation of an eighth mill, followed by an additional expansion to 100Mtpa after 2022 from plant upgrades and optimization, which we expect to bring total Cu [copper] production at Cobre up to 400,000 tons per year," said Mr. Walker. "For the initial expansion to 85Mtpa throughput, FM expects capital costs of $600-million. The guidance for 2019 and 2020 Cobre Panama production ramp-up is essentially in line with our forecast and we now incorporate the 2021 to 2023 expansion to 100Mtpa in our model. Management noted that development is 70-per-cent complete and phased commissioning is expected throughout 2018."

Mr. Walker now forecasts First Quantum's copper production to grow from 574,000 tons in 2017 to 940,000 tons in 2021 with the Cobre Panama expansion. His net asset value (NAV) estimate rose to $29.95 from $26.79, noting the company's guidance met his expectations.

"FM is trading at a NAV discount of 32.5 per cent compared to its peers at a 5.3-per-cent discount," noted Mr. Walker.

Keeping an "outperform" rating for First Quantum shares, his target rose to $23 from $21. The analyst average target is currently $22.30.

"We believe that First Quantum offers investors the potential for attractive returns based on its copper production growth over the next 4–5 years and management's track record of project development and mining expertise," the analyst said. "Over the 2018–21 period, we estimate a 3-year copper production CAGR [compound annual growth rate] of 14 per cent.

"First Quantum's operations include the 80-per-cent-owned Kansanshi copper-gold mine and the 100-per-cent-owned Sentinel copper mine in Zambia, both of which we estimate account for 73 per cent of FM's 2018 copper production. The key development project is the 90-per-cent-owned Cobre Panama project in Panama, which is expected to start commercial production in 2019 and to contribute 37-per-cent of FM's copper production by 2021. First Quantum has an experienced team of mine builders and operators who successfully built Sentinel and executed the Kansanshi expansion. We have confidence in FM's ability to deliver the Cobre Panama project with similar success."


Emerson Electric Co.(EMR-N) is "pivoting to growth," according to RBC Dominion Securities analyst Deane Dray, leading him to upgrade the St. Louis-based diversified global manufacturing company to "outperform" from "sector perform."

"After weathering two years of oil capex declines and the 'industrial recession,' Emerson emerged from the storm in fiscal 2017 with plenty of tailwinds from healthy orders trends, a positive organic growth inflection, U.S. tax reform benefits, a bigger M&A war chest, and a more agile, streamlined portfolio," the analyst said. "Looking ahead to fiscal 2018 and beyond, Emerson appears well-positioned to transition to offense now. At its upcoming Feb. 15 analyst meeting in NYC, we expect to hear an array of positive updates on the outlook by geography, more aggressive M&A aspirations, and boosts to FY2021 targets. We have been warming up to Emerson as an oil & gas and earnings recovery story, and we like its positioning as the global leader in process automation. With valuation having pulled back to the midpoint of its relative range, we believe this is an attractive entry point."

Mr. Deay raised his target for Emerson shares to US$80 from US$75. The average on the Street is $71.50.


Echelon Wealth Partners analyst Amr Ezzat thinks Mediagrif Interactive Technologies Inc.'s (MDF-T) "strong" cash flow generation should "bode well" for its stock price.

On Tuesday after market close, the Longueuil, Que.-based company, which provides e-business solutions to consumers and businesses, reported third-quarter 2018 sales of $20.5-millon, up 6.2 per cent year over year and in-line with Mr. Ezzat's $20.8-million projection. Its EBITDA of $6.1-million also met his expectation ($6.3-million).

"Overall organic top line growth was flat year over year (previously declining) and up a hair sequentially despite the seasonally slower December quarter," the analyst said. "We are encouraged but await further confirmation of this trend before becoming more constructive. Overall sale dynamics continue to be hampered by legacy and consumer platforms (with the notable exception of LesPac, which came in flat year-over-year/ this quarter), while the Orckestra acquisition contributed $1.2-million.

"As we pointed out the last few quarters, the Company is actively reinvesting into the business to revive top line growth, as evidenced by the increased opex intensity in the last few quarters. This is also supplemented by the recently closed Orckestra acquisition, which while unprofitable, has great potential to add to top line growth and profitability in F2019."

Mr. Ezzat said Mediagrif's free cash flow (FCF) profile provides "limited" downside to investors from current levels.

Keeping his "buy" rating, he lowered his target to $16 from $19 based on a lower margin forecast for fiscal 2019 as well as a decline in his growth rate forecast. The average target on the Street is $15.10.

"With the shares trading at 9.9-per-cent FCF yield, we continue to think this is an opportunistic time to accumulate a position in a solid operator," he said.

Elsewhere, Acumen Capital analyst Brian Pow increased his target to $17 from $16.50 with a "speculative buy" rating (unchanged).

Mr. Pow said: "MDF shares fell out of favour amid concerns over lackluster growth. We believe that the sales beat should at least provide some support for the shares. Our sense is that MDF is in the early stages of a reasonable growth period; and, if Management can drive operational performance over the coming quarters, this will help improve the sentiment for the shares. We continue to view the rating and valuation upside as appropriate."



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