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Smart Balance gets ‘buy’ on natural-foods injection

Sophisticated Canadian agri-food producers are seizing opportunity associated with rising international demand for higher-quality foods by developing more nutritious food products and leveraging Canada’s reputation as a trusted producer of healthy foods.

Smart Balance Inc.'s $125-million (U.S.) acquisition of Udi's Healthy Foods LLC will help entrench the food company in the highly attractive "natural" category, says Canaccord Genuity analyst Scott Van Winkle.

With nearly half of sales coming from natural or organic offerings after the deal closes, Smart Balance is not only diversifying its product base, but also establishing itself as the category leader in the high growth, multi-billion dollar gluten-free market, he said.

Smart Balance, which sells buttery spreads, cooking sprays and other products, is buying Denver-based Udi's from majority shareholder Hubson Acquisition LLC and minority shareholders, including the family of founder Udi Bar-On. The all-cash deal for the Denver company closes in July.

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"The $125-million purchase price is rich on current sales to EBITDA [earnings before interest, tax, depreciation and amortization], but if the trajectory of gluten-free foods continues, as we expect it will, the valuation shouldn't be an obstacle," Mr. Van Winkle wrote on Monday.

Paramus, N.J.-based Smart Balance expects future tax benefits of about $22-million arising from the transaction, making the effective purchase price about $103-million. Last year, it bought gluten-free food maker Glutino.

Upside: The analyst raised his rating to a "buy," and boosted his one-year target to $8 a share from $6.50.


Rocky Mountain Dealerships Inc. (RME-TSX)

The operator of agriculture and construction equipment dealerships announced Monday that it had acquired Camrose Farm Equipment Ltd. in Alberta. Shareholder value will be created as management improves margins by stripping out costs from acquisitions, said M Partners analyst Tom Varesh. "

Upside: The analyst, who maintains a "buy" rating, raised his one-year target to $17.50 a share from $17.25.

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Exfo Inc. (EXF-TSX)

Exfo has said it will miss its earlier revenue guidance of $68-$73-million (Canadian) for the third quarter because of weaker markets in Europe, China and the Americas. The company, which sells test equipment in fibre optic communications, expects revenue of roughly $60-million.

Downside: BMO Nesbitt Burns analyst Thanos Moschopoulos reduced his one-year target to $7 a share from $9.50, but maintains his "outperform" rating.


Canadian Apartment REIT (CAR.UN-TSX)

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The $72-million purchase of 12 trailer parks from Killam Properties Inc. represents a 150-per-cent increase in CAP REIT's manufactured home portfolio, said Dundee Securities analyst Brad Cutsey. "Management expects 2012 to be a record year of portfolio growth."

Upside: The analyst, who maintains a "neutral" rating, raised his one-year target to $24.50 a share from $24.


PetroMagdalena Energy Corp. (PMD-TSXV)

Concerns about balance sheet strength and market-risk aversion will likely keep the stock of the oil and gas company range-bound over the next six to 12 months, said Raymond James analyst Rafi Khouri. Road blockades at its Cubiro operations in Colombia is not helping, he added.

Downside: He downgraded the stock to "market perform," and cut his one-year target to $1.50 a share from $1.60.

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