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

After its adjusted earnings fell “well below” expectations in the second half of fiscal 2018, Desjardins Securities analyst Keith Howlett expects Saputo Inc. (SAP-T) to continue to face “challenging” global market conditions in the first half of 2019.

Accordingly, he lowered his rating for its stock to “hold” from “buy,” believing visibility for near-term earnings growth is limited.

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“The turnaround of the recently acquired ($1.29-billion) Murray Goulburn operations in Australia may take some time to effect,” he said. “U.S. operations are absorbing significantly elevated freight costs. Canadian operations may potentially be facing a retail channel price war.”

On Thursday, Montreal-based Saputo reported adjusted earnings per share for the fourth quarter of 35 cents, missing the projections of both Mr. Howlett (44 cents) and the Street (42 cents). Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $262-million also fell short of Mr. Howlett’s projection (by $37-million), which he attributed to weak prices in export markets, higher transportation and logistics costs and incremental Enterprise Resource Planning (ERP) implementation costs.

In reaction to the miss, Mr. Howlett lowered his 2019 EPS projection to $1.85 from $2.14 and introduced a 2020 forecast of $2.04 with the expectation higher freight, logistics and ERP costs will persist.

His target for Saputo shares fell to $42 from $48. The average target on the Street is currently $45.11, according to Thomson Reuters Eikon data.

“Global dairy prices appear to be stabilizing at modestly higher levels, but it remains a challenging time to be integrating the Murray Goulburn assets in Australia,” he said.

Elsewhere, CIBC World Markets’ Mark Petrie bumped his target down a loonie to $50 with an “outperformer” rating.

Mr. Petrie said: “Saputo faces substantial obstacles to near-term earnings growth including unfavourable commodity prices, an increasingly competitive Canadian market, higher operating costs, further increases in ERP costs and the possibility of negative fallout from trade. On this basis, we have reduced our H1/F2019 EPS forecast by 11 per cent, which now implies a 6-per-cent year-over-year decline. However, while our forecast for H2 also falls (though by 5 per cent), we see substantial upside as commodity prices rebound and lap deeply unfavourable periods. This supports year-over-year growth above 30 per cent in H2/F2019 and carries on for 20-per-cent growth in F2020. Better commodity prices are an important driver, but upside from Murray Goulburn will begin to be realized as that asset is integrated and reshaped. That said, even our F2020 forecast has that asset performing well below the international segment’s historical range, and we view this as a potential lever to value creation.”

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Though Andrew Peller Ltd. (ADW.A-T) continues to display “impressive” organic growth, Echelon Wealth Partners analyst Amr Ezzat downgraded the winemaker to “hold” from “buy” based on its current valuation.

On Wednesday after market close, the company reported fourth-quarter sales of $79.8-million, up 10.4 per cent year over year and in-line with Mr. Ezzat’s projection of $79.9-million. He attributed the growth to both a better-than-expected organic growth rate of 5.4 per cent and $3.7-million in contributions from acquisitions completed in the previous quarter.

Adjusted EBITDA of $5.7-million was flat from the same period a year ago.

“The results showcase the benefits of the Company’s premiumization strategy with organic top line growth coming in at a strong 5.4 per cent,” said Mr. Ezzat. “Increased SG&A expenses to support product launches (during the seasonally weak FQ4) impacted earnings, but we expect the investments to pay off in future quarters helping sustain the Company’s expanding margins. We believe that this is by no means a one-off quarter, but the unfolding of a deliberate strategy to drive better product mix and sell through higher-margin distribution channels.”

Though his rating fell, Mr. Ezzat increased his target for Andrew Peller shares to $18.50 from $18, which sits just below the average among analysts covering the stock of $18.83.

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“We continue to be big fans of the company and the management team, and feel there is more upside to be had beyond our one-year target,” he said. “The recent acquisitions kill two birds with one stone and pave the way to $1-billion-plus equity valuation, in our opinion. On the one hand, they enable ADW to grow top line at a faster pace (acquired brands will grow at 6-7-per-cent CAGR versus ADW’s historical 4-per-cent CAGR), and on the other, the acquisitions provide an immediate boost to margins on a normalized basis (33.5-per-cent EBITDA margin versus ADW’s 13.2 per cent in fiscal 2017). As we have expanded in our initiation report, excluding any other acquisitions (which is unlikely), we believe ADW can grow its pro-forma EBITDA to over $83-million by fiscal 2023, at which point, we believe the Company’s equity value would be worth $1-billion-plus. We also believe ADW benefits from a sustainable competitive advantage due to its size and unique positioning in the industry (namely, with its Company-owned retail locations and its growing number of wineries). We believe these factors, together with an evolving regulatory environment, provide the Company with more wiggle room than smaller peers to drive better product mix and sell through higher-margin distribution channels. As such, over the long-term we see substantial running ground for ADW to defend and grow its margins.”

Elsewhere, Acumen Capital’s Brian Pow raised his target to $20.25 from $18, maintaining a “buy” rating.

“The company’s investment in sales and marketing is likely to pay off with a step up in sales helping to absorb the investment in marketing,” he said.


Desjardins Securities analyst Keith Howlett played down investor concern over Dollarama Inc. (DOL-T) same-store sales growth trajectory.

On Thursday, shares of the discount retailer dipped 6.7 per cent after it reported a deceleration in growth to 2.6 per cent.

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However, Mr. Howlett said the result “reflected very poor April weather and nothing more.”

“Most discretionary retailers were negatively affected by the poor April weather in Canada and the northern regions of the U.S.,” he said. “We note, however, that Dollar Tree Canada posted same-store sales above 4 per cent in its quarter ending April, with particular strength in the lawn and garden category.

“Given the breadth and depth of Dollarama’s summer seasonal category, our view is that it is plausible that sales were deferred to May and June from April due to cold weather. On the other hand, it could be viewed as a sign of maturing sales trends that other factors (eg increasing traffic and expanding share of customers’ wallets) did not overwhelm the impact of the poor weather.”

He added: “Same-store sales growth in 1Q of 2.6 per cent was the weakest since the 1.1 per cent posted in 4Q FY14, when major storms hit key markets on important weekends leading into Christmas. Average transaction size increased by 2.9% in 1Q, with same-store traffic declining 0.3 per cent. Items priced greater-than $1.25 represented 67.3 per cent of sales (64.8 per cent a year ago). We surmise that lawn and garden items are both the purpose of some shopping trips, and an additional basket item for other trips. Our view is that the poor weather in April affected both number of trips and average transaction size per trip.”

Though its first-quarter 2019 earnings per share of 92 cents fell below both his estimate and the expectation on the Street by a penny, Mr. Howlett did raise his fiscal 2020 EPS expectation by 2 cents to $5.92.

He kept a “buy” rating and target price of $173, which exceeds the consensus of $167.67.

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Meanwhile, BMO Nesbitt Burns upgraded Dollarama to “outperform” from “market perform” with a target of $170, rising from $152.

Raymond James’ Kenric Tyghe kept an “outperform” rating and $167 target.

Mr. Tyghe said: “Our three key takeaways with respect to the SSS miss, are (i) that April is normally the highest grossing month for seasonal summer merchandise, (ii) that May is tracking well above the norm given the late start to the summer, and (iii) that April’s summer sales are not lost as was the case during the Winter Ice storm that spoiled the 2013 festive season. The F1Q19 SSS performance (excl. seasonal summer items) was comfortably in the guidance range of 4.0% - 5.0%. We are mindful of the gross margin progression through F2019 (on IFRS 9) and have made modest adjustments to reflect this dynamic. The specific cost reduction initiatives already in market (which are generating better than expected leverage) will be further bolstered by additional planned measures through F2019. In addition, credit card penetration continues to increase (at the expense of cash versus the expense of debit) which is incrementally positive (cash handling and shrinkage costs are typically relatively high). Dollarama’s e-commerce initiative continues to evolve, with a delivery pilot (in the province of Quebec) expected to go live by the end of calendar 2018. ”


Desjardins Securities analyst Benoit Poirier said he’s “encouraged” by the progress made by all of Bombardier Inc.’s (BBD.B-T) business units since the launch of its five-year turnaround plan in November of 2015 and expressing confidence in management’s ability to deliver on its objectives.

“Management has been able to improve each division’s performance over the last three years,” said Mr. Poirier in a recent note released Friday ahead of the closing of its Airbus partnership.

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“As a result, BBD’s financial situation has improved significantly in recent years due to the current success of the turnaround plan. Following the recent debt and equity financing, we now expect management to unlock the full potential of its turnaround plan by leveraging past investments in the C Series and the Global 7500 program while also completing its transformation at BT. Bottom line, we are impressed by the improvement and consistency demonstrated by the management team since their appointment. We now have more confidence in management’s ability to deliver on its 2020 objectives on the back of its solid track record.”

Maintaining a “buy” rating for Bombardier shares, the analyst raised his target price to $6 from $4.75, exceeding the consensus of $4.80.


Given a lack of large-scale M&A since 2014, WSP Global Inc. (WSP-T) is “is ‘due’ (at some point) for a deal,” according to National Bank Financial analyst Maxim Sytchev.

“In order to justify current share price, we believe the market is imputing M&A, and of rather large size,” he said. “While the timing of such an event is uncertain, WSP has been relatively quiet on the platform acquisition front since 2014 (Parsons Brinckerhoff).

“We of course are not making an allusion here that management would be using its premium valuation as the determining factor around transactions. To the contrary, we believe WSP has a very deliberate strategy around transactions, targeting specific geographies, making sure it’s the right fit for both parties, accretive, etc.”

Mr. Sytchev added: “WSP obviously has a pipeline of M&A opportunities. In order to make the math more ’real,’ we believe there is a strategic fit between WSP and Arcadis (ARDS-AS); that being said, we would prefer investors to interpret our math as if WSP were looking for an ‘Arcadis-type‘ asset in terms of size, scope, etc. Based on our numbers, a combination would be 16-per-cent accretive to WSP’s 2019 estimated EPS and depending on how the market reacts to leverage, would push the share price to 1) $76.00 or 2) $85.00 per share. Respectively, the market is now imputing an 84% / 55% chance of a large-scale transaction. The higher WSP share price goes, the more accretive any potential deal becomes.“

Keeping a “sector perform” rating on WSP stock, Mr. Sytchev raised his target to $71 from $57. The average is $69.73.

“WSP is a formidable company,” he said. “In our coverage universe, we view Toromont and WSP as having the countercyclical M&A foresight. The platform has been materially strengthened over the years, both in terms of assets, expertise and people. The trading multiple has historically reflected these positive changes (despite ROE drag via equity issuance), but recently the shares went parabolic vs. TSX.”

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