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

CIBC World Markets analyst Paul Holden made a series of rating changes to non-bank financial stocks in his coverage universe on Friday, emphasizing “the economic impact in Q2/20 is significant and that market risks remain high for at least another month or two."

“Our estimate revisions contemplate CIBC Economics’ base-case scenario that contemplates an unprecedented collapse in Q2 GDP, both in Canada and the U.S,” the analyst said in a research report released before the bell. "A recovery is assumed to resume in H2/20 and build through 2021. Unemployment rates are assumed to remain over 200 basis points higher through 2021 versus end of 2019 levels. In other words, we are expecting lasting scars from the current economic shutdown.

“A number of companies we cover have direct and indirect exposure to financial markets (equities, interest rates and FX), which have seen wild swings over the last month. We have included estimated mark-to-market impacts on our Q1/20 estimates based on company disclosures. Disclosed sensitivities tend to be good rules of thumb, but should not be taken to be too specific when asset values swing as much as they have over the last month.”

Mr. Holden lowered his earnings per share projections for 2020 by an average of 18 per cent for the 16 companies he covers. For 2021, he’s expecting a 9-per-cent decline.

“For most companies, we expect a rebound in EPS in 2021 as we work with a base-case scenario of 4-per-cent GDP growth in 2021. However, that 2021 base-case also includes an unemployment rate of 7.9 per cent,” he said.

With that revised view, Mr. Holden raised his ratings for:

Great-West Lifeco Inc. (GWO-T) to “outperformer” from “neutral” with a $32 target, down from $36. The average target on the Street is $31.73.

“We view GWO as a more defensive lifeco given a more conservative balance sheet, both from an asset and liability standpoint,” said the analyst. “The balance sheet is less sensitive to market levels (interest rates and equities) and earnings are not overly sensitive to economic growth. The biggest source of loss during the financial crisis was a goodwill write-down on Putnam, which is unlikely to repeat. The company should be in a good position to pursue acquisitions when economic and financial conditions settle down.”

Onex Corp. (ONEX-T) to “outperformer” from “neutral” with an $82 target, down a loonie. Average: $79.30.

“Onex has been one of the stocks hit hardest over the last month,” he said. “It is after all levered equity and levered credit. Financial risk is higher for assets in the ground, which represents approximately 55 per cent of our updated valuation. Risk of permanent asset impairment in the fee portion of the business is much smaller (14 per cent of value) and cash now represents roughly 30 per cent of total value.”

Power Corporation of Canada (POW-T) to “outperformer” from “neutral” with a $30 target, rising from $22. Average: $29.71.

“We view Power Corp. as one of the more stable companies within our coverage universe,” he said. "That’s not to say there will be no earnings impact from a drawdown in the equity market and an economic contraction, but the company has prudently managed balance sheet risk over multiple decades. Financial risk is low and we believe the dividend to be safe.

Conversely, Mr. Holden downgraded these companies:

Fairfax Financial Holdings Ltd. (FFH-T) to “neutral” from “outperformer” with a $600 target, falling from $800. The average on the Street is $683.26.

“Fairfax was positioned for continued economic expansion and rising equity markets," he said. "The last few months have not been kind to its equity investments and the premium growth story is sure to be disrupted. This is a name that should recover along with the U.S. economy and equity market.”

Genworth MI Canada Inc. (MIC-T) to “underperformer” from “neutral” with a $35 target, down from $59. Average: 39.50.

“Genworth is the most economically sensitive name we cover," said Mr. Holden. "The economic stall has obvious implications for premiums written and later for mortgage delinquencies. Recent moves to increase leverage and payout capital increases financial risk in a contracting economy. This is a name that could be feeling the earnings impact for longer than others.”

IGM Financial Corp. (IGM-T) to “neutral” from “outperformer” with a $35 target, down from $46. Average: $34.

“Our investment thesis was premised on improving fund flows and profit margins," he said. "The damage done in the equity market disrupts that thesis. While we believe that management has taken the right strategic course for the business, the company likely has a long recovery period ahead of it.”

ECN Capital Corp. (ECN-T) to “neutral” from “outperformer” with a $4.50 target, down from $6. Average: $6.15.

“Earnings sensitivity to the economy is relatively high compared to other companies in our coverage universe,” he said. “We expect that access to funding will not be an issue given the quality of loans sold to funding partners and regulatory incentives to keep lending fluid. The current situation will not help with the disposal of non-core assets. We don’t see any issues with leverage or dividend sustainability.”


Though he expects North American Construction Group Ltd. (NOA-T, NOA-N) to “adapt to the current market challenges and exit the crisis relatively unharmed,” Raymond James analyst Ben Cherniavsky downgraded its stock by two levels to “market perform” from “strong buy” on Friday, seeing a lack of positive catalysts on the horizon for the next 6-12 months.

“It wasn’t supposed to turn out this way,” he said. "A year ago when we published a comprehensively bullish report on North American Construction Group we suggested that, after many years of successful restructuring and renewal, the company had entered a new chapter defined as the ‘set-up for future growth’ phase. Importantly, this was not predicated on an expectation of rising oil prices driving earnings higher. Instead, we saw compelling opportunities on the horizon for NACG to harvest growth from recent acquisitions, cost and contract restructurings, and its new maintenance & rebuild operation. Furthermore, deleveraging was a major component of our investment thesis as management continued its solid track record of capital allocation. Regrettably, our report also included the four cursed words— it’s different this time —suggesting that ‘over the past ten years the oil sands have matured, the producers have become more disciplined, and the competitive landscape for contractor services has been rationalized, thus making it a less volatile place to operate.’ To be clear, it wasn’t that we thought oil markets no longer mattered for NACG’s business in Fort McMurray; but so long as the price of crude remained above a certain threshold level where production would be maintained, we believed the company was in a much better position to make money in the process.

“In effect we were wrong for the wrong reason. Volatility has returned to the oil sands not because of undisciplined producers, irrational competitors, or unfavourable contracts but simply because two concurrent Black Swans (Coronavirus and OPEC) caused oil prices to crater below the point where production remained unaffected. As a result, pressure has, once again, been put on the supply chain, which has, in turn, forced us to revisit our investment thesis on NACG.”

Though he said "adjusting forecasts in this environment is a rather futile task,” Mr. Cherniavsky lowered his 2020 earnings per share projection to 87 cents from $2.10. His 2021 estimate fell to $1.22 and $2.45.

His target for NACG shares fell to $8 from $26. The average on the Street is $22.58

“As much as we dislike downgrading a stock in such a volatile environment, and at a price that is much lower than where we advised investors to buy it, we are compelled to adjust our thinking to the new reality of the oil sands.”

“While long-term investors who already own this illiquid stock may elect to maintain their position to see the bullish narrative outlined in our 2019 ‘New & Improved’ NACG report eventually run its course, we no longer see any urgency to step into this story here and now.”


Teck Resources Ltd. (TECK.B-T) is “well positioned to navigate near-term uncertainty,” said RBC Dominion Securities analyst Sam Crittenden, who thinks its “strong” balance sheet mitigates near-term risk and sees “significant potential upside if commodities recover.”

However, following the company's Investor Day event and a better-than-anticipated QB1 update, Mr. Crittenden trim his forecast for the miner, pointing to "timing uncertainty."

“Capex escalation was mostly offset by depreciation of the Chilean peso and the updated cost estimate ended up being at the lower end of expectations,” he said. "We have opted to remain conservative in light of further delays and capital escalation resulting from COVID-19 and continue to model project capex of US$6-billion and first production at the end of 2022. This compares with Teck’s pre COVID-19 impacted estimates of US$5.2-billion and production beginning in mid-2022

"We reduced Q2/2020 production forecasts for coal operations and Highland Valley copper by 20 per cent and other operations by 10 per cent to account for impacts of COVID-19."

Mr. Crittenden trimmed his 2020 earnings per share projection to $1.93 from $2.06 with his 2021 and 2022 estimates rising to $2.33 and $2.61, respectively, from $2.19 and $2.56.

Seeing “short-term pain for long-term gain” in its coal operations, he also reduced his target by a loonie to $23. The average is $22.64.

Believing its possesses an “attractive” valuation, Mr. Crittenden maintained an “outperform” rating.

“The shares are trading at 2.7 times 2020 estimated EBITDA versus the global diversifieds at 3.9 times and the large cap copper miners at 5.1 times,” he said. “On a P/NAV [price to net asset value[ basis the shares are trading at 0.38 times compared to the diversifieds at 0.73 times and large cap copper producers at 0.61 times.”


Though she sees near-term disruption as “inevitable,” CIBC World Markets analyst Sumayya Syed sees both Colliers International Group Inc. (CIGI-Q, CIGI-T) and FirstService Corp. (FSV-Q, FSV-T) as “well-positioned for the long-term, with high recurring revenues, low capex requirements and ample liquidity.”

In a research note released Friday, Ms. Syed lowered her 2020 earnings per share expectation by an average of 5 per cent, but she said she expects 2021 to benefit from deferred M&A activity as well as improved organic growth.

The analyst raised her rating for FirstService to “outperformer” from “neutral” with a US$93 target, down from US$118. The average on the Street is US$99.20

“We believe FirstService’s roster of essential property services has always held appeal for investors seeking defense, and is even more attractive in the current environment,” she said. “Contractual property management revenues provide stability, and the restoration segment is uncorrelated to economic cycles, leaving a relatively small slice of the business susceptible to declines in consumer spending. Shares are trading at trough multiples and represent an attractive entry point for a quality company with defensive characteristics. Notably shares have typically traded at a 10 times P/E [price-to-earnings] premium to the S&P, which has now shrunk to 7 times.”

Keeping an “outperformer” rating for Colliers, Ms. Syed reduced her target to US$75 from US$91. The average is currently US$78.81.


Seeing the impact of COVID-19 putting chemicals “to the test,” Desjardins Securities analyst David Newman lowered his financial forecast for Chemtrade Logistics Income Fund (CHE.UN-T).

On Thursday after the bell, Chemtrade announced its operations have not been significantly affected by the pandemic. However, citing "general economic uncertainty," it suspended its 2020 earnings guidance.

“Despite near-term chlorine (disinfectants) and sodium chlorate (bleached pulp for tissue, etc) strength, the weakness in caustic soda and HCl could be magnified by potential downside in merchant and regen acid given slack industrial and refinery demand amid COVID-19,” said Mr. Newman. “Water treatment chemicals should remain stable. We have lowered our estimates, despite the benefit of a weak Canadian dollar and a potential 2H20 caustic soda recovery.”

To reflect a “more subdued” outlook for the year, the analyst lowered his 2020 EBITDA estimate to $280-million from $322-million before seeing a recovery in 2021.

With a “hold” rating, he trimmed his target for Chemtrade to $7.50 from $11. The average is $7.67.

“Stay on the sidelines as CHE will be pressured by COVID-19 across a range of chemicals,” said Mr. Newman. “Some chemicals could fare better/recover and FX is a tailwind.”

Elsewhere, TD Securities’ Damir Gunja cut Chemtrade to “hold” from “buy” with a $5.50 target, down from $7.50.


Believing “COVID-related events have levelled the playing field,” Scotia Capital analyst Trevor Turnbull upgraded Pan American Silver Corp. (PAAS-Q, PAAS-T) to “sector underpeform” from “sector perform” with a US$14 target (unchanged). The average is US$23.34.

“We recently downgraded the company when it was forced to suspend six operations in Peru, Argentina and Bolivia,” he said. "We estimated this was over half of its 2020 operating cash flow (CFO). At the time we saw the potential for Mexico to follow suit as it has done this week and it appeared to us the company was impacted more than most of its peers. However, most companies are now being severely impacted and some have lost 100 per cent of their CFO or stand to. Hence we no longer feel the company warrants a Sector Underperform rating in the context of its peers.

"The Timmins operation is now the company`s only asset online. Although, it is reducing personnel and hence throughput by 10- 20 per cent to facilitate social distancing. We estimate Timmins represents about 16% of CFO for 2020.

Separately, Mr. Turnbull downgraded a pair of stocks.

He lowered Fortuna Silver Mines Inc. (FSM-N, FVI-T) to “sector peform” from “sector outperform” with a US$3 target, down from US$4.50. The average is US$6.

“We expect that, unless Fortuna is able to secure an exemption for its San Jose gold-silver mine in Oaxaca, Mexico, it will need to ramp down operations for at least a month,” he said. "This would leave only the Caylloma silver-lead-zinc mine, which has remained in operation in Peru. However, we estimate it would only contribute about 17 per cent to this year’s full operating cash flow. San Jose would be 54 per cent and Lindero would have been 30 per cent once in commercial production.

“In our opinion, a prolonged suspension at San Jose could cause Fortuna`s liquidity position to erode at the worst possible time with Lindero`s completion being delayed. Hence, we are moving our rating to Sector Perform. Note that the company has not provided guidance on the status of the San Jose mine since the government decree, and it is still operating as far as we know.”

Mr. Turnbull also dropped Torex Gold Resources Inc. (TXG-T) to “sector perform” from “sector outperform” with a $26 target. The average is $24.41.

“Torex will comply with the directive of the Mexican Federal government and temporarily suspend operations now that a three-day planned maintenance is complete,” he said. "The company plans to re-establish guidance once it has a better “line of sight” on the resumption of normal activity levels.

“We are downgrading Torex to Sector Perform given its sole source of revenue is being idled.”


COVID-19 is a “thesis changer” for U.S. textbook publisher Houghton Mifflin Harcourt Co. (HMHC-Q), according to Citi analyst Jason Bazinet.

Pointing to the impact of the pandemic on the education market, he lowered his rating for its stock by two levels to "sell" from "buy" and dropped his target to US$1 from US$7.50. The average is xxx.

"Houghton was in the midst of a gradual but noticeable turnaround," said Mr. Bazinet. "Management was making steady progress in positioning the firm to generate positive FCF even at the low-point of the textbook cycle. However, the COVID outbreak has interrupted this plan."

On March 27, the company withdrew its 2020 outlook, believing "significant uncertainty is likely to persist in the marketplace," and took several steps to address its situation, including placing employess on a four-day work week and tapping into its US$150-nillion revolver capacity.

“If our FCF burn estimates [of between US$100-million and US$250-million] are right for 2020 and if we apply the same valuation framework we’ve used for some time, Houghton does not have any equity value,” said Mr. Bazinet. “However, if we roll-forward to 2021 – and assume the market sees a modest recovery in 2021 – the firm’s equity could be worth $1 per share. Of course, this COVID disruption is unprecedented. As such, we may be overestimating (or underestimating) the ultimate impact. But, we will reassess our estimates as the impact becomes a bit clearer.”


Citing the “painful industry dynamics and consolidation” stemming from COVID-19, RBC Dominion Securities analyst Kate Fitzsimons downgraded a pair of U.S. clothing companies on Friday.

She dropped Ralph Lauren Corp. (RL-N) to “sector perform” from “outperform” and reduced her target to US$65 from US$136. The average on the Street is US$108.81.

“While near-term the business is undoubtedly seeing sales and margin impacts from store closures across North America and Europe, our longer-term concern is on impairments to North American wholesale, inventory misalignment industry-wide jeopardizing efforts to drive AUR [average unit retail] elevation, and inevitable pullbacks in marketing spend impeding the efforts to engage new customers,” she said.

Ms. Fitzsimons also lowered PVH Corp. (PVH-N), which owns several brands including Tommy Hilfiger and Calvin Klein, to “sector perform” from “outperform” with a target to US$30, down from US$90. The average on the Street is US$56.63.

“While our original OP rating hinged on an underlying 4-6-per-cent top line and low- to mid-teens algo led by CK margin recovery, with COVID-19, PVH is being hit from all sides, as sales and supply chain disruptions wreak havoc on retail, wholesale, and licensed partners globally,” the analyst said. “With 30-40 per cent of North American retail revenues generated from international tourists and already industry challenges in the North American wholesale channel (18 per cent of sales to 5 largest customers including Macy’s), the duration of COVID-related headwinds could last longer on the PVH model. This is on top of intensifying FX headwinds currently hitting the model as the pandemic plays out. Thus, we prefer to be on the sidelines.”


In other analyst actions:

* Cormark Securities analyst Amir Arif raised Cenovus Energy Inc. (CVE-T) to “buy” from “hold”

* Scotia Capital analyst Orest Wowkodaw lowered Capstone Mining Corp. (CS-T) to “sector perform” from “sector outperform” with a 70-cent target, down from $1. The average is $1.10.

Mr. Wowkodaw said: "We are lowering our investment rating on Capstone Mining .... based on heightened risks associated with the currently very depressed Cu price environment and new emerging operating risks in Mexico. With Cu prices currently wallowing in the $2.00-$2.25/lb range due to the escalating COVID-19 crisis, the company’s flagship mine, Pinto Valley (PV), is likely to burn material FCF [free cash flow] in the current environment (we currently forecast 2020 AISC of $2.50/lb - lower diesel prices will help, but PV does not benefit from a weaker FX). While the situation remains fluid, many mines in Mexico appear to be temporarily closing for 30 days to comply with a government-issued quarantine protocol related to COVID-19. Although Cozamin represents only 20 per cent of our asset level 8-per-cent NAVPS [net asset value per share] for the company, it is a low-cost asset, and a potential shutdown would be a meaningful blow to the company, particularly if extended beyond 30 days.

* RBC Dominion Securities downgraded Mullen Group Ltd. (MTL-T) to “sector perform” from “outperform” with a $4 target, down from $11. The average is $8.42.

The firm said the drop in oil prices as well as significant reductions in capex by producers and lowered activity is directly hitting the company’s oilfield services (OFS) business, and it views the long-term viability of that segment with a high degree of uncertainty.

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