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

In reaction to the reacceleration in the spread of the COVID-19 pandemic, Canaccord Genuity’s Aravinda Galappatthige further reduced his financial expectations for Cineplex Inc. (CGX-T).

Also seeing the pressing need to renegotiate covenant commitments, the equity analyst downgraded his rating for the company’s stock to “sell” from “hold.”

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“With new COVID19 cases seeing a notable uptick nationwide, and Quebec reinstating certain pandemic restrictions including the closing of theatres, we are forced to yet again revise down Cineplex’s estimates,” he said. "This is exacerbated by the continuing shifts in the film slate as key film titles are delayed (e.g. Wonder Woman in Q4) and the existing line up (Black Widow, James Bond) carrying significant uncertainty.

“We have thus shifted our estimates to an even more bearish scenario with Q4/20 now projected to see a 73-per-cent box office decline vs the 48-per-cent decline we had previously. We have also delayed the recovery built into F2021, with the box office now expected to be down 36 per cent off 2019 levels vs 22 per cent previously. This results in F2021 EBITDA, falling from $121.4-million to $79.0-million.”

David Berman: For Cineplex, the show must go on – but can it?

Mr. Galappatthige said it is also clear Cineplex’s renewed covenants with the banks cannot be met and require a “significant” amendment.

“The key question now is what a renegotiation with the banks would entail,” he said. “On one hand the banks already extracted a significant degree of protection for themselves last time around, including new financing ($300-million in converts), a $100-million repayment, decrease in maturity, etc., is there really more they can ask for? On the other hand, the current financial outlook likely necessitates a longer-term solution from the banks, at least one that goes into F2022. The unknown cost of a revised bank agreement needs to be considered as one ponders the underlying long-term value here.”

“Cineplex continues to work on cost management including renegotiating leases while also benefiting from CEWS. We believe there are additional options including the potential sale of the head office building, sale of CDM (the signage business). However, in the current conditions, and considering the timing, this is not likely to stave off covenant risks.”

After dropping his 2020 and 2021 earnings per share projections to losses of $3.69 and 90 cents, respectively, from losses of $2.37 and 52 cents, Mr. Galappatthige trimmed his target for Cineplex shares to a Street-low $7 target from $8. The average target on the Street is $13.69, according to Refinitiv data

“Given the risk around bank covenants and continued downward revisions to estimates, we are downgrading the stock from Hold to a SELL. We believe investors are best advised to wait to see the outcome of the likely credit amendments before considering a position in CGX. We also note that the trading value of the convertible debenture fell below par ($100) for the first time [Thursday], reflecting the rising risk profile," he said.

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Following the release of “positive” exploration results from an area near its Pahtavaara project in Finland, Canaccord Genuity’s Tom Gallo raised Rupert Resources Ltd. (RUP-X) to “speculative buy” from “hold.”

“Since May 2020, Rupert has released a series of drill results from Ikkari, a recent discovery located in Area 1, approximately 20 kilometres west of the Pahtavaara site," he said. "Rupert believes the regional structure that Ikkari is situated within likely extends towards the Saitta discovery, located 5 kilometres east. We believe results to date demonstrate the potential to build large tonnage resources along this prospective corridor.”

After increasing his resource and operating assumptions for a potential bulk tonnage open pit scenario, Mr. Gallo hiked his target to $6 from $2.60, exceeding the $3.08 average.

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TransAlta Renewables Inc. (RNW-T) both benefits and appears to be burdened by its relationship with its parent company, according to Credit Suisse analyst Andrew Kuske.

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“RNW entered the market in 2013 in an IPO from TransAlta Corporation (TA) as the renewables focused part of the business with a yield focus along with a visible pipeline of “drop-downs” to help facilitate growth," he said. "From the IPO, RNW grew the total amount of generation capacity from 1,376MW to 2,500MW today by way of a series of transactions with TA.

“Currently, TA possesses $600-million of existing and prospective invested capital across 353MW of generation capacity that could be dropped to RNW on a shorter-term basis. That amount of generation does not include TA’s existing hydro portfolio that is subject to an agreement with Brookfield Renewable Partners LP (BEP). That potential drop-down pipeline is not part of our existing financials forecasts; however, we note RNW is well positioned to buy much of this portfolio with debt capacity. Under some simple assumptions, we believe another $1.50 per share of value could be generated from such a deal – that should be helpful for both TA and RNW.”

In a research note released Friday, Mr. Kuske initiated coverage of TransAlta Renewables with a “neutral” rating.

“In our view, RNW really suffers from two separate (albeit somewhat related) issues: (a) versus its peers, a greater skew of non-renewable generation; and, (b) the benefits and the burdens (real or perceived) of the sponsor relationship,” he said.

“From our perspective, there are three distinguishing features of TransAlta Renewables versus some of the peer group: (a) the public sponsor relationship; (b) visibility on drop-downs from TransAlta Corporation; and, (c) the generation mix with a higher than typical fossil percentage. These factors impact valuation differently in the cycle.”

He set a $17 target for its shares. The average on the Street is $16.33.

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“Durable tailwinds warrant a re-rating” of MDF Commerce Inc. (MDF-T), said Desjardins Securities analyst Mager Yaghi after hosting virtual presentations for CEO Luc Filiatreault.

“We came out of the day with renewed confidence in the company’s prospects, especially in the rapidly growing fields of ecommerce and supply chain digitization,” he said. "MDF’s stock has performed well recently but we believe there is more room for growth based on the much higher valuations of comparable companies.

On Sept. 24, the Montreal-based tech firm changed its name from Mediagrif Interactive Technologies Inc. in order to better reflect “the evolution of the company and its vision for the future as a unified commerce technology company servicing forward-looking businesses.”

However, Mr. Yaghi said MDF began its change in September of 2019 with Mr. Filiatreault’s appointment.

“The main change in philosophy is that the company is now focusing less on identifying cost-saving opportunities and opting instead to invest in improving revenue growth,” he said. “In our view, this is a better strategy for technology companies to ensure they stay relevant and competitive.”

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During the meetings this week, the analyst said the focus was on how MDF benefits from trends emerging from the COVID-19 pandemic.

“First, the Unified Commerce segment (40 per cent of sales) mostly consists of services that enable e-commerce platforms for client companies, many of which have rushed to MDF to set them up with an online store,” he said. "While the pandemic has accelerated e-commerce trends, we believe fundamentals should remain strong in this field for many more years as penetration of online commerce is still low.

“E-procurement and e-tendering platforms should also benefit from durable tailwinds. This segment represents the main focus of the company’s M&A strategy, which we believe should be active in the coming month.”

In response, Mr. Yaghi raised his sales and revenue expectations for 2021 and 2022, expressing increase confidence in “the potential success of the different initiatives undertaken to boost topline growth.”

Keeping a “buy” rating for its shares, he increased his target to $12, a high on the Street, from $8.25. The average is $9.38.

“With the recent change in leadership, MDF’s strategy has completely shifted, with a new goal of generating revenue growth. This strategy is beginning to deliver results, and should in turn lead to upside for investors by gradually narrowing the valuation gap with peers,” said Mr. Yaghi.

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Barclays analyst Kannan Venkateshwa initiated coverage of four Canadian telecom stocks on Friday.

He gave Telus Corp. (T-T, TU-N) an “overweight” rating with a $27 target. The average on the Street is $25.88.

Mr. Venkatshwa handed “equal weight” ratings to the following:

  • Shaw Communications Inc. (SJR.B-T, SJR-N) with a $27 target. Average: $27.79.
  • Rogers Communications Inc. (RCI.B-T, RCI-N) with a $56 target. Average: $64.60.
  • BCE Inc. (BCE-T, BCE-N) with a $56 target. Average: $59.91.

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Desjardins Securities analyst Andrew Breichmanas raised his target for Golden Star Resources Ltd. (GSC-T, GSS-A) in response to the completion of the sale of its 90-per-cent interest in the Bogoso-Prestea Gold Minein Ghana to Future Global Resources Ltd.

Keeping a “hold” rating, he moved his target for the Toronto-based miner to $7 from $6.25, which exceeds the $6.77 average.

“The transaction provides cash inflow of US$30-million by 2023, removes negative working capital and liabilities from the balance sheet, and offers potential for further contingent payments if sulphide production restarts,” said Mr. Breichmanas. “While interest had already largely shifted to defining the scale of underground potential at Wassa, divesting Prestea should enable GSC to focus its resources and accelerate its investment programs.”

Conversely, H.C. Wainwright analyst Heiko Ihle reduced his target for Golden Star’s U.S.-listed shares to US$6.25 from US$6.75, keeping a “buy” rating.

Mr. Ihle said: “In short, we expect this transaction to improve Golden Star’s balance sheet and provide meaningful cash flow over the next several years. We ultimately anticipate these funds to allow the company to accelerate growth at Wassa, including incremental exploration efforts, as well as support potential acquisition opportunities. We note that Golden Star plans to complete a preliminary economic assessment for development options of the Wassa orebody by the end of FY20, which we believe should provide a clear path forward for the project”

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After resuming coverage of the stock, Scotia Capital analyst Paul Steep increased his target for Dye & Durham Ltd. (DND-T) to $27, matching the current consensus, from $21 with a “sector outperform” rating.

“Our view is that the firm’s financial results will continue to be fueled by its organic growth and integration of acquisitions (e.g., Property Information Exchange [PIE], Stanley Davis Group, Atsource Solutions) that have been completed during the past year,” he said. “We believe that DND’s existing mix of business and geographic markets offer the potential for ongoing acquisitions, given that legal information and software markets remain fragmented.”

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In other analyst actions:

* Credit Suisse’s Allison Landry raised her rating for Canadian National Railway Co. (CNI-N, CNR-T) to US$112 from US$102 and Canadian Pacific Railway Ltd. (CP-N, CP-T) to US$336 from US$304, keeping “outperform” ratings for both. The average targets on the Street are US$101.75 and US$305.56, respectively.

“Given better than expected volume trends across the board, we are raising our Q3 estimates by an average of 4 per cent - which now stand 2 per cent above the Street on average,” she said. “Our 2021 and 2022 forecasts increase by 2 per cent on average (3% above the consensus). We are also raising target prices for the entire group. On a 12-month view, we see the most upside to shares at UNP (up 16 per cent); CSX (up 16 per cent); and NSC (up 14 per cent).”

* Evercore ISI’s Jonathan Chappell raised his target for CP to US$331 from US$305 with a “outperform” rating and CN to US$108 from US$102 with an “in line” rating.

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