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

Raymond James analyst Daryl Swetlishoff upgraded his rating for Canfor Corp. (CFP-T) following its “transformative accretive” $580-million acquisition of a 70-per-cent stake in Swedish sawmill company Vida Group.

“While this deal clearly surprised the market, we see it as very much in line with Canfor’s well-defined growth strategy centered around high-quality timber facilitating the manufacture of prime solid wood products,” said Mr. Swetlishoff. “Geographic diversification is the key to this deal. Reducing exposure to the timber-short, high-cost B.C. interior region while gaining more stable product pricing is a big win, in our opinion. While investors may be disappointed Canfor is not instead buying back more shares at current depressed levels, this action would cement the regional status quo. Over time, we expect the potential for more stable earnings to be rewarded with higher trading multiples. We expect that sawmill curtailment announcements have put a floor under lumber pricing and recommend investors take advantage of the outsized negative market reaction to add to positions.”

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Moving Canfor to "strong buy" from "outperform," the analyst said diversification was the "key motivator" for the deal and sees more stable earnings ahead for the Vancouver-based company.

“Prior to this announcement, Canfor had 67 per cent of lumber assets in the B.C. interior region,” he said. "Due to Mountain Pine Beetle and wildfire-related log shortages; BC-delivered log cost inflation has resulted in the region becoming the high-cost NA producing region – a key reason for our prior less favourable Outperform rating. Proforma this deal, Canfor will have material operations in B.C., the U.S. South, and now Europe extending global reach with freight logical access to all major world markets. While Canfor announced a tuck-in U.S. South acquisition last Friday, we highlight that similar scale M&A opportunities are rare in that region.

“A key gripe from generalist investors dabbling in the forest sector has been the extreme commodity and hence earnings volatility. We expect this is a key contributor to the very low current trading multiples. With a high proportion of prime grades and proprietary products, we expect Canfor Euro ops to add a measure of stability to reported earnings, which over time has the potential to lead to better valuations.”

Mr. Swetlishoff raised his target for Canfor shares to $35 from $32. The average target on the Street is $28.54, according to Thomson Reuters Eikon data.


Tervita Corp. (TEV-T) entered the public market “with a bang,” said Industrial Alliance Securities analyst Elias Foscolos.

The Calgary-based company, which was formed from the recent merger of Newalta Corp. and Tervita Corp. and began trading on the TSX in mid-July, reported better-than-anticipated third-quarter financial results after the close on Wednesday.

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Adjusted EBITDA of $71-million easily topped the $58-million expectation on the Street, due largely to a strong performance from its Energy Services segment. Net revenue of $203-million also beat Mr. Foscolos's estimate ($197-million).

With the results, the analyst raised his 2019 adjusted earnings per share forecast to 82 cents from 61 cents.

With a "buy" rating (unchanged), his target for Tervita shares increased to $13.50 from $11. The average on the Street is $12.57.


Following weaker-than-expected third-quarter financial results, Desjardins Securities analyst Keith Howlett thinks the fourth quarter takes on added importance for Leon’s Furniture Ltd. (LNF-T).

“Leading big-ticket retailers experienced weak demand in 3Q18, which appears at odds with the strength of employment, wages and economic growth,” said Mr. Howlett, questioning whether a dip in demand was temporary or a “sign of a big-ticket slowdown.”

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On Wednesday, the retailer reported comparable corporate store sales dropped by 1.6 per cent in the quarter, the first decline in three years. Adjusted earnings per share of 42 cents fell below the 45-cent expectation of both Mr. Howlett and the Street.

"Management noted that Ontario was relatively weak, although small markets performed better than urban areas," the analyst said. "Sleep Country management had also called out Ontario as a relatively weak market. Given elections and trade talks during 3Q, we are not ready to call a change of trend."

In reaction to the results, Mr. Howlett lowered his 2018 and 2019 EPS estimates to $1.29 and $1.40, respectively, from $1.37 and $1.46.

With a "buy" rating (unchanged), he dropped his target for Leon's shares to $20 from $21. The average is now $19.

Elsewhere, CIBC World Markets analyst Matt Bank lowered his target to $18 from $21, maintaining a “neutral” rating.

“Leon’s is operating in an increasingly difficult consumer and competitive environment. While a strong balance sheet and costefficiency potential offer upside and optionality, we trim our forecasts and target multiple,” said Mr. Bank.

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Based on regulatory changes that have pushed its municipal aggregation portfolio into the red, RBC Dominion Securities analyst Nelson Ng lowered his target price for Crius Energy Trust (KWH.UN-T), despite seeing it “well on its way” to achieving an adjusted EBITDA run-rate of $100-million in 2019.

“Crius has grown its municipal aggregation portfolio to 300,000 RCEs [residential customer equivalent] (22 per cent of total RCEs) over the last several years,” he said. "However, over the summer, Massachusetts increased the Renewable Portfolio Standards (RPS) requirements, and New Jersey increased transmission costs in relation to the Regional Transmission Expansion Plan (RTEP), which increased Crius’s cost to serve customers. Crius was not able to pass through most of the costs to customers, resulting in an unprofitable (negative margin) municipal aggregation portfolio. Management plans to run off (through 2020) or divest the portfolio.

"Over the next several quarters, we expect new retail customer additions to generate $20–25 per megawatt-hour of gross margins and commercial customers $5–10/MWh, while the run-off of unprofitable municipal aggregation customers will further improve gross margins. Although the 300,000 RCEs of municipal aggregation customers that management wants to run off or divest may exceed new customer additions, we expect the profitability of the customer book (embedded gross margin is a good proxy) to improve."

Mr. Ng expects the Toronto-based company, which reported third-quarter results on Wednesday, to be "lean and clean" in 2019, seeing the benefits of cost-saving initiatives and the wind-down of its solar business as well a lack of restructuring changes.

However, he lowered his adjusted EBITDA forecast through fiscal 2020 to account for both the quarterly results and the expectation of further net customer attrition.

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Keeping an "outperform" rating, Mr. Ng lowered his target by a loonie to $9 "to reflect a moderate reduction in our forecast due to headwinds from the municipal aggregation portfolio." The average on the Street is $8.55.

Meanwhile, Desjardins Securities' Bill Cabel also dropped his target to $9 from $10, keeping a "buy" rating.

Mr. Cabel said: "While efforts to strategically realign the business have unfolded in line and on time with expectations, and are on the cusp of completion, another mis-step (this time in the muni agg business) has derailed recently gained momentum. The stock is clearly out of favour, but the deeply discounted valuation (3.5 times EV/EBITDA), safe dividend (2019 payout ratio of 57 per cent) and very attractive yield (15 per cent) should be very rewarding to those investors willing to believe in a clean 2019."


Canaccord Genuity analyst Brendon Abrams does not expect the Alberta rental apartment business to bounce back following years of deceleration brought on by the struggles of the energy industry, leading him to lower his financial expectations for Boardwalk Real Estate Investment Trust (BEI.UN-T).

“We are now approximately four years past the beginning of the oil downturn that precipitated a major economic recession in Alberta,” he said. "And while most investors perhaps were not anticipating a full recovery to the ‘good old days’ of 2014, we do not believe either that many have fully baked-in the prospect that the current rental apartment environment in Alberta could be the ‘new normal.’ Following Boardwalk’s underwhelming Q3/18 results, most notably a lack of meaningful sequential revenue growth, despite significant capital invested into the portfolio over the past two years, we are leaning very heavily towards the latter than the former.

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“In addition, we believe investors (and analysts) are, once again, ‘recalibrating’ expectations after having waited several quarters (or in some instances years) for a strong and sustained recovery. While we acknowledge the market has bottomed, what we have seen instead is a very slow and gradual recovery with no obvious catalyst to drive rents meaningfully higher. We continue to watch very closely leading indicators which would have us change our view including multi-family units under construction, net migration patterns, and employment trends. However, none of these suggest to us a material rebound in the near term. An expectation that current woes facing Alberta’s primary economic driver, the energy sector, will be resolved in the near term requires in our opinion a very optimistic viewpoint.”

Mr. Abrams lowered his 2018 and 2019 funds from operations projections to $2.25 and $2.54, respectively, from $2.29 and $2.55.

With a “hold” rating, he dropped his target for Boardwalk units to $45 from $48. The average target is currently $50.38.

Elsewhere, CIBC World Markets analyst Dean Wilkinson maintained a "neutral" rating and $49 target.

Mr. Wilkinson said: "Boardwalk reported its fourth sequential quarter of positive SP [same property] revenue growth. While the recent trend appears to be somewhat decelerating on a slight occupancy decline, we would expect that as rental incentives burn off through 2019, the overall trend should remain biased to the upside. We surmise the initial negative price reaction to what was otherwise an in-line and arguably rather uneventful quarter may be routed more in the sentiment inherent in the REITs geography than in its operations per se.

“To the extent Boardwalk is potentially viewed as a derivative energy play (as has been historically the case), then the recent weakness in oil, and specifically WCS, may be having a negative (albeit delayed) impact on the units; i.e. it’s catching up (or down as it may be) to other energy-centric companies.”


Citing “weak” third-quarter results and forbearance on a senior secured facility credit agreement, Raymond James analyst Steven Li downgraded UrtheCast Corp. (UR-T) to “under review” from “market perform.”

"Given doubts around UR’s ability to service its near-term obligations, we are moving our target and rating to Under Review until we get greater visibility," he said.

On Wednesday, the Vancouver-based earth observation company reported revenue for the quarter of $3.4-million, well below the $7.3-million consensus expectation. EBITDA of a loss of $6.8-million also missed projections (a $2.7-million loss).

On Oct. 26, UrtheCast announced an event of default has occurred under its senior facility credit agreement as a result of the recent resignation of Fabrizio Pirondini as an executive.

"UR has entered into a forbearance agreement with the lenders under which they have agreed to refrain from taking any actions until Nov. 23, 2018," said Mr. Li. "No amount is outstanding under the credit agreement with the practical consequence of the event of default is that the lenders are not obligated to fund UrtheDaily under the Credit Agreement. UR is actively negotiating with the current senior lenders as well as exploring alternate financing solutions. While UrtheDaily backlog currently amounts to $34-million in potential annual recurring revenues, the financing snafu could delay UrtheDaily constellation build (or worst, may not happen at all)."

Mr. Li removed his target for the stock. It had previously been 30 cents, which is the consensus.


In other analyst actions:

Credit Suisse analyst Andrew Kuske upgraded Pembina Pipeline Corp. (PPL-T) to “outperform” from “neutral” with a target of $54, jumping from $46. The average is $54.94.

GMP Securities analyst Robert Fitzmartyn lowered Traverse Energy Ltd. (TVL-X) to “reduce” to “hold” with a 5-cent target, down from 10 cents. The average is 15 cents.

Cormark Securities resumed coverage of Western Energy Services Corp. (WRG-T) with a “buy” rating and 90-cent target. The average is 99 cents.

The firm also resumed coverage of Total Energy Services Inc. (TOT-T) with a “buy” rating and $15 target (versus the average of $14.96) and Precision Drilling Corp. (PD-T) with a “buy” rating and target of $6.75 (versus $6.21).

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