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

Though Rogers Communications Inc. (RCI-B-T, RCI-N) is entering 2019 with “good momentum” following stronger-than-expected fourth-quarter results, Desjardins Securities analyst Maher Yaghi cautions that capital expenditure increases are limiting free cash flow growth.

“The implementation of IFRS 16 starting on January 1, 2019 has made the analysis of RCI’s guidance more sinuous than usual,” he said in a research report released Friday. "After making adjustments, we conclude that EBITDA growth guidance is decent at 4–6 per cent and in line with consensus. However, management expects higher capex in 2019—a surprise which led to lower-than-expected FCF guidance. Still, management was confident enough in the company’s cash generation to increase the dividend by 4 per cent. Importantly, RCI did not commit to recurring annual increases, indicating its preference for potential marginal cash distributions through buybacks.

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“While the company’s operations remain healthy, competition stemming from the now four-way wireless dance does have an impact on pricing power, in our view, affecting longer-term growth prospects.”

In response to both the results and guidance, Mr. Yaghi increased his postpaid net subscriber addition expectations but lowered his projection for prepaid net additions “to reflect the new competitive landscape.” That led to a slight increase in wireless revenue.

Overall, his 2019 and 2020 EBITDA estimates rose to $6.47-billion and $6.62-billion, respectively, from $6.37-billion and $6.59-billion. His earnings per share projections rose to $4.76 and $4.89 from $4.62 and $4.83.

He maintained a "hold" rating and target price of $74.50 for Rogers shares. The average target on the Street is $74.79, according to Thomson Reuters Eikon data.

"While EBITDA continues to grow at a decent pace, increasing capex trends are pressuring FCF growth," he said. "We expect somewhat tougher comps for wireless ABPU growth in the back half of the year, with margin expansion becoming somewhat harder to achieve, as wireline and wireless competition is expected to intensify. While the company’s fundamentals are strong, we see better value elsewhere in the sector."

Meanwhile, Canaccord Genuity analyst Aravinda Galappatthige raised his target to $75 from $73 with a "hold" rating (unchanged).

Mr. Galappatthige said: "We are of the view that rising competitive intensity in wireless and lower relative FCF growth and dividend yield vis-à-vis comps could moderate share price gains in 2019 following a 35-per-cent upswing through 2017/18."

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With significant exposure to long-term cobalt growth, Cobalt 27 Capital Corp. (KBLT-X) is a “developing battery minerals play” with an “attractive” valuation, according to RBC Dominion Securities analyst Andrew Wong.

Pointing to the rising demand for both cobalt and nickel stemming from the increasing adoption of electric vehicles, Mr. Wong initiated coverage of the Toronto-based company with an “outperform” rating.

"We view the company as an attractive investment vehicle for direct exposure to positive long-term fundamentals in battery minerals," he said.

"We also believe valuation is attractive at a significant discount to NAV [net asset value], and several potential catalysts could help valuation including: 1) cobalt prices bottoming and stabilizing in 2019; 2) completion of the ongoing Ramu acquisition; 3) generating cash flow by mid-2019; 4) returning cash in dividends and buybacks; 5) additional streaming deals to provide greater diversification and reduce concentration risk."

He added: "We think Cobalt 27 provides the most direct investment exposure in cobalt through a combination of physical cobalt holdings and streaming assets free from potential sourcing conflicts - cobalt accounts for 70 per cent of our NAV [net asset value] estimate. The company's cobalt assets are well positioned to capitalize on two emerging trends – the growing deficit in cobalt metal markets, and the increasing focus on cobalt supply that is free from potential conflict. Notably, the price premium on free market (i.e. US, EU) cobalt metal compared to Chinese cobalt chemical widened in late-2018 ($2-5/lb)."

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With Cobalt 27 shares trading at a "deep discount" to his NAV estimate and below comparable streaming peers, Mr. Wong set a target of $8. The average target on the Street is currently $11.15.

"Although we think a discount to NAV may be warranted as cobalt prices remain relatively weak in the near term and Cobalt 27 is less diversified than streaming peers, we think the valuation gap should close as the Ramu acquisition closing results in cash generation, cobalt prices stabilize in 2019 and the market tightens, and further streaming transactions are completed to help diversify the portfolio," the analyst said.

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Calling it an “under-the-radar, mid-cap compounder,” Canaccord Genuity analyst Rufus Hone initiated coverage of People Corp. (PEO-X) with a “buy” rating.

“In our view, People Corp is a compelling growth story,” said Mr. Hone of the Winnipeg-based employee benefit, pension and human resource consulting company.

Mr. Hone thinks the Canadian small and medium size enterprise (SME) market’s structure now sits fragmented and “ripe for consolidation,” which is likely to benefit People.

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"The Canadian SME market for group benefits, retirement and HR consulting has traditionally been serviced by many small/regional companies, providing a fairly narrow range of services," the analyst said. "Since 2006, People Corp has successfully completed 20+ acquisitions (financed through cash and stock) as they consolidate the market. With acquisitions typically done at 5-7-times EBITDA multiples and PEO shares trading at a mid-teens multiple, this is a highly accretive combination. Based on data from Statistics Canada, we estimate that People Corp has a market share only in the low to mid-single digits. People Corp has discussed a very strong pipeline of acquisitions (with 100s of potential targets) and an increasing number of inbound calls from business owners looking to sell.

“Part of our investment thesis is underpinned by what we view as an attractive industry backdrop, primarily driven by: (i) rising healthcare costs; (ii) aging demographics of the workforce; (iii) higher utilization rates; (iv) the advent of new medical services; (v) the increasing prevalence of chronic diseases; and (vi) the high cost of new drugs and treatments. While these trends remain a challenge for many employers and the healthcare industry, the business of providing employee benefits and HR solutions should be a beneficiary.”

Mr. Hone said he expects to People to continue to grow at a more rapid pace than the current expectations on the Street, pointing to "healthy organic growth rates complemented by a modest amount of acquisition activity over the next several years."

“Our 2019E-21E EBITDA estimates are between 12-22 PER CENT above consensus as we model sustained organic growth and modest acquisition activity,” he said. “For reference, over the last five years, People Corp has grown revenues by 300 per cent. This includes average organic growth of 10 Per cent annually.”

Pointing to its “low risk, highly cash generative business model with an attractive, increasingly sticky revenue mix,” Mr. Hone set a target price of $10 for its shares. The average is $9.43.

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Citi analyst Christopher Danely sees downside in 2019 for Intel Corp. (INTC-Q) following a “rare” earnings miss and lower-than-expected first-quarter guidance, cautioning that its stock is “not a buy on weakness” and removing it from the firm’s “catalyst watch.”

"Despite the lower guidance, we believe there is still substantial downside to consensus," he said.

On Thursday after market close, Intel reported fourth-quarter revenue of US$18.7-billion, a drop of 3 per cent from the previous quarter and below the estimates of both Mr. Danely (US$19.5-billion) and the consensus on the Street (US$19-billion). The result was attributed to softness in China, server chips, Apple smartphones and memory.

The company also guided first-quarter revenue and earnings per share of US$16-billion and 94 US cents, respectively. Both fell short of the analyst's projections (US$17.7-billion and 94 US cents).

"Intel expects revenue growth of 1 per cent in 2019 along with EPS growth of 2 per cent," he said. "Both of which require a strong revenue ramp after the weak 1Q19. We believe this will be very difficult given the inventory build in microprocessors and a slower overall demand environment. As a result, our 2019 revenue and EPS estimates are roughly 4 per cent and 10 per cent respectively below guidance, and we believe there could be downside to even our estimates."

Maintaining a “neutral” rating for Intel shares, Mr. Danely lowered his target to US$50 from US$54. The average is US$53.94.

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Elsewhere, Susquehanna analyst Christopher Rolland lowered Intel to "neutral" from "positive."

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Ahead of the release of its second-quarter 2019 financial results on Jan. 31 after market close, Raymond James analyst Steven Li sees “room for upside” with Open Text Corp. (OTEX-Q, OTEX-T), believing a read-through of bellwethers “looks positive.”

"We find current expectations have been kept well in check (consensus implying negative 1.8-per-cent organic growth in a seasonally strong December quarter) which leaves room for some potential upside," said Mr. Li in a research note released Friday.

"Recent software/IT industry reports have largely been solid. IBM on Tuesday reported 2-per-cent year-over-year costant currency software growth, an acceleration from previous quarters. IBM commentary suggested the strength was across all software segments. Similarly, Accenture PLC [most recent quarter] growth accelerated to 10-per-cent year-over-year cc from 8 per cent year-over-year cc the previous quarter. There do not seem to be macro factors out there that could potentially trip OTEX F2Q results."

Mr. Li is projecting revenue and earnings per share for the quarter of US$732-million and 75 US cents, respectively, both exceeding the consensus (US$727-million and 72 US cents).

He maintained an “outperform” rating and US$48 target for Open Text shares. The average target is currently US$32.

"Overall, we still find the execution opportunity substantial given OTEX's improving organic growth profile (F2018: 2.5 per cent) and the potential for a market re-rating if OTEX can sustain even modest organic growth," he said.

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Troilus Gold Corp.'s (TLG-T) low-grade open pit mine in Northern Quebec offers investors “strong torque” to gold prices, according to Canaccord Genuity analyst Tom Gallo.

"It also provides a unique opportunity, in our view, that many large-scale, low-grade open pits do not," he said. "Initial capital is assumed to be substantially lower than a greenfield, or brand-new, site. Due to past production, the site is tailored for an operation of this scale, with ground works and remnant infrastructure completed and largely in place.

"Upcoming potential catalysts include ongoing drill results to continue from the 40-kilometre drill program planned, with a technical study (likely a PEA) by mid-year.

In a research note released Friday, Mr. Gallo initiated coverage of the Toronto-based advanced stage exploration and early development company with a "speculative buy" company.

"We believe reasons to own TLG include: leverage to the commodity price as an upper-quartile cost operation; location in what we see as one of the best mining jurisdictions in the world: Quebec; supportive government, low-cost power; exploration upside, which could aide in boosting grade and metal inventory; predictable metallurgy and rock mechanics as a past producer; some remnant infrastructure remains, which will save a portion of restart capex," he said.

Mr. Gallo set a target price of $1.60 per share. The average is now $2.61.

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Citing its current valuation, Credit Suisse analyst Andrew Kuske raised Acadian Timber Corp. (ADN-T) to “outperform” from “neutral” and said “that stock becomes our preferred exposure in our universe given the attractive risk/reward.”

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Credit Suisse analyst Curt Woodworth initiated coverage of Largo Resources Ltd. (LGO-T) with an “underperform” rating and target of $2.50. The average is $5.55.

“We believe vanadium (V) prices have peaked for the cycle, but expect continued volatility given the highly illiquid nature of the spot market,” he said. “Largo has a world-class resource base and pure-play position in the market, which has benefited from a step-function change in China demand owing to rebar standards implemented in November 2018. However, the market for vanadium is volatile; over seven trading days in 4Q18, prices in China fell by $14 per pound.”

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In other analyst actions:

National Bank Financial initiated coverage of Richelieu Hardware Ltd. (RCH-T) with an “outperform” rating and $29 target. The average is $33.

Haywood Securities analyst Pierre Vaillancourt cut Goldquest Mining Corp. (GQC-X) to “sell” from “hold” with an 8-cent target, falling from 20 cents. The average is 41 cents.

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