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

Air Canada’s (AC-T) offer for Transat A.T. Inc. (TRZ-T) is a “fair price for a solid asset,” according to Desjardins Securities analyst Benoit Poirier.

“We had maintained our bullish stance on TRZ over the last year as the company was clearly undervalued in our view, trading well below its surplus cash,” he said. “We are pleased with Air Canada ’s (AC, TSX, not rated) proposed transaction at $13/share and remain confident that a deal will be finalized.”

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Seeing a strong rationale for the deal, Mr. Poirier moved his rating for Transat shares to “hold” from “buy” given what he perceives to be limited upside to the proposed deal price (of approximately 8 per cent) as well as the time he expects the transaction to take to close (12-18 months).

“TRZ enjoys a solid market position in both the transatlantic and sun destinations markets,” the analyst said. “It also has a well-established brand/product in the leisure industry, having been named the World’s Best Leisure Airline in 2018 at the Skytrax World Airline Awards. Consequently, we see a strong rationale for the transaction and remain confident that a deal will be finalized in the coming weeks. We believe synergies could be significant considering both businesses are complementary (route optimization, system integration, implementation of best practices, etc). We also understand that AC could look to divest of its land in Mexico (acquired for $76-million in September 2018) as TRZ has agreed to limit its undertaking and expenses related to the implementation of its hotel strategy during the exclusivity period—a potential opportunity to reduce the price paid for the asset (we derive a value of C$1.82/share after applying a 10% discount for liquidity). Finally, recall that AC’s B737 MAX fleet is grounded; however, TRZ does not have any exposure to the B737 MAX and has started to receive the A321neoLR, which is attractive for AC.

“Antitrust issues are manageable, in our view, considering the significant overlap between TRZ’s and AC’s businesses. Assuming a transaction is finalized and approved, we estimate that the combined entity would have capacity of 3.3 million seats in the transatlantic market (60-per-cent market share for Europe only) and 2.2 million seats in the sun destinations market (46-per-cent market share). While we believe market share is important, we estimate there is substantial overlap between TRZ’s and AC’s offering, and we would expect the companies to propose some remedy in order to obtain regulatory approval (with the possibility of redeploying some of the fleet outside of Europe). This would allow new players to expand/enter the market and provide competition.”

Mr. Poirier moved his target for Transat to the proposed transaction price of $13 per share from $12. The average target on the Street is $10.36.

“Our new target implies an EV/EBITDA multiple of 3.0 times on the tour operator business (up from 2.0 times; assuming a value of C$8.92/share for the surplus cash at year-end and $1.82/share for the value of land adjusted for liquidity). We are pleased with the proposed transaction as we believe the offer price is fair (we had previously anticipated a price of C$12–16/share). Therefore, we believe the potential of a higher bid for the company remains limited in light of the break fee and $1.00 uplift needed to beat AC’s proposal. We believe it could be difficult for a financial partner (ie Groupe Mach, Pierre Karl Péladeau or FNC Capital) to offer a higher price as they would require the $150-million cushion to operate the business. While a strategic partner could still propose a higher price (we estimated up to C$16/share vs the minimum offer required by the 30-day agreement with AC of $14/share), we believe the probability is limited considering the exclusivity deal with AC.”

Elsewhere, CIBC World Markets analyst Kevin Chiang upgraded Transat to “neutral” from “undeperformer” with a $13 target, rising from $6.

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CIBC World Markets analyst Scott Fromson sees “limited” 12- to 18-month share price lift potential for Intertape Polymer Group Inc. (ITP-T), leading him to initiated coverage with a “neutral” rating.

“This largely reflects ITP’s revenue, adjusted EBITDA and margin goals out to 2022, which imply growth rates above those of the last four (robust) years. ITP has liquidity for acquisitions, but recent deals highlight the challenge of paying reasonable multiples for higher-margin companies, while maintaining reasonable leverage,” said Mr. Fromson in a research note released Friday.

"Against a backdrop of three 2019 asset ramp-ups, persistently high M&A valuations and an aging economic cycle, we believe ITP will be challenged to concurrently hit its growth goals and delever."

The analyst set a $20 target, which falls short of the $23.14 consensus.

“We see leverage as the potential vulnerability in ITP’s growth strategy,” he said. "In our scenario forecasts, ITP can hit its 2022 growth goals without issuing equity and stay within its covenants; ITP has almost $340-million of cash and available credit under its bank facility. Under our upside case scenario, we forecast leverage remaining around the 3-times level – this is at the higher end of packaging comps, which average around the low-2-times range. At ITP’s current multiple, there isn’t a lot of wiggle room for missteps.

“Our $20 price target is based on an 8.0-times multiple on our $178-million 2020 EBITDA estimate, accounting for $511-million of estimated net debt. Where we could be wrong is if: 1) ITP makes large, higher-margin acquisitions at better-than-expected valuations; 2) ITP shows better-than-expected progress on asset ramp-ups (particularly India); 3) ITP produces a few sequential quarters of EBITDA margin improvement; or 4) packaging industry valuations reverse the trend of multiple contraction.”

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Park Lawn Corp.'s (PLC-T) first-quarter financial results provide “solid evidence” that it is executing is business plan, said Acumen Capital analyst Brian Pow.

In Tuesday after market close, the Toronto-based company reported revenue for the quarter rose 84.3 per cent year-over-year to $50.2-million, slightly less than the projections of Mr. Pow ($52.3-million) and the Street ($51-million). Adjusted EBITDA jumped 102.2 per cent to $11.7-million (versus estimates of $10.9-million and $11.4-million), while earnings per share rose to 14.1 cents from 10.8 cents and exceeded Mr. Pow's 9.8-cent projection.

“PLC reiterated its longer-term target for growth to $100-million of pro forma adjusted EBITDA by the end of 2022 with expectations they can achieve this while maintaining leverage in a range of 2.0-2.5-times debt/proforma adjusted EBITDA,” he said.

“Acquisitions will continue to be a part of the story with the Company making good progress over the first five months of FY19. Management noted on the conference call that their acquisition pipeline remains healthy with many good Yuck-in opportunities. They continue to believe they can execute acquisitions in the targeted multiple ranges. Funeral home acquisitions in Canada at 4-6-times EBITDA and U.S. funeral home acquisitions 5-8 times EBITDA, while Cemetery acquisition multiples can vary and could be as high as 10 times. Management is targeting approximately $35-million EBITDA from acquisitions.”

With a "buy" rating for Park Lawn shares, Mr. Pow increased his target to $31 from $29.50. The average on the Street is $31.61.

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“Unlike some of its larger North American competitors, we believe PLC has significant abilities to drive growth from its current footprint through organic initiatives as well as additional tuck-in acquisitions which can be very accretive,” he said. “The Company is also managing its leverage more conservatively which we believe is prudent.”

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Mainstreet Equity Corp. (MEQ-T) “continues to deliver strong results,” said Laurentian Bank Securities analyst Yashwant Sankpal after the Calgary company beat the Street in the second quarter by a “big margin.”

On Tuesday, Mainstreet reported diluted funds from operations per share of 92 cents, rising from 68 cents a year ago and topping Mr. Sankpal's projection by 7 cents and the consensus on the Street by 11 cents.

“With recovery in Alberta and Saskatchewan sustaining, MEQ should be able to easily maintain its title of the best FFO/unit growth story across the entire Canadian REIT sector over the last 5 years (CAGR of 11 per cent),” the analyst said. “In spite of MEQ’s historical track record of value creation, MEQ trades at a large discount to its peers because of its low trading liquidity, smaller market cap, and its exposure to Western Canada.”

Expecting a active year of acquisitions, Mr. Sankpal hiked his target to $63 from $55 with a “buy” rating. The consensus is $59.75.

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Boardwalk Real Estate Investment Trust’s (BEI-UN-T) operating metrics in the first quarter showed “continued, albeit gradual, improvements,” said Canaccord Genuity analyst Brendon Abrams.

On Wednesday after the bell, the Calgary-based REIT reported a same-property occupancy average of 96.6 per cent, up 0.85 per cent from the previous quarter and 0.55 per cent year-over-year.

"Combined with an easing of incentives, this drove sequential stabilized revenue growth of 1.0 per cent in the quarter," the analyst said. "While this is all positive, it is also consistent with our view that the pace of recovery in Boardwalk’s core Western Canada markets (AB and SK combined total 75 per cent of net operating income) will be gradual, rather than the 'V' shape that many investors have been anticipating since the beginning of the Alberta recession several years ago."

Overall, Boardwalk reported funds from operations per unit of 56 cents, up 16.7 per cent year-over-year and ahead of the 54-cent expectation of both Mr. Abrams and the Street.

"Boardwalk entered the downturn in Alberta with a very healthy balance sheet and has utilized this capacity to high-grade its portfolio through capital expenditures, acquisitions, and development projects," said Mr. Abrams. "However, this has also resulted in an increased debt burden for the REIT with net debt increasing 33 per cent, from $2.1-billion at the end of Q4/14 to $2.8-billion today. It should be noted that Boardwalk's suite count has remained relatively constant. On a per suite basis, net debt has increased 38 per cent from $61,000 to $84,000 over this period. While on a debt to total assets basis (IFRS) Boardwalk’s leverage is conservative at below 50 per cent, on a debt to EBITDA basis it is 14 times, which is at the higher-end of REITs within our coverage universe."

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Mr. Abrams maintained a "hold" rating and $44 target for Boardwalk units. The average is $48.58.

“We still prefer multi-family REITs with GTA and Ottawa exposure,” he said. “Overall, our investment thesis following Q1/19 results is unchanged. We expected, and continue to expect Boardwalk to show financial and operational improvements in 2019. Notwithstanding this, we continue to prefer multi-family REITs with significant exposure to the GTA and Ottawa. We believe, particularly on a risk-adjusted basis, the visibility for stronger rental and SPNOI growth is much higher in these markets relative to Alberta over both the near and medium term. Put simply, for us, there is no ‘FOMO’ (fear of missing out) on a potential outsized Alberta recovery and we do not see an obvious near-term catalyst that would see Boardwalk outperform its peers in Eastern Canada.”

Elsewhere, Raymond James analyst Ken Avalos kept an "outperform" rating and $48 target.

Mr. Avalos said: “The slow and steady recovery continues with the Company continuing to post sequential revenue gains and NOI improvements. Clearly, fundamentals in BEI’s core Alberta markets are lagging when compared to other large Canadian cities, but are improving nonetheless. We expect BEI is poised to pick up sizable gains in cash flow over the next three years from the current recovery pace, and if for any reason the pace of concession burn off accelerates, that time frame gets compressed. In a world with CDN apartment REITs generally trading at premiums to near peak cash flows, we like the value proposition of an established property and asset management platform trading at a 7-per-cent discount to likely trough cash flow.”

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Raymond James analyst Johann Rodrigues raised his financial projections for Automotive Properties Real Estate Investment Trust (APR-UN-T) following a “strong” first quarter.

“After a disappointing year last year, with a negative 11-per-cent total return (vs. a 6-per-cent return by the TSX REIT Index), Auto has rebounded strongly and is up 20 per cent to begin 2019 (vs. 13 per cent for the TSX REIT Index). The story is very consistent, with a 1.4-per-cent increase in SPNOI [same property net operating income] and 3.5-4.0-per-cent FFO [funds from operations] growth almost a certainty, and a 7.5-per-cent yield as the cherry on top. We believe this makes Auto Properties one of the most desirable yield names in Canadian REITs and reiterate our Outperform rating on the name.”

On Tuesday after the bell, the Toronto-based REIT reported FFO of 27 cents per unit, up 6 per cent year-over-year and 2 cents above the projection of Mr. Avalos and the Street. He attributed the beat to “stronger” contributions from acquisitions.

“The REIT enjoyed 10-per-cent rent bumps at three properties which helped contributed to 1.7-per-cent overall SPNOI growth, above the typical 1.3-1.4-per-cent range. Auto Properties does not have any leases that expire until mid-2021, and carries a weighted average lease term just under 14 years.”

“With a host of recent acquisitions ($200-million-plus in the last 6 months), Auto Properties’ leverage now sits at 56 per cent. We believe that the REIT could raise equity in conjunction with the next sizable acquisition, especially as the stock approaches NAV. The one drawback to APR’s strategy is that it is very equity-dependent; however, that equity is put to good use as most acquisitions are quite accretive to both FFO and NAV.”

With the results, Mr. Rodrigues increased his 2019 and 2020 FFO per unit forecast by a penny to 27 cents and 28 cents, respectively.

He kept an “outperform” rating and $11.50 target, which is 3 cents less than the consensus.

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