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

Investors applauded the release of better-than-projected fourth-quarter financial results by Computer Modelling Group Ltd. (CMG-T) on Thursday, sending its stock up 7.91 per cent.

In reaction to that jump, however, Industrial Alliance Securities analyst Elias Foscolos downgraded his rating for the Calgary-based provider of reservoir simulation software for the oil and gas industry to "buy" from "strong buy" based on recent share price appreciation.

"We categorize the results as positive, and the market absorbed the results," he said.

Before the bell, Computer Modelling reported revenue and EBITDA for the quarter of $21.1-million and $9.4-million, respectively, exceeding the estimates of both Mr. Foscolos ($17.6-million and $7.2-million) and the Street ($17.5-million and $7.1-million).

"CMG’s results beat expectations driven by above-expectation Prior Period and Perpetual software licences, which drove a more than 30-per-cent beat in adjusted EBITDA," said Mr. Foscolos. "Canada appears to be stabilizing and period-ending deferred revenue of $35-million is a positive sign. For the second consecutive quarter, CMG was just a hair short of funding its dividend with FFO. Our outlook is reinforced by the results."

Though he largely maintained his forward estimates, Mr. Foscolos lowered his rating for the stock, pointing to a 21-per-cent jump in price in April 21.

He maintained a target price of $7.50. The average on the Street is $7.67.


Héroux-Devtek Inc.'s (HRX-T) long-term fundamentals remain “solid” following the release of “robust” fourth-quarter financial results, according to Desjardins Securities analyst Benoit Poirier.

"[Thursday], HRX reported stellar results for a second consecutive quarter," he said. "Solid FCF helped to solidify the balance sheet. Management also introduced decent FY20 guidance, supported by both the Commercial and Military segments. Overall, we continue to like the name for its solid growth potential and attractive valuation."

The Longueuil, Que.-based manufacturer reported adjusted earnings per share of 36 cents, exceeding the projections of both Mr. Poirier and the Street (25 cents and 26 cents). Revenue of $158-million also topped forecasts ($147-million and $145-million).

Mr. Poirier said recent acquisitions Compañia Española de Sistemas Aeronáuticos S.A. (CESA) and Beaver Aerospace & Defense Inc. contributed "nicely" during the quarter. Expecting both both to create further shareholder value, the analyst thinks the stock has "key ingredients in place" to reach $27-32 in the long term.

"Management reiterated its long-term revenue guidance of $620–650-million in FY22," he said. "We expect HRX to end FY20 with an EBITDA margin of 15.5 per cent. We calculate that HRX could generate an EBITDA margin of 16.5–18.5 per cent in FY22 as new programs ramp up, help fill utilization rates and improve margins (we conservatively forecast 16.0 per cent). In a base case, assuming revenue of $620-million, an EBITDA margin of 16.5 per cent, net debt of $146-million and an EV/EBITDA multiple of 11 times, the stock could be worth $27. In a bullish scenario, assuming revenue of $650-million, an EBITDA margin of 18.5 per cent, net debt of $146-million and an EV/EBITDA multiple of 11 times, the stock could be worth $32, which provides significant upside potential from current levels. Accretive acquisitions could provide some upside to these numbers."

He raised his fiscal 2020 and 2021 earnings per share projections to 93 cents and $1.07, respectively, from 85 cents and $1.01.

Maintaining a “buy” rating, Mr. Poirier increased his target for the stock to $23 from $21, which tops the average on the Street of $20.36.

“HRX remains among our preferred names due to its impressive growth prospects (organically and through cross-selling opportunities with CESA and Beaver), potential for margin improvement (driven by the insourcing of the latest surface treatment and integration of recent acquisitions), improved balance sheet and attractive valuation (8.3 times EV/FY2 EBITDA vs 11.2 times for peers),” he said. “We therefore believe investors should revisit HRX given its strong potential.”

Elsewhere, Raymond James analyst Ben Cherniavsky hiked his target to $19.50 from $17 with an "outperform" rating.

Mr. Cherniavsky said: “For the past several years we have encouraged investors to consider Héroux-Devtek’s shares in the context of the company’s longer-term “fully-ramped” earnings power. This approach has been designed to allow sufficient time for certain key contracts (most notably the Boeing 777/777X) to mature and recent acquisitions to be integrated. It has also required some patience along the way as a number of developments have pushed the timeline for ‘fully-ramped’ EPS over to the right. That patience, however, was rewarded by the company’s strong F4Q19 results. Not that one quarter makes a trend or can serve as a definitive confirmation of a long-standing thesis, but in our view Héroux’s most recent print does provide an encouraging indication of what the business is capable of doing once it is firing on all cylinders. Accordingly, we remain constructive on the stock and recommend that investors continue to own it to see the company’s potential come to full fruition over the next few years.”


RBC Dominion Securities analyst Tyler Broda thinks Vale S.A. (VALE-N) is “starting to emerge” from the recent Brazilian damn tragedy.

“The company has taken $4.9-billion in provisions for compensation and the decommissioning of tailings dams,” he said. “New CEO Eduardo Bartolomeo is now permanent and will be driving Vale to regain its social license in Brazil. We reduce our expected impact from the tailings tragedy to $5-billion (from $10-billion) after taking into account the above. Although beyond the scope of this note, we think the potential for a significant reshaping of Vale which reduces complexity and geographic exposures could be on the cards. First though, the company will be focusing on bringing its asset efficiency higher while continuing to drive a new culture of safety.”

Also seeing a "more robust" near-term iron ore outlook, Mr. Broda thinks the mining giant's valuation has moved to neutral levels.

“Risks still remain, but solid cash generation and a recovery in production, with plenty of embedded optionality elsewhere drives the upgrade,” said Mr. Broda, raising Vale shares to “sector perform” from “underperform.”

“We continue to see iron ore as a heightened risk, especially for companies like Vale over the medium-term,” he said. “This said, we believe Vale’s valuation at 0.94 times NAV is fair even in a lower iron ore price environment. In the near-term with our more constructive outlook on iron ore prices ($82 per ton in 2019), Vale’s 13-per-cent FCFY and 3.9 times 2019 estimated EV/EBITDA multiple provide enough valuation support to drive our upgrade. Should iron ore prices stay stronger for longer, Vale’s optionality to higher prices also drives a more compelling risk/reward balance. The shares have underperformed the MSCI World Metals and Mining index by 15 per cent since the start of the year.”

His target increased to US$11 from US$10. The average is US$13.75.


There’s “more value than meets the eye” with PrairieSky Royalty Ltd. (PSK-T), said Raymond James analyst Jeremy McCrea following its Investor Day event in Toronto on Thursday.

“With a well-attended audience, there was plenty of information for investors to digest,” he said. "Overall, the play book highlights potential value across PSK’s GORR and Fee Title landbase with unbooked upside based on locations that have nearby drilling and type curves based on a 5-year averages. While near-term volatility and scaled back E&P capex spending continue to weigh on the stock, the impressive asset playbook reinforces our long-term bullish outlook on the company.

"With the total land base consisting of $59/share in unbooked upside ($13.8-billion, up from $12.5-billion in May 2017), we believe there remains plenty of upside for long-term investors. Overall, we believe the playbook not only provides increased visibility into the company's large undeveloped future inventory pool, but is also likely to result in increased new lease signing. We believe fund managers will appreciate the in-depth portfolio update, reaffirming PrairieSky’s lowrisk (limited need for capital/acquisition spending) business model, that likely results in increased confidence in the name."

With a "market perform" rating, Mr. McCrea increased his target to $20.50 from $20. The average is $22.56.

“As the playbook highlights on its cover page, $1.02-billion in total funds returned to shareholders since 2Q14 is a nice, not-so-subtle reminder of why many investors continue to hold this name.”

Elsewhere, AltaCorp Capital analyst Nick Lupick maintained a "sector perform" rating and $23.50 target.

Mr. Lupick said: “We continue to be thoroughly impressed with the expansiveness of PrairieSky’s asset base along with the elevated interest in its lands., particularly the East Shale Duvernay, which generated more than $40.0-million in lease bonuses in 2017 and has resulted in 2019 drilling activity on PSK lands improving versus 2018. Despite the near term weakness in the share prices resulting from near-term expectations being tempered by uncertainty in the commodity and drilling activity, we continue to believe that PSK is a strong Company for investors with conservative, long term mandates in energy. Our current valuation of the stock remains unchanged based on our expectations for FCF generation and a prolonged improvement in WCSB drilling activity, under our commodity outlook. We believe that the nature of PSK’s 7.8million acres of Fee Title lands, which do not expire, positions the Company’s FCF generation as having annuity’esque characteristics, offering a very unique investment opportunity for investors with a yield mandate and a very long term investment horizon – something that no other Canadian E&P can offer.”


Believing its current valuation is “not reflective of reality” and expecting a “significant re-rating,” Jefferies analyst Owen Bennett initiated coverage of Aphria Inc. (APHA-T) with a “buy” rating and $15 target, which falls below the consensus of $16.61.

Mr. Bennett thinks its valuation is now the cheapest in the sector, despite a strong global outlook, and thinks governance-related issues, which have weighed, are fading.


In other analyst actions:

Bank of America Merrill Lynch initiated coverage of CannTrust Holdings Inc. (TRST-T) with a “buy” rating and $11 target. The average is $12.63.

Acumen Capital initiated coverage of Viemed Healthcare Inc. (VMD-T) with a “buy” rating and $12 target. The average is currently $12.75.

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