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

Citing its strong share price performance thus far in 2019, Industrial Alliance Securities analyst Elias Foscolos lowered his rating for Superior Plus Corp. (SPB-T) on Friday to “buy” from “strong buy.”

“Since our upgrade on January 11, Superior has returned 25 per cent (excluding dividends), far outpacing comparable peers and the TSX,” he said.

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Mr. Foscolos thinks the potential sale of its Speciality Chemicals business has now been absorbed by the Street. Since the June 10 announcement, Superior Plus’ share price has increased by 9 per cent.

"This news has helped enhance SPB’S year-to-date stock performance which has far outpaced its peers," he said.

“Historically, the company has indicated that it had no plans to divest this business segment, however this announcement strongly indicates that multiple expressions of interest have been received. We estimate SPB could sell the SC business in excess of $1-billion. There is no assurance the sale will be complete, therefore there are no transaction details nor a set timeline for the transaction. However, since that announcement SPB’s stock has risen 9 per cent adding $200-million in equity value.”

Mr. Foscolos raised his target for the stock to $15 from $14.75. The average on the Street is $14.65.

“As its price performance continues to appreciate we have elected to take a breath and downgrade our rating,” he said.


In separate research notes, Mr. Foscolos trimmed his target price for shares of both CES Energy Solutions Corp. (CEU-T) and Pason Systems Inc. (PSI-T) in response to the firm’s lower rig count expectations.

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Pointing to “recent market trends,” Industrial Alliance lowered both its Canadian and U.S, rig count estimates for 2019 and 2020.

In Canada, the firm is projecting a 29-per-cent decline in average rigs in 2019 to 135 with a rebound of 19 per cent (to 160) coming in 2020. For the U.S., it expects a 2-per-cent decline to 990 rigs in 2019 and a 6-per-cent increase in 2020 to 1,050 rigs.

With those changes, Mr. Foscolos reduced his 2019 and 2020 revenue estimate for Canadian Energy Solutions by 2 per cent and 5 per cent, respectively.

He also expressed concern over a "general" decline in its margins since 2017, which he said "seems to be causing concern for investors."

“Although not broken out, we believe that CEU’s Canadian Production Chemicals division now accounts for 50 per cent of total Canadian revenue,” he said. “To us, lower margins are of moderate concern, but we believe understanding why margins are lower is important. Specifically, these chemical sales do not seem to be tied to the drill bit, and are likely lower margin. This change would account for a muted decline in Canadian revenue relative to rig counts, as the Company is becoming less reliant on direct drilling activity. We are forecasting CEU’s Q2/19 Canadian revenue to be about triple that of Q2/16, while we only project rig counts to be 50 per cent higher. We believe that investors are not currently accounting for this shift into a more diversified revenue mix.”

Maintaining a “buy” rating for CEU shares, Mr. Foscolos lowered his target to $4 from $4.25, which falls short of the $4.77 aversge.

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“We believe that a disconnect exist between the value of CEU’s equity and the Company’s current situation. CEU’s stock is 25 per cent lower than during the previous downturn in 2016, while its debt is yielding 300 basis points less and Adj. EBITDAC is projected to more than triple from 2016 based on consensus estimates,” the analyst said.

At the same time, Mr. Foscolos lowered his target for Pason Systems to $22.50 from $25, keeping a “buy” rating. The average on the Street is $24.50.

The analyst said: “Most of the company’s revenue is tied to North American (but not Canadian) drilling, resulting in a projected mid-single-digit impact on PSI’s top line. Although, a clean balance sheet, international presence, and potential for growth from peripheral product offerings help insulate PSI from a full effect of current market weakness. We are reducing our estimates and trimming our target price.”


The race for video content “bodes well” for Evertz Technologies Ltd. (ET-T), according to Raymond James analyst Steven Li, who sees future upside.

On Thursday, the Burlington, Ont.-based developer and manufacturer of electronic systems for the broadcast and film industry reported better-than-anticipated fourth-quarter results, which Mr. Li called a "nice beat."

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He noted a jump in revenue and backkog along with a $13-million purchase order announced last week comes at a time when many non-traditional players are increasing video content in the United States.

"During F2019, ET had revenue from two large U.S. broadcasters more than 10 per cent (at 12 per cent each)," the analyst said. "Historically, ET rarely had any notable customer concentration (no customers greater than 7.5 per cent in 2018, no customers greater than 5 per cent in 2017). Also last week, ET reported a large purchase order in excess of $13-million from a leading U.S. carrier. The purchase order reflects a large scale multi-site adoption of Evertz IP based Software Defined Networking infrastructure including EXE core. At the same time, we note many non-traditional players are increasing video content in the US (Netflix, Amazon Prime video, Google YouTube,Apple etc). Coincidence? We think not."

Also pointing out “positive” deferred revenue trends, Mr. Li raised his target for Evertz shares to $19 from $18 with an “outperform” rating. The average on the Street is $19.33.


ARC Resources Ltd.'s (ARX-T) capex reduction helps calm investors’ “unending uncertainty,” said Raymond James analyst Jeremy McCrea.

On Thursday, the Calgary-based oil and gas producer cut its 2019 capital expenditure budget by $75-million to $700-million, citing the deferral of the Attachie West Phase I gas processing and liquids-handling facility.

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“With the collapse in WTI, NYMEX and AECO prices in the past weeks and ongoing political, and regulation (curtailment) uncertainty, one of the top questions lately from investors has been related to the company’s 2019 outspending,” said Mr. McCrea. "As ARC mentioned in its Q1 release, “ARC regularly monitors commodity prices and market conditions to ensure that, first and foremost, its balance sheet and dividend are protected”. As such, the capex cut announced shouldn’t come as much of a surprise but more importantly, helps now alleviate any uncertainty with ARC’s business strategy. This was likely weighing on the company’s share price lately (with each dividend investors, growth investors and risk adverse investors all likely trimming positions given the indecision on what they’value most’ and what ARX would ‘cut’).

“Although we are disappointed that Attachie Phase 1 is now not likely on stream before June 2022 (given the quality of asset), long term value investors should appreciate the difficult decision made by the company to protect the balance sheet, that ultimately might attract investors back into the name given the current valuation. After catching up with management, it appears if commodity prices continue to decline further, the company believes they can support production down to $400-million in spending still but further indicated that depending on the commodity price, it might not make profitable sense to even spend $400-million.”

Maintaining a “strong buy” rating for the stock, Mr. McCrea lowered his target by a loonie to $15.25. The average is $12.88.

“Overall, we’re not certain when investor sentiment will return to the sector. The industry has along road in proving to investors that rate of return metrics are competitive with other industries and balance sheet risk won’t always dictate share price performance. ARX demonstrating it is willing to sacrifice some growth in return for improved profitability and balance sheet safety should be rewarded (and likely will). With a compelling asset base, coupled with a clean balance sheet and an 8.8-per-cent yield, ARC is well positioned to weather the current market conditions.”


Calian Group Ltd. (CGY-T) is a “rare value play in technology and professional services,” said Laurentian Bank Securities analyst Chris Martino.

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In a research report released Friday, Mr. Martino initiated coverage of Ottawa-based company with a "buy" rating, calling it a "consistent value creator" with a "renewed focus on growth."

"The company has delivered 70 consecutive quarters of net profitability while weathering periods of reduced spend by the Canadian federal government and U.S. defense contractors, increased competitive activity in its legacy business and the inherent cyclicality of its engineering and manufacturing unit," he said. "We believe this is indicative of Calian’s disciplined contract bidding practices, tight opex control and the ability to right-size operations as needed, creating value throughout cycle.

“In a departure from the company’s historic yield orientation, management has taken on a mandate for accelerated growth, delivering 8-per-cent revenue CAGR [compound annual growth rate], 13-per-cent EBITDA CAGR and 16-per-cent EPS CAGR since 2015; with the stock generating a total return CAGR of 21 per cent over this period, outperforming both the TSX Composite and Small Cap indices. With a 'Five plus Five’ organic / M&A growth strategy and opportunities for margin gains, we see a continuation of profitable growth, particularly with M&A supportive of international expansion and diversification away from CGY’s traditional government client exposure.”

Calling it “attractively valued,” Mr. Martino set a target of $38.25. The average is $37.50.

“We see Calian as a growing, scalable business with a unique position as a proven leader and consolidator in attractive niche growth market,” he said.


In other analyst actions:

CIBC World Markets initiated coverage of Brookfield Business Partners LP (BBU-N, BBU-UN-T) with a “neutral” rating and US$43 target. The average on the Street is US$47.

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