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

Desjardins Securities analyst Maher Yaghi lowered his rating for The Stars Group Inc. (TSGI-T, TSG-Q) in response to Wednesday’s announcement that it has agreed to a US$6-billion takeover by Ireland’s Flutter Entertainment PLC.

“As the UK gambling industry is affected by significant regulatory headwinds and the U.S. sports betting industry is likely to be the theatre of competition among large, credible companies, we believe gambling firms see an increasingly attractive business case for industry consolidation,” said Mr. Yaghi. "This likely prompted the management teams from Flutter and TSGI to propose a merger, which will now have to gain regulatory approval. This could prove challenging, especially in the UK and Australia, as the companies are already strong players in these markets.

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"We believe the offer is attractive to TSGI’s shareholders if Flutter’s stock price remains at the current level. Overall, we believe the combined entity faces less risk due to reduced indebtedness (vs TSGI on a standalone basis) and stronger operations, as the two companies own well-established brands in complementary products in an industry in which scale is a competitive advantage."

Emphasizing the assets for both companies are "very compatible and synergies are significant," Mr. Yaghi moved TSGI to "hold" from "buy" with a $31 target. The average on the Street is currently $30.79.

“We estimate TSGI’s current share price implies a probability that the deal will succeed of 85 per cent,” he said. “We acknowledge that there are a lot of moving parts to TSGI’s value, including Flutter’s stock price and the possibility of a higher bidder. However, at this point, given the stock is trading very close to our fundamental valuation of $31, we are downgrading it to Hold from Buy. That said, we believe the stock is meaningfully discounted for regulatory risk but does not consider the potential emergence of other bids.”

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Though he remains “positive” on its long-term outlook and diversification strategy, CIBC World Markets analyst Kevin Chiang cut Linamar Corp. (LNR-T) to “neutral” from “outperformer” in response to its revised financial outlook.

On Thursday, the auto-parts maker’s shares dropped 10.4 per cent after it announced the strike by 49,000 General Motors Co. workers in the United States is costing as much as $1-million a day in profit.

“While we see significant upside in LNR’s share price over a longer-term horizon given its more diverse business model, we realize that looking out over our forecast period, the company’s end markets are facing heightened volatility,” he said. "Until we get some clarity on these end markets, we expect LNR’s share price will be range bound.

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“Given the growing trade tension between the U.S. and China, it is unclear that this will be resolved looking out the next 6-12 months. As such we move to the sidelines given these headwinds impacting LNR are macro and outside of the company’s direct control. We view LNR’s TBVPS [tangible book value per share] ($34) as a good entry point.”

Mr. Chiang reduced his target of $48 to $56. The average on the Street is $50.40.

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In response to recent share price depreciation, Bloom Burton analyst David Martin raised his rating for HLS Therapeutics Inc. (HLS-T) to “buy” from “hold.”

“Following the Aug. 8 FDA call for a Vascepa Advisory Committee Meeting (AdCom) and Bloom Burton’s ensuing downgrade of HLS stock to HOLD, the shares have declined 18 per cent and Bloom Burton has talked to KOLs,” he said. "Based on our KOL discussions, we stand by our estimate of 75-per-cent probability of Vascepa approval by the FDA (and subsequent approval by Health Canada) and are maintaining our risk-adjusted target price of $19.00.

“However, because of the drop in HLS share price; our increased confidence in the 75% probability of approval; and adjusted views* of the upside (C$23.00 per share at the conservative end of the range to more than $75.00 per share if certain labelling and competitive scenarios occur) and downside ($8.00 per share if Vascepa is not approved), we are returning HLS stock to a BUY rating, but changing investment risk to Speculative (was Average).”

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Mr. Martin’s target of $19 sits below the average on the Street of $20.50.

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The Street’s reaction to the release of Constellation Brands Inc.'s (STZ-N) quarterly results on Thursday was “overdone,” according to RBC Dominion Securities analyst Nik Modi, who said the firm is “buyers on weakness.”

The New York-based beverage maker, which invested $5-billion in Canadian cannabis producer Canopy Growth Corp. (WEED-T) last year, reported results that fell largely in-line. However, its stock fell by 6.1 per cent, which Mr. Modi attributed to being “caught up” on lower-than-anticipated beer depletion growth.

"We continue to believe STZ's beer fundamentals remain healthy, and see a clear path to 6-8-per-cent volume growth over the next 3 years," the analyst said. "Our beer FY'20e beer depletion number remains unchanged at 8 per cent and we are raising EPS to $9.15 (excl. Canopy) in accordance with the delayed wine divestiture."

Despite raising his 2020 earnings per share projection to US$9.15 from US$8.85 (versus guidance of US$9 to US$9.20), Mr. Modi maintained an "outperform" rating and US$250 target. The average is currently US$227.36.

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“STZ’s P/E trades in-line with the group, but on a growth adjusted basis it is one of the cheapest names in our coverage universe - trading at a 20-per-cent discount to the group,” he said. “We admit there’s been a lot of noise over the past year, but we believe visibility is poised to improve because: 1) the W&S business is on track to close by calendar year-end, which would leave behind faster growing, higher margin brands; 2) we expect Canopy losses to moderate with new management; and 3) we expect continued delivery in beer will debunk current concerns.”

Elsewhere, though he lowered his target to US$228 from US$230 with an "outperform" rating, Credit Suisse's Kaumil Gajrawala also emphasized Constellation's potential.

“Distractions aside, Constellation reported its largest quarter mostly in line with or slightly above expectations. EPS and FCF guidance was raised, underlining the strength of the model,” he said. “We see an opportunity to own on the pullback, given valuation at 21 times NTM [next 12 month] P/E (5-yr average 22 times).”

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Canaccord Genuity analyst Yuri Lynk lowered his third-quarter financial projections for North American Construction Group Ltd. (NOA-T), pointing to “probable adverse weather impacts.”

“We believe NACG could see share price weakness around the release of Q3/2019 financial results as the current consensus EBITDA estimate of $40-million now looks unlikely to be achieved,” he said. “We recommend buying any such weakness as we believe NACG should be a core small-cap industrial holding based on its strong growth outlook, underpinned by a backlog of $1.4-billion (13 times larger year-over-year), and two highly accretive acquisitions completed late in 2018 which have yet to be fully appreciated by the market, in our view.”

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Mr. Lynk said heavy rain in the oil sands likely resulted in lost revenue days.

“Government of Canada precipitation data indicates that, in Q3/2019, the Mildred Lake weather station saw total rainfall of 202 millimetres, just the second time precipitation has exceeded 200 millimetres in a quarter in the past 10 years (222mm in Q3/2012),” he said. “On a year-over-year basis, total precipitation was up 22 per cent while rainfall days, which totaled 61 in Q3/2019, were 39 per cent higher.”

With that unexpected hurdle, Mr. Lynk reduced his EBITDA projection for the quarter to $35-million from $40-million. His 2019 EBITDA estimate dropped to $175-million, which is the low end of the company’s guidance, from $180-million.

“We remind investors that Nuna generates the bulk of its $14-million of EBITDA in Q3/2019 and we don’t believe it was impacted by adverse weather as it operates in more northern regions. This diversity blunts some of the negative impact from the reduced oil sands activity.”

Mr. Lynk kept a “buy” rating and $27 target for the stock. The average is currently $24.70.

“Taking a step back, we remain comfortable with our BUY recommendation given NACG’s strong fundamentals,” he said. “According to the Canadian Association of Petroleum Producers’ (CAPP) 2019 Crude Oil Forecast, oil sands production should increase 6 per cent in 2019 and a further 4 per cent in 2020. Furthermore, we note a favourable competitive environment for NACG after its acquisition of its largest competitor while others have exited the industry. This has allowed the company to build a $1.4 billion backlog at favourable terms that supports revenue for the next five years.”

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