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

Canaccord Genuity analyst Matthew Lee upgraded his rating on MAV Beauty Brands (MAV-T) to “buy” from “hold,” commenting that better medium-term visibility into the company has convinced him the stock’s discount against peers is unwarranted given its growth and debt deleveraging efforts. He also raised his price target on the global personal care company to $6 (Canadian) - which matches the median price target on the Street - from $4.

“We have revisited our MAV thesis after performing independent channel checks and having follow-up conversations with management. This leads us to the view that the company’s medium-term organic growth appears solid with management’s strategy allowing MAV to improve margins, reduce balance sheet leverage, and prepare for further accretive acquisitions beyond fiscal 2020,” Mr. Lee said in a note.

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Excluding the newly acquired Mane Choice, the analyst said he believes that North America revenue growth for the company was mid-single digits throughout H1/20. Meanwhile, a refreshed management team will help MAV enter its next phase, he said.

“MAV’s business model is naturally asset-light with no owned factories, very low capex, and robust gross/EBITDA margins. While F19 (and Q1/20) saw cash flows somewhat derailed by working capital usage, we expect that going forward, the company will be able to convert ~50% of its EBITDA to free ash flow, driving 8% yield in F20 and 11% in F21. Importantly, we believe this will allow MAV to reduce its leverage from 4.0x at the start of F20 to 3.6x at the end of the year, and 3.1x by the end of F21," he said.

**

Several analysts cut their price targets on SNC-Lavalin Group Inc. (SNC-T) after the Canadian engineering company on Friday said it swung to an unexpected loss in its latest quarter, stung by a series of fixed-price contracts that it is trying to close. The stock fell as much as 15 per cent to a six-month low on Friday.

An arbitration ruling that went against SNC-Lavalin on a decade-old unnamed resources project cost the Montreal-based company $57.9-million, contributing to a loss of $85.1-million or 48 cents a share for the third quarter. The company said it is now doing a review of all outstanding legal issues on its legacy projects to get a better handle on the remaining risk.

BMO cut its target price on SNC to $24 from $26; Atb Capital Markets to $41 from $42; CIBC to $30 from $35; Desjardins Securities to $34 from $36; RBC to $32 from $33; and Scotiabank to $38 from $39.

“The profitability of the Resources segment was negatively impacted by an unfavourable C$58m arbitration ruling on a legacy LSTK project completed in 2013 (not related to the current LSTK backlog) and, to a lesser extent, restructuring costs for the Engineering Services business,” commented Desjardins analyst Benoit Poirier. “This is unfortunate as SNC would have delivered a much better performance than expected with the remaining LSTK projects.”

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But Mr. Poirier reiterated a “buy” rating on the stock. “We continue to see significant long-term value creation potential from SNC’s strategy to exit LSTK projects (especially Resources LSTK projects) to focus on SNCL Engineering Services. We estimate that the market is still attributing more than C$2.3b of cash toward completion of the remaining C$2.1b of LSTK construction projects. This is well above our revised assumption of C$975m in a worst-case scenario,” he said in a note.

Canaccord Genuity analyst Yuri Lynk also urged investors to be patient as he reiterated a “buy” rating and $40 price target on the stock.

“Despite the disappointing quarter, we continue to see a compelling value opportunity,” Mr. Lynk said in a note. “SNCL Engineering Services boasts a stable backlog (it’s only down 4% despite the pandemic) and generated $186 million of OCF (operating cash flow) in Q3/2020 alone. Once the loss-making LSTK projects roll off, the worst of which should be completed by Q2/2021, these strong results will no longer be overshadowed by negative cost reforecasts on LSTK work. With just $707 million in net debt, including $400 million of limited recourse debt to CDPQ, SNC’s largest shareholder, we believe SNC has ample financial flexibility to see this transition to a pure-play services firm through to the end.”

Raymond James analyst Frederic Bastien was one of the most bearish on the Street, moving his price target down to $23 while reiterating a “market perform” rating.

“We believe investors should continue to steer clear of SNC-Lavalin until its Resources LSTK backlog is burned off and all potential warranty risks are eliminated. These reared their ugly heads again in 3Q20, overshadowing a better-than-anticipated operating performance from the engineering services business. We also worry that since there is no sure way to quantify how much working capital the Infrastructure EPC Projects will continue to consume, they will likely force management to play defense for much of 2021,” Mr. Bastien said in a note.

The median price target is now $32, down $3 from a month ago, according to Refinitiv Eikon data.

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**

At least three brokers initiated coverage on Nuvei Corp. (NVEI-T) with bullish ratings on the Canadian provider of payment technology solutions for merchants and other partners.

Cowen and Company gave Nuvei an “outperform” rating and price target of $59 (Canadian). Credit Suisse started coverage with an “outperform" rating and US$45 target. Citibank gave it a “buy” rating and US$44 price target. Nuvei stock is traded in both U.S. and Canadian dollars.

“We believe the positives (favorable and relatively differentiated revenue mix; tech stack geared to take advantage of that revenue mix; attractive financial metrics, etc.) more than offset the risks (M&A-heavy backdrop; controlled corporation dynamics, etc.),” said Citibank analyst Ashwin Shirvaikar. “While the stock is up about 43% from the IPO cover, volume trends indicated in the prospectus point to a strong quarter out of the box.”

The median price target is US$50, according to Refinitiv Eikon.

**

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A rare opportunity has opened up to purchase Allied Properties REIT (AP-UN-T) at a deep discount to its underlying real estate values, according to Raymond James analyst Brad Sturges.

He cut his price target on Allied Properties, to $43.50 from $48, but reiterated an “outperform” rating.

“We believe that Allied’s earnings results in 2020 (YTD) highlight the resiliency and high-quality nature of its Canadian urban office real estate portfolio, and that the REIT is well positioned to withstand short-term operating challenges as a result of the pandemic given its balance sheet strength. The large dislocation between Allied’s current unit price and the REIT’s underlying asset values tends to be a very rare occurrence for Allied, which we believe could offer investors a sizable total return opportunity if this pricing gap closes back to previous historical levels. Positive developments on the vaccine front that provides greater clarity on an expected timeline for the safe return to the office for Allied’s tenants and visibility on future WHF trends represents the main key positive catalyst for Allied’s units, in our view. While discussions remain very preliminary, Allied noted on its 3Q conference call that many of its tenants suggest that they are planning for their entire workforce to return to the office once its safe to do so,” Mr. Sturges said in a note.

Allied Properties REIT’s third quarter funds from operations were 0.57/unit, unchanged from a year ago. The REIT’s quarterly same-property rental income remained relatively flat.

Mr. Sturges noted that Allied’s units trade at 16.6x estimated 2021 adjusted funds from operations, about 31% below his $46.00 net asset value estimate.

RBC Monday also cut its price target on Allied Properties REIT to $50 from $56.

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The median price target is $45.

**

RioCan Real Estate Investment Trust’s (REI-UN-T) third-quarter results were “a welcome improvement” from the previous quarter, but investors should remain cautious on the retail sector, said BMO analyst Jenny Ma.

She cut her price target on RioCan to $17 from $18.50, while maintaining a “market perform” rating.

“As the economy reopened, operational metrics improved q/q (namely rent collection and provisions); however, the retail sector continues to grapple with both pandemic-induced near-term uncertainty and long-term structural challenges,” Ms. Ma said in a note.

She raised her applied cap rate on RioCan’s portfolio, which resulted in a decline in her net asset value estimate.

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Her lowered price target still implies a total return of 28 per cent over the next year, including a 10 per cent distribution yield.

The median target among analysts is $20.50.

**

Monday saw both a ratings upgrade, as well as a downgrade, for Canada’s Imperial Oil Ltd. (IMO-T) at major U.S. banks.

JP Morgan raised its price target to $23 from $18 and bumped up its rating to “neutral” from “underweight.” Analyst Phil Gresh cited the company’s third-quarter results for the action, which he termed as strong thanks to cost management, better margins and higher-than-expected pricing. He noted refining fundamentals have held up better in Canada than the U.S.

But Goldman Sachs downgraded Imperial Oil to “sell” from “neutral” with a price target of $15, down from $19.

Goldman analyst Neil Mehta linked the action to Imperial’s higher cost structure, which reduces the upside for free cash flow. He sees better upside for energy stocks that include Suncor and Canadian Natural Resources.

**

In other analyst actions:

Canada Goose Holdings Inc. (GOOS-T): BTIG raises target price to C$50 from C$41

Alphabet Inc. (GOOGL-Q): Canaccord Genuity raises target price to US$1900 from US$1800.

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