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

Expecting a “more muted” recovery in the second half of the year due to sustained weakness in caustic soda prices, Desjardins Securities analyst David Newman downgraded his rating for Chemtrade Logistics Income Fund (CHE.UN-T) to “hold” from “buy” ahead of the Aug. 8 release of its second-quarter financial results.

“Following a lacklustre 1Q18, beset by rail congestion and other previously discussed legacy issues, we anticipate another soft quarter in 2Q18,” said Mr. Newman. “For 2Q18, we expect investors to focus on: (1) the decline in Northeast Asia caustic soda prices after peaking in late 2017 (as well as a recent slowdown in demand for hydrochloric acid (HCl)), albeit with some signs of recent stabilization; (2) CHE’s efforts to improve operational performance at its Sulphur Products & Performance Chemicals (SPPC) segment (eg constrained sulphur by-product supply, margin issues due to self-marketing sodium bisulphite (SBS)) and Water Solutions & Specialty Chemicals (WSSC) segment (eg high employee turnover at one of its water chemical plants in Virginia, unacceptable safety procedures at an ACH facility in Alabama and higher raw material costs with a slow recovery through municipal contract pricing), with a recovery anticipated toward 2H18 (albeit not likely as robust as the Street is forecasting); (3) an above-average number of turnarounds at SPPC; and (4) lingering rail constraints that may have modestly curtailed some of CHE’s chlor-alkali shipments, as well as the impact of the truck strike in Brazil.”

The analyst is projecting adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $68-million for the quarter, which is below both the consensus on the Street of $72-million and the $92-million result from the same period a year ago.

“While we had anticipated much improved financial results in 2H18, based on strong chemicals markets, a recovery in some specialty chemicals deferred business, improved pricing, less operational noise and potential asset sales, caustic soda markets have rolled over, especially caustic soda prices in Northeast Asia, which has a strong correlation to the pricing realized by CHE at its plant in North Vancouver (subject to a 30–90-day lag, by our estimate),” he said. “Weakness at its SPPC and WSSC segments has been buffered by strength in the chlor-alkali markets at its Electrochemicals (EC) segment, specifically caustic soda and HCl. However, the upside from an operational recovery at SPPC and WSSC may not be enough to offset the recent weakness in the caustic markets, which has compelled us to revisit our 2H18 recovery thesis, especially given the Street has the recovery priced to perfection.”

Mr. Newman lowered his full-year 2018 and 2019 EBITDA estimates to $305-million and $334-million, respectively, from $320-million and $363-million. His adjusted free cash flow per share projections fell to $1.41 and $1.57 from $1.53 and $1.84.

With those adjustments, his target for Chemtrade units dropped to $17 from $19. The average target on the Street is currently $19.69, according to Bloomberg data.

“While we like CHE’s longer-term prospects as the company looks to stabilize its base business in 2H18 and 2019, we are taking a cautious stance in the short to mid-term, given the substantial price declines in caustic soda and an overly optimistic Street view despite an increasingly volatile environment,” he said. “With the stock’s reduced potential upside, we are moving our recommendation to Hold.”


Ahead of the release of its third-quarter 2018 financial report on Aug. 1, Raymond James analyst Steven Li removed CGI Group Inc. (GIB.A-T, GIB-N) from the firm’s “Canadian Analyst Current Favourites” list in response to the stock’s “strong” outperformance since being added in late January.

During that span, the Montreal-based information technology company’s share price has jumped by almost 28 per cent, versus a 1-per-cent increase in the TSX as a whole.

Despite the move, Mr. Li expects CGI to report “solid” quarterly results, highlighted by “strong” cash generation and an improved outlook in IT Service spending.

“Similar to other U.S. Fed IT names (Booz, CACI) that have recently outperformed, we expect CGI U.S. Fed exposure to drive strong bookings,” he said. “When paired with margin expansion (Raymond James projects a 50 basis point increase; in contrast to other peers) as well as solid cash flow generation, we expect investors’ take-aways to be generally positive. We are a little bemused that we end up a couple pennies below consensus EPS despite our positive growth/margin outlook. With CGI shares’ strong outperformance year-to-date, these high expectations likely temper stock reaction on earnings day.”

Mr. Li is projecting revenue for the quarter of $2.97-billion, in line with the expectation on the Street, while his earnings per share estimate of $1.07 is 2 cents below the consensus.

“Outsourcing consultant ISG recently highlighted tailwinds benefiting the global economy; low interest rates, strong dollar, increasing GDP of major markets,” the analyst said. “Digital transformation has started to mature with ‘deals coming to market [that were earlier] pilots’ and deal sizes increasing. ISG raised its growth forecast for traditional sourcing to up 4 per cent year over year for calendar 2018 (was to 2 per cent). Several of CGI’s recent awards have been large scale digital transformation projects (e.g. Glasgow, Meyer Werft, Lufthansa, SSA, CDM). With an estimated y/y FX tailwind of 0.7 per cent this quarter, we expect we could see a small upside on the top-line reflecting 3 per cent organic revenue growth.”

Maintaining an “outperform” rating for CGI shares, Mr. Li raised his target price to $94 from $85. The analyst average is currently $81.86.

Elsewhere, CIBC World Markets analyst Stephanie Price increased her target to $90 from $83, keeping an “outperformer” rating.

Ms. Price said: “CGI continues to operate in a solid environment, with clients increasingly viewing IT (digitization, consumerization, etc.) as a competitive differentiator. We see CGI as well positioned in this market.”


Beacon Securities analyst Jacob Willoughby raised his rating for Adventus Zinc Corp. (ADZN-X), warning: “If you don’t buy this, someone else will.”

On July 17, the Toronto-based company announced the closing of a private placement of 10.27 million common shares with total gross proceeds of approximately $9.2-million. Wheaton Precious Metals Corp. (WPM-T, WPM-N) was the largest participant in the offering and now owns 9.9 per cent of Adventus’ common shares.

At the same time, Adventus issued 3.8 million shares to Salazar Resources Ltd. as consideration for the Pijilí and Santiago projects, which were acquired under its previously announced Ecuador exploration alliance.

“We view this as very positive news and as another major validation of Adventus Zinc’s management and properties,” said Mr. Willoughby. “We expect a steady flow of news on this name going forward including several batches of drill results from Curipamba (both infill and exploration on the greater land package), a potential joint venture partner on the company’s Irish properties, and possible new property acquisitions.”

Currently the lone analyst on the Street covering the stock, he moved it to “buy” from “speculative buy” and increased his target to $1.80 from $1.50.


Choice Properties Real Estate Investment Trust’s (CHP.UN-T) integration of the acquisition of Canadian Real Estate Investment Trust “appears to be going smoothly,” according to Desjardins Securities analyst Michael Markidis, who said its second-quarter financial results met his expectations.

“Less than three months have elapsed since the CHP– REF transaction closed,” he said. “During this time, we believe the new senior management team, consisting of president and CEO Stephen Johnson, COO Rael Diamond and CFO Mario Barrafato, have spent a disproportionate amount of their time focusing on personnel decisions (8 per cent of the combined headcount has been reduced), systems integration and on touring properties. We expect additional disclosure surrounding CHP’s longterm strategy (including potential dispositions and targeted leverage/payout ratio) will be provided over the next several quarters. At the same time, the size of CHP’s development pipeline, which including active and future projects has an aggregate cost base of $469.9-million, will likely expand.”

On July 18, Choice reported funds from operations (FFO) per unit of 27 cents, in line with Mr. Markidis’s projection. Pre-merger operating performance also met his expectations.

Maintaining a “hold” rating for Choice, he raised his target to $13.25 from $12.75. The average is $13.12.


Desjardins Securities analyst David Newman believes Parkland Fuel Corp. (PKI-T) is “revving up its engines for a strong quarter.”

Previewing the company’s second-quarter financial results, scheduled to be released on Aug. 2, Mr. Newman said its Burnaby refinery continues to show momentum, pointing to “attractive” crack spreads. He’s projecting adjusted EBITDA for the quarter of $200-million, exceeding the consensus on the Street of $165-million.

“We expect PKI to stay on track toward its 3–5-per-cent organic growth target, underpinned by: (1) its refreshed On the Run c-store concept and improved merchandising; (2) a burgeoning private label offering; (3) the upcoming launch of its loyalty plan; and (4) the contribution from new-to-industry sites and retrofits,” said Mr. Newman. “For 2Q, we believe the unseasonably cold weather in April may have cut into traffic at its gas stations, but likely benefited PKI’s commercial propane business.”

“PKI is looking to ramp up its M&A activities via tuck-in deals across the mid-continental US while leveraging its Canadian supply. In Canada, we expect PKI to focus on tuck-ins to bolt on to its pan-Canadian network and fill in white space (eg Calgary, Edmonton and Toronto). We forecast net debt to adjusted EBITDA to decline to sub-3.0x at the end of 2018, at which point the company should be well-positioned to undertake transformative deals.”

Keeping a “buy” rating for Parkland shares, he raised his target price from $37, which is the current consensus on the Street, to $38.

“PKI offers a combination of strong growth and stable yield, as well as potential catalysts given the integration of CST and CCL (including strong expected synergies),” the analyst said.


Seeing upside to both sales and earnings forecasts for BJ’s Wholesale Club Holdings Inc. (BJ-N), Citi analyst Kate McShane initiated coverage of Wall Street’s top-performing initial public offering of 2018 with a “buy” rating.

“Although this retailer operates in a highly competitive space both in number of competitors and on price, BJ’s club model offers compelling value for its customers and benefits from positive traffic trends,” said Ms. McShane. “As an investment, BJ is one of the few growth stories in hardlines/broadlines retail that also carries an EBIT margin expansion opportunity, creating an attractive algorithm with upside potential as operations continue to improve."

Believing its an opportunity for investors to “own the warehouse club space at a cheaper multiple,” she set a target price of US$30 for its stock. The average on the Street is US$27.

“BJ’s is no COST [Costco Wholesale Corp, COST-Q],” she said. “Compared to COST, BJ’s is smaller, has a slower comp growth rate, is more regional, does not own its real estate, and has a higher debt/EBITDA ratio. However, COST is currently trading at 28 times price-to-earnings and 15 time EV/EBITDA on an FY2 basis with EPS growth of 9 per cent over the next two years versus BJ’s currently trading 20 times P/E and 10 times EV/EBITDA on an FY2 basis and long-term EPS growth rate in the double digits. We think at least part of the COST premium is driven by its value / treasure hunt model, a factor that is also part of the BJ thesis.”

Ms. McShane was one of several analysts to initiate coverage following a quiet period for banks who underwrote the IPO.

Other initiations included:

-Jefferies’ Christopher Mandeville with a “buy” rating and US$31 target.

-Baird’s Peter Benedict with an “outperform” rating and US$30 target.

-Nomura’s Simeon Siegel with a “buy” rating and US$29 target.

-William Blair’s Ryan Domyancic with an “outperform” rating without a specified target.


In other analyst actions:

TD Securities analyst Sean Steuart upgraded West Fraser Timber Co. Ltd. (WFT-T) to “buy” from “hold” and raised his target to $102 from $99. The average target is currently $102.29.

National Bank Financial analyst Dan Payne upgraded Baytex Energy Corp. (BTE-T) to “outperform” from “restricted” with a $7.25 target, exceeding the consensus of $6.

Mr. Payne downgraded Raging River Exploration Inc. (RRX-T) to “tender” from “restricted” with a $6 target, which is below the average on the Street of $8.02.

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