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

CIBC World Markets lowered its base metal forecast on Monday to reflect “negative impact of escalating trade wars on global growth.”

Accordingly, equity analyst Oscar Cabrera said he’s taking a “more cautious stance” on base metal mining equities.

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“The downgrade to our 2019-2020 copper and zinc metal price forecasts had a negative impact on most of our covered companies’ EBITDA, EPS and net asset value (NAV) estimates,” he said. “Thus, we lowered most of our covered companies’ price targets by an average of 10 per cent. However, given the relative performance of our covered companies since Q4/18, our ratings did not see many changes.”

However, Mr. Cabrera did downgrade Hudbay Minerals Ltd. (HBM-T, HBM-N) to “neutral” from “outperformer” in response to recent “strong” price appreciation.

“HBM has a number of hard capital allocation decisions to make, not to mention obtain permits, to continue its growth plans (i.e., Rosemont) under a challenging macro-economic environment,” said Mr. Cabrera, who lowered his target for Hudbay shares by a loonie to $8. The average target on the Street is currently is $9.58, according to Bloomberg data.

At the same time, Mr. Cabrera upgraded First Quantum Minerals Inc. (FM-T) to an “outperformer” rating from “neutral.”

“Despite near-term risks with potential changes to Zambia’s sales tax and Panama’s stability agreement, FM has nearly completed the foundation for one of the best copper growth profiles in the mining industry (45 per cent to 850,000 tons by 2025), which should propel the company to among the world’s top 5 copper producer next decade,” he said. “In addition, the completion of the Cobre Panama project improves FM’s free cash flow profile significantly, from a mere $80-million in 2018 to $890-million in 2020. The largest downside risk to our FM $16.00 per share price target would be a decline in copper prices below $2.50/lb on a sustainable basis, because this could trigger negative debt covenants in the company’s debt (net debt/EBITDA: 4.75 times until Q2/19; 4.5 times until Q4/19; 4.0 times until Q2/20; 3.5x thereafter).”

His target of $16 is unchanged. The average is $18.29.

Mr. Cabrera said Teck Resources Ltd. (TECK-B-T, TECK-N) remains his top pick “in the current challenging macro-economic environment.” He maintained an “outperformer” rating and $45 target, which exceeds the average of $40.46.

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“The company has one of the highest average 2019-2020 estimated free cash flow (FCF) yields among our coverage universe (6.5 per cent versus a weighted peer average of negative 0.6 per cent), strong balance sheet (peak net debt to EBITDA at 2.5 times in 2019), potential to increase cash return to shareholders after closing the Quebrada Blanca Phase 2 (QB2) transaction in Q2/19 and organic growth in its copper business, with attributable copper production increasing over 50 per cent to 440,000 tonst once QB2 ramps up by 2023.”


After an increase in the firm’s 2019 and 2020 gold price outlook, CIBC’s Anita Soni upgraded Yamana Gold Inc. (AUY-N, AUY-T) to “outperformer” from “neutral.”

“We believe that consistent delivery evidenced by upward guidance revisions in 2018, organic growth opportunities, and exploration potential combine nicely with an improving balance sheet and attractive relative valuation," she said. "We see further upside to the stock in the near to medium term.”

Ms. Soni’s target rose to US$3.75 from US$3.20 “to reflect our improved outlook for the medium term and higher gold/silver price assumptions.” The average is US$3.27.


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The sell-off in shares of MEG Energy Corp. (MEG-T) since the announcement by Husky Energy Inc. (HSE-T) that it has abandoned its takeover bid has created an opportunity for investors, according to AltaCorp Capital analyst Nicholas Lupick, who upgraded his rating for MEG shares to “sector perform” from “underperform.”

“Following the collapse of the Husky take-over of MEG we downgraded our rating to Sector Underperform as a reflection of the negative 6-per-cent return implied in the share price (at $8.54 per share) versus our current 12-18 month price target of $8.00 per share,” he said.

“Since that time the stock has fallen 37 per cent, resulting in an implied upside to our target price of 48-per-cent - above the Mid-Cap, heavy oil exposed, peer average of 34 per cent. In fact, since July 1 (when Canadian differentials began to show signs of widening), and following this week’s selloff, the stock is now down 51 per cent - underperforming its peers which have fallen 39 per cent on average.”

His target remains $8, which is 57 cents lower than the consensus.

“As we have highlighted numerous times, we continue to believe that MEG has among the best thermal heavy oil resource in the Athabasca Fairway – consistently achieving some of the lowest operating costs in the basin," the analyst said. “We continue to believe that MEG is an ideal investment candidate for investors with a high risk tolerance (given the Company’s leverage) looking for exposure to a rebound in commodity prices.”


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A “weak” 2019 for the global automotive industry is likely weigh on the near-term results for Sierra Wireless Inc.’s (SWIR-Q, SW-T) original equipment manufacturer (OEM) segment, according to Raymond James analyst Steven Li.

However, Mr. Li sees multiple “strong” organic growth drivers in the second half of the year.

“EU passenger car declined for the 4th month in a row in December at negative 8 per cent year-over-year,” he said. “VW recently noted a more challenging macro, with issues around tariffs/trade impacting demand. VW believes it will see some effects at least into 1Q19. The NADA forecasts USA vehicle volume dropping 1 per cent in 2019 (car incentives down, interest rates up). Similarly, China vehicle unit sales were down 4 per cent year-over-year in 2018, with 2019 growth expected to be muted. 1Q19 consensus outlook ($198-million rev/$0.21 EPS) would imply 5-per-cent growth by our estimates in the OEM segment (where Auto is), which appears optimistic given above. Additionally, we usually see some softer seasonality in 1Q for Enterprise Solutions. We could see some price volatility for the stock post the 4Q18 earnings report as a result.”

The analyst pointed to a trio of potential catalysts for the latter half of the calendar year: the ramp-up of its five-year contract with Volkswagen; several contract wins for its low-power wire-area (LWA) wireless technology and the commencement of shipping of its ready-to-connect modules.

“We are watching the latter closely given its potential to increase recurring services attach rate (and build a stronger business model over time),” he said. “Valuation still inexpensive given Telit transaction.”

Maintaining an “outperform” rating for its shares, Mr. Li lowered his target price to US$25 from US$28. The average target on the Street is US$22.70, according to Bloomberg data.

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“Telit’s agreement on July 13, 2018 to sell its Automotive segment for 1.0-1.2 times sales highlights how inexpensive SWIR is, currently trading at 0.5 times sales,” he said. “OEM represents 75 per cent of SWIR revenue. It is their lowest GM segment (27 per cent) while Enterprise Solutions and IoT Services (25 per cent of revenue) carry much higher GM at 54 per cent and 40-44 per cent and precedent M&A transactions for ES & IOT indicate these assets routinely command an even higher multiple (2-3 times-plus sales). The Telit transaction should be setting a floor for SWIR’s valuation at 1.0-1.2 times.”


Acumen Capital analyst Trevor Reynolds lowered his 2019 financial expectations for Vertex Resource Group Ltd. (VTX-X), citing both “uncertainty” surrounding activity in the oil and gas sector and “continuous” delays on pipelines.

“Activity levels in Alberta and Canada have been impacted heavily on the back of the blow out in differentials in Q4/18 followed by curtailments which have reduced demand for rental equipment across the board and placed pressure on margins,” he said. “Overall, in a market which is curtailed there will clearly be a reduction in drilling activity and completions with less emphasis on addressing freeze offs and short-term maintenance issues. While there is the potential for longer term maintenance activities to be fast tracked by companies in order to take advantage of the curtailments, management is not currently banking on it.

“On a more positive note the abandonment business outperformed expectations in 2018 with strong activity levels expected to continue into 2019. In addition, activity levels on municipal infrastructure projects remain high.”

Mr. Reynolds decreased his revenue expectation for fiscal 2019 by 4 per cent to $173.5-million (from $173.5-million), while his adjusted EBITDA projection dropped 17 per cent to $24.1-million (from $28.9-million). He also introduced 2020 estimates of $190.6-million and $27.4-million, respectively.

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He maintained a “buy” rating for shares of the Sherwood Park, Alta.-based provider of environmental services. His target fell to 95 cents, matching the consensus, from $1.20

“While the near-term outlook has softened, we believe VTX’s high quality executive team coupled with industry diversification, and environmental focus will help to weather the storm,” said Mr. Reynolds. “Based on the material insider ownership liquidity remains an issue at this point however it does create a strong alignment with shareholder interests. We expect liquidity to improve as the stock price improves.”


Echelon Wealth Partners analyst Frederic Blondeau initiated coverage of Granite Real Estate Investment Trust (GRT-UN-T) with a “buy” rating, believing its “top-notch team and conservative balance sheet combined with global expertise translates into superior optionality.”

“Generally speaking, we think GRT is conservatively managed,” he said. "The REIT’s units yield 4.9 per cent, implying a 2019 estimated AFFO [adjusted funds from operations] distribution payout ratio of 85 per cent, in line with the Industrial REITs average of 86 per cent.

“In addition, although GRT is diversifying away from Magna International, GRT’s main tenant, the car manufacturer is currently benefiting from a strong strategic positioning within the global car sector, which has continuously been improving since the end of the global financial crisis. We believe that GRT should profit from relatively strong FFO growth as it levers up its portfolio over the next two years, which should translate into distribution increases and capital gains.”

Mr. Blondeau set a target price of $62 per unit, which exceeds the consensus of $60.25.

“Our target price, combined with a distribution yield of 4.9 per cent, represents a potential 12-month return of 12.3 per cent,” he said. “In our opinion, GRT benefits from a strong optionality and growth profile, mainly stemming from three factors: a top-notch team with a proven track record, and a very conservative balance sheet combined with an ambitious global business plan.”


Raymond James analyst Frederic Bastien said he’s “constructive on construction” for 2019 in a research report on the industry released Monday.

“These predominantly small-cap stocks derive significant business from Canada’s resources markets, making them more cyclical than the more diversified pure-play engineers we cover,” he said. “They also work on far fewer projects, which invariably increases concentration and execution risks. In short, while they collaborate closely along the E&C value chain, contractors and engineers appeal to very different investor bases. We should add that construction projects tend to be much longer dated than engineering and design assignments. This generally provides contractors with greater visibility into future operating performance (for better or worse). Said performance will almost always be poor coming out of sector bottoms, when excess supply exerts downward pressure on going-in margins, and significantly more robust as construction activity enters its late-cycle phase. This helps explain why we are so comfortable recommending Aecon Group to investors today.”

Mr. Bastien maintained a “strong buy” rating and $23 target price for shares of Aecon Group Inc. (ARE-T), which exceeds the average of $22.25.

“The company is working off a record backlog of mass transit and nuclear power refurbishment work in Eastern Canada, and ideally positioned on all major pipelines earmarked for construction in Western Canada,” he said. “Aecon’s also sitting on a pile of cash following the sale of its contract mining assets, giving it the flexibility to invest in long-term concessions, pursue bolt-on acquisitions and/or raise its dividend. Oh and we almost forgot: the stock continues to trade well off its historical and the peer group averages.”

The analyst said he “equally bullish” on Bird Construction Inc. (BDT-T) “as it nears mobilization on LNG Canada’s massive Cedar Valley Lodge, continues to diversify its industrial work program and stands to win more P3 projects in the foreseeable future”. He’s also pegged it a “strong buy” with a $10.50 target. The average is $9.38.

“Behavioral adaptation can help birds survive heavy rains and frigid nights, but for BDT, there was no escaping the perfect storm that 2018 brewed up,” the analyst said. “It had it all — IFRS glitches, commercial dispute, labour strike, design-driven execution issues, extended procurement deadlines, investor apathy toward Canadian small-cap stocks and, of course, tax-loss selling. But with financial results finally stabilizing, management’s efforts to diversify the industrial work program bearing fruit and more P3 awards coming down the pipe, rarely has it been as good a time to pick up the stock as now, in our view.”

Mr. Bastien also sees “good upside” for Stuart Olson Inc. (SOX-T) “now that some U.S.-based activist shareholders are campaigning to shake up the board and crystallize value in the stock.” He has given it an “outperform” rating and $7 target. The average is $7.

Conversely, he cautions investors against owning shares of Distinct Infrastructure Group Inc. (DUG-X) “until its workload in the GTA recovers and its debt level stabilizes.” He has a “market perform” rating and 30-cent target for its shares. The average is 42 cents.

“We believe the company needs to manage its working capital better and reverse the recent pattern of earnings disappointments before the stock moves higher,” said Mr. Bastien. “Until this transpires, DIG is the group’s ‘show me’ story.”


Shawcor Ltd.'s (SCL-T) $312-million acquisition of ZCL Composites Inc. (ZCL-T) is a “positive,” according to Industrial Alliance Securities analyst Elias Foscolos.

On Sunday evening, Toronto-based Shawcor, an oilfield services company, announced the deal to buy all of the issued and outstanding shares of ZCL Composites, an Edmonton-based company which is North America’s largest manufacturer and supplier of fibreglass reinforced plastic underground storage tanks, for $10.00 per share.

“This acquisition fits within SCL’s current business and we believe there are meaningful cross-selling and cost synergy opportunities,” said Mr. Foscolos.

He maintained a “strong buy” rating and $26.50 target for Shawcor shares. The average is $28.70.


Pointing to its leading position in Florida’s cannabis market, Beacon Securities analyst Russell Stanley initiated coverage of Trulieve Cannabis Corp. (TRUL-CN) with a “buy” rating.

“Trulieve dominates the Florida (population 21.3 million) cannabis market, with an approximate 60-70-per-cent share of volumes,” he said. “This is a highly concentrated medical cannabis market, with just 14 companies currently licensed to operate in it. The company’s Q3/18 EBITDA margins of 44 per cent are otherwise unheard of amongst publicly traded cannabis companies, reflecting Trulieve’s focus on profitable growth. The company has also made significant progress in expanding to California (population 40 million) and Massachusetts (population 6.9 million), which should support continued revenue/EBITDA expansion.”

He set a Street-high target of $28 for shares of Toronto-based Trulieve. The average is currently $25.

“We value TRUL using a 20 times enterprise value-to-2020 estimated EBITDA multiple applied to our forecast of $124-million,” the analyst said. “This is in line with the broad peer group average, which we view as conservative considering the company’s dominant position in a major market, and industry leading 44-per-cent EBITDA margins. This multiple also represents a 50-per-cent discount to the 40-times average for the closest peers (companies with $1-billion-plus market capitalizations), reflecting residual regulatory uncertainty and a modest float.”


Believing its likely attract a “wide range” of suitors given the potential of its Block 14 project in Sudan, M Partners analyst Bereket Berhe initiated coverage of Orca Gold Inc. (ORG-X) with a “buy” rating.

“The project stands out globally as a result of both the attractiveness of Block 14 economics and the size of the resources already identified, as well as the outstanding exploration upside potential,” said Mr. Berhe.

He set a target of $1.69 per share. The average is $1.08.

“Orca has a diversified set of assets in a new and fast-growing gold district - the Nubian Arabian Shield in east Africa and on the Birimian greenstone belts in west Africa,” he said. ORG has the experience and financial strength to fast-track its development and exploration projects. It is led by former Red Back Mining Inc. management, who have a strong track record of delivering value.”


In other analyst actions:

Canaccord Genuity analyst Rahul Paul initiated coverage of Kirkland Lake Gold Ltd. (KL-T) with a “buy” rating and $44 target, exceeding the current average of $42.50.

Macquarie analyst Peter Lam upgraded Iamgold Corp. (IMG-T, IAG-N) to “outperform” from “neutral” with a $6 target. The average is $7.07.

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