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

“Assuming a cautious stance” as its transformation continues, Canaccord Genuity analyst Jenny Ma lowered her rating for Frontera Energy Corp. (FEC-T) to “hold” from “buy” in a research report released Monday.

"In our view, Frontera remains a 'show-me' story, due to the ongoing challenges that the company is facing, including declining production, a high cost structure, and the need of acquisitions to grow," she said. "Two and a half years after the restructuring, transformation efforts continue throughout the organization.

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“Looking back at the company’s track record to date and the consequent share price underperformance, we believe that Frontera’s management has some trust to rebuild with the investment community, something that will likely take time. We think that management realizes this. In his remarks on the conference call discussing Q4/18 results, the CEO Richard Herbert said that among the things the company is focusing on this year, ‘regaining and building trust’ is one of them.”

To rebuild that trust, Ms. Ma thinks investors will need to see at least two or three quarters of "consistent, positive and 'clean'" results before they become exciting again.

"In our opinion, Frontera needs to focus on finishing 'cleaning house' and delivering on its growth strategy," the analyst said. "Setting realistic expectations and delivering on those expectations will be an important part of rebuilding trust. The company is off to a good start, having met or exceeded guidance on all measures except production in 2018. Also, we believe that a stable dividend funded by free cash flow and an active share buyback program could help support the share price."

Ms. Ma dropped her target price for Frontera shares to $14.50 from $22. The average target on the Street is currently $18.75.

"Over the last 12 months, the stock has traded at an average forward EV/DACF [enterprise value to debt-adjusted cash flow] multiple of 3.5 times based on consensus estimates," she said. "We believe that significant multiple expansion is not warranted at this time. Hence, we are capping our 2018 estimated Contingent NAV [net asset value] estimate that we typically use for setting targets and are fixing our short-term target price at 3.5 times 2019 estimated EV/DACF, translating into $14.50 per share (based on our $60/bbl Brent forecast in

2019). We will be reviewing our estimates and the target price on a regular basis. Upside to our target could come from higher commodity prices and growth in CFPS [cash flow per share]."


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There was “lots of noise” in the fourth-quarter financial results for The North West Company Inc. (NWC-T), said Industrial Alliance Securities analyst Neil Linsdell, lowering his target price for the rural retailer.

On Thursday after market close, the Winnipeg-based company reported revenue for the quarter of $532.5-million, an increase of 7.1 per cent year-over-year and topping the consensus projection on the Street of $529.2-million. However, Adjusted EBITDA of $40.5-million fell short of both last year’s result ($43.8-million) and the consensus expectation ($52.7-million), due largely to non-recurring costs as well as higher training and insurance costs.

“Although Q4 results were disappointing, the drivers of the shortfall were mostly one-time in nature, although insurance costs will be higher in northern Canada and the Caribbean in fiscal 2020, and ongoing expenses at the airline may be higher in the near term as maintenance is ramped-up, prompting us to be more cautious with our profit forecasts, hence the decrease in our target price, although we continue to see efforts to improve the longer-term health and profitability of the Company, and the Board’s decision to increase the dividend provides confidence in the outlook,” said Mr. Linsdell.

"Near-term sentiment is stable to positive in most of the Company’s markets, with the northern Canada economic outlook being positive in 2019 due to government investments, western Canada remaining stable for the Giant Tiger business, continuing recovery in Alaska, and a mixed environment in the Caribbean with post-hurricane reconstruction offsetting tourism downturns."

Maintaining a "buy" rating for North West shares, the analyst trimmed his target to $32.50 from $34 after lowering his earnings expectations for fiscal 2020, 2021 and 2022. The average target on the Street is $32.08.

Elsewhere, CIBC World Markets analyst Matt Bank lowered his target by a loonie to $30, keeping a "neutral" rating.

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Calling its 5G spectrum a “valuable commodity,” Canacord Genuity analyst Matthew Lee initiated coverage of Toronto-based Terago Inc. (TGO-T) with a “buy” rating.

“In our view, TeraGo’s ownership of large swaths of high-band spectrum puts it in prime position to capitalize on the growing bandwidth needs of the Canadian wireless players as the industry transitions to 5G,” said Mr. Lee. “While the shares are up meaningfully over the last twelve months, we see further upside from its spectrum assets. In addition, we believe there is potential for further value to be realized as the price of high-band spectrum continues to be crystalized through auctions and transactions in both Canada and the United States.”

He added: "In 2017, U.S. spectrum holding company Straight Path was acquired by Verizon after a substantial bidding war with AT&T. Straight Path shares saw a 400-per-cent-plus increase from their pre-acquisition price, despite the company owning nothing more than high-band spectrum licenses. While there are variances in the details, we believe the Straight Path acquisition, as well as the recent 28GHz auction, are beginning to bring TeraGo’s upside into light. Our valuation of TGO’s spectrum is largely based on the aforementioned transactions. We believe the firm’s licenses should be valued at the higher end of these precedents, given the 50-80-per-cent premium historically given to licenses in prime locations, the improving visibility into 5G’s spectrum needs, and the large number of potential buyers. We note,

however, that any sale of TGO’s spectrum may be impacted by regulatory hurdles, namely a spectrum clawback. We expect the probability of some form of clawback is 60 per cent, which we incorporate into our valuation. In terms of timing, we believe that potential acquirers will likely become more active in 2020 as Canada moves toward the 2021 high-band spectrum auctions."

He set a target price of $12.50 for Terago shares, exceeding the current average on the Street of $10.38.

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Cormark Securities upgraded Hexo Corp. (HEXO-T) to “buy” from “speculative buy” while raising its price target to $7.50 (Canadian) from $11.

Hexo’s Newstrike Brands deal is its first meaningful acquisition and helps expand cultivation platform and incremental distribution in five provinces, Cormark Securities analysts wrote.

HEXO is well capitalized and has a combo of scalable capacity, competitive cost structure and pursues differentiated products with credible partners such as Molson Coors, it said.

But it added that fiscal 2020 guidance appears aggressive due to several industry-related factors that could act as headwinds.


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Challenges in the U.S. market will continue to weigh on the results for AutoCanada Inc. (ACQ-T), said AltaCorp Capital analyst Chris Murray in the wake of an “extremely noisy” fourth quarter.

On Thursday evening, the Edmonton-based automobile dealership group reported revenue of $782.8-million, exceeding Mr. Murray's $782.8-million estimate. However, the company reported an adjusted fully diluted loss of 34 cents per share, missing the analyst's expectation of a 43-cent gain.

The company also announced several management changes, including the departure of its chief financial officer and the head of its U.S. operations.

"Management hedged its previously announced 2019 $100-million-plus EBITDA target, noting that while the Company may achieve its goal in Canada, a less favourable cost structure in the U.S. business is proving to be a drag on their operations in the market," said Mr. Murray. "Although the environment remains uncertain, management sees a $10-million loss in 2018 in the U.S. and is looking to drive that to $0 by the end of 2019. The Company is implementing its plan to create operational efficiencies and grow revenues, with a particular focus on creating a sustainable platform with U.S. assets that can weather a challenging economic climate. We believe there remains a possibility that the Company shuts down the business or sells it outright if it continues to underperform."

Though he sees improvements in its Canadian operations, driven by the company's "Go Forward” plan, Mr. Murray said the cost structure of U.S. business continues to weigh on his expectations, leading him to cut his 2019 and 2020 adjusted EBITDA estimates to $100.2-million and $111.6-million, respectively from $103.3-million and $110.9-million. His adjusted FD EPS expectations fell to $1.63 and $2.01 from $1.71 and $2.04.

With a "sector perform" rating, he raised his target to $18 from $17.50 citing his "roll of estimates and valuation period."

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The average is $14.22.

"Overall, we see the release as negative, as the loss of a competent executive coupled with much weaker than expected U.S. performance and a challenging macro environment offset partially by improving Canadian execution has us continue to remain cautious, looking for additional evidence prior to becoming more constructive," said Mr. Murray. "We continue to see a wide range of outcomes for the story with expectations for highly volatile trading."


Citi analyst Paul Lejuez assumed coverage of a quartet of U.S. apparel makers from colleague Kate McShane on Monday.

Mr. Lejuez downgraded the firm’s rating for PVH Corp. (PVH-N) to “neutral” from Ms. McShane’s “buy” rating with a target price of US$120, falling from US$140. The average on the Street is US$134.72.

"While the company has two brands with good global growth potential in Tommy Hilfiger (TH) and Calvin Klein (CK), PVH overall is still heavily dependent on the North America wholesale and outlet channels (we estimate these channels combined represent 50 per cent of sales)," he said. "Despite management typically beating guidance in the past, we are concerned that exposure to wholesale/outlet channels will weigh on sales and profits in the coming years, limiting upside."

He lowered his target price for shares of VF Corp. (VFC-N) to US$85 from US$90 with a “neutral” rating (unchanged). The average is US$95.45.

"While the company has very strong momentum in several of its businesses (particularly Vans), and we do not see a near-term slowdown coming, given the valuation at 15 times our fiscal 21 EBITDA (reflecting continued optimism), we believe it is hard to see the path for much upside from here, creating a balanced risk/reward," he said. "VFC has a portfolio of several strong brands with good global growth potential but the pending spin-off of the jeans business (although it makes sense operationally), complicates the story near term, and based on our analysis we do not believe it will unlock incremental value."

He maintained a “buy” rating and US$120 target for Carter’s Inc. (CRI-N), which exceeds the consensus target of US$110.13.

"CRI is the dominant player in baby with diversified distribution (and limited mall exposure) that positions them favorably to capitalize on market share opportunities," he said. "Management has a renewed focus on profitability and has established conservative long-term revenue growth targets (low-single digits), but we believe they can achieve high-single digit to low-double digit EPS growth over the next few years, making the risk/reward attractive at current levels."

He also kept a “neutral” rating and US$131 target for Ralph Lauren Corp. (RL-N). The average is US$137.

"While the company has made significant progress cutting back on distribution (in North America) for the long term health of the brand and has introduced the brand to a younger customer, we remain concerned about its still-high exposure to the U.S. wholesale and outlet channels," said Mr. Lejuez. "Although we believe RL is a strong brand internationally and has good growth opportunities in China, this positive is balanced out by the risks we see in the North America business (and North America is 50 per cent of sales)."


Pointing to a “diminished outlook,” Canaccord Genuity analyst Yuri Lynk lowered his earnings forecast for Hardwood Distributions Inc. (HDI-T) after its fourth-quarter results fell short of his expectations.

On Thursday after market close, the Langley, B.C.-based company reported adjusted earnings before interest, taxes, depreciation and amortization of $10-million, down 13 per cent year over year, while revenue grew 10 per cent to $275-million.

"The negative impact of the trade case against Chinese hardwood has dragged on longer than we, or management, initial envisioned," said Mr. Lynk. "It appears the effects could drag into 2019 with management now guiding for gross margin between 17 per cent and 18 per cent, 100 basis points lower than the previously stated long-term target range. Additionally, due to weaker demand from customers supplying the U.S. residential housing market, management is guiding to U.S. organic growth in the low-to-mid-single digit range versus mid-to-high-single digit range previously. Management expects Q1/2019 to feature flat revenue growth year-over-year due to sales days lost due to poor weather. We believe Q1/2019 EBITDA will be $9-million, 33-per-cent lower year-over-year.

"Given management's incrementally more cautious tone, we are taking our estimates lower. Our 2019 adjusted-EBITDA estimate is now $53 million vs. $62 million previously and our 2020 estimate is now $58-million vs. $67-million previously. Our 2019/2020 EPS estimates are now $1.46/$1.62 vs. $1.68/$1.87 previously. Our 2020 estimate assumes a 17.5-per-cent gross margin, which could prove conservative if U.S. trade authorities effectively stem the flow of low-cost competing products."

Maintaining a "buy" rating, his target fell to $15 from $17. The average is currently $19.08.

"HDI is the largest distributor of architectural building products in North America and therefore well positioned to participate in the attractive long-term growth potential of the U.S. housing industry," he said. "In addition to this organic growth opportunity, we see the opportunity for inorganic growth. In this vein, we note management are proven acquirers in a highly fragmented market. In the near term, however, HDI faces a slowing housing market and pricing pressure caused by offshore product entering the market. At 8 times our 2019 EPS estimate, we believe this tougher operating environment is adequately reflected in the stock and we're comfortable recommending it here."

Elsewhere, though its results met his expectations, Acumen Capital analyst Brian Pow lowered his target by a loonie to $16.50 based on headwinds he expects through 2019, while maintaining a “buy” target and reaffirming Hardwood Distribution as one of his “Dark Horse” picks for the year.

“While the street may focus on the short-term guidance (reduced organic growth and margins), we highlight that HDI is well positioned to show growth in the top and bottomline in long-term from organic growth and acquisitions,” he said. “We continue to view any weakness in HDI’s share price as an opportunity for investors to buy.”


In the wake of the recent departure of several members of its management team, Needham analyst Laura Martin downgraded Facebook Inc. (FB-Q) to “hold” from “buy.”

“We are concerned that regulatory, headline, and strategic pivot risks will negatively impact Facebook’s valuation more than investors currently believe due to the negative flywheel created by Network Effects,” said Ms. Martin. “A Negative Network Effect suggests that departures will continue, and since we believe that people are a key competitive advantage of FAANG companies, this implies accelerating value destruction until senior executive turnover ends."

Her target for Facebook shares is US$170, while the average is US$196.07.

Ms. Martin said: “We are downgrading our rating to Hold (from Buy) as we worry about: a) the negative financial impact of FB’s strategic pivot toward privacy and encrypted messages; b) growing risks of regulation; and c) horrific images uploaded to FB (like the recent New Zealand events) that are technologically difficult to block at the 100 per cent level and which hurt FB’s brand ... Together, we believe these risks are causing a Negative Network Effect, as evidenced by senior management departures.”


Ahead of the release of its fourth-quarter financial results on Thursday, Paradigm Capital analyst Kevin Krishnaratne downgraded Photon Control Inc. (PHO-T) to “hold” from “buy” with a target of $1.50, falling from $2 and below the average of $1.95.

“While we have not made any changes to our Q4 estimates, we have lowered our forecast for 2019 following industry data points since Q3 in Nov. that suggest weakening trends in semiconductor capex spending to which PHO is tied to,” he said. "We are lowering our target to $1.50 and moving to a Hold given the stock’s valuation and anticipated near-term revenue softness.


In other analyst actions:

Coming off restriction, Citi analyst Robert Morris resumed coverage of Encana Corp. (ECA-N, ECA-T) with a “buy” rating and target of US$13, down from US$14. The average is US$10.38.

“We believe ECA will remain a ‘Show Me’ stock for the next several quarters as it transitions the STACK to full development and proves that its cube development approach can generate consistent liquids growth and competitive economic returns,” he said. “But in the meantime, ECA’s stock does not yet reflect this outcome for the STACK, in our view, and thus we maintain our Buy rating.”

BMO Nesbitt Burns analyst Michael Mazar cut Source Energy Services Ltd. (SHLE-T) to “market perform” from “outperform” with a target of $1.50, sliding from $3. The average is $1.81.

“Our downgrade is based on a combination of slowing WCSB drilling/completion activity and U.S. proppant oversupply, which has slowed minegate sales,” said Mr. Mazar.

“SHLE has done a solid job at contracting more work in 2019; however, we are now recommending a neutral stance on the company given activity level slowdowns and a lack of upcoming catalysts.”

BMO’s Jackie Przybylowski lowered Ero Copper Corp. (ERO-T) to “market perform” from “outperform” with a target of $16.50, up from $16 but 31 cents lower than the consensus.

Ms. Przybylowski said: “This downgrade is a reluctant one. While we continue to like Ero’s impressive exploration potential, low-cost and low-risk production growth opportunities, and capable management team, we believe the recent share price outperformance has reduced further near-term upside opportunities.”

Credit Suisse upgraded TransAlta Corp. (TA-T) to “neutral” from “underperform” with a target of $10, up from $7. The average is $8.56.

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