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

Spark Power Group Inc. (SPG-T) is a “sustainable growth story for patient investors,” according to Raymond James analyst David Quezada.

In a research report released Monday, Mr. Quezdada initiated coverage of the Oakville, Ont.-based company with an “outperform” rating, pointing to the combination of “significant” organic growth and its position as “an early consolidator in the highly fragmented electrical services and solutions sector.”

“Supported by the company’s branch expansion model, cross-selling opportunities among segments, and an emerging suite of power advisory/sustainability products, we believe Spark will continue to display strong organic growth,” he said. “Notably, organic growth has been strong over Spark’s short history coming in at 17.4 per cent in 2018 and 17.9 per cent for 1H19. Moreover, Spark has a strong track record of growing sales of acquired companies as exemplified by the New Electric acquisition where Spark grew revenues 26 per cent in the first year of ownership.”

“Operating in a large, fragmented market we believe there exists a significant opportunity for Spark to play a consolidation role in the North American electrical services sector. With 10 acquisitions thus far, the company has seen good success and we note management’s background in M&A is well suited to this strategy. Of crucial importance, we believe modest maintenance capex for Spark will support strong free cash flow generation, providing potential for self-funding of M&A. As an aspirational outcome, we envision a scenario where Spark is able to emulate several industry consolidators that have been among the top-performing stocks on the TSX in recent years.”

Also pointing to a customer base consisting of many “high-profile, blue-chip” companies, Mr. Quezada said he’s projecting EBITDA growth of 26 per cent annually between 2018 and 2021. He sees free cash flow reaching an inflection point “imminently," rising from $6.4-million in 2019 to $21.7-million in 2021 (a 3-year CAGR of 44 per cent).

“As Spark demonstrates the potential cash generation, we anticipate the market will re-rate SPG’s trading multiple,” he said.

Mr. Quezada set a target price of $2 per share, which falls 28 cents below the average target on the Street, according to Bloomberg data.

“While shares have been under pressure of late, we see a roadmap to addressing this weakness," the analyst said.


Raymond James analyst David Novak raised his rating for Zymeworks Inc. (ZYME-N, ZYME-T) in response to its discussion at the European Society for Medical Oncology’s 2019 Congress in Barcelona this weekend.

At the event, the Vancouver-based clinical-stage biopharmaceutical company announced updated data from its ongoing Phase 1 clinical trial evaluating ZW25 in patients with HER2‑expressing solid tumors, including biliary tract cancer (BTC), colorectal cancer (CRC), gynecological cancers, and gastroesophageal adenocarcinoma (GEA).

With the release, Zymeworks announced it will initiate a registration-enabling Phase II trial in second-line HER2-expressing biliary tract cancer in 2020, prompting Mr. Novak to upgrade the company’s stock to “strong buy” from “outperform.”

“With ZW25 continuing to demonstrate highly encouraging antitumor activity across a range of indications, we have increased conviction that ZYME could, in time, transform the HER2 therapeutic landscape. With multiple potential clinical catalysts anticipated in the coming months, we expect additional positive data readouts, and thus are upgrading ZYME,” he said.

Mr. Novak raised his target price for Zymeworks shares to US$40 from US$36. The average on the Street is US$36.13.


There are “many different notes” in Stingray Group Inc.'s (RAY.A-T) “song,” said Desjardins Securities analyst Maher Yaghi after attending the Montreal-based media and entertainment company’s Investor Day event on Friday.

“RAY comprehensively described all of its business lines as management understands the story has become harder to forecast with recent acquisitions and diversification into new verticals,” he said. “While we believe risk exists in some business lines — particularly B2C — the company has thus far been able to quickly adapt to evolving technology trends. A major reason why the company made a radio acquisition was to increase its advertising expertise. RAY is now accelerating the deployment of ad-based products, which allows it to scale partnerships in new markets, therefore broadening the company’s addressable market.”

Mr. Yaghi said the company unveiled a more bullish financial guidance outlook for fiscal 2020, expressing confidence in its advertising pursuits and its ability to lower financing costs. Stingray thinks the measures could boost free cash flow by as as much as $90-million in that fiscal year, which is well above the current consensus projection on the Street of $79-million.

"Given the numerous projects RAY is undertaking, the company sees strong potential for organic growth," he said. "RAY’s FY20 budget is targeting organic revenue growth in the double-digit range, which would be a strong improvement over the adjusted 0.6 per centreported in 1Q FY20. Management indicated the bulk of the growth would be back-end loaded as many advertising initiatives are still ramping up. To support this forecast, management indicated it recently entered into an agreement with Metro and is scaling its relationship with BMO. We believe a return to strong organic growth could prompt many investors to take a second look at the stock at this level."

Though he did not change his financial estimates for the company, as he "awaits traction in advertising," Mr. Yaghi suggested his current projections are "potentially conservative."

He maintained a “buy” rating and $9 target. The average target on the Street is $9.56.

“As the integration of NCC brings expected synergies and more, FCF generation is accelerating,” said Mr. Yaghi. “The stock appears to trade as if the top line is challenged, which we do not currently see or expect. Overall, we believe the current share price and dividend make for an attractive entry point for investors.”


Following a tour of its Heat Seal facility near Montreal, CIBC World Markets analyst Scott Fromson thinks Winpak Ltd. (WPK-T) is “positioned for the long-term win."

“Our visit ... reinforced our view that Winpak’s investment in products, production equipment and manufacturing process positions it as a long-term winner in a packaging industry under pressure,” he said. “Winpak’s approach to sustainability from the C-suite to the shop floor is another competitive advantage. Winpak should eventually benefit from its currently ‘inefficient’ balance sheet, and the company’s product and financial stability lend themselves to a ‘safe haven’ investment theme.”

Though he acknowledged the packaging industry faces "both challenges and opportunities from sustainability pressures on multiple fronts: customers, end-use consumers, governments and NGOs,” Mr. Fromson said he sees Winpak “in a position of long-term strength.”

In justifying his stance, he pointed to the several factors, including: “1) Strong, defensible product differentiation, a product innovation focus and efficient operations – evidenced by industry-leading EBITDA margins of 22 per cent vs. average 15-16 per cent; 2) A net cash position of US$400- million (2 times EBITDA) for consolidation opportunities when the economy slows and valuations recede; and 3) Strong management and a 52.5-per-cent majority owner that focus on long-term value creation.”

He maintained a “neutral” rating and $48 target for Winpak shares. The average on the Street is $50.


With it “now at scale,” it’s time for Akumin Inc. (AKU-U-T) to “reap the rewards,” said Canaccord Genuity analyst Tania Gonsalves.

She initiated coverage of the Florida-based diagnostic imaging services provider with a “buy” rating.

“Over the past year, it has grown from 90 to 130 centres, revenue is up over 50 per cent, EBITDA margins remain above 20 per cent (despite an expansion into lower-priced Florida), and free cash flow has finally turned green,” she said. “AKU’s growth has outpaced outpatient medical service peers and its closest competitor, RadNet, all while maintaining superior margins. Still, the stock has declined almost 27 per cent over this time frame, trading at a discount to the group and RadNet. With the benefits of industry tailwinds, operating leverage and technology deployment yet to emerge, we believe there is a compelling case for shares at these levels.”

Pointing to the potential for “significant” operating leverage with the “tides are finally turning for the independent players,” Ms. Gonsalves also heaped praise on Akumin’s management.

“Coming from an industry outside healthcare, AKU’s CEO was able to identify and chart a course to fix the inefficiencies within,” the analyst said. “For example, at inception, AKU took the time to build out a centralized cloud-based back office platform. This has yielded attractive administrative synergies, improved service quality, and facilitated M&A integration, allowing AKU to grow at the speed it has. Still, we believe the most transformational changes are yet to come. Management intends to deploy technology across the entire process workflow, extracting every incremental dollar of profit. The team remains steadfast in its belief that shares are undervalued, so until the benefits of these initiatives emerge, we find it very unlikely that insiders would reduce their more-than 30-per-cent stake in the company.”

She set a target of US$5.75 per share. The average is currently US$5.92.

“We view AKU as a compelling value play, one that could very well warrant a multiple commensurate with the technology space once the benefits of workflow optimization emerge,” said Ms. Gonsalves.


In a separate now, Ms. Gonsalves also initiated coverage of Hamilton Thorne Ltd. (HTL-X), a Massachusetts-based provider of advanced laser systems and computer aided sperm analysis (CASA) systems, with a “buy” rating, believing its emerged as a “leading player” in the in-vitro fertilization (IVF) industry.

“Following several accretive acquisitions, Hamilton Thorne has evolved from a small, pureplay in-vitro fertilization (IVF) equipment business into one of the 10 largest and most diversified IVF lab suppliers in the world,” she said. “This is a burgeoning market, forecast to grow organically at a rate of 5-10 per cent year-over-year. As management continues to build out the value chain and expand internationally via M&A, we are confident HTL will emerge as a preeminent one-stop-shop solution for IVF clinics. Still, despite its superior organic growth and similar margin profile to medical equipment and supplies peers, shares continue to trade at a steep discount.”

Emphasizing its “long runway” for M&A and potential for margin expansion, she set a target of $1.50 per share, which falls 5 cents below the consensus.

“Management is in the process of transitioning equipment sales onto its expanded in-house sales team. This should garner an additional 20-30 per cent in pricing compared to wholesale distribution. Second, the majority of consumables are still built by third-party contract manufacturers. When this is moved in-house, we see the potential for gross margins to move back above 60 per cent. Finally, incremental M&A not only adds to the top line but also yields better margins, as thirdparty products are replaced with a higher-margin in-house offering. Together, we forecast adjusted EBITDA margins inflecting from the current 19 per cent lows back up to 22 per cent by 2021.”


In other analyst actions:

Bank of America Merrill Lynch analyst David Barden raised Telus Corp. (T-T) to “buy” from “neutral” with a $52 target. The average on the Street is $53.49.

RBC Dominion Securities analyst Drew McReynolds upgraded Trilogy International Partners Inc. (TRL-T) to “outperform” from “sector perform” with a $3.50 target. The average is $3.73.

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