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

Headwinds are turning to tailwinds for Black Diamond Group Ltd. (BDI-T), according to Raymond James analyst Andrew Bradford, who upgraded his rating for Calgary-based work camp operator to “outperform” from “market perform.”

Mr. Bradford made the move after Black Diamond announced on May 3 that it had reduced its net debt by $9-million in the first quarter of 2018, which it is the equivalent of almost 17 cents per share or 7 per cent of its current market cap. The analyst expects a larger reduction in the second quarter with the completion of its $11-million deal to assume the lease and ongoing operations of its 1,244-room Sunset Prairie Lodge from Encana Corp. He also expects $5-million to come from the sale of real estate.

“This is in addition to its operating cash flow (we expect just under $7-million in 2Q18), and what we expect should be a modest reduction in working capital,” he said.

“On the whole, we expect BDI will have reduced its net debt load by almost $42-million through calendar 2018 and just under $33-million over the next three quarters. Put another way, over the next 9-months BDI is positioned to repay an amount of debt equal to approximately 24 per cent of today’s market cap. So, all else equal, we should expect a similar response in the stock. And while we aren’t changing our numbers for BDI … to any significant measure, we are increasingly confident in our forward estimates. We expect the market will be as well.”

Mr. Bradford raised his target for Black Diamond shares to $3.25 from $2.40. The average on the Street is currently $2.80, according to Bloomberg data.

“LNG aside, the workforce accommodations business has very likely passed through its cyclical bottom (LNG business would provide a direct and indirect boost of demand for the industry as a whole),” he said. “Indeed, we hear of small incremental demand increases from several sources – mostly in the ‘west of 5’ and ‘west of 6’ regions. These gains are by no stretch substantial either individually or in aggregate, but they are indicative of an industry that is no longer moving in the wrong direction. In addition, we are still gathering data, but we understand that a considerable number of older, shared-washroom-style dormitories have left the basin, reducing the asset overhang at the same time demand is marginally increasing.

“We also consider BDI’s geographic positioning to be advantageous. From our perspective, BDI’s ‘“west of 5’ and ‘west of 6’ open camp portfolio is situated on high-quality leases (ample parking, dry, graveled, etc.) that are advantageously located relative to major projects, and have good availability of executive-style rooms - that is, private washrooms.”

Elsewhere, BMO Nesbitt Burns analyst Michael Mazar raised his rating to “market perform” from “underperform” with a target of $2.75, up from $2.

“ Black Diamond Group produced solid Q1/18 results and appears to be ticking along quite well after rebalancing its business in 2017 after the fall-off in oil sands spending,” said Mr. Mazar.”


Following “weak” first-quarter results, Canaccord Genuity analyst Derek Dley expects headwinds to persist for Dorel Industries Inc. (DII.B-T) from both its sports and juvenile division.

That outlook led him to downgrade his rating for the Montreal-based manufacturing company to “sell from “hold.”

“Q1/18 results were challenged in all divisions for Dorel, and outside of Dorel Home, we do not see a material improvement in any of the headwinds faced during Q1/18 over the balance of the year,” said Mr. Dley. “Dorel Sports is likely to remain challenged by softness at mass market retailers, and by incremental promotional activity to clear out existing inventory. At Dorel Juvenile, sales trends in Chile appear to be deteriorating as competition on-line accelerates. Meanwhile, the company experienced some manufacturing inefficiencies during the quarter which are likely to continue in the near-term.

“Given the lack of near-term catalysts, and the weakening sales and margin trends in two of the three divisions, we are downgrading our rating.”

On Friday, Dorel reported adjusted earnings per share of 29 cents, excluding the impact of a US$12.5-million charge stemming from the liquidation of U.S. Toys “R” Us stores. The result was significantly below the expectation on the Street of 65 U.S. cents and the 69-cent result from the same period a year ago.

Mr. Dley emphasized a 6-per-cent dip year over year in revenue from its Dorel Home segment, which he called its “bright spot” in the last three years. Revenue from its sports segment fell 6.2 per cent, which he attributed to “softness in the mass-market channel, and the pending bankruptcy at Toys “R” Us.”

Based on the results, Mr. Dley dropped his 2018 EPS expectation to US$1.52 from US$2.38, while his 2019 estimate is now US$1.71, down from US$2.76.

He also reduced his target for Dorel shares to $22 (Canadian) from $33, which is below the consensus on the Street of $26.08.

Elsewhere, TD Securities analyst Derek Lessard downgraded the stock to “reduce” from “hold” with a $23 target, falling from $34.


Though ZCL Composites Inc. (ZCL-T) met Raymond James analyst Ben Cherniavsky’s revenue and earnings projection for the first quarter, the storage tanker manufacturer fell short in other key results, leaving him expecting any even weaker second quarter.

Accordingly, he downgraded the Edmonton-based company to “market perform” from “outperform.”

On May 3, ZCL reported earnings per share of 2 cents, meeting Mr. Cherniavsky’s estimate but a penny below last year’s results. Revenues of $32-million also topped his forecast ($30-million), which he attributed to performance from its fuel and industrial segments.

“Lower gross margins and unfavourable F/X impacts were offset by lower-than-expected SG&A, largely as a result of long-term incentive compensation being deferred to later in the year (DSUs are typically awarded in Q1 but have been deferred until later in the year as a result of the strategic review process),” he said.

“Management expects improved sequential results in 2Q18 but warns that it may not match the exceptionally strong results in 2Q17. This muted near-term outlook contributes to our view that ZCL will not show improved year-over-year results until at least the latter quarters of 2018. On a positive note, ZCL expects to deliver improved profitability in the 2H18 over 2Q17, and management remains confident in meeting their 10/10/10 objective for revenue, profit and dividend growth over the long-term.”

With the results, Mr. Cherniavsky dropped his 2018 and 2019 EPS projections to 60 cents and 75 cents, respectively, from 70 cents and 80 cents.

His target for ZCL shares fell to $11.50 from $13.50. The average on the Street is $12.17.

“Positively, the board announced another special dividend ($0.40), but this was overshadowed by the concurrent news that an expansive strategic review over the past six months was unable to identify a buyer of the business,” said the analyst. “As outgoing CEO Ron Bachmeier explained ‘ZCL as a business is difficult to compartmentalize for a lot of people.’ Our thesis never rested exclusively on the potential for ZCL to be acquired, but it is difficult to argue that this optionality was not part of the market’s attraction to the stock (which declined 9.5 per cent on this news vs. TSX up 0.5 per cent). We think ZCL is still a good–albeit somewhat orphaned–business, but with the take-over factor removed from the equation, CEO succession still unclear … and recent results faltering, we see no near-term catalysts on the horizon.”


Though its fundamentals and valuation “remain compelling,” Desjardins Securities analyst David Newman said he’s waiting for Enercare Inc.’s (ECI-T) share price to “thaw amidst an expected hot summer and positive outlook.”

On May 4, the Toronto-based home and commercial services energy providers reported adjusted EBITDA of $59-million for the first quarter, meeting Mr. Newman’s projection and $2-million short of the consensus and representing a jump of 12 per cent year over year. Adjusted free cash flow per share of 20 cents fell 8 cents short of his expectation.

“The EBITDA performance was driven by: (1) the cold weather that swept over much of Canada and the U.S., which increased seasonal demand for furnace-related replacement and services; (2) solid growth in HVAC sales and rentals; (3) the 11th consecutive quarter of net unit growth at Home Services; and (4) tuck-in acquisitions completed over the past year,” said Mr. Newman.

He added: “There are growing concerns regarding ECI’s ability to deleverage with higher costs (eg SG&A) ahead of revenues (IT, connected home, U.S. HVAC rental), capex creep (rentals, sub-meters), annual dividend increases and M&A, especially on investments with long-tailed returns. However, we believe ECI’s cohesive ‘land and expand’ organic growth strategy should drive longer-term ROIC for patient investors. The ‘sunk’ initial investments should fund a long-term cash flow annuity.”

Mr. Newman did lower his forward financial expectations to relect “an elevated level of investment and SG&A in its nascent organic growth programs (information technology (ERP, CRM), connected home, mobile offerings, US HVAC rental rollout) and slow monetization of its various long-tailed investments.”

That led to him dropped his target for the stock to $23 from $24 with a “buy” rating. The average $24.14.

“We like the ECI story given the stable, recurring nature of its business, competitive moat, solid FCF generation and potential upside through various growth initiatives and M&A in a fragmented market,” said Mr. Newman. “The set-up for the remainder of 2018 appears favourable given a strong macro backdrop, looming replacement cycle, stronger pricing, conducive weather, organic growth and M&A, offset by higher costs (eg SG&A).”


Renaissance Oil Corp. (ROE-X) is “blazing the trail” for shale development in Mexico, said Canaccord Genuity analyst Jenny Xenos, who initiated coverage of Vancouver-based company with a “speculative buy” rating.

“Mexico’s energy industry has undergone a significant transformation since the energy reforms of 2013,” she said. “While changes, in some cases, have been slow in coming, they have indeed been positive. Since the reforms, billions of dollars have poured into Mexico, from investors eager to take advantage of the improved economic conditions in order to develop the country’s vast resource base. Mexico is estimated to hold 3P reserves of more than 40 billion barrels of oil equivalent (boe) and onshore and offshore resources of 72 billion boe, offering significant opportunities for companies of all sizes.

“Renaissance has assembled an impressive team to take advantage of the opportunities in Mexico. Its team includes key members of the former Mitchell Energy technical team that ‘cracked’ the Barnett shale in the late 1990s. The company’s successful approach sparked a shale revolution in North America and has since been widely adopted by the energy industry worldwide. As a result of this success, Mitchell Energy was sold to Devon Energy for US$3.1-billion, and its team went on to build a track record of success in establishing and developing shale plays around the world. Interests of the team are aligned with those of shareholders through share, option and warrant ownership. Renaissance insiders, including board members, management and the technical team, own 60 million shares of the company, representing 21.4 per cent of current outstanding share.”

Calling it a “high-risk/high-reward” opportunity, Ms. Xenos set a target of 80 cents, which is 17 cents ahead of the consensus.

“Should unconventional drilling be unsuccessful, we estimate the downside to the stock could be 5 cents per share, as the value of the company’s conventional assets is minimal,” the analyst said. “Should the team, however, be successful in proving the economic viability of its shale resource, we think that the stock could be worth multiples of its current valuation. It is for this potential upside that we recommend buying ROE.”


BMO Nesbitt Burns analyst Michael Mazar downgraded PHX Energy Services Corp. (PHX-T) to “underperform” from “market perform.” Mr. Mazar lowered his target for the stock to $2 from $2.50. The average is $2.85.

“PHX reported softer Q1/18 results, while trends in its Canadian and U.S. divisions are concerning,” he said.

“Our downgrade is based on negative utilization trends in both its Canadian and U.S. segments, while its Stream EDR divisi on continues to operate at a loss.”


After a “disappointing” first quarter, CIBC World Markets analyst Matt Bank downgraded AutoCanada Inc. (ACQ-T) to “neutral” from “outperform” with a $22 target, falling from $27. The average target is now $25.42.

“Our positive view on AutoCanada is moderating as the market is rolling over and causing margin compression, company-specific levers to outperform have been slow to materialize, and tougher industry growth may lead to lower multiples as we’ve seen in the U.S.,” he said. “Our forecasts fall by 12 per cent and we lower our target multiple in line with U.S. peers, reducing our price target.”

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