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

Despite a third-quarter earnings beat, Desjardins Securities analyst Keith Howlett lowered his rating for Cascades Inc. (CAS-T) on Monday, believing a 25-per-cent jump in share price thus far in 2019 makes the risk-reward proposition for investors “less compelling.”

On Friday before the bell, the Kingsey Falls, Que.-based company reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $161-million, exceeded the estimates of both Mr. Howlett ($160-million) and the Street ($157-million).

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“Cascades is continuing to benefit from solid demand for containerboard in North America and from declining input prices, particularly OCC,” the analyst said. “The tissue business recovery, off a very low base, is occurring faster than expected, driven by improving industry fundamentals and internal actions (both short- and long-term in nature).”

“Looking forward, we have modestly reduced our adjusted EBITDA forecast for the containerboard division, with a view that industry output prices may decline modestly due to lower input costs and more capacity.”

Though he trimmed his EBITDA expectations for both 2019 and 2020, his earnings per share projections rose to 96 cents and $1.16, respectively, from 83 cents and $1.03.

While he moved the stock to “hold” from “buy,” Mr. Howlett raised his target for Cascades shares to $14 from $13. The average on the Street is $13.88, according to Thomson Reuters Eikon data.

“While we had reservations on Cascades’ decision to reinvest heavily in its tissue business rather than sell it, management is making good progress on modernizing and optimizing the asset base, including the acquisition in September of the two Orchids Paper plants in the U.S. for US$237-million,” he said. “The course of action being taken in tissue has precedence in the successful upgrading of the assets of the containerboard division. The next step for the containerboard business will be new capacity in the southeast U.S., financed and structured similarly to the successful Greenpac plant in New York state. An announcement is expected within six months."


Improving macro fundamentals are likely to provide CanWel Building Materials Group Ltd. (CWX-T) with a “healthy tailwind going forward,” according to Raymond James analyst Steve Hansen, leading him to raise his rating for its stock to “outperform” on “market perform.”

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On Thursday, the Vancouver-based company reported third-quarter EBITDA of $25.3-million, up 25.8 per cent year-over-year and in-line with expectations. Revenue increased 6.6 per cent to $373-million.

Mr. Hansen called the result “solid” as it came despite a “lingering drag associated with sharply lower lumber/panel (LBM) prices and a sizeable drop in Canadian single-family housing starts.”

“After a difficult year, several indicators suggest to us that the macro backdrop for CWX is improving, including: 1) while Canada remains sluggish, U.S. housing activity has re-accelerated in recent months, an inflection that’s reportedly translated into brisk activity across CWX’s westcoast/Hawaii operations (particularly after a very wet spring), with lower interest rates and a healthy consumer expected to sustain this pattern going forward; and 2) aggressive lumber capacity curtailments across the BC industry have already helped spur higher commensurate prices — a trend that could accelerate into next spring’s busy season," the analyst said. "Given this improving backdrop, and management’s ability to weather recent challenges, we feel comfortable increasing our rating.”

Mr. Hansen raised his target for CanWel shares to $5.50 from $5. The average is $4.81.


Following last week’s release of “mixed” quarterly results and in the wake of recent share price appreciation, Echelon Wealth Partners analyst Douglas Loe downgraded Extendicare Inc. (EXE-T) to “hold” from “buy.”

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"We believe we are justified in shifting our rating to a HOLD at least until sustained sequential margin improvement in home healthcare operations are achieved from recent growth capex investments in IT infrastructure, improvement that we do expect by fiscal 2020," said Mr. Loe.

On Thursday, the Markham, Ont.-based long-term care facilities company reported revenue and EBITDA for the quarter of $282.7-million and $23.6-million, respectively, versus Mr. Loe's forecast of $279.5-million and $25.6-million.

“We were pleased to see Extendicare generate reasonably strong EBITDA that while down incrementally from FQ219 level, would best be characterized in our view as stable by recent standards, with only FQ1s tending to exhibit some seasonal softness on utility cost escalation," the analyst said.

“Virtually all of the sequential revenue softness, to the extent that we could characterize the comparison as softness, arose from home healthcare operations that generated FQ319 revenue of $105.4-million that was down from $108.2-million last quarter. This was predominantly due to reduced total service hours in the quarter.”

Mr. Loe maintained a $9 target for Extendicare shares, which falls 4 cents below the average on the Street.

“With seasonally soft FQ419 data likely on the horizon and with FQ319 financial data exhibiting some year-over-year softness that while not unexpected did indeed transpire, we believe we are justified in shifting our EXE rating to a HOLD, with existing shareholders clearly expected to enjoy the aforementioned 5.4-per-cent dividend yield with low risk of dividend policy revisions on the horizon,” he said.

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IBI Group Inc.'s (IBG-T) “solid” third-quarter results showed it has “successfully leveraging its differentiated service offering to drive profitable growth,” said Raymond James analyst Frederic Bastien.

"Moreover, with its U.S. and Canadian businesses in fine form, the firm looks poised to ride powerful urbanization tailwinds for years to come," he said. "An improved balance sheet should also yield management the flexibility to deploy capital on tuck-in acquisitions, reinstate a dividend, or do both in 2020."

Seeing little evidence that investors have priced this into the stock, he raised his rating for the Toronto-based professional services company to "strong buy" from "outperform."

On Thursday, IBI reported adjusted EBITDA of $12-million, up 21 per cent year-over-year and "comfortably" ahead of the $11-million expectation of both Mr. Bastien and the Street. He pointed to performance south of the border as the "key source of strength."

Mr. Bastien also said the company’s “momentum is palpable,” noting: “In his prepared comments, CEO Scott Stewart listed a handful of successful pursuits and several more opportunities available to IBI in the near-term. In the U.S. the firm was selected as Architect of Record for Ford’s newest R&D center, secured a systems mandate on Michigan’s Mackinac Bridge, and awaiting the green light on a 50-acre development in Silicon Valley. In Canada, it secured work on the Royal Columbia Hospital redevelopment through 2025 and scored the lead design role on the $4.6-billion Hurontario LRT. We see this massive transit project as a gift that will keep on giving, since it will stimulate countless condo developments — IBI’s bread and butter business) along its route."

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After raising his earnings expectations for both 2019 and 2020, he hiked his target by a loonie to $8.50, which exceeds the $7.75 consensus.

“We base our valuation on an EV/EBITDA multiple of 8.0x our estimates for 2020. Since we are revising these upward, we now believe the stock will be worth $8.50 at the same time next year. We should note our target multiple remains below the pure-play engineering group’s 10-year average of 8.7 times to reflect IBG’s small-cap status, poor liquidity and below-average growth profile.”


RBC Dominion Securities analyst Al Stanton expects Gran Tierra Energy Inc.'s (GTE-T) third-quarter results to mark a low point for production and a peak for unit operating expenses, quarterly spending and net debt.

The analyst sees growth in both production and cash flow as well as a reduction in debt through the fourth quarter and into 2020.

“In 2020, increased production and materially lower (facilities) spending should enable Gran Tierra to generate FCF and pay down debt,” he said. “We are anticipating FY20 spending of $235-million, down from $365-million in FY19. Management is targeting $75-100-million of FCF (at $60/bbl Brent).”

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In response to last week's release of its earnings, Mr. Stanton lowered his full-year production and cash flow per share projections for both 2019 and 2020.

Believing a “vicious circle [is] becoming [a] virtuous cycle,” he kept an “outperform” rating while lowering his target to $2.75 from $3. The average on the Street is $2.47.

“We believe Gran Tierra is turning a corner, finally; and confirmation should become visible in: 1) mid-December’s Operational Update and 2020 Guidance that we expect to include year-end 19 production growth, a positive view on 2020 production and a materially lower capex budget; and 2) mid-January’s reserves report that includes an upgrade in reserves, from 70mmboe for 1P and 150mmboe for 2P," the analyst said.


Though he deemed its third-quarter financial results as “neutral,” Acumen Capital analyst Nick Corcoran raised CRH Medical Corp. (CRH-T) based on its “continued operational performance.”

Moving the stock to "buy" from "speculative buy," Mr. Corcoran said its main catalyst will the company's goal of $35-million in acquisitions in 2019.

“Management reiterated that the strategy will be: (1) the anesthesia business that will grow through acquisitions and organically, (2) restoring organic growth in the O’Regan product, and (3) adding ancillary products to its existing gastroenterology anesthesia practices,” he said. “While deal flow remains strong, CRH may be behind its target of $35-million of acquisitions in 2019 (currently $18-million year-to-date). Management highlighted that the deals are still in the pipeline, however, the delays has had an impact on revenue per case.”

He maintained a $6 target, which falls 29 cents of the consensus.


Pointing to recent underperformance, Credit Suisse analyst Andrew Kuske raised Emera Inc. (EMA-T) to “neutral” from underperform."

“Recently, the stock performed weakly going into the Q3 results and on the reporting day, in part, given the miss versus expectations,” he said. “With storm related damages (7 cents per share) and weaker results from Emera Energy (9 cents per share) now reflected in the stock and, what looks to be a better appreciation of the JEA situation, a lower share price collectively translates into a revised risk-reward favouring the Neutral rating,” he said. “We like EMA’s core Florida exposure, but maintain our preference for the defensive, CAD exposed Canadian Utilities (CU-T) and Hydro One (H-T).”

He maintained a $56 target, which falls short of the $57.54 average.


Though Regulus Resources Inc.'s (REG-X) exploration stage AntaKori copper-gold project in Peru as a “sizable resource,” Canaccord Genuity analyst Michael Pettingell thinks the junior exploration company’s true near-term investment thesis “lies to the north.”

Initiating coverage of the Vancouver-based company with a “speculative buy” rating, Mr. Pettingell emphasized Regulus’ identification of a large magnetic anomaly to the north of AntaKori that has yet to be tested.

“The ongoing geologic hypothesis, rooted in drill core observations and geophysical analysis, suggests that near-surface, clean (low-arsenic) skarn/porphyry mineralization increases to the north towards a massive intrusive body,” he said. “If proven, this has the potential to 1) significantly expand the mineralized footprint at AntaKori, underpinned by a reduction in contained arsenic, and 2) shift the center of mass north onto more Regulus controlled ground, away from the Tantahuatay pit . Regulus is currently on the verge of receiving the required drill permits to better target these highly prospective anomalies, which in our view, on the back of exploration success, could support a near-term market re-rating.”

Citing its management's "proven" track record, the analyst thinks the company is "well-positioned to execute."

“Regulus’ management/technical team, led by CEO John Black, consists of several core individuals who were previously involved in the discovery/ delineation of the Haquira Cu-porphyry deposit prior to its acquisition by First Quantum Minerals in 2010 for $650-million,” said Mr. Pettingell. “At AntaKori, the group aims to duplicate this success through the application of modern exploration techniques. With an ongoing Phase II drill program (25,000 metre) well underway (11,000 metre complete) and exploration agreements now in place, we view Regulus to be well positioned to significantly expand the mineral footprint at AntaKori ahead of an updated resource estimate in H2/20.”

He set a target of $2.75 per share. The average is $3.43.


Pointing to “too many unknowns,” Scotiabank Financial analyst Vladislav Vlad lowered Enerflex Ltd. (EFX-T) to “sector perform” from “sector outperform” with a $16 target, down from $20. The average is $18.10.

Mr. Vlad said: “We have covered EFX for nearly a decade and have also been a regular customer in our engineering days. EFX is an extremely well-run business and we believe the new management team should continue that operational momentum well into the future, no question. We are also bullish on EFX’s long-term fundamentals as we see gas as a greener and cost-competitive hydrocarbon. However, in our view, EFX is at a crossroad and we do not feel we have an adequate grasp on the company to continue to warrant a Sector Outperform rating, according to our standards (we only have two Sector Outperforms in our coverage). Given the stock capitulation in recent months, we humbly admit the stock could be at a bottom and it may, in fact, be a strong performer. Additionally, it is also an excellent value stock for longer-term investors, trading at 0.7 times P/BV. We have reduced our PT by $4 to $16 and believe there could be downside risk to our 2H/20 and more importantly, 2021 estimates, which should come into greater focus in a few months (only three analysts have estimates thus far). That said, Q4 and Q1 results should not disappoint.”


In other analyst actions:

CIBC World Markets analyst Paul Holden downgraded Power Corporation of Canada (POW-T) to “underperformer” from “neutral” with a target of $33, rising from $31. The average on the Street is $33.

“This is primarily a trading call based on an abnormally tight NAV [net asset value] discount of 14.5 per cent versus a five-year average of 18.9 per cent,” he said. “A switch trade from POW to PWF should provide a similar growth outlook but with less valuation risk.”

* Ahead of its analyst day event in New York on Tuesday, Laurentian Bank Securities analyst Elizabeth Johnston placed her rating and target for Dirtt Environmental Solutions Ltd. (DRT-T) under review.

“With the quarterly release, guidance for Q4/19 implies a further deteriorating sales pipeline heading into 2020, and no further commentary was provided on the conference call,” she said. “Recall that in September, DIRTT had initially taken down 2019 revenue guidance to flat (from 5-10 per cent), at which time we had left our 2020 (CAD) sales forecast unchanged at up 18.5 per cent. Given this further guidance revision, we have made a significant reduction in our 2020 forecast, though cognizant that there may be new information provided that could change our view. Commentary surrounding the sales process and strategy indicates that there is still much work to be done. As such, given what we know now, we do not have confidence that 2020 sales are poised to grow year-over-year.”

* TD Securities analyst Jonathan Kelcher raised Cominar Real Estate Investment Trust (CUF-UN-T) to “buy” from “hold” with a $16 target, up from $13.50. The average is $15.

* Bank of America Merrill Lynch upgraded Thomson Reuters Corp. (TRI-N, TRI-T) to “buy” from “neutral” with a US$78 target, up from US$73. The average is US$70.05.

* Scotiabank Financial analyst Ovais Habib cut Semafo Inc. (SMF-T) to “sector perform” from “sector outperform," citing an increasingly cautious stance on its near-term outlook and expecting investors to take a wait-and-watch approach towards the stock.

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