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

With shares of Sun Life Financial Inc. (SLF-T) up 34 per cent thus far in 2019 and its valuation now sitting above both peer and historical averages, RBC Dominion Securities analyst Darko Mihelic sees little room for further multiple expansion in the near term.

That led him to downgrade his rating for its stock to “sector perform” from “outperform” in a research note released Monday.

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“The stock has generated total returns of 39 per cent this year, well above the global peer average of 27 per cent,” he said. "While we still like the company longer term, we don’t see much room for further near-term outperformance. Our $67 price target implies a total return of 14.2 per cent over the next 12 months, a healthy implied return but still below the implied peer average return of 20 per cent for the other Canadian lifecos under our coverage.

“Valuations appear elevated on an absolute and relative basis. SLF’s stock is trading at 10.7 times our 2020 core EPS estimate, the highest multiple of the Canadian lifecos vs. a peer average multiple of 9.7 times or approximately 8 per cent above its historical average premium to peers. The stock trades at the highest P/B multiple of the group at 1.70 times vs. a peer average of 1.35 times or 35 per cent above its historical average discount to peers.”

Mr. Mihelic did emphasize that he’s projecting “good” underlying earnings per share growth in 2020 (9.6 per cent) in 2020, however he suggested his earnings growth assumptions for Asia “could prove to be a bit aggressive.”

“We have currently modeled Asia earnings growth of 20 per cent in 2020 which suggests meaningful acceleration from expected growth of 10 per cent in 2019 and actual growth of 13 per cent in 2018,” the analyst said. “Further, as we wrote about in our concurrently published note “Q3 solid and stocks have performed well, updating theses and recommendations”, management commentary from the Q3/19 conference call suggested possible short-term headwinds for the Hong Kong business. If we were to lower our 2020 Asia earnings estimate to imply growth around 10 per cent, our 2020 underlying EPS estimate would imply year-over-year growth of 7.7 per cent, modestly higher than the peer average of 7.2 per cent.”

Mr. Mihelic’s target price of $67 for Sun Life shares (unchanged) exceeds the consensus target on the Street of $63.50, according to Thomson Reuters Eikon data.


2020 will likely be "another challenging year" for North American oil and gas companies, said Desjardins Securities analyst Scott Van Bolhuis.

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"Company fundamentals have improved and FCF [free cash flow] is abundant; however, the market is constrained by low prices, limited market access and subdued investor sentiment," he said. "We believe investors should focus on companies that can generate returns, yield FCF, have staying power and a track record of execution.

"In our view, capital spending and prudent balance sheet management will remain key in 2020 given the headwinds facing the sector. As budgets continue to trickle in, we expect most producers will aim to spend within cash flow, with excess funds allocated to reducing debt or toward share buybacks. In total, our universe is expected to generate $2.3-billion of pre-dividend FCF in 2020, up 124 per cent from 2018 levels."

In a research report released Monday, Mr. Van Bolhuis assumed coverage of 14 North American E&P companies, which he thinks are “well-positioned based on FCF [free cash flow] growth, management discipline and a renewed focus on returns.”

He gave seven companies "buy" ratings. They are:

ARC Resources Ltd. (ARX-T) with a $9 target. Average: $9.50.

Analyst: “We believe that the company offers low-risk exposure to higher natural gas prices, a sustainable dividend and longer-term upside from its Montney development program.”

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Crescent Point Energy Corp. (CPG-T) with a $10 target. Average: $7.95.

Analyst: “Crescent Point’s strategy hinges on two main pillars—preserving sustainability and maintaining balance sheet strength. We believe management’s strategy combined with dispositions offer investors a good entry point and should result in a re-rating of the shares.”

Encana Corp. (ECA-N/ECA-T) with a US$6 target. Average: US$6.91.

Analyst: “In our view, Encana offers investors a unique value proposition, trading below Canadian and U.S. peers while having geographical diversification and a growing free cash flow profile. The company recently announced its intention to rebrand as Ovintiv Inc. (OVV, NYSE/TSX) and establish its corporate domicile in the U.S..”

Enerplus Corp. (ERF-T) with a $16 target. Average: $14.61.

Analyst: “Enerplus is our top pick in the North American E&P space. The company has a best-in-class balance sheet (less than 1.0 times D/CF at strip), with most of its revenue coming from the U.S. (86 per cent in 2020). The company’s management has a history of operational and A&D execution, and a disciplined approach. It yielded the highest ROCE [return on capital employed] in the space for 2017 and 2018 at 18 per cent and 23 per cent, respectively. In 2019 and 2020, we forecast ERF’s ROCE at 11 per cent and 12 per cent, respectively. Enerplus’s balance sheet allows for strategic capital allocation, including accelerated drilling, acquisitions, buybacks and dividend increases. The company opportunistically outspent cash flow this year, completing its 7-per-cent NCIB in November while increasing the limit to 10 per cent of the public float with a March 2020 expiry. We believe the shares are underappreciated in view of the company’s track record of operational and transactional excellence, as well as its U.S. exposure.”

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TORC Oil & Gas Ltd. (TOG-T) with a $6.50 target. Average: $5.91.

Analyst: “Given the top-decile light oil netbacks and a relatively unhedged production base, we see significant upside for TORC shares with higher oil prices.”

Tourmaline Oil Corp. (TOU-T) with a $18 target. Average: $20.89.

Analyst: “We believe the company can continue to deliver growth in natural gas and liquids while generating free cash flow. We also believe Tourmaline will start to track the senior peer group more closely and that it deserves a premium multiple compared with its current level. The company also has a modest dividend which provides shareholders with a safe yield.”

Whitecap Resources Inc. (WCP-T) with a $6 target. Average: $6.51.

Analyst: “Whitecap is a top-tier producer with a solid management team. It offers an estimated 2020 predividend FCF yield of 16 per cent and a dividend yield of 8.3 per cent. While the company has historically been active in the acquisition market, we believe that for the next 6–12 months, the focus will be on moderating its decline, generating corporate returns and paying down debt.”

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Mr. Van Bolhuis gave the following stocks “hold” ratings:

Baytex Energy Corp. (BTE-T) with a $2.50 target. Average: $3.05.

Analyst: “We are cautious on the company due to its heavy oil exposure and leverage relative to peers; however, Baytex offers significant torque to higher oil prices in a rising commodity price environment.”

Bonavista Energy Corp. (BNP-T) with a 75-cent target. Average: 62 cents.

Analyst: “We are neutral on the shares given the company’s heightened debt levels. We would be more constructive if management can reduce debt and post positive Duvernay well results.”

Obsidian Energy Ltd. (OBE-T) with a 75-cent target. Average: $3.49.

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Analyst: “We like management’s goal of becoming a pure-play Cardium player; however, we remain cautious on Obsidian shares given the recent cancellation of the Peace River Oil Partnership (PROP) sale and the company’s above-average leverage. In early September, Obsidian announced the initiation of a formal strategic alternatives process. We do not expect any near-term developments resulting from the process given the weak M&A prospects in the Canadian oil & gas space.”

Paramount Resources Ltd. (POU-T) with a $7 target. Average: $8.07.

Analyst: “Based on our estimates, Paramount reaches an FCF inflection point in 2021. The company is on a production growth track heading into next year; however, we believe potential gas outages and outspend will keep the shares range-bound.”

Peyto Exploration and Development Corp. (PEY-T) with a $3.50 target. Average: $4.25.

Analyst: “We are encouraged by management’s decision to augment the natural gas business with additional lands prospective for liquids-rich Cardium and Montney rights. However, we remain neutral on the shares given the company’s leverage relative to its peers and high natural gas exposure.”

Seven Generations Energy Ltd. (VII-T) with a $10 target. Average: $12.36.

Analyst: " We remain neutral on the shares given the company’s current sustainability metrics; however, we believe Seven Generations will transition to a divco in the next 2–3 years as the company’s corporate decline moderates."

Vermilion Energy Inc. (VET-T) with a $21 target. Average: $24.53.

Analyst: “We like Vermilion for its dividend yield in a low rate environment. However, the dividend’s sustainability at a 14-per-cent yield is in question, in our view. We are neutral on the shares given the company’s valuation and the recent weakness in European gas prices.”


Seeing “substantial” free cash flow on the horizon, Canaccord Genuity analyst Dalton Baretto called Dundee Precious Metals Inc. (DPM-T) “a compelling investment for investors looking for a near-term, low-risk growth profile at an attractive valuation.”

He initiated coverage of the Toronto-based miner with a "buy" rating.

“With Ada Tepe now built and ramped up, DPM is expected to generate substantial FCF from 2020 onward given 50 per cent overall AISC [all-in sustaining cost] margins,” said Mr. Baretto. "We forecast a 20-per-cent FCF yield for 2020 based on the current share price, with similar yields for 2021 and 2022, and we note that DPM offers the highest FCF yield in our mid-cap precious metals coverage universe. We discuss the company’s capital allocation criteria in the body of the report, but note here that we believe management is likely to initiate some form of shareholder return program in 2020 (or earlier)

"DPM has substantially de-risked itself in 2019 with Ada Tepe entering commercial production, and we believe the stock will re-rate over 2020 as the market begins to realize this. We outline a number of dimensions on which DPM is lower risk, but we note that the company is now a multi-mine, low-cost producer with a diversified commodity mix (20-per-cent copper), clean balance sheet and no more development or capex risk. While perceptions around Bulgaria may always be a concern for some investors, we note that Bulgaria is a member of the European Union, has been a stable democracy without a major economic dependency on mining, and has no history of attempting to re-negotiate mining contracts."

Mr. Baretto set a target price of $8.50 per share. The average on the Street is $7.

“From a relative value perspective, we note that despite DPM’s growth and risk profile, the company trades at a discount to its peers,” he said. “At the current share price, the company trades at just 2.4 times our 2020 EBITDA estimate 0.51 times NAV, vs. the peer group averages of 5.1 times and 1.21 times, respectively. We attribute this discount to the fact that until recently DPM has been a single-mine producer with a significant copper component, high arsenic production, and is located in Bulgaria. As such we believe the company is poised for a significant re-rate.”


The macro-economic climate made 2019 “a year to remember” for Canadian power, utilities and infrastructure companies, according to Industrial Alliance Securities analyst Jeremy Rosenfield.

Pointing to low, stable interest rates continuing to support fund flows into real assets, Mr. Rosenfield said he’s “keeping it positive heading into 2020.”

In a research note released Monday, he raised his target price for several stocks after adjusting his relative valuations to focus on 2021 forecasts.

“Share price performance has exceeded our expectations heading into the year, leading to strong valuation multiple expansion across the sector,” he said. “Still, the growth outlook remains broadly robust across the space; companies across our coverage universe continue to exhibit strong underlying growth characteristics, and we continue to see the potential for sustainable high single-digit earnings and cash flow growth over the medium term for a wide swath of the sector. Our overall outlook remains optimistic heading into 2020.”

Mr. Rosenfield made the following changes for Canadian utility companies in his coverage universe:

Algonquin Power & Utilities Corp. (AQN-T, “buy”) to $22 from $20. The average on the Street is $18.41.

Canadian Utilities Ltd. (CU-T, “hold”) to $41 from $39. Average: $40.31.

Emera Inc. (EMA-T, “hold”) to $59 from $57. Average: $57.54.

Hydro One Ltd. (H-T, “hold”) to $26 from $25. Average: $24.58.

His changes for Canadian independent power producers were:

Brookfield Renewable Partners LP (BEP-N/BEP.UN-T, “hold”) to US$44 from US$40. Average: US$43.25.

Boralex Inc. (BLX-T, “buy”) to $27 from $24. Average: $25.44.

Capital Power Corp. (CPX-T, “strong buy”) to $40 from $36. Average: $33.50.

Innergex Renewable Energy Inc. (INE-T, “strong buy”) to $19 from $18. Average: $17.25.

Northland Power Inc. (NPI-T, “strong buy”) to $33 from $32. Average: $29.63.

For energy infrastructure companies, his lone adjustment was:

Enbridge Inc. (ENB-T, “strong buy”) to $65 from $60. Average: $54.67.

Mr. Rosenfield also raised his target for Brookfield Infrastructure Partners LP (BIP-N/BIP-UN-T, “buy”) to US$56 from US$52. Average: US$52.73.


Citi analyst Adam Spielman is becoming more bullish on tobacco companies, pointing to valuations dropping to multi-decade lows amid overstated concerns about the state of the industry.

"In the past couple of years it appeared as if the conventional cigarette market would be upended, and the Next Generation Products would take over. In addition, the FDA had threatened to regulate hard against cigarettes in the U.S," he said. "These two points, combined with the growth of ESG investing and rotation in favor of growth, resulted in the tobacco stocks’ dramatic under-performance."

However, Mr. Spielman emphasized a trio of factors, leading to his increased conviction in the sector:

  • A belief NGPs have had “little effect” on tobacco companies’ profit this far;
  • The conventional cigarette business is now looking stronger than it did, especially in the U.S.;
  • The U.S. government has “halted the ban against flavored products for the time being, and it is no longer pursuing its single most aggressive anti-cigarette regulation, namely the proposal to radically cut nicotine in cigarettes.”

He added: “The ‘disruption in tobacco’ thesis now looks hard to sustain Most importantly e-vapor has stopped growing in the U.S., which means we expect less bad cigarette volumes there in 4Q19 and 2020. Heated tobacco’s best growth is coming from Russia now, and we wonder for how long rapid growth can continue there. Also, despite the ‘disruption’ in the past two years, the tobacco companies managed to keeping growing profit, unlike say traditional retailers. Finally the U.S. Administration has let the proposal to cut nicotine in cigarettes fall off its agenda.”

Mr. Spielman noted tobacco stocks last traded at their current price-to-earnings ratio in the late 1990s and early 2000s, “when investors thought that litigation might lead to bankruptcy.”

With this bullish stance, he upgraded Altria Group Inc. (MO-N) to “buy” from “neutral,” expressing “much more confident about its base business.”

He hiked his target for Altria shares to US$60 from US$47. The average is US$52.32.

Conversely, Mr. Spielman downgraded Philip Morris International Inc. (PM-N) to “neutral” from “buy,” noting: “We think its strengths are well known now, and because we think the move into new products is likely to seem a little less urgent than it did before.”

“We still expect excellent organic sales (up 5 per cent (2019-21) and profit growth (up 8-9 per cent) as iQos expands,” he said. “Nonetheless we think it will be hard for PM to sustain such a wide gap in multiples because (1) the outlook for cigarettes in the U.S. is becoming less bad; (2) at the margin we are getting less bullish on iQos revenues; and (3) we think cigarette volumes (not sales) will worsen in early 2020. In 2020 PM will launch Mesh – its answer to Juul – but we think the problems Juul has had will mean investors will view it as a ‘show me’ story not a ‘buy off plan’ one.”

His target for Philip Morris shares remains US$90. The average on the Street is US$91.50.

“We are upgrading MO to a Buy because we think its multiple can now rise relative to PM’s,” he said. “We still think PM is an attractive investment because we continue to project 8-9-per-cent organic EBIT growth in the next couple of years. Nonetheless we think its virtues are well understood, and at the margin we think the newsflow is likely to get worse.”


Shares of Fortuna Silver Mines Inc. (FVI-T) could be set for a re-rating with a clean start-up to its Lindero project in Argentina achieves commercial production, according to Laurentian Bank Securities analyst Jacques Wortman.

Seeing the Vancouver-based miner trading at a "significant" discount," he initiated coverage with a "buy" rating.

"Fortuna Silver is in the final stages of its transition from being predominantly a silver producer (50 per cent of revenue in 2019) with significant gold, zinc and lead credits, to a precious metal producer (57-per-cent revenue contribution from gold and 29-per-cent revenue from silver in 2020) with minor zinc, lead and copper," said Mr. Wortman.

“While the market has been well aware of this change as Lindero was acquired, sanctioned and constructed, there has been significant variability in FVI share price and market valuation multiples in the last two years. We attribute this variability to: 1) Commodity price variability, 2) The 6-month delay to the start of production at Lindero, 3) The Feb/19 announcement of the 20-per-cent Lindero capex overrun, and 4)The need to take on additional debt financing to complete the Lindero construction in the form of the issuance of $46-million of convertible debentures that closed in Oct. 19. In our view, these developments have — at least in part — contributed to FVI trading at a discount to its peer group.”

Seeing Fortuna shares as "undervalued," he set a target of $6.25. The consensus is $6.61.

“Fortuna Silver shares are undervalued on the basis of both P/NAV [price to net asset value] and fiscal 2020 EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization],” said Mr. Wortman. “FVI shares trade at 0.72 times our NAV and compare favourably with small and intermediate cap precious metal producers with significant silver production (1.74 times NAV). Additionally, FVI shares trade at a F2020 EV/EBITDA multiple of 3.6 times, which compares with 7.6 times for small and intermediate cap precious metal peers with significant silver production. FVI also compares favourably with smaller cap gold producers, which trade at group averages of 0.8-times P/NAV and 4.0-times F20 EV/EBITDA. By these two metrics, we believe that FVI shares offer an attractive value proposition at current price levels.”


RBC Dominion Securities analyst Robert Kwan expects to see a “material uptick” in non-Canadian investor interest in Brookfield Infrastructure Partners L.P. (BIP-N, BIP-UN-T) given the plans for its new structure.

Following recent investor meetings with chief financial officer Bahir Manios, Mr. Kwan called the creation of Brookfield Infrastructure Corp. “a game changer.”

“We believe that the existing Bermuda-based limited partnership structure has been a material impediment for many investors with respect to investing in BIP,” he said. “In particular, many non-Canadian institutional investors (whether due to mandate, philosophy or administrative reasons) and U.S. retail investors (BIP issues a K-1 tax form; BIPC is expected to pay tax-advantaged dividends) have historically shunned an investment in BIP’s units due to the structure. We have observed a material uptick in the interest in Brookfield Infrastructure since the announcement of BIPC’s creation.”

“History is not indicative of future performance, but it sure seems to help. We believe that BIP’s historical business success (e.g., business growth, acquisitions, capital recycling, financing), unit price appreciation (18-per-cent CAGR since its inception) and distribution growth (11-per-cent CAGR since 2009) have helped drum up interest ahead of the creation of BIPC.”

Mr. Kwan maintained an “outperform” rating and US$53 target for Brookfield Infrastructure. The average is currently US$52.73.


In other analyst actions:

RBC Dominion Securities analyst Darko Mihelic lowered iA Financial Corp. (IAG-T) to “sector perform” from “outperform” with a $72 target. The average is $75.20.

Scotia Capital analyst Trevor Turnbull cut Centerra Gold Inc. (CG-T) to “sector perform” from “sector outperform.”

Compass Point analyst Rommel Dionisio raised Trulieve Cannabis Corp. (TRUL-CN) to “buy” from “neutral” with a $17 target, rising from $11. The average is $28.35.

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