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

After Hydro One Ltd. (H-T) announced that its board and CEO would resign following pressure from the newly elected Conservative government, Credit Suisse has downgraded the utility.

“After market close, Hydro One (H) announced an agreement with Province of Ontario for ‘the orderly replacement of the board of directors… …and the retirement of… …Mayo Schmidt’ effective today. Ontario has a long-history of painful power (i.e. electricity) politics that took prominence during the recent election campaign. We viewed the Governance Agreement between the Province and Hydro One as providing sufficient protections to all involved, especially Hydro One, from negative actions. Yet, such protections can really only be relied upon if one is willing to fight – what can be rather unpleasant battles at times. In our view, we believe Hydro One’s shares will de-rate and suffer from a potentially long-term ‘Ontario overhang’. Accordingly, we downgrade the stock to Neutral from the prior Outperform and our target is unchanged,” said analyst Andrew Kuske.

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Credit Suisse’s target price remained at $22. The median is $23, according to Zack’s Investment Research.

“Notable points: (1) an ad hoc committee of H’s largest shareholders will be formed to nominate six of the new 10 board members; (2) Hydro One will consult with the Province on the matter of executive compensation; and, (3) on an interim basis, CFO Paul Dobson will be the acting CEO,” said the analyst.

“Hydro One’s attractive asset base has a reasonable amount of embedded growth with potential upside from incentive regulation. Yet, we view the stock suffering an Ontario overhang given recent events,” he said.

“Our Neutral rating and $22 target are obtained from several approaches, including an implied 16.4 times P/E multiple of 2018e EPS, an EV/EBITDA multiple of 12.5 times; and a target dividend yield of 4.14 per cent (implying a 114 bps spread on a normalized 3.0 per cent Canadian 10-year bond yield. Risks to our rating and target include: political realities and perceptions, lower growth in Ontario, regulatory changes and increased interest rates,” he said.

In other analyst actions, CIBC cut its target price on Hydro One to $20.50 from C$24 and IA Securities cut its rating to hold from buy and its target to $24 from $26.

Also: Read David Berman’s take on the story.

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Raymond James is initiating coverage on early-stage specialty pharmaceutical company Knight Therapeutics Inc. (GUD-T).

Analyst David Novak initiated coverage of the company with an “outperform” rating and target price of $10.25. The median is $10.50.

“Knight is an early-stage specialty pharmaceutical company which was spun out from Paladin Labs as a result of its acquisition by Endo International. Through Paladin, Knight’s CEO, Jonathan Ross Goodman has developed a consistent track record of delivering ROIC [return on invested capital]. With a war chest of cash at its disposal, we believe that in time, Knight will outperform the accomplishments of Paladin by uncovering value through patience, opportunism, and calculated foresight,” he said.

“This is not Knight’s executive team’s first rodeo: Mr. Jonathan Goodman, Ms. Samira Sakhia, and Ms. Amal Khouri are well known in Canada for delivering a spectacular exit with Paladin Labs’ acquisition by Endo International. Furthermore, through Paladin’s history, management proved time after time, its steadfast commitment to delivering shareholder value through responsible and disciplined capital deployment aimed at generating future growth and bottom line profitability,” he said.

“Currently exiting 1Q18 with $802.4-million in cash and marketable securities ($658.1-million in uncommitted capital) Knight is in possession of the largest cash war chest amongst its Canadian Specialty Pharmaceutical peers. As such, we believe Knight is the best-positioned company to rapidly close on unique transactional opportunities without the caveat of conditional financing,” he said.

“While still in the early days of amassing a robust pipeline of commercial therapeutic and diagnostic assets, Knight has nonetheless generated approximately $203-million in net income since inception through its unique lending and investment strategies in conjunction with its early commercial activities,” he said.

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“While we would typically value a specialty pharmaceutical company by utilizing either a DCF [discounted cash flow] valuation methodology or a forward EBITDA multiple, we believe neither approach accurately captures the inherent value in Knight’s early-stage operational strategy nor growing cash balance. This is particularly true as at present, the majority of Knight’s earnings are to date generated from interest income on loans receivable, as well as other unique investment tactics. As such, we have opted to utilize a price-to-book value per share multiple valuation methodology which we believe more precisely represents the current value in in Knight’s growing asset base. Specifically, we value Knight at 1.5 times P/BVPS which represents a 25 per cent discount to its North American Specialty Pharmaceutical comps which currently trade at an average of 2.0 times. Our 1.5 times multiple results in a value of $10.35 per share which we round down to $10.25,” he said.

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Mackie Research has raised its price target on TheScore Inc. (SCR-X) after the company posted better-than-expected third quarter results and the U.S. overturned the federal sports betting ban.

Analyst Nikhil Thadani raised his price target to 55 cents from 35 cents and kept his rating a “buy.” The median is 35 cents.

“SCR is up about 100 per cent since our note on May 14 suggesting the stock could benefit from renewed interest following the U.S. Supreme Court overturning a federal sports betting ban,” the analyst said.

“SCR reported better than expected Q3 (May) on higher user monetization, with revenue outperformance falling to the EBITDA line. We believe U.S. sports betting will only accelerate SCR’s user monetization via potential new products, partnerships and organic growth owing to consistently high user engagement.”

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Stantec Inc. (STN-T) has reached a turning point, says BMO Research analyst Devin Dodge.

He initiated coverage of the infrastructure services company with an “outperform” rating at target price of $38, which implies a total return of 13 per cent. The median is $37.

“After a few challenging years for the company, we believe Stantec has reached a turning point and financial performance appears set to improve. Though we suspect it may take a few quarters for the company to demonstrate that it is fully back on track, we believe the stock offers a compelling risk/return for patient investors,” he said.

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WSP Global Inc. (WSP-T) is a top company, but it’s stock is a bit expensive right now, said analyst Devin Dodge.

He initiated coverage on the stock with a “market perform” rating and a target price of $70 – close to the stock’s current trading price. The media price target is $70.

“Though WSP is a top-tier firm in the engineering and construction sector, we believe the current valuation includes an M&A premium that limits the upside in the shares and could leave the stock vulnerable should attractive deals be slower-than-expected to materialize. Barring a pullback in the multiple and/or the emergence of a sizeable acquisition opportunity, we believe the current risk/reward is not compelling,” he said.

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Clothing retailer Aritzia Inc. (ATZ-T) reported solid first quarter results and CIBC analyst Mark Petrie has boosted his price target for the company in response.

“Aritzia’s strong Q1 results highlight the relevance it is achieving with new and existing customers, and the high-level of execution across its numerous initiatives. We continue to see excellent growth prospects in the near- and longer-term, and believe the business is well-positioned for multiple years of about 20 per cent growth. Averaging our F2019 and F2020 valuations (based on 25 times P/E) implies a price target of $22 (up from $20). Aritzia remains Outperformer rated and one of our top picks in the consumer space.”

He raised his target price to $22 from $20. The median is $19. He kept his “outperformer” rating.

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In other analyst actions:

Acadian Timber Corp : CIBC raises price target to C$20 from C$19 and raises rating to neutral from underperformer.

Aritzia Inc : BMO raises target price to C$20 from C$19; CIBC raises target price to C$22 from C$20; TD Securities raises price target to C$20 from C$19.

Bombardier : Credit Suisse raises target price to C$7 from C$5.68

Boralex Inc : TD Securities cuts price target to C$26 from C$27

Canfor Corp : CIBC raises target price to C$37 from C$33

Canfor Pulp Products Inc : CIBC cuts to neutral from outperformer but raises price target to C$27 from C$22.

Canwel Building Materials Group Ltd : CIBC raises target to C$7 from C$6.5

Capstone Mining Corp : Cormark Securities cuts target to C$1.50 from C$1.75; Eight Capital cuts price target to C$1.75 from C$2.15.

Interfor Corp : CIBC raises target price to C$33 from C$32

KP Tissue : CIBC cuts to neutral from outperformer; cuts target to C$10

MTY Food Group Inc : TD Securities raises price target to C$56 from C$55

Norbord Inc : CIBC raises target price to C$59 from C$56

Stantec Inc : BMO starts with outperform rating; C$38 target price

Tricon Capital Group Inc : RBC raises target price to C$14 from C$13

West Fraser Timber Co Ltd : CIBC raises target price to C$112 from C$110

WSP Global Inc : BMO starts with market perform rating; C$70 target price


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