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

In light of the proposed deal for Aimia Inc.'s (AIM-T) Aeroplan program, Industrial Alliance Securities has put Aimia’s rating and target price under review.

“A group comprised of Air Canada, TD Bank, CIBC and Visa announced a proposal to buy the Aeroplan program from Aimia for $250-million or $1.64 per share. Aimia has until Aug. 2 to respond,” said analyst Neil Linsdell.

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“The press release from the acquiring group implies a value of $2.25-billion for the deal, seemingly made up of $1.64 per share times 152.3 million shares equalling $250-million plus liabilities of $2-billion, seemingly representing the $1.96-billion in estimated (Future Redemption Cost) liabilities from Aeroplan Miles in active accounts as reported as at March 31, although we would presume that the potential liability of $586-million for broken Loyalty Units would also be transferred,” he said.

"If the proposal is accepted, Aimia would supposedly be left as a public entity with the remaining assets, investments, and liabilities not directly related to the Aeroplan program. While we do not have a firm accounting of cash and liabilities connected to the Aeroplan program versus the other business, the group is estimating the remaining value at $2.00/sh. This would include its remaining (ILS) business, plus its investment in PLM and other equity-related investments that were recorded at a book value of $108-million at the end of Q1, plus cash and investments ($560-million), less preferred shares ($322-million) and long-term debt ($350-million). ILS recorded approximately $183-million in gross billings last year and an adjusted EBITDA [earnings before interest, taxes, depreciation and amortization] loss of about $22-million. The investment in PLM, which currently provides annual dividends of about $20-million, is conceivably worth more than the stated book value. "

His current rating on the stock is “speculative buy” and his target price is $3.25. Both are under review. The median target price is $2.75, according to Zack’s Investment Research.

“With the lack of clarity on the specific cash and value of other investments remaining if Aimia agrees to the sale of the Aeroplan program, we are putting our recommendation and target price Under Review.”

“With Aimia’s two main sources of gross billings (TD & CIBC, representing about $650-million of annual gross billings) partnering up with Air Canada in this proposal, we have to wonder of the repercussions of declining the proposal on their decisions to renew their contracts after 2020, or if they have clauses in their agreements to allow them to end their deals with Aeroplan in 2020 when the Air Canada deal ends,” he said.

“While the implied value of $3.64/sh cited by the group appears favourable compared to the previous closing price of $2.50/sh, the offer would strip Aeroplan out of Aimia and leave shareholders with the remaining investments, which were likely not core to their investment decision when originally purchasing Aimia shares. Additionally, we do not have complete details of the assets that would remain after the sale of Aeroplan, and if the $1.64/sh collected from the sale would be retained by Aimia or distributed to shareholders. We are moving to an Under Review rating while we await further details,” he said.

Also, National Bank of Canada raised its price target on Aimia to $4.30 from $3.50 and RBC raised its price to $5 from $2.

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National Bank of Canada is initiating coverage on Fairfax Financial Holdings Ltd. (FFH-T) with a strong rating.

Analyst Jaeme Gloyn started coverage with an “outperform" rating and a target price of C$850, which expects a total return of about 20.1 per cent, including the company’s 1.4 per cent dividend.

Fairfax attempts to achieve 15 per cent BVPS [book value of equity per share] annual growth over the long term through solid underwriting performance and a focus on generating total returns on its asset portfolio – the latter a differentiator versus P&C insurance peers. With a market cap of US$15.5-billion and net premiums written of about US$12 billion (2018E), FFH is one of the top 10 insurance companies in North America," he said.

“We believe the company’s diversified operations (geographic, business lines, risks) and decentralized management approach support stable premiums growth (mid-single digit) and consistent combined ratio performance (long-term average of 95 per cent). We believe recently soft total return performance is in the company’s rear-view mirror following a shift to a more “risk-on” (but still conservative) approach. Though the timing of net gains is uncertain, we believe the company holds meaningful upside on several “at-cost” investments. Moreover, continued deployment of cash into other investments as well as declining interest expenses will further support stronger investment profitability,” he said.

“We expect Fairfax to deliver consistent double-digit ROE [return on equity] over the long term. Combining our outlook for underwriting profitability and investment returns, we believe FFH will generate about 10 per cent ROE through our forecast horizon. Supported by a solid balance sheet and capital levels, we expect management to enhance ROE through purchasing non-controlling interests, share buybacks and disciplined increases in underwriting leverage (i.e., in hard markets). Catastrophes (e.g., 2017) and adverse market movements (eroding total returns) pose material risks to our outlook; however, we believe these risks are sufficiently reflected in our target valuation,” he said.

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“With a consensus ROE forecast of just 8.5 per cent in 2019, implying a approximately 1.2 times P/B [price to book value] – also the current trading multiple – we believe consensus (and the market) are missing some aspect of the profitability outlook. We use a 1.3 times P/B multiple on our Q2 2019 BV estimate to arrive at our price target of US$650 (C$850). Given an approximately 20 per cent total return, including a 1.4 per cent dividend yield, we rate the shares Outperform.”

The shares are currently trading near C$720. The median target price is C$755.

**

The resignation of Hydro One Ltd.'s (H-T) CEO and board following pressure from the Ontario government will be an overhang on the stock, said Credit Suisse analyst Andrew Kuske as he downgraded the stock.

“We downgrade Hydro One to “Underperform” from the prior “Neutral” rating and reduce our target from $22 to $19. Very simply, we believe the Ontario overhang will persist with a company that currently is in the process of replacing the entire Board of Directors and, eventually, searching for a new full-time CEO. With the recent formation of the ad-hoc committee to replace the Board of Directors as per the governance agreement, the issue of the Board will be addressed no later than Aug. 15. We regard the uncertainty associated with recent government activism around Hydro One as translating into a major overhang and a discounted valuation," he said.

The median target price on the stock is $23.

“Beyond the Ontario government’s potential for more intervention, perhaps the most important question facing H investors is the status of the Avista deal. In our view, H wants to close the transaction, but we continue to believe that regulatory delays will result in a longer close period. Given that view, we delay the H2 2018 Hydro One close to Q2 2019 in our financial model. One should note, the “outside date” for the instalment receipts issued for the AVA deal is May 1, 2019,” he said.

“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 Underperform rating and $19 target price are obtained from several approaches, including an implied 13.6 times P/E multiple of 2019e EPS, an EV [enterprise value]/EBITDA multiple of 10.8 times; and a target dividend yield of 5.05 per cent (implying a 205 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.

**

Performance at New Gold Inc.'s (NGD-A; NGD-T) Rainy River mine continues to falter and that’s led to a downgrade by Credit Suisse analyst Anita Soni.

“On July 25th, the company reported its Q2/18 earnings results. As a result of continued weakness at Rainy River, which was the primary driver to the downward production guidance revisions and increased costs guidance, we have downgraded NGD to Underperform from Neutral and decreased our target price to US$1.60 from US$2.20,” she said.

The median price target is US$2.96. The stock is down more than 15 per cent in trading Thursday.

“NGD is now guiding to 415-480kozs gold (down from 525-595kozs) at AISC of US$1,080- 1,120/oz (up from US$860-900/oz). Guidance at Rainy River has been revised to 210-250kozs gold (below CS at 270kozs, now revised to 228kozs, down from prior guidance of 310-350kozs) at AISC of US$1,600-1,700/oz (up from US$990-1,090/oz). Guidance at Cerro San Pedro has been revised to 10-15kozs (down from 20-30kozs) at AISC of US$2,000-2,140/oz (up from US$1,330-1,370/oz). New Afton and Mesquite were unchanged,” she said.

“We have made preliminary changes to our model to reflect the company’s updated guidance at Rainy River and our view of higher costs expected at the asset into 2019. Our 2018 production estimates have been revised to 456.4kozs (down from 511.1kozs), driven by reductions in our Rainy River CS estimates to 228kozs (down from 270kozs). We have also revised our 2018 Rainy River cash costs estimates to US$953/oz (up from US$784/oz). Given continued elevated costs at Rainy River expected in 2018, we have also increased our view on 2019 cash costs to US$695/oz (up from US$607/oz),” she said.

"NGD reported Q2/18 adj. EPS of US$0.00, below both US$0.02 CS est. and US$0.01 consensus. 2018 EPS revised to US$(0.01) from US$0.05 on revised guidance. Commodity prices and operations are key risks.

**

Loblaw Cos. Ltd. (L-T) has been able to offset cost pressures and post better than expected results and that’s led Desjardins to raise its price target on the company.

“Loblaw management is succeeding in offsetting severe cost pressures affecting both gross margin (drug reform) and SGA expense rate (minimum wage increases). The company is on track in 2018 to deliver flat net earnings growth and modest EPS growth, driven by share buybacks. Key long-term investments in loyalty and online are being made concurrently. As headwinds recede in 2Q19, underlying operating performance is expected to deliver EPS growth, supplemented by share buybacks. Our rating is Buy," said analyst Keith Howlett.

“Loblaw posted adjusted diluted EPS of C$1.11, ahead of our forecast of C$1.06 and consensus of C$1.08. Management delivered positive same-store food sales growth of 0.8 per cent against internally measured inflation that was marginally lower (slightly deflationary) than the 0.1 per cent measured by the CPI. Adjusted gross margin rate increased by ~20bps despite drug reform headwinds and intense competition in grocery. Pharmacy revenue and gross margin were negatively affected by drug reform, which was in effect for 11 of 12 weeks in the quarter. Same-store pharmacy revenue increased 0.3 per cent on same-store script count growth of 2.9 per cent. Management indicated that it expects modestly higher food inflation in 2H18, driven by increases in operating costs related to transportation, foreign currency rates and new tariffs on U.S. products imported into Canada,” he said.

“We are reducing our 2018 EPS estimate to $4.64 (from $4.68) and our 2019 EPS estimate to $5.18 (from $5.27) to reflect higher interest expense in relation to Choice REIT’s acquisition of CREIT. Our target is based on 9 times 2018 EBITDA from retail and financial services plus the value of interests held in Choice REIT using our real estate team’s target price of $13.25 (recently increased from $12.75). Our target price is $77 (was $76),” he said.

The median price target is $76.

“Loblaw management is steering a steady course in extremely challenging conditions. We expect the results of the 16-week 3Q to affirm that this leg of the voyage will be successful. The better deployment of capital, combined with the return of excess capital to shareholders, appears to be the new norm.”

**

Other analyst actions:

Numerous analysts downgraded their rating or price targets for Facebook Inc. (FB-Q) on Thursday. Read more here.

* Calfrac Well Services Ltd : BMO cuts target price to C$6.50 from C$8; RBC cuts target price to C$7 from C$8

* Cameco Corp : TD Securities raises target price to C$18 from C$16.50 and raises to buy from hold

* Canfor Pulp Products Inc : Raymond James raises target price to C$25 from C$24

* Detour Gold Corp : Credit Suisse cuts price target to C$15.50 from C$16; National Bank of Canada raises price target to C$17 from C$15

* Hydro One Ltd : Credit Suisse cuts price target to C$19 from C$22 and cuts to underperform from neutral

* Loblaw Companies Ltd : CIBC raises price target to C$81 from C$78; Desjardins raises target price to C$77 from C$76; National Bank of Canada ups price target to C$72 from C$71; Raymond James raises target price to C$85 from C$82; TD Securities raises target price to C$82 from C$81

* Parkland Fuel Corp : CIBC raises price target to C$38 from C$37.50

* Real Matters Inc : Canaccord Genuity cuts price target to C$8 from C$12

* Suncor Energy Inc : BMO raises target price to C$60 from C$58; TD Securities raises target price to C$59 from C$58

* Toromont Industries Ltd : CIBC raises price target to C$64 from C$61; Raymond James raises target price to C$71 from C$67; RBC raises target price to C$65 from C$60

* Western Energy Services : TD Securities cuts target price to C$1.10 from C$1.20

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