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

Raymond James’ Ken Avalos added Tricon Capital Group Inc. (TCN-T) to the firm’s “Canadian Analyst Current Favourites” list, citing the fact that it is currently trading at a “steep” 15-per-cent discount to its historical average.

“We continue to expect the company to generate high single, or double digit SPNOI [same property net operating income] growth in the TAH [Tricon American Homes] vertical while THP [Tricon Housing Partners] fundamentals remain sound,” he said. “Tricon shares have underperformed dramatically year to date, falling 15 per cent, versus TSX Capped REIT Index at 1 per cent and the broader market at a 5-per-cent-drop. This is in spite of strong fundamentals in the single family rental business, and continued execution on its operating and balance sheet strategy. Based on our estimates, the TAH vertical net of debt is worth roughly $7.00 per share, while the remaining verticals contribute another $5.50 to our NAV.”

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Mr. Avalos has a “strong buy” rating and $12.50 target for Tricon shares. The average target on the Street is currently $13.18, according to Bloomberg data.

He removed InterRent Real Estate Investment Trust (IIP.UN-T) from the list, noting it has appreciated 10 per cent thus far in 2018.

The analyst made a “strong buy” rating and $11 target for InterRent shares. The average is $10.77.


Polaris Infrastructure Inc. (PIF-T) is now a “timely buy” given its 84-per-cent EBITDA margin and “overlooked” production growth, said Echelon Wealth Partners analyst Russell Stanley.

Accordingly, he named the Toronto-based renewable energy company, which owns and operates the San Jacinto geothermal project in Nicaragua, a “Top Pick” for the second quarter of 2018.

“We believe the current share price gives very little credit to the results of the last drilling program, despite our view that those wells should have PIF producing at the maximum levels contemplated by the power purchase agreement (PPA) once they are tied in later this quarter,” said Mr. Stanley.

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“Possible catalysts include M&A news flow, updates on the Casita Project, and improved financial results.”

Mr. Stanley has a “speculative buy” rating and $29 target for Polaris shares. The average target is currently $26.

“Given our forecast for production/EBITDA growth, the stock is now trading at approximately 5.6 times enterprise value-to-2019 estimated EBITDA, a 47-per-cent discount to the 10.5-times multiple at which Ormat Technologies (ORA-N) is acquiring PIF’s closest comparable (U.S. Geothermal, HTM-N),” he said.


“Everybody loves streaming,” according to Canaccord Genuity analyst Maria Rippa, who believes both Spotify Technology S.A. (SPOT-N) and Pandora Media Inc. (P-N) can win in a growing market.

“After over a decade of decline, the global music market has finally found a growth engine in streaming,” she said. “Consumers have embraced the simplicity and ease of access of paid music subscription, with an estimated 150 million-plus people currently paying a monthly fee for unfettered access to the world’s music. Streaming benefits everyone in the ecosystem: consumers, labels, and artists, and we think both Spotify and Pandora are well-positioned to grow with this shift in consumption.”

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In a research report released Thursday, Ms. Rippa initiated coverage of Spotify, which began trading on the NYSE on Tuesday, with a “buy” rating. She also pegged Pandora “buy” after assuming coverage of the stock.

“With over 70 million Spotify subscribers, and over 160 million estimated music subscribers worldwide, streaming music subscription is becoming mainstream,” the analyst said. “This new way of music distribution benefits both consumers and the labels. Consumers like simplicity. Labels like the emerging, faster-growing revenue stream, which now offsets declines in other music sales. We think that streaming music consumer spending will continue to grow, as users enjoy the simplicity, convenience, access, and personalization of streaming platforms.”

Ms. Rippa set a target price for Spotify shares of US$200, which is above the current average among analyst covering the stock of US$166.22.

“Spotify has emerged as the global leader in streaming music, benefiting from its global scale and network effect. More users create more data for Spotify, which helps to continually improve its music discovery algorithm, and attracts more users. Similarly, more paying subscribers allow for higher investment in R&D to refine the platform, which also drives more subscribers. With Spotify currently at 40-45 per cent of total global subscriber share, we think this positive network effect should help the company grow ahead of the industry, reaching about 55-per-cent subscriber share by 2025.”

She added: “Our $200 PT on Spotify is based on 4.5 times forward sales, and is supported by our DCF valuation. Spotify is a growth stock, a leader in the space, primarily a subscription business, and warrants a premium valuation. Its subscribers are currently valued at 1/3 the value of NFLX subs despite similar ARPU [average revenue per user], churn, and margin characteristics.”

Ms. Rippa set a target of US$7 for Pandora, down from the firm’s previous target of US$8. The average on the Street of US$6.36.

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“We see value in Pandora’s large, highly engaged audience base, while most of the challenges are well understood and priced in,” she said. “Pandora has recently had some stumbles, as the company transitioned through multiple management teams and strategy changes. In particular, under-investment in product and advertising technology eventually led to user attrition and advertising revenue declines. With several initiatives in place for both audience growth (Premium Access) and monetization (programmatic audio launch and the recent AdsWizz acquisition, which should enable Pandora to accelerate its ad tech initiatives), we think there is a good chance the company can meet or exceed expectations that are currently modest (4-per-cent ad revenue growth and 1-per-cent total active user growth in 2019).

“Meanwhile, Pandora remains the leading streaming advertising platform in the U.S., with nearly 2.5 times more ad-supported users and 3.5 times more ad revenues last year compared to Spotify. The gap between the two has been narrowing, but even by 2020, we estimate that Pandora’s U.S. ad platform will still be 2 times larger than Spotify’s, which highlights the importance of scale in the ad business.”


Tamarack Valley Energy Ltd. (TVE-T) is poised to enjoy long-term sustainable growth, said Industrial Alliance Securities analyst Michael Charlton, who initiated coverage with a “buy” rating.

“We believe Tamarack is well positioned to continue to grow organically with over 9 years of drilling locations that at current prices look to payout in less than 1.5 years,” he said. “The company’s significant liquids weighting with a focus to add high-quality oil assets and production hedges coupled with positive cash flow, ensures it will be able to fund all of its near-term capital programs at its core Viking and Cardium prospective properties.

“Management has a history of exceeding guidance, while preserving its strong balance sheet through strategic decisions that have become a standard of operations and shareholder value creation that we believe will continue with further optimization and acquisition potential.”

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Mr. Charlton set a target price of $4.75, which exceeds the current consensus of $4.27.

“For investors seeking an actively growing company in the WCSB [Western Canadian Sedimentary Basin], with more than one asset, run by management with a track record of outperforming, we believe they need look no further,” the analyst said. “Tamarack offers just that – exposure to multiple high-quality plays that are liquids focused with a highly experienced management team who have served at some of the most well-known names in the business.”


Johnson Controls International PLC’s (JCI-N) “low-quality” earnings have drained its upside, said RBC Dominion Securities analyst Deane Dray.

He dropped his rating for the multinational conglomerate, which manufactures both car batteries and Heating, ventilation, and air conditioning (HVAC) parts, to “underperform” from “sector perform.”

“We are downgrading Johnson Controls … as the stock looks unfavorably exposed to incremental fiscal 2018 cash flow pressures, cuts to fiscal 2020 targets, and a market rotation towards higher-quality, more defensive names,” said Mr. Dray. “The prospective Power Solutions divestiture is unlikely to unlock compelling upside in the stock, in our view. We expect JCI’s multiple de-rating to persist over the near-term.”

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Mr. Dray dropped his target to US$31 from US$37. The average on the Street is US$42.40.

“JCI ranks among the lowest quality and most cyclical names in our Investment Framework, largely due to its disappointing 60-per-cent historical FCF conversion, the worst in our coverage,” he said. “Recent management commentary revealed that F2Q18 softness in Power Solutions may dampen hopes for any big inventory flush, creating incremental risk to its FY2018 cash flow targets. We remain unimpressed with the Buildings platform, ostensibly the centerpiece of its Sept-2016 merger with Tyco, given its tepid installation growth and low-margin project backlog. The security products business is witnessing relentless commoditization. Meanwhile, the passage of U.S. tax reform has added a new headwind to the outlook. Not only has the advantage of having an Irish tax domicile evaporated, but the prospect of a 300 basis points tax rate hike in FY2019 is also a reminder that JCI is one of the losers of tax reform. As a result, the company is tracking meaningfully below its FY2020 targets, with a guidance cut likely forthcoming. Finally, if there is any ‘flight to quality’ or market rotation towards defensive industrial names, JCI shares are likely to be left behind.”


CIBC World Markets analyst Cosmos Chiu upgraded Eldorado Gold Corp. (EGO-N, ELD-T) in response to the release of technical reports for its Kisladag (Turkey) , Skouries (Greece) and Lamaque (Quebec) projects.

“Our analysis shows that the assets in Turkey/Greece/Canada alone are worth $1.3-billion, higher than the company’s current market capitalization of $690-million,” said Mr. Chiu, moving the company’s stock to “neutral” from “underperformer.”

“Shares of Eldorado are currently trading at 0.30 tunes P/NAV [price-to-net asset value], at historical lows, as we believe the market ascribes minimal value to the Greek assets. In our opinion, there is an opportunity for Eldorado to surface value by segregating the geopolitical risk in Greece from the operational/start-up risk in Turkey and Canada. For example, one way to achieve this objective could be the spinning out of the Greek assets, which could make Kisladag and Lamaque (along with other assets in the remaining portfolio) acquisition targets.”

He did lower his target for Eldorado shares to US$1.30 from US$1.70 “to better reflect the valuation from our sum-of-the parts analysis, and multiple compression experienced by gold miners with geopolitical risk.”

The average target is US$1.42.


In other analyst actions:

Independent Research GmbH analyst Sven Diermeier upgraded Tesla Inc. (TSLA-Q) to “hold” from “sell” with a target of US$275, down from US$300. The average target is currently US$330.57.

Bank of America Merrill Lynch reinstated coverage of Suncor Energy Inc. (SU-T, SU-N) with a “buy” rating and $55 target, which is above the $51.91 consensus.

The firm also reinstated coverage of Imperial Oil Ltd. (IMO-T) with an “underperform” rating and $35 target (versus $39.24) and Cenovus Energy Inc. (CVE-T, CVE-N) with a recommendation of “neutral” and $12 target (versus $14.32).

UBS analyst Saul Martinez upgraded Citigroup Inc. (C-N) to “buy” from “neutral” with a target of US$80, up from US$78. The average is $83.84.

Mr. Martinez upgraded Wells Fargo & Co. (WFC-N) to “buy” from “neutral” and lowered his target to US$60 from US$63. The average is US$63.74.

Barclays analyst Geoffrey Christopher Meacham upgraded Merck & Co. Inc. (MRK-N) to “overweight” from “equal-weight” with a target of US$64, rising from US$62 though below the average on the Street of US$67.35.

Mr. Meacham downgraded Pfizer Inc. (PFE-N) to “equal-weight” from “overweight” with a target of US$38, down from US$41. The average is US$40.47.

He also lowered Biogen Inc. (BIIB-Q) to “equal-weight” from “overweight” with a target of US$295, down from US$395. The average is US$374.56.

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