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

Early termination of mandated production cuts and associated WCS/Syncrude differential "blowout" are the biggest risks to the Canadian integrated oil and gas sector, according to Credit Suisse analyst Manav Guptra.

In a research note released Thursday, Mr. Gupta revised his estimates and made a trio of rating changes to companies in his coverage universe.

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In justifying his moves, Mr. Gupta pointed to: "(1) Delays in Line 3 startup; (2) Changes in the methodology of calculating production cuts; (3) Venezuelan sanction and increased tightness in North American heavy sour markets; (4) Alberta adding to crude by rail capacity; and (5) Berkshire adding Suncor to its portfolio."

He downgraded his rating for Husky Energy Inc. (HSE-T) to “neutral” from “outperform” with a target of $18, falling from $24. The average is currently $17.43.

“HSE is in the 'have-nots” bucket when it comes to Alberta-mandated production cuts," he said. “Even though the government rolled back the level of curtailments for February and March, HSE will see steeper cuts for the period, as new methodology works against those operators that were already curtailing volumes owing to economic reasons. HSE’s free cash flow yield lags peers, and investors are skeptical of management’s claim it is not actively pursuing another deal after MEG fell through.”

Mr. Gupta upgraded Imperial Oil Ltd. (IMO-T) to “neutral” from “underperform” with a $39 target, rising from $38 but 86 cents lower than the consensus on the Street.

"Given IMO's contracted pipe (100 mb/d) and rail capacity (100 mb/d) and its integrated business model, it will be less affected by Line 3 delays," the analyst said. "We believe after 4Q18 earnings call, the market better understands the risk to 2019 volume guidance, which was the basis of our initial underperform rating. With Venezuelan barrels displaced, North America is short heavy sour barrels, and IMO is 300mb/d long heavy sour barrels (production - refinery usage), which we view positively. IMO owns its own rail terminals and is the lowest-cost rail operator, when diffs do widen modestly, IMO's rail will be back in the money moving stranded barrels to the Gulf Coast."

He also raised his rating Suncor Energy Inc. (SU-T) to “outperform” from “neutral” with a $52 target price, jumping from $48. The average is $55.07.

"Suncor's 17-per-cent annual dividend hike came in well above Credit Suisse and Street estimates of 12-15 per cent," he said. "Besides its dividend hike, SU reloaded buyback by $2-billion. Suncor is one of the most shareholder-friendly energy companies, with an integrated business model, no AECO exposure, and dividend safety. Alberta government change in methodology of calculating cuts provides relief to SU that was ramping volumes on projects like Fort Hills in the past 6-9 months or suffered unplanned downtime at Syncrude. Recently, BRK [Berkshire Hathaway] added 10.8 million shares of SU (0.7-per-cent outstanding, valued at $301-million) to its portfolio in 4Q18. Looking at its investment pattern, we expect BRK will add to the position which should drive stock re-rating."

At the same time, Mr. Gupta maintained an “outperform” rating for Canadian Natural Resources Ltd. (CNQ-T) and raised his target to $50 from $48. The average is currently $45.88.


Citing potential upside from recent capital deployment, CIBC World Markets analyst Paul Holden upgraded Great-West Lifeco Inc. (GWO-T) to “outperformer” from “neutral” in a research note released Thursday.

"We have become increasingly positive on GWO as we have worked through various capital deployment scenarios," he said. "Our belief is that the announced SIB [substantial issuer bid] is just the tip of the iceberg, and that the company has more than ample remaining capital to complete acquisitions in both asset management and retirement administration. In fact, we would argue that the SIB signals management has line of sight on acquisition targets, providing confidence around transaction size and accretion potential. We estimate EPS upside of 17-21 per cent from completing the SIB, acquiring Wells Fargo's retirement admin business, and acquiring a U.S. asset manager that is roughly the same size of Putnam.

"SIBs completed in Canada since the beginning of 2017 show that the offers are fully taken up in more than 90 per cent of occurrences. The average clearing price relative to the minimum offer price is 6 per cent. Applying these figures to the GWO SIB implies a clearing price of $31.80 and a 6.4-per-cent reduction in shares o/s. Our 2019E EPS for GWO increases by 6 per cent to account for our average SIB assumptions."

Mr. Holden raised his target to $37.50 per share from $33. The average is currently $32.78.

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"The stock is trading at 10.3 times price-to-earnings (next 12-month consensus), a 13-per-cent discount to its five-year average, and excluding any benefit for the announced SIB. Accordingly, we view relative downside risk as limited if management is not able to close acquisitions this year."

Conversely, Mr. Holden lowered Sun Life Financial Inc. (SLF-T) to “underperformer” from “neutral.”

"We think organic growth will slow following a solid 2018 result and we think that M&A price discipline may take longer to execute," the analyst said. "Our price target increases ... but that still implies less potential upside relative to the other lifecos. Effectively we see more potential catalysts and more potential for multiple expansion for the other lifecos. Perhaps the greatest risk to our call is that the broader equity markets move lower and SLF is able to find better pricing for acquisition targets."

Mr. Holden’s target rose by a loonie to $54. The average is $54.58.


Barrick Gold Corp.'s (ABX-T, ABX-N) proposed joint venture with Newmont Mining Corp. (NEM-N) that combines their assets in Nevada is a “low-risk, high-reward agreement with positive long-term implications,” according to Desjardins Securities analyst Josh Wolfson.

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“The partnership secures a long-held aspiration to reduce redundancies and improve efficiency among an overlapping asset base,” said Mr. Wolfson in a research note released Wednesday.

"Although quantifying synergy upside is challenging, we forecast interim ABX Nevada forecasts improve materially from the JV alone."

Believing the JV improves his interim outlook, Mr. Wolfson raised his rating for Barrick to "buy" from "hold."

“Excluding the benefit of any synergies, our 2020/21 FCF [free cash flow] improves by a sizeable US$135/302-million as ABX benefits from both higher attributable production and lower attributable capital spending due to shared Goldrush development costs,” he said. “This is partially offset by modestly lower Nevada FCF thereafter as prior Nevada growth is now also shared within the JV. Absent the inclusion of any synergies, our ABX NAV increases 2 per cent solely from the JV agreement.”

“In its original hostile approach, ABX detailed US$480-million in initial annual synergies available, of which U.S. $120-million was allocated to a rationalization of duplicated overhead costs—potentially uncertain under the new JV structure. A conservative combined US$180-million synergy estimate (ie 50-per-cent realization of US$480-million less US$120-million) would increase our prior ABX NAV by 7 per cent (consensus 9 per cent) and increase short-term ABX FCF by 8 per cent (consensus 8 per cent). Our updated published forecasts reflect a similar realization, yielding a net 6 per cent to our NAV from synergies (or 8 per cent including JV benefits).”

Mr. Wolfson maintained a $22 target for Barrick shares. The average on the Street is $18.67.

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"Despite the expected material available benefits from the Nevada JV (and future potential upside from reserves cut-off assumptions), ABX shares responded mildly and now trade at a discount to the group on a spot NAV basis (1.66 times vs 1.67 times) and at fair FCF/EV yield of 4.0/3.7 per cent in 2019/20," he said. "Although longer-term declining production and required capital reinvestment remain a challenge for ABX, in our view the company’s intermediate outlook has improved materially."


Empire Company Ltd. (EMP.A-T) is seeing early stage traction for its strategic initiatives, according to Raymond James analyst Kenric Tyghe, noting “category resets [are] starting to click.”

On Wednesday, the grocery retailer reported adjusted earnings per share of 27 cents, missing the expectation on the Street by 4 cents.

However, Mr. Tyghe said the miss “belies a stronger than expected absolute and relative performance by Empire, given the noise in the consensus estimate.”

“In the quarter, Empire not only reported broader share gains, but also share gains (excl. Farm Boy) in the must win Ontario market, where its market share was historically low,” he said. “The SSS [same-store sales] growth of 3.3 per cent (excl. fuel), on internal food inflation of 1.8 per cent and tonnage growth of 1.5 per cent, reflected a de minimus (which we estimate at high single digit to low double digit basis points) contribution from Farm Boy. On gross margin expansion of 24 basis points, which would have been higher if not for the pace of Fresh Inflation (which exacerbates the normal tracking error) and negative mix impact (on the relative strength of both discount and Quebec), the team was clearly disciplined in its execution (and was not buying share). The gross margin performance in quarter reflected the early stage benefits of the category resets (which management is confident are passed the pointof maximum risk), and accretion from the Farm Boy acquisition. While Farm Boy today is a small piece of the puzzle in terms of dollars, it is quite obviously a critical piece of winning in urban Ontario (specifically the GTA).”

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With the results, Mr. Tyghe raised his 2019, 2020 and 2021 EPS projections to $1.46, $2.02 and $2.18, respectively, from $1.41, $1.95 and $2.04.

Keeping a "market perform" rating for Empire shares, Mr. Tyghe increased his target by a loonie to $32, which is 65 cents lower than the consensus.

"While the customer-centric transformation of Empire (focused on delivering the right experience at the right cost), is gaining traction faster and with fewer missteps to date than we expected (given the innate complexity of the transformation), we remain on the sidelines," he said. "The continued traction of the category resets and discount strategy, would further improve our increasingly positive bias."


Badger Daylighting Ltd. (BAD-T) delivered “surprising” fourth-quarter results and now possesses an “attractive” valuation, according to Canaccord Genuity analyst Yuri Lynk.

On Wednesday, the Calgary-based environmental services company reported revenue and adjusted EBITDA of $179-million and $48-million, respectively, representing jumps of 35 per cent and 39 per cent year-over-year and exceeding Mr. Lynk's projections ($147-million and $41-million). Earnings per share of 63 cents was an increase of 113 per cent after removing tax benefits realized in the fourth quarter of 2017.

"As hydrovac gains wider acceptance in the U.S. and Badger leverages its considerable first mover enabled scale advantage, its growth numbers are impressive," said Mr. Lynk. "In Q4/2018, Badger's U.S. operations put up 21 per cent year-over-year constant currency organic growth before emergency services work associated with wildfires in California and hurricane Michael in the Southeast boosted growth to 41 per cent year-over-year. This growth was not done at the expense of profitability as the U.S. EBITDA margin expanded to 29.7 per cent from 28.0 per cent in Q4/2017 pushing U.S. EBITDA 54 per cent higher year-over-year to $42-million in Canadian dollar terms.

"Gross margin increased 40 basis points year-over-year to 31.5 per cent or 31.7 per cent excluding the aforementioned bad debt expense. Management continues to drive gross margin improvement through lower labour expenses thanks to better utilization, better management of variable labour costs, and growth of the business in lower labour cost regions. SG&A as a proportion of revenue was 4.7 per cent versus 5.0 per cent in Q4/2017. The implementation of the Common Business Platform is on time and on budget."

Pointing to a lower share count following the fourth-quarter repurchase of 628,414 shares, Mr. Lynk raised his 2019 and 2020 EPS estimates by 3 per cent and 5.3 per cent, respectively, to $2.42 and $2.75.

Maintaining a "buy" rating, he increased his target price for Badger shares to $47 from $41. The average on the Street is $38.93.

“Badger trades at 16.5 times 2019 estimated EPS, which is attractive relative to the 19-per-cent EPS growth we forecast this year (PEG of 0.87),” he said. “Our target is based on 17 times 2020 estimated EPS, and we have increased our target valuation multiple from 16x to better reflect Badger’s growth prospects.”


Macquarie analyst Konark Gupta thinks it’s a good time to “take advance” of recent weakness in Air Canada (AC-T) shares following a recent slide related to Boeing Co.'s (BA-N) 737 Max problems.

Though he sees near-term earnings issues, Mr. Gupta said he does not see long-term weakness, believing its ability to meet share buyback expectations remains.

He maintained an “outperform” rating and $45 target, which exceeds the average of $41.62.

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