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

In the wake of weaker-than-anticipated first-quarter results and seeing a “more muted” outlook for growth in poker over the remainder of the year, Desjardins Securities analyst Maher Yaghi sees “mounting risk” for his bullish call on The Stars Group Inc. (TSGI-T, TSGI-Q).

Accordingly, he lowered his rating for its stock to "hold" from "buy."

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“Guidance for 2019 is potentially at risk if we do not see a material reversal in results in the coming quarter,” said Mr. Yaghi. “Hence, while we still like the long-term prospects for the business, we believe a more cautious view is warranted until we have more confidence in the company’s operational performance.”

On Wednesday before the bell, the Toronto-based company reported quarterly results that fell short of expectations on the Street, which Mr. Yaghi noted had already declined almost 10 per cent since the company's investor day event in late March.

"While the results were negatively affected by foreign exchange fluctuations, they were also materially affected by operational issues related to poker and betting," he said. "In poker, the company saw a 4.5-per-cent decline in constant-currency revenue in its international segment. These declines were the result of market disruptions in app availability and payment processing in countries such as Russia. We believe these issues are likely to persist for another 1–2 quarters before year-over-year comps improve.

"In betting, while stakes saw growth, betting net win margins saw a sizeable reduction due to unfavourable sports results and increased promotional spending. While a return to normal win margins is likely in the coming quarters, we are still surprised by the significant decline in margins toward the end of the quarter over only a few sporting events — which underscores the erratic nature of this business."

With the results, Mr. Yaghi lowered his revenue and earnings forecasts for both fiscal 2019 and 2020. He's now projecting earnings per share for this fiscal year of US$1.86, down from US$1.93.

With those changes, he lowered his target for Stars Group shares to $35 from $37.50. The average is $34.71, according to Bloomberg data.

“While we see solid long-term upside potential from these levels, we believe a more cautious view is warranted in the short term as our new 2019 estimates are now below the bottom end of management guidance; without a material reversal as soon as 2Q19 in poker trends, the odds of a guidance reduction later this year could increase, potentially limiting upside for shareholders,” said the analyst.

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Atlantic Gold Corp. (AGB-X) move to enter into an agreement to be acquired by Australia’s St Barbara in a friendly transaction worth $722-million is a “solid outcome” for shareholders, said Desjardins Securities analyst Raj Ray.

Under the agreement, announced Wednesday, St. Barbara is paying $2.90 a share for Atlantic, which represents an approximately 40-per-cent premium to the Tuesday closing price.

Shareholders will receive the equivalent of 5 cents a share in a spin-off company that will hold Atlantic’s equity stake in Velocity Minerals Ltd., a small development stage company.

"Due to the all-cash offer and attractive deal multiple, we recommend that shareholders tender their shares," said Mr. Ray, who moved his rating for the stock to "tender" from "buy."

In reaction to the deal, he moved his target for Atlantic shares to $2.95 from $2.60. The average on the Street is $2.85.

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Pointing to its proven leadership team, “remarkable” execution and long-term growth prospects, Raymond James analyst Steve Hansen raised his target for Boyd Group Income Fund (BYD-UN-T) following its “solid” first-quarter beat.

Before the bell on Tuesday, Boyd reported adjusted earnings before interest, taxes, depreciation and amortization of $54.2-million, a rise of 28.6 per cent year-over-year and ahead of the projections of both Mr. Hansen and the Street ($51.3-million and $50.4-million, respectively). He attributed the beat largely to stronger-than-expected EBITDA margin.

"Revenue advanced 23.1 per cent year-over-year to $557.9-million (vs. our $563.8-million estimate), benefiting from: 1) a spate of recent tuck-in acquisitions (42 in 1Q19, 51 in 2019); 2) very robust SSS [same-store sales] growth (up 5.3 per cent as reported, 6.6-per-cent adjusted for one less workday in 1Q19); and, 3) a healthy FX tailwind ($20.4-million). Looking forward, management noted it is seeing some seasonal softening in demand in some markets entering into 2Q19. On balance, we expect healthy (but more measured) SSS growth to continue and, per our broader industry outlook, believe the company is superbly positioned to gain further share in the current macro backdrop."

Also pointing to "stronger" margins and "very brisk" M&A activity, Mr. Hansen hiked his target to $180 from $160, keeping an "outperform" rating. The average on the Street is $178.92.

Elsewhere, Laurentian Bank Securities' Elizabeth Johnston increased her target to $185 from $160 with a "buy" rating (unchanged).

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Ms. Johnston said: "Boyd has continued to outperform, with consistent quarterly results, strong revenue growth, modest EBITDA margin improvement and a strong balance sheet. We believe that a premium multiple remains warranted and our 14-times multiple reflects a 1.5-times premium over the peer group as Boyd has historically traded at a similar premium (1-yr average of 1.4 times above peers)."


Though its endured a “slow” start to 2019, Shawcor Ltd.'s (SCL-T) outlook “remains strong,” said Industrial Alliance Securities analyst Elias Foscolos.

"Shawcor’s Q1/19 results were in line with consensus forecasts, and the reaction in the market [Wednesday] was minimal as investors await contribution from ZCL and the return of International pipe coating," said Mr. Foscolos. "The outlook for a near-term recovery remains intact, and we expect backlog to build through 2019 before seeing significant conversion beginning in 2020. SCL now anticipates annualized run-rate cost synergies from ZCL to be $8M, with the potential of $35M in cross-selling synergies. The North American business appears to be the wild card for 2019, with potentially flat activity."

However, pointing to a weaker near-term outlook for the book-and-turn business in North America , Mr. Foscolos lowered his 2019 outlook. He now projects revenue and operating income of $1.608-billion and $82-million, respectively, falling from $1.648-billion and $91-million.

Keeping a "strong buy" rating for the stock, he dropped his target by a loonie to $26.50. The average is $27.57.

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Keyera Corp.'s (KEY-T) plan to proceed with the Key Access Pipeline System (KAPS) adds a “key strategic piece” to its business, according to Raymond James analyst Chris Cox.

On Tuesday after market close, the Calgary-based company made the announcement on KAPS, which will transport NGL and condensate from northwest of Grande Prairie into Fort Saskatchewan and Keyera’s fractionation facility and condensate hub, with the release of its first-quarter results, which fell short of the Street’s forecast.

"While KAPS still requires a little more project definition and commercial advancement, the project is nevertheless a key addition to the portfolio," said Mr. Cox. "Guided returns of 10-15 per cent were better than the single digit range we had been anticipating, although the strategic value to the broader network will likely dwarf the direct financial impact of this project. KAPS allows Keyera to directly connect it's emerging position in the liquids-rich Montney/Duvernay with the company's cornerstone liquids infrastructure in Fort Saskatchewan, providing customers with a fully integrated suite of midstream solutions, which we ultimately see driving additional opportunities down the road."

Keeping an "outperform" rating for Keyera shares, Mr. Cox moved his target to $42 from $40, which exceeds the consensus of $38.85.

Elsewhere, Desjardins Securities analyst Justin Bouchard increased his target to $38 from $34 with a "buy" rating.

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Mr. Bouchard said: "To say that KAPS is a big deal would be an understatement. From an integration standpoint, we believe this pipeline project is an absolutely critical piece of infrastructure for KEY. Indeed, being able to provide an end-to-end solution for producers is the holy grail; without KAPS, doing so is simply not possible. It is no surprise that the market is highly supportive of this transaction, as evidenced by the stock reaction. We also like the JV itself. For a start, it turns a potential competitor into a partner, but more importantly, by connecting the KEY/SemCAMS networks together, we believe it creates the potential for a more compelling value proposition for customers, which is particularly important in the context of broader WCSB competition. The main drawback is that KAPS is not expected to be operational until 1H22."


Though its third-quarter results fell short of expectations on the Street, Aurora Cannabis Inc. (ACB-T) is making “meaningful progress,” said Desjardins Securities analyst John Chu, pointing to its “robust” medical market and gains in the recreational market.

"We are encouraged by the continued progress operationally and on the sales front," said Mr. Chu. "As production ramps up, we see a mix shift evolving on the product side (eg oils), by geography (Europe) and by segment (domestic medical), all of which should also drive margins higher."

With the results, Mr. Chu increased his net sales expectations for 2019 through 2021, however his EBITA expectations fell marginally for that period.

He kept a "buy" rating and $16.50 target for the stock. The average is now $13.98.

"Canadian industry sales for 1Q CY19 appear on pace to decline 5 per cent quarter-over-quarter (assuming March sales are flat with February levels)," the analyst said. "Meanwhile, Aurora’s 3Q FY19 recreational sales increased 37% qoq, suggesting meaningful market share gains. In contrast, CannTrust’s March-ending quarterly sales increased 5 per cent qoq, while Cronos reported sales rose 18 per cent. Also, HEXO (HEXO-T, "Buy" rating, $14 target) indicated last quarter that sales for the April-ending period are likely to be flat sequentially as it ramps up production. As such, Aurora’s recreational sales growth performance this quarter is pretty impressive."

Meanwhile, Canaccord Genuity's Matt Bottomley said Aurora is "continuing to execute on all fronts."

“Aurora reported FQ3/19 financial results (ended Mar 31) that came in higher than our forecasts for the period as the company (in our view) continues to check all the right boxes in its Cdn medical, recreational and international roll-outs,” he said. “For the quarter, Aurora reported net revenue $65.1-million ($75.2-million gross of excise taxes), ahead of our net estimate of $62.5-million ($70.7-million gross) and up 21-per-cent quarter-over-quarter. The increase was supported by sequentially higher penetration in all of its market segments, but most notably in its Cdn adult-use revenues, which were up 37 per cent in what represented the company’s second quarter of recreational sales in Canada. As a result, we believe Aurora continues to hold the #2 rec market position in Canada (after Canopy) and is further distancing itself from its most immediate peers in the space with a strong showing out of the gate.”

Mr. Bottomley kept a “speculative buy” rating and $13.50 target.


"A much tougher operating environment lies ahead" for Canadian banks, according to Credit Suisse analyst Mike Rizvanovic.

“We see growing uncertainty for the Canadian banks as challenges mount around rising loan losses, credit growth deceleration in Canada, and diminishing prospects for margin expansion with some offset from improving efficiency ratios, which we see as a strong longer-term catalyst for the group,” he said.

In a research report in which the firm reinstated coverage of the sector, the analyst said he thinks the Street’s earnings forecast for the next two fiscal years appears too high.

“We are below FactSet consensus (a decline of 0.6 per cent in F2019 and a 2.4-per-cent drop in F2020), which we believe is largely attributed to our more pessimistic views on both credit losses and lending growth in Canadian P&C Banking, where our detailed analysis on longer-term historical trends suggests further weakness in the consumer portfolio and likely deceleration in the commercial book,” he said."

“While the Big Six currently trades at ~1 standard deviation below the 10-yr average (on PE based on consensus EPS for the next 12 months), we see limited upside as the group appears favorably valued versus large-cap banks in other countries (i.e., the Big Six have a PEG ratio of 0.85 vs. 0.79 for large US banks, while their P/BV to ROE ratio already reflects their superior profitability).”

Mr. Rizvanovic expects Toronto-Dominion Bank and Bank of Nova Scotia to lead the sector in terms of earnings per share growth, adding: “We forecast average EPS growth of 3.8 per cent in F2019 and 5.2 per cent in F2020 for the Big Six and have a strong preference for non-domestic exposure, which we expect will outperform the domestic lending business in light of a weak macroeconomic outlook for Canada (the Bank of Canada recently further reduced its GDP growth estimate for 2019 to a very modest 1.2 per cent). We expect TD Bank (TD) and Scotiabank (BNS), our only two Outperform-rated stocks, to report the strongest growth among the Big Six. The Bank of Montreal (BMO) is our lone Underperform-rated stock among the large banks. While we favor BMO’s U.S. exposure, we are concerned with 1) its over-reliance on low PCLs, 2) unsustainably high commercial loan growth in the US, and 3) an already-healthy PE premium.”

The analyst reinstated the following stocks:

Toronto-Dominion Bank (TD-T) with an “outperform” rating and $81 target. The average on the Street is $81.36.

Bank of Nova Scotia (BNS-T) with an “outperform” rating and $78 target. Average: $78.69.

Royal Bank of Canada (RY-T) with a “neutral” rating and $109 target. Average: $109.24.

Canadian Imperial Bank of Commerce (CM-T) with a “neutral” rating and $116 target. Average: $123.13.

Canadian Western Bank (CWB-T) with a “neutral” rating and $31 target. Average: $32.17.

National Bank of Canada (NA-T) with a “neutral” rating and $65 target. Average: $65.92.

Bank of Montreal (BMO-T) with an “underperform” rating and $106 target. Average: $107.26.

Laurentian Bank of Canada (LB-T) with an “underperform” rating and $41 target. Average: $41.40.


In other analyst actions:

BMO Nesbitt Burns analyst Ryan Thompson initiated coverage of North American Palladium Ltd. (PDL-T) with an “outperform” rating and $15.50 target. The average on the Street is $17.25.

Cormark Securities analyst Jeff Fenwick downgraded Spark Power Group Inc. (SPG-T) to “speculative buy” from “buy” with a $3 target, down from $3.50 and below the consensus of $3.63.

Mr. Fenwick also downgraded Chesswood Group Ltd. (CHW-T) to “market perform” from “buy” with an $11 target, down from $13 but matching the consensus.

Cormark’s Amir Arif upgraded Pipestone Energy Corp. (PIPE-X) to “top pick” from “buy” with a $4.50 target, which exceeds the consensus of $3.42.

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