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

Industrial Alliance Securities analyst Brad Sturges raised his rating for Killam Apartment Real Estate Investment Trust (KMP-UN-T) on Thursday, citing “the recent pullback in the REIT’s unit price, its P/AFFO [price to adjusted funds from operations] multiple discount valuation, the high-quality nature of its Canadian multifamily property portfolio, and Killam’s forecasted NAV [net asset value] per unit and fully diluted AFFO per unit growth prospects.”

Moving the Halifax-based REIT to "buy" from "hold," Mr. Sturges sees it poisted to benefit over the next few years from "positive underlying Canadian multifamily property demand fundamentals, particularly in Atlantic Canada, and further execution of the REIT’s value creation and development growth initiatives."

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On Tuesday after the bell, Killam reported third-quarter results that exceeded the Street’s expectations. Fully diluted funds from operations of 27 cents rose 1 cents from the same period a year ago, which the analyst attributed to organic growth and its acquisition, renovation and development activities. Same property net operating income rose 4.5 per cent, fueled by a 3.7-per-cent jump in same period revenue and an improved same property net operating income margin.

“As Atlantic Canada’s largest apartment property landlord (13-per-cent market share), Killam could benefit from increasing rental apartment demand in the region in the next 12 months and beyond,” said Mr. Sturges. "Halifax, the REIT’s largest rental property market (35 per cent of 2019 year-to-date net operating income), continues to benefit from local population and economic growth, intensifying urbanization, and rising rental apartment demand from Halifax’s seniors population that are transitioning from homeownership to rental accommodations. Reflecting strong leasing demand across its Canadian multi-residential property portfolio, Killam continues to experience accelerating SP-AMR [same property average market rent] growth in 2019 year-to-date, which has been augmented by its renovation activities.

“We are forecasting Killam to generate SP-NOI growth in 2020 of 3 per cent to 4 per cent year-over-year, reflecting strong same-property average apartment occupancy in the 97% range, and SP-AMR growth of 3 per cent year-over-year. Killam’s investment risks include high geographic concentration in Atlantic Canada and potential development risks, as well as Killam’s slight NAV premium.”

Mr. Sturges increased his target for Killam unit to $22 from $21.50. The average on the Street is $21.10, according to Bloomberg data.

Elsewhere, Canaccord Genuity analyst Mark Rothschild raised his target to $21 from $20.50 with a “hold” rating (unchanged).

Mr. Rothschild said: “Fundamentals remain robust in all of Killam’s core markets, which should support continued steady same-property NOI growth. In addition, the active development pipeline should, in our view, be a key component of NAV growth.”


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After the release of “lackluster" third-quarter financial results, Stuart Olson Inc. (SOX-T) sits in “one fine mess,” according to Raymond James analyst Frederic Bastien, prompting him to lower his rating for the Calgary-based company to “underperform” from “market perform.”

“Stuart Olson managed to meet expectations for 3Q19, but that was about the only positive we took away from the earnings release,” said Mr. Bastien. “Markets and competition are not cooperating, the balance sheet is deteriorating, and more executives are leaving the company. SOX might not be a lost cause longer term, but with yesterday’s dividend suspension the prospect of retail investors dumping the stock like rats fleeing a sinking ship seem highly probable. As we see no point fighting the tape heading into tax loss selling season, we are cutting our recommendation.”

On Tuesday, Stuart Olson reported adjusted EBITDA for the quarter of $11-million, which met expectations. However, a loss of 7 cents per share missed the estimates of both Mr. Bastien (4-cent gain) and the Street (5-cent gain), due to restructuring costs and a loss related to a closure within its Industrial Group.

In justifying his move, Mr. Bastien emphasized the company’s “revolving door of leadership,” noting: "We did not think much of CFO Daryl Sands’ departure earlier this fall, but we were surprised to learn yesterday that Bob Myles also left his position as COO of the Industrial Group. Taking over the segment’s leadership duties is none other than CEO David LeMay, who in 2Q18 also starting assuming the top role for the Buildings Group. We’re all for a leaner, more vertically integrated organization with direct lines of communication to operations and customers, but we are left wondering if this right sizing comes too little too late.

He also sees Stuart Olson sitting in a “precarious” financial situation.

“The net debt to adjusted EBITDA ratio shot up to 4.0 times at quarter end, forcing the company to call on its bankers for amended terms (and call it quits on the dividend)," said Mr. Bastien. "SOX must now keep its leverage below 4.25 times through Jun-30-20, a feat that does not come without risk in Alberta’s current business landscape.”

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After lowering his financial estimates for the company, he reduced his target to $2 from $3.50. The average is $3.42.


In response to a “solid” third-quarter beat, Desjardins Securities analyst David Newman upgraded Chemtrade Logistics Income Fund (CHE.UN-T), citing “strength in legacy chemicals and a focus on operational improvement.”

On Wednesday after the bell, the Toronto-based industrial chemicals and services provider announced quarterly adjusted EBITDA of $90-million, exceeding both Mr. Newman’s $84-million estimate and the consensus projection of $86-million.

“3Q19 results were positively impacted by higher realized pricing in SPPC [Sulphur Products & Performance Chemicals] and WSSC [Water Solutions & Specialty Chemicals] and a lack of material operational issues (easy comp), offset by expected softness in EC [Electrochemicals]," he said. “Benchmark caustic soda prices appear to have found a footing (at close to cash costs).”

Moving Chemtrade to “buy” from “hold," Mr. Newman increased his target to $12 from $11.50. The average target is $11.88.

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“Our constructive outlook on CHE is premised on: (1) strength in its legacy chemicals markets; (2) an expected operational recovery; (3) a focus on the core business; and (4) an attractive distribution yield of 12 per cent,” he said.


Raymond James analyst Steven Li downgraded Optiva Inc. (OPT-T) in response to a 37-per-cent jump in share price over the past month.

With the Toronto-based software provider to the telecommunications industry up 26 per cent thus far in 2019, he moved it back to “market perform” from “outperform.”

After the bell on Wednesday, Optiva released fourth-quarter financial results that Mr. Li deemed “okay.”

Revenue of $23.1-million misses his estimate of $23.5-million and represented a 15-per-cent dip year-over-year, due largely to expected customer churn.

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“his industry moves slowly and adopts new technologies cautiously. Customer attrition has slowed as customers are encouraged by OPT’s long-term prospects," he said. "Still, given long telco BSS sales cycles (18-24 months), expectations need to be clear in that growth may take years to materialize.”

Mr. Li maintained a $60 per share target, which exceeds the consensus of $48.33.


National Bank Financial analyst Maxim Sytchev sees “sustained upward momentum” for WSP Global Inc. (WSP-T), pointing to its “predictability” and “strong” organic growth following a guidance raise.

“While the shares have risen 41 per cent on year-to-date basis, this is actually 20 per cent below some of the high-multiple global peers,” he said. “We continue to like WSP’s execution philosophy, its defensive nature (with very little commodity exposure) and M&A optionality.”

In reaction to Tuesday evening’s release of stronger-than-anticipated quarterly results, Mr. Sytchev hiked his target to $92 from $84, keeping an “outperform” rating. The average is currently $89.08.

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“We view the large discrepancy vs. the international peers as too much to ignore based on the imbedded FCF [free cash flow] generation,” he said.

At the same time, he maintained a “sector perform” rating and $22 target for ATS Automation Tooling Systems Inc. (ATA-T). The average is $23.63.

“Life Sciences division is firing on all cylinders while the company appears to be gaining traction on its joint go-to-market strategy with Comecer in North America,” the analyst said. “From a risk perspective, we remain cautious on verticals and end-markets that are right in the firing line of global trade slowdown, i.e., German manufacturing industry and global automotive sales. Risk is also rising in the UK around Brexit while EV capital decisions are being slowly pushed to the right in North America. Macro as of yet has not impacted bookings / backlog and client channel checks are showing a healthy funnel but contracting industrial PMIs in key geographies (Germany / most of Europe / U.S.), that are also forward-looking, have been weaker than expected. We wonder if that macro readings are acting with a greater lag or whether ATS has been able to outmaneuver the slowdown. We remain on the sidelines”

Mr. Sytchev also kept an “outperform” rating and $9.50 target for Bird Construction Inc. (BDT-T). The average is $8.13.

“The investment thesis for the near term is continued (positive) backlog evolution; margin improvement will be the by-product of that,” he said. :Against the backdrop of numerous incidents due to industry challenges, Bird management has shrewdly identified a “comfort zone” of smaller or medium-sized projects to proactively manage risks. We applaud this approach as in our view, investor mindset has also shifted from rewarding size (by simply growing backlog) to focusing on consistent profitability. The embedded backlog is underpinning a positive trajectory to higher margins while the company strives to bring industrial work back to 50 per cent of consolidated top line. Cedar Valley Lodge is in full production; management is adamant that FLR’s recent issues are isolated from Bird’s progress on site. The additional wins at LNG Canada are both in early stage but recall the scope of addressable work can be up to $1.0-billion. The problematic contract that plagued the H1 performance will be in the rear-view mirror by year end (even in the current quarter the impact was negligible). All in, we are feeling very comfortable with company’s prospects."


Though he lowered his target for its shares following Wednesday’s release of weaker-than-anticipated third-quarter results, Industrial Alliance Securities analyst George Topping emphasized Osisko Gold Royalties Ltd. (OR-T) remains oversold following the announcement of its proposed acquisition of Barkerville Gold Mines Ltd.

“This [quarter] is disappointing particularly post the Barkerville Gold Mines bid when a good result is needed the most,” said Mr. Topping. "OR has fallen 25 per cent as investors react to the change in strategy, temporary or not, from royalty company to developer, and the corporate governance issues. However, combined with tax loss selling, we believe the shares are oversold. OR still offers the greatest growth with an average of 10-per-cent GEO growth p.a. over the next five years and the best torque to the gold price. "

With a “buy” rating (unchanged), he dropped to his target to $18 from $21.50. The average is $17.60.


Desjardins Securities analyst John Chu initiated coverage of a trio of extraction companies that he feels are poised to benefit from the transition to Cannabis 2.0.

“As investor fatigue sets in on the cultivation segment, we introduce the extraction segment as a means of gaining exposure to the fast-growing cannabis sector, which we believe also offers lower risk,” he said. “Extraction companies offer better sales visibility, limited downside margin risk and a faster path to positive EBITDA compared with the cultivation segment. With the upcoming launch of edibles in Canada, the sector should be well-positioned to benefit from this new sales growth catalyst.”

“The cultivation-focused companies are still in the early growth stage of their business life cycle, but we fear the period between growth and the shake-out phase could be rather short as production capacity ramps up and as cannabis (especially dry flower) becomes commoditized and cannabis 2.0 products take market share. With extraction, the segment launched not too long ago, with supply agreements commencing in 1H18, and has been ramping up ever since. Despite its later launch, the path to profitability for the extraction segment has been much quicker, with two companies already posting positive EBITDA (vs only two LPs, out of many).”

Seeing it positioned to be “king of the cannabis extraction sea,” Mr. Chu initiated coverage of Neptune Wellness Solutions Inc. (NEPT-T) with a “buy” rating and $10 target. The average on the Street is $10.

To the best of our knowledge, Neptune is the only company in the cannabis extraction sector which has extensive commercial-scale oil extraction experience; this should help lower its execution risk as it builds the largest cannabis and hemp extraction capacity in the industry," he said. "It is also the only company in the sector which has extensive experience with formulation, manufacturing and distributing health and wellness products, which we believe gives it an edge in addressing the CPG opportunity and in attracting potential CPG-related customers. Neptune also offers investors direct US optionality— something no other extraction company can offer at this time.”

Mr. Chu also gave Heritage Cannabis Holdings Corp. (CANN-CN) a “buy” rating with a 90-cent target. The average is 75 cents.

“Heritage plans to make use of a manufacturing hub which is unique to the extraction space and which could foster long-term partnerships above and beyond what we have seen in the industry thus far," the analyst said. "We believe this model could also provide better insulation against potential margin compression as industry extraction capacity ramps up. In addition, Heritage is one of the few extraction companies to have extensive direct cannabis extraction experience (under the old medical cannabis rules) across different extraction methods, which should help lower execution risk (extraction, formulation and specification) as it ramps while freeing up resources to spur new product growth. Its formulation expertise, which has won awards in the past, should give it an edge when courting new partners that wish to enter the budding cannabis CPG world.”

Mr. Chu sees Valens GroWorks Corp. (VGW-X) “setting the gold standard for extraction and beyond.” He gave it a “buy” rating with an $8 target. The average is $8.45.

“With a growing focus on testing, formulations and product development, the company is looking to be a partner with its customers in the CPG world," he said. "As a result, it has partnered with industry-leading players to build a unique and diverse portfolio of IP and technology that, along with its expertise with multiple extraction methods, can be leveraged into product development and white labelling service.”


BMO Nesbitt Burns analyst Troy MacLean raised Granite Real Estate Investment Trust (GRT-UN-T) to “outperform” from “restricted.”

“We think Granite is well positioned to deliver above-average FFO/unit growth from its sizable investment capacity, solid property fundamentals, and the potential to accretively re-finance debt in 2020 and 2021,” he said.

His target increased to $71.25 from $69.50. The average is $70.91.

“Based on consensus estimates, the REIT is trading below peers on a Price to 2020 estimated AFFO [adjusted funds from operations] basis, yet it is expected to produce above-average FFO per unit growth in both 2020 and 2021,” the analyst said.


In other analyst actions:

D.A. Davidson & Co analyst John Morris cut Canada Goose Holdings Inc. (GOOS-N, GOOS-T) to “neutral” from “buy” with a target of US$42, down from US$48. The average on the Street is US$50.87.

Veritas Investment Research analyst Dan Fong downgraded Linamar Corp. (LNR-T) to “sell” from “buy” with a $42 target, which falls short of the $48.40 consensus.

TD Securities analyst Graham Ryding upgraded Morneau Shepell Inc. (MSI-T) to “buy” from “hold” with a $36 target. The average is $35.75.

GMP analyst Ian Parkinson cut Endeavour Silver Corp. (EDR-T) to “hold” from “buy” with a $3.20 target, down by a loonie and below the average of $3.32.

National Bank Financial analyst Dan Payne lowered Painted Pony Energy Ltd. (PONY-T) to “underperform” from “sector perform” and reduced his target to 60 cents from 75 cents. The average is $1.15.

National Bank’s Zachary Evershed raised KP Tissue Inc. (KPT-T) to “outperform” from “sector perform” with a $10 target, rising from $8 and above the $9.88 average.

RBC Dominion Securities analyst Douglas Miehm downgraded Medical Facilities Corp. (DR-T) to “underperform” from “sector perform” with a $5 target, dropping from $10. Consensus is $8.

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