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

Forest product company stocks continue to lag the rally in commodity prices, according to Raymond James analyst Daryl Swetlishoff, who urges investors to add to their positions before valuations catch up to fundamentals.

“Showing no signs of slowing momentum, benchmark SPF [spruce-pine-fir] lumber prices hit US$655 per thousand board feet last week; uncharted territory for even lumber industry veterans,” said Mr. Swetlishoff in a research note released Tuesday. “With a fundamental mismatch between Canadian supply and U.S. demand, thin end-user inventories, extended order files and the very real risk of another devastating fire season, we expect pricing to move higher over the summer months. With half the year in the books, our lumber price forecasts were looking very stale – prompting us to increase our 2018 WSPF estimate by nearly 20 per cent to US$550. While our targets are based on our (largely unchanged) 2019 estimates, strong forecast 2018 FCF does impact our valuations prompting modest upward target revisions.

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“Share prices have dramatically lagged fundamentals with the average lumber stock discounting just US$460 benchmark lumber pricing 30 per cent below current cash pricing. We have also marked our OSB panel and NBSK pulp forecasts to market, resulting in a further earnings boost to integrated producers.”

The changes to his commodity price deck led Mr. Swetlishoff to make “material” increases to his 2018 earnings and free cash flow estimates for building materials companies in his coverage universe. He did note increases to his target price for stocks in the sector were “more muted” given the lack of changes to 2019 commodity price forecasts.

“The one exception being NBSK [Northern bleached softwood kraft ] pulp, which impacts Canfor Pulp and Mercer targets by 19-20 per cent,” he said. “Higher pulp prices (along with 2018 FCF) also benefit integrated lumber producers Canfor and West Fraser resulting in slight upward revisions. With valuations materially lagging commodity fundamentals, we encourage investors to add to positions.”

In the report, Mr. Swetlishoff downgraded his rating for Canfor Pulp Products Inc. (CFX-T) to “market perform” from “outperform” with a target price of $24, up from $20. The average target on the Street is currently $20.95, according to Bloomberg data.

His other target price changes were:

Canfor Corp. (CFP-T, “outperform”) to $41 from $40. Average: $34.64.

Interfor Corp. (IFP-T, “strong buy”) to $35 from $34.50. Average: $30.25

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West Fraser Timber Co. Ltd. (WFT-T, “outperform”) to $122 from $120. Average: $97.71.

Domtar Corp. (UFS-N/UFS-T, “market perform”) to US$49 from US$48. Average: $47.05.

Mercer International Inc. (MERC-Q/MERC.U-T, “outperform”) to US$19 from US$16. Average: US$19.


Apple Inc.’s (AAPL-Q) announcements at its annual developers conference on Monday “weren’t big/splashy but focused on small but critical changes that strengthen AAPL’s ecosystem over the long term,” said RBC Dominion Securities analyst Amit Daryanani.

He highlighted “crucial” upgrades to its Siri voice assistant, which he feels should close the gap with competitors, and the fact that “privacy and improved digital well being” were emphasized in operating system updates.

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“As AAPL strengthens the ecosystem, we see several levers that could convert low single digit unit/sales growth, in a muted smartphone environment, to mid-teens EPS growth through: 1) Gross margin upside from cost downs, NAND tailwinds & yield efficiencies, 2) Services growth, & 3) Capital allocation,” said Mr. Dayanani.

Maintaining an “outperform” rating for Apple shares, he raised his target to US$210 from US$203, exceeding the consensus on the Street of US$196.94.

“We believe AAPL’s current stock price creates an attractive entry point for investors to benefit from its ability to generate revenue and EPS growth in FY18,” the analyst said. “We believe multiple catalysts remain as the company benefits from: 1)iPhone ramps; 2) Mac/iPad refresh cycle; 3) potential iTV launch or other major product lines; and 4) improvements in capital allocation policy. We believe the fundamental reality remains that AAPL’s valuation is materially sub-par to what we anticipate is its long-term revenue and EPS potential.”


Investor concern about the near-term margin pressure facing Stella-Jones Inc. (SJ-T) are “overblown,” according to CIBC World Markets analyst Hamir Patel, who sees signs of a return to balance in the railway tie market.

“As organic revenue growth in ties recovers, we foresee a recovery in SJ’s enterprise value-to-EBITDA multiple (currently 12.5 times 2019 estimates) closer to its historical five-year average (14.0 times),” said Mr. Patel. “After railway tie organic sales declined 8 per cent in 2017, and fell 3 per cent year over year in Q1/18, we see comps turning positive by H2/18 to close out this year effectively flat year over year (with annual growth of 3.5 per cent in 2019E). Category organic growth should be supported by a recovery in railway tie contract pricing and the ongoing transition of more U.S. customers to the ‘black-tie’ program.”

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Mr. Patel initiated coverage of the stock with an “outperformer” rating and $55 target, which exceeds the current average on the Street of $52.50.

“We regard SJ as a well-managed utility-like business, with leading market positions in railway ties (50-per-cent share) and utility poles (40-per-cent share), two categories with very stable consumption (largely tied to maintenance spending, which can represent up to 90 per cent of railway tie and utility pole demand) and high barriers to entry,” the analyst said.

“Due to safety concerns, railroads and utility companies tend to be cautious about deferring replacement spending on ties and poles. Over 2017-2020, we foresee SJ growing EBITDA at a CAGR [compound annual growth rate] of 9.3 per cent, with EBITDA margins expanding from 12.8 per cent to 14.5 per cent over this period (which may even prove conservative considering margins averaged 15.5 per cent over 2012-2016).”


In the wake of its release of a preliminary economic assessment on its Eau Claire gold project, Industrial Alliance Securities analyst George Topping moved Eastmain Resources Inc. (ER-T) to full coverage from the firm’s watch list, giving the Toronto-based company a “speculative buy” rating.

“Eastmain would make a good tuck-in acquisition for Goldcorp’s (G-T) nearby Éléonore mine, particularly as C$ gold prices climb, as we predict,” said Mr. Topping. The project also works for an Eastmain/third-party build. With ongoing expansionary drilling and plans in place for a ramp and bulk sample, management is on track for a 2022 start-up in mining friendly Quebec. We use the lower valuation stand-alone mill scenario to derive a 48-cent per share target (as opposed to 68 cents per share in a Goldcorp takeover situation).”

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The average target is currently 82 cents.


A pair of equity analysts downgraded Distinct Infrastructure Group Inc . (DUG-X) following the release on Friday of its full-year 2017 and first-quarter 2018 results.

Industrial Alliance Securities’ Nav Malik lowered the Toronto-based company to “speculative buy” from “buy.”

“Financial performance in Q1/18 and Q4/17 was below our expectations primarily due to losses in DUG’s West operating unit,” he said. “In addition, the restatement of historical financials resulted in a breach of debt covenants, however, DUG’s lender has provided a covenant waiver until June 22, 2018. We have revised our estimates lower, but are still anticipating strong growth through 2019 driven by continued demand for network infrastructure upgrades, gas distribution, and hydro projects.”

Mr. Malik’s target price for its shares is $1.75, which is slightly below the average of $1.89.

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Canaccord Genuity’s Yuri Lynk lowered the stock to “sell” from “hold” with a $1 target, down from $1.50.

“Given DIG’s limited financial flexibility and the erosion in our confidence in its internal controls and procedures we believe the stock should trade at a discount,” he said. “Therefore, our target is based on 7 times 2019 estimated EBITDA less our Q4/2018 net debt estimate. The decline in our target is due to the aforementioned reduction in our 2019 EBITDA estimate combined with the negative impact lower-than-expected FCF generation in Q4/2017 and Q1/2018 has on our EV-derived valuation.”


Echelon Wealth Partners analyst Russell Stanley thinks iAnthus Capital Holdings Inc. (IAN-CN) separates itself from its cannabis-producing peers through its significant investments in Florida, New York and Massachusetts.

Believing it’s the lone Canadian-listed company with footprints in those markets, Mr. Stanley initiated coverage of New York-based iAnthus with a “speculative buy” rating.

“These three markets have an aggregate population of almost 48 million, with expected legal annual cannabis sales of $1.2-billion in 2018. In other words, these three states alone represent a population base that is 30 per cent larger than Canada’s. However, there are now over 100 sites licensed for cultivation in Canada, whereas the barriers to entry in these three states remain very high (IAN is 1 of just 10 licensees in New York, and 1 of just 13 in Florida). Massachusetts is expected to open its recreational market this summer, and New York’s Democratic Party recently declared its support for recreational legalization, which should drive further market growth.”

Mr. Stanley believes iAnthus will benefit from good timing, believing recent developments should de-risk the sector south of the border.

“U.S. operating companies currently trade at approximately 12.2 times enterprise value-to-calendar 2019 estimated EBITDA based on consensus estimates,” he said. “This represents a 40-per-cent discount to the 20.5 times multiple given to companies focused on the Canadian market. We primarily attribute that discount to the fact that cannabis is still a Schedule I substance in the U.S,. However, the recent commitment by President Trump to support congressional efforts to protect states that have legalized cannabis, along with other developments, indicate a lower risk of federal interference relative to three to six months ago. Moreover, we have seen an increase in the number of U.S.-focused cannabis companies listed on the CSE. As investors are presented with more options, and the political risk declines, we expect this valuation gap to narrow. This bodes well for iAnthus investors.”

He set a target of $7.50, exceeding the consensus of $5.94.


Clarus Securities analyst Noel Atkinson initiated coverage of Florida-based Liberty Health Sciences Inc. (LHS-CN), which aims to acquire and operate medical marijuana companies in the United States, with a “speculative buy” rating.

“Liberty is one of the first five licensed medical marijuana cultivation and dispensary companies in Florida to open retail stores,” said Mr. Atkinson. “State licensing of new producers is highly restricted. Florida’s medical cannabis registry could reach 500,000 patients by early 2021, generating statewide industry retail sales worth over US$1-billion annually.

“Florida medical cannabis licensees can each operate at least 25 retail dispensaries across the state. Liberty now has 4 locations open and expects to increase to 12 stores by the end of CY2018 and 20 by the end of CY2019, which should drive significant near-term revenue growth.”

Currently the lone analyst covering the stock, according to Bloomberg, Mr. Atkinson set a target of $2 for Liberty Health Sciences shares.


In other analyst actions:

Bank of America Merrill Lynch downgraded Bank of Nova Scotia (">BNS-T, BNS-N) to “neutral” from “buy” with a target of $87, down from $91. The average is $88.61.

TD Securities initiated coverage of Superior Gold Inc. (SGI-X) with a “buy” rating and $2.25 target. The average is $2.43.

Cormark Securities analyst Richard Gray initiated coverage of Leagold Mining Corp. (LMC-T) with a “buy” rating and target price of $4.50. The average is $5.08.

Macquarie analyst David Medilek initiated coverage of K92 Mining Inc. (KNT-X) with an “outperform” rating and $2.50 target. The average is $2.08.

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