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

Desjardins Securities analyst Benoit Poirier upgraded Stella-Jones Inc. (SJ-T) upon resuming coverage of the stock following Tuesday announcement of the completion of Stella Jones International S.A.'s previously announced secondary public offering.

“Given the recent pullback in SJ’s share price (the stock is down 15 per cent from its 52-week high on Jan. 31 versus an increase of 2 per cent for the TSX) and improving market fundamentals, we view SJ as attractive with a potential return of 16 per cent,” said Mr. Poirier. “Moreover, we believe the stock could reach $56 by 2020, a compelling potential return for long-term investors.”

Moving the stock to “buy” from “hold,” citing “strong fundamentals and attractive valuation,” Mr. Poirier maintained a $51 target price. The average target on the Street is $53.29, according to Thomson Reuters Eikon data.

“We are upgrading the stock on the back of (1) the improving fundamentals across all segments, (2) management’s proven track record of value creation through M&A, (3) the company’s improved governance, and (4) our increased confidence that management can return EBITDA margin to the 15-per-cent range by 2020,” he said.


Industrial Alliance Securities analyst Elias Foscolos thinks Badger Daylighting Ltd.'s (BAD-T) move to update its IT systems into a single standardized enterprise resource planning (ERP) system will help optimize its existing fleet and “positively impact” its stock by adding economic value, leading him to raise his rating to “buy” from “hold.”

On Monday before market open, the Calgary-based provider of non-destructive excavating services reported second-quarter revenue of $148-million, exceeding Mr. Foscolos's forecast of $135-million. Adjusted EBITDA of $38.5-million also topped his expectation ($35.5-million).

"Badger's Q2/18 results were positive with a beat in both revenue and cash EBITDA estimates and consensus," he said. "Going forward, we believe that BAD is on track to exceed its truck build estimate for 2018 as year-to-date net hydrovac build is 81 units. The announcement of a new ERP system should add further EBITDA in H2/19."

Mr. Foscolos raised his target price for Badger shares to $36.50 from $34.50. The average on the Street is $34.11.

Elsewhere, Canaccord Genuity's Yuri Lynk raised his target to $39 from $38, keeping a "buy" rating.

"Badger is attractively priced given the 35-per-cent 2017-2019 EPS CAGR [compound annual growth rate] we see, its strong balance sheet, and its impressive ROIC [return on invested capital], which we see increasing 230 basis points to 25.7 per cent by year-end," he said.

BMO Nesbitt Burns analyst Jonathan Lamers bumped his target to $40 from $36, maintaining an "outperform" rating.

Mr. Lamers said: “Badger delivered another quarter of revenue-driven earnings growth, with new customers & markets, increased asset utilization, and improved gross margin. Announced ERP system costs were generally consistent with expectations and the company appears prepared for implementation. We believe Badger’s U.S. growth opportunity is being compounded by recovering oil & gas end markets, the business can generate annual earnings growth in excess of 10 per cent for an extended period, and the stock has opportunity to re-rate to the 9-10x EV/EBITDA range if results continue to demonstrate margin stability/improvement.”


Despite a “tumultuous past,” Rubicon Minerals Corp. (RMX-T) possesses several “exciting” opportunities for investors currently that demonstrate upside beyond its current valuation, according to Canaccord Genuity analyst Tom Gallo, who initiated coverage with a “speculative buy” rating.

He pointed to five reasons to buy into the Vancouver-based company, which owns the Phoenix gold project in Red Lake camp in Ontario. They are:

- A new model and mine plan for Phoenix, which he expects to lead to potentially lower costs, noting: "Though significantly different than the first resource, Phoenix’s conservative, well-scrutinized model leads to a more realistic minable resource, in our opinion."

- The sum-of-the-parts from its infrastructure and land package could be worth more than the company's current $80-million market cap

- A "strong, proven, diligent" management team

- A "very large margin for error." Mr. Gallo said: "A significant reduction in resource grade (3.91 grams per ton from 6.2 g/t) still results in a NAVPS [net asset value per share] of $1.52, good for a potential 22-per-cent return. Contrarily, the same grade variability to the upside generates a 152-per-cent return from current levels and pushes gold production to +100koz/a. Though we expect some grade irregularity QoQ, we believe our modeled head grade (4.8g/t Au) is perhaps an overly conservative base case."

- "Massive" optionality through its land position in Red Lake.

Mr. Gallo sees test mining results in the fourth-quarter as a "major" catalyst for the company, which he thinks could lead to both a feasibility study and restart plan.

"We expect the 30,000 tons of material mined could grade north of 5 grams per ton Au which would demonstrate a path toward profitability, in our view," he said. "In 2016, Phoenix’s widely publicized failure to achieve steady state production culminated in a fall from grace that has left many investors with a cautious stance on the company. The story illustrates once again that rushing into production, with a preliminary economic assessment and not further, finer detailed technical work, can have catastrophic consequences."

Mr. Gallo set a target price of $2.30 for Rubicon shares. The average is $2.73.

"Rubicon in particular is poised to benefit from a strong macro environment, in our view, as the company has numerous potential fundamental catalysts on the horizon including test mining results, an additional updated resource (+20km of new drilling) and a feasibility study decision, all expected around year end,” he said. “We see real, considerable upside going forward with a positively skewed risk/reward profile due in large part to sunk capital and completed infrastructure. We believe an unrecognized opportunity has presented itself and it is up to investors to take advantage.”


Canadian Apartment Properties REIT’s (CAR.UN-T) “impressive” second-quarter financial results highlight the strength of the rental apartment market, said Canaccord Genuity analyst Mark Rothschild.

“CAP REIT reported an exceptionally strong quarter and it continues to benefit from record setting fundamentals in both Toronto and Vancouver (47 per cent of the REIT’s net operating income),” he said. “With demand continuing to rise, and insufficient new supply, vacancy is almost nonexistent in Toronto and Vancouver and rental rates are facing material upward pressure.”

On Monday, the Toronto-based REIT reported funds from operations per diluted unit of 53 cents, easily exceeding the 49-cent forecast of the Street and a jump of 15 per cent year over year, due largely to 7.7-per-cent growth in same-property net operating income.

“CAP REIT’s portfolio remains essentially fully occupied at 98.9 per cent as of Q2/18, up 30 basis points year over year,” he said. "There were notable improvements in Nova Scotia (up 620 bps) and the Netherlands (up 220 bps). We understand that management reduced asking rental rates in Halifax to boost occupancy. Given the strength in apartment fundamentals across most Canadian markets, we expect CAP REIT to maintain its near full occupancy through our forecast period.

Mr. Rothschild maintained a “hold” rating for the stock, but he raised his target price to $49 from $43.50. Consensus is $46.02.

“With low vacancies in ... major markets, we expect strong internal growth to continue to drive cash flow and NAV higher," he said.

Elsewhere, Despite exceeding his second-quarter expectations by 6 per cent, CIBC World Markets analyst Dean Wilkinson downgraded the REIT to "neutral" from "outperformer" while raising his target to $46 from $40.50.

Mr. Wilkinson said: “We wish to be clear that our move to a more neutral stance on CAR’s units is rooted purely in relative valuation, as we continue to view CAR as a core holding, representing best-in-class characteristics in a highly defensive real estate sub class. However, and with that caveat, there are a few underlying dynamics at play within the broader multifamily space that we believe may ultimately constrain relative performance in the very near term, and while we fully acknowledge that momentum in and of itself can be a more powerful near-term determinant of price performance than either fundamentals or relative valuation, we also believe that ultimately the latter two do (or will) prevail. We also acknowledge that in the possibility of a privatization of the REIT, it could trade at levels well in excess of what we deem current value (such as witnessed earlier this year on other M&A transactions); however, the possibility of M&A in isolation can’t (or perhaps shouldn’t) be enough to warrant an expectation of continued outsized gains.”

Industrial Alliance Securities' Brad Sturges hiked his target to $50 from $43.50, keeping a “buy” rating.

Mr. Sturges said: “While CAPREIT’s units have benefitted from strong price appreciation in 2018 year-to-date, we believe the REIT could continue to command a premium valuation to reflect its robust rent growth outlook in the coming quarters.”

"Desjardins Securities' Michael Markidis raised his target to $49 from $43 with a “buy” rating (unchanged).

"Market fundamentals in CAR’s key markets have strengthened considerably over the past 12–18 months, as demonstrated by accelerating top-line growth,” said Mr. Markidis. “We believe this momentum will carry into 2019.”


CIBC World Markets analyst David Haughton downgraded Lundin Gold Inc. (LUG-T), citing a lack of upcoming catalysts and 18 months of development risk ahead of the commencement of commercial production for its Fruta del Norte in Ecuador.

“At spot, Lundin Gold trades at 1.1 times our P/NPV5%, relative to its developer peers that trade at an average of 0.5 times P/NPV5%,” he said. “The premium likely reflects project de-risking that has been achieved to date, such as fully financing the project and a proactive social licence approach.”

Moving the stock to “neutral” from “outperformer,” he maintained a $6 target. Consensus is $7.60.


Both CannaRoyalty Corp. (CRZ-CN) and iAnthus Capital Holdings Inc. (IAN-CN) should benefit from the current growth of the U.S. cannabis market as well as the possibility of a re-classification of cannabis south of the border, said PI Financial analyst Jason Zandberg.

In a research report on the U.S. cannabis industry released Tuesday, Mr. Zandberg initiated coverage of both companies with "buy" ratings.

"We expect U.S. cannabis stock valuations to significantly increase once the U.S. Federal government changes its stance on the restrictive scheduling of cannabis," he said. "We look to the Canadian market to see what can happen when a government adopts a more liberal stance on cannabis."

"Looking into the U.S. market, we expect to see similar stock appreciations when the Federal Government takes a more relaxed stance on cannabis. Currently, U.S. cannabis companies are valued at a significant discount to the Canadian companies. With U.S. federal cannabis laws historically being so prohibitive, that gap in valuations was justified. However, the regulatory landscape is changing, with multiple states now having full scale recreational cannabis programs and the federal government loosening enforcement. With cannabis legislation on the U.S. federal level fast approaching, we expect to see the valuation gap begin to close."

Mr. Zandberg said CannaRoyalty's past as an investment company providing growth capital to cannabis business on both sides of the border provided its management "deep insight" into the market and also a strong base of assets to operate in California.

He set a target price of $8 for its shares, which exceeds the current consensus of $7.38.

The analyst thinks iAnthus sits in an advantageous market spot on the U.S. East Coast, particularly in the "very attractive" states of Florida, Massachusetts, Vermont and New York.

"We believe license holders in medical only states are extremely well positioned to become market leaders when those states open up for recreational sales,” he said. “Florida and New York are two states where iAnthus has that head start and we expect cannabis regulations to open up."

His target for iAnthus is $9.50. The average target is $6.17.


“The dog days are over” for Boardwalk Real Estate Investment Trust (BEI.UN-T), said Desjardins Securities analyst Michael Markidis in the wake of a second-quarter earnings beat.

On Monday, the Calgary-based REIT reported quarterly funds from operations of 60 cents per unit, down 6 per cent year-over-year but 3 cents above the forecast on the Street. Same-property net operating income jumped 8.8 per cent, leading the REIT to the first positive result since the third quarter of 2015.

"BEI’s stronger-than-expected 2Q18 results provide strong evidence that (1) market conditions in Alberta are improving, and (2) common area and in-suite improvement programs are having a favourable impact, in our view. Declining incentive use should be a key earnings driver through 2019; however, we believe the market is appropriately pricing in this upside," said Mr. Markidis.

Keeping a "hold" rating for Boardwalk units, he bumped his target to $50 from $49. The average is $50.31.

Meanwhile, Raymond James analyst Ken Avalos increased his target to $52 from $50 with an "outperform" rating (unchanged).

"The Street has been waiting for a quarter like this for some time," said Mr. Avalos. "It is clear that the turn has happened in Alberta and there were positives across all key areas in 2Q18. Management expects the trend to continue, and investors should expect acceleration in the back half."


Western Canadian headwinds are likely to persist for Premium Brands Holdings Corp. (PBH-T) in the near term, said Canaccord Genuity analyst Derek Dley following the release of weaker-than-anticipated second-quarter results on Monday.

The B.C.-based specialty food manufacturing and distribution company reported revenue of $762-million, jumping almost 32 per cent year over year due to “strong” organic growth (6.6 per cent) and the impact of acquisitions. However, adjusted EBITDA of $74-million missed the $79-million projection of the Street despite increasing from $55-million a year ago.

“While Q2/18 experienced some headwinds, including a challenging seafood supply chain, and a deceleration in sales growth from Western Canada, Premium Brands was able to offset these challenges with recent acquisition activity,” the analyst said. “As a result, the company modestly increased its 2018 annual guidance. Sales are now expected to amount to $3,010-3,070-million, ahead of previous guidance of $2,980-3,060-million. EBITDA guidance was increased to $278-287-million, from $274-286-million. We note we had previously forecasted EBITDA of $277-million.”

Maintaining a “hold” rating for Premium Brand shares, Mr. Dley lowered his target to $110 from $120. Consensus is $127.60.

“In our view, the company is well positioned for growth in 2019, as the custom cutting and portioning facility in the GTA ramps up.," he said. "Construction of this facility is forecasted to be completed in Q4/18, with the facility operating at designated capacity shortly thereafter. We believe the ramp-up of this facility should be a margin driver for Premium Brands, as the company increases its vertical integration within eastern Canada.”

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