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

Héroux-Devtek Inc. (HRX-T) is “ready for takeoff,” according to Raymond James analyst Ben Cherniavsky, who upgraded his rating for its stock to “outperform” from “market perform” following Monday’s release of its second-quarter 2019 financial results.

The Quebec-based aerospace parts manufacturer reported adjusted earnings per share of 12 cents, a penny below the analyst’s expectations but 1 cent higher than the result a year ago. “Strong” gross margins of 16.2 per cent were offset by higher-than-anticipated expenses.

"We downgraded Héroux from Outperform on May 24 based on a combination of a lofty valuation and our concerns regarding flattening organic growth, earnings 'misses,' and downward revisions to our forecasts," said Mr. Cherniavksy. "We saw these risks materialize in F1Q18 and in the company’s long-term guidance update in October.

"Since then, the stock has fallen nearly 20 per cent (vs. the TSX down 6 per cent). While the stock declined for legitimate reasons, in our view, we believe that the risks we have outlined are now more appropriately priced into the stock. Meanwhile, we continue to believe that Héroux’s financial results will benefit from a resumption of growth as contracts mature and as recent acquisitions are integrated. We are mindful that our 'fully-ramped' EPS estimate has been repeatedly pushed to the right as new headwinds have transpired, but we remain confident that our updated F22 EPS estimate of $1.10 is achievable. Based on Héroux’s long-term earnings potential and the company’s more reasonable valuation, we are upgrading the stock back to Outperform."

Mr. Cherniavsky lowered his target price for the stock to $16.50 from $17. The average target on the Street is $17.50, according to Thomson Reuters Eikon data.

Elsewhere, TD Securities' Turan Quettawala raised the stock to "sector outperform" from "sector perform" with a $17.50 target (unchanged).

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Canaccord Genuity analyst Raveeel Afzaal thinks the near-term impact of price increases from Just Energy Group Inc. (JE-T) could be a positive for its share price, leading him to upgrade his rating for its stock to “speculative buy” from “hold.”

On Nov. 7, the Mississauga-based natural gas and electricity retailer reported second-quarter 2019 EBITDA of $37.3-million, up 81 per cent year over year and ahead of the projections of both Mr. Afzaal and the Street ($24.4-million and $31.9-million, respectively.

During that period, the company's Consumer division added and renewed customers at $333 per residential customer equivalent (RCE), rising from $197 a year earlier. The analyst pointed to weather volatility in Texas as an opportunity for even further improvement.

"We believe sustainability of the recent price increases is a valid concern," he said. "This is because rates charged by JE appear to be at a premium to its competitors, based on our review of switching sites in Texas. Hence, it is too early to tell whether the recent price increases will hold in a competitive market like Texas or whether the customer attrition rate will significantly increase over the longer term. That said, we believe the near-term impact on the financial results and share price should be positive."

In justifying that optimism, Mr. Afzaal pointed to the company's use of retail kiosk and digital channels to acquire customers that aren't actively seeking a new energy retailer, the growth of its loyalty program and success in moving variable rate customers to higher-priced fixed rate contracts.

“JE is continuing to increase pricing to its customers. We believe the company is well positioned to deliver strong performance in H2/F19 even without additional price increases as wholesale energy costs decline seasonally in H2/F19,” he said. "Also, JE should see improved margins as an increasing percentage of its overall customer base rolls over to higher-priced contracts. Management noted that if it is able to increase pricing by 6 per cent for its overall book, its EBITDA run-rate should double.

"JE's working capital builds up in H1/F19 and should decline in H2/19, which should positively impact its net debt/EBITDA, which ballooned to 3.5 times in the quarter. Strong H2/19 results should also improve the sustainability of its dividends, yielding 10 per cent."

Mr. Afzaal raised his target for Just Energy shares by a loonie to $5.50. The average on the Street is $5.63.

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With a “favourable” outlook in western Canada and expecting new technology platforms to make an impact in 2019, Raymond James analyst Frederic Bastien raised his rating for IBI Group Inc. (IBG-T) following better-than-expected third-quarter results.

On Nov. 8, the Toronto-based professional services company reported adjusted EBITDA of $10-million, exceeding the $9-million estimate of both Mr. Bastien and the Street. Earnings per share of 21 cents topped the analyst’s 8-cent expectation due largely to gains from convertible debentures.

"We see Canada as a source of strength as the services firm continues to focus on the ever growing transportation market across the nation and bids on upcoming LRT projects in Edmonton, Surrey, and Vancouver," said Mr. Bastien. "The modus operandi in the U.S. calls for further streamlining of the operations and growth across all three key platforms, particularly in California. The 2Q18 acquisition of Green Owl is already positively impacting on the intelligence practice in the U.S.

and, we believe, poised to bridge the gap for IBI’s Smart City platform in the future."

“IBI has already unveiled three of the four technology platforms ... The technology platforms have annuity-like revenues and once scaled can bring predictability and stability to the engineering firm’s revenue mix. We expect to see a top-line impact from the Smart City and InForm platform in the latter half of 2019 while the newest edition, Blue IQ, taking longer to materialize. The outlook for IBI’s technology platform rings positive to us, and we are particularly constructive on the diversity these platforms will bring to the firm.”

Mr. Bastien moved his target for IBI shares to $7 from $6.50. The average is $7.88.

"Notwithstanding the ensuing double-digit bounce in the stock price on Friday, it remains 45 per cent off its March 8 close (versus a 4-per-cent gain for the TSX)," he said. " That’s when management started exposing its operational challenges south of the border. But with the restructuring of the US practice now largely behind the company, visibility on 2019 significantly better, the intelligence practice building momentum across North America, and IBI’s valuation at levels not seen since 2015 (on both an absolute and relative basis), we feel the margin of safety on the stock has sufficiently improved to merit a constructive recommendation again."

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Believing the current federal monetary policy “remains supportive” and with its stock now trading at a discount, Industrial Alliance Securities analyst Jeremy Rosenfield initiated coverage of AltaGas Canada Inc. (ACI-T) with a “buy” rating.

AltaGas Canada completed its initial public offering on Oct. 25 through a spin-off transaction with AltaGas Ltd. (ALA-T).

"Benchmark interest rates remain relatively low from an historical perspective, effectively acting as a stimulus for regulated utility sector investment, driving robust earnings, cash flow and divided growth across the Canadian Power & Utility sector," said Mr. Rosenfield. "Although the removal of monetary policy stimulus, and the expectation for rising interest rates have negatively impacted stock prices and relative valuation levels within the sector, the sector remains an attractively priced source of defensive growth and income for longer-term investors, and AltaGas Canada Inc. nicely fits that profile."

Mr. Rosenfield emphasized AltaGas Canada's ability to generate "stable" earnings and cash flows through both regulated gas utilities, which accounts for 80 per cent of EBITDA, and long-term contracted power plant "with no material operating or financial exposure to commodity prices over the near term."

He set a price target of $16.50 for its shares.

“We view ACI as a defensive Canadian small cap utility and power play; with (1) a unique mix of regulated utility and contracted renewable power assets, (2) healthy mid single-digit EPS and FFO per share growth (4-6 per cent year year compound annual growth rate 2018-2023), driven by organic rate base investments, (3) attractive income characteristics (6-7-per-cent yield, 65-75-per-cent earnings per share payout, and (4) strategic and financial support from AltaGas Ltd. (37-45-per-cent ownership, pro forma exercise of the over-allotment option),” he said.

Elsewhere, CIBC World Markets' Robert Catellier called AltaGas Canada "too cheap to ignore," and initiated coverage with an "outperformer" rating and $16 target.

Mr. Catellier said: “AltaGas Canada is fully funded for a $330-million capital plan through 2023, which should lead to a 5-per-cent CAGR in rate base and net income. While this is a competitive proposition in its own right, the real intrigue to us is valuation. To put in perspective, the IPO was priced at about 1.1 times rate base, essentially giving no value for the renewables assets. In other words, the utilities are priced at a discount and the renewables come for free. Some discount to the peer group is warranted given AltaGas Canada’s size, but the valuation is compelling for those investors with a longter investment horizon who are willing to assume the market liquidity risk.”

National Bank Financial initiated coverage of the stock with a “sector perform” rating and $15.50 target.

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ARC Resources Ltd.'s (ARX-T) recent underperformance has creating a buying opportuniy, according to BMO Nesbitt Burns analyst Randy Ollenberger, who believes “longer-term upside is becoming more visible as the company completes its infrastructure build-out.”

That led him to raise his rating to “outperform” from "market perform while lowering his target to $13.50 from $17. The average is $17.37.

“ARC shares provide an attractive dividend yield that is well-supported by the company’s balance sheet and diversified market strategy, in our opinion,” he said.

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Minto Apartment Real Estate Investment Trust (MI-UN-T) enjoyed a “strong start out of the gate” with third-quarter financial results that were “substantially higher” than both its IPO forecast and the expectations on the Street, said Desjardins Securities analyst Michael Markidis.

On Monday, the REIT reported funds from operations per unit of 22 cents, exceeding Mr. Markidis's estimate by 2.3 cents due largely to occupancy gains and higher-than-anticipated turnover.

Based on the results, Mr. Markidis raised his FFO outlook through 2020 by 6-8 per cent. His fiscal 2018 expectation is now 38 cents, up from 42 cents, and his 2019 estimate increased by 6 cents to 84 cents.

Keeping a "buy" rating for the REIT, his target rose to $20 per unit from $19. The average is $18.97.

"A well-located, high-quality asset base, strong sponsorship and conservative payout (48 per cent of our 2019 FFO) position MI for long-term success, in our view," he said.

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In other analyst actions:

Cormark Securities analyst Jeff Fenwick raised Element Fleet Management Corp. (EFN-T) to “market perform” from “reduce.”

TD Securities analyst Craig Hutchinson resumed coverage and moved Nevsun Resources Ltd. (NSU-T) to a “tender” rating from “buy.” His target rose to $6 from $4.50. The average is $6.03.

Laurentian Bank Securities' Yashwant Sankpal cut BTB Real Estate Investment Trust (BTB.UN-T) to “hold” from “buy” with a target of $4.50, falling from $5. The average is $4.58.

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