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

Canaccord Genuity analyst Aravinda Galappatthige lowered his target price for shares of Rogers Communications Inc. (RCI.B-T, RCI-N) ahead of Thursday’s release of its first-quarter financial results.

Mr. Galappatthige is forecasting adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $1.225-billion, slightly below the Street’s expectation of $1.235-billion but a rise of 6.2 per cent year over year. He expects the result to be driven by “continued impressive” growth in its “sector leading” wireless segment, for which he is projecting 6.8-per-cent EBITDA growth.

“We believe this is achievable due to still strong ARPU [average revenue per user] trends and substantial subscriber loading over the past two years where year-over-year postpaid sub growth has accelerated from 1.3 per cent to 4.2 per cent,” he said. “We are calling for 53.7k postpaid net adds in Q1/18 versus 60k last year. Note, however, that this excludes the loss of the Shared Services Canada contract, which could amount to 15-20k subs. This impact is being excluded to better reflect underlying trends. Our blended ARPU forecast is for 3.5-per-cent growth to $62.06 and we expect postpaid churn of 1.20-per-cent, up slightly from 1.10-per-cent last year to reflect gains by Freedom in the GT.”

Mr. Galappatthige is projecting adjusted earnings per share for the quarter of 73 cents, in line with the consensus and up from 62 cents in the same period a year ago.

“There are a number of items to consider regarding RCI’s outlook,” he said. “First, given the recent traction (sub loading) at Freedom, we expect greater emphasis on RCI’s net adds given that much of Freedom’s gains were in the GTA. Second, wireless EBITDA growth (9 per cent Q2-Q4/17) has been at elevated levels, while we expect that a 6-per-cent growth level can be achieved in 2018, investors would be paying attention to trajectory and ARPU trends. Third, as alluded to earlier, cable sub trends are likely to see some pressure and with Bell launching its new all-fibre broadband products in the GTA and X1 unlikely to be a factor for Rogers in 2018, we expect these trends to continue.”

Keeping a “buy” rating for Rogers shares, Mr. Galappatthige dropped his target to $71 from $66. The average target on the Street is $67.85, according to Bloomberg data.

“Given that we had not factored in the year-to-date interest rate increases, and also given the near-term threat to wireless sub loading strength due to Freedom, we have lowered our wireless target multiple from 9.0 times to 8.5 times,” he said. “We have also slightly trimmed the cable multiple (from 6.25 times to 6.5 times) to reflect the current momentum swing towards the Telcos. Thus, our target is lowered.”

He added: “Rogers’ stock is down 10.6 per cent year-to-date, partly due to rising interest rates, but also due to a number of company specific factors such as 1) the decision to not increase the dividend in January; 2) soft Q4/17 wireless postpaid net adds; 3) expectations of a sale of non-core assets receding; and 4) loss of momentum in cable sub loading. On the other hand, 2018 guidance was particularly encouraging, and we believe that if Rogers can maintain strong wireless metrics (EBITDA growth in the 6-7-per-cent range and ARPU growth in excess of 2-2.5 per cent), some of the lost ground can be recovered.”


2018 is an inflection year for Netflix Inc. (NFLX-Q), said RBC Dominion Securities analyst Mark Mahaney, who raised his target for the growing media giant following the release of “very strong” first-quarter financial results after market close on Monday.

“Global streaming revenue growth should accelerate from 36 per cent in 2017 to 40 per cent in 2018,” he said. “One of our top 10 surprises for 2018. Check. And operating margins are ramping. iNFLeXion! And our assumptions may be conservative. Global sub adds in H1:18 appear on track to be over 30 per cent higher versus H1:17… and content and marketing costs are expected to be back-end loaded in ’18 – just think about that…).”

Netflix reported quarterly revenue of US$3.7-billion, exceeding the US$3.69-billion projection of both Mr. Mahaney and the Street. U.S. subscription additions of 1.96 million topped the Street’s expectation by 32 per cent, while international adds of 5.46 million was a beat of 9 per cent.

“We believe secular demand for Internet TV is ramping rapidly globally, and Netflix has positioned itself extremely well to benefit from this. Pricing power helps,” the analyst said. “We also believe the breadth of NFLX’s content offering is paying dramatic dividends in terms of Sub Adds and Retention. (Per our “Kings Of Content” report, each $1 of monthly subscription paid to Netflix gives a user access to $1.1-billion of content spend – almost 2 times the ratio of most Media companies.) Increased Marketing spend and distribution partnerships (T-Mobile, Sky, Comcast, etc…) are also helping. And the scale advantages of the business model are proving out – U.S. Streaming Gross Margin now at record-high 51 per cent.”

Based on both the results and his recent survey, Mr. Mahaney said Netflix can now build a global subscription base of 220 million to 250 million by 2022.

“And by 2022, we believe NFLX can achieve Operating Margins of 25-30 per cent, with the U.S. likely surpassing 25 per cent in FY19,” he said. “This generates 2022 EPS of $14-$22. Applying a premium P/E of 25X – 30X, we see this generating a stock price range of $350-$660 within 3 years.”

With an “outperform” rating, Mr. Mahaney increased his target to US$360 from US$350. The average is currently US$322.85.

Elsewhere, Credit Suisse’s Stephen Ju hiked his target to US$330 from US$266 with a “neutral” rating.

Mr. Ju said: “Netflix’s programming win streak continues and it wields its large content acquisition budget as a weapon to put greater distance between itself and its competitors (especially as Disney prepares to exit the platform), and given the accelerated pace of subscriber additions, we believe the Street will continue to underwrite the investments. Our updated assumption for 2018 paid subscribers now contemplates 28.4 million in net adds, with 6.2 million from Domestic and 22.2 million for International (versus prior 26 million globally). Our price target resets higher to $330 (vs prior $266) on primarily the higher pace of subscriber growth, with no material changes to our Content Acquisition assumptions for 2018 and beyond. We remain on the sidelines for now on balanced risk/reward and maintain our Neutral rating.”

Canaccord Genuity’s Michael Graham increased his target to US$350 from US$280, keeping a “buy” rating.

Mr. Graham said: “We find ourselves in a familiar place with NFLX stock, having to stretch our forecast and valuation framework to justify a higher target price, while feeling very confident in the near- and mid-term fundamental outlook.”


Alaris Royalty Corp. (AD-T) now possesses a “compelling” risk-reward profile and valuation for investors, according to Desjardins Securities analyst Gary Ho, leading him to raise his rating for its stock to “buy”from “hold.”

“With the restart of the partial distributions at Kimco announced earlier in April, this essentially resolves the five underperforming files in AD’s 16 portfolio companies,” he said. “We currently believe AD’s book value has been conservatively written down. We also think net capital deployment could pick up later this year, particularly given the recent hike in interest rates, which increases the appeal of AD’s royalty structure.”

In justifying his upgrade, Mr. Ho pointed to five factors:

1. The resolution of five underperforming files, noting: “We view AD’s book value as having been conservatively written down. While there remains some risk relating to its promissory notes, the amounts are manageable, in our view.”

2. The view that net capital deployment could be poised to pick up in the near term, acting as a stock catalyst. Mr. Ho said: “The rate hikes have caused an increase in the cost of borrowing for PE transactions. Management foresees a robust pipeline for the royalty structure. This is key for the AD story as new capital deployment should reduce the payout ratio.”

3. The benefits of U.S. tax changes. While Alaris currently derives nearly 80 per cent of its revenue from the U.S., Mr. Ho feels changes should improve earnings and cash coverage ratios.

4. A dividend cut has already been priced into the stock. He noted: “Given the 9.6-per-cent dividend yield, the market is essentially pricing in a dividend cut, which we are not modelling in.”

5. The fact that Alaris stock is currently trading a 1.0 times price-to-book value per share, which is an eight-year low.

Mr. Ho maintained a price target for Alaris shares of $20.50. The average is $22.21.

“AD has a diverse portfolio, strong capital deployment since inception and a solid track record of growing dividends,” the analyst said.


RBC Dominion Securities analyst Paul Quinn raised Canfor Corp. (CFP-T) to “outperform” from “sector perform,” citing its “superior” lumber/pulp exposure, inexpensive valuation and “squeaky clean” balance sheet.

It’s his first upgrade of the stock since 2015, according to Bloomberg.

Believing strong lumber market are “here to stay,” Mr. Quinn raised his target to $39 from $33. The average is currently $33.36.


Black Diamond Group Ltd.’s (BDI-T) new plan for its Sunset Prairie Lodge camp is “a good outcome in a less than ideal situation,” said Raymond James analyst Andrew Bradford.

However, expecting earnings to decline, Mr. Bradford downgraded his rating for the Calgary-based provider of modular space solutions and workforce accommodations to “market perform” from “outperform.”

On Monday after market close, Black Diamond announced that it has entered into an agreement to assume the land lease and ongoing operations of its the 1,244-room facility, which is located between Fort St. John and Dawson Creek, B.C. The camp, which was previously rented to Encana Corp., will be converted into an open lodge and operated by its Cygnus partnership with the West Moberly First Nations.

Mr. Bradford estimates the company is losing $10-million in annualized EBITDA from the deal’s expiration, and it will recover only $5-million through margins earned as an open camp.

“We’re modeling just over $1-million EBITDA contribution per quarter from Sunset Prairie Lodge Open Camp going forward – at least initially,” he said. “This estimate is predicated on about 300 to 350-bed average occupancy. There are many unknowns, but we can observe that Sunset Prairie is the largest camp in the region with 1,244 beds. BDI would not likely construct a camp of this size if it were installing an open camp on the same lease, and most open camps in the area are running around 50-per-cent occupancy.”

Based on the move, Mr. Bradford lowered his 2018 and 2019 EBITDA estimates for the company to $34-million and $40-million, respectively, from $37-million and $45-million.

His target for Black Diamond shares fell to $2.40 from $2.45, which is below the consensus of $2.72.

“Black Diamond, and indeed all remote accommodations stocks, have been among the top performers within the broader energy group year-to-date,” he said. “The market is more willing than it has been in some time to price-in potential events – like an LNG project – even with unknowable impacts on individual stocks. For our part, we believe investors who don’t pay for these uncertain events ahead of time tend to generate more reliable returns. We are accordingly lowering our rating.”


Raymond James analyst Jeremy McCrea expects Spartan Energy Corp. (SPE-T) shareholders to be frustrated by the lack of premium paid by Vermilion Energy Inc. (VET-T, VET-N) in its proposed acquisition of the company.

On Monday, Vermilion announced the $1.2-billion deal in which it is offering to 0.1476 of its shares for each Spartan share, which represents a small premium of 5 per cent from Spartan’s Friday closing price.

“Ultimately, most SPE shareholders will be frustrated why such little premium was accepted by management but unfortunately, we believe this may be a sign of what has becoming the reality of mid-cap Canadian energy,” said Mr. Bradford, who dropped his rating for Spartan shares to “market perform” from “outperform.”

“The current ‘status quo’ isn’t attracting investor attention (whether due to Canadian politics, differential concerns, etc.), and we believe management teams are looking at alternatives now. Ultimately, we believe SPE has some of the top well economics in western Canada (given the conventional nature) and with its low leverage, the merger should improve Vermilion’s debt position and likely their future profitability. Within a larger entity, this should help spur new investor interest. Although some investors may be hoping for a second bid (similar to management’s prior company’s history when it broke its deal with Pinecrest to sell to Bonterra), we don’t see this happening in the current environment today. We do not cover Vermilion and as such, we are changing our rating to Market Perform given no alternative bid likely.”

Mr. Bradford lowered his target price for Spartan shares to $6.50 from $9. The average on the Street is $7.96.

Elsewhere, BMO Nesbitt Burns analyst Ray Kwan moved Spartan to “market perform” from “outperform” with a $7 target, down from $7.50.

Mr. Kwan said: “We don’t believe a competing bid will emerge and we recommend that shareholders vote in favour of the arrangement. We are downgrading Spartan … based on expected return. Our revised target price of $7.00 (down from $7.50) represents the exchange ratio equivalent of our VET target.”

CIBC World Markets’ Dave Popowich moved the stock to “neutral” from “outperformer” with a $6.50 target, falling from $8.

Mr. Popowich said: “Given that we believe a competing offer for Spartan is unlikely, and with limited implied upside to our price target, we are downgrading Spartan.”

Cormark Securities analyst Garett Ursu downgraded Spartan to “market perform” from “buy” with a target of $6.50, down from $11.


In reaction to the proposed Spartan deal, BMO Nesbitt Burns analyst Ray Kwan downgraded Vermilion Energy Inc. ( VET-T , VET-N ) to “market perform” from “outperform.”

“We view the acquisition of Spartan in a positive light in terms of accretion and deleveraging the balance sheet,” he said. “We are also forecasting a healthy 14-per-cent production per share growth in 2018. Although we still consider Vermilion to be a premium multiple name, with the increased Canadian exposure, we think this multiple should move closer in line with its Canadian peers.”

His target fell to $47 from $50, versus the average on the Street of $53.27.

“With an implied return of 16 per cent, we are downgrading,” he said.


Calling it a “small-cap GARP [growth at a reasonable price] opportunity,” BMO Nesbitt Burns analyst Jonathan Lamers initiated coverage of Badger Daylighting Ltd. (BAD-T) with an “outperform” rating.

“We believe the best comps are three U.S.-listed construction contractors that have similar end-market exposure (infrastructure, some oil & gas): on EV/EBITDA, these are valued in the range of 7.3-8.7 times (2018E), and Badger is valued slightly below (7.1 times), although offering similar growth (peer median: 12 per cent per year), stronger returns on capital, improving free cash flow, and a dividend,” said Mr. Lamers. “If Badger’s quarterly results continue to demonstrate it can maintain its high margins, the stock should re-value to the midpoint-to-higher end of the peer range, in our view.”

He set a target of $31 for Badger shares, which is below the average target among analysts covering the stock of $32.18.

“The past three quarters have demonstrated asset utilization improvement and margin stability, following the oil & gas industry downturn that lead Badger to shift its mix toward infrastructure end markets and compressed margins,” the analyst said. “Badger is now positioned to benefit from both steady infrastructure sector growth and strong pipeline sector activity. We believe investors stand to benefit from earnings-driven growth (10-15 per cent-plus) and we see potential for multiple expansion (perhaps 1-2 times on EV/EBITDA) if quarterly results continue to demonstrate margins within the historic range.”


Dropbox Inc. (DBX-Q) is a “great growth asset” that is currently fairly priced, said RBC Dominion Securities analyst Mark Mahaney, who initiated coverage with a “sector perform” rating.

“Dropbox is addressing a very large market opportunity that combines the cloud storage, team collaboration and work productivity vectors,” he said. “It does this with a high-growth, high-margin business model, and is developing new growth options. Fundamentals are very impressive, but valuation beyond 9 times 2019 estimated enterprise value-to-sales doesn’t look compelling at this point, in our view.”

He set a price target for Dropbox shares of US$33, which is above the US$32.15 consensus.

Mr. Mahaney was one of many analysts to initiated coverage on Tuesday. Others included:

  • JPMorgan’s Mark Murphy with an “overweight” rating and US$32 target
  • Goldman Sachs’ Heather Bellini with a “neutral” rating and US$27 target
  • Deutsche Bank’s Karl Keirstead with a “buy” rating and US$36 target
  • Bank of America Merrill Lynch’s Justin Post with a “neutral” rating and US$31 target
  • Canaccord’s Richard Davis with a “buy” rating and US$35 target
  • KeyBanc’s Rob Owens with an “overweight” rating and US$40 target
  • Piper Jaffray’s Alex Zukin with an “overweight” rating and US$40 target
  • Jefferies’ John DiFucci with a “hold” rating and US$31 target


International Paper Co. (IP-N) is “better off on its own,” said RBC Dominion Securities analyst Paul Quinn, who believes the potential acquisition of Smurfit Kappa “clouds the picture.”

Mr. Quinn said he continues to like IP’s outlook given the “considerable” tailwinds in the North American containerboard market along with “stronger than expected” conditions in its pulp and paper business.

However, given the uncertainty surrounding the proposed takeover, he downgraded the stock to “sector perform” from “outperform.”

“IP’s initial takeover offer equated to €36/share but now stands at over €38,” he said. “Smurfit Kappa has been unwilling to officially engage with IP, while in the interim IP has been courting SKG shareholders (potential hostile approach). However, according to recent (although unsubstantiated) commentary from The Irish Independent (April 12, 2018), a number of large European SKG shareholders are ‘unlikely to support a fresh takeover offer from International Paper if it is under €40.’ As it stands currently we think the deal is already at the high end of the valuation range expected for c’board M&A and would stretch IP’s leverage (currently IP’s offer equates to 9.6 times trailing EBITDA and 8.7 times and 8.4 times 2018 estimated and 2019 estimated EBITDA, respectively).”

“IP has estimated $450-million in run-rate synergies in 4 years and has said there may be “significant revenue synergies that have not been quantified for reporting under the Irish Takeover Rules”. As we have mentioned previously, we can get on board with the strategic rationale behind the deal, but we think IP should be careful about increasing its bid, as “transatlantic” synergies are existent but with limited visibility. IP’s $450-million target (4 per cent of SKG’s 2017 sales at current F/X) seems achievable but ambitious (a bit above the $250-$300-million range we had in our mind) and the long time frame for achievement gives us pause.”

Mr. Quinn dropped his target to US$57 from US$70. The average is US$63.71.

“While IP should trade at a multiple above the typical 6.0-8.0 times range for U.S. paper & forest product companies, reflecting its strong market position and favourable market conditions across its key businesses, uncertainty and a cautious outlook on the proposed SKG takeover are likely to weigh on its valuation in the near term,” he said.


Echelon Wealth analyst Stephan Boire initiated coverage of Slate Office REIT (SOT.UN-T) with a “buy” rating and $8 target, which is below the $8.43 average.

“Although we believe SOT’s management is taking the right steps while taking SOT to its critical mass, at this time we would look for improvements and better consistency of same-property metrics,” the analyst said. “Although SOT does not present SSNOI [same store net operating income] variations on a yearly basis, SS-NOI decreased by 1.9 per cent year over year in Q117, increased by 0.4 per cent in Q217, increased by 1.2 per cent in Q317, and decreased by 1.8 per cent in Q417. NOI in 2017 as momentarily affected by some specific tenant situations (Bell Aliant, MMM, SNC). That said, we expect 2018 to show improvements in this regard. In addition, management mentioned that the REIT could do $50-million of asset sales/capital recycling. In terms of occupancy and rental revenues, 2018 seems to offer substantial upside.”


Predicting advertising growth in the coming year, Morgan Stanley analyst Brian Nowak upgraded Twitter Inc. (TWTR-N) to “equal weight from underweight.”

“Constructive advertiser conversations, improving user growth, and positive revisions make [Twitter shares] a more compelling risk/reward,” said Mr. Nowak. “Recent advertiser conversations continue to be incrementally positive about Twitter’s ad business.”

He raised his target to US$29 from US$28. The average is US$27.40.


In other analyst actions:

TD Securities analyst Greg Barnes downgraded Hudbay Minerals Inc. (HBM-T, HBM-N) to “buy” from “action list buy.”

DZ Bank AG analyst Elmar Kraus upgraded Bristol-Myers Squibb Co. (BMY-N) to “buy” from “hold” with a US$63 target, falling from US$70 but above the consensus of US$62.17.

Morgan Stanley’s David Risinger raised Merck & Co. Inc. (MRK-N) to “overweight” from “equal-weight” with a target of US$68, up from US$63. The average is US$67.75.

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