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

Newmont Mining Corp.'s (NEM-N) US$10-billion takeover of Goldcorp Inc. (G-T, GG-N) will establish it as “the new global gold leader,” according to Canaccord Genuity analyst Carey MacRury.

Emphasizing Newmont’s “steady gold production, strong balance sheet, low geopolitical risk profile, trading liquidity and [a] deep project pipeline [that] stacks up well against senior peers,” Mr. MacRury upgraded his rating for its stock to “buy” from “hold.”

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“In our view, the transaction provides Newmont with an upgraded project pipeline, lower AISC [all-in sustaining cost] profile and is 12 per cent accretive to NAV [net asset value] and 20-per-cent accretive to EBITDA/share on our estimates,” he said. “We see Goldcorp benefiting from Newmont’s solid track record of meeting guidance and project execution and an improved balance sheet at a (albeit modest) premium.”

Mr. MacRury does not expect a competing bid to emerge for the Vancouver company, despite speculation that Australia’s Newcrest Mining may be a potential suitor.

“We see less compelling economics for a competing bid based on consensus estimates,” the analyst said. “In addition, the $350-million break fee to Newmont provides an additional hurdle to overcome. In our view, there are few other global gold producers with the size and relative valuation to outbid Newmont and we don’t see Newmont as an acquisition target.”

Mr. MacRury raised his target price for shares of Newmont to US$42 from US$37. The average target on the Street is currently US$39.71, according to Bloomberg data.

“On a pro forma basis, Newmont Goldcorp is trading at 0.90 times NAV versus 0.88 times for Barrick Gold (ABX-T, “hold” rating, $19 target), its closest peer,” he said. “We would argue Newmont Goldcorp should trade at a premium to Barrick given its relatively steady production profile, operating reserve life and lower geopolitical risk profile.”

At the same time, Mr. MacRury lowered his target for Goldcorp shares to $18.50 from $20.50 to reflect the bid. The average is $17.40.

He kept a “buy” rating.

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“2018 was a disappointing year for Goldcorp; its shares were down 23 per cent versus Newmont (down 8 per cent) and Barrick (down 6 per cent),” the analyst said. “Encouragingly, Goldcorp achieved its Q4/18 guidance producing 630,000 ounces vs. its 620,000-ounce guidance) and a 25-per-cent improvement over Q3/18. Goldcorp also noted that it expects its full-year AISC to be in line with its guidance of $850/oz. However, despite the strong quarter, the company did not provide any asset-level production or cost details or 2019 guidance leaving investors uncertain as to whether Cerro Negro, Eleonore and the Penasquito Pyrite Leach project successfully met expectations in the quarter and whether Goldcorp’s previous 2019 guidance of 2.7 Mozs (+/-5%) is still largely intact. We expect to get further details with Goldcorp’s results on Feb. 13.”

Conversely, CIBC World Markets analyst Anita Soni downgraded Newmont to “neutral” from “outperform," believing “the uncertainty surrounding the long-term production and cost outlook for Goldcorp’s assets will create an overhang for the stock.”

Ms. Soni lowered her target to US$41 from US$48.

Meanwhile, Cormark Securities' Richard Gray lowered Goldcorp to “tender” from “buy” with a target of $14.50, down from $18.


Calling it “the gold standard of rail efficiency,” Credit Suisse analyst Allison Landry upgraded Canadian National Railway Co. (CNI-N, CNR-T) to “outperform” from “neutral.”

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“It is now clear that 2018 was merely a blemish on CN’s otherwise impressive scorecard relative to its rail peers, with recent network investments adding sufficient capacity for the company to handle more traffic and grow at low incremental cost,” she said. “To this end: (1) RTM [revenue ton mile] growth has inflected; (2) network fluidity is close to being fully restored; and (3) the O.R. is set up for meaningful improvement in 2019. We see mid-teens EPS growth in 2019 - with close to 200bps of margin expansion that we think is not only achievable but potentially conservative. Considering these factors alongside reasonable valuation and relative defensiveness, we have upgraded our rating.”

“That said, this is not a turnaround story; while there is room for margin improvement, CN maintains the best cost structure (and ROIC) in the industry. And up until now, it is the only rail to have achieved the next level of PSR - driving volume growth that consistently outpaces the industry, while continuing to push the O.R. to unprecedented levels. In our view, CN is well positioned to exploit the substantial top line opportunity that is visibly in front of it ($2-billion pipeline of incremental revenue growth), and achieve efficiencies not previously seen.”

Ms. Landry increased her target to US$95 from US$90. The average is US$89.31.

“Our upgraded rating is also consistent with the sector view that we outlined in our 2019 Rail Outlook: own the rails with the PSR [Precision Scheduled Railroading] model,” she said. “A hallmark of PSR is the ability to convert fixed costs to variable costs in a downturn - which helps to protect margins (and earnings and cash flow) in the face of volume declines by quickly removing excess equipment and restoring balance on the network.”


After a stronger 2018 than its peers, RBC Dominion Securities analyst Geoffrey Kwan downgraded Brookfield Business Partners LP (BBU-N, BBU-UN-T) to “sector perform” from “outperform” based on its current relative return.

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"BBU’s units outperformed in 2018 relative to our coverage universe (down 3 per cent vs. the median of a 17-per-cent decline) and now offer an implied total return that is more in line with the average of our coverage universe," he said. "Furthermore, we think increased market volatility could reduce the earnings visibility and ultimately the estimated values of BBU’s investments, particularly given higher financial leverage and as some of them tend to be cyclical, purchased as turnaround stories, etc. We think increased disclosures regarding financial performance at BBU’s investments could help reduce some of the unit price volatility during times like this."

Mr. Kwan's target fell to US$42 from US$46, which below the average of US$47.60.

“We continue to like BBU’s long-term growth potential, diversified portfolio of businesses and strong investment track record and believe the shares could be attractive for those with a longer investment horizon,” he said. “As we have previously discussed, we think BBU has a narrower unitholder base in part due to its $1.5-billion float market cap and lower unit liquidity. However, we think BBU has the potential to become a core holding, assuming BBU’s investment track record continues, which could increase BBU’s market cap, broaden unitholder ownership and increase unit liquidity.”

Meanwhile, Mr. Kwan also downgraded IGM Financial Inc. (IGM-T) to “sector perform” from “outperform” and lowered his target to $38 from $43. The average on the Street is $37.29.

He lowered First National Financial Corp. (FN-T) to “underperform” from “sector perform” with a $29 target, which sits a loonie below the average.

Conversely, Mr. Kwan upgraded TMX Group Ltd. (X-T) to “outperform” from “sector perform” with an $89 target, down from $95 and below the average of $95.60.

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Though he thinks it “continues to offer investors above-average leverage to a rising silver prices,” BMO Nesbitt Burns analyst Ryan Thompson downgraded First Majestic Silver Corp. (FR-T) to “market perform” from “outperform.”

“Weaker-than-expected 2019 guidance has led us to take our cash flow per share (CFPS) and net asset value (NAV) estimates down by 26 per cent and 11 per cent, respectively,” he said.

Mr. Thompson’s target is $8.25, falling from $8.50. The average is $9.86.


Industrial and multifamily property real estate investment trusts are now displaying “strong” underlying fundamentals, particular in Ontario and the Greater Toronto Area, according to Industrial Alliance Securities analyst Brad Sturges, who believes both sectors will benefit from tight leading conditions, strong tenant demand and accelerating rent growth prospects in 2019.

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"For the North American industrial property sector in 2019, continued e-commerce growth underscores the increasing need for modern distribution and logistics industrial space," said Mr. Sturges in a research note released Tuesday. "Vacancy rates for industrial space across many of the Canadian property markets are low, placing greater upward pressure on rental rates. Including traditional industrial leasing demand from the North American manufacturing sector, other burgeoning industries such as cannabis, data centres, and cryptocurrency mining have added additional tenant demand pressures to already tight leasing conditions across many major North American industrial property markets. For investors seeking pure-play exposure to the Canadian industrial asset market, we recommend Summit. Alternatively, for those pursuing pure-play US industrial asset market exposure, we highlight WPT Industrial REIT (WIR.U-T, US$12.95, Buy, Target US$15.25). Finally, Dream Industrial REIT (DIR, DIR.UN-T, $10.23, Buy, Target $11.00) is a cross-border industrial REIT that trades at a relative discount valuation to its peer group, which may attract value and income-oriented investors.

"The Canadian multifamily real estate sector could be poised once again for strong operating results. Robust rent growth conditions are anticipated to remain in 2019, reflecting the combination of strong population growth trends and limited affordable housing options in major Canadian urban property markets, most notably in Ontario. While the amount of planned purpose built rental construction continues to accelerate, Canadian apartment rents across the country are striking new peaks. Higher interest and tighter mortgage rules have made it more difficult to buy homes, which is spurring multi-residential developers in action. For investors seeking exposure to the Canadian multifamily property market, we recommend CAPREIT, Minto Apartment REIT (MI, MI.UN-T, $18.46, Buy, Target $21.00), and Killam Apartment REIT (KMP.UN-T, $16.65, Buy, Target $18.00)."

Mr. Struges downgraded his rating for InterRent Real Estate Investment Trust (IIP-UN-T) to “hold” from “buy” after it achieved the strongest total return performance in the sector for 2018, believing its premium valuation “fairly reflects strong growth prospects.”

His target for InterRent rose to $14 from $13.25. The average target on the Street is $13.63.

"The significant expansion in InterRent’s P/AFFO [price to adjusted funds from operations] multiple achieved in 2018 reflected the REIT’s stellar operating performance during the year," he said. "InterRent achieved solid organic growth of 14.0 per cent in the first nine months of 2018, due in large part to robust rent growth achieved in Ontario, and the internalization of its property management function early in the year. In addition, InterRent’s relative outperformance was driven by increased investor interest as a result of the REIT’s inclusion in the S&P/TSX Composite Index, and the potential for M&A/privatization activity in the Canadian-listed multifamily REIT/REOC subsector given strong investment demand in the underlying Canadian apartment property market over the past 12 months.

"After achieving stellar trading performance in 2018, we believe InterRent’s premium valuation fairly captures its strong growth NAV/unit and AFFO/unit growth prospects in 2019."

The analyst also adjusted his target for the following equities:

American Hotel Income Properties REIT LP (HOT.UN-T, “hold”) to US$5.50 from US$6.25. Average: $8.49 (Canadian)

Cominar REIT (CUF.UN-T, “buy”) to $13.25 from $13. Average: $13.18.


WSP Global Inc. (WSP-T) is exhibiting the “benefit of diversification,” said CIBC World Markets analyst Jacob Bout, upgrading its stock to “outperform” from “neutral.”

“We believe there is a compelling case that WSP will benefit from improved organic growth/free cash flow, margin expansion, and accretive M&A in 2019/2020,” he said. “Also, our stress tests indicate that during times of extreme market volatility WSP’s performance has been relatively better than peers (positive organic growth, very modest margin contraction, high M&A activity), which we attribute to its diversified business model. As an industry leader with a proven track record, we believe WSP deserves a premium multiple (WSP trading at ~9.1x our 2020E EV/EBITDA.”

Mr. Bout raised his target to $75 from $70. The average is now $75.23.


Equity analysts at Acumen Capital introduced their 2019 “dark horse” picks for 2019 on Tuesday.

The list is comprised of four stocks from the firm’s special situations coverage list.

"The collection of names have either lost a surprising amount of investor conviction or remain under the radar," said analysts Brian Pow, Trevor Reynolds, Nick Corcoran and Jim Byrne.

Their picks are:

Alaris Royalty Corp. (AD-T) with a “buy” rating and $23.50 target. Average: $21.07.

Mr. Pow: "AD’s outlook has improved but investors continue to reflect on past challenges and maintain a cautious stance, leaving the shares trading well below historical levels. We believe the risk reward profile is attractive, based on (1) improvements in the partner performance, and (2) AD’s potential to deploy additional capital. Despite the bumps along the way, AD has retained its dividend which is currently paying shareholders an attractive dividend yield of 9.2 per cent. With a manageable payout ratio of 90 per cent, supported by the underlying strength of the partner portfolio, patient and committed investors are being rewarded.

Hardwoods Distribution Inc. (HDI-T) with a “buy” rating and $17.50 target. Average: $18.50.

Mr. Corcoran: "HDI was one of the weakest performers in our coverage universe in 2018 with a return of negative 45.6 per cent (excluding dividends). While margin pressure from the US trade case, a slowdown in US housing starts, and general sentiment against building products has weighed on the stock, we remind investors that (1) demand for hardwood products is generally less cyclical, (2) HDI has a solid plan to grow organically and through acquisitions, and (3) HDI can delever its balance sheet by reducing inventory. We view the recent sell off as overdone and the stock as attractively valued at current levels."

Sylogist Ltd. (SYZ-X) with a “buy” rating and $17 target. Average: $17.50.

Mr. Pow: "SYZ is a name that remains under the radar. An investment in SYZ provides exposure to a solid underlying business with good organic growth. 2019 is setting up to be a transformative year for the Company given a number of catalysts. A positive decision on the K12 opportunity in North Carolina will provide significant runway for growth in the future. Our current estimates are not factoring in a win as the risk remains elevated as to how and when the revenue will flow to the SYZ. We expect the stock to get a re-rating upwards once more information becomes available."

Tidewater Midstream and Infrastructure Ltd. (TWM-T) with a “buy” rating and $2.15 target. Average: $2.13.

Mr. Reynolds: "Following several years of planning and regulatory work, 2019 is the year in which the rubber hits the road on TWM’s two major greenfield projects. Both the Pipestone deep cut sour plant and Pioneer pipeline projects are expected to be complete in the latter half of 2019 driving an increased run rate EBITDA level of $120-million-plus (currently $80-million). In addition, with the two projects complete Management estimates that 80 per cent of revenue will be backed by take or pay agreements with an average contract length of ~7 years. In our view, execution on the two major project projects and an increase in contracted revenue should result in a decrease to the valuation gap between TWM and its peers."


After a "challenging" 2018 for both the energy infrastructure sector and the broader North American equity market, CIBC World Markets expects a more "stable environment" for Canadian energy infrastructure companies in 2019.

“Further, we believe defensive companies/stocks are currently more coveted, as is the ability to manage macro/commodity volatility and deliver self-funded growth against the headwinds of enhanced regulatory scrutiny and strong competition,” said analysts Robert Catellier, Mark Jarvi and Ollie Primak in a report released late Monday.

“We believe the energy infrastructure sector should fare relatively well in 2019 given the current defensive market tone (these companies provide attractive dividends underpinned by less economically sensitive and relatively stable cash flows) and a rather benign interest rate outlook. We also believe there is valuation support from the robust asset transaction multiples we continue to see in the private market. That being said, the operating environment provides some headwinds and growth expectations have generally moderated given competition and regulatory burdens. We continue to believe companies with proven execution and clear strategies will perform relatively well in the current market conditions.”

In the note, Mr. Catellier downgraded his rating for AltaGas Canada Inc. (ACI-T) to “neutral” from “outperformer,” citing both price appreciation and the expectation of a lower total return,

His target rose by a loonie to $17, which still sits below the consensus of $19.47.

He also lowered Hydro One Ltd. (H-T) to “underperformer” from “neutral” based on the same factors. His target remains $20, which is 93 cents lower than the average.


In other analyst actions:

TD Securities analyst Craig Hutchison upgraded Copper Mountain Mining Corp. (CMMC-T) to “speculative buy” from “hold” with a $1.50 target. The average target on the Street is $1.71.

TD’s Greg Barnes downgraded Sherritt International Corp. (S-T) to “hold” from “speculative buy” with a 60-cent target, down from $1.20 and below the $1.40 average.

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