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

Though it is displaying “strong” momentum, Empire Company Ltd. (EMP-A-T) is also showing a “full” valuation, said CIBC World Markets analyst Mark Petrie, leading him to downgrade its stock to “neutral” from “outperformer.”

“Empire delivered an impressive fiscal 2019 with substantial progress on its operational foundation, cost base and market positioning,” he said. “Though progress on Project Sunrise has been solid and continues into F2020, leading tonnage growth was the most encouraging result. In particular, category resets had a less disruptive impact in FQ4 than we had feared, and we expect tonnage momentum to remain healthy in F2020 and F2021.”

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In justifying his rating change, Mr. Petrie pointed to three issues:

1. A lack of flow-through on its Project Sunrise savings.

“Despite the large headline savings from Sunrise ($200-million in F2019), only $90-million in savings made it to grocery EBITDA, even after adding back $45-million in extraordinary items incurred in FQ3,” the analyst said. “F2019 was impacted by well-telegraphed cost headwinds (particularly minimum wage and freight), so the flow-through should improve, though we believe that F2020 will continue to be marked by higher spending. While Empire will likely contain cost inflation in its legacy business, Farm Boy’s higher labour costs will contribute to increased SG&A, as will new investments in innovation and marketing to support FreshCo West and Voila (Empire’s brand for Ocado) and maintain momentum in the core business.”

2. A rise in execution risk

“Empire has several concurrent initiatives on the go and, though attention once devoted to Sunrise can be redirected, we believe material execution risk remains,” he said. “The rollout of FreshCo in Western Canada holds significant promise for market share gains, but the competitive response is likely to be fierce, with a growing potential for extended timelines in order to reach profitability targets. And, while Empire appears to be minimizing commotion in its stores caused by category resets, there is still the ever-present risk of disruption caused by negative store conditions as the rollout continues over the next four quarters. Further ahead, the rollout of Voila in the Greater Toronto Area, and later in Montreal & Ottawa, will require significant investment to build awareness in a nascent but rapidly growing part of the market. We recognize Ocado as a leader, and remain bullish on the potential sales upside from Farm Boy and Voila/Ocado, but the amount of spending required is not insignificant.”

3. A less compelling valuation

“With the quarter, the company made two announcements that we viewed as likely positive catalysts: first, an increase in the Project Sunrise target, and second, a modest share buyback. Now that these events have materialized, additional upside can come from higher estimates or a hard-earned higher multiple. Our valuation is based on a 7-times EBITDA multiple (versus Loblaw at an implied grocery multiple of 7.5 times and Metro at 9.5 times), and we see a discount to Loblaw as justified given the risks.”

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Mr. Petrie raised his target by a loonie to $34. The average on the Street is $35.13, according to Bloomberg data.


Stingray Digital Group Inc. (RAY-A-T) offers investors a “unique asset mix,” according to Canaccord Genuity analyst Matthew Lee.

Initiating coverage of the Montreal-based media and entertainment company with a “buy” rating, Mr. Lee said it currently possesses an “attractive investment profile” due to a trio of factors.

- Conventional radio and Canadian music broadcasting both possess “high penetration in the domestic market that generate stable EBITDA with very low capital intensity,” which supports the company’s 14-per-cent free cash flow yield.

- The areas are experiencing "solid" top line growth, "driven by increasing penetration and growing share across a variety of geographical markets. We expect that with Stingray actively adding BDUs and commercial clients to its customer base, these segments will be able to maintain solid mid-single-digit EBITDA growth over the medium to long term."

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- Stingray's subscription video on demand (SVOD) and business-to-consumer (B2C) offer investors "blue sky upside." He added: "While this segment currently makes up only 12 per cent of consolidated revenues, the business has seen over 30-per-cent organic revenue growth through 2019 and we see potential for further acceleration, with its expanding suite of apps and cross-sale opportunities among products."

“In our view, RAY’s unique set of assets allows it to offer investors a rare combination of 5 per cent-plus organic EBITDA growth, exposure to a rapidly growing digital industry, and double-digit FCF yield,” he said. “In addition, management has prudently used acquisitions to augment its operations and take advantage of opportunities in adjacent markets, which has allowed it to grow FCF/share by an 8-per-cent CAGR [compound annual growth rate] over the last five years. Since the company’s 2018 acquisition of Newfoundland Capital Corporation (NCC) the shares have declined by 40 per cent, with RAY now trading at an attractive 6.3 times EV/F20E EBITDA. We opine that the selloff reflects investors’ misunderstanding of the radio assets and strategy, and believe that if management can prove its ability to execute in the segment while building its SVOD/B2C business, sentiment will turn around, driving a bounce-back in valuation.”

Mr. Lee set a target price of $10 for Stingray shares. The average on the Street is currently $9.50.


Citi analyst Jim Suva expects Apple Inc. (AAPL-Q) to experience share price volatility as the Street’s expectations “calibrate lower.”

"Recall we slashed estimates post our Asia trip in May which showed a less favorable brand image desire for iPhone in China and China representing 18 per cent of Apple sales which we believe could be cut in half," said Mr. Suva in a research note released late Monday. "Within China Apple has 12-per-cent unit share (exiting Dec 2018 and 10-per-cent market share for FY18) and we believe these unit shipments could be cut in half. We remain optimistic on Apple services with Apple Arcade to launch in 2H 2019. We note Apple stock is trading at 15 times NTM PE [next 12-month price-to-earnings] on consensus and 16 times NTM PE our materially below consensus forecast. So we don’t see multiple compression but rather see risk that consensus is simply too high."

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Mr. Suva said the consensus forecast on the Street for Apple's third quarter is nearing the mid-point of the company's guidance at US$53.35-billion in revenues and earnings per share of US$2.10. His projections now site at US$52.6-billion and US$2.06.

"On iPhones we are modeling for $25.76-billion in revenues (down 12 per cent year-over-year) vs the Street at $26.2-billion," he said. "For the Sep quarter, consensus is expecting $61.05-billion in revenues (down 3 per cent year-over-year, up 14 per cent quarter-over-quarter vs 16 per cent seasonal norms), gross margins of 37.7 per cent resulting in EPS of $2.68. We are significantly below consensus, mainly on iPhone expectations with Citi at $55.9-billion, gross margins of 37.6 per cent and EPS of $2.42. This is the first quarter we will also get a sense for the cadence of execution for their $75-billion buyback program which was announced on last earnings call."

Mr. Suva maintained a "buy" rating and US$205 target for Apple shares. The average on the Street is US$208.80.

"Smartphone growth remains tempered and China remains a key risk, while services revenue growth and installed base growth are positives," he said. "The full product + software + service package is what makes Apple unique as others do not control this. We see Apple shares as attractively priced given the unique product + service set and potential for strong cash flow generation and shareholder returns."


Blackline Safety Corp. (BLN-X) is “lined up for growth and profitability,” said Raymond James analyst Ben Cherniavsky following last week’s release of its second-quarter financial results.

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"In our latest update on the company (on June 20), we observed that sales momentum for Blackline’s G7 products and related services continues to build at an impressive rate, suggesting that growth will remain strong over the coming quarters," he said. "F2Q19 lived up to these lofty expectations with Blackline

reporting $8.2-million of revenue, up 118 per cent year-over-year, 31 per cent quarter-over-quarter, and exceeding our $6.8-million estimate by 20 per cent. We were also encouraged to see product margins pull through and expand on significantly higher delivery volumes. Finally, although increased SG&A continued to encroach upon the company's profitability, we expect the benefits of these investments to generate strong returns going forward as operating leverage begins to take effect.

"We are still targeting Blackline's bottom line to be in the black by F1Q20. Beyond that point, we anticipate accelerated growth in EPS and cash flow as the company establishes itself as the global leader in the emerging world of connected worker safety and data analytics."

Maintaining an "outperform" rating, Mr. Cherniavsky raised his target for the Calgary-based developer and manufacturer of connected safety monitoring technology to $9, matching the current consensus, from $7.50.


Ahead of second-quarter earnings season in the Northern American metals and mining sector, Citi analyst Alexander Hacking thinks the Street's expectations are "generally too high" for base metals, which will require mark-to-market price downgrades.

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"On the other side, bulks prices remained strong, especially iron ore," said Mr. Hacking.

"Investors remain broadly cautious on metals and mining equities. The key macro theme is US-China trade where significant uncertainty remains. The key micro theme is FCF generation."

In the note, Mr. Hacking raised his target price for several stocks, including:

Newmont Goldcorp Corp. (NEM-N, NGT-T, “buy”) to US$44 from US$40. The average is US$41.57.

Analyst: "NEM has outperformed the sector in recent years with strong leadership. The market reacted negatively to the recent acquisition of Goldcorp, but NEM now has the opportunity to apply its superior management to these assets. We see value in Newmont which trades at a relative discount to GOLD despite sharing a core of JV assets (Nevada JV TBD, Pueblo Viejo and Kalgoorlie)."

Agnico Eagle Mines Ltd. (AEM-N, AEM-T, “neutral”) to US$55 from US$41. Average: US$54.45.

Analyst: "Production should grow over the next few years as projects come online and AEM should return to FCF generation by 2H19. However, we believe this is already reflected in AEM’s full valuation which is at a substantial premium to its peers."

Barrick Gold Corp. (GOLD-N, ABX-T, “neutral”) to $16 from $12.50. Average: US$14.80.

Analyst: "Barrick is the second largest gold miner in the world with a core of assets in N.America, S.America and Africa. The company operates low cost mines but has struggled with poor capital allocation and execution in recent years. The merger with Randgold and appointment of the new management team is a clear positive."

Kinross Gold Corp. (KGC-N, K-T, “neutral”) to US$4 from US$3.25. Average: US$4.14.

Analyst: "We continue to see limited upside for the stock until there is more clarity around Mauritania and how KGC plans to proceed with Tasiast expansions given its significant exposure. KGC will likely trade at a discount to NAV until the Tasiast situation is clear."

Mr. Hacking maintained his target for:

Teck Resources Ltd. (TECK-B-T, “neutral”) at $30. Average: $39.71.

Analyst: "We see outperformance potential for Teck if the company can deliver on reducing costs in coal and reducing capex (ex-QB2) in 2020+. Additional buyback is a clear positive and extends the narrative that Teck has significantly improved its capital allocation priorities in recent years."

First Quantum Minerals Ltd. (FM-T, “neutral - high risk”) at $13. Average: $17.20.

Analyst: "We continue to believe commentary on Zambia/Cobre Panama will be more important than results this quarter. We expect the company to update on Cobre Panama now that first concentrate has shipped."


Industrial Alliance Securities analyst Jeremy Rosenfield raised his target price for Brookfield Infrastructure Partners L.P. (BIP.UN-T/BIP-N) following the Monday announcement of its US$8-billion to acquire Genesee & Wyoming Inc. (GWR-N).

Brookfield and its instiutional partners are offering US$112 for all common shares of the Connecticut-based short line railroad holding company.

"We initially expect 2-4-per-cent cash flow accretion from the GWR stake," said Mr. Rosenfield. "We estimate that BIP’s ownership stake in GWR could initially contribute US$35-45-million of annual run-rate FFO to BIP, or roughly 2-4-per-cent accretion to our current 2020 estimated FFO (US$3.87/share), with longer-term potential upside as BIP executes its growth strategy for the business."

"BIP continues to offer investors unparalleled access to a diversified infrastructure growth platform. BIP’s overall long-term growth outlook

remains robust, with forecasted 6-9-per-cent FFO/share growth (CAGR 2018-23E), and high single-digit FCF/share growth, supporting the Company’s 12-15-per-cent long-term total shareholder return objective and 5-9-per-cent average annual dividend growth (within a 60-70-per-cent target FFO payout range). We continue to see BIP as the best-positioned diversified infrastructure play for all types of investors."

With a "buy" rating (unchanged), Mr. Rosenfield moved his target to US$48 from US$47. The average on the Street is US$46.47.

“We view BIP as the most diversified way for investors to play the broader long-term infrastructure investment theme, with (1) access to a global diversified infrastructure investment platform (ownership interests in more-than US$30-billion of assets), (2) defensive regulated/contracted cash flows (95 per cent of FFO), (3) visible cash flow growth (6-9 per cent per year, CAGR 2018-23E), and (4) attractive income characteristics (4.5-per-cent yield, 60-70-per-cent FFO payout, and a 5-9 per cent per year dividend growth target). We are increasing our price target to reflect the incremental value from the GWR investment,” he said.


Credit Suisse’s Alison Landry raised her rating for Genesee & Wyoming Inc. (GWR-N) to “neutral” from “underperform” following the offer from Brookfield Infrastructure, calling the valuation “rich but warranted within [the] infrastructure context.”

"A valuation of $112 per share implies 13.3 times TTM [trailing 12-month] adjusted EBITDA, which is well north of current rail valuations (GWR traded at 11.6 times the 2020 consensus EBITDA on Friday), and is also higher than historical domestic short-line transactions (7-8 times average)," she said. "

However, we note that infra funds can typically underwrite higher valuations (vs. traditional short-line buyers like GWR) - a focus on assets that are viewed to be less risky justifies a lower ROE [return on equity]. We also point to the 13.6-times multiple that Grupo Mexico paid for the Florida East Coast in 2016."

Ms. Landry raised her target to the proposed acquisition price of US$112 from US$75. The average is currently US$105.88.

"Both the premium paid for GWR along with our observations that infrastructure funds have been increasingly involved in rail M&A over the last several years are factors that, in our view, are indicative of the rising value of rail assets," she said. "While we would stop short of saying that this portends Class I M&A, we do think this is supportive of higher asset valuations at the big carriers longer term."


RBC Dominion Securities announced it has added Altagas Canada Inc. (ACI-T), Enghouse Systems Ltd. (ENGH-T), Nuvista Energy Ltd. (NVA-T), Teranga Gold Corp. (TGZ-T) and Torc Oil and Gas Ltd. (TOG-T) to its “RBC Canadian Small-Cap Conviction List.”

It removed Freehold Royalties Ltd. (FRU-T), Roxgold Inc. (ROXG-T) and Superior Plus Corp. (SPB-T) from the list.

The firm also added Encana Corp. (ECA-T) to its “best ideas” list.

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