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

Ahead of its seasonally soft period in October and November, Raymond James’ Johann Rodrigues thinks it’s time to take profits from the Canadian real estate sector with its equities currently at full valuations.

Accordingly, in a research note released Tuesday, the analyst downgraded his ratings for several investing options, including his top names.

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“A consistent seasonal pattern exists in REIT investing,” said Mr. Rodrigues. "Over a 20 year period, the Canadian REIT sector has averaged an 11-per-cent total return however this is heavily front-end weighted with 8 per cent occurring in Jan-Jun. Furthermore, October and November are traditionally the worst two months for Canadian REITs, lagging the broader market six of the last eight years by an average of 230 basis points. As such, we would encourage investors to take some profits in the sector, or at the very least, put off committing new capital for a few months. We will sit on the sidelines, for the most part, over the next 10 weeks and review our outlook in early December, in advance of the traditional January-April RRSP/tax season run.

“With the sector up 23 per cent year-to-date (vs. TSX at 21 per cent), September has already seen a shift to growthier aspects of the market and REITs underperforming by 150 basis points. This is due to 1) a robust Canadian economy keeping the BoC sidelined, 2) a solid string of recent U.S. data points, 3) improving trade talks, 4) an oil price spike and 5) mixed Fed commentary post-cut #2. It seems fears of an imminent recession driven by the inversion of the yield curve were, for the time being, premature. This should drive a short-term rally in growth stocks. That said, we think fears will return and (aided by US election-driven volatility) could drive 2020 capital to Canada and an obvious bastion of safety: REITs. As such, our outlook is quite bullish entering 2020."

Though he admitted he had a “fairly slim” buy list before Tuesday’s moves, Mr. Rodrigues said he continues to “whittle it down.”

He lowered all five of his “strong buy” rating equities to “outperform.” They are:

Minto Apartment Real Estate Investment Trust (MI.UN-T) with a $25 target. The average is $24, according to Bloomberg data.

InterRent Real Estate Investment Trust (IIP.UN-T) with an $18 target, up from $16. Average: $15.99.

Park Lawn Corp. (PLC-T) with a $32 target. Average: $32.33.

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StorageVault Canada Inc. (SVI-X) with a $3.50 target. Average: $3.44.

Tricon Capital Group Inc. (TCN-T) with an $11.50 target, falling from $13.25. Average: $13.14.

Mr. Rodrigues also lowered the following equities to “market perform” from “outperform.”

Automotive Properties Real Estate Investment Trust (APR.UN-T) with a $11.50 target. Average: $11.56.

Boardwalk Real Estate Investment Trust (BEI.UN-T) with a $48 target. Average: $48.96.

BSR Real Estate Investment Trust (HOM.U-T) with a US$11.50 target. Average: US$12.20.

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Killam Apartment Real Estate Investment Trust (KMP.UN-T) with a $21 target. Average: $20.90.

Pure Multi-Family Real Estate Investment Trust LP (RUF.U-T) with a $7.60 target, rising from $7. Average: $7.61.

Sienna Senior Living Inc. (SIA-T) with a $20 target. Average: $20.25.

"When we inherited the entire Canadian REIT universe in mid-July, our view was that it was time to take profits in the commercial REITs that had outperformed and rotate into the multi-family laggards, " he said. “We downgraded the last of our our commercial names (First Capital and RioCan), while simultaneously upgrading two multi-family names that had lagged to that point (InterRent and Minto). Since then, Minto (13 per cent) and InterRent (11 per cent) have led a resurgence in populationdriven names and have enjoyed top decile performance (the REIT Index is up 6 per cent), while First Capital/RioCan have lagged (1 per cent/2 per cent, respectively). Additionally, implied cap rates (5.4 per cent vs. 6.2 per cent 10-yr avg) and AFFO multiples (18.5 times, 2.5 times above the 10-year average) are at 5-year peaks and the sector trades at a rare 2-per-cent premium to NAV. At this point however, we’d advise investors with the ability to be more nimble to take profits in the sector and wait it out until December.”

“We have left Allied, CAP REIT and True North at Outperform due to momentum. To be clear, this isn’t a call on fundamentals or operations, we think Q3 will continue to show strong results across virtually all property types, especially multi-family and self-storage. This is simply playing a seasonal trend that has a 75-per-cent hit rate, in conjunction with a current macroeconomic environment and stretched valuations that we believe support doing so. Despite taking the overall sector to market weight, we believe a number of individual, population-driven stocks will continue to Outperform: Allied, CAP REIT, InterRent, Minto, and StorageVault, in particular. True North remains our top yield name.”


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Though regulatory woes linger, Canada’s cannabis industry is “just getting started,” according to CIBC World Markets analyst John Zamparo.

In a research report released Tuesday, Mr. Zamparo reaffirmed his bullish view of the sector, pointing to last week’s Statistics Canada data that showed a fourth consecutive month of double-digit sequential sales growth, which he said supports his retail sales forecast for 2020 of $5.5-billion, “well-above" the current $1.2-billion run rate.

“Our view is that political uncertainty reigns supreme, albeit with a likely eventual outcome of legalization; the most likely immediate positive catalyst will come from the FDA,” he said.

“Our preference points towards strong balance sheets, prudent capital allocation, access to international (especially U.S.) markets, and the support of strategic partners.”

Concurrent with the report, Mr. Zamparo initiated coverage of a trio of stocks.

Expressing concern over its balance sheet, despite a “market leadership position,” he gave Aurora Cannabis Inc. (ACB-T) a “neutral” rating.

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“Aurora has already established itself as a dominant player in the Canadian adult-use and medical markets, as well as internationally, and has executed its adult-use strategy admirably. However, at Aurora’s valuation, we wish to see greater clarity on a U.S. strategy, visibility on more material strategic partners, and, most importantly, a balance sheet more capable of making significant investments in future growth opportunities outside cultivation.,” he said.

He set a target price of $7 per share, which falls well short of the average on the Street of $10.74.

“Across the cannabis space, we use an enterprise value-to-sales approach for comparability,” the analyst said. "While some businesses have prioritized near-term profitability, we acknowledge some others are investing in an attempt to build brands and expand globally. Aurora fits the description of a brand-building, globally expanding business. While ACB’s valuation (10 times calendar 2020 estimated sales; 45 times C2020 estimated EBITDA) won’t compare favourably to traditional CPG industries, it’s the cheapest among the large-cap names, which we define as enterprise value exceeding $3 billion.

“However, balance sheet woes, a recent deferral of profitability (contrary to previous guidance), and, in our view, an over-allocation of capital to production limit our optimism on the stock. Applying 2 times the median EV/sales multiple of the medium- and large-cap names would imply 8 times our F2020 and F2021 estimates. Placing emphasis on F2021 estimated, which includes a full year of derivative products, yields a value of just under $7.”

Mr. Zamparo initiated coverage of Supreme Cannabis Co. (FIRE-T) with an “outperformer” rating, calling its strategy “simple” but “supremely effective.”

“Supreme Cannabis’ focus on existing, premium-seeking consumers may be the most effective and yet somehow neglected strategy in the adult-use cannabis space," HE SAID. "Paired with its brand awareness and demonstrated execution (EBITDA-positive last quarter) FIRE has begun to distance itself from its mid-cap peers, in our view. Valuation, at sub-9 times our C2020E EBITDA, is among the most compelling in the industry.”

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He set a $2 target for shares of Toronto-based Supreme. The average is currently $2.72.

“We find Supreme’s strategy appealing because of its sharp focus on existing consumers, while its 7Acres brand is highly regarded," he said. Future financing concerns are valid, but appear to be priced into the stock, and we deem it likely the company will be able to attain non-dilutive financing at reasonable terms.”

Mr. Zamparo also gave Organigram Holdings Inc. (OGI-T) an “outperformer” rating, believing it is “under the radar, but ahead of the pack.”

“Many investors in the sector have demonstrated a preference for names with immediate EBITDA profitability; while this has harmed some stocks, OGI stands above its peers, having generated positive EBITDA for four consecutive quarters and a leading GM% and EBITDA% since adult-use cannabis legalization,” he said. “U.S. and international exposure trails peers, but we view this as more than adequately captured in OGI’s relative discount (11 times C2020E EBITDA vs. comps at 20 times), particularly given OGI’s existing profitability and estimated low-double-digit Canadian market share.”

His target for Organigram shares is $9, versus the $11.76 consensus on the Street.

“Our Favoured Names: In our coverage universe, we rate Cronos Group, Canopy Rivers, Canopy Growth, Organigram and Supreme as Outperformer; we rate HEXO, Aurora and Sundial as Neutral, and Aphria as Underperformer," he said.


Citing an attractive earnings per share outlook, a relatively stable economic backdrop and a growing confidence that the stock is “well-positioned” to offset its recent underperformance, Bank of America Merrill Lynch analyst Ebrahim Poonawala upgraded Bank of Nova Scotia (BNS-T) to “buy” from “neutral.”

“BNS shares have underperformed peers by 1000 basis points since the beginning of 2017, reflecting investor caution given the flurry of deal announcements; 2020 should be the year when mgmt reaps the rewards from these deals,” the analyst said.

Believing it offers an attractive investing proposition given its discounted valuations and an improving earning outlook, Mr. Poonawala raised his target to a Street-high of $82 from $69. The average is $77.


Osisko Gold Royalties Ltd.'s (OR-T) takeover of Barkerville Gold Mines Ltd. (BGM-X) raises uncertainty about the company’s strategic direction, said RBC Dominion Securities analyst Melissa Oliphant, leading her to lower her rating for its stock to “sector perform” from “outperform.”

On Monday before the bell, Toronto-based Osisko announced an agreement to acquire the share of Barkerville it doesn’t already own. Osisko said it currently holds approximately 32.6 per cent of the outstanding Barkerville shares.

Under the terms of the arrangement, each shareholder of Barkerville (excluding Osisko) will receive 0.0357 of a common share of Osisko for each share of Barkerville.

Ms. Oliphant sees the deal as accretive to Osisko’s net asset value but dilutive to near-term EBITDA. She also sees it bringing a higher degree of financial and operative risk relative to its current core portfolio.

Expecting the shares to trade in-line with peers over the next 12 months, she lowered her target to $16 from $19. The average on the Street is $18.44.

Elsewhere, Canaccord Genuity’s Kevin MacKenzie lowered Barkerville shares to “hold” from “speculative buy” with a target of 52 cents, down from 92 cents and below the 70-cent average.

Mr. MacKenzie said: “We expect that the arrangement will be concluded per the agreed upon terms/time frame.”


Though he remains optimistic about Caterpillar Inc.’s (CAT-N) short-term prospects, Citi analyst Timothy Thein expressed concern about 2020 and beyond after recent conversations with dealers in both North America and internationally suggested a “moderation” in future sales outlooks.

In the United States and Canada, Mr. Thein concluded the sentiment remains "solid."

"As always, end market mix and disparity in state-level government funding / project activity make for unique dealer-by-dealer feedback, but in general the tone remains positive across most of NA," he said. "Many pointed to robust project activity that is helping to keep contractors busy, especially in equipment-heavy areas like road building & commercial development.

"Looking further out, though, we detect some caution that has crept-in to initial 2020 outlooks. A number of trade-related and political (esp. the Presidential election) wildcards loom on the horizon, but at this point none of the dealers are calling for a sharp slow-down in sales. Most referenced a natural ebbing of sales following what for many dealers has been two consecutive record years of revenues. We also suspect some of the same factors weighing on the manufacturing sector and business investment globally –direct impact from tariffs and indirect effect from trade policy uncertainty – may be impacting dealer (and their customer) sentiment and their spending intentions. Of course impacts from this vary around the globe, but we expect this theme to get increasing airplay as 3Q earnings get underway. As an example, we note that one of CAT’s largest global dealers with operations in China in August called out trade tensions as a contributor to lower year-over-year order rates."

Mr. Thein pointed to several potential risks in the near-term, particularly slowing activity in the upstream energy markets, however he did point to a recovery in global mining markets as a potential benefit for the company.

Based on a “softer” near-term outlook, he lowered his earnings per share projections for 2019, 2020 and 2021 to US$11.80, US$12.30 and US$11.40, respectively, from US$12, US$13 and US$12.55.

Maintaining a “buy” rating, he trimmed his target to US$145 from US$150. The average on the Street is US$143.83.

“We see solid return potential to our lowered $145 target, which could have upside should trade / policy uncertainty ease, but we recognize that the stock may remain range-bound should these overhangs persist,” he said.


Square Inc.'s (SQ-N) “transition year” continues to keep the upside for its stock “muted” in 2019, according to Citi analyst Peter Christiansen.

Though he sees an attractive risk/reward proposition for "patient" investors, the analyst cut his target price for the San Francisco-based mobile payment company in order to "discount recent uncertainties."

"The stock has been under pressure this year on narrower earnings beats with an emphasis on the rate of GPV deceleration, compounded by Square’s first 'no-raise' quarter attributable to the sale Caviar," said Mr. Christiansen. "To be clear, Square has met its own outlook so far, but has fallen short of both investor and our elevated expectations – a function of last year’s strong performance and the stock’s 'terminal multiple' valuation."

Mr. Christiansen called the recent sale of Caviar, its food-delivery service, to DoorDash for US$410-million an "important catalyst," noting: "On a pure-carve out basis, our sense is that the sale will be neutral-to-positive to overall growth and accretive to margins. The more interesting aspect of the Caviar sale relates to Square’s ability to reinvest the cost savings which could result in a fairly quick and meaningful pick-up in Seller GPV, in our view. Our scenario analysis indicates GPV could benefit 2 per cet to 5 per cent assuming future savings generated from this lower margin business line is fully directed into Seller acquisition.

"We take our first, unguided modeling attempt at the post Caviar era. Reported metrics come down, but pro formas remain fairly unchanged. Upside should manifest as savings is redeployed into core products, likely resulting in growth stabilization and potentially reacceleration, still while maintaining the existing margin expansion trajectory. Square’s Seller funnel has been ramping above trend since 1Q."

Keeping a “buy” rating, Mr. Christiansen reduced his target to US$80 from US$95. The average is US$76.50.


Seeing it in the midst of a “transformative” year as it ramps up production at its Ada Tepe mine in Bulgaria, M Partners analyst Bereket Berhe initiated coverage of Dundee Precious Metals Inc. (DPM-T) with a “buy” rating.

“DPM has positioned itself to be a long-term low-cost gold producer with a strong resource and reserve base, a solid management team, near term production growth and free cash flow from mining friendly jurisdictions,” he said. “The Company has strong institutional backing and capital share structure.”

Mr. Berhe set a target of $7.50 per share, which exceeds the consensus of $6.86.

“With large capital investment moderating focus is turning to production optimization and cash flow generation,” he said. “With the transition progressing well at Ada Tepe we anticipate higher cash flow in 2020 and beyond, and P/CFPS to come in line with peers at 9.1 times.”


In other analyst actions:

Scotiabank analyst Paul Steep downgraded BlackBerry Ltd. (BB-T, BB-N) to “sector perform” from “sector outperform.”

With a file from Bloomberg News

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