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

Desjardins Securities analyst Doug Young expects Canadian life insurance companies to report “decent” core results for the third quarter, however, despite a strong recent run, he warns macro volatility may prove to be a headwind.

“Based on our estimates, several items impacted 3Q19 headline earnings: (1) equity markets had a net negative impact; (2) lower government bond yields had a negative impact; (3) widening corporate spreads had a positive impact; (4) swap spread movements were slightly positive; and (5) a flattening Canadian yield curve likely hurt,” said Mr. Young in a research note released Tuesday.

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“First, equity markets decreased 0.1 per cent on average across all regions we track, and the most important index for lifecos (S&P/TSX) increased only 1.7 per cent (below the roughly 2-per-cent per quarter lifecos assume). Second, government bond yields in both the U.S. and Canada declined sequentially; however, the shift in the yield curve was not parallel, which could skew actual results vs our expectations (sensitivities provided by the companies are based on parallel changes). U.S. 10- and 30-year Treasury yields decreased 34 basis points (bps) and 42 bps, respectively, and Government of Canada 10- and 30-year yields decreased 11 bps and 16 bps, respectively. U.S. 30-year corporate spreads widened by 7 bps (a positive) and swap spread movements had a positive impact.”

With that view, Mr. Young tweaked his headline estimates for the third quarter marginally.

“We are forecasting core EPS growth of 2 per cent, 7 per cent, 8 per cent and 7 per cent on average in 3Q19, 2019, 2020 and 2021, respectively,” the analyst said. “For SLF, the drivers will be momentum/margin expansion at its US group insurance operations, momentum in Asia, expense actions in Canada and capital deployment (including buybacks). MFC stands to benefit from momentum in Asia and in wealth management, and expense efficiencies. IAG should benefit from organic growth, profit improvement from all businesses and leveraging improved distribution capabilities (HollisWealth and PPI acquisitions). GWO should benefit from expense savings in the US and Canada, as well as growth in Europe.”

He’s now projecting the following earnings per share for companies in his coverage universe:

Manulife Financial Corp. (MFC-T) at 73 cents, rising from 72 cents.

iA Financial Corp. (IAG-T) at $1.55, up from $1.54.

Great-West Lifeco Inc. (GWO-T) at 72 cents, down from 74 cents.

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He maintained a $1.25 projection for Sun Life Financial Inc. (SLF-T).

“The lifecos outperformed the S&P/TSX and S&P/TSX Financials sub-sector by a wide margin in 3Q19, and this was despite lower Canadian and U.S. government bond yields,” said Mr. Young. “The stocks increased 7.5 per cent on average vs 1.7 per cent for the S&P/TSX and 4.2 per cent for the S&P/TSX Financials sub-sector. The returns have varied however, ranging from 2 per cent for MFC to 13 per cent for IAG.”

Concurrent with the changes to his earnings expectations, he adjusted his target prices for the companies’ stock. His changes are:

Sun Life (“buy”) to $62 from $60. The average on the Street is $58.89, according to Bloomberg data.

iA Financial (“buy") to $64 from $58. Average: $64.44.

Great-West Lifeco (“hold”) remains $31. Average: $32.23.

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Manulife (“buy”) remains $29. Average: $28.38.

“In our view, MFC has the potential to outperform coming out of 3Q19 results,” said Mr. Young. “Management expects a net neutral impact from its triennial review of U.S. LTCI assumptions; we expect further progress on various initiatives (freeing up capital, expense efficiency and leverage reduction) and its valuation seems to be pricing in bad news. Clearly, there are concerns about its Asian businesses, but if the message is business as usual, this could be the flame that lights the torch.”


Equity analysts at CIBC World Markets expect quarterly results for TSX-listed energy companies to be a “mixed bag," however they also expected it to be “relatively quieter.”

“Specifically, while we are 2 per cent above consensus estimates for Q3/19 CFPS [cash flow per share] on an aggregate basis, this includes a mix of positive and negative outliers," they said in a research report Tuesday. “It’s also worth noting that we have reduced our CFPS expectations by a simple average of 6 per cent coming into reporting season and 1 per cent on a market-cap weighted basis.”

“We came into the year believing that the right playbook was a bit of a rinse and repeat from past years and that the safety trade would be alive and well. As such, we were of the view that the right positioning for the better part of the year would be to be overweight larger, more stable and less-capital-intensive platforms that have strong margins of safety. And while that thesis largely still holds today, we believe a combination of valuation and other factors leaves us believing that it makes sense to turn some dials in select weights. This includes taking up Cenovus to the upper part of our pecking order, along with becoming positive on select condensate names (Kelt, NuVista and Seven Generations), and then starting to think about getting more positive on selective natural gas names as we move closer into the winter season. That said, on the latter point we are also cautious of Q3 prints for most natural gas and liquids-weighted companies, and we do not yet see Street estimates reflecting potential weakness and thus we believe these may be dials to think more about post-earnings season."

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Analyst Jon Morrison raised his rating for Imperial Oil Ltd. (IMO-T) to “neutral” from “underperformer," seeing "less downside risk in the name given the current valuation, potential tailwinds of an Alberta Rail-Above Curtailment announcement and IMO 2020 downstream tailwinds.”

His target for the stock rose by a loonie to $38. The average is $38.30.

Daine Biluk raised Black Diamond Group Ltd. (BDI-T) to “neutral” from “underperformer," pointing to a “more stable near-term outlook and the recent share price pressures.”

His target remains $2.50, which sits below the $2.84 average.


Industrial Alliance Securities analyst Jeremy Rosenfield raised his target price for shares of Pattern Energy Group Inc. (PEGI-T, PEGI-Q) in reaction to the US$293-million acquisition of ownership interests in a pair of wind facilities and a concurrent US$260-million preferred share private placement.

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On Monday, the San Francisco-based renewable energy company announced a commitment to acquire a 50-per-cent equity ownership interest in the 300-MegaWatt Henvey Inlet Wind facility on the shores of Ontario’s Georgian Bay and a 51-per-cent stake in the 220-MegaWatt Grady Wind facility in New Mexico.

“Both assets are being acquired from subsidiaries of Pattern Development (PD), as part of PEGI’s iROFO pipeline, in line with previous company guidance for two to four drop downs in 2019,” said Mr. Rosenfield. “We note that both wind projects achieved commercial operations in Q3/19 and will sell substantially all of their output under long-term contracts (20/25 years, respectively).”

Keeping a “hold” rating, Mr. Rosenfield increased his target to US$25 from US$24. The average is currently US$25.58.

“We continue to like PEGI’s (1) stable cash flows from its largely contracted portfolio (pro forma 3 GW net, 14-year average PPA life), (2) targeted CAFD [cash available for distribution] per share growth of 10 per cent per year through 2020 (5-7 per cent per year CAGR 2018-23, based on our estimates), (3) longer-term potential upside from the iROFO growth pipeline, and (4) an attractive source of income (6-per-cent yield, albeit at an elevated more than 80 per cent CAFD payout ratio). PEGI continues to execute on its growth pipeline with Henvey Inlet and Grady, although these acquisitions had previously been baked into estimates/valuation, and accretion remains limited at the current cost of capital. We continue to see the shares as fairly valued at this time.”

Elsewhere, Desjardins Securities’ Bill Cabel hiked his target to US$24 from US$23, keeping a “hold” rating.

Mr. Cabel said: “We believe that all eyes are on the potential for a takeout, which, in our view, has been partially priced into the shares. We continue to see long-term value in this name once financing options become clearer.”

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Tracking a dip in metals prices, Citi analyst Alexander Hacking expects North American steel and mining companies to see “weaker” results in the third quarter.

“Metals stocks generally underperform during periods of slowing global growth,” he said in a research note released late Monday. “The good news is that capital discipline remains mostly intact (ex-steel and arguably copper) and balance sheets are generally in good shape. Large cap gold miners are relatively counter-cyclical.”

“Earnings risk seems roughly balanced with investors mostly cautiously positioned based on our conversations.”

After updating his estimates ahead of the start of earnings season, he made a single target price changes, lowering Teck Resources Ltd. (TECK.B-T, "neutral) to $25 from $30, citing “the more challenging price outlook & macro uncertainty.”

The average on the Street is $34.75.

“Our 3Q EBITDA estimate is $1-billion,” he said. “Prices, particularly coal, are down quarter-over-quarter,” said Mr. Hacking. "This should be partially offset by seasonally higher volumes at Red Dog. Our revised EBITDA estimates are $4.3-billion in 2019 and $4.2-billion in 2020. Changes to estimates reflect mark-to-market for 3Q, latest Citi price forecasts and guidance.

“[We] maintain our Neutral recommendation given Citi’s cautious view on zinc and met coal. We see relatively attractive valuation and latent FCF potential post-QB2. Capital allocation has been improved/less risky recently as evidenced by buybacks and selling of QB [Quebrada Blanca] stake.”

Mr. Hacking maintained a “neutral” rating and $11 target for shares of First Quantum Minerals Ltd. (FM-T). The average is $14.77.

“Focus will continue to be on the Cobre Panama ramp and various moving parts in Zambia,” he said. “Zambia power supply remains a risk as load shedding is ongoing. The cancellation of the new Zambia sales tax will benefit FM, adding US$180-million of EBITDA (or 7 per cent of 2020). Investors will also be focused on potential for M&A for the Zambia assets.”


Acumen Capital analyst Nick Corcoran thinks Friday’s sell-off in shares of MTY Food Group Inc. (MTY-T) was “more than deserved given the strong fundamentals of the underlying business and the expected recovery in Q4/FY19.”

The Quebec-based restaurant franchisor and operator plummeted 8.7 per cent after reporting third-quarter results before the bell that fell short of expectations on the Street, despite logging record system sales and positive same-store growth.

“Management is focused on refranchising a significant number of Papa Murphy’s corporate stores,” said Mr. Corcoran. "This is expected to occur in the next couple quarters, with a corresponding improvement in margins (due to higher margin franchise revenue) and decrease in the variability of consolidated EBITDA.

“Weakness in corporate stores is nothing new. In our view, the weakness in corporate stores is nothing new to the MTY story. Recall that MTY’s consolidated EBITDA was impacted by its corporate Pinkberry stores in New York City in Q1/FY17. These stores added volatility to the consolidated EBITDA as overhead was relatively constant while sales were highly seasonal. The result was that the corporate locations would swing from negative EBITDA in seasonally/operationally weak quarters to positive EBITDA in seasonally/operationally strong quarters. MTY franchised these stores last year removing the volatility from its consolidated results.”

Though he thinks MTY is poised for a “strong” fourth quarter both financially and operationally, Mr. Corcoran lowered his target for its shares to $72 from $74, maintaining a “buy” rating. The average on the Street is $63.50.

“MTY continues to execute a successful acquisition strategy and drive top- and bottom-line growth through, among other things, organic growth and expanding its retail footprint,” he said. “This will create some noise as corporate stores weigh on the consolidated EBITDA margin or retail orders vary in timing.”


Though Lundin Mining Corp.'s (LUN-T) latest technical report on its Chapada mine in Brazil was met with a “collective shrug,” RBC Dominion Securities analyst Sam Crittenden said the Toronto-based company remains his “preferred name ahead of a potential FCF inflection point which has historically driven outperformance for mining stocks.”

“We have lowered near term production and added capital which brings our Chapada NAV down by $80-million to $1.0-billion, which lowers our Lundin NAVPS [net asset value per share] estimate by 1 per cent to $10.33 (using $3.00/lb copper and an 8-per-cent discount rate),” the analyst said. “The updated technical report was largely a refresh of the 2018 version with more details around the timing of spend over the next 5 years and some more conservatism around grade and recovery assumptions to better reflect recent performance. We believe it makes sense to reset expectations after acquiring a new asset so there aren’t any surprises with Lundin’s annual 3- year guidance update in late November and with future quarterly releases.”

Mr. Crittenden maintained an “outperform” rating and $9 target, which exceeds the consensus of $8.54.

“As significant capital investments at all four operations are completed we expect production growth and a return to positive FCF in H2/2019 continued into 2020,” he said. “We model a negative 2-per-cent yield in 2019 (at $2.75/lb copper) increasing to 8.3 per cent in 2020 (at $3.00/lb copper or 5.7 per cent at spot). We model $400-million in expansion capital at Chapada starting in 2021 and believe Lundin is well positioned to fund this while continuing to generate positive FCF.”


Seeing its recent deals opening the door to big markets, Canaccord Genuity analyst Tania Gonsalves initiated coverage of Knight Therapeutics Inc. (GUD-T) with a “buy” rating.

“Knight Therapeutics (GUD) was spun out of Paladin Labs in 2014, with the intention of creating Canada’s next leading specialty pharmaceutical company,” she said. “Over the 19 years prior, Jonathan Goodman, CEO, took Paladin from $1.50 to $151 per share. He says he is committed to repeating Paladin’s success, especially given his 16-per-cent interest in Knight. Over two-thirds of Knight’s equity remains in cash, making it one of the best positioned Canadian pharmaceutical companies to rapidly execute on large and transformative transactions as soon as pricing warrants. In the meantime, we believe investors will benefit from Knight’s recent entry into sizable new therapeutic areas, such as oncology and women’s health, as well as a potential expansion into new geographies. These opportunities are not valued in the stock. This is the closest GUD has traded to its BVPS since inception, providing an ideal entry point for investors willing to be patient.”

Ms. Gonsalves set a target of $8.50 for the Montreal-based company’s shares. The average is currently $9.37.

“While it is customary to value specialty pharma companies in terms of EV/EBITDA, Knight’s drug portfolio is still in the very early innings,” she said. “Over the near term, Knight is expected to generate the majority of its income from loan and VC fund investments. As such, we opt to value it much like we would any financial firm, in terms of book value. We value Knight’s cash at 1.0 times and the 22-per-cent of equity that’s invested at 1.6 times (midpoint of specialty finance firms and Paladin). This yields an average valuation multiple of 1.15 times, which on our Q3/20 BVPS of $7.49 per share, yields a $8.50 per share valuation.”

In a separate note, Ms. Gonsalves also initiated coverage of Medexus Pharmaceuticals Inc. (MDP-X) with a “buy" rating.

“Pediapharm’s acquisition of Medexus and Medac has created what we believe will become North America’s preeminent rheumatology and pediatric specialty pharma company,” she said. “Medexus Pharmaceuticals Inc. has emerged with a combined 18 products, 48 sales representatives and over $50-million in trailing revenue. With 88 per cent of current sales attributable to products in the growth or launch phase, we believe this is just the beginning of several years of double-digit growth. Accounting for operating leverage off the partially fixed-cost sales infrastructure, we forecast EBITDA margins expanding from mid-single digits toward the industry average of 25-30 per cent within five years.”


Probe Metals Inc.'s (PRB-X) exploration success is being “overlooked” in its share price, said Laurentian Bank Securities analyst Barry Allan.

He initiated coverage of the Toronto-based gold exploration company with a “buy” rating.

“Compared to a peer group of non-producing gold companies, the valuation of PRB based on either the market capitalization per ounce of resource or as a share price multiple of indicated underlying value (NAV), trades below the industry averages and belies the fundamentals of successful exploration on a large property that is located in the prolific Val-d’Or mining camp,” said Mr. Allan. “While we do recognize that non-producing gold companies continue to suffer in the market place from a lack of investor appetite for higher-risk, earlier stage exploration companies, in our opinion the quality of PRB’s land holdings and the track record of successfully finding additional gold mineralization should attract a better valuation level compared to the peer group.”

Emphasizing it’s “well-supported” by capital market and possesses “impressive” management depth and strength, he set a target of $2.40 for Probe shares. The average is now $2.25.

“We believe PRB represents a good investment opportunity for investors who can accept the additional risk of an earlier stage development company that is not yet cash flow positive,” the analyst said.


In other analyst actions:

Barclays analyst Christine Cho cut Enbridge Inc. (ENB-T) to “equal-weight” from “overweight" with a $51 target. The average on the Street is $55.76.

Barclays’ Matthew Murphy downgraded Kinross Gold Corp. (K-T) to “equal-weight” from “overweight” with a $6.62 target, which falls short of $7.48 average.

Mr. Murphy also reduced Wheaton Precious Metals Corp. (WPM-T) to “equal-weight” from “overweight” with a target of $37.05. The average is $44.25.

Scotiabank analyst Konark Gupta initiated coverage of Cargojet Inc. (CJT-T) with a “sector outperform” rating and $110 target. The average is $114.91.

Scotiabank’s Orest Wowkodaw cut Copper Mountain Mining Corp. (CMMC-T) to “sector perform” from “sector outperform” with a target of 80 cents. The average on the Street is $1.38.

Cormark Securities analyst Stefan Ioannou raised Ero Copper Corp. (ERO-T) to “buy” from “market perform” with a $19.50 target. The average is $20.09.

Wolfe Research analyst Josh Silverstein cut Encana Corp. (ECA-N, ECA-T) to “underperform” from “peerperform.”

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