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

With earnings season set to commence for Canadian power and utilities companies, Desjardins Securities analyst Bill Cabel recommends investors accumulate shares of both Algonquin Power and Utilities Corp. (AQN-N, AQN-T) and Northland Power Inc. (NPI-T).

“The stocks in our coverage universe have continued to perform well this year, with our IPP coverage up 40.7 per cent year-to-date on average versus 17.2 per cent year-to-date for the broader S&P/TSX Composite Index,” he said in a research report released Tuesday. “We continue to believe that rates will be lower for longer, which should continue to be a tailwind or, at the very least, supportive of current valuations for our coverage universe. We believe 3Q19 generation for wind assets in Ontario and Quebec and hydro assets in Ontario, Quebec and the northeastern U.S. could be weak; we believe generation for wind assets in France could be around LTAs [long-term agreements] while U.S. wind assets could depend more on the region/site. Going into the quarter, we think the best names for investors to park in are AQN and NPI, as our view is that they are most likely to have a good quarter, whereas BEP and BLX could both have tougher quarters.”

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Heading into the quarter, Mr. Cabel has raised his target prices for stocks in his coverage universe after reducing his cost of equity assumptions, citing “persistent demand from investors for higher-yielding, defensive stocks.”

At the same time, Mr. Cabel recommends investors trim positions in Brookfield Renewable Partners LP (BEP-UN-T). His target for its stock rose to $53 from $45 with a “hold” rating (unchanged). The average on the Street is $53.46, according to Bloomberg data.

“It is our understanding that BEP.UN’s North American hydro and wind assets (totalling 50 per cent of our EBITDA estimate) could be weak due to below-LTA weather resources,” the analyst said. “We expect light generation from its hydro assets in Brazil and Colombia, but this weakness will likely be largely mitigated by higher realized prices. Additionally, its wind portfolio in Europe is expected to come in roughly in line with LTAs; we do not have a view on its solar assets. As a result, we have reduced our 3Q19 LTAs for its North American wind and hydro assets by 5 per cent, which is the primary reason for the reduction in our EBITDA estimate to US$276-million (from US$289-million).”

He also suggests being “cautious” with Boralex Inc. (BLX-T). He raised his target to $25.75 from $25.25 with a “buy” rating. The average is $24.84.

“Our 3Q19 EBITDA estimate is split 45-per-cent French wind, 40-per-cent Canadian wind (Ontario and Quebec) and 10-per-cent Canadian and U.S. hydro, with solar and thermal accounting for the remainder,” he said. "The data suggests that French wind could come in around LTAs; however, its Canadian wind could be below LTAs, and it will likely be a tough quarter for its hydro assets. Therefore, we have reduced our 3Q19 LTAs for its Canadian wind and hydro assets by 5 per cent, which reduces our EBITDA estimate to $78-million (from $84-million).

For Algonquin Power and Utilities Corp. (AQN-N, AQN-T), Mr. Cabel increased his target to US$14.50 from US$14 with a “buy” rating. The average is US$14.24.

“We believe AQN could be a good place to park for investors going into 3Q19 reporting,” he said. “AQN is heavily weighted toward utility assets in the U.S. (70 per cent of our 3Q19 EBITDA estimate) and based on our high-level analysis, cooling degree days were higher than the norm, which could drive higher consumption and offset potentially weak wind resources. We have reduced our LTA expectation on AQN’s Ontario and Québec wind assets in 3Q19 by 5 per cent, which has no material impact on our estimates.”

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Mr. Cabel increased his target for Northland Power Inc. (NPI-T) to $32 from $30 with a “buy” rating. The average is $29.25.

“We believe NPI is another good name in which investors should accumulate shares in advance of 3Q19 reporting,” he said. “We believe its offshore wind assets should be in line with LTAs based on what we are seeing per the Gemini app. Also, pre-completion revenues from the 269MW DeBu offshore wind asset could provide a positive surprise compared with the Street. To be consistent, we have taken a 5-per-cent haircut to our expected LTAs for NPI’s onshore wind assets (located in Ontario and Quebec), which reduces our 3Q19 EBITDA estimate to $212-million (from $213-million).”


DIRTT Environmental Solutions Ltd.'s (DRT-T) third-quarter results could “disappoint” versus expectations on the Street, said Industrial Alliance Securities analyst Neil Linsdell, who warned he’s remaining “cautious” in the short term.

“While we are optimistic about the longer-term potential for DIRTT’s offerings, we see reductions in short-term guidance and further manufacturing optimization efforts still tempering enthusiasm until DIRTT demonstrates sustained growth and profitability improvements. We don’t expect to see any substantial results from these efforts until some time in 2020,” the analyst said in a quarterly preview ahead of the Nov. 7 release.

Pointing to “the loss of certain expected contracts and the deferral of other projects into 2020,” Mr. Linsdell is projecting an 8-per-cent revenue decline in the quarter to US$68-million from US$73.9-million during the third quarter of 2018. He’s also projecting a full-year decline of 2.8 per cent.

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For adjusted EBITDA, the analyst now expects US$6.6-million, down from US$13.1-million a year ago. His full-year estimate is US$23.4-million, versus US$42.9-million a year ago.

“With a mostly changed, and beefed up, senior management team, DIRTT has been finalizing restructuring efforts and establishing a plan for sustainable growth, improved profitability, and cash generation,” said Mr. Linsdell. “We anticipate more insight into efficiency improvements, capacity additions, and a more focused sales & marketing strategy, towards scaling operations to support growth initiatives. We expect this plan to be touched on with the Q3 results and to be presented in-depth during the November 12 Analyst Day in NYC.”

Mr. Linsdell maintained his “sell” rating for the stock with a $5.75 (Canadian) target. The average is $8.77.


Desjardins Securities analyst Benoit Poirier thinks Bombardier Inc.'s (BBD-B-T) current share price does not properly incorporate the value of its A220 program or the potential long-term margin improvements at both Bombardier Transportation and Bombardier Aviation.

Accordingly, he recommends recommends long-term investors "capitalize on this opportunity to revisit the story and buy the shares."

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In research note previewing Thursday’s release of the company’s third-quarter financial results, Mr. Poirier reiterated his view that 2019 will be seen as “another transition year” for Bombardier. However, he expects 2020 to “mark a turning point for the story as we expect BBD to start generating positive FCF [free cash flow] next year.”

For the quarter, he’s projecting revenue and earnings before interest and taxes of US$3.9-billion and US$189-million, respectively, falling in line with the consensus expectations on the Street (US$4-billion and US$159-million).

“The results release should present an opportunity to get an update on the progress that the company has made on the ramp-up of the Global 7500 program and on the challenging projects at Bombardier Transportation (BT), setting the tone for 4Q19 and 2020,” he said. “In addition, we believe the divestiture of the aerostructures businesses in Belfast and Morocco could also be announced alongside the 3Q results (we derive a value of US$400–700-million).”

Mr. Poirier adjusted his forecast to account for the divestiture of the regional-jet business to Mitsubishi Heavy Industries Ltd..

He maintained a “buy” rating and $4 target. The average is $3.01.


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Following the release of weaker-than-anticipated third-quarter results after the bell on Monday, three equity analysts downgraded PrairieSky Royalty Ltd. (PSK-T).

RBC Dominion Securities’ Luke Davis cut the stock to “sector perform” from “outperform” with a $17 target. He expects it underperform until its volume decline reverses or its stock multiple is adjusted downward to a “much more modest premium" to Freehold Royalties Ltd. (FRU-T).

CIBC World Markets’ Jamie Kubik lowered it to “neutral” from “outperformer” with a $18 target, expecting the stock’s multiple compression to continue based on a “lack of clarity on Canadian basin trends.”

Eight Capital’s Adam Gill moved it to “sell” from “neutral” with a $12.15 target.

The average target on the Street is $18.04.


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Raymond James analyst David Quezada is maintaining a “constructive stance” on Capital Power Corp. (CPX-T) following Monday’s release of “solid" third-quarter results, pointing to “the company’s attractive dividend growth, discounted valuation relative to peers and solid expected growth via a diverse opportunity set.”

Before the bell, the Edmonton-based independent power generation company reported adjusted EBITDA of $284-million, exceeding the projections of both Mr. Quezada ($269-million) and the Street ($272-million) and up 59 per cent year-over-year (from $179-million). Adjusted funds from operations of $225-million was a jump of 44 per cent and kept the company on track to reach the high end of its guidance for the year ($484-$535-million).

“With an impressive slate of potential investments, including dual-fuel projects at Genesee, U.S. wind development portfolio, and potential acquisition of additional natural gas power plants, we believe Capital Power enjoys a diverse and substantial opportunity set,” he said. “In fact, on the back of recent gas M&A and renewable power development, we forecast CPX growing AFFO [adjusted funds from operations] per share by a CAGR [compound annual growth rate] of 13 per cent out to 2020 — a growth rate we believe is sustainable for the company beyond our forecast horizon. Longer term we believe there is also potential for CPX to invest in natural gas (G4/G5) and merchant wind in Alberta (where management noted the Whitla 2 project is close to moving forward on a merchant basis). We see strong potential for Capital Power to extend 7-per-cent dividend growth guidance and note, by our estimates, the payout ratio is currently below CPX’s stated 45-55 per cent of AFFO range.”

In response to the results, he raised his earnings per share expectations for 2019 and 2020 to $1.51 and $1.72, respectively, from $1.50 and $1.53.

He kept an “outperform” rating and $36 target, which exceeds the current consensus of $33.50.

“We expect the re-contracting at Decatur/Island Generation, as well as a potential extension of 7-per-cent dividend growth guidance (beyond the current 2021) to represent material catalysts going forward,” said Mr. Quezada.


Ahead of the start of earnings season for Canadian information technology firms, CIBC World Markets analyst Stephanie Price said her top picks for the sector are “biased to more defensive names” given the current macroeconomic environment.

“We expect solid Q3 revenue growth from companies within our coverage universe (up an average of 16 per cent year-over-year) in what is typically a seasonally weaker quarter given the slower summer months," she said in a research report released Tuesday. "We expect revenue growth to be driven by those companies benefiting from recent acquisitions (Constellation, Descartes, Enghouse and Morneau Shepell) and from the on-boarding of client wins (Kinaxis). We expect earnings accretion as these companies reap operating leverage and scale from acquisitions and client wins.”

Ms. Price raised her target prices for stocks in her coverage universe, and she pointed to a trio of preferred stocks: Open Text Corp. (OTEX-Q, OTEX-T) Constellation Software Inc. (CSU-T) and Morneau Shepell Inc. (MSI-T).

“We foresee less risk of a multiple contraction for Open Text in the event of a downturn, and regard it as well positioned to execute on M&A if valuations decline ($1.4-billion in available liquidity)," she said. "We also expect Constellation to benefit from lower M&A valuations in the event of a downturn. Finally, we regard Morneau’s base business as relatively recession resistant and we continue to expect solid growth from the U.S. business.”

Ms. Price raised her target prices for two of those three:

Constellation Software (“outperformer”) to $1,550 from $1,350. Average: $1,431.15.

“We retain our belief that Constellation is a top-flight capital allocator, growing free cash flow at a 17-per-cent five-year CAGR [compound annual growth rate] and spending an average of 60-per-cent of FCF [free cash flow] on acquisitions over the last five years," the analyst said.

Morneau Shepell (“outperformer”) to $38 from $35. Average: $36.

“Morneau continues to build out its U.S. and international business while maintaining strong performance in its core wellness and pension administration businesses,” she said. “We expect the focus of the Q3 call to be on organic growth (cross-selling, recent contract wins) and updates on the Mercer U.S. and LifeWorks integrations.”

She maintained a US$53 target for Open Text Corp. (“outperformer”), which exceeds the average of US$47.38.

“Open Text remains well positioned to execute on M&A, with approximately $1.8 billion to spend towards a transformational deal," said Ms. Price. "With no announced deals in nearly nine months, we believe that Open Text is prepared to deploy capital in a meaningful way.”


In reaction to its fourth-quarter results, released Monday after the bell, a pair of equity analysts downgraded MedMen Enterprises Inc. (MMEN-CN) .

Canaccord Genuity’s Matt Bottomley lowered the California-based cannabis retailer to “hold” from “speculative buy” with a $2 target.

“After recently electing to terminate its planned acquisition of PharmaCann, MedMen reported FQ4/19 financial results on Monday (ended June) that were generally in line with our expectations given the company’s pre-release back in August.,” said Mr. Bottomley. “However, more concerning (in our view), is the current state of the company’s balance sheet in light of its 2020 obligations and planned expansion initiatives. As at FQ4 end, MedMen had US$33.8-million of cash on hand with another US$180-million available through its strategic partner Gotham Green (US$150M in convertible debt and US$30-million in a subsequent equity financing) and another US$30-million-plus via its ATM program. Although this should allow the company some flexibility to maneuver, we are concerned given the existing opex burn and the capital requirements that lay ahead for the company over the next year. We believe these include: (1) US$100-million to fund operations until hitting break-even Adj. EBITDA near the end of CY2020; (2) capex that could exceed US$75-million given the company’s current expansion initiatives; (3) US$110-million in promissory notes/term loans that come due over the next 12 months; and (4) increased debt service costs if the entire Gotham Green facility is utilized.

“As a result, we believe the potential for near-term dilution is highly likely, and after building this expectation into our model (while MMEN continues to trade at near all-time lows) we are reducing our target price... and lowering our recommendation.”

Eight Capital’s Graeme Kreindler cut it to “neutral” from “buy” with a $2 target.

The average on the Street is $3.68.


In other analyst actions:

TD Securities’ Sean Steuart cut Canfor Corp. (CFP-T) to “tender” from “hold.”

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