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

Raymond James' Frederic Bastien added Aecon Group Inc. (ARE-T) to the firm’s “Canadian Analyst Current Favourites” list, replacing Russel Metals Inc. (RUS-T).

“We are adding Aecon Group as an Analyst Current Favourite after the firm produced solid results and grew its backlog to unprecedented levels in 2Q18,” he said. “This, in our opinion, clearly shows that Aecon is the contractor best positioned to profit from Canada’s exceptional market opportunity. What we find particularly encouraging is the high level of continuity in the recent contract wins and the multitude of sectors and regions from where they are derived. The Site C civil works in B.C. is a larger version of the John Hart project completed in that same province; the Line 3 Replacement assignment in Manitoba is a repeat of the work Aecon and its JV partner executed for Enbridge in Saskatchewan; crews from the Darlington nuclear refurbishment will also apply their expertise to Bruce Power’s own fuel channel and feeder replacement project; and Montreal’s REM mega-project is an awful lot like Toronto’s equally large Eglinton Crosstown. We expect Aecon will take advantage of all the lessons learned on past projects to minimize risk and improve margins on the new ones. Considering this and ARE’s compelling valuation, we expect the stock to outperform its peers in the foreseeable future."

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Mr. Bastien has a "strong buy" rating and $23 target price for Aecon shares, The average target on the Street is $20.05, according to Thomson Reuters Eikon data.

Saying he removed Russel from the list after it stock price "responded well" to better-than-expected second-quarter results, he kept a "strong buy" rating and $36, which exceeds the average of $35.75.


Cronos Group Inc. (CRON-T) is set to become a “meaningful” player in the marijuana industry, according to Canaccord Genuity analyst Matt Bottomley.

Despite believing valuations in the sector are currently "more indicative of fair value at this time," Mr. Bottomley upgraded his rating for Toronto-based Cronos to "hold" from "sell" in the wake of Tuesday's release of in-line second-quarter financial results.

Cronos reported revenue of $3.4-million, slightly below the analyst's $4-million forecast but an increase of 15.2 per cent from the first quarter. Production costs of $2-million beat his $2.1-million estimate.

Moving forward, Mr. Bottomley expects the company's expansion of its Peace Naturals indoor facility to drive "significant" growth.

"With a current capacity of 6,700 kilograms, Peace Naturals recently completed a sizable expansion (Building 4), which is ready for planting once approved by Health Canada (expected imminently)," he said. "Once fully ramped, management estimates it will achieve a total capacity of 40,000 kilograms at Peace by the end of 2018, excluding its recently announced Cronos GrowCo JV, which could add another proportional 35,000 kilograms by the end of 2019."

He added: "Over the past several months, we believe Cronos has added a number of compelling strategic initiatives to the mix, including: a supply agreement into Poland’s recently legalized medical market; a partnership with MedMen that could provide insights on consumer trends and potential access to retail in Canada; the creation of Cronos GrowCo that will increase the company’s potential capacity for intentional export; and a recent take-or-pay supply agreement with US-based Cura Select (should the company receive a license in Canada)."

To reflect Cronos’ recent partnerships and international supply agreements, Mr. Bottomely increased his revenue and EBITDA estimates for fiscal 2020 to $229-million and $91-million, respectively, from $200-million and $73-million.

His target for Cronos shares rose to $7.50 from $6.50. The average is $8.70.

“With industry valuations continuing to face headwinds and with CRON off 50 per cent from its 2018 highs, our revised target implies a return of 0.2 per cent, and we are raising or recommendation,” he said.


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Citing a further erosion of free cash flow at its Rainy River project in northern Ontario, RBC Dominion Securities analyst Dan Rollins lowered his rating for New Gold Inc. (NGD-A, NGD-T) to “underperform” from “sector perform.”

“In our view, the elevated balance sheet risk at spot commodity prices/currencies, inherent ramp-up risk related to Rainy River, and lack of investor confidence will preclude New Gold’s shares from keeping pace with peers, irrespective of current valuation. Although New Gold’s shares have underperformed the GDX by 30 per cent since the company guided to higher costs at Rainy River, we believe they will continue to underperform until risks abate. Upside risks to our Underperform rating include stronger gold/copper prices and/or an opportunistic takeover offer.”

Mr. Rollins pointed to a rise in guided mine-site sustaining cash costs over the first nine years of the project since a feasibility study was released in January of 2014. The estimates now sit at $1015 per ounce, rising from $735 in that study. He attributed the jump to "materially" higher sustaining capital, higher unit costs and lower reserve grades.

“We believe the key headwind facing New Gold, and potential investors looking at the name following the material sell-off this year, is balance sheet risk,” he said. “In our view, balance sheet risk has significantly increased as a result of elevated near-term sustaining costs at Rainy River as well as the decline in gold and copper prices over the last few months.

“At spot prices, we believe New Gold could require external capital to meet its upcoming debt obligations, specifically $180-million due on its line of credit in August 2020 and $500-million of long-term debt due in November 2022 ($300-million of notes are due in 2025). While extending the line of credit would alleviate potential medium-term balance sheet risk, we believe there are a number of alternatives that New Gold could consider should it be unable to refinance/restructure/extend its current debt obligations alternatives such as deferring growth capital, divesting of Blackwater (full/partial), selling a gold/copper stream, issuing convertible debt, and/or raising equity, should outstanding debt not be refinanced.”

Mr. Rollins dropped his target price for New Gold shares to US$1.40 from US$3.50. The average on the Street is US$2.

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Desjardins Securities analyst Gary Ho is anticipating a turnaround in Mosaic Capital Corp. (M-X) in the traditionally strong third-quarter in the wake of weaker-than-anticipated results.

On Monday, the Calgary-based investment company reported adjusted earnings before interest, taxes, depreciation and amortization for the second quarter of $6.1-million, missing both Mr. Ho's $9.4-million projection and the consensus forecast of $9.3-million. He attributed the miss to "weak" results from its diversified and energy segments.

"3Q tends to be the strongest quarter and management appears to be confident that it can turn operations around at some of its underperforming investments in 2H18,” he said. “We are awaiting more consistent results, a lower payout ratio and reduced leverage before getting more bullish on the stock. "

Maintaining a "hold" rating for its stock, Mr. Ho lowered his target to $5.75 from $6. The average is $6.08.

"While M has a diversified portfolio and we like the company longer-term, we need to see an earnings recovery to get more constructive. Our investment thesis is based on the following: (1) the challenges at some of its companies may take a few quarters to iron out; (2) the payout ratio remains elevated; and (3) it will need to look for financing alternatives to fund growth opportunities.”

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Elsewhere, Canaccord Genuity's Raveel Afzaal dropped his target to $5.50 from $6 with a "hold" rating.

Mr. Afzaal said: "Management on the conference call noted it expects to see a sharp rebound in its performance next quarter, which is a seasonally strong quarter. However, we maintain our HOLD recommendation as we await better visibility on the magnitude and sustainability of the anticipated improvement.”


Though feels there isn’t “anything particularly bad” about CAE Inc.'s (CAE-T, CAE-N) third-quarter financial results, Raymond James analyst Ben Cherniavsky thinks its earnings “have not been robust enough to justify the stock’s increasingly elevated valuation.”

On Tuesday, the Montreal-based company, which provides training for the civil aviation, defence and security, and health care markets, reported earnings per share of 26 cents, missing Mr. Cherniavsky’s forecast by 4 cents and the consensus by a penny.

"While CAE’s financial performance ... has generally met our expectations , it remains below where we think it should be relative to the amount of capital that has been invested in the company, the operating leverage that is inherent in the business, and the strong macro tailwinds that are present at this (late) stage of the cycle," said the analyst.

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Mr. Cherniavsky maintained a "market perform" rating for CAE shares, lowering his target to $24.50 from $25. The average on the Street is $27.77.

Elsewhere, Desjardins Securities' Benoit Poirier kept a "buy" rating and $30 target.

He said: "We believe that recent share price weakness is unjustified as we remain confident that the softness in 1Q will be offset in 2H FY19. Consequently, we recommend investors remain opportunistic and buy the shares in light of the compelling 17-per-cent potential total return to our target."


In other analyst actions:

Following “weak” second-quarter results and another capital raise, Echelon Wealth Partners analyst Ralph Garcea, downgraded Spectra7 Microsystems Inc. (SEV-T) to “hold” from “speculative buy.” His target fell to 20 cents from 30 cents, which is 7 cents less than the consensus.

Cormark Securities analyst Maggie MacDougall cut AirBoss of America Corp. (BOS-T) to “market perform” from “buy” and lowered her target to $14.50 from $15.50. The average is $15.30.

National Bank of Canada initiated coverage of Iron Bridge Resources Inc. (IBR-T) with a “sector perform” rating and 85-cent target. The average is 80 cents.

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