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

With a suite of new senior executives and a “couple of troubled projects in backlog,” Cannacord Genuity analyst Yuri Lynk said that he is not yet able to recommend the stock of engineering and construction management firm Fluor Corp. (FLR-N) ahead of its second quarter results on Aug. 1.

He raised his price target on Fluor to US$35 from US$32 but maintained his hold rating. The median is US$38, according to Zack’s Investment Research.

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“There are several items that could negatively weigh on Q2/2019 results. Fluor is in an ongoing dispute over additional costs to complete a gas-fired power plant in Citrus County, Florida for Duke Energy. Negative cost reforecasts, which totalled US$26-million in Q1/2019, could very well spill into Q2/2019. Additionally, Fluor is only around 50 per cent complete on the troubled engineering, procurement, and fabrication contract for Shell’s Penguins FPSO [floating production storage and offloading] vessel in the North Sea. This project required a US$53-million negative cost reforecast in Q1/2019 and it could require more before reaching completion.”

“With Fluor’s stock close to 20-year lows, we wonder if investors will care much if Q2/2019 numbers disappoint. For our part, we will be on the lookout for any change in strategic tack from management. Recall, by the time the Q2/2019 call will be held, Carlos Hernandez will be approaching 100 days in the CEO’s chair, generally the time it takes a new CEO to form an opinion on a company’s strategic positioning. Additionally, we note Mr. Hernandez met with the Board of Directors in mid-June to discuss Fluor’s strategy. What we’ll likely hear about are changes to bid process and project risk management, which should be neutral to the stock as the proof will be in the pudding.”

Mr. Lynk said that Fluor could see upside from a number of booking prospects if it could improve its execution, adding that “Fluor’s backlog ended Q1/2019 35 per cent higher year over year at US$39-billion. We are tracking several projects that could materially add to backlog, including Exxon’s Rovuma LNG project in Mozambique, the South Louisiana Methanol project, and the Lake Charles Methanol project. Additionally, the company has numerous FEED/study mandates that could translate into meaningful EPC awards across the mining and petrochemical verticals in 2020-2021.”

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Desjardins upgraded its rating on Premium Brands Holdings Corp. (PBH-T) to “buy” from “hold,” and also raising its price target to $103 from $83. The median is $96.

Analyst David Newman said that he is upgraded the stock based on its strong track record of growth, concrete growth initiative and M&A [merger and acquisition] opportunities, the extent of growing platforms such as seafood and meat snacks, and growing confidence from management “as exemplified by its ‘PB Ecosystem’, which targets annual sales of $6 billion and EBITDA [earnings before interest, taxes, depreciation and amortization] of $600-million over the next five years (about 15 per cent CAGR [compound annual growth rate]).”

“While there are still short-term challenges, we are increasingly optimistic on the company’s long-term growth prospects, with a groundswell of tangible initiatives and M&A opportunities poised for execution, which should propel the share price. Furthermore, greater clarity and confidence from management (backstopped by the recent financial backing of the Canada Pension Plan Investment Board (CPPIB) and certain shareholders through a private placement) has driven renewed optimism in the story and its strategy. In our view, PBH is building and managing the business for the long term, with focus on quarterly results, which implies that it is making decisions to fit its long-term vision and strategy.”

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Even with a positive long-term outlook on the stock, Desjardins is reducing its 2Q19 EBITDA estimate to $77-million from $86-million (consensus is $88-million). “Rising raw material costs from the outbreak of African Swine Fever (with pricing to offset rising costs in 2H19), a delayed start to the summer BBQ season and weak foodservice demand could weigh on PBH’s results, despite expected positive organic growth, the contribution from previous acquisitions and an FX tailwind. We expect earnings growth to accelerate in 2H19 and 2020,” Mr. Newman said.

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Ahead of CGI Group Inc. (GIB-A-T; GIB-N) reporting its third quarter results at the end of July, Desjardins has updated its revenue and earnings per share estimates for the company.

Desjardins adjusted its earnings targets for the stock, raising revenue for 2020 to $13.1-billion from $12.9-billion while lowering adjusted EPS for 2019 to $4.77 from $4.84.

“For the quarter ended June 30, we expect revenue of $3.15-billion, adjusted EBIT of $474-million and adjusted EPS of $1.22. We forecast CGI will report a book-to-bill ratio of 1.05 times, similar to the previous quarter. Revenue growth should be underpinned by the closing of the Acando acquisition, as we expect a 3 per cent contribution to revenue growth from M&A, up from 0.7 per cent last quarter,” analyst Maher Yaghi said.

“While we expect profitability to keep climbing in the quarter, we believe year-over-year EBIT margin growth could start to slow sequentially. Indeed, the integration of Acando, coupled with expected pressure on the profitability of the Canadian operations, could hamper margin improvement, in our view. However, we note that the Street’s EBIT margin forecast of 15.1 per cent is similar to our estimate of 15 per cent.”

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He kept his “hold” rating on the stock and his $101.50 price target. The median is $106.

“We continue to value GIB using the average of three different techniques to generate our target of $101.50. Our target does not assume further acquisitions but does include about $1.2-billion of annual share buybacks. Our three-stage DCF [discounted cash flow] model returns a value of $98.12. Our forward P/E valuation applies a multiple of 20 times to our FY20 EPS estimate, which generates a value of $110.27. Our EV [enterprise value]/EBITDA valuation applies a multiple of 11 times to our FY20 EBITDA estimate, which yields a value of $96.24,” he said.

“While we continue to believe GIB is a core holding for a tech portfolio, we view the stock’s current valuation as a potential headwind to upside in the short to medium term without sizeable accretive acquisitions. We continue to look for a more attractive entry point.”

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Echelon Wealth Partners cuts its price target on Tucows Inc. (TC-T; TCX-Q) as the domain services and network access provider announced it would be adding service over the Verizon network later this year, extended its agreement with Sprint and will cut its ties with T-Mobile at the end of the year, with a one-year runoff period.

“We view the migration as short-term pain for longer-term gain and believe these are structurally positive changes for Ting Mobile despite its near-term impact to guidance. Its contract with Verizon carries better rates, coverage, guarantees and other terms that had negatively impacted Ting Mobile’s past performance. Tucows estimates that cost of migration, primarily in the form of SIMs, shipping and device marketing, to be in the range of US$3-million this year and as much as US$12-million over the following years. As part of the new contracts negotiated, TC will be saving US$3-4-million in COGS [cost of goods sold] annually. We believe this one-time event at Ting Mobile is a step in the right direction in a return to longer-term growth in this SBU,” said analyst Gianluca Tucci.

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He kept his “buy” rating on the stock but cut his discounted cash flow-based price target to $100 from $125. There is no median price target for the company as not enough analysts cover the stock.

After the announcement, “Tucows revised its 2019 financial guidance primarily reflecting the short-term impact on Ting Mobile. Tucows’ updated 2019 guidance includes Adj. EBITDA of US$47.9-million (vs. EWP of $53.3-million pre-announcement) and Cash EBITDA of US$52-million. This compares to TC’s original 2019 guidance of US$57.4-million in Adj. EBITDA and US$62-million in Cash EBITDA. The three primary drivers for the US$10-million hit to EBITDA guidance are Ting Mobile underperformance, carrier migration costs, and excess carrier penalties, each accounting for roughly one-third of the US$10-million decrease,” the analyst said.

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Flooding and poor weather conditions hitting farmers in the U.S. and Canada are affecting sales at AG Growth International Inc. (AFN-T), according to CIBC.

“We reduce our Q2/19E EBITDA from $54.2-million to $49.7-million (vs. consensus of $52-million), reflecting continued wet weather in the U.S. (impacting farm storage and commercial sales; farm handling demand still strong) and dry weather in Canada (impacting farm sales)," said analyst Jacob Bout.

“We anticipate a slowdown of U.S. farm storage demand and some commercial projects due to the extremely wet Spring (demand for portable equipment remains strong). Some projects were under water and unable to start construction. However, we do not think this will have a meaningful impact on H2/19, and is likely to be a positive for 2020 (buoyed by a positive crop pricing outlook and expectations for a very large 2020 corn crop).”

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CIBC maintained its price target at $71 and rating of “outperformer.” The median is $70.50.

“Only about 20 per cent-25 per cent of AFN’s consolidated sales come from U.S. Farm compared to over 50 per cent for DE [Deere & Co.]. If the U.S. corn crop is 10 per cent below initial forecasts (due to lower acreage and yields), that implies that just 2 per cent-3 per cent of sales for AFN are at risk. Additionally, dryer sales could nearly double this season and offset the smaller crop,” Mr. Bout said.

“Western Canada has been very dry for much of Q2/19, but the outlook has since improved with recent rains. Farm backlogs remain decent (both storage and handling). The Canada/China canola dispute is likely to create near-term demand for storage.”

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In other analyst actions:

Centerra Gold Inc: Credit Suisse raises target price to $10 from $8

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Transalta Renewables: National Bank of Canada raises target price to $13.25 from $13

Canadian Pacific Downgraded to Hold at Loop Capital; target price of $338

UBS downgraded Deere & Co. to “neutral” and boosted its price target to US$167 from US$158.

With files from Reuters

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