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Wednesday's analyst upgrades and downgrades

Jean Coutu Group

Christinne Muschi/The Globe and Mail

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

Jean Coutu Group (PJC) Inc. (PJC.A-T) reported stronger-than-forecast first quarter results of 25 cents per share, higher than Desjardins Capital Markets' forecast, and it also beat the consensus of 23 cents a share.

As a result, analyst Keith Howlett kept his "hold" rating on the stock but boosted his target price to $21.50 from $21. The consensus is $20.55, according to Thomson Reuters.

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"The imputed royalty rate on system sales was increased by over 40bps [basis points] and is expected to be maintained at the higher level. Pro Doc's EBITDA [earnings before interest, taxes, depreciation and amortization] margin fell to 12.4 per cent from 41.4 per cent a year ago, causing the decline in EPS [earnings per share] from 27 cents a year ago. Management appeared optimistic that the minister of health of Québec and generic drug manufacturers will reach a negotiated agreement on generic drug costs," Mr. Howlett said.

"Adjusted same-store sales in pharmacy increased by 4.4 per cent while front-end sales grew by 1.4 per cent. Same-store script count increased by 3.0 per cent. Front-end sales faced the headwind of a slow start to sales of seasonal products, including sunscreen. The franchised network benefited in the first quarter from payments received from the Québec government related to an adjustment for past dispensing fees and from the receipt of higher professional allowances from generic drug manufacturers. The franchise royalty rate increase was very modest in relation to these inflows. Note that reported EPS benefited by less than 0.5 cents due to royalties paid on one-time revenues of franchisees. While it is positive that the minister of health of Québec and the generic drug industry continue to negotiate over future pricing, it now appears probable that it will be 4Q FY18 before the 15 per cent cap is reimposed on professional allowances. The imposition of the cap will likely coincide with a lowering of generic drug prices," he wrote.

In addition, he increased his EPS estimates to $1.04 for FY18, up from 99 cents, and to $1.16, up from $1.09, for FY19 " to reflect an increased royalty rate on system sales and a one quarter delay in returning to the 15 per cent cap on professional allowances paid by Pro Doc. Our target price is based on 13 times FY18 EBITDA from franchising and 8 times FY18 EBITDA from Pro Doc, plus estimated cash on hand at the end of FY18."

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Inotek Pharmaceuticals Corp. (ITEK-Q) reported disappointing results for a recent drug trial and Canaccord Genuity has downgraded the stock.

"Inotek reported disappointing top-line data for its Phase 2 fixed-dose combination (FDC) trial investigating three dosing combinations of trabodenoson and latanoprost versus monotherapy latanoprost. With no FDC arms demonstrating statistically significant mean IOP reduction versus latanoprost monotherapy, we see a limited future for trabo, which was further highlighted by management hiring advisers to explore strategic options for the company. Ultimately, we see ITEK shares range-bound for the foreseeable future as the company works through its strategic options," said analyst Dewey Steadman.

Canaccord downgraded the stock to "hold" from "buy" and cut its price target to $1 (U.S.) from $3. The consensus is $5.75. The stock closed Tuesday at 96 cents.

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"Inotek has hired advisers to assist with developing strategic options for the company moving forward. We expect the company will seek ways to maximize shareholder value that include the development of trabodenoson in indications outside glaucoma, a sale of the company or a wind-down and return of cash to shareholders. However, we believe management is unlikely to pursue additional trials at this point, and may favour an M&A-focused strategy as an exit. While the company does have sufficient cash on hand to run additional clinical trials, management does not feel the recent results warrant further attention directed toward trabodenoson's IOPlowering properties, and does not believe its investors are best served by development of preclinical indications on their own given the much-extended timeline they now face."

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Pengrowth Energy Corp. (PGF-T) recently announced that it has a buyer for its Garrington/Olds assets in southern Alberta for $300-million, but that the buyer of its Swan Hills asset has backed out of its deal.

"Overall, we view [the] announcements as being mixed as, despite the failed Swan Hills sale, the $300-million sale continues to move PGF towards lowering its debt," said AltaCorp Capital.

However, Pengrowth still has some challenges ahead, said AltaCorp Capital.

"Although the $827-million of asset sales expected to close in 2017 is impressive, investors should be aware that the CF [cash flow] generation of these assets leave the company precariously at risk of breaching its trailing 12 month Senior Debt to EBITDA [earnings before interest, taxes, depreciation and amortization] ratio covenant of 3.5 times by mid-2017. With today's update management has reiterated that it continues to work with lenders to renegotiate or refinancing its remaining term debt. The company has about $372-million of debt due in 2018."

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AltaCorp Capital cut its price target to $1.20 from $1.35 but kept its "sector perform" rating. The consensus is $1.24.

"Given the reduction to the company's near term production base in its Conventional portfolio our NAV[net asset value] DCF [discounted cash flow] blowdown has been reduced by about $350-million (but materially offset by the proceeds of $300-million and the Swan Hills deposit of $19-million). Concurrent with today's announcement and management's plans to materially divest of the remainder of its conventional portfolio we have also removed all value for the company's undeveloped land outside of Groundbirch and Lindbergh. This has resulted in a reduction to our NAV of about $80-million. As a result we have lowered our price target by 15 cents per share, from $1.35 to $1.20. Our price target is roughly in line with a 1.0 times multiple applied to our PV10 risked, sum-of-the-parts, net asset value per share (NAV) of $1.20."

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High Arctic Energy Services Inc. (HWO-T) has entered into negotiations to exchange three of its rigs for two rigs that it operates under long-term management contracts in Papua New Guinea (PNG).

"HWO has entered into negotiations to exchange an equal share of its owned rigs (rigs 102, 115 and 116) for an equal share of the rigs that it has historically managed for its key customer (Oil Search Ltd.) under long-term management agreements (rigs 103, and 104) in a company to be jointly owned by High Arctic and its customer. It's expected that negotiations could be completed by year end," said Acumen Capital analyst Brian Pow.

"We view the proposed transaction as positive long term, as it improves the go-forward visibility of HWO's operation in PNG. Although the rate restrictions appear significant, given the current price environment we were expecting similar rate concessions in our model. The agreement is targeted to be completed by year end, and based on our discussions with management we anticipate the likelihood of a successful transaction as high. We look to updates around negotiations as the next catalysts for HWO. In Canada, the deterioration in commodity prices through Q2 have lowered our expectations of a recovery for the oil services sector in F17. We still believe HWO is one of the best positioned names in the space, and given its balance sheet we expect the company to look at acquisition opportunities to build scale," he said.

He kept his "buy" rating but cut his target price to $6.20 from $6.90. The consensus is $7.24.

"Our adjustments are based on a successful agreement taking place towards the end of F17, and including a full fiscal year of changes in F18. We have revised our revenue contributions (Drilling Services) downwards for F18 to account for to possibility of longer turnaround times between drilling wells. This leads to a reduction of about $8-million in our revenues forecast next year. Offsetting this, HWO will be able to remove about $34.1-million in drilling rig rental costs from their income statement (previously paid to OSL to operate rigs 103/104). Accounting for these adjustments and backing out OSL's JV portion, HWO's Drilling Services EBITDA contributions decrease to $36.6-million from $46.2-million."

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BMO Capital Markets is upgrading Jagged Peak Energy (JAG-N) because it sees that its shares are currently inexpensive.

"We're upgrading JAG to 'outperform' and increasing our target price to $19 (U.S) to be in line with our NAV [net asset value]. In simple terms, we frame JAG shares as inexpensively priced beta appeal with a defensive quality, pointing to a strong balance sheet and a capital-efficient operation that can deliver competitive debt-adjusted growth, and where individual well results expected near-term can create greater transparency on resource potential," said analyst Dan McSpirit.

BMO upgraded Jagged Peak to "outperform" from "market perform" and boosting its target to $19 (U.S.) from $14.  The consensus is $17.40.

BMO also increased its 2018 EPS estimate to$1.05 from $1.04 and raising its cash flow per share to $2.06 from $2.05.

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About the Author
Assistant Editor, Globe Investor

Gillian Livingston started her journalism career at The Gazette at Western University. She's worked for The Financial Post, Dow Jones Newswires and The Canadian Press as a reporter for news, business, markets and Ontario politics. More

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