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A U.S. toy-industry analyst says the Hatchimals’ popularity is on the a scale similar to past runaway successes such as the Cabbage Patch Kids or Tickle Me Elmo.Spin Master

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

Stock of Smart Real Estate Investment Trust (SRU.UN-T) is oversold, providing investors with an "attractive" entry point, according to Desjardins Securities analyst Michael Markidis.

He upgraded his rating for the Concord, Ont.-based REIT to "buy" from "hold."

"SRU has materially underperformed over the past several months," said Mr. Markidis. "On a price-only basis, the stock is down 22 per cent from the mid-July peak. The S&P/TSX Capped REIT index has declined by only 12 per cent over the same time period. In our view, the more pronounced sell-off is partially due to the perception that SRU is more bond-like than other Canadian REITs, and therefore it is a name that should be avoided in a rising rate environment.

"We believe this simplistic argument ignores (1) the untapped potential of SRU's low site coverage asset base, and perhaps equally as important, (2) the capital efficiency of the existing portfolio. The latter, combined with SRU's conservative (sub-80-per-cent) FFO [funds from operations] payout ratio and high DRIP participation (18 per cent), should allow management to fund $175–200-million of development on a leverage-neutral basis. In our view, the stock is now oversold, trading at an implied cap rate of 6.0 per cent and a 2.5-per-cent discount to our $31.00 NAV [net asset value]. The previous closing price represents a FTM FFO multiple of 13.7 times, significantly below the recent peak of 17.3x and only slightly above the range of 12.7–13.5x experienced throughout most of the 2013 taper tantrum. Moreover, the FFO yield spread (versus the 10-year Government of Canada bond) of 640 basis points is significantly above the trailing six-year average of 490 bps."

Mr. Markidis made the rating change after hosting the REIT for three days of corporate marketing in Western Canada. He pointed to five takeways from the events:

- "Aggressive behaviour from landlords looking to backfill former Target space has pressured SRU's ability to drive rents." He added: "While the follow-through impact of Target's departure will likely persist throughout most of 2017, we believe SRU has moved beyond the point of maximum pressure. As a result, we have increased confidence that occupancy will remain stable and that renewal spreads, while modest, will remain in positive territory over the next 12–24 months."

- A business model capable of baseline same-property growth of 0.5 to 1.0 per cent. He added: "This outlook assumes stable occupancy, continued strong retention (80–90 per cent) and comparatively modest (approximately 3-per-cent) increases on renewal and new leasing."

- "Substantial" business upside may not be reflected in current book value per unit.

- "Intensification — it is not only about residential and office." He noted: "We find that discussions regarding intensification opportunities in the retail real estate sector are typically focused on the future development of multi-family residential and/or office space. In select instances, such as SRU's VMC and Westside Mall properties, this is appropriate. However, it is clear to us that in strategizing how to maximize the land underlying its existing portfolio, management is also open to other uses, such as seniors housing and self-storage. These initiatives will likely play a larger role in the intensification and redevelopment of more suburban sites that are not directly adjacent to new/existing transit infrastructure."

- The creation of long-term income streams is a priority, however monetization will play an important part in strategy. He said: "Transactional income will likely become a visible component of SRU's operating results in the future, and hence is a potential FFO growth driver. The proceeds realized from these activities will also enable management to liberate equity to fund a portion of the future pipeline."

Mr. Markidis maintained a target price of $36. The analyst consensus price target is $36.13, according to Thomson Reuters.

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Alaris Royalty Corp. (AD-T) is "shifting from defence to offence," said CIBC World Markets analyst Scott Fromson.

He initiated coverage of the Calgary-based company with a "sector outperformer" rating.

"Alaris' stock has been under pressure over the last five months, trading at a high relative yield versus its strong historical dividend growth and comparable royalty companies," said Mr. Fromson. "This is due largely to challenges at five investment partners, which have contributed to a stall in dividend increases. We believe management can execute on its remediation plans, setting up a series of potential catalysts for the stock over the next year as Alaris announces resumption of distribution payments and/or monetization of problem investments."

Mr. Fromson said Alaris' current situation "highlights the short-term/long-term tension between the investors' desire for stable quarterly results and Alaris' strategy of building a diversified investment portfolio under a long-term investment horizon."

"By its very nature, a diversified portfolio will have ups and downs – and while the present is certainly a down period, we believe Alaris is through the trough."

He added: "Alaris has organic and acquisition growth opportunities. Organic growth is through both contractually set annual distribution increases and follow-on investments (e.g., to support partner growth opportunities, provide owner liquidity and/or to optimize capital structure). Through its management team and board of directors, Alaris has built a large network of financial advisors, mid-market investment banks and consultants. Alaris has a vigorous business development program; its marketers are continually travelling around North America in search of opportunities, supported by the company's strong investment track record. In some cases, the experience of Alaris' investment partners allows them to deliver a compelling sales pitch to prospective partners. An example of the company's innovative marketing techniques is an annual gathering of all of Alaris' investment partner companies."

Mr. Fromson said the company's stock price has recently faced challenges based on the hardships of some of its investment partners.

"The good news is that management has active files to address each issue," he said. "As well, for better or worse, most of the companies' stumbles are from self-inflicted wounds, not deteriorating market conditions, and can be rectified through active management overseen by Alaris."

Calling its current valuation "attractive," Mr. Fromson set a price target of $24 for the stock. Consensus is $24.26.

"Valuation is never an investment catalyst in itself, though Alaris' potential catalysts over the coming year allow us to see a roadmap to dividend growth and a yield re-rating, underpinning our $24.00 price target," he said. "Should Alaris be unable to turn things around at its partner companies or continue to make partner investments, we would foresee downside value at $16.00 (our 'annuity' scenario). Rising interest rates in a post-Trump election world also pose a risk."

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Recent marketing meetings with executives reinforced Credit Suisse analyst Jason Frew's "positive" view of Enerplus Corp. (ERF-T).

"Management provided clear visibility around growth plans and further down spacing tests in the Bakken which could enhance depth of inventory – one of few remaining pushback areas in our view," he said. "Management also provided strong rationale for the Ante Creek acquisition which leverages the company's core water flood competency."

He added: "From a capital markets perspective, institutional support continues to grow – now approaching 70 per cent versus versus just 30 per cent several years ago. We understand the composition of institutional ownership is stronger now as well. Asset sales and the equity issue earlier this year were instrumental in removing the balance sheet overhang and broadening interest. The current $2.5-billion market capitalization also improves relevancy."

Maintaining an "outperform" rating for the stock, he raised his target price to $14 from $12. Consensus is $11.86.

"We believe the stock may still be under-owned relative to peers in certain markets, such as Canada," said Mr. Frew. "The meeting schedule in Toronto was full, which is encouraging. While the stock has traded relatively well off the lows seen in Q116, estimates have risen to reflect strong cost control on items ranging from opex, G&A, and interest – thus the stock's performance has not led to a commensurate increase in the trading multiple and still appears good value to us."

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Following "strong" runs following the U.S. election, RBC Dominion Securities analyst Gary Bisbee downgraded both Robert Half International Inc. (RHI-N) and CEB Inc. (CEB-N) to "sector perform" from "outperform."

On Robert Half, a staffing and human resources provider based in Menlo Park, Calif., he said: "RHI has far outpaced our coverage and the market since the U.S. election, mirroring the performance of many cyclicals on optimism around the potential for pro-growth policy changes from President-elect Trump and a Republican Congress. We believe the move is largely warranted, as RHI was trading at a depressed valuation (approximately 13.5 times price to earnings), and it seems reasonable to believe that some combination of lower taxes, infrastructure spend, and other changes will improve GDP growth. Recent trends indicate a sharp loss of momentum."

Mr. Bisbee said recent trends indicate a "sharp" loss of momentum for the company, adding: "Recent trends (including Q4 guidance) have been challenging, with RHI's organic CC year-over-year revenue growth slowing from mid-teens in Q1/15 to 2.5 per cent in Q3/16, and Q4/16 guidance calls for flattish revenue. Like other staffers, RHI has cited delayed decision-making and increased selectivity from its clients in a long-growth environment with high uncertainty. Temp and Perm have both slowed, as has Protiviti (the latter amid slower financial regulatory spend, a trend that could accelerate if Dodd-Frank is repealed or softened)."

Mr. Bisbee raised his target price for the stock to $46 (U.S.) from $41 based on his "increased optimism about better GDP growth." The consensus price target is $39.34.

"Like the market, we are optimistic that the new U.S. government will succeed in implementing policies that bolster US GDP growth, which would be positive for the temp staffing industry and RHI," the analyst said. "However, much uncertainty remains, changes will likely take time, and short-term trends remain challenging (Q4 guidance called for EPS down 10 per cent year over year). After the recent strong run, we see failure to deliver improving growth in fairly short order being a risk to the stock. As a result, we see a balanced risk-reward today, which supports a Sector Perform rating."

Mr. Bisbee called the expectations and valuation for Arlington-Va.-based CEB, an insight and technology company, "undemanding." However, he said "significantly" better fourth-quarter bookings are necessary to drive profit growth next year. He called consensus 2017 projections "high."

"In what has been a recurring theme since Q2/15, CEB's Q3/16 bookings (reported last month) fell short of expectations and failed to grow," he said. "CEB cited weaker add-on sales in addition to a failure to reinvigorate the US large customer market. While it is focused on improvement in the key Q4 sales season and cited some improvement in October, we have little confidence in the company's sales execution after a string of miss-steps.

"The poor Q3 bookings led to a sharp reduction in 2016 guidance and will likely limit earnings growth in 2017 without a significant improvement in the key Q4 period. We forecast slightly lower year-over-year adjusted EPS in 2017 and believe the consensus forecast for mid-single-digit growth seems high."

He maintained his price target of the stock of $60. Consensus is $58.

"Continued poor execution and deteriorating growth clearly warrant the valuation discount to its history and peers," said Mr. Bisbee. "We are optimistic that the upcoming management change will lead to a reassessment of strategy and capital allocation discipline, and hopefully improved sales management and execution in time. However, after a strong run in recent weeks, with bookings improvement likely to be slow, and cons. estimates for 2017 looking too high, we see a more balanced risk-reward and consider a Sector Perform rating to be appropriate."

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Diversified Royalty Corp. (DIV-T) is "at a crossroads," said CIBC World Markets analyst Scott Fromson.

"It has sold its Franworks restaurant royalty just two years into the investment, the fallout from high Alberta exposure and low oil prices," said Mr. Fromson. "This will give it $60-$70 million of cash to deploy (and a 15-per-cent IRR) when the deal closes, expected in late 2016. While DIV currently trades at a high relative yield vs. its brief history and comparable royalty companies, its valuation reflects a higher dividend level than the two remaining royalty investments will cover.

"We believe DIV will be able to take advantage of its second chance to build a truly diversified portfolio and successfully close an acquisition in H1/17. This is the key near-term potential catalyst. Our view is supported by the following: 1) the large addressable market among North American franchisors; 2) DIV's attractive royalty structure for owners who want liquidity but wish to retain control; and, 3) DIV's strong deal track record and extensive business network. We forecast nominal dividend growth in 2017, increasing to [approximately] 9 per cent."

Mr. Fromson initiated coverage of the stock with a "sector outperformer" rating based on his belief that the company will continue to acquire new royalties. However, he added a "speculative" label to his rating to acknowledge execution risks.

"DIV faces a number of challenges," he said. "First, and despite its name, the company lacks diversification in its business model. This is largely a function of the company's early stage: DIV is only two years old in its current structure. Still, the portfolio is not yet sufficiently broad to offset a weak Alberta economy, which has hurt its royalty investment in Franworks restaurants. The sale of this interest should bring in $90-million cash plus the cancellation of 9 million shares, which we see as a big win for management. However, it leads to the second, more urgent challenge: finding good opportunities to redeploy the cash. Mr. Lube and Sutton Group are performing well, but expected cash flows may not cover the dividend. Another challenge is concluding an ongoing legal entanglement with John Bennett, the former CEO of the shell company that became DIV."

He set a 12-18 month price target of $3 for the stock "supported by dividend discount and yield valuations." Consensus is $3.42.

"To a certain extent, we see our $3.00 price target as a 'place holder,' given the uncertainty over the size and timing of the next royalty acquisition," said Mr. Fromson. "To be clear, we are comfortable with DIV's business model, from the perspectives of investor attractiveness, royalty deal structure, management capabilities and benefits to franchisor sellers. Should DIV management announce additional acquisitions with which we and the street are comfortable, and ahead of our expected timeline, we could potentially increase our financial and dividend growth forecasts, as well as lower our yield and cost of capital assumptions. Should the end of Q2/17 pass without DIV having made substantial progress in redeploying capital, we could see our downside case play out. This underpins the speculative component of our rating."

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In other analyst actions:

KLR Group analyst John Gedes downgraded Encana Corp. (ECA-N, ECA-T) to "accumulate" from "buy" with an unchanged target of $14 (U.S.). The analyst average is $12.68, according to Bloomberg.

Spin Master Corp. (TOY-T) was downgraded to "neutral" from "overweight" at Piper Jaffray by analyst Stephanie Wissink with a target price of $39, up from $36. The average is $38.14.

CRH Medical Corp. (CRH-T) was downgraded to "sector perform" from "outperform" at RBC Capital by analyst Douglas Miehm. He raised his target to $8.50 from $7. The analyst average is $7.73.

Gap Inc. (GPS-N) was raised to "neutral" from "underweight" at Piper Jaffray by analyst Neely Tamminga with a target of $23 (U.S.), which did not change. The average is $26.20.

Hasbro Inc. (HAS-Q) was downgraded to "neutral" from "overweight" at Piper Jaffray by analyst Stephanie Wissink. Her target of $88 did not change. The average is $87.67.

MetLife Inc. (MET-N) was downgraded to "market perform" from "outperform" at FBR Capital Markets by analyst Randy Binner with an unchanged target of $54 (U.S.). The average is $54.83.

Mundoro Capital Inc. (MUN-X) was rated new "buy" at Cantor Fitzgerald by equity analyst Asa Bridle with a target of 64 cents.

Roxgold Inc. (ROG-X) was rated new "buy" at Echelon Wealth Partners by analyst Ryan Walker with a target price of $2.70 per share. The average is $2.26.

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