Monday’s analyst upgrades and downgrades

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

The Canadian telecommunications services sector should enjoy stable growth in 2017, however downside risks are rising, according to RBC Dominion Securities analyst Drew McReynolds.

In a research preview of fourth-quarter 2016 financial results and looking ahead to the new calendar year, Mr. McReynolds emphasized the macro backdrop for the sector looks challenging with respect to both bond yields and fund flows.

"2017 could actually be the year [Government of Canada] bond yields back-up on a sustained basis," he said. "Simplistically, we believe an increase in the GoC [Government of Canada] 10-year bond yield to 2.50 per cent to 2.75 per cent could negatively impact FTM EV/EBITDA [forward 12-month enterprise value to earnings before interest, taxes, depreciation and amortization] telecom multiples by approximately negative 0.5 times, equating to a 9-per-cent to 10-per-cent decline in share prices before NAV [net asset value] growth (average of 8 per cent) and dividends (average dividend yield is 3.5 per cent). Under this bond yield scenario, our total return expectation for the group in 2017E would be 0 per cent to 5 per cent. At constant bond yields, our total return expectation would be closer to 10 per cent."

Mr. McReynolds added: "The positive macro impact (bond yields, fund flows) on Canadian telecom stocks was much stronger than we would have anticipated [in 2016]. The average FTM EV/EBITDA multiple for the group reached a cyclical peak of 7.7 times in August. We attribute this run-up in valuation to record low bond yields, which once again (and to the extreme) stood in contrast to an expected steady increase in bond yields that was the consensus view at the beginning of the year. The GoC 10-year declined from 1.39 per cent at the beginning of 2016 to a low of 0.95 per cent on Sept. 29th before backing up to 1.72 per cent to end the year (versus 2.60 per cent originally forecasted by RBC Economics)."

Mr. McReynolds is forecasting average revenue growth of 3 per cent year over year for the sector in 2017, in line with his 3-per-cent projection for 2016.

"Although robust data growth and reasonably disciplined pricing should be supportive, a more intense wireless and wireline competitive environment suggests the downside risks to our forecasts are rising," the analyst said. "Furthermore, the impact of pending CRTC decisions on Internet wholesale access rates could prove to be an additional structural headwind for incumbents. We forecast average EBITDA growth of 4 per cent year over year, up versus an estimated 3 per cent in 2016 driven by cost efficiencies and wireless margin expansion.

"Within the sector, we believe stock selection is boiling down to a 'game of inches' with it being increasingly difficult for any one stock to 'break out of the pack.' This view reflects several factors: (i) largely similar NAV growth expectations across the group (ranging from 6 per cent to 10 per cent over the next one to two years); (ii) a reasonably tight valuation range among the large-caps (FTM EV/EBITDA of 7.2 times to 8.2 times); (iii) the absence of any identifiable and material new business opportunity within industry that could favour one operator over another; (iv) increasingly minimal network advantage/differentiation across the group; and (v) consistently strong management teams."

In the note, Mr. McReynolds downgraded BCE Inc. (BCE-T) and Rogers Communications Inc. (RCI.B-T) to ratings of "sector perform" from "outperform." He maintained his "sector perform" rating for Telus Corp. (T-T).

"In this game of inches, we are struggling to differentiate between the three large operators," he said. "We currently forecast an identical 2016E-2021 NAV CAGR [net asset value compound annual growth rate] of 6 per cent for each while FTM EV/EBITDA multiples remain in a reasonably tight valuation range of 7.2 times to 7.8 times. We believe potential company-specific catalysts are likely to emerge, but over the medium-term (one to two years) rather than over the near-term."

He also upgraded Quebecor Inc. (QBR.B-T) to "top pick" from "outperform" and Shaw Communications Inc. (SJR.B-T) to "outperform" from "sector perform."

"In our view, what stands out with Quebecor and Shaw is: (i) the potential for higher sustained NAV growth in a maturing Canadian telecom industry, driven by mainly by wireless; and (ii) an improving relative risk profile where the upside versus downside trade-off looks the most compelling in an intensifying wireless and wireline competitive environment

Mr. McReynolds also made the following target price changes:

- BCE to $60 from $61. The analyst consensus price target is $60.82, according to Thomson Reuters.

Mr. McReynolds said: "Our previous upgrade of the stock in 2015 was predicated on BCE's improving risk profile, specifically renewed wireline EBITDA growth, greater capex visibility and improved visibility on the Bell Media margin 'reset.' As we struggle to meaningfully differentiate between large-cap peers within the sector, we see BCE stock performing in line with the average for the group and hence our 'Sector Perform' ranking. Despite what could be a more challenging wireline environment for BCE in 2017 (maturation, competition, regulation), our view of BCE as a core holding in Canadian telecom is unchanged, reflecting: (i) industry-leading execution; (ii) the expectation of continued wireless leadership; (iii) strong cost management; (iv) a valuation (FTM EV/EBITDA of 7.8 times) that should be underpinned by healthy FCF generation (FTM FCF yield of 7.6 per cent) and mid-single digit annual dividend growth; and (v) FCF accretion from the proposed acquisition of Manitoba Telecom (our BCE forecast already factors in the acquisition of Manitoba Telecom)."

- Rogers to $55 from $56. Consensus is $55.33.

Mr. McReynolds said: "Our previous upgrade of the stock in 2015 was predicated on an attractive set-up for Rogers looking out into 2016/2017 (i.e., industry trends that favour Rogers' asset mix, steady improvement in wireless, potential for upside estimate revisions, valuation). As we struggle to meaningfully differentiate between large-cap peers within the sector, we see Rogers stock performing in line with the average for the group and hence our 'Sector Perform' ranking. While we continue to favourably view Rogers' asset mix relative to large-cap peers and see continued gradual improvement in both wireless and cable performance, we believe a degree of patience is required before potential re-rating catalysts emerge: (i) more meaningful positive operating leverage within wireless; (ii) the rollout of X1 that should commence in 2018; (iii) the resumption of dividend growth (likely in 2018); and (iv) new initiatives from incoming CEO Joe Natale post-transition."

- Shaw to $29 from $26. Consensus is $26.77.

Mr. McReynolds said: "In a maturing Canadian telecom industry, we see the potential for sustained high-single digit NAV growth driven by wireless, as well as improved wireline performance in F2017 and F2018 with X1 and 1 Gbps Internet deployments. This renewed Shaw growth story will not be without its challenges, including execution, managing heavy wireless capex requirements and facing a very strong wireline competitor in Telus in Western Canada."

- Telus to $44 from $43. Consensus is $44.58.

Mr. McReynolds said: "As we struggle to meaningfully differentiate between large-cap peers within the sector, we see Telus stock performing in line with the average for the group and hence our 'Sector Perform' ranking. We continue to believe investors will benefit from an industry-leading capital return program via healthy dividend increases and share repurchases. Furthermore, we believe Telus' asset mix will rank as the most attractive within the group upon completion of its FTTH [PureFibre] build."

- Quebecor to $44 from $43. Consensus is $43.48.

Mr. McReynolds said: "Our Top Pick recommendation reflects what we believe to be the best riskadjusted total return potential within the Canadian telecom sector looking into 2017/2018. Specifically: (i) we see the potential for sustained high-single digit NAV growth driven by wireless; (ii) a further improvement in the relative risk-profile of the stock as Quebecor should be largely immune to a more competitive Shaw in wireless; (iii) potential catalysts over the next one to two years that include the eventual elimination of the NAV discount once Quebecor owns 100 per cent of Quebecor Media and/or a potential sale of unused spectrum outside of Quebec; and (iv) an attractive valuation at FTM EV/EBITDA of 6.6 times versus the group average of 7.3 times (a 13 per cent NAV discount, in line with the five-year average)."

- Cogeco Communications Inc. (CCA-T) ("sector perform" rating) to $70 from $69. Consensus is $71.46.

Mr. McReynolds said: "Our investment thesis on Cogeco Communications prior to our 2016 downgrade was predicated on above average NAV growth and a re-rating of the stock driven by a turnaround in Business ICT [information and communications technology], improving RGU [revenue-generating units] resilience within Canadian Broadband and declining execution risk around the U.S. cable tuck-in strategy. While we remain very comfortable with execution risk in the U.S., we have less conviction around the timing/magnitude of a turnaround in Business ICT as well as the longer-term RGU trajectory within Canadian Broadband. Despite what remains a cheap stock (5.8 times FTM EV/EBITDA), we would remain patient for a more timely entry point."

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A group of Canaccord Genuity analysts believe predicting the price of gold has become an increasingly difficult task.

In a research report on precious metals producers, Tony Lesiak, Rahul Paul and Peter Bures cited the uncertainty surrounding the incoming Donald Trump-led U.S. administration as well as "global economic growth questions (policy driven expansion or trade wars), geopolitical risk (when will the current market complacency end), and the outlook for the U.S. dollar and real rates (Fed rate hike versus inflation expectations)."

"Overall, the outlook for bullion in early 2017 appears solid given positive seasonality, the aggressive net long positioning in the U.S. dollar and broader markets, net short positioning in the yen and euro, more extreme valuations of the broader markets which already appear to be pricing in the full benefits from potentially favourable Trump policies which may not happen and ignoring the potential risk of negative consequences of a strong dollar and possible trade wars," they said. "Over the medium term (12 months) we see potential that the trajectory for rising real rates disappoints expectations (two to three hikes with muted inflation). While remaining constructive in the intermediate term, our U.S. Market Strategist, Tony Dwyer, believes that the U.S. market may currently be in overbought territory; a market pullback could present an opportunity for a safety bid for precious metals. A market turn could be more explosive with complacency at peak levels as measured by net short VIX positioning."

In the report, they lowered their rating for Endeavour Silver Corp. (EDR-T) to "hold" from "buy" with a target of $6, down from $6.25. The analyst consensus is $6.04.

The analysts also downgraded Pan American Silver Corp. (PAAS-Q) to "hold" from "buy" with a target of $17 (U.S.), down from $18. Consensus is $19.36.

Both rating changes were made based on implied returns to their targets.

"We have updated our valuations to current forward curve pricing (gold down 3.4 per cent and silver down 4.4 per cent) which has resulted in a negative revision to our target prices (down 8 per cent for seniors)," the analysts said. "Despite the current depressed commodity price environment, we still forecast that half of senior producers will generate free cash flow in 2017 with the majority turning FCF [free cash flow] positive by 2018."

"During the recent pullback, valuation disconnects have re-emerged with the current senior valuation range between 0.57 times NAV (Centerra) and 1.0 times NAV (Agnico-Eagle with more defensive attributes and a strong catalyst profile currently rewarded by the market). For safety, quality assets, strong management, consistency, and the premier catalyst profile among the seniors we advocate Agnico-Eagle despite the premium valuation. For torque to a rising gold price we recommend Kinross, which is currently trading at an approximately 60-per-cent discount on 2017/18 EV/EBITDA and P/CF. Our Focus List currently includes B2Gold and Yamana Gold, which has been added given the superior value proposition."

Their other target changes were:

- Barrick Gold Corp.(ABX-T, buy) to $28 from $29. Consensus: $27.45.

- Agnico Eagle Mines Ltd. (AEM-T, buy) to $75 from $82. Consensus: $66.12.

- Alamos Gold Inc. (AGI-T, hold) to $10.75 from $12. Consensus: $12.63.

- Asanko Gold Inc. (AKG-T, spec. buy) to $6 from $6.75. Consensus: $6.17.

- Argonaut Gold Inc. (AR-T, hold) to $2.75 from $3.25. Consensus: $4.06.

- B2Gold Corp. (BTO-T, buy) to $4.50 from $4.75. Consensus: $4.85.

- Coeur Mining Inc. (CDE-N, buy) to $12.50 (U.S.) from $13.50. Consensus: $13.33.

- Centerra Gold Inc. (CG-T, buy) to $8.50 from $8.75. Consensus: $8.34.

- Detour Gold Corp. (DGC-T, buy) to $26.50 from $29. Consensus: $28.55.

- Endeavour Mining Corp. (EDV-T, buy) to $29 from $31.50. Consensus: $31.

- Eldorado Gold Corp. (ELD-T, hold) to $5 from $5.25. Consensus: $6.65.

- Hecla Mining Co. (HL-N, hold) to $6 (U.S.) from $6.50. Consensus: $6.44.

- IAMGOLD Corp. (IMG-T, buy) to $7 (Canadian) from $7.50. Consensus: $6.17.

- Kinross Gold Corp. (K-T, buy) to $6.75 from $7.75. Consensus: $7.18.

- Klondex Mines Ltd. (KDX-T, hold) to $6.75 from $7.50. Consensus: $7.74.

- New Gold Inc. (NGD-T, hold) to $5.75 from $6. Consensus: $6.89.

- Primero Mining Corp. (P-T, buy) to $1.50 from $2. Consensus: $2.08.

- Richmont Mines Inc. (RIC-T, buy) to $14.25 from $15. Consensus: $13.98.

- Roxgold Inc. (ROG-X, spec. buy) to $1.75 from $2. Consensus: $2.24.

- Silver Wheaton Corp. (SLW-T, buy) to $37 from $40. Consensus: $38.09.

- Sandstorm Gold Ltd. (SSL-T, buy) to $8.50 from $9. Consensus: $7.82.

- Tahoe Resources Inc. (THO-T, buy) to $17.50 from $20. Consensus: $21.06.

- Torex Gold Resources Inc. (TXG-T, buy) to $32 from $33. Consensus: $34.30.

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In his January, 2017, top ideas and commodity price update report, Acumen Capital analyst Trevor Reynolds lowered his projection for the Canadian loonie versus the greenback to 76 cents (U.S.) from 80 cents.

That change resulted in a "positive" impact for the majority of the stocks in his coverage universe.

"With the improvement in current commodity prices and a more positive overall outlook, we have increased the number of names on our list," said Mr. Reynolds. "In 2016, aside from a few outliers, operations and capital deployment were generally limited as most management teams worked to right size their company's cost structure and properly position themselves for a turnaround. During the year numerous names from our list were eliminated due to M&A [mergers and acquisitions] (AEI, Rock) and going-private transactions (Canamax, Yoho). On the flip side, we added several high quality names that we believe offer upside moving forward including Bonterra, Ikkuma, and Freehold. Overall, we view the majority of our coverage list as well positioned at current commodity prices."

Mr. Reynolds upgraded his rating for Altura Energy Inc. (ATU-X) to "buy" from "speculative buy" and raised his target price to 70 cents from 55 cents. Consensus is 58 cents.

"ATU is an underfollowed name in which we see big potential," the analyst said. "The company has a strong management team led by President and CEO David Burghardt, and features a high quality board with the likes of Darren Gee (Peyto), Brian Lavergne (Storm), and John McAleer. Management and the Board are big picture thinkers. We had expected ATU to be acquirers through the downturn, but the company elected not to transact as they felt the assets evaluated were either overpriced, or burdened by material abandonment liabilities and/or unprofitable associated properties. The company did however quietly piece together a land position in a yet to be disclosed area where they have drilled a horizontal test well. The test result is expected over the coming weeks and represents a major catalyst for the name. Management has proven their operating abilities through the successful drilling of multiple horizontal wells at record pace and cost in the Sparky and Mannville formations. With cash on the balance sheet ATU is well positioned moving forward with the next step being to prove up inventory."

He also raised Journey Energy Inc. (JOY-T) to "buy" from "speculative buy" and raised his target price to $4.50 from $3.25. Consensus is $3.14.

"JOY began 2016 with their backs against the wall," said Mr. Reynolds. "Debt to cash flow in the first quarter of 2016 was 8.2 times. Without issuing a share, debt to CF to exit 2016 is expected to be [approximately] 2.7 times, and 1.7 times by the end of 2017. Through a combination of asset swaps, acquisitions, divestitures, and the recent AIMco deal, the operating cost structure has been completely realigned, while the credit facility is no longer a concern ($52-million drawn on $90-million line). For 2017 JOY has the ability to provide modest production growth while spending less than CF, which is expected to double from 2016 at $50 (U.S.) a barrel WTI. JOY has a stable low decline asset base that can be maintained with minimal capital, while the company has consistently been one of the lowest cost finders in the space. With the debt situation resolved, and the cost structure realigned we see little downside in the name and believe the stock will trend higher with results."

His target price changes were:

• Bonterra Energy Corp. (BNE-T, buy) to $33 from $30. Consensus: $31.83.
• Eagle Energy Inc. (EGL-T, spec. buy) to $1.15 from $1. Consensus: $1.08.
• Freehold Royalties Ltd. (FRU-T, buy) to $17.25 from $16.25. Consensus: $15.96.
• Ikkuma Resources Corp. (IKM-X, spec. buy) to $1.30 from $1.25. Consensus: $1.23.
• Leucrotta Exploration Inc. (LXE-T, buy) to $3.60 from $2.80. Consensus: $2.80.
• RMP Energy Inc. (RMP-T, spec. buy) to $1.10 from $1. Consensus: $1.04.
• Surge Energy Inc. (SGY-T, buy) to $4.50 from $4.25. Consensus: $3.59.
• Yangarra Resources Ltd. (YGR-T, buy) to $2.85 from $1.40. Consensus: $2.06.

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BMO Nesbitt Burns analyst Andrew Kaip initiated coverage of Pretium Resources Inc. (PVG-T, PVG-N) with an "outperform" rating, citing its relative valuation, asset quality, development stage, financing level and "safe haven" status.

"In the mining industry 'Grade is King' and the Valley of the Kings (VOK) deposit at the Brucejack mine, located in northwestern British Columbia, hosts one of the highest grades and largest reserve and resource bases when compared to undeveloped deposits within the BMO Research coverage universe," said Mr. Kaip. "High-grade deposits attract both positive and negative views, and the VOK has had no shortage of skeptics since the maiden resource was announced in 2011.

"In a career spanning 25 years as a geologist, I have never seen a more unique example of such highgrade with such a high degree of variability of gold mineralization within the deposit type that is comparable to the VOK deposit. That said, in our view, PVG has addressed what can best be described as "geological risk" by systematic exploration to the point where we believe the deposit controls are well understood. Aside from the normal execution risks facing a developer, we believe the key risk for investors is the variability of gold mineralization and the impact that lower grades at Brucejack will have for the outlook of PVG shares. While we are of the view that PVG has progressively reduced this risk, even we admit that that the high variability or 'nugget effect' of gold-silver mineralization at the VOK will remain an issue until mining is well established."

Mr. Kaip set a price target of $19.50 for the stock. Consensus is $17.43.

"Even taking into consideration PVG's share price performance through 2016, we are of the view that shares of PVG trade at a 30-per-cent discount to comparable peers using P/NPV [price to net present value] 5 per cent at spot, suggesting investors have assigned a higher risk premium to PVG related to this 'geological risk,'" he said. "Looking out to 2018, PVG as a medium producer of 500,000 ounces plus of annual production and projected AISC [all-in sustaining costs] of $450 (U.S.), PVG is one of the lowest cost producers with the longest reserve lives. Shares of PVG trade at a larger discount to this future peer group."

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BMO Nesbitt Burns analyst Dan McSpirit initiated coverage of Resolute Energy Corp.  (REN-N) and WildHorse Resource Development Corp. (WRD-N) with "outperform" ratings.

Despite recent outperformance by Resolute, Mr. McSpirit said the stock still provides attractively priced exposure to improving returns and greater growth.

"Launching coverage at this point may look like the equivalent of walking into a movie with minutes remaining and asking, 'What did I miss?'," he said. "To be sure, a lot has happened in the past 24 months or so, from a second lien financing and asset divestitures conducted so the company could remain a going concern to an acquisition that bolstered the company's position in the prolific Delaware Basin to most recently an equity capital raise that helps finance the value capture of the West Texas properties, this last development being the point where we walk in. Today we see a producer finally in possession of asset quality and now the financial wherewithal to drive returns and generate growth not seen in the company's recent history. This isn't about a rebound trade. That's happened. This is about gaining exposure through a SMid-cap E&P sustainable growth (nearly 70 per cent 4Q17/4Q16) grounded in relatively low breakeven rock in the Delaware Basin and, less directly, to developments provided by other, larger operators in the same basin that could act as catalysts for the shares, all put in the context of a relative valuation that shows the shares trading at a discount (2017 8.1 times versus 11.3 times group median). Potentially assisting is a short interest position still greater than 20-per-cent of the public float."

His target price for the stock is $50. The analyst average price target is $47.75, according to Bloomberg.

On Houston-based WildHorse, Mr. McSpirit said: "We see in WildHorse attractively priced exposure to two emerging plays that have the potential to drive top-tier returns and growth. We use the words "emerging" and "potential" to frame the company's earlier-stage operations of exploring and exploiting the asset bases in east Texas prospective for the oil-bearing Eagle Ford and north Louisiana prospective for the natural gas-producing Cotton Valley. That context helps in placing the shares on the risk curve, in our view. Central to our positive view on the shares are the company's geographically advantaged assets that lead to better cash margins on better price realizations, contributing to top-tier debt-adjusted growth in production and cash flow over time. To this we add rate of change appeal that comes from progressing the completion techniques in both the Eagle Ford and Cotton Valley plays, a development we see potentially leading to greater capital efficiency and positive revisions to our own estimates. Lastly, we put all this against the backdrop of what looks to be a discounted valuation relative to a group of other multi-basin and/or hyper-growth producers, with the shares trading at less than 5.0 times 2018E EBITDA versus the peer median closer to 7.0 times."

He set a price target of $20 for the stock.

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In other analyst actions:

National Bank of Canada (NA-T) was downgraded to "market perform" from "buy" at Cormark Securities by analyst Meny Grauman with a target of $60, up from $56. The analyst average target price is $54.92, according to Bloomberg.

StorageVault Canada Inc. (SVI-X) was raised to "top pick" from "buy" by Cormark analyst Maggie Macdougall with a target of $1.70, up from $1.45. The average is $1.54.

Cogeco Communications Inc. (CCA-T) was downgraded to "sector perform" from "outperform" by National Bank analyst Adam Shine. His target remains $67, compared to the analyst average if $71.73.

Imperial Oil Ltd. (IMO-T) was downgraded to "sector perform" from "outperform" by Alta Corp Capital analyst Nicholas Lupick. His target price for the stock rose to $52 from $50. The average target is $49.

Mr. Lupick upgraded BlackPearl Resources Inc. (PXX-T) to "outperform" from "sector perform" with a target of $2.35, up from $1.80. The average is $2.23.

Bonavista Energy Corp. (BNP-T) was raised to "outperform" from "sector perform" by Alta Corp's Thomas Matthews. His target rose by a loonie to $5.75. The average is $6.02.

Mr. Matthews raised Journey Energy Inc.  (JOY-T) to "outperform" from "sector perform" with a target of $4.10, up from $3.20. The average is $3.50.

Chinook Energy Inc. (CKE-T) was downgraded to "sector perform" from "speculative" by Alta Corp.'s Patrick O'Rourke. His target fell to 65 cents from 85 cents. The average is 61 cents.