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Monday’s analyst upgrades and downgrades

An RBC sign is seen in Toronto’s financial district in this file photo.

Mark Blinch/The Globe and Mail

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

Canadian bank stocks, which have been flat this year as a sector, are due to start reporting third-quarter reports later this week.

Ahead of that, Sumit Malhotra, analyst at Scotia Capital Inc. raised his rating on Toronto-Dominion Bank to "sector outperform" and lowered his rating on Royal Bank of Canada to "sector perform."

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"The price performance of TD has been soft thus far in 2017, and we like this entry point to move our rating up to sector outperform," that analyst wrote in a research note. "At 11.2 times our 2018 [earnings estimate], TD no longer has any price to earnings premium, as compared to an average four per cent advantage since the start of 2015. We expect the shares to reflect an improved valuation due to (1) rebound in operating leverage in Canadian personal & commercial banking; (2) Net interest margin benefit from higher rates in Canada and the U.S.; and (3) less pronounced provision for credit losses up-tick given sizable reserve build ($872-million) enacted in past two years." His target on TD is $73.

"Though Royal Bank has long been one of our preferred names in the sector, the move down to sector perform speaks to our view that the P/E premium (11.8x our 2018 earnings estimate], six per cent above the sector average) no longer has room to expand, and the combination of higher reliance on trading revenue and lower capital position (with G-SIB [global systemically important banks] again on the horizon) is a near-term impediment to valuation." His Royal Bank target is $100.

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Credit Suisse analyst Jason Frew lowered his price target on Cenovus Energy Inc. (CVE-T) to $15 from $20 as he dropped his oil price assumptions across the sector.

He kept his "outperform" rating on the stock, which closed Friday at $9.43.

"While there remains a big opportunity to realize synergies, drive further cost reduction, and grow within cash flow at lower oil prices, post the ConocoPhillips Co. transaction, the key driver for now is asset sales, in our view," the analyst wrote in a research note. "We continue to assume the sale of CVE's four key legacy assets (Pelican, Weyburn, Suffield, and Palliser) at an aggregate value of C$30,000 per flowing boe [barrel of oil equivalent]. While timing and price are risks, we are comforted by the free cash flowing nature of the assets in the current commodity price environment as well as CVE's optionality for sales of additional assets, such as Deep Basin infrastructure."

The analyst cut his target prices by an average 19 per cent across the sector, but did not change any of his ratings. Credit Suisse lowered its West Texas Intermediate oil price assumption to $49 (U.S.) per barrel for 2017 from $55, and to $50.50 for 2018 from $62.50, and $55.75 for 2019 from $62.50.

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His target prices changes were as follows:

  • ARC Resources Ltd. $23 (Canadian) from $26
  • Baytex Energy Corp. $3.50 from $5.50
  • Canadian Natural Resources Ltd. $47 from $52
  • Crescent Point Energy Crop. $12 from $18
  • Encana Corp. $14 (U.S.) from $15
  • Enerplus Corp. $17 from $18 (Canadian)
  • Husky Energy Inc. no change at $17
  • Imperial Oil. Ltd. $43 from $49
  • Obsidian Energy Ltd. $1.25 from $1.75
  • Pengrowth Energy Corp. 75 cents from $1.75
  • Suncor Energy $48 from $50
  • Vemilion Energy Inc. $45 from $52

"Given our revised lower for longer oil price view, we reiterate our preference for the Canadian 'Majors' (Canadian Natural, Imperial, Suncor) which still have attractive free cash flow profiles as they exit mining capital and ramp up long-life projects," the analyst wrote in a research note. "We also continue to favor ARC, Enerplus and Encana among E&Ps [exploration and production companies] for their respective growth outlooks, supported by balance sheet strength and margin expansion. Our positive view of Cenovus is somewhat differentiated – asset sales will be key to restoring investor confidence."

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PI Financial Corp. analyst David Kwan raised his target on VersaPay Corp. (VPY-T) to $3 from $2.50 (Canadian) and maintained his buy rating with speculative risk following the company's second quarter earnings report.

"In early July, VPY started the second half with fireworks with the announcements of the Royal Bank of Canada (RBC) partnership and the Livingston International win (now their largest customer) in quick succession that led to the stock jumping about 50 per cent at one point in the following days," the analyst wrote in a research note. "Despite the strong recent move in the stock on the back of the RBC and Livingston announcements, we believe there is plenty of more upside ahead driven by the announcements of new channel partners (at least two expected by year-end), new large customer wins, and ongoing acceleration in organic revenue growth (where we see revenues more than tripling next year driven by the ramp at RBC and Ricoh Canada)."

The stock closed Friday on the TSX Venture Exchange at $1.80.

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Eric Zaunscherb at Canaccord Genuity Corp. initiated coverage of Cobalt 27 Capital Corp. (KBLT-T) with a "speculative buy" rating and $10 target price. The company owns physical cobalt metal and is the only equity investment vehicle offering pure cobalt exposure at this time, he said. The stock closed Friday at $7.90 on the TSX Venture Exchange.

"With the advancement of lithium-ion battery technology, cobalt has become a key component of battery chemistry," the analyst wrote in a research note. "It is vital for stable battery chemistry in positively charged cathodes and makes up 9 per cent to 14 per cent by weight of the material used in battery construction. Cobalt prices have risen 193 per cent since December 2015 on accelerating electric vehicle and grid energy storage applications, but we expect a cobalt demand cumulative average growth rate of 14 per cent and ongoing supply deficits to 2025.

"Cobalt 27 is a hybrid investment vehicle engineered to provide the only pure investment quality cobalt exposure. At the core is its holding of 2,158 tonnes of physical cobalt metal, providing pure exposure to the commodity. Management intends to enhance exposure to potential cobalt price appreciation and provide potential growth via acquisitions of meaningful royalties, streams, and direct property interests. Increased royalty and stream exposure may also support multiple expansion."

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Credit Suisse analyst Jamie Cook trimmed her target price on Deere & Co. (DE-N) after the company missed third-quarter consensus earnings forecasts in part due to disappointing margins in its agriculture business. She kept her "outperform" rating.

"Bottom line, the debate on Deere for fiscal 2018 remains centered on the agriculture equipment demand given the weak commodity backdrop," the analyst wrote in a research note. "We tweak our fiscal year 2017 to 2019 earnings to $6.45 (U.S.), $8.35 and $10.65 (from $6.35, $8.66 and $10.83 respectively) and our target price to $148 (from $151), which assumes 15 times our CY2019 earnings per share estimate. Risks to our thesis include a rapid decline in soft commodity prices."

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BMO Capital Markets Corp. analyst Joe Levesque is staying positive on Seven Generations Energy Ltd. (VII-T) even as the company cut production guidance and he lowered his price target to $27 from $34.

"The stock has historically traded at a discount with investors not giving credit for peer-leading production, production/share, and cash flow/share growth," the analyst wrote in a research note, explaining that the company has been growing so quickly that it has been having troubles with planning and execution inefficiencies.

"The discount widened with the guidance revision as investors applied a planning and execution discount to the stock," he said. "With the adoption of modest growth expectations in 2018 and the stated goal of improving operational performance to create value, we believe the company will achieve the revised production targets. We anticipate the valuation discount will narrow in 2018 with the company successively meeting production expectations. While we are not pounding the table for investors to buy the stock today, we believe the stock will outperform over our 12-18 month target price horizon."

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About the Author
Executive Editor, Report on Business

Scott Adams is the executive editor for Report On Business and Globe Investor. He was previously the managing editor of Globe Investor. He has been a business journalist for more than 10 years, worked as an associate analyst on Bay Street and has been with The Globe and Mail since 2007. More

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