Monday’s analyst upgrades and downgrades

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

The recent decline in share price for Rogers Communications Inc. (RCI.B-T, RCI-N) has been "too extreme" and has resulted in an "appealing" valuation, according to Desjardins Securities analyst Maher Yaghi.

"Only three months ago, the stock was trading at the highest multiple among its large-cap peers, but now it is trading at the lowest multiple," he said. "However, we continue to expect the company to post one of the sector's highest earnings growth rates in 2018."

Mr. Yaghi reacted to the recent dip by raising his rating for Rogers stock to "buy" from "hold."

"Based on recent operational performance, Rogers has outperformed other wireless incumbents in terms of sub loading, while margins remain among the highest in the sector," he said. "In addition, cable segment EBITDA growth remains small yet positive, even amid continued pressure on cable TV subs. Overall, consolidated EBITDA growth has averaged a strong 5.4 per cent year-to-date. For 2018, consensus estimates continue to show Rogers with the fastest EBITDA growth rate among large-cap peers.

"So why has the stock declined this much? We believe the market is questioning the impact of Freedom Mobile on Rogers' operations. While longer-term, Freedom could pressure industry ARPU [average revenue per user], we do not expect this to begin until sometime in 2019 given that for now Shaw's network is still at a disadvantage. While Shaw is seeing some improved subscriber trends, we do not believe Rogers' churn rate to Shaw has increased materially."

Mr. Yaghi believes the Street's expectation of consolidated EBITDA growth of 5.6 per cent in 2018, which would surpass peers, is not currently reflected in its valuation.

He added: "That being said, RCI's stock price has been under pressure since mid-November. While it is true that the whole sector has also declined significantly, RCI has shed 10.1 per cent since its Nov. 21 peak, compared with a weighted average decline of 5.2 per cent for the sector. Consequently, RCI is now trading at a discount based on fiscal 2018 enterprise value-to-EBITDA (RCI 7.8 times versus Canadian average of 8.0 times), which is unusual compared with the last few years. In addition, this has occurred at a time when operational execution is strong, even when compared with peers. Moreover, we note that RCI currently has the lowest ratio of EV/EBITDA to EBITDA growth in the industry (1.4 times vs industry 1.8 times), indicating that future EBITDA is cheap. We now expect upside potential of 18 per cent (including dividends) to our $72 target price, which is more than enough to justify a Buy rating, in our view, given the risk level."

Despite lowering his earnings per share projections for 2017 and 2018 to $3.50 and $3.94, respectively, from $3.52 and $3.97, Mr. Yaghi raised his 12-month target price for Rogers shares to $72 from $67.50. The analyst average price target is currently $71.00, according to Bloomberg data.

"Our view is that the shares are attractive at these levels, as they trade at a discount to peers despite the company's current and expected above-average EBITDA growth versus large-cap Canadian telcos," he said.

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Fundamentals in the Canadian real estate sector remain solid and are "generally improving," according to Raymond James analysts Ken Avalos and Johann Rodrigues.

"After delivering a 10-per-cent total return (70 basis points above the TSX Composite Index) in 2017, we expect Canadian REITs to deliver a 5 to 10-per-cent total return in 2018 as a result of 4-per-cent funds from operations (FFO) growth, distribution income and flat multiples, likely driven in the first four to six months of the year," they said in a research note released Monday.

"This decade, real estate has dramatically outperformed in the first four months of the year, averaging a 9-per-cent return versus only 2 per cent in the back eight months. In fact, 2010 was the only year the latter outperformed. We think this seasonal trade will likely be in effect again in 2018. While we think real estate equities can have a decent 1Q18, and even possibly first half to the year, as a result of valuations and RRSP/TFSA fund flows, the 12 month outlook is decidedly less attractive, in our opinion. Overall, we expect 2018 to fall short of 2017."

On the sector, in general, they said: ""Residential, self-storage and senior-care are no doubt the strongest currently. Industrial and office remain healthy in most markets," the analyst said in a research note released Monday. "Retail is the obvious weak spot, though the public REIT/REOCs have vastly outperformed the broader retail market. All this excludes Alberta and Saskatchewan which, though still soft, look to have bottomed in most asset classes. The negative is long-term rates, which popped up to close out the year, and external growth, which should be difficult to come by given pricing."

Mr. Avalos raised his rating for InterRent Real Estate Investment Trust (IIP.UN-T) to "strong buy" from "outperform." He upgraded Pure Industrial Real Estate Trust (AAR.UN-T) and SmartCentres Real Estate Investment Trust (SRU.UN-T) to "outperform" from "market perform."

At the same time, he lowered H&R Real Estate Investment Trust (HR.UN-T) to "market perform" from "outperform," while Mr. Rodrigues dropped Timbercreek Financial Corp. (TF-T) to "market perform" from "outperform."

The analyst said: "Our large-cap best picks are First Capital Realty, RioCan REIT and SmartCentres REIT. In the mid/small-cap square, we recommend InterRent REIT, Pure Industrial REIT, StorageVault Canada and Tricon Capital Group."

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Shares of Hudbay Minerals Inc. (HBM-T) are currently fully valued, said Canaccord Genuity analyst Dalton Baretto.

He downgraded his rating for the Toronto-based company to "hold" from "buy" in his 2018 outlook for base and precious metals producers, which was released late Sunday.

"We expect 2018 to be a year of clarity for HBM, particularly in H1 when we expect updates on all three assets – permitting at Rosemont, the grade reconciliation study at Constancia, and the optimization study at Manitoba," said Mr. Baretto. "However, we believe that positive outcomes for these are already largely priced into HBM shares, and we are hard pressed to understand where the next leg up for the share price could be other than further increases in the commodity price or multiple expansion (HBM already trades at a premium to our NAV). We note that a resource update at Lalor mid-2018 could be a modest positive for the shares. Given what we view as a relatively full valuation, the significant catalysts in 2018, and the anticipated volatility in both copper and zinc prices, we expect HBM's share price to be very volatile in 2018."

Mr. Baretto raised his target for Hudbay shares to $11.50 from $11. The average is $12.82.

In the note, he said he sees the world's economy moving into the "middle phase of the late-stage cycle" in 2018.

"The monetary policy tightening by many DM central banks implies that the early phase of this stage is over, while the ongoing monetary easing among EM central banks implies that inflation is not high enough to suggest we are at the tail end of this stage," he said. "Confirmation of a transition to the late phase should occur when EM central banks stop cutting rates on the back of rising inflation (likely a 2019 story)."

"After the industrial commodity price surges of 2016 and 2017, we believe 2018 will be a year of pause and heightened uncertainty. We expect demand drivers in China to moderate, as we expect the focus on corporate deleveraging to increase, and real estate completions and Fixed Asset Investment to slow. Offsetting this to some extent, we expect consumption from the transportation and consumer sectors to improve. Outside of China, we expect demand to continue to improve on the back of ongoing global growth, particularly in EMs where central bank policies remain accommodative. We expect higher demand uncertainty in 2018, as concerns increase around the stage of the investment-driven expansion, the Chinese property market, potential deleveraging efforts in China and over-tightening by the US Federal Reserve. On the supply side, we expect a repeat of 2017 in terms of potential supply-side shocks, with numerous wage negotiations in Chile and Peru (copper), the potential for weather-related disruptions in H1/18 (coking coal) and ongoing (but easing) tightness in supply (zinc and copper).

Mr. Baretto said 2017's surge in industrial commodity prices placed the focus on growth in the eyes of both investors and corporations. He sees M&A as a key factor in achieving growth.

"As such, we favour AZ and TRQ over 2018 as prime acquisition candidates," he said. "Considering more fundamental factors, however, we prefer TECK for its combination of commodity diversity, significant forecast free cash flow generation over 2018, and very reasonable absolute and relative valuation. In the small cap space, we prefer CS as we expect a better operating year versus 2017, along with an un-hedged sales book and a reasonable valuation relative to its peers. In the silver producer space, we continue to like PAAS for its size, asset quality, base metals exposure and pristine balance sheet."

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In reaction to a 14-per-cent jump in share price following the release of its third-quarter financial results in mid-November, Industrial Alliance Securities analyst Elias Foscolos downgraded Gibson Energy Inc. (GEI-T) to "buy" from "strong buy."

"Although the company has a robust pipeline of organic growth projects and a strong dividend yield of 7 per cent, the increase in stock price since mid-November and the lack of news on the sale of the company's U.S. Environmental Services business lead us to conclude that there is no further upside in our Street-high $21.00 target," said Mr. Foscolos. "With this strong price movement behind us, GEI's stock now represents a potential 19-per-cent one-year total return precipitating a downgrade in our recommendation."

Mr. Foscolos maintained his $21 target. The average is $19.

"Investors should still find GEI's 7-per-cent dividend yield attractive, providing a steady income flow while Gibson continues to streamline operations," he said. "We anticipate no reduction in GEI's dividend."

"Since our last full note post the Q3/17 results, GEI's stock price has materially increased. Furthermore, the company's share price is now trading only 7 per cent below its 52-week high. Finally, there have been no updates on the progress of the disposition of its U.S. Environmental Services business although one could be provided at its investor day on Jan. 30."

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In a separate note on Monday, Mr. Foscolos raised his rating for Keyera Corp. (KEY-T), citing its "suppressed" stock price.

"We believe this recent downward pressure is not an accurate portrayal of KEY's enhanced financial strength, its large organic near-term growth portfolio, and conservative payout ratio," the analyst said, moving Keyera to "strong buy" from "buy."

"In June 2017, Keyera's stock price reached a high of $42.57. Since then, the Company's stock has descended. Post reporting its latest financial results in November, KEY's stock price has drifted downwards. Looking at this on a 52-week trailing basis, KEY is trading only 6 per cent above its 52-week low."

Mr. Foscolos emphasized the Calgary-based midstream energy company's "impressive" near-term organic growth profile, noting: "We believe it is important to reiterate the large near-term organic growth profile ($1.7-billion) KEY has in place for the next three years. Keyera announced its 2018 capex budget of $800-900M in December 2017. A few of Keyera's most significant projects include: (1) Wapiti Phase II; (2) Baseline Terminal joint venture; (3) Two Simonette expansion projects; and (4) South Grand Rapids Pipeline joint venture. Additionally, Keyera has the potential for further upside if it sanctions its Wapiti Phase II and Simonette Phase II projects."

"KEY generates a significant portion of its free cash flow from long-term take-or-pay agreements, providing it with financial strength and stability. With the recent equity financing, it has further de-risked its already conservative capital structure. Finally, the Company's $1.68 per share (4.7 per cent) annualized dividend reflects a 2018 payout ratio at 64 per cent leaving room for a dividend increase (KEY has grown at an annual compounded rate of 8 per cent since 2003)."

He kept a target price of $42 for Keyera shares. The average is $44.25.

"Due to the persistent weakness in Keyera's stock we have elected to increase our rating to Strong Buy," he said. "The stock is currently trading at a 15-per-cent discount to its 52-week high and is 6 per cent above its 52-week low. We do not believe Keyera's current stock price is a fair representation of the Company's financial strength, its large growth portfolio, conservative capital structure, and solid dividend which has upside potential to be increased. Currently, we are maintaining our $42.00 target which translates into a potential 22-per-cent one-year return."

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Scotiabank analyst Trevor Turnbull expects Pan American Silver Corp.'s (PAAS-Q)  fourth-quarter financial results to be "its best quarter to date" with "record setting" guidance for 2018 and 2019.

Accordingly, he sees a buying opportunity ahead of the Feb. 20 release of the results and upgraded his rating for its stock to "sector outperform" from "sector perform."

He kept a target of $21 (U.S.). The average is $20.54.

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Though he acknowledged elevated risks due to an ongoing labour dispute at its Mexican mine, Desjardins Securities analyst Josh Wolfson upgraded Torex Gold Resources Inc. (TXG-T) to "buy" from "hold" based on a "highly attractive" valuation.

"Following revised operating expectations and an employee blockade, TXG shares have materially underperformed peers (three-month down 48 per cent, TTGD down 1 per cent), returning to prices not seen since the company's initial acquisition of the Morelos Gold property," said Mr. Wolfson. "While TXG's interim outlook is highly uncertain, in our view the share price does not appropriately reflect the company's long-term outlook, and we now view TXG's risk/ reward as asymmetric."

"Reflecting outstanding uncertainties, our forecasts now include $50-million (U.S.) equity and a conservative ramp-up (pre-existing grinding/recovery limitations, delayed SART plant, potential poststrike employee turnover). Nonetheless, we calculate a TXG P/NAV [price to net asset value] at spot gold of 0.70 times (peer average 1.08 times), well below its 1.32-times one-year average. Furthermore, in the context of initial mine acquisition and capital totalling $1.2-billion, in addition to construction and the discovery of Media Luna and the sub-sill, TXG's current EV of $1.0-billion represents an anomaly."

He lowered his target to $14.50 from $16. The average is $20.15.

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The consumer backlash to Electronic Arts Inc.'s (EA-N) in-game monetization strategy for its new Star Wars release, which drove its shares lower, was "overdone," according to BMO Nesbitt Burns analyst Gerrick Johnson.

Now seeing a buying opportunity for what he deems a "solid long-term story," Mr. Johnson upgraded EA shares to "outperform" from "market perform."

"We prefer to focus on the stability of the company's sports portfolio and its sensible eSports strategy rather than missteps in Star Wars," he said.

"The transition of physical software sales to digital downloads offers higher margins and the opportunity for incremental add-on sales and multi-player online services. What we think the market values the most is the consistency and stability of cash flows generated by this transformation. And we don't think any other genre has proven to be more stable than EA's solid franchise of sports titles and growing Ultimate Team monetization strategy. We believe these games are outperforming our original expectations, and we are increasing our EPS estimate for FY2019 to $5.20 from $4.80 and introducing a FY2020 EPS estimate of $5.50."

His target for the stock jumped to $130 (U.S.) from $97. The average is $128.43.

"In the near term, underperformance of Star Wars Battlefront 2 unit sales and confusion around the company's ongoing non-sports MTX/DLC strategy could continue to weigh on the stock, and we are lowering our FY2018 EPS estimate to $3.95 from $4.10 as a result. But we now view these issues as short term and transitory (besides, in-game transactions from non-sports games like Battlefront represent only about 5 per cent of total sales). We would use any potential weakness on 3Q reporting (January 30) as an additional buying opportunity.

"From a seasonal trading standpoint, historically the holiday and post-holiday periods are often a time of weakness for video game stocks. After the company reports 3Q results in late January, we think investor focus will again shift toward the longer-term opportunities and the stock can continue its march higher."

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The combination of the legacy businesses of Agrium Inc. and Potash Corp. of Saskatchewan Inc. are "highly complementary," said RBC Dominion Securities analyst Andrew Wong, who predicted "significant" opportunity for both synergies and strategic benefits.

He initiated coverage of Nutrien Ltd. (NTR-N, NTR-T), the company created by the merger of the fertilizer giants, with an "outperform" rating and $60 (U.S.) target.

"We believe Nutrien is an attractive investment offering strong synergy potential, significant capital re-allocation opportunities, robust FCF generation, and an asymmetric return profile," said Mr. Wong. "With the long-anticipated completion of the merger, we expect integration efforts to eagerly move into action, while management can more effectively tell the compelling story."

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In other analyst actions:

TD Securities analyst Cherilyn Radbourne downgraded Methanex Corp. (MEOH-Q, MX-T) to "hold" from "buy" after its recent rally, which was driven by strong 2018 methanol prices. Noting price volatility in recent years and a lack of visibility pas the first half of 2018, she maintained a $66 (U.S.) target. The average target is $62.

CIBC World Markets analyst Robert Bek downgraded Cogeco Inc. (CGO-T) to "neutral" from "restricted" with a target of $90, which is 50 cents below the consensus on the Street.

"Prior to going on restriction we had an Outperformer rating on CGO shares, so we have downgraded our rating," said Mr. Bek. "Own downgrade is solely a valuation call owing to the sharp appreciation in CGO shares (up 81 per cent since November 2016). While we continue to see upside in the underlying cable assets, we recommend that investors play that directly through Cogeco Communications (CCA) shares at this time."

Enghouse Systems Ltd. (ENGH-T) was downgraded to "sector perform" from "sector outperform" by Paul Steep at Scotiabank. Mr. Steep's target for the stock rose by a loonie to $62, which is below the average of $64.50.

TD Securities analyst Sean Steuart upgraded Canfor Pulp Products Inc. (CFX-T) to "buy" from "hold" with a target of $16, up from $14.50. The average is $15.38.

Cormark Securities Inc. analyst Richard Gray upgraded Goldcorp Inc. (G-T, GG-N) to "buy" from "market perform" with a $24 target, rising from $20. The average is $21.53.

J.P. Morgan analyst Ann Duignan upgraded Caterpillar Inc. (CAT-N) to "overweight" from "neutral" with a target of $200 (U.S.), up from $144. The average is $159.73.