Monday’s analyst upgrades and downgrades

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

Citing valuation concerns following its third consecutive earnings revision and changing video consumption trends, BMO Nesbitt Burns analyst Tim Casey downgraded Cineplex Inc. (CGX-T) to "market perform" from "outperform."

"Given a 32-per-cent decline in the share price over the last six months, investors have clearly discounted a reduced earnings profile for Cineplex," said Mr. Casey. "It started last August as the seasonal box office performance posted its worst performance in more than two decades. As we discuss in our note, we feel it's prudent to remain cautious on yearly box office performance for 2018.

"Our rating downgrade primarily reflects our concerns over relative valuation as well as a reduction in our earnings profile. We have lowered our target multiple to 11 times from 12 times 2019 estimated EBITDA [earnings before interest, taxes, depreciation and amortization]. It is worth noting the average trailing multiple over the last five years for Cineplex exceeds 14 times. The exhibition peer group trades at roughly 8 times. Dave and Buster's (PLAY-Q), a comp for The Rec Room, trades at 9 times."

Mr. Casey lowered his fourth-quarter financial projections for Cineplex based on reported box-office data. He now estimates revenue growth of 2.5 per cent from 9 per cent, which he said its a result of the "relatively disappointing performance" of Star Wars: The Last Jedi and Justice League. His concessions revenue growth fell to 5 per cent from 12 per cent due to lower theatre attendance).

He also dropped his 2018  box office revenue growth assumptions to 1 per cent from 2.5 per cent and concession revenue growth assumption to 2 per cent from 3 per cent based on a slower-than-expected finish to 2017.

"This is the third successive quarter we have lowered our box office and concessions assumptions," said Mr. Casey. "Looking forward, we are assuming 1 per cent box office growth. Some may argue we are too punitive or optimistic given the franchises coming to theatres this year. The release slate is heavy with effects-driven sequels and lots of premium pricing options (3D, IMAX, AVX, etc.). That said, we said the same thing a year ago about the 2017 slate."

Mr. Casey has a Street-low target for Cineplex shares of $37, falling from $44. The consensus target is $42, according to Bloomberg data.

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In reaction to its fourth-quarter guidance reduction, Raymond James analyst Steve Hansen downgraded his rating for Chemtrade Logistics Income Fund (CHE.UN-T).

On Friday, it announced it now expects 4Q17 aggregate EBITDA from its Water Solutions (WSCC) and Sulphur Products & Performance Chemicals (SPPC) divisions to drop 20 per cent year over year. It had previously expect flat results.

"While few details were provided in Friday's release, we suspect the firm's lower guidance stems (in part) from the same operating issues that clipped its 3Q17 results," Mr. Hansen said. "While we're normally willing to look through such events, we're mindful that this incremental 'hit' dovetails closely on the unexpected downtime that surfaced at the firm's Electrochem division last month – not to mention a series of other operational 'hits' over the past 12 months."

With the guidance change, Mr. Hansen dropped his 2017 earnings per unit projection to 37 cents from 48 cents. His 2018 estimate dropped 13 cents to 54 cents.

Accordingly, he lowered the stock to "market perform" from "outperform" and his target by a loonie to $20. The average target on the Street is $21.56.

"While Chemtrade continues to benefit from several macro tailwinds (i.e., U.S. GDP growth, chlor-alkali cycle), in our view, we also believe the firm needs to demonstrate a period of operating consistency in order to garner our positive rating. In this context, we believe it prudent to move to the sideline until greater visibility/consistency emerges. We have lowered our 4Q17 estimates accordingly."

Elsewhere, Desjardins Securities analyst David Newman lowered his target to $21.50 from $23 with a "buy" rating (unchanged).

"Despite near-term headwinds, we advise that investors take a long-term view on the company amid strong demand, especially for caustic soda and HCl," said Mr. Newman. "We are maintaining our Buy rating for several reasons: (1) strong competitive moat (leadership positions, broad geographic footprint and industry-leading cost advantages); (2) robust chloralkali pricing, driven by favourable demand and supply dynamics; and (3) consistent and sustainable distribution of $1.20/unit (unchanged over the past 10 years)."

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Steven Li added CGI Group Inc. (GIB.A-T) to the Raymond James' "Canadian Analyst Current Favourites" list, replacing Sierra Wireless Inc. (SWIR-Q, SW-T).

"CGI shares have underperformed IT Services peers recently on the back of mixed F3Q17 and F4Q17 earnings reports," said Mr. Li. "This has created an opportunity, in our view, as we see F2018 setting up for organic growth upside (some major contracts won under the radar: Glasgow/SSA) and margin upside (optimization underway, tax reform). M&A activity also picked up in F2017 and we expect a similar/better M&A pace in F2018 - M&A would be incremental to our estimates."

Mr. Li has a "outperform" rating and $78 target for CGI shares. The analyst average target is $73.31.

He also has an "outperform" rating for Sierra with a $30 (U.S.) target, which is above the average target of $28.27.

"We are replacing SWIR on our RJL Analyst Current Favourites, as we see a greater immediate potential for share price appreciation with CGI shares," he said.

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CIBC World Markets analyst Jacob Bout upgraded Finning International Inc. (FTT-T) to "outperformer" from "neutral" with a target of $38, up from $31. The analyst average target is $36.39.

"Key assumptions underlying our upgrade include: (1) a better outlook for South America (higher anticipated Chilean copper production, improved Argentinian construction demand, and political tailwinds with elections of Macri and Piñera); (2) modest expected equipment and higher product support demand in Canada, a factor of re-emerging Oil & Gas and construction activity; (3) an uptick in U.K. power and construction largely offsetting the negative impacts from Brexit; and (4) operating leverage (resulting from recent cost-reduction efforts and South American ERP [enterprise resource planning] rollout in 2018) helping drive adjusted EBITDA margins to 10.5 per cent by 2019," said Mr. Bout.

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Onex Corp. (ONEX-T) should be viewed as a core long-term portfolio holding, said BMO Nesbitt Burns analyst Nik Priebe.

He initiated coverage of the stock with an "outperform" rating.

"Onex is among the oldest and most successful private equity firms in the industry," said Mr. Priebe. "Onex went public in 1987, and has generated a gross multiple of invested capital ('MoC') of 2.8 times from its core activities since inception (reflecting a gross 28-per-cent internal rate of return on realized, substantially realized, and publicly traded investments). Onex's private equity platform focuses on investing in companies that offer a market leadership position, attractive free cash flow characteristics and have some controllable elements where an opportunity exists to effect change. Onex attempts to add value to the underlying business in three ways: 1) cost reductions or operational restructurings; 2) add-on acquisitions, and/or; 3) corporate carve-outs.

"An investment in shares of Onex offers a unique opportunity for exposure to private equity strategies in the form of a publicly traded vehicle. An investment in shares of Onex is also unencumbered by liquidity constraints typically associated with privately managed funds. The company is one of the oldest and most successful private equity firms in the industry and has demonstrated a solid long-term track record of investment performance over 30-plus years. Onex also holds a broadly diversified portfolio of operating companies across various industry segments and geographies, which mitigates sector-specific and geographic risks. We expect that a heightened level of interest in alternative strategies will continue to support a premium multiple for shares of Onex."

Mr. Priebe said he sees momentum in the factors that have contributed to its historical outperformance, noting: "Since 2009, Onex shares have increased at a CAGR [compound annual growth rate] of 15.5 per cent (measured in U.S. dollars), outpacing the S&P 500 at 12.1 per cent and S&P/TSX at 4.2 per cent. This outperformance can be attributed to solid NAV [net asset value] per share growth, as well as a meaningful scale up in the asset management business. In the context of an environment that appears highly supportive for fundraising efforts and exit multiples, we expect the company to continue delivering solid NAV growth and growing fee-generating capital."

He set a price target of $105 for Onex shares. The average target is $101.90.

"Onex currently trades at a 12-per-cent premium to net asset value per share, slightly below its three-year and five-year averages of 15 per cent," he said.

"We conclude that valuation has certainly been a factor influencing shareholder returns, but that a premium to NAV is warranted given: i) growing contributions from Onex's asset management business; ii) an improved NAV growth outlook, and; iii) a solid long-term track record of investment performance."

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Calling it a "clear standout within the zinc space," Canaccord Genuity analyst Kevin MacKenzie initiated coverage of Tinka Resources Ltd. (TK-X) with a "speculative buy" rating.

Tinka is a Vancouver-based junior exploration company with a 100-per-cent-owned Ayawilca project in Peru.

"Since the initial discovery of the Ayawilca zinc carbonate replacement deposit in 2012, Tinka has made considerable progress in expanding the project's resource base," said Mr. MacKenzie. "In late 2017, Tinka published an updated inferred resource estimate of 42.7 million tons grading 7.3-per-cent ZnEq [zinc equivalent] (6.0 per cent Zinc), which marked a 127-per-cent increase over the 2016 estimate. The current resource remains open for expansion on multiple fronts, with the recent discovery of Zone 3 (7.9 per cent Zn+Pb over 10.3m) providing the basis for yet another potential material increase to the project's resource base. We note that the Ayawilca project hosts multiple high-grade showings, which presents the potential for the discovery of additional centers of mineralization."

Calling it a "strong" M&A [merger and acquisition] candidate, Mr. MacKenzie set a price target of $1 for Tinka shares, which is a nickel lower than the consensus.

"Given the overall size and grade of the Ayawilca deposit, we view Tinka to be one of the most attractive takeout candidates within the zinc exploration/pre-development space," he said. "In contrast to many of its peer comparables, which are focused on repositioning last cycle projects, Tinka continues to stand out, given its ongoing discovery momentum. We note that the Ayawilca project is well situated within the heart of central Peru's polymetallic belt, with numerous mid-tier to senior company operations within the region. Overall, we view Tinka as potentially an attractive acquisition for such local operators as Nexa, Volcan and Trevali."

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In a research note released Monday, AltaCorp. analysts raised their 2018 forecast for WTI [West Texas Intermediate] crude by 12 per cent to $59 (U.S.) per barrel.

"Our prediction made in spring of last year for WTI to exit 2017 in the $57-$60 per barrel range came to fruition," the firm said. "This was on the back of OPEC and non-OPEC nations agreeing to extend its production cuts through to the end of 2018 and global stockpiles of crude falling in a rapid manner. In addition, we are widening our WCS [Western Canadian select], Canadian Par, and synthetic crude oil differentials to WTI due to a shortage of takeaway capacity from Keystone and Enbridge outages and two new major oil sands projects (Fort Hills and Horizon)."

At the same time, the firm's NYMEX natural gas projection fell by 10 cents to $2.90 (U.S.) per thousand cubic feet, while its AECO (Alberta Energy Company) estimate dropped by 85 cents to $1.75 per thousand cubic feet (mcf).

"We continue to see NYMEX as effectively range bound in the near and medium term," the firm said. "This is followed by a drop in the end of the withdrawal season in 2018 to $2.80/mcf and then a spike to $3/mcf in the 2019 withdrawal season. Without a doubt, the biggest revision to our price deck assumptions is to our forecast of AECO basis. In the near-term, we have chosen to set our basis forecast to be in line with strip ($1.51/mcf forecast 2018e versus strip at $1.54/mcf) for two reasons: 1) Western Canadian storage levels continue to trend near the five-year high (which is partially the result of an increase in U.S. supply), and 2) though the upstream James River debottlenecking changed the system, it did not add egress capacity to escape the basin, which is desperately needed and do not see a physical solution to allow WCSB gas to flow to different markets until late 2019 or beyond.. We believe AECO basis will likely remain challenged in the near term."

With the updated forecasts, the firm's analysts made a trio of rating changes to stocks in their coverage universe.

Analyst Nicholas Lupick downgraded Encana Corp. (ECA-N, ECA-T) to "sector perform" from "outperform" with an unchanged target of $15 (U.S.), which is 12 cents less than the current consensus.

"The rationale for our downgrade is purely the result of the stock's outperformance to date, now up 57 per cent since our upgrade on July 6, versus its Canadian E&P peers (CNQ, CPG, and ARX) which generated a return of 7 per cent.

"Despite the downgrade, we continue to believe that Encana holds material upside for investors who 1) believe in further increases in WTI crude oil pricing beyond our 2018 assumption of $59 U.S. per barrel through its material U.S. Shale portfolio and/or; 2) believe in a strengthening WCSB [Western Canadian Sedimentary Basin] natural gas commodity beyond our 2018 assumption of C$1.75/mcf AECO. It should be highlighted that of the company's 145 mboe/d of growth over the next two years (2019 versus 2017), 90 mboe/d of this (62 per cent) will originate as Montney natural gas. Given our reduced outlook for regional gas pricing, the improvement in our CF figures from higher liquids pricing has been more than offset by our outlook for materially lower Canadian gas prices over the medium term. If WCSB gas pricing improves beyond our outlook, there could be material upside for ECA shareholders."

At the same time, Mr. Lupick upgraded Imperial Oil Ltd. (IMO-T) to "sector perform" from "underperform" and raised his target by a loonie to $43. The average is $40.57.

"The primary reason for our upgrade is the stock's underperformance since downgrading the stock in August, 2017," he said. "Imperial has seen its forward 12-month consensus enterprise value-to-debt-adjusted cash flow multiple contract by 1.5 times versus Suncor (its closes peer). Although the multiple is still expensive versus the peer group, at 10.9 times versus SU at 9.0 times, this valuation spread between these two entities has narrowed dramatically from the 6.6-times multiple premium which IMO had in 1Q16."

Analyst Thomas Matthews upgraded Baytex Energy Corp. (BTE-T, BTE-N) to "outperform" from "sector perform" with a target of $5.75, up from $4.25. The average is $4.26.

"We do not think that anyone will disagree that Baytex is one of the highest beta ways to play a crude price recovery in our coverage universe due to the leverage it currently carries on the balance sheet (2018 year-end debt-to-cash flow 4.0 times) and growth/economics of its Eagle Ford play at Karnes County, TX," he said.

"Overall, although leverage is still high (4.0 times debt-to-cash flow) we believe the discount to our NAV cannot be overlooked. On a valuation standpoint, the company now trades at a discount to its peers (5.3 times 2018 enterprise value-to-debt-adjusted cash flow versus 7.2 times average) and with the leverage profile becoming stronger with our new price deck (a decrease in D/CF of 1.2 times), we believe the stock will outperform in the near term."

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Canaccord Genuity analyst Tony Lesiak hiked his target for Wheaton Precious Metals Corp. (WPM-T, WPM-N) in reaction to its restructured steaming deal on the San Dimas mine in Mexico.

On Friday, First Majestic Silver Corp. (FR-T; AG-N) announced a deal to buy Primero Mining Corp. (P-T). Concurrent with the deal, First Majestic has entered into agreements with Wheaton whereby, the current silver streaming interest at Primero's San Dimas mine held by WPM will be terminated and First Majestic and WPM will enter into a new stream arrangement based on 25 per cent of the gold equivalent production at San Dimas.

"We view the deal as positive for WPM as it allows for the continued streaming from San Dimas and avoids a potential lengthy and distracting legal and bankruptcy case (Primero)," said Mr. Lesiak. "We also expect an improved operating and social focus and increased resource conversion potential (higher margins to the producer and increase in the mining concession). We have revised our model to reflect the proposed First Majestic purchase agreement and have increased our San Dimas mine life assumption from eight to 12 years.

"The key negative aspects of the transaction to WPM include a materially (40 per cent) lower than anticipated restructured stream size (now averages 40 to 45,000 ounces gold equivalent in first five years according to WPM) and lower margin (55 per cent versus 63 per cent ) based on a $600/ oz production payment base versus our forecast restructured stream. In return for these concessions, WPM did receive $151-million in FR paper subject to a six-month hold. Overall, the revised San Dimas purchase agreement and share deal is largely neutral to our valuation on the base case."

Mr. Lesiak raised his 2018 and 2019 earnings per share projections for Wheaton to 60 cents (U.S.) and 67 cents, respectively, from 46 cents and 53 cents.

Keeping a "buy" rating for its stock, his target jumped to $38 from $34. The average target is $33.35.

"In the past 12 months WPM has underperformed its peers by 13 per cent and Franco-Nevada (its most comparable, diversified peer) by 21 per cent," he said. "This was primarily driven by issues with San Dimas and the overhanging CRA [Canadian Revenue Agency] decision. With the San Dimas resolution we see WPM as one step closer to a material re-rating. We believe there is a very high probability of the CRA situation (based on the merits of WPM's position) being resolved favourably to WPM, with the window for a potential pre-trial settlement approaching. We no longer believe it is suitable to assume the worst-case scenario in our valuation. Our model now (still conservatively) assumes $2.72 per share (50 per cent of the full potential impact) in potential back-taxes, penalties and the DCF [discounted cash flow] impact of future potential taxation on WPM's foreign income. We expect WPM to post a strong 4Q17 with rising sales (includes inventory release) with our EPS estimates exceeding consensus."

Meanwhile, colleague Rahul Paul downgraded Primero Mining Corp. (P-T) to "hold" from "speculative buy" and dropped his target by a dime to 30 cents. The average is 16 cents.

Cormark Securities analyst Richard Gray lowered Primero Mining Corp. to "tender" from "market perform" with a 28-cent target, up from 10 cents.

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BMO Nesbitt Burns analyst Andrew Breichmanas upgraded Centerra Gold Inc. (CG-T) to "outperform" from "market perform" and raised his target to $10 from $9.50. The average is $9.71.

"Over the last year the company has established a more constructive partnership with stakeholders at Kumtor, received necessary permits to advance the Öksüt project, further shifted its asset base to lower-risk jurisdictions, and upgraded its project pipeline," said Mr. Breichmanas. "Mount Milligan remains a near-term concern, but we expect water shortages to be addressed and believe the issues have overshadowed recent achievements that no longer appear to be reflected in the share price."

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In other analyst actions:

Touting its attractive growth and valuation, Credit Suisse analyst Anita Soni upgraded Goldcorp Inc. (G-T, GG-N) to "outperform" from "neutral" and raised her target to $19 from $15.50. The average target on the Street is $21.72.

TD Securities analyst Mario Mendonca upgraded Sun Life Financial Inc. (SLF-T) to "buy" from "hold" with a target of $60, rising from $54. The average target is $55.

Macquarie analyst Michael Siperico initiated coverage of Osisko Mining Inc. (OSK-T) with an "outperform" rating and $6.50 target. The average is $5.80.

Eight Capital analyst Adam Gill upgraded Raging River Exploration Inc. (RRX-T) to "buy" from "neutral" and increased his target to $13.15 from $10.50. The average is $10.84.

Sherritt International Corp. (S-T) was upgraded to "outperform" from "sector perform" with a $2 target, which is 45 cents higher than the consensus, by National Bank analyst Don DeMarco.