Thursday's analyst upgrades and downgrades

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

A revamped SNC-Lavalin Group Inc. (SNC-T) is well-positioned for growth, according to CIBC World Markets analyst Jacob Bout.

Upon assuming coverage of the Montreal-based engineering and construction company, Mr. Bout upgraded the stock to "sector outperformer" from "sector performer."

"Since the crippling corruption crisis in 2012, SNC has charted a course towards a culture of zero tolerance of unethical behaviour," he said. "In the past four years, there has been complete changeover of senior management and the board. As well, SNC has pioneered new systems to prevent, detect and respond to unethical related behaviour. That said, headline risk remains – specifically the resolution of Canadian debarment from future Canadian federal government projects, outstanding class action lawsuits (but as SNC share price recovers, it reduces the potential settlement) and ban on any World Bank funded projects (World Bank business was less than 1 per cent of total revenues at time of ban in April 2013)."

Mr. Bout called the company's engineering and construction platform "solid" with the expectation of margin expansion from its current EBITDA margin of 5.6 per cent to 7 per cent in 2017. He also emphasized its 16.77-per-cent stake in 407 International Inc., calling it a "cash cow."

"The new management team led by Neil Bruce is pursuing a 'performance driven' mindset, which is evident to us given the new initiatives management is taking to streamline its business and improve operational efficiencies," said Mr. Bout, who said the company's balance sheet is "pristine" with a focus on growth.

He added: "With significant progress made on cost-cutting initiatives, a strong balance sheet and good financial performance in four successive quarters, we believe that SNC is considering M&A opportunities, specifically in companies exposed to Canadian and U.S. infrastructure or power. It is unlikely that SNC will make a bid in the resources sector, as it already has 50-per-cent sales exposure to oil & gas and mining & metallurgy (post Kentz acquisition) and is pursuing a diversified strategy. SNC will likely find it difficult to grow organically in the U.S. (SNC only has some oil & gas/thermal capabilities in the U.S.), but could enter the market either via an acquisition or through partnerships with local E&C firms. The Water market (currently making up a very small proportion of company's business) has become attractive for E&C firms (Stantec recently acquired MWH) as companies look to get a share of the large expected public spending (WRDA bill, California water bond)."

He raised CIBC's target price for the stock to $63 from $55. The analyst average price target is currently $62.94, according to Bloomberg.

"SNC is a great Canadian-based E+C company that had its reputation sullied by a small group of individuals that are no longer with the firm," said Mr. Bout. "We believe that systems have been put in place to identify and prevent further corruption issues. While there is some headline risk, we believe the majority of this overhang is behind the company."

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Credit Suisse analyst Kevin Choquette upgraded Great-West Lifeco Inc. (GWO-T), citing a "significant" share price correction and "more attractive" valuation.

Moving his rating to "neutral" from "underperform," Mr. Choquette noted a 15-per-cent decline in price in the last four months "with Brexit risk now fully reflected our view."

"[Price to book value] has declined to 1 standard deviation below the mean with relative [price-to-earnings] multiple now more in the Neutral range versus Overvalued," he said.

He raised his target by a loonie to $35. Consensus is $34, according to Thomson Reuters.

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Klondex Mines Ltd. (KDX-T) is building an "attractive pipeline" following a pair of important acquisitions, according to Canaacord Genuity analyst Rahul Paul.

However, despite raising his target price for the stock, Mr. Paul downgraded his rating to "hold" from "buy" to reflect a limited return to that target following recent share price appreciation.

"The operation showed well during a recent site visit hosted by Klondex following a positive production decision," he said. "We see considerable valuation upside (we value True North at $246-million U.S.), beyond the modest purchase price ($32-million) based on a DCF [discounted cash flow] profile which incorporates re-processing of historic tailings, underground production from the Cohiba, 710/711 zones and potential reserve/resource growth primarily from 710/711. Our modelled profile assumes average annual production of 77 koz at AISC [all-in sustaining costs] of $772 (U.S.) per ounce over an 8.5-year mine life (we assume a ramp-up to 1,000 tpd by early 2019)."

Mr. Paul said the Vancouver-based company's recent acquisition of the membership interests of Carlin Resources LLC, which owns the Hollister mine, the Esmeralda mine and ore milling complex brings it a "high-grade" asset with both near-term production potential and "significant" synergies in Nevada.

"Hollister represents a high-grade and fully permitted underground operation with existing infrastructure already in place," he said. "Aside from the near-term incremental high-grade feed to the Midas mill (30 kilometres away), the asset provides several additional synergies (estimated at $18-$20-million) by consolidating Klondex' Nevada operations. Klondex' management also has extensive technical expertise and knowledge of the asset having previously worked at Hollister. We see considerable valuation upside (we value Hollister at $145-million), above the $80-million (plus shares) purchase price based on a DCF profile which incorporates historic reserves and our estimates on operating parameters. Our modelled profile assumes average annual production of 69 koz AuEq at AISC of $849 (U.S.)/oz over a 12- year mine life (we assume a ramp-up to 250 tpd by early 2019)."

After lowering his 2016 earnings per share projection to 15 cents (U.S.) from 19 cents, he raised his 2017 and 2018 estimates to 48 cents and 55 cents, respectively, from 29 cents and 35 cents. He increased his cash flow per share forecasts for all three years to 39 cents, 57 cents and 91 cents from 32 cents, 46 cents and 35 cents.

He raised his target price for the stock to $8 from $6.75 to reflect the incorporation of the True North operation (87 cents per share to its net asset value) and Hollister operation (97 cents). The analyst consensus price target is $6.82.

"With Rice Lake (23 per cent of operating net asset value) and Hollister (13 per cent of operating NAV) essentially in ramp-up mode, we believe that execution remains key as we recognize the potential for ramp-up challenges that could adversely impact the share price," he said. "Since the beginning of July, Klondex shares are up 61 per cent (outperforming the S&P/TSX Global Gold Index by 66 per cent) and currently trade at 1.07x P/ NAV, the highest multiple among covered mid-cap producers (26-per-cent premium to the midcap producer average). While a premium valuation is warranted based on the high-grade assets and strong FCF [free cash flow] margins, we believe the shares may be close to fair value in the context of our forward curve-based price deck."

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In a research report on precious metals and minerals, Canaccord Genuity analyst Rahul Paul initiated coverage of Sandstorm Gold Ltd. (SSL-T) with a "hold" rating, which is a downgraded from an earlier "buy" recommendation based on recent share price appreciation and relative performance. He set a target price of $9 for the stock, versus the consensus of $8.16.

On the sector, analyst Peter Bures said: "In a world starved for yield, any return that exceeds the ever-declining (i.e. LIBOR-based) cost of debt is highly prized. The three senior royalty/stream companies (Franco-Nevada, Royal Gold, and Silver Wheaton) have been capitalizing on the fixed income mispricing very actively over the last 12 months adding a total of $2.8-billion in stream purchases to their collective stables. However, two concerns have recently cropped up: 1) asset scarcity – and thus price – in the land of streams, and 2) willingness to sell streams in a rising metal/equity price environment (i.e. easier access to capital). We believe both fears are overblown – recent stream transactions continue to point to base metal producers' willingness to shore up their balance sheets with stream sales as opposed to equity issuance."

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Chemtrade Logistics Income Fund's (CHE.UN-T) offer for Canexus Corp. (CUS-T) is a "solid" opportunity, according to Raymond James analyst Steve Hansen, who emphasized bidding "needs to be enticing."

On Wednesday, Chemtrade announced it had advanced a $1.45 per share offer to acquire Canexus on Sept. 6, which would represent an 18-per-cent premium on Canexus' closing price of a day earlier ($1.23). The offer was "summarily rejected" and Canexus later announced plans for a $75-million offer of senior unsecured notes.

In response to the news, Mr. Hansen raised his targets for both, and, based on those changes, upgraded both companies to "outperform" from "market perform."

"As suggested, several factors point to a strong potential fit between these two organizations, including: 1) CUS offers the ability to significantly bolster CHE's position in North American sodium chlorate, a highly consolidated, mature-end market (i.e., attractive), transforming it from a small niche (1 plant) player today into a top-tier player (4 plants, approximately 25-per-cent share), all while simultaneously cementing its position at the low-end of the cost curve thanks to CUS' flagship Brandon facility," said Mr. Hansen. "Importantly, we see little regulatory risk to this transaction (unlike the failed SPB bid), largely due to CHE's modest existing market position; and, 2) second, we also like the stable, consistent cash flow associated with CUS' Brazilian operation/segment (chlorate & chlor-alkali), a business notably underpinned by a long-term, fixed-margin (U.S. dollar) contract with Fibria — attributes that we feel fit very well with CHE's culturally entrenched risk-mitigation philosophy."

He added: "While the tone of CHE's release suggests a degree of bewilderment by CUS' unwillingness to negotiate, and subsequent high-yield offering, we're not entirely surprised. After all, the company just emerged from a lengthy, failed merger process (with Superior Plus)— one that no doubt left a bitter after-taste and reluctance to jump right back into another marriage process. At the same time, while we sincerely appreciate CHE's opportunistic/frugal tendencies — a discipline that's served them very well over the years—we can also appreciate how an 18% premium during a trough earnings year is unlikely to garner much excitement from the CUS team/Board, particularly in light of the recent trauma/baggage noted. Fortunately, given the solid accretion opportunity we envision for CHE, we still see room to move its bid up to a more 'enticing' level, and therefore a good chance a deal will ultimately be struck (time will tell of course)."

Mr. Hansen raised his target for Chemtrade to $20 from $19. Consensus is $19.08.

His target for Canexus rose to $1.65 from $1.50. Consensus is $1.48.

"While perceived 'value' is always a moving target, we're fortunate to have some helpful reference points to determine what type of bid might be 'enticing' enough for CUS to willingly negotiate and strike a deal that is acceptable to both parties." he said. "First, we're mindful that the CUS Board recently accepted an all-stock bid (from SPB) valued at $1.70 per share—one notably steeped with significant regulatory risk. That said, we also know the company has since demonstrated strong operational strides and posted strong quarterly cash flow (despite a tough macro tape). Conversely, CHE brings some attractive soft features to the table, including the get paid swiftly (all-cash) with little/no perceived regulatory risk. Based upon these considerations, we feel that $1.60–$1.75/share represents an acceptable outcome for both sides, a range that represents a 30-per-cent– 42-per-cent premium over CUS' unaffected stock price ('enticing' in our view), and one that still preserves a healthy accretion level for CHE."

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Industrial Alliance Insurance and Financial Services Inc. (IAG-T) is "getting the recognition it deserves," said CIBC World Markets analyst Paul Holden.

Though he said the possibility of "further" multiple expansion may be limited based on that attention, he raised his target price for the Quebec-based company upon assuming coverage of the stock.

"IAG is easily the best-performing life insurer over the last year (up 17 per cent)," said Mr. Holden. "It has posted the best results to start 2016 with core EPS up 14 per cent year over year and presented a well-communicated growth plan at its investor day in June. Both 2016 results and the plan have been effective at reducing interest rate concerns for what has traditionally been viewed as the most rate-sensitive name.

"As a result, the valuation discount for the stock has significantly narrowed. IAG is trading at 1.2x book value, close to its post-crisis average and the average for its Canadian peers."

Mr. Holden cited four factors for IA's success: growth in individual insurance; achieving target improvements "in strain"; improvement in wealth growth rate; delivering on the expectations for its Group Services division and the avoidance of credit pitfalls.

"Management is targeting annual EPS growth of 10 per cent through 2019, which provides an easy benchmark for us to gauge financial performance," the analyst said. "Core EPS guidance for 2016 is $4.20-$4.60 and the growth plan is deliver another $1.50/share in earnings by end of 2019. Core EPS was introduced in 2012 and through the end of 2015, EPS grew at a CAGR [compound annual growth rate] of 12 per cent. While this is too limited a track record to make any strong conclusions, it does support the argument that a 10-per-cent earnings growth objective looks reasonable. It also does not look unreasonable in the context of what its life insurance peers have achieved and are targeting."

With a "sector performer" rating, Mr. Holden's target is $51, up from $46. Consensus is $47.90.

"Sales have been mixed in recent quarters, however, solid progress in capital-light businesses and a clearly articulated growth strategy, supported by a significant amount of deployable cash to fund acquisitions, support our favourable outlook for the shares," the analyst said. "This company is also the one lifeco in our universe that should benefit the most from rising rates."

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Raymond James analyst Phil Russo resumed coverage of Integra Gold Corp. (ICG-X) with an "outperform" rating.

"To date Integra has been successful in defining a high grade resource with an initial economic mine plan, in our view, highlighted by the updated PEA released in January 2015 and the most recent resource estimate released in November 2015," said Mr. Russo. "Currently Lamaque [in Val-d'Or, Que.] is defined as 1.7 Moz at 9.1 g/t (at a 5 g/t cut-off). We believe the project is in the midst of a positive transformation in terms of definition of the deposit, as well as scope, and encourage investors to build positions ahead of upcoming news flow, which in our view, could begin to unlock the further asset optionality on offer and not yet reflected in Integra shares."

He set a target of $1.10 for the stock. Consensus is $1.18.

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In other analyst actions:

In reaction to a recent rally in met coal prices, Teck Resources Ltd. (TCK-N, TCK.B-T) was raised to "equal-weight" from "underweight" by Morgan Stanley analyst Evan Kurtz, who said it may take 6-12 months for prices to start cooling again. He raised his target to $18 (U.S.) from $7. The average is $15.49.

Sherritt International Corp. (S-T) was rated new "neutral" by Dundee analyst Joseph Gallucci with a 90-cent target. The average is $1.10.