Skip to main content

The Globe and Mail

Thursday's analyst upgrades and downgrades

Detour Gold Storage Dome at Detour Lake mine.

Detour Gold

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

The momentum has slowed for Aecon Group Inc. (ARE-T) as exhibited by "lacklustre" third-quarter results, said Raymond James analyst Frederic Bastien.

He downgraded his rating for the Toronto-based construction and infrastructure development company to "market perform" from "outperform."

Story continues below advertisement

On Wednesday, Aecon reported adjusted quarterly earnings before interest, taxes, depreciation and amortization (EBITDA) of $60-million, "well below" Mr. Bastien's projection (and the consensus of $75-million). He noted its top line was 1 per cent above his forecast, thus "leaving margins as the culprit behind the earnings miss."

"All three construction segments fell short of our profitability targets, effecting an EBITDA margin of 7.2 per cent that missed our overall estimate by 190 basis points," he said.

Adjusted earnings per share of 42 cents also missed Mr. Bastien's estimate (52 cents) and the consensus projection (57 cents).

"Mining continued its solid run, beating our EBITDA estimate to the tune of $4-million," the analyst said. "The segment is still benefitting from strong volume of site work at the K+S Legacy potash mine, which offset lower year-over-year contract mining revenues (due to the Alberta wildfire disruptions). Weaker performance from Infrastructure was the major offender during the quarter, as delays in the roll out of projects and ongoing competitive pressures pushed EBITDA $12-million off our forecast. Energy met our top-line forecast, but fell short on the margin front. This reflected a revenue mix shifting away from highly profitable pipeline work to comparatively lower-margin utility activities."

On the basis of the results, Mr. Bastien lowered his 2016 and 2017 EPS projections to 70 cents and 80 cents, respectively, from 94 cents and $1.10.

"Although Aecon's backlog stands at a healthy $4.6-billion, the portion to be executed over the next 24 months is off 12 per cent versus where it was at the same time last year," he said. "Moreover, with both energy and mining markets suffering from near-term headwinds, and the oft talked about increased government infrastructure spending not set to be deployed until 2H17 at the earliest, we are lacking near-term visibility on new contract win. This, coupled with the strong set of comps Aecon's is now set to lap over the next several quarters, provides the premise for our downgrade."

Mr. Bastien lowered his target price for the stock to $17 from $19. The analyst average target price is $17.96, according to Bloomberg.

Story continues below advertisement

"We remain big fans of the company and believe that its scale, financial strength, diverse service offering and improved execution capabilities will benefit shareholders over the long run," he said. "But with the contractor set to lap a strong set of comps in what is becoming a tougher market near-term, we are inclined to wait for a more attractive entry point or better visibility before revisiting a constructive thesis."

Elsewhere, BMO Nesbitt Burns analyst Bert Powell lowered his target to $16 from $20 with a "market perform" rating (unchanged).

"Q3 results may demonstrate the benefits of a diversified business in a tough environment, but achieving Aecon's (ARE) aspirational profit margins is likely to require too many things to work at the same time; and if they are achieved, we believe they are likely not sustainable," said Mr. Powell. "The business is just too diverse. This diversity also makes ARE a difficult company to forecast. We believe after the weaker Q3, and questions around the path to higher margins, that the multiple should mean revert lower."

Canaccord Genuity analyst Yuri Lynk lowered his target by a loonie to $20 with a "buy" rating and said he still sees good value in the stock following a "steep" sell-off.

"While an 18-per-cent miss on Q3/2016 EBITDA deserves some ensuing weakness, the 16-per-cent plunge in the stock [Wednesday] is overkill, in our view. Construction is a lumpy business and this is a relatively small company taking on very large projects. There will likely be fits and starts in Aecon's short-term earnings profile as it executes on the various stages of these projects. [Wednesday's] decline in response to one such "fit" presents an interesting buying opportunity, in our view."


Story continues below advertisement

Following "another" earnings miss, Raymond James analyst Ken Avalos downgraded Allied Properties Real Estate Investment Trust (AP.UN-T) to "outperform" from "strong buy."

The Toronto-based REIT reported third-quarter funds from operations per share of 54 cents on Wednesday, a result that fell below Mr. Avalos's projection by 4 cents and the consensus estimate by 2 cents. He blamed the result, a decline of 2 per cent year over year, on lower revenues, due to vacancies in Montreal and turnover in Edmonton and Vancouver, as well as a higher unit count.

Same-asset net operating growth fell to negative 0.4 per cent on its rental portfolio following a positive second quarter.

"The Western portfolio continues to be the weak link ( down 6.3 per cent) with the Eastern portfolio taking a massive swing (from 15.2 per cent last quarter to a decline of 6.1 per cent)," the analyst said. "The Central portfolio was the lone positive (up 3.9 per cent). Quarter-end leased occupancy was 91.5 per cent, up 50 basis points quarter over quarter."

Noting the REIT is looking into the sale of non-core assets in Edmonton, Quebec City and Winnipeg, with a total estimated value of $160-million, Mr. Avalos said: "Sentiment is challenging, given lackluster SANOI and FFO growth. Management has revised FFO growth guidance to the low single-digits but maintains NAV growth in the mid-single digits. We think investors need to see more leasing progress before driving an even higher valuation, thus our move to an Outperform rating given the overall total return expected to our revised target price."

Mr. Avalos lowered his target price for the stock to $38 per unit from $43. The analyst consensus is $39.93, according to Thomson Reuters.

"Our new price target of $38.00 is based on 20.0 times our 2017 AFFO [adjusted funds from operations] estimate, a premium to Canadian office REIT peers given its premium balance sheet and net asset value-creation potential," he said.


Citing a total return forecast of 25 per cent, Canaccord Genuity analyst Mark Rothschild upgraded his rating for Killam Apartment Real Estate Investment Trust (KMP.UN-T).

"The Canadian REIT market has been soft over the past few months and Killam Apartment's unit price is down 12 per cent since the recent high on July 26," he said. "Fundamentals remain sound, in our view, and we expect steady same-property NOI [net operating income] growth through 2017. Killam's units trade at an 8.0-per-cent discount to our NAV [net asset value] estimate, and at 15.5 times 2017 AFFO [adjusted funds from operations]. In our view, the units are attractively valued by both measures."

In the wake of the release of "solid" third-quarter 2016 financial results on Wednesday, Mr. Rothschild moved his rating to "buy" from "hold."

Killam reported funds from operations (FFO) per unit of 24 cents, a cent below both the projections of both Mr. Rothschild and the Street and in line with the result of the same period a year ago. He called the company's internal growth "healthy" at 3.9 per cent, adding interest expense savings from refinancing debt were offset by dilution from its recent equity raise.

Mr. Rothschild said the REIT's core markets "remain sound and, as a result, Killam's portfolio continues to perform well." Same-property net operating income increased 3.0 per cent year over year, which he said resulted in the seventh consecutive quarter of "strong" internal growth.

"Going forward, we expect a steady, although slightly more modest pace of internal growth, primarily driven by higher rental rates," the analyst said. "Management has indicated that they expect to realize utilities savings, due to a decrease in natural gas prices in Nova Scotia over the next year, as well as from ongoing energy efficiency investments. Management's guidance for internal growth in 2017 is 1-3 per cent."

"After an active first half of 2016 in which Killam completed $57 million of acquisitions, the pace of transaction activity has slowed. We are not expecting a large volume of acquisitions, as demand for rental apartment properties remains intense and pricing is strong. Rather, we expect management to continue to focus on growing the portfolio through development."

Mr. Rothschild maintained his price target of $14 per unit. Consensus is $13.89.

"Development has become a core part of Killam's growth strategy, as going-in returns on development projects are generally greater than for acquisitions of similar quality assets," he said. "In addition, newer properties should require less maintenance cap-ex."


Following a "disappointing" 2017 outlook and seeing risks to its 2018 as well, CIBC World Markets analyst Cosmos Chiu downgraded Detour Gold Corp. (DGC-T).

On Wednesday, Detour lowered its 2017 production guidance to 540,000 and 590,000 ounces, a a reduction of 40,000 ounces from the current life of mine (LOM) and assuming approximately 10,000 ounces (using the mid-point of the guidance) for downside risk. It cited slower-than-expected development progress at its Campbell pit in 2016.

The company's preliminary is expected to be between 600,000 and 670,000 ounces (with no ounces attributed to its West Detour facility) compared to the LOM plan of 658,000 ounces (which attributes 13,000 ounces to West Detour).

With that outlook, Mr. Chiu lowered his production projections for both years and "assumed a more conservative go-forward dilution assumption."

"Clearly, Detour continues to be a unique company with a unique asset in a tier-1 jurisdiction," he said. "Detour is also well levered to the gold price with a 10-per-cent move in the gold price equating to a 25-per-cent move in its NAV. With that said, given recent setbacks in both 2016 and 2017 production and guidance, CIBC expects that Detour needs to demonstrate that it can deliver on its promises before investor confidence can return."

He lowered his rating to "sector performer" from "sector outperformer" and reduced his target price for the stock to $26 from $34. Consensus is $38.88.

Elsewhere, Credit Suisse analyst Anita Soni downgraded the stock to "neutral" from "outperform" and dropped her target to $35 from $45.

"Positively, Detour remains a long life asset in Canada, however greater uncertainty now exists around the FCF [free cash flow] inflection point," said Ms. Soni. "We are disappointed by operational inconsistency over the past few quarters."


Industrial Alliance Insurance and Financial Services Inc. (IAG-T) had a "strong" third-quarter, featuring "good quality" earnings, said BMO Nesbitt Burns analyst Tom MacKinnon.

On Wednesday, the Toronto-based company reported earnings per share of $1.40, easily topping Mr. MacKinnon's $1.18 projection and the consensus of $1.17 as well its own guidance of $1.15-$1.25.

"Excluding 9-cent EPS attributable to equity market impacts we peg core EPS at $1.31 (versus our $1.14 estimate), of which 5-10-cent EPS could be deemed as being recurring, especially given IAG's improving fundamentals (the combination of expected profit, new business strain and earnings on surplus were up 9 per cent year over year and 5.5 cents EPS higher, after-tax, than our 5-per-cent estimate) and its consistent track record of policyholder experience gains," he said.

Mr. MacKinnon raised his 2017 EPS projection to $4.85 from $4.66 "to reflect 11-cent EPS in the after-tax combination of stronger expected profit, new business strain and earnings on surplus (which includes a lowered CTL [Corp.] contribution from 8-cent EPS to 6-cent EPS) and 8-cent EPS in policyholder experience gains (which continue to track better than expected owing to conservative assumptions and improving claims cost control in group insurance)."

"Management now claims it currently has on hand enough in terms of investment gains and other management actions to offset a potential 37 basis point IRR hit and a conservative 20 bps URR hit assuming long Canada rates remain unchanged from now until year end. If rates were to decline it still has its "interest rates reserve buffer" which allows for further downside protection (we estimate coverage for up to 40 bps decline)."

Mr. MacKinnon raised his target price for the stock to $56 from $51 with an "outperform" rating. Consensus is $51.50.

"IAG has shown improvement in fundamentals in its mutual fund and group businesses, along with a continued trend of policyholder experience gains and good earnings visibility all around," he said. "We believe future catalysts for the stock include: better-than-expected new business strain, accelerated improvement in the mutual fund business, and better-than-expected growth from dealer service."

Elsewhere, Desjardins Securities analyst Doug Young raised his target to $56 from $52 with an unchanged "buy" rating.

"It has cushions to absorb lower IRR and URR assumptions," he said. "Group employee plans claims experience has settled down. We are encouraged by improved net mutual funds flows. And we still view its valuation as attractive. The CTL noise was a surprise, but this is a small part of IAG."


BMO Nesbitt Burns analyst Fadi Chamoun raised his target for Westshore Terminals Investment Corp. (WTE-T) in reaction to its third-quarter earnings beat.

On Wednesday after market close, the Vancouver-based company reported adjusted earnings per share of 42 cents, a decline of 5 per cent year over year but ahead of Mr. Chamoun's estimate (38 cents) and the consensus projection (41 cents).

"The variance relative to our forecast is primarily a result of higher-than-expected coal tonnage shipped of 6.6 million versus our estimate of 6 million," the analyst said. "Supported by improving coal markets, Westshore is now projecting volume throughput to reach 26 million tons in 2016 versus prior guidance of between 25.5 million and 26 million tons. Results should be well received although we sense that valuation has benefited from improved coal markets in recent months."

He added: "We believe that to the extent that coal markets remain robust, there is a strong likelihood that throughput can rise further in 2017 supported by new mine openings in Canada and improving thermal coal exports from the U.S. We have raised our throughput assumptions for 2016 to 26 million tons from 25 million tons previously. For 2017, we are assuming throughout of 27.6 million tons at this stage but note that visibility into the sustainability of the improvement in coal markets remains poor, particularly as it relates to the economics of exporting U.S. thermal coal."

Mr. Chamoun raised his fourth-quarter EPS estimate to 42 cents from 37 cents. His full-year 2017 projection increased to $1.72 from $1.44.

Keeping his "market perform" rating for the stock, he bumped his target to $24 from $19. Consensus is $22.60.

"We are using 9 times EV [enterprise value]/EBITDA to derive our $24 price target," he said. "While this is below the historical average valuation of [approximately] 12 times, we note that visibility into the sustainability of coal demand over the medium term is weak. Sensitivity of valuation for each 1 point multiple of EBITDA is $2 per share. We continue to favor exposure to the Canadian railroads where we see opportunities for more sustainable growth in EPS and dividends with a more moderate risk profile."

He added: "While we acknowledge value in WTE's unique terminal assets, we believe a high level of conviction in an improving coal outlook is required to justify share price upside. Visibility into coal outlook remains poor, particularly U.S. export thermal coal."


In other analyst actions:

Scotiabank analyst Pammi Bir upgraded CT Real Estate Investment Trust (CRT.UN-T) to "sector outperform" from "sector perform" with a target of $16.50, up from $15.75. The average is $15.64.

Detour Gold Corp. (DGC-T) was downgraded to "hold" from "buy" by GMP analyst Ian Parkinson. His target is $31, versus the average of $34.42.

Gibson Energy Inc. (GEI-T) was raised to "strong buy" from "buy" by Industrial Alliance analyst Elias Foscolos. He maintained a target of $20, compared to the analyst average of $18.67.

Transocean Inc. (RIG-N) was raised to "buy" from "hold" by Canaccord Genuity analyst Alex Brooks with a target of $11 (U.S.), up from $9. The average is $9.18.

In a time when investors should be looking to gold given rising interest in the metal ahead of the uncertainty of U.S. election, Newmont Mining Corp. (NEM-N) has been lagging the sector, according to JPMorgan analyst John Bridges, who upgraded the stock to "over-weight" from "neutral." He raised his target to $43 (U.S.) from $41. The average is $44.71.

Fitbit Inc. (FIT-N) was downgraded by several analysts after its revenue estimates for the important holiday quarter failed to meet estimates, including SunTrust Robinson Humphrey's Robert Peck. He moved his rating to "hold" from "buy" and lowered his target to $10 (U.S.) from $17. The average is $14.31.

Oppenheimer & Co analyst Colin Rusch downgraded First Solar Inc. (FSLR-Q) to "market perform" from "outperform." Mr. Rusch did not specify a target price. The consensus is $49.56.

Due its pending $5.9-billion sale to Broadcom Ltd., RBC Dominion Securities analyst Mitch Steves downgraded Brocade Communications Systems Inc. (BRCD-Q) to "sector perform" from "outperform" and lowered his target to $12.75 (U.S.) from $14. Consensus is $11.25. He said: "While the valuation was a tad lower than what we originally anticipated (closer to $14) we think the asset has been properly analyzed by potential suitors and do not foresee a topping bid. Specifically, potential other suitors (large OEMs Dell/HPE/IBM) all compete with one another creating customer issues if a OEM were to bid on Brocade. We look for the transaction to close in a timely manner, during the second half of Broadcom's fiscal 2017."

Report an error Licensing Options
About the Author
Globe Investor Content Editor

David Leeder is a content editor in the Report on Business. He was previously Deputy Sports Editor and Weekend Digital Editor at The Globe.  He holds an undergraduate degree from McMaster University and a graduate degree from Ryerson University. More


The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

We’ve made some technical updates to our commenting software. If you are experiencing any issues posting comments, simply log out and log back in.

Discussion loading… ✨

Combined Shape Created with Sketch.

Combined Shape Created with Sketch.

Thank you!

You are now subscribed to the newsletter at

You can unsubscribe from this newsletter or Globe promotions at any time by clicking the link at the bottom of the newsletter, or by emailing us at