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Thursday's analyst upgrades and downgrades

BCE CEO George Cope watches a presentation as he attends the company's AGM in Toronto on May 9, 2013.

Chris Young/The Canadian Press

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

In reaction to a better-than-expected operational update and 2017 preliminary outlook, Raymond James analyst Kurt Molnar upgraded Paramount Resources Ltd. (POU-T) to "strong buy" from "outperform."

Mr. Molnar said Wednesday's release exceeded his projections, emphasizing they came as a result of "much" higher condensate leverage than he previously assumed.

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"That carries even more relevance when you consider we were likely carrying one of the higher liquids ratio assumptions on the Street," he said. "This update/revision to outlook is also particularly impressive given it comes on the back of only one Karr well that has been on production for a meaningful period (more than 150 days) plus three new wells on a new pad."

He added: "Paramount's 15-14 well is rate restricted but is still flowing almost 2,000 Boed [barrels of oil equivalent per day] and with half the volumes being condensate. This well has paid out in less than 180 days. The newest wells discussed by Paramount have very limited flow data thus far, but Paramount has explicitly noted their expectation that the newest wells are better than 15-14 both in terms of total rate and in terms of condensate to gas ratios. We note these newest wells had a frack intensity that is 50 per cent greater than 15-14 … so the big question is whether we can see 30-50-per-cent improvements in well type. When Paramount started their drilling program at Karr they guided to expect IP30s of 2,000 Boed and IP365s of 1,000 Boed. Early data from the first four wells suggest that there is material upside to the Boe targets for IP30 and IP365 and even more upside when considering solely the condensate volumes."

Based on the update, Mr. Molnar raised his 2017 and 2018 cash flow per share estimates to $1.57 and $3.14, respectively, from $1.18 and $2.36. His revenue projections rose to $304-million and $533-million from $247-million and $416-million.

His target price for the stock rose to $27.50 from $25. The analyst consensus is $19.58, according to Thomson Reuters.

"We are only four wells into what will be more than 20 wells by mid-year 2017. If new wells keep coming in like the first four then we think there is upside to production guidance and leverage to condensate," he said. "The latter is a powerful lever in the context that we see Paramount getting to cash netbacks in the order of $25/Boe in 2017 corporately, which means Karr alone should be $30/Boe or better. The prolific nature of these wells also suggest PDP [proved developed producing] capital costs in 2017 in the order of $10-12/Boe are also achievable on wells that can pay out in well under a year. This is suggestive of PDP recycle ratios of 2.5x-3.0x with extremely rapid recycling of invested capital (short payouts). If this trajectory is sustained, then this is a business model that may have a peer group that can be counted on less than half the fingers of one hand. It is too early to get to that conclusion, but the early data is stronger than our updated forecasts."

Elsewhere, Desjardins Securities analyst Kristopher Zack maintained a "hold" rating and $21 target.

"We have been cautious on the stock as we await evidence of further operational execution," said Mr. Zack. "While the initial production results from the new 4-19 pad appear positive, the timeframe is still fairly limited at this point with only one of the four wells including more than 30 days of flowback. That said, the condensate-to-gas ratio over the first five months on the initial 15-14 well is very strong relative to expectations and, as a result, we believe that further validation of the resource potential through extended results could still be a catalyst for the stock."

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Citing a recent pullback in share price as well as a further increase in licensing activity, Raymond James analyst Jeremy McCrea raised his rating for PrairieSky Royalty Ltd. (PSK-T).

Ahead of the release of its fourth-quarter results and update on reserves on Feb. 27, he moved the stock to "outperform" from "market perform."

"As we highlighted in the latter part of 2016, the improving energy price outlook has started to have an impact on activity on PSK's land," said Mr. McCrea. "Both licensing and spudding activity tracked above the lows set in 2015, but licensing activity in particular foreshadows a faster pace of development in 2017."

Mr. McCrea noted the outlook for activity on PrairieSky's mineral title land continues to show signs of improvement, including well licensing reaching its highest level since 2014.

"In the full 2016 and January, 2017, data we are seeing a continuation of that trend," he said. "There were 189 wells licensed on PSK's mineral title land in 4Q16, the highest pace of licensing since 226 wells were licensed in 3Q14. The strong trend continued in the January, 2017, with 82 wells licensed. January was the highest pace of monthly licensing since July, 2014, and sits firmly within the five-year average for January. The increase in licensing activity in 4Q16 and early 2017 has yet to result in a sharp up-tick in spudding activity – which ultimately feeds into production. Spudding in 4Q16 and January, 2017, was only slightly higher than 2015. We suspect that the backlog in licensing activity will begin to show in February and March spudding data or after spring breakup."

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He added: "Although well spudding has lagged licensing in recent months, we fully expect a catchup in the coming months which likely will be an impetus for consensus (and us) to raise our production and funds flow estimates."

The analyst also pointed out PrairieSky recently revealed updated consensus forecasts for both the fourth quarter of 2016 which exceeded his expectations. The quarterly consensus estimate for production is 23,070 barrels of oil equivalent per day, topping his projection of 22,697 boe/d, and cash flow per share of 27 cents, in line with his estimate. The company expects 2017 production of 24,200 boe/d and cash flow of $1.18 per share.

"We suspect that PSK will continue to post prior-period adjustments related to its conservative account methodologies," he said.

Mr. McCrea maintained a target price of $34 for the stock. Consensus is $33.25.

"With the pull back in the stock and another month of licensing activity increasing, we are upgrading our rating to Outperform," he said. "Key potential catalysts investors can look forward to include: 1) reserves update that should provide a base valuation for investors; 2) dividend increase (likely in the range of 10-20 per cent); 3) an internal 'valuation book' being prepared by PSK and likely to be published in May. The purpose is to highlight to third-party operators different plays available across PSK's land base. The play book is also likely to be available to investors which will likely provide more insight across the company's land portfolio."

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Despite "fundamentally strong" fourth-quarter results, Canaccord Genuity analyst Dalton Baretto lowered his target price for shares of Teck Resources Ltd. (TECK.B-T, TECK-N).

On Wednesday, the Vancouver-based company reported adjusted earnings per share of $1.61, ahead of Mr. Baretto's projection of $1.55.

"The EPS beat was due to higher copper and zinc sales, higher realized met coal and copper prices, and better operating costs," he said. "On an operating basis, production of met coal and copper exceeded our estimates, while zinc production was roughly in line. Cash costs were also better than our forecast in both the coal and copper businesses. For the full year, production of all three commodities was at or above the high end of guidance."

The company reported its second consecutive record quarter for production of 7.3 million tonnes, an increased of 14 per cent year over year and ahead of Mr. Baretto's forecast of 6.9 million tons. Sales of 6.9 million tonnes failed to reach his projection of 7.1 million tons.

"Despite the strong production in the quarter, the operations appear to have hit some logistical issues towards the end of the year," he said. " TECK indicated that winter conditions as well as performance issues with rail transport as well as terminal operations have impacted the movement of inventory from mine to port. As a result, port inventories have been drawn down, while mine inventory levels have reached critical levels, necessitating production cutbacks. Management indicated that these issues have continued to persist till today, and as a result, we have adjusted our Q1 production figures accordingly. The Coal Mountain mine remains scheduled for closure at the end of 2017, with production expected to be made up by the other operations moving forward. TECK has indicated that this will necessitate higher stripping requirements along with additional manpower and equipment, and as such, operating costs and capitalized stripping are expected to be higher moving forward. Our estimates had already included higher capitalized stripping and operating costs from 2018 onward, in line with the new guidance.

Mr. Baretto called Teck's guidance for fiscal 2017 "missed" with production for the year (plus the period of 2018 through 2020) meeting his estimates, but operating costs exceeding expectations.

"The higher coal costs are related to additional mining activity in higher strip areas required to replace production from Coal Mountain, while we believe the higher copper cash cost guidance reflects an element of conservatism," he said. "Capex (capital expenditure) was also higher than our forecasts. Higher coal capex is largely related to additional stripping activity, and is expected to continue going forward. We note that our estimates from 2018 onward had already included higher stripping capex and higher operating costs in line with the new guidance. In the copper business, higher capex is largely related to engineering work required ahead of a QB2 sanction potentially next year -- project development appears to be being accelerated. Higher capex in the zinc business is largely related to higher sustaining capex -- we are unclear as to the cause."

Mr. Baretto reacted to the announcement by lowered his EPS projections for 2017 and 2018 to $4.44 and $3.27, respectively, from $6.76 and $3.35.

"We note that our NAV of 8 per cent has declined by 5 per cent, to $41.06 per share from $43.09, largely due to a decline in our estimated valuation of the coal business based on changes to our realized pricing and capex estimates," he said. "We now forecast realized prices of $207 (U.S.) per tonne in Q1, $150 in Q2, and $150 in Q3, versus our previous forecasts of $285, $245 and $192."

He maintained a "buy" rating for the stock, but his target price fell to $39.50 (Canadian) from $43. Consensus is $35.24.

"Despite the declining met coal price and the increased operating and capital cost assumptions in the coal business, we continue to like TECK for its forecast free cash flow generation, its leverage to rising zinc and copper prices, and its relatively inexpensive valuation," said Mr. Baretto. "However, we note that ongoing headline risk from declining met coal prices could continue to weigh on the shares."

Meanwhile, the stock was downgraded to "hold" from "buy" by Deutsche Bank analysts Chris Terry and Jorge Beristain, who feel the company is reaching the end of a "good-news cycle" with positive catalysts almost played out.

They lowered their target price to $24 from $26.

BMO Nesbitt Burns analyst Alex Terentiew said Teck's valuation remains "attractive," but he lowered his target to $40 from $43 with an "outperform" rating.

"While we view the results from Q4/16 as operationally strong, our 2017 estimates have been cut on higher operating cost expectations in coal, and lower realized prices modelled in both 1Q and 2Q 2017," said Mr. Terentiew. "Our EPS estimates have declined as we made adjustments to our depreciation and tax forecasts, but we note that beyond 2017, our CFPS [cash flow per share] and EBITDA [earnings before interest, taxes, depreciation and amortization] estimates remain largely in line with our prior estimates. Q1/17 realized price guidance is simply a function of the volume-weighted average realized price in the quarter, and not reflective of any change in price discount Teck receives for its coal products. With sales in Q1 guided to be back-end loaded to the second half of the quarter, and spot prices down 34 per cent since the end of 2016, the low realized price is disappointing, but not surprising."

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BCE Inc. (BCE-T, BCE-N) is closing its $3.1-billion takeover of Manitoba Telecom Services Inc. (MBT-T) in a "favourable position," according to Desjardins Securities analyst Maher Yaghi.

On Wednesday, Competition Bureau and the federal department of Innovation, Science and Economic Development (ISED) approved the transaction more than nine months after it was proposed.

"Overall, we estimate the deal should generate 3.3 per cent free cash flow per share accretion (versus our prior 2018 estimate), down from the 4.1 per cent we had initially estimated nine months ago," said Mr. Yaghi. "The difference is due to the additional remedies that were agreed upon by BCE. It is important to note, however, that on an NAV [net asset value] basis, the finalized deal is higher than if the subscriber plus spectrum transfer had been made to Shaw instead."

He added: "Given the fact that no further approval is required for the deal to go through, we are now including MBT in BCE's results. Our forecast is pro forma the divestiture of TELUS subscribers. However, we left the wireless subs to be sold to Xplornet in BCE's results for 2017, since we believe Xplornet's new wireless service will launch only at the end of 2017 or the beginning of 2018. In the meantime, BCE will keep these subscribers. We believe the acquisition of MBT will improve BCE's ability to operate in Manitoba as it lacked the bundling capacity it now has. We recently saw that market participants with a bundling capacity have a net advantage over wireless-only or wireline-only businesses … We highlight that our 2017 forecast includes the MBT's results for only nine months (ie the remaining 2017 months after the deal closes)."

After including MBT in his BCE projections, Mr. Yaghi raised his 2017 revenue and earnings before interest, taxes, depreciation and amortization estimates to $22.683-billion and $9.241-billion, respectively, from $21.995-billion and $8.968-billion, representing increases of 3.1 per cent and 3.0 per cent. His estimates for 2018 rose to $23.2267-billion and $9.525-billion from $22.335-billion and $9.168-billion (or increases of 4.0 per cent and 3.9 per cent, respectively).

"We forecast capex intensity to be relatively stable despite the MBT acquisition," he said. "However, we estimate that the deal will be dilutive on an EPS basis given the equity issuance required to finance the acquisition and the increased amortization. Therefore, we have decreased our EPS forecast to $3.29 (from $3.49) in 2017 and to $3.43 (from $3.69) in 2018. Our 2017 FCF [free cash flow] forecast should not be considered a clean nine-month performance given the working capital requirements that would be needed to integrate MBT. For 2018, we now estimate the deal would generate 3.3 per cent FCF/share accretion, down from the 4.1 per cent we had estimated when the deal was initially announced. The difference is mainly due to the additional remedies that BCE agreed upon to close the deal."

Mr. Yaghi's rating for BCE stock remains a "buy" and his target rose by a loonie to $65. Consensus is $59.66.

"Led by a strong management team which can invest significantly in FTTH [fibre to the home] infrastructure while maintaining relatively low capex intensity, we view the current dividend growth model as sustainable given current underlying trends," he said. "Although the stock may not have the highest organic growth in the sector, we believe it should be attractive to low-beta or income funds."

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Colliers International Group Inc. (CIGI-Q, CIGI-T) currently has an attractive valuation in light of its organic and acquisition growth opportunities, according to BMO Nesbitt Burns analyst Stephen MacLeod.

"In Colliers's comparables group, we include two global commercial real estate services companies, CBRE and Jones Lang LaSalle, both of which are direct comparables to Colliers, along with several 'other' real estate service companies/intermediaries," he said. "We believe that this comparables group represents a reasonable cross-section of Colliers's services offerings, ranging from transaction-based sales and lease brokerage activity and multi-year contractual revenues from outsourcing and advisory services."

On Wednesday, the Toronto-based provider of commercial real estate services reported fourth-quarter results that exceeded Mr. MacLeod's expectation. Adjusted earnings per share of $1.22 beat the $1.16 estimate of both the analyst and the Street, while adjusted earnings before interest, taxes, depreciation and amortization of $90-million topped projections of $80-million.

"With respect to the outlook for 2017, management expects solid revenue pipelines in most markets, assuming stable market conditions," said Mr. MacLeod. "However, the company continues to note some uncertainty around the timing and completion with respect to its pipeline, particularly given uncertainty in the U.K. (Brexitrelated) and Western Europe. Management expects high-single-digit to low-double-digit revenue growth in local currency terms in 2017, based on acquisitions already completed in January 2017 and an expected low-single-digit internal revenue growth rate. The adjusted EBITDA margin in 2017 is expected to be in line with the 10.7 per cent achieved in 2016, reflecting a balance between operating leverage and investments being made for growth. Overall, management expects to achieve high-single-digit to lowdouble-digit percentage adjusted EPS growth in 2017.

"Management continues to note that aside from Brexit, there is considerable commercial real estate activity in most markets and it expects growth to continue into 2017E, albeit at lower growth levels than seen in 2016. Management intends to continue to strategically invest in its global platform and pursue tuck-in acquisitions to augment internal growth and believes that slowing internal growth could accelerate consolidation in the industry. Management also indicated that its five-year plan to 2020 is still intact and continues to expect to double the business by that time (from 2015)."

Mr. MacLeod raised his target price for the stock to $49 (U.S.) from $41 with an "outperform" rating. Consensus is $44.41.

"We continue to believe that Colliers has attractive organic top-line growth and margin expansion opportunities, which are expected to drive annual low- to mid-single-digit organic revenue growth over the next several years," he said. "In addition, we believe that as a standalone entity, Colliers is well-positioned to continue investing in acquisitions, focused on augmenting internal growth, strengthening market share, and adding/expanding complementary business lines (including increasing recurring revenues in Outsourcing & Advisory). Colliers has strong free cash flow generation and a solid balance sheet position to fund both internal and acquisition growth. Net debt/adjusted EBITDA was 0.7 times as of the end of 2016, well below management's stated range of 1-1.5 times."

Elsewhere, CIBC World Markets analyst Stephanie Price upgraded the stock to "outperform" from "neutral" and raised her target to $50 from $40.

"Management continues to demonstrate its ability to drive operational leverage from its base business and execute on its accretive tuck-in strategy," said Ms. Price. "We see overall growth tilted towards acquisitions in the near term, with pro-forma leverage of 0.7 times and $500-million in liquidity to fund the pipeline. Our price target moves to $50  as we increase our growth assumptions slightly and roll forward our valuation year to 2018. Our target multiple of 9-times forward EBITDA is unchanged and a half-turn discount to the historical CRE [commercial real estate] peer average."

Raymond James analyst Frederic Bastien said Colliers delivered on 2016 promises and expects "more good stuff to come." He raised his target to $51 (U.S.) from $44 with an "outperform" rating (unchanged).

"We continue to believe the benefits of Colliers' scale and diversification, proven roll-up model and market share gains will far outweigh the risks tied to a slowing commercial real estate sector through 2018," he said.

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Shopify Inc. (SHOP-N, SHOP-T) has a strong close to 2016 and carries momentum into fiscal 2017, said Citi analyst Kenneth Wong.

On Thursday, the Ottawa-based tech company reported fourth-quarter revenue of $130-million, ahead of the consensus projection of $122-million. Earnings per share of nil topped Mr. Wong's projection of a 1-cent loss.

"Management provided a FY17 revenue range of $580-$600-million, well ahead of expectations, essentially rolling forward Q4 upside ($8-million times 4) into consensus ($562-million)," he said. "While SHOP targeted operating losses of $18-22-million, CFO Jones reiterated achieving breakeven by 4Q17 which should alleviate concerns that profitability would be punted into FY18. We wouldn't expect to see leverage until 2H with spend typically concentrated early in the year. Q1 guide … looks conservative given recent outperformance."

Mr. Wong raised his target price for Shopify stock to $65 (U.S.) from $48 "to reflect to extended growth trajectory." The consensus is $59.57.

He kept a "neutral" rating.

"We have a hard time chasing with SHOP up 41 per cent year to date and trading at 7 times calendar year 2018 sales," said Mr. Wong. "We are intrigued by the opportunity presented by the new Plus pricing scheme and could get more constructive as we develop a better sense of the economic uplift, all things equal."

RBC Dominion Securities analyst Ross MacMillan bumped his target to $66 (U.S.) from $63 with an "outperform" rating.

"Another strong quarter with a 7-per-cent revenue beat (86 per cent year-over-year growth) and a 5-per-cent raise on FY17 (54 per cent year-over-year growth) and we continue to see multiple areas of potential conservatism," he said. "The biggest push back is valuation and the lack of leverage. We think growth adjusted valuation is ok, while big investments reflect the market opportunity."

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Wells Fargo & Co. (WFC-N) was downgraded to "neutral" from "outperform" at Credit Suisse by analyst Susan Roth Katzke after the stock exceeded her target of $56 (U.S.).

"Our ratings are based on relative valuation and total return to our target price," she said. "The risk to downgrading Wells Fargo's shares today lies in the potential for near term acceleration in revenue and earnings growth, with the former a function of a better macro environment (benefiting all/most banks) and/or earlier re-acceleration of organic momentum in Wells Fargo's Community Banking business unit."

The analyst average target price is $58.85, according to Bloomberg.

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In other analyst actions:

Bank of America Corp. (BAC-N) was raised to "outperform" from "neutral" at Macquarie by analyst David Konrad. He raised his target to $28 (U.S.) from $25. The analyst average price target is $24.87, according to Bloomberg.

Conifex Timber Inc. (CFF-T) was upgraded to "outperform" from "sector perform" by RBC analyst Paul Quinn with a target of $4.50 (Canadian), up from $3. The average is $4.65.

Groupon Inc. (GRPN-Q) was downgraded to "neutral" from "outperform" at Wedbush by analyst Aaron Turner with a target of $4.50 (U.S.), down from $6.50. The average is $4.93.

Hershey Co. (HSY-N) was raised to "buy" from "hold" at Argus by analyst David Coleman. He kept his target price of $125 (U.S.) per share. The average is $109.39.

Keyera Corp. (KEY-T) was raised to "buy" from "hold" by TD Securities analyst Linda Ezergailis. Her target rose to $46 (Canadian) from $43, while the average is $45.38.

Northern Dynasty Minerals Ltd. (NDM-T) was upgraded to "speculative buy" from "hold" by TD Securities analyst Craig Hutchison. His target remains $5, which is also the analyst average.

New Gold Inc. (NGD-N, NGD-T) was raised to "sector perform" from "sector underperform" by Scotia analyst Trevor Turnbull. His target remains $3 (U.S.), versus the average of $3.74.

Sun Life Financial Inc. (SLF-T) was downgraded to "sector perform" from "sector outperform" by Scotia  analyst Sumit Malhotra with a target of $55 (Canadian), down a loonie. The average is $54.42.

Westshore Terminals Investment Corp. (WTE-T) was raised to "outperform" from "sector perform" at RBC by analyst Walter Spracklin with a target of $30 (Canadian), up from $27. The average is $26.80.

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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

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