Thursday’s analyst upgrades and downgrades

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

There is "plenty" of upside left in WSP Global Inc. (WSP-T), said Raymond James analyst Frederic Bastien.

Ahead of the release of its fourth-quarter financial results, scheduled for March 2, Mr. Bastien said the Montreal-based professional services company is standing out in an expensive market.

"It'd be a stretch to call WSP 'cheap,' but we argue it is attractively priced when stacked against other pure-play engineering firms globally," he said. "The stock notably trades at a 0.8 multiple point discount to the peer group's average forward EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiple of 10.7 times, which runs contrary to the 0.5 multiple point premium it has commanded for the past five years. We don't see this discrepancy lasting long given WSP's larger capitalization, solid track record and healthy dividend yield, so advise investors to act accordingly."

Mr. Bastien is projecting a 3-per-cent increase in revenue year over year to $1.28-billion for the quarter, which he said reflects 2-per-cent organic growth, a 5-per-cent rise from M&A and foreign currency headwinds of 4 per cent.

"We have good reason to believe the strong momentum observed in the U.S. and Australia for 3Q16 carried over to 4Q16 and offset softer results from Canada and the U.K.," he said.

He is forecasting a margin gain of 0.6 per cent and a 9-per-cent rise in EBITDA to $135-million. He is projecting adjusted earnings per share of 59 cents.

"Organic growth, deal flow and margin expansion all on tap for 2017 and 2018," said Mr. Bastien. "We have left our 3-per-cent organic growth target for this year intact, but trimmed our EBITDA projection to $567-million from $575-million to account for the continued weakness of the British pound and Swedish Krona relative to the Canadian dollar, and a more modest margin profile for the EMEIA region. Still embedded in our projections are much improved margins for the Canadian operations, and continued momentum down under and south of the border. We should highlight our 2017 EBITDA forecast includes an incremental contribution of $33-million from new acquisitions we expect WSP to complete this year. Our expectations for 2018 assume much of the same in terms of organic and acquisition growth, but a more modest advance in margin. This, at least, is what is implicit on our $639 –million EBITDA forecast for the year."

Mr. Bastien kept his "outperform" rating for the stock and increased his price target to $55 from $50. The analyst consensus price target is $48.50, according to Thomson Reuters.

"We continue to believe WSP Global should be at the core of every infrastructure portfolio," he said. "Our Outperform recommendation rests on the firm's entrepreneurial DNA, strong technical expertise, proven roll-up model, healthy balance sheet and ever-growing diversification. It also helps that WSP stands to capitalize on a projected upswing in transportation infrastructure spending across most industrialized regions of the world."

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Barrick Gold Corp. (ABX-T, ABX-N) is "emerging from the crowd," according to Canaccord Genuity analyst Tony Lesiak.

"While attending Barrick's operations and technical update, one of the first impressions was noting the dramatic change in culture and the renewed focus on return," said Mr. Lesiak. "The session showcased strong head office and site management alignment and integration between all parts of the business (exploration, engineering, and capital allocation). Combining Cortez and Goldstrike into one business unit was one example."

Mr. Lesiak said Barrick is emphasizing "margins over ounces." He expects a projected 16-per-cent decline in projections to be more than offset by increased cost optimization, suggesting free cash flow could actually rise despite a flat gold price environment.

"Cost savings are expected to be driven by digital transformation and innovation that could reduce unit costs up to 20 per cent at certain assets (potential benefits not in current guidance) through automation and improved productivity," he said. "ABX also confirmed its more rigorous approach to capital budgeting with a formal 15-per-cent IRR [internal rate of return] hurdle at $1,200 gold with additional filters including sensitivity and payback analysis followed by qualitative factors (jurisdiction, technical risk, resource upside etc.). The new smaller, phased approach to development (Goldrush. Alturas and a refresh at Donlin, Pascua, and Casale) lowers initial capital and risk while preserving expansion optionality."

He also emphasized the company's "exceptional optionality in the project pipeline which continues to improve given recent Minex success and remains open for further expansion."

"New resource conversion potential was highlighted at Cortez (Fourmile and Renegade), Goldstrike (Ren/Banshee, Meikle Halo), Phase 5 Hemlo (Horizon, West and B and C Zone extensions and OP layback), PV (UG and feeder zones and Upper Mejita), Turquoise Ridge (Footwall), Lagunas Norte (oxide and sulphide extensions), (Veladero depth extension)," he said.

Mr. Lesiak raised his 2017, 2018 and 2019 earnings per share projections to 69 cents, 74 cents and 71 cents, respectively, from 63 cents, 72 cents and 70 cents. His cash flow per share estimates moved to $2.12, $2.15 and $2.07, respectively, from $2.03, $2.12 and $2.02.

"We revised higher our resource conversion assumptions (from 48 per cent to 56 per cent overall) at a number of key assets but particularly at Goldstrike, Hemlo and Lagunas," he said. "Noting ABX's exploration track record (143 million ounces found since 1990), our 41mozs conversion assumption (mainly at Alturas, Goldrush, Cortez) may prove conservative. We have also revised our cost forecast over the next few years to the lower bound of guidance and production to the upper range. Partially offsetting these positive revisions was an assumed higher tax structure at PV over the next three years (we question the need for renegotiations with the DR government), a reduction in ultimate recovery assumptions at the TCM circuit at Goldstrike and some additions to LT sustaining capital. We have increased our FCF assumption 21 per cent in 2018 and our NAV 4%."

With a "buy" rating (unchanged), his target price for the stock rose by a loonie to $30. Consensus is $27.01.

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A "solid" quarter from InterRent Real Estate Investment Trust (IIP.UN-T) led Desjardins Securities analyst Michael Markidis to raise his target price for the stock.

On Tuesday, the Ottawa-based REIT reported fourth-quarter funds from operations per unit of 10.1 cents, ahead of the analyst's projection of 9.7 cents and an increase of 12 per cent year over year. InterRent's net operating income (NOI) rose 6.6 per cent from the previous year, while Mr. Markidis called its revenue growth (of 6.9 per cent) "robust." He pointed to higher average rents (4.1 per cent) and occupancy increases (up 1.3 per cent to 96.7 per cent at year end).

"IIP's results were consistently light versus Street consensus from 1Q16–3Q16," said Mr. Markidis. "In our view, this was not indicative of operational weakness; rather, it was mostly a function of capital recycling activity. FFO/unit in 4Q16, which was free of any moving parts, was slightly ahead of our estimate and generally in line with the Street. As a result, we believe investor confidence in the outlook for 2017–18 has strengthened."

He added: "Capital recycling emerged as a dominant theme last year, as dispositions ($85-million) outweighed acquisitions ($77-million) for only the second time in IIP's history. Activity was characterized by the sale of smaller, mature assets in secondary markets, with proceeds being redeployed to acquire two larger properties in Montreal and Ottawa. As a result, the total number of owned suites contracted by 300, to 8,059."

Mr. Markidis expects the pace of dispositions to slow in 2017, expecting InterRent to become a buyer. He said it's "off to a good start on the acquisition front" with the $24-million acquisition of a 224-suite property in Montreal.

"Continued organic growth has the potential to drive significant net asset value upside," the analyst said. "Performance from the stabilized portfolio (properties owned for at least 24 months) was robust in 4Q16, with NOI increasing 6.6 per cent year over year. Equally as important is the potential embedded in the non-stabilized segment, which accounted for 28 per cent of NOI. Occupancy and profitability metrics for this segment are substantially lower than those for the stabilized pool. Continued execution on the repositioning front should drive outsized cash flow/NAV growth over the next 12–24 months."

He did not change his "buy" rating for the stock, while his target rose to $8.50 per unit from $8. Consensus is $8.38.

"As a small cap with a business model focused on value creation, IIP has the ability to generate outsized cash flow and NAV growth versus peers," said Mr. Markidis. "Moreover, the cost of capital has reverted back to a level that we believe is conducive to accretive portfolio expansion."

Elsewhere, Raymond James analyst Ken Avalos increased his target to $8.25 from $8.

Mr. Avalos said: "InterRent's stock performance was in-line with the broader TSX Capped REIT Index last year (up 17 per cent). However, our feeling is that the stock should have outperformed, given an increase in SPNOI [same property net operating income] of 7 per cent, 10-per-cent rise in FFO and 10-per-cent NAV growth, all while culling $85-million of assets and with LIV [its 'trophy' property in Ottawa] only 60-per-cent leased. We think 2017 will yield similar growth, along with LIV's stabilization, and asset culling largely out of the way. This should lead to strong stock performance, in our opinion. To us, there simply isn't another Canadian multi-family REIT with InterRent's ability to generate SPNOI, FFO and NAV growth. We continue to rate InterRent an Outperform and it remains one of our top picks for the year."

CIBC World Markets analyst Dean Wilkinson raised his target for the stock to $8.25 from $8 with a "neutral" rating (unchanged).

"The quarter was operationally stable, and benefited from some of the fruits of labor of an active repositioning program, which manifested in the form of incremental rent appreciation," said Mr. Wilkinson. "We continue to highlight InterRent's strong track record of creating value from under-utilized assets, backed by a well-located portfolio of defensive multi-family assets."

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Citing a "favourable" outlook for retirement homes, BMO Nesbitt Burns analyst Troy MacLean said Sienna Senior Living Inc. (SIA-T) possesses a "nice mix of offence and defence."

"We think SPNOI [same property net operating income] growth will be at a lower, but still solid rate in 2017, driven by occupancy gains in the retirement home portfolio," said Mr. MacLean. "SIA provides an attractive combination of offence (strong organic growth) and defence (economically resilient cash flow from its Ontario LTC portfolio, which provides necessity-based care)."

On Feb. 16, Sienna reported fourth-quarter operating funds from operations of 32 cents per share, a rise of 4.6 per cent year over year and in line with both Mr. MacLean's estimate and the consensus. He pointed to a 7.1-per-cent increase in retirement SPNOI and the completion of the acquisition of its Baltic properties, a group of seniors living residences in British Columbia, as the chief drivers of the growth.

"SIA reached its target leverage range in Q4 … and post Q4 increased its liquidity position substantially to $118-million versus $58-million 12 months ago at Q4/15," said Mr. MacLean. "We expect Sienna will use its increased liquidity on acquisitions, and potentially some development activity. In the near term we expect the company to focus on redeveloping its class B/C Ontario LTC properties under the Ministry of Health and Long Term Care's (MOHLTC) capital renewal program, but in the longer term we expect SIA to develop retirement properties on excess land, as well as senior living campuses."

Mr. MacLean bumped his net asset value estimate to $17 per share from $15.25, "based on a 25 basis points reduction in the cap rates we applied to the LTC class A portfolio, as well as the REIT's retirement home portfolio."

He added: "We believe a lower cap rate is warranted given recent transaction activity, particularly the pending acquisition of a large, private seniors housing operator in Western Canada by a foreign buyer at a valuation premium to our previously applied cap rate for Sienna."

With a "market perform" rating, his target rose to $19 from $18. Consensus is $18.41.

"SIA has produced above-average organic growth for the past four years, which we think will continue in 2017, but at a more modest rate," said Mr. MacLean. "We expect solid SPNOI growth will be driven by the company's retirement home portfolio, where occupancy entering 2017 (94.5 per cent at Dec. 31) was [approximately] 130 basis points higher than the full-year average in 2016 (93.2 per cent)."

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BMO Nesbitt Burns analyst Jonathan Lamers called High Liner Foods Inc.'s (HLF-T) fourth-quarter results "negative."

The Lunenburg, N.S.-based company reported earnings per share of 24 cents (U.S.), lower than Mr. Lamers's projection of 30 cents and the Street's 31-cent estimate. He blamed the miss on higher corporate segment expenses (3 cents per share), lower earnings from both its U.S. and Canadian segments (2 cents) as well as a higher effective income tax rate on adjusted earnings (1 cent).

Adjusted earnings before interest, taxes, depreciation and amortization fell 2.2 per cent year over year to $17.4-million, also below the analyst's projection ($19.1-million).

"Lower demand for breaded and battered seafood products continued to weigh on High Liner's sales in Q4/16," said Mr. Lamers. "U.S. sales volumes declined 6.8 per cent year over year, excluding volumes related to a divestiture, worse versus our projection for slight volume growth relative to a weak comparable quarter. High Liner indicated the U.S. sales volume decline was entirely due to lower demand for breaded and battered products from both Retail and Foodservice channels. High Liner believes the declines are affecting the entire industry, and the company is experiencing less severe declines versus the overall breaded and battered product categories. However overall sales volumes are not expected to grow until new product development and marketing re-positioning initiatives can offset the declines for breaded and battered categories, and volumes are expected to continue to decline in Q1/17. In Q4, the company introduced a new fully cooked salmon product to Sam's Club stores."

In reaction to the results, Mr. Lamers lowered his full-year 2017 EPS estimate to $1.43 from $1.54. He introduced his 2018 projection of $1.48 per share.

He kept his "market perform" rating for the stock, but he lowered his target to $22 (Canadian) from $24. Consensus is $23.96.

"We believe a substantial portion of High Liner's portfolio consists of breaded & battered products that are not well-aligned with consumer preferences," said Mr. Lamers. "Positively, cost savings from High Liner's recently completed supply chain optimization project should benefit earnings in 2017, and we believe High Liner is positioning the balance sheet for potential acquisition opportunities."

Elsewhere, CIBC World Markets analyst Mark Petrie raised his target for the stock by a loonie to $35 with an "outperformer" rating (unchanged).

"Maple Leaf continues to deliver improving profitability following the completion of its Value Creation plan, and we expect modest gains to continue through 2017," said Mr. Petrie. "Beyond the core operations, the acquisition of Lightlife brings growth opportunities, but at a substantial price tag in an evolving and increasingly competitive category."

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RBC Dominion Securities analyst Arun Viswanathan initiated coverage of Monsanto Co. (MON-T) with a "sector perform" rating and target of $118 (U.S.). Consensus is $120.35.

He said: "Finite arable land, climate change, long-term global food security, and the pipeline are positive drivers offset by near-term oversupply, low corn and soybean prices, and deteriorating Crop Protection prospects. Given challenging Ag conditions, we see limited near-term catalysts to drive the stock higher, but a downward move towards pre-deal levels of $90-100/share could entice us."

Mr. Viswanathan initiated coverage of FMC Corp. (FMC-N) with an "outperform" rating and $71 (U.S.) target. Consensus is $62.82.

"We think FMC's portfolio transformation, improvements to its Ag business, and Lithium optionality are all under-appreciated," said Mr. Viswanathan. "Strong growth in Health and Nutrition and Lithium should drive margin and multiple expansion. Despite the recent run in the stock, we are buyers with a 1-2 year horizon."

The analyst gave Albermarle Corp. (ALB-N) with an "outperform" rating and $114 (U.S.) target. Consensus is $99.65.

"The recent run in the stock could have investors wondering if we are in the eighth inning for Lithium, but robust growth expectations and the large time/cost/complexity for new supply leads us to believe we could be in the second/third," he said. "Optionality on the rest of the portfolio supports incremental lithium investment and attractive FCF in the outer years could lead to further dividend increases and buybacks."

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In other analyst actions:

PrairieSky Royalty Ltd. (PSK-T) was raised to "buy" from "hold" at TD Securities by analyst Aaron Bilkoski with a target of $33. Consensus is $33.25.

Restaurant Brands International Inc. (QSR-N, QSR-T) was raised to "neutral" from "underperform" by Longbow Research analyst Alton Stump.

Taseko Mines Ltd. (TKO-T) was downgraded to "hold" from "speculative buy" at TD Securities by analyst Craig Hutchison. His target price is $2 per share, while the consensus is $1.68.

Spin Master Corp. (TOY-T) was raised to "overweight" from "neutral" at Piper Jaffray by equity analyst Stephanie Wissink with a target of $39. Consensus is $39.78.

Credit Suisse analyst Jason West downgraded Bloomin' Brands Inc. (BLMN-Q) to "neutral" from "outperform" and dropped his target to $19 (U.S.) from $21. Consensus is $19.89.  Mr. West said: "Our thesis of real estate monetization supporting outsized share repurchases has largely played out, and we see few fundamental catalysts from here. BLMN's core restaurant sales and profit have steadily deteriorated over the past few quarters (something we did not anticipate), partly in line with weakening industry trends. However, BLMN has also generally underperformed industry benchmarks over the past 6 quarters, and we see limited evidence of a turnaround. BLMN has also not made progress on closing the margin gap with peers, as adj. EBIT margins finished 20 basis points lower in 2016 than 2012."

BMO Nesbitt Burns analyst Ambrish Srivastava downgraded NVIDIA Corp. (NVDA-Q) to "underperform" from "market perform" with a target of $85 (U.S.), down from $100. Consensus is $114.10. Mr. Srivastava said: "We believe the stock is overvalued at current levels. We believe that the perfect storm in fundamentals that drove the rarely seen magnitude of earnings upside is ebbing. We also see the competitive environment changing, and do not believe the shares at current valuations are pricing in any such change."