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Hydro One has an electricity transmission monopoly in Ontario, and seems intent on building on its 25-per-cent share of assets that distribute power to end users in homes and businesses.Tim Fraser/The Globe and Mail

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

Hydro One Ltd.'s (H-T) $6.7-billion deal for U.S. energy company Avista Corp. is a "fair start" to its acquisition strategy, according to CIBC World Markets analyst Robert Cattelier.

Noting the move provides an entry into the market south of the border and makes it a top 20 North American utility by enterprise value, Mr. Cattellier upgraded his rating for Hydro One stock to "outperformer" from "neutral," citing a higher price target and a recent pullback in price.

"Avista provides diversification benefits, and is the right size – bigger than a tuck-in but not a merger of equals," he said. "It also provides a sensible entry into generation and gas distribution, while the company remains essentially entirely rate regulated.

"We see Avista's regulatory exposure as average. A recent regulatory setback for its main franchise in Washington was a departure from previous rate cases and should be overcome in future rate cases. The franchise areas have both higher ROEs (rate-base weighted average of 9.66 per cent) and higher equity thickness (49 per cent) than Ontario (8.78 per cent on 40-per-cent equity), a common element of U.S. utilities compared to Canadian peers."

His target increased by a loonie to $28. The current analyst consensus price target is $25.75, according to Thomson Reuters data.

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Raymond James analyst Kurt Molnar downgraded Granite Oil Corp. (GXO-T) in response to a "slight" second-quarter earnings miss and a reduction in its full-year guidance.

"We continue to see this as a superior profitability and free cash flow business model that can ultimately attract much higher valuations (either in the market or in a takeout) with the passage of time and better oil prices," said Molnar, moving the stock to "outperform" from "strong buy." "The balance sheet and per BOE profitability of the business also remains robust. But an intentional slow pace business plan in the capital market we have right now also only appeals to a smaller segment of institutional investors in particular. For this reason we are downgrading our recommendation."

On Wednesday, the Calgary-based company reported quarterly production of 2,859 barrels of oil equivalent per day (boed), below Mr. Molnar's projection of 3,142 boed. Cash flow of $6.74-million also missed his expectation ($7.3-million).

"The cash netback in 2Q was still $25.92 per boe despite the lower oil price," he said. "This is where Granite is a particular standout. Their PDP [proved developing producing] capital cost last year was $12.95 per Boe so PDP recycle ratio on capex is still just above 2.0 times. Said another way, true profitability per BOE (cash netback less PDP capital cost) was $12.97 per Boe which is one of the best results we are aware of both in the basin and among oil levered stocks."

"The key to the GXO business premise is this low PDP capital cost which can allow for a growth in PDP reserves and PDP NPV that is faster than the rate of production growth. This, in turn allows for the premise of growth in free cash flow that is far faster than the growth in production."

With its results, Granite lowered its full-year production guidance to 2,900-3,000 boed from 3,050. Its exit debt grew to $37-million from $31-million due to lower oil prices and that production decline. However, Mr. Molnar pointed out it remains lower than "$60-million bank line and only 1.4 times cash flow under a low oil price (higher Canadian dollar) scenario going forward."

"With that said, the gas flood continues to still plainly 'work' with year over year production being held flat despite spending less than cash flow at a time when oil prices have been very weak," he said. "The bank line was renewed at its prior $60-million borrowing base as another indicator that the broader business plan continues to work despite these near term adjustments."

The analyst lowered his cash flow per share projection for 2017 to 75 cents from 81 cents, while his 2018 estimate moved to 67 cents from 69 cents.

He also dropped his target price for the stock to $8.50 from $8.75 based on valuation. The analyst consensus price target is $7.35.

Elsewhere, National Bank Financial analyst Brian Milne downgraded Granite Oil to "sector perform" from "outperform" with a $4.50 target, falling from $6.

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In the wake of "mixed" first-quarter 2018 results, Acumen Capital analyst Brian Pow downgraded his rating for Mediagrif Interactive Technologies Inc. (MDF-T).

Though he said the Montreal-based company's financial position remains strong, Mr. Pow moved the stock to "speculative buy" from "buy," citing the need for a "better line of sight" from its integration of recently acquired Orckestra, turnaround from LesPAC Inc. and EBITDA margin improvement.

"Revenues and [gross margin percentage] were near our estimates," said Mr. Pow. "The biggest difference to our model is the investment the Company is making in overhead (S&M), technology, and infrastructure to build market share."

On Tuesday, Mediagrif reported total revenue of $20-million, slightly below the analyst's estimate of $20.4-million and representing a rise of 5 per cent year over year. Earnings before interest, taxes, depreciation and amortization of $6.1-million was below his $7.7-million projection and a drop from $7-million a year ago, due largely to higher expenses.

"The trends for EBITDA and EBITDA margin performance in FY/17 and FY/18 reflect the impact of higher overall expenses to drive future growth," said Mr. Pow. "The EBITDA margin of 30.8 per cent for Q1/FY18 was below our estimate of 37.8 per cent primarily as result of the G&A and technology expense levels. Moving forward we are reducing our expectations and now forecasting EBITDA margins of 31.8 per cent for FY/18 and 32.6 per cent for FY/19."

"The clear attraction to MDF remains the FCF yield. The Company has limited need for maintenance capital so the free cash flow conversion is quite high. Management's near-term priority is further repayment of debt to free up capacity on the operating line for future acquisitions."

Mr. Pow lowered his target price for the stock to $19.50 from $22.50. The analyst average target price is $19, according to Bloomberg data.

Elsewhere, Desjardins Securities analyst Maher Yaghi lowered his target to $17 from $17.50 with a "hold" rating.

Mr. Yaghi said: "MDF's stock continues to underperform as financial results have been pressured by increased investments in SG&A and R&D. We believe these investments are the right decision to retool the company for FY19; however, we believe they are also likely to lead the stock to trade sideways during this retooling phase, even if we do see long-term value in the story, especially on the FCF front."

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Uncertainty surrounding the status of its Escobal silver mine in Guatemala is likely to remain an overhang for Tahoe Resources Inc. (THO-T), according to RBC Dominion Securities analyst Stephen Walker.

"While Q2 results compared favourably to consensus estimates, this was overshadowed by ongoing uncertainty surrounding the suspension of the Escobal mining license," he said. "We view the dividend cut and suspension of operational guidance to be in line with our expectations amid the uncertainty surrounding the operating license in the Guatemala courts. Tahoe's motion for reconsideration of the Escobal suspension with the Guatemala Supreme Court was denied on July 28. Management noted that the Constitutional Court is expected to rule on Tahoe's appeal within the next three months, and Tahoe seeks to have the license reinstated in the meantime. However, it could take 12–18 months to resolve the NGO CALAS's constitutional claim (which led to the license suspension)."

Mr. Walker is now projecting a 6-month revenue disruption, compared to a previous 3-month estimate.

"We assume that fixed costs at Escobal are reduced to $18-million in H2/17, and across the company $30-million of capex is deferred," he said. "Our 2017 EPS/CFPS estimates decline as a result. In addition, we have reduced the value we attribute to Tahoe's non-operating reserves/resources in our NAV by 45 per cent given our view that the market will attribute less value to these projects amid near-term liquidity concerns."

His 2017 earnings per share estimate fell to 37 cents from 49 cents, while his 2018 and 2019 projections declined to 58 cents and 70 cents, respectively, from 61 cents and 71 cents.

With a "sector perform" rating (unchanged), his target for Tahoe Resources shares declined by a loonie to $9. The average is $9.57.

"While we assume normal operations resume in Q1/18, we expect that the various related legal challenges could remain an overhang over the next 12–18 months," he said.

BMO Nesbitt Burns analyst Andrew Kaip dropped his target to $7 from $11.50 with a "market perform" rating (unchanged).

Mr. Kaip said: "Despite a relatively strong Q2/17, investors are likely to look past the results and focus on the suspended guidance, cessation of dividends and continued uncertainty surrounding the Escobal mining license."

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Finning International Inc. (FTT-T) has "another solid performance" in the second quarter, according to Raymond James analyst Ben Cherniavsky.

"One quarter may not make a trend, but two consecutive quarters of better than expected results certainly gets us one step closer to substantiating our view that a slow but steady recovery is in the works for the equipment sector," he said. "It also increases the conviction in our recent upgrade on Finning to Outperform [on May 11] and our view that the 'full cycle' EPS potential of this restructured company is in the range of $2.35. Accordingly, we recommend the purchase of Finning's stock."

On Wednesday, the Vancouver-based company reported earnings per share of 34 cents, exceeding Mr. Cherniavsky's projection by 6 cents and an increase of 14 cents from the same period in fiscal 2016. Consolidate revenue of $1.581-billion beat Mr. Cherniavsky's estimate of $1.421-billion and represented a rise of 21 per cent year over year.

"All three of Finning's regions produced double-digit revenue growth that exceeded our forecasts," the analyst said. "EBIT margins were also up substantially in the UK and Canada, while FINSA remains under some pressure despite a recent rally in copper. This is expected to prevail for the rest of the year, at least until Chile moves past its fall election."

He added: "We have raised our EPS forecasts to reflect 2Q17's beat and our higher confidence in this market recovery. Although many headwinds still exist, we believe strong CSS demand, reduced costs, and stronger free cash flow will drive Finning's EPS higher."

Mr. Cherniavsky's EPS projection for 2017 rose to $1.30 from $1.25, while his 2018 estimate is now $1.60 (from $1.55).

Maintaining an "outperform" rating, his target for the stock jumped to $32 from $29.50. The analyst average is $31.50.

Meanwhile, National Bank analyst Maxim Sytchev bumped his target to $33 from $31.50 with an unchanged "outperform" rating.

"With 4-per-cent dividend increase, revenue guidance hike to 5-per-cent top-line growth vs. prior flat and the second in a row beat, management's tone was understandably upbeat on the call even though macro / political uncertainty can always rear its ugly head," said Mr. Sytchev. "For instance, in oil sands we believe management now has fully reset expectations for slower growth (GDP+… don't forget that we still have production growth in the oil sands on the back of Fort Hills). In Latam, we have two elections, one in Argentina and another one in Chile, so we have to be mindful for that. Brexit in the UK has not seemed to impact the results but engineers (read WSP) felt some uneven growth this quarter. That being said, we are off the trough now in most end markets. Now, the question is whether FTT can migrate towards keeping costs in line as revenue normalizes. Q2/17 was a good case in point as SG&A increased 7 per cent year over year but versus 18-per-cent jump in revenue. We would suggest that 50 per cent of SG&A is stickier in nature versus the rest being more variable."

TD Securities analyst Cherilyn Radbourne also raised her target to $32 (from $29) with an unchanged "buy" rating.

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Stantec Inc. (STN-T, STN-N) appears to be "back on track" with its second-quarter financial results, according to Raymond James analyst Ben Cherniavsky, who expects further upside from the stock moving forward.

"Recently, we have sensed mounting investor frustration with Stantec as the range-bound performance of its stock has lagged behind that of its closest peer, namely WSP Global Inc.," he said. "Having upgraded our rating to 'outperform' shortly after the MWH acquisition last year, we share this frustration.

"Although our call clearly proved to be premature, we have stuck with it on the belief that, once the dust settled around the integration, MWH would prove to be both an accretive and transformative transaction. One quarter certainly does not make a trend, but we view 2Q17 results as a big step towards vindicating our thesis. Stantec surprised to the upside, exceeding all our forecasts and reporting its first quarter of year-over-year EPS growth since 3Q15. This increases our confidence that 2018 will, in fact, be a more 'normalized' year, reflecting higher margins, better organic growth, and continued M&A accretion."

On Wednesday, the Edmonton-based company reported quarterly earnings per share of 85 cents. Adjusted for amortization, integration costs and gains from the sale of Innovyze, the result was 51 cents, well ahead of the analyst's expectation of 39 cents and the consensus of 46 cents.

Gross revenues of $1.319-billion also topped Mr. Cherniavsky's estimate (by 9 per cent) and was an increase of 26 per cent year over year.

"Gross margins were up slightly and a sliver above of our forecast," he said. "Meanwhile, the ratio of ADM/MKTG expenses to revenue declined by much more than we expected, aided by the beneficial impact of reduced integration costs and improved external billing. As a result, EBIT was 25 per cent greater than we expected and up 63 per cent year over year.

"Following nine previous quarters of declines, organic growth resumed in 2Q17, led by the Buildings (5.1 per cent), Infrastructure (4.6 per cent), and Water (4.1 per cent) consulting practices. Construction Services, acquired from MWH, also registered very strong (21 per cent) organic growth. Meanwhile, Environmental organic growth was flat and Energy & Resources, now down to 11 per cent of revenue, declined another 11.8 per cent."

In reaction to the results, Mr. Cherniavsky's EPS estimate for 2017 rose to $1.64 from $1.60 with his 2018 moving to $2.05 from $1.90.

Keeping an "outperform" rating for the stock, his target rose to $38 from $35. The consensus is $38.06.

Elsewhere, Desjardins Securities analyst Benoit Poirier maintained a $39 target and "buy" rating.

"We are maintaining our positive stance on STN given our expectation that future improvement in organic growth will continue to support the shares," he said. "Meanwhile, we believe the solid balance sheet—post-Innovyze divestiture — provides enough dry powder to support management's M&A strategy. Overall, we continue to like STN in light of the significant catalysts ahead and the potential upside to our target price."

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Desjardins Securities analyst Maher Yaghi continues to see "risk in the name" for Stars Group Inc. (TSGI-T, TSG-Q), believing its balance sheet is "stretched" as it continues to transition its business model.

On Wednesday, the Toronto-based company, formerly Amaya Inc., reported second-quarter revenue of $305-million (U.S.), in line with Mr. Yaghi's projection ($307-million) as well as the consensus ($302-million and up 7 per cent year over year). Adjusted EBITDA of $147-million topped the consensus of $137-million.

Though he called the revenue growth from its casino and sportsbook segment of 50 per cent year over year "impressive," Mr. Yaghi expressed concern about the underperformance from its poker business. That segment's revenue fell 5.9 per cent from the previous year, versus his expectation of a 1.0-per-cent drop.

"The decline was mostly due to cannibalization from new products (casino) and decreased revenue in Australia, the Czech Republic and Poland," he said. "Following the 1Q17 release, management guided to lower poker growth in 2Q17 due to a tough comp vs the previous year, but actual 2Q17 results still disappointed. The company indicated that it is looking to generate flat poker revenue growth in 2017 due to the encouraging response to the launch of its new loyalty program. We estimate this growth will require the company to increase revenue by 2.0 per cent year over year in 2H17. We believe this is achievable as past loyalty programs did generate significant traction for the company. However, we note that there is risk to achieving this target as the growth rate for 2H17 would imply a significant turnaround in poker revenue growth versus the 5.6-per-cent decline recorded in 2Q17. Should this goal be reached, we see the company exceeding or at least being at the high end of 2017 revenue guidance. Overall, we have been highlighting poker's sluggish growth as a reason not to be bullish on the stock, as it still represents 66 per cent of the company's revenue. We are waiting for growth to pick up before warming to that segment again."

Based on the quarterly results, Mr. Yaghi raised his revenue and EBITDA projections for both 2017 and 2018. However, his adjusted earnings per share estimates fell to $2.08 and $2.20, respectively, from $2.11 and $2.22.

He kept a "hold" rating for the stock, lowering his target to $27.50 (Canadian) from $30. Consensus is $28.55.

"We believe the stock's current potential upside is not high enough to compensate for the elevated balance sheet leverage, even though prospects have recently improved," the analyst said. "We would wait until we see less risk in the company's future liquidity position as well as stabilizing poker revenue before becoming more bullish on the name."

Canaccord Genuity analyst Kevin Wright did not change his "buy" rating and $31 target.

Mr. Wright said: "The Stars Group reported a solid quarter that saw it handily beat the Street on revenue, adjusted EBITDA (and margin), and adjusted EPS. Across the board, we were impressed with progress seen in poker, casino and, to a lesser degree, sports. To be clear, poker exhibited erosion on a year-over-year basis (down 5.9 per cent) but came in modestly ahead of our 6.0-per-cent-drop estimate and commentary from management continues to express optimism that the segment can end the year flat; we are not quite there yet as we continue to forecast declines but any evidence in Q3/17 to the contrary could be the turning point that improves our own outlook. Casino continued on its strong growth trajectory and while sports book remains small, it is the segment that is most likely to undergo M&A to bolster its customer base. The company continues to pay down debt and it sounds to us like management is open to negotiating a settlement in Kentucky, which would remove a meaningful overhang."

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In other analyst actions:

Citing a de-risk second-half outlook and its current valuation, Credit Suisse analyst Robert Reynolds upgraded Semafo Inc. (SMF-T) to "outperform" from "neutral" with a $4. Consensus is $4.88.

TD Securities analyst Timothy James downgraded AirBoss of America Corp. (BOS-T) to "hold" from "buy" with a $15 target, while Cormark Securities analyst Maggie Macdougall lowered it to "market perform" from "buy" with a $14.50 target (from $14.75). The average target is $14.81.

Analyst Todd Kepler at Laurentian Bank Securities raised Paramount Resources Ltd. (POU-T) to "top pick" from "buy" with a target price of $33, rising from $30. The average is $25.46.

TD Securities analyst Craig Hutchison downgraded Nevsun Resources Ltd. (NSU-T) to "hold" from "buy" and lowered his target by a loonie to $4. The average is $4.57.

Aimia Inc. (AIM-T) was raised to "hold" from "reduce" by GMP analyst Martin Landrym who lowered his target to $3 from $4. The analyst average is $3.37.

TD Securities analyst Sean Steuart upgraded KP Tissue Inc. (KPT-T) to "buy" from "hold" with a $16 target, which is $1 lower than the consensus.

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