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Thursday’s analyst upgrades and downgrades

Kempegowda International Airport in Bengaluru (Bangalore), India.

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

Plaza Retail Real Estate Investment Trust (PLZ.UN-T) currently provides investors with an attractive entry point, according to Desjardins Securities analyst Michael Markidis.

With the Fredericton-based REIT's stock having fallen by 13 per cent since late February, he upgraded his rating to "buy" from "hold."

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"Beyond our valuation argument, we note that (1) insider ownership is abnormally high, (2) PLZ has established a solid track record of being a good steward of capital, and (3) it is has been one of the most consistent distribution growers in the Canadian real estate space over a period of many years," said Mr. Markidis.

On Aug. 10, Plaza reported second-quarter funds from operations of 9.5 cents per unit, exceeding Mr. Markidis's projection of 8.6 cents. He noted the result was "buoyed by a significant amount of lease termination income." Excluding that income, underlying FFO was 8.1 cents, falling short of his estimate.

"Despite lower occupancy, PLZ was still able to deliver same-property NOI growth of 1.1 per cent, reflecting positive contributions from a decrease in non-recoverable costs and maintenance expenses," said Mr. Markidis. "Although the former Staples and Future Shop locations noted above will remain vacant for the remainder of this year, PLZ believes that it will still be able to eke out a modest gain over the next several quarters. We believe an organic growth rate assumption of 0.5–1.0 per cent is a reasonable working assumption."

He added: "The active development pipeline includes 12 properties that should result in the addition of more than 250,000 square feet of space (at PLZ's interest) to the rental pool by mid-2Q18. The estimated annual NOI contribution of $1.0–1.3-million (1 cent per unit) is significant relative to the size of the existing asset base. Beyond this, management has demonstrated an uncanny ability to continually restock its value-add pipeline such that expenditures consistently come in at $25–50-million on an annual basis. The Shoppes at Galway could become a significant component of PLZ's investment program within the next 2–3 years."

Based on the results, Mr. Markidis lowered his 2018 FFO per unit estimate by 2 cents to 35 cents, which is also his 2019 projection.

He maintained his 12-month target price for the stock of $5.25. The analyst consensus price target is $5.21, according to Thomson Reuters.

"Performance wise, it has been a tough year for PLZ unitholders; the stock has generated a total return of negative 8 per cent versus a 4-per-cent rise for the S&P/TSX Capped REIT Index," the analyst said. "Clearly, PLZ is getting caught up in the negative sentiment impacting all retail-focused REITs; however, we would point out that PLZ does not have exposure to Sears or any other large-box tenants. The portfolio is predominantly focused on servicing small, necessity-based tenants (Shoppers Drug Mart is PLZ's largest tenant at 26 per cent of base rent). In our view, these businesses are not in the direct line of fire of the e-commerce threat."

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"PLZ is trading at 12.9 times our 2018 FFO/unit estimate. In our view, this looks attractive when compared with the five-year trailing average consensus FTM [forward 12-month] multiple of 13.5 times (peak of 16.3 times and trough of 11.8 times) … It is worth noting that PLZ has been one of the most consistent distribution growers in the Canadian REIT space. We are confident that investors will likely be rewarded with another 2–4-per-cent increase for 2018."

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Fairfax India Holdings Corp. (FIH.U-T) is continuing to do a good job building upon its investments and deploying cash to "attractive" opportunities, said RBC Dominion Securities analyst Mark Dwelle.

He called the Toronto-based investment holding company's shares "attractive for long-term investors seeking unique exposure to the Indian market."

"Its been a busy first half of the year for Fairfax India with the completion of a secondary offering, the purchase, via multiple transactions, of 48 per cent of Bangalore International Airport Limited (BIAL), the purchase of Saurashtra Freight, the merger of Fairchem and Privi to form Fairchem specialty and an additional investment in IIFL [India Infoline Ltd.]," said Mr. Dwelle. "While this has been happening interest in emerging market investments has been surging and the company has seen meaningful unrealized gains on several of its holdings. In particular shares of IIFL have risen from a fair value of $266-million at Dec. 31, 2016 to $792-million at June 30 reflecting both increased ownership as well as significant share price appreciation. The closing of the BIAL [Bangalore International Airport Ltd. ] transaction was also very significant as this is high margin asset with substantial long-term potential."

Mr. Dwelle raised his financial estimates for the company to reflect first half results, share issuances and "other operating developments." He raised his 2017 and 2018 earnings per share projections to $2.86 and nil, respectively, from losses of 7 cents and 8 cents.

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"Our estimate remains focused primarily on operating revenues and expenses and does not reflect realized or unrealized gains on investments which cannot be readily anticipated though are a substantial component of net earnings," he said.

Keeping an "outperform" rating for the stock, Mr. Dwelle hiked his target price to $20 from $14. Consensus is $17.55.

"Investors should have a fairly long-term approach in considering an investment in FIH as valuation depends inherently on the monetization of these investments," he said. "While it is always possible that monetization could come quicker than expected, these are inherently private equity investments and the realization of value will take time as the various underlying management teams execute their business models and market reforms get enacted and take hold.

"Fairfax India is a narrowly positioned investment company, tasked with doing one thing—investing in attractive Indian businesses. Our Speculative Risk rating reflects this narrow mandate and the assortment of risks inherent in emerging market investments. While we think management has taken reasonable steps to mitigate these exposures, it is the evolving and rapidly changing environment in which FIH invests which leads to this view."

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Canadian Apartment Properties Real Estate Investment Trust (CAR.UN-T) recorded a "solid" second quarter, said Raymond James analyst Ken Avalos, who emphasized the results take a backseat to the death of  President and Chief Executive Officer Thomas Schwartz.

On Wednesday, the Toronto-based REIT announced Mr. Schwartz had passed away after a battle with prostate cancer. He was 68.

"Tom cofounded and built one of the most highly regarded companies in Canada," said Mr. Avalos. "Part of his leadership was surrounding himself with an experienced team that we believe will continue to build on the vision and success that Tom has left behind. While his passing is a sincere loss to his family, friends, and the real estate community, it does not sway our opinion on the stock."

"We believe that regardless of whom they select, the team that is in place should continue to drive strong SPNOI, FFO and NAV growth, further cementing CAP REIT at the forefront of the Canadian apartment sector. We believe and hope this is legacy enough for Thomas Schwartz."

On Monday, CAP REIT reported quarterly funds from operations of 46 cents, up 3 per cent year over year and in line with both Mr. Allan's projection and the consensus. Same property net operating income grew 3.9 per cent on 3.3-per-cent revenue growth. Ontario saw 6.7-per-cent growth and Quebec was up 3.4 per cent, offsetting a 9.0-per-cent drop in Alberta.

With the results, Mr. Allan raised his FFO per unit projections for 2017 and 2018 to $1.84 and $1.90, respectively, from $1.82 and $1.88.

With an "outperform" rating, his target rose by a loonie to $36. Consensus is $35.92.

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Despite a "good" second quarter that featured record gold sales, Laurentian Bank Securities analyst Barry Allan lowered his target price for shares of Klondex Mines Ltd.  (KDX-T).

On Aug. 9, the Vancouver-based company reported sales of 69,511 gold equivalent ounces.  Revenue was a quarterly record of $86.8-million (U.S.), up 74 per cent year over year, from average realized selling prices per gold and silver ounce of $1,249 and $17.10, respectively.

Quarterly production of 53,300 ounces GEO was in line with Mr. Allan's forecast of 54,900 GEO, while an average operating cost of $624 per ounce of gold sold exceeded his expectation of $690 per ounce. Mr. Allan believes the beat was due to gold held over from the first quarter and sold from inventory, as well as better ore grades at the Fire Creek mine.

"We have moderated our forecast in spite of increased production guidance," said Mr. Allan. "For the year, we have slightly reduced our forecast to reflect more underground development at the Fire Creek mine than we had originally judged, and we have not increased our estimated production for the Hollister or True North mines as guided by management, reflecting our more conservative start-up expectations for both of these mines. The impact on NAV is a small 5 cents per share reduction.

"Klondex is all about executing full start-up of two new gold mines. The established Fire Creek and Midas mines are operating well and in-line with expectations, and the near-term future for KDX is about ramping up production at both the Hollister and True North mines. So far to date, both mines have met expectations in terms of output and grade. However, for 2H/17 Klondex is guiding to material increases in output for both mines, offsetting potentially lower output of the Fire Creek mine for 2H/17. Our forecast reflects a more measured start-up than what management are guiding to."

With a "buy" rating, his target declined to $5.80 (Canadian) from $6.15 due largely to the strength of the Canadian dollar. Consensus is $6.38.

"More than 80 per cent of Klondex's production is from mines located in the United States," said Mr. Allan. "Hence, the impact of a stronger Canadian dollar is largely confined to converting a US$-dominated NAV per share to C$/sh. Due to strength in the C$, we have lowered our conversion rate from $1.30 to $1.25 which reduced the C$ target price by 24 cent per share. The additional reduction in target price (11 cents per share) is due to a more conservative production forecast. However, the underlying fundamental value of KDX remains good."

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Target Corp.'s (TGT-N) stronger-than-projected second-quarter results and its second-half guidance "should serve as catalyst to sustain near-term stock price momentum with attractive valuation (P/E and dividend yield) also representing a critical factor," said Macquarie analyst Bob Summers.

On Wednesday, the U.S. retailer reported adjusted EPS of $1.23, exceeding the Street's expectation by 4 cents.  

Mr. Summers called its store comparable-store sales of 1.3 per cent both "impressive" and "strong."

"From a fundamental perspective, we view the 1.3-per-cent comparable stores performance and underlying 2.1-per-cent traffic count as very attractive when factoring the overall competitive climate and are encouraged by strength across the more important merchandising categories (food and beverage still needs work)," he said.

"We are encouraged by the improvements posted this year and revised guidance (management raised FY17 adjusted EPS to $4.34-$4.54 from $3.80-$4.20 and comp guidance to flat growth (plus or minus 1 per cent) from low-single digit decline). Uncertainty still exists but we take comfort from improved momentum but appreciate sustained execution and a visible path to succeeding in the overall current operating environment are critical components to eliminating deep seated investor concerns."

Mr. Summers raised his fiscal 2017 and 2018 EPS projections to $4.53 and $4.50, respectively, from $4.43 and $4.38.

He maintained an "outperform" rating and $77 (U.S.) target for the stock. Consensus is $59.57.

"We think the negative sentiment and limited EPS risk near-term set the stock up better than some of their peers," the analyst said. "However, we recognize perception issues will remain a constraint that will not simply be overcome with two strong earnings quarters and compelling guidance but will require sustained strength/execution over a period of time."

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In other analyst actions:

Believing its "platform is being underestimated," RBC Dominion Securities analyst Wes Golladay raised his rating for Regency Centers Corp. (REG-N) to "top pick" from "outperform" with a target of $75 (U.S.), up from $72. Consensus is $71.92.

"We have moved to overweight shopping centers and favour quality within the space," said Mr. Golladay. "We view REG as one of the best-positioned shopping center REITs for organic and external growth and believe the company's access to the debt markets on favorable terms adds incremental value."

He also upgraded Retail Opportunity Investments Corp. (ROIC-Q), a San Diego-based REIT, to "outperform" from "sector perform" with an unchanged $23 (U.S.) target. Consensus is $22.88.

The analyst said: "Our upgrade is based on the following attributes of ROIC: 1) superior geographic positioning; 2) a high leased rate should drive pricing power; 3) limited exposure to troubled tenants including lower exposure to larger box concepts that could become capital-intensive to re-tenant; 4) optionality for alternative use; 5) well-established network for acquisitions; and 6) above-average embedded growth from optimizing performance at acquired properties."

Mr. Golladay's colleague Michael Carroll downgraded Boston Properties Inc. (BXP-N) to "outperform" from "top pick" with a $140 (U.S.) target, down from $150. The consensus target for the REIT is currently $133.95.

"We remain encouraged by the company's long-term growth prospects, especially after the solid 2Q17 earnings report," said Mr. Carroll. "However, we believe trends will be more modest in the near term due to upcoming known tenant move-outs. Additionally, the expected uptick in economic growth appears to be more muted compared to our previous expectation. Therefore, we lower our rating."

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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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