Thursday’s analyst upgrades and downgrades

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

Though there is "no sign of trouble," Dollarama Inc.'s (DOL-T) high share price suggests a "time for caution," according to Desjardins Securities analyst Keith Howlett.

"Dollarama's growth story shows no signs of fatigue," he said. "While increases to the minimum wage rates in Ontario, Alberta and Quebec represent a challenge in calendar 20118, Dollarama is on equal footing with its competitors in dealing with it. Weather in 4Q FY18 (January) was generally not an obstacle to customer traffic. We find no evidence that a lower Canadian dollar compresses Dollarama's gross margin rate. Its partner in Latin America is rapidly opening stores. The share price, however, is running too far ahead."

Accordingly, Mr. Howlett downgraded his rating for the Montreal-based discount retailer to "hold" from "buy."

Despite the move, the analyst continues to project the company to see growth "rapidly and profitably in Canada, with 8–10 years of runway ahead of it." His earnings per share projection for fiscal 2018 is $4.50, rising from its 2017 result of $3.71. His 2019 estimate sits at $5.16.

Mr. Howlett's target for Dollarama shares remains $165. The average target price on the Street is currently $160.93, according to Bloomberg data.

"Dollarama remains an exceptional growth story, combining great consumer appeal with a highly profitable business model," the analyst said. "We do not see any direct competitive threat. Miniso and Giant Tiger represent tangential incursions into Dollarama's market space. Dollar Tree Canada, focused at retail price points of $1.25, remains a potential threat. Higher minimum wage rates and a lower Canadian dollar affect all competitors, but are challenges. Poor weather can inhibit sales, but it is transitory. Share valuation is the real issue."

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Just Energy Group Inc. (JE-T, JE-N) received a trio of upgrades on Thursday in reaction to the release of its third-quarter financial results.

After market close, the Toronto-based company reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $52.5-million, a rise of 2 per cent year over year and in line with the expectations of the Street.

Canaccord Genuity analyst Raveel Afzaal thinks the results enhance the sustainability of its dividend payments, leading him to raise its stock to "buy" from "hold."

"The company's Q3/F18 EBITDA represented a sharp sequential improvement from $21-million in Q2/F18," said Mr. Afzaal. "FQ2 was adversely impacted by unseasonal weather conditions which elevated its LTM [last 12-month] payout ratio to 106 per cent. Q3/F18 results helped push the LTM payout ratio to 90 per cent as JE heads into its seasonally strongest quarter. The weather in Q4/F18 has been very volatile to date, but we believe JE has comprehensive hedges in place. Hence, we are comfortable with our EBITDA forecast of $77-million, implying a F2018 payout ratio of 81 per cent. As a result, we believe the dividends are sustainable and view the dividend yield of 9.8 per cent as attractive."

Though he marginally raised his EBITDA projections for both 2018 and 2019 and noted visibility is improving on its customer division's net customer growth, Mr. Afzaal kept a target of $6.25 for Just Energy shares. The average target on the Street is $7.99.

"We maintain our $6.25 per share target price derived using 7.5 times enterprise value-to-2019 EBITDA," the analyst said. "However, we are upgrading to BUY from Hold given (1) the recent share price decline resulting in the dividend yield increasing to 9.8 per cent; (2) improved visibility on sustainability of dividends following Q3/F18 results; and (3) JE trading at 6.9 times EV/2019 EBITDA versus historical average of 8.1 times."

Elsewhere, touting a "compelling risk/reward set-up" following a 41-per-cent drop in share price since May of 2017, CIBC World Markets' Kevin Chiang bumped his rating to "outperformer" from "neutral." He dropped his target to $6.50 from $7.50.

"We upgrade JE from Neutral To Outperformer for the following reasons: 1) We see a more compelling risk/reward profile with JE's EV-to-forward EBITDA 2 standard deviations below its 5-year average. 2) JE's 10-per-cent dividend yield is compelling and we view its payout as safe. 3) The company is beginning to see the benefits of its growth strategy as it remains on track to expand into 500 retail stores by year-end; its loyalty program is reducing attrition; and its recent acquisition of EdgePower should help improve commercial customer adds and renewals," said Mr. Chiang.

National Bank Financial's Trevor Johnson raised it to "outperform" from "sector perform" with a target of $6.25, up from $6.

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Citing both its current valuation and progress at its Mount Milligan operation in central British Columbia, Canaccord Genuity analyst Tony Lesiak upgraded Royal Gold Inc. (RGLD-Q) to "buy" from "hold."

On Thursday after market close, the Denver-based company reported second-quarter adjusted earnings per share of 41 US cents, a penny below the Street's expectation and 2 US cents lower than Mr. Lesiak's projection. He cited higher legal and depreciation expenses as the chief culprits of the miss.

Mr. Lesiak also noted its operating cash flow rose 6 per cent from the first quarter to US$75.6-million, while its net debt improved by US$100-million (to US$395-million).

"On a positive note, RGLD indicated that operator Centerra expects milling operations at Mt. Milligan to be back at full capacity in April with the start of the second ball mill and additional water availability," he said. "Centerra had previously announced receipt of additional permits to draw water from Philip Lake which appears to have resolved the longerterm water issue. Unfortunately, water was not the only issue (maintenance, pebble crusher availability, premature failure of the SAG liners, ore complexity, fragmentation and blending issues) preventing this key asset (27 per cent of net asset value) for RGLD from reaching full production in the past. To account for these lingering concerns our estimates remain more cautious. We now expect Mt. Milligan to operate at 72 per cent of nameplate in calendar 2Q18, averaging 84 per cent in 3Q and 92 per cent in 4Q. Sales are expected to lag production given the typical 5-month shipping and revenue recognition lag. Our FY 2018 earnings have been revised lower to reflect this. Centerra is expected to provide a more fulsome update on Feb 23."

His earnings per share estimate for 2018 fell to US$1.77 from US$2.16 with his 2019 estimate remaining US$2.76. His cash flow per share projection also dropped (US$4.94 from US$5.18), but his 2019 CFPS expectation rose to US$5.73 from US$5.70.

Mr. Lesiak increased his target by US$1 to US$102 to reflect both increased assumptions at Mt. Milligan as well as expected positive benefits from U.S. tax changes, from which the company expects to see a corporate rate reduction to 21 per cent from 35 per cent.

The average target is US$94.92.

"Our target remains predicated on a 1.75 times multiple to our forward curve derived operating NAV of $74.91 (from $73.98) minus net debt and other items," he said. "Given the 27-per-cent implied return, we are upgrading RGLD to BUY from Hold. RGLD shares have, surprisingly, performed in line with the royalty peer average (down 8 per cent) on 3 months despite the issues at Mt. Milligan."

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The market currently prices Mullen Group Ltd. (MTL-T) "near-to-perfection," said Raymond James analyst Andrew Bradford following the release of its fourth-quarter financial results.

Alberta-based Mullen, which provides trucking and logistics services to the Canadian oil and natural gas industry, reported EBITDA for the quarter of $46-million, just missing the $48-million projection of both Mr. Bradford and the Street.

The company's Trucking/Logistics segment saw a 19.4-per-cent rise in revenue year over year to $206.6-million.

"About half of MTL's T/L revenue is from its 'less-than-truckload' (LTL) carriers, and this revenue was up 15 per cent year over year," said Mr. Bradford. "It's impossible to say how much of the LTL revenue comes from Western Canada with any certainty, though about half MTL's LTL assets are based in Western Canada. Our macro estimates suggest the economic tailwinds in Western Canada have probably already exerted most of the differential impact on the T/L segment they're going to have, though the year-over-year differential should continue showing-up for the next 2 quarters. The caveat to this would of course be the potential lifts from pipeline or LNG expansion."

"Mullen is starting 2018 with a $134-million cash position. Looking forward through 2018, we expect Mullen will generate $205-million EBITDA, which after non-operating expenses will yield $157-million cash flow. From this we expect Mullen will repay its $70-million Series D note (due Jun-30-18), invest $9-million in working capital and $40-million in essentially maintenance capital, and pay $63-million in dividends. This should leave MTL with $110-million at year-end, notwithstanding potential acquisitions. The next maturity following the $70-million note repayment isn't until 2024. Net debt/trailing EBITDA is currently 2.1 times, though we expect this drop to 1.7 times by mid-year before potential acquisitions."

With the results, Mr. Bradford lowered his 2018 and 2019 EBITDA expectations to $205-million and $218-million, respectively, from $222-million and $232-million.

Accordingly, his target for the stock fell to $14.70 from $15.75. The consensus target is now $16.93.

"The stock is currently priced at 9.1 times our 2018E EBITDA estimate, while it averaged 9.1 times over the 2 years before the energy downturn began and expanded the multiple to the 11-times range," said Mr. Bradford. "We think it's reasonable that the market will begin to consider the current consensus range for 2018/19 as the new baseline, which could keep a lid on multiple expansion."

Meanwhile, National Bank Financial analyst Greg Colman upgraded Mullen to "outperform" from "sector perform" with a target of $16.50 (unchanged).

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Following "robust" fourth-quarter financial results, RBC Dominion Securities analyst Michael Smith sees a "bright" outlook for FirstService Corp. (FSV-Q, FSV-T), driven by growth from its Brands division and supported by a "healthy" macro backdrop and continued tuck-under acquisitions.

On Wednesday, the Toronto-based property services company reported revenue for the quarter of US$438-million, exceeding Mr. Smith's projection of US$418-million. The beat was driven by 38-per-cent year-over-year growth in its brands division and a 6-per-cent jump in its residential segment.

Adjusted EBITDA of US$41-million also topped his expectation (US$35-million) and was an increase of 17 per cent from the previous year. Adjusted earnings per share of 51 US cents was 10 US cents ahead of his estimate and up a "healthy" 24 per cent.

"Concurrent with Q4 results, management provided high-level commentary regarding its 2018 outlook, which calls for organic revenue growth in the mid-single digits and several tuck-under acquisitions, driving double-digit total revenue growth," said Mr. Smith. "On the EBITDA margin front, management is striving for a 'very modest' improvement over the 9.5-per-cent level achieved in 2017. In addition, management guided toward an effective tax rate of about 25 per cent, down from the low- to mid-30-per-cent range over the past few years. On balance, the company's five-year plan remains on track despite near-term expectations for moderating organic growth in the Residential division."

"In 2018, management expects to deploy capital toward the growth of its company-owned operations within the Brands division—namely, Paul Davis Restoration, California Closets, and Century Fire Protection. Notably, management continues to be 'quite bullish' about the opportunities within its fire protection business, commenting that expansion in the U.S. Southeast is a strategic focus. It sees potential expansion opportunities in Florida and the Carolinas as well as the opportunity to add new services to existing operations."

Keeping a "sector perform" rating for FirstService shares, Mr. Smith raised his target by US$3 to US$78. The average is currently US$73.33.

"We continue to see attractive risk-adjusted return potential for long-term investors and point to our five-year DCF [discounted cash flow] value of $84," he said. "Moreover, we continue to see healthy growth prospects (PEG ratio: less-than 1.0x), a generally constructive macro backdrop in the U.S., and a healthy acquisition pipeline."

At the same, BMO Nesbitt Burns analyst Stephen MacLeod said the results showed a "strong finish" to 2017, however he expects 2018 growth to be more moderate.

With a "market perform" rating (unchanged), he raised his target by US$1 to US$75.

"The outlook for 2018 estimate was in line with our forecasts (mid-single-digit organic growth; could see 4 per cent-plus upside from tuck-ins) and call for more moderate margin gains in FSR versus previous years," he said. "While we have a positive fundamental view, we believe the stock is reasonably valued.

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In other analyst actions:

Clarus Securities analyst Jamie Spratt downgraded Klondex Mines Ltd. (KDX-T) to "sell" from "accumulate" with a target of $2.90, down from $3.25. The average target on the Street is $3.72.

PI Financial Corp. analyst Robert Gibson downgraded Corby Spirit and Wine Ltd. (CSW.A-T) to "neutral" from "buy" with a target price of $22.75, down from $24. He's the lone analyst currently covering the stock, according to Bloomberg.