Thursday’s analyst upgrades and downgrades

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

Ahead of the release of its fourth-quarter financial results after market close on Thursday, Raymond James' Daryl Swetlishoff added Canfor Corp. (CFP-T) to the firm's "Canadian Analyst Current Favourites" list.

"With high leverage to strong Western SPF lumber and NBSK pulp markets we expect Canfor to deliver strong quarterly earnings (and an earnings beat) when they report," he said.

"In addition, with higher YTD [year-to-date] commodity pricing we expect positive forward management guidance and upward analyst earnings revisions. Longer term we have strong conviction we are in the early stages of a multi-year run in lumber pricing, of which Canfor will be an obvious beneficiary."

Mr. Swetlishoff has an "outperform" rating and $33 target for Canfor shares. The average target on the Street is $29.50.

In adding Canfor, Mr. Swetlishoff removed Interfor Corp. (IFP-T) from the list. He has a "strong buy" rating for its stock and $31 target, which remains above the consensus of $26.80.

"We are removing Interfor from the Analyst Current Favourite list following an increase in the share price of 18 per cent quarter to date versus the TSX Index (down 4 per cent)," he said. "We continue to see favourable conditions for Interfor with its strategic geographic footprint providing low relative exposure to export duties, with high torque to higher lumber pricing. As Interfor continues to deliver on their business optimization initiatives in the U.S. South, and further expands on these opportunities, we expect the company to deliver robust and improving results, particularly in what are fundamentally tight lumber markets."

At the same time, analyst Steve Hansen added Superior Plus Corp. (SPB-T) to the list in place of Bombardier Inc. (BBD.B-T)

Mr. Hansen said: "We are adding Superior Plus Corp. to our ACF list based upon our increasingly constructive view of the firm's macro environment and commensurate near-term opportunities associated with: 1) strong leverage to North America's frigid winter conditions (+ heating demand) & rising oil prices (+ oilfield activity = + propane demand); 2) healthy exposure to robust NA chlor-alkali fundamentals (see our 02/16/2018 Comment for details); 3) a robust M&A pipeline (i.e. propane & specialty chemicals); 4) an attractive dividend yield (5.8 per cent); and, 5) reasonable valuation (8.4 times enterprise value/EBITDA on 2018 estimates)."

He has a "outperform" rating and target price of $14.50 for Superior Plus shares. The average target is $14.05.

Mr. Hansen kept an "outperform" rating and $4.25 target for Bombardier, versus the average of $4.29.

"We have removed Bombardier from our ACF list based upon the stock's handsome 37-per-cent appreciation since being added to the ACF list on Oct. 17, 2017," he said.

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Western Energy Services Corp. (WRG-T) reset its baseline day rates with "impressive" growth in the fourth quarter, according to Raymond James analyst Andrew Bradford.

Calling it a "hightorque" investment in a rising Canadian rig count environment, Mr. Bradford raised his rating for the Calgary-based company to "outperform" from "market perform" following Wednesday's release of its quarterly results.

The contract drilling services provider reported earnings before interest, taxes, depreciation and amortization (EBITDA) of $10.1-million for the quarter, exceeding both Mr. Bradford's estimate of $6.9-million and the Street's expectation of $8.2-million. He attributed the beat to the "exclusive function" of higher Canadian day rates.

"Revenue per day in Canada was $2,500 higher sequentially, only a small portion of which was attributable to winter equipment rentals," said the analyst. "We admit to being surprised by this sequential change. WRG's Canadian dayrate hadn't strayed more than $200 above or below the $18,800 mark for four consecutive quarters, but last night WRG reported generating $21,100 revenue per operating day in Q4.

"At this point, it looks as though some of the dayrate increase we envisioned for 2018 has been pulled-forward sooner than we had anticipated. And any remaining dayrate pressure through 2018 will tack-on incrementally to the 4Q17 dayrate figures. We had previously envisioned dayrates rising by about $1,900 per day from 3Q17 to 4Q18. Now we envision the rate rising by $2,600 over the same timeframe."

Based on those results, Mr. Bradford raised his 2018 and 2019 EBITDA forecasts by $7-million (or 14 per cent) and $6-million (10 per cent), respectively. His earnings per share projections are now losses of 18 cents and 6 cents, respectively, from losses of 26 cents and 13 cents.

"Given WRG's historical 6.0x EBITDA multiple, this bump in baseline annual EBITDA implies roughly a $40-million increase in enterprise value, all of which accrues to equity," he said. "Since WRG's market cap is approximately $110-million, this implies a 36-per-cent increase in our target – financial leverage in action."

Mr. Bradford increased his target price for Western Energy Services shares to $1.65 from $1.20. The average target is $1.53.

"We establish targets based on the assumption that the market will view the state of the world in 6 to 12 months as 'normal' – or at any rate, the 'new normal,'" he said. "Therefore, we look back to years where the market might have held the same view as today and apply those multiples to our forward estimates. During nondownturn, or 'normal' years (2011 to 2014), WRG averaged between 5 times and 6 times EBITDA, and tended to peak between 6.0 times and 6.5 times. We target WRG at the average of 6.0 times 2018E and discounted 2019E EBITDA. This yields our $1.65 target price."

Elsewhere, RBC Dominion Securities analyst Benjamin Owens upgraded his rating to "outperform" from "sector perform" with a target of $1.25 (unchanged).

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Kirkland Lake Gold Ltd. (KL-T, KL-N) "makes it look easy," said Desjardins Securities Raj Ray, who raised his target for its stock in response to a "strong" reserve update on Wednesday.

"KL Gold has two of the highest-grade underground mines in the world, Macassa in Canada and Fosterville in Australia," said Mr. Ray. "While Macassa has always been known as a narrow-vein, high-grade operation, with reserves grade at the end of 2017 of 21grams per ton and increasing at depth, Fosterville's increase in grade has been a revelation for the company and the market. At the end of 2017, Fosterville hosted total reserves of 1.7 moz grading 23 grams per ton with grade and ounces increasing 29 per cent year over year and 65 per cent year over year. Ongoing exploration continues to further extend the high-grade, visible-gold mineralization at Fosterville."

"If recent operational updates from Fosterville and Macassa are anything to go by, KL Gold is expected to keep growing production and margins as mining advances into the higher-grade zones at Fosterville and Macassa. Specifically, KL Gold is expected to start mining from the high-grade Swan zone at Fosterville in 2H18 and has started mining from the 5700 level at Macassa. For context, the reserves grade at the Swan zone is 61 grams per ton vs the overall Fosterville reserves grade of 23 grams per ton (2017 average mined grade of 15.8 grams per ton). Similarly, the reserves grade at the 5700 level in Macassa is 27.3 grams per ton vs the overall Macassa reserves grade of 21 grams per ton (2017 average mined grade of 16.0 grams per ton)."

For the fourth quarter of fiscal 2017, the Toronto-based company reported cash flow per share of 45 US cents, which met Mr. Ray's expectation and was a penny lower than the consensus estimate. It was a jump of 12 US cents from the previous quarter due largely to "significantly" higher production.

"Cash and cash equivalents at the end of 4Q17 totalled US$231.6m with no debt. Despite the high capital spend guidance in 2018, we estimate the company can generate over US$70m of FCF at a spot gold price of US$1,325/oz with cash flow breakeven at gold price around US$1,200/oz. In addition, while the company's dividend program (quarterly dividend of C$0.02/share) is small, KL Gold has also been active on its NCIB, with 5.4m shares bought back in 2017 for C$76.5m."

Seeing "strong" catalysts to drive its share price higher in 2018, Mr. Ray increased his target to $26 (Canadian) from $25, maintaining a "buy" rating. The average is $24.55.

"In 2017, KL Gold was one of the best-performing gold stocks (up 175 per cent versus 0.6 per cent for the S&P/TSX Global Gold Index) on the TSX," he said. "We believe there is additional upside to the share price as KL Gold could continue to surprise market expectations in the near term, driven by operational results from Fosterville and Macassa, especially after the strongly positive reserves and resource update. In addition, positive results from the ongoing exploration in Australia and Canada could provide a further boost to the share price."

"KL Gold currently trades at 0.95 times based on our NAV [net asset value] estimate vs the average for intermediate producers of 0.90 times. On P/2018 CFPS, KL Gold trades at 9.1 times versus peers at 6.2 times. Given KL Gold's attributes of a strong operational outlook, solid balance sheet and significant organic growth potential, we believe its shares could trade closer to 1.3–1.4 times  P/NAV and 11–12 times P/CFPS in the near term. Also note that the peer average is currently skewed to the downside, given recent operational and/or jurisdictional issues with a number of intermediate producers."

Elsewhere, PI Financial Corp. analyst Philip Ker upgraded Kirkland Lake to "buy" from "neutral" and raised his target to $22 from $19.25. The average is $24.55.

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Calling it an "under-recognized" yet established junior producer, BMO Nesbitt Burns analyst Andrew Mikitchook initiated coverage of Wesdome Gold Mines Ltd. (WDO-T) with an "outperform" rating, emphasizing it has been leveraging its exploration success to improve grades, throughputs and profitability at its Eagle River mine in northern Ontario.

"Wesdome is preparing to deliver production growth derived from recent exploration successes and operational improvements at its two Canadian assets," he said. "The company's flagship Eagle River mine in Ontario has seen ongoing exploration at the 7 and 300 zones proximal to existing infrastructure and we expect the upcoming reserve update to include more significant contributions from these zones. The Kiena mine in Val d'Or, Que., currently on care and maintenance, has seen its own exploration successes since August 2016 with the discovery of a repetition of the S–50 mineralized zone to depth at grades higher than those previously mined."

"In our opinion the current development plans are within the capacity of treasury and projected cash flows. We have modeled a $16-million annual sustaining capex for Eagle River, which is inline with current spending rates. For Kiena's restart, we are modeling a modest $40-million spread out over three years mostly dedicated to ramp sinking and underground development. Looking beyond the restart of Kiena in 2021, Wesdome would build cash flows from the higher grades at both mines that, in our opinion, would exceed even aggressive exploration programs and likely support dividends or potentially attract an acquirer looking for low jurisdiction risk assets."

Mr. Mikitchook set a target of $3.75, which is below the average on the Street of $4.11.

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Sienna Senior Living Inc.'s (SIA-T) growth by consolidation is supported by a stable cash flow, said Laurentian Bank Securities analyst Yashwant Sankpal.

"Being the second largest public-listed Seniors' Living operator in Canada, SIA offers an excellent investment vehicle to get exposure to the aging-demographic trends in North America," he said. "The balanced mix of its steady Long Term Care business and the higher-margin, privatepay Retirement Home segment, makes SIA attractive to yield investors. Over the last few years, SIA has done an excellent job at improving the operational performance of its existing properties as well as at capital allocation by using its all-time high stock currency to grow its Retirement Home portfolio."

However, Mr. Sankpal feels Sienna's share price of $17.39 at the close of Wednesday trading properly reflects those factors. That led him to call it "fairly valued" upon resumption of coverage with a "hold" rating.

"The Canadian Seniors Living sector tends to remain quite active in terms of M&A," he noted. "In the last three years, 3 operators were taken private at cap rates ranging between 4.7-7.0 per cent. Large institutional investors such as pension funds and U.S. Healthcare REITs tend to snap up well-run portfolios. SIA's current size and the lack of a controlling shareholder make it an attractive target for even a mid-size U.S. REIT."

Mr. Sankpal has a target price of $19 for Sienna shares, which is 42 cents less than the average target on the Street.

"Between its IPO in 2010 and before the appointment of new CEO in Apr 2013, SIA was essentially a dormant company, essentially because of a large debt maturity looming over its head and a few struggling acquisitions," he said. "Under the new leadership, SIA not only addressed the issues but also undertook various initiatives to streamline its operations - sold its Home Care business, and integrated the third-party management operations with its LTC [Long Term Care] division - and to enhance SIA's public profile – property level and corporate re-branding. The stock market most favorably responded to the improvement in the performance of SIA's RH [Retirement home] portfolio. … The occupancy rate of the RH segment increased from 76 per cent to 94 per cent, giving a significant boost to SIA's SS-NOI. While part of the improvement in the RH portfolio is attributable to improving property fundamentals, SIA's property level initiatives also contributed significantly. Assuming, a 6-per-cent yield, SIA delivered a solid 15-per-cent per year total return over this period."

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Air Canada (AC-T) possess both an inexpensive valuation and several levers to add "significant" additional value, said BMO Nesbitt Burns analyst Fadi Chamoun after hosting a dinner with Calin Rovinescu, the airline's chief executive officer.

"AC's transformation has further runway and significant opportunities to add value to shareholders," he said. "We expect $2.7-billion of free cash flow by 2020 to be utilized to repay debt, which equates to $10 per share without assuming a benefit from a potential re-rating in valuation. Loyalty program in-sourcing should add another $7 per share from 2020. Demand is strong in the immediate term, which combined with cost-improvement initiatives should help defend operating margins and deliver growth in earnings despite higher fuel costs."

Mr. Chamoun maintained an "outperform" rating and $34 target, which is higher than the $32.29 average on the Street.

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In other analyst actions:

Echelon Wealth Partners analyst Russell Stanley initiated coverage of Hydropothecary Corp. (THCX-X) with a "speculative buy" rating and $5.50 target. The average is $6.42.

Eight Capital analyst Craig Stanley initiated coverage of SilverCrest Metals Inc. (SIL-X) with a "buy" rating and $3 target, which is 8 cents less than the consensus.