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Wednesday's analyst upgrades and downgrades

A Canadian Tire store is seen in North Vancouver, B.C.

JONATHAN HAYWARD/THE CANADIAN PRESS

Inside the Market's roundup of some of today's key analyst actions. This file will be updated during the trading day. For breaking analyst actions prior to market open every day, read our Before the Bell morning report.

Desjardins Securities analyst Keith Howlett believes it is "highly likely" that Canadian Tire Corp. will announce a partner for its credit card unit within the next six months, freeing up a lot of cash for the retailer to use for other business purposes.

He said such a transaction, which would be with a "major financial institution," could add $6 (Canadian) per share to the value of Canadian Tire stock.

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As Streetwise reported last August, teaming up with a financial institution would allow the retailer to release some of the cash it has tied up in capital to cushion the blow against any credit card losses. Canadian Tire has stayed quiet on the details of any potential partnership but hasn't denied it's shopping its credit card portfolio around.

"We expect Canadian Tire to conclude a transaction within six months, similar to that between Target and TD Bank in the U.S., to remove credit card receivables from its balance sheet while retaining a substantial proportion of the economics," Mr. Howlett said in a research note today. "Value surfaced for shareholders should be significant."

He said such a transaction will release about $8.35 per share of book value for other purposes. Valuation multiples of strong retailers are generally superior to those of credit card companies, and he expects Canadian Tire's valuation multiple will increase when it is strictly valued as a retailer.

"Canadian Tire has good operating momentum and remains inexpensively valued, in our view, relative to its retail peer groups. A credit card transaction similar to that of Target and TD Bank in the US will generate an estimated $6 per share in value, while converting the balance sheet to that of a retailer (rather than that of a financial institution). The balance sheet will be very strong," he said.

Mr. Howlett hiked his price target on Canadian Tire to $125 (Canadian) from $113 and maintained a "buy" rating. The analyst consensus price target over the next year is $112.82, according to Thomson Reuters.

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RBC Dominion Securities analyst Michael Smith downgraded Partners Real Estate Investment Trust to "underperform" from "sector perform," concerned with the REIT's higher-than-average debt, payout ratio and operating risk.

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He cut his price target to $5.50 (Canadian) from $6.50.

Mr. Smith sees less risk and more upside potential elsewhere in the sector: "Competition for investor interest among retail REITs is intense with lots of high quality, liquid names trading at attractive valuations and higher projected returns, especially on a risk-adjusted basis," he said.

Partners' funds from operations - a key metric for REITs - fell 31 per cent to 11 cents in its fourth quarter, four cents below RBC estimates.

Management is embarking on a turnaround, but Mr. Smith cautions this is going to take some time to play out.

"The new management team highlighted its commitment to lowering leverage, keeping its AFFO (adjusted funds from operations) payout ratio below 100 per cent and improving asset performance. This is welcome news but we believe there is much work to be done, not the least of which is finding a new CEO and accomplishing its goal of lowering leverage at a time when access to equity capital is poor," he said in a research note.

"Despite the REIT's distribution cut, its AFFO payout ratio is still too high, in our view, so retained earnings/AFFO will not be a contributor. In addition, we believe Partners' competitive niche has elevated risk. In particular, we think that the risk of cap rate expansion is higher with Class-B assets in small and tertiary markets where there is far less leasing velocity and liquidity."

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The consensus price target is $5.78.

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Paradigm Capital analyst Spencer Churchill upgraded Verde Potash Plc to "buy" from "speculative buy" after the company released a positive pre-feasibility study on Phase 1 of its Thermo Potash pilot project in Brazil.

The study suggested the project's net asset value and internal rate of return were higher than originally estimated.

"Net-net, we believe this is a positive start to this project, which is essentially fully funded by the Brazilian government," Mr. Churchill commented in a research note.

"This is yet another de-risking event for the company, giving the market comfort in the economics for Phase 1. Despite the recent move in the stock (up about 75 per cent in the past month), with a market cap of about $65-million and $10-million in cash, we believe further upside remains," he added.

Given the more concrete understanding of economics for Phase 1, he raised his price target to $2.80 (Canadian) from $2.

Also on the Street, Scotiabank analyst Shawn Siddiqui raised his price target to $2.10 from $1, while reiterating a "sector perform" rating.

The consensus price target is $1.79.

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Analysts weren't impressed by Amaya Gaming Group Inc.'s fourth-quarter results, which significantly missed consensus estimates and came in well below the company's implied guidance for the quarter.

Industrial Alliance Securities downgraded Amaya to "buy" from "strong buy" and cut its target to $8.50 (Canadian) from $10.25. Canaccord Genuity cut its price target to $8.75 from $10 and maintained a "buy" rating. Euro Pacific Canada cut its target to $9.30 from $10.30 and maintained a "buy" rating.

Amaya develops technology used in the regulated gaming industry worldwide. Its revenue in the fourth quarter came in at $39.0-million, below the consensus estimate of $46.6-million. Adjusted EBITDA was $15.4-million, also well below the Street forecast of $18.9-million.

"With Q4 results being so disappointing, we believe that Amaya will be a 'show me' story for the next couple of quarters as we also wait to see how much traction the company can show with the ramp-up in business in New Jersey, with Diamond Game, and with the continuation of the refurbished unit program in Latin America," commented Industrial Alliance Securities analyst Neil Linsdell.

While lowering his price target, Canaccord Genuity analyst Robert Young was sounding more optimistic. "Amaya currently trades at 8.2x 2014 Enterprise value/EBITDA, versus peers at 9.1x. Given Amaya's strong growth, margin profile, and product strength, we believe it deserves to trade at a premium and could be viewed as an attractive acquisition in a consolidating industry," he said.

The consensus price target is $10.38.

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An offer to take Nordion Inc. private is unlikely to be bested, said Canaccord Genuity analyst Neil Maruoka, who downgraded the stock to a "hold" from "buy."

On Friday, the medical isotope provider announced a $727-million (U.S.) bid by Sterigenics, a sterilization services company. The $11.75 (U.S.) offer represented a 12-per-cent premium over Nordion's Thursday closing price.

"We believe that this is a reasonable offer for Nordion," Mr. Maruoka said in a note, adding that "the chances of a new bidder emerging is minimal." His price target is also $11.75.

The agreement concludes a 14-month strategic review, which began after the company lost a legal fight with its supplier, Atomic Energy of Canada Ltd., putting in question Nordion's long-term supply of isotopes. Nordion had sought $1.6-billion (Canadian) in compensation from AECL for cancelling construction of the proposed twin Maple nuclear reactors in 2008.

"Given the uncertainty relating to Nordion's medical isotopes business, the lack of growth opportunities, and a number of liabilities that remain, we view this deal as preferable to Nordion continuing as a public company," Mr. Maruoka said.

The consensus price target is $12 (U.S.).

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In other analyst actions:

Canaccord Genuity hiked its price target on Input Capital to $3 (Canadian) from $2.75 and reiterated a "buy" rating.

CIBC World Markets raised its price target on Cardinal Energy to $17.25 (Canadian) from $16.50 and maintained a "sector outperformer" rating.

Nomura Securities initiated coverage on Ford with a "neutral" rating and $15 (U.S.) price target. It also initiated coverage on General Motors with a "reduce" rating and $32 (U.S.) price target.

Credit Suisse downgraded Arcelor Mittal to "neutral" from "outperform" and cut its price target to $17 (U.S.) from $20.

Credit Suisse upgraded Dover to "outperform" from "neutral" and raised its target price to $93 (U.S.) from $81.

Goldman Sachs downgraded Essex Property Trust to "neutral" from "buy" but raised its price target to $177 (U.S.) from $156.

JMP Securities upgraded Intuitive Surgical to "market outperform" from "market underperform" and raised its price target to $700 (U.S.) from $320.

Goldman Sachs raised its price target on GT Advanced Tech to $24 (U.S.) from $20 and maintained a "buy" rating.

UBS raised its price target on Marvell Technology Group to $17 (U.S.) from $14 and maintained a "neutral" rating.

UBS upgraded Cognizant Technology Solutions to "buy" from "neutral" and raised its price target to $58 (U.S.) from $50.

Sandler O'Neill downgraded U.S. Bancorp to "hold" from "buy" and maintained a $46 (U.S.) price target.

For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @eyeonequities

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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