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Tuesday’s analyst upgrades and downgrades

The logo of U.S. car manufacturer Tesla is seen in Zurich, Switzerland July 14, 2016.

© Arnd Wiegmann / Reuters

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

Expecting it to dominate the electric vehicle market for the next decade, Berenberg analyst Alexander Haissl upgraded Tesla Inc. (TSLA-Q) to "buy" from "hold."

Touting the company's "disruptive potential," Mr. Haissl pointed to the "complacency" of traditional auto makers toward EV technology and discounting the threat from original equipment manufacturers.

"With no clear pathway to high-volume EV production for these OEMs  before the mid-2020s, Tesla will be given a near-monopolistic opportunity to gain market share and outcompete the incumbent automotive industry," he said.

Mr. Haissl raised his price target for Tesla shares to $464 (U.S.) from $193. The analyst average price target is $299.94, according to Bloomberg data.

"Once the business reaches scale, the cash generation potential is significantly superior to existing premium OEMs with cash flow per vehicle more than 50 per cent higher," he said. "For traditional OEMs, more drastic measures to create shareholder value may need to be considered – including, for example, spinning out their EV divisions to better focus on technology development and improve capital allocation. However, this would first require a transition to dedicated production lines rather than integrated production."

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Imvescor Restaurant Group Inc. (IRG-T) is poised to enter a new phase of its growth, creating an "attractive" entry point for investors, according to Acumen Capital analyst Brian Pow.

"Importantly, a low payout ratio, low leverage, strong return on equity, and strong FCF [free cash flow] will provide IRG with flexibility going forward to (1) acquire complementary brands, (2) increase the dividend, or (3) buy back shares," said Mr. Pow.

He initiated coverage of the Montreal-based company, which operates four restaurant brands in Eastern Canada, with a "buy" rating.

On June 9, Imvescor reported second-quarter 2017 same restaurant sales growth of 2.4 per cent, a result Mr. Pow called a "significant achievement." It was the eighth consecutive quarter of positive sales, which he said reflects the "ongoing success" of the company's four-pillar strategic plan to regain and grow its market share. Imvescor's priorities remain an improved quality of food; enhanced service; positioning itself as a "value" brand in the marketplace and greater ambiance at its restaurants through a rejuvenation program.

Mr. Pow also believes the company's restaurant count has reached an inflection point following a period of closing of underperforming stores through the recent acquisition of 41 Ben & Florentine locations as well as 6 new restaurants.

"The acquisition of Ben & Florentine adds a brand with significant growth potential that could lead to stronger-than-expected organic growth," he said.

"Management has indicated its willingness to pursue acquisitions that complement its existing brand offerings and geographic footprint. We believe that Management would pursue acquisitions like the Ben & Florentine acquisition that have a similar footprint that leverages the existing supply chain."

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Mr. Pow set a price target of $4.20 for the stock. The analyst consensus price target is $4.25.

"Based on the peer group, quick-service restaurants generally trade at a premium to full-service restaurants on both price/EBITDA and enterprise value/EBITDA," he said. "While IRG appears to be trading at a premium to the peer group on both 2016 and 2017 P/EBITDA and EV/EBITDA, we believe this is justified given the strong underlying EBITDA and earnings growth of the company. We forecast EBITDA growth of 14 per cent between fiscal 2017 and fiscal 2018, compared to the peer group of 5 per cent."

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Cardinal Energy Ltd.'s (CJ-T) recently announced $330-million acquisition of high quality, low decline light oil assets in Western Canada follows its already established blueprint for growth, according to Raymond James analyst Jeremy McCrea.

He said the company's "strategy and appeal" has been to acquire low decline assets during counter cyclical period.

"Unfortunately, the timing and 40-per-cent dilution occurred at a low point in the stock at $5.50 per share and could likely frustrate long-term shareholders who were waiting for an uplift in WTI prices. Nevertheless, the inexpensive acquisition price was unlikely to be obtained if WTI prices were higher, especially if the company can sell the royalty interest lands (potentially worth $130-million)."

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Announced on June 1, the acquisition of the assets, located are in the Weyburn/Midale area of southeast Saskatchewan and in the House Mountain area of Alberta, will be funded with a $170-million bought deal financing and its credit facilities.

"No doubt, Cardinal has a lot of torque to a rebound in oil prices combined with an inexpensive valuation (on many standard metrics); we believe investors are likely surprised why the share price has not performed better," he said. "With an experienced management team and a debt/PDP reserve value at 25 per cent, the name checks off different positive attributes on our 5-point checklist. But given the market today, relative upside among other names in our mid-cap universe, and a couple of unknowns, we are launching with a Market Perform rating."

Mr. McCrea set a price target of $6.75 for the stock. Consensus is currently $9.73.

"On a go forward basis, the company has stated 'We recognize that the public markets are transitioning capital to larger producers and are evaluating several options that would give us increased market capitalization in an accretive manner,'" said Mr. McCrea "For reference, we believe a key reason to CJ's historical production growth has been the ability to buy inexpensive assets due to these assets having a small future drilling inventory and high environmental decommissioning cost (none of which would be reflected in the low $14.65 per barrel PDP FD&A [proved developed producing finding, development, and acquisition ]cost that Cardinal has been able to post on a 3-year average). We believe future acquisitions may be more difficult, and more costly, given CJ's high abandonment liabilities (especially if the AER proposes new directives). As such, if the company is to now move to a higher pace of organic growth, the combination of the dividend payout and lower field margins (although offset by a low production decline) may leave profitable production growth more muted over the near term (at least until we see production results from the Midale). Although we believe the recent acquired asset is one of the more intriguing assets in the portfolio, the cost in terms of equity dilution and investor confidence will likely weigh on the stock."

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Chinook Energy Inc.'s (CKE-T) turnaround is complete, according to Canaccord Genuity analyst Anthony Petrucci.

Calling the Calgary-based company "a well funded Montney pure play on the cusp of further delineation and accelerated production growth," Mr. Petrucci initiated coverage with a "buy" rating.

"While other small cap Montney land plays have garnered much market attention, CKE has become significantly undervalued (on both a relative and absolute basis)," he said. "We believe this is partially the result of the significant change in the story over the last 2 years, with the market taking a 'wait and see' approach in regards to execution."

Mr. Petrucci said Chinook has "reinvented itself" following two years of asset sales, possessing cash on its balance sheet and a development plan to double production this year with continued "robust" growth to follow.

"With a return to the drill bit, we estimate Chinook will increase production by 100 per cent this year (exit to exit)," he said. "This growth in production should also serve to expand corporate netbacks, as economies of scale are realized. We believe executing on its growth plans this year, along with providing additional well results that delineate its acreage, could lead to significant multiple expansion.

Mr. Petrucci set a price target of 60 cents for the stock. Consensus is 55 cents.

"Chinook is trading at a material discount on all metrics to its small cap Montney peers (LXE, BBI, and RMP) with similar land positions and/or production levels ," he said. "With 50 net sections of Montney land it is trading at just $0.75-million per section (versus listed peers at $2.4-million), and early well results suggest CKE's Montney position is at least on par with the peer group. CKE's investment case is also augmented by real production support for its land position, with its production level of 3,400 barrels of oil equivalent per day suggesting an enterprise value/boe of just $13,000."

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BMO Nesbitt Burns analyst Jonathan Lamers raised his target price for shares of Uni-Select Inc. (UNS-T) in reaction to its $265-million (U.S.) acquisition of The Parts Alliance.

On June 1, Uni-Select announced the deal for the U.K.'s second-largest independent distributor of automotive aftermarket parts.

"Parts Alliance provides Uni-Select with a third distinct platform to deploy capital through further tuck-in acquisitions, appears to have substantial runway for market consolidation, and has potential to create value by expanding sales volumes for acquired stores," he said.

Mr. Lamers projects annual earnings accretion of 13 cents per share, "primarily as the purchase will be funded with relatively inexpensive debt financing." He does not anticipated cost synergies.

"Parts Alliance is a rapidly growing business, with revenue having nearly doubled over the past two years, primarily from acquisitions, and organic growth of 4 per cent," he said. "Uni-Select has retained the existing management for Parts Alliance, we believe intends to continue to consolidate at a rapid pace, and appears to have a long runway, with only 7-per-cent share in a highly fragmented market. Parts Alliance believes it has capability to accelerate sales growth for individual stores and groups it acquires, and targets opportunities at purchase valuations below Uni-Select's own valuation."

With a "market perform" rating (unchanged), Mr. Lamers's target increased by a loonie to $35 Consensus is $36.39.

"Uni-Select's valuation is near its larger U.S. distributor peers, and the U.S. acquisition strategy that has contributed meaningfully to results over the past two years may slow as leverage is reduced toward the targeted range and as FinishMaster's market share gradually approaches some natural limit," he said.

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Yangarra Resources Ltd.'s (YGR-T) upward revisions to its type curves prove it's been "doing the right things with its new path, extended reach, horizontal Cardium development program," said Industrial Alliance Securities analyst Michael Charlton.

"Yangarra provides investors with oil-focused development while maintaining a large inventory of multi-zone prospects," he said. "Trading at a substantial discount to its pre-tax base reserve NPV, Yangarra offers investors an attractive entry point into both Cardium and Glauconitic plays with additional upside potential from its existing land base in the Second White Speck

On Monday, Yangarra announced the changes as well as a $20-million to its 2017 capital spending budget and the plan to drill 12 additional extended reach Cardium wells.

"Using $47.50 per barrel WTI pricing, the new curves generate an IRR [internal rate of return] of 132 per cent, payout in 10 months, and carry an NPV10 of $5.5-million per well," the analyst said. "We note that this shift in the curve looks to affect large reserve increases."

Mr. Charlton maintained a "buy" rating for the stock and increased his target to $5.40 from $4.40. Consensus is $4.18.


"At current share prices, Yangarra continues to trade at a deep discount to its base unrisked reserve NPV of $9.16 per share discounted at 10 per cent," he said. "We continue to believe the Company's reserves are not being fully valued in the market nor is the near-term upside of its Cardium and Glauconitic plays. Furthermore, the growth potential from its existing land base in the Second White Specks or the 100-per-cent working interest in seven sections of very prospective Duvernay Shale lands are also not reflected in its current share price, providing a value opportunity for investors."

Elsewhere, Acumen Capital analyst Trevor Reynolds also increased his target by a loonie (to $5.25) with a "buy" rating.

Mr. Reynolds said: "Overall, the improvement over the previous type curve is impressive. As a reminder, nine of the ten wells were drilled deeper into the bioturbated portion of the Cardium reservoir, and completed with a higher numbers of frac stages than previously utilized. Strong results from the program have been well documented by management, however this is the first run of an updated type curve based on the new drilling technique."

"Overall, the updated curve appears highly economic at today's commodity price, with projected payouts of under one year. … Of note, based on the results achieved to date, Management intends to drill two mile wells wherever their land position allows. We do expect further refinement moving forward based on additional drilling, and more time on-stream."

Raymond James analyst Jeremy McCrea hiked his target to $4.50 from $4.

Mr. McCrea said: "The biggest pushback we get is 1) stock price performance YTD relative to other names and 2) better confidence in the recent bioturbated type curves. Although we can't monitor well-head pressure that would give better confidence in the decline, the data the company sees itself has clearly given them enough confidence to provide updated well economics now. With both the Chairman and CEO both buying recently at $2.82 per share and the current valuation still highly attractive (based on our PDP + risked upside now at $4.50 per share), we maintain our Outperform rating."

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Canaccord Genuity analyst Kevin MacKenzie initiated coverage of Barkerville Gold Mines Ltd. (BGM-X) with a "speculative buy" rating.

"Over the last two years, Barkerville has increasingly been focused on developing a solid geological framework from which to more accurately constrain/inform future resource estimates," he said. "Through detailed underground mapping and oriented drill core logging, the team has developed a new structural model which now provides the basis to more accurately test/illustrate the continuity of mineralization at Cariboo Gold. Not only is this expected to provide Barkerville the capacity to significantly expand the project resource, but also to develop a solid technical foundation from with which to advance the project.

Though 1-2 years behind, Mr. MacKenzie said he sees parallels between the Cariboo Gold project  in British Columbia and Osisko's Windfall project in Quebec "in terms of testing a revised geological model and overall project development."

"At a high level, we note that both projects are hosted within relatively untested mineral belts, but located within safe/established mining jurisdictions," he said. "As with Windfall, the Cariboo Gold project  benefits from a regional scale consolidated land package, which presents the opportunity to uncover additional centers mineralization, and build-out a large scale integrated operation. We suspect that a future milling facility at Cariboo Gold could serve as a centralized regional processing hub, much in the same capacity as Osisko's proposed Quevillon mill.

"Although Cariboo Gold is yet an exploration stage project, Osisko Group's significant investment (51-per-cent equity position) in Barkerville foreshadows a path much beyond that. Given the caliber of the current management team, and the depth/experience of the Osisko brain trust, we believe that if feasibility can be demonstrated, that Barkerville is well positioned to develop and operate the Cariboo Gold project. As such, we suspect that any near- to medium-term M&A will be with that of other Osisko Group affiliate companies, or driven by Barkerville with the goal of further expanding its long-term project pipeline."

Mr. MacKenzie set a price target of $1.75. Consensus is $1.55.

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In other analyst actions:

Goldman Sachs analyst Jesse Hulsing downgraded Shopify Inc. (SHOP-T, SHOP-N) to "neutral" from "buy" without a specified target. The consensus target is $125.12.

Cormark Securities Inc. analyst Kyle McPhee upgraded Organigram Holdings Inc. (OGI-X) to "speculative buy" from "market perform" with a target of $3.10. The average is $3.80.

Canaccord Genuity analyst Neil Maruoka downgraded Medical Facilities Corp. (DR-T) to "hold" from "buy" and lowered his target to $17 from $22.50. The average is $20.43.

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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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