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Wednesday’s analyst upgrades and downgrades

A server pours a cup of coffee at a Tim Hortons in Toronto in this file photo.


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

Raymond James analyst Ken Avalos downgraded his rating for Sienna Senior Living Inc. (SIA-T), citing its strong share price performance and a moderating growth outlook.

On Feb. 16, Sienna reported fourth-quarter 2016 funds from operations of 32 cents per share, an increase of 5 per cent year over year and meeting the projections of both Mr. Avalos and the Street.

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"Sienna finished off another strong year, one that featured the stabilization of their RH [retirement homes] portfolio and the acquisition of a higher margin LTC portfolio (Baltic)," said Mr. Avalos. "However, the stock has run [up] 18 per cent since we upgraded it on Nov. 10 (vs. up 7 per cent for the TSX Capped REIT Index). Due to this outperformance and the expectation of moderated growth in the coming year, we are downgrading Sienna."

Sienna's long-term care segment saw flat same-property net operating income for both the quarter and year, though occupancy dipped mildly (0.1 per cent year over year to 98.7 per cent).

"Management expects the LTC portfolio to be largely constant from a growth perspective," said Mr. Avalos.

"RH SPNOI finished off another strong year with SPNOI growth of 7.1 per cent (up 13.5 per cent for the year). Average RH occupancy rose 180 basis points year over year to 95.2 per cent. Although occupancy slipped at the end of the quarter to 94.5 per cent, management considers the retirement home portfolio to now be stabilized and expects growth to normalize in the low single-digit range for 2017."

Moving his rating to "market perform" from "outperform," Mr. Avalos maintained a $17 target price. The analyst consensus price target is $18.28.

"Sienna currently trades at an 8-per-cent premium to our NAV [net asset value] estimate and at 12.9 times and 12.0 times our 2017 and 2018 AFFO [adjusted funds from operations] estimates, compared to the Canadian healthcare index that trades at a 7-per-cent premium and 16.2 times and 15.5 times consensus AFFO," he said.

Elsewhere, CIBC World Markets analyst Yashwant Sankpal raised his target to $17.25 from $17 with a "neutral" rating.

He said: "In 2016, Sienna continued to increase the private-pay component of its revenue through occupancy improvements in its RH portfolio, conversion of basic LTC beds into preferred accommodation and through external acquisitions. Currently, 20 per cent of SIA's suites are funded by private pay sources. While we continue to view Sienna as a strong operator with a stable cash flow profile, we believe the stock is fairly valued."

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Though he called Restaurant Brands International Inc.'s (QSR-T, QSR-N) deal for Popeyes Louisiana Kitchen Inc. (PLKI-Q) "a relatively small acquisition," BMO Nesbitt Burns analyst Peter Sklar said there's potential upside if it can successfully accelerate Popeye's international rollout.

"We also believe this acquisition could result in a change of investor perception to recognize RBI as a consolidator of quick-service restaurant chains that creates value through cost reductions and accelerating international expansions," said Mr. Sklar. "We believe this perception change could lead to investors attributing a higher valuation multiple for RBI."

Prior to market open on Tuesday, RBI announced the $1.8-billion (U.S.) acquisition. Under the deal, Popeyes shareholders received $79 per share, a 19-per-cent premium from its closing price on Friday.

"We note that Popeyes is a relatively small acquisition, with a transaction value of $1.8-billion versus RBI's current enterprise value of $37-billion," the analyst said. "In addition, RBI is paying [approximately] 19-times forward EBITDA for Popeyes, which is in excess of its own forward trading multiple of 18.5 times. In terms of synergies, we believe it would be relatively limited versus the value created at Burger King as Popeyes' network is already largely franchised, and unlike Tim Hortons, which was a larger company with significant overhead reduction opportunities, Popeyes' general & administrative expenses appear to offer fewer areas for cost cutting. As a result, we calculate that annual earnings accretion is modest at 10 cents per share or 6 per cent.

"Positively, we believe there is potential upside to Popeyes' growth trajectory if RBI can successfully accelerate the brand's international roll-out through the master franchise joint venture structure, similar to what has been successfully done at Burger King, and what RBI is currently implementing at Tim Hortons."

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With the deal, Mr. Sklar's 2018 earnings projection rose to reflect a 12-cents-per-share contribution for Popeyes. He also assumes RBI's outstanding $3-billion of preferred shares will not be redeemed (an negative impact of 35 cents per share). Accordingly, his EPS estimate is now $2.23, down from $2.46.

"As a result of this acquisition, which will see RBI's pro forma leverage ratio reach 4.7 times, we believe there is a higher likelihood that RBI will not refinance its outstanding preferred shares in the beginning of 2018," he said. "Instead, we believe RBI will use cash flow generated from operations to paydown debt related to this transaction throughout 2017 and 2018."

He kept his "outperform" rating for the stock and raised his target price to $63 (U.S.) from $57, "which is based on a projected enterprise value that is 18 times (from 16.5 times) our revised 2018 EBITDA estimate." Consensus is $52.54.

"We believe that RBI offers investors further opportunity through continued global development of the BK chain, cost discipline, and the potential for success with the global rollout of the TH and Popeyes brands," said Mr. Sklar. "In addition, we consider that RBI generates substantial and consistent free cash flow through a 'capital light' model that is increasingly valued by investors."

RBC Dominion Securities analyst David Palmer raised his target for RBI stock to $63 (U.S.) from $59 with an "outperform" rating (unchanged).

"We view Popeyes as a relatively low-priced asset that is also small when compared to the long-term global growth potential of the brand," said Mr. Palmer. "Despite only modest near-term EPS accretion with Popeyes, international unit growth is an area of competitive differentiation for RBI. While some investors had hoped for Restaurant Brands' next deal to be sizable (e.g., Yum! Brands), we believe smaller-sized acquisitions like this one can be meaningful provided growth is scalable, as it appears to be with Popeyes. Popeyes has an existing footprint of 2,000 domestic and 675 international stores versus [approximately] 4,200 and 16,500, respectively, for Yum! Brands' KFC chain. Over the next 5–7 years, we believe RBI can accelerate net restaurant development of Popeyes from greater-than 150 to 700-plus Popeyes stores per year, just as it did with Burger King. This could add 150 basis points to RBI's average annual unit growth (from 4.7 per cent today to 6-per-cent-plus by 2023)."

CIBC World Markets analyst Mark Petrie raised his target to $65 (U.S.) from $60 with an "outperform" rating.

Mr. Petrie said: "Popeyes is an excellent fit within RBI. Unit economics are attractive, the concept is working well and growing domestically and internationally, and the menu complements the existing portfolio nicely. We expect RBI to apply its usual fierce focus on costs while accelerating new unit growth plans."


Despite a "significantly" better-than-expected earnings beat in the fourth quarter of 2016, Raymond James analyst Ben Cherniavsky said he's maintaining a "neutral" view of Ritchie Bros. Auctioneers Inc. (RBA-N, RBA-T) given near-term gross auction proceeds (GAP) headwinds and execution risk with its IronPlanet acquisition.

On Tuesday, Burnaby, B.C.-based Ritchie Bros. reported quarterly earnings per share of 26 cents (U.S.). After adjusting for restructuring and debt repayment costs, the result rose to 34 cents, "much higher" than Mr. Cherniavsky's projection of 23 cents and the consensus of 27 cents. It's an increase of 5 cents year over year.

In explaining the 11-cent earnings beat, Mr. Cherniavsky pointed to "the volatile and unpredictable" auction revenue rate (ARR), which rose to a record 14.1 per cent "due to strong underwritten performance and the increased contribution of new revenue streams." The analyst expected 12.5 per cent estimate.

"Looking beyond the beat, 4Q16 was mixed with a number of puts and takes," he said. "On the plus side was the aforementioned ARR, which generated 8 per cent year-over-year revenue growth and offered some encouraging validation to the company's multi-channel strategy. We also saw continued momentum in Ritchie's key auction metrics and positive (10 per cent) growth in E1 revenues. Finally, management elected to close some underperforming auction yards, which we view favourably."

"On the minus side, Ritchie's 4Q16 GAP fell 8 per cent year over year (down 4 per cent calendar-adjusted) while SG&A continued to grow faster than revenues. We also saw EBIT margins decline year over year, negative free cash flow (including acquisitions), and relatively flat ROIC [return on invested capital]. Finally, management moderated 1Q17 expectations noting that, despite firmer prices, equipment supply is softening, especially in oil and gas markets, and that auction activity will track closer to 1Q14 levels as a result (1Q14 GAP was $850-million versus $1.019-billion last year)."

With an unchanged "market perform" rating, Mr. Cherniavsky raised his target price for the stock to $37.50 (U.S.) from $35. Consensus is $36.80.

"The inherent lumpiness of Ritchie's business, combined with the rapid strategic change that the company is embracing and the large number of adjustments that are being made each quarter, makes our forecasts prone to error and the stock price vulnerable to bouts of high volatility," he said. "As a result, we are uninclined to alter our thesis around any single quarterly beat or miss. Instead, we remain focused on the execution risks that lie ahead as Ritchie integrates the pending IP acquisition, and the macro headwinds on the horizon as the company laps its very strong 1H16 auction activity. As we gain further visibility on these two variables—and continue to factor valuation into the equation—we may be in a position to resume a more constructive view on this stock."


Veresen Inc.'s (VSN-T) $1.18-billion sale of its power generation business exceeded the expectations of Desjardins Securities analyst Justin Bouchard.

Announced Tuesday, the sale, involving three separate transactions, equates to a valuation of 12.8 times Mr. Bouchard's 2016 earnings before interest, taxes, depreciation and amortization (EBITDA) estimate.

"Based on the suite of assets sold, we believe VSN realized full value for its power assets—in our view, this is primarily a reflection of the ongoing appetite for investments offering stable cash flows in a 'low for longer' interest rate environment," the analyst said. "Of note, the sale does not include the waste-heat assets located on the Alliance Pipeline. Additionally, we believe all three counterparties are of high quality (including Capital Power and BluEarth Renewables), which substantially limits the closing risk related to the transaction.

"With VSN sporting an estimated 94-per-cent payout ratio (2017), the $1.18-billion divestiture effectively allows the company to fund its existing capex program through year-end 2018 (in addition to incremental growth capex projects that may be announced) without the need to cut the dividend, issue incremental corporate-level debt or issue additional equity. With the large majority of its growth capex slated to be invested in natural gas–focused midstream assets within Veresen Midstream, the transaction effectively allows VSN to recycle the proceeds from the non-core Power assets (which generated an implied annualized EBITDA return of 8 per cent at the transaction price) into core midstream investments that are expected to generate an annualized EBITDA return of 10–13 per cent, provide fee-for-service revenue through 2044 based on a target rate of return within the agreement and provide a platform for further growth as the Montney is developed."

Mr. Bouchard maintained a "hold" rating for Veresen stock and raised his target price by a loonie to $14. Consensus is $14.53.

"The proceeds should allow VSN to strengthen its balance sheet, focus on its core business and fund its existing growth program without further equity issuance," he said. "In our view, the transaction improves the near-term visibility toward a sustainable payout ratio; however, longerterm, we remain concerned with recontracting risk associated with the Ruby Pipeline."


Amid an improved backdrop and outlook, BMO Nesbitt Burns analyst Mark Wilde raised his target price for Interfor Corp. (IFP-T).

"With 65 per cent of its lumber capacity in the U.S., IFP is very well hedged against any punitive duties on Canadian lumber exports to the U.S. IFP's balance sheet has improved dramatically over the past 12 months," said Mr. Wilde. "Productivity gains and higher operating rates in the U.S. South should boost EBITDA over 12-24 months. U.S. housing demand is improving and lumber prices have strengthened. We think there is additional runway."

On Feb. 9, the Vancouver-based company reported fourth-quarter results that Mr. Wilde deemed "solid." Sales rose 7.5 per cent year over year, while adjusted EBITDA jumped 43 per cent.

"Fiscal 2016 EBITDA of $200-million was a record," he said. "Q4 shipments were a bit light (up 1 per cent year over year), but hit by weather-related issues in Western Canada and the Pacific Northwest. Continued weather issues and the lag in flowing-thru higher lumber prices are apt to dampen q/q EBITDA gains during Q1."

"IFP's financial position has improved dramatically in the past 18 months. Net debt at year-end 2016 was $290-million, or 1.5 times net leverage -- down from 5.0 times at year-end 2015. With a stronger balance sheet, IFP could pursue growth via acquisitions. However, after 2014-16 struggles in integrating and optimizing all of their southern acquisitions, IFP appears bit more cautious in pursuing growth. Near-term capital allocation priorities: $90-95-million of capex in FY17."

Mr. Wilde raised his EPS projections for the first quarter to 24 cents from 9 cents, while his full-year fiscal 2017 estimate moved to $1.10 from 86 cents.

He kept an "outperform" rating for the stock and bumped his target price to $21 from $16. Consensus is $19.


Though its fourth-quarter results were "soft," Capital Power Corp.'s (CPX-T) higher 2017 guidance is a "positive development," said BMO Nesbitt Burns analyst Ben Pham.

On Tuesday, the Edmonton-based power producer reported adjusted earnings before interest, taxes, depreciation and amortization of $138-million, down slightly from $146-million in the previous year and lower than Mr. Pham's projection of $141-million. Adjusted earnings per share of 27 cents were a 15-cent drop year over year and below both the consensus projection (29 cents) and Mr. Pham's expectation (37 cents), which he blamed on realized settlement losses on interest rate swaps.

"More important, the 2017 AFFO [adjusted funds from  operations] guidance range was increased 5 per cent to $320-365-million (versus $305-345-million) due to a $500-million acquisition of 294MW of contracted power assets that is expected to be accretive to 2018 estimated AFFO (25 cents or up 7 per cent) and EPS (11 cents)," said Mr. Pham. "We view the acquisition positively as it provides for stable, contracted cash flow (14-year average remaining contract length) in markets that CPX is familiar with. It mitigates the potential downside to Alberta spot power prices in 2018, where CPX is only 53-per-cent hedged at low-$50 vs. forward prices of $39. With the reduced volatility to EBITDA (to 79-per-cent contracted from 66%), CPX's valuation should gradually improve."

He raised his 2017 and 2018 EPS projections to $1.17 and $1.18, respectively, from $1.02 and 99 cents.

Mr. Pham maintained a "market perform" rating for the stock, raising his target to $26 from $23.50. Consensus is $25.28.

"We believe the shares are reasonably valued at current levels," he said.


In other analyst actions:

Canadian Solar Inc. (CSIQ-Q) was downgraded to "neutral" from "overweight" at JPMorgan by analyst Paul Coster with a target of $16 (U.S.) per share. Consensus is $15.21

Discovery Communications Inc. (DISCA-Q) was downgraded to "hold" from "buy" at Loop Capital Markets by analyst David Miller with a target of $31 (U.S). Consensus is $28.17.

Parker-Hannifin Corp. (PH-N) was raised to "overweight" from "neutral" at JPMorgan by analyst Ann Duignan with a target of $173 (U.S.). Consensus is $159.80.

Ralph Lauren Corp. (RL-N) was downgraded to "underweight" from "neutral" at Atlantic Equities by analyst Daniela Nedialkova with a target of $68 (U.S.). Consensus is $81.

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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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