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A CIBC sign is shown in the financial district in Toronto in this file photo.Nathan Denette/The Canadian Press

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

IAMGold Corp.'s (IAG-N, IMG-T) Saramacca resource is a "game-changer," according to CIBC World Markets analyst David Haughton, upgrading his rating to "outperformer" from "neutral."

On Tuesday, the Toronto-based company announced a "significant" gold discovery at the project, located 25 kilometres southwest of its Rosebel gold mine in Suriname, which exceeded its initial targets. IAMGOLD owns a 70-per-cent stake in Saramacca, while the remaining 30 per cent is held by the country's government.

In its first mineral resource estimate for the project, IAMGOLD projected 14.4 million tons of indicated resources averaging 2.20 grams of gold per tonne for 1,022,000 ounces and 13.6 million tons of inferred resources averaging 1.18 grams of gold per tonne for 518,000 ounces.

"Rosebel (95 per cent owned by IAG) is currently producing 300,000 ounces gold (attributable) per year, but production is expected to decline over the near few years due to higher proportion of hard rock (from current 40 per cent to 100 per cent by 2026/27)," said Mr. Haughton. "The addition of ore feed from Saramacca (70 per cent owned by IAG) is forecast to improve the mill operation at the Rosebel plant with the introduction of softer rock and higher ore grades. Saramacca is assumed to start in late 2019 for initial capital of $50-$60-million (U.S.) to be spent during 2018 and 2019. Production is assumed at 3.5Mtpa with the ore transported 25km to Rosebel for $2.50 per ton via an existing rail connection. The satellite has potential to produce 250,000 ounces per year (100-per-cent basis) for 3.5 years based on the indicated resource of 14.4Mt at 2.2 grams per ton for 1.0Moz."

Mr. Haughton raised his target for the stock to $8.50 (U.S.) from $6.50. The analyst average is $6.93, according to Bloomberg.

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Calling it a "large player in an attractive market," Canaccord Genuity analyst Kevin Wright initiated coverage of Pollard Banknote Ltd. (PBL-T) with a "buy" rating.

Mr. Wright emphasized the Winnipeg-based company's "long history" in instant win tickets, emerging as one of three companies to provide North American government lotteries. It saw revenue jump 16 per cent year over year in 2016, exceeding its peers.

"Pollard Banknote is 1) an organic sales growth story that is 2) increasing profitability through manufacturing efficiency in its core business, 3) within a reasonably low risk segment that has low exposure to economic risk, and 4) that is delivering enhanced shareholder value using M&A in the charitable gaming segment; we would be unsurprised if M&A were to continue and we believe that liquidity is likely to increase as management may look to raising equity to fund deals," he said.

"It is estimated, by La Fleur's Lottery Almanac, that U.S. instant tickets growing at less than 5 per cent per annum generated $40.5-billion in sales in 2015 of a total $80-billion in lottery sales in North America," he said. "Pollard holds second spot in U.S. instant ticket sales with market share of roughly 22 per cent. This puts it behind Scientific Games' 70 per cent (SGMS-Q) and ahead of IGT's 8 per cent (IGT-N), which largely account for the meaningful suppliers in North America. Due to the risk-adverse nature of government lotteries, the barriers to entry are high, which has seen the competitive landscape shrink from 10-12 manufacturers 20 years ago to only three today. Pricing has largely been stable and companies enhance profitability through investments that enhance efficiencies. We view the lottery market as a favourable operating environment which limits competitive pressure from new entrants and provides a steady stream of reoccurring business."

Following the acquisition of INNOVA Gaming Group Inc., announced at the end of June, Mr. Wright expects Pollard's revenue from instant ticket sales to drop to 80-85 per cent of total revenue as charitable gaming revenue increases.

"Expertise in lottery and charitable gaming align with industry growth trends and, we believe, positions the company well to participate in opportunities as they emerge," the analyst said. "In our view, Pollard is capable of generating stable mid-single-digit organic growth as the company leverages its proprietary game play features and strong industry reputation to expand market share. We believe Pollard is a well-managed company that investors should own for its steady organic growth trajectory, FCF profile and opportunities for continued M&A."

Mr. Wright set a price target of $16.50 for Pollard shares. The analyst consensus price target is $15.50.

"We rate Pollard Banknote a BUY with a 12-month target of $16.50 based on 9.5 times our 2018 estimated enterprise value to EBITDA," the analyst said. "This is a half-turn discount to with Lottery & Gaming technology vendors at 9.9 times. In our view, this valuation reflects the higher top-line growth profile of Pollard's core instant ticket business and the current iLottery opportunity from NeoPollard but also the smaller size of the company relative to peers. As Pollard gains more exposure to higher-margin segments, including lottery management services and iLottery, we believe the company's valuation could trend upwards closer to the peer average."

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BMO Nesbitt Burns analyst Tim Casey lowered his financial projections for Cineplex Inc. (CGX-T) to reflect "soft" third-quarter box office trends.

"North American box office is down 21.6 per cent Q3/17 to date and is down 6.3 per cent year to date to $7.6-billion (U.S.)," he said. "For perspective, 2016 represents the high watermark at $11.4-billion U.S.. Canadian box office is down 15.7 per cent Q3/17 to date and is down 2.1 per cent year to date (through the week ending Aug. 31) to $693-million. Canadian and North American reporting periods differ modestly (weekly versus calendarized)."

"In light of the weakness at the box office in Q3/17, we have made a number of adjustments to our Q3/17E estimates which include: (i) we have assumed a 15-per-cent decline in box office related revenues (i.e. box office revenue, concessions, and cinema media advertising); (ii) we have accounted for some softness in the digital signage business of $2-million in EBITDA due to a slower pace of deployment of customer installations; and (iii) additional costs related to the Rec Room of $3-million (in-line with Q2/17). We do not expect any meaningful revenue impact from the company's ongoing recliner program. We have also made some slight revisions to our 2018 box office and EBITDA margin estimates. We continue to forecast mid to high-single-digit EBITDA growth through 2018."

Mr. Casey's earnings per share projection for the third quarter is 7 cents, down from 35 cents. His full-year 2017 expectation fell to $1.14 from $1.46, while his 2018 estimate dropped to $1.43 from $1.75.

His target price for the stock fell to $44 from $48. Consensus is $48.50.

"Despite the soft summer box office film slate, we remain Outperform on Cineplex," said Mr. Casey. "We continue to believe the company will successfully transition to a diversified entertainment company with growth investments in digital signage, advertising, The Rec Room, gaming and in time, Topgolf and eSports. We believe exhibition will remain a stable, profitable business over the medium term. That said, we are lowering our target price from $48 to $44 which reflects 12.5 times our 2018 EBITDA estimate as a result of our earnings revision."

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The large and fragmented Canadian industrial market provides opportunities for Summit Industrial Income REIT (SMU.UN-T) to grow, according to Canaccord Genuity analyst Mark Rothschild.

"There is an opportunity for Summit to continue to grow its portfolio while remaining a relatively small player in the overall market," said Mr. Rothschild. "Currently, Canadian commercial REITs under coverage own approximately 74 million square feet of industrial space in Canada, which represents just 4 per cent of the overall Canadian industrial market. Summit currently owns 0.4 per cent of the total Canadian market, notably less than larger commercial REIT peers."

Despite emphasizing its "significant" exposure to the "hot" Toronto market and a healthy outlook for the Canadian industrial real estate sector, Mr. Rothschild initiated coverage of Summit, based in Brampton, Ont., with a "hold" rating.

"Management of Summit has been active in expanding the REIT's portfolio, and we expect this growth to continue," he said. "Since 2012, the REIT's GLA has increased from less than 1.0 million square feet to more than 6.4 million square feet currently, with an asset value of $650-million.

"While initially growth has been largely in the markets of Ontario and Quebec, more recently management has expanded the REIT's portfolio in Alberta. Since year-end 2015, the REIT has acquired three properties in Alberta, spanning 571,395 square feet (9 per cent of gross leasable area), for $63-million. We would not be surprised to see the exposure to Alberta rise as cap rates have compressed significantly in the Toronto industrial market. While fundamentals in the Alberta industrial market have softened, we expect the market to stabilize and this market should do well over the long term. In the near term, there are two upcoming expiries in the REIT's Edmonton portfolio."

Mr. Rothschild set a target of $7.50 for units of Summit. Consensus is $7.32.

"Despite our positive fundamental outlook, we believe that the units are fairly valued at current levels," the analyst said. "Looking forward, multiple expansion could be achievable over time as the REIT grows its portfolio and achieves more consistent cash flow per unit growth. Combined with an annualized distribution of 52 cents per unit, the forecast total return is 10 per cent."

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United Technologies Corp. (UTX-N)'s $30-billion (U.S.) acquisition of Rockwell Collins Inc. (COL-N) makes strategic sense and positions it with a strong aerospace and defence portfolio, according to Canaccord Genuity analyst Ken Herbert.

On Tuesday, United Technologies, a Farmington, Conn.-based jet-engine maker, announced it has agreed to buy Rockwell, an aircraft parts manufacturer. Under the deal, Rockwell shareholders will receive $140 per share in stock and cash, split between $93.33 in cash and $46.67 in United Tech stock, the companies said in a statement.

In response to the acquisition, Mr. Herbert downgraded Rockwell Collins to "hold" from "buy."

"We believe the acquisition will create the largest tier 1 aerospace supplier, with important positions on all major programs," he said. "Moreover, we believe this deal is partly in response to the increased pricing pressure from the leading aerospace OEMs (Airbus and Boeing) and the increased push by the leading OEMs, notably Boeing, into the commercial aftermarket, traditionally the source of most industry profits and cash flow. Note that UTX was careful to stress that this acquisition will create value for customers, and we expect UTX will share in some savings with customers.

"However, we expect some pushback from Boeing as we believe the relationship between Boeing and COL was much stronger than the relationship between Boeing and UTX. It is too early to see how this deal may impact Boeing's AM efforts, or where BA may look to invest beyond what it has announced (remember BA has announced it is establishing an in-house avionics capability as it likely brings the flight control computer for the 777X in-house, and looks to have more control over the avionics architecture on future programs), but we do not necessarily believe this was a near-term threat to COL, or that this effort by Boeing played a part in COL's sale."

Mr. Herbert raised his target price for Rockwell shares to $140 (U.S.) from $125 to reflect the deal. The average is currently $131.14.

Elsewhere, Seaport Global Securities analyst Josh Sullivan downgraded Rockwell Collins to "neutral" from "buy" without a specified target.

Drexel Hamilton LLC analyst Peter Skibitski downgraded lowered the stock to "hold" from "buy" and also did not state a target.

Cowen Cai Von Rumohr downgraded United Technologies to "market perform" from "outperform" with a target of $120 (U.S.), falling from $127. The average is $128.50.

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Hewlett Packard Enterprise Co.'s (HPE-N) third-quarter results were "better than feared, but worse than hoped," said RBC Dominion Securities analyst Amit Daryanani.

On Tuesday, the Palo Alto, Cal.-based tech company reported revenue of $8.2-billion and earnings per share of 21 cents. Both exceeded the Street's expectations ($7.5-billion and 26 cents).

"HPE reported Jul-qtr results that were ahead of expectations driven by cost-saving benefits coupled with better revenue trends within core enterprise group," said Mr. Daryanani. "We estimate that HPE (core) is running at $1.00 EPS run-rate and focus will be on: a) whether HPE can grow that EPS in FY18 organically; and b) whether HPE will commit to a large buyback (accelerated repurchase program?) from cash generated from Microfocus transaction during its analyst day.

"Fundamentally, we think current valuation is attractive and there are headwinds that could offset some of the tailwinds, ensuring that core HPE EPS remains below the $1.20 range that was discussed for FY17. Key levers to consider: a) stranded costs post s/w sale; b) DRAM headwinds that we think persist; c) cost savings being realized in FY17 are more one-time in nature and annual tailwind in FY18 will be less; d) M&A headwinds should abate and boost EPS; e) F/X could be a sizable tailwind; and f) buybacks — large ASR could materially drive EPS higher."

Mr. Daryanani maintained a "sector perform" rating for the stock but dropped his target to $15 (U.S.) from $20 to reflect the sale of its software business. The average target is $15.29.

"Although we expect HPE to incur several one-time cash flow outflows related to the separation of its Enterprise Services and Software businesses, we think 'normalized' FCF trends will continue to be a driver of HPE's stock price performance," he said. "We expect this dynamic to remain for HPE post the close of both ES and Software spins. For FY17, we think HPE's reported FCF guide of -$1.8-billion is below target, but it appears solid on a normalized level ($2.1–2.4-billion)."

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In other analyst actions:

TD Securities analyst Mario Mendonca upgraded Canadian Imperial Bank of Commerce (CM-T) to "buy" from "hold" with a target of $120 (unchanged). The analyst average price target is $118.46, according to Bloomberg data.

Thomson Reuters Corp. (TRI-T) was upgraded to "buy" from "hold" by TD Securities analyst Vince Valentini. He kept a target of $65, while the average target is $61.08.

First Quantum Minerals Ltd. (FM-T) was raised to "neutral" from "underperform" by Exane analyst Daniel Lurch, who raised his target to $14.80 from $12.50. The average is $17.48.

Beacon Securities Ltd analyst Vahan Ajamian initiated coverage of CannaRoyalty Corp. (CRZ-CN) with a "buy" rating and $3.75 target.

Exxon Mobil Corp. (XOM-N) was raised to "neutral" from "sell" by UBS analyst Jonathon Rigby with a target of $76 (U.S.), rising from $75. The average target is $83.48.

Seaport Global Securities analyst Michael Shlisky initiated coverage of Caterpillar Inc. (CAT-N) with a recommendation of "neutral" and $120 (U.S.) target. The average is $123.58.

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