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Onex's cash hoard seen fuelling more stock gains

It's already been a busy year of asset sales at Onex Corp. , leaving investors pondering what the Toronto-based investment firm and asset manager will do with the proceeds.

UBS analyst Tasneem Azim estimates that the cash raised from the sales - which include Husky International Ltd. and Emergency Medical Services Corp. - will reach about $1.6-billion, assuming the deals close. That's raised some concern among shareholders that the Gerry Schwartz-led holding company may end up holding too much cash - which only generates minuscule returns.

But Ms. Azim isn't terribly worried. Her take is that the company's track record of achieving a 29 per cent internal rate of return is in part tied to its success in identifying unique opportunities and making disciplined investments.

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Onex's recent investment in Jeld-Wen Holding Inc., a manufacturer of windows and doors, "signals to us that OCX is indeed actively seeking investment opportunities. We expect more investments to be announced this year," she said.

Onex shares have already appreciated about 20 per cent this year, and she sees further upside. "In light of the improving health of the IPO/M&A markets, we believe that Onex will remain opportunistic with future sales or investments likely to further enhance the net asset value and provide positive catalysts for the shares," she said.

CIBC World Markets Inc. analyst Paul Holden, meanwhile, sees the potential for further monetization of assets in the next 12 months, pointing to Allison Transmission, Skilled Heathcare and Warranty Group as possible candidates. Mr. Holden also changed his valuation methodology for Onex to include a separate component for management fees and carried interest. When factoring this in, he believes the market "is missing the significant value attributable to earnings generated on third party capital."

Upside: Ms. Azim raised his price target by $4.50 to $44.50 and maintained a "buy" rating, while Mr. Holden raised his price target by $1.25 to $44.25 and affirmed his "sector outperformer" recommendation.

Uranium One Inc. reported relatively disappointing first-quarter results, largely due to the timing of uranium deliveries, but is maintaining its full-year sales guidance. "While the current overhang in the uranium market following the ongoing Japanese crisis is likely to further erode uranium prices in our view, our 'buy' rating on Uranium One is supported by the company's impressive growth profile and low-cost operating position," commented Canaccord Genuity analyst Orest Wowkodaw.

Downside: Mr. Wowkodaw cut his price target by 20 cents to $4.65.

Northgate Minerals Corp. , a gold and copper producer with mining projects in Canada and Australia, looks ripe for a takeover, said CIBC World Markets Inc. analyst Barry Cooper. He sees Northgate's hunt for a new CEO after the announced retirement of Ken Stowe as a possible catalyst, and suspects a buyer may be interested in breaking up the company and selling or closing the underperforming Australian assets.

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Downside: Citing ongoing operational difficulties in Australia, Mr. Cooper cut his price target by 25 cents to $4 (U.S.) but maintained a "sector outperformer" rating.

Versant Partners analyst Neil Linsdell expects to see continued improvement in sales and profitability at Mega Brands Inc. in the seasonally strong second quarter. While the company's Stationary & Activities division has been a drag on earnings, he's anticipating a turnaround that "will restore investor confidence and allow the stock to reflect these improvements."

Upside: Mr. Linsdell's one-year price target is $1.

Cisco Systems Inc. faces at least another two quarters of challenging conditions despite recent bold initiatives to turn around the Silicon Valley bellwether, said Canaccord Genuity analyst Paul Mansky. "As such, we are stepping to the sidelines ... and looking to re-engage as fundamentals show signs of stabilization - possibly late this calendar year," he said.

Downside: Mr. Mansky downgraded Cisco to a "hold" and cut his price target by $4 (U.S.) to $20.


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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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