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

Seeing “limited downside” to its stock following a recent decline in price, Bank of America Merrill Lynch analyst Danidl Barus raised his rating for BlackBerry Ltd. (BB-N, BB-T) to “neutral” from “underperform” on Monday.

Though he touted the Waterloo, Ont.-based tech firm’s “favourable” valuation following a slid of almost 45 per cent since March, he feels it’s “offset by near-term execution issues and the potential for further quarterly result disappointments.”

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“Investors are potentially overlooking some key assets, such as Cylance, QNX, and Athoc,” the analyst said.

Calling it a “show-me story” and emphasizing it “needs better execution,” Mr. Bartus increased his target to US$7 per share from US$6. The average target on the Street is currently US$7.50, according to Bloomberg data.


Ahead of third-quarter earnings seasons for Canadian Alt-A mortgage lenders, CIBC World Markets analyst Marco Giurleo thinks it’s “time to flip the script,” leading him to make a pair of ratings changes.

“The significant share price appreciation of the Alt-A lenders (up 92 cent year-to-date for EQB and 88 per cent YTD for HCG) is reflective of improving housing conditions (particularly in the GTA), a benign credit environment, and a robust mortgage growth outlook,” he said. “While the earnings growth profile has improved as a result, much of the heavy lifting with respect to price appreciation has come from multiple expansion.”

Mr. Giurleo raised his rating for Home Capital Group Inc. (HCG-T) to “outperformer” from “neutral” with a $35 target, rising from $25 and above the $29.61 consensus.

“We now see a path to double-digit profitability that will in all likelihood be outlined by management at the upcoming investor day in November," he said. "On the last conference call, management indicated that over the next two to three years they see potential for 500 basis points of ROE expansion, approximately half of which will come from “optimizing the capital base” and the remainder from profit expansion.”

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Mr. Giurleo added: “Our Outperformer rating is underpinned by the company’s: 1) path to double-digit profitability; 2) strong mortgage growth outlook; and 3) attractive valuation."

At the same time, he lowered Equitable Group Inc. (EQB-T) to “neutral” from “outperformer” with a $130 target, up from $100. The average is $122.43.

“With the stock trading near the high end of its historical valuation range (on both a P/E and P/BV basis), we see the risk-reward on the shares as skewed to the downside and believe future share price appreciation will be contained to earnings growth + dividend yield, which combine for a healthy double-digit return (15 per cent),” the analyst said.


Seven Aces Ltd. (ACES-X) is holding “a dominant position in a highly fragmented, but highly regulated and highly lucrative market,” according to Industrial Alliance Securities analyst Neil Linsdell.

He initiated coverage of the Toronto-based gaming company, which focuses exclusively on Georgia through its 70-per-cent stake in coin operating amusement machine (COAM) operator Lucky Bucks LLC, with a “buy” rating, believing it is “well positioned to adapt to an increasingly restrictive regulatory environment.”

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“Seven Aces is operating in a market that is highly fragmented, but also highly regulated," he said. “This provides the opportunity for a well organized and well capitalized organization to profitably grow organically, and to become a sought-after and efficient acquirer. Using the organizational capabilities of ACES’ management team, the company is creating infrastructure and processes that allow it to operate more efficiently, and to offer superior terminals, games, and customer service to location operators. This puts it in a better position to win contracts as they expire (typically every 5-10 years) from less organized or less well-capitalized route operators, and to be seen as a preferred acquirer for sellers looking for an exit or to implement succession plans. This competitive advantage is further highlighted by increasing regulations that place additional pressure on smaller operators, enticing them to consider selling their COAM assets to LB rather than face escalating compliance and other costs in order to continue operating.”

Mr. Linsdell said Seven Aces currently operates with an “attractive" free cash flow attributable to shareholders of 12 per cent of gross revenue, which he projects to improve by 15 per cent over the next five years.

“The Company’s growth strategy includes a significant focus on M&A, by selectively acquiring the highest producing COAMs in the state, while leveraging its growing infrastructure and network, and advancing structure and best-in-class reporting systems to create a protective moat. The market is relatively fragmented, with LB as the largest COAM operator in Georgia, with 9 per cent of units (11 per cent of revenue), providing ample opportunities for additional acquisitions. The top 10 operators combined (including LB) are estimated to control 40 per cent of the market. As such, we are optimistic about LB’s potential opportunity to continue consolidating this market for many years to come.”

He set a target of $1.90 per share, which falls 2 cents below the consensus.


Aecon Group Inc.'s (ARE-T) newly introduced normal-course issuer bid is “another tool in the box to build shareholder value,” said Desjardins Securities analyst Benoit Poirier in the wake of Thursday’s release of “decent” third-quarter results.

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“ARE’s stock has lagged the S&P/TSX since the beginning of the year (up 4 per cent versus 16 per cent) despite the robust operational results delivered in 2019,” he said. “In our view, the underperformance is explained by the weakness of some peers on LSTK [lump-sum turnkey] projects, notably SNC-Lavalin and Fluor. We believe this situation is unjustified and does not reflect ARE’s robust operational track record and growth potential. We support the NCIB as we believe it will enable ARE to close what we see as an unwarranted valuation gap vs its Canadian and U.S. peers (enterprise value to FY1 EBITDA discount of 0.2 times and 4.5 times, respectively).”

For the quarter, the Toronto-based construction company reported revenue of $1.025-billion, exceeding Mr. Poirier’s estimate of $952-million and in line with the consensus projection of $1.014-billion. Adjusted EBITDA of $91-million, which the analyst said was investors’ main focus, also topped both the expectations of both Mr. Poirier ($88-million) and the Street ($86-million).

“In 3Q19, net debt to EBITDA increased slightly to 1.7 times from 1.6 times (including convertibles), as ARE continues to ramp up on key contracts (working capital investments expected to improve in 4Q),” he said. "A solid balance sheet remains a competitive advantage to secure attractive partnerships for major projects — a key growth driver. It also allows management to be active with its newly implemented NCIB program to buy back shares opportunistically. Management reiterated that it is prudently looking to enter the U.S. market by acquisition. We support this strategy, which enables ARE to leverage its strong expertise to diversify the business while also expanding its addressable market.

With a “buy” rating (unchanged), Mr. Poirier increased his target for Aecon shares to $25 from $24. The average is $24.90.

“We continue to see significant potential for value creation as management delivers on the solid backlog while continuing to pursue projects ($40-billion-plus identified),” he said.

Elsewhere, Canaccord Genuity’s Yuri Lynk maintained a “buy” rating and $27 target.

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Mr. Lynk said: “Aecon’s outlook remains compelling. Next year is shaping up to be very strong in terms of new awards. We are tracking six projects Aecon is shortlisted on that could be awarded next year and potentially add $1.6 billion to backlog or 25 per cent on a risk-adjusted basis. Additionally, Aecon enjoys a $525 million stream of recurring revenue work that is increasing steadily over time. Management continues to call for EBITDA growth in 2020, which is supported by 22-per-cent year-over-year growth in NTM [next 12-month] backlog.”


TMAC Resources Inc. (TMR-T) faces a significant new operational risk with ground condition concerns at its Hope Bay mine in Nunavut, said Canaccord Genuity analyst Tom Gallo.

“The TMAC story has revolved around mill operations, as the mill has struggled to reach name plate capacity of 2,000 tons per day and achieve targeted gold recoveries of 90 per cent,” he said. “Q3/19 did not deliver on these two fronts; however, tonnes milled and recoveries improved quarter over quarter. Production for Q3/19 of 36,290 ounces was a miss compared to Q2/19 and Canaccord Genuity estimates, but management was confident it was still possible to reach the low end of 2019 guidance. That has now been changed as ground condition issues have forced rehabilitation of the Doris BTD East Limb to ensure safe conditions, and management has revised guidance to reflect the delay in accessing higher grade ore.”

Based on the need for “significant rehabilitation work” at the Doris BTD East Limb of the mine, Mr. Gallo has taken a “more conservative” stance toward production costs for the next several quarters, leading to declines in both his EBITDA and earnings per share projections.

“Though we believe this to be an isolated event, we expect the stock to continue to lag peers until the company demonstrates a solution to the ground condition situation, as well as showing consistent improvements in mill recoveries,” said Mr. Gallo.

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Maintaining a “speculative buy” rating, he lowered his target to $7.50 from $9. The average is currently $7.37.

Elsewhere, Laurentian Bank Securities’ Barry Allan cut his target to $7.80 from $9 with a “buy” rating (unchanged).

Mr. Allan said: "We updated our financial model for actual Q3/19 results and have trimmed our 2019 forecast as per recent Q4/19 guidance. We have also taken a more conservative milling rate for 2020 and 2021 to reflect our revised view that the operating rate of the mill may be constrained by the ability of the mine to produce sufficient ore to keep the mill at capacity. With a low level of stockpiles to offset potential hiccups in the underground, we have capped the mill rate at 1,750 tpd. The impact of this assumption change is that our NAV/sh fell to $7.79 from $8.94 previously. In-line with the drop in underlying NAV, we are reducing the target price to $7.80 from $9.00. However, our recommendation remains a Buy – we do see value in TMR. "


Calling it a “premier defensive utility,” Raymond James analyst David Quezada thinks Fortis Inc.'s (FTS-T) past acquisitions showed their “value” in its in-line third-quarter financial results.

Before the bell on Friday, Fortis reported adjusted earnings per share of 66 cents, exceeding Mr. Quezada’s expectations by 4 cents.

“Relative to 3Q18′s EPS of $0.65, Fortis saw a lift from higher earnings at ITC [Holdings Inc.] due to rate base growth (partially offset by the 25 basis points reduction in the independence adder) while UNS’ earnings saw a lift year-over-year on regulated recoveries,” he said. “These benefits were offset by lower rainfall in Belize which impacted the company’s Energy Infrastructure segment while higher share count also had a modest negative impact. At $2.6-billion year-to-date, Fortis remains on track to spend a targeted $4.3-billion in capex for 2019. FTS also announced a 6.1-per-cent dividend increase, consistent with guidance. We believe these results reflect continued impressive performance from ITC and UNS [Energy Corp.], each of which outpaced our estimates, and the value the company has delivered with past acquisitions.”

He added: “Our Market Perform rating notwithstanding, we consider Fortis to be a best-in-class North American utility with diversified footprint, attractive rate base and earnings growth and enviable dividend track record. We believe Fortis’ $18.3-billion five year capital plan— which supports three and five year rate base CAGRs [compound annual growth rates] of 7.2 per cent and 6.5 per cent, respectively—stacks up well vs. peers, which considering the company’s low risk footprint (93 per cent of FTS’ earnings come from transmission and distribution) and relatively small likelihood of discrete equity, represents a compelling combination, in our view. That said, currently trading at 19.8 times P/NTM EPS [price to next 12 month earnings per share], we believe FTS stock resides within shooting distance of its historical peak and has closed much of the gap versus U.S. peers.”

Mr. Quezada kept a “market perform” rating and $55 target, which falls short of the $56.59 consensus.

“While strong year-to-date share price gains and valuation approaching cycle peak levels prompt our neutral stance, we continue to regard Fortis as a premier energy infrastructure holding,” he said. "With attractive rate base growth, positive optionally from longer term opportunities outside the company’s capital plan and best-in-class diversification, we see Fortis as a go-to name among large cap Canadian utilities.”


In other analyst actions:

Bank of America Merrill Lynch upgraded First Quantum Minerals Ltd. (FM-T) to “neutral” from “underperform” with a $13 target. The average on the Street is $15.63.

TD Securities analyst Linda Ezergailis cut TC Energy Corp. (TRP-T) to “buy” from “action list buy” with a $76 target, which exceeds the $72.41 average.

Eight Capital analyst Suthan Sukumar raised his target for shares of Kinaxis Inc. (KXS-T) to Street-high $115 from $100 with a “buy” rating (unchanged). The average is currently $104.92.

With a file from Bloomberg News

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