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

Though he expects fiscal 2019 to be a “challenging” year for Dollarama Inc. (DOL-T) as it deals with minimum wage increases in both Alberta and Ontario, Desjardins Securities analyst Keith Howlett upgraded his rating for its stock ahead of the release of its first-quarter results on June 7, believing a decline in share price since February “compensates for this concern.”

“1Q is seasonally weakest for sales, and this will make the large increase in the Ontario minimum wage slightly more difficult to mitigate,” he said. “Scheduled labour hours are typically least flexible in the year’s slowest quarter. We also expect Dollarama will become more innovative and effective at offsetting wage pressures as the year progresses.

“Dollarama purchased only 94,500 shares during the quarter. Capital spending was high during the period as the company purchased its DC in Montreal from its landlord for $39.4-million and prepared to expand it on acquired adjacent land.”

Moving the discount retailer to “buy” from “hold,” Mr. Howlett increased his target price for its stock to $173 from $165. The average target on the Street is currently $165.69, according to Bloomberg data.

“We expect shareholders will approve the three-for-one stock split [at its AGM in Montreal on June7], with a record date of June 14 and an effective date of June 19,” he said. “We are rolling forward the basis of our target price from FY19 EPS to forward-four-quarter EPS, commencing 2Q FY19.”

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Citing both its current relative valuation and lower 2018 earnings expectations, CIBC World Markets analyst Paul Holden downgraded Sun Life Financial Inc. (SLF-T, SLF-N) to “neutral” from “outperform.”

“SLF is trading at 11.7 times price-to-earnings using consensus core EPS for the next 12 months,” said Mr. Holden. “This is a 17-per-cent premium to the peer group average, which is the largest premium we have seen for SLF over the last five years. In addition, our sum-of-the-parts model suggests SLF is now trading at an appropriate multiple relative to global comps (i.e., the discount for MFS has been removed). Multiple expansion is a tougher story than it was a year ago.

“In the past we also made the argument that consensus EPS estimates were too low. For 2018, consensus is 10 per cent higher than it was a year ago and looks to be more appropriately capturing the margin stories for U.S. Group and MFS. Our 2018 core EPS estimate is $4.70 versus consensus of $4.71.”

Mr. Holden maintained a $59 target. The average target on the Street is $57.83.

“We think the next legs of upside for SLF could come from margin expansion/cost reductions in Canada and the deployment of excess capital,” he said. “Regarding capital deployment, we get the sense that management will patiently wait for better opportunities in terms of valuation. We believe it’s the right strategy, but that it won’t help the stock until we come out the other side of whatever it is that may cause valuations to move lower.”

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Though it has a “long history” of meeting the expectations of the Street, Raymond James analyst Ben Cherniavsky said he was both impressed and surprised by the fourth-quarter earnings beat by CAE Inc. (CAE-T).

On Friday, shares of the Montreal-based flight-simulator manufacturer jumped 5.2 per cent to an all-time high after it reported quarterly earnings per share of 37 cents, exceeding the projections of both Mr. Cherniavksky (31 cents) and the Street (32 cents).

“One quarter, of course, does not make a trend, and we recall that this strong beat follows a couple of misses that CAE reported earlier this year,” the analyst said. “In fact, on the whole fiscal 2018 estimated EPS of $1.11 was only two pennies better than the consensus annual estimate from one year ago (and two cents shy of our number). Still it is worth noting that a number of the key factors that have been issues for us with this story … moved markedly in the right direction last quarter. These include EBIT margins, ROIC, and free cash flow (see below for details).

“While encouraging, we still struggle with CAE’s valuation and are uninclined to chase the stock at the levels, especially given what we see as the late stages of the cycle. That said, we concede that EPS momentum, a favourable narrative around pilot shortages, and a generally bullish aerospace sentiment may help this stock grind a little higher in the near-term.”

Despite the earnings beat, revenue for the quarter did fall short of expectations (though up 6 per cent year over year), however “strong” margins in all three of CAE’s operating segments drove the earnings success.

“In Civil, higher FFS [full-flight simulator] utilization (82 per cent!) and newly deployed capacity drove revenue and SOI [segment operating income] up 9 per cent and 14 per cent respectively,” said Mr. Cherniavsky. “Meanwhile, Defence revenue and SOI grew 3 per cent and 17 per cent year over year, while Healthcare saw the same respective metrics rise 3 per cent and 63 per cent. Other notable F4Q18 items include a 4-per-cent increase in the backlog, driven by a 21-per-cent increase in the Civil segment, offset by a 9 per cent ($400-million) decline in Defence. Also, CAE’s adj. ROIC reached a five-year high of 12.3 per cent, while quarterly free cash flow of $95-million was positive, albeit down $20-million year over year. Investors familiar with our research will know that we have been watching these latter two items very closely.”

With the results, Mr. Cherniavsky increased his 2019 EPS projection to $1.25 from $1.20 and introduced a 2020 estimate of $1.40.

Keeping a “market perform” rating for the stock, his target price rose to $25 from $21, which sits below the average target of $27.55.

Elsewhere, Desjardins Securities’ Benoit Poirier increased his target to $30 from $27 with a “buy” rating (unchanged).

Mr. Poirier said: “CAE reported impressive 4Q results, with a solid beat across all key metrics. The company also introduced robust FY19 guidance, supported by a record backlog and strong bidding activities. Overall, we are maintaining our positive stance on CAE in light of the solid industry fundamentals, which should drive operating leverage and margin improvement in the future. We also like CAE for its leading position in its markets and solid balance sheet, which provide potential for cash-deployment opportunities.”

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Canaccord Genuity analyst Carey MacRury expects Yamana Gold Inc.’s (YRI-T, AUY-N) operating cash flow to rise and capex to decline as its production at its Cerro Moro mine in Argentina grows.

On May 16, Yamana announced the first pour of gold and silver doré at the mine and production and ramp up remains on track with commercial production expected in the second quarter of 2018.

“We forecast gold-equivalent production increasing to 1.31 million ounces by 2020, up from 1.13 million ounces in 2018,” said Mr. MacRury in a research note released Monday upon assuming coverage of Yamana.

“The growth is largely due to the ramp-up of Cerro Moro. Yamana poured first gold at the mine on May 15 and expects to achieve commercial production in Q2/18. Yamana is forecasting 85,000 ounces of gold and 3.75 million ounces of silver production in 2018 and ramping up to 130,000 ounces gold and 8.3 million ounces silver by 2020. Longer-term growth options that we do not currently include in our forecasts include the potential expansion at Chapada to 32 million tons per annum from 23 Mtpa currently (feasibility study expected in 2019) and the potential of a satellite Odyssey/East Malartic underground mine feeding the Malartic mill.”

Mr. MacRury is forecasting free cash flow for Yamana of $218-million in 2018 and $364-million in 2019, rising from a $122-million deficit in 2017.

“Yamana ended Q1/18 with net debt of $1.55-billion (ND/EBITDA of 1.9x), down from $1.71-billion at Q4/17 (2.1 times),” the analyst said. “Yamana received $162.5 million in proceeds in Q1 from the sale of its 50% interest in Upper Beaver, Hammond Reef and other Kirkland exploration properties and $125 million from its advance copper sales program. We expect the balance sheet to continue to improve as Cerro Moro ramps up - we forecast net debt/EBITDA declining to 1.2 times by year-end 2019.”

Maintaining the firm’s “buy” rating for the stock, he did lower its target to $5.75 from $6. The average is $4.69.

“Our $5.75 target price is predicated on a 0.9-times multiple applied to our forward curve-derived operating NAV [net asset value] less net debt and other corporate adjustments,” he said. “Our target multiple is at the lower end of the 0.8 times to 1.3 times range we use for the large-cap producers, reflecting start-up risks, higher political risk exposure, and higher debt levels relative to its peers.”

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Desjardins Securities analyst Frederic Tremblay raised his target price for shares of TSO3 Inc. (TOS-T) based on opportunities in the gastrointestinal market.

“With the first and only system cleared by the FDA for the terminal sterilization of duodenosocopes (approval of the claim was obtained earlier this month), TSO3’s STERIZONE VP4 sterilizer has a window of opportunity to penetrate the untapped U.S. GI market where high-level disinfection is the current standard of care,” he said. “We view this first-mover advantage in GI as refreshing for TSO3 vs the competition from larger, well-entrenched players in central sterile supply departments (CSSD). Another point of differentiation is that the sales efforts in GI are expected to be mainly the responsibility of TSO3, with Getinge playing a smaller role than in CSSD. ”

After recent meetings with the management of the Quebec-based company, Mr. Tremblay increased his 2019 revenue estimate to $26.6-million from $20.9-million. His earnings per share projection moved to a 5-cent loss from a 6-cent loss.

“Following our discussion with management, our previous approach of not including sales to the GI market into our forecasts appears overly conservative,” he said. “We updated our model to reflect our view that the STERIZONE VP4 sterilizer should appeal to early adopters in GI in the near term, followed by other hospitals looking for a solution that can enhance patient safety and help manage risk in the context of past superbug outbreaks associated with the use of flexible endoscopes.”

“Looking forward to more frequent updates on the progress of this show-me story. TOS can now provide more information to the market given its recently assembled direct sales platform. We believe announcements of purchase orders from GI or CSSD customers would be received positively by the investment community as TOS is currently considered to be a ‘show-me story.’”

With a “hold” rating, his target rose to $1.25 from 90 cents. The average is $1.63.

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Aecon Group Inc. (ARE-T) possesses “attractive upside potential” if it continues to be “successful in delivering on our expectations,” according to TD Securities analyst Michael Tupholme.

“Aecon’s robust backlog, diverse end-market exposure, and healthy new-award prospects support our positive view on the company’s outlook,” said Mr. Tudholme in a research note Monday upon resuming coverage of the stock following the federal government’s decision to block a proposed takeover by CCCC International Holding Limited.

Mr. Tupholme called the 14-per-cent dip in share price since the announcement last week “not suprising given the circumstances.” However, he emphasized the stock is now only 4 per cent higher than its Aug. 24, 2017, unaffected price, “despite a variety of positive fundamental developments in recent months.”

“Notably, since late-2017, Aecon has secured three very significant infrastructure contracts worth a combined $2.1-billion,” he said. “With two of these awards ($1.6-billion) slated for backlog inclusion this quarter, we expect Aecon to exit Q2/18 with a record backlog in the $5.5bln-$6.0bln range (i.e., 12-22 per cent above the historical high of $4.9bln). Moreover, based on a healthy prospect pipeline (infrastructure and nuclear, in particular), we see potential for further backlog growth beyond Q2/18. Additionally, in our view, Aecon is well-positioned to benefit from what appears to be an improving outlook for resource sector activity.

“Overall, we are encouraged by Aecon’s outlook. Our forecast, which we note is predominantly supported by already secured work and assumes no new large project awards, calls for year-over-year adjusted EBITDA growth of 9 per cent in 2018 and 13 per cent in 2019.”

With a “buy” rating, Mr. Tupholme has a $20 target for Aecon shares, exceeding the average of $18.70.

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In other analyst actions:

Veritas Investment Research analyst Nigel D’Souza downgraded Royal Bank of Canada (RY-T, RY-N) to “sell” from “buy” with a $95 target, down from $99. The average is $110.41.

BMO Nesbitt Burns analyst Andrew Mikitchook downgraded Northern Dynasty Minerals Ltd. (NDM-T) to “speculative outperform” from “outperform” with a target of $1.25. The average is $1.82.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 18/03/24 3:58pm EDT.

SymbolName% changeLast
RY-T
Royal Bank of Canada
-0.22%134.34
RY-N
Royal Bank of Canada
-0.07%99.27
CAE-T
Cae Inc
+0.3%27.06
CAE-N
Cae Inc
+0.45%20
DOL-T
Dollarama Inc
-0.38%104.92
SLF-T
Sun Life Financial Inc
-0.15%73.86
SLF-N
Sun Life Financial Inc
-0.18%54.53
ARE-T
Aecon Group Inc
+0.18%16.44
NDM-T
Northern Dynasty Minerals Ltd
-3.41%0.425

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