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

Canaccord Genuity analyst Scott Chan downgraded his rating for IGM Financial Inc. (IGM-T) in a research report released Tuesday previewing second-quarter financial results for Canadian asset managers, believing its business model is “most vulnerable” to earnings contraction.

“Despite market tailwinds, IGM’s EPS [earnings per share] has remained relatively flattish over the past 7 years,” said the analyst. “Further, EPS estimates from the Street appear abnormally high. For 2019E, IGM consensus EPS is for $3.69 versus Canaccord Genuity at $3.43 (a 7-per-cent variance). Our 2019 EPS estimate was reduced by 1 cent due to our lower IGM retail net sales forecast stemming from deteriorating industry wide mutual fund net inflows witnessed in Q2/18.”

Ahead of Thursday’s release of its quarterly report, Mr. Chan moved IGM to “hold" from “buy” with a target price of $42 per share, falling from $45. The average target on the Street is currently $46.33, according to Thomson Reuters Eikon data.

“We have lowered our target P/E [price-to-earnings] multiple on IGM to 12.5 times (from 13.5 times) that reflects multiple compression across the retail group,” he said. “Further, we suggest IGM’s EPS growth estimates are more at risk due to volatile markets, recent net outflows, persistent fee pressure (e.g. Vanguard launched 4 Global investment F Class mutual funds in Canada with lower management fees; Invesco Canada reduced fees on its ETF lineup, CI and Manulife fee reductions), higher cost of operations that could result in negative operating leverage, and potentially lower than expected AUM [assets under management] growth from China AMC. We’ve marked IGM’s June, 2018 AUM, which included retail net outflows of $106-million (versus greater-than $1-billion last year) as industry wide mutual flows dropped sharply in Q2/18 (down $41-milliion significantly below the addition of $12.2-billion last year). We note IGM’s retail net sales averaged $1-billion per quarter over the past 5-quarters, including $2.0-billion (from $3.3-billion).

“Based on our lower target multiple, our IGM target price is reduced to $42.00/sh. (from $45.00/sh.). With a total return of 11 per cent (dividend yield of 5.7 per cent), we believe a HOLD rating is appropriate considering a price return forecast of 6 per cent. Currently, IGM trades at P/E (2019 estimate) of 11.6 times versus CIX and FSZ at 9.0 times/ 9.5 times. Historically, we note that CIX has traded at a 0.8-times P/E premium to IGM.”

Despite believing its shares have “bottomed and provides a good entry point” for investors, Mr. Chan also lowered his target price for CI Financial Corp. (CIX-T) to $27 from $30 with a “buy” rating (unchanged). The average is $28.22.

“Similar to IGM, we have lowered our target P/E multiple on CIX to 11.0 times (from 12.0 times) that reflects multiple compression across the retail group and fund flow headwinds,” he said. “Year-to-date, CIX shares have declined 22 per cent, significantly underperforming peers and benchmarks. At this juncture, we favor CIX over IGM mainly based on relative valuation … CIX stock has historically traded at P/E (fwd.) valuation premium of 0.8 times (versus a 1.7-times discount today and 1.5 times on Canaccord Genuity’s revised target multiples). Although, we acknowledge that IGM should trade at a current premium relative to CIX (i.e. better net flow traction), we suggest the widening valuation gap is unwarranted. Currently, CIX trades at trough P/E (2019 estimates) of 9.0 times, with a dividend and FCF yield of 6.3 times, and 11 times, respectively. We expect CI to fully utilize its current NCIB program by repurchasing 20 million shares (8 per cent of o/s) providing share support. The recent CSA consultation proposal to keep trailer fees who make a suitability determination (e.g. IIROC, MFDA channels) is incrementally positive for retail asset managers including CIX and IGM.”

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Citing its “strong” second-quarter results as well as its improved 2018 operating guidance, CIBC World Markets analyst Oscar Cabrera upgraded Lundin Mining Corp. (LUN-T) to “outperformer” from “neutral.”

“LUN’s stock has underperformed peers due to copper/zinc price weakness since mid-June 2018 as well as continued attempts to acquire Nevsun Resources (NSU), in our view,” said Mr. Cabrera. “While the company’s CEO transition was surprising, we expect LUN to continue delivering strong operating performance and disciplined capital allocation under Ms. Marie Inkster. The main risks to our price target, outside of weaker metal prices due to escalating trade wars, are a dilutive increased bid for NSU (our reports published on June 5, 28 and July 16, 2018 explore different scenarios), and delays (i.e., increased capex) at Neves Corvo (NC) Zinc Expansion Project (ZEP) and Candelaria.”

The analyst maintained a price target of $10 per share, which is in-line with the current consensus.

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WSP Global Inc.’s (WSP-T) US$400-million acquisition of Berger Group Holdings should provide growth opportunities both in the United States and internationally, said Desjardins Securities analyst Benoit Poirier.

On Monday, Montreal-based WSP announced the deal for the privately held New Jersey-based firm, which is the parent company of the group of companies under the umbrella name of Louis Berger. With over 5,000 employees worldwide, it is active in the Transportation & Infrastructure and Environmental & Water sectors.

“With the acquisition of Louis Berger, we estimate that WSP will derive 34 per cent of its total revenue from the U.S. by 2019 (up from 28 per cent currently),” said Mr. Poirier. “More specifically, this acquisition should enable WSP to double its exposure to the water & environment market in the U.S. while strengthening its exposure to the transportation & infrastructure segment—two key sectors for the company. Recall that we recently highlighted the opportunity for up to US$1.700-billion of infrastructure investments in the U.S. In addition, we also expect that WSP will try to combine its aviation sector expertise with Louis Berger’s expertise in the defence industry. Finally, the acquisition will also enable WSP to expand its geographical reach to Spain, a market poised for an increase in infrastructure spending.”

Mr. Poirier added: “Back in 2010, Louis Berger was charged with overbilling the USAID for work in Afghanistan, Iraq and Sudan. In connection with these allegations, the company paid US$18.7-million in criminal penalties and US$50.6m in civil penalties. Also, two former executives were charged and sentenced for defrauding the government. Subsequent to these accusations, the company was monitored by the U.S. Department of Justice for three years as it restructured its international operations. While the monitoring period has passed, the restructuring measures are ongoing and are expected to result in US$50-million of one-time integration and restructuring costs over the next three years. The closing of the acquisition is subject to the completion of certain administrative actions following the termination of the monitoring activities. Consequently, we do not foresee any regulatory risk for WSP. In fact, we expect that on top of the US$15-million in cost synergies expected within a year of the closing date, WSP should be able to increase revenue synergies by rebranding the activities under its own brand.”

With the deal, Mr. Poirier raised his 2019 and 2020 adjusted EBITDA projections to $742-million and $795-million, respectively, from $683-million and $722-million. His EPS estimates rose to $4.04 and $4.35 from $3.79 and $4.06.

Keeping a “hold” rating for WSP shares, his target price rose to $74 from $70, exceeding the current consensus of $71.38.

“While management has again demonstrated its ability to create value with its M&A strategy, we are maintaining our cautious stance in the short term in light of WSP’s recent share price performance (up 50 per cent from 52-week low) and fair valuation vs its pure-play engineering peers (13.3 times EV/FY1 EBITDA vs an average of 12.4 times),” he said.

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Telus Corp. (T-T) is currently “ticking almost all the boxes,” according to RBC Dominion Securities analyst Drew McReynolds, who raised his target price for its stock ahead of the release of its second-quarter financial results on Friday.

“In 2018, we believe TELUS entered an inflection period whereby key performance metrics, sentiment, competitive position and NAV [net asset value] growth are set for multi-year improvement,” the analyst said. “Although we are not expecting TELUS to fully ‘break out of the pack’ given the ‘game of inches’ among the big three, in 2018, we expect capex intensity to ease, FCF [free cash flow] to improve, the dividend payout ratio to fall below 100 per cent, leverage to decline into the upper end of the 2.0-2.5-times target range and NAV growth to re-accelerate – all while delivering 7-10-per-cent annual dividend growth. Longer term, we believe investors will benefit from the best asset mix in the group, strong execution, industry-leading 5G preparation, any economic tailwind in Alberta and steady growth in TELUS Health and TELUS International.”

Mr. McReynolds expects Telus to report a “decent” quarter from its wireless segment, keeping pace with rivals BCE Inc. and Rogers Communications Inc., despite a deceleration in average revenue per user (ARPU).

“We expect TELUS to capture 28-per-cent share of postpaid net additions among the national wireless operators (consistent with recent trends) and see only modest ARPU growth,” he said.

“For wireless in Q2/18, we forecast: (i) revenues and EBITDA (excluding restructuring and unusuals) of $1.961-billion (up 4.6 per cent year over year) and $866-million (up 5.1 per cent), respectively; (ii) postpaid net additions of +87k (versus +99k in Q2/17) factoring in 5-per-cent growth in gross additions and industry-leading postpaid churn of 0.78 per cent(down 1 basis point year over year); (iii) a deceleration in ARPU growth from 1.5 per cent in Q1/18 to 0.5 per cent; and (iv) a 22 basis point year-over-year increase in wireless margins to 44.2 per cent.”

To reflect the adoption of IFRS 15, Mr. Reynolds raised his 2018 and 2019 earnings per share projections to $2.95 and $3.17, respectively, from $2.83 and $3.07. He also introduced his 2020 estimate of $3.42.

His target price for Telus shares rose by a loonie to $53 with an “outperform” rating (unchanged). The average target on the Street is $50.53.

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In a separate note, Mr. McReynolds said he expects “strong” wireless and “steady” wireline results to mitigate the media headwinds facing BCE Inc. (BCE-T, BCE-N).

BCE is scheduled to report its second-quarter earnings on Thursday before market open.

“Despite solid wireless quarters from Rogers and Shaw, underlying expansion in the postpaid wireless market in Canada and continued execution should enable BCE to deliver another strong wireless quarter in Q2/18,” he said. “For wireless in Q2/18, we forecast: (i) revenues and EBITDA of $2.052-billion (up 5.3 per cent year over year) and $914-million (up 7.4 per cent), respectively, compared to consensus of $2.053-billion and $901-million; (ii) postpaid net additions of 107k (versus 89k in Q2/17) factoring in 5.0-per-cent year-over-year growth in gross additions and postpaid churn of 1.08 per cent (flat year over year); (iii) a deceleration in ARPU growth from 1.4 per cent in Q1/18 to 1.0 per cent; and (iv) margins up 89 basis points year over year to 44.6 per cent.”

Though he called it "not overly material," Mr. McReynolds expects to see a "tough" quarter from Bell Media, which he said reflects “the combination of a sluggish revenue environment and higher television programming costs." He's projecting revenue and EBITDA declines of 1.3 per cent and 8.0 per cent, respectively.

Mr. McReynolds lowered his 2018 EPS projection to $3.49 from $3.55, while his 2019 estimate rose by 2 cents to $3.67. He introduced a 2020 expectation of $3.84.

He maintained a "sector perform" rating and $61 target for BCE shares. The consensus is currently $59.78.

“Given BCE’s position within the group as a reliable dividend grower and bond proxy, we would expect the stock to remain susceptible to changes in interest rate expectations – this despite some FCF [free cash flow] benefit on the back of lower pension funding should bond yields back-up,” said the analyst. “Notwithstanding macro headwinds, we believe underlying company fundamentals remain intact driven by: (i) continued wireless leadership with respect to network quality, market share gains and profitability; (ii) a steadily expanding FTTH [fiber to the home] footprint, which should enable BCE to weather pending X1 deployment by Rogers and Quebecor; and (iii) a continued aggressive approach to cost management. Consistency, predictability and industry- leading execution reinforce BCE as a core holding in Canadian telecom, in our view.”

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The bankruptcy of Toys “R” Us in the United States remains a headwind for Spin Master Corp. (TOY-T), said Canaccord Genuity analyst Derek Dley ahead of Wednesday’s release of its second-quarter results.

“Towards the end of Q1/18, Toys “R” Us announced its plans to liquidate its operations in the U.S. and this process is expected to last until the end of Q2/18,” he said. "As well, the company has commented that it expects to realize most of this impact in Q2/18 and that the overall impact will be contained to 2018. In our view, the effect of the bankruptcy on the company’s results will be transitory, as Spin Master is actively working with its other retail partners to absorb the lost volume from Toys “R” Us.

“Furthermore, we believe continued strength in the company’s international division will help offset some of the softness in sales resulting from the Toys “R” Us bankruptcy. In the prior quarter, international sales accounted for 35.9 per cent of gross product sales, up from 32.5 per cent in Q1/17. We expect international sales to increasingly become a more important part of the Spin Master business as the company is targeting 40 per cent of gross product sales to come from the international business in the long term.”

Mr. Dley is projecting net sales for the quarter of US$286-million, an increase of just 3.5 per cent year over year.

“We believe the company (and industry) remained impacted by the Toys “R” Us bankruptcy during the quarter,” said the analyst, who is orecasting adjusted EBITDA of US$41-million, which is below last year’s result of US$44-million.

He lowered his earnings per share projections for fiscal 2018 and 2019 to US$1.87 and US$2.05, respectively, down from US$1.91 and US$2.10.

Mr. Dley kept a “buy” rating and $63 (Canadian) target. The average is $61.22.

“While not inexpensive, we believe a premium valuation is warranted as Spin Master offers investors robust top-line growth, a healthy balance sheet which will allow for accretive acquisitions, and robust free cash flow generation.,” he said.

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In other analyst actions:

Cormark Securities analyst Gavin Fairweather cut Real Matters Inc. (REAL-T) to “market perform” from “buy” with a target of $6.50, falling from $8. The average on the Street is $7.38.

BMO Nesbitt Burns raised Yamana Gold Inc. (AUY-N, YRI-T) to “outperform” from “market perform” with a target of US$4.25, rising from $3. The average is US$3.96.

The firm initiated coverage of Dream Office REIT (D.UN-T) with a “market perform” rating and $24 target. Consensus is $24.71.

It gave Allied Properties REIT (AP.UN-T) an “outperform” rating and $46 target, which $44.68.




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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 28/03/24 4:00pm EDT.

SymbolName% changeLast
BCE-T
BCE Inc
-1.01%46.03
BCE-N
BCE Inc
-0.82%33.98
WSP-T
WSP Global Inc
-1.75%225.76
RCI-B-T
Rogers Communications Inc Cl B NV
-0.72%55.5
T-T
Telus Corp
+0.37%21.67
CIX-T
CI Financial Corp
+0.06%17.32
IGM-T
Igm Financial Inc
-0.06%34.93
D-UN-T
Dream Office REIT
+0.62%16.25
AP-UN-T
Allied Properties Real Estate Inv Trust
+0.45%17.67
TOY-T
Spin Master Corp
+0.06%34.66
REAL-T
Real Matters Inc
-1.13%6.12
LUN-T
Lundin Mining Corp
+3.43%13.86

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