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

Pointing to what he sees as a growing net asset value premium and “muted” projected total return, Industrial Alliance Securities analyst Brad Sturges lowered his rating for Killam Apartment REIT (KMP.UN-T) to “hold” from “buy” on Tuesday.

“To be clear, while we believe that Killam’s unit price appreciation potential may be more limited in the near term, the REIT remains well positioned to capture continued SP-NOI [same-property net operating income], NAV per unit, and AFFO [adjusted funds from operations] per unit growth in the coming quarters,” the analyst said. “Killam could continue to benefit from strong underlying demand fundamentals, high occupancy rates, and execution of its suite repositioning program that may allow for further SP-AMR [same-property average monthly rent] growth acceleration in the coming quarters. Additionally, Killam’s sizeable development pipeline totaling close to 3,000 planned apartment suites may further augment its long-term NAV/unit growth.”

On May 1, Halifax-based Killam reported first-quarter fully diluted funds from operations of 21 cents per unit, up 5 per cent (or 1 cent) from the same period a year ago. Same-property net operating income rose 4.3 per cent year-over-year as same-property revenue grew 3.3 per cent and its same-property net operating income margin improved by 0.6 per cent to 58.1 per cent.

“Killam’s investment considerations are based on the potential for increasing apartment rental demand in the REIT’s Atlantic Canada property markets, and Killam’s above-average growth prospects derived from the continued execution of acquisition and development growth initiatives,” he said. “Our Hold rating balances these investment considerations with Killam’s investment risks including high geographic concentration in Atlantic Canada and potential development risks, as well as Killam’s NAV premium.”

Mr. Sturges raised his target price for Killam units to $19.75 from $19.25. The average target on the Street is currently $19.96, according to Bloomberg data.

“Our rating for Killam Apartment REIT (Killam) is adjusted to Hold from Buy, to reflect its 12-per-cent premium to its estimated net asset value (NAV), versus an 6-per-cent average NAV discount for its Canadian apartment REIT/REOC peers,” he said. “Our 12-month price target is 26.0 times 2019 estimated FD AFFO of 76 cents per unit or $19.75 (up from $19.25), and equal to a 12-month total return projection of 9 per cent.”

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Norbord Inc. (OSB-T) is an “underperformer no more,” said CIBC World Markets analyst Hamir Patel, who upgraded the stock to “neutral."

“With Norbord’s variable dividend currently yielding 4.8 per cent, we no longer see a negative total return in holding OSB shares,” he said. “We now utilize a slightly higher 2020 EV/EBITDA valuation multiple (7.0 times from 6.75 times previously) given modestly improved housing fundamentals. With 50 per cent of OSB demand tied to new home construction, Norbord is the name in our coverage universe most sensitive to U.S. housing starts.”

The move came in the wake of last week’s release of first-quarter results that met Mr. Patel’s expectations.

“We have trimmed our 2019 EBITDA forecast from $293-million to $283-million, entirely reflecting weaker realization assumptions for the second quarter given recent pricing,” he said. “With current-year consensus estimates having fallen sharply over the past month, we are now 13% lower than the Street (vs. 25% lower four months ago) and only modestly lower when adjusting consensus for one extreme outlier.”

Despite the reduction, he raised his target to $32 from $30. The average on the Street is $39.79

“When we downgraded Norbord on Jan. 13, North Central OSB prices were at $210/msf,” he said. “Since then, the commodity is now 12 per cent lower at $185/msf, while Norbord’s share price is down 13 per cent over the same period. By comparison, LouisianaPacific (closest peer) has risen 7 per cent, the TSX Composite is up 10 per cent, and the Homebuilders ETF has surged 17 per cent higher.”

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With its mine in the Ivory Coast now in commercial production, Endeavour Mining Corp. (EDV-T) is likely entering a period of free cash flow generation and deleveraging, according to Desjardins Securities analyst Raj Ray, who thinks it should “bode well for positive share price momentum.”

He initiated coverage of the intermediate gold producer with a “buy” rating.

“Endeavour has been largely successful in building an asset base that can deliver strong shareholder returns,” said Mr. Ray. “Management’s strategy of asset rationalization and optimization has been a success, not only in reducing costs but also almost doubling production over the last six years. Looking at 2019, Endeavour’s now nearly optimized portfolio illustrates one of the best operating profiles (based on 2019 guidance) among its peer group. Endeavour has a strong history of delivering on guidance (has met or exceeded guidance every year since 2014), and with Ity carbon-in-leach (CIL) reaching commercial production and full nameplate capacity ahead of schedule, we remain confident in the company’s ability to deliver on 2019 guidance.”

“Endeavour’s share price performance has lagged recently (year-to-date performance of a 14-per-cent decline vs the GDX at a 4-per-cent drop and GDXJ at down 7 per cent), which can partly be attributed to geopolitical reasons. In addition, with the gold sector in the doldrums over 2017 and 2018, Endeavour went through a capital spend cycle from 2016 to the present, which resulted in negative FCF and increased leverage. We believe 2019 is when FCF will reach an inflection point and deleveraging will commence, and therefore provides a good entry point for potential investors with the share price yet to reflect the positive outlook for the company. Endeavour’s 2019/20 FCF/EV yield compares favourably vs both its peer group and the broader gold sector under our coverage.”

Touting an asset base he feels is primed to launch future growth as well as its “quality” management team, Mr. Ray set a target of $30 for Endeavour shares. The average is $29.64.

“Endeavour currently trades at 4.7 times price-to-2019 cash flow and 4.2x times P/2020 CF vs the peer average at 7.2 times and 6.3 times, respectively. At P/NAV of 1.16 times, Endeavour trades roughly in line with most of its peer group, although the peer average of 1.02 times is being brought down by some companies trading at a discount due to operational/jurisdictional reasons. We have already incorporated some upside to reserves at Endeavour’s key assets, Houndé and Ity CIL; however, we see potential for further reserves and resource additions—and therefore NAV growth—driven by the company’s exploration program over the next 12–24 months. In our opinion, Endeavour’s share price should start to do well assuming Ity performs as expected over the coming quarters.”

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Despite hiking his target price for shares of Air Canada (AC-T) following better-than-anticipated first-quarter results and a favourable outlook for the second quarter, Raymond James analyst Ben Cherniavsky said he’s “mindful of the premium that the stock now commands over its U.S. peers.”

“For the first time since we began tracking the data 5+ years ago, Air Canada managed to move up a notch in our league tables vs. the U.S. carriers, surpassing American Airline's TTM [trailing 12-month[ pre-tax profit margin for 1Q19,” he said. “However, there is still a significant gap to close before we can be convinced that further multiple expansion on Air Canada's stock is justified. Therefore, we view the shares as fairly-valued at this late stage of the cycle.”

Before market open on Monday, the airline reported revenue, earnings before interest and taxes and adjusted earnings per share of $4.453-billion, $127-million and 6 cents, respectively, exceeding Mr. Cherniavsky’s projections of $4.304-billion, $20-million and a 22-cent loss.

The company’s total operating costs came in a $4.326-billion, which Mr. Cherniavsky said was a “a rather remarkable (and lucky!) feat considering the lack of visibility we had going into this particular quarter.”

“In our view, the nature of the 1Q19 revenue beat was more notable than the size of it,” he added. “In past quarters, Air Canada typically drove its top line higher by adding more and more capacity to its network. For 1Q19, however, ASM [average seat mile] growth slowed to 4.6 per cent, still high relative to GDP, but lower than it has been in the past five years. This follows decelerating capacity growth 6.7 per cent and 5.8 per cent for 3Q18 and 4Q18 respectively. Lo and behold, for the past three quarters Air Canada has generated the highest RASM [revenue per average seat mile] growth in the past five years, thus demonstrating the powerful relationship between capacity discipline and pricing power.”

With the results, Mr. Cherniavsky raised his 2019 and 2020 EPS forecast to $3.70 and $4, respectively, from $3.25 and $3.90.

Keeping a “market perform” rating, his target for Air Canada shares jumped to $38 from $29. The average on the Street is now $43.94.

“While these trends are encouraging, we are reluctant to conclude that the market is in perfect balance and that all the excessive capacity growth of the past few years has been absorbed,” he said. “Some of this curtailment in ASMs is related to the Max grounding, which is expected to come back online at some point. Also, global macro trends continue to decelerate, suggesting that additional yield improvements might be more difficult to achieve. Finally, we note that while declerated capacity growth produced strong 1Q19 RASM it also effected an above average NF CASM increase of 4.4 per cent, the highest since 1Q16, as fixed cost increases were amortized over fewer incremental ASMs. Managing the right balance between cost containment, network growth, and pricing power remains a work-in-progress for Canada's airlines, in our view.”

Meanwhile, AltaCorp analyst Chris Murray moved his target to $51 from $46 with an “outperform” rating.

Mr. Murray said: “We view the release positively with contributions from the Aeroplan program ramping, a healthy demand outlook and strong financial performance despite the impact of the 737 MAX grounding. We see share prices as trading at attractive levels even with the post quarter outperformance.”

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Citing a more positive outlook on the retailer following its Investor Day event two weeks ago, Macquarie Research analyst Laurent Vasilescu upgraded lululemon athletica inc. (LULU-Q) to “neutral” from “underperform.”

"While we wish more numbers were shared during the full-day presentation, the company addressed a number of our key concerns," said Mr. Vasilescu, pointing to concerns about store traffic trends and international growth.

Also listing “the new management team, international profitability inflecting and achievable five-year targets” as factoring into his upgrade, the analyst raised his target to US$159 from a Street-low US$101. The average is currently US$184.43.

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A pair of equity analysts downgraded their ratings for Iamgold Corp. (IMG-T) following Monday’s release of its first-quarter results, expressing concern that its 2019 guidance could be at risk given the issues at its Westwood project.

Canaccord Genuity analyst Carey Macrury moved the stock to “hold” from “buy” with a target of $3.75, dropping from $7. The average is $6.36.

BMO Nesbitt Burns analyst Andrew Kaip lowered Iamgold to “market perform” from “outperform" with a US$3.50 target, down from US$5.

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The Street is currently underestimating the impact of Boeing Co.’s (BA-N) 737 Max aircraft crashes, said Barclays analyst David Strauss.

After surveying almost 1,800 passengers in North America and Europe, he found many likely to avoid the grounded jets “for an extended period,” leading him to downgrade Boeing stock to “equal-weight” from “overweight.”

“Nearly half won’t fly MAX for year or more ... if given the choice between a MAX and another aircraft type on otherwise identical flights, 52 per cent would choose the other aircraft type,” said Mr. Strauss.

He added: “We expect the recovery of 737 MAX production to take longer than expected. We think the production rate recovery will be slower to come through than anticipated as we believe the airlines are unlikely to take aircraft as quickly as prior to the grounding.”

Mr. Strauss dropped his target to US$367 from US$417. The average is now US$429.

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In other analyst actions:

Eight Capital analyst Ralph Profiti downgraded Hudbay Minerals Inc. (HBM-T) to “neutral” from “buy” and lowered his target by a loonie to $11. The average is $11.62.

Conversely, Canaccord Genuity’s Dalton Baretto upgraded Hudbay to “buy” from “hold” with a $10.50 target, down from $11.

National Bank Financial analyst Matt Kornack upgraded Slate Office REIT (SOT.UN-T) to “outperform” from “sector perform” with a $7 target, rising from $6.50 and above the $6.59 average.

RBC Dominion Securities analyst Sabahat Khan downgraded Sleep Country Canada Holdings Inc. (ZZZ-T) to “sector perform” from “outperform” with a $19 target, falling from $23 and below the average of $25.75.

Noble Capital Markets analyst Mark Reichman downgraded Endeavour Silver Corp. (EDR-T) to “market perform” from “outperform” without a specified target.

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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 3:15pm EDT.

SymbolName% changeLast
SOT-UN-T
Slate Office REIT
+7.04%0.76
KMP-UN-T
Killam Apartment REIT
+0.05%18.61
AC-T
Air Canada
-0.61%19.52
LULU-Q
Lululemon Athletica
+0.7%392.2
EDV-T
Endeavour Mining Corp
+0.47%27.59
EDR-T
Endeavour Silver Corp
+4.17%3.25
HBM-T
Hudbay Minerals Inc
+0.96%9.47
IMG-T
Iamgold Corp
+5.31%4.56
BA-N
Boeing Company
+0.6%193.11
ZZZ-T
Sleep Country Canada Holdings Inc
-0.4%29.87

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