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A Canadian Pacific Railway crew works on their train at the CP Rail yards in Calgary, Alberta, April 29, 2014.TODD KOROL/Reuters

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

Park Lawn Corp. (PLC-T) is positioned to benefit from demographic support "unlike anything in history," said Raymond James analyst Johann Rodrigues.

"At this point, the historic aging population trend in North America is an established theme," said Mr. Rodrigues. "In Canada, the 60–79 bracket has more than doubled since 1980 and is projected to make up almost a quarter of the population by 2060 (11 million people). Meanwhile, the 80-plus age bracket has grown at an even faster pace, and is set to almost quadruple from 2000 to 2060 (5 million people). In the U.S., it's a similar picture; the 60–79 age bracket is expected to grow from 13 per cent to 21 per cent from 1980 to 2060 (90 million people) while the 80-plus age bracket to quadruple (35 million people).

"Never before in history has the size of those two brackets been as large. This had led to remarkable growth in the long-term care and retirement residence sectors. However, we believe knowledge of the death care industry is slightly more obtuse. While the mortality rate has stayed fairly constant (7 per cent), purely as a function of population growth, the number of deaths per year continually rises. Over the last 35 years, it has increased over 60 per cent to 280,000 per year in Canada and 35 per cent to 2.7 million in the U.S.. Death rates continue to grow at roughly 1 per cent annually in both countries. A quickly aging population and a steady rise in deaths should fuel consistent and reliable growth in all of Park Lawn's service lines."

Believing the Toronto-based owner and operator of cemeteries, crematoriums and funeral homes is poised for "substantial" growth based on a strong market, its market share and both organic and external growth, Mr. Rodrigues initiated coverage of the stock with an "outperform" rating.

"Management has stated that it would like to hit $25-million in run-rate EBITDA by the end of 2019, with 60– 70 per cent of this growth coming from external acquisitions, but we think they could hit this goal before the end of 2018," he said. "According to our forecasts, the company is positioned to achieve double-digit growth in both adjusted EBITDA and earnings per share in each of the next two years, with adjusted EBITDA set to grow by 41-per-cent annualized through 2019 and adjusted earnings set to grow 35 per cent annually. Roughly two-thirds of this growth comes from external acquisitions while the balance is generated through organic revenue growth and expansions on existing land. Although this is not a traditional real estate company, we are real estate analysts, and opportunities to achieve this level of growth are few and far between in REIT-land.

Mr. Rodrigues said the North American death care industry, which he valued at $22-billion (U.S.) with 10 per cent coming from Canada, currently has few players and high barriers to entry. He emphasized Park Lawn currently has only three domestic competitors (one of which is a church) and is the only publicly listed death care company, while the U.S. market remains quite fragmented.

"Regulatory hurdles and municipal reluctance to cemetery zoning creates large barriers to entry for new entrants and supply," the analyst said. "On the funeral home side, the number of homes in both countries has actually shrunk by 15 per cent over the last decade as a result of rising land values and consolidation. Overall, 80 per cent of the U.S. market and 90 per cent of the Canadian market are owned by non-institutional entities, leaving a sizable opportunity for established scale players to consolidate the space at still reasonable valuations."

Mr. Rodrigues set a price target of $25 for Park Lawn shares, which is 13 cents less than the current average on the Street, according to Bloomberg data.

"The 'nothing in this world is certain except death and taxes' trope might be hackneyed at this point, but that does not mean it is untrue," he said. "While people may scale back on flourishes and extra services during a recession, they still almost always require a burial or cremation, as well as a service and/or viewing. While certain real estate asset classes are more prone to cyclicality, death is more certain and thus Park Lawn provides shareholders an opportunity to benefit from fairly recession-proof cash flows."

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Believing "low risk growth [is] on sale," Credit Suisse analyst Robert Reynolds upgraded SSR Mining Inc. (SSRM-T) to "outperform" from "neutral" following the release of strong-than-anticipated fourth-quarter operating results.

"SSR shares have lagged the HUI index by 27 per cent since it reported a weak Q3 and the partial sale of its PVG stake on Oct. 12, fueling M&A speculation," said Mr. Reynolds. "Delivery of a better than expected Q4 and in-line 2018 guidance should put operational concerns to rest.

"Meanwhile, we believe the 'M&A overhang' is a poor reason to not buy SSR given (i) the overhang exists due to SSR's strong balance sheet ($361-million U.S. in net cash+investments), which is a positive attribute; (ii) SSR's M&A track record is good as Marigold, Claude Resources and Chinchillas were all value accretive; and (iii) SSR has less of a need for M&A now than when it did the Claude resources transaction; at that time the company was trending towards single asset status. Now, SSR has a platform of three mines with a 10 year mine life and 33-per-cent organic growth in 2019 with the ramp up of Chinchillas in the second half of 2018."

On Monday, the Vancouver-based company announced 2018 production guidance of 325,000 gold equivalent ounces at cash costs of between $705 and $760 (U.S.) per ounce, which largely fell in line with Mr. Reynolds's expectations (331,000 ounces).

"We view SSR's growth outlook for 2019 as relatively lower risk given the fully permitted brownfield Chinchillas project is driving the growth, SSR has a strong technical team and a well capitalized balance sheet to fund the remaining $70-million in capex," he said. "With completion of the Chinchillas project, SSR will have a portfolio of three mines, Marigold in the USA (45 per cent of net asset value), Seabee in Canada (34 per cent of NAV) and Puna/Chinchillas in Argentina (12 per cent of NAV). Our estimates for SSR currently do not include any organic growth opportunities after Chinchillas. The company has prioritized investment in exploration at Marigold and Seabee ($19-million budget for 2018). Additionally, Marigold's equipment replacement study could be a $100-million investment opportunity to drive a 36-per-cent expansion and mine life extension from 10 to 15 years through a larger truck fleet. SSR plans to release the study results by mid-2018."

Mr. Reynolds did lower his target for the stock to $14 from $14.50. The average is $15.90.

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Essential Energy Services Ltd. (ESN-T) has caught the "frackers' fourth quarter flu," according to Raymond James analyst Andrew Bradford.

"Fracturing demand in the 4Q was finally impacted by the gap in producers cash flow created by weak gas prices," he said. "We expect completion services demand to recover in 1Q18, roughly in-line with 3Q17, while the second half of 2018 will likely recover as a function of growing condensate production."

Mr. Bradford downgraded his rating for the Calgary-based oilfield services provider in reaction to its 2018 capital budget, which was released Monday, emphasizing "caution is the better part of valor in Capital budgeting."

Essential Energy's 2018 capital budget was set at $13-million, with $5-million allocated to growth and $8-million toward maintenance. Overall, it's a drop of $10-million from 2017.

"The growth capital includes the cost to retrofit one Gen IV coil tubing rig, the addition of one nitrogen pumper, coil support equipment, and $1.5-million in carryover capital from 2017," said Mr. Bradford. "We suspect this budget would move higher if market conditions warranted – but for now it clearly reflects a cautious near-term outlook."

He added: "On Friday, ESN received a copy of Packers Plus' Notice of Appeal of the early November rulings in Essential's favour. Given the trial judge's rulings, it should go without saying Essential believes the appeals to be without merit. For our part, we suspect Packers has reasons to pursue the appeals that don't necessarily have anything to do with Essential at this point. For instance, Packers likely needs to overturn the validity ruling to pursue infringement trials with other named parties. Regardless, the appeals are unlikely to be fully put to rest for at least another 12 to 18 months."

Moving the stock to "outperform" from "strong buy," Mr. Bradford lowered his target price to $1.30 from $1.50. The average on the Street is $1.10.

"Our view on the fundamental relationship between Essential's service lines and the broader trend toward greater frack-intensity is unchanged and for this reason we believe Essential is advantageously positioned," he said. "Further, we believe the stock is lingering too far below both historical EBITDA multiples and theoretical sum-of-the-parts value. What has changed, however, is the Canadian natural gas market and the impact this could have on overall producer cash flows and capital spending – particularly in 4Q17 and potentially in 1Q18. For this reason we are toggling back our target and rating to reflect this tactical risk."

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SNC-Lavalin Group Inc. (SNC-T) is CIBC World Markets analyst Jacob Bout's top pick in the Canadian engineering and construction sector.

"We continue to think SNC stands to benefit from the surge of Canadian infrastructure P3 projects expected to reach financial close this year (SNC has a solid pipeline and arguably the best win rates in Canadian transit over the past few years)," said Mr. Bout in a research report previewing 2018 in the sector.

"A stabilizing/improving oil & gas environment (30 per cent of E&C sales) bodes well for 2018/2019. In contrast to 2017, we think book-to-bill ratios will track higher than 1.0 times in 2018. The potential for a positive outcome to the Deferred Prosecution Agreement (DPA) could be a catalyst for share price upside. We estimate that the E&C business (excluding Capital portfolio) trades at 7.2 times 2019 EBITDA, considerably lower than design peers in the 9.5 times-10.5 times range. With less than 15 times exposure to construction, the majority of corruption risk behind the company, a robust infra and nuclear outlook, and improving commodity markets, we think SNC's E&C business should trade at a higher multiple.

Maintaining an "outperformer" rating for its stock, he raised his target to $68 from $65, which is slightly below the consensus on the Street of $69.86.

At the same time, Mr. Bout made the following other target price changes:

  • WSP Global Inc. (WSP-T, “neutral”) to $63 from $57. Consensus: $62.27.

    “While we continue to think that WSP is well positioned to take advantage of global megatrends (such as urbanization, surging infrastructure spend), and there is a compelling case that WSP will see improving organic growth and margin expansion trends, our main pushback is on current valuations,” he said. “Though we think a valuation premium over peers is warranted, WSP is trading at the higher end of its historical averages, at 10.5 times 2019 EBITDA consensus estimates (10.2 times on CIBC’s estimate) vs. design peers at 9.2 times.”
     
  • Stantec Inc. (STN-T, “neutral”) to $39 from $38. Consensus: $39.45.

    “We are lowering 2018 EBITDA estimates to reflect a lower contribution from reduced M&A in 2017, a slower rate of margin expansion (we expect 2017 to close at the lower end of margin guidance), and more Construction in the business mix (higher sub-contracting expenses),” he said. “We think the Water group should return to positive organic growth, and a bottom for Energy/Resources is fast approaching, which lead us to believe that 2018 and 2019 should be years of positive organic growth for STN. Leverage levels are very healthy at 1.6 times, and while our numbers do factor in some tuck-in M&A growth, potentially larger strategic acquisitions would be an upside to our numbers.”

  • Stuart Olson Inc. (SOX-T, “neutral”) to $8 from $6. Consensus: $7.17.

    “We expect to see an improved 2018 on the back of higher MRO activity, strength in the Commercial group (several wins in 2017), and a modest uptick for the Buildings group (caveat is SOX is able to fill its backlog shortage),” he said. “FCF levels have stepped up (FCF-based dividend payout of 68 per cent in 2017 and 55 per cent in 2018 versus negative in 2016).

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Summit Industrial Income REIT (SMU.UN-T) has become a high-growth, high-quality Canadian REIT due to its "strong leadership," said Echelon Wealth Partners analyst Stephane Boire.

Believing it "finished the year on a home run" and will continue to benefit from consolidation movements within the sub-sector, he raised his rating for the Toronto-based REIT to "buy" from "hold."

"The Industrial Real Estate sub-sector has begun the year with a 'bang,' to say the least, with the announcement by AAR of an agreement to get taken over by Blackstone," he said. "This news, in our opinion a strong positive for the Listed Industrial Real Estate space, comes in addition to another positive for SMU as the REIT announced on Dec. 27, 2017, its first JV partnership with private developer Urbacon. Urbacon has so far developed more than 2.0 million square feet. of datacentre space, with Bell (BCE-T, "hold" rating and $62 target) and Telus (T-T, "buy" rating, $50 rating) among their most significant clients. We view this news as potentially very beneficial for the REIT. The goal of the JV partnership is to develop datacentre facilities nationally, with the initial investment being the acquisition of a 50-per-cent interest in Urbacon's Data Center One in Richmond Hill, ON, for a total equity investment of $15.0-million. The seller is Fonds de Solidarite FTQ. In parallel, SMU announced a $15.8M mezzanine loan to Urbacon, which Urbacon will use to buy its current partner's 50-per-cent interest in the Montreal, Quebec, facility. The partner in Montreal is also Fonds de Solidarite FTQ. SMU has the option to convert the loan into a 50-per-cent ownership interest in the facility. Taking into account a three-year working capital loan of $14.3-million, the $45-million initial total investment is expected to be accretive with a yield between 8-10 per cent. Management indicated that the REIT's datacentre platform could eventually grow enough to become a stand-alone REIT. The REIT's buying capacity is approximately an additional $70-100-million at the moment. We believe SMU is progressively getting to its critical mass, benefitting from solid access to capital and a robust acquisition pipeline."

Mr. Boire raised his target to $8.50 per unit from $7.25. The average is $8.11.

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The outlook for Canadian railway companies looks "solid" in 2018 despite potential first-half obstacles, said Raymond James analyst Steve Hansen.

"We believe the fundamental outlook for the Canadian rails (both CN & CP) remains solid entering 2018 underpinned by a series of tailwinds that include: 1) accelerating GDP growth (on both sides of the border); 2) healthy price trends, benefitting from rising inflation & tightening truckload capacity; 3) stable/rising commodity prices in key end-markets (i.e., met coal, potash); 4) beneficial US tax reform (modest, but still real); 5) sustained pension tailwinds (on higher rates); 6) improving oilfield activity in key energy basins; and, 6) a handful of strategic growth opportunities associated with recent port expansions and/or crude-by-rail," he said. "Broadly speaking, we expect these same tailwinds will collectively drive healthy traffic/earnings growth for both CN & CP in 2018."

He added: "Notwithstanding the optimistic backdrop described above, we caution that 1H18 also brings with it stiffer comparable hurdles given the outsized growth seen last year — particularly in the case of CN (1H17 RTMs [revenue ton miles: up 16 per cent versus CP: up 4.5 per cent). While too early to draw major inference, we do note that initial 1Q18 data (first 2 weeks) broadly supports this near-term view (CN: down 4.0 per cent, CP: up 5.2 per cent). We will continue to monitor accordingly."

Citting traffic patterns and his macro outlook, Mr. Hansen raised his target price for shares of Canadian Pacific Railway Ltd. (CP-T, CP-N) to $255 from $245 with an "outperform" rating (unchanged). The average is $248.60.

He kept a "market perform" rating and $115 target for Canadian National Railway Co. (CNR-T, CNI-N). The average is $109.01.

"While we continue to admire the long-term prospects for both Canadian carriers, our current preference for CP is largely based upon the firm's reinvigorated growth prospects (recent contract wins, new product offerings, CBR opportunity), and sharply discounted valuation vs. CN and the broader Class 1 universe," said Mr. Hansen.

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In other analyst actions:

Scotia Capital analyst Paul Steep upgraded Constellation Software Inc. (CSU-T) to "sector outperform" from "sector perform." Mr. Steep increased his target to $850 from $740. The average target is currently $750.

Roth Capital Partners analyst Jake Sekelsky initiated coverage of Sierra Metals Inc. (SMT-T) with a "buy" rating and $4 target. The average is $4.22.

Peters & Co. analyst Tyler J Reardon upgraded Pembina Pipeline Corp. (PPL-T) to "sector outperform" from "sector perform" with a $49 target, up $2. The average is $50.94.

Tudor Pickering & Co analyst Aaron Swanson upgraded Seven Generations Energy Ltd. (VII-T) to "buy" from "hold" with a $21 target, rising from $19. The average is $23.88.

BMO Nesbitt Burns analyst Andrew Breichmanas downgraded Roxgold Inc. (ROXG-T) to "market perform" from "outperform" with a target price of $1.75, down from $2. The average is $2.02.

SunTrust Robinson Humphrey analyst John Boris upgraded Merck & Co. Inc. (MRK-N) to "buy" from "hold" and hiked his target to $72 (U.S.) from $54. The consensus target is $65.91.

Macquarie analyst Laurent Vasilescu downgraded Under Armour Inc. (UAA-N) to "underperform" from "neutral" and dropped his target to $8 from $10. The average is $13.25.

Consumer Edge Research analyst David A Schick upgraded Lowe's Cos Inc. (LOW-N) to "overweight" from "equal-weight" and raised his target to $124 (U.S.) from $80. The average is $96.70.

Aegis Capital Corp. analyst Victor Anthony upgraded Twitter Inc. (TWTR-N) to "buy" from "sell" and hiked his target to $30 (U.S.) from $13. The average is $20.50.

Wells Fargo Securities analyst Jim Birchenough upgraded Gilead Sciences Inc. (GILD-Q) to "outperform" from "market perform" with a $96 (U.S.) target, rising from $84. The consensus is $86.10.

Nomura Instinet analyst Romit J Shah upgraded Qualcomm Inc. (QCOM-Q) to "buy" from "neutral" with a target of $75 (U.S.), rising from $58. The average is $66.97.

MoffettNathanson analyst Craig Moffett downgraded Verizon Communications Inc. (VZ-N) to "neutral" from "buy" and raised his target by $5 (U.S.) to $56. The average is $52.90.

Wolfe Research analyst Hunter Keay upgraded Boeing Co. (BA-N) to "outperform" from "peer perform."

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