Wednesday's upgrades and downgrades: CIBC cuts outlook on asset managers

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Inside the Market's roundup of some of today's key analyst actions. This file will be updated during the trading day.

CIBC World Markets has downgraded AGF Management Ltd. and IGM Financial Inc. to "sector underperformer" ratings in anticipation of new rules that could limit the trailer fees their mutual funds charge.

But it simultaneously upgraded CI Financial Corp. and Gluskin Sheff + Associations Inc., recommending investors rotate into those names in the belief that they are less at risk in the face of the new rules.

In what's been dubbed CRM2 (Client Relationship Model), the Canadian Securities Administrators will require by July, 2016 that investment dealers clearly disclose, at least annually, everything the client has been charged (commissions, management fees and administration charges) and provide a full reporting of investment returns.

The CSA is also considering whether to eliminate embedded compensation, or what's commonly known as trailer commissions – an arrangement whereby the financial adviser receives a portion of a mutual fund's fee (usually 1 per cent for an equity fund) as long as the client holds the fund.

"The combination of fee disclosure under CRM2 and a ban of trailer fees, which we think is coming and coming sooner than later, has material implications for all mutual fund manufacturers," CIBC World Markets analyst Paul Holden said in a research note.

"Those with scale, distribution, competitive pricing and a deep product shelf should cope much better than those that don't. We see regulatory change accelerating the trend to a consolidation of assets, resulting in some winners and some losers. All fund companies are likely to feel a margin squeeze as regulatory costs go up and pressure on fees increases. Overall profitability, or at least earnings growth, will suffer. However, the earnings impact will be felt longer term and as such we are revising down valuation multiples rather than near term EPS estimates," he said.

Both AGF and IGM Financial were downgraded to "sector underperformer" from "sector performer." AGF's price target went to $11 (Canadian) from $13 while IGM went to $49.50 from $62. Concerns Mr. Holden cited for AGF included lack of scale, lack of distribution and relatively high MERs (Management Expense Ratios). Mr. Holden cited margin pressure at IGM, given its large distribution network and high MERs.

Both CI Financial and Gluskin Sheff were upgraded to "sector outperformer" from "sector performer." CI Financial's price target, however, was reduced to $38.50 from $41. CIBC made no change to Gluskin Sheff's price target of $35.50.

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Industrial Alliance upgraded Dollarama Inc. to "buy" from "hold" and hiked its target price to $109 (Canadian) from $95.

Analyst Neil Linsdell largely attributed the move to rolling forward his valuation estimates for the company into fiscal 2017, but also cited a number of positives for the stock, including its plans to reduce costs and expected free cash flows of over $200-million a year that should continue to support share buybacks and dividend increases. He cautioned that with Dollarama now at 917 stores and Dollar Tree at 196 stores in Canada, same-store sales could modestly decrease over the next few years "due to minor cannibalization."

"Dollarama remains a favourite longer-term investment opportunity, although headwinds such as recent labour cost (minimum wage) increases, Ontario on June 1 and Alberta on September 1, will offset some of the efficiency improvements that the company has been putting into place," Mr. Linsdell said in a research note. "The company continues to perform better than its U.S. comparables and still has significant expansion opportunities in Canada, before the focus moves to international expansion in Central America in the coming years."

The analyst consensus price target for Dollarama over the next year is $103.13, according to Thomson Reuters data.

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Credit Suisse analyst Ralph Profiti initiated coverage on Tahoe Resources Inc. with an "outperform" rating, calling it one of the "better positioned" precious metals companies the bank covers both operationally and financially. He set a price target of $30.50 (Canadian).

"THO's high-grade silver-gold-lead-zinc Escobal mine in Guatemala provides strong operating margins and low cash-costs, with a strong balance sheet and growing free cash flows to further support a dividend," Mr. Profiti commented in a research note. "The Escobal mine boasts one of the highest resource grades among primary silver mines at 422 grams per tonne (Indicated category) and first half 2014 silver cash cost (net of by-product credits) of $6.08/oz ranks among the lowest cost primary silver mines in the world."

Escobal achieved commercial production in the first quarter of this year and is well on its way to annual production of between 18 million to 20 million ounces. "We believe valuation will be supported through: (1) strong execution of the Escobal mine plan, (2) an updated Escobal feasibility study in Q4, (3) throughput expansion to 4,500 tpd, (4) possible announcement of a dividend; and (5) pursuit of a growth and diversification strategy beyond Escobal and Guatemala," he added.

The analyst consensus price target for Tahoe Resources over the next year is $29.22.

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Macquarie analyst Jiong Shao initiated coverage on Alibaba Group Holding Ltd. with a "neutral" rating and an $88 (U.S.) price target, believing shares are rather pricey even with strong growth expected at the Chinese e-commerce giant.

He notes that shares are already trading at 25 times his 2016 earnings per share estimates. Meanwhile, the company faces increasing competition.

"As the Internet is becoming increasingly mobile, the biggest mobile franchise in China, Tencent's WeChat business, could possibly jump into the mobile e-commerce foray at some point, outside its partnership with JD.com. Thus, market share for Alibaba in ecommerce will be something the company needs to try extra hard to hold on to in the face of potential competition," Mr. Shao was quoted as saying by StreetInsider.com.

The analyst consensus price target for Alibaba over the next year is $101.25.

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Monthly auction metrics from Ritchie Bros. Auctioneers Inc. suggest that the company is on track to exceed the top end of its annual guidance, says Cantor Fitzgerald analyst Peter Prattas.

Ritchie Bros published its monthly auction metrics for September showing gross auction proceeds of $446-million (U.S.), up 7.2 per cent over September 2013, Mr. Prattas explains.

"We remain confident that RBA can achieve the top end of its 2014 guidance and that growth will continue into 2015," he says.

Mr. Prattas maintains his "buy" recommendation and $27 (U.S.) target price. The analyst consensus price target is $25.41, according to Thomson Reuters.

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In other analyst actions:

Dundee Securities downgraded Teck Resources to "neutral" from "buy" and cut its price target to $24 (Canadian) from $29. The action was linked to Dundee today lowering its price forecasts for base metals and coal.

HSBC upgraded Goldcorp to "overweight" from "neutral" with a price target of $29.60 (U.S.).

Cormark Securities upgraded Lundin Mining to "buy" from "market perform" with a price target of $7 (Canadian).

BMO Nesbitt Burns downgraded MBAC Fertilizer to "market perform" from "speculative outperform."

Beacon Research initiated coverage on Integra Gold with a "buy" rating and 70 cents (Canadian) price target.

Goldman Sachs cut its price target on Deere to $69 (U.S.) from $78 and reiterated a "sell" rating.

Macquarie upgraded Bill Barrett to "neutral" from "underperform" with a price target of $20 (U.S.).

Macquarie upgraded Goodrich Petrolum to "neutral" from "underperform" with a price target of $14 (U.S.).

Piper Jaffray downgraded GoPro to "Neutral" from "overweight" with a price target of $90 (U.S.).

MKM Partners downgraded Juniper Networks to "neutral" from "buy" with a price target of $24 (U.S.).

With files from Bloomberg