A Methanex methanol plant in Chile.
Inside the Market's roundup of some of today's key analyst actions
The fourth-quarter results for Bank of Nova Scotia (BNS-T, BNS-N) show it is "firing on all cylinders" according to BMO Nesbitt Burns analyst Sohrab Movahedi.
On Tuesday, Scotiabank reported cash earnings per share of $1.58, ahead of the Street's projection of $1.51.
"Overall, a clean, broad-based beat with solid underlying business trends across the board: another strong quarter in GBM (primary source of beat relative to our expectations), and continued good momentum in Canadian and International Banking segments," said Mr. Movahedi. "Credit fundamentals remain intact and the bank delivered a CET1 ratio of 11.0 per cent, up from 10.5 per cent last quarter. Book value per share was up 7 per cent year over year."
Mr. Movahedi emphasized the results of the Canadian segment, noting: "Contribution in the quarter was $966-million, up 14 per cent year over year, with good volume growth (in part helped by an acquisition), higher risk-adjusted margins (given the targeted focus on unsecured lending as well as deposit growth), and positive operating leverage of 3.8 per cent. For 2017, management expects favourable risk-adjusted NIM trends and positive operating leverage."
He also expects rebounds from the global banking and markets segments.
"Contribution of $461-million was well up from last year's depressed levels, reflecting higher trading revenue (up 22 per cent year over year) and 300 basis points lower NIX ratio, offsetting higher credit costs (PCL ratio of 19 bps versus 14 bps last year)," he said. "This segment should be able to grow earnings at the lower end of the bank's medium-term EPS growth target of 5-10 per cent."
In reaction to the results, his 2017 EPS projection rose by a dime to $6.40.
He maintained his "outperform" rating for the stock and raised his target price to $80 from $75. The analyst average target price is $78.08, according to Bloomberg.
"Our Outperform rating on BNS stock is based on expectations of: 1) efficiency improvements from restructuring charges; 2) higher-than-peer earnings growth driven from its International Banking segment, which is augured in the Pacific Alliance region, where credit penetration is less-than 50 per cent; and 3) continued positive momentum in domestic banking operations," he said.
Elsewhere, EVA Dimensions analyst Neil Fonseca upgraded his rating for the stock to "overweight" from "underweight." He did not specify a target price.
Desjardins Securities analyst Doug Young raised his target to $80 from $75 with a "buy" rating.
"There are two drivers of our positive bias," he said. "First, the earnings outlook for its international division (specifically the LatAm countries of Peru, Colombia, Mexico and Chile), which we believe will be driven by organic growth, expense reductions, integration of past acquisitions and margin improvements. Second, management laid out clear expense reduction targets which will flow through in 2017–19."
RBC Dominion Securities analyst Darko Mihelic bumped his target to $78 from $76 with an "outperform" rating.
"Overall, we view Q4 results positively and our thesis remains intact," he said.
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The changes to the power market introduced by Alberta's government last week are likely to be a net positive for TransAlta Corp. (TA-T, TAC-N), according to RBC Dominion Securities analyst Robert Kwan.
Though he admits further details are necessary to evaluate both the positive and negative impacts for the company, Mr. Kwan said the provincial government has taken a "balanced" approach to both the industry and rate and tax payers.
"With Alberta currently being the only real merchant power market in Canada, the transition from an 'energy only' pricing scheme to one that introduces a 'capacity' price framework is generally new to stocks in our coverage," the analyst said. "Although some stocks that we cover such as TransCanada (New York) have assets that have had exposure to capacity prices for several years, our discussions indicate that the merchant power assets held by those companies have not been a primary focus for investors and therefore capacity pricing frameworks are relative unknowns."
He added: "With so many details yet to be finalized, we have tried to use parameters from other capacity markets to try to estimate what capacity pricing could mean for TransAlta along with providing a sensitivity analysis given how broad the range of outcomes could be … We estimate that capacity pricing could add between $1-4/share to value based on a range of capacity prices and discount rates."
On Tuesday, TransAlta held a conference call to discuss the province's changes and agreement struck with the government to shut down six coal-fired plants, announced on Nov. 24.
"TransAlta highlighted that its existing coal fleet is well-positioned to capture expansion opportunities as Alberta transitions into a low-carbon economy and a new capacity market structure," said Mr. Kwan. "Specifically, TransAlta has a sizable coal fleet that can be converted into gas facilities at a lower cost than new generation, which lines up nicely with the demand by the province to have lower carbon generation output that is reliable, but also at a low cost."
"TransAlta highlighted that the coal-to-gas conversions would have substantially lower (roughly 40-50 per cewnt less) operating and sustaining capital costs compared to existing coal generation. Additionally, the timeline to convert coal burners to gas can be completed in approximately 60 days and has the potential to add 15 years to the Alberta coal fleet … When comparing the economics to a new combined cycle gas turbine (CCGT) facility, management highlighted that the cost per kilowatt for a coal-to-gas conversion would only be roughly 10-per-cent of the cost per kilowatt required for a new CCGT facility."
Based on his estimate that the introduction of the capacity market could add $2 per share in value, Mr. Kwan raised his target price for the stock to $8 from $6. The analyst consensus price target is $6.85, according to Thomson Reuters.
He maintained a "sector perform" rating.
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In a research note wrapping up third-quarter earnings in the precious metals sector, Desjardins Securities analyst Michael Parkin made several revisions to target prices in his coverage universe.
The changes were:
Alamos Gold Inc. (AGI-T, "buy" rating) to $12.50 from $13.50. Consensus is $13.37.
Mr. Parkin: "We have made some small changes to our operating assumptions after having the opportunity to discuss the company's outlook with senior management during a recent marketing trip. Key changes include taking down our grade assumption at El Chanate and taking up our residual-leach assumption for the asset once mining ceases in [approximately] 18 months."
Argonaut Gold Inc. (AR-T, "buy" rating) to $3.60 from $3.70. Consensus is $4.12.
Mr. Parkin: "The primary change to our Argonaut model was pushing out our assumed start date at San Agustin after the company announced that it has received the change in use of soil permit … The company anticipates first production in 3Q17, which we have moved to be in line with our model (we were previously assuming a start date of 2Q17)."
Mandalay Resources Corp. (MND-T, "buy" rating) to $1.15 from $1.50. Consensus is $1.47.
Mr. Parkin: "With its 3Q16 financial results, Mandalay announced a slightly negative revision to its 2016 guidance and announced its 2017 guidance. Our 2016 estimates are now in line with the upper end of the revised production ranges and, based on our metals price assumptions, this drives our gold-equivalent estimate to slightly exceed the stated GEO production guidance."
New Gold Inc. (NGD-T, "buy"rating) to $7 from $6.75. Consensus is $7.21.
Mr. Parkin: "We have updated our model to factor in the copper hedges for 2017, which were announced on Nov. 15. The company announced that it has hedged 31.7mlbs of copper production over 1H17, which represents [about] 65 per cent of our estimated 1H17 copper production, at a price of $2.52 per pound."
Stornoway Diamond Corp. (SWY-T, "buy" rating) to $1.40 from $1.50. Consensus is $1.39.
Mr. Parkin: "We have updated our model to include the 3Q financial results, which had little impact on our valuation and target price. We also included the results from the initial diamond sale in our model and have assumed that 75 per cent of the inventory build will be sold in 1Q17 as the company has three sales scheduled for the quarter. We have also factored in a large stone upside scenario in our model."
He did not change his targets for:
First Majestic Silver Corp.(FR-T, "buy") $14 (vs. $22 consensus);
MAG Silver Corp.(MAG-T, "buy") $22 (vs. $24.35);
Richmont Mines Inc. (RIC-T, "buy"), $14.75 (vs. $14.67).
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Methanex Corp.'s (MEOH-Q, MX-T) contract prices for December set the tone for a solid winter, said Raymond James analyst Steve Hansen.
He said the Vancouver-based company's prices for both North America ($366 U.S. per tonne) and Asia ($350), posted on Tuesday, are consistent with the "sharp upward move" for global spot pricing in recent weeks. They are increases of 14.7 per cent and 12.9 per cent month over month, respectively.
"These latest contracts complement the strong upturn that began this summer, with the NA and Asian contracts up a handsome 47.0 per cent and 32.1 per cent, respectively, over the past six months," said Mr. Hansen. "Given that both these latest increases handily exceeded our prior estimates, we have adjusted our estimates higher accordingly.
"Given the parallel upward move in European spot prices, we expect these latest contract posts will inject a firm underlying tone into the upcoming 1Q17 Euro contract negotiations, likely setting the stage for a sizeable 1Q17 post, in our view."
Mr. Hansen raised his 2016 earnings per share projection to a loss of 40 cents from a 47-cent loss. His estimates for 2017 rose to $1.79 from $1.66.
"By most accounts, strong global demand has collided with a series of planned/unplanned outages in recent months to drive this latest price uptrend," the analyst said. "While many of the industry's current unplanned outages are expected to fade with time, we remind investors that the upcoming winter months are typically regarded as one of the more volatile periods for supply disruptions. At the same time, Chinese inventories recently fell to a 6 month low and there is strong visibility re: new MTO demand coming online in the coming months. Taken together, we foresee tight fundamentals supporting a lofty price backdrop through the upcoming winter period before a spring fade ultimately ensues."
He kept his "outperform" rating for the stock and raised his target to $48 (U.S.) from $46. Consensus is $41.80.
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"The fog of confusion is gradually lifting" around Autodesk Inc. (ADSK-Q), said Canaccord Genuity analyst Richard Davis.
On Tuesday, Autodesk, a California-based design software and services company, reported third-quarter non-GAAP earnings per share of a 18-cent loss, "far better" than Mr. Davis's projection of a 26-cent loss. Revenue of $489.6-million was down 18 per cent year over year, but ahead of the analyst's $475-million estimate. Net subscriber additions of 134,000 topped his 120,000 estimate.
"Sorting through what continues to be an extremely complicated fundamental story, it looks as if Autodesk reported a solid quarter," said Mr. Davis. "To management's credit, they said that next week they will give us outsiders a means to make the model foot, specifically with regard to incremental color around average price per subscriber and customer count trends. That is certainly a big help, but we will push management to hear their opinion as to the 'exit growth rate' as the model transition ends (i.e. the sustainable ARR growth rate) – against which we will place our view. The fact that a third of new product subscribers today are coming from customers new to Autodesk bodes well that the exit growth rate five years from now will be materially faster than the broader CAD industry growth rate of about 5 per cent. We doubt Autodesk's growth rate will be 20-per-cent-plus then, but it certainly could be somewhere between 10-15-per-cent plus. The key variables will be how many pirated seats become legal subscribers and to what extent will Autodesk expand its functional reach to increase its TAM."
Mr. Davis kept his "hold" rating for the stock and raised his target to $70 from $65. The average is $74.33.
At the same time, RBC Dominion Securities analyst Matthew Hedberg raised his target to $71 from $70 with a "sector perform" rating, saying there are "still lots of moving parts."
"We continue to believe in the long-term transition story and we think that once completed, the model should have more predictability, an expanded TAM, and higher margins/cash flow," said Mr. Hedberg. "We believe most investors should welcome the granularity of data provided at the recent investor day, during which management laid out a 2020 plan with at least $3.5-billion in revenue, mid 20-per-cent operating margins, and $1-billion-plus of FCF [free cash flow], or $6+ per share. The debate will now shift to the underlying assumptions including sub growth and ARPS. With ARR and revenue that should grow at 20-per-cent CAGR [compound annual growth rate] through 2020 and expanding margins after bottoming in FY/17, Autodesk most likely appeals to a large-cap investor with a long-term horizon who believes in the changing story and that the emerging markets will continue to improve."
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In other analyst actions:
DH Corp. (DH-T) was raised to "buy" from "neutral" by Dundee Securities analyst Eyal Ofir with a target of $23.50 per share (unchanged). The analyst average is $21.50.
F5 Networks Inc. (FFIV-Q) was downgraded to "market perform" from "outperform" at Bernstein by analyst Pierre Ferragu. His target price of $140 (U.S.) did not change. The average is $140.43.
UnitedHealth Group Inc. (UNH-N) was raised to "buy" from "neutral" by Mizuho Securities USA analyst Sheryl Skolnick with a target price of $178 (U.S.), up from $135. The average is $175.40.
MORE TO COME
David Leeder