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Analysts unfazed by RBC suit, Dexia acquisition

Royal Bank of Canada

NATHAN DENETTE/Nathan Denette/The Canadian Press

Royal Bank of Canada's prominence in the media spotlight this week is unlikely to materially alter the outlook for its share price, according to two analysts.

RBC announced Tuesday that it had reached an agreement to acquire full ownership of its RBC Dexia joint venture for $1.1-billion, a deal that was months in the making and a surprise to few. That's where the good news ends.

The bad news is that RBC has been accused by U.S. regulators of orchestrating an illegal trading scheme to gain a tax advantage in Canada, a charge the bank flatly denies.

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Together, these developments should produce a "neutral to negative reaction" for the company's shares, says Desjardins Securities Inc. analyst Michael Goldberg. Indeed, its shares are down about 3 per cent in late afternoon trading.

RBC insists its trades were in full compliance, and that it had gone so far as to get the green light from U.S. authorities prior to executing the trades, explains Mr. Goldberg. "But, on today's conference call regarding RBC Dexia, Royal's CEO Gord Nixon confirmed our interpretation that the U.S. legal action was really aimed at the contention by U.S. authorities that even if the trading activity were fully compliant, it went against the intent of the law," he says.

"The eventual outcome is likely far in the future, uncertain and irrelevant; the more immediate impact is a reputational black eye for Royal's capital markets business and a possible litigation reserve, perhaps as early as in 2Q FY12 results."

UBS analyst Peter Rozenberg agrees the CFTC suit is not a positive, but notes that RBC indicated the amounts involved are not financially material. There could potentially be tax penalties involved, but he sees these likely being modest.

Meanwhile, Mr. Goldberg says the acquisition of RBC Dexia ends the euro zone liquidity crisis for Dexia and is expected to be "moderately accretive" to Royal's fiscal 2013 earnings per share. "However, both the potential earnings contribution and the cost of this transaction are much higher than we had earlier estimated," he says. "Accordingly, we cannot yet gauge Royal's likely return on capital based on the available information."

Mr. Rozenberg is estimating the Dexia purchase will bring modest returns of 8 per cent. "However, this is a stable, low risk business, with good growth prospects, and low capital requirements, purchased at a low point given low rates and uncertain ownership. Furthermore, it provides good diversification, and management expects double-digit returns and growth given new stronger ownership, and increasing outsourcing and cost synergies," he said.

The acquisition prompted Mr. Rozenberg to raise his fiscal 2012 earnings per share estimate by 2 cents, and fiscal 2013 estimate by 6 cents.

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Upside: Mr. Goldberg and Mr. Rozenberg both maintained their "buy" ratings. Mr. Goldberg has a price target of $66.50 and Mr. Rozenberg $62.


SNC-Lavalin Group Inc. stock is trading very inexpensively relative to U.S. peers, but National Bank Financial analyst Trevor Johnson suggests investors should stay on the sidelines for now.

Already reeling from a scandal over $56-million in improper payments, missing cash in Libya, and a host of executive departures, including chief executive officer Pierre Duhaime, the company announced Monday that one of its subsidiaries has been temporarily suspended by the World Bank from bidding on bank projects.

The suspension relates to an ongoing investigation into allegations that SNC officials bribed government officials in Bangladesh to win a $10-million contract related to a massive bridge project in that country. SNC has launched an internal probe.

The direct financial impact from the latest investigation should be minimal, as the company has stated its current backlog of work contains very little tied to the World Bank.

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But SNC-Lavalin's "reputational franchise" is another matter, Mr. Johnson maintains.

"While SNC management recently indicated its internal investigation yielded no other questionable contracts or dealings, our view is that it will take time for investors to give SNC the benefit of the doubt," he said in a note.

Upside: Mr. Johnson maintained a "sector perform" rating and $40 price target.

Related: SNC's troubles widen as World Bank suspends subsidiary

Also: SNC Lavalin to pay outgoing CEO $4.9-million


Even after their recent rally, Equinix Inc. shares are attractively priced, said Brigantine Advisors analyst Bruce Roberts. The retail data centre operator should benefit from improving economic conditions and increased demand for its services, he said, predicting its earnings before interest, taxes, depreciation and amortization will rise 18.2 per cent in 2012.

Upside: Mr. Roberts raised his price target to $175 (U.S.) and reiterated a "buy" rating.


CIBC World Markets Inc. analyst Ian Tharp sees improved fortunes for Atlantic Power Corporation's based on its decision to increase its stake in its recently acquired Canadian Hills Wind project in Oklahoma.

Atlantic's stake in Canadian Hills is now 99 per cent (up from 51 per cent). The 300-megawatt project's power output is now fully contracted under a long-term power purchase agreement and improves the company's renewables portfolio. Most importantly, says Mr. Tharp, it helps to mitigate the earnings decline resulting from expiration of some of its contracts.

Upside: Mr. Tharp maintained his "sector performer" rating and increased his price target by 25 cents to $13.75 (Canadian).


HudBay Minerals Inc. now expects its Constancia copper-gold project in Peru to require capital expenditures of $1.5-billion (U.S.), on the high end of analyst expectations. But the ore production rate is now projected to be higher, prompting Desjardins Securities Inc. analyst John Hughes to boost his annual copper output estimates by 15,000 tonnes to 100,000 tonnes per year.

Upside: Mr. Hughes trimmed his price target by 30 cents to $17.20 a share and maintained a "buy" rating.


For more analyst actions and market developments, follow Darcy Keith on Twitter

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About the Authors
Streetwise editor

Jody White is the web editor for Streetwise. He previously worked as a senior editor at Canadian Business Online and has written for MoneySense Magazine, Maclean's, the National Post and other national publications. More

Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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