Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Gabriel Dechaine thinks a more dovish shift from the Bank of Canada will benefit the country’s Big 6 Banks.
“Big-6 bank stocks have underperformed the S&P/TSX by approximately 250 basis points so far this year, including an unusual 220bps of second half underperformance,” he said. “The looming recession is what’s keeping bank stocks in check, to state the obvious. And from that perspective, it is important to note that bank stocks currently reflect a 55-per-cent probability of a recession, based on P/B [price-to-book] multiples correcting by 22 per cent from their peaks (i.e., average compression during a recession is 40 per cent, with a range of 20-60 per cent). Moreover, if we assume 2023 PCLs [provisions for credit losses] double (i.e., to 60 basis points, which is more recessionary-like), the pro forma sector P/E multiple of 10.9 times is slightly above the historical 10-year average of 10.6 times.
“Finally, with the Bank of Canada and Fed possibly shifting to a more dovish stance, we could see risk factors weighing on the banks (e.g., housing) moderate. Though we are cautious with regard to CM’s Q4/22 outlook (especially as it relates to NIM), we believe the stock is a solid outperformer candidate over the next 12 months. For the quarter, we are most bullish on RY due to its capacity for NIM outperformance and a potential rebound in the Capital Markets business.”
In a research report released Friday previewing fourth-quarter earnings season for the sector, which is scheduled to begin on Nov. 29, Mr. Dechaine said he expects net interest margin (NIM) divergence within the group to widen and also predicts “another quarter of ‘marginal’ performing provision additions.”
“Margin expansion has been one of the more exciting developments in the banking space, partially offsetting recessionary concerns,” he said. “During Q3/22 Big-6 margins expanded by 7 basis points quarter-over-quarter (all-bank, excl. Trading), with TD (up 12 basis points) and RY (up 13 basis pointss) delivering the most margin expansion. We expect these two banks to report similar outperformance during Q4/22, a reflection of their large core deposit bases. Our expectations are for modest NIM expansion for the other Big-6 banks, with BNS (again) at the low end of the peer group.”
“Q3/22 marked the first quarter of performing provision additions across the Big-6 since Q4/20. The shift resulted from banks taking a more cautious outlook for credit risk, given the higher probability of an upcoming recession. However, the performing ACL ratio actually declined quarter-over-quarter, as loan growth outpaced provision ‘build.’ We expect upward pressure on performing provisions once again this quarter, which should impact the consensus 2023E PCL ratio forecast of 29 basis points, which is slightly below the historical average (i.e., not indicative of a recession).”
Also emphasizing the risk stemming from the volatility in the housing market, Mr. Dechaine reduced his valuation and target multiples for the banks, citing “greater uncertainty” in his earnings outlook, “which could be heavily influenced by PCL volatility.”
“In other words, we are adjusting our valuation multiples to reflect EPS downside risk that could stem from higher loan loss provisions. The exception here is RY, the valuation of which we are maintaining due to its industry-high CET 1 ratio and relatively stronger NIM outlook,” he said.
With that adjustment, he lowered his target prices for the banks’ stocks. His changes were:
- Bank of Montreal (BMO-T, “sector perform”) to $147 from $151. The average on the Street is $147.57.
- Bank of Nova Scotia (BNS-T, “sector perform”) to $85 from $90. Average: $81.75.
- Canadian Imperial Bank of Commerce (CM-T, “outperform”) to $80 from $84. Average: $73.84.
- Canadian Western Bank (CWB-T, “outperform”) to $34 from $38. Average: $32.86.
- Laurentian Bank of Canada (LB-T, “sector perform”) to $46 from $51. Average: $41.62.
- Toronto-Dominion Bank (TD-T, “sector perform”) to $103 from $106. Average: $98.87.
Mr. Dechaine maintained an “outperform” recommendation and $148 target for shares of Royal Bank of Canada (RY-T). The average is currently $137.58.
Elsewhere, Keefe, Bruyette & Woods’ Mike Rizvanovic also made a series of target reductions to bank stocks. His changes were:
- Bank of Montreal (BMO-T, “outperform”) to $158 from $159. Average: $147.57.
- Bank of Nova Scotia (BNS-T, “market perform”) to $75 from $86. Average: $81.75.
- Canadian Imperial Bank of Commerce (CM-T, “market perform”) to $69 from $72. Average: $73.84.
- Laurentian Bank of Canada (LB-T, “market perform”) to $38 from $40. Average: $41.62.
- Toronto-Dominion Bank (TD-T, “outperform”) to $102 from $103. Average: $98.87.
The impact of rising inflation and interest rates was very apparent during third-quarter earnings season for Canadian midstream companies, according to Canaccord Genuity analyst John Bereznicki.
“As we had expected, the third-quarter earnings season was a mixed bag in our coverage universe,” he said. PPL and GEI benefitted from steady results in their core infrastructure operations, along with strong marketing segment contributions that allowed them to remain active on their NCIBs. Conversely, ALA faced margin pressures in its NGL export business, while KEY reported further cost inflation on its KAPS project. While TWM experienced some sequential moderation in Q3/22 crack spreads at its Prince George Refinery, economics at this facility nonetheless remained very attractive from an historical perspective.”
“While the upstream sector has faced chronic inflationary pressures since late last year, these headwinds are becoming increasingly apparent in the midstream space from both an operating and capital perspective. Although midstream companies are taking steps to mitigate the impact of these cost pressures, we believe they must ultimately be passed on to operators. In our view, this is particularly true for assets that are in high demand (such as fractionation capacity in Central Alberta and gas processing capacity in the Pipestone). For new infrastructure, we believe midstream companies are being forced to revisit targeted return thresholds, and pricing assumptions as borrowing costs also move higher. The renewable fuel space has not been immune to these pressures, with Tidewater Renewables reporting cost inflation at its flagship HDRD and RNG players also disclosing project cost headwinds. We believe these pressures may curtail investment and force some infrastructure backers to partner with entities that have access to relatively low-cost capital.”
Mr. Bereznicki continues to expect the pace of rig additions in the Western Canadian Sedimentary Basin (WCSB) to slow in 2023 as operators “moderate their budget growth.” However, he predicts an “active” winter drilling season, which will “set the stage for continued mid-single digit midstream volume growth next year.”
“In our view LNG Canada should also support WCSB volume growth as it moves closer to first gas, while the creation of a viable development framework with the Blueberry First Nation could potentially create further volume tailwinds for the sector,” he said.
Making “modest” estimate changes following earnings season, Mr. Bereznicki made a group of target adjustments. They are:
- AltaGas Ltd. (ALA-T, “buy”) to $29 from $31. The average on the Street is $31.80.
- Gibson Energy Inc. (GEI-T, “hold”) to $25 from $24. Average: $25.25.
- Keyera Corp. (KEY-T, “buy”) to $34 from $33. Average: $33.62.
- Pembina Pipeline Corp. (PPL-T, “buy”) to $52 from $51. Average: $50.56.
- Tidewater Renewables Ltd. (LCFS-T, “speculative buy”) to $18 from $19. Average: $19.35.
He maintained a “buy” rating and $1.75 target for Tidewater Midstream and Infrastructure Ltd. (TWM-T), exceeding the $1.62 average.
“There are no changes to any of our recommendations,” Mr. Bereznicki said. “PPL remains our focus name, and we believe TWM represents significant value (and optionality on Tidewater Renewables) for investors able to go down-cap.”
In a research report titled It’s Been a Good Ride; Just Taking a Pit Stop, Scotia Capital analyst Himanshu Gupta downgraded Automotive Properties REIT (APR.UN-T) to “sector perform” from “sector outperform” in response to a period of relative outperformance.
“Year-to-date, a ‘defense basket’ (SGR, CHP etc.) have outperformed the REIT sector,” he said. “‘Growth’ has clearly lagged. APR is somewhere in the middle (i.e. neither defence, given the cyclical nature of the auto industry, nor growth, given APR is more of a high yield product with a distribution yield of 6.8 per cent). For APR to outperform from here, the market has to be believe that this is a defensive entity. We note that APR has WALT of 10.8 years and no lease expiry until 2026. However, market has preference for “grocery dollars” in terms of defence, and therefore we upgraded CHP to SO. In CHP note, we mentioned that CHP has the best combination of grocery exposure, low leverage and discounted valuation.”
“APR has outperformed the REIT sector and retail peers since its inception due to higher and consistent distribution yield. We continue to like APR’s distribution yield of 6.8-per-cent at 88-per-cent 2023 estimated AFFO [adjusted funds from operations] payout ratio and recommend to income-oriented investors.”
Separately, Mr. Gupta trimmed his Parkit Enterprise Inc. (PKT-X) target to $1.10, below the $1.27 average, from $1.30 with a “sector perform” rating.
“while management has made good progress on ‘value-add’ initiatives, it has taken a bit of time and therefore we have pushed out our NOI ramp-up assumptions,” he said. “We think Parkit as an entity will take another two years to fully come together, i.e., the right mix of stabilized and non-stabilized properties. Right now, Parkit has 13 properties, and out of these, 4 (or one-third) are in repositioning mode. Therefore, any delays can temporarily impact our earnings estimates.
“We suggest investors should have a longer time horizon on this story (two to three years). We forecast 38-per-cent year-over-year increase in 2024 FFOPS estimate which is 4 times the 2022 FFOPS estimate. Parkit has very low leverage (18-per-cent Debt/ Assets), and could take advantage of market repricing. Parkit valuation looks reasonable as it trades at its NAV and 25.8 times 2024 AFFO multiple.”
Pet Valu Holdings Ltd (PET-T) “operates in a defensive industry, has a loyal customer base and is gaining market share, making it an investor favorite,” according to Stifel analyst Martin Landry.
In a report titled Do not surrender this PET, he came off research restriction following the Markham, Ont.-based secondary offering of 5.175 million shares, reiterating a “buy” recommendation and touting its potential addition to the S&P TSX Composite Index.
“Despite Pet Valu’s share near an all-time high, the offering was more than 2 times oversubscribed, an indication of the strong investor demand for the company,” said Mr. Landry.
“This secondary offering increases the company’s float-adjusted market capitalization. According to our calculations, Pet Valu could potentially be added if its share price would exceed $40. The index revision is scheduled to occur on December 2nd with the reference date to meet the criteria being the 10 trading sessions prior to Friday, December 2, 2022.”
To make the cut, Pet Valu will need to reach a market cap criteria of 0.04 per cent of the index weight and reach a liquidity criteria of 50 per cent of its total float of adjusted shares traded in the last year.
“We analyzed the 11 companies which were added to the S&P/TSX Composite index this year,” said Mr. Landry. “Our analysis suggests that the daily average trading volume of the companies added increased by 100 per cent over the next 10 trading sessions following the announcement vs. their previous 6-month average. Assuming, a similar outcome for PET, we could see an incremental demand for 1.1-1.2 million shares following an index inclusion.”
He maintained a $42 target for Pet Valu shares. The current average is $44.67.
“The equity offering increases PET’s float by 19 per cent, which we view as positive given it improves liquidity for shareholders, something that was often flagged by investors,” said Mr. Landry. “With an increased likelihood to be added to the S&P/TSX in the coming year, we believe Pet Valu will attract a broader shareholder base, a positive for the shares.”
With the close of its $17-million equity financing, Desjardins Securities analyst John Sclodnick sees Argonaut Gold Inc. (AR-T) fully funded to complete and ramp up its Magino project in northern Ontario, which he expects will lead its stock to re-rate and trade more in line with peers.
“Prior to the announcement of the deal, we had already viewed AR’s Magino build as fully financed with its $195-million public equity financing and US$250-million loan facility, as well as its US$52.5-million NSR sale and US$10-million private equity sale, both to Franco-Nevada,” he said. “With this additional $17-million, we have few concerns about AR’s ability to complete the build and now model a remaining cash buffer of US$82-million when Magino starts up in 2Q23 after fully drawing on the credit facility and revolver.”
Resuming coverage with the close of the deal, which involved the issuing of 35.9 million CDE (Canadian development expenses) flow-through shares, Mr. Sclodnick reaffirmed his “buy” recommendation and $1 target for Argonaut shares. The current average is $1.20.
While gold prices continue to surge, Credit Suisse analyst Fahad Tariq warns the relief for investors could be short-lived.
“Gold prices have increased significantly over the past two weeks from a 2.5-year low of almost $1,615 per ounce to$1,760/oz at the time of this writing,” he said. “At this time, gold prices are 3.7 per cent lower year-to-date. The higher gold prices are a function of a weaker U.S. dollar, which has retreated from 20-year highs as investors price in a lower Fed terminal rate – the market is currently expecting the fed funds rate to peak at 5.00-5.25 per cent in spring 2023 before starting to trend down.
“Taking a step back, we believe the recent excitement around a slightly better than expected October inflation reading in the U.S. (7.7 per cent vs. 8.0 per cent consensus) appears overdone, and we continue to believe gold prices could retreat in 2023 in a higher real rate environment, though we also expect safe-haven demand support in a stagflation/recessionary environment. The 10Y TIPS yield (i.e., real rate) is currently 1.43 per cent (down from a recent high of 1.74 per cent) and vs. negative 0.97 per cent at the beginning of 2022. We continue to forecast gold prices averaging $1,650 per ounce in 2023.”
Coming out of third-quarter earnings season, Mr. Tariq sees signs throughout the precious metals sector that inflation has spiked.
“Coming into the Q3-22 results, there was an expectation among investors we spoke with that cost inflation for the gold miners would begin to roll over and that Q2-22 likely represented peak cost inflation, which would be positive from a margin perspective,” he said. “However, Q3-22 likely represented peak inflation. Q3 commentary on inflation from management teams varied considerably, with some producers like Agnico Eagle indicating ‘a gradual easing of inflationary pressures and some relief in supply chain procurement’ (although, Agnico’s management also noted ‘it’s too early to say that it’s over’) while others indicated continued elevated costs into year-end. Barrick indicated on its Q3 call that the biggest driver (’at least half’) of the inflationary pressure is energy prices, so diesel prices coming off is an important factor. However, Barrick’s management also noted that labour and consumables costs are not coming down quickly. Newmont indicated on its Q3 call that cost inflation remained 12 per cent in the quarter, but that there is ‘some relief’ across energy and consumables (specifically, diesel, steel, ammonia, cyanide, chemicals, reagents, and grinding media) in Q4-22 and into 2023.”
Updating his financial models to account for the results as well as his expectation that the fourth quarter will be “the highest production/lowest cost quarter this year due to mine sequencing,” Mr. Tariq made a series of target price adjustments for gold stocks.
His changes included:
- Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “outperform”) to US$59 from US$54. The average on the Street is US$61.15.
- Alamos Gold Inc. (AGI-N/AGI-T, “neutral”) to US$9 from US$8. Average: $9.92.
- Barrick Gold Corp. (GOLD-N/ABX-T, “outperform:) to US$20 from US$19. Average: US$21.16.
- Eldorado Gold Corp. (EGO-N/ELD-T, “underperform”) to US$6.50 from US$5.75. Average: US$9.
- Franco-Nevada Corp. (FNV-N/FNV-T, “neutral”) to US$140 from US$130. Average: US$135.14.
- Iamgold Corp. (IAG-N/IMG-T, “underperform”) to US$1.60 from US$1.20. Average: US$1.75.
- Kinross Gold Corp. (KGC-N/K-T, “neutral”) to US$4.50 from US$4. Average: US$5.38.
- Triple Flag Precious Metals Corp. (TFPM-T, “outperform”) to $19 from $20. Average: $20.97.
- Wheaton Precious Metals Corp. (WPM-T, “neutral”) to $50 from $48. Average: $50.65.
- Yamana Gold Inc. (AUY-N, YRI-T, “outperform”) to US$5.50 from US$5.25. Average: US$6.13.
“Top picks: Outperform-rated stocks remain Agnico Eagle (AEM), Barrick (GOLD), Endeavour Mining (EDV), Yamana (AUY), and Triple Flag (TFPM),” he concluded.
Calling it a “wait and see story,” RBC Dominion Securities analyst Maxim Matushansky initiated coverage of Toronto-based investor-relations software maker Q4 Inc. (QFOR-T) with a “sector perform” recommendation on Friday, seeing few catalysts for a near-term re-rating despite its shares trading below peers.
“We are cautious on the stock in the near-term given the lack of visibility into macroeconomic conditions (which will impact the ability and willingness of publicly traded companies to buy and switch to new IR products), an inability to continue investing for growth at the expense of high levels of cash burn, a weakened M&A value proposition, the lack of visibility into the role virtual events will have in sell-side conferences in a post-pandemic world, and the established competition by large players like NASDAQ and S&P in corporate IR CRM and analytics,” he said. “If it can overcome these headwinds, perhaps through the delivery of a superior product offering or customer service in a better macroeconomic environment, we do see the opportunity for long-term growth that can justify a return to a valuation multiple closer to other Canadian SaaS peers
“While we believe there is potential for Q4 to continue executing on its organic growth strategy, we see a better risk/reward in other names within our coverage universe and don’t see any immediate catalysts in the near-term, justifying our Sector Perform rating.”
Mr. Matushansky set a target of $3.50 per share. The average on the Street is $4.63.
Raymond James’ Andrew Bradford added Enerflex Ltd. (EFX-T) to the firm’s “Analyst Current Favourites list” on Friday.
“Enerflex is set-up to display all the characteristics that the market has rewarded in energy equities so far this cycle: free cash flow generation, rapid balance sheet deleveraging, and direct shareholder returns,” he said. “The steady cash flow of Enerflex + Exterran’s Energy Infrastructure assets and continued recovery in Engineered Systems will combine to generate meaningful Free Cash Flow in 2023 that will be applied directly to the balance sheet. Once the balance sheet reaches targeted debt levels, EFX will shift toward shareholder returns. We are now including a 50-cent-per-share dividend by the end of 2023 as a placeholder in our forecasts (up from 10 cents per share and a 20-per-cent payout of 2024E discretionary cash flow).
“Debt reduction plus increased direct shareholder returns have been common themes across the energy complex, and have benefited equity holders. We expect the same for Enerflex in 2023. In our view, this is creating a catalyst-rich environment for Enerflex’s equity. The first goal post will be to show meaningful free cash flow combined with payments on EFX’s credit facility. After reaching its debt targets, the next catalyst will be an increase in shareholder returns. This fact pattern should support the equity moving higher in 2023.”
Maintaining a “strong buy” rating, Mr. Bradford raised his target to $15 from $13. The average is $11.42.
In other analyst actions:
* TD Securities analyst Aaron MacNeil downgraded Shawcor Ltd. (SCL-T) to “hold” from “buy” with a $13 target, down from $12 and below the $14.66 average.
* CIBC’s Jacob Bout raised his Ag Growth International Inc. (AFN-T) target to $53 from $48, keeping an “outperformer” recommendation. The average target on the Street is $55.27.
“We had the opportunity to host AFN’s new CEO, Paul Householder, and CFO Jim Rudyk on November 17 for a group investor call. Management remains bullish for 2023, driven by continued strong organic revenue growth, margin expansion and strengthening of the balance sheet. The company has a strong backlog position and is not seeing pushback from farmers/customers despite the current macro-inflationary environment. We are raising our 2023 estimates to reflect higher margins,” said Mr. Bout.
* Raymond James’ Brian MacArthur raised his target for shares of Altius Minerals Corp. (ALS-T) to $26 from $24, reiterating an “outperform” recommendation. The average is $24.79.
“We believe ALS provides exposure to numerous commodities/businesses with favorable long-term outlooks and there are multiple options/catalysts within the portfolio that could highlight additional value,” he said. “ALS also pays a quarterly dividend of $0.08/share.”
* RBC’s Irene Nattel bumped her target for George Weston Ltd. (WN-T) to $203 from $197, above the $180.43 average, with an “outperform” rating.
“Our constructive outlook on WN is predicated on our favourable outlook for 52.6-per-cent-owned Loblaw (L-T) and 61.7-per-cent-owned Choice Properties REIT (CHP.UN-T), augmented by share repurchases at WN,” she said. “Although we continue to field questions around potential restructuring at GWL, our view remains that at least for the foreseeable future, GWL will remain as is, with management deploying excess FCF/ cash balances to consistent share repurchase. Current discount to NAV estimated at 11 per cent, tighter than the holdco discount we apply to generate our SOTP target price (15 per cent).”
* National Bank’s Don DeMarco increased his K92 Mining Inc. (KNT-T) target to $11.25 from $11 with an “outperform” rating. The average is $11.29.