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

In the wake of its $1.73-billion equity offering to partially fund the $2.6-billion acquisition of MD Financial Management, RBC Dominion Securities analyst Darko Mihelic downgraded Bank of Nova Scotia ( BNS-T , BNS-N ) , citing a “relatively high” execution risk with several acquisitions coming on stream through his forecast period.

“We think BNS’ stock will not perform as well as peers over this time frame,” said Mr. Mihelic, lowering it to “sector perform” from “outperform.”

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On May 31, Scotiabank announced the deal for MD Financial and that it will enter into a 10-year agreement to become the Canadian Medical Association’s exclusive provider of financial products and services to physicians and their families.

“Several rather large (and expensive) acquisitions ($7-billion worth) are set to be completed in H2/18, which we estimate will be dillutive to ROE [return on equity] and even to ‘adjusted’ EPS through 2019,” the analyst said. “We estimate BNS’s ROE in 2019 will decline to 13.7 per cent—easily now the lowest of the large big banks we cover. Synergies will take significant time (and effort) to be realized.”

“To shore up capital, BNS suggested that there could be some divestitures—while positive from a capital perspective, such actions are likely to result in further earnings pressure.”

To reflect the dilution from the common share offering, Mr. Mihelic lowered his 2018 and 2019 core earnings per share projections to $7.14 and $7.31, respectively, from $7.18 and $7.36.

His target for Scotiabank shares fell to $86 from $95. The average target on the Street is currently $86.74, according to Bloomberg data.

“We think the Canadian economy is also poised to slow next year and thus the timing of these deals (which we believe BNS cannot control) is also not ideal. As Canada’s economy slows, we believe efficiency will continue to be a focus for investors and we suspect that BNS will not interfere in the early days of acquisitions—a good thing long-term, but shorter-term tough on operating leverage. We believe BNS is likely to produce negative operating leverage in 2019 compared to average positive operating leverage of 0.8 per cent for the other big banks we cover.”

Elsehwere, Desjardins Securities analyst Doug Young lowered his financial estimates and target price for shares of Scotiabank, asking: “Was this costly surgery necessary.”

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Calling its valuation of MD “rich regardless of how we cut the numbers,” Mr. Poirier called the deal, as a whole, a “negative” for Scotiabank, believing it diverts attention away from potential deals in Pacific Alliance countries, like Mexico and Columbia, where “scale benefits could help drive value creation.”

“[The bank] has a lot of ‘balls in the air’, in our opinion,” he said. “Over the last several months, BNS has announced the acquisition of Jarislowsky (deal has closed), Banco Cencosud in Peru, Citibank’s consumer and small/medium enterprise operations in Colombia, and BBVA Chile. While management has proven its ability to integrate acquisitions in the past, we cannot ignore the increased (rapid) amount of M&A as of late and the related execution risk.”

He maintained a “buy” rating for the stock and dropped his target to $88 from $91.

“We view BNS’s recent acquisition activity in Canada as mixed. However, we like the international banking momentum and management’s focus on expenses,” the analyst said.


Seeing “significant” upside in Bombardier Inc. (BBD.B-T), CIBC World Markets analyst Kevin Chiang upgraded his rating ahead of it “achieving another milestone” with the expected close of the C Series joint venture on July 1,

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Raising its stock to “outperformer,” Mr. Chiang acknowledged his previous “neutral” rating “has been wrong.”

“With the biz jet market improving, BT’s order book growing, and an improved liquidity buffer, it is clear the company’s fortunes have significantly improved,” the analyst said in a research note released late Friday.

“Adding to this is reduced execution risk facing BBD with the C Series no longer a drag and the Global 7500 set to enter into service in H2. We recognize that none of these are ‘new’ catalysts, but we also see them as continuing to act as tailwinds for BBD’s share price, helping narrow the discount at which it trades relative to its peers. While there has been an acknowledgement that the new management team at BBD has helped ‘right the ship,’ like many investors, our negative legacy bias may have prevented us from fully appreciating this. So while the share price is up 125 per cent since the beginning of 2017, we continue to see significant upside as it trades at 10-per-cent normalized FCF [free cash flow] yield versus its peers at 5 per cent.”

Mr. Chiang raised his 2018 and 2019 EBITDA estimates to $1.35-billion and $1.79-billion, respectively, from $1.29-billion and $1.83-billion.

His target for Bombardier shares rose to $6 from $4.50. The average is $4.91.


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Believing the fundamentals for zinc remain “strong,” RBC Dominion Securities analyst Sam Crittenden initiated coverage of Trevali Mining Corp. (TV-T) with an “outperform” rating, calling its valuation “attractive” in comparison to North American base metal peers and emphasizing a recent pullback in share price provides an enticing investment opportunity.

“Trevali is down 26 per cent year-to-date with a lower zinc price and some disappointment around Q1 operating costs,” he said. “We view this as an attractive entry point with the shares now trading at 2.3 times 2018-19 estimated EBITDA versus peers at 5.3 times. The shares are trading at 0.93 times NAV [net asset value], above peers at 0.66 times, which we attribute to the shorter mine lives which we believe can be extended through exploration. We estimate Trevali is pricing in a US$1.10 per pound long-term zinc price which does not factor in potential for elevated near-term zinc prices or optionality within the assets.”

One of few pure play zinc producers in the world, Mr. Crittenden said Trevali provides near-term leverage to the metal through underground minds in four countries – Canada, Burkina Faso, Peru and Namibia. He emphasized all four possess organic growth potential, adding exploration success is expected to be key value driver moving forward.

“Trevali can generate strong attributable operating free cash flow (FCF, defined as operating cash flow less total capex) at forward zinc prices (22 per cent 2018 estimated FCF yield) and can also unlock value in each of its four assets by increasing production and mine life through exploration success,” the analyst said. “The company has budgeted $12-million for 2018 for exploration which includes drilling several prospective targets at the recently acquired Perkoa and Rosh Pinah mines in Africa which have seen limited recent exploration activity.”

“We attribute the recent zinc pullback to a more cautious view around global growth and some lumpy inventory build ups earlier in 2018 signalling potential production increases. However, zinc inventories remain at historically low levels and the concentrate market remains tight as evidenced by smelters recently agreeing to treatment charges at a 12- year low of $147/t. There has been a supply response but it takes time to restart and build new mine supply. We believe it could take 2-3 years to rebuild inventories to normal levels and zinc prices can remain elevated through this period.”

Mr. Crittenden set a target price of $1.75 per share, which falls just short of the consensus on the Street of $1.96.

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“In our view, Trev ali’s current valuation does not fully reflect its organic growth potential and free cash flow generation capability based on our zinc price outlook,” he said. “We would expect the shares to re-rate higher over the next 12 months as Trevali (1) demonstrates exploration success and extends its average mine life, (2) advances its growth project pipeline and demonstrates positive project economics through ongoing studies (including the Rosh Pinah expansion study due mid-2018), and (3) provides more clarity on capital allocation priorities.”


In reaction to “successful” exploration results thus far from its 99.6-per-cent interest in Mineração Caraíba S.A. (MCSA), Raymond James analyst Farooq Hamed raised his financial projections and target price for shares of Ero Copper Corp. (ERO-T), expecting positive catalysts over the next 3-6 months.

“With positive exploration updates provided through the year we expect ERO will be able to convert a significant amount of resources in to reserves at the Pilar district as well as add additional reserve tonnes at the Vermelhos district,” said Mr. Hamed. “At Pilar, the initial plan for 2018 envisioned a 39 km drill program focused on the South and North Extensions as well the ‘Deepening’ Extension which included a number of high-grade lenses. During 1H18, drilling also uncovered the new West Limb which represents a significant extension to what was previously considered a discrete zone called P1P2W to the west of the known East Limb. With the success of the drill program at Pilar through 1H18, we are adding 5 Mt of 2P reserves to our mine plan from the 11 Mt of M&I resource (exclusive of reserves) carried at year-end. This represents 100 Kt of additional in-situ copper tons into our forecasted mine plan.

“At Vermelhos, the initial plan for 2018 envisioned a 35 km drill program focused on ore body extensions and a potential oxide deposit. Drill results to the south seem to extend the ore body by 25 m with results out to 50m pending. Mineralization remains open to the South. To the North, ERO is still waiting for assay results on 6 drill holes. Infill and definition drilling during 1H18 showed positive results and as a result we are adding 0.8 Mt of 2P reserves and 2 Mt of M&I resources to our forecast for Vermelhos. This represents 30 Kt of additional in-situ copper tons into our forecasted mine plan.”

With the increased forecast, Mr. Hamed raised his 2018 earnings per share projection to 31 U.S. cents from 23 U.S. cents. His 2019 estimate remains 95 U.S. cents.

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Keeping an “outperform” rating for the stock, his target rose to $12 from $9.50. The average target is $11.61.

“We note further potentially positive catalysts for ERO in 2018 could come from updates on the Airborne survey currently underway (7 per cent complete), additional updates on the recently announced West Limb Discovery at Pilar and updated economics on the company’s Boa Esperanca project towards the end of the year,” he said.


NuVista Energy Ltd.’s (NVA-T) second-quarter results should be “strong,” according to Canaccord Genuity analyst Sam Roach, who believes the Calgary-based company is a “good way for investors to minimize exposure to commodity price differentials in the near to medium term.”

“NVA is mostly exposed to AB condensate and U.S. natural gas prices, which have been relatively stable year-to-date, whereas wide differentials have hit many other benchmarks - from Canada to the Permian,” said Mr. Roach. “We expect NVA to outperform as investors seek to minimize basis risk before Q2 results hit the wire.”

When NuVista’s results are released, scheduled for Aug. 7, Mr. Roach expects the company to see benefits of a 6-per-cent rise in condensate prices quarter over quarter as well as steadiness in U.S. natural gas prices.

“Further, we believe flush production in April could have a positive effect on NuVista’s condensate weighting and realized condensate price in Q2. And … the one-time refinancing costs that weighed on Q1 cash flows are now in the rear-view mirror,” he said.

With a “buy” rating (unchanged), Mr. Roach increased his target by a loonie to $11. The average target is $11.43.

“NVA trades at 6.1 times 2019 EV/DACF [enterprise value to debt-adjusted cash flow], which is a 30-per-cent premium to peer group average of 4.7 times and 16 per cent below the stock’s historical average trading multiple,” he said. “NVA trades at an 18-per-cent discount to our CNAV estimate of $11.14 per share, vs. the average peer group discount of 23 per cent. We believe that the premium to peers is warranted given NuVista’s 840-plus potential Montney well locations.”


In other analyst actions:

Stephens analyst Brad Delco initiated coverage of TFI International Inc. (TFII-T) with an “overweight” rating and $48 target, exceeding the consensus of $41.29.

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