Inside the Market’s roundup of some of today’s key analyst actions
A group of equity analysts on the Street adjusted their target prices for Canadian bank stocks on Monday ahead of fourth-quarter earnings season for the sector, which kicks off on Dec. 1 with Bank of Nova Scotia and Bank of Montreal.
Desjardins Securities’ Robert Young is projecting cash earnings per share to decline by 19 per cent year-over-year on average for the quarter, citing headwinds from lower interest rates and higher provisions for credit losses.
“We suspect estimates will be all over the map,” he cautioned. “More importantly, we expect pre-tax, pre-provision (PTPP) earnings to decline 2 per cent year-over-year, with pressure on P&C banking operations being offset by strong capital markets results. Credit will remain a focus, and we are anticipating a 20 basis points year-over-year increase on average in PCL rates, with relatively low PCLs for performing loans and higher PCLs on impaired loans. We are not anticipating any release of performing loan allowances from any of the banks. We expect CET1 ratios for the Big 6 banks to be 11.6 per cent on average, excluding ECL transition.”
“We suspect the banks could beat our estimates. This would most likely be driven by lower-than-anticipated PCLs, which are impossible to model, and even higher earnings from capital markets vs our estimates. Clearly, these are trends we saw from other financials during 3Q20 reporting.”
After underperforming the broader S&P/TSX composite index thus far in 2020, Mr. Young sees banks “well-positioned to play catch-up” as “encouraging” COVID-19 vaccine news continues to emerge.
“That said, there are still some headwinds for bank results as we peer into FY21, including persistent low interest rates, a potential steady increase in net charge-offs as loan deferrals run off and further economic lockdowns take hold to deal with the second wave, and a potential return to more normal capital markets activity,” he said. “As a result, we believe the stocks could be in for a bumpy ride early in the new year, as has historically (seasonally) been the case.”
After adjusting his fourth-quarter projections, Mr. Young made the following target price changes in order of his preference:
* Toronto-Dominion Bank (TD-T, “buy”) to $75 from $71. The average on the Street is $68.11, according to Refinitiv data.
* Royal Bank of Canada (RY-T, “buy”) to $115 from $112. Average: $105.82.
* Bank of Nova Scotia (BNS-T, “buy”) to $67 from $61. Average: $62.38.
* Canadian Western Bank (CWB-T, “buy”) to $31 from $30. Average: $31.
* National Bank of Canada (NA-T, “hold”) to $74 from $72. Average: $73.70.
* Canadian Imperial Bank of Commerce (CM-T, “hold”) to $112 from $106. Average: $111.38.
* Bank of Montreal (BMO-T, “hold”) to $93 from $83. The average on the Street is $88.63.
Mr. Young maintained a “hold” rating and $31 target for shares of Laurentian Bank of Canada. Average: $29.70.
Credit Suisse analyst Mike Rizvanovic raised his target prices for the Big 6 banks by an average of 8 per cent.
“We expect another volatile quarter for the Canadian banks in Q4 that will feature: 1) further sequential improvement in PCLs for most of the banks and more clarity on deferrals, which should be materially lower than last quarter; 2) continued weakness in net interest income driven by margin compression, slower loan growth, and a less favorable loan mix; 3) early signs of recovery in fee-based revenue, which was hit hard following the lockdown; and 4) sequential moderation in Capital Markets on lower volatility and trading volume,” he said. “For the group we are forecasting an average EPS decline of 16% relative to the prior year, but a very mixed result sequentially as some banks benefit more than others from lower loan losses.
“Looking past that noise, and in light of the positive developments on a COVID-19 vaccine, which we believe will eventually result in a more normal operating environment for the banks, albeit with an uncertain timeline, we are introducing our F2022 EPS estimates and reverting back to valuing the group using a PE multiple on those forecasts.”
Mr. Rizvanovic raised his rating for National Bank of Canada (NA-T) to “outperform” from “neutral” with a $74, target up from $70.
He pointed to “1) consistent execution that has driven by far the best growth in pre-tax, pre-provision earnings over the past year, which we expect will continue; 2) more conservative reserving since the onset of the pandemic with a group-high multiple of ACLs to trailing 12-month write-offs, which we believe gives NA a higher likelihood of reversals in economic recovery; 3) less volatile Capital Markets earnings, which in our view justifies a higher relative multiple for that business vs. peers; and 4) a favorable entry point following NA’s recent underperformance as the shares now trade at roughly the peer group average on F2021 consensus EPS.”
He downgraded Canadian Imperial Bank of Commerce (CM-T) to “underperform” from a “neutral” recommendation “based on: 1) a continued loss of market share in Canadian residential mortgages, a key anchor product, which was evident through September 2020 and shows no signs of slowing; 2) the bank’s inability to keep up with peers on pre-tax, pre-provision earnings growth over the past year with no obvious near-term catalyst for a turnaround; and 3) a less compelling valuation as CM now trades slightly better than its historical discount vs. peers on F2021 consensus EPS. We believe any further rerating of the shares will need to be supported by a better earnings trajectory.”
Elsewhere, TD Securities analyst Mario Mendonca also cut Canadian Imperial Bank of Commerce to “buy” from “action list buy” with a $125 target, up from $120 and exceeding the $111.38 average.
In an earnings preview titled If You’re Not Early, You’re Late, Scotia Capital analyst Meny Grauman said his attention has turned past the fourth quarter and all of 2021.
“This shift reflects a growing comfort with the large allowance builds that the banks delivered in Q2 and Q3 as well as increased confidence in the efficacy of fiscal stimulus and the likely success of coming vaccines,” he said. “Yet with the Big Six banks still trading at 1.51 times book versus a historical average multiple of 2.05x, this shift in thinking has still not yet fully translated into valuations. The good news is that we expect that to change over the coming months, and so we enter reporting season more positive on the Canadian banking sector than we have been since the pandemic began.”
For the quarter, Mr. Grauman is projected a 2-per-cent rise in earnings per share from the third quarter but a drop of 16 per cent year-over-year, which is 5 per cent higher than consensus on average.
“Our core EPS estimates are better than consensus for every bank in our coverage universe,” he said. “We are higher than consensus primarily because of a more favorable outlook on credit, but we are also looking for a slightly better outcome for capital markets and for loan growth as well.”
Mr. Grauman upgraded Laurentian Bank of Canada (LB-T) to “sector perform” from “sector underperform” with a $30 target, up from $28.
At the same time, he made the following target price changes:
* Bank of Montreal (BMO-T, “sector perform”) to $104 from $85.
* Canadian Imperial Bank of Commerce (CM-T, “sector outperform”) to $139 from $112.
* Canadian Western Bank (CWB-T, “sector perform”) to $33 from $29.
* National Bank of Canada (NA-T, “sector outperform”) to $83 from $77.
* Royal Bank of Canada (RY-T, “sector outperform”) to $122 from $111.
“As a result of our more positive outlook on the sector and shift in valuation methodology CIBC replaces RY as our top pick in the space,” he said. “Although we continue to rate both RY and NA as Sector Outperforms, we do so not because of their defensive characteristics but because of their preferred domestic positioning. We maintain our Sector Perform ratings on BMO and TD, but believe that BMO’s recent outperformance is stretched and see TD gaining some ground. Among the smaller banks we keep CWB as a Sector Perform, but upgrade LB from Sector Underperform to Sector Perform as we have more comfort in downside risks here.”
Though he thinks Barrick Gold Corp.’s (GOLD-N, ABX-T) “big picture is unchanged,” RBC Dominion Securities analyst Josh Wolfson trimmed his short-term financial estimates for the mining giant following its Nov. 20 Investor Day event due to the impact of the COVID-19 pandemic and “some challenges.”
“Barrick outlined refreshed guidance indications, which at a high level reinforces stable 10-year output and declining capital spending, allowing for attractive free cash flow growth,” he said. “Detailed guidance provided over the upcoming 5-year period from 2021-25 outlines higher capital spending and lower production largely over 2021/22. These changes have reduced our FCF [free cash flow] estimates by 17 per cent over 2021/22, but long-term our forecasts are unchanged.
“Higher capital spending of $500-million is now expected in 2021, of which $250-million is represented by deferrals from delays in 2020 with project spending at Pueblo Viejo’s plant expansion, Veladero’s heap leach expansion, and Zaldivar’s chloride leach project. Production has also been revised lower by 7-8 per cent in 2021/22, reflecting project delays at Veladero, lower but longer-duration output at Tongon, the ramp-up and revised assumptions at Porgera, a rephasing at Long Canyon due to permitting delays, and a slowed ramp-up at Turquoise Ridge/Twin Creeks.”
Mr. Wolfson said Barrick is “focused upon ensuring long-term production stability” and expects an upcoming dividend policy revision to “introduce a mechanism for excess cash to be distributed as return of capital.”
“Rolling 10-year guidance will be provided on an ongoing basis, where the company is focused upon ensuring production stability via the extension of the Bulyanhulu and North Mara mines in Tanzania and replacement of forecast depletion at Tongon (expected in 2024),” he said. “Exploration remains a core competency of the company, expected to enable Barrick to replenish its opportunities. Barrick reaffirmed long-term planning prices of $1,200/oz, but may seek to leverage short-term higher pricing, noting opportunities with Kibali processing upside, stockpiling strategies, and Tongon mine life extension. In conjunction with the de-levering of Barrick’s balance sheet, good outlook visibility, and high cash generation, the company is expected to issue a new dividend policy framework that will distribute excess cash above its base dividend, which is calculated using gold prices of $1,200 per ounce. Our analysis outlines Barrick’s dividend could reasonably increase to 2-3 times current levels in upcoming years at current gold price.”
Mr. Wolfson trimmed his 2020 earnings per share estimate by 1 US cent to US$1.10. His 2021 and 2022 projections slid to US$1.03 and 87 US cents, respectively, from US$1.15 and 95 US cents.
Keeping an “outperform” rating, he lowered his target to US$31 from US$33. The average is US$33.94.
Seeing an “attractive” risk-reward proposition for investors given its “discounted valuation with potential for a near-term re-rating,” RBC Dominion Securities analyst Mark Mihaljevic initiated coverage of Gatos Silver Inc. (GATO-N, GATO-T) with an “outperform” rating on Monday, pointing to the potential stemming from its Cerro Los Gatos mine in Mexico.
Colorado-based Gatos, formerly known as Sunshine Silver Mining & Refining Corp., began trading on the New York Stock Exchange and the Toronto Stock Exchange on Oct. 28.
“Our constructive outlook on Gatos reflects the above average quality of CLG with the potential for it to evolve into an even more attractive asset as operations ramp-up and the exploration/expansion potential is demonstrated,” said Mr. Mihaljevic. “We highlight that CLG offers above-average margins (EBITDA margin in the 80th percentile) and mine life (11-year reserve life vs. 7 years for primary silver mines). We expect investors to attribute more value to the asset as operations ramp-up and positive FCF is delivered (expected late-2020 or early-2021), noting typical 20-40-per-cent outperformance.
“While investors are justified being cautious around ramp-ups, we believe the actual risk is lower than perceived by the market given progress to-date (90 per cent of capacity in Q1/20 pre-COVID), small scale operation (typically ramp-up quicker), and experienced management team. We believe Gatos has the opportunity to create value at CLG by delineating the exploration upside with a material $15-million budget earmarked on its more than 1,000 square kilometre land package, which hasn’t been drilled since 2012. We also note ongoing exploration success can bolster the economics of a potential 20-per-cent plant expansion.”
Mr. Mihaljevic also emphasized Gatos provides “attractive” exposure to silver, which he calls “a commodity with improving underlying attributes.”
“We also believe Gatos fits an investment niche as one of only 6 producers globally with over 50 per cent of its revenue from silver and noting the silvers consistently trade at premiums of 20-30 per cent to comparable gold companies,” he said. “Our analysis of silver fundamentals also indicates improvements through 2020 with record investment demand, rebounding industrial demand, and relatively inelastic supply.”
Mr. Mihaljevic, currently the lone analyst on the Street covering the stock, set a US$8.50 target for Gatos shares.
“Gatos is trading at average discounts of 25 per cent on P/NAV and 43 per cent on EV/EBITDA to its silver peers at forecast prices (discounts of 32 per cent and 34 per cent at spot), despite offering stronger FCF (yield of 13.3 per cent vs. 9.6 per cent),” he said. “In our view, this more than compensates investors for its relative positioning and risks. This incudes single asset risk, limited trading liquidity ($4-million per day), ramp-up risk, and relationships with Electrum & Dowa, balanced against its above average asset quality, attractive silver exposure, and strong FCF. We believe Gatos also offers both clear catalysts to a re-rating as well as the potential for further value accretion.”
After Boralex Inc.’s (BLX-T) “solid” acquisition of the remaining stakes in three wind assets in Quebec, Desjardins Securities analyst Bill Cabel correctly predicted a deal for U.S. solar assets “could still be around the corner.”
“We like seeing BLX complement development with M&A,” said Mr. Cabel in response to Friday’s announcement of a $121.5-million deal to acquire 49-per-cent stake in three Quebec wind farms it does not already own from the Caisse de dépôt et placement du Québec.
“On the 3Q call, BLX mentioned that it is looking at a solar acquisition in the U.S.; however, limited details were provided. Based on FERC filings, BLX could announce a U.S. solar acquisition, potentially in the range of 130MW, in the near term. The filing requested FERC approval by December 1.”
On Monday before the bell, Boralex announced agreements to acquire interests in seven solar plants in the U.S. and Canada for $283-million.
After raising his earnings and free cash flow projections in response to the Caisse deal, he increased his target for Boralex shares to $46 from $45, keeping a “buy” rating. The average on the Street is $43.86..
“With a solid near-term identified growth pipeline and 2.7GW development pipeline in various stages in Europe and North America, BLX is well-positioned to drive growth beyond 2020 in our view; its outlook remains positive,” said Mr. Cabel.
Elsewhere, others raising their targets included:
* Scotia Capital’s Justin Strong to $46.25 from $44.50 with a “sector outperform” rating
* BMO Nesbitt Burns’ Ben Pham to $41 from $39 with an “outperform” rating.
* Raymond James’ David Quezada to $45.50 from $45 with a “strong buy” rating.
“We reaffirm our Strong Buy rating on Boralex which is underpinned by the company’s attractive niche and development portfolios in France and New York,” he said. “We regard solid growth in these markets as adding shareholder value with an attractive spread between the company’s returns and cost of capital. Further, we consider the recent 10-per-cent pullback in BLX as an opportunity to add to positions in this pure play renewable IPP ahead of RFP results in France and New York.”
Canaccord Genuity’s Robert Young said it was a “good quarter but bad reaction” for Real Matters Inc. (REAL-T), recommending investors “buy on weakness.”
“Real Matters posted solid Q4 results albeit below inflated expectations from strong U.S. mortgage activity,” he said. “The market had become accustomed to a healthier level of upside, and this coupled with some new areas of worry (confusing share targets, higher waiver volume, weak HELOC and default) that crept into the quarter, led to shares being sold off 15 per cent. We believe the focus should be on the emerging growth in the Title business and a potentially attractive Data business. We expect to learn more about these opportunities and gain insight into the above areas of worry during the Analyst Day [Monday]. On balance, we remain positive on Real Matters shares.”
On Friday, shares of the Markham, Ont.-based online mortgage services firm fell almost 16 per cent despite reporting revenue and EBITDA ($47-million and $22-million, respectively) for the fourth quarter that exceeded the Street’s expectations ($45-million and $20.8-million).
“Headwinds to appraisal volumes from reduced HELOC and foreclosure activity are a pressure that is known, although the impact was greater than expected in Q4,” Mr. Young said. “Real Matters is also seeing higher waiver impact as GSEs such as Fannie Mae allow originations with recent appraisals and lower LTV to forego a full in-person appraisal. As well, Real Matters indicated it is accelerating its investment to scale up in front of meaningful pipeline growth, particularly in Title, which leads us to increase our F2021 OpEx estimate, driving reduced EBITDA in the short term. We now forecast F2021 net revenue of $207-million (from $205-million and more back end loaded) with adj. EBITDA of $88.5-million (from $94-million).”
Keeping a “buy” rating for Real Matters shares, Mr. Young cut his target to $35 from $40. The average is $33.71.
“Mortgage market cyclicality and exposure to rates now at all-time lows remain a headwind to valuation, which is why we believe Real Matters trades at a wide discount to SaaS peers despite the attractive growth and margin profile,” he said.
Other analysts lowering their targets included:
*TD Securities’ Daniel Chan to $30 from $36 with a “buy” rating
* Scotia Capital’s Paul Steep to $29 from $30 with a “sector perform” rating
“We are watching for further progress in the firm’s expansion of its U.S. Title business beyond the refinancing market as it seeks to establish a platform business similar to its U.S. Appraisal operation. Factors we are monitoring in revisiting our view on the shares include: sustained new client wins and ramp-up of volumes in U.S. Title given volatility in this business previously. We believe that Real Matters’ financial outlook remains exposed to U.S. interest rates along with movements in U.S. mortgage markets, particularly refinancing, which has experienced a significant uptick in volumes,” said Mr. Steep.
* BMO’s Thanos Moschopoulos to $28 from $35 with an “outperform” rating
“While results were ahead of consensus, appraisal waivers are having a larger-than-expected impact on REAL’s end market,” said Mr. Moschopoulos. “From a FY2021 perspective, we expect this dynamic to be offset by an accelerated ramp in U.S. Title, and have consequently made only minor changes to our full-year estimates.
“However, we expect that the year will be more back-end weighted than we were previously modeling.”
In a research report titled I get by with a little help from my friends, Canaccord Genuity analyst Katie Lachapelle initiated coverage of Fission Uranium Corp. (FCU-T) with a “speculative buy” rating, calling it “a compelling investment for investors looking for exposure to uranium through a world-class deposit in a low-risk jurisdiction.”
Ms. Lachapelle said her investment thesis for the Kelowna, B.C.-based company is based on three factors:
* Its 100-per-cent owned Patterson Lake South deposit in the Athabasca Basin is a “large, low-cost development project” that is likely garner increased interest from major producers as it advances toward productions. She said: “We believe a major partner or outright acquisition is key to unlocking value from this asset.”
* The deposit is located in “the next hotspot for high-grade uranium production” and will benefit from inherent synergies from similar projects, including NexGen Energy’s Arrow deposit.
* The rising demand for uranium worldwide. She said: “Central to our investment thesis is a lack of investment in uranium development projects, despite an increasing uranium supply demand deficit. We note that the fundamentals for uranium are the best we have seen in years: with global demand for nuclear energy increasing, and security of future supply becoming ever more important in light of ongoing production curtailments, government-driven trade policies, and more recent COVID-19 related supply disruptions.”
Ms. Lachapelle set a target of 40 cents per share, matching the consensus.
In other analyst actions:.
* Scotia’s Himanshu Gupta raised his target for Summit Industrial Income REIT (SMU.UN-T) to $14.25 from $13 with a “sector outperform” rating. The average is $14.06.
“While MGA has a strong track record as a well-run company, one of the investor criticisms has been that narrative is tough to decipher given a diverse product offering,” said Mr. Levy. “Yet with MGA undergoing a transition at the CEO post, with long-time CEO Don Walker retiring and President/CTO Swamy Kotagiri taking the post, we see three key ways that the MGA narrative can accelerate: as a ‘hidden’ play on EV, Active Safety offering / program wins, using FCF to fund growth. We reaffirm our Outperform rating on MGA and raise our TP to $74 from $67 – not only do we appreciate MGA’s exposure to end-market recovery/its positioning as a defensive supplier (solid FCF gen, strong balance sheet, leading share positions), but we believe narrative may accelerate under incoming CEO Swamy Kotagiri…all at an attractive multiple.”
* CIBC World Markets analyst Hamir Patel raised his target for Nobord Inc. (OSB-T, “outperformer”) to $59 from $55. The average is $54.86.
* Mr. Patel also increased his target for West Fraser Timber Co Ltd. (WFT-T, “outperformer”) to $88 from $84. The average is $86.83.
* CIBC’s Dennis Fong bumped his target for Imperial Oil Ltd. (IMO-T, “neutral”) shares to $26 from $25. The average is $22.55.
“Imperial Oil provided positive operational updates and increased clarity on current operations and 2021 guidance at its Investor Day. We highlight the significant improvement in clarity of disclosures could further increase investor confidence over time with execution of the company’s operational and financial goals,” said Mr. Fong.
* Canaccord Genuity analyst Bobby Burleson raised his rating for Planet 13 Holdings Inc. (PLTH-CN) to $6.50 from $5.50 with a “speculative buy” rating. The average is $5.50.
“After a lengthy process that was part of a broader court contest against NV’s licensing awards in late 2018, PLTH was finally able to reopen its Medizin store this week,” he said. “While we are already modeling a $12-million contribution to our 2021 revenue estimate, we note this could prove conservative. Las Vegas has gotten more competitive since Medizin closed in late 2018, but the market has also grown considerably over that period. Further, at the time of closing, Medizin was on an annual run rate of just under $20-million and had strong gross margins of 53%. We don’t expect an imminent return to those levels, but something closer to $15-million could be in the cards. When combined with strength for the Superstore and a looming expansion in Santa Ana, momentum looks solid for 2021 and beyond.”
“This year, we’ve seen OGI’s market share decline materially — from 6 per cent in 1Q20 to 4 per cent in 3Q20 — which we attribute mainly to COVID-19 oriented logistical challenges causing OGI to miss the significant windfall engendered by large-format, deep value cannabis offerings in early and mid-2020,” said Mr. Sarugaser. “Channel checks indicate that 4Q20 showed a continuation of in this downward market share trend, with OGI capturing less than 4 per cent of the Canadian market — which, importantly, has grown 75 per cent since 1Q20 — resulting in flat adult-use cannabis revenue: we estimate $15.6-million.”