Inside the Market’s roundup of some of today’s key analyst actions
Following a period of outperformance, National Bank Financial analyst Jaeme Gloyn thinks the outlook for the property and casualty (P&C) insurance sector remains “robust.”
In a research note released Monday titled P&C Still The Place To Be, he reiterated his view of the sector being “well positioned for the near term,” pointing to “hard market conditions and rising interest rates that support improved investment income (in particular for FFH).”
“We maintain our view that pricing trends will continue to outpace loss cost trends overall, even for Personal Auto lines, as driving behaviour has yet to complete its path to normalization and auto repair parts price increases still lag U.S. trend,” he added.
Mr. Gloyn thinks “there’s something for everyone” in the sector.
“Small to Mid-Cap Growth? Look to TSU and DFY. Large-Cap Value / GARP? Look to FFH and IFC,” he said.
“That said, the lines of value, GARP, and even momentum, are blurring. TSU remains at the top of our pecking order given a rapid growth outlook but is also an attractive value play with upside to specialty insurance peer valuations. Although one of the best performing Financials stocks year-to-date, FFH, remains the best value idea in our coverage. FFH also offers investors rapid top-line growth and leverage to a higher interest rate environment. As it relates to IFC and DFY, we continue to believe share price acceleration is contingent on proof of execution. We see no reason to adjust our view that both companies will continue to deliver: IFC on integration of RSA and DFY on its strategic growth objective.”
The analyst made a pair of target adjustments to stocks in his coverage universe on Monday:
* Definity Financial Corp. (DFY-T, “outperform”) to $38 from $37. The average on the Street is $37.27.
* Intact Financial Corp. (IFC-T, “outperform”) to $227 from $230. Average: $207.64.
He maintained a $1,050 target for shares of Fairfax Financial Holdings Ltd. (FFH-T, “outperform”) and $60 for Trisura Group Ltd. (TSU-T, “outperform”). The averages are $907.56 and $54.43, respectively.
“DFY (up 15 per cent) is the top performing Financial stock in the S&P/TSX Financials Index year-to-date,” Mr Gloyn said. “FFH (up 9 per cent) and IFC (up 8 per cent) are two of the top four performing stocks. While our top pick in the sector, TSU (down 28 per cent), has lagged considerably following a profit hiccup in Q4-21 results, we expect solid Q2-22 results to firmly set the stock back on an upward trajectory following a massive Q1-22 beat and growth-inspired equity raise ... We reiterate our view TSU’s current trading multiple remains unduly cheap.”
RBC Dominion Securities analyst Geoffrey Kwan recommends taking a “defensive” stance on Canadian diversified financial companies heading into second-quarter earnings season, citing the need for patience in assessing economic trends and when to become more aggressive with investments.
“Element Fleet is our new #1 best idea (previously #3) .... P&C insurance remains one of our favorite sectors due to positive fundamentals, potential catalysts, strong defensive attributes and attractive valuations (Intact is now our #2 (was #1) best idea and Definity is one of our ‘sleeper’ best ideas for 2022),” he said. “We also like the risk-reward for the exchanges (TMX is our #3 (was #2) best idea). We are slightly more cautious on asset/wealth managers, private equity/alternatives and mortgage stocks, although these sectors have significantly underperformed within our coverage so far this year.”
Mr. Kwan raised his target for Element Fleet Management Corp. (EFN-T), his “best idea” in the sector, by $1 to $19 with an “outperform” rating. The average on the Street is $15.83.
“Best Idea: Element Fleet, a stock we think can do well in a recession, high inflation, high interest rates AND also when the market rallies,” he said. “We think EFN offers investors the best mix of strong defensive attributes but also can outperform during a market rally. In a recession, EFN should benefit from the gradual improvement in OEM production, perhaps even more if consumer demand declines and production is shifted to fleet management companies. EFN benefits from high inflation (high vehicle prices = higher financing income; many fleet services are priced based on dollar values). EFN hedges interest rate risk, effectively locking-in NIM yields. EFN continues to win new customers and cross sell fleet services to existing customers, providing further EPS tailwinds. We think recent private equitydriven consolidation (Athene and Donlen/Wheels/LeasePlan, Bain/ADIA and Merchants) validate the highly attractive nature of the fleet management industry. Finally, we think EFN is attractively valued (2023: 9-per-cent FCF yield, 13 times P/E).”
His other target changes were:
- Alaris Equity Partners Income Trust (AD.UN-T, “sector perform”) to $20 from $24. Average: $24.86.
- Brookfield Asset Management Inc. (BAM-N/BAM.A-T, “outperform”) to US$63 from US$68. Average: US$67.40.
- Brookfield Business Partners LP (BBU-N/BBU.UN-T, “outperform”) to US$31 from US$35. Average: US$38.33.
- Chesswood Group Ltd. (CHW-T, “sector perform”) to $15 from $16. Average: $18.67.
- CI Financial Corp. (CIX-T, “sector perform”) to $17 from $19. Average: $20.94.
- EQB Inc. (EQB-T, “outperform”) to $75 from $80. Average: $84.43.
- First National Financial Corp. (FN-T, “sector perform”) to $40 from $41. Average: $37.50.
- Home Capital Group Inc. (HCG-T, “outperform”) to $37 from $46. Average: $44.14.
- IGM Financial Inc. (IGM-T, “sector perform”) to $44 from $47. Average: $46.
- Onex Corp. (ONEX-T, “outperform”) to $98 from $110. Average: $104.40.
- Power Corp. of Canada (POW-T, “sector perform”) to $45 from $47. Average: $42.06.
- Sprott Inc. (SII-T, “sector perform”) to $54 from $63. Average: $56.
- TMX Group Ltd. (X-T, “sector perform”) to $159 from $165. Average: $148.86.
“Positioning for a recession, but also thinking about positioning for an eventual market rally,” he said. “In our 2022 Outlook report, we looked at share price performance over the past 25 years when the market was down more than 10 per cent(8 instances) and the subsequent rally. Unsurprisingly, defensive stocks performed the best during downturns (IFC, X, but we think EFN and DFY are also defensive). During market rallies, small caps in our coverage typically outperformed and by sector, specialty finance (EFN, ECN, CHW), mortgages (HCG, EQB) and private equity (ONEX, BBU) typically outperformed.”
In a research report titled Start Buying this Global Industrial Behemoth, iA Capital Markets’ Gaurav Mathur initiated coverage of Granite Real Estate Investment Trust (GRT.UN-T) with a “strong buy” recommendation on Monday.
The analyst sees the industrial and logistics sector, both in North America and Europe, “moving into a higher gear than ever witnessed,” noting rental rates continue to rise, supply pipelines are tightening, and cap rates are stabilizing.
“We note that the stock gets a pass on most investors’ desks, especially those with a North American and global focus,” said Mr. Mathur. “We firmly believe that the process of price discovery continues to occur for the Canadian industrial REITs in our coverage. In our view, segments of the CRE market that have witnessed acquisition activity support our belief that private real estate values have been more than stable and are moving higher in many instances. ... Given recent market conditions, we still expect above-average demand for space to persist, as compared to past peak.”
Mr. Mathur called Granite a “consistent cash flow compounder,” noting: “The REIT has built a stable and strong portfolio of assets in the U.S. (49 per cent of Q1/22 net operating income), Europe (35 per cent of Q1/22 NOI), and Canada (16 per cent of Q1/22 NOI). In the recent past, we have discussed the strength of the industrial CRE sector in each of these countries, and remain bullish on the underlying strength of the market, in spite of the equity market volatility. Adding the Company’s strong acquisition and development pipeline to the mix, as well asthe stringent focus on capital allocation, we note the rise of stable cash flows the REIT has posted. We understand that the correlation between excess stock returns and NAV is the strongest. However, amid the new normal, we strongly believe that investors should begin to think about cash flow payers that can continue to grow amid the volatility.”
“There is no indication of either tenant vacating existing square footage, nor do the longer-term themes work against the business models,” said Mr. Mathur. “Our channel checks indicate strong thematic upsides for both tenants thereby allaying any fears of tenant risk.”
“While most of the REIT’s NOI is derived from the U.S. and Europe, we find it interesting that the Street continues to compare Granite REIT to its Canadian industrial peers. In our view, with most of the portfolio domiciled in the U.S., we think it’s high time that we start comparing Granite REIT to its U.S. peers. We believe that to compare apples to apples, the comparative set needs to reflect that view.”
Anticipating above-average demand for space that “rivals past peak cycles” and expecting the REIT to post “strong” rent growth due to “low availability, rising construction costs, and strong tenant demand,” Mr. Mathur set a target of $100 per unit of Granite. The current average on the Street is $102.70.
“Add low leverage and attractive FFO, AFFO and NAV growth to the mix, and the units currently provide a very attractive entry point,” he concluded.
Scotia Capital’s Michael Doumet thinks the pullback in equipment dealer stocks has been “too deep” and “too uneven,” believing a significant recession has been priced in.
“The market has become increasingly convinced that the economy is headed for a recession/slowdown,” he said. “For the equipment dealers, given the supply chain bottlenecks, extended backlogs, and recent management commentary that activity levels remain robust, it may take several months for clear signs of such a slowdown to emerge. To us, this creates an environment where beats are unlikely to be rewarded in full as investors look for 2023 consensus to reset/bottom out; the exception are margin/SG&A beats as those have positive implications regardless of the demand/revenue outlook investors assume for 2023 and beyond.
“That does not mean we do not see an opportunity in the sector. Typically, for a sustained rally to occur in the sector, history tells us earnings visibility will need to improve/reset (i.e. consensus will need to get closer to a “bottom”). That could take several months. And, in this environment, where recessionary risks are on the rise, TIH often proves to be the best name to hold. However, we believe FTT provides the better near-term opportunity as its outsized share price decline offers a potentially asymmetric bet as it is pricing-in a uniquely pessimistic scenario.”
Mr. Doumet said the recent weakness in commodity prices had led to “meaningfully” lower share prices and reduced earnings per share expectations for the equipment dealers.
“As a quick litmus test on what the market appears to be pricing-in, we back out forward EPS expectations from the current share price (using a mid-cycle multiple),” he said. “This approach suggests the market is pricing in a approximately 35-per-cent, 10-per-cent, and 25-per-cent EPS decline for FTT, TIH, and WJX versus consensus. These figures compare to the 2019-2020 EPS peak-to-trough (ex. CEWS) of 40 per cent, 15 per cent, and 50 per cent for FTT, TIH, and WJX, respectively. With this in mind, FTT’s share price decline appears too uniquely pessimistic. While lower copper prices and higher taxes will slow activity levels in Chile (the lower Peso may boost profits though), we remain constructive on Western Canada, a geography that produces a similar line up of commodities (oil, gas, potash, grain, etc.) as those that might remain in short supply due to sanctions on Russia. Product support and operating efficiencies have also been made by each of the dealers.”
Mr. Doumet lowered his earnings estimates and valuation multiples across his coverage universe, noting “while higher interest rates and lower commodity prices will slow activity, we question the steep decline in the share prices.”
His target prices also slide. His changes are:
- Finning International Inc. (FTT-T, “sector outperform”) to $38 from $46. Average: $40.
- Toromont Industries Ltd. (TIH-T, “sector outperform”) to $120 from $126. Average: $120.50.
- Wajax Corp. (WJX-T, “sector outperform”) to $25.50 from $29. Average: $25.63.
“Typically, it is best to wait out rising recession risks with the most defensive name, TIH,” he added. “However, the pullback in FTT has been so deep that we think a near-term upside adjustment is in store. Our thinking on FTT’s valuation is anchored to its mid-cycle valuation, a product of a 16 times P/E multiple on a mid-cycle EPS estimate of $2.30 per share. This view credits FTT’s enhanced product support growth, improved operating leverage, and capital deployment. Further, we think a positive (margin) surprise in 2Q22 could help alleviate the decline in its imbedded EPS expectations.”
CIBC World Markets analyst Stephanie Price sees a “solid” market backdrop for Canadian telecommunications companies heading into second-quarter earnings season, forecasting an average of 5-per-cent EBITDA growth for her coverage universe.
However, she expects results to be overshadowed by the regulatory environment with investor focus on both the impact of Rogers Communications Inc.’s national outage and the ongoing Rogers/Shaw/Quebecor Tribunal process.
“Overall, we see some potential headwinds to the sector from rising rates (our coverage universe underperformed the TSX by 200 bps over the last three months), but expect that the sector’s defensiveness in an uncertain economic climate should offset much of the potential impact,” she said. “In the current environment, we prefer names that are trading at a discount and our top picks are Rogers and Quebecor.”
Citing a “worsening macroeconomic environment,” Ms. Price reduced her sector valuations, leading to lower target prices for stocks.
She said: “While we consider the space as defensive in nature, we also foresee potential headwinds from rising rates and the potential for slowing demand in some areas if the economy continues to deteriorate. Cablecos are trading at a 70 bps discount to their five-year averages, while the telcos are trading at a 40 bps premium.”
Her changes were:
- BCE Inc. (BCE-T, “neutral”) to $68 from $73. Average: $68.40.
- Quebecor Inc. (QBR.B-T, “outperformer”) to $33 from $37. Average: $33.83.
- Rogers Communications Inc. (RCI.B-T, “outperformer”) to $77 from $84. Average: $75.80.
In the wake of in-line second-quarter financial results, Desjardins Securities analyst Kyle Stanley continues to see Choice Properties Real Estate Investment Trust (CHP.UN-T) “well-positioned in the face of market uncertainty.”
After the bell on Thursday, the Toronto-based REIT reported funds from operations per unit of 24 cents, matching the forecast of both the analyst and the Street, as same-property net operating income grew 3.1 per cent and occupancy was up 0.6 per cent to 97.6 per cent.
However, in response to increased borrowing costs and “general market uncertainty,” Choice “proactively” raised its retail cap rates, leading Mr. Stanley to lower his net asset value estimate by 5 per cent.
With that move, he trimmed his target for Choice units to $15, matching the consensus on the Street, from $16.50 with a “hold” recommendation.
“CHP’s defensive attributes, including a (1) largely necessity-based retail portfolio; (2) stable cash flow outlook; (3) relatively conservative leverage profile; and (4) 5.3-per-cent cash distribution yield, should be attractive to investors given current market instability,” said Mr. Stanley. “Our Hold rating reflects limited expected FFOPU growth over the forecast period.”
Elsewhere, others making target changes include:
* BMO’s Pammi Bir to $15 from $16 with a “sector perform” rating.
“We believe CHP remains in good form to navigate a decelerating economy and higher interest rates,” he said. “Indeed, supported by its defensive retail assets and strength in industrial, our near-term organic growth outlook improved. The pipeline of value-add opportunities through development also continues to expand, while the balance sheet is in solid form. Still, the business is not immune to rising rates, with our AFFO and NAV estimates trimmed on higher debt costs and cap rate expansion. On balance, we see current levels as well-supported.”
* Canaccord Genuity’s Mark Rothschild to $15 from $16.50, maintaining a “buy” rating.
“Choice Properties REIT’s (Choice) Q2/22 results illustrate steady cash flow growth that was in line with expectations as the REIT owns an extremely defensive retail portfolio as well as a high-quality industrial portfolio. While internal growth should be relatively modest from the retail portfolio, growth will be augmented by stronger performance from the industrial portfolio and completing new industrial development projects,” he said.
Touting its “high margin business model offering lower-risk exposure to precious metals,” Raymond James analyst Brian MacArthur initiated coverage of Vancouver-based Gold Royalty Corp. (GROY-A) with a “market perform” recommendation.
“We believe royalty companies like Gold Royalty offer equity investors exposure to precious metals prices while mitigating downside risk given limited exposure to operating and capital costs,” he said. “At the same time, upside optionality exists through exploration potential. Gold Royalty is a relatively new company having IPO’ed in 2021. Through a number of strategic acquisitions and transactions, Gold Royalty’s portfolio now consists of over 190 royalties — that is precious metals focussed, with a favourable jurisdictional risk profile and longer-term growth. Gold Royalty also has a flexible balance sheet and pays a quarterly dividend of 1 cent per share, representing around 1.6-per-cent dividend yield.
“On the other hand, we note the relatively low cash flow generation over the next two years which we expect Gold Royalty may address given its transactional history. While we like Gold Royalty’s high margin business model, longer-term growth optionality, jurisdictional profile, relative share liquidity, and dividend, given current valuation and lower near- term cash generation, we rate the shares Market Perform.”
He set a target of $3.75. The current average is $6.93.
In other analyst actions:
* Following recent meetings with its management, Scotia Capital analyst Divya Goyal trimmed her target for shares of Converge Technology Solutions Corp. (CTS-T) to $11 from $14 with a “sector outperform” rating. The average target on the Street is $11.31.
“Based on our discussion, we have updated our financial model to include the latest acquisition of Notarius, postpone the revenue recognition of some recent large acquisitions that have not closed yet and revised our estimates based on the continued supply chain disruptions resulting in increased backlogs and potential delay in some Managed Services contracts,” she said. “We continue to stay optimistic on the company’s long-term growth and management potential, but based on our revised estimates, our one-year forward share price target has been revised.”
* BMO Nesbitt Burns’ Étienne Ricard cut his Guardian Capital Group Ltd. (GCG.A-T) target to $40, below the $42 average. from $44 with an “outperform” rating.
“Recent market performance is set to weigh on earnings growth for traditional asset managers. Guardian’s differentiated business model mitigates this exposure, with approximately 30 per cent of operating revenues insensitive to market fluctuations. We reiterate our Outperform; the valuation disconnect should close over time with: i) improving investor appreciation for IDC WIN; ii) peer-leading AUM growth, and iii) declining capital intensity.”
“Our valuation is underpinned by the large copper resource at the company’s Santa Cruz project, as well as proprietary geophysics and grid storage technologies. The company has assembled a notable portfolio of copper exploration assets with the aim to deliver multiple new sizable sources of domestic copper production to support the global shift to green energy and electrification,” he said.
* JP Morgan’s Phil Cusick cut his target for shares of Rogers Communications Inc. (RCI.B-T) to $80 from $90, reiterating an “overweight” rating. The average is $75.80.