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

Scotia Capital analyst Sumit Malhotra raised his rating for Royal Bank of Canada (RY-T, RY-N) on Monday, citing the strength of its deposit base and consistency of its investment spending.

“Two of the key themes that we explored at our Scotiabank Financials Summit last week were (1) the trade-off that managament. teams enact between continued investment in their franchises and the efficiency improvement that the market demands; and (2) the ability to leverage a lower-cost deposit base for NIM [net interest margin] expansion as the rate hike cycle continues in both Canada and the U.S.,” said Mr. Malhotra in a research note. “In our view, no name we cover is as well-positioned to benefit from these factors as RY, and when coupled with the renewed operating momentum that was visible in the recent Q3 results, after thirteen months on the sidelines with the stock we are moving our rating up.”

Mr. Malhotra’s rating rose to “sector outperform” from “sector perform” with a target price of $113. The average target on the Street is currently $111.75, according to Bloomberg data.

"RY shares trade at 11.4 times our 2019 estimates, a 4-per-cent premium to the sector average of 10.9 times (our target values the stock at a 6-per-cent advantage)," he said. "Our positive view towards the earnings power of RY is aided by the conservatism in the numbers which includes (1) RY ranks at the high-end of the sector with respect to both PCL allocated to reserve build and percentage of PCL comprised of non-impaired loans (i.e., Stage 1 and 2); and (2) despite boasting the largest Canadian P&C franchise in the sector, expense growth for RY has consistently trended at/above the industry avg. since 2015, which to us speaks to both commitment to business development as well as a potential lever if revenue growth decelerates."


A pair of equity analysts at Raymond James made changes to their picks for the firm’s “Canadian Analyst Current Favourites” list in a research note released Monday.

Ken Avalos added RioCan Real Estate Investment Trust (REI.UN-T), replacing Tricon Capital Group Inc. (TCN-T)

“RioCan’s portfolio closed 2Q18 with 81-per-cent VECTOM [Vancouver, Edmonton, Calgary, Toronto, Ottawa, Montreal] exposure,” said Mr. Avalos. “When the balance of the $2-billion secondary market portfolio is sold, this rises to 90 per cent. At that point (mid-2019), we would lower our NAV cap rate by 30 basis points (to a 5.2 per cent, which matches First Capital). This moves our NAV $3/unit higher to $30. With 90% VECTOM exposure, management expect SPNOI [same-property net operating income] growth acceleration to 3 per cent annually, which equates to ~$1/unit of NAV per year. We figure the Company, by mid-2019, will be at an annual development delivery run-rate of $250-million. Built to a 5.5-per-cent yield but valued at 5.0 per cent, this adds another $1/unit annually. With a $30 starting NAV given the cap rate readjustment, combined with $1 (SPNOI) and $1 (development) per year, we can see a fairly visible path to a $35 NAV by the end of 2020, or 10-per-cent CAGR [compound annual growth rate]. Based on the discount to NAV, strong operating metrics, improving portfolio, growing apartment/retail development pipeline and strong balance sheet, we are making RioCan our Analyst Current Favourite.”

Mr. Avalos has an “outperform” rating and $27 target for units of RioCan. The average target on the Street is $27.04, according to Bloomberg data.

The analyst currently has a “strong buy” rating and $13 target for Tricon shares, which is slightly lower than the $13.61 average.

“We are removing Tricon from our ACF list due to the outperformance it has enjoyed since we added it, doubling the TSX Index (up 6 per cent) with a 12-per-cent total return,” said Mr. Avalos. “While we still continue to hold a Strong Buy rating and are long-term believers in the name, we feel RioCan has better short-term potential at the moment.”

Meanwhile, colleague Johann Rodrigues added Minto Apartment REIT (MI-UN-T), replacing StorageVault Canada Inc. (SVI-X)

“In our opinion, Minto has the highest-quality portfolio (100-per-cent VECTOM markets) in the current hottest asset class in Canadian real estate,” he said. ”Management is highly aligned with investors (Minto Group owns 57 per cent of the REIT), prioritizing NAV growth over FFO [funds from operations] growth, pushing rents at the expense of vacancy in order to maximize NOI, using IRRs and not cap rates as the basis for evaluating potential acquisitions/development, and insisting that any assets with development potential get vended-in before development starts so unitholders may reap the economics. Furthermore, with 3-per-cent annual SPNOI growth adding $1/unit to NAV annually, another $2 coming from in-suite renovations on the remaining 2,000 suites and $4 coming from intensification, we see a quite an achievable path to growing NAV by $10 over the next five years (60-per-cent potential upside or 11-per-cent CAGR). It is also the only domestic apartment REIT that trades at a discount to NAV.”

Mr. Rodrigues has an “outperform” rating for Minto shares but has not specified a target price. The average target on the Street is $18.92.

He rates StorageVault a “strong buy” with a $3.25 target, which is 16 cents higher than the consensus.

“We are removing StorageVault from our ACF list after its outperformance (up 19 per cent) vs. the TSX Index (up 10 per cent) since we added it exactly a year ago,” the analyst said. “While we are still strong believers in the name (hence the retained Strong Buy rating), we felt that after a year, it was time to change our pick.”


A floor should soon be in place for shares Cenovus Energy Inc. (CVE-T, CVE-N) after inking a crude-by-rail deal with Canadian National Railway Co.. according to J.P. Morgan analyst Phil Gresh.

He raised his rating to overweight” from “neutral” and added to the bank's analyst focus list.

Mr. Gresh's target rose to $17 from $16, which is 20 cents more than the average.


Citing uncertainty surrounding the revenue potential stemming from its recent $5-billion investment in Canopy Growth Corp. (WEED-T) and concerns that the move "shifts investor focus away from [its] outperforming beer portfolio," SunTrust analyst William Chappell downgraded Constellation Brands Inc. (STZ-N) to “hold” from “buy.”

Believing the investment may “keep a cloud” over the stock and seeing “limited near term catalysts” for its cannabis business, Mr. Chappell’s target fell to US$220 from US$260, expecting it to remain range bound for an extended period.

The average target is currently US$245.32.


Despite the “drama” surrounding Tesla Inc. (TSLA-Q) and its chief executive Elon Musk, Baird analyst Ben Kallo named its stock a “fresh pick” and sees the potential for the electric carmaker to beat financial expectations for the second half of the year if it meets production targets.

"While negative headlines around management turnover and executive leadership could be an overhang, we are labeling TSLA a 'Fresh Pick' as we believe strong fundamentals should drive shares higher," said Mr. Kallo.

He maintained a “market perform” rating and US$325 target, which exceeds the average of US$319.49.

"We recently toured the Fremont factory and came away incrementally positive [about Tesla],” the analyst said. "Gigafactory 1 creates a significant barrier for competition and manufacturing capability should be a competitive advantage for TSLA over the long term. We believe TSLA's Gigafactory enables the company to drive down costs through an industrialization of battery pack assembly and economies of scale."


In other analyst actions:

RBC World Markets analyst Geoffrey Kwan upgraded Onex Corp. (ONEX-T) to “top pick” from “outperform” and raised his target by a loonie to $111. The average target on the Street is $105.58.

Scotia Capital analyst Robert Hope upgraded Hydro One Ltd. (H-T) to “sector outperform” from “sector perform” with a $23 target, rising from $21 and above the consensus of $21.58.

Scotia Capital analyst Paul Steep downgraded Enghouse Systems Ltd. (ENGH-T) to “sector underperform” from “sector perform” with a target of $80, up from $74. The average is $85.60.

Tudor Pickering & Co initiated coverage of Pembina Pipeline Corp. (PPL-T) with a “buy” rating and $53 target. The average is $52.16.

With a file from Bloomberg

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