Inside the Market’s roundup of some of today’s key analyst actions
Credit Suisse analyst Joo Ho Kim says the second-quarter earnings report from Canadian Western Bank (CWB-T) highlighted “many persistent challenges that have pressured the bank’s results for some time.”
“These include another quarter with disappointing margin performance (despite some one-time items), and while funding pressure seems to be easing, we maintain our caution on this metric,” he said. “Expenses also missed our estimate, though the bank remains focused on driving this down in the near term. CWB also saw new formations from CRE (some from the office segment), which will remain a key area of focus particularly given its relative exposure.”
Shares of the the Edmonton-based bank dropped 5.9 per cent on Friday after it reported core cash earnings per share of 74 cents, which fell short of the 77-cent estimate from both Mr. Kim and the Street. He attributed the miss to lower net interest income and higher expenses. Pre-tax pre-provision earnings fell 1 per cent year-over-year (a 7-per-cent miss versus the analyst’s forecast), while core return on equity of 8.9 per cent was down 3.1 per cent quarter-over-quarter.
“We take down our estimates for core cash EPS in fiscal 2023 by 2 per cent to $3.50 (was $3.57) as we reflect the miss on our numbers, lower NIM, loan growth, and higher taxes, offset by removal of ATM issuance,” said Mr. Kim. “Meanwhile, our F2024 goes down by a more meaningful 5 per cent to $3.63 (was $3.82) due to the same reasons.”
“In terms of our outlook, we do layer in some conservatism in our numbers (namely on expenses), with our core EPS forecast for F2023 positioned at the low end of the guidance range, while our F2024 also implies a modest growth in what could be another tough year for the sector.”
Maintaining a “neutral” rating for CWB shares, he trimmed his target by $1 to $25. The average target on the Street is $29.93, according to Refinitiv data.
Other analysts making target adjustments include National Bank’s Gabriel Dechaine, who said net interest margin concerns overshadowed “a pretty good quarter.”
“Excluding a one-time NIM benefit during Q1/23, CWB’s margins declined by 3 basis points quarter-over-quarter (and fell 4 bps shy of our forecast),” he said. “This quarter marked the third time over the past four quarters that CWB’s NIM fell short of expectations. The culprit once again was funding costs as higher loan yields were more than offset by higher funding costs. CWB expects NIM expansion during H2/23, albeit at a lower level than previously anticipated. Unfortunately, NIM/NII shortfall pushed CWB’s NIX ratio to 55 per cent, masking what happened to be a period of strong expense control. NIX rose 5 per cent, or less than half the growth rate over the prior four quarters.”
Mr. Dechaine cut his target to $28 from $31 with an “outperform” recommendation.
* Scotia’s Meny Grauman to $27 from $28 with a “sector perform” rating.
“After a challenging period that has seen CWB’s earnings power get weighed down by significant margin pressure and elevated expenses, the second half of F2023 should begin to see those pressures reverse,” said Mr. Grauman. “Those improvements should be driven by a stable overnight rate and an increased focus on cost control, but will also be accompanied by a guided-to slowdown in loan growth which is now expected to be in the mid single-digits versus the high single-digits previously. That projected slowdown in the bank’s loan growth has helped on the capital front, as Q2 marks the first quarter that the bank has not issued shares under its existing ATM. Nevertheless, we view this slowdown as largely negative given our belief that for this stock to really work, it needs to deliver growth above the large bank peer average – something which we don’t expect to see over the coming quarters.”
* Desjardins Securities’ Doug Young to $30 from $32 with a “buy” rating.
“Adjusted pre-tax, pre-provision (PTPP) earnings were 5 per cent below our estimate (down 1 per cent year-over-year),” said Mr. Young. “Net interest margin (NIM) was lower than expected; however, the bank did not tap the ATM program, loan growth was in line, and while guidance was reduced, our FY23 cash EPS estimate was already below the low end of its guidance range. We reduced our target to $30 (from $32) and maintained our Buy. But we acknowledge the stock is likely to remain range-bound near-term.”
* Raymond James’ Stephen Boland to $30 from $34 with an “outperform” rating.
“While the guidance cut was disappointing, there were some positives from the release,” he said. “Most notably, there was no use of the ATM facility — a welcome departure having been active for several quarters. In addition, credit remains stable with impaired loans still below pre-pandemic levels. Positives aside, execution continues to be the issue for CWB. We are lowering our estimates and target for 2023 but maintain our Outperform rating on account of the stock’s depressed valuation.”
* CIBC’s Paul Holden lowered his target to $27 from $28 with a “neutral” rating.
“We continue to think liquidity cost pressures and competition for commercial loans could put further pressure on earnings. Our revised EPS estimate is below guidance,” Mr. Holden said.
* Cormark Securities’ Lemar Persaud to $28 from $30 with a “buy” rating.
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While Suncor Energy Inc. (SU-T) appears to have failed in its attempt to buy TotalEnergies SE’s 50-per-cent stake in the Surmont oilsands project, National Bank Financial analyst Travis Wood is maintaining his “positive bias” on the Calgary-based company.
On Friday, ConocoPhillips (COP-N) announced it was exercising its right of first refusal to purchase the stake in the site for $4-billion. Suncor had announced in April its intention to acquire Total’s share as part of a larger $6.1-billion deal that would also see it also gained its portion of the Fort Hills oil sands project..
“We recently upgraded Suncor to Outperform as a reflection of the TotalEnergies acquisition and a compelling valuation, compounded by our view that the relative operational downside is becoming limited as the company appears to be establishing a more conservative approach to operational milestones,” said Mr. Wood. “Our thesis is unchanged as we view Fort Hills as the more important piece of the acquisition given the higher potential operational impact compared to what would be a non-op position at Surmont.
“Based on the revised transaction price of $1.5-billion (was $5.5-billion) and a contingent payment of $160-million (was $600-million), the implied price per flowing barrel for the remaining Fort Hills stake is $24,000/bbl/d (nameplate), in line with the prior consolidation from Teck last year. Furthermore, the $4.5-billion in savings should accelerate the time horizon for the company to meet its net debt targets of $12-billion and $9-billion, triggering an increase of FCF allocation to share buybacks to 75 per cent and 100 per cent, respectively (from 50 per cent currently). We now see the $12-billion target being reached in late 2024, and the $9 billion target in mid-2025 (based on the company’s net debt definition).
Updating his projections based on the revised acquisition price and the removal of Surmont-related assumptions from his outlook, Mr. Wood cut his target for Suncor shares to $60 from $61, maintaining an “outperform” recommendation. The average is $51.12.
Elsewhere, RBC’s Greg Pardy lowered his target to $51 from $52 with an “outperform” rating.
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ATB Capital Markets analyst Frederic Gomes thinks it’s increasingly unlikely Alimentation Couche-Tard Inc. (ATD-T) will exercise its warrants on almost 18 million Series C shares of Fire & Flower Holdings Corp. (FAF-T), which would have provided much-needed funding for the Toronto-based cannabis retailer.
On Friday, Fire & Flower announced it has “engaged a financial advisor to assist the Company with reviewing strategic options including financing options.”
“We believe the announcement is negative and a signal indicating a higher probability that Alimentation Couche-Tard Inc.’s Series C warrants may not be exercised,” said Mr. Gomes in a note released Monday.
That led him to lower his recommendation for its shares to “sector perform” from “outperform” on Monday.
“FAF’s balance sheet was a near-term overhang, but we had previously assumed that it was more likely than not that the Company would obtain capital via the exercise of the warrants before their expiration in June,” he said. “We are reversing course; we now view a lower likelihood of the warrants being exercised (at least with their current terms) due to challenging market conditions and the engagement of a financial advisor. As such, we view higher dilution and liquidity risks impacting the stock, and we have updated our model to reflect FAF potentially obtaining financing at more challenging terms and with a higher cost of capital.”
Pointing to both its operations and balance sheet, Mr. Gomes thinks Fire & Flower will “inevitably require additional financing over the near term to execute its strategy.” He thinks that could occur via debt, equity or even asset sales.
Previously, he projected the company would gain almost $41-million from the Couche-Tard warrants. He’s now modelling raises of $20-million in both 2023 and 2024 at an average price of 68 cents per share, or a 20-per-cent discount to its closing price on Friday.
“Late last year, a proposal for a $5.0-million private placement and amendments to the warrants was not approved by FAF’s shareholders,” said Mr. Gomes. “The amendments would have divided the warrants into two tranches and effectively decreased their exercise price to a 15-per-cent discount to the 20-day VWAP at the time of exercise of the first tranche ... We viewed the event as negative for FAF, as it would have increased the probability that it might have to pursue other financing options (equity or debt) at more punitive terms or find an alternative solution. With the engagement of a financial advisor, we believe this is a scenario that has become more likely.”
The analyst cut his target for Fire & Flower shares to $1.50 from $2.50. The average is currently $3.63.
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While its first-quarter results came in “largely as expected,” Desjardins Securities analyst Kyle Stanley said he has a “tempered view” on Canadian Net Real Estate Investment Trust (NET.UN-X), citing its “limited organic growth profile and elevated leverage.”
“Broader market volatility and interest rate uncertainty continue to depress transaction volumes,” he added.
On May 24, the Montreal-based REIT, which focuses on triple net and management-free retail properties, reported funds from operations per unit of 15.7 cents, up 3.8 per cent year-over-year and above Mr. Stanley’s 14.2-cent estimate.
“A fractional negative variance within NOI was more than offset by positive variances within G&A and unit-based compensation,” the analyst said. “Total portfolio occupancy was unchanged sequentially at 100 per cent, while one remaining lease maturity in 2023 has not yet been renewed. Moreover, almost 40 per cent of the 2024 lease maturities (12 leases totalling $1.7-million of annual NOI) have already been addressed.”
Despite narrow, “immaterial” increases to his outlook for 2023 and 2024, Mr. Stanley trimmed his target for Canadian Net units by $1 to $6 with a “buy” rating. The average is $6.59.
Meanwhile, Laurentian Bank Securities’ Munish Garg sees the REIT’s valuation levels remaining “attractive,” but warned liquidity is “becoming a concern.” He maintained a “buy” rating and $7 target.
“When looking at NET holistically, on the positive side, the portfolio remains conservatively positioned, and we continue to expect NET to outperform operationally in a context of macroeconomic uncertainty,” he said. “Moreover, the unit trades at a 31-per-cent discount to FTM [forward 12-month] NAV/unit estimate, translating into exceptionally compelling valuation levels in our opinion, especially given the quality of NET’s portfolio. When looking at liquidities, we believe 2023 could become critical for the REIT, notably when considering the REIT’s current cash position. At Q1, the REIT had $15.4-million on the credit facilities (with a maximum available of $20-million), the $1.4-million convertible debenture coming to maturity in August, and $14.1-million remaining in mortgages coming to maturity in 2023. We believe risks relating to mortgage debt maturities post-2023 are relatively limited, especially with $9-million of mortgage balances due in each of 2024 and 2025, and $6-million due in 2026. All aspects being considered, we maintain our favorable views on NET.”
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Eight Capital analyst Anoop Prihar thinks new drilling results from Patriot Battery Metals Inc.’s (PMET-X) Corvette Property within the La Grande Greenstone Belt of Northern Quebec “continue to demonstrate resource potential.”
“We believe the Corvette property is evolving into a world-class spodumene resource,” he said. “Based on the drill results released to-date, we estimate the CV5 zone contains approximately 130mm tons of 1.16-per-cent Li2O mineralization. This, in turn, is likely sufficient to allow for 800,000 tons of spodumene production for 20 years. ... PMET compares favorably to the highest-quality spodumene resources globally. This is especially the case given that drilling remains ongoing and that Canada, as an operating jurisdiction, is as attractive as any other location globally, particularly when the financial incentives associated with the Inflation Reduction Act (IRA) are factored into the equation.”
After raising his net asset value assumptions for the Vancouver-based company, Mr. Prihar hiked his target for its shares to a Street-high of $20 from $14, reiterating a “buy” recommendation. The average is currently $16.71.
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In other analyst actions:
* RBC’s Michael Carroll lowered his target for Vancouver-based City Office REIT Inc. (CIO-N) to US$7 from US$10 with a “sector perform” recommendation. The average is $7.30.
* CIBC’s Bryce Adams raised his target for Ero Copper Corp. (ERO-T, “neutral”) to $26 from $27, First Quantum Minerals Ltd. (FM-T, “neutral”) to $29 from $28 and Lundin Mining Corp. (LUN-T, “neutral”) to $10.50 from $10. The averages on the Street are $28.27, $35.01 and $11.06, respectively.
“We have revised our commodity price assumptions and expect copper prices to bottom in H2/23 from near-term headwinds of weaker economic data from China and the U.S.,” said Mr. Adams. “In the medium and longer-term, we remain constructive on the red metal. Given this view, we expect to see buying opportunities in copper equities later this year. On average, our H2/23 copper forecast is $3.55/lb, and prices at or below this level can provide investors with attractive entry points ahead of strong supply and demand fundamentals into 2024.
“We fine-tune our FY2023 and FY2024 estimates to $3.72/lb and $3.90/lb from $3.69/lb and $3.75/lb, respectively, and note that this includes prices weakening in H2/23 to Q1/24, and price strengthening for the remainder of 2024. We expect the copper market to be in a slight deficit position from 2023 to 2026. We have taken a copper cautious tone for the last 12 months and make no rating changes at this time. We reiterate our Outperformer ratings on Teck, Capstone and Filo. We remain Neutral on Ero, First Quantum, Lundin and Largo (while tweaking our price targets on ERO, FM and LUN), and are research Restricted on Copper Mountain, Hudbay, Sierra, and Cameco.”
* Stifel’s Ian Gillies trimmed his Legend Power Systems Inc. (LPS-X) target by 5 cents to 25 cents, maintaining a “hold” rating. He’s currently the lone analyst covering the Vancouver-based company.
“Legend’s quarterly results came in lower-than-expected as revenue of $0.1-million came in significantly lower than our expectation of $1.3-million,” he said. “The company’s cash position remains very low with $1.5-million of cash exiting the quarter. There has been no material update to the progress of the company’s financing alternatives, and we believe the company could run out of cash by calendar 2023 if no financing is obtained. With that said, Legend has several options for financing including government loans and loans secured with inventory/large orders. Being able to secure financing is critical, but we believe the cost is likely going to be high given current financing market conditions with elevated interest rates, tightening credit cycle and share dilution if an equity raise is used.
* Following its Investor Day event, Scotia’s Benoit Laprade raised his Stella-Jones Inc. (SJ-T) target to $70 from $64 with a “sector outperform” rating. The average is $70.71.
“After achieving its 2022-2024 objective of $3.0-billion in sales early (TTM [trailing 12-month] sales of $3.1-billion in Q1/23), management now expects revenues to exceed $3.6-billion by 2025, solely on the back of organic growth (5.5-per-cent CAGR from 2022), and an EBITDA margin of 16 per cent (compared to previous 2022-2024 guidance of 15-per-cent-plus and 14.6 per cent in 2022),” he said. “This implies 2025 EBITDA of $576-million-plus (8.7-per-cent CAGR from 2022). The company expects to return $500-million-plus to shareholders over the period, while maintaining a net-debt to EBITDA ratio of between 2.0 times and 2.5 times (in the absence of acquisitions). We believe the company’s target are achievable.”
David Leeder