Inside the Market’s roundup of some of today’s key analyst actions
Several analysts raised their price targets on shares of Royal Bank of Canada (RY-T) following the company’s second quarter results Wednesday. Desjardins Securities analyst Doug Young raised his price target to C$96 from $94 while Credit Suisse increased its target to $101 from $100. Scotiabank raised its target to $105 from $97.
Mr. Young summed up the earnings report, which contained a sharp rise in provisions for loan losses, as a positive development for the bank, but maintained a “hold” rating. “The bank recorded: a material build in performing loan PCLs as it factors in economic uncertainties and potentially elevated credit losses in coming periods; an all-in CET1 ratio of 11.5% (above our forecast); and pre-tax, pre-provision (PTPP) earnings above our estimate (and +3% yoy)," Mr. Young said in a note.
Scotiabank analyst Sumit Malhotra also termed the results as a positive. “RY posted operating EPS of $1.03 in Q2/20, down 54% YoY and below both our forecast ($1.69) & consensus ($1.54). Similar to NA, the bulk of the delta in the numbers related to RY employing the ‘big bang’ approach to provisioning, as the $2.83bn PCL print represented a ~7x sequential increase and underpinned a hefty $2.5bn in reserve build. Despite the surge in credit costs the impact on capital was manageable, as RY ended April with the CET1 ratio at a solid 11.68% (down 36bp, aided by a 23bp benefit from the ECL transition) and BVPS up 5% YoY. Following the 3% lift in our numbers (which largely reflects the ‘front loading’ of provisions the bank enacted in Q2) RY shares now trade at 10.6x our 2021E, 6% above the market-cap weighted sector avg. of 10.0x. While we expect that the PCL ratio will remain at higher-than-normal levels in the interim (~60bp in 2H/20E and 42bp in 2021E), the ability of RY to use its sector-best capital position to get ahead of meaningful underlying deterioration in the loan book should benefit the trend-line in run-rate earnings power going forward. When considered alongside the lower revenue exposure of the bank to net interest income and its proven ability to manage the cost base within Canadian P&C, we expect the valuation premium accorded to the stock will soon migrate back to the double-digit range, and as such we remain sector outperform-rated on RY."
Analysts gave lukewarm reviews of Bank of Montreal’s second quarter earnings report.
RBC Capital Markets cut its price target to C$75 from $76. Analyst Darko Mihelic commented: “Valuations may seem compelling but we think this mostly reflects the bank’s relatively larger exposure to COVID-19-vulnerable loans, lower pre-tax pre-provision earnings, lower CET 1 ratio and lower reserves vs. peers (under a number of different measures). BMO is currently trading at a P/B multiple of 0.91x vs. 1.36x on average for the other large Canadian banks.”
Scotiabank’s Sumit Malhotra raised his price target to $75 from $73. Mr. Malhotra commented: “Operating EPS at BMO came in at $1.04 in Q2/20, down 56% YoY and below both our forecast ($1.46) & consensus ($1.14). While the increase in credit costs has been seen across the group (total PCL at BMO jumped to $1.12bn, up 3.2x from the Q1 level but not that far above our $1.05bn), counter to the solid growth in PTPP earnings delivered by its peers the key metric declined 7% YoY for BMO, negatively impacted by a few differing factors (capital markets hits, legal provision in Wealth, plunge in Insurance revenue). BMO ended April with the CET1 ratio at a stronger-than-expected 11.04% (down 37bp QoQ, with an 11bp benefit from the ECL transition), and BVPS up 11% YoY (aided in Q2 by large OCI gains on FX and hedges). After the 2% reduction in our number (largely revenue related) BMO shares now trade at 8.7x our 2021E, 13% below the market-cap weighted sector avg. of 10.0x and at just 0.91x BVPS. While the dichotomy between outsized loan growth and lower reserve levels has steadily eroded the relative valuation accorded to the stock over the past year, we think the growth outlook for the bank in a period of constrained commercial lending activity and crisis-level interest rates is also an open question. As such, when considered alongside the faster migration seen in gross impaired loans since the start of 2019, we expect BMO shares to continue to trade at reduced valuations in the interim.”
Canaccord Genuity reduced its price target on Aecon Group Inc. (ARE-T) to $19 from $22, but reiterated a “buy” rating.
“Previously, we gave Aecon some credit for its $490 million of JV cash but now believe the more appropriate (and conservative) approach is to exclude it. This cash is not readily available to shareholders and largely represents pre-payment on fixed-price work. We are increasing our target multiple to 8x (from 7x Construction 2021E EBITDA) to better reflect where we believe Aecon should trade relative to peers, which largely trade between 6x-6.5x EV/EBITDA. To this we add $1.60 for Skyport, representing book value and $0.75 for JVs. Excl. Concessions, Aecon trades at 7.0x. EV/EBITDA,” said analyst Yuri Lynk.
Desjardins Secutities analyst David Stewart initiated coverage on three junior precious metals producers that he believes have attractive growth profiles.
“Both gold prices and gold mining equities have seen checkmark-shaped recoveries following the broader market sell-off in March. In general, the large caps have led the rally and as money continues to flow down-cap, we believe those companies with robust growth profiles will attract more investors, including the three juniors on which we are initiating coverage today,” Mr. Stewart said in a note.
He started coverage on K92 Mining Inc. (KNT-X) with a “buy-above average risk” rating and C$6.50 price target; Americas Gold and Silver Corp. (USA-T) got a “buy-above-average risk” rating and C$5.65 price target; and Fiore Gold Ltd. (F-X) got a “buy-above-average risk” rating and C$1.50 price target.
Imperial Capital downgraded Walt Disney Co. to “underperform” from “in-line," citing too much excitement over the planned reopening of its U.S. theme parks. Analyst David Miller cut his price target to US$105 from $107.
Disney shares have risen more than 20 per cent over the past month. "Based on our experience, the stock has risen too far too fast and the performance is simply due to excitement around the prospects of the domestic theme parks re-opening, for which Disney submitted a plan to Orange County, Florida government officials just yesterday,” Miller said in a note.
He suggests investors take profits in the stock.
Canaccord Genuity analyst Matt Bottomley downgraded cannabis operator Medmen Enterprises Inc. (MMEN-CN) to “sell” from “hold." He cited “near-term growth headwinds on the back of COVID-19 on top of a balance sheet that will very likely need another true-up sooner rather than later.”
His price target was dropped to 25 cents from 30 cents.
“Although FQ3/20 saw relatively small top-line growth, it was generally in line with our expectations. However, looking forward, we believe FQ4/20 could see increased headwinds given the company’s store closures in Nevada and lower foot traffic in California. We typically do not consider short-term bumps in the road to impact longer-term value; however, with an extremely thin balance sheet, we believe it could become increasingly difficult for the company to navigate within what are clearly uncertain times,” the analyst said in a note.
In other analyst actions:
Enbridge Inc: Jefferies raises target price to C$49 from C$47
More to come
With files from Reuters