Inside the Market’s roundup of some of today’s key analyst actions
“However you dice up the numbers, it was a good quarter across the board” for Canadian banks, said Desjardins Securities analyst Doug Young.
“Yes, cash EPS was boosted by unusually low provisions for credit losses (PCLs),” he added in a research report released Thursday. “However, on a pre-tax, pre-provision basis (PTPP), earnings still beat. Even excluding capital markets, PTPP earnings beat. The outlook continues to improve, and to reflect this we increased our target prices by 3 per cent on average.”
For the quarter, cash earnings per share rose 15 per cent year-over-year on average, while Mr. Young had expected a 12-per-cent decline.
“As we suspected might be the case, the main drivers of the beat were lower PCLs along with stronger wealth management and capital markets results,” he said. “However, once again pre-tax, pre-provision (PTPP) earnings for P&C banking operations also outperformed our expectations—a positive, in our view.
“More importantly, PTPP earnings increased 8 per cent year-over-year on average vs our estimate of a 3-per-cent year-over-year decline. On a consolidated basis, revenue was slightly above what we were looking for, mainly driven by non-interest income, but NIMs were also higher than our estimate. At the same time, adjusted NIX ratios were slightly below our forecast, meaning more of the revenue beat flowed through to pre-tax earnings. On a segmented basis, capital markets were a main contributor to the beat; however, so were Canadian P&C banking, US P&C banking and wealth management.”
With the results and improved outlook, Mr. Young raised his rating for National Bank of Canada (NA-T) to “buy” from “hold.”
“We are upgrading NA to Buy (from Hold) for five quantitative reasons: (1) outlook for PTPP earnings, (2) attractive ROE, (3) strong risk-adjusted NIMs, (4) highest ACL coverage ratio vs LTM [last 12-month] net write-offs, and (5) unlike peers, there’s no difference between reported and cash EPS, meaning there’s less noise. Yes, it has more exposure to capital markets vs peers, but the results from this division have been more stable over the past several years than we anticipated,” the analyst said.
He also made changes to his pecking order for the eight Canadian banks.
Toronto-Dominion Bank (TD-T) remains his top pick. He moved Bank of Nova Scotia (BNS-T) and Canadian Western Bank (CWB-T) up one spot each to No. 2 and No. 3, respectively, while moving Royal Bank of Canada (RY-T) to No.4 from No. 2.
“While RY tends to perform well in times of volatility, its stock could lag as we move into a risk-on environment,”
His pecking order with revised targets is now:
- Toronto-Dominion Bank (TD-T) with a “buy” rating and $84 target (from $83). The average on the Street is $80.95.
- Bank of Nova Scotia (BNS-T) with a “buy” rating and $82 target (from $79). Average: $78.67.
- Canadian Western Bank (CWB-T) with a “buy” rating and $39 target (unchanged). Average: $35.15.
- Royal Bank of Canada (RY-T) with a “buy” rating and $119 target (unchanged). Average: $120.43.
- National Bank of Canada (NA-T) with a “buy” rating and $87 target (from $83). Average: $85.91.
- Canadian Imperial Bank of Commerce (CM-T) with a “hold” rating and $125 target (from $122). Average: $129.99.
- Bank of Montreal (BMO-T) with a “hold” rating and $113 target (from $110). Average: $114.24.
- Laurentian Bank of Canada (LB-T) with a “hold” rating and $41 target. Average: $37.10.
Though he sees its better-than-anticipated first-quarter results as a “step up,” Credit Suisse analyst Mike Rizvanovic thinks the 9.9-per-cent jump in share price enjoyed by Laurentian Bank of Canada (LB-T) after the release on Wednesday “was a bit overdone.”
“Coming out of Q1 we have some concerns around LB’s underperformance in both mortgage lending and deposit growth relative to peers, while valuation looks stretched as the shares now trade at a modest premium to the Big Six Canadian banks on our F2022 EPS estimates,” the analyst said.
Laurentian reported earnings per share of $1.03 for the quarter, “comfortably” exceeding both Mr. Rizvanovic’s 72-cent forecast and the 74-cent consensus projection on the Street. However, he pointed to a trio of reasons for concern: weaker mortgage volumes “suggests client attrition”; expenses remain “noisy” and a deposit decline “has not abated.”
After raising his 2021 and 2022 earnings estimates, Mr. Rizvanovic increased his target for Laurentian shares to $36 from $30, however he maintained an “underperform” rating. The average on the Street is $37.10.
Other analysts adjusting their targets include:
* Scotia Capital’s Meny Grauman to $44 from $34 with a “sector perform” rating.
* CIBC World Markets’ Paul Holden to $37 from $32 with an “outperformer” rating.
* RBC Dominion Securities’ Darko Mihelic to $43 from $33 with a “sector perform” rating.
* National Bank Financial’s Gabriel Dechaine to $34 from $29 with an “underperform” rating.
* TD Securities’ Mario Mendonca to $40 from $34 with a “hold” rating.
* Desjardins Securities’ Doug Young to $41 from $33 with a “hold” rating.
Ahead of the release of its fourth-quarter financial results on March 11, iA Capital Markets’ Elias Foscolos is “moving to the sidelines” on Badger Daylighting Ltd. (BAD-T), seeing “perfection priced into the stock.”
The analyst is projecting revenue and EBITDA for the Calgary-based hydrovac services company of $141-million and $34-million, respectively, falling in line with the consensus estimates on the Street of $143-million and $36-million.
Citing tempered expectations for utilization and forex headwinds, he trimmed his 2021 estimates to $623-million and $155-million (versus $641-million and $164-million).
“We are assuming that in 2021, BAD will not add any net additions to its fleet,” said Mr. Foscolos. “While we do forecast improving utilization as the year progresses, we believe that the year will start off fairly slow in terms of economic recovery and with headwinds from a weaker U.S. dollar and cold weather in Texas.”
“We believe that in 2021 BAD will solely be relying on improved utilization to drive EBITDA growth. Beyond 2021, BAD will need to significantly ramp up its manufacturing to continue growing while replacing projected retirements. While BAD’s growth potential may be substantial, we believe there is a risk that high expectations will not be fully realized.”
Mr. Foscolos said it’s “difficult to see further upside on valuation” with the market pricing in “extremely robust industry growth potential, which runs a significant risk of not being realized.”
Moving the stock to “sell” from “hold,” he trimmed his target for Badger shares to $39 from $40. The average on the Street is $42.33.
RBC Dominion Securities analyst Maurice Choy sees TransAlta Corp.‘s (TA-T) share price weakness as an “attractive entry point” following “upbeat” 2021 guidance and given it’s “making good progress towards generating cleaner energy via coal-to-gas conversions as well as new renewables and onsite cogeneration assets.”
On Wednesday, the Calgary-based electricity provider released guidance that exceeded the expectations of both Mr. Choy and the Street, including comparable EBITDA of $960-million to $1.080-billion and free cash flow of $340-million to $440-million.
Coupled with in-line fourth-quarter results, Mr. Choy raised his 2021 and 2022 EBITDA and FCF expectations in response to both the outlook and “stronger Alberta Thermal EBITDA forecasts (reflecting higher power prices, partially offset by lower production levels).”
Keeping an “outperform” recommendation, Mr. Choy raised his target to $13 from $11. The average is $13.15.
“We remain positive on the stock, noting the strong Alberta power market fundamentals observed recently, which should benefit its thermal business and its hydro assets, TransAlta’s self-funded capex plan, and its ability (and willingness) to use its discretionary cash flow to buy back stock,” he said.
Elsewhere, TD Securities’ John Mould raised his target to $12.50 from $11 with a “buy” rating, while National Bank’s Patrick Kenny trimmed his target to $12 from $13 with a “sector perform” recommendation.
Meanwhile, CIBC World Markets analyst Mark Jarvi upgraded TransAlta Renewables Inc. (RNW-T) to “neutral” from “underperformer,” believing its 2021 guidance and growth update “points to a stable outlook with some upside.”
“After a substantial pullback in the shares (down 20 per cent) from the 52-week and all-time highs reached in early January, we no longer see the same downside risk. While investors should be mindful there’s still some risk around the ongoing rise in bond yields and reset in the valuations for the renewable-focused IPP stocks, we believe the upside/downside potential is now more balanced. As such, we upgrade the shares,” he said.
Mr. Jarvi trimmed his target to $19.50 from $20. The average is $20.65.
Elsewhere, Mr. Choy lowered his target to $22 from $25 with a “sector perform” rating and TD Securities’ John Mould reduced his target to $21 from $24 with a “hold” rating.
After its fourth-quarter 2020 results, released after the bell on Tuesday, exceeded expectations, a group of equity analysts raised their targets for Sleep Country Canada Holdings Inc. (ZZZ-T).
* BMO Nesbitt Burns’ Stephen MacLeod to $36 from $30 with an “outperform” rating. The average on the Street is $34.29.
“Notably, Sleep Country’s strong omnichannel positioning shone through again, with triple-digit e-commerce growth, as well as instore sales growth,” he said. “Q4 capped off a strong recovery from the depths of the pandemic, and momentum is strong heading into 2021E
“Sleep Country is still ‘early’ in its digital journey, with a multi-year opportunity for e-commerce growth and market share gains for everything “sleep”, including a renewed focus on health & wellbeing. We see attractive risk-reward.”
* CIBC World Markets’ Matt Bank to $32 from $27 with a “neutral” rating.
“A strong Q4, albeit in line with expectations, caps off a volatile but ultimately impressive year for AutoCanada,” said Mr. Bank. “While the industry tailwinds make it difficult to discern how much of the progress has come from operational improvements, the track record is clearly improving. The balance sheet is in substantially better shape, improving to 1.3 times net debt to EBITDA (ex. leases) vs. 3 timesat the end of last year, providing stability and enabling M&A to ramp up again.”
* RBC’s Sabahat Khan to $29 from $24 with a “sector perform” rating.
* Scotia Capital’s Patricia Baker to $38 from $32.50 with a “sector outperform” rating.
* TD Securities’ Meaghen Annett to $37 from $31 with a “buy” rating.
* National Bank Financial’s Vishal Shreedhar to $33 from $30 with a “sector perform” rating.
In the wake of fourth-quarter 2020 financial results that exhibited “records across the board,” Laurentian Bank Securities analyst Nick Agostino upgraded Descartes Systems Group Inc. (DSGX-Q, DSGX-T) to “buy” from a “hold” recommendation, seeing it poised to rebound from the pandemic-related economic slowdowns quicker than previously anticipated.
The Waterloo, Ont.-based tech firm reported revenue rose 11 per cent year-over-year to US$93.4-million, exceeding both Mr. Agostino’s US$89.3-million estimate and the consensus forecast of US$89.5-million due largely to a strong service performance. Adjusted EBITDA rose 20 per cent to US$38.6-million, also exceeding projections (US$37.6-million and US$36.9-million).
“We had modelled accelerated organic growth in-line with the expected re-opening of economies, however that acceleration has happened one quarter earlier than expected,” he said. “The short-term elevated organic growth rate, however, is still in-line with our one-year outlook. We believe the delivery of EBITDA margin at the 40-per-cent mark is proving to be increasingly sustainable, despite DSG’s conservative approach. We welcome the increasing openness for the company to be more active on the M&A front, as it remains a key component of the company’s strategy. Improving macro-environment data points are also encouraging.”
Mr. Agostino increased his target for Descartes shares to US$67 from US$61. The average on the Street is US$62.79.
Elsewhere, RBC Dominion Securities Paul Treiber thinks Descartes is “well positioned” to benefit from re-opening of the economy and continuing to allocate capital on accretive acquisitions.
Seeing “solid” first-quarter 2021 baselines pointing to “strong” organic growth, Mr. Treiber said: “We see Descartes as one of the better positioned companies in our coverage universe to benefit from the re-opening of the economy. Our revised outlook calls for organic growth to strengthen to company-record levels (8-9 per cent) in the next 2-3 quarters. We anticipate sustained healthy margins (likely above Descartes’ conservatively unchanged 35-40-per-cent target), along with potential upside from acquisitions.”
Keeping an “outperform” recommendation for Descartes shares, Mr. Treiber raised his target to US$70 from US$68.
Other analysts raising their targets included:
* BMO Nesbitt Burns’ Thanos Moschopoulos to US$65 from US$63 with a “market perform” rating.
“We think Descartes can continue to execute successfully against its strategy of delivering consistent EBITDA growth,” said Mr. Moschopoulos. “However, on a relative basis (and due to valuation), we prefer other consolidators in our coverage universe.”
* Raymond James’ Steven Li to US$64 from US$58 with a “market perform” rating.
“DSG remains well positioned to benefit from the dynamic global environment (Brexit)and growing importance of supply chains coming out of this pandemic (e.g. vaccine distribution,” he said.
* TD Securities’ Daniel Chan to US$70 from US$68 with a “buy” rating.
* Scotia Capital’s Paul Steep to US$64 from US$61 with a “sector outperform” rating
* Barclays’ Raimo Lenschow to US$63 from US$59 with an “equalweight” rating
* Stephens’ Justin Long to US$72 from US$70 with an “overweight” rating. The average is US$62.79.
Several analyst raised their targets for shares of AutoCanada Inc. (ACQ-T) in response to its quarterly results, including:
* ATB Capital Markets’ Chris Murray to $40 from $32 with an “outperform” rating. The average is $36.34.
“We view the quarter as generally in-line with expectations, with management continuing to be very positive around the Company’s outlook. We believe a solid core in all facets of auto retailing should continue to show good growth while the Company’s digital and acquisition strategy creates two additional avenues to grow,” said Mr. Murray.
* Acumen Capital’s Trevor Reynolds to $37.50 from $35 with a “buy” rating.
“Q4/20 results up year-over-year with continued outperformance of the Canadian market on a same store basis,” he said. “ACQ well positioned for growth moving forward with the launch of their digital used strategy and $250-million of capital available for M&A.”
* Canaccord Genuity’s Luke Hannan to $36 from $32 with a “buy” rating.
“We believe the realignment of AutoCanada’s business following the implementation of the Go Forward Plan to focus on developing the higher-margin and economically resilient operating segments will reward investors with stable earnings growth. Further, we believe AutoCanada’s introduction of a digital used car retailing strategy in Canada offers investors potential trading multiple upside,” said Mr. Hannan.
* CIBC’s Matt Bank to $34 from $27 with a “neutral” rating.
* Scotia Capital’s Michael Doumet to $40 from $35 with a “sector outperform” rating.
* National Bank Financial’s Maxim Sytchev to $29 from $27 with a “sector perform” rating.
Pointing to its “dominant” market position and “solid” performance, iA Capital Markets analyst Neil Linsdell said he continues to like GDI Integrated Facility Services Inc.’s (GDI-T) “story,” expecting increased demand for cleaning services and enhanced air quality systems “for the foreseeable future.”
On Tuesday after the bell, the Montreal-based company reported revenue of $365-million for the fourth quarter, up 5.9 per cent year-over-year but below the the expectations of both Mr. Linsdell ($390-million) and the Street ($364-million). However, EBITDA rose 54.7 per cent to $32.2-million, exceeding projections ($28.9-million and $29.4-million, respectively).
“The organic decline [in revenue] was primarily related to the 17.8-per-cent drop in Technical Services, as projects were delayed and on-call services reduced as buildings operated with limited services or low occupancies,” he said. “This business was recovering through the latter half of 2020 and is now approaching normalized levels, with good backlog and new projects, including opportunities for air quality equipment and customizable control systems. Janitorial USA showed a modest revenue increase as those markets have reopened more quickly than customers in Canada, where more buildings and offices remained closed or at reduced capacity. Profitability in both janitorial segments showed significant improvements in margins due to higher proportions of more specialized cleaning services, most notably in Canada, as the U.S. client base has fewer office building clients but more education-related clients. We do expect the surge in specialized services to eventually subside, but potentially not until 2022, and that when we do return to a more normalized environment, cleaning requirements will remain more stringent than before COVID. The Complementary Services business continues to work at full capacity as it manufactures and distributes cleaning supplies and is prudently adding capacity to deal with still high demand.”
Citing its performance and “growing” opportunities as “the company continues to deliver on profitability and diversifying its business and integrating acquisitions,” Mr. Linsdell increased his target for GDI shares to $58 from $50 with a “buy” rating (unchanged). The average is $55.93.
“We believe that the COVID-19 situation will continue to drive increased demand for janitorial services in both Canada and the U.S., which combined represent approximately 60 per cent of GDI’s revenue and 80 per cent of EBITDA,” the analyst said. “As both Canada and the U.S. ease restrictions, and allow for more normal routines but with enhanced precautions, we expect mostly normalized business levels, but with extra cleaning services layered on top. We see the current spike in specialized services eventually ceding to a steadier, but still more thorough, cleaning regiment. We also expect a significant lift in Technical Services as many buildings focus on air quality and better and more customizable control systems, and still require maintenance regardless of the number of tenants.”
Others raising their targets include:
* Desjardins Securities’ Frederic Tremblay to $55 from $49.50 with a “buy” rating.
“GDI remained on the front lines of the COVID-19 crisis and continued to shine with solid execution, another adjusted EBITDA beat, a stronger financial position and a promising acquisition. Looking ahead, we expect GDI to remain an essential partner for customers in both janitorial (enhanced service levels) and technical services (record project backlog),” said Mr. Tremblay.
* National Bank Financial analyst Zachary Evershed to $59 from $52 with an “outperform” rating
* Scotia Capital’s Michael Doumet to $55 from $54 with a “sector outperform” recommendation
Raymond James analyst Rahul Sarugaser initiated coverage of Rubicon Organics Inc. (ROMJ-X) with a “strong buy” recommendation on Wednesday, calling it his “very best micro-cap cannabis idea.”
“ROMJ focuses exclusively on the production of super-premium cannabis, and is one of only 6 LPs that offer certified organic cannabis products in Canada: a key niche that is seeing significant consumer-driven growth,” he said.
“Similar to premium liquor brands affiliated with rarity and prestige — Johnny Walker Blue Label is a favourite example — ROMJ is building distinguished premium brands built on a portfolio of intensely high-quality, innovative cannabis products designed to generate the sector’s highest gross margins: greater than 50 per cent. Our channel checks indicate that premium cannabis (more than $10 per gram) presently makes up 15 per cent of the Canadian marketplace by revenue, and—leveraging data from mature U.S. cannabis states —we see premium and super-premium cannabis offerings comprising 20-per-cent market share of 2025′s $10-billion market. We believe ROMJ has masterfully set the stage to own a meaningful portion of this growing market segment, both in Canada and internationally.”
Mr. Sarugaser expects Rubicon to capture 25 per cent of the premium/craft cannabis market, which he estimates will represent approximately 20 per cent of the total market. With that view, he projects revenue to double for his 2021 estimate of $26.5-million to $52.2-million in 2022.
Citing “confidence in management’s heritage, combined with their selection of—and execution in — the highest margin segment of the market,” Mr. Sarugaser set a target of $6 per share. The current average is $4.50.
In other analyst actions:
* Scotia’s Cameron Bean raised his target for Peyto Exploration & Development Corp. (PEY-T) by a loonie to $6.50 with a “sector perform” rating, while BMO Nesbitt Burns’ Randy Ollenberger increased his target to $6 from $5.75 with a “market perform” rating. The average is $5.84.
“We believe that Peyto shares offer potential longer-term value as the company benefits from higher natural gas prices in 2021,” said Mr. Ollenberger.
* RBC’s Geoffrey Kwan increased his Element Fleet Management Corp. (EFN-T) target to $18 from $17 with an “outperform” rating, while National Bank Financial’s Jaeme Gloyn raised his target to $19 from $18 with an “outperform” recommendation. The average is $15.88.
* CIBC’s Jamie Kubik hiked his target for Paramount Resources Ltd. (POU-T) to $11.50 from $9, maintaining an “outperformer” rating. The average is $10.64.
“After a deeper look at Paramount’s disclosures, we are fine-tuning our expectations for 2021 and 2022. The company’s new hedge disclosure reduces our 2021 cash flow expectations versus our prior estimates, however, our 2022 estimates drift higher in step. Following the Apache Canada and Trilogy acquisitions in 2017, POU has carried more debt than many of its peers, and we therefore do not mind the added downside protection for 2021. That said, it could also be a weight on the stock if commodity pricing continues its ascent,” said Mr. Kubik.
* Mr. Kubik also raised his Nuvista Energy Ltd. (NVA-T) target to $2.50 from $2.25 with an “outperformer” rating, while Canaccord Genuity’s Anthony Petrucci increased his target to $2.25 from $2, keeping a “hold” recommendation. The average is $2.46.
* Canaccord Genuity analyst Mark Rothschild raised his Artis REIT (AX.UN-T) target to $11.85 from $11.25 with a “hold” rating. The average is $11.87.
“Artis REIT (Artis) continues to execute on the strategy of divesting non-core assets while investing in new development projects, primarily industrial, and maintaining a stable balance sheet,” he said. “With the units trading well below IFRS NAV, we believe that buying back units will likely be a key part of the future strategy. On today’s earnings call, it was disclosed that the new strategy will be released in the near term. While it is not clear what new goals will be presented, we expect continued focus on divesting weaker assets, with greater focus on the unit price, potentially a larger buyback. In the near term, some of the office and retail assets (combined 63 per cent of NOI) present challenges, although rent collections have largely recovered.”
* Scotia Capital’s Phil Hardie increased his Guardian Capital Group Ltd. (GCG.A-T) target to $39 from $35 with a “sector outperform” rating. The average is $37.
* Scotia’s Justin Strong cut his Innergex Renewable Energy Inc. (INE-T) target to $26 from $32 with a “sector perform” rating. The average is $28.30.
* Desjardins Securities analyst David Newman raised his target for Boyd Group Services Inc. (BYD-T) to $250 from $236 with a “buy” rating. The average is $249.25.
* TD Securities analyst Jonathan Kelcher raised his Cominar REIT (CUF.UN-T) target to $9.50 from $9 with a “hold” rating, while Scotia Capital’s Mario Sarci increased his target to $10.50 from $9.75 with a “sector perform” rating. The average is $9.65.
* TD Securities’ Kasia Trzaski lowered Pinnacle Renewable Energy Inc. (PL-T) to “tender” from “hold” with an $11.30 target, down from $12.50. The average is $11.61.
* Ahead of earnings season for U.S. multi-state cannabis operators, Canaccord Genuity analyst Matt Bottomley raised his target for Green Thumb Industries Inc. (GTII-CN) to $47 from $34 with a “speculative buy” rating and Vireo Health International Inc. (VREO-CN) to $4 from $2 with a “speculative buy” recommendation. The average targets on the Street are $46.90 and $2.63, respectively.