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

Credit Suisse analyst Joo Ho Kim thinks the commentary on the macro conditions facing Canadian banks thus far in second-quarter earnings season “has been encouraging, and partly supported by the rather solid near-term credit conditions.”

“Further signs of confidence from the banks should be positive for the sector, in our view,” he added.

Mr. Kim was one of several equity analysts on the Street to raise their target prices for shares of Bank of Nova Scotia (BNS-T) following Wednesday’s better-than-anticipated quarterly release.

It reported core cash earnings per share of $2.18, topping both the analyst’s $1.99 forecast and the consensus estimate of $1.96. The beat was driven largely by lower-than-expected provisions for credit losses, while pre-tax pre-provision earnings growth was down 1 per cent quarter-over-quarter.

Bankers buck gloomy trend by forecasting growth amid concerns about economic slowdown

“While Scotiabank’s Q2 results largely beat [Credit Suisse’s estimate] via lower-than-expected total PCLs, we are impressed that its International Banking put up better than-expected-results, and its Canadian Banking segment also put up another quarter of strong performance,” said Mr. Kim. “We believe continued solid performance from International Banking in particular is important for the bank’s outlook, and look for further signs of gains ahead.”

Mr. Kim increased his full-year 2022 EPS estimate to $8.41 from $8.28 to reflect the beat. His 2023 forecast remains “largely unchanged” at $8.61, down from $8.63 previously.

Keeping a “neutral” rating, Mr. Kim bumped his target for Scotiabank shares to $91 from $88 just six days after initiating coverage of the sector. The average target on the Street is $91.31, according to Refinitiv data.

Other analysts making target adjustments include:

* RBC’s Darko Mihelic to $94 from $93 with an “outperform” rating, who called it his “favourite ‘risk on’ bank stock.”

“Q2/22 results were good as both International and Canada P&C had better than expected results,” said Mr. Mihelic. “Impairments and write-offs remained low and our only concern on credit is that BNS has the least amount of pandemic reserves left to reverse back into earnings/capital. The International P&C segment is key to our thesis, and we continue to see improving NIMs and loan growth, and solid underlying credit this quarter. We maintain our Outperform and view BNS as the most levered to an improving global economy.”

* Canaccord Genuity’s Scott Chan to $92 from $89 with a “buy” rating.

“We are encouraged by continued fundamentals improvement at International (i.e. commodities tailwind) despite a tough macro backdrop. Concurrent with results, BNS raised its dividend by 3 per cent (in line with Canaccord Genuity estimate) and providing a peer-high dividend yield of 5 per cent,” he said.

* Barclays’ John Aiken to $86 from $84 with an “equal weight” rating.

“There will likely be some concern in the market surrounding BNS’s relative capital position, however, we believe that it is unwarranted on an absolute basis. That said, given its new pro forma payout ratio, dividend increases moving forward may not be as robust, unless Scotia can generate better than expected earnings growth. We believe that as the success in international are recognized by investors, Scotia has the ability to generate relative multiple expansion moving forward,” he said.

* Stifel’s Mike Rizvanovic to $97 from $95 with a “buy” rating.

“BNS had a strong Q2 that was driven largely by abnormally low PCLs, but also showed continued momentum in both Canadian Banking, which was once again helped by market share gains in mortgage lending, and the International business, which featured a sizable margin uptick and solid expense control,” said Mr. Rizvanovic. “While we acknowledge rising macroeconomic risks that could continue to weigh on the sector, we still have a positive view on BNS’s outlook, and we note the bank’s relative valuation discount to peers, which in our view has further room to close through earnings season and beyond.”

* CIBC’s Paul Holden to $88 from $86 with a “neutral” rating.

“We remain cautious on the forward outlook given rapidly rising central bank rates and the anticipated impact on credit demand and credit losses,” he noted.

* TD Securities’ Mario Mendonca to $90 from $88 with a “hold” rating.

* National Bank Financial’s Gabriel Dechaine to $91 from $90 with a “sector perform” rating.

Conversely, Desjardins Securities analyst Doug Young cut his target to $94 from $96, citing “reflect higher macroeconomic concerns today.” He kept a “buy” recommendation.

“We like BNS’s valuation and the prospect of improved international banking results,” he added.


Analysts had a more mixed response to the second-quarter release from Bank of Montreal (BMO-T).

BMO reported adjusted earnings per share of $3.23, beating the Street by 2 cents due largely to lower-than-expected PCLs and higher revenue.

National Bank Financial’s Gabriel Dechaine expressed concern over an increase to the bank’s expense guidance, noting: “BMO has grown expenses by 3.5 per cent in the first half (excl. variable comp), including 2.5 per cent during Q2/22. After targeting flat expense growth (excl. variable comp) in 2022 during the Q4/21 call, upping to 1.5 per cent during the Q1/22 call, BMO has increased its full-year expense growth to 2.5 per cent (or 6-per-cent organic, excluding the impact of the EMEA business sale). Wage inflation is an important driver, with all segment commentary including some fashion of higher employee costs.”

However, pointing to higher net interest margins and loan balances, Mr. Dechaine raised his target for BMO shares to $152 from $151 with a “sector perform” rating. The average on the Street is $155.40.

Others increasing their targets include:

* Stifel’s Mike Rizvanovic to $160 from $157 with a “buy” rating.

“MO’s Q2 results were ahead of our expectations (and just a touch above consensus) with the P&C Banking business on both sides of the border largely driving that variance on strong commercial lending growth, while the bank also benefited from continued low credit losses,” he said. “We’ve made some upward revisions to our EPS forecasts (up 2 per cent in F2023) to reflect management’s newly-introduced revenue synergy guidance for Bank of the West, which is currently not embedded in consensus expectations and only part of which will show up in F2023. Given what we view as a unique growth opportunity among the large Canadian banks over the medium term, we believe BMO’s current elevated relative PE discount of 10 per cent is overdone and will inevitably close in the next couple of quarters as investors begin to focus more on F2024.”

* Canaccord Genuity’s Scott Chan to $157 from $155 with a “buy” rating.

“BMO reported a generally in-line quarter as headline adj. cash EPS of $3.23 matched our estimate,” said Mr. Chan. “As a result, we made modest changes to our forecasts. Our F2022E/2023 adj. EPS forecasts are revised down 2 per cent/1 per cent, respectively, and we roll forward our valuation one quarter (to Q3/F23). Overall, our forecasts mainly account for higher revenue (e.g. NII), more than offset by BMO’s higher total cost guidance (F2022 estimate: up 1 per cent to 2.5 per cent), and slightly higher PCLs in F2023.”

* Scotia’s Meny Grauman to $159 from $158 with a “sector outperform” rating.

“BMO delivered a solid Q2 result, just not quite as good as what we have come to expect from this name over the past few quarters,” he said. “Given that this bank is now lapping some pretty impressive quarters, we chalk up much of this moderation in performance to simple math. The reality is that BMO continues to execute well, and despite growing market fears, management continued to highlight ongoing margin expansion, high-single-digit loan growth led by the commercial book on both sides of the border, and ongoing strong expense management albeit hotter than previously guided to (2.5-per-cent year-over-year growth in F2022 excluding variable compensation versus 1.5 per cent previously). Most notably though, management upgraded its outlook for synergies from the Bank of the West deal, highlighting US$450-million to US$550-million in additional revenue synergies net of incremental expenses to be fully realized 3-5 years after deal close. In an uncertain world where the outlook for earnings is particularly hazy, the Bank of the West deal provides BMO shareholders with a significant amount of upside support for EPS in F2023 and beyond.”

Conversely, analysts trimming their targets include:

* Credit Suisse’s Joo Ho Kim to $157 from $159 with an “outperform” rating.

“Despite what we view as somewhat moderate results from BMO’s U.S. P&C business (particularly given the strings of very strong quarters recently), we believe the outlook remains largely intact for the bank to continue outperforming its peer group,” said Mr. Kim. “That is driven by commercial utilization rate that still has rooms to recover, in addition to generally strong client demand and finally (importantly), the bank’s track record of execution. Expenses were another area of focus for BMO this quarter, as we would have to track back quite a number of quarters (all the way to Q2/F20) to see a negative operating leverage quarter from the bank. That said expenses are also expected to moderate. Lastly, the bank’s capital position is expected to remain solid post BotW acquisition (and we continue to believe there is upside our estimates from the deal).”

* TD Securities’ Mario Mendonca to $155 from $160 with a “buy” rating


Seeing a pullback thus far in 2022 creating “an opportunity to invest in a quality asset on sale,” Morgan Stanley’s Kimberly Greenberger raised Lululemon Athletica Inc. (LULU-Q) to “overweight” from “equal-weight” on Thursday.

“Lulu trades at a discount versus history on growth deceleration and recession/consumer fears,” she said. “But risk seems priced in, and we think the biz could be more resilient thru history/macro headwinds than the market discounts.”

Ms. Greenberger cut her target to US$303 from US$339, below the US$424.15 average.

“Current levels offer an attractive entry point, so we move off the sidelines and recommend long-term oriented investors take another look at this quality asset on sale,” she added.


Desjardins Securities analyst Jonathan Egilo said Osisko Development Corp.’s (ODV-X) new preliminary economic assessment and resource update for its Cariboo mine has caused a “substantial drop” in his net asset value per share estimate, driven by a 13-per-cent decline in measured and indicated mineral resource grade and a 830,000 ounce cut to global resources.

His NAVPS projection fell to $18.58 from $26.02, and, with its stock now trading at a 20-per-cent premium to the peer price-to-NAV average, he sees a fair valuation. That prompted him to downgraded Osisko shares to “hold” from “buy.”

“While our estimates declined due to the updated resource, we are supportive of the new phased approach, which starts with a 75koz per year operation beginning in 2024,” he said. “Not only will this allow the asset to begin generating operating cash flows in the relatively near term, but it will allow for underground development and access to the deposits to perform further exploration work. The current average mine depth is only 350 metres, with drilling showing significant deeper opportunities that can be more economically drilled from underground platforms.”

Mr. Egilo dropped his target to $14.50 from $23.25. The average is $19.84.


Ahead of the June 14 release of its second-quarter results, Canaccord Genuity analyst Doug Taylor is “taking a more conservative view” on Blackline Safety Corp. (BLN-T) due to supply chain disruptions.

“The company’s January Q1 results reflected lower margins as higher opex and supply chain challenges impacted the hardware segment,” he said. “Since then, the macro environment has continued to weigh heavily on the global supply chain as the impacts of geo-political issues, COVID lockdowns in China, rising inflation, and interest rate hikes have proven unavoidable for most industries. Given these factors extended into Blackline’s Q2 and beyond, we have assumed additional margin pressure and a slower profitability ramp, particularly as the company continues to prepare to launch several products in its roadmap.”

Mr. Taylor said he’s looking for confirmation on the timeline for the launch of the Calgary-based company’s G6 “zero maintenance” single-gas cloud-connected monitor, which was expected in July of this year and remains a focus of investors.

For the quarter, he’s now projecting revenue of $16.6-million, down from $17.6-million and below the consensus on the Street of $18.4-million. His adjusted EBITDA loss forecast slid to $5.9-million from a $3.7-million deficit.

Also lowering his full-year 2022 and 2023 revenue and earnings estimates due to “increased near-term costs “stemming from continued supply chain challenges and potential delays of new product launches,” Mr. Taylor reduced his target for Blackline shares to $7 from $8.50. The average is $9.50.


In other analyst actions:

* Seeing it “closet to retreat to amid housing uncertainty,” CIBC World Markets analyst Hamir Patel upgraded Richelieu Hardware Ltd. (RCH-T) to “outperformer” from “neutral” with a $47 target. The average target on the Street is $49.83.

“While affordability constraints for housing (from rising monthly payment costs and construction inflation) may constrain growth in 2023, we believe these risks are more than priced in to RCH shares at present,” he said. “At the same time, with its strong balance sheet (currently 0.1 times net debt/EBITDA), we believe Richelieu may actually see accelerated market share gains and increased M&A opportunities in a recessionary-type environment.”

* Piper Sandler’s David Amsellem cut his Bausch Health Companies Inc. (BHC-N, BHC-T) target to US$7 from US$27 with a “neutral” rating. The average is US$25.50.

* RBC’s Nelson Ng reduced his Evergen Infrastructure Corp. (EVGN-X) target by $1 to $5, below the $7.75 average, with an “outperform” rating.

“EverGen has a number of near-term opportunities across Canada to significantly grow its RNG production capacity. However, we believe the market is waiting for additional details with respect to the timing, cost, and project economics,” said Mr. Ng. “Given the potential capital required to build out its pipeline, particularly in the current inflationary environment, we believe another focus would be the company’s funding approach. We are lowering our price target ... to reflect the uncertainty around the timing, cost, and funding approach of the near-term RNG developments.”

* Canaccord Genuity’s Michael Fairbairn raised his K92 Mining Inc. (KNT-T) target to $12 from $11.50, reiterating a “speculative buy” rating. The average is $12.06.

“We recently hosted K92 CEO John Lewins for a series of non-deal institutional investor presentations in Montreal,” he said. Conversations centered around K92′s recent exploration results, the company’s success in insulating itself from industry-wide inflationary pressures, its upcoming ‘Phase 3′ FS and PEA, and the June 2022 election in PNG. The investor meetings reaffirmed our view of K92′s self-financed expansion plans, strong balance sheet & FCF generation, and promising exploration prospects.”

* Canaccord Genuity’s Robert Young cut his target for Quisitive Technology Solutions Inc. (QUIS-X) to $1.75 from $2 with a “buy” rating. Others making changes include: Scotia Capital’s Divya Goyal to $2.20 from $2.60 with a “sector outperform” rating, Raymond James’ Stephen Boland to $1.70 to $2.20 with an “outperform” rating and Echelon Partners’ Rob Goff to $2.20 from $2.40 with a “speculative buy” rating. The average is $2.31.

“Quisitive reported strong Q1 results that beat revenue expectations and met EBITDA,” said Mr. Young. “The positive performance was driven by both the Cloud solutions and Payments segments. Revenue was up 256 per cent year-over-year with organic growth in ‘high-teens’ percent in the cloud solutions business and “double digits” percent growth in the payments business driven by BankCard volume growth. Management remained bullish on cloud demand with visibility 1-2 quarters out, further bolstered by their strengthening position in the Microsoft channel. Hotspots include digital transformation and cybersecurity consistent with peers although servicing the strong demand is driving increased headcount in a tight market, which is a short-term drag on operating margins. BankCard continues to be the driver of payments revenue with record payment volumes in the month of March. LedgerPay continues to build credibility with certification by MasterCard in Q2 and active testing supporting near-term certification on VISA. Pilots are expected to commence in Q2 driving LedgerPay revenue in Q4. We expect the focus in Q2 and 2022 to be on payments rollout with cash directed towards de-risking debt and servicing the BankCard earnout. We believe Quisitive’s overall business is performing well, and management is executing the communicated plan. While we acknowledge small-cap tech headwinds, we continue to see Quisitive stock highly undervalued relative to IT Services peers without considering the incremental value in the payments business.”

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