Inside the Market’s roundup of some of today’s key analyst actions
Ahead of the start of their third-quarter reporting season next week, Scotia Capital analyst Meny Grauman reiterated his “constructive” view on Canadian banks in a research report titled Priced for Imperfection.
He’s forecasting core cash earnings per share for the sector of $2.30, down 3 per cent from the previous quarter and 2 per cent from the same stretch a year ago. However, he noted that the year-over-year result is being weighed down by a normalization in provisions and as a result PTPP earnings, which he projects to rise 7 per cent year-over-year.
“As we head into another Canadian bank earnings season, investors continue to struggle with the post-pandemic outlook for the group,” said Mr. Grauman. “The good news is that there are signs that a more balanced consensus is forming. Gone is the view that the end of pandemic-related lockdowns would usher in an economic boom to rival the Roaring-20s. War in Ukraine, runaway inflation across the globe, and China’s insistence on maintaining its zero-COVID policy have dashed those hopes and replaced it with a darker vision of the future. But investors appear to be stepping back from the brink and realizing that while rising rates will weigh on economic growth by design, the outcome is not necessarily a deep and prolonged recession. That discovery process has taken the bank group multiple (based on 2023 consensus EPS) from a high of 11.7 times just this past February to a low of 8.9 times in July and up to its current 10.0x. At current valuation levels the market appears to be pricing in a mild recession with only limited impact on credit performance, which is in fact our base case scenario.”
Expecting investors to be “very focused on any data point that seems to point to a deterioration in either loan demand or credit performance,” Mr. Grauman made a trio of target price changes to stocks in his coverage universe.
His changes are:
- National Bank of Canada (NA-T, “sector outperform”) to $112 from $107. The average on the Street is $103.08.
- Royal Bank of Canada (RY-T, “sector outperform”) to $144 from $147. Average: $139.80.
- Toronto-Dominion Bank (TD-T, “sector perform”) to $101 from $102. Average: $99.88.
He maintained his targets for these stocks:
- Bank of Montreal (BMO-T, “sector outperform”) at $159. Average: $151.25.
- Canadian Imperial Bank of Commerce (CM-T, “sector outperform”) at $83. Average: $77.18.
- Canadian Western Bank (CWB-T, “sector outperform”) at $37. Average: $36.11.
- EQB Inc. (EQB-T, “sector outperform”) at $79. Average: $78.93.
- Laurentian Bank of Canada (LB-T, “sector perform”) at $50. Average: $46.83.
“Heading into the quarter we spotlight what we view as a particularly favorable set up for both NA and TD,” said Mr. Grauman. “With respect to NA which we rate Sector Outperform, performance should be helped by a relatively more resilient trading business than peers. The bank should also benefit from the fact that Quebec’s housing market is more resilient to a slowdown than other key regions in the country. We continue to be cautious on TD longer-term, and the Cowen deal only adds to execution risk for the name, but heading into Q3 reporting we see the bank’s outsized rate sensitivity as an advantage, as well as its relatively lower exposure to capital markets. We also highlight capital as being less of an issue this quarter given the introduction of a hedging program tied to the First Horizon deal, and the bank’s willingness to use its Schwab stake as a source of deployable capital. Another name we want to flag is CIBC. Although housing-related concerns continue to weigh on this bank’s relative valuation, the outlook for Q3 looks good here as well, especially given the fact that the bank was ahead of the pack on reserving in Q2. A key question here will be if the bank can continue to outperform on the capital markets front, but recent performance suggests yes. We are a little more cautious on RY and BMO given concerns about mark-to-market losses in their trading books, and for BMO in its PE book as well.
“Among the smaller banks, we flag CWB which missed expectations by a wide mark in Q2, and needs to prove to the Street that this disappointing performance was indeed just a one-off influenced by timing.”
Canaccord Genuity analyst Scott Chan lowered his financial forecast for Canadian banks given concerns over their credit and market-sensitive businesses.
In a research report released Thursday, he cut his cash earnings per share projection for the quarter by an average of 5 per cent with his full-year 2022 and 2023 estimates falling by 1 per cent and 3 per cent, respectively.
“Credit trends likely will be topical due to the uncertain market environment as we see a normalizing of credit conditions (although Canada and U.S. unemployment rates remain at record lows),” he said. “That said, Big-6 banks (except RY) have remaining allowances still built from the start of COVID-19, adding support near term, in our view. In FQ3, we forecast Big-6 banks (avg.) EPS growth of 1 per cent year-over-year and PTPP growth of 8 per cent year-over-year.
“Last quarter, we felt that Big-6 banks management commentaries were better than our expectations, and await incremental thoughts concurrent with upcoming FQ3 results. Heading into the quarter, we continue to favor the Banks (BMO, BNS, CM, TD) with larger P&C exposure / interest rate sensitivity.”
Emphasizing the group is now trading at a price-to-earnings multiple of 9.8 times, below the historical average of 11.0 times, Mr. Chan reduced his target prices for the sector’s stocks. His changes are:
- Bank of Montreal (BMO-T, “buy”) to $152.50 from $157. The average on the Street is $151.25.
- Bank of Nova Scotia (BNS-T, “buy”) to $89 from $92. Average: $88.96.
- Canadian Imperial Bank of Commerce (CM-T, “buy”) to $77 from $83. Average: $77.18.
- National Bank of Canada (NA-T, “hold”) to $101 from $104. Average: $103.08.
- Royal Bank of Canada (RY-T, “hold”) to $131.50 from $134. Average: $139.80.
- Toronto-Dominion Bank (TD-T, “hold”) to $96 from $99. Average: $99.88.
“Currently, TD, BMO, and BNS’ P/E (next 12-month) trade at the widest discounts (11 to 12 per cent) relative to its historical average, while CM offers a 6-per-cent discount,” said Mr. Chan. “We are generally less constructive on Banks (NA, RY) with more market-sensitive exposure. Further, NA and RY’s P/E (NTM) trades at more modest discounts vs. its average (3 to 4 per cent).”
“For the Banks to re-rate higher on valuation, we would have to see positive annual EPS revisions with annual growth tracking toward historical averages in F2023E, in our view. ... We note that there has been minimal F2023E adj. EPS revisions from the Street near term. The Big-6 banks remain well capitalized and support a dividend yield (avg.) of 4.3 per cent (BNS highest, NA lowest). Since FQ2 reporting and year-to-date, the Big-6 banks (avg.) have performed relatively in line with the TSX Composite. BMO stock performance has led the Group in both those time periods.”
Automotive Properties Real Estate Investment Trust’s (APR.UN-T) “predictable growth” continued in the the second quarter, according to National Bank Financial analyst Tal Woolley, who expects acquisition activity to accelerate through the remainder of the year.
On Monday after the bell, the Toronto-based REIT reported results that largely fell in line with his expectations. That included funds from operations of 24.1 cents per unit, narrowly lower than Mr. Woolley’s 24.3-cent estimate and the Street’s forecast of 25 cents.
“Reported SPNOI [same property net operating income] growth was 1.7 per cent, but excluding last year’s bad debt recovery, APR posted a 2.3-per-cent SPNOI during the quarter, driven by contractual rent increases (with some inflation indexation adding to growth, alongside the traditional 1.5-per-cent growth across the core of the portfolio),” the analyst said. “The quarter was quiet on the transaction front, with expectations for a more active Q4 now in place.”
Given a “softening” in demand, Mr. Woolley said the REIT’s management has “avoided deals with low cap rate bids that would have not been accretive to cash flow per unit,” calling its capital allocation choices “sensible.”
“Management noted that the number of deals brought to market decreased meaningfully during the quarter,” he added. “As is customary, we would expect more activity in the latter half of the year, giving the market some time to find a groove after recent interest rate volatility, and following the historical seasonal acquisition cadence seen in the industry (which tends to ramp into year-end). APR is looking to find targets where it can offer vendors a fair exit cap rate, but also incorporate some escalators in the lease that can hedge against inflation upticks. The portfolio typically has 1.5-per-cent annual rent hikes which translate into consistent, steady growth of cash flows. In addition, 40 per cent of APR’s leases have some form of CPI indexation included, creating a resilient name during volatile times.”
Keeping a “sector perform” rating for the REIT’s units, Mr. Woolley raised his target to $13.50 from $13. The average on the Street is $14.06.
Elsewhere, others making changes include:
* Scotia Capital’s Himanshu Gupta to $14 from $15 with a “sector outperform” rating.
“Year-to-date, a ‘defence basket’ (CRT, CHP, SGR etc.) and ‘diversified basket’ with specific catalysts (HR, AX) have outperformed the REIT sector,” he said. “‘Growth’ has clearly lagged. APR is somewhere in the middle (i.e. neither defence, given the cyclical nature of the auto industry, nor growth, given APR is more of a high yield product with a distribution yield of 6.1 per cent). Nevertheless, we think APR is a potential candidate for the ‘defence basket’ given a WALT of 11.1 years and no lease expiry until 2026. Cash flow visibility is high as far as lease structure is concerned.”
* Laurentian Bank Securities’ Frederic Blondeau to $14.50 from $15.50 with a “buy” rating.
“[APR] remains one of our top yield ideas on portfolio stability, limited exposure to inflationary pressures,” he said. “The REIT continues to show steady financial performance, as reflected in the 2.3-per-cent year-over-year increase in SP-NOI for Q2, essentially explained by the contractual rent increases. Despite the risks relating to supply chain disruptions, the automotive dealership business fundamentals remain relatively solid, and the current conditions relating to inflationary pressures and disruptions are not expected to have a significant impact on APR tenants’ stability. Also, inflation only has a very limited impact on the REIT cost structure, given the triple-net nature of the portfolio. Lastly, although the REIT hasn’t been active in Q2, management continues to see acquisition opportunities in the 6.25-per-cent to 7.25-per-cent capitalization range, within the REIT’s traditional range, and expects the REIT to be active during the remainder of 2022. For these reasons we maintain our positive stance on APR.”
While calling its second-quarter results “noisy,” Mr. Woolley thinks SmartCentres Real Estate Investment Trust (SRU.UN-T) continues to display stability in its core portfolio and leasing is “showing progress.”
On Aug. 11, the Toronto-based REIT reported funds from operations per unit of 49 cents, down 15 per cent year-over-year and narrowly below the analyst’s 52-cent forecast as well as the consensus projection on the Street of 51 cents. After “stripping away a lot of items,” Mr. Woolley estimates FFO per unit was down approximately 1 per cent.
“There were a lot of harder to forecast variances this quarter, including big swings in rent provisions (an expense last year vs a recovery this year), big changes in the income from SRU’s total return swap (modest income last year, bigger loss this year), and condo gains ($13-million last year vs $1-million this year),” he said. “Putting that noise aside, we estimate FFO/u [funds from operations per unit] was down around negative 1 per cent, as improved performance at retail was offset by the equity issuance for the SmartVMC West development land acquisition. Reported SPNOI was up 5 per cent, and excluding changes in rent provisions, it was up 2 per cent (which should be considered a good number for SRU, which typically guides in the negative 1-per-cent to positive 1-per-cent range). Occupancy was 97.2 per cent, up 10 basis points year-over-year, up 20 basis points quarter-over-quarter. Renewal spreads averaged 2.6 per cent for H1.”
Mr. Woolley called the REIT’s progress on its SmartVMC project, a 100-acre city centre in Vaughan, Ont., “impressive” and pre-sale activity at newly launched condo projects remains “robust.”
Keeping a “sector perform” rating for SmartCentres, he bumped his target for the REIT to $30 from $29. The average is $31.18.
“We raised FFO/u forecasts 1-2 per cent (AFFO/u up 0-2 per cent) and our NAV estimate by 3 per cent,” he said.
“2023 will show more FFO progress thanks to condo closings (costing $181-million, whose earnings will hit FFO in 2023) and $211-million of apartment completions (whose earnings will build over a couple of years at an expected initial yield of 5 per cent).”
Expecting higher U.S. fuel margins, BMO Nesbitt Burns analyst Peter Sklar raised his first-quarter fiscal 2023 earnings forecast for Alimentation Couche-Tard Inc. (ATD-T) ahead of its Aug. 30 release.
“We believe the recent strength in the stock is reflective of the combined possibility of continued strong U.S. fuel margins and uptick in M&A activity, and the strength of Couche-Tard’s resilient business model,” he said. “Notwithstanding the current stock level, Couche-Tard is currently valued towards the low-end of its valuation range.”
For the quarter, Mr. Sklar is now projecting EPS of 69 cents, up from 56 cents. That’s based on a fuel margin of 45 cents per gallon, rising from a 35-cent estimate previously.
“In terms of our thesis on Couche-Tard, we have noted that at the current $60 level, the stock is at an all-time high,” he said. “We believe the strength in the stock reflects a number of developments. Most prominently, and as noted above in the discussion regarding our earnings estimate revisions. The U.S. fuel margin has been extraordinarily strong. This has resulted in the FQ1/23 consensus estimates moving upwards, and there is the potential for further upward revisions to the remaining quarters of FY2023 and the FY2024 estimates given the relatively conservative fuel margin assumptions most analysts have incorporated into their models. For example, by FQ4/23 we are assuming that the margin reverts from the current levels to about 33cpg, which is a substantial decline given that over the last few weeks the margin has been at least 70cpg. As noted above, during periods of oil price declines, as we are seeing now, retail fuel margins are typically high as the industry is slow to bring down pricing at the pump. As a result, the current decline in oil prices supports the possibility of further upward earnings revisions.
“Another consideration is that Couche-Tard has proven itself to be a resilient business in the face of the many challenges of the last two years. The merchandise comps have essentially held up, and when the U.S. fuel volume comp went deeply negative as a result of the COVID-19 lockdowns, the fuel margin at the pump strengthened to offset the volume decline. Similarly, while the industry and Couche-Tard were seeing accelerated inflationary pressures on store operating costs, again the fuel margin has strengthened to offset.”
Keeping an “outperform” rating for Couche-Tard shares, Mr. Sklar raised his target to $70 from $65. The average is $64.11.
“Proponents of the bear thesis on the stock will often refer to the electrification of the global automotive industry and the implications for CoucheTard’s lucrative retail fueling business. However, we believe the decline in the demand for gasoline will unfold slowly over decades and on a present value basis we see little erosion in the value of this part of Couche-Tard’s business at this time,” said Mr. Sklar.
Echelon Capital Markets analyst Andrew Semple “meaningfully curtailed” his financial projections for Cresco Labs Inc. (CL-CN) after its outlook for the second half of 2022 came in notably “softer” than the Street’s expectations.
“Management noted cannabis prices have compressed 10-30 per cent in the Company’s core markets and continue to trend lower,” he said following the release of in-line second-quarter results. “U.S. cannabis businesses are allocating more of their own products to their own stores to mitigate this pricing pressure, though this dynamic has softened wholesale market conditions, which may have an outsized impact on Cresco as the nation’s largest wholesaler of branded cannabis products.
“Based on these conditions, management indicated Cresco’s H222 is likely to see wholesale revenues down compared to Q222, which has led us to forecast a sequential consolidated revenue decline in Q322. Management also guided to flat adj. gross margins and EBITDA margins through H222. Gross margins are expected to remain above the 50-per-cent level for the foreseeable future despite pricing headwinds as Cresco too will increasingly vertically integrate by allocating more of its own branded products to its own dispensary shelves. Further, the Company is maintaining a focus on managing costs and expects to further reduce expenses in both COGS and SG&A in H222, which will help to protect profitability.”
Mr. Semple reduced his EBITDA estimate for the second half of fiscal 2022 by 23 per cent to $98.5-million (from $127.7-million), while his 2023 forecast slid by 29 per cent to $246-million (from $347-million). Both are well below the consensus on the Street.
“We expect Cresco to return to wholesale revenue growth in 2023 as the Company benefits from new third-party stores opening in Illinois and Ohio, expanding the potential wholesale opportunity of these markets,” he said. “Retail revenue growth is expected to be driven primarily by new store openings in Florida and Pennsylvania, mostly in the latter half of Q422 and in Q123.
“We believe Cresco will have a deeper pipeline of imminent growth opportunities after completing the acquisition of Columbia Care, which operates in high torque states such as New Jersey and Virginia. Besides this acquisition, Cresco also has large upside opportunities in its current portfolio if markets that are currently medical use only (e.g., New York, Ohio, Pennsylvania) approve adult-use sales on the coming years. We note New York has already approved adult-use sales, and we are awaiting greater regulatory and timing clarity before incorporating.”
While expressing optimism about its progress toward the close of its acquisition of Columbia Care Inc. (CCHW-CN), the analyst reduced his target for Cresco shares to $9 from $15, maintaining a “buy” rating. The average is $12.90.
“Excluding upcoming divestitures, we believe Cresco and Columbia Care have complementary assets that could result in upside surprise to our forecasts,” he said. “First of all, New Jersey has been the primary growth driver for U.S. MSO’s with exposure to the state, which we expect to continue to accelerate through 2023. Cresco’s sequential revenue growth slower than that of peers, including Columbia Care, reflects its lack of exposure to the New Jersey market. Columbia Care has two adult-use dispensaries in the state and is undergoing a cultivation expansion that will add 250,000 SFT of capacity. Combining Columbia Care’s extensive retail network with Cresco Labs large wholesale business should be accretive to both revenues and margins.”
Other analysts cutting their targets include:
* Canaccord Genuity’s Derek Dley to $8 from $9.50 with a “buy” rating.
“We have lowered our EBITDA estimate for 2022 to reflect the relatively muted growth expected over the front half of the year, wholesale pricing challenges, and the shifting consumer spending habits given the elevated inflation within the overall retail market,” said Mr. Dley.
* ATB Capital Markets’ Kenric Tyghe to $15 from $16 with an “outperform” rating.
“Despite the material positives in the quarter, management struck a cautious (and we believe prudent) tone on the impact of the expected market dynamics (most notably in Pennsylvania) in H2/22. We have lowered our 2022 (and 2023) estimates to better reflect these dynamics,” he said.
* Haywood Securities’ Neal Gilmer to $9 from $13 with a “buy” rating.
“We have made some adjustments to our model following the results and management commentary. Management indicated a more cautious outlook for H2/22 than previously, citing the overall macro-economic concerns and potential price compression across certain markets. Cresco’s expectations are for new store openings to be late this year or early 2023 that will drive organic growth in certain markets. As a result, we have lowered our 2022 estimates lower that has a carry through effect into 2023,” said Mr. Gilmer.
* Alliance Global Partners’ Aaron Grey to $10 from $15 with a “buy” rating.
Seeing its forecast ”shrouded by multiple challenges,” Canaccord Genuity analyst Doug Taylor lowered his recommendation for CloudMD Software & Services Inc. (DOC-X) to “hold” from “speculative buy” on Thursday.
“[Thursday] morning, CloudMD updated the market on the status of its Ontario TAiCBT [therapy assisted internet-based cognitive behavioural therapy] contract that was inherited through the acquisition of MindBeacon,” he said. “The update suggests that the revenue run-rate from this relationship will decline 85 per cent, a $10-million revenue hit. While this represents a relatively small amount of CloudMD’s overall revenue profile (6 per cent of 2022E), we believe the step down of a high-margin contract will have a significant impact on CloudMD’s quest to achieve breakeven. In light of this added uncertainty, compounded by the previously announced troubles with its VisionPros acquisition, we have elected to move our rating to HOLD (from Speculative Buy) until such time as we can chart a clearer path forward.”
Ahead of next week’s release of its quarterly results, Mr. Taylor cut his target to 45 cents from $1.50. The current average is $1.33.
“Our new $0.45 target price (from $1.50) equates to 0.8 times our 2022 estimated EV/Sales and 0.7 times NTM+1 EV/Sales (ending March 2024),” he said. “While this presents a significant discount to peers on an EV/sales basis (WELL trades at 2.5 times 2022 EV/sales for example), we believe a discounted valuation is likely to persist until the company can rightsize its cost base in order to drive towards sustainable margins.”
In other analyst actions:
* In a second-quarter earnings review, Credit Suisse’s Fahad Tariq cut his target for Lundin Mining Corp. (LUN-T, “neutral”) to $8.50 from $9.50 and Hudbay Minerals Inc. (HBM-T, “outperform”) to $7.50 from $9. The averages on the Street are $9.91 and $9.65, respectively.
“Overall, our preference remains Hudbay over Lundin due to more stable operations in the near term, lower risk of taxation/royalty changes in Peru vs. Chile, use of short-term hedges to mitigate commodity price volatility, lower capex intensity, and better medium-term growth profile. Commodity prices and operations are key risks to our view,” he said.
* CIBC’s Anita Soni raised her target for Karora Resources Inc. (KRR-T) to $4.50 from $4.25, below the $6.12 average, with a “neutral” rating.
* Scotia Capital’s Himanshi Gupta cut his Pro REIT (PRV.UN-T) target to $7.50 from $7.75 with a “sector perform” rating. The average is $7.44.
“We remain buyers of TCN, with our TP +$0.50 to $15.25 (approximately C$19.75) on a $0.75 jump in our Current NAVPS to $14.25 (C$18.25); Forward NAVPS is flat at $16.00 so we gave TCN the benefit of the doubt on $0.125,” he said. “We think that benefit is warranted post another strong print (Exhibits 10-13) that beat CAD multi-family results, while we also liked TCN tackling expressed investor concerns (funding acquisitions, defensiveness of SFR, and impact of rising rates on guidance/acquisition accretion).”