Inside the Market’s roundup of some of today’s key analyst actions
Following Royal Bank of Canada’s (RY-T) in-line fourth-quarter results, Desjardins Securities analyst Doug Young anticipates the focus of investors will remain on net interest margins as well as its pending acquisition of HSBC Canada.
“We like the outlook on both fronts,” he said in a research note titled There’s room for everyone on the nice list!.
The premarket release on Wednesday drew a muted response from the Street with its shares closed up a mere 0.01 per cent.
RBC faces challenge retaining HSBC Canada business clients before takeover deal closes
Cash earnings per share of $2.78, exceeding Mr. Young’s $2.71 estimate and the consensus forecast of $2.69.
“Adjusted pre-tax, pre-provision (PTPP) earnings were less than 1 per cent below our estimate; relative to our estimates, Canadian banking, wealth management and insurance beat, while investor and treasury services, and capital markets missed,” said Mr. Young.
“The all-bank NIM excluding trading was in line with our expectations. There was a lot of detail provided on NIMs. In a nutshell, management anticipates further NIM expansion through FY23, but as central bank rates move closer to peaking, it has acted to protect NIMs (via hedging).”
After tweaks to his estimates, Mr. Young raised his target for RBC shares to $145 from $140, maintaining a “buy” recommendation. The average is $139.79.
“We like RY’s scale, NIM sensitivity and the pending HSBC Canada acquisition,” he said.
Elsewhere, KBW’s Mike Rizvanovic upgraded RBC to “market perform” from “underperform” with a $138 target, up from $129.
Other analysts making target adjustments include:
* Credit Suisse’s Joo Ho Kim to $153 from $150 with an “outperform” rating.
“RY finished off F2022 with what we view as a muted set of results,” he said. “The bank continued to put up good margin performance, but was also impacted by higher expenses from Capital Markets, that led to a miss on our PTPP estimate (Y/Y growth was still solid). Beyond the results, the macro commentary for the year ahead from the bank was more favorable than it has been in our view, and further reflected in a generally constructive set of guidance for the year ahead. The bottom line is, we continue to favor RY’s diversified business mix that should better withstand periods of stress on a relative basis, as well as its rate sensitivity profile (and the potential for further margin improvements) despite a more modest positioning.
* National Bank’s Gabriel Dechaine to $147 from $148 with an “outperform” rating.
“RY’s all-bank NIM (excl. trading) was up 8 basis points quarter-over-quarter,” said Mr. Dechaine. “The bank benefits from its strong core deposit base in Canadian banking (where NIM was up 10 bps Q/Q) and the rate sensitivity of City National (NIM up 30 bps Q/Q). We expect a similarly strong NIM trajectory during Q1/23, however, moderation thereafter is reflected in our estimates. For starters, RY has put on some hedges to reduce its downside rate sensitivity. More importantly, we’re seeing the impact of higher funding costs coming in two forms : 1) higher core deposit betas, which have moved from 15 per cent during Q2/22 to 20 per cent during Q4/22, still below the 40 per cent « natural » level; and 2) consumers shifting from zero cost chequing deposits to term GICs. We note that despite these trends, we expect RY’s NIM performance to exceed that of peers.”
* Barclays’ John Aiken to $151 from $140 with an “overweight” rating.
“Royal posted another solid quarter, underscoring the benefits and profitability of its diversified platform. RY posted a quarter that will be difficult for its remaining peers to exceed,” said Mr. Aiken.
* Canaccord Genuity’s Scott Chan to $136 from $131 with a “hold” rating.
=====
While the “challenging” fourth-quarter results from National Bank of Canada (NA-T) failed to meet “elevated” expectations, Credit Suisse analyst Joo Ho Kim sees its “defensive positioning as a key positive, especially in an environment where elevated uncertainties still linger around the economic outlook, in addition to a solid pace of margin expansion, which we believe could continue given the bank’s strong market share gain in the low-cost deposit base over time.”
On Wednesday, the bank reported core cash earnings per share of $2.08, below both the analyst’s $2.25 estimate and the consensus on the Street of $2.24. The loss was attributed to lower-than-anticipated revenue (by 24 cents per share) and higher expenses (7 cents).
“NA’s miss in Q4 largely reflected impacts from market-driven parts of the bank, including markdowns in Credigy, higher expenses in Financial Markets, and wider losses in the Other segment,” said Mr. Kim. “Combined with elevated expectations for the bank heading into the quarter, the shares underperformed its peers on the earnings day.”
With the results, Mr. Kim cut his 2023 EPS forecast by 4 per cent to $9.70 from $10.07 to reflect the impact of lower NIMs and higher losses in the Other segment. His 2024 estimate declined 1 per cent to $10.05 from $10.12.
That led him to cut his target for National Bank shares to $109 from $111 with an “outperform” rating. The average is $102.88.
Others making changes include:
* RBC’s Darko Mihelic to $111 from $109 with an “outperform” rating.
“NA had a weaker than expected quarter due to lower trading revenues, which we don’t expect to repeat. Otherwise, NIM was solid and credit was in the ballpark, though we would have liked to see a bigger reserve build (we think a recession is coming and NA has historically been viewed as relatively defensive). We see NA as well positioned to deliver low single digit EPS growth next year. We roll forward our valuations to our 2024 core EPS estimate, which brings our price target up to $111 (was $109). We see better relative returns elsewhere,” said Mr. Mihelic.
* Barclays’ John Aiken to $93 from $92 with an “underweight” rating.
“National stepped up its return of capital with a 5-per-cent increase to its dividend and announced a 2.1-per-cent repurchase program. However, the disappointing results will likely make NA’s outlook even more opaque for investors,” said Mr. Aiken.
* TD Securities’ Mario Mendonca to $97 from $99 with a “hold” rating.
* KBW’s Mike Rizvanovic to $105 from $106 with an “outperform” rating.
=====
Canadian Natural Resources Ltd. (CNQ-T) “continues to demonstrate ways to support the premium valuation relative to the peer group,” according to National Bank Financial analyst Travis Wood, who said its 2023 budget highlighted its “wide array of future growth opportunities.”
On Wednesday before the bell, the Calgary-based company announced a plan for the next fiscal year that largely fell in line with expectations, including capital spending of $5.2-billion, up from $4.9-billion this year, and total production of between 1.33 million and 1.37 million barrels of oil equivalent per day.
Mr. Wood said the Canadian Natural also provided additional details on its “diverse suite of short-, medium- and long-term development opportunities across its Conventional E&P, Thermal and Mining segments.” He thinks it can drive organic growth through a capital-efficient drill-to-fill strategy, pointing to “ample spare processing capacity for both liquids and gas.”
“Leveraging its diverse portfolio of top-tier assets (more within), CNQ’s budget highlights incremental volumes of 56,000 boe/d [barrels of oil equivalent per day] in 2023 (up 4 per cent year-over-year) supported by strategic growth capital of $1-billion (with numerous highly economical opportunities on the table for future growth),” said Mr. Wood.
“In our view, the relatively low-risk, capital-efficient asset base provides confidence in the ability to drive increased shareholder returns through our forecast period, specifically as the company targets net debt of $8 billion (triggering 80-100-per-cent FCF [free cash flow] allocation from 50 per cent currently). Year-to-date, CNQ has returned $8.5-billion to shareholders through dividends (base and special) and buybacks, equating to a TTM [trailing 12-month] cash yield of 11 per cent. Looking ahead, we are now forecasting 2023 FCF of $7.7 billion on a total payout of 53 per cent and leverage of 0.5 times, with net debt reaching $8 billion in late 2023.”
Maintaining an “outperform” recommendation for CNQ shares, Mr. Wood hiked his target to $105 from $88. The average on the Street is $96.38.
“We have expanded our target multiple to 7.0 times (from 6.0 times) to better align with the CNQ’s historical mid-cycle valuation,” he said. “In our view, multiple expansion will continue to drive select energy equities higher, compounded by solid business fundamentals that are showcasing strict capital processes that support longterm value generation through robust return of capital models. Our revised multiple implies a target price of $105 (up from $88), driving a total return of approximately 35 per cent.”
Elsewhere, others making changes include:
* ATB Capital Markets’ Patrick O’Rourke to $94 from $92 with an “outperform” rating.
“On November 30 before market open, CNQ released its 2023 guidance and subsequently held its investor day,” he said. “Overall we view the event as positive and after making incremental adjustments to our long term modeling and NAV/DCF assumptions. Near term the company portrayed at 2023 production guidance (1,330-1,374 mboe/d) directly in line with expectations, while doing so with capex also in line with prior expectations.”
* TD Securities’ Menno Hulshof to $97 from $92 with a “buy” rating.
=====
After Wednesday’s release of “strong” third-quarter 2023 financial results and an increase to its earnings guidance, Stifel analyst Martin Landry thinks BRP Inc. (DOO-T) “looks better than valuation suggests,” pointing to “impressive” market share gains.
The Valcourt, Que.-based recreational vehicle maker reported revenue of $2.709-million, up 71 per cent year-over-year and above the Street’s expectation of $2.315-million. Normally fully diluted earnings per share of $3.64 blew past the consensus estimate of $2.19.
“Q3 results came in ahead of expectations driven by strong performance in side-by-side vehicles (SSV), snowmobiles and personal watercrafts (PWC),” he said. “Sell-though metrics were strong with North American retail sales up 39 per cent year-over-year (excluding Switch) and EMEA retail sales up 34 per cent. Management noted that its customers’ household income exceed $115,000. This affluent customer base appears less impacted by the general pressure on discretionary income, possibly explaining the sustained demand picture.
“From FY13 to FY22, BRP gained 11 percentage points of market share within the North American Powersports industry. The momentum continued with BRP gaining an additional 2pp of market share year to date. This impressive performance is driven by (1) innovative products, which are well received by customers, (2) increased production capacity enabling better shipments vs. the industry and (3) BRP’s ability to gain floor space within dealership as dealers typically make more money selling BRP’s products. We note the strong market share gains within the SSV segment, with retail sales up high 40 per cent vs. the industry at 5 per cent and already nearing the FY25 market share target of 30 per cent.”
With the results, BRP raised its fiscal 2023 EPS guidance to $11.65–12.00 from $11.30‒11.65, above the consensus estimate among analysts of $11.51. Mr. Landry said the 3-per-cent increase points to a growth rate of 17-21 per cent for the year, a faster pace of expansion than its peers.
“This strong performance, in a year of macroeconomic headwinds, impresses, especially when looking at the 2-year and 3-year EPS CAGR [compound annual growth rate], which could potentially reach 49 per cent and 46 per cent, respectively. The visibility increases on next year and management expects year-over-year sales and earnings growth, boosted by improved capacity, lower supply chain costs and market share gains. With a healthy balance sheet, no immediate refinancing needs and earnings growth, BRP appears better positioned than its valuation suggest with shares trading at 50 per cent discount to historical averages. Despite a strong stock performance in the last 40 days, we believe investors will push the stock higher given it is still in deep value territory.”
Mr. Landry made a minor reduction to his 2024 EPS estimate ($12.52 from $12.73) and introduced his 2025 fiscal estimate of $14.03, which is line with the company’s target of $13.50-$14.50.
“In our view, BRP’s as significant growth drivers to sustain earnings growth over the coming years with the introduction of two fully electric motorcycles available in mid-2024 and incremental contribution from the recently announced Sea Doo Rise,” he said.
Touting its “track record of operational excellence” and “long growth runway,” he sees BRP’s valuation as “compelling,” maintaining a “buy” recommendation and $145 target.
“BRP’s valuation contracted significantly from its high in July 2020,” said Mr. Landry. “BRP trades at 7.2 times our FY25 EPS estimate, which is below the average forward P/E of 14 times since it became public. We see limited downside risk from current valuation levels and believe that over time the company’s valuation multiple will return to historical levels, providing investors with a strong tailwind.”
Similarly, National Bank’s Cameron Doerksen thinks BRP’s valuation “remains compelling,” reiterating an “outperform” rating and $130 target. The average is $131.20.
“A more challenging market for consumers may weigh on sentiment around BRP shares in the near term, but we believe the company is well positioned to weather potential softness in retail demand and view the stock’s current valuation as already reflecting a high likelihood of a recession,” said Mr. Doerksen.
Elsewhere, analysts making target changes include:
* Desjardins Securities’ Benoit Poirier to a Street-high $156 from $155 with a “buy” rating.
“BRP once again outperformed expectations by delivering solid results despite ongoing macroeconomic headwinds,” he said. “The momentum was sustained, with robust customer demand for its products and numerous longer-term electrification catalysts. Management continues to prudently leverage the balance sheet to strategically return capital to shareholders via buybacks and dividends. We reiterate our bullish stance..”
“We are very pleased with the company’s execution since the beginning of the pandemic to drive profitable growth. We recommend investors revisit the story.”
* RBC’s Joseph Spak to $124 from $114 with an “outperform” rating.
“F3Q23 results were much better than expected aided by timing. Still FY23 guidance raised. Dealer inventory is up substantially on timing as well, which bears will likely focus on, but management not seeing tougher consumer impacting results,” said Mr. Spak.
* DA Davidson’s Brandon Rolle to $125 from $123 with a “buy” rating.
“BRP’s CanAm ORV business continued to gain meaningful share in 3Q23, with supply chain improvements aiding product availability,” said Mr. Rolle. “Given BRP’s solid 3Q23 performance and favorable outlook, we are maintaining our BUY rating while raising our PT.”
* CIBC’s Mark Petrie to $137 from $132 with an “outperformer” rating.
“BRP again reported results well above expectations and increased full-year guidance for sales and earnings,” said Mr. Petrie. “Though gaining market share is not a new phenomenon for the company, wins have accelerated and the company has added 200 basis points to its North American powersports share this year. Inventory availability has improved, and no doubt supports wins, but competitors share the same supply chain dynamics. Clearly macro uncertainty rules the day and weighs on valuation, but we continue to believe BRP has built a stronger business with excellent prospects.”
=====
Citing its “disappointing Q3/22 print, uncertain regulatory hurdles in Colombia and a challenging capital position,” ATB Capital Markets analyst Frederico Gomes downgraded Khiron Life Sciences Corp. (KHRN-X) to “sector perform” from “speculative buy.”
The Toronto-based medical cannabis company, which focuses on Europe and Latin America, reported third-quarter revenue of $3.4-million, down 24.3 per cent sequentially and 26.5 per cent below Mr. Gomes’s estimate ($4.6-million). An adjusted EBITDA loss of $2.8-million also missed his forecast (a $2.1-million loss).
“The revenue miss was mainly due to a 38.6-per-cent quarter-over-quarter decline in medical cannabis sales, driven by two factors: (1) a review by the newly elected government in Colombia of the insurance coverage requirements in the country, and (2) delays in the launch of new products in Germany until the completion of the Pharmadrug acquisition, which occurred midway through the quarter,” the analyst said. “We believe these two factors impacted near-term results, but they may subside through Q4/22 and into 2023 as the Colombian Ministry of Health completes its review process (and provides necessary approvals) and KHRN ramps sales in Germany with its new distribution platform. Moreover, we see momentum in the UK (21-per-cent quarter-over-quarter sales growth) and growth opportunities in Brazil.”
Mr. Gomes thinks Khiron’s management has been “executing well amid a challenging regulatory and economic environment.” However, he thinks its “stretched” balance sheet, despite being “relatively unencumbered” by debt, is “an overhang on the stock, poses liquidity risks, and may impact the growth outlook as the Company cuts costs.”
“As of quarter-end, KHRN had $1.9-million in cash compared to Q3/22 free cash flow of negative $5.8-million, which, in our view, showcases the need to pursue additional sources of financing imminently,” he said.
The analyst cut his target for Khiron shares to 10 cents, matching the average, from 30 cents.
“Our Sector Perform rating reflects the risks inherent to the Company and the lower potential upside to our price target,” said Mr. Gomes.
=====
In other analyst actions:
* In a research note titled Connecting the Dots: A Compelling Lithium Hard Rock Discovery with Room to Grow in the Right Address, Stifel’s Cole McGill initiated coverage of Patriot Battery Metals Inc. (PMET-X) with a “speculative buy” rating and $8.25 target. The average is $8.76.
“The 100-per-cent owned Corvette Property is located within the CV Lithium Trend, an emerging spodumene pegmatite district discovered by PMET in 2017 and drilled in fall 2021,” he said. “PMET’s CV5-1 Corridor anchors potentially one of the largest conventional spodumene discoveries to date in North America. Corvette is 15km south of provincial highway access and a hydro electric power line. Strong provincial government support, attractive and stable financial incentive programs, lowest electricity rates in North America, cleanest grid globally, and a nearly 30-per-cent cost advantage on salaries for battery manufacturing employers has led to multiple midstream Electric Vehicle investments by global firms in Quebec. We see investing in Canadian lithium projects like Corvette as one of the strongest ways to invest in North American EV adoption, as PMET controls domestic lithium units OEMs increasingly require.”
* BNP Paribas Exane’s Sami Kassab cut Thomson Reuters Corp. (TRI-N, TRI-T) to “underperform” from “neutral” with a US$95 target. The average is US$115.10.
* CIBC’s Krista Friesen increased her target for Boyd Group Services Inc. (BYD-T) to $225 from $205, exceeding the $223.50 average, with a “neutral” rating.
* CIBC’s Robert Catellier raised his Enbridge Corp. (ENB-T) target by $1 to $59, above the $58.35 average, with an “outperformer” rating, while Barclays’ Theresa Chen cut her target to $55 from $57 with an “equal-weight” rating.
“Bid-ask spread for Mainline negotiations is narrowing and the next couple of months will be integral,” said Ms. Chen.
* In response to the $750-million sale of its insurance and wealth management operations to Desjardins Group, CIBC’s Nik Priebe increased his target for Guardian Capital Group Ltd. (GCG-T) to $49, matching the consensus, from $40 with an “outperformer” rating, while Scotia’s Phil Hardie hiked his target to $55 from $42 with a “sector outperform” recommendation.
“The deal unlocks significant value given that GCG.A traded at just under $29 per share prior to the announcement and yet the company has a corporate investment portfolio we estimate at $25 per share with a profitable institutional asset manager conservatively valued at $6.25 per share,” said Mr. Hardie, calling the transaction “transformative.”
* Guggenheim’s Gregory Francfort raised his Restaurant Brands International Inc. (QSR-N, QSR-T) target to US$62 from US$58 with a “neutral” rating. The average is US$66.
* Desjardins Securities’ Chris MacCulloch bumped his Spartan Delta Corp. (SDE-T) target to $21 from $19 with a “buy” rating, while BMO’s Mike Murphy also raised his target to $21 from $19 with an “outperform” rating. The average is $21.04.
“[Wednesday] morning, Spartan Delta announced the initiation of a strategic repositioning process to enhance shareholder value,” Mr. MacCulloch said. “Although the process may go in several directions, in our view it was refreshing to see a Canadian producer adopt a pragmatic approach to creating shareholder wealth given the stock continues to trade at a material discount vs peers. Meanwhile, we have bumped our target to $21 (from $19), reflecting positive estimate revisions stemming from the 2023 guidance release.”
* Stifel’s Alex Terentiew raised his target for shares of Teck Resources Ltd. (TECK.B-T) to $61 from $58 with a “buy” rating. The average is $53.03.
“Following an analyst lunch on Nov. 30 with new CEO Jonathan Price, and ahead of 2023 guidance in February, we have updated our forecasts and raised our target price ... As reflected in Teck’s Q3 results and conference call, we think Mr. Price brings a refreshing and positive change, while continuing on the copper-focused growth strategy set in motion by his predecessor,” he said. “Considering the inflationary pressures witnessed across the industry, we have raised our spending estimates once again for 2023+, but have also raised our long-term met coal price forecast to $180 per ton (from $160 per ton). Although our target price is $61 per share, we layout a scenario that highlights upside to $74 per share. With met coal continuing to generate impressive cash flow and QB2 set to double Teck’s copper production, we reiterate our Buy rating.”