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

Attractive returns and book value growth trump "the slowdown" for Canadian banks, said Citi analyst Maria Semikhatova in a research note released Thursday.

"We do not view the risk of meaningful domestic asset quality deterioration as a near-term concern and expect the banks to maintain strong profitability with improving efficiency helping to counter revenue pressures," she said. "Sector average RoTEs [return on tangible equities] were 19.5 per cent in 2Q19, while dividend payout ratios remained in the 40-50-per-cent range (excl. buybacks). An average RoTE of 18.9 per cent in 2019-20 and 46-per-cent payout ratio should drive 8-per-cent sector TBV [tangible book value] growth in 2020. Adding to that a 4-per-cent forward dividend yield and 2-per-cent buyback yield generates a total shareholder return (assuming unchanged P/TBV multiple) of c.14 per cent."

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However, Ms. Semikhatova did lower her earnings per share estimates for the Big 5 banks by a range of 1 to 5 per cent. , citing a “more cautious stance on margins and on provisions.” For the current fiscal year, Bank of Montreal and Canadian Imperial Bank of Commerce saw the largest declines, dipping to $9.60 and $11.87, respectively, from $9.55 and $12.32.

With those changes, while maintaining a “buy” rating for the stocks, she made the following target price changes:

Bank of Montreal (BMO-T) to $115 from $120. The average target on the Street is $107.73, according to Bloomberg data.

Canadian Imperial Bank of Commerce (CM-T) to $120 from $130. The average is $115.

Royal Bank of Canada (RY-T) to $120 from $125. The average is $110.44.

Bank of Nova Scotia (BNS-T) to $85 from $90. The average is $79.50.

Ms. Semikhatova maintained a $90 target for Toronto-Dominion Bank (TD-T) , which exceeds the average of $83.47.

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“While we rate all Canadian banks Buy, our top pick is TD given: 1) top-tier market position in Canadian retail and strong banking franchise in the U.S. (top 10 ranked by deposits); 2) superior earnings growth (2018-21 estimated CAGR of 6.3 per cent vs. peers at 4.7 per cent); and 3) strong capital position (CET1 of 12 per cent),” the analyst said.


The commencement of propane exports from AltaGas Ltd.'s (ALA-T) Ridley Island Propane Terminal “is significant as it could be more profitable than the market think,” according to Industrial Alliance Securities analyst Elias Foscolos, who believes the facility “can add significantly more EBITDA than currently projected.”

He said the facility, which saw its first ship depart for Asia on May 23, provides AltaGas a "first mover advantage" in establishing relationships in the "premium" Asian market for propane. It also has the capacity to handle butane in the future.

"Increased propane supply from North America has piqued the interest of Asian buyers who have been sourcing their propane from the Middle East," said Mr. Foscolos. "The reduced shipping times, lower prices, and reduced political risk make North American propane an attractive alternative. The RIPET export facility is very advantageous to Canadian NGL producers as it should offer them a price advantage in selling propane as a fuel or petrochemical feedstock to the Asian markets at a higher price, as exports through RIPET will reduce transportation costs and could improve producers’ netbacks. ALA estimates that producers could gain $8/bbl."

Mr. Foscolos projects RIPET, which is a joint venture with Canadian subsidiary of Royal Vopak N.V., will contribute almost 5 per cent of the company's EBIDA in 2020 with the potential for up to 10 per cent. He notes this contribution comes despite being only 3 per cent of AltaGas' current property, plant, and equipment (PP&E).

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Maintaining a “buy” rating, he increased his target to $23 from $21.50. The average on the Street is $20.15.


Calling it a free cash flow and capital efficiency story, rather than a growth one, Credit Suisse analyst Dan Levy initiated coverage of Magna International Inc. (MGA-N, MG-T) with a “neutral” rating.

“We expect MGA to exhibit organic top-line growth only modestly ahead of global light vehicle production: 1. MGA’s BES segment (Body Exteriors and Structures/its largest segment), is highly leveraged to North America, which is likely to see modestly negative growth given amid cycle pressures; 2. With MGA already one of the top 3 suppliers in many of its product areas, we believe its newer, more high-growth products, will not be large enough to shift the revenue mix in a way that adds significant growth to the total company,” he said.

“The increased focus on FCF generation and improved capital efficiency helps MGA in two ways: 1. Given our view for limited organic revenue and EBIT upside, FCF can support EPS growth through either share buybacks or inorganic growth; 2. FCF is the key link in MGA’s diverse product strategy – by executing well in more mature products, MGA can fund development of new technologies.”

Mr. Levy set a US$55 target for Magna shares. The average on the Street is US$55.29.

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"MGA is an anomaly amongst auto suppliers – whereas most suppliers have pursued product specialization, MGA has maintained a diverse product offering, with on the surface no similarities aside from end market or customer. It is also focused on auto tech, but not just one ‘megatrend,’ said the analyst. “While this makes the narrative tough to decipher, we believe the key link is FCF, as the mature products can fund development in new technology. We see solid FCF generation ahead, which can help to support EPS growth in the face of limited EBIT growth. Yet given our outlook for modest top-line growth and that it may take time for the FCF story to drive a re-rating, and also given the lack of a clear catalyst, we remain on the sidelines.”

Magna’s initiation came in a report from Mr. Levy titled “The Challenge of the Two Clocks,” in which he began coverage of U.S. auto and auto parts companies.

Mr. Levy gave Tesla Inc. (TSLA-Q) an “underperform” rating, believing the debate between the electric vehicle maker and Volkswagen will likely “define” it for the next 10 years.

“To best understand Tesla’s prospects in its push for electric vehicles (EV) proliferation, we believe it’s worthwhile to compare it to an auto industry incumbent – most appropriately Volkswagen (VW),” he said. “With both Tesla and VW committed to EV proliferation, the Tesla vs. VW debate could be relevant for the next decade or more. Tesla currently leads in areas that will likely define the future of carmaking. Yet it faces risks ahead – reflected in our below-consensus estimates. And despite growth ahead, we believe Tesla is likely to settle as a niche automaker.”

“ Both Tesla and VW are treating the EV push as existential, yet they come from different positions. Tesla is a small newcomer to an industry with high barriers to entry. VW is the definition of an incumbent, selling more vehicles than any other automaker including 40-times Tesla’s deliveries in 2018. And with VW making a strong push on EVs, it will go up against Tesla. The comparison informs us of Tesla’s risks – 1. Competition from larger, better capitalized players; 2. Tesla lacks the same scale as other automakers; 3. Tesla has struggled with the basic ‘processes of the auto industry. Ultimately, if Tesla can’t maintain healthy margins, then its edge in the differentiating aspects of the auto business will be a moot point.”

Mr. Levy set a target of US$189 for Tesla shares. The average is US$266.88.

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He gave Ford Motor Co. (F-N) an “outperform” rating and US$13 target, which sits above the US$11.05 average.

“The central theme of our launch is ‘The Two Clocks,’ reflecting the industry challenge of concurrently balancing cyclical (the ‘near’) and secular challenges (the ‘far’),” the analyst said. "Given the concept was originally cited by Ford, it is only fitting that Ford is the textbook case for our ‘two clocks’ framework. Ford faces a number of risks ahead, as it redesigns its business to address profitability, while concurrently pursuing a longer-term reimagining of the business. Yet we see upside for the stock, as there have been early signs of improvement with more to come.

He also gave ratings to the following companies:

Adient PLC (ADNT-N) with a “neutral” rating and US$24 target. Average: US$25.09.

BorgWarner Inc. (BWA-N) with a “outperform” rating and US$50 target. Average: US$27.18.

Delphi Technologies PLC (DLPH-N) with a “neutral” rating and US$21 target. Average: US$27.18.

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Dana Inc. (DAN-N) with an “outperform” rating and US$22 target. Average: US$22.20.

Aptiv PLC (APTV-N) with an “outperform” rating and US$90 target. Average: US$88.92.


After “pushing back” his uranium price forecast, RBC Dominion Securities analyst Andrew Wong lowered his earnings expectations for Cameco Corp. (CCO-T, CCJ-N).

“Uranium spot prices weakened in 1H/19 due to limited demand as uncertainty around Section 232 generally kept buyers away from the market,” he said. "We expect prices to remain relatively unchanged until better clarity later in 2019, followed by a gradual increase to ~$40/lb through 2022E/2023E as prices reflect a more balanced market. Longer term, we continue to expect a significant market deficit forming later in the next decade, but we have pushed back

our expectations for when the market requires incentive pricing due to delayed new reactor construction in China and potential re-shutdowns in Japan in the early-2020s. As a result, we have also slowed and pushed back our expectations for rising prices, with long-term prices reaching our $65/lb incentive price in 2028 vs. 2025 previously."

Mr. Wong thinks the uncertainty surrounding the investigation by the U.S. Department of Commerce on Section 232 of the Trade Expansion Act remains an overhang for Cameco, despite calling a report that the U.S. may establish a 5-per-cent import quota “a better outcome than expected and would only add a small amount of new supply.”

“We expect clarity on the issue should result in improved activity, although we note there is risk that the situation remains unclear due to general uncertainty around U.S. trade policy,” the analyst said.

Also delaying adding the restart of Cameco’s McArthur River operation into his financial assumptions as a result of a slower-than-anticipated recovery in uranium prices, Mr. Wong lowered his 2019, 2020 and 2020 EBITDA estimates to $289-million, $263-million and $438-million, respectively, from $312-million, $355-million and $583-million.

Maintaining a “sector perform” rating for Cameco shares, Mr. Wong moved his target to $15 from $16. The average is $17.56.

“We believe the company is well positioned to benefit from an eventual long-term recovery in uranium prices, while strong operations support a very robust financial position in the near term,” he said. “However, we expect a uranium price recovery to be gradual. We view the CRA and TEPCO disputes as potential positives to our valuation, which we have not yet incorporated.”


The shortfall in the first-quarter results from BlackBerry Ltd.'s (BB-N, BB-T) enterprise software and services (ESS) segment reaffirms the software company is a “show me story,” said RBC Dominion Securities analyst Paul Treiber.

“While Q1 headlines were essentially in line, ESS revenue was well below expectations,” he said. “This overshadowed stronger growth at Cylance, Q1 profitability and BTS design wins. Despite lower ESS revenue, management reaffirmed FY20 guidance and expressed confidence in future growth opportunities.”

Mr. Treiber said the ESS struggles reduces visibility to BlackBerry’s long-term growth, leading him to lowered his earnings projections and his target price for its shares to US$9 from US$10. The average on the Street is US$10.04.

He maintained a “sector perform” rating.

“BlackBerry has successfully transitioned its business away from handsets to enterprise software,” he said. “Our Sector Perform thesis reflects our view that BlackBerry is trading near fair value and stronger growth is required to drive material upside for the shares.”


Calling it a “king in the north,” Raymond James analyst Kurt Molnar initiated coverage of Pipestone Energy Corp. (PIPE-X) with an “outperform” rating.

“We would recommend that prospective investors should initiate at least a portion of their Pipestone position here and now,” he said. “E&P stocks in Canada have rarely been more out of favor and there is the very real alternate potential that Pipestone wells outperform expectations from the “get go” and can even improve from there. Binary potentials no doubt in the relative near term, while the longer term and regional well control offer high conviction that the Pipestone project will be unusually levered to oil and condensate.

“That leads us to one final regional advantage that Pipestone may be able to claim with the passage of time. We think their lands have resource windows that are distinctly biased to oil or condensate. Most of the peers on the map sheet above are focused on condensate rich Montney, but those on the updip edge of the broader trend of our first map have very distinct oil prospects in their inventory. Similarly, in a number of areas on the Pipestone lands (north, south and east) we think there is the potential for oil wells that are distinct from their condensate wells. Given that we expect that natural gas pricing is likely to remain challenged in the near and mid term at least, we expect investors and E&Ps to become increasingly focused on minimizing their leverage to natural gas. Gas has the poorest commodity price prospects, while ironically having some of the highest cash costs (processing and transport) such that gas is highly dilutive to marginal economics in oil and condensate projects. As such, we expect that players who enjoy meaningful condensate leverage in their Montney (say 20-40 per cent for condensate alone) will increasingly look for windows of opportunity (in the drilling inventory) to up their liquids leverage (oil in particular) while reducing their gas leverage.”

Mr. Molnar set a target of $2 per share. The average is $3.45.

“We think Pipestone is well situated to achieve their targeted ramp up in production to 14,000-16,000 Boed by the end of 2019,” said the analyst. “Within that production target, the Company expects to be 35-40% levered to condensate and 5-10-per-cent levered to NGLs. We think the Pipestone lands and the fracks to date are capable of delivering on that commodity mix. If so, Pipestone will be in relatively rare company among public E&Ps with regards to Montney condensate leverage. We frankly think they may be capable of exceeding this condensate leverage. In the mid term, we also think the prospect of even greater oil/condensate leverage (from oil specific windows in the drilling inventory) is an effective call option the investor is getting for free as a means to even further reduce leverage to “gas dilution” of marginal economics into the future. If these production estimates are achieved we expect run rate annualized field cash flow in the order of $110 million at the end of 2019 to be offset with forecast net debt in the order of $180 million. This guidance from the field drives the corporate forecasts we launch for 2019 and 2020 deriving our typical sum of parts build out to a $2.00 target price and initiating coverage with an Outperform rating.”


In other analyst actions:

TD Securities analyst Daryl Young initiated coverage of Badger Daylighting Ltd. (BAD-T) with a “buy” rating and $55 target. The average on the Street is $54.13.

TD’s Craig Hutchison initiated coverage of ERO Copper Corp. (ERO-T) with a “hold” rating and $22 target. The average is $20.80.

TD’s Graham Ryding downgraded AGF Management Ltd. (AGF-B-T) to “hold” from “buy” with a $5.50 target, down from $7.50 and below the $6.26 consensus.

Scotiabank analyst Cameron Bean downgraded Crew Energy Inc. (CR-T) to “sector perform” from “sector outperform” with a target of $1, falling from $1.80. The average is $1.78.

National Bank Financial analyst Travis Wood initiated coverage of Husky Energy Inc. (HSE-T) with a “sector perform” rating and $16 target, which falls 37 cents below the consensus.

Canaccord Genuity analyst Brendon Abrams initiated coverage of Inovalis Real Estate Investment Trust (INO-UN-T) with a “hold” rating and $10.50 target, which falls 17 cents lower than the consensus.

Cormark Securities analyst Richard Gray initiated coverage of Altius Minerals Corp. (ALS-T) with a “buy” rating and $20 target. The average target is $17.75.

GMP initiated coverage of Trisura Group Ltd. (TSU-T) with a “buy" rating and $38 target. The average is $35.33.

GMP also initiated coverage of Zenabis Global Inc. (ZENA-T) with a “buy” and target price of $3.25, which falls short of the consensus of $5.13.

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