Inside the Market’s roundup of some of today’s key analyst actions
Ahead of the start of second-quarter earnings season for Canadian banks next week, National Bank Financial’s Gabriel Dechaine trimmed his earnings expectations based a “flattening” of his net interest margins forecast, rising expense growth and a “more conservative view” on provisions for credit losses.
The result was a 3-per-cent decline in his earnings per share projections for both the second quarter and full-year 2023. His estimate for 2024 declined by 4 per cent.
“Big-6 bank stocks are underperforming the S&P/TSX by close to 400 basis points so far this year,” said Mr. Dechaine. “They are trading at a NTM P/E [next 12-month price-to-earnings] of 9.2 times on consensus earnings, or 10 percent below their five-year average. However, consensus earnings include an industry PCL ratio of roughly 30 bps over the next year, which is below the historical average of 35 bps and well short of the 70-80 bps seen in prior recessions. If we simply assume a doubling of PCLs (i.e., to 60 bps), the pro forma P/E of 11.2 times looks a lot less compelling (10 per cent above the five-year average).”
In a research note released Thursday titled Let the numbers do the talking (down), Mr. Dechaine said “it is is difficult for us to get excited about anything” in terms of stock calls, declaring “broken record alert: still too early.”
However, he does think the “short-term risk/reward” on Toronto-Dominion Bank (TD-T) is “compelling.”
“The stock is trading at a mid-single digit discount (compared to a typical mid-single digit premium),” he said. “We believe it will be a relative NIM outperformer this quarter. And we could see some modestly positive news on the capital deployment front (e.g., elimination of DRIP discount). Longer-term questions on capital deployment cloud TD’s outlook, though we do not believe this issue matters much next week.”
After his forecast reductions, Mr. Dechaine cut target price for TD shares to $94 from $98, maintaining a “sector perform” recommendation. The average target on the Street is $95.77, according to Refinitiv data.
His other target adjustments are:
- Bank of Montreal (BMO-T, “sector perform”) to $129 from $133. Average: $138.66.
- Bank of Nova Scotia (BNS-T, “sector perform”) to $69 from $72. Average: $71.48.
- Canadian Imperial Bank of Commerce (CM-T, “sector perform”) to $62 from $64. Average: $63.85.
- Laurentian Bank of Canada (LB-T, “sector perform”) to $39 from $42. Average: $39.54.
- Royal Bank of Canada (RY-T, “outperform”) to $142 from $145. Average: $139.98.
He maintained a $31 target and “sector perform” recommendation for Canadian Western Bank (CWB-T). The average is $30.57.
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RBC Dominion Securities’ Paul Treiber came away from BlackBerry Ltd.’s (BB-N, BB-T) annual analyst summit event on Wednesday believing a split of the Waterloo, Ont.-based company is much more likely than a sale.
“CEO John Chen reiterated that the market is heading towards convergence,” he said. “However, the company’s strategic review announced May 1 will look at the structure of the company and if shareholder value can be created by segmenting the company into two business units. Both segments are trading well below peers, as Cybersecurity’s underperformance has overshadowed the attractiveness of IoT [Internet of Things]. On a sum of the parts basis, we estimate the stock is currently valuing IoT at 8 times FTM EV/S [forward 12-month enterprise value to sales] and Cybersecurity at 1.5 times FTM EV/S, which is a 27 per cent and 75-per-cent discount to peers at 11 times and 6 times, respectively.”
The company’s updated long-term financial targets imply fiscal 2026 revenue that is 12 per cent below their projection from a year ago, largely due to lower Cybersecurity revenue. Mr. Treiber emphasized short-term shareholder returns are likely “dependent on a rebound in Cybersecurity, which remains unclear.”
“BlackBerry acknowledged historical missteps that led to the revenue challenges in its Cybersecurity unit, including being late with EDR (endpoint detection and response) and its under-focus on the SMB market,” he said. “Following new channel investments and the release of new products, management reiterated FY24 targets provided on March 30 for Cybersecurity to grow revenue 5 per cent year-over-year mid-point, ARR to return to sequential growth 2H, $430-480-million billings, and sees growth acceleration through FY26; negatively, BlackBerry’s FY26 Cybersecurity revenue outlook is 16 per cent below the inferred targets provided last year.”
Seeing “many moving parts,” Mr. Treiber raised his target for BlackBerry shares to US$5 from US$4.25, citing better visibility to growth from its IoT business, which he called the company’s “gem.” The average target on the Street is $5.17.
“The recent rally in BlackBerry’s shares reflects the potential for the strategic review to surface value,” said Mr. Treiber, reaffirming his “sector perform” recommendation.
“At this point, a split of the company appears more likely than a sale. There’s a material divergence between the fundamentals of Cybersecurity (down 14 per cent year-over-year ARR and 81-per-cent NDR last quarter) vs. IoT. Even with a potential split, Cybersecurity’s struggles may continue and limit potential shareholder returns; we believe BlackBerry’s discount to peers will persist pending a turnaround in billings, improved revenue growth and other key metrics.”
Elsewhere, Canaccord Genuity’s T. Michael Walkley increased his target to US$5.50 from US$4 with a “hold” rating.
“BlackBerry hosted its annual analyst summit today, and we were encouraged by strides management has made in improving its product offerings and GTM strategies for Cybersecurity while also driving a strong backlog in its IoT business despite macro challenges,” said Mr. Walkely. “With management announcing on May 1 the Board of Directors is performing a strategic review to unlock shareholder value that could include the separation of one or more of BlackBerry’s businesses, we have updated our price target methodology to a sum-of-parts analysis. While discussed in more detail below, this analysis results in us increasing our price target to $5.50 from $4. While management has created a cogent long-term strategy and several parts of the business divisions are turning the corner toward improving growth trends, we await more proof in execution on the new Cybersecurity product roadmap, evidence of cross-selling opportunities emerging, growth in software and services revenue, and the potential for upside to our estimates before becoming more constructive on the shares. Therefore, with the current share price near our increased price target, we maintain our HOLD rating.”
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Shares of Ritchie Bros Auctioneers Inc. (RBA-N, RBA-T) “feel washed out,” according to National Bank Financial analyst Maxim Sytchev.
Believing recent “relative (and absolute) valuation compression” has set up “a favourable risk-reward dynamic” for investors, he raised his recommendation for the Vancouver-based company to “outperform” from “sector perform” previously.
“Since reporting Q1/23 results after close on May 10th (which included 11 days of IAA’s contributions), RBA shares have pulled back 11 per down, approaching the November 2022 nadir when the transformational acquisition was initially announced,” he said. “While a multitude of risks related to the IAA integration remain ... we remain constructive on both the heavy equipment and salvage vehicle auctioneering space given their structurally defensive nature. With Ritchie Bros. shares now trading at less than consensus 19 times NTM [next 12-month] EPS, we believe the material multiple compression now reflects an overly punitive view of the pro-forma business. Although we do not think that RBA shares will fully regain their historical valuation premium (27.6 times average NTM P/E since 2017) in the short term, the current multiple is a full 2.6 standard deviations below this mean and presents an attractive entry point for a quality company with a resilient margin and a significant anti-cyclical earnings profile.”
Cautioning the change to his investment thesis for Richie Bros. is basely solely “within a risk / reward confine,” Mr. Sytchev maintained a US$61 target for its shares. The average target on the Street is US$66.71.
“Looking across the rest of our coverage, names that are doing well (read consulting, automation) are imputing those dynamics in forward P/E multiples, on both absolute and relative basis,” he said. “With RBA, we have the inverse - a material step-down in valuation on pro-forma basis as the IAA transaction barely went through, we had a material shareholder churn, Q1/23 was in line to sub-par with lack of modeling clarity while the near-term outlook on capex / SG&A was marginally worse than expected (hence, shares down 8 per cent year-to-date vs. S&P 500 up 8 per cent, consulting/automation cohort in 20-per-cent range and Copart up 33 per cent). B
“But… and, it’s a big BUT, these dynamics are KNOWN to the market participants. Whether one likes the IAA deal (or not), it’s done. Because we also cover the auto dealer space (vis-à-vis which we are positioned negatively), we follow closely used car pricing and with higher rates / affordability, better new product availability, eventual pricing contraction should benefit IAA’s business (as opportunity cost to total a car is less onerous – we are seeing early signs of that that now). Legacy RBA equipment business will see better flow on compressed pricing; this too, is just a matter of time.”
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Coming off a research restriction, National Financial analyst Matt Kornack lowered Dream Office REIT (D.UN-T) to “sector perform” from “outperform,” recommending investors tender into its substantial issuer bid.
Concurrent with the release of first-quarter results that met expectations on May 4, Dream Office announced an agreement to sell 12.5 million units of Dream Industrial REIT (DIR.UN-T) on a bought deal basis for total gross proceeds of approximately $177.5-million. It intends to use those gains to help fund the commencement of a substantial issuer bid to purchase up to 12.5 million of its outstanding REIT units at a price of $15.50 per unit.
“Results were largely in line with expectations and led to a positive revision to our earnings outlook in light of a beat to NOI [net operating income],” he said. “Layered on top of this was the accretion associated with the announced SIB, which was high single-digit accretive to our earnings outlook at over 10-per-cent accretive to NAV.
“Admittedly there is some uncertainty around what level of take-up there will be for the offering, but we have assumed modelling wise that the entire buyback is accomplished. There will be important optics around the amount tendered by various actors including Dream Unlimited and Artis that won’t be known until close. While we continue to think the REIT has levers to pull on the asset monetization front, in light of the announced special distribution, which carries tax consequences for some holders, we would be inclined to tender into the SIB and will reassess our rating and target price after close, hence our move to Sector Perform in the interim given the lower return to target relative to the broader sector.”
Mr. Kornack cut his target for Dream Office units to $15.50 from $16 to reflect the SIB. The current average on the Street is $17.
“We are taking a larger discount to NAV to reflect D.UN’s reduced exposure to DIR.UN and higher leverage and downgrading to SP as we would be inclined to tender into the SIB,” he said. “We will reassess our rating and target price post close.”
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In a research report released Thursday titled A Big Spoonful of Equity Helps the Leverage Go Down, ATB Capital Markets analyst Chris Murray said the balance sheet “reset” by NFI Group Inc. (NFI-T) “clears the way for the company to return to profitability as it meets record levels of demand for its best-in-class products.”
On May 10, the Winnipeg-based bus manufacturer announced a “comprehensive refinancing plan to improve financial flexibility, strengthen its balance sheet and best position the Company to capitalize on the historic demand for its products and expected financial recovery.” It includes amendments to its existing senior secured credit facilities, extensions to its senior unsecured debt facilities with the Government of Manitoba and Export Development Canada and moves to raise additional funds through the sale of new common shares and a second lien debt financing.
“As NFI Group Inc. remains in active discussions with creditors and potential new equity and debt holders, we are making a first attempt at modelling the impact on the Company’s capital structure,” said Mr. Murray. “The Company has disclosed that it has reached an agreement with creditors to extend the Company’s primary credit facility, including adding a term loan component, that it has a backstop in place for at least $150-million in new equity, and that it is seeking new subordinated debt in the $200-million-$250-million range. With the transaction mutually conditional on closing and requiring shareholder approval for the equity issue (and needed before a breach on June 25, 2023), we believe there is a high likelihood of success. While the credit and equity components have been disclosed, the sub-debt component remains in progress. Still, with our expectation for a successful close and not a CCAA filing, which is the likely alternative if this process fails (reiterating our Speculative Buy rating), we have lowered our target.”
Reiterating a “speculative buy” rating, Mr. Murray reduced his target for NFI shares to $12.50 from $14. The average on the Street is $11.25.
“Assuming the Company completes the refinancing, we see a clearer runway for the Company to achieve its goals given the dominant market share position in each of its core verticals (60-per-cent-plus in NA Coach, 45 per cent in NA Transit, and 73-per-cebt-plys in UK Coach and Bus), very strong products, a long track record of supplying challenging public sector customers, and record funding levels and demand as governments look to transition fleets to electric propulsion,” he said.
“As we look at valuation, we remain mindful that the Company’s prevailing trading multiple is likely to expand towards 10 times as ROIC trends towards the 2025 target of more than 12 per cent, as it has historically. While the cost of capital is expected to remain higher than previously, we see a path to deleveraging as the Company generates significant cash flows. With capex of $50-million, or historically less than 2 per cent of revenue with neutral working capital needs, cash flow on EBITDA of $400-million-plus should be available for balance sheet repair, including reducing sub-debt, as we enter 2025 and 2026.”
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In other analyst actions:
* Following its Investor Day event on Wednesday, TD Securities’ Aaron Bilkoski cut his PrairieSky Royalty Ltd. (PSK-T) to “hold” from “buy” with a $24 target, below the $25.22 average on the Street.
* TD Securities’ Aaron MacNeil downgraded Next Hydrogen Solutions Inc. (NXH-X) to “hold” from “speculative buy” and cut his target to 90 cents from $4. The average target is $3.25.
* National Bank’s Michael Parkin trimmed his target for Centerra Gold Inc. (CG-T) to $12.50 from $13 with an “outperform” rating. The average is $10.17.
“Centerra closed down 18.1 per cent on Monday after reporting 1Q23 results, which we feel was overdone given several one-time items impacted earnings, some of which should reverse over the course of this year,” said Mr. Parkin. “We continue to believe that the ministry approval for the restart of the Oksut mine will be a positive catalyst for Centerra’s share price as it supports the potential return strong FCF.”
* Raymond James’ Steve Hansen cut his targets for Cubicfarm Systems Corp. (CUB-T, “market perform”) to 15 cents from 25 cents and Farmers Edge Inc. (FDGE-T, “underperform”) to 15 cents from 30 cents. The averages are 25 cents and $1.43, respectively.
* Piper Sandler’s Charles Neivert cut his Nutrien Ltd. (NTR-N, NTR-T) target to US$70 from US$82 with a “neutral” rating. The average is US$82.02.
* Stifel’s Ian Gillies lowered his targets for Russel Metals Inc. (RUS-T, “buy”) to $42 from $42.50 and Stelco Holdings Inc. (STLC-T, “hold”) to $46 from $47. The averages are $40.30 and $51.82, respectively.
“The North American steel market has been unusually uneventful in the past month on all fronts: pricing, demand and notable news,” said Mr. Gillies. “Market participants are trying to find a new price equilibrium in an attempt to reach a more balanced supply/demand dynamic. Moreover, recession concerns are looming in the industry, adding onto buyers’ hesitations while sellers cautiously navigate their operations. In our view, it is difficult to handicap the impact on steel prices and demand in a recession, but we believe there are two key factors that make ’this time different’: significant infrastructure spending supporting steel demand; and balance sheets for steel producers/distributors in our coverage universe are in impeccable shape.”
David Leeder