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

National Bank Financial analyst Gabriel Dechaine thinks accretion expectations for Bank of Montreal’s (BMO-T) takeover of California-based Bank of the West “may need tempering” following a “messy” first quarter of incorporating its performance into the overall results.

“On an organic basis, the U.S. segment did well, with 11-per-cent PTPP [pre-tax, pre-provision] growth and 2-per-cent positive operating leverage,” he said. “On the other hand, NIM [net interest margin] was flat sequentially and commercial loan balances fell 4 per cent. Management attributed weaker loan growth to slowing business activity, particularly in U.S. CRE/leveraged finance sectors. More importantly, as we shift to the contribution of BoW, revenues were in line, while expenses were higher than expected.

“Separately, we believe there is downside risk to accretion from BoW, especially as it relates to balance sheet growth. For instance, deposit balances are down nearly 10 per cent from year-end 2022 levels. Management explained that BoW had a significant level of excess/surge deposits that the bank chose not to replace with higher cost (term) funding. While that’s a reasonable explanation, our concern is that continued deposit erosion could trigger new funding needs (note BMO’s U.S. P&C segment LTD ratio now stands at 98 per cent compared to 88 per cent a year ago).”

Shares of BMO slid 3.9 per cent on Wednesday following its premarket earnings release that missed the Street’s expectations. The bank earned $2.93 per share for its second quarter of 2023, below the consensus estimate of $3.16 as revenue fell short of projections and expenses rose.

“Q2/23 operating leverage of negative 10 per cent (or negative 6 per cent on an organic basis) resulted in BMO backing off its target of positive operating leverage on a full-year basis,” said Mr. Dechaine. “Management cited the combination of a tougher revenue growth environment, challenging comparables, and BoW’s elevated NIX ratios as primary contributing factors. We note that an under-appreciated revenue headwind is foregone NII in the corporate segment BMO was earning on excess capital the bank ultimately used to pay for BoW (which we adjusted in our revised forecast). Looking ahead, BMO expects positive operating leverage in fiscal 2024, boosted by BoW expense synergies that it aims to fully realize by Q2/24.”

Reducing his estimates to reflect lower net interest income in BMO’s Corporate segment and higher expenses, Mr. Dechaine reduced his target for its shares to $122 from $129, maintaining a “sector perform” recommendation. The average target on the Street is $133.20, according to Refinitiv data.

Other analysts making target adjustments include:

* Scotia Capital’s Meny Grauman to $143 from $151 with a “sector outperform” rating.

“It is hard to label a 7-per-cent miss to consensus as anything other than a negative outcome, although we note that adjusting for about $80-million in one-time expenses BMO’s core EPS the miss would have narrowed to 5 per cent,” said Mr. Grauman. “Look past the noise from the Bank of the West (BoW) transaction, and you can clearly see an operating environment that is getting much more difficult for the bank as revenue growth slows and expenses remain persistently high. The thing is that those pressures are sector wide, and in fact less likely to impact BMO once the expected synergies from the BoW deal (synergies that Management just reiterated) kick in. However, with the bank now guiding to continued negative operating leverage for the rest of this year, that relative outperformance story is only likely to really emerge next year. Although Canadian bank investors are re-examining their exuberance for U.S. exposure, we continue to believe that at BMO’s scale the recent crisis should actually create opportunities for what is now a Top-10 U.S. bank. Despite that positive stance, we take the opportunity to make some pretty deep cuts to our forward estimates to reflect the tougher revenue and expense environment even in the face of deal-related synergies.”

* Desjardins Securities’ Doug Young to $134 from $141 with a “buy” rating.

“We like the higher-than-expected CET1 ratio and the future potential BoTW integration benefits. However, BMO has turned into a FY24 story,” he said.

* Canaccord Genuity’s Scott Chan to $121.50 from $130 with a “buy” rating.

“For the quarter, BMO’s P&C segments performed well on both sides of the border with the addition of BOTW results (full quarter of contribution) benefitting from strong balanced growth and higher margins,” said Mr. Chan. “Canadian deposits continued to grow (up 1.6 per cent quarter-over-quarter) and the balance shift to term deposits stabilized. Capital markets PTPP down 16 per cent year-over-year (tough comp), while Wealth management was impacted by unfavourable global markets and higher expenses (i.e., last year’s investment in salesforce and technology). As a result, we made net negative changes to our forecasts.”

* Barclays’ John Aiken to $123 from $127 with an “overweight” rating.

“BMO reported weaker than forecast earnings, under expense growth with management pushing out its forecast for positive operating leverage to 2024. However, the integration (and additional cost controls) can provide tailwinds moving forward,” said Mr. Aiken.

* CIBC’s Paul Holden to $134 from $139 with a “neutral” rating.

“We have lowered our adjusted EPS estimates following the FQ2 earnings miss. Non-interest expense assumptions have moved higher while NIM assumptions have moved lower. We think there is an interesting setup for BMO in F2024 based on the realization of expected cost synergies and organic growth in the U.S.,” said Mr. Holden.

* BoA Global Research’s Ebrahim Poonawala to $125 from $134 with a “neutral” rating.


The second-quarter results from Bank of Nova Scotia (BNS-T) were “not great,” according to Desjardins Securities analyst Doug Young.

However, he saw “encouraging” signs from its international banking performance as well as the outlook for its CET1 ratio and non-interest expense (NIX) growth.

Summarizing “positives” from the report, he said: “The CET1 ratio of 12.3 per cent was above our forecast. And it plans to maintain the ratio above 12 per cent until it has more conviction on the macro environment and clarity around regulatory expectations. Buybacks are not in the cards, but perhaps it could turn off the discounted DRIP. (2) We liked the trends in international banking (eg NIMs, loan growth, etc). Results were strong in LatAm and the Caribbean. (3) There has been a change to the bank’s interest rate hedging strategy, reflecting management’s ‘higher for longer’ view. (4) Management expects all-bank NIM excluding trading to modestly expand from here as asset repricing continues and funding costs stabilize. (5) The bank showed good deposit trends.”

Scotia shares slipped 1.3 per cent following the premarket release, which included cash earnings per share of $1.70 that fell below both Mr. Young’s $1.73 estimate and the consensus forecast of $1.70.

“Relative to our estimates, international banking was in line and all the other divisions fell short,” he said.

“Concerns. (1) Higher expenses were a drag on Canadian P&C banking results. (2) The all-bank non-interest expense (NIX) ratio was elevated, as was expense growth. That said, management expects NIX to grow sequentially in the low-single-digit range (its target). (3) The ‘other’ division’s PTPP loss was bigger than anticipated, and this is likely to remain elevated through FY23.”

Maintaining a “cautious stance” on Scotia, Mr. Young trimmed his target by $1 to $72 with a “hold” recommendation. The average target is $70.41.

Others making changes include:

* Canaccord Genuity’s Scott Chan to $67 from $68 with a “hold” rating.

“Relative to CG estimates, BNS’s lower earnings were primarily impacted by lower NII and larger expenses,” he said. “As a result, we made net negative changes to our forecasts with our F2023E / F2024E declining by 5 per cent/5 per cent impacted by NII (e.g., moderating loan growth), higher NIX, partially offset by lower PCLs. Further, we rolled forward our valuation one quarter (Q4/F23E to Q3/F24E) and is now consistent with our peer valuations. We maintain our HOLD rating and slightly lower our target price.”

* National Bank Financial’s Gabriel Dechaine to $66 from $69 with a “sector perform” rating.

“BNS’ expense growth of 10 per cent this quarter, resulted in 8 per cent over the course of H1/23, and negative 8-per-cent operating leverage along the way,” said Mr. Dechaine. “We had expected moderation, as BNS has historically been relatively stingy on costs. However, base salary cost increases and general inflationary pressures have proven to be the overriding influences. Management has guided to low single-digit sequential expense growth in coming quarters, which implies high single-digit cost expansion for the year. We have adjusted our estimates accordingly. Separately, management clarified that its ‘strategic refresh’ under new CEO Scott Thomson will not trigger an incremental increase in expense growth (i.e., no new & large investment phase on the horizon).”

* Barclays’ John Aiken to $63 from $64 with an “underweight” rating.

“Scotia continues to make headway on its stated priorities; however, higher-than-forecast expense growth weighed on operating leverage and caused the bottom line to disappoint. Should Scotia address expenses in future quarters, the momentum in International could garner the attention it merits,” said Mr. Aiken.

* CIBC’s Paul Holden to $71 from $74 with a “neutral” rating.

“BNS reported a FQ2 miss and we have revised our estimates lower. While we think the story has improved from a NIM and capital perspective, we think there is still potential downside related to a credit cycle that is just beginning. BNS is a more credit-sensitive bank,” said Mr. Holden.

* BMO’s Sohrab Movahedi to $73 from $75 with a “market perform” rating.


While he reduced his estimates for Ensign Energy Services Inc. (ESI-T), Raymond James analyst Andrew Bradford thinks recent market shares losses are “likely to moderate or even reverse in the coming quarters,” leading him to upgrade his recommendation for its shares to “outperform” from “market perform” previously.

“We have been commenting on Ensign’s unique market share dynamics in our written research for over 18 years now,” he said. “We can summarize those dynamics as follows: Ensign’s market share tends to degrade over time organically, but it periodically replaces that lost market share with acquisitions — acquiring its market share, in effect.

“To Ensign’s credit, most drillers’ capital costs aren’t wildly differentiated from each other – they tend to build or upgrade their rigs at similar cost points and at similar points in the cycle in order to defend or gain market share (of course there are exceptions). And Ensign spends on upgrades too, though to a lesser degree than other drillers, preferring to differentiate its capital costs by trying to time the acquisition market. .... Today, we see Ensign’s market share losses as primarily confined to its Canadian drilling business – ESI’s 1Q23 market share was 19.1 per cent compared to 22 per cent 5-quarters prior – immediately following the Naabors rig acquisition. And while it’s tempting to ascribe these losses to underinvestment, we suspect it has more to do with producers’ style preferences for certain rig-types resulting in lower upside capture for ESI with its latent heavy-double rig capacity. By symmetry, we expect ESI could have lower downside capture in the immediate quarters ahead. We’re expecting ESI’s Canadian market share will revert to above 20 per cent for the balance of 2023.”

In a research report titled The “Icarus” of Balance Sheet Managers (Minus the Melted Wings), Mr. Bradford cut his projections based on lower U.S. drilling and “the below-normal rig count in Canada for this time of the year (at least partly a function of Alberta’s wildfires).”

“While 2023 consensus estimates moved lower in the days following the 1Q report, we expect downward pressure on these numbers over the near-term: our $476-million EBITDA estimate for 2023 is the low within the consensus grouping,” he added. “Even so, Ensign’s $200-million debt reduction target for 2023 should be easily achieved based-on our estimates.

“Could estimates move lower? Sure: our numbers are predicated a bottoming of the US rig count by mid-summer followed by a partial recovery spread-out over the subsequent 6 quarters. But we have ESI’s equity yielding 49-per-cent Free Cash in 2023. In our view, the downside potential is that ESI’s Free Cash yield simply becomes less highly attractive.”

He reduced his target for Ensign shares to $4.75 from $6.25. The average is $4.67.


While he trimmed his forecast for Bombardier Inc. (BBD.B-T), Citi analyst Stephen Trent thinks it “appears to be on a good track, with ongoing operational improvements, higher free cash flow and declining net financial leverage.”

“Forecast adjustments for Bombardier include the incorporation of (A) slightly higher, expected deliveries, (B) a more conservative sales mix, driving softer margins, (C) lower net interest expense and (D) 1Q’23 results into our model,” he said.

Maintaining a “buy” recommendation, Mr. Trent trimmed his target to $67 from $71. The average on the Street is $77.86.

“Citi continues to favor Bombardier over Embraer, owing to the former’s stronger FCF generation, higher margins and better governance,” he added. “However, within Canadian aviation, we now switch our preference to Air Canada over Bombardier, as the former should benefit from the ongoing, strong momentum in commercial, long-haul traffic. Although a resurgence in international, long-haul traffic should not necessarily supplant large cabin business jet demand, the former appears to be in the earlier innings of its post-pandemic recovery.”


National Bank Financial analyst Vishal Shreedhar expects “solid” first-quarter 2024 results from Dollarama Inc. (DOL-T), seeing the discount retailer continuing to benefit from consumers “seeking value amid heightened inflation.”

Previewing the June 7 release, the analyst is now projecting earnings per share of 59 cents, up 18.5 per cent year-over-year (from 49 cents) and in line with the consensus expectation on the Street. He said that gain is “predicated on high-teens revenue growth (mid-double-digit same store sales growth, new stores), and share repurchases over the last 12 months, partly offset by gross margin contraction and higher SG&A.”

Mr. Shreedhar is forecasting a same-store sales increase of 13.7 per cent, rising from 7.3 per cent during the same period a year ago based on both basket growth (1.5 per cent) and transaction growth (12.0 per cent).

In a research note released Thursday, he called the company’s lack of share repurchases during the quarter “unusual,” noting the last pause in its normal course issuer bid came in the first quarter of fiscal 2020.

“Reducing leverage is likely the reason for the absence of buybacks, in our view,” he said. “In particular, last quarter, management stated: “in the current macroeconomic environment, we will continue to actively manage our capital structure and anticipate that our leverage ratio will be below our historical target range of 2.75 times to 3.0 times.

“That said, we do acknowledge other possible reasons, including not buying in advance of a tepid quarter, and building capital in advance of a large-anticipated purchase (such as a larger equity stake in Dollarcity). We think these outcomes are not likely.”

“We continue to hold a positive view on DOL’s shares given its defensive growth orientation supported by strong cash flows, a solid balance sheet and resilient sales performance,” said Mr. Shreedhar. “Over the medium term, we believe that Dollarama will be well positioned to grow earnings given anticipated network expansion, favourable sssg and ongoing development of the international business.

“Given premium valuation amidst an increasingly competitive backdrop, a key investor question is can Dollarama outperform. We think it can, provided fundamental performance remains strong. In our view, Dollarama is a well-managed retailer, and we expect the company’s growth to remain solid. That said, we acknowledge that DOL’s performance will also be governed, to some degree, by market demand for stocks with defensive properties.”

While he said peer management commentary pointed to “incremental pressure in discretionary spending, continued emphasis on value, and expectations for a challenged macroeconomic backdrop through 2023,” the analyst raised his target for Dollarama shares to $93 from $92, maintaining an “outperform” recommendation. The average is $90.21

Elsewhere, calling Dollarama “extremely well-suited for the current environment,” RBC’s Irene Nattel raised her target to $98 from $95 with an “outperform” rating.

“Reiterating our view of DOL as a core holding, with the business model resonating particularly well with consumers against the backdrop of economic uncertainty and consumer wallet pressure,” said Ms. Nattel. “In our view, the stock remains attractive with excellent visibility and sustainability of growth runway, Dollarcity optionality, and perennial return of capital to shareholders through both dividend growth and share buyback.”


Seeing it “poised for potential performance,” Credit Suisse analyst Andrew Kuske upgraded Pembina Pipeline Corp. (PPL-T) to “outperform” from “neutral” previously.

“Our positive view on Western Canada’s regional energy infrastructure is, in part, underpinned by volume growth potential and somewhat advantaged margins,” he said. “Such a favourable backdrop is contrasted by Pembina Pipeline Corporation’s (PPL) stock performance that for Q2 to date underperformed the Canadian energy infrastructure group by nearly 900bps. That stock performance results in sufficient excess return potential that warrants an Outperform rating.”

“PPL’s Western Canadian asset footprint is broad-based with significant capability. Unlike some other investment alternatives, PPL is embarking on several capex initiatives that are manageable, but do create a slightly different risk profile. That expansion effort will help PPL remain at the epicenter of much of Western Canada’s regional energy infrastructure sector for the foreseeable future, in our view.”

Mr. Kuske maintained his target for Pembina shares of $53, exceeding the average on the Street by $1.

“PPL’s regional midstream assets in the Western Canadian Basin help underpin critical energy activities and are poised to benefit from both volume and margin expansion,” he concluded. “Moreover, the core commodity exposure (ie. frac related) looks positive for PPL.”


While the first-quarter results of Cresco Labs Inc. (CL-CN) were “softer than expected,” Echelon Capital Partners analyst Andrew Semple was alarmed by the “incrementally more cautious commentary” from its management about its proposed US$2-billion acquisition of rival Columbia Care Inc. (CCHW-CN).

“In the press release and on the earnings call, management indicated that they do not have an update to provide on the timing related to the outstanding divestiture transaction,” said Mr. Semple. “Nonetheless, they continue to collaborate closely with Columbia Care on the required divestiture transactions to find a path forward that makes both strategic and financial sense. We view the latter part of that statement being new language and more cautious than prior remarks from Management. Additionally, on the earnings call, Management stated that the leverage of the pro forma company is ‘a big driver of whether or not this deal can proceed.’ We believe that it appears the cash proceeds raised are being given more importance as to whether the deal closes. This is different from prior commentary where more emphasis was placed on type of buyers, regulatory considerations, and reviewing the structuring options for assets divestitures. We view these comments as Cresco indicating a higher risk to closing than they have previously stated.

“We have not included Columbia Care in our outlook or forecasts for Cresco, and so would not expect a material impact to our forecasts or DCF based valuation if the transaction were terminated. However, we also note that without Columbia Care’s high growth markets, long-term growth expectations for Cresco could be more muted relative to peers. Therefore, this could still pose a risk to Cresco shareholders. We would prefer to see the deal completed, with the understanding that the Company needs to have access to sufficient liquidity to close the transaction, given that Columbia Care has $300-million of bonds that contain a change of control provision and may need to be redeemed upon consummating the transaction.”

On Wednesday, the Chicago-based multistate cannabis operator reported revenue of US$194.2-million, down 9.4 per cent year-over-year and in line with Mr. Semple’s US$195.8-million estimate. Adjusted EBITDA dropped 42.3 per cent to US$29.3-million, below Mr. Semple’s Street-low US$30.2-million projection.

“Adjusted EBITDA was below our nearly Street-low estimate, marking the sixth consecutive quarter of earnings underperformance for Cresco,” he said. “The beginning of adult- use sales in Missouri pressured pricing levels in Illinois, reducing sales and margins for Cresco in this profitable state. Business may recover as new third-party dispensaries open in Illinois which will increase the wholesale market opportunity, but these new stores will also create modest pressure on Cresco’s own retail sales in the state.

“The Company indicated that it is aiming to achieve an adj. gross margin of 50 per cent and adj. EBITDA margin of 20 per cent for the second half of the year as they continue to rationalize their operations through the expense reductions and automation of the cultivation processes across many states. These margin levels were roughly in line with our estimates and consensus estimates before the results.”

While Cresco shares soared 9.8 per cent following the release, which Mr. Semple attributed to “a function of merger arb traders unwinding their positions, as indicated by the wider arb spread,” he cut his target to $2.75 from $3, keeping a “hold” recommendation. The average on the Street is $5.67.

“We prefer to remain tactfully to the sidelines with our rating since the Company will likely continue to have some ongoing noise in its financial results asset closures undertaken in H123, as well as potential risk that divestitures from the Columbia Care transaction could fall short of prior expectations,” he concluded. “Although our EBITDA estimates remain below the consensus for 2023, the gap has narrowed from 30 per cent as of our last update to 5 per cent currently, with the consensus moving closer to our figures. We believe forward estimates may find some support in H223 as Cresco focuses on cashflow and cost cutting, which could lend support to its valuation. We see other opportunities for potential upside to our forecasts and valuation. We continue to exclude Pennsylvania, Ohio, Florida and New York’s adult-use programs in our financial forecasts and valuation model as we await regulatory updates from those states. We believe adult-use sales in New York will likely become a meaningful contributor to Cresco’s financial performance and our valuation once the Company is allowed to launch adult-use sales in the state.”

Elsewhere, others making changes include:

* Canaccord Genuity’s Derek Dley to $3 from $4 with a “buy” rating.

“We have revised our estimates to account for industry-wide headwinds in the form of pricing compression, inflationary pressures, and a more challenging Illinois market,” said Mr. Dley.

* Alliance Global Partners’ Aaron Grey to $5 from $6.50 with a “buy” rating.


In other analyst actions:

* In a report titled A winding road ahead, RBC’s Sabahat Khan assumed coverage of AutoCanada Inc. (ACQ-T) with a “sector perform” rating and $19 target, below the $26.95 average on the Street

Although AutoCanada has made good progress since the 2018 management transition, we believe that macro factors and the potential for downward revisions to consensus earnings estimates are likely to limit upside potential in the share price over the near- to medium term (our 2023/2024 EPS estimates are 24 per cent/11 per cent below consensus),” he said. “Longer-term, we believe the company is well positioned to consolidate the fragmented dealership space.”

* Raymond James’ Craig Stanley initiated coverage of New Pacific Metals Corp. (NUAG-T) with an “outperform” recommendation and $4.75 target. The average is $5.25.

* After coming off restriction following its $17.5-million equity financing, Scotia Capital’s Ovais Habib reduced his Argonaut Gold Inc. (AR-T) target to 90 cents from $1.20 with a “sector outperform” rating. The average is 96 cents.

“We view the announcement as mixed for AR shares as this financing provides additional funds that can be used for development of the Magino project, however after updating our estimates for this financing, our asset NAV value has declined due to the dilutive effect of the shares issued below our NAV estimate,” he said. “As previously noted, Argonaut previously indicated that the company is fully financed to complete the construction of its Magino project where first gold pour is planned by the end of May 2023.”

* Canaccord Genuity’s Yuri Lynk cut his Good Natured Products Inc. (GDNP-X) target to 20 cents, below the 31-cent average, from 25 cents with a “hold” rating.

“The company’s industrial products line continues to face headwinds due to lower demand levels and excess inventory throughout the supply chain,” said Mr. Lynk. “We remain on the sidelines, viewing the attractive long-term demand trends for GDNP’s plant-based packaging as being offset by its limited financial flexibility at present.”

* ATB Capital Markets’ Tim Monachello raised his Questor Technology Inc. (QST-X) target by 5 cents to $1.15, exceeding the average by 3 cents, with a “sector perform” rating.

“While we remain cautious on QST, we note that upside to our estimates could be driven by a relatively small number of orders, as QST continues to operate at fairly depressed revenue levels,” he said.

* TD Securities’ Greg Barnes trimmed his Triple Flag Precious Metals Corp. (TFPM-T) target to $27 from $28 with a “buy” rating. The average is $23.81.

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