Inside the Market’s roundup of some of today’s key analyst actions
Canadian banks are likely to continue to face challenging conditions through 2021, according to Canaccord Genuity analyst Scott Chan.
However, in a research report previewing the coming fourth-quarter earnings season in the sector, he said growing optimism on potential COVID-19 vaccine “provides better visibility and outlook” into fiscal 2022.
For the fourth quarter, Mr. Chan is projecting cash net income to fall 6 per cent from the third quarter and 22 per cent year-over-year. He expects earnings per share to drop 5 per cent and 21 per cent, respectively.
“For FQ4, we made slightly positive EPS revisions across the board (up 3 per cent on average), which mainly relate to lowering our PCL ratio forecasts reflecting strong peer comp reporting (as of Sept. 30),” he said. “Our Q4/F20 EPS estimates are 4 per cent below current consensus (e.g. BNS above, BMO in-line). With an extra month of reporting for the Canadian banks (majority of deferral programs will have expired), we expect that results should show more conservatism (e.g. allowance builds) vs. peers on FYE reporting. Due to near-term uncertainty (e.g. lockdowns in certain regions), we suggest that BNS (e.g. Latam exposure) could be more susceptible to higher overall credit losses (e.g. compared to Canada). That said, we do expect the Banks with more Canadian exposure (e.g. RY, CM, NA) to report increasing allowances that mainly supported better than expected results last quarter. In total, we forecast total PCLs of $5.6-billion (66 bps) vs. $6.8-billion (78 bps last quarter). That said, we expect investors will place more focus on PTPP trends.”
Though he also emphasized a “challenging” core lending environment, Mr. Chan raised his target prices for Canadian bank stocks. His changes were:
- Bank of Montreal (BMO-T, “buy”) to $94.50 from $86.50. The average on the Street is $92.80.
- Bank of Nova Scotia (BNS-T, “hold”) to $63.50 from $59.50. Average: $64.71.
- Canadian Imperial Bank of Commerce (CM-T, “buy”) to $115.50 from $110.50. Average: $113.95.
- National Bank of Canada (NA-T, “hold”) to $69 from $67. Average: $75.30.
- Royal Bank of Canada (RY-T, “hold”) to $107.50 from $104.50. Average: $108.46.
- Toronto-Dominion Bank (TD-T, “hold”) to $70.50 from $64. Average: $70.65.
“Since FQ3 results commenced (August 25), the Big-6 banks (avg.) returned 12 per cent significantly outpacing the TSX Composite at 3 per cent,” said Mr. Chan. “Since that point, we have seen relative valuations amongst the Group narrow. BMO and BNS (lowest valuations prior) have outperformed, while NA and RY relatively underperformed (premium valuation multiples). Currently, the Group trades at P/B (NTM) of 1.4 times with a prospective F2021 ROE of 12 per cent. Although the near-term outlook remains challenging, we believe the market is ascribing more optimism for a rebound in F2022 (e.g. COVID-19 vaccines).”
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In reaction to two weeks of “strong” share price performance, Industrial Alliance Securities analyst Elias Foscolos lowered his rating for Pason Systems Inc. (PSI-T) to “hold” from “speculative buy.”
“Since we upgraded PSI to a Speculative Buy on Nov. 5, the stock has posted a price return of 35 per cent,” he said. “We attribute this to positively trending indicators including U.S. land rig count and WTI, as well as positive news-driven sentiment surrounding the effectiveness of COVID-19 vaccines in clinical trials and the potential for near-term distribution of large numbers of doses.”
Mr. Foscolos said his “cautiously optimistic” outlook for the Calgary-based provider of specialized data management systems for drilling rigs remains unchanged, noting: “In our view, the positive trends that are emerging align with our previous outlook, which called for U.S. drilling to reach a trough in Q3/20, followed by a swoosh-shaped recovery thereafter. Improving industry activity with industry-leading market position, a clean balance sheet with substantial cash reserves, and a strong cash flow profile are all reasons to be positive on PSI’s outlook. However, we believe it is appropriate to maintain a degree of caution based on both near- and long-term risk factors including political/regulatory factors in the U.S. and terminal value of oil & gas assets.”
The analyst maintained a $7 target price for Pason shares. The current average on the Street is $7.79.
“Leaving our forecasts and valuation unchanged, and weighing the recent monetization of positive trends against our cautiously optimistic outlook, we are choosing to move back to the sidelines with a Hold rating,” said Mr. Foscolos.
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RBC Dominion Securities analyst Walter Spracklin thinks fourth-quarter volumes for Canadian railroad companies are trending higher than expectations.
In a research report previewing earnings season, he said Canadian Pacific Railway Ltd. (CP-T) is seeing the benefits of increased energy, chemicals and plastics volumes, while Canadian National Railway Co. (CNR-T) is experiencing higher-than-anticipated petroleum and chemicals revenue ton miles (RTMs).
Mr. Spracklin raised his financial expectations for CP, which remains his preferred North American rail company, to fall closer in line with the consensus projections on the Street.
“Quarter-to-date volumes of an increase of 5.2 per cent are trending ahead of our forecast for flat, however with tougher comps in the back part of Q4, we see volumes coming in-line with our current forecast, which therefore remains unchanged,” he said. “Recent management commentary, however, around steady yields and strong efficiencies have prompted us to take up our Q4 estimates, which are effectively in-line with consensus. While our 2021 and 2022 estimates also come up, they are below street as we believe consensus is not taking into consideration lower volumes associated with Coal, Grain and Crude.”
The analyst increased his fourth-quarter earnings per share projection to $4.95 from $4.90, which is largely in-line with consensus of $4.97.
“We expect management to guide to low-single digit volumes and EPS growth of high-single to low-double digit. We consider this guidance as being conservative in nature and neutral to sentiment,” he said.
Conversely, Mr. Spracklin trimmed his CN estimates, which now sit below the Street’s forecast.
“Quarter-to-date volumes of up 5.7 per cent are trending ahead of our 2.4 per cent and with the easy compares of last year’s strike coming, we see volumes ending the quarter notably higher, and we are revising upward to 8.3 per cent,” he said. “However, despite this strong volume performance, we expect mix to work meaningfully against CN this quarter. Further, recent challenges from weather in Western Canada, and a higher employee count creates a further headwind. As a result, our Q4 EPS estimate drops to $1.40 (from $1.43) and is below consensus of $1.44. We are also taking our 2021 and 2022 estimates lower.”
“We expect management to guide to mid-single digit volumes and EPS growth aiming toward double digit,” he said. “We consider this guidance as being conservative in nature and neutral to sentiment.”
With the changes, Mr. Spracklin raised his target for CP shares to $506 from $451 with an “outperform” rating. The average is $452.56.
“We continue to like CP reflecting its solid service and in our view industry leading operating model,” he said. “We point to a strong recent track record of industry leading EPS growth, 3-yr CAGR [compound annual growth rate] of 16 per cent compared to a peer range of 2 per cent to 9 per cent (excluding tax impact). Further, CP has delivered remarkable operating performance during 2020 (industry leading year-to-date operating ratio) and strong service. Our view is that CP’s operating model will drive meaningful operating leverage as volumes recover into 2021.”
He also increased his target for CN shares to $155 from $144 with a “sector perform” rating. The average is $129.56.
“Rail valuation has come up meaningfully in 2020 (from 16 times in 2019 to 22 times currently),” said Mr. Spracklin. “We view the valuation lift as a function of solid performance during the pandemic in which margins mostly held up despite volume volatility, and also reflecting higher multiples in the market as a whole. We note that despite increases to rail valuation, relative to the S&P 500, rail valuation is trading at a 2-per-cent premium to the S&P 500, which is slightly below its historical premium of 3 per cent since 2010. Accordingly, as noted above we are taking up our multiples by 2-pts across the group.”
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Jefferies’ Christopher LaFemina expects the demand for copper to significantly exceed supply starting in 2021 and shortages leading to substantially higher prices.
In a research report, the analyst said he sees the copper market heading into a multi-year period of deficits, in part due to secular demand growth in renewable energy and electric vehicles.
Calling it one of the firm’s preferred copper miners, Mr. LaFemina raised his target for shares of First Quantum Minerals Ltd. (FM-T) to $33 from $20 with a “buy” rating. The average is $18.77.
He also increased his target for Sierra Metals Inc. (SMT-T) to $4 from $2.75 with a “hold” rating. The average is $4.25.
Conversely, Mr. LaFemina trimmed his target Barrick Gold Corp. (GOLD-N, ABX-T) to US$27.50 from US$32 with a “hold” rating. The average is US$33.68.
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Canaccord Genuity analyst Matthew Lee thinks Score Media and Gaming Inc. (SCR-T) has “significant upside potential as it leverages its strong brand and content platform to gain share in the rapidly growing online sports betting (OSB) industry.”
In a research report released Tuesday, he initiated coverage of the Toronto-based company with a “buy” recommendation, believing its content and brand differentiate it in a “burgeoning” sector.
“The U.S. online sports betting industry is still in its formative years, which we believe creates a substantial opportunity for smaller players like Score to gain a foothold in the market,” said Mr. Lee. “We believe that as legalization occurs across states, the market could grow to be as large as $26-billion.”
“One of Score’s key differentiators in the OSB space is its content platform, which offers users free access to news, proprietary articles, and betting statistics. The value of content to sports betting platforms has become increasingly pronounced as the industry realizes that media assets drive improved user experience, and that the subscriber base of sports media apps largely represents the same demographic (male, 21–44) as those interested in online sports betting, thus making customer acquisition more economical.”
Mr. Lee sees “significant” medium-term catalysts providing upside for the Score, including the legalization of sports betting in Ontario, which he thinks occur as early as the second quarter of 2021 and bring $100-million in revenue. Other gains may occur through further expansion south of the border and the potential stemming from IGaming.
“The company’s theScore app is currently the second most popular sports app in North America, which we believe provides a springboard for the company’s foray into the $26-billion USD online sports betting and IGaming industry,” he said. “Given the company’s market access (skin) agreements, we expect that SCR will be able to reach nearly 40 per cent of the U.S. market and, using a content-driven offering, will be able to take long-term market share of 5 per cent. This points to a U.S. blue sky revenue scenario of over $500-million USD, which we believe is an immense opportunity. While our forecasts focus on only the four states currently served, we see several potential medium-term catalysts for SCR, which would accelerate growth far beyond our current estimates.”
“SCR is currently net cash positive. However, we believe the company will likely be best served by adding capital in order to fuel its subscriber and revenue growth as it expands its operations into new geographies and further develops its platform.”
Mr. Lee set a target of $1 per share. The current average is $1.05.
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After better-than-anticipated third-quarter financial results, Founders Advantage Capital Corp.’s (FCF-X) momentum is likely to continue in the fourth quarter, according to Desjardins Securities analyst Gary Ho, pointing to “strong” housing activity over the past few months.
“Recent robust housing data and the on-boarding of Premiere Mortgage Centre (increase of 5 per cent to run-rate mortgage volumes) suggest another solid quarter ahead,” he said. “We also anticipate a few catalysts on the horizon.”
Keeping a “buy” rating for shares of the Calgary-based investment firm, Mr. Ho raised his target to $3.25 from $2.50. The average is $2.75.
“Our positive thesis is predicated on: (1) a rebound in housing activity bodes well for DLC [Dominion Lending Centres] in the near term; reorg will focus purely on the DLC business, supporting a valuation re-rate; (2) reflagging efforts to add new brokers could bolster DLC growth in 2021; (3) a potential fintech play with Velocity, to which we ascribe little value; and (4) the monetization of non-core assets could reduce leverage,” he said.
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Pointing to “sustained momentum” in global methanol market fundamentals in recent months, which he expects will “force contract prices higher through the balance of winter,” Raymond James analyst Steve Hansen raised his financial estimates for Methanex Corp. (MEOH-Q, MX-T).
“Dovetailing on previous signs of firming fundamentals, spot methanol prices have surged again in recent weeks, benefiting from: 1) a sustained demand recovery—largely owing to firming traditional (GDP-sensitive) end-markets and surging energy-related markets (rising oil/olefin prices, MTO demand); and 2) challenged industry supply—grappling with unexpected plant global outages (i.e., Iran), reduced gas-fired methanol production (China winter gas diversions), and sliding Chinese inventories,” he said. “Exacerbating these supply-related concerns, we note that industry sources are now suggesting that the start-up of a long-awaited new facility in the US Gulf (YCI’s Methanol One, 1.8 mln tpy) is likely to be delayed (again), with commissioning now expected mid-to-late 1Q21 (vs. prior Dec-20 plan). ... Spot methanol prices have rallied accordingly, with all three regions either at, or above prepandemic levels--most notably China (up 13 per cent vs. Feb-7-20 prices).”
“Given the macro backdrop described, late [Monday] Methanex posted its NA contract price for December at $399/mt, representing a $20/mt (up 5.2 per cent) vs. its prior post. Consistent with this pattern, we also expect the company will post a similar increase for Asia in the coming days—a pattern we broadly expect to hold through the balance of winter while the supply base typically remains fragile/vulnerable. We have increased our financial estimates as a result.”
Mr. Hansen is now projecting an earnings per share loss of US$1.85 for 2020, down from US$1.94 previously. He’s also forecasting a profit of 29 US cents for 2021, jumping from a 51-US-cent loss.
Keeping an “outperform” rating, he hiked his target to US$45 from US$35. The average is US$29.69.
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Seeing it “primed for growth,” BMO Nesbitt Burns analyst Étienne Ricard initiated coverage of First National Financial Corp. (FN-T) with an “outperform” rating and $44 target. The average is $40.20.
“Key drivers of value for First National’s stock are trending positively with i) accelerating prime residential mortgage origination growth; ii) a leading position in the growing mortgage broker channel; and iii) strong institutional demand for mortgage credit,” he said.
“From a relative standpoint, we value First National’s prime segment focus, significant non-spread-based revenue mix, and limited credit risk inherent in the company’s differentiated “underwrite/originate/service” business model. Overall, we forecast double-digit earnings growth and see potential for outsized dividend hikes.”
Mr. Ricard started Home Capital Group Inc. (HCG-T) with “market perform” rating and $31 target. The average is $32.43.
“We believe Home Capital is on stronger footing, supported by a renewed risk management-focused leadership team driving operational efficiencies, funding diversification, and loan growth since 2017,” the analyst said.
“Looking ahead, we are concerned Home Capital’s high exposure to the slowing Alt-A market could limit the runway for growth given competitive dynamics and subdued economic fundamentals. In addition, exposure to commercial lending is likely to remain a credit overhang, acknowledging credit metrics have been resilient to date.”
He also initiated coverage of Equitable Group Inc. (EQB-T) with a “market perform” rating and $98 target. The average is $107.
“Equitable Group has an extended track record of annual double-digit loan growth, contained credit losses, and diversification of funding sources leveraging its internally developed EQ Bank digital banking platform,” said Mr. Ricard.
“Looking ahead, we are concerned that Equitable’s growth prospects could slow given competitive dynamics and subdued economic fundamentals in the Alt-A mortgage market. In addition, the company’s relatively larger commercial mortgage exposure is likely to remain a credit overhang.”
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In other analyst actions:
* TD Securities analyst Meaghen Annett resumed coverage of Canada Goose Holdings Inc. (GOOS-T) with a “buy” rating and $60 target. The average is $44.35.
* Scotia Capital analyst Ben Isaacson hiked his target for Nutrien Ltd. (NTR-N, NTR-T) shares to US$54 from US$45 with a “sector outperform” recommendation. The average is US$48.68.
* Scotia’s Himanshu Gupta increased his target for Summit Industrial Income REIT (SMU.UN-T) to $14.25 from $13, keeping a “sector outperform” rating. The average is $14.22.
* Baird’s David Tarantino increased his target for Restaurant Brands International Inc. (QSR-N, QSR-T) to US$63 from US$60, maintaining an “outperform” rating. The average is US$64.31.
* Eight Capital initiated coverage of Trulieve Cannabis Corp. (TRUL-CN) with a “buy” rating and $62 target, exceeding the $52.40 average.
* TD Securities analyst Arun Lamba raised his target for Solaris Resources Inc. (SLS-X) to $8.50 from $8 with a “speculative buy” rating. The average is currently $8.40.
* RBC Dominion Securities analyst Nelson Ng increased his target for Boralex Inc. (BLX-T) to $42 from $40 with a “sector perform” rating, while Raymond James’ David Quezada raised his target by a loonie to $46.50 with a “strong buy” recommendation. The average is $44.53.
“At the core of our constructive stance on BLX, is the solid returns we believe the company is realizing in New York and France — where lesser competition from larger players and a more complex regulatory environment play to BLX’s strengths,” said Mr. Quezada. “Now at 2,330 net capacity, BLX maintains a further 278 MW of projects under construction or ready-to-build which would bring capacity to 2,608 MW. Thus, in order to reach the company’s 2,800 MW 2023 capacity goal, a further 192 MW would be required; this is far less than the 566 MW the company now has in advanced development. As such, we have conviction the company can meet/exceed this target. While we acknowledge BLX’s valuation resides towards the high end of its historical trading range with a 2021 EV/EBITDA of close to 13 times, we continue to see potential for fund flows from sustainability focused investors to push the stock’s valuation to new highs.”
With a file from Reuters
David Leeder