Inside the Market’s roundup of some of today’s key analyst actions
Scotia Capital analyst Meny Grauman thinks the focus of third-quarter earnings season for Canadian banks will be the threat brought by the Delta variant.
“While we remain bullish on the banks and believe that even the rise of the delta variant will not ultimately derail the Canadian (for that matter global) economic recovery (an effective vaccine means lockdowns are a last resort), we do think that COVID will most certainly act as a headwind for the stocks,” he said in a research report released Tuesday. “That said, we emphasize that the real issue is heightened uncertainty as the direct impact of the delta variant on results this quarter will be limited to a more modest pace of reserve releases as Management teams increase the probability of their extreme downside scenarios.”
“The bottom line is that we continue to bet on the economic recovery and continue to believe that the Canadian banks are the best way for investors to play that thesis. The good news for investors is that Canadian bank valuations have lagged most US peers, and forward PE multiple continues to hover around historical averages. Even more comforting is the fact that forward EPS estimates remain very conservative with the Street baking in only modest loan growth and margin expansion. In fact, consensus is only looking for pre-tax pre-provision earnings growth of 3 per cent in 2021 and 5 per cent in 2022.”
Ahead of the Aug. 24 kickoff of the sector’s earnings season by Bank of Montreal (BMO-T) and Bank of Nova Scotia (BNS-T), Mr. Grauman is projecting the sector will generate core cash earnings per share of $2.33, up 44 per cent year-over-year but down 3 per cent from the second quarter.
“Note that the sequential results are being impacted by three more interest earnings days, while the year-over-year result is being inflated by a big decline in loan loss provisions (note that PTPP earnings are forecast to be up 1 per cent year-over-year),” he said. “We still forecast beats this quarter but by a smaller margin than what we saw in Q2 - our estimates are on average 2 per cent above consensus.
“We make no changes to our recommendations ahead of reporting season, but we do adjust our pecking order. Given the uncertainty surrounding the macro-outlook RY now moves up to our top pick taking the place of CIBC. Recall that we became a lot more positive on this name last quarter, and although that was based on a very bullish call that emphasized the upside that the stock had to a robust economic recovery, we note that RY is also the go-to defensive name in the space. We are still constructive on CIBC through our forecast horizon, but believe that it is vulnerable heading into reporting season given its massive outperformance since Q2 reporting.”
His target price adjustments are:
- Bank of Montreal (BMO-T, “sector outperform”) to $147 from $138. The average on the Street is $133.82.
- Canadian Imperial Bank of Commerce (CM-T, “sector outperform”) to $166 from $157. Average: $152.96.
- Canadian Western Bank (CWB-T, “sector outperform”) to $42 from $43. Average: $40.19.
- Equitable Group Inc. (EQB-T, “sector perform”) to $172 from $160. Average: $169.75.
- Laurentian Bank of Canada (LB-T, “sector perform”) to $46 from $48. Average: $46.40.
- National Bank of Canada (NA-T, “sector outperform”) to $109 from $104. Average: $100.25.
- Royal Bank of Canada (RY-T, “sector outperform”) to $148 from $144. Average: $135.48.
- Toronto-Dominion Bank (TD-T, “sector perform”) to $94 from $95. Average: $92.57.
“From a positioning perspective, we continue to believe that the entire sector is a buy, but among the individual names we think that investors should be looking towards the more defensive names during this period of heightened uncertainty,” he said. “As a result we reiterate our Sector Outperform rating on RY in particular but also see NA as good place to hide despite now trading at a premium to the group. We believe that its premium is justified by a peer-leading ROE and peer-leading RWA growth.”
While he continues to think Equitable Group Inc. (EQB-T) could offer investors “attractive valuation upside over the long term (3-5 years) given their track record for growth and profitability,” RBC Dominion Securities analyst Geoffrey Kwan currently sees its shares as “fairly valued in the near term (next 12 months).”
That led him to lower his rating for the Toronto-based financial firm to “sector perform” from an “outperform” recommendation on Tuesday.
“EQB continues to do a very good job executing on its growth and diversification strategy,” said Mr. Kwan. “EQB’s shares have generated a total return of 55 per cent 2021 year-to-date which compares to the +29% average and 26-per-cent median of our coverage universe and 18 per cent for the S&P/TSX Composite and 29 per cent for the S&P/TSX Financials Index.”
“EQB’s shares trade at 1.55 times P/BV [price to book value], above their 5-year historical average of 1.30 times and 10-year historical average of 1.20 times, which we think is warranted given EQB’s financial performance. However, historically, EQB’s next 12-month total return has tended to be more modest when its P/BV multiple has exceeded 1.50 times.”
Though he projects “incremental valuation upside when OSFI eventually ends its ban on banks/insurers doing share buybacks and dividend increases,” Mr. Kwan maintained a $163 target for Equitable shares. The average on the Street is $169.75.
Elsewhere, Scotia Capital’s Meny Grauman increased his target to $172 from $160 with a “sector perform” rating.
“The Q2 beat may not have been quite as large as in Q1, but performance here is strong and remains more than just a credit story. Solid macro fundamentals and new product launches will continue to support robust loan growth, while funding costs will continue to be helped by ongoing diversification including better-than- expected deposit growth at EQ Bank and the firm’s recent announcement that it has received CMHC approval to launch a $2-billion covered bond program. The bank also recently announced a 2-for-1 share split,” said Mr. Grauman.
Pointing to recent share price depreciation and its positive sales momentum, ATB Capital Markets analyst Frederico Gomes raised his rating for Auxly Cannabis Group Inc. (XLY-T) following the release of “strong” second-quarter results, seeing its valuation as “attractive” versus his fair value estimate.
On Monday, the Toronto-based company reported revenue of $20.9-million, exceeding Mr. Gomes’s $16.8-million projection and the consensus estimate on the Street of $15-million. Adjusted earnings before interest, taxes, depreciation and amortization loss of $3.3-million also topped expectations (losses of $6.3-million and $5.2-million, respectively).
“Despite the headwinds in Canada, Auxly has gained 182 basis points in market share this year (5.4-per-cent share in July), validating our thesis that the Company has a robust and diversified platform to continue driving sales growth,” the analyst said. “In particular, we believe that Auxly is well-positioned to increase cannabis 1.0 sales given that the Company is under-indexed in this segment, has a strong pipeline of products, and is ramping flower production at Sunens and pre-roll production at Kolab.
“Auxly guided for positive adj. EBITDA by the end of 2021, which according to management implies a market share of 7-9 per cent, cash SG&A of $10-million a quarter ($11-million currently), and an adj. gross margin of more than 30 per cent. We estimate that Auxly would have to reach quarterly sales of $3o-million to turn adjusted EBITDA positive, which we forecast will happen in Q1/22.”
With that market share “outperformance,” Mr. Gomes raised his full-year revenue estimate, expecting Auxly to end 2021 with a 6.6-per-cent share of the recreational market.
However, he maintained a 45-cent target for its shares, seeing his higher profitability estimates offset by dilutive financing activity during the quarter. The average on the Street is 55 cents.
“Our Outperform rating is supported by the 67-per-cent implied total return from our price target relative to Auxly’s current market price,” said Mr. Gomes.
Elsewhere, Desjardins Securities’ John Chu bumped up his target to 75 cents from 60 cents with a “buy” recommendation.
“Auxly produced a strong sales beat in 2Q and we expect the positive momentum to continue into 3Q and beyond,” said Mr. Chu. “Further, it increased its recreational market share (15.4 per cent vs 12.6 per cent in 1Q) and outlined it is on track to reach positive EBITDA in 4Q. However, given market volatility, we conservatively forecast Auxly reaching positive EBITDA in early 2022. If it can maintain a robust near-term sales growth rate, we may need to revise our EBITDA timeline to 4Q.”
Calling its second-quarter shortfall “temporary” and blaming it on “timing issues,” Desjardins Securities analyst John Chu expects Vancouver-based IM Cannabis Corp.’s (IMCC-CN, IMCC-Q) margins to rebound in the near future.
“The binding sales agreements previously announced in Israel and Europe give us comfort that our sales outlook and margin assumptions should remain relatively intact, although a bigger push into the retail sector may weigh on margins,” he said. “Sales growth should remain robust and margins should return to more normalized levels by 1Q22.”
On Monday, the multi-country operator in the medical cannabis sector reported sales of $11.1-million and an adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) loss of $4.8-million. Both fell short of Mr. Chu’s projections ($12.5-million and a profit of $0.1-million) and the consensus estimates on the Street ($12-million and a loss of $0.2-million).
“The EBITDA miss and gross margin decline were attributed to delayed contracted shipments to Germany from its primary supply partner and temporary production constraints in Canada,” the analyst said. “It noted that these issues were resolved during the quarter and consolidated margins should benefit from the full integration of Trichome and MYM in the coming quarters.”
“Gross margin fell to 5 per cent from over 50 per cent in the past several quarters due to the sales-related issues cited above. The binding sales agreements IMCC has in place (EU, Israel) give management confidence it can quickly return to a gross margin in the 40–50-per-cent range.”
After trimming his EBITDA projections through 2023, Mr. Chu lowered his target for IM shares to $10.25, matching the consensus, from $10.50, reaffirming his “buy” rating.
Cormark Securities analyst Nick Corcoran sees Cervus Equipment Corp.’s (CERV-T) $302-million agreement to be acquired by Brandt Tractor Ltd. “as a favourable outcome” for its shareholders.
Under the deal announced Monday alongside stronger-than-anticipated quarterly results, shareholders will receive $19.50 per hare, a 37-per-cent premium to the 20-day volume weighted average price.
“Given Brandt is the largest privately-owned John Deere dealership in the world and any transaction requires OEM approvals, we do not see any potential for a higher bid,” said Mr. Corcoran.
He moved Cervus to “tender” from “buy” with a $19.50 target, up from $19 and 37 cents higher than the average.
Others making rating changes include:
* TD Securities analyst Cherilyn Radbourne to “hold” from “buy” with a $19.50 target, down from $21.
“We have lowered our target price to $19.50 from $21.00, and reduced our rating to HOLD (vs. to Tender) from Buy, because we cannot rule out the potential of another suitor and/or shareholder pressure for a bump, as we saw when Rocky Mountain was privatized in late-2020,” she said.
* Raymond James’ Bryan Fast to “market perform” from “outperform” with a $19.50 target from $20.
“We upgraded Cervus towards the end of 2020, after the company reduced used Ag equipment inventory to manageable levels (an issue that plagued the whole industry),” Mr. Fast said. “This coincided with a robust Ag market and strong demand for both used and new equipment. Although supply chain disruptions has resulted in delayed deliveries and extended lead times, the fundamentals of the equipment industry remain strong. We are reducing our target in-line with the acquisition price and our rating to Market Perform.”
Raymond James analyst Rahul Sarugaser raised his rating for shares of HLS Therapeutics Inc. (HLS-T) in response to Monday’s announcement of an agreement with Pfizer Inc. (PFE-N) to co-market its cardiovascular drug Vascepa in Canada.
“We see HLS locking down big-name support of Vascepa’s launch in Canada as significant validation of the drug itself — Pfizer is in the business of evaluating drugs’ commercial potential — and a material de-risking event for HLS’s marketing execution,” he said.
Moving the Toronto-based pharmaceutical company to “outperform” from “market perform,” Mr. Sarugaser raised his target to $26 from $24. The average on the Street is $31.29.
“We see Pfizer getting behind Vascepa — adding serious firepower to this effort — as a significant validation of the product, shedding light on its high intrinsic value,” he said. “Pfizer is a marquee name in commercializing CV drug franchises, and has a strong history of co-promotion: Pfizer’s cholesterol-lowering statin drug Lipitor was one of the highest-selling drugs in history (US$12-billion in peak annual sales); Pfizer co-markets the blockbuster anti-coagulant drug Eliquis — US$7.7-billion in 2019 sales — with Bristol-Myers Squibb (BMY-NYSE, not covered) in Canada. With key drugs like Eliquis winding down (exclusivity expiring soon), Pfizer is motivated to keep its CV pipeline filled with high-potential drugs such as Vascepa, maintaining its sales team’s relevance with physicians. We take Pfizer’s agreement to co-market Vascepa as a signal that it is strongly invested in making this product a big success.”
In other analyst actions:
* Stifel analyst Stephen Soock lowered Americas Gold and Silver Corp. (USA-T) to “sell” from “hold” with a $1.15 target, down from $2.30, while Laurentian Bank Securities’ Barry Allan moved it to “hold” from “buy” with a $1.30 target, falling from $3. The average on the Street is $2.39.
“Overall, a much weaker quarter than we were anticipating with the prospects for Relief Canyon dimming,” Mr. Soock said. “While the company remains optimistic about the prospects of restarting Cosalá, the only way this would be possible is by continuing to utilize the dilutive ATM. We see the reorganization of the company as the best option and would direct investors towards Fiore Gold (F-X) (46koz/yr heap leach operation in Nevada with near-term growth through Gold Rock project) or Aya Gold & Silver (AYA-T) for silver exposure (1.6Moz/yr production growing to 7M oz through an upcoming expansion).”
* RBC Dominion Securities analyst Pammi Bir raised his CT Real Estate Investment Trust (CRT.UN-T) target to $18 from $17.50, exceeding the $18.04 average on the Street. He maintained a “sector perform” rating.
“CRT’s Q2 results marked another quarter of in line, yet solid results, adding to an impressive track record built over the last eight years,” said Mr. Bir. “Indeed, underpinned by its defensive strengths, we expect the REIT’s portfolio to remain operationally resilient in the face of a retail landscape still in the midst of significant transformation. As well, the development pipeline continues to expand, providing a consistent source of cash flow and value growth, while also demonstrating CTC’s needs for more space, not less. Bottom line, we believe CRT’s premium valuation is well-earned.”
* RBC’s Greg Pardy lowered his Vermilion Energy Inc. (VET-T) target to $11 from $12, reiterating a “sector perform” rating, while Stifel’s Cody Kwong sliced his target to $11.75 from $12.25 with a “hold” rating.. The average is $12.37.
“Vermilion is continuing to reduce its debt organically with a balance sheet that should be in a better place by the end of 2021. Looking ahead, the company remains focused on a return to a dividend-paying framework,” said Mr. Pardy.
* RBC’s Alexander Jackson increased his Stelco Holdings Inc. (STLC-T) target to $62 from $59 with an “outperform” rating. The average is $56.94.
“We continue to like Stelco for its strong leverage to North American steel prices through its highly fixed, low cost operations,” he said.
* After increasing his valuation for its U.S. cable assets TD Securities analyst Vince Valentini raised his target for Cogeco Communications Inc. (CCA-T) to $135 from $130 with a “buy” rating. The average is $130.70.
* Mr. Valentini also increased his Cogeco Inc. (CGO-T) target to $140 from $135, above the $127 average, with a “buy” recommendation.
* TD’s Craig Hutchison cut his First Majestic Silver Corp. (FR-T) target by $1 to $20 with a “hold” rating. The average is $21.34.
“We expect First Majestic to return to being FCF-positive in Q3/21, benefitting from higher production estimates and our expectation of higher precious-metal prices,” said Mr. Hutchison.
* Scotia Capital analyst Mario Saric raised his Minto Apartment Real Estate Investment Trust (MI.UN-T) target to $24.75 from $22.75, keeping a “sector perform” rating. The average on the Street is $26.45.
* BMO Nesbitt Burns analyst Joanne Chen bumped up her Automotive Properties Real Estate Investment Trust (APR.UN-T) target to $13.20 from $12.50 with an “outperform” rating. The average is $13.31.
“The quarter solidified our view that the recovery is well under way for the retail auto business andthat further consolidation opportunities are on the horizon. We also continue to favour APR.UN’s visible cash flow stability amidst this recovery period,” said Ms. Chen.
* BMO’s Jenny Ma increased her target for Canadian Apartment Properties Real Estate Investment Trust (CAR.UN-T) to $68.50 from $62, exceeding the $65.17 average, with an “outperform” rating.
“ Our outlook on CAPREIT remains mostly unchanged post Q2/21,” said Ms. Ma. “We continue to believe CAR.UN’smid-tier portfolio in Canada’s major suburban markets will attract a healthy proportion of new immigrants, which we expect will pick up significantly in H2/21.
“ Furthermore, we believe CAPREIT’s diversified scale and platform will continue to support the REIT through the recovery, particularly if it gets extended with the Delta variant.”
“Detroit Three production in Q3/21 is expected to increase 31 per cent quarter-over-quarter, weaker than our prior estimate of an increase of 50 per cent q/q,” he said. “Western European production in Q3/21 is expected to decrease 4.5 per cent q/q, weaker than our prior estimate of a decrease of 1 per cent q/q.
“During this period, reflecting negative platform mix, Magna’s revenues from its top North American platforms are expected to increase 14 per cent q/q and revenues from its top European platforms areexpected to decrease 5.5 per cent q/q.”
* JP Morgan analyst Tien-Tsin Huang downgraded Lightspeed Commerce Inc. (LSPD-T) to “underweight” from “neutral” with a $122 target, below the $137.93 average.
* Barclays analyst Dave Anderson cut his target for Computer Modelling Group Ltd. (CMG-T) to $7 from $8 with an “overweight” rating. The average is $5.42.
“FY1Q22 results came in below expectations in a seasonally lower FY1Q largely as a residual effect of last year’s challenges (COVID, industry consolidation, reduced shale activity), but we expect a rebound in annuity license revenue in each of the next three quarters (based in part on CMG’s deferred revenue balances). Despite the quarter-over-quarter and year-over-year revenue decline, conversations are trending in the right direction as several customers recently added to their contracts the past quarter (including a large customer in Canada) and many are trying to lock in current pricing for longer periods (a leading indicator of demand), and we believe CMG stands to benefit as one of the three primary providers of reservoir simulation software globally,” he said.
* CIBC World Markets analyst Todd Coupland bumped up his Quarterhill Inc. (QTRH-T) target to $4.50 from $4, exceeding the $3.38 average, with an “outperformer” rating.
“Quarterhill announced its intention to acquire Texas-based Electronic Transaction Consultants (ETC), a leading end-to-end tolling and mobility systems provider, for $150-million. The acquisition is transformational and should expose Quarterhill to growth in the tolling market and opportunities for revenue synergies between ETC and the company’s existing International Road Dynamics (IRD) segment. We expect the news will impact Quarterhill’s shares positively,” he said.
* TD Securities analyst Sam Damiani raised his H&R Real Estate Investment Trust (HR.UN-T) target to $19 from $18.50 with a “buy” rating. The average is $18.42.
* Scotia Capital analyst Mario Saric increased his Northwest Healthcare Properties Real Estate Investment Trust (NWH.UN-T) target by 25 cents to $14.75, keeping a “sector outperform” rating. The average is $13.88.
* National Bank Financial analyst Tal Woolley raised his SmartCentres Real Estate Investment Trust (SRU.UN-T) target to $32 from $31 with a “sector perform” rating. The average is $31.50.
* National Bank’s Shane Nagle cut his Nevada Copper Corp. (NCU-T) target to 15 cents from 30 cents with a “sector perform” rating. The current average is 29 cents.
* JP Morgan analyst Chris Turnure raised his Emera Inc. (EMA-T) target to $62 from $59, topping the $60.81 average, with a “neutral” rating.
* iA Capital Markets analyst Frédéric Blondeau trimmed his target for Inovalis Real Estate Investment Trust (INO.UN-T) to $9 from $9.50 with a “hold” rating. The average is currently $9.65.