Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Darko Mihelic sees Bank of Montreal’s (BMO-T) $20.9-billion acquisition of San Francisco-based Bank of the West as a “bold deployment of capital,” leading him to raise his rating for its shares to “outperform” from “sector perform” on Tuesday.
“With the acquisition of Bank of the West, BMO will add 1.8 million new customers and US$108-billion of assets to their U.S. footprint. Bank of the West’s loan mix complements BMO’s existing portfolio and provides a solid base to work from with expanded footprint in the Western and Midwestern parts of the U.S.,” he said. “We always viewed BMO as a good commercial bank, but a mediocre bank at best in retail. We believe Bank of the West improves BMO’s consumer business, as the acquisition will add a stronger retail portfolio with respect to deposits, though we believe retail lending may still be somewhat of a gap for BMO. For the consumer business, the acquisition will increase the mix of other consumer loans in categories such as: personal lines of credit, credit cards, autos, marine, and recreational vehicles. On the commercial side, Bank of the West will add additional expertise in the food and agriculture business and provide further diversification with expertise in technology and a decent leasing business.”
In a research report titled Boldly growing, where no Canadian bank has grown before..., Mr. Mihelic said he was “positive on BMO and can’t help but think that TD (rated Sector Perform) may have missed out on a good opportunity given TD’s substantially higher level of excess capital and larger scale U.S. operations. Such impactful deals in the U.S. are hard to come by and this was clearly an auction.”
The analyst expects the deal to be immediately accretive to BMO’s 2023 core earnings per share, prompting him to raise his full-year 2022 projection to $13.94 from $13.30 and his 2023 forecast to $14.57 from $13.84.
“Our model now reflects the operations of Bank of the West starting in Q2/23 and other acquisition-related impacts,” said Mr. Mihelic. “Arguably, BMO deserves a higher valuation multiple for bold and solid actions like this, but we think a rerating needs proof of execution.”
“We see three primary risks. 1) Of all the large banks we cover, it seems that BMO has recently been the most aggressive with cost control, so it is natural to fret that further core investments for future growth may suffer as BMO tries to build capital to pay for this deal; 2) Targeting a CET 1 ratio so close to the minimum ratio may cause discomfort should an unforeseen negative event occur between now and closing; 3) Regulatory uncertainty in the U.S. may cause issues.”
Mr. Mihelic did warn that BMO shares might be “challenged” in the near term, noting: “There are a lot of moving parts between now and closing that some investors might fret over (e.g., capital build, regulatory uncertainty, etc.). However, assuming that the transaction goes according to plan, we find the deal compelling both strategically and financially.”
He raised his target for BMO shares to $160 from $154. The average on the Street is $153.69, according to Refinitiv data.
Conversely, Scotia Capital’s Meny Grauman downgraded BMO to “sector perform” from “sector outperform” with a $162 target.
“As Yogi Berra famously said, ‘When you get to a fork in the road, take it,’” he said. “Heading into the new year most investors would have been content with seeing BMO forego M&A and continue to focus on execution including further ROE and NIX ratio improvements supplemented by above average share buybacks. Instead, what we got was something more complicated, a $21-billion acquisition of a US regional bank that transforms BMO into a major player in California’s competitive banking market and effectively doubles its US branch footprint. The financial metrics of this deal are hard to argue with, including an IRR of 14 per cent and immediate and material EPS accretion, but the strategic rationale for this deal is somewhat more ambiguous. The allure of the California market is undeniable, and we have no doubt that BMO will be a more engaged owner than BNP, but it will likely take a few years before we can judge the true merits of this deal. Over the next few quarters though, the stock is likely to face some headwinds at least until the market can get more clarity on just how big an equity raise will be needed to close this transaction. We do not believe that the path BMO took is a bad one, but it is certainly messier than the alternative.”
CIBC World Markets analyst Paul Holden downgraded the bank to “neutral” from “outperformer” with a $145 target, falling from $157.
“We think the Bank Of The West acquisition has clear financial and strategic merits. However, we expect the stock will be handicapped for a time given the long time to closing (end of 2022), pending equity issuance and time to realize cost synergies (2024). Also, we have removed assumed share repurchases from our financial model resulting in a reduction to our EPS estimates (3.5 per cent),” said Mr. Holden.
While Lundin Mining Corp.’s (LUN-T) proposed $625-million acquisition of sister firm Josemaria Resources Inc. (JOSE-T) “appears negative” on a standalone basis, Canaccord Genuity analyst Dalton Baretto thinks it is “a prelude to a larger strategy.”
Shares of Toronto-based Lundin dropped 16.9 per cent on Monday following the premarket announcement of the cash-and-stock deal, which implies a purchase price of $1.60 per share, a 31.1-per-cent premium to Josemaria’s last close
“We understand the negative reaction in the share price [Monday], given the substantial $3.0 billion capex bill, the nominal project economics on an unfinanced basis, and the perceived geopolitical and technical risk associated with building a large project in the high Andes in Argentina,” said Mr. Baretto. “That said, permits and a fiscal stability agreement in 2022 will likely open the door to a partnership structure with a major company, not just at Josemaria but also to the sister properties Filo del Sol and Los Helados that are controlled by the Lundin Family. Such a partnership could unlock regional synergies and improve the economics on the project substantially.”
Keeping a “hold” rating for Lundin shares due to a limited implied return, he cut his target to $10 from $10.50. The average on the Street is $11.82.
Mr. Baretto lowered his rating for Josemaria to “hold” from “speculative buy” with a $1.60 target, down from $2.50 and below the $1.90 consensus.
BMO Nesbitt Burns analyst Ryan Thompson called Fortuna Silver Mines Inc.’s (FVI-T) acquisition of a 12-year extension to its environmental impact authorization for its San Jose mine in Mexico “materially positive event,” prompting him to raise his rating for its shares to “outperform” from “market perform.”
“Since Fortuna announced the EIA was denied on November 11, shares have underperformed, which we think has now created a buying opportunity,” he said.
“We like Fortuna for its expected growth from Seguela, and we think the stock is now trading at an attractive entry point.”
He said Monday’s announcement removed a significant overhang for Fortuna shares, noting: “In our view, the granting of this extension is material in two key ways 1) it provides investors with assurance that the San Jose Mine will continue to operate and generate cash flow for the company; 2) it should alleviate liquidity concerns — recall that there was potential for the company’s credit facility to be called should the EIA not be extended.”
His target is now $7.25, up from $5.75 and exceeding the $6.28 average on the Street.
“We see the potential for value creation with the development of Séguéla, ramp-up of Lindero, and renewed focus on exploration across the asset portfolio,” he added.
Though he sees “better days ahead,” Desjardins Securities analyst Chris Li thinks investors will require patience with Saputo Inc. (SAP-T), believing a range of difficult conditions will continue to weigh on its financial results and lead its shares to trade “sideways” in the near-term.
“We expect industry headwinds (Omicron, labour and supply chain challenges, inflationary pressures and unfavourable dairy commodities) to continue to weigh on profitability near-term and keep the shares range-bound,” he said. “The inflection point will likely come in 4Q FY22 (1Q CY22) with EBITDA growth resuming, driven by the full impact of price increases, improving market factors and the early benefits of the global strategic plan.”
In a research report released Tuesday, Mr. Li cut his earnings before interest, taxes, depreciation and amortization (EBITDA) and earnings per share projections for its current fiscal quarter (the third quarter of 2022) to $315-million and 31 cents, respectively, from $368-million and 41 cents. That led him to reduce his full-year projections to $1.2-billion and $1.23 from $1.3-billion and $1.33.
“The reduction mainly reflects: (1) ongoing unfavourable USA market factors (negative milk–cheese spread), with the negative EBITDA impact worsening to $35–40-million in 3Q FY23 from $17-million in 2Q FY22; (2) B.C. floods impacting two facilities in Abbotsford and Port Coquitlam, affecting logistics, transportation and the supply chain; the impact ($2-million EBITDA per month) is likely to continue for part of 4Q, but to have no effect on sales; (3) tornado impacting a facility in Kentucky ($2-million EBITDA impact related to inventory); (4) limited containership availability impacting the International segment’s profitability; and (5) lagging price inflation in the UK,” he said.
Mr. Li maintained a “buy” rating and $37 target for Saputo shares. The average on the Street is $37.63.
“If earnings remain stagnant next year due to industry factors outside of SAP’s control, there is a risk that its valuation could fall below the five-year average, resulting in a downside valuation of approximately $26 (11 times FY23 EBITDA),” he said.
“With the stock at a trough valuation, there is potential for rerating assuming profitability can show meaningful improvement next year.”
Elsewhere, BMO Nesbitt Burns analyst cut his earnings per share forecast to 27 cents from 30 cents, keeping an “outperform” rating and $39 target for Saputo shares.
“We believe the Canadian segment will be impacted by floods in B.C. that disrupted road access. In the U.S., we expect labour availability to improve but believe that the segment will be negatively impacted by market factors and impacts from the tornado on its Kentucky facility,” said Mr. Sklar. “We expect the consensus estimate to be revised lower, but do not expect the stock to react negatively to the downward revisions given Saputo’s depressed stock price.”
Ahead of the Jan. 13 release of its first-quarter financial results, Scotia Capital analyst Jeff Fan trimmed his 2022 estimates for Corus Entertainment Inc. (CJR.B-T) to account for higher programming costs.
“We now expect Q1 programming costs (amortization in the P&L to increase just under 30 per cent year-over-year, including approximately $5-million related to Cancon,” he said. “For fiscal 2022, we now expect total programming in the P&L to increase by approximately 14 per cent, including $25-million related to Cancon. For F2023, we estimate the remaining $25-million Cancon to flow through. Also, for Q2/F22, we incorporated approximately $7-million of CRTC fee reversal to occur.”
At the same time, Mr. Fan maintained his revenue estimates, noting: “We believe that CJR performed well in TV advertising in Q1/F22, led by strong fall ratings and limited ad inventory which supported healthy CPMs. We maintained our TV revenue growth estimate for Q1/F22 at just under 10 per cent. We also expect low-single-digit radio revenue growth in Q1/F22.”
Keeping a “sector outperform” rating, Mr. Fan trimmed his target for Corus shares to $8.70 from $10, The average is $8.18.
“Our current estimates are now slightly below consensus for Q1/F22 and F2022. However, we continue to believe CJR shares are undervalued with 2H/F22 catalysts,” he said.
“With the recent share price performance, even with our estimate revisions, we believe the shares are very attractively valued at 4.5 times NTM [next 12-month] EV/EBITDA, 5 times P/E, and 28-per-cent FCF yield. CJR remains very focused on FCF generation and deleveraging. CJR achieved its 3-times leverage target earlier than expected, and we expect it will achieve its 2.5-times target before F2022 year-end. We think the market is not placing any terminal value for the business and that the shares are positioned to re-rate when CJR can demonstrate sustainable consolidated revenue growth in 2H/F22 as it laps the COVID-19 recovery. We think this will lift its depressed EBITDA and FCF valuation multiples.”
Shares of the Toronto-based clinical-stage biotechnology company dropped 7.7 per cent on Monday after it announced it will discontinue further clinical development of its APTO-253 investigational drug for hematologic cancers in favour of advancing its kinome inhibitor pipeline.
“APTO-253 has had a very long and volatile history, and we are encouraged by management making the tough decision here,” said Mr. Pantginis.
“Up until now, the shares have been significantly punished, including very likely tax loss selling, exacerbating the performance. As we enter 2022, we now have later stage data for HM43239 and continuing progress out of the lux programs, both of which should drive important visibility back onto the shares.”
Though he’s encouraged by the progress of its HM43239 treatment for patients with relapsed or refractory acute myeloid leukemia (AML), calling it “a welcome addition to an expanding arsenal of kinase inhibitors,” Mr. Pantginis cut his target for Aptose shares to US$12 from US$14 with a “buy” rating. The average is US$9.86.
Elsewhere, Piper Sandler analyst Edward Tenthoff dropped his target to US$3 from US$7 with an “overweight” rating.
Arizona Sonoran Copper Company Inc. (ASCU-T) is “well positioned” to capitalize on investor interest in the copper sector, according to Haywood Securities analyst Pierre Vaillancourt, emphasizing the “dearth” of new producers and the long-term price outlook for the medal.
He initiated coverage of Vancouver-based company with a “buy” rating, pointing to the “significant” resource potential and “positive economics with upside potential” for its past-producing Cactus property in Arizona.
“Our rating is driven by our outlook for the potential at the project and catalysts in the year ahead as the project is de-risked,” he said. “Given the dearth of new copper companies with near to medium term cash flow, we view ASCU as an attractive investment opportunity of a development stage copper company, benefiting from established infrastructure on a past-producing property, in a safe jurisdiction. In addition, ASCU’s large land package with well identified targets provides attractive upside to develop new resources, extend the mine life and expand operation.”
Mr. Vaillancourt set a $3 target. The current average is $3.20.
“In the near term, we believe achievement of project milestones toward construction and production could improve the valuation as the project is de-risked. Over the long term, we believe the resource growth and exploration upside could add value,” he said.
In other analyst actions:
* Scotia Capital analyst Konark Gupta raised his Canadian National Railway Co. (CNR-T) target to $166 from $160, keeping a “sector outperform” rating. The average is $159.
* Following last week’s release of a feasibility study for its Skouries project in Greece as well as its updated mineral reserve and resource estimates, CIBC’s Cosmos Chiu lowered his Eldorado Gold Corp. (EGO-N, ELD-T) target to US$15 from US$16 with an “outperformer” rating, while Scotia Capital’s Tanya Jakusconek cut her target to US$13 from US$15 with a “sector perform” recommendation. The average is US$13.74.
“We view Skouries as a high-quality project, and we believe EGO is in a strong position to finance and begin construction of the $845-million project in 2022,” said Ms. Jakusconek. “As of September 30, 2021, EGO had $439-million of cash on its balance sheet and nearly $700-million of total available liquidity with no debt maturities until 2029; we expect EGO to generate positive FCF (ex-Skouries) from 2022E-2024E to supplement existing liquidity. We believe the project will generate a lot of interest from potential financing partners and expect a financing announcement will be a positive near-term catalyst for the shares.”
* In response to its deal to sell its Mercedes Gold-Silver Mine in Mexico to Bear Creek Mining Corp., National Bank Financial analyst Michael Parkin trimmed his target for Equinox Gold Corp. (EQX-T) to $12.25 from $13.50, maintaining an “outperform” rating, while BMO’s Ryan Thompson cut his target to $14.50 from $16.50 with an “outperform” rating.. Others making changes include: The average is $14.65.
“We are not entirely surprised to see Mercedes sold as management has suggested in the past it would look to monetize non-core assets,” said Mr. Thompson. “Although the proceeds are a bit below our previous carrying value, we are pleased to see a non-dilutive cash infusion ($100-million total cash) as the company embarks on construction of Greenstone. Mercedes represented less than 5 per cent of our overall NAV. EQX will retain exposure to Mercedes and gain exposure to Corani through its ownership in BCM.”
* Raymond James analyst Craig Stanley cut his Bear Creek Mining Corp. (BCM-X) target to $3.35 from $4.50 with an “outperform” rating. The average is $4.32.
“The [Mercedes] acquisition provides numerous benefits to Bear Creek, including: No longer a single asset development story; Diversifies country exposure; Producer status should attract broader institutional interest; Provides a source of free cash flow to help fund development and construction of the Corani Ag + Pb + Zn Project in Peru,” he said.
* Given the uncertainty surrounding the US$1.75-billion Build Back Better bill south of the border, Citi analyst J.B. Lowe cut his target for Canadian Solar Inc. (CSIQ-Q) shares to US$46 from US$53 with a “buy” rating. The average is US$43.13.
“Given the numerous solar-friendly tax credits included in the bill, the scuttling of the legislation in its current form, in combination with the preliminary NEM 3.0 decision announced by California regulators last week, would put a dent in the growth outlook for U.S. solar-exposed stocks,” he said. “We trim our estimates across the group and lower our price targets given the regulatory and legislative uncertainty. Our top pick remains SEDG given its lower exposure to the U.S. and its relative valuation discount. We continue to believe the recent move lower in solar names on the heels of the NEM 3.0 decision has been overdone, and would look to add exposure on any BBB-related weakness.”