Inside the Market’s roundup of some of today’s key analyst actions
Emera Inc. (EMA-T) is “doing exactly what defensive-minded investors would expect a regulated utility company to do,” said RBC Dominion Securities analyst Maurice Choy following its release of in-line first-quarter results and a reaffirmation of its outlook.
On Friday, the Halifax-based company reported adjusted earnings per share of 92 cents, missing the analyst’s estimate by 3 cents and a penny below the consensus forecast on the Street. It reiterated its annual dividend growth guidance of 4-5 per cent to 2024 with a long-term targeted payout ratio of 70-75 per cent.
“Emera maintained its capital plan covering 2022-2024 with forecast capital spending of $8.4 billion, which it expects would drive around a 7-per-cent rate base CAGR [compound annual growth rate] through 2024 …with no material changes due to inflation and supply chain factors,” he said in a research note released Tuesday.
“Emera noted that the capital plan is progressing on time and on budget, that there have been no material changes to its capital plan at this time in response to supply chain challenges or inflation. In relation to the ongoing U.S. Department of Commerce investigation on solar tariffs that affects the broader industry, costs related to Tampa Electric’s Solar Wave 3 are likely to increase in our view, although we highlight that rate applications related to these future solar waves have yet to be submitted.”
Maintaining his EPS estimates of $3.05 for 2022 and $3.25 for 2023, Mr. Choy raised his target for Emera shares to $72 from $66, exceeding the $65.37 average on the Street, with an “outperform” rating.
“The change reflects an increased valuation multiple to 22-times forward P/E (up from 20x) to reflect the greater demand for regulated utility exposure amidst the market uncertainty,” he said.
“We also find both the stock’s relative valuation (2.0-2.5 times P/E discount to its closest peer) and 4.0-4.5 per cent dividend yield attractive.”
=====
CIBC World Markets analyst Paul Holden is expecting “another set of strong results” for Canadian banks during the quickly approaching second-quarter earnings season.
However, he thinks an economic slowdown is “increasingly being priced in,” and headline results “might not matter all that much.”
“We expect similar trends as last quarter, such as strong loan growth, below-average PCLs, high trading revenue, positive operating leverage plus a small uplift to NIMs from recent rate hikes,” said Mr. Holden. “Our estimates do imply a sequential decline in earnings (down 8 per cent on average), mostly due to a moderation in non-interest revenue (NIR) and less of a benefit from performing credit releases. While our estimates imply a material Q/Q decline, we are 2 per cent above consensus on average.”
In a research report released Tuesday, he reduced his 2022 adjusted earnings per share projections for the sector by an average of 1 per cent and 2023 by 4 per cent, citing “anticipation of slowing loan growth and higher credit losses.”
That led him to cut his price targets for bank stocks by an average of 5 per cent.
His changes are:
- Bank of Montreal (BMO-T, “neutral”) to $142 from $150. The average on the Street is $162.51.
- Bank of Nova Scotia (BNS-T, “neutral”) to $86 from $94. Average: $93.65.
- Canadian Western Bank (CWB-T, “neutral”) to $34 from $38. Average: $42.29.
- Laurentian Bank of Canada (LB-T, “neutral”) to $41 from $44. Average: $46.
- National Bank of Canada (NA-T, “outperformer”) to $100 from $102. Average: $105.
- Royal Bank of Canada (RY-T, “outperformer”) to $146 from $149. Average: $148.17.
- Toronto-Dominion Bank (TD-T, “neutral”) to $100 from $103. Average: $105.83.
“We only have two Outperformers in the group – RY and NA – for defensive reasons,” said Mr. Holden.
=====
Expecting a sustained jump in dayrates alongside rising rig counts, Raymond James analyst Andrew Bradford sees increased profitability for North American contract drillers.
“At this point, each increment in the US. rig count and each higher-spec single or double in Canada is incurring reactivation costs, which can range from 200k to 700k,” he said. “These rigs require recertification of the overhead equipment and often of the electrical components. In some cases, the producer may wish to see some minor upgrades, such as an additional pump, more moderate upgrades like specialty pipe, or even more comprehensive upgrades such as walking systems – the costs of which are variable to rig design. But whatever these costs, the drillers have been ruthlessly successful at passing them on to producers in the form of higher rates.”
“Drillers aren’t as vulnerable to cost inflation as other, more product-heavy service lines. In Canada, labour costs are passed-through per CAODC contracts and rig fuel is typically on the outside of contracts. Items where cost escalation matters are repairs & maintenance and, to a degree, U.S. wages. Consequently, we won’t be surprised if 3Q Canadian margins are around $4,000 per day higher year-over-year and up a similar increment in the US, in USD terms. We’re expecting overall EBITDA growth in the 70-per-cent to 85-per-cent range in 2022, which would be the largest percent change for Canadian drillers in at least 12 years.”
Mr. Bradford views the Street’s estimates for Canadian drillers as “too conservatively biased,” particularly from the third quarter as “contracts begin rolling into current market pricing at accelerated rates.”
Given that view, he upgraded Precision Drilling Corp. (PD-T) to “strong buy” from “outperform” with a $130 target, up from $115. The average on the Street is $120.12.
“We anticipate PD will surpass 70 working rigs in the U.S. later this year, up from 51 in 1Q,” he said. ”These incremental, reactivated rigs will be working under new market rates. In addition, at least half of the 51 rigs working in 1Q will have their contracts expire and will also roll into new market rates. In many cases, the terms of these contracts are already set.”
Mr. Bradford also raised his target for Ensign Energy Services Inc. (ESI-T) to $6 from $5.25, exceeding the $5.39 average, with an “outperform” rating.
In a separate note, Mr. Bradford adjusted his targets for a trio of pressure pumpers:
- Calfrac Well Services Ltd. (CFW-T, “market perform”) to $5.50 from $5.75. Average: $6.08.
- STEP Energy Services Ltd. (STEP-T, “outperform”) to $6 from $4.25. Average: $6.18.
- Trican Well Service Ltd. (TCW-T, “outperform”) to $5 from $4. Average: $5.25.
=====
With its valuation discount now at its widest since March of 2020, Scotia Capital analyst Phil Hardie sees an “attractive entry point” into Guardian Capital Group Ltd. (GCG-T) following weaker-than-anticipated first-quarter results.
“Guardian’s first-quarter results were slightly weaker than expected, with AUM [assets under management] dropping more than anticipated and operating earnings falling modestly below our estimates,” he said. “The miss versus our forecast was largely driven by lower-than-expected management fees likely due to lower-than-expected AUM.
“Despite the earnings miss, we believe the current valuation discount is too steep to ignore and that Guardian’s stock can outperform its peers in both bull and bear scenarios given its limited sensitivity to AUM outlook. We estimate that the market is ascribing just over a 2.2 times EBITDA multiple to Guardian’s investment and wealth management platforms. We also estimate that the stock trades at an 48-per-cent discount to NAV, 1.7 standard deviations above its historical average.”
After reducing his earnings forecasts to reflect a lower AUM outlook “given the quarter-to-date broad market depreciation,” Mr. Hardie trimmed his target for Guardian shares to $45 from $50 with a “sector outperform” rating. The average is $42. The average is $42.
“We believe the combination of Guardian’s significant capital position through its corporate portfolio and discounted valuation result in a high level of embedded optionality,” he added. “Various scenarios such as the sale of Guardian’s holdings in BMO and the redeployment of capital in the form of significant share buybacks, acquisition of other institutional platforms, streamlining operations to become a pure-play institutional asset manager, or financial restructuring, together with a steep NAV discount could significantly increase Guardian’s share price. Over time, generating more meaningful earnings from its underlying operations will likely serve as the catalyst to structurally reduce its NAV discount. Strategic focus on diversifying its AUM and capabilities outside of Canadian equities, with a priority on increasing presence in U.S. markets along with Global equities, are likely to accelerate earnings growth over the medium term. Opportunities related to the build-out of its Canadian Retail platform and continued expansion of its Wealth Management capabilities likely represent additional sources of longer-term growth and overlooked optionality in the stock.”
=====
RBC Dominion Securities analyst James McGarragle sees Exchange Income Corp. (EIF-T) “proven resiliency and upside from investment” creating a “compelling” investment opportunity.
Following a recent site tour in Winnipeg and meetings with senior management, he reiterated the firm’s “positive view” on the company’s shares upon assuming coverage with an “outperform” recommendation, calling it a “rare opportunity to own both a value and a growth story.”
Mr. McGarragle thinks Exchange Income’s “demonstrated resilience” in Aviation remains underappreciated by investors following “an exceptionally challenging pandemic.”
“EBITDA held in better when compared to airline peers,” he said. “EBITDA at EIF was down 28 per cent in Q2/20, vs. down 190 per cent at [Air Canada] for example. We point to the Aviation segment’s revenue mix with medevac, freight, maritime surveillance, as all providing meaningful diversification - a key driver of EIF’s resiliency in our view. EIF also recovered to 2019 EBITDA levels by 2021 (AC still down 140 per cent). We believe this resilience and recovery demonstrated over the past two years will translate into higher valuation due to the inherently reduced risk profile.”
He also emphasized its “significant” investment during the pandemic “sets the stage for growth.”
“While the airline industry as a whole was meaningfully affected by COVID-19, EIF capitalized and invested heavily in its Aviation segment via M&A and aircraft purchases,” he said. “Our view is the uncertainty associated with the pandemic created attractive buying opportunities. Moreover, EIF completed last week its largest ever acquisition, of Northern Mat, which is a leader in temporary access solutions. Overall, we view recent investments as providing an important platform for growth.”
With that view, Mr. McGarragle increased the firm’s estimates for Exchange Income “substantially,” projecting EBITDA for 2022 of $424-million (from $380-million). His 2023 forecast jumped to $527-million from $433-million, above the $512-million consensus on the Street and bear the top of the company’s guidance of $500-million to $530-million.
Accordingly, his target for Exchange Income shares increased to $62 from $52, exceeding the $58.50 average.
“Shares of EIF sold-off significantly during the pandemic, and while the shares have largely recovered (now only down 7 per cent from Nov 2019), the valuation in our view underestimates the resiliency of the company’s Aviation revenue (proven out by the pandemic) and the new investments made in capex and M&A during the pandemic,” he said. “Key is that despite this resiliency, EIF shares trade at a 9-per-cent FCF yield (CFO – maintenance capex) and 5-per-cent dividend yield, which we believe presents an attractive opportunity for investors looking for value and yield. In addition, the shares provide a meaningful opportunity for investors looking for growth – we are modelling for mid-20-per-cent EBITDA growth in 2022 and 2023 on the back of reopening, recent organic investments and the acquisition of Northern Mat.”
=====
In other analyst actions:
* Despite calling it “a core holding in the Canadian REIT space,” CIBC World Markets’ Scott Fromson cut his Allied Properties Real Estate Investment Trust (AP.UN-T) target to $50 from $54 with an “outperformer” rating. The average on the Street is $50.35.
“While concerns over inflation and recession constrain current investor sentiment and valuation, our bullish investment thesis is unchanged and we believe the recent selloff represents compelling value,” he said. “We estimate Allied’s office portfolio trades at a 5.75-per-cent implied cap rate on our 2022 estimated NOI, above CBRE’s recent survey estimate of a 5.5-per-cent Canada average for Class AA/A office. Private investors take a long-term view on valuation that is not always reflected in public markets, and we are taking a more conservative view on cap rates. ... Upside is attractive, barring significant cap rate expansion.”
* RBC’s Jimmy Shan lowered his target for Automotive Properties Real Estate Investment Trust (APR.UN-T) to $13.75, below the $14.85 average, from $14.50 with a “sector perform” rating.
“Automotive Properties REIT reported an in line Q1. APR worked to lock in some rates and extend term on its credit facility post quarter. APR trades at a fair valuation in our view – valuation does have some buffer as IFRS cap rates did not go down as much as other sectors when rates declined,” he said.
* RBC’s Geoffrey Kwan increased his target for Chesswood Group Ltd. (CHW-T) to $16 from $15, keeping a “sector perform” rating. The average is $19.
“Q1/22 results were slightly mixed, with normalized EPS ahead of our forecast due to higher-than-forecast net interest income and lower-than-forecast loan loss provisions, partly offset by higher-than-forecast OpEx,” he said. “However, excluding the much better-than-forecast loan loss provisions, pre-tax, pre-PCL earnings were slightly below our forecast. Finance receivables growth was ahead of forecast, and credit trends, while still positive, saw slight Q/Q deterioration. We view the risk-reward as relatively balanced, as CHW is executing well on its growth and diversification strategy but a weakening macro environment has the potential to constrain its valuation multiple and potentially its financial performance.”
* After “mixed” first-quarter results, Canaccord Genuity’s Tania Armstrong-Whitworth trimmed her target for Vancouver-based Else Nutrition Holdings Inc. (BABY-T) to $2.50 from $3 with a “speculative buy” rating.
“We remain hopeful that sales traction will accelerate as COVID-19 headwinds subside, especially in light of the recent baby formula shortage,” she said.
* RBC’s Drew McReynolds raised his Enthusiast Gaming Holdings Inc. (EGLX-T) target by $1 to $8, matching the consensus. He reiterated an “outperform” rating.
“We view much better than forecast Q1/22 results as an inflection point that showcases both the growing importance of the global gaming ecosystem and early earnings potential of the company. Following upward estimate revisions, our price target increases from $7 to $8. We view the quarter as positive for the shares at current levels,” he said.
* Following the suspension of operations at its RDM mine in Brazil. BMO’s Ryan Thompson trimmed his Equinox Gold Corp. (EQX-T) target to $14 from $14.60 with an “outperform” rating. The average is $13.67.
* CIBC’s Jacob Bout lowered his Farmers Edge Inc. (FDGE-T) target to $3 from $3.50 with a “neutral” rating, while Canaccord Genuity’s Doug Taylor cut his target to $2.50 from $3.50 with a “hold” rating. The average is $3.40.
“DGE reported another weak quarter, and continues to burn through its cash balance at an accelerated pace,” said Mr. Bout. “While FDGE is implementing cost reduction measures to reduce annualized costs by $8-million, our forecasts imply the company will have run through its cash balance by Q3/22-end and fully utilized its recently secured Fairfax credit facility exiting 2023/early 2024. On a positive note, FDGE is seeing early signs of better conversion rates for its Progressive Grower Program (PGP). Also, FDGE reported 90-per-cent retention for mature customers that were due for contract renewal in Q1/22 (but note that this was on a very small sample size).”
* Desjardins Securities’ Chris Li raised his George Weston Ltd. (WN-T) target to $173 from $167 with a “buy” rating. The average is $175.71.
* In response to its US$27-million acquisition of Success TMS, Stifel’s Justin Keywood cut his Greenbrook TMS Inc. (GTMS-T) to $10 from $19 with a “buy” rating. The average is $9.69.
“The combined company will result in a clear market share leader with 191 locations, US$82-million in pro-forma revenue and synergies are to result in positive EBITDA operations,” he said. “Success will be financed through GTMS’ common shares, where 40 per cent will be issued to Benjamin and Batya Klein at 26 per cent and 14 per cent with Greybrook Health retaining 16-per-cent ownership. GTMS also said that it is exploring new debt financing to fund expansion plans. The transaction is to close in Q3/2022. We see the deal as necessary in adding new scale to achieve profitable operations.”
* B Riley’s Susan Anderson reduced her Lululemon Athletica Inc. (LULU-Q) target to US$440 from US$487 with a “buy” rating. The average is US$427.33.
* National Bank Financial’s Rupert Merer cut his Next Hydrogen Solutions Inc. (NXH-X) target to $2.50 from $4.50, maintaining a “sector perform” rating. The average is $5.83.
“While the Hydrogen industry benefits from sector tailwinds, NXH could see some progress this year with the commercialization of its electrolyzer systems,” he said. “With a reset in sector valuations, NXH’s pure-play peer group now trades at 10.5 times EV/Sales on 2023 estimates (range 5 to 25 times). As it is pre-commercial, we believe NXH should trade at the low end of this range.”
* After updating his forecast to account for a first-quarter beat, increased capital program and Willesden Green Duvernay acquisition, Scotia Capital’s Cameron Bean raised his Paramount Resources Ltd. (POU-T) target to $35 from $33, keeping a “sector perform” rating. The average is $41.95.
* Raymond James’ Brad Sturges cut his Slate Office REIT (SOT.UN-T) target to $5.25 from $5.50, keeping a “market perform” rating. The average is $5.30.
* National Bank Financial’s Cameron Doerksen reduced his Taiga Motors Corp. (TAIG-T) target to $9, matching the consensus, from $12 with a “buy” rating. The average is US$16.67.
“With still a substantial potential return to our target, we keep our Outperform rating, although we caution that given that it is an early-stage company, an investment in Taiga carries a higher degree of risk,” said Mr. Doerksen.
* Canaccord Genuity’s Dalton Baretto trimmed his target for Trevali Mining Corp. (TV-T) to 60 cents from $1.50 with a “sell” rating. Others making changes include: National Bank’s Shane Nagle to $1.50 from $1.90 with a “sector perform” rating, Raymond James’ Brian MacArthur to $1.40 from $2.25 with a “market perform” rating, Scotia’s Orest Wowkodaw to 50 cents from $1 with a “sector underperform” rating and TD Securities’ Craig Hutchison to 90 cents from $2 with a “hold” rating. The average is $1.87.
“Incorporating Q1 results, adjusting our operating assumptions to model higher operating costs given inflationary pressures as well as ceased production from Perkoa as operations remain suspended, and revised valuation multiples, results in a decrease of our target price,” said Mr. Nagle. “We maintain our Sector Perform rating given the need for additional funding to complete the expansion of Rosh Pinah to support long-term production and Perkoa is suspended and scheduled to be mined out in 2023.”
* KBW’s Jade Rahmani lowered his target for Tricon Residential Inc. (TCN-N, TCN-T) to US$16.50 from US$17.50 with an “outperform” rating. The average is US$17.
David Leeder