Inside the Market’s roundup of some of today’s key analyst actions
The impact of market “uncertainties” are likely to be very evident during the coming third-quarter earnings season for Canadian banks, according to Desjardins Securities analyst Doug Young.
In a research note released Tuesday titled Come on shake your body baby do the conga, he said bank stocks “admittedly are not a late-cycle sector.” However, he now sees a mild recession baked into valuations for the sector.
“There’s a new ride at Disney World called Guardians of the Galaxy: Cosmic Rewind which pulls you backwards and spins you around while hurtling you up and down, all to a Gloria Estefan track —that’s what this last quarter felt like,” Mr. Young said.
“During 3Q FY22, the TSX fell 5.1 per cent and Canadian bank stocks were down 6.1per cent, with lots of volatility. This should be an OK quarter for the group. But given the macro backdrop, the ride might not yet be over.”
Ahead of earnings season, which kicks off with Bank of Nova Scotia (BNS-T) on Aug. 23, Mr. Young is projecting a 5-per-cent decline in cash earnings per share year-over-year, “mostly as a result of swings in performing loan PCLs, which are tough to predict.”
The analyst said his focus remains on pre-tax, pre-provision earnings, which he expects to rise 3 per cent due to “strong” results in both Canadian and U.S. as well as international P&C banking.
“We may sound like a broken record, but inflation remains a big risk to our economy, a focus for investors, and the banks are not immune,” he said. “We are forecasting a 41 basis points year-over-year increase on average in the group’s adjusted efficiency ratio, and negative operating leverage on average in 3Q FY22.”
“We are not anticipating any big credit surprises. Rather, we expect impaired PCLs to normalize and the banks to build performing loan PCLs as a result of adjustments to forward-looking indicators and higher weightings toward pessimistic scenarios in light of current macro uncertainties.”
Citing the impact of market turbulence, Mr. Young reduced his target prices for bank stocks. In order of preference, his changes are:
- Toronto-Dominion Bank (TD-T, “buy”) to $104 from $107. The average on the Street is $100.74.
- Bank of Nova Scotia (BNS-T, “buy”) to $92 from $94. Average: $89.75.
- Bank of Montreal (BMO-T, “buy”) to $153 from $155. Average: $153.15.
- Canadian Western Bank (CWB-T, “buy”) to $36 from $38. Average: $36.75.
- Royal Bank of Canada (RY-T, “buy”) to $143 from $147. Average: $141.36.
- National Bank of Canada (NA-T, “hold”) to $100 from $103. Average: $103.25.
- Canadian Imperial Bank of Commerce (CM-T, “hold”) to $74 from $77. Average: $78.43.
- Laurentian Bank of Canada (LB-T, “hold”) to $44 from $47. Average: $46.15.
“The Big 6 Canadian banks are all trading below their 20-year historical average P/4QF EPS multiples, and on average almost 20 per cent below historical average P/BVPS [price to book-value per share] multiples,” he said. “Over the near term, concerns around inflation, recession and the impact from the war in Ukraine could weigh on bank valuation multiples. We believe many of these concerns are already baked into current market prices. And if the Canadian economy remains resilient and recession concern eases, we could see valuation multiples improve; however, it is too early to make that call.”
Northland Power Inc. (NPI-T) is poised to benefit from soaring European power prices, according to iA Capital Markets analyst Naji Baydoun.
That led him to upgrade his recommendation for its shares of Toronto-based company to “strong buy” from “buy” in a research report released on Tuesday before the bell.
“Power prices in Europe began to increase in late 2021 as demand rebounded from low levels observed in 2020 (following a negative demand shock on the back of COVID-19),” he said. “As demand continued to recover in 2022, a supply crunch impacted several countries’ ability to generate enough electricity to meet rising demand. The situation was further complicated by (1) low levels of generation from nuclear facilities (e.g., maintenance work and repair programs in France have led to much lower-than-expected output from the country’s large nuclear fleet), (2) capacity retirements, and (3) the ongoing war in Eastern Europe. These supply issues have led to much higher power prices in many parts of Europe, with spot prices in Germany and the Netherlands up more than 250 per cent year-over-year (based on year-to-date monthly averages.
“NPI’s operating European offshore windprojects are currently contracted at more than €180/MWh (on average), which provides downside protection to their financial performance (55 per cent of NPI’s EBITDA). As European power prices began to rise more dramatically over the past 2-4 weeks, these facilities could now potentially capture a spread above their contracted prices.”
Mr. Baydoun thinks forward pricing starting in the second half points to “a substantial potential pickup” in near-term EBITDA and free cash flow for NPI, which we estimates at $200-700-million for 2023. He also expects it to provide further support to NPI’s projects in the region.
“This translates into $1.00-3.00 per share of undiscounted additional upside to valuation, excluding any incremental upside from incremental cash flows in H2/22 and potentially in 2024,” he said. “Importantly, such alarge potential near-term cash flow windfall would also reduce equity dilution(e.g., less need to use the current ATM program).”
Also emphasizing the presence of several other near-term catalysts, including “Hai-Long financing and sell-down in H2/22 following the recent corporate PPAs and progress/de-risking developments on other offshore wind initiatives,” Mr. Baydoun raised his target for Northland shares to $47 from $44. The average on the Street is $46.52.
“Overall, we view NPI as the best investment vehicle for investors to gain exposure to the offshore wind investment theme. NPI offers investors an attractive mix of (1) stable cash flows from contracted power assets (2.8GW net in operation, 10-year weighted average contract term), (2) strong potential long-term FCF/share growth (primarily driven by offshore wind projects), (3) longer-term potential upside from organic development activity and accretive M&A, and (4) an attractive dividend profile (3-per-cent yield, 50-70-per-cent long-term FCF payout),” he said.
In a research note titled Buy Nutrien: How the Risk/Reward Tilted to the Long Side, he reaffirmed his bullish stance on nitrogen and now sees a shift in sentiment toward the Saskatoon-based company.
“Investor conversations on NTR are have transitioned to bullish from bearish: (1) the ‘hot’ generalist money that poured into the space when tech valuations imploded and during the emergence of the Russia/Ukraine conflict are long gone. In other words, we don’t see imminent selling pressure on NTR like we did when we downgraded the stock; (2) investors, both inside and outside of Canada, are now suggesting NTR as the best way to play ag in H2,” said Mr. Isaacson. “Rightly or wrongly, their investment criteria includes: fertilizer diversification (#1), valuation gap, macro/recession hedge, with a commodity catalyst kicker; and (3) NTR could see market sentiment lift if NTR’s nitrogen margin guidance reduction proves to be too Draconian – we’re on the fence on this one. Overall, sentiment is turning bullish as we transition from the off-season to the size of fall demand as well as positioning for ‘23.”
Seeing “strong valuation support” for Nutrien, he cut his target to US$110 from US$118. The average on the Street is US$110.09.
“We estimate NTR is worth $110 to $115 per share, using our and NTR’s mid-cycle EBITDA estimates, respectively,” he said. “Based on our math, NTR’s mid-cycle EBITDA has meaningfully improved to $7.5B from $5.5B previously . Applying this to NTR’s five-year average multiple of 8.5 times, the implied price value is $110. In NTR’s June update, the company put forth a mid-cycle EBITDA estimate of $9.2-billion, using a volume scenario in ‘25. The implied price value using NTR’s math is $139 per share; however, when discounting the amount back to today for an apples-to-apples comparison, we derive a price value of $115 per share.”
Seeing improving conditions through the remainder of the year, National Bank Financial analyst Ryan Li expects sequential improvement from Lassonde Industries Inc. (LAS.A-T) when it reports its second-quarter results on Aug. 12.
However, he warns cost inflation will continue to weigh on results before the benefits from pricing are seen.
“Our analysis suggests that inflationary headwinds continued in the quarter, particularly with juice concentrates (apple; orange is stabilizing), plastic/ packaging, and shipping/freight,” he said. “We look to confirm with management whether additional pricing is required throughout H2.
“For 2022, management anticipates moderate sales growth year-over-year (despite potential volume pressure); profitability challenges in H1/22 (supply chain, labour, inflationary costs) are anticipated to be offset by run-rate selling price increases/U.S. initiative benefits in H2/22. Our current estimates reflect improving trends through H2/22; however, we anticipate slightly lower year-over-year EBITDA in 2022.”
Mr. Li is projecting second-quarter earnings per share of $2.44, below the consensus forecast of $2.58 and down 10 per cent year-over-year from $2.71 during the same period due to rising input, labour and freight/transportation costs. His sales projection of $497-million is narrowly higher than the Street ($495-million) and up from $469-million a year ago,
After “minor” cuts to his revenue and earnings estimates for both 2022 and 2023, he lowered his target for Lassonde shares to $161 from $169. The average is currently $158.
“We believe Lassonde is a mature and historically well-managed company, with potential to grow through future acquisitions (over the medium-to-long term) and continued organic vectors (market share gains),” he said. “Beyond near-term cost and productivity pressures, we are looking for progress updates regarding Lassonde’s multi-year strategic plan to drive long-term value, accelerate growth and improve overall margins/profitability.”
Desjardins Securities analyst Chris Li said Saputo Inc.’s (SAP-T) “solid” first-quarter 2023 financial results increased his confidence in a “strong recovery of profitability” this year.
“Following the strong share price performance and with valuation returning to historical levels, further share price appreciation will be driven by a clear path to achieving management’s EBITDA target of $2.125-billion by FY25,” he said. “While we remain constructive on the longer-term growth potential, we expect investors to take a wait-and-see approach in the near term.”
On Aug. 4, the Montreal-based company reported adjusted EBITDA of $347-million, easily exceeding both Mr. Li’s $310-million projection and the consensus estimate of $316-million. Earnings per share of 39 cents also topped expectations (30 cents and 29 cents, respectively).
“The outperformance came from all the key geographies, partly offset by slightly softer performance in Europe,” he said. “Adjusted EBITDA grew 20 per cent year-over-year, driven by solid performance from Canada and International, and early signs of recovery in USA. Overall, we believe SAP is off to a strong start to FY23.”
“The combination of pricing actions, productivity improvements and cost-containment initiatives mitigated the impact of inflationary pressures in the quarter. There is no change to management’s outlook. While inflation and supply chain disruptions are likely to persist, a meaningful recovery in earnings is expected in FY23, driven mainly by the full impact of previously announced price increases, improved productivity and fixed-cost absorption, a return to historical order fill rates.”
Maintaining a “positive long-term view” and expressing increased confidence in its ability to rebound this year, Mr. Li raised his target for Saputo shares to $39 from $35, keeping a “buy” rating. The average is $38.63.
“Following the strong share price performance, valuation has returned to historical evels (approximately 12.5 times FY23 consensus) as the market fully expects EBITDA to return to the FY21 ($1.5-billion) level per management’s target,” he said. “We are slightly more conservative at $1.4-billion. Further share price appreciation will be driven by a clear path to achieving management’s EBITDA target of $2.125-billion by FY25. This implies low-20-per-cent annual EBITDA growth in FY24 and FY25. While we are more conservative, our estimates still call for attractive 18-per-cent annual EBITDA growth. The U.S. is key as we expect it to drive 70 per cent of the EBITDA growth. We expect high-single-digit EBITDA growth for the other geographies. The full ramp-up of the EBITDA benefits from the global strategic plan will be the main driver.”
The tax reform proposals from Colombia’s new president, Gustavo Petro, could have “a meaningful negative impact” on Parex Resources Inc.’s (PXT-T) cash flow, according to Scotia Capital analyst Kevin Fisk.
“President Petro’s proposed tax reform includes a tax on oil exports and the elimination of royalty deductibility in the calculation of taxable income,” he said.
“Based on the information currently available, we estimate the proposed tax reform could have a 10-20-per-cent impact on NAV (Scotia’s price deck).”
While Mr. Fisk said he continues to like the company’s management and exploration upside, he lowered his recommendation for its shares to “sector perform” from “sector outperform” until tax reform clarity emerges.
His target for Parex shares remains $34, below the $40.51 average.
In other analyst actions:
* CIBC World Markets’ Anita Soni lowered her target for shares of Barrick Gold Corp. (GOLD-N, ABX-T) to US$27 from US$29, above the US$25.79 average, with an “outperformer” rating, while BMO’s Jackie Przybylowski raised her target by US$1 to US$28 with an “outperform” recommendation.
“Barrick met Street expectations for its Q2 results, an outcome which should not be a surprise given the company pre-released production and sales volumes and provided guidance for unit costs and realized prices,” said Ms. Przybylowski. “In our view, the release and conference call highlighted the positive progress that Barrick is making across its portfolio — specifically on projects described below which are moving closer to completion.”
* Barclays’ David Strauss raised his Bombardier Inc. (BBD.B-T) target to $30 from $27 with an “underweight” rating. The average is $52.52.
* RBC Dominion Securities’ Sam Crittenden cut his Capstone Copper Corp. (CS-T) target by $1 to $6 with an “outperform” rating. The average is $6.09.
“Capstone continues to execute on strong copper growth over the next two years as they ramp up the Mantos Blancos mine and complete the expansion at Mantoverde. The shares have pulled back alongside macro uncertainty; however, we believe this creates an opportunity for investors,” he said.
* Mr. Crittenden also lowered his Labrador Iron Ore Royalty Corp. (LIF-T) target to $36 from $39, above the $33.26 average, with a “sector perform” rating.
“LIF continues to benefit from high iron ore and pellet prices; however, the IOC mine is going through a higher capex phase and we forecast declining iron ore prices, implying declining dividend payments from LIF,” he said. “We estimate the dividend declining from $6.00 in 2021 to $3.10 in 2022 and $2.70 in 2023, which implies a yield of 9.6 per cent vs. the historical average of 8 per cent.”
* Scotia Capital’s David Weiss bumped his Coveo Solutions Inc. (CVO-T) target to $11 from $9 with a “sector outperform” rating. The average is $10.61.
“In our view, Coveo shares remain attractive, given strong expected growth (approximately 27 per cent plus next 2 years on average), and with peer valuations down 57 per cent since November of last year (trading 2 standard deviations below the 4-year mean),” he said. “In our June 15 upgrade note, we demonstrated that software peer valuation multiples have compressed as much as during the trough of prior recessionary downturns, which we view as attractive for firms with competitive products offering strong growth potential.”
* Scotia Capital’s Cameron Bean raised his Crew Energy Inc. (CR-T) target to $8 from $7.50, keeping a “sector perform” rating. The average is $7.82.
* In response to its second-quarter results, Canaccord Genuity’s Matt Bottomley cut his target for shares of Curaleaf Holdings Inc. (CURA-CN) by $1 to $13.50 with a “buy” rating. The average is $15.94.
“Although Q2/22 was encouraging with the resumption of top-line growth and respectable margin expansion, given continued inflationary headwinds on consumer spending habits, as well as the company now pointing toward the bottom-end of its 2022 guidance range, we have tapered down our overall growth expectations into 2023, resulting in a slightly lower forward valuation in our model,” he said. “However, independent of macro-level considerations, we believe CURA continues to demonstrate strong execution on its previously communicated strategic initiatives.”
* Ahead of the Aug. 10 release of its second-quarter results, National Bank’s Endri Leno cut his Dialogue Health Technologies Inc. (CARE-T) target to $8.50 from $11.50, keeping an “outperform” rating. The average is $7.39.
“We maintain a positive view on CARE due to its 1) top-line visibility through recurring and reoccurring revenues; 2) significant market position in Canadian virtual primary health and mental care; 3) potential to disrupt the in-person primary / mental healthcare and EAP delivery; 4) expectations of continued growth; and 5) the integrated and well-liked approach / platform / user experience,” he said. “While we remain positive on CARE and its outlook, the higher interest rate environment leads us to increase our DCF discount rate to 12 per cent (was 10 per cent) resulting in a target of $8.50.”
* After the release of in-line quarterly results late last week, Scotia Capital’s Michael Doumet raised his target for GDI Integrated Facility Services Inc. (GDI-T) to $52.50 from $50 with a “sector perform” rating and Desjardins Securities’ Frederic Tremblay bumped his target to $64 from $63.50 with a “buy” rating, while National Bank’s Zachary Evershed lowered his target to $64.50 from $70.50 with an “outperform” rating. The average is $62.64.
“GDI delivered elevated organic growth across all segments, strong M&A contributions and healthy profitability,” said Mr. Tremblay. “Looking ahead, not only do we continue to believe that Canadian janitorial margins will not decline to pre-pandemic levels, but we now forecast that they will be ‘higher for longer’ given slow return-to-the-office dynamics. In Technical Services, the supply chain issues are moderating faster than we had anticipated, which better positions GDI to execute on a record backlog.”
* Cormark Securities’ Nicolas Dion raised his GeoDrill Ltd. (GEO-T) target to $4 from $3.50, keeping a “buy” rating after a “positive” second-quarter earnings report. Elsewhere, Beacon Securities’ Ahmad Shaath bumped his target to $4.25 from $3.90 with a “buy” recommendation. The current average is $4.25.
“Benefiting from higher gold prices (and larger drilling budgets), we continue to see GEO’s business pick-up steam, while it continues to operate at peer-leading margins (despite global cost inflation),” Mr. Dion said. “The recent contracts signed with senior gold producers show the shift in the business toward more production drilling, which offers less cyclicality compared to exploration drilling for junior companies.
“Geodrill offers a unique way to gain exposure to the gold price, without the geological and technical risk of mining. The stock trades at 2 times 2022 EBITDA, well below its peers in the Americas and Australia which is not justified by the business fundamentals. We do note, however, that trading volumes continue to be light.”
* BMO’s Jackie Przybylowski trimmed her target for shares of Hudbay Minerals Inc. (HBM-T) to $12.50 from $13 with an “outperform” rating. Th average is $9.84.
“A very modest miss,” she said. “Hudbay reported strong production results and sales and impressive costs, aided by the performance at the 777 mine. Low operating costs year-to-date support Hudbay’s previously disclosed 2022 guidance. The continuing operations are on track, and Hudbay continues to progress its exploration and development projects according to expectations.”
* RBC’s Greg Pardy cut his Imperial Oil Ltd. (IMO-T) target by $1 to $84, reiterating an “outperform” rating. The average is $71.35.
“Our bullish stance towards Imperial Oil reflects its capable leadership team, favorable long-term operating outlook, strong balance sheet and commitment to shareholder returns,” he said.
* CIBC’s Krista Friesen raised her Martinrea International Inc. (MRE-T) target to $10.50 from $9.75 with a “neutral” rating. Others making changes include: BMO’s Peter Sklar to $11 from $9 with a “market perform” rating. Scotia’s Mark Neville to $14 from $13 with a “sector perform” rating and Raymond James’ Michael Glen to $12 from $11 with a “market perform” rating The average is $13.81.
“We found the quarter to be inherently stronger than the EPS level indicates as both North American and European operations performed notably better than our projections in terms of operating earnings,” said Mr. Sklar. “However, earnings were suppressed by COVID lockdowns in China (Shanghai and in other areas), which caused significant disruption to operations and results. Notwithstanding the favourable earnings outlook for 2023, our thesis is that we find auto parts stocks generally underperform during periods of Fed tightening.”
* RBC’s Irene Nattel lowered his Park Lawn Corp. (PLC-T) target to $50 from $54 with an “outperform” rating. The average is $46.14.
“Forecasting EBITDA $21.8-million (up 17 per cent year-over-year), slightly above consensus $21.0-million (range $19.0-$22.4-million) when PLC reports Q2 on August 11,” he said. “While Q-to-Q visibility is muddled by the ebb and flow of regional death rates and cadence of M&A, we reiterate our favourable long-term view and recommend investors benchmark valuation against broader attributes, namely: i) defensive, relatively inelastic demand, ii) demonstrated resilience through downturns, iii) demographic tailwind, and iv) industry fragmentation with succession challenges.”
* BMO’s Tom MacKinnon reduced his target for shares of Power Corp. of Canada (POW-T) to $37 from $39, below the $39.63 average, with a “market perform” rating. Other changes include: TD Securities’ Graham Ryding to $41 from $45 with a “buy” rating and Scotia Capital’s Phil Hardie to $41 from $43.50 with a “sector perform” rating.
“POW’s reorganization simplifies its corporate structure and generates modest EPS accretion, but a heavier reliance on GWO makes it difficult to get constructive on NAV growth given our Market Perform rating on GWO,” said Mr. MacKinnon. “As well, we need to see a much smaller negative contribution from the holdco to see the discount narrow beyond the 20 per cent represented by our $37 target price.”