Tuesday’s analyst upgrades and downgrades

Inside the Market’s roundup of some of today’s key analyst actions

Ahead of the start of second-quarter earnings season for the Canadian banking sector next week, a group of equity analysts made a series of recommendation and target changes on Tuesday.

CIBC World Markets’ Paul Holden expects a “challenging” quarter, reducing his adjusted earnings per share projection by 1 per cent to now imply a decline of 10 per cent on average from the first quarter.

“Trends for the majority of earnings drivers are negative, with an increasing rate of change,” he said.

“With the recent bank failures in the U.S., a main focus this quarter will be on funding and liquidity risks and the overall impact to NIMs going forward. With most banks guiding to NIM expansion in the second half of F2023, any updates on how the market environment has changed these assumptions will likely be a major driver of stock performance. We can’t help but think there is a downward bias to the NIM outlook. We expect banks will continue to work their way up to a 12-per-cent CET1 ratio by the end of the year (for those that are still below), but still announce a modest dividend increase. PCLs are likely to come in slightly higher versus last quarter, as impairments continue to normalize and banks build performing provisions at a steady rate. Given that commercial real estate (CRE) credit risk has become very topical, we expect further disclosure and commentary from the banks, but overall we expect the message will be that risks are being monitored while current loan performance is okay. Lastly, we expect elevated expenses and slowing loan growth.”

Citing the ”sizable valuation premium” at which it current trades, Mr. Holden downgraded Royal Bank of Canada (RY-T) to “neutral” from “outperformer” with a $142 target for its shares, down from $147. The average on the Street is $140.17, according to Refinitiv data.

He also made these target adjustments:

• Bank of Montreal (BMO-T, “neutral”) to $139 from $145. Average: $139.38.
• Bank of Nova Scotia (BNS-T, “neutral”) to $74 from $77. Average: $71.70.
• Canadian Western Bank (CWB-T, “neutral”) to $28 from $30. Average: $30.71.
• Laurentian Bank of Canada (LB-T, “neutral”) to $37 from $40. Average: $39.85.
• National Bank of Canada (NA-T, “outperformer”) to $110 from $112. Average: $105.29.

“We continue to lean on defensive positioning and view TD as a more defensive name now that the First Horizon transaction is off the table. NA remains our other Outperformer,” said Mr. Holden.

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Elsewhere, Credit Suisse’s Joo Ho Kim made these changes:

• Bank of Montreal (BMO-T, “outperform”) to $139 from $147. Average: $139.38.
• Bank of Nova Scotia (BNS-T, “neutral”) to $70 from $72. Average: $71.70.
• Canadian Imperial Bank of Commerce (CM-T, “neutral”) to $60 from $65. Average: $64.22.
• Canadian Western Bank (CWB-T, “neutral”) to $26 from $28. Average: $30.71.
• Laurentian Bank of Canada (LB-T, “underperform”) to $32 from $35. Average: $39.85.
• Royal Bank of Canada (RY-T, “outperform”) to $149 from $151. Average: $140.17.

Conversely, Mr. Kim raised his Street-high target for National Bank of Canada (NA-T, “outperform”) to $116, above the $105.29 average, from $113.

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In a research report titled The Best Offense Is a Strong Defense, and That Makes TD Our Best Idea, Scotia Capital analyst Meny Grauman thinks the earning season “will make it very clear that the US regional bank crisis did not cross the border, recent events in the United States serve as a good reminder that investors need to focus on liquidity risk and not just credit risk when thinking about banks.

“That is not to say that worries about credit will subside, just the opposite as the market continues to take a keener interest in banks’ CRE exposure in particular,” he said. “Nevertheless, in addition to all the credit metrics investors typically look at, this earnings season liquidity metrics and deposit trends will get a lot more air time, especially for the smaller banks we cover.

“Broadly speaking, the failures of SIVB, Signature Bank and FRC should actually be viewed as further vindication of the Canadian banking model, which is dominated by a few large and diversified players. But while the U.S. banking sector probably needs to become more ‘Canadian, that does not mean that there are no negative implications for our banks. Those negatives include regulatory uncertainty in the US, and the likelihood of even tougher regulation at home.”

For the quarter, Mr. Grauman is forecasting the sector to generate core cash earnings per share of $2.25, down 7 per cent from the first quarter and 5 per cent versus fiscal 2022.

“Note that the year-over-year result is being weighed down by a normalization in loan loss provisions and for a number of banks very tough Q2/F22 comparables,” he said. “On a PTPP basis, earnings are projected to be up 11 per cent year-over-year on still solid NII growth. On average, our quarterly EPS estimates are below consensus, but we are above on NA and TD and modestly below on BMO, CM, CWB, LB, and RY.

“In terms of positioning into the quarter, we prefer TD and NA. Among the smaller banks we prefer CWB over LB for the quarter.”

He maintained his targets for the stocks in his coverage universe. They are:

• Bank of Montreal (BMO-T, “sector outperform”) at $151. Average: $139.38.
• Canadian Imperial Bank of Commerce (CM-T, “sector perform”) at $66. Average: $64.22.
• Canadian Western Bank (CWB-T, “sector perform”) at $28. Average: $30.71.
• EQB Inc. (EQB-T, “sector outperform”) at $82. Average: $86.88.
• Laurentian Bank of Canada (LB-T, “sector perform”) at $38. Average: $39.85.
• National Bank of Canada (NA-T, “sector outperform”) at $111. Average: $105.29.
• Royal Bank of Canada (RY-T, “sector outperform”) at $146. Average: $140.17.
• Toronto-Dominion Bank (TD-T, “sector outperform”) at $104. Average: $95.77

“Although RY and NA have been the ‘go to’ defensive names in the space for some time now, we want to suggest that TD should in fact take that crown now that it has walked away from the FHN acquisition,” he said. “With a peer leading pro forma CET1 ratio of 15.0 per cent, TD now has an underappreciated fortress balance sheet that is high enough to withstand a very significant amount of economic stress. Yes, the bank needs to answer some important strategic questions; however, given regional banking crisis in the US and the overall downbeat macro-economic outlook defense looks pretty good now. This is why, despite their rich relative valuation premiums, we also continue to rate NA and RY Sector Outperform. Notwithstanding the uncertainty about the U.S. regulatory environment, we also continue to like BMO here as significant synergies from the BoW deal should help offset a broader slowdown in organic revenue growth.”

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Touting its “world class” assets and copper production growth, Eight Capital analyst Puneet Singh initiated coverage of Ivanhoe Mines Ltd. (IVN-T) with a “buy” recommendation.

“Over the last decade Ivanhoe has made not just one, but numerous world-class discoveries of Tier 1 assets, transforming its market cap from that of a junior stage explorer to one that is starting to resemble that of a senior stage copper producer,” he said. “The value creation for shareholders over the aforementioned time period has resonated with investors who have given management a stamp of approval on their track record when it comes to strategy and execution. As we highlighted in our recent copper thematic piece, despite the strong moves in copper prices already, the market is likely to be further surprised by potential price spikes due to low inventories, supply disruptions to existing operations, etc.”

In a research report released Tuesday, Mr. Singh said few North American senior and intermediate producer peers possess “robust copper production growth in the near-term.”

“Among the seniors, Teck Resources Ltd. (TECK.B-T, BUY, Target: C$75.00; Covered by Ralph M. Profiti) has strong growth but is in the midst of a battle with Glencore (GLEN-L, Not Rated) regarding a potential sale of the company,” he said. “Other seniors have flat growth. Larger funds tend to gravitate towards copper equities with market caps larger than $10-billion as they have better trading liquidity. In the intermediate category, we are seeing a trend whereby companies are buying already-producing assets. However, in our view, the list of these assets that could be made available for sale is small. Junior valuations still remain cheap but buying earlier-stage projects is harder for executive teams to green light given the capex associated with most projects that have the scale companies are looking for.”

The analyst said Ivanhoe’s flagship Kamoa-Kakula Copper Complex in Congo is projected to be the world’s highest grade copper mine and is currently undergoing a phased ramp-up that is expected to double copper over the next three years.

“Additionally, during this time period, Ivanhoe will finish construction of its own copper smelter, that is expected to reduce cash costs (2023 guided: $1.45/lb) by more than 20 per cent,” said Mr. Singh. “Investors can also look to Platreef and Kipushi, Ivanhoe’s Tier 1 PGM and zinc assets that are currently under construction, and will start up in 2024.

“Looking at our copper producer coverage list, Ivanhoe has the best growth profile, both year-over-year (20 per cent) and over the next three years (87 per cent). This puts the Company in an advantageous position, as, in our view, having embedded organic production growth will be sought after by investors. The Company trades at a 35-per-cent discount to the senior copper group but that could potentially reverse as Ivanhoe realizes growth.”

He set a target of $18.50 per share. The current average on the Street is $15.51.

“We think that given IVN’s leading copper growth profile stemming from Kamoa-Kakula (plus the regional Western Foreland opportunity in the background) and that it has two other assets, Platreef and Kipushi, also starting up in the near-term, it will receive a premium NAV multiple compared to its peers. We’re seeing a trend amongst peers to buy assets to ensure growth. However, the pool of existing operating assets available for sale is small. Additionally, as we highlighted in our recent copper thematic piece (North American Copper Equities - From Prospecting to Prosperity) acquiring development-stage juniors at this juncture is not preferred by management teams. Thus, for Ivanhoe we emphasize that having a portfolio that has embedded organic production growth will be sought after by investors. This will be especially true for larger funds that prefer copper equities in the $10-billion or larger market cap range of which Ivanhoe is among a small peer group.”

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Following an in-line first quarter, Scotia Capital analyst Mario Saric reaffirmed his view SmartCentres REIT (SRU.UN-T) offers “reasonably valued defence with a well above-average distribution yield,” which he emphasized is “safe, barring a material economic correction.”

“SRU recorded healthy 4.3-per-cent SSNOI [same store net operating income] growth (expects similar through 2023) but more modest 0.4-per-cent year-over-year FFOPU [funds from operations per unit] growth, a consistent theme across the REIT space as higher interest expense offsets improved SSNOI performance,” he said. “On the margin, we saw three positives. First. renewal spreads inched up a bit (not huge, but going in right direction). Second, it appears SRU has re-commenced disposition discussions, which we believe should improve sentiment (sale of low-cap rate residential density), given SRU’s elevated financial leverage. Lastly (and perhaps tied to #2), SRU obtained residential zoning approvals for 3.4Msf in Q1 (3 permits).”

Seeing its valuation as “reasonable,” Mr. Saric trimmed his target to $30.50 from $31 after modest cuts to his forecast, which he said is " fairly comparable to the sector average to date.” The average is $30.19.

He maintained a “sector perform” rating.

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After its first-quarter revenue exceeded estimates on the Street, National Bank Financial analyst Vishal Shreedhar thinks Premium Brands Holdings Corp. (PBH-T) “showed signs of progress, although margin expansion and balance sheet improvement lagged expectation.”

“We expect improvement through the year; investors still require PBH to demonstrate sustained improvement before more fully rewarding valuation,” he added. “Relative to National Bank Financial [estimates], Specialty Foods (SF) delivered stronger EBITDA, partly offset by weaker EBITDA in Premium Food Distribution (PFD).”

Before the bell on Monday, the Vancouver-based specialty food company reported revenue of $1.431-billion, up from $1.251-billion during the same period a year ago and above Mr. Shreedhar’s estimate of $1.391-billion. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $111-million was inline with his forecast of $112-million, however earnings per share of 64 cents fell below his expectation of 85 cents due to higher interest and D&A.

Premium Brands reiterated its full-year guidance for revenue of $6.4-$6.6-billion and EBITDA of $590-$610-million. After narrow increases to his forecast, Mr. Shreedhar is now projecting $6.556-billion and $594.6-million, respectively.

“PBH’s outlook will be supported by accelerating organic growth and pending EBITDA margin expansion (to 9.1 per cent in 2023 from 8.4 per cent in 2022); PBH’s longterm EBITDA margin target is 10 per cent,” he said. “We are constructive on PBH given low valuation relative to history and strong growth expectations. PBH currently trades at 11.5 times our NTM [next 12-month] EBITDA compared to its 5-year average of 13.9 times.”

Maintaining an “outperform” rating, Mr. Shreedhar trimmed his target for the company’s shares to $121 from $124, pointing to higher leverage. The average is $116.

Elsewhere, others making changes include:

* CIBC’s John Zamparo to $99 from $98 with a “neutral” rating.

* TD Securities’ Derek Lessard to $125 from $120 with a “buy” rating.

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While its first-quarter results displayed slower-than-anticipated growth, Lifespeak Inc.’s (LSPK-T) new capital structure provides breathing room, according to Desjardins Securities analyst Jerome Dubreuil.

Shares of the Toronto-based mental-health content creator jumped 15.4 per cent on Monday following its premarket earnings release, which saw revenue of $13.4-million and adjusted EBITDA of $3.7-million fall narrowly below the Street’s expectations of $13.8-million and $3.8-million, respectively. Organic growth of approximately 10 per cent was lower than expected “due to the sequential decline in annual recurring revenue (ARR) in the embedded segment.”

“LSPK reported results which were generally in line with expectations,” said Mr. Dubreuil. “The stock still reacted well as we believe the market has assessed that the company’s balance sheet/liquidity has improved vs a few months ago. The stock currently trades at 5.7 times 2024 EBITDA, which is low for the mid-teens EBITDA growth we forecast with limited capex. That said, we acknowledge that the high leverage, limited visibility and recent deterioration in churn metrics are valid reasons for caution.”

During the quarter, Lifespeak secured a $15-million convertible term loan with Beedie Capital and amended its existing term loan, which Mr. Dubreuil emphasized has resulted in lower interest and principal amortization payments overall.

“We estimate leverage currently stands at approximately 6.4 times,” he said. “We believe immediate concerns were alleviated in recent months, but it should still take several quarters before the situation is comfortable again.”

Maintaining a “buy” recommendation for its shares, he trimmed his target to 80 cents from $1.25. The average is 89 cents.

Other analysts making changes include:

* Canaccord Genuity’s Doug Taylor to $1 from $1.50 with a “speculative buy” rating.

“LifeSpeak’s Q1 results were slightly below Street forecasts as the company continues to navigate a period of higher churn and longer sales cycles while servicing its substantial balance sheet obligations,” he said. “Management continues to expect 30-per-cent-plus EBITDA margins this year. Alongside a more meaningful anticipated growth profile, the resulting valuation at 6.3 times EV/EBITDA for this year and 5.1 times next year is inexpensive. With that said, substantial balance sheet liabilities inform our SPECULATIVE BUY rating, despite the strides made to remove near-term liquidity concerns. Ongoing higher churn leads us to reduce our valuation to $1.00.”

* RBC’s Paul Treiber to 60 cents from 80 cents with a “sector perform” rating.

“Q1 was below RBC/consensus due to macro delaying sales cycles and churn of smaller customers. With a broader portfolio of products following 4 acquisitions over the last 18 months, LifeSpeak is now focusing on cross-selling into existing customers to augment slower new customer growth. LifeSpeak has turned cashflow positive, but leverage remains high,” said Mr. Treiber.

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In other analyst actions:

* CIBC World Markets Inc. analyst Nik Priebe downgraded CI Financial Inc. (CIX-T) to “neutral” from “outperformer” with a $13.50 target, down from $19 and below the $19.31 average on the Street. For further details, click here.

* TD Securities’ Mario Mendonca downgraded ECN Capital Corp. (ECN-T) to “hold” from “buy” and cut his target to $4 from $5.50. The average is $4.04.

* TD Securities’ David Kwan cut Absolute Software Corp. (ABST-Q, ABST-T) to “tender” from “buy” with a US$11.50 target, down from US$16 and below the US$14.17 average.

* BMO’s Rachel Walsh downgraded Carbon Streaming Corp. (NETZ-NEO) to “market perform” from “outperform” with a $2.25 target, down from $3 and below the $4.75 average.

“With continued price weakness in the voluntary carbon market, we have lowered our price expectations across several of the company’s streams,” she said. “As a result, the majority of the company’s cash balance will be required to cover existing agreements and G&A. We estimate that Carbon Streaming will be unable to bring in additional material stream agreements until market conditions improve substantially.”

“Carbon Streaming remains one of the few ways to gain exposure to potential growth and price appreciation in the voluntary carbon market which we anticipate will be substantial. We expect the company to have significant revenue growth. If market conditions improve the company could have several potential upcoming catalysts, which we believe will be positively received.”

* CIBC’s Dean Wilkinson raised his Canadian Apartment Properties REIT (CAR.UN-T) target to $55 from $53 with a “neutral” rating. Other changes include: Desjardins Securities’ Kyle Stanley to $59 from $57 with a “buy” rating, Canaccord Genuity’s Mark Rothschild to $55.50 from $54.50 with a “buy” rating and TD Securities’ Jonathan Kelcher to $63 from $61 with an “action list buy” recommendation. The average is $56.48.

* TD Securities’ Daryl Young moved his target for CCL Industries Inc. (CCL.B-T) to $77, above the $76.40 average, from $73 with a “buy” rating.

* CIBC’s Anita Soni reduced her target for Centerra Gold Inc. (CG-T) to $11 from $12 with an “outperformer” rating, while Canaccord Genuity’s Dalton Baretto lowered his target to $9.50 from $12 with a “buy” rating. The average is $10.47.

* Raymond James’ Andrew Bradford trimmed his CES Energy Solutions Corp. (CEU-T) target to $4.40 from $4.75 with a “strong buy” rating. The average is $4.10.

“1Q Reported EBITDA was $77-million, which put it in-line with both the consensus ($76-million) and our own $77-million estimate,” he said. “We are reducing our estimates nonetheless, predicated primarily on the steepened downward trajectory in U.S. drilling.

“Given CEU’s share price today, the market is, in-effect, pricing the stock as though CEU’s EBITDA were about to drop more than 40 per cent from current run-rate levels to approximately $175-$200-millionn. Considering CEU’s market share gains in both U.S. drilling fluids and production chemistry over the last cycle, we think the market is over-pricing this downside scenario. We’re forecasting $298-million EBITDA for 2023, which is down from our prior $309-million estimate. Our reduced estimate implies a similarly reduced target price.”

* RBC’s Paul Treiber increased his Constellation Software Inc. (CSU-T) target to $3,100 from $3,000 with an “outperform” recommendation. Other changes include: BMO’s Thanos Moschopoulos to $2,950 from $2,800 with an “outperform” rating and Raymond James’ Steven Li to $2,750 from $2,500 with a “market perform” rating. The average is $2,925.74.

“Constellation reported mixed Q1 results,” said Mr. Treiber. “Organic growth and capital deployed on acquisitions were solid. However, margins were light, partially due to Altera. Altera differs from Constellation’s typical profile for acquisitions; despite lower margins, we believe Altera is tracking to meet Constellation’s hurdle rate. Therefore, we believe the near-term noise regarding Altera shouldn’t overshadow Constellation’s solid M&A and organic growth.”

* National Bank’s Zachary Evershed lowered his target for GDI Integrated Facility Services Inc. (GDI-T) to $53 from $56 with an “outperform” rating. The average is $56.93.

* Mr. Evershed raised his Shawcor Ltd. (SCL-T) target to $18, above the $17.44 average, from $17.50 with an “outperform” rating.

* Desjardins Securities’ Jonathan Egilo moved his Lundin Gold Inc. (LUG-T) target to $21 from $20.75 with a “buy” rating. The average is $20.42.

* National Bank’s Tal Woolley trimmed his Northwest Healthcare Properties REIT (NWH.UN-T) target to $8.50 from $9, maintaining a “sector perform” rating. The average is $10.64.

* In a note titled We See Good Value Here Even if It’s a Little Messy, BMO’s Joel Jackson cut his Nutrien Ltd. (NTR-N, NTR-T) target to US$90 from US$110 with an “outperform” rating. The average is US$87.85.

“We now see 2023 EBITDA a little higher than the revised $7.2-billion guidance midpoint, and slightly lower 2024 EBITDA estimate to $6.5-billion, which we continue to deem a mid-cycle proxy,” he said. “Our target is 8-8.5 times 2024 estimated EV/EBITDA. We get it’s tough topoint out specific catalysts for ferts stocks like NTR currently, but believe that the stock represents good value currently assuming re-ratings come from investors ultimately feeling greater comfort levels around mid-cycle prices/earnings/multiples.”

* CIBC’s Stephanie Price raised her Q4 Inc. (QFOR-T) target to $3.75 from $3.75 with a “neutral” rating, while Canaccord Genuity’s Doug Taylor bumped his target to $3 from $2.75 with a “hold” rating. The average is $3.83.

“We maintain a HOLD rating on Q4 following its first quarter results, which were below expectations as growth continues to be challenged given higher uncontrollable churn related to the slow capital markets backdrop,” said Mr. Taylor. “While the company is seeing some early indicators that public company formation trends may be turning, the market outlook remains far from certain. Management continues to execute on what is within its control, including delivering substantial gross margin improvements and outlining another $6M in annualized OPEX reductions. This is expected to produce two-thirds of the improvement required to achieve its unchanged EBITDA breakeven goal by year-end. We factor in a slight improvement in investor sentiment into our new target price.”

* TD Securities’ Michael Tupholme raised his Russel Metals Inc. (RUS-T) target to $39 from $37 with a “hold” rating. The average is $39.90.

* Credit Suisse’s Andrew Kuske bumped his TC Energy Corp. (TRP-T) target to $60 from $59.50 with a “neutral” rating. The average is $61.18.

“Following TRP’s Q1 2023 print that beat the Street’s along with our views, the company is on a path to regaining market confidence,” he said. “That re-rating path is interesting as the stock looks relatively inexpensive – often greater than by one standard deviation on a 10-year basis of calculation. With the passage of time, the plan delivering and the rekindling of higher quality executable growth will also help restore confidence with a potential re-rating amplification.”

“TRP looks very well positioned for ongoing growth across the asset base with key competitive advantages across multiple natural gas basins and other parts of the asset network. The renewed focus on the balance sheet (with some accelerated sales), the longer-term sustainability of capital growth combined with dividend growth that should eventually translate into a self-funding model with (over time) re-rate potential, in our view.