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

While he does not see a near-term catalyst for Canadian Western Bank (CWB-T), RBC Dominion Securities analyst Darko Mihelic thinks its shares are currently “too discounted,” leading him to upgrade his recommendation to “outperform” from “sector perform” on Tuesday.

On Friday, the Edmonton-based bank reported adjusted cash earnings per share for its second quarter of 74 cents, missing Mr. Mihelic’s forecast by 6 cents and the consensus estimate on the Street by 3 cents.Net interest income of $230.5-million also fell short of his projection ($236.9-million) as expenses jumped 2 per cent from the first quarter to $146.2-million, higher than his $143.0-million.

“The economic landscape continues to be challenging for CWB,” the analyst said in a research note. “CWB management revised its core EPS target for 2023 lower from a low to mid single-digit growth target, to now expecting a 2023 core EPS between $3.50 to $3.60. The new core EPS guidance represents a 1-per-cent to 3-per-cent decline in earnings from 2022. CWB’s net interest margin contracted 6 basis points quarter-over-quarter this quarter to 2.26 per cent, primarily due to a 16 basis pointss negative impact from fixed rate funding costs. Due to higher funding costs, CWB now expects slower net interest margin (NIM) expansion in the second half of 2023 than it previously expected. Management also indicated that expense management will be another focus area for 2023 as the bank adjusts to the lower growth environment.”

Despite the difficult conditions, Mr. Mihelic now thinks the bank’s valuation “reflects harsh (possibly unreasonable) scenarios.”

“We believe NIMs [net interest margins] can improve, although lower loan growth is likely,” he said. “Expense control has been a challenging area for the bank, but here too we believe expense growth can moderate (with some effort). Capital is solid at a 9.3-per-cent CET 1 ratio, achieved without using the ATM. In our view, the stock is now very disconnected from a range of reasonably adverse scenarios — we provide some stressed losses in this note for context.

“Changes to our model mainly reflect Q2/23 actual results and various moving parts that offset. We increase our 2024 NIM assumptions and decrease our loan growth assumptions for the remainder of our forecast period. These changes decrease our 2024 core earnings estimate, but removing our previous expectation of shares issued under the ATM partially offsets the lower net income. We assume CWB will continue to issue shares from its DRIP. Our adjusted EPS estimate moves to $3.49 (was $3.64) in 2023 and $3.80 (down $0.05 per share) in 2024.”

With his forecast reduction, Mr. Mihelic trimmed his target for CWB shares by $1 to $35, exceeding the $29.93 average on the Street.

Elsewhere, Barclays’ John Aiken lowered his target to $26 from $27 with an “overweight” rating.


National Bank Financial analyst Cameron Doerksen thinks the outlook for Transat A.T. Inc.’s (TRZ-T) summer “continues to improve.”

Ahead of the release of its second-quarter results on June 8, he raised his forecast for the remainder of the fiscal year, citing “very strong” summer demand and pricing on its core Atlantic routes and a recent easing of jet fuel prices.

“Demand and pricing on Transat’s core trans-Atlantic routes, which account for almost 75 per cent of total revenue in fiscal Q3 and Q4, look to be exceptionally strong this summer,” said Mr. Doerksen in a note released Tuesday. “Based on our pricing surveys on key routes during peak travel periods, price increases this year are the highest we have seen since we began the surveys in 2015, up year-over-year and also up dramatically from 2019 levels. Additionally, jet fuel prices have eased in recent months which should be a further tailwind for Transat as its current F2023 EBITDA margin target range is based on an assumed jet fuel price of $1.20 per litre versus the current spot price of $0.90 per litre.”

For its second quarter, which includes “the peak sun destination month of March,” the analyst expects to see “meaningful” improvement from the previous year, which was hurt by pandemic-related restrictions.

“Air Canada noted with its Q1 report that its Air Canada Vacations subsidiary, which competes directly with Transat, had a very strong quarter with results ahead of Q1/19, the last pre-pandemic quarter for the airline industry,” he said. “We are nevertheless reducing our Q2 estimates for Transat based on model adjustments to better reflect expected revenue in the quarter, which we had overestimated. However, we are increasing our Q3 and Q4 estimates based on the better-than-expected demand and pricing environment as well as an assumed lower fuel price. Overall, our F2023 EBITDA forecast moves higher to $170 million, up from $151 million previously.

“For F2024, which is the basis for our valuation, we have made only modest adjustments as our model already assumed an ongoing improvement in margins and an easing of jet fuel prices.”

While he warned Transat is likely to “need to refinance a portion of its debt as well as reduce overall debt significantly,” Mr. Doerksen bumped his target for its shares to $3.25 from $3, maintaining an “underperform” recommendation. The average target on the Street is $3.10.


Stifel analyst Martin Landry sees the potential for a revenue beat when Dollarama Inc. (DOL-T) releases its first-quarter 2024 financial results on June 7, pointing to a “strong” same-store sales performance recently reported by Walmart Canada.

However, he sees “limited” upside potential to the Street’s estimates overall, citing “potential headwinds from higher financing costs and potential increasing inventory shrink coupled with accelerating mix-shift towards lower margin consumables, which could pressure gross margin levels.”

“Nonetheless, we expect a strong quarter FY24 for Dollarama with double digits EPS growth year-over-year amid a challenging macroeconomic environment, putting the company in a select group of companies with growing EPS this year,” said Mr. Landry.

He’s now projecting “strong” same-store sales growth of 10.7 per cent “boosted by the $4-plus price points introduced last summer as well as sustained gain of share of wallet.”

“This represents a slight deceleration from the 13-per-cent average growth of the last three quarters given we are starting to lap high inflation and wallet share gains,” the analyst said. “However, Walmart Canada reported a good SSS growth of 6.3 per cent year-over-year, a sequential improvement compared to Q4FY23 of 5.7 per cent. Our current SSS estimates of 10.7 per cent suggest a deceleration of 530 basis points sequentially, which might be conservative given Walmart’s print.”

“Walmart (WMT-NYSE) pointed to sequential deceleration in comparable sales growth during the Q1FY24 quarter and into Q2FY24. We will look for commentary on sales trends post quarter end for Dollarama. We note that our Q2FY24 SSS assumptions already reflect a deceleration from the Q1FY24 levels as DOL begins to lap difficult comparable.”

For the quarter, he’s projecting revenue of $1.235-billion and earnings per share of 56 cents, up 15.2 per cent and 12.3 per cent year-over-year, respectively. The Street’s expectations are $1.247-billion and 59 cents, according to Refinitiv data.

“In FY23, Dollarama benefited from strong market share gains driven by consumers trading down to fight inflationary pressures,” he said. “However, our latest survey suggests that peak share of wallet for the dollar store channel might be behind us. This dynamic could ultimately result in same-store sales headwinds for DOL as consumers return to historical buying habits. We do not expect this dynamic to have a significant impact on DOL’s SSS in the short term but this will likely be a point of focus over the medium term.”

Calling it a “market leader with sustainable competitive advantage” and touting its “attractive business model with significant control over margins,” Mr. Landry reiterated a “buy” rating and $94 target for Dollarama shares. The average is $90.21.

“In our view, DOL offers investors with a lower risk profile as its business model tends to be less impacted by economic cycles,” he said. “We expect EPS growth of 12 per cent year-over-year in FY24, an attractive growth amid a challenging economic backdrop and the best growth rate within our coverage universe. DOL’s share are trading at 24 times forward P/E a slight premium to its historical average, which we feel is warranted given the ongoing uncertainty in equity markets.”

Elsewhere, Scotia Capital’s George Doumet raised his target to $95.50 from $93, maintaining a “sector perform” recommendation.

“We are ahead of consensus for Q1 (and for F23) and expect DOL to see continued impressive SSS growth driven by healthy traffic trends and by trade down,” said Mr. Doumet. “We see upside to consensus gross margin estimates as the company benefits from higher price points and lower costs (both product and transport); we are at the upper end of company guidance for F23 (and see some room for potential upside there).”

“Dollarama remains our top defensive idea (positive earnings revisions and continued TAM expansion) and valuation remains reasonable in our view – with shares trading at only a modest premium to its historical average (on our estimates).”


With construction at its Seguela mine in Cote d’Ivoire complete, Scotia Capital analyst Eric Winmill sees Fortuna Silver Mines Inc. (FSM-N, FVI-T) “nearing a free cash flow inflection point” that he thinks could “drive a positive share price re-rating.”

He resumed coverage of the Vancouver-based company with a “sector perform” recommendation.

“Management’s stated capital allocation priorities are paying down debt ($245M as of Q1/23), share buybacks, potentially initiating a dividend, and investing in growth,” he said.

Mr. Winmill has a target of US$4.25 per share. The average is $6.10 (Canadian).


National Bank Financial analyst Jaeme Gloyn said recent investor meetings with Element Fleet Management Corp.’s (EFN-T) new president and chief executive Laura Dottori-Attanasio reaffirmed his confidence in his “top pick.”

“Our bullish position on EFN partly rested on a successful leadership transition,” he said. “Not only did our three-day marketing event confirm a seamless hand-off, we came away more confident in the company’s outlook. As important, investors generally shared our positive assessment of the meetings.”

Mr. Gloyn said Ms. Dottori-Attanasio, who was named to the role in late January, “demonstrated a deep knowledge both of EFN and industry dynamics, strategic vision, and strong collaboration with CFO Frank Ruperto.”

As uncertainty looms, Canadian CEOs head for the exits

“In addition to continuing organic growth strategies to increase share of wallet, convert self-managed fleets, and win market share, Laura sees opportunities to accelerate and enhance growth through digitization/automation, EV transition, and new partnerships,” the analyst said. “We view these opportunities as key supports in de-risking the already solid 6-8-per-cent annual revenue growth outlook with positive operating leverage to drive double-digit adjusted EPS and free cash flow per share growth.”

Mr. Gloyn reaffirmed his “top pick” status, “outperform” recommendation and Street-high target of $30 for Element Fleet shares. The current average is $24.58.

“EFN is a ‘core holding’ we believe every PM needs to own in all environments,” he said. “EFN is a low-risk, double-digit FCF and dividend grower, with blue-sky share price potential easily into the $30s over the next two years regardless of the market backdrop. We view growth as de-risked given 1) continued solid execution on an organic growth pipeline of $500 million of revenues (40 per cent above 2022 levels) to be earned in the next few years, 2) a massive order backlog with high-margin revenues to support that growth in H2 2023 through 2024, and 3) mega-fleet wins not baked into guidance or consensus estimates (see Rentokil in December 2022 and Armada, OXXO and TELUS added in early 2023). In addition, EFN still trades at an FCF Yield of almost 9 per cent on 2024 estimates, roughly 40 per cent above the yield of Canadian Financials with similar fundamentals (e.g., defensiveness, strong organic revenue growth, expanding profitability, solid FCF generation, low credit risk, and barriers to entry). As EFN executes in 2023, we expect significant yield compression.”


RBC Dominion Securities analyst Greg Pardy reaffirmed his “constructive stance” toward Cenovus Energy Inc. (CVE-T) following a meeting with president and chief executive Jon McKenzie, pointing to its “capable leadership team, strengthened balance sheet, stern capital discipline, and bolstered shareholder returns.”

“The missing ingredient in the mix has been operating momentum, but this should surface in the second half of this year,” he added.

Mr. Pardy expressed confidence in the development of the Calgary-based company’s downstream business, citing improved operating momentum at its U.S. refineries. He expects gains to be seen in its third- and fourth-quarter results.

“Cenovus’s progress in ramping up its U.S. refinery operations remains an important element in terms of achieving its net debt target, in part because its downstream utilization rate should rise as the year unfolds,” said Mr. Pardy. “At Toledo, the east side of the plant was brought up in April, with the west side of the refinery expected to be fully running in June. The crude unit at Cenovus’s Superior refinery came online in April, with ramp-up progressing on a unit-by-unit basis and a full restart expected later in the second quarter. The company’s Lima refinery continues to run well at rates proximate to nameplate capacity.”

He maintained an “outperform” rating and $28 target for Cenovus shares. The average is $30.37.

“At current levels, CVE is trading at a 2023 estimated debt-adjusted cash flow multiple of 3.9 times (vs. our global major peer group avg. of 4.6 times) and a free cash flow yield of 16 per cent (vs. our peer group at 13 per cent) under our base outlook,” said Mr. Pardy. “We believe CVE should trade at an average/above-average multiple vis-à-vis our peer group, reflective of the company’s capable leadership team, strengthened balance sheet, and bolstered shareholder returns, partially offset by its still fractionalized downstream portfolio.”


In other analyst actions:

* CIBC’s Dennis Fong cut his Suncor Energy Inc. (SU-T) target by $1 to $61, above the $52.12 average, with an “outperformer” rating.

“We have updated our estimates to incorporate ConocoPhillips’ (COP-NYSE) announcement of exercising its pre-emption right to purchase the remaining 50-per-cent interest in Surmont from TotalEnergies EP Canada Ltd,” he said. “We still anticipate Suncor to complete a transaction with TotalEnergies to acquire the remaining working interests in Fort Hills assets. As a result, we are reducing our price target to $61.00 (from $62.00), which represents an asset transaction for Fort Hills and the lower benefit of cash taxes from the revised acquisition.”

Follow David Leeder on Twitter: @daveleederOpens in a new window

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