Tuesday’s analyst upgrades and downgrades

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

Desjardins Securities analyst Doug Young expects investor sentiment toward Canada’s banks to remain “subdued” in the near term.

In a research report released Tuesday previewing second-quarter earnings season for the sector, which begins with Bank of Nova Scotia (BNS-T) and Bank of Montreal (BMO-T) on May 24, Mr. Young predicted the crisis south of the border is likely to continue to weigh on sentiment. Canadian bank stocks are down an average almost 6 per cent for the quarter, underperforming the broader TSX.

“It has been an eventful quarter, with history being made, just not the good kind — three of the top five largest U.S. bank failures occurred in the past two months,” he said. “However, this crisis differs from the Great Financial Crisis in that it is liquidity- and duration-driven, not credit-driven, at least not yet. We do not believe the U.S. banking crisis has direct material implications for Canadian banks, and we should get further evidence of this with 2Q FY23 results.”

“Since 1Q FY23, the average P/BVPS [price to book value per share multiple of the Big 6 has decreased by 10 per cent, which can be attributed to the stress in the U.S. banking sector and risk-off sentiment. As we write this preview, a fresh wave of stress has emerged among U.S. regional banks. We believe the fundamentals of Canadian banks remain sound; however, near-term patience may be required.”

Mr. Young is forecasting a 9-per-cent year-over-year decline in cash earnings per share on average, due largely to the normalization in provisions for credit losses. He also expecting a 7-per-cent increase in “adjusted pre-tax, pre-provision (PTPP) earnings, driven by P&C banking operations and partially offset by weaker capital markets results.”

“M&A will be topical,” he said. “With TD’s termination of the FHN acquisition, what’s next? Anything new with TD’s integration of Cowen? How is the integration of Bank of the West (BOTW) going for BMO? Should we read anything into the delayed closing of RY’s acquisition of HSBC Canada?”

“We expect seven of the eight banks to increase dividends (by 3 per cent quarter-over-quarter on average), with TD being the exception in that it typically reviews its dividend annually with 4Q results.”

Mr. Young reaffirmed Toronto-Dominion Bank (TD-T) as his top pick in the sector, maintaining a “buy” rating and $104 target. The average on the Street is $95.61, according to Refinitiv data.

He trimmed his targets for the other seven banks in his coverage universe. His changes, in order of preference, are:

• Bank of Montreal (BMO-T, “buy”) to $141 from $146. Average: $139.84.
• Royal Bank of Canada (RY-T, “buy”) to $145 from $147. Average: $140.45.
• Canadian Western Bank (CWB-T, “buy”) to $32 from $33. Average: $30.86.
• National Bank of Canada (NA-T, “hold”) to $103 from $104. Average: $106.50.
• Bank of Nova Scotia (BNS-T, “hold”) to $73 from $76. Average: $72.09.
• Canadian Imperial Bank of Commerce (CM-T, “hold”) to $64 from $67. Average: $64.32.
• Laurentian Bank of Canada (LB-T, “hold”) to $35 from $37. Average: $40.08.

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Elsewhere, Barclays analyst John Aiken downgraded a trio of Canadian banks in a quarterly preview released on Tuesday.

Although we are anticipating a reasonably solid quarter, we believe that the market will be forward, not backward, looking,” he said. “Consequently, solid results will take a back seat to management commentary on the outlook, particularly for credit and revenue. Unfortunately, we see more downside risk than upside … Downgrading our Outlook to Neutral from Positive: While we do not anticipate that the Canadian banks’ second quarter will demonstrate much earnings weakness, we believe that cracks in the foundation will become evident. Further, with an uncertain outlook and a looming recession, we anticipate that there will continue to be pressure on the banks’ valuations and declining confidence in their earnings outlook. Consequently, we are lowering our target multiples for the group to reflect a much wider dispersion of potential earnings outcomes and have reduced our ratings on several banks.”

Mr. Aiken lowered Royal Bank of Canada (RY-T) by two notches to “underweight” from “overweight” with a $124 target, falling from $151.

He also made these recommendation changes:

• Bank of Nova Scotia (BNS-T) to “underweight” from “equalweight” with a $64 target, down from $78.
• Toronto-Dominion Bank (TD-T) to “equalweight” from “overweight” with a $83 target, down from $101.

His target changes include:

• Bank of Montreal (BMO-T) to $127 from $149 with an “overweight” rating.
• Canadian Imperial Bank of Commerce (CM-T) to $56 from $65 with an “equalweight” rating.
• Canadian Western Bank (CWB-T) to $27 from $29 with an “overweight” rating.
• Laurentian Bank of Canada (LB-T) to $34 from $36 with an “equalweight” rating.
• National Bank of Canada (NA-T) to $82 from $98 with an “underweight” rating.

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With Asante Gold Corp. (ASE-CN) in “liquidity limbo” after entering into a confidentiality agreement with Fujairah Holding LLC in connection with its bid to acquire the company, Canaccord Genuity analyst Michael Fairbairn lowered his recommendation to “hold” from “speculative buy” previously.

On April 21, Vancouver-based Asante announced it received unsolicited, non-binding and conditional expression of interest from UAE’s Fujairah, which owns 11.43 per cent of Asante’s stock. It said cash consideration was contemplated at a price of $2.20 per common share, but the company’s board determined the offer was “highly conditional and fails to address Asante’s near-term financing requirements.”

“We believe Asante granting Fujairah an exclusivity period on its non-binding expression of interest may be a signal that financing is not available elsewhere for the company at acceptable terms,” said Mr. Fairbairn. “While the exclusivity period comes with a confidentiality agreement, we note that Fujairah’s last expression of interest required ASE to cease all discussions and negotiations with all persons other than Fujairah in respect of any debt or equity financing ... We believe Asante is looking to secure $200-million in incremental funding in the coming months to meet its financial obligations. Ultimately, management has indicated that Fujairah is willing to engage in financing discussions, and we note Fujairah may come back with a higher offer, however, we believe the lack of clarity surrounding Asante’s financial position could complicate upcoming negotiations.”

Despite a $27-million non-brokered private placement in early April, Mr. Fairbairn thinks a near-term funding gap remains as Asante continues to ramp up its Bibiani mine, make payments to Kinross Gold Corp. for Chirano and pay various other creditors.

He maintained a target of $2.20 for Asante shares. The current average is $2.68.

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After Finning International Inc. (FTT-T) “blew past” expectations with its first-quarter results, Raymond James analyst Bryan Fast thinks there’s room for its shares to trade higher, pointing to “a solid backlog and improvements in the operating model that is able to achieve higher peaks and higher trough earnings.”

“Results have outpaced Street expectations in recent quarters, though FTT share price reaction has been muted as investors remain weary of peak earnings,” he said.

“End-markets remain supported by steady activity levels and commodity prices. Valuation is still attractive at 2.1 times book value, below the long-term average of 2.3 times.”

On Monday after the bell, the Vancouver-based industrial equipment dealer reported revenue of $2.1-billon, up 23 per cent year-over-year and above Mr. Fast’s $2-billion forecast. Adjusted diluted earnings per share jumped 30 cents from the same period a year ago to 89 cents, topping the analyst’s expectation of 72 cents.

“All regions contribute to beat,” said Mr. Fast. “Revenue in Canada and South America, surpassed our expectations by 10 per cent and 9 per cent respectively. Margins in all three regions, came in ahead of our forecast. SG&A gained 16 per cent year-over-year to $407-million but as a percentage of revenue declined 120 bps. Gross margin of 29 per cent was 200 bps ahead of our estimate and 80 bps above the level reported in 1Q22. Contributing to the year-over-year increase was improved margins from product support and a greater proportion of product support revenue to the overall revenue mix, which increased to 61 per cent from 59 per cent last year.”

Also noting its backlog is now at record levels, Mr. Fast increased his 2023 and 2024 EPS projections, leading him to bump his target for Finning shares by $1 to $43 with an “outperform” recommendation. The average is $42.33.

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Following better-than-expected first-quarter results, National Bank Financial analyst Tal Woolley raised his valuation for Extendicare Inc. (EXE-T) in response to potential gains brought by provincial long-term care funding changes as well as its “changing business mix, growth prospects and leverage.”

“Starting in Q2, COVID funding offered by the Ontario and Manitoba government will cease, similarly followed by Alberta in Q3,” he said. “While this means less revenue, pandemic-type expenses should come down as COVID becomes an endemic. In addition, a less restrictive operating environment makes touring facilities easier, likely translating into EXE reaching full occupancy sooner. Further changes were announced in ON, with the province offering a 2-per-cent increase in accommodation funding (where EXE can earn a profit), which is likelyinsufficient relative to the inflationary impact (SIA estimates a 10-per-cent increase is needed). Depending on the accommodation funding increase announced by MB and AB, EXE sees LTC NOI [net operating income] margins now trending around 8-9 per cent. Flowthrough funding (where EXE cannot earn a profit) will begin to be phased out in Q2 for ward-style beds taken out of service during COVID, ending in Q1 2025. Accommodation funding will be retained. EXE phased out 185 ward-style beds, with 84 set to be re-opened in different formats. Lastly, on the home healthcare front, the recent ON budget increased flow-through funding aimed at alleviating staffing costs, also set to begin in Q2.”

On May 4, the Markham, Ont.-based for-profit long-term care provider reported funds from operations per unit of 21 cents, up 151 per cent year-over-year and well ahead of the 6-cent forecast from both Mr. Woolley and the Street. The beat was due to a due to $12.1-million in COVID cost recoveries, $6.1-million in favourable wage settlements and other funding adjustment of $0.5-million.

“We increased our 2023 forecast to reflect the Q1 recoveries and the new funding outlook, offset by higher interest costs,” said Mr. Woolley. “Our forecasts will vary as the Axium/Revera transactions close in Q3, and EXE’s asset mix changes.”

Maintaining a “sector perform” rating, he raised his target to $7.50 from $7, which is the current average on the Street, after he “increased the value of the LTC operations segment to better reflect expected future earnings.”

“We would expect EXE shares to track the market near term,” he said in a note following the earnings release. “The closing of the Axium/Revera deals still lies ahead in Q3, which will change EXE’s asset mix/earnings profile again. Until we see better earnings visibility, we cannot envision shares meaningfully outperforming the market. We note, however, that EXE remains active on its buyback, which could provide some downside protection while the last of the COVID-era volatility diminishes.”

Elsewhere, RBC Dominion Securities’ Pammi Bir also raised his target to $7.50 from $7 with a “sector perform” rating.

“Our outlook for EXE has modestly improved post Q1 results that were ahead of our call,” said Mr. Bir. “While results were aided by prior year cost recoveries, operating metrics and earnings traction seem set to build as pandemic related pressures continue to gradually fade. Coupled with less anticipated volatility in results, we see levers to support a recovery in valuation over time.”

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After “solid” first-quarter results, RBC Dominion Securities analyst Greg Pardy reaffirmed his constructive stance toward Imperial Oil Ltd. (IMO-T), citing “its long life-low decline upstream portfolio, cash flow diversification via its refining and chemical segments, strong balance sheet, free cash flow generation, abundant shareholder returns and impressive operating performance in recent years.”

In response to its earnings report, which came with a 14-per-cent increase to its quarterly dividend, Mr. Pardy raised his earnings per share projections for 2023 to $9.69 from $9.27 and 2024 to $11.84 from $11.21 and touted its “abundant” free cash flow.

“We peg Imperial’s free cash flow at $5.6-billion in 2023 (before working capital and dividends, including A&D) ($3.2- billion after working capital adjustments) under our base outlook,” he said. “Under futures pricing (US$73 WTI, US$17.49 WCS-WTI, US$28 NYH 3-2-1), we peg Imperial’s free cash flow at $3.9 billion ($1.5 billion after working capital adjustments). Factored into our base outlook is a (pre-tax) downstream cash flow contribution of $3.1 billion in 2023.”

Mr. Pardy maintained his “sector perform” recommendation and $78 target for Imperial Oil shares. The average on the Street is $79.25.

“Imperial is trading at a debt-adjusted cash flow multiple of 4.6 times in 2023 (vs. our Canadian majors peer group avg. of 4.1 times in 2023) and at a free cash flow yield of 16 per cent in 2023 (vs. our peer group avg. of 18 per cent),” he said. ”In our opinion, Imperial should command an above-average multiple given its low decline upstream portfolio, cash flow diversification via its refining and chemical segments, and impressive operating performance in recent years.”

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In other analyst actions:

* Credit Suisse’s Andrew Kuske lowered his AltaGas Ltd. (ALA-T) target to $32.50 from $33 with an “outperform” rating. The average on the Street is $31.30.

“With the planned retirement of existing AltaGas Ltd. (ALA) CEO Randy Crawford, the announcement of a new inbound leader was long awaited and concluded with the appointment of well-known Enbridge Inc. (ENB) senior executive Vern Yu. Given ALA’s hybrid business model (i.e. energy infrastructure and utility), in our view, there is a relatively narrow group of well suited senior executive talent with credibility to lead the company and Mr. Yu is one of those individuals,” he said. “Clearly, we expect some form of strategic review – albeit likely on a ‘lighter handed’ approach because of the rather large growth opportunity ahead for ALA. Simply, we expect the company’s export business to be in focus for the foreseeable future and underlying western Canadian energy infrastructure assets – much of which can be further successfully de-risked to complement the core Utility business profile.”

* Stifel’s Cole Pereira cut his Ensign Energy Services Inc. (ESI-T) target to $3 from $3.50 with a “hold” rating. Other changes include: BMO’s John Gibson to $4 from $5 with an “outperform” rating and CIBC World Markets’ Jamie Kubik to $4.25 from $5 with a “neutral” rating. The average is $5.16.

“ESI reported 1Q23 EBITDAS of $127-million, below our forecast of $132-million and the Street at $134-million,” Mr. Pereira said. “We expect market focus for Ensign to now be on the company’s path to a potential balance sheet refinancing given the maturity of its US$400-million unsecured note in April 2024 and $847-million draw on its $900-million credit facility. No specifics or timelines were provided on the earnings call, and while we ultimately expect a resolution to occur, there is still uncertainty in our view around how punitive the coupon will be, and whether there will be a change in security or some sort of dilutive event alongside it. As such, we continue to take a cautious view on the stock.”

* CIBC’s Bryce Adams raised his Ero Copper Corp. (ERO-T) target to $27 from $23.50 with a “neutral” rating, while BMO’s Jackie Przybylowski raised her target by $1 to $26 with an “outperform” rating. The average is $27.70.

“Ero Copper performed well at its Caraíba and Xavantina operations and is moving its Tucuma project forward on/ahead of schedule and roughly on budget,” said Ms. Przybylowski. “The Caraíba new shaft and mill expansion also remain on schedule. These projects contribute to Ero’s plan to double copper production over the next few years — meaningful and low-risk growth. Ero also continues to explore for nickel through the Curaçá Valley; this could be a major catalyst later in 2023.”

* BMO’s Jackie Przybylowski trimmed her Hudbay Minerals Inc. (HBM-T) target to $11.50 from $13 with an “outperform” rating. The average is $10.22.

“Hudbay reported Q1 results that reflected challenges in Peru in the quarter, including temporary production and shipping disruptions,” she said. “Additionally, Hudbay reported temporary challenges at the Lalor mine in the quarter. These challenges serve to further confirm the company’s rationale for acquiring Copper Mountain, another ‘leg to the stool’ to diversify sources of production. The transaction is expected to close by late June. We continue to see tremendous value at Hudbay.”

* CIBC’s Hamir Patel trimmed his target for Mercer International Inc. (MERC-Q) to US$10, below the US$10.40 average, from US$11 with a “neutral” rating.

* BMO’s Devin Dodge raised his target for Russel Metals Inc. (RUS-T) to $36 from $34 with a “market perform” rating. The average is $39.40.

“Financial performance continues to be well above historical levels and the recent firming of steel prices suggests it could persist in 2023,” he said. “Though the market has recently been reluctant to reward more cyclical stocks after an earnings beat, we suspect the dividend increase will be well-received by investors.”

* Following its deal to acquire a 40-per-cent interest in the Hod Maden gold-copper development project in Turkey from Lidya Mines, Scotia Capital’s Ovais Habib raised his SSR Mining Inc. (SSRM-T) target to $30 from $29.50 with a “sector outperform” rating. The average is $27.94.

“We view this announcement as positive for SSRM shares as the deal is NAV accretive (3.5 per cent at our Scotia price deck) and leverages the company’s existing competencies in Turkey, adding the potential to create operational synergies in country,” he said. “Following the deal, SSRM’s exposure to Turkey increases to 52 per cent from 46 per cent. We look forward to an updated technical report exploring the project’s economics in 2024.”

* TD Securities’ Menno Hulshof cut his Suncor Energy Inc. (SU-T) target to $49, below the $53.28 average, from $52 with a “buy” rating.

* RBC’s Walter Spracklin raised his Westshore Terminals Investment Corp. (WTE-T) target to $35 from $30 with an “outperform” rating, while CIBC’s Jacob Bout bumped his target to $29 from $28 with a “neutral” rating. The average is $29.10.

“WTE’s Q1 results were in line but 2023 loading rate and throughput guidance were both increased,” said Mr. Spracklin. “Key from the results in our view was the higher pricing, which has a meaningful compounding effect on our out year estimates. With solid coal prices keeping demand strong, potash conversion on track, and a high single digit FCF yield, not to mention no debt and more than $2 per share in cash, we continue to see value in WTE shares at current prices.”