Inside the Market’s roundup of some of today’s key analyst actions
Pointing to revenue headwinds and higher provisions for credit losses stemming from the fallout of the COVID-19 pandemic, Citi analyst Maria Semikhatova reduced her earnings per share projections for Canada’s Big 5 banks by average of 25 per cent for 2020 and 18-20 per cent for 2021 and 2022.
"Canadian bank shares have been hit significantly since the COVID-19 outbreak," she said in a research report released Wednesday. "In contrast to the global financial crisis banks are now expected to be part of the solution. Still banks are poised to suffer from lower rates, reduced client activity and deteriorated asset quality with the degree of negative impact depending on the length of the disruption to the real economy. Uncertainty is extremely high given an unprecedented shock to the economy met with unprecedented monetary and fiscal actions."
"We believe the main focus for the Canadian banks is on: 1) asset quality outlook given sector vulnerabilities, i.e. high household indebtedness and recent increase in corporate debt, and 2) capital position due to sector high leverage compared to global peers (equity/assets 5.8 per cent)."
Ms. Semikhatova’s earnings reduction came primarily due to the expectation of a 7-9-per-cent decline in revenue and higher PCLs, which she now projects to rise by 59 per cent in 2020 and 8 per cent in 2021.
With those changes and given the "high uncertainty" of the current economic climate, she adjusted her valuation method to use projected average return on total equity (ROTE) from 2020 through 2022, rather than just her 2022 estimates previously. Accordingly, she reduced her target prices for the banks' stocks by 16-30 per cent.
"We see value in RBC and CIBC given: 1) low exposure to high risk sectors as well as consumer loans & credit cards and 2) healthy capital buffers," she said.
Her target for CIBC shares slid to $93 from $113. The average on the Street is $94.57.
“Following recent sell off we upgrade CIBC to Buy given lowest exposure to high risk sectors as well as consumer loans & credit cards and attractive valuation (the stock trades at a discount to peers on P/E basis),” she said.
Her target for RBC shares fell to $95 from $113, which falls below the $99.77 average.
"Following recent sell off we upgrade RBC to Buy," the analyst said. "Given low exposure to high risk sectors as well as consumer loans & credit cards we forecast PCLs to reach 46 basis points this year, the lowest among peers, which coupled with strong pre-provision profitability, results in solid ROTE of 16.2 per cent this year and 16.7 per cent in 2021-22. In addition, RBC enjoys comfortable capital buffers to withstand potential headwinds from credit lines drawdown and credit migration of corporate exposures."
Ms. Semikhatova also made the following target price changes:
* Bank of Montreal (BMO-T, “neutral”) to $76 from $108. The average on the Street is $83.83.
"We remain Neutral on the shares given BMO’s high exposure to the high risk sectors (13.7 per cent of total loans) including Oil & Gas (2.8 per cent) and relatively weak capital buffer taking into account potential headwinds from credit lines drawdown and credit migration of corporate exposures," she said.
* Bank of Nova Scotia (BNS-T, “neutral”) to $56 from $80. Average: $66.25.
"We remain Neutral on the shares given BNS’s second largest exposure to the high risk sectors (13.0 per cent of total loans) including Oil & Gas (2.7 per cent) and to consumer & credit cards driven by the International markets," she said.
* Toronto-Dominion Bank (TD-T, “neutral”) to $59 from $78. Average: $66.08.
"We remain Neutral on the shares given TD’s high exposure to consumer and credit cards in Canada and U.S.," said Ms. Semikhatova.
Freehold Royalties Ltd. (FRU-T) offers yield and acquisition upside through the downturn, said Industrial Alliance Securities analyst Michael Charlton.
Following the release of its first-quarter results after the bell on Tuesday, Mr. Charlton raised his rating for the Calgary-based company to “buy” from “hold," citing an “improved” outlook and the expectation for increased commodity prices through 2021
Freehold reported royalty production of 10,618 barrels of oil equivalent per day, up 3 per cent from the previous quarter and 5 per cent year-over-year. Drilling on royalty lands came in at 175 gross (6.2 net) wells, up 19 per cent year-over-year on a gross basis but down 15 per cent net.
At the same time, Freehold withdrew its 2020 guidance, citing uncertainty in its payors near-term spending programs and production levels. Previously, it had reduced its monthly dividend to 1.5 cents per share from 5.25 cents.
“While the first quarter looks to have gone reasonably well, commodity pricing did not really crumble until the latter part of the quarter, and despite the recent uptick, prices have not yet returned to a level that would promote increased drilling on its GORR lands,” said Mr. Charlton. “Given the uncertainty surrounding when energy companies might get back on the bit, Freehold has suspended its previous guidance and will remain conservative. We believe the new lower dividend is maintainable and stable in the current volatile price environment and Freehold’s structural advantage over E&Ps will enable the Company to be well-positioned to maintain its balance sheet strength with a view to accretive acquisitions.”
Mr. Charlton raised his rating and increased his target to $4.75 from $3. The average on the Street is $6.19.
“The company looks to be well-positioned to continue delivering dividends to its shareholders through the continued leasing and development of its royalty holdings across the WCSB with minor interests in the U.S.,” he said. “For investors seeking income in a company that pays a sustainable monthly dividend while waiting for a broader recovery in investor sentiment towards the Canadian E&P space, we believe those investors need look no further. In our view, Freehold offers exactly that — balanced exposure to multiple plays and formations in all stages of development.”
With Citi’s commodity strategists expecting gold prices to approach US$2,000 per ounce by the end of 2021, equity analyst Alexander Hacking remains bullish on Newmont Corp. (NEM-N, NGT-T), calling it a sector leader.
"Company management has a multi-year track record of optimizing assets," he said. "Dividend increases are very positive in terms of messaging and offering a premium to holding physical gold. We caution that NEM valuation is getting stretched requiring $1,600/oz gold to hit our 5-per-cent FCF [free cash flow] yield target. Market cap has passed $50bn boosting NEM to 3rd largest in Citi’s global mining coverage (behind only BHP and Rio). That said, the history of gold stocks suggests valuation matters less than gold price momentum."
Mr. Hacking maintained his 2020 EBITDA estimate, though his earnings per share projection slid to US$1.80 from US$1.94.
However, he raised his 2021 EBITDA expectation by 30 per cent based on the firm’s price forecast, leading him to raise his EPS expectation to US$3.52 from US$2.43. His 2021 estimate rose to US$4.05 from US$2.71.
Keeping a “buy” rating, Mr. Hacking hiked his target for Newmont shares to US$74 from US$46. The average on the Street is US$68.28.
Desjardins Securities analyst Chris Li lowered his first-quarter projections for Canadian Tire Corporation Ltd. (CTC.A-T) ahead of its earnings release on Thursday before the bell.
“We have lowered our estimates to reflect COVID-19, including the closure of non-CTR banners (SportChek, Mark’s, etc) since March 19, losure of CTR stores in Ontario since April 4, lower discretionary spending and higher operating costs,” he said. “We have also increased the provision for credit card losses for Financial Services to reflect the deterioration in economic conditions.”
Mr. Li is now projected an earnings per share loss of 53 cents, well below the consensus on the Street of a 28-cent loss and the profit of $1.12 reported during the same period a year ago. He's expected retail revenue to fall 7 per cent year-over-year and financial services income before taxes to drop 76 per cent due to higher loss provisions.
The analyst also shrunk his full-year 2020 and 2021 EPS projections to $7.08 and $12.76, respectively, from $14.24 and $15.77. The consensus estimates are $7.49 and $12.90.
" We believe the wide range of 2020 consensus estimates reflects limited near-term visibility," he said. “As CTC is likely valued based on the 2021 outlook, we note that the consensus range for 2021 is tighter, with the expectation that earnings will recover close to pre-crisis levels in 2019. While we share the same view, a prolonged recession, increasing competition from e-tailers and/or elevated operating costs pose downside risk.”
Mr. Li maintained a “buy” rating for Canadian Tire shares with a $130 target, down from $170. The average on the Street is $127.78.
“Despite near-term challenges, we believe CTC’s solid balance sheet positions it well to benefit from improvement in market conditions next year,” he said. “As a result of this, combined with the stock’s low valuation, we maintain our positive long-term view.”
“We expect the 1Q results/conference call to provide more guidance on near-term operating cost and credit loss provision trends. While it is possible our 2020 estimates will be revised down again, our positive view is predicated on better market conditions next year, which should improve CTC’s financial performance.”
Though Thomson Reuters Corp. (TRI-N, TRI-T) possesses “strong defensive qualities,” Canaccord Genuity analyst Aravinda Galappatthige sees limited valuation upside, expecting its stock to be “fairly” range bound in the near to medium term.
On Tuesday, Thomson Reuters reported first-quarter financial results that fell below Mr. Galappatthige's EBITDA expectation. Its guidance also narrowly missed his projections.
However, he said the company's guidance suggested stablity through its three major divisions, which can be seen as a "key positive."
“The impact of COVID-19 on 2020 guidance was a bit higher than we originally anticipated owing to a slightly higher impact from installation delays, global print trends, and a higher concentration of the events business on Q2,” the analyst said. “However, management guidance of 3-4-per-cent revenue growth for the big 3 (Legal, corporate and Tax & Accounting) is certainly impressive and speaks to the solid defensive qualities of TRI’s business. On the call, management made a strong case for the stability of its key Legal and T&A segments by referring to the trends during the 2008/2009 recession. All in all, we believe these defensive characteristics will serve as proponents to maintain TRI as a core holding for most investors, as the markets monitor the financial impact of the current crisis on various sectors and businesses.”
Mr. Galappatthige thinks the company's "highly specific" quarterly guidance is likely to keep expectations for "fairly tight" for 2020. However, he sees a potential divergence on 2021.
“The more optimistic view would consider pre-COVID19 guidance as a starting point and potentially add the positive rebound effects from global print, transaction revenues, etc., taking revenue growth expectations towards 7-7.5 per cent,” he said. “On the other hand, there is a case to be made that the economic slowdown which could follow the COVID crisis will impact revenue trends in F2021, resulting in lower growth. Our own view is that organic 2021 revenue growth will be slightly lower than the original mid-single digit growth rates set for 2020, likely in the 3.5-4-per-cent range. We are factoring in the empirical evidence that suggests that the impact of a global slowdown would be somewhat lagged on TRI’s businesses. In fact, on a quarterly basis, Legal and T&A hit their low only in Q1/10 in terms of the prior recession. We also have to consider that the Legal industry (based on recent data) was very much hitting peak levels in terms of demand, headcount growth, hourly rates, etc., during late 2019; hence, there is a high base factor to consider as well, whereas when the 2008/09 recession hit, legal demand was already well on its way down.”
Maintaining a "hold" rating for Thomson Reuters shares, Mr. Galappatthige raised his target to US$66 from US$63. The average on the Street is US$72.80.
“TRI now trades at 16.3 times fiscal 2020 and 15.2 times 2021 EV/EBITDA,” he said. “The stock is only down 6 per cent from the beginning of March. Wolters and RELX are now at 13.7 times and 13.5 times EV/F21 EBITDA respectively. At the current juncture we do not see further upside to valuation multiples in the backdrop of underlying (normalized) mid-single digit growth rates in revenue and EBITDA. Additionally, we believe that the following factors will limit near term upside; a) buyback programme likely suspended in the near term, recall TRI bought back $200-million in each of Q4/19 and Q1/20, b) we suspect the market may take a little while to assess new management and monitor progress given the changing of the guard in March this year and c) On a PE basis and FCF yield basis, TRI’s valuations have even surpassed higher growth entitles like Intuit and FactSet.”
Elsewhere, BMO Nesbitt Burns analyst Tim Casey raised Thomson Reuters to “outperform” from “market perform" citing "an updated outlook showing attractive business stability coupled with balance sheet strength."
“TRI guided for growth in its core business units and attractive free cash flow conversion. We expect continued investment in product development will position the company to exploit accelerating secular trends,” said Mr. Casey, who lowered his target to $106 from $110.
Conversely, TD Secruities’ Vince Valentini lowered the stock to “hold” from “buy” with a $100 target, down from $110.
On the heels of a “solid” first quarter, Raymond James analyst Chris Cox thinks Gibson Energy Inc.'s (GEI-T) 2020 outlook “should provide further comfort.”
“We continue to view Gibson as one of the best positioned Midstream names through the downturn, with more than 60 per cent of 2020 estimated EBITDA consisting of take-or-pay contracts with large, investment grade counterparties with high demand for the company’s storage assets,” he said. “On the Marketing front, guidance of 'more than $100-million’ reinforced the inherent optionality across the company’s asset base, despite the compression in more traditional quality and location based marketing opportunities. Looking through the downturn, we believe the nearterm focus on COVID-19 related impacts across the energy value chain has resulted in the market loosing focus of an improving long-term outlook for growth in the Terminals business, largely owing to the advancement of both the TMX & KXL pipeline projects in 2020.”
Keeping an “outperform” rating, Mr. Cox raised his target by a loonie to $24. The average on the Street is $22.80.
In other analyst actions:
* Cormark Securities analyst David Ocampo cut Air Canada (AC-T) to “market perform” from “buy” with a $20 target, down from $28. The average on the Street is $27.75.
* Citi analyst Jason Bazinet downgraded Snap Inc. (SNAP-N) to “sell” from “neutral” with a US$14 target, up from US$10. The average is US$17.41.
"We believe investor expectations for 2020-21 revenues are too high. And, if we’re right, Snap is trading near the peak of its historical valuation," he said.
“While investors seem to have embraced Snap’s encouraging pre-COVID-19 results, we remain more cautious on the revenue outlook and believe investors may be too bullish on (1) continued DAU [daily active user] growth and (2) future monetization trends.”
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