Inside the Market’s roundup of some of today’s key analyst actions
Ahead of second-quarter earnings season for Canadian banks, Canaccord Genuity analyst Scott Chan “significantly” reduced his forecast for the sector.
For the Big 6, he now expects to see a decline in earnings per share of 51 per cent from the first quarter. His full-year 2020 and 2021 EPS projections fell by 34 per cent and 21 per cent, respectively.
"We mainly took the playbook from U.S. Mega bank earnings and adjusted our EPS estimates downwards amidst COVID-19, mainly related to (1) higher FQ2 loan growth (e.g. commercial and corporate drawdowns) and deceleration over next two quarters; (2) NIM compression (e.g. U.S. Fed and BOC rate cuts, lower credit card rates); (3) CMRR (e.g. AUM/WM/custodial related fees, underwriting and advisory); (4) slightly lower NIX (e.g. from variable comp; majority of Banks to not lay off employees during pandemic); (5) credit (F2020 estimate: PCL ratio of 90 basis points for Group); and (6) removed NCIB and dividend growth assumptions," he said.
Mr. Chan added: "For the upcoming quarter, we believe BMO, BNS, and CM are most susceptible to the largest QoQ EPS declines (ranging from down 55 per cent to down 61 per cent), while RY, NA, and TD offer less EPS downside, in our view. For F2020, our Group (avg.) EPS forecast declines 32 per cent year-over-year and rebounds by 25 per cent in F2021. The Big 6 banks have averaged 7-per-cent EPS growth over the past 14 years (F2019: up 3 per cent). With our revised F2021 EPS forecasts, the Group currently trades at a P/E (F2021E) of 9.2 times versus its historical range of 7.2 times to 12.4 times."
Pointing to earnings "uncertainty," Mr. Chan changed his valuation approach for banks to lean on price-to-book multiples from price-to-earnings previously. That led him to suggest they ave "decent share upside medium term."
“We continue to believe the higher quality Big 6 bank stocks include RY, TD, and NA (from credit and capital perspective), while BMO, BNS, and CM (all trading at P/B fwd. of less than 1 times) should offer more upside in a market recovery," he said.
Based on that new approach and reduced estimates, Mr. Chan adjusted his target price for the eight banks in his coverage universe.
He lowered the following stocks:
- Toronto Dominion Bank (TD-T, “hold”) to $57 from $75. The average on the Street is $64.15.
- Royal Bank of Canada (RY-T, “hold”) to $86.50 from $110. Average: $97.85.
- Canadian Imperial Bank of Commerce (CM-T, “hold”) to $84 from $109. Average: $92.79.
- Bank of Nova Scotia (BNS-T, “hold”) to $53 from $77. Average: $62.50.
- Bank of Montreal (BMO-T, “buy”) to $73 from $106. Average: $79.67.
- National Bank of Canada (NA-T, “hold”) to $58.50 from $72.50. Average: $60.55.
He raised his target for:
- Laurentian Bank of Canada (LB-T, “sell”) to $26.50 from $23. Average: $29.50.
- Canadian Western Bank (CWB-T, “buy”) $24 from $22. Average: $24.82.
Canadian Apartment Properties REIT’s (CAR.UN-T) “strong” balance sheet and below-market average monthly rents “provide cushion during this uncertain economic environment,” according to Industrial Alliance Securities Brad Sturges.
On May 15, the Toronto-based REIT reported normalized fully diluted funds from operations of 55 cents per unit, up 11 per cent year-over-year. It has also received 98 per cent of its April rents for its apartment and manufactured housing community portfolios, which sits in line with its March revenue collections.
Mr. Sturges said the rent collection result “highlights the desire for many residents to pay for food and shelter.”
"CAPREIT could benefit from pent up housing market activity that could increase its average turnover rates, and from a possible return to recent Canadian population growth trends that could be fuelled again by immigration," he added.
"In light of the pandemic’s expected near-term impact, we are revising our forecast for CAPREIT to generate 2020 SP-NOI [same-property net operating income] growth of 3 per cent to 4 per cent year-over-year (previous forecast: up 5 per cent year-over-year), mainly reflecting higher AMRs YoY driven by rent guideline increases for CAPREIT’s rent controlled properties, AGI applications filed from recent capital investments, and rent growth realized upon suite turnover. Notably, the rent guideline increases allowed in 2020 for existing tenants in Ontario and B.C. are 2.2 per cent and 2.6 per cent, respectively, compared to 1.8 per cent and 2.5 per cent, respectively, in 2019."
Though he raised his 2020 FFO per unit forecast by 2 cents to $2.30, Mr. Sturges trimmed his target for CAPREIT units to $60 from $62, keeping a “buy” rating. The average on the Street is $57.57.
“Based on the defensive and stable cash flow nature of the REIT’s diversified Canadian multi-residential property portfolio, CAPREIT’s attractive exposure to the strong underlying property fundamentals in Toronto, Montreal, and Vancouver, its above-average unit liquidity as one of Canada’s largest multi-residential focused REITs, above-average SP-NOI and FD AFFO/unit growth prospects, partly offset by the REIT’s premium valuation to its estimated NAV, its high geographic concentration with significant exposure to rent controlled markets, and development and redevelopment risks, we maintain our Buy rating.”
Despite lingering “uncertainty” from the both the impact of COVID-19 pandemic and the status of its $2.8-billion acquisition by Britain-based Cineworld PLC, Canaccord Genuity analyst Aravinda Galappatthige raised his rating for Cineplex Inc. (CGX-T) on Wednesday.
“We have revised our estimates for Cineplex as we update our financial model based on our latest expectations around potential opening dates for cinemas, the likely slope of the ramp-up thereafter given film slate and other considerations (e.g. initial cautiousness by patrons, imposition of capacity limitation in initial months, etc.), and more aggressive cost reduction initiatives, particularly through Q1-Q3 2020,” the analyst said. “Our new forecast assumes a gradual reopening of cinemas by mid-August, but with low takeup early on.”
Mr. Galappatthige now projects fiscal 2020 EBITDA of a loss of $94-million, falling from a previous estimate of a profit of $94-million.
At the same time, he expects Cineplex to keep its debt level below $725-million, which is a key condition for the Cineworld transaction. However, he emphasized that timing is key.
“Based on our revised estimates, we believe this is achievable through the end of Q2 (possibly a couple of weeks more), helped by the layoffs reported in the press, reductions in salaries, elimination of capex projects, possible deferral of lease payments and the government wage subsidy of 75 per cent.”
“The transaction requires approval under the Investment Canada Act (Heritage Canada). Recall the period of review was extended from the end of March, with further extensions possible. While foreign ownership should not be a point of contention, we suspect the delay is related to considerations around employment levels and Canadian content commitments in theatres. The above financial forecasts suggest that approval from Heritage Canada needs to come at least by early June, as otherwise the clock may run out on Cineplex’s ability to keep the debt levels below $725-million."
Moving the stock to "speculative buy" from "hold," Mr. Galappatthige dropped his target to $21.50 from $34. The average on the Street is $29.50.
“Against the current backdrop, we feel that a conservative approach would be to apply a 50-per-cent probability factor to a deal closing,” the analyst said. “This is based on our analysis of comments made by Cineworld in prior investor communications, Cineworld’s own balance sheet conditions, and the fact that as of now there is no formal request or indication from Cineworld that it intends to back out of the deal. In any case, we believe that in the event Cineplex remains below $725-million in debt and regulatory approval is obtained, the legal options to back out may be limited and complicated. Consequently, we apply 50 per cent to the $34 cash take-out value and 50 per cent to our standalone valuation of $9 per share.”
Uranium Participation Corp. (U-T) is the "cleanest investment vehicle for uranium exposure, according to Canaccord Genuity analyst Katie Lachapelle, who initiated coverage with a “buy” rating.
“Through its strategy of buying and holding uranium, UPC provides investors with an indirect way to invest in physical uranium, without being exposed to the operational risks associated with companies that engage in the exploration, development, mining and processing of uranium,” she said. “These risks can result in negative share price movements, independent of sentiment in the uranium market. Thus, by not being exposed to operational risks, UPC’s shares closely track movements in the uranium price with a high degree of correlation (0.89 versus the producer and developer group average of 0.61).”
“As a holding company, UPC is not actively managed to track the price of uranium. Therefore, UPC’s shares often trade at a premium or a discount to their net asset value. In our view, this creates opportunity whenever the share price deviates from the underlying value of the physical uranium UPC holds. We estimate a current NAV of $6.01 per share, based on UxC’s last reported spot price of US$34 per pound U3O8 and UPC’s uranium holdings of 17.4 million pounds U3O8 equivalent. This implies that UPC’s shares are currently trading at a 19-per-cent discount to NAV, well below the historical average premium of 0.7 per cent. In our view, this presents an attractive buying opportunity, given our expectation of a rising uranium price.”
Ms. Lachapelle set a target of $6.25 per share. The average on the Street is $5.58.
“In light of recent supply/demand dynamics, we are increasingly positive on the near-term outlook for uranium pricing, and we continue to believe in the strong long-term fundamentals,” the analyst said. “In our view, upward pressure on pricing is likely to continue given uncertainty around the timing of production restarts related to COVID-19, as well as ongoing supply-side discipline from some of the world’s largest producers (Cameco and Kazatomprom)."
Concurrently, Ms. Lachapelle initiated coverage of Denison Mines Corp. (DML-T) with a “speculative buy” rating and 90-cent target, which falls below the $1.14 consensus.
“Denison continues to advance and de-risk its 90-per-cent-owned flagship project, Wheeler River. With a resource of 1.9Mt grading 3.2-per-cent U3O8, Wheeler River is one of the world’s highest-grade and lowest-cost undeveloped uranium projects,” she said. “We anticipate increased interest in the project as momentum builds in the uranium sector and Denison further de-risks the project through additional test work, permitting and final Feasibility. We believe that continued positive field and laboratory results in support of in-situ recovery mining will significantly de-risk the project, and present a potential re-rating opportunity.”
Pointing to lower global agricultural production and a weaker outlook for construction and road building spending, Citi analyst Timothy Thein further lowered his second-quarter financial expectations for Deere and Co. (DE-N) ahead of their Friday release.
"We now assume a steeper decline in production volumes in both Ag & Turf and Construction & Forestry," he said. "We expect decremental margins will be above average as fixed costs become a larger drag with the steep volume decline. We also expect manufacturing inefficiencies on account of factory shut-downs/higher absenteeism and ongoing supply chain disruptions.
"While not core to an investment thesis, FX is likely an outsized drag in FY2Q with the BRL a particular headwind to results (with some harder to define offsets from higher net realized pricing for Brazilian farmers). We expect raw materials to be a slightly larger benefit in F2Q20 compared to the first quarter, as Deere should benefit more from the sharp decline in steel and key oil-based inputs. We also model a modest benefit from voluntary separation programs and a headwind from other items (freight and pension)."
Mr. Thein is now forecasting earnings per share for the quarter of US$1.70, falling from US$2.16. His full-year estimate dipped to US$7.55 from US$7.60.
"We remain constructive on the company’s competitive positioning within its core Ag equipment markets, particularly in the Americas with respect to its dealer base, brand and precision ag offerings," the analyst said. "We also think DE will continue to pursue value accretive capital allocation policies through the cycle. That said, we expect its most profitable segment (North America large ag) to come under increased pressure in coming quarters as significant ethanol capacity is likely to shut down, negatively impacting what has typically accounted for 40 per cent of corn demand in the U.S.. A recovery in its Construction & Forestry segment is difficult to forecast at this point."
Maintaining a "neutral" target, Mr. Thein lowered his target for Deere shares to US$145 from US$155. The average on the Street is US$160.12.
"Feedback to our mid-April downgrade suggested to us that many investors want to own DE at least on a relative basis within Machinery," he said. "We can see this in Citi quant team’s data on crowding, which shows DE as the most 'crowded' name within Machinery, and well ahead of the average across Industrials.
“Admittedly FY21 is a long ways off & there are many unknowns, but we think the consensus earnings ramp is unrealistic at this point in light of weak projected row crop fundamentals and public spending headwinds on Wirtgen. Our $145 target suggests a slightly better return than what Citi projects for the U.S. market.”
Having achieved profitability, Delta 9 Cannabis Inc. (DN-T) was upgraded to “speculative buy” from “hold” by Canaccord Genuity analyst Kimberly Hedlin on Wednesday.
“With revenues of $11.8-million, Delta 9′s first-quarter results represented an inflection into positive EBITDA and operating cash flows, driven by pricing improvements and strong Grow Pod sales,” she said. “We believe a pipeline of Grow Pod projects will continue to boost revenues over the next couple of quarters while retail store growth should provide a conduit for wholesale distribution over the coming 24 months.”
Expecting the Winnipeg-based company to “maintain low overhead costs and modest capital expenditures, while improving its wholesale pricing,” Ms. Hedlin raised her target for Delta shares to 75 cents from 60 cents. The average on the Street is $1.05.
“In our view, key upcoming catalysts include provincial distribution agreements in Ontario, additional retail locations in AB and MB, and new Grow Pod projects in both Canada and the U.S.," she said. "In our view, with manageable debt levels ($20-million maturing in two to more than 10 years), Delta 9 has no major near-term balance sheet concerns that should act as an overhang on the stock.”
Protech Home Medical Corp. (PTQ-X) has displayed operational growth through the COVID-19 pandemic, said Industrial Alliance Securities analyst Chelsea Stellick, who sees tailwinds stemming from the increase need for in-home healthcare.
On Tuesday after the bell, the Cincinnati-based company reported revenue of $24.1-million for the second quarter, up 16 per cent year-over-year and in-line with Ms. Stellick's $24-million forecast. Adjusted EBITDA of $4.9-million represented a 30-per-cent increase from the same period in 2019 but fell just short of the analyst's $5.2-million projection.
"The Company’s supply chain has remained strong as it has responded opportunistically to build its inventory following a US$1.5-million cash injection as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act Provider Relief Fund, particularly for ventilators and home oxygen equipment," said Ms. Stellick.
"With $6.2-million of cash on hand as of March 31, 2020, and more than $7.5-million in payments from the CARES Act, PTQ remains well-positioned to execute on its near- and long-term objectives. We anticipate that PTQ is actively focused on its acquisition strategy as deal terms remain favourable."
Keeping a "buy" rating for Protech shares, Ms. Stellick nudged her target to $2.60 from $2.40. The average on the Street is $2.38.
“As the demand for in-home healthcare increases, PTQ has responded diligently by increasing its inventory purchases to backstop any supply chain issues and meet the increasing demand,” the analyst said. “The Company has also leveraged its telehealth platform realizing cost savings as patients seek at-home medical attention. PTQ trades at a significant discount to its peers (5.0 times versus 13.0 times 2020 estimated enterprise value-to-adjusted EBITDA), which we believe is unwarranted given its strong track record of successfully improving profitability.”
In other analyst actions:
Seeing its stock poised to benefit from an ongoing rally in silver prices, Canaccord Genuity analyst Dalton Baretto upgraded Pan American Silver Corp. (PAAS-Q, PAAS-T) to “buy” from “hold” with a US$31 target, up from US$24.50. The average on the Street is US$25.91.
Mr. Baretto downgraded SSR Mining Inc. (SSRM-T) to “hold” from “buy” with a $32 target, rising from $27. The average is $30.85.