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

RBC Dominion Securities’ Darko Mihelic continues to believe Bank of Nova Scotia’s (BNS-T) results will improve with continued loan growth momentum and the benefits of rate increases emerge.

He was one of several equity analysts on the Street to raise his financial expectations and target prices for shares of Scotiabank following Tuesday’s premarket release of stronger-than-anticipated fourth-quarter results. Adjusted earnings per share of $2.10 exceeded both Mr. Mihelic’s $1.97 estimate and the consensus projection of $1.90.

“Q4/21 was better than expected, driven by continued good credit performance and lower expenses. Loan growth momentum is starting to build in Canada and International P&C but NIM continued to compress QoQ from the shift in loan mix,” he said.

Mr. Mihelic emphasized Scotia’s sharp drop in PCLs in both its Canadian Banking and International Banking segments, falling almost 56 per cent quarter-over-quarter and 85 per cent year-over-year to $168-million (versus his $337-million projection). That prompted him to cut his total impaired PCL forecast for 2022 to $2.425-billion from $2.661-billion.

“Changes to our model mainly reflect lower assumed impaired PCLs in 2022 and 2023 for Canadian Banking and International Banking. We increase our non-interest income growth assumptions in Canadian Banking, but this was offset by lower forecast Corporate earnings and lower assumed loan growth in International Banking in 2023,” he said.

Keeping an “outperform” rating for Scotia shares, he raised his target to $99 from $89. The average on the Street is $92.64, according to Refinitiv data.

Other analysts making changes include:

* TD Securities’ Mario Mendonca to $95 from $90 with a “buy” rating.

“Reflecting a slower recovery in Latin America (banking fees, loan growth) as well as the sharp NIM compression reported in IB, we believe Scotia’s period of PTPP [pre-provision earnings] outperformance has been pushed out to mid-to-late 2022 when BNS should benefit from better retail banking fees and retail loan growth (which helps NIM) in the International segment,” said Mr. Mendonca. “We continue to believe that relative valuation and the eventual shift to Scotia from the outperforming banks continue to support a BUY-rating.”

* BoA’s Ebrahim Poonawala to $100 from $98 with a “buy” rating.

“Although earnings for the international segment (IB; incl. LatAm ops) fell short of expectations, the outlook for an improving net interest margin, efficiency boost from the announced restructuring and a pick-up in loan growth (reported up 3 per cent quarter-over-quarter) should help lift investor sentiment and narrow the 1 times-plus P/E discount relative to peers, in our opinion,” he said.

* Canaccord Genuity’s Scott Chan to $89 from $88 with a “buy” rating.

* Cormark Securities’ Lemar Persaud to $98 from $90 with a “buy” rating.


TD Securities analyst Menno Hulshof likes the “timing and structure” of Vermilion Energy Inc.’s (VET-T) deal to increase its stake in the Corrib natural gas project off the coast of Ireland.

Accordingly, after coming off research restriction, he raised his rating for its shares to “buy” from “hold” on Wednesday.

“While we would have arguably been less positive on this deal had it been announced six months ago given VET’s specific circumstances at that time (e.g., higher-than-average financial leverage and reduced potential to fund it through FCF generation), we like [Monday’s] timing and how the deal was structured,” he said.

“We believe VET’s long history in Ireland and the lack of large players in the region (and therefore involvement in EQNR’s process) worked in its favour, and translated into what we consider very attractive deal terms.”

He pointed to several “positives” in justifying his upgrade, include: “aggressive 2022/2023 hedging locks in a very short payback period of two years;” seeing the deal “in tune with the current operating and investing environment in two ways ... lowers corporate GHGi even further, plus a significant FCF generator”; its “reputation for being the go-to name for European gas exposure [is] only further enhanced” and the potential for the acquisition to trigger some short covering.

Mr. Hulshof’s target for Vermilion shares rose to $17 from $15. The average target is $16.28.

Elsewhere, RBC’s Greg Pardy increased his target to $16.50 from $14.50 with a “sector perform” rating.

“Vermilion’s US$434 million Corrib acquisition is low-risk, boosting the company’s free cash flow generation and supporting its return of capital strategy, which now includes a dividend,” said Mr. Pardy.


In response to increasingly “tough” market conditions in Nevada, Canaccord Genuity analyst Bobby Burleson lowered his rating for Flower One Holdings Inc. (FONE-CN) to “hold” from “speculative buy” on Wednesday.

“With a soft demand and pricing environment likely to linger in Las Vegas due to COVID-related constraints on corporate events, we expect FONE to report challenging results for the next several quarters. While we are encouraged by the capital improvements underway, we note they are occurring in a phased approach as total required funding is not yet in place,” the analyst said.

On Tuesday before the bell, the Toronto-based company reported third-quarter revenue of $14.1-million, up 18 per cent year-over-year but down 23 per cent from the previous quarter and missing the estimates of both Mr. Burleson ($20-million) and the Street ($18-million). Adjusted earnings before interest, taxes, depreciation and amortization of a loss of $5.7-million also failed to meet the analyst’s forecast (a profit of $1.4-million).

“During the quarter, FONE’s performance in Nevada experienced lingering headwinds from pandemic-affected tourism, with weaker mid-week customer traffic due to hesitancy toward and restrictions surrounding larger conventions,” he said. “FONE continued its push to further engage the local cannabis market, noting stronger results than originally anticipated. As a reminder, Nevada is in the process of legalizing on-site cannabis consumption lounges, and the company anticipates completion sometime during 2022. Recognizing seasonal challenges to the company’s production operations, FONE finalized a private placement in September that generated $5 million and has begun the first phase of improvements to its greenhouse facility in Nevada, which are expected to reach completion in early 2022, and anticipates future operations to continue delivering on overall product consistency, yield, and quality.”

Despite seeing “meaningful steps” to improve operations at its Nevada greenhouse facility and a strengthening of its management team, Mr. Burleson cut his target for Flower One shares to 9 cents from 40 cents “to reflect sharply reduced adjusted EBITDA estimates for 2022.” The current average on the Street is 55 cents.


Parkland Corp.’s (PKI-T) acquisition of 156 retail locations from Cenovus Energy Inc. (CVE-T) for $156-million should be viewed as a “positive” move, according to ATB Capital Markets analyst Nate Heywood, citing “the natural fit” with its existing Canada asset base and “attractive” post-synergy valuation.

“The focus on urban sites also complements the recently highlighted strategy at the 2021 investor day, where PKI plans to diversify its business through the ‘convenience as a destination model’, where it can focus on the rollout of the ON the RUN brand and enhanced food offerings at well positioned locations,” he said in a research report released Wednesday. “For context, this asset package has long been rumoured for sale and Parkland has been a highly speculated upon buyer of the assets. Given the purchase of the partial portfolio, we do not view the competition bureau review to pose significant hurdles for transaction close.”

Raising his estimates though 2023 with the expectation contributions from the deal will begin in the third quarter of 2022 “with a ramp-up of synergies to follow over the following 12 months,” Mr. Heywood increased his target for Parkland shares to $50 from $49, keeping an “outperform” rating. The average is $51.21.

“PKI has started to see volume related tailwinds related to the re-opening of economies and relaxed pandemic restrictions, a trend we expect to continue through 2022,” he said. “In the longterm, as highlighted with the 2021 investor day, PKI plans to invest $4.8-billion in growth initiatives across its three strategic silos: develop, diversify and decarbonize. We expect the near-term growth will largely be through tuck-in acquisitions in a fragmented U.S. market and international expansion opportunities. In its Canada segment, we expect the Company will focus more on organic growth initiatives and optimizing its existing retail portfolio. Parkland is expected to continue to support the adoption of its JOURNIE loyalty program and the continued rollout of the ON the RUN brand in North America. Given the Company’s strong historical track record, we believe in management’s ability to execute and deliver value to shareholders through prudent capital allocation. Parkland is currently trading at a 2022 estimated EV/EBITDA valuation of 6.6 times, below the peer group average of 8.2 times.”


Touting its “highly successful track record and runway to repeat,” Echelon Capital analyst David Chrystal initiated coverage of Canadian Net Real Estate Investment Trust (NET.UN-X) with a “buy” recommendation, seeing it a “substantial” runway for growth.

The Pointe-Claire, Que.-based REIT focuses on triple net leases, which require tenants to pay property taxes, building insurance and maintenance or repairs costs as well as rent. It currently owns a portfolio of 88 properties, comprising 1.1 million square feet of leasable area, in Ontario, Quebec and Nova Scotia with its top three contributors to net operating income being Loblaws, Walmart and Sobeys.

“Canadian Net REIT offers investors access to a unique platform that is assembling a portfolio of triple-net leased, single-tenant properties with a diverse roster of third-party, high credit quality tenants,” said Mr. Chrystal. “The triple-net model provides investors with a stable and highly predictable stream of cash flow, with modest baseline organic growth. Management has established a track record of highly efficient and highly accretive external growth, delivering a decade of double-digit per-unit FFO and distribution growth. We believe the opportunity to continue accretively growing the portfolio is substantial given the REIT’s current size, cost of capital, and the current acquisition environment.”

After a third-quarter secondary offering for gross proceeds of approximately $20.1-million, Mr. Chrystal thinks the REIT’s leverage is at the lower end of management’s target range (50-60 per cent) and its liquidity position is “strong.” He sees the potential for $40-50-million of incremental acquisitions.

“We expect management to deploy excess balance sheet capacity over the course of the coming year, driving another year of double-digit FFO/unit growth,” he said.

“Disciplined external growth has been the primary driver of NET’s exceptional track record of per-unit cash flow growth. Despite cap rate compression and a larger current asset base, we believe that this past success is replicable. The REIT continues to target acquisitions in secondary markets that are too large for typical individual private investors, but too small for larger REITs and institutional investors. We believe there is a substantial opportunity to consolidate assets in the $2-10-million range in secondary and tertiary markets in Ontario, Quebec, and the Atlantic provinces.”

He set a target price of $9 per unit, equating to a potential 12-month total return of 21.3 per cent. The current average on the Street is $9.10.


RBC Dominion Securities equity search group revealed its “Canadian Focus List: New Year 2022″ on Wednesday.

The list, which represents the firm’s best investment ideas, has returned 26.8 per cent over the past year, exceeding the TSX’s 23.4-per-cent performance.

Shopify Inc. (SHOP-T) and Bank of Nova Scotia (BNS-T) have been added to the list, while GFL Environmental Inc. (GFL-T) and Restaurant Brands International Inc. (QSR-T) were removed.

The list is now:

Alimentation Couche-Tard Inc. (ATD.B-T), Bank of Montreal (BMO-T); Bank of Nova Scotia (BNS-T); Brookfield Asset Management Inc. (BAM-N; BAM.A-T); Canadian Imperial Bank of Commerce (CM-T); Canadian Natural Resources Ltd. (CNQ-T); Canadian Pacific Railway Ltd. (CP-T); CCL Industries Inc. (CCL.B-T); Cenovus Energy Inc. (CVE-T); Constellation Software Inc. (CSU-T); Dollarama Inc. (DOL-T); Element Fleet Management Corp. (EFN-T); First Capital Real Estate Investment Trust (FCR.UN-T); Intact Financial Corp. (IFC-T); Magna International Inc. (MGA-N/MG-T); Nutrien Ltd. (NTR-N/NTR-T); Pembina Pipeline Corp. (PPL-T); TC Energy Corp. (TRP-T); TELUS Corp. (T-T); Thomson Reuters Corp. (TRI-N/TRI-T); Toromont Industries Ltd. (TIH-T); Toronto-Dominion Bank (TD-T) Waste Connections Inc. (WCN-N/WCN-T); Wheaton Precious Metals Corp. (WPM-N/WPM-T) and WSP Global Inc. (WSP-T)


In other analyst actions:

* CIBC World Markets analyst John Zamparo upgraded GDI Integrated Facility Services Inc. (GDI-T) to “outperformer” from “neutral” with a $59 target, rising from $57 but below the $64.86 average.

“Since its peak, GDI’s stock is down almost 20 per cent, partly from a soft Q3, and more moderated expectations on future EBITDA margins,” he said. “However, we believe this sell-off is overdone; furthermore, the stock’s mid-single-digit positive reaction to Omicron seems an underreaction. GDI remains a significantly more profitable business than it was pre-pandemic, with an LTM EBITDA margin of 8.6 per cent vs. 6.0 per cent in 2019. We expect that enhanced recurring sanitation will be the norm for most customers in the future, while a return to offices combined with Omicron may mean one-time disinfection services surge in Q1.”

* Canaccord Genuity analyst Doug Taylor cut his Avante Logixx Inc. (XX-X) target to $2.50 from $3 with a “buy” rating, while Acumen Capital’s Nick Corcoran lowered his target to $2.40 from $3 also with a “buy” recommendation. The average is $2.45.

“Avante’s September Q2 EBITDA was far lower than we have seen in recent quarters based on a combination of higher labour costs and a negative impact on revenue from lower COVID-related special work while full reopening remains elusive,” said Mr. Taylor. “There was no substantive update on the potential outcome of the ongoing strategic review — for transparency, recall that Canaccord Genuity is acting as financial advisor in this process. We have lowered near-term EBITDA as the company works to pass through higher costs and awaits reopening of customer sites.”

* With its plans to merge with Mantos Copper, Canaccord’s Dalton Baretto raised his target for Capstone Mining Corp. (CS-T) to $9, exceeding the $7.38 average, from $7 with a “buy” rating, while BMO’s Rene Cartier, bumped up his target to $7 from $6.26 with an “outperform” recommendation.

“A tremendous opportunity for CS, with the combined entity likely to be the go-to copper name given scale, growth, leverage to copper and portfolio diversity,” Mr. Baretto said.

* Canaccord’s Katie Lachapelle lowered her Rock Tech Lithium Inc. (RCK-X) target to $7.50 from $8.75 with a “hold” rating. The average is $6.71.

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