Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Gabriel Dechaine thinks there is “a lot to like” about the Canadian banking sector.
However, he predicts first-quarter earnings season, set to kick off with Royal Bank of Canada (RY-T) on Thursday, “won’t be very supportive of those factors.”
“The Big-6 have followed a 34-per-cent average uptick in 2021 (up 12 percentage points vs. S&P/TSX) with a 7-per-cent average gain so far in 2022 (up 830 basis points vs. S&P/TSX),” said Mr. Dechaine in a research report released Wednesday. “Bank stocks offer rate-driven top-line growth potential, upside from excess capital deployment and leverage to an up-trending economy. However, we do not believe many (if any) of these positive attributes will be evident from Q1/22 results, which matters against a backdrop of the strongest performance at this point of the year in the past 20 years. In short, we believe the stocks have overshot expectations and believe investors trading around earnings should be trimming positions.”
Bank earnings season is here. Expect more profits, no dividend hikes
For the quarter, the analyst is forecasting pre-tax, pre-provision earnings growth of an average of 1 per cent for the sector, emphasizing results will be challenged by comparisons to “excellent” Capital Markets results from the same period a year ago, which included 34-per-cent average PTPP growth.
“Banks with the toughest comps include TD (52-per-cent Capital Markets segment PTPP growth during Q1/21), BNS (41 per cent) and NA (35 per cent),” said Mr. Dechaine. “Of these three, it’s interesting to note that TD has relatively high consolidated PTPP growth expectations embedded in consensus at 5 per cent.”
He’s also “pushing back” his performing provision reversal expectations for the banks’ credit business, noting: “The Big-6 released $5.5-billion of performing provisions during fiscal 2021. With 55 per cent of ‘peak COVID’ allowance build still on balance sheet, we expect more releases to propel earnings in the year ahead. Lockdowns experienced in Canada for most of the quarter, though, prompt us to dial back our Q1/22 credit expectations (i.e., we are moving our sector PCL ratio to 6 basis points from 3 basis points). This adjustment reflects a lagged expectation of additional performing provision releases rather than a changed view on underlying credit quality/performance.”
Mr. Dechaine also warned that low rate and lending mix will “keep pressure on margins until rate hikes materialize.”
“Margin compression could be a disappointment for bank investors anticipating rate hike-driven revenue growth. Balance sheet growth trends are a primary margin headwind,” he said. “According to OSFI filings, total loans on big-6 balance sheets grew by $99-billion during the first two months of fiscal Q1/22, of which 26 per cent was comprised of low-margin mortgages. Moreover, total deposit growth outpaced loans by 3 per cent. We note that average 5-year swap rates moved up by 80 basis points quarter-over-quarter, though we expect this change to have a marginal impact on consolidated NIM.”
Though he trimmed his first-quarter earnings estimates to “reflect higher PCLs, lower advisory revenue in Capital Markets and buyback activity,” Mr. Dechaine raised his target prices for shares of the bank stocks in his coverage universe. His changes are:
- Bank of Montreal (BMO-T, “outperform”) to $163 from $151. The average on the Street is $161.79.
- Bank of Nova Scotia (BNS-T, “sector perform”) to $90 from $86. Average: $96.99.
- Canadian Imperial Bank of Commerce (CM-T, “outperform”) to $167 from $165. Average: $169.69.
- Canadian Western Bank (CWB-T, “sector perform”) to $43 from $39. Average: $42.92.
- Laurentian Bank of Canada (LB-T, “sector perform”) to $49 from $47. Average: $46.90.
- Royal Bank of Canada (RY-T, “outperform”) to $147 from $140. Average: $148.54
- Toronto-Dominion Bank (TD-T, “outperform”) to $108 from $106. Average: $109.20.
=====
CI Financial Corp. (CIX-T) capped 2021 with “significant advancement in strategic initiatives,” according to Scotia Capital’s Phil Hardie.
He was one of several equity analysts on the Street to raise their target price for shares of the Toronto-based firm following Tuesday’s release of its fourth-quarter financial results.
Mr. Hardie deemed the report as “mixed,” noting operating results were in line with expectations but January sales were “disappointing.”
“CI delivered a record 2021,” he said. “The year also showcased significant progress related to the company’s key strategic pillars: expand wealth management, modernize its asset management business, and globalize the company. The highlights for the year were (1) the dramatic growth in its U.S. wealth management platform and (2) the strongest flows from its asset management business since 2015.”
“The stock performed extremely well through 2021 and reached a multi-year high in November. This was driven by a combination of solid earnings growth and multiple expansion, reflecting improved sentiment as investors began to recognize the benefit of the U.S. expansion strategy and also reacted to improved sales momentum. The stock is now down 30 per cent from its November high. We attribute the weakness to a dramatic shift in the operating environment and market conditions with CIX stock likely better positioned to outperform peers in a market rally with an industry tailwind and underperform in a downmarket or period of elevated volatility.”
While he raised his financial projections to reflect an increase to his earnings outlook for the wealth management segment, Mr. Hardie trimmed his target for CI shares to $27 from $29, below the $29.50 average on the Street, “given higher-than-expected net debt levels heading into 2022.”
“We view CI as a great early cycle or market rebound play, but more vulnerable in choppy or downmarket as it transitions its business model,” he said. “CIX stock dramatically outperformed its peers in 2021, however as the operating environment and market conditions shifted, it has underperformed over recent months. In times of market volatility, we tend to favour the asset managers with strong operational performance over those mounting a turnaround into potentially rising industry headwinds. We believe CIX stock is likely to be more vulnerable to a market downturn than IGM. This reflects (1) its higher financial leverage, (2) risk of derailing improved retail flow momentum, and (3) risk of eroding AUA and, as a result, earnings contribution from the recent flurry of U.S. RIA acquisitions. Recent stock weakness is likely prompting investors to take a second look at CIX. We believe CIX management is executing its strategy well, but we need more confidence in the broader market outlook to become more constructive on the stock given that it continues to trade at a premium to IGM.”
He kept a “sector perform” rating.
Others making changes include:
* RBC’s Geoffrey Kwan to $29 from $34 with an “outperform” rating
“There is potentially substantial valuation upside, BUT we think it’s primarily predicated on 2 things: (1) enhanced disclosure providing clear evidence of value creation in the RIA segment; and to a slightly lesser extent (2) sustained or stronger net sales performance,” said Mr. Kwan. “We think lack of progress in the short-term on one or both of these could limit valuation multiple expansion as significant share buybacks and meaningful insider buying in the past year or so have not driven sustainable increases in the share price. Ultimately, we think the shares are undervalued and that improvements in fundamentals in the past year warrant a higher valuation multiple, hence our Outperform rating.”
* TD’s Graham Ryding to $24 from $28 with a “hold” rating.
“Despite a lower-than-expected WM EBITDA run-rate, we are encouraged with the growth and margin profile of this platform. Future disclosure changes should help improve earnings visibility. Asset management flows have improved, but growth remains muted. Leverage has moved higher, which could constrain the volume of acquisitions, or share buybacks, going forward,” he said.
* KBW analyst Rob Lee to $29 from $36 with an “overweight” rating.
* CIBC’s Nik Priebe to $30 from $32 with an “outperformer” rating.
=====
Stifel analyst Cody Kwong sees Obsidian Energy Ltd. (OBE-T) as “a compelling way to gain leverage to a constructive oil quote in the Canadian E&P landscape.”
In a research report released Wednesday, he initiated coverage with a “buy” rating, calling it “a company whose outlook could be one of the biggest turnaround stories as we emerge from the COVID-19 lows.”
“Not only does Obsidian have outsized leverage to both light oil and heavy oil prices, it also holds a myriad of operational catalysts, including resurgent production growth and underappreciated exposure to one of the hottest plays in the WCSB today, the Clearwater play,” added Mr. Kwong.
Believing it is “finally shaking the stigma of being a debt laden entity,” the analyst touted “excitinG field level catalysts on the come.”
“With capital plans ramping up alongside crude oil price recovery, we believe the company is poised to deliver 20-per-cent growth year-over-year (27-per-cent PPS DA) with a program focused on low risk development of its Cardium assets in Willesden Green and Pembina,” he said. “After the consolidation of its PROP [Peace River Oil Partnership] acquisition, management has detailed an overlapping Clearwater footprint comprised of 473 sections of land that we believe the market has overlooked, until now. We believe a key March 9, 2022 Alberta land sale could attract significant attention in this region and could help validate the tangibility of this option value. Obsidian’s 2022 program includes the drilling of 4-times appraisal wells in the play.
“Rising oil prices and narrow WCS differentials will see the company kick off a PROP Bluesky drilling program, where the market could be reminded of a play that can generate IP rates of more than 500 barrels per day from wells that cost less than $3.0-million.”
Seeing “compelling” free cash flow characteristics, he set a target of $14 per share. The current average is $9.38.
“With the strength in the crude oil quote, we believe Obsidian could be one of the most overlooked stories in our E&P coverage universe. Not only does it have appreciable leverage to oil prices with a very modest hedge book, it also has operational catalysts that could stimulate new interest from institutional shareholders that haven’t been paying attention to this story for numerous years,” he added.
=====
Though Gran Tierra Energy Inc.’s (GTE-T) fourth-quarter results fell below his expectations, RBC Dominion Securities analyst Luke Davis expects investor focus to “remain on deleveraging and exploration activity through 2022 given continued commodity price strength.”
After the bell on Tuesday, the Calgary-based company pre-released production volumes for the quarter of 29,493 barrels of oil equivalent per day, leading to cash flow per share of 18 cents, lower than both Mr. Davis’s 21-cent estimate and the consensus on the Street of 19 cents. The miss was driven by higher-than-anticipated cash cost.
However, Mr. Davis emphasized Gran Tierra’s balance sheet is “improving” and sees incremental hedging protecting its downside.
“As pre-released, the credit facility balance fell to $67.5 million to close out 2021, with Gran Tierra paying this down $122.5 million over the year,” he said. “Our updated estimates incorporate debt repayment of $193/$145 million in 2022/23, bringing D/CF [debt to cash flow] ratios to 1.2 times/0.9 times relative to peers at 0.2 times/0.0 times. Management has noted a long-term financial leverage target of sub-1.5 times at prevailing forward prices with hedging utilized on an ad-hoc basis. Gran Tierra currently has two US$300 million note issues due in 2025/27, as we expect management will remain focused on deleveraging near-term.”
While making minor trims to his cash flow projections through 2022, the analyst raised his target for the company’s shares to $1.75 from $1.65, reiterating a “sector perform” rating. The average is $2.02.
“Gran Tierra shares currently trade at 1.4 times/1.2 times 2022/23 estimated EV/DACF [enterprise value to debt-adjusted cash flow] vs. peers at 2.8 times/1.9 times,” Mr. Davis said. “In our view, a discounted multiple is appropriate given higher than average financial leverage and inherent geographic and execution risks.”
Elsewhere, BMO Nesbitt Burns analyst Mike Murphy raised his target to $1.75 from $1.25 with a “market perform” rating.
=====
Credit Suisse analyst Andrew Kuske sees Innergex Renewable Energy Inc. (INE-T) as a “show me” stock after a year in which the renewables sub-sector de-rated “fairly substantially.”
Coming off research restriction, he said the Longueuil, Que.-based company needs to have “relatively ‘clean’ quarters that lack accounting noise and operational questions as a first step in the path to redemption.”
“INE’s execution of the growth strategy will be key as will improvements to the finances, capital allocation and payout ratios. A continuation of some project builds and tactical M&A on a value basis are likely to help with the longer-term re-rate,” said Mr. Kuske.
After trimming his earnings expectations through 2023, the analyst cut his target to $24 from $29 in response to its recent equity issuance and expected inclusion of deal-related debt. The average is $22.03.
Maintaining an “outperform” rating, he added: “Innergex faces positive market prospects; however, there is a degree of near-term noise associated with the stock. Beyond the near-term noise, INE looks to be well positioned to continue to grow the overall asset base in a number of geographies on an attractive risk-reward relationship versus a number of other renewable stocks.”
=====
While he expects to see “strong” quarter-over-quarter revenue growth when it reports its results on Feb. 28, RBC Dominion Securities’ Douglas Miehm reduced his 2022 estimates for Victoria-based Aurinia Pharmaceuticals Inc. (AUPH-Q) in response to the impact of the Omicron variant.
The equity analyst is projected revenues for its fourth quarter of fiscal 2021 of US$22.2-million, up 51 per cent from the quarter and narrowly above the consensus on the Street of US$22-million. He estimates that brings full-year revenue for its Lupkynis drug, developed to treat lupus nephritis, to US$44.3-million, in line with the company’s guidance (a range of US$40-million to US$50-million).
“We would look for updates on the key drivers for LUPKYNIS’ success (PSFs, conversion rate and compliance) and updates on approval timeline for voclosporin in the EU,” said Mr. Miehm. “We expect AUPH to provide guidance for FY22 during Q4/21 earnings call.”
“We believe the focus to be on the determinants of LUPKNIS’ success: 1) Patient Start Forms (PSFs): PSFs were impacted due to the delta variant in the Q3 (412), however October month saw a pick-up in PSF (160). As of Nov. 3, AUPH had received 1,265 PSFs. We would look for any commentary on the impact from Omicron variant on PSFs. 2) Conversion rate from PSFs to patients on therapy, this indicator has increased quarter-over-quarter to 68 per cent in Q3 from 50 per cent in Q2 and 40 per cent end of Q1. A higher conversion rate can potentially offset a weaker growth in PSFs due to Omicron. 3) Compliance: AUPH did not provide any data related to compliance rates till Q3, as management believed it was too early to quantify this factor. We would look for any commentary around compliance.”
Mr. Miehm does expect the ramp-up for the drug to be “negatively impacted by the spread of Omicron,” leading him to reduce his 2022 product revenues estimate to of US$157-million from US$180-million and below the US$181-million consensus.
That led him to lower his target for Aurinia shares to US$31 from US$34 with an “outperform” recommendation. The average is US$31.22
“We believe Aurinia Pharmaceuticals is well positioned for future growth from its recently FDA-approved drug, voclosporin (brand name LUPKYNIS),” he said. “We believe the lupus nephritis market is under-penetrated, with only one other FDA-approved therapy (BENLYSTA, approved in Dec. 2020) and no EMA approved therapy for the condition. Additionally, the established treatment paradigm consists of off-label medication and has significant room for improvement given complete remission rates only in the mid-teens. The Ph. III trial for voclosporin demonstrated a statistically significant improvement in patient outcomes when added to the current standard of care, with a renal response rate of 41 per cent. Following a 2021 launch in the U.S. and 2022 launches in the EU and Japan, we believe LUPKYNIS can achieve peak global sales of $1-billion-plus.”
=====
Echelon Capital analyst Ryan Walker moved Bunker Hill Mining Corp. (BNKR-CN) to full coverage from the firm’s Watch List, setting a “speculative buy” recommendation following its recent US$5.4-million acquisition of the Bunker Hill mine in Idaho from Placer Mining Corp.
“An investment in Bunker Hill Mining Corp. affords investors exposure to the prospective restart (and associated potential share re-rating on transitioning to producer status) and exploration in and around the recently acquired and like-named Ag-Pb-Zn mine in Idaho’s prolific Coeur d’Alene Silver District,” he said. “We also highlight the strength of BNKR’s very experienced management team and see the Bunker Hill restart as the first of a potential serial modus operandi, with additional such opportunities represented by the Company’s London joint venture in Colorado (and other regional opportunities), where it has the option to earn-in to a 50-per-cent interest in a +12km2 package of patented land claims.”
Currently the lone analyst covering the Toronto-based company, he set a target of 60 cents per share. It closed at 30 cents on Tuesday.
=====
Following its acquisition of an independent dealer auction platform in Michigan, Scotia Capital analyst Michael Doumet sees E Automotive Inc. (EINC-T) “on the fastlane to growth.”
Before the bell on Tuesday, E Automotive announced a deal for FastLane Auto Exchange, an independent, dealer-only auction marketplace focused on the U.S. Midwest, for an undisclosed price. It said FastLane will serve as the anchor asset of its EBlock sub-brand.
“Having built a leading digital platform and successfully expanded across Canada, EINC is pursuing an aggressive growth strategy in the U.S.,” he said. “FastLane will be used as its second launchpad for growth in the U.S. In addition to acquiring a base of operations and adding a capable team in the U.S. Midwest, EINC will look to overlay its digital platform and accelerate the uptake of its product offering in the region. We expect EINC to continue to pursue M&A as it builds scale across the U.S. (we estimate EINC maintains more than $40 million in excess capital to fund inorganic expansion.”
Keeping a “sector perform” rating, Mr. Doumet cut his target for the Toronto-based company’s shares to $16.50 from $24 after adjusting his valuation in response to recent compression in both the digital auction space and tech sector. The average is currently $25.77.
“EINC maintains strong growth prospects, with an ability, in our view, to organically expand sales at a 35-per-cent CAGR [compound annual growth rate] through 2023 (and beyond). EINC will report its first quarter since its IPO in March,” he said.
=====
In other analyst actions:
* In response to Tuesday’s announcement of a series of restructuring and repositioning initiatives, iA Capital Markets analyst Neil Linsdell raised his DIRTT Environmental Solutions Ltd. (DRT-T) target to $1.65 from $1.45, keeping a “sell” rating. The average is $3.06.
“While we like DIRTT’s solutions and believe that its product offerings are unique and valuable, we are cautious of significant near-term traction in this uncertain environment and a general lack of urgency from clients due to pandemic-related uncertainty,” he said. “We have made slight adjustments to our model to reflect expected profitability improvements but maintain our EV/EBITDA multiple at 7.5 times with the worst now behind us, but a slow recovery, as the Company still seeks a permanent CEO and rolls out its new go-to-market plan. Using slightly improved 2023 forecasts, our target price is revised up.”
* After it announced an agreement with Bank of Nova Scotia to offer its Employee Assistance Program to is nearly 38,000 employees, iA Capital Markets’ Chelsea Stellick cut her target for shares of Dialogue Health Technologies Inc. (CARE-T) to $10, below the $11.28 average, from $14, citing compression in health tech multiples and wage inflation. She maintained a “buy” rating.
“Dialogue continues to execute on its ‘land and expand’ strategy by expanding insurance partnerships and securing large contract wins. With $111-million cash on hand and $85-million ARR at year-end, the Company has ample dry powder to execute on other strategic acquisitions, which we anticipate could be announced by the end of 2022,” said Ms. Stellick.
* National Bank Financial analyst Mike Parkin raised his Barrick Gold Corp. (ABX-T) to $29 from $30 with a “sector perform” rating. The average is $26.33.
* Cowen and Co. analyst Vivien Azer lowered her Cronos Group Inc. (CRON-T) target to $4.50, below the $6.24 average, from $9 with a “market perform” rating.
* Canaccord Genuity analyst Carey MacRury cut his Kinross Gold Corp. (K-T) target to $10.50 from $11.50, keeping a “buy” rating. The average is $11.91.
* BMO’s John Gibson raised his Pason Systems Inc. (PSI-T) target to $15.50, exceeding the consensus by 29 cents, from $14.50 with an “outperform” rating after a “solid” quarter and dividend bump.
“PSI represents one of the highest quality names in our coverage group given its strong market share and exposure to rising activity levels,” he said.
* Mr. MacRury raised his Yamana Gold Inc. (YRI-T) target to $9 from $8 with a “buy” rating, while National Bank’s Michael Parkin increased his target to $7.25 from $6.75 with an “outperform” rating. The average is $8.10.
* TD Securities’ Daniel Chan bumped up his target for Sierra Wireless Inc. (SWIR-Q, SW-T) to US$19, below the US$21.40 average, from US$18 with a “hold” recommendation.
“Although management has navigated the challenging environment well, we believe there is still considerable uncertainty in the name. We believe the stock will perform well [Wednesday] to bring the returns in line with our rating,” he said.
* RBC’s Pammi Bir trimmed his Summit Industrial Income REIT (SMU.UN-T) target to $25 from $25.50, reiterating a “sector perform” rating. The average is $25.09.
“Post in-line Q4 results, we believe SMU remains well-positioned to continue delivering strong earnings and NAV growth,” he said. “Indeed, the pace of organic growth seems set to rise as renewal and re-leasing activities crystallize the embedded upside in in-place rents. As well, Management’s outlook on acquisitions remains confident, while an expanding development pipeline provides a good line of sight into valuecreation opportunities ahead. At current levels, we believe SMU’s premium valuation is well-supported”
* CIBC’s Jacob Bout lowered his target for Superior Plus Corp. (SPB-T) to $14 from $16 with a “neutral” rating. The average is $14.25.
“SPB’s 2022 guidance was weaker than we had anticipated, with the delta (compared to our estimates) driven by a slower-than-expected recovery in the Canadian propane segment (continued COVID-19 impact to commercial/industrial volumes in H1/22 and higher inflationary costs). That said, we would point out SPB’s guidance does not include new acquisitions (other than Kamps which should close in early Q2/22), and we believe a 2022 adjusted EBITDA estimate closer to the higher end of SPB’s target range is more realistic. With leverage already at the high end of SPB’s revised target range, we would not rule out SPB looking at equity markets as part of its accelerated acquisition strategy,” said Mr. Bout.
David Leeder