Inside the Market’s roundup of some of today’s key analyst actions
While the third-quarter financial results from Bank of Montreal (BMO-T) fell short of his forecast, Desjardins Securities analyst Doug Young thinks the composition of the results was “good” with both P&B banking and wealth management exceeding expectations.
“A mark on its leveraged lending loan book soured the mood. Our thesis has not changed. We like the larger exposure to commercial vs retail banking,” he said in a research note titled Expedition Everest.
BMO shares fell 2.6 per cent on Tuesday following the premarket earnings release, which was headlined by cash earnings per share of $3.09, missing both Mr. Young’s $3.02 estimate and the consensus projection on the Street of $3.14.
“On an adjusted PTPP basis, earnings were 3 per cent below our estimate; relative to our estimates, Canadian P&C banking, US P&C banking, wealth management and corporate beat while capital markets missed,” said the analyst. “If we exclude the two unusual items (severance of $49-million and loan markdowns of $88-million, pre-tax), PTPP earnings would have been above our estimate.”
Though he expressed concern about the $88-million pre-tax leveraged loan markdown, calling it a “surprise,” Mr. Young thinks the impact of the quarterly report was “neutral.”
“We like the outlook for commercial banking and the pending BoTW acquisition,” he said.
Maintaining a “buy” recommendation for BMO shares, Mr. Young trimmed his target to $150 from $153. The average on the Street is $150.82, according to Refinitiv data.
Elsewhere, Veritas Research analyst Nigel D’Souza cut his rating to “reduce” from “buy” with a $149 target.
Other analysts making changes include:
* RBC’s Darko Mihelic to $151 from $158 with an “outperform” rating.
“BMO’s Q3/22 results were lower than we expected, mainly driven by weak results in capital markets,” said Mr. Mihelic. “BMO had strong loan growth this quarter, whereas total revenue growth and the all-bank NIM improvement were mediocre. Our model refinements modestly reduce our estimates, and we lower our price target ... as a result. This quarter does not change our view that BMO’s EPS growth should outpace peers’ over the next two years, especially during a period of rising PCLs, mostly related to its acquisition of Bank of the West.”
* Canaccord Genuity’s Scott Chan to $150.50 from $152.50 with a “buy” rating.
“Our NTM core EPS forecast is relatively unchanged as we adjust for better expected NII and credit, generally offset by lower other income,” said Mr. Chan. “We decreased BMO’s P/E target premium modestly to 3 per cent (from 4 per cent) to account for its FQ3 adj. EPS miss (mainly impacted by markdowns in loan underwriting portfolio and severance costs within Capital Markets). That said, BMO has solid core P&C trends on both sides of the border, supported by robust loan growth and higher NIM.”
* Credit Suisse’s Joo Ho Kim to $150 from $152 with an “outperform” rating.
“BMO’s Q3 results were a miss to both us and consensus, largely driven by the unfavorable impact of markdown on the bank’s U.S. leveraged finance business and broader severance charge impacting Capital Markets, somewhat offset by more favorable (to us) results from the Corporate segment (a modest gain this quarter, but expected to normalize to losses in Q4). The bank’s P&C businesses showed up solidly this quarter, particularly given the better-than-expected margin expansion that supported mid-teens PTPP earnings growth (outperforming its peers south of the border in particular). Beyond the results, we continue to highlight BMO’s growth runway as strong, and a key source of support for our Outperform recommendation,” he said.
* Barclays’ John Aiken to $151 from $140 with an “overweight” rating.
“While BMO’s capital markets performance (exacerbated by some likely nonrecurring charges) did generate a miss, we do not believe that the results negatively impact the bank’s outlook,” he said.
* KBW’s Mike Rizvanovic to $149 from $146 with an “outperform” rating.
* Cormark Securities’ Lemar Persaud to $157 from $156 with a “buy” rating.
=====
Citing a “constructive” outlook and “supportive” end markets, Raymond James analyst Bryan Fast is forecasting continued earnings growth for Finning International Inc. (FTT-T) through the end of 2022 after it secured a “massive” contract win in Chile.
On Tuesday, Finning and industry bellwether Caterpillar Inc. (CAT-N) announced a deal to replace the haul truck fleets for BHP at its Escondida copper mine in Chile. It’s one of the largest fleets in the world.
“The massive equipment order reflects positively for Finning (and other equipment dealers) as long-term investments decisions push forward as resource companies balance energy transitionand decarbonization efforts with commitment to meet demand for resources,” said Mr. Fast. “We expect a continuation of this trend and highlight the equipment dealers as beneficiaries.”
“While the business is operating well, there are external factors that present risks including constitutional reform in Chile, volatility in commodity prices, inflationary pressures and an economic slowdown. Focusing on the controllable, Finning has displayed improvements in the operating model, with a leap forward in execution, driving earnings beyond prior peaks, something we believe has yet to be reflected in its valuation.”
Calling its “attractive” valuation “increasingly difficult to ignore,” the analyst maintained an “outperform” rating and $39 target for Finning shares, which is 75 cents lower than the consensus.
“On a relative basis, Finning’s stock is trading at a 10-times discount to peer Toromont, which is an improvement from 12 times last month, but it remains well above the historical average at 3.6 times,” said Mr. Fast. “The spread is increasingly difficult to ignore as Finning continues to deliver operationally. Further, the stock is trading at 1.9-times book value, which is below the 20-yr average of 2.3 times and approaching one standard deviation below the long-term average. We note this has only happened three times in the last 15 years. We believe these levels represent strong downside support”
Elsewhere, reiterating an “outperform” rating and $40 target, National Bank Financial’s Maxim Sytchev said: “It’s interesting to observe the dichotomy of FTT shares floundering (down 13 per cent year-to-date vs. TSX down 8 per cent) amidst the broader Chilean Index (S&P IPSA) actually advancing 29 per cent year-to-date (lower currency of course helps here as we are talking about local denomination). Nevertheless, with Canadian investors being highly concerned about the September 4 vote on the new constitution (that does not appear to have enough votes to be changed, based on most recent polls), the resource and financials-heavy local index is chugging along. From FTT’s perspective, this is a major win as the mine is going to an all-CAT offering (the site now is mixed, predominantly CAT, however) while also validating a thesis that aged mining equipment will need replacement, regardless of what might be happening from a political standpoint. We believe that Canadian oil sands fleets are in a similar age group (10 to 12 years old), right on the cusp of a material refresh / rebuild cycle. While there are no numbers in the press release, large, brand-new mining trucks are somewhere in the US$5-million range (list prices are not advertised), depending on configuration. Importantly, the eventual tail of Product Support is as important as selling the original gear. Overall, the announcement is showing that Finning/CAT are able to win contracts even in this uncertain environment. FTT shares continue to impute a dislocated vs. commodity pricing dynamic (as measured by WTI/copper index.”
=====
In a research note titled Bang for your buck, RBC Dominion Securities analyst Irene Nattel raised his valuation for Dollarama Inc. (DOL-T) ahead of the Sept. 9 release of its second-quarter results, citing “trading multiple expansion, sweet spot positioning and stability of operations as DOL’s deep value positioning resonates even more strongly as we head into a period of economic uncertainty and cautious consumer spending against the backdrop of rapidly rising inflation.”
She raised her full-year earnings per share estimates to $2.76 from $2.70 in 2023 and $3.27 from $3.23 in 2024.
“Same-store sales comping against significant prior-year restrictions in key market,” said Ms. Nattel. “Forecasting FQ2 SSS [same-store sales] up 12 per cent and three-year stacked 12.3 per cent (12-per-cent five weeks into the quarter), reflecting prior-year dislocation due to 8-week ban on sale of non-essentials in Ontario, 40 per cent of DOL store base. Price points up to $5 began arriving in store during FQ2, accelerating in H2, with impact on P&L more of an F24 event.
“Transient gross margin pressure reflects mix, normalizing supply chain costs. Forecasting gross margin 43.2 per cent, down 16 basis points year-over-year, reflecting: i) strong demand for lower-margin consumables; and ii) normalizing warehousing and distribution expenses as inventory in transit during FQ1 makes its way into the system. Looking ahead, improving seasonal inventory mix and normalizing freight rates should help underpin gross margin rates.”
The analyst hiked her target for Dollarama shares to $93 from $81 with an “outperform” recommendation. The average is $82.08.
“The target multiple increase reflects the stability of the business model against the backdrop of an uncertain economy and consumer wallet pressure along with traction on higher price points and the Dollarcity opportunity with put option window opening October 1,” said Ms. Nattel.
=====
Arizona Metals Corp.’s (AMC-X) flagship Kay Mine in Arizona is “highly compelling because of its strong exploration results to date, location in an attractive jurisdiction (Arizona), exploration upside, and proximity to existing infrastructure and mining districts, according to Scotia Capital analyst Eric Winmill.
“Unlike the legendary showdown at the O.K. Corral in Arizona, we believe that grade and tonnage can both be winners at this deposit,” he said.
Initiating coverage with a “sector outperform” recommendation on Wednesday, Mr. Winmill said the Toronto-based company “remains well funded for ongoing exploration,” pointing to working capital of $61-million through June.
“Exploration to date has been focused on the main Kay Mine; however, Versatile Time Domain Electromagnetic (VTEM) surveys have outlined several compelling nearby targets, including the undrilled Central Zone and West Zone, located 600 m and 1.6 kilometres (km) east of Kay, respectively,” he added. “Drilling recently started at the Central Zone with first results expected soon. Drilling at the West Zone is expected to start later this year, pending permitting, along with testing of other nearby high-priority targets.”
Mr. Winmill set a $7.50 target, below the $8.81 average.
“Most of our valuation is attributed to the Kay Mine using a discounted cash flow (DCF10%) approach based on a range of scenarios and our assessment of a target resource to be defined alongside a valuation component to capture exploration upside,” he concluded. “AMC’s non-core wholly-owned Sugarloaf Peak gold project also factors into our valuation on an EV per ounce (/oz) basis. We ascribe a blended 1.0-times multiple to NAV for our price target, as we believe that AMC shares can re-rate higher as the company continues to expand and upgrade the resource at the flagship Kay Mine project and further advances the project.”
“We believe that AMC shares should trade at a premium valuation given the location in an attractive jurisdiction (Arizona), compelling exploration upside, proximity to existing infrastructure and mining districts, potential as a merger and acquisition target, and strong working capital position to fund ongoing project advancement. We expect an active year of news flow as drilling results are released, leading to an updated resource (likely in 2023).”
=====
CIBC World Markets’ Dennis Fong made target price adjustments to a trio of Canadian large-cap energy stocks on Wednesday.
“Commodity prices remained relatively strong through the second quarter, but weakened as we entered Q3/22 as concerns of a global recession picked up,” he said.
His changes are:
* Canadian Natural Resources Ltd. (CNQ-T, “outperformer”) to $85 from $95. The average is $92.20.
* Cenovus Energy Inc. (CVE-T) to $32 from $34. Average: $32.53.
* MEG Energy Corp. (MEG-T) to $22 from $26. Average: $25.19.
=====
Following weaker-than-anticipated second-quarter results and seeing its product roll-out and penetration taking longer than expected, Laurentian Bank Securities analyst Frederic Blondeau thinks Voxtur Analytics Corp. (VXTR-X) is “becoming a 2023 ‘show me’ story.”
After the bell on Monday, the Toronto-based technology firm, which is focused on real estate lending, reported an adjusted EBITDA loss of $4-million, below the analyst’s forecast of a $1.8-million deficit. Revenue of $38.1-million also missed his estimate ($42.1-million).
“Management indicated having implemented a cost reduction program, and we expect the Corporation to start seeing benefits from the program starting in September. We revised our estimates on the basis of more conservative assumptions, given the current context. That said, we fully acknowledge the positive aspects from the acquisition of Blue Water Financial Technologies, and the overall favorable outlook for 2023,” said Mr. Blondeau.
Reducing his revenue and earnings estimates for the second half of 2022 and full-year 2023, he added: “Notwithstanding the positive outlook for 2023, notably on the back of the integration of Blue Water and consequent potential synergies within VXTR’s existing segments, we are adopting a more conservative approach on the Corporation given the present context. We would also underline that, given prevailing conditions, management is not only focusing on external growth opportunities, but also on EBITDA margins and ultimately cash flow. Generally speaking, we feel like we might have to wait until VXTR reports Q1/23 results before seeing more tangible impacts on the Corporation profitability. In parallel, management’s ability to source strategic transactions in this environment further supports our positive views on the management team and the business plan for 2023. Because of these reasons we maintain a favorable opinion on VXTR.”
Maintaining a “buy” rating for Voxtur shares, Mr. Blondeau cut his target to $1.50 from $2. The average is $1.97.
=====
In other analyst actions:
* H.C. Wainwright initiated coverage of Vancouver-based AgriFORCE Growing Systems Ltd. (AGRI-Q) with a “buy” rating and $5.50 target. The average on the Street is $5.
* In response to Tuesday’s post-market earnings release, RBC’s Irene Nattel raised her Alimentation Couche-Tard Inc. (ATD-T) target to $79 from $77, keeping an “outperform” rating. The average is $65.24.
“FQ1 results reflective of underlying strength of the ATD business, notable gains in fuel procurement to drive strong gas margins, but nonetheless challenging macro backdrop with record high gas prices and surging inflation,” she said. “Comparing results to forecast, inside store gross profit $$ unchanged year-over-year and close to in line. Fuel volumes weaker than expected across all regions as high gas prices drove higher volumes to discount retailers, and as ATD focuses on GP $$, but gas margins well above expectation across regions. Opex/SG&A $$ lower than expected, up 7.3 per cent on a normalized basis and a welcome reversal from Q4 up 15.6 per cent.”
* Eight Capital’s Ty Collin cut his Curaleaf Holdings Inc. (CURA-CN) target to $16 from $20, remaining above the $14.11 average, with a “buy” rating.
* JP Morgan’s Patrick Jones cut his First Quantum Minerals Ltd. (FM-T) target to $35 from $40 with an “overweight” rating. The average is $32.34.
* Following in-line third-quarter results, Canaccord Genuity’s Aravinda Galappatthige lowered his PopReach Corp. (POPR-X) target to 55 cents from 70 cents, below the 72-cent average, with a “speculative buy” rating.
“We believe the stock could start to see more sustainable strength later in the year as growth prospects begin to formalize and synergies between the legacy PopReach business and Federated Foundry begin to take shape,” he said.
* BMO Nesbitt Burns’ Andrew Mikitchook cut his Victoria Gold Corp. (VGCX-T) target to $20 from $23 with an “outperform” rating. The average is $18.31.
“We are updating our production assumptions for the Eagle mine after Q2′s earnings and conference call — our new production profile assumes a more gradual increase towards the 250,000oz/year range now that previously planned ore scalping screen is being redesigned due to supplier delays. During our recent site visit to Eagle, the mine appeared to be operating well and discussions focused on various optimizations to improve performance,” he said.
David Leeder