Inside the Market’s roundup of some of today’s key analyst actions
Citing “uncertainty on credit costs (where performance seems weaker relative to peers),” RBC Dominion Securities analyst Darko Mihelic lowered his rating for Bank of Montreal (BMO-T) a day after the release of its first-quarter financial results.
Before the bell on Tuesday, BMO reported adjusted earnings per share of $2.41, falling short of Mr. Mihelic’s projection by 4 cents. He attributed the miss to larger-than-expected provisions for credit losses (PCLs) of $349-million, up 38 per cent from the previous quarter and surpassing the analyst’s $242-million estimate.
“PCLs were higher than anticipated and gross impaired loans (GILs) continued to trend higher, more so than we have seen from peers thus far,” the analyst said. “PCL guidance for the remainder of 2020 is higher than guidance provided just last quarter ... Management expects BMO’s stage 3 (impaired) PCL ratio to decline to the mid-20 basis points range over the next few quarters (vs. 29 bps this quarter). Last quarter management guided to 2020 total PCLs in the low-to-mid 20 bps range. We come away from the quarter incrementally more cautious and uncertain on BMO’s credit costs going forward.”
Mr. Mihelic said the recent trend toward rising GILs “warrants monitoring and could potentially result in additional PCLs should the trend continue.”
He added: “One of the tenets of our investment thesis for BMO was our view that the bank exhibited “defensive” characteristics that should help limit downside in the event of a potential Canadian consumer/housing-driven issue. However, it seems that commercial loans are driving higher PCLs thus far, not consumers, i.e., we are starting to see the ‘lumpiness’ in the commercial book which would likely cause further concern for investors should it persist and it seems broadly based and different (worse) from peers. Our somewhat simplistic view is that an outlier on credit quality (at this late stage in the economic cycle) will not work as a stock.”
See also: Big banks report record highs in capital markets results
Placing BMO “in the penalty box” for its high PCLs, he lowered his rating for its stock to “sector perform” from “outperform" with a target price of $98, falling from $109. The average on the Street is $103.71, according to Bloomberg data.
“Our 12-month price target of $98 ... is based on a P/ E [price-to-earnings] multiple of 10.0 times our 2020 core cash EPS estimate,” he said. “The target multiple is near the lower end of the target range that we use for the big Canadian banks, mainly reflecting our uncertainty surrounding credit quality at this late part of the economic/credit cycle.
Elsewhere, also expressing credit concerns, Canaccord Genuity’s Scott Chan lowered his target by a loonie to $106 with a “buy” rating.
Mr. Chan said: “Higher provisions impacted several sectors including Oil & gas (e.g. US natural gas in corporate lending book), Transportation finance (e.g. trucking), manufacturing, service industries and construction (non-RE). Most of the provisions were related to the US market. COVID-19 could continue to impact some of the sectors mentioned above, but we believe it’s still too early to assess financial impact at this juncture (similar to across the Group). With BMO’s PCL ratio running below peers (despite commercial bent), investors will be mindful on credit trends throughout the year. Going forward, management expects provisions to come down. For the balance of F2020, the firm guides for PCL ratio running on average at 25 bps vs. the low to mid-20 bps prior. Incremental increases could come from COVID-19 on performing loans (similar to peers) and potential additional provisioning on impacted sectors (e.g. management called out Transportation finance and U.S. natural gas).”
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In a separate note, Mr. Mihelic said Bank of Nova Scotia’s (BNS-T) quarterly report lived up to his “noisy” expectations, however thinks “results can improve from here.”
Scotiabank reported adjusted earnings per share of $1.83, exceeding the expectations of both the analyst ($1.79) and the Street ($1.75).
“The bank’s definition of adjusted EPS this quarter included a $43-million after-tax (or $0.03 per share) benefit from the elimination of a one-month reporting lag related to Mexico," he said. "Adjusted EPS excluding this benefit could be viewed closer to $1.80, relatively in line with our estimate but still above consensus. From a business segment perspective, International Banking excluding the one-month reporting lag came in below our forecast, mostly offset by better than expected results in Global Banking and Markets.”
Mr. Mihelic said that International Banking miss ($578-million versus his $654-million) was “rather noisy," however he noted the bank indicated that it is a “transitional” quarter with better results to come.
Based on the results, Mr. Mihelic made “modest” increases to his earnings expectations, raising his 2020 and 2021 core EPS projections to $7.35 and $7.79, respectively, from $7.30 and $7.78.
Keeping a “sector perform” rating, he increased his target for Scotiabank shares to $77 from $76. The average is currently $77.67.
Elsewhere, Desjardins Securities’ Doug Young maintained a “buy” rating and $78 target.
Mr. Young said: “Cash EPS (based on our definition) was a penny higher than we expected. It was a noisy quarter, but we knew it would be. Canadian banking results were encouraging, and we now have a starting point for international banking earnings (ex divestitures), which management believes it can grow rapidly.”
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Pointing to its current valuation and limited implied return to his target price, Canaccord Genuity analyst Carey MacRury lowered Barrick Gold Corp. (ABX-T, GOLD-N) to “hold” from “buy," despite the release of fourth-quarter results that exceeded expectations and a 40-per-cent raise to its annual dividend.
On Feb. 12, Barrick reported adjusted EBITDA and earnings per share of $1.353-billion and 17 cents, respectively, topping the Street’s estimates of $1.347-billion and 13 cents.
“Guidance was largely in line with our expectations and the preliminary 5-year guidance provided with Q3/19 reporting,” said Mr. MacRury. “Top-line gold reserves declined year-over-year. We view 2020 as a year of reinvestment for Barrick as its guided higher near-term capital spend should support a more stable, long-term production profile. We continue to like Barrick for its exploration potential in Nevada, increased confidence in Nevada synergies, and an improving outlook on the company’s long-term production profile.”
He raised his target for Barrick shares to $28 from $27, which exceeds the current consensus of $27.85.
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Though Northland Power Inc. (NPI-T) remains a top pick in his coverage universe following better-than-anticipated fourth-quarter results, Raymond James analyst David Quezada lowered his rating for its stock to “outperform” from “strong buy,” pointing to share price appreciation and “transitory headwinds.”
“We continue to believe our thesis on NPI is intact and the company’s global offshore wind development portfolio will yield handsome returns for long term investors,” he said.
On Tuesday after the bell, the Toronto-based company reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $274-million, beating Mr. Quezada’s $252-million projection as well as the Street’s $260-million consensus estimate.
“Relative to 4Q18′s adj. EBITDA of $221-million, NPI saw improved results at its offshore wind facilities on pre-completion revenue at Deutsche Bucht (a $77-million positive impact), offset by lower year-over-year performance at Gemini on lower wind resources and wholesale prices below the SDE floor partially offset by lower insurance costs (a $10-million negative impact),” he said. “In addition, NPI saw a $9-million increase in corporate costs on higher development expenses and increased personnel related to NPI’s growth and a $7-million year-over-year negative impact from reduced performance at Nordsee One due to lower wind resources, unpaid curtailments partially offset by lower operating costs.”
However, the company’s 2020 guidance for adjusted EBITDA of $1.1-$1.2-billion fell “modestly” below the Street’s expectations, leading Mr. Quezada to shrink his 2020 earnings per share estimate to $1.70 from $1.88. He maintained a 2021 expectation of $2.04.
He also kept a $34 target for Northland shares. The average on the Street is $32.19.
“With shares up 21 per cent year-to-date (vs. the TSX up 1 per cent) and now within shooting distance of our target price, we now see upside in shares of NPI as more consistent with an Outperform rating,” he said. “Meanwhile, although we expect lower realized prices at Gemini and unpaid curtailments at Nordsee One will be transitory issues, we acknowledge they could represent near-term headwinds. Nevertheless, we continue to believe the company is developing a large scale, high return offshore wind portfolio which will ultimately yield handsome returns for long term investors. The company continues to distinguish itself as a global leader in offshore wind with attractive development opportunities in Taiwan (626 net MW across three projects), Japan (up to 600 MW via JV), and now South Korea. While these projects will take time to develop, we believe this is precisely what is needed in an era where increased competition has pressured returns on renewable power development.”
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Raymond James analyst Rahul Sarugaser initiated coverage of Avicanna Inc. (AVCN-T), a Toronto-based cannabinoid platform company, with an “outperform” rating on Wednesday, seeing its value “escalating materially” as its products penetrate international markets and clinical reduce risk.
He also emphasized Avicanna’s current value may be depressed by investor confusion.
“This, we think, is something quite separate from a cannabis company,” said Mr. Sarugaser. “Rather than specializing in the commercialization of cannabis biomass as an end product unto itself, AVCN treats the plant as an agricultural input from which it mines a trove of active pharmaceutical ingredients (APIs)—e.g. cannabinoids like CBD, THC, CBG, CBN, and THCV. With these APIs, AVCN draws upon rich experience in drug formulation — via in-house expertise and a succession of top-tier academic and commercial partnerships — to develop proprietary, data-supported products to serve cosmetic, wellness, medical cannabis, and pharmaceutical markets. This is evidenced by the fact that AVCN is the first and only cannabinoid product development company to be accepted by Johnson and Johnson Innovation’s (JNJ) JLABS biotechnology accelerator network, and hence, is embedded in a rarified ecosystem of thought-leading physicians and researchers that are aligned with the company’s core scientific team and its approach to product development.”
“AVCN leverages its comprehensive partnership with El Grupo Daabon — a global organic agriculture power— to cultivate high-quality, very low-cost hemp and cannabis (5 cents per gram) in northern Colombia’s ideal growing climate. This biomass is mined for its APIs, which are then formulated into a range of pharmaceutical-standard, quality-assured, animal and/or human efficacy-evaluated products.”
Mr. Sarugaser said the market is “chronically underappreciated” the company’s capabilities due to its technical "complexity."
“The era of poor-quality, highly variable cannabinoid products is coming to a close; companies that have focused intensely on the science and technology of cannabinoid product development, we believe, will inherit much of the extant and future cannabis market worldwide,”he said.
Currently the lone analyst on the Street covering the stock, he set a target of $3 per share.
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After its fourth-quarter results fell short of his expectations, Noble Capital Markets analyst Mark Reichman lowered his rating for Endeavour Silver Corp. (EDR-T, EXK-N) to “market perform” from “outperform.”
“While we expect improved performance in 2020 compared with 2019, we would like to see more evidence of an improving operating cost structure leading to greater profitability and more certainty with respect to Terronera" he said. "Based on the current valuation, we think a Market Perform rating is appropriate.
Mr. Reichman did not specify a target price. His previous target was $2.50, versus the current consensus of $2.94.
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Seeing its financial outlook remaining “healthy” following Tuesday’s Investor Day event in Tampa, Industrial Alliance Securities analyst Jeremy Rosenfield raised his target for shares of Emera Inc. (EMA-T).
“At Investor Day, EMA reiterated that it remains committed to delivering clean, reliable, and affordable energy to customers across its North American operations,” he said. “To that end, the Company expects to invest $7.5-billion (2020-22, up from $6.9-billion previously) across its portfolio of regulated utilities (primarily in Florida), which should drive 8-per-cent average annual rate base growth (CAGR 2018-22, up from 7 per cent previously).”
“We continue to expect EMA’s three-year capital investment plan to drive mid-single-digit EPS growth over the forecast horizon (2019-24), supporting the Company’s 4-5 per cent per year dividend growth target through 2022, with a declining payout ratio over time.”
With a “hold” rating, Mr. Rosenfield moved his target to $62 from $59. The average is $61.20.
“EMA offers investors defensive income and growth in the regulated utility sector, underpinned by (1) its regulated utility businesses (more than 95 per cent of adjusted earnings), (2) healthy forecast EPS growth (5-7 per cent per year, CAGR 2019- 24E), primarily driven by investments within Tampa Electric, and (3) attractive income characteristics (4-per-cent yield, 4-5 per cent per year dividend growth through 2022),” he said. “Given that EMA’s recapitalization is almost complete, and as the Company continues to execute on its organic growth strategy, we see EMA as more in line with its Canadian large cap regulated utility peers; as a result, we are increasing our relative valuation to the sector average 20 times 2021 estimated P/E (up from 18 times 2021 P/E previously), and increasing our price target accordingly.”
Meanwhile, Raymond James’ David Quezada raised his target to $63 from $61 with a “market perform” rating (unchanged).
Mr. Quezada said: “We attended the Emera investor day in Tampa, Florida yesterday and came away impressed by not only the 8-9-per-cent rate base growth out to 2022, but also the long runway of large scale investments the company has in Florida. While our Market Perform rating is primarily a valuation call, we believe Emera is a high quality utility with a robust regulatory profile and attractive growth.”
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In other analyst actions:
* Citing capex “creep” and its ongoing litigation with Tervita CIBC World Markets analyst Jon Morrison lowered Secure Energy Services Inc. (SES-T) to “neutral” from “outperformer” with a $5 target, down from $6.50, which is the current consensus.
Mr. Morrison said: “Although we expect Secure will try to focus on minimizing any cash outlays associated with such a settlement, the decision to pursue mediation after nearly a dozen years of litigation will likely be taken in a negative light and create uncertainty for the stock. All-in, although our forward EBITDA estimates are not changing in any material way, the combination of the higher capex outlay and update on the Tervita lawsuit drives our price target to decrease to $5.00 from $6.50, and we are concurrently downgrading the stock.”
* Positive on its positioning for the year and seeing its management driving “best-in-class” organic growth, Canaccord Genuity analyst Yuri Lynk raised WSP Global Inc. (WSP-T) to “buy” from “hold” ahead of the release of its quarterly results after the bell on Wednesday. His target rose to $100 from $95, which is the current consensus.
* Veritas Investment Research analyst Jeffrey Craig cut Vermilion Energy Inc. (VET-T) to “sell” from “buy” with a $16.50 target, falling from $22. The average is $23.47.
* TD Securities analyst Aaron MacNeil initiated coverage of North American Construction Group Ltd. (NOA-T) with a “buy” rating and $20 target. The average is currently $24.42.
David Leeder