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

National Bank Financial analyst Gabriel Dechaine thinks Bank of Montreal (BMO-T) is using “cost-cutting as a lever to offset weakness, mainly in the U.S.”

On Tuesday, BMO reported adjusted earnings per share for its third quarter of $2.78, missing both the analyst’s $2.89 estimate and the Street’s expectations. However, he emphasized it was “not as big of a miss as it appears” given it included 34 cents of severance and litigation expenses.

“BMO’s adjusted EPS included $223-million of (pre-tax) severance charges, which was larger than we anticipated,” said Mr. Dechaine. “The bank stated that 2.5 per cent of FTE were impacted, which implies a staffing reduction figure of around 1,500. Separately, the bank pre-disclosed a $45-million impairment charge to downsize its real estate footprint during Q4/23. Combined, these programs are expected to yield annualized cost savings in excess of $400-million, with most being realized during fiscal 2024. The motivation behind these decisions (and likely others yet to be announced) is tied directly to the more challenging topline environment. We believe they are also motivated to support accretion targets set for the Bank of the West.”

Mr. Dechaine was focused on a weaker performance south of the border, which he thinks raised “accretion questions” as the bank integrates its takeover of California-based Bank of the West.

“We estimate the segment reported negative PTPP growth of 11 per cent year-over-year on an organic basis (and down 11 per cent quarter-over-quarter including BoW in both quarters),” he said. “Expenses rose mainly due to severance charges previously mentioned. The primary drag on performance, on a sequential basis, was NIM [net interest margin] compression of 16 basis points and declines in both loans (down 1 per cent quarter-over-quarter) and deposits (down 3 per cent).

“Updated disclosures make it difficult to assess how the acquired BoW balance sheet is progressing, though we believe revenue performance overall is falling short of expectations. For example, BoW revenues were flat quarter-over-quarter despite the longer quarter, and flat relative to pre-acquisition levels (i.e., calendar H2/22). The bank will provide an update regarding its accretion expectations with Q4/23 results, following IT systems conversion taking place this upcoming Labour Day weekend. We believe accretion could still come close to the most recent plan (i.e., 7 per cent by 2024). However, we believe it will be mostly tied to cost savings initiatives, that BMO states are tracking ahead of targets (i.e., US$670 mln run-rate synergies by Q1/24).”

Raising his forecast for BMO to reflect lower expenses, offset by lower U.S. NIM, Mr. Dechaine moved his target for its shares to $123 from $122, maintaining a “sector perform” recommendation. The average target on the Street is $130.33, according to Refinitiv data.

Elsewhere, other analysts making target adjustments include:

* RBC Dominion Securities’ Darko Mihelic to $138 from $143 with an “outperform” rating.

“After adjusting for one-time charges, adjusted EPS of $3.12 was higher than our estimate,” said Mr. Mihelic. “U.S. P&C had weaker than expected results due to a challenging operating environment (deposit competition, slowing loan growth, and higher PCLs). We lower our earnings expectations for the U.S. business on lower NIM and slightly elevated PCLs as well as higher expenses. In addition to Bank of the West expense synergies, BMO plans further expense reductions in 2024 and thus while we are disappointed by U.S. revenue challenges, we see BMO’s response as strong (and based on experience, credible).”

* Barclays’ John Aiken to $126 from $131 with an “overweight” rating.

“While the headline was disappointing, charges that are not expected to recur weighed on the results, with BMO coming in just below expectations after accounting for these events. Management pointed to additional upside in synergies but some patience may be required,” he said.

* BoA Securities’ Ebrahim Poonawala to $120 from $125 with a “neutral” rating.

“We see potential for a secular re-rating in the stock over the next few years driven by successful integration of BOTW and assuming mgmt. can navigate a highly uncertain macro backdrop without any major hiccups. However, our cautious view on the sector (given growth/credit risks due to a higher for longer rate backdrop) keeps us Neutral rated,” he said.

* Cormark Securities’ Lemar Persaud to $130 from $132 with a “buy” rating.


Credit Suisse analyst Joo Ho Kim concluded the third-quarter financial results from Bank of Nova Scotia (BNS-T) were “good,” however he’s maintaining a cautious outlook on its shares.

The bank’s shares jumped 2.7 per cent on Tuesday after it reported core cash earnings per share of $1.73, a penny below the Street’s expectation and 2 cents lower than Mr. Kim’s estimate. He attributed the performance to higher provisions for credit losses (PCLs) and lower revenues. Pre-tax, pre-provision profit earnings topped the analyst’s projections by 1 per cent.

A breakdown of the big banks’ third-quarter earnings so far

“While BNS reported relatively in-line earnings results this quarter, PTPP earnings came in modestly better than CS for the first time this year,” he said. “We also note some encouraging underlying trends, including good expense management at International Banking and GBM, solid domestic commercial loan growth (up 2.7 per cent quarter-over-quarter), and good results from Mexico (PTPP earnings growth in the double-digit range year-over-year).

“That said, we believe it is too early to call this quarter an inflection point on earnings trajectory for the bank, especially given concerns around certain pockets in International Banking (we highlight Chile and Colombia again), where PCLs could remain elevated (was a negative surprise this quarter) and loan growth could remain muted (sequential growth moderated to 0.5 per cent this quarter vs. 3.9 per cent last quarter), putting pressure on earnings growth in the near term, in our view. Lastly, the 40 basis points lift up in the CET1 ratio was a positive surprise (especially in light of the regulatory environment), and we believe only a small part (5bps) of that was driven by a risk transfer activity.”

After maintaining his full-year 2023 and 2024 earnings expectations, Mr. Kim raised his target for Scotia shares to $68 from $66, keeping a “neutral” rating. The average target on the Street is $69.52.

Other analysts making changes include:

* RBC’s Darko Mihelic to $72 from $73 with a “sector perform” rating.

“Q2/23 results were slightly above our expectations due to better results in Capital Markets and Corporate on a segmented basis,” said Mr. Mihelic. “Capital exceeded our expectations and benefited from synthetic risk transfers and capital floor add-on reductions. BNS recorded a large quarter-over-quarter increase in impaired PCLs mainly due to retail in Colombia and Chile, which BNS expects to persist in the challenged macroeconomic environment and we model ‘strained’ results in International Banking to continue. We like BNS’s stronger capital position and will review our assumptions/model after BNS reveals its strategic plan, likely sometime soon.”

* TD Securities’ Mario Mendonca to $66 from $68 with a “hold” rating.

“We believe there are several things to feel better about coming out of this quarter. However, until consensus estimates are adjusted downward, and we get some clarity around Scotia’s strategic review (will the bank shrink before growing), we continue to believe our HOLD rating (rather than Buy) is appropriate,” said Mr. Mendonca.

* Barclays’ John Aiken to $66 from $65 with an “underweight” rating.

“Scotia’s credit losses were higher than expected, but this was offset by strong cost controls. The International segment continues to face challenges, but an argument could be made that it is seeing some stabilization,” said Mr. Aiken.

* Cormark Securities’ Lemar Persaud to $65 from $68 with a “market perform” rating.


In a research note titled Firing on All Cylinders, Scotia Capital analyst George Doumet said he expects the first-quarter 2024 results from Alimentation Couche-Tard Inc. (ATD-T) to display “favourable topline trends both in store and at the forecourt, as food/beverage offerings and healthy travel demand continue to drive traffic.”

Ahead of the Sept. 6 release, Mr. Doumet is forecasting revenue of $16.2-billion and adjusted earnings per share of 80 cents, exceeding the consensus estimates on the Street of $16-billion and 78 per cent. He expects same-store sales to grow 4 per cent in Canada, up from 3.3 per cent a year ago, and 3.3 per cent in the United States, down from 3.5 per cent in fiscal 2023.

“We continue to expect ATD’s push in beverage and food to drive strong SSS growth, partly offset by weakness in tobacco,” he said. “This dynamic will likely contribute to a favourable mix impact on gross margin, and we expect merchandise gross margin to increase 58 basis points/64bps/97bps in U.S., Europe and other regions, and Canada respectively. At the forecourt, we expect fuel volume growth of 2.3 per cent/1.5 per cent/3.5 per cent in the U.S., Europe and other regions, and Canada (vs down 4 per cent/down 3.7 per cent/up 0.4 per cent a year ago). We view stronger summer travel demand and lower pricing to be tailwinds for volume growth.”

Raising his U.S. fuel margin projection, Mr. Doumet increased his target for Couche-Tard shares to $82 from $78, reiterating a “sector outperform” rating. The average target on the Street is $79.78.

“Despite its strong year-to-date performance (up approximately 20 per cent), in this current environment, ATD remains a preferred name given that it checks off many boxes, including: (i) operating in a largely defensive industry, (ii) a pristine balance sheet in an increasingly more conducive M&A environment, (iii) an undemanding valuation,” he said. “Furthermore, we see upside to street estimates if fuel margins remain higher for longer.”


Eight Capital analyst Christian Sgro lowered his financial forecast for Quisitive Technology Solutions Inc. (QUIS-X) in response to weaker-than-anticipated second-quarter results, however he continues to see value in its shares as it “pushes through macroeconomic headwinds and maintains positive cash flow.”

The Toronto-based Microsoft solutions provider and payments solutions provider plummeted 23.7 per cent on Tuesday after it reported revenue of $45.3-millio, below the Street’s expectation of $47.4-million due to weakness in its Cloud segment. Adjusted EBITDA of $4.4-million was also well below the consensus forecast of $6.6-million.

“Similar to peers, Quisitive is seeing sales delays [for its Cloud business], leading to lower pro services revenue and utilization. We expect operational enhancements and July cost reductions to improve efficiency,” said Mr. Sgro. “Recurring revenues continue to be a focus, which can benefit from a resurgence in pro services work. To increase market penetration, Quisitive is focused on key verticals (i.e. healthcare) and offerings (i.e. cyber and AI) to drive demand.”

“The Payments segment had a strong quarter, benefitting from third party processor volumes (revenue lift, margin headwind). We model flattish performance in H2/23 after the seasonally stronger first half of the year. Quisitive continues to invest in PayiQ commercialization and development. The company is expecting to receive Amex and Discover certification in the coming months. Significant merchant adoption/ migration is expected after the busier holiday season.”

Mr. Sgro said the company’s guidance provided him “in near-term visibility as deals cross the finish line.

“While the demand environment is less controllable, we see several areas for margin improvement,” he added. “This includes higher Cloud utilization, less Payments residual outflows, and a leaner opex profile. We have reduced our estimates however have broadly maintained margins.”

With those lower estimates, Mr. Sgro trimmed his target for Quisitive shares to $1.25 from $1.50, keeping a “buy” recommendation. The average target among analysts is $1.11.

Elsewhere, others making changes include:

* Scotia’s Divya Goyal to 70 cents from $1.10 with a “sector outperform” rating.

“Overall, we think Q2/23 was a weak quarter for the company primarily due to macroeconomic concerns, and believe management has actioned it appropriately, potentially returning the business to 15-per-cent Adj. EBTDA margins in Q3/23,” she said.

“While we believe QUIS management has taken appropriate steps to address business slowdown driven by macro, the time to PayiQ commercialization (now initiated but slower, given pending AMEX and Discover certifications currently underway) has taken longer than anticipated, resulting in lack of investor patience thus impacting the share performance.”

* Raymond James’ Stephen Boland to $1 from $1.50 with an “outperform” rating.

“While this was a slower quarter, the company has been proactive in adapting to the challenging market conditions and the guidance for 2H23 is a positive,” said Mr. Boland.

* Echelon Capital Markets’ Rob Goff to $1 from $1.25 with a “speculative buy” rating.

“Quarterly guidance lowered expectations by the year while likely leaving revised forecasts at a relatively narrow range as management expressed relatively strong visibility on Q323 and a solid backlog,” said Mr. Goff

* Canaccord Genuity’s Robert Young to $1 from $1.25 with a “buy” rating.

“All things considered, the 24-per-cent decline in QUIS shares [Tuesday] appears overdone given the intrinsic value of the payments business on a SOTP [sum-of-the-parts] basis is higher than the company’s market cap, with the Cloud business and PayiQ essentially appearing as free options at current levels with the stock trading at 4.7 times EV/2024E EBITDA vs peers at 11-12 times,” he said.

* Cormark Securities’ Gavin Fairweather to 90 cents from $1.15 with a “buy” rating.


The outlook for Good Natured Products Inc. (GDNP-X) is “still cautious” following weaker-than-anticipated second-quarter results, according to National Bank Financial analyst Ahmed Abdullah, who expects further volatility ahead.

Before the bell on Tuesday, the Vancouver-based plant-based product manufacturer reported revenue of $18.3-million, missing both the analyst’s $19.2-million estimate and the consensus forecast of $20.4-million as well as down from $25.5-million during the same period a year ago. The miss came despite a 83-per-cent year-over-year jump in revenue from its Packaging business as it Industrial segment plummeted 55 per cent due to “customer destocking, lower average selling prices, softer demand paired with elevated competitive pressure for commodity petroleum-based products, and a shift to just-in-time ordering.” Adjusted EBITDA fell to $47,000, down from $1.01-million a year ago and also below Mr. Abdullah’s $419,000 estimate and the Street’s projection of $300,000.

“GDNP still anticipates challenging operating conditions due to macro, geopolitical, and supply chain factors,” the analyst said. “It views the market for its Industrial group to be in a transitionary period as the business stabilizes towards the end of 3Q and into 4Q. GDNP aims to shift its Industrial production capacity to support its growth in Packaging. Input cost declines driven by lower transport costs will help margins but may continue to weigh on average selling prices. GDNP is still targeting a variable gross margin in the range of 28 per cent to 35 per cent and a gross margin range of 21 per cent to 28 per cent. Given the current backdrop, volatility is expected over the next two to three quarters. The focus remains on growing revenue and gross margin mix from Packaging.”

Adjusting his projections due to the quarterly miss, Mr. Abdullah cut his target for Good Natured shares to 15 cents from 20 cents, maintaining a “sector perform” rating. The average on the Street is 18 cents.


In other analyst actions:

* After Collective Mining Ltd. (CNL-X) received conditional approval to graduate to the Toronto Stock Exchange on Tuesday, PI Financial initiated coverage of the Toronto-based copper, silver, and gold exploration company, which is focused on projects in Caldas, Colombia, with a “buy” rating and $10.25 target.

* Following Tuesday’s release of an updated Feasibility Study (FS) for its flagship Rose Lithium-Tantalum project in Quebec, Canaccord Genuity’s Katie Lachapelle lowered her target for Critical Elements Lithium Corp. (CRE-X) to $4 from $5, maintaining a “speculative buy” rating, while iA Capital Markets’ Sehaj Anand trimmed his target to $4.30 from $5 also with a “speculative buy” rating. The average target on the Street is $4.56.

“Overall, we view the new FS as a positive incremental step as the Company advances Rose toward construction,” said Mr. Anand. “We believe that the market remains focused on the upcoming strategic partner and project financing package, a significant catalyst for the stock.”

* iA Capital Markets’ Neehal Upadhyaya trimmed his Plurilock Security Inc. (PLUR-X) target to 50 cents from 60 cents with a “buy” rating. The average is 55 cents.

“Gross margins [in the second quarter] passed the double-digit threshold for the third consecutive quarter and while further work remains to increase the Company’s margin profile, this is a step in the right direction,” he said. “However, the true test on margin improvement will be in Q3, which is seasonally the Company’s strongest quarter in terms of revenue as it coincides with the procurement cycle of U.S. Federal Agencies that are serviced by PLUR’s subsidiary, Aurora Systems Consulting. The sales made to the U.S. Federal Agencies are typically hardware, which already has lower margins and with contracts being extremely competitive, margins become even thinner.”

* A day after its stock hitting a 52-week high, Eight Capital’s Adhir Kave reaffirmed his “buy” rating and $3.25 target for Rivalry Corp. (RVLY-X), a Toronto-based sports betting and sports media company.

“Rivalry reported a Q2 print beating our Handle estimate while Revenue and Gross Profit were largely in-line,” he said. “Rivalry continues to successfully deploy its differentiated user acquisition strategy, which is leading to strong unit economics including 44-per-cent year-over-year growth in customers acquired whilst spending 41 per cent less on customer acquisition and increasing average Handle/customer by 60 per cent. The strong unit economics and initiatives such as growing sports book volume and a margin-enhancing productroadmap all bode well for the company’s path toprofitability, which is now expected in H1/F24. With the seasonally stronger H2 periodproviding upside opportunities to our estimates and the clear path to profitability, we continue to believe that Rivalry’s shares remain undervalued and see a strong setup for the balance of the year and into F24.”

* Canaccord Genuity’s Doug Taylor cut his Think Research Corp. (THNK-X) target to 75 cents from 80 cents with a “speculative buy” rating, while Echelon Capital Markets’ Rob Goff lowered his target to 80 cents from $1.10 also with a “speculative buy” recommendation. The average target is 83 cents.

“While we are encouraged with another record quarter from Think and the broader trajectory pointing up, we are mindful of the moderate near-term headwinds around the breached debt covenant and softness across the Company’s Clinical Research/Services segments,” said Mr. Goff. “Unfortunately, that softness, particularly at Clinic360 (a non-core asset), has coincided with a challenged healthcare clinic environment (though less so on the private pay side, comprising most of the segment’s revenues) where it would likely be difficult for Think to realize fair value for the asset at a time when it could use the liquidity to pay down debt. With the Company’s contract research organization (CRO) BioPharma, the asset has underperformed since its announced acquisition in July 2021. Recall that Think paid $44.6-million for BioPharma (excluding earnouts) at a 1.0 times 2022 revenue multiple (i.e., the Company expected 2022 revenues of $45-million for the CRO). Two-plus years later, BioPharma is still searching for its first $40.0-million revenue year (we are now forecasting $37.9-million for 2024), well short of 2021 expectations. Additionally, the thesis around its acquisition was to digitize the asset and improve efficiencies, but it’s hard to see evidence that its then 10-per-cent EBITDA margins have meaningfully improved under Think (segmented margins are not provided). In any event, the Company’s bread-and-butter SaaS offerings continue seeing strong demand from enterprises (both government and large private organizations) and given the Company’s commentary on its call, we would anticipate near-term material announcements to come over the remaining four months of 2023.”

* RBC Dominion Securities’ Nelson Ng raised his TransAlta Renewables Inc. (RNW-T) target to $13.35 from $12, keeping a “sector perform” recommendation. The average is $12.99.

“We believe the market generally expected TransAlta Corporation (TA) and TransAlta Renewables (RNW) to be reunited eventually, as they understood that the converging renewable energy strategies, complex structure, and RNW’s near-term cash tax and cash flow headwinds no longer supported having two separate entities,” said Mr. Ng. “We believe the proposed transaction is favourable for RNW shareholders because the company was facing dividend sustainability pressures that may result in a material dividend reduction within the next two years. We are increasing our RNW PT to $13.35 to reflect proposed transaction (mix of cash and TA shares).”

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