Inside the Market’s roundup of some of today’s key analyst actions
While he “aggressively” reduced his financial forecast for Bank of Montreal (BMO-T) following weaker-than-expected first-quarter report, RBC Dominion Securities analyst Darko Mihelic cautioned he does not think the results are “actually indicative of BMO’s revenue runrate and therefore its pre-provision pre-tax earnings growth potential.”
“Earnings results that are this low relative to expectations are not common and revenues contained many items that seemed idiosyncratic in nature,” he said. “Losses in the ever-opaque Corporate segment were significant and items that we thought would be manageable (e.g., IFRS 17, change in dividend taxation) just added to the weakness. We think a lot of things went wrong all at once for BMO this quarter (some of which we perhaps should have anticipated and some of which perhaps should have been telegraphed better by the company). We model a rebound in earnings power; nonetheless, our estimates have materially declined.”
BMO shares dropped 3.6 per cent on Tuesday after it reported adjusted earnings per share of $2.56, well below Mr. Mihelic’s $3.07 forecast as each of its business segments logged lower-than-anticipated results. That included a 74-per-cent drop in Corporate earnings from the fourth quarter of 2023 and drops of 5 per cent for U.S. P&C and 14 per cent for Capital Markets.
“Our model updates result in a sizable decline in our core EPS estimates (down $1.07 for 2024 and $0.47 for 2025), reflecting negative earnings revisions in almost all segments (mostly Corporate and U.S. P&C),” said the analyst. “We expect more net interest margin (NIM) compression and higher impaired provisions for credit losses (PCLs) in U.S. P&C than we did before. We now assume larger Corporate losses than before to reflect headwinds to both revenues and PCLs.”
Maintaining his “outperform” recommendation for BMO shares, Mr. Mihelic reduced his target to $130 from $134. The average target on the Street is $136.10, according to LSEG data.
Elsewhere, calling it “a glass half full quarter,” National Bank’s Gabriel Dechaine cut his target to $137 from $141 with an “outperform” rating.
“Despite an expectation of a soft start to the year, BMO still managed to report an underwhelming quarter,” said Mr. Dechaine. “The most glaring misses were in the Corporate segment, where negative adjusted revenues of $271-million were weighed down by hedging losses, lower securities gains and lower (BoW) purchase accounting gains. The latter element is expected to be lower by $250-$300-million in 2024 compared to 2023. Separately, the Capital Markets business had a difficult quarter, with revenue down 6 per cent year-over-year and PTPP down 20 per cent. The bank has guided to Q1/24 being the low water mark for revenues on the year. Considering the nature of this quarter’s revenue weakness (e.g., accounting noise, marketrelated), we are optimistic a turnaround can be delivered.”
Other analysts making target adjustments include:
* Scotia’s Meny Grauman to $141 from $145 with a “sector outperform” rating.
“A better-than-expected capital position (including the elimination of its discounted DRIP) does not change the fact that BMO delivered a very disappointing result to kick off F2024,” said Mr. Grauman. “What makes this result even harder to swallow is the fact that consensus EPS expectations for the bank came down 3 per cent since last earnings season. And yet the bank not only failed to step over this low bar, but actually missed by 15 per cent. In our view that miss overstates the weakness we saw in the quarter, but even if we normalize for an unusually weak capital markets earnings, corporate segment revenues, and elevated performing PCLs we still get an earnings run-rate that is about 5 per cent below our prior expectations. The silver lining is that Management is on the record as believing that Q1 will stand as “low point” for total revenue and “high point” for expenses this year, and is also guiding to positive operating leverage both for Q2 and the year as a whole. The market will likely take a wait-and-see approach to these encouraging predications, but given the substantial expense synergies that BMO has already realized coupled with our more constructive macro outlook as we head into F2025, we view today’s sell-off as a buying opportunity.”
* Desjardins Securities’ Doug Young to $133 from $135 with a “buy” rating.
“Cash EPS and adjusted pre-tax, pre-provision (PTPP) earnings missed due to noise across various divisions, corporate in particular,” said Mr. Young. “There is no way to sugarcoat this—it was a disappointing quarter. That said, management stated that 1Q FY24 should be the low point for results in FY24. We lowered our estimates and reduced our target ... We maintain our Buy rating but acknowledge that the stock might be in the penalty box for a quarter.”
* Canaccord Genuity’s Matthew Lee to $136 from $137 with a “buy” rating.
“Despite a soft print, we found the firm’s guidance constructive suggesting progressively improving capital markets results, underlying growth in wealth management, and positive operating leverage for the remainder of the year. In addition, we expect BMO’s performing PCLs in the quarter to pave the way for a lower ratio in the second half of the year. Along with its results, BMO removed its discount DRIP, which was a quarter ahead of our expectation. While our estimates are reduced post Q1, we believe that the firm will benefit from several EPS tailwinds over the near to medium term that justify its premium valuation. We maintain our BUY rating but reduce our target,” said Mr. Lee.
* TD Securities’ Mario Mendonca to $135 from $140 with a “buy” rating.
* CIBC’s Paul Holden to $125 from $126 with a “neutral” rating.
* Jefferies’ John Aiken to $136 from $144 with a “buy” rating.
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Bank of Nova Scotia (BNS-T) delivered “a good quarter against lowered expectations,” according to National Bank Financial’s Gabriel Dechaine.
He was one of several equity analysts on the Street to raise their targets for Scotiabank after Tuesday’s release of better-than-anticipated first-quarter results that led investors to push up its shares by 3.2 per cent. Adjusted to exclude certain items, Scotiabank earned $1.69 a share, beating the $1.61 expected by the Street, according to Refinitiv.
“BNS’ Canadian segment delivered impressive 10-per-cent PTPP growth, on the back of 30 basis points of year-over-year NIM expansion and positive operating leverage of 4 per cent,” said Mr. Dechaine. “The bank’s margin performance continues to benefit from a shrinking mortgage book (i.e., down 5 per cent year-over-year), which is not a permanent feature of the bank’s market strategy. We recall comments during BNS’ Investor Day, indicating that it plans on resuming mortgage book growth over the course of fiscal 2024, which may dampen the bank’s NIM momentum (which was embedded in the bank’s outlook for flatter NIM performance).”
“The IB [International] segment also posted a strong quarter, with PTPP growth of 22 per cent, earnings growth of 16 per cent, 19 basis points quarter-over-quarter NIM expansion, and 6-per-cent operating leverage. This performance was delivered despite tepid loan growth (i.e., down 1 per cent quarter-over-quarter) and a 40 per cent-plus year-over-year rise in loan losses. An unexpected boost came from the bank’s wholesale operations in LatAm (i.e., GBM LatAm), which reported a record quarter, with $372-million of earnings (80 per cent of segment earnings growth) that outstripped BNS’ guidance range of $275-300-million per quarter from the business. Although we don’t expect to see another quarter like this one, we believe its profitability won’t be as weak as anticipated considering plans to reduce capital allocation to it.”
Like his peers, Mr. Dechaine expressed caution about Scotia’s higher credit losses. Canadian business loan losses of $962-million topped his forecast, “due mainly to higher impaired provisions in Canada (up 28 per cent Q/Q) and IB (up 14 per cent).”
“In the domestic business, formations were evident in both retail (up 9 percent quarter-over-quarter) and commercial (nmf, a single large account) books, whereas IB formations were more retail-driven,” he added. “Guidance implies another uptick in formations/losses during Q2/24, with moderation thereafter.”
Pointing to the assumed elimination of its DRIP discount by Q4/24 and a higher NIM base, Mr. Dechaine increased his forecast for the bank, prompting him to bump his target to $67 from $66 with a “sector perform” rating. The average on the Street is $66.94.
Elsewhere, other changes include:
* RBC’s Darko Mihelic to $64 from $62 with a “sector perform” rating.
“BNS had a good quarter with an adjusted EPS of $1.69 (8 cents higher than we expected),” said Mr. Mihelic. “There were strong results in International Banking, with strength in GBM Latam operations which we do not view as sustainable. Impaired PCLs increased as did delinquency rates, but we still view these increases as modest. Capital remains solid and BNS will revisit its DRIP in June when OSFI makes the next DSB announcement — we assume the DRIP will be turned off in Q3/24. We still think 2024 is (another) transitional year but off to a good start.”
* Desjardins Securities’ Doug Young to $68 from $64 with a “hold” rating.
“Overall, it was a good quarter, with some encouraging trends in both Canadian and international banking,” said Mr. Young.
* Canaccord Genuity’s Matthew Lee to $67.50 from $65 with a “hold” rating.
“BNS delivered a solid quarter featuring NIM strength driven by both sides of the balance sheet. PCLs, while slightly above consensus, were also within guidance and do not raise any concerns for us at this juncture. Our key takeaway from the quarter was the firm’s EPS guidance for the year, with management reiterating its expectation for marginal growth despite strong Q1 metrics. We were impressed in the quarter by BNS’ improving deposit mix, which both contributes to NIM and provides capital to spur loan growth. Looking forward, we expect Scotia to maintain Q1 NIM levels, see modestly increasing PCLs, and perhaps deliver slightly higher NIX growth than experienced this quarter. In the back half of the year, we expect to see loan growth return, accelerating in F25,” said Mr. Lee.
* TD Securities’ Mario Mendonca to $65 from $64 with a “hold” rating
* BMO’s Sohrab Movahedi to $69 from $66 with a “market perform” rating.
* CIBC’s Paul Holden to $66 from $63 with a “neutral” rating.
* Jefferies’ John Aiken to $66 from $63 with a “hold” rating.
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Touting its “significant” sales momentum, “profitability inflection point” and discounted valuation, Stifel analyst Martin Landry initiated coverage of Kits Eyecare Ltd. (KITS-T) with a “buy” recommendation.
“KITS is a small but rapidly growing online retailer of contact lenses and glasses,” he said. “KITS aims to disrupt the eyewear industry and accelerate the shift online by offering deep value products, often at prices that are up to 10 times lower than the U.S. national average. The company’s vertically integrated operations translate into a low-cost structure enabling a rapid turnaround and a low price offering.”
Mr. Landry said the Vancouver-based company had an “impressive” last 12 months, seeing revenues jump 34 per cent year-over-year “while expanding gross profit margin, which translated into positive EBITDA for each of the last four quarters.”
“The company has gained market share as the online eyewear industry has grown at a rate of 3-5 per cent during the same period according to Euromonitor,” he added. “KITS benefitted from a richer product mix, developed an extensive offering of prescription glasses, and benefitted from a high proportion of repeat customers. We believe this momentum will carry into 2024.”
“Following a period of investment in infrastructure and talent in 2021 and 2022, KITS has generated positive adjusted EBITDA for the last four consecutive quarters. While profitability is marginal currently, margin expansion should continue, driven by a higher number of repeat customers, which should reduce marketing spending combined with improved fixed cost absorption from higher sales levels. The combination of margin expansion and rapid sales growth is an appealing proposition for investors, in our view.”
While he cautioned that growth is likely to slow, Mr. Landry emphasized he sees Kits as “a rapidly growing company,” despite competing against larger and better capitalized companies.
“KITS’ shares trade at a valuation of 1.2 times on our 2025 sales estimates, a 17-per-cent discount to peers,” he added. “While KITS’ valuation needs to be handicapped to account for the low liquidity of its shares and its small size, the company’s recent growth outpaces peers by approximately 3 times. In our view, as management continues to execute and gain market share, we could see the company’s valuation expand.”
He set a target of $8 per share. The current average is $8.50.
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Despite notable industry pressures, National Bank analyst Vishal Shreedhar predicts Lassonde Industries Inc. (LAS.A-T) will exhibit growth when it delivers its fourth-quarter 2023 financial results on March 22.
“We expect juice industry demand to remain pressured amid elevated inflation and increasing consumer price sensitivity,” he said. “We, however, model higher LAS sales, reflecting pricing, benefits from diversification/innovation and the lapping of challenged volumes last year.
“We model continued gross margin expansion year-over-year despite rising orange juice concentrate (OJC) costs. Our blended index of select input costs, which is coarsely inversely correlated to the gross margin, continued to decline year-over-year in Q4/23.”
For the quarter, Mr. Shreedhar is projecting sales of $617-million, up from $556-million during the same period a year ago and above the consensus projection of $589-million. He estimates adjusted earnings per share of $3.39, rising from $2.09 in fiscal 2022 and 5 cents above the Street’s view. He said that 62-per-cent year-over-year growth “reflects continued improvement in the U.S. (Project Eagle), and good performance in Canada, partly offset by higher costs.”
“We model 2024 EPS of $15.26 (cons. is $15.44), 13.7 per cent higher year-over-year,” Mr. Shreedhar added. ”We expect volume benefits from, among others: (i) a new aseptic single-serve line in North Carolina, (ii) 2 new aseptic high-speed juice box lines in Rougemont, (iii) the filler installed in New Jersey (July 2023), and (iv) contract wins in the U.S. (3) We expect gross margin expansion due, in part, to multiple efficiency initiatives (integrated supply and demand planning system, etc.), and improved fixed cost absorption due to higher volumes. We believe LAS has plans in place to mitigate higher OJC costs, including pricing/adjusting product formulations.”
Reiterating an “outperform” recommendation for the Rougemont, Que.-based company’s shares, Mr. Shreedhar increased his target to $173, exceeding the $161.50 average, from $167.
“Though there remains near term uncertainty surrounding consumer health, cost inflation, and operational performance, we maintain a positive view given favourable valuation and expectations of improving performance (pricing, Project Eagle, etc.),” he concluded.
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Calling it “an overlooked, deep value name with limited institutional interest,” CIBC’s Nik Priebe upgraded AGF Management Ltd. (AGF.B-T) to “outperformer” from “neutral” on Wednesday.
“We consider AGF to be a deep value name trading below 2x EV/EBITDA with: 1) an asset management business that is outperforming peers; 2) very strong earnings quality; 3) negligible net debt, and; 4) a healthy dividend supported by a comfortable payout ratio,” he said. “We don’t believe there are any valid sources of pushback that could reasonably explain the severity of the valuation discount to peers. We have always been cognizant of the deep value characteristics of the stock but have been unclear on what catalyst could emerge to inspire a positive re-rating. In our view, the persistence of a risk-on market environment and reversal in the pattern of asset flows (i.e., a reallocation away from cash products and back into risk assets) could be an important catalyst in 2024.”
Mr. Priebe raised his target for AGF shares to $11 from $9. The average target on the Street is $9.29.
“Small-cap names with constrained liquidity profiles can often get overlooked by institutional investors and become mispriced in the public markets,” he added. We believe this may be the case for AGF. Our rough back-of-the-envelope math illustrates how AGF’s share price implies that the asset management business is being valued at an extraordinarily low multiple of 1.6 times EV/EBITDA. We have always been cognizant of the deep value characteristics of the stock, but have been unclear on what catalyst may emerge to inspire a positive re-rating. With markets veering back into risk-on mode and the trajectory of industry fund sales starting to improve, we believe that a market-driven catalyst may be on the horizon.”
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In other analyst actions:
* TD Securities’ Graham Ryding upgraded Timbercreek Financial Corp. (TF-T) to “buy” from “hold” and raised his target to $8.50 from $7, while National Bank’s Jaeme Gloyn increased his target to $7.50 from $7 with a “sector perform” recommendation. The average is $8.06.
“Although Q4-23 results were largely in line, we view recent developments on the impaired loan portfolio, a more optimistic growth outlook, and a special dividend of $0.0575 per share as key to building positive investor sentiment,” said Mr. Gloyn. “Notably, impaired loans (i.e., Stage 2, Stage 3, and “real estate inventory”) decreased to $202 million at Q4-23, or 21 per cent of mortgage investments plus real estate inventory. This is down from 34 per cent last quarter primarily as loans tied to Groupe Huot of $146 million returned to Stage 1 (and were then sold in Q1-24). Management remains confident of full recovery on nearly all impaired loans, which demonstrates the strength of underwriting. Management presented an optimistic growth outlook given an aging downcycle in commercial real estate markets, rent inflation, and lower interest rates. TF boasts $350-million of capacity on its renewed credit facility. The payout ratio on distributable income was a healthy 89 per cent in 2023 (incl. the special). Overall, the outlook bodes well for investors stepping in today at 90 per cent of book value.”
* Deutsche Bank’s Hillary Cacanando downgraded Chorus Aviation Inc. (CHR-T) to “hold” from “buy” with a $2.50 target, down from $3.15 and below the $3.21 average.
* National Bank’s Matt Kornack bumped his target for BTB REIT (BTB.UN-T) to $3.15 from $3 with a “sector perform” rating. The average is $3.35.
“Q4 figures came in better than expected both financially and operationally which resulted in NOI above forecast as the leasing environment improved (particularly for necessity-based retail) and SL rent was converted to cash quicker than anticipated (seasonality in margins also at play),” said Mr. Kornack. “The industrial portfolio remains strong for BTB (that said, there are limited maturities in FY24 as more space matures in FY25 onward); meanwhile the REIT highlighted better retail fundamentals which is translating to increased asking rents and tenant quality. Office remains weaker relative to the rest of the portfolio (despite some marginal positives on the leasing front) as management continues contemplating the selective disposition of assets in this portfolio. Notwithstanding encouraging operational performance, elevated leverage and near-term mortgage refinancing will continue to be an earnings headwind.”
* CIBC’s Paul Holden raised his Element Fleet Management Corp. (EFN-T) target to $25 from $24 with an “outperformer” rating. Other changes include: Raymond James’ Stephen Boland to $29 from $26 with a “strong buy” rating and Scotia’s Phil Hardie to $26 from $25 with a “sector perform” rating. The average is $26.67.
“Element capped off a record 2023 with solid Q4 results that came in line with street expectations, but a touch shy of our forecasts,” said Mr. Hardie. “Key highlights included: 1) management reaffirming 2024 guidance, 2) an announcement that the company will report financial results in US$ starting in 2024, and 3) a stronger-than-expected top line. A bit of a negative surprise was an almost 30 basis point sequential compression in net financial margins. That said, we had modelled a compression in both the gross and net margins through 2024 and into 2025, with the Q4/23 step down generally reflecting our expected run-rate for the first part of the year, and as a result not having a material impact on our estimates or outlook.
“Overall, a solid quarter that likely demonstrated solid execution, continued operational momentum, and progress against recently announced strategic initiatives.”
* CIBC’s John Zamparo moved his target for Jamieson Wellness Inc. (JWEL-T) to $32 from $27, keeping a “neutral” rating. The average is $38.61.
* National Bank’s Don DeMarco bumped his Lundin Gold Inc. (LUG-T) to $20 from $19 with a “sector perform” rating. The average is $20.62
* RBC’s Matthew McKellar increased his target for Vancouver-based Mercer International Inc. (MERC-Q) to US$10 from US$9, keeping a “sector perform” rating. The average is US$9.25.
“Mercer reported Q423 EBITDA of $21.1-million, trailing our forecast of $36.8-million and Bloomberg consensus of $26.4-million,” said Mr. McKellar. “While 2024 should be a better year for Mercer and bring growing contribution from its mass timber business, we still think the near-term fundamental backdrop is likely to be somewhat challenging until pulp prices gain momentum and European wood products demand improves.”
* Evercore ISI’s David Palmer raised his Restaurant Brands International Inc. (QSR-N, QSR-T) target to US$93 from US$88 with a “buy” rating. The average is US$84.66.
* CIBC’s Jamie Kubik bumped his Secure Energy Services Inc. (SES-T) target to $11 from $10.50 with a “neutral” rating. The average is $12.64.
* BMO’s Michael Markidis raised his SmartCentres REIT (SRU.UN-T) target to $24.50 from $24 with a “market perform” rating. The average is $26.16.
* Following the release of its fourth-quarter results after the bell on Tuesday, Scotia’s Ovais Habib dropped his SSR Mining Inc. (SSRM-T) target to $6 from $12 with a “sector perform” rating. The average is $9.84.
“We view the results as negative for SSRM shares as the company’s retraction of guidance from its Turkish assets points to a potentially prolonged shutdown at Çöpler with a high degree of uncertainty surrounding SSRM’s broader social license to operate in the country. As the company works to maintain its near-term liquidity, we continue to expect heightened volatility in the stock until a possible pathway to resuming operations at Çöpler can be determined. As SSRM has removed Çöpler and Hod Maden from its short- and long-term guidance, we have followed suit and removed these assets from our DCF, switching to an in-situ value for each asset.”
David Leeder