Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Darko Mihelic remains “unsure” about Bank of Nova Scotia’s (BNS-T) earnings power for 2024 after its guidance was “a little disappointing,” leading him to place added importance on its Dec. 13 Investor Day event for signs of optimism.
“For us, it seems like a high capital cost of corporate lending suggests that capital for the Global Banking and Markets segment may be more restricted and as such, lower earnings should be expected there, even after a rebound in capital markets activities occurs,” he said in a research report released Wednesday.
“Beyond this simple observation, we still would like to see and better understand what the longer-term strategy/earnings power of International Banking and the Canadian Banking segments looks like. We also have some reservations about its capital level. We are not so much concerned that there is a negative hit to capital in Q1/24 – after all, many banks will have negative hits but are likely to build capital right back up again. We are just a little more surprised that BNS believes a 12.5-per-cent ratio is the right level even in the event that the Canadian regulator pushes the minimum capital level up to 12.0 per cent. Perhaps this is the correct level when things are ‘good,” but we suspect other banks may operate at higher capital levels and in times of uncertainty, all else equal, the higher capital ratio is usually rewarded.”
On Tuesday, Scotia shares dropped 4.45 per cent following the premarket release of its fourth-quarter results, kicking off an earnings season for Canadian banks that is expected to display a sector-wide profit decline.
The bank reported adjusted earnings per share of $1.26, well below both Mr. Mihelic’s $1.64 estimate and the consensus estimate on the Street of $1.65. The miss was due to higher-than-expected provisions for credit losses (a 24-cent negative impact versus his projection) and weaker-than-anticipated revenue (20 cents), offsetting lower taxes (a 17-cent gain).
“In 2024, BNS expects “marginal growth” in core EPS, which still leaves us questioning its underlying earnings power,” he said. “We anticipate that the investor day on December 13 will shed more light on BNS’s strategy. All segments missed our expectations though there was a lot of noise.”
“We have long suggested that BNS looked relatively ‘light’ when it came to loan loss allowances. From our perspective, this quarter might be the start of a more conservative view on reserving and we think that might be positive as it has been our experience that investors have rewarded management teams that erred on the conservative side of reserving. So we are not too fussed that a large conservative performing loan loss reserve was built – almost the exact opposite (we hope these reserves will not truly be necessary…).”
The release led Mr. Mihelic to make “significant” changes to his model with reductions to his core earnings per share estimates for 2024 and 2025 to $6.69 and $7.50, respectively, from $7.37 and $7.86.
“Changes to our model reflect Q4/23 actual results and weaker expectations for loan growth, impaired PCLs, and expenses, partially offset by an increase in net interest margin assumptions,” he said. “We also expect more shares to be issued from the discounted DRIP than we did before, which has a small negative impact on our EPS estimates.”
Maintaining a “sector perform” recommendation for Scotia shares, he dropped his target to $62 from $68. The average target on the Street is $62.16, according to Refinitiv data.
Elsewhere, other analysts making target adjustments include:
* Desjardins Securities’ Doug Young to $62 from $64 with a “hold” rating.
“Cash EPS and adjusted pre-tax, pre-provision (PTPP) earnings fell short of our expectations and consensus,” said Mr. Young. “The performing loan provision build in Canada was a surprise. A ‘kitchen sink’ quarter? Possibly. But it’s more of a 2H FY24 story. The focus now turns to the investor day on December 13.”
* National Bank’s Gabriel Dechaine to $60 from $65 with a “sector perform” rating.
“BNS’ outlook statement guides to ‘marginal’ earnings growth in 2024,” he said. “From a timing standpoint, the bank expects H1/24 profits to improve from Q4/23 levels (which was the low water mark for the year), with additional improvement during H2/24, in part due to expectations of rate cuts by Central Banks. There are a few noteworthy implications from this guidance. For starters, if we consider shares issued under BNS’ DRIP program, EPS growth could be pretty flat (or, at least, less than marginal growth). Separately, the bank’s dividend payout ratio will likely remain above 60 per cent for an extended period. Management stated that it could take ‘a couple of years’ before the payout ratio returns to its 40-50-per-cent targeted range. Accordingly, dividend increases could be nonexistent (or ‘marginal’) during that timeframe.”
* BoA Securities’ Ebrahim Poonawala to $60 from $68 with a “neutral” rating.
“Bank of Nova Scotia’s stock underperformance on worse than expected 4Q23 results is not surprising with pre-tax pre-provision (PTPP) and credit costs (PCLs) missing consensus forecasts by 10 per cent/40 per cent,” he said. “The margin expansion was the silver lining in an otherwise weak quarter. While management guided for an improvement in PTPP and lower PCLs during 1H24 vs. 4Q23, we believe that the Street is likely to remain skeptical on the core EPS power of this franchise. We revise our FY24 estimated EPS to $6.50 from $6.83 which reflects continuation of the DRIP through YE24, expense growth of 2 per cent year-over-year and an average NIM of 1.50 per cent. We lower our PO to $60 from $68, 1 times year-end 2024 estimated book value and 9.2 times 2024 P/E. We reiterate our Neutral rating as we see the challenges growth/ROE outlooks adequately reflected in stock valuation.”
* CIBC’s Paul Holden to $58 from $62 with a “neutral” rating.
“BNS reported a bad set of results and the stock is now trading at roughly 1.0 times P/BV with a 7.4-per-cent dividend yield. Is now the time to be opportunistic and buy? It feels to us like that is jumping the gun. We want to know what long-term strategy investors will be backing. We also want to have a better handle on where capital requirements are heading and still see potential for negative credit surprises in F2024,” said Mr. Holden.
* BMO’s Sohrab Movahedi to $68 from $74 with a “market perform” rating.
* TD Securities’ Mario Mendonca to $56 from $59 with a “hold” rating.
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Capital Power Corp. (CPX-T) is “joining the exclusive top 5 Gas IPP club” with a pair of transformative deals, according to National Bank Financial analyst Patrick Kenny.
He resumed coverage of the Edmonton-based independent power producer on Wednesday following the close of its $400-million equity financing. The proceeds will be used to assist in the funding of a pair of significant deals, announced Nov. 20, with CSG Investments, Inc., a subsidiary of Beal Financial Corp., to buy two U.S. natural gas power plants for US$1.1-billion.
Capital Power will acquire CXA La Paloma, which owns the La Paloma natural gas-fired generation facility in Kern County, Calif. It will also form a 50-50 partnership with an affiliate of a fund managed by BlackRock’s Diversified Infrastructure business to buy New Harquahala Generation Co. LLC, which owns the Harquahala natural gas-fired generation facility in Maricopa County, Ariz.
“On the strategic front, the announcement furthers CPX’s blueprint of acquiring mid-life natural gas fired assets with strong financial profiles in attractive markets well positioned for recontracting,” the analyst said.
After the deals close, which is expected in the first quarter of 2024, Mr. Kenny said Capital Power will become the fifth-largest natural gas IPP in the North America based a new unregulated capacity.
“The acquisitions add another 1,608 mega watts of net capacity to CPX’s U.S. WECC portfolio, boosting run-rate U.S. EBITDA to 40 per cent of total contributions (from less than 25 per cent), while diluting Alberta merchant exposure to less than 35 per cent (from 45 per cent),” the analyst said. “Of note, La Paloma is underpinned by resource adequacy (RA) contracts through 2029 and stands to benefit from increasing demand for reliable, dispatchable gas-fired capacity to offset the rise of intermittent renewables (inside, we highlight California’s net qualifying capacity shortfall expanding from 1,000 MW in 2023 to 11,500 MW by 2026e). Meanwhile Harquahala is 100-per-cent contracted through 2031 with contract extension upside given Arizona’s population growth.”
Given his expectation for an increase in average annual EBITDA of $265-million through 2026 from the deal, Mr. Kenny sees 8-per-cent long-term accretion, seeing an “attractive” transaction multiple. That led him to raise his 2024 adjusted funds from operations per share estimate to $7.95 from $7.57.
Reiterating an “outperform” recommendation for Capital Power shares, Mr. Kenny raised his target to $48 from $47. The average is $44.88.
“Combined with both natural gas-fired facilities well positioned to benefit from rising market demand for reliable, dispatchable generation, we reiterate our Outperform rating alongside a 37.4-per-cent total return opportunity,” he said.
Elsewhere, others making target changes include:
* Desjardins Securities’ Brent Stadler to $53 from $52 with a “buy” rating.
“The acquisition is highly accretive to AFFO/share on average through 2028,” said Mr. Stadler. “The transaction is in line with CPX’s balanced transition strategy, which includes acquiring and optimizing strategically located, midlife gas assets with the potential to innovate to decarbonize and optionality to develop renewables.”
“In our view, CPX offers investors deep value. It offers near-term exposure to a strong Alberta power market and the hot renewables market, but also provides a unique re-rate angle as it works to remove coal and decarbonize assets through efficient repowers (1H24). Longer-term, we believe another re-rate is possible as CPX cleans up its strategically located natural gas assets through a hydrogen/carbon capture, utilization and storage solution.”
* Raymond James’ David Quezada to $46 from $45 with a “market perform” rating.
“We believe this acquisition ticks all the key boxes for CPX providing solid financial accretion, strategic upside, diversification, and scale in markets with attractive demand trends. Accordingly, we are increasing our price target,” he said.
“While today’s higher cost of funding clearly implies in lower valuations for contracted energy infrastructure assets, we believe the price paid for this acquisition is attractive, and likely also reflects CPX’s ability to close on such a transaction. We also believe these large scale generating assets fit nicely with the profile of past acquisitions where CPX has shown an ability to optimize and re-contract, providing longer term upside. La Paloma and Harquahala have an 8 year remaining PPA term with La Paloma partially contracted through a various resource adequacy contracts.”
* BMO’s Ben Pham to $40 from $42 with a “market perform” rating.
“While the US$1.1-billion acquisition of two U.S. natural gas power plants (net 1.6GW) is expected to be highly accretive to FCF, the public markets may not yet fully appreciate the intrinsic value of mid-life natural gas power assets with shorter-dated contracts,” said Mr. Pham. “As such, we believe that acquiring for value could pressure CPX’s consolidated market multiple driving our Market Perform rating.”
* CIBC’s Mark Jarvi to $43 from $41 with a “neutral” rating.
“We see mixed impacts from the acquisition of two large gas plants in the U.S.: AFFOPS accretion and diversification are positives but the deal does not improve CPX’s contractedness. It’s also a sizable deal at a time when CPX’s cost capital is elevated and the low asset purchase price brings into question the argument for a higher trading multiple for CPX,” said Mr. Jarvi.
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Citi analyst Itay Michaeli is “encouraged” by Magna International Inc.’s (MGA-N, MG-T) recent execution, however he sees “a balanced risk/reward” proposition for investors, believing its “2023-25 margin bridge to be somewhat more vulnerable versus peers.”
“We’d also like to see signs of improving FCF generation after this year’s increased capex spend,” he added.
In a note released Wednesday, he raised his 2024 earnings per share projection for the Aurora, Ont.-based auto parts manufacturer to US$5.56 from US$5.29 in response to its “strong” third-quarter results and company guidance.
That led him to increase his target for Magna shares to US$60 from US$58, keeping a “neutral” recommendation. The average target on the Street is US$67.83.
“While we are fundamentally constructive on the story based on the company’s strong positioning and relative defensiveness, we view risk/reward to be balanced,” said Mr. Michaeli.
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National Bank Financial analyst Shane Nagle thinks a restart of First Quantum Minerals Ltd.’s (FM-T) Cobre Panama mine is “unlikely” prior to national elections in May of 2024.
On Tuesday, Panama’s Supreme Court ruled the Vancouver-based copper miner’s contract is unconstitutional and its president ordered the imminent closing of the mine, leading the analyst to remove near-term production from its base case estimates.
“We have updated our model to reflect no production from Cobre-Panama through to the end of [the first half of 2024,” said Mr. Kenny. “Cobre-Panama now accounts for US$9.2-billion in NAV [net asset value] (10 per cent) or 49 per cent of the company’s project NAV (NBF Estimates). We see 2024 estimated EBITDA decreasing to US$2.3-billion (approximately 30-per-cent decrease to our previous estimate of US$3.2-billlion) and ND/EBITDA would peak close to 3.5 times (from 2.1 times as of Q3/23).”
Maintaining his “sector perform” recommendation for First Quantum shares, Mr. Kenny dropped his target to $18 from $36. The average is $24.52.
“Following the Supreme Court ruling amidst recent protests, it has become clear that full value being ascribed to the asset is not appropriate at this time. In addition to the delayed restart, we have reduced our target multiple to 0.90 times NAV (50 per cent) + 6.0 times EV/2024 CF (50 per cent) (was 1.25 times P/NAV (50 per cent) and 8.0 times EV/2024 CF (50 per cent) given uncertainty around future operation of the mine and need to negotiate a new contract with newly elected Government following next May’s elections,” he said. “FM currently trades at 0.48 times NAV compared to NBF peers at 0.84 times and 5.7 times EV/2024 estimated CF compared with industry-leading copper producers closer to 8.3 times.”
Elsewhere, CIBC’s Bryce Adams lowered his target to $20 from $24.50 with a “neutral” rating.
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Desjardins Securities analyst Chris MacCulloch expects the market to “adopt a more cautious view” on Spartan Delta Corp.’s (SDE-T) first foray into the West Shale Basin Duvernay formation, citing “its chequered history of industry result.”
After the bell on Tuesday, the Calgary-based company announced the completion of a series of asset acquisitions in the area for approximately $25-million. It came alongside the release of Spartan’s preliminary 2024 guidance and announcement CFO Geri Greenall plans to step down at year-end.
Mr. MacCulloch emphasized Spartan will “attempt to replicate previous success in the oil window of the Montney, which ultimately resulted in the return of $9.50 per share of capital earlier this year.”
“In aggregate, the acquisitions include 400 boe/d [barrels of oil equivalent per day] of production and 130,000 net acres of land in the volatile oil, condensate and liquids-rich gas window of the Duvernay, which is internally viewed as geologically similar to the Kaybob Duvernay and East Shale Basin Duvernay,” said the analyst in a report titled Duver-’nay’ or Duver-’yay’?. “Details on development plans remain limited as SDE pursues further consolidation in the area, which it views as fragmented, undercapitalized and ripe for consolidation. However, the company plans to provide additional colour on long-term development plans in the new year, potentially coinciding with further M&A activity.”
“There were no surprises from the preliminary 2024 capital budget in our view, with total Deep Basin capex of $130-million broadly aligning with our forecast of $125-million, although we have also incorporated an additional $20-million to account for initial development of the Duvernay. Meanwhile, production is expected to range from 38,500–40,500 boe/d (69-per-cent natural gas), the mid-point of which matched our expectations (after accounting for the Duvernay acquisitions). Plans to add a second rig to accelerate development of the Cardium, Spirit River and other oil-weighted plays are expected to improve capital efficiencies by 20 per cent.”
Maintaining a “buy” recommendation for Spartan Delta shares, Mr. MacCulloch lowered his target to $5.50 from $6. The average on the Street is $5.90.
Elsewhere, Scotia Capital’s Cameron Bean trimmed his target to $6.50 from $7 with a “sector outperform” rating.
“SDE’s 2024 guidance came with puts and takes,” he said. “Both production guidance and capex were slightly better than expected; however the company expects opex to come in approximately 16 per cent higher than us and the Street were forecasting. As a result, cash flow guidance is 6 per cent lower than expected. SDE unveiled more details on its entry into the West Shale Duvenay, with another deal(s) adding considerable acreage to boost the company’s position to more than 200 net sections. While the 2023 guide does not have Duvenay capex at this point, we have added a handful of wells to our 2024 to 2026 forecasts and NAV estimate. While the play is at an early stage, offsetting operators have shown promising results and enthusiasm for its potential. If the play works out for SDE, we believe it could add an important avenue of growth for the company.”
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With “achievement of significant de-risking milestones over the last year and construction at Media Luna now halfway complete,” RBC Dominion Securities analyst Wayne Lam now sees shares of Torex Gold Resources Inc. (TXG-T) as “attractively valued,” prompting him to raise his recommendation to “outperform” from “sector perform” previously.
“In our view, TXG shares do not currently reflect significant headway made over the last year in de-risking the company’s future,” he said. “This includes receipt of the key MIA Integral and in-pit tailings deposition permits amidst a challenging regulatory environment, El Limon pushback to address the potential production gap in extending the open pit to mid-2025 while ramping up the ELG underground, and advancement of the tunnel beneath the Balsas River with planned breakthrough by year-end, well ahead of schedule. With shares having pulled back to levels last seen in late 2022, we view current valuation as not reflective of the progress and de-risking initiatives undertaken over the last year.:
Believing its discounted valuation has created an “attractive” risk-reward proposition for investors, Mr. Lam’s target for Torex shares rose by $2 to $22. The average on the Street is $23.39.
“We estimate that TXG is trading at significant discounts to Growth peers of approximately 10 per cent on spot P/NAV [price to net asset value] and 60 per cent on 3-year EBITDA,” he said. “We believe this continues to reflect market caution around the Media Luna construction, which in our view overlooks significant progress made in de-risking both ongoing operations and the project build over the last year. We anticipate a rerating as the company continues to execute to plan and as visibility to first concentrate approaches in late 2024. We raise our price target ... reflecting inclusion of 12-month sustaining FCF (25-per-cent EV/SCF and 75-per-cent NAV) vs. prior 100-per-cent NAV weighting given visibility ahead at Media Luna.”
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In other analyst actions:
* BoA’s Ronald Epstein downgraded CAE Inc. (CAE-T) to “underperform” from “neutral” with a $26 target, dropping from $37 and below the average on the Street of $35.46.
* In response to Monday’s release of better-than-expected fourth-quarter results and 2024 guidance, RBC’s Maxim Matushansky lowered his target for Calian Group Ltd. (CGY-T) to $65 from $70 with an “outperform” rating. Other changes include: Acumen Capital’s Jim Byrne to $75 from $77 with a “buy” rating and CIBC’s Scott Fletcher to $67 from $65 with an “outperformer” rating. The average is $74.
“In our view the long-term thesis for Calian remains intact as they execute their growth strategy. The company is poised to post solid quarterly results in the next few quarters, and we believe investors will be rewarded for their patience,” said Mr. Byrne.
* Calling it “the offensive play on cash flow in cannabis,” ATB Capital Markets’ Frederico Gomes initiated coverage of Green Thumb Industries Inc. (GTII-CN) with an “outperform” rating and $20 target. The average on the Street is $23.50.
“Green Thumb is the only large-cap MSO with consistent positive net income,” he said. “The Company has a track record of generating solid cash flow as a result of its right-sized cost structure (adj. EBITDA margins above 30 per cent) and deleveraged balance sheet (net debt/LTM [last 12-month] adj. EBITDA ratio of 0.5 times vs the peer average of 2.4 times). Over the past 12 months, Green Thumb has generated $224.2-million in cash from operations and invested $243.2-million in capex. We expect Green Thumb to significantly reduce capex and generate $154.5-million in FCF in 2024e, supporting organic growth and competitive differentiation investments, and potential capital return via debt repayment and buybacks. Our bullish investment thesis is based on Green Thumb’s efficient operations and prudent capital allocation, with a track record of patience before executing on growth plans, thereby avoiding the leverage, overbuilding, and associated shuttering of assets experienced by some peers. We forecast 2023 sales of $1,046.5-million (consensus: $1,046.8-million) for 2.9-per-cent growth year-over-year and 2024 sales of $1,115.9-million (consensus: $1,107.1-million), reflecting 6.6-per-cent year-over-year growth, driven by the ramp of adult-use sales in New York and traction of stores opened in H2/23 and 2024. We expect a six-year sales CAGR [compound annual growth rate] of 8.1 per cent from 2022 to 2028 (in line with our projected industry growth of 8.2 per cent). Green Thumb has a diversified presence across states, some of which have (or have the potential for) near-term catalysts (e.g., Florida, Pennsylvania, Ohio, New York), and the Company could grow at rates materially above our base-case estimates. We think Green Thumb deserves a premium given its leading operational and financial performance (we view Green Thumb as the preferred MSO to attract capital as new investors enter the space).”
* Following Open Text Corp.’s (OTEX-Q, OTEX-T) announcement of a deal to divest Micro Focus’s application modernization and connectivity unit for US$2.275-billion to Rocket Software Inc., BMO’s Thanos Moschopoulos raised his target for its shares to US$48 from US$45, keeping an “outperform” rating. Elsewhere, TD Securities’ Daniel Chan bumped his target to US$53 from US$52 with a “buy” recommendation. The average on the Street is US$49.58.
“We think the transaction makes sense, and makes OTEX a more attractive business,” said Mr. Moschopoulos.
* CIBC’s Robert Catellier bumped his TC Energy Corp. (TRP-T) target to $54 from $53, exceeding the $52.82 average, with a “neutral” rating.
“Key takeaways from TRP’s Investor Day were: 1) The increased short-term guidance shows continued solid performance; 2) TRP remains committed to spending discipline and deleveraging; and 3) We have a better understanding of the Liquids spinoff. Overall, we come away more optimistic, but there is still a lot for the company to accomplish. We maintain our Neutral rating and bump our DCF-based price target,” he said.
* Believing a “discounted and misunderstood story creates [a] deep value setup,” Echelon Partners’ Adam Gill initiated coverage of Vancouver-based Trillion Energy International Inc. (TCF-CN) with a “speculative buy” recommendation and a 75-cent target. The average is $2.17.
“Trillion is a Türkiye-focused producer, with its main development asset being the South Akcakoca Sub-Basin (’SASB’) offshore Black Sea gas field, and a potentially high-impact oil exploration opportunity in the southeast part of the country in the Cudi-Gabar region,” said Mr. Gill. “The team is led by seasoned oilman, Dr. Arthur Halleran, who has over 40 years of experience across various countries and was a founder of Colombia producer Canacol Energy (CNE-T, not rated). Overall, we believe that if the team can deliver on volumes at SASB, which have been challenged but resolutions are being implemented, the stock will look deeply discounted on valuation with substantial upside for potential for investors today.”
With a file from the Canadian Press
David Leeder