Inside the Market’s roundup of some of today’s key analyst actions
After the release of “strong” fourth-quarter financial results, RBC Dominion Securities Darko Mihelic thinks Toronto-Dominion Bank’s (TD-T) earnings will “rebound in 2021 and beyond.”
“We also believe there are some headwinds to TD’s U.S. business (NIM pressures, risks to fees and maybe even taxes) that create just enough uncertainty to cap some upside for the stock,” he said in a research note.
On Thursday, TD reported adjusted earnings per share of $1.60, easily exceeding the projections of both Mr. Mihelic ($1.18) and the Street ($1.27). Total provisions for credit losses (PCLs) of $917-million also beat his expectations ($1.534-billion), driven by lower impaired losses.
Mr. Mihelic called TD’s Canadian Personal and Commercial Banking segment “strong,” noting: “We continue to view TD as a bank with a strong “deposit franchise” with greater access to relatively lower-cost sources of funding. Canada P&C earnings were down 18 per cent in 2020 driven by higher PCLs.”
However, he expressed concern about the U.S. P&C results, which saw earnings decline 27 per cent year-over-year on higher PCLs and lower revenues.
“We are maintaining our valuation multiple to account for possible risks to TD’s earnings power, particularly in the U.S. TD has experienced relatively more net interest margin (NIM) compression in the U.S. compared to peers (a great bank to own during rising rates….) and TD will be most impacted if tax rates increase in the U.S.,” said Mr. Mihelic. “There may also be some issues with overdraft fees over time. We are also not entirely convinced that its Canada P&C will perform better than peers, although we do expect the bounce back of credit cards and personal loans to help this segment. With all these uncertainties, we believe there is limited room for multiple expansion from the current premium TD has over peers.”
Keeping a “sector perform” rating, he hiked his target to $79 from $69. The average on the Street is $73.65, according to Refinitiv data.
Elsewhere, National Bank analyst Gabriel Dechaine downgraded the stock to “sector perform” from “outperform” with a $73 target, up from $71.
Others making target changes included:
* Desjardins Securities’ Doug Young to $77 from $75 with a “buy” rating.
“Cash EPS and PTPP earnings were above our estimates, but there were several items to consider,” he said. “While management didn’t provide details on its outlook, what we do know is it has materially built ACLs, it has the highest CET1 of the group and smaller relative exposure to capital markets, a segment facing a tough comp in FY21.”
* Scotia Capital’s Meny Grauman to $80 from $77 with a “sector perform”
* Credit Suisse’s Mike Rizvanovic to $68 from $66 with an “underperform”
* CIBC’s Paul Holden to $84 from $80 with an “outperformer”
“Positives in the quarter include credit trends, core fee income and capital,” said Mr. Holden. “NII is still a challenge, but we think the trajectory will improve through F2021 with better loan growth. TD is our preferred way to gain exposure to a recovery in consumer activity and capital optionality is best in the group.”
* Canaccord Genuity’s Scott Chan to $76 from $70.50 with a “hold”
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In a research note titled A little momentum can go a long way, RBC Dominion Securities analyst Darko Mihelic predicts Canadian Imperial Bank of Commerce’s (CM-T) revenues can “gradually” build from its fourth-quarter results, seeing mortgage growth picking up and amid “solid” results south of the border.
With CIBC remaining “heavily discounted” versus its peers, he thinks a “modest improvement in valuation is warranted,” leading him to raise his rating for its stock to “outperform” from “sector perform.”
On Thursday, the bank reported adjusted earnings per share of $2.79, exceeding both Mr. Mihelic’s $2.49 projection and the consensus estimate on the Street of $2.54. He attributed the beat to better-than-anticipated provisions for credit losses (PCLs), which came in at $291-million (versus his $518-million estimate).
“Our 2021 EPS estimate is increasing as we assume lower NIM [net interest margin] compression and higher performing reserve releases but our 2022 EPS estimate is unchanged,” he said. “CM is currently trading at rather discounted valuations compared to peers. On a consensus forward P/E [price-to-earnings] basis, CM is trading at a 12-per-cent discount vs. a historical average discount of 7 per cent. We believe a modest improvement in CM’s valuation multiple will lead to good upside and our price target also suggests the highest implied return to target of 23 per cent relative to a peer average of 16 per cent.”
Mr. Mihelic raised his target for CIBC shares to $130 from $110. The average on the Street is $117.27.
Several equity analysts also raised their target prices for shares of in response to better-than-anticipated quarterly results, including:
* Desjardins Securities’ Doug Young to $116 from $112 with a “hold” rating.
“Cash EPS and PTPP earnings beat our forecast, and management’s outlook was constructive,” he said. “But, the lingering questions are: can it reverse Canadian mortgage market share losses and what’s going on with the sale of CIBC FCIB?”
* Credit Suisse’s Mike Rizvanovic to $108 from $105 with an “underperform”
* BMO’s Sohrab Movahedi to $124 from $118 with a “market perform”
* Canaccord Genuity’s Scott Chan to $122 from $115.50 with a “sector outperform”
“Despite a challenging environment, we believe CM is well positioned to improve growth (particularly in Canada),” he said.
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In the wake of RioCan REIT (REI.UN-T) cutting its monthly distribution by one-third amid growing uncertainty about some of its tenants’ futures, Canaccord Genuity analyst Mark Rothschild downgraded its stock to “hold” from “buy” on Friday.
“We note that management and the board of RioCan had long stood by its distribution, even in times of weakness,” he said. “In fact, there have been times when the distribution appeared ‘at risk’, yet accretive acquisitions and internal growth combined to remove the risk over time. We believe that the revised distribution reflects a change in strategy as well as a more cautious outlook for retail properties. In our view, this move validates the concern that there will be pressure on occupancy over the next year.
“While the reduced distribution will be surprising to many, retail investors in particular, we believe that management provided some indication that this would be considered on its most recent earnings conference call when current CEO Ed Sonshine stated, “At the end of the day, the board will have a continuing discussion with management over quite frankly, is this [the distribution] the absolute best use of our funds or are there other things we can do to create more value for unitholders like buying back stock.”
Though he emphasized the move will allow RioCan to fund growth without diluting cash flow per unit, he expects “some near-term pressure on the unit price.”
“Whereas the distribution cut appeared to be ‘priced in’ last month, the unit price has risen 22 per cent over the past month, and that may no longer be the case,” he said.
“While this announcement may be viewed negatively by some, ultimately it strengthens the REIT’s financial position, in our view.”
Mr. Rothschild kept a target price of $17.50. The average on the Street is $20.81.
“While there remain near-term concerns for retail fundamentals and the REIT’s occupancy, we believe RioCan’s portfolio is, for the most part, extremely well located and should perform well over the long term,” he said.
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WSP Global Inc.’s (WSP-T) $1.5-billion acquisition of earth sciences specialist Golder Associates “provides a solid platform to accelerate growth, which is further supported with two top-tier strategic institutional investors joining the company’s investor base,” according to ATB Capital Markets analyst Chris Murray.
On Thursday, shares of Montreal-based engineering services company jumped 11.6 per cent in reaction to the deal, which Mr. Murray said came at a “reasonable” price and “a globally leading third practice area” for WSP.
“With the close of the transaction, WSP will have three primary practice areas with Transport & Infrastructure representing 47 per cent of the Company’s $8-billion in proforma revenues, environment at 25 per cent of proforma revenues and Property & Buildings at 21 per cent of proforma revenues,” he said. “With the combination with Golder as well as other targeted environmental practice acquisition over recent years, WSP now has a leading position globally in each of the sectors it is focused in.”
“Management indicated that it had been in discussions with Golder for several years, with the timing for the transaction tied to the Company’s view that demand for environmental consulting is expected to accelerate with demand for more sustainable practices. The acquisition is supportive in achieving the Company’s 2021 stated Strategic goals, with the Company indicating that with the combination it will meet several of its key strategic objectives.”
After raising his 2021 revenue and EBITDA projections by 10.6 per cent and 11.1 per cent, respectively, Mr. Murray hiked his target for WSP shares to $125 from $120, keeping an “outperform” rating. The current average on the Street is $103.31.
Other analysts raising their targets for WSP shares include:
* Desjardins Securities’ Benoit Poirier to $117 from $98 with a “buy” rating.
“The Golder acquisition checked many boxes for WSP as it will position the combined entity to benefit from the green transition,” said Mr. Poirier. “This global structural change should continue to drive business for the consulting sector for years to come. We derive adjusted EPS accretion of 14 per cent in 2022, although there is likely more upside as WSP realizes cross-selling opportunities along the way (the main rationale behind this transaction). We reiterate our bullish stance.”
* Scotia Capital’s Mark Neville to $115 from $90 with a “sector perform” rating
* Raymond James’ Frederic Bastien to $125 from $105 with an “outperform” rating.
“From where we sit, the proposed $1.5-billion transaction ticks all the right boxes,” said Mr. Bastien. “It promises to achieve the engineering consultancy’s strategic priorities for the 2019-2021 period, uniquely positions WSP to capitalize on powerful ESG trends, and establishes new relationships with two highly credible long-term investors — the Singaporean sovereign wealth fund (GIC) and British Columbia Investment Management Corporation (BCI). With both entities on record saying they look forward to expanding their involvement alongside CPPIB and La Caisse, one can safely conclude the WSP ride ain’t over yet.”
* CIBC’s Jacob Bout to $125 from $103 with an “outperformer” rating
“This acquisition pushes WSP into a leadership position in global environmental consulting, capitalizing on growth markets of ESG, climate change and earth sciences (and why we believe WSP deserves a premium multiple),” said Mr. Bout. “Also, the acquisition is another fine example of WSP’s proven acquisition strategy (reasonable valuation for cutting edge expertise).”
* Laurentian Bank Securities’ Nauman Satti to $123 from $100 with a “buy” rating.
* Canaccord Genuity’s Yuri Lynk to $120 from $97 with a “buy” rating
“Management appears to have done it again: They found a high-quality firm to acquire on extremely accretive terms that adds exposure to a growing end market — in this case, environmental services,” Mr. Lynk said. “With WSP shares jumping nearly 12 per cent on the news of this acquisition we only have 12-per-cent implied upside to our target price. However, we see this as sufficient to maintain our BUY-rating as WSP has room to surprise on revenue synergies over the next year and, more importantly, has the balance sheet and four pension funds at its disposal to move on additional targets.”
* BMO’s Devin Dodge to $110 from $91 with a “market perform” rating
* TD Securities’ Michael Tupholme to $130 from $105 with a “buy” rating
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Though he viewed its Investor Day event as “positively,” ATB Capital Markets analyst Chris Murray lowered shares of Capital Power Corp. (CPX-T) to “sector perform” from an “outperform” recommendation, pointing to “modest” upside to his target price for its shares after recent appreciation and the potential for funding concerns.
On Thursday, Capital Power management provided 2021 adjusted EBITDA guidance of $975-million to $1.025-billion, versus Mr. Murray’s $980-million forecast. Its adjusted funds from operations (AFFO) estimate was $500-550-million, versus $521-million.
It is also set to repower its Genesee Generating Station Units 1 & 2 near Warburg, Alberta at an expected capital cost of $997-million and plans to be off coal generation in 2023.
“We note that this incremental capital outlay of nearly $1-billion could potentially slow growth in pure play renewable positioning or may result in increased reliance on equity markets,” said Mr. Murray. “CPX has demonstrated strong commitment to growth in 2020 by sanctioning 427 MW of renewable generation, and has highlighted a $500-million committed capital target in 2021 that could include future growth through both renewables and thermal investment. The stock has performed well (up 20 per cent since ATB’s initiation in July), leaving a total return to our revised price target of $36.00 (prev: $35.00).
Mr. Murray’s new target continues to be lower than the current consensus on the Street of $36.05.
“Despite the company’s impressive transition towards more sustainable technologies and contracted cash flows, we view the funding around future growth as a risk if it requires divestitures of quality assets or reliance on equity financing,” he said. “The company continues to provide an attractive dividend yield at 6.1 per cent, supported by a modest payout ratio of 40 per cent in 2020. With a current 2020 estimated EV/EBITDA of 8.0 times, we would note that Capital Power is trading at a significant discount compared to the peer average of 13.3 times.”
Others making target price changes included:
* Industrial Alliance Securities’ Naji Baydoun to $38 from $36 with a “strong buy” rating.
“CPX offers investors (1) a mix of contracted (more than 70 per cent) and merchant cash flows, (2) longer-term leverage to market recovery in Alberta, (3) healthy growth (mid-single-digit FCF/share growth through 2024), (4) an attractive income profile (6-per-cent yield, 7 per cent per year dividend growth through 2021, 5 per cent per year thereafter, with a 45-55-per-cent payout), and (5) a discounted relative valuation versus IPP peers,” he said. “As CPX continues to execute on its diversified growth strategy, we see the potential for the shares to experience valuation multiple expansion over time, closing some of the relative valuation discount versus IPP peers.”
* RBC Dominion Securities’ Maurice Choy to $35 from $31 with a “sector perform”
* CIBC’s Mark Jarvi to $37 from $34 with an “outperformer”
“While there is some execution risk and a few questions on exact funding mix, we believe CPX shares can push higher aided by an improving power price environment in Alberta,” said Mr. Jarvi.
* Scotia Capital’s Robert Hope to $37 from $35 with a “sector perform”
* BMO’s Ben Pham to $33 from $29 with a “market perform”
* TD’s John Mould to $39 from $37 with a “buy”
* Raymond James’ David Quezada to $38 from $36.50 with an “outperform” rating.
“We believe CPX’s investor day highlighted an attractive slate of high-return investments that represent significant progress on reducing GHG emissions while also supporting strong growth in the business. While the Genesee 1&2 repowering falls beyond our forecast horizon, we believe it,
and other development projects, add material shareholder value,” said Mr. Quezada.
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Raymond James analyst Stephen Boland sees Intact Financial Corp. (IFC-T) acquisition of RSA Insurance Group as “perfect timing” for a deal that provides “material” accretion.
In a research report released Friday, he raised his rating for Intact shares to “strong buy” from “outperform.”
“The deal will expand IFC’s operations in Canada, strengthens the specialty lines business and provides entry into European markets,” said Mr. Boland. “We believe the reporting divisions will be Canada, US., and the UK & International. Underlying, management has made a point to disclose the growth of the now global Specialty Lines business and may provide supplementary information on those business lines. We believe this is a positive deal for IFC since it strengthens the Canadian business, expands the profitable Specialty Lines business and provides further optionality on which specific geographies it wants to keep operations.”
Mr. Boland raised his target to $180 from $160.The average is $172.73.
“We believe this is a positive transaction for several reasons: 1. This continues to consolidate the Canadian market for IFC generating material synergies; 2. Expands the business into the UK & Europe with a high proportion of profitable Specialty Lines; 3. Most importantly, the transaction is materially accretive to IFC’s NOIPS and BVPS,” he said.
Elsewhere, Desjardins Securities’ Doug Young resumed coverage with a “buy” rating and $170, up from $165.
“IFC has a high-quality management team and strong Canadian franchise, and the math behind the RSA transaction makes sense in our view,” he said.
* TD Securities’ Mario Mendonca resumed coverage with a “buy” rating and $170 target, up from $160.
* Scotia Capital’s Phil Hardie raised his target to $175 from $166 with a “sector outperform” rating.
“We like the transaction given: (1) compelling expected financial benefits, (2) increased scale and distribution across its core home market, (3) expansion of specialty insurance capabilities and scale, and (4) new avenues for long-term growth. Broader geographic and product diversification likely adds to the resilience and high degree of optionality of Intact’s strategy that allows it to rapidly pivot to industry changes,” said Mr. Hardie.
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Ahead of the release of its third-quarter 2021 financial results on Dec. 9 before the bell, Canaccord Genuity analyst Derek Dley is forecasting a top-line “uplift” for Dollarama Inc. (DOL-T) driven by better-than-expected seasonal sales.
Mr. Dley is projecting revenue of $1.033-billion, up 9-per-cent year-over-year and 2 per cent from the previous quarter. It exceeds the consensus projection of $998-million. His EBITDA and earnings per share projections of $291-million and 47 cents, respectively, also exceed the Street’s view ($274-million and 44 cents).
“Counterintuitively, we believe that Halloween sales were quite strong during Q3/F21, despite the COVID-19 physical distancing restrictions,”he said. “Both Dollar Tree and Dollar General reported strong Halloween décor sales, which tend to carry higher margins than consumables, such as candy, which we believe was negatively impacted this season. That said, the company did have a very strong Halloween season last year, which may mitigate a portion of the positive growth in Q3/F21.
“As it relates to gross margins, seasonal products offer higher margins than Dollarama’s consumable and discretionary items, but we do expect continued strength in sales of consumable goods, namely household cleaning products, which are likely to challenge margins in the quarter. Accordingly, we are forecasting same-store sales growth of 3.5 per cent, above Q2/F21′s 2.5 per cent and down from the 5.3 per cent witnessed in Q3/F20. Further, we are forecasting gross margins of 43.2 per cent for the quarter, down 50 basis points from a year ago.
Mr. Dley also expects Holiday season sales to be “strong,” pointing to restrictions limiting travel. He thinks those funds may be put toward home decorating and gift giving.
Keeping a “hold” rating for the retailer’s shares, he raised his target to $50 from $46. The average is $55.92.
“While we still believe in Dollarama’s long-term growth profile, a result of its lack of meaningful competition, industry-leading profitability and free cash flow generation, and healthy ROIC, we believe the softer near-term outlook is likely to leave the stock range-bound over the coming quarters,” said Mr. Dley.
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In other analyst actions:
* CIBC World Markets analyst Kevin Chiang initiated coverage of Mullen Group Ltd. (MTL-T) with an “outperformer” rating and $13.50 target. The average on the Street is $11.52.
“We view it as a value cyclical that is well positioned as the economy continues to recover from the impacts of COVID-19,” said Mr. Chiang. “With our constructive outlook on freight trends, we expect continued steady improvement in MTL’s earnings, and valuation upside.”
* Scotia Capital analyst Mark Neville raised his target for Stantec Inc. (STN-T) to $46 from $43 with a “sector outperform” rating. The average on the Street is $45.91.
* Canaccord Genuity’s Yuri Lynk raised his target for Greenlane Renewables Inc. (GRN-X) to $1.60 from $1.30 with a “buy” rating, while PI Financial’s Devin Schilling bumped his target to $1.60 from $1.24 with a “buy” recommendation. The average is $1.60.
* Scotia Capital analyst George Doumet lowered his target for Goodfood Market Corp. (FOOD-T) to $11 from $11.50 with a “sector outperform” rating. The current average is $11.72.
* Scotia’s Michael Doumet bumped his target for Exco Technologies Ltd. (XTC-T) to $9 from $8.25 with a “market perform” rating, while BMO’s Peter Sklar increased his target to $9 from $7 with a “market perform” recommendation. The average is $8.42.
* Jefferies analyst Owen Bennett raised his target for OrganiGram Holdings Inc. (OGI-T) to $3.89 from $3.79 with a “buy” rating. The average is $2.66.
* Mr. Bennett raised his target for Aphria Inc. (APHA-T) to $12.80 from $9.42, keeping a “buy” rating. The average is $9.74.
* Mr. Bennett cut his target for Flowr Corp. (FLWR-X) to 70 cents from $1.20, keeping a “buy” recommendation. The average is $1.02.
* BMO Nesbitt Burns analyst Brian Quast raised his target for Superior Gold Inc. (SGI-X) to $1.10 from $1 with an “outperform” recommendation. The average is $1.21.
* TD Securities initiated coverage of WPT Industrial REIT (WIR.U-T) with a “buy” rating and US$15.50 target. The average is US$15.19.
* Echelon Capital Markets analyst Amr Ezzat raised his target for Tecsys Inc. (TCS-T) to $54 from $35 with a “buy” rating, while , while Laurentian Bank Securities’ Nick Agostino raised his target to $47 from $38 with a “buy” recommendation. The average is $40.
“Tecsys Inc continues to post blockbuster results, with the Company’s aggressive SaaS growth, as well as its direct exposure to favorable trends accelerated by COVID-19, driving yet another record sales quarter,” Mr. Ezzat said. “As we pointed out in the past, in our experience, double digit organic top line growth together with higher visibility revenues are key valuation drivers in the software space. We’ve seen this story before and Tecsys is no exception. Bookings continue to grow at a healthy clip, suggesting there is more growth to come on the back of aggressive adoption and deployment of SCM software in the healthcare space. We remain bullish on the Company and despite the recent stock outperformance, we believe there is more upside to be had from current levels.”