Inside the Market’s roundup of some of today’s key analyst actions
Following a “big beat,” Desjardins Securities analyst Doug Young sees the impact of the second-quarter results from Royal Bank of Canada (RY-T) as a “positive” from an investing point of view, reiterating his appreciation for its scale, Canadian banking business and the potential stemming from its HSBC Canada acquisition.
“Adjusted pre-tax, pre-provision (PTPP) earnings were 7 per cent above our estimate, with all operating divisions beating our estimates,” he said. “We applaud management for providing a lot of helpful disclosures around the HSBC Canada business. The CET1 ratio was higher than expected, and RY adopted an NCIB. We increased our estimates.”
RBC shares gained 5.2 per cent on Thursday following the premarket release of its quarterly results, which included cash earnings per share of $2.92 that blew past both Mr. Young’s $2.65 estimate and the consensus of $2.76.
“HSBC Canada is on track to deliver $1.4-billion of adjusted earnings (excluding purchase accretion but with expense synergies), but potentially a little later than expected due to various industry headwinds. Management seems excited about revenue synergy opportunities (eg cross-selling credit cards, wealth management),” he added. “Canadian banking adjusted PTPP earnings were 4 per cent above our estimate. The outlook for NIMs remains constructive; RY also believes operating leverage can run above its historical range of 1‒2 per cent in FY24 (6 per cent this quarter).
“Capital markets delivered a solid quarter; however, management expects a seasonal moderation in 2H FY24.”
After raising his earnings expectations for both 2024 and 2025, Mr. Young increased his 12-month target for RBC shares to $156 from $142, reiterating a “buy” recommendation. The average target on the Street is $146.07, according to LSEG data.
Elsewhere, other analysts making changes include:
* Scotia Capital’s Meny Grauman to $153 from $148 with a “sector outperform” rating.
“Royal Bank came into Q2 reporting season as the consensus favorite, and results did not disappoint as the bank put up a strong and clean quarter, delivering a sizable beat even with a $200-million PCL headwind from the establishment of Day 1 provisions for HSBC Canada,” said Mr. Grauman. “To top it off, the bank also announced a 2 per cent buyback, which comes on the heels of RY turning off its discounted DRIP. On the call Management reiterated impaired PCL guidance in 30-35 bps range, and some modest margin expansion in Canada and for the bank as a whole. The bank did indicate that Capital Markets results are likely to moderate in the second half of the year, but that is after year-to-date earnings growth of 10 per cent and a record Q2. RY is a crowded trade, but sometimes there is wisdom in the crowd, and certainly this quarter highlighted that with potential upside to numbers from revenue synergies at HSBC and improved performance at City National.”
* National Bank’s Gabriel Dechaine to $161 from $154 with an “outperform” rating.
“The [HSBC] acquisition closed nearer the end of the quarter, so it is premature to make any concrete conclusions on the transaction progress,” said Mr. Dechaine. “However, we did note the following: 1) annualized, fully synergized earnings contribution from HSBC of around $1.3-billion, just shy of the $1.4-billion target level; and 2) excluding fair value marks, loan balances 3 per cent below the level at the time the deal was announced. We attribute these modest shortfalls to a mix of factors, including the rise in funding costs since the deal was announced, along with a later than expected closing that likely interfered with new business acquisition/ retention. Overall, we believe the transaction was well timed, giving RY a source of growth at a time when growth is low supply. Moreover, NIM should benefit from higher mortgage spreads over time and from purchase accounting marks that will boost NIM to the end of fiscal 2025.”
* BMO’s Sohrab Movahedi to $151 from $150 with an “outperform” rating.
“RY is a G-SIB with a premium ROE, building on its leadership in Canadian Banking with its recently closed acquisition of HSBC Canada. The bank is well-positioned to benefit from an anticipated rebound in market-related activities through its Wealth Management and Capital Markets businesses. Our case for a premium multiple is supported by peer-leading EPS growth through FY25 and premium ROE,” he said.
* TD Cowen’s Mario Mendonca to $160 from $156 with a “buy” rating.
“RY delivered strong results this quarter, with particularly strong OP especially for the first quarter post a large transaction. Capital was better than expected and the bank, surprisingly, announced an NCIB. The bank also raised the quarterly dividend as expected. Other than higher CRE losses in multi-family in the U.S., credit was not a significant issue this quarter,” said Mr. Mendonca.
* CIBC’s Paul Holden to $150 from $135 with a “neutral” rating.
“RY posted a very good quarter on many fronts and management came across as confident in the outlook. While RY surprised to the positive on credit this quarter, it did guide to higher credit losses through the second half of the year. While we have increased our forward estimates we think it will be hard for the bank to repeat these FQ2 earnings, given macro headwinds,” said Mr. Holden.
* Jefferies’ John Aiken to $159 from $157 with a “buy” rating.
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While its second-quarter results largely fell in line with his expectations, RBC Dominion Securities analyst Darko Mihelic said Canadian Imperial Bank of Commerce’s (CM-T) “gets a high grade” in “a quarter with a lot of negative surprises (and where other analysts were more negative).”
“CM did some house cleaning on CRE [commercial real estate] in the U.S. with loan sales, but still, U.S. P&C results came in lower than we anticipated due to higher than expected impaired PCLs,” he said. “Positively, we saw some loan growth in the U.S., expense control was also solid, corporate losses are declining, and capital is in good shape. We nonetheless revised PCL estimates higher, to peak in mid-2025.”
CIBC shares jumped over 7 per cent on Thursday after it reported adjusted earnings per share of $1.75, a penny below Mr. Mihelic’s forecast but 10 cents higher than the Street’s projection. Its Corporate segment had a lower loss than he anticipayed, while its Canadian Personal and Business Banking business is now likely to see higher net interest margins.
“Overall, our core EPS estimate moves $0.09 higher for 2024 to $7.23 (was $7.13) but decreases by $0.19 to $7.56 (was $7.74) in 2025 on slightly higher than previous PCL,” the analyst said. “We introduce 2026 estimates ... and we model a 10-per-cent increase in the core EPS in 2026 to $8.29. Notably, we increased our PCL estimates for all banks this quarter but we would stress that our estimates do not reflect recessionary conditions. Given evidence (across the group of banks we cover) that there is some credit quality deterioration (we’ll stop calling it “normalization”) we simply felt our PCL estimates were too low across the group. We will revisit our PCL assumptions shortly now that the second quarter reporting period is over.”
While warning of “some signs of consumer credit deterioration,” Mr. Mihelic raised his target for CIBC shares to $69 from $68, reiterating a “sector perform” rating. The average target is $69.24.
Elsewhere, other analysts making target adjustments include:
* National Bank of Canada’s Gabriel Dechaine to $78 from $76 with an “outperform” rating.
“Credit deterioration in CM’s U.S. Office loan portfolio has been an area of focus over the past year, as the overall CRE portfolio had generated roughly a third of impaired loan provisions,” said Mr. Dechaine. “This quarter, we saw a few positive developments: 1) a 40-per-cent quarter-over-quarter drop in CRE impaired PCLs; and 2) a 30-per-cent quarter-over-quarter decrease in impaired CRE loans, largely reflecting the sale of a portfolio of 8 loans, 7 of which were impaired. This quarter confirmed CM’s guidance that CRE losses would be abating. It also reinforces our view that lower CRE losses will provide a ‘buffer’ for rising impairments in other loan categories. As such, we weren’t surprised to hear management reiterate its guidance for an impaired PCL ratio in the mid-30s this year.”
* Desjardins Securities’ Doug Young to $71 from $67 with a “hold” rating.
“Adjusted pre-tax, pre-provision (PTPP) earnings were 1 per cent above our estimate, and while cash EPS beat by a bigger margin, this was partially due to a lower-than-expected tax rate. Overall, it was a good quarter,” said Mr. Young.
* Scotia’s Meny Grauman to $77 from $73 with a “sector outperform” rating.
“Investors often ask us what CIBC need to do to re-rate higher, and the simple answer is report more quarters like Q2,” he said. “This result was not without its share of noise, but overall CM delivered on a number of crucial fronts including credit, operating leverage, and overall revenue growth. PCLs were a big part of the beat, but as we highlighted in our First Look, that is a good thing in the current environment and given the bank’s history. In particular, we note the improving credit trends in the bank’s U.S. office portfolio which the company guided to in Q1. Guidance for the rest of year acknowledges that impaired loan loss ratios may not have peaked just yet, but that increases from here are likely to be modest. Meanwhile, guidance on the all-bank margin is encouraging, and we continue to see good expense management in relation to better-than-expected revenue growth, and have increased confidence in the ability of the bank to deliver positive operating leverage for the year as a whole. CIBC has outperformed the peer average for the year-to-date, and we expect that momentum to continue as we exit this quarter. Re-rating takes time, but with the shares up 7 per cent on earnings day, that process is happening.”
* BMO’s Sohrab Movahedi to $77 from $74 with an “outperform” rating.
“We like CM’s momentum in its domestic franchise and believe its strength will persist through 2024-25, supported by its focus on its affluent customer acquisition strategy,” he said. “While CM has faced valuation pressure from the bank’s exposure to Canadian housing and U.S. office CRE, we expect the valuation discount to unwind as investor fears abate; we see ROE trending favourably through FY25.”
* Barclays’ Brian Morton to $71 from $70 with an “underweight” rating.
“An EPS beat driven by a lower than expected PCL as well as higher NII and fee income, partially offset by higher than expected expenses. The office CRE portfolio declined $400-million on dispositions, although with a 23.6-per-cent NCO rate,” he said.
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Scotia Capital analyst Meny Grauman thinks EQB Inc.’s (EQB-T) return on equity trajectory is “strong even in a ‘higher for longer’ rate environment which leaves significant upside for the shares even after a 14-per-cent move on earnings day.”
Shares of the Toronto-based lender soared 13.5 per cent on Thursday after it reported second-quarter adjusted earnings per share of $2.81, exceeding Mr. Grauman’s expectation of $2.65 by 6 per cent as well as the consensus estimate on the Street at $2.66. He attributed the beat to “much better-than-expected” revenues, which topped his projection by 28 cents.
“NII contributed a large share of the beat thanks to a 10 bps sequential expansion in net interest margins (versus guidance of flat),” he added. “Non interest income beat expectations primarily driven by higher-than-expected mortgage commitment and other fees, net gains on loans and investments, as well as gains on securitization. EQB’s adjusted ROE came in at 15.9 per cent, and BVPS was $73.73, up 10 per cent year-over-year. EQB boosted its quarterly dividend by 7 per cent quarter-over-quarter to $0.45/share (vs. our estimate of $0.44/share). "
With EQB’s management also reiterating its full-year guidance, Mr. Grauman bumped his 2024 core cash EPS estimate by 4 per cent to $11.72, while his 2025 forecast increased by 6 per cent to $13.44 “primarily to reflect the beat this quarter, as well as Management guidance of stable NIMs, lower credit losses, low single-digit expense growth, and higher non-interest revenue as a percentage of total revenues.”
“Our first take of EQB’s Q2 result was mixed for two reasons,” he said. “First, 10 basis points of sequential margin expansion surprised us, and we wanted to wait for the call to see if this lift was sustainable. And second, we noted a mixed credit performance which saw impaired PCLs increase beyond the equipment finance portfolio and gross impaired loans increase in equipment finance and residential mortgages. On both of these fronts (margins and credit), as well as a number of others, Management guidance during the call was constructive. With respect to the margin, the bulk of that increase looks sustainable and EQB believes that there is upside potential, especially given the bank’s strong funding profile. On credit, Management reaffirmed guidance that Q2 would mark a peak for PCLs and noted that is continues to work through challenges in the equipment finance portfolio. The outlook on non-interest income was also very encouraging, as was the outlook for expense management.”
Keeping a “sector outperform” recommendation, Mr. Grauman bumped his target to $113 from $111. The average on the Street is now $105.10.
Others making target adjustments include:
* CIBC’s Paul Holden to $110 from $100 with an “outperformer” rating.
“FQ2 earnings were better than expected and we revise our EPS estimates higher. Management is delivering on its growth strategy and hitting its ROE target. Fundamental performance is very strong and we expect credit losses will remain well below those posted by the big banks. Better EPS growth than the big banks should result in better share price upside,” said Mr. Holden.
* TD Cowen’s Graham Ryding to $101 from $98 with a “buy” rating.
“We are moving our F2024 EPS estimate back to the low-end of guidance,” he said. “NIM was notably higher than expected this quarter, and commentary suggests this should largely be sustainable. In our view, management appears confident that PCLs should decline in H2/ F24. We continue to forecast earnings growth to pick up in F2025. Valuation remains attractive, in our view.”
* BMO’s Étienne Ricard to $104 from $102 with an “outperform” rating.
“The key takeaway from the conference call is that EQB reiterated its view Q2 most likely represented a peak in provisions for credit losses with “further progress since quarter-end in commercial loan resolutions” and equipment leasing losses expected to normalize over the next couple quarters. The 2024 guidance is reaffirmed with EQB expecting a stronger H2,” said Mr. Ricard.
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National Bank Financial’s John Shao has increased confidence in the investment proposition for Computer Modelling Group Ltd. (CMG-T) following investor meetings with its executive team, touting a “clearer growth roadmap and evidence of consistent execution from the most recent quarter.”
After discussions with chief executive Pramod Jain, chief financial officer Sandra Balic (CFO) and director of investor relations Kim MacEachern, the equity analyst sees the Calgary-based company, which provides reservoir simulation software to the energy sector, completing the “heavy lifting” from its recent transition from a research-oriented to a sales-focused organization.
“We like CMG because it exhibits a set of unique attributes such as product leadership, high customer stickiness and strong financial metrics,” he added. “During today’s meetings, we took away incremental attributes that further set CMG apart from other Tech names: 1. Short Sales Cycle and Flat Learning Curve. Unlike other software companies with long sales cycles ranging from 12 to 24 months, CMG’s sales cycle is relatively short (in some cases, as short as just 7 days) because its products are designed in a ‘ready-to-go’ state, and professionals in the space are already familiar with CMG’s products. In our view, this relatively short sales cycle and flat learning curve suggest the company could direct more resources towards upselling and thus increase its odds of wallet-share gains. 2. Sales and Customer Support Are Integrated. Within the Company, the support team and sales team are essentially one group supporting each other instead of being siloed functions. For instance, some of the pre-selling activities could be completed by the support personnel who already know the customers’ pain points.”
Mr. Shao also touted “multiple growth drivers ahead,” seeing it “now well positioned to generate meaningful growth both organic and inorganic.” Those include gains from steady annual price increases, targeting new global markets and “energy transition as an emerging but fast-growing new business segment.”
“We believe those organic growth opportunities represent the low-hanging fruits, apart from ‘free options’ such as CoFlow and revenue synergies from future M&As,” he said. On acquisitions, we continue to believe the Company is in no rush to make another one. This is consistent with our view of CMG adopting a disciplined M&A strategy.”
Seeing it “at the cusp of scaling,” Mr. Shao raised his target for Computer Modelling Group shares to $14 from $12.50 to reflect a “multi-stage DCF model that now captures a lower discount rate as its strategic initiatives are taking a meaningful shape.”
“On top of the solid fundamental business, M&A has the potential to grow CMG into a Tech platform company within the oil and gas sector,” he said, maintaining an “outperform” recommendation.
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In other analyst actions:
* Following the FID on its latest LPG export facility, CIBC’s Robert Catellier increased his target for AltaGas Ltd. (ALA-T) to $38 from $36 with an “outperformer” rating. Other changes include: Raymond James’ David Quezada to $35 from $34 with an “outperform” rating and National Bank’s Patrick Kenny to $35 from $33 with an “outperform” rating. The average target is $34.82.
“We maintain our constructive stance on ALA — a function of an attractive slate of growth opportunities, de-risking related to increased tolling volumes in the company’s midstream segment, as well as key catalysts including the newly approved FID at REEF and sale of the Mountain Valley pipeline stake,” said Mr. Quezada. “We also like the solid rate base growth and improving ROEs in ALA’s utility segment and midstream growth coming from Pipestone II. We’ve increased our target price to $35.00 reflecting a higher assumed multiple for AltaGas’ midstream segment.”
* CIBC’s John Zamparo cut his Canopy Growth Corp. (WEED-T) target to $4 from $4.50 with an “underperformer” rating. The average is $7.62.
“Canopy’s debt level remains problematic, and we continue to expect material equity issuance in order to repay the $475-million balance, whose March 2026 due date is fast approaching,” said Mr. Zamparo. “As we’ve written multiple times before, cannabis stocks have a poor track record when facing equity raises, and we expect heavy use of an at-the-market vehicle soon enough. We consider the stock’s run unsubstantiated by fundamentals: rescheduling creates minimal benefit for WEED; and the German outcome was both expected and has minimal sales impact, in our view. We believe the stock will remain pressured, regulatory-driven surges aside.”
* TD Cowen’s Arun Lamba resumed coverage of Faraday Copper Corp. (FDY-T) with a “buy” rating and $1.25 target, below the $1.38 average.
* Desjardins Securities’ Frederic Tremblay trimmed his Lithium Ionic Corp. (LTH-X) target to $3.50 from $3.75 with a “buy” rating. The average is $4.69.
“Following the feasibility study completed at Bandeira, we aligned our model with most of the new assumptions (eg processing, production and costs) and kept our more moderate pricing and discount rate unchanged,” he said. “At 0.23 times P/NAV, LTH offers significant value and we continue to like the quick path to production, low costs, proximity to producers and infrastructure, and resource growth potential.”
* BMO’s Greg Jones raised his Patriot Battery Metals Inc. (PMET-T) target to $14 from $12.50 with an “outperform” rating. The average is $16.56.
“We resume coverage of PMET following a period of restriction after its recent $75-million flow-through financing,” said Mr. Jones. “We view the financing as an opportunistic way to secure additional capital to advance Corvette exploration activities. Proceeds were raised at a 51-per-cent premium, and in advance of potential changes proposed in the Canadian federal budget that could reduce flow-through financing premiums after 25-Jun-24. Pro forma (as at 30-Apr-24), PMET’s cash position is $120-million. We update our model for a revised exploration spend profile and increase our target price.”
David Leeder