Inside the Market’s roundup of some of today’s key analyst actions
Ahead of the start of earnings season for Canadian banks later this week, Scotia Capital analyst Meny Grauman said he’s taking a “generally neutral view of the space” with his outlook largely mirroring recent trends.
“Since the start of the pandemic, Canadian bank stocks have generally moved in lock step with macro factors, but as rate cuts continue to build in Canada (and the Fed gets set to cut rates in September) fears of a hard landing are receding and economic indicators are beginning to take a back seat to company-specific dynamics (micro factors),” he said. “That switch is driving a wider dispersion in bank returns than we have seen in a long time, and is a trend that we expect to persist, and even intensify as we head into F2025. That is not to say that economic indicators don’t matter anymore, but they are increasingly taking a back seat to company-specific developments, at least when it comes to driving relative share performance across the group.”
“The central questions in bank land are no longer about interest rates and GDP growth rates, but a host of other more specific questions including: when will TD resolve its US AML issues, and at what cost both in terms of monetary fines and non-monetary restrictions? And did BMO take on more credit risk than the market realized as it accelerated its US expansion, especially in the Corporate loan book?”
In a research report released before the bell titled As Macro Fears Fade, the Performance Gap Is Widening, Mr. Grauman said he continues to see “a relatively challenged operating environment punctuated by higher impaired PCL ratios, but no reason to believe that we will see anything more than a further gradual deterioration in credit conditions.” He’s projecting core cash earnings per share for $2.19 in the third quarter, rising 1 per cent sequentially and 3 per cent year-over-year.
“Loan growth remains very sluggish for the group as a whole (and especially in the domestic mortgage market), and capital markets results are likely to be less robust than what we saw in the U.S.,” he added. “That said, domestic margins could be a little better than the flat guidance most banks provided at the end of last earnings season, and expense management should remain strong despite the underwhelming revenue environment, with improved positive operating leverage trends persisting from last quarter. Meanwhile, capital positions are now very healthy, although lower on a pro forma basis after factoring in some recent corporate actions. We are likely to see some divergence in these trends across the banks we cover, but broadly speaking we don’t expect anything dramatic to drive major EPS revisions one way or another this earnings season. The one exception is BMO which has already seen the most significant earnings revisions across the group for the year to date, and which could see a further big swing in expectations depending on its Q3 credit performance which is very much under the microscope right now. One near-term headwind for the group is the impending implementation of the Global Minimum Tax which will be introduced for the banks at the start of the new fiscal year, but we don’t expect any additional disclosure on this issue until Q4 reporting. Another issue we are watching is the mounting U.S. regulatory scrutiny on sweep rates which could impact banks’ U.S. wealth businesses.”
Mr. Grauman made a series of target price adjustments to stocks in his coverage universe on Monday.
His changes include:
- Bank of Montreal (BMO-T, “sector outperform”) to $123 from $129. The average on the Street is $126.66, according to LSEG data.
- EQB Inc. (EQB-T, “sector outperform”) to $109 from $113. Average: $105.30.
- National Bank of Canada (NA-T, “sector perform”) to $120 from $123. Average: $119.77.
- Royal Bank of Canada (RY-T, “sector outperform”) to $154 from $157. Average: $152.98.
- Toronto-Dominion Bank (TD-T, “sector outperform”) to $86 from $87. Average: $85.97.
He maintained his targets for these stocks:
- Canadian Imperial Bank of Commerce (CM-T, “sector outperform”) at $77. Average: $73.09.
- Canadian Western Bank (CWB-T, “sector outperform”) at $52. Average: $46.07.
- Laurentian Bank of Canada (LB-T, “sector perform”) at $26. Average: $26.73.
“Heading into the quarter we like the setup for CM and RY, and are most cautious on BMO and EQB,” he said. “Once again, TD heads into reporting season in a unique position as AML issues at the bank overshadow quarterly results. We doubt that Management will be able to provide any more colour on this topic, and as a result we see tail risk magnified for this name with any sign of weakness in the US either on the asset or liability side of the ledger likely to be severely punished, but any strength unlikely to drive a rally in the shares as investors wait for the terms of a resolution. Given its pending acquisition by NA, CWB is also in a unique position where results are unlikely to drive material moves in the stock either up or down barring any significant change in the underlying health of the business.”
“From a stock-selection perspective, CM is our top pick in the group. For the longest time the market was of the view that a re-rating of this stock would only happen if it managed to hold up well relative to peers through a credit cycle. Well, as Q2 illustrated, we are in the midst of a credit cycle and despite some early pressure in its U.S. office portfolio, CIBC’s credit performance is holding very well versus other banks. The re-rating of this stock is well underway, but we see more room to go.”
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Mining analysts at Scotia Capital lowered their near-term commodity price outlook on Monday to reflect “the impact of weaker global demand, particularly in China, which appears to be more than offsetting supply-side challenge.”
The firm cut its 2024 outlook for copper, nickel and zinc by an average of 8 per cent and 2025 by 7 per cent. That led to several negative target price changes for stocks in its coverage universe.
“Given the significant recent downward move in both commodity prices and the equities, we have revisited the Cu equities in the context of current spot prices under several key relative metrics: (1) value, (2) growth, (3) leverage, and (4) capital return potential,” the analysts said. “Due to the extreme challenge in building new large-scale Cu capacity and ongoing shareholder pressure to reposition asset portfolios toward “green metals”, we anticipate a heightened M&A environment to continue, supporting elevated multiples. The large/mid Cu producers are currently trading at an average implied Cu price of $5.26/lb (a lofty 28-per-cent premium to spot).
“CS, CCO, and TECK are top picks; ERO, FCX, HBM, IVN, LUN, MTAL are also recommended for Cu exposure. Among the developers, we prefer ASCU, DML, IE, and NXE. We rate GMEXICO, NEXA, and SCCO Sector Underperform due to unattractive risk/reward profiles.”
Analyst Orest Wowkodaw upgraded Lundin Mining Corp. (LUN-T) to “sector outperform” from “Sector perform” on Monday, citing “the shares’ attractive relative valuation, the material de-risking (project development and FCF outlook) via the new Vicuna District JV, and a markedly improved H2/24 operating forecast.”
“Moreover, we now believe the company is a potential medium-term takeover candidate,” he added.
Mr. Wowkodaw lowered his target for its shares to $16 from $18. The average target on the Street is $17.80.
Target adjustments include:
- Altius Minerals Corp. (ALS-T, “sector perform”) to $24 from $23. Average: $25.57.
- Cameco Corp. (CCO-T, “sector outperform”) to $80 from $81. Average: $76.10.
- Capstone Copper Corp. (CS-T, “sector outperform”) to $12 from $13. Average: $13.57.
- Ero Copper Corp. (ERO-T, “sector outperform”) to $36 from $40. Average: $36.46.
- First Quantum Minerals Ltd. (FM-T, “sector perform”) to $17 from $18.50. Average: $20.73.
- Hudbay Minerals Inc. (HBM-T, “sector outperform”) to $14.50 from $17. Average: $16.12.
- Ivanhoe Mines Ltd. (IVN-T, “sector outperform”) to $21 from $23. Average: $24.67.
- Labrador Iron Ore Royalty Corp. (LIF-T, “sector perform”) to $31 from $32. Average: $33.67.
- Teck Resources Inc. (TECK.B-T, “sector outperform”) to $78 from $84. Average: $74.23.
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Citing interest rates, inflation, U.S. dollar expectations and incorporating the stronger than expected buying of gold from the official sector, precious metals analysts at Scotia Capital raised 2024/2025 gold price forecast by 5 per cent to US$2,300 per ounce and her long-term assumption by 6 per cent to $1,900 per ounce on Monday.
The firm also raised her forecast for silver by 4 per cent in 2024 and 2025 to US$27 per ounce and 6 per cent over the long term to US$25 per ounce.
Those changes led to adjustments to analysts’ net asset value and target price adjustments as well as group of rating changes.
Analyst Tanya Jakusconek made these changes:
- Newmont Corp. (NEM-N/NGT-T) to “sector outperform” from “sector perform” with a US$59 target, up from US$48. The average is US$55.65.
- AngloGold Ashanti Ltd. (AU-N) to “sector underperform” from “sector perform” with a US$30 target, up from US$27. Average: US$30.
“We have made two rating changes in the group; NEM to Sector Outperform (from Sector Perform), with the company expected to show operational improvement and hence margin expansion in 2H/24; AU has been moved to Sector Underperform (from Sector Perform) due to strong price appreciation (up 66 per cent year-to-date),” she said. “Target price changes were seen for most companies (NAV increased by 5 per cent, target prices by 10 per cent).”
Analyst Eric Winmill upgraded Torex Gold Resources Inc. (TXG-T) to “sector outperform” from “sector perform” with a $27 target, up from $26. The average is $29.17.
“With Torex Gold’s Media Luna project build progressing well despite modest capex pressures and positive outlook for free cash flow in 2025E as Media Luna ramps up (with significant copper byproducts from copper concentrate production also starting in 2025), we think the risk/reward profile for TXG shares looks increasingly favourable and supports our ratings change,” he said.
Analyst Ovais Habib downgraded Osisko Mining Inc. (OSK-T) to “sector perform” from “sector perform” with a $4.90 target, up from $4.25. The average is $5.21.
“[Our changes are] based on a valuation of 1.10 times NAV (up from 1.00 times NAV previously) following Gold Fields’ (GFI) all-cash offer to acquire the company,” he said. “The transaction would consolidate the remaining 50-per-cent interest in the 50/50 JV between OSK and GFI for the Windfall gold project located in Quebec, which hosts a mineral reserve of ~3.2 Moz Au. We see GFI as the logical consolidator for OSK, and see the likelihood of a third-party offer as very low, given the existing 50/50 JV structure for Windfall and the strong cash offer premium. Following the deal announcement, OSK has re-rated to 98 per cent of the offer price, currently trading at 0.77 times P/NAV at spot, while developer peers trade at an average of 0.37 times.”
Other notable target changes include:
- Agnico Eagle Mines Ltd. (AEM-N/AEM-T) to US$94 from US$81. Average: US$83.21.
- Barrick Gold Corp. (GOLD-N/ABX-T) to US$25 from US$23. Average: US$22.90.
- Eldorado Gold Corp. (EGO-N/ELD-T) to US$20 from US$18. Average: $27.60 (Canadian).
- Franco-Nevada Corp. (FNV-N/FNV-T) to US$142 from US$141. Average: US$137.96.
- Kinross Gold Corp. (KGC-N/K-T) to US$11 from US$9.50. Average: US$10.44.
- Osisko Gold Royalties Ltd. (OR-T) to $27 from $25. Average: $28.54.
- Triple Flag Precious Metals Corp. (TFPM-N/TFPM-T) to US$21 from US$20. Average: US$18.67.
- Wheaton Precious Metals Corp. (WPM-N/WPM-T) to US$72 from US$66.50. Average: US$67.24.
“Our top picks are AEM, KGC, GOLD, NEM in the operators and WPM and TFPM in the streamers, with the operators preferred to the streamers,” she said.
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Touting its “ample returns and excess value,” National Bank Financial analyst Dan Payne said he’s increasingly looking towards Topaz Energy Corp. (TPZ-T) as “one of the highest quality and most defensive orientations” in his coverage universe following a “strong” second quarter.
“The crux of our thesis remains the same, with high visibility for high-quality growth supporting unique & expanding returns and shareholder value,” he said.
“Bottom line, with broad portfolios of indiscernible royalty interests in the peer group trading at 12-13 times (or an effective implied FCF yield of 8 per cent), we wonder why the market wouldn’t be willing pay at least that multiple (which our revised target is based on), if not more, for the high visibility of returns through TPZ’s portfolio?!”
In a research report released Monday, Mr. Payne ascribed a value of $28.50 per share to Topaz’s royalty portfolio, noting: “Tangible growth remains unique for its royalty business, with high-quantum committed capital (approximately $2.7-billion per annum) that provides high visibility to a diversity of high-quality projects, through exposure to the Montney (TOU) and the Clearwater (HWX & TVE).”
He also gave $2 per share in value from its M&A upside, believing that organic growth outlook will “remain complemented by continued momentum for transactional growth through M&A, for which it remains well funded with about $175-million per annum in excess FCF.”
The analyst pegged its “foundation of support and returns” at $5.50 per share, believing “the diversity, quality and resilience of its asset portfolio continue to backstop strong margins from which to insulate it through the commodity cycle, while supporting defensive (and growing) returns & income.”
Mr. Payne thinks the Calgary-based company’s “investments to date has created a depth and diversity across its portfolio, which support a quantum and quality of returns to backstop its multiple and value, and towards which we have distilled its exposures and value prospects.” That led him to hiked his target for its shares to $32.50 from $28.50, reiterating an “outperform” recommendation. The current average is $29.69.
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In other analyst actions:
* RBC’s Jimmy Shan raised his target for Automotive Properties REIT (APR.UN-T) to $12.50 from $11.50, keeping a “sector perform” rating. The average on the Street is $12.22.
* TD Cowen’s Tim James cut his Chorus Aviation Inc. (CHR-T) target to $3.25, matching the average, from $3.50 with a “buy” rating, while Canaccord Genuity’s Matthew Lee lowered his target to $2.50 from $2.75 with a “hold” recommendation.
“With the leasing business slated for sale, we believe Chorus’ growth focus will now be on the redeployment of the nine aircraft that are coming off lease with AC next year and long-term contract opportunities in Voyageur,” said Mr. Lee. We have increased our revenue forecast on Voyageur given the strong performance this quarter and the firm’s renewed focus on the segment. Management reiterated its guidance of $150-million revenue contribution from Voyageur in 2025 ($35-million EBITDA). The outlook for CPA revenue remains unchanged, with a step down of leasing and fixed margin in F26.”
* RBC’s Pammi Bir bumped his Extendicare Inc. (EXE-T) target to $9.50, matching the average, from $8.50 with a “sector perform” rating.
* Piper Sandler’s Charles Neivert lowered his Nutrien Ltd. (NTR-N, NTR-T) target to US$50 from US$55, reiterating an “underweight” recommendation. The average is US$61.34.
* Truist Securities’ Jake Barlett trimmed his Restaurant Brands International Inc. (QSR-N, QSR-T) target by US$1 to US$86 with a “buy” rating. The average is US$84.55.
* Barclays’ Theresa Chen raised her TC Energy Corp. (TRP-T) target to $64 from $61 with an “overweight” rating. The average is $59.74.