Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Darko Mihelic reduced his forecast for Canadian banks on Monday, projecting weaker-than-anticipated net interest margins and loan growth amid turmoil in the sector.
“The bank stock volatility has been dramatic in the wake of the SIVB/SBNY failures and the Credit Suisse/UBS merger,” he said. “Like our colleagues in the U.S., we believe those U.S. bank failures were idiosyncratic and their business models that drove the failures are not representative of the banking industry. Similarly, the events surrounding Credit Suisse were quite specific to that institution, though the impact of the forced merger may have more unforeseen global impacts than SIVB or SBNY. Essentially these ‘events’ have caused disruption and issues for the financial system globally. It is still early days (very early), and there could be some aftershocks from these failures that may yet emerge.
“When there are bank shocks that could (however remotely) cause contagion, our first concern is liquidity/funding, direct exposures to either the failed institution or assets that are immediately affected, and then after effects (so called 2nd order and 3rd order impacts) which in this case could lead to a swifter or more pronounced recession.”
In a report released before the bell, Mr. Mihelic cut his core earnings per share estimates by an average of 3 per cent with his 2023 and 2024 full-year projections sliding 2 per cent.
“We have not altered our capital markets estimates, wealth estimates and/or our PCL estimates for any of the banks under our coverage,” he said. “The Canadian banks’ second quarter ends April and hence we believe we will be in a better position to properly vet capital markets, wealth, and PCL estimates closer to quarter end. Shorter term, we continue to expect heightened volatility as the aftershocks of these events become clearer. We acknowledge, however, that for investors with a longer-term horizon and with a higher risk tolerance, valuations appear attractive.”
Those changes led to these adjustments to target prices for stocks:
* Bank of Montreal (BMO-T, “outperform”) to $151 from $154. The average target on the Street is $141.77, according to Refinitiv data.
* Bank of Nova Scotia (BNS-T, “sector perform”) to $76 from $77. Average: $73.70.
* Canadian Imperial Bank of Commerce (CM-T, “sector perform”) to $69 from $70. Average: $65.07.
* National Bank of Canada (NA-T, “sector perform”) to $108 from $111. Average: $106.50.
* Toronto-Dominion Bank (TD-T, “outperform”) to $110 from $113. Average: $100.07.
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Scotia Capital’s Orest Wowkodaw “meaningfully” increased his financial estimates for First Quantum Minerals Ltd. (FM-T) following its new 20-year fiscal agreement for Cobre Panama, seeing the terms “less punitive than initially anticipated” and a “positive” for its shares.
“Following a review of the detailed document released on March 23 (translated by FM), we note the following three key takeaways: (1) The royalty is less onerous than anticipated due to an unexpected depreciation allowance. (2) Taxes are markedly lower than envisioned due to allowable deductions for interest, depreciation, and most importantly, resource depletion; the resource depletion credit serves to effectively shield 70 per-cent of taxable income in the 2023-2031 period and 30 per cent thereafter. (3) Cash taxes will be further shielded by $750-million of LOM [life-of-mine] infrastructure credits (up to $60-million per annum),” he said.
Mr. Wowkodaw raised his EBITDA projections for 2023 through 2025 by an average of 6 per cent. His adjusted earnings per share estimates are now $1.48, $1.57 and $2.83, respectively, rising from $1.28, $1.47 and $2.43.
Maintaining a “sector outperform” rating for First Quantum shares, he hiked his Street-high target to $40 from $38. The average is $31.07.
“Despite heightened geo-political risks, we rate FM shares SO based on the company’s solid growth profile, high Cu leverage, takeover optionality, and attractive valuation,” he said.
Elsewhere, others making changes include:
* BMO’s Jackie Przybylowski to $23 from $22 with a “market perform” rating.
“We continue to see some risks to the agreement, particularly given the relatively long period before the agreement is confirmed by the National Assembly, and given the uncertainty in behaviour of National Assembly members (potentially escalating as the May 5, 2024 federal elections move closer),” she said. “We are supportive of First Quantum maintaining its steps to proceed towards an arbitration process as a stopgap measure in the event that approvals are not straightforward.”
* Barclays’ Matt Murphy to $22 from $20 with an “underweight rating.
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In a research note titled History Doesn’t Repeat but It Often Rhymes, equity analysts at BMO Nesbitt Burns lowered their oil price forecast for 2023 and 2024, leading to a series of target reductions to stocks in their coverage universe on Monday.
“Crude oil prices plunged as the recent banking crisis amplified fears of a global recession that could lead to weaker oil demand,” they said. “Recessionary fears have been weighing on oil prices over the past six months as interest rates have risen. We believe that the current oil market reflects ‘peak pessimism,’ due to the uncertainty over global oil demand and that crude oil prices could strengthen over the second half of 2023 as global oil demand improves, outpacing supply and shifting the supply-demand balance to a deficit. Our outlook assumes a moderate recession leads to a year-over-year decline in OECD demand, but overall demand grows thanks to rising non-OECD demand, especially in China. We believe that rising oil prices should re-focus investors’ attention on the strong free cash profiles and expectations for higher cash returns.”
Their target changes include:
- Cenovus Energy Inc. (CVE-T, “outperform”) to $30 from $32. The average is $32.84.
- Imperial Oil Ltd. (IMO-T, “outperform”) to $84 from $85. Average: $78.63.
- MEG Energy Corp. (MEG-T, “outperform”) to $25 from $26. Average: $25.
- Topaz Energy Corp. (TPZ-T, “outperform”) to $28 from $30. Average: $28.83.
- Tourmaline Oil Corp. (TOU-T, “outperform”) to $78 from $85. Average: $89.07.
- Vermilion Energy Inc. (VET-T, “market perform”) to $22 from $23. Average: $29.81.
“We remain bullish on the outlook for oil and gas equities over the second half of 2023 based on our expectations for a continuation of strong (or even stronger) commodity prices and a concomitant increase in distributions to shareholders. Our top recommendations are Canadian Natural Resources, Chevron, Headwater, Hess, Parex, Pioneer, Suncor, and Tourmaline,” the firm said.
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In response to “soft” 2023 guidance with the expectation for “heightened” competition, National Bank Financial analyst Endri Leno downgraded Knight Therapeutics Inc. (GUD-T) to “sector perform” from “outperform” previously.
On Thursday, the Montreal-based company reported better-than-expected results for the fourth quarter of fiscal 2022. Revenue rose 40 per cent year-over-year to $81.7-million, while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) jumped 143 per cent to $13.8-million. Both topped the Street’s forecast ($61-million and $5.4-million, respectively).
However, Knight’s guidance fell short of the consensus projections. Revenue for fiscal 2023 is expected to come in at $280-million to $300-million and adjusted EBITA margin at 13 per cent to 15 per cent. The Street had estimated $302.2-million and 16.5 per cent, respectively.
“[Those are] implying a 2023 Adj. EBITDA of $41-million (down 25 per cent year-over-year) at midpoint (vs. our $53-million prior estimate),” said Mr. Leno. “The decline is due to competition in the branded generics portfolio in 2023 (GUD to respond with price cuts) with some moderation from new product launches and the one-time Ambisome contract. Management characterizes these headwinds as a phasing issue related to the slower realization of the BD pipeline, noting that guidance does not include any new deals/products. While we find the 2023 guidance disappointing, we do note that prior ones have generally been conservative – GUD’s actual 2022 revenues were approximately 9 per cent/12 per cent ahead of Nov-2022/Mar-2022 guidance, respectively.”
After trimming his 2023 revenue and earnings estimates in response to the release, Mr. Leno cut his target for Knight shares to $6 from $7.75. The average on the Street is $6.30.
“Considering that 2023 Adj. EBITDA guidance and our 2024 Adj. EBITDA forecast are both below GUD’s 2022 results, we are moving the stock to Sector Perform (was Outperform) until we have more visibility on the inflection of Knight’s financial performance,” he concluded.
Elsewhere, BMO’s Douglas Miehm cut his target by $1 to $6.50 with an “outperform” rating.
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After a record 2022, Canaccord Genuity’s Carey MacRury thinks Osisko Gold Royalties Ltd. (OR-T) provides “a compelling combination of growth, value, balance sheet strength, and upcoming potential catalysts.”
“The company achieved annual records for GEO production, revenue, and operating margin in 2022, and we forecast GEOs growing 11 per cent to 99 koz in 2023 and 33 per cent by 2027, and again note that several potential catalysts could provide further upside to the production profile,” he said. “Osisko currently trades at 1.07 times NAV [net asset value] and 13.8 times 2024 estimated EBITDA vs. its royalty and streaming peers at 1.40 times and 13.7 times. Osisko remains one of our top picks in the precious metals royalty/streaming space.
In a research report released Monday, he trimmed his earnings and cash flow expectations for 2023 and 2024 in reaction to its largely in-line fourth-quarter results as well as several asset updates and tweaks to his valuation. He’s now estimating adjusted earnings per share of 55 cents for the current fiscal year and 71 cents for next year, down from 61 cents and 76 cents previously.
However, he raised his target for Osisko shares to $25.50, above the $22.19 average, from $23 with a “buy” rating.
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Echelon Partners analyst Stefan Quenneville thinks Medexus Pharmaceuticals Inc.’s (MDP-T) top line is “poised to grow meaningfully in the coming years via successful growth product launches and label expansions.”
Pointing to its “stable core portfolio of commercial assets” complimented by “high-growth launch products,” he initiated coverage of the Bolton, Ont.-based specialty pharma company with a “speculative buy” recommendation.
“Medexus licenses or acquires products to grow its product portfolio and leverages its established North American salesforce to provide essential medicines to patients. By targeting higher-priced medicines with wide moats that treat smaller, distinct patient populations (orphan drugs) overlooked by ‘Big Pharma’, the Company has grown its revenue per salesperson by almost 80 per cent over the last four years,” said Mr. Quenneville.
“Growth products such as Gleolan (Glioblastoma imaging agent) and Treosulfan (pre-stem cell transplant conditioning agent), as well as other potential additions, are expected to boost top line growth and improve profitability over the coming years. With increasing capital and sales infrastructure, Medexus is afforded opportunities to in-license or acquire products with successively greater market potential.”
Seeing a “proven” business model, the analyst thinks there are multiple catalysts forming, particularly the resubmission of a regulatory application for its stem cell transplant drug treosulfan. He thinks recent delays have resulted in “market overreactions” and now present a buying opportunity for investors.
“We believe the FDA will ultimately join Canadian and European regulators in approving the drug for pre-transplant immune conditioning given the survival benefit it has shown in clinical trials,” he said. “With the stock now trading below its ex-Treosulfan value, the expected FDA approval in mid-F2025 provides meaningful upside and a favourably skewed risk/reward opportunity for investors.”
Mr. Quenneville set a target of $3 per share, representing upside of almost 140 per cent. The average on the Street is $3.30.
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Still seeing “significant growth opportunities ahead” after “supercharged” 2022 growth, Canaccord Genuity analyst Matthew Lee thinks the valuation for Hammond Power Solutions Inc. (HPS.A-T) “remains attractive given growth, balance sheet, and cash flow.”
On March 9, the Guelph, Ont.-based manufacturer reported fourth-quarter consolidated revenue of $144.3-million, up 24 per cent year-over-year but below the the Street’s forecast of $154.6-million as sales in North American disappointed. However, EBITDA jumped 287 per cent to $24.1-million, easily exceeding the consensus of $17-million with easing material costs and inventory adjustments.
“We note that excluding the one-time inventory adjustment, EBITDA of $17-18-million would still handsomely beat our forecasts and consensus,” said Mr. Lee.
“Our key takeaway from the quarter was management’s view that Hammond could be a $1-billion revenue firm by the end of the decade, which suggests robust growth via both organic distribution expansion and opportunistic acquisitions over the next several years.”
Mr. Lee thinks project-driven demand is likely to continue “despite economic softness,” supporting his estimate of 9-per-cent revenue growth in 2023.
“Management noted that most of Hammond’s facilities are operating near capacity now due to the significant increase in volume last year,” he said. “We expect that Hammond will invest at least $40-million in factory facilities over the next two years for it to sustain its growth and fulfill its backlog. Even with the incremental capex, we believe HPS will still generate double-digit FCF yield and remain in a net cash position.”
“Given the strong quarter and continued demand expectations of customers, we have increased our estimates in F23 and F24. We now forecast F23 EBITDA of $72.8-million (from $62.1-million) and F24 EBITDA of $78.8-million (from $65.1-million). Our EPS forecast is $3.57 in F23 and $3.82 in F24. We have increased our capex to $44-million over the next two years to support volume growth.”
Reiterating his “buy” recommendation, Mr. Lee hiked his target to $41.50 from $29. The average is $48.83.
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In other analyst actions:
* Scotia Capital’s Michael Doumet increased his target for Badger Infrastructure Solutions Ltd. (BDGI-T) to $32.50 from $32 with a “sector perform” rating, while Stifel’s Ian Gillies raised his target to $49 from $44 with a “buy” rating. The average on the Street is $36.47.
“Margin momentum was evident through 2022, particularly in the 2H: gross margins in 1Q (down 1070 basis points), 2Q (down 660bp), 3Q (down 540bp), and 4Q (down 400bp) progressively closed the gap versus the comparable quarters in 2019 as COVID-related headwinds abated and operations improved,” Mr. Doumet said. “On the cc, management noted an opportunity to further increase margins with price, operating leverage, and cost containment efforts. For 2023, we forecast EBITDA margin expansion of 400bp versus 2022, with the improvement skewed towards the 1H (i.e. easier comps). The offset to the margin expansion story, in our view, is the large capex outlay required in the next 2-3 years to update the fleet. As such, while we expect the margin expansion story to play out, we believe the risk/reward on the shares is largely balanced, as macro risks could weigh on the margin upside and as FCF remains muted through 2024.”
* BoA Securities’ Ken Hoexter cut his Canadian National Railway Co. (CNI-N, CNR-T) target to US$134 from US$137 with a “buy” rating. The average is US$129.25.
* Scotia Capital’s Konark Gupta raised his Exchange Income Corp. (EIF-T) target to $65, above the $63.27 average, from $64 with a “sector outperform” rating.
“We hosted investor meetings with Mike Pyle (CEO) and Pam Plaster (VP Investor Development) following the company’s announcement of its latest strategic acquisition,” said Mr. Gupta. “The discussions mostly centered on the new M&A and growth pipeline as EIF remains a growth story with a relatively resilient portfolio of defensive and cash flow positive businesses. We came away more confident in our financial outlook for EIF and now expect EBITDA to exceed $600M in as early as 2024, even before upside from new M&A or organic growth opportunities. We have slightly raised our estimates to reflect the latest accretive acquisition, which drives our target to $65 (was $64). We maintain our Sector Outperform rating as we expect a number of growth catalysts ahead and the valuation looks attractive at 6.4 times EV/EBITDA on our 2024 estimates.”
* Raymond James’ Steve Hansen cut his Farmers Edge Inc. (FDGE-T) target to 30 cents from 45 cents, keeping an “underperform” rating. The average is $1.43.
“While management has made clear progress on its cost reduction efforts, new channels for revenue growth remain murky/elusive, in our view,” he said. “At the same time, with credit line resources quickly depleting, we worry that turnaround efforts come too little, too late.”
* Scotia Capital’s Phil Hardie bumped his Guardian Capital Group Ltd. (GCG-T) target to $56 from $55 with a “sector outperform” rating. The average is $52.57.
“We believe the value proposition for owning Guardian shares continues to be strong,” he said. “Guardian has delivered an estimated 10-year annual total shareholder return of 15 per cent, yet the stock continues to fly under the radar of most investors despite what we view as a high level of optionality and steeply discounted valuation.
Earlier this month, the company closed a milestone transaction that successfully monetized a number of what we believed to be perpetually undervalued assets. We estimate the roughly $630-million of proceeds bolster its net corporate investment portfolio to $1.25-billion representing almost $48 per share. ... Guardian’s sizeable corporate investment portfolio likely provides a high degree of optionality for value creation that include levers ranging from M&A strategies to share buybacks which could potentially double the share price over the next few years.”
* Barclays’ Adrienne Yih cut her Lululemon Athletica Inc. (LULU-Q) target to US$368 from US$394, keeping an “overweight” recommendation. The average is US$372.64.
* Canaccord Genuity’s Katie Lachapelle bumped her Patriot Battery Metals Inc. (PMET-X) target to $16.75 from $16.50 with a “speculative buy” rating. The average is $16.37.
* Stifel’s Alex Terentiew cut his Teck Resources Ltd. (TECK.B-T) target by $5 to $65 with a “buy” rating. The average is $65.72.
“Ahead of Teck’s modelling workshop on March 30, where the company will attempt to reduce some cash flow and valuation uncertainty that has emerged since its announcement that it is divesting its steel making coal business (Elk Valley Resources - EVR), we are updating our estimates to reflect what we believe the new value of the company is to existing shareholders,” he said. “In our view, the structure of the divestiture is more complicated than most deals we have witnessed, but after discussions with management, we have added more long-term capital to EVR, separated the met coal business into value for Teck Metals and value of EVR as a standalone entity.”
David Leeder