A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
RBC Capital Markets analyst Pammi Bir discussed the difficult market for REITs and provided top picks.
“The TSX REIT Index has posted a -19% total return (to Jun-23/22), on pace for among its weakest first-half returns on record … We believe the combination of the sharp rise in interest rates (particularly at the long-end of the yield curve) and growing concerns of a potential material economic slowdown has weighed heavily on sector sentiment … A reasonable but not excessive “margin of safety.” The sector is trading at 23% below net asset value, well below its LTA [ long term average], with investors likely discounting higher cap rates and/or lower NOI [net operating income] ahead. Notably, the sector’s 6.3% implied cap rate is 80 bps above our 5.5% avg. NAV cap rate. The current 17x P/AFFO [price to adjusted funds from operations] (6.0% AFFO yield) is in line with the 10 year avg. The 268 bps AFFO yield spread to the 10Y GoC has returned to fair value range, as has the 62 bps spread to Moody’s Baa Index. We have 16 outperforms: Allied Properties, Boardwalk, BSR, CAPREIT, Chartwell Retirement Residences, Dream Industrial, European Residential, First Capital, Granite, InterRent, Killam Apartment, Minto Apartment, Morguard North American Residential, RioCan, SmartCentres, and StorageVault. Amid higher interest rates, our picks remain skewed to names we view as more resilient in delivering NOI, FFO, NAV, and distribution growth, particularly in industrial & multi-family.”
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CIBC energy analyst Dennis Fong believes domestic oil stocks are already pricing in slower growth.
“Our review of U.S. recessions over the past five decades suggests that demand destruction of as much as 4.5 MMBbl/d is possible. In such a draconian scenario, Canada’s major oil producers would still have over 10% free cash flow yield. Simply put, current stock prices for Canada’s large-cap oil and gas producers already seem to be discounting material commodity price declines … On the demand front, declines of as much as 4.5 MMBbl/d against current demand of ~100 MBbl/d would be extreme but not extraordinary. Using a price decline metric of US$8 to $12 per MMBbl/d of demand destruction would suggest a dramatic decline in WTI to US$70 … It is difficult to consider a $40+ decline in oil prices as anything other than punitive, but even in such a scenario, Canada’s large-cap oil and gas names would still be significant free cash flow generators.”
Mr. Fong has outperform ratings on Suncor Energy Inc., Whitecap Resources Inc., Canadian Natural Resources, Crescent Point Energy and Cenovus Energy Inc.
“CIBC: domestic oil stocks already priced for eco slowdown” – (research excerpt) Twitter
Also see: Why Canadian energy stocks are a no-brainer
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BMO chief strategist Brian Belski reiterates domestic financials as his highest conviction overweight sector.
“Yes, earnings growth is set to slow on tough comparables, rising rates will put pressure on debt servicing and household loan growth, and normalizing loan loss provisioning is now a headwind for earnings growth. However, these are all largely expected and very manageable risks in our opinion. Overall, despite these modest headwinds we believe the sector remains one of the strongest relative value plays in Canada, not to mention within most global markets. Moreover, the sector’s perpetual strong income and dividend growth characteristics broadly position Canadian Financials as an attractive destination for value, income and even GARP investors. As such, we steadfastly maintain our holdings within this highest-conviction Canadian sector and continue to prefer those companies with strong US platforms – especially within the banks (commercial banking + wealth management). Furthermore, Canadian-centric investors concerned about rising and elevated interest rates could tilt their Financials exposure towards insurance providers which offer similar value and income characteristics, but also tend to outperform banks during extended periods of rising rates.”
BMO bank analyst Sohrab Movahedi has outperform ratings on CIBC, Canadian Western bank National Bank and Bank of Nova Scotia. BMO financial services analyst Tom Mackinnon has an outperform rating on Sun Life Financial among major insurers.
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Diversion: “Why roller coaster loops aren’t circular anymore” – Vox
Tweet of the Day: “OIL MARKET: Over the last 2 weeks, the US gov has injected 13.7 million barrels from the SPR into the market. And yet, commercial oil stockpiles still fell 3 million barrels over the period. Just imagine if the SPR wasn’t there. Or what would happen post-Oct when sales end” – Twitter
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