Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
CIBC REIT analyst Sumayya Syed sees stability in the sector,
“Q2 results saw almost all REITs maintain their outlooks, reflecting consistent operational performance. Retail REIT fundamentals were the most intact with high-90% occupancy and sustained large leasing spreads. CHP units notably lead the sector on valuation and are within 5% of NAV, reflecting the market’s preference for defense. In retail we like CRR for its defensive positioning and potential for valuation to catch up to concentrated-tenant peers. Normalization was once again the theme for industrial REITs, and valuations suggest to us that occupancy declines are garnering more attention than consistently high leasing spreads. The FFO growth outlook remains well ahead of peers and DIR is our preferred industrial name … We estimate 2025 FFO/unit growth at ~3%, led by industrial REITs at ~8%, retail at 3%, and office REITs trail the group at a ~2% FFO decline. At ~9%, DIR leads the pack for 2025 FFO growth. Valuation: The average NAV discount for our coverage of ~20% is larger than historical levels, but improved from last quarter. Defensive names continued to be favored, as CHP, CRR and CRT trade at much smaller discounts of ~9%. Industrial REITs have lagged the sector YTD, and average an 18% discount, which we view as punitive in light of a growth outlook that exceeds peers’. In office, AP and D are trading at ~17% discount, which in our view is a better valuation than the fundamentals warrant”
Ms. Syed has outperform ratings on H&R REIT, Nexus Industrial REIT, Automotive Properties REIT, Granite REIT, Crombie REIT, PRO REIT and Primaris REIT.
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BofA Securities analyst Ebrahim Poonawala previewed Canadian bank earnings and provided top picks,
“3Q24 results are likely to reflect a challenged Canadian economy, with banks expected to report sluggish loan growth, while credit costs (impaired PCLs) creep higher. The key question for investors is whether the ~100bp recent decline in bond yields is enough to brighten the EPS outlook for the sector? … Our revised EPS estimates imply EPS growth +3.3% YoY for 3Q24 or the same as what banks reported for 2Q24. Key drivers of our 3Q24 forecast include: rising impaired PCLs 48bp or +4bp QoQ, tepid loan growth 2.8% YoY, stable net interest margins averaging 1.49% or flat QoQ. Capital levels are a bright spot … We anticipate CIBC (and maybe BMO) to initiate share buybacks … We view Royal Bank of Canada (RY) as best-of-breed, and it remains our top pick given potential for EPS upside / ROE improvement driven by synergies stemming from the recently closed HSBC Canada transaction. We also highlight Buy-rated BMO Financial (BMO) where mgmt. credibility has been hurt due to back-to-back disappointing quarters, driving -11% YTD revision to consensus FY25e EPS. Despite this, we see risk/reward as attractive given the lowered expectations”
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BMO chief strategist Brian Belski thinks a turnaround in foreign equity buying could drive the TSX much higher,
“Even as the S&P/TSX hits a new all-time high, sentiment and general tone from most of the Canadian centric investors we speak with remains decidedly skeptical, at best. However, when we combine predominantly negative sentiment with elevated levels of cash on the sidelines and steadily improving foreign flows, we believe there remains a lot of room for Canadian stocks to run to continued new price highs. Granted, although our work indicates that institutional investors have been actively deploying excess cash over the first half of 2024, retail investors have been building cash positions, while foreign investors have remained net sellers of Canadian equities year-to-date. As such, we believe there remains a significant amount of cash on the sidelines and potential for positive equity flows into Canada to drive Canadian equities higher through the remainder of the year and beyond. Indeed, as of the end of the first quarter 2024, Canadian households continued to hold decade high levels of cash and cash equivalents, with both household money market funds and cash holdings near 10-year highs. In fact, our work shows that the TSX tends to bottom and exhibit strong returns when cash positions decline from peak levels, with peaks in money market assets under management often coinciding with troughs in TSX performance. Additionally, while foreign investors remained net sellers of Canadian equities as recent as June 2024, the pace of selling has slowed significantly over the last 12-months and will likely reverse course”
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Diversion: “How the Sony Hack Changed Hollywood” – The Ringer