Inside the Market’s roundup of some of today’s key analyst actions
Royal Bank of Canada (RY-T) is “earning that premium valuation,” according to National Bank Financial analyst Gabriel Dechaine.
Shares of the country’s largest bank by market capitalization jumped 2.2 per cent on Wednesday after it reported better-than-anticipated third-quarter financial results, driven by a strong performance from its domestic personal and commercial banking division and a better-than-expected credit performance due to lower wholesale and U.S./Wealth losses as well as with a lower sequential loss rate in Canada. Adjusted earnings per share came in at $3.26, topping both Mr. Dechaine’s $2.99 estimate and the consensus projection on the Street of $2.95.
A breakdown of the big banks’ third-quarter earnings so far
In particular, Mr. Dechaine was impressed by RBC’s credit performance, which he thinks “allays broader sector concerns,” and its P&C domestic gains as it integrates its HSBC Canada acquisition.
“Q3/24 loan losses were 32 per cent below our forecast. Impaired loss rates declined in Canadian banking, Capital Markets and Wealth/CNB on a sequential basis,” he said. “Credit improvement in Capital Markets is noteworthy, if only because it had been running a higher loss rate the past five quarters (in part due to elevated CRE losses) and because of concerns related to RY’s $20-billion leveraged finance book. Separately, RY added only $42-million (or 1 basis point) to performing provisions this quarter, citing increased confidence in the bank’s base case economic outlook. Looking ahead, RY reiterated its 30-35 bps impaired loss rate for fiscal 2024. While no 2025 guidance was provided, we believe it could be bumped higher (i.e., 35-40 bps), if only because of RY citing ongoing concerns about financial strain on consumers, many of which haven’t faced higher mortgage financing costs.”
“Canadian P&C banking PTTP was up 24 per cent year-over-year and 13 per cent year-over-year, excluding HSBC Canada (operating leverage was 4 per cent on an organic basis). Speaking of the HSBC acquisition, the bank disclosed that it had achieved $120-million in year-to-date synergies, or 50 per cent of the annualized targeted figure. On the other hand, we were disappointed by the lack of standalone HSBC loan balance disclosure. Management commentary provided no clarity, either, on how retention of acquired loans has progressed. At Q2/24, HSBC loans were 3 per cent below where they were when the acquisition was announced. Stabilizing and growing this base is an important indicator of integration success.”
Expecting a “more active” share buyback program moving forward, Mr. Dechaine raised his EPS projection modestly to reflect lower credit costs, leading him to increase his target for RBC shares to $169 from $160 with an “outperform” recommendation. The average target on the Street is currently $160.70, according to LSEG data.
“We are not using this quarter’s performance as a run-rate,” he noted. “We are also increasing our target multiple to 12.5 times from 12 times, mainly to reflect challenges facing other banks, which limits choices in the sector.”
Elsewhere, others making target adjustments include:
* Scotia’s Meny Grauman to $167 from $154 with a “sector outperform” rating.
“Royal Bank came into this reporting season as a consensus favorite despite its peer leading premium (16 per cent on consensus F2025 before reporting season), and it leaves in the same position thanks to a very strong Q3 performance that beat the Street by 11 per cent,” said Mr. Grauman. “Although a beat on Loan Loss Provisions is part of the story it is not the whole story as revenues, and in particular Net Interest Income, came in well above our expectations. RY’s Canadian Banking unit was a key reason for the beat, and we have seen that trend at other banks this earnings season, but Wealth also delivered better than expected results. Meanwhile, Royal’s Capital Markets business also delivered another quarter of earnings above the $1-billion mark. We note that this quarter marks the first time RY has hit its medium-term core ROE target of 16 per cent plus since Q1/F23. That said, we still don’t expect the bank to hit that target next year given still deteriorating credit conditions into F2025.”
* Canaccord Genuity’s Matthew Lee to $172 from $159.50 with a “buy” rating.
“RY reported Q3 results [Wednesday] morning that featured an EPS beat driven by outstanding performance on both the cost and credit fronts,” said Mr. Lee. “While management remained somewhat conservative on its views of F25, we opine that there remains upside to the firm’s expectations, particularly in terms of credit. In addition, we were impressed by Royal’s capital markets business in the quarter, which should continue to strengthen in F25. On the P&C front, cost management was solid with the firm continuing to benefit from HSBC cost synergies, which we believe make positive operating leverage highly attainable. We have raised our estimates post-quarter on better capital markets and Wealth forecasts. In addition, we have raised our valuation premium for RY to 18 per cent from 15 per cent, reflecting the firm’s top-of-the-peer-group earnings visibility and performance.”
* RBC’s Sohrab Movahedi to $165 from $151 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 ROE and EPS growth,” he said.
* Desjardins Securities’ Doug Young to $172 from $163 with a “buy” rating.
“While adjusted pre-tax, pre-provision (PTPP) earnings were roughly in line with our estimate, cash EPS beat our estimate and consensus by a decent margin, driven by lower PCLs and a lower tax rate,” said Mr. Young. “All in, it was a good quarter.”
“We like RY’s scale and Canadian banking business, and the HSBC Canada acquisition.”
* CIBC’s Paul Holden to $166 from $155 with a “neutral” rating.
“RY posted a solid quarter with the majority of the EPS beat coming from lower PCLs and lower taxes. We are not making any major changes to our F2025 PCL assumption at this juncture and the company guided to a higher effective tax rate going forward. In other words, our F2025 and F2026 EPS estimates do not change. We generally like the results, but the valuation multiple at 12.9 times P/E (F2025 consensus) is getting stretched,” said Mr. Holden.
* TD Cowen’s Mario Mendonca to $178 from $171 with a “buy” rating.
“RY delivered strong results this quarter, with particularly strong NIM, underwriting results, and operating leverage. HSBC cost savings are on track. Capital was strong and supports greater activity under the NCIB. Finally, credit was not an issue, a key point in light of challenges at BMO. We believe this quarter’s results support RY’s significant P/E premium to the group,” he said.
=====
Desjardins Securities analyst Doug Young does not see any big issues stemming from “another solid quarter” from National Bank of Canada (NA-T).
Montreal-based National Bank reported cash earnings per share for its third quarter of $2.68, blowing past Mr. Young’s estimate of $2.53 and consensus of $2.47. Adjusted PTPP earnings topped his expectations by 4 per cent as all of its operating divisions beat.
“Canadian P&C banking adjusted PTPP earnings were above our estimate (up 13 per cent year-over-year),” he said “It had stable performance at ABA and Credigy. ABA’s gross impaired loan balance remains elevated, but management is comfortable with this book (average loan size $70,000, LTV 50 per cent). Credigy remains an interesting story. Margins are stable and 94 per cent of the book is secured.
“Credit has been another area of stability. PCLs [provisions for credit losses] were in line with our estimate — its Québec focus helps. In retail, its true variable-rate mortgage portfolio experienced higher delinquencies, but mostly from insured clients (whereas uninsured delinquencies are not far off pre-COVID-19 levels). It had one larger impairment in capital markets (mining). While it still expects increases in delinquencies going forward, there was no change to its impaired PCL rate guidance of 15–25 basis points for FY24 (it expects to be more at the midpoint).”
Also pointing to “strong” capital markets earnings, its positive operating leverage and lower-than-anticipated expenses, Mr. Young raised his full-year EPS forecast for both 2024 and 2025, prompting him to bump his target for National Bank shares to $127 from $118 with a “hold” recommendation (unchanged). The average target is $123.85.
“We like various parts of the NA story, but believe it is fairly valued,” he concluded.
Others making changes include:
* Scotia Capital’s Meny Grauman to $129 from $120 with a “sector perform” rating.
“There is no doubt that National Bank delivered a strong, high-quality Q3 result that beat Street expectations by a wide margin, but that doesn’t tell the whole story of why the shares were up 6 per cent on earnings day,” said Mr. Grauman. “Beyond impressive numbers is Canadian bank investors’ sudden insatiable appetite for Canadian exposure, and National Bank has plenty of that. That makes it a very hot commodity despite the fact that it already came into earnings season trading at an 4-per-cent premium to peers based on next year’s consensus EPS. This embrace of Canada is quite a switch from the state of affairs early in the year when rising rates and stretched consumer balance sheets was supposed to signal tough times for the group’s domestic results. Across the board the takeaway of this earnings season has been the resiliency of domestic P&C results. National delivered on that, while also beating in Wealth and Financial Markets (where earnings are up 23 per cent year-to-date), and meeting expectations in its US Specialty Finance and International segment.”
* Canaccord Genuity’s Matthew Lee to $123 from $113 with a “hold” rating.
“Overall, we came away from Q3 more positive on the organic prospects for National, noting that credit remains in very good shape and growth appears to be buoyant,” said Mr. Lee. “On the CWB front, management suggested that it was too early to provide additional details on revenue synergies, which is an area we remain keenly focused on. Overall, our forecasts for NA are increased to reflect sturdier Financial Markets performance and slightly higher P&C loan growth. We have raised our target multiple on NA post-quarter from 10.5 times NTM+1 P/E to 11x, making it only the second bank in our space that we ascribe a premium valuation to (next to RY). We maintain our HOLD rating on NA largely on valuation as the shares now trade at 11.6 times NTM P/E against the peer group at 10.5 times.”
* RBC’s Darko Mihelic to $116 from $113 with a “sector perform” rating.
“NA had a good quarter with solid revenues relative to our estimates and a higher than anticipated performing PCL build which we view as prudent. NA implemented an interest rate hedge to mitigate the impact of declining rates on capital with respect to its acquisition of CWB and hence, we expect nil impact from interest rates on its CET 1 ratio when the deal closes. We expect stronger earnings from Personal & Commercial than we did previously and our estimates increase modestly,” said Mr. Mihelic.
* BMO’s Sohrab Movahedi to $125 from $115 with an “outperform” rating.
“We like NA’s commitment to maintaining high ROEs while maintaining strong capital/reserve levels. NA’s earnings profile and profitability benefit from its duopoly in Quebec. The pending acquisition of CWB should add to earnings growth and diversification over time similar to its International strategy which has been both ROE and earnings accretive in recent years,” he said.
* CIBC’s Paul Holden to $134 from $122 with an “outperformer” rating.
“NA continues to deliver peer-leading results on most metrics and our forward EPS estimates increase on strong revenue trends. NA is trading at 12.1 times P/E (2025E consensus), a 12.5-per-cent premium to the group and well above where NA has traded historically. We see a healthy premium as deserved based on an adjusted ROE of 17.0 per cent vs. the peer average of 13.9 per cent,” said Mr. Holden.
* TD Cowen’s Mario Mendonca to $129 from $123 with a “hold” rating.
“NA delivered another earnings surprise, with EPS coming in 8 per cent higher than estimates. Results were supported by 60-per-cent year-over-year increase in Financial Markets PTPP and material (we estimate) treasury gains (in NII). Despite elevated GILs formations in ABA, NA continues to report 17-per-cent loans growth (no moderation in growth planned). We remain uncomfortable with the nature of NA’s business mix and growth,” said Mr. Mendonca.
* Jefferies’ John Aiken to $126 from $119 with a “hold” rating.
=====
Following “good” third-quarter financial results, National Bank Financial analyst Gabriel Dechaine is expecting an earnings growth rebound in 2025 for EQB Inc. (EQB-T), despite the trucking sector continuing to generate losses for its leasing business and “subdued” loan growth.
After the bell on Wednesday, the Toronto-based digital financial services company reported adjusted earnings per share for the quarter of $2.96, exceeding Mr. Dechaine’s estimate by 2 cents and the consensus on the Street by 5 cents due largely to gains from non-interest income. It also announced a 4-per-cent increase to its quarterly dividend to 47 cents per share.
EQB also announced a reduction in its full-year 2024 EPS guidance range to $11.50-11.75 from $11.75-12.25.
“While EQB’s other income exceeded our forecast, NII [net interest income] was below forecast, due to lower-than-expected loan balances (i.e., NIM was in line),” he said. “Mortgages, which represent 63 per cent of EQB’s loan book, were flattish for the fifth consecutive quarter (average balances fell 1 per cent in Q3/24). We believe EQB’s outlook commentary will be more bullish on the [Thursday morning conference call], contingent on the BoC delivering more rate cuts to stimulate demand.
“Excluding $1.7-million of provisions due to methodology changes, EQB’s loan losses were below our forecast. However, Q3/24 was another period of weak credit performance in EQB’s $1.2-billion equipment finance portfolio (3 per cent of total loans), which includes an estimated $500-million-plus of loans to the trucking industry. This sector ‘drove’ nearly a quarter of the quarter-over-quarter increase in GILs and 75 per cent of impaired loan provisions. Our forecasts assume more losses of this nature during Q4/24, with moderation thereafter. Guidance on [Thursday’s] call could assuage investor concerns related to this issue.”
Pointing to a “good” deposit growth mix, Mr. Dechaine raised his target for EQB shares to $102 from $95, keeping a “sector perform” recommendation. The average target is $105.44.
Elsewhere, BMO’s Étienne Ricard increased his target to $106 from $104, reiterating an “outperform” rating.
“Higher provisions for credit losses could remain topical for another quarter while fiscal 2025 looks more constructive as EQB works through loan resolutions in equipment finance and commercial mortgage lending combined with a normalizing monetary policy,” he said. “We rate EQB Outperform and view the stock’s 1.2 times book valuation as attractive for a 15-per-cent-plus through-the-cycle ROE bank.”
“EQB is executing on-strategy, providing shareholders with an increasingly diversified bank, both on the asset and liability sides of the balance sheet. In addition, the acquisition of Concentra is strategically enhancing, providing scale, funding, and revenue diversification. The net result is we believe EQB’s relative valuation to other Canadian banks has the potential to expand.”
=====
National Bank Financial’s Vishal Shreedhar expects Empire Company Ltd. (EMP.A-T) to return to earnings per share growth when it reports first-quarter fiscal 2025 results on Sept. 12 due to strength in gross margins and its investments, however he continues to “remain on the sidelines” as he seeks “confirmation of sustainable momentum.”
The analyst is currently forecasting EPS to rise 13.4 per cent year-over-year (or 10 cents) to 88 cents, which is a penny below the consensus estimate on the Street. He attributes the gain to positive Food Retailing same-store sales growth, gross margin expansion, higher investments & other operations and share repurchases, partly offset by lower sales due to the sale of the Western Fuel business last year and modestly higher expects.
“We consider FR segment results to be more meaningful than total company results for the purposes of evaluating recurring earnings power (total company results include contribution from the Investments and Other Operations segment),” he said.” For reference, we model FR EPS of $0.85, higher by 4.4 per cent year-over-year.
“We forecast core FR sssg, excluding fuel, of 0.5 per cent versus 4.1 per cent last year. This compares with recent peer reporting of Loblaw at 0.2 per cent and Metro at 2.4 per cent. We expect a slight benefit to Empire from the public boycott of Loblaw stores.”
Mr. Shreedhar predicts the Stellarton, N.S.-based retailer’s management will emphasize sequentially similar themes, including higher traffic partly offset by a smaller consumer basket as the retail backdrop remains challenging.
“We believe discount will continue to outperform conventional over our forecast horizon, reflecting ongoing consumer pressure,” he said. “We expect Q1/F25 FR gross margin to be 40 basis points higher year-over-year, reflecting benefits gradually manifesting from initiatives including space productivity, supply chain improvements and others (private label expansion, shrink reduction, etc.).
“We highlight a recent Bank of Canada survey that shows Canadians continue to feel the negative impacts of elevated inflation and high interest rates on their financial situation. Notwithstanding near-term consumer pressure, if sales meaningfully improve, EPS growth could accelerate further. NBF models F2025 sssg of 1.3 per cent vs. the 5-year average of 2.6 per cent We estimate an incremental 1-per-cent improvement to sssg could add 4-8 per cent to our EPS estimate, all else equal.”
Seeing the potential for further gains in 2025, Mr. Shreedhar raised his target for Empire shares to $42 from $41 after an updated to his valuation, keeping a “sector perform” recommendation. The average is currently $38.57.
“Looking forward, we believe that EMP has opportunity related to ongoing improvement initiatives and inexpensive valuation,” he said. “That said, it has structural deficiencies versus peers including an elevated mix of lower growth conventional stores and less pharmacy exposure.
“Empire trades at 6.5 times our NTM [next 12-month] Retail EBITDA (5-year average is 7.0 times). For comparison, Loblaw trades at 9.7 times our NTM Retail EBITDA and Metro trades at 11.2 timesour NTM EBITDA.”
=====
Scotia Capital analyst Ben Isaacson downgraded Lithium Royalty Corp. (LIRC-T) to “sector perform” from “sector outperform” previously, declaring “the prospect for outperformance is slipping away.”
“The tables have turned in LIRC’s favour,” he said. “Low lithium prices, slowing demand, higher costs of capital, and of course, weak investor/lender sentiment mean that financing options for developers have dried up. LIRC’s phone should be ringing off the hook, more so today than at any other time since IPO. And, not only has the opportunity set improved, but risk-adjusted valuations are more attractive too. Based on our channel checks, the juniors are finally knocking on doors with hat in hand - the perfect set up for LIRC.
“The problem? LIRC has run out of money ($9-million of cash left), and near-term royalty FCF to close any funding gap ambition has deteriorated on project setbacks and low lithium prices. LIRC is unlikely to raise equity at a level more than 60 per cent below last year’s IPO price (LIRC has been repurchasing shares). While lying low until the storm passes is understandable, investors will reward LIRC for striking while the iron is hot. The iron is hot for LIRC, with target valuations unlikely to get much more attractive. But, with the year now two-thirds behind us, LIRC has only deployed $1.5-million in ‘24.”
His target slid to $8.50 from $9. The average is currently $11.75.
=====
Ventum Capital Markets mining analysts Alex Terentiew and Phil Ker think free cash flow is “increasingly awarded a premium” in the sector, emphasizing “generators are being rewarded.”
“Over the past year, we’ve seen several companies with improving free cash flow rewarded with a significant improvement in their share price,” they said. “WDO and JAG are two notable examples, with each company realizing increasing quarter-over-quarter FCF that has turned around their balance sheets and treasury positions. The junior miners, developers and exploration companies, however, have generally not seen the same level of investor response to higher gold prices, strengthening our view that investors are increasingly focusing on FCF.”
“Due to recent inflationary pressures, operators were forced to identify operating efficiencies to reduce costs and maintain operating margins. These cost cuts have now resulted in many operations realizing record profit margins and robust cash flow. Given the resurgence of market sentiment, we are seeing favourable valuations being applied to operators demonstrating strong and consistent FCF and believe these FCF generators can maintain a premium valuation similar to established royalty companies, which generally have more consistent quarterly cash flow and trade at P/NAV multiples of 1.2-2.1 times. Applying a moderate discount for risk to operators in the precious metals sector, we suggest strong FCF generators should be trading at 1.2-1.6 times on a P/NAV metric. We note that under this thesis, we have positively revised several target multiples for operators in our precious metals space.”
In a research report released Thursday, the analysts predicted the price for gold, which is already one of the best-performing commodities in 2024, could see further gains before the end of the year.
“Year-to-date, gold prices are up 21 per cent, solidly outperforming most other metals (silver is up 23 per cent) and continuing to show gold’s role (perceived, or otherwise) as a safe-haven asset, hedge against inflation, and store of value,” they said. “Although our revised near-term gold price is now US$2,400/oz, up from US$2,150/oz previously, spot prices continue to rally and push all-time highs, with the yellow metal now trading above US$2,500/oz. Some equities are similarly seeing the benefit, with many of the industry’s leading companies at or near 52-week highs.”
“We have updated our near-term metal price forecasts, raising our gold price forecast to US$2,400/oz for the remainder of 2024 and US$2,350/oz for 2025. For silver and base metals, we have made minor reductions to our near-term price assumptions.”
With those price deck adjustments, the analysts made a series of target price adjustments.
These companies saw increases:
- Artemis Gold Inc. (ARTG-X, “buy”) to $18 from $16. The average is $15.78.
- Jaguar Mining Inc. (JAG-T, “neutral”) to $4.50 from $2.75. Average: $4.40.
- SilverCrest Metals Inc. (SIL-T, “buy”) to $13.45 from $12.65. Average: $13.16.
- Wesdome Gold Mines Ltd. (WDO-T, “buy”) to $15 from $12.05. Average: $15.08.
- Vizsla Silver Corp. (VZLA-X, “buy”) to $4.10 from $3.55. Average: $4.39.
These saw reductions:
- G Mining Ventures Corp. (GMIN-T, “buy”) to $18.40 from $19.40. Average: $15.04.
- i-80 Gold Corp. (IAU-T, “buy”) to $2.65 from $3.35. Average: $3.91.
- Osisko Development Corp. (ODV-X, “buy”) to $4.50 from $7.50. Average: $6.82.
=====
In other analyst actions:
* Scotia Capital’s Kevin Krishnaratne cut his Kinaxis Inc. (KXS-T) target to $190 from $200 with a “sector outperform” rating. The average is $189.92
* CIBC’s Bryce Adams lowered his target for O3 Mining Inc. (OIII-X) to $3, below the $3.21 average, from $3.50 with an “outperformer” rating.
* Resuming coverage following its $144-million equity offering, Desjardins Securities’ Lorne Kalmar lowered his Sienna Senior Living Inc. (SIA-T) target to $17 from $17.50. with a “buy” rating, while RBC’s Pammi Bir raised his target to $17 from $16 with a “sector perform” rating. The average is $17.21.
“We believe SIA is in good form to capitalize on momentum in seniors housing fundamentals,” said Mr. Bir. “Operationally, the effects of its targeted sales strategies, stronger cost controls, muted new supply, demographic tailwinds, and significantly improved govt funding should continue to fuel healthy organic growth over the N18M. As well, the equity issue creates plenty of financial flexibility to deploy capital into an expanding set of acquisition and development opportunities.”