Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Dan Payne thinks Crew Energy Inc.’s (CR-T) $1.3-billion acquisition by Tourmaline Oil Corp. (TOU-T) is “a logical and synergistic transaction” shareholders, seeing it “folding its strategic assets into a larger enterprise, and through which it should gain greater participation in the value growth of each.”
“The company has found a strong culmination to its business (in which it had established significant & strategic inherent value), and through which we expect it to positively participate and benefit from an expanded long-term value proposition in association with the materiality of the pro-forma business,” he said.
Accordingly, Mr. Payne moved his recommendation for Crew, a Montney-focused natural gas producer, to “tender” from “sector perform” previously.
He emphasized the deal, announced before the bell on Monday, expands Tourmaline’s “dominance” in the Montney region, calling it the Basin’s largest player “with a dominant footprint in NEBC.” He pointed to several key characteristics to support the deal, including “acquired assets include approximately 30 mboe/d (23 per cent liquids) of lowdecline production across 340 net sections of land at Groundbirch & Septimus in NEBC, which hold an expansive suite of Tier 1 inventory (700 locs., 35-per-cent booked), and complements of a 180 mmcf/d gas processing footprint, from which to complement their long-term development potential.”
“This is unique to the asset and should be optimized by the strength of the company’s marketing function,” he said.
“The inherent long-term development potential will be compounded through its execution, where cost/capital savings of 20 per cent will be brought by its drilling efficiencies and economics of scale. That is a low cost & capital efficiency of development ahead of that historically realized (as noted by TOU capital efficiencies of $10,000/boed), with referenced breakeven pricing of acquired inventory at $1.50/mcf break-even.”
Mr. Payne moved his target for Crew Energy shares to $6.75 to reflect the deal price from $5. The average target on the Street is $7.02.
Elsewhere, other analysts making rating changes include:
* Desjardins Securities’ Chris MacCulloch to “tender” from “hold” with a $7 target, rising from $5.50.
“In our view, the deal represents fair value, as partially reflected by the significant takeout premium, and we believe the likelihood of a competing bid is relatively low,” he said. “We also view the all-stock nature of the transaction as highly appealing for CR shareholders as it enables them to retain exposure to the assets through a larger entity offering lucrative dividends in a tax-efficient manner.”
* Canaccord Genuity’s Mike Mueller to “hold” from “buy” with a $6.75 target, up from $5.75.
Analysts making target changes for Crew include:
* Scotia’s Cameron Bean to $10.70 from $8 with a “sector outperform” rating.
“We see the deal as a win-win, with the more than 70 pr cent premium representing an impressive premium for CR shareholders (with a tax-efficient exit in an all-share deal) and yet still very good value for TOU shareholders (our CR NAV with near-term development of Groundbirch was $8.00 [10Y] and $11.70 [SOA]). Overall, we think this is a great deal for both sets of shareholders. Moreover, we believe the deal further cements TOU as best in class in the North American natural gas space,” said Mr. Bean.
* BMO’s Jeremy McCrea to $6.75 from $5.25 with a “market perform” rating.
“Decline in natural gas prices hasn’t been kind to E&P names,” said Mr. McCrea. “But that’s the disconnect we see. Investors have grouped Crew with other operators whose valuations are reflective of near-term FCF-sustainability/dividend requirements, when the valuation premise for Crew should be reflecting long-term ‘global’ gas prices (given its strategically held land). That was our comment for Q2, only to have Tourmaline come in with an acquisition announcement for a 75-per-cent premium a few days later. We see a high likelihood of the deal closing.”
* RBC’s Michael Harvey to $6.75 from $6 with a “sector perform” rating.
“In our view the transaction represents good value for CR shareholders, and allows continued participation in the region’s success through Tourmaline. The transaction is expected to close in early October 2024,” said Mr. Harvey.
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Concurrently, analysts raised their targets for Tourmaline shares. Changes include:
* Mr. Payne to $72.50 from $70 with an “outperform” rating. The average is $78.06.
“A highly strategic acquisition by the company, and from which its dominance of the Canadian gas market (and significance of opportunity therein) should only expand; TOU is poised for a 14-per-cent return profile (vs. peers 19 per cent) on leverage of 0.1 times (vs. peers 0.3 times) while trading at 4.9 times 2025 estimated EV/DACF (vs. peers 3.5 times),” said Mr. Payne.
* Mr. MacCulloch to $75 from $72 with a “buy” rating.
“Although TOU clearly had to pay up in a competitive process, we view the transaction positively to the extent that it was immediately financially accretive while bolstering the company’s South Montney growth optionality. To put a finer point on it, we would argue that TOU effectively picked up the Groundbirch asset for free. We continue highlighting the stock as a top pick,” said Mr. MacCulloch.
* Mr. Bean to $93 from $90 with a “sector outperform” rating.
“Given TOU’s peer leading scale and track record of top-tier operations and capital efficiencies, we see potential for the company to realize efficiencies over and above the initial estimate as it operates the CR assets. However, we are modeling the deal more in line with TOU’s initial synergy estimate and leaving the upside to be added as we move forward and learn more about TOU’s plans for the assets,” said Mr. Bean.
* Mr. Mueller to $75 from $73.50 with a “buy” rating.
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In response to its deal to be acquired by South African miner Gold Fields Ltd., three analysts adjusted their recommendations for Osisko Mining Inc. (OSK-T) on Tuesday.
Calling the bid “strong” and believing it “reinforces the quality and scarcity value of the Windfall deposit,” BMO’s Andrew Mikitchook moved his rating to “market perform” from “outperform” with a $4.90 target, down from $5.75. The average is $5.24.
“In our opinion, the already existing Windfall JV combined with the strong premium significantly reduces the likelihood of a third party emerging as a bidder,” he said. “We will continue to monitor.
“Osisko joins the long list of junior names bought out by seniors during the development stage.”
Elsewhere, others making changes include:
* CIBC’s Bryce Adams to “tender” from “outperformer with a $4.90 target, up from $4.75.
“We view this as a positive outcome for Osisko shareholders,” said Mr. Adams. “Recall, Gold Fields acquired 50 per cent of Windfall in May 2023, which we viewed as a positive de-risking event that essentially financed Osisko through to production. However, thereafter, the M&A premium for Osisko moderated, in our view, and news flow has been quiet.
“Given the setup and the deal price, we view the update as a positive for Osisko shares. We view the high-quality attributes of Windfall as a key reason for the strong takeout valuation.”
* Raymond James’ Craig Stanley to “market perform” from “outperform” with a $4.90 target, up from $3.25.
* Canaccord Genuity’s Kevin Mackenzie to “hold” from “speculative buy” with a $4.90 target, down from $5.75.
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A pair of analysts on the Street downgraded Burnaby, B.C.-based Ballard Power Systems Inc. (BLDP-Q, BLDP-T) following Monday’s release of weaker-than-expected second-quarter financial results and a reduction to its capital expenditure budget as management acknowledged “slower market adoption” for hydrogen technology.
TD Cowen’s Aaron MacNeil moved his rating to “sell” from “hold” previously, saying the release provided “limited read-throughs on our go-forward and full-year estimates,” and expecting cash burn to continue.
“While featuring minor changes, our estimates already included meaningful reductions in operating expenses (now down 25 per cent from management’s 2024 guidance midpoint), consistent with management’s conference call commentary,” he said. “Notably, the Rockwall Giga 1 factory is not contemplated in our go-forward spending assumptions and if Ballard reaches a positive FID for this expansion, our forecasted cash balance would likely decrease.”
His target slid to US$1.50 target from US$2.50. The average is US$3.76.
“While we view a wholesale recovery in hydrogen fuel cell demand unlikely, Ballard could move to aggressively reduce its costs, potentially preserving more cash than we are currently forecasting,” he noted.
Elsewhere, CIBC’s Krista Friesen moved Ballard to “underperformer” from “neutral” with a US$1.6 target, down from US$3.50.
“Ballard provided a disappointing update with its Q2 earnings, reporting order intake of just $5-million in the quarter (versus $65-milion in Q1/24 and $25-million in Q2/23). While we believe the company is operating well, and is achieving key product milestones, the macro environment is increasingly less supportive of hydrogen adoption, and the upcoming U.S. election adds an additional level of uncertainty,” said Ms. Friesen.
Other analysts making target adjustments include:
* National Bank’s Rupert Merer to US$3 from US$4 with a “sector perform” rating.
“The market is nascent, resulting in order lumpiness with nearly $130-million of orders in the prior two quarters helped by deals in the European stationary power and bus segments, including its recently announced deal with Solaris, and Vertiv,” said Mr. Merer. “The 12-month backlog of $75.5-million should support a ramp up in H2E versus H1E, though year-over-year growth may be challenging with the market backdrop and upcoming election.”
* BMO’s Ameet Thakkar to US$1.70 from US$2.25 with an “underperform” rating.
“BLPD’s latest results did little to boost hopes that an inflection in demand for its fuel cell applications focused on mobility is at hand. The company cut its FY 2024 capex guidance as it considers whether it should precede with its proposed TX gigafactory when demand has been slower to ratchet up. In the near term, disappointing quarter with respect to orders/backlog growth. 2Q orders of $5-million, 12-month order book declined to $75.5-million, and the company’s backlog shrunk to $169.5mm. We trim FY 2025 estimates and target; maintain Underperform rating,” he said.
* Jefferies’ Dushyant Ailani to US$2 from US$3.25 with a “hold” rating.
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Desjardins Securities analyst Chris Li expects Metro Inc.’s (MRU-T) third-quarter financial results to reflect duplicative costs and inefficiencies related to the transition to its new distribution centre as well as “moderating” food inflation and a tough food comparable of 9.4 per cent.
“MRU on track to meet its FY24 EPS guidance of flat to down 10 cents,” he added in a research note previewing Wednesday’s release.
“We believe it is well-positioned for 8–10-per-cent EPS growth, supported by efficiency benefits from the automated DCs and structural Rx tailwinds and consistent execution. Our 10-per-cent EPS growth expectation for FY25 is in line with consensus.”
Mr. Li is currently projecting adjusted earnings per share of $1.35 for the quarter, matching the result of the same period a year ago and a penny ahead of the consensus forecast on the Street. He expects food same-store sales of 1.5 per cent, down from 9.4 per cent a year ago and 2.7 per cent in the second quarter, which he said reflects " moderating basket inflation to 1.2 per cent from 3.0 per cent in 2Q FY24 and 1.2-per-cent food CPI for Ontario and Quebec, and the continuing shift to discount.”
While he trimmed his full-year earnings and revenue expectations, Mr. Li raised his target to Metro shares to $80 from $75 after updating his valuation. The average is $80.88.
“We believe MRU is well-positioned for 8–10-per-cent EPS growth longer-term, underpinned by benefits from supply chain modernization, structural pharmacy tailwinds and a consistent execution record. But we see limited upside to valuation given moderating inflation and potential for sector rotation next year,” said the analyst, reiterating a “hold” recommendation.
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Stifel analyst Justin Keywood expects continued market volatility in the North American pharmaceuticals sector, pointing to “macro uncertainty as the U.S. election approaches.”
“We see a general inflection in the Pharma sector, stemming from record FDA approvals and submissions, highlighting extensive ongoing innovation. GLP-1 drug growth also remains favorable and supportive of overall sector sentiment,” he added. “Pharmaceuticals are largely not impacted by the broader economy, and we see the election as having a relatively muted impact at this point. Pharma also has defensive attributes with potential torque, dependent on product life cycles.
“The broader Pharma/Healthcare indices may reflect this dynamic more recently with the S&P 500 Pharmaceuticals and Healthcare indices, outperforming the S&P 500 in a 3-month period by 400 & 300bps. The S&P Pharma index has also outperformed the S&P 500 year-to-date, up 16 per cent vs. 12 per cent with the broader Healthcare index, slightly lagging in performance at up 9 per cent.
In a research report released Tuesday, he raised his rating for four stocks to “buy” recommendations, expecting outperformance for the remainder of 2024 “with upcoming growth, M&A or regulatory catalysts.”
“We also refine certain targets in our broader coverage, where medium-term opportunities could still exist, but we see limited stock price appreciation in 24,” he added.
Mr. Keywood’s changes include:
* Cipher Pharmaceuticals Inc. (CPH-T) to “buy” from “hold” with a $16 target, up from $9.50. The average on the Street is $15.50.
Analyst: “Cipher is a specialty pharma company focused in dermatology, a therapeutic area that we see as having secular tailwinds, including in a social media world. The base business is high margin at 60-per-cent EBITDA with a strong conversion into Free Cash Flow, including from the use of tax loss credits, where we estimate a balance, approaching $200-million. Cipher announced a transformational acquisition on July 29 of US$89.5mm for the global rights and commercial infrastructure of Natroba (Spinsoad), where we estimate the asset will more than double Cipher’s EBITDA. We also see the use of tax loss credits for Natroba, implying substantial FCF inflection. Natroba (Lice & Scabies) is a condition that cannot be ignored and the incumbent, market share leader, permethrin could be ineffective with genetic mutations, where there has been no innovation for many years, prior to Natroba. We also see the commercial infrastructure of 50 employees in the U.S., as underutilized and supporting a revenue level, in excess of US$100-milion. Operating leverage could be realized as we expect Natroba to grow double-digits organically in the near-term but also with the opportunity for Cipher to acquire/in-license additional U.S. products with the infrastructure to support.”
* DRI Healthcare Trust (DHT.UT-T) to “buy” from “hold” with a $16 target, up from $15. Average: $18.58.
Analyst: “DRI is a portfolio of 25 royalty assets tied to the global pharmaceutical industry. After a period of substantial capital deployment and solid growth quarters recently, a surprise development, related to the prior CEO and alleged expense irregularities, led to a sharp correction in share price on July 8. We also downgraded the stock at the time with uncertainty of the eventual fallout of an ongoing investigation. However, our recent discussions with several members of DRI’s executive team and chairman, has provided us confidence that the identified US$6.51-million in irregular expenses is accurate and several initiatives to improve governance and controls are underway.
“We also see limited impact of DRI’s revenue and cash flow receipts for 2024 but expect one-time expenses, related to the investigation. DRI has conveyed still an active M&A pipeline as an inflection in the industry is underway in capital constrained markets and on-pace to more than double in 2024. Although, perceived counter-party risk in transacting with DRI is a valid concern, we also see price as the most important consideration and expect M&A to resume in the near-term, serving as catalysts.”
* Knight Therapeutics Inc. (GUD-T) to “buy” from “hold” with a $6.75 target, up from $5.75. Average: $7.26.
Analyst: “Knight is a specialty pharma company with 90 per cent of sales tied to the LATAM market. We have rated Knight a HOLD, since 2022 with a LATAM discount factored in, impacting investor sentiment and what we expected to be a range-bound stock. However, we see good growth ahead, in Q3 (up 7 per cent) and more materially in Q4 (up 19 per cent), consistent with guidance and setting up for what could be an inflection in 2025 with several new products set to be launched.”
* Medexus Pharmaceuticals Inc. (MDP-T) to “buy” from “speculative buy” with a $3 target, up from $2.80. Average: $3.18.
Analyst: “Medexus is a cross-border specialty pharma company but with bio-tech like characteristics. The base business is profitable and cash flow positive, but the focus remains on a potential FDA-approval for Orphan-drug status, Treosulfan that could double sales and lead to material profit inflection. The FDA is expected to issue a decision on Treosulfan by late October 2024, serving as a potential near-term catalyst. The FDA review marks a third submission after a complete response letter in 2021 and second incomplete response in 2022. We were encouraged to see the FDA accept Treosulfan for review in April 2024 and in our view, suggests that the data package is now in order, including from the use of FDA consultants.”
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While signs of “regrowth” are emerging in the forest products industry, National Bank Financial analyst Zachary Evershed warns Doman Building Materials Group Ltd. (DBM-T) is likely to face volatility through the remainder of 2024.
“Depressed pricing (albeit now improving) should weigh on organic growth again in the third quarter and put transient pressure on gross margins as higher priced inventory is sold,” he said. “Management’s view of the macro environment remained unchanged as higher interest rates continue to stifle housing market activity; with renewed skepticism around a soft landing, customers are likely to continue keeping inventories lean, leading to flattish (but stable) volumes. Management believes the industry reached a pricing trough earlier in July, as reflected in the bounce in cash prices since, though additional curtailments could of course support higher lumber pricing (on estimated sawmill cost curves, SYP just this side of profitable and SPF still printing red).
“Though the worst is likely behind us, as our organic growth forecasts were admittedly overly ambitious in the second quarter, we trim our estimates for both Q3 and Q4, now reflecting further organic contractions driven by pricing.”
On Aug. 9, the Vancouver-based company reported second-quarter results that displayed “strong” gross margins and “good” expense control, however Southern Yellow Pine (SYP) pricing pressures weighed. Earnings per share of 20 cents fell 8 cents below Mr. Evershed’s projection and 2 cents under the consensus forecast on the Street.
“We believe the 15.7 per cent gross margin achieved in Q2 despite the pricing pressure presents a robust base case scenario for profitability moving forward,” he said. “Management reiterated satisfaction with this level, and indicated the 17-per-cent generated in Q2/23 represents a high watermark, achievable when optimal conditions occur on pricing, timing and operational excellence. We leave our gross margin forecasts largely unchanged as our estimates agree with management’s commentary on that front.”
With pricing pressure driving negative revisions to his growth outlook, the analyst reduced his target for Doman shares to $8.50 from $10.50. The average is $9.
“We rate DBM Outperform as although the short term outlook remains clouded by the industry’s reticence to restock inventory in the face of economic uncertainty and elevated rates, DBM remains well positioned to benefit from long-term drivers of housing market dynamics on both sides of the border, and can continue to supplement growth through accretive tuck-in acquisition,” he concluded.
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In other analyst actions:
* CIBC’s Hamir Patel raised his targets for Adentra Inc. (ADEN-T, “outperformer”) to $53 from $52 and Interfor Corp. (IFP-T, “neutral”) to $19 from $18. The averages are $54 and $23, respectively.
* JP Morgan’s Dushyant Ailani cut his ATS Corp. (ATS-N, ATS-T) target to US$31 from US$36 with a “hold” rating. The average is $57.83 (Canadian).
* TD Cowen’s Michael Tupholme raised his Bird Construction Inc. (BDT-T) target to $31 from $30 with a “buy” rating. The average is $29.
“Overall, we view Bird’s Q2/24 results release as positive. Revenue growth was strong and margins showed healthy year-over-year improvement. Meanwhile, the company provided full-year 2024 revenue guidance that is ahead of pre-quarter expectations. We remain constructive on Bird’s outlook, supported by its record backlog/pending backlog, a healthy demand backdrop, and its margin improvement potential,” he said.
* Following its “solid” quarterly results, BMO’s Michael Markidis raised his BSR REIT (HOM.U-T) target to US$14.50 from US$13.50 with an “outperform” rating. The average is US$15.22.
“We are encouraged by the improvement in blended leasing spreads that have been captured since the beginning of this year. A substantial decrease in net deliveries through 2025, coupled with continued strength in household formation, should gradually restore pricing power, in our view,” said Mr. Markidis.
* Stifel’s Daryl Young cut his Boyd Group Services Inc. (BYD-T) target to $280 from $295 with a “buy” rating. The average is $286.85.
“Boyd delivered slightly-better-than feared results, and management’s conference call tone/outlook commentary was effective in easing investor concerns around the industry-wide depressed claims activity,” he said. “Management acknowledged that, in hindsight and with the benefits of data, consumer repair deferrals have been placing significant added pressure on activity levels (potentially beginning in Q4/23). Specifically, consumers have been looking to avoid incurring elevated insurance-related costs (i.e. higher deductibles + premium impacts from filing a claim) and broader economic sensitivities (e.g. pocketing claims proceeds but not repairing the vehicle). However, Boyd emphasized that these are largely transitory impacts, and importantly, it does not see larger issues related to accelerating total write-offs or ADAS-reduced accident frequency. That said, it seems clear that a snap-back in industry-wide activity levels is unlikely, and we have reduced our estimates accordingly.”
* Canaccord Genuity’s Carey MacRury reduced his target for shares of B2Gold Corp. (BTO-T) to $7 from $7.50 with a “buy” rating. The average is $5.65.
* Raymond James’ Brad Sturges bumped his Canadian Apartment Properties REIT (CAR.UN-T) target to $59 from $58 with an “outperform” rating. The average is $56.44.
“CAPREIT is advancing its transformation path back towards a pure-play Canadian MFR investment opportunity. CAPREIT’s capital rotation program offers several strategic benefits, including: 1) high-grading the quality of its Canadian MFR portfolio through purchasing new build, non-rent-controlled Canadian MFR assets; 2) reducing CAPREIT’s future maintenance capex; 3) unlocking non-productive, underlying land value that is not fully captured in its NAV/unit estimate; and 4) supporting the creation of affordable MFR supply as a valued development capital partner,” he said.
* National Bank’s Giuliano Thornhill bumped his Chartwell Retirement Residences (CSH.UN-T) target to $16 from $15 with an “outperform” rating. The average is $15.93.
“Q2 featured steady occupancy improvements alongside robust margin gains,” said Mr. Thornhill. “Whether the pace of margin increases continues into next year is not if, but at what quantum. CSH’s approach to achieving this will be to continue to lease-up assets with some light promotions, increasing its pricing power as availability subsides but also raising guest satisfaction. This may translate to low-40-per-cent NOI margins on achievement of 95-per-cent occupancy owing to higher asset efficiency/utilization. Additional margin improvements, which can be quite torquey to results, is a remaining catalyst available to drive units higher. Q2/Q3 were both M&A heavy ($1-billion in AUM), and further transactions of new retirement residences or disposition of older ones, remain possible for optimizing the portfolio. With interest rates expected to soften, and operational upside/accretive M&A available, don’t count CSH units out for the year quite yet.”
* Eight Capital’s Ty Collin trimmed his Decisive Dividend Corp. (DE-X) target to $10 from $11 with a “buy” rating, while Canaccord Genuity’s Yuri Lynk lowered his target to $6 from $8 with a “hold” rating. The average is $8.88.
“As expected, results reported last week reflected macro and seasonal headwinds, continuing trends that emerged last quarter,” said Mr. Collin. “However, we also see reason for optimism going forward, and believe that 1H/24 could prove to be the nadir of this cycle for DE. Seasonally strong sales in the hearth segment (DE’s largest by sales) should drive an acceleration in 2H, and the Company is seeing higher order activity across several subsidiaries as interest rates have begun to decline. With shares nearly 50 per cent off of their highs and trading below peers, we believe the valuation does not reflect a potential recovery in earnings, and signals concern about the sustainability of the dividend. Accordingly, we think a recovery in sales (and margins along with it) is the key catalyst for the stock, and look for this to begin materializing over the next several quarters.”
* Canaccord Genuity’s Mark Rothschild raised his Dream Office REIT (D.UN-T) target to $17.25 from $16.75, remaining below the $18.56 average, with a “hold” recommendation.
* RBC’s Tom Narayan cut his Magna International Inc. (MGA-N, MG-T) to US$47 from US$57 with a “sector perform” rating. The average is US$51.33.
“Magna’s H2/24 guidance implies a significant upswing in EBIT across the company’s business segments. UAW comps and some onetimers should help, but for the most part, the improved margin profile is a show-me story. Finally, while buybacks could be on the table in the future, for now, management is focused on bringing leverage down,” he said.
* Canaccord Genuity’s Yuri Lynk bumped his target for Neo Performance Materials Inc. (NEO-T) to $12 from $11, keeping a “buy” rating. The average is $12.26.
* Stifel’s Christopher O’Cull lowered his Restaurant Brands International Inc. (QSR-N, QSR-T) target to US$77 from US$80 with a “hold” rating. The average is $84.61.
* National Bank’s Gabriel Dechaine bumped his Sun Life Financial Inc. (SLF-T) target to $73 from $72 with a “sector perform” rating, while TD Cowen’s Mario Mendonca trimmed his target to $72 from $73 with a “hold” recommendation. The average is $78.67.
“SLF beat estimates on lower expenses, but the quarter featured weak top line results in two of SLF’s most important businesses: MFS (spike in outflows) and U.S. dental (sales down 85 per cent on Medicaid redetermination). Management remains confident that dental sales/ earnings will recover in ‘25. SLF also reported a restructuring charge and elevated R/E charges which hurt our outlook on earnings quality,” said Mr. Mendonca.