Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Darko Mihelic’s perception of Bank of Montreal’s (BMO-T) credit quality has declined, leading him to downgrade its shares to a “sector perform” recommendation from “outperform” on Tuesday.
“Even after normalizing BMO’s Q2/24 credit result for idiosyncratic/outlier losses, BMO’s credit deterioration appears to be occurring at a faster pace than its U.S. peers despite having a remarkably similar loan mix (and possibly more credit protection than peers),” he said. “Furthermore, BMO seems to be alone in flagging higher PCL [provisions for credit loss] guidance for H2/24.”
In a research note released before the bell, Mr. Mihelic adjusted his financial forecast for BMO to reflect higher impaired PCLs in capital markets until the third quarter of 2025 with a peak coming in the third quarter of the current fiscal year. He also made changes for higher expenses in Corporate and Canada P&C than previously assumed and other tweaks. That led his core earnings per share estimates to decline to $10.83 (from $11.07) in 2024, $11.57 (from $11.73) in 2025, and $13.56 (from $13.64) in 2026.
“The bigger longer-term issue we see for BMO is credit quality and its impact on valuation should the perception change from relative superiority to average or below average against peers,” he said. “Admittedly, we may only be able to truly measure BMO’s relative credit quality after the fact, so we may be proven wrong in the fullness of time. However... So far in the early stages of rising credit losses, BMO’s credit quality appears to be deteriorating faster than U.S. peers. In this note we compare and contrast BMO’s U.S. credit experience to its U.S. peer group.
“We find: • BMO’s PCLs are rising faster than its U.S. peer group; • BMO’s non-performing loans are rising faster than U.S. peers; BMO’s impaired PCL guidance was increased (whereas U.S. peers kept PCL guidance largely unchanged).”
Also assuming a “modestly higher” risk premium for BMO, Mr. Mihelic lowered his price target for its shares to $118 from $124. The average target on the Street is $128.73, according to LSEG data.
“From a valuation perspective, we view BMO as somewhat already in the penalty box with some modest amount of downside,” he said. “BMO is trading at a P/E multiple of 10.8 times our next-12-month core EPS estimate, in line with its longterm historical average but above the peer average of 9.8 times. However, on a P/B basis, BMO is trading at 1.24 times, below its long-term historical average of 1.50 times and the peer average of 1.52 times. Its P/BVPS multiple is being affected by its acquisition of Bank of West and lower ROE, so we see modest downside to its P/BVPS multiple should its ROE not improve.”
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Scotia Capital analyst Eric Winmill thinks the Filo Corp.’s (FIL-T) $4.5-billlion takeover by BHP Group and Lundin Mining Corp. (LUN-T) as a “positive” for its shares, affirming his view that a friendly acquisition was “a likely outcome.”
“This not only positions the Filo del Sol project for continued advancement by large, well-funded multi-national partners but also provides for potential synergies with the nearby Josemaria project,” he said. “We see a competing bid as unlikely given Lundin family and BHP’s existing ownership of 33 per cent and 6 per cent, respectively.”
In a note released before the bell, Mr. Winmill moved his Filo recommendation to “sector perform” from “sector outperform” and adjusted his target to $33 to reflect the deal price from $33.50 previously. The average is $34.70.
Elsewhere, Ventum Capital Markets’ Connor Mackay moved his recommendation to “tender” from “buy” previously with a $33 target, down from $37.
“The transaction marks an immediate crystallization of value for FIL shareholders with the potential for investors to maintain a long-term interest in the project by opting to receive a portion of their consideration in LUN shares,” said Mr. Mackay. “LUN and BHP will form a 50/50 JV that will advance both Filo del Sol and Lundin Mining’s (currently) 100-per-cent owned Josemaria project. We see this as an optimal scenario for the development of both projects, allowing for shared infrastructure and major operational synergies. Additionally, combining Filo with Josemaria will allow Filo to enjoy the full benefits of Argentina’s large investment incentive regime (RIGI) under which it would have otherwise faced tight qualification and capital outlay timelines.”
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National Bank Financial analyst Matt Kornack thinks Northview Residential REIT’s (NRR.UN-T) current structure “uniquely positions it as a higher income-oriented vehicle that offers commercial REIT-like yield versus its more expensive Canadian multi-residential peers.”
“Valuation is interesting in the context of attractive CMHC-insured financing,” he added. “Given the REIT’s comparatively higher implied cap rate it provides a spread to cost of financing that is unobtainable for the broader apartment universe.”
In a research report released Tuesday titled A Potential Diamond in the Rough but More Polishing Required, Mr. Kornack initiated coverage of the Calgary-based trust with a “sector perform” recommendation, seeing it as a “secondary/remote market-focused residential play” that allows investors to broaden their geographic exposure, particularly to Northern Canada. In that region, he sees Northview possessing a “material market share of the rental stock, and benefits from structurally higher rents, often government subsidized or guaranteed.”
“These markets have high barriers to entry with respect to new construction, which speaks to the defensive attributes of the portfolio, albeit the tradeoff is slower rates of growth,” he noted. “The residual portfolio has evolved beyond a historic resource market focus to a more diversified national footprint.”
“Apartment fundamentals remain strong with a long runway to a re-establishment of an equilibrium of supply and demand, particularly of affordable rental product. This has even been seen (albeit to varying degrees) in some secondary/tertiary markets that Northview operates in, translating into solid organic revenue and NOI growth.”
Seeing a “reasonable valuation for a high-torque real estate play,” Mr. Kornack set a target of $18.50 per unit. The average on the Street is $17.50.
“Northview currently trades at a 2025 estimated P/FFO multiple of 9 times, which represents an 8-turn discount to the peer average (implied cap rate of 7.1 per cent vs. 5.1 per cent for peers),” he said. “The lower multiple also provides relative downside protection but is reflective of higher structural / execution-oriented risks. Addressing structural issues including higher leverage and increasing trading liquidity could lead to a multiple rerating.”
“The return to our target places NRR at the higher end of our Sector Perform rated names, which we think is justified given a potentially significant re-rating opportunity. The major drawback and risk to this outlook relates to NRR’s less than ideal structural attributes. Leverage is on the high side, as is variable-rate debt exposure. Trading liquidity is also constrained with a very small public float limiting the investability of this vehicle (especially for institutional accounts). Shares are concentrated in the hands of entities that vended in assets to scale the portfolio with varying commitments to longer-term ownership. In time we think these issues can be fixed although this won’t take place overnight.”
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Ahead of the Aug. 13 release of its first-quarter fiscal 2025 financial results, National Bank Financial analyst Cameron Doerksen is “fundamentally positive” long-term view on CAE Inc. (CAE-T), the world’s largest manufacturer of pilot simulators, however he warns growth in its Civil business may slow in the near term.
“We still believe the company will enjoy a multi-year period of growth in its Civil segment and, notwithstanding Defense’s recent struggles, we believe investors will ultimately ascribe more value to the business once CAE demonstrates some positive margin trends in the segment,” he said.
“We fully expect CAE’s airline pilot training segment to see growth this year and beyond as airlines globally continue to recover to pre-pandemic growth trends. However, over the last two years, CAE has enjoyed exceptionally strong pilot training demand in the U.S. where major U.S. airlines accelerated pilot hiring and faced a training capacity shortfall, leading to more outsourcing to CAE. So far in 2024, however, U.S airlines have slowed and, in some cases, frozen all new pilot hiring, and although we see this as a temporary issue, softer airline pilot training demand could impact revenue growth and margins in Civil in the coming quarters.”
Mr. Doerksen trimmed his growth projections for Civil to “reflect a modest slowdown in airline pilot training growth,” but his forecast for the Defense segment, which he said remains “a show-me story,” was left unchanged. That led him to reduce his first-quarter earnings per share projection by 2 cents to 18 cents with his full-year 2025 and 2026 estimates sliding to $1.15 and $1.37, respectively, from $1.20 and $1.43.
“We believe CAE appropriately reset its Defense segment last quarter and based on a strong $5.7 billion backlog and growing revenue from better-margin transformational programs, we believe a 6-7-per-cent EBIT margin this year is achievable and a 10-per-cent-plus margin over the long term also realistic,” he said. “In the next couple of quarters, however, Defense segment margins are likely going to be in the 5-per-cent range and investors are likely to remain somewhat skeptical until the company demonstrates a positive margin inflection.
“We have trimmed our Civil segment growth forecast for CAE, and on our new F2025 estimates, CAE trades at 9.9 times EV/EBITDA, which is a discount to the aerospace peer group which trades at 12 times current year EV/EBITDA.”
Reaffirming his “outperform” rating for CAE shares, Mr. Doerksen lowered his target to $29 from $31 in response to the forecast changes. The average on the Street is $29.63.
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Despite a first-quarter beat, Desjardins Securities analyst Frederic Tremblay thinks the Street’s estimates for Savaria Corp. (SIS-T) do not fully reflect the increasing momentum of its company-wide improvement program.
“We also see a valuation disconnect as the stock trades at an unwarranted discount to its five-year average multiple,” he said. “We view SIS as too cheap.”
In a note released Tuesday, Mr. Tremblay raised his estimates for the Quebec-based accessibility solutions provider, which now sit even further above his peers.
“One year into the company-wide Savaria One improvement program, we expect momentum to have picked up,” he said. “We now forecast 9.4-per-cent year-over-year revenue growth to $217.1-million (was $213.1-million) in 2Q24, mainly driven by the Accessibility segment thanks to demand (aging population and Savaria’s breadth of products), pricing and the non-recurrence of Europe’s 2Q23 ERP issue. Our 2Q adjusted EBITDA forecast is $39.2-million (was $38.1-million). This reflects top-line growth and profitability tailwinds captured through Savaria One (operational efficiencies, procurement optimization, European improvements, etc). We expect the balance sheet to have remained in good shape with leverage of 2 times adjusted EBITDA.
“We view consensus for 2Q adjusted EBITDA of $36.5-million as conservative. We believe this could be due to noise from last year’s one-time $5-million ERP headwind, from 2Q being seasonally stronger than 1Q or, more likely, due to a portion of the Street adopting a wait-and-see approach as it relates to Savaria One’s benefits. ... [The] consensus appears to imply an approximately $2.1-million contribution from Savaria One and other factors in 2Q. In our view, this is too low. Recall that Savaria is advancing toward its goal of $200-million in annual adjusted EBITDA (20-per-cent margin on sales of $1-billion), up from $120-million in 2022. We believe this could be reached in 2025 (run rate) or 2026.”
Maintaining his “buy” rating for Savaria shares and seeing them as “attractively” value, Mr. Tremblay bumped his target to $24 from $23.50 to reflect his higher estimates. The average is $22.83.
“SIS trades at only 9.1 times EV/adjusted EBITDA on our 2025 estimate,” he said. “This is well below its five-year average of 10.4 times and too cheap considering a persistent age-at-home tailwind and the company’s positive evolution driven by the ongoing implementation of Savaria One.”
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Desjardins Securities analyst Gary Ho is expecting the second-quarter results from CareRx Corp. (CRRX-T) to be “relatively quiet,” pointing to stable bed count and “modest” progress in EBITDA margin.
“2H24 and 2025 look more exciting, with a robust pipeline of bed growth/RFPs (but the timing of onboarding may vary), and margin expansion from accretive bed growth and the McKesson contract,” he added. “Over the medium term, initiatives underway could further drive EBITDA margin in the low teens.”
For the quarter, he’s projecting revenue of $90.3-million for the Toronto-based provider of pharmacy services to seniors living and other congregate care communities, down from the same period a year ago ($95.2-million) and in line with the Street ($90.7-million). Adjusted EBITDA is expected to rise to $7.6-million from $7-million, also matching the consensus.
“We model no bed adds in 2Q ,” he said. “For 2H24, we expect +3,500 beds, followed by +5,700 beds in 2025. We believe CRRX has secured some new contracts/RFPs (recall that management estimated a >5,000-bed opportunity in the pipeline), with more to come in 2H24/2025. It is also more selective, adding beds with higher (likely double-digit) contribution margin. However, the timing of onboarding varies.
“We expect modest margin improvement in 2Q (8.4 per cent from 8.3 per cent in 1Q), given flattish bed growth and lumpiness in labour costs (vacations temporarily led to higher overtime and third-party contract labour). Management remains confident in the 10-per-cent target, but given the timing of bed onboarding, it may reach this goal by 1H25. We believe the McKesson procurement contract should be finalized imminently and be a tailwind starting in 2H24, representing roughly one-third of the EBITDA margin expansion from 8.3 per cent in 1Q to 10 per cent. We model 9.5-per-cent EBITDA margin by 4Q24 and 10.6 per cent by 4Q25. With other initiatives in progress, we believe CRRX could achieve low-teens EBITDA margin based on its multi-year strategic plan.”
Seeing it as “attractively valued,” Mr. Ho bumped his target for CareRX shares to $4 from $3.75, keeping a “buy” rating. The average is $3.67.
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In other analyst actions:
* Eight Capital’s Adhir Kadve initiated coverage of Xtract One Technologies Inc. (XTRA-T), a Toronto-based AI-powered security technology company, with a “buy” rating and $1.30 target. The average is $1.40.
“Xtract One is a developer of a next-gen patron-screening solution called ‘SmartGateway,” he said. “With this product, the company is looking to disrupt an age-old market fraught with legacy, outdated solutions. SmartGateway aims to detect and identify patrons who are attempting to enter a public facility with any sort of weapon. Given validation from key industry players who are both customers and investors, like Madison Square Garden, the Oak View Group and multiple third-party verifications combined with a massive pipeline of business, we see compelling evidence of product market fit for SmartGateway and a strong growth trajectory ahead for the company.”
* Following the announcement of its $140-million acquisition of Woolf Distributing Company Inc., CIBC’s Hamir Patel increased his Adentra Inc. (ADEN-T) target to $52 from $51, reiterating an “outperformer” recommendation. Other changes include: Acumen Capital’s Nick Corcoran to $56 from $54 with a “buy” rating, Stifel’s Ian Gillies to $55 from $50 with a “buy” rating and Scotia’s Jonathan Goldman to $52.50 from $51 with a “sector outperform” rating. The average on the Street is $51.64.
“The transaction advances the goal of adding $800-million in sales via M&A over the next five years through 2028, but perhaps more importantly, it further shifts the mix to higher margin specialty products and channels,” said Mr. Goldman. “On a pro forma basis, we estimate value-add and Pro Dealer channel now account for 14 per cent and 32 per cent of consolidated sales, respectively. As investors see continued evidence of structural margin expansion via improved mix, we think shares will re-rate closer to specialty building product peers that have historically traded at a 2.5 times premium.”
* In reaction to its agreement to sell an automotive dealership property in Markham, Ont., for $54-million to an affiliate of the Dilawri Group, Canaccord Genuity’s Mark Rothschild raised his Automotive Properties REIT (APR.UN-T) target by $1 to $12.50 with a “buy” rating. The average is $12.06.
“While it is unlikely that many of these transactions will occur in the near term, we believe this sale provides evidence of the significant long-term value in some of APR’s properties. We believe that many of APR’s properties would be extremely valuable rezoned for residential, and though long-term leases constrain the REIT’s ability to maximize this value in the near term, it is proving to be a greater source of value creation in the near term than we previously anticipated,” he said.
* Ahead of Wednesday’s quarterly release, Canaccord Genuity’s Katie Lachapelle lowered her Cameco Corp. (CCO-T) target to $75 from $80, below the $76.74 average, with a “buy” rating.
“Despite strong Q1 volumes, we still think investors will be watching the operating performance at McArthur River/Key Lake and Cigar Lake,” she said. “When we visited McArthur River late last year, it was evident that there were operational issues at the Key Lake mill, which was suffering from an inexperienced workforce and failed optimization efforts. At that time, the mill was limiting production capacity to 75 per cent or ~14mlbpa. It is not clear if some of these issues have bled into 2024. Any reduction in Cameco’s production volumes in 2024 could screen as a net positive for pricing, if the company decided to enter the spot market to pick up additional pounds. Historically, Cameco has also looked to draw down existing inventory and/or borrow product to reduce near-term spot buying. As a reminder, CCO had a total of 11mlbs of U3O8 in inventory at the end of Q1.”
* In response to their second-quarter earnings releases, Scotia’s Ben Isaacson cut his targets for Canfor Corp. (CFP-T) to $19 from $20 and Canfor Pulp Products Inc. (CFX-T) to $1.50 from $2 with “sector perform” rating for both. The averages are $19.33 and $1.44, respectively.
“First , most lumber markets remain challenged, with weakness expected to persist through 2H,” he said. “A lack of relief on mortgage rates, as well as demand erosion in multi-family housing starts, have capped near-term enthusiasm. Second, on pulp, supply disruptions have eased, new capacity is being added in Brazil/China, and now we’re seeing weak seasonal demand. Not a great set-up. Third, CFP’s net cash position is dwindling, and could/should see a return to net debt this quarter. With duty rates expected to ‘rise considerably’ in August, B.C. lumber economics will only strain CFP’s B/S further. Fourth, CFP continues to prioritize capital spending toward improving its lumber portfolio cost structure, including the Q4 start-up of the greenfield at Axis, AL, the mill closure in Mobile, AL, as well as a $50-milion expansion at the recently acquired El Dorado mill from Resolute. Finally , one wildcard we’re watching is rail availability, as it makes up 50 per cent of CFP/CFX’s combined transportation capacity. Given temporary wildfire-related shutdowns + the potential for a Canadian rail strike, we could see some variability to Q3.”
* Jefferies’ John Aiken bumped his Element Fleet Management Corp. (EFN-T) target to $31 from $28 with a “buy” rating. The average is $29.11.
* Raymond James’ Brian MacArthur moved his Integra Resources Corp. (ITR-X) target to $2.75 from $2.50. with an “outperform” rating. The average is $3.82.
“Integra has announced it will acquire Florida Canyon Gold (FCGI). FCGI shareholders will receive 0.467 of a share of ITR for each share of FCGI which implies total consideration of about $95-million. The transaction is expected to close in 4Q. In addition, ITR has announced a $20-million subscription receipt issue. In connection with the closing of the transaction, ITR and Beedie Capital have agreed to amend the US$20-million convertible loan agreement and Beedie Capital has agreed to a second advance in the amount of US$5-million subject to satisfying certain conditions. FCGI’s major asset is the Florida Canyon mine located in Nevada that is expected to produce about 70 kozs AuEq at AISC of about US$1,525/oz over a 7-year mine life. The transaction allows ITR to transition from gold developer to junior gold producer with cash flow from an operation with favourable jurisdictional risk. It also provides exploration optionality, potential synergies, and increased trading liquidity and the potential to reduce the cost of capital, which will be important for project financing at DeLamar.”
* Canaccord Genuity’s Mike Mueller raised his target for Topaz Energy Corp. (TPZ-T) to $29.50 from $29 with a “buy” rating, while BMO’s Jeremy McCrea bumped his target to $30 from $29 with an “outperform” rating. The average is $29.19.
“Topaz stands out as a uniquely positioned company amid uncertainties in the current macro environment,” said Mr. McCrea. “Being a royalty company offers several advantages, but specifically to Topaz is its infrastructure royalty on ‘newer’ assets, and GORRs on the best plays in the basin (where waterflooding has limited production declines). Nevertheless, a premium is warranted for these important subtleties, that are sometimes difficult to fully appreciate. With a better-than-expected quarter, increased drilling market-share in the basin, and another dividend bump, we increase our target price to $30 and maintain our Outperform rating.”
* BMO’s Ketan Mamtora hiked his West Fraser Timber Co Ltd. (WFG-N, WFG-T) target to US$105 from US$92 with an “outperform” rating. The average is US$99.64.
“Lumber markets remain extremely challenged,” he said. “Producers are starting to reduce supply. We expect more capacity reductions as lumber prices have been at/below cash costs for four quarters. WFG’s balance sheet is strong (net cash increased to $6/share) and provides financial flexibility.”