Inside the Market’s roundup of some of today’s key analyst actions
While he viewed the third-quarter report from Canadian Western Bank (CWB-T) as “negative,” Desjardins Securities analyst Doug Young expects its shares to trade off the value of its acquisition from National Bank of Canada rather than the results.
“We maintain our Buy rating, noting a favourable spread between CWB’s and NA’s current share prices,” he said.
A breakdown of the big banks’ third-quarter earnings
Shares of the Edmonton-based bank finished higher by over 0.3 per cent on Friday despite the premarket release of weaker-than-anticipated quarterly results, including cash earnings per share of 60 cents that fell well below both Mr. Young’s 83-cent estimate and the Street’s expectation of 85 cents. The miss was attributed solely to higher provisions for credit losses (PCLs).
“It experienced higher impaired PCLs (more than double what we estimated), which related to two separate loans in its general commercial portfolio (represented 30 basis points of its 57bps impaired PCL),” the analyst said. “We are still a bit confused as to why it took losses. According to management, the losses were specific to those two borrowers (that are unrelated) and does not represent a trend or pending issues within its loan book; it expects PCLs to trend toward its historical normal range next quarter (18–23bps).”
After the bank reduced its full-year guidance, Mr. Young cut his 2024 and 2025 earnings expectations, however he raised his target for its shares to $57 from $53 to fall in line with his changes to National Bank. The average target on the Street is $47.39, according to LSEG data.
He reiterated his “buy” recommendation.
Other analysts making target adjustments include:
* RBC’s Darko Mihelic to $52 from $51 with a “sector perform” rating.
“CWB’s Q3/24 results were below our expectations as the quarter had much higher than expected impaired PCLs, mainly related to 2 loans where borrower-specific circumstances resulted in large provisions for these exposures. We adjust our model slightly to be in line with CWB’s updated guidance for Q4/24 and 2024, which reflects elevated impaired PCLs next quarter but not as high as the level seen in the current quarter. We believe PCLs will trend toward “normal” levels prior to Q3/24 unless we see more spikes in credit losses,” said Mr. Mihelic.
* CIBC’s Paul Holden to $60.30 (a Street high) from $55.80 with a “neutral” rating.
“Given the pending acquisition by National Bank and our Outperformer rating on National Bank, all we wanted was a clean quarter from CWB. Unfortunately that is not what we got, with elevated credit losses. CWB management has a high degree of conviction that elevated credit losses are isolated to two loans and specific to the quarter given significant writedowns on those two loans,” said Mr. Holden.
* Jefferies’ John Aiken to $57 from $52 with a “hold” rating.
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Expecting “a step change in copper production starting in 3Q24 and growing through 2025 translating into strong cash flow and EBITDA growth over the period,” Raymond James analyst Farooq Hamed upgraded Ero Copper Corp. (ERO-T) to “outperform” from “market perform” previously.
“Further, we believe valuation for ERO does not fully reflect the growth expected to begin in 3Q24 as compared to copper peers,” he added.
In justifying his move, Mr. Hamed pointed to a “ramp up” in commerical production at its Tucumã project, the expectations for a stronger second half of the year at Caraiba after a “weak start” to the year and a “strong” contributions at Xavantina.
“We are modeling 2H24 EBITDA of $270-million at ERO representing a significant increase over 1H24 EBITDA of $95-million,” he said. “We are modeling NTM [next 12-month] EBITDA of $591-million implying an EV/NTM EBITDA multiple of 4.6 times versus the copper producer peer group average of closer to 6 times for 2025 EBITDA. As a result, we believe the growth and improvement in operations that is expected to start in 3Q24 is not fully reflected in ERO’s share price.”
Mr. Hamed bumped his target to $36 from $34. The average is $36.36.
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In a separate report, Mr. Hamed initiated coverage of Capstone Copper Corp. (CS-T) with an “outperform” rating, seeing it “well-positioned to deliver on copper production growth with declining operating costs through the remainder of 2024 and all of 2025 driven by the ramp up of the Mantoverde development project (MVDP) in 2H24,”
“With capital spending effectively complete for the MVDP, production and costs expected to improve, and lower capex spending ahead of the Santo Domingo project sanctioning (modeling 2026), we believe Capstone could be in a cash harvesting phase through 2026 allowing for further balance sheet deleveraging and flexibility to pursue other strategic opportunities,” he added.
“Beyond the growth expected from the MVDP in the near term and from Santo Domingo in the longer term, Capstone has a number of organic growth options in its development pipeline to add further copper production at low capital intensity.”
Also pointing to its “strong” pipeline of brownfield and greenfield opportunities as well as its low geopolitical and complexity risk, the analyst set a target of $12 per share, which falls below the current average of $13.50.
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One stock was added and four were removed from National Bank’s “Dividend All-Stars portfolio” for the second half of 2024.
The list contains 18 of the firm’s “favourite yield ideas” with the following three investment criteria: a dividend/distribution yield of approximately 5 per cent or greater; a “good chance for growth in the payout, with a low risk of a cut”; and “a positive bias regarding the prospects of the company and/or share price.”
For the first half of the year (from Feb. 9), the portfolio returned 10.81 per cent versus a 11.35-per-cent gain for the S&P/TSX composite. Over the past 12 years, it has outperformed the broader index at 11.0 per cent per year versus 8.9 per cent.
“The purpose of the NBF Dividend All-Stars portfolio is to provide income-seeking investors with high quality companies towards which NBF Analysts generally hold a positive view,” the analysts said in a research report released Tuesday. “For the updated portfolio for 2024, the average 5.9-per-cent yield is attractive despite high in interest rates (10-year Canada yield at 3.16 per cent, consistent with our last review in mid February 2024).
“Six companies increased dividends since the last publication (February 2024) including Capital Power, Gibson Energy, Mullen Group, RioCan REIT, Topaz Energy and TC Energy. Dividend increases have continued to significantly outpace reductions; including the first half of 2024, there have been 161 dividend increases versus 11 reductions since the initial 2012 publication.”
Sienna Senior Living Inc. (SIA-T) was added to the portfolio in the latest update.
“SIA offers investors a steady yield of 6 per cent, thanks to its ownership of long-term care (LTC) assets, alongside growth related to its retirement platform,” said analyst Giuliano Thornhill. “We are comfortable with the LTC redevelopment risk that compensates investors with additional yield, and as the retirement rebound continues to take shape, expect steadily improving credit metrics to support this payout.”
Mr. Thornhill has an “outperform” recommendation and $17.50 target for Sienna shares. The average target on the Street is $17.21, according to LSEG data.
Stocks removed from the list are:
Northland Power Inc. (NPI-T)
Analysts: “The payout ratio could be high for a couple of years, so dividend increases are unlikely. With a change in CEO, a strategy reset is possible and investors in the sector are increasingly more interested in organic growht and less in dividends.”
Primaris REIT (PMZ.UN-T)
Analysts: “We moved to [a “sector perform” rating] due to economic backdrop that has us taking an increasingly defensive tack (consumers are stretched and rates remain a risk to consumption).”
Telus Corp. (T-T)
Analysts: “The stock has moved lower in our Telecom pecking order, with guidance revised for the second year in a row with Q2 reporting and its pricing structure serving to undermine growth amid elevated competitive intensity.”
Secure Energy Services Inc. (SES-T)
Analysts: “Was removed due to strong share price performance moving the yield out of our criteria.”
The remainder of the list is: Alaris Equity Partners Income Trust (AD.UN-T’), AltaGas Ltd. (ALA-T), Brookfield Renewable Partners LP (BEP.UN-T), Capital Power Corp. (CPX-T), Chemtrade Logistics Income Fund (CHE.UN-T), Canadian Imperial Bank of Commerce (CM-T), Dexterra Group Inc. (DXT-T), Doman Building Materials Group Ltd. (DBM-T), Dream Industrial REIT (DIR-UN-T), Exchange Income Corp. (EIF-T), Gibson Energy Inc. (GEI-T), IGM Financial Inc. (IGM-T), Mullen Group Ltd. (MTL-T), RioCan REIT (REI.UN-T), TC Energy Corp. (TRP-T), Topaz Energy Corp. (TPZ-T) and Transcontinental Inc. (TCL.A-T).
“The average yield of All-Star equities for 2024 is elevated at 5.9 per cent and payout easily funded with most having the capacity to grow dividends/distributions,” they said. “The average payout ratio of the portfolio is 62.9 per cent and the average payout measure (AFFO, FCF, etc.) yield is 10.5 per cent.
“With lower interest rates expected (market is expecting 75 bps of cuts in Canada by EOY), dividend paying stocks could come back in favour.”
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Touting its “attractive” valuation and advising investors to buy the U.S. Sunbelt " just ahead of market rent growth reaching an inflection point,” Scotia Capital analyst Himanshu Gupta upgraded BSR REIT (HOM.U-T, HOM.UN-T) to “sector outperform” from “sector perform” on Tuesday.
“We think valuation was discounted for the last 12 months, but will now get noticed as fundamentals begin to stabilize,” he said. “HOM is trading at 19-per-cent discount to our NAV and implies 6.1-per-cent cap rate and $178k per unit. KKR-Quarterra $2.1-billion portfolio transaction at 5-per-cent cap rate and EQR purchase of $1-billion portfolio from Blackstone at $270k per unit. Large U.S. Sunbelt peers (CPT & MAA) trading at 5.4-per-cent implied cap which is very wide relative to historical average. HOM was already trading at a larger spread to CDN multi-family for some time now.”
Mr. Gupta thinks BSR’s unit price “tends to move hand-in-and with effective market rent growth,” and he expects market rent growth to turn positive (from negative currently) year-over-year in the fourth quarter with further improvement into 2025.
“Seniors housing sector have been working well with accelerating fundamentals and (still) reasonable valuation,” he said. “Seniors housing remain our highest conviction idea. Industrial and self storage are seeing decelerating fundamentals, somewhat similar to U.S. Sunbelt multi-family, and in order to be constructive, we will have to focus solely on valuation here. Retail has been able to show limited FFO per unit growth despite fundamentals looking strong.”
Calling his upgrade “a value call and not a growth pick,” Mr. Gupta bumped his target to US$16.50 from US$15.50. The current average is US$15.22.
“We expect modest FFOPU [funds from operations per unit] growth of 4 per cent year-over-year in 2024 and a similar 4 per cent in 2025, which is driven by 2-per-cent SS NOI growth,” he said “As such, we see HOM as a value stock, and not part of the Growth club. HOM stacks well with NAVPU [net asset value per unit] growth of 9 per cent as we see forward NAVPU at $18.00.”
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RBC Dominion Securities analyst Greg Pardy said a recent meeting with Suncor Energy Inc. (SU-T) CEO Rich Kruger reinforced his confidence in its “favorable operating/financial momentum is being driven by structural changes to its culture,” leading him to reinforce it as his favourite integrated company in Canada and its spots on the firm’s “Global Energy Best Ideas” list.
“The cultural shift occurring at Suncor over the past year was at the center of our discussion,” said Mr. Pardy. “Not long after overcoming a vicious cyber-attack last July, Suncor moved quickly to reduce its headcount by approximately 1,800 above-field personnel (22 per cent), which was completed in November ahead of schedule. Rich and the leadership team have spent a great deal of time engaging with personnel on the field, serving to reenergize the workforce and instill accountability and connectivity with leadership. Collective company-wide efforts have borne fruit quicker than Rich expected when he arrived in April 2023. The job ahead now is to deeply ingrain these cultural aspects in an enduring manner.”
“We anticipate that Rich will remain in his role for the next several years and were pleased to hear that the company has already begun its longer-term CEO succession planning process. Ongoing performance and driving results are in sharp focus at Suncor in what can be described as a CEO horse race in the coming years.”
Mr. Pardy thinks a strong foundation has been built to continue Suncor’s “strong” operational momentum.
“In the past year, Suncor moved to establish internal operating performance targets that are not easily attainable and exceed its external market guidance,” he said. “In turn, the company’s employees have stepped up, applying their ingenuity to drive continuous improvement surrounding things like scheduling, planning, executing and reviewing operations across the entire organization.”
The analyst reiterated an “outperform” recommendation and $67 target for the Calgary-based company’s shares. The average on the Street is $60.93.
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In other analyst actions:
* Desjardins Securities’ John Sclodnick bumped his Andean Precious Metals Corp. (APM-X) to $1.70 from $1.60 with a “buy” rating. The average is $1.55.
“We have updated our estimates to factor in the company’s 2Q financial results, where it generated US$7.8-million in FCF for an implied annualized yield of 27 per cent,” he said. “However, we expect quarterly FCF to increase in 3Q and beyond as the FDF begins to contribute at San Bartolomé and optimizations continue to bear fruit at the recently acquired Soledad Mountain. While our modelled mine lives run until just 2029, we discuss why we expect them to continue well beyond then.”
* Scotia’s Eric Winmill raised his Arizona Sonoran Copper Co. Inc. (ASCU-T) to $3 from $2.75 with a “sector outperform” rating. The average is $3.63.
* RBC Dominion Securities’ Wayne Lam raised his Torex Gold Resources Inc. (TXG-T) target to $32 from $30 with an “outperform” rating. The average is $30.25.
“Torex will host an investor day on Thursday, September 5, and is expected to outline initial results from its internal PFS on the EPO deposit. We outline our estimate of the potential opportunity and future contribution from the deposit, which we view as an important catalyst for the company in helping to sustain output levels and fill the mill beyond 2027+,” he said.
“We view the upcoming internal PFS on the EPO deposit as a significant milestone for TXG, culminating after several years of assessment and drilling. The deposit sits adjacent to the existing Media Luna orebody and has nearly doubled in size since release of the maiden Inferred resource in 2021, now sitting at 1.9 Moz AuEq at 4.9 g/t with 60 per cent within the Indicated category. Given the proximity of the deposit to existing infrastructure, located 500 m from the Guajes Tunnel, we view EPO as a relatively lower-risk growth opportunity that will help support production through 2030+”