Inside the Market’s roundup of some of today’s key analyst actions
Headwinds to growth for Bank of Nova Scotia (BNS-T) are emerging after weaker-than-expected first-quarter financial results, according to CIBC World Markets analyst Robert Sedran, leading him to downgrade his rating for the stock to “neutral” from “outperform.”
Before market open on Tuesday, Scotiabank reported adjusted earnings per share of $1.75, missing the $1.82 projection of both Mr. Sedran and the Street. The miss came largely from higher expenses and loan losses.
"Our Outperformer rating had been based on our expectation that continued strong performance from International Banking, an improved outlook for Canadian Banking and better performance from Global Banking & Markets would drive strong organic growth in 2019 that would be complemented by synergies from the many acquisitions in 2020," the analyst said. "This may yet prove to be the right call, but after the third consecutive miss against estimates, a year-over-year decline in Canadian Banking earnings, a slowdown (to admittedly still solid growth) in International, negative 23-per-cent operating leverage in the Capital Markets segment and a decline in our earnings estimates, our conviction in this call has been shaken.
"Absent that conviction, we are also not in a position to recommend adding to positions at this time. As such ... we are downgrading the shares."
Mr. Sedran said the growth in expenses resulted in negative operating leverage in two of its three main operating segments, leading the bank to miss his expectations. He does, however, think they will remain elevated levels moving forward.
"We have also been compelled to reduce our fiscal 2020 forecast to account for the anticipated impact of the planned monetization of the investment in T-bank in Thailand," he said. "The timing of that move confirmed by the bank on earnings day is uncertain, but it seems prudent to assume that much of the $250-million in earnings from that venture will be falling away beginning next year. We are highly supportive of the densification strategy being pursued throughout the footprint, but there is no question that it also creates some earnings dislocations while the capital is reallocated. It appears at this point that the added capital flexibility will come with an 2-per-cent earnings headwind likely beginning to emerge next year. For fiscal 2019, we are at $7.41 (was $7.54). For 2020, we are at $7.90 (was $8.11)."
Mr. Sedran lowered his target for Scotiabank shares to $81 from $86. The average analyst target price on the Street is currently $80.82, according to Thomson Reuters Eikon data.
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Pointing to “good” U.S. momentum and “solid” credit quality, RBC Dominion Securities analyst Darko Mihelic said he remains “favourable” toward Bank of Montreal (BMO-T, BMO-N) following Tuesday’s release of better-than-anticipated first-quarter financial results.
BMO reported adjusted earnings per share of $2.32, exceeding Mr. Mihelic’s $2.15 forecast and the consensus on the Street of $2.23. He pointed to loan loss recovery in its U.S. P&C segment of 4 cents as a key reason for the beat, adding revenues, expenses and provisions for credit losses (PCL) also topped his projections.
"U.S. P&C results were good and better than expected excluding the one-time loan loss recovery," the analyst said. "Earnings growth of 33 per cent year-over-year reflected benefits from the U.S. tax reform, lower PCLs and solid efficiency gains of 300 basis points year-over-year. Total loan growth remained solid at 11 per cent year-over-year driven by strong commercial loan growth of 13 per cent year-over-year, while consumer loan growth moderated to 3 per cent year-over-year. Net interest margins moved modestly higher by 1 basis point year-over-year.
"We continue to expect good results from this segment and forecast average earnings growth of 11 per cent in 2019/2020."
Mr. Mihelic said Canadian P&C results “remained soft” with earnings flat in comparison to the same period a year ago, but he noted loan growth accelerated to 4.8 per cent year-over-year (versus an average of 4.5 per cent for its peers in this earning seasons thus far).
Calling the bank's credit quality "relatively stable" and its common equity tier 1 (CET 1) ratio "solid," he raised his diluted EPS projection for 2019 to $9.86 from $9.57 and his 2020 estimate to $10.30 from $10.20.
Keeping an "outperform" rating for the stock, he increased his target by a loonie to $113. The average on the Street is currently $109.83.
"Valuations are relatively in-line with longer-term averages," said Mr. Mihelic. "BMO is currently trading at 10.3 times our 2019 EPS estimate, down 2 per cent below its historical average premium to peers. The stock is trading at 1.5 times price-to-book versus a peer average of 1.8 times."
Elsewhere, Desjardins Securities' Doug Young increased his target to $106 from $104 with a "hold" rating (unchanged).
"While not perfect, overall it was a good quarter in our opinion. That said, a 0.13-per-cent PCL rate is not likely sustainable," he said.
He added: "We like BMO’s commercial (vs retail) banking focus in Canada and the U.S.; however, we also believe increased competition could weigh on this segment over the coming years."
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Husky Energy Inc.'s (HSE-T) fourth-quarter results brought “more than noise,” said Raymond James analyst Chris Cox, who thinks it’s time to take a “pause.”
He lowered his rating for its stock to "outperform" from "market perform."
“4Q18 results surprised noticeably to the downside,” he said. “[Funds from operations] came in at 58 cents per share versus our 85 cents per share estimate and consensus at 83 cents. A number of factors drove the miss, with weaker than expected operating margin from the I&M segment the largest factor; weakness here was primarily attributable to the devaluation of inventory held in the company’s integrated corridor, given the drop in commodity prices during the quarter. Additionally, upgrading margins came in below expectations, realized pricing in the thermal business disappointed and turnaround activity at Lima lasted longer than expected.”
Mr. Cox called Husky’s operational execution a “tale of two cities,” despite headline results falling largely in line with expectations.
"The good news is that some of the company's marquee assets saw strong performance during the quarter," he said. "Production at Liwan reached a quarterly record, both Sunrise and Tucker reached nameplate capacity and performance of the Lloydminster Thermal projects continues to impress. Offsetting that, the company had to extend a planned turnaround at the Lima refinery during the quarter and operations at White Rose only recently resumed, with some uncertainty still remaining on the ramp-up profile. The biggest misstep though occurred at the West White Rose project where the company attempted to accelerate certain work during the quarter to try and hit a narrow weather window, only to later abandon some of those pursuits. As such, spending for the quarter came in $350-million above expectations and above full-year guidance. Notably, this is not a matter of the timing of capex,but instead appears to reflect cost creep on the project, with Management also noting some timing slippage into late-2022."
With the results, Mr. Cox lowered his cash flow per share and EBITDA projections for 2019 to $3.24 and $3.526-billion, respectively, from $3.45 and $3.8-billion. His 2020 CFPS estimate rose by a penny to $4.05, while his EBITDA expectation fell to $4.559-billion from $4.588-billion.
His target for Husky shares dropped to $18 from $22. The average on the Street is currently $17.76.
“Admittedly, many of the issues that weighed on 4Q18 results are expected to be one-time in nature and/or transitory,” he said. “Weaker than expected performance in the I&M [Industrial and Manufacturing] segment in particular drove most of the miss, and indeed, much of this is expected to reverse in 1Q19. However, we do believe this ‘noise’ stands out relative to other well insulated peers in Western Canada. Investors may be willing to give other companies the benefit of the doubt on noisy quarters like this, but given the company’s operational missteps - some of which continued during 4Q18 - we suspect no favors will be given over the near-term. Finally, the company remains one of the few integrated producers globally that is not currently living within its means and demonstrating increasing free cash flow - an aspect of the story that we believe could garner more attention coming out of 4Q18 results. Accordingly, we have lowered our rating.”
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In reaction to “weak” third-quarter financial results, Acumen Capital analyst Nick Corcoran downgraded Diamond Estates Wine & Spirits Inc. (DWS-X) to “hold” from “buy.”
On Wednesday before market open, the Niagara-on-the-Lake, Ont.-based wine maker reported revenue of $7.4-million, a drop of 28.4 per cent year-over-year and below the analyst’s $10.3-million projection, due largely to lower export sales and the loss of two large agency suppliers.
EBITDA came in at a loss of $0.2-million, falling from a $1.1-million profit a year ago and lower than Mr. Corcoran’s $2.1-million expectation. Earnings per share of a 1-cent loss also missed his 1-cent estimate.
"We believe that the market’s focus will now turn to 1) whether DWS can return to growth in FY/20, and 2) how DWS will move back onside of its debt covenants," the analyst said. "Catalysts for the story include increased sales in the Chinese export channel and a potential announcement by the Ontario government of additional licenses for the sale of wine/beer in grocery and convenience store. Risks to the story include its lender requesting immediate payment of the loan (forcing a liquidity event)."
After lowering his fiscal 2019 and 2020 earnings and revenue expectations, Mr. Corcoran dropped his target for the stock to 20 cents from 32 cents. The average is 37 cents.
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Teck Resources Ltd.'s (TECK.B-T, TECK-N) earnings in fiscal 2019 and 2020 are likely to be weighed down by lower coal sales volume and higher operating costs, according to RBC Dominion Securities analyst Stephen Walker, who feels “executing on strategy can drive better share price performance in 2019.”
“Since August 2016 the spot coking coal price has averaged $203 per ton and despite a prolonged period of price elevation there has been little supply side response to meet demand,” he said in a research note released Wednesday. “A string of logistics and mine issues have kept the market tight, and these usually deemed ‘one-off’ incidents have become a pattern that we expect to continue through 2019 as there is a lack of investment in new projects, and currently operating mines become older and more likely to have problems. This backdrop allows Teck to execute on its strategy and continue to return capital to shareholders.”
Mr. Walker said Teck’s “strong” free cash flow has allowed for a return on capital, noting: “With 2019 estimated FCF of $1.6-billion at RBC estimated commodity prices (FCF yield of 9 per cent) and $2.2B (yield of 12 per cent) at spot prices, we believe Teck can fund development of QB2 and its portfolio projects and has flexibility to return capital to shareholders. We expect details on capital allocation plans mid-year following the close of the QB2 transaction and receipt of project financing and would not be surprised to see Teck continue to repurchase shares and distribute supplemental dividends.”
Due to lower sales volumes and higher opex, Mr. Walker lowered his 2019, 2020 and 2021 earnings per share expectations to $3.96, $3.79 and $3.62, respectively, from $4.64, $4.12 and $3.90.
With an unchanged "outperform" rating, his target for Teck shares dipped to $44 from $52, which remains above the consensus of $39.59.
"Teck has historically traded at a 0.7-times EBITDA discount to the global diversified miners, however, that discount has widened with Teck trading at 3.9-times EBITDA versus its peers at 6.1 times," said Mr. Walker. "On a P/NAV basis Teck is trading at 0.7 times, while its peers are trading at 1.1 times. We believe Teck can close this gap with better execution and we prefer met coal to iron ore due to tighter supply."
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Citi analyst Itay Michaeli said recent investor meetings with executives from Magna International Inc. (MGA-N, MG-T) brought “continued confidence in the bull case for the stock and the overall risk/reward proposition.”
"Fundamentally, Magna fits well into our auto supplier selectivity process: (1) revenue growth driven by Car of the Future trends; (2) margin expansion runway to drive profitable growth; (3) strong FCF both for growth and conversion, with shareholder-friendly deployment; (4) heavy investments into long-term upside opportunities in AV/EV, including unique assets (Complete Vehicle Assembly) that could play a crucial role in the urban RoboTaxi domain," the analyst said. "At an 11-per-cent 2019 estimated FCF yield and a strong balance sheet, we continue to view Magna shares as deeply undervalued.
"Common pushback (and our response) on the stock include the following:
(1) Magna is more cyclical than secular—Magna’s revenue growth should outpace industry production, and importantly, revenue could end up proving more defensive than some believe, thanks to relatively less dependence on trim/option mix in certain businesses. This is an important point that’s often overlooked;
(2) Is Magna a true leader in Car of the Future trends? We do think that Magna is well positioned based on organic growth expectations and known level 3+ wins; however, we do think that the company’s current segment reporting doesn’t present the business as well as it should (per our prior “two-entity thesis”), and this remains an opportunity."
To reflect the company's recent guidance, Mr. Michaeli reduced his 2019 and 2020 earnings per share projections to US$6.35 and US$7.30, respectively, from US$7.15 and US$7.58.
However, he raised his target for the stock to US$66 from US$63, keeping a "buy" rating.
"We see two paths for further multiple expansion," said Mr. Michaeli. "The first is simply delivery of Magna’s 2018-20 FCF growth/conversion plan. The second, in our view, is to reposition the segments/story (including for a possible future spin) toward the increasingly important and unique role that Magna can play in AV/EV mobility scaling. This 'two-entity' thesis as a way to perceive Magna in the context of Car of the Future investing."
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Following in-line fourth-quarter 2018 results, Laurentian Bank Securities analyst Yashwant Sankpal expects InterRent Real Estate Investment Trust (IIP.UN-T) to deliver “steady” funds from operations per unit growth moving forward.
Mr. Sankpal said: "We believe IIP should be able to comfortably deliver mid-single digit FFO/unit growth over the next few years for the following reasons: 1) rental fundamentals remain strong in all its core markets. Even though IIP was able to grow its AMR [average market rent] at 8 per cent per year for the last two years, management is of the view that its overall in-place rents are 20-25 per cent below the market rents, and 2) 37 per cent of IIP’s suites are non-repositioned and currently producing NOI [net operating income] per suite of $7.7K per year, approximately 20 per cent below that of a repositioned suite."
Keeping a "buy" rating, his target rose to $15.50 from $14, which exceeds the consensus of $14.35.
“IIP appears expensive on both price-to-net-asset-value and P-FFO basis, however after considering the fact that 1/3 of IIP’s portfolio is yet to be repositioned (and producing 20 per cent lower per suite NOI), its track record of producing solid organic growth and its ability to scale its platform, these multiples may seem reasonable,” he said.
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In other analyst actions:
National Bank Financial analyst Tal Woolley resumed coverage of Northwest Healthcare Properties REIT (NWH.UN-T) with a “sector perform” rating and $10 target. The average is $11.30.