Inside the Market’s roundup of some of today’s key analyst actions
While he expects the approaching earnings season for Canadian banks to be noisy, Desjardins Securities analyst Doug Young predicts “the quarter will be fine.”
“We’re gonna shake it off and stay the course with our market overweight call,” he said in a research report released Wednesday titled ‘Cause the players gonna play, play, play, play….
“1Q FY24 reporting starts on February 27 with BNS and BMO, and there’s a lot going on—with the economy, rate expectations, credit normalization, concerns with commercial real estate (CRE) (specifically office), tax rule changes, IFRS 17 adoption, new guidelines that will lower CET1 ratios, news (or lack thereof) around U.S. regulatory matters and negative sentiment on U.S. banks, to name ‘a few’.”
Mr. Young is forecasting an 11-per-cent year-over-year decline in cash earnings per share for the Big 6 on average, pointing to “elevated expenses and normalizing credit trends; and by segment, weaker U.S. P&C banking and weaker capital markets results as last year was a banner quarter for this segment.”
“More importantly, we forecast a decline of 1 per cent year-over-year for adjusted pre-tax, pre-provision (PTPP) earnings ... On average, we expect stable all-bank NIMs ex trading with some pressure in the U.S., elevated adjusted efficiency ratios and a 14 basis points year-over-year increase in PCL rates,” he said.
“Outside the normal industry trends, there are several topics we’ll be watching for. Any updates on: TD’s U.S. AML issues; RY’s pending integration of HSBC Canada; the impact from the removal of the tax deductibility of Canadian corporate dividends; U.S. CRE (office) portfolios; and whether other material loan book divestitures, or risk transfer transactions, are being considered?”
In the wake of a “strong rally” following the release of fourth-quarter results, Mr. Young did caution that the group has “run into fresh resistance as concerns for U.S. regional banks is revived.”
“While the Canadian banks have less exposure to the issues plaguing their U.s. peers, the negative sentiment could linger in our opinion,” he said.
Seeing an “absence of near-term catalysts,” Mr. Young downgraded Laurentian Bank of Canada (LB-T) to “sell” from a “hold” recommendation.
Examining three items to watch in each bank’s release, he said this about Laurentian: “First, we are keenly interested in the perspectives and plans of the new CEO. Is he contemplating any big changes? Second, following last year’s system disruptions, we are curious about the bank’s customer retention and deposit flows. Lastly, any further restructuring/charges?”
His target for Laurentian shares, which places last in his ranking of the Big 8 banks, slid to $26 from $27. The average target on the Street is $29.20, according to Refinitiv data.
In order of preference, Mr. Young’s other ratings and targets heading into earnings season are:
- Bank of Montreal (BMO-T) with a “buy” rating and $135 target. Average: $135.36.
- Canadian Western Bank (CWB-T) with a “buy” rating and $37 target. Average: $34.60.
- Royal Bank of Canada (RY-T) with a “buy” rating and $142 target. Average: $139.58.
- Toronto-Dominion Bank (TD-T) with a “buy” rating and $94 target, down from $96. Average: $89.69.
- National Bank of Canada (NA-T) with a “hold” rating and $105 target. Average: $103.
- Bank of Nova Scotia (BNS-T) with a “hold” rating and $64 target. Average: $65.06.
- Canadian Imperial Bank of Commerce (CM-T) with a “hold” rating and $64 target, up from $62. Average: $63.73.
=====
Citing retail headwinds, Canaccord Genuity’s Luke Hannan said he’s “moving to the sidelines” on Canadian Tire Corp. Ltd. (CTC.A-T), downgrading its shares to a “hold” recommendation from “buy” ahead of the Feb. 15 release of its fourth-quarter financial results.
The analyst is forecasting revenue of $4.87-billion, a drop of 9 per cent year-over-year and below the Street’s expectation of $4.92-billion. He expects adjusted earnings per share to drop 53 per cent to $4.43 from $9.34 in fiscal 2022 and also below the consensus of $4.98.
“Recall, the softness in demand Canadian Tire witnessed in its Retail segment in Q3/23 extended into the early part of Q4/23, a trend we believe that worsened due to the milder-than-usual winter experienced across the country,” said Mr. Hannan. “Further exacerbating the headwinds for the Retail business in Q4/23 are 1) CTR Dealers already holding ample inventory heading into Q4/23, reducing the need for shipments during Q4/23, and 2) early deliveries of Helly Hansen product in Q3/23. Altogether, we expect a noisy quarter for the Retail segment, particularly when considering that the softer retail environment should lead to a lower MSA [Margin Sharing Arrangement] being recorded in Q4/23.”
Alongside these headwinds, he also expects ongoing mortgage renewals to weigh, pointing to a Royal LePage report that estimates 31 per cent of current mortgagees will be renewing over the next 18 months at “significantly” higher rates.
“Recall, Canadian Tire noted on its Q3/23 call that 70 per cent of the year-over-year decline in consolidated comparable Retail sales that quarter was attributable to debt-laden customers,” he added.
After lowering his revenue and earnings projections through 2024, Mr. Hannan dropped his target for Canadian Tire shares to $154 from $167. The average is currently $161.30.
“In light of these factors, coupled with our view that other stocks in our discretionary coverage universe offer better risk-reward profiles (i.e., TOY, ATZ, and GIL, notwithstanding the latter’s ongoing boardroom feud), we are moving to the sidelines,” he concluded.
“Longer term, we remain positive on 1) Canadian Tire’s robust Owned Brands business (approximately 900 basis points higher margins than National Brands, 36.2-per-cent consolidated Retail sales penetration as of Q3/23), which we believe will continue to resonate with a consumer that’s placing increasing importance on value, and (2) the spend retention capabilities of Triangle Rewards. That said, we believe the above mentioned dynamics will make investors unlikely to reward the stock with a higher multiple in the near term.”
=====
While he warned of “cloudy” conditions in the United States alongside a “robust” Canadian market, ATB Capital Markets analyst Waqar Syed is maintaining his positive outlook on Precision Drilling Corp. (PD-T) despite trimming his earnings expectations following Wednesday’s release of its fourth-quarter 2023 financial results, pointing to its “robust [free cash flow] theme.”
Shares of the Calgary-based company rose 5.3 per cent on Wednesday after it reported earnings before interest, taxes, depreciation and amortization (EBITDA) of $157.2-million for the quarter, exceeding the consensus forecast by 4 per cent ($151.8-million) due to stronger-than-expected rig activity on both side of the border and gains in Canadian margins. Adjusted earnings per share of $3.99 blew past the $2.69 expectation.
Precision also said it will continue to focus on deleveraging and share buybacks in 2024, increasing its long-term debt reduction target to $600-million between 2022 and 2026 from its previous goal of $500-million from 2022 to 2025. It will allocate 25-35 per cent of free cash flow before debt repayments to share repurchases.
“PD has strong visibility for the Canadian market as operators are seeking to lock up rigs in preparation for increases in oil and gas export capacity, while the uncertainty in Lower-48 persists,” said Mr. Syed in a research note. “PD secured multiple term contracts averaging 23 rigs in Q4/23 which was a 44-per-cent increase year-over-year. This strong demand for rigs in Canada bodes well for PD who now has 30 Super Triple rigs in the country. On the other hand, the U.S. market outlook remains blurry. Historically, PD had significant exposure to the gas basins and private operators, and is now pursuing larger public operators in oilier basins. This transition has been challenging, with PD currently operating 39 rigs in the US. A small pick-up is likely in the coming weeks and in Q2/24.”
While he cut his 2024 EBITDA estimate by 11 per cent, Mr. Syed increased his free cash flow and working capital projections alongside a decline in capital spending. He said those changes drive his “confidence in the underlying investment story for PD, who continues to reduce debt and return cash to shareholders with FCF yield on market cap at 14 per cent for 2024 and 17 per cent for 2025.”
“In Canada, we continue to see a secular growth angle driven by improving gas export capacity, strong oil prices, and tight supply of Super-Spec drilling rigs,” he said. “In January 2024, PD added a Super Triple rig in Canada to bring its Canadian fleet size to 30. In the U.S., PD currently has 39 active rigs and expects active rigs to improve slightly in the coming weeks and then into Q2/24, as some of its Rockies-based rigs pick up seasonally. The Company is targeting penetrating larger operators with exposure to the oilier basins, as it tries to pivot away from private operators with gassier exposure. PD now has eight active rigs in the Middle East with the majority of rigs on long-term contracts and they provide stable cash flows. The Company is also continuing to bid its idle rigs for jobs in the region.
“We now project 65.1 rigs active in Canada in 2024 (Previous: 65.9 rigs) and 43.0 rigs active in the U.S., versus previous forecast of 43.8 rigs. The biggest impact to estimates is lowering of our U.S. margin outlook, as we now project US drilling margins to average US$9,974/rig-day in 2024e, versus prior forecast of US$11,737/rig-day.
Maintaining his “outperform” rating for Precision Drilling shares, Mr. Syed reduced his target by $1 to $125. The average target on the Street is $125.55.
“We point out that the strong FCF (14-per-cent/17-per-cent yield for 2024/2025) and shareholder capital returns are key drivers of our investment case,” he said.
Elsewhere, others making changes include:
* Evercore ISI’s James West to $139 from $142 with an “outperform” rating.
“We believe the company’s ability to 1) expand geographically in the Middle East (8 active rigs currently in the Middle East, while average active international rig count is expected to increase 40 per cent year-over-year in 2024), 2) meet Canadian demand for natural gas, LNG, and NGLs (outlook for a sustained period of elevated natural gas drilling activity remains strong), 3) strengthen its balance sheet (long-term debt reduction target stands now at $600-million between 2022-2026), 4) generate free cash flow and shareholder returns, and 5) capitalize on environmental solutions (e.g. Battery Energy Storage Systems, grid power connections, diesel fuel emission and reduction systems, and low-emission location lighting solutions) further strengthens our positive outlook for the stock,” said Mr. West.
* Stifel’s Cole Pereira to $115 from $120 with a “buy” rating.
“PD reported 4Q23 results modestly above Stifel/Street estimates. TMX and LNG Canada continue to support attractive WCSB fundamentals, while PD expects a 40-per-cent year-over-year activity increase from its International segment,” he said. “However, Precision has seen U.S. activity decline further, and worsening fixed-cost absorption is expected to further compress margins near-term. Our EBITDAS forecasts decline 7 per cent in 2024 and 4 per cent in 2025, while FCF is reduced by 15 per cent and 6 per cent, respectively. However, Precision plans to accelerate shareholder returns, allocating 25-35 per cent of FCF to share repurchases - equivalent to 6-9 per cent of its market cap on our updated estimates. The company also increased its long-term debt reduction target to $600-million by 2026 (from $500-million by 2025). Our TP declines to $115.00/sh on the estimate reduction, but we reiterate our Buy rating, and believe its increased shareholder return focus and Canadian exposure could help narrow the valuation gap with its U.S. peers.”
* BMO’s John Gibson to $130 from $125 with an “outperform” rating.
“The company has now allocated more than $1.1-billion in free cash flow to debt repayments/share buybacks since 2016, and we expect more of the same going forward (with an increasing percentage of FCF moving towards buybacks/dividends). We also believe ongoing multiple compression should end eventually, driving improved shareholder performance more in line with PD’s financial fundamentals,” said Mr. Gibson.
* Raymond James’ Michael Barth to $132 from $137 with a “strong buy” rating.
“While 4Q23 results were largely in-line with expectations, the outlook for 1Q24 and FY2024 was a mixed bag,” he said. “PD’s U.S. active rig count and day margins are trending much lower than we expected to start the year, but the Canadian business is firing on all cylinders and surprised to the upside, while the 2024 capital budget also came in lower than expected. On balance, our FCFE estimates are revised lower in 2024 but largely unchanged in 2025, which results in a modest reduction to our target price to $132/share. Even with the negative FCFE revision, combined with a 15-per-cent increase in PD’s share price since we resumed coverage, PD is trading at a 20-per-cent and 25-per-cent FCF estimated yield (before debt repayment) on our 2024 and 2025 estimates respectively. Despite the negative U.S. headwinds into 1Q24, we maintain our Strong Buy rating given the improving balance sheet, expected return of capital to shareholders, high FCFE yield, strong Canadian contributions, and what we expect will be trough U.S. drilling contributions in 1Q24.”
* CIBC’s Jamie Kubik to $110 from $100 with an “outperformer” rating.
=====
Eight Capital analyst Adhir Kadve thinks the decision by Propel Holdings Inc. (PRL-T) to raise its dividend for a third time since its 2021 initial public offering “displays management’s confidence in its business and its ability to execute on key growth and profitability initiatives moving forward.
On Tuesday, the Toronto-based fintech company announced a 14-per-cent increase to its annual payment to 48 cents from 42 cents, citing its “strong” credit performance, “confidence” in its profitable growth prospects and “solid financial position.”
“The company has capitalized on the demand it has seen, growing CLAB to $299.4-million as of Q3/F23 (up 44 per cent year-over-year) while sequentially increasing its originations every quarter through Q3,” he said. “On the profitability side, Propel’s strong underwriting posture has led to improvements in both PCL and Charge-off rates which have trended lower year-over-year, despite the growth. This, in our view, continues to validate our thesis on the name. With the Canadian expansion and the burgeoning LaaS [logging as a service] partnership, we see a strong TAM [total addressable market] expansion opportunity and a strong re-rate catalyst and thus we remain incrementally positive on Propel’s opportunity ahead.”
Believing an improvement in macroeconomic conditions is likely to continue, Mr. Kadve now sees the release of its fourth-quarter 2023 results as “a catalyst to look forward to.”
“While we don’t venture to forecast interest rate movements or take a stance on the broader macro, we do not ignore the increasingly favorable macro backdrop,” he said. “Consumer demand for credit remains strong, buoyed by low unemployment rates, while consensus seems to be factoring in an improving interest environment, both of which bode well for profitable growth ahead for Propel.”
“We see the company’s seasonally strong Q4/F23 print as an upcoming catalyst, where we will be looking for ongoing execution and more importantly, the introduction of F24 guidance. Within the guidance we believe the company will be providing updates on its LaaS partnership with Pathward, which we do not believe is being contemplated within the current valuation given early days. Recall that the partnership calls for Pathward to leverage Propel’s platform, to originate loans and subsequently Propel will sell those loans in a forward flow arrangement to different financial institutions. In our view, as the partnership scales, this revenue stream should have accretive SaaS-like margins with no balance sheet risk, and thus offer another potential re-rate catalyst for the stock.”
Reiterating his “buy” recommendation for Propel shares, Mr. Kadve hiked his target to $20 from $15. The current average is $16.40.
“We continue to expect strong 30-per-cent year-over-year growth into F24 largely led by ongoing demand from consumers for credit,” he said. “Further, we also see contributions from both the Canadian FORA rollout and the company’s LaaS partnership. Given Propel’s strong underwriting posture, we expect a continued decline in PCL’s, which plays an important role in achieving profitable growth, with these dynamics continuing into our F25 estimates.”
=====
Analysts at CIBC World Markets are expecting a “solid” fourth-quarter 2023 earnings season for Canadian precious metals companies, but they warned of the importance of 2024 guidance for investors.
“We are expecting higher Q4 EPS (vs. Q3) as many companies tend to deliver their strongest results at the end of the year while also benefitting from a stronger gold price quarter-over-quarter,” they said. “Further, it seems we saw more positive operational developments in Q4 compared to earlier quarters in 2023 with many companies pre-releasing production results in line with guidance (both original and revised). However, at this time of the year, we expect investors to be more focussed on 2024 outlooks, which is where we direct our attention as well.”
Remaining bullish on both silver and gold in both the near- and long-term, the firm raised their price assumptions, pointing to the “continued Central Bank and wealth preservation demand, geopolitical unrest and expectations of the Fed pivoting to rate cuts from rate increases.”
“We believe that a higher longer-term price is warranted given costs of extraction, and lower grade nature of deposits,” the analysts said.
Analyst Allison Carson raised her recommendation for Karora Resources Inc. (KRR-T) to “outperformer” from “neutral” with a $6.50 target, up from $5.25 but below the $6.88 average.
“We are upgrading Karora ... given the overall shift we expect to see in the company’s risk/reward ratio back to reward,” she said. “We believe the company’s capex risk has now been significantly reduced given the Beta Hunt expansion is substantially finished, and we expect to see production growth over the next two years with the completion of this expansion. Additionally, the company has managed to get costs under control and meet guidance for the past two years.”
Conversely, colleague Anita Soni lowered Endeavour Mining PLC (EDV-T) to “neutral” from “outperformer” with a $30 target, down from $38 and below the $37.83 average.
“In light of the overhang and ongoing investigation into the non-authorized payment by the former CEO, we are downgrading Endeavour Mining from Outperformer to Neutral until more clarity is achieved,” she said.
Ms. Soni also made several other target adjustments, including:
- Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “outperformer”) to US$69 from US$72. Average: US$67.68.
- B2Gold Corp. (BTG-N/BTO-T, “outperformer”) to US$3.40 from US$3.60. Average: US$4.43.
- Barrick Gold Corp. (GOLD-N/ABX-T, “outperformer”) to US$23 from US$27. Average: US$21.59.
- Centerra Gold Inc. (CG-T, “outperformer”) to $9.50 from $11. Average: $10.10.
- Equinox Gold Corp. (EQX-T, “neutral”) to $7.60 from $7.20. Average: $8.75.
- Iamgold Corp. (IAG-N/IMG-T, “neutral”) to US$3.10 from US$3. Average: US$3.16.
- Kinross Gold Corp. (KGC-N/K-T, “outperformer”) to US$8.15 from US$7. Average: US$6.67.
Analyst Cosmos Chiu made these changes:
- Eldorado Gold Corp. (EGO-N/ELD-T, “outperformer” ) to US$18 from US$16.50. Average: $19.72 (Canadian).
- Endeavour Silver Corp. (EDR-T, “neutral”) to $3.75 from $4.50. Average: $5.27.
- Oceanagold Corp. (OGC-T, “outperformer”) to $5 from $4.50. Average: $4.06.
- Osisko Gold Royalties Ltd. (OR-T, “outperformer”) to $28.50 from $27. Average: $24.96.
- Pan American Silver Corp. (PAAS-N/PAAS-T, “outperformer”) to US$27.50 from US$28. Average: $20.89.
- Triple Flag Precious Metals Corp. (TFPM-T, “outperformer”) to $31 from $30. Average: $23.48.
- Wheaton Precious Metals Corp. (WPM-N/WPM-T, “outperformer”) to US$70 from US$66. Average: US$58.32.
=====
In other analyst actions:
* Stifel’s Michael Dunn lowered his Advantage Energy Ltd. (AAV-T) target to $13 from $14.25, keeping a “buy” rating. The average on the Street is $12.20.
“We expect Advantage shares to outperform Wednesday on announcing its intention to significantly reduce 2024 spending while still meeting prior 2024 production guidance, and reporting a strong 2023 exit rate of more than 70 mboe/d [thousand barrels of oil equivalent per day] thanks in part to the latest five-well Glacier pad averaging more than 15 mmcf/d [million cubic feet per day] rates per well. AAV disclosed that it plans to meaningfully underspend the low end of its 2024 capital plan of $260-290-million due to unfavourable gas pricing, but still expects to meet its prior production guidance of 65-68 mboe/d. We have revised our 2024e capex estimate to $215-million, resulting in our 2025 production estimate declining from 74.0 mboe/d to 70.3 mboe/d. The Company pre-released solid 4Q23 production results that matched our expectations, as did capex and net debt.”
* CIBC’s Scott Fletcher cut his target for Dye & Durham Inc. (DND-T) to $21.50 from $23, which is the current average on the Street, with an “outperformer” recommendation.
* CIBC’s Todd Coupland raised his Shopify Inc. (SHOP-N, SHOP-T) target to US$100 from US$82 with an “outperformer” rating. The average is US$76.66.
* Seeing it “likely poised for accelerated growth,” Scotia’s Phil Hardie increased his target for TMX Group Ltd. (X-T) target to $38 from $36 with a “sector perform” rating. Other changes include: BMO’s Étienne Ricard, to $36 from $35 with a “market perform” rating, CIBC’s Nik Priebe to $35 from $34 with a “neutral” rating and RBC’s Geoffrey Kwan to $36 from $34 with a “sector perform” rating. The average is $35.50.
“TMX delivered a relatively solid quarter with core earnings coming in line with street expectations and rising by upper-single digits year-over-year,” Mr. Hardie said. “The quarter was characterized by solid performance across its key pillars with its data-related and derivatives segments being key of strength and outsized growth. Management also demonstrated TMX’s ability to use selective pricing actions as a lever to help boost growth with its announced price increase across several areas.
“Despite a challenging operating environment, 2023 was another record year for core operating earnings. It was also a time that saw TMX advance strategically, demonstrate progress toward its transformational goals, and set the foundation for further growth. We believe the benefits from the recent acquisition of VettaFi have appropriately supported a re-rating of TMX stock. TMX is widely recognized for the resilience of its business model, and we believe the next leg up for the stock will be to instill broader investor confidence in its ability to attain average annual EPS growth in the double digits.”