Inside the Market’s roundup of some of today’s key analyst actions
Laurentian Bank of Canada’s (LB-T) fourth-quarter results brought “uncertainty on many fronts,” said Canaccord Genuity analyst Scott Chan, leading him to lower his rating for its stock to “sell” from “hold.”
On Wednesday, the bank reported a “significant” earnings miss for a second consecutive quarter. Adjusted earnings per share of $1.22 fell below the projections of both Mr. Chan ($1.30) and the Street ($1.26) and represented a drop of 25 per cent year-over-year. Revenue missed expectations by 4 per cent and came alongside “flattish” net interest margins, higher-than-anticipated provisions and a lower tax rate.
“We have reduced our 2019/2020 EPS estimates by 7 per cent/3 per cent, respectively to account for our lower revenue forecasts (NII, other income) and higher credit provisions,” said Mr. Chan. “As a slight offset, we have reduced our non-interest expenses (NIX) going forward. Our downgrade is supported by a negative total return assumption, further earnings volatility going forward and uncertainty surrounding ongoing labour negotiations that could impact the firm’s retail banking transformation plan.”
Seeing lower revenue, “tempered” NIM expansion and larger credit provisions, Mr. Chan’s EPS projections for 2019 and 2020 now sit at $4.84 and $5.13, respectively, from $5.19 and $5.29.
His target price for Laurentian shares dipped to $37 from $40. The average on the Street is currently $44.33, according to Bloomberg data.
“With our revised EPS estimates, LB trades at a price-to-earnings (2019) of 8.2 times (versus average of 8.9 times), and 20-per-cent discount to peers (in line with its historical average),” he said. “This is in spite of a more challenged outlook for the business and negative near-term EPS growth.”
Elsewhere, Desjardins Securities’ Doug Young lowered his target by a loonie to $44 with a “hold” rating (unchanged).
Mr. Young said: “The seven-year transformation plan has been a lot bumpier than we initially expected: NIM could be weighed down by higher liquidity balances, NIX is expected to remain elevated through FY19 and we still view management’s goal of closing the ROE [return on equity] gap vs large-cap peers by 2022 as aggressive. That said, we could argue a lot of bad news is already priced in (8.3 times our estimated FY19 EPS and 0.8 times book value).”
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In a separate note, Mr. Chan said the risk-reward proposition for National Bank of Canada (NA-T) “appears balanced” following another “clean” quarter.
National Bank reported fourth-quarter adjusted EPS of $1.53, exceeding the Street’s expectation by a penny and Mr. Chan’s estimate by 3 cents.
“Overall, we view core operating earnings as relatively in line with Street estimates,” he said. “NA raised its dividend by 5 per cent (above consensus) signifying a strong outlook; in our view.”
Mr. Chan hiked his 2019 and 2020 EPS estimates to $6.45 and $6.70, respectively, from $6.30 and $6.70, “almost entirely driven by slightly higher revenue.”
Maintaining a “hold” rating for its stock, he increased his target to $67 from $64. The average is $66.67.
“We forecast revenue growth decelerating to 6 per cent/4 per cent over the next two years with growth moderating in P&C, WM and Credigy,” he said. “NA provided a robust outlook for F2019, in part based on the expected strength of Quebec relative to the rest of Canada.
“Based on Canaccord Genuity estimates, NA trades at a P/E of 9.3 times (2019), which is roughly in line with its historical average of 9.6 times. However, shares currently trade at a premium relative to its historical valuation.”
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Citing potential return following recent share price compression, Echelon Wealth Partners analyst Douglas Loe upgraded his rating for ProMetic Life Sciences Inc. (PLI-T) to “speculative buy” from “hold.”
On Wednesday, the Laval, Que.-based company confirmed its intention to pursue Phase 3 clinical testing for PBI-4050 drug, which targets fibrosis in multiple organs.
“We stand by our medium-term investment thesis that still advises caution on ProMetic’s lingering financial risk and on extended timelines to FDA review for lead plasma-derived plasminogen formulation Ryplazim, particularly with most other affinity-purified plasma products, other than IVIG, that we originally thought would be in active clinical testing by now (alpha-1-antitrypsin & C1 esterase inhibitor, to name two of many), not yet achieving clinical status,” said Mr. Low. “But we have long since revised our model to solely reflect on IVIG, plasminogen/Ryplazim, and PBI-4050, and we remain positive about core scientific underpinnings of ProMetic’s capture affinity resin-purified plasma products program and on PBI-4050’s well-documented anti-fibrotic activity and the relevance of that activity to several metabolic/fibrotic disease markets, independent of financial risk percolating in the background.”
Mr. Loe raised his target price for ProMetic shares to $1 from 60 cents. The average target on the Street is now $1.13.
“We are mindful of ProMetic’s sustained balance sheet risk – a level of risk that made its recently announced up-to-$50-million at-the-market equity transaction strategically necessary – but we are still comfortable with ascribing a Speculative BUY to PLI based on pipeline attractiveness and on our expectation that at least two affinity-purified plasma products can advance to regulatory stage and then to commercial stage in F2019/20,” he said.
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Possessing a “dynamic” business model with “a lot of moving parts,” Allied Properties Real Estate Investment Trust’s (AP-UN-T) financial results are likely to be “lumpy” from quarter to quarter, according to Desjardins Securities analyst Michael Markidis.
In a research note released late Wednesday, Mr. Markidis updated his outlook for the Toronto-based REIT, projecting two-year compound annual funds from operations (FFO) per unit growth of 4 per cent through 2020.
“On the plus side, we anticipate (1) strong uplifts on renewal and replacement leases (particularly within Central Canada), and (2) incrementally positive contributions from King Portland Centre, Le Nordelec, 425 Viger and 250 Front,” he said.
“We also see several factors that could weigh on FFO and AFFO per unit, including: (1) lease terminations as King and Spadina is prepared for construction, (2) temporary downtime related to the planned upgrade of 468 King, and (3) potential dilution during lease-up of the commercial and residential components of TELUS Sky.”
Mr. Markidis feels Allied’s balance sheet now sits “adequately capitalized” and express confidence in the “trajectory of the underlying value of the business.”
With a “buy” rating for its stock, he increased his target to $49 per unit from $47. The average is $47.75.
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Despite facing strong headwinds stemming from the drop in Western Canadian Select prices, Canadian Natural Resources Ltd.'s (CNQ-N, CNQ-T) “strong FCF template [remains] intact,” said Citi analyst Robert Morris following the company’s Investor Day in Toronto on Wednesday.
“Management staked out a conservative ‘base’ 2019 capital budget for now while total production guidance came in a bit light versus expectations,” he said. “But the company laid out a long list of projects that could boost production longer-term while re-emphasizing its policy to evenly distribute free cash flow, after capex and dividends, to reducing debt and repurchasing stock. As such, management expects to post a per-share production CAGR [compound annual growth rate] of 7.5 per cent through 2022. Also, we expect continued strong annual dividend growth going forward.”
He added: “While the 2019 budget likely ends up closer to $4.4-billion if this week’s initiative by the Alberta government is successful in lifting WCS oil prices, CNQ laid out a $3.7-billion ‘base’ budget, versus our prior $4.4-billion forecast. Total production is pegged at 1.030-1.119 million BOE/d [barrels of oil equivalent per day], or essentially flat vs. this year, and below our prior 1.137 million BOE/d forecast due in part to a step up in production curtailments in Q1’19 per the Alberta government mandate. But even at the higher budget, the 2019 production outlook won’t change as the incremental $700-million would be directed to projects that would start production in 2020 to 2024. Notably, this ‘base’ budget entails drilling only 87 oil wells in Canada next year vs. closer to 300 oil wells under a ‘normalized’ $4.7-billion budget expected in 2020.”
In reaction to the presentation and the company’s lower fourth-quarter production guidance, Mr. Morris moved his 2019 earnings per share and cash flow per share projections to US$2.27 and US$7.30, respectively, from US$2.18 and US$7.49.
Maintaining a “neutral” rating for CNQ shares, his target dipped to US$29 from US$38, which falls below the average on the Street of US$39.27.
“With regard to 2019 pilot projects that could add significant future production or reduce operating costs, we would keep an eye on the Septimus gas reinjection pilot, heavy crude oil multilateral development pilots, Horizon reliability projects including an autonomous truck pilot, oil sands mining IPEP pilot, along with initiatives to reduce GHG emissions and continuously reduce CNQ’s environmental footprint in espousing social responsibility,” he said. “Also, CNQ will be largely carried for its 25-per-cent interest in the cost to re-enter a 1.0 billion barrel oil exploration well offshore South Africa with results likely in Q2’19.”
Elsewhere, BMO Nesbitt Burns analyst Randy Ollenberger lowered his target to $55 from $58, keeping an "outperform" rating.
“While the company’s Q4/18 financial results will be negatively impacted by weak prices, discounts are expected to improve in 2019 as inventory levels fall and rail capacity grows, allowing for a recovery in the company’s free cash flow generating capabilities," he said.
“We believe that the company offers compelling longer-term value for investors.”
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CIBC World Markets analyst Chris Couprie initiated coverage of Dream Office Real Estate Investment Trust (D-UN-T) with a “neutral” rating.
“Dream Office REIT has repositioned itself into a smaller, internalized, and more focused urban Central Business District office landlord,” he said. "Downtown Toronto is a market with favourable fundamentals and represents 66 per cent of Dream’s comparative portfolio fair value, making it the REIT with the largest exposure to this geography. With a portfolio more concentrated on markets with strong fundamentals, we expect a return to positive organic growth.
“Our overall positive view is tempered by our expectations of below-average FFOPU [funds from operations per unit] growth and higher relative returns available elsewhere in the REIT universe. In addition, while current market fundamentals are strong for downtown Toronto office, supply under construction is at an elevated level, which in the mid-term could lead to a moderation in the presently robust market.”
Mr. Couprie set a target of $25 per unit. The average is 46 cents higher.
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In other analyst actions:
TD Securities analyst Greg Barnes upgraded Teck Resources Ltd. (TECK-B-T) to “action list buy” from “buy” with a $45 target, up from $43. The average on the Street is $40.04.
TD Securities’ Brian Morrison downgraded Roots Corp. (ROOT-T) to “buy” from “action list buy” and dropped his target to $7 from $12. The average is $5.44.
Laurentian Bank Securities analyst Barry Allan initiated coverage of TMAC Resources Inc. (TMR-T) with a “buy” rating and $8.50 target, which falls below the average of $8.07.
MORE TO COME
David Leeder