Inside the Market’s roundup of some of today’s key analyst actions
Credit Suisse analyst Mike Rizvanovic said the "same old headwinds" seen affecting the fourth-quarter results for Canadian banks have left him "more concerned" heading into 2020.
"Results in Q4-F19 capped off a very challenging F2019 for the Canadian banks with average EPS growth at its lowest since the Financial Crisis," said Mr. Rizvanovic in a research note released Friday. "Coming out of Q4 reporting season we are more concerned about the near-term outlook for the sector as we expect the same headwinds around volatile and rising loan loss provisions, margin compression, very modest upside in Capital Markets, and weaker growth in non-domestic exposure to persist into F2020."
"Our fiscal 2020 EPS estimates are largely intact, while our price targets move up for most of the banks as we now value the group on our F2021 EPS forecasts. Our base case assumption is for a slight improvement in growth to 4 per cent in F2021 as the benefits of cost-cutting initiatives, which we believe will become an important theme in F2020, has a more meaningful impact on the bottom line. However, we continue to see downside risk for the sector, largely around a further potential spike in loan losses, which will remain largely dependent on macroeconomic conditions."
Mr. Rizvanovic raised his rating for Royal Bank of Canada (RY-T) to “outperform” from “neutral,” citing a “scale advantage that sets up well in the face of slowing revenue growth and the bank’s superior earnings quality.” His target for the stock rose to $108 from $102, which remains below the current consensus on the Street of $111.
Conversely, he lowered Bank of Nova Scotia (BNS-T) to “neutral” from “outperform,” pointing to “growing risks in International Banking and relative weakness in Canadian P&C Banking.” His target remains $75, versus the consensus of $78.92.
“We believe that valuation multiples for the group will remain below historical levels given the challenging operating environment, which we believe could deteriorate further in F2020,” the analyst said. “As such, we don’t see any compelling catalyst for PE multiple expansion in the near-term and we expect the large banks to trade at an average group multiple in the 9.5-times to 10.5-times range for the foreseeable future.”
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Seeing an attractive investing opportunity, Raymond James analyst Johann Rodrigues upgraded the Canadian real estate sector on Friday ahead of its annual “Go-Go Period.”
“The annual Fall Freeze (Oct. to Dec. 15) in Canadian REIT-land cooled stocks again this year, with the TSX Capped REIT Index lagging the TSX by 500 basis points,” he said in a research note released Friday. “We downgraded the sector at the end of September, but as we approach the seasonal Winter/Spring Upswing period for Canadian REITs/REOCs (January-April) we are upgrading several stocks and urging investors to pick up a basket of real estate equities in advance of the new year.”
“Since inception, Canadian REITs have generated an 11-per-cent CAGR [compound annual growth rate] though heavily front-end weighted, with 8 per cent coming in January-June and 3 per cent generated in H2. Traditionally, the Fall Freeze (Oct. to Dec. 15) is the worst period of the year for REIT stocks, providing agile investors the opportunity to maximize returns by taking profits in late September and redeploying capital in late-December ahead of the usual Winter/Spring Upswing. This strategy has outperformed a full-year hold in 75 per cent of the years since the inception of Canadian REITs.”
Mr. Rodrigues thinks large cap stocks in the sector could go “from laggard to leader” in the coming months, noting: “While almost all REITs have enjoyed a strong 2019, large-caps have lagged their small and mid-cap peers by 500 and 1,000 basis points, respectively. We think 2020 will see broader market volatility, driven by recession fears returning and U.S. impeachment/election headlines. Canadian real estate equities could act as a bastion of safety for both domestic and foreign capital, with REITs proven to generate consistent, low volatility excess returns. If our thesis plays out, the large-cap, liquid names would be the biggest beneficiaries.”
The analyst raised his rating for six stocks to "outperform" from "market perform" on Friday. They are:
Boardwalk Real Estate Investment Trust (BEI.UN-T) with a $50 target, up from $48. The average on the Street is $52.39.
First Capital Realty Inc. (FCR-T) with a $23 target, up from $22.50. Average: $23.81.
H&R Real Estate Investment Trust (HR.UN-T) with a $23 target (unchanged). Average: $24.63.
Killam Apartment REIT (KMP.UN-T) with a $22 target, up from $21. Average: $21.21.
RioCan Real Estate Investment Trust (REI.UN-T) with a $30 target, up from $27.50. Average: $28.50.
SmartCentres Real Estate Investment Trust (SRU.UN-T) with a $33 target, up from $32.50. Average: $34.72.
“Our top picks are centered around companies with strong SPNOI [same property net operating income] and NAV [net asset value] per unit growth prospects, as this has proven to have the highest correlation with excess return. For large-cap investors, we highlight Allied Properties, CAP REIT, First Capital, and RioCan. For mid/small-cap investors, we suggest InterRent, Killam, Minto, and StorageVault. On another note, for nimble investors, there are three 2019 laggards that we believe will get a ‘reversion to the mean bounce’ in early 2020 - H&R, SmartCentres and Tricon.”
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Patient investors will be “rewarded” with Empire Company Ltd. (EMP.A-T), according to Desjardins Securities analyst Chris Li.
Shares of the grocery chain operator plummeted 9.3 per cent in the wake of Thursday’s premarket release of its second-quarter results, which exhibited a slowing of sales momentum.
“While management’s comments about consumer softness and an uptick in competition likely caught the market by surprise, we do not believe it justifies the big share price decline yesterday (down 9 per cent vs down 2 per cent for MRU and L) considering largely in-line financial 2Q FY20 results and our view that EMP remains well-positioned to drive outsized EPS growth,” said Mr. Li.
Though its likely to face a “more challenging” near-term environment, he thinks Empire is “well-positioned to generate outsized” earnings per share growth. Pointing to various sales productivity and gross margin improvement initiatives, he’s projecting 14-per-cent year-over-year growth, versus 10-per-cent from competitors Loblaw Companies Ltd. and Metro Inc.
“The next catalyst will be in late spring, when the company plans to provide its three-year roadmap on how to further narrow its EBITDA margin gap vs L and MRU (we estimate the gap is 150–250 basis points),” the analyst said. “While structural differences account for some of the margin variance, management believes Project Sunrise has fundamentally reset the company, enabling it to achieve additional margin improvement.”
Expecting same-store sales growth to rise to 2.0 per cent fiscal 2021 from 1.6 per cent in 2021 and an improvement in EBITDA margin growth, Mr. Li raised his EPS projection to $1.94 from $1.93. His 2021 expectation rose by 6 cents to $2.21.
With a “buy” rating, he reduced his target for Empire shares to $37 from $39. The average target on the Street is $39.78, according to Thomson Reuters Eikon data.
“EMP will be lapping two more quarters of high year-ago SSSG [same-store sales growth],” said Mr. Li. “But we believe expectations have now been reset to a more conservative level. While our forecasts incorporate incremental investments in key growth initiatives such as e-commerce, FreshCo 2.0, marketing, data analytics, etc, there is a risk that the investments are higher than expected.”
Elsewhere, CIBC World Markets analyst Mark Petrie lowered his target to $34 from $39 with a "neutral" rating (unchanged).
Mr. Petrie said: “A second consecutive quarter of slower top-line growth highlights the challenges Empire is facing. Though Sunrise benefits remain a substantial tailwind, opportunities and demands to invest those savings are accumulating, and Q2 normalized earnings were materially short of our estimates. The company has visible drivers to re-accelerate top line, but those all carry additional investment and/or elevated execution risk. Our estimates have been moderated, as has our target multiple for core grocery(from 8.45 times to 8.25 times).”
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Citing “limited” visibility into its 2020 commercial revenue growth and diversification efforts, Echelon Wealth Partners analyst Gianluca Tucci lowered his rating for Nanotech Security Corp. (NTS-X) to “hold” from “speculative buy.”
On Thursday after the bell, the Burnaby, B.C.-based company reported fourth-quarter financial results that Mr. Tucci deemed "light." Revenue of $1.5-million and adjusted earnings before interest, taxes, depreciation and amortization of a loss of $3-million both fell short of his expectations ($2.2-million and a $1-million loss, respectively).
“Management expects the modest adjusted EBITDA losses to continue in F2020 as investments materialize into revenue growth in F2021 and beyond,” said the analyst. “Developing market focused product lines, and investing is sales professionals should generate more activity over time. Generally speaking, orders in the banknote, secure documents and brand protection markets tend to be recurring in nature.”
Though he feels the company now possesses a "comfortable" cash balance to develop new products for both the commercial and banknote markets, Mr. Tucci expressed concern about its decision to not provide annual guidance. Consequently, he lowered his 2020 and 2021 revenue estimates to $6-million and $6.9-million, respectively, from $9.4-million and $12.3-million.
"While we now view likely all of F2020 as a transition period in its sales & marketing efforts, we note progress has been made in diversifying from banknotes and in particular, to the commercial market where NTS recently booked its first sales – we note the commercial market also provides recurring revenue and with the launch of NTS’ first two products in April 2019, we expect early, albeit modest traction to grow in this vertical into the new year."
Mr. Tucci lowered his target for Nanotech shares to 45 cents from 70 cents. The average on the Street is 62 cents.
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RBC Dominion Securities analyst Paul Treiber expects BlackBerry Ltd. (BB-N, BB-T) to report “mixed” third-quarter results on Dec. 20 before market open, leading to share price volatility.
“However, given BlackBerry’s discounted valuation, which implies no value for BlackBerry’s ESS [enterprise software solutions] segment, we believe ‘less bad’ results may be a short-term catalyst for the stock,” the analyst said in a research note released Friday.
"Longer-term, BlackBerry faces challenges in its ESS segment, which need to be addressed to sustain a valuation re-rating upwards."
Mr. Treiber is projecting non-GAAP revenue to rise 21 per cent year-over-year to US$277-million, in line with the consensus expectation on the Street (US$276-million). His adjusted earnings per share estimate of 1 US cent is a penny below the consensus.
Though he thinks sales execution challenges in ESS are likely to weigh on organic growth, Mr. Treiber said a bright spot for the quarter may be its IP Licensing.
“In 8 of the last 9 quarters, BlackBerry has reported IP Licensing revenue above our expectations,” he said. “We believe upside to our Q3 estimate for $72-million IP Licensing revenue (up 2 per cent quarter-over-quarter) is possible, considering management’s positive comments on IP Licensing momentum and given that guidance calls for 2H revenue above 1H revenue.”
Mr. Treiber maintained a “sector perform” rating and US$7.50 target for BlackBerry shares. The current average on the Street is US$7.65.
“BlackBerry remains a ‘show me’ story,” he said. “The investor debate on BlackBerry stems from the company’s future opportunity compared to its current momentum. Licensing and BTS appears the healthiest, given design win momentum which may drive stronger growth. For other opportunities like ESS and Radar, limited near-term growth reduces long-term visibility. Cylance is early, and Cylance’s lower growth vs. some competitors creates uncertainty.”
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Though Goodfood Market Corp. (FOOD-T) is adding subscribers at a more rapid pace than he anticipated, Acumen Capital analyst Jim Byrne lowered his financial projections for the Montreal-based meal kit company ahead of the release of its first-quarter 2020 financial results on Jan. 8.
"The company recently reported subscribers had reached 230,000 as of November 30," he said. "While this number was ahead of our estimate of 222,000, we believe the additional subscribers were added at the end of November following an aggressive promotional campaign around Black Friday.
"We are lowering our revenue and margin assumptions to reflect the lower contribution from the added subscribers."
Mr. Byrne lowered his 2020 revenue estimate to $250-million from $255-million. Seeing “slightly lower order rates and increased costs associated with new product launches,” his EBITDA loss projection slipped to $9.2-million from $13.5-million.
Maintaining a “buy” rating for Good Food shares, his target slid to $5 from $5.25. The average is $4.38.
“Fiscal 2019 results were very strong with an improvement in gross margins and adjusted EBITDA margins," the analyst said. "We believe the company is well positioned for strong growth in revenue, increasing market penetration, and line of sight to profitability.”
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In other analyst actions:
* Paradigm Capital analyst David Davidson initiated coverage of GT Gold Corp. (GTT-X) with a “speculative buy” rating and $2.10 target. The average on the Street is $2.39.
Mr. Davidson said: “With investors refraining from capital investment in low-moderate grade copper projects (0.3–1.0% CuEq) owing to fear of capital overruns and weak commodity prices, GT Gold offers a high-grade, high-quality project that we expect will offer profitable economics, regardless of the timing of the commodity cycle. We see optionality at Tatogga, which has the option to develop as an open pit, underground or a combination of both — the project could initially be developed as a small-scale open pit (and therefore smaller capex investment) if the commodity price downcycle persists, owing to current resource estimates of +1% CuEq. In the event of a commodity price upturn, the project offers several sources of expansion potential through unlocking deeper mineralization, lower-grade ore or expansion at different zones — specifically, Saddle North is GTT’s top priority, followed by Saddle South and the new target at Quash Pass. This optionality is key when assessing how the asset will fare in the long term.”
* Stifel initiated coverage of Restaurant Brands International Inc. (QSR-N, QSR-T) with a “hold” rating and US$68 target. The average target on the Street is US$77.35.
* Pointing to “rapid share price appreciation and the resultant reduction in the projected return to our target to approximately 2 per cent,” Scotia Capital analyst Trevor Turnbull cut Dundee Precious Metals Inc. (DPM-T) to “sector perform” from “sector outperform."
“In our opinion, Dundee’s operations are working well, and we expect production, cash flow, and free cash flow growth to continue into 2020,” said Mr. Turnbull. “Nonetheless, we believe much of this is priced in, and relative to its intermediate gold producer peers Dundee’s shares are trading in line with the group. Hence, we would stay alert for any weakness that would make for a more attractive entry point.”
* Desjardins Securities analyst Michael Markidis raised Allied Properties Real Estate Investment Trust (AP.UN-T) to “buy” from “hold” with a $58 target. The average on the Street is $57.08.
Mr. Markidis said: “AP is down by 9 per cent since closing at an all-time high of $54.74 on Nov. 25. The magnitude of this correction is disproportionate to what has been experienced by the S&P/TSX Capped REIT Index (down 4 per cent). With the stock now trading at a modest 6-per-cent premium to our spot NAV, we believe investors should capitalize on a unique opportunity to add a large-cap, high-quality name. Recognizing the 19-per-cent total return potential to our $58 target (unchanged), we are upgrading our rating.”
David Leeder