Inside the Market’s roundup of some of today’s key analyst actions
With third-quarter earnings season for Canadian banks set to begin next week, National Bank Financial analyst Gabriel Dechaine said the outlook for interest rates supports his “positive” stance on the sector.
“The Big-6 enter Q3/24 reporting season having underperformed the market by 200 basis pointss since Q2/24 (approximately 600bps underperformance year-to-date),” he said. “Despite our conservative EPS revisions ahead of the quarter, we remain positive on the sector overall.
“A sufficient level of rate cuts should allow Canadian banks to avoid a sharp uptick in loan losses, as we’ve seen in previous downturns. As it stands, our Economics team is forecasting an additional 50bps of rate cuts by the end of the year, with a further 100bps expected in 2025. Separately, the group is well capitalized, and the regulatory environment has become more supportive.”
Business Brief: The Big Six earnings, and a spotlight on TD
In a research report released Friday, Mr. Dechaine made small “tweaks” to his credit expectations, increasing his sector provisions for credit losses (PCL) ratio to 47 basis points from 45 basis points, previously, to reflect a “general sense of conservatism, given rising insolvencies in Canada, potential commercial impairments and losses in some consumer categories (e.g., auto).” He also trimmed his net interest margin projection, estimating sequential compression of 1-2 basis points, down from flat to modest increases previously due to “Weak loan growth and funding cost pressures.”
From a stock-specific standpoint, Mr. Dechaine said he favours banks with relatively higher domestic focus.
“That puts CM and RY at the top of our pecking order,” he said. “Incidentally, they are two of the three banks that have outperformed the market this year (NA is the other). We are also Outperform-rated on BMO, a bank that faced the steepest EPS revisions we made this quarter. The overhang related to its credit performance, sluggish loan growth and U.S. exposure in general will likely persist until after the November U.S. election and the Fed begins to shift towards a rate cutting cycle. Translation: patience is required.”
The analyst made three target price reductions to the seven stocks in his coverage universe. They are:
- Bank of Montreal (BMO-T, “outperform”) to $131 from $136. The average on the Street is $127.
- Royal Bank of Canada (RY-T, “outperform”) to $160 from $161. Average: $153.05.
- Toronto-Dominion Bank (TD-T, “underperform”) to $74 from $75. Average: $86.04.
His other targets are:
- Bank of Nova Scotia (BNS-T, “sector perform”) at $66. Average: $67.74.
- Canadian Imperial Bank of Commerce (CM-T, “outperform”) at $78. Average: $73.09.
- Laurentian Bank of Canada (LB-T, “underperform”) at $26. Average: $26.73.
- EQB Inc. (EQB-T, “sector perform”) at $95. Average: $105.30.
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National Bank Financial analyst Dan Payne thinks an oversupplied North American low-carbon fuel standard (LCFS) market has “impaired” Tidewater Renewables Ltd.‘s (LCFS-T) earnings potential in the immediate term, “and a liquidity crisis has set in, with assets being harvested for sale (including base business take-or-pays) to stem the tide.”
Accordingly, while noting utilization and realizations at its Renewable Diesel & Renewable Hydrogen Complex (HDRD) facility were strong through its second quarter “as an indication of its value therein,” he lowered his recommendation for the Calgary-based company to “underperform” from “sector perform” previously, despite stronger-than-expected financial results.
Before the bell on Thursday, Tidewater Renewables reported revenue for its second quarter of $147.2-million, up 32 per cent sequentially and above the Street’s forecast of $104.9-milion. Adjusted EBITDA grew 17 per cent to $29.6-million, also topping expectations.
“The outcome of the quarter continued to reflect strong throughput and utilization at its HDRD facility (98 per cent vs. 71 per cent prior quarter) in association with the stability of margins within its base business,” said Mr. Payne. “In general, and optimistically, the performance of the quarter validated the low end of its forecast aggregate annual range.
“The company expects to exceed utilization forecasts at its HDRD facility, with a focus on optimizing FCF with limited maintenance capex spend ($4 mln).”
However, pointing to a material weakening in the B.C. LCFS credit pricing complex, the analyst now sees the company “experiencing a liquidity crisis.”
“With that, and while it anticipates the market will rebalance with shut-ins and stronger compliance in LCFS markets, it is evaluating alternative sources of liquidity,” Mr. Payne. “In that regard, it has entered into a related-party agreement with TWM, whereby the parent company will reacquire substantially all the inter-related assets of its base business for $130-million and commit to purchasing a minimum of $81-million of B.C. LCFS credits over the next nine months.”
The analyst updated his forecast to reflect the sale of its base business to parent Tidewater Midstream and Infrastructure Ltd. (TWM-T), with the sole remaining driver of earnings being its HDRD facility “(for which the revenue is highly dependent on the TWM credit sale agreement, noted above, and/or the eventual rebalancing of the BC credit market thereafter).”
“Therein, we have assumed it achieves the low end of its historical EBITDA forecast ($90-million) in association with that noted credit support through H1/25, before risking that for limited credit sales (by 50 per cent) in H2/25,” said Mr. Payne. “To that end, this is a conservative outlook (to which it could outperform, notably, with a normalization of the B.C. RD market), while we similarly caution that there are multiple risks towards the durability of this outlook.”
His target dropped to $3.50 from $12. The average target on the Street is $10.61.
“From there, the value of the business has deteriorated, with little visibility on the quality (i.e., reduced take-or-pay) and repeatability (i.e., nine-month credit sale the only backstop) of revenue. Alternatively, a logical outcome could be for its parent company to acquire its remaining interest and consolidate the Prince George Refinery and HDRD facility (as a means to best insulate the liability therein); however, that is similarly called into question by its associated challenged cost of capital. To that end, the visibility of its earnings and associated value prospects are limited,” he concluded.
Elsewhere, CIBC’s Robert Catellier downgraded Tidewater Renewables to “neutral” from “outperformer” with a $4.50 target, down from $12.
“Despite the strong operating performance of the HDRD facility, LCFS credit market uncertainty is a major risk factor. Combined with a tight liquidity situation, the risk of shareholder dilution has increased materially,” said Mr. Catellier.
Meanwhile, calling the outlook “bleak,” ATB Capital Markets’ Nate Heywood cut his target to $8 from $14, keeping an “outperform” rating.
“With liquidity and leverage now bridged for the near-term, eyes are likely to focus on credit markets and government policy going forward to rebalance the RD supply in B.C. and the associated credit market,” he said.
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With that outlook, Scotia’s Robert Hope downgraded parent company Tidewater Midstream and Infrastructure Ltd. (TWM-T) to “sector perform” from “sector outperform” with a 45-cent target, down from 85 cents. The average is 82 cents.
“It was another tough update for Tidewater Midstream (TWM-T) as the sharp and significant decline in B.C. low carbon fuel standard (LCFS) credits pressures liquidity at Tidewater Renewables (LCFS-T) and led to a reduction in 2024 guidance,” he saidd. “TWM-T’s shares were down 40 per cent, which we largely attribute to the 58-per-cent decline in its LCFS-T shares, partially offset by the benefits of the acquired EBITDA and potentially stronger conventional refining margins. We reduce our go-forward estimates to reflect lower LCFS prices moving forward, which pressures LCFS-T EBITDA. Our target price decreases to $0.45 to reflect our lower estimates as well as adjusting some infrastructure asset valuations to those of recent transactions. Looking forward, we expect the key driver of the share price will be BC LCFS credit pricing, which we expect will be depressed through the balance of 2024. While the shares look oversold and inexpensive (3.6 times EV / 2025E EBITDA), we question what drives the shares higher and gets investors to re-engage on the name aside from LCFS pricing, which is a very niche and opaque market. We see better risk-adjusted opportunities elsewhere in our midstream coverage, and as such, downgrade the shares.”
Target adjustments included:
* Mr. Heywood to 80 cents from $1.10 with an “outperform” rating.
* Mr. Catellier to 50 cents from 90 cents with a “neutral” rating.
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Following “soft” second-quarter results that highlighted a slower-than-anticipated ramp-up in production, National Bank Financial analyst Rupert Merer downgraded Exro Technologies Inc. (EXRO-T) to “sector perform” from “outperform” previously, emphasizing an “uncertain” outlook.
Shares of the Calgary-based clean-technology company plummeted 38.5 per cent on Thursday after it reported a record $5.3-mln in sales, which fell below both Mr. Merer’s $17.2-million estimate and the consensus forecast on the Street of $17-million. Revenue came from the the delivery of 36 electric propulsion units, which was missed the analyst’s projection (77 units).
“We had also forecasted more than $3-million from the sale of EXRO’s Coil Driver systems, although we believe sales were materially lower with delays to commercialization of the product,” he added. “The company reports that it had 40 electric propulsion units in inventory at the end of Q2 awaiting a software patch (work in progress inventory of $6.7-million), which, if delivered, would have brought results closer to our forecasts. The units were delivered in early Q3. Our revenue forecast was $101-million for 2024, based on initial forecasts for the company for deliveries of its propulsion systems to Hino and Mack trucks, following the merger with SEA. This forecast appears to be at risk.”
Mr. Merer also warned liquidity “could constrain activities” moving forward.
“To date, EXRO has realized $7.5-million in annualized savings across the business, of a targeted $10-million reduction by year-end,” he noted. “Additionally, it has recognized 10-per-cent in bill of material cost savings. EXRO is in late stage conversations to secure a working capital line of credit, and it receives deposits from customers in advance of product delivery. However, with ($26)-million in CFO in Q2 and $2-million in cash on the balance sheet, liquidity is a concern and EXRO has the risk of equity dilution.”
He dropped his target for Exro shares to 65 cents from $1.40. The average on the Street is 91 cents.
Elsewhere, Canaccord Genuity’s Yuri Lynk lowered Exro to “hold” from “speculative buy” with a 40-cent target, down from $1.20.
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In other analyst actions:
* National Bank’s Don DeMarco trimmed his target Aris Mining Corp. (ARIS-T) to $8.25 from $8.25 with an “outperform” rating. The average is $10.04.
* National Bank’s Zachary Evershed raised his Chemtrade Logistics Fund (CHE.UN-T) target to $14 from $13.50 with an “outperform” rating. Other changes include: Desjardins Securities’ Gary Ho to $13.25 from $13 with a “buy” rating and CIBC’s Jacob Bout to $14 from $13.50 with an “outperformer” rating. The average is $12.54.
“CHE reported a strong 2Q beat,” said Mr. Ho. “Management raised 2024 EBITDA guidance by 7 per cent to $430‒460-milllion —incorporating the 2Q beat, we raised our 2024/25 estimates. We are encouraged by CHE’s priority toward buybacks given the current attractive valuation (as well as dilution from ITM converts), followed by organic growth and, lastly, moderate M&A. We continue to believe its Arizona project would be a prudent way to deploy capital.”
* RBC’s James McGarragle lowered his target for Chorus Aviation Inc. (CHR-T) to $3.25, below the $3.31 average, from $3.50 with an “outperform” rating.
“With the sale of RAL progressing we expect Chorus to be able to focus on its core competencies, including structuring long-term fixed payment contracts and value-added aviation services,” he said. ”Key is that we believe the remaining business is easier to understand, more stable, and will generate solid FCF (9-per-cent yield on our 2026 estimates), with potential upside from M&A, organic growth in Voyageur, and re-leasing aircraft falling out of the CPA post-2025. We also see FCF and lower leverage as precursors to shareholder returns, which we see as a catalyst and expect management to revisit later this year.”
* TD Cowen’s Derek Lessard increased his Cineplex Inc. (CGX-T) target to $16 from $14, keeping a “buy” rating. The average is $13.
“CGX shares have had a solid 13-per-cent rebound following last week’s NCIB announcement, but trail CNK’s 200-per-cent-plus run since Jan/23 (vs. 30 per cent for CGX). In addition to the healthier balance sheet, given the better visibility on film releases we expect a material improvement in profitability (and FCF) going forward, which should lift valuation and push the share price closer to our new street-high $16 target,” he said.
* Scotia’s Konark Gupta bumped his Street-high MDA Space Ltd. (MDA-T) target to $22 from $21 with a “sector outperform” rating. The average is $17.43.
“We hosted investor meetings with Michael Greenley (CEO), Janet McEachern (interim CFO) and Shereen Zahawi (investor relations),” he said. “As the fastest-growing company in our coverage universe, MDA has become a topical name among investors. We recently highlighted it as our top pick for solid execution on continued 25-per-cent top-line growth and 20 per cent margins. We came back from the meetings more constructive on the near-term cash flow story as well as the longer-term growth potential, which causes us to raise our 2H/24 FCF outlook and our 2026 growth assumption. We believe our estimates could still prove conservative given the momentum MDA is seeing in order activity. Our target increases to $22 (was $21) as a result, based on our existing 10 times EV/EBITDA multiple, which is still conservative vs. peers at 13 times. Although the leverage ratio inflection catalyst has already come (with Q2 results), we see further strengthening in FCF, Telesat Lightspeed’s funding completion, continued backlog growth and sustained high growth/margins as potential catalysts.”
* TD Cowen’s Aaron MacNeil reduced his target for Next Hydrogen Solutions Inc. (NXH-X) to 50 cents from 75 cents with a “hold” rating.
* Desjardins Securities’ Kyle Stanley increased his target for units of Nexus Industrial REIT (NXR.UN-T) to $9.25 from $8.75 with a “buy” rating. Other changes include: Scotia’s Himanshu Gupta to $9 from $8.50, which is the current average, with a “sector outperform” recommendation and Raymond James’ Brad Sturges to $9.25 from $8.50 with an “outperform” rating.
“2Q24 results were in line,” said Mr. Stanley. “As the inflection in portfolio operating growth is now behind us, NXR appears well-positioned to benefit from a favourable gain-to-lease opportunity, development deliveries and an improving interest rate environment. We expect a material step-change in FFOPU [funds from operations per unit] growth in 2025 (from a trough earnings year in 2024), which should persist into 2026—our model assumes a three-year FFOPU CAGR [compound annual growth rate] of 6 per cent.”
* Scotia’s Kevin Fisk dropped his target for Parex Resources Inc. (PXT-T) to $23 from $27 with a “sector perform” rating. The average is $29.14.
* ATB Capital Markets’ Tim Monachello cut his Questor Technology Inc. (QST-X) target to 60 cents from 65 cents with a “sector perform” rating. The average is 70 cents.
“We believe QST’s international strategy could offer sizable upside over time, it is still early days and we believe QST must demonstrate a sustained period of improving demand from a diverse customer base before investors can gain confidence in its international expansion strategy,” he said.
* Scotia’s Meny Grauman trimmed his Sagicor Financial Company Ltd. (SFC-T) target by $1 to $9 with a “sector outperform” rating. The average is $8.83.
“We have a mixed view of Sagicor’s Q2 result as lower core EPS and CSM guidance for 2024 is balanced out by a core EPS beat in Q2 (despite a miss in the US segment), and a meaningful expansion of the company’s financial disclosures,” he said. “Expanded disclosure including a formal core earnings measure and a Drivers of Earnings (DOE) schedule both on a consolidated and segmented basis is an important milestone for the company, and will help investors both interpret and forecast results. Although the lower guidance for 2024 is backward looking, it still drives downward revisions in our estimates. That said, we remain bullish on this name especially in light of the recent refinancing of a portion of the debt that the company took on to finance the ivari transaction. That action will now allow Sagicor to deploy more capital in the U.S. in order to ramp up production in its U.S. annuities business. With the shares trading at just 0.7 times current book value, and ROE still expected to hit the low teens over the medium-term, we believe that there remains material upside here despite the re-rating we saw late last year.”
* Stifel’s Daryl Young trimmed his Superior Plus Corp. (SPB-T) target to $12, matching the high on the Street, from $12.50, reaffirming a “buy” recommendation. The average is $10.59.
“Q2/24 results were disappointing, with EBITDA of $43.3-million 12 per cent below consensus (albeit a seasonally weak quarter representing less than 10 per cent of full-year EBITDA),” he said. “Q2/24 was well-telegraphed to be challenging given brewing competitive headwinds for Certarus in the West Texas O&G market. Full-year guidance was maintained given expectations for stronger H2/24 performance, but significant investor skepticism remains around Certarus’ near-term growth/profitability prospects, the fear being that continued industry capacity increases exacerbate current West Texas issues, and leak into other geographies/end-markets as companies reposition fleets. We acknowledge these competitive pressures are very real and likely to temper the growth/profitability outlook for Certarus, but argue that the shares are pricing in an overly punitive downside scenario. Moreover, SPB is making good strides in its propane operations (approximately 70 per cent of EBITDA), which should deliver upside this winter, and the company has significant optionality from a capital allocation perspective so is by no means backed into a corner, in our view.”