Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Greg Pardy reaffirmed Suncor Energy Inc. (SU-T) as his favourite Canadian energy company and its spot on the firm’s “Global Energy Best Ideas” list following Tuesday’s business update.
“Going full gas—a phrase which describes a cyclist going all out when riding—captures our impression of Suncor’s recent update,” he said. “We like what we heard and would emphasize that Suncor’s impressive operating performance over the past year gives its game plan credibility.”
“Suncor Energy delivered a series of crisp presentations in its 2024 Business Update (2024-26) which emphasized the power of its integrated model and big opportunity to capture low hanging fruit across its portfolio. Our sense has been that Suncor has begun to thrive under the leadership of its new skipper, Rich Kruger, and this was reflected in what we viewed as a confident, bold and balanced plan. What stood out most to us from the presentation was an incremental 100,000+ bbl/d of production and a US$10 reduction in Suncor’s WTI corporate break-even (to cover operating costs, base dividends and sustaining capital) to about US$43 over the 2023-26 timeframe. The company also pointed towards an incremental $3.3 billion of free funds flow (FFF) (in a stable US$75 WTI world) by 2026 relative to a normalized 2023.”
Alongside its redefined net debt targets, the Calgary-based oil sands giant increased its share buyback allocation to 75 per cent (from 50 per cent) of free funds flow, beginning in the second-quarter.
“As a stretch target, the company could potentially achieve a 100-per-cent share repurchase allocation by the end of 2024. Capital Spending,” predicted Mr. Pardy.
“Notably, Suncor has no significant capital investment aimed at Base Mine replacement over the next five years, but will continue to assess various bitumen supply options in the meantime.”
Increasing his earnings and cash flow projections through fiscal 2025, Mr. Pardy increased his target to $65 from $60 with an “outperform” recommendation, citing “modest” multiple expansion given his “increased confidence in the company’s outlook.” The average target on the Street is $58.64, according to LSEG data.
“At current levels and under our base outlook, Suncor is trading at a 2024 debt-adjusted cash flow multiple of 5.2 times (vs. our global major peer group avg. of 6.2 times) and a free cash flow yield of 11 per cent (vs. our peer group avg. of 9 per cent),” he said. “We believe the company should trade at an average multiple vis-à-vis our peer group given its physical integration, attractive downstream assets, free cash flow generation, solid balance sheet and rising shareholder returns, somewhat counterbalanced by the need to address its Base mine depletion down the road.”
Other analysts making changes include:
* Desjardins Securities’ Chris MacCulloch to $56 from $54 with a “hold” rating.
“We have increased our target on Suncor ... reflecting positive revisions to our estimates following [Tuesday’s] business update webcast, which was impressive both in scope and ambition,” said Mr. MacCulloch. “Specifically, we have increased our upstream and downstream production forecast while trimming our opex assumptions to reflect key initiatives currently in motion across the asset base. Although we are warming up to the story, we retain our Hold rating given limited return to our revised price target.”
* Scotia’s Jason Bouvier to $61 from $54 with a “sector perform” rating.
“OUR TAKE: Positive,” he said. “SU outlined a strategy to deliver a US$10/bbl reduction in its breakeven by 2026 ($4/bbl captured already). The company is now using 75 per cent of its free cash flow, after dividends, for SBBs (up from 50 per cent). The net debt target was increased to $8-billion and management expects to achieve this target by mid-2025.”
* ATB Capital Markets’ Patrick O’Rourke to $57.50 from $53 with a “sector perform” rating.
“While we certainly view the update as incrementally positive (improved near-term capital efficiency outlook and incremental FCF drives our DCF based NAV target price to $57.50/share (from $53.00/share)), we believe key questions remain around mine reserve replacement (with SU clear in the update that no significant Base Mine replacement is planned in the next five years) and cadence/magnitude of carbon emissions mitigation capital spend,” he said.
* BMO’s Randy Ollenberger to $62 from $60 with a “market perform” rating.
“Suncor provided a business update that was better than expected, highlighting a larger reduction in its corporate breakeven price, incremental cash flow from the company’s downstream business, more upstream production growth through 2026, lower capital spending as several projects come to an end, and an updated shareholder returns framework that sees the company allocating 100 per cent of free cash flow to shareholders once the company achieves its revised net debt target of $8 billion, which could potentially happen around mid-year 2025,” said Mr. Ollenberger.
* TD Cowen’s Menno Hulshof to $57 from $52 with a “hold” rating.
* Wells Fargo’s Roger Read to $66 from $61 with an “overweight” rating.
* National Bank Financial’s Travis Wood to $79 from $75 with an “outperform” rating.
* Jefferies’ Lloyd Byrne to $62 from $54 with a “hold” rating.
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Cormark Securities analyst Lemar Persaud has a “a slightly positive view” on Canadian banks ahead of the start of earnings season late this week and is “moving closer to flipping in favour of the banks over the lifecos.
“To be clear, we are sticking with our call on lifecos over the banks at this time, however: 1) we are getting more positive on the banks given persistently strong credit experience, 2) lifecos valuations (P/B) are now through the banks (given the strength of MFC particularly), 3) the prospect of lower rates which are a net positive to the banks,” he said in a report titled Warmer on Banks But Still Not There; TD in Focus.
Mr. Persaud is currently projecting a 2-per-cent year-over-year decline in earnings per share, which he said reflects mid single-digit PTPP growth and higher PCLs. His projection is 0.4 per cent below the consensus on the Street.
Top Canadian banks expected to report slower profit growth in second quarter earnings, analysts say
“Capital markets results could be ‘good but not great’ in Q2,” he said. “Given the positive readthroughs from the U.S. bank Q1 results, strong client sentiment, balance sheet strength and confidence that we will avoid a hard landing, we think capital markets results could be good in Q2. We expect this to be driven by robust investment banking results. The wildcard, in our view is what we will see in terms of trading revenue. Q2/23 trading results were weak and while the markets were solid in Q2/24, volatility remained low. Given that trading revenues are approximately 2 times the size of investment banking revenues, this is why our expectations are for a ‘good but not great’ Q2 for capital markets. When rate cuts materialize, this should be positive for both FICC and equities trading.”
The analyst thinks the biggest focus of investor attention during the period will be on Toronto-Dominion Bank’s ongoing anti-money laundering investigation.
“In late April the bank booked a US$450-million initial provision related to discussions with one of its regulators (there are 3 plus the DoJ),” he said. “We then learned the investigation was likely tied to a US$653-million money laundering and drug trafficking case. The big questions remain what could the size of the penalties be and (more importantly, in our view), what are the longer term implications? We heard rumors of US$500-million-$1.5-billion but would not rule out something even in the $2-billion-plus range. We still don’t believe this would be a capital issue, we believe investors are focused on what the longer term impacts could be on growth/capital deployment prospects if TD is hit with consent orders and/or asset caps (similar to what we’ve seen at Wells Fargo).
“Resolution of these issues could take years and would leave TD with limited options for inorganic capital deployment. We are still comfortable with our Buy recommendation given TD’s 10-per-cent discount valuation (vs. 2-per-cent premium over the past 5 years), conservative model assumptions and earnings upside from elevated buybacks.”
Mr. Persaud raised his group target price-to-earnings multiple to 11.0 times from 10.5 times to account for “persistently strong credit experience despite elevated levels of macroeconomic uncertainty.”
“This is balanced against positive PTPP growth, attractive dividend hikes and solid capital levels,” he added. “We made some changes to our target premiums (increases for BMO/Royal and reduction for TD).”
That change led to these target price adjustments:
- Bank of Montreal (BMO-T, “buy”) to $141 from $134. The average on the Street is $134.35.
- Bank of Nova Scotia (BNS-T, “market perform”) to $70 from $68. Average: $68.08.
- Canadian Imperial Bank of Commerce (CM-T, “market perform”) to $71 from $68. Average: $69.05.
- Canadian Western Bank (CWB-T, “buy”) to $37 from $35. Average: $33.73.
- EQB Inc. (EQB-T, “buy”) to $114 from $109. Average: $103.70.
- Laurentian Bank of Canada (LB-T, “market perform”) to $27 from $26. Average: $27.73.
- National Bank of Canada (NA-T, “market perform”) to $119 from $114. Average: $115.42.
- Royal Bank of Canada (RY-T, “buy”) to $159 from $151. Average: $145.54.
- Toronto-Dominion Bank (TD-T, “buy”) to $91 from $93. Average: $87.17.
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Following the late Tuesday announcement of a re-baselining of its Defense business, Canaccord Genuity analyst Matthew Lee thinks the current valuation for CAE Inc. (CAE-T) “gives little credit” to that segment, however he said he has “opted to move to the sidelines on the name until we see further signs of development.”
In a research note titled Defence is becoming harder to defend, he lowered his recommendation for the Montreal-based company to “hold” from “buy” previously.
“[Tuesday] night, CAE announced a substantial write-down in its defence business, combining a revaluation of goodwill, unfavourable contract adjustments, and the impairment of intangibles,” said Mr. Lee. “The consolidated impact was nearly $700-million, which we believe removes much of the impact of the firm’s eight negative-margin legacy contracts. In our view, CAE’s clearing of the deck was necessary and positions the firm to improve under new Group President, Jason Goodfriend. However, we expect that the firm will have to rebuild investors’ trust in the segment, which could take time given the opacity of the business and the firm’s difficulty in driving margin growth.”
Alongside the changes to Defense, CAE reported preliminary fourth-quarter 2024 results that fell short of Mr. Lee’s expectations. Consolidated revenue fell 6 per cent year-over-year to $1.126-billion, below his $1.351-billion estimate. Adjusted segment operating income (SOI) slid 35 per cent to $125.7-million, also missed the analyst’s $225.7-million projection.
“F25 outlook [is] weaker than our expectations due to Defence,” said Mr. Lee. “On the Civil side, management is looking for low double-digit SOI growth and aSOI margin of 23 per cent, which are largely in line with our estimates. Excluding the eight legacy contracts, CAE expects Defence revenue to grow by low to mid-single-digits in 2025 with an annual aSOI margin of 6-7 per cent, weighted to the second half. The Defence margin outlook is better than our previous estimate of 5.2 per cent, but revenue growth is below our 5 per cent year-over-year. In addition, management scaled back its three-year EPS growth target from mid-20 per cent to low- to mid-teens percentage range. F25 capex is expected to be $50-$100-milion higher than F24 ($329.8-million), with 75 per cent related to organic growth investments in Civil. While we await the full financial statements (expected on May 27), we have made preliminary estimate changes for our F25 forecasts resulting in slightly lower revenues but largely unchanged EBITDA estimates.”
With his lower projections for fiscal 2024 and 2025, Mr. Lee lowered his target for CAE shares to $30 from $34. The average on the Street is $31.83.
Elsewhere, analysts making target adjustments include:
* BMO’s Fadi Chamoun to $34 from $37 with an “outperform” rating.
“CAE announced senior leadership reorganization; $604m goodwill/intangible assets impairments in Defense; $90.3-million of unfavorable contract adjustments related to eight Defense legacy contracts; published preliminary Q4/F24 results; and provided its F2025 outlook. Final/audited results are expected on May 27 and management conf. call on May 28. Overall, our take on this announcement is mixed with results/guidance driving our EBIT forecast lower by 3-5 per cent for F2025-F2027,” he said.
* CIBC’s Kevin Chiang to $29 from $32, keeping an “outperformer” rating.
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National Bank Financial analyst Vishal Shreedhar expects a “sequentially consistent” final quarter of Empire Company Ltd.’s (EMP.A-T) current fiscal year while predicting for earnings per share growth in the year ahead.
“We believe that EMP has opportunity related to ongoing improvement initiatives and inexpensive valuation,” he said. “That said, it has structural deficiencies versus peers including an elevated mix of lower growth conventional stores, and less pharmacy exposure. Empire trades at 6.1 times our NTM [next 12-month] Retail EBITDA (5-year average is 7.1 times). For comparison, Loblaw trades at 9.1 times our NTM Retail EBITDA and Metro trades at 10.3 times our NTM EBITDA.”
Mr. Shreedhar is projecting consolidated EPS for the current quarter of 64 cents, down 8 cents from a year ago but 2 cents ahead of the consensus estimate on the Street. He attributes that 12-per-cent year-over-year decline to rising expenses (higher retail store labour costs, partly offset by headcount reductions and other initiatives), partly offset by positive same-store sales growth, Food Retailing (FR) gross margin expansion and share repurchases.
“We consider FR segment results to be more meaningful than total company results for the purposes of evaluating recurring earnings power (total company results include contribution from the Investments and Other Operations segment),” he said. “For reference, we model FR EPS of $0.59, lower by 9.5 per cent year-over-year.
“We forecast core FR sssg, excluding fuel, of 1.0 per cent versus 2.6 per cent last year. This is below recent peer reporting with Loblaw delivering sssg of 3.4 percent and Metro delivering sssg of 2.7 per cent, adjusted for a Christmas shift. Empire’s sssg is expected to underperform peers, reflecting a lower mix in the better performing discount grocery stores as well as timing differences.”
While he expects to see signs of moderating inflations when Empire releases its results on June 20, Mr. Shreedhar warned consumer pressure persists.
“Food store inflation (Statistics Canada data) averaged 1.9 per cent during Empire’s Q4/F24 (data until April 2024),” he said. “Management previously indicated moderating inflation, among other factors, is expected to support a narrowing sssg performance gap between discount and conventional. That said, we believe discount will continue to outperform conventional over our forecast horizon, reflecting ongoing consumer pressure. Specifically, the Bank of Canada’s 2024 Financial Stability Report highlighted ‘households are adjusting to the rise in debt-servicing costs’ and that signs of financial stress are rising (normalizing from pandemic lows).
“Also, our analysis of peer commentary indicates that consumer trends remain largely consistent with prior quarters. Specifically, we note: (i) A continued focus on value (private label, elevated promotional penetration, and a shift to discount); and (ii) A normalization of inflation.”
For fiscal 2025, the analyst is currently projecting EPS of $3.14, higher by 14.3 per cent year-over-year and exceeding Empire’s long-term EPS growth objective of 8-11 per cent annualized. He said his expectation “reflects various margin initiatives including: (i) space productivity, (ii) supply chain improvements, and (iii) several other initiatives (headcount reductions, non-merch procurement, renovations, private label expansion, FreshCo expansion etc.).”
While he made modest reductions to his revenue and earnings forecast for 2024 and 2025, Mr. Shreedhar reiterated his “sector perform” rating and $40 target for Empire shares. The average on the Street is $37.63.
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Mexico’s general election on June 2 is likely to be “a major catalyst” for exploration and development mining companies with projects in the country, according to Eight Capital analyst Felix Shafigullin, who declares “now is the time to buy.”
“Mining companies are stuck in an uncertain regulatory environment in Mexico,” he said in a research report released Wednesday titled As Mexican Election Draws Near, It’s Time to Go Shopping. “In May 2023, Mexico’s ruling left-wing party, ORENA, enacted a mining law reform that tightened state control of the industry and made a number of significant changes to the procedures and conditions for granting and revoking mining concessions. The government has not published any supporting details for the new mining laws, creating a new regulatory environment that is lacking in clarity and challenging for mining companies to navigate.
“In addition to the mining law reform, Mexico’s incumbent president, Andrés Manuel López Obrador (known by his initials as AMLO) also proposed a constitutional amendment that, if passed, would effectively ban open-pit mining in the country. The double whammy combining the reform and the proposed open-pit ban created a climate of uncertainty for mining companies operating in Mexico. This uncertainty has had a negative impact on permitting: to our knowledge, no new open-pit permits have been issued in the country over the past year, with multiple permit applications seemingly stuck in regulatory limbo. In our view, the results of the June 2024 general election could lead to a shake-up in Mexico’s political leadership, bring a more mining-friendly administration into power, and pave the way for the authorities to start issuing new open-pit permits.”
Believing the “regulatory environment is likely to get better no matter who wins the presidential election,” Mr. Shafigullin thinks a change in fortune could come for Mexican exploration and development stocks, which have “been beaten down.”
“Since the mining law reform was announced, Mexican exploration and development names have experienced sharp declines in share prices and underperformed the main junior mining index-tracking ETFs,” he said. “Despite the recent price surge experienced by the Mexican juniors under our coverage, they are still lagging behind GDXJ and SILJ in terms of their relative performance over the past year. In our view, the result of the upcoming election could potentially become a significant catalyst that would re-ignite interest in Mexican junior mining stocks and consequently lead to their re-rating.”
He pointed to four companies that he thinks would be “materially affected by the outcome of the election.” They are:
* Discovery Silver Corp. (DSV-T) with a “buy” rating and $2.65 target. The average is $2.28.
Analyst:: “DSV is focused on advancing its large-scale open-pit Cordero project (total resource of 1.4B AgEq ounces) in the mining-friendly state of Chihuahua toward becoming one of the leading silver-polymetallic operations globally. The project is expected to produce 33 Moz AgEq per year on average over its 19-year mine life, for a total of 635 Moz. With the release of the Feasibility Study (FS) in February 2024, Cordero is now substantially de-risked, which would allow DSV to focus on permitting, advancing the project toward a construction decision, and securing a development financing package.”
* GoGold Resources Inc. (GGD-T) with a “buy” rating and $3.20 target. Average: $3.08.
Analyst: “GGD is focused on advancing its flagship silverpolymetallic Los Ricos South (LRS) project in the state of Jalisco toward a definitive FS directly from an updated PEA study. The PEA envisioned LRS as a combined underground and open-pit operation producing 8 Moz AgEq per year on average, with underground mining done in the first 7 years of the project’s mine life, and open-pit mining done in years 3 to 11. GGD is planning to complete the FS in the summer of 2024″
* Prime Mining Corp. (PRYM-T) with a “buy” rating and $3.80 target. Average: $3.83.
Analyst: “PRYM is currently conducting a drilling program at its open-pit gold-silver Los Reyes project in the state of Sinaloa. The main goal of the program is to expand the Los Reyes resource pit shells that currently contain 2.2 Moz AuEq in 45.3 Mt at 1.5 g/t. The results of the 2024 drilling program will form the basis of the updated Los Reyes resource estimate that PRYM is planning to release in late 2024 or early 2025. We expect the next resource update to increase the total AuEq ounces at Los Reyes to 3.0 Moz. In the longer term, we see the potential for the resource to double to 4-5 Moz AuEq supported by the delineation of the exploration targets outside of the current pit boundaries.”
* Silver Tiger Metals Inc. (SLVR-X) with a “buy” rating and 75-cent target. Average: 88 cents.
Analyst: “Following the release of a PEA study for the open-pit component of the gold-silver El Tigre project located in the state of Sonora, SLVR is now working on an open-pit Prefeasibility Study that we expect to be released in H2 2024. The open-pit component incorporated the mineralization in the near-surface Stockwork Zone only and was envisioned as a low-cost heap leach operation producing 59 koz AuEq (4.6 Moz AgEq) per year on average over its 13-year mine life.”
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CIBC World Markets analyst Cosmos Chiu raised his target prices for a group of silver equities on Wednesday. His changes included:
- Endeavour Silver Corp. (EDR-T, “neutral”) to $6 from $4.25. The average is $6.13.
- Fortuna Silver Mines Inc. (FVI-T, “neutral”) to $9.25 from $8. Average: $6.95.
- Gatos Silver Inc. (GATO-N, “outperformer”) to US$16 from US$11.25. Average: US$10.38.
- MAG Silver Corp. (MAG-T, “neutral”) to $22 from $17.50. Average: $21.01.
- Pan American Silver Corp. (PAAS-N/PAAS-T, “outperformer”) to US$30 from US$27.50. Average: US$23.31.
- Wheaton Precious Metals Corp. (WPM-N/WPM-T, “outperformer”) to US$75 from US$70. Average: US$61.51.
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In other analyst actions:
* National Bank’s Don DeMarco raised his Aya Gold & Silver Inc. (AYA-T) target to $22, exceeding the $18.43 average on the Street, from $18.25, keeping an “outperform” rating.
* Wedbush’s Tom Nikic cut his Lululemon Athletica Inc. (LULU-Q) target to US$397 from US$492 with an “outperform” rating, while UBS’ Jay Sole reduced his target to US$385 from US$475 with a “neutral” recommendation. The average is US$448.92.
“LULU has been a notable laggard in our coverage this year (shares down 37 per cent year-to-date vs. SPX up 12 per cent), due largely to concerns that upstart competitors such as Alo and Vuori are causing U.S. growth to slow,” said Mr. Nikic. “Amid this undercurrent of fear, LULU unfortunately announced that Chief Product Officer Sun Choe will be leaving the company to pursue another opportunity. Shares are trading down 3 per cent as of this writing, which we understand given how well-liked and well-respected Ms. Choe was by the Street. She joined the company in 2016 and during her tenure LULU’s revenues grew by 4 times (low-20′s CAGR). While this can’t be attributed entirely to Ms. Choe, we do believe that she played an instrumental part in LULU’s success over the past 7+ years. Clearly, the narrative around the company has worsened, and as a result, we no longer think LULU will command the valuation multiples it has achieved in recent years. Thus, we lower our 12-month price target to $397, based on 25 times FY25E EPS (our prior target of $492 was based on a low-30′s P/E). That said, we believe the selloff in shares is overdone, as hypergrowth internationally can mitigate slower growth at home, while reduced discounting online could be a sign that U.S. trends are starting to stabilize.”