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Inside the Market’s roundup of some of today’s key analyst actions

Canaccord Genuity analyst Scott Chan expects a slow start to 2019 for Canadian banks, projecting year-over-year earnings per share growth of 4 per cent for the Big Six.

“Year-to-date, the Big-6 banks have rebounded significantly (12 per cent), slightly outpacing the TSX Composite of more than 10 per cent,” said Mr. Chan in a research note previewing earnings season, which begins with Royal Bank of Canada (RY-T) on Friday.

“At this level, we expect strong total returns (13 per cent) over the next year, including an average dividend yield of 4.2 per cent. Currently, the Big-6 banks trade on average at a price-to-earnings (next 12 months) of 10.4 times, slightly below the historical average of 11.0 times, and could see modest multiple expansion throughout the year on potential positive earning revisions that could benefit our Group 5-per-cent EPS growth forecast for 2019.”

For the first quarter, Mr. Chan’s estimates exceed the Street for Canadian Imperial Bank of Commerce (2 per cent), Bank of Montreal (1 per cent), and Royal Bank (1 per cent). He sits below the consensus on Bank of Nova Scotia (by 1 per cent), National Bank of Canada (by 1 per cent), Toronto-Dominion Bank (by 1 per cent) and Laurentian Bank of Commerce (by 3 per cent).

“For F2019 and F2020, we forecast Big-6 EPS (avg.) of 5 per cent and 6 per cent vs. 8-per-cent growth over the last 13 years,” he said. “Fiscal 2019 mid-single-digit EPS growth should be achievable with potential tailwinds that could come from several factors (e.g. benign credit environment could be extended, equity markets rebounding, flow improvement, cost efficiencies, NCIBs, accretive M&A). ... F2019 annual EPS consensus revisions have remained relatively flat since Sept/18, while F2020 EPS revisions declined mostly in Q4/18, reflecting a difficult macro backdrop and equity market declines.”

Mr. Chan lowered his target price for a trio of stocks:

Bank of Montreal (BMO-T, “buy”) to $111 from $112. The average on the Street is $107.05, according to Bloomberg data.

“We forecast Q1/F19 EPS of $2.29 per share versus consensus of $2.26,” he said. “[We are] more caution on near term earnings than peers; expect to make it up in 2H/19.”

Canadian Imperial Bank of Commerce (CM-T, “buy”) to $125 from $126. Average: $125.93

“We forecast Q1/F19 EPS of $3.15 per share versus consensus of $3.10,” he said.

“Most cautious tone from management among Big-5. Targets F19 EPS at low end of medium-term range of 5-10 per cent.”

Canadian Western Bank (CWB-T, “buy”) to $33 from $34. Average: $32.64.

“We reiterate that our top picks for Canadian banks in order are: (1) BMO (U.S. earnings ramp, attractive Wealth business, highest commercial loan mix, lowest Canadian housing exposure, positive operating leverage, strong capital position); (2) TD (largest U.s.S exposure, best dividend growth prospects, low relative capital markets exposure, strongest capital position); and (3) CM (strong momentum in Canadian P&C and in U.S. division, highest quarterly EPS surprises provides support, cheapest on valuation, largest dividend yield),” he said. “On regional banks, we continue to favor CWB over LB mainly due to its relative valuation, EPS growth attributes, and higher excess capital potential under AIRB.”

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Southern Energy Corp. (SOU-X) is “ticking the boxes for energy investors amid uncertain times,” according to Haywood Securities analyst Darrell Bishop.

He initiated coverage of the Calgary-based oil and natural gas exploration and production company, which focuses on the Southeastern United States, with a "buy" rating.

“As a U.S. pure play natural gas E&P with impactful near-term catalysts, we believe that Southern Energy is worthy of investors’ attention today, especially when considering the anticipated growth in natural gas demand over the next 3-4 years as feedstock for U.S. LNG,” said Mr. Bishop. “With most companies focused on developing/holding land in the pricey U.S. shale basins (Permian, Eagle Ford, etc.), while trying to live within cash flow below US$55/b WTI, non-core conventional assets are ripe for consolidation by players like Southern. Having demonstrated the ability to execute on its growth strategy amid challenging market conditions (i.e. Dec/18), we see the current levels providing an attractive ground-floor entry point into this new and unique investment opportunity.”

He set a target of 25 cents for Southern Energy shares.

Previously, Laurentian Bank Securities analyst Jonathan Tempro initiated coverage with a “speculative buy” rating and 25-cent target.

“Over time, we believe that SOU can effectively grow production and create a meaningful gas reserve base that would be an attractive takeover candidate for a larger natural gas producer or an LNG company pursuing feedstock gas,” said Mr. Tempro in a Feb. 1 note.

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Despite currently possessing a “premium” valuation, Inter Pipeline Ltd. (IPL-T) now has a “discounted” outlook, said Raymond James analyst Chris Cox in the wake of last week’s release of fourth-quarter financial results.

On Feb. 14, the Calgary-based company reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $307-million, slightly ahead of Mr. Cox’s estimate of $300-million but narrowly below the $313-million consensus expectation on the Street.

“While headline results were consistent with Street expectations, the weakness exhibited in the Conventional Pipelines segment deserves greater attention than strong results in NGL Processing, both due to the quality of the respective cash flows, and in the context of the noticeable decline in frac spreads into 2019,” the analyst said. "If weakness in the Conventional Pipelines segment persists, and unless frac spreads show a return to strength, we believe the funding outlook for the Heartland Petrochemical Complex may not be as rosy as Management has recently been conveying to the market.

“In any event, our broader concerns with the story focus on the ability of the company to garner a sufficient level of contracting to support the investment in the Heartland project, coupled with the ongoing deterioration in the quality of the company’s cash flows and a relative lack of organic growth opportunities available within the company’s legacy business.”

Though he expressed concern over the “noisy” segmented results, Mr. Cox raised his EBITDA and adjusted funds from operations per share projections for fiscal 2019 to $1.192-billion and $2.13, respectively, from $1.167-billion and $1.95. His 2020 estimates increased to $1.239-billion and $2.08 from $1.217-billion and $1.79.

However, he maintained an “underperform” rating and lowered his target for Inter shares to $20 from $23, which sits below the average target on the Street of $25.31.

“With the stock still trading at a 2.0 times premium to peers on 2020 EBITDA, we believe the risk-reward is firmly skewed to the downside and reiterate our Underperform rating,” he said.

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Pfizer Inc.'s (PFE-N) outperformance in 2018 was driven largely by both macro concerns and its lack of interest in large-scale M&A activity, according to Andrew Baum, who resumed coverage of the pharmaceutical giant by raising his rating to “neutral” from “sell.”

“The stock pull back gives us the opportunity to close our Sell rating,” he said. “Our estimate upgrades largely reflect greater anticipated opex control rather than revenue upgrades, especially in relation to SG&A. Increases to our estimates for in-market agents (Eliquis, Xeljanz, Inlyta) are partly offset through c.10-20-per-cent reduction in pipeline estimates. ... In the mid-term, we anticipate a judicious mix of buy backs and M&A to bolster their long term growth until the next product cycle.”

“We have not seen enough data to share PFE’s exuberance over the strength of their mid-stage pipeline. Given we expect reimbursement pressure in the US to intensify with the roll out of net pricing (Medicare initially, commercial likely post 2023), we anticipate intensified BD in high values therapeutic areas with significant barriers to entry (most notably gene and even potentially cell therapy). We remind investors that PFE’s BD efforts historically have been checkered with dubious ROI (MRCG’s avelumab, Medivation, Hospira).”

After increasing his long-term revenue and earnings per share projections by 1-2 per cent and 4-8 per cent, respectively, Mr. Baum increased his target price for Pfizer shares to US$41 from US$37. The average target on the Street is US$45.50.

“Despite the pipeline newsflow, we suspect management action on BD [Becton, Dickinson & Company], cost saving or moves to better monetize PFE’s Established Product business are more likely near term drivers of the share price,” he said. “Near term and mid-term, investors will focus on the pending tafamadis launch (cardiovascular) and for Ibrance phase III data in adjuvant breast cancer (likely 2020), as well as competitive risk for Prevnar. Longer term, we await to see the returns on PFE’s growing investment in gene therapy.”

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Desjardins Securities analyst Michael Markidis said Granite Real Estate Investment Trust (GRT.UN-T, GRP.UN-N) is “takin’ care of business.”

“GRT is capitalizing on its underleveraged balance sheet and international portfolio footprint, raising low-cost debt capital to fund acquisition opportunities in the U.S.” he said in a research note reviewing the REIT’s recent moves to take out a pair of unsecured term loans and US$173-million in acquisitions south of the border.

Citing an “improved” earnings outlook following the deals, he raised his 2020 funds from operations per unit projection to $3.80 from $3.65. “Based on our full-year 2018 estimate, this represents a two-year CAGR [compound annual growth rate] of 6 per cent,” he said.

Maintaining a “hold” rating, his target rose to $64 from $58. The average is $61.13.

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Pointing to both “upward momentum” in Chinese pulp prices and an “attractive” supply-demand outlook, CIBC World Markets analyst Hamir Patel increased his target price for shares of Mercer International Inc. (MERC-Q).

“While North American prices are likely to continue eroding through Q1, the leading market indicator for pricing, China (35 per cent of global pulp demand), bottomed in January around $680 per ton (net), with several softwood producers announcing hikes of $10/ton-$20/ton in February,” said Mr. Patel. “Additionally, reports in PPI Asia last week suggest some buyers are bracing for producers to announce a further $20/ton hike for March.”

“With no sizable new NBSK capacity slated to come online over for the next 2.5 years, several industry conversions to viscose planned, and recurring production challenges in the industry (given the age of other producers' assets still in operation), softwood pulp markets are expected to remain tight through our forecast horizon (2020). According to pulp consultant Brian McClay & Associates, upcoming softwood capacity reductions this year include OJI's Tasman, New Zealand mill which will reportedly transition from radiata production to entirely UKP output by March, as well as Arauco's Valdivia, Chile mill which will switch from 80-per-cent BSK to 100-per-cent BEK by November.”

Maintaining an “outperformer” rating for Mercer shares, Mr. Patel moved his target to US$19 from US$17 in order to reflect “slightly higher estimates and lower-than-expected net debt.” The average target is $23.60.

“MERC remains our top pick in forestry given the favorable long-term supply/demand fundamentals for pulp and an average free cash flow yield of 12 per cent over 2019-2020,” he said.

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In other analyst actions:

BMO Nesbitt Burns analyst Michael Mazar initiated coverage of Tervita Corp. (TEV-T) with a “market perform” rating and $7.50 target. The average is $10.94.

“Tervita has the free cash flow potential to deliver both growth and de-levering, so the opportunity is certainly there to narrow the valuation discount to Secure (SES-T),” he said. “However, we are taking a cautious approach until management demonstrates execution on some of the projects in its relatively robust backlog of growth initiatives.”

Macquarie initiated coverage of Ascot Resources Ltd. (AOT-X) with an “outperform” rating and $2 target, which matches the consensus.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 0:06pm EDT.

SymbolName% changeLast
CWB-T
CDN Western Bank
-0.18%28.15
CM-T
Canadian Imperial Bank of Commerce
+0.88%68.5
RY-T
Royal Bank of Canada
+0.37%136.73
BNS-T
Bank of Nova Scotia
+1.11%70.19
BMO-T
Bank of Montreal
+1.19%132.32
PFE-N
Pfizer Inc
+0.94%28.04
SOU-X
Southern Energy Corp
0%0.155
GRT-UN-T
Granite Real Estate Investment Trust
-0.51%76.62
MERC-Q
Mercer Intl Inc
-0.4%10.08

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