Inside the Market’s roundup of some of today’s key analyst actions
Heading into 2024, Desjardins Securities analyst Doug Young recommends investors take an “overweight” stance on banks while taking a “market-weight” approach to life insurance companies and going “underweight” for property and casualty insurers.
“With a fluid macro environment, our sector calls will evolve through 2024,” he warned. “First, there are several positives that we see for Canadian bank stocks as we head into FY24, and a lot of bad news seems to have been priced in (trading at a 28-per-cent discount on average to historical P/BV multiples). True, financials are not a late-cycle sector, but the market could look through a shallow recession (which Desjardins Economic Studies is calling for in 1H24). Furthermore, a large proportion of investors are already underweight banks, and this could reverse. Second, while we see several positives for the Canadian lifecos that could drive EPS growth, ... general confusion and negative surprises from the new accounting regime (IFRS 17/9), in addition to continued variance between reported and core EPS (due to a multitude of factors), could weigh on sentiment for the sector. Additionally, if we are correct and there is a rotation back into bank stocks, lifecos could be on the other side of the trade in our opinion. Third, while we like the fundamentals of the P&C insurance sector, and specific themes for IFC and DFY, we are increasingly concerned with the frequency and severity of global weather events, the impact they are having on P&C insurance results (via higher catastrophe losses, as was the case in 2Q and 3Q of 2023) and rising catastrophe reinsurance costs. Both are also defensive stocks which we believe could underperform if the market looks past a shallow recession.”
In a research report released Tuesday titled Should I stay or should I go?, Mr. Young named three “top picks” for the next year. They are:
Large-cap banks: Bank of Montreal (BMO-T) with a “buy” rating and $135 target, rising from $130 previously. The average on the Street is $130.11.
“We designate BMO as our top bank pick for 2024,” he said. “First, BMO has the most promising setup for FY24 in our opinion, primarily driven by the BOTW [Bank of the West] integration, which should result in US$800-million in expense synergies (vs its initial estimate of US$670-million). This factors in no revenue synergies, which could materialize over time. Second, BMO should reap cost savings of $400-million through FY24 from various actions taken in FY23. BMO’s track record in expense management is notable, achieving seven consecutive years of positive operating leverage from FY16–22, and reducing its adjusted efficiency ratio to 56 per cent from 65 per cent. Third, we like its position as a top four commercial bank in North America, as well as its lower relative exposure to Canadian mortgages vs the other Big 6 Canadian banks. We also view BMO’s current valuation as attractive — 1.3 times P/BV vs the Big 6 average of 1.4 times.”
Small-cap banks: Canadian Western Bank (CWB-T) with a “buy” rating and $37 target. Average: $34.
“This year, we are introducing a small-cap bank into our nominations — CWB,” said Mr. Young. “We believe it stands apart from the Big 6 with its unique story. First, we expect NIM expansion in the 10 basis points range through FY24 vs relatively stable NIMs for the Big 6. Second, CWB has limited exposure to unsecured lending, a greater focus on commercial secured lending and much lower relative exposure to Canadian mortgages vs the Big 6. Third, CWB does not operate in the (volatile) capital markets business. Fourth, it finished FY23 with a healthy CET1 ratio, has curtailed its use of the ATM program, benefited from the capital adequacy requirements (CAR) changes in 2023 and is not subject to various buffers (eg the domestic stability buffer) to which the Big 6 banks must adhere. With its current 0.9 times P/BV multiple and a dividend yield of 4.3 per cent, we see a compelling case for further upside potential.”
Lifecos: Sun Life Financial Inc. (SLF-T) with a “buy” rating and $75 target. Average: $73.50.
“There are four themes we like,” he said. “First, its medium-term underlying ROE target of 18 per cent plus, which is peer-leading (compares favourably with the Canadian banks). Second, we see several earnings growth drivers over the coming year— DentaQuest (DQ) in the U.S., getting to scale and continued momentum in Asia, SLC Management hitting its stride, as well as potential capital deployment. Third, by our math, SLF has $6.0-billion in excess capital and debt capacity, and generates an attractive amount of excess capital annually, partially from MFS. Fourth, MFS has been performing well even in volatile equity markets.”
Mr. Young’s pecking order for Canadian banks heading into 2024 is:
- Bank of Montreal
- Canadian Western Bank
- Royal Bank of Canada (RY-T) with a “buy” rating and $142 target, up from $136. Average: $135.87.
- Toronto-Dominion Bank (TD-T) with a “buy” rating and $96 target. Average:
- National Bank of Canada (NA-T) with a “hold” rating and $105 target, up from $99. Average: $101.50.
- Bank of Nova Scotia (BNS-T) with a “hold” rating and $64 target, up from $62. Average: $63.32.
- Canadian Imperial Bank of Commerce (CM-T) with a “hold” rating and $62 target, up from $58. Average: $60.49.
- Laurentian Bank of Canada (LB-T) with a “hold” rating and $27 target, down from $28. Average: $28.82.
“We are projecting 1-per-cent growth on average in cash EPS for the Big 6 Canadian banks in FY24, marking a recovery from FY23,” said Mr. Young. “While this might not appear great, it factors in normalization, and some deterioration, in PCLs after several good years on this front. Looking at adjusted PTPP earnings, a better metric of banks’ earnings power, we predict 9-per-cent growth for the Big 6 in FY24; this reflects slight NIM expansion, low- to mid-single-digit organic loan growth, acquisitions (for BMO and RY) and expense management initiatives. We actually believe the setup for FY25 is good, and that is reflected in our cash EPS growth forecast of 6% on average for the Big 6 banks.”
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Desjardins Securities analyst Chris Li thinks the risk-reward proposition for economically and commodity-sensitive stocks “seems favourable” as 2024 approaches.
However, in a research report previewing the year ahead for consumer stocks, he warned near-term catalysts are limited and patience is required for investors.
“We expect the tug of war between staples and discretionary to continue, at least in 1H24,” he said. “Desjardins’ economic outlook calls for risks in Canada to remain skewed to the downside as the economy is expected to enter a recession next year. Furthermore, mortgage renewals will weigh on household finances into 2025 and 2026, providing a medium-term headwind to consumption and economic growth. Against a cautious consumer spending backdrop, we continue to prefer defence, at least nearterm. Our outlook is focused on company-specific themes and downside valuation.”
Mr. Li does think market volatility will create “attractive buying opportunities,” but “clear winners are once again difficult to identify (staples are well-priced and discretionary lacks catalysts).”
He named Alimentation Couche-Tard Inc. (ATD-T) his “top pick” for 2024, citing “its all-season attributes and reasonable valuation.”
“ATD remains our preferred idea given: (1) improving macro conditions and easing of cigarette headwinds next year should reaccelerate merchandise SSSG [same-store sales growth], which we believe is a key near-term catalyst; (2) continuing strong fuel margins and cost reductions are more than offsetting c-store sales softness; (3) funds flow to staples with torque to an economic recovery and less exposed to disinflationary/commodity risks; (4) a robust pipeline of growth initiatives supporting attractive organic EBITDA growth; (5) M&A environment is becoming more favourable; and (6) reasonable valuation at 16.5 times forward P/E (vs 17.5 times average),” he said.
Mr. Li has a “buy” recommendation and $85 target for Couche-Tard shares. The average is $86.25.
Elsewhere, the analyst thinks fundamentals for Canadian grocery companies “remain supportive of current valuation, with inflation remaining above the historical average, rational competition and recession-resilient pharmacy/front store.”
“We expect [Loblaw Companies Ltd. (L-T)] to benefit most from these trends but prefer [George Weston Ltd. (WN-T)] as we view the current holdco discount as attractive (16 per cent vs 8‒10-per-cent FV),” he said. “For the group, we expect sector rotation and slowing inflation to limit valuation expansion, with share price appreciation mainly driven by EPS growth.”
Mr. Li added: “Many of our economically/commodity-sensitive stocks (CTC.A, GIL, PBH, SAP) trade at/below 1 sd from the average and largely reflect near-term challenges, in our view. While we believe risk/reward is favourable for long-term investors as these are strong companies with solid balance sheets and FCF, near-term catalysts are limited, with potential for more estimate reductions. We estimate these stocks offer more than 20-per-cent average potential total return vs 10-per-cent downside. Using our downside analysis as a guide, we believe market volatility will create attractive buying opportunities. We highlight PBH as it trades close to trough valuation and has the most torque to lower interest rates given investor concerns around its high leverage, supported by attractive EBITDA growth of 12 per cent next year (consensus).”
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In response to Monday’s announcement of its friendly cash and share agreement to be acquired by Dundee Precious Metals Inc. (DPM-T), Echelon Capital analyst Ryan Walker moved his recommendation for Osino Resources Corp. (OSI-X) to “tender” from “speculative buy” previously, touting the favourable valuation implied by the offer.
Shares of Vancouver-based Osino, a gold exploration and development company focused on its wholly owned Twin Hills Gold Project in central Namibia, soared 26.6 per cent in response to the $287-million deal that values it at $1.55 per share. Mr. Walker noted that valuation is just shy of its all-time high share price as well as a 37.2-per-cent premium to its Dec. 15 close.
“We recommend that OSI shareholders Tender to the friendly DPM bid, given the cash and share consideration (at real premiums) and the longer-term exposure it affords to a well-regarded intermediate precious metals producer and developer with the financial and technical wherewithal (in a still tight market for junior developer capital) to advance OSI’s Twin Hills gold project in Namibia into production (planned for 2026),” he said. “Indeed, DPM shares have been among the best performers in the mining sector, up 50 per cent year-to-date (prior to [Monday’s] bid announcement). We also see the two as an excellent fit given DPM’s operating presence in Namibia since 2010 and strong government relations.
“During its conference call, DPM highlighted many of the attractive features of OSI that comprise our investment thesis (and enduring Top Pick status on OSI shares), namely a multi-million-ounce resource, substantially complete permitting, off-the-shelf processing scheme, substantial exploration potential (more than 8,000 square kilometre land package) and stable mining-friendly geopolitically stable jurisdiction.”
Mr. Walker removed his target price for Osino shares. It was previously $2, which is below the $2.49 average on the Street.
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CIBC World Markets analyst Krista Friesen expects “uncertainty” to linger in the Canadian automotive industry in 2024.
“The auto industry had a significant amount of adversity to overcome throughout 2023, beginning with ongoing supply chain challenges, the historic UAW strike, and ever-changing consumer preferences as EV adoption started to slow,” she said. “Looking out to 2024, we continue to see some uncertainty in the industry with regards to EV adoption and the associated investments, as well as the macro backdrop. With that said, we do expect to see production and sales rise, which should bode well for supplier margins.”
In a research report released Tuesday, Ms. Friesen made a trio of rating changes to stocks in her coverage universe on Tuesday.
She raised her recommendations for the these companies:
* Boyd Group Services Inc. (BYD-T) to “outperformer” from “neutral” with a $306 target, up from $285. The average on the Street is $288.36.
Analyst: “Our upgrade of BYD reflects: a) BYD’s current valuation. While we acknowledge BYD’s shares have performed well in 2023, we do still see opportunity in the name. BYD is currently trading at 10.3 times 2025 consensus EBITDA versus a historical average of 13.0 times; b) We continue to see improving industry dynamics with BYD investing in its Technician Development Program, which should in turn help increase capacity to meet the strong market demand; and c) Lastly, through the back half of this decade we see a significant opportunity within scanning and calibration as BYD looks to insource more of this work, which should provide a boost to margins.”
* Martinrea International Inc. (MRE-T) to “outperformer” from “neutral” with a $20 target, jumping from $14.75 and above the $19 average.
Analyst: “Our upgrade of MRE reflects: a) our broader thesis on the auto industry for 2024 and that those with greater exposure to EVs may see a lower ceiling on their multiple. Given MRE’s lower exposure to EVs relative to the other suppliers in our coverage, we believe that bodes well for the company’s multiple; b) The valuation on MRE is compelling with the company trading at 3.3 times 2025 consensus EBITDA versus its 10-year historical average of 4.0 times; and 3) Historically FCF has been somewhat elusive for MRE; however, 2023 looks to have been a turning point for the company. After several years of minimal to negative FCF, we are forecasting FCF conversion (as a percentage of EBITDA) to improve from 10 per cent in 2022 to 22 per cent in 2023 and nearly 40 per cent in 2025.”
Conversely, Ms. Friesen downgraded Magna International Inc. (MGA-N, MG-T) to “neutral” from “outperformer” with a US$63 target, down from US$70 and under the US$67.56 average.
Analyst: “Our downgrade reflects: a) our broader thesis on the auto industry for 2024 and that those with greater exposure to EVs may see a lower ceiling on their multiple. Given MGA’s investments into its EV offering, we believe that MGA falls into the camp of being more heavily exposed to EVs, and we openly wonder if the returns on its investments will be pushed out as the adoption of EVs is pushed out; and b) MGA is currently trading at 4.9 times 2025 consensus EBITDA, versus its historical average of 5.3 times, and we believe the other suppliers offer more compelling returns.”
Ms. Friesen also made these target adjustments:
- Badger Infrastructure Solutions Ltd. (BDGI-T, “neutral”) to $46 from $42. Average: $42.31.
- Exchange Income Corp. (EIF-T, “outperformer”) to $61.50 from $58. Average: $63.45.
- NFI Group Inc. (NFI-T, “underperformer”) to $11.50 from $10.75. Average: $15.70.
“We have adjusted our pecking order within the autos,” she said. “LNR remains our top pick, while we have upgraded MRE to Outperformer making it our second pick, and downgraded MGA to Neutral. The downgrade of MGA reflects our concerns around adoption of EVs, as well as the megatrends more broadly. Of the suppliers within our coverage, MGA has invested the most heavily in this space, and we are concerned that the returns on that investment will be pushed out further. Conversely, we view MRE as the least exposed to these megatrends, and that, coupled with its valuation lead us to our upgrade. We have also upgraded BYD to Outperformer, noting that the company is trading at a compelling valuation and what we believe will be a material opportunity within scanning and calibration through the remainder of this decade.”
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CIBC World Markets analyst Kevin Chiang sees reasons for optimism heading into 2024 for Canadian transportation and industrial companies.
“It was a challenging 2023 for the industrial / transport equities we cover, which are flat year-to-date on a market-cap-weighted basis versus the S&P/TSX up 4 per cent YTD and the S&P 500 Industrial up 12% YTD (through December 11),” he said. “That being said, we are more optimistic heading into 2024. We foresee an improving backdrop for the freight sector with there being signs that the freight recession is coming to an end. We anticipate that strong underlying fundamentals will benefit the North American solid waste sector and expect outsized margin expansion in 2024. And while Canadian air passenger demand is returning to normal seasonal trends, we expect the Canadian airlines to continue to benefit from a supply/demand imbalance which should help partially offset the current inflationary environment. On balance, we expect stronger earnings growth across our coverage universe next year, which bodes well for equity performance.”
In a note released Tuesday, Mr. Chiang made these target changes:
- Andlauer Healthcare Group Inc. (AND-T, “outperformer”) to $50 from $47.50. The average is $49.71.
- Bombardier Inc. (BBD.B-T, “neutral”) to $62 from $60. Average: $77.87.
- Cargojet Inc. (CJT-T, “outperformer”) to $159 from $150. Average: $135.50.
- Chorus Aviation Inc. (CHR-T, “outperformer”) to $4.25 from $4. Average: $3.76.
- GFL Environmental Inc. (GFL-T, “outperformer”) to $57 from $55. Average: $47.37.
- Lion Electric Co. (LEV-N/LEV-T, “neutral”) to US$2 from US$3.50. Average: US$3.67.
- Parkland Corp. (PKI-T, “outperformer”) to $57 from $56. Average: $52.31.
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RBC analysts Matthew McKellar and Paul Quinn expect demand for wood products will trend higher in 2024, but they think the near-term fundamental outlook for lumber is stronger than for oriented strand board (OSB).
“We expect interest rates could move somewhat lower through 2024 and begin to catalyze somewhat stronger demand year-over-year later in the year,” they said in the firm’s Wood Products Primer. “Wood products inventory levels through the chain are also lean, which suggests to us that even a moderate improvement in demand could translate quickly into stronger pricing. We expect lumber markets to also benefit from lower imports from Europe, and declining production in British Columbia. However, in OSB markets, recent and near-term additions will add capacity equivalent to 5.5 per cent of the existing industry, excluding the restart of the Tolko mill in High Prairie (which itself is another ~2.5 per cent); as such, we forecast OSB pricing modestly above cash costs in 2024.”
With “modest” adjustments to their commodity price deck for wood products, Mr. Quinn made the following target price adjustments:
* Canfor Corp. (CFP-T) to $22 from $27 with an “outperform” rating. The average on the Street is $23.40.
“We continue to like Canfor’s diversified lumber platform, solid balance sheet and valuation discount, and reiterate our Outperform rating,” he said.
* Doman Building Materials Group Ltd. (DBM-T) to $10 from $9 with an “outperform” rating. Average: $9.17.
“We continue to like Doman’s well-covered dividend and expect the company will be able to capitalize on M&A opportunities to increase its scale in the near term. As such, we see an attractive total return profile and reiterate our Outperform rating,” he said.
* West Fraser Timber Co. Ltd. (WFG-N/WFG-T) to US$90 from US$95 with an “outperform” rating. Average: US$110.
“We continue to like West Fraser’s low-cost focus and strong balance sheet in the context of an uncertain demand environment and significant OSB capacity additions, and reiterate our Outperform rating,” he said.
* Western Forest Products Inc. (WEF-T) to 80 cents from $1 with a “sector perform” rating. Average: 76 cents.
“We think the outlook for Western remains somewhat challenging for the near-term with relatively soft specialty lumber markets, and we see more compelling opportunities elsewhere in the lumber names at present,” he said.
Mr. Quinn reiterated an “outperform” recommendation and $30 target, exceeding the $28.20 average on the Street, for shares of Interfor Corp. (IFP-T), which remains his “top idea in the Canadian wood products group.”
“Interfor has built a geographically diversified but lumber-focused business,” he said. “We positively view the company’s diversification across operating regions and its focus on the lumber business, which we believe brings clarity to the company’s decision-making and provides opportunities to replicate best practices across its mill network. Interfor’s use of an internal capital projects team (vs. relying more heavily on third-party companies that deliver projects on a turnkey basis) also allows greater flexibility around the execution of projects, including as it relates to the cadence of capital spending through industry downturns.
“We prefer Interfor’s pure-play lumber exposure heading into 2024. While we think there are reasons to be reasonably optimistic about wood products demand across all products in 2024, particularly as it relates to the potential for lower interest rates to catalyze stronger housing starts in the back half of the year, we think supply considerations differ between lumber and OSB. In lumber, lower European import levels and decreased production out of BC should help tighten the market, while in OSB, material capacity additions through 2023 (equivalent to 8 per cent of the market, including the restart of Tolko’s High Prairie mill) are likely to put downward pressure on pricing over the next couple of years.”
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RBC Dominion Securities analyst James McGarragle emphasized the valuations for Canadian steel companies Russel Metals Inc. (RUS-T) and Stelco Holdings Inc. (STLC-T) are now below peers, which he thinks is “unwarranted” given “solid operational performance at both companies and similar end market demand drivers.”
“Stelco shares traded up 30 per cent quarter-to-date on the back of a recent surge in steel prices, in line with Cleveland Cliffs, but below U.S. Steel, which [Monday] saw its share price surge following an announcement it agreed to be acquired by Nippon Steel,” he said. “Russel shares traded up 16 per cent quarter-to-date, nicely outperforming the group average following its acquisition of seven Metal Service Centers from Samuel Son & Co., which we view positively.”
“Russel trades at a 12-per-cent discount to the group, below its trailing 10-year average premium of 10 per cent. Stelco is trading at 3.6 times NTM [next 12-month] consensus EV/EBITDA, versus blast furnace peers both above 6 times.”
In a research report previewing the companies’ fourth quarter, Mr. McGarragle cut his EBITDA expectation for Stelco to $56-million from $71-million, below the Street’s forecast of $61-million due to the timing of expected coal pricing benefits. His full-year estimate slid to $489-million from $504-million, also under the consensus estimate of $492-million.
The analyst maintained his projections for Russel, including earnings per share of 74 cents, topping the consensus by 7 cents seeing a recent surge in prices benefitting results.
“We adjust higher our H1 estimates at both companies to reflect a recent surge in steel prices,” he added. “Moreover, we increased our 2024 and 2025 estimates at Russel to reflect the recent acquisition of seven service centers from Samuel, Son & Co.”
Maintaining “sector perform” recommendations for both companies’ shares, Mr. McGarragle raised his targets with Russel jumping to $47 from $42 and Stelco to $46 from $41. The averages are $45.44 and $47.93, respectively.
“We are leaving our Q4 steel price estimate unchanged at US$850 per ton which reflects weak pricing in the beginning of the quarter followed by a recent surge,” he said. “We expect prices to remain elevated into H1/24; however, we see prices moderating toward the back half of next year as imports increase to capture the current premium and domestic production picks up in the latter half of the year. Added to this are further headwinds from higher interest rates on construction activity and industrial production, which is evidenced in ABI and PMI indicators both trending below 50. Taken together, our 2024 steel price estimate increases marginally 2.9 per cent to US$900/st from US$875/st and trends down in H2/24, ending the year at US$800/st.”
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In other analyst actions:
* JP Morgan’s John Royall cut his Canadian Natural Resources Ltd. (CNQ-T) target to $101 from $106 with a “neutral” rating. The average is $97.54.
* In response to its US$413-million acquisition of a controlling interest in Roofing Corp. of America, Scotia Capital’s Michael Doumet raised his FirstService Corp. (FSV-Q, FSV-T) target to US$165 from US$155 with a “sector outperform” rating. Others making changes include: BMO’s Stephen MacLeod to US$196 from US$188 with an “outperform” rating and Raymond James’ Frederic Bastien to US$185 from US$180 with an “outperform” rating.. The average is US$167.14.
“We view the transaction favorably as RCA/roofing (i) provides another avenue for multi-year organic/M&A growth and (iii) is complementary to Restoration,” Mr. Doumet said. “Additionally, given its similarities to the other Brands sub-segments (i.e. labour-intensive, leading market position, fragmented industry, etc.), we believe FSV will be able to execute its share gain strategies to drive strong organic growth at RCA (as it did with Century Fire and Restoration); we also expect follow-on (tuck-in) roofing transactions to be completed at lower/more accretive multiples. We raised our one-year target to reflect the accretion from the transaction.”
* Following Monday’s release of an updated technical report for its Essakane mine located in Burkina Faso, National Bank’s Mike Parkin raised his Iamgold Corp. (IMG-T) target to $4.50 from $4 with a “sector perform” rating, while BMO’s Jackie Przybylowski lowered her target to US$3.25 from US$3.50 with an “outperform” rating. The average is $4.32.
“The updated life-of-mine plan extends operations to 2028 (from 2026 previously), although we had previously assumed subsequent production from stockpiles to 2033,” said Ms. Przybylowski. “The shorter total mine life has resulted in lowering our target modestly to US$3.25/share (from US$3.50/share previously). Offsetting this slightly is deferral of the previously arranged gold prepay and addition of a new forward sale which increases cash flow to IAMGOLD in Q1/24.”
* In the wake of its lower go-private offer, BMO’s Stephen MacLeod reduced his Neighbourly Pharmacy Inc. (NBLY-T) target by $2 to $18.50 with a “market perform” rating. The average is $21.79.
* BMO’s Andrew Mikitchook cut his Orla Mining Ltd. (OLA-T) target to $7.50 from $8 with an “outperform” rating. The average is $7.25.
“[Monday] morning, Orla announced that its request to extend the mining concessions at Cerro Quema have been rejected and the project area has been declared a reserve,” he said. “Although this announcement is unfavorable, in our opinion, it provides clarity for investors as Orla will focus time and finances advancing its other assets instead of Cerro Quema. We have updated our model by cutting our Panama valuations by 50 per cent to retain a modest placeholder value for Cerro Quema optionality.”
* JP Morgan’s Tessa Romero moved her target for Vancouver-based Xenon Pharmaceuticals Inc. (XENE-Q) to US$59 from US$54 with an “overweight” rating. The average is US$53.81.
David Leeder