**August 12th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer Market
- Canadian Bank Earnings Preview Q3 f2016 (Thematic Research): Housing Landscape Shifting Rapidly
- JMRD Basket Corner
- Retirement Corner
- Reads of the Week
- Economic Calendar
- Earnings Reports
Canadian Bank Earnings Preview Q3 f2016 (Thematic Research): Housing Landscape Shifting Rapidly
For quite some time, we argued that household credit risk represents the primary threat to the performance and valuations of Canadian banks. Canadian banks have helped Canadian households lever up and have become overweight Canadian household debt in the process. We believe falling home prices would trigger a spike in loan losses, not from residential mortgage lending, but rather from unsecured household debt and household loans secured by other collateral (e.g., auto loans). As detailed herein, some stakeholders share our concern about the housing market – we recently observed active intervention by Canadian governments (at both the provincial and federal levels) into the Canadian housing markets. What are the implications of the foregoing for the Canadian banks in our coverage universe?
Ultimately, our outlook for Canadian banks and the economy at large rests on the sustainability of surging property markets in Toronto and Vancouver. A shock to the housing markets in Toronto and Vancouver – which together represent over 50% of the Canadian housing market – would trigger a marked increase in credit losses on household loans not secured by residential real estate.
We find contrasting housing market dynamics at play in Vancouver and Toronto. In Vancouver, domestic sales activity (since the start of the year) has driven speculative activity in the housing market. As foreign capital inflows ease (a result likely to be accelerated by the recent B.C. foreign home buyer transfer tax), local residents who bought in neighbourhoods with greater levels of speculative activity may suffer more from a housing correction. We find a rather different supply-demand relationship taking hold in the Toronto housing market. Recent price inflation reflects supply scarcity to a significant degree, as opposed to an unsustainable spike in demand.
Accordingly, in our view, the immediate risk of a housing correction remains confined to Vancouver, but this risk could quickly metastasize to Toronto. The banks in our coverage universe will not suffer these losses uniformly – we expect CM would suffer the most.
Our targets and rank order for the sector is as follows (owing to our affiliation, we do not rate NA):
- TD [Outperform; $60 PT];
- BMO [Sector Perform; $84 PT];
- BNS [Sector Perform; $66 PT];
- RY [Sector Perform; $83 PT];
- LB [Sector Perform; $53 PT];
- CM [Underperform; $95 PT]; and,
- CWB [Underperform; $24 PT].
(Full report attached)
JMRD Basket Corner
Brookfield Asset Management (BAM.a) – “Brookfield’s U.K. Assets Could See Boost From Brexit, Flatt Says” (Bloomberg)
Emera (EMA) – EMA reported Q2 2016 adj. EPS (FD) of $0.33 (excl. non-recurring items), below of our estimate of $0.38 on adj. EBITDA of $191 mln versus our $238 mln estimate, largely reflected weaker contributions from Energy Services of -$9 million versus our $35 million estimate (lower gas trading margins due to increased short-term fixed cost commitments for transportation and storage, as well as lower merchant power contributions). (Full report attached)
Hydro One (H) – “Hydro One profit rises 16%, revenue flat compared with last year” (Financial Post)
Keyera (KEY) – KEY reported Q2 adj. EBITDA of $158 mln, in line with our $160 mln estimate (consensus: $162 mln) with slightly higher fee-based contributions (G&P and Liquids Infrastructure) offset by slightly lower Marketing & Other margins. Meanwhile, the company announced a 6% dividend increase to $1.59/sh annually – albeit below our +10% forecast. (Full report attached)
Metro (MRU) – “Lower food prices may be coming to a Metro near you” (Money Sense)
Franco Nevada (FNV) – Financial results consistent with NBF Estimates.: Franco-Nevada released Q2/16 financial results, reporting adjusted EPS of US$0.22, effectively in line with NBF Estimates of US$0.23 and slightly above Consensus of US$0.20. Operating CFPS (before non-cash working capital changes) of US$0.62 also compared well with NBF Estimates and Consensus at US$0.63 and US$0.61, respectively. In total, the company sold 112,787 GEOs in Q2/16, generating US$150.9 mln of revenue (inclusive of US$7.8 mln from its oil and gas division). Financial position still best-in-class. Franco-Nevada ended the quarter with US$226 mln in cash, no debt and US$1.0 bln of available credit to pursue additional acquisitions in both its precious metal and oil and gas segments. (Full report attached)
All Cap Growth Basket
Enercare (ECI) – John MacDonald, CEO at Enercare joins BNN for a look at the drivers behind the Q2 earnings season and what the catalysts will be when the temperature drops.: http://www.bnn.ca/business-day-pm/enercare-s-acquisition-of-service-experts-drives-q2-earnings~926333 Enercare Results ahead of NBF and Street estimates: ECI reported Q2/16 revenue of $244.1 mln (vs. $218.4 mln est. & $135 mln Q2/15), acquisition adj. EBITDA of $74.7 mln (vs. $67.7 mln est. & $61.2 mln), and DCPS (NBF definition) of $0.39 reflecting a 60% payout ratio (vs. $0.33/73% est. & 0.34/62%). Results were similarly ahead of the Street’s top line / adj. EBITDA of $229 mln / $67.7 mln. (Full report attached)
Milestone Apartments REIT: How was the quarter?: Q2 FFO/unit was $0.28/unit, largely in line with our estimate and consensus of $0.29/unit. NOI came in 2.8% ahead of our forecast while G&A was higher but contained one-time items (and unit based comp).
Financing costs were slightly above our model leading to a 4.8% negative variance to FFO/unit. (Full report attached)
New Flyer (NFI) – EBITDA well ahead of NBF/Street: NFI reported Q2/16 revenue of US$587 mln (vs. US$570 mln est. & US$375 mln Q2/15), adj. EBITDA of US$80.3 mln (vs. US$65.5 mln est. & US$39.2 mln Q2/15) and DCPS of US$0.81 reflecting a 24% payout ratio (vs. US$0.58 / 33% est. & US$0.39 / 30% Q2/15). Results were similarly ahead of consensus US$559 mln top-line and US$72.1 mln EBITDA (Full report attached)
Parkland Fuel (PKI) – EBITDA/CF ahead of NBF and consensus: PKI reported Q2/16 revenue of $1.6 bln (vs. $2 bln est. & $1.4 bln Q2/15), adj. EBITDA of $56.4 mln (vs. $47.0 mln est. & $34.1 mln Q2/15) & DCPS of $0.30 for a 96% payout (vs. $0.17/166% est. & $0.10/274% Q2/15). Top line was similarly below consensus $2 bln, but EBITDA ahead of the Street’s $52.5 mln target. (Full report attached)
Premium Brands Holdings (PBH) – “More upside seen for dividend stock that’s up 85% in past year to a record high” (Globe and Mail) (We can forward a copy of this article if unable to view)
Savaria Corporation (SIS) – Strong Q2with sales up 23% and EBITDA up 44% y/y Revenue of $30.1 million (NBF: $28.8 mln) was up 23.2% y/y on the back of 16% organic growth, a one-month contribution of $1.1 million from SHHC Automotive and $0.5 million from FX. Adj. EBITDA rose 44.0% y/y to $5.1 million, slightly ahead of our $4.7 million forecast (Street: $4.8 mln). Operating leverage, cost control and improved productivity drove margin to 16.9% which is the highest level in years. (Full note attached)
U.S. Growth Basket
Applied Materials (AMAT) – AMAT reports F3Q16(JulQ) results on Aug 18 and Credit Suisse’s analyst increased their target price to $29 (from $26), acknowledging multiple positive catalysts in coming weeks. Specifically (i) They expect the company to guide OctQ EPS to $0.50, above Street estimates of $0.47 (ii) AMAT is holding an Analyst day in New York on 09/21. They expect a new target model with long term EPS target midpoint of $2.90 (versus current target of $2) (iii) Increased confidence in growth in Memory CapEx in CY17, driven by DRAM (pricing recovery in C2H16 increases confidence of 2017 CapEx growth), and 3D NAND proliferation (Flash memory summit this week will be positive).
Vail Resorts (MTN) – “Vail Resorts’ purchase of Whistler Blackcomb aims to boost makeover” (Globe and Mail)
Reads of the Week
- “Why New Highs in August Are Rare and Significant” (LPL Research)
- “The Best Stock Market Indicator Is Financial Media Competition For Clicks” (Price Action Lab Blog)
- “David Rosenberg: If you think this market is confusing, wait until you see what the ‘smart money’ is doing” (Financial Post)
- “Things I’m Pretty Sure About” (The Motley Fool)
Monday August 15th – RMP Energy,
Tuesday August 16th – Home Depot, Grenville Strategic Royalty
Wednesday August 17th – None
Thursday August 18th – None
Friday August 19th – Deere and Co
Monday August 15th – US Empire State Index
Tuesday August 16th – Canada Manufacturing Sales; US Housing Starts, US Inflation
Wednesday August 17th – US FOMC Minutes
Thursday August 18th – US Initial Jobless Claims, US Existing Home Sales, US Leading Indicators, US Philly FED Index
Friday August 19th – Canada Inflation, Canada Retail Sales
Have a good weekend and Go Canada!