- High-quality US industrial REIT offering investors access to a well-located portfolio of assets that service e-commerce, distribution and logistics users.
- Fortune 500 tenant base with high credit quality; ~40% of the portfolio is occupied by top 10 tenants including General Mills, Unilever, Zulily, Radial (eBay) and Amazon.
- Attractive source of US income (distributions are paid in US dollars, ~6% cash yield).
Scotiabank is one of Canada's Big 6 banks and has operations on several continents. It has an established presence in the Caribbean, Latin America and South America, and is focused on expanding its presence in the Pacific Alliance countries (Mexico, Peru, Chile and Colombia). The company has strong capital levels and recently announced two acquisitions: Jarislowsky Fraser, a Canadian wealth manager, and BBVA Chile, which will expand the bank's retail presence in Chile.
International banking continues to deliver for the bank, and the division's earnings increased 15% in fiscal 2017. The acquisition of BBVA Chile, expected to close in fiscal 2018, increases the bank's scale in the region. Prudent expense management is also a key theme, as Scotiabank has one of the more aggressive savings targets among the Canadian banks; according to management, this is ahead of schedule.
While the stock price is down ~5.8% in the year to date, Scotiabank has outperformed the peer group, which is down ~6.5% on average. In our view, it is trading at an attractive valuation—10.9x forward P/E versus a historical forward multiple of 11.4x. We believe it could benefit from multiple expansion if momentum in its international banking operations continues.
With that being said, we still have concerns with macro factors affecting the name. Concerns regarding the bank's exposure to Mexico may heighten as the market focuses on US protectionism and NAFTA. The bank is also exposed to foreign exchange risk, which could be a headwind in fiscal 2018. In our view, these concerns are already baked into expectations.
Our rating is Buy–Average Risk, with a target price of C$92.
- CIBC Bank USA provides a potential growth catalyst
- Dividend yield of ~4.8%, the highest among the Big 6 banks
- Attractive valuation
CIBC is one of Canada's Big 6 banks, with operations focused in Canada and the United States. The bank has been making meaningful investments in its Canadian banking franchise, hiring mortgage advisors (resulting in industry-leading mortgage growth) and investing in technology and distribution platforms.
Last year, the bank acquired PrivateBancorp (renamed CIBC Bank USA), which provides a potential growth catalyst. The US operations beat consensus expectations in the last two quarters, and we believe this solid performance could continue if the bank realizes synergies from the acquisition as planned. Management is focused on developing relationships with clients on both sides of the border, so we believe the acquisition provides CIBC with access to a client pool it did not have before.
In our view, it is trading at an attractive valuation—9.7x forward P/E versus a historical forward multiple of 9.9x and the peer average of 11.0x. We believe it could benefit from multiple expansion if management's plan for CIBC Bank USA plays out.
With that being said, we still have concerns with the name. There are integration risks with CIBC Bank USA if management cannot capture the expected synergies. The bank has also received a notice of reassessment from the Canadian Revenue Agency disallowing certain deductions taken by the bank in the past; this potential reassessment could loom for a number of years. In our view, these concerns are already baked into expectations.
CIBC is our second pick among the Canadian banks, behind Scotiabank. Its share price is down ~10% in the year to date, but we believe it could play catch-up in 2018. Our rating is Buy–Average Risk, with a target price of C$134.
|Company||Ticker||Price ($)||Market cap ($m)||Ratingfootnote 1||Target price ($)||Dividend yield (%)||Total expected return (%)||Sector|
|Manulife Financial Corporation||MFC||23.42||46,439||Buy-AAR||28.00||3.8%||23%||Life Insurance|
|Alimentation Couche-Tard Inc.||ATD.B||53.20||29,986||Buy-AAR||74.00||0.7%||40%||Consumer Staples|
|Sun Life Financial Inc.||SLF||50.96||31,064||Buy-AAR||58.00||3.6%||17%||Life Insurance|
|TELUS Corporation||T||44.66||26,581||Buy-AR||52.00||4.5%||21%||Telecom, Media & Tech|
|Algonquin Power & Utilities Corp||AQN||12.52||5,406||Buy-AR||15.75||4.8%||31%||Power & Utilities|
|Uni-Select Inc.||UNS||19.86||840||Top Pick–AR||34.00||1.9%||73%||Consumer Discretionary|
|Transat A.T. Inc.||TRZ||8.35||325||Buy-AR||18.00||–||116%||Transportation & Aerospace|
- Target price change: MFC to $28 (from $30); AQN to $15.75 (from $16).
- AR: Average Risk, AAR: Above-average Risk
Source: Desjardins Capital Markets, Bloomberg, FactSet