RBC Dominion Securities analyst Robert Kwan is expressing a more bullish view on Canadian diversified financial companies heading into 2024. Although Mr. Kwan is “tilting a bit more offensive”, he cautioned that he’s still “valuing defence.”
“Given the lack of clarity on macro and economic conditions, we prefer stocks that have a balanced mix of offensive and defensive attributes,” he added. “Our 2024 best ideas (EFN, BN, then BAM) tilt moderately more offensive vs. our 2023 best ideas (EFN, X, then BAM). Although we still remain slightly cautious on the short-term outlook, we remain cognizant that the macro and economic outlook could improve and that a stronger market recovery may occur in 2024. As a result, we believe it remains prudent to be positioned in names with a solid blend of growth and defensiveness pending early signs of improving market conditions and then slowly pivot to more offensive-oriented names as more evidence emerges of a sustainable market rally. Our 2024 best ideas reflect a solid mix of positive fundamentals; potential catalyst(s); defensive attributes; and in most cases, attractive valuations: Element Fleet; then Brookfield Corp.; and then Brookfield Asset Management.”
His ratings and targets for his best ideas are:
* Element Fleet Management Corp. with an “outperform” rating and $31 target, up from $30. The average is $25.58.
“A rare stock for all seasons. Simply put, we think EFN is a stock that can perform well in pretty much any scenario in 2024 (e.g., offensive or defensive markets, recession, high inflation, high interest rates, etc.), but bigger picture, we think EFN is a core holding that should be in any portfolio,” he sai.
“Why we still have high conviction in our bullish call one year later: (1) there is strong evidence that OEM production is back to pre-pandemic levels, unlike at the start of 2023, when it was unclear when OEM production would normalize; (2) the return of capital catalyst is finally imminent vs. being something that was ‘x’ years away; and (3) EFN continues to execute winning new customers and cross-selling existing clients additional fleet services.”
* Brookfield Corp. with an “outperform” rating and US$52 target, up from US$44. The average is US$46.20.
“Positive fundamentals excluding Real Estate, although Real Estate trends appear to be stabilizing,” he said. “While BN’s Real Estate segment was likely the primary focus for investors in 2023, we think that BN’s other verticals were performing well. Excluding Real Estate, BN’s LTM [last 12-month] OFFO/share grew by 9 per cent year-over-year. In Real Estate, we think there were encouraging signs in 2023 as Real Estate FFO is showing signs of stabilizing in the past couple of quarters.”
“Potential catalyst(s): (1) should interest rates decline, we think this would be most positive for BN’s Real Estate vertical, via higher OFFO from lower interest expense/improved leverage metrics and higher asset values from lower discount rates; (2) even without lower interest rates, Real Estate OFFO could increase from higher lease rates, increased lease up activity; and (3) favorable monetization markets facilitating opportunities to surface value.”
* Brookfield Asset Management Ltd. with an “outperform” rating and US$49 target, up from US$41. The average is US$38.49.
“While we think EFN, IFC, and DFY are the most defensive within our coverage, we think BAM has certain defensive attributes,” he said. “For example, we think BAM’s FRE is not as sensitive to a significant decline in public market valuation as investors might think as we estimate only about 25 per cent of BAM’s revenues are driven by public market valuations, with the remainder of its revenues largely driven off of a percentage of 3rd party capital committed or outstanding and those values are not impacted by changes in public market valuations. Furthermore, certain BAM funds (e.g., credit funds, non-flagship fund strategies) have management fees that are received only when capital is deployed (not when capital is committed), so if BAM were to make (opportunistic) investments during a capital markets decline, this would help to incrementally increase revenues.”