RBCDS Upgrade => Outperform => Target: $106 Equitable Group Inc.
Strong Q2/19 results highlighted by dividend
increase and higher dividend growth
Our view: EQB reported another very good quarter punctuated with
another dividend increase and the announcement that it plans to increase
its dividend by 20-25%/year for the next 5 years. We like the risk-reward
setup for Equitable, as the latest housing data and our channel checks
suggest that the Canadian housing and mortgage market are showing
early signs of improvement, which we think could continue in the nearterm and which should help EQB’s EPS growth, support further dividend increases and likely valuation multiple expansion.
Key points:
Q2/19 normalized EPS of $3.18 was well ahead of our forecast and
consensus of $2.75 (consensus range of $2.65-2.86). We adjusted
reported EPS of $3.15 to exclude derivative fair value changes (as we do
for our mortgage coverage universe, as it can vary significantly quarter to
quarter). The positive variance was primarily due to higher-than-forecast
net interest income. Provisions for credit losses of $1.4MM were lower
than our $3.0MM forecast.
10% quarterly dividend increase ($1.20/share to $1.32/share
annualized) and plans to increase dividends by 20-25%/year for the next
5 years. The dividend increase, as well as the dividend growth strategy,
were both higher than our forecast.
Q2/19 originations of $2.04B were below our $2.48B forecast. On a
segmented basis, originations were: (1) $1.12B in Retail vs. our $1.33B
forecast; and (2) $0.92B in Commercial vs. our $1.15B forecast.
Loans under administration (including off balance sheet mortgages) of
$29.3B were in line with our forecast of $29.6B (+2% Q/Q and +19% Y/Y).
Within EQB’s major loan categories, Y/Y loan growth vs. our forecast was:
(1) +13.5% in non-prime residential mortgages (RBC: +14.4%); (2) +45.1%
for prime residential mortgages (RBC: +46.7%); (3) +17.2% in conventional
commercial (RBC: +25.3%); (4) +7.5% in commercial securitized multi-unit
(RBC: +2.9%); and (5) +8.3% for de-recognized multi-unit (RBC: +8.2%).
We are increasing our 12-month price target to $106/share (was
$96), but are maintaining our Outperform rating. Introducing our
2021 forecasts. Our increased price target reflects both higher financial
forecasts and a slightly higher target multiple (1.2x P/BV, was 1.1x). We
believe the combination of an attractive growth story with a greater return
of capital story is likely to benefit EQB’s valuation multiple.