TD Direct downgrade Event
Q3/21 Conference Call
Impact: NEGATIVE
For income seeking investors, First National continues to be a very rewarding
investment. The $1.25/share special dividend announced (paid in Q4/21) reinforces
this theme, in our view (well ahead of $0.60/share estimate, and up from $0.50/
share in 2019 and 2020). In 2021, we have underestimated the earnings headwind
of tighter mortgage spreads and higher expenses, which have more than offset
strong origination volumes (+27% ytd), including volumes driving placement fees
(+23% ytd). EPS of $3.85 in 2020 may been a peak and now, we are not forecasting
EPS to surpass this mark until 2023 ($4.00/share estimate). We have materially
reduced our estimates to reflect expectations for tighter spreads and higher
expenses to persist. Our target moves to $43 (from $49; multiple unchanged).
We maintain our HOLD rating.
First National has missed our estimates, and consensus, for three quarters
in a row. This reflects a combination of poor earnings visibility due to inquarter funding mix allocations, increased competition in 2021 leading to tighter
mortgage spreads (vs. 2020), and higher-than-expected expenses (brokerage
fees, salaries, and other expenses). Our 2021-2023 EPS estimates have come
down by 12% on average (vs. our previous forecast).
Origination volumes continue to be a bright spot, although guidance
suggests Q4/21 will be lower than expected. Q3/21 volumes of $8.4bln were
in-line with our $8.5bln forecast (up 10% y/y). Q4/21 guidance is weaker than
expected (residential volumes could be off 25% y/y, while commercial volumes
are expected to "remain strong").
The special dividend of $1.25/share is well received. We have increased our
special dividend forecast to $1.00/share for 2022/2023 (up from $0.60/share).
TD Investment Conclusion
First National is a solid income-generating investment (8.4% dividend yield, including
the announced special dividend). Mortgage spread tightening and rising expenses
suggest near-term earnings potential is lower than 2020 levels, in our view. We
continue to value First National's low credit risk 'originate-to-sell' mortgage model
and strong origination capabilities. We see origination growth potentially moderating
in 2022. We view valuation at 11.9x 2022E EPS as fair.