Home Capital Group Inc HMCBF

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Raise their target by 3 bucks to $53.00. GLTA

Home Capital Group Inc.

(HCG-T) C$45.31

Material Capital Returns Expected in Q4/21 and 2022

Event

Q3/21 Conference Call

Impact: POSITIVE; moving to BUY (from Action List Buy) on share- price appreciation

As expected, Home Capital announced a material substantial issuer bid (SIB) as it looks to right-size its capital base. The board has approved a $300mm SIB. Terms will be announced over the near term in order to complete the buyback before year-end. A positive surprise, in our view, was management accelerating the capital return program. It is now targeting to exit 2022 with a CET 1 ratio in the targeted 14-15% range (previous guidance was 18-24 months). In addition to the $300mm Q4/21 SIB, we are now forecasting an additional $394mm in buybacks in 2022 (compares with our previous forecast of $358mm including the expected SIB). As a result, our 2022/2023 EPS estimates have increased 10-12%, and our ROE outlook has increased ~200bps (now 14.5%/15.1% for 2022/2023). With the higher ROE outlook, we have increased our 4QF P/B multiple to 1.35x-1.45x (from 1.2x-1.3x previously). Our target price increases to $53.00 (from $50.00). We are moving our rating to BUY (from Action List Buy), given the 18.0% total potential return.

• Terms for the $300mm SIB will likely be announced in November to allow for a closing before year-end. We now see potential for the SIB to be priced in the 1.35x-1.45x P/B range (we previously estimated 1.3x-1.4x). Based on Q3/21 BVPS of $36.40, this implies a price range of $49-$53. For context, Home Capital's previous SIB ($150mm; December 2019) implied a P/B range of 1.2x-1.3x (closed at 1.2x). We believe a higher P/B multiple is warranted today, given the higher ROE outlook.

• We calculate current excess capital of $613mm or $12.29/share (current CET 1 ratio of 22.6% vs. the target of 14-15%). Right-sizing the capital base by Q4/22 implies material capital returns in 2022 (buybacks, dividend reinstated) in addition to Q4/21 SIB.

  TD Investment Conclusion

  Home Capital is very well-capitalized, and we are encouraged to see the board approve a significant capital return program. We expect this to drive material EPS growth and ROE expansion. As a result, we see further valuation upside potential.