TD reiterated $43 targetExpects another big SIB before year end (excerpt below):
Home Capital announced the final results of the $115mm SIB offer. In the end it was undersubscribed with Home Capital repurchasing 1.5mm shares for $44mm (~3.9% of shares outstanding). Shares were tendered at $28.60 (0.74x P/B), the high-end of the offer range.
- Pro-forma this SIB, and factoring in the completion of its NCIB (July-22), we estimate excess capital of $77mm ($1.88/share) based on the Q2/22 CET 1 ratio. Home Capital is targeting to exit 2022 with a CET 1 ratio in the 14-15% range (we model 14.6% by Q4/22).
- We view the undersubscribed SIB as a positive read-through for valuation. The offer price implied a very discounted 0.65x - 0.74x P/B multiple. Previously management had indicated a willingness to revise the SIB price if demand was insufficient. Given this undersubscribed SIB we see potential for another higher priced SIB before year-end.
- On August 15, 2022, Home Capital disclosed that it had received an expression of interest (EOI) from an arms-length third party. The EOI was an all-cash offer that exceeded the SIB price ceiling ($28.60). The board determined the EOI was not in the best interest of the company or its shareholders. The thirdparty, in conjunction with another party, had previously made an offer which was subsequently terminated.
- Our $43 target is based on the high-end of 0.9x-1.0x Q2/23 book value as we attempt to factor in the uncertain macro-environment. This is above Home Capital's current 0.74x P/B multiple. In the Canadian mortgage space we would flag the acquisitions of Sagen MI Canada by Brookfield (1.04x-1.06x P/B; see our previous notes here and here) and the pending acquisition of Concentra by EQB (1.08x P/B; see our note here) as relevant precedents.
TD Investment Conclusion Material buybacks are playing out as management works to right-size its capital base. 2022 NIM compression has been material as the timing of mortgage rate increases is lagging funding cost inflation. We believe material buybacks will support EPS growth and ROE expansion in 2023, and while credit trends will likely deteriorate, they will be manageable.