TU E S DAY , F E BRU ARY 18, 2020 | T HE GLOB E AND MAIL G
Analysts expect mostly smooth year ahead for bank stocks
Some market observers
see big lenders starting
2020 with a bang, but
ending with a whimper
DAVID BERMAN
INVESTMENT REPORTER
C
anada’s big banks are set
to report their fiscal first-
quarter results starting
this week, and there’s a
lot at stake: Bank stocks under-
performed the S&P/TSX Compos-
ite Index in 2019 and have been
lagging this year, too, amid con-
tinuing concerns about lacklustre
profit growth and rising loan loss-
es.
The good news: The first quar-
ter – which ended Jan. 31 – tends to
be a strong one for the banks,
largely thanks to a seasonal pick-
up in trading activity and invest-
ment banking.
“This year, we are far more
comfortable that the year will
have gotten off to a better start,”
Robert Sedran, an analyst at CIBC
World Markets, said in a note.
Mr. Sedran estimates that prof-
its for the Big Six banks will in-
Cirque: Company’s largely debt-funded expansion effort is a concern, Moody’s says
FROM B1
The company was preparing doc-
umentation for that option, but
there is no current plan to pro-
ceed with an IPO and no updated
timeline, a well-placed source
told The Globe Monday. The
Globe is not identifying the
source because they were not au-
thorized to speak to the media
about the matter.
TPG controls Cirque after buy-
ing a roughly 55-per-cent interest
in the company from Mr. Laliber-
té in 2015. Chinese fund manager
Fosun Capital Group bought
about 25 per cent, and the Caisse
took 10 per cent in a deal that was
estimated to be worth $1.5-bil-
lion.
Mr. Laliberté kept 10 per cent,
but is now cashing out.
Going public would give Cir-
que greater financial flexibility
as it moves ahead with an ambi-
tious acquisition strategy
steered by chief executive Daniel
Lamarre, who is trying to re-
shape the company beyond the
circus arts to other live-enter-
Vancouver clean-tech company SemiosBio
raises $102-million on pest-control product
SEAN SILCOFF
TECHNOLOGY REPORTER
A Vancouver startup that uses
wireless technology and a chem-
istry trick to prevent the spread of
crop-damaging insects has se-
cured one of the biggest finan-
cings in Canada’s clean-technolo-
gy sector.
SemiosBio Technologies Inc.
raised $102-million in an equity
deal led by Morningside Group, a
private equity firm controlled by
billionaire brothers Gerald and
Ronnie Chan, heirs to a Hong
Kong property fortune. Early in-
vestors also sold an undisclosed
stake in a side deal.
It’s the fourth big financing for
a Vancouver-area clean-tech firm
in the past year, following deals
for organic pest control maker
Terramera Inc., alternative energy
developer General Fusion Inc. and
Carbon Engineering Ltd., which
sucks carbon dioxide from the air.
Like Terramera, SemiosBio’s
signature offering is bug-control
technology aimed at reducing the
use of insecticides. At the heart of
the company’s product are syn-
thesized chemicals that mimic
pheromones, natural chemical
signals that pests send out to one
another.
The SemiosBio copycat,
sprayed at controlled intervals
from canisters mounted in or-
chards and vineyards, confuses
male insects. Their instincts tell
them they are heading toward fer-
tile females, but instead they fly
into a fog of phony pheromones
and perish before propagating.
“We send them on a wild goose
chase,” said SemiosBio chief exec-
utive and founder Michael Gil-
bert. “They only have enough en-
ergy for one flight and they waste
it on us.”
The process prevents pests
from multiplying and destroying
valuable crops such as lemons,
apples, grapes, almonds and pis-
tachios. As pheromones are spe-
cific to bug types, SemiosBio can
target individual classes of pests,
crease by an average of 5.8 per
cent, year-over-year. National
Bank of Canada’s 12.1 per cent esti-
mated growth, owing to strong
capital markets activity, is the
standout in the sector.
But will decent profit growth
be enough to get bank stocks
moving?
Royal Bank of Canada will kick
off the reporting season on Friday,
followed by Bank of Nova Scotia
and Bank of Montreal on Feb. 25.
Canadian Imperial Bank of Com-
merce will report its results on
Feb. 26, and National Bank and
Toronto-Dominion Bank will
wrap things up on Feb. 27.
Analysts expect that RBC, TD
and CIBC will announce hikes to
their quarterly dividends when
they report their financial results.
But the focus is likely to be on
credit losses, given that the banks
have been setting aside more
money in recent quarters to cover
bad loans – a byproduct of the
slow-growing Canadian econo-
my, low oil prices and rising per-
sonal bankruptcies.
Last year, provisions for credit
losses (PCLs) surged 26.3 per cent
from 2018, according to DBRS.
While that looks like trouble,
analysts characterize rising losses
Cirque du Soleil founder Guy Laliberté is seen in Montreal in 2018. Mr. Laliberté is no longer involved in Cirque’s
day-to-day operations, but still has a seat on the board. DARIO AYALA/THE GLOBE AND MAIL
leaving bees alone. Its process has
been certified as organic for com-
mercial use by California against
navel orangeworm, an enemy of
almond growers.
While use of pheromones for
“mating confusion” and other
biopesticides is widespread in
pest management, SemiosBio’s
patented offering is more than
that. The pheromone dispensers
are part of solar-powered sensor
wireless networks it installs on
farms, enabling growers to also
monitor pest counts in traps, tem-
perature, frost and soil conditions
and plant diseases.
Growers access the data on
their smartphones and can
change the pace of spraying with-
in minutes. “They are the first to
bring networking to mating con-
fusion,” said Mel Machado, direc-
tor of member relations with al-
mond handling giant Blue Dia-
mond Growers.
“It’s a really good and innova-
tive system [that has led to] a defi-
nite decrease in overall damage,”
as improved yields cover the cost,
said Derek Liu, in-house pest con-
trol adviser for Chowchilla, Calif.-
based almond grower Agriland
Farming Co. Inc., which uses
SemiosBio on 21,000 acres. “That
keeps our clients happy.”
SemiosBio doesn’t charge for
equipment or upkeep, but levies a
subscription fee ranging from
US$50 to US$200 for each acre a
year to its 500-plus customers, pri-
marily growers of nuts in Califor-
nia and apples in Washington
State.
“A lot of companies in agricul-
ture technology would just sell a
system to a grower and they’d
have to manage it themselves,”
leaving many with outdated or
unused equipment, Mr. Gilbert
said. “Technology always breaks,
especially in an environment as
harsh as agriculture. I was con-
vinced we had to take that burden
[off] growers and take it on our-
selves.”
Revenue has grown by an aver-
age of 150 per cent over the past
three years and exceeds USS$20-
as a process of “normalization”
from historically low levels in re-
cent years, rather than the start of
an alarming trend – for now at
least.
Sohrab Movahedi, an analyst at
BMO Nesbitt Burns, estimated
that the banking sector’s PCL ra-
tio, which compares impaired
loans to the banks’ loan books,
will rise to 0.41 basis points in the
first quarter, up from 0.37 basis
points (there are 100 basis points
in a percentage point). But the ra-
tio is still below the “through-the-
cycle averages,” Mr. Movahedi
said in a note.
Nonetheless, the increase is
weighing on bank stock valua-
tions. The S&P/TSX Composite
Diversified Banks Index has a
price-to-earnings ratio of just 10.8,
based on estimated 2020 earn-
ings. That is well below the 10-
year average of 11.4 times earn-
ings, according to Bloomberg.
Although the banks index is up
3.2 per cent so far this year, the re-
turn is trailing the 4.6-per-cent re-
turn for the S&P/TSX Composite.
“Not only was credit perform-
ance a drag on sector earnings
growth in fiscal 2019, it represents
an overhang on the Big Six out-
look,” Gabriel Dechaine, an ana-
million annually. Mr. Gilbert said
he has 4-per-cent market penetra-
tion in the United States and less
than 0.1 per cent globally.
The big play for the 160-person
company is data. SemiosBio sen-
sors collect 350 million data
points daily. “This is where it gets
really exciting,” Mr. Gilbert said.
“We have the largest data set ever
collected in agriculture in some of
the highest value crops. I have no
doubt we’ll start solving some
major problems on both the qual-
ity and yield our farmers get.”
Mr. Gilbert spent his teen years
living on a hobby farm east of Ot-
tawa. (His “hardcore organic”
mother preferred squeezing pota-
to bugs by hand than using pesti-
cides.) He earned a biochemistry
degree at the University of Ottawa
and a doctorate at the University
of British Columbia, then worked
in drug development until his em-
ployer, Cardiome Pharma Corp.,
was acquired and he found him-
self out of work.
He started SemiosBio in 2010,
building on his long-held interest
in using pheromones to manage
insect behaviour. Mr. Gilbert ini-
tially targeted bed bugs, but dis-
covered there was more potential
in agriculture.
While farmers sprayed pesti-
cides every few weeks, they had to
apply costly pheromones every
few hours – a laborious, expensive
and inefficient process. He fig-
ured it was better to administer
pheromones remotely, as needed.
It took him more than two years
to create a wireless network that
could communicate around sig-
nal-blocking plants and water; it
was commercially available in
2014.
He also got a hand from gov-
ernment agencies, including Sus-
tainable Development Technolo-
gy Canada, which provided three-
quarters of his first $10-million in
funding. “Michael and his team
have shown you can take public
money as your base and take your
company into full commercializa-
tion in a short period of time,”
said CEO Leah Lawrence said.
R EPORT ON BUSINESS | B3
lyst at National Bank Financial, weigh on the stocks,” Mr. Mihelic
said in a note. said in a note.
He added that analysts have in- Still, the outlook isn’t entirely
creased their estimates for 2020 gloomy. Mr. Mihelic expects that
credit losses in three of the past profits will rise by an average of
four quarters, and by a cumula- 6.4 per cent in the first quarter,
tive total of $1.2-billion, or 11 per year-over-year, while revenue ris-
cent. es 5.5 per cent. What’s more, he ex-
“Until this trend is broken, we pects that the banks will generate
believe investors will remain cau- more profit from their revenues,
tious on the sector due to uncer- resulting in better efficiency ra-
tain earnings expectations,” Mr. tios. That’s important because
Dechaine said. greater efficiency will help offset
In mid-December, after the rising loan losses and shrinking
banks reported their fiscal fourth- margins on loans as banks strug-
quarter and full-year financial re- gle with a flat yield curve.
sults, Maria Semikhatova, an ana- But even if the first-quarter re-
lyst at Citigroup, downgraded her sults are relatively upbeat, analy-
recommendations on the five big- sts expect that full-year results
gest Canadian banks to “neutral,” will be less impressive.
citing loan losses among other “We think this first quarter,
challenges. Previously, the ana- backed by strong and rising mar-
lyst had “buy” recommendations kets and good capital market re-
on bank stocks. sults at U.S. banks, will be a much
Darko Mihelic, an analyst at better start to the year than the
RBC Dominion Securities, is also first quarter of 2019. However, af-
cautious. ter that initial burst, we see
“Valuations are below histori- growth rates settling back down
cal averages but we maintain our into our forecast range,” Mr. Se-
market-weight position for the dran said.
banks as we think near-term For 2020, he expects bank prof-
headwinds and the outlook for a its will rise just 3.7 per cent, or
relatively soft year with modestly about two percentage points be-
rising PCLs and elevated econom- low his expectations for the first
ic risks will likely continue to quarter.
tainment content.
Over the past two years alone,
Cirque has purchased The Works
Entertainment, the production
company known for The Illusion-
ists franchise, as well as Blue Man
Group and VStar Entertainment
Group, which is best known for
its children’s shows, PAW Patrol
Live!
Cirque is also branching out
geographically, opening its first
resident circus show in China
and developing lower-budget
shows specifically for emerging
markets such as India.
That growth has not come
without risk. Moody’s Investors
Service has said the company’s
largely debt-funded expansion
strategy could be unsustainable.
With an IPO, Cirque would
buck the trend of Quebec compa-
nies snubbing public markets in
recent years. The situation has
become so acute that a blue-rib-
bon panel of experts was con-
vened in 2016 to reverse the tide.
It recommended offering special
tax breaks and incentives to com-
panies weighing public listings.
APPOINTMENT
R. JEFFREY ORR
Power Corporation of Canada is pleased to announce
the appointment of R. Jeffrey Orr as President and Chief
Executive Officer.
Mr. Orr has extensive experience in the financial services
industry, including the past two decades in executive
positions in Power group companies. He has been President
and Chief Executive Officer of Power Financial Corporation
since 2005.
He serves as a director of Power Corporation and Power
Financial. He is also a director and Chairman of a number of
Power Corporation subsidiaries, including Great-West Lifeco,
IGM Financial, and their operating companies.
Mr. Orr is active in various community and business
organizations. He holds a Bachelor of Arts – Honours
Business Administration (HBA) degree from the Richard
Ivey School of Business in London, Ontario.
Power Corporation is an international management
and holding company that focuses on financial services
in North America, Europe and Asia. Its core holdings are
leading insurance, retirement, wealth management and
investment businesses, including a portfolio of alternative
asset investment platforms.