Power Corporation Of Canada Appoints New President & Ceo

TU E S DAY , F E BRU ARY 18, 2020

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R EPORT ON BUSINESS

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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

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anada’s big banks are set to report their fiscal firstquarter results starting this week, and there’s a lot at stake: Bank stocks underperformed the S&P/TSX Composite Index in 2019 and have been lagging this year, too, amid continuing concerns about lacklustre profit growth and rising loan losses. The good news: The first quarter – which ended Jan. 31 – tends to be a strong one for the banks, largely thanks to a seasonal pickup in trading activity and investment 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 profits for the Big Six banks will in-

crease by an average of 5.8 per cent, year-over-year. National Bank of Canada’s 12.1 per cent estimated 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 Commerce 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 economy, low oil prices and rising personal 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

as a process of “normalization” from historically low levels in recent 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 ratio, 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 ratio is still below the “through-thecycle averages,” Mr. Movahedi said in a note. Nonetheless, the increase is weighing on bank stock valuations. The S&P/TSX Composite Diversified Banks Index has a price-to-earnings ratio of just 10.8, based on estimated 2020 earnings. That is well below the 10year average of 11.4 times earnings, according to Bloomberg. Although the banks index is up 3.2 per cent so far this year, the return is trailing the 4.6-per-cent return for the S&P/TSX Composite. “Not only was credit performance a drag on sector earnings growth in fiscal 2019, it represents an overhang on the Big Six outlook,” Gabriel Dechaine, an ana-

lyst at National Bank Financial, said in a note. He added that analysts have increased their estimates for 2020 credit losses in three of the past four quarters, and by a cumulative total of $1.2-billion, or 11 per cent. “Until this trend is broken, we believe investors will remain cautious on the sector due to uncertain earnings expectations,” Mr. Dechaine said. In mid-December, after the banks reported their fiscal fourthquarter and full-year financial results, Maria Semikhatova, an analyst at Citigroup, downgraded her recommendations on the five biggest Canadian banks to “neutral,” citing loan losses among other challenges. Previously, the analyst had “buy” recommendations on bank stocks. Darko Mihelic, an analyst at RBC Dominion Securities, is also cautious. “Valuations are below historical averages but we maintain our market-weight position for the banks as we think near-term headwinds and the outlook for a relatively soft year with modestly rising PCLs and elevated economic risks will likely continue to

weigh on the stocks,” Mr. Mihelic said in a note. Still, the outlook isn’t entirely gloomy. Mr. Mihelic expects that profits will rise by an average of 6.4 per cent in the first quarter, year-over-year, while revenue rises 5.5 per cent. What’s more, he expects that the banks will generate more profit from their revenues, resulting in better efficiency ratios. That’s important because greater efficiency will help offset rising loan losses and shrinking margins on loans as banks struggle with a flat yield curve. But even if the first-quarter results are relatively upbeat, analysts expect that full-year results will be less impressive. “We think this first quarter, backed by strong and rising markets and good capital market results at U.S. banks, will be a much better start to the year than the first quarter of 2019. However, after that initial burst, we see growth rates settling back down into our forecast range,” Mr. Sedran said. For 2020, he expects bank profits will rise just 3.7 per cent, or about two percentage points below his expectations for the first quarter.

Cirque: Company’s largely debt-funded expansion effort is a concern, Moody’s says FROM B1

The company was preparing documentation for that option, but there is no current plan to proceed 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 authorized to speak to the media about the matter. TPG controls Cirque after buying a roughly 55-per-cent interest in the company from Mr. Laliberté 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-billion. Mr. Laliberté kept 10 per cent, but is now cashing out. Going public would give Cirque greater financial flexibility as it moves ahead with an ambitious acquisition strategy steered by chief executive Daniel Lamarre, who is trying to reshape the company beyond the circus arts to other live-enter-

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

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 chemistry trick to prevent the spread of crop-damaging insects has secured one of the biggest financings in Canada’s clean-technology 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 investors 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 synthesized 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 orchards and vineyards, confuses male insects. Their instincts tell them they are heading toward fertile 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 executive and founder Michael Gilbert. “They only have enough energy 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 pistachios. As pheromones are specific to bug types, SemiosBio can target individual classes of pests,

leaving bees alone. Its process has been certified as organic for commercial 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, temperature, frost and soil conditions and plant diseases. Growers access the data on their smartphones and can change the pace of spraying within minutes. “They are the first to bring networking to mating confusion,” said Mel Machado, director of member relations with almond handling giant Blue Diamond Growers. “It’s a really good and innovative system [that has led to] a definite decrease in overall damage,” as improved yields cover the cost, said Derek Liu, in-house pest control 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, primarily growers of nuts in California and apples in Washington State. “A lot of companies in agriculture 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 convinced we had to take that burden [off] growers and take it on ourselves.” Revenue has grown by an average of 150 per cent over the past three years and exceeds USS$20-

million annually. Mr. Gilbert said he has 4-per-cent market penetration in the United States and less than 0.1 per cent globally. The big play for the 160-person company is data. SemiosBio sensors 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 quality and yield our farmers get.” Mr. Gilbert spent his teen years living on a hobby farm east of Ottawa. (His “hardcore organic” mother preferred squeezing potato bugs by hand than using pesticides.) 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 employer, Cardiome Pharma Corp., was acquired and he found himself out of work. He started SemiosBio in 2010, building on his long-held interest in using pheromones to manage insect behaviour. Mr. Gilbert initially targeted bed bugs, but discovered there was more potential in agriculture. While farmers sprayed pesticides every few weeks, they had to apply costly pheromones every few hours – a laborious, expensive and inefficient process. He figured 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 signal-blocking plants and water; it was commercially available in 2014. He also got a hand from government agencies, including Sustainable Development Technology Canada, which provided threequarters 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 commercialization in a short period of time,” said CEO Leah Lawrence said.

tainment content. Over the past two years alone, Cirque has purchased The Works Entertainment, the production company known for The Illusionists 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 companies snubbing public markets in recent years. The situation has become so acute that a blue-ribbon panel of experts was convened in 2016 to reverse the tide. It recommended offering special tax breaks and incentives to companies 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.