The Globe and Mail - 18.02.2020

TUESDAY,FEBRUARY18,2020 | THEGLOBEANDMAILO REPORTONBUSINESS| B

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-

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? RoyalBankofCanadawill kick off the reporting season on Friday, followed byBank of Nova Scotia andBank of Montrealon Feb. 25. CanadianImperialBankofCom- mercewill report its results on Feb. 26, andNational Bankand 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

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-the- cycle 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 10- year average of 11.4 times earnings, 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 outlook,” Gabriel Dechaine, an ana-

lyst at National Bank Financial, said in a note. He added that analysts have in- creased their estimates for 2020 credit losses in three of the past four quarters, and by a cumula- tive 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 uncer- tain earnings expectations,” Mr. Dechaine said. In mid-December, after the banks reported their fiscal fourth- quarter 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 histori- cal 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 econom- ic 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 ris- es 5.5 per cent. What’s more, he expects that the banks will generate more profit from their revenues, resulting in better efficiency ra- tios. That’s important because greater efficiency will help offset rising loan losses and shrinking margins on loans as banks strug- gle 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. Se- dran 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.

Analðstseï·ectmostlðsmoothðearaheadforbankstocks

Somemarketobservers

seebiglendersstarting

2020withabang,but

endingwithawhimper

DAVIDBERMAN
INVESTMENTREPORTER

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-

tainment content. Over the past two years alone, Cirque has purchased The Works Entertainment, the production company known forThe Illusion- istsfranchise, 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-rib- bon panel of experts was con- vened in 2016 to reverse the tide. It recommended offering special tax breaks and incentives to companies weighing public listings.

Cirque:
om·anð’slargelðdebtfundedeï·ansioneffortisaconcern,!oodð’ssaðs

CirqueduSoleilfounderGuyLalibertéisseeninMontrealin2018.Mr.LalibertéisnolongerinvolvedinCirque’s day-to-dayoperations,butstillhasaseatontheboard.DARIOAYALA/THEGLOBEANDMAIL

FROMB

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,

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 confusion,” said Mel Machado, director of member relations with almond 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 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, pri- marily growers of nuts in Califor- nia 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 con- vinced we had to take that burden [off] growers and take it on our- selves.” 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 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.

Vancouverclean-techcompanySemiosBio

raises$102-milliononpest-controlproduct

SEANSILCOFF
TECHNOLOGYREPORTER

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.

APPOINTMENT

R.JEFFREYORR

The Globe and Mail - 18.02.2020

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