Top picks - The Globe and Mail

Transcription

DHX Media Ltd.
(DHX.B-TSX, $7.89, BUY, PT $13.00)
Bullish Content Thesis in Middle Innings! Significantly Stronger Line-Up
Entering 2016.
TSO3 Inc.
(TOS-TSX, $1.90, BUY, PT $3.10)
Abundant upside still remains for one of our strongest 2015 performers.
Cipher Pharmaceuticals Inc.
(CPH-TSX/CPHR-NASDAQ, US$3.90, BUY, PT US$13.25)
Poised to out-perform operationally.
Computer Modelling Group Ltd.
(CMG-TSX, $8.36, BUY, PT $15.00)
Top Pick second year running.
TECSYS Inc.
(TCS-TSX, $7.40, BUY, PT $11.00)
Earnings growth outperformer.
Pyrogenesis Canada Inc.
(PYR-TSXV, $0.20, SPECULATIVE BUY, PT $0.60)
Near-term catalysts in AM compel us to nominate PYR as our Top Pick Status.
Pure Industrial REIT
(AAR.un-TSX, $4.40, BUY, PT $5.30)
FedEx cash flow massively undervalued.
Kaminak Gold Corp.
(KAM-TSXV, $0.88, SPECULATIVE BUY, PT $1.85)
Shares performed admirably during a challenging market environment for
junior gold explorers in 2015.
We are pleased to present Euro Pacific Canada’s Research Top Picks for 2016.
We recognize that 2015 was a significantly more challenging year relative to 2014. The overall
TSX Composite declined -11.1% following a gain of 7.4% for 2014. We are pleased to note the
full year return of 10.5% across our portfolio of 2015 Top Picks. The portfolio gained
significant outperformance from the take-outs of Wanted Technologies and Probe Mines
generating a full year gain of 24% and a first half gain of 51% respectively.
Furthermore, the portfolio performance reflected the significant outperformance of TSO3 Inc.
(TOS-T, Buy, PT $3.10) ahead 59% (from date of publishing 15/01/2015) on the year and the 16%
return (from 14/01/2015) on the shares of Espial Group Inc. (ESP-T, Buy Rated, PT $4.25).
Within the sectors, mining continued to underperform with the index down -40.4% on the year,
following on the sector’s 21.7% decline in 2014. Moving the 10-year rates down by -35 bps on
the year was not enough to support net gains for the REIT Index which was down -9.9% over the
year (-5.2% 2015 total return) following 2014’s 4.2% advance (9.5% total return). Looking for
positive returns, we are pleased to highlight that the Health Care Index recorded another year
of solid outperformance appreciating 22.5% for the year following on its 33.4% return for 2014.
While not as robust as the Health Care Index, we were encouraged to see the Telecom sector
return 2.2%, against the broader TSX Composite Index, which returned -11.1% for 2015. The
modest positive gains for the Telecom Index in 2015 fell below its 5 and 10 year compound
annual returns of 8.9% and 5.8%. Elsewhere, the Information Technology Index experienced a
robust 14% gain for the year building on the sector’s 35.9% return in 2014. Euro Pacific’s
commitment to the Canadian Healthcare and Technology sectors has been a clear win.
The TSX Venture Exchange continued to struggle, with the composite index down 24.4% on the
year following similar declines of 25.4% and 23.7% in 2014 and 2013, respectively. The TSX-V
performance continues to underperform US small cap indices. Returns on the Russell 2000 Index
entered into negative territory following a modest 3.5% return for 2014, and a stellar 37% return
in 2013. The Russell 2000 Index fell by 5.7% during 2015, underperforming the -2.2% (7.5% 2014) and -73bps (11.4% - 2014) declines by the DJIA and S&P 500, respectively.
The past two years of underperformance by Canadian small caps (down ~44% against the
modest decline of 2% for the Russell 2000 over the past two years) highlights both challenges
and potential opportunities. Many recognize the premium valuations accorded late-stage
privates relative to public small cap valuations. While it is difficult (and probably naively
optimistic) to say this imbalance will quickly correct with a positive revaluation of publics, we
see value in the small cap arena. We also derive some measure of support from private equity
investors who share our view in this regard. We look for increased takeover activity where
public markets continue to undervalue high-growth companies that are delivering to plan. Our
research team places greater scrutiny on exit scenarios within their small cap coverage given
the tough capital markets conditions.
Euro Pacific Canada continues to look for outperformance in the Technology and
Healthcare/Life Sciences sectors, where Canadians are recognized leaders. On the natural
resource side, we are purposefully focused on gold and technology-focused extraction.
Euro Pacific Canada was pleased to add another engineer to our ranks, with Fadi Benjamin, CFA,
P.Eng joining our research team through our acquisition of Pope & Company. Fadi has brought his
coverage of Pyrogenesis Canada Inc. and Yangaroo Inc., to our coverage while he looks to expand
his universe in special situations. We note that during the past quarter (Q415 plus YTD), the
following 10 initiations have brought our direct coverage to 64 names. An additional 10 Canadian
names are under coverage from our partners at Euro Pacific Capital.
Recent Initiations: We are pleased to highlight the ten most recent additions to our coverage.
1. Euromax Resources Ltd. (EOX-TSXV, $0.42, SPEC. BUY, PT $0.80) – Ryan Walker, October 26, 2015
2. Photon Control Inc. (PHO-TSXV, $0.62, $1.00, BUY, PT $1.00) – Amr Ezzat, October 30, 2015
3. Pyrogenesis Canada Inc. (PYR-TSXV, $0.20, SPEC. BU Y, PT $0.60)- Fadi Benjamin, CFA, P.Eng,
November 27, 2015
4. Yangaroo Inc. (YOO-TSXV, $0.10, SPEC. BUY, PT $0.36)- Fadi Benjamin, CFA, P.Eng, December 1, 2015
5. ProMetic (PLI-T, $2.67, SPEC. BUY, PT $4.00) – Doug Loe, December 7, 2015
6. STT Enviro Corp. (STT-TSXV, SPEC. BUY, PT $0.40) – Amr Ezzat, December 8, 2015
7. DataWind Inc. (DW-T, $2.39, SPEC. Buy, PT $3.50) – Andrej Krneta, B.Eng, January 6, 2016
8. D-Box Technology Inc. (DBO-TSX, $0.28, SPEC. BUY, PT $0.65)- Rob Goff, January 19, 2016
9. Edgefront REIT (ED.un-TSXV, $1.60, BUY, PT $2.20) – Rob Sutherland, January 25, 2016
10. AcuityAds Holdings Inc. (AT-TSXV, $1.08, SPEC. BUY, PT $1.80) - Rob Goff, January 27, 2016
A Look Back on Last Year’s Top Picks: Looking back to our list of eight Top Picks as published midyear, we have four remaining in our list for 2016. We saw Wanted Technologies taken out at an
attractive premium generating a 24% return from our date of publishing (14/01/2015). We also
saw Espial (ESP-T, $2.09, Buy, PT $4.25) return 16% from our date of publishing (14/01/2015),
despite a second-half return of negative -23%. This year, we have adopted a more defensive and
targeted approach within the Telecom and Media space where DHX Media is our sole returning
Top Pick. Rob Sutherland maintained his top pick status for Pure Industrial REIT (introduced midyear 2015), with his preference for liquidity and stability of cash flows over absolute growth. On
the Life Sciences side, Doug kept TSO3 as one of his top two picks following its impressive 59%
return during 2015 (from 15/01/2015). Doug elected to go with Cipher Pharmaceuticals replacing
last year’s Theratechnologies (down 7% for H215), focusing on value creation and operational
success. Doug remains positive on Theratechnologies with his Buy rating and PT $3.00. Ryan
Walker introduced Kaminak Gold (up 10% in 2015) as his Top Pick after the Company tabled
impressive results from a Feasibility Study for its Coffee gold project in the Yukon. The results
ensconce Coffee as one of the best undeveloped gold projects out there, and certainly place it
near the centre of any M&A radar screen.
Four Returning Top Picks: We are pleased to maintain our Top Pick Status with Pure Industrial
Real Estate Trust (up 5% for 2015), TSO3 (positive 59% from 15/01/2015), DHX Media (down
6.7% from 14/10/2015) and Computer Modelling Group (down 14.7% from 14/01/2015). Our
reports on both DHX Media and Computer Modelling address the progress each company made
during 2015 despite their share price declines on the year.
Top Picks for 2016
We present our 2016 Top Picks below, and look forward to addressing their performance
as the year progresses. We include our Top Pick reports in the following pages following
on their recent release as individual notes during the weeks of January 18, 2016 and
January 25, 2016. These reports have also been included in each analyst’s sector weekly.
Company
Stock
Analyst
DHX Media Ltd.
DHX.B-TSX
Rob Goff, CFA
Current $7.89, PT $13.00
Cipher Pharmaceuticals Inc.
CPH-TSX/CPHR-NASDAQ
Doug Loe, PhD
Current US$3.90, PT US$13.25
TSO3 Inc.
TOS-TSX
Doug Loe, PhD
Current $1.90, PT $3.10
Computer Modelling Group.
CMG-TSX
Amr Ezzat, Hon. Fin.
Current $8.36, PT $15.00
Tecsys Inc.
TCS-TSX
Andrej Krneta, B.Eng
Current $7.40, PT$11.00
Pyrogenesis
PYR-TSXV - $0.20
Fadi Benjamin, CFA, P.Eng
Current $0.20, PT $0.60
AAR.un-TSX
Rob Sutherland FRI(e)
Current $4.40, PT $5.30
Kaminak Gold Corp.
KAM-TSXV
Current $0.88, PT $1.85
We wish you all the best in 2016!
Best Regards!
The Euro Pacific Research Team
Ryan Walker, MSc
20 January 2016
Telecom & New Media
DHX.B-TSX: $7.46
DHX Media Ltd.
Top Pick – Again! Bullish Content Thesis in
Middle Innings! Significantly Stronger Line-Up
Entering 2016.
Thesis: We are once again selecting DHX Media as our Top Pick for 2016. While
disappointed with the 14.08% decline in the shares for C2015, we believe that DHX
made significant strides forward that will significantly benefit shareholders. We are
encouraged by DHX’s moves to reposition the Family Channel (bringing it into the family
for programming), new initiatives in China, the Teletubbies relaunch, and more recently
its innovative Mattel (MAT-NasdaqGS, NR) partnership. Beyond these strategic moves,
the Company continues to execute internally delivering 26% organic growth for F2015.
Catalysts:
 Merchandising and Licensing (M&L): We continue to see significant option
value in M&L owned where we have F2016 revenues of $27.4M against
$20.0M for F2015. We see building traction in F2017/18 where we have
revenues of $33.2/$46.9M. For perspective, Teletubbies at its peak would
have generated the equivalent of ~$80M annually to DHX in M&L. We refrain
from making similarly aggressive forecasts; however, we believe that the
upside option value warrants fuller consideration. DHX noted at its AGM that
Teletubbies commanded a 66% share of its target market during the first
week of carriage on CBeebies, the brand used by BBC for children’s
programming. Reviewing the consensus F2017 and F2018 revenue/EBITDA
figures at $325M/$122.6M and $334M/$129.7M, respectively, suggests low,
or one could say, no expectations for real Teletubbies contributions in
F2018. We look for positive revisions.
 China: DHX Media announced on November 16/15 that it had signed two
non-exclusive content distribution deals with SVOD operators in China.
China’s leading online entertainment platform iQiyi (Private) acquired AVOD
and SVOD rights to 400+ half-hours of content. At the same time, DHX Media
announced that it had reached a deal with online video provider LeTV
(Private) for 313 half-hours for its web broadcast rights via Smart TV and set
top box (STB). These deals follow on DHX signing an agreement (September
16/15) to provide 2,500+ half-hours of content to Alibaba Group’s (BABANYSE, NR) VOD service across OTT devices, STBs, and Smart TVs. DHX’s initial
efforts surfaced on November 7/14 when it signed its agreement with
CNTV/CCTV to provide 700+ half-hours. While assigning specific revenue
forecasts is impossible, we could see the joint venture following a trajectory
similar to YouTube (Private) where annualized revenues approached a $9M
run rate within its first three years. We believe the potential significance of
the transaction has been diluted by the inability to assign revenue targets.
We see these deals as international prototypes.
 Acquisitions: The Nerd Corps. acquisition (December 2, 2014) for $50M was
the Company’s last public acquisition. DHX has stated on its last two
conference calls that its pipeline of targets is strong. The Company’s track
record of strategic, accretive acquisitions, tough capital markets, and
increased scale support our confidence and more important, investors’
confidence that further acquisitions will occur and are likely to be positive.
Valuation: DHX shares are currently valued at 10.0x/8.7x C2016/17 EV/EBITDA with
our $13 PT at 16.0x/14.2x C2016/17 EV/EBITDA. Our PT finds primary support
against our five-year DCF forecasts where we have F2015-20 revenue/EBITDA
CAGRs of 11.1%/14.4% (7.25% discount rate, 10.0x terminal EV/EBITDA).
Rob Goff, CFA | 416.933.3351 | rob.goff@europac.ca
Sophia Ren | 416.842.1793 | sophia.ren@europac.ca
Buy Rating
$13.00 Target Price
Projected Return: 75.1%
Valuation: 10.0x EV/F2016 EBITDA
Market Data
Market Capitalization
Net Debt
Enterprise Value
Basic Shares O/S
Fully Diluted Shares O/S
Avg. Daily Volume (M)
52 Week Range
Dividend Yield
936.8
262.3
1,199.1
125.6
126.3
0.42
$6.80 - $9.99
0.8%
Revisions
New
Old
302.7
107.1
$0.46
NC
NC
NC
2015A
264.0
90.2
$0.15
36.0
2.5x
3.9%
2016E
302.7
107.1
$0.46
20.2
2.2x
2.2%
2017E
325.2
116.3
$0.58
32.2
1.8x
3.5%
11.1x
12.7x
17.7x
24.4x
15.9x
42.4x
$11.75
10.0x
11.2x
16.0x
14.4x
27.2x
25.0x
$12.81
8.7x
6.2x
14.2x
11.4x
12.9x
19.8x
2016E Revenue
2016E Adj. EBITDA
2016E EPS
Financial Metrics
FYE - Jun 30
Revenue
Adj. EBITDA
EPS
FCF
Net Debt:EBITDA
FCF Yield
Valuation Data
DCF - Current/Target
EV/EBITDA
Current
Peers
Target
P/E
Current
Peers
Target
Quarterly Data
Revenue
EBITDA
EPS
Q1
Q2
Q3
Q4
2015 43.0
64.3
85.6 71.2
2016 63.9
72.2
86.4 80.1
23.9
29.8 22.8
2015 13.7
26.8
33.3 28.6
2016 18.4
2015 ($0.06) $0.04 $0.14 $0.03
2016 $0.06 $0.10 $0.16 $0.13
Company Description
DHX produces and distributes TV and interactive content for
domestic and international markets. The company focuses
on children's and family entertainment with a library of
9,000+ half-hours of production and 60+ titles including
Caillou, Yo Gabba Gabba!, and Johnny Test. DHX Media is
based in Halifax, Nova Scotia, Canada with facilities in
Halifax, Toronto, Vancouver and London.
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
5.00
4.00
3.00
2.00
1.00
0.00
Volume (M)
Price
www.epccm.ca
Page 5 of 56
DHX.B-TSX | 20 January 2016
Focus Points
Organic Growth: We believe DHX’s consistent double-digit organic growth gets lost within reported
results where acquisitions often dominate y/y growth figures. With its F2015 results, DHX reported its
organic and acquisition driven growth on a divisional basis. From the divisional figures, we calculated that
overall organic growth was 26% for the year. We note that production revenues increased by 69% in
F2015 to $70.7M or 27% of total revenues with organic growth of $20M or 29%y/y, as delivered content
increased 31% y/y from 171 half-hours to 224 half-hours, and the average price increased 24% from
$137K to $170K per half-hour. We believe the 31% volume growth and 24% price gains have been very
much overlooked in the market. The volume growth is a key consideration given it represents additional
IP to the Company that then moves to distribution globally and offers M&L opportunities in names with
the potential for extended shelf lives of up to 20 years.
Mattel Partnership: DHX Media announced on December 16 that it has formed a long-term partnership
with Mattel for the development, production, and distribution of new content for the Mattel properties
Bob the Builder™, Fireman Sam™, Little People® and Polly Pocket™. The broader market did not respond
to the announcement and we encountered various interpretations of the deal. Under the new and
incremental partnership structure, DHX Media will produce new content across all platforms for the four
properties while DHX Media will distribute both new and existing programming for the properties.
Essentially, DHX Media is levering its strengths in development, production and distribution while Mattel
will continue to play to its strength in toy development and merchandising. The structure enables DHX
Media to fully qualify for the government credits for the new show productions.
DHX Media will pay a low eight-digit figure (we estimate $10-30M) with half upfront as part of the
partnership. Production under the agreement will be consistent with existing margins while the
distribution revenues will bring significant revenues albeit with lower margins given an undisclosed
revenue sharing agreement. We note that Mattel originally acquired the four properties as part of its
$680M acquisition of Hit Entertainment in October 2011. The key properties identified with the
transaction were Bob the Builder and Thomas the Tank Engine. At the time, Thomas & Friends was put at
~80% of Hit’s profits.
We were modestly surprised at the AGM when the Mattel partnership was presented alongside the
pivotal Cookie Jar (2012, Enterprise Value $111M) and Family Channel acquisitions ($170M, announced
Nov/13.). We believe the importance accorded the partnership reflects the longer-term potential working
with Mattel, Inc. and DHX Media’s strengthened position in structuring similar deals with other content
owners such as Marvel (MRVL-NasdaqGS, NR). We look for the transaction to be debt financed. We could
see DHX Media use the same structure for additional Mattel programs and for alternative prospective
partners.
DreamWorks (DWA-NasdaqGS, NR): DHX Media announced on December 8th that it had signed a fiveyear,
strategic
content
pact
with
DreamWorks
(For
the
full
report:
DreamWorks Strategic Pact Validates Moves, Global Profile.). The move clearly replaced the Disney (DISN, NR) content deal for the Family Channel suite of channels and validates the Company’s decision to
move away from its reliance on reselling Disney content. The deal has three parts:
 DHX essentially became the exclusive content provider of DWA content in Canada. The ~1,200
half-hours of content significantly strengthened DHX’s linear, mobile and OTTP content in Canada.
 DHX gained the same rights to 300 half-hours from ATV (AwesomenessTV – majority owned by
DWA) following an ATV SVOD deal with Verizon (VZ-N, NR). The ATV programming is particularly
strong with teenage girls and fits nicely alongside the Degrassi shows that are being used to
strengthen the Family Channel lineup with a modestly older demographic. Family Channel
viewership was known to peak early and decline, as its young audience went to sleep early! Adding
the older shows is a smart strategy to build audience levels when they previously would have
declined. It should be noted that DHX successfully levered the brand strength of Degrassi with its
exclusive Netflix (NFLX-NasdaqGS, NR) deal for Degrassi, The Next Class. These shows represent a
strong core to Family Channel’s announced teen block, F2N, launching in January of 2016.
Page 6 of 56
 With the agreement, DHX secured an incremental content contract to produce 130 half-hours of
new content that it will be co-producing with DWA. Beyond the production business, DHX will
benefit from an ongoing stake in the global economics of the shows.
It is fair to say that the announced deal is clear evidence of DHX’s strong position as a producer,
broadcaster and distributor of youth programming. The deal should be well received for the above
considerations and the validation it provides for the Company’s decision to move away from its Disney
reliance. We felt that deal itself was clear evidence of DHX’s strong position as a producer, broadcaster
and distributor of youth programming. We do not believe the share performance following the
announcement appropriately reflected the positive significance of the DWA partnership for either its
validation of DHX’s decision to move away from reselling Disney content or for its reflection on DHX’s
global profile.
Netflix Supports Bullish Thesis: We refer to Netflix’s Q315 quarter as something of a perfect storm for
DHX. Netflix’s shares saw pressure reflecting disappointing US subscriber growth, concerns towards the
financial pressures of original content, and concerns towards the accounting treatment of original
production while international growth was the bright star. We view children’s programming as a key
weapon in defending N. American market share and in opening new markets. While original programming
is important to Netflix, the argument can be made that DHX is a more efficient supplier and exclusives
could replace internal production for Netflix. We note Netflix’s exclusive deal for DHX’s Degrassi, The Next
Class. We are encouraged that the programming will mesh with the Family Channel line-up, adding a
modestly older demographic at a point in the daily schedule when viewership historically declined with
the younger audiences’ bedtimes. We view this move as further evidence of the advantages of vertical
integration and moving The Family Channel away from “reselling” Disney programming. The advantages
of DHX’s independence outside of Canada were highlighted as a strategic advantage as the discussion has
been building on the potential channel conflicts of Disney and Nickelodeon (Viacom VIAB- NasdaqGS, NR)
with SVOD/OTTP providers. We note that DHX’s definition as a non-vertically integrated provider within
the Canadian definition (broadcast distribution network owning/controlling content such as BCE [BCE-T,
$56.34, Hold, PT $58] with CTV, Rogers [RCI.B-T, $49.87, Buy, PT $56] with City-TV, and Shaw [SJR.B-T,
$27.14, Hold, PT $28] with Corus[CJR.B-T,NR]) acts as strategic leverage for DHX TV where the Canadian
BDUs are facing 3:1 linkage requirements. We are encouraged by DHX TV’s success in renegotiating its
BDU agreements, in particular given investor focus on the perceived risk.
China Opportunity: DHX Media announced on November 16, 2015 that it had signed two non-exclusive
content distribution deals with SVOD operators in China. China’s leading online entertainment platform
iQiyi acquired AVOD and SVOD rights to 400+ half-hours of content. At the same time, DHX Media
announced that it had reached a deal with online video provider LeTV for 313 half-hours for its web
broadcast rights via Smart TV and STB. These deals follow on DHX Media signing an agreement
(September 16/2015) to provide 2,500+ half-hours of content to Alibaba Group’s VOD service across OTT
devices, STBs and Smart TVs. Looking back, we note DHX Media’s efforts stemming back to November 7,
2014 when it signed its agreement with CNTV/CCTV to provide 700+ half-hours of Mandarin content
including Teletubbies, Inspector Gadget, Madeline, Sonic the Hedgehog, and Dennis the Menace.
While assigning specific revenue forecasts is impossible, we could see the joint venture following a
trajectory similar to the YouTube revenues where annualized revenues approached $9M within its first
three years. We believe the potential significance of the transaction has been diluted by the inability to
assign revenue targets. We further believe that the significance of the transaction as a prototype for
additional markets has been lost. (For the full report: FQ116 Supports Thesis; Modest Positive Forecast
Revisions.)
Post the FQ415 release, CEO, Dana Landry was quoted on BNN stating that Asian revenues could reach
as much as $50M. On the quarterly conference call (September 28/15), DHX indicated it was “woefully
under-represented” and that the Company would look for further partnerships and contracts in Asia. We
believe that the seemingly aggressive $50M target (F2015 revenues were <$1M) was benchmarked
against the $92.4M of revenues derived from the US in F2015 (37% of total) against $25.3M in F2013
(26% of total). DHX’s first moves into China were strategically designed starting with the government JV
for the SVOD service announcement that it will supply more than 700 half-hours of Mandarin content,
Page 7 of 56
which launched last quarter. The next significant move was the September 16, 2015, announcement of its
contract with Alibaba for its OTTP service. The Alibaba connection offers the potential to expand into
merchandising given Alibaba’s ecommerce capabilities. We note that DHX has signed on with an
additional six OTTP providers in China over the past six months.
We note that the SVOD market in N. America is forecast at $5.1B against the movie rental market at
$4.6B (2014 SVOD $4.0B, Movie Rental $5.3B), as SVOD revenues surpassed movie rentals for the first
time, marking a significant change in market shares looking back to C2011 when movie rentals dominated
at $6.8B and SVOD was put at $1.6B (source: nScreenMedia).
Exhibit 1 – US Movie Rental Revenue vs. SVOD Revenue 2011-2015
Source: nScreenMedia, 2015, DEG data
According to Ooyala, the Chinese SVOD market is forecast at US$1.2B in C2016 at 6% of the overall payTV revenue in China with an estimated 28.3M subscribers. Ooyala identified premium sports, such as
English Premier League (EPL), as a key content driver to date while the addressable market expands with
China’s fibre-to-the-home build-out (FTTH/B) where coverage is expected to grow 77%+ over the next
two years connecting more that 117M structures, up from ~66M currently.
Digital TV Research forecasts 68.83M SVOD homes in Asia by 2020; this figure was only 1.47M in 2010.
However, in Asia, the SVOD penetration rate among countries is significantly different. In South Korea,
the SVOD service is available to 54.3% of households; however, in Pakistan this figure is only 1.5%. Thus, it
is important to focus on major countries when entering the Asian market. According to the Asia Pacific
OTT TV & Video Forecasts report, China will overtake South Korea to become the second largest country
by SVOD homes in C2020. From the 51.63M SVOD home additions between C2014-2020, China will
supply 11.84M, Japan 12.55M, and India 7.21M. Considering these figures, we agree that China is a wise
market for DHX to enter. With the fast growing Chinese market, we are looking forward to DHX’s further
development and expansion in the Asian and global markets.
Results, Forecasts
Our F2016/17 revenue/EBITDA forecasts at $302.68/$98.16M and $325.16/$109.10M are generally in
line with the consensus at $301.59/$108.82M and $325.22/$122.58M, respectively. We believe our
forecasts have modest upside within the current fiscal year. We see greater upside beginning in F2017
and into F2018, in particular where we believe our M&L revenue forecasts could be materially surpassed.
Page 8 of 56
Below, we compare our F2016 forecast with management guidance updated with its FQ116 results.
Exhibit 2 – DHX F2016 Guidance versus EPC Estimates
2016E
F2016 Guidance
Low
High
Mid
2014
Old Guiance
Mid
EPC
EPC
EPC
Estimates Old Estimates Est. Growth
Revenue
Proprietary Production
40.0
50.0
45.0
NC
42.9
43.4
12.5%
Producer & Service Fee
Combined Production
40.0
80.0
50.0
100.0
45.0
90.0
NC
45.9
88.7
43.6
87.0
40.7%
25.5%
Distribution
M&L - Owned Brands
M&L - Represented
New Media
DHX TV
Total Revenue
Gross Margin
Combined Production
Distribution
M&L - Owned Brands
M&L - Represented
New Media
DHX TV
80.0
24.0
16.0
5.0
68.0
95.0
30.0
20.0
10.0
75.0
87.5
27.0
18.0
7.5
71.5
82.5
NC
15.0
NC
NC
87.7
27.5
18.9
7.7
71.9
87.2
26.6
15.4
6.6
74.9
273.0
330.0
301.5
302.4
297.7
36.0%
36.0%
42.0%
42.0%
39.0%
39.0%
NC
NC
38.6%
36.5%
41.3%
37.5%
65.0%
55.0%
95.0%
20.0%
75.0%
65.0%
100.0%
30.0%
70.0%
60.0%
97.5%
25.0%
NC
NC
NC
NC
67.7%
59.6%
98.1%
24.6%
70.1%
62.9%
100.0%
23.0%
NC
55.0%
65.0%
60.0%
Total Gross Margin
Gross Profit
Combined Production
Distribution
M&L - Owned Brands
M&L - Represented
New Media
DHX TV
54.1%
62.0%
58.4%
14.4
14.4
28.8
52.0
13.2
15.2
1.0
37.4
21.0
21.0
42.0
71.3
19.5
20.0
3.0
48.8
17.7
17.7
35.4
61.6
16.4
17.6
2.0
42.9
Total Gross Profit*
147.6
204.5
176.1
SG&A
Share-based Compensation
Finance Expense
Amortization/Development Expense
Tangible Benefit Obligation Expense
Other
Total Opex
Pre-Tax Profit
60.0
2.0
14.5
23.0
2.0
2.0
101.5
46.1
66.0
3.0
17.5
28.0
4.0
3.0
117.5
87.0
63.0
2.5
16.0
25.5
3.0
2.5
109.5
66.6
NC
NC
58.1
NC
14.7
NC
NC
62.0
NC
NC
NC
NC
NC
52.6%
57.9%
55.3%
57.9%
16.5
16.8
33.3
59.4
16.4
18.5
1.9
37.8
17.9
16.4
34.3
61.1
16.7
15.4
1.5
43.4
167.3
172.4
66.6
2.6
15.6
26.2
3.0
2.5
113.4
53.9
64.5
3.2
16.7
23.9
3.0
0.0
12.9%
37.2%
31.5%
50.5%
-5.6%
Commentary
Our Proprietary production revenue forecasts are modestly
below the midpoint of guidance while our PSF is modestly
above. The Guidance ranges were unchanged for both
ptoduction and production service revenue.
Strong Q116 results, supported moving up the distribution
revenue from $75-90 to $80-95M and M&L represented
revenue from $14-16M to $16-20M. We are generally in line
to modestly above the mid-points. Our discribution growth
while at the high end implies 12.9% growth significantly
below the 68% organic growth in F2015.
We moved our proprietary margins lower than the mid point
of guidance. Our conservative stance on PSF similarly
considers last years margins.
Our margins are generally in line with guidance ranges. Our
DHX TV margins are modestly below the range as we allow
for higher programing costs that could initially dilute
potential program synergies of $12-$14M.
Just below the midpoint due conservative DHX TV margin
-2.0%
56.0%
20.5%
17.8%
34.1%
42.7%
65.9%
-9.7%
12.7%
-39.7%
-30.8%
151.9%
Proprietary is below the midpoint while PSF is just in line.
The Distribution and M&L representative Gross Profit
guidance went up $3.5M and $2.9M driven by higher
revenue guidance. We are generally in line with the
midpoint of guidance ranges although holding on to upside
at DHX TV and Distribution in particular.
We are generally a snick above the midpoint such that our
total opex is $4M above midpoint. Could see higher as a
good thing where it is support of higher merchandising and
licensing where significant royalties should really gain
traction in CQ416 or FQ117 for DHX.
2015
2014
Actual
2015
Actual
Total
y/y G%
23.5
38.1
62%
29%
33%
18.4
41.8
32.6
70.7
77%
69%
10%
68%
40.9
17.3
12.2
3.9
87.8
77.7
20.0
14.4
5.1
76.2
90%
16%
18%
30%
-13%
22%
4%
0%
5%
100%
68%
12%
100%
25%
0%
60%
40%
204.0
264.0
29%
38.2%
44.0%
40.8%
70.0%
57.3%
100.0%
42.2%
44.3%
32.9%
39.1%
64.9%
61.0%
90.4%
22.3%
16.0%
-25.2%
-4.1%
-7.2%
6.4%
-9.6%
-47.2%
70.0%
55.0%
-21.4%
64.2%
0.0%
-100.0%
9.0
8.1
17.1
28.6
9.9
12.2
1.7
16.9
10.7
27.6
50.4
12.2
13.0
1.1
41.9
88%
33%
62%
76%
23%
7%
-31%
34.3
1.6
11.4
17.1
59.1
4.3
22.5
10.4
72%
168%
97%
-39%
2.0
66.3
64.6
4.6
100.9
-100.9
134%
0.5
-2.6
Acquisition Organic
y/y G%
y/y G%
Source: Euro Pacific Canada, Company Reports and Filings, Capital IQ
Page 9 of 56
Exhibit 3 – F2016 DHX Quarterly Revenue Breakdown- EPC Estimates vs. Guidance
Quarterly Revenue Breakdown - Forecasts vs Guidance
Q116
Q216
Q316
Q416
2016E
Revenue
63,910
72,237
86,434
80,102
302,683
Production Revenue
4,102
14,080
17,640
7,030
42,852
% of full year-Production
10%
33%
41%
16%
100%
Guidance
10%
35%
40%
15%
40-50M
Distribution Revenue
14,034
15,988
29,874
27,823
87,719
% of full year-Distribution
16%
18%
34%
32%
100%
New Guidance
15-20% 15-20% 30-35% 30-35%
80-95M
Old Pre Q116 Guidance
NC
NC
NC
NC
75-91M
Producer and Service Fee Revenue
14,030
10,930
10,096
10,839
45,894
% of full year-Service
31%
24%
22%
24%
100%
New Guidance
31%
25%
25%
19%
40-50M
25%
30%
25%
20%
NC
M&L-owned Revenue
4,710
7,000
7,600
8,175
27,485
% of full year-ML owned
17%
25%
28%
30%
100%
Guidance
24-30M
M&L-represented Revenue (CPLG)
6,707
3,306
3,745
5,115
18,873
% of full year-ML Rep.
36%
18%
20%
27%
100%
New Guidance
16-20M
14-16M
New Media Revenue
1,230
1,653
2,153
2,653
7,689
% of full year-Media
16%
21%
28%
35%
100%
Guidance
5-10M
DHX TV
18,820
19,281
15,326
18,468
71,894
% of full year-TV
26%
27%
21%
26%
100%
Guidance
68-75M
Source: Euro Pacific Canada, Company Reports and Filings
Page 10 of 56
Exhibit 4 – Forecasts, Consensus, Comments
DHX
All units in '000 CAD, unless otherwise indicated
Financial Summary
Revenue
Growth y/y
Pro Forma Revenue
Growth y/y
Q116
Q216
Q316
Q416
2016E
2017E
2018E
2019E
2020E
63,910
43.9%
63,910
48.5%
72,237
12.4%
72,237
12.4%
86,434
5.1%
86,434
1.0%
80,102
7.6%
80,102
12.6%
302,683
14.4%
302,683
14.6%
325,157
6.0%
325,157
7.4%
360,420
10.8%
360,420
10.8%
401,596
11.4%
401,596
11.4%
15-20E
Fiscal
CAGR
444,214
11.0%
10.6%
444,214
10.6%
Consensus
58,089
72,217
82,723
77,168
303,523
328,353
321,139
322,359
353,163
EBITDA
14,044
24,943
31,804
27,367
98,158
109,097
126,721
147,879
169,032
13.4%
Adj. EBITDA (DHX Definition)
18,372
26,784
33,345
28,608
107,109
116,256
134,286
155,883
177,509
14.5%
Flow-through
22.2%
36.5%
415.9%
64.9%
43.7%
40.7%
51.1%
52.4%
50.7%
Growth y/y
33.8%
12.2%
11.9%
25.4%
18.7%
8.5%
15.5%
16.1%
13.9%
Margin
Consensus
28.7%
17,766
37.1%
24,481
38.6%
32,675
35.7%
30,502
35.4%
109,093
35.8%
122,969
37.3%
129,683
38.8%
155,800
40.0%
176,700
Capex
Intensity
Consensus
-478
-0.7%
-675
-1,264
-1.8%
-871
-1,513
-1.8%
-954
-1,402
-1.8%
-917
-4,657
-1.5%
-4,532
-5,690
-1.8%
-6,031
-6,307
-1.8%
-4,006
-7,028
-1.8%
-4,250
-7,774
-1.8%
-4,500
34.1%
EPS - Diluted
Growth y/y
Consensus
Number of Estimates
CFPS
Growth y/y
Consensus
Number of Estimates
FCF
$0.06
-194.1%
$0.04
10
-$0.18
-3650.7%
$0.04
1
-22,877
$0.10
130.9%
$0.07
6
$0.01
-140.7%
$0.07
2
346
$0.16
12.1%
$0.12
5
$0.13
-50.1%
$0.20
2
13,885
$0.13
344.4%
$0.11
5
$0.17
122.6%
$0.18
2
18,872
$0.46
194.5%
$0.39
10
$0.12
-63.0%
$0.30
4
10,226
$0.58
26.8%
$0.47
10
$0.30
143.3%
$0.49
4
30,700
$0.73
26.2%
$0.54
3
$0.71
134.7%
$0.67
3
80,037
$0.89
21.2%
NA
NA
$0.93
31.8%
$0.99
1
108,142
$1.04
16.9%
NA
NA
$1.15
23.4%
$1.20
1
136,237
111.4%
FCFPS
-$0.18
$0.00
$0.12
$0.16
$0.09
$0.25
$0.66
$0.88
$1.09
10.9%
13.5%
Q116
Q216
Q316
Q416
2016E
2017E
2018E
2019E
2020E
15-20E
4,102
14,080
17,640
7,030
42,852
46,210
49,090
52,102
55,250
23.0%
-26%
14%
17%
37%
13%
8%
6%
6%
6%
6%
19%
20%
9%
14%
14%
14%
13%
12%
1,540
5,350
5,998
3,656
16,544
19,408
20,618
21,883
23,205
38%
38%
34%
52%
39%
42%
42%
42%
42%
39
64
72
38
213
223
230
237
244
105
220
245
185
201
207
213
220
226
39
84
83
96
78
87
90
92
95
14,034
15,988
29,874
27,823
87,719 100,876 114,999 129,949 146,842
36.2%
40%
25%
-2%
14%
13%
15%
14%
13%
13%
21%
22%
35%
35%
29%
31%
32%
32%
33%
8,200
13,749
23,003
14,468
59,420
64,561
73,599
83,167
93,979
58%
86%
77%
52%
68%
64%
64%
64%
64%
14,030
10,930
10,096
10,839
45,894
50,025
54,027
57,269
60,705
21.0%
102.2%
65.0%
23.0%
0.0%
40.7%
9.0%
8.0%
6.0%
6.0%
20.6%
15.1%
11.7%
13.5%
15.0%
15.4%
15.0%
14.3%
13.7%
5,060
4,809
3,635
3,252
16,755
18,263
19,724
20,908
22,162
36.1%
44.0%
36.0%
30.0%
36.5%
36.5%
36.5%
36.5%
36.5%
4,710
7,000
7,600
8,175
27,485
33,177
46,919
63,345
77,837
17.0%
72%
6%
19%
91%
37%
21%
41%
35%
23%
7%
10%
9%
10%
9%
10%
13%
16%
18%
2,600
3,990
2,432
7,358
16,380
19,772
27,961
37,750
46,386
55.2%
57.0%
32.0%
90.0%
59.6%
59.6%
59.6%
59.6%
59.6%
6,707
3,306
3,745
5,115
18,873
21,138
23,251
25,577
28,134
24.8%
125.1%
7.0%
7.0%
7.0%
31.5%
12.0%
10.0%
10.0%
10.0%
9.8%
4.6%
4.3%
6.4%
6.1%
6.5%
6.5%
6.4%
6.3%
6,710
3,207
3,633
4,961
18,511
20,732
22,805
25,086
27,595
100.0%
97.0%
97.0%
97.0%
98.1%
98.1%
98.1%
98.1%
98.1%
1,230
1,653
2,153
2,653
7,689
6,151
5,229
4,444
3,778
0.1%
46%
86%
278%
-6%
50%
-20%
-15%
-15%
-15%
2%
2%
2%
3%
3%
2%
1%
1%
1%
406
380
495
610
1,891
1,415
1,203
1,022
869
33%
23%
23%
23%
25%
23%
23%
23%
23%
18,820
19,281
15,326
18,468
71,894
67,580
66,904
68,912
71,668
-3.2%
5.0%
-12.0%
-15.0%
-17.0%
-5.6%
-6.0%
-1.0%
3.0%
4.0%
27.6%
26.7%
17.7%
23.1%
23.4%
20.8%
18.6%
17.2%
16.1%
6,218
10,990
9,349
11,265
37,822
40,548
40,812
42,725
44,434
Operating/Segmented Summary
Production Revenue
Growth y/y
% of total
Gross Margin ($)
Gross Margin (%)
Output (Half Hours)
Revenue/Half Hour
Gross Profit/Half Hour
Distribution Revenue
Growth y/y
% of total
Gross Margin ($)
Gross Margin (%)
Producer and Service Fee Revenue
Growth y/y
% of total
Gross Margin ($)
Gross Margin (%)
M&L-owned Revenue
Growth y/y
% of total
Gross Margin ($)
Gross Margin (%)
M&L-represented Revenue (CPLG)
Growth y/y
% of total
Gross Margin ($)
Gross Margin (%)
New Media Revenue
Growth y/y
% of total
Gross Margin ($)
Gross Margin (%)
DHX TV
Growth y/y
% of total
Gross Margin ($)
Gross Margin (%)
33.0%
57.0%
61.0%
61.0%
52.6%
60.0%
61.0%
62.0%
62.0%
176.5%
We hold back 2017/18 forecast revenues to
conservatively allow for revenue declines of
$4.3M/$0.7M at DHX TV. We believe our
forecasts leave significant upside on Distribution
and M&L.
Our F2016 is largely in line with consensus. We
are taking a conservative stance on F2017 but
are optimistic we will move up to the consensus.
We believe our above consensus F2018 is
conservative.
We forecast modest F2016 FCF given production
expansion and moves to upfront programming
purchases away from monthly payment with
Disney. Production accounting and cash profiles
see a 4 year cash cycle - a negative when
ramping but a huge competitive moat.
Comments
We are likely to upgrade our revenue growth
profile to reflect the Mattel partnership. Margins
under the contract should be consistent with
past levels. Further details are likely to be
provided.
We would describe our forecast growth more
along the lines of conservative extrapolation
with significant upside in new region expansion.
We forecast modest growth. We could see lower
P&SF revenues with capacity displaced for IP
generating proprietary production.
We are optimistic that our $5.5M/$14M
revenue pick-up in F2017 and F2018 prove
conservative given Teletubbies traction.
Success to date plus international growth
potential could support higher growth.
We forecast annual declines pending
confirmation of UMIGO's outlook post grants.
We belive our forecasts reflect programming
costs that should support higher revenues.
Should revenues mirror our forecasts we could
see margins expand.
Page 11 of 56
DHX Media Ltd. (DHX.B-T, $7.46) - Data Sheet
$12.00
Last Sale Price
50-Day MA
200-Day MA
7
Volum e (M Shares)
$10.00
Stock Price ($)
BUY | PT: $13.00
Company Description
8
6
$8.00
5
4
$6.00
3
$4.00
2
$2.00
3 Mths Ago
Current
Return
Rating:
Target:
Median:
High:
Low:
Outperform Outperform
$11.04
$11.23
$11.00
$11.00
$15.75
$15.75
$9.00
$9.30
51.4%
48.3%
111.9%
25.5%
Consensus Distribution
Sector Outperform/Buy
Sector Perform/Hold
Sector Underperform/Sell
# Est
Jan-16
Dec-15
Oct-15
Nov-15
Sep-15
Jul-15
Aug-15
May-…
0
Jun-15
Apr-15
Mar-15
Jan-15
Feb-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
May-…
Apr-14
Feb-14
Mar-14
$0.00
Jun-14
1
DHX produces and distributes TV and interactive content for
domestic and international markets. The company focuses on
children's and family entertainment with a library of 9000+
half-hours of production and 60+ titles including Caillou, Yo
Gabba Gabba!, and Johnny Test. DHX Media is based in
Halifax, Nova Scotia, Canada with facilities in Halifax,
Toronto, Vancouver and London.
Consensus
8
3
0
11
Historical Valuations
CAPITAL IQ - CONSENSUS BASED NTM EV/EBITDA
TSX:DHX.B
17.0x
CAPITAL IQ - CONSENSUS BASED NTM EV/SALES
TSX:CJR.B
6.0x
LSE:ETO
15.0x
5.0x
13.0x
4.0x
11.0x
3.0x
9.0x
DHX Media Ltd.
Corus Entertainment Inc.
Entertainment One Ltd.
Jan-16
Dec-15
Oct-15
Nov-15
Sep-15
Jul-15
Aug-15
Jun-15
Apr-15
May-15
Mar-15
Jan-15
Feb-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Feb-14
Jan-16
Dec-15
Oct-15
Nov-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Feb-15
Mar-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
0.0x
Feb-14
1.0x
3.0x
Mar-14
5.0x
Mar-14
2.0x
7.0x
Key Financial Metrics
Financial Summary/Key Metrics
Consolidated
Revenue
Growth y/y
Cons.
Cons. 3 Mts. Ago
Pro Forma Revenue
Adj. EBITDA
Growth y/y
Margin
Flow-Through
Cons.
Cons. 3 Mts. Ago
Pro Forma Adj. EBITDA
EPS
Growth y/y
Cons.
Cons. 3 Mts. Ago
Cash
Net Debt
2015
Q116
Q216
Q316
Q416
2016E
2017E
2018E
2019E
2020E
Value
$9.99
$6.80
418
126
937
262
1,199
0.8%
Jun 30
365
34%
(9%)
264.0
127.4%
118.1
118.1
264.0
90.2
143.6%
34.2%
36.0%
36.7
36.7
97.7
$0.15
83.5%
NA
NA
42.9
239.9
63.9
48.5%
49.0
49.0
63.9
18.4
33.8%
28.7%
22.2%
15.6
15.6
22.9
$0.06
(192.4%)
$0.05
$0.05
25.5
262.3
72.2
12.4%
65.0
65.0
72.2
26.8
12.2%
37.1%
36.5%
22.4
22.4
26.8
$0.10
132.6%
$0.08
$0.08
11.5
276.4
86.4
1.0%
68.8
68.8
86.4
33.3
11.9%
38.6%
415.9%
23.7
23.7
33.3
$0.16
12.5%
$0.08
$0.08
22.2
265.6
80.1
12.6%
65.7
65.7
80.1
28.6
25.4%
35.7%
64.9%
22.1
22.1
28.6
$0.13
346.8%
$0.06
$0.06
40.8
247.0
302.7
14.6%
257.8
257.8
302.7
107.1
18.7%
35.4%
43.7%
89.4
89.4
111.6
$0.46
198.9%
$0.33
$0.33
40.8
247.0
325.2
7.4%
303.5
294.7
325.2
116.3
8.5%
35.8%
40.7%
109.1
106.7
116.3
$0.58
26.8%
$0.39
$0.37
70.3
212.6
361.5
11.2%
328.4
313.8
361.5
134.3
15.5%
37.2%
49.8%
123.0
121.2
134.3
$0.73
26.2%
$0.47
$0.47
150.7
127.2
403.6
11.6%
321.1
323.7
403.6
155.8
16.0%
38.6%
50.9%
129.7
134.9
155.8
$0.89
21.1%
$0.54
$0.53
252.0
20.8
446.3
10.6%
322.4
323.4
446.3
176.7
13.5%
39.6%
49.0%
155.8
NA
176.7
$1.03
16.4%
NA
$0.58
381.0
(113.2)
38.1
62.2%
16.9
77.7
89.9%
50.4
32.6
77.5%
10.7
20.0
15.8%
12.2
14.4
17.9%
13.0
5.1
30.0%
1.1
4.1
-26.2%
1.5
14.0
40.5%
8.2
14.0
102.2%
5.1
4.7
71.9%
2.6
6.7
125.1%
6.7
1.2
46.4%
0.4
18.8
5.0%
6.2
14.1
13.9%
5.4
16.0
25.0%
13.7
10.9
65.0%
4.8
7.0
5.7%
4.0
3.3
7.0%
3.2
1.7
85.7%
0.4
19.3
(12.0%)
11.0
17.6
17.2%
6.0
29.9
(2.0%)
23.0
10.1
23.0%
3.6
7.6
18.8%
2.4
3.7
7.0%
3.6
2.2
277.7%
0.5
15.3
(15.0%)
9.3
7.0
37.5%
3.7
27.8
14.0%
14.5
10.8
3.3
8.2
91.5%
7.4
5.1
7.0%
5.0
2.7
(5.6%)
0.6
18.5
(17.0%)
11.3
42.9
12.5%
16.5
87.7
12.9%
59.4
45.9
40.7%
16.8
27.5
37.2%
16.4
18.9
31.5%
18.5
7.7
50.5%
1.9
71.9
(5.6%)
37.8
46.2
7.8%
19.4
100.9
15.0%
64.6
50.0
9.0%
18.3
33.2
20.7%
19.8
21.1
12.0%
20.7
6.2
(20.0%)
1.4
67.6
(6.0%)
40.5
49.1
6.2%
20.6
114.5
13.5%
73.3
54.0
8.0%
19.7
46.9
41.4%
28.0
23.3
10.0%
22.8
6.8
10.0%
1.6
66.9
(1.0%)
40.8
52.1
6.1%
21.9
129.4
13.0%
82.8
57.3
6.0%
20.9
63.3
35.0%
37.7
25.1
8.0%
24.6
7.4
10.0%
1.7
68.9
3.0%
42.7
0.0
0.0%
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0%
0.0
0.0
0.0
0.0
0.0
Price
Target
Div Yield
Return
1 Week
1 Month
3 Month
YTD
1 Year
F2016E
F2017E
F2016E
F2017E
F2016E
F2017E
$7.46
$10.84
$4.20
$27.83
£2.17
$25.49
$13.00
$12.25
$5.44
$42.47
£3.50
$23.33
0.8%
10.2%
1.3%
0.7%
2.4%
75.1%
23.2%
29.5%
53.9%
62.4%
(8.5%)
32.1%
(5.9%)
(7.4%)
2.4%
(5.4%)
(7.5%)
(0.9%)
(3.8%)
(10.7%)
3.6%
4.5%
(14.0%)
(14.5%)
(1.2%)
(4.3%)
(10.0%)
(12.5%)
(8.9%)
(29.0%)
(39.3%)
26.0%
(12.7%)
(11.9%)
0.4%
5.0%
(14.1%)
(12.0%)
(1.1%)
(4.4%)
(16.6%)
(50.6%)
(37.6%)
(4.0%)
(48.8%)
15.0%
(25.2%)
303
1,011
613
2,471
1,116
995
325
1,746
626
2,725
1,284
1,089
112
327
52
303
182
125
116
604
60
432
214
180
$0.46
$1.26
$0.09
$1.41
£0.28
$0.58
$0.58
$1.55
$0.40
$2.10
£0.28
$1.05
C2017E
C2015
C2016E
C2017E
11.4x
7.0x
NA
11.9x
7.3x
24.3x
12.6x
28.2x
4.6x
6.8x
25.8x
18.2x
138.1x
38.7x
29.1x
5.1x
4.4x
14.9x
17.1x
186.0x
45.5x
13.9x
5.2x
NA
11.0x
NA
NA
8.1x
Operating/Segmented Summary
Production Revenue
Growth y/y
Gross Margin
Disitribution Revenue
Growth y/y
Gross Margin
Prod. & Service Fee Revenue
Growth y/y
Gross Margin
M&L-owned Revenue
Growth y/y
Gross Margin
M&L-represented Revenue
Growth y/y
Gross Margin
New Media Revenue
Growth y/y
Gross Margin
Family Channel Revenue
Growth y/y
Gross Margin
Key Statistics
52-Week High
52-Week Low
Avg Vol (3-Mo)
Shares Outstanding
Market Cap
Net Debt
Enterprise Value
Div Yield
FYE
Employees
Top Inst. Ownership
M Shares
6 Mnths
% Held
36.09
16.87
15.46
7.88
6.33
3.75
3.58
2.09
1.84
1.33
(1.42)
1.45
0.00
NA
0.00
(2.39)
(0.02)
(0.00)
0.00
0.00
28.7%
13.4%
12.3%
6.3%
5.0%
3.0%
2.9%
1.7%
1.5%
1.1%
Valuation
F2015
F2016E
F2017E
Revenue
EBITDA
Depreciation
Capex
Discretionary CF
Discount Rate
Terminal EBITDA Multiple
264.0
54.8
(10.4)
(4.8)
22.8
302.7
98.2
(22.1)
(4.7)
64.5
7.25%
10.00x
325.2
109.1
(15.5)
(5.7)
97.9
Current
1-Yr TGT
1,293.9
1,484.1
$11.75
1,387.7
1,590.1
$12.81
Luxor Capital
Fiera Capital
Fine Capital Partners
Tybourne Capital Mgmt.
Lioneye Capital
CI Investments
Fiam Llc
Pembroke Management
Pleasant Lake
BMO Investments
Terminal Value PV
Equity Value
DCF Value
Comparables
Comparables
and Peer Analysis
DHX Media
Corus
TVA
Lion's Gate
Entertainment One
Dreamworks Animation
Peer Average
Comparables
Multiples Analysis
DHX Media
Corus
TVA
Lion's Gate
Entertainment One
Dreamworks Animation
Peer Average
Enterprise
FCF Yield
Return
EV/EBITDA
Revenue
EV/EBITDA - Target
EBITDA
EPS
P/E
Value
F2016E
F2017E
C2015
C2016E
C2017E
C2015
C2016E
C2017E
1,199
1,735
239
5,574
1,009
2,542
2.2%
20.5%
6.2%
3.5%
0.3%
1.3%
6.4%
3.5%
17.6%
14.9%
7.4%
6.5%
21.1%
13.5%
11.1x
7.6x
2.2x
22.9x
7.1x
33.9x
14.8x
10.0x
8.3x
7.9x
15.9x
6.3x
22.4x
12.2x
8.7x
6.4x
NA
11.7x
6.0x
NA
8.0x
17.7x
8.0x
2.4x
32.5x
10.0x
31.3x
16.8x
16.0x
8.7x
9.8x
22.6x
9.0x
20.8x
14.2x
14.2x
6.8x
NA
16.5x
8.7x
NA
10.7x
C2015
24.4x
8.2x
NM
20.8x
8.9x
NM
12.6xNA
C2016E
14.4x
8.0x
49.4x
14.4x
7.8x
43.8x
24.7xNA
P/CFPS
*Non-coverage names reflect consensus, 2014 numbers for DHX are based on actual results
$0.00
Page 12 of 56
DHX Media Ltd. - Valuation Analysis
Terminal
EBITDA
Multiple
7.75%
$13.71
$13.16
$12.61
$12.06
$11.51
8.25%
$13.49
$12.95
$12.41
$11.87
$11.33
Consensus Indexed EV/EBITDA
DHX
Corus
Dreamworks
25.0x
15.0x
5.0x
Sep-15
Nov-15
Jan-16
Sep-15
Jan-16
Jul-15
Jul-15
Nov-15
May-15
May-15
Jan-15
Mar-15
Nov-14
Jul-14
Sep-14
May-14
Jan-14
Mar-14
Nov-13
(5.0x)
Consensus Indexed P/E
DHX
Corus
Dreamworks
Mar-15
Jan-15
Sep-14
Nov-14
Jul-14
Mar-14
May-14
Jan-14
Sep-13
35.0x
15.0x
(5.0x)
(25.0x)
Nov-13
Current
Target
C2014 C2015E C2016E C2015E C2016E
EV/EBITDA - DHX
12.9x
11.1x
10.0x
17.7x
16.0x
Corus
6.2x
7.6x
8.3x
8.0x
8.7x
Dreamworks
170.8x
33.9x
22.4x
31.3x
20.8x
Entertainment One
9.3x
7.1x
6.3x
10.0x
9.0x
P/E - DHX
63.0x
24.4x
14.4x
42.4x
25.0x
Corus
7.4x
8.2x
8.0x
9.3x
9.0x
Dreamworks
15.5x
NM
43.8x
NM
40.1x
Entertainment One
18.0x
8.9x
7.8x
14.4x
12.6x
P/CFPS - DHX
34.8x
28.2x
29.1x
49.1x
50.7x
FCF Yield - DHX
2.5%
3.0%
2.9%
1.7%
1.6%
Corus
19.5%
20.6%
19.5%
18.2%
17.3%
Dreamworks
-9.1%
0.9%
1.3%
1.0%
1.4%
Entertainment One
-5.2%
-1.1%
5.0%
-0.7%
3.1%
*Non-coverage names reflect consensus
DCF Sensitivity
Discount Rate
6.25%
6.75%
7.25%
$14.39
$14.16
$13.93
$13.81
$13.59
$13.37
$13.23
$13.02
$12.81
$12.65
$12.45
$12.25
$12.08
$11.88
$11.69
0
11.00x
10.50x
10.00x
9.50x
9.00x
Jul-13
1 Year
(16.2%)
(49.0%)
15.0%
(45.2%)
(39.1%)
(1.3%)
37.2%
● For perspec ve, a 1% change in the discount rate adds
$0.42/share, or 3.3%, to our valuation while a 0.5x
increase in the terminal multiple adds $0.56/share, or
4.3%, to the valuation
Sep-13
YTD
(11.5%)
3.6%
(1.1%)
(8.4%)
2.5%
(10.6%)
7.0%
● The DCF produces a current/target valua on of
$11.75/$12.81, from which we derive our $13.00 target
Jul-13
3 Mths
(9.5%)
(9.7%)
26.0%
(33.7%)
(11.1%)
(14.7%)
(2.6%)
● Our DCF valua on is driven by an 7.3% discount rate and
10.00x terminal EBITDA multiple
May-13
1 Mth
(10.2%)
7.0%
(1.2%)
(10.0%)
2.0%
(12.8%)
9.5%
● We prefer DCF valua ons for our new media space over
relative valuations, which leave investors exposed to group
revaluations
$0.42
3.3%
$0.56
4.3%
Mar-13
1Wk
(5.4%)
(4.4%)
(0.9%)
(6.0%)
0.0%
(7.5%)
1.8%
7.3%
$ from 1% in Disc Rate
10.00x
$ from 0.5x in Term Mult
12.68x
71.0%
-0.6%
Current 1-Yr TGT 2-Yr TGT
1,724
1,837
1,906
(240)
(247)
(213)
1,484
1,590
1,694
126
126
126
$11.75
$12.81
$13.84
$8.05
$13.00
$14.00
31.5%
-1.5%
-1.2%
2020E 15-20 CAGR
446
11.1%
25.1%
168
13.9%
-15
Avg.
-8
1.8%
1.7%
-21
139
May-13
Recent Performance
DHX
Corus
Dreamworks
Entertainment One
TVA
Disney
Hasbro
Multiples
2019E
404
148
16.6%
-15
-7
1.8%
-18
121
Jan-13
Enterprise Value
Net Debt
Total Equity Value
Shares Outstanding
DCF Value per Share ($)
Current, Target Share Price ($)
Discount % to DCF Value
2018E
361
127
16.2%
-15
-6
1.8%
-14
110
Mar-13
Discount Rate %
Terminal FCF Multiple
Terminal Value as % of Equity Value
Implied Perpetual Growth Rate of FCF
2017E
325
109
11.1%
-15
-6
1.8%
-14
98
Jan-13
All figures in $M CAD, unless otherwise indicated
DCF
2014
2015
2016E
Revenue
116
264
303
Adj. EBITDA
32
55
98
Growth %
135.5%
71.2%
79.1%
D&A
-17
-10
-22
Capex
-2
-5
-5
Intensity %
2.1%
1.8%
1.5%
Cash Taxes
-4
-14
-16
Unlevered FCF
20
23
65
Page 13 of 56
Important Information and Legal Disclaimers
Euro Pacific Canada Inc. is a member of IIROC and CIPF. The documents on this website have been prepared for the viewer only as an example of strategy consistent with
our recommendations; it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing
strategy. Any opinions or recommendations expressed herein do not necessarily reflect those of Euro Pacific Canada Inc. Euro Pacific Canada Inc. cannot accept any
trading instructions via e-mail as the timely receipt of e-mail messages, or their integrity over the Internet, cannot be guaranteed. Dividend yields change as stock prices
change, and companies may change or cancel dividend payments in the future. All securities involve varying amounts of risk, and their values will fluctuate, and the
fluctuation of foreign currency exchange rates will also impact your investment returns if measured in Canadian Dollars. Past performance does not guarantee future
returns, investments may increase or decrease in value and you may lose money. Data from various sources were used in the preparation of these documents; the
information is believed but in no way warranted to be reliable, accurate and appropriate. Euro Pacific Canada Inc. employees may buy and sell shares of the companies
that are recommended for their own accounts and for the accounts of other clients.
Research Dissemination Policy: All final research reports are disseminated to existing and potential clients of Euro Pacific Canada Inc. simultaneously in electronic form.
Hard copies will be disseminated to any client that has requested to be on the distribution list of Euro Pacific Canada Inc. Clients may also receive Euro Pacific Canada Inc.
research via third party vendors. To receive Euro Pacific Canada Inc. research reports, please contact your Registered Representative. Reproduction of any research report
in whole or in part without permission is prohibited.
U.K. Disclosures: This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian
Investor Protection Fund. EURO PACIFIC CANADA INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE
OF ANALYSTS. The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets
Act 2000 (Financial Promotion) Order 2001. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.
U.S. Disclosures: This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the
Canadian Investor Protection Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Euro Pacific
Canada Inc. is not registered as a broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of
research reports and the independence of research analysts.
ANALYST CERTIFICATION
Company: DHX Media | DHX.B:TSX
I, Rob Goff, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and
will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
IMPORTANT DISCLOSURES
Is this an issuer related or industry related publication?
Issuer
Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject issuer?
If Yes: 1) Is it a long or short position? Yes; and, 2) What type of security is it? Common shares
No
Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer?
No
Does Euro Pacific Canada Inc. or the Analyst have any actual material conflicts of interest with the issuer?
No
Does Euro Pacific Canada Inc. and/or one or more entities affiliated with Euro Pacific Canada Inc. beneficially own common shares (or any other class of common equity
securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. provided financial advice to and/or, either on its own or as a syndicate member, participated in a public offering,
or private placement of securities of this issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. received compensation for having provided investment banking or related services to this Issuer?
No
Has the Analyst had an onsite visit with the Issuer within the last 12 months?
No
Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months?
No
Has the Analyst received any compensation from the subject company in the past 12 months?
No
Is Euro Pacific Canada Inc. a market maker in the issuer’s securities at the date of this report?
No
Page 14 of 56
RATING DEFINITIONS
Buy
The security represents attractive relative value and is expected to appreciate significantly from the current price over the next 12 month time
horizon.
Speculative Buy
The security is considered a BUY but in the analyst’s opinion possesses certain operational and/or financial risks that are higher than average.
Hold
The security represents fair value and no material appreciation is expected over the next 12-18 month time horizon.
Sell
The security represents poor value and is expected to depreciate over the next 12 month time horizon.
Under Review
While not a rating, this designates the existing rating and/or forecasts are subject to specific review usually due to a material event or share price
move.
Tender
Euro Pacific Canada recommends that investors tender to an existing public offer for the securities in the absence of a superior competing offer.
Dropped Coverage
Applies to former coverage names where a current analyst has dropped coverage. Euro Pacific Canada will provide notice to investors whenever
coverage of an issuer is dropped.
RATINGS DISTRIBUTION
Recommendation Hierarchy
Buy
Number of recommendations
% of Total (excluding Restricted)
Hold
Sell
Under Review
Restricted
2
0
2
0
29
21
8
1
5
45%
33%
13%
2%
8%
8
7
2
0
3
40%
35%
10%
0%
15%
Number of investment banking relationships
Speculative Buy
Tender
PRICE CHART, RATING & PRICE TARGET HISTORY
DHX Media Ltd. (TSX:DHX.B)
$14.00
Date
Target (C$)
Rating
9 Aug 2013
$3.80
Buy
16 Sep 2013
$4.00
Buy
$12.00
29 Nov 2013
$6.25
Buy
$10.00
25 Jun 2014
$7.40
Buy
25 Jul 2014
$8.00
Buy
26 Sep 2014
$9.50
Buy
$8.00
$6.00
6 Nov 2014
$4.00
$2.00
$0.00
Jan 13
May 13
Sep 13
Jan 14
May 14
Price
Sep 14
Jan 15
PT Revisions
May 15
Sep 15
Under Review
10 Nov 2014
$11.00
Buy
2 Dec 2014
$11.50
Buy
18 Feb 2015
$12.00
Buy
15 May 2015
$13.00
Buy
Coverage Initiated: Aug 9, 2013
Data sourced from: Capital IQ
Toronto
150 York Street, Suite 1100
Toronto, ON, M5H 3S5
416-649-4273 | 888-216-9779
Oakville
1275 North Service Road, Suite 612
Oakville, ON L6M 3G4
289-348-5936
Vancouver
900 West Hastings Street,
Suite 710, Vancouver BC V6C 1E5
604-453-1382 | 888-216-9779
Montreal
1501 McGill College Avenue Suite 1450
Montréal, Québec H3A 3M8
514-940-5096 | 888-216-9779
Tokyo
Holland Hills Mori Tower
RoP #603 5-11-1 Toranomon, Minato-Ku, Tokyo, 105-0001
+81.90.1470.1684| 888-216-9779
Page 15 of 56
Healthcare & Biotechnology
22 January 2016
CPH-TSX: $5.66 | CPHR-NASDAQ: US$3.97
Douglas W. Loe, PhD MBA | (416) 775-1004 | Doug.Loe@europac.ca
Siew Ching Yeo (Associate) | SiewChing.Yeo@europac.ca
104.7
Ent Val (US$M)
111.0
Cash (US$M)
28.1
34.4
Total debt (US$M)
52 Week Range
$4.77-$18.75
0.2866
Fiscal Year End
Dec-31
Financial Metrics
In US$
2014A
2015E
2016E
Revenue ($M)
29.2
34.0
46.3
EBITDA ($M)
19.8
10.4
16.6
Net Income ($M)
EPS
18.7
(2.2)
5.4
$0.74
($0.09)
$0.21
P/E
EV/EBITDA
5.4x
NA
19.3x
5.6x
10.7x
6.7x
Quarterly Data
In US$M
Q1
Q2
Q3
Q4
2014
7.1
8.0
6.6
7.5
2015E
7.4
8.8
8.5
9.3
2014
4.8
5.8
4.6
4.5
2015E
5.1
2.5
2.5
2.8
REVENUE
Adj EBITDA
Company Description
Cipher is an ON-based specialty pharmaceutical
firm, with early pipeline drugs based on partner
Galephar's CIP platform (Lipofen/(CIP-fenofibrate,
ConZip-Durela/CIP-Tramadol, Absorica-Epuris/CIPisotretinoin), and with active expansion of North
American dermatology footprint through acquisition, including SC-based Innocutis
$20.00
0.5
0.4
$15.00
0.3
$10.00
0.2
$5.00
0.1
Jan-16
0
Oct-15
$0.00
Jul-15
Focus on the ‘flat’ if you wish, but we see that term as far more positive within the
context of our long-term Absorica revenue expectations than the term ‘flat’
normally implies. First of all, Absorica revenue, at what now appears to be steadystate levels, is actually well above our original revenue expectations for this drug
back when it was FDA-approved in FQ212 and launched by Ranbaxy in FQ412. Sun
Pharma does not provide product-specific sales (and Ranbaxy did not either) in its
financial filings, but we infer just by assuming that Cipher’s royalties are about 9% of
Mkt cap (US$M)
Apr-15
Describing Absorica’s royalty revenue growth as flat, while true by our forecasts,
is deceptive because it ignores how positive ‘flat’ actually is in this context. By our
calculation, Cipher’s flagship once-daily super-bioavailable FDA-approved Sun
Pharma-partnered CIP-isotretinoin formulation Absorica has generated impressively
strong but admittedly flat quarterly royalty revenue since about FQ313, with
Cipher’s quarterly share of Absorica gross US sales fluctuating within a US$3.9-5.0M
band over the last nine quarters, though settling in at the top end of this range since
FQ414. Our model projects that Absorica royalty revenue, representing about 9% of
gross sales by US marketing partner Sun Pharma (524715-BOM, NR)/Ranbaxy
Laboratories, will remain stable at or near US$5.0-5.2M (or about US$20-21M
annually) out to F2018.
26.0
Jan-15
Long-standing top performer within our coverage universe even after considering
challenging F2015 returns. And yet despite all of the legacy gloom-and-doom
described above, we are identifying Cipher as one of our two Top Picks for 2016 (the
other is medical technology developer TSO3 [TOS-T, BUY, PT $3.10], as we describe
separately), and in so doing, returning to a former Top Pick of ours in 2014, when
CPH shares returned 121.4% to shareholders holding the stock for the full-year
duration. We believe that capital markets will see the Innocutis acquisition more for
its revenue growth potential in future quarters than for its more modest trailing
revenue already achieved, if not in FH116 then certainly by FH216. We separately
believe that capital markets are dramatically undervaluing Absorica’s free cash flowgenerating capabilities, the extent to which that has been de-risked in recent
months, and the extent to which the drug mitigates Cipher’s financial risk and
growth prospects overall. Accordingly, our investment thesis is focused on the
following core elements of Cipher’s growing dermatology franchise:
Market Data
Basic Shares O/S (M)
Oct-14
Investment Highlights
Revisiting a legacy Top Pick poised to outperform operationally after committing
strategically to building out North American dermatology franchise. So let’s get
the bad news out of the way first – from a capital markets perspective, Cipher had a
year to forget in 2015, experiencing nearly 62% share price decline during which it
had flat quarterly royalty revenue for flagship US dermatology drug Absorica while
simultaneously experiencing EBITDA margin compression from 61-72% (in FQ114FQ115) to 29-30% in FQ215-FQ315 on impact from a strategic dermatology
acquisition consummated early in the year (SC-based Innocutis, in Apr/15). The
macroenvironment for the ever-increasingly scrutinized specialty pharmaceutical
space did not help either, infusing broad capital market caution on average
multiples ascribed to Cipher and its peers.
Valuation: 20x EPS, 12.5x EV/EBITDA (F2017
estimates)
Jul-14
Event: We are identifying Cipher Pharmaceuticals as one of our 2016 Top Picks.
US$13.25 Target
Apr-14
2016 Top Pick
Jan-14
Cipher Pharmaceuticals
Buy Rating
www.epccm.ca
Page 16 of 56
CPH-TSX | CPHR-NASDAQ | 22 January 2016 2015
Company Description
Consensus
Return
Rating:
Cipher Pharmaceuticals is an ON-based specialty pharma-ceutical
firm, with three already-approved & marketed con-trolled-release
oral therapies from its legacy portfolio - Lipofen (CIP-fenofibrate),
ConZip-Durela (CIP-Tramadol), Absorica-Epuris (CIP-isotretinoin) plus newly-acquired Innocutis-derived derm-atology therapies in
Sitavig-Nuvail-Bionect and several licensed dermatology assets
expected to be accretive by F2017/18 (Dermadexin, Pruridexin,
ozenoxacin, CF101)
Dec-15
Oct-15
Nov-15
Sep-15
Jul-15
Aug-15
Jun-15
Apr-15
0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
200-day MA
May-15
Jan-15
50-day MA
Feb-15
Dec-14
Oct-14
Nov-14
Jul-14
Aug-14
Sep-14
Last Sale Price
Mar-15
$20.50
$18.50
$16.50
$14.50
$12.50
$10.50
$8.50
$6.50
$4.50
$2.50
$0.50
Volume (M Shares)
Stock Price ($)
TEARSHEET - Cipher Pharmaceuticals (DND-T, US$3.97, BUY, PT: US$13.25)
Outperform
Target:
$9.32
134.7%
Medi an:
$8.50
114.1%
High:
$13.25
233.8%
Low:
$6.20
56.2%
# Est:
3
Sector Outper/Buy
6
Sector Perform/Hold
0
Sector UnderPerform/Sell
0
NTM EV/EBITDA
30.0x
LTM EV/EBITDA
Cipher
14.0x
Merus
Cipher
10.0x
20.0x
8.0x
15.0x
6.0x
10.0x
Growth y/y
Cons.
Cons. 3 Mts. Ago
2013
2014
1Q-15
2Q-15
3Q-15
4Q-15E
2015E
2016E
26.0
29.2
7.4
8.8
8.5
9.3
34.0
46.3
64.1
382.7%
22.8
22.8
12.4%
32.0
32.0
308.6%
9.0
9.0
442.4%
11.4
11.4
299.4%
11.8
11.8
220.8%
12.8
12.5
16.3%
22.8
22.8
36.1%
32.0
32.0
38.4%
45.1
45.0
19.0
19.8
5.1
2.5
2.5
2.8
10.4
16.6
30.6
Margin
72.9%
14.8
14.8
67.8%
22.3
22.3
68.7%
6.4
6.4
28.7%
4.2
4.2
30.1%
3.0
3.0
30.1%
3.8
3.7
30.4%
14.8
14.8
35.9%
22.3
22.3
47.7%
14.2
15.7
Cons. 3 Mts Ago
Net Income
Adjusted EPS
Cons.
Cons. 3 Mts. Ago
18.7
2.7
(0.4)
(2.2)
0.5
(2.1)
7.2
$0.72
17.6
$0.74
$0.11
($0.02)
($0.09)
$0.01
($0.09)
$0.21
NA
NA
NA
NA
NA
NA
$0.05
$0.05
($0.04)
($0.04)
($0.02)
$0.06
NA
NA
NA
NA
17.5x
$10.71
11.0x
$12.70
Implied value/share
EV/EBITDA Multiple
Implied value/share
One year Cipher Pharmaceuticals Target Price (US$)
20.0x
$12.24
12.5x
$14.46
CPH
Allergan
ACT
Concordia
AGN
Cardinal Health
CAH
Celgene
CELG
Endo Pharmaceuticals
ENDP
Gilead Sciences
GILD
TEVA
Teva
Valeant
VRX
Average
Comparables - Multiples Analysis
21.2
T12
15.3x
2016E
8.3x
2017E
5.2x
21.2x
NA
10.4x
31.0x
25.3x
6.2x
9.8x
12.0x
16.4x
18.0x
3.4x
9.4x
NA
9.4x
6.1x
7.5x
8.8x
8.9x
15.8x
3.2x
8.4x
NA
8.4x
6.2x
7.7x
8.1x
7.9x
Allergan
5.5%
6.5%
7.1%
Concordia
5.7%
22.3%
25.7%
Cardinal Health
7.0%
7.2%
8.0%
Celgene
4.1%
5.3%
6.7%
Endo Pharmaceuticals
5.3%
11.7%
15.5%
13.6%
15.0%
15.3%
8.7%
11.9%
14.1%
10.7%
16.1%
20.3%
Gilead Sciences
Teva
Valeant
Average
T12M
2016E
($0.02)
$0.12
8.2x
5.1x
21.2x
18.0x
15.8x
13.2x
3.3x
3.1x
10.2x
9.2x
8.3x
N/A
14.5x
11.7x
N/A
9.8x
8.7x
6.0x
5.9x
5.9x
9.7x
7.5x
7.6x
12.1x
8.9x
8.2x
12.7x
9.5x
8.3x
Dec-15
Oct-15
Nov-15
Sep-15
Jul-15
Aug-15
Jun-15
34.4
108.9
0.0%
www.cipherpharma.com
Dec 31
12
M Shares
% Held
2.36
1.51
0.75
0.73
0.73
0.64
0.53
0.45
0.30
0.22
9.1%
5.8%
2.9%
2.8%
2.8%
2.5%
2.0%
1.7%
1.2%
0.8%
Forecast
EBITDA
2016E
1-Year
T12M
2017E
13.1
21.0
7.1
(67.8%)
7.3% 7,641.6 8,986.2 10,249.2
(23.4%)
162.0
616.5
649.8
(2.3%) 2,842.0 3,148.8 3,511.7
(13.7%) 2,866.2 6,283.5 7,744.3
(29.4%)
782.2 2,112.1 2,371.5
(14.2%) 22,435.0 22,694.3 22,388.7
6.0% 6,548.0 8,500.8 8,358.0
(42.5%) 4,971.6 6,755.5 7,395.1
(20.0%)
EV/Revenue
16.2x
Apr-15
103.1
Top Institutional Ownership
Montrusco Bolton Investments Inc.
Grandeur Peak Global Advisors, LLC
RBC Global Asset Management Inc.
Intact Investment Management Inc.
Acadian Asset Management, Inc.
O'Shaughnessy Asset Management, LLC
Taylor Asset Management, Inc.
Raffles Associates LP
Armistice Capital LLC
AWM Investment Company Inc.
22.5x
$13.77
14.0x
$16.22
2017E
May-15
Feb-15
Mar-15
Jan-15
26.0
Market Cap:
Employees:
Target - EV/EBITDA
Current - EV/EBITDA
2017E
11.5%
0.28
Shares O/S:
FYE:
$0.61
% Return
Trading Current Target Dividend
Market Enterprise
CCY
Price
Price
Yield % Return
Cap
Value
1-Week 1-Month 3-Month
0.0%
134.1%
$13.25
CAD
$5.66
147.0
155.5
(7.2%) (12.0%)
(0.7%)
USD
$295.79 $366.86
0.0%
24.0% 116,606.1 162,154.8
(1.1%)
(4.8%)
10.1%
CAD
$40.31
$50.96
1.0%
27.5%
2,055.6
2,864.8 (14.0%) (22.8%)
(7.8%)
$80.08
$98.50
1.9%
24.9% 26,344.8 29,062.2
(2.1%)
(9.9%)
(0.1%)
USD
$105.46 $142.29
0.0%
34.9% 82,855.2 90,823.6
(0.2%)
(5.1%) (12.2%)
USD
$56.37
$80.68
0.0%
43.1% 12,522.3 20,664.8
4.4% (10.0%)
(0.4%)
USD
$88.87 $123.67
1.9%
41.1% 128,077.7 135,118.7
(4.5%) (13.6%) (17.7%)
USD
USD
$61.99
$77.24
2.7%
27.3% 52,815.5 63,712.5
(1.9%)
(5.7%)
4.1%
USD
$90.27 $154.22
0.0%
70.8% 30,799.3 60,369.0
0.6% (20.2%) (22.3%)
47.5% 50,247.1 62,769.5
(2.9%) (11.6%)
(5.2%)
0.8%
2016E
4.4%
$3.55
Avg Vol (3-Mo)
Website:
$13.25
FCF Yield
2015
0.4%
52-Wk Low (US$):
Div Yield:
Based on F2017 adjusted fully-taxed EPS forecast of US$0.61; adjusted EBITDA forecast of US$30.6M
2
Based on 12.5× EV/EBITDA, 20x EPS (F2017 adj forecasts); FQ315 cash of US$28.0M and LT debt of US$34.4M
Ticker
$15.04
Ent. Value:
1
Comparables and Peer Analysis
Value
52-Wk High (US$):
Net Debt:
Valuation
Price/Earnings Multiple
Dec-14
Nov-14
Oct-14
Key Statistics
2017E
EBITDA
Cons.
Sep-14
Jul-14
Jun-14
Jan-16
Dec-15
Nov-15
Oct-15
Nov-15
Sep-15
Aug-15
Aug-15
Jul-15
Jun-15
Jun-15
May-15
Apr-15
Apr-15
Mar-15
Feb-15
Jan-15
Feb-15
Dec-14
Dec-14
Oct-14
Nov-14
Sep-14
Sep-14
0.0x
Aug-14
2.0x
0.0x
Aug-14
4.0x
5.0x
US$MM except for per share data
Total Revenue
1
Merus
12.0x
25.0x
EPS
2016E
T12
2017E
($0.02)
$0.10
$0.56
($7.37)
$0.14
$4.03
$2.08
($8.41)
$11.42
$2.08
$1.78
$16.44
$6.70
$5.29
$5.74
$6.00
$11.86
$5.56
$13.48
$19.27
$7.66
$6.00
$7.33
$7.03
$12.11
$5.79
$16.39
P/CFPS
P/E
T12M
4.0x
2016E
2.6x
2017E
1.9x
T12
NA
FY1
38.9x
FY2
7.2x
2015
NA
2016E
0.0x
2017E
0.0x
8.3x
8.3x
0.3x
10.1x
5.9x
4.4x
3.2x
6.0x
5.6x
9.2x
8.4x
2.0x
1.9x
0.2x
0.2x
8.1x
6.9x
4.4x
4.0x
4.2x
4.1x
2.8x
2.8x
4.8x
4.4x
4.3x
3.8x
NA
NA
20.2x
49.6x
NA
8.0x
30.0x
49.8x
31.5x
18.0x
4.4x
15.3x
18.0x
8.8x
7.7x
11.3x
6.6x
14.3x
15.3x
3.8x
13.5x
14.1x
7.5x
7.6x
10.8x
5.4x
9.5x
NA
17.7x
13.8x
NA
3.1x
2.3x
NA
10.8x
11.0x
NA
18.0x
13.2x
NA
12.4x
8.7x
NA
7.1x
6.5x
NA
10.6x
10.0x
NA
6.8x
5.6x
NA
9.6x
7.9x
Targets, forecasts and valuations reflect consensus estimates derived from Capital IQ
Page 17 of 56
gross sales, that based on FQ315 run-rate, Absorica US sales are tracking at around US$212M (for the
record, we originally thought peak sales would eventually hit US$120M or so). Legacy CIP-formulated
drugs CIP-fenofibrate (Cipher’s Lipofen) and CIP-Tramadol (Conzip in US, Durela in Canada) are still
generating stable royalty revenue of about $1.3-$1.7M per quarter and despite limited growth prospects
(particularly for Lipofen for which core Orange Book patents expired in FQ115), both formulations still
contribute favourably to quarterly free cash flow, with limited downside from current levels, and thus
providing substantial non-dilutive free cash to fund future dermatology acquisitions, just as Absorica does
though to a more modest scale.
Exhibit 1 — Income Statement & Financial Forecast Data For Cipher Pharmaceuticals
(US$000, except EPS)
2012A
2013A
2014A
2015E
2016E
2017E
2018E
Revenue, ConZip/Durela
1,278
1,963
1,909
1,469
1,661
1,685
1,694
Revenue, Lipofen
4,103
3,317
5,072
4,037
3,185
4,171
4,913
Revenue, CIP-isotretinoin (N.Am)
1,945
13,842
20,444
21,945
24,308
24,989
25,452
Revenue, CIP-isotretinoin (RoW)
0
0
0
25
1,077
2,372
2,904
Revenue, other Cdn
0
0
0
436
1,024
1,500
2,196
Revenue (Ozenoxacin)
0
0
0
0
0
318
688
Revenue, Sitvig (US)
0
0
0
1,488
7,262
16,121
32,980
Revenue, Sitvig (Cda)
0
0
0
0
48
369
1,120
Revenue, Innocutis (non-Sitvig)
0
0
0
3,697
7,720
12,549
18,373
1,142
6,870
1,800
900
0
0
0
$8,469
$25,992
$29,224
$33,996
$46,284
$64,073
$90,320
135%
207%
12%
16%
36%
38%
41%
Milestone payments, other
Total revenue
Revenue growth (%)
Operational expenses
EBITDA
4,798
7,035
9,416
23,646
29,683
33,480
40,969
$3,671
$18,957
$19,808
$10,350
$16,601
$30,594
$49,351
EBITDA growth (%)
NA
416%
4%
(48%)
60%
84%
61%
EBITDA margin (%)
43.3%
72.9%
67.8%
30.4%
35.9%
47.7%
54.6%
Non-operating expenses
$1,273
$1,559
$1,883
$6,151
$6,240
$6,240
$6,240
Net interest expense (income)
($155)
($240)
($441)
$2,842
$3,124
$3,124
$3,124
Tax expense, exc carryforwards
$777
$42
($380)
$1,964
$1,809
$5,307
$9,997
$1,777
$17,595
$18,746
($2,207)
$5,428
$15,922
$29,990
$0.07
$0.72
$0.74
($0.09)
$0.21
$0.61
$1.15
Fully-taxed EPS (fd)
$0.07
$0.67
$0.70
($0.08)
$0.20
$0.58
$1.09
P/E (basic)
55.3x
5.6x
5.4x
NA
19.3x
6.6x
3.5x
EV/EBITDA
30.3x
5.9x
5.6x
10.7x
6.7x
3.6x
2.3x
Adj net inc, tax-affected
Fully-taxed EPS (basic)
Source: Euro Pacific Canada, Cipher Pharmaceuticals
Absorica’s free cash flow-generating capabilities substantially de-risked by negotiating favourable
timelines to generic launch by first-to-ANDA-filer Allergan/Actavis, a fact unrecognized by Cipher’s
current valuation, in our view. But secondly and as importantly, Absorica’s ability to sustain this quarterly
sales performance was substantially de-risked when Cipher and partner Sun Pharma negotiated a timeline
to generic Absorica launch with Actavis/Allergan (AGN-NY, NR), which was the first-to-file an Absorica
ANDA back in FQ313, no earlier than late FQ420. Cipher’s core Absorica patents did not expire until
Sept/21, but we believe that sacrificing three quarters of branded sales exclusivity is a reasonable price to
pay for eliminating generic risk for the next 21 quarters (including FQ415) and thus substantially
mitigating risk from any CIP-like isotretinoin formulations capturing market share from Absorica
imminently. Assuming FQ315 Absorica US royalty revenue is a reasonable run-rate for future royalties,
and excluding added revenue from RoW CIP-isotretinoin sales (notably in Canada, where the Epuris brand
has comparable Rx market share of 19%-20% that Absorica sustains in the US), we believe it is reasonable
to assume Absorica’s cumulative royalty revenue (EBITDA and free cash flow would of course be identical)
of >US$100M, or US$3.86/shr (or if we ascribe a 10% discount rate to projected annual Absorica-derived
Page 18 of 56
free cash, we still derive a sizable discounted value per share of US$3.20), close to CPH/CPHR’s current
share value.
We would have preferred a lower valuation on Innocutis too (and a lower interest rate on debt used to
fund it), but we expect capital markets to shift attention to Innocutis’ growth potential imminently. Our
views on Innocutis have been articulated before, initially following its acquisition in Apr/15 and a few
times since, but just to lay all our cards on the table before espousing the virtues of its acquisition as we
see them, we do have some sympathy for the market’s caution on Innocutis, at least until we see
sustainable upward revenue trajectory on its existing approved product portfolio. According to the
Business Acquisition Report filed with Sedar, the firm has generated T12M operating loss of ($5.6M) and
its US$45.5M acquisition value was mostly funded with 10.25% interest-bearing debt. Thus, Innocutis is
not yet sufficiently profitable to self-fund the financial costs put in place to acquire it, and then layer on
the reality that in the first quarter post-Innocutis integration (FQ215), Cipher’s EBITDA margin declined
sequentially from 68.7% in FQ115 to 28.7% in FQ215, and then overlay this with the fact that many of
Cipher’s recent product acquisitions (ozenoxacin, CF101, Dermadexin, Pruridexin, among others) have
been clinical-stage and not already-approved drugs – well, we get it, honest!!
Exhibit 2 — Valuation Scenarios for Cipher Pharmaceuticals
Price/earnings multiple, F2017
Implied share price
1
EV/EBITDA multiple, F2017
Implied share price
1
10x
15x
17.5x
20x
22.5x
25x
30x
$6.12
$9.18
$10.71
$12.24
$13.77
$15.30
$18.36
5x
10x
11x
12.5x
14x
17.5x
20x
$5.64
$11.52
$12.70
$14.46
$16.22
$20.34
$23.28
One-year Cipher target price
$13.35
1
Based on F2017 adjusted fully-taxed EPS forecast of US$0.61; adjusted EBITDA forecast of US$30.6M
2
Based on 12.5× EV/EBITDA, 20x EPS (F2017 adj forecasts); FQ315 cash of US$28.0M and LT debt of US$34.4M
Source: Euro Pacific Canada, Cipher Pharmaceuticals
But with that as backdrop, we are optimistic that core Innocutis assets Sitavig/Nuvail/Bionect can
perform well in F2016 and beyond. So on Innocutis’ existing pipeline, we are already seeing strong
sequential growth for all three core products in the pipeline, starting with muco-adhesive acyclovir
formulation Sitavig for which gross sales according to IMS Health/Bloomberg data grew impressively by
113% in FQ415 to US$3.6M from US$1.7M in FQ315 (Cipher actually recorded US$0.7M in FQ315 Sitavig
sales, so Cipher’s actual FQ415 Sitavig sales though growing, are likely to be proportionately lower than
the published gross sales data indicated above), a trend we expect to continue throughout F2016. Nail
dystrophy drug Nuvail also grew impressively in FQ415 by 57% to generate branded sales in the quarter of
around US$2.7M versus US$1.7M in FQ315 and hyaluronic acid formulation Bionect was more stable in a
much more crowded market and yet still grew 10% sequentially to US$1.41M from US$1.28M in FQ315.
Accordingly, we are already seeing evidence of Cipher’s marketing strategy on core Innocutis dermatology
assets and we see this as equally strong evidence of Cipher’s already strong marketing bandwidth in its
target medical market (dermatology).
Regulatory milestones also on the horizon for recently acquired, attractively valued dermatology assets,
but valuation impact likely to be more modest than quarterly EBITDA growth could be. It is abundantly
clear that EBITDA-positive Cipher, like its EBITDA-positive specialty pharmaceutical peers, is valued by
capital markets by, well, its EBITDA growth trajectory and less by milestone-driven events that de-risk
future EBITDA growth but for which the market ascribes limited value until the impact on profitability
upside is tangibly realized. Accordingly, we expect modest valuation impact on Cipher’s clinical/regulatory
activities, but that does not mean we are obliged to ignore them and there are many such events that we
indeed do not plan to ignore. These include forthcoming regulatory filing (probably this quarter) of
Ferrer’s (Private) impetigo drug ozenoxacin for which Cipher holds Canadian marketing rights and for
which Health Canada approval by FQ416/FQ117 timeframe seems reasonable to us. We separately
anticipate Health Canada approval by FQ316 for Astion Pharma-licensed nicotinamide formulations
Dermadexin (seborrheic dermatitis) and Pruridexin (chronic itching), both of which were filed in FQ315.
Page 19 of 56
And the recently filed psoriasis-targeted betamethasone-hyaluronic acid patch formulation Beteflam
could separately be Health Canada-approved by FQ416.
Clinical-stage assets in Cipher’s portfolio do not really contribute to valuation at present, but asset
quality (and the modest price to acquire them) is still positive for longer-term growth, in our view.
Other clinical-stage dermatology products on the horizon of course include Can-Fite’s Phase III-stage
adenosine receptor-targeted small-molecule ribofuronamide drug CF-101 (data from a second Phase III
psoriasis study could be available by F2017, as a guess), and the firm could spearhead new clinical studies
for Astion’s Phase II-stage lupus drug ASF-1096 (topical levosalbutamol cream), for which orphan drug
status is already granted in Europe, and for which positive Phase II data from a University of Copenhagen
study was already published back in 2009 in the British Journal of Dermatology, confirming the drug’s
clinical potential in treating lupus suggested by smaller earlier Phase II studies. We like the drug’s medical
prospects based on available data we have reviewed but its development will require EBITDAcompressing R&D capital, thus it may be more prudent to co-develop this asset with partners; Cipher has
not really updated ASF-1096’s development status since acquiring it from Astion back in Feb/15, and it
does not currently contribute to our revenue/EBITDA projections.
Summary & valuation. We are of course maintaining our BUY rating and US$13.25 PT on CPH/CPHR, with
our valuation still based on multiples of our F2017 EBITDA/EPS forecasts (US$30.6M & US$0.61/shr,
respectively) as described in Exhibits 1 and 2. The substantial EBITDA/EPS growth that our F2017
projections imply (we project US$16.6M/US$0.21/shr in F2016) is largely Sitavig/Nuvail/Bionect-driven –
cumulative revenue for those three products projected by us to grow from US$15.0M this year to
US$29.0M in F2017 – though we do expect more widespread regulatory/commercial activities on CIPisotretinoin, mostly in Latin America where the drug is partnered with Sun Pharma in Brazil and
Andromaco (Private) in Chile and where other high-population geographies are equally plausible markets
where Cipher’s pivotal bioequivalency data supporting FDA approval back in May/12 could be just as
favourably received.
Our valuation is solely based on Cipher’s existing commercial or soon-to-be-commercial portfolio and
gives no regard to future acquisitions that Cipher could comfortably fund with available cash (FQ315 cash
was US$28.1M, or US$1.08/shr, giving no effect to FQ415 operating cash that we expect to be in the
US$3M-ish range, as it was in FQ215 and FQ315). At current levels, our PT corresponds to a one-year
return of 233.8%.
Page 20 of 56
Exhibit 3 — Comparable companies for Cipher Pharmaceuticals
Filing
Curr.
Company
Sym.
Shares
Out.
(M)
Share
Price
21-Jan-16
Mkt
Cap
($M)
Ent.
Value
EV/EBITDA
($M) (T12) (2016E) (2017E)
CHH
160.7
$0.25
39
333 12.7
19.9
17.7
Price/Earnings
(T12) (2016E) (2017E)
Profitable Canadian healthcare firms
Centric Health
CAD
NA
NA
NA
Chartwell REIT
CAD
CSH-U
176.4
$12.21
2,154
3,680 16.5
15.7
14.8
NA
NA
NA
USD
CPHR
26.0
$2.78
72
79 11.0
5.9
3.7
NA
24.5
4.5
USD
CXR
51.0
$28.22
1,439
2,043
NA
3.3
3.1
NA
4.2
3.7
CRH Medical
Extendicare REIT
USD
CRH
83.0
$2.45
203
215
NA
6.9
5.8
46.3
11.9
10.0
CAD
EXE
88.0
$8.41
740
1,007 11.7
NA
9.5
42.6
NA
NA
Knight Therapeutics
CAD
GUD
103.5
$6.89
713
258
NA
NA
NA
NA
38.3
NA
USD
CAD
DR
MSL
31.1
102.6
$9.34
$1.85
291
190
334
222
3.4
7.4
3.7
7.2
3.7
5.3
24.8
NA
15.8
NA
14.7
22.3
Nobilis Health
USD
NHC
73.6
$2.00
147
147
6.0
2.3
NA
11.4
5.2
NA
Northwest Healthcare
Patient Home Monitoring
CAD
CAD
NWH-U
PHM
71.9
339.1
$8.33
$0.56
599
190
2,262 NA
147 12.3
14.8
3.1
14.7
NA
NA
NA
9.3
NA
10.2
NA
Pharmacie Jean Coutu
CAD
PJC.A
186.9
$18.26
3,413
3,291 10.2
9.8
10.1
15.7
15.5
15.8
Sienna Senior Living
Valeant Pharmaceuticals
CAD
USD
SIA
VRX
36.5
341.2
$15.71
$90.27
573
30,799
1,158 17.6
60,247 12.1
15.2
8.9
14.4
8.1
NA
50.7
NA
6.7
NA
5.5
11.0
9.0
9.2
31.9
14.6
11.5
18.0
15.8
NA
18.0
15.4
Concordia Healthcare
1
1
Medical Facilities
Merus Labs
1
Average
Profitable specialty pharmaceutical firms
Allergan
USD
AGN
394.2
$295.79
116,606
162,155 21.2
Akorn
USD
AKRX
114.4
$27.58
3,156
4,203 20.2
7.9
7.1
NA
11.7
10.4
BioSyent
CAD
RX
14.0
$6.36
89
81 15.8
12.4
9.6
23.3
19.3
14.8
Cardinal Health
USD
CAH
329.0
$80.08
26,345
29,062 10.2
9.2
8.3
19.9
15.1
13.3
Celgene
USD
CELG
785.7
$105.46
82,855
90,824 31.7
14.5
11.7
50.7
18.3
14.3
USD
CPHR
26.0
$3.97
103
109 15.2
8.2
5.1
NA
34.9
6.5
3.7
1
USD
CXR
51.0
$28.22
1,439
2,043
NA
3.3
3.1
NA
4.2
USD
DEPO
60.5
$15.56
941
1,571
7.4
8.9
7.0
18.7
9.4
8.3
Dr. Reddy Labs
INR
500124
170.6
Rp2,758
Rp470,459
Rp473,482 11.8
11.6
10.9
19.3
17.8
16.9
Endo Health Solutions
USD
ENDO
222.1
$56.37
12,522
20,665 26.4
9.8
8.7
NA
9.4
8.0
Gilead Sciences
USD
GILD
1441.2
$88.87
128,078
6.0
5.9
5.9
7.8
7.5
7.3
Impax Labs
USD
IPXL
70.5
$38.59
2,721
2,822 24.4
9.4
8.3
NA
17.2
13.9
Jazz Pharmaceuticals
USD
JAZZ
61.5
$130.16
8,005
8,295 12.5
Merus Labs
CAD
MSL
102.6
$1.85
190
Mylan
USD
MYL
491.8
$51.44
25,300
Pediapharm
CAD
PDP
63.1
$0.25
16
Shire
USD
SHP
592.1
$41.26
24,428
Concordia Healthcare
DepoMed
2406.6
135,119
8.7
7.1
24.2
11.5
9.8
7.4
7.2
5.3
NA
NA
22.3
31,098 11.8
9.0
8.3
27.1
10.4
9.7
222
NA
NA
NA
NA
NA
NA
36,542 13.5
15
10.8
9.6
8.0
10.0
8.5
Sun Pharma/Ranbaxy
INR
524715
Rp773 Rp1,860,668 Rp1,823,512 24.6
21.7
15.7
NA
34.9
23.7
Teva Pharmaceuticals
USD
TEVA
852.0
$61.99
52,815
63,712
9.7
7.5
7.6
29.8
11.2
10.7
Valeant Pharmaceuticals
USD
VRX
341.2
$90.27
30,799
60,247 12.1
8.9
8.1
50.7
6.7
5.5
15.7
10.2
8.6
25.4
14.9
11.7
108 15.0
8.1
5.0
NA
37.7
7.0
Average
1
USD
CPHR
26.0
$3.97
103
Share price converted to USD for stocks reporting financial data in USD but for which share value is reported in CAD
Source: Capital IQ
Page 21 of 56
U.K. Disclosures: This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the
Canadian Investor Protection Fund. EURO PACIFIC CANADA INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE
INDEPENDENCE OF ANALYSTS. The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial
Services and Markets Act 2000 (Financial Promotion) Order 2001. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities
discussed herein.
Company: Cipher Pharmaceuticals | CPH: CPHR
I, Douglas Loe, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not,
and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
Issuer
No
No
No
No
No
No
No
No
No
No
Page 22 of 56
RATING DEFINITIONS
Buy
horizon.
Speculative Buy
Hold
Sell
Under Review
move.
Tender
Dropped Coverage
Buy
Speculative Buy
Hold
Sell
Under Review
Restricted
29
22
9
1
5
2
0
45%
33%
13%
2%
8%
8
7
2
0
3
2
0
40%
35%
10%
0%
15%
Tender
Cipher Pharmaceuticals Inc. (TSX:CPH)
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
Apr 13
Aug 13
Dec 13
Apr 14
Aug 14
Price
Dec 14
Apr 15
Aug 15
Dec 15
PT revision
Target (C$)
$8.25
$9.50
$11.00
$12.75
$14.25
$16.50
$19.50
$23.00
$21.75
US$13.25
Rating
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Coverage Initiated: Jul 25, 2013
[Note: USD PT displayed in US dollar amount without conversion to CAD]
Toronto
416-649-4273 | 888-216-9779
Date
25 Jul 2013
31 Jul 2013
30 Oct 2013
2 May 2014
28 Jul 2014
30 Oct 2014
9 Jan 2015
14 Apr 2015
12 Aug 2015
17 Aug 2015
Oakville
289-348-5936
Vancouver
604-453-1382 | 888-216-9779
Montreal
514-940-5096 | 888-216-9779
Tokyo
+81.90.1470.1684| 888-216-9779
Page 23 of 56
Healthcare & Biotechnology
22 January 2016
TOS-TSX: $1.86
Siew Ching Yeo (Associate) | SiewChing.Yeo@europac.ca
155.0
Enterprise Value
133.0
Adj cash (rec. Q, $M)
22.0
Net Debt (rec. Q, $M)
0.0
52 Week Range
$2.25-$1.13
1.0320
Fiscal Year End
Dec-31
Financial Metrics
In C$000's
2014A
Sterizone VP4 systems
2015E
2016E
$0
$3,122
$18,975
Maint/service/consumables $433
$820
$2,975
$433
Total revenue
EBITDA
EBITDA margin (%)
Net income
$3,942
$21,950
($5,482)
($5,780)
$2,185
NA
NA
10.0%
($5,948)
($6,226)
$1,130
($0.07)
($0.06)
$0.01
P/E
NA
NA
159.1x
EV/EBITDA
NA
NA
60.9x
Quarterly Data
Q1
Q2
Q3
Q4
EBITDA ($M)
2015
(1.7)
(1.6)
(1.6)
(0.9)
2016
(0.4)
0.1
0.8
1.3
EPS (fd)
2015 ($0.02) ($0.02) ($0.02) ($0.01)
2016 ($0.00)
$0.00
$0.01
$0.01
Company Description
TSO3 is a QC-based low-temperature hospital sterilization equipment developer, focused on its ozone-based
Sterizone VP4 platform; alliance partner identified
(Getinge AB) & regulatory approvals granted in North
America and Europe, so firm is poised to accelerate
revenue/EBITDA growth trajectory in F2016/17
3
$2.00
2.5
2
$1.50
1.5
$1.00
1
$0.50
0.5
0
Nov-15
$0.00
Aug-15
Projected milestones mostly operational, and based on quarterly VP4 unit sales
ramp approaching/exceeding our forecasts. So on the milestone watch, TSO3 has
become a quarterly revenue growth story after multiple quarters of value creation
through technical (and eventually, regulatory) achievements on VP4 development.
Our model is probably a bit aggressive on projected FQ415 VP4 revenue/EBITDA at
$2.5M/($0.9M), just because we know that most of Getinge’s efforts to establish a
mostly US-based VP4-dedicated sales/marketing/support team was intensified after
the exclusive alliance was consummated in Nov/15. However, we see no reason
why global VP4 market demand could not support FQ116 revenue/EBITDA of
96.7
Market capitalization(M)
May-15
No change in competitive landscape, but execution risk remains as VP4
manufacturing/marketing simultaneously ramp during FH116 launch. VP4’s
technological advantages over ethylene oxide or steam-formaldehyde or hydrogen
peroxide gas plasma-based systems as sold by larger peer firms 3M Healthcare
(MMM-NY, NR), J&J (JNJ-NY, NR), Steris (STQ-EU, NR), or even partner Getinge AB
itself are as we have described before – higher capacity per load reduces medical
device reprocessing costs for client hospitals without sacrificing sterilization
potency, without the toxicity limitations of ethylene oxide and with the
documented ability (well, at least to Health Canada’s satisfaction, FDA views still
pending) to fully sterilize flexible endoscopes and duodenoscopes, a capability that
if formally acknowledged in FDA-endorsed claims, positions VP4 well to capture
dominant global market share in the 30,000-unit low-temperature hospital central
sterilization market, not just in the US.
83.3
Fully-diluted Shares O/S (M)
Feb-15
Value creation in F2016 expected to be based more on tangible revenue/EBITDA
generation than on the events in F2015 making tangible revenue/EBITDA possible.
But we believe that value creation swings to more tangible operational success in
F2016, with our model assuming that global VP4 systems can approach $19.0M next
year (and $22.0M overall, including service contract and consumables revenue)
while swinging into sustainably positive EBITDA territory (we project $2.2M/10%
margin next year). We expect sequential unit sales ramp throughout F2016, and
probably with FQ4 strength as we have seen with other medical technology
developers in our universe before, notably but not exclusively with Novadaq’s
(NDQ-T, BUY, PT US$16.00) SPY platform.
Market Data
Nov-14
Investment Highlights
Abundant upside still remains for one of our strongest 2015 performers and Top
Picks. We could certainly be accused of lacking creativity by re-anointing 2015 Top
Pick TSO3 as one of our Top Picks for 2016 as well, and we plead guilty to that
accusation, of course. But for context, TSO3 performed well under the burden of
our ‘top pick-ification’ last year by returning 43.8% at year-end, ostensibly by
achieving abundant preparative milestones positioning the firm well for commercial
success in F2016/17, such as (finally!) garnering favourable FDA review for lead
ozone-hydrogen peroxide-based low-temperature sterilizer VP4 (well, this was in
Dec/14 but continued to favourably impact TOS valuation, we believe) and
consummating a global non-exclusive distribution alliance with now-partner
Getinge AB (GETI.B-STO, NR) in Mar/15 that became exclusive and with more
tangible commercial commitments in Nov/15.
Valuation: NPV, 20x EPS, 12.5x EV/EBITDA
(F2018 forecasts, 20% disc rate for NPV)
Aug-14
Event: We are identifying TSO3 as one of our 2016 Top Picks.
$3.10 Target Price
May-14
2016 Top Pick
Feb-14
TSO3
Buy Rating
www.epccm.ca
Page 24 of 56
TOS-TSX | 22 January 2016
TEARSHEET - TSO3 (TOS-T, $1.86, BUY, PT: $3.10)
$2.50
Last Sale Price
50-day MA
3
200-day MA
Company Description
Stock Price ($)
2
$1.50
1.5
1
$1.00
0.5
Nov-15
Jul-15
Sep-15
May-15
Jan-15
Mar-15
Nov-14
Jul-14
Sep-14
May-14
Jan-14
Mar-14
Nov-13
Jul-13
Sep-13
May-13
Jan-13
0
Mar-13
$0.50
Consensus
Rating:
Buy
Target:
$3.69
Median:
$3.63
High:
$4.40
Low:
$3.10
# Est:
4
Sector Perform/Hold
TSO3 is a QC-based low-temperature hospital sterilization equip-ment
developer, focused on its ozone-based Sterizone VP4 platform, for which
regulatory approvals have now been granted in all major markets,
including the US in Dec-14, and global channel partner Getinge AB is
actively building out VP4-specific marketing & support infrastructure to
drive unit sales in F2017/17. Specific claims have been granted in
Canada for sterilizing duodenoscopes & flexible endoscopes, similar
claims pending in the US
Volume (M Shares)
2.5
$2.00
Return
98.3%
94.9%
136.6%
66.7%
4
0
0
LTM EV/EBITDA
120.0x
100.0x
80.0x
60.0x
TSO3
40.0x
Steris
20.0x
C$000's except for per share data
Total Revenue
Growth y/y
Cons.
Cons. 3 Mts. Ago
EBITDA
Margin
Cons.
Cons. 3 Mts Ago
Net Income
Adjusted EPS
Cons.
Cons. 3 Mts. Ago
Operating Cash Flow
2011
2012
2013
2014A
2015E
2016E
2017E
2018E
3,355
N/A
2,890
2,890
(7,473)
-222.7%
-6,851
-6,851
(7,655)
($0.12)
($0.14)
($0.14)
(8,645)
2,854
(14.9%)
2,189
2,189
(5,519)
-193.4%
-6,886
-6,886
(5,796)
($0.08)
($0.11)
($0.11)
(6,469)
254
(91.1%)
375
375
(6,931)
-2724.9%
-7,036
-7,036
(9,270)
($0.11)
($0.12)
($0.12)
(8,651)
433
70.2%
417
417
(5,482)
-1266.2%
-4,857
-4,857
(5,948)
($0.07)
($0.08)
($0.08)
(2,903)
3,942
810.4%
3,754
4,998
(5,780)
-146.6%
-5,616
-4,729
(6,226)
($0.06)
($0.07)
($0.07)
(5,138)
21,950
456.8%
24,351
25,714
2,185
10.0%
306
2,574
1,130
$0.01
$0.01
$0.02
(4,368)
43,514
98.2%
48,466
54,996
13,765
31.6%
15,588
11,782
9,352
$0.10
$0.11
$0.10
7,339
60,669
39.4%
66,156
80,396
21,702
35.8%
19,209
18,589
14,908
$0.15
$0.15
$0.14
16,730
Key Statistics
15.0%
$5.71
15.0x
$2.31
10.0x
$2.25
One year TOS Target Price 1
20.0%
$3.83
20.0x
$3.08
12.5x
$2.81
Value
$2.25
$1.13
1.03
83.3
155.0
36.1
143.6
0.0%
www.tso3.com
Dec 31
42
52-Wk High:
52-Wk Low:
Avg Vol (3-Mo)
Shares O/S:
Market Cap:
Net Debt:
Ent. Value:
Div Yield:
Website:
FYE:
Employees:
Top Inst. Ownership
Fidelity Investments
Sprott Asset Management, LP
Caisse de dépôt et placement du Québec
IG Investment Management, Ltd.
Formula Growth Limited
Desjardins Global Asset Management Inc.
BlackRock, Inc.
Gilder Gagnon Howe & Co. LLC
Next Edge Capital Corp.
Valuation
NPV, Discount Rate
Implied value/share1
Price/Earnings Multiple
EV/EBITDA Multiple
Jan-16
Jan-16
Jan-16
Jan-16
Jan-16
Jan-16
Jan-16
Jan-16
Jan-16
Jan-16
Dec-15
Dec-15
Dec-15
Dec-15
Dec-15
Dec-15
Dec-15
Dec-15
Dec-15
Dec-15
Dec-15
Dec-15
Dec-15
Dec-15
Dec-15
Nov-15
Nov-15
Nov-15
Nov-15
Nov-15
Nov-15
0.0x
25.0%
$3.36
25.0x
$3.86
15.0x
$3.37
$3.10
Dimensional Fund Advisors LP
121.0%
60.8%
M Shares
8.40
8.11
8.11
2.29
0.70
0.12
0.09
0.04
% Held
10.1%
9.7%
9.7%
2.7%
0.8%
0.1%
NA
NA
NA
0.00
NA
1
Based on fully-taxed F2018 EPS (fd) forecast of $0.15, EBITDA of $21.7M, NPV, 20% disc rate; pro forma cash, including Getinge payment in
Nov/15, of $22.0M, no LT debt; revised fd S/O of 96.7M
Comparables and Peer Analysis
Ticker
TSO3
3M
Balchem Corp
Getinge AB
Ion Beam Applications
Johnson & Johnson
Nanosonics
Steris
Average
TOS
MMM
BCPC
GETI.B
IBAB
JNJ
NAN
STE
Comparables - Multiples Analysis
TSO3
3M
Balchem Corp
Getinge AB
Johnson & Johnson
Nanosonics
Steris
Average
1
Trading Current
Target
CCY
Price
Price
$3.10
CAD
$1.86
$158.13
USD
$137.76
$69.00
USD
$54.45
SEK
SEK 190.40 SEK 222.53
€33.70
EUR
€27.76
$107.67
USD
$95.94
$1.92
AUD
$1.72
$88.40
USD
$67.60
2015
FCF Yield
2016E
2017E
0.0%
5.6%
4.5%
3.6%
2.3%
6.2%
-0.4%
0.0%
0.0%
5.9%
4.4%
5.9%
2.5%
6.4%
0.9%
0.0%
0.0%
6.2%
4.3%
7.1%
2.8%
6.7%
1.1%
0.0%
Div
Yield
Implied
% Return
0.0%
66.7%
3.0%
17.8%
0.6%
27.3%
1.5%
18.4%
0.6%
22.0%
3.1%
15.4%
0.0%
12.2%
1.5%
32.2%
1.3%
26.5%
% Return
Market Enterprise
Cap
Value
1-Week 1-Month 3-Month
155.8
143.6
(5.1%)
(14.3%)
9.4%
84,328.1 93,861.1
(2.4%)
(7.5%) (11.6%)
1,755.1
1,979.8
(5.6%)
(12.0%) (18.9%)
45,376.7 66,092.7
(4.5%)
(10.8%) (11.2%)
788.3
767.6 (10.0%)
(14.0%) (10.8%)
264,934.9 247,563.9
(3.0%)
(6.6%)
(4.4%)
486.2
449.2
(0.3%)
3.6%
17.9%
5,825.7
6,494.2
(0.5%)
(8.7%)
(0.3%)
50,456.3
52,169.0
Current - EV/EBITDA
T12M
2016E
2017E
Target - EV/EBITDA
T12M
2016E
NA
11.0x
14.7x
11.8x
25.5x
11.0x
NA
19.0x
NA
10.6x
14.7x
10.6x
18.8x
9.9x
NA
13.3x
9.2x
10.2x
14.7x
9.4x
15.4x
9.3x
95.3x
10.4x
N/A
11.0x
14.7x
11.8x
N/A
11.0x
N/A
19.0x
15.5x
13.0x
21.7x
13.5x
NA
10.6x
14.7x
10.6x
18.8x
9.9x
NA
13.5x
NA
(3.9%)
2017E
9.2x
10.2x
14.7x
9.4x
15.4x
9.3x
NA
10.3x
NA
(8.8%)
1-Year
T12
30.1%
-6.2
(15.2%) 8,496.0
3.1%
135.1
5.5% 5,589.0
100.3%
30.1
(5.8%) 22,554.0
29.9%
-5.9
4.8%
341.9
(3.7%)
19.1%
EV/Revenue
T12M
2016E
2017E
Consensus Valuations
EBITDA
EPS
2016E
2017E
T12
2016E
2017E
0.3
15.6
($0.09)
$0.01
$0.11
8,825.7 9,218.2
$7.88
$8.23
$8.91
134.5
134.9
$2.04
$2.45
$2.72
6,213.7 7,025.5
SEK 6.00 SEK 8.86 SEK 11.90
40.9
50.0
€1.13
€ 1.00
€ 1.17
25,066.3 26,700.3
$5.29
$6.41
$6.81
-2.0
4.7
($0.02)
($0.01)
$0.04
490.0
627.0
$1.88
$3.51
$4.01
Forward P/E
N12M
2016E
2017E
T12M
92.2x
3.1x
3.4x
2.3x
3.2x
3.5x
20.2x
3.4x
5.9x
3.1x
3.3x
2.1x
2.7x
3.4x
13.5x
2.9x
3.0x
3.0x
3.3x
2.1x
2.4x
3.3x
8.9x
2.3x
0.0x
17.4x
23.5x
22.9x
30.1x
15.3x
NM
17.9x
187.0x
16.7x
22.7x
21.5x
27.8x
14.9x
NM
19.3x
17.0x
15.4x
20.5x
16.0x
23.7x
14.1x
41.2x
16.9x
16.4x
4.6x
3.5x
18.1x
44.3x
20.6x
NA
NA
NA
NA
NA
NA
NA
NA
NA
P/CFPS
2016E
2017E
0.0x
12.7x
0.0x
11.3x
0.0x
12.5x
NM
0.0x
0.0x
12.1x
0.0x
9.4x
0.0x
11.6x
92.3x
0.0x
5.2x
15.7x
Targets, forecasts and valuations reflect consensus estimates derived from Capital IQ
Page 25 of 56
$3.7M/($0.4M) (23 VP4 unit sales, plus modest service/consumables revenue), increasing to
$4.9M/$0.1M in FQ216 (31 VP4 unit sales; the first full-quarter when we project positive quarterly
EBITDA), to $6.2M/$0.8M in FQ316 (39 VP4 units), and $7.2M/$1.3M in FQ416 (45 VP4 units). Our model
still assumes a VP4 transfer price to Getinge AB for TSO3-manufactured systems of US$110,000, with
achievable steady-state gross margin (including higher-margin service contracts and consumables
[biological/chemical indicators of sterilization cycle efficacy] sales) of 60-61%, ramping steadily up to that
level by FH217.
Exhibit 1 – Financial Summary for TSO3
(C$000, except EPS)
Sterizone VP4/125L+ systems
Maint/service/consumables
Total revenue
Revenue growth (%)
VP4 Unit sales
Gross margin
Gross margin (%)
EBITDA
EBITDA growth (%)
EBITDA margin (%)
Net Income
Net income, fully-taxed
P/E
EV/EBITDA
2014A
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
0
3,122
18,975
37,125
44,138
52,800
63,250
69,988
77,413
433
820
2,975
6,389
16,531
27,469
39,578
52,859
67,313
$433
70%
NA
(686)
(158%)
($5,482)
NA
NA
($5,948)
($5,948)
($0.07)
NA
NA
$3,942
810%
22
1,355
34%
($5,780)
NA
NA
($6,226)
($6,226)
($0.06)
NA
NA
$21,950
457%
138
12,241
56%
$2,185
(138%)
10%
$1,781
$1,130
$0.01
159.1x
60.9x
$43,514
98%
270
25,967
60%
$13,765
530%
32%
$13,360
$9,352
$0.10
19.2x
9.7x
$60,669
39%
321
34,885
58%
$21,702
58%
36%
$21,297
$14,908
$0.15
12.1x
6.1x
$80,269
32%
384
48,161
60%
$33,915
56%
42%
$33,511
$23,457
$0.24
7.7x
3.9x
$102,828
28%
460
61,697
60%
$46,298
37%
45%
$42,285
$32,125
$0.33
5.6x
2.9x
$122,847
19%
509
73,708
60%
$56,614
22%
46%
$39,658
$39,658
$0.41
4.5x
2.3x
$144,725
18%
563
86,835
60%
$68,383
21%
47%
$47,896
$47,896
$0.50
3.8x
1.9x
But still one non-operational milestone on the horizon with FDA consideration of
endoscope/duodenoscope sterilization claims still pending. As important, we are watching closely for
timelines to what we hope will be positive FDA consideration of TSO3’s recently submitted data claiming
efficacy in fully sterilizing flexible endoscopes and duodenoscopes, and if granted, as it already has been
in Canada in Oct/15, we believe VP4 rapidly emerges as a sterilization platform that is not just nice-tohave, but is mandatory for any hospital that frequently conducts endoscope/duodenoscope-based GI
diagnosis.
The medical imperative to displace chemical disinfection with sterilization was not always realized, but is
increasingly seen as a problem in search of a solution through the emergence of endoscope-associated GI
infections at major US hospitals, notably but not exclusively at the UCLA Medical Center as reported in
Feb/15 and as compelled distribution of warning letters by the FDA to endoscope manufacturers like
market-leading Japanese firm Olympus (7733-JP, NR), among others. Accordingly, we believe now as
before that the FDA is motivated to expeditiously identify credible solutions to endoscope reprocessing
that disengage standard-of-care from chemical disinfection as has been conventional practice until
recently, and VP4 seems poised to emerge as that solution, perhaps as early as FQ216 (our expectation
only, not formal guidance from FDA or TSO3 itself).
It is far more positive for us that partner Getinge AB was willing to publish minimum VP4 unit sales
obligations than what that minimum actually was. Since we emphasized above that we still believe the
global low-temperature sterilization unit installed base is about 30,000, with a 10-year average
replacement cycle implying annual turnover of around 3,000 systems, we should again be clear that
Getinge AB itself has published in its own filings that it believes its VP4 target market is around 2,300
systems. We believe the delta in the two values caters to the probability that Getinge AB is excluding
more cost-sensitive tier 2 medical markets that it expects to target with its lower-cost recently partnered
Page 26 of 56
Stericool platform, and we suspect that Getinge AB is also excluding its own steam-formaldehyde installed
base from the calculation.
Accordingly, we still believe that Getinge’s published commitment to achieve at least 10% annual
turnover market share by F2020 corresponds to 300 VP4 systems annually, not 230, and regardless, we
consider this to be a floor and not a ceiling on achievable five-year VP4 market share. We believe that VP4
cumulative installed base can trip over 5,000 systems at least as fast as J&J/Advanced Sterilization
Products did with its first-generation hydrogen peroxide-based Sterrad platform in the 1990s (about nine
years post-FDA approval in 1992). Formal FDA recognition of endoscope sterilization claims should, in our
view, accelerate timelines to achieving and exceeding that threshold installed base.
Exhibit 2 – Valuation Summary for TSO3
NPV, discount rate
Implied value per share
10%
15%
20%
25%
30%
40%
$7.67
$5.71
$3.83
$3.36
$2.65
$1.75
Discounted projected share price to year-end 2016
Price/earnings multiple, F2018
Implied share price
1
EV/EBITDA multiple, F2018
Implied share price
1
One-year TSO3 target price
10x
15x
20x
25x
30x
40x
$1.54
$2.31
$3.08
$3.86
$4.63
$6.17
5x
10x
12.5x
15x
17.5x
20x
$1.12
$2.25
$2.81
$3.37
$3.93
$4.49
$3.24
1
Based on fully-taxed F2018 EPS (fd) forecast of $0.15, EBITDA of $21.7M, NPV, 20% disc rate; pro
forma cash of $22M, including Getinge payment in Nov/15, no LT debt; revised fd S/O of 96.7M
Source: Euro Pacific Canada
Summary & valuation. Our fundamental investment thesis on TOS is unchanged by re-establishing the
stock as our Top Pick in our medical technology coverage universe, with our $3.10 PT still based on NPV
and multiples of our F2018 EBITDA/fully-diluted fully-taxed EPS forecasts ($21.7M and $0.15/shr,
respectively), as shown in Exhibit 2, and as summarized within our ‘tearsheet’ financial summary. All
methodologies still incorporate a discount rate of 20%, which if anything is a bit conservative in our view
for a commercial-stage medical technology developer and for which we have a downward bias should
FDA claims on endoscope sterilization be granted by mid-F2016 as we predict. At current levels, our PT
corresponds to a one-year return of 66.7%.
Page 27 of 56
Exhibit 3 – Publicly Traded Peer Firms For TSO3
Share
Shares Share
Company
Price
Curr.
Sym.
Out. Price
(M) 21-Jan-16
Market Enterprise
Cap
($M)
Value
($M)
EV/EBITDA
(T12) (FY1) (FY2)
EV/rev
Price/Earnings
(T12) (T12) (FY1) (FY2)
Medical imaging equipment manufacturers
Hologic
USD
HOLX
282.9
$33.91
9,593
13,024
13.4
12.4
11.6
4.9
NA
18.6
16.8
IBM
USD
IBM
970.1
$122.91
119,236
150,075
7.7
7.4
7.3
1.8
9.1
9.1
8.6
Kon Philips
EUR
PHIA
925.3
€ 22.68
20,985
25,602
10.9
8.4
7.6
1.1
25.1
15.5
13.2
Siemens AG
EUR
SIE
808.6
€ 82.00
66,310
84,221
10.4
8.5
7.8
1.1
9.3
12.5
11.2
Toshiba
JPY
6502
4234.1
¥211
895,090 2,491,990
18.0
NA
6.8
0.4
NA
NA
7.2
Varian Medical Systems
USD
VAR
96.0
$74.81
7,181
6,889
10.9
10.3
9.8
2.2
18.1
16.8
15.3
Waters Corp.
USD
WAT
81.7
$124.56
10,172
9,529
14.3
14.1
13.3
4.7
22.0
21.2
19.5
12.2
10.2
9.2
2.3
16.7
15.6
13.1
93,861
11.0
11.3
10.7
3.1
17.5
18.2
16.7
Average
Sterilization product manufacturers
3M
USD
MMM
615.7
$137.76
84,821
Balchem Corp
USD
BCPC
Getinge AB
SEK
GETIB
31.5
$54.45
1,716
1,980
14.7
14.6
14.7
3.4
26.7
22.2
22.2
238.3 SEK 190.40 SEK 45,377
66,093
11.8
11.6
10.5
2.3
31.8
28.5
21.5
EUR
IBAB
28.4
$27.76
€ 788
768
25.5
22.3
18.8
3.2
24.7
32.8
27.8
Johnson & Johnson (ASP)
USD
JNJ
2766.9
$95.94
265,461
247,564
11.0
10.8
9.9
3.5
18.1
15.5
15.0
Nanosonics
AUD
NAN
283.5
$1.72
486
449
NA
NA
NA
20.2
NA
NA
41.2
14.8
14.1
12.9
5.9
23.8
23.5
24.1
Average
Medical technology manufacturers
Boston Scientific
USD
BSX
1345.2
$17.56
23,622
29,104
16.2
14.8
13.0
4.0
NA
19.1
16.7
Hologic
USD
HOLX
282.9
$33.91
9,593
13,024
13.4
12.4
11.6
4.9
NA
18.6
16.8
Intuitive Surgical
USD
ISRG
37.4
$555.60
20,760
18,982
24.2
17.1
15.4
8.3
37.5
27.4
24.1
Kon Philips
EUR
PHIA
925.3
€ 22.68
20,985
25,602
10.9
8.4
7.6
1.1
25.1
15.5
13.2
Medtronic
USD
MDT
1406.2
$74.60
104,899
123,546
16.0
13.4
12.3
4.8
42.2
17.0
15.3
Siemens AG
EUR
SIE
808.6
€ 82.00
66,310
84,221
10.4
8.5
7.8
1.1
9.3
12.5
11.2
Smith & Nephew
GBP
SN
896.5
$11.04
9,898
15,394
11.6
11.1
10.6
NA
17.7
12.9
12.3
St Jude Medical
USD
STJ
282.7
$53.72
15,185
17,772
10.7
10.8
10.0
3.2
15.0
13.7
12.9
Stryker
USD
SYK
376.0
$91.89
34,551
34,332
13.0
12.9
12.1
3.5
29.5
18.0
16.5
Varian Medical Systems
USD
VAR
96.0
$74.81
7,181
6,889
10.9
10.3
9.8
2.2
18.1
16.8
15.3
Waters Corp.
USD
WAT
81.7
$124.56
10,172
9,529
14.3
14.1
13.3
4.7
22.0
21.2
19.5
Zimmer-Biomet Holdings
USD
ZBH
203.8
$98.18
20,007
30,134
14.4
12.8
10.1
5.7
NA
14.3
12.6
13.8
12.2
11.1
3.9
24.0
17.2
15.5
NA
NA
NA
85.4
NA
NA
NA
Average
TSO3
CAD
TOS
83.3
$1.86
$155
133
Source: Capital IQ
Page 28 of 56
Company: TSO3 Inc. | TOS: TSX
I, Douglas Loe, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not,
Issuer
No
No
No
No
Yes
Yes
No
No
No
No
Page 29 of 56
RATING DEFINITIONS
Buy
horizon.
Speculative Buy
Hold
Sell
Under Review
move.
Tender
Dropped Coverage
Buy
Speculative Buy
Hold
Sell
Under Review
Restricted
29
22
9
1
5
2
0
45%
33%
13%
2%
8%
8
7
2
0
3
2
0
40%
35%
10%
0%
15%
Tender
Date
25 Jul 2013
30 Jan 2014
19 Sep 2014
18 Dec 2014
6 Mar 2015
TSO3 Inc. (TSX:TOS)
$4.00
$3.50
$3.00
$2.50
Target (C$)
$1.50
$1.00
$2.75
$3.75
$3.10
Rating
Buy
Buy
Buy
Buy
Buy
$2.00
$1.50
$1.00
$0.50
$0.00
Apr 13
Aug 13
Dec 13
Apr 14
Price
Aug 14
Dec 14
Apr 15
Aug 15
Dec 15
Coverage Initiated: Jul 25, 2013
PT revision
Toronto
416-649-4273 | 888-216-9779
Oakville
289-348-5936
Vancouver
604-453-1382 | 888-216-9779
Montreal
514-940-5096 | 888-216-9779
Tokyo
+81.90.1470.1684| 888-216-9779
Page 30 of 56
20 January 2016
Special Situations
CMG-TSX: $8.44
Computer Modelling Group
Top Pick for a Second Year Running
Investment Thesis: We are pleased to introduce Computer Modelling Group
(“CMG” or “the Company”) as a top pick for a second year running. With the share
price tumbling 25.8% since the announcement of FQ216 results in mid-November
2015, the stock finished 2015 down 26.9% (including dividends). Shares sold off on
what we thought were unrealistic top line Street estimates and moderately higher
costs. We believe investors’ concerns are overblown and thus consider this an
opportunistic time to accumulate a position in a best-in-breed business.
With 88% of sales coming from a recurring revenue base, CMG leverages investors
to unique defensive characteristics in declining commodity price markets and to
secular growth trends supporting low double-digit top line growth in rising
commodity price markets. The strength of the product/brand is evidenced in the
fact that CMG is successfully displacing oil service bellwethers and gaining market
share (most recently in Colombia and the Middle East). The name is a great refuge
for investors seeking a more defensive name (in the short run), while keeping
leverage to the secular growth in secondary/tertiary oil production.
Catalysts:
1 – Pace of annuity & maintenance revenues over the next quarters: We look for
CMG to deliver flat sequential annuity & maintenance revenues (88% of FQ216
revenues) over the next couple of quarters highlighting the resilience of its business
model in the face of a deteriorating commodity price environment. In Exhibit 1, we
showcase CMG’s sales growth versus WTI oil prices. We highlight that sales growth
in recent quarters has been comparable to the last oil crash (2008-09). We expect
validation of business model resilience to drive share outperformance.
2 – Margin resilience and potential uptick: EBITDA was the letdown last quarter,
coming in at a 45% margin versus our 50% estimate and Street estimate of 51% on the
back of higher sales/marketing expenses (up 19.8% y/y). The Company mentioned in
its MD&A that increased costs relative to last year stem from a higher employee count
and the Society of Petroleum Engineers (SPE) Annual Technical Conference &
Exhibition, which took place in FQ2 this year (the SPE conference took place in FQ3
last year). As such, we believe the 45% margin level is a trough.
3 – CoFlow update: We recently visited the Company in view of getting a better grasp
on CoFlow. CoFlow will effectively increase users that CMG targets as the Company
shifts from only catering to reservoir engineers to adding on production engineers and
geomechanic professionals in one integrated interface. This is a structural shift that
we believe is not widely appreciated by the market. CoFlow offers an integrated endto-end, multi-user, multi-discipline platform allowing for easy data-sharing in a realtime work environment. This is a complete shift from the current reservoir modelling
workflow which is challenged by an inherently sequential process with no real-time
feedback, making for a very inefficient work process and the need to maintain many
tools. We understand that current JV partners (Shell [RDSA-ENXTAM, NR] and
Petrobras [PETR4-BOVESPA, NR]) are deploying the product worldwide, which is a big
vote of confidence. It is one thing to help develop a product; it’s another to use it for
your day-to-day decision making.
Valuation: Our DCF analysis calls for a $15.00 target price. We highlight the
Company’s historical NTM P/E ratio in Exhibit 2. It is worth noting that CMG
shares are currently trading close to a five-year low on an NTM P/E basis (23.2x).
Amr Ezzat | 514.905.7944 | amr.ezzat@europac.ca
Buy Rating
$15.00 Target Price
Projected Total Return: 82.5%
Valuation: DCF (8.5% discount; 3.0% GRIP)
Market Data
Net Cash
Enterprise Value
Basic Shares O/S
Avg. Daily Volume (K)
52 Week Range
Dividend Yield
662.9
66.8
596.1
78.7
80.0
156.7
$8.22 - $14.60
4.7%
Revisions
FQ316E Revenue
FQ316E EBITDA
FQ316E EPS
Current
Old
19.7
9.2
$0.09
na
na
na
Financial Metrics
FYE - Mar 31
Revenue
EBITDA
EPS
2015A
84,861
43,099
$0.41
2016E
81,443
38,947
$0.36
2017E
98,590
50,421
$0.45
2015A
7.0x
13.9x
20.5x
2016E
7.3x
15.5x
23.1x
2017E
6.0x
11.8x
18.5x
Q2
19,731
19,125
9,949
8,519
$0.09
$0.08
Q3
25,206
19,689
14,717
9,205
$0.14
$0.09
Q4
20,372
21,189
8,945
10,402
$0.10
$0.10
Valuation Data
FYE - Mar 31
EV/Sales
EV/EBITDA
P/E
Quarterly Data
Rev. '15
Rev. '16
EBITDA '15
EBITDA '16
EPS '15
EPS '16
Q1
19,552
21,440
9,488
10,824
$0.08
$0.09
Company Description
Incorporated in 1996, Computer Modelling Group
develops and licenses reservoir simulation software.
The Company's software helps oil and gas companies
achieve increased recoveries of hydrocarbons from
their reservoirs. CMG is recognized as the leading
supplier of dynamic reservoir modelling software. CMG
has over 550 clients using its software in 58 countries.
The company is headquartered in Calgary, AB and has
approximately 200 employees, half of which are
dedicated to R&D.
$18.00
5.00
4.50
4.00
$16.00
$14.00
3.50
3.00
2.50
$12.00
$10.00
$8.00
2.00
1.50
1.00
$6.00
$4.00
$2.00
$0.00
Jan-15
Apr-15
Jul-15
Oct-15
0.50
0.00
Jan-16
www.epccm.ca
Page 31 of 56
CMG-TSX | 20 January 2016
Exhibit 1 – 2008-2009 Déjà-Vu – Sales Growth vs. WTI Price Change
Y/Y Growth (%)
CMG Sales ($mm)
WTI ($)
CMG Sales
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
11.7
14.4
10.2
9.1
11.7
14.3
12.1
13.3
12.1
14.4
15.9
12.0
15.9
17.2
16.5
16.1
16.8
19.3
18.1
44.60
49.66
69.89
70.61
79.36
83.76
75.63
79.97
91.38
106.72
95.42
79.20
98.83
103.02
84.96
92.19
91.82
97.23
96.56
Sep-13
17.2
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15E
Mar-16E
19.2
20.0
19.6
19.7
25.2
20.4
21.4
19.1
19.7
21.2
WTI Oil
58.8%
60.4%
23.8%
(5.2% )
0.3%
(1.0% )
17.8%
46.8%
3.2%
0.6%
32.2%
(10.0% )
31.8%
19.6%
3.5%
34.2%
5.7%
12.2%
9.7%
(53.5% )
(51.1% )
(50.1% )
(29.8% )
77.9%
68.7%
8.2%
13.3%
15.1%
27.4%
26.2%
(1.0% )
8.2%
(3.5% )
(11.0% )
16.4%
(7.1% )
(5.6% )
13.7%
102.33
6.8%
11.0%
98.42
101.58
105.37
91.16
53.45
47.72
59.48
45.06
37.13
14.3%
3.6%
8.3%
14.5%
31.3%
1.9%
9.4%
(2.9% )
(21.9% )
4.0%
7.2%
4.5%
9.1%
(10.9% )
(45.7% )
(53.0% )
(43.6% )
(50.6% )
(30.5% )
Dec 14 comp includes ~$5M
of one time software sales
Source: Euro Pacific Canada, Bloomberg, Company filings
Exhibit 2 – NTM P/E Currently Trading Close to a Five-year Low
Source: Euro Pacific Canada, CapitalIQ
Page 32 of 56
Computer Modelling Group Ltd. (CMG-T, $8.44) - Data Sheet
$18.00
Last Sale P rice
50-D ay MA
Stock Price ($)
$14.00
$12.00
$10.00
$8.00
$6.00
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Volume (M Shares)
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
200 -Day MA
$16.00
Dec-15
BUY | PT: $15.00
Company Description
Consensus
3 Mths Ago
Current
Return
Incorporated in 1996, Computer Modelling Group develops
and licenses reservoir simulation software. The Company's
software helps oil and gas companies achieve increased
recoveries of hydrocarbons from their reservoirs. CMG is
recognized as the leading supplier of dynamic reservoir
modelling software. CMG has over 550 clients using its
software in 58 countries. The company is headquartered in
Calgary, AB and has approximately 200 employees, half of
which are dedicated to R&D.
Rating:
Target:
Median:
High:
Low:
Outperform
$13.11
$13.00
$16.00
$10.00
Hold
$11.79
$11.50
$15.00
$10.00
44%
41%
82%
23%
Sector Perform/Hold
# Estimates
4
3
2
9
Historical Valuation
CAPITAL IQ - CONSENSUS BASED NTM P/E
3.50x
40.0x
23.0x
3.00x
35.0x
2.50x
21.0x
2.50x
30.0x
2.00x
19.0x
2.00x
25.0x
1.50x
20.0x
1.00x
Jan-16
Dec-15
Oct-15
Nov-15
Sep-15
Jul-15
Aug-15
Jun-15
Apr-15
May-15
Mar-15
Jan-15
Feb-15
Dec-14
Oct-14
3.00x
Relat ive to TEV/ Forw ard EB ITDA
Nov-14
Sep-14
Jul-14
Feb-14
Jan-16
Dec-15
Oct-15
Nov-15
Sep-15
Jul-15
Aug-15
Jun-15
Apr-15
May-15
Mar-15
Jan-15
Feb-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Feb-14
1.00x
Mar-14
15.0x
Aug-14
1.50x
Jun-14
17.0x
TEV /For war d EBITD A
Apr-14
Relat ive to TEV/ Forw ard EB ITDA
May-14
TEV /Forwar d EBITD A
Mar-14
25.0x
Financial Summary
2015A
Q116A
Q216A
Q316E
Q416E
2016E
2017E
2018E
Key Statistics
Revenue
Growth y/y
Cons.
Cons. 3 Mts. Ago
EBITDA
Margin
Cons.
Cons. 3 Mts. Ago
Diluted EPS
Growth y/y
Cons.
Cons. 3 Mts. Ago
84.9
13.9%
85.9
85.9
43.1
50.8%
45.0
45.0
0.41
17.7%
0.40
0.40
21.4
9.7%
21.4
21.4
10.8
50.5%
10.9
10.9
0.09
10.1%
0.10
0.10
19.1
(3.1%)
21.5
21.3
8.5
44.5%
11.0
11.0
0.08
-9.2%
0.10
0.10
19.7
(21.9%)
20.4
21.8
9.2
46.8%
10.2
11.7
0.09
-34.8%
0.09
0.10
21.2
4.0%
20.6
22.2
10.4
49.1%
10.2
11.8
0.10
1.2%
0.09
0.11
81.4
(4.0%)
81.7
86.4
38.9
47.8%
40.3
45.2
0.36
-11.5%
0.35
0.39
98.6
21.1%
88.8
94.9
50.4
51.1%
46.1
49.9
0.45
25.0%
0.40
0.45
106.0
7.5%
97.7
110.6
55.2
52.1%
51.2
58.3
0.49
9.0%
0.44
0.48
52-Week High
52-Week Low
Avg Vol (3-Mo)
Shares Outstanding
Market Cap
Net Debt
Enterprise Value
Div Yield
FYE
Employees
Value
2015A
Q116A
Q216A
Q316E
Q416E
2016E
2017E
2018E
63.4
11.0%
82.6%
13.4
47.7%
17.4%
8.0
(3.2%)
9.5%
16.7
4.8%
86.7%
2.6
79.0%
13.3%
2.1
(0.7%)
10.0%
16.8
9.5%
93.9%
1.1
(58.9%)
6.1%
1.2
(28.7%)
6.5%
17.3
7.6%
93.9%
1.1
(84.7%)
6.1%
1.3
(28.7%)
6.6%
18.2
13.0%
93.9%
1.5
(30.6%)
6.1%
1.5
(28.7%)
7.2%
69.0
8.7%
91.7%
6.3
-53.4%
$0.08
6.2
-22.6%
7.6%
84.7
22.9%
90.0%
9.4
50.6%
$0.10
4.4
-28.7%
4.5%
92.5
9.2%
90.0%
10.3
9.2%
$0.10
3.2
-28.7%
3.0%
1 Week
1 Month
3 Month
YTD
1 Year
LTM
NTM
LTM
(1.1%)
0.1%
(4.7%)
0.2%
(4.7%)
(8.3%)
(7.3%)
(3.2%)
(1.2%)
(1.5%)
(3.2%)
(7.0%)
(1.8%)
(4.2%)
(14.3%)
3.5%
(7.3%)
(19.7%)
(13.4%)
(8.5%)
(2.0%)
(6.3%)
(7.4%)
(9.6%)
14.0%
(3.9%)
(9.7%)
11.6%
11.9%
(1.2%)
(16.1%)
(35.2%)
(3.7%)
(5.1%)
(3.7%)
(29.7%)
22.7%
(21.6%)
45.0%
(10.2%)
48.2%
46.3%
(19.2%)
(28.1%)
(11.4%)
(24.9%)
4.7%
(29.8%)
16.4%
(21.7%)
45.2%
(6.7%)
40.7%
53.5%
(9.0%)
(19.2%)
(11.2%)
(22.0%)
6.6%
(23.9%)
1,756.8
509.9
314.3
324.9
56.7
57.8
17.5
25.5
23.8
24.0
2,005.0
560.9
526.4
384.1
67.6
82.0
24.0
38.5
29.9
29.2
3.14
1.73
7.11
2.80
0.25
1.20
0.21
(0.09)
1.11
0.88
3.47
3.58
19.34
6.22
0.86
1.65
0.29
0.15
1.04
0.88
43.1
38.9
0.41
0.36
$14.60
$8.22
160k
79
$662.88
-67
$596.07
4.7%
Mar 31
~208
Top Inst. Ownership
Segmented Revenue
Annuity/maintenance licenses
Growth y/y
% of Software Sales
Perpetual licenses
Growth y/y
% of Software Sales
Professional services
Growth y/y
% of Total Sales
Comparables
and Peer Analysis
CGI Group
Open Text
Constellation
Macdonald Dettwiler
Descartes
Enghouse
Solium
Redknee
Mediagrif
Information Services
Peer Average
CMG (EPC)
Return
EBITDA
M Shares
Burgundy Asset Management Ltd. 12.87
Neuberger Berman Llc
7.31
T. Rowe Price Group, Inc.
5.64
Manulife Asset Management
5.04
Fidelity Investments
2.19
Royce & Associates, Llc
1.88
Blackrock, Inc.
1.46
Wasatch Advisors Inc.
1.26
Pembroke Management Ltd.
1.13
Dimensional Fund Advisors Lp
0.78
EPS
EV / EBITDA
NTM
LTM
10.5x
12.6x
34.1x
11.9x
32.5x
25.5x
13.8x
11.7x
10.9x
8.7x
17.2x
13.8x
NTM
9.2x
11.4x
20.4x
10.1x
27.3x
18.0x
10.1x
7.7x
8.7x
7.2x
13.0x
15.3x
Price / Earnings
LTM
17.0x
26.5x
NM
29.6x
NM
49.1x
30.6x
NM
14.2x
15.5x
26.1x
20.6x
NTM
15.4x
12.8x
25.4x
13.3x
29.4x
35.7x
22.0x
18.0x
15.1x
15.6x
20.3x
23.3x
73%
(3%)
6 Mnths
% Held
3.43
0.00
(0.06)
(0.00)
(0.03)
0.88
0.07
0.00
0.00
0.78
16.4%
9.3%
7.2%
6.4%
2.8%
2.4%
1.9%
1.6%
1.4%
1.0%
Dividend
LTM
Yield
ROIC
1.7%
1.2%
1.8%
0.8%
2.5%
5.9%
1.4%
4.7%
11.5%
6.8%
25.0%
8.3%
4.4%
12.8%
7.7%
7.5%
9.3%
14.5%
10.8%
42.9%
Page 33 of 56
Company: Computer Modelling Group | CMG:TSX
I, Amr Ezzat, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not,
Issuer
No
No
No
No
No
No
Yes
No
No
No
Page 34 of 56
RATING DEFINITIONS
Buy
horizon.
Speculative Buy
Hold
Sell
Under Review
move.
Tender
Dropped Coverage
Buy
Speculative Buy
Hold
Sell
Under Review
Restricted
29
23
8
1
5
2
0
44%
35%
12%
2%
8%
8
7
1
0
3
2
0
40%
35%
10%
0%
15%
Tender
Computer Modelling Group Ltd. (TSX:CMG)
Date
$18.00
Target (C$) Rating
Date
Target (C$) Rating
7 Oct 2014
$15.00
Buy
15 Jul 2015
$15.00
Buy
$14.00
27 Oct 2014
$15.00
Buy
10 Aug 2015
$15.00
Buy
$12.00
11 Nov 2014
$15.00
Buy
13 Aug 2015
$15.00
Buy
$10.00
14 Nov 2014
$15.00
Buy
26 Aug 2015
$15.00
Buy
$8.00
14 Jan 2015
$15.00
Buy
9 Nov 2015
$15.00
Buy
$6.00
4 Feb 2015
$15.00
Buy
20 Jan 2016
$15.00
Buy
$4.00
11 Feb 2015
$15.00
Buy
$2.00
17 Feb 2015
$15.00
Buy
$0.00
Jan 13
2 Apr 2015
$15.00
Buy
19 May 2015
$15.00
Buy
22 May 2015
$15.00
Buy
$16.00
May 13
Sep 13
Jan 14
May 14
Price
Sep 14
Jan 15
May 15
Sep 15
Target (C$)
Coverage Initiated: Oct 7, 2014
Jan 16
Toronto
416-649-4273 | 888-216-9779
Oakville
289-348-5936
Vancouver
604-453-1382 | 888-216-9779
Montreal
514-940-5096 | 888-216-9779
Tokyo
+81.90.1470.1684| 888-216-9779
Page 35 of 56
Technology
20 January 2016
TCS-TSX: $7.60
TECSYS Inc.
Top Pick 2016: Earnings Growth Outperformer
Thesis: In the year of early signs of macro malaise, we turn to names with a
countercyclical tilt. We are encouraged by the growing visibility at TECSYS. Faster US
deal cadence and structural trends of technology adoption make the healthcare
sector more impervious to macro gyrations. Further, recent TCS results confirmed
acquisition-driven top line synergies and firming operating leverage. With nearterm EBITDA% expansion, we expect earnings growth to upstage that of the
relevant peer group. In a year that is shaping into a challenge for earnings upside,
we see TCS as a refuge among small-capitalization names. Thus, we pick the
Company as our 2016 Top Pick with our Buy rating and $11 price target in place.
 Visibility catalyst: Secular drivers in the US healthcare market (40% of F2015 sales
vs. 26% in F2014) underpin the demand for TCS’s supply chain software. Recent
regulatory reforms left its addressable space of healthcare facilities (c. 300)
searching for cost savings via supply chain productivity. With c. 20 deals signed to
date, TCS is in the early stage of the adoption curve. Indeed, F2015 (April C2015
end) backlog rose 53.7% y/y to $44.9M (vs. 7.4% y/y in F2014) and bookings
doubled to $47M. As of late, top line visibility ramped as FQ216 saw acceleration
in bookings (49.8% y/y on rolling LTM vs. 47.2% in FQ116) and backlog (FQ216:
37.2% y/y vs. 33.3% in FQ116) rise. Much of the upside is due to the recent bolton’s revenue synergies (Logi-D acquisition in C2014) that helped FQ216 bookings
increase 44% y/y to $13.4M. With a five IDN (healthcare supply networks) deal
guidance for FH216e confirmed and $47.6M backlog in place, TECSYS looks wellpositioned for c. $70M top line over the NTM (c. 14% y/y vs. LTM revenues).
 Earnings growth catalyst: Firming operating leverage and margin expansion are
set to drive the ongoing EBITDA growth cycle. FQ116’s bookings ramp validated
PoUs (acquired via Logi-D) cross-selling potential into existing IDN clients. In
turn, high-GM% (70%+) proprietary software sales are set to rise to 60%+ of
product revenues (35% of F2015 total revenue). As a result, GM% is set for
200bpsy/y expansion to 50% in F2016e. With operating expenses largely stable
q/q (headcount-add completed in F2015), we see y/y EBITDA% expansion to c.
10% in FH216e and 73% y/y EPS growth in F2016e.
 Defensive catalyst: The strength in the healthcare space lowered TCS’s exposure
to more cyclical industries. TCS’s complex supply chain market (industrial, etc.)
receded from 74% in F2014 to 60% in F2015 amid 23% y/y revenue growth. With
the aforementioned structural trends in healthcare (reform-induced demand for
cost-savings), we see the sector as more impervious to macro gyrations.
 Cash generation catalyst: We see cash generation on the mend, as EBITDA
growth offsets working capital intensity (FH116: $0.6M CfOp amid -$1.3M NWC).
With net cash of $7.5M, TCS is well-positioned to maintain 1.2% dividend yield.
Valuation: TCS’s Canadian SCM “comparables” have outperformed the S&P/TSX
Composite Index on the back of stellar EBITDA CAGR. Their SaaS operating model offers
higher operating leverage than that at on-premise peers. Thus, TCS’s past margin
expansions came at glacial-like rates (vs. Kinaxis [KXS-T, NR] and Descartes [DSG-T,
NR]). However, near-term margin recovery (F2015: flat y/y) sees EBITDA growth of 44%
CAGR and c. 98% CAGR EPS rise in F2015-F2017e, outstripping those at SCM
frontrunners. In turn, we placed our F2017e EBITDA estimates (adjusted for
capitalization) on 15-16x (Canadian peers 18-20x) to derive our $11 price target and
keep the Buy rating. Risks to our rating include low barriers to competitors’ entry, sales
concentration, capacity restrictions, and macro pressures.
Buy Rating
$11.00 Target Price
Projected Return: 46%
Valuation: 16x EV/EBITDA F2017E
Market Data
Net Debt
Enterprise Value
Basic Shares O/S
52 Week Range
Dividend Yield
93.6
-5.0
88.6
12.3
12.3
0.01
$10.35 - $7.25
1.3%
Revisions
New
Old
65.5
6.0
$0.23
n/c
n/c
n/c
2016E Revenue
2016E EBITDA
2016E EPS
Financial Metrics
FYE - Apr 15
Revenue
EBITDA
EPS
FCF
Net Debt:EBITDA
FCF Yield
F2015
57.3
4.4
$0.13
-1.0
-1.2x
-0.9%
-0.7%
7.0%
Valuation Data
C2014
EV/EBITDA Current
Peers
Target
P/E
Current
Peers
Target
48.0x
41.2x
72.3x
47.1x
68.9x
68.1x
C2015E C2016E
$11.00 $12.38
44.3x
11.1x
22.9x
19.9x
66.7x
16.8x
61.4x
15.0x
51.7x
42.8x
88.8x
21.7x
Quarterly Data
EBITDA
EPS
2015
2016
2015
2016
Q1
Q2
Q3
Q4
1.0
1.2
1.3
1.0
0.8
1.2
1.7
2.3
$0.03 $0.04 $0.04 $0.02
$0.01 $0.03 $0.07 $0.12
Company Description
TECSYS is a provider of Supply Chain Management
(SCM) software. Through its Supply Chain Platform,
TECSYS helps corporates manage warehouse
facilities, distribution networks and logistics. The key
focus is the healthcare vertical where TCS ships into
integrated delivery networks (IDNs) and third-party
logistics providers. TECSYS is headquartered in
Montreal, Quebec.
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
0.30
0.25
0.20
0.15
0.10
0.05
0.00
Volume (M)
Andrej Krneta, MBA | 416.687.6656 | andrej.krneta@europac.ca
Mindy Lau, MBA | 416.360.2576 | mindy.lau@europac.ca
F2016E F2017E
65.5
73.4
6.0
9.2
$0.23
$0.51
-0.6
6.5
-3.9x
-1.2x
Price
www.epccm.ca
Page 36 of 56
TCS-TSX | 20 January 2016
TECSYS Inc. (TCS-T, CAD $7.60) - Data Sheet
$12.00
Last Sale Price
50-Day MA
200-Day MA
Consensus
3 Mths Ago
Current
Return
Buy
$11.50
$11.00
$13.00
$11.00
Buy
$11.40
$11.00
$13.00
$11.00
51%
46%
72%
46%
Rating:
Target:
Median:
High:
Low:
TECSYS Inc. provides supply chain management (SCM)
systems that helps corporates manage warehouse facilities,
distribution networks, and logistics. The Company offers its
solutions to the healthcare, high-volume distribution, and
third-party logistics (3PL) industries. TECSYS is
headquartered in Montreal, QC.
Sector Perform/Hold
# Est
Dec-15
Oct-15
Nov-15
Sep-15
Jul-15
Aug-15
May-…
Jun-15
Apr-15
Jan-15
Feb-15
Mar-15
Dec-14
Oct-14
Nov-14
Sep-14
Apr-14
Jul-14
0
Aug-14
$0.00
May-…
0.05
Jun-14
0.1
$2.00
Mar-14
0.15
$4.00
Jan-14
$6.00
Feb-14
0.2
Dec-13
Stock Price ($)
$8.00
Volume (M Shares )
0.25
$10.00
BUY | PT: CAD $11.00
Company Description
0.3
5
0
0
5
CAPITAL IQ - CONSENSUS BASED NTM EV/SALES
Manhattan
Inc.
The Descartes
Systems
Inc Systems Group
TecsysInc
Inc.
Tecsys
Inc. Associates,
Manhattan
Associates,
Inc.
The Group
Descartes
10.0x
Manhattan
Inc.
The Descartes
Systems
Group IncSystems Group
Tecsys
Tecsys
Inc. Associates,
Manhattan
Associates,
Inc.
The Descartes
IncInc.
33.0x
28.0x
8.0x
23.0x
6.0x
18.0x
4.0x
13.0x
2.0x
8.0x
Oct-15
Sep-15
Nov-15
Nov-15
Dec-15
Jul-15
Sep-15
Jul-15
May-15
Aug-15
Jun-15
Mar-15
Sep-14
Feb-15
Mar-15
Nov-14
Apr-15
Jan-15
May-15
Dec-14
Jul-14
Jan-15
Nov-14
May-14
Aug-14
Jan-14
Sep-14
Mar-14
Oct-14
Nov-13
Jul-14
Apr-14
Jul-13
May-14
Sep-13
Jun-14
Jan-13
Dec-13
Oct-15
Sep-15
Nov-15
Nov-15
Dec-15
Jul-15
Sep-15
Jul-15
May-15
Aug-15
Jun-15
Mar-15
Sep-14
Feb-15
Mar-15
Nov-14
Apr-15
Jan-15
May-15
Dec-14
Jul-14
Jan-15
Nov-14
May-14
Aug-14
Jan-14
Sep-14
Mar-14
Oct-14
Nov-13
Jul-14
Apr-14
Jul-13
May-14
Sep-13
Jun-14
Jan-13
Dec-13
Jan-14
Mar-13
Feb-14
May-13
Mar-14
Jan-14
Mar-13
Feb-14
May-13
Mar-14
0.0x
3.0x
Consolidated ($M)
2014
Net Sales
Growth y/y
Cons.
Cons. 3 Mts. Ago
46.6
6.4%
46.2
46.2
57.3
23.0%
56.3
56.3
14.9
14.7%
11.9
11.9
15.8
16.3%
13.5
13.5
16.7
11.8%
14.3
14.3
18.1
14.6%
14.9
14.9
65.5
14.3%
64.8
64.3
73.4
12.1%
71.5
71.6
EBITDA
Margin
Cons.
Cons. 3 Mts. Ago
4.1
9%
4.1
4.1
4.4
8%
4.9
4.9
0.8
6%
0.9
0.9
1.2
7%
1.2
1.2
1.7
10%
1.5
1.5
2.3
13%
1.4
1.4
6.0
9%
5.5
6.0
9.2
13%
8.8
9.2
EPS
Cons.
Cons. 3 Mts. Ago
$0.16
$0.16
$0.16
$0.13
$0.18
$0.18
$0.01
$0.02
$0.02
$0.03
$0.04
$0.04
$0.07
$0.06
$0.06
$0.12
$0.06
$0.06
$0.23
$0.20
$0.25
$0.51
$0.43
$0.44
8.8
(6.3)
10.8
(6.0)
11.9
(7.5)
9.1
(5.0)
9.7
(5.6)
8.2
(4.1)
8.2
(4.1)
13.4
(9.4)
5.3
(1.0)
1.5
(1.8)
0.9
(1.2)
(0.6)
6.5
Total Products Revenue
% of total
14.9
32%
21.1
37%
4.2
28%
5.1
32%
6.1
36%
7.1
40%
22.6
34%
25.3
34%
Software Products
% of total
8.1
17%
12.5
22%
2.1
14%
3.0
19%
3.8
23%
4.7
26%
13.7
21%
16.1
22%
Third-party Hardware & Software
% of total
6.8
15%
8.6
15%
2.1
14%
2.1
13%
2.3
14%
2.4
13%
8.9
14%
9.2
13%
30.2
65%
34.3
60%
10.3
69%
10.2
65%
10.2
61%
10.5
58%
41.2
63%
45.7
62%
1.5
3%
1.8
3%
0.4
3%
0.5
3%
0.4
2%
0.5
2%
1.8
3%
2.4
3%
Price
Target
Div Yield
Return
1 Week
1 Month
3 Month
YTD
1 Year
F2016E
F2017E
F2016E
F2017E
F2016E
F2017E
$7.60
$4.06
$42.31
$54.93
$12.31
$62.21
$25.53
$43.50
$11.00
$8.30
$61.00
$74.00
$14.84
$85.00
$21.31
$38.47
1.3%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
46%
104%
44%
35%
21%
37%
-17%
-12%
30.4%
-0.4%
-3.8%
(7.0%)
(2.8%)
(3.3%)
(0.4%)
(4.8%)
(11.2%)
(4.8%)
-11.7%
-19.4%
(15.4%)
(21.8%)
(7.4%)
(12.0%)
(7.4%)
(4.0%)
(12.5%)
-12.1%
-9.2%
(21.2%)
(21.6%)
21.5%
(15.9%)
15.6%
13.0%
(2.6%)
3.1%
-20.2%
(16.7%)
(17.0%)
(5.1%)
(11.4%)
(8.3%)
(7.3%)
(12.3%)
-9.5%
-59.6%
19.4%
23.5%
(10.4%)
7.7%
40.5%
132.7%
22.0%
65.5
76.4
343.6
611.6
112.1
193.9
185.4
109.4
73.4
89.3
402.3
671.4
124.5
232.9
206.6
136.6
6.0
-10.1
113.7
202.7
22.3
26.8
60.1
28.9
9.2
-1.0
141.1
226.0
25.9
34.7
69.8
41.1
$0.23
-$0.74
$1.46
$1.48
$0.28
$0.78
$0.57
$0.73
$0.51
-$0.61
$1.76
$1.66
$0.33
$0.90
$0.78
$0.76
F2015
F2016E
C2014
C2015E
C2016E
C2014
C2015E
C2016E
C2014
C2015E
C2016E
C2014
C2015E
C2016E
-0.9%
-13.8%
2.5%
3.0%
2.8%
0.6%
2.2%
3.4%
0.1%
-0.7%
-8.3%
3.5%
3.0%
3.8%
1.2%
2.6%
1.8%
1.1%
1.6x
2.2x
8.5x
9.4x
2.6x
8.8x
8.8x
11.0x
7.3x
1.9x
2.2x
8.5x
9.4x
2.6x
8.8x
7.8x
9.5x
7.0x
1.2x
1.6x
5.3x
7.0x
2.3x
5.8x
7.1x
7.5x
5.2x
19%
0%
0%
0%
0%
0%
13%
15%
4%
-14%
31%
60%
34%
17%
52%
9%
28%
33%
57%
11%
21%
10%
7%
22%
11%
22%
15%
48.0x
NA
25.9x
29.3x
46.1x
69.2x
26.3x
50.4x
41.2x
44.3x
NA
16.4x
21.6x
12.0x
41.8x
22.0x
23.5x
22.9x
11.1x
NA
13.2x
19.3x
10.7x
34.2x
19.0x
23.2x
19.9x
3%
-43%
33%
32%
6%
13%
30%
19%
13%
4%
-17%
32%
33%
19%
14%
32%
32%
21%
11%
-13%
33%
33%
20%
14%
34%
26%
21%
Cash
Net Debt
FCF
2015
Q116
Q216
Q316E
Q416E
2016E
2017E
Key Statistics
Value
52-Week High
52-Week Low
Avg Vol (3-Mo)
Shares Outstanding
Market Cap
Net Debt
Enterprise Value
Div Yield
FYE
Employees
$10.35
$7.25
0.00
12.32
93.6
-5.0
88.6
1%
Apr-15
346
Top Inst. Ownership
Fiera Capital
Mackenzie
Penderfund Capital Mgmt
Pembroke Management
Front Street
Counsel Portfolio
AGF Management
Acuity Investment Mgmt
Natcan
CIBC AM
Operating/Segmented Summary ($M)
Valuation
Services Revenue
% of total
Reimbursable Expenses
% of total
EBITDA
Net Change in WC
Capex
FCFF
36%
(5%)
M Shares
6 Mnths
% Held
1.46
0.24
0.22
0.21
0.06
0.00
0.00
NA
NA
NA
0.00
0.00
0.00
0.00
0.00
0.00
0.00
NA
NA
NA
11.9%
2.0%
1.8%
1.7%
0.5%
0.0%
0.0%
NA
NA
NA
F2016E
F2017E
F2018E
6.0
(4.1)
(0.9)
0.3
9.2
(1.5)
(1.2)
5.1
10.6
(0.5)
(1.3)
7.0
WACC
Term. Growth Rate
11.2%
2.0%
Terminal Value PV
Equity Value
DCF Value
Current
1-Yr TGT
64.5
137.2
$11.14
152.5
$12.38
Comparables
Comparables
and Peer Analysis
TECSYS Inc.
Amber Road, Inc. ($US)
Fleetmatics Group PLC ($US)
Manhattan Associates, Inc. ($US)
SciQuest, Inc. ($US)
SPS Commerce, Inc. ($US)
The Descartes Systems Group Inc
Kinaxis Inc.
Peer Average
Comparables
Multiples Analysis
TECSYS Inc.
Amber Road, Inc. ($US)
Fleetmatics Group PLC ($US)
Manhattan Associates, Inc. ($US)
SciQuest, Inc. ($US)
SPS Commerce, Inc. ($US)
The Descartes Systems Group Inc
Kinaxis Inc.
Peer Average
Enterprise
Value
89
113
1,504
3,914
237
916
1,788
973
FCF Yield
Return
EV/Sales
Revenue
Sales Growth (%)
EBITDA
EV/EBITDA
EPS
EBITDA Margin (%)
*All financial values in CAD unless otherwise noted
Source: Euro Pacific Canada, Company Reports and Filings, Capital IQ, Bloomberg
Page 37 of 56
Exhibit 1 –Income Statement ($CAD 000s, except EPS)
Income Statement
2013
2014
($CAD K)
Apr-13
Apr-14
Jul-14 Oct-14
Products
as % of total sales
15,160
35%
14,914
32%
3,857
30%
4,953
37%
6,134
41%
6,157 21,101
39%
37%
Services
as % of total sales
27,458
63%
30,176
65%
8,743
67%
8,096
60%
8,415
56%
1,141
3%
1,468
3%
412
3%
499
4%
409
3%
Reimbursable Expenses
as % of total sales
Total Revenues
43,759
Q115
Q215
Q315
Q415
2015
Q216
Q316e
Q416e
2016e
2017e
Jul-15 Oct-15
Jan-16
Apr-16
Apr-16
Apr-17
5,092
32%
6,103
36%
7,148
40%
22,555
34%
25,301
34%
9,093 34,347 10,316 10,172
58%
60%
69%
65%
10,221
61%
10,466
58%
41,175
63%
45,707
62%
498
3%
400
2%
450
2%
1,751
3%
2,370
3%
46,558 13,012 13,548 14,958 15,766 57,284 14,931 15,762
Jan-15 Apr-15 Apr-15
516
3%
1,836
3%
Q116
4,212
28%
403
3%
16,724
18,063
65,481
73,378
23%
15%
16%
12%
15%
14%
12%
7,888
7,967 29,711
7,511
7,972
8,310
8,862
32,655
35,622
6,618
49%
7,070
47%
7,799 27,573
49%
48%
7,420
50%
7,790
49%
8,415
50%
9,201
51%
32,826
50%
37,755
51%
2,611
20%
2,935
22%
3,230
22%
3,951 12,727
25%
22%
3,592
24%
3,503
22%
3,523
21%
3,563
20%
14,181
22%
14,460
20%
4,050
9%
1,427
11%
1,521
11%
1,340
9%
1,611
10%
5,899
10%
1,369
9%
1,391
9%
1,489
9%
1,529
8%
5,778
9%
6,080
8%
5,338
12%
5,223
11%
1,574
12%
1,630
12%
1,870
13%
1,926
12%
7,000
12%
2,252
15%
2,395
15%
2,400
14%
2,472
14%
9,519
15%
9,792
13%
EBITDA
EBITDA margin (%)
2,966
7%
4,076
9%
1,003
8%
1,157
9%
1,286
9%
955
6%
4,401
8%
831
6%
1,153
7%
1,677
10%
2,319
13%
5,980
9%
9,183
13%
Depreciation & Amortization
Amortization of Capitalized R&D
1,069
883
898
1,045
265
292
307
311
301
359
304
329
1,177
1,291
305
337
311
357
314
365
317
370
1,247
1,429
1,310
475
EBIT
EBIT margin (%)
1,268
3%
2,265
5%
474
4%
532
4%
630
4%
311
2%
1,947
3%
207
1%
501
3%
1,003
6%
1,637
9%
3,348
5%
7,423
10%
54
12
-242
112
-35
-167
28
25
-3
29
-13
-6
24
-1
-5
24
-10
1
105
1
-13
22
17
-1
16
17
1
30
0
-5
29
0
-5
97
34
-10
125
0
-25
960
2,021
418
510
602
298
1,828
167
469
968
1,603
3,207
7,273
Tax (credit)/charge
Effective Tax Rate
75
8%
226
11%
75
18%
100
20%
135
22%
3
1%
313
17%
98
59%
102
22%
125
13%
92
6%
417
13%
946
13%
Net Profit
Profit margin (%)
Basic Shares (M)
Diluted Shares (M)
885
2%
11
12
1,795
4%
11
12
343
3%
12
12
410
3%
12
12
467
3%
12
12
295
2%
15
15
1,515
3%
12
12
69
0%
12
12
367
2%
12
12
843
5%
12
12
1,511
8%
12
12
2,790
4%
12
12
6,328
9%
12
12
Basic EPS ($)
Diluted EPS ($)
0.08
0.08
0.16
0.16
0.03
0.03
0.04
0.04
0.04
0.04
0.02
0.02
0.13
0.13
0.01
0.01
0.03
0.03
0.07
0.07
0.12
0.12
0.23
0.23
0.51
0.51
yoy growth
11%
6%
23%
16%
26%
Cost of sales
25,476
26,265
6,926
6,930
Gross Profit
Gross margin (%)
18,283
42%
20,293
44%
6,086
47%
Sales & Marketing
as % of total sales
7,796
18%
8,755
19%
General & Administrative
as % of total sales
3,881
9%
Research & Development
as % of total sales
Interest Expense/ (Income)
FX (Gain)/ Loss
Other
Profit before tax
27%
Page 38 of 56
Company: TECSYS Inc. | TCS:TSX
I, Andrej Krneta, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am
not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
Issuer
No
No
No
No
No
No
No
No
No
No
Page 39 of 56
RATING DEFINITIONS
Buy
horizon.
Speculative Buy
Hold
Sell
Under Review
move.
Tender
Dropped Coverage
Buy
Speculative Buy
Hold
Sell
Under Review
Restricted
29
22
8
1
5
2
0
45%
34%
13%
2%
8%
8
7
2
0
3
2
0
40%
35%
10%
0%
15%
Tender
Tecsys Inc. (TSX:TCS)
$12.00
Date
Target (C$)
Rating
21 Sep 2015
$11.00
Buy
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
Jan 13
May 13
Sep 13
Jan 14
May 14
Sep 14
Jan 15
May 15
Sep 15
Jan 16
Coverage Initiated: Sep 21, 2015
Price
Toronto
416-649-4273 | 888-216-9779
Series2
Oakville
289-348-5936
Vancouver
604-453-1382 | 888-216-9779
Montreal
514-940-5096 | 888-216-9779
Tokyo
+81.90.1470.1684| 888-216-9779
Page 40 of 56
Special Situations
20 January 2016
PYR-TSXV: $0.22
PyroGenesis Canada Inc.
Near-Term Catalysts In AM Compel Us To Nominate PYR
To Top Pick Status
Thesis: PyroGenesis offers exposure to the high growth additive manufacturing
(“AM”) industry with 32-45% CAGR and downside protection with a diversified
portfolio of business verticals it services. We like the name for its sector orientation,
supplying metal powders to a growing manufacturing technology, and robust gross
margins of 40%. Trading at 10.5x EV/2016 Adjusted EBITDA multiple, we believe
PyroGenesis is undervalued against its growth prospects. With a backlog of $16M
for 2016, we see a base case for our revenue projections that should result in
positive Adjusted EBITDA and free cash flow.
Catalysts:
 Near-Term Catalyst in AM: The Company has been successful at driving its
Plasma Atomization Process (“PAP”) to produce industry leading metal powders
specifically suited for AM as well as other metal powder applications. Powders
produced from the PAP units are characterised with high purity, sphericity at
very small particle sizes. PyroGenesis has successfully landed an order for 10
units to an Asian customer for $12.5M. It has delivered the first unit with a
follow-on order for the remaining 9 units once the first unit passes customer
factory acceptance. Management expects the order for the balance, valued at
$10M, to be looming early in Q116. The global market for AM is projected at
US$20B by 2020 with metal AM representing 9%, and the addressable market
for PYR can be as much as US$1.8B.
 Impressive Defense Business – For a Canadian Company: Recall that PYR is the
only Canadian company that supplies the US Navy. PYR is under contract to
provide onboard waste destruction systems for the Ford Class Super Carrier
program. The Company also has a contract with a multi-national military
consortium to deliver and test tactical systems for the destruction of chemical
warfare agents. These contracts represent a $28M revenue opportunity for 2016
to 2020.
 DROSRITE and Yasui remain Catalyst Rich: Coming from behind is the recent
entry into Aluminum dross treatment and metal recovery with the delivery of
PYR’s first DROSRITE unit to an automotive part manufacturer. Once this unit
achieves operational status, the customer will act as a reference plant for
prospecting and new orders. Similarly, the JV with Yasui of Japan is expected to
bear fruit in 2016 with the first order for a waste destruction system.
Valuation: Our valuation and one-year price target of $0.60 is based on a DCF
model with an 18% discount and 6.5x EV/Adjusted EBITDA exit multiple. Our target
equates to 24.4x EV/2016 Adjusted EBITDA and 5.4x EV/2017 Adjusted EBITDA,
which are below that of peers in the AM and clean tech sectors.
Speculative Buy Rating
$0.60 Target Price
Valuation: 24.4x EV/F2016 EBITDA
Market Data
Net Debt
Enterprise Value
Basic Shares O/S
Fully Dil. Shares O/S
52 Week Range
Dividend Yield
18.9
4.1
23.0
84.8
100.8
0.03
$0.20 - $0.50
0.0%
New
Old
Revisions
2015E Revenues
2015E EBITDA
2015E EPS
2016E Revenues
2016E EBITDA
2016E EPS
8.3
(1.7)
($0.05)
22.4
2.3
($0.01)
NC
NC
NC
NC
NC
NC
2014A
5.8
(1.2)
($0.04)
(5.0)
NA
NM
2015E
8.3
(1.7)
($0.05)
(0.4)
NA
NM
2016E
22.4
2.3
($0.01)
4.9
1.8x
25.8%
NM
17.0x
NM
NM
36.6x
NM
25.0x
NM
NM
34.4x
10.2x
10.4x
24.4x
NM
36.2x
Financial Metrics
FYE - Dec 31
Revenues
Adj. EBITDA
EPS
FCF
Net Debt:EBITDA
FCF Yield
Valuation Data
EV/EBITDA Current
Peers
Target
P/E
Current
Peers
Quarterly Data
Q1
(0.6)
Q2
0.1
Q3
(0.5)
Q4
(0.2)
EBITDA
2014
EPS
2015
(0.7)
(0.7)
(0.6)
0.4
2014 ($0.02) ($0.01) ($0.01) ($0.01)
2015 ($0.02) ($0.02) ($0.01) ($0.00)
Company Description
PyroGenesis Canada Inc. is a technology company
engaged in the design, development, and
manufacturing of plasma torches and plasma process
equipment. PYR’s products service the Additive
Manufacturing,
Oil
&
Gas,
Defence,
Mining&Metallurgical, and Environmental industries.
PYR is headquartered in Montreal, Canada.
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Volume (M)
Price
Source: FactSet
www.epccm.ca
Fadi Benjamin, CFA, P.Eng. | 416.842.1791 | fadi.benjamin@europac.ca
Page 41 of 56
PYR-TSXV | 20 January 2016
PyroGenesis Canada, Inc. (PYR:TSXV, $0.22) - Data Sheet
$0.80
Last Sale Price
50-Day MA
1.2
200-Day MA
1
$0.60
0.8
$0.50
0.6
$0.40
$0.30
0.4
$0.20
0.2
PyroGenesis Canada Inc. is a technology company engaged
in the design, development, and manufacturing of plasma
torches and plasma process equipment. PYR’s products
service the Additive Manufacturing, Oil & Gas, Defence,
Mining&Metallurgical, and Environmental industries. PYR is
headquartered in Montreal, Canada.
Rating:
Target:
Median:
High:
Low:
Current
Return
Buy
$0.75
$0.75
$0.75
$0.75
Buy
$0.60
$0.60
$0.60
$0.60
169%
169%
169%
169%
1
0
0
1
Historical Dividend Yield Spread
FactSet - CONSENSUS BASED NTM EV/EBITDA
PyroGenesis Canada, Inc.
19.5x
3 Mths Ago
Sector Perform/Hold
# Est
Jan-16
Dec-15
Oct-15
Nov-15
Sep-15
Jul-15
Aug-15
May-…
Consensus
0
Jun-15
Apr-15
Jan-15
Feb-15
Mar-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
May-…
Apr-14
Mar-14
$0.00
Jun-14
$0.10
Volume (M Shares)
Stock Price ($)
$0.70
Buy | PT: $0.60
Company Description
FactSet - CONSENSUS BASED NTM EV/Sales
Questor Technology Inc.
30.0x
Newalt a Corporation
Newalta Corporation
Questor Technology Inc.
PyroGenesis Canada, Inc.
25.0x
20.0x
14.5x
15.0x
10.0x
9.5x
5.0x
Jan-16
Dec-15
Oct-15
Nov-15
Sep-15
Jul-15
Aug-15
Jun-15
Apr-15
May-15
Mar-15
Jan-15
Feb-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
Mar-14
May-14
0.0x
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Jul-14
Aug-14
Jun-14
May-14
Apr-14
Mar-14
4.5x
Consolidated
Revenues
Growth y/y
Adjusted EBITDA
Growth y/y
Margin
EPS
Growth y/y
FCF
Growth y/y
Cash
Net Debt
2014
Q115
Q215
Q315
Q415E
2015E
2016E
2017E
2018E
2019E
5.8
0.2%
-1.2
43.2%
(20.6%)
($0.04)
17.3%
(5.0)
(84.4%)
0.4
1.7
1.1
38.4%
-0.7
15.5%
(65.3%)
($0.02)
89.6%
0.0
(137.2%)
2.8
1.7
1.5
-21.7%
-0.7
(635.7%)
(47.9%)
($0.02)
65.2%
(1.4)
(136.1%)
1.2
3.2
1.4
12.2%
-0.6
10.9%
(43.3%)
($0.01)
73.4%
(0.7)
(169.6%)
0.3
4.1
4.3
138.1%
0.4
(337.5%)
8.9%
($0.00)
23.5%
1.6
264.9%
3.5
0.7
8.3
43.3%
-1.7
41.5%
(20.3%)
($0.05)
12.1%
(0.4)
(59.7%)
3.5
0.7
22.4
170.5%
2.3
(234.2%)
10%
($0.01)
4.5%
4.9
44.4%
7.7
(3.8)
45.1
101.8%
10.3
355.6%
22.7%
$0.08
2.2%
15.9
9.8%
23.2
(19.3)
45.2
0.2%
9.5
(7.0%)
21.1%
$0.07
2.2%
11.6
10.5%
34.9
(34.9)
34.2
-24.3%
5.4
(43.8%)
15.7%
$0.04
2.9%
5.2
18.7%
40.1
(40.1)
Key Statistics
Value
52-Week High
52-Week Low
Avg Vol (3-Mo)(000)
Shares Outstanding
Market Cap
Net Debt
Enterprise Value
Div Yield
FYE
$0.50
$0.21
33.0
85
19
4
23
0.0%
Dec 31
Top Inst. Ownership
122%
(8%)
M Shares
6 Mnths
% Held
PASCALI PHOTIS PETER JR
PASCALI PETER P SR
COTE 100, Inc.
AGF Investments, Inc.
CURLEIGH ALAN ROBERT
37.56
24.62
3.56
2.65
0.04
6.75
0.00
-0.29
-1.03
0.00
44.3%
29.0%
4.2%
3.1%
0.1%
Valuation
2014
2015E
2016E
5.8
(1.2)
0.2
(0.1)
(5.0)
8.3
(1.7)
0.2
(0.0)
(0.4)
17.00%
5.50x
22.4
2.3
0.2
(1.6)
4.9
Current
1-Yr TGT
% Total
28.5
21.3
45.7
$0.45
30.2
25.1
59.2
$0.59
51.1%
42.5%
100.0%
Revenue
EBITDA
Depreciation
Capex
Unlevered FCF
Discount Rate
P V F CF
Terminal Value PV
Equity Value
DCF Value
Comparables
Comparables
and Peer A nalysis
PyroGenesis Canada
Questor Technology
Fuel Tech
Waste Management Inc
Newalta
Ceiba Energy Services
Materialise ADR
Arcam
AMG Adv Metallugical Grp
Peer Average
Comparables
Multiples A nalysis
PyroGenesis Canada
Questor Technology
Fuel Tech
Waste Management Inc
Newalta
Ceiba Energy Services
Materialise ADR
Arcam
AMG Adv Metallugical Grp
Peer Average
Price
$0.22
$0.79
$1.65
$51.52
$2.31
$0.15
$6.03
kr164.00
€ 8.02
Enterprise
Value
23
16
24
32,766
445
17
249
2,898
263
Target
$0.60
$1.55
$2.50
$57.33
$8.36
$0.41
$10.15
kr207.67
€ 9.28
Div Yield
Return
Return
Revenue
EBITDA
EPS
1 Week
1 Month
3 Month
YTD
1 Year
2015E
2016E
2015E
2016E
2015E
2016E
3.0%
10.8%
2.0%
169.1%
96.2%
51.5%
14.3%
272.6%
182.8%
68.4%
26.6%
15.8%
101.8%
4.5%
2.7%
(6.8%)
(1.1%)
5.7%
3.6%
(9.7%)
(3.6%)
(1.8%)
(1.3%)
9.5%
(3.8%)
(9.3%)
(0.3%)
(35.5%)
(12.1%)
(23.7%)
10.0%
(5.2%)
(10.7%)
(4.2%)
(8.3%)
(17.0%)
0.2%
(70.2%)
(39.1%)
(26.8%)
(3.9%)
11.8%
(23.6%)
4.5%
(1.3%)
(11.7%)
(1.5%)
(30.7%)
(23.7%)
(14.4%)
(12.2%)
(10.6%)
(13.6%)
(16.4%)
(75.2%)
(51.9%)
0.7%
(82.5%)
(70.1%)
(38.9%)
(1.8%)
29.0%
(45.7%)
8.3
7.8
77.5
13,018.7
336.5
7.7
109.1
584.8
953.5
22.4
13.6
82.5
13,455.8
354.6
14.0
131.4
744.9
953.6
-1.7
1.7
-0.9
3,422.8
51.4
1.6
2.6
79.1
72.1
2.3
4.8
-4.7
3,603.2
75.7
4.5
11.8
112.5
73.3
($0.05)
$0.03
($0.17)
$2.57
($1.11)
($0.02)
($0.11)
kr1.98
€ 0.68
($0.01)
$0.12
($0.08)
$2.76
($0.22)
$0.01
$0.05
kr3.37
€ 0.84
FCF Yield
2015
2016
2014
EV/EBITDA
2015E
2016E
2014
EV/Sales
2015
2016
2014
P/E
2015
2016
2014
P/CFPS
2015
2016
-19.4x
3.3x
8.2x
9.2x
2.6x
19.4x
39.1x
144.9x
3.7x
32.4x
-13.7x
9.4x
-25.8x
9.6x
8.6x
10.6x
96.0x
36.6x
3.6x
20.7x
10.2x
3.3x
-5.2x
9.1x
5.9x
3.9x
21.1x
25.8x
3.6x
9.1x
4.0x
1.3x
0.3x
2.3x
0.5x
2.6x
2.5x
8.6x
0.3x
2.6x
2.8x
2.0x
0.3x
2.5x
1.3x
2.3x
2.3x
5.0x
0.3x
2.2x
1.0x
1.2x
0.3x
2.4x
1.3x
1.2x
1.9x
3.9x
0.3x
1.7x
NM
7.0x
NM
21.2x
NM
NM
99.8x
53.7x
12.3x
45.4x
NM
23.7x
NM
20.4x
NM
NM
NM
81.8x
11.8x
42.0x
NM
6.7x
NM
19.0x
NM
24.2x
111.1x
48.1x
9.6x
41.8x
NM
4.7x
NM
9.9x
1.3x
NM
NM
NM
2.8x
5.3x
NM
12.8x
NM
9.3x
5.5x
58.0x
30.9x
NM
5.2x
23.3x
3.9x
4.5x
NM
8.7x
2.4x
5.8x
30.9x
NM
4.4x
10.4x
NM
3.9%
6.2%
(101.7%)
(48.3%)
13.8%
(35.0%)
25.8%
4.5%
6.1%
7.0%
(34.5%)
11.6%
(4.2%)
* PyroGenesis is based on Euro Pacific Canada forecasts, all other comparables are based on FactSet consensus est imates
Source: Euro Pacific Canada, Company Reports and Filings, FactSet
Page 42 of 56
31-Dec
4,089
1,676
21%
Cost of Sales
Gross Profit
Gross Margin
216
Source: Company reports, Euro Pacific Canada
Adjusted EBITDA
Share Based Compensation
(1,185)
303
(1,488)
181
Depreciation
EBITDA
1,397
(0.04)
(3,279)
-
(3,279)
Amortization
EPS -Basic
Net Income /Loss
Income Tax Expense
Earnings Before Tax (EBT)
Financing Charges
(3,066)
209
Research & Development Expenses
Results from Operating Activities (EBIT)
4,533
Selling, General and Administrative
EXPENSES
5,765
Revenue
REVENUE
Figures in thousands of C$, except for share data
2014
2014
INCOME STATEMENT
1
2
27
1,108
40%
(24)
1,558
1,534
30-Jun
Q2A
137
-
(729)
149
(878)
40
349
(0.02)
(735)
34
(769)
41
349
(0.02)
(1,279) (1,296)
-
(1,279) (1,296)
12
(1,268) (1,159)
29
1,192
-3%
(47)
1,164
1,116
31-Mar
Q1A
3
(590)
150
(740)
41
349
(0.01)
(1,268)
-
(1,268)
138
(1,130)
33
1,122
12%
24
1,339
1,363
30-Sep
Q3A
4
2015
2015E
Q1E
Q2E
Q3E
Q4E
2016
2016E
378
150
228
40
349
(0.00)
(265)
-
(265)
103
(162)
100
1,200
44%
1,138
3,112
4,250
(1,676)
483
(2,159)
163
1,397
(0.05)
(4,108)
-
(4,108)
390
(3,719)
189
4,622
29%
1,091
7,172
8,263
290
150
140
40
349
(0.00)
(349)
-
(349)
100
(249)
100
1,100
-4%
951
2,299
3,250
440
150
290
40
349
(0.00)
(195)
-
(195)
96
(99)
100
1,850
-2%
1,851
3,649
5,500
390
150
240
40
349
(0.00)
(244)
-
(244)
95
(149)
100
2,000
2%
1,951
3,799
5,750
1,130
150
980
40
349
0.00
357
139
496
95
591
100
2,100
27%
2,791
5,059
7,850
2,250
600
1,650
160
1,397
(0.01)
(431)
139
(292)
386
93
400
7,050
13%
7,543
14,807
22,350
31-Dec 31-Dec 31-Mar 30-Jun 30-Sep 31-Dec 31-Dec
Q4E
2,390
150
2,240
40
-
0.02
1,516
589
2,105
95
2,200
100
2,000
29%
4,300
6,450
10,750
31-Mar
Q1E
2,990
150
2,840
40
-
0.02
1,948
757
2,705
95
2,800
100
2,000
34%
4,900
7,350
12,250
30-Jun
Q2E
3,640
150
3,490
40
-
0.03
2,416
939
3,355
95
3,450
100
2,150
34%
5,700
8,550
14,250
30-Sep
Q3E
1,230
150
1,080
40
-
0.01
680
265
945
95
1,040
100
2,000
36%
3,140
4,710
7,850
31-Dec
Q4E
2017
10,250
600
9,650
160
-
0.08
6,559
2,551
9,110
380
9,490
400
8,150
34%
18,040
27,060
45,100
31-Dec
2017E
Page 43 of 56
Important Information and Legal Disclaimers (All prices are in C$ unless noted)
Analyst Certification
Ticker: PYR:TSXV
I, FADI BENJAMIN, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am
not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
COMPANY SPECIFIC DISCLOSURES
Issuer
If Yes: 1) Is it a long or short position? NA; and, 2) What type of security is it? NA
No
No
No
Does Euro Pacific Canada Inc. and/or one or more entities affiliated with Euro Pacific Canada Inc. beneficially own common shares (or any other class of common
equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. provided financial advice to and/or, either on its own or as a syndicate member, participated in a public
offering, or private placement of securities of this issuer?
Yes
Yes
Yes
No
No
No
Page 44 of 56
RATING DEFINITIONS
Buy
horizon.
Speculative Buy
Hold
Sell
Under Review
move.
Dropped Coverage
Buy
Speculative Buy
Hold
Reduce
Sell
Under Review
29
21
9
0
1
18
Number of investing banking relationships
8
6
2
0
0
2
Date
9 Oct 2014
22 Sep 2015
27 Nov 2015
PyroGenesis Canada, Inc. (PYR-TSX)
$1.20
$1.00
Target (C$) Rating
$1.00
Spec Buy
$0.75
Spec Buy
$0.60
Spec Buy
$0.80
$0.60
$0.40
$0.20
$0.00
Jan 13
May 13
Sep 13
Jan 14
May 14
Sep 14
Jan 15
May 15
Sep 15
Jan 16
Coverage Initiated: Oct 9, 2014
Data sourced from: FactSet
Price
Toronto
416-649-4273 | 888-216-9779
PT revisions
Burlington
3385 Harvester Road, Suite 230
Burlington, ON, L7N 3N2
289-348-5936 | 888-216-9779
Vancouver
604-453-1382 | 888-216-9779
Montreal
514-940-5096 | 888-216-9779
Tokyo
RoP #603 5-11-1 Toranomon,
Minato-Ku, Tokyo, 105-0001
+81.90.1470.1684| 888-216-9779
Page 45 of 56
26 January 2016
Real Estate
AAR.un-TSX: $4.39
FedEx Cash Flow Massively Undervalued
Event: We are reiterating PIRET as our Top Pick for the Real Estate sector.
Conservative Underpinnings: In this period of market insecurity, Canadian dollar
weakness and Alberta angst, we feel those REITs with strong balance sheets; strong
tenant covenants; significant, long-term debt and leases; and US dollar revenue will
be the ones best able to weather our current market volatility.
PIRET, through its recent acquisitions of new or best-in-class assets in both the US
and Canada as well as its ongoing dispositions of its older and smaller stock,
continues to demonstrate that it intends to create a REIT that carries state-of-theart assets coupled to conservative financial metrics and debt profiles, and perfectly
fits our ideal of a conservative but nimble REIT. The fact that well over 35% of its
NOI comes from US properties and 19.8% of its NOI comes from the US portion of
its FedEx (FDX-NYSE, NR) portfolio further strengthens this story against the
backdrop of Canada’s stumbling economy.
It has been our argument that PIRET is run more like a Pension Fund than the way
many REITs are. While short-term performance is important at the REIT, long-term
value creation is paramount, and it must be done in a conservative way to weather
storms that invariably brew over a long enough period. PIRET has been incredibly
diligent, entering new markets where spreads are better, building when it couldn’t
or wouldn’t buy and doing both with conservative leverage coupled to long-term
leases with high quality covenants.
Unrealized FedEx Value:
We feel that the REIT’s FedEx portfolio has not been adequately appreciated by the
market as a whole, undervaluing its FedEx covenant, its existing robust cash on cash
returns, and its ability to unlock capital through a potential non-managing interest
partial disposition.
First for FedEx’s covenant. FedEx currently has four 10-year unsecured corporate
debentures issuances in the marketplace dating from mid-2012 to early 2015 with a
current YTW of 3.25%. These debt instruments, which have no recourse to FedEx,
value the cash flow coming from the company as needing to pay a 3.25% yield for
its inherent risk whereas the leases to PIRET, which have both recourse to the
tenant (FedEx) as well as the underlying value of the properties, is valued by the
market as needing to pay more than double that amount with an estimated average
cap rate of 6.3% for that portion of the REIT’s portfolio. We would argue that the
market doesn’t even value these properties at a 6.3% cap rate in regards to its unit
price but more likely closer to a 6.5% cap or more. Valuing the estimated cash flow
from PIRET’s US FedEx properties at the same yield as FedEx’s unsecured
debentures would see the properties worth ~US$650M. PIRET purchased the
properties for US$203.3 in 2014. The delta between the current value and using
FedEx’s unsecured bond yield for the portfolio is ~C$370M or ~C$1.95/unit.
Buy Rating
$5.30 Target Price
Valuation: 12.6x TP/FFO (F2016)
Market Data
$824.0
187.7
186.6
7.1%
$1,013
Units S/O (M)
Float S/O (M)
Yield
Total Debt (M)
49.1%
383,160
$4.1 - $5.25
Debt/GBV
Average Volume (3mo)
52 Week Range ($)
Financial Metrics
FY-Dec 31
Quaterly FFO
2014
2015
2016
Annual
FFO
AFFO
Current Multiples
P/FFO
P/AFFO
Target Multiples
TP/FFO
TP/AFFO
Distribution
AFFO Payout Ratio
NAV Estimate
Q1
Q2
Q3
Q4
$0.10A $0.09A $0.09A
$0.10A $0.09A $0.10A
$0.10E $0.10E $0.11E
13A
14A
15E
$0.40 $0.37 $0.39
$0.36 $0.32 $0.35
$0.09A
$0.10E
$0.11E
16E
$0.42
$0.38
11.9x
13.7x
11.3x
12.5x
10.5x
11.6x
14.3x
16.6x
$0.31
97%
13.6x
15.1x
$0.31
89%
12.6x
13.9x
$0.31
82%
$5.00
$0.31
86%
Company Description
Pure Industrial Real Estate Trust is Canada's largest internally
managed public REIT with its head quarters located in
Vancouver, BC. PIRET focuses exclusively on Industrial
properties with a portfolio spread across Canada and the US. As
of September 30th, 2015, the REIT owned 170 investment
properties spanning ~17.42M sq. ft. of GLA in addition to 2
properties under development comprising of 482K sq. ft.
16.00
$5.40
14.00
$5.20
12.00
10.00
$5.00
$4.80
8.00
$4.60
6.00
4.00
$4.40
2.00
$4.20
0.00
Jan-15 Mar-15 May-15
Jul-15
Volume (M)
Sep-15 Nov-15
$4.00
Jan-16
Price
Source: Company Reports, S&P Capital IQ, Euro Pacific Canada
Despite the undervaluing of the FedEx cash flow the properties do give superior
cash on cash returns. FedEx produced ~22% of the REIT’s NOI in Q315 and 19.8% of
the REIT’s NOI came from its US located FedEx properties. That 19.8%, we estimate,
climbs to ~20.5% by the end of Q415 due to f/x changes through a weakening
Canadian dollar. Accounting for mortgage debt servicing changes, we estimate the
Robert Sutherland, FRI(E) – Analyst | 416.933.3353 | Rob.Sutherland@europac.ca
Asad Siddiqui – Associate | 416.933.3353 x202 | Asad.Siddiqui@europac.ca
www.epccm.ca
Page 46 of 56
AAR.un-TSX |26 January 2016
annual cash on cash return for the US FedEx portfolio to be ~17.5%. That is at the current 100%
ownership.
We have previously discussed the REIT’s ability to, if it chooses, drastically increase AUM with minimal or
no cash outlays through dispositions of non-managing interests in portfolios. This comes back to PIRET’s
Pension Fund-esque management style. Pension Funds and other large, adroit managers have used this
technique to increase cash flow back to their coffers, selling other investors on their superior ability to
manage and execute on transactions. PIRET has shown both an eagerness and an ability to manage for
other parties in a JV and we expect it to continue to do so in the future.
A sale of a 50% non-managing interest in PIRET’s US FedEx portfolio at a 6.3% cap rate and accounting for
the current mortgages on the properties could net the REIT ~C$80M. Reinvesting that capital with a JV
partner on a 50-50 basis at a 50% LTV could allow the REIT to grow its AUM by ~C$320M.
Assuming a 2% asset management fee on the managed portion, the 50% sell down of the US FedEx
portfolio would see the REIT’s cash outlay in the portfolio drop to under ~C$26M while its total NOI and
asset management revenue from the properties would only drop ~17% creating an ~60% annual cash on
cash return on the US FedEx portfolio going forward.
This might be a conservative REIT but it has the ability to create anything but conservative returns.
While our model assumptions and unit/NAV valuations do not take into account the potential of these
possible dispositions/acquisitions or transformational changes in perceived value of FedEx’s cash flow, we
feel that the REIT has the potential to fundamentally change its valuation through massive AUM
expansion, significant asset management fee onboarding, and the re-pricing of its substantial FedExsourced NOI.
Valuation - Maintaining BUY Rating and Target of $5.30
We are maintaining our target and other estimates. Our target is ~12.6x our 2016E FFO of $0.42 and 13.9x
our 2016E AFFO of $0.38. Euro Pacific Canada estimates PIRET’s NAV/unit of $5.00.
Page 47 of 56
Company: Pure Industrial Real Estate Trust | AAR.un:TSX
I, Robert Sutherland, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not,
am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
Issuer
No
No
No
No
No
No
Yes
Yes
No
No
Page 48 of 56
RATING DEFINITIONS
Buy
horizon.
Speculative Buy
Hold
Sell
Under Review
move.
Tender
Dropped Coverage
Buy
Speculative Buy
Hold
Sell
Under Review
Restricted
30
20
9
1
5
2
0
46%
31%
14%
2%
8%
8
7
2
0
3
2
0
40%
35%
10%
0%
15%
Tender
Date
Target
12 Jan 2015 $5.20
11 Mar 2015 $5.30
Pure Industrial Real Estate Trust (TSX:AAR.un)
$6.00
Rating
Buy
Buy
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
Apr 13
Aug 13
Dec 13
Apr 14
Price
Toronto
416-649-4273 | 888-216-9779
Aug 14
Dec 14
Apr 15
Aug 15
Dec 15
Coverage Initiated: Jan 12, 2015
PT revision
Oakville
289-348-5936
Vancouver
604-453-1382 | 888-216-9779
Montreal
514-940-5096 | 888-216-9779
Tokyo
+81.90.1470.1684| 888-216-9779
Page 49 of 56
Precious Metals
25 January 2016
KAM-TSXV: $0.83
Kaminak Gold Corp.
Top Pick for 2016
Event: We are pleased to select Kaminak Gold as our Top Pick for 2016. KAM
shares performed admirably during a challenging market environment for junior
gold explorers in 2015. Indeed, KAM shares put in a 10.4% increase during 2015,
compared with a 9.6% decrease in gold price, and plus-20% declines experienced by
a basket of peers represented by the Global X Gold Explorers ETF and BMO Jr. Gold
Producers ETF (Exhibit 1). We would expect such performance to persist in 2016,
potentially bolstered by hopes for a higher gold price on recently diminished
prospects for further interest rate increases by the US Federal Reserve.
Strong Coffee: The recently released summary of the results of a Feasibility Study
(FS) of the Company’s 100%-owned Coffee gold project in the Yukon ensconce
Coffee as one of the best undeveloped gold assets in the hands of a junior right
now. As such, Kaminak surely sits near the centre of sector M&A radar screens.
Robust Economics: The FS yielded an after-tax IRR of 37% and after-tax NPV5% of
$455M, based on an initial capex estimate of $317M, and base-case gold price of
US$1,150/oz. Total cash costs are estimated at US$482/oz, with all-in sustaining
costs of US$550/oz. The study envisages an open-pit heap-leach mine running at
5Mtpa to annually produce an average of 184,000oz of gold over 10 years.
Production peaks at 228,000oz in year 4, average steady production (excluding 3month ramp-up) in years 1-9 is forecast at 193,000oz. The FS focuses on a Probable
Reserve totalling 46.4Mt at 1.45 g/t Au (2.16Moz).
Well funded, and supported: Something of an anomaly among its peers, Kaminak
also remains well funded for its near-term goals, with $20M in cash remaining at
the end of 2015. In late October 2015, Kaminak closed a non-brokered private
placement of 27.4M units at $0.82/unit for gross proceeds of $22.5M. Importantly,
the placement saw the addition of noted resource investor Thomas Kaplan, via
the Electrum Strategic Opportunities Fund, as a significant new shareholder with a
10.32% equity interest upon closing.
Equally important, existing large shareholders Ross Beaty and Zebra Holdings and
Investments S.à.r.l., Luxembourg (a company owned by a Trust whose settlor was
the late Adolf H. Lundin) also participated in the private placement. We contend
that the placement’s high-profile participants provide a meaningful vote of
confidence in the Coffee gold project and Kaminak’s management team. The
presence of such strategic long-term investors tends to further de-risk the story.
Looking Ahead: KAM now plans to begin advancing the project through the Yukon
permitting process (Exhibit 5). The Project will be subject to an environmental and
socio-economic assessment under the Yukon Environmental and Socio-economic
Assessment Act. KAM plans to submit a Project Proposal in Q316. Following an
adequacy review, the Company would submit Quartz Mining License and Water
License applications -- the two major licenses required for mine construction and
operation. The Company expects to complete permitting over two years, with all
required permits in hand by Q218, and subsequent first production in Q419.
Valuation: We reiterate our Speculative Buy rating and price target of $1.85/shr.
We note that the Coffee project features some of the same attributes — a districtscale property anchored by a multi-Moz deposit — as recent M&A targets.
Speculative Buy Rating
$1.85 Target
Valuation: DCF (5% discount)
Market Data
Market Capitalization ($M)
Net Debt ($M)
Cash & Equivalents ($M)
Debt ($M)
Enterprise Value ($M)
Fully Diluted Shares O/S (M)
Avg. Daily Volume (k)
52-Week Range
142.1
na
28.4
0.0
113.7
171.2
195.0
193.9
$0.61 - $1.15
Key Asset
Coffee Gold Project, Yukon
FS Highlights
After-tax
Gold Price
NPV5% (C$)
IRR
Payback
US$1,100
295
27%
2.2
US$1,100
402
34%
1.7
US$1,200
509
40%
1.3
US$1,250
562
43%
1.1
US$1,300
616
46%
1.0
US$1,400
722
52%
0.8
US$1,500
828
58%
0.7
Valuation
Discount
Coffee Gold Project
5.0%
Exploration Upside
In Situ
Unadjusted NAV
Corporate Adjustments
Cash & Equivalents
Options & Warrants
Future Equity Finance Proceeds
$ (M)
445
21
466
(39)
28
23
105
$/shr
1.40
0.07
1.47
(0.12)
0.09
0.07
0.33
Adjusted NAV
P/Adjusted NAV
584
1.84
0.45x
Risks
Events/Catalysts
Permitting Risk
Permits Received - Q218
Financing Risk
First Production - Q419
Development/Operational Risk
Company Description
Kaminak Gold Corp. is advancing the 100%-owned
Coffee Gold Project in the Yukon. Coffee hosts a multimillion oz high-grade oxide gold deposit amendable to
heap leaching. The Company recently initiated a
Feasibility Study following the announcement of a
robust Preliminary Economic Assessment (at
US$1,250/oz gold), and an investment into the company
by Ross Beaty and Zebra Holdings & Investments
2.0
$1.20
$1.00
1.5
$0.80
1.0
$0.60
$0.40
0.5
0.0
Jan-15
$0.20
Apr-15
Jul-15
Volume
$0.00
Jan-16
Oct-15
Price
Source: Capital IQ
www.epccm.ca
Ryan Walker, MSc | 416.479.8997 | ryan.walker@europac.ca
Page 50 of 56
KAM-TSXV | 25 January 2016
Kaminak Gold Corp. (TSXV:KAM, $0.83) - Data Sheet
Category
Project Description
Name
Location
Stage
Average Resource Grade
Initial Production
Mine Life
Avg. Annualized Production
Coffee Gold
Yukon, Canada
PEA
1.23 g/t Au
H219
11 years
199,700
Indicated
Inferred
Geography
Tonnes (M)
Gold (g/t)
SPEC BUY | PT: $1.85
Gold (Moz)
Oxide
47.13
1.43
2.17
Transition (all)
16.40
1.50
0.79
Sulphide
Total
0.14
63.67
2.09
1.56
0.01
2.97
Oxide
25,020
1.07
0.86
Transition (all)
24,304
1.50
1.17
Sulphide
3
78,591
1.87
1.36
0.18
2.21
Total
Recommendation
Close Price
Target:
Return:
$0.83
$1.85
122.9%
Consensus
3 Mo. Ago
Current
Rating:
Target:
Median:
High:
Low:
Sector Perform/Hold
Outperform Outperform
$1.68
$1.64
$1.68
$1.60
$2.00
$1.85
$1.30
$1.40
Return
97%
93%
123%
69%
7
7
0
0
Coffee Gold Project NAV Sensitivity
Long-Term Gold Price (US$/oz)
Discount Rate (%)
1.85
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
1,100
1.20
1.15
1.10
1.05
1.00
0.95
0.90
0.85
0.85
1,175
1.50
1.40
1.35
1.25
1.20
1.15
1.10
1.05
1.00
1,250
1.80
1.70
1.60
1.50
1.40
1.35
1.25
1.20
1.15
1,325
2.10
1.95
1.85
1.75
1.65
1.55
1.45
1.40
1.30
1,400
2.40
2.25
2.10
1.95
1.85
1.75
1.65
1.55
1.45
1,475
2.70
2.50
2.35
2.20
2.05
1.95
1.80
1.70
1.60
1,550
3.00
2.80
2.60
2.40
2.25
2.15
2.00
1.90
1.80
1,625
3.30
3.05
2.85
2.65
2.50
2.30
2.20
2.05
1.95
1,700
3.55
3.30
3.10
2.90
2.70
2.50
2.35
2.20
2.10
Comparables Price Performance
1M
6M
KAM
KAM
VIT
TGM
VIT
TGM
KAM
VIT
TGM
ORE
ORE
ORE
LYD
LYD
LYD
GRM
GRM
GPY
GQM
GRM
GPY
GQM
KOR
CMM
CMM
CMM
ATM
AGG
ATM
ATM
AGG
AGG
0%
20%
40%
Comparables
60%
-100%
Ticker
African Gold Group Inc.
TSXV:AGG
TSXV:ATM
Atacama Pacific Gold Corporation
NewCastle Gold Ltd.
TSXV:NCA
Corvus Gold Inc.
TSX:KOR
TSX:GQM
Golden Queen Mining Co. Ltd.
Golden Predator Mining Corp.
TSXV:GPY
Goldrock Mines Corp.
TSXV:GRM
Lydian International Limited
TSX:LYD
Orezone Gold Corporation
TSX:ORE
True Gold Mining Inc.
TSXV:TGM
Victoria Gold Corp.
TSXV:VIT
Kaminak Gold Corp.
TSXV:KAM
Average
Exploration/Development Company Average
-50%
0%
50%
Share
Mkt Cap.
$0.04
$0.14
$0.27
$0.41
$1.00
$0.11
$0.20
$0.21
$0.00
$0.27
$0.16
$0.83
$8.8
$9.1
$21.0
$34.6
$99.9
$3.5
$20.5
$38.8
$29.9
$105.7
$56.0
$142.1
-100% -50%
EV
$8.0
$8.0
$20.1
$31.1
$185.1
$7.0
$16.0
$25.7
$22.4
$77.1
$42.5
$113.7
All items in Millions except per share items
0%
50%
M&I&I (oz)
2.8
3.5
4.2
2.0
2.6
1.5
3.5
4.1
5.7
5.0
6.3
4.9
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Key Statistics
Current Price (C$)
52-Week Range (C$)
Avg. Vol. (3-Mo, k)
Shares Outstanding (M)
Shares Outstanding (diluted) (M)
Cash
Market Cap
Net Debt
Net Debt / Total Capital
Enterprise Value
Enterprise Value/oz
FYE
CEO
Employees
Website
Top Inst. Ownership
GPY
GQM
KOR
KOR
-40% -20%
12M
$1.60
$1.40
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
Volume (M shares)
Share Price ($)
Stock Price / Volume Chart
$0.83
$0.61 - $1.15
193.9
171.2
195.0
$28.4
$142.1
$0.0
$0.0
$113.7
$23.1
Sep 30
Thomas, Eira
13
www.kaminak.com
Shares
% Held
Ross Beaty
8.5
9.98%
Zebra Holdings & Investments S.a.r.l.
8.5
9.98%
Ppm America, Inc
24.5
14.3%
Columbia Wanger Asset Management, Llc
2.9
1.7%
100%
Global X Management Company Llc
2.3
1.3%
EV/oz Agf Management Limited
1.4
0.8%
$3 Quantex Ag
1.4
0.8%
$2 Company Description
$5 Kaminak Gold Corp. is advancing the 100% owned Coffee Gold Project, a multi$15 million ounce, high-grade oxide gold district that is amendable to heap leaching
and located in the Yukon Territory, Canada. The company recently initiated a
$72 Feasibility study following the announcement of a robust Preliminary Economic
$5 Assessment (“PEA”) using a US$1250 gold price and an investment into the
$5 company by Ross Beaty and Zebra Holdings and Investments S.à.r.l., Luxembourg.
$6 Coffee represents a low-risk, high-margin development-track gold project in the
Yukon, Canada where there is a long history of and strong support for gold mining.
$4
The completion of a Feasibility study is the next major milestone on the path
$15 towards a production decision.
$7
Last Financing
Price
Value
$23 Date
Non-Brokered PP
$0.82
$22.5M
$13 30-Oct-15
$16 11-Mar-15
Bought Deal PP
$1.00*
$21.0M
14-Jul-14
Non-Brokered PP
$0.80
$13.5M
27-Mar-14
Bought Deal PP
$0.82
$11.5M
* 12.2M common shs at $0.90/shr & 8.7M FT shs at $1.15/shr
Page 51 of 56
2015 Performance
Exhibit 1 – Kaminak Gold 2016 Relative Share Price Performance
Source: CapitalIQ
Exhibit 2 – Select Advanced Exploration/Development Peers: Room to Grow with Further Advancement
TSXV:ROG
TSX:TXG
TSX:PVG
TSX:GUY
TSXV:KAM
TSX:DNA
TSX:CNL
TSXV:TGM
TSX:SBB
TSX:MAX
TSX:ORE
$0
$50
$100
$150
$200
$250
EV/oz
Permitting/Construction/Commissioning Stage
PEA/PFS/FS Stage
Source: Capital IQ and Company Reports
Page 52 of 56
Exhibit 3 – Valuation Summary & Sensitivity
Coffee Gold Project
Exploration Upside
Project NAV
Corporate Adjustments
Cash & Equivalents
Options & Warrants
Future Equity Finance Proceeds
Adjusted NAV
Discount
$ Million
$/Share
5.0%
In Situ
$445
$21
$466
($39)
$28
$23
$105
$584
$1.40
$0.07
$1.47
($0.12)
$0.09
$0.07
$0.33
$1.84
Project NAV
Target Multiple
Unadjusted Valuation
Adjustments
Total Valuation
USD:CAD
$1.47
1.00x
$1.47
$0.37
$1.84
1.10
C$0.83
0.45x
12-Month Target
Implied Return
C$1.85
123%
Current Share Price
P/Adjusted NAV
$/Share
Discount Rate (%)
Long-Term Gold Price (US$/oz)
1.85
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
1,100
1.20
1.15
1.10
1.05
1.00
0.95
0.90
0.85
0.85
1,175
1.50
1.40
1.35
1.25
1.20
1.15
1.10
1.05
1.00
1,250
1.80
1.70
1.60
1.50
1.40
1.35
1.25
1.20
1.15
1,325
2.10
1.95
1.85
1.75
1.65
1.55
1.45
1.40
1.30
1,400
2.40
2.25
2.10
1.95
1.85
1.75
1.65
1.55
1.45
1,475
2.70
2.50
2.35
2.20
2.05
1.95
1.80
1.70
1.60
1,550
3.00
2.80
2.60
2.40
2.25
2.15
2.00
1.90
1.80
1,625
3.30
3.05
2.85
2.65
2.50
2.30
2.20
2.05
1.95
1,700
3.55
3.30
3.10
2.90
2.70
2.50
2.35
2.20
2.10
Source: Euro Pacific Canada Estimates
Page 53 of 56
Exhibit 4 – Summary Comparison of FS, PEA, and EPC Assumptions
Coffee PEA
(June 2014)
Coffee FS
(Jan 2016)
% Difference
EPC Old
EPC New
Mineable Resources
Average Gold Grade
Contained Ounces
Stripping Ratio
M tonnes
g/t
oz
waste:ore
53.4
1.23
2.11
4.00
46.4
1.45
2.16
5.70
-13%
18%
2%
43%
53.4
1.23
2.11
4.00
46.4
1.45
2.16
5.70
Crushing Rate
Recovery Rate
Average LOM Gold Production
tpd
%
oz/year
13,251
88.0%
167,000
14,000
86.3%
184,000
6%
10%
13,251
85.0%
160,300
14,000
86.0%
183,900
Average LOM Operating Costs
Mining
Processing
G&A
Total Unit Costs
$/t
$/t
$/t
$/t
2.37
6.67
4.00
22.53
2.28
4.97
3.86
24.10
-4%
-25%
-3%
7%
2.50
7.00
4.20
23.70
2.39
5.22
4.05
25.29
US$/oz
US$/oz
$613
$688
$482
$550
-21%
-20%
828*
734*
$M
$M
$M
$305
$146
$450
$317
$161
$478
4%
11%
6%
$351
$170
$521
$333
$162
$495
US$/oz
USD:CAD
$1,250
$0.95
$1,150
$0.78
-8%
-18%
$1,400
$0.90
$1,400
$0.90
$/L
$/L
$1.16
$1.16
$0.85
$0.89
-27%
-23%
na
na
na
na
$M
%
years
$330.00
$26
2.00
$455.00
37%
2.00
38%
$333.33
50%
6.5
$444.53
55%
3.5
Average Cash Costs
All-in Sustaining Cost
Capital Expenditures
Initial Capex
Expansion & Sust. Capex
LOM Capital Expenditures
LT Gold Price Assumption
Exchange Rate
Diesel
Stationary Equipment
Mobile Equipment
NPV5% (post-tax)
IRR (post-tax)
Payback
0%
Reflects inclusion of
additional transitional ore
material
+200Koz/yr in first 5 yrs,
194Koz/yr LOM, excl. ramp-up
Decrease reflects switch to 2stage crushing from 3-stage,
and lower diesel fuel price
assumptions
Closure cost increased by
$20M
C$, uunless otherwise noted. *C$/oz
Source: Company Reports and Euro Pacific Canada Estimates
Exhibit 5 – The Path Forward — Permitting & Licencing
Source: Company Reports
Page 54 of 56
Company: Kaminak |KAM:TSXV
I, Ryan Walker, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not,
Issuer
No
No
No
No
Yes
Yes
No
No
No
No
Page 55 of 56
RATING DEFINITIONS
Buy
horizon.
Speculative Buy
Hold
Sell
Under Review
move.
Tender
Dropped Coverage
Buy
Speculative Buy
Hold
Sell
Under Review
Restricted
30
20
9
1
5
2
0
46%
31%
14%
2%
8%
8
7
2
0
3
2
0
40%
35%
10%
0%
15%
Tender
Date
Target (C$) Rating
13 Aug 2014 $2.00
Spec Buy
17 Mar 2015 $1.85
Spec Buy
Kaminak Gold Corp. (TSXV:KAM)
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec
13 13 13 13 13 14 14 14 14 14 14 15 15 15 15 15 15
Price
Toronto
416-649-4273 | 888-216-9779
PT revision
Oakville
289-348-5936
Vancouver
604-453-1382 | 888-216-9779
Coverage Initiated: Aug 13, 2014
Montreal
514-940-5096 | 888-216-9779
Tokyo
+81.90.1470.1684| 888-216-9779
Page 56 of 56

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