  Pertinent Revision Summary Edge at a Glance

Transcription

1
Investment Views
Monday, November 10, 2014
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Click to view synopsis
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Pertinent Revision Summary
4
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Edge at a Glance
9
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28
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Companies Reporting
Industry Comments
LatAm Retail
Chile Retail: Tough Environment but
Cheaper Valuations
Rodrigo Echagaray
34
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North American Telecom
AT&T Entering Mexico and Lowers
CapEx: Implications for Mexico, U.S,
and Canada
Jeff Fan &
Andres Coello
40
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Ben Isaacson
52
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Mario Saric
55
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Hanging Around
Jason Bouvier
60
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Record Quarter; Growth on Track
Anthony Zicha
64
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Q3 - Cost Initiatives Bearing Fruit
Gavin Wylie
68
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A More Tempered Outlook
Mark Neville
73
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Vincent Perri &
Anthony Zicha
75
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Mario Saric
76
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Pammi Bir
84
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Gavin Wylie
88
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Pammi Bir
92
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Patricia A. Baker
97
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Uranium
Riding the Bull
Company Comments
Canada
Artis REIT
AX.UN-T
Athabasca Oil Corporation
ATH-T
AutoCanada Inc.
ACQ-T
Bankers Petroleum Ltd.
BNK-T
Bird Construction Inc.
BDT-T
Boyd Group Income Fund
BYD.UN-T
Brookfield Asset Management
BAM-N, BAM.A-T
Calloway REIT
CWT.UN-T
Calvalley Petroleum Inc.
CVI.A-T
Canadian Real Estate Inv. Trust
REF.UN-T
Canadian Tire Corporation Limited
CTC.A-T
Steady Fundamentals; Good Yield Pick
Up
Q3/14 Preview
Positive Tailwinds Remain Supportive
Good Quality, Decent Growth,
Reasonable Price
Q3 - Sales Delay Weigh
Growth Boosted as Balance Sheet Put
to Work
CTC Driving a Better Top Line
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by
non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S.
2
Investment Views
Canyon Services Group Inc.
FRC-T
Centerra Gold Inc.
CG-T
Chartwell Retirement Residences
CSH.UN-T
Cineplex Inc.
CGX-T
Dominion Diamond Corporation
DDC-N, DDC-T
DDC-N, DDC-T
Eagle Energy Trust
EGL.UN-T
Emera Incorporated
EMA-T
Enerflex Ltd.
EFX-T
Enerplus Corporation
All Beta and Nothing Less; Op Torque
Yet Again
Vladislav C. Vlad 103
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Trevor Turnbull 111
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Superior Growth, Lower Leverage,
Distribution Growth Capacity = Staying
the Course
Pammi Bir 113
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Q3/14 Preview - Soft Box Office
Paul Steep 118
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Files DAR and Posts Surety Bond
Tanya Jakusconek 121
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Upside Potential With Jay
Tanya Jakusconek 122
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Patrick Bryden 127
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Matthew Akman 132
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Vladislav C. Vlad 135
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Patrick Bryden 145
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Jeffery Coles 151
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Deals Done - Outlook Organic
Matthew Akman 155
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Stuck In The Middle With You
Sumit Malhotra 157
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Phil Hardie 168
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Matthew Akman 176
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Vincent Perri & 178
Anthony Zicha
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Jeffery Coles 179
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Mario Saric 184
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Anthony Zicha 186
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Patricia A. Baker 188
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Robust Top Line Growth
Mark Neville 189
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A Good Q1
Mark Neville 192
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Phil Hardie 193
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Ezequiel Fernández 134
López
 
Deferring Gatsuurt on Mongolian
Political Turmoil
Clean Balance Sheet Sees Eagle Eying
Potential Acquisitions
New England Normalization
Bookings Momentum Continues to
Impress
ERF-T, ERF-N
Third Quarter Volumes Ahead and 2014
Guidance Increased
Firm Capital Mortgage Investment
Corporation
Solid Q3/14; Target Raised to $13.25
FC-T
Fortis Inc.
FTS-T
GMP Capital Inc.
GMP-T
IGM Financial Inc.
IGM-T
Innergex Renewable Energy Inc.
INE-T
K-Bro Linen Inc.
KBL-T
MCAN Mortgage Corporation
IGM Pulls No Punches , Sets the
Record Straight
Depending on Development
Q3/14 Preview
MKP-T
Q3/14 Recap: Operationally Sound
Despite Quarterly Earnings Volatility
NorthWest Healthcare Properties
REIT
Q3 Glance: In Line; Occupancy Takes
Step Back
NWH.UN-T
RONA Inc.
RON-T
Saputo Inc.
SAP-T
Stella-Jones Inc.
SJ-T
Student Transportation Inc.
STB-T, STB-Q
TMX Group Ltd.
X-T
Q3/14 Preview
SAP Q2 in Line with Acquisitions
Driving Growth
New CEO Bullish on TMX Prospects
Latin America
Endesa Chile
ENDESA-SN, EOC-N
A New-Old Deal with Enel Green
Power?
3
Investment Views
Equity Event: Telecom & Cable 2015
200
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Equity Event: Transportation & Aerospace 2014
201
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Equity Event: Canadian Energy Infrastructure Conference
202
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Equity Event: Mining Conference 2014
203
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4
(For Rating Changes: 24-Hour SC Pro Personal Trading Restriction Applies)
1-Yr
Rating
Risk
Target
Key Data
Year 1
Year 2
Year 3
Valuation
Artis REIT (SP) (AX.UN-T C$15.46)
Steady Fundamentals; Good Yield Pick Up
New -Old --
---
---
FFOPU14E: $1.43
FFOPU14E: $1.44
FFOPU15E: $1.48
FFOPU15E: $1.49
-- --- --
Valuation: 12.75x AFFO (F'16 estimate)
Key Risks to Price Target: Excess Calgary office supply, rising interest rates
Athabasca Oil Corporation (SP) (ATH-T C$3.54)
Hanging Around
New -Old --
---
---
CFPS14E: $0.05
CFPS14E: $0.00
CFPS15E: $0.13
CFPS15E: $0.01
-- 1.1x our risked 2P+RU (Risked Upside) NAV.
-- 0.9x our risked 2P+RU (Risked Upside) NAV.
Valuation: 1.1x our risked 2P+RU (Risked Upside) NAV.
Key Risks to Price Target: Commodity prices, timing of projects, and project execution.
AutoCanada Inc. (SO) (ACQ-T C$62.12)
New -Old --
---
---
EPS14E: $2.31
EPS14E: $2.25
---
-- --- --
Valuation: 22.5x P/E on Q3/15 to Q2/16 EPS
Key Risks to Price Target: OEM restrictions, weak discretionary consumer spending, integration risk.
Bankers Petroleum Ltd. (SO) (BNK-T C$4.52)
New --
--
$8.50
CFPS14E: US$1.29
CFPS15E: US$1.34
Old --
--
$9.00
CFPS14E: US$1.26
CFPS15E: US$1.33
CFPS16E: US$1.36 Based on our risked NAV ($8.43/share) that
also equates to 5.3x 2015E debt-adjusted CF
and 1.22x our 2P NAV.
Valuation: Based on our risked NAV ($8.43/share) that also equates to 5.3x 2015E debt-adjusted CF and 1.22x our 2P NAV.
Key Risks to Price Target: Commodity prices, project execution, political/regulatory.
Bird Construction Inc. (SP) (BDT-T C$13.34)
New -Old --
---
$12.50
$15.00
EBITDA14E: $61
EBITDA14E: $64
EBITDA15E: $69
EBITDA15E: $83
EBITDA16E: $71
EBITDA16E: $88
5.75x EV/EBITDA on 2016E
Valuation: 5.75x EV/EBITDA on 2016E
Key Risks to Price Target: Slower-than-expected recovery in non-residential building construction; Commodity price volatility.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates
are not registered/qualified as research analysts with FINRA in the U.S.
5
Brookfield Asset Management (SO) (BAM-N US$49.59)
New -Old --
---
$52.00
$48.00
FFOPS14E: $2.31
FFOPS14E: $2.55
FFOPS15E: $3.04
FFOPS15E: $2.97
FFOPS16E: $3.38 -FFOPS16E: -- --
Valuation: Forward NAV
Key Risks to Price Target: Materially higher interest rates, fundraising slowdown, decelerating U.S. economy, lack of credit
Calloway REIT (SP) (CWT.UN-T C$26.92)
Good Quality, Decent Growth, Reasonable Price
New -Old --
---
$29.50
$29.25
---
FFOPU15E: $2.01
FFOPU15E: $2.00
FFOPU16E: $2.07 -FFOPU16E: $2.06 --
Valuation: 15x AFFO (F'16 estimate)
Key Risks to Price Target: Material exposure to Wal-Mart Canada, potential for conflicts of interest.
Calvalley Petroleum Inc. (SP) (CVI.A-T C$1.18)
New --
--
$2.00
--
CFPS15E: US$0.35
Old --
--
$2.25
--
CFPS15E: US$0.60
CFPS16E: -- Based on our risked NAV ($2.48/share) that
Key Risks to Price Target: Commodity prices, exploration, project execution, political/regulatory.
Canadian Real Estate Inv. Trust (SO) (REF.UN-T C$48.11)
Growth Boosted as Balance Sheet Put to Work
New -Old --
---
$51.50
$51.00
FFOPU14E: $2.96
FFOPU14E: $2.97
FFOPU15E: $3.10
FFOPU15E: $3.07
FFOPU16E: $3.23 -FFOPU16E: $3.20 --
Key Risks to Price Target: Mezzanine loan exposure with Hopewell, new supply pressures in key markets.
Canadian Tire Corporation Limited (SP) (CTC.A-T C$124.75)
New -Old --
---
$128.00
$125.00
EPS14E: $7.75
EPS14E: $7.44
EPS15E: $8.11
EPS15E: $7.82
-- --- --
Valuation: NAV
Key Risks to Price Target: Higher than expected Discret. Spend, Unexpected improvement in Unemployment; Improvement in net write-off rate
Canyon Services Group Inc. (SO) (FRC-T C$12.00)
All Beta and Nothing Less; Op Torque Yet Again
New -Old --
---
---
EBITDA14E: $146
EBITDA14E: $122
EBITDA15E: $178
EBITDA15E: $171
Valuation: 6.5x our 2015 EV/EBITDA estimate.
Key Risks to Price Target: Commodity prices, labour supply, access to supplies, weather, and customer concentration.
-- 6.5x our 2015 EV/EBITDA estimate.
6
Centerra Gold Inc. (SP) (CG-T C$5.01)
Deferring Gatsuurt on Mongolian Political Turmoil
New -Old --
---
---
-- Adj. EPS15E: US$-0.04 Adj. EPS16E: US$-0.02 --- Adj. EPS15E: US$0.02 Adj. EPS16E: US$0.25 --
Valuation: 0.75x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Chartwell Retirement Residences (SO) (CSH.UN-T C$11.40)
Superior Growth, Lower Leverage, Distribution Growth Capacity = Staying the Course
New -Old --
---
---
FFOPU14E: $0.78
FFOPU14E: $0.77
FFOPU15E: $0.86
FFOPU15E: $0.87
FFOPU16E: $0.94 14.5x AFFO (F'16 estimate)
FFOPU16E: $0.96 14.25x AFFO (F'16 estimate)
Key Risks to Price Target: Significant weakening of housing markets, new supply, regulatory environment.
Eagle Energy Trust (SP) (EGL.UN-T C$4.47)
Clean Balance Sheet Sees Eagle Eying Potential Acquisitions
New -Old --
---
$6.00
$7.50
CFPU14E: $1.06
CFPU14E: $1.21
CFPU15E: $1.08
CFPU15E: $1.10
CFPU16E: $1.06 1.0x our 2P NAV plus risked upside.
CFPU16E: $1.10 1.2x our 2P NAV plus risked upside.
Valuation: 1.0x our 2P NAV plus risked upside.
Key Risks to Price Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program success
Emera Incorporated (SP) (EMA-T C$37.28)
New -Old --
---
---
---
Adj. EPS15E: $1.90
Adj. EPS15E: $1.88
Adj. EPS16E: $1.95
Adj. EPS16E: $1.92
---
Valuation: 6.5% 2015E Free Cash Yield and 11.6x 2015E EV/EBITDA
Key Risks to Price Target: Interest rates; Regulated ROE; Rate cases; Growth projects; Environmental Legislation
Enerflex Ltd. (SO) (EFX-T C$16.96)
Bookings Momentum Continues to Impress
New -Old --
---
---
EBITDA14E: $241
EBITDA14E: $229
EBITDA15E: $288
EBITDA15E: $279
Key Risks to Price Target: Commodity prices, access to supplies, weather, FX, and labour supply
Enerplus Corporation (SO) (ERF-T C$16.74)
Third Quarter Volumes Ahead and 2014 Guidance Increased
New -Old --
---
$24.00
$29.00
CFPS14E: $4.29
CFPS14E: $4.24
CFPS15E: $4.58
CFPS15E: $4.54
Key Risks to Price Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program success
CFPS16E: $4.20 1.3x our 2P NAV plus risked upside.
CFPS16E: $4.18 1.6x our 2P NAV plus risked upside.
7
Firm Capital Mortgage Investment Corporation (SP) (FC-T C$12.85)
New -Old --
---
$13.25
$13.00
Adj. EPS14E: $0.96
Adj. EPS14E: $0.97
---
Adj. EPS16E: $1.02
Adj. EPS16E: $1.01
---
Valuation: 13.0x Adj. EPS (2016E)
Key Risks to Price Target: Declining real estate prices, origination volumes, and credit quality
Fortis Inc. (SO) (FTS-T C$37.74)
New --
--
$40.00
Adj. EPS14E: $1.71
--
Old --
--
$39.00
Adj. EPS14E: $1.72
--
-- 6.3% 2015E Free Cash Yield and 10.6x 2015E
EV/EBITDA
-- 6.4% 2015E Free Cash Yield and 10.3x 2015E
EV/EBITDA
Key Risks to Price Target: Interest rates; Rate base growth; Regulated ROE; Acquisitions; Regulatory
GMP Capital Inc. (SP) (GMP-T C$6.37)
New --
--
$7.00
Old --
--
$7.50
Operating EPS14E:
$0.31
Operating EPS14E:
$0.35
Operating EPS15E:
$0.36
Operating EPS15E:
$0.40
Operating EPS16E: -$0.49
Operating EPS16E: -$0.52
Valuation: 1.5x 2015E BV / 1.9x 2016E BV, 14.5x 2015E/2016E EPS
Key Risks to Price Target: Capital markets conditions, retention of and ability to recruit key personnel, health of small/mid-cap energy and resources sector.
IGM Financial Inc. (SO) (IGM-T C$47.34)
IGM Pulls No Punches , Sets the Record Straight
New --
--
$55.00
Old --
--
$54.00
Operating EPS14E:
$3.30
Operating EPS14E:
$3.33
Operating EPS15E:
$3.67
Operating EPS15E:
$3.62
-- 8.25x 2015E EBITDA, 9.5% EV/MFA, 1-year
out.
-- 8.25x 2015E EBITDA, 9.8% EV/MFA, 1-year
out.
Valuation: 8.25x 2015E EBITDA, 9.5% EV/MFA, 1-year out.
Key Risks to Price Target: Capital markets levels, margin and competitive pressures
Innergex Renewable Energy Inc. (SP) (INE-T C$10.71)
New --
--
--
CFPS14E: $1.00
CFPS15E: $1.13
Old --
--
--
CFPS14E: $1.03
CFPS15E: $1.14
Key Risks to Price Target: Government Support for Renewables; Credit Spreads; Hydrology; Growth Projects
CFPS16E: $1.20 5.7% 2015E Free Cash Yield and 17.4x 2015E
EV/EBITDA
CFPS16E: $1.22 5.9% 2015E Free Cash Yield and 17.3x 2015E
EV/EBITDA
8
MCAN Mortgage Corporation (SP) (MKP-T C$14.50)
Q3/14 Recap: Operationally Sound Despite Quarterly Earnings Volatility
New -Old --
---
---
Adj. EPS14E: $1.27
Adj. EPS14E: $1.43
Adj. EPS15E: $1.46
Adj. EPS15E: $1.52
-- --- --
Key Risks to Price Target: Declining real estate prices, origination volumes, and credit quality
Saputo Inc. (SO) (SAP-T C$32.36)
SAP Q2 in Line with Acquisitions Driving Growth
New -Old --
---
---
EPS15E: $1.61
EPS15E: $1.63
---
EBITDA14E: $180
EBITDA14E: $178
EBITDA15E: $226
EBITDA15E: $222
-- --- --
Valuation: 21x F16E EPS
Key Risks to Price Target: Drop in U.S. cheese prices; rising C$
Stella-Jones Inc. (SP) (SJ-T C$32.20)
New -Old --
---
---
EBITDA16E: $242
EBITDA16E: $237
---
Valuation: 10.5x EV/EBITDA our 2016E
Key Risks to Price Target: Successful integration of acquisitions; Railway Tie and Pole Demand
Student Transportation Inc. (SP) (STB-T C$7.11)
A Good Q1
New -Old --
---
---
EBITDAR15E: US$102 EBITDAR16E: US$112
EBITDAR15E: US$101 EBITDAR16E: US$111
-- --- --
Valuation: 9.0x EV/EBITDAR F2016E
Key Risks to Price Target: Credit market conditions/ability to access capital markets.
TMX Group Ltd. (SP) (X-T C$52.98)
New -Old --
---
---
CEPS14E: $3.86
CEPS14E: $3.91
---
-- 10.5x EV/EBITDA on 2015E EBITDA
-- 10.7x EV/EBITDA on 2015E EBITDA
Valuation: 10.5x EV/EBITDA on 2015E EBITDA
Key Risks to Price Target: Declining revenue from lost market share and pricing pressure, Lack of growth from derivatives platform
Source: Reuters; Scotiabank GBM estimates.
Table of Contents
9
Edge at a Glance
Edge at a Glance
LatAm Retail
Chile Retail: Tough Environment but Cheaper Valuations
Rodrigo Echagaray, MBA, CFA - (416) 945-4405
(Scotia Capital Inc. - Canada)
Event
■ Chilean Retailers under coverage should report quarterly earnings in the coming days: we
expect Falabella to report on Wednesday November 12 and Cencosud on November the 28.
Ripley should report during the week of November the 17 (TBC).
Implications
■ Macro indicators and retail sales are finally displaying the slowdown the market had been
expecting in Chile for months. Despite the negative macro trends and the impact on SSS in
Chile, we argue that EBITDA growth from the Chilean retailers under our coverage in Q3
should not be as disappointing as some are expecting. We expect Ripley to deliver the
highest EBITDA growth in the sector (+11% YOY) followed by Falabella (+5%). We
expect Cencosud's Adjusted EBITDA to fall slightly YOY.
■ We believe this quarter will also be an important gauge of retailers' ability to pass on price
increases to consumers because of more costly imports, given the sharp depreciation of the
CLP in recent months.
Recommendation
■ In our view, EBITDA growth in Chile retail should not be very different from EBITDA
growth for the Mexican retailers in Q3 (see Exhibit 13). Therefore, we believe valuations in
Chile look attractive on a relative basis vs. the Mexican retailers, given our EBITDA growth
expectations for the quarter. Our preference remains unchanged with Falabella as our top
pick in Chile. We prefer Ripley to Cencosud but remain neutral on both names.
Jeff Fan, CPA, CA, CFA - (416) 863-7780
Andres Coello - +52 (55) 5123 2852
AT&T Entering Mexico and Lowers CapEx: Implications for Mexico,
(Scotiabank Inverlat)
U.S, and Canada
Event
■ AT&T announced on Friday, Nov 7th that it will be acquiring Mexican wireless provider
Iusacell. It also provided capex guidance for 2015.
Implications
■ AT&T announced Friday after the market close that it is acquiring Iusacell for $2.5B.
Iusacell is a distant third mobile operator in Mexico with approximately 8% market share
behind Telcel (America Movil/AMX) and Telefonica (TEF). In the same release, T
announced that its capex in 2015 will be in the $18B range (down from $21B in 2014) and
that this translates to capex intensity in the mid-teens level. We think this guidance will
raise questions about T's revenue and FCF in 2015.
■ Good news for Mexico's telecom industry, but what's next? AT&T may have selected
Iusacell as the vehicle to capitalize on the Mexico opportunity only after sensing regulatory
resistance towards acquiring the AMX assets. If AT&T acquires the latter on top of Iusacell,
its market share may reach up to 90% in certain areas, while hoarding up to ~60% of
spectrum. This could be subject to legal scrutiny, jeopardizing the removal of dominancy
regulations. Other suitors looking at the AMX assets (e.g., Softbank) may scrap valuations
as they will now compete against AT&T.
Recommendation
■ We believe the more important part of the announcement is the capex guidance and the
implications for 2015 revenue and FCF. We maintain our Sector Underperform rating on T.
We have a neutral rating on AMX.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed
by non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S.
10
Edge at a Glance
Uranium
Riding the Uranium Bull
Ben Isaacson, MBA, CFA - (416) 945-5310
Event
■ On Friday, spot uranium hit $41.75/lb, a level we haven't seen in ~18 months, and a
stunning 50% increase since the $28 July lows.
Implications
■ While we would like to see greater liquidity supporting these price moves, if discretionary
demand continues to develop as we've seen over the past few weeks, we believe the equities
are going to follow - even if on sentiment alone.
■ In our note, we highlight equity correlations to spot movements, where ETFs like URA and
U rank #1, followed by producers such as CCO and PDN, among others. Non-producer
DML ranks last (as it should), as the L/T price is more relevant for development projects
than the spot price.
■ With respect to spot-implied equity values, CCO and U have 17% and 14% upside. DML
and PDN have significantly more spot-implied upside, but the r-squared is relatively weak
with DML, while financial challenges may place a cap on the enthusiasm investors give to
PDN.
■ With the sale of its Bruce Power stake behind it, as well as a good contract mix, CCO's
earnings leverage to spot is better next year. Upside on a 2015 spot price of $50/lb vs. $40 is
a ~50% increase in 2015E EPS.
Recommendation
■ We maintain Sector Outperform ratings on CCO and DML, although we expect investors
will be less selective than usual if spot continues to rally.
Artis REIT (AX.UN-T C$15.46)
Mario Saric, CPA, CA, CFA - (416) 863-7824
Event
■ Full comment following an in line quarter.
Implications
■ Capital recycling program focused on development. AX intends to be more active on the
capital recycling front in 2015, looking to recycle out of select Western Canadian assets
(vs. Ontario and Ottawa), redeploying proceeds in to the U.S. on a better value basis.
While we continue to view recycling out of non-core assets in non-core U.S. markets
and consolidation into fewer larger markets as a positive, it seems like selling the Tampa
and New Hartford assets (classified as held-for-sale in Q2) may be less imminent. While
a constant source of internal discussion and despite a 4% decline in unit price since
September 5th (to 6.9% implied cap rate), a unit buyback doesn't appear to be in the
cards.
■ Estimates intact; looking for moderate growth through 2016. Our 2014E and 2015E
FFOPU are down ~$0.01 following an in line quarter. Our recently released 2016E
AFFOPU (unchanged) reflects a 2014E-2016E CAGR of 4.4%, slightly above the 3.8%
for its diversified REIT peers, but below the 5.5% for our universe of coverage.
Recommendation
■ Maintain SP rating and $17.00 target. Our view is unchanged following an in line
quarter, we continue to view AX as a solid bet for investors looking for inexpensive U.S.
and industrial exposure.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
Med
--
$17.00
FFOPU14E
$1.43
$1.44
FFOPU15E
$1.48
$1.49
FFOPU16E
-$1.53
New Valuation:
-Old Valuation:
12.75x AFFO (F'16 estimate)
Key Risks to Target:
Excess Calgary office supply, rising interest
rates
CDPU (NTM)
CDPU (Curr.)
Yield (Curr.)
$1.08
$1.08
7.0%
11
Edge at a Glance
Athabasca Oil Corporation (ATH-T C$3.54)
Hanging Around
Event
■ Athabasca provided Q3/14 results and an operational update.
Implications
■ Operationally, Q3 was a neutral quarter with ATH producing 6,381 boe/d in line with
guidance, 2% ahead of estimates, but with a 6% lower netback from NGL pricing. Q4 is
now guided at 5,500-6,000 boe/d, putting 2H/14 at the lower end prior 6,000-6,500
guidance range.
■ 3 rigs are active in the Duvernay winter drilling program, with a 4th starting this week.
No new well data was available and we anticipate an update in the Q4/full-year release.
Drilling (a mix of multi- and single-well pads) is focused on the de-risked Saxon,
Kaybob West and Simonette areas, but the later program could also see wells at Kaybob
East and Two Creeks.
■ Hangingstone is 94% complete and tracking to cost and timeline expectations. First
production remains on track for 2H/15.
■ ATH de-emphasized near-term JV outcomes in Duvernay and Thermal. Meanwhile, a
process has begun to optimize board composition, while also looking at ways to improve
costs, potentially with an update on the latter prior to year-end 2014. With this renewed
focus on efficiency, we have nudged down our future G&A estimates. We have also
adjusted 2015 interest capitalization to improve operating cash flow.
Recommendation
■ We are maintaining our Sector Perform rating $9.00/sh target price (to be reviewed with
the commodity price deck in the next few weeks).
AutoCanada Inc. (ACQ-T C$62.12)
Event
■ AutoCanada reported Q3/2014 results with a headline EPS of $0.74. Adjusted for share
based compensation costs, EPS was $0.71. This compares to our expectations of $0.67
and consensus of $0.73.
Implications
■ Solid same store growth. Results reflect the contribution from dealerships acquired
during the last year as well as same store revenue growth of 8.9% and same store gross
profit growth of 11.4%.
■ Acquisition guidance reiterated. The company reiterated its acquisition guidance for
eight to 10 dealership acquisitions by May 31, 2015.
■ Target-rich environment. We believe acquisition targets are plentiful in a highly
fragmented industry with single-point dealerships looking for a buyer given: (1) the
increasing purchase cost of dealerships, (2) lack of succession, and (3) increasing capital
investment requirements.
Recommendation
■ We continue to rate AutoCanada shares Sector Outperform. As Canada's largest publicly
owned dealership, we believe AutoCanada is well positioned to seize new growth
opportunities supported by: 1) access to growth capital via the equity markets, 2) solid
relationship with auto OEMs, individual dealers & dealership groups across the country
and, 3) a highly disciplined and successful acquisition strategy.
Jason Bouvier, CFA - (403) 213-7345
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
High
--
$9.00
CFPS14E
$0.05
$0.00
CFPS15E
$0.13
$0.01
New Valuation:
1.1x our risked 2P+RU (Risked Upside) NAV.
Old Valuation:
0.9x our risked 2P+RU (Risked Upside) NAV.
Commodity prices, timing of projects, and
project execution.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Anthony Zicha - (514) 350-7748
Pertinent Data
New
Old
Rating:
Risk:
---
SO
High
Target:
1-Yr
--
$93.00
EPS14E
$2.31
EPS15E
-EPS16E
-New Valuation:
-Old Valuation:
22.5x P/E on Q3/15 to Q2/16 EPS
OEM restrictions, weak discretionary
consumer spending, integration risk.
$2.25
$3.57
$4.37
Div. (NTM)
Div. (Curr.)
$0.92
$0.92
Yield (Curr.)
1.5%
12
Edge at a Glance
Bankers Petroleum Ltd. (BNK-T C$4.52)
Event
■ Bankers reported in-line financial results with Q4 production already 1% higher than
that of Q3.
Implications
■ Q3 diluted CFPS was reported at $0.31 ($84.6M), 6% above consensus and our estimate
of $0.30 ($80M), while production was pre-released at 21,865 bbl/d (+6% QOQ).
■ We reiterate our Sector Outperform rating on Bankers and revised our one-year target
price to $8.50 per share ($9.00 previously), based on our revised risked NAVPS estimate
of $8.43 (vs. $8.64).
Recommendation
■ Bankers' solid operational performance is indicative of the company continuing to
execute a sound strategy underpinned by consistent growth from its hz wells, with
polymer / waterflood projects demonstrating a clear and rewarding path for the company
over the next 4-5 years.
■ At $85/bbl we would anticipate Bankers will maintain a 6 rig program (>175 Hz wells)
and 20-25 polymer conversions, well positioned to achieve something near the mid to
low end of its guidance range of 10%-15%. Full details on the company's 2015E capital
budget and guidance will be released on December 12.
Gavin Wylie - (403) 213-7333
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
-SO
-- Speculative
$8.50
$9.00
CFPS14E
US$1.29
US$1.26
CFPS15E
US$1.34
US$1.33
CFPS16E
US$1.36
US$1.35
New Valuation:
Based on our risked NAV ($8.43/share) that
Old Valuation:
Commodity prices, project execution,
political/regulatory.
Bird Construction Inc. (BDT-T C$13.34)
Div. (NTM)
C$0.00
Div. (Curr.)
C$0.00
Yield (Curr.)
0.0%
Mark Neville, CFA - (514) 350-7756
Event
Pertinent Data
■ Bird reported relatively in line results.
Implications
■ Bird continues to execute well on its Western Canadian-based industrial backlog, which
drove significantly improved margins in Q3. However, Bird's other segments were more
challenged as (1) Eastern Canada-based industrial work (H.J. Connell) continued to
operate in a slowed mining sector with increased competition, and (2) institutional and
commercial markets remained competitive.
■ We have lowered our estimates for the 2H/15 and 2016 as we believe the company's
ability to maintain its elevated (higher-margin) industrial book of business could become
increasingly challenging.
■ We lowered our valuation multiple to 5.75x EV/EBITDA on our 2016E to reflect (1) an
increasingly uncertain outlook for the Western Canadian market, and (2) reduced
earnings visibility. Having said that, we believe the company's strong balance sheet
should help it navigate a potentially more difficult operating environment.
■ We have lowered our one-year target to $12.50/share.
Recommendation
■ We like the 5.7% dividend yield and the company's cash heavy balance sheet. However,
with an increasing uncertain outlook, and with the stock trading at a premium to its
peers, we maintain our Sector Perform rating on BDT shares.
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
High
$12.50
$15.00
EBITDA14E
$61
$64
EBITDA15E
$69
$83
EBITDA16E
$71
$88
New Valuation:
Old Valuation:
Slower-than-expected recovery in nonresidential building construction; Commodity
price volatility.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.76
$0.76
5.7%
13
Edge at a Glance
Boyd Group Income Fund (BYD.UN-T C$44.73)
Q3/14 Preview
Vincent Perri, CPA, CA, CFA - (514) 287-4990
Event
Pertinent Data
■ Boyd Group Income Fund is scheduled to release Q3/14 results on Wednesday,
November 12. A conference call will be held on the same day at 10:00am ET. The dialin number is 1-888-231-8191.
Implications
■ Acquisitions driving growth. We expect sales to increase by 36% to reach $203.5
million, compared to $149.6 million last year. Our forecasted increase reflects the
contribution from recent acquisitions, new store openings throughout the last year, samestore sales growth (3% in the U.S. and 2% in Canada), and a favourable FX in the
quarter.
■ Margin expansion. We expect margins to expand as the company benefits from higher
back-end purchase discounts (amended paint agreement), positive same store sales
growth and continued integration of recent acquisitions. Accordingly, we expect
EBITDA margins to increase to 8.2% or $16.6 million in the quarter (consensus at $16.7
million), compared to 7.1% or $10.6 million recorded last year. We expect adjusted EPU
of $0.44 per unit, in line with consensus.
■ Fragmented market. Supported by the fragmented nature of the North American
collision repair industry, we believe Boyd is well positioned to continue consolidating
the collision repair market. Given its financial flexibility, we continue to believe
important network acquisitions could be a catalyst for further growth and unit price
appreciation.
Recommendation
■ We rate Boyd a Sector Outperform with a $49.00 target price.
Rating:
Risk:
Target:
1-Yr
Brookfield Asset Management (BAM-N US$49.59)
SO
Med
C$49.00
Adj EBITDA14E:
Adj EBITDA15E:
Adj EBITDA16E:
$68
$81
$86
Valuation:
Integration risk, insurance/industry practices,
level of repair claims
CDPU (NTM)
CDPU (Curr.)
Yield (Curr.)
$0.48
$0.47
1.1%
Event
■ Full comment post Q3 results that were impacted by weak hydrology.
Implications
■ Fairly quiet on news front. This was to be expected given BAM held its investor day in
September, providing investors with a plethora of analysis, particularly on the value of
its asset management franchise. We can't point to any one thing that drove BAM's share
price gains on Friday, but sentiment on its asset management franchise continues to
improve as BAM embarks on a mega fundraising initiative through 2015; we've
increased our asset management valuation to $10.80 (from ~$8.50), with long-term
annual 15%-20% cash flow growth likely.
■ New 2016 estimates reflect 11% YOY growth; superior asset management growth.
Exhibit 3 breaks down our 2016E YOY FFOPS growth, driven by the asset management
franchise (+28% YOY). We've modestly increased our 2015E FFOPS as we've synced
up our BAM and BPY models. Overall, our 2014E-2016E AFFOPS CAGR of 21%
looks very attractive, and should drive 5%-7% dividend/sh growth.
Recommendation
■ Maintain SO; target +$4/sh (+8.3%) to $52/sh. Valuation is becoming a bit of an
obstacle, but that said, we like BAM's superior growth profile and positive positioning in
a low interest rate environment, rising institutional allocations to real assets, and positive
U.S. economic momentum. We also think improving sentiment on BPY (36% of our
BAM Forward NAVPS) should help. BAM is trading at a 13% premium to our $44
current NAVPS and 5% discount to our $52 Forward NAVPS
Pertinent Data
New
Old
Rating:
Risk:
---
SO
Med
Target:
1-Yr
$52.00
$48.00
FFOPS14E
$2.31
$2.55
FFOPS15E
$3.04
$2.97
FFOPS16E
$3.38
N/A
New Valuation:
-Old Valuation:
Forward NAV
Materially higher interest rates, fundraising
slowdown, decelerating U.S. economy, lack of
credit
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.67
$0.64
1.3%
14
Edge at a Glance
Calloway REIT (CWT.UN-T C$26.92)
Pammi Bir, CPA, CA, CFA - (416) 863-7218
Event
■ Calloway reported Q3/14 FFOPU of $0.49 vs. $0.47 last year, in line with our $0.49
estimate and the $0.48 consensus.
Implications
■ After Q3 speed bump, internal growth should revert back to ~1%. The flat Q3 SP NOI
delivery was partly due to a tough prior year comp (higher bad debt recoveries). Our
2015E-16E of ~1% annual SP NOI are intact, with solid 99% occupancy impeding a
more robust pace.
■ Earnouts/developments slow, but other channels helping to backfill. We've taken a
slightly more cautious view on E&D completions as tenants re-think space needs,
though Premium Outlets, VMC, and mixed-use intensification should help offset the
slower pace. VMC continues to progress well, with the next site for development being
explored. Also, the new Penguin Pick-Up program may ultimately help drive more
traffic to its centres and participate in e-commerce's growth.
■ Reasonable growth on deck. Our estimate revisions were minor and mostly reflect lower
net interest costs. Our 2014E-16E AFFO CAGR of 3.8% is in line with its retail peers,
but below the 5.5% sector average.
Recommendation
■ SP, target price bumped to $29.50. We believe CWT remains in good form for
potentially less favourable rates with visible cash flows, good quality assets, and a
sizeable value-add pipeline. In light of its larger-than-typical NAV discount (-9.9%) and
near-6% yield, we think current levels offer a good entry. We would buy more
aggressively below $26.00.
Calvalley Petroleum Inc. (CVI.A-T C$1.18)
Event
■ Calvalley reported little in the way of new information as ongoing operational
challenges continue to weigh on activity.
Implications
■ Production was reported at 1,576 bbl/d (flat QOQ) while sales were impacted by a late
shipment which reduced volumes to 914 bbl/d. That said, Calvalley noted that a
shipment on October 1, 2014 would have brought the volume sold to 1,867 bbl/d (+60%
QOQ).
■ Weak production/sales also had a negative knock-on effect on Q2 operating cash flow of
$1.5M (vs. our $2M) or CFPS of $0.02 (vs. our $0.03).
■ We maintain our Sector Perform rating on Calvalley and reduced our one-year price
target of $2.00 (vs. $2.25) per share based on our revised risked NAVPS estimate of
$2.22 (vs. $2.48).
Recommendation
■ In our view, Calvalley's production growth remains largely contingent upon a more
stable operating environment.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
Med
$29.50
$29.25
FFOPU14E
-$1.94
FFOPU15E
$2.01
$2.00
FFOPU16E
$2.07
$2.06
New Valuation:
-Old Valuation:
15x AFFO (F'16 estimate)
Material exposure to Wal-Mart Canada,
potential for conflicts of interest.
CDPU (NTM)
$1.60
CDPU (Curr.)
Yield (Curr.)
$1.60
5.9%
Gavin Wylie - (403) 213-7333
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
-SP
-- Speculative
$2.00
$2.25
CFPS14E
-US$0.10
CFPS15E
US$0.35
US$0.60
CFPS16E
US$0.45
N/A
New Valuation:
Old Valuation:
Commodity prices, exploration, project
execution, political/regulatory.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
C$0.00
C$0.00
0.0%
15
Edge at a Glance
Canadian Real Estate Inv. Trust (REF.UN-T C$48.11)
Event
Pertinent Data
■ REF reported Q3/14 FFOPU of $0.74 vs. $0.72 last year, in line with our $0.75 estimate
and consensus ($0.74).
Implications
■ Despite Q3's hiccup, expect retail and industrial SP NOI to outpace office. Internal
growth squeezed out a modest +0.6% YOY as strength from retail more than offset flat
industrial and weak office. We expect 2015 will be a transitional year as office vacancies
are backfilled (albeit with still slightly positive SP NOI), followed by a stronger 2016.
■ Gaining access to centre-ice mixed use play, while managing risk (it's the CREIT way!).
In our view, the $120M financing provided to Mizrahi Developments and partners to
partially fund a mixed-use retail/residential development at Yonge/Bloor allows REF to
puts its balance sheet capacity to work in a sought after urban site with a decent near
term return and an option to participate in further possible upside.
■ Growth profile improves. Our estimate revisions mostly reflect lower net interest
expense. Our 2014E-16E AFFO CAGR is up 90bp to 4.8%, ahead of its diversified
peers (3.8%) and our overall universe (5.5%).
Recommendation
■ SO, target bumped to $51.50. We believe REF's premium valuation (17.4x 2015E
AFFO/5.8% implied cap) is well-supported by its top shelf quality and strong position
amid prospects of higher rates. With capacity for distribution hikes, low leverage , and
better growth, we believe its risk-reward profile remains attractive and recommend
building positions.
Canadian Tire Corporation Limited (CTC.A-T C$124.75)
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
Med
$51.50
$51.00
FFOPU14E
$2.96
$2.97
FFOPU15E
$3.10
$3.07
FFOPU16E
$3.23
$3.20
New Valuation:
-Old Valuation:
Mezzanine loan exposure with Hopewell, new
supply pressures in key markets.
CDPU (NTM)
$1.78
CDPU (Curr.)
Yield (Curr.)
$1.75
3.6%
Patricia A. Baker, MBA, PhD - (514) 287-4535
Event
■ CTC.A delivered a Q3 beat on EPS of $2.17 (consensus at $1.99). The beat itself is
owed to top line momentum, lower finance costs, a lower share count, a lower tax rate
(added about 9 cents) and substantial gains in Financial Services (+22.9% pre-tax
income).
Implications
■ CTC's strong marketing efforts and added spend to support its retail business boosted
consolidated Retail sales +4.4% YOY, with CTR SSS +3.2%, FGL +8.5%, and Mark's
+6.8%. Gross margin $ +6.0%, largely on higher shipments to CTR and revenue from
strong sales trends.
■ SG&A was higher 4.5%, but reasonably in line with retail sales and revenue growth.
Operating expenses were higher on rising personnel costs and on strategic spending to
support the businesses.
■ Although Retail saw good sales growth, EBITDA declined 11.9% with margins 120 bps
lower at 7.3%.
■ CTC made progress on its goal to achieve a 9% ROIC by F2017-end, with ROIC up 33
bps to 7.81% on a rolling 12-month basis.
■ The company raised its dividend by 5% to 52.5 cents.
Recommendation
■ Our model adjusts to reflect changes in our forward assumptions on sales, driving new
EPS of $7.75 in F2014E and $8.11 in F2015E. Our target adjusts slightly to $128. CTC
now trades at a P/E of 15.4x and an EV/ EBITDA of 7.7x, in our view fairly valued in
the context of comparable retail players.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
Low
$128.00
$125.00
EPS14E
$7.75
$7.44
EPS15E
$8.11
$7.82
New Valuation:
-Old Valuation:
NAV
Higher than expected Discret. Spend,
Unexpected improvement in Unemployment;
Improvement in net write-off rate
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$2.05
$1.73
1.4%
16
Edge at a Glance
Canyon Services Group Inc. (FRC-T C$12.00)
Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759
Event
Pertinent Data
■ $57.8M EBITDA was 24% ahead of our est. and 34% above consensus.
Implications
■ Operational leverage & increasing well intensity leads to solid beat. Revenue of $204M
was 13% above our $181M estimate (consensus was $169M) and 1.5x higher YOY. The
beat was driven largely by a fully utilized fleet which pumped 137% more sand YOY.
During the quarter 80% of FRC's revenue came from 24 hour ops, which surprised even
management. Pricing and cost recovery had a modest impact, up 5% since Q1/14 and up
10% YOY. Also, it's newly created Fluid Management Services division started to
contribute during Q3 with $6.2M EBITDA. Interestingly, sales were capped by water
access restrictions due to a dry summer in Fraction's most active areas. In other words,
the beat could have been even more impressive.
■ Fully booked heading into break-up with flat pricing expected; further out remains
unknown. Management has, however, noted 70% of its activity is natural gas based, and
augmented by ongoing LNG-related delineation. We attempted to model FRC's
operating leverage into 2015 and have made minor tweaks. We have incorporated FRC's
$63M capex spend, $43M of which is for 25 kHP (10% fleet increase).
Recommendation
■ We maintain SO, for now; subjectively, we see $2 downside and $8 upside. FRC is all
beta, both operationally and as a stock (and that is not necessarily correlated). While
FRC should post two more impressive quarters, we struggle with the impact of lower oil
prices LT on pumpers.
Centerra Gold Inc. (CG-T C$5.01)
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
High
--
$15.50
EBITDA14E
$146
$122
EBITDA15E
$178
$171
New Valuation:
6.5x our 2015 EV/EBITDA estimate.
Old Valuation:
Commodity prices, labour supply, access to
supplies, weather, and customer
concentration.
Div. (NTM)
$0.60
Div. (Curr.)
Yield (Curr.)
$0.60
5.0%
Trevor Turnbull, MBA, MSc - (416) 863-7427
Event
■ We now forecast initial gold production from the Gatsuurt project in Q3/16. This is due
to the ouster of the Mongolian Prime Minister.
Implications
■ The Mongolian parliament voted to remove Mr. Altankhuyag following stagnating
economic growth and declining foreign investment, along with allegations of corruption
and nepotism surrounding former cabinet ministers. His successor will need to be
approved by the President and confirmed by parliament, but the timeline is unclear.
■ Permitting of Gatsuurt is contingent on parliament designating the project as a "strategic
deposit" which would exempt it from the country's Water and Forest Law. Centerra
expected parliament to consider the designation in Q4/14, but we see risk to the timeline
given that the legislature is still working to pass this year's budget.
■ A favourable decision would allow the government to acquire up to a 34% interest in the
project. We assume and model this scenario.
■ Our net asset valuation (NAV8%) estimate has declined slightly to C$9.45 per share.
Gatsuurt contributes 27% to our asset-based valuation.
Recommendation
■ We maintain our Sector Perform rating due to near-term legal uncertainties surrounding
Kumtor restructuring but highlight our estimate of $72 million ($0.45 per share) in FCF
in Q4/14 at $1,200/oz gold price.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
High
--
$7.00
Adj. EPS14E
-US$0.06
Adj. EPS15E
US$-0.04
US$0.02
Adj. EPS16E
US$-0.02
US$0.25
New Valuation:
-Old Valuation:
0.75x NAV
Multiple contraction, commodity prices,
technical and operational risks, and
geopolitical risks
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
C$0.16
C$0.16
3.2%
17
Edge at a Glance
Chartwell Retirement Residences (CSH.UN-T C$11.40)
Superior Growth, Lower Leverage, Distribution Growth Capacity = Staying the Course
Event
■ Chartwell reported Q3/14 FFOPU of $0.21 vs. $0.21 last year, modestly above our $0.20
estimate and in line with the $0.21 consensus.
Implications
■ Delivering on expectations, with impressive SP NOI rebound. The significant level of
platform infrastructure investments, the disposition of weaker non-core assets, and
stronger market fundamentals helped lift SP NOI 2.6% YOY, a solid recovery from last
quarter's dip. We expect +2%-3% annually through 2016 as occupancy momentum
builds.
■ Portfolio clean-up mostly done with development spending set to rise. Notwithstanding
the dilutive impact on growth from ~$450M of non-core assets sold in the last two years,
we believe the improved asset quality and stronger balance sheet are supportive of a
higher valuation. Along with select acquisitions, capital allocation towards
developments looks set to rise with $250M of expected projects over the next 3 years.
■ Solid growth outlook intact. Our minor estimate revisions reflect higher NOI offset by
modest dilution from additional development spending. Our 10.4% 2014E-16E AFFO
CAGR remains well above the 5.5% sector average, with distribution growth potentially
in early 2015.
Recommendation
■ SO, $12.50. We continue to believe the right ingredients remain in place to support a
lower CSH risk premium ahead. At 14.5x 2015E AFFO/6.9% implied cap rate, we see
an attractive risk/reward mix; build positions.
Cineplex Inc. (CGX-T C$42.51)
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
Med
--
$12.50
FFOPU14E
$0.78
$0.77
FFOPU15E
$0.86
$0.87
FFOPU16E
$0.94
$0.96
New Valuation:
Old Valuation:
Significant weakening of housing markets,
new supply, regulatory environment.
CDPU (NTM)
$0.55
CDPU (Curr.)
Yield (Curr.)
$0.54
4.7%
Paul Steep, MBA - (416) 945-4310
Event
Pertinent Data
■ Cineplex reports Q3 results on November 13, 2014 at 10:00 a.m. EST; dial-in: 1-866530-1533. We anticipate revenues of $306M and EBITDA of $55M (consensus $316M;
$57M).
Implications
■ We believe Cineplex's Q3/14 results will reflect soft same-store box office revenue
given a weak movie slate early in the quarter and a relatively strong prior-year
comparable period, partially mitigated by the impact of Empire theatres acquired and
higher media revenues. We remain encouraged by the upcoming blockbuster releases
amid a solid line-up for 2015.
■ Cineplex continues to execute on its strategy to grow the business through various
initiatives within its core Exhibition business. Our view is that the firm will continue to
roll out premium products and build up its own proprietary concession brands in theatres
(for further supply chain efficiencies) and other non-theatre locations longer term.
Recommendation
■ We rate Cineplex Sector Outperform, given the firm's strong market position, track
record in achieving ongoing operating efficiencies, proven ability to consistently
generate FCF, and sustainable yield.
Rating:
Risk:
Target:
1-Yr
SO
High
C$44.00
Adj. EPS14E:
$1.28
Adj. EPS15E:
$1.95
Adj. EPS16E:
$2.40
Valuation:
10.0x EV/EBITDA on NTM EBITDA 1 year
forward + $1 for SCENE
Weaker Canadian Box Office performance
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.50
$1.48
3.5%
18
Edge at a Glance
Dominion Diamond Corporation (DDC-N US$13.65)
Tanya Jakusconek, MSc, Applied - (416) 945-4083
Event
Pertinent Data
■ DDC posts surety bonds and files DAR for Ekati.
Implications
■ Surety Bonds - DDC has posted surety bonds with the Government of the Northwest
Territories for a total of C$253.5M to secure the obligation under its Water Licence for
reclamation at Ekati. The surety bonds have been issued by several insurance companies
and carry an annual average cost of 1.3%. The surety bond posted was lower than the
previously proposed amount of $265M.
■ Files DAR - DDC has also filed its Developers Assessment Report (DAR) with the
Mackenzie Valley Environmental Impact Review Board for the Jay pipe at Ekati (this is
a requirement for the Environmental Assessment). Next steps include the analytical and
hearing phases which are expected to lead to a ministerial decision in late 2015. Once
the decision is issued, the water licence and land-use permitting process will take an
additional six months. A prefeasibility study is expected to be published before year-end.
If a positive decision is made, construction could begin in the summer of 2016 and
continue through 2019, with production beginning in 2020.
Recommendation
■ The timeline for Jay is in line with management's previous comments. The submission of
the DAR is positive as it advances the permitting process for Jay. SC believes the market
is not giving much value to this pipe given the limited information with respect to
project economics. The prefeasibility should provide more clarity on this pipe. SO.
Rating:
Risk:
Target:
1-Yr
Dominion Diamond Corporation (DDC-N US$14.77)
Adj. EPS15E:
Adj. EPS16E:
Adj. EPS17E:
SO
High
US$20.00
$0.88
$0.71
$1.34
Valuation:
1.00x NAV
Commodity prices; technical and operational
risk; foreign exchange risk; global economy
outlook.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Event
Pertinent Data
■ We have attempted to determine the potential value of the Jay Project and provided
sensitivities on key assumptions.
Implications
■ DDC submitted the Developers Assessment Report (DAR) to the Mackenzie Valley
Environmental Impact Review Board for the Jay pipe at Ekati (this is a requirement for
the Environmental Assessment). The report included some general parameters sufficient
to compute a crude analysis of the potential value of the project.
■ In our base case scenario, we see a potential value for Jay of $409M (100% basis) or
$267M ($3.10/sh) for DCC share. Based on our analysis, the project has an 18% aftertax IRR. Assuming a 2% price and cost escalator, the value more than doubles at $868M
at 100% or $567M ($6.55/sh) for DDC's share. See within for more details.
■ We currently value Jay on an EV/ct basis and ascribe a value of about $30M or 2% of
our NAV for its share. We believe that the market ascribes little value to Jay at this point
but as more data points emerge over time (with pre-feasibility and ultimately feasibility
study) and DDC advances the permitting process, Jay should add value to the current
share price.
Recommendation
■ Jay has the potential to add to the current valuation. We await more detail with the prefeasibility study to come out at year end which will have a LOM plan. We maintain our
Sector Outperform rating at $20.00/sh target.
Rating:
Risk:
SO
High
Target:
1-Yr
US$20.00
Adj. EPS15E:
$0.88
Adj. EPS16E:
$0.71
Adj. EPS17E:
$1.34
Valuation:
1.00x NAV
Commodity prices; technical and operational
risk; foreign exchange risk; global economy
outlook.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
19
Edge at a Glance
Patrick Bryden, CFA - (403) 213-7750
Eagle Energy Trust (EGL.UN-T C$4.47)
Clean Balance Sheet Sees Eagle Eying Potential Acquisitions
Event
Pertinent Data
■ Eagle Energy releases third quarter results to a rally on its stock.
Implications
■ Stock up 22% on release of third quarter results. Eagle recouped some of its equity value
lost since October 30, closing at $4.43/unit.
■ Production in line but cash flow hurt by lower commodity prices. Third quarter
production of 2,859 boe/d was in line with our estimate of 2,973 boe/d. Cash flow per
unit (CFPU) of $0.20/un came in well below consensus estimate of $0.28/un and our
estimate of $0.35/un, mainly on the back of lower realized prices.
■ Permian assets sold off. Eagle disposed of its entire position in the Permian as of July 1
for net proceeds of $150.1 mm. Disposed volumes were ~1,400 boe/d. The proceeds are
expected to be re-deployed into assets that are more in line with the company's business
model. Eagle has ~$69.5 mm of cash on hand and a $61.6 mm unused credit facility.
■ Special Meeting upcoming. Eagle plans to hold a Special Meeting of unitholders on
November 24, 2014 to vote on an amendment to its Trust Indenture that will remove
investment restrictions and allow the trust to invest in Canadian assets.
Recommendation
■ We maintain our SP rating but have opted to lower our target price in light of weakness
in commodity and energy equity market. We have reduced our one-year target price by
20% to $6.00 from $7.50/unit.
Emera Incorporated (EMA-T C$37.28)
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
High
$6.00
$7.50
CFPU14E
$1.06
$1.21
CFPU15E
$1.08
$1.10
CFPU16E
$1.06
$1.10
New Valuation:
1.0x our 2P NAV plus risked upside.
Old Valuation:
Crude oil and natural gas prices; CAD/USD
exchange rate; drilling program success
CDPU (NTM)
$1.05
CDPU (Curr.)
Yield (Curr.)
$1.05
23.5%
Matthew Akman, MBA - (416) 863-7798
Event
■ EMA reported Q3/14 adjusted EPS of $0.35 in line with our estimate of $0.35 and $0.34
in Q3/13.
Implications
■ The positive variance was driven primarily by a $0.06 earnings dilution gain on AQN
shares. Other than that, most segments were in line with our expectations except for
Caribbean utilities which came in below.
■ With the return to more normal weather patterns, the New England power assets are now
contributing in line with our initial expectations. Reported EBITDA of $13.3M is
slightly higher than the ~$12M that CPX was recording in the summer quarter for the
same assets.
■ The Maritime Link should continue generating solid mid-single-digit growth through
2017 on a normalized basis as final construction contracts have been signed and there
were no further project delays.
■ However, our actual forecasts for the next two years remain below this year as we
anticipate the normalization of trading and merchant generation profit following the
unusually strong start to 2014. The next visible catalyst for those assets is 2017 when
New England capacity payments move from US$3/KW-month to US$7/KW-month.
Recommendation
■ EMA continues with solid growth in Northeast electricity transmission. At the same
time, there could be a downward shift in earnings momentum into next year and the
stock has reached premium valuation. Our Sector Perform rating balances these
considerations.
Pertinent Data
New
Old
Rating:
--
SP
Risk:
Target:
1-Yr
--
Low
--
$36.00
Adj. EPS14E
-$2.14
Adj. EPS15E
$1.90
$1.88
Adj. EPS16E
$1.95
$1.92
New Valuation:
-Old Valuation:
6.5% 2015E Free Cash Yield and 11.6x 2015E
EV/EBITDA
Interest rates; Regulated ROE; Rate cases;
Growth projects; Environmental Legislation
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.55
$1.55
4.2%
20
Edge at a Glance
Endesa Chile (ENDESA-SN CLP 888.00)
A New-Old Deal with Enel Green Power?
Ezequiel Fernández López, CFA - +56 9 9991 9152
(Scotia Corredora de Bolsa Chile SA)
Event
Pertinent Data
■ Yesterday, Enel Green Power (EGP) announced a US$2.3B renewable energy provision
deal with Endesa Chile for up to 25 years.
Implications
■ Although previously undisclosed, the deal appears to be old news. Apparently, the deal
was signed in mid-2014 for up to 750GWh per annum, with the objective of helping
Endesa meet its renewable energy quota as required by Chilean law (20% by 2025).
■ The move became particularly relevant in Q4/12 when Endesa was awarded a yearly
regulated contract for ~3,200GWh, at US$129/MWh. We remind investors that Endesa
is unlikely to generate enough renewable energy to meet its quota, as holding company
ENEL - parent company of both EGP and Endesa - makes investments in renewables
solely through EGP.
■ ENEL disclosed only that the deal terms were consistent with prevailing market
conditions; however, this is virtually impossible for us to verify, especially given the
opacity of Chile's renewable energy contracts market. That said, the deal may well offer
value to both parties.
■ EGP's announcement can be found here.
Recommendation
■ That ENEL is keeping Endesa out of the renewables push in Chile should not surprise
investors familiar with the story. Nonetheless, this latest deal serves as a good reminder.
We maintain our Sector Perform rating.
Rating:
Risk:
Target:
1-Yr
Enerflex Ltd. (EFX-T C$16.96)
SP
Med
CLP 850.00
EPS14E:
US$0.073
Valuation:
SOTP DCF Model
Asset restructuring, hydrology, commodity
exposure.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
CLP 30.06
CLP 14.29
1.6%
Event
■ Adj. EBITDA of $65.1M was in line with our $64.8M estimate and consensus of
$63.7M. Adj. EPS of $0.39 was also in line.
Implications
■ Solid Q3 could have been better. Better-than-expected EBITDA contribution from
Canada & Northern U.S. offset weakness internationally. That said, International results
included an additional $6.2M of cost overruns at Oman; adjusting for this, EBITDA
would have been 10% ahead of our estimate. Commissioning and mechanical
completion of the project was completed in October; EFX notes variation claim
discussions continue to advance, but no timeframe was provided. We currently model
full recovery of the $43.8M in Q4/14.
■ Strength of demand evident in backlog and LOIs. Bookings during the quarter were 24%
above our estimate and 38% higher YOY. The largest contributor to the beat was
Southern U.S. & LatAm, which saw the backlog increase for the seventh consecutive
quarter. EFX was also provided with two new LOIs in the MENA region via the Axip
acquisition, bringing awarded HP additions to 88kHP (up from 60kHP).
Recommendation
■ While variation claims could muddy near-term results, ongoing momentum in the
backlog and continued execution on international growth initiatives via Axip should see
the company outperform both near and long-term. We remain bullish on EFX at these
levels, and see further upside from NAM LNG and / or stabilizing commodity prices.
Pertinent Data
New
Old
Rating:
Risk:
---
SO
High
Target:
1-Yr
--
$24.00
EBITDA14E
$241
EBITDA15E
$288
New Valuation:
Old Valuation:
Commodity prices, access to supplies,
weather, FX, and labour supply
$229
$279
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.34
$0.34
2.0%
21
Edge at a Glance
Enerplus Corporation (ERF-T C$16.74)
Third Quarter Volumes Ahead and 2014 Guidance Increased
Event
Pertinent Data
■ Enerplus released its third quarter financial and operational results.
Implications
■ Production slightly ahead of estimates while CFPS in line. Average production for the
quarter was 104,035 boe/d, which was slightly ahead of our estimate of 101,862 boe/d.
Cash flow per share of $1.02 was in line with our estimate of $1.01.
■ Non-core divestments announced. Enerplus delivered on its non-core divestment
strategy during the third quarter, with the completion of two transactions, reducing
production by 3,100 boe/d in exchange for total proceeds of $91 mm. Year-to-date
divestitures have generated proceeds of over $200 mm, with the funds being redeployed
to the company's core properties, most notably the Wilrich and Fort Berthold.
■ 2014 guidance increased. Management has increased the low end of 2014 production
guidance by 2% to 102,000-104,000 boe/d (previously 100,000-104,000 boe/d), while
increasing the capital budget for 2014 by $30 mm, to a total budget of $830 mm
(previously $800 mm).
■ U.S. assets attracting the majority of capital. Enerplus invested $208 mm on drilling
activities during the quarter, with the company's U.S. assets attracting approximately
66% of the total capital spend.
Recommendation
■ We have maintained our SO rating and lowered our one-year target price to $24.00
(previously $29.00).
Firm Capital Mortgage Investment Corporation (FC-T C$12.85)
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
Med
$24.00
$29.00
CFPS14E
$4.29
$4.24
CFPS15E
$4.58
$4.54
CFPS16E
$4.20
$4.18
New Valuation:
Old Valuation:
Crude oil and natural gas prices; CAD/USD
exchange rate; drilling program success
Div. (NTM)
$1.08
Div. (Curr.)
Yield (Curr.)
$1.08
6.5%
Jeffery Coles, MBA, CFA - (416) 863-7067
Event
■ Firm Capital reported Q3/14 adj. EPS of $0.24 vs. $0.24 last year, in line with us and the
Street at $0.24 and $0.24, respectively.
Implications
■ Flexing origination capacity to generate portfolio growth. FC demonstrated the strength
of its origination platform with solid 3% sequential growth despite facing the highest
level of discharges since Q1/09. In the midst of competitive market conditions we have
reduced our 2015 mortgage growth forecast by half (now 4%) though we see room for
FC to potentially surprise to the upside with forecast maturities declining to ~$62M per
quarter in 2015.
■ Expansion in Western Canada is coming into focus following the opening of a Calgary
office at the end of 2013. While the proportion of the portfolio invested in the west has
yet to rise we expect growth will follow. We see potential benefits both from
diversification and from adding another growth channel outside its core Ontario market.
■ Growth forecast inches higher. Our 2014E-16E adj. EPS CAGR improved to 3%
(previously 2.2%), in line with the Sector at 3.1%.
Recommendation
■ Maintaining Sector Perform rating; target price raised to $13.25/share (+$0.25). Trading
at 12.7x our adj. EPS/1.2x book value FC is trading in line with AI and at a reasonable
premium to the sector at 12x/1.1x. Our neutral view is predicated on a lower forecast 1year ROR.
Pertinent Data
New
Old
Rating:
--
SP
Risk:
Target:
1-Yr
--
Med
$13.25
$13.00
Adj. EPS14E
$0.96
$0.97
Adj. EPS15E
-$1.01
Adj. EPS16E
$1.02
$1.01
New Valuation:
-Old Valuation:
13.0x Adj. EPS (2016E)
Declining real estate prices, origination
volumes, and credit quality
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.97
$0.94
7.3%
22
Edge at a Glance
Fortis Inc. (FTS-T C$37.74)
Event
■ FTS reported normalized (excluding one-time acquisition costs) Q3/14 EPS of $0.33 vs.
our estimate of $0.34 and $0.23 in Q3/13.
Implications
■ Regulatory decisions should provide positive earnings catalysts in the coming few
quarters. FTS has been attempting to secure rate recovery of capital spent in Alberta
("capital tracker") that could add $20M+ in annual revenue (decision expected Q1/15).
■ We have reasoned that, since CH Energy is under-earning, it can generate increased
profit without requesting an unreasonable ROE. In fact, CH just filed in July for new
rates that could result in a $40M+ revenue increase while maintaining a conservative 9%
ROE (down from 10% currently). A decision is expected in 1H/15.
■ A process has commenced for the disposition of Properties. This process should unlock
value and also signals a willingness to more proactively manage capital. We value the
potential sale and re-deployment of funds at about $1/share (see comment dated October
2).
■ Concerns over erosion of the UNS customer base due to distributed solar might be
overblown. There was no evidence of erosion this past summer as sales were in fact up
YOY in the quarter by 2.3%.
Recommendation
■ Management guidance for 7% growth with the potential for 8.5% if LNG projects pan
out is consistent with our outlook. Given the combination of growth and safety, we
maintain our SO rating, and increase TP to $40.
GMP Capital Inc. (GMP-T C$6.37)
Event
■ On an operating basis, GMP posted diluted EPS of $0.03 in Q3/14, right in-line with our
estimate. Though there was some 'back and forth' in the numbers (advisory fees were
very strong, but higher facilitation losses and a lower retail brokerage contribution
offset), in the bigger picture we viewed this as essentially an in-line print from GMP,
and a continuation of the 'so-so' performance the company has exhibited over the past
year ($0.36 in core EPS in the trailing four quarters).
Implications
■ Although GMP did derive a larger proportion of its revenue from outside of Canada in
Q3 (44%), the top-line of the company remains very reliant on the commodities complex
(74% of IB fees in Q3, and 59% in 2014). Our long-held view is that broker stocks take
their cue from the revenue environment, and with the resource space currently persona
non grata we are expecting a quiet end to the calendar year for GMP from a new issue
announcement perspective.
Recommendation
■ GMP remains in very good shape from a capital perspective, and our sum-of-the-parts
"floor methodology" reaches a low point of $6.05 in the current quarter (Q4/14). In other
words, the combination of a limited downside and lack of current catalysts to drive the
upside in our view make GMP shares very much a Sector Perform rating, and as such we
expect the stock to tread water in the $6 - 7 range in the near term.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
Low
$40.00
$39.00
Adj. EPS14E
$1.71
$1.72
Adj. EPS15E
-$2.00
Adj. EPS16E
-$2.10
New Valuation:
EV/EBITDA
Old Valuation:
EV/EBITDA
Interest rates; Rate base growth; Regulated
ROE; Acquisitions; Regulatory
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.33
$1.28
3.4%
Sumit Malhotra, CFA - (416) 863-2874
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
High
$7.00
$7.50
Operating EPS14E
$0.31
$0.35
Operating EPS15E
$0.36
$0.40
Operating EPS16E
$0.49
$0.52
New Valuation:
-Old Valuation:
1.5x 2015E BV / 1.9x 2016E BV, 14.5x
2015E/2016E EPS
Capital markets conditions, retention of and
ability to recruit key personnel, health of
small/mid-cap energy and resources sector.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.20
$0.20
3.1%
23
Edge at a Glance
IGM Financial Inc. (IGM-T C$47.34)
Phil Hardie, P.Eng., MBA, CFA - (416) 863-7430
Event
Pertinent Data
■ IGM reported Q3/14 operating EPS of $0.87, in line with consensus but a penny shy of
our $0.88 estimate. EBITDA/sh of $1.49 was consistent with our forecast.
Implications
■ Record high earnings, improved flows, and a 5% dividend increase were not the key
highlights of the quarter. Rather, it was management pulling no punches and setting the
record straight on misconceptions on regulatory change and what it might mean for
IGM. Management also quantified the expected impact (minimal) of recent price
adjustments at Mackenzie and reiterated that Mackenzie's intention was to simplify its
fee structure and enhance consistency of pricing between funds rather than any
competitive response to fee pressure.
■ IGM management is quite excited about the changes coming about related to the
implementation of CRM2 and believes that it presents very significant opportunities for
its IG division to differentiate itself and for its consultants to convey a strong value
proposition to clients.
■ We are quite pleased with what appears to be a newly energized IGM management team.
We believe there have been more positive changes at IGM over the past two years than
we have seen in a long time. In our view, the perception of an increasingly progressive
and outspoken management style is a strong positive for sentiment towards the stock.
Recommendation
■ Raising target price to $55.00 (was $54.00) and maintaining SO rating.
Innergex Renewable Energy Inc. (INE-T C$10.71)
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
Med
$55.00
$54.00
Operating EPS14E
$3.30
$3.33
Operating EPS15E
$3.67
$3.62
New Valuation:
8.25x 2015E EBITDA, 9.5% EV/MFA, 1-year
out.
Old Valuation:
8.25x 2015E EBITDA, 9.8% EV/MFA, 1-year
out.
Capital markets levels, margin and competitive
pressures
Div. (NTM)
$2.31
Div. (Curr.)
Yield (Curr.)
$2.25
4.8%
Event
■ INE reported Q3/14 adj. EBITDA of $51.7M vs. our $53.8M estimate and $46.7M in
Q3/13.
Implications
■ Short-term growth remains slow and the payout remain high (113% trailing 12-months).
However, recent acquisition and development activity are injecting sufficient cash to
comfortably cover the dividend by 2016 and potentially grow it thereafter, in our
opinion.
■ The quarter was uneventful with respect to projects under construction, which we see as
good news. No further delays or modifications in production or financial guidance were
made to the B.C. hydro facilities.
■ A partnership with certain B.C. First Nations is logical and strategically sound. We
believe partnerships with First Nations are a key success factor given Canada's
aboriginal legal framework. The development of 150 MW in B.C. is promising
particularly given Site-C uncertainty.
■ Hydro Quebec (HQ) has finally moved forward with its long-standing 450 MW wind
RFP and INE is well positioned. Just recently HQ accepted offers with prices up to
$90/MW-hr inflation-escalated. The bids will be competitive (especially BLX) but INE
should win its share.
Recommendation
■ INE is on a trajectory that should deliver reliable low-risk dividends well into the future.
Whether growth can accelerate likely depends on the B.C. dynamics (Site C) and on
diversification through acquisition. We maintain our Sector Perform rating and $11.50
target price.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
Low
--
$11.50
CFPS14E
$1.00
$1.03
CFPS15E
$1.13
$1.14
CFPS16E
$1.20
$1.22
New Valuation:
EV/EBITDA
Old Valuation:
EV/EBITDA
Government Support for Renewables; Credit
Spreads; Hydrology; Growth Projects
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.60
$0.60
5.6%
24
Edge at a Glance
K-Bro Linen Inc. (KBL-T C$39.70)
Q3/14 Preview
Event
Pertinent Data
■ K-Bro is scheduled to release Q3/14 results on Thursday, November 13 after market
close. A conference call will be held on the following day (November 14) at 9:00 a.m.
ET, dial-in: 1-888-231-8191.
Implications
■ Internal growth supports top line. Supported by continued internal growth in both the
Healthcare and Hospitality segments, as well as incremental volume from the Saskatoon
Health region, we forecast revenues to increase by 5% over last year to reach $36.3
million.
■ Efficiency gains to lift margins. We forecast EBITDA to increase by 15.9% and reach
$7.5 million or 20.6%, in line with consensus at $7.4 million. This compares to $6.5
million or 18.7% last year. The margin improvement reflects efficiency gains from the
new Edmonton facility, which should more than offset any price inflation from natural
gas and electricity. We expect EPS of $0.50, in line with consensus.
■ Operational update. We also expect an update on the construction project for the new
Regina facility (to service Saskatchewan), its natural gas hedging strategy (as it looks to
lock up roughly 50% of its annual requirements) and the search for a new CFO.
Recommendation
■ We rate K-Bro shares Sector Perform. While we view shares as being fairly valued, we
believe the company is well positioned to benefit from potential growth opportunities
through acquisitions and continued outsourcing within the Canadian market, which
could act as a catalyst.
Rating:
Risk:
Target:
1-Yr
MCAN Mortgage Corporation (MKP-T C$14.50)
SP
Med
C$41.00
Adj EBITDA14E:
Adj EBITDA15E:
Adj EBITDA16E:
$26
$29
$32
Valuation:
10.5x EV/EBITDA (2015E)
Client concentration, contract dependence,
labour supply, integration of acquisitions
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.20
$1.15
2.9%
Q3/14 Recap: Operationally Sound Despite Quarterly Earnings Volatility
Event
■ MCAN reported Q3/14 adj. EPS of $0.26 vs. $0.41 last year, below our $0.36 estimate
and the Street at $0.345 (range from $0.33-$0.36).
Implications
■ Transition of securitized portfolio on track. MBS mortgages increased to $562 million
(+52% QOQ; +233% YTD) as MCAN continues to generate impressive origination
volumes. Negative NIM CMB assets and liabilities continue to expire with final
maturities on track for mid-2015. We expect to see NIM expansion beginning in Q4.
■ Corporate mortgage portfolio in solid form. Despite the slight decrease in corporate
mortgages outstanding we expect growth to resume but trimmed our growth forecast to
10% annually to reflect management's near- to mid- term target for corporate assets.
■ Growth forecast revised higher. Our 2014E-16E adj. EPS CAGR is 10.6% (previously
4.0%) and significantly ahead of the MIC Sector. With our 2016 estimate unchanged the
upward revision was driven by our lower 2014E resulting from the Q3 earnings miss.
Recommendation
■ Maintaining Sector Perform rating, $15.50/share target price unchanged. Trading at 9.9x
2015E adj. EPS/1.4x book value vs. the MIC Sector at 12x/1.1x, and non-MIC mortgage
lenders at 9.7x/2.7x we see MKP as reasonably valued and view current levels as a
decent entry point for longer-term investors.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
Med
--
$15.50
Adj. EPS14E
$1.27
$1.43
Adj. EPS15E
$1.46
$1.52
Adj. EPS16E
-$1.55
New Valuation:
-Old Valuation:
10.0x Adj. EPS (2016E)
Declining real estate prices, origination
volumes, and credit quality
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.22
$1.12
7.7%
25
Edge at a Glance
NorthWest Healthcare Properties REIT (NWH.UN-T C$9.79)
Q3 Glance: In Line; Occupancy Takes Step Back
Event
Pertinent Data
■ Q3/14 FFOPU was $0.25 vs. $0.25 YOY, in line with our and consensus $0.25 (range =
$0.25-$0.26). SP NOI was -0.8% YOY (Q2/14 was +0.8% YOY).
Implications
■ Occupancy takes a step back. NOI was below our expectations on lower-than-expected
revenue and higher-than-expected operating costs (both likely occupancy driven), which
offset lower G&A and interest costs; see Exhibit 1. The 30bp of QOQ occupancy gains
in Q2 disappeared as occupancy fell 30bp to 91.8% (vs. our 92.4% est.), mostly driven
by a 200bp and 80bp declines in Quebec and Atlantic Canada to 94.9% and 93.7%,
respectively. Management expects to meet its renewal targets for 2014, but fall short on
new leasing (having achieved 97% of renewal target YTD vs. only 49% for new
leasing); we expect an update on managements 93% target occupancy on the call. NWH
signed 9,900sf (+20bp) of new leasing commencing post Q3. Leasing spreads on
renewals turned negative (-6.2%) vs. +6.8% in Q2/14, due to one core medical renewal
(+1.2% ex. that renewal). Avg. in-place net rent was flat at $16.39/sf (-0.1% QOQ).
■ IFRS cap rate flat QOQ at 6.8% vs. our 6.8% NAV cap rate and 7.2% implied cap
Leverage was relatively unchanged QOQ, with debt-to-GBV +20bp to 55.1% and
disclosed net-debt/EBITDA +0.2x to 9.0x, while interest coverage was +0.1x to ~2.4x.
Recommendation
■ Full update post c/c on Mon., Nov. 10th at 11:00am. ET. #800-499-4035.
Rating:
Risk:
Target:
1-Yr
RONA Inc. (RON-T C$13.77)
Q3/14 Preview
SP
Med
C$10.70
FFOPU14E:
FFOPU15E:
FFOPU16E:
$1.00
$1.01
$1.04
Valuation:
Speculative Office Supply, Rising Interest
Rates, Liquidity, Adverse Provincial
Regulatory Reform
CDPU (NTM)
CDPU (Curr.)
Yield (Curr.)
$0.80
$0.80
8.2%
Event
Pertinent Data
■ RONA is scheduled to release Q3/14 results on Tuesday, November 11, 2014. The
company will hold a conference call to discuss results on the same day at 3:00 pm ET.
The dial-in number is 1-866-223-7781.
Implications
■ Q3 Preview. We expect EPS of $0.36 in Q3/14 versus consensus of $0.34. We expect
results to reflect a continued challenging retail environment and some inflation in lumber
and building products.
■ We expect same-store sales growth of less than 1%, which should translate into net sales
of roughly $1.18 billion. Our margin assumption reflects the company's efforts to
improve efficiencies and reduce SG&A, offset by a heightened competitive and
challenging retail environment. Accordingly, we expect EBITDA to reach $84.4 million
or 7.2% of sales compared to $70.7 million or 6.0% last year.
■ Built-in growth. While we expect earnings growth to be supported by the company's
recovery plan, we continue to believe an improvement in housing starts, particularly in
Quebec, will be required to support growth (SSSG) and further enhanced earnings power
into 2015.
■ Corporate update. We will look for an update regarding potential plans to export the
Reno-Depot concept outside Quebec, as well as whether management plans to remain
active with its share buyback.
Recommendation
■ We continue to rate RONA shares a Sector Perform. To value RONA shares we apply a
13x P/E multiple on our 2015 EPS estimate of $0.98.
Rating:
Risk:
SP
Med
Target:
1-Yr
C$13.00
Adj. EPS14E:
Adj. EPS15E:
$0.71
$0.98
Valuation:
13.0x P/E on 2015E
Housing recovery stalls; identifying and
integrating potential acquisitions.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.14
$0.14
1.0%
26
Edge at a Glance
Saputo Inc. (SAP-T C$32.36)
Event
■ Saputo reported Q2/F15 EPS of $0.39, +14.7% YOY, in line with consensus and below
$0.41 forecast. Revenues +21.1% YOY to $2.7B, with growth in all sectors, while
EBITDA +17.4% to $282.2M, with the margin dropping 33 bps to 10.5%.
Implications
■ In Canada Sector, revenues +5.6% YOY to $971.7M due to Scotsburn acquisition and
+selling prices. EBITDA -8.5% YOY to $106.8M due to rise in opex and +ingredient
costs. Margin down 169 bps to 11.0%.
■ In U.S. Sector, revenues jumped 24.7% YOY to $1.35B, due to +selling prices and
+cheese volumes. EBITDA +26.6% YOY to $136.6M due to +volumes at Dairy Foods
USA and favourable market factors.
■ International Sector revenues +66.3% YOY with the inclusion of WCB results and
+selling prices. EBITDA grew 144.9% YOY, leading to a 324 bps jump in the margin to
10.1%.
■ SAP reconsidered its closure of Glenwood, AB, facility but announced it will cease ops
in Sep 2015 at its Trois-Rivières, QC, facility.
■ SAP renewed NCIB to purchase ~19.5M shares, or 5% of shares issued.
Recommendation
■ Our estimate for F2015 EPS decreases slightly to $1.61, while our rating and target price
remain the same. With a growing global platform, SAP is well positioned to seek further
accretive M&A opportunities and to continue returning cash to shareholders.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
Med
--
$37.50
EPS15E
$1.61
EPS16E
-New Valuation:
-Old Valuation:
21x F16E EPS
Drop in U.S. cheese prices; rising C$
$1.63
$1.76
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.52
$0.46
1.4%
Stella-Jones Inc. (SJ-T C$32.20)
Event
Pertinent Data
■ SJ reported Q3 results that were in line with expectations.
Implications
■ In Q3, the company reported robust organic sales growth (+14%) and benefited from a
weaker C$ (+3%), but results were, again, negatively impacted by higher YOY raw
material costs (i.e., untreated ties).
■ Tie sales were up 17% organically, with "a little over half" from pricing as SJ has
"initiated certain selling price adjustments" that should continue through the remainder
of 2014 - we forecast 10% growth (from pricing) through 1H/15. Management also
indicated it was seeing some increased tie supply and relatively stable pricing.
■ Pole sales were up 3.5% organically - a deceleration from Q2 - but largely attributable to
slightly lower sales of transmission poles (higher $ value product), which is expected to
come back in coming quarters. The company also indicated organic sales were
somewhat "understated" as the acquired assets saw significant growth in recent quarters.
■ We have made relatively modest changes to our estimates. Our Sector Perform rating
and $32/share target price are unchanged.
Recommendation
■ We continue to believe SJ is attractively positioned for growth in the rail tie and utility
pole markets. We also see upside potential in the shares and dividend assuming the
company is able to reach the high end of its three- to five-year target ($1.5 billion in
revenues). However, we see a fairly balanced risk/reward profile at current levels. SJ
shares are rated SP.
New
Old
Rating:
--
SP
Risk:
Target:
1-Yr
--
Med
--
$32.00
EBITDA14E
$180
$178
EBITDA15E
$226
$222
EBITDA16E
$242
$237
New Valuation:
-Old Valuation:
10.5x EV/EBITDA our 2016E
Successful integration of acquisitions; Railway
Tie and Pole Demand
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.28
$0.28
0.9%
27
Edge at a Glance
Student Transportation Inc. (STB-T C$7.11)
Event
Pertinent Data
A Good Q1
■ STB reported sales/EBITDAR of $88.5 million/-$1.6 million vs. our estimate of $83.2
million/-$2.5 million.
Implications
■ Q1 is seasonally weak. That said, results were modestly ahead of expectations primarily
on stronger-than-expected revenues. Sales were up 21% YOY (vs. our 14%) on better
pricing, increased summer-related extracurricular, charter and ancillary revenues, as well
as additional operating days in September.
■ We are forecasting 13% growth in 2015. We also continue to believe the company is
well positioned for growth potentially in excess of its booked revenues given the "right"
acquisition opportunities and an accelerated ramp-up of its non-asset businesses (i.e.,
SchoolWheels Direct, SafeStop, and TSC). The weaker C$ and lower fuel prices should
also provide a noticeable tailwind for the company in F2015.
■ We have made modest changes to our estimates. Our $8.00 one-year target price and
Sector Perform rating are unchanged.
Recommendation
■ Given what we see as a sustainable dividend and the current 7.9% yield, we believe the
shares are attractive for income-oriented investors.
TMX Group Ltd. (X-T C$52.98)
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
Med
--
$8.00
EBITDAR15E
US$102
US$101
EBITDAR16E
US$112
US$111
New Valuation:
-Old Valuation:
9.0x EV/EBITDAR F2016E
Credit market conditions/ability to access
capital markets.
Div. (NTM)
C$0.56
Div. (Curr.)
C$0.56
Yield (Curr.)
7.9%
Event
■ TMX reported Q3/14 core cash EPS of $0.86 (ex-items), below consensus of $0.97 and
our estimate of $0.91.
Implications
■ In his initial address to analysts and investors, Mr. Eccleston articulated TMX's strategic
focus to leverage its portfolio of talent and capabilities to create greater value than the
sum of the parts. We view this as the next logical step and acceleration of TMX's recent
progress in transforming into a fully integrated multi-asset class exchange group. Our
initial perception is that Mr. Eccleston aims to manage the exchange as a (applied
technology) growth company, rather than simply a financial utility company.
■ Mr. Eccleston highlighted three key reasons he is bullish on TMX group's prospects: its
demonstrated ability to innovate and move nimbly, strong positioning to execute growth
strategy, and constructive dialogue with participants and regulators.
■ We estimate TMX currently trades at an unusually wide 27% discount (EV/EBITDA) to
its peers. We attribute this to the recent shift in market conditions and key energy sector
weakness but expect the discount to revert back towards the mean within the next twelve
months.
Recommendation
■ Maintaining Sector Perform rating and $60.00 target.
Pertinent Data
Rating:
Risk:
Target:
1-Yr
New
---
Old
SP
Med
--
$60.00
CEPS14E
$3.86
$3.91
CEPS15E
-$4.60
CEPS16E
-$5.16
New Valuation:
10.5x EV/EBITDA on 2015E EBITDA
Old Valuation:
Declining revenue from lost market share and
pricing pressure, Lack of growth from
derivatives platform
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.60
$1.60
3.0%
28
Companies Reporting
Companies Reporting
Reporting
Date
Conference Call Details
(time, number, pass code)
Est.
for
Qtr
Earnings
Last
Year’s
Qtr
Most
Recent
Qtr
Year
End
Qtr
Dec
3
$0.67
$0.53
-$0.26
Dec
3
$0.23
$0.21
$0.23
Dec
3
$0.23
$0.27
$0.32
Dec
3
$0.11
$0.10
$0.08
Dec
3
$0.52
$0.51
$0.45
3
$0.79
n.a.
$0.72
Dec
3
$0.02
$0.01
$0.02
Dec
3
$0.20
$0.19
$0.18
Dec
3
$0.05
$0.10
$0.09
Dec
3
$0.06
-$0.04
$0.10
3
$1.92
$1.59
$1.99
3
$0.52
$0.50
$0.51
Aecon Group Inc. (ARE-T)
10-NOV-14
No Details
Choice Properties REIT (CHP.UN-T)1
Monday, Nov-10, 2014 at 2:00 PM EST. Dial In: 647-427-7450 Replay: 416-849-0833
10-NOV-14
(Code: 13777389)
Guardian Capital Group Limited (GCG.A-T)
10-NOV-14
No conference call.
InterRent Real Estate Investment Trust (IIP.UN-T)1
10-NOV-14
No conference call.
Legacy Oil + Gas Inc. (LEG-T)2
10-NOV-14
No Details
Northern Blizzard Resources Inc. (NBZ-T)2
Conference call details: Date: Monday, Nov 10, 2014 Time: 11:00 EST / 9:00 MST Dial-in:
10-NOV-14
Dec
1-403-532-5601
 Before Market Open.
LGX Oil + Gas Inc. (OIL-V)2
10-NOV-14
No Details
Parallel Energy Trust (PLT.UN-T)2
10-NOV-14
Rio Alto Mining Ltd. (RIO-T)3
10-NOV-14
Results before market open.
 No conference call.
Thompson Creek Metals Company Inc. (TCM-T)3
10-NOV-14
Results after market close.
 Conference call at 11:00am EST on Tuesday, November 11 . Dial in: 1.888.211.7383.
Vermilion Energy Inc. (VET-T)2
Conference call details: Date: Monday, Nov 10, 2014 Time: 11:00 EST / 9:00 MST Dial-in:
10-NOV-14
Dec
1-888-231-8191 (North America)
Allied Properties REIT (AP.UN-T)1
Wednesday, Nov-12, 2014 at 12:00 PM EST. Dial In: 866-530-1553 / 416-847-6330
11-NOV-14
Replay: Available on marketwire.com and Allied website
Dec
29
Companies Reporting
CAP REIT (CAR.UN-T)1
Wednesday, Nov-12, 2014 at 10:00 AM EST. Dial In: 866-225-0198 / 416-340-2216
11-NOV-14
Replay: 800-408-3053 / 905-694-9451 (Code:4966209#)
Dec
3
$0.43
$0.43
$0.43
Dec
3
$0.34
$0.39
$0.41
Dec
3
$0.23
$0.24
$0.24
Mar
2
$0.03
$0.06
-$0.03
Dec
3
$0.36
$0.25
$0.35
Dec
3
$0.05
-$0.00
$0.05
3
$22.90
$15.12
$23.25
Dec
3
$12.82
$12.07
$6.17
Dec
3
$0.25
$0.24
$0.24
Dec
3
$60.40
$47.10
$55.00
Dec
3
$0.39
$0.55
$0.39
Dec
3
$0.23
$0.32
$0.25
Dec
3
-$0.06
$0.22
$0.02
Capstone Infrastructure Corporation (CSE-T)2
11-NOV-14
November 12, 8:30 AM ET, 1-800-319-4610
Dream Industrial REIT (DIR.UN-T)1
Tuesday, May-06, 2014 at 9:00 AM EST. Dial In: 416-216-4169 / 866-229-4144 (Code:
11-NOV-14
9411711#) Replay: www.dundeeindustrial.com
GLV Inc. (GLV.A-T)3
11-NOV-14
RONA Inc. (RON-T)3
11-NOV-14
SEMAFO Inc. (SMF-T)3
11-NOV-14
 Conference call Nov. 11 at 10:00 a.m. ET. Dial-in 647-788-4922 or 1-877-223-4471.
SunOpta Inc. (STKL-Q)4
Conf. call on Nov. 12, 2014 at 10:00AM EST. Dial-in: 1 (877) 312-9198 or (631) 291-4622
11-NOV-14
Dec
(international). Webcast: www.sunopta.com.
 Earnings to be released after market close.
Vicwest Inc. (VIC-T)5
11-NOV-14
WPT Industrial REIT (WIR.U-T)1
"Wednesday, Nov-12, 2014 at 11:00 AM EST. Dial In: 866-605-3851 / 412-902-4153
11-NOV-14
Replay: 855-669-9658 / 412-317-0088 (Code: 10053362#)
WSP Global Inc. (WSP-T)5
11-NOV-14
4:00pm; 1-877-223-4471
Zargon Oil & Gas (ZAR-T)2
11-NOV-14
 After Market Close.
Argent Energy Trust (AET.UN-T)2
12-NOV-14
First Majestic Silver Corp. (AG-N)3
12-NOV-14
 Conference call Nov. 12 at 11:00 a.m. ET. Dial-in 1-800-319-4610 or 604-638-5340.
30
Companies Reporting
Aimia (AIM-T)4
12-NOV-14
No Details
Dec
3
$59.02
$85.65
$58.70
Dec
3
$17.09
$19.02
$12.00
Dec
3
$1.62
$1.49
$2.02
Dec
3
$16.60
$10.62
$18.07
Mar
2
$0.18
$0.15
$0.17
Dec
3
$72.45
$78.63
$78.17
Dec
3
$0.21
$0.21
$0.23
Dec
3
$31.01
$15.61
$27.81
Dec
3
$0.03
$0.06
$0.02
Dec
3
$7.51
-$49.07
$7.67
Dec
2
$16.03
n.a.
$18.04
Dec
3
$0.84
$0.76
$0.71
Dec
3
$0.29
$0.22
$0.28
Dec
3
$0.52
$0.45
$0.55
Armtec Infrastructure Inc. (ARF-T)5
12-NOV-14
Bonterra Energy Corp. (BNE-T)2
12-NOV-14
Boyd Group Income Fund (BYD.UN-T)4
12-NOV-14
No Details
CAE Inc. (CAE-T)3
12-NOV-14
Conference call at 1PM ET at 877-586-3392
Chorus Aviation Inc. (CHR.B-T)6
12-NOV-14
Conference call on November 13 at 930AM ET at 888-231-8191
Dream Global REIT (DRG.UN-T)1
Thursday, Nov-13, 2014 at 10:00 AM EST. Dial In: 416-216-4169 / 866-229-4144 (Code:
12-NOV-14
8694 191#) Replay: http://dream.ca/global
Exchange Income Corporation (EIF-T)5
12-NOV-14
November 13, 10:00am; 1-888-231-8191
IAMGOLD Corporation (IAG-N)3
Results AMC. Conference call next morning at 8:30am ET: 800-319-4610 (N. America),
12-NOV-14
604-638-5340 (Intl).
IBI Group Inc. (IBG-T)5
12-NOV-14
8:30am; 1-800-381-7839
KP Tissue Inc. (KPT-T)5
KPT will hold its conference call the same day at 8:30 a.m. Eastern Time. Via telephone:
12-NOV-14
1-888-231-8191 or 647-427-7450 Via the internet at: www.kptissueinc.com
 Before the market open
Loblaw Companies Limited (L-T)7
12-NOV-14
Leisureworld Senior Care Corporation (LW-T)1
Thursday, Nov-13, 2014 at 9:00 AM EST. Dial In: 416-340-8527 / 800-565-0813 Replay:
12-NOV-14
800-408-3053 / 905-694-9451 (Code: 5750906)
Morneau Shepell Inc. (MSI-T)5
Conference call on November 12, 2014 at 1:00 p.m. ET. Dial in 416-340-2217 or 1-86612-NOV-14
696-5910 (passcode: 2809543)
 Replay available at www.morneausobeco.com
31
Companies Reporting
Peyto Exploration & Development Corp. (PEY-T)2
12-NOV-14
Dec
3
$1.11
$0.65
$1.01
Dec
3
$0.35
$0.31
$0.31
Dec
3
$0.19
$0.22
$0.18
Dec
3
$0.09
$0.11
$0.09
Dec
3
$0.23
$0.10
$0.25
Dec
3
$25.97
$23.33
$23.21
Dec
3
$0.02
$0.03
$0.07
Dec
3
$0.91
$0.86
$0.86
Dec
3
$0.35
$0.41
$0.37
3
$0.27
$0.27
$0.27
Dec
3
$0.51
$0.56
$0.35
Dec
3
$0.71
$0.72
$0.72
Rocky Mountain Dealerships Inc. (RME-T)3
Conf. call on Nov. 12, 2014 at 11:00AM EST. Dial-in: 1-888.231-8191 or 647-427-7450.
12-NOV-14
Webcast: rockymtn.com
Silver Wheaton Corp. (SLW-N)3
12-NOV-14
Conference call: August 7, 11:00am EST. 1-888-231-8191 or 647-427-7450.
 After Market Close
Pure Industrial REIT (AAR.UN-T)1
Thursday, Nov-13, 2014 at 5:00 PM EST. Dial In: 416-764-8609 / 888-390-0605 Replay:
13-NOV-14
416-764-8677 / 888-390-0541 (Code: 150420)
Advantage Oil & Gas Ltd. (AAV-T)2
13-NOV-14
Ag Growth International Inc. (AFN-T)4
Conf. call on Nov. 13, 2014 at 10:00AM EST. Dial-in: 1-866-225-0198 or 416-340-2216
13-NOV-14
(local).
 Earnings to be released after market open.
Algonquin Power & Utilities Corp. (AQN-T)3
13-NOV-14
November 14, 9:00 AM ET 1-866-530-1553 or Local 416-847-6330
Boardwalk REIT (BEI.UN-T)1
Friday, Nov-14, 2014 at 11:00 AM EST. Dial In: 888-231-8191 / 647-427-7450 and
13-NOV-14
webcast (Code: 10381077) Replay: www.boardwalkreit.com
Cineplex Inc. (CGX-T)3
13-NOV-14
10:00am ET; Dial-in: 416-847-6330; 1-866-530-1533.
Crombie REIT (CRR.UN-T)1
Thursday, Nov-13, 2014 at 11:30 AM EST. Dial In: 888-231-8191 / 647-427-7450 Replay:
13-NOV-14
Dec
855-859-2056 / 416-849-0833 (Code: 23307055)
Cervus Equipment Corporation (CVL-T)3
Conference call on Nov. 14, 2014 at 11AM EST. Dial-in numbers: (647) 427-7450 or 113-NOV-14
888-231-8191. Webcast: http://www.newswire.ca/en/webcast/detail/1431330/1590260
Dream Office REIT (D.UN-T)1
Friday, Nov-14, 2014 at 2:00 PM EST. Dial In: 866-229-4144 / 416-216-4169 (Code:
13-NOV-14
7678875#) Replay: www.dreamofficereit.ca
32
Companies Reporting
EnerCare Inc. (ECI-T)4
13-NOV-14
647.788.4922 or 1.877.223.4471
Dec
3
$43.72
$43.18
$43.11
Dec
3
$0.14
$0.09
$0.11
Dec
3
$1.62
$1.44
$1.65
Dec
3
$0.53
$0.54
$0.55
Dec
3
$0.22
$0.15
$0.23
Dec
3
$0.53
$0.50
$0.50
4
$0.72
$0.67
$0.72
 Expected to report BMO. Conference Call at 10:00 AM EST
Element Financial Corporation (EFN-T)8
Conference call on November 14 at 8:00 a.m. ET, dial-in 416-340-2217 or 1-866-69613-NOV-14
5910 (passcode 8764790)
Equitable Group Inc. (EQB-T)3
Conference call on November 14 at 10:00 a.m. ET, dial-in 416-849-1847. Replay: 64713-NOV-14
436-0148 passcode 1979339
Freehold Royalties Ltd. (FRU-T)2
13-NOV-14
Fiera Capital Corporation (FSZ-T)7
Conference call on November 13 at 10:30 a.m. ET, dial-in 1-888-231-8191 Passcode:
13-NOV-14
23428869. Replay: 1-855-859-2056, Passcode:23428869
 webcast at www.fieracapital.com
Finning International Inc. (FTT-T)3
Conference call on Nov. 13, 2014 at 11AM EST. Dial-in numbers: 800-766-6630 or 41613-NOV-14 340-8527 Webcast: http://www.finning.com/Investors/events-andpresentations/default.aspx
 Earnings to be released before market open.
CGI Group Inc. (GIB.A-T)
Earnings release before market open. conference call at 9:00a.m. dial-in: 1-866-225-2055
13-NOV-14
Sep
or through the Internet at www.cgi.com
 Supporting slides will be available at www.cgi.com. A replay of the call and copy of the slides will be archived at www.cgi.com
H&R REIT (HR.UN-T)1
13-NOV-14
No conference call.
Dec
3
$0.45
$0.43
$0.45
Dec
3
$7.47
$6.45
$7.00
Dec
3
$0.41
$0.36
$0.36
Dec
3
$0.39
$0.41
$0.35
Jun
1
-$0.02
-$0.04
-$0.03
Dec
3
$0.17
$0.37
$0.31
Dec
3
$0.10
$0.17
$0.15
K-Bro Linen Inc. (KBL-T)4
13-NOV-14
Manulife Financial Corporation (MFC-T)8
13-NOV-14
Conference call: 2:00PM EST, 800-769-8320 Replay: 800-408-3053, passcode 6718073
Northland Power Inc. (NPI-T)2
13-NOV-14
November , 10:00 AM ET, 1-800-269-0310 or 416-981-9080
Paladin Energy Ltd. (PDN-T)3
13-NOV-14
K+S AG (SDF-DE)
13-NOV-14
Spyglass Resources Corp. (SGL-T)2
13-NOV-14
No Details
33
Companies Reporting
Twin Butte Energy Ltd. (TBE-T)2
13-NOV-14
Dec
3
$0.14
$0.14
$0.14
Dec
3
$0.51
$0.32
$0.53
Dec
3
-$0.00
$0.02
$0.00
Mar
3
$8.29
$7.67
$6.25
Dec
2
n.a.
n.a.
n.a.
Dec
3
n.a.
$3.22
-$0.80
Dec
3
$0.68
$0.51
$0.70
Dec
3
$0.74
$0.67
$0.77
TORC Oil & Gas Ltd. (TOG-T)2
13-NOV-14
No Details
B2Gold Corp. (BTO-T)
14-NOV-14
 Conference call Nov. 14 at 1:00 p.m. ET. Dial-in 416-340-2216 or 1-866-223-7781.
Héroux-Devtek Inc. (HRX-T)5
14-NOV-14
Crius Energy Trust (KWH.UN-T)4
8:30 AM ET Conference Call. To access the conference call by telephone, dial 647-42714-NOV-14
7450 or 1-888-231-8191
Onex Corporation (OCX-T)9
14-NOV-14
Conference call at 11:00 a.m. ET, 1-866-631-5252, conference ID: 75491580.
 Webcast at http://www.onex.com/Webcasts_And_Presentations.aspx.
Power Corporation of Canada (POW-T)8
14-NOV-14
n.a.
Power Financial Corporation (PWF-T)8
14-NOV-14
n.a.
Source: Scotiabank GBM estimates.
Table of Contents
1
Funds From Operations
2
Cash Flow
3
Adj Earnings
4
Adj EBITDA
5
EBITDA
6
EBITDAR
7
Cash Op Earnings
8
Operating Earnings
9
Continuing Earnings
34
Industry Comment
Monday, November 10, 2014, Pre-Market
LatAm Retail
Chile Retail: Tough Environment
but Cheaper Valuations
Rodrigo Echagaray, MBA, CFA - (416) 945-4405
rodrigo.echagaray@scotiabank.com
Karla B. Peña - +52 (55) 9179 5211
karla.pena@scotiabank.com
Event
■ Chilean Retailers under coverage should report quarterly earnings in the
coming days: we expect Falabella to report on Wednesday November 12
and Cencosud on November the 28. Ripley should report during the week of
November the 17 (TBC).
ScotiaView Analyst Link
Implications
■ Macro indicators and retail sales are finally displaying the slowdown the
market had been expecting in Chile for months. Despite the negative macro
trends and the impact on SSS in Chile, we argue that EBITDA growth from
the Chilean retailers under our coverage in Q3 should not be as
disappointing as some are expecting. We expect Ripley to deliver the
highest EBITDA growth in the sector (+11% YOY) followed by Falabella
(+5%). We expect Cencosud's Adjusted EBITDA to fall slightly YOY.
■ We believe this quarter will also be an important gauge of retailers' ability
to pass on price increases to consumers because of more costly imports,
given the sharp depreciation of the CLP in recent months.
Recommendation
■ In our view, EBITDA growth in Chile retail should not be very different
from EBITDA growth for the Mexican retailers in Q3 (see Exhibit 13).
Therefore, we believe valuations in Chile look attractive on a relative basis
vs. the Mexican retailers, given our EBITDA growth expectations for the
quarter. Our preference remains unchanged with Falabella as our top pick in
Chile. We prefer Ripley to Cencosud but remain neutral on both names.
Universe of Coverage
Price
CENCOSUD-SN
CHDRAUI B-MX
COMERCI UBC-MX
FALAB-SN
FMX-N
RIPLEY-SN
SORIANA B-MX
WALMEX V-MX
CLP 1650.90
MXN 46.22
MXN 52.29
CLP 4264.30
US$97.29
CLP 317.91
MXN 43.99
MXN 30.84
Rating
Risk
SP
SU
SP
SO
SO
SP
SU
SP
Medium
Medium
Medium
Medium
Medium
High
Medium
Low
1-Yr
ROR
2,100
41.00
54.00
5,600
$108.00
475.00
36.00
37.00
28.4%
-11.3%
4.5%
32.8%
15.1%
51.1%
-17.5%
23.1%
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
35
The Andean Region: A Mixed Bag; Brazil Remains Challenging
■ As we reach the final stretch of the year, the Andean region offers mixed trends in terms of
economic activity. Chile is in full deceleration mode, Peru’s economic activity seems to
be picking up, while Colombia’s economy remains solid. In line with macro trends, we
expect the Andean companies under coverage to post better results coming from Colombia,
but expect SSS in Chile to slowdown vs. previous quarters. Also, we would expect more
defensive formats such as supermarkets to outperform other discretionary formats such as
department stores. We believe this quarter will also be important to gauge retailers’ ability to
pass on price increases to consumers due to more costly imports (i.e., imports are
denominated in US$) – this will be especially important for department stores (i.e., Falabella,
Ripley). Also, we expect Ripley, Falabella and Cencosud to writedown certain tax benefits due
to recent changes in the Tax Law. However, a press release recently issued by the regulators in
Chile (SVS) confirmed these accounting changes will only impact equity without passing
through the companies’ P&L (http://www.svs.cl/normativa/ofc_856_2014.pdf).
Exhibit 1 – Chile Economic Activity Index YOY
5.9%
15%
4.7%
4.4%
4.4% 4.2%
11%
3.8%
3.5%
4%
2%
1.3%
7.0%
7%
6.0%
5.4% 5.3%
4.9%
5%
3%
1.1%
0.9%
0.3%
1%
9.1%
9%
3.3%
2.8% 2.6%
2.1%
2.8%
3%
13.4%
13%
2.4%
1.6%
1.5% 1.8%
1%
-1%
-0.9%
Exhibit 3 – Colombia GDP YOY
Exhibit 4 – Colombia Retail Sales Index YOY
6.5%
10%
2%
1%
1.2%
0.1%
0.5%
3%
Aug-14
2.4%
4%
5.2%
6%
5%
3.0%
2.2%
7%
5.0%
4.5%
4.3%
6.6%
8%
4.5%
6.5%
6.7%
9%
5.4%
5.9%
5.1%
4.4%
5.5%
6.8%
5.8%
7.5%
Source: Company reports; Scotiabank GBM estimates, Bloomberg.
Jul-14
Jun-14
8.3%
7.2%
8.1%
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Oct-13
-3%
0%
Sep-14
6%
5%
Exhibit 2 – Chile Retail Sales Index YOY
Jul-14
May-14
Mar-14
Jan-14
Q2/14
Nov-13
Q1/14
Sep-13
Q4/13
Jul-13
Q3/13
May-13
Q2/13
Mar-13
Q1/13
Jan-13
0%
36
Exhibit 5 – Brazil GDP YOY
6.7%
Exhibit 7 – Local Currencies vs. USD, YOY (EOP as at Q3)
-1.1%
-0.9%
0%
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
-2%
Jan-14
Q2/14
2%
Q3/14
Q1/14
-1.1%
-0.9%
Source: Bloomberg.
Q4/13
Q3/13
-2%
1.0%
4%
Q2/13
Q1/13
Q4/12
Q3/12
Q2/12
Q1/12
Q4/11
Q3/11
Q2/11
Q1/11
4.7%
1.9%
6%
0%
-1%
6.4%
8%
2.2%
1.8%
2.4%
3.5%
10%
0.9%
0.6%
1%
0.8%
2%
0.8%
1.4%
2.1%
3%
1.9%
3.3%
4%
8.7%
4.2%
5%
Exhibit 6 – Brazil Retail Sales Index YOY
Source: Bloomberg.
Exhibit 8 – Peru GDP YOY
7.2%
6.8%
6.0%
6.2%
5.7%
5.4%
5.2%
5.1%
4.3%
Source: Bloomberg.
Source: Bloomberg.
Falabella Q3/14: SSS in Chile Department Stores Likely Negative, Yet
EBITDA should increase ~5% YOY
■ We expect Falabella to deliver ~10% revenue growth YOY. In Chile, we expect
negative SSS at department stores (-1%), but expect relatively more healthy SSS at
Sodimac and Tottus. In Peru, economic activity seems to be picking up according to
management; therefore, we expect SSS in department store to return to positive territory in
Q2 (after falling in Q2). However, we expect SSS at Sodimac in Peru to continue in negative
territory due to the large amount of store openings in recent months, which is leading to some
cannibalization. We expect the Maestro transaction to be reflected in the P&L until Q4,
but the balance sheet should likely reflect the increase in leverage to finance that
transaction in Q3. We expect SSS in Colombia to remain strong, but expect SSS in Brazil to
finish in negative territory.
■ Gross margins should be affected by inventory markdowns in Peru due to a milder winter,
and weaker currencies YOY (i.e., more costly imports in US$). However, we think the recent
margin expansion in banking services should be able to offset some of this pressure (i.e.,
lower provisions). SG&A should remain under pressure in Brazil as Falabella prepares for an
Q2/14
Q1/14
Q4/13
Q3/13
Q2/13
Q1/13
Q4/12
Q3/12
Q2/12
Q1/12
1.7%
37
expansion in Home improvement in Brazil, but we expect cost control initiatives to be able to
maintain SG&A as % of revenues flattish YOY. In all, we expect a slight gross margin
contraction and lower sales in Chile to lead to EBITDA margin contraction – we
estimate an EBITDA growth of ~5% YOY. Finally, we expect net income to remain
unchanged YOY.
Exhibit 9 – Falabella Q3/14 Results
Cencosud Q3/14: Expect Slightly Positive SSS in Brazil and Colombia
Supermarkets, but Adjusted EBITDA Should Fall Slightly YOY
■ We expect a relatively more solid SSS performance from Cencosud in Chile (vs.
Falabella) due to its higher exposure to supermarkets. As is the case with Falabella, we
expect Cencosud to post negative SSS in department stores. From management comments we
learned that Cencosud’s home improvement format Easy is likely to also post negative SSS
due to lower construction activity in Chile (on the back of the introduction of VAT under the
new Tax Law). We expect Supermarket SSS in Brazil and Colombia to finish slightly
positive, which we view as positive given recent trends. However, Home improvement stores
in Colombia should post negative SSS due to increasing competition from Sodimac (in line
with recent trends). Finally, Peru should be a mixed bag with solid performance in
Supermarkets but a poor performance in Department stores.
■ In all, we expect revenues to increase 7% to CLP2,684 bn, and expect adjusted EBITDA to
fall ~3% YOY. The lower profitability should be explained by inventory markdowns in
Peru, lower profitability in Colombia (due mainly to poor performance at EASY), and
lower EBITDA margins in Argentina (COGS growing ahead of average ticket) and in
Peru Department stores (i.e., inventory markdowns).
Exhibit 10 – Cencosud Q3/14 Results
Ripley Q3/14: Gross Margins Under Pressure Due to Inventory Markdowns
in Peru and a Weaker CLP, But Adjusted EBITDA Should Increase 11%
■ We expect Ripley’s SSS in Chile to outperform peers, though in part due to lower
comps. We expect positive SSS in Chile should lead to a 1% increase in total revenues YOY.
Peru SSS in Peru should continue under pressure, while Colombia SSS are a big
question mark given that this will be the first quarter Ripley will report SSS in
Colombia.
38
■ We expect to see pressure in gross margins because of an adverse FX effect in imported
goods (most of the merchandise is imported) and due to inventory markdowns in Peru.
Ripley also cited margin pressure in Peru as a result of the introduction of import taxes in
textiles from China.
■ Gross margin contraction coupled with operating losses in Colombia should lead to an
EBITDA margin contraction, which should in turn result in an EBITDA decline of ~4%
YOY. If we adjust for the fact that in this quarter credit card operations interest should be
above the operating line, adjusted EBITDA should increase ~11% YOY.
Exhibit 11 – Ripley Q3/14 Results
Exhibit 12 – Scotia vs. Consensus
Source: Company reports; Scotiabank GBM estimates, Bloomberg. Cencosud earnings and P/E not adjusted for Revaluation of Real Estate.
Exhibit 13 – P/E 2014E vs. EBITDA Growth Q3/14 (YOY)
*EBITDA growth for Cencosud, Falabella and Ripley are estimates; EBITDA growth for Comerci, Chedraui, Walmex and Soriana are actuals. Cenc osud P/E not
adjusted for Revaluation of Real Estate.
Source: Company reports; Scotiabank GBM estimates.
39
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Cencosud, SA (CENCOSUD-SN)
Valuation: 21x (NTM) adj P/E
Key Risks to Price Target: Pension funds concentration, foreign ops, potential dilution
Grupo Comercial Chedraui, SAB de CV (CHDRAUI B-MX)
Valuation: 2014E-2020E DCF w/ 9.3% WACC; 9x (NTM) EV/EBITDA; 18X (NTM) P/U
Key Risks to Price Target: Operating performance, consumer behavior, tax reforms
Controladora Comercial Mexicana, SAB de CV (COMERCI UBC-MX)
Valuation: Sum of the parts; Retail (NTM)11x EV/EBITDA & (NTM) 21x P/E.
Key Risks to Price Target: Operating performance, consumer behaviour, tax reforms
SACI Falabella (FALAB-SN)
Valuation: 2014E-2020E DCF w/ 9% WACC; 14x (NTM) EV/EBITDA; 23x (NTM) P/E
Key Risks to Price Target: Pension funds overhang, foreign ops
FEMSA, SAB de CV (FMX-N)
Valuation: Sum of the Parts
Key Risks to Price Target: Operating performance, consumer behaviour, FX Exposure
Ripley Corp SA (RIPLEY-SN)
Valuation: 2014E-2020E DCF w/ 10% WACC; SOTP
Key Risks to Price Target: Pension funds overhang, foreign ops
Organización Soriana, SAB de CV (SORIANA B-MX)
Valuation: 2014E-2020E DCF w/ 10.3% WACC; 8x (NTM) EV/EBITDA; 17X (NTM) P/U
Wal-Mart de México y Centroamerica, SAB de CV (WALMEX V-MX)
Valuation: 2014E-2020E DCF w/ 9.1% WACC; 13x (NTM) EV/EBITDA
Source: Scotiabank GBM estimates.
40
Industry Comment
AT&T Entering Mexico and Lowers
CapEx: Implications for Mexico,
U.S, and Canada
Jeff Fan, CPA, CA, CFA - (416) 863-7780
jeff.fan@scotiabank.com
Andres Coello - +52 (55) 5123 2852
andres.coello@scotiabank.com
Event
th
■ AT&T announced on Friday, Nov 7 that it will be acquiring Mexican
wireless provider Iusacell. It also provided capex guidance for 2015.
Implications
■ AT&T announced Friday after the market close that it is acquiring Iusacell
for $2.5B. Iusacell is a distant third mobile operator in Mexico with
approximately 8% market share behind Telcel (America Movil/AMX) and
Telefonica (TEF). In the same release, T announced that its capex in 2015
will be in the $18B range (down from $21B in 2014) and that this translates
to capex intensity in the mid-teens level. We think this guidance will raise
questions about T's revenue and FCF in 2015.
■ Good news for Mexico's telecom industry, but what's next? AT&T may
have selected Iusacell as the vehicle to capitalize on the Mexico opportunity
only after sensing regulatory resistance towards acquiring the AMX assets.
If AT&T acquires the latter on top of Iusacell, its market share may reach
up to 90% in certain areas, while hoarding up to ~60% of spectrum. This
could be subject to legal scrutiny, jeopardizing the removal of dominancy
regulations. Other suitors looking at the AMX assets (e.g., Softbank) may
scrap valuations as they will now compete against AT&T.
Recommendation
■ We believe the more important part of the announcement is the capex
guidance and the implications for 2015 revenue and FCF. We maintain our
Sector Underperform rating on T. We have a neutral rating on AMX.
41
AT&T Announces Iusacell Acquisition
■ AT&T (Sector Underperform – $36 target) announced Friday after the market close
that it is acquiring Iusacell for $2.5B. Iusacell is a distant third mobile operator in Mexico
with approximately 8% market share behind Telcel (America Movil/AMX) and Telefonica
(TEF). In the same release, T announced that its capex in 2015 will be in the $18B range
(down from $21B in 2014) and that this translates to capex intensity in the mid-teens range.
We think this guidance will raise questions about T's revenue and FCF in 2015.
■ The agreement is to purchase all Iusacell’s wireless assets inclusive of debt. AT&T has
entered into an agreement with Grupo Salinas to acquire all of Iusacell’s wireless properties,
including licenses, network assets, retail stores and ~8.6M wireless subscribers. The
acquisition is contingent upon Grupo Salinas closing its purchase of the remaining 50% of
Iusacell, which it does not currently control. The transaction is subject to review by the IFT,
Mexico’s telecom regulator and is expected to close in Q1/15. Iusacell headquarters will
continue to remain in Mexico City after closing. We believe that AT&T is eligible to benefit
from the provisions of Transitory Article 9 of Mexico’s telecommunication law, which allow
for acquisitions to happen without regulatory approval as long as certain conditions are met.
■ Premium valuation. AT&T is disclosing that Iusacell has approximately US$700M of net
debt, which means that the equity component was valued at US$1,800M. This would imply a
~25.5% premium over the price that Grupo Salinas offered to Televisa for its 50% stake in
Iusacell (US$714M for 50%). Of note, Televisa’s management recently stated that Iusacell
has positive EBITDA margin, which we believe is currently at mid-single digits.
■ Iusacell spectrum holdings. As part of the acquisition, AT&T will take control of
Iusacell’s spectrum. This includes 21.6-41.6MHz of 1.9GHz PCS nationwide and 2025MHz of 800MHz primarily in the southern half of the country, including Mexico City and
Guadalajara. A summary of Iusacell’s spectrum holdings is detailed in Exhibit 1. Secondary
legislation in Mexico allows for the creation of a secondary spectrum market, so we believe
AT&T could look to lease AWS spectrum from Nextel Mexico in order to launch 4G
services (we understand that Iusacell currently does not offer LTE services in Mexico).
■ AT&T's entry is motivated by regulatory change, market opportunity and synergies.
AT&T Chairman and CEO Randall Stephenson indicated that the investment decision was
facilitated by the Mexican government's recent actions to introduce more competition into
the country’s telecommunications sector. Additionally, AT&T stated that the market
conditions in Mexico provide significant growth opportunities, due to the country’s
comparatively low wireless penetration, mobile data adoption and nascent product offerings
(Exhibit 2). Lastly, the company states it expects synergies to stem from economies of scale
through purchasing, sharing of best practices, and greater customer value through a North
American presence.
Implications for AT&T, and what about Canada?
■ Financially for AT&T the acquisition is not that material. T's goal is to create a
contiguous mobile footprint with Mexico and the US, which makes sense. But Iusacell will
require some work to improve its scale and return. We believe Iusacell's network and
spectrum position are inferior to AMX and TEF. We estimate approximately 70% of its
subscribers are still on 2G and POP coverage currently is approximately 80%.
■ We believe the capex guidance may create confusion for investors regarding 2015
revenue. T's $18B range at mid-teens capex range implies total revenue of $120B, which is
8% below our current 2015 revenue estimate. We spoke to T investor relations and there was
not much more clarity on revenue outlook. The only possible explanation is that the CI%
does not include equipment revenue, which amounts to approximately $11B. However in the
release it clearly states that CI% is based on total revenue. We note that in recent past T has
reduced capex outlook primarily due to lower operating outlook and that the capex reduction
in the past was to maintain FCF to support the dividend.
■ T's entrance into Mexico increases the probability that T will look to acquire additional
assets in the future. Our initial analysis suggests T has the capacity to further pursue the
assets being divested by AMX under Project Sunrise. There were media speculations
regarding T's interest in AMX's assets but the regulator may have some issues regarding T's
independence from AMX due to T being a minority holder of AMX until recently. T's
acquisition of Iusacell could reduce the independence question if T becomes a real
competitor in mobile. However, as we discuss later in this note, buying Iusacell could also
42
create serious concentration issues in areas to be divested by America Movil, both in terms
of market share and spectrum holdings. Also, there could be an issue with timing as pressure
on AMX’s management to get the breakup plan approved by the local regulator is mounting.
A report by the Wall Street Journal suggests that Softbank is looking at the assets as well.
■ From friend to foe? With T entering Mexico, we wonder whether this paves the way for
AMX to leverage its Tracfone subscriber base and become a facility based player in USA by
acquiring T-Mobile. But our AMX analyst Andres Coello believes that AMX's M&A
interests are in South America (specifically Brazil, where the company has openly said it is
exploring opportunities) and Southeast Europe. Given AMX's higher debt level after the
acquisition of Telekom Austria, T-Mobile may not be within reach in the short term. In line
with management’s comments, we believe AMX is currently satisfied with Tracfone
operating as an MVNO in the US.
■ North America contiguous coverage? Then what about Canada? Not unlike Mexico,
Canadian regulators have also implemented measures to increase competition. However, it
appears that T is not looking to enter Canada. The last review of the Canadian opportunity
was done in mid-2013 and since then T's international roaming rates with Canadian partners
have declined and thus there are less incentive to expand into Canada.
43
Exhibit 1 – Iusacell Mexican Spectrum Holdings (in MHz)
Region
1 (Baja California)
2 (Sonora,Sinaloa)
3 (Chihuahua, Durango)
4 (Nuevo Leon)
5 (Jalisco)
6 (Queretaro)
7 (Puebla, Veracruz)
8 (Chiapas, Quintana Roo)
9 (Mexico City)
AWS
Telcel
Iusacell
30
0
20
0
20
0
20
0
30
0
20
0
20
0
30
0
20
0
TEF
0
10
10
10
0
10
10
0
10
NIHD
30
30
30
30
30
30
30
30
30
Region
1 (Baja California)
2 (Sonora,Sinaloa)
4 (Nuevo Leon)
5 (Jalisco)
6 (Queretaro)
9 (Mexico City)
PCS 1.9
Telcel
Iusacell
28.4
41.6
28.4
41.6
28.4
31.6
28.4
31.6
28.4
31.6
28.4
31.6
28.4
31.6
28.4
21.6
28.4
21.6
TEF
40
40
50
40
50
50
50
30
60
NIHD
0
0
0
10
0
0
0
0
0
Region
1 (Baja California)
2 (Sonora,Sinaloa)
4 (Nuevo Leon)
5 (Jalisco)
6 (Queretaro)
9 (Mexico City)
800 MHz
Telcel
Iusacell
20
0
20
0
25
0
20
0
20
25
20
20
20
20
20
20
25
25
TEF
20
20
20
20
0
0
0
0
0
NIHD
21.4 (non contiguous)
44
Exhibit 2 – Latin American Wireless Penetration (in % of Pops Under Coverage)
Regulations Could Help AT&T Gain Market Share in Mexico, But
Reversing Portability Trends and the Elimination of Domestic Long
Distance Could Put Pressure on ARPUs in the Short Term
■ In 2013, the Mexican Congress approved a constitutional reform aimed to put an end to the
concentration issues in Mexico’s telecom and media industries. Broadly speaking, the
regulations included: (1) creating a new, independent and powerful regulator (Ifetel); (2) a
complete overhaul of the industry's legal framework, including the creation of specialized
courts; (3) setting tougher sanctions for non-compliance; and (4) ensuring that America
Movil and Televisa were subject to special regulations, which were published by Ifetel on
March 6, 2014 (please see our March 10 report: “No Free Lunch for Rivals”).
■ In 2014, Congress passed secondary legislation governing the constitutional reform, which
basically ratified regulations and penalties on AMX but, in our view, was more relaxed on
the media front.
■ Secondary legislation included the possibility for AMX to have its status as dominant player
removed by proposing Ifetel a plan that would reduce its market share to below 50.0% of the
telecom sector, among other conditions. On July 8, 2014, AMX officially announced that it
will propose such a plan. At this point, it is not clear if AMX intends to divest assets by
regions or by selling portions of its subscriber base on a nationwide basis (the press has
speculated on a regional breakup, as we will explain later.)
■ As such, there is uncertainty regarding what will happen to dominancy rules once AMX's
breakup plan is accepted. While this process could take time, AMX’s competitors have
expressed concerns regarding legal uncertainty on the investments required to take advantage
of such regulations.
■ Some of the regulations that could help AT&T develop its franchise in Mexico are:
1. Asymmetric mobile termination rates. Currently, AMX competitors pay nothing to
terminate calls in the Telcel and Telmex network. However, AMX still has to pay a
MXN 0.30/minute rate for terminating calls in rival networks. This has helped
45
competitors to launch better rates (see Exhibit 4). Once the regulator accepts AMX’s
breakup plan, all termination rates in Mexico will go to zero.
2. Commercial restrictions for AMX as long as it is dominant. As we show on Exhibit
3, Iusacell is losing thousands of lines to AMX every month through portability, which
in our view means that AT&T will need to make investments to improve its competitive
position. Some of the dominancy regulations could help AT&T. America Movil is
restricted to have handset-exclusivity agreements, it must sell handsets unlocked, there
are restrictions to sell services not expressly mentioned in contracts, and it cannot charge
a differentiated rate for on-net and off-net calls, among others.
3. Infrastructure sharing, including towers and capacity, as long as AMX is
dominant. Ifetel’s dominancy ruling dated March 6, 2014, includes literally hundredths
of provisions on how AMX must share its infrastructure with rivals, including both the
wireless and wireline infrastructure. This means that, as it expands its network, AT&T
will have access to the towers and backhaul infrastructure needed to provide quality
services (when it comes to sharing, the Ifetel ruling requires AMX to provide
competitors the same quality levels under which it operates its network). The “reference
offers” for infrastructure sharing, which contain further detail on the application of the
ruling for both the fixed and wireless networks were delivered to AMX by the Mexican
regulator last week and will be made public within days. AMX and rivals are free to
negotiate the rates at which the infrastructure will be leased; however, if no agreement is
reached, the regulator Ifetel can intervene, using models that are generally oriented to
costs.
4. Roaming agreements as long as AMX is dominant. America Movil is forced to allow
subscribers of rival networks to roam on its network. In practical terms, this means that
AT&T’s subscribers will be in position to enjoy the same coverage as offered by the
incumbent carrier today. This could be particularly helpful for AT&T as it expands its
coverage to new geographies.
■ Elimination of domestic long distance could put pressure on Iusacell's ARPU in the
short term. While several regulations could help AT&T to gain market share in Mexico, the
elimination of domestic long distance could put pressure on short-term ARPUs. According to
a recent statement by Televisa’s management, Iusacell has positive EBITDA, but we believe
its margins are very low (~5.0%.) Efforts to improve coverage and market share, coupled
with ARPU pressure, are some of the challenges that AT&T is likely to face as it tries to
engage Iusacell in a turnaround effort. We think that eliminating the use of two brands
("Iusacell" and "Unefon") would be a good idea in terms of saving marketing costs.
Exhibit 3 – Iusacell Line Erosion
46
Exhibit 4 – Asymmetric MTRs Are Helping Competitors to Have Competitive Rates in Mexico
Domestic Long Distance to Be
Eliminated by January 1, 2015
OLD $0.85/min
Preferential Rate
$0.50/min*
MTR
Free First Five
Minutes
$0.00
OLD $1.98/min
$0.85/min
MTR
$0.30
$0.98/min*
Portability Users
Get 5 Free Numbers
for 3 Months, Then
Migrate to Standard
Promotion of 3 Free
Numbers
Free WhatsApp

Source: Company reports; Scotiabank GBM estimates. * Recharge Above MXN $100 per month
What Does the AT&T’s Acquisition of Iusacell Means to America Movil?
How Would the Mexican Industry Look After the Iusacell Acquistion?
■ On July 8, 2014, AMX announced plans to break up its Mexican subsidiary in order to
reduce its market share to below 50.0% of the “sector” (the “sector” includes mobile
telephony, wireline, broadband and pay-TV.) However, we believe that AMX will try to
reduce its market share in the sector to 45.0% in order to leave room for growth in the future.
According to press reports, AMX is analyzing the possibility of breaking up the local
subsidiary in two pieces (this plan is allegedly called “Project Sunrise”; see map on Exhibit
5.)
■ Several press reports suggest that AT&T is one of the main candidates to acquire the assets
(Softbank was also mentioned as a potential acquirer.) The question now is how the
acquisition of Iusacell impacts T’s ability to acquire other assets in Mexico.
■ The head of the local regulator Ifetel, Gabriel Contreras, recently stated that historic
relationships between AMX and the companies interested in buying the divested assets will
be analyzed. As AT&T was a shareholder of AMX for nearly two decades, and because
certain relationships still exists (the press has mentioned that Mr. Chico Pardo is still on the
AT&T board), the regulator’s comments were understood as a direct message to AT&T
regarding the resistance it could face should it try to acquire assets from AMX. The regulator
also made it clear that the approval of the breakup plan is subject to AMX disclosing who
would acquire the assets, another sign that the regulator is carefully contemplating the
impact of a potential acquisition by AT&T, in our view.
■ While the Iusacell acquisition shows commitment by AT&T to compete with AMX on a
nationwide basis (e.g. not limiting its coverage to a certain number of states), it could limit
its ability to acquire assets from AMX given antitrust issues, both in terms of spectrum
holdings and market share.
47
■ According to our estimates, if AT&T was to acquire both Iusacell and the AMX assets
allegedly included in “Project Sunrise”, it would see its market share in the wireless segment
rising to between 70% and 90%, depending on the state. On the other hand, AT&T would
concentrate as much as 59.6% of wireless spectrum in certain states like Chiapas.
■ Transitory Article 9 of the Mexican telecommunications law provides that companies not
deemed dominant can make acquisitions without regulatory approval as long as certain
conditions are met, including not surpassing a 20.0% market share of the sector, as well as
other conditions. While Iusacell’s market share in the wireless sector stands at ~8.4% (see
Exhibit 6), its market share of the telecommunications sector is only 5.6% (see Exhibit 7).
Meanwhile, AMX’s market share of the sector stands at approximately 60.3% (see Exhibit
7.) If AMX intends to reduce its market share to 45.0%, then AT&T would require
regulatory permission to acquire the assets as it would surpass the 20.0% threshold. That
said, AMX could look to sell fewer assets, but this would impact valuations.
■ In our view, even if AT&T was to buy assets that would keep its market share below 20.0%
of the sector, it remains to be seen if the regulator Ifetel would agree to remove the
dominancy status on AMX. In other words, Ifetel has other means to discourage AMX from
selling the assets to AT&T. In contrast, we don't think the acquisition of Iusacell will face
resistance by the regulator (in fact, we think it's great news to have AT&T entering Mexico.)
■ As pressure on AMX mounts to get the breakup plan approved, other candidates looking at
the assets, like Softbank, are likely to be less inclined to pay rich valuations. For example,
they could look to share the benefits of rescuing AMX from the dominancy rules. And now
that they will be competing with one of the world’s largest telecom companies (AT&T),
potential suitors are likely to think twice about valuations, in our view. Please see our
November 6 report, “Breakup: It's Now About Disentangling''.
■ There are three scenarios for the Mexican wireless industry at this point: (1) AT&T
competing with AMX, TEF and Nextel on a nationwide basis; (2) AT&T competing with
TEF and Nextel on a nationwide basis, with AMX in certain areas, and with a new player in
the divested areas; and (3) AT&T buying the AMX assets and competing with it only in the
areas not divested by AMX, and with TEF and Nextel on a nationwide basis.
Exhibit 5 – Assets to Be Divested by AMX According to "Project Sunrise"
Project “Sunrise”*
States:
Nuevo Leon, Tamaulipas, Coahuila, Puebla Veracruz, Guerrero,
Oaxaca & Chiapas 2015E:
Wireless subs (000): 21,213
Fixed line Subs (000): 5,207
GDP contribution: 27.1%
Estimated Valuation: US$7,965M
Source: Scotiabank Estimates; * Project Sunrise as Disclosed by Mexican Press (El Financiero)
48
Exhibit 6 – Market Share Structure of Mexican Telecommunications Industry
MEXICO’s TELECOM INDUSTRY
Fixed-line Telephony
Telmex (AMX)
Subs
3Q14
Mkt Share
(%)
Fixed Internet Access
Subs
3Q14
Mkt Share
(%)
13,250
71.4%
Telmex (AMX)
9,119
64.1%
Telefonica (fixed w.)
1,561
8.4%
Televisa
2,166
15.2%
Televisa
1,148
6.2%
Megacable
1,143
8.0%
Axtel
922
5.0%
Axtel
518
3.6%
Others
710
3.8%
Maxcom
170
1.2%
Megacable
654
3.5%
Others
1,100
7.7%
303
18,549
1.6%
100.0%
Total
14,216
100.0%
Maxcom
Total
Penetration pops
16%
Penetration pops
12%
Penetration homes
64%
Penetration homes
49%
Mobile Telephony
Subs
3Q14
Mkt Share
(%)
Pay-Television
Subs
3Q14
Mkt Share
(%)
Televisa SKY + Cable
9,888
62.6%
Telcel (AMX)
70,474
69.0%
MVS (Dish + MMDS)
2,400
15.2%
Telefonica (TEF)
20,300
19.9%
Megacable
2,262
14.3%
Iusacell
8,600
8.4%
Axtel
87
0.6%
Nextel (NIHD)
2,830
2.8%
Maxcom
70
0.4%
Total
102,204
100.0%
Other cable
Total
1,100
7.0%
15,806
100.0%
Penetration pops
14%
Penetration homes
55%
Penetration pops
88%
Source: Scotiabank Estimates; Ifetel
Exhibit 7 – Market Share of Mexican Sector Post Iusacell Acquisition, AMX and AT&T
Fixed-Line
Pay-TV
Mobile
Broadband
Total
Mkt Share of the sector
Source: Scotiabank Estimates; Ifetel
Total Q2/14
19,465,203
15,384,869
103,955,241
14,890,767
153,696,080
AMX Q3/14
22,242,000
AT&T
0
70,474,000
8,600,000
92,716,000
8,600,000
100.0%
60.3%
5.6%
49
Could AT&T Be Interested in Other Assets in Mexico?
■ Following the acquisition of Iusacell, AT&T could look to acquire other assets in Mexico.
For the reasons explained above, we think that buying assets from AMX could face
resistance by the regulator given concentration problems. However, T could look to buy
other assets in the future, especially once it digests the potential acquisition of DTV.
■ It is telling that AT&T did not acquire from Grupo Salinas the fibre assets of Iusacell,
including Total Play (a FTTH network, mostly present in Mexico City). As such, it appears
to us that AT&T will be focused on the wireless market, at least during an initial phase.
Given the spectrum issues disclosed above, it is possible that AT&T looks to take advantage
of new spectrum-leasing regulations, particularly in regards to Nextel Mexico, which owns
30 MHz of AWS spectrum. Given NIHD’s ongoing bankruptcy process, we don’t discard a
potential acquisition by AT&T in the future, especially if valuations make sense (using as
reference the acquisition of Iusacell, we think Nextel Mexico could be worth approximately
US$900M.)
■ Once it completes the acquisition of DTV, AT&T will hold a minority stake in SKY Mexico
(currently controlled by Televisa). We think AT&T may look to integrate Iusacell with
Televisa’s cable assets, especially as TV is analyzing the possibility of launching an MVNO.
■ Another possibility is that AT&T looks to buy other Mexican assets available. We think
Televisa will acquire Megacable, but this operator remains an option for AT&T (as a
remainder, Megacable’s bylaws require the payment of a 30% premium over the highest
price of the previous twelve months, which we estimate would put its enterprise value at
above US$4.0B.) Alfa’s Alestra inherited some of the business that AT&T used to have in
Mexico’s long-distance segment, so they probably have a solid relationship with them. The
company has suffered a dramatic transformation in recent years, focusing now in the
corporate segment, value-added services and data centers. Alestra could therefore become an
option for AT&T in case the latter decides to explore the corporate niche in Mexico.
■ In our view, the coming elimination of domestic long distance by January 1, 2015, coupled
with increased pressure on wireline prices (including the new offer recently launched by
Televisa’s Izzi), will put significant pressure on Axtel and Maxcom. In fact, we believe
Axtel is already immersed in a debt spiral that could lead to financial distress next year (we
believe that net debt to EBITDA could reach 3.4x at the close of 2015; as a remainder, Axtel
will see an increase in interest payments following the increase to 9.0% in the interest rate of
the 2020 notes). As such, AT&T (or any other suitor) could wait until these assets are
distressed in order to selectively pick assets that could be worth something.
50
Price
AMX-N
AMX-N
BA-T
BCE-T
CCA-T
CMCSA-Q
GLN-T
MBT-T
QBR.B-T
RCI.B-T
SJR.B-T
T-T
T-N
TV-N
TWC-N
VZ-N
US$24.15
US$24.15
C$31.66
C$50.98
C$62.97
US$55.15
C$10.80
C$28.23
C$29.36
C$42.19
C$29.25
C$41.01
US$34.91
US$35.17
US$143.60
US$50.86
Rating
Risk
SP
SP
N/A
SP
SP
SO
SO
SP
FS
SP
SO
SP
SU
SU
SO
SO
Medium
Medium
N/A
Medium
Medium
Medium
High
Medium
Medium
Medium
Medium
Medium
Medium
High
Medium
Medium
1-Yr
ROR
$19.00
$19.00
N/A
$50.00
$64.00
$65.00
$14.00
$30.00
$35.50
$43.00
$32.00
$38.00
$36.00
$28.00
$187.00
$54.00
-19.8%
-19.8%
N/A
3.0%
3.9%
19.4%
34.6%
12.3%
21.3%
6.3%
13.2%
-3.3%
8.5%
-20.2%
32.3%
10.5%
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
America Movil (AMX-N)
Valuation: DCF - 5 years results, 8.3% WACC, terminal growth rate of 1.0%
Key Risks to Price Target: Regulation in Mexico
America Movil (AMX-N)
Key Risks to Price Target: Regulation in Mexico
BCE Inc. (BCE-T)
Valuation: 1-yr fwd: 7.1x NTM EBITDA; 6.5% NTM FCF yield (fully-taxed); 12.5x NTM EV/Cash EBIT
Key Risks to Price Target: Faster acceleration in access line loss and higher wireline capex to compete on broadband.
Cogeco Cable Inc. (CCA-T)
Key Risks to Price Target: Cdn. IPTV and fiber expansion and content costs; acquisitions
Comcast Corporation (CMCSA-Q)
Valuation: 1-yr fwd: 8.2x NTM EV/EBITDA; 6.3% NTM FCF yield (fully-taxed); 11.6x NTM EV/Cash EBIT
Key Risks to Price Target: U.S. economic slowdown; OTT cord-cutting; content costs; telco/satellite competition
Glentel Inc. (GLN-T)
Valuation: 9x Forward Cash P/E
Key Risks to Price Target: Slowing wireless market growth, increasing retail competition
Manitoba Telecom Services Inc. (MBT-T)
Valuation: 1-year fwd: 6.4x NTM EBITDA, 4.8% NTM FCF yield (fully-taxed); 14.8x NTM EV/Cash EBIT
Key Risks to Price Target: Pension funding, Further Allstream deterioration
Quebecor Inc. (QBR.B-T)
Key Risks to Price Target: Wireless execution; IPTV competition; Newspaper/TV cyclicality
51
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Rogers Communications Inc. (RCI.B-T)
Key Risks to Price Target: Wireless competition (from both incumbents and new entrants)
Shaw Communications Inc. (SJR.B-T)
Key Risks to Price Target: Irrational competitive behaviour by Shaw or TELUS.
TELUS Corporation (T-T)
Valuation: 1-yr fwd: 7.3x NTM EBITDA; 5.0% NTM FCF Yield (Fully-Tax); 15.3x NTM EV/Cash EBIT
Key Risks to Price Target: Wireless competition; Wireline business deterioration
AT&T Inc. (T-N)
Valuation: 13.4x NTM EPS 1-year forward; 11.8x NTM EV/Cash EBIT; 6.1x NTM EV/EBITDA; 6.4% FCF Yield (Fully-taxed)
Key Risks to Price Target: Cable/wireless competitive intensity; pension funding; U.S. economy
Grupo Televisa, SAB (TV-N)
Key Risks to Price Target: Decline of broadcast ratings in Mexico and the U.S.; expensive acquisitions
Time Warner Cable Inc. (TWC-N)
Valuation: 2.875x exchange ratio of 1-year forward CMCSA target price ($65)
Key Risks to Price Target: U.S. economy; cord-cutting; programming costs
Verizon Communications Inc. (VZ-N)
Key Risks to Price Target: U.S. economy; pension funding; VZW cash to support dividend
52
Industry Comment
Uranium
Ben Isaacson, MBA, CFA - (416) 945-5310
ben.isaacson@scotiabank.com
Carl Chen - (416) 863-7184
carl.chen@scotiabank.com
Event
■ On Friday, spot uranium hit $41.75/lb, a level we haven't seen in ~18
months, and a stunning 50% increase since the $28 July lows.
Implications
■ While we would like to see greater liquidity supporting these price moves, if
discretionary demand continues to develop as we've seen over the past few
weeks, we believe the equities are going to follow - even if on sentiment alone.
■ In our note, we highlight equity correlations to spot movements, where
ETFs like URA and U rank #1, followed by producers such as CCO and
PDN, among others. Non-producer DML ranks last (as it should), as the L/T
price is more relevant for development projects than the spot price.
■ With respect to spot-implied equity values, CCO and U have 17% and 14%
upside. DML and PDN have significantly more spot-implied upside, but the
r-squared is relatively weak with DML, while financial challenges may
place a cap on the enthusiasm investors give to PDN.
■ With the sale of its Bruce Power stake behind it, as well as a good contract
mix, CCO's earnings leverage to spot is better next year. Upside on a 2015
spot price of $50/lb vs. $40 is a ~50% increase in 2015E EPS.
Recommendation
■ We maintain Sector Outperform ratings on CCO and DML, although we
expect investors will be less selective than usual if spot continues to rally.
Price
CCO-T
DML-T
PDN-T
U-T
C$21.24
C$1.25
C$0.36
C$5.47
Rating
Risk
SO
SO
SP
SP
High
Speculative
Speculative
High
1-Yr
ROR
$24.00
$1.75
$0.55
$6.00
14.9%
40.0%
54.9%
9.7%
53
R-Squared
■ Sentiment is turning. It’s not often uranium equities move
10% to 20% higher in one trading session, but that’s exactly Exhibit 1 – Uranium Equities Price vs. Spot U3O8
what happened on Friday following news that the first two
0.9
Japanese nuclear reactors have cleared the final major hurdle to
0.79
restart. On the back of this catalyst, as well as the pro-nuclear
0.8
0.74
0.73
GOP taking the Senate, and heightened speculation of nuclear
0.67
0.7
0.64
or uranium sanctions on Russia, the spot price has now moved
to $41.75/lb, up 50% since July.
0.6
0.52
0.50
■ The last time spot was in the low-$40s was ~18 months ago.
0.5
However, spot was trending lower, not higher. In fact, spot was
0.4
still steadily falling from $73/lb, since the Fukushima disaster
occurred in March 2011. Accordingly, the market may have
0.3
already been anticipating lower prices, with CCO trading in
0.2
the $18 to $20/sh range.
■ Correlations to spot vary among equities. As Exhibit 1
0.1
shows, the ETFs, URA and U, have the highest correlations to
0.0
changes in the spot price, at 0.79 and 0.74, respectively.
URA
U
URE
CCO
PDN
EFR
DML
Producers, such as CCO and PDN, among others, naturally rank
*DML sold production assets in 2012, and URE became a producer in 2013
after the ETFs, mostly in the mid-0.60s. Non-producer DML
ranks last at 0.50, as the L/T price is more relevant for Source: Bloomberg; Scotiabank GBM.
development projects than the spot price.
■ Spot-implied equity prices suggest
further upside available. Based on spot Exhibit 2 – Spot-Implied Equity Prices
Implied
Last
Implied
at $41.75/lb, CCO’s stock price ‘should’
Y
=
m
x
+
b
=
Price
Price
Upside
Relevance
be closer to the $25 area, according to a
(R )
(Ticker)
(Slope)
(US$/lb U O )
(Intercept)
($/sh)
($/sh)
(%)
linear equation with an r-squared value of
CCO
= 0.4106
x $41.75 +
7.6068 =
$24.75
$21.24
17%
0.67
0.67 (Exhibit 2). PDN’s implied stock
price of $2+ is naturally clouded by its
PDN
= 0.0845
x $41.75 +
-1.2991 =
$2.23
$0.36
n.m.
0.64
balance sheet challenges. Although, one
could argue PDN should have the best
U
= 0.1117
x $41.75 +
1.5686 =
$6.23
$5.47
14%
0.74
torque to an improving uranium market.
DML
= 0.0832
x $41.75 +
-0.6196 =
$2.85
$1.25
128%
0.50
■ CCO earnings leverage. With the sale of
its Bruce Power stake behind it, as well as Source: Scotiabank GBM estimates.
a good contract mix, CCO’s earnings
leverage to spot is better next year. Upside
on a 2015 spot price of $50/lb vs. $40 is a
~50% increase in 2015E EPS.
2
3
Exhibit 3 – CCO Earnings Leverage to Spot
8
54
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Cameco Corporation (CCO-T)
Valuation: 1.5x NAV, 13.5x 2015E EBITDA, 23.0x 2015E EPS
Key Risks to Price Target: Uranium S/D; uranium prices; CAD/USD
Denison Mines Corp. (DML-T)
Key Risks to Price Target: Uranium outlook; exploration and development progress; CAD/USD
Paladin Energy Ltd. (PDN-T)
Valuation: 0.5x NAV
Key Risks to Price Target: Uranium S/D; uranium prices; F/X rates; geopolitical risk
Uranium Participation Corporation (U-T)
Valuation: 1.0x F2016E NAV
Key Risks to Price Target: Uranium prices (U3O8 and UF6); CAD/USD exchange rate
55
Company Comment
(AX.UN-T C$15.46)
Artis REIT
mario.saric@scotiabank.com
Rating: Sector Perform
Risk Ranking: Medium
Trevor Thompson-Harry - (416) 863-7986
trevor.thompsonharry@scotiabank.com
Target 1-Yr:
C$17.00
ROR 1-Yr:
16.9%
Key Risks to Target: Excess Calgary office supply, rising interest rates
CDPU (NTM)
CDPU (Curr.)
Yield (Curr.)
$1.08
$1.08
7.0%
Event
■ Full comment following an in line quarter.
Pertinent Revisions
Implications
■ Capital recycling program focused on development. AX intends to
be more active on the capital recycling front in 2015, looking to recycle
out of select Western Canadian assets (vs. Ontario and Ottawa),
redeploying proceeds in to the U.S. on a better value basis. While we
continue to view recycling out of non-core assets in non-core U.S.
markets and consolidation into fewer larger markets as a positive, it
seems like selling the Tampa and New Hartford assets (classified as
held-for-sale in Q2) may be less imminent. While a constant source of
internal discussion and despite a 4% decline in unit price since
September 5th (to 6.9% implied cap rate), a unit buyback doesn't appear
to be in the cards.
■ Estimates intact; looking for moderate growth through 2016. Our
2014E and 2015E FFOPU are down ~$0.01 following an in line quarter.
Our recently released 2016E AFFOPU (unchanged) reflects a 2014E2016E CAGR of 4.4%, slightly above the 3.8% for its diversified REIT
peers, but below the 5.5% for our universe of coverage.
FFOPU14E
FFOPU15E
New
$1.43
$1.48
Old
$1.44
$1.49
Recommendation
■ Maintain SP rating and $17.00 target. Our view is unchanged
following an in line quarter, we continue to view AX as a solid bet for
investors looking for inexpensive U.S. and industrial exposure.
Qtly FFOPU (FD)
2013A
2014E
2015E
2016E
Q1
$0.36 A
$0.36 A
$0.36
$0.38
(FY-Dec.)
Funds from Ops/Unit
Adj. Funds from Ops/Unit
Price/AFFO
EV/EBITDA
EBITDA (M)
EBITDA/Int. Exp
NOI Margin
Q2
$0.35 A
$0.35 A
$0.37
$0.38
Q3
$0.35 A
$0.35 A
$0.37
$0.38
Q4
$0.35 A
$0.36
$0.37
$0.39
Year
$1.41
$1.43
$1.48
$1.53
P/FFO
10.5x
10.8x
10.5x
10.1x
2012A
$1.31
$1.10
14.2x
16.5x
$242
2.5x
64.6%
2013A
$1.41
$1.19
12.5x
14.9x
$291
2.8x
64.2%
2014E
$1.43
$1.21
12.7x
14.4x
$309
2.8x
63.2%
2015E
$1.48
$1.26
12.2x
13.9x
$321
2.9x
63.4%
2016E
$1.53
$1.32
11.7x
13.6x
$328
3.0x
64.1%
BVPU14E: $19.40
ROE14E: 6.23%
NAVPU:
P/NAV:
$16.70
0.93x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Units O/S (M)
Float O/S (M)
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
$2,100
$2,354
$4,454
136
136
56
■ Maintain SP rating; $17.00 target. Our view on AX is intact following a relatively in line
quarter, with our unchanged $17.00 target reflecting a solid 17% 1-year ROR, in line with the
17% for its diversified peers and slightly ahead of the 15% average for our universe of
coverage. Following a strong start to the year (+10% to May 12 vs. +7% for sector), AX now
modestly lags the REIT Index (+4% vs. +6%), creating a more fluid entry point for investors
seeking either yield, U.S. exposure vis-à-vis a Canadian REIT (23.6% of AX NOI), or
exposure to arguably one of the healthier asset classes today (industrial = 23.8% of AX NOI),
despite another hiccup in Q3 (industrial occupancy was down 40bp QOQ largely on a tenant
departure in Minneapolis vs. down 230bp QOQ in Q2).
■ Capital recycling pace expected to accelerate in 2015…. As you may know, AX has been
noticeably hitting the “pause button” on new acquisitions over the past few quarters with the
$166M of YTD acquisitions likely all we’ll see completed (including a $39.5M retail
acquisition in Alberta subsequent to quarter-end), settling in the low-to-mid range of
management’s revised guidance of $100M-$300M (which is already below the historical
guidance range of $400M-$600M). Looking to 2015, management believes we may see more
capital recycling with AX potentially recycling out of Western Canadian assets (vs. Ontario
and Ottawa) and redeploying proceeds in the U.S. That said, it now sounds as though AX is
less focused on selling the Mosaic Office building in Tampa, FL and Hartford Corporate
Plaza in New Hartford, NY (moved to assets held-for-sale in Q2; carried at $48M) and is
instead looking to extend leases at the properties (perhaps selling afterwards makes sense).
While we still view capital recycling in the U.S. (and consolidation of its U.S. exposure into
fewer and larger markets) as a positive for the unit price, we think selling smaller non-core
U.S. assets or select West coast Canadian assets also makes sense assuming attractive
valuations.
■ …With redeployment options available. We think Exhibit 1 - Development Pipeline Starting To Ramp Up – Sits at 4Msf (16% of Portfolio)
proceeds may go towards a growing development pipeline Including Developments in Planning
(see Exhibit 1) as AX continues to build its land bank
(acquiring $52M of development land YTD). For example, Properties Under Development as a % of Total Assets
we think proceeds could go towards funding construction 1.0%
0.9%
of the Park West project in the Energy Corridor in Houston 0.9%
0.8%
that AX acquired in Q2 (a 1.6Msf four phase office 0.8%
development; see our Q2 comment here for more details) 0.7%
0.7%
or to fund construction of Park 890 in the Southwest
0.6%
industrial submarket of Houston, a 1.8M-2Msf industrial
park (see below). We’re generally supportive of 0.5%
Avg. = 0.4%
0.4%
0.4%
development in this environment if it is completed while 0.4% 0.3%
0.2%
minimizing risk (pre-leasing, fixed construction costs, 0.3%
0.2%
0.2% 0.2%
financing obtained), so our preference would be to see pre- 0.2%
0.1%
leasing before construction commences. Outside of the 0.1%
development pipeline, we believe AX will look to redeploy 0.0%
capital into its core U.S. markets (vs. Canada), where it
Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14
continues to see a better value proposition; activity on its
NCIB sound unlikely at this time (we think due to Source: Company reports; Scotiabank GBM.
limitations indirectly inherent to its credit rating).
Valuation Looks Interesting, in Our View
■ Slightly wider-than-average discount to sector persists across all metrics. AX is trading
at a 12.2x 2015E AFFO, 6.9% implied cap rate, and a 7% discount to our unchanged $16.70
NAVPU vs. 14.6x / 6.5% / and 2% discount for our universe of coverage (ex. industrial
REITs). We note AX is trading at a slightly wider-than-historical AFFO discount to the
Sector (-2.4x vs. -1.7x post June ’07); the same is true on an implied cap rate basis (current
spread to the sector is +44bp vs. +22bp historically). The 7% discount to our $16.70 NAVPU
is below the historical 1% premium, exceeding the disconnect in our universe of coverage (2% today vs. a +4% historically). See Exhibits 2 and 3 for AX historical trading patterns.
57
Exhibit 2 - Trading at a Wider-Than-Average Discount on AFFO and Implied
Cap…
Exhibit 3 - …Same Holds True on NAV
AX: Premium/Discount to NAV
10%
1.0%
0%
0.5%
-10%
-2x
-20%
0.0%
-30%
-40%
AX
Sector
Current (vs. Scotia)
Current (vs. Consensus)
Historical Average (vs. Scotia)
-50%
Jun 14
-60%
Dec 10
Jun 10
Dec 09
Jun 09
Dec 08
Jun 08
Dec 07
Source: SNL Financial; Scotiabank GBM estimates.
Modest Growth Anticipated Through 2015
■ Estimates unchanged following relatively in line results. Our 2015E FFOPU and
AFFOPU are virtually unchanged at $1.48 (was $1.49) and 1.26 (was $1.27), respectively.
Our 2016 estimates, introduced as part of our Q3/14 preview (see link here), are unchanged,
with our AFFOPU of $1.32 reflecting a 2014E-2016E CAGR of 4.4% vs. the diversified
REIT peers and our universe of coverage at 3.8% and 5.5%, respectively. Exhibit 4
highlights our same-property NOI and total portfolio occupancy forecasts vs. historical
average, with the decline in our forecast occupancy largely driven by declines in the office
portfolio. See Exhibit 8 for our broader forecast assumptions and how they stack up against
historical results.
Exhibit 4 - Decent Same-Property NOI Expected to Continue (Particularly if C$ Continues to Depreciate); Occupancy Losses
Expected to Improve
YOY Same-Property NOI (bars)
15%
YOY Occupancy Change (line)*
250 bp
200 bp
10%
3.5%
5%
2.6%
2.6%
150 bp
100 bp
50 bp
0 bp
0%
-40 bp
-50 bp
-100 bp
-150 bp
-200 bp
2016E
Q3/14
Q2/14
Q1/14
Q4/13
Q3/13
Q2/13
Q1/13
Q4/12
Q3/12
Q2/12
Q1/12
Q4/11
Q3/11
Q2/11
Q1/11
Q4/10
Q3/10
Q2/10
Q1/10
Q4/09
Q3/09
Q2/09
Q1/09
Q4/08
Q3/08
Q2/08
-10%
2015E
-5%
2014E -80 bp
-50 bp
Q1/08
NAV
Prem / Disc.
-7%
-6%
1%
-70%
Jun 07
Dec 13
Jun 13
Dec 12
Jun 12
Dec 11
Jun 11
Dec 10
Jun 10
Dec 09
Dec 08
Jun 09
-1.0%
Jun 08
-5x
Dec 07
-0.5%
Jun 07
-4x
*Historical YOY occupancy change reflects same-property; Scotia forecasts is total portfolio.
Q3/14 Highlights and Developments
■ AX Q3/14 FFOPU was $0.35 vs. $0.35 YOY, roughly in line with our and consensus $0.36
(range = $0.35-$0.37). Lower-than-expected NOI (-$0.01) drove the variance to our estimate.
See our Initial Glance comment for a detailed reconciliation.
Jun 14
-3x
Dec 13
RS
Jun 13
0x
-1x
20%
1.5%
Dec 12
0.36%
0.22%
30%
Jun 12
1x
P/AFFO
-2.4x
-1.7x
Dec 11
AX vs. Sector
Current
Historical Average
AX Implied Cap Rate
Spread to REIT Sector
2.0%
Implied Cap
Jun 11
AX P/AFFO Spread to
REIT Sector
2x
LS
58
■ Rent growth and f/x continue to drive YOY same-property Exhibit 5 - Artis Q3/14 Same-Property Operating Statistics
NOI growth. The YOY SP NOI growth of +2.4% was rate
and SP NOI*
Q3/14
Q3/13
and f/x driven as SP occupancy was -90bp YOY to 94.3% Occupancy
by Geographical Region
Occupancy SP NOI
Occupancy SP NOI
95.2%
26,752
96.0%
26,321
(industrial -210bp, office flat, and retail +20bp). The Alberta
Columbia
96.8%
6,669
93.4%
6,327
occupancy decline in the industrial portfolio was primarily British
Manitoba
94.9%
9,496
94.0%
9,076
driven by the departure of a 130,000sf tenant in Minneapolis; Ontario
95.9%
8,930
97.1%
8,805
98.9%
3,494
98.6%
3,370
AX
is
currently
working
on
releasing
the Saskatchewan
90.0%
8,844
93.9%
8,725
warehouse/distribution space. As highlighted in Exhibit 5, Minnesota
U.S. - Other
95.7%
4,687
95.5%
4,614
each asset class delivered positive YOY SP NOI growth; with Total Portfolio
94.3%
68,872
95.2%
67,238
retail leading the charge at +3.0%, followed by office (+2.9%),
and SP NOI*
Q3/14
Q3/13
and industrial (+0.9%). By region, Canada was +2.7% YOY Occupancy
By Asset Class
Occupancy SP NOI
Occupancy SP NOI
(range = B.C. at +5.4% to Ontario at +1.4%), while the U.S. Retail
97.4%
16,659
97.2%
16,172
93.8%
35,007
93.8%
34,016
was +1.4% YOY (on f/x tailwinds, as occupancy was – Office
Industrial
93.5%
17,206
95.6%
17,050
94.3%
68,872
95.2%
67,238
225bp). See Exhibit 6 for historical same-property NOI and Total Portfolio
occupancy, and Exhibit 7 for historical same-property NOI
and renewal leasing spreads.
YOY Change
Occupancy
SP NOI
-80 bp
1.6%
340 bp
5.4%
90 bp
4.6%
-120 bp
1.4%
30 bp
3.7%
-390 bp
1.4%
20 bp
1.6%
-90 bp
2.4%
YOY Change
Occupancy
SP NOI
20 bp
3.0%
0 bp
-210 bp
-90 bp
2.9%
0.9%
2.4%
*SP NOI = Same-property NOI in $'000's
Exhibit 6 - Artis Historical Same-Property NOI and Portfolio Occupancy
Exhibit 7 - Solid Leasing Spreads and Same-Property NOI Growth Continue
YOY Same-Property NOI
10%
12%
2%
2.4% 94%
94.6%
93%
-2%
92%
Q4/07
Q1/08
Q2/08
Q3/08
Q4/08
Q1/09
Q2/09
Q3/09
Q4/09
Q1/10
Q2/10
Q3/10
Q4/10
Q1/11
Q2/11
Q3/11
Q4/11
Q1/12
Q2/12
Q3/12
Q4/12
Q1/13
Q2/13
Q3/13
Q4/13
Q1/14
Q2/14
Q3/14
0%
Source: Company reports; Scotiabank GBM.
4%
2%
0%
2.4%
5.2%
3.1%
3.8%
3.7%
2.4%2.8% 2.6%
■ New acquisition pace remains in the slow lane; capital recycling may pick up in 2015.
With ~$220M of acquisitions completed to date ($166M of income producing properties and
$52M of development land), it appears AX may be just about done for the year. During Q3,
AX acquired the Shoppes of St. Vital retail property in Winnipeg for $12M and a ~130 acre
land parcel in the Southwest industrial submarket of Houston known as Park 890. In
Houston, AX is in the process of planning a multi-phase (1.8M to 2M sf) industrial park,
with construction potentially kicking off in Q3/15 following the signing of a smaller
industrial tenant; AX is considering kicking off the development with one small spec
building to get the ball rolling. While we don’t have a ball-park range for total costs, AX is
targeting an 8% development yield.
■ Leverage remains stable QOQ. Q3/14 debt/FV was unchanged QOQ at 48.6% (54.6%
treating preferred units as debt), net debt/EBITDA was also unchanged QOQ at 8.2x and
interest coverage remained solid at 2.8x. AX ended the quarter with $125M of cash on hand;
after adjusting for transactions following Q3, we estimate AX cash-on-hand remains high at
~$85M. We note, AX also let is $80M credit facility mature in September and is in the
process of negotiating a $125M unsecured line. Providing additional flexibility it the 39property unencumbered property pool with a FV of $538M; assuming 50% leverage, we
estimate the pool could provide AX with $270M of debt financing if needed.
3.3%
2.7%2.4%
Q3/14
6%
95%
Q2/14
96%
7.5%
6.9%
Q1/14
Avg (LS): 3.6%
8%
Q4/13
4%
97%
Q3/13
6%
Q1/13
8%
10.0%
10%
Q2/13
98%
Leasing renewal
Spread
YOY SP-NOI
Total Portfolio Occupancy
99%
59
Exhibit 8 - Scotiabank - Artis Estimate and Valuation Summary
Artis REIT - recurring operations
Forecast ($000s)
Scotia
2013A
Scotia
2014E
Scotia
2015E
Scotia '14E to '16E
2016E
CAGR
Net operating income (NOI)
NOI - forecast acquisitions
NOI - forecast lease rollover
Total net operating income
Interest income
General and administrative
EBITDA
Amortization1
Net interest expense
Current and future income taxes
One-time/FV adjstmts and disc. ops
Net income
298,698
298,698
(2,026)
9,713
291,011
117,114
(3,253)
177,150
316,875
1,342
180
318,397
(1,876)
10,304
309,969
127,217
6,378
176,374
330,295
15,805
125
346,225
(2,000)
11,007
337,217
132,188
205,029
337,895
27,977
(188)
365,684
(2,000)
11,340
356,345
135,829
220,516
Funds from Operations (FFO)
TIs amortized to revenue
FV and other adjustments
Gain/loss on FX and tax recovery
FFO - basic
Scotia capex reserve
Scotia leasing reserve
Net impact of rent amortization
Amortization of prem on assumes mtgs
Net impact of straight-line rent
AFFO - basic
FFOPU - basic
FFOPU - fully diluted
AFFO - basic
AFFO - fully diluted
Balance Sheet Summary
Debt to fair value (2010 = Debt/GBV)
Interest coverage
Net Debt/EBITDA (Q4)
% Debt maturing
Average interest rate on maturing debt
1
2
2013A
FFOPU
AFFOPU
EBITDA*
Estimates and Actuals
2014E
2015E
2016E
1.41
1.19
291,011
1.43
1.21
308,628
1.48
1.26
321,412
1.53
1.32
328,368
2010A
2011A
Multiples and Yield
2012A 2013A 2014E
2015E
2016E
13.0x
19.4x
17.1x
12.4x
15.3x
17.2x
11.8x
14.0x
19.0x
11.0x
13.0x
14.9x
10.8x
12.7x
14.5x
10.5x
12.2x
13.9x
10.1x
11.7x
13.6x
7.0%
7.0%
7.0%
7.0%
7.0%
7.0%
7.2%
1.5x
-1.7x
-2.7x
-2.0x
-3.3x
-2.9x
-2.4x
-2.3x
2.2x
2.2x
Implied cap rate:
2.5x
6.9%
2.8x
2.8x
2.9x
3.0x
7.2%
Distribution
AFFO Payout Ratio
1.08
91%
1.08
89%
1.08
86%
1.11
84%
7.2%
Premium/(discount) AFFO multiple to REIT sector
Historical AFFO average premium/(discount) (since 2009)
nm
Interest coverage ratio
NAV @ 6.7% cap rate:
Premium to NAV / Historical:
$16.70
-7.3%
/
1%
* Multiple represents current EV/EBITDA, excluding acquisitions.
9,291
(10,543)
1,085
176,983
4,325
17,492
1,801
5,627
147,737
9,734
(10,389)
18,344
194,063
4,632
18,748
1,836
5,135
163,712
1.45
1.41
1.21
1.19
45.7%
2.8x
8.0x
1.46
1.43
1.23
1.21
42.2%
2.8x
8.2x
2%
4.79%
8,158
213,187
4,835
19,562
1,836
6,000
180,955
1.51
1.48
1.28
1.26
41.9%
2.9x
7.9x
14%
4.27%
8,286
228,802
5,007
20,225
1,836
5,000
196,734
1.57
1.53
1.35
1.32
41.2%
3.0x
7.7x
12%
4.12%
Operating Metrics / Assumptions
8.6%
3.6%
3.5%
4.6%
4.4%
2009A
2010A
2011A
2012A
2013A
2014E
2015E
2016E
Office Occupancy
Retail Occupancy
Industrial Occupancy
Occupancy
95.2%
98.8%
96.1%
96.6%
95.6%
97.5%
95.3%
96.0%
94.9%
96.6%
94.3%
95.1%
95.2%
96.4%
95.5%
95.6%
93.6%
96.3%
96.7%
95.5%
94.5%
94.1%
93.7%
Same-property NOI
5.2%
3.5%
1.9%
0.9%
3.3%
2.6%
3.5%
2.6%
Trust expenses as % of Revenue
1.3%
1.6%
1.7%
3.2%
2.1%
2.0%
2.1%
2.1%
NOI margin
64.2%
65.0%
62.8%
64.6%
64.2%
63.2%
63.4%
64.1%
Sustaining capex per sf (estimate is Scotia reserve)
$
0.34
$ 0.24
$ 0.27
$ 0.26
$ 0.20
$ 0.20
$ 0.20
$ 0.20
Leasing cost per sf (estimate is Scotia reserve)
$
8.47
$ 8.33
$ 6.07
$ 8.50
$ 5.68
$ 5.70
$ 5.69
$ 5.69
Acquisition Assumptions ($M's)
Assumed acquisition cap rates
$
30
$ 885
$ 670
$ 982
$ 533
$ 234 $ 225 $ 150
6.80% 6.83% 6.83%
Includes amortization of properties and intangibles.
Includes convertible debenture interest and amortization adjustments.
60
Company Comment
(ATH-T C$3.54)
Athabasca Oil Corporation
Hanging Around
Jason Bouvier, CFA - (403) 213-7345
jason.bouvier@scotiabank.com
Ryan Galloway, CFA, CMA - (403) 213-7768
Jason McDougall, MBA, P.Eng. - (403) 213-7329
Target 1-Yr:
C$9.00
Risk Ranking: High
Valuation: 1.1x our risked 2P+RU (Risked Upside) NAV.
ROR 1-Yr: 154.2%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Key Risks to Target: Commodity prices, timing of projects, and project execution.
Event
Pertinent Revisions
■ Athabasca provided Q3/14 results and an operational update.
New
Old
CFPS14E
$0.05
$0.00
CFPS15E
$0.13
$0.01
New Valuation:
1.1x our risked 2P+RU (Risked Upside)
NAV.
Old Valuation:
0.9x our risked 2P+RU (Risked Upside)
NAV.
Implications
■ Operationally, Q3 was a neutral quarter with ATH producing 6,381
boe/d in line with guidance, 2% ahead of estimates, but with a 6% lower
netback from NGL pricing. Q4 is now guided at 5,500-6,000 boe/d,
putting 2H/14 at the lower end prior 6,000-6,500 guidance range.
■ 3 rigs are active in the Duvernay winter drilling program, with a 4th
starting this week. No new well data was available and we anticipate an
update in the Q4/full-year release. Drilling (a mix of multi- and singlewell pads) is focused on the de-risked Saxon, Kaybob West and
Simonette areas, but the later program could also see wells at Kaybob
East and Two Creeks.
■ Hangingstone is 94% complete and tracking to cost and timeline
expectations. First production remains on track for 2H/15.
■ ATH de-emphasized near-term JV outcomes in Duvernay and Thermal.
Meanwhile, a process has begun to optimize board composition, while
also looking at ways to improve costs, potentially with an update on the
latter prior to year-end 2014. With this renewed focus on efficiency, we
have nudged down our future G&A estimates. We have also adjusted
2015 interest capitalization to improve operating cash flow.
Recommendation
■ We are maintaining our Sector Perform rating $9.00/sh target price (to be
reviewed with the commodity price deck in the next few weeks).
Qtly CFPS (FD)
2012A
2013A
2014E
2015E
Q1
$-0.03 A
$-0.02 A
$0.01 A
$0.03
(FY-Dec.)
Earnings (FD)/Share
Cash Flow (FD)/Share
Price/Earnings
Q2
$-0.02 A
$0.00 A
$0.01 A
$0.02
Q3
$-0.02 A
$-0.01 A
$0.02
$0.03
Q4
$-0.02 A
$0.02 A
$0.03
$0.04
Year
$-0.09
$-0.01
$0.05
$0.13
P/CF
n.m.
n.m.
65.6x
28.2x
2011A
$0.35
$-0.07
35.3x
2012A
$0.65
$-0.09
16.1x
2013A
$-0.32
$-0.01
n.m.
2014E
$-0.28
$0.05
n.m.
2015E
$-0.27
$0.13
n.m.
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$1,416
$-439
$977
400
352
61
Exhibit 1 - CFPS Sensitivity for 2015 and 2016
$0.07
$75.00
$80.00
$85.00
$90.00
$3.00
$0.04
$0.06
$0.08
$0.10
Estimates
AECO Pricing (C$/mcf)
$3.25
$3.50
$3.75
$0.04
$0.05
$0.06
$0.06
$0.07
$0.07
$0.08
$0.09
$0.09
$0.10
$0.11
$0.11
$0.29
$75.00
$80.00
$85.00
$90.00
$3.00
$0.18
$0.22
$0.27
$0.31
$3.25
$3.50
$3.75
$0.18
$0.19
$0.20
$0.23
$0.24
$0.24
$0.27
$0.28
$0.29
$0.32
$0.33
$0.33
2015E CFPS
WTI Price
2016E CFPS
WTI Price
$4.00
$0.06
$0.08
$0.10
$0.12
$0.13
$75.00
$80.00
$85.00
$90.00
$4.00
$0.20
$0.25
$0.29
$0.34
$0.35
$75.00
$80.00
$85.00
$90.00
$3.00
-69%
-54%
-39%
-24%
% Change from Scotia Deck
$3.25
$3.50
$3.75
-64%
-60%
-55%
-49%
-45%
-40%
-34%
-30%
-25%
-19%
-15%
-10%
$4.00
-51%
-36%
-21%
-6%
$3.00
-49%
-36%
-23%
-10%
$3.25
$3.50
$3.75
-47%
-45%
-44%
-34%
-32%
-30%
-21%
-19%
-17%
-8%
-6%
-4%
$4.00
-42%
-29%
-16%
-3%
Exhibit 2 - NAVPS Sensitivity
$60
Light Oil Division
$55
$50
Grosmont
$45
Leduc
$40
$35
Hangingstone
$30
$25
Birch
$20
Dover West
$15
$10
Target Price
Net Cash, G&A and
Other
$5
Share Price
$0
Unrisked
Risked
Low Case
Unrisked
Risked
Scotiabank GBM
Unrisked
Risked
High Case
-$20/bbl WTI, -$1.00/mcf Henry Hub
Current Price Deck
+$20/bbl WTI, +$1.00/mcf Henry Hub
62
Exhibit 3 - NAVPS Details
$MM
Clastic Resources
Dover West
Phase 1
Phase 2
Phase 3
Phase 4
Phase 5
Other Dover West 2C
Unrisked NAV
%
$/share
Factor
Risked NAV
$MM
%
$/share
$1,208
$897
$748
$620
$471
$701
$4,645
7%
5%
4%
4%
3%
4%
27%
$2.89
$2.14
$1.79
$1.48
$1.12
$1.68
$11.10
20%
20%
20%
20%
20%
10%
18%
$242
$179
$150
$124
$94
$70
$859
6%
4%
4%
3%
2%
2%
21%
$0.58
$0.43
$0.36
$0.30
$0.22
$0.17
$2.05
$862
$678
$550
$463
$2,553
5%
4%
3%
3%
15%
$2.06
$1.62
$1.31
$1.11
$6.10
20%
20%
20%
20%
20%
$172
$136
$110
$93
$511
4%
3%
3%
2%
13%
$0.41
$0.32
$0.26
$0.22
$1.22
$634
$401
$416
$1,451
$8,648
4%
2%
2%
8%
50%
$1.52
$0.96
$0.99
$3.47
$20.66
80%
$507
30%
$120
25%
$104
50%
$732
24% $2,101
13%
3%
3%
18%
52%
$1.21
$0.29
$0.25
$1.75
$5.02
$3,514
$327
$3,841
$4,925
20%
2%
22%
28%
$8.39
$0.78
$9.18
$11.77
5%
$176
5%
$16
5%
$192
35% $1,724
4%
0%
5%
43%
$0.42
$0.04
$0.46
$4.12
Enterprise Value
G&A and Option Proceeds
Net Debt
Equity Value
$17,414
($581)
$250
$17,084
(3%)
1%
98%
$41.61
($1.39)
$0.60
$40.82
23% $4,017
100% ($581)
100%
$250
22% $3,686
Net Asset Value
1P
2P
2P + RU
$884
$2,092
$17,084
$2.11
$5.00
$40.82
86%
$757
48%
$999
22% $3,686
Birch
Phase 1
Phase 2
Phase 3
Phase 4
Hangingstone
Phase 1
Phase 2
Phase 3
Total Clastics
Carbonate Resources
Leduc
Grosmont
Total Carbonates
Light Oil Division
(14%)
6%
92%
$9.60
($1.39)
$0.60
$8.81
$1.81
$2.39
$8.81
63
Exhibit 4 - Operating & Financial Summary
64
Company Comment
Friday, November 7, 2014, After Close
(ACQ-T C$62.12)
AutoCanada Inc.
anthony.zicha@scotiabank.com
Sami Abboud, MBA - (514) 350-7737
Rating: Sector Outperform
Target 1-Yr:
Risk Ranking: High
Valuation: 22.5x P/E on Q3/15 to Q2/16 EPS
C$93.00
ROR 1-Yr:
51.2%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.92
$0.92
1.5%
Key Risks to Target: OEM restrictions, weak discretionary consumer spending, integration risk.
Event
Pertinent Revisions
■ AutoCanada reported Q3/2014 results with a headline EPS of $0.74.
Adjusted for share based compensation costs, EPS was $0.71. This
compares to our expectations of $0.67 and consensus of $0.73.
Implications
■ Solid same store growth. Results reflect the contribution from
dealerships acquired during the last year as well as same store revenue
growth of 8.9% and same store gross profit growth of 11.4%.
■ Acquisition guidance reiterated. The company reiterated its
acquisition guidance for eight to 10 dealership acquisitions by May 31,
2015.
■ Target-rich environment. We believe acquisition targets are plentiful
in a highly fragmented industry with single-point dealerships looking
for a buyer given: (1) the increasing purchase cost of dealerships, (2)
lack of succession, and (3) increasing capital investment requirements.
Recommendation
■ We continue to rate AutoCanada shares Sector Outperform. As
Canada's largest publicly owned dealership, we believe AutoCanada is
well positioned to seize new growth opportunities supported by: 1) access
to growth capital via the equity markets, 2) solid relationship with auto
OEMs, individual dealers & dealership groups across the country and, 3)
a highly disciplined and successful acquisition strategy.
Qtly EPS (FD)
2012A
2013A
2014E
2015E
Q1
$0.21 A
$0.34 A
$0.38 A
$0.64
(FY-Dec.)
Revenues (M)
EBITDA (M)
EBITDA Margin
Price/Earnings
EV/EBITDA
Price/Book
Dividends/Share
Adj Total Debt/Capital
Q2
$0.34 A
$0.53 A
$0.59 A
$0.94
Q3
$0.34 A
$0.51 A
$0.74 A
$1.09
Q4
$0.33 A
$0.44 A
$0.58
$0.91
Year
$1.22
$1.83
$2.31
$3.57
P/E
12.6x
25.1x
26.9x
17.4x
2012A
$1,102
$38
3.4%
12.6x
7.9x
2.4x
$0.62
0.18x
2013A
$1,409
$58
4.1%
25.1x
17.3x
5.0x
$0.77
0.32x
2014E
$1,912
$90
4.7%
26.9x
18.1x
3.2x
$0.92
0.30x
2015E
$2,863
$145
5.1%
17.4x
13.4x
2.9x
$0.92
0.43x
2016E
$3,466
$179
5.2%
14.2x
10.9x
2.5x
$0.92
0.43x
BVPS14E: $19.69
ROE14E: 16.04%
EPS14E
New
$2.31
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
Old
$2.25
$1,521
$53
$1,574
24
21
65
Q3/2014 Results
■ AutoCanada reported Q3/2014 results with a Exhibit 1 – AutoCanada Inc. Q3/14 Results
headline EPS of $0.74. Adjusted for share
Consolidated Non-Cons.
based compensation costs, EPS was $0.71. Fiscal Year Ending December 31
Q3A/14
Q3A/14
This compares to our expectations of $0.67 (in millions $, except per share amount)
Total revenues
$733.4
$585.4
and consensus of $0.73.
$119.9
$95.7
■ Results reflect the contribution from Gross Profit
Margin (%)
16.4%
16.4%
dealerships acquired during the last year as
well as same store revenue growth of 8.9% Operating expenses (includes D&A)
$89.7
$71.3
Operating expenses as a % of gross profit
74.8%
74.5%
and same store gross profit growth of
11.4%.
Income from investments in associates
($0.4)
(2.6)
■ Total revenues increased by 45.3% to reach EBITDA (as per company)
$28.7
na
$585.4 million which was ahead of our
Margin (%)
3.9%
expectation $546.1 million. Overall the
$17.8
$17.8
increase reflects the contribution from NetNetEarnings
margin %
2.4%
3.0%
dealerships acquired during the last year and
$0.74
$0.74
same store revenue growth of 8.9%, with all EPS (as reported)
business lines showing growth. When we Source: Company reports; Scotiabank GBM.
consider the consolidation of the GM
dealerships, revenues increased by 82.0% to
reach $733.4 million (see Exhibit 2).
Exhibit 2 – AutoCanada Revenue and Gross Profit by Segment
■ We believe most of the same store revenues
Consolidated Non-Cons.
growth was driven by higher prices within
(in millions, except units and average price)
Q3A/14
Q3A/14
most segments, except for Parts, Service and Revenues
Collision Repair segment which benefitted
New vehicles sales
$457.2
$366.4
from a 7.9% increase in repair orders on a
Used vehicle sales
$158.8
$126.9
Finance, insurance & other
$39.0
$30.9
same store basis.
Parts, service & collision repair
$78.4
$61.1
o New vehicle sales (ex. GM Total
$733.4
$585.3
consolidation) increased by
42.5% mainly supported by Units sold
Q3A/14
New vehicles
12,821
acquisitions. Same store new
New retail vehicles
10,686
vehicle
revenue
growth
New fleet vehicles
2,135
increased by 6.1%, mainly
Used vehicles
5,258
driven by an increase in
Service & collision repair orders
198,612
average transaction price of
vehicles sold. In fact, same Gross Profit
Q3A/14
Q3A/14
New vehicles sales
$35.7
$29.2
store new vehicle unit growth
Used vehicle sales
$9.6
$7.3
increased by 1.5% during the
$35.6
$28.4
quarter as weak fleet sale of Parts, service & collision repair
$38.9
$30.9
7.1% offset a 3.7% increase Total
$119.9
$95.7
same store new retail vehicle
Gross Margins
Q3A/14
Q3A/13
unit sales.
New vehicles sales
7.8%
8.0%
o Used vehicle sales (ex. GM
Used vehicle sales
6.1%
5.8%
consolidation) were up 47.6%
91.3%
91.7%
supported also driven by
Parts, service & collision repair
49.7%
50.6%
16.4%
16.4%
acquisitions as well as solid Total
same store sales growth of Source: Company reports; Scotiabank GBM.
16.1%. This growth was
supported mainly by a strong
increase of 20.3% in the average price of used vehicles sold.
o Financial and insurance (F&I) sales increase by 11.7% with same store
finance and insurance sales up 6.2% supported by new and used retail sales.
Non-Cons.
Q3A/13
Change
Change
$402.8
82.0%
45.3%
$67.7
77.1%
41.4%
16.8%
$51.1
75.4%
($0.6)
$16.6
4.1%
$11.0
2.7%
$0.51
-46 bp
75.6%
-46 bp
39.7%
-61 bp
-91 bp
na
na
72.5%
na
-22 bp
61.7%
-30 bp
61.7%
31 bp
45.2%
45.2%
Change
Change
77.7%
84.7%
73.1%
111.2%
82.0%
42.5%
47.6%
37.3%
64.7%
45.3%
Non-Cons.
Q3A/13
$257.2
$86.0
$22.5
$37.1
$402.8
Q3A/13
Change SSS Growth
7,351
74.4%
5,986
78.5%
3.7%
1,365
56.4%
(7.1%)
2,974
97,074
76.8%
104.6%
(3.5%)
7.9%
1.5%
Q3A/13
Change
Change
$20.7
$6.2
$20.7
$20.1
$67.7
72.6%
54.4%
72.3%
93.6%
77.1%
41.1%
17.0%
37.3%
53.7%
41.4%
Q3A/13
Change
8.0%
7.3%
91.7%
54.2%
16.8%
-23 bp
-119 bp
-41 bp
-452 bp
-46 bp
66
o
The parts, service and collision (PS&C) repair department generated solid
growth of 9.9% mainly driven by an increase in the number of repair order
completed.
■ Gross profit increased by 41.4% to reach $95.7 million (ex. GM consolidation) slightly ahead
of our expectation of $94.2 million with same store gross profit increasing by 11.4%. When
we consider the consolidation of the GM dealerships gross profit increased by 77.1%.
■ Operating costs increased by 39.7% to reach $71.3 million during the quarter (up 75.6% to
reach $89.7 million including consolidation of GM). As a percentage of gross profit,
operating expenses represent 74.5% versus 75.4% last year. This was slightly higher than our
forecast of $68.3 million ($84.9 million including GM consolidation).
■ EBITDA increased by 72.5% to reach $28.7 million which came in below our expectations
of $30.3 million.
■ When compared to our expectations this shortfall was offset by lower finance costs and a
lower tax rate.
New vehicle unit sales growth continues, albeit lower than industry.
■ New vehicle unit sales growth continues, albeit lower than industry. During the quarter,
AutoCanada recorded new vehicle retail same store unit sales growth of 3.7% which pales in
comparison to new vehicles sales in Canada which grew by 10.6 during the quarter (see
Exhibit 3).
Exhibit 3 – Canadian New Light Vehicles Sales
New Light Vehicles Sales
Canada - Total
Growth %
Total passenger sales growth %
Total light truck sales growth %
Q1
361,958
8.4%
14.5%
3.9%
AutoCanada Same Store Unit Sales - (Total new vehicles sold)
AutoCanada same store unit sales - (New retail vehicles sold)
AutoCanada same store unit sales - (New fleet vehicles sold)
17.9%
15.1%
27.8%
2012
Q2
502,952
6.2%
7.8%
4.7%
-4.2%
7.5%
-28.3%
Q3
440,628
5.8%
7.6%
4.4%
Q4
370,137
2.4%
9.7%
(2.7%)
Q1
355,212
(1.9%)
(4.7%)
0.4%
5.6%
10.1%
-7.1%
4.6%
12.3%
-29.2%
15.7%
18.3%
6.9%
2013
Q2
Q3
528,455
467,089
5.1%
6.0%
(0.5%)
6.7%
10.1%
5.4%
25.8%
19.7%
45.7%
15.7%
19.4%
3.2%
Source: DesRosiers Automotive Consultants; Scotiabank GBM.
■ We are not overly concerned as same store sales growth can be influenced by sales mix (fleet
sales on new vehicle sales and wholesale sales on used car sales, both of which carry lower
margins) and by individual dealerships strategies focused on either volume or pricing.
■ Accordingly, we place equal importance to same store gross profit growth which increased
11.4% while new vehicle same store gross profit growth increased by 20.5%. Furthermore,
we do highlight that the company recorded strong comps in the previous year.
Management Realignment
■ AutoCanada’s management has realigned its executive leadership in response to the
company’s rapid growth environment. Effective January 1, 2015:
o 1) Pat Priestner (formerly CEO) will act as Executive Chair and focus on
strategic initiatives, acquisitions, and Manufacturer and Dealer relations,
o 2) Tom Orysiuk (formerly President) shall become President and CEO with a
focus on assisting Pat Priestner as well as overall operational direction and
performance of ACQ,
o 3) Steve Rose (formerly Senior Vice President, Sales Marketing and Corporate
Operations) shall become COO, and
o 4) Erin Oor shall become VP Corporate Development and Administration.
2nd BMW dealership acquisition in Quebec
■ The company also announced it has obtained approval from BMW Canada to purchase an
85% interest in Auto Boulevard St. Martin Inc which owns and operates BMW Laval and
MINI Laval based in Laval, Quebec. Combined with the recent acquisition (May 2014) of the
Q4
392,396
6.0%
na
na
5.1%
6.7%
-5.9%
2014
Q1
Q2
358,392
549,702
0.9%
4.0%
(6.2%)
0.7%
6.3%
6.8%
2.3%
2.4%
1.7%
-8.0%
4.5%
-41.8%
Q3
516,474
10.6%
2.1%
17.4%
1.5%
3.7%
-7.1%
67
BMW Canbec, this would bring the number of dealers to two in the greater Montreal area
and essentially establishes base for a new regional platform.
o As part of the transaction, AutoCanada has also entered into an agreement
with the current owner (Mr. D’Argenio) of BMW Laval and MINI Laval
whereby he will retain 15% ownership of BMW Laval and MINI Laval and
acquire 15% of BMW Canbec. Mr. D’Argenio is expected to oversee
operations of these dealerships.
■ The announcement represents the company’s 4th acquisitions since initiating its acquisition
guidance which calls for 8 to 10 acquisitions by May 31, 2015. Transaction is expected to
close on November 27, 2014.
■ Reiterates Acquisition Guidance. With the release of its quarterly results, the company
reiterated its acquisition guidance for eight to 10 dealership acquisitions by May 31, 2015.
o A key component of the company’s strategy is growth through acquisitions.
We believe AutoCanada is well positioned to execute its strategic initiatives
given its experience with integrating acquisitions, and its access to the equity
market.
■ Target-rich environment. Acquisition targets are plentiful in a highly fragmented industry
with ~3,500 dealerships. We believe many single-point dealerships are looking for a buyer
given: (1) the increasing purchase cost of dealerships, (2) lack of succession, and (3)
increasing capital investment requirements. Moreover, we believe dealers are looking to sell
as prices remain attractive (5.0x to 7.0x pre-tax earnings) before the next sales down cycle.
o Our estimates include six acquisitions in Q1/2015,
which combined with the four announced Exhibit 4 – Acquisition Scenario
acquisitions is in line with company guidance for
Scotia
eight to 10 dealership acquisitions by May 31,
Acquisition
Estimated
Company Acquisition
2015 (as announced on June 5, 2014).
Period
Assumptions Store Count
Guidance
o Our estimates also continue to model another 10
Q3/14
47
acquisitions in Q3/2015 and five incremental
Q1/15
6
53 8 to 10 by end May 31, 2015
acquisitions in Q2/2016 (See Exhibit 4).
Q3/15
10
63
o AutoCanada competes mainly with dealership
Q2/16
5
68
groups and individual dealerships for acquisitions.
We also note that OEMs have right of first refusal. Source: Company reports; Scotiabank GBM estimates.
Valuation and Recommendation
■ We continue to rate AutoCanada shares Sector Outperform with a $93.00 target price.
To value AutoCanada Inc. shares we continue to apply a P/E multiple of 22.5x to our Q3/15
to Q2/16 (12-month period) estimates.
o As Canada's largest publicly owned dealership, we believe AutoCanada is well
positioned to seize new growth opportunities supported by: 1) access to
growth capital via the equity markets, 2) solid relationship with auto OEMs,
individual dealers & dealership groups across the country and, 3) a highly
disciplined and successful acquisition strategy.
68
Intraday Flash
Friday, November 7, 2014 @ 2:05:45 PM (ET)
(BNK-T C$4.52)
Bankers Petroleum Ltd.
Gavin Wylie - (403) 213-7333
gavin.wylie@scotiabank.com
Risk Ranking: Speculative
Jenna Halwa, M. Econ - (403) 213-7762
jenna.halwa@scotiabank.com
Target 1-Yr:
C$8.50
ROR 1-Yr:
88.1%
Key Risks to Target: Commodity prices, project execution, political/regulatory.
Event
■ Bankers reported in-line financial results with Q4 production already
1% higher than that of Q3.
Implications
■ Q3 diluted CFPS was reported at $0.31 ($84.6M), 6% above consensus
and our estimate of $0.30 ($80M), while production was pre-released at
21,865 bbl/d (+6% QOQ).
■ We reiterate our Sector Outperform rating on Bankers and revised our
one-year target price to $8.50 per share ($9.00 previously), based on our
revised risked NAVPS estimate of $8.43 (vs. $8.64).
Recommendation
■ Bankers' solid operational performance is indicative of the company
continuing to execute a sound strategy underpinned by consistent growth
from its hz wells, with polymer / waterflood projects demonstrating a
clear and rewarding path for the company over the next 4-5 years.
■ At $85/bbl we would anticipate Bankers will maintain a 6 rig program
(>175 Hz wells) and 20-25 polymer conversions, well positioned to
achieve something near the mid to low end of its guidance range of 10%15%. Full details on the company's 2015E capital budget and
guidance will be released on December 12.
Qtly CFPS (FD)
2012A
2013A
2014E
2015E
Q1
$0.19 A
$0.26 A
$0.32 A
$0.32
(FY-Dec.)
Earnings/Share
Cash Flow/Share
Debt-Adj CF Multiple/Share
Price/Earnings
Prod-Oil (mbbl/d)
Prod-Nat Gas (mmcf/d)
Operating Cash Flow (M)
Net Cap Exp (M)
Q2
$0.17 A
$0.24 A
$0.35 A
$0.34
Q3
$0.19 A
$0.28 A
$0.31 A
$0.35
Q4
$0.21 A
$0.32 A
$0.30
$0.33
Year
$0.76
$1.09
$1.29
$1.34
P/CF
4.2x
3.8x
3.1x
3.0x
2012A
$0.14
$0.76
4.2x
23.7x
14.8
0.0
$193
$223
2013A
$0.24
$1.09
6.1x
17.2x
18.2
0.0
$279
$234
2014E
$0.38
$1.29
2.7x
10.3x
21.1
0.0
$344
$309
2015E
$0.62
$1.34
2.4x
6.4x
24.5
0.0
$359
$322
2016E
$0.52
$1.36
2.4x
7.6x
28.5
0.0
$365
$338
NAVPS:
P/NAV:
C$6.94
0.65x
Div. (NTM)
Div. (Curr.)
C$0.00
C$0.00
Yield (Curr.)
0.0%
Pertinent Revisions
New
Old
Target:
1-Yr
$8.50
$9.00
CFPS14E
US$1.29
US$1.26
CFPS15E
US$1.34
US$1.33
CFPS16E
US$1.36
US$1.35
New Valuation:
Based on our risked NAV ($8.43/share)
that also equates to 5.3x 2015E debtadjusted CF and 1.22x our 2P NAV.
Old Valuation:
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
C$1,180
$-35
C$1,077
All values in US$ unless otherwise indicated.
261
261
69
Q3 – Cost Initiatives Bearing Fruit
■ Bankers reported in-line financial results with Q4 production already 1% higher than
that of Q3. In our minds, Bankers’ solid operational performance is indicative of the
company continuing to execute a sound strategy underpinned by consistent growth from its
hz wells, with polymer / waterflood projects demonstrating a clear and rewarding path for the
company over the next 4-5 years. Bankers noted there would no major changes to its 2015
capital program compared to the previous year, with previously released guidance for ~25
additional secondary well conversions and 5-10 new multi-lateral drills. We also anticipate
the company will continue to target annual growth of 10%-15% (vs. our 17%) and drill
around 150-170 hz wells.
■ For a more detailed operations update / outlook see our October 31 note on our
recent field tour in Albania, available on ScotiaView.
■ Q3 production was pre-released at 21,865 bbl/d, which represents a 6% quarterly
growth rate, with sales reported at 21,994 bbl/d. Q4 production to date has averaged
22,000 bbl/d, which puts the company on track to meet or exceed our Q4 estimate of 22,450
bbl/d and achieve quarterly growth of ~3%. Overall, 2014E annual growth is tracking an
impressive 17% that is nicely above full year guidance of 10%-15%.
■ We reiterate our Sector Outperform rating on Bankers and revised our one-year
target price to $8.50 per share ($9.00 previously), based on our revised risked
NAVPS estimate of $8.43 (vs. $8.64). Our revised NAV reflects the company’s
updated balance sheet and a moderately more conservative view around future
production / spending levels as we have been doing with our coverage universe this
quarter.
■ Bankers remains attractively valued in the context of our revised 2P NAVPS
estimate of $6.94. The company is trading at a P/NAV ratio of 66% and 2015E
DACF multiple of 2.7x versus its peer group averages of 68% and 2.6x,
respectively. We continue to view Bankers as one of the best / most levered ways to
play any rise in crude prices and/or the benefits of a widening Brent / WTI spread.
■ Upcoming catalysts. Outside of consistent quarterly delivery, we see the company’s
progress on its secondary recovery and dual lateral wells as the most significant upcoming
catalysts. In our minds, additional technical data coming out of the 2015 program will help
establish recovery factors and potential impacts on long-term production.
■ 2015 outlook. Full details on the company’s 2015E capital budget and guidance will be
released on December 12. Overall, we see the company as well funded in an $85/bbl Brent
crude price environment that would imply after-tax cash flow of $265M-$275M versus our
base capital spending program of $320M-$330M. That said, we could see the company cut
out a number of more costly longer term projects (thermal, Block F exploration and field
flow line installation). At $85/bbl we would anticipate Bankers will maintain a 6 rig program
(>175 Hz wells) and 20-25 polymer conversions, well positioned to achieve something near
the mid to low end of its guidance range of 10%-15%.
■ Brent <$85/bbl likely to limit growth. Should oil prices average $80/bbl, we would
fully expect the company to look at laying off a rig (~25-30 wells per year) that could
save upwards of $35M-$40M in capex for 2015E. However, it would be likely that the
rig would be brought on quite quickly if oil prices strengthened in 2H/15E. We further
estimate the net impact of losing a rig for the full year would be the loss of ~1,500 bbl/d
of production. Under this scenario, production would likely run 22,500-23,000 bbl/d.
Q3 CFPS – 6% Beat on Lower Operating Costs
■ Bankers Petroleum reported Q3 diluted CFPS of $0.31 ($84.6M), 6% above consensus
and our estimate of $0.30 ($80M). Major sources of variation were overall operating /
transportation costs of $21.41 – 5% lower than our base $22.50/bbl forecast, largely due to
reductions in energy costs, which offset the newly introduced excise tax. Royalties also came
in 2% below our forecast at 14.4%. Bankers’ pre-released production and sales of 21,865
70
bbl/d (+6% QOQ) and sales at 21,994 bbl/d were largely offset by lower Brent this quarter.
Overall, realized prices were reported at $78.55/bbl (vs. $86.68/bbl in Q2) while netbacks
decreased to $45.78/bbl from $53.89/bbl in Q2.
■ Balance sheet remains strong. In the context of estimated 2015 capital expenditures of
$321.5 million and estimated cash flow of $359M, Bankers appears to be well funded
through 2015E. The balance sheet also includes $88M in cash and $190M in net working
capital as of September 30, 2014, which should allow the company to fully fund an active
2015 drilling program.
71
Exhibit 1 - BNK - NAVPS Summary
C$/Share
$30.00
Building Blocks of NAVPS
$25.00
P/NAV
100%
$31.95
83%
80%
Unbooked
Upside
$20.00
67%
66%
60%
54%
$15.00
40%
$10.00
`
$5.00
$0.00
Patos Marinza - Southern Area - Polymer
Flood
Patos Marinza - Core Area - Polymer Flood
Patos Marinza - Core Area - Waterflood
Patos Marinza - Prospective (EOR/Thermal)
Patos Marinza - Contingent (EOR/Thermal)
Kucova
Patos Marinza
Balance Sheet/Land/Fx
Current Price
Target Price
P/NAV
14%
18%
Base
Strip
Base 2P NAV
Base
Strip
Risked NAV
Base
Strip
All-In Identified Projects
$0.00
$0.00
$0.02
$0.02
$0.39
$0.32
$0.00
$0.00
$0.00
$0.00
$0.30
$6.32
$0.32
$4.55
$8.50
66%
$0.00
$0.00
$0.00
$0.00
$0.24
$4.92
$0.31
$4.55
$8.50
83%
$0.05
$0.02
$0.00
$0.00
$0.31
$7.74
$0.27
$4.55
$8.50
54%
$0.05
$0.02
$0.00
$0.00
$0.25
$6.16
$0.27
$4.55
$8.50
67%
$0.37
$0.21
$8.25
$10.65
$0.74
$11.06
$0.27
$4.55
$8.50
14%
$0.30
$0.18
$6.86
$8.26
$0.61
$9.06
$0.27
$4.55
$8.50
18%
20%
0%
72
Exhibit 2 - BNK - Snapshot
2008
2009
2010
2011
2012
2013
2014E
2015E
2016E
5,875
6,438
9,597
12,784
14,808
18,173
21,062
24,465
28,452
0
0
0
0
0
0
0
0
0
Equivalent (boe/d)
5,875
6,438
9,597
12,784
14,808
18,173
21,062
24,465
28,452
% BOE growth
24%
10%
49%
33%
16%
23%
16%
16%
16%
% Natural Gas
0%
0%
0%
0%
0%
0%
0%
0%
0%
% Crude Oil
100%
100%
100%
100%
100%
100%
100%
100%
100%
Price Assumptions ($/boe)
51.27
36.86
48.64
72.85
79.73
85.39
82.63
80.71
79.79
Operating Netbacks ($/bbl)
23.78
13.40
23.15
36.36
40.27
47.64
49.87
46.11
45.28
2P Reserves (Net) mmboe
164.8
193.5
202.4
227.9
192.8
201.5
N/A
N/A
N/A
Cash balance US$M
15.6
59.5
106.6
49.0
33.7
24.6
0.0
51.2
44.8
Operating Cash Flow US$M
52.2
25.4
73.2
147.9
192.6
279.0
343.6
359.2
365.2
Financing Cash Flow US$M
67.5
72.9
107.9
46.6
48.3
(1.6)
22.3
(37.7)
(27.2)
CFPS (D)
$0.30
$0.12
$0.30
$0.58
$0.76
$1.09
$1.29
$1.34
$1.36
CFPS growth
111%
-59%
146%
96%
31%
43%
18%
4%
2%
Net Capital spending (US$M)
$104
$38
$122
$243
$223
$234
$309
$322
$338
Free cash flow (US$M)
($52)
($13)
($49)
($95)
($30)
$45
$35
$38
$27
ROACE (%)
-1%
0%
5%
9%
7%
10%
15%
20%
15%
US$000's unless otherwise noted
Production
Crude Oil & NGLs (bbl/d)
Natural Gas (mcf/d)
Valuation
P/CF
13.2x
32.5x
13.2x
6.7x
5.1x
3.6x
3.0x
2.9x
2.9x
Debt Adjusted Cash Flow (US$M)
51.97
25.36
74.14
148.94
196.06
282.89
350.05
368.51
371.20
Debt-adj CF multiple
2.4x
53.9x
23.6x
7.2x
4.2x
6.1x
2.7x
2.4x
2.4x
D/CF
0.3x
-2.0x
-1.5x
-0.2x
0.0x
-0.1x
-0.2x
-0.3x
-0.4x
Net Debt/Cap
Shares Outstanding (000)
Net Debt (Year End) (US$M)
10%
-32%
-47%
-9%
2%
-7%
-14%
-16%
-17%
182540
228272
244795
247700
253829
255682
261041
261041
261041
14.26
-51.97
-109.11
-33.59
8.36
-35.38
-81.95
-119.66
-146.83
73
Intraday Flash
(BDT-T C$13.34)
Bird Construction Inc.
mark.neville@scotiabank.com
Risk Ranking: High
Michael Doumet, CFA - (514) 350-7778
michael.doumet@scotiabank.com
Target 1-Yr:
C$12.50
ROR 1-Yr:
-0.6%
Key Risks to Target: Slower-than-expected recovery in non-residential building construction; Commodity price volatility .
Event
■ Bird reported relatively in line results.
Div. (NTM)
Div. (Curr.)
$0.76
$0.76
Yield (Curr.)
5.7%
Pertinent Revisions
Implications
■ Bird continues to execute well on its Western Canadian-based industrial
backlog, which drove significantly improved margins in Q3. However,
Bird's other segments were more challenged as (1) Eastern Canadabased industrial work (H.J. Connell) continued to operate in a slowed
mining sector with increased competition, and (2) institutional and
commercial markets remained competitive.
■ We have lowered our estimates for the 2H/15 and 2016 as we believe
the company's ability to maintain its elevated (higher-margin) industrial
book of business could become increasingly challenging.
■ We lowered our valuation multiple to 5.75x EV/EBITDA on our 2016E
to reflect (1) an increasingly uncertain outlook for the Western
Canadian market, and (2) reduced earnings visibility. Having said that,
we believe the company's strong balance sheet should help it navigate a
potentially more difficult operating environment.
■ We have lowered our one-year target to $12.50/share.
New
Target:
1-Yr
$12.50
EBITDA14E
$61
EBITDA15E
$69
EBITDA16E
$71
New Valuation:
Old Valuation:
Old
$15.00
$64
$83
$88
Recommendation
■ We like the 5.7% dividend yield and the company's cash heavy balance
sheet. However, with an increasing uncertain outlook, and with the stock
trading at a premium to its peers, we maintain our Sector Perform rating
on BDT shares.
Qtly EBITDA (M)
2013A
2014E
2015E
2016E
(FY-Dec.)
Earnings/Share
Price/Earnings
Price/Cash Flow
Dividends/Share
Yield
Revenues (M)
EBITDA (M)
EV/EBITDA
Q1
Q2
Q3
Q4
Year
$7 A
$4 A
$10
$10
$1 A
$16 A
$20
$20
$10 A
$20 A
$21
$22
$10 A
$20
$18
$19
$33
$61
$69
$71
EV /
EBITDA
13.2x
7.3x
6.3x
6.0x
2012A
$1.38
9.6x
5.1x
$0.72
5.4%
$1,455
$102
4.0x
2013A
$0.28
45.7x
17.1x
$0.72
5.5%
$1,332
$33
13.2x
2014E
$0.84
15.9x
9.5x
$0.72
5.4%
$1,335
$61
7.3x
2015E
$0.97
13.7x
10.2x
$0.72
5.4%
$1,348
$69
6.3x
2016E
$1.00
13.4x
9.8x
$0.72
5.4%
$1,351
$71
6.0x
BVPS14E: $4.26
ROE14E: 19.92%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
All values in C$ unless otherwise indicated. Note: 2011/12 divs. are estimates.
$567
$-46
$521
43
42
74
Results in Line
■ Bird reported relatively in line results with revenue/EPS of
$370.4 million/$0.29 vs. consensus of $385 million/$0.31and Exhibit 1 – Results in Line
our estimate of $386.6 million/$0.32. Book-to-bill was 0.9x.
(all figures are in C$ million, except per share amounts)
Industrial Headwinds Likely in 2H/2015
■ With the company’s backlog more heavily weighted towards
industrial projects (vs. the beginning of 2014), we believe
YOY earnings improvements are achievable at least through
the early part of 2015. However, beyond that, we believe the
company could face some near-term headwinds that could
impact its ability to build/maintain backlog given (1) the
recent volatility/decline in oil prices and (2) tightening in
provincial government spending in Western Canada.
 That said, to date, management indicated that it
has not yet seen any delays or cancellations.
Cash Rich… and Adding
Actuals
Revenue
Q3/14A
Scotiabank Consensus
Q3/13A
Actuals
$370.4
$386.6
$384.1
$367.3
Contract Income
Margin %
$33.4
9.0%
$33.6
8.7%
na
na
$21.9
6.0%
EBITDA
Margin %
$20.5
5.5%
$21.5
5.6%
$22.0
5.7%
$10.4
2.8%
EPS
$0.29
$0.32
$0.31
$0.10
■ As at Q3, the company had a net cash position of $77.3 Source: Company reports; Scotiabank GBM estimates.
million (or $1.82/share). On the conference call, management
indicated it would be willing to become acquisitive, but believes valuations are still high.
■ On the dividend, we are forecasting a payout ratio of 84% in 2015 – we estimate FCF in
excess of dividends of $6.0 million (or $0.14/share).
Lowering Target to $12.50/share
■ We have lowered our estimates for the 2H/15 and 2016 as we believe the company’s ability
to maintain its elevated (higher-margin) industrial book of business could become
increasingly challenging.
 Our revenue forecast was revised downward: we are forecasting 3.3% growth in
the 1H/15 and a -1% decline in the 2H/15.
 We also lowered our margins assumptions: we are forecasting only a modest
improvement in 2015 (40bp), despite forecasting a material improvement in Q1/15
on a YOY basis.
■ We have lowered our valuation multiple to 5.75x EV/EBITDA (from 6.0x) on our 2016E to
reflect (1) an increasingly uncertain outlook for the Western Canadian market, and (2)
reduced earnings visibility. Having said that, we believe Bird’s reputation should enable it to
win business in existing/new markets and help protect its top line.
 We have lowered our one-year target to $12.50/share (from $15.00). We maintain
our Sector Perform rating.
 Our $12.50/share valuation translates to a 12.5x P/E multiple on our 2016E, or
11.0x P/E on our 2016 excluding cash.
■ That said, we like Bird’s dividend yield of 5.7% and cash-heavy balance sheet.
75
Intraday Flash
(BYD.UN-T C$44.73)
Q3/14 Preview
vincent.perri@scotiabank.com
Target 1-Yr:
C$49.00
ROR 1-Yr:
10.6%
Key Risks to Target: Integration risk, insurance/industry practices, level of repair claims
CDPU (NTM)
CDPU (Curr.)
$0.48
$0.47
Yield (Curr.)
1.1%
Event
■ Boyd Group Income Fund is scheduled to release Q3/14 results on
Wednesday, November 12. A conference call will be held on the same
day at 10:00am ET. The dial-in number is 1-888-231-8191.
Implications
■ Acquisitions driving growth. We expect sales to increase by 36% to
reach $203.5 million, compared to $149.6 million last year. Our
forecasted increase reflects the contribution from recent acquisitions,
new store openings throughout the last year, same-store sales growth
(3% in the U.S. and 2% in Canada), and a favourable FX in the quarter.
■ Margin expansion. We expect margins to expand as the company
benefits from higher back-end purchase discounts (amended paint
agreement), positive same store sales growth and continued integration
of recent acquisitions. Accordingly, we expect EBITDA margins to
increase to 8.2% or $16.6 million in the quarter (consensus at $16.7
million), compared to 7.1% or $10.6 million recorded last year. We
expect adjusted EPU of $0.44 per unit, in line with consensus.
■ Fragmented market. Supported by the fragmented nature of the North
American collision repair industry, we believe Boyd is well positioned
to continue consolidating the collision repair market. Given its financial
flexibility, we continue to believe important network acquisitions could
be a catalyst for further growth and unit price appreciation.
Recommendation
■ We rate Boyd a Sector Outperform with a $49.00 target price.
Qtly Adj EBITDA (M)
2013A
2014E
2015E
2016E
Q1
Q2
Q3
Q4
Year
$8 A
$15 A
$19
$21
$9 A
$18 A
$22
$23
$11 A
$17
$19
$20
$14 A
$19
$20
$22
$41
$68
$81
$86
EV/Adj
EBITDA
14.2x
12.5x
10.7x
9.7x
2012A
$434
$30
$1.14
$1.09
48.4%
n.m.
$225
$0.45
2013A
$578
$41
$1.21
$1.20
18.8%
1.16x
$282
$0.47
2014E
$808
$68
$1.92
$1.88
30.9%
1.49x
$472
$0.48
2015E
$937
$81
$2.03
$2.75
34.6%
0.89x
$503
$0.48
2016E
$993
$86
$2.24
$2.95
37.0%
0.45x
$528
$0.48
(FY-Dec.)
Revenues (M)
Adjusted EBITDA (M)
Adj Earnings/Unit
Free Cash Flow/Un
Net Debt/Capital
Net Debt/EBITDA
Total Assets (M)
Cash Distributions/Unit
BVPU14E: $8.44
ROE14E: 27.55%
Capitalization
Market Cap (M)
Units O/S (M)
Float O/S (M)
$743
$139
$835
17
16
76
Company Comment
(BAM-N US$49.59)
(BAM.A-T C$56.18)
Target 1-Yr:
US$52.00
ROR 1-Yr:
6.2%
Valuation: Forward NAV
Key Risks to Target: Materially higher interest rates, fundraising slowdown, decele rating U.S. economy, lack of credit
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.67
$0.64
1.3%
Event
■ Full comment post Q3 results that were impacted by weak hydrology.
Pertinent Revisions
Implications
■ Fairly quiet on news front. This was to be expected given BAM held
its investor day in September, providing investors with a plethora of
analysis, particularly on the value of its asset management franchise.
We can't point to any one thing that drove BAM's share price gains on
Friday, but sentiment on its asset management franchise continues to
improve as BAM embarks on a mega fundraising initiative through
2015; we've increased our asset management valuation to $10.80 (from
~$8.50), with long-term annual 15%-20% cash flow growth likely.
■ New 2016 estimates reflect 11% YOY growth; superior asset
management growth. Exhibit 3 breaks down our 2016E YOY FFOPS
growth, driven by the asset management franchise (+28% YOY). We've
modestly increased our 2015E FFOPS as we've synced up our BAM
and BPY models. Overall, our 2014E-2016E AFFOPS CAGR of 21%
looks very attractive, and should drive 5%-7% dividend/sh growth.
Target:
1-Yr
FFOPS14E
FFOPS15E
FFOPS16E
New
Old
$52.00
$2.31
$3.04
$3.38
$48.00
$2.55
$2.97
N/A
Recommendation
■ Maintain SO; target +$4/sh (+8.3%) to $52/sh. Valuation is becoming
a bit of an obstacle, but that said, we like BAM's superior growth profile
and positive positioning in a low interest rate environment, rising
institutional allocations to real assets, and positive U.S. economic
momentum. We also think improving sentiment on BPY (36% of our
BAM Forward NAVPS) should help. BAM is trading at a 13% premium
to our $44 current NAVPS and 5% discount to our $52 Forward NAVPS
Qtly FFOPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.52 A
$0.56 A
$0.70
$0.81
(FY-Dec.)
Funds from Ops
Adj. Funds from Ops
Price/FFO
Price/AFFO
EV/EBITDA
EBITDA (M)
EBITDA/Int. Exp
Q2
$0.59 A
$0.61 A
$0.76
$0.85
Q3
$0.49 A
$0.51 A
$0.75
$0.82
Q4
$0.59 A
$0.66
$0.75
$0.89
Year
$2.19
$2.31
$3.04
$3.38
P/FFO
17.8x
21.5x
16.3x
14.7x
2012A
$2.40
$1.45
15.3x
25.3x
14.8x
$5,898
2.4x
2013A
$2.19
$2.57
17.8x
15.1x
11.4x
$8,039
3.1x
2014E
$2.31
$2.17
21.5x
22.8x
15.2x
$6,694
2.6x
2015E
$3.04
$2.91
16.3x
17.1x
14.1x
$7,217
2.8x
2016E
$3.38
$3.24
14.7x
15.3x
13.1x
$7,760
2.9x
BVPS14E: $29.45
ROE14E: 9.76%
NAVPS:
P/NAV:
$52.00
0.95x
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$30,642
$70,849
$101,491
618
513
77
■ Ok to pay for quality and superior Exhibit 1 - QOQ Change in our Forward NAVPS – Several Positive Revisions Partially Offset by BPY Intro
asset management growth. We are
Listed Vehicles
Shares /
∆ in Shares
New
Old
QOQ
Value per
maintaining our Sector Outperform
Company
Units
/ Units
Target
Target
Change
Change %
Value
BAM Share
rating, increasing our forward NAVPS BEP
172
0
$ 38.00
$
38.00
$
0%
$ $
259
-27
$
0.76
$
0.76
$
0%
-$
20
-$
0.03
(and hence target price) by $4/sh (+8.3%) BISA
BRP
82
0
$ 25.33
$
25.33
$
0%
$ $
to $52/sh. Exhibit 1 illustrates the key BIP
60
0
$ 44.00
$
42.75
$
1.25
3%
$
75
$
0.11
NBD
28
0
$ 32.00
$
32.00
$
0%
$ $
drivers of the higher target price, many of ANS
54
0
$
3.40
$
3.40
$
0%
$ $
which are related to the introduction of Total
$
54
$
0.08
our 2016 estimates (our forward NAVPS
Other
$ 291
$
0.45
reflects NTM NOI twelve months from Inclusion of deferrred carried interest earned
$ 452
$
0.69
now;
Q4/15E-Q3/16E
vs.
2015E Construction and property services
-$ 2,451
-$
3.75
previously), but we’ve also inched up Including BPY vs. previous sum-of-the-parts commercial property investments
Adjustment to net working capital (BPY-related)
$ 1,560
$
2.39
some valuation multiples (i.e., asset Higher valuation multiple on asset management (+0.4x to 16x) and private equity (+1x to 11x)
$ 425
$
0.65
management +0.4x to 16x). Our 2016E Rolling Forward - Asset Management Cash Flow (to 2016E)
$ 1,179
$
1.80
FFOPS reflects an attractive 11% YOY Rolling Forward - Financial Assets Cash Flow (to 2016E)
$ 318
$
0.49
growth (more on that below). The biggest Private Equity and Finance
$ 827
$
1.27
$ 2,601
$
3.98
change in the construction of our NAVPS Total Direct
$
4.06
is the inclusion of Brookfield Property Total QOQ Change to Scotia BAM Forward NAVPS
Partners (BPY.un, SO, US$24.75), Source: Company reports; Bloomberg; Scotiabank GBM estimates.
replacing its individual parts (i.e. former
BPO, GGP, RSE, Canary Wharf, etc.)
Overall, the change reduced our forward NAVPS by ~$3.75/sh, more than offset by some of
the factors noted in Exhibit 1.
■ We acknowledge that our NTM total return of 6% appears skinny for a Sector Outperformrated name, but we continue to believe that aside from valuation perhaps, BAM continues to
enjoy several tailwinds: really low interest rates (good for listed subsidiaries), rising
institutional allocations to real assets (really good for BAM), and U.S. economic momentum
(good for both subsidiaries and BAM). As a result, barring a significant change in any of the
aforementioned, we suspect sentiment on BAM should remain positive. Lastly, we believe
improving sentiment on BPY should also be positive for BAM given BPY accounts for 36%
of our BAM Forward NAVPS.
■ With respect to valuation, BAM is now trading at a 5% discount to our revised $52/sh
Forward NAVPS, a gap which has not historically yielded attractive near-term absolute or
relative returns (see Exhibit 2). That said, as we discussed in our Q2/14 Results note, we
think the old “10%-15% discount” territory is evolving to a steady state 0%-5% or 5%-10%
discount territory in terms of BAM’s ability to outperform the broader index; at some point
(perhaps as we approach the next round of successful fundraising), a premium to Forward
NAVPS may become the norm. For example, Exhibit 3 illustrates that BAM is indeed
gradually moving towards the left of Exhibit 2 over time; BAM has traded at a 0%-5%
discount to NAVPS 23% of the time since August 2013 (and shows good levels of absolute
and relative outperformance; BAM typically outperforms the S&P in the following one,
three, and six months – we’re showing 3-month performance in the chart – since August
2013, BAM has outperformed the S&P by an average 330bp over the following three months
when it trades at a 0%-5% discount to our forward NAVPS vs. average 210bp
underperformance since October 2010) vs. 11% of the time going back to October 2010
Exhibit 2 - BAM is at a 5% discount to Our Updated Forward NAVPS - 10% - 15% Discount Goals Posts Continue to Move Left, In Our View
Range
Forward 1 Month
Forward 3 Month
Forward 6 Month
Premium
11% / -3.7% / -3.1%
0% / 0.0% / -7.7%
0% / -3.8% / -15.5%
0%-5% Discount
42% / 0.8% / -0.6%
41% / 2.2% / -2.1%
27% / 2.1% / -8.0%
BAM Share Price vs. Scotia Forward NAVPS - Historical Trading Range
5%-10% Discount
10%-15% Discount
15%-20% Discount
47% / -0.5% / -0.8%
60% / 2.0% / 0.8%
60% / 2.3% / 0.9%
45% / 0.1% / -1.2%
69% / 4.7% / 1.5%
58% / 5.5% / -0.7%
37% / 1.4% / -2.4%
49% / 6.8% / 0.7%
49% / 12.0% / 1.2%
% of Time BAM has traded at:
1%
11%
40%
31%
* Data shows the following: % of times BAM outperforms S&P / Average BAM absolute share price change / Average BAM relative price-only return vs. S&P
For example, when BAM has historically traded at say a 13% discount to our forward NAVPS estimate, it has delivered an average 4.7% price-only return in the
following three months, outperforming the S&P 500 69% of the time by an average 150bp (1.5%).
** Historical data comprises performance post Scotia BAM initiation on October 19, 2010.
Source: Bloomberg; Scotiabank GBM estimates.
12%
20%-30% Discount
39% / 4.4% / -0.5%
57% / 10.0% / -0.5%
63% / 17.3% / 2.7%
5%
78
Since October 19,
2010*
Since August 28,
2013**
(absolute and relative near-term returns not so good).
We don’t necessarily see material share price upside in Exhibit 3 – We Think Maturation of its Asset Management Franchise Makes More Recent
the near term following a great run (+28% YTD vs. Trading Patterns a Better Reflection of Things to Come (i.e. Trading at a Lower Discount to
+10% for S&P 500), but we do value BAM’s high- our Forward NAV, and Perhaps a Premium Over Time)
quality portfolio, potential positive private fundraising % of Time BAM has Traded at a Premium / (Discount) to Scotia Forward NAVPS
announcements, and industry-leading management
45%
40% 41%
team (in our view), all of which is certainly worth
40%
35%
paying for. Lastly, while it does not appear it is
31%
28%
30%
imminent or even remotely on the radar, a potential
23%
25%
spin-out of its asset management franchise remains an
20%
arrow in BAM’s quiver should the market fail to
12%
15%
11%
appropriately value its asset management franchise for
10%
5%
5%
an extended period of time (we generally think it is
5%
1% 3%
0%
0%
reasonably valued today).
Premium
0%-5%
5%-10%
10%-15%
15%-20%
20%-30%
Discount
Discount
Discount
Discount
Discount
Double Your Fun-draising
3-Month BAM absolute / relative vs. S&P when trading with in each range since:
■ Successor private funds expected to double the size Oct. '10 0.0% / -7.7% 2.2% / -2.1% 0.1% / -1.2% 4.7% / 1.5% 5.5% / -0.7% 10.0% / -0.5%
of predecessors; would be an impressive feat, in our Aug. '13 NA / NA 5.6% / 3.3% 4.5% / 1.5% 6.3% / 1.8% 9.0% / 1.3% 13.3% / 2.8%
view. In its Letter to Shareholders, BAM took a peak *Scotia BAM initiation date; **BAM discount to our Forward NAVPS started to compress.
into its crystal ball and highlighted an asset Source: Bloomberg; Scotiabank GBM estimates.
management franchise that could be worth $45B
(almost $70/sh at the current shares outstanding) in ten
years, very simply assuming a 15x valuation multiple on ~$3B of annual cash flow. In their
example, fee-bearing third-party capital has grown to $200B (currently $85B, of which
~$26B is Brookfield capital), averaging a 10% CAGR. While ten years is certainly a long
time, BAM is looking to take a big step towards that goal over the next 12-24 months,
currently in the market seeking $12B of capital ($9B of third-party capital) in four funds
(flagship property and private equity, along with two niche funds). Interestingly, BAM
indicated the successor flagship funds (property, infrastructure/renewable power, and private
equity) in aggregate could be twice as large as its predecessor funds. On an individual fund
basis, that could imply an $8B+ property fund, a $12B-$14B infrastructure/power fund, and a
$2B+ private equity fund. While a $14B infrastructure fund would be very impressive (we
view infrastructure as the platform where BAM maintains its largest competitive advantage),
we would be equally impressed with an $8B+ property fund, which we believe would truly
cement BAM’s status as a dominant global real asset manager (we view property as a more
competitive product, but we’re not aware of many $8B+ global funds out there).
2016 Should Deliver Low Double-Digit FFOPS Growth
■ Low-double digit growth is driven by high double-digit management revenue growth.
We’ve marginally increased our 2015E FFOPS by $0.07 to $3.04. We’re also introducing our
2016 estimates, which reflect 11% YOY growth. As shown in Exhibit 4, we think asset
management and property should post particularly strong results; significant fee-bearing
Exhibit 4 - Low-Double Digit Growth Expected Through 2016 Driven by High Double-Digit Asset Management Growth
Operating
Operating
cash flow Interest
costs
Asset management
Construction services
Renewable power
Commercial property
Infrastructure
Residential development
Private equity and finance
Finacial assets
Corporate
Preferred dividends
Total
Total per share
1,189
214
1,382
3,026
1,651
374
474
252
8,563
$13.55
377
1,355
365
213
80
304
2,694
$4.26
692
65
575
149
14
1,495
$2.37
Current
Nonincome controlling Preferred Disposition Acquisition
taxes
interests Dividends
gains
FFO
10
4
14
$0.02
484
438
892
56
190
2,059
$3.26
164
164
$0.26
$0.00
$0.00
Net cash
flow
2015E
FFOPS
2016E
FFOPS
2016E YOY
Growth
496
214
446
657
246
105
187
252
(304)
(164)
2,136
$3.38
$0.61
$0.30
$0.69
$0.97
$0.36
$0.13
$0.30
$0.38
-$0.45
-$0.26
$3.04
$0.79
$0.34
$0.71
$1.04
$0.39
$0.17
$0.30
$0.40
-$0.48
-$0.26
$3.38
28.1%
11.8%
2.2%
6.8%
7.1%
29.6%
0.0%
5.0%
-7.1%
0.0%
11.2%
79
third-party capital growth at relatively higher base management fees should drive increased
profitability, while the stabilization of Brookfield Place in New York should drive significant
YOY growth at BPY. We’re also forecasting a dividend CAGR of 7%-8% through 2016.
■ No fun in the sun as low hydrology impacts results; core ops are stable. Reported FFOPS
was $0.83. Ex. $202M of dispositions gains, we estimate recurring FFOPS was $0.51 vs.
$0.49 YOY, below our $0.63 & $0.61 consensus (range=$0.54-$0.65). We note the majority
of realized gains were in the private equity platform from the sale of their remaining interest
in a forest products business. By platform, results were impacted by low hydrology (13%
below LTA), which was to be expected given BEP’s reported results last week. As expected,
the impact was ~$0.08/sh, while the Q3/14 energy marketing FFO was -$10M vs -$45M
QOQ. Private equity also came in lower than our forecast (-$0.07/sh), offset by lower general
corporate costs (+$0.03). Otherwise, core ops appear stable, while asset management is
showing solid growth (+$0.02/sh QOQ). Exhibit 5 highlights the variance analysis.
Exhibit 5 - Q3/14 Results Analysis – No Fun in the Sun; Low Hydrology Impacts Q3/14 Results, but Investors Looked Past the Results on Friday (BAM Share Price was
+2.6% vs. Flat for S&P and +0.9% for TSX (BPY, BEP, and BIP were +1.6%, -0.1%, and +1.4%, respectively)
Recurring
Q3/14A
102
43
28
136
55
46
21
19
450
Scotia
Q3/14E
103
44
81
129
57
24
66
38
541
Variance
To Scotia
(0.00)
(0.00)
(0.08)
0.01
(0.00)
0.03
(0.07)
(0.03)
(0.14)
Scotia
Q2/14A
88
37
83
137
53
32
54
34
518
QOQ
Impact
0.02
0.01
(0.09)
(0.00)
0.00
0.02
(0.05)
(0.02)
(0.11)
Corporate Expenses
Interest
Operating costs
Current income taxes
Cash flow from operations
58
30
0
362
66
38
3
434
(0.01)
(0.01)
(0.00)
(0.11)
60
36
0
422
0.00
0.01
0.00
(0.09)
Less: preferred dividends
Funds from Operations
(41)
321
(38)
396
(0.00)
(38)
384
(0.00)
$0.51
$0.63
($0.12)
$0.61
($0.10)
BAM Quarterly Results Reconciliation
Funds From Operations A vs. E. ($US millions)
Asset management
Construction and property services
Power
Property
Infrastructure
Development
Private Equity and Finance
Other Assets (Investment Income)
Recurring FFOPS*
Additional Notes
Annualized base management fees are +$20M QOQ to $630M; BAM achieved a 53% margin vs. 48% QOQ
Hydrology was 13% below long-term average (-$0.08/sh vs. us), leading to an $10M FFO loss on its marketing biz (vs. our +$6M forecast).
Results were negatively impacted by dispositions and low panel board pricing (FFO was down $28M YOY on lower prices).
A very difficult platform to forecast; results vary significantly QOQ. Invested capital (including cash) down 11% QOQ to $1.29B
* Scotiabank GBM estimated recurring FFOPS (ex. gains).
Asset Management– FFO of $102M vs. $88M QOQ & $96M YOY
■ Fee-bearing 3rd-party capital and annualized fees/carry are +0.6% and +2.1% QOQ to
$84B and $1.1B, respectively. Fee-bearing 3rd-party capital increased by $0.5B QOQ as
growth in listed partnerships of +$0.8B (BEP, BIP, and BPY) offset a $0.4B decline in
private fund capital due to the cancellation of uncalled commitments at the end of the
investment period for two niche funds. That said, BAM is marketing four funds (flagship
property and private equity and two niche funds), targeting $12B of capital, $9B of which
would be from third-parties. BAM indicated future flagship funds (property, infrastructure,
private equity) should roughly double the size of their respective predecessors, an impressive
feat to be sure. Exhibit 6 highlights the current committed level of BAM’s three
flagship funds. Our estimates reflect 14% and 13% YOY growth in fee-bearing 3rd- Exhibit 6 - Three Flagship Funds are ~70%
party capital in 2015 and 2016, respectively. Annualized fees & carried interest was Committed to Investments; Successor BSREP and
+2.1% QOQ to $1.143B, with target annualized carried interest was unchanged QOQ BCP III Funds are In the Market Today; We Expect
at $375M (we suspect it may be 2-3 years before we see constant and significant BIF III to Start Fundraising by Early Next Year
realized gains being recorded), while annualized fee base (and IDRs) were +3% QOQ
Total Fund
Invested or
to $678M. We note base fees on BAM-invested capital in listed subsidiaries were
$M
Commitments
Committed
~$55M during the quarter. Net (of direct costs) deferred carried interest was +$12M
$4,400
95%
QOQ to $291M as BAM did not realize any un-booked carry during the quarter (we BSREP
$7,000
50%
now give BAM credit for the deferred carried interest in our NAV). Overall dry BIF II
$1,000
90%
powder (committed capital) sits at $7.9B (-$1.6B QOQ), comprised of $4B of BCP III
$12,400
69%
committed capital for property (-$0.1B QOQ), $3.3B for infrastructure (-$1.1B QOQ), Total
80
and $0.7B for private equity (-$0.3B QOQ). BAM delivered a Q3/14 asset management
margin of 53%, up 500bp QOQ, in line with its 50%+ target.
Property (BPY.un) – FFO of $129M vs. $122M QOQ & $111M YOY
■ BPY reported Q3/14 FFOPU was $0.28 vs. $0.27 YOY, slightly below our $0.30 and in line
with $0.285 consensus (range = $0.27-$0.30). The variance (vs. us) was driven by lowerthan-expected office FFO (-$0.03/un) & higher G&A (-$0.01), partially offset by higher
industrial (+$0.01) and multi-family FFO (+$0.015). BPY is seeing positive leasing
momentum across all platforms; office in particular. We remind investors that Lower
Manhattan (strong market) comprises ~15% of our NAVPU. We’re looking for an avg.
annual portfolio same-property NOI growth of 5.2% through 2016. See our Q3/14 comment
(“Positive View Intact; Value Growth, and Income”) for a detailed overview and our
initiation report (“A Three-Point Play: Value, Growth, and Income”) for a deep dive into our
thesis and BPY.
■ A case of go hard or go home? The news of the day was that BPY is teaming up with Qatar
Investment Authority (QIA) to bid for Songbird Estates (SBD-L, not rated), which was later
reported to be £2.95/sh. While we provide an overview of our thoughts on the bid in our Q3
comment (see link above), we’ve long believed BPY’s stake in/control of Canary Wharf
Group (CWG) would either increase materially or go to zero, with our view admittedly tilted
towards the latter. We think any potential transaction size would depend on BPY’s ultimate
target investment in CWG (as highlighted in Exhibits 3 & 4 of our BPY comment).
■ New 2016 estimates reflect positive momentum. We introduced our 2016E FFOPU and
AFFOPU as part of our Q3 comment, reflecting 12% and 16% YOY growth, respectively,
with ~$0.10 (or 10%) of the YOY AFFOPU growth driven by stabilization of Brookfield
Place New York. Our 2014E-2016E AFFOPU CAGR of 19% exceeds the 5.6% and 7.4%
average for the Canadian and U.S. REIT universe (based on our and consensus estimates,
respectively).
■ BPY is trading at a 10% discount to our updated $25.25 NAVPU (+$0.25) and 14%
discount to its updated disclosed IFRS NAVPU of $26.33 (+$0.64). The increase in
disclosed IFRS NAVPU was primarily on the back of $869M of gains in the office portfolio
(mostly U.S. and U.K.), and despite $864M of erosion from currency weakness (~$1.20/un).
The disclosed NAVPU implies a 4.9% cap rate, flat QOQ. We note that BPY is currently
trading at a 15% discount to its IFRS NAVPU vs. an average 17.5% discount since it was
spun out in April 2013.
Infrastructure (BIP.un) – FFO of $55M vs. $53M QOQ & $216M YOY
■ BIP reported Q3/14 FFOPU of $0.85 vs. $0.80 YOY ($0.86 QOQ), in line with $0.86
consensus (range = $0.83-$0.88). The results reflected an AFFO yield of ~12% vs. 13%
QOQ and 12% YOY, at the lower end of its 12%-15% long-term target. Please see Benoit
Laprade’s Q3/14 comment for additional detail (“Q3/14 In Line”); Scotiabank GBM BIP
one-year target price was reduced by a very modest $0.25 to $42.50, having virtually no
impact to our BAM NAVPS calculation (-$0.02/sh).
■ Entering European Telecom Business. One day following the release of their Q3 results,
BIP announced the acquisition of a 50% interest in TDF, the largest independent
communication tower infrastructure business in France for US$1.1B (EUR0.9B) at the
consortiums share; other partners will be acquiring the remaining 50%. BIP’s equity
commitment is expected to be ~$500M, representing a 23% interest in TDF. Please see
Benoit Laprade’s comment for additional details (“Entering Europe Telecom Infrastructure
Business – Raising Target to $44.00”); Scotiabank GBP BIP one-year target price was raised
$1.50 to $44.00.
Power (BEP.un) – FFO of $28M vs. $83M QOQ & $61M YOY
■ We’ve summarized some of the highlights below, while we also direct you to Matt Akman’s
BEP Q3/14 results note (“Brazilian Buying Opportunity”).
■ Generation falls meaningfully below long-term average (LTA) in Canada and on wind
portfolio. BEP reported total generation of 4,383GWh, down 15% YOY and 13% below
81
LTA. Focusing more on actual vs. LTA, BEP delivered good hydro
generation in the U.S. (+1% vs. LTA), offset by softer results in Exhibit 7 - Energy Marketing Business FFO Was Negative Again This
Canada (20% below LTA) and overall slower wind production Quarter, But Lower Volumes Helped Mitigate the Loss
(23% below LTA; was 9% below LTA in Q2/14). BEP-disclosed
average revenue was $78/MWh, +$1/MWh and +$2/MWh QOQ FFO From Energy Marketing Platform ($M)
$44
and YOY, respectively. We estimate overall NOI margin was 72% $50
$40
vs. 80% QOQ and 71% YOY, as Q3 tends to be a seasonally slow
$30
quarter for power generation.
$20
■ BAM energy marketing business delivers negative FFO $10
contribution. The business (which we value at $73/sh, unchanged
$0
QOQ) was thrust into the spotlight in Q1/14, when a strong power -$10
-$10
price environment drove $44M ($0.07/sh) of FFO. The business -$20
-$14
essentially gave back the FFO in Q2/14 (loss of $45M), while -$30 -$23
-$30
-$32
Q3/14 delivered another loss of $10M (-$0.015/sh); see Exhibit 7. -$40
-$45
Overall, BAM realized a price of $52/MWh for the uncontracted -$50
-$43
Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14
power, up $8/MWh QOQ and flat YOY.
0%
45%
Western Forest Products (WEF.T)
Acadian Timber Income Fund (ADN.T)
22%
Ainsworth Lumber Co. (ANS.T)
$
$
$
$
2.38
$
0.76
2.38
$
$
$
$
$
$
$
$
$
$
27,712
963
-$
$
$
$
-$
$
-$
$
$
$
Corporate Borrowings
Property Specific Borrowings
Accounts Payable and other (net working capital)
Capital securities
BPY Preferred Units Held
Preferred Equity
Net Asset Value
Add:
Option Proceeds
FD Net Asset Value
Source: Company reports; Bloomberg; FactSet; Scotiabank GBM estimates.
Premium (Discount) to Current BAM Share Price
13%
FD NAV per share
* Translated into US$ at identified valuation date
654.6
$ 43.81
FD shares outstanding
2,078
291
6,792
1,962
561
3,742
2,762
167
813
2,737
106
-
2,631
963
654.6
0%
$ 49.61
2,286
291
7,641
2,214
561
3,993
3,013
167
813
2,737
106
-
2,631
963
-5%
$ 52.45
654.6
$ 34,333
$
$ 33,370
1,275
3,280
4,257
424
4,633
800
$ 41,283
$ 12,992
$
$
$
$
$
$
$
$
$
$
$
$
$
1,275 $
3,280 -$
$ 32,477
$
612
197
2,064
$ 15,064
$
$
$
4,257 -$
$
424 $
$
4,633 -$
$ 31,513
6,496
512
5,984
High
$ 12,191
$
$
$
800 -$
$ 39,426
$ 11,683
$
$
$
$
$
$
$
$
$
$
$
$
$
1,275 $
3,280 -$
28,676
612
174
2,064
$ 14,799
$
$
$
4,257 -$
$
424 $
$
4,633 -$
-$
6,464
480
5,984
Mid
$ 11,949
$
$
$
800 -$
35,625
10,374
1,870
291
5,943
1,709
561
3,217
2,511
126
580
2,523
106
-
2,417
13,653
612
174
1,898
10,969
5,859
448
5,411
Low
Attributable property-specific debt & minority interest
Private equity & finance
Liabilities
Total Asset Value
11.0x
$
10.0x
$
$
$
9.0x
18.0x
Total Financial and Asset Management
208
16.0x
Construction and Property Services
14.0x
11.0x
12.0x
3.11
$ 29.25
$ 14.14
$
$ 44.00
$
$
424
10.0x
11.0x
3.11
$ 29.25
$ 14.14
$
$ 44.00
0.67
$
$
Asset Management - Deferred Carried Interest (net)
252
Financial Assets
Asset Management (net of direct and general operating costs)
9.0x
10.0x
2.34
20.86
14.14
-
40.41
$
$ 25.33
$ 25.25
$
$
$
$
2.34
20.86
14.14
-
$
0.67
$ 25.33
$ 24.75
16.0x
$ 34.73
Financial Assets & Asset Management
Cash and cash equivalents
$
$
$
$
40.41
$
23.29
22.72
15.0x
$ 34.73
$
251
54
28
7.5
0
$
0.67
$
31.40
14.0x
High
Total Private Equity and Finance
Direct investments
52%
Norbord (NBD.T)
Private Equity and Finance
Total Infrastructure
28%
Brookfield Infrastructure Partners L.P. (BIP.N)
Infrastructure
60
$
23.29
$
$
Mid
$
259
$
22.72
31.40
Low
$
50%
Brookfield Incorporacões (BISA3.B)
82
$
$
Share
Price (US$)
Total Commercial Properties & Residential Development
70%
Brookfield Residential Properties (BRP.N)
483
32
172
# of shares /
OCF 2015E
(millions)
Brazilian rural lands (sustainable resources)
68%
63%
%
Interest
Brookfield Property Partners (BPY)
Commercial Properties & Residential Development
Total Renewable Power
Energy Marketing Business
Brookfield Renewable Partners (BEP)
Renewable Power
Assets
Exhibit 8 - Scotiabank GBM Forward NAV = $52.00 = +8% QOQ (was $48.00)
654.6
34,016
963
33,053
1,275
3,280
4,257
424
4,633
800
800
39,691
11,683
2,078
291
6,792
1,962
561
3,742
2,762
167
813
2,737
106
-
2,631
15,064
612
197
2,064
12,191
6,464
480
5,984
-4.6%
$ 51.96
$
$
$
$
-$
-$
$
$
$
-$
-$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
GBM
Value
$
$
$
$
-$
-$
$
$
$
-$
-$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
51.96
1.47
50.49
1.95
5.01
6.50
0.65
7.08
1.22
1.22
60.63
17.85
3.17
0.44
10.38
3.00
0.86
5.72
4.22
0.25
1.24
4.18
0.16
-
4.02
23.01
0.93
0.30
3.15
18.62
9.87
0.73
9.14
Value per
BAM share
34%
6%
1%
20%
6%
2%
9%
6%
0%
2%
8%
0%
0%
8%
44%
2%
1%
6%
36%
19%
1%
18%
% of
BAM NAV
10x Q4/15-Q3/16E FFO
Q3/14; Net of Direct Costs
16x Q4/15-Q3/16E FFO
10x Q4/15-Q3/16E FFO, less cash on hand
Cash at BAM Level
10.0x 15x Q4/15-Q3/16E FFO; driven by expected ~10% return
on capital.
Based on Benoit Laprade one-year target price of CAD$3.40
Based on Benoit Laprade one-year target price of CAD$32.00
All based on current share price
Based on Benoit Laprade's one-year target price of C$2.60
Based on Benoit Laprade's one-year target price of $44.00 and
current unit price.
Recorded at Q2/14 Net Invested Capital
Low and Mid = current share price, High = One-year consensus
target price of BRL$1.80 for BISA
Based on consensus target share price and assumes
conversion of BAM-held preferred shares
Low = current unit price; mid = Scotia Target Price; High =
Scotia NAVPU
GBM Estimate; 15x Q4/15-Q3/16E FFO
Based on Matt Akman's one-year target price (CAD$38.00)
Commentary
82
Scotiabank GBM Forward NAV
83
Valuation and Key Risks to Target
Brookfield Infrastructure Partners LP (BIP - N $40.41)
Valuation
1.0x NAV
Key Risks to
Target
Lower-than-expected GDP, regulatory regime changes, weaker-than-expected U.S. housing
recovery
Brookfield Property Partners LP (BPY - N $22.72)
Valuation
0.98x NAV
Key Risks to
Target
Spiking interest rates, inability to access capital markets, lack of direct comparables, U.S.
contraction
84
Company Comment
(CWT.UN-T C$26.92)
Calloway REIT
pammi.bir@scotiabank.com
Ganan Thurairajah, MBA - (416) 863-2899
ganan.thurairajah@scotiabank.com
Target 1-Yr:
C$29.50
ROR 1-Yr:
15.5%
Valuation: 15x AFFO (F'16 estimate)
Key Risks to Target: Material exposure to Wal-Mart Canada, potential for conflicts of interest.
Event
■ Calloway reported Q3/14 FFOPU of $0.49 vs. $0.47 last year, in line
with our $0.49 estimate and the $0.48 consensus.
Implications
■ After Q3 speed bump, internal growth should revert back to ~1%.
The flat Q3 SP NOI delivery was partly due to a tough prior year comp
(higher bad debt recoveries). Our 2015E-16E of ~1% annual SP NOI
are intact, with solid 99% occupancy impeding a more robust pace.
■ Earnouts/developments slow, but other channels helping to backfill.
We've taken a slightly more cautious view on E&D completions as
tenants re-think space needs, though Premium Outlets, VMC, and
mixed-use intensification should help offset the slower pace. VMC
continues to progress well, with the next site for development being
explored. Also, the new Penguin Pick-Up program may ultimately help
drive more traffic to its centres and participate in e-commerce's growth.
■ Reasonable growth on deck. Our estimate revisions were minor and
mostly reflect lower net interest costs. Our 2014E-16E AFFO CAGR of
3.8% is in line with its retail peers, but below the 5.5% sector average.
Recommendation
■ SP, target price bumped to $29.50. We believe CWT remains in good
form for potentially less favourable rates with visible cash flows, good
quality assets, and a sizeable value-add pipeline. In light of its largerthan-typical NAV discount (-9.9%) and near-6% yield, we think current
levels offer a good entry. We would buy more aggressively below $26.00.
Qtly FFOPU (FD)
2013A
2014E
2015E
2016E
(FY-Dec.)
Funds from Ops/Unit
Price/AFFO
EV/EBITDA
EBITDA Margin
EBITDA/Int. Exp
AFFO Payout Ratio
Q1
$0.45 A
$0.47 A
$0.50
$0.51
Q2
$0.46 A
$0.49 A
$0.50
$0.51
Q3
$0.47 A
$0.49 A
$0.50
$0.51
Q4
$0.47 A
$0.49
$0.51
$0.53
Year
$1.84
$1.94
$2.01
$2.07
P/FFO
13.7x
13.9x
13.4x
13.0x
2012A
$1.77
$1.65
17.6x
18.4x
64.0%
2.8x
94.0%
2013A
$1.84
$1.74
14.5x
17.4x
63.6%
2.9x
89.1%
2014E
$1.94
$1.82
14.8x
17.1x
63.7%
2.8x
85.7%
2015E
$2.01
$1.90
14.1x
17.3x
63.7%
3.4x
84.4%
2016E
$2.07
$1.96
13.7x
16.9x
63.6%
3.5x
83.2%
BVPU14E: $28.68
Cap Rate: 6.00%
NAVPU:
NAV
Prem/(Disc):
$29.88
-9.91%
CDPU (NTM)
CDPU (Curr.)
$1.60
$1.60
Yield (Curr.)
5.9%
Pertinent Revisions
Target:
1-Yr
FFOPU15E
FFOPU16E
New
Old
$29.50
$2.01
$2.07
$29.25
$2.00
$2.06
Capitalization
Market Cap (M)
Units O/S (M)
Float O/S (M)
All values in C$ unless otherwise indicated. Note: M. Goldhar (24% econ. interest)
$3,662
$3,054
$6,716
136
107
85
5.5%
3.6%
3.8%
6.6%
6.2%
-2.8%
After Q3 Speed Bump, Internal Growth Should
Estimated NAVPU
$32.00
$29.88
$27.93
Premium/(Discount) to NAV
-15.9%
-9.9%
-3.6%
Revert Back Up to ~1% Annually
Current implied cap rate
6.4%
6.4%
6.4%
■ Occupancy firm, but internal growth decelerates; we expect
~1% SP NOI in 2015-16. After alluding to a potential drop in Source: Company reports; Scotiabank GBM estimates.
occupancy from still tepid economic growth, a more competitive
tenant environment, and more selective expansion, Q3 held firm Exhibit 3 – CWT NAV Discount Exceeds Historical Levels
at 99% for the 19th straight quarter (Exhibit 5). However, SP
NOI decelerated to +0.1% YOY (+0.9% YTD) as higher bad 40%
debts and lower recoveries offset vacant space lease-up and 30% 28% CWT Avg: -2.0%
CWT Current: -9.9%
25%
higher rents. Management sees the decline as temporary,
20%
18%
particularly with the strong performing Toronto Premium Outlets 20%
moving into the SP bucket in Q4. Leasing appears to have 10%
slowed with 75% of 2014 maturities addressed, up marginally
0%
from 73% at Q2, though renewal spreads remain decent at +7%.
-10%
With respect to recent retailer closures/downsizings, CWT’s
portfolio has held up quite well with only 1 Jacob closure, 4 Best -20%
-16%
Sector Avg: 4.9%
Buys (2 re-leased, 2 in-talks and still paying rent), 2-3 stores -30%
impacted by Bowring/Benix/Bombay Co.’s CCAA filing, and no
CWT's NAV discount spread to
change to its Staples’ footprint. Indeed, its WMT-anchored -40%
historical average is 790bps
portfolio (63% of properties, or 73% incl. shadows) remains a -50%
-45%
significant draw for consumers and tenants alike. Tenants cited -60%
as expanding incl. dollar stores, Winners, SportChek, Toys ‘R
Us, and Michaels, along with pharmacies, beer/liquor stores, and
Dec-13
3,863,865
Mar-13
Jun-12
4,133,994
Sep-11
Dec-10
Mar-10
Jun-09
Sep-08
4,427,611
Dec-07
Mar-07
Jun-06
Estimated NAV
Sep-14
-1.4%
-9.9%
6.4%
19.2x
14.0x
15.5x
14.1x
Healthy Growth, Attractive Yield, and Deeper-than-Typical NAV Discount
Point to Reasonable Entry Point
■ Maintaining Sector Perform, target price nudged to $29.50
(+$0.25). Post in line Q3 results, our outlook remains intact. Exhibit 1 – CWT Relative Valuation Appears Attractive, Particularly on NAV
Notwithstanding a hiccup in internal growth and a still lukewarm
CDN Retail REITs
CWT
economic backdrop, we expect fundamentals to remain sound in
US Shopping Centre REITs
CDN
REITs
CWT’s value-oriented portfolio with SP NOI expected to hover
~1% through our forecast period. Though that’s not much to get
excited about, the REIT’s development pipeline is where the
action is, with potentially 9M sf (32% of existing GLA) across
intensification (3M sf), Vaughan Metro Centre (3M sf), and
earnouts/development (E&D) opportunities over the next 10+
years. As we’ve noted in the last few quarters and in more detail
below, we’re becoming more cautious on the E&D program,
P/AFFO (2015E)
Prem to NAV
Implied Cap Rate
AFFO CAGR
though other channels may backfill the slower pace of
(14E-16E)
completions. Moreover, Penguin Pick-Up could provide a means
for its centres to participate in the significant expected growth of Source: Company reports; Scotiabank GBM estimates.
e-commerce. Overall, we think CWT’s in steady form for
potentially higher rates ahead with a healthy growth profile
(3.8% 2014E-16E AFFO CAGR), highly visible cash flows, a Exhibit 2 – Sizeable Discount to NAV Remains Attractive in Our View
high quality Walmart anchored portfolio, and a healthy payout Adjusted NTM NOI
405,192
405,192
405,192
ratio to continue supporting modest distribution growth. The NOI Capitalization Rate
5.75%
6.00%
6.25%
units are trading at 14.1x 2015E AFFO/6.4% implied cap Assets
Value Range
7,046,824
6,753,207
6,483,078
rate/9.9% below NAV vs. 16.8x/5.8%/4.1% NAV premium for Investment properties
351,656
351,656
351,656
REI and 14x/6.6%/-2.8% for the REIT sector (Exhibits 1-4). The PUDs
Mortgages, loans receivable
149,323
149,323
149,323
slight uptick in our target price reflects our updated estimates, Other assets
88,134
88,134
88,134
with no change to our 15x target multiple. In our view, its larger7,635,937
7,342,320
7,072,191
than-typical absolute and relative (vs. REIT sector) NAV Liabilities
discount seem somewhat excessive. Coupled with reasonable Mortgages payable
1,710,785
1,710,785
1,710,785
1,240,000
1,240,000
1,240,000
growth and near-6% yield, we believe current levels offer a Unsecured debentures
reasonable entry point. All else equal, we would be more Convertible debt (dilutive)
Other debt
257,541
257,541
257,541
aggressively below $26.00.
3,208,326
3,208,326
3,208,326
86
fitness centres. Looking ahead, our 2015E-16E SP NOI average
Exhibit 4 – CWT Implied Cap Rate Spread Remains Wider Than Average
~1% largely from our assumed +10% renewal spreads.
7%
20.0x
Solving the Last Mile? Penguin Pick-Up Program a Potential
Step in the Right Direction
■ Addressing the last mile with Penguin Pick-Up. In Sept., SmartCentres
(CWT’s 21% unitholder) announced the launch of “Penguin Pick-Up”
(PPU). PPU will allow consumers to order goods online from any retailer
that ships within/to CDA and have the goods sent to a PPU location.
Consumers are then notified by text/email/voice when their goods arrive
and can pick them up at a PPU location without having to get out of their
vehicle. The program is set to launch within the next few months, with the
first three pilot sites in the GTA, two of which are at CWT properties.
Based on demand, PPU could be rolled out across 250 SmartCentres
locations. At this stage, the program is being offered at no cost to
consumers or retailers, with the intention of addressing e-commerce
challenges with shipping the “last mile”. As well, setup costs are being
borne by SmartCentres with no investment from CWT, other than
Jun-14
Jun-13
Dec-13
Jun-12
Dec-12
Jun-11
Dec-11
Jun-10
Dec-10
Jun-09
Dec-09
Jun-08
Dec-08
Jun-07
Dec-07
Jun-06
Dec-06
Sector P/AFFO (RS)
Focus Remains on Developments, Though Expect a
Calloway P/AFFO (RS)
18.0x
6%
Slower Near-Term Pace of E&D as Tenants Re-think
16.0x
Formats and Space Needs
5%
14.0x
■ Earnouts and developments (E&D) remain slow, though 4%
12.0x
Premium Outlet program has picked up some of the slack.
10.0x
E&D continue to provide an attractive source of value creation, 3%
CWT - Implied Cap Rate
8.0x
Spread to GOC 10-YR (LS)
with the pipeline sitting at $923M (2.9M sf; 10% of GLA) at an
6.0x
2%
average 6.9% yield (Exhibit 6). However, the pace of
Calloway Implied Cap Rate
Calloway P/AFFO
4.0x
completions remains slower than typical (Exhibit 7) as tenants re- 1%
Current / Avg. = 6.4% / 6.7% Current (2015E)/Avg. = 14.1x/14.5x
Spread to GOC 10 Yr = 4.4% Spread to Sector
2.0x
evaluate space needs and formats, particularly as e-commerce
Avg Spread = 3.7%
Current (2015E)/Avg. = 0.1x/0.3x
expands. In Q3, $19M was completed at an attractive 7.3% yield, 0%
with the YTD total at $50M (7.8%), but tracking below CWT’s
$170M annual average from 2007-13. The Premium Outlet
program has, however, filled some of the void. On Oct. 30th,
Montreal Premium Outlets opened with 85% occupancy and an Source: Company reports; Scotiabank GBM estimates.
8% expected yield (occupancy is expected to rise by 8%-10%
over the next few months). As a reminder, CWT’s interest in MPO is 25%
($34M). Additional sites are currently being explored by the SPG/CWT Exhibit 5 – Operationally Sound, Albeit with Soft SP NOI
JV. Looking ahead, we modestly reduced our 2015E-16E E&D
Change (bp)
Q3/14 Q2/14 Q3/13
QOQ
YOY
completions to $120M annually (7.25% yield) from $130M.
Occupancy
99.0% 99.0% 99.0%
0
0
■ Focus remains on developments, with next site at VMC under review. Renewal leasing sprd YTD 7.0% 7.2% 7.5%
-20
-50
CWT’s growth efforts remain centred on developments, with 3M-4M sf of Lease maturity (to Q4/16) 10.7%
mixed-use retail, office, and residential intensification being explored on
YOY
YTD
0.1% 0.9%
existing sites (incl. a 1M sf opportunity at Westside Mall in Toronto). SP NOI Growth
Coupled with 3M sf from VMC and ~3M sf from E&D, the aggregate 9M Source: Company reports; Scotiabank GBM estimates.
sf (32% of GLA) provides the framework for more compelling longer-term
AFFO and NAV growth. With respect to VMC, the next site for
development is being explored, with more colour expected in Q1/15. A Exhibit 6 – Calloway’s Earnout and Development Pipeline
lead broker was also engaged to lease-up the balance of the KMPG Tower Remains Substantial…
(40% pre-leased to KPMG). On the acquisition front, CWT completed its Committed Earnouts & Developments ($000s)
50/50 JV purchase of 2 WMT Supercentre-anchored properties in Year of completion
Earnouts
Develop.
Total
2,249
26,496
28,745
Edmonton and Montreal for $63M (at its 50% share; 6% cap rate, $207/sf) 2014
and beyond
22,585
90,165
112,750
from SmartCentres/Walmart CDA (CWT’s partner is Investors Real 2015
Gross commitment
24,834
116,661
141,495
Property Fund). In Q4, the previously announced $111M (6.6% cap rate; Invested to date
(12,687)
(46,108)
(58,795)
$174/sf) portfolio sale to Retrocom was completed. Looking ahead, our Net commitment
12,147
70,553
82,700
78
358
436
forecasts reflect $125M of annual acquisitions. Capital recycling via non- Area (sq. ft.) - 000s
ft. - $
319
326
324
core dispositions may also continue, though management noted the amount Cost/sq.
Expected yield
6.8%
7.6%
7.5%
is not significant.
Uncommitted Future
Developments ($000s)
Gross commitment
Invested to date
Net commitment
Area (sq. ft.) - 000s
Cost/sq. ft. - $
Expected yield
Earnouts
250,577
(54,054)
196,523
806
311
7.1%
Develop.
531,187
(212,027)
319,160
1,663
319
6.7%
Total
781,764
(266,081)
515,683
2,470
317
6.8%
Total Committed &
Uncommitted ($000s)
Gross commitment
Invested to date
Net commitment
Area (sq. ft.) - 000s
Cost/sq. ft. - $
Expected yield
Earnouts
275,411
(66,741)
208,670
884
311
7.1%
Develop.
647,848
(258,135)
389,713
2,022
320
6.9%
Total
923,259
(324,876)
598,383
2,906
318
6.9%
% of total
2.5%
12.5%
15.0%
sf (000s)
73
364
436
Executed leases
2014
2015 and beyond
Total
87
providing the vacant space at its sites. The economics are still being
worked out, though in time, retailers may be charged a fee by PPU and Exhibit 7 – …but Pace of Completions is Slowing
CWT may collect percentage rent from the PPU sites. Given the early $225
Completed (LS, $M):
Yields (RS):
stages, we expect minimal impact on CWT’s near-term operating
Developments
Developments
$200
income. Longer term, however, the program could provide a modest
Earnouts
Earnouts
incremental income stream and, importantly, bring more consumer $175
$150
traffic to its centres. Details are available at www.penguinpickup.com.
$125
Q3/14 Recap: In Line Results; Balance Sheet Steady
$100
■ Results largely as expected. CWT reported Q3/14 FFOPU of $0.49 $75
vs. $0.47 last year, in line with our $0.49 estimate and $0.48 consensus $50
(Exhibit 8). Slightly lower NOI was offset by lower interest costs. The $25
4.3% YOY FFOPU growth was driven mostly by acquisitions and
$developments, partly offset by higher net interest expense.
2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E
■ Leverage and liquidity in good form. Leverage remains in good
shape with our net debt/NAV assets at 42% and 2014E net Source: Company reports; Scotiabank GBM estimates.
debt/EBITDA at 7.7x (vs. 8.4x sector). Liquidity expanded with a new
3-year $350M revolving credit facility and $35M in cash. During Q3,
CWT issued $150M of Series M unsecured debentures (expiring July 2022) at an attractive
3.73% and issued (reopened) $50M of its 3.985% Series I debentures in order to repurchase
$50M of its more expensive (5.37%) Series B notes. We expect refinancing savings will
continue to provide a tailwind for AFFOPU growth, with $286M of mortgages maturing
through 2015 at 5.71% (vs. our 4.9% average assumed refi rate).
10.5%
10.0%
9.5%
9.0%
8.5%
8.0%
7.5%
7.0%
6.5%
6.0%
Exhibit 8 – Forecast Summary, Variance, Leverage Snapshot
Forecasts
2006
2007
2008
2009
2010
2011
2012
2013
2014E
2015E
2016E
Estimates (fully diluted)
FFOPU
AFFOPU
Distributions
AFFO payout ratio
1.66
1.50
1.47
98%
1.77
1.60
1.52
95%
1.80
1.65
1.55
94%
1.68
1.52
1.55
102%
1.65
1.51
1.55
103%
1.70
1.57
1.55
99%
1.77
1.65
1.55
94%
1.84
1.74
1.55
89%
1.94
1.82
1.56
86%
2.01
1.90
1.61
84%
2.07
1.96
1.63
83%
Valuation
P/FFOPU
P/AFFOPU
EV/EBITDA
Distribution yield
AFFO yield
Pre-tax NAV / Cap rate
Income Statement ($ millions)
Revenues
Net operating income
EBITDA
NOI margin
EBITDA margin
Balance Sheet ($ millions)
Total assets
Net debt
Leverage
Net debt/EV
Debt/GBV
Net Debt/EBITDA
EBITDA/net interest
15.5x
17.2x
17.5x
5.7%
5.8%
$29.88
290
197
191
68%
66%
3,584
1,744
41%
52%
8.3x
2.8x
14.4x
15.8x
17.7x
5.9%
6.3%
9.9x
10.8x
15.4x
8.7%
9.6%
6.0%
370
249
242
67%
65%
3,894
2,309
51%
56%
8.7x
2.7x
414
273
265
66%
64%
4,194
2,610
71%
57%
9.6x
2.6x
9.2x
10.1x
14.2x
11.1%
10.7%
13.9x
14.8x
16.9x
6.0%
6.5%
13.9x
14.8x
17.1x
5.9%
6.8%
13.4x
14.1x
16.6x
6.0%
7.1%
Current NAV Premium / Implied Cap Rate
-9.9%
6.4%
610
402
392
65%
64%
630
415
404
65%
64%
447
294
285
66%
64%
4,237
2,715
58%
58%
9.5x
2.3x
13.5x
14.6x
16.2x
7.1%
6.8%
481
318
308
66%
64%
4,374
2,674
50%
55%
8.8x
2.3x
15.0x
16.2x
17.1x
6.1%
6.2%
512
341
330
66%
64%
5,955
2,695
45%
52%
8.2x
2.6x
15.9x
16.9x
17.8x
5.4%
5.9%
546
361
351
66%
64%
6,480
2,640
41%
50%
7.8x
2.8x
573
378
367
66%
64%
7,071
2,982
7,129
3,029
7,447
3,111
13.0x
13.7x
16.3x
6.1%
7.3%
668
439
428
65%
64%
7,769
3,187
47%
53%
7.8x
2.9x
45%
52%
7.7x
2.8x
45%
50%
7.6x
3.4x
44%
49%
7.4x
3.5x
Forecast Assumptions
($MM, except where noted)
2007
2008
2009
2010
2011
2012
2013
2014E
2015E
2016E
Same-property NOI growth
Completed Earnouts
Assumed cap rate
Completed Developments
Assumed cap rate
Acquisitions
Assumed cap rate
G&A expenses
% of revenues
Maintenance capex
% of revenues
Leasing costs
% of revenues
1.6%
139.6
7.3%
40.5
8.1%
150.0
6.1%
7.2
1.9%
0.9
0.3%
2.2
0.6%
1.0%
193.4
6.8%
29.5
10.2%
285.0
6.6%
8.6
2.0%
1.7
0.4%
2.5
0.6%
-0.1%
158.0
7.0%
28.5
9.0%
0.0
na
9.4
2.0%
1.8
0.4%
4.5
1.0%
1.7%
135.5
7.3%
15.8
8.7%
129.9
6.8%
9.6
2.0%
1.9
0.4%
5.5
1.2%
1.2%
81.6
7.3%
81.4
7.6%
140.7
6.5%
10.9
2.1%
3.1
0.6%
5.9
1.2%
0.7%
80.2
7.7%
47.7
7.2%
102.7
6.0%
10.1
1.8%
3.3
0.6%
5.5
1.0%
1.0%
59.2
7.1%
122.3
7.2%
286.6
6.0%
10.8
1.9%
3.4
0.6%
5.7
1.0%
1.0%
30.9
7.8%
73.0
8.0%
63.1
6.1%
10.6
1.7%
6.1
1.0%
6.1
1.0%
0.7%
60.0
7.3%
60.0
7.3%
125.0
6.3%
11.0
1.7%
6.3
1.0%
6.3
1.0%
1.0%
60.0
7.3%
60.0
7.3%
125.0
6.5%
11.7
1.7%
6.7
1.0%
6.7
1.0%
Condensed Quarterly
Variance Analysis ($000s)
Q3/14A
Q3/13A
% chg
Scotia
Q3/14E
Variance
per unit
Revenue
Operating expenses
NOI
NOI margin
147,849
48,775
99,074
67.0%
140,318
45,790
94,528
67.4%
5.4%
6.5%
4.8%
(4)
147,761
48,219
99,542
67.4%
0.001
0.004
(0.003)
(36)
2,584
1.7%
96,490
65.3%
2,570
1.8%
91,958
65.5%
0.5%
(1)
4.9%
(3)
2,628
1.8%
96,914
65.6%
(0.000)
(3)
(0.003)
(33)
30,754
3.9%
nm
36,314
nm
(4,297)
nm
629
nm
nm
nm
nm
nm
28,558 189.8%
32,009
64,905
(0.000)
nm
nm
nm
nm
nm
nm
nm
nm
nm
694
36,314
(4,297)
338
629
294
62,530
0.467
1,088
325
66,318
0.486
nm
nm
nm
nm
nm
nm
nm
nm
nm
0.2%
0.001
General & administration
% of revenue
EBITDA
EBITDA margin
Amortization
FV change investment properties
FV loss on financial instruments
(Gain)/loss on asset sales
Earnings from associates
Writedown of PUDs
Income from discontinued ops
Income tax expense
Net income/(loss)
31,942
(15,593)
(2,607)
82,748
FFO adjustments:
Amortization
1,162
FV change investment properties
(15,593)
FV change financial instruments
(2,607)
LP and deferred unit distributions
375
Future taxes
Current taxes
Proceeds from asset (sales)/impairments
Other (gains)/losses
360
Non-recurring items
FFO
66,445
0.487
nm
nm
nm
nm
nm
nm
nm
nm
nm
6.3%
4.3%
Leverage/Liquidity Snapshot @
Q3/14
Debt/GBV (incl. converts)
Max limit (incl. converts)
Net debt/EV
Debt/NAV assets
52.3%
65.0%
45.5%
42.1%
Liquidity ($000s)
Credit facility capacity
Undrawn amounts
Cash on hand
Available liquidity
Q3/14
350,000
350,000
34,940
384,940
Mortgage Profile
% due pre-2017
Average in-place mortgage rate
Weighted average term (years)
2014E refinancing rate
25.5%
5.3%
5.6
4.5%
5.0%
Assumed Equity Issuance
2014E issuance
2014E timing
2015E issuance
2015E timing
na
125,000
Q2/15
88
Company Comment
(CVI.A-T C$1.18)
Gavin Wylie - (403) 213-7333
gavin.wylie@scotiabank.com
Risk Ranking: Speculative
Jenna Halwa, M. Econ - (403) 213-7762
jenna.halwa@scotiabank.com
Target 1-Yr:
C$2.00
ROR 1-Yr:
69.5%
Key Risks to Target: Commodity prices, exploration, project execution, political/regulatory.
Event
■ Calvalley reported little in the way of new information as ongoing
operational challenges continue to weigh on activity.
Implications
■ Production was reported at 1,576 bbl/d (flat QOQ) while sales were
impacted by a late shipment which reduced volumes to 914 bbl/d. That
said, Calvalley noted that a shipment on October 1, 2014 would have
brought the volume sold to 1,867 bbl/d (+60% QOQ).
■ Weak production/sales also had a negative knock-on effect on Q2
operating cash flow of $1.5M (vs. our $2M) or CFPS of $0.02 (vs. our
$0.03).
■ We maintain our Sector Perform rating on Calvalley and reduced our
one-year price target of $2.00 (vs. $2.25) per share based on our revised
risked NAVPS estimate of $2.22 (vs. $2.48).
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
C$0.00
C$0.00
0.0%
Pertinent Revisions
New
Old
Target:
1-Yr
$2.00
$2.25
CFPS15E
US$0.35
US$0.60
CFPS16E
US$0.45
N/A
New Valuation:
Old Valuation:
Recommendation
■ In our view, Calvalley's production growth remains largely contingent
upon a more stable operating environment.
Qtly CFPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.10 A
$-0.02 A
$0.06
$0.11
(FY-Dec.)
Earnings/Share
Cash Flow/Share
Debt-Adj CF Multiple/Share
Price/Earnings
Prod-Oil (mbbl/d)
Prod-Nat Gas (mmcf/d)
Operating Cash Flow (M)
Net Cap Exp (M)
Q2
$0.09 A
$0.03 A
$0.08
$0.11
Q3
$0.09 A
$0.02 A
$0.09
$0.11
Q4
$0.10 A
$0.08
$0.11
$0.11
Year
$0.38
$0.10
$0.35
$0.45
P/CF
4.4x
9.9x
3.0x
2.3x
2012A
$0.27
$0.38
1.9x
6.7x
2.5
0.0
$36
$39
2013A
$0.28
$0.38
1.5x
6.0x
2.3
0.0
$31
$-7
2014E
$0.05
$0.10
8.6x
19.4x
1.1
0.0
$8
$11
2015E
$0.25
$0.35
1.8x
4.2x
2.5
0.0
$27
$60
2016E
$0.33
$0.45
2.1x
3.1x
3.0
0.0
$35
$60
NAVPS:
P/NAV:
C$3.25
0.36x
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
C$92
$-87
C$3
78
59
89
■ Calvalley reported little in the way of new information as ongoing operational
challenges continue to weigh on activity. Production was reported at 1,576 bbl/d (flat
QOQ) while sales were impacted by a late shipment which reduced volumes to 914 bbl/d.
That said, Calvalley noted that a shipment on October 1, 2014 would have brought the
volume sold to 1,867 bbl/d (+60% QOQ). The late shipment should give the company a solid
start in Q4 with an estimated bump to cash flow of ~$1.4M or $0.02/share although we
expect production to remain challenged by ongoing geo-political turmoil. Overall, production
was restricted at Hiswah and Ras Nowmah for 23 days this quarter due to operational issues
and a labour dispute. Weak production/sales also had a negative knock-on effect on Q2
operating cash flow of $1.5M (vs. our $2M) or CFPS of $0.02 (vs. our $0.03).
■ In our view, Calvalley’s production growth remains largely contingent upon a more
stable operating environment. The company announced that construction is underway for a
water filtration / injection facility with capacity of 40,000 bbl/d and plans to have it ready to
for transport to Yemen in 2015. While we view the expanded capacity as a positive step
toward future growth from the current 8,000 bbl/d facility, Calvalley noted unstable
conditions in Yemen prevent it from firming up the timeline on when the facility will be
operational. Calvalley further reported that the Al Roidhat field remains shut-in due to
marketing constraints while blockades at Block 51 and the Ash Shihir terminal continue to
prevent access to marketing infrastructure.
■ We maintain our Sector Perform rating on Calvalley and reduced our one-year
price target of $2.00 (vs. $2.25) per share based on our revised risked NAVPS
estimate of $2.31 (vs. $2.48). Our NAV reflects the company’s updated balance sheet
and a moderately more conservative view around future production / spending levels as
we have been doing with our coverage universe this quarter.
■ Balance Sheet – solid. Calvalley’s balance sheet remains strong despite modest cash flows.
Net working capital was reported at $80.6M and we estimate 2014E spending will come in at
$20M, which should leave the company fully funded. With capital spending in Q3 coming in
at $0.2M, we also anticipate spending will remain subdued in 2015 on account of operational
issues in the region and allow the company to fully fund its budget.
90
Exhibit 1 - CVI - NAVPS Summary
$/Share
Building Blocks of NAVPS
$12.31
$12.00
60%
56%
51%
$10.00
41%
$8.00
40%
Unbooked
Upside
36%
$6.00
$4.00
20%
$2.00
$0.00
10%
Base
Strip
Base
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Base
Strip
All-In Identified Projects
$4.56
$3.54
$1.14
$0.91
$0.00
$0.00
$0.00
$0.00
$2.43
$1.79
$2.11
$1.14
$1.18
$2.25
36%
$1.71
$1.15
$1.18
$2.25
41%
$1.16
$1.16
$1.18
$2.25
51%
$0.94
$1.16
$1.18
$2.25
56%
$3.02
$1.16
$1.18
$2.25
10%
$2.46
$1.16
$1.18
$2.25
12%
Base 2P NAV
Qarn Qaymah (Basement)
Qarn Qaymah (Kohlan/NGL)
Ras Nowmah South / Other
(Prospect)
Hiswah/Al Roihdat/Auqban
Balance Sheet/Land/Fx
Current Price
Target Price
P/NAV
Strip
12%
Risked NAV
0%
91
Exhibit 2 - CVI - Snapshot
2008
2009
2010
2011
2012
2013
2014E
2015E
2016E
2,261
2,160
2,256
2,081
2,509
2,328
1,136
2,503
3,000
0
0
0
0
0
0
0
0
0
Equivalent (boe/d)
2,261
2,160
2,256
2,081
2,509
2,328
1,136
2,503
3,000
% BOE growth
-14%
-4%
4%
-8%
21%
-7%
-51%
120%
20%
% Natural Gas
0%
0%
0%
0%
0%
0%
0%
0%
0%
% Crude Oil
100%
100%
100%
100%
100%
100%
100%
100%
100%
Price Assumptions ($/boe)
90.25
64.48
77.57
97.83
111.22
109.40
101.17
99.50
99.50
Operating Netbacks ($/bbl)
71.01
45.70
57.18
74.61
81.94
78.81
65.57
70.15
71.55
2P Reserves (Net) mmboe
11.2
12.3
14.4
13.4
12.2
11.4
N/A
N/A
N/A
Cash balance US$M
21.0
20.0
19.6
4.1
6.2
6.2
(4.9)
(37.9)
(62.8)
US$000's unless otherwise noted
Production
Crude Oil & NGLs (bbl/d)
Natural Gas (mcf/d)
Operating Cash Flow US$M
31.1
13.6
21.9
27.6
35.7
31.2
8.1
27.1
35.0
Financing Cash Flow US$M
(42.0)
(10.2)
(1.8)
(6.0)
(0.9)
(38.1)
(5.3)
0.0
0.0
CFPS (D)
$0.31
$0.14
$0.22
$0.28
$0.38
$0.38
$0.10
$0.35
$0.45
CFPS growth
-11%
-55%
62%
28%
33%
1%
-73%
233%
30%
Net Capital spending (US$M)
$28
$12
$24
$25
$39
($7)
$11
$60
$60
Free cash flow (US$M)
$4
$2
($2)
$2
($4)
$39
($3)
($33)
($25)
ROACE (%)
13%
2%
7%
12%
12%
11%
2%
9%
11%
Valuation
P/CF
3.6x
8.0x
4.9x
3.9x
2.9x
2.9x
10.5x
3.2x
2.4x
31.13
13.60
21.91
27.57
35.71
31.18
8.00
26.56
34.80
Debt-adj CF multiple
1.1x
14.4x
19.1x
3.4x
1.9x
1.5x
8.6x
1.8x
2.1x
D/CF
-2.4x
-5.2x
-3.2x
-2.7x
-2.9x
-2.8x
-8.8x
-1.4x
-0.4x
Debt Adjusted Cash Flow (US$M)
Net Debt/Cap
-91%
-79%
-68%
-64%
-90%
-74%
-54%
-21%
-6%
Shares Outstanding (000)
100266
98218
97714
94821
94329
78537
77791
77791
77791
Net Debt (Year End) (US$M)
-75.77
-70.71
-69.68
-75.36
-103.30
-86.97
-71.55
-38.61
-13.66
92
Company Comment
(REF.UN-T C$48.11)
Target 1-Yr:
C$51.50
ROR 1-Yr:
10.7%
Key Risks to Target: Mezzanine loan exposure with Hopewell, new supply pressures in key markets .
CDPU (NTM)
CDPU (Curr.)
Yield (Curr.)
$1.78
$1.75
3.6%
Event
■ REF reported Q3/14 FFOPU of $0.74 vs. $0.72 last year, in line with
our $0.75 estimate and consensus ($0.74).
Pertinent Revisions
New
Old
Implications
■ Despite Q3’s hiccup, expect retail and industrial SP NOI to outpace
office. Internal growth squeezed out a modest +0.6% YOY as strength
from retail more than offset flat industrial and weak office. We expect
2015 will be a transitional year as office vacancies are backfilled (albeit
with still slightly positive SP NOI), followed by a stronger 2016.
■ Gaining access to centre-ice mixed use play, while managing risk
(it’s the CREIT way!). In our view, the $120M financing provided to
Mizrahi Developments and partners to partially fund a mixed-use
retail/residential development at Yonge/Bloor allows REF to puts its
balance sheet capacity to work in a sought after urban site with a decent
near term return and an option to participate in further possible upside.
■ Growth profile improves. Our estimate revisions mostly reflect lower
net interest expense. Our 2014E-16E AFFO CAGR is up 90bp to 4.8%,
ahead of its diversified peers (3.8%) and our overall universe (5.5%).
$51.50
$2.96
$3.10
$3.23
$51.00
$2.97
$3.07
$3.20
Target:
1-Yr
FFOPU14E
FFOPU15E
FFOPU16E
Recommendation
■ SO, target bumped to $51.50. We believe REF’s premium valuation
(17.4x 2015E AFFO/5.8% implied cap) is well-supported by its top shelf
quality and strong position amid prospects of higher rates. With capacity
for distribution hikes, low leverage, and better growth, we believe its riskreward profile remains attractive and recommend building positions.
Qtly FFOPU (FD)
2013A
2014E
2015E
2016E
Q1
$0.68 A
$0.73 A
$0.76
$0.80
(FY-Dec.)
Funds from Ops/Unit
Price/AFFO
EV/EBITDA
EBITDA Margin
EBITDA/Int. Exp
AFFO Payout Ratio
Q2
$0.71 A
$0.74 A
$0.77
$0.81
Q3
$0.72 A
$0.74 A
$0.78
$0.82
Q4
$0.72 A
$0.75
$0.79
$0.81
Year
$2.84
$2.96
$3.10
$3.23
P/FFO
15.3x
16.3x
15.5x
14.9x
2012A
$2.62
$2.33
18.6x
19.8x
63.6%
3.9x
63.3%
2013A
$2.84
$2.51
17.3x
19.0x
63.8%
3.6x
64.0%
2014E
$2.96
$2.64
18.2x
20.3x
63.7%
3.8x
66.0%
2015E
$3.10
$2.77
17.4x
19.9x
63.7%
4.2x
64.8%
2016E
$3.23
$2.90
16.6x
18.6x
63.7%
4.0x
64.2%
BVPU14E: $24.50
Cap Rate: 6.15%
NAVPU:
NAV
Prem/(Disc):
$44.15
8.97%
Capitalization
Market Cap (M)
Units O/S (M)
Float O/S (M)
$3,339
$2,067
$5,406
69
69
93
PEG Ratio*
5.5%
Oct-14
3.8%
Apr-14
Oct-13
REIT Sector
Apr-13
4.8%
6.6%
Oct-12
Apr-12
2015E AFFO Payout
Ratio
*PEG ratio = (2015E P/AFFO) / (2014E-16E AFFO CAGR)
**Diversified REITs incl. AX, ACR, CUF, HR, MRT
Diversified REITs**
7.1%
Oct-11
CREIT
5.8%
Net Debt/EBITDA
(2014E)
Apr-11
Oct-10
Apr-10
REIT Sector
Diversified REITs**
Oct-09
-2.8%
-11.2%
Apr-09
Oct-08
CREIT
Apr-08
Oct-07
REIT Sector
Apr-07
9.0%
14.0x
Apr-06
Oct-05
Oct-06
Diversifieds
0
CREIT
Apr-05
12.1x
17.4x
21.6x
Growth Gets a Boost as Balance Sheet Capacity Put to Work; Premium
Valuation is Well-Supported by Top Shelf Quality
■ Maintaining Sector Outperform, target price bumped to
$51.50 (+$0.50). Although the flat SP NOI delivery from Exhibit 1 – Trading at a Premium Valuation Relative to Peers
industrial was somewhat surprising (and likely temporary),
CREIT
REIT Sector
Q3 results were for the most part as expected. We expect the
Diversified
U.S. REITs
benefits of REF’s diversified strategy will continue to play
out as anticipated momentum from the retail and industrial
portfolios should outweigh weak organic growth from office,
with stronger overall SP NOI growth on deck for 2016.
Moreover, the recent debt investment in the potential mixeduse development at Yonge/Bloor highlights the benefits of
REF’s low leverage. With limited attractive acquisition
opportunities, REF was able to put its balance sheet capacity
P/AFFO (2015E) Prem/(Disc.) to Implied Cap Rate
AFFO CAGR
to work in a property at centre ice with an option to
NAV
(2014E-16E)
participate in additional longer-term value creation should the
economics prove compelling, while simultaneously managing Source: Company reports; Scotiabank GBM estimates.
risk. Our estimates and target price moved up as a result, with
our 2014E-16E AFFO CAGR improving to 4.8% (+90bp),
ahead of its diversified peers (3.8%) and moving closer to the Exhibit 2 – REF’s Premium Valuation Remains Warranted in Our View
sector (5.5%). Moreover, the continued growth of its
Implied Cap Rate
CREIT P/AFFO
25.0x
development pipeline provides an attractive source of mid-to 7% CREIT
Current / Avg. = 5.8% / 6.6%
Current (15E) / Avg. = 17.4x/15.0x
Spread to Sector
longer-term AFFO and NAV growth. Coupled with low 6% Spread to GOC 10 Yr = 3.8%
Current/Avg. = 3.4x / 0.8x
Average Spread = 3.5%
20.0x
leverage and a payout ratio that continues to afford significant
capacity for distribution growth, we believe REF’s well 5%
positioned amid prospects of a higher rate environment. The
15.0x
units are trading at 17.4x 2015E AFFO/5.8% implied cap 4%
rate/9% above NAV (Exhibit 4), with its premium to the 3%
10.0x
sector above historical levels (Exhibits 1-2). That said, we
CREIT P/AFFO (RS)
believe the premium is well supported by it top shelf 2%
Sector P/AFFO (RS)
attributes. We also continue to flag its PEG ratio which
5.0x
1%
REF - Implied Cap Rate Spread to GOC
remains in line with the sector, but with less relative risk
10-Yr (LS)
given its below average leverage and payout ratio (Exhibit 3). 0%
Despite a strong YTD run (10.9% vs. 6% for RTRE), we
believe its risk/reward profile remains attractive and
recommend investors build positions.
■ Senior ranks of Canadian REITs continue to realign as
CREIT CFO appointed as new President and COO (it’s a
good time to be a CFO!). REF announced the appointment Exhibit 3 – On Risk-Adjusted Basis, CREIT Remains Attractively Valued
of Rael Diamond to President & COO effective Jan. 1/15.
Stephen Johnson will remain as the REIT’s CEO. Mr. 10 CREIT: PEG ratio is below diversified peers and in line
REIT sector, but with
Diamond has served as REF’s CFO since April 2013 and 9 with
84% 84%
8.2x 8.3x
less risk given its
joined the REIT in 2012 with prior experience at Brookfield 8 lower leverage
7.6x
Asset Management (incl. Rouse Properties and Brookfield
and payout
65%
Office Properties Canada). The search for a new CFO has 7 ratio.
commenced. The announcement follows Adam Paul’s (EVP, 6
4.5
Investments & Leasing) pending departure to First Capital 5
3.6
Realty where he was appointed as President & CEO last 4
3.4
week. Given the strength of REF’s overall team, we don’t 3
expect a material shift in near-term strategy or disruptions to
operations as management realigns for the next stage of its 2
1
evolution.
94
Despite Q3 Hiccup, Strength in Retail and Industrial SP NOI Should
Continue to Offset Office; Look for a Stronger 2016 Delivery
■ Internal growth ekes out modest gain; expect a subdued
2015, with stronger 2016 recovery. Cash SP NOI rose 0.6% Exhibit 4 – CREIT NAVPU Summary
YOY (Exhibits 5,7) as strength in retail (+1.8% YOY) offset a Adjusted NTM NOI ($000s)
285,592
285,592
285,592
surprisingly soft industrial delivery (-0.4%) and expected NOI Capitalization Rate
5.90%
6.15%
6.40%
weakness in office (-0.7% or -4.1% adjusted for one-time Q3/13
Value Range
charge). Occupancy remained steady sequentially at 95.3% Assets
4,840,542
4,643,772
4,462,374
(+10bp QOQ, -80bp YOY), with office at 92.9% (+180bp, - Income properties
Other
assets
634,808
634,808
634,808
80bp), retail at 97% (+40bp, -30bp), and industrial at 94.3% (5,475,349
5,278,579
5,097,182
90bp, -140bp). Retail SP NOI rose from higher rents on releasing and renewals along with favourable F/X moves, with Liabilities
debt
2,098,940
2,098,940
2,098,940
industrial down due to increased vacancy in ON and Atlantic Long-term
Other debt
115,285
115,285
115,285
CDA (Liquidation World’s CDN exit). However, the largest
2,214,225
2,214,225
2,214,225
vacancy (113K sf at 6956 Columbus Rd, Mississauga, ON; 0.5%
3,261,124
3,064,354
2,882,957
of GLA) was re-leased in Q4 and should provide a boost to Estimated net asset value
results ahead, coupled with another 100bp of leasing in retail Estimated NAVPU
$46.98
$44.15
$41.53
post quarter end. Overall, retail and industrial demand remain
Current
Unit
Price
$48.11
$48.11
$48.11
strong across the portfolio. Office, however, remains challenged
and will likely stay weak through 2015. Leasing velocity in Premium/(Discount) to NAV
2.4%
9.0%
15.8%
REF’s Calgary and Halifax office portfolios remains slow, Current implied cap rate
na
5.8%
na
particularly amid new supply and the significant drop in oil
prices. Indeed, Q3 marked the first time since 2011 that Source: Company reports; Scotiabank GBM estimates.
Central/Eastern CDN SP NOI (+0.7% YOY) outpaced W. CDA
(+0.1%). The REIT continues to chip away at re-leasing ~28.5K
sf of vacancy (at REF’s 50% interest) at Calgary Place (CP; Exhibit 5 – Operating Stats Summary: Fundamentals Steady
currently 89% occupied) of which 12K sf relates to Shell
Change (bp)
Q3/14 Q2/14 Q3/13
QOQ YOY
Canada’s non-renewal in 2H/13. As a reminder, Harvest
Operations’ lease (62.5K sf at REF’s 50% interest; ~$23.25/sf Occupancy
Overall
95.3% 95.2% 96.1%
10
-80
net rent, $40 gross/sf or ~$0.04/unit) at CP expires in Feb. 2015,
Retail
97.0% 96.6% 97.3%
40
-30
for which we estimate about a year of downtime. Bottom line,
Industrial
94.3% 95.2% 95.7%
-90
-140
Office
92.9% 91.1% 93.7%
180
-80
we expect relatively modest SP NOI growth in 2015 (+0.3%) as
strength in retail and industrial should continue offsetting the
Mix
drag from office. Stronger growth should surface in 2016 as Portfolio
Retail
54% 55% 55%
-66
-64
office vacancies are re-leased.
Industrial
22% 22% 21%
16
56
Office
24%
23%
24%
50
8
Entering Mixed-Use Arena While Managing Risks
SP NOI (cash basis)
YOY YTD
(it’s the CREIT Way!); Creating Value through
Overall
0.6% 1.1% Incr. rents offsetting incr. vac.
Retail
1.8% 2.1% Incr. rents and leasing activity
Developments with $50M-$75M Annual Deliveries
Industrial
-0.4% 1.4% Incr. vac. in ON & Atl. CDA
■ Stepping into the mixed-use development arena at
Office
-0.7% -1.0% Incr. vac. in AB & Atl. CDA
Yonge/Bloor while simultaneously managing risk. In October,
REF provided $120M of financing (6% rate, due Oct. 2016) to
27.1% (% of GLA)
an entity comprised of Mizrahi Developments and partners to Lease Maturities to Q4/16
partially fund the purchase of lands at the southwest corner of Source: Company reports; Scotiabank GBM estimates.
Yonge/Bloor in Toronto. The redevelopment envisions a large,
mixed-use complex with multi-level luxury retail and residential. REF funded
the loan from its credit lines and has the option to convert its financing into a Exhibit 6 – 100 Disco Road, Toronto ON
55% equity stake in the property. The site is expected to be developed with a
focus on high end retail first and residential second, with discussions underway
with international retailers. The project is in preliminary stages with the next
two years focused on site assembly, design, approvals, and leasing, with
construction likely still a few years away. REF also agreed to make $50M of
mezzanine financing available to assist with the acquisition of various
surrounding parcels. In our view, the investment provides REF a means to
participate in a potential centre-ice, mixed-use project with an experienced
developer, while managing its risk with a secured debt investment (via first
mortgage charge on the property with additional guarantees) at a decent spread
Source: Company website.
95
16.0%
2%
5.6%
10%
-1.0%
-4.4%
1%
3.8%
-1.2%
-6.1%
9%
10%
29%
39%
to its cost of funds (~3%). As well, the conversion feature
provides an option to participate in additional value creation Exhibit 7 – Central / E.CDA Outpaced W.CDA for the First Time Since 2011
upside, should the economics become more compelling.
Overall, we view the investment as modest (3% of assets),
but allows REF to put some of its balance sheet capacity to
Q3/14 YOY
work in a highly sought after Canadian urban location with a
Cash
decent near-term return.
SP NOI
Growth
% of portfolio
■ Development pipeline continues to expand; expect
Cash SP NOI
completions to accelerate in Q4. The pipeline grew to
$588M (Exhibit 8), up 9% from $540M in Q2, with the
increase partly attributable to the acquisition of the remaining
50% interest in Great Plains Business Park-Building A for
$23M (100% leased to Canadian Tire) from Hopewell. The
22 projects stand to add 3.4M sf (16%) to GLA over the next
five years with yields in the 6.5%-8% range providing an
attractive source of AFFO and NAV growth. Amounts spent
to date total $261M (7% of assets) with $326M still to be
incurred. Transfers to IPP in Q3 were modest at $8M ($17M
Atlantic
QC
ON
Prairies
AB
BC
US
YTD), but should pick-up in Q4 with the completion of
Building A noted above and others (we estimate $70M of Q3/14 Regional Highlights: Higher retail rents achieved on re-leasing
renewals in BC along with increased retail leasing activity in the U.S.
2014 completions). With 70% of the 1.1M sf under active and
portfolio. Increased leasing activity was also seen in Alberta industrial.
development pre-leased ($174M cost), we expect $75M of These gains were offset by industrial vacancies in Atlantic Canada and
Ontario and persistent office vacancies in Atlantic Canada and Alberta.
annual completions in 2015-16.
■ Not much happening in acquisitions; opportunistic deals Source: Company reports; Scotiabank GBM estimates.
could create upside to our estimates. In Aug., REF
completed its only YTD IPP
purchase, a $29M (5.7% cap rate, Exhibit 8 – Development Pipeline Provides an Incremental Value Creation Channel
$111/sf), 261K sf industrial property
Building Area (sq. ft.) at REF's interest
Investment ($000's) at REF's interest
Under development
at 100 Disco Road in Toronto
Not
Planned
(Exhibit 6). With management’s
Commit'd Commit'd Future
invest.
focus on developments, we expect
Project
Prov.
Lease
Lease
Dev.
Total
To-date
under dev. Future
Total
deal flow will remain muted with
Retail
AB
25,842
2,509
14,612
42,963
7,051
5,250
3,174
15,475
our 2015-16 assumed purchases at a 1 Sunwapta
AB
TBD
TBD
6,421
275
TBD
6,696
modest $100M annually (6.5%- 2 Sunwapta West
Ridge Commons
ON
4,105
4,247
8,352
1,426
687
311
2,424
6.75% cap rates). A more aggressive 34 Credit
South Edmonton Common
AB
77,500
24,465
101,965
11,348
687
3,899
15,934
approach could yield upside to our 5 Cornerstone
SK
69,500
69,500
246
13,855
14,101
SK
1,374
5,500
6,874
603
25
885
1,513
estimates, with every $100M 6 Carlton Spur
NS
8,565
52,500
61,065
3,047
1,494
14,333
18,874
translating to ~$0.02 of AFFOPU 7 Dartmouth Crossing
8 201 Earl Stewart Drive
ON
32,500
5,650
38,150
5,274
5,916
11,190
(+1% to our 2015E; Exhibit 9).
9 Oak Ridges (13265 Yonge St.)
ON
11,686
3,141
5,500
20,327
7,367
679
568
8,614
AB
104,250
104,250
8,446
608
33,365
42,419
■ Balance sheet remains sound, 10 Mahogany Retail Centre
Oshawa retail lands Phase I
ON
16,065
26,324
60,993
103,382
15,332
3,648
12,402
31,382
minimal need for equity. Leverage 11
12 930 Erb Street West
ON
30,300
30,300
7,080
875
2,405
10,360
remains healthy with our 2014E net 13 MacKenzie Commons
ON
225,000
225,000
46,868
250
20,747
67,865
debt/EBITDA at 7.6x (below 8.4x 14 42 & 46 Overlea Blvd.
ON
75,000
75,000
11,926
3,800
15,726
AB
11,865
13,830
144,305
170,000
13,035
8,194
22,800
44,029
sector average) and debt/NAV assets 15 Erin Ridge Retail Lands
Strathcona Lands
AB
9,074
TBD
TBD
9,074
at 40%. We expect the $120M loan 16
17 Bovaird West Retail Lands
ON
208,000
208,000
15,670
2,502
26,028
44,200
noted above to increase leverage in 18 Other intensification
nm
nm
nm
nm
5,876
nm
nm
5,876
2015 (Exhibit 10) but anticipate a
Subtotal Retail
254,563
61,393
949,172 1,265,128
176,090
34,890
154,772
365,752
Retail as % of total
32%
18%
42%
37%
67%
57%
58%
62%
decline in 2016 due to high retained
cash. The increase in our leverage is 19 Industrial
Horizon Business Park
AB
89,126
135,280
347,083
571,489
19,779
13,228
33,310
66,317
partly due to our exclusion of 20 Great Plains Business Park
AB
454,977 138,705
258,908
852,590
51,772
12,161
32,710
96,643
interest income from EBITDA, 21 Milton Distribution Centre
ON
162,832
162,832
3,071
9,032
12,103
ON
565,701
565,701
10,643
915
35,408
46,966
whereas NOI from acquisitions is 22 Milton II - 8645 Hwy 25
Subtotal Industrial
544,103 273,985 1,334,524 2,152,612
85,265
26,304
110,460
222,029
included; including interest income
Industrial as % of total
68%
82%
58%
63%
33%
43%
42%
38%
would reduce our 2015E net Total
798,666 335,378 2,283,696 3,417,740
261,355
61,194
265,232
587,781
debt/EBITDA to 7.4x from 8x. % of total
23%
10%
67%
100%
44%
10%
45%
100%
Liquidity is ample with $168M
available from cash and lines (line Source: Company reports; Scotiabank GBM estimates.
capacity was increased by $100M in
96
Q3/14 Recap: Results as Expected, Modest YOY
Growth
■ Net-net, results in line. REF reported Q3 FFOPU of $0.74
vs. $0.72 last year, in line with our $0.75 estimate and
consensus ($0.74). The -$0.01/unit variance to our call was in
NOI, but was partly due to slower-than-forecast completed
developments. YOY FFOPU growth was driven by
acquisitions, completed developments, modestly higher SP
NOI, and higher mezz loan interest income.
Assumed Cap Rate
October). With ~$60M of annual retained free cash flow
(~$90M incl. the DRIP), an equity raise through our forecast Exhibit 9 – AFFOPU Sensitivity to Acquisitions: More Active Capital
Deployment Could Yield Upside to Estimates
period appears unlikely.
0
5.00%
5.50%
6.00%
6.50%
7.00%
7.50%
8.00%
8.50%
9.00%
9.50%
100,000
0.005
0.012
0.019
0.025
0.032
0.039
0.045
0.052
0.059
0.065
Assumed Acquisitions/Developments ($000s)
200,000
300,000
400,000
500,000
600,000
0.011
0.016
0.021
0.026
0.032
0.024
0.036
0.048
0.060
0.072
0.037
0.056
0.074
0.093
0.112
0.051
0.076
0.101
0.126
0.152
0.064
0.096
0.128
0.160
0.192
0.077
0.116
0.154
0.193
0.232
0.091
0.136
0.181
0.226
0.272
0.104
0.156
0.208
0.260
0.312
0.117
0.176
0.234
0.293
0.352
0.131
0.196
0.261
0.326
0.392
Assumptions:
1. Acquisitions funded 100% debt (@ 4.25%) given balance sheet capacity.
2. Blue highlights are potential upside from acquisitions; green is potential
upside from developments.
Exhibit 10 – Forecast Summary, Variance Analysis, Leverage Snapshot
Forecasts
2006
2007
2008
2009
2010
2011
2012
2013
2014E
2015E
2016E
FFOPU
AFFOPU
Distributions
AFFO payout ratio
1.93
1.66
1.29
78%
2.11
1.84
1.32
71%
2.27
2.01
1.35
67%
2.31
2.03
1.36
67%
2.36
2.09
1.40
67%
2.36
2.13
1.43
67%
2.62
2.33
1.47
63%
2.84
2.51
1.61
64%
2.96
2.64
1.74
66%
3.10
2.77
1.80
65%
3.23
2.90
1.86
64%
Valuation
P/FFOPU
P/AFFOPU
EV/EBITDA
Distribution yield
AFFO yield
13.2x
15.3x
15.3x
5.2%
6.5%
13.7x
15.6x
15.7x
4.4%
6.4%
11.7x
13.3x
14.8x
5.0%
7.5%
10.5x
11.9x
14.1x
5.9%
8.4%
12.5x
14.0x
15.3x
4.8%
7.2%
14.2x
15.8x
16.5x
4.2%
6.3%
15.1x
17.0x
18.0x
3.7%
5.9%
15.0x
16.9x
18.5x
3.7%
5.9%
16.3x
18.2x
19.7x
3.8%
5.5%
15.5x
17.4x
19.5x
3.7%
5.8%
14.9x
16.6x
18.6x
3.9%
6.0%
$44.15
6.2%
9.0%
5.8%
260
164
162
63%
62%
278
178
175
64%
63%
430
277
274
64%
64%
449
289
286
64%
64%
Income Statement ($ millions)
Revenues
EBITDA
NOI margin
EBITDA margin
Balance Sheet ($ millions)
Total assets
Net debt
Leverage
Net debt/EV
Debt/GBV
Net Debt/EBITDA
ND/EBITDA (w/interest inc.)
EBITDA/net interest
1,805
1,127
38%
58%
6.6x
6.2x
3.4x
1,980
1,195
40%
55%
6.5x
6.0x
3.6x
307
199
196
65%
64%
2,196
1,398
50%
58%
6.7x
6.3x
3.4x
315
206
203
65%
64%
2,159
1,238
41%
52%
6.6x
6.1x
3.6x
315
208
204
66%
65%
2,165
1,222
37%
50%
6.1x
5.7x
3.8x
339
219
215
64%
64%
3,301
1,498
39%
43%
6.3x
6.0x
3.8x
379
244
241
64%
64%
3,654
1,817
38%
46%
7.1x
6.7x
3.9x
414
267
264
65%
64%
3,879
2,026
4,055
2,219
4,165
2,320
482
310
307
64%
64%
4,154
2,294
40%
48%
7.5x
7.1x
3.6x
40%
49%
7.6x
7.1x
3.8x
41%
49%
8.0x
7.4x
4.2x
40%
47%
7.7x
7.2x
4.0x
Condensed Quarterly
Q3/14A
Q3/13A
Revenue
Operating expenses
NOI
NOI margin
105,827
36,689
69,138
65.3%
103,565
35,218
68,347
66.0%
2.2%
4.2%
1.2%
(66)
105,888
36,008
69,880
66.0%
(0.001)
0.010
(0.011)
(66)
% of revenue
EBITDA
EBITDA margin
667
0.6%
68,471
64.7%
806
0.8%
67,541
65.2%
(17.2%)
(15)
1.4%
(52)
847
0.8%
69,033
65.2%
(0.003)
(17)
(0.008)
(49)
Amortization
Equity accounted (income)/loss
Acqn. costs/FV loss on int. rate swap
(Gain)/loss on dispositions
F/X translation (gain)/loss
Current income taxes
Future income taxes
Net income/(loss)
18,443
28,427
722
721
(37)
168
(38)
20,065
18,952
28,286
133
27
20,143
(2.7%)
nm
nm
nm
nm
nm
26.3%
nm
nm
17,041
26,920
268
24,803
0.020
nm
nm
nm
nm
nm
(0.001)
nm
nm
FFO adjustments:
Amortization
Future income tax expense
Discontinued operations
F/X translation (gain)/loss
(Gain)/loss on dispositions
Property acquisition costs
Notional interest capitalization
Non-recurring/unusual items
FFO
FFOPU - FD
28,427
(38)
(37)
721
722
1,314
51,174
0.738
28,286
27
1,047
49,503
0.723
nm
nm
nm
nm
nm
nm
nm
nm
3.4%
2.1%
26,920
51,724
0.746
nm
nm
nm
nm
nm
nm
nm
nm
nm
(0.008)
% chg
Scotia
Q3/14E
2007
2008
2009
2010
2011
2012
2013
2014E
2015E
2016E
Q3/14
Acquisitions
Assumed cap rate
Completed Developments
Assumed cap rate
G&A expenses
% of revenues
Maintenance capex
% of revenues
Leasing costs
% of revenues
2.7%
235.8
na
na
na
2.6
0.9%
2.7
1.0%
8.8
3.2%
1.5%
244.8
na
na
na
2.7
0.9%
3.0
1.0%
9.7
3.2%
1.0%
57.2
7.8%
na
na
3.1
1.0%
3.1
1.0%
9.9
3.1%
-0.6%
27.5
7.3%
na
na
3.9
1.2%
3.1
1.0%
9.8
3.1%
0.4%
236.2
6.0%
37.2
8.5%
3.3
1.0%
3.2
0.9%
10.1
3.0%
1.4%
334.3
6.2%
22.9
8.5%
3.2
0.8%
7.6
2.0%
10.7
2.8%
1.7%
199.1
6.5%
71.9
7.2%
3.4
0.8%
8.9
2.1%
12.1
2.9%
0.5%
29.1
5.8%
67.2
6.8%
3.2
0.7%
9.0
2.1%
12.3
2.9%
0.3%
100.0
6.5%
75.0
7.5%
3.3
0.7%
9.4
2.1%
12.8
2.8%
1.9%
100.0
6.8%
75.0
7.5%
3.6
0.7%
9.8
2.0%
13.4
2.8%
Debt/GBV
Max limit
Net debt /EV
Net debt /NAV assets
47.6%
60.0%
38.2%
40.1%
Liquidity ($000s)
Undrawn amounts
Cash on hand
Available liquidity
Mortgage Profile
% due pre-2017
28.3%
4.6%
6.0
4.50%
5.00%
2014E issuance
2014E timing
2015E issuance
2015E timing
Variance
per unit
Q3/14
200,000
137,829
30,581
168,410
n/a
n/a
97
Company Comment
Friday, November 7, 2014, Pre-Market
(CTC.A-T C$124.75)
patricia.baker@scotiabank.com
Risk Ranking: Low
Target 1-Yr:
Jean Marc Ayas - (514) 287-3626
jeanmarc.ayas@scotiabank.com
C$128.00
ROR 1-Yr:
4.2%
Valuation: NAV
Key Risks to Target: Higher than expected Discret. Spend, Unexpected improvement in Unemployment; Improvement in net write -off rate
Event
■ CTC.A delivered a Q3 beat on EPS of $2.17 (consensus at $1.99). The
beat itself is owed to top line momentum, lower finance costs, a lower
share count, a lower tax rate (added about 9 cents) and substantial gains
in Financial Services (+22.9% pre-tax income).
Implications
■ CTC's strong marketing efforts and added spend to support its retail
business boosted consolidated Retail sales +4.4% YOY, with CTR SSS
+3.2%, FGL +8.5%, and Mark's +6.8%. Gross margin $ +6.0%, largely
on higher shipments to CTR and revenue from strong sales trends.
■ SG&A was higher 4.5%, but reasonably in line with retail sales and
revenue growth. Operating expenses were higher on rising personnel
costs and on strategic spending to support the businesses.
■ Although Retail saw good sales growth, EBITDA declined 11.9% with
margins 120 bps lower at 7.3%.
■ CTC made progress on its goal to achieve a 9% ROIC by F2017-end,
with ROIC up 33 bps to 7.81% on a rolling 12-month basis.
■ The company raised its dividend by 5% to 52.5 cents.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$2.05
$1.73
1.4%
Pertinent Revisions
New
Target:
1-Yr
EPS14E
EPS15E
$128.00
$7.75
$8.11
Old
$125.00
$7.44
$7.82
Recommendation
■ Our model adjusts to reflect changes in our forward assumptions on
sales, driving new EPS of $7.75 in F2014E and $8.11 in F2015E. Our
target adjusts slightly to $128. CTC now trades at a P/E of 15.4x and an
EV/ EBITDA of 7.7x, in our view fairly valued in the context of
comparable retail players.
Qtly EPS (FD)
2012A
2013A
2014E
2015E
(FY-Dec.)
Earnings/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q1
$0.87 A
$0.90 A
$0.88 A
$0.79
Q2
$1.84 A
$1.92 A
$2.12 A
$2.20
Q3
$1.61 A
$1.86 A
$2.17 A
$2.21
Q4
$2.14 A
$2.35 A
$2.58
$2.91
Year
$6.46
$7.03
$7.75
$8.11
P/E
10.7x
14.1x
16.1x
15.4x
2011A
$5.53
11.9x
0.8x
$10,387
$1,067
1.7x
7.9x
2012A
$6.46
10.7x
0.6x
$11,427
$1,156
1.7x
9.2x
2013A
$7.03
14.1x
0.5x
$11,786
$1,247
1.8x
11.8x
2014E
$7.75
16.1x
0.6x
$12,477
$1,363
1.7x
12.5x
2015E
$8.11
15.4x
0.6x
$12,512
$1,406
1.7x
18.3x
BVPS14E: $80.37
ROE14E: 10.51%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$9,744
$1,866
$11,898
All values in C$ unless otherwise indicated. ^ Non-Voting
78
71
98
Good Retail Momentum, But Growth in Financial Services Real Highlight
■ Again CTC’s quarterly results showed that CTFS can ably put up numbers on the board.
Q3 performance at CTFS saw pre-tax income up 22.9%. In fact, the overall performance
improvement YOY in Q3 is owed to the solid results in this segment. Although the company
did point to certain tailwinds that helped, clearly this steady performance can be attributed to
a strong operating business. In the quarter, revenue grew 5.8% YOY on the back of increases
in both average number of accounts (+4.0% YOY) and average account balance (+3.0%
YOY). Additionally, gross receivables increased 7.1%, while the allowance rate dropped,
slightly offset by higher write-offs.
■ The hero for Q3 was undoubtedly the top line, as FGL led the Retail parade with sales
growth of 13.0% YOY. System-wide sales rose 4.4% YOY, while revenues advanced 3.9%
YOY. Each of the three banners delivered very strong comp-store performance in the quarter,
with Canadian Tire SSS growth at 3.2% (on top of 2.0% in the prior year), Mark’s SSS
growth at 6.8% (on top of 4.3%) and FGL Sports SSS growth at 8.5% (on top of an alreadystrong 6.3%).
Exhibit 1 - Retail Banner Performance
Retail Banner
Canadian Tire
FGL Sports
Mark's
SSS growth
Q3/F14
Q3/F13
3.2%
2.0%
8.5%
6.3%
6.8%
4.3%
Sales per sq.ft
Q3/F14
Q3/F13
growth
$391
$387
1.0%
$284
$275
3.3%
$329
$317
3.8%
Source: Company reports.
■ The higher sales in Q3 across the board reflect a positive response from Canadian
consumers to the resonant marketing campaigns underway in each of the banners. In our
view as well, the top-line momentum is driven by an overall strengthening of the brand and
how it now "speaks" to its redefined target segments. Along with this have come some
changes in assortment and in-store merchandising to better support the marketing effort and
more clearly address the segments. These efforts certainly delivered in Q3 as CTC’s Retail
division top-line results can attest.
■ There is no doubt, regardless of slight improvements in the economy, that the retail
landscape in Canada remains competitive and promotional. That is something we don't
expect to shift any time soon and CTC needs to remain mindful of this across its entire
business. We believe they are. Although the retail gross margin was up 17 bps in the third
quarter, it actually saw a decline of 22 bps when excluding the contribution from Petroleum,
indicating a competitive retail environment. In the context of the current landscape, CTC is
working hard to drive a better balance vis-à-vis margin and spend in order to ensure a positive
top-line trend. We have said for some time that driving a better top line will require a different
operating model than what has been effective in the past. While marketing needs to earn its
keep, CTC needs to maintain in each business an elevated mind share and emotional share with
Canadians, and that means a higher spend. Similarly, operating expenses at store level with
respect to service and expert advice for customers has new requirements. In our view, the
11.9% YOY decline in Retail EBITDA during Q3 in part reflects operating to this new reality.
■ ‎Third-quarter bottom-line EPS of $2.17 handily beat Street consensus, and the beat
essentially is owed to a superb performance in Financial Services, combined with lower
financing costs, a dramatically lower YOY tax rate and the cumulative impact of the
company's NCIB. On a consolidated basis, EBITDA rose 10.2%, or $32.6M. As mentioned,
the core CTR operations did not contribute to the improved YOY performance; and,
notwithstanding our assertions above with regards to a new operating reality, we suspect
investors eventually will be looking towards delivery of better YOY profitability.
■ CTC has done a superb job of delivering wealth to shareholders by way of unlocking
inherent value in its real estate assets (CT REIT creation) and in its financial services
subsidiary (partnership with Scotiabank). From our perspective, this value-creation exercise,
99
although well executed, is now complete. The task at hand under Michael Medline is to drive
a more productive retail operation and, in so doing, deliver enhanced cash flow and earnings.
On this he and the shares will be judged, in our opinion. There is no doubt early signs (and
commitment) are good, though it is a journey that will unfold over many quarters.
Changed Guard, Added Insight
■ Incoming CEO Michael Medline provided further insight into his way of looking at and
measuring the business. His approach hints at an emphasis on retail productivity that we
selfishly believe aligns with our view on what is needed and what investors eventually will look
for and reward. According to Medline, his assessment of quarterly performance starts with the
determination of whether the business is working towards a proper price/promotion balance, as
well as top-line and margin management. Second, he looks at whether the creative marketing
employed across the banners is actually delivering the customers. As noted, marketing is an
imperative but it must "earn". CTC prides itself on being a seasonal retailer; as such, it must
work to win in each season. This is simply measurable in the throughput of seasonal categories
and indeed in the success of innovation employed to drive the same. This is an area to be
watched closely. Medline's final metric is on costs and whether the teams are managing
expenses efficiently in the context of having to spend and invest in order to grow.
■ As to the last measure, we note that Q3 SG&A rose 4.5%. Importantly, this was maintained
within the level of revenue and system sale growth (3.9% and 4.4% respectively). On a rate
to sales basis, however, operating expenses rose 16 bps to 23.7% of sales. However given
that Q3 is a smaller sales quarter, this is not necessarily the best way to look at expense
management and can be misleading. To better frame the rise in SG&A, the components
impacting Q3 all look to be necessary to support growth and will be ongoing:
■ Higher personnel costs due to a greater number of corporate stores at FGL Sports and
PartSource, higher share-based compensation expenses from share price appreciation,
and increased supply chain labour costs to support higher shipments at Canadian Tire;
■ Higher costs to support strategic and operational initiatives including marketing and
digital initiatives;
■ Higher D&A expense due to banner network expansion projects and capital spending
on IT initiatives; and
■ Higher occupancy costs due to new corporate stores in the network.
A Strategic and Likely Lucrative Partnership
■ On October 1, 2014, CTC completed a strategic partnership with Scotiabank,1 which
acquired a 20% interest in the company’s‎ financial‎ services‎ business for net proceeds of
$479M. The transaction agreement includes a credit card funding facility from Scotiabank of
up to $2.25B and an option to sell an additional 29% of the business to Scotiabank within 10
years at the then fair market value. The agreement also includes an option for Scotiabank to
sell its shares back to CTC after 10 years at fair market value.
■ The partnership also provides CTC with a partner to help drive new business through joint
marketing. The two companies will use exclusive offers to tap into each other’s respective
customer base, while providing more value to loyal consumers.
■ Our discussions with CTC prior to the announced partnership around their expectations of
what would comprise an ideal partnership revealed some specific goals. CTC indicated the
right partnership would provide the corporation with reduced financing risk and lower credit
risk. The company was also looking to remove complexity from the balance sheet. Clearly
the Scotiabank deal does deliver on the first two, particularly in light of the backstop
financing agreement. Although, in our view, the transaction does not make the balance sheet
less complex, there is the added gain here of some interesting joint marketing possibilities
that could see enhanced growth in the future. As well, the cultural fit of the two organizations
and alignment of customers may perhaps provide added scope.
1
The Bank of Nova Scotia is the parent company and a related issuer of Scotia Capital Inc. and ultimate parent
company and related issuer of Scotia Capital (USA) Inc.
100
Aug-14
Feb-14
16.1x
May-14
Aug-13
Nov-13
Feb-13
May-13
Aug-12
Nov-12
Feb-12
May-12
Aug-11
Nov-11
Feb-11
May-11
Nov-10
Aug-10
Feb-10
May-10
Nov-09
CTC Target Price Moving to $128
■ Our F2014 and F2015 EPS forecasts adjust to $7.75 and
$8.11, reflecting a more constructive outlook on growth Exhibit 2 - Multiple Expansion Driven by Value Creation and Execution
across retail banners. Based on yesterday’s closing price of 17x
$124.75, CTC.A shares now discount a 15.4x multiple on
our F2015 EPS estimate. This compares favourably with the 16x
peer group average of 15.5x (see Exhibit 3).
15x
1-yr avg. = 14.1x
■ As evidenced in Exhibit 2, the valuation multiple on CTC.A
14x
shares has seen solid expansion over the past 18 months,
going from just under 11.0x in the spring of 2013 to more 13x
than 16x currently. This coincides with a series of solid
5-yr avg. = 11.7x
value-creation activities, including the creation of CT REIT 12x
and the Financial Services deal with Scotiabank. Recent 11x
improvements in execution have supported the current
higher valuation and we believe that only ongoing improved 10x
execution will sustain the valuation at these levels. To a 9x
degree, CTC.A shares appear to be discounting an assumed
8x
flawless execution to the F2017 goals and this might be a risk.
Source: FactSet; Scotiabank GBM.
Exhibit 3 - Mass Merchant & Auto Parts Dealer Comparables
Ticker
Rating Curr.
11/6/2014
Price
EPS (Calendar)
2013 2014E 2015E
P/E (Calendar)
EV/EBITDA (Calendar)
2013 2014E 2015E
2013 2014E 2015E
PEG
Div.
Yield
12/31/13
Close
Year-to-date
Performance
Canadian Tire Corporation
CTC.A-CA
SP
CAD
$124.75
7.03
7.75
8.11
17.7
16.1
15.4
9.4
8.0
7.7
2.4
1.6%
$99.49
25.4%
Sporting Goods Retailers
Big 5 Sporting Goods
Cabela's International
Dick's Sporting Goods
Finish Line
Foot Locker
Hibbett Sports
Sports Direct
Average
BGFV-US
CAB-US
DKS-US
FINL-US
FL-US
HIBB-US
SPD-GB
NR
NR
NR
NR
NR
NR
NR
USD
USD
USD
USD
USD
USD
GBP
$12.68
$49.70
$46.38
$27.05
$54.47
$45.88
£6.45
1.31
3.18
2.67
1.53
2.90
2.73
0.28
0.77
3.14
2.78
1.77
3.40
2.69
0.35
0.90
3.53
3.15
2.01
3.78
2.99
0.42
9.7
15.6
17.4
17.7
18.8
16.8
23.2
17.0
16.6
15.8
16.7
15.3
16.0
17.1
18.2
16.5
14.1
14.1
14.7
13.5
14.4
15.3
15.4
14.5
4.8
16.7
8.0
7.3
8.9
8.6
13.8
9.7
6.4
16.3
7.7
6.3
7.7
8.6
11.1
9.2
6.0
14.8
6.9
5.7
7.2
7.9
9.6
8.3
nm
2.9
2.0
1.2
1.3
nm
1.0
3.2%
nm
1.0%
1.2%
1.7%
nm
nm
1.8%
$19.82
$66.66
$58.10
$28.17
$41.44
$67.15
£7.15
-36.0%
-25.4%
-20.2%
-4.0%
31.4%
-31.7%
-9.8%
-13.7%
Home Improvement & General Merchandisers
Home Depot*
HD-US
NR
Lowe's*
LOW-US
NR
RONA
RON-CA
SP
Target*
TGT-US
NR
Wal-Mart Stores*
WMT-US
NR
Average
USD
USD
CAD
USD
USD
$97.29
$57.57
$13.90
$61.89
$77.81
3.85
2.20
0.41
3.28
5.01
4.44
2.59
0.71
3.20
5.01
5.14
3.09
0.98
3.74
5.26
25.3
26.2
33.9
18.9
15.5
24.0
21.9
22.2
19.6
19.4
15.5
19.7
18.9
18.6
14.2
16.6
14.8
16.6
13.2
11.6
10.1
8.4
8.4
10.3
12.0
10.7
8.1
8.6
8.3
9.5
11.0
9.8
7.0
7.8
8.2
8.8
1.6
1.4
0.6
2.8
nm
2.2%
1.6%
1.0%
3.3%
2.6%
2.1%
$82.34
$49.55
$13.21
$63.27
$78.69
18.2%
16.2%
5.2%
-2.2%
-1.1%
7.3%
Auto Parts Dealers
Advance Auto Parts
Autozone*
O'Reilly Automotive
Uni-Select
Average
USD
USD
USD
CAD
$145.56
$566.05
$179.61
$28.01
5.66
29.05
6.03
2.36
7.14
32.84
7.25
2.57
8.56
36.86
8.28
2.75
25.7
19.5
29.8
11.9
21.7
20.4
17.2
24.8
10.9
18.3
17.0
15.4
21.7
10.2
16.1
13.7
11.6
15.5
8.9
12.4
10.6
11.0
13.8
8.2
10.9
9.0
10.4
12.6
7.7
9.9
1.1
1.5
1.7
1.5
0.2%
nm
nm
2.1%
1.2%
$110.68
$477.94
$128.71
$28.73
31.5%
18.4%
39.5%
-2.5%
21.7%
AAP-US
AZO-US
ORLY-US
UNS-CA
NR
NR
NR
SO
na = not available, nm = not material/meaningful
*Indicates companies with non-calendar year-ends
Source: Company reports; FactSet; Scotiabank GBM estimates for CTC.A-CA (analyst: P. Baker) as well as RON-CA and UNS-CA (analyst: A. Zicha).
101
■ Our SOTP analysis (see Exhibit 4) yields a value and target price of $128. At the same
time, applying a 16.5x multiple, which is a slight premium to the comp group of general
merchants, sporting and automotive specialty players, implies a consistent valuation of $128.
Exhibit 4 - Sum-of-the-Parts Valuation
Retail Segm ent
Financial Services Segm ent
CT REIT Segm ent & Related RE
Consolidated
F15E EBITDA (M)
$724
F15E Net income (M)
$272
Class A&B units ow ned by CTC (M)
EV/EBITDA multiple
7.0x
Less: BNS' 20% equity interest (M)
($54)
CRT.un current market price
$11.70
$218
CT REIT investment MV (M)
$1,767
Enterprise value (M)
$5,065
F15E Net income attr. to CTC (M)
REIT Class C units redeemable (M)
$1,847
P/E mulitple
Less: F15E Retail adj. net debt (M)
Retail m arket value (M)
F15E FD shares O/S (M)
Market value per share
($333)
$6,579
Add: Near term RE opportunity (M)
(BNS paid ~9.9x fwd earnings for CTFS stake)
(Approx. 25-30 locations)
FS m arket value (M)
CRT & near term RE MV (M)
75.9
$86.71
10x
$2,177.4
151
$160
$1,927
75.9
$28.70
Total m arket value (M)
$10,683
CTC im plied 1-yr value
$140.81
75.9
$25.40
75.9
Holdco. discount
CTC 1-yr price target
■ CTC.A shares, in our view, currently sport a robust valuation with a forward P/E of 15.4x
and a forward EV/ EBITDA of 7.7x. As we noted earlier the value-creation exercises that
are implied in a sum-of-the-parts analysis to expose undervalued aspects of the business
model have been completed and there is little else that can realistically be surfaced. The
exercise was quite successful and has resulted in a serious re-rating of the shares. Going
forward and over time the ability to drive improved cash flows, earnings, and ROIC will, in
our view, drive the valuation. At the current implied multiples, we see a lot of success
already built in to the price. As the accompanying table shows (Exhibit 2), CTC.A is being
afforded a more than reasonable valuation.
Third Quarter Highlights
■ Total retail network sales increased 4.4% to $3.4B, reflecting higher sales at each banner
and a positive response to marketing campaigns and enhanced product assortment.
■ Retail sales at FGL rose 13.0% in Q3, representing the fourth consecutive quarter of
double-digit growth for this division. Comps were up 8.5% (ahead of our forecast of
+5.0% SSS), reflecting strong growth across all banners and categories, especially at
Sport Chek, which saw SSS of +11.2%. Performance was strongest in men’s and
women’s athletic and casual apparel, athletic footwear, and outerwear.
■ At Mark's, retail sales rose 6.5% on comps of 6.8% (versus our estimate of 3.0% SSS),
reflecting a positive customer reaction to improved merchandising and the addition of
new national brands, particularly in casual apparel. Early snowfall in western Canada
and incremental promotional activity YOY also provided sales growth.
■ At CTR, retail sales rose 3.7% on comps of 3.2% (beating our expectation +2.0% SSS
growth), with all categories contributing to the increase. This performance was led by
strong sales in the non-seasonal fixing category and a larger proportion of higher-priced
items. Seasonal spring/summer assortments posted solid increases, with outdoor
recreation and backyard living categories doing well. Additionally, the automotive
business delivered another strong quarter across the board, with high promotional
activity lending support, and a more attractive assortment of car care accessories and
tires adding the magic touch.
■ Petroleum sales decreased 0.4%, primarily due to a decline in gasoline volume, which
dropped 3.0% YOY, but partially offset by higher prices and bigger non-gas sales.
■ Consolidated revenue advanced 3.9% to $3.1B.
10%
$128.00
102
■
■
■
■
■
■
■
■
■
■
■ Retail segment revenue increased 3.5%, pushed higher by 17.6% revenue at FGL
(12.1% when excluding inter-segment sales), higher shipment levels to Canadian Tire
stores, and increased sales at Mark’s.
■ Financial Services (CTFS) segment revenue rose 5.8%, driven by strong growth in
receivables (+7.1%). This growth is attributable to increases in both average balances
and active accounts of 3.0% and 4.0%, respectively. Improved customer acquisition
strategies in-store and better marketing programs also helped drive results.
■ CTC also recognized $89.5M in property revenue related to CT REIT.
Consolidated gross profit rose 6.0% to $984.6M, as the margin expanded 64 bps to 32.1%.
Gross margin dollar growth was driven by higher shipments to Canadian Tire dealers and
stronger sales at both Mark’s and FGL. In the retail segment, the margin increased 17 bps to
28.2%, due to a greater contribution from higher-margin FGL business, better cents-per-litre
gasoline margins at Petroleum, lower inventory write-downs at Mark’s, and the benefits of
cost saving initiatives at Canadian Tire. This was partially offset by an unfavourable shift in
mix of shipments to Dealers. CTFS margin improved 334 bps to 61.3%, reflecting lower cost
of funding and a reduction in the allowance for future write-offs of the credit card portfolio.
Consolidated SG&A expenses were generally higher, reflecting higher personnel costs due
to a greater number of corporate stores at FGL and PartSource, higher stock-based comp,
increased supply chain labour, and higher occupancy costs. More importantly, costs to
support strategic and operational initiatives, such as marketing and digital, also contributed to
the rise. As a percentage of revenue, the SG&A rate increased 16 bps to 23.7%. Retail SG&A
expenses rose 12.8% YOY due to the aforementioned reasons, as well as market rent paid on
retail properties sold to CT REIT (which are recovered in the CT REIT segment).
Consolidated EBITDA for the quarter was $351.9M, up 10.2% YOY, as margin improved
approximately 70 bps to 11.5%. However, the more important Retail Segment saw EBITDA
decrease 11.9% to $201.4M, as the margin tumbled 120 bps to 7.3%.
Net finance costs decreased 14.6% YOY to $21.4M, mainly due to the early redemption of
$200M in medium-term notes last June.
Income tax expense decreased 7.2% YOY to $56.3M, on the back of a lower effective tax
rate of 24.0%. While the effective tax rate dropped from 29.4% in the previous year,
management expects to finish F2014 with an overall effective rate of 26.5%, increasing
slightly to 27.5% in F2015.
The company reported Q3 EPS of $2.17, up 21.2% YOY, ahead of consensus of $1.99 and
of our $1.92 forecast.
In Q3, CTC saw progress on its stated goal to achieve a ROIC of 9% by F2017-end. On a
rolling 12-month basis, ROIC reached a level of 7.81%, up 33 bps from 7.48% in Q3/F13.
Capital expenditures totalled $290.3M in the quarter and $496.4M FYTD. The company
expects capex for the year to be at the high end of its $500M to $525M range. This excludes
the prior guidance of $75M to $100M needed to build replacement distribution capacity.
CTC repurchased 0.8M shares in the third quarter for total consideration of $99.6M.
Under the 2014/2015 NCIB, the company repurchased a total of 1.87M shares at a total cost
of $200M. On October 9, 2014, it announced its intention to repurchase an additional $400M
of its shares through the end of F2015, on top of its anti-dilutive purchases.
On November 6, 2014, the board of directors increased the dividend by 5.0% to $0.525 per
share, and declared a dividend payable on March 1, 2015.
103
Company Comment
(FRC-T C$12.00)
Sam Devlin, CFA - (403) 213-7332
vladislav.vlad@scotiabank.com
Risk Ranking: High
sam.devlin@scotiabank.com
Target 1-Yr:
C$15.50
ROR 1-Yr:
34.2%
Div. (NTM)
Div. (Curr.)
$0.60
$0.60
Yield (Curr.)
5.0%
Key Risks to Target: Commodity prices, labour supply, access to supplies, weather, and customer concentration.
Event
■ $57.8M EBITDA was 24% ahead of our est. and 34% above consensus.
Implications
■ Operational leverage & increasing well intensity leads to solid beat.
Revenue of $204M was 13% above our $181M estimate (consensus
was $169M) and 1.5x higher YOY. The beat was driven largely by a
fully utilized fleet which pumped 137% more sand YOY. During the
quarter 80% of FRC's revenue came from 24 hour ops, which surprised
even management. Pricing and cost recovery had a modest impact, up
5% since Q1/14 and up 10% YOY. Also, it's newly created Fluid
Management Services division started to contribute during Q3 with
$6.2M EBITDA. Interestingly, sales were capped by water access
restrictions due to a dry summer in Fraction's most active areas. In other
words, the beat could have been even more impressive.
■ Fully booked heading into break-up with flat pricing expected;
further out remains unknown. Management has, however, noted 70%
of its activity is natural gas based, and augmented by ongoing LNGrelated delineation. We attempted to model FRC's operating leverage
into 2015 and have made minor tweaks. We have incorporated FRC's
$63M capex spend, $43M of which is for 25 kHP (10% fleet increase).
Pertinent Revisions
New
Old
EBITDA14E
$146
$122
EBITDA15E
$178
$171
New Valuation:
Old Valuation:
Recommendation
■ We maintain SO, for now; subjectively, we see $2 downside and $8
upside. FRC is all beta, both operationally and as a stock (and that is not
necessarily correlated). While FRC should post two more impressive
quarters, we struggle with the impact of lower oil prices LT on pumpers.
Qtly EBITDA (M)
2012A
2013A
2014E
2015E
Q1
Q2
Q3
Q4
Year
$58 A
$20 A
$27 A
$73
$-2 A
$-13 A
$-9 A
$-6
$32 A
$14 A
$58 A
$51
$19 A
$11 A
$70
$61
$108
$33
$146
$178
EV /
EBITDA
6.6x
23.8x
6.2x
5.1x
2011A
$130
$101
$29
42.1%
36.9%
-0.3x
$1.59
$0.11
2012A
$73
$69
$4
30.5%
17.7%
-0.2x
$0.93
$0.60
2013A
$27
$14
$12
10.9%
n.m.
-0.6x
$0.00
$0.60
2014E
$135
$106
$29
23.0%
19.1%
0.3x
$1.09
$0.60
2015E
$147
$63
$84
23.7%
18.9%
0.3x
$1.27
$0.60
(FY-Dec.)
CF from Ops (M)
Capex (M)
Free Cash Flow (M)
Adj EBITDA Margin
Return on Equity
Net Debt/Cash Flow
Adj Earnings/Share
Dividends/Share
Curr. BVPS:
ROE14E:
$5.72
19.15%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$867
$51
$918
72
72
104
Exhibit 1 - Snapshot Summary
Canyon Services Group Inc. (TSX: FRC)
Financial Statistics
Valuation Analysis
2009
2010
2011
2012
2013
2014E
2015E
Share Price
$12.00
EV/EBITDA
nmf
7.2x
4.6x
6.6x
23.8x
6.2x
5.1x
1-Yr Target Price
$15.50
P/CF
nmf
8.4x
5.7x
9.6x
27.9x
5.8x
5.6x
34%
P/E
nmf
10.6x
7.5x
12.2x
nmf
11.0x
9.5x
Dividend
$0.60
P/BV
0.9x
3.1x
2.4x
2.2x
2.6x
2.0x
1.8x
Yield
5.0%
P/TBV
0.9x
3.1x
2.4x
2.2x
2.6x
2.4x
2.2x
FD Share Count
72 M
ROE (adjusted)
-9%
34%
37%
18%
0%
19%
19%
Market Capitalization
$867 M
ROA (adjusted)
-8%
30%
29%
14%
0%
14%
13%
Net Debt (Net Cash)
$51 M
Enterprise Value
$918 M
Implied Return
Corporate Margins
2009
2010
2011
2012
2013
2014E
2015E
Gross
14.7%
46.8%
47.1%
35.7%
17.1%
27.6%
30.0%
EBITDA
0.5%
41.5%
42.1%
30.5%
10.9%
23.0%
23.7%
Debt Summary as of
Q3/14
Earnings Summary ($M)
2009
2010
2011
2012
2013
2014E
2015E
Net Debt (Net Cash)
$51 M
Total Revenue
$47
$216
$372
$353
$300
$634
$750
Facility Size
$100 M
EBITDA
$0
$90
$157
$108
$33
$146
$178
Draw on Facility
$50 M
EBIT
($10)
$71
$130
$74
($5)
$93
$119
Facility Remaining
$50 M
EBT
($11)
$71
$130
$73
($5)
$91
$115
Reported Earnings
($11)
$54
$95
$54
($4)
$66
$84
Adjusted Earnings
($10)
$60
$99
$58
($0)
$71
$88
($0.37)
$1.03
$1.59
$0.93
($0.00)
$1.09
$1.27
50%
%
Per FD Share (Adjusted)
Segmented Revenue
Cash Flow Summary ($M)
$250
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
$200
$150
$100
$50
2015E
2013
Revenue per job ($000's)
2014E
2012
2011
2010
2009
$0
EBITDA Margin
Company Profile
Canyon is a Western Canadian oilfield service
company specializing in deep basin pressure
pumping services. Canyon provides several
stimulation services including hydraulic
fracturing, high-rate nitrogen fracturing, coiled
tubing, chemical stimulation, and remedial
cementing services. The company also recently
entered the frac fluid and water management
market.
2009
2010
2011
2012
2013
2014E
2015E
($0.01)
$1.30
$2.08
$1.18
$0.43
$2.08
$2.12
($0)
$75
$130
$73
$27
$135
$147
Capex1
Free Cash Flow
$17
$80
$101
$69
$14
$106
$63
($17)
($5)
$29
$4
$12
$29
$84
$0
$3
$7
$37
$37
$40
$41
$0.00
$0.05
$0.11
$0.60
$0.60
$0.60
$0.60
CFPS FD
Dividends
Per FD Share
0%
-65%
24%
953%
300%
137%
49%
Capex1/Cash Flow
Net Debt (Cash)/Cash Flow
nmf
1.1x
0.8x
0.9x
0.5x
0.8x
0.4x
nmf
-0.5x
-0.3x
-0.2x
-0.6x
0.3x
0.3x
Net Debt/Equity
-0.1x
-0.2x
-0.1x
-0.1x
-0.1x
0.1x
0.1x
Operational Summary
2009
2010
2011
2012
2013
2014E
2015E
38,000
110,500
175,500
225,500
225,500
255,500
280,500
980
2,194
2,482
2,198
1,828
3,124
3,023
$48,127
$98,903
$152,050
$161,668
$164,529
$193,757
Payout From FCF
Operational Statistics
Horsepower - Period End
No of Jobs
Revenue Per Job
Analyst Contact Info
Vladislav C. Vlad, MBA, P.Eng.
(403) 213-7759
Notes: (1) Cash capex may vary from corporate capital program due to timing differences.
Source: Company reports; FactSet; Scotiabank GBM estimates.
$42,139
105
Exhibit 2 – Q3/14 Results Summary
Q3/14
Figures in $M
Actual
YOY
Estimated
∆
Q3/13
QOQ
∆
Q2/14
2014E
∆
New
2015E
Current
∆
New
Current
∆
Revenue
Pressure Pumping
Fluid Management Services
$188
$161
17%
$81
$16
$20
-19%
$0
13%
Total Revenue
$204
$181
Gross Margin
32.3%
30.8%
$52.9
$38.8
37%
$13.6
$6.2
$7.0
-12%
$0.0
$81
NA
$60
NA
$0
NA
23.8%
$60
239%
-6.0%
$601
$553
9%
$666
$633
5%
$33
$46
-27%
$84
$103
-18%
6%
2%
$634
$599
27.6%
25.4%
$134
$102
$13
$16
$750
$736
30.0%
28.7%
31%
$156
$131
19%
-20%
$29
$36
-18%
EBITDA
Pressure Pumping
NA
($10.2)
NA
$0.0
Corporate
($1.3)
$1.0
NA
$0.8
NA
$1.0
NA
($1)
$4
NA
($7)
$4
NA
Total EBITDA
$57.8
$46.8
24%
$14.4
NA
($9.2)
NA
$146
$122
20%
$178
$171
4%
EBITDA Margin
28.3%
25.8%
23.0%
20.3%
23.7%
23.3%
Operating Earnings
$0.48
$0.33
$1.02
$0.73
$1.21
$1.13
Discontinued Operations
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Adjustments/Unusual Items
$0.03
$0.01
82%
$0.01
NA
$0.01
80%
$0.07
$0.06
19%
$0.06
$0.06
3%
Adjusted Net Earnings
$0.51
$0.34
48%
$0.07
NA
($0.23)
NA
$1.09
$0.79
38%
$1.27
$1.19
7%
CF From Operations
$0.92
$0.55
68%
$0.20
NA
($0.15)
NA
$2.08
$1.56
33%
$2.12
$2.05
4%
$60.7
$38.6
58%
$12.8
NA
($9.2)
NA
$135
$104
31%
$147
$144
2%
Net Capex
$43.4
$41.2
5%
$1.5
NA
$18.4
NA
$106
$94.2
13%
$63
$46
36%
17.7%
-15.2%
F.D. Per Share Data
47%
$0.06
NA
$0.00
($0.24)
NA
$0.00
39%
7%
Cash Flow Summary
Net Acquisition (Disposition)
Cash Dividends
Net Capex/Cash Flow
Net Debt
$0.0
$4.5
NA
$0.0
$0.0
$4.5
NA
$0
$0
$10.3
$10.3
0%
$9.4
10%
$0.0
$9.4
NA
$39
$39
0%
$41
$41
0.7x
1.1x
-33%
0.1x
NA
-2.0x
NA
0.8x
0.9x
0.4x
0.3x
$51.3
$81.6
-37%
($9.9)
NA
$14.2
NA
$38
$50
-25%
$47
$54
-13%
245,500
245,500
0%
225,500
9%
245,500
0%
255,500
255,500
0%
280,500
255,500
10%
887
950
-7%
553
60%
347
NA
3,124
3,337
-6%
3,023
3,539
-15%
$213,320 $163,500
30%
$147,794
44%
$178,028
20%
$193,757 $163,001
19%
$221,804 $173,285
28%
0%
Fleet
No of Jobs
Pressure Pumping
Revenue Per Job
Pressure Pumping
Gross Margins
Pressure Pumping
30.9%
28.4%
23.8%
-6.0%
26.4%
23.4%
27.5%
25.3%
48.8%
50.0%
NA
NA
49.4%
50.0%
50.0%
50.0%
106
Only Pure-Play Pumper in Canada
■ We are maintaining our one-year price target of $22.00. Our one-year target price is
predicated on 6.5x our 2015 EV/EBITDA estimate and is supported by comparative
valuation. Our price target compares to our one standard deviation historical trading band of
4.2x to 7.7x (see Exhibit 3).
Exhibit 3 – Forward Year EV/EBITDA - Consensus Estimates
- 1 σ FRC
Oct.14
Aug.14
Apr.14
Jun.14
Feb.14
Dec.13
Oct.13
Jun.13
Aug.13
Apr.13
Feb.13
Oct.12
GBM Pumpers
Dec.12
Aug.12
Jun.12
Jan.12
Mar.12
Mar.11
FRC
Nov.11
2.5x
Sep.11
3.5x
2.5x
Jul.11
4.5x
3.5x
May.11
5.5x
4.5x
Jan.11
6.5x
5.5x
Nov.10
7.5x
6.5x
Jul.10
8.5x
7.5x
Sep.10
9.5x
8.5x
May.10
10.5x
9.5x
Jan.10
11.5x
10.5x
Mar.10
11.5x
+ 1 σ FRC
Source: Bloomberg; Company reports; Scotiabank GBM estimates.
■ Canyon is currently trading at 5.1x 2015E EV/EBITDA versus its Canadian peer group
average of 5.3x (see Exhibit 4). Canyon is the only pure-play pumper in Canada, has a
demonstrated track-record of recording industry-leading margins during up-cycles, and has
increasing exposure to top-tier clients focused on developing projects over a multi-year time
horizon.
Exhibit 4 – Comparable Company Analysis
Company
Pressure Pumpers
Calfrac Well Services
Canyon Services Group
GasFrac Energy Services
Trican Well Service
Baker Hughes
Basic Energy Services
C&J Energy
Halliburton
Patterson-UTI
RPC
Schlumberger
Superior Energy Services
Average
Average - Canada
Average - United States
GBM
1
Ticker Analyst Rating
Share
Price
Target
Price
Total
Return
CFW
FRC
GFS
TCW
BHI
BAS
CJES
HAL
PTEN
RES
SLB
SPN
$14.21
$12.00
$0.75
$10.41
$52.27
$12.15
$19.17
$53.71
$22.37
$16.13
$98.73
$24.96
$19.00
$15.50
$1.50
$13.50
$64.00
$20.00
37%
34%
100%
33%
24%
65%
$70.00
$38.00
31%
72%
$120.00
$37.00
23%
50%
VV
VV
VV
VV
BS*
BH*
BS*
DW*
BS*
BH*
SO
SO
SU
SP
SO
SP
11
SO
SO
12
SO
SP
2
Div. Mkt Cap EV/EBITDA
P/CF
P/E
Yield
($M)
2014E 2015E 2014E 2015E 2014E 2015E
3.5% $1,411
5.0%
$867
0.0%
$50
2.9% $1,669
1.2% $22,612
0.0%
$525
0.0% $1,060
1.2% $45,517
1.8% $3,275
2.7% $3,525
1.6% $127,045
1.3% $3,798
1.9%
3.8%
1.2%
5.9x
6.2x
nmf
8.2x
5.2x
4.2x
5.4x
6.7x
4.0x
5.5x
9.0x
4.0x
5.8x
6.8x
5.5x
5.3x
5.1x
23.5x
5.6x
4.2x
3.5x
2.6x
5.4x
3.3x
3.9x
7.6x
3.3x
4.5x
5.3x
4.2x
4.8x
5.8x
nmf
6.8x
6.8x
2.1x
6.0x
9.0x
3.9x
8.3x
11.8x
4.0x
6.3x
5.8x
6.5x
4.3x
5.6x
51.3x
4.8x
5.7x
1.8x
4.6x
7.2x
3.2x
5.9x
10.4x
3.7x
5.2x
4.9x
5.3x
12.8x
11.0x
nmf
nmf
13.2x
22.1x
14.2x
13.3x
14.1x
14.4x
17.6x
13.7x
14.6x
11.9x
15.3x
10.8x
9.5x
nmf
17.8x
10.8x
11.5x
10.5x
11.1x
10.2x
10.7x
15.5x
11.2x
11.8x
12.7x
11.4x
Notes:
1. Number of analysts who make up consensus (i.e., Scotiabank GBM does not cover the name) or our rating (*Howard Weil).
2. Adjusted for stock-based compensation and non-recurring items.
3. Figures for U.S.-listed companies are in U.S. dollars.
Analyst legend: VV = Vladislav Vlad, BH=Blake Hutchinson, BS=Bill Sanchez, DW=Dave Wilson
Ratings legend: FS = Focus Stock, SO = Sector Outperform, SP = Sector Perform, SU = Sector Underperform.
Source: Bloomberg; Company reports; FactSet; Scotiabank GBM estimates (CFW, FRC, GFS, TCW); Howard Weil estimates (ratings an d targets only for BHI,
BAS, PTEN, SLB, SPN, WFT).
EBITDA
107
Exhibit 5 – Operational Summary
Figures in $M
2009
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
Revenue
$46.9
$215.9
$372.1
$353.1
$86.9
$27.4
$81.2
$104.2
$299.7
$138.2
$60.3
$204.5
$231.5
$634.4
$750.5
YOY Growth
Gross Margin
-35%
nmf
72%
-5%
-36%
-28%
-14%
23%
-15%
59%
120%
152%
122%
112%
18%
14.7%
46.8%
47.1%
35.7%
28.4%
-33.5%
23.8%
15.8%
17.1%
23.9%
-6.0%
32.3%
34.4%
27.6%
30.0%
$178.2
$0.2
$89.7
$156.7
$107.6
$20.4
($13.1)
$14.4
$11.0
$32.6
$27.4
($9.2)
$57.8
$69.7
$145.8
YOY Growth
-97%
nmf
75%
-31%
-65%
nmf
-56%
-42%
-70%
34%
-30%
nmf
nmf
nmf
22%
EBITDA Margin
0.5%
41.5%
42.1%
30.5%
23.5%
-47.9%
17.7%
10.6%
10.9%
19.8%
-15.2%
28.3%
30.1%
23.0%
23.7%
Operating Earnings
($0.42)
$0.93
$1.53
$0.87
$0.14
($0.28)
$0.06
$0.01
($0.07)
$0.19
($0.24)
$0.48
$0.55
$1.02
$1.21
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Corporate, Other, and Adjustments
$0.05
$0.09
$0.06
$0.05
$0.01
$0.02
$0.01
$0.02
$0.07
$0.02
$0.01
$0.03
$0.01
$0.07
$0.06
($0.37)
$1.03
$1.59
$0.93
$0.15
($0.26)
$0.07
$0.03
($0.00)
$0.21
($0.23)
$0.51
$0.56
$1.09
$1.27
CF From Operations
($0.01)
$1.30
$2.08
$1.18
$0.30
($0.25)
$0.20
$0.17
$0.43
$0.43
($0.15)
$0.92
$0.82
$2.08
$2.12
nmf
nmf
61%
-43%
-50%
106%
-47%
-42%
-63%
41%
-43%
355%
375%
382%
2%
($0.4)
$75.4
$129.6
$73.3
$19.1
($15.8)
$12.8
$10.8
$26.9
$26.9
($9.2)
$60.7
$56.9
$135.4
$147.0
Capex
$16.6
$80.0
$101.0
$69.4
$3.3
$2.2
$1.5
$7.3
$14.4
$13.1
$18.4
$43.4
$31.2
$106.1
$63.0
$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
Cash Dividends
$0.0
$0.0
$6.1
$31.4
$9.3
$9.3
$9.4
$9.4
$37.4
$9.4
$9.4
$10.3
$10.3
$39.4
$41.2
Adjusted EBITDA
F.D. Per Share Data
YOY Growth
Cash Flow Summary
Capex/Cash Flow
Net Debt
Net Debt/Cash Flow
nmf
1.1x
0.8x
0.9x
0.2x
-0.1x
0.1x
0.7x
0.5x
0.5x
-2.0x
0.7x
0.5x
0.8x
0.4x
($12.4)
($41.1)
($37.4)
($17.0)
($25.2)
($22.7)
($9.9)
($15.5)
($15.5)
$3.4
$14.2
$51.3
$38.0
$38.0
$46.7
nmf
-0.5x
-0.3x
-0.2x
0.3x
0.3x
38,000
110,500
175,500
225,500
225,500
225,500
225,500
225,500
225,500
245,500
245,500
245,500
255,500
255,500
280,500
980
2,194
2,482
2,198
470
151
553
654
1,828
890
347
887
1,000
3,124
3,023
$48,127
$98,903
14.7%
46.8%
-0.6x
No of Jobs
Revenue Per Job
Gross Margins
$152,050 $161,668 $185,065 $181,979 $147,794 $159,835 $164,529 $155,963 $178,028 $213,320 $215,500 $193,757 $221,804
47.1%
35.7%
28.4%
-33.5%
23.8%
15.8%
17.1%
23.9%
-6.0%
30.9%
33.1%
26.4%
27.5%
108
Exhibit 6 – Income Statement
Figures in $M
2009
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
Gross
14.7%
46.8%
47.1%
35.7%
28.4%
-33.5%
23.8%
15.8%
17.1%
EBITDA
0.5%
41.5%
42.1%
30.5%
23.5%
-47.9%
17.7%
10.6%
10.9%
23.9%
-6.0%
32.3%
34.4%
27.6%
30.0%
19.8%
-15.2%
28.3%
30.1%
23.0%
EBIT
-21.8%
32.8%
35.0%
21.0%
13.6%
-80.8%
6.9%
0.2%
23.7%
-1.5%
11.8%
-33.1%
21.1%
22.8%
14.6%
Adjusted Earnings
-20.8%
27.7%
26.6%
16.4%
10.8%
-58.2%
5.8%
15.9%
1.5%
-0.1%
9.5%
-23.8%
16.3%
16.8%
11.2%
$46.9
$215.9
$372.1
$353.1
$86.9
$27.4
11.7%
$81.2
$104.2
$299.7
$138.2
$60.3
$188.2
$214.5
$601.2
$666.5
($40.0)
($114.9)
($196.9)
($227.2)
($62.2)
($7.9)
($16.7)
($22.4)
($21.8)
($5.2)
($36.6)
($61.9)
($87.7)
($248.5)
($105.2)
($63.9)
($138.4)
($152.0)
($459.4)
($525.5)
($5.2)
($5.7)
($6.7)
($22.8)
($6.4)
($6.6)
($9.4)
($10.8)
($33.2)
$0.2
$89.7
$156.7
$107.6
($50.9)
$20.4
($13.1)
$14.4
$11.0
$32.6
$27.4
($9.2)
$57.8
$69.7
$145.8
$178.2
Depreciation
($9.2)
($13.5)
($22.4)
FX (Loss) Gain
$0.0
$0.0
$0.0
($30.0)
($7.7)
($7.8)
($8.0)
($9.6)
($33.0)
($9.8)
($9.9)
($12.9)
($15.9)
($48.4)
($54.6)
$0.0
$0.1
$0.0
$0.0
$0.0
$0.1
($0.4)
$0.1
($0.6)
$0.0
($0.9)
One-Time Charges
$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
Income From Equity Holdings
$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
($10.2)
$70.8
$130.4
$74.2
$11.8
($22.2)
$5.6
$0.2
($4.6)
$16.4
($20.0)
$43.2
$52.9
$92.5
$119.4
Interest
($0.9)
($0.1)
($0.5)
($0.7)
($0.2)
($0.2)
($0.1)
($0.2)
($0.7)
($0.2)
($0.1)
($0.7)
($0.8)
($1.8)
($4.9)
Other
$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
($11.1)
$70.6
$129.9
$73.4
$11.7
($22.3)
$5.4
($0.0)
($5.2)
$16.2
($20.0)
$42.5
$52.1
$90.7
$114.5
Total Tax
$0.1
($16.3)
($34.7)
($19.0)
($3.2)
$5.1
($1.5)
$0.4
$0.8
($4.3)
$4.8
($10.8)
($14.1)
($24.4)
($30.9)
Net Earnings
($11.1)
$54.4
$95.3
$54.4
$8.5
($17.2)
$3.9
$0.4
($4.4)
$11.9
($15.3)
$31.7
$38.0
$66.3
$83.6
$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
$1.3
$5.4
$3.9
$3.4
$0.8
$1.2
$0.8
$1.2
$4.1
$1.2
$0.9
$1.7
$1.0
$4.9
$4.1
($9.8)
$59.7
$99.2
$57.8
$9.4
($15.9)
$4.7
$1.6
($0.2)
$13.1
($14.4)
$33.4
$39.0
$71.2
$87.7
Margins
Revenue
Expenses
Operating Costs
General and Administrative
EBITDA1
Operating Income (EBIT)
Earnings Before Taxes (EBT)
Cash Flow2
From Operations
($0.4)
$75.4
$129.6
$73.3
$19.1
($15.8)
$12.8
$10.8
$26.9
$26.9
($9.2)
$60.7
$56.9
$135.4
$147.0
Funds From (For) Investments
($16.6)
($80.0)
($101.0)
($69.4)
($3.3)
($2.2)
($1.5)
($7.3)
($14.4)
($13.1)
($18.4)
($43.4)
($31.2)
($106.1)
($63.0)
Funds From (For) Financing
$26.3
$44.9
($6.5)
($30.9)
($8.9)
($9.5)
($9.8)
($9.8)
($37.9)
($8.5)
$2.8
$17.2
($10.3)
$1.3
($41.2)
Operating Earnings
($0.42)
$0.93
$1.53
$0.87
$0.14
($0.28)
$0.06
$0.01
($0.07)
$0.19
($0.24)
$0.48
$0.55
$1.02
$1.21
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.05
$0.09
$0.06
$0.05
$0.01
$0.02
$0.01
$0.02
$0.07
$0.02
$0.01
$0.03
$0.01
$0.07
$0.06
($0.37)
$1.03
$1.59
$0.93
$0.15
($0.26)
$0.07
$0.03
($0.00)
$0.21
($0.23)
$0.51
$0.56
$1.09
$1.27
CF From Operations
($0.01)
$1.30
$2.08
$1.18
$0.30
($0.25)
$0.20
$0.17
$0.43
$0.43
($0.15)
$0.92
$0.82
$2.08
$2.12
Book Value
$2.55
$3.53
$4.94
$5.24
$5.17
$4.77
$4.70
$4.57
$4.57
$4.59
$4.25
$5.72
$6.12
$6.12
$6.76
Tangible Book Value
$2.55
$3.53
$4.93
$5.23
$5.17
$4.77
$4.69
$4.57
$4.57
$4.59
$4.25
$4.50
$4.90
$4.90
$5.54
$0
$3
$7
$37
$9
$9
$9
$9
$37
$9
$10
$10
$10
$40
$41
$0.00
$0.05
$0.11
$0.60
$0.15
$0.15
$0.15
$0.15
$0.60
$0.15
$0.16
$0.15
$0.15
$0.60
$0.60
F.D. Per Share Data
Dividends
Per Share
Payout From CF
0%
4%
5%
50%
49%
-59%
73%
87%
139%
35%
-112%
17%
18%
30%
28%
Payout From FCF
0%
-65%
24%
953%
59%
-52%
83%
271%
300%
68%
-37%
59%
40%
137%
49%
Basic - Period End
47.2
60.4
61.0
61.8
62.2
62.4
62.5
62.5
62.5
62.8
63.1
68.6
68.6
68.6
68.6
Weighted Average - Basic
26.6
56.6
60.7
61.4
62.2
62.4
62.5
62.3
62.3
62.7
63.0
65.8
68.6
65.0
68.6
Weighted Average - F.D.
26.6
58.2
62.2
62.2
62.7
62.4
63.0
62.3
62.3
62.7
63.0
65.8
69.2
65.2
69.2
Share Information (M)
Notes: (1) Adjusted for stock-based compensation, FX, unusual, and infrequent items. (2) Before changes in working capital.
109
Exhibit 7 – Cash Flow Analysis and Capital Expenditure Summary
Figures in $M
2009
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
Cash Flow Analysis
CF From Operations
less Maintenance Capital
less Sale of PPE
Distributable Cash Flow
less Expansion Capital
Free Cash Flow
less Cash Dividends
($0.4)
$75.4
$129.6
$73.3
$19.1
($15.8)
$12.8
$10.8
$26.9
$26.9
($9.2)
$60.7
$56.9
$135.4
$147.0
($16.6)
($80.8)
($101.3)
($69.9)
($3.5)
($2.3)
($1.6)
($7.4)
($14.8)
($13.3)
($18.6)
($44.0)
($31.2)
($107.0)
($12.0)
$0.0
$0.8
$0.3
$0.5
$0.2
$0.1
$0.1
$0.1
$0.4
$0.2
$0.2
$0.6
$0.0
$0.9
$0.0
($17.0)
($4.6)
$28.6
$3.9
$15.8
($18.0)
$11.3
$3.5
$12.5
$13.8
($27.6)
$17.4
$25.8
$29.3
$135.0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
($51)
($17.0)
($4.6)
$28.6
$3.9
$15.8
($18.0)
$11.3
$3.5
$12.5
$13.8
($27.6)
$17.4
$25.8
$29.3
$84.0
$0.0
$0.0
($6.1)
($31.4)
($9.3)
($9.3)
($9.4)
($9.4)
($37.4)
($9.4)
($9.4)
($10.3)
($10.3)
($39.4)
($41.2)
($17.0)
($4.6)
$22.6
($27.6)
$6.5
($27.4)
$1.9
($5.9)
($24.9)
$4.4
($37.0)
$7.1
$15.5
($10.1)
$42.8
less Acquisitions/Investments
$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
plus Disposition/Divestures
$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
Surplus (Deficit) Cash Flow
($17.0)
($4.6)
$22.6
($27.6)
$6.5
($27.4)
$1.9
($5.9)
($24.9)
$4.4
($37.0)
$7.1
$15.5
($10.1)
$42.8
CF From (For) Financing
$26.3
$44.9
($0.4)
$0.6
$0.4
($0.2)
($0.4)
($0.4)
($0.5)
$0.9
$12.3
$27.5
$0.0
$40.7
$0.0
Other/Non-cash w.c. changes
$0.9
($11.8)
($20.9)
$7.1
$1.0
$25.2
($14.5)
$12.4
$24.2
($24.3)
$24.7
($43.0)
($2.1)
($44.8)
($51.5)
$10.3
$28.5
$1.2
($19.9)
$7.9
($2.3)
($13.0)
$6.1
($1.3)
($19.0)
($0.1)
($8.5)
$13.3
($14.2)
($8.7)
$16.6
$80.8
$101.3
$69.9
$3.5
$2.3
$1.6
$7.4
$14.8
$13.3
$18.6
$44.0
$31.2
$107.0
$63.0
Excess (Short) FCF
Net Change In Cash Position
Total Capex
Exhibit 8 – Capitalization, Valuation, and Ratio Analysis
Figures in $M
Capitalization Summary1
2009
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
Share Price
$2.35
$10.84
$11.95
$11.35
$11.12
$11.92
$11.74
$12.02
$12.02
$16.34
$18.90
$12.89
$12.00
$12.00
$12.00
$115
$684
$760
$732
$729
$783
$772
$793
$793
$1,091
$1,262
$931
$867
$867
$867
Net Debt
($12)
($41)
($37)
($17)
($25)
($23)
($10)
($16)
($16)
$3
$14
$51
$38
$38
$47
Enterprise Value
$103
$643
$723
$715
$704
$760
$763
$777
$777
$1,094
$1,277
$983
$905
$905
$914
Net Debt (Cash)/EBITDA
nmf
-0.5x
-0.2x
-0.2x
-0.4x
-0.4x
-0.2x
-0.5x
-0.5x
0.1x
0.3x
0.6x
0.3x
0.3x
0.3x
nmf
-0.5x
-0.3x
-0.2x
-0.5x
-0.5x
-0.3x
-0.6x
-0.6x
0.1x
0.3x
0.6x
0.3x
0.3x
0.3x
Net Debt (Cash)/Equity
-10%
-18%
-12%
-5%
-7%
-7%
-3%
-5%
-5%
1%
5%
12%
9%
9%
10%
Net Debt/Total Capitalization
-11%
-23%
-14%
-5%
-8%
-8%
-3%
-5%
-5%
1%
5%
11%
8%
8%
9%
Net Debt/Enterprise Value
-12%
-6%
-5%
-2%
-4%
-3%
-1%
-2%
-2%
0%
1%
5%
4%
4%
5%
Capex/Cash Flow
nmf
1.1x
0.8x
0.9x
0.2x
-0.1x
0.1x
0.7x
0.5x
0.5x
-2.0x
0.7x
0.5x
0.8x
0.4x
Current Ratio
3.1x
2.1x
1.8x
2.1x
2.4x
1.9x
1.9x
1.5x
1.5x
1.5x
1.4x
1.5x
1.5x
1.5x
2.0x
Interest Coverage Ratio
NA
NA
NA
99.3x
48.6x
34.0x
8.1x
-6.9x
-6.9x
-0.1x
3.7x
34.1x
51.5x
51.5x
24.3x
EV/EBITDA
nmf
7.2x
4.6x
6.6x
10.1x
13.0x
18.9x
23.8x
23.8x
27.6x
29.3x
11.3x
6.2x
6.2x
5.1x
P/CF
nmf
8.4x
5.7x
9.6x
12.9x
16.2x
21.3x
27.9x
27.9x
29.6x
28.8x
9.5x
6.1x
5.8x
5.6x
P/E
nmf
10.6x
7.5x
12.2x
24.0x
37.4x
nmf
nmf
nmf
nmf
nmf
nmf
11.7x
11.0x
9.5x
P/BV
0.9x
3.1x
2.4x
2.2x
2.2x
2.5x
2.5x
2.6x
2.6x
3.6x
4.4x
2.3x
2.0x
2.0x
1.8x
0.9x
3.1x
2.4x
2.2x
2.2x
2.5x
2.5x
2.6x
2.6x
3.6x
4.4x
2.9x
2.4x
2.4x
2.2x
ROE
-9.2%
34.4%
36.9%
17.7%
8.5%
6.2%
1.8%
-0.1%
-0.1%
1.1%
1.7%
9.4%
19.1%
19.1%
18.9%
ROA
-7.8%
29.5%
29.2%
14.2%
7.0%
5.2%
1.5%
-0.1%
-0.1%
0.9%
1.3%
7.0%
13.5%
13.5%
13.2%
ROCE
-8.9%
40.5%
47.5%
21.8%
10.1%
6.8%
1.5%
-1.3%
-1.3%
0.0%
0.7%
9.7%
21.8%
21.8%
21.8%
ROIC
-7.7%
32.7%
33.9%
16.4%
8.0%
5.9%
1.8%
-20.5%
-20.5%
-19.1%
-19.7%
-8.9%
16.7%
16.7%
16.4%
Valuation Analysis
P/TBV
Ratio Analysis2
Notes:
(1) Historicals based on closing pricing.
(2) Based on two-year average capital and adjusted earnings.
110
Exhibit 9 – Balance Sheet & Debt Position Analysis
Figures in $M
2009
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
Cash & Equivalents
$13
$41
$42
$23
$31
$28
$15
$21
$21
$6
$6
$6
$19
$19
$10
Accounts Receivables
$7
$46
$87
$64
$57
$27
$45
$62
$62
$87
$49
$122
$139
$139
$168
Inventory
$5
$8
$16
$14
$14
$15
$16
$17
$17
$15
$18
$21
$30
$30
$38
Prepaids
$1
$2
$3
$1
$2
$3
$2
$2
$2
$2
$3
$3
$3
$3
$3
$26
$97
$149
$106
$108
$81
$87
$119
$119
$124
$95
$153
$192
$192
$220
Future Income Tax
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Investments
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$107
$173
$258
$300
$296
$291
$285
$283
$283
$287
$296
$353
$368
$368
$377
Current Assets
Property, Plant, & Equipment
Total Assets
2015E
$133
$271
$407
$406
$404
$372
$372
$403
$403
$411
$391
$595
$648
$648
$685
Bank Indebtedness
$0
$0
$0
$0
$0
$0
$0
$0
$0
$4
$0
$0
$0
$0
$0
Current Long Term Debt
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
A/P & Accrued Liabilities
$8
$30
$61
$38
$33
$30
$34
$65
$65
$64
$54
$90
$113
$113
$99
Income Tax Payables
$0
$14
$16
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Dividend Payables
$0
$3
$4
$9
$9
$9
$9
$9
$9
$9
$10
$10
$10
$10
$10
$112
Current Liabilities
$8
$47
$82
$50
$45
$42
$46
$77
$77
$80
$67
$103
$126
$126
Risk Management
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Credit Facility
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$15
$50
$50
$50
$50
Senior Notes
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Future Income Taxes
$0
$1
$7
$15
$17
$13
$15
$21
$21
$22
$23
$24
$26
$26
$31
Total Liabilities
Share Capital
Contributed Surplus
Retained Earnings (Deficit)
Comprehensive Income/Other
$8
$49
$93
$68
$65
$58
$63
$101
$101
$105
$107
$181
$206
$206
$196
$135
$182
$183
$187
$188
$189
$190
$190
$190
$192
$195
$302
$303
$303
$307
$3
$4
$6
$8
$9
$9
$10
$11
$11
$12
$12
$13
$13
$13
$13
($14)
$37
$125
$142
$141
$115
$109
$100
$100
$103
$77
$99
$126
$126
$169
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Total Shareholders' Equity
$125
$223
$314
$338
$339
$314
$309
$301
$301
$306
$284
$413
$442
$442
$489
Total Liabilites & Equities
$133
$271
$407
$406
$404
$372
$372
$403
$403
$411
$391
$595
$648
$648
$685
Net Debt
Net Debt + NCWC1,2
($12)
($41)
($37)
($17)
($25)
($23)
($10)
($16)
($16)
$3
$14
$51
$38
$38
$47
($17)
($50)
($67)
($56)
($63)
($38)
($41)
($42)
($42)
($44)
($12)
($0)
($16)
($16)
($59)
Total Credit Facility
$36
$36
$60
$60
$60
$100
$100
$100
$100
$100
$100
$100
$100
$100
$100
Drawn
$0
$0
$0
$0
$0
$0
$0
$0
$0
$4
$15
$50
$50
$50
$50
Available Lines
$36
$36
$60
$60
$60
$100
$100
$100
$100
$96
$85
$50
$50
$50
$50
Available Lines (%)
100%
100%
100%
100%
100%
100%
100%
100%
100%
96%
85%
50%
50%
50%
50%
Debt Position Analysis
Notes: (1) Working capital adjusted. (2) Definition matches traditional E&P net debt calculation.
111
Company Comment
(CG-T C$5.01)
Centerra Gold Inc.
Trevor Turnbull, MBA, MSc - (416) 863-7427
trevor.turnbull@scotiabank.com
Risk Ranking: High
Vitali Mossounov, CPA, CA - (416) 862-3910
Alex Watt, MBA - (416) 860-1429
Target 1-Yr:
C$7.00
ROR 1-Yr:
42.9%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
C$0.16
C$0.16
3.2%
Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s
Event
Pertinent Revisions
■ We now forecast initial gold production from the Gatsuurt project in
Q3/16. This is due to the ouster of the Mongolian Prime Minister.
Implications
■ The Mongolian parliament voted to remove Mr. Altankhuyag following
stagnating economic growth and declining foreign investment, along
with allegations of corruption and nepotism surrounding former cabinet
ministers. His successor will need to be approved by the President and
confirmed by parliament, but the timeline is unclear.
■ Permitting of Gatsuurt is contingent on parliament designating the
project as a "strategic deposit" which would exempt it from the
country's Water and Forest Law. Centerra expected parliament to
consider the designation in Q4/14, but we see risk to the timeline given
that the legislature is still working to pass this year's budget.
■ A favourable decision would allow the government to acquire up to a
34% interest in the project. We assume and model this scenario.
■ Our net asset valuation (NAV8%) estimate has declined slightly to
C$9.45 per share. Gatsuurt contributes 27% to our asset-based
valuation.
Adj. EPS15E
Adj. EPS16E
New
US$-0.04
US$-0.02
Old
US$0.02
US$0.25
Recommendation
■ We maintain our Sector Perform rating due to near-term legal
uncertainties surrounding Kumtor restructuring but highlight our estimate
of $72 million ($0.45 per share) in FCF in Q4/14 at $1,200/oz gold price.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.21 A
$0.00 A
$-0.03
$-0.02
(FY-Dec.)
Adj Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA (M)
Production (oz) (000)
Tot. Cash Cost ($/oz)
All-In Sust. Cost ($/oz)
Q2
$0.03 A
$-0.13 A
$0.00
$-0.02
Q3
$-0.01 A
$-0.02 A
$0.00
$0.01
Q4
$0.45 A
$0.21
$0.00
$0.01
Year
$0.68
$0.06
$-0.04
$-0.02
P/E
6.0x
71.7x
n.m.
n.m.
2013A
$0.68
6.0x
$2.11
1.9x
$610
690.7
$404
$913
2014E
$0.06
71.7x
$1.36
3.3x
$252
634.8
$396
$912
2015E
$-0.04
n.m.
$0.95
4.6x
$206
658.6
$548
$923
2016E
$-0.02
n.m.
$0.99
4.5x
$212
677.4
$583
$997
2017E
$0.58
7.6x
$1.74
2.5x
$333
776.2
$400
$902
BVPS14E: $7.21
ROE14E: 0.92%
NAVPS:
P/NAV:
C$9.45
0.53x
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
C$804
$-328
C$431
160
159
112
Exhibit 1 - Operating and Financial Forecasts
2015E
($6)
($6)
($0.04)
n.m.
$152
$0.95
5.7x
2016E
($3)
($3)
($0.02)
n.m.
$157
$0.99
5.5x
$788
($223)
($17)
($57)
($326)
($5)
$5
$252
($74)
$166
($105)
64%
$60
($46)
$3
$0.06
$0.06
$856
($361)
($20)
($45)
($316)
($1)
$18
$206
($110)
$132
($120)
91%
$12
($6)
($6)
($0.04)
($0.04)
$881
($395)
($20)
($40)
($318)
$0
$17
$212
($106)
$124
($120)
97%
$4
$5
($3)
($0.02)
($0.02)
$3
$326
($66)
$263
$271
($36)
($261)
($342)
($107)
$1.31
($6)
$316
($158)
$152
$152
($104)
($130)
($130)
($83)
$0.90
($3)
$318
($159)
$157
$157
($28)
($364)
($364)
($235)
$0.93
$472
$824
$529
$1,353
$76
$135
$0
$207
$1,147
$1,353
$690
$389
$741
$501
$1,243
$59
$0
$131
$1,112
$1,243
$683
$154
$506
$705
$1,211
$59
$0
$131
$1,080
$1,211
$448
M&I
Inf
5.5
3.7
Average Share Price (C$)
S/O (mm) - End of Year
Realized Gold Price (US$/oz)
Spot Gold Price Forecast (US$/oz)
Mine Gold Production and Costs
Kumtor Production (koz)
Boroo Production (koz)
Gatsuurt Production (koz)
Total Production ('koz)
Average Cash Costs (US$/oz gold)
All-in Sustaining Costs (US$/oz)
2013A
$5.14
236
$1,630
2014E
$7.00
159
$1,271
$1,271
600
90
691
$404
$913
585
50
635
$396
$912
2015E 2016E
$7.00
$7.00
159
159
$1,300 $1,300
$1,300 $1,300
659
659
$548
$923
800
660
17
677
$583
$997
$1,100
$1,000
$900
$800
$700
600
$600
.
$500
$400
Cash Cost (US$/oz)
2014E
$3
$0
$0.09
54x
$263
$1.65
3.3x
Gold Production (koz)
Ratio Analysis
2013A
Net Income (US$mm)
$158
Net Income Adjusted (US$mm)
$163
EPS (f.d.) (US$/sh)
$0.67
P/E (x)
7.6x
Operating CF bf. ch. in WC (US$mm)
$490
CFPS bf. ch. in WC (US$/sh)
$2.07
P/CF (bf. ch. in WC) (x)
2.6x
Income Statement Items (US$mm)
Total Revenue
$944
Operating Costs
($250)
Exploration
($30)
SG&A
($54)
Depreciation
($309)
Interest Expense
($9)
Other - gain (loss)
$0
EBITDA
$610
EBIT
$301
EBT
$293
Taxes - recovery (expense)
($127)
Effective Tax Rate
43%
Earnings bf. Minority Interests
$166
Minority Interest
$0
Reported Net Earnings
$158
Reported EPS (f.d.) (US$/sh)
$0.67
Adjusted EPS (f.d.) (US$/sh)
$0.68
Cash Flow Statement Items (US$mm)
Net Earnings
$158
DD&A
$309
Deferred Taxes
Other
$24
Operating CF bf. ch. in WC
$490
CF from Operating Activities
$484
CF from Financing Activities
($34)
CAPEX
($328)
CF from Investing Activities
($441)
Net Change in Cash
$9
CFPS bf. ch. in WC (f.d.) (US$/sh)
$2.08
Balance Sheet Items (US$mm)
Cash
$501
Current Assets
$983
Long-term Assets
$705
Total Assets
$1,688
Short-term Debt
$76
Current Liabilities
$142
Long-term Debt
$0
Total Liabilities
$213
Shareholders' Equity
$1,474
Total Liabilities & Shareholders' Equity
$1,688
Working Capital
$841
Mine Reserves/Resources
2P
Gold Reserves (Moz)
10.2
$300
400
$200
2013A
2014E
Kumtor Production (koz)
Gatsuurt Production (koz)
All-in Sustaining Costs (US$/oz)
Additional Ratio Analysis
Net Interest Coverage (x)
Gross Margin
ROE
ROA
EV/EBITDA (x)
Net Debt/Equity
Book Value (US$/sh)
Free Cash Flow (US$/sh)
NAV Analysis
Operating Mining Assets (C$mm)
Kumtor
Gatsuurt
Boroo
Exploration
Oksut
Total Mining Assets
Net Debt
Working Capital (Net of Cash and ST Debt)
In-the-Money Instruments
G&A, Expl, Reclamation
Net Asset Value
2015E
2016E
Boroo Production (koz)
Average Cash Costs
2013A
33.3x
1.3
11%
9%
1.3x
n.m.
$6.24
$0.66
2014E 2015E 2016E
-15.0x -168.3x
n.m.
1.3
1.4
1.4
0%
(1%)
(0%)
0%
(1%)
(0%)
1.6x
2.3x
3.4x
n.m.
n.m.
n.m.
$7.21
$6.99
$6.80
$0.06
$0.14 ($1.30)
C$M
$654
$269
$0
$13
$72
$1,008
$361
$323
$5
($182)
$1,516
C$/Sh
$4.08
$1.68
$0.00
$0.08
$0.45
$6.28
%
43%
18%
0%
1%
5%
66%
$2.25
$2.02
$0.03
($1.13)
$9.45
24%
21%
0%
(12%)
100%
113
Company Comment
(CSH.UN-T C$11.40)
Superior Growth, Lower Leverage, Distribution
Growth Capacity = Staying the Course
Target 1-Yr:
C$12.50
ROR 1-Yr:
14.4%
Key Risks to Target: Significant weakening of housing markets, new supply, regulatory environment .
Event
■ Chartwell reported Q3/14 FFOPU of $0.21 vs. $0.21 last year, modestly
above our $0.20 estimate and in line with the $0.21 consensus.
Implications
■ Delivering on expectations, with impressive SP NOI rebound. The
significant level of platform infrastructure investments, the disposition
of weaker non-core assets, and stronger market fundamentals helped lift
SP NOI 2.6% YOY, a solid recovery from last quarter's dip. We expect
+2%-3% annually through 2016 as occupancy momentum builds.
■ Portfolio clean-up mostly done with development spending set to
rise. Notwithstanding the dilutive impact on growth from ~$450M of
non-core assets sold in the last two years, we believe the improved asset
quality and stronger balance sheet are supportive of a higher valuation.
Along with select acquisitions, capital allocation towards developments
looks set to rise with $250M of expected projects over the next 3 years.
■ Solid growth outlook intact. Our minor estimate revisions reflect
higher NOI offset by modest dilution from additional development
spending. Our 10.4% 2014E-16E AFFO CAGR remains well above the
5.5% sector average, with distribution growth potentially in early 2015.
CDPU (NTM)
CDPU (Curr.)
$0.55
$0.54
Yield (Curr.)
4.7%
Pertinent Revisions
New
FFOPU14E
$0.78
FFOPU15E
$0.86
FFOPU16E
$0.94
New Valuation:
Old Valuation:
Old
$0.77
$0.87
$0.96
Recommendation
■ SO, $12.50. We continue to believe the right ingredients remain in place
to support a lower CSH risk premium ahead. At 14.5x 2015E AFFO/6.9%
implied cap rate, we see an attractive risk/reward mix; build positions.
Qtly FFOPU (FD)
2013A
2014E
2015E
2016E
Q1
$0.18 A
$0.18 A
$0.20
$0.22
(FY-Dec.)
Funds from Ops/Unit
Price/AFFO
EV/EBITDA
EBITDA Margin
EBITDA/Int. Exp
AFFO Payout Ratio
Q2
$0.20 A
$0.19 A
$0.21
$0.23
Q3
$0.21 A
$0.21 A
$0.22
$0.24
Q4
$0.19 A
$0.20
$0.23
$0.25
Year
$0.77
$0.78
$0.86
$0.94
P/FFO
13.0x
14.6x
13.2x
12.1x
2012A
$0.73
$0.66
16.4x
17.3x
27.3%
2.0x
81.5%
2013A
$0.77
$0.70
14.3x
15.9x
26.7%
2.2x
77.2%
2014E
$0.78
$0.71
16.1x
16.6x
26.3%
2.2x
76.3%
2015E
$0.86
$0.79
14.5x
15.9x
26.4%
2.6x
69.9%
2016E
$0.94
$0.86
13.2x
15.0x
26.5%
2.8x
65.3%
BVPU14E: $2.53
Cap Rate: 7.28%
NAVPU:
NAV
Prem/(Disc):
$10.20
11.77%
Capitalization
Market Cap (M)
Units O/S (M)
Float O/S (M)
$1,992
$2,124
$4,116
175
175
114
2016E
Q4/16E
2015E
Q3/16E
Q2/16E
5.5%
6.4%
10.4%
6.6%
8.1%
2014E
Q1/16E
2013
Q4/15E
Q3/15E
2012
Q2/15E
2011
Q1/15E
2010
Q3/14
Q4/14E
2009
Q2/14
Q1/14
2008
-2.8%
6.9%
11.1%
11.8%
15.3x
14.0x
14.5x
10.2x
Superior Growth Profile, Declining Leverage, Distribution Growth
Capacity = Staying the Course
■ Maintaining Sector Outperform and $12.50 target.
Following a better-than-expected Q3 delivery, our outlook on Exhibit 1 – Given Superior Growth, CSH’s Valuation Still Attractive in Our View
CSH remains positive. After setting expectations for stronger
CSH
CDN REITs
internal growth in 2H/14, CSH followed through with SP
US Health
LW
NOI posting an impressive rebound across all segments.
Importantly, the significant sales, marketing, and
infrastructure investments appear to be supporting occupancy
growth, coupled with gradually improving fundamentals in
most of its markets. The heavy lifting in non-core asset sales
appears to be largely done, with ~$450M of CDN and U.S.
properties sold in the last two years. Despite the short-term
dilutive impact on growth (particularly in 2014), the
P/AFFO (2015E)
Prem to NAV
Implied Cap Rate
AFFO CAGR
significant improvement in leverage, reduced U.S. exposure,
(13E-16E)
and a higher-quality remaining portfolio remain supportive of
a lower equity risk premium. Looking ahead, our forecasts Source: Company reports; Scotiabank GBM estimates.
reflect a solid 10.4% 2014E-16E AFFO CAGR, well above
the 5.5% sector average (Exhibit 1). As the majority of our
growth is organic and in light of an increased emphasis on Exhibit 2 – Low AFFO Payout Ratio = Ample Capacity for Distribution Growth
developments, we see an attractive combination to support
AFFOPU (LS)
continued NAV growth. In addition, CSH’s low payout ratio $1.00
140%
(2015E=70%) provides ample capacity to support distribution
Retained
120%
Payout Ratio (RS)
upside and a further reduction of leverage (Exhibits 2-3), $0.80
Cash (LS)
features that we believe will continue to support multiple
100%
expansion amid prospects of higher rates. Notwithstanding a
$0.60
strong year of outperformance (+14% price only vs. 6% for
80%
RTRE), we continue to see an attractive risk/reward profile
$0.40
60%
and recommend investors build positions.
■ Superior growth profile remains supportive of improved
40%
valuation relative to sector. CSH’s trading at 14.5x 2015E $0.20
Distribution (LS)
AFFO/6.9% implied cap rate vs. 15.3x for U.S. healthcare
20%
REITs and 14x/6.6% for our coverage universe (Exhibits 1, $0.00
0%
4). Though it has closed its P/AFFO discount (historically 1x
below sector), we believe its reduced risk premium is -$0.20
-20%
warranted in light of its above average growth prospects,
below average payout ratio, and seniors housing market Source: Company reports; Scotiabank GBM estimates.
dominance, partly offset by its more volatile cash flows and
still higher leverage. We tweaked our target multiple by
+0.25x to 14.5x, partly offset by our slightly lower 2016E
leaving our target price intact. On an NAV basis, the units are Exhibit 3 – Good Growth + Low Payout Ratio = Visible Path to Lower Leverage
YOY AFFOPU Growth (line)
trading at an 11.8% premium to our NAVPU vs. -2.8% for Net Debt/EBITDA (bars)
the sector. However, we note that our NAV does not reflect
10.0x
20%
stabilized occupancy. As shown in Exhibit 5, raising
9.5x
2014E-16E AFFO
15%
occupancy to a stabilized 92% would take our NAVPU up
CAGR = 10.4%
9.0x
~$1.50 (+15%) to ~$11.70, implying a current discount that’s
10%
more in line with the sector. We believe its higher-than8.5x
typical NAV premium (historically +3%) is also partly due to
8.0x
5%
ongoing market speculation of CSH being a possible takeover
7.5x
candidate, particularly given the active pace of consolidation
0%
by its U.S. peers. As well, we believe previously noted recent
7.0x
transactions (e.g., Ventas’ purchase of Holiday Retirement
-5%
6.5x
Canada for ~5.9% cap rate) are supportive of a lower NAV
6.0x
-10%
cap rate than we’re currently reflecting.
115
Oct-14
Dec-13
Feb-13
Apr-12
Jun-11
Aug-10
Oct-09
Dec-08
Feb-08
Apr-07
Jun-06
Aug-05
Sales/Marketing Efforts Bearing Fruit as Internal
Exhibit 4 – Chartwell’s Implied Cap Rate Spread Remains Wider-than-Average
Growth Momentum Builds; Province’s LTC
CSH Implied Cap Rate
7%
20.0x
Renewal Strategy Advances with Consultations
Current / Avg.= 6.9% / 7.3%
Sector
P/AFFO
Spread to GOC 10 Yr = 4.9%
18.0x
■ Delivering on expectations, as internal growth posts 6%
Avg Spread = 4.1%
16.0x
impressive rebound; annual 2%-3% is achievable in our
5%
14.0x
view. After last quarter’s weak -1.3% YOY posting, SP NOI
rose 2.6% YOY (+1.2% YTD) with all segments in positive 4%
CSH
12.0x
P/AFFO
territory (Exhibits 6-7). The primary drivers were rent
10.0x
growth, higher ancillary revenue, and expense controls, partly 3%
8.0x
offset by higher insurance, utilities, property taxes, and
CSH P/AFFO
6.0x
incentives (in ON). Importantly, the significant platform 2%
Current ('15E) /Avg.= 14.5x / 13.3x
Spread
to
Sector
4.0x
investments (i.e., new call centre, rebranding, salesforce
Current / Avg. = 0.5x / -1.0x
changes/training, IT infrastructure, and marketing) appear to 1% CSH Implied Cap Rate
2.0x
be paying dividends. By segment, CDN RH rose 2.8% YOY, 0% Spread to GOC 10-Yr
led by QC at +4.9%, ON at +1.9%, and W. CDA at +1.7%. In
ON, growth from higher rents and ancillary revenue was
more than enough to offset lower YOY occupancy, while
similar forces along with higher occupancy drove QC’s solid Source: Company reports; Scotiabank GBM estimates.
gain. U.S. RH rose 1.8% YOY mostly from higher rents,
partly offset by lower occupancy. Competitive pressures
appear to be rising in some U.S. markets (FL), with CSH
selectively investing capital to improve its competitive Exhibit 5 – Trading at a Premium to NAV, Albeit on Non-Stabilized Occupancy
7.00%
7.25%
7.50%
position. LTC was +2.8% YOY from higher service revenue CDN RH
6.65%
6.90%
7.15%
and preferred accommodation rate hikes. Looking forward, US RH
LTC
8.25%
8.50%
8.75%
we expect internal growth momentum to build as excess CDN
Wtd avg cap rate
7.03%
7.28%
7.53%
inventory is absorbed (particularly in ON & QC) and the CDN RH
188,685
188,685
188,685
payoff from ramped up sales and marketing efforts grows. US RH
60,388
60,388
60,388
29,475
29,475
29,475
Our 2015E-16E SP NOI are +2.6% and +2.9% from 40bp- CDN LTC
NTM NOI
278,548
278,548
278,548
60bp of annual occupancy gains and modest rent bumps.
2,695,500
2,602,552
2,515,800
■ Occupancy jumps higher; we haven’t seen a 9-handle CDN RH
RH
908,090
875,188
844,588
since 2012! SP occupancy rose to 90.2% (+90bp QOQ, US
CDN LTC
357,269
346,761
336,853
+30bp YOY), with CDN RH at 88.8% (+110bp, +60bp), US Other assets
199,024
199,024
199,024
4,159,883
4,023,525
3,896,265
RH at 88.9% (+80bp, -80bp), and LTC at 98.8% (+30bp, Total assets
flat). Though ON RH was down 60bp YOY, the 60bp QOQ CDN long-term debt
1,442,724
1,442,724
1,442,724
498,400
498,400
498,400
gain is encouraging in light of the still oversupplied US long-term debt
debt
299,952
299,952
299,952
conditions in Ottawa, the GTA, and Windsor. We also note Other
Total liabilities
2,241,076
2,241,076
2,241,076
that Q3/14 marked the first time since Q4/12 that SP
1,918,807
1,782,449
1,655,189
occupancy has moved above 90%, albeit partly driven by Estimated NAV
$10.98
$10.20
$9.47
non-core asset sales. Overall occupancy rose to 89.7% Estimated NAVPU
(+160bp QOQ, +50bp YOY) and remains below CSH’s Current unit price
$11.40
$11.40
$11.40
historical 92% average, leaving ample room for upside to Prem.(Disc.) to NAV
3.8%
11.8%
20.4%
support AFFO and NAV growth.
Current implied cap rate
6.9%
6.9%
6.9%
■ Positive step forward as MOHLTC to begin LTC Home Net debt/market value
51.6%
53.4%
55.1%
Renewal Strategy consultation process. The MOHLTC NAV impact of 25 bp cap rate chg
7.7%
0.0%
-7.1%
announced that it will be working with LTC home operators
Stabilized
Occupancy
NOI
Impact
(PV)
to rework the province’s redevelopment strategy for the ~35K
18,874
18,874
18,874
Class B and C beds across ~300 homes. The process begins CDN RH & US RH
Stabilized Value Upside (PV)
this month and will focus on enhancing construction funding CDN RH & US RH
273,541
263,972
255,049
subsidies, working with operators, LTC Associations and
Stabilized Value Upside per Unit
Local Health Integration Networks to determine scheduling, CDN RH & US RH
1.57
1.51
1.46
and establishing a committee to oversee requests for NAVPU upside (%)
14%
15%
15%
exceptions to design standards. The province is aiming to
complete the process over the next few months and begin Source: Company reports; Scotiabank GBM estimates.
funding redevelopments in Fall 2015. Of CSH’s 3,135 LTC
beds (11% of NOI), ~900 beds (29%) are Class B and C. Though more information is
required to gauge the economics, the MOHLTC’s indication for an “enhanced” construction
subsidy is an encouraging sign and may improve redevelopment returns for CSH. As we’ve
116
stated before, increasing the $13.30 per diem 25-year capital funding
– Good Q3 Rebound
subsidy, further hikes in the $23.25 per diem private room rate, and/or Exhibit 6 – Chartwell Select Operating MetricsChange
(bp)
raising the 60% preferred accommodation limit, are all ways in which
Q3/14 Q2/14 Q3/13
QOQ
YOY
the program could improve otherwise modest current redevelopment
SP
Occupancy
returns.
Overall
CDN RH
W. CDA
ON
QC
CDN LTC
US RH
Recycling Capital as Developments Set to Pick Up;
Leverage Improves with Further Reductions in Sight
90.2%
88.8%
93.5%
87.0%
88.7%
98.8%
88.9%
89.3%
87.7%
92.4%
86.4%
87.2%
98.5%
88.1%
89.9%
87.5%
92.0%
87.6%
87.5%
98.7%
89.8%
90
110
110
60
150
30
80
30
130
150
-60
120
10
-90
■ Recycling capital into developments, with $250M of approved
projects over next ~3 years. Having sold $450M of non-core
properties in the last two years, management remains focused on
recycling capital into acquisitions, developments, and debt reduction. Overall Occupancy
In Q3, CSH completed its previously announced sale of 4 U.S.
CDN RH
88.0% 85.9% 87.0%
210
100
properties (827 suites) for US$136M (7.3% cap rate; $165K/suite). It
CDN LTC
98.8% 98.5% 98.7%
30
10
also completed its $66M (7.3% cap rate) purchase of two RH (418
US RH
89.3% 88.7% 90.4%
60
-110
suites) and 1 medical office building in QC. Looking ahead, our
Overall
89.7% 88.1% 89.2%
160
50
forecasts exclude further purchases, though developments seem set to SP NOI Growth YOY YTD
pick up. Management noted several projects are approved with
Overall
2.6% 1.2%
~$250M of estimated costs over the next three years, beginning in
CDN RH
2.8% 1.7%
2015. The projects mostly relate to lower-risk additions to existing
W. CDA
1.7%
n.a
assets. Given the expected ramp-up in activities, we have increased
ON
1.9%
n.a
the development spending reflected in our model to $60M annually.
QC
4.9%
n.a
Though the projects provide an attractive source of mid-to longerCDN LTC
2.8% 2.3%
term growth, a modest degree of short-term dilution is expected as
US RH
1.8% -0.8%
lease-up can take 3-4 years. A summary of current projects is Regional drivers of SP NOI Growth
provided in Exhibit 8.
W. CDA - Higher rents and increased ancillary revenue, offset by higher
property tax and food expenses.
■ Balance sheet health continues to improve; path to lower leverage staffing,
ON - Higher rents and increased ancillary revenue, offset by lower
remains in sight. D/GBV improved to 55.2% (-170bp QOQ) with occupancies, and higher incentives, staffing, food/property tax expenses.
our debt/EBITDA improving to 8.1x at Q3 (8.7x 2014E trailing 12 QC - Higher rents, increased ancillary revenue, and improved occupancy,
months), partly driven by non-core asset sales. Based on the growth partially offset by higher utilities and food expenses.
reflected in our estimates and CSH’s low payout ratio, we expect Source: Company reports; Scotiabank GBM estimates.
further reductions with our 2015E at 8.0x (Exhibit 9). Our estimates
exclude equity issuance (aside from the DRIP), with $97M available
Exhibit 7 – Our 2014E-16E Reflect Healthy Gains in SP NOI
from undrawn lines and cash.
Occupancy (RS) YOY SP NOI Growth (LS)
Current = 90.2% Current = 2.6%
Average = 91.4% Average = 2.9%
12%
10%
95%
94%
93%
1.6%
2.6%
2.9%
6%
4%
2%
92%
91%
90%
89%
2015E
Q2/14
Q3/13
Q4/12
Q1/12
Q2/11
Q3/10
Q4/09
Q1/09
87%
-4%
Q3/07
88%
-2%
Q4/06
0%
Q1/06
■ Results modestly ahead of our call. CSH reported Q3/14 FFOPU of
$0.21 vs. $0.21 last year, modestly above our $0.20 estimate and in
line with the $0.21 consensus. The +$0.01/unit variance to our
estimate was from higher NOI and lower G&A, partly offset by
higher interest costs. The +1% YOY FFOPU was driven by higher SP
NOI, acquisitions, developments, lower interest costs, positive F/X
moves, and lower G&A, offset by the significant level of non-core
asset sales.
8%
Q2/08
Q3/14 Recap: Good Results, Modestly Ahead
86%
Exhibit 8 – Summary of Development Projects Completed YTD and Currently in Progress
Project
Chartwell Deerview Crossing RH
Tamarac Memory Care - Phase II(1)
Chartwell Tranquility Place -Apartments Phase II
Chartwell Georgian Traditions - Memory Care Phase II
Chartwell L’Unique - Phase II
Total
Prov./
City
State
Hamilton
ON
Tamarac
FL
Brantford
ON
Collingwood
ON
Ste. Eustache QC
Act. / Est.
Dev. Cost
($MM)
32.3
5.1
8.3
9.2
n/a
$54.9
Act. / Est.
Act. / Est.
Completion Stabilization
Date
Date
Q1/14
Q2/15
Q4/14
Q4/15
Q3/15
Q3/16
Q1/15
Q1/17
Q2/15
Q2/16
(1) Purchase price of US$4.5M converted to CDN at $0.88/USD. Source: Company reports; Scotiabank GBM estimates.
Est.
Unlevered
Yield
9.0%
10.1%
7.7%
9.0%
8.9%
117
Exhibit 9 – Forecast Summary, Variance Analysis, Leverage Snapshot
Forecasts
2006
2007
2008
2009
2010
2011
2012
2013
2014E
2015E
2016E
FFOPU
AFFOPU
Distributions
AFFO payout ratio
0.91
0.80
1.07
134%
0.83
0.70
1.07
152%
0.80
0.67
0.79
119%
0.76
0.65
0.66
101%
0.65
0.57
0.54
95%
0.67
0.59
0.54
91%
0.73
0.66
0.54
81%
0.77
0.70
0.54
77%
0.78
0.71
0.54
76%
0.86
0.79
0.55
70%
0.94
0.86
0.56
65%
Valuation
P/FFOPU
P/AFFOPU
EV/EBITDA
Distribution yield
AFFO yield
16.1x
18.6x
14.5x
7.5%
5.4%
16.3x
19.4x
14.0x
7.7%
5.2%
9.8x
11.8x
12.7x
10.8%
8.5%
8.1x
9.4x
13.7x
12.2%
10.6%
11.8x
13.5x
15.2x
6.9%
7.4%
12.2x
13.7x
14.7x
6.7%
7.3%
13.4x
14.7x
15.8x
5.6%
6.8%
13.3x
14.6x
16.1x
5.2%
6.9%
14.6x
16.1x
16.7x
5.0%
6.2%
13.2x
14.5x
15.8x
4.8%
6.9%
12.1x
13.2x
15.0x
4.9%
7.6%
11.8%
6.9%
940
280
247
30%
26%
982
293
259
30%
26%
Income Statement ($MM)
Revenues
EBITDA
NOI margin
EBITDA margin
Balance Sheet ($MM)
Total assets
Net debt
Leverage
Net debt/EV
Debt/GBV
Net Debt/EBITDA
EBITDA/net interest
Same-property occupancy
Acquisitions
Estimated cap rate
Fee income
% of revenues
Mezzanine loan interest
G&A expenses
% of revenues
Maintenance capex
% of revenues
$10.20
337
111
94
33%
28%
1,978
984
47%
57%
8.7x
2.8x
7.3%
624
206
184
33%
30%
2,603
1,574
59%
61%
7.3x
1.6x
710
229
209
32%
29%
2,705
1,894
78%
62%
8.2x
1.5x
662
200
179
30%
27%
2,599
1,741
66%
60%
10.4x
1.8x
707
210
189
30%
27%
2,677
1,866
62%
58%
9.7x
1.8x
754
222
197
29%
26%
2,707
2,018
62%
59%
9.4x
2.0x
882
267
241
30%
27%
3,005
2,315
55%
59%
8.8x
2.0x
931
279
248
30%
27%
2,863
2,211
2,680
2,113
2,597
2,108
1,035
309
274
30%
26%
2,520
2,091
56%
57%
8.8x
2.2x
51%
55%
8.7x
2.2x
51%
54%
8.0x
2.6x
51%
52%
7.5x
2.8x
Condensed Quarterly
Q3/14A
Q3/13A
Revenue
Operating expenses
NOI
NOI margin
231,498
159,282
72,216
31.2%
235,778
162,962
72,816
30.9%
-1.8%
-2.3%
(0.8%)
31
231,827
162,310
69,517
30.0%
(0.002)
(0.016)
0.014
121
6,442
2.8%
65,774
28.4%
6,800
2.9%
66,016
28.0%
-5.3%
(10)
-0.4%
41
7,882
3.4%
61,635
26.6%
(0.008)
(62)
0.022
183
Other expense (income)
Property lease expense
Depreciation & amortization
Fair value changes and F/X
(Gains)/losses on asset sales
Acquisition transaction costs
Current taxes
Future taxes
Net income/(loss)
26,059
(39,277)
684
41,194
679
1,285
3,304
31,846
27,430
797
682
41,640
(3,074)
65
(1,524)
-5.0%
nm
0.3%
nm
nm
nm
nm
nm
nm
nm
25,092
683
40,785
99
(5,024)
0.004
nm
0.000
nm
nm
nm
nm
0.006
nm
nm
FFO adjustments:
Depreciation and amortization
(Gains)/losses on asset sales
Acquisition transaction costs
Class B unit interest expense
Fair value changes and f/x
Future taxes
Other non-recurring items
FFO
41,035
(40,001)
1,937
221
(978)
3,304
37,364
0.208
41,411
(105)
902
224
(4,331)
36,577
0.206
2.2%
1.0%
40,702
35,678
0.199
0.009
4.6%
% of revenue
EBITDA
EBITDA margin
% chg
Scotia
Q3/14E
2006
2007
2008
2009
2010
2011
2012
2013
2014E
2015E
2016E
Q3/14
7.4%
93.4%
615
7.8%
12
3.7%
10
17
5.0%
6
2.0%
4.2%
93.9%
911
6.6%
14
2.3%
13
22
3.5%
12
2.0%
3.8%
93.1%
107
7.8%
9
1.3%
11
20
2.8%
14
2.0%
-0.5%
91.6%
74
7.8%
7
1.1%
8
21
3.2%
14
2.0%
3.5%
90.4%
315
7.7%
5
0.7%
5
21
2.9%
14
2.0%
2.3%
90.6%
193
7.3%
3
0.4%
2
25
3.3%
15
2.0%
5.3%
90.3%
436
7.6%
8
0.9%
1
26
3.0%
17
2.0%
1.9%
89.4%
68
na
8
0.9%
0
31
3.3%
18
2.0%
1.6%
90.1%
87
6.3%
8
0.8%
0
33
3.5%
19
2.0%
2.6%
90.4%
na
8
0.8%
1
33
3.4%
19
2.0%
2.9%
91.0%
na
8
0.7%
1
35
3.4%
21
2.0%
Debt / GBV
Max limit
Net debt / EV
Net debt / NAV assets
55.2%
65.0%
51.6%
53.4%
Liquidity ($000s)
Undrawn amounts
Cash on hand
Available liquidity
Mortgage Profile
% due pre-2017
37.4%
4.9%
6.9
4.0%
4.5%
2014E issuance
2014E timing
2015E issuance
2015E timing
Variance
per unit
Q3/14
131,460
82,460
14,340
96,800
na
na
118
Company Comment
(CGX-T C$42.51)
Cineplex Inc.
Paul Steep, MBA - (416) 945-4310
paul.steep@scotiabank.com
Risk Ranking: High
Andy Ko, CFA, MBA - (416) 863-7993
andy.ko@scotiabank.com
Target 1-Yr:
C$44.00
ROR 1-Yr:
7.0%
Valuation: 10.0x EV/EBITDA on NTM EBITDA 1 year forward + $1 for SCENE
Key Risks to Target: Weaker Canadian Box Office performance
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.50
$1.48
3.5%
Event
■ Cineplex reports Q3 results on November 13, 2014 at 10:00 a.m. EST;
dial-in: 1-866-530-1533. We anticipate revenues of $306M and
EBITDA of $55M (consensus $316M; $57M).
Implications
■ We believe Cineplex's Q3/14 results will reflect soft same-store box
office revenue given a weak movie slate early in the quarter and a
relatively strong prior-year comparable period, partially mitigated by
the impact of Empire theatres acquired and higher media revenues. We
remain encouraged by the upcoming blockbuster releases amid a solid
line-up for 2015.
■ Cineplex continues to execute on its strategy to grow the business
through various initiatives within its core Exhibition business. Our view
is that the firm will continue to roll out premium products and build up
its own proprietary concession brands in theatres (for further supply
chain efficiencies) and other non-theatre locations longer term.
Recommendation
■ We rate Cineplex Sector Outperform, given the firm's strong market
position, track record in achieving ongoing operating efficiencies, proven
ability to consistently generate FCF, and sustainable yield.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
(FY-Dec.)
Cash Flow from Ops
Price/Cash Flow
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q1
$0.14 A
$0.08 A
$0.30
$0.42
Q2
$0.45 A
$0.37 A
$0.52
$0.63
Q3
$0.41 A
$0.35
$0.50
$0.60
Q4
$0.32 A
$0.48
$0.64
$0.75
Year
$1.33
$1.28
$1.95
$2.40
P/E
33.1x
33.1x
21.8x
17.7x
2012A
$2.88
11.0x
$1,092
$202
0.5x
16.0x
2013A
$3.57
12.3x
$1,171
$198
0.5x
18.5x
2014E
$2.74
15.5x
$1,245
$211
0.5x
9.7x
2015E
$3.90
10.9x
$1,374
$270
0.5x
13.3x
2016E
$4.19
10.1x
$1,466
$310
0.7x
15.9x
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
BVPS14E: $11.68
ROE14E: 20.12%
All values in C$ unless otherwise indicated. Note: Company-announced CDPS 2011
$2,677
$370
$3,047
63
63
119
Q3/14 Preview
■ Expecting same store box office revenue to decrease ~12.3%. We estimate same store
attendance decrease (-12.3%) for the quarter, and slightly higher average ticket prices, with
the revenue contribution from the 24 Empire theatres acquired, will result in a flat year-overyear box office revenue (-0.4%) (see Exhibit 1). Our expectation is that Cineplex indexed in
line with the reported Canadian box office (-12.3% in Q3/14) based on adjusted Motion
Picture Theatre Associations of Canada data. We note that box office in Q3/14 was
negatively impacted by a weak movie slate early on and against a relatively strong prior-year
comparable period (e.g., Despicable Me 2, Grown Ups 2, Pacific Rim, and The Wolverine).
In Q3, we anticipate lower EBITDA margin given the higher occupancy and other operating
expenses (newly acquired EK3 and Empire theatres).
Exhibit 1 – Empire Theatres Acquired and Media Revenues to Mitigate Soft Same Store Box Office Revenues
C$000s except per share amounts
Q3/14E
18,423
Q3/13A
19,011
$9.09
$5.05
$2.46
$16.60
Box office
Concessions
Other revenues
Total Revenue
Total operating expenses
Attendance
Average ticket price
Concessions per patron
Other revenues per patron
Total revenue per patron
EBITDA
EBITDA margin
Adjusted earnings per share
Consensus
Q3/14E
-3.1%
Q2/14A
19,301
-4.5%
$8.84
$4.81
$2.04
$15.69
2.8%
5.0%
20.3%
5.8%
$9.40
$5.08
$2.28
$16.76
-3.3%
-0.5%
7.6%
-1.0%
167,472
93,092
45,252
305,815
168,066
91,487
38,805
298,358
-0.4%
1.8%
16.6%
2.5%
181,419
98,024
44,053
323,496
-7.7%
-5.0%
2.7%
-5.5%
250,402
241,941
3.5%
265,074
-5.5%
55,413
18.1%
56,417
18.9%
-1.8%
-4.2%
58,422
18.1%
-5.2%
0.3%
56,800
18.0%
$0.35
$0.41
nmf
$0.37
-4.4%
$0.41
Y/Y
Q/Q
316,300
Source: Company reports; Bloomberg; Scotiabank GBM estimates.
■ Enhanced offerings continue to lift concession revenue per patron (CPP). For the
quarter, we forecast CPP of $5.05 (up 5.0% year-over-year), sustained by the firm's
continued focus on revised concession offerings, RBO program, and improved product
promotion through the expanded digital menu board. The acquired Empire theatres and
higher CPP are expected to mitigate the lower same-store attendance, resulting in modest
(+1.8%) concession revenues in Q1.
■ Media revenues. In the quarter, we anticipate the firm's media revenues to increase due to
acquisition of Empire theatres, contribution from EK3 Technologies, and higher Cineplex
Digital Media (CDM) revenues. We anticipate the completion of the launch of TimsTV in
2,200 Tim Hortons locations in the quarter and soft show-time and pre-show revenues given
a weak film slate.
■ Exhibition industry activity. We expect that Cineplex strategy will remain consistent with
management’s long-stated plans to prudently and conservatively seek to grow the business.
Regal Entertainment (RGC, NYSE) the largest U.S. exhibitor by number of screens indicated
on its Q3/14 conference call that the firm was exploring a variety of strategic alternatives.
Our view is that Cineplex is unlikely to enter the U.S. exhibition market via an acquisition or
organic means.
120
Box Office Outlook
■ We remain encouraged by the upcoming blockbuster releases scheduled for 2015 ( Fast &
Furious 7, Avengers: Age of Ultron, Jurassic World, James Bond movie, Star Wars: Episode
VII, Kung Fu Panda 3, and Mission Impossible 5).
■ Some notable 2D titles in Q4/14 include: Gone Girl, Annabelle, The Judge, Alexander and
the Terrible, Fury (2014), Ouija, Interstellar, The Hunger Games: Mockingjay - Part 1,
Horrible Bosses 2, and Night at the Museum: Secret of the Tomb. Highly anticipated 3D
films scheduled for release in Q4/14 include: Big Hero 6, Penguins of Madagascar, Exodus:
Gods and Kings, and The Hobbit: The Battle of the Five Armies.
■ We believe the upcoming titles scheduled for release should allow premium products to
continue to account for a higher percentage of Cineplex's total box office revenues, as the
company enjoys premium pricing on these titles.
121
Company Comment
(DDC-N US$13.65)
(DDC-T C$15.62)
tanya.jakusconek@scotiabank.com
Risk Ranking: High
Target 1-Yr:
Joanne van Ballegooie - (416) 863-7431
James Bender, CPA, CA - (416) 945-4648
US$20.00
ROR 1-Yr:
46.5%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Key Risks to Target: Commodity prices; technical and operational risk; foreign exchange risk; global economy outlook .
Event
■ DDC posts surety bonds and files DAR for Ekati.
Implications
■ Surety Bonds – DDC has posted surety bonds with the Government of
the Northwest Territories for a total of C$253.5M to secure the
obligation under its Water Licence for reclamation at Ekati. The surety
bonds have been issued by several insurance companies and carry an
annual average cost of 1.3%. The surety bond posted was lower than the
previously proposed amount of $265M.
■ Files DAR – DDC has also filed its Developers Assessment Report
(DAR) with the Mackenzie Valley Environmental Impact Review
Board for the Jay pipe at Ekati (this is a requirement for the
Environmental Assessment). Next steps include the analytical and
hearing phases which are expected to lead to a ministerial decision in
late 2015. Once the decision is issued, the water licence and land-use
permitting process will take an additional six months. A prefeasibility
study is expected to be published before year-end. If a positive decision
is made, construction could begin in the summer of 2016 and continue
through 2019, with production beginning in 2020.
Recommendation
■ The timeline for Jay is in line with management's previous comments.
The submission of the DAR is positive as it advances the permitting
process for Jay. SC believes the market is not giving much value to this
pipe given the limited information with respect to project economics. The
prefeasibility should provide more clarity on this pipe. SO.
Qtly Adj. EPS (FD)
2012A
2013A
2014A
2015E
Q1
$0.04 A
$0.14 A
$0.13 A
$0.17 A
(FY-Jan.)
Diamond Prod (ct) (000)
Diamond Price (/ct)
Cash Cost ($/ct)
Total Production Cost ($/ct)
Adj Earnings/Share
Cash Flow/Share
Free Cash Flow/Share
Price/Cash Flow
Q2
$0.11 A
$0.08 A
$0.07 A
$0.29 A
Q3
$0.05 A
$0.03 A
$-0.02 A
2013A
2,892
$120
$62
$103
$0.47
$1.35
$0.02
10.9x
2014A
4,217
$187
$101
$139
$0.30
$1.86
$-0.09
7.8x
Q4
$0.21 A
$0.22 A
$0.12 A
2015E
4,909
$177
$95
$144
$0.88
$3.59
$1.21
3.8x
Year
$0.41
$0.47
$0.30
$0.88
P/E
28.5x
31.2x
48.5x
15.5x
2016E
5,055
$159
$92
$143
$0.71
$3.88
$1.92
3.5x
2017E
7,399
$142
$73
$110
$1.34
$5.13
$4.01
2.7x
NAVPS:
P/NAV:
$20.55
0.66x
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$1,162
$-380
$932
85
84
122
Company Comment
(DDC-N US$14.77)
(DDC-T C$16.72)
tanya.jakusconek@scotiabank.com
Risk Ranking: High
Target 1-Yr:
Joanne van Ballegooie - (416) 863-7431
James Bender, CPA, CA - (416) 945-4648
US$20.00
ROR 1-Yr:
35.4%
Div. (NTM)
Div. (Curr.)
$0.00
$0.00
Yield (Curr.)
0.0%
Key Risks to Target: Commodity prices; technical and operational risk; foreign exchange risk; global economy outlook .
Event
■ We have attempted to determine the potential value of the Jay Project
and provided sensitivities on key assumptions.
Implications
■ DDC submitted the Developers Assessment Report (DAR) to the
Mackenzie Valley Environmental Impact Review Board for the Jay pipe
at Ekati (this is a requirement for the Environmental Assessment). The
report included some general parameters sufficient to compute a crude
analysis of the potential value of the project.
■ In our base case scenario, we see a potential value for Jay of $409M
(100% basis) or $267M ($3.10/sh) for DCC share. Based on our
analysis, the project has an 18% after-tax IRR. Assuming a 2% price
and cost escalator, the value more than doubles at $868M at 100% or
$567M ($6.55/sh) for DDC’s share. See within for more details.
■ We currently value Jay on an EV/ct basis and ascribe a value of about
$30M or 2% of our NAV for its share. We believe that the market
ascribes little value to Jay at this point but as more data points emerge
over time (with pre-feasibility and ultimately feasibility study) and
DDC advances the permitting process, Jay should add value to the
current share price.
Recommendation
■ Jay has the potential to add to the current valuation. We await more detail
with the pre-feasibility study to come out at year end which will have a
LOM plan. We maintain our Sector Outperform rating at $20.00/sh target.
Qtly Adj. EPS (FD)
2012A
2013A
2014A
2015E
Q1
$0.04 A
$0.14 A
$0.13 A
$0.17 A
(FY-Jan.)
Diamond Prod (ct) (000)
Diamond Price (/ct)
Cash Cost ($/ct)
Total Production Cost ($/ct)
Adj Earnings/Share
Cash Flow/Share
Price/Cash Flow
Q2
$0.11 A
$0.08 A
$0.07 A
$0.29 A
Q3
$0.05 A
$0.03 A
$-0.02 A
2013A
2,892
$120
$62
$103
$0.47
$1.35
$0.02
10.9x
2014A
4,217
$187
$101
$139
$0.30
$1.86
$-0.09
7.8x
Q4
$0.21 A
$0.22 A
$0.12 A
2015E
4,909
$177
$95
$144
$0.88
$3.59
$1.21
4.1x
Year
$0.41
$0.47
$0.30
$0.88
P/E
28.5x
31.2x
48.5x
16.7x
2016E
5,055
$159
$92
$143
$0.71
$3.88
$1.92
3.8x
2017E
7,399
$142
$73
$110
$1.34
$5.13
$4.01
2.9x
NAVPS:
P/NAV:
$20.55
0.72x
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$1,257
$-380
$1,028
85
84
123
The Project
■ DDC submitted the Jay Project’s Developers Assessment Report (DAR) on Nov 6 th which is
a requirement to obtain the necessary environmental permits to advance the project. Some
general details relating to capital, operating cost and output were provided in this report,
however, we must highlight that this is preliminary in nature and this report did not have a
LOM plan.
■ DDC is proposing to develop the Jay kimberlite pipe located beneath Lac du Sauvage. The
proposed Jay Project is envisioned as an open pit operation and it will be an extension of the
Ekati Mine (which is a large, stable, and successful mining operation that has been operating
for 16 years). Most of the facilities required to support the development of the Jay pipe and to
process the kimberlite currently exist at the Ekati Mine. The Project is located in the
southeastern portion of the Ekati claim block approximately 25 km from the main facilities
and approximately 7 km to the northeast of the Misery Pit (Ekati Mine), in the Lac de Gras
watershed.
■ The proposed approach to mining the Jay pipe is to isolate the area of Lac du Sauvage
overlying the pipe within a water-retaining dike and then dewater the diked area to allow for
open-pit mining. The dike construction will is expected to commence during summer of 2016
and continue through to 2019. The diked area will be approximately 4.2 km 2, and the total
volume of water to be removed over approximately six months will be 29.6 million m 3. The
approach is similar in concept to those implemented for the Diavik Mine and the
Meadowbank Gold Mine (Meadowbank Mine) in Nunavut. The Project will also require an
access road, pipelines, and power lines to the new open pit. On the processing front, a single,
centralized processing plant is located within the Ekati main camp, processing an average of
~12,500tpd as a continuous operation. The current proposed schedule for the project is in
Exhibit 1.
■ The Jay open-pit mining could be followed by underground operations (if the economics are
favourable) consistent with other Ekati Mine pits, such as the Panda and Koala pits. If
underground mining is considered feasible for the Jay pipe, block caving would be an
appropriate mining method due to the combination of high wall rock strength, low kimberlite
strength, and steeply dipping sides.
Exhibit 1 - Overview of Project Timeline and General Activities for the Jay Project
Source: Company reports
124
Economic Analysis - Jay Pipe Has the Potential to Add Significant Value
■ The Jay Project (65.3% interest in the buffer zone) has the potential to add significant value
to DDC current valuation as we believe the market is not attributing much value to Jay in the
share price. At this point in time, we attribute minimal value to Jay based on an EV/ct
valuation of about $0.50/ct or $30M for its interest ($45M on a 100% basis).
■ We have provided a very preliminary estimate of what we think Jay could be worth based on
the limited information provided. Our analysis is based on the following assumptions:
■ The base case assumes that all of the M&I resources are mined out at the respective
grade. The last published resource for Jay was for 78.1 Mct in 36.2 Mt at 2.2 ct/t in the
Measured and Indicated category and 12.9 Mct in 9.5 Mt at 1.4 ct/t in the Inferred
category (all at 100% basis). However, in the recently submitted Developer’s
Assessment Report (DAR), DDC highlighted that the latest resource estimate included
Indicated resources of 45.6 Mt but did not provide grade or carat figures. If we add both
the prior M&I and inferred tonnages we obtain 45.7Mt, so clearly the inferred material
has been upgrade. We have assumed that the previous Inferred grade of about 1.4 ct/t
was maintained when upgraded to Indicated. As such, the total indicated resource is 91
Mct in 45.6Mt at 2.0 ct/t.
■ We have assumed that the head grade through the mill is 2.0 ct/t at 4.3 Mtpa. DDC
stated that the grade would vary from 1.3-2.1c/t. There is no information on the grade
profile of the ore processed on an annual basis. This results in average annual
production of 8.7 Mct. We have assumed operating costs of $44/ct.
■ We have assumed the capital of $671M over a 3 year period; sustaining capital at $20M
per annum over a 10 year mine life.
■ We have assumed a conservative value of $74/ct on Jay in line with DDC last
mentioned value compared to the DAR’s value of $80-$100/ct.
■ Permits are obtained in due course. We have incorporated a one year delay in our
analysis for the purposes of calculating NPV. We have assumed the mine starting 2021.
We see the permitting process as the most critical path item in order for the market to
attribute value to DDC. In addition, management would have to provide further insights
into funding of the capital.
■ We have assumed $10M per annum in selling costs (in line with current Ekati costs)
■ The NPV is based on the value of the project as of February 1, 2015 (the beginning of
DDC’s year-end).
■ In our analysis, we obtain a value of $409M for 100% of the project, of which $267M or
$3.09/sh would be attributable to DDC. We have provided sensitivities from the Base Case
on discount rates, price/cost inflators, costs per tonne and development capital. Important to
note is that if one assumes escalating diamond prices and cost (on average at about 2% per
annum), the value of the asset would be $868M on 100% basis or over twice the base case
value. The project is highly sensitive to diamond pricing.
■ Please refer to Exhibit 2 and Exhibit 3 for details on our analysis.
Conclusion
■ The Jay Project remains in the permitting stage and has potential to add further value for the
company when developed (assuming the pre-feasibility study to be released at year end
shows the pipe to be viable). Given the limited information provided in the DAR report, SC
calculates a very crude NPV of about $409M (about $267M or $3.10/sh for DDC account)
and an after-tax IRR of 18%. This would improve significantly if we assume a 2% price and
cost annual inflator. We have not adjusted our model as we wait for the pre-feasibility for
more details with respect to LOM plan.
125
Exhibit 2 - Base case scenario vs. DAR
Jay Valuation Summary
Base Case
Per DAR1
Assumptions
Mining Resource
Indicated
Indicated
Tonnes (Mt)
45.6
45.6
Carats mined/processed (Mct)
91.0
n.a.
Mine life (years)
10.5
10.5
Summary
Capital
Totals
Initial capital ($M)
$671
$671
Sustaining Capex/year ($M)
$20
$20
Economic Metrics (Annual Averages)
LOM
Price inflator
0%
n.a.
Cost inflator
0%
n.a.
Cost ($/t)
$87
n.a.
Value ($/ct)
$74
$80-$100
Cash cost ($/ct)
$44
n.a.
Depreciation ($/ct)
$10
n.a.
Production cost ($/ct)
$53
n.a.
AISC ($/ct)
$46
n.a.
Gross margin ($/ct)
$21
n.a.
Gross margin %
28%
n.a.
Cash margin ($/ct)
$28
n.a.
Cash margin %
38%
n.a.
Throughput/Production
Total LOM tonnes processed (Mt)
45.6
45.6
Total carats produced (Mct)
91.0
n.a.
Avg annual throughput (Mt)
4.3
4.3
Avg grade processed (ct/t)
2.0
1.3-2.1
Avg annual carats produced (Mct)
8.7
n.a.
Financials
Avg annual revenue ($M)
$612
$7502
Avg operating cost ($M)
$360
$357
Avg annual CFOps ($M)
$184
n.a.
Valuation
Discount rate
5%
n.a.
After-tax IRR
18%
n.a.
Value ($M) - 100% basis
$409
n.a.
Value ($M) - DDC Share - 65.3%
$267
n.a.
1 Assuming the full 45.6Mt of indicated resource highlighted by the DAR are mined in full.
2 C$825M converted to US$ at 1.10 CAD/USD rate.
126
Exhibit 3 - Individual Sensitivities – NPV at 100%
Sensitivity
Price & Cost Inflator
0.00%
1.00%
2.00%
3.00%
4.00%
Cost per tonne
IRR
NPV5%
18%
$409- $M
17.8%
$409
22.2%
$624
26.4%
$868
30.5%
$1,145
34.5%
$1,460
Sensitivity
0%
52%
112%
180%
257%
IRR NPV5%$409
- $M
18%
24.9%
$742
21.5%
$575
17.8%
$409
13.5%
$243
7.7%
$65
Sensitivity
$67
$77
$87
$97
$107
Sensitivity
$671,000
$771,000
$871,000
$971,000
$1,071,000
IRR NPV5%$409
- $M
18%
17.8%
$409
15.1%
$354
12.8%
$296
10.7%
$233
8.9%
$171
Dev. Capital
Discount
5.00%
10.00%
15.00%
NPV - $409
$M
$409
$168
$42
81%
41%
0%
-41%
-84%
0%
-14%
-28%
-43%
-58%
Sensitivity
0%
-59%
-90%
127
Company Comment
(EGL.UN-T C$4.47)
Eagle Energy Trust
Clean Balance Sheet Sees Eagle Eying Potential
Acquisitions
patrick.bryden@scotiabank.com
Riley Hicks, CA, MBA - (403) 213-7760
Justin Strong, MBA - (403) 213-7328
Target 1-Yr:
Risk Ranking: High
C$6.00
ROR 1-Yr:
57.7%
CDPU (NTM)
CDPU (Curr.)
$1.05
$1.05
Yield (Curr.)
23.5%
Key Risks to Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program success
Event
■ Eagle Energy releases third quarter results to a rally on its stock.
Pertinent Revisions
Implications
■ Stock up 22% on release of third quarter results. Eagle recouped some
of its equity value lost since October 30, closing at $4.43/unit.
■ Production in line but cash flow hurt by lower commodity prices. Third
quarter production of 2,859 boe/d was in line with our estimate of 2,973
boe/d. Cash flow per unit (CFPU) of $0.20/un came in well below
consensus estimate of $0.28/un and our estimate of $0.35/un, mainly on
the back of lower realized prices.
■ Permian assets sold off. Eagle disposed of its entire position in the
Permian as of July 1 for net proceeds of $150.1 mm. Disposed volumes
were ~1,400 boe/d. The proceeds are expected to be re-deployed into
assets that are more in line with the company's business model. Eagle
has ~$69.5 mm of cash on hand and a $61.6 mm unused credit facility.
■ Special Meeting upcoming. Eagle plans to hold a Special Meeting of
unitholders on November 24, 2014 to vote on an amendment to its Trust
Indenture that will remove investment restrictions and allow the trust to
invest in Canadian assets.
New
Old
Target:
1-Yr
$6.00
$7.50
CFPU14E
$1.06
$1.21
CFPU15E
$1.08
$1.10
CFPU16E
$1.06
$1.10
New Valuation:
Old Valuation:
Recommendation
■ We maintain our SP rating but have opted to lower our target price in
light of weakness in commodity and energy equity market. We have
reduced our one-year target price by 20% to $6.00 from $7.50/unit.
Qtly CFPU (FD)
2013A
2014E
2015E
2016E
Q1
$0.40 A
$0.32 A
$0.25
Q2
$0.39 A
$0.32 A
$0.25
(FY-Dec.)
Cash Distributions/Unit
Price/Cash Flow
Pre-tax Cash Yield
2012A
$1.05
5.8x
13.7%
Q3
$0.37 A
$0.22
$0.25
2013A
$1.05
5.6x
13.0%
Q4
$0.28 A
$0.20
$0.25
2014E
$1.05
4.2x
23.5%
Year
$1.44
$1.06
$1.08
$1.06
P/CF
5.6x
4.2x
4.2x
4.2x
2015E
$1.05
4.2x
23.5%
2016E
$1.05
4.2x
23.5%
Capitalization
Market Cap (M)
Units O/S (M)
Float O/S (M)
BVPU14E: $9.30
$152
$-51
$101
34
33
128
Eagle Awaits Acquisition Opportunity
■ Production in line but cash flow hurt by lower commodity prices. Third quarter
production of 2,859 boe/d was in line with our estimate of 2,973 boe/d. Cash flow per unit
(CFPU) of $0.20/un came in well below consensus estimate of $0.28/un and our estimate of
$0.35/un, mainly on the back of lower realized prices. Third quarter realized prices dropped
to $89.61/boe from $96.20/boe over the second quarter.
■ Hedge book protects netbacks through 2015. Eagle currently has ~80% of production
hedged through to H1/15E at an average price above US$90/bbl WTI and 30% of H2/15E
production hedged at an average price of $87/bbl WTI. We view this as prudent given current
weakness and volatility in commodity markets.
■ Permian assets sold off. Eagle disposed of its entire position in the Permian as of July 1 for
net proceeds of $150.1 mm. Disposed volumes were ~1,400 boe/d. The proceeds are
expected to be re-deployed into assets that are more in line with the company’s business
model.
■ Premium DRIP discontinued and regular DRIP discounted cut. Eagle suspended its
Premium DRIP and reduced the discount from 5% to 2% on units acquired under the regular
DRIP. Eagle DRIP participation is expected to drop from 60% to 5% - 8%.
■ “Rights Plan” adopted. The Board of Eagle has instituted an anti-takeover, defensive
mechanism designed to protect unitholders from unfair hostile bids. When triggered, rights to
purchase additional units at a discount to the market price at the time are issued to
unitholders not party to the unsolicited bid. The plan is designed to be triggered when a
unitholder either buys more than 20% of outstanding units or announces an intention to do so
without board approval or following the “Permitted Bid” provisions. A permitted bid must be
made to all unitholders of the trust and is open for acceptance for not less than 60 days. If, at
the end of the 60 day period, at least 50% of the outstanding units not owned by the offeror
have been tendered, the offeror may buy those units but must also extend the bid for another
10 days to allow other unitholders to tender. Although effective immediately, the Rights Plan
is subject to Toronto Stock Exchange approval. It will also be required to be ratified by the
unitholders of Eagle within six months of its adoption.
Approval Sought to Allow Canadian Assets
■ Special Meeting upcoming. Eagle plans to hold a Special Meeting of unitholders on
November 24, 2014 to vote on an amendment to its Trust Indenture that will remove
investment restrictions and allow the trust to invest in Canadian assets.
■ Canadian assets are more attractive to the trust. Management has indicated that
Canadian oil and gas assets and talent are currently available at attractive cost levels relative
to the U.S. oil and gas industry.
■ No immediate tax consequences expected. Management has indicated that a structural
change will not trigger the SIFT tax; however, Eagle will need to monitor and manage its tax
obligations.
Hardeman Update
■ 3D seismic put to use. Eagle has begun drilling its first two well on the Hardeman properties
since the beginning of the third quarter, which utilizes the 3D seismic shot in September. The
129
wells target Mississippian Carbonates primarily but management believes there is
opportunity for production from the Pennsylvanian and Ordovician formations as well.
■ Cost reduction initiatives continue to be pursued. Eagle continues to optimize water
disposal methods at Hardeman, which includes piped water to Eagle owned disposal wells
across the field. A salt water disposal well is planned for 2015. To mitigate power costs
Eagle has acquired and repaired an inactive natural gas distribution system and recompleted
an inactive natural gas well which will be used to displace the need for propane. Water
disposal and power costs represent ~80% of field operating costs.
Salt Flat Update
■ Sidetrack well put on production. A sidetrack well utilizes a previous well bore to target a
different formation than the original well with the aim to lower drilling costs. Eagle
completed a sidetrack well and placed it on production over the third quarter.
■ Power costs secured. Eagle has signed a power contract in order to hedge electricity costs
associated with field operations. The contract is for 4.9 cents/kWh and extends for three
years. Power costs make up more than half of Salt Flat operating costs. Power usage and
pump size continue to be optimized in order to lower operating costs with 2014 expenses
expected to be 5%-7% lower than those in 2013.
■ Additional well locations sought. High density 3D seismic was conducted at Salt Flat over
the third quarter. The area covered was 8.3 square miles and interpretation is expected in the
fourth quarter.
Investment Thesis
■ Clean balance sheet following Permian disposition, redeployment awaited. Eagle
withdrew its guidance following its disposition of Permian assets and revised guidance is
expected after the proceeds from the sale are redeployed. Eagle has ~$69.5 mm of cash on
hand and a $61.6 mm unused credit facility. While Eagle has a good cash position on the
balance sheet, it gave up producing assets in the Permian to achieve this. The market awaits a
redeployment of capital. The capital and distribution responsibilities outweigh the cash flow
generation of the enterprise, which weighs on interim sustainability metrics.
■ Scenario analysis. At US $80/bbl WTI, we see a 2015E CFPS and effective payout ratio of
$1.01 and 179%, respectively. While the effective payout ratio metric remains temporarily
high, the future development of the company hinges on completing an acquisition at
attractive metrics which may prove difficult in the near term given the volatility commodity
market have exhibited recently. Exhibit 1 outlines our expectations across a range of WTI
prices.
130
Exhibit 1 -2015E Sensitivity Analysis
CFPS Sensitivities
WTI
Current Scotia Deck
Estimate:
$1.08
$70
$0.97
$75
$0.99
$80
$1.01
$75
183%
$80
179%
$85
$1.03
$90
$1.05
$95
$1.10
$85
175%
$90
172%
$95
165%
Effective Payout Sensitivities
WTI
Current Scotia Deck
Estimate:
168%
$70
187%
Note: All other Scotiabank price deck assumptions unchanged in sensitivities.
■ A further word about our price deck assumptions. Our estimates still reflect WTI price
assumptions that are higher than current market prices. Our price deck is typically subject to
quarterly update, which can impact our coverage universe target prices and ratings. While we
have not revised our commodity price deck that was released in late September, given
material deterioration in crude oil prices recently, we refer our readers to our Thursday,
October 16 update Running WTI Scenarios: Commodity Prices Put Sector Under Pressure
for scenario and sensitivity analysis our income-focused oil and gas research coverage. We
further include sensitivity tables in Exhibit 2, which provide a sense for how CFPS, D/CF
and effective payout ratios change with different WTI crude oil and Henry Hub natural gas
assumptions.
■ Rating maintained and target price moderated. We have reduced our target price by
approximately 20% to $6.00 given the potential impact of a lower commodity price
environment. Our target price represents a 2015E EV/DACF of 4.5x, which compares to the
peer group average of 7.3x. Eagle currently trades at a 2015E EV/DACF of 3.7x, which
compares to the peer group average of 6.4x. Exhibit 2 shows our financial and operating
summary for Eagle.
131
Exhibit 2 - Financial & Operating Summary
Fiscal Year End - December 31
2010A
2011A
2012A
2013A
Q1/14A
Q2/14A
Q3/14A
Q4/14E
2014E
2015E
2016E
US$/B
US$/Mcf
US$/C$
$79.13
$4.35
$0.96
$94.72
$4.01
$1.01
$94.09
$2.76
$1.00
$98.01
$3.72
$0.97
$98.65
$5.06
$0.91
$103.15
$4.53
$0.92
$97.69
$4.53
$0.92
$92.00
$4.10
$0.90
$97.85
$4.55
$0.91
$92.00
$4.00
$0.90
$91.00
$4.00
$0.90
Daily Production
Total Oil & Liquids
Natural Gas
Total Production
Change in Total Production
Percentage Natural Gas
B/d
Mmcf/d
Boe/d
%
%
74
-726
100%
90%
1,376
-1,376
90%
0%
2,597
-2,597
89%
0%
3,004
-3,004
16%
0%
3,010
-3,010
0%
0%
3,341
-3,341
11%
0%
2,859
-2,859
-14%
0%
1,966
-1,966
-31%
0%
2,791
-2,791
-7%
0%
2,007
-2,007
-28%
0%
1,982
-1,982
-1%
0%
Financial Estimates
Cash Flow from Operations
Investment Cash Flows - Internal
Investment Cash Flows - M&A
Financing Cash Flows
Dist/Div
[$mm]
[$mm]
[$mm]
[$mm]
[$mm]
-$0.3
-$0.0
-$110.3
$135.9
$0.0
$19.9
-$27.3
$0.0
-$11.0
-$19.5
$35.2
-$43.5
-$115.9
$120.4
-$25.9
$44.3
-$30.3
-$35.7
$23.6
-$32.2
$10.3
-$11.5
-$5.3
$2.2
-$8.5
$10.5
-$6.4
-$0.1
-$2.4
-$8.7
$7.5
-$2.2
$150.1
-$87.6
-$8.9
$7.0
-$10.3
$0.0
$3.3
-$8.9
$35.3
-$30.4
$144.7
-$84.5
-$35.1
$34.2
-$21.5
$0.0
-$12.7
-$35.9
$33.8
-$21.5
$0.0
-$12.3
-$36.1
Cash Flow Per Unit - FD
EBITDA
EPU
Distribution - Basic
$/Unit
$/Unit
$/Unit
$/Unit
($0.07)
($0.91)
($0.81)
$0.11
$1.10
$0.61
($0.07)
$1.05
$1.33
$1.43
$0.23
$1.05
$1.44
$1.25
$0.16
$1.05
$0.32
$0.36
$0.07
$0.26
$0.32
($0.34)
($0.70)
$0.26
$0.20
$0.47
$0.22
$0.26
$0.20
$0.20
$0.02
$0.26
$1.06
$0.75
($0.37)
$1.05
$1.04
$1.04
$0.21
$1.05
$1.02
$1.02
$0.21
$1.05
Netbacks
Revenue (pre-hedging)
Heging Gains (Losses)
Royalties
Operating Costs
Transportation Costs
Field Netback
After-Tax Netback
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
$83.73
$0.00
-$22.98
-$10.25
-$2.01
$48.49
-$56.88
$87.94
$0.09
-$24.73
-$11.17
-$1.98
$50.14
$38.61
$85.37
$0.51
-$23.58
-$12.37
-$2.11
$47.82
$36.92
$90.08
-$0.48
-$25.13
-$10.41
-$2.32
$51.74
$40.48
$98.02
-$3.02
-$26.19
-$15.03
-$2.51
$51.26
$38.14
$96.20
-$5.06
-$25.93
-$14.76
-$2.41
$48.05
$35.15
$89.60
-$2.38
-$24.42
-$15.77
-$0.62
$46.41
$29.31
$97.11
$0.98
-$26.22
-$15.56
-$0.62
$55.70
$39.03
$95.14
-$2.75
-$25.66
-$15.23
-$1.66
$49.84
$35.13
$97.11
-$1.11
-$26.22
-$15.56
-$0.62
$53.61
$47.16
$96.06
$0.00
-$25.94
-$15.56
-$0.62
$53.94
$47.24
Valuation Measures
EV/DACF
EV/EBITDA
P/E
D/P
EV per Boe/d
x
x
x
%
$/Boe/d
(569.0)
(45.2)
(5.5)
2%
$225,895
9.7
17.6
(66.8)
23%
$140,545
7.4
7.1
19.4
23%
$103,665
7.5
9.1
27.9
23%
$115,679
6.4
6.0
20.9
19%
$94,652
6.8
(6.9)
(1.6)
23%
$93,144
4.0
1.8
5.2
23%
$43,253
3.7
3.7
62.0
23%
$51,440
2.7
4.1
(12.2)
23%
$36,223
3.7
3.6
21.1
23%
$61,611
4.4
4.3
21.4
23%
$74,052
Credit Capacity
Credit facility
% Drawn
[$mm]
%
$15
0%
$17
0%
$48
84%
$94
71%
$99
88%
$99
87%
$62
0%
$61
19%
$61
19%
$61
54%
$61
91%
Net Debt & Debentures
EBITDA
Cash Flow
Net Debt, Debentures & Equity
EV
$/Unit
x
x
x
%
($1.33)
6.6
83.4
(0.2)
-15%
$0.17
0.3
0.2
0.0
2%
$1.47
1.1
1.2
0.2
16%
$2.74
2.3
2.0
0.3
25%
$3.05
2.1
2.4
0.3
35%
$2.95
(2.2)
2.4
0.3
32%
($1.81)
(0.9)
(2.1)
(0.4)
-51%
($1.50)
(1.9)
(1.8)
(0.3)
-51%
($1.50)
(2.1)
(1.5)
(0.3)
-51%
($0.87)
(0.9)
(0.9)
(0.2)
-24%
($0.22)
(0.2)
(0.2)
(0.0)
-5%
Sustainability
Payout Ratio - Simple
Payout Ratio - Effective
Capital Expenditures / Cash Flow
%
%
%
-665%
-677%
-12%
97%
235%
138%
76%
199%
124%
73%
141%
68%
82%
194%
111%
83%
144%
61%
121%
150%
30%
128%
276%
148%
100%
186%
86%
105%
168%
63%
107%
170%
64%
Hedging
Percentage of Light & Medium Oil
Percentage of Heavy Crude Oil
Percentage of Natural Gas Producticn
Percentage of Total Production
%
%
%
%
-----
-----
-----
-----
-----
-----
-----
84%
0%
0%
84%
72%
0%
0%
72%
54%
0%
0%
54%
0%
0%
0%
0%
Price Deck Assumptions
WTI
Nymex Natural Gas
Exchange Rate
132
Company Comment
(EMA-T C$37.28)
Emera Incorporated
matthew.akman@scotiabank.com
Lukasz Michalowski, MBA - (416) 863-5915
Dario Neimarlija, CA, CFA - (416) 863-2852
Target 1-Yr:
C$36.00 ROR 1-Yr:
Risk Ranking: Low
0.7%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.55
$1.55
4.2%
Key Risks to Target: Interest rates; Regulated ROE; Rate cases; Growth projects; Environmental Legislatio n
Event
Pertinent Revisions
■ EMA reported Q3/14 adjusted EPS of $0.35 in line with our estimate of
$0.35 and $0.34 in Q3/13.
Implications
■ The positive variance was driven primarily by a $0.06 earnings dilution
gain on AQN shares. Other than that, most segments were in line with
our expectations except for Caribbean utilities which came in below.
■ With the return to more normal weather patterns, the New England
power assets are now contributing in line with our initial expectations.
Reported EBITDA of $13.3M is slightly higher than the ~$12M that
CPX was recording in the summer quarter for the same assets.
■ The Maritime Link should continue generating solid mid-single-digit
growth through 2017 on a normalized basis as final construction
contracts have been signed and there were no further project delays.
■ However, our actual forecasts for the next two years remain below this
year as we anticipate the normalization of trading and merchant
generation profit following the unusually strong start to 2014. The next
visible catalyst for those assets is 2017 when New England capacity
payments move from US$3/KW-month to US$7/KW-month.
Adj. EPS15E
Adj. EPS16E
New
$1.90
$1.95
Old
$1.88
$1.92
Recommendation
■ EMA continues with solid growth in Northeast electricity transmission.
At the same time, there could be a downward shift in earnings momentum
into next year and the stock has reached premium valuation. Our Sector
Perform rating balances these considerations.
Qtly Adj. EPS (Basic)
2013A
2014E
2015E
2016E
Q1
$0.69 A
$1.03 A
$0.82
(FY-Dec.)
Dividends/Share
EV/EBITDA
Payout Ratio
EBITDA (M)
Debt/EBITDA
Tot. Debt/(Tot.Dbt+Eq.)
Q2
$0.30 A
$0.31 A
$0.32
2012A
$1.32
$1.36
13.1x
103.2%
$670
5.53x
0.62
$8,788
Q3
$0.34 A
$0.35 A
$0.36
2013A
$2.32
$1.41
11.4x
61.0%
$780
5.30x
0.59
$8,895
Q4
$0.53 A
$0.46
$0.41
2014E
$2.38
$1.48
10.8x
62.0%
$980
4.39x
0.55
$10,612
Year
$1.86
$2.14
$1.90
$1.95
P/E
16.4x
17.4x
19.6x
19.1x
2015E
$2.35
$1.57
12.1x
66.8%
$974
5.11x
0.56
$11,741
2016E
$2.46
$1.67
11.9x
67.7%
$1,058
5.22x
0.56
$12,589
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$5,297
$4,959
$10,557
142
142
133
Exhibit 1 - Emera Incorporated Financial Statement Summary
Earnings and Per Share Data ($M)
Nova Scotia Power
Maine (Bangor Hydro, MPS)
Pipelines
Caribbean
Energy
Corporate and Other
Operating earnings for common*
Adjustments (gains/losses, derivatives)
Reported earnings for common
2013
$126
$38
$30
$30
$48
($26)
$246
($30)
$217
2014E
$126
$40
$30
$32
$79
($0)
$306
$37
$343
2015E
$127
$42
$31
$31
$34
$9
$275
$0
$275
2016E
$132
$44
$30
$32
$34
$32
$304
$0
$304
Average shares outstanding
Operating earnings per share*
Reported earnings per share
Dividends per share
EBITDA
133
$1.86
$1.63
$1.41
$780
143
$2.14
$2.40
$1.48
$980
145
$1.90
$1.90
$1.57
$974
156
$1.95
$1.95
$1.67
$1,058
Cash Flow Statement ($M)
Net earnings applicable to common
Depreciation
Other
FFO
Working capital changes
Cash provided by operations
2013
$217
$314
$47
$577
($14)
$563
2014E
$343
$341
($75)
$609
$0
$609
2015E
$275
$337
($2)
$609
$0
$609
2016E
$304
$372
($38)
$637
$0
$637
($186)
$548
$362
($211)
$585
$373
($227)
$993
$766
($260)
$772
$512
($1,044)
$123
($922)
($1,021)
($6)
($1,027)
($1,385)
($14)
($1,399)
($1,120)
($15)
($1,135)
$0
($45)
$100
$55
$0
($25)
$55
$30
Common share dividends
Other financing activities
Net cash provided by financing
Property plant and equipment / Investments
Other
Cash Used in Investing Activities
Effect of exchange rate changes
Increase (decrease) in cash position
Cash start year
Cash position at year end
$9
$13
$87
$100
$0
$14
$30
$45
Balance Sheet ($M)
Cash
Other Current Assets
PP&E
Intangibles & Goodwill
Other Assets
Total Assets
2013
$100
$1,061
$5,328
$207
$2,181
$8,876
2014E
$55
$989
$5,888
$217
$2,713
$9,862
2015E
$30
$989
$6,936
$217
$2,768
$10,941
2016E
$45
$989
$7,685
$217
$2,859
$11,795
Short Term Debt
Other Short Term Liabilities
Long Term Debt
Other Liabilities
Total Liabilities
Common Equity
Preferred Equity
Non-Controlling Interest
$438
$764
$3,692
$1,086
$5,980
$2,094
$514
$289
$2,897
$8,877
$326
$712
$3,978
$1,270
$6,286
$2,566
$710
$301
$3,576
$9,862
$326
$712
$4,649
$1,270
$6,957
$2,973
$710
$301
$3,984
$10,941
$326
$712
$5,199
$1,270
$7,507
$3,277
$710
$301
$4,287
$11,795
* Excludes gains on investments
134
Intraday Flash
Friday, November 7, 2014 @ 10:46:08 AM (ET)
(ENDESA-SN CLP 888.00)
(EOC-N US$45.32)
Endesa Chile
A New-Old Deal with Enel Green Power?
Ezequiel Fernández López, CFA - +56 9 9991 9152
(Scotia Corredora de Bolsa Chile SA)
ezequiel.fernandez@scotiabank.cl
Valuation: SOTP DCF Model
Target 1-Yr: CLP 850.00
1-Yr: US$44.35
ROR 1-Yr:
-0.9%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
CLP 30.06
CLP 14.29
1.6%
Key Risks to Target: Asset restructuring, hydrology, commodity exposure.
Event
■ Yesterday, Enel Green Power (EGP) announced a US$2.3B renewable
energy provision deal with Endesa Chile for up to 25 years.
Implications
■ Although previously undisclosed, the deal appears to be old news.
Apparently, the deal was signed in mid-2014 for up to 750GWh per
annum, with the objective of helping Endesa meet its renewable energy
quota as required by Chilean law (20% by 2025).
■ The move became particularly relevant in Q4/12 when Endesa was
awarded a yearly regulated contract for ~3,200GWh, at US$129/MWh.
We remind investors that Endesa is unlikely to generate enough
renewable energy to meet its quota, as holding company ENEL – parent
company of both EGP and Endesa – makes investments in renewables
solely through EGP.
■ ENEL disclosed only that the deal terms were consistent with prevailing
market conditions; however, this is virtually impossible for us to verify,
especially given the opacity of Chile's renewable energy contracts
market. That said, the deal may well offer value to both parties.
■ EGP's announcement can be found here.
Recommendation
■ That ENEL is keeping Endesa out of the renewables push in Chile should
not surprise investors familiar with the story. Nonetheless, this latest deal
serves as a good reminder. We maintain our Sector Perform rating.
Qtly EPS (FD)
2011A
2012A
2013A
2014E
Q1
$0.025 A
$0.017 A
$0.016 A
$0.008 A
(FY-Dec.)
Earnings/Share
Dividends/Share
EV/EBITDA
Price/Earnings
Revenues (M)
EBITDA (M)
Free Cash Flow (M)
Capex (M)
Q2
$0.017 A
$0.009 A
$0.009 A
$0.013 A
Q3
$0.030 A
$0.016 A
$0.027 A
$0.020 A
Q4
$0.041 A
$0.017 A
$0.034 A
$0.027
Year
$0.113
$0.059
$0.087
$0.073
P/E
13.1x
27.7x
17.1x
20.5x
2010A
$0.128
$17.53
2011A
$0.113
$32.53
7.5x
13.1x
$4,974
$2,021
$599
$551
2012A
$0.059
$27.24
9.7x
27.7x
$4,871
$1,721
$823
$538
2013A
$0.087
$14.29
7.9x
17.1x
$4,064
$1,951
$786
$590
2014E
$0.073
$30.06
7.9x
20.5x
$4,288
$1,985
$494
$697
14.7x
$4,775
$2,106
$1,487
BVPS14E: $0.66
Curr. ROE: 14.07%
Capitalization
Market Cap (B)
Shares O/S (M)
Float O/S (M)
CLP 7,283
$3,354
CLP 9267770
8,202
4,921
135
Company Comment
(EFX-T C$16.96)
Enerflex Ltd.
Risk Ranking: High
Target 1-Yr:
Sam Devlin, CFA - (403) 213-7332
sam.devlin@scotiabank.com
C$24.00
ROR 1-Yr:
43.5%
Key Risks to Target: Commodity prices, access to supplies, weather, FX, and labour suppl y
Event
■ Adj. EBITDA of $65.1M was in line with our $64.8M estimate and
consensus of $63.7M. Adj. EPS of $0.39 was also in line.
Implications
■ Solid Q3 could have been better. Better-than-expected EBITDA
contribution from Canada & Northern U.S. offset weakness
internationally. That said, International results included an additional
$6.2M of cost overruns at Oman; adjusting for this, EBITDA would
have been 10% ahead of our estimate. Commissioning and mechanical
completion of the project was completed in October; EFX notes
variation claim discussions continue to advance, but no timeframe was
provided. We currently model full recovery of the $43.8M in Q4/14.
■ Strength of demand evident in backlog and LOIs. Bookings during
the quarter were 24% above our estimate and 38% higher YOY. The
largest contributor to the beat was Southern U.S. & LatAm, which saw
the backlog increase for the seventh consecutive quarter. EFX was also
provided with two new LOIs in the MENA region via the Axip
acquisition, bringing awarded HP additions to 88kHP (up from 60kHP).
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.34
$0.34
2.0%
Pertinent Revisions
New
Old
EBITDA14E
$241
$229
EBITDA15E
$288
$279
New Valuation:
Old Valuation:
Recommendation
■ While variation claims could muddy near-term results, ongoing
momentum in the backlog and continued execution on international
growth initiatives via Axip should see the company outperform both near
and long-term. We remain bullish on EFX at these levels, and see further
upside from NAM LNG and / or stabilizing commodity prices.
Qtly EBITDA (M)
2012A
2013A
2014E
2015E
Q1
Q2
Q3
Q4
Year
$31 A
$33 A
$20 A
$65
$38 A
$37 A
$41 A
$71
$39 A
$31 A
$65 A
$75
$48 A
$26 A
$114
$77
$157
$129
$241
$288
EV /
EBITDA
5.8x
8.7x
7.1x
5.4x
2011A
$86
$-34
$120
10.0%
n.m.
0.4x
$0.73
$0.18
2012A
$119
$33
$86
10.5%
8.6%
-0.4x
$1.06
$0.25
2013A
$98
$17
$81
9.2%
6.9%
-0.9x
$0.73
$0.28
2014E
$179
$50
$129
13.5%
12.1%
1.9x
$1.39
$0.30
2015E
$218
$90
$128
15.5%
13.6%
0.8x
$1.76
$0.34
(FY-Dec.)
CF from Ops (M)
Capex (M)
Free Cash Flow (M)
Adj EBITDA Margin
Return on Equity
Net Debt/Cash Flow
Continuing Earnings/Share
Dividends/Share
Curr. BVPS: $11.99
ROE14E: 12.09%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$1,377
$336
$1,713
81
81
136
Exhibit 1 - Snapshot Summary
Enerflex Ltd. (TSX: EFX)
Financial Statistics
Valuation Analysis
2011
2012
2013
2014E
2015E
Share Price
$16.96
EV/EBITDA
8.9x
5.8x
8.7x
7.1x
5.4x
1-Yr Target Price
$24.00
P/CF
11.9x
7.8x
12.0x
7.5x
6.2x
44%
P/E
NA
12.6x
18.9x
11.3x
9.0x
Dividend
$0.34
P/BV
1.3x
1.1x
1.3x
1.3x
1.2x
Yield
2.0%
P/TBV
3.1x
2.4x
2.7x
4.5x
3.1x
FD Share Count
81 M
ROE (adjusted)
-1%
9%
7%
12%
14%
$1,377 M
ROA (adjusted)
-1%
5%
4%
7%
8%
Net Debt (Net Cash)
$336 M
Implied Return
Enterprise Value
$1,713 M
Corporate Margins
2011
2012
2013
2014E
2015E
Gross
21.8%
20.8%
20.3%
24.3%
26.5%
EBITDA
10.0%
10.5%
9.2%
13.5%
15.5%
Debt Summary as of
Q3/14
Earnings Summary ($M)
Net Debt (Net Cash)
$336 M
Total Revenue
Facility Size
$675 M
Draw on Facility
$365 M
Facility Remaining
$310 M
46%
%
2011
2012
2013
2014E
2015E
$1,227
$1,502
$1,405
$1,785
$1,865
EBITDA
$123
$157
$129
$241
$288
EBIT
$85
$117
$87
$181
$216
EBT
$78
$112
$82
$170
$194
Reported Earnings
$57
$82
$58
$110
$140
Adjusted Earnings
($10)
$74
$63
$119
$149
($0.13)
$0.95
$0.79
$1.50
$1.88
Per FD Share (Adjusted)
Segmented Revenue
100%
75%
50%
Cash Flow Summary ($M)
2011
2012
2013
2014E
2015E
CFPS FD
$1.12
$1.53
$1.25
$2.26
$2.75
$86
$119
$98
$179
$218
Capex1
Free Cash Flow
($34)
$33
$17
$50
$90
$120
$86
$81
$129
$128
Dividends
25%
Per FD Share
2015E
2014E
2013
2012
2011
0%
Canada and Northern U.S.
Southern U.S. and Latin America
International
Company Profile
Enerflex is a leading supplier of compression
and processing equipment. The company
specializes in the engineering, design, and
fabrication of rotary screw and reciprocating
compression packages, used in upstream,
midstream, and downstream applications.
Enerflex also supplies process systems for
energy and chemicals applications.
Analyst Contact Info
$14
$19
$22
$24
$27
$0.18
$0.25
$0.28
$0.30
$0.34
12%
23%
28%
18%
21%
Capex /Cash Flow
-0.4x
0.3x
0.2x
0.3x
0.4x
0.4x
-0.4x
-0.9x
1.9x
0.8x
Net Debt/Equity
0.0x
-0.1x
-0.1x
0.3x
0.2x
Operational Summary
2011
2012
2013
2014E
2015E
$349
$302
$435
$431
$430
$438
$412
$575
$728
$640
International
$456
$162
$131
$156
$165
$177
$159
$307
$304
$303
$285
$228
$359
$458
$411
International
$524
$297
$129
$86
$109
Payout From FCF
1
Bookings
Order Backlog
Backlog Conversion %
Vladislav C. Vlad, MBA, P.Eng.
53%
54%
38%
35%
35%
(403) 213-7759
37%
41%
43%
38%
42%
International
21%
20%
36%
43%
38%
Notes: (1) Cash capex may vary from corporate capital program due to timing differences.
Total Revenue excludes intersegment.
Pre-2013 results have not been restated to reflect Production & Processing in the Canada & Northern U.S. segment (previously reported under International).
Source: Company reports; Reuters; Scotiabank GBM estimates.
137
Solid Q3; Bookings Momentum Continues
■ Q3 adjusted EBITDA of $65.1 million was in line with our $64.8M estimate and
consensus of $63.7 million. Better-than-expected EBITDA contribution from Canada and
Northern U.S. (despite weaker revenue) offset softer International results. Included in the
results is an additional $6.2 million of cost overruns at Oman, bringing the total to $43.8
million (including $20 million from 2013); adjusting for this impact (assuming full
recovery), results would have been 10% ahead of or estimate. Recall, we did not model any
additional cost overruns in Q3/14, and now model full recovery of $43.8 million in Q4/14.
Adjusted EPS of $0.39 compares to our $0.40 estimate (consensus was $0.35). Operating
EPS of $0.38 was also in line with our $0.39 estimate.
■ Order backlog continues to impress, up 33% YOY, an 8% beat on our numbers. The
beat on backlog can be directly attributed to higher-than-expected bookings with Engineered
Systems revenue essentially in line with our expectations. Bookings for the quarter we re 24%
ahead of our estimate, up 38% YOY. The strong bookings were driven by Southern U.S. and
Latin America, as well as Canada and Northern U.S. to a lesser extent. Also, $19 million of
the current backlog was attributed to Axip.
■ Two new Letters of Intent via Axip. Both LOIs relate to turnkey rental, operation, and
service work for equipment in the MENA region (one for 60 months and one for 36 months);
this coupled with previously announced LOIs and rental contracts brings total awarded HP
on the five projects to roughly 88,000 HP, up from 60,000 HP as of Q2 results. The
incremental HP additions are already reflected in our capital spending estimates. As a recap,
we estimate roughly $1 million of capital per 1,000 HP, with a four-year payback period.
Outlook Remains Constructive Despite Commodity Headwinds
■ Canada & Northern U.S. EBITDA was 13% above our estimate despite a 10% miss on
revenue. While backlog conversion, Engineered Systems revenue, and Service revenue were
short of our estimates, better-than-expected margins more than offset the miss (particularly
lower-than-expected G&A across the company).
■ Bookings were 24% ahead of our estimate and 33% higher YOY. Management pointed
to increased momentum in liquids-rich plays as well as ongoing contribution from the
electric power market, and oil sands to a lesser extent. Management does not anticipate
a material decrease in natural gas prices in the near future, and believes fundamentals
should continue to improve as LNG projects progress, and as development of the
Duvernay expands. While the company has yet to book any LNG-related work,
management’s view on LNG remains constructive, particularly now that proponents
have greater clarity on tax implications from the B.C. government.
■ We adjusted our estimates to reflect margin outperformance and the higher backlog;
that said, we have reduced our bookings expectations in 2015 given uncertainty
surrounding E&P capital programs. Our 2014 and 2015 EBITDAs are increased 10%
and 6%, respectively (Exhibit 2).
138
■ Southern U.S. & Latin America EBITDA was in line with our estimate. Backlog
conversion was higher than we anticipated at 43% (versus our 38% estimate), but in line
sequentially. As such, revenue in the division came in 10% ahead of our expectations. That
said, operating margin was 254 bps below our estimate, albeit still a 318 bps improvement
sequentially. Collectively, service and rental revenue was in line, up $33 million sequentially,
largely due to Axip’s contribution.
■ Bookings continue to surprise, 49% ahead of our estimate and in line QOQ. Despite
stronger-than-expected Engineered Systems revenue, the order backlog continued to
grow for a seventh consecutive quarter. Management pointed to ongoing support from
liquids-rich plays as well as equipment needs for associated gas production in oildirected plays. Management notes they have yet to record any bookings related to LNG
in the U.S., which could offer meaningful upside with several projects now under
construction.
■ Our 2015 EBITDA is increased 4% to reflect the stronger backlog position. That said,
we held our bookings assumptions relatively flat in 2015, down 12% year-over-year as
commodity price headwinds could weigh on activity, in our view.
■ International results could have been better if not for Oman. Management highlighted
cost overruns of $6.2 million during the quarter, bringing total overruns to $43.8 million
(including $20 million from 2013). Absent the overruns, EBITDA would have been $11.1
million versus our $6.9 million estimate on what appears to be better underlying margins.
Management notes that commissioning and mechanical completion on the project was
achieved during October, and as such Enerflex has been able to advance the variation claim
discussions with the client. No timeline has been provided for conclusion of the process. We
currently model full recovery of the $43.8 million without any incremental margin on the
recoveries in Q4/14, but are cognisant there is potential for slippage on timing. Also, full
recovery is not guaranteed.
■ Bookings of $20 million were 56% below our estimate, and 8% lower YOY. Order
backlog for Q3 was 19% below our estimate and 36% lower YOY. While the
international space continues to be lumpy, we suspect we could begin to see cross-sell
synergies with Axip begin adding to bookings as we head into 2015.
■ We have updated our estimates to reflect a lower order backlog, partially offset by the
recent LOI awards. We increased our 2014 EBITDA by 11%; our 2015 EBITDA is
reduced 7%.
139
Exhibit 2 – Q3/14 Results Summary
Q3/14
Figures in $M
YOY
QOQ
Actual
Estimated
∆
Q3/13
∆
Q2/14
$170
$189
-10%
$135
26%
$235
$213
10%
$164
43%
International
$74
$81
-8%
$92
-19%
-1%
$391
23%
2014E
2015E
∆
New
Prior
∆
New
Prior
∆
$183
-7%
$671
$688
-2%
$666
$716
-7%
$171
37%
$764
$730
5%
$923
$870
6%
$92
-19%
$350
$361
-3%
$276
$320
-14%
$446
7%
$1,785
$1,779
0%
$1,865
$1,906
-2%
24.3%
24.1%
26.5%
25.8%
Revenue
Total Revenue
$479
$484
Gross Margin
23.5%
24.1%
$18.6
$16.4
13%
$11.6
61%
$11.3
65%
$52
$48
10%
$61
$57
$40.3
$40.2
0%
$22.7
78%
$20.5
97%
$123
$121
1%
$188
$180
4%
International
$4.9
$6.9
-29%
($4.6)
NA
$6.2
-21%
$57
$51
11%
$31
$33
-7%
18.3%
21.4%
EBITDA
6%
Corporate
$1.4
$1.2
15%
$1.8
-22%
$3.2
-57%
$9
$9
2%
$9
$9
2%
Total EBITDA
$65.1
$64.8
1%
$31.4
NA
$41.2
58%
$241
$229
5%
$288
$279
3%
EBITDA Margin
13.6%
13.4%
13.5%
12.9%
15.5%
14.7%
Operating Earnings
$0.38
$0.39
$1.76
$1.76
($0.01)
$0.00
$0.00
$0.00
$0.02
$0.02
$0.39
$0.40
CF From Operations
$0.67
$0.59
$53
Net Capex
$12
$0
$0
Cash Dividends
$6
$6
Net Capex/Cash Flow
23%
42%
Net Debt
$336
$386
-13%
8.0%
9.2%
F.D. Per Share Data
-1%
$0.16
NA
$0.14
($0.00)
NA
$0.00
28%
$0.02
-19%
$0.04
-2%
$0.18
NA
$0.18
13%
$0.32
NA
$47
13%
$25
$20
-39%
$7
NA
$1.39
$1.33
($0.01)
$0.00
5%
0%
-53%
$0.12
$0.11
4%
$0.11
$0.11
2%
NA
$1.50
$1.44
5%
$1.88
$1.88
0%
$0.35
94%
$2.26
$2.06
9%
$2.75
$2.64
4%
NA
$27.4
94%
$179
$163
9%
$218
$209
4%
82%
$7.6
59%
$50
$50
0%
$90
$91
-1%
$459
$459
0%
$0
$0
$23
$23
0%
$26
$23
28%
31%
41%
43%
Cash Flow Summary
$0
0%
$5
$459.4
8%
26%
$5.9
0%
28%
10%
($13)
NA
$285.8
18%
$331
$345
-4%
$176
$216
-19%
Bookings
$99
$80
24%
$75
33%
$111
-11%
$431
$411
5%
$430
$461
-7%
Order Backlog
$296
$265
12%
$220
35%
$309
-4%
$304
$279
9%
$303
$290
4%
36%
40%
35%
37%
35%
38%
Engineered Systems Revenue
$112
$123
-10%
$71
57%
$127
-12%
$434
$439
-1%
$431
$450
Service Revenue
$52
$55
-5%
$53
-2%
$50
5%
$202
$205
-1%
$202
$219
-8%
Rental Revenue
$6
$11
-47%
$10
-44%
$7
-15%
$35
$44
-21%
$33
$47
-30%
Bookings
$223
$150
49%
$151
47%
$227
-2%
$728
$630
16%
$640
$630
2%
Order Backlog
$472
$419
13%
$280
69%
$434
9%
$458
$393
17%
$411
$378
9%
43%
38%
38%
38%
42%
41%
$185
$165
12%
$149
24%
$154
20%
$628
$595
6%
$688
$645
7%
Service Revenue
$27
$41
-34%
$15
81%
$17
57%
$90
$119
-25%
$132
$186
-29%
Rental Revenue
$23
$7
NA
$0
$46
$16
NA
$103
$38
NA
33%
39%
-4%
54%
43%
$0
International
Bookings
$20
$45
-56%
$21
-8%
$77
-74%
$156
$198
-21%
$165
$188
-12%
Order Backlog
$98
$120
-19%
$152
-36%
$125
-22%
$86
$114
-25%
$109
$115
-5%
38%
40%
43%
44%
38%
40%
$47
$50
-6%
$72.5
-35%
$68
-31%
$242
$250
-3%
$142
$187
-24%
Service Revenue
$23
$29
-21%
$18.5
23%
$24
-5%
$98
$107
-8%
$114
$124
-8%
Rental Revenue
$5
$2
NA
$0.7
NA
$0
$10
$4
NA
$20
$9
NA
Engineered Systems
$344
$338
2%
$293
17%
$348
-1%
$1,304
$1,284
2%
$1,260
$1,282
-2%
Services
$102
$125
-18%
$87
18%
$91
12%
$390
$431
-10%
$449
$529
-15%
Rentals
$33
$20
65%
$11
NA
$7
NA
$91
$64
43%
$156
$94
66%
36%
58%
Segmented Revenue
Operating Margin
6.8%
6.3%
6.0%
4.0%
4.5%
4.4%
5.8%
5.5%
13.0%
15.5%
11.2%
9.8%
12.9%
13.7%
17.2%
17.4%
International
2.4%
5.2%
-7.6%
4.6%
13.2%
11.5%
6.0%
7.2%
Total Revenue excludes intersegment.
140
Attractive Valuation
■ We are maintaining our one-year price target of $24.00. Our one-year target price is
predicated on 7.4x our 2015 EV/EBITDA estimate and is supported by comparative
valuation. Our target price multiple compares with our one standard deviation historical
trading band of 5.7x to 7.5x (see Exhibit 3).
Exhibit 3 – Forward Year EV/EBITDA - Consensus Estimates
6.0x
5.0x
5.0x
4.0x
4.0x
GBM OFS
Apr.14
Nov.12
Apr.12
EFX
- 1 σ EFX
Aug.14
6.0x
Jan.14
7.0x
Sep.13
7.0x
Jun.13
8.0x
Feb.13
8.0x
Aug.12
9.0x
Jan.12
9.0x
Sep.11
10.0x
Jun.11
10.0x
+ 1 σ EFX
■ Enerflex is currently trading at 5.4x 2015E EV/EBITDA versus its North American peer
group average of 6.1x (see Exhibit 4). While variation claims could muddy near-term results,
ongoing momentum in the backlog and continued execution on international growth
initiatives via Axip should see the company outperform both near and long-term. We remain
bullish on EFX at these levels, and see further upside from NAM LNG and / or stabilizing
commodity prices.
Exhibit 4 – Comparable Company Analysis
GBM
1
Ticker Analyst Rating
Share
Price
Target
Price
Total
Return
VV
VV
BS*
BH*
BS*
$16.96
$20.25
$59.25
$34.26
$73.39
$23.06
$24.00
$26.00
$74.00
$52.00
$80.00
44%
30%
25%
54%
11%
Company
Compression and Fabrication
Enerflex
EFX
Total Energy Services
TOT
Cameron International
CAM
Exterran Holdings
EXH
National Oilwell Varco
NOV
USA Compression
USAC
Average
Average - Canada
Average - United States
SO
SO
SP
SO
SP
6
2
Div. Mkt Cap EV/EBITDA
P/CF
P/E
Yield
($M)
2014E 2015E 2014E 2015E 2014E 2015E
2.0%
1.2%
0.0%
1.8%
2.2%
8.7%
2.6%
1.6%
3.2%
$1,377
$645
$11,698
$2,339
$31,600
$696
7.1x
6.2x
7.2x
6.6x
6.3x
11.7x
7.5x
6.7x
7.9x
5.4x
5.3x
5.8x
5.5x
5.4x
9.5x
6.1x
5.3x
6.6x
7.5x
6.3x
10.5x
5.0x
9.9x
12.0x
8.5x
6.9x
9.4x
6.2x
6.4x
8.7x
4.7x
9.6x
9.8x
7.5x
6.3x
8.2x
11.3x
11.8x
14.5x
nmf
12.1x
nmf
12.4x
11.6x
13.3x
Notes:
1. Number of analysts who make up consensus (i.e., Scotiabank GBM does not cover the name) or our rating (*Howard Weil).
2. Adjusted for stock-based compensation and non-recurring items.
3. Figures for U.S.-listed companies are in U.S. dollars.
Analyst legend: VV=Vladislav Vlad, BH=Blake Hutchinson, BS=Bill Sanchez
Ratings legend: FS = Focus Stock, SO = Sector Outperform, SP = Sector Perform, SU = Sector Underperform.
Source: Bloomberg; Company reports; Reuters; Scotiabank GBM estimates (EFX, TOT); Howard Weil estimates (ratings and targets for CAM, EXH, NOV).
9.0x
10.3x
12.2x
23.5x
11.6x
29.9x
16.1x
9.7x
19.3x
EBITDA
141
Exhibit 5 – Operational Summary
Figures in $M
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
$454
$524
$592
$120
$122
$135
$148
$525
$142
$183
$170
$176
$671
$666
$364
$342
$512
$115
$99
$164
$125
$504
$119
$171
$235
$240
$764
$923
International
$250
$361
$397
$118
$89
$92
$77
$376
$72
$92
$74
$112
$350
$276
$1,068
$1,227
$1,502
$353
$311
$391
$350
$1,405
$332
$446
$479
$527
$1,785
$1,865
Revenue
Total Revenue*
YOY Growth
-
15%
22%
-1%
-12%
6%
-17%
-6%
-6%
43%
23%
51%
27%
5%
20.9%
21.8%
20.8%
20.0%
23.9%
18.3%
19.7%
20.3%
18.4%
21.4%
23.5%
31.3%
24.3%
26.5%
Adjusted EBITDA
$80
$123
$157
$33
$37
$31
$26
$129
$20
$41
$65
$114
$241
$288
YOY Growth
-
54%
28%
6%
-2%
-20%
-45%
-18%
-38%
10%
108%
332%
87%
20%
EBITDA Margin
7.5%
10.0%
10.5%
9.4%
12.0%
8.0%
7.6%
9.2%
6.2%
9.2%
13.6%
21.6%
13.5%
15.5%
Gross Margin
EBITDA
F.D. Per Share Data
Operating Earnings
$0.40
$0.73
$1.06
$0.20
$0.24
$0.16
$0.14
$0.73
$0.05
$0.14
$0.38
$0.82
$1.39
$1.76
($0.05)
($0.83)
($0.13)
($0.01)
($0.02)
($0.00)
($0.00)
($0.02)
$0.00
$0.00
($0.01)
$0.00
($0.01)
$0.00
($0.24)
($0.04)
$0.03
$0.02
$0.02
$0.02
$0.03
$0.09
$0.04
$0.04
$0.02
$0.02
$0.12
$0.11
$0.10
($0.13)
$0.95
$0.21
$0.23
$0.18
$0.17
$0.79
$0.09
$0.18
$0.39
$0.83
$1.50
$1.88
CF From Operations
$0.56
$1.12
$1.53
$0.32
$0.37
$0.32
$0.24
$1.25
$0.15
$0.35
$0.67
$1.08
$2.26
$2.75
-
98%
37%
11%
17%
-11%
-57%
-18%
80%
22%
YOY Growth
Cash Flow Summary
$43
$86
$119
$25
$29
$25
$19
$98
$12
$27
$53
$86
$179
$218
Capex
($9)
($34)
$33
($2)
$9
$7
$3
$17
$3
$8
$12
$27
$50
$90
$289
($3)
$0
$0
$0
$0
$0
$0
$0
$459
$0
$0
$459
$0
$0
$9
$19
$5
$5
$5
$5
$22
$6
$6
$6
$6
$23
$26
Capex/Cash Flow
-0.2x
-0.4x
0.3x
-0.1x
0.3x
0.3x
0.2x
0.2x
0.2x
0.3x
0.2x
0.3x
0.3x
0.4x
Net Debt (Cash)
($15)
$38
($49)
($41)
$18
($13)
($89)
($89)
($131)
$286
$336
$331
$331
$176
-0.3x
0.4x
-0.4x
1.9x
0.8x
Total Bookings
$284
$349
$302
$70
$123
$75
$167
$435
$100
$111
$99
$120
$431
$430
Order Backlog
$136
$177
$159
$164
$217
$220
$307
$307
$324
$309
$296
$304
$304
$303
49%
53%
54%
41%
43%
33%
37%
38%
27%
39%
36%
38%
35%
35%
$234
$307
$385
$64
$71
$71
$81
$287
$83
$127
$112
$113
$434
$431
Service Revenue
$164
$172
$171
$40
$43
$53
$54
$191
$45
$50
$52
$55
$202
$202
Rental Revenue
$56
$45
$35
$15
$9
$10
$12
$47
$14
$7
$6
$8
$35
$33
Total Bookings
$358
$438
$412
$119
$119
$151
$186
$575
$103
$227
$223
$175
$728
$640
Order Backlog
$146
$285
$228
$243
$278
$280
$359
$359
$362
$434
$472
$458
$458
$411
47%
37%
41%
45%
35%
54%
38%
43%
28%
43%
43%
40%
38%
42%
$327
$299
$469
$103
$84
$149
$107
$444
$100
$154
$185
$189
$628
$688
Service Revenue
$37
$43
$43
$12
$15
$15
$18
$60
$19
$17
$27
$27
$90
$132
Rental Revenue
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$23
$23
$46
$103
Total Bookings
$553
$456
$162
$1
$76
$21
$34
$131
$34
$77
$20
$25
$156
$165
Order Backlog
$362
$524
$297
$196
$203
$152
$129
$129
$116
$125
$98
$86
$86
$109
30%
21%
20%
34%
35%
36%
38%
36%
37%
58%
38%
38%
43%
38%
$212
$299
$324
$102
$68
$73
$57
$299
$47
$68
$47
$81
$242
$142
Service Revenue
$38
$48
$70
$15
$21
$18
$19
$74
$24
$24
$23
$27
$98
$114
Rental Revenue
$1
$14
$4
$1
$1
$1
$1
$3
$0
$0
$5
$5
$10
$20
Engineered Systems
72%
74%
78%
76%
72%
75%
70%
73%
69%
78%
72%
73%
73%
68%
Services
22%
21%
19%
19%
25%
22%
26%
23%
26%
20%
21%
21%
22%
24%
Rentals
5%
5%
3%
5%
3%
3%
4%
4%
4%
2%
7%
7%
5%
8%
Cash Dividends
-0.9x
International
Segmented Revenue
*Excluding intersegment revenue.
Pre-2013 results have not been restated to reflect Production & Processing in the Canada & Northern U.S. segment (previously reported under International).
142
Exhibit 6 – Income Statement
Figures in $M
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
Gross
20.9%
21.8%
20.8%
20.0%
23.9%
18.3%
19.7%
20.3%
18.4%
21.4%
23.5%
31.3%
24.3%
26.5%
EBITDA
7.5%
10.0%
10.5%
9.4%
12.0%
8.0%
7.6%
9.2%
6.2%
9.2%
13.6%
21.6%
13.5%
15.5%
Operating
5.6%
6.9%
7.8%
6.4%
8.7%
5.4%
4.7%
6.2%
3.0%
6.8%
9.5%
18.1%
10.2%
11.6%
2.2%
7.4%
6.7%
2.7%
4.3%
6.0%
3.7%
4.2%
1.8%
4.0%
6.8%
4.9%
4.5%
5.8%
12.7%
9.7%
10.9%
11.2%
11.5%
11.2%
13.6%
11.9%
11.0%
9.8%
13.0%
15.9%
12.9%
17.2%
International
-6.1%
2.2%
4.7%
5.0%
10.8%
-7.6%
-10.6%
0.1%
-11.5%
4.6%
2.4%
43.2%
13.2%
6.0%
Adjusted Earnings
0.7%
-0.8%
4.9%
4.6%
5.9%
3.8%
3.7%
4.5%
2.2%
3.2%
6.5%
12.5%
6.7%
8.0%
$454
$524
$592
$120
$122
$135
$148
$525
$142
$183
$170
$176
$671
$666
$364
$342
$512
$115
$99
$164
$125
$504
$119
$171
$235
$240
$764
$923
International
$250
$361
$397
$118
$89
$92
$77
$376
$72
$92
$74
$112
$350
$276
$1,068
$1,227
$1,502
$353
$311
$391
$350
$1,405
$332
$446
$479
$527
$1,785
$1,865
($845)
($959)
($1,189)
($282)
($237)
($319)
($281)
($1,120)
($271)
($350)
($367)
($362)
($1,351)
($1,371)
($143)
($146)
($159)
($39)
($38)
($42)
($45)
($164)
($44)
($58)
($49)
($52)
($202)
($215)
$80
$123
$157
$33
$37
$31
$26
$129
$20
$41
$65
$114
$241
$288
($39)
($42)
($39)
($10)
($10)
($10)
($10)
($40)
($10)
($10)
($20)
($18)
($57)
($65)
FX (Loss) Gain
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
One-Time Charges
$19
$4
$1
$0
$0
($0)
$0
$0
($0)
($0)
($0)
$0
($0)
$0
Income From Equity Holdings
$0
$1
$2
$1
$1
$2
$2
$5
$3
$2
$2
$1
$7
$2
$60
$85
$117
$23
$27
$21
$16
$87
$10
$30
$45
$95
$181
$216
($15)
($7)
($6)
($1)
($2)
($1)
($1)
($6)
($1)
($2)
($3)
($6)
($11)
($22)
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$45
$78
$112
$21
$26
$20
$15
$82
$9
$29
$43
$90
$170
$194
Total Tax
($14)
($21)
($29)
($6)
($7)
($6)
($4)
($24)
($5)
($18)
($13)
($25)
($60)
($54)
Net Earnings
$30
$57
$82
$15
$18
$13
$11
$58
$4
$11
$30
$65
$110
$140
($4)
($64)
($10)
($0)
($1)
($0)
($0)
($2)
$0
$0
($1)
$0
($1)
$0
($19)
($3)
$2
$1
$1
$2
$2
$7
$3
$3
$2
$1
$9
$9
$8
($10)
$74
$16
$18
$15
$13
$63
$7
$14
$31
$66
$119
$149
$218
Margins
Revenue
Total Revenue
Expenses
Operating Costs
General and Administrative
EBITDA1
Depreciation
Operating Income (EBIT)
Interest
Other
Earnings Before Taxes (EBT)
Cash Flow
From Operations
$43
$86
$119
$25
$29
$25
$19
$98
$12
$27
$53
$86
$179
Funds From (For) Investments
($288)
$39
($32)
$3
($8)
($8)
($0)
($13)
($3)
($465)
($7)
($27)
($502)
($90)
Funds From (For) Financing
$176
($101)
($38)
$11
($20)
($11)
($0)
($21)
($8)
$324
$29
($75)
$269
($181)
F.D. Per Share Data
Operating Earnings
$0.40
$0.73
$1.06
$0.20
$0.24
$0.16
$0.14
$0.73
$0.05
$0.14
$0.38
$0.82
$1.39
$1.76
($0.05)
($0.83)
($0.13)
($0.01)
($0.02)
($0.00)
($0.00)
($0.02)
$0.00
$0.00
($0.01)
$0.00
($0.01)
$0.00
($0.24)
($0.04)
$0.03
$0.02
$0.02
$0.02
$0.03
$0.09
$0.04
$0.04
$0.02
$0.02
$0.12
$0.11
$0.10
($0.13)
$0.95
$0.21
$0.23
$0.18
$0.17
$0.79
$0.09
$0.18
$0.39
$0.83
$1.50
$1.88
CF From Operations
$0.56
$1.12
$1.53
$0.32
$0.37
$0.32
$0.24
$1.25
$0.15
$0.35
$0.67
$1.08
$2.26
$2.75
Book Value
$10.99
$10.47
$11.04
$11.30
$11.36
$11.40
$11.53
$11.53
$11.88
$11.83
$11.99
$12.73
$12.73
$14.24
Tangible Book Value
$4.15
$4.32
$4.98
$5.22
$5.43
$5.47
$5.65
$5.65
$5.87
$2.76
$2.94
$3.74
$3.74
$5.42
$0
$14
$19
$5
$5
$5
$6
$22
$6
$6
$6
$6
$24
$27
$0.00
$0.18
$0.25
$0.07
$0.07
$0.07
$0.07
$0.28
$0.07
$0.08
$0.07
$0.08
$0.30
$0.34
Payout From CF
0%
16%
16%
22%
19%
22%
31%
23%
48%
21%
11%
7%
13%
12%
Payout From FCF
0%
12%
23%
20%
28%
29%
38%
28%
63%
30%
14%
10%
18%
21%
Basic - Period End
76.2
77.3
77.7
77.9
78.0
78.0
78.1
78.1
78.4
78.3
78.6
78.6
78.6
78.6
Weighted Average - Basic
76.2
77.2
77.6
77.8
77.8
77.8
78.3
77.9
78.2
78.3
78.3
78.6
78.4
78.6
Weighted Average - F.D.
76.4
77.3
77.7
78.0
78.1
78.2
78.7
78.2
78.8
79.0
79.2
79.3
79.1
79.3
Dividends
Per Share
Share Information (M)
Notes: (1) Adjusted for stock-based compensation, FX, unusual, and infrequent items. (2) Before changes in working capital.
Pre-2013 results have not been restated to reflect Production & Processing in the Canada & Northern U.S. segment (previously repo rted under International).
143
Exhibit 7 – Cash Flow Analysis and Capital Expenditure Summary
Figures in $M
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
Cash Flow Analysis
CF From Operations
$43
$86
$119
$25
$29
$25
$19
$98
$12
$27
$53
$86
$179
$218
less Capital Program
($54)
($35)
($43)
($6)
($12)
($10)
($9)
($37)
($10)
($9)
($12)
($27)
($59)
($90)
less Sale of PPE
$63
$69
$10
$8
$3
$3
$6
$19
$7
$1
$0
$0
$9
$0
Distributable Cash Flow
$52
$120
$86
$27
$20
$19
$15
$81
$9
$20
$41
$59
$129
$128
Free Cash Flow
$52
$120
$86
$27
$20
$19
$15
$81
$9
$20
$41
$59
$129
$128
$0
($9)
($19)
($5)
($5)
($5)
($5)
($22)
($6)
($6)
($6)
($6)
($23)
($26)
$52
$111
$67
$21
$14
$13
$10
$59
$3
$14
$35
$53
$105
$102
($293)
$0
$0
$0
$0
$0
$0
$0
$0
($459)
$0
$0
($459)
$0
$4
$3
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Surplus (Deficit) Cash Flow
($238)
$114
$67
$21
$14
$13
$10
$59
$3
($446)
$35
$53
($354)
$102
CF From (For) Financing
$176
($92)
($20)
$16
($15)
($6)
$5
$1
($2)
$329
$35
($69)
$292
($155)
Other/Non-cash w.c. changes
$41
$44
$16
($31)
($73)
$17
$65
($23)
$36
$26
($85)
($47)
($70)
$53
Net Change In Cash Position
($20)
$66
$64
$7
($74)
$24
$80
$37
$37
($90)
($15)
($64)
($132)
$0
Total Capex
$54
$35
$43
$6
$12
$10
$9
$37
$10
$9
$12
$27
$59
$90
less Cash Dividends
Excess (Short) FCF
less Acquisitions/Investments
plus Disposition/Divestures
Exhibit 8 – Capitalization, Valuation, and Ratio Analysis
Figures in $M
Capitalization Summary1
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
Share Price
NA
$13.26
$11.98
$13.92
$13.50
$13.89
$15.00
$15.00
$17.60
$20.32
$19.11
$16.96
$16.96
$16.96
NA
$1,060
$962
$1,118
$1,085
$1,116
$1,212
$1,212
$1,423
$1,636
$1,551
$1,377
$1,377
$1,377
Net Debt
NA
$38
($49)
($41)
$18
($13)
($89)
($89)
($131)
$286
$336
$331
$331
$176
Enterprise Value
NA
$1,097
$914
$1,077
$1,103
$1,102
$1,123
$1,123
$1,292
$1,922
$1,887
$1,707
$1,707
$1,552
Net Debt (Cash)/EBITDA
-0.2x
0.3x
-0.3x
-0.3x
0.1x
-0.1x
-0.7x
-0.7x
-1.1x
2.4x
2.2x
1.4x
1.4x
0.6x
-0.3x
0.4x
-0.4x
-0.3x
0.1x
-0.1x
-0.9x
-0.9x
-1.5x
3.4x
3.0x
1.9x
1.9x
0.8x
Net Debt (Cash)/Equity
NA
5%
-5%
-5%
2%
-1%
-10%
-10%
-14%
30%
35%
32%
32%
15%
Net Debt/Total Capitalization
NA
4%
-6%
-5%
2%
-1%
-11%
-11%
-16%
23%
26%
24%
24%
13%
Net Debt/Enterprise Value
NA
3%
-5%
-4%
2%
-1%
-8%
-8%
-10%
15%
18%
19%
19%
11%
Capex/Cash Flow
-0.2x
-0.4x
0.3x
-0.1x
0.3x
0.3x
0.2x
0.2x
0.2x
0.3x
0.2x
0.3x
0.3x
0.4x
Current Ratio
0.9x
1.5x
1.7x
1.9x
1.8x
1.8x
1.8x
1.8x
1.7x
1.4x
1.5x
1.5x
1.5x
1.4x
Interest Coverage Ratio
3.9x
12.1x
20.7x
21.1x
21.0x
19.1x
15.8x
15.8x
13.9x
14.6x
15.3x
16.5x
16.5x
10.0x
Valuation Analysis
EV/EBITDA
-0.2x
8.9x
5.8x
6.8x
7.0x
7.3x
8.7x
8.7x
11.2x
16.1x
12.3x
7.1x
7.1x
5.4x
P/CF
0.0x
11.9x
7.8x
9.0x
8.4x
8.9x
12.1x
12.0x
16.3x
19.2x
13.6x
7.5x
7.5x
6.2x
P/E
0.0x
-102.2x
12.6x
14.3x
12.9x
14.0x
18.8x
18.9x
25.9x
32.4x
23.0x
11.3x
11.3x
9.0x
P/BV
NA
1.3x
1.1x
1.2x
1.2x
1.2x
1.3x
1.3x
1.5x
1.7x
1.6x
1.3x
1.3x
1.2x
NA
3.1x
2.4x
2.7x
2.5x
2.5x
2.7x
2.7x
3.0x
7.4x
6.5x
4.5x
4.5x
3.1x
ROE
1.3%
-1.2%
8.6%
8.7%
9.2%
8.7%
6.9%
6.9%
5.7%
5.3%
7.0%
12.1%
12.1%
13.6%
ROA
0.8%
-0.7%
5.4%
5.6%
5.8%
5.6%
4.5%
4.5%
3.7%
3.0%
3.9%
7.0%
7.0%
7.6%
ROCE
10.2%
9.3%
11.7%
11.6%
11.2%
10.4%
8.1%
8.1%
6.4%
5.7%
7.5%
13.9%
13.9%
14.6%
ROIC
3.0%
-0.5%
7.9%
7.9%
8.4%
8.1%
6.5%
6.5%
5.4%
4.3%
5.6%
10.0%
10.0%
11.2%
P/TBV
Ratio Analysis2
Notes:
(1) Historicals based on closing pricing.
(2) Based on two-year average capital and adjusted earnings.
144
Exhibit 9 – Balance Sheet & Debt Position Analysis
Figures in $M
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
Cash & Equivalents
$15
$81
$145
$152
$78
$102
$182
$182
$219
$130
$114
$50
$50
$50
Accounts Receivables
$243
$254
$287
$277
$340
$345
$331
$331
$322
$350
$398
$441
$441
$408
Inventory
$223
$240
$193
$169
$201
$187
$166
$166
$221
$233
$265
$248
$248
$234
Prepaids
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Income Tax
$2
$3
$0
$0
$0
$0
$0
$0
$1
$1
$2
$2
$2
$2
Other
$22
$17
$12
$11
$7
$11
$10
$10
$8
$22
$13
$13
$13
$13
$707
Current Assets
2015E
$505
$596
$637
$610
$625
$645
$689
$689
$770
$735
$792
$755
$755
Risk Management Assets
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Future Income Tax
$48
$40
$33
$33
$32
$30
$32
$32
$35
$30
$30
$30
$30
$30
Investments
Property, Plant, & Equipment
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$288
$225
$221
$214
$218
$209
$209
$209
$210
$450
$438
$452
$452
$491
Intangibles
$39
$32
$29
$26
$24
$27
$24
$24
$21
$46
$45
$41
$41
$27
Goodwill
$483
$460
$457
$462
$453
$450
$451
$451
$464
$684
$689
$689
$689
$689
Other
$14
$18
$13
$12
$9
$11
$10
$10
$13
$18
$14
$14
$14
$16
$1,378
$1,371
$1,389
$1,358
$1,361
$1,373
$1,416
$1,416
$1,513
$1,964
$2,009
$1,981
$1,981
$1,960
Bank Indebtedness
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Current Long Term Debt
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
A/P & Accrued Liabilities
$164
$154
$169
$130
$124
$163
$156
$156
$164
$242
$230
$209
$209
$214
Income Tax Payables
$7
$2
$5
$9
$2
$2
$2
$2
$8
$2
$11
$11
$11
$11
Dividend Payables
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$1
$366
$248
$211
$178
$220
$198
$226
$226
$284
$278
$284
$284
$284
$284
$510
Total Assets
Other
Current Liabilities
$537
$405
$386
$316
$347
$363
$385
$385
$456
$523
$525
$504
$504
Risk Management
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Credit Facility
$0
$31
$9
$23
$8
$1
$5
$5
$0
$331
$365
$296
$296
$141
Senior Notes
$0
$88
$88
$88
$88
$88
$88
$88
$88
$84
$85
$85
$85
$85
Convertible Debentures
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Asset Retirement Obligation
$0
$0
$0
$0
$0
$0
$0
$0
$0
$4
$5
$5
$5
$5
Non-controlling Interest
$0
$0
$0
$0
$0
$0
$0
$0
$0
$3
$3
$3
$3
$3
Future Income Taxes
$0
$0
$0
$0
$0
$0
$0
$0
$0
$47
$37
$40
$40
$46
$1
$11
$20
$22
$5
$6
$7
$7
$9
$17
$15
$15
$15
$15
Total Liabilities
Other
$538
$534
$503
$450
$447
$457
$484
$484
$553
$1,011
$1,036
$948
$948
$804
Share Capital
$850
$207
$213
$216
$217
$219
$221
$221
$225
$228
$229
$230
$230
$239
Contributed Surplus
$0
$657
$656
$655
$655
$655
$655
$655
$654
$653
$653
$653
$653
$653
Retained Earnings (Deficit)
$0
($36)
$17
$26
$38
$46
$50
$50
$49
$54
$78
$137
$137
$250
($11)
$8
$1
$10
$3
($3)
$6
$6
$33
$18
$13
$13
$13
$13
$839
$836
$887
$908
$913
$916
$932
$932
$960
$953
$973
$1,033
$1,033
$1,156
Total Liabilites & Equities
$1,378
$1,371
$1,389
$1,358
$1,361
$1,373
$1,416
$1,416
$1,513
$1,964
$2,009
$1,981
$1,981
$1,960
$176
Comprehensive Income/Other
Debt Position Analysis
Net Debt
Net Debt + NCWC1,2
($15)
$38
($49)
($41)
$18
($13)
($89)
($89)
($131)
$286
$336
$331
$331
$32
($73)
($154)
($183)
($183)
($194)
($212)
($212)
($226)
$204
$183
$130
$130
$29
Total Credit Facility
NA
$395
$415
$415
$415
$416
$416
$416
$417
$697
$675
$675
$675
$675
Drawn
NA
$31
$9
$23
$8
$1
$5
$5
$0
$331
$365
$296
$296
$141
Available Lines
NA
$364
$406
$392
$407
$415
$411
$411
$417
$366
$310
$379
$379
$534
Available Lines (%)
NA
92%
98%
94%
98%
100%
99%
99%
100%
53%
46%
56%
56%
79%
Notes: (1) Working capital adjusted. (2) Definition matches traditional E&P net debt calculation.
145
Company Comment
(ERF-T C$16.74)
(ERF-N US$14.78)
Enerplus Corporation
Third Quarter Volumes Ahead and 2014 Guidance
Increased
patrick.bryden@scotiabank.com
Riley Hicks, CA, MBA - (403) 213-7760
Justin Strong, MBA - (403) 213-7328
Target 1-Yr:
C$24.00
ROR 1-Yr:
49.8%
Div. (NTM)
Div. (Curr.)
$1.08
$1.08
Yield (Curr.)
6.5%
Key Risks to Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program succes s
Event
■ Enerplus released its third quarter financial and operational results.
Pertinent Revisions
Implications
■ Production slightly ahead of estimates while CFPS in line. Average
production for the quarter was 104,035 boe/d, which was slightly ahead
of our estimate of 101,862 boe/d. Cash flow per share of $1.02 was in
line with our estimate of $1.01.
■ Non-core divestments announced. Enerplus delivered on its non-core
divestment strategy during the third quarter, with the completion of two
transactions, reducing production by 3,100 boe/d in exchange for total
proceeds of $91 mm. Year-to-date divestitures have generated proceeds
of over $200 mm, with the funds being redeployed to the company's
core properties, most notably the Wilrich and Fort Berthold.
■ 2014 guidance increased. Management has increased the low end of
2014 production guidance by 2% to 102,000-104,000 boe/d (previously
100,000-104,000 boe/d), while increasing the capital budget for 2014
by $30 mm, to a total budget of $830 mm (previously $800 mm).
■ U.S. assets attracting the majority of capital. Enerplus invested $208
mm on drilling activities during the quarter, with the company's U.S.
assets attracting approximately 66% of the total capital spend.
New
Old
Target:
1-Yr
$24.00
$29.00
CFPS14E
$4.29
$4.24
CFPS15E
$4.58
$4.54
CFPS16E
$4.20
$4.18
New Valuation:
Old Valuation:
Recommendation
■ We have maintained our SO rating and lowered our one-year target price
to $24.00 (previously $29.00).
Qtly CFPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.85 A
$1.05 A
$1.16
$1.03
(FY-Dec.)
Cash Flow/Share
Dividends/Share
Price/Cash Flow
Pre-tax Cash Yield
Q2
$1.01 A
$1.02 A
$1.17
$1.03
Q3
$0.95 A
$1.02
$1.18
$1.06
Q4
$0.86 A
$1.17
$1.07
$1.08
Year
$3.66
$4.29
$4.58
$4.20
P/CF
5.3x
3.9x
3.7x
4.0x
2012A
$3.19
$1.62
4.0x
12.6%
2013A
$3.66
$1.08
5.3x
5.6%
2014E
$4.29
$1.08
3.9x
6.5%
2015E
$4.58
$1.08
3.7x
6.5%
2016E
$4.20
$1.08
4.0x
6.5%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
BVPS14E: $10.12
ROE14E: 11.11%
$3,443
$1,119
$4,562
206
206
146
Third Quarter Results and Operations Update
■ Production slightly ahead of estimates while CFPS in line. Average production for the
quarter was 104,035 boe/d, which was slightly ahead of our estimate of 101,862 boe/d. Cash
flow per share of $1.02 was in line with our estimate of $1.01.
■ Non-core divestments announced. Enerplus delivered on its non-core divestment strategy
during the third quarter, with the completion of two transactions, reducing production by
3,100 boe/d in exchange for total proceeds of $91 mm. Year-to-date divestitures have
generated proceeds of over $200 mm, with the funds being redeployed to the company’s core
properties, most notably the Wilrich and Fort Berthold.
■ U.S. assets attracting the majority of capital. Enerplus invested $208 mm on drilling
activities during the quarter; with the company’s U.S. assets attracting approximately 66% of
the total capital spend. The U.S. capital was directed mainly towards the Bakken and
Marcellus during the third quarter, drilling 19.3 net wells, with 17.3 net wells brought on
stream.
■ Shortage of take-away capacity compressing production in the Marcellus. Differentials
continue to widen in the Marcellus region due to a lack of take-away capacity. As a result of
the constrained pipeline capacity, combined with planned maintenance during the quarter,
Enerplus reduced its production by 3,000-4,000 boe/d during the third quarter. The company
has indicated that it will continue to slow the pace of activity, and have reduced its rig
activity from four rigs to two, resulting in lower expected capital expenditures in the
Marcellus during the fourth quarter.
■ Costly Duvernay wells will need further evaluation before commercialization, but could
be a catalyst in the future. Enerplus drilled and completed two horizontal Duvernay wells
during 2014. The drilling and completion cost of these wells was much higher than expected
– similar to what has been seen across the Duveray by most companies, with the resulting
production in line with expectations. In our recent publication of The Playbook¸the Kaybob
Duvernay ranked as a top quartile play, as shown by Exhibit 3. Under the scenario of
US$81/boe oil and US$3.85/mcf gas, the Profit Investment Ratio for the Kaybob Duvernay is
1.5x. In our view, Enerplus’ exposure to this play could be a catalyst for production growth
in the future but the company will need to further evaluate its drilling and completion
techniques prior to commercializing the play.
■ Activity at Fort Berthold ramping up. Enerplus continues to advance its drilling program
in Fort Berthold during the quarter, with production increasing by 1,600 boe/d to 22,400
boe/d. Enerplus has drilled both the Bakken and Three Fork zones, with a focus on drilling
optimization through evolving completion techniques. The IP30 rates of the two horizontal
wells brought on stream in 2014 have been strong, outperforming management’s type curve
and averaging 1,725 boe/d. The company has also noted an improvement of over 10% in the
IP60 rates, with production averaging approximately 1,400 boe/d. Exhibit 1 shows well
performance for Enerplus at Fort Berthold.
■ 2014 guidance increased. Management has increased the low end of 2014 production
guidance by 2% to 102,000-104,000 boe/d (previously 100,000-104,000 boe/d), while
increasing the capital budget for 2014 by $30 mm, to a total budget of $830 mm (previously
$800 mm).
147
Exhibit 1 - Williston Basin Vintage Production
1,400
Oil (bbl/d; calendar day)
1,200
1,000
800
600
400
200
0
1
4
7
10
1,600
1,400
1,400
1,200
16
19
Month
22
25
28
31
34
25
1,000
800
600
400
20
6 Months
1,000
15
800
12 Months
Wells
Raw boe (boe/d; calendar day)
1 Month
1,200
GOR (scf/bbl)
13
600
10
18 Months
400
5
24 Months
200
200
0
0
0
1
4
7
10
13
16 19 22
Month
SC Type Curve (858 mboe)
25
28
31
34
Total (54 wells)
1
4
7
10
13
2014 (2 wells)
16 19 22
Month
25
28
31
2013 (20 wells)
34
2011
2012 (23 wells)
Source: Company reports; GeoScout; Scotiabank GBM estimates.
■ A further word about our price deck assumptions. Our estimates still reflect WTI price
assumptions that are higher than current market prices. Our price deck is typically subject to
quarterly update, which can impact our coverage universe target prices and ratings. While we
have not revised our commodity price deck that was released in late September, given
material deterioration in crude oil prices recently, we refer our readers to our Thursday,
October 16 update Running WTI Scenarios: Commodity Prices Put Sector Under Pressure
for scenario and sensitivity analysis our income-focused oil and gas research coverage. We
further include sensitivity tables in Exhibit 2, which provide a sense for how CFPS, D/CF
and effective payout ratios change with different WTI crude oil and Henry Hub natural gas
assumptions.
2012
2013
2014
2011 (5 wells)
148
Exhibit 2 - Commodity Price Sensitivities
CFPS Sensitivities
Current Scotia Deck
Estimate:
$4.58
Henry
$2.00
Hub
$2.50
$3.00
$3.50
$4.00
$4.50
$70
$3.19
$3.34
$3.48
$3.63
$3.77
$3.92
$75
$3.38
$3.53
$3.67
$3.82
$3.96
$4.11
$80
$3.57
$3.71
$3.86
$4.00
$4.15
$4.30
D/CF Sensitivities
Current Scotia Deck
Estimate:
1.3x
Henry
$2.00
Hub
$2.50
$3.00
$3.50
$4.00
$4.50
$70
2.2x
2.1x
1.9x
1.8x
1.7x
1.6x
$75
2.0x
1.9x
1.8x
1.7x
1.6x
1.5x
$80
1.9x
1.8x
1.7x
1.6x
1.5x
1.4x
$75
150%
144%
138%
133%
128%
124%
$80
142%
137%
132%
127%
122%
118%
WTI
$85
$3.76
$3.90
$4.05
$4.19
$4.34
$4.48
$90
$3.94
$4.09
$4.23
$4.38
$4.52
$4.67
$95
$4.13
$4.28
$4.43
$4.57
$4.72
$4.86
$85
1.7x
1.6x
1.5x
1.4x
1.4x
1.3x
$90
1.6x
1.5x
1.4x
1.3x
1.3x
1.2x
$95
1.5x
1.4x
1.3x
1.2x
1.2x
1.1x
$85
135%
130%
126%
121%
117%
113%
$90
129%
124%
120%
116%
112%
109%
$95
123%
119%
115%
111%
108%
105%
WTI
Effective Payout Sensitivities
Current Scotia Deck
Estimate:
111%
$70
Henry
$2.00
159%
Hub
$2.50
152%
$3.00
146%
$3.50
140%
$4.00
135%
$4.50
130%
WTI
Note: All other Scotiabank price deck assumptions unchanged in sensitivities.
Investment Thesis
■ Enerplus remains attractively valued on EV/DACF, and the balance sheet remains
intact. Enerplus remains attractively price versus peers at current levels based on cash flow,
trading at 4.6x 2015E EV/DACF, versus the peer group average at 6.1x. Additionally, the
company has maintained its financial flexibility through capital spending, divestitures and its
hedge book. 2015E D/CF of 1.3x and a 201E effective payout ratio of 120% indicate greater
financial defensiveness than the peer group averages of 2.0x and 125%, respectively.
■ Target price reduced. We have maintained our rating of Sector Outperform but lowered our
one-year target price to $24.00 (previously $29.00). Our target price represents a 2015E
EV/DACF of 6.1x, which compares to the peer group average of 8.2x, while on a 2P NAV it
reflects 1.6x versus the peer group at 1.7x. Please refer to Exhibit 4 for our financial and
operating forecast.
149
Exhibit 3 - Play Ranking by PIR - US$81/boe; US$3.85/mcf (C$3.25/mcf)
Woodenhouse Heavy - Vt
Seal Cold Heavy Multi-Lateral
Ante Creek Montney (Tier 1; Coquina)
SE Sask Viewfield Bakken
Musreau/Resthaven Montney
SE SK Frobisher/Alida
Dodsland Viking
Kaybob Montney Oil
SE Sask Border Torquay
Bantry Glauconite
Valhalla Doig
SW Sask Shaunavon (Upper)
Lloyd (Tier 1) Heavy
AB Bakken (east, shallow)
Eagle Ford - Karnes Trough Condensate
Gordondale Montney Oil
Bilbo/Karr Montney Gas
PRA Montney Oil
Spirit River Charlie Lake Oil
Marcellus - NE PA (Dry Gas - Tier 1)
SE Sask Border Midale
Hoadley Glauconite (Tier 1)
Nesson Anticline Three Forks
Brazeau Belly River
Kaybob Duvernay ($12M, 300 bbl/mmcf)
Garrington Cardium
NE BC Montney
Pembina Notikewin/Falher
East Pembina Cardium
Karr Dunvegan Oil
Elmworth Montney
SW Sask Shaunavon (Lower)
Lloyd (Regional) Heavy
Provost Heavy
Cold Lake Heavy
Kakwa Falher/Wilrich
Tower Montney Oil
Kaybob Duvernay ($12M, 150 bbl/mmcf)
Glacier/Pouce Coupe Montney/Doig Gas
Uinta Basin Green River/Wasatch - Vt
Lloyd (Regional) Heavy - Vt
Redwater Viking
West Pembina Cardium
Marcellus (SW PA, wet gas)
Average
Permian Delaware Wolfcamp (Reeves Core)
Simonette Montney Gas
Septimus Montney Gas
Ante Creek (Regional) Montney
San Juan Mancos
Inga Doig Gas
Swan Hills Beaverhill Lake
Willesden Green Cardium
North Dakota Spearfish
Niobrara (Greater Wattenberg)
Eagle Ford - Edwards Condensate
Sanish/Parshall Bakken
Ansell Wilrich
Waskahigan Montney Oil
Eagle Ford - Hawkville Condensate
Lochend (West) Cardium
Waskada Lower Amaranth
Central Pembina Cardium
Permian Midland Wolfcamp (Deep Basin)
Provost Viking
Deep Basin Notikewin
Foothills Multizone Gas - Vt
Utica Dry Gas
AB Bakken (west, deep)
Fort Berthold Bakken
Utica Wet Gas
Deep Basin Bluesky
Eagle Ford - Black Oil
Granite Wash
Cana Woodford
West Nesson Bakken
Blair/Town Montney
Barnett (core, liquids rich gas)
Deep Basin Cardium
Red Earth (West) Slave Point Oil
Haynesville (core)
Tuscaloosa Marine Shale
Permian Delaware Bone Spring (Pecos River)
Fayetteville
All Cardium - Vt
Fort Berthold Three Forks
Permian Midland Wolfcamp (Ozona)
Marcellus - NE PA (Dry Gas - Tier 2)
Deep Basin Multizone - Vt
Haynesville (non-core)
Barnett (core, dry gas)
Birchwavy Colorado / Viking - Vt
Horn River - 20 Stages
Shallow Gas Multi-Zone - Vt
0.0x
0.5x
1.0x
1.5x
2.0x
Profit Investment Ratio (PIR)
Oil
Liquids
Gas
2.5x
3.0x
150
Exhibit 4 - Financial and Operating Forecast
Fiscal Year End - December 31
2010A
2011A
2012A
2013A
Q1/14A
Q2/14A
Q3/14A
Q4/14E
2014E
2015E
2016E
Price Deck Assumptions
WTI
Edmonton Par
WCS
Nymex Natural Gas
AECO 30-Day Spot
Exchange Rate
US$/B
C$/B
C$/B
US$/Mcf
C$/Mcf
US$/C$
$79.13
$76.61
$64.42
$4.35
$3.86
$0.97
$94.72
$95.37
$73.73
$4.01
$3.64
$1.01
$94.09
$87.12
$70.55
$2.76
$2.39
$1.00
$97.91
$93.51
$75.34
$3.71
$3.16
$0.97
$98.65
$99.51
$83.18
$5.06
$5.49
$0.91
$103.15
$106.67
$90.47
$4.53
$4.69
$0.92
$97.69
$98.31
$83.84
$3.93
$4.03
$0.92
$92.00
$96.39
$81.78
$4.10
$4.22
$0.90
$97.85
$100.21
$84.81
$4.40
$4.60
$0.91
$92.00
$95.56
$81.78
$4.00
$4.00
$0.90
$91.00
$94.44
$80.89
$4.00
$4.00
$0.90
Daily Production
Total Oil & Liquids
Natural Gas
Total Production
Change in Total Production
Percentage Natural Gas
B/d
Mmcf/d
Boe/d
%
%
35,023
289
83,139
-9%
58%
33,488
251
75,332
-9%
56%
40,135
252
82,098
9%
51%
41,722
288
89,792
9%
54%
41,022
347
98,821
5%
58%
43,499
363
103,987
5%
58%
44,201
359
104,035
0%
58%
46,166
331
101,257
-3%
54%
43,737
350
102,037
14%
57%
48,058
352
106,784
5%
55%
49,626
369
111,180
4%
55%
Financial Estimates
Cash Flow from Operations
Investment Cash Flows - Internal
Investment Cash Flows - M&A
Financing Cash Flows
Dist/Div
[$mm]
[$mm]
[$mm]
[$mm]
[$mm]
$718.8
-$546.7
-$146.6
-$149.0
-$384.1
$552.0
-$877.0
$386.0
-$176.8
-$388.9
$624.0
-$864.7
$60.4
$225.2
-$277.9
$737.6
-$687.9
$120.3
-$266.0
-$170.7
$216.3
-$218.2
$107.3
-$66.6
-$42.2
$209.0
-$205.6
-$3.8
$14.9
-$50.5
$209.5
-$209.2
$64.9
-$61.8
-$51.1
$240.6
-$197.0
$91.0
-$134.6
-$55.5
$875.3
-$830.0
$259.4
-$248.1
-$199.2
$944.8
-$825.0
$0.0
-$119.8
-$222.7
$871.0
-$850.0
$0.0
-$21.0
-$223.8
Cash Flow Per Share - FD
EBITDA
EPS
Distribution - Basic
$/Share
$/Share
$/Share
$/Share
$4.04
$4.12
$0.71
$2.16
$3.07
$3.54
$0.61
$2.16
$3.19
$1.84
-$0.80
$1.62
$3.66
$3.67
$0.24
$1.08
$1.05
$1.06
$0.19
$0.27
$1.02
$1.08
$0.20
$0.27
$1.02
$1.36
$0.33
$0.27
$1.17
$1.30
$0.37
$0.27
$4.29
$4.83
$1.09
$1.08
$4.58
$4.94
$1.19
$1.08
$4.20
$4.57
$0.83
$1.08
Netbacks
Revenue (pre-hedging)
Heging Gains (Losses)
Royalties
Operating Costs
Transportation Costs
Field Netback
After-Tax Netback
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
$42.84
$1.64
-$7.36
-$9.54
-$0.89
$26.68
$29.13
$48.76
-$1.21
-$8.92
-$10.23
-$0.75
$27.65
$19.42
$44.74
$0.61
-$8.98
-$10.64
-$0.88
$24.85
$20.11
$48.35
$0.81
-$10.21
-$10.48
-$1.22
$27.25
$21.64
$54.74
-$1.72
-$12.05
-$10.02
-$1.47
$29.47
$23.68
$52.86
-$2.59
-$9.47
-$10.09
-$1.39
$29.31
$20.72
$46.91
-$0.26
-$8.14
-$10.67
-$1.53
$26.31
$20.95
$50.42
$0.86
-$8.76
-$10.40
-$1.30
$30.82
$26.33
$51.17
-$0.92
-$9.57
-$10.30
-$1.42
$28.96
$22.89
$49.86
$0.44
-$9.63
-$10.28
-$1.30
$29.09
$24.74
$49.16
$0.00
-$11.38
-$10.20
-$1.30
$26.28
$21.96
Valuation Measures
EV/DACF
EV/EBITDA
P/E
D/P
EV per Boe/d
x
x
x
%
$/Boe/d
8.4
8.8
21.3
14%
77,504
9.9
9.3
25.0
14%
78,767
5.5
10.3
-19.1
11%
45,294
6.3
6.8
63.8
7%
56,200
6.7
7.0
31.5
4%
62,397
4.8
4.9
19.5
7%
41,894
4.8
3.9
11.6
7%
41,667
4.2
4.0
10.3
7%
41,924
4.6
4.3
13.9
7%
41,604
4.4
4.3
12.8
7%
40,634
5.0
4.8
18.2
7%
40,979
Credit Capacity
Credit facility
% Drawn
[$mm]
%
$1,400
23%
$1,000
45%
$1,000
26%
$1,000
21%
$1,000
19%
$1,000
29%
$1,000
6%
$1,000
0%
$1,000
0%
$1,000
16%
$1,000
36%
EBITDA
Cash Flow
Net Debt, Debentures & Equity
EV
$/Share
x
x
x
%
$5.40
1.3
1.3
0.2
15%
$6.90
2.0
2.3
0.3
21%
$5.82
3.2
1.9
0.3
31%
$6.04
1.7
1.7
0.4
24%
$5.78
1.3
1.4
0.4
19%
$6.08
1.4
1.5
0.4
29%
$5.90
1.1
1.4
0.4
28%
$5.44
1.0
1.2
0.3
26%
$5.44
1.1
1.3
0.3
26%
$5.79
1.2
1.3
0.4
28%
$6.74
1.5
1.6
0.4
31%
Sustainability
Payout Ratio - Simple
Payout Ratio - Effective
Capital Expenditures / Cash Flow
%
%
%
53%
130%
76%
70%
229%
159%
48%
187%
139%
29%
123%
93%
25%
126%
101%
26%
125%
98%
26%
126%
100%
23%
105%
82%
25%
120%
95%
24%
111%
87%
26%
123%
98%
Hedging
Percentage of Light & Medium Oil
Percentage of Heavy Crude Oil
Percentage of Natural Gas Production
Percentage of Total Production
%
%
%
%
-----
-----
-----
-----
-----
-----
-----
64%
0%
48%
54%
63%
0%
36%
46%
39%
0%
23%
30%
39%
0%
23%
30%
151
Company Comment
Firm Capital Mortgage Investment
Corporation
(FC-T C$12.85)
jeffery.coles@scotiabank.com
Target 1-Yr:
C$13.25
ROR 1-Yr:
10.6%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.97
$0.94
7.3%
Key Risks to Target: Declining real estate prices, origination volumes, and credit quality
Event
■ Firm Capital reported Q3/14 adj. EPS of $0.24 vs. $0.24 last year, in
line with us and the Street at $0.24 and $0.24, respectively.
Pertinent Revisions
New
Old
Implications
■ Flexing origination capacity to generate portfolio growth. FC
demonstrated the strength of its origination platform with solid 3%
sequential growth despite facing the highest level of discharges since
Q1/09. In the midst of competitive market conditions we have reduced
our 2015 mortgage growth forecast by half (now 4%) though we see
room for FC to potentially surprise to the upside with forecast
maturities declining to ~$62M per quarter in 2015.
■ Expansion in Western Canada is coming into focus following the
opening of a Calgary office at the end of 2013. While the proportion of
the portfolio invested in the west has yet to rise we expect growth will
follow. We see potential benefits both from diversification and from
adding another growth channel outside its core Ontario market.
■ Growth forecast inches higher. Our 2014E-16E adj. EPS CAGR
improved to 3% (previously 2.2%), in line with the Sector at 3.1%.
$13.25
$0.96
$1.02
$13.00
$0.97
$1.01
Target:
1-Yr
Adj. EPS14E
Adj. EPS16E
Recommendation
■ Maintaining Sector Perform rating; target price raised to
$13.25/share (+$0.25). Trading at 12.7x our adj. EPS/1.2x book value FC
is trading in line with AI and at a reasonable premium to the sector at
12x/1.1x. Our neutral view is predicated on a lower forecast 1-year ROR.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.23 A
$0.25 A
$0.25
$0.25
(FY-Dec.)
Earnings/Share
Price/Earnings
Revenues (M)
Q2
$0.25 A
$0.24 A
$0.25
$0.25
Q3
$0.24 A
$0.24 A
$0.25
$0.26
Q4
$0.24 A
$0.24
$0.25
$0.26
Year
$0.97
$0.96
$1.01
$1.02
P/E
12.5x
13.4x
12.7x
12.6x
2012A
$0.99
13.8x
$27.1
2013A
$0.97
12.5x
$28.3
2014E
$0.96
13.4x
$30.9
2015E
$1.01
12.7x
$33.6
2016E
$1.02
12.6x
$34.7
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
BVPS14E: $10.38
ROE14E: 9.83%
$259
$146
$405
20
20
152
Operational Activity Appears Healthy; Relative Valuation Appears
Reasonable but Forecast Total Return Modestly Trails the Group
■ Solid operating quarter; portfolio growth. In the quarter
mortgage growth was solid, with the portfolio reaching
$357M (+15% YOY; +3% QOQ). Portfolio interest rates
increased by 21 bp sequentially to 8.58%, the first increase
9.8%
4.2%
15.0%
1.4%
10.3%
5.4%
16.3%
1.4%
9.0%
8.0%
15.0%
2.0%
-50 bp
-120 bp
-130 bp
0 bp
80 bp
-380 bp
0 bp
-60 bp
14.0%
69.0%
11.0%
6.0%
15.0%
67.0%
12.0%
6.0%
17.0%
72.0%
8.0%
3.0%
-100 bp
200 bp
-100 bp
0 bp
-300 bp
-300 bp
300 bp
300 bp
Oct-14
Mar-14
Aug-13
Jan-13
Jun-12
Nov-11
Apr-11
Sep-10
MIC Avg.
Feb-10
MKP
Jul-09
FC
Dec-08
AI
Oct-07
May-…
MIC Avg.
Mar-07
Aug-06
Conv. non-1st mtges
Non-conv. mtges
Related investments
Discounted debt
Geographic Profile
Western CDA
Ontario
Quebec
Other
MKP
FC
AI
Jan-06
■ Maintaining Sector Perform rating, target price raised to
$13.25/share (+$0.25). Following a solid quarter and strong Exhibit 1 – FC is Trading at a Reasonable Premium to the Sector, in Our View
origination volumes, FC’s mortgage portfolio reached $357M
Firm Capital MIC
(+15% YOY; +3% QOQ). Our outlook for FC remains Adj. P/E Ratio
Current = 12.7x
15x
positive with its external manager demonstrating its
Target = 13.0x
14x
origination capability by delivering solid sequential growth
13x
despite facing the highest level of mortgage discharges since 12x
FC Avg. = 11.3x
at least Q1/09. Firm Capital is turning west as it looks to 11x
grow its portfolio in Western Canada, particularly in Alberta 10x
Average = 10.2x
and the Prairie Provinces as it seeks to leverage its Calgary
9x
office that opened in late 2013. That said, the lending market
8x
MIC Average
remains competitive and we have modestly lowered our
7x
Current = 12.0x
portfolio growth outlook to reflect market realities. Credit
6x
performance remains strong with payments not being
5x
received on a single loan (originated as a discounted debt
investment). Nonetheless, FC maintains the highest provision
for credit losses in the Sector which, in our view, provides
insulation from potential future credit impairments. While we Source: Company reports; Scotiabank GBM estimates.
continue to like FC, our neutral view is largely the result of
our 10.6% forecast total return which slightly trails the
Exhibit 2 – Firm Capital’s Relative Valuation Appears Fair across Key Metrics
average of coverage universe.
50%
■ FC’s relative valuation appears reasonable in our view.
Left Scale Right Scale
35%
FC is trading at 12.7x 2015E adj. EPS, in line with Atrium 35x
33.0%
MIC but at a 0.7x premium to the MIC sector. Valuation is 30x
30%
above it’s 11.3x historical average (since 2006) but generally 25x Historical
25%
Average
in line (0.1x premium) to its average since the beginning of
Current
23.8%
20%
2011 (Exhibits 1-2). FC’s adjusted EPS yield spread to the 20x
19.1%
12.9%
15%
GoC 2-Yr is currently ~690 bp, relatively in line with its 15x
12.7x
12.0x
9.5x
historical average. That said we still see room for spread 10x
10%
12.7x
compression in a rising rate environment with FC trading at
5x
5%
an average adj. EPS yield spread of ~540 bp in the two years
6.8% 7.3%7.7% 7.6%
0x
0%
prior to the onset of the financial crisis or ~150 bp tighter
Adj. EPS
Premium
Recur.
than today. In our view, this does not suggest the potential for
('15E)
to Book
Div. Yield
near term multiple expansion but rather reflects the current
low interest rate environment and expectations that interest Source: Company reports; Scotiabank GBM estimates.
rates may eventually rise.
■ Minor estimate revisions following an in line quarter. Our
revised 2014E-‘16E adjusted EPS estimates are $0.96 (- Exhibit 3 – Firm Capital MIC Key Portfolio Metrics
$0.008), $1.01 (unchanged), and $1.02 (+$0.007) and
Change
Q3/14
Q2/14
Q3/13
QOQ
YOY
represent a 3.0% CAGR (Exhibit 8) which is up marginally
Portfolio
from the 2.2% growth rate reflected in our prior forecast. The Mortgage
Size ($ millions)
355.6
344.9
308.7
3.1%
15.2%
negative revision in 2014 reflects lower forecast special Provision for mtge losses
94 bp
97 bp
103 bp
-3 bp
-9 bp
FC does not report a portfolio LTV
income resulting from the decline in discounted debt LTV ratio
8.58%
8.37%
8.64%
21 bp
-6 bp
investments in the quarter. The increase in 2016 is due the Interest rate
Term to maturity
0.9 yrs
1.0 yrs
1.0 yrs
-0.1 yrs -0.1 yrs
impact of a slightly lower forecast weighted average share Mortgage Seniority
count resulting from our lower portfolio growth forecast.
Conv. 1st mtges
69.6%
66.6%
66.0%
300 bp
360 bp
153
Exhibit 4 – We Expect Maturities to Slow in 2015 from Above Avg. Pace YTD
($000s)
Historical avg. = $64M/qtr
Avg. = $69M/qtr
120,000
Mtge
Origination
80,000
Portfolio
growth
40,000
0
(40,000)
(80,000)
Mtge repayments
Q4/15E
Q3/15E
Q2/15E
Q1/15E
Q4/14E
Q3/14A
Q2/14A
Q4/13A
Q3/13A
Q2/13A
Q1/13A
Q4/12A
Q3/12A
Q2/12A
Q1/12A
Q1/14A
Our forecast* reflects loan maturities
rising to $65M/qtr from $56M/qtr
(120,000)
*Forecast = contractual maturities plus annual prepayments of 10% of outstanding mortgages
Exhibit 5 – Firm Capital’s Loan Diversification is Excellent, in Our View
Mtges Outstanding (millions)
Outstanding Mtges
by size (LS)
$120
$113
$100
Avg. Mtge (millions)
$16.0
$14.0
$110
$80
$89
Portfolio avg.
= $2.1M (RS)
Avg. Mtge
Size (RS)
$60
$12.0
$10.0
$8.0
$40
$6.0
$44
$4.0
$20
$2.0
$0
$0.0
Loan Size <$2.5M
$2.5-$5M
# of Loans 122
$5M-$7.5M
31
>$7.5M
16
3
$3.3
$3.3
Q2/14
Q3/14
$3.3
$3.3
$1.7
$1.4
$1.1
Q1/14
Q4/13
Q4/12
Q4/11
Q4/08
Q4/07
Q4/06
Q4/05
Q4/10
Loan Loss Provision (LS)
0.0
Q4/09
0.5
$1.1
1.5
1.0
$3.2
$2.4
2.0
$3.0
$2.7
$ millions
3.5
Loan Loss Provision (RS)
Current = 94 bp
3.0
Average = 101 bp
2.5
$3.0
Exhibit 6 – FC has the Highest Credit Provision in the MIC Sector
Q4/04
since Q3/12 although mortgage rates were down 6 bp YOY.
Although we view the rise as a slight positive, with the
market remaining competitive we view the increase as a
reflection of the mortgage mix in the quarter rather than a
general rise in market interest rates. That said, FC’s portfolio
mix appears to have become slightly more conservative with
the proportion of conventional first mortgages rising to
69.6% (+300 bp QOQ; +360 bp YOY) and non-conventional
mortgages declining to 4.2% (-120 bp; -380 bp). Though not
specifically disclosed we estimate that FC’s average
remaining mortgage term to maturity declined to 0.9 years (0.1 years QOQ and YOY). Please see Exhibit 3 for a
summary of key portfolio metrics.
■ Despite competitive market conditions FC continues to
source deals. During the quarter FC funded gross mortgages
of $97 million ($243 million YTD) verse mortgage
repayments of $85 million ($226 million YTD) which was
the highest level since at least Q1/09. Looking ahead our
forecast reflects quarterly mortgage origination of $69
million, slightly above the $64 million average since Q1/12
but below the $81 million average YTD. Based on
contractual maturities and our assumed prepayment rate we
expect mortgage maturities to remain high in Q4/14 but to
begin to slow in 2015 (Exhibit 4). As a result our forecast
reflects FC’s mortgage portfolio growing to $363 million
(+2%) and $377 million (+4%) by the end of 2014 and 2015,
respectively. As a result of continued competitive market
dynamics we have halved our annual mortgage portfolio
growth assumption to 4% and 2% in 2015 and 2016,
respectively.
■ Targeting growth in Western Canada; loan level
diversification remains excellent. Western Canada is in
focus with a particular emphasis on Alberta and the Prairie
Provinces. With high relative valuations in British Columbia
that province is less of a focus for FC at this point in the
cycle. That said since opening its Calgary office in Q4/13
growth in Western Canada has been slow to gain traction and
at Q3/14 represented 14% of the portfolio (-100 bp
QOQ; -300 bp YOY). Over time we expect FC to gain
momentum in the west and expect the proportion of
mortgages from Western Canada to rise. In our view, benefits
of expansion are twofold as geographic diversification is
enhanced and FC opens a second avenue of growth outside of
its core Ontario market. Loan level diversification remains
excellent with FC’s average loan size holding firm at $2.1
million, the smallest average in the Sector (excl. MCAN).
Moreover, Firm Capital has only a limited number of large
loans with just 19 of 172 loans exceeding $5 million (Exhibit
5).
■ Credit quality remains in excellent form. The credit quality
of FC’s portfolio remains very strong in our view, with
payments not being received on only a single loan with a
principal balance of $4.0 million (1.1% of mortgages
outstanding). The loan was originally acquired as a nonperforming loan from a Schedule A Bank at a discount to the
outstanding principal amount. The original intent was to
realize on the underlying security and capture a portfolio of
the initial discount which remains the intention. FC
1.8%
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
154
maintained its $3.3 million general provision for credit losses though given the growth of the
portfolio the provision as a percentage of gross mortgages declined marginally to 94 bp (-3
bp QOQ). Nonetheless, FC maintains the highest provision for credit losses in the sector
which in our view provides investors with an added margin of safety in the event of future
credit impairment (Exhibit 6).
■ Balance sheet in good form; portfolio growth caused leverage to creep higher. Firm
Capital’s balance sheet remains in solid form with leverage on the basis of debt/assets
(including converts) at 40.6% up 220 bp sequentially (-330 bp YTD) due to increased
utilization of its credit facility to fund mortgage portfolio growth. Leverage remains
reasonable though we do not consider FC to be under levered and our forecast reflects
portfolio growth being funded with 60% equity going forward.
Q3/14 Recap: In Line Quarter; Fundamentals Remain Solid
■ Minor puts and takes but results in line. Firm Capital reported Q3/14 adj. EPS of $0.24 vs.
$0.24 last year, in line with us and the Street at $0.24 and $0.24 (Exhibit 7), respectively. Net
lending income was in line with our estimates with higher interest expense (+0.01/sh) offset
by modestly higher than expected interest income and lower than expected provision for
mortgage credit losses.
Exhibit 7 – Firm Capital Condensed Variance Analysis
Exhibit 8 – Firm Capital Forecast Summary
($000s except per share amounts)
GBM Var. per
Q3/14A
Q3/13A % chg Q3/14E
share
Mtge. interest and fees
7,796
7,061
10.4% 7,738
0.003
Interest expense
(2,098)
(1,780) 17.8% (1,825) (0.011)
Provision for credit loss
na
(158)
0.006
Net lending income
5,698
5,280
7.9% 5,755
(0.001)
Forecast Summary
2012A
2013A
2014E
2015E
2016E
Estimates
EPS - Fully Diluted
Adj. EPS - Fully Diluted
Recurring Dividend Per Share
Total Dividend Per Share
Dividend Payout Ratio
$0.99
$0.99
$0.94
$0.99
100%
$0.97
$0.97
$0.94
$0.98
100%
$0.96
$0.96
$0.94
$0.97
100%
$1.01
$1.01
$0.94
$1.02
99%
$1.02
$1.02
$0.94
$1.02
97%
Manager interest allocation
G&A and other
Non-interest expenses
Valuation
P/E - FD
Adj. P/E - FD
Price/Book Value
Reccurring Dividend Yield
Total Dividend Yield
13.7x
13.7x
1.3x
7.0%
7.4%
13.0x
13.0x
1.2x
7.4%
7.7%
13.4x
13.4x
1.2x
7.3%
7.5%
12.7x
12.7x
1.2x
7.3%
7.9%
12.6x
12.6x
1.2x
7.3%
7.9%
294,037
8.5%
$10.12
65.8%
39.1%
32.9%
336,903
14.6%
$10.24
80.3%
43.9%
40.3%
361,272
7.2%
$10.38
73.1%
41.7%
37.1%
375,853
4.0%
$10.48
70.9%
41.1%
36.6%
383,383
2.0%
$10.54
71.1%
41.1%
36.8%
Profitability Metrics
Net Interest Margin (incl. fees)
ROE
7.1%
9.8%
6.6%
9.6%
6.6%
9.8%
6.7%
9.9%
6.9%
10.0%
Loan Portfolio Metrics
Weighted Average Interest Rate
Conventional First Mortgages
8.6%
70%
Net income
Adj. earnings
Adj. EPS - FD
715
185
900
563
238
800
4,798
4,798
$0.237
4,480
4,480
$0.244
27.1%
-22.2%
12.5%
653
265
919
0.003
(0.00)
(0.001)
7.1% 4,836
na
7.1% 4,836
-2.9% $0.239
(0.002)
na
(0.002)
(0.002)
Balance Sheet and Leverage
Loan Portfolio (net of provisions; $000s)
YOY Loan Portfolio Growth
Book Value per Share
Debt/Equity
Debt/GBV
Net Debt/EV
155
Company Comment
(FTS-T C$37.74)
Fortis Inc.
Target 1-Yr:
C$40.00 ROR 1-Yr:
Risk Ranking: Low
9.5%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.33
$1.28
3.4%
Key Risks to Target: Interest rates; Rate base growth; Regulated ROE; Acquisitions; Regulatory
Event
Pertinent Revisions
■ FTS reported normalized (excluding one-time acquisition costs) Q3/14
EPS of $0.33 vs. our estimate of $0.34 and $0.23 in Q3/13.
New
Old
Target:
1-Yr
$40.00
$39.00
Adj. EPS14E
$1.71
$1.72
New Valuation:
6.3% 2015E Free Cash Yield and 10.6x
2015E EV/EBITDA
Old Valuation:
2015E EV/EBITDA
Implications
■ Regulatory decisions should provide positive earnings catalysts in the
coming few quarters. FTS has been attempting to secure rate recovery
of capital spent in Alberta ("capital tracker") that could add $20M+ in
annual revenue (decision expected Q1/15).
■ We have reasoned that, since CH Energy is under-earning, it can
generate increased profit without requesting an unreasonable ROE. In
fact, CH just filed in July for new rates that could result in a $40M+
revenue increase while maintaining a conservative 9% ROE (down
from 10% currently). A decision is expected in 1H/15.
■ A process has commenced for the disposition of Properties. This
process should unlock value and also signals a willingness to more
proactively manage capital. We value the potential sale and redeployment of funds at about $1/share (see comment dated October 2).
■ Concerns over erosion of the UNS customer base due to distributed
solar might be overblown. There was no evidence of erosion this past
summer as sales were in fact up YOY in the quarter by 2.3%.
Recommendation
■ Management guidance for 7% growth with the potential for 8.5% if LNG
projects pan out is consistent with our outlook. Given the combination of
growth and safety, we maintain our SO rating, and increase TP to $40.
Qtly Adj. EPS (Basic)
2013A
2014E
2015E
2016E
Q1
$0.67 A
$0.66 A
$0.61
(FY-Dec.)
Dividends/Share
EV/EBITDA
Payout Ratio
EBITDA (M)
Debt/EBITDA
Q2
$0.32 A
$0.22 A
$0.40
2012A
$2.28
$1.20
11.5x
52.7%
$1,240
5.21x
0.56
$14,284
Q3
$0.23 A
$0.33 A
$0.53
2013A
$2.10
$1.24
11.3x
59.2%
$1,401
5.58x
0.57
$15,833
Q4
$0.48 A
$0.49
$0.45
2014E
$1.88
$1.28
13.9x
68.3%
$1,663
6.43x
0.55
$23,139
Year
$1.70
$1.71
$2.00
$2.10
P/E
18.0x
22.1x
18.9x
18.0x
2015E
$2.50
$1.34
10.3x
53.7%
$2,217
4.64x
0.53
$22,855
2016E
$2.64
$1.41
9.5x
53.5%
$2,434
4.34x
0.53
$23,153
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$10,352
$12,329
$23,106
274
273
156
Exhibit 1 - Fortis Inc. Financial Statement Summary
Income Statement ($M)
BC Gas
Newfoundland Power (Electric)
Alberta & BC Utilities (Electric)
Other Canadian (Electric)
Caribbean Electric
CH Energy
UNS Energy
Fortis Generation
Non-Regulated Non-Utility
Corporate and Other
Earnings to Common S/H - Adjusted
Unusual items
Earnings to Common S/H - Reported
EBITDA
Avg. Shares Outstanding - Basic
EPS to Common S/H - Reported
EPS to Common S/H - Adjusted
Cash Flow Statement ($M)
Earnings
Depreciation and Amortization
Other
Funds Flow from Operations
Changes in non-cash Working Capital
Cash from Operating Activities
Total Capex
Other & Asset Sales
Cash Used in Investing Activities
Dividends - common shares (net of DRIP)
Other Financing Activities
Cash Used in Financing Activities
Foreign Currency Translation
Change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Balance Sheet ($M)
2013
$127
$35
$144
$22
$23
$23
$19
$20
($73)
$341
$13
$353
2014E
2015E
2016E
$129
$39
$156
$22
$23
$49
$42
$22
$16
($117)
$381
($56)
$325
$139
$39
$164
$23
$25
$58
$139
$43
$7
($85)
$552
$0
$552
$147
$40
$176
$23
$29
$65
$144
$50
$0
($88)
$587
$0
$587
$1,401
$1,663
$2,217
$2,434
203
$1.74
$1.70
222
$1.45
$1.71
277
$2.00
$2.00
279
$2.10
$2.10
2013
2014E
2015E
2016E
$353
$541
$50
$944
($45)
$899
$325
$592
$71
$988
$0
$988
$552
$809
$137
$1,497
$0
$1,497
$587
$874
$132
$1,593
$0
$1,593
($1,175)
($992)
($2,167)
($1,430)
($2,492)
($3,922)
($1,765)
$461
($1,305)
($1,441)
$50
($1,391)
($181)
$1,367
$1,186
$0
($201)
$3,248
$3,047
$0
($271)
$160
($110)
$0
($293)
$266
($27)
$0
($82)
$154
$72
$113
$72
$185
$82
$185
$267
$175
$267
$441
2013
2014E
2015E
2016E
Cash
PP&E
Intangibles
Goodwill
Other Assets
Total Assets
$72
$1,224
$13,939
$345
$2,075
$253
$17,908
$185
$2,785
$19,389
$458
$3,652
$414
$26,882
$267
$2,785
$19,690
$430
$3,652
$317
$27,140
$441
$2,785
$20,256
$430
$3,652
$255
$27,819
Short-term debt
Other Current Liabilities
Long-term debt and convertible debentures
Other Liabilities
Total Liabilities
Preferred shares
Common equity
Total Liabilities and Shareholders' Equity
$160
$1,924
$7,653
$2,170
$11,907
$1,229
$4,772
$6,001
$17,908
$0
$4,238
$10,694
$3,306
$18,237
$1,820
$6,825
$8,645
$26,882
$0
$4,238
$10,292
$3,395
$17,926
$1,820
$7,394
$9,214
$27,140
$0
$4,258
$10,557
$3,495
$18,310
$1,820
$7,689
$9,509
$27,819
157
Company Comment
(GMP-T C$6.37)
GMP Capital Inc.
Sumit Malhotra, CFA - (416) 863-2874
sumit.malhotra@scotiabank.com
Sunny Singh, MBA, CFA - (416) 863-7286
Matthew Rajnauth, MBA - (416) 863-7076
Target 1-Yr:
C$7.00 ROR 1-Yr:
Risk Ranking: High
Valuation: 1.5x 2015E BV / 1.9x 2016E BV, 14.5x 2015E/2016E EPS
13.0%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.20
$0.20
3.1%
Key Risks to Target: Capital markets conditions, retention of and ability to recruit key personnel, health of small/mid-cap energy and resources sector.
Event
Pertinent Revisions
■ On an operating basis, GMP posted diluted EPS of $0.03 in Q3/14,
right in-line with our estimate. Though there was some ‘back and forth’
in the numbers (advisory fees were very strong, but higher facilitation
losses and a lower retail brokerage contribution offset), in the bigger
picture we viewed this as essentially an in-line print from GMP, and a
continuation of the ‘so-so’ performance the company has exhibited over
the past year ($0.36 in core EPS in the trailing four quarters).
Implications
■ Although GMP did derive a larger proportion of its revenue from
outside of Canada in Q3 (44%), the top-line of the company remains
very reliant on the commodities complex (74% of IB fees in Q3, and
59% in 2014). Our long-held view is that broker stocks take their cue
from the revenue environment, and with the resource space currently
persona non grata we are expecting a quiet end to the calendar year for
GMP from a new issue announcement perspective.
Recommendation
■ GMP remains in very good shape from a capital perspective, and our
sum-of-the-parts “floor methodology” reaches a low point of $6.05 in the
current quarter (Q4/14). In other words, the combination of a limited
downside and lack of current catalysts to drive the upside in our view
make GMP shares very much a Sector Perform rating, and as such we
expect the stock to tread water in the $6 – 7 range in the near term.
Qtly Operating EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.00 A
$0.07 A
$0.08
$0.12
(FY-Dec.)
Op Earnings/Share
Price/Operating EPS
Price/Book
Return on Equity
Tot. Comp. % of Rev.
Book Value/Share
Revenues (M)
Q2
$-0.02 A
$0.16 A
$0.09
$0.12
Q3
$-0.02 A
$0.03 A
$0.09
$0.12
Q4
$0.11 A
$0.06
$0.10
$0.13
Year
$0.07
$0.31
$0.36
$0.49
P/E
96.2x
20.4x
17.7x
13.1x
2012A
$0.17
34.9x
1.6x
4.8%
62.6%
$3.62
$267
2013A
$0.07
96.2x
1.9x
2.0%
64.2%
$3.66
$209
2014E
$0.31
20.4x
1.7x
8.5%
62.6%
$3.80
$274
2015E
$0.36
17.7x
1.6x
9.4%
62.9%
$4.06
$275
2016E
$0.49
13.1x
1.4x
12.5%
61.9%
$4.43
$287
BVPS14E: $3.80
ROE14E: 8.48%
Target:
1-Yr
Operating
EPS14E
Operating
EPS15E
Operating
EPS16E
New
Old
$7.00
$0.31
$7.50
$0.35
$0.36
$0.40
$0.49
$0.52
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
Earnings in the quarter – core EPS of $0.03 right in-line with
our estimate
$463
$-289
$176
73
50
158
■ GMP posted diluted EPS of $0.05 in Q3/14 (September quarter); the reported number
included two items of note – the now normal adjustment that GMP makes for MTR retention
shares ($0.3m after-tax), and a $2.0m gain that resulted from the ownership dilution of the
company in Richardson GMP following the issuance of convertible debentures by the retail
brokerage firm.
■ Accordingly, on an operating basis we put EPS at $0.03, right in-line with our forecast
though down from the levels that GMP printed in the first-half of 2014 ($0.07 in Q1, $0.16 in
Q2). That said, despite what have been choppy operating conditions for the Canadian
independent brokerage sector GMP has been consistently profitable over the past year, as in
the trailing four quarters the company has produced operating EPS of $0.36.
■ Operationally speaking, GMP printed $65.6m on the revenue line, ahead of our $57.2m
estimate. There was some ‘back and forth’ on the top-line, however, as despite a better than
expected result on the advisory line ($19m vs. our $8m) the company gave some back due to
a sizable up-tick in facilitation & inventory losses (implied loss rate of 38.8%, not far from
the 43.4% level seen in the “Barrick quarter” of Q4/13), a reminder of how quickly the
impact of volatility in the commodities space will impact facilitation at GMP.
■ The other area of interest for us from an operational perspective was the aforementioned
Richardson GMP, as the core earnings pick-up for GMP stepped back to $0.9m from the
record $1.8m three months ago. Though the integration of MPW is complete (and the
associated charges have come to an end), the drop-off in QoQ earnings was due to a 9%
sequential decline in revenue, which pushed the operating expense ratio up to 93.5%, higher
than both our modelled 91.1% and the 91.3% mark seen in Q2.
■ GMP ended September with reported BVPS $3.77, up 11% YoY, and extending the upward
streak in the key metric to a fourth consecutive quarter. Operating ROE in Q3 averaged a
skinny 3.1%, comprised of a 0.38% RoA and an 8.4x average assets to average common
equity ratio.
Exhibit 1 – Operating EPS – Fourth consecutive positive quarter at GMP
$0.40
Exhibit 2 – Book value per share increased to $3.77; operating ROE in
Q3/14 came in at 3.1%
$5.50
$0.34
85%
Book value per share
$0.30
$0.20
$0.17
$0.07
$0.04
$5.00
65%
$4.50
45%
$4.00
25%
$3.50
5%
$3.00
(15%)
$2.50
(35%)
$0.16
$0.11
$0.10
Operating ROE
$0.07
$0.03
$0.03
$0.00
$0.00
($0.00)
($0.03)
($0.02)
($0.04)
($0.02)
($0.10)
1Q14
2Q13
3Q12
4Q11
1Q11
2Q10
3Q09
4Q08
1Q08
2Q07
3Q06
4Q05
1Q05
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
159
Exhibit 3 - GMP - A Rolling-Five-Quarter Look at the Operating Income Statement and Key Fundamental Ratios
Investment banking
Commissions
Investment mgt and fee income
Fixed income trading
Other principal activities
Interest and dividends
Other
Total revenue
3Q13
17,721
10,854
145
9,495
(1,401)
1,667
4,136
42,617
4Q13
51,008
11,351
153
8,428
(8,710)
1,754
3,791
67,775
1Q14
29,634
14,980
220
11,860
79
1,734
5,365
63,872
2Q14
48,305
17,959
239
8,373
(1,965)
2,032
5,437
80,380
3Q14
45,906
11,942
252
8,514
(7,587)
2,149
4,384
65,560
Total expenses
Pre-tax income
Income taxes
Stake in Richardson GMP
Non-controlling interest
Preferred dividends
Other items
Net income - reported
Net income - operating
Diluted average shares
Basic average shares
EPS - reported basis
EPS - operating basis
43,633
(1,016)
(47)
264
1,397
(1,581)
288
(695)
(983)
69,771
65,026
($0.01)
($0.02)
$3.39
56,699
11,076
(2,956)
979
(26)
(1,581)
(3,315)
4,177
7,492
70,220
65,935
$0.06
$0.11
$3.66
56,999
6,873
(2,433)
1,008
1,027
(1,581)
(2,721)
2,173
4,894
74,264
70,487
$0.03
$0.07
$3.70
64,587
15,793
(4,132)
1,755
103
(1,581)
(1,274)
10,664
11,938
74,448
69,957
$0.14
$0.16
$3.73
59,025
6,535
(3,031)
899
(656)
(1,581)
1,652
3,818
2,166
74,542
69,285
$0.05
$0.03
$3.77
Key Metrics
Comp. expense to revenue
Total expenses to revenue
Tax rate
Operating leverage
Return on equity - operating
69.7%
102.4%
(4.6%)
(6.4%)
(1.6%)
59.7%
83.7%
26.7%
(5.4%)
11.7%
62.4%
89.2%
35.4%
10.1%
7.3%
60.1%
80.4%
26.2%
31.5%
17.5%
64.3%
90.0%
46.4%
18.6%
3.1%
($000s, except where noted)
EPS Estimate and Target Price Review – Modest Trim to Numbers
■ After reviewing the Q3/14 results and commentary from GMP, and taking into account our
own outlook for the operating backdrop, we are enacting modest reductions to our EPS
estimates. On an operating basis our 2014E declines to $0.31 (from previous $0.35), our
2015E falls to $0.36 (from $0.40), and our 2016E is now $0.49 (from $0.52). The reductions
largely reflect a more restrained forecast for the pace of efficiency improvement at
Richardson GMP; please see ‘the components of the change’ to our estimates below.
■ We are setting our target price on GMP shares using a blend of our 2015 and 2016 estimates
for operating ROE and reported BVPS. Accordingly, alongside the trim to our estimates our
target price declines as well, with the share price forecast now standing at $7.00 (down from
$7.50).
QoQ
YoY
(34%)
5%
2%
10%
74%
(10%)
6%
(19%)
(18%)
29%
6%
54%
(9%)
(59%)
n/a
(49%)
(737%)
35%
n/a
n/a
241%
(147%)
(64%)
(82%)
0%
(1%)
(64%)
(82%)
1%
n/a
n/a
7%
7%
n/a
n/a
11%
160
Exhibit 4 - Revising our operating EPS estimates for GMP – The components of the change
($000s, except per share data)
Investment banking
Commissions
Investment mgmt & fee income
Other
Total revenue
Total expenses
Pretax income
F2014E - old F2014E - new
146,439
161,345
59,939
58,881
944
967
38,733
37,747
(5,936)
(12,973)
7,516
7,915
20,602
19,986
268,237
273,868
233,969
238,484
34,268
35,384
Income taxes
Preferred dividends
Non-operating items
Earnings per share - reported
Earnings per share - operating
(9,664)
6,384
1,130
(6,324)
(4,548)
21,246
25,794
74,402
70,090
$0.29
$0.35
$3.81
(11,204)
4,900
474
(6,324)
(2,343)
20,888
23,231
74,449
69,754
$0.28
$0.31
$3.80
Change
10%
(2%)
2%
(3%)
5%
(3%)
2%
2%
3%
n/a
(23%)
(58%)
n/a
n/a
(2%)
(10%)
0%
(0%)
(2%)
(10%)
(0%)
F2015E - old F2015E - new
152,000
160,000
60,000
57,000
1,030
1,064
38,000
36,000
(7,200)
(7,125)
7,700
8,000
20,400
20,000
271,930
274,939
235,702
239,153
36,228
35,786
(9,419)
8,969
(6,324)
29,454
29,454
74,448
69,957
$0.40
$0.40
$4.15
(9,304)
6,722
(6,324)
26,880
26,880
74,542
69,285
$0.36
$0.36
$4.06
Change
5%
(5%)
3%
(5%)
F2016E - new
168,000
58,000
1,128
38,000
(7,250)
8,000
20,800
286,678
244,376
42,302
Change
2%
(3%)
2%
(5%)
4%
(2%)
1%
1%
(1%)
F2016E - old
164,000
60,000
1,110
40,000
(7,200)
7,900
21,200
287,010
242,524
44,486
n/a
(25%)
n/a
n/a
n/a
(9%)
(9%)
0%
(1%)
(9%)
(9%)
(2%)
(11,566)
12,199
(6,324)
38,794
38,794
74,448
69,957
$0.52
$0.52
$4.61
(10,999)
11,282
(6,324)
36,261
36,261
74,542
69,285
$0.49
$0.49
$4.43
n/a
(8%)
n/a
n/a
n/a
(7%)
(7%)
0%
(1%)
(7%)
(7%)
(4%)
1%
(2%)
(0%)
1%
(5%)
Exhibit 5 - Lowering our target price on GMP shares to $7.00 (from
$7.50)
Valuation Methodology
2015E - 9.4% ROE w/ 1.41x P/B
2016E - 12.5% ROE w/ 1.87x P/B
Average of 2015-16E
Rounded target price
Exhibit 6 - GMP is currently trading at a P/BV of 1.68x; well below the 52-week
average of 2.04x
9.00x
$5.74
$8.31
$7.02
$7.00
P/BV
historical average
52 wk moving average
8.00x
7.00x
6.00x
5.00x
4.00x
3.00x
2.00x
1.00x
0.00x
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Oct-05
Jul-05
Apr-05
Jan-05
Oct-04
Jul-04
161
Outlook on GMP – In a Tougher Revenue Tape, We Expect the Stock to
Tread Water in the $6 – 7 Range in the Near Term
■ Continuing the trend that we observed with GMP for most of the past three years, in our view
there was nothing particularly concerning in the financial results of the company, but at the
same time there was nothing particularly inspiring either. We believe the two key areas of
interest for investors with GMP are (1) the ability of the revenue line to benefit very quickly
from periods of strength in market activity; and (2) the build-out of the Richardson GMP
retail brokerage franchise.
■ Unfortunately, neither component is trending particularly well at the current time. Though
GMP did derive a larger-than-normal proportion of its revenue from outside of Canada in Q3
(44%, as compared to 30% in H1/14), the top-line reliance of the broker on the commodities
complex remains uncomfortably high, with the Energy and Mining sectors comprising 74%
of total investment banking fees in Q3 and 59% YTD. With energy having recently joined
mining in the equity market penalty box, we expect new issue activity for GMP to be muted
for the balance of the calendar year.
■ We might be guilty of short-term-ism when looking at Rich-GMP, but in what is admittedly a
slower qtr for market activity we were still surprised to see revenue retrench 9% sequentially
despite what for most of the July – Sept period were decent market conditions. Though the
stake in the retail brokerage firm – which was down to 30.7% in Q3 – remains a small
contributor to the GMP bottom line, in our view it hits well above its weight in terms of
valuation (at current prices we think the Rich GMP stake comprises 40 – 50% of the GMP
market cap), and as such improving the operating performance of the unit (particularly now
that the MPW integration is complete) is clearly a key driver for the stock.
■ All of this said, while we do not see a near-term catalyst to get GMP shares moving, at the
same time we do not think there is much downside risk in the quote either. Our sum-of-the
parts ‘floor methodology’ for the brokers values the stocks at the sum of their net working
capital position and the theoretical value of their wealth management operations. With the
capital profile of GMP very healthy, our calculation ended September at $6.10, and we have
it bottoming at $6.05 in the December quarter.
■ We remain Sector Perform rated on shares of GMP. Our long-held mantra with the
broker/dealer sector is that the stocks take their cue from the revenue backdrop, and in the
near-term we have a tough time getting too bullish in this regard. However, we think our
‘floor valuation’ does represent a reasonable way to think about downside risk, and as such
we expect the stock to tread water in the $6 – 7 range in the interim.
Exhibit 7 – GMP shares have had a tight correlation with the commodity-heavy
TSX Venture Index over the years
$30.00
3,500
3,000
$20.00
2,500
$15.00
2,000
$10.00
1,500
$5.00
1,000
$0.00
500
S&P/TSX Venture
GMP share price
R-squared = 85.7%
$25.00
Exhibit 8 – GMP – our sum-of-the-parts ‘floor value’ bottoms at $6.05 in the
December 2014 quarter
Net working capital ($M)
Shares outstanding (M)
Net working capital per share
224.9
72.7
$3.10
Richardson GMP - AUA ($M)
Valued at 2.5% of AUA ($M)
GMP ownership - 30.7% ($M)
Shares outstanding (M)
Value of stake per share
27,923
698.1
214.3
72.7
$2.95
Alternative valuation
$6.05
Jul-14
Jan-14
Jul-13
GMP share price
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
S&P/TSX Venture
162
Revenues up 54% YoY – ahead of our forecast – strong advisory activity
underpins Q3 result
■ GMP generated total revenues of $65.6M in Q3/14, down 18% QoQ but up 54% YoY, and
ahead of our estimate of $57.2M. GMP benefited from stronger-than-expected advisory fees
($19M vs. our $8M estimate), but gave some back to due to higher facilitation & inventory
losses (a reflection of the increased volatility in market conditions).
■ Total Investment Banking fees improved 159% YoY on the back of very strong advisory fees
(best level in nearly two years). Underwriting revenues moderated from last quarter’s very
strong result to $26.7M (-39% QoQ), but remained solid nonetheless (+82% YoY), and were
ahead of our $23.0M estimate. Oil and Gas activity was the standout this quarter, posting its
strongest quarterly revenues since Q4/12 at $22.1M, highlighted by the Mapan Energy,
Petroflow Energy and Legacy Oil + Gas mandates. Mining also posted a solid result at
$11.7M, up 50% QoQ, highlighted by the HudBay Minerals and Rio Alto Mining
transactions. The Mining and Oil & Gas sectors combined for 73.6% of total investment
banking fees vs 39.1% last quarter (Financials – particularly CIX and EFN – led the way in
Q2/14) and 49.7% a year ago.
■ Commissions in the quarter were down 34% YoY but were up 10% QoQ to $11.9M, in line
with our estimate. The results were driven mainly by softer equity trading volumes, with
TSX trading activity by GMP down 28% QoQ and 21% YoY. Fixed income trading revenue
was $8.5M, down 10% YoY but up 2% QoQ, and slightly below our $9.0M estimate.
■ While revenue generation in the quarter was solid, given GMP’s Canadian centric operations,
the weakness in the energy complex of late clearly adds to the domestic challenge for the
company. On a full-year basis, we are forecasting a 31% increase in revenues for 2014, led
by a 41% YoY improvement in investment banking fees. In 2015, we are expecting revenues
to remain flat with investment banking fees declining 1% YoY.
Exhibit 10 – Commissions for Q3/14 up 10% YoY , but down 34% QoQ
Exhibit 9 – Revenue growth was strong in the quarter up 54% YoY
160,000
250%
50,000
140%
45,000
140,000
200%
120,000
150%
100,000
100%
80,000
50%
60,000
110%
40,000
80%
35,000
30,000
50%
25,000
20%
20,000
0%
40,000
20,000
-
(50%)
10,000
(100%)
5,000
(10%)
(40%)
-
(70%)
3Q14
1Q14
3Q13
1Q13
3Q12
1Q12
3Q11
1Q11
3Q10
1Q10
3Q09
1Q09
3Q08
1Q08
3Q07
1Q07
3Q06
1Q06
3Q05
1Q05
3Q04
1Q04
3Q03
1Q03
3Q14
1Q14
3Q13
1Q13
3Q12
1Q12
3Q11
1Q11
3Q10
1Q10
3Q09
1Q09
3Q08
1Q08
3Q07
1Q07
3Q06
1Q06
3Q05
1Q05
3Q04
1Q04
3Q03
1Q03
Total revenue
15,000
YoY change
Commission income
YoY growth (%)
163
Exhibit 12 – …as commodity’s contribution to investment banking fees spiked
to 74% in Q3/14
Exhibit 11 – IB revenue solid once again…
80,000
Underwriting fees
Advisory
80,000
70,000
70,000
60,000
60,000
100.0%
90.0%
($000s)
80.0%
50,000
50,000
40,000
40,000
30,000
30,000
70.0%
60.0%
50.0%
20,000
20,000
10,000
40.0%
10,000
-
30.0%
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
Oil & Gas
3Q12
2Q12
1Q12
4Q11
Mining
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
3Q14
1Q14
3Q13
1Q13
3Q12
1Q12
3Q11
1Q11
3Q10
1Q10
-
As a % of total IB fees
Share-based comp above expectations, but revenue ‘beat’ drives solid
positive operating leverage
■ Expenses for the quarter increased 35% YoY, largely due to higher total compensation,
which has risen 37% over the same period. Fixed salaries and benefits are up 36% YoY,
while variable and share-based comp is up 43% and 52% YoY, respectively. Employee
compensation related to GMP’s expansion into Houston amounted to $3.2M in Q3/14.
SG&A costs increased 5% QoQ and 26% YoY to $15.7M, slightly above our $15.0M
estimate. Headcount rose by 19, or an increase of 5% QoQ, marking the third consecutive
quarter of increase, largely reflecting the continued expansion into Houston.
■ Overall, the increase in expenses was more than offset by the strong revenue line, with the
compensation ratio for the quarter at 64.3% (below our estimate of 66.7%). The total
efficiency ratio for Q3/14 increased to 90.0%, compared with 79.8% last quarter. Operating
leverage for the quarter was 18.6%, above our 9.5% estimate.
■ For 2014, we are forecasting a 21% increase in expenses, with a comp ratio of 62.9% and an
efficiency ratio of 87.0%. When coupled with an estimated ~31% rise in revenue, we see
GMP generating +10% operating leverage in 2014.
Exhibit 13 – Revenue growth outpaced expense growth for the third
consecutive quarter….
Exhibit 14 – …driving positive operating leverage of 18.6%
175%
60%
150%
40%
125%
170%
20%
0%
(20%)
100%
130%
75%
110%
50%
25%
90%
0%
70%
(40%)
(25%)
(50%)
3Q14
1Q14
3Q13
Efficiency ratio
1Q13
3Q12
1Q12
3Q11
1Q11
Operating leverage
3Q10
1Q10
3Q09
1Q09
3Q08
1Q08
3Q07
1Q07
3Q06
1Q06
3Q05
3Q14
YoY change in expenses
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
YoY change in revenue
50%
1Q05
(60%)
Efficiency ratio (%)
Operating leverage (%)
150%
164
Exhibit 16 – Cost components of efficiency ratio
As a % of total revenue
Exhibit 15 – GMP’s compensation ratio has consistently trended above 60%
since mid-2011
80%
70%
60%
140%
120%
100%
80%
60%
40%
20%
50%
0%
Richardson GMP – Revenues light, MPW Canada integration complete
■ Richardson GMP contributed $0.90M on an operating basis to GMP earnings in Q3, down
from $1.76M last quarter and well below our $1.77M forecast due to softer revenues. The
integration of MPW Canada was completed in Q3/14, with no acquisition related costs in the
quarter. On an operating basis the expense ratio increased to 93.5% (worse than the 91.3%
seen last quarter and our 91.1% estimate).
■ Revenue was soft in the quarter, declining to $75.8M down 9% QoQ, and below of our
$82.4M estimate. AUA ended the quarter at $28.5B, down 1% sequentially. The firm ended
the quarter with 199 advisory teams, down from 204 in the previous quarter. AUA per
advisor reached $143.2M, up from $141.5M last quarter.
■ With the MPW Canada integration complete, we will continue to monitor the pace of
improvement (or lack thereof this quarter) in the operating efficiency ratio. As compared to
the $3.7M operating contribution GMP received from Rich-GMP thus far in 2014, we
envision a contribution of $4.9M for the balance of the year, and $6.7M for 2015.
Exhibit 18 - …with GMP picking up $0.9m in operating earnings in Q3/14
Exhibit 17 – Rich-GMP revenue has jumped after MPW acquisition…
2,000
Revenue ($000s)
120%
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
(10%)
(20%)
(30%)
YoY (%)
80,000
70,000
60,000
50,000
40,000
30,000
20,000
1,000
500
(500)
(1,000)
(1,500)
(2,000)
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
1,500
$thousands
90,000
3Q14
Interest & amortization
1Q14
3Q13
1Q13
3Q12
1Q12
3Q11
SG&A
1Q11
3Q10
1Q10
3Q14
1Q14
3Q13
1Q13
3Q12
1Q12
3Q11
1Q11
3Q10
1Q10
3Q09
1Q09
3Q08
1Q08
3Q07
1Q07
3Q06
1Q06
3Q05
1Q05
Employee comp & benefits
3Q09
1Q09
3Q08
1Q08
3Q07
1Q07
3Q06
1Q06
3Q05
1Q05
40%
165
Exhibit 19 – Richardson - GMP Capital Inc – A Rolling-Five-Quarter Look at the Operating Income Statement and Key Fundamental Ratios
Revenue
Expenses excl. acquisition costs
Operating income
Other items (taxes, pref div)
Net income / (loss)
GMP stake (operating)
3Q13
38,375
36,830
1,545
(729)
816
264
4Q13
65,486
61,084
4,402
(1,370)
3,032
979
1Q14
79,545
74,398
5,147
(1,988)
3,159
1,008
2Q14
83,453
76,151
7,302
(1,743)
5,559
1,755
3Q14
75,810
70,867
4,943
(2,015)
2,928
899
QoQ
(9%)
(7%)
(32%)
16%
(47%)
(49%)
YoY
98%
92%
220%
176%
259%
241%
Assets under administration ($m)
Number of advisory teams
AUA per advisory team ($m)
Rev. per avg advisory team
15,224
114
133.5
1,324
29,021
275
105.5
1,336
27,693
209
132.5
1,333
28,874
204
141.5
1,621
28,493
199
143.2
1,493
(1%)
(2%)
1%
(8%)
87%
75%
7%
13%
Average AUA ($m)
Revenue as a % of average AUA
Efficiency ratio excl. acq. related costs
14,959
1.02%
96.0%
22,123
1.17%
93.3%
28,357
1.14%
93.5%
28,284
1.18%
91.3%
28,684
1.05%
93.5%
1%
92%
Key Metrics:
Capital position declined slightly – remains in good shape
■ GMP ended Q3/14 with net working capital (NWC) on the balance sheet of $224.3 million, a
decline of $4.2 million compared to last quarter. NWC has averaged just below $250 million
over the last eight consecutive quarters, a substantial improvement over the $145 million low
point seen just prior to the company raising capital in Q4/08.
■ Our “floor valuation” for GMP is a sum-of-the-parts containing two components: (1) net
working capital; and (2) the value of their retail brokerage operations (GMP’s one-third
ownership stake in Richardson GMP). The “floor value” for GMP shares was $6.10 in Q3,
down $0.13 QoQ, and is comprised of $3.09 per share in NWC and $3.01 for the retail
brokerage stake. On our estimates this will increase to $6.43 by the end of 2015.
■ We have not baked in any capital deployment from GMP outside of the $0.05 per quarter
normal dividend. With operating profitability remaining at modest levels, we expect to see
the company continue to add to its capital buffer, and are of the view that GMP would have
to string together a series of $0.15+ operating EPS quarters in order to make talk of a special
dividend to top up the regular $0.05 per quarter payment a realistic possibility.
Exhibit 21 – Alternative Valuation – From Current $6.10 Mark, We See the
Sum of the Parts Rising to $6.43 by the End of 2015
Exhibit 20 – Net working capital was flattish at $224.3m in Q3/14
400,000
60%
$8.00
50%
350,000
40%
30%
300,000
$7.00
$6.00
20%
250,000
10%
0%
200,000
$3.40
$5.00
$1.38
$3.17
$3.16
$2.95
$3.09
$3.10
2013
2014E
$4.00
(10%)
$3.00
(20%)
150,000
100,000
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
4Q08
3Q08
2Q08
1Q08
(30%)
$2.00
(40%)
$1.00
$3.95
2015E
YoY (%)
Net working capital per share
$3.55
$0.00
2012
Net working capital
$3.27
Value of stake in Richardson GMP
2016E
166
Exhibit 22 – GMP Capital Inc. – Q3/14 Actual Results vs. Scotiabank GBM Estimates
Revenue
Underwriting revenue
Advisory fees
Commissions
Investment management and fee income
Other
Total revenue
Sep-13
3Q13
Jun-14
2Q14
Sep-14
3Q14
Sep-14
3Q14E
14,683
3,038
10,854
145
9,495
(1,401)
1,667
4,136
42,617
43,907
4,398
17,959
239
8,373
(1,965)
2,032
5,437
80,380
26,698
19,208
11,942
252
8,514
(7,587)
2,149
4,384
65,560
Expenses
Fixed salaries and benefits
Variable incentive-based compensation
Share-based compensation
Selling, general and administrative
Interest
Amortization
Total expenses
8,739
17,820
3,134
12,478
657
806
43,634
11,576
33,218
3,084
14,985
587
683
64,133
Pre-tax income
(1,017)
Income taxes
Preferred dividends
Non-operating items
(47)
264
1,397
(1,581)
288
(696)
(984)
Key metrics
Diluted EPS - reported basis
Diluted EPS - operating basis
Return on equity - reported basis
Return on equity - operating basis
Tangible book value per share
Dividend declared per share
Payout ratio - operating basis
QoQ
YoY
23,000
8,000
12,000
240
9,000
(1,800)
1,875
4,900
57,215
(39%)
337%
(34%)
5%
2%
82%
532%
10%
74%
(10%)
6%
(19%)
(18%)
29%
6%
54%
11,922
25,497
4,764
15,660
400
782
59,025
11,525
23,658
3,000
15,000
585
678
54,447
3%
(23%)
54%
5%
(32%)
14%
(8%)
36%
43%
52%
26%
(39%)
(3%)
35%
16,247
6,535
2,768
(60%)
n/a
(4,333)
1,755
103
(1,581)
(1,274)
10,917
12,191
(3,031)
899
(656)
(1,581)
1,652
3,818
2,166
(720)
1,769
(1,581)
(395)
1,841
2,236
n/a
(49%)
(737%)
n/a
241%
(147%)
(65%)
(82%)
n/a
n/a
65,026
69,771
($0.01)
($0.02)
(1.2%)
(1.6%)
$3.39
$2.72
$0.05
n/a
69,957
74,448
$0.15
$0.16
16.0%
17.8%
$3.73
$3.07
$0.05
30.5%
69,285
74,542
$0.05
$0.03
5.5%
3.1%
$3.77
$3.08
$0.05
172.1%
69,957
74,448
$0.02
$0.03
2.7%
3.2%
$3.74
$3.09
$0.05
166.5%
(1%)
0%
(65%)
(82%)
7%
7%
n/a
n/a
1%
0%
0%
11%
13%
0%
Fundamentals
Total compensation ratio
Fixed salaries & benefits to total revenue
Variable compensation to total revenue
Total expenses to total revenue
Operating leverage
Effective tax rate
69.7%
20.5%
41.8%
102.4%
(6.4%)
(4.6%)
59.6%
14.4%
41.3%
79.8%
32.4%
26.7%
64.3%
18.2%
38.9%
90.0%
18.6%
46.4%
66.7%
20.1%
41.4%
95.2%
9.5%
26.0%
Richardson GMP
Revenue
Net income - total (reported)
Net income - GMP share (operating)
38,375
(264)
264
15,224
114
133.5
83,453
2,326
1,755
28,874
204
141.5
75,810
2,928
899
28,492
199
143.2
82,359
4,347
1,769
28,450
204
139.8
(9%)
26%
(49%)
(1%)
(2%)
1%
98%
n/a
241%
87%
75%
7%
Staffing numbers
Headcount
Revenue per head (annualized)
Expenses per head (annualized)
Compensation per head (annualized)
354
477.6
489.0
332.8
384
839.6
669.9
500.1
403
645.4
581.1
415.3
385
590.4
561.8
394.0
5%
(23%)
(13%)
(17%)
14%
35%
19%
25%
167
Exhibit 23 – GMP Capital Inc. – Annual Summary Earnings Model
Revenue
Investment banking
Commissions
Investment management and fee income
Other
Total revenue
Dec-12
2012
Dec-13
2013
Dec-14
2014E
Dec-15
2015E
Dec-16
2016E
164,793
57,878
9,535
30,033
(24,339)
7,141
22,362
267,403
114,503
49,419
3,417
37,796
(19,189)
6,606
16,247
208,799
161,345
58,881
967
37,747
(12,973)
7,915
19,986
273,868
160,000
57,000
1,064
36,000
(7,125)
8,000
20,000
274,939
168,000
58,000
1,128
38,000
(7,250)
8,000
20,800
286,678
(31%)
(15%)
(64%)
26%
41%
19%
(72%)
(0%)
(1%)
(3%)
10%
(5%)
5%
2%
6%
6%
(7%)
(27%)
(22%)
20%
23%
31%
1%
0%
0%
0%
4%
4%
Expenses
Fixed salaries and benefits
Variable incentive-based compensation
Share-based compensation
Selling, general and administrative
Interest
Amortization
Total expenses
44,959
109,877
12,647
64,852
2,441
3,135
237,911
36,606
85,574
11,828
56,878
2,532
3,580
196,998
46,355
110,963
14,074
61,845
1,960
2,832
238,030
48,360
109,563
15,000
61,600
1,572
3,058
239,153
48,360
114,098
15,000
62,400
1,540
2,978
244,376
(19%)
(22%)
(6%)
(12%)
4%
14%
(17%)
27%
30%
19%
9%
(23%)
(21%)
21%
4%
(1%)
7%
(0%)
(20%)
8%
0%
0%
4%
0%
1%
(2%)
(3%)
2%
29,492
11,802
35,838
35,786
42,302
(60%)
204%
(0%)
18%
(8,080)
(776)
(2,568)
(6,324)
(14,490)
(2,746)
11,744
(4,556)
1,869
2,317
(6,324)
(6,593)
(1,486)
5,108
(11,204)
4,900
474
(6,324)
(2,343)
21,342
23,685
(9,304)
6,722
(6,324)
26,880
26,880
(10,999)
11,282
(6,324)
36,261
36,261
n/a
n/a
162%
(80%)
37%
(100%)
68%
n/a
n/a
(57%)
n/a
364%
26%
13%
35%
35%
65,053
70,033
($0.04)
$0.17
4.8%
$3.62
$2.95
$0.20
119.3%
65,434
69,990
($0.02)
$0.07
2.0%
$3.66
$3.01
$0.20
274.1%
69,754
74,449
$0.29
$0.32
8.5%
$3.80
$3.11
$0.20
62.9%
69,285
74,542
$0.36
$0.36
9.4%
$4.06
$3.38
$0.20
55.5%
69,285
74,542
$0.49
$0.49
12.5%
$4.43
$3.77
$0.20
41.1%
1%
(0%)
n/a
(56%)
7%
6%
n/a
336%
(1%)
0%
26%
13%
0%
0%
35%
35%
1%
2%
0%
4%
3%
0%
7%
9%
0%
9%
11%
0%
62.6%
16.8%
41.1%
89.0%
(7.9%)
27.4%
64.2%
17.5%
41.0%
94.3%
(4.7%)
38.6%
62.6%
16.9%
40.5%
86.9%
10.1%
31.3%
62.9%
17.6%
39.9%
87.0%
0.1%
26.0%
61.9%
16.9%
39.8%
85.2%
2.1%
26.0%
22%
3%
40%
7%
0%
7%
11%
68%
7%
0%
7%
0%
(6%)
(6%)
(5%)
0%
4%
2%
3%
Pre-tax income
Income taxes
Preferred dividends
Other deductions
Key Metrics
Diluted EPS - reported basis
Diluted EPS - operating basis
Return on equity - operating basis
Tangible book value per share
Dividend paid per share
Payout ratio - operating basis
Fundamentals
Total compensation ratio
Fixed salaries & benefits to total revenue
Variable compensation to total revenue
Total expenses to total revenue
Operating leverage
Effective tax rate
Richardson GMP
Revenue
Net income - total (operating)
Staffing numbers
Headcount
Revenue per head (annualized)
Expenses per head (annualized)
Compensation per head (annualized)
148,962
(2,341)
14,782
114
129.7
437
592.1
526.8
370.9
2013
Year-over-Year
2014E
2015E
181,504
5,787
29,021
275
105.5
317,018
15,681
27,923
199
140.3
325,771
21,897
29,989
199
150.7
362,265
36,748
32,207
199
161.8
96%
141%
(19%)
75%
171%
(4%)
(28%)
33%
329
555.8
524.3
356.7
403
723.6
630.1
454.0
403
682.2
593.4
429.1
403
711.4
606.4
440.3
(25%)
(6%)
(0%)
(4%)
22%
30%
20%
27%
2016E
168
Company Comment
(IGM-T C$47.34)
IGM Financial Inc.
phil.hardie@scotiabank.com
Michael Lee, CPA, CA - (416) 863-7826
Beam Ukarapong, MBA - (416) 945-4528
Target 1-Yr:
C$55.00
Valuation: 8.25x 2015E EBITDA, 9.5% EV/MFA, 1-year out.
ROR 1-Yr:
21.1%
Div. (NTM)
Div. (Curr.)
$2.31
$2.25
Yield (Curr.)
4.8%
Key Risks to Target: Capital markets levels, margin and competitive pressures
Event
■ IGM reported Q3/14 operating EPS of $0.87, in line with consensus but
a penny shy of our $0.88 estimate. EBITDA/sh of $1.49 was consistent
with our forecast.
Implications
■ Record high earnings, improved flows, and a 5% dividend increase
were not the key highlights of the quarter. Rather, it was management
pulling no punches and setting the record straight on misconceptions on
regulatory change and what it might mean for IGM. Management also
quantified the expected impact (minimal) of recent price adjustments at
Mackenzie and reiterated that Mackenzie's intention was to simplify its
fee structure and enhance consistency of pricing between funds rather
than any competitive response to fee pressure.
■ IGM management is quite excited about the changes coming about
related to the implementation of CRM2 and believes that it presents
very significant opportunities for its IG division to differentiate itself
and for its consultants to convey a strong value proposition to clients.
■ We are quite pleased with what appears to be a newly energized IGM
management team. We believe there have been more positive changes
at IGM over the past two years than we have seen in a long time. In our
view, the perception of an increasingly progressive and outspoken
management style is a strong positive for sentiment towards the stock.
Pertinent Revisions
New
Old
Target:
1-Yr
$55.00
$54.00
Operating
$3.30
$3.33
EPS14E
Operating
$3.67
$3.62
EPS15E
New Valuation:
8.25x 2015E EBITDA, 9.5% EV/MFA, 1year out.
Old Valuation:
8.25x 2015E EBITDA, 9.8% EV/MFA, 1year out.
Recommendation
■ Raising target price to $55.00 (was $54.00) and maintaining SO rating.
Qtly Operating EPS (FD)
2012A
2013A
2014E
2015E
Q1
$0.77 A
$0.72 A
$0.77 A
$0.85
(FY-Dec.)
Op EBITDA/Sh
Total AUM (B)
Total AUM Growth
Total Net Sales (%AUM)
Mut Fnd AUM (B)
MFA Growth
MF Net Sales (%AUM)
Q2
$0.69 A
$0.76 A
$0.81 A
$0.88
Q3
$0.73 A
$0.77 A
$0.87 A
$0.95
Q4
$0.72 A
$0.79 A
$0.86
$0.98
Year
$2.92
$3.02
$3.30
$3.67
P/E
14.0x
18.6x
14.6x
12.9x
2011A
$5.82
$119
-8.3%
-1.9%
$100
-7.6%
-1.2%
2012A
$5.32
$121
1.7%
-4.7%
$104
4.2%
-2.8%
2013A
$5.37
$132
9.2%
-3.1%
$118
13.2%
-0.3%
2014E
$5.70
$141
7.2%
0.8%
$126
6.8%
1.0%
2015E
$6.27
$156
10.7%
2.9%
$139
10.8%
2.4%
Curr. BVPS: $18.74
Curr. ROE: 18.56%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$11,927
$452
$12,380
252
101
169
Valuation and Outlook
■ IGM pulls no punches and sets the record straight on a number of key issues. Record
high earnings, improved flows, and a 5% dividend increase were not the key highlights of the
quarter. Rather, it was management pulling no punches and setting the record straight on
misconceptions on regulatory change and what it might mean for IGM. Management also
quantified the expected impact (minimal) of recent price adjustments at Mackenzie and
reiterated that Mackenzie’s intention was to simplify its fee structure and enhance
consistency of pricing between funds rather than any competitive response to fee pressure.
Given the rally in the stock investors were clearly pleased with what management had to say
in setting the record straight.
■ We are quite pleased with what appears to be a newly energized IGM management
team. We believe there have been more positive changes at IGM over the past two years than
we have seen in a long time. In our view, the perception of an increasingly progressive and
outspoken management style is a strong positive for sentiment towards the stock. We think
recent changes will continue to bode well for IGM over our forecast period and expect
further improvements in sales and earnings momentum. IGM’s significant scale, dual
distribution model and affiliation with the Power Group of companies likely support the
resilience of its business model and enhance its competitive positioning.
■ Clearing up the misconceptions. Management spent the majority of time on its conference
providing background and dispelling misconceptions surrounding recent regulatory
developments and highlighted concern related to the degree of misinformation circulating in
the market and media. Some of these misconceptions have likely weighed on IGM ’s stock
price. The two most topical issues are 1) Client Relationship Model Phase 2 (CRM2), and 2)
CSA discussion papers published in late 2012 titled: Mutual Fund Fees and Exploring the
Appropriateness of Introducing a Statutory Best Interest Duty When Advice is Provided to
Retail clients. First and foremost, management stressed that the two issues are separate.
CRM2 is actual regulation being enacted into law with full implantation in the 2016/2017
time frame. The CSA papers are strictly “discussion” papers to open up a constructive
dialogue on a number of approaches.
o CRM2 relates to enhanced client reporting. The two principal components
of the full CRM2 implementation taking most significant discussion are 1)
Performance reporting, and 2) Cost and Compensation Disclosure.
Management believes the most significant but underappreciated change is the
performance reporting requirements that will mandate a multi-period rate of
return reporting (1,3,5,10 and since inception) at the client account level. The
annual Cost and Compensation Disclosure relates to the compensation
received by the dealer in relation to an account. This is the amount of money
that has been passed to the dealer (e.g. trailer fees). This is not the management
fee or MER. For a new account starting off with $10,000, a typical 1% trailer fee
would yield a cost of $100 that would be transferred to the dealer over a oneyear period. Depending on the year-end of the fund, the implantation deadline
for the full reporting is either July 2016 or July 2017.
o CSA papers are part of an ongoing dialogue with viewpoints not expected
until mid-2015. In late 2013 updated papers were published by the CSA
following extensive discussion with mutual fund dealers, stakeholders, and
other parties. The papers provided a balanced discussion on the key issues. In
early 2014, the CSA requested proposals for research to be conducted to
explore behavioural impacts on mutual fund fee structures with results
expected in early 2015. The conclusive CSA viewpoints are expected to be
known by mid-2015. Management stressed that it does not believe that the
CSA has any hidden agenda related to these discussions (recent brokerage
report suggested lowering mutual fund fees was the motivation). Further,
management does not believe the regulator will suddenly enact any “surprise”
regulatory changes before entering a further comment period. It also
170
Exhibit 2 – MKF Asset Management Margins
Mackenzie Asset Management Margins (TTM)
40%
35%
35%
Q3-14A
Q3-14A
Q2-14A
Q1-14A
Q4-13A
Q3-13A
Q2-13A
10%
Q1-13A
10%
Q4-12A
15%
Q3-12A
15%
Q2-14A
20%
Q1-14A
20%
25%
Q4-13A
25%
30%
Q3-13A
30%
Q2-13A
Asset Management Margins %
40%
Q2-12A
Asset Management Margins %
Exhibit 1 – IG Asset Management
Margins
Investors Group Asset Management Margins (TTM)
Q1-13A
■
Q4-12A
■
Q3-12A
■
Q2-12A
■
highlighted emerging data suggesting the adverse impact of banning of
embedded compensation on small investors in the U.K.
What could CRM2 mean for IGM? IGM management is quite excited about the changes
coming about related to the implementation of CRM2 and believes that it presents very
significant opportunities for its IG division to differentiate itself and for its consultants to
convey a strong value proposition to clients. This is consistent with our own view that the
increased focus on the value of advice can offer significant opportunities for those who do it
well. We believe that this shift may play out well for IGM’s Investors Group division given
its core focus on financial planning and advice. We would argue that given the range of
services offered the average Investor Group consultant is much better positioned to convey
his value proposition to existing and perspective clients than that of a small mutual fund
dealer. Further, smaller investors may well recognize more value than they had initially
perceived when they compare the amount they pay to receive financial planning compared to
“flat fee” advisors.
Impact of Mackenzie fee adjustment expected to be limited. In early October, Mackenzie
announced a number of fee changes. The changes include management fee reductions of 15
to 25 bp (est. average of 16 bp) across 13 mutual funds in addition to revisions to
administrative fees of 1 to 6 bp. The changes impact an estimated $6B in Mackenzie Mutual
Fund AUM, representing 12.5% of its total Mutual Fund Assets and just over 4% of IGM’s
total AUM. Management estimate the impact of the fees to be roughly 3 bps of Mackenzie’s
total mutual fund AUM. This is consistent with our earlier adjustments that equated to a
reduction in overall IGM average management fees of under 1.5 bps reducing EPS by $0.05,
which is less than 1% of our 2015 forecast.
Oh yeah…did we mention that IGM also posted a pretty decent Q3/14. Improved flows,
earnings momentum and improving industry conditions are likely to support share gains for
IGM over the coming twelve months. The quarter’s results were supportive of our underlying
thesis and the demonstrated earnings leverage to AUM growth and the 5% dividend increase
help filling in some missing pieces from earlier quarters.
Underlying asset management earnings looked solid in the quarter. Looking at IG’s
estimated asset management margins we see a continued improving trend, with Mackenzie’s
margins remaining relatively stable (see Exhibits 2 and 3). The asset management margin
measures profitability of management fee margins by eliminating variance in management
fees from AUM mix and the impact of back end loaded funds.
171
■ Mackenzie experienced its strongest Q3 gross sales since 2008. Mackenzie recorded
mutual fund outflows of $207 million (0.4% of beg. AUM), compared to outflows of $223
million (0.5% of beg. AUM) in Q3/13 (see Exhibit 3). Mutual fund outflows largely reflect a
shift away from global equity, a trend similar to overall industry. Mutual fund gross sales
were up 9% YOY in the quarter and management highlighted that gross sales were the
strongest third quarter gross sales since 2008. Redemptions rate was flat sequentially but
improved from the previous year (see Exhibit 4).
Exhibit 3 – MKF MFA & Net Sales
Exhibit 4 – MKF MFA, Gross Sales, Redemptions, and Net Sales Performance
MKF MFA & Net Sales
$14
1.0%
$4
0.0%
($6)
Ending MFA
Net Sales (% of beg. MFA)
Gross sales (% of beg. AUM)
Redemption (% of beg. AUM)
Q3-14A
Q2-14A
Q1-14A
Q4-13A
Q3-13A
Q2-13A
Q1-13A
Q4-12A
Q3-12A
Q2-12A
Q1-12A
Q4-11A
Q3-11A
Q2-11A
Q1-11A
($16)
Q1-09A
Q3-14A
Q2-14A
Q1-14A
Q4-13A
Q3-13A
Q2-13A
Q1-13A
Q4-12A
Q3-12A
Q2-12A
Q1-12A
Q4-11A
Q3-11A
Q2-11A
(2.0%)
Q1-11A
-2.0%
Q4-10A
($80)
Q3-10A
(1.0%)
Q2-10A
-1.5%
Q1-10A
($60)
Q4-09A
-1.0%
Q3-09A
($40)
Q2-09A
-0.5%
Net sales (% of beg. AUM)
■ Investors Group experienced its strongest third quarter gross sales on record. Investors
Group (IG) generated inflows of $86M (0.1% of beg. AUM) in the quarter, improved from
the $109M of outflows in Q3/13 (see Exhibit 5). Gross sales were up 19% YOY in the
quarter and management noted that gross sales were the highest third quarter sales on record.
With redemption rate remaining in check and well below the industry average, we are
encouraged by the continued momentum in gross sales (see Exhibit 6). During the quarter
Investors Group also added three new mandates including Investors Global Fixed Income
Flex Portfolio, IG Mackenzie Floating Rate Income Fund, and IG Putnam Emerging Markets
Income Fund. At the beginning of Q4/14, IG also announced the pending addition of two
new investment options – Investors U.S. Dividend Registered Fund and Allergro Income
Balanced Portfolio Class.
Exhibit 6 – IG MFA, Gross Sales, Redemptions, and Net Sales Performance
IGI MFA & Net Sales
MFA (Ending)
Net Sales (% of beg. MFA)
$10
0.0%
$0
Ending MFA
Gross sales (% of beg. AUM)
Redemption (% of beg. AUM)
■ The number of Investors Group consultants reached another new record high in Q3/14.
Following declines in both 2011 and 2012, Investors Group reversed track and expanded its
consultant network through 2013 adding 155 consultants during the year. IG continued to
build on that trend with an additional 198 consultants added in the first half of 2014 and an
additional 140 during Q3/14 with the size of its consultant network reaching a new record
high (see Exhibit 7). This likely reflects a new program for its early stage consultants that it
expects to significantly enhance growth of its network through increased recruiting and
retention. We believe the growing size of consultant network will build on sales momentum
for IG in the future quarters. IG introduced the client experience survey program to measure
client experience for new and existing clients (see Exhibit 8). The survey suggested that
clients have a strong appreciation of the value of advice and service provided by consultants.
Net sales (% of beg. AUM)
Q3-14A
Q2-14A
Q1-14A
Q4-13A
Q3-13A
Q2-13A
Q1-13A
Q4-12A
Q3-12A
Q2-12A
Q1-12A
($20)
Q4-11A
($10)
(1.0%)
Q3-11A
(0.5%)
Q2-11A
Q3-14A
Q2-14A
Q1-14A
Q4-13A
Q3-13A
Q2-13A
Q1-13A
Q4-12A
Q3-12A
Q2-12A
Q1-12A
Q4-11A
Q3-11A
Q2-11A
Q1-11A
Q4-10A
Q3-10A
Q2-10A
Q1-10A
Q4-09A
Q3-09A
Q2-09A
-1.0%
Q1-09A
($80)
$20
0.5%
Q1-11A
-0.5%
($60)
$30
1.0%
Q4-10A
($40)
$40
1.5%
Q3-10A
($20)
$50
2.0%
Q2-10A
0.0%
$60
2.5%
Q1-10A
$0
$70
3.0%
Q4-09A
MFA ($B)
$20
$80
3.5%
Q3-09A
0.5%
4.0%
Q1-09A
$40
% of beg. AUM
$60
Mutual Fund Net Sales (% of Beg. MFA)
1.0%
MFA ($B)
IG MFA, Gross Sales, Redemption, Net Sales Performance
$80
Q2-09A
Exhibit 5 –IG MFA & Net Sales
MFA ($B)
$24
2.0%
($20)
MFA (Ending)
$34
3.0%
Q4-10A
0.0%
4.0%
Q3-10A
$0
$44
5.0%
Q2-10A
0.5%
Q1-10A
1.0%
$20
Q4-09A
$40
$54
6.0%
Q3-09A
1.5%
Q2-09A
$60
7.0%
% of beg. AUM
2.0%
MFA ($B)
MKF MFA, Gross Sales, Redemption, Net Sales Performance
$80
172
Exhibit 7 –Number of Investors Group Consultants Q1/13 – Q3/14
Exhibit 8 – Client Experience Survey
New Clients (to September 30, 2014)
Existing Clients (to September 30, 2014)
98%
94%
95%
95%
4,599
88%
92%
86%
91%
84%
90%
82%
89%
80%
88%
Satisfied with service
Q3/13
Q4/13
88%
93%
4,465
Q2/13
92%
86%
90%
4,673
Q1/13
92%
92%
91%
94%
4,731
4,550
96%
96%
96%
4,871
98%
97%
97%
5,011
Q1/14
Q2/14
Offered a Financial
Plan
Satisfied with goals
and concerns
discussion
Satisfied with service
Willing to refer
Offered a Financial
Plan
Satisfied with goals
and concerns
discussion
Willing to refer
Q3/14
■ Slight upward revision to 2015 estimates. With the quarter
generally in line with expectations, we have made upward Exhibit 9 – Summary of Estimate Changes
adjustment to our 2015 estimates to reflect updated Q4/14
2014E
AUM. Exhibit 9 summarizes the changes to our estimates
Old
New
while Exhibit 14 details our forecast and key assumptions.
Operating EPS
$3.33
$3.30
■ IGM trading below its historical average. We estimate that Operating EBITDA/share
$5.71
$5.70
IGM trades at 7.3x on an EV/EBITDA (NTM) basis, roughly
0.5 standard deviation below its 5-year historical average (see Source: Scotiabank GBM estimates.
Exhibit 10). IGM trades at 18.8% discount to its North
American peers, wider than its historical discount of 16.1%
(see Exhibit 11).
IGM Financial
Exhibit 10 - IGM Historical EV/EBITDA
(NTM)(NTM)
EV/EBITDA
2015E
Old
New
$3.62
$3.67
$6.21
$6.27
Exhibit 11 – IGM Premium/
(Discount) to North American Average EV/EBITDA
IGM Relative Premium/(Discount) to North American Average
EV/EBITDA (NTM)
(NTM)
10.0
30.0%
9.5
20.0%
EV/EBITDA (NTM)
8.5
+1 S.D.
8.0
8.1
7.5
7.6
7.1
7.0
-1 S.D.
6.5
Relative Premium/ (Discount)
9.0
10.0%
0.0%
(10.0%)
-10.3%
-16.1%
(20.0%)
-22.0%
(18.8)%
6.0
(30.0%)
5.5
Note: North American Peer Group includes: AGF/B, BEN, BLK, CIX, EV, IGM, IVZ, JNS, LM, TROW, WDR
Source: Thomson; Company reports; Scotiabank GBM estimates.
■ Raising target price to $55.00 (was $54.00) and maintaining Sector Outperform rating.
Reflecting the modest upward revision to our 2015 estimates, we have raised our target price.
We derive our one-year target price using an 8.25x EV/EBITDA multiple based on our 2015
estimates and represents 9.5% EV/MFA one year out. With an expected one-year ROR of
21% we maintain our Sector Outperform rating.
Oct-14
Apr-14
Jun-14
Aug-14
Oct-13
Feb-14
Dec-13
Apr-13
Jun-13
Aug-13
Oct-12
Feb-13
Dec-12
Aug-12
Apr-12
Jun-12
Feb-12
Oct-11
Dec-11
Aug-11
Apr-11
Jun-11
Feb-11
Oct-10
Dec-10
Aug-10
Apr-10
Jun-10
Oct-09
Feb-10
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Source: Thomson; Company reports; Scotiabank GBM estimates.
Dec-09
(40.0%)
5.0
173
Q3/14 Highlights
■ Q3/14 operating EPS came in a touch below our estimate. IGM reported Q3/14 operating
EPS of $0.87, in line with consensus but slightly below our estimate of $0.88 (see Exhibit
13). Operating EBITDA/sh of $1.49 was in line with our expectation. The weaker-thananticipated top line was offset by lower-than-expected opex. The higher-than-estimated tax
rate contributed to the EPS miss. Management fee margin of 144 bp (% of average AUM)
was slightly below our expectation of 145 bp. Administration fee margin came in at 28 bp (%
of average AUM), a touch below our forecast of 29 bp. Trailer fee margins of 50 bp as a % of
average AUM were above our estimate of 48 bp. Operating EBITDA margin of 50% was up
from 48.3% in the previous quarter but down from 51.3% a year earlier.
■ Mutual fund flows improved over last year. IGM recorded mutual fund outflows of $70
million (0.1% of beg. AUM), improved from outflows of $317 million a year ago. IG
recorded inflows of $86 million (0.1% of beg. AUM),
improved from net redemptions of $109 million (0.2% of Exhibit 12 – IGM MFA & Net Sales
beg. AUM) a year earlier. Mackenzie posted mutual fund
outflows of $207 million (0.4% of beg. AUM) slightly
improved from outflows of $223 million in the previous
year. Mackenzie recorded institutional outflows of $894
million, improved from outflows of $2.5 billion in
Q3/13. Q3/14 institutional inflows were impacted by net
redemptions of $905 million that was the result of
portfolio rebalancing by an institutional client at
Mackenzie. Consolidated AUM declined 0.6% QOQ but
was up 11.6% YOY, with market appreciation of 0.1% of
beg. AUM.
1.2%
MFA ($B)
$127
1.0%
$97
0.8%
$67
0.6%
0.4%
$37
0.2%
$7
0.0%
($23)
-0.2%
($53)
-0.4%
-0.6%
($83)
Net Sales ($ of beg. MFA)
Q3-14A
Q2-14A
Q1-14A
Q4-13A
Q3-13A
Q2-13A
Q1-13A
Q4-12A
Q3-12A
Q2-12A
Q1-12A
Q4-11A
Q3-11A
Q2-11A
Q1-11A
Q4-10A
Q3-10A
Q2-10A
Q1-10A
Q4-09A
Q3-09A
Q2-09A
-1.2%
Q1-09A
-1.0%
($143)
MFA (Ending)
.
-0.8%
($113)
IGM MFA & Net Sales
174
Exhibit 13 - IGM Quarterly Overview
IGM Financial Q3-14 Results Overview
(FYE Dec 31; CAD$thousands except per share data)
Income Statement Summary
Change
Q3-14A
Q2-14A
Q3-13A
Q/Q
Y/Y
Revenue
Management Fees
Administration Fees
Distribution Fees
Net Investment Income and Other
Proportionate share of affiliates earnings
Total Revenue
$517,063
$101,997
$84,968
$21,257
$24,877
$750,162
$503,887
$99,309
$86,113
$8,483
$23,995
$721,787
$462,196
$90,370
$76,211
$15,373
$23,316
$667,466
2.6%
2.7%
(1.3%)
150.6%
3.7%
3.9%
11.9%
12.9%
11.5%
38.3%
6.7%
12.4%
Mutual Fund EBITDA
Mutual Fund EBITDA Margin
$351,615
52.0%
$338,431
51.3%
$322,988
53.9%
3.9%
66 bp
8.9%
(195) bp
Non-Mutual Fund EBIT
$23,802
$9,946
$19,682
139.3%
20.9%
Operating EBITDA
Operating EBITDA Margin
$375,417
50.0%
$348,377
48.3%
$342,670
51.3%
7.8%
178 bp
1.7%
(129) bp
18.6%
17.6%
17.3%
95 bp
129 bp
$1.39
$0.09
$1.49
$1.34
$0.04
$1.38
$1.28
$0.08
$1.36
4.0%
139.6%
7.9%
8.8%
20.8%
9.5%
Operating ROE
Per Share Data
Mutual Fund EBITDA Per Share
Non-Mutual Fund EBIT Per Share
Operating EBITDA Per Share
Operating EPS (diluted)
$0.87
$0.81
$0.77
7.9%
13.5%
Book Value Per Share
Dividend Per Share
$18.74
$0.54
$18.52
$0.54
$17.82
$0.54
1.2%
0.0%
5.2%
0.0%
Revenues
Management Fees
Administration Fees
Distribution Fees
144 bp
28 bp
16 bp
146 bp
29 bp
16 bp
147 bp
29 bp
15 bp
(1) bp
(0) bp
(0) bp
(2) bp
(0) bp
1 bp
Expenses
Trailers Fees
SG&A
50 bp
43 bp
50 bp
45 bp
46 bp
44 bp
0 bp
(2) bp
4 bp
(1) bp
Investment Management Operating Margin
51 bp
50 bp
57 bp
1 bp
(5) bp
$141,434
($986)
$169
$140,617
$137,315
$1,293
$2,826
$141,434
$124,803
($2,896)
$4,100
$126,007
3.0%
nmf
(94.0%)
(0.6%)
13.3%
66.0%
(95.9%)
11.6%
(0.7%)
0.1%
(0.6%)
11.6%
0.9%
2.1%
3.0%
13.3%
(2.3%)
3.3%
1.0%
5.6%
(164) bp
(194) bp
(358) bp
(173) bp
162 bp
(317) bp
(154) bp
595 bp
Operating Margins (% of Avg. AUM)
AUM Schedule ($M)
Beginning AUM
Net Sales
Market Performance
Quarter-end AUM
Net Sales as % of Beg. AUM
Market Performance as % of Beg. AUM
AUM Growth (QOQ)
AUM Growth (YOY)
175
Exhibit 14 - IGM Financial Summary
IGM Financial
FINANCIAL SUMMARY
Operating Income Statement Summary1
(Cdn $ millions except where noted)
F2012A
Q1-13A
(Mar)
F2013A
Q2-13A
Q3-13A
(Jun)
(Sep)
Q4-13A
(Dec)
F2013A
Q1-14A
(Mar)
F2014E
Q2-14A
Q3-14A
(Jun)
(Sep)
Q4-14E
(Dec)
F2014E
F2015E
Revenue
Management fees
Administration fees
Distribution fees
Net investment income and other
Proportionate share of affiliates earnings
Total Revenue
$1,766.3
$337.2
$321.1
$80.6
$77.5
$2,582.7
$442.9
$85.6
$81.4
$23.5
$19.3
$652.7
$452.0
$87.9
$79.8
$26.4
$21.0
$667.0
$462.2
$90.4
$76.2
$15.4
$23.3
$667.5
$475.6
$93.7
$85.6
$15.5
$21.2
$691.6
$1,832.6
$357.5
$323.0
$80.7
$84.8
$2,678.8
$485.8
$95.2
$92.4
$22.0
$19.4
$714.8
$503.9
$99.3
$86.1
$8.5
$24.0
$721.8
$517.1
$102.0
$85.0
$21.3
$24.9
$750.2
$512.9
$100.8
$93.7
$18.2
$26.0
$751.6
$2,019.6
$397.4
$357.1
$70.0
$94.3
$2,938.4
$2,155.3
$418.8
$368.1
$77.1
$107.9
$3,127.3
Expenses
Commission
Non-commission
Total Expenses
$858.2
$668.6
$1,526.8
$218.0
$177.9
$395.9
$219.0
$182.6
$401.6
$219.7
$173.1
$392.8
$229.4
$179.9
$409.3
$886.1
$713.5
$1,599.6
$243.2
$195.8
$438.9
$245.7
$194.4
$440.1
$249.8
$190.8
$440.6
$247.3
$197.2
$444.5
$986.0
$778.2
$1,764.2
$1,015.4
$824.8
$1,840.2
Operating earnings before interest and taxes
Interest
Operating earnings before income taxes
Income taxes
Operating earnings
$1,055.9
$92.2
$963.7
$208.5
$755.3
$256.8
$22.7
$234.0
$51.3
$182.7
$265.3
$23.0
$242.4
$49.3
$193.1
$274.7
$23.2
$251.5
$55.9
$195.6
$282.4
$23.2
$259.1
$58.2
$201.0
$1,079.2
$92.2
$987.0
$214.6
$772.4
$275.9
$22.7
$253.2
$56.5
$196.7
$281.7
$23.0
$258.7
$52.6
$206.1
$309.5
$23.2
$286.3
$64.5
$221.9
$307.1
$23.2
$283.9
$63.9
$220.0
$1,174.2
$92.1
$1,082.1
$237.5
$844.6
$1,287.1
$92.8
$1,194.3
$268.9
$925.5
Perpetual preferred share dividends
Operating net income avail to common s/h1
$8.9
$746.4
$2.2
$180.5
$2.2
$190.9
$2.2
$193.4
$2.2
$198.7
$8.9
$763.5
$2.2
$194.4
$2.2
$203.9
$2.2
$219.7
$2.2
$217.8
$8.9
$835.8
$8.9
$916.6
Discountinued operations, net of tax
Non-recurring items adjustment, net of tax
Reported net income
$0.0
($12.4)
$758.8
$0.0
$0.0
$180.5
$0.0
$0.0
$190.9
$0.0
$0.0
$193.4
$0.0
$1.6
$197.1
$0.0
$1.6
$761.9
$0.0
$0.0
$194.4
$0.0
$13.6
$190.3
$0.0
$0.0
$219.7
$0.0
$0.0
$217.8
$0.0
$13.6
$822.1
$0.0
$0.0
$916.6
$2.92
$2.97
$5.32
$0.72
$0.72
$1.30
$0.76
$0.76
$1.33
$0.77
$0.77
$1.36
$0.79
$0.78
$1.38
$3.02
$3.02
$5.37
$0.77
$0.77
$1.36
$0.81
$0.75
$1.38
$0.87
$0.87
$1.49
$0.86
$0.86
$1.48
$3.30
$3.25
$5.70
$3.67
$3.67
$6.27
F2012A
Q1-13A
(Mar)
F2013A
Q2-13A
Q3-13A
(Jun)
(Sep)
Q4-13A
(Dec)
F2013A
Q1-14A
(Mar)
F2014E
Q2-14A
Q3-14A
(Jun)
(Sep)
Q4-14E
(Dec)
F2014E
F2015E
Mutual Fund AUM
Beginning AUM
Net Sales
Market Performance
Quarter-end Mutual Fund AUM
MFA Growth (YOY)
MFA Growth (Sequential)
$99.7
($2.7)
$7.0
$103.9
4.2%
4.2%
$103.9
$0.5
$4.1
$108.5
3.2%
4.4%
$108.5
($0.5)
($0.4)
$107.6
7.4%
(0.8%)
$107.6
($0.3)
$3.9
$111.2
8.7%
3.3%
$111.2
$0.1
$6.4
$117.6
13.2%
5.8%
$103.9
($0.3)
$14.0
$117.6
13.2%
13.2%
$117.6
$0.8
$4.0
$122.5
12.9%
4.1%
$122.5
$0.1
$2.6
$125.2
16.4%
2.2%
$125.2
($0.1)
$0.1
$125.2
12.6%
(0.0%)
$125.2
$0.3
$0.2
$125.7
6.8%
0.4%
$117.6
$1.2
$6.9
$125.7
6.8%
6.8%
$125.7
$3.1
$10.5
$139.2
10.8%
10.8%
(2.8%)
7.00%
0.5%
3.91%
(0.5%)
(0.33%)
(0.3%)
3.63%
0.1%
5.76%
(0.3%)
13.48%
0.7%
3.43%
0.1%
2.10%
(0.1%)
0.05%
0.2%
0.18%
1.0%
5.86%
2.4%
8.33%
Total AUM
Beginning AUM
Net Sales
Market Performance
Quarter-end AUM
AUM Growth (YOY)
AUM Growth (Sequential)
$118.7
($5.6)
$7.6
$120.7
1.7%
1.7%
$120.7
$0.6
$4.5
$125.8
1.3%
4.2%
$125.8
($0.4)
($0.6)
$124.8
5.8%
(0.8%)
$124.8
($2.9)
$4.1
$126.0
5.6%
1.0%
$126.0
($1.0)
$6.7
$131.8
9.2%
4.6%
$120.7
($3.7)
$14.8
$131.8
9.2%
9.2%
$131.8
$1.1
$4.4
$137.3
9.2%
4.2%
$137.3
$1.3
$2.8
$141.4
13.3%
3.0%
$141.4
($1.0)
$0.2
$140.6
11.6%
(0.6%)
$140.6
($0.4)
$1.0
$141.2
7.2%
0.4%
$131.8
$1.0
$8.4
$141.2
7.2%
7.2%
$141.2
$4.1
$11.0
$156.4
10.7%
10.7%
(4.7%)
6.40%
0.5%
3.77%
(0.3%)
(0.46%)
(2.3%)
3.29%
(0.8%)
5.34%
(3.1%)
12.26%
0.8%
3.37%
0.9%
2.06%
(0.7%)
0.12%
(0.3%)
0.70%
0.8%
6.39%
2.9%
7.80%
F2012A
Q1-13A
(Mar)
$1.20
$0.10
$1.30
Q4-13A
(Dec)
$1.31
$0.07
$1.38
F2013A
Q1-14A
(Mar)
$1.28
$0.08
$1.36
F2014E
Q2-14A
Q3-14A
(Jun)
(Sep)
$1.34
$1.39
$0.04
$0.09
$1.38
$1.49
Q4-14E
(Dec)
$1.40
$0.08
$1.48
F2014E
F2015E
$5.41
$0.29
$5.70
$5.93
$0.34
$6.27
Reported EPS (diluted)
Operating EBITDA Per Share
AUM Schedule
(Cdn $ billions except where noted)
Per Share Data
(Cdn $ except where noted)
Mutual Fund EBITDA
Non-Mutual Fund EBIT
Operating EBITDA
$4.94
$0.38
$5.32
$5.00
$0.36
$5.37
$2.92
$0.72
$0.76
$0.77
$0.79
$3.02
$0.77
$0.81
$0.87
$0.86
$3.30
$3.67
Book Value
Free Cash Flow
Dividends
$17.02
$3.17
$2.15
$17.19
$0.69
$0.54
$17.44
$0.79
$0.54
$17.82
$0.97
$0.54
$18.06
$0.78
$0.54
$18.06
$3.24
$2.15
$18.31
$0.69
$0.54
$18.52
$0.79
$0.54
$18.74
$1.15
$0.54
$18.93
$0.86
$0.56
$18.93
$3.50
$2.18
$19.81
$3.61
$2.31
F2012A
F2013A
Q2-13A
Q3-13A
(Jun)
(Sep)
52.1%
53.9%
50.2%
51.3%
17.5%
17.3%
20.3%
22.2%
Q4-13A
(Dec)
53.5%
50.6%
17.4%
22.5%
F2013A
F2014E
Q2-14A
Q3-14A
(Jun)
(Sep)
51.3%
52.0%
48.3%
50.0%
17.6%
18.6%
20.3%
22.5%
Q4-14E
(Dec)
52.6%
49.7%
18.2%
22.5%
F2014E
F2015E
53.0%
50.6%
17.3%
21.7%
Q1-14A
(Mar)
50.7%
48.2%
17.2%
22.3%
51.6%
49.1%
17.9%
21.9%
52.8%
50.1%
19.0%
22.5%
Financial Ratios
Mutual Fund EBITDA Margin
Operating EBITDA Margin
Operating ROE
Effective Tax Rate
54.9%
52.6%
17.3%
21.6%
Q1-13A
(Mar)
52.4%
50.4%
17.0%
21.9%
Payout Ratio
FCF/Dividend
73.6%
1.47x
75.2%
1.28x
71.1%
1.48x
70.2%
1.81x
68.4%
1.46x
71.1%
1.51x
70.0%
1.29x
66.7%
1.47x
64.7%
2.15x
65.2%
1.54x
66.6%
1.61x
64.4%
1.58x
Total Debt/EBITDA
Total Debt/EBITDA (LTM)
Times Interest Coverage
Profit Margin
108.5%
1.1x
11.5x
28.9%
23.9%
1.1x
11.3x
27.7%
109.8%
1.1x
11.6x
28.6%
108.5%
0.6x
11.8x
29.0%
106.2%
1.1x
12.2x
28.7%
108.7%
1.1x
11.7x
28.5%
105.5%
1.1x
12.1x
27.2%
105.6%
1.1x
12.3x
28.2%
99.0%
1.0x
13.3x
29.3%
99.4%
1.0x
13.2x
29.0%
102.3%
1.0x
12.7x
28.4%
94.1%
0.9x
13.9x
29.3%
F2012A
Q1-13A
(Mar)
F2013A
Q2-13A
Q3-13A
(Jun)
(Sep)
Q4-13A
(Dec)
F2013A
Q1-14A
(Mar)
F2014E
Q2-14A
Q3-14A
(Jun)
(Sep)
Q4-14E
(Dec)
F2014E
F2015E
147
28
17
145
28
17
144
28
15
147
29
15
146
29
16
145
28
16
147
29
19
146
29
16
144
28
16
144
28
17
145
28
17
145
28
16
44
45
46
47
45
47
46
44
46
45
46
46
50
48
50
45
50
43
47
45
49
45
47
45
54
49
50
51
52
51
54
(% of AUM)
Revenues
Management Fees
Administration Fees
Distribution Fees
Expenses
Trailers Fees
SG&A
1
F2013A
Q2-13A
Q3-13A
(Jun)
(Sep)
$1.21
$1.28
$0.11
$0.08
$1.33
$1.36
58
52
52
57
55
Line items on operating net income summary adjusted for unusual or non-recurring items and discountued operations.
176
Company Comment
(INE-T C$10.71)
Innergex Renewable Energy Inc.
Target 1-Yr:
C$11.50 ROR 1-Yr:
Risk Ranking: Low
13.0%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.60
$0.60
5.6%
Key Risks to Target: Government Support for Renewables; Credit Spreads; Hydrology; Growth Projects
Event
Pertinent Revisions
■ INE reported Q3/14 adj. EBITDA of $51.7M vs. our $53.8M estimate
and $46.7M in Q3/13.
New
Old
CFPS14E
$1.00
$1.03
CFPS15E
$1.13
$1.14
CFPS16E
$1.20
$1.22
New Valuation:
2015E EV/EBITDA
Old Valuation:
2015E EV/EBITDA
Implications
■ Short-term growth remains slow and the payout remain high (113%
trailing 12-months). However, recent acquisition and development
activity are injecting sufficient cash to comfortably cover the dividend
by 2016 and potentially grow it thereafter, in our opinion.
■ The quarter was uneventful with respect to projects under construction,
which we see as good news. No further delays or modifications in
production or financial guidance were made to the B.C. hydro facilities.
■ A partnership with certain B.C. First Nations is logical and strategically
sound. We believe partnerships with First Nations are a key success
factor given Canada's aboriginal legal framework. The development of
150 MW in B.C. is promising particularly given Site-C uncertainty.
■ Hydro Quebec (HQ) has finally moved forward with its long-standing
450 MW wind RFP and INE is well positioned. Just recently HQ
accepted offers with prices up to $90/MW-hr inflation-escalated. The
bids will be competitive (especially BLX) but INE should win its share.
Recommendation
■ INE is on a trajectory that should deliver reliable low-risk dividends well
into the future. Whether growth can accelerate likely depends on the B.C.
dynamics (Site C) and on diversification through acquisition. We
maintain our Sector Perform rating and $11.50 target price.
Qtly CFPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.15 A
$0.05 A
$0.13
(FY-Dec.)
Dividends/Share
EV/EBITDA
Payout Ratio
EBITDA (M)
Debt/EBITDA
Q2
$0.36 A
$0.39 A
$0.44
2012A
$0.36
$0.58
18.1x
160%
$138
9.7x
0.66
$2,495
Q3
$0.34 A
$0.24 A
$0.36
2013A
$0.54
$0.58
16.9x
108%
$149
9.2x
0.68
$2,613
Q4
$0.13 A
$0.31
$0.19
2014E
$0.66
$0.60
17.1x
92%
$171
10.1x
0.75
$3,064
Year
$0.97
$1.00
$1.13
$1.20
P/CF
10.9x
10.8x
9.5x
8.9x
2015E
$0.66
$0.60
16.9x
91%
$193
10.6x
0.78
$3,406
2016E
$0.72
$0.63
15.4x
87%
$222
10.0x
0.80
$3,535
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$1,078
$1,925
$3,003
101
89
177
Exhibit 1 – Innergex Renewable Energy Inc. Financial Statement Summary
Summary Income Statement ($M)
2013A
2014E
2015E
2016E
Revenues
Expenses
Adjusted EBITDA (reported)
Depreciation and amortization
Interest
Other
Earnings before income taxes
Income taxes
Non-Controlling Interests & Pref. Dividends
Reported Net Earnings to Common Shares
Add: Adjustments for FX, Derivatives & Other
Adjusted Net Earnings to Common Shares
$198
$49
$149
$69
$65
($52)
$66
$21
$5
$41
($33)
$8
$231
$60
$171
$76
$78
$73
($55)
($15)
$5
($46)
$53
$7
$253
$60
$193
$88
$82
($2)
$24
$6
$6
$11
$0
$11
$290
$69
$222
$98
$98
($2)
$27
$7
$7
$13
$0
$13
Average shares outstanding (diluted)
Diluted Adjusted EPS
Adjusted EBITDA (inc. proportional EBITDA from JV's)
94.8
$0.08
$155
98.5
$0.07
$179
102.1
$0.11
$201
104.3
$0.12
$230
Summary Cash Flow Statement ($M)
2013A
2014E
2015E
2016E
Operating activities
Cash Flow from Operations before W/C
Changes in working capital
Cash from Operating Activities
Cash used in Investing Activities
Cash used in Financing Activities
Currency Translation: Impact on Cash
$92
$30
$122
($132)
($5)
$0
$98
$0
$98
($416)
$293
$0
$115
$0
$115
($389)
$287
$0
$126
$0
$126
($181)
$118
$0
($15)
$49
$34
($25)
$34
$10
$12
$10
$22
$63
$22
$85
2013A
2014E
2015E
2016E
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Summary Balance Sheet ($M)
Cash & Equivalents
PP&E
Intangibles & Goodwill
Other Assets
Total Assets
$34
$91
$1,608
$474
$170
$2,377
$10
$76
$2,110
$501
$120
$2,817
$22
$76
$2,411
$501
$120
$3,131
$85
$76
$2,494
$501
$120
$3,277
Current Portion of Long Term Debt
Other Current Liabilities
Long Term Debt
Convertible Debentures
Other Liabilities
Total Liabilities
Pref. Shares
Non-Controlling Interest
Common Equity
$27
$79
$1,314
$80
$212
$1,711
$131
$81
$453
$666
$2,377
$33
$145
$1,690
$80
$258
$2,206
$131
$58
$422
$611
$2,817
$33
$147
$2,022
$80
$258
$2,541
$131
$56
$403
$590
$3,131
$33
$148
$2,190
$80
$258
$2,709
$131
$56
$380
$568
$3,277
178
Intraday Flash
(KBL-T C$39.70)
K-Bro Linen Inc.
Q3/14 Preview
vincent.perri@scotiabank.com
Target 1-Yr:
C$41.00
ROR 1-Yr:
6.3%
Valuation: 10.5x EV/EBITDA (2015E)
Key Risks to Target: Client concentration, contract dependence, labour supply, integration of acquisition s
Div. (NTM)
Div. (Curr.)
$1.20
$1.15
Yield (Curr.)
2.9%
Event
■ K-Bro is scheduled to release Q3/14 results on Thursday, November
13 after market close. A conference call will be held on the following
day (November 14) at 9:00 a.m. ET, dial-in: 1-888-231-8191.
Implications
■ Internal growth supports top line. Supported by continued internal
growth in both the Healthcare and Hospitality segments, as well as
incremental volume from the Saskatoon Health region, we forecast
revenues to increase by 5% over last year to reach $36.3 million.
■ Efficiency gains to lift margins. We forecast EBITDA to increase by
15.9% and reach $7.5 million or 20.6%, in line with consensus at $7.4
million. This compares to $6.5 million or 18.7% last year. The margin
improvement reflects efficiency gains from the new Edmonton facility,
which should more than offset any price inflation from natural gas and
electricity. We expect EPS of $0.50, in line with consensus.
■ Operational update. We also expect an update on the construction
project for the new Regina facility (to service Saskatchewan), its natural
gas hedging strategy (as it looks to lock up roughly 50% of its annual
requirements) and the search for a new CFO.
Recommendation
■ We rate K-Bro shares Sector Perform. While we view shares as being
fairly valued, we believe the company is well positioned to benefit from
potential growth opportunities through acquisitions and continued
outsourcing within the Canadian market, which could act as a catalyst.
Qtly Adj EBITDA (M)
2012A
2013A
2014E
2015E
Q1
Q2
Q3
Q4
Year
$5.6 A
$5.9 A
$5.3 A
$6.3
$6.4 A
$6.3 A
$7.0 A
$7.4
$6.7 A
$6.4 A
$7.5
$8.4
$5.8 A
$5.1 A
$6.5
$7.5
$24.5
$23.7
$26.2
$29.5
EV /
EBITDA
8.5x
12.7x
11.5x
10.6x
2012A
$1.59
$2.89
$126
$25
8%
0.24x
$95
$1.13
2013A
$1.51
$2.79
$131
$24
22%
0.83x
$112
$1.15
2014E
$1.67
$3.05
$137
$26
19%
0.70x
$118
$1.18
2015E
$1.82
$3.32
$149
$29
29%
1.11x
$137
$1.20
2016E
$2.16
$3.56
$162
$32
18%
0.63x
$135
$1.20
(FY-Dec.)
Adj Earnings/Share
Revenues (M)
Adjusted EBITDA (M)
Net Debt/(Net Debt+Eq)
Net Debt/EBITDA
Total Assets (M)
Dividends/Share
BVPS14E: $10.63
ROE14E: 16.20%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$279
$17
$296
7
5
179
Company Comment
(MKP-T C$14.50)
MCAN Mortgage Corporation
Q3/14 Recap: Operationally Sound Despite
Quarterly Earnings Volatility
jeffery.coles@scotiabank.com
Target 1-Yr:
C$15.50
ROR 1-Yr:
15.3%
Div. (NTM)
Div. (Curr.)
$1.22
$1.12
Yield (Curr.)
7.7%
Key Risks to Target: Declining real estate prices, origination volumes, and credit quality
Event
■ MCAN reported Q3/14 adj. EPS of $0.26 vs. $0.41 last year, below our
$0.36 estimate and the Street at $0.345 (range from $0.33-$0.36).
Implications
Pertinent Revisions
Adj. EPS14E
Adj. EPS15E
New
$1.27
$1.46
Old
$1.43
$1.52
■ Transition of securitized portfolio on track. MBS mortgages
increased to $562 million (+52% QOQ; +233% YTD) as MCAN
continues to generate impressive origination volumes. Negative NIM
CMB assets and liabilities continue to expire with final maturities on
track for mid-2015. We expect to see NIM expansion beginning in Q4.
■ Corporate mortgage portfolio in solid form. Despite the slight
decrease in corporate mortgages outstanding we expect growth to
resume but trimmed our growth forecast to 10% annually to reflect
management's near- to mid- term target for corporate assets.
■ Growth forecast revised higher. Our 2014E-16E adj. EPS CAGR is
10.6% (previously 4.0%) and significantly ahead of the MIC Sector.
With our 2016 estimate unchanged the upward revision was driven by
our lower 2014E resulting from the Q3 earnings miss.
Recommendation
■ Maintaining Sector Perform rating, $15.50/share target price
unchanged. Trading at 9.9x 2015E adj. EPS/1.4x book value vs. the MIC
Sector at 12x/1.1x, and non-MIC mortgage lenders at 9.7x/2.7x we see
MKP as reasonably valued and view current levels as a decent entry point
for longer-term investors.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.31 A
$0.35 A
$0.35
$0.38
(FY-Dec.)
Adj EPS
Earnings/Share
Price/Earnings
Yield
Revenues (M)
Q2
$0.38 A
$0.33 A
$0.36
$0.38
Q3
$0.43 A
$0.26 A
$0.37
$0.39
Q4
$0.31 A
$0.33
$0.38
$0.40
Year
$1.43
$1.27
$1.46
$1.55
P/E
9.1x
11.4x
9.9x
9.3x
2012A
$1.42
$1.22
9.9x
10.1%
$85
2013A
$1.43
$1.54
9.1x
8.8%
$84
2014E
$1.27
$1.22
11.4x
7.7%
$79
2015E
$1.46
$1.46
9.9x
8.4%
$91
2016E
$1.55
$1.55
9.3x
8.7%
$106
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
BVPS14E: $10.68
ROE14E: 11.60%
$302
$1,406
$1,708
21
16
180
Fundamental Outlook Unchanged; Valuation Appears Reasonable
9.8x
1.7x
8.7x
2.6x
1.4x
3.9x
MIC Avg.
FC
MKP
AI
MKP
MIC Avg.
10.4x
9.9x
AI
FC
■ Fundamental outlook unchanged despite quarterly
earnings volatility. We would characterize MCAN’s third Exhibit 1 – MKP’s Valuation Appears Reasonable across Metrics, in our View
quarter as somewhat mixed with excellent progress in its
50%
Left Scale Right Scale
securitized portfolio offset by a modest decline in corporate 40x
40%
mortgage growth and timing-related issues that caused
35x
35%
36.0%
negative earnings volatility in income from MCAP and gains
30%
on whole loan sales. That said our fundamental outlook for 30x Historical
Current
25%
MCAN is unchanged and expect longer-term earnings growth 25x Average
23.8%
to be driven by NIM expansion and growth in securitized 20x
20%
19.1%
12.9%
assets with a lesser but still positive impact from growth in 15x
15%
12.7x
12.0x
9.9x
corporate mortgages. The acquisition of Xceed and its
10x
10%
12.7x
mortgage origination platform has been tracking ahead of
5x
5%
management’s expectations with significant mortgage
6.8% 7.3%7.7% 7.6%
0x
0%
volumes flowing into both of MKP’s corporate and
Adj. EPS
Premium
Recur.
securitized portfolios. On the securitization front we are
('15E)
to Book
Div. Yield
encouraged by the progress made in the quarter with excellent
MBS origination volumes totalling $197 million and MBS Source: Company reports; Scotiabank GBM estimates.
mortgages rising to $562 million (+52% QOQ; +233% YTD)
with interest rate spreads holding firm at 86 bp. Moreover,
expiry of negative NIM CMB assets continued as expected
with CMB assets declining to $105 million (-65% QOQ; Exhibit 2 – MKP’s Valuation Vs. Non-MIC Mortgage Lenders
-88% YTD) and on track for final expiries in mid-2015.
4.5x
Nonetheless, CMB assets continued to cause a material drag 11.0x
2015E Adj. P/E Ratio (LS)
Price-to-Book Value (RS)
on securitized net interest income in the quarter as maturities
4.0x
were back-end loaded. We expect MKP to recognize the 10.0x
3.5x
benefits of CMB rolls beginning in Q4/14. MCAN’s
3.0x
corporate mortgage portfolio continues to perform well on the 9.0x
2.5x
credit front though the portfolio declined marginally to $879 8.0x
2.0x
million (-0.3% QOQ; +7.3% YOY) mainly due to a lag in
redeploying proceeds of construction loan repayments.
7.0x
1.5x
■ MCAN’s current valuation appears reasonable, in our
1.0x
view. MKP is trading at 9.9x 2015E adj. EPS/1.4x book value 6.0x
0.5x
verse the MIC sector at 12x/1.1x (Exhibit 1). In our view, the
5.0x
0.0x
roughly two-multiple point discount to the Sector is
MKP
HCG
EQB
FN
reasonable due to MKP’s higher earnings volatility and
per Scotiabank GBM analyst Phil Hardie's estimates
leverage. MCAN’s premium valuation on book value appears
fair based on its higher NTM ROE. Relative to the non-MIC
mortgage lenders MKP trades at a modest 0.2 multiple point Source: Company reports; Scotiabank GBM estimates.
premium on 2015E adjusted EPS and a 1.3 multiple point
discount on price to book value (Exhibit 2). In our view, MKP’s premium earnings multiple
fairly balances its higher dividend yield and lower leverage offset by its lower growth profile
and liquidity. MKP’s lower price-to-book multiple reflects lower NTM ROE.
■ Estimates revised lower on earnings miss in the quarter. Our revised 2014E-‘16E
adjusted EPS estimates are $1.27 (-$0.16), $1.46 (-$0.06), and $1.55 (unchanged) and
represent a 10.6% CAGR (Exhibit 7), albeit over what we consider to be a depressed base
year. The negative revision to our 2014 estimate reflects the miss in equity income from
MCAP, lower gains on whole loan sales, slightly lower than forecast corporate mortgages,
and higher average CMB assets which continued to cause a drag on securitized net interest
income. The negative revision in 2015 is largely the result of lower forecast net corporate
interest income as we lowered our growth forecast to reflect management’s 10% near- to-mid
term growth target, and higher assumed G&A, partially offset by higher forecast net interest
income from securitized assets as a result of stronger-than-expected MBS origination in the
quarter. Our 2016 estimate is unchanged as growth in securitized interest income is expected
to fully offset the negative flow through impact of our higher assumed G&A and lower
corporate mortgage growth.
181
■ Volatility in equity income from MCAP likely here to stay. During the quarter MCAN’s
earnings from MCAP Commercial LP were down 44% sequentially to $0.8 million
($0.04/shares) which was the largest component of MKP’s quarterly miss verse our estimate.
The decline in earnings from MCAP was partially the result of MCAP securitizing a larger
portion of its funded mortgages in the current year, causing MCAP not to recognize the
associated origination fees. Fundamentally, MCAP’s business appears solid with mortgage
originations of $3.7 billion (+3% YOY) and AUM rising to $44.2 billion (+13% YOY).
MCAP’s YTD net income was $28.7 million (+10.7% YOY) though MCAN’s share declined
to $4.4 million from $6.3 million as a result of its lower ownership interest. Looking ahead
our forecast for equity income from MCAP is based on an assumed 3.5% ROE on MCAP’s
equity (in line with the 3.6% quarterly average since Q1/13). In our view this is a reasonable
estimate though investors should be aware that significant positive and negative variations
are possible on a quarterly basis.
■ Corporate mortgage portfolio in solid form despite slight
portfolio contraction. During the quarter MCAN’s corporate Exhibit 3 – MCAN Key Corporate Mortgage Portfolio Metrics
mortgage portfolio slipped to $879 million (-0.3% QOQ;
Change
+7.3% YOY) mainly as result of a lag in redeploying
Q3/14
Q2/14
Q3/13
QOQ
YOY
construction loan repayments and fewer warehoused MBS Mortgage Portfolio
879.3
882.1
819.4
(0.3%) 7.3%
loans. The weighted-average portfolio interest rate was 5.54% Size ($ millions)
54 bp
61 bp
0 bp
-7 bp
in Q3 (-4 bp QOQ). YOY MCAN’s interest rate was down Provision for mtge losses 54 bp
5.54%
5.58%
7.32%
-4 bp -178 bp
178 bp with the interest rate in the year earlier period Interest rate
mtge ratio
0.43%
0.47%
0.76%
-4 bp -33 bp
impacted by high interest rate loans acquired in the Xceed Impaired
Corporate Asset Profile
transaction. Excluding the impact of Xceed, portfolio Singe family insured
14.5%
14.7%
14.1%
-17 bp 40 bp
mortgage rates declined by a more modest 43 bp. Looking Singe family uninsured
36.1%
34.5%
33.3%
159 bp 280 bp
ahead we expect mortgage portfolio growth to resume and Construction
39.8%
41.1%
42.5%
-129 bp -270 bp
9.6%
9.7%
10.1%
-13 bp -50 bp
our forecast reflects 10% annual growth in 2015 and 2016 in Commercial
line with management’s near- to medium-term growth target. Geographic Profile
46.7%
46.6%
42.6%
10 bp 410 bp
For a summary of MCAN’s key corporate mortgage portfolio Western CDA
Ontario
42.4%
42.0%
46.9%
40 bp -450 bp
metrics see Exhibit 3.
Quebec
3.2%
3.4%
4.6%
-20 bp -140 bp
■ Corporate mortgage spread to term deposits holds Atl. CDA & other
7.7%
8.0%
5.9%
-30 bp 180 bp
relatively firm. Profitability of MCAN’s corporate mortgage
portfolio was relative stable in the quarter with the interest Source: Company reports; Scotiabank GBM estimates.
rate spread of corporate mortgages over term deposits holding
relatively firm at 3.09% (-3 bp QOQ). Gains on whole loan
sales were impacted by timing related issues as
mortgages were held into the fourth quarter. The result Exhibit 4 – MCAN Mortgage Arrears Data
was sales of $10 million at an average gain of 1.75%
1 - 30
31 - 60
61 - 90
over 90
of mortgages sold. As a frame of reference in the first ($000s)
days
days
days
days
Total
6,835
2,576
971
0
10,382
two quarters of 2014 MKP competed $45 million of Single family - uninsured
Single family - uninsured (inventory)
2,286
0
0
0
2,286
whole loan sales at an average gain of 1.9%.
Single family - insured
2,675
2,329
1,045
1,323
7,372
4,332
0
0
0
4,332
■ Credit quality in MCAN’s corporate mortgage Residential construction
16,128
4,905
2,016
1,323
24,372
portfolio appears to be in excellent shape. Portfolio Total
1.8%
0.6%
0.2%
0.2%
2.77%
credit quality remains in good form in our view, with % of corporate mortgages
66%
20%
8%
5%
100%
impaired mortgages totalling $4.1 million or 0.4% of % of mortgages in arrears
corporate mortgages (-4 bp QOQ; -33 bp YOY). At Source: Company reports; Scotiabank GBM estimates.
2.8% the percentage of corporate mortgages in arrears
inched up 36 bp sequentially (-170 bp YOY) with the
proportion of the arrears less than 30 days relatively steady at 66% of the total (Exhibit 4).
Net write-offs in the quarter totalled just 0.2 bp taking YTD write-offs to just 1.5 bp which is
well below the MCAN’s historical annual average of ~4.5 bp.
■ Rising NIM from securitized assets expected to contribute meaningful adjusted EPS
growth. In our view, the transition of MCAN’s securitized portfolio away from low-margin
CMB assets to higher margin MBS assets will be the primary driver of MCAN’s adjusted
EPS growth over our forecast period. In the quarter MKP made excellent progress with MBS
182
Q3/14 Recap: Operationally Sound; TimingRelated Issues Drove Quarterly Earnings Miss
Exhibit 6 – MCAN Condensed Variance Analysis
■ Quarterly earnings miss driven by timing-related items.
MCAN reported Q3/14 adj. EPS of $0.26 vs. $0.41 last year,
below our $0.36 estimate and the Street at $0.345 (range from
$0.33-$0.36). Negative variance vs. our estimates in net
investment income (NII) corporate assets (-$0.05/sh) driven
by miss in equity income from MCAP (-$0.04/sh), gains on
whole loan sales (-$0.02), and higher interest expense
($0.01), partially offset by lower provisions for credit loss
(-$0.02). Negative variance in NII securitized assets
(-$0.02/sh excl. FV adjustment) on lower interest income and
higher interest expense. Balance of variance in G&A (Exhibit
6).
Interest expense
Mortgage expenses
G&A and other
Taxes
Non-interest expenses
Net income
Adj. earnings
Adj. EPS - FD
($000s except per share amounts)
Q3/14A
Interest - corp. assets
15,288
Interest - securitized assets
3,706
73
Interest income
19,067
bp
100
80
60
40
20
0
-20
-40
Q4/16E
Q3/16E
Q2/16E
Q1/16E
Q4/15E
Q3/15E
Q2/15E
Q1/15E
Q4/14E
Q3/14A
Q2/14A
Q1/14A
mortgages increasing to $562 million (+52% QOQ) as the Exhibit 5 – We Expect NIM Expansion Post Expiry of CMB Assets
company securitized $197 million of new MBS product.
Interest rate spreads for MBS remain very attractive with $ millions Net interest margin CMB
MBS
MCAN’s MBS portfolio yielding 2.98%, an 86 bp spread 1,400
Securitized assets (RS)
over average MBS liabilities (-1 bp QOQ). CMB assets 1,200
declined by $194 million to close the quarter at $105 million, 1,000
relatively in line with our estimate though the average CMB
800
assets was significantly higher as the bulk of maturities
occurred toward the end of the quarter. As a result the CMB
600
program continued to be a drag on the overall securitized
400
portfolio and generated a loss of $0.6 million. Based on the
200
contractual maturity of MKP’s CMB liabilities we expect
0
CMB assets to decline to $45 million by Q4/14 which is
relatively minor in the context of MCAN’s securitized
portfolio which we expect to reach $663 million by Q4/14.
As a result the drag caused by the CMB portfolio on the
overall securitized NIM should also substantially decline. Source: Company reports; Scotiabank GBM estimates.
Looking ahead our forecast reflects significant NIM
expansion beginning in Q4/14 as outlined in Exhibit 5.
■ Sales of I/O strips may have shifted to the back burner. During the year MKP was
granted the right to sell its retained interest in its MBS assets (i.e. the interest only or I/O
strip) which would allow it to derecognize both the asset and associated liability from its
balance sheet. Sales of I/O strips would allow MKP to generate one-time gains which would
boost near-term earnings. Given current favourable economics of retaining MBS assets on
balance sheet and MCAN’s solid capital position it appears that the likelihood of sales of I/O
strips has diminished. MCAN had previously suggested that a sale was likely in 2014
although that appears to no longer be the case. In our view, retaining the MBS assets is a
preferable long-term strategy as it provides MCAN with recurring income rather than volatile
one-time gains and is better suited to MIC structure that prioritizes income distribution to
shareholders.
■ Balance sheet remains in solid form. MCAN continues to be well capitalized with its all-in
CET1 capital ratio rising to 22.4% (+172 bp QOQ; +326 bp YOY) and significantly higher
than the current regulatory minimum of 7% and ahead of MCAN’s 20% internal target. With
respect to the MIC leverage requirements in the income tax act MCAN’s assets to capital
multiple declined to 4.96x (-0.03x QOQ; -0.53x YOY) and remains below management’s
5.75x target and 6.0x regulatory maximum. With leverage marginally declining and MCAN
well below its target leverage we have reduced our forecasted equity issuance to $5 million
from $10 million in each of 2015 and 2016.
GBM
Q3/13A % chg
Q3/14E
18,413
-17.0% 16,529
2,477
49.6% 3,989
(272) -126.8%
(239)
20,618
-7.5% 20,278
Var. per
share
(0.060)
(0.014)
0.015
(0.059)
8,916
1,539
3,596
165
14,216
8,109
10.0% 8,359
1,289
19.4% 1,385
2,238
60.7% 3,112
(304) -154.3%
11,332
25.5% 12,856
0.027
0.007
0.023
0.008
0.066
4,851
579
5,430
$0.263
9,286
(868)
8,418
$0.414
-47.8% 7,422
na
- na
-35.5% 7,422
-36.6% $0.358
(0.124)
(0.096)
(0.096)
183
Exhibit 7 – MCAN Forecast Summary
Forecast Summary
2012A
2013A
2014E
2015E
2016E
Estimates - Fully Diluted
EPS
Adj. EPS
Book Value per Share
Recurring Dividend Per Share
Total Dividend Per Share
$1.22
$1.42
$9.49
$1.09
$1.42
$1.54
$1.43
$10.28
$1.12
$1.15
$1.22
$1.27
$10.68
$1.12
$1.12
$1.46
$1.46
$11.04
$1.12
$1.22
$1.55
$1.55
$11.43
$1.12
$1.27
Valuation
P/E
Adj. P/E
Price/Book Value
Reccurring Dividend Yield
Total Dividend Yield
10.4x
9.7x
1.5x
7.9%
10.2%
9.5x
9.8x
1.3x
8.1%
8.3%
11.9x
11.4x
1.4x
7.7%
7.7%
9.9x
9.9x
1.3x
7.7%
8.4%
9.3x
9.3x
1.3x
7.7%
8.7%
739,812
16.3%
60 bp
936,947
21.7%
5.7x
91.0%
861,613
16.5%
62 bp
592,416
19.8%
5.3x
87.1%
0.6%
3.4%
-0.2%
12.8%
1.6%
3.5%
-0.3%
15.6%
Balance Sheet and Leverage
Corporate Loan Portfolio (net; $000s)
YOY Loan Portfolio Growth
CMB Mortgages ($000s)
MBS Mortgages ($000s)
CET 1 Capital Ratio (all-in)
Assets to Capital Multiple
Net Debt/EV
Profitability Metrics
Net Interest Margin (overall)
Net Interest Margin (corporate)
Net Interest Margin (securitized)
ROE
Current Loan Portfolio Metrics
Weighted Average Interest Rate - Corporate Assets
Weighted Average Interest Rate - Securitized Assets
939,718 1,036,777 1,143,912
9.1%
10.3%
10.3%
55 bp
55 bp
55 bp
14,367
618,318
990,425 1,262,227
21.6%
21.3%
21.1%
5.1x
5.4x
5.7x
82.8%
85.7%
87.3%
2.0%
3.2%
0.1%
11.6%
2.2%
3.2%
0.8%
13.5%
2.0%
3.2%
0.8%
13.8%
5.5%
3.0%
184
Company Comment
NorthWest Healthcare Properties REIT
(NWH.UN-T C$9.79)
Q3 Glance: In Line; Occupancy Takes Step Back
Target 1-Yr:
C$10.70
ROR 1-Yr:
17.5%
Key Risks to Target: Speculative Office Supply, Rising Interest Rates, Liquidity, Adverse Provincial Regulatory Refor m
CDPU (NTM)
CDPU (Curr.)
Yield (Curr.)
$0.80
$0.80
8.2%
Event
■ Q3/14 FFOPU was $0.25 vs. $0.25 YOY, in line with our and
consensus $0.25 (range = $0.25-$0.26). SP NOI was -0.8% YOY
(Q2/14 was +0.8% YOY).
Implications
■ Occupancy takes a step back. NOI was below our expectations on
lower-than-expected revenue and higher-than-expected operating costs
(both likely occupancy driven), which offset lower G&A and interest
costs; see Exhibit 1. The 30bp of QOQ occupancy gains in Q2
disappeared as occupancy fell 30bp to 91.8% (vs. our 92.4% est.),
mostly driven by a 200bp and 80bp declines in Quebec and Atlantic
Canada to 94.9% and 93.7%, respectively. Management expects to meet
its renewal targets for 2014, but fall short on new leasing (having
achieved 97% of renewal target YTD vs. only 49% for new leasing); we
expect an update on managements 93% target occupancy on the call.
NWH signed 9,900sf (+20bp) of new leasing commencing post Q3.
Leasing spreads on renewals turned negative (-6.2%) vs. +6.8% in
Q2/14, due to one core medical renewal (+1.2% ex. that renewal). Avg.
in-place net rent was flat at $16.39/sf (-0.1% QOQ).
■ IFRS cap rate flat QOQ at 6.8% vs. our 6.8% NAV cap rate and
7.2% implied cap Leverage was relatively unchanged QOQ, with debtto-GBV +20bp to 55.1% and disclosed net-debt/EBITDA +0.2x to 9.0x,
while interest coverage was +0.1x to ~2.4x.
Recommendation
■ Full update post c/c on Mon., Nov. 10th at 11:00am. ET. #800-499-4035.
Qtly FFOPU (FD)
2013A
2014E
2015E
2016E
Q1
$0.25 A
$0.24 A
$0.25
$0.26
(FY-Dec.)
Funds from Ops/Unit
Price/AFFO
EV/EBITDA
EBITDA (M)
EBITDA Margin
EBITDA/Int. Exp
Q2
$0.25 A
$0.25 A
$0.25
$0.26
Q3
$0.25 A
$0.25
$0.25
$0.26
Q4
$0.25 A
$0.26
$0.26
$0.26
Year
$1.01
$1.00
$1.01
$1.04
P/FFO
10.3x
9.8x
9.6x
9.5x
2012A
$0.99
$0.80
15.6x
17.5x
$70
52.1%
2.6x
2013A
$1.01
$0.80
13.0x
15.1x
$78
51.7%
2.5x
2014E
$1.00
$0.81
12.0x
14.8x
$79
52.1%
2.6x
2015E
$1.01
$0.82
11.9x
13.9x
$85
55.6%
2.6x
2016E
$1.04
$0.84
11.6x
13.1x
$90
58.0%
2.7x
BVPU14E: $11.79
ROE14E: 6.55%
NAVPU:
P/NAV:
$11.25
0.87x
Capitalization
Market Cap (M)
Units O/S (M)
Float O/S (M)
$486
$688
$1,174
50
37
185
Q3/14 Initial Glance: In Line; Occupancy Takes Step Back
Exhibit 1 - NWH Q3/14 Results Summary
All in $000s, except for per unit figures
Q3/14A
Scotia
Q3/14E
QOQ
Q2/14A
Actual
vs. Scotia
A vs. E
FFOPU
Rental Revenue - Cash Basis
$32,500
$32,864
$32,691
-$364
-$0.007
Parking Revenue
$3,780
$3,793
$4,020
-$13
$686
$625
$545
$61
$0
$0
$0
$0
$104
$125
$118
-$21
Other Revenue
Lease Termination Revenue
Straight Line Rent
Management Fee Revenue
$33
$50
$37
-$17
Total Commercial Property Revenue
$37,103
$37,457
$37,411
-$354
-$0.007
Property Operating Costs
-$17,109
-$16,899
-$16,857
-$210
-$0.004
$0
$0
$0
$0
$19,994
$20,557
$20,554
-$563
$0
$334
$0
-$334
$19,994
$20,891
$20,554
-$897
-$932
-$1,030
-$1,254
$98
EBITDA
$19,062
$19,861
$19,300
-$799
-$0.016
Net Interest Expense*
-$7,250
-$7,718
-$7,349
$468
$0.009
-$533
-$534
-$527
$1
Less: Non-Recurring Lease Termination Income
Recurring Commercial Property NOI
Commercial Property NOI - Acquisitions
Total Commercial Property NOI
Trust Expenses
Convertible debenture interest expense
Amort of MTM Debt Adj. and Deferred Financing Costs
$66
$65
$127
$1
Internal Leasing Costs
$365
$450
$450
-$85
FFO - Recurring**
$11,710
$12,125
$12,001
-$415
FFOPU - diluted
$0.246
$0.250
$0.252
-$0.004
Straight-Line Rent
-$104
-$125
-$118
$21
Amortization of Debt Mark-to-Market
-$172
-$215
-$215
$43
-$1,711
-$1,762
-$1,715
$51
Leasing Reserve (Scotia Reserve)
-$285
-$294
-$286
$8
AFFO
$9,438
$9,730
$9,667
-$292
AFFOPU - diluted
$0.19
$0.19
$0.19
-$0.002
Physical Occupancy (quarter-end)
91.8%
92.4%
92.1%
-0.6%
Average In-Place Net Rent (per sq.ft.)
$16.39
n/a
$16.41
Recurring same-property NOI (YOY)
-0.8%
n/a
0.1%
Leasing Spread Achieved on Renewals***
1.2%
n/a
6.8%
Non-Revenue Enhancing Capex (Scotia Reserve)
-$0.011
-$0.018
Operating Metrics
Implied IFRS cap rate
6.80%
6.79%
6.80%
*Net interest costs excludes $38,000 of repayment costs.
**Excludes a $36,000 gain on disposal and $17,000 of FV adjustments on deferred unit plan liability.
***Q3/14 Excludes impact of one core renewal done at a discount to in-place rent; disclosed was -6.2%.
n/a
186
Company Comment
(RON-T C$13.77)
RONA Inc.
Q3/14 Preview
Valuation: 13.0x P/E on 2015E
Sami Abboud, MBA - (514) 350-7737
Target 1-Yr:
C$13.00
ROR 1-Yr:
-4.6%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.14
$0.14
1.0%
Key Risks to Target: Housing recovery stalls; identifying and integrating potential acquisitions .
Event
■ RONA is scheduled to release Q3/14 results on Tuesday, November 11,
2014. The company will hold a conference call to discuss results on the
same day at 3:00 pm ET. The dial-in number is 1-866-223-7781.
Implications
■ Q3 Preview. We expect EPS of $0.36 in Q3/14 versus consensus of
$0.34. We expect results to reflect a continued challenging retail
environment and some inflation in lumber and building products.
■ We expect same-store sales growth of less than 1%, which should
translate into net sales of roughly $1.18 billion. Our margin assumption
reflects the company's efforts to improve efficiencies and reduce
SG&A, offset by a heightened competitive and challenging retail
environment. Accordingly, we expect EBITDA to reach $84.4 million
or 7.2% of sales compared to $70.7 million or 6.0% last year.
■ Built-in growth. While we expect earnings growth to be supported by
the company's recovery plan, we continue to believe an improvement in
housing starts, particularly in Quebec, will be required to support
growth (SSSG) and further enhanced earnings power into 2015.
■ Corporate update. We will look for an update regarding potential
plans to export the Reno-Depot concept outside Quebec, as well as
whether management plans to remain active with its share buyback.
Recommendation
■ We continue to rate RONA shares a Sector Perform. To value RONA
shares we apply a 13x P/E multiple on our 2015 EPS estimate of $0.98.
Qtly Adj. EPS (FD)
2012A
2013A
2014E
2015E
Q1
$-0.10 A
$-0.15 A
$-0.12 A
$-0.06
(FY-Dec.)
Adj EPS
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
Adjusted EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q2
$0.36 A
$0.28 A
$0.35 A
$0.44
Q3
$0.27 A
$0.25 A
$0.36
$0.44
Q4
$0.05 A
$0.04 A
$0.12
$0.16
Year
$0.58
$0.41
$0.71
$0.98
P/E
18.4x
32.3x
19.5x
14.0x
2011A
$0.66
$1.25
14.7x
1.0x
$4,805
$269
2.4x
10.8x
2012A
$0.58
$1.15
18.4x
1.0x
$4,884
$229
1.9x
11.2x
2013A
$0.41
$0.89
32.3x
1.0x
$4,192
$185
2.5x
15.3x
2014E
$0.71
$1.38
19.5x
0.7x
$4,089
$230
2.4x
17.7x
2015E
$0.98
$1.68
14.0x
0.5x
$4,205
$264
2.5x
47.2x
BVPS14E: $14.23
ROE14E: 5.05%
Capitalization
Market Cap (M)
Float Value (M)
TSX Weight
Shares O/S (M)
Float O/S (M)
$1,672
$1,643
0.1%
121
119
187
RONA Q3/14 Preview
■ RONA is scheduled to release Q3/2014 results on Tuesday, November 11, 2014. The
company will hold a conference call to discuss results on the same day at 3:00 pm ET. The
dial-in number is 1-866-223-7781.
■ Q3 Preview. We are looking for EPS of $0.36 in Q3/14, which compares to consensus EPS
of $0.34. We expect results to reflect a continued challenging retail environment and some
inflation in lumber and building products.
■ We expect same-store sales growth of less than 1%, which should translate into net sales of
roughly $1.18 billion. Our margin assumption reflects the company’s efforts to improve
efficiencies and reduce SG&A, offset by a heightened competitive and challenging retail
environment. Accordingly, we expect EBITDA to reach $84.4 million or 7.2% of sales
compared to $70.7 million or 6.0% last year.
■ We will also look for an update of the company’s potential plans to export the Reno-Depot
concept outside of Quebec and whether management plans to remain active with it share
buyback.
■ Active share buyback to continue? We note that since initiating its NCIB in November
2013, we estimate that the company has purchased over 6.0 million shares at a value of
roughly $77 million. This represents roughly 70% of the company’s NCIB.
o We estimate roughly 2.0 million shares were bought back and cancelled since
the company reported its Q2/13 results. Recall that in November 2013, the
company announced a share buyback program (NCIB) and could acquire up to
8.6 million shares (10% of public float or roughly 7% of shares outstanding).
■ SSSG key to future earnings power. While Rona has been benefiting from its cost savings
effort, we continue to believe the full realization of the cost initiatives is contingent on
improved same-store sales growth.
■ Housing
outlook
remains
challenging. Exhibit 1 – Canadian Housing Statistics
Furthermore, we believe we need to see an
2012
2013
2014F
improvement in Canadian housing resales and new Housing Starts
199,629
186,665
189,000
(1.0%)
(6.5%)
1.3%
construction activity to drive same-store sales
457,804
476,100
growth into positive territory. This should translate Housing Resales 454,003
(1.2%)
0.8%
4.0%
into improved same-store sales growth (SSSG) and
drive comps into positive territory (see Exhibit 1).
Source: CMHC, CREA, Statistics Canada.
2015F
189,500
0.3%
482,500
1.3%
2016F
187,100
(1.3%)
477,200
(1.1%)
Valuation & Recommendation
■ Sector Perform rating. We rate RONA shares Sector Perform with a target price of $13.00.
To continue to value RONA shares using a 13x P/E multiple on our 2015 EPS estimate of
$0.98.
188
Company Comment
(SAP-T C$32.36)
Saputo Inc.
patricia.baker@scotiabank.com
Target 1-Yr:
Jean Marc Ayas - (514) 287-3626
jeanmarc.ayas@scotiabank.com
C$37.50
ROR 1-Yr:
17.5%
Valuation: 21x F16E EPS
Key Risks to Target: Drop in U.S. cheese prices; rising C$
Event
■ Saputo reported Q2/F15 EPS of $0.39, +14.7% YOY, in line with
consensus and below $0.41 forecast. Revenues +21.1% YOY to $2.7B,
with growth in all sectors, while EBITDA +17.4% to $282.2M, with the
margin dropping 33 bps to 10.5%.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.52
$0.46
1.4%
Pertinent Revisions
EPS15E
New
$1.61
Old
$1.63
Implications
■ In Canada Sector, revenues +5.6% YOY to $971.7M due to Scotsburn
acquisition and +selling prices. EBITDA -8.5% YOY to $106.8M due
to rise in opex and +ingredient costs. Margin down 169 bps to 11.0%.
■ In U.S. Sector, revenues jumped 24.7% YOY to $1.35B, due to +selling
prices and +cheese volumes. EBITDA +26.6% YOY to $136.6M due to
+volumes at Dairy Foods USA and favourable market factors.
■ International Sector revenues +66.3% YOY with the inclusion of
WCB results and +selling prices. EBITDA grew 144.9% YOY, leading
to a 324 bps jump in the margin to 10.1%.
■ SAP reconsidered its closure of Glenwood, AB, facility but announced
it will cease ops in Sep 2015 at its Trois-Rivières, QC, facility.
■ SAP renewed NCIB to purchase ~19.5M shares, or 5% of shares
issued.
Recommendation
■ Our estimate for F2015 EPS decreases slightly to $1.61, while our
rating and target price remain the same. With a growing global
platform, SAP is well positioned to seek further accretive M&A
opportunities and to continue returning cash to shareholders.
Qtly EPS (FD)
2013A
2014A
2015E
2016E
Q1
$0.30 A
$0.34 A
$0.37 A
(FY-Mar.)
Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q2
$0.32 A
$0.34 A
$0.39 A
Q3
$0.33 A
$0.37 A
$0.44
Q4
$0.32 A
$0.39 A
$0.41
Year
$1.27
$1.44
$1.61
$1.76
P/E
20.3x
19.3x
20.1x
18.4x
2012A
$1.23
$1.29
17.6x
0.9x
$6,930
$831
1.6x
33.7x
2013A
$1.27
$1.62
20.3x
0.7x
$7,298
$861
1.2x
25.2x
2014A
$1.44
$1.67
19.3x
0.7x
$9,233
$1,020
1.1x
14.8x
2015E
$1.61
$2.13
20.1x
0.7x
$10,536
$1,154
1.4x
15.5x
2016E
$1.76
$2.54
18.4x
0.7x
$10,839
$1,219
1.2x
18.1x
BVPS15E: $8.08
ROE15E: 21.04%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$12,662
$2,012
$14,738
391
256
189
Intraday Flash
(SJ-T C$32.20)
Stella-Jones Inc.
Target 1-Yr:
C$32.00
ROR 1-Yr:
0.2%
Valuation: 10.5x EV/EBITDA our 2016E
Key Risks to Target: Successful integration of acquisitions; Railway Tie and Pole Demand
Div. (NTM)
Div. (Curr.)
$0.28
$0.28
Yield (Curr.)
0.9%
Event
■ SJ reported Q3 results that were in line with expectations.
Pertinent Revisions
Implications
■ In Q3, the company reported robust organic sales growth (+14%) and
benefited from a weaker C$ (+3%), but results were, again, negatively
impacted by higher YOY raw material costs (i.e., untreated ties).
■ Tie sales were up 17% organically, with "a little over half" from pricing
as SJ has "initiated certain selling price adjustments" that should
continue through the remainder of 2014 - we forecast 10% growth
(from pricing) through 1H/15. Management also indicated it was seeing
some increased tie supply and relatively stable pricing.
■ Pole sales were up 3.5% organically - a deceleration from Q2 - but
largely attributable to slightly lower sales of transmission poles (higher
$ value product), which is expected to come back in coming quarters.
The company also indicated organic sales were somewhat "understated"
as the acquired assets saw significant growth in recent quarters.
■ We have made relatively modest changes to our estimates. Our Sector
Perform rating and $32/share target price are unchanged.
EBITDA14E
EBITDA15E
EBITDA16E
New
$180
$226
$242
Old
$178
$222
$237
Recommendation
■ We continue to believe SJ is attractively positioned for growth in the rail
tie and utility pole markets. We also see upside potential in the shares and
dividend assuming the company is able to reach the high end of its threeto five-year target ($1.5 billion in revenues). However, we see a fairly
balanced risk/reward profile at current levels. SJ shares are rated SP.
Qtly EBITDA (M)
2013A
2014E
2015E
2016E
Q1
Q2
Q3
Q4
Year
$34 A
$39 A
$47
$52
$45 A
$46 A
$65
$70
$43 A
$51 A
$62
$67
$34 A
$43
$51
$54
$155
$180
$226
$242
EV /
EBITDA
14.5x
14.5x
11.2x
10.0x
2012A
$1.13
$120
16.8%
$0.21
$0.44
$0.16
13.7%
2.29x
2013A
$1.34
$155
16.0%
$1.12
$1.52
$0.20
14.9%
2.14x
2014E
$1.54
$180
14.2%
$1.08
$1.36
$0.28
18.2%
2.12x
2015E
$1.99
$226
16.3%
$1.50
$1.79
$0.40
20.1%
1.38x
2016E
$2.19
$242
16.6%
$2.11
$2.35
$0.56
25.6%
0.84x
(FY-Dec.)
Earnings/Share
EBITDA (M)
EBITDA Margin
Cash Flow/Share
Dividends/Share
Dividend Payout
Net Debt/EBITDA
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$2,211
$407
$2,618
69
42
190
In-Line Quarter
■ SJ’s Q3 results came relatively in line with expectations:
sales/EBITDA came in at $357.3 million/$51.3 million vs. Exhibit 1 – Results in Line
consensus of $353.0 million/$51.0 million and our estimate
of $362.0 million/$51.4 million (see Exhibit 1).
Q3/14A
Actuals
Scotiabank
Consensus
$362.0
$353.0
Ties: Strong Volume Growth + Pricing Gains
■ Excluding FX gains, the contribution from acquisitions, and Revenue
$357.3
the impact of a Class 1 customer transitioning to a “black tie”
program in Q3/13, sales were up 17% – with “a little over
Railway Ties
$148.8
half” coming from pricing and the remainder from higher
Utility
Poles
127.6
volumes (demand + market share gains + “pulling” from
Industrial Products
29.7
1H/14).
Residential Lumber
$43.5
 Given higher untreated tie costs, the company
has “initiated certain selling price adjustments”
$51.3
that began at the end of Q2 and should EBITDA
Margin %
14.4%
continue through the remainder of 2014 – we
forecast 10% sales growth (from pricing)
EPS
$0.43
through 1H/15.
 The company also indicated it was Source: Company reports; Scotiabank GBM estimates.
seeing some increased tie supply and
relatively stable pricing.
 The selling price adjustments + additional integration synergies/network
efficiencies (e.g., facility rationalization in Alabama) should have a positive
impact on margins through 2015 – we are forecasting a 210 bp improvement
in consolidated EBITDA margin in 2015.
■ While sales at the acquired Boatright assets were below expectations in the quarter (at $12.0
million), management indicated the business was undercapitalized at the time of purchase (in
terms of the amount of ties) and is playing a bit of “catch-up”. In fact, management indicated
that they were moving volumes into the facility (as opposed to out of the facility) – the
company closed a small “off-line” (not on rail line) facility in Alabama in the quarter, which
resulted in a small asset impairment charge.
$158.2
138.0
17.7
$0.0
$51.4
14.2%
$51.0
14.4%
$0.46
$0.46
Utility Poles: Filling and Expanding Capacity
Available Under Credit Facility
Q4/16e
Q3/16e
Q2/16e
Q1/16e
Q4/15e
Q3/15e
Q2/15e
Q1/15e
At the end of Q3, the company had $411.2 million of net
debt (2.4x EBITDA), with $84.1 million available (of $450
million) on its credit facility. We expect debt levels to
decline further (forecasting approximately $133 million of
FCF through the end of 2015) outside an acquisition (see
Exhibit 2).
Q4/14e
■
Q3/14e
Leverage to Decline
Q2/14a
■ Utility pole sales were up 3.5% organically in the quarter – a
deceleration from Q2 – but largely attributable to slightly Exhibit 2 – Debt to Decline
lower sales of transmission poles (a higher $ value product),
which is expected to come back in coming quarters. The
$303
company also indicated that organic sales were somewhat
$261
“understated” as the acquired assets (i.e., PWP) saw
$216
$200
significant growth in recent quarters – the PWP assets went
$178
$164
from running at approximately 60% capacity utilization at
$127
$124
the time of the acquisition to close to 100% now, according
$98
$81
to management.
$58
■ The company also said it was experiencing some capacity
constraints on the west coast and plans to expand certain
facilities in 2015, investing approximately $10 million.
191
Maintain Target and Rating
■ We have made relatively modest changes to our estimates. Our Sector Perform rating and
$32/share target price are unchanged.
192
Intraday Flash
(STB-T C$7.11)
(STB-Q US$6.19)
A Good Q1
Target 1-Yr:
C$8.00
ROR 1-Yr:
20.4%
Valuation: 9.0x EV/EBITDAR F2016E
Key Risks to Target: Credit market conditions/ability to access capital markets.
Event
■ STB reported sales/EBITDAR of $88.5 million/-$1.6 million vs. our
estimate of $83.2 million/-$2.5 million.
Implications
■ Q1 is seasonally weak. That said, results were modestly ahead of
expectations primarily on stronger-than-expected revenues. Sales were
up 21% YOY (vs. our 14%) on better pricing, increased summer-related
extracurricular, charter and ancillary revenues, as well as additional
operating days in September.
■ We are forecasting 13% growth in 2015. We also continue to believe
the company is well positioned for growth potentially in excess of its
booked revenues given the "right" acquisition opportunities and an
accelerated ramp-up of its non-asset businesses (i.e., SchoolWheels
Direct, SafeStop, and TSC). The weaker C$ and lower fuel prices
should also provide a noticeable tailwind for the company in F2015.
■ We have made modest changes to our estimates. Our $8.00 one-year
target price and Sector Perform rating are unchanged.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
C$0.56
C$0.56
7.9%
Pertinent Revisions
EBITDAR15E
EBITDAR16E
New
US$102
US$112
Old
US$101
US$111
Recommendation
■ Given what we see as a sustainable dividend and the current 7.9% yield,
we believe the shares are attractive for income-oriented investors.
Qtly EBITDAR (M)
2013A
2014A
2015E
2016E
Q1
Q2
Q3
Q4
Year
$-4 A
$-2 A
$-2 A
$-2
$26 A
$28 A
$33
$36
$26 A
$26 A
$35
$38
$30 A
$33 A
$36
$39
$78
$85
$102
$112
EV /
EBITDAR
9.3x
9.6x
7.3x
6.8x
2012A
$0.52
$0.56
107.6%
$66
$55
8.4%
3.4x
3.7x
2013A
$0.63
$0.56
88.9%
$78
$63
9.2%
3.4x
4.6x
2014A
$0.60
$0.56
89.1%
$85
$66
8.5%
3.9x
4.1x
2015E
$0.66
$0.56
76.7%
$102
$71
8.9%
2.9x
0.0x
2016E
$0.65
$0.56
76.4%
$112
$75
8.9%
n.m.
0.0x
(FY-Jun.)
Dividends/Share
Payout Ratio
EBITDAR (M)
EBITDA (M)
Yield
Debt/EBITDA
EBITDA/Int. Exp
BVPS15E: $1.73
ROE15E: 3.93%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
C$589
$263
C$888
83
83
Intraday Flash
(X-T C$52.98)
TMX Group Ltd.
phil.hardie@scotiabank.com
Target 1-Yr:
Michael Lee, CPA, CA - (416) 863-7826
Beam Ukarapong, MBA - (416) 945-4528
C$60.00
ROR 1-Yr:
16.3%
Valuation: 10.5x EV/EBITDA on 2015E EBITDA
Key Risks to Target: Declining revenue from lost market share and pricing pressure, Lack of growth from derivatives platform
Div. (NTM)
Div. (Curr.)
$1.60
$1.60
Yield (Curr.)
3.0%
Event
Pertinent Revisions
■ TMX reported Q3/14 core cash EPS of $0.86 (ex-items), below
consensus of $0.97 and our estimate of $0.91.
Implications
■ In his initial address to analysts and investors, Mr. Eccleston articulated
TMX's strategic focus to leverage its portfolio of talent and capabilities
to create greater value than the sum of the parts. We view this as the
next logical step and acceleration of TMX's recent progress in
transforming into a fully integrated multi-asset class exchange group.
Our initial perception is that Mr. Eccleston aims to manage the
exchange as a (applied technology) growth company, rather than simply
a financial utility company.
■ Mr. Eccleston highlighted three key reasons he is bullish on TMX
group's prospects: its demonstrated ability to innovate and move
nimbly, strong positioning to execute growth strategy, and constructive
dialogue with participants and regulators.
■ We estimate TMX currently trades at an unusually wide 27% discount
(EV/EBITDA) to its peers. We attribute this to the recent shift in market
conditions and key energy sector weakness but expect the discount to
revert back towards the mean within the next twelve months.
New
Old
CEPS14E
$3.86
$3.91
New Valuation:
Old Valuation:
Recommendation
■ Maintaining Sector Perform rating and $60.00 target.
Qtly CEPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.78 A
$1.05 A
$1.08
$1.23
(FY-Dec.)
Cash Earnings/Share
Earnings/Share
Price/Cash Earnings
EV/EBITDA
Trading Revenue (M)
Data Revenue (M)
Listing Revenue (M)
Q2
$0.89 A
$1.01 A
$1.20
$1.36
Q3
$0.75 A
$0.86 A
$1.13
$1.26
Q4
$0.96 A
$0.94
$1.19
$1.31
Year
$3.39
$3.86
$4.60
$5.16
P/Cash E
15.0x
13.7x
11.5x
10.3x
2012A
2013A
$3.39
$2.29
15.0x
11.3x
$303.10
$181.5
$189.30
2014E
$3.86
$1.91
13.7x
10.9x
$300.36
$189.7
$203.18
2015E
$4.60
$4.08
11.5x
9.4x
$323.78
$201.6
$236.65
2016E
$5.16
$4.64
10.3x
8.6x
$336.31
$213.0
$249.63
n.m.
10.4x
n.m.
n.m.
n.m.
BVPS14E: $54.64
ROE14E: 6.11%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$2,865
$956
$3,822
54
14
Scotia Capital Inc. or an affiliate thereof owns or controls an equity interest in TMX Group Limited and in excess of 1%
of the issued and outstanding equity securities thereof. In addition, an affiliate of Scotia Capital Inc. is a lender to TMX
Group Limited under its credit facilities. As such, Scotia Capital Inc. may be considered to have an economic interest in
TMX Group Limited. For Reg AC Certification and important disclosures see Appendix A of this report. Analysts
employed by non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S.
Valuation & Outlook
Jul-14
Oct-14
Jan-14
Apr-14
Jul-13
LTM Average: 12.4
Oct-13
Jan-13
Historical Average: 17
Apr-13
Jul-12
Oct-12
Jan-12
Apr-12
Jul-11
Oct-11
Jan-11
Apr-11
Jul-10
Oct-10
Jan-10
Apr-10
Oct-09
S&P/TSX 60 VIX Index
■ Strategic focus is to leverage portfolio of talent and capabilities to create greater value
than the sum of the parts. This week TMX welcomed its new CEO, Lou Eccleston, to the
organization. In his initial address to analysts and investors, Mr. Eccleston articulated TMX’s
strategic focus to leverage its portfolio of talent and capabilities to create greater value than
the sum of the parts. We view this as the next logical step and acceleration of TMX’s recent
progress in transforming into a fully integrated multi-asset class exchange group. Our initial
perception is that Mr. Eccleston aims to manage the exchange as a (applied technology)
growth company, rather than simply a financial utility company. We believe that diversified
revenue sources, robust free cash flow, and a high degree of operating leverage warrant
taking a closer look at TMX.
■ CEO bullish on TMX given its demonstrated ability to innovate and move nimbly and
strong positioning to execute growth strategy. Mr. Eccleston highlighted three key reasons
he is bullish on TMX group’s prospects: its demonstrated ability to innovate and move
nimbly, strong positioning to execute growth strategy, and constructive dialogue with
participants and regulators. Mr. Eccleston also elaborated on his background and how that
experience can be levered across all parts of TMX’s business line. Initial investor perception
has focused on his expertise in the information services and financial technology sectors.
■ Softer than expected top line drives miss, but positive operating leverage supports 13%
YOY EPS growth. Q3 revenues fell a bit short of expectations, rising just 3% YOY, but
solid cost containment and reduced financing costs supported YOY EPS growth of 13%. The
TMX cost structure primarily consists of fixed costs such as salaries and technology
operating expenses, with little in the way of variable costs. This results in a high degree of
operating leverage. The high degree of operating leverage depresses profitability in a weak
revenue environment but also results in significant earnings growth as markets rebound and
trading and financing activity increases.
■ Spike in volatility and recent weakness in energy sector
expected to cloud near term outlook. Volatility is a bit of a Exhibit 1 – S&P/TSX 60 VIX Index
S&P/TSX 60 VIX Index
double-edged sword for TMX. Periods of low volatility tend
40
to create a more favourable environment for equity issuance,
but weigh on trading activity. We have seen this trend play
35
out for over the last few quarters with a trend of rising listing
30
fees and lower trading volumes. The recent spike in volatility
has quickly dampened the number of recent financings but
25
likely supported trading volumes across a range of asset
20
classes (see Exhibit 1). October trading statistics are
encouraging with consolidated volumes (TSX, TSX-V and
15
Alpha) increasing by just over 12% for the month of
10
October. The recent weakness across the energy sector is
5
likely to weigh on TMX’s energy trading business as well as
reducing potential financing activity in related sectors. That
0
said, TMX has developed an increasingly diversified multiasset class platform which includes both equity and fixed
income derivatives, which are likely to see higher volumes.
Source: Bloomberg, Scotiabank GBM.
■ TMX continues to roll out and introduce new initiatives
that include proposed changes in addressing investor
concerns with predatory high frequency traders. Since the beginning of the year, TMX
has announced a number of new initiatives that include: TSX Private Market, Santiago
Venture Exchange and a new office in Singapore. In October, TMX released a discussion
paper outlining a number of innovative proposals the exchange is considering for 2015 to
address three key challenges it sees impacting Canada’s equity trading business:
1) migration of Canadian order flow to the U.S.,
2) technology-driven markets are not optimized to serve all, and
3) rising market complexity.
■ The proposed changes include introducing a “speed bump,” minimum posted order size and
an inverted maker/taker fee model for Alpha by June of 2015. For Q4/15 TMX is proposing
to offer a new “long life” order type on TSX and TSX Venture. These long life orders are
committed for a few seconds and in return will receive priority over order of the same price
that are not subject to the same minimum resting time. In addressing market complexity and
fragmentation, TMX is proposing the shuttering of TMX Select and decommissioning of
Alpha Intraspread in mid-2015 and also aims to harmonize some functionalities across TSX,
TSX-V and Alpha.
■ Timing of new initiative is in response to a change in the regulatory environment. We
see a number of these proposed changes geared towards addressing investors’ concerns
surrounding predatory high frequency traders. It also appears to be an effective “blunting
strategy” ahead of the potential launch of a new rival (Aequitas) that appears to be
positioning its value proposition along similar lines.
■ Lots of risk priced in with TMX trading at what appears to be an unusually steep
discount to its peers. Following the Maple transaction we believe TMX Group re-emerged
with enhanced competitive positioning, broadened capabilities, increasingly diversified
revenue sources, and strong backers. On an EV/EBITDA (NTM) basis, we estimate that
TMX has traded at an average discount of roughly 6% to its peers (see Exhibits 2 and 3).
That said, we estimate the discount has widened substantially over the last quarter. Based on
November 7, 2014 intraday price, we estimate the discount stands at 27.3%, well above the
post-Maple average and the last twelve month average discount of 10.7%. We attribute the
widened discount to recent shift in market conditions and key energy sector weakness but
expect the discount to revert back towards the mean within the next twelve months.
Exhibit 2 – Historical EV/EBITDA
(NTM) TMX vs. Exchange Peer
Historical EV/EBITDA (NTM) Multiples
Exhibit 3 – TMX Relative EV/EBITDA (NTM) Discount/Premium to Peer Group
TMX Relative EV/EBITDA (NTM) Discount to Peer Group
20%
Relative EV/EBITDA (NTM) Discount/Premium
25
TMX Group
Exchange Peer Group
Post-Maple
Acquisition
Proposed Maple transaction
announced
15
10
5
0
10%
5%
0%
(5)%
(10)%
(15)%
Post-Maple
Acquisition Average: -5.8%
(20)%
LTM Average: -10.7%
(25)%
* Exchange peer group includes: ASX, CME, DB1, HK Exchange, LSE, NDAQ, SGX.
* Exchange peer group includes: ASX, CME, DB1, HK Exchange, LSE, NDAQ, SGX.
Source: Bloomberg.
Source: Bloomberg.
Source: Bloomberg, Scotiabank GBM estimates.
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Mar-14
Jan-14
Feb-14
Dec-13
Oct-13
Nov-13
Sep-13
Jul-13
Aug-13
Jun-13
Apr-13
May-13
Mar-13
Jan-13
Feb-13
Dec-12
Oct-12
Nov-12
Sep-12
Jul-14
Oct-14
Apr-14
Jan-14
Jul-13
Oct-13
Apr-13
Jul-12
Oct-12
Jan-13
Apr-12
Jan-12
Jul-11
Oct-11
Apr-11
Jan-11
Jul-10
Oct-10
Apr-10
Jan-10
Jul-09
Oct-09
Apr-09
Jan-09
Jul-08
Oct-08
Apr-08
Jan-08
Jul-07
Oct-07
Apr-07
Oct-06
Jan-07
(30)%
Aug-12
EV/EBITDA (NTM)
20
15%
■ Modest revisions to 2014 estimates but maintaining
2015 core cash EPS estimate. With Q3/14 results Exhibit 4 – Earnings Revision Summary
coming below our estimates, we have reduced our
2014E EPS
2015E EPS
2016E EPS
2014 estimates and have made offsetting adjustments
Old
New
Old
New
Old
New
to our forecast for 2015 and 2016. Changes to our
estimates are highlighted in Exhibit 4, and forecast
Cash EPS1 $3.91
$3.86
$4.60
$4.60
$5.16
$5.16
details are summarized in Exhibit 11.
1. Cash EPS excl. non-core items and excl. amortization of intangibles related to acquisitions
■ Maintaining $60.00 target and Sector Perform
rating. With our focus on free cash flow and use of Source: Scotiabank GBM estimates.
excess free cash to de-lever, our primary valuation
metric is EV/EBITDA. This metric also helps facilitate
comparisons across exchange groups given varying Exhibit 5 – TTM Free Cash Flow Yield
10.0%
degrees of financial leverage. Our $60.00 target price
represents a 10.5x multiple of our 2015 estimates. This
represents 13x our 2015E cash EPS. Strong free cash
8.0%
flow, diverse revenue source and a high degree of
operating leverage position TMX stock as an attractive
6.0%
play on a capital markets recovery. That said with an
expected one-year rate of return of 16% and some
4.0%
uncertainty on the horizon, we maintain our Sector
Perform rating.
TTM FCF Yield
Average TTM FCF Yield International Exchanges (4.8%)
Q3/14 Highlights
2.0%
0.0%
■ Q3 results came in below consensus and our
TMX Group
Australian
CME Group
Deutsche
Hong Kong London Stock Nasdaq OMX
Stock
Borse AG Exchange and Exchange
estimate. Q3/14 results came in weaker than expected
Exchange
Clearing
primarily driven by lower than expected top line,
particularly in issuer services, partially offset by better Source: Bloomberg, Company reports, Scotiabank GBM estimates.
than forecast cost containment. While revenues
increased by 3% YOY, core cash EPS increased by
13% as TMX continues to benefit from positive Exhibit 6 - TMX Group Q3/14 Earnings Summary
operating leverage. Reported earnings of $0.73/sh TMX Group
included $0.13/sh of amortization of intangibles related
Quarterly Highlights
to acquisitions, which we view as non-core.
■ Issuer services revenues up 5.4% YOY. Issuer (FYE Dec 31; CAD$millions except EPS; CDN GAAP)
Q3-14A Q2-14A Q3-13A
services revenue of $47.1 million came in lower than
Revenue
our expectation, increasing 5.4% YOY but declining
Issuer Services
$47.1
$58.5
$44.7
just under 20% QOQ. Sequential drop was attributable
Trading, clearing and related
$70.5
$73.3
$72.3
to seasonal factors while the YOY growth was
Information services
$45.9
$47.7
$42.4
Technology services and other
$6.7
$2.8
$5.9
primarily related to an increase in the number and
value of additional financings raised on the Toronto
$170.2
$182.3
$165.3
Stock Exchange, as well as the number and value of Total Revenue
additional financings raised on TSX Venture Operating Income
$63.1
$71.3
$58.9
Exchange.
Operating Margin
37.1%
39.1%
35.6%
■ Trading revenue slightly above expectations. Q3/14 EBITDA
$79.9
$89.0
$76.9
trading revenue of $70.5 million came in slightly better
1
than our estimate of $69.3M, declining 4% QOQ and Core EPS
$0.73
$0.88
$0.61
$0.86
$1.01
$0.75
3% YOY, primarily driven by a decline in the volume Core Cash EPS2
of securities traded on Toronto Stock Exchange and Includes amortization of intangibles related to acquisitions.
Alpha, partially offset by an increase in volume of Excludes amortization of intangibles related to acquisitions
securities traded on TSX Venture Exchange and TMX
Select. Lower overall volumes drove the decline in Source: Company reports; Scotiabank GBM estimates.
cash markets trading revenue. We continue to expect
the cash equity trading environment to remain highly competitive, limiting pricing power and
making market share increasingly difficult to defend even as industry volumes recover.
TMX’s consolidated trading statistics for the month of October 2014, released on November
4, showed YOY growth on the TSX where volumes increased by 19.5% to $7.7B while
volumes on the TSX-V showed a YOY decline of 8% in October, down to $3B.
1
2
Singapore
Exchange
Limited
Change
Q/Q
Y/Y
(19.5%)
(3.8%)
(3.8%)
139.3%
5.4%
(2.5%)
8.3%
13.6%
(6.6%)
3.0%
(11.5%)
(5.2%)
7.1%
4.0%
(10.2%)
3.9%
(17.9%)
(15.6%)
18.0%
13.3%
■ Derivatives trading revenues slightly lower than our Exhibit 7 - Segmented Quarterly Highlights
forecast. Derivatives trading revenues of $24.4 million
came in slightly lower than our expectation of $25.4M,
Q3-14A
remaining relatively flat QOQ but declining 7.2% YOY. Trading Revenue
Cash Markets revenue
$24.4
YOY drop in derivatives revenue was due to a decline in
CDS & CDS Clearing
$10.7
Energy Market revenue
$11.0
revenue from BOX resulting from price reduction
Derivatives
Market
$24.4
implemented in March 2014, partially offset by a 24% Total Trading Revenue
$70.5
increase in BOX trading volumes, increase in trading Relates to cash markets trading revenue including
revenue from MX and positive currency appreciation. revenue from Alpha but excluding CDS clearing.
MX’s trading statistics for the month of October 2014
Q3-14A
showed YOY improvement where volumes improved
Services Revenue
30% to 7M contracts (see Exhibit 8). Following pricing Issuer
Initial (& Additional)
$23.8
changes implemented in March 2014, BOX’s market
Sustaining
$16.6
Other Issuer Services
$6.7
share increased to 2.8%. That said, BOX’s market share Total
Issuer Services Revenue
$47.1
has declined since July 2014 and is currently at 2.0% in
October 2014 (see Exhibit 9).
1
Q2-14A
Q3-13A
$26.4
$11.4
$11.0
$24.5
$73.3
$24.7
$11.3
$10.0
$26.3
$72.3
Q2-14A
Q3-13A
$32.7
$16.4
$9.4
$58.5
$19.9
$16.9
$7.9
$44.7
Change
Q/Q
Y/Y
(7.6%)
(6.1%)
0.0%
(0.4%)
(3.8%)
(1.2%)
(5.3%)
10.0%
(7.2%)
(2.5%)
1
Change
Q/Q
Y/Y
(27.2%)
1.2%
(28.7%)
(19.5%)
19.6%
(1.8%)
(15.2%)
5.4%
Monthly Derivatives Trading Volume
Boston
Options
Marketshare
Exhibit 9 – Monthly BOX Volumes
and
MarketExchange
Share
6.0%
20
4.5%
15
3.0%
10
1.5%
5
0
0.0%
BOX Volumes
Source: OCC; Scotiabank GBM.
Volume
Growth (YOY)
■ Energy trading revenues posted 10% YOY growth. NGX trading revenues of $11 million
came in better than our forecast, increasing 10% YOY but remaining relatively flat QOQ.
YOY increase in energy revenue reflected higher NGX fees that came into effect on July 1,
2014, net recapture of previously deferred revenue and increase in revenue related to Shorcan
Energy Brokers Inc. partially offset by a double digit YOY decline in total energy volumes.
■ Technology services and other revenue posted QOQ and YOY growth. Technology
services revenue of $6.7M came in better than expected, increasing by triple digits QOQ and
by 14% YOY. YOY increase in technology services revenue was the result higher revenue
generated from Razor Risk Technologies Limited partially offset by the discontinuation of
CDS services largely relating to the administration of SEDAR, SEDI and NRD.
BOX Market Share
Market Share
Volume (Millions)
25
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Oct-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Mar-14
Jan-14
Feb-14
Dec-13
Oct-13
Nov-13
Sep-13
Jul-13
Aug-13
Jun-13
Apr-13
May-13
Mar-13
Jan-13
60%
50%
40%
30%
20%
10%
0%
(10)%
(20)%
(30)%
(40)%
Feb-13
8
7
6
5
4
3
2
1
0
(1)
(2)
Dec-12
Volume (millions)
Exchange
Exhibit 8 – Monthly DerivativesMontreal
Trading Volumes
(MX)
Exhibit 10 – Comparative valuation – Global Exchanges
Source: IBES; First Call; Bloomberg; Scotiabank GBM estimates.
Exhibit 11 – TMX Financial Summary
TMX Group
SUMMARY INFORMATION
(CDN $'000s except per share data)
2013A
Q1-14A
Q2-14A
Q3-14A
Q4-14E
Interest Expense
Other income (expense), net
Income Taxes
Non-controlling Interest
Net Income
$189,300
$303,100
$181,500
$26,600
$0
$700,500
$442,800
$257,700
$73,900
$800
$60,900
($200)
$123,900
$46,700
$80,900
$47,300
$7,200
$0
$182,100
$104,800
$77,300
$10,800
($2,600)
$17,400
$100
$46,400
$58,500
$47,100
$73,300
$70,500
$47,700
$45,900
$2,800
$6,700
$0
$0
$182,300 $170,200
$111,000 $107,100
$71,300
$63,100
$13,000
$9,400
($136,000)
$700
($5,900)
$15,300
($45,400)
($300)
($26,400) $39,400
Non-recurring Items
Core Earnings
$27,074
$150,974
$2,711
$49,111
$74,334
$47,934
Core Cash EPS1
Growth (Y/Y)
Growth (Q/Q)
$3.39
$1.05
34.2%
8.6%
EBITDA
$6.10
$2.79
(34.5%)
2014A
Q1-15E
Q2-15E
Q3-15E
Q4-15E
2015E
Q1-16E
Q2-16E
Q3-16E
Q4-16E
2016E
$50,880
$75,663
$48,800
$5,000
$0
$180,343
$111,334
$69,009
$9,246
$700
$16,325
$100
$44,038
$203,180
$55,350
$300,363
$79,889
$189,700
$49,288
$21,700
$5,050
$0
$0
$714,943 $189,578
$434,234 $110,961
$280,709
$78,616
$42,446
$9,045
($137,200)
$700
$43,125
$18,973
($45,500)
$100
$103,438
$51,198
$61,676
$82,557
$50,028
$5,101
$0
$199,361
$111,513
$87,848
$9,145
$700
$21,439
$100
$57,864
$58,531
$80,254
$50,778
$5,152
$0
$194,714
$111,609
$83,105
$9,246
$700
$20,131
$100
$54,328
$61,091
$81,078
$51,540
$5,203
$0
$198,912
$111,527
$87,385
$9,246
$700
$21,287
$100
$57,453
$236,648
$323,778
$201,633
$20,505
$0
$782,565
$445,611
$336,954
$36,681
$2,800
$81,830
$400
$220,844
$59,675
$83,244
$52,055
$5,255
$0
$200,229
$110,013
$90,216
$9,145
$700
$22,078
$100
$59,593
$65,863
$60,937
$63,158
$249,633
$52,836
$5,308
$0
$210,003
$110,407
$99,596
$9,145
$700
$24,611
$100
$66,440
$53,628
$5,361
$0
$203,295
$110,521
$92,774
$9,246
$700
$22,742
$100
$61,387
$54,433
$5,414
$0
$206,708
$110,466
$96,242
$9,246
$700
$23,678
$100
$63,918
$212,952
$21,338
$0
$820,235
$441,407
$378,828
$36,781
$2,800
$93,109
$400
$251,338
$0
$39,400
$0
$44,038
$77,045
$180,483
$0
$51,198
$0
$57,864
$0
$54,328
$0
$57,453
$0
$220,844
$0
$59,593
$0
$66,440
$0
$61,387
$0
$63,918
$0
$251,338
$1.01
13.3%
(3.1%)
$0.86
13.3%
(15.6%)
$0.94
(2.0%)
10.4%
$3.86
13.8%
$1.08
2.9%
14.0%
$1.20
18.3%
11.4%
$1.13
32.6%
(5.4%)
$1.19
26.3%
5.1%
$4.60
19.2%
$1.23
14.4%
3.3%
$1.36
13.2%
10.3%
$1.26
11.5%
(6.9%)
$1.31
10.0%
3.7%
$5.16
12.2%
$1.75
$1.64
$1.47
$1.61
$6.47
$1.77
$1.94
$1.86
$1.93
$7.51
$1.98
$2.15
$2.02
$2.08
$8.23
$0.91
46.3%
11.3%
$0.88
19.2%
(2.5%)
$0.73
18.0%
(17.9%)
$0.81
0.0%
12.2%
$3.33
19.4%
$0.95
4.4%
16.3%
$1.07
21.0%
13.0%
$1.00
38.4%
(6.1%)
$1.06
30.5%
5.8%
$4.08
22.6%
$1.10
16.4%
3.7%
$1.23
14.8%
11.5%
$1.13
13.0%
(7.6%)
$1.18
11.3%
4.1%
$4.64
13.8%
$54.92
54.1
54.1
$55.57
54.1
54.2
$53.77
54.1
54.3
$54.18
54.1
54.3
$54.64
54.1
54.1
$54.64
54.1
54.1
$55.23
54.1
54.1
$55.94
54.1
54.1
$56.59
54.1
54.1
$57.30
54.1
54.1
$57.30
54.1
54.1
$58.05
54.1
54.1
$58.93
54.1
54.1
$59.72
54.1
54.1
$60.55
54.1
54.1
$60.55
54.1
54.1
$1.60
57.2%
$0.40
44.2%
$0.40
45.3%
$0.40
55.2%
$0.40
49.2%
$1.60
48.1%
$0.40
42.3%
$0.40
37.4%
$0.40
39.8%
$0.40
37.7%
$1.60
39.2%
$0.40
36.3%
$0.40
32.6%
$0.40
35.3%
$0.40
33.9%
$1.60
34.4%
36.8%
3.2x
5.1%
33.0%
42.4%
3.0x
6.7%
27.2%
39.1%
2.9x
6.5%
7.6%
37.1%
2.7x
5.4%
28.1%
38.3%
2.7x
5.9%
27.0%
39.3%
2.7x
6.1%
42.7%
41.5%
2.5x
7.0%
27.0%
44.1%
2.2x
7.7%
27.0%
42.7%
2.1x
7.1%
27.0%
43.9%
1.9x
7.4%
27.0%
43.1%
1.9x
7.3%
27.0%
45.1%
1.7x
7.7%
27.0%
47.4%
1.5x
8.4%
27.0%
45.6%
1.4x
7.6%
27.0%
46.6%
1.3x
7.8%
27.0%
46.2%
1.3x
7.9%
27.0%
114.6
(9.1%)
135.5
(14.4%)
33.2
10.6%
38.4
1.6%
28.0
(4.1%)
32.1
(6.0%)
26.3
(3.3%)
29.9
(3.8%)
28.7
1.7%
33.2
2.1%
116.2
1.4%
133.6
(1.4%)
30.7
(7.6%)
35.0
(8.9%)
31.4
12.4%
35.7
11.3%
29.9
13.7%
34.0
13.7%
31.0
7.8%
35.1
5.7%
123.0
5.9%
139.8
4.6%
31.7
3.1%
35.9
2.5%
32.4
3.1%
36.6
2.5%
30.8
3.1%
34.8
2.5%
31.7
2.5%
35.8
1.9%
126.6
3.0%
143.1
2.4%
$43,639
(22.8%)
$2,355.3
7.5%
$14,878
51.2%
$2,494.5
11.3%
$16,984
56.7%
$2,606.6
24.1%
$15,077
70.8%
$2,578.2
16.8%
$10,881
(23.0%)
$2,546.9
8.1%
$57,819
32.5%
$2,546.9
8.1%
$12,000
(19.3%)
$2,597.8
4.1%
$14,040
(17.3%)
$2,649.8
1.7%
$13,305
(11.8%)
$2,702.8
4.8%
$14,369
32.1%
$2,756.8
8.2%
$53,713
(7.1%)
$2,756.8
8.2%
$13,119
9.3%
$2,812.0
8.2%
$15,053
7.2%
$2,868.2
8.2%
$13,603
2.2%
$2,925.6
8.2%
$14,521
1.1%
$2,984.1
8.2%
$56,295
4.8%
$2,984.1
8.2%
66.2
39.9%
17.6
6.3%
16.2
(11.0%)
16.8
6.6%
18.6
18.0%
69.1
4.4%
19.5
10.9%
20.5
27.0%
20.1
19.7%
19.9
7.0%
80.0
15.7%
20.7
6.0%
21.8
6.0%
21.3
6.0%
20.7
4.0%
84.4
5.5%
(4.2%)
11.2%
1.2%
12.2%
9.4%
6.9%
(1.3%)
22.0%
12.7%
(8.4%)
9.4%
(58.8%)
5.4%
(2.5%)
8.3%
13.6%
1.8%
0.7%
2.5%
(37.5%)
7.3%
(0.9%)
4.5%
(18.4%)
18.5%
(1.2%)
4.2%
(29.9%)
5.4%
12.6%
4.9%
82.2%
24.3%
13.8%
10.6%
(23.1%)
20.1%
7.2%
5.6%
4.1%
16.5%
7.8%
6.3%
(5.5%)
7.8%
4.2%
5.6%
4.1%
6.8%
4.2%
5.6%
4.1%
4.1%
3.9%
5.6%
4.1%
3.4%
3.2%
5.6%
4.1%
5.5%
3.9%
5.6%
4.1%
27.0%
43.3%
25.9%
3.8%
25.6%
44.4%
26.0%
4.0%
32.1%
40.2%
26.2%
1.5%
27.7%
41.4%
27.0%
3.9%
28.2%
42.0%
27.1%
2.8%
28.4%
42.0%
26.5%
3.0%
29.2%
42.1%
26.0%
2.7%
30.9%
41.4%
25.1%
2.6%
30.1%
41.2%
26.1%
2.6%
30.7%
40.8%
25.9%
2.6%
30.2%
41.4%
25.8%
2.6%
29.8%
41.6%
26.0%
2.6%
31.4%
40.9%
25.2%
2.5%
30.0%
41.0%
26.4%
2.6%
30.6%
40.5%
26.3%
2.6%
30.4%
41.0%
26.0%
2.6%
$91,500
57.3%
$68,200
42.7%
$22,000
57.0%
$16,600
43.0%
$32,700
66.6%
$16,400
33.4%
$23,800
58.9%
$16,600
41.1%
$25,026
60.0%
$16,655
40.0%
$103,526
61.0%
$66,255
39.0%
$28,200
61.1%
$17,950
38.9%
$34,468
65.7%
$18,007
34.3%
$31,266
63.4%
$18,065
36.6%
$33,767
65.1%
$18,124
34.9%
$127,701
63.9%
$72,147
36.1%
$30,829
61.1%
$19,646
38.9%
$36,956
65.2%
$19,708
34.8%
$31,967
61.8%
$19,770
38.2%
$34,124
63.2%
$19,834
36.8%
$133,875
62.9%
$78,958
37.1%
3.0%
(6.6%)
0.7%
(3.5%)
105.2%
(249.2%)
18.4%
(17.8%)
(0.2%)
6.0%
1.8%
4.0%
6.4%
11.8%
(0.2%)
11.8%
2.1%
4.1%
5.1%
5.9%
(0.3%)
10.3%
16.3%
4.3%
16.3%
9.4%
5.2%
0.5%
0.5%
(319.2%)
13.0%
20.7%
13.0%
14.4%
(2.3%)
4.2%
0.1%
37.9%
(6.1%)
37.9%
(6.1%)
10.3%
2.2%
0.2%
(0.1%)
30.5%
5.8%
30.5%
5.8%
9.5%
5.6%
0.7%
(0.9%)
(1.4%)
16.4%
3.7%
16.4%
3.7%
5.3%
4.9%
(1.0%)
0.4%
14.8%
11.5%
14.8%
11.5%
4.4%
(3.2%)
(1.0%)
0.1%
13.0%
(7.6%)
13.0%
(7.6%)
3.9%
1.7%
(1.0%)
(0.0%)
11.3%
4.1%
11.3%
4.1%
Summary Income Statement
Issuer Services
Trading and related
Information Services
Technology Services & Other
Other
Total Revenue
Expenses
$85,996
$83,369
$83,703
ScotiaView
Analyst
Link$336,312
Per Share Data (f.d.)
Core Operating Earnings2
Growth (Y/Y)
Growth (Q/Q)
Book Value
Share Outstanding (end of period, in millions)
Avg. Shares Outstanding (fully diluted, in millions)
Dividends
Per Share
Earnings Payout Ratio (core)
Other
Operating Margin
Net Debt/Trailing EBITDA
Core Return on Equity
Effective Tax Rate
Market Statistics
Equity:
TSX & TSX-Venture Volume ( billions)
Y/Y Growth(%)
Equity Volume Incl. Alpha (billions)
Y/Y Growth(%)
New Equity Financings ($ millions)
Y/Y Growth(%)
Mkt Cap of Issuers Listed ($Bln)
Y/Y Growth(%)
Derivatives (Montreal Exchange):
Volume ( billions)
Y/Y Growth(%)
Revenue Growth (Y/Y)
Issuer Services
Trading and related
Revenue Composition
Issuer Services
Trading and related
Listing Fee Breakdown
Initial & Additional
% of total Listing Fees
Sustaining
% of total Listing Fees
P&L Growth
Revenue (Y/Y)
4.1%
5.7%
0.0%
(Q/Q)
0.8%
0.1%
Expenses (Y/Y)
19.4%
(6.4%)
(3.5%)
(Q/Q)
(4.2%)
5.9%
Net Income (Y/Y)
(3.6%)
22.8%
(203.5%)
(Q/Q)
12.1%
(156.9%)
Core Earnings (Y/Y)
(28.7%)
46.7%
19.5%
(Q/Q)
11.3%
(2.4%)
1. Excludes non-reoccurring items and amortization of intangibles related to acquisitions
2. Excludes non-reoccurring items but includes amortization of intangibles related to acquisitions
Source: Bloomberg; Scotiabank GBM estimates.
(1.9%)
(16.5%)
19.5%
2.6%
113.5%
22.4%
4.8%
(0.9%)
13.8%
13.8%
Equity Event
Wednesday, October 15, 2014
Equity Event: Telecom & Cable 2015
Insert graphic here
201
Equity Event
XXX, XXX XX, XXXX
Equity Event: Transportation & Aerospace 2014
Insert graphic here
202
Equity Event
XXX, XXX XX, XXXX
Equity Event: Canadian Energy Infrastructure
Conference
Insert graphic here
203
Equity Event
XXX, XXX XX, XXXX
Xs 2
Equity Event: Mining Conference 2014
Insert graphic here
204
Equity Event
XXX, XXX XX, XXXX
205
Disclosures and Disclaimers
Appendix A: Important Disclosures
Company
Aecon Group Inc.
Ag Growth International Inc.
Aimia
Ainsworth Lumber Co. Ltd.
Algonquin Power & Utilities Corp.
Allied Properties REIT
America Movil
Argent Energy Trust
Armtec Infrastructure Inc.
Artis REIT
Atrium Mortgage Investment Corporation
AutoCanada Inc.
B2Gold Corp.
Baker Hughes Incorporated
Basic Energy Services, Inc.
BCE Inc.
Bell Aliant Inc.
Boardwalk REIT
Bonterra Energy Corp.
Brookfield Infrastructure Partners LP
Brookfield Property Partners LP
Brookfield Renewable Energy Partners LP
CAE Inc.
Calfrac Well Services Ltd.
Calloway REIT
Cameco Corporation
Cameron International Corporation
CAP REIT
Capital Power Corporation
Capstone Infrastructure Corporation
Cencosud, SA
Centerra Gold Inc.
Cervus Equipment Corporation
CGI Group Inc.
Choice Properties REIT
Chorus Aviation Inc.
Cineplex Inc.
Cogeco Cable Inc.
Controladora Comercial Mexicana, SAB de CV
Crius Energy Trust
Crombie REIT
Ticker
ARE
AFN
AIM
ANS
AQN
AP.UN
AMX
AET.UN
ARF
AX.UN
AI
ACQ
BTO
BHI
BAS
BCE
BA
BEI.UN
BNE
BYD.UN
BAM
BIP
BPY
BEP.UN
CAE
CFW
CWT.UN
CVI.A
CCO
CAM
REF.UN
CTC.A
FRC
CAR.UN
CPX
CSE
CENCOSUD
CG
CVL
GIB.A
CSH.UN
CHP.UN
CHR.B
CGX
CCA
COMERCI
UBC
KWH.UN
CRR.UN
Disclosures (see legend below)*
G, I, T, U
G, I, T, U, VS30
G, I, T, U
J
G, I, U, V76
G, I, T, U
M12, M4, T
I, VS27
T, V10
G, I, T, U
G, I, U
G, I, U, VS144, VS145
VS54, VS126, VS133
V19
J, V19
B26, B8, G, I, S, T, U
G, I, T, U
P, T, VS96
I
G, I, J, T, U
G, I, S, U
I
VS179, VS180, VS181
G, I, U
T
J, T
G, I, U
J
G, I, U, VS95, VS112
V19
G, I, U
S, T
T
I, S, T
I, T
T, VS50
M13
P, T
VS120
J
T
B40, G, I, U
J, T
I
I, T
M13, S
VS92
B25, G, I, U
206
Denison Mines Corp.
Dream Global REIT
Dream Office REIT
Eagle Energy Trust
Element Financial Corporation
Emera Incorporated
Endesa Chile
EnerCare Inc.
Enerflex Ltd.
Equitable Group Inc.
Exchange Income Corporation
Exterran Holdings, Inc.
FEMSA, SAB de CV
Fiera Capital Corporation
Finning International Inc.
Firm Capital Mortgage Investment Corporation
First Majestic Silver Corp.
First National Financial Corporation
Fortis Inc.
Freehold Royalties Ltd.
GLV Inc.
Grupo Comercial Chedraui, SAB de CV
Grupo Televisa, SAB
H&R REIT
Halliburton Company
Home Capital Group Inc.
Héroux-Devtek Inc.
IAMGOLD Corporation
IGM Financial Inc.
InterRent Real Estate Investment Trust
K+S AG
K-Bro Linen Inc.
KP Tissue Inc.
Leisureworld Senior Care Corporation
LGX Oil + Gas Inc.
Loblaw Companies Limited
Manitoba Telecom Services Inc.
Manulife Financial Corporation
National-Oilwell Varco, Inc.
Norbord Inc.
Northern Blizzard Resources Inc.
Northland Power Inc.
NorthWest Healthcare Properties REIT
Organización Soriana, SAB de CV
Patterson-UTI Energy, Inc.
Peyto Exploration & Development Corp.
Power Corporation of Canada
Power Financial Corporation
Pure Industrial REIT
Quebecor Inc.
DML
DDC
DRG.UN
D.UN
EGL.UN
EFN
EMA
ENDESA
ECI
EFX
EQB
EIF
EXH
FMX
FSZ
FTT
FC
AG
FN
FTS
FRU
GLV.A
CHDRAUI B
TV
HR.UN
HAL
HCG
HRX
IAG
IGM
IIP.UN
SDF
KBL
KPT
LW
OIL
L
MBT
MFC
NOV
NBD
NBZ
NPI
NWH.UN
SORIANA B
PTEN
PEY
POW
PWF
AAR.UN
QBR.B
G, I, U
P, T, VS107
I, T
G, I, S6, T, U
T
G, I, U
G, I, S, T, U
M8
G, I, U
I, U
G, I, U
G, I, U, VS89
V19
M13, T, VS62
I, J
VS119
G, I, U
VS56, VS110
G, I, U
G, I, S, U
G, I, U
T
M13, T
M12, M4, T
I, T
I, N2, V19
I, J
G, I, T, U, VS182
P, T, VS7, VS61
S
I, P, T
T
J, VS63, VS97
VS93
I
S
B27, I, T
B9, G, I, S, T, U
G, I, J, S, U
H.P.241, V19
G, I, N1, U
G, I, U
G, I, U
I, T
M13, T
V19
G, I, U
I, S
G, I, S, U
G, I, U
I, T
207
Rio Alto Mining Ltd.
Ripley Corp SA
Rogers Communications Inc.
RONA Inc.
SACI Falabella
Schlumberger
SEMAFO Inc.
Shaw Communications Inc.
Silver Wheaton Corp.
Stella-Jones Inc.
SunOpta Inc.
Superior Energy Services, Inc.
TELUS Corporation
Thompson Creek Metals Company Inc.
Time Warner Cable Inc.
TMX Group Ltd.
TORC Oil & Gas Ltd.
Total Energy Services Inc.
Trican Well Service Ltd.
Twin Butte Energy Ltd.
Uni-Sélect Inc.
Uranium Participation Corporation
Verizon Communications Inc.
Vermilion Energy Inc.
Vicwest Inc.
Wal-Mart de México y Centroamerica, SAB de CV
Western Forest Products Inc.
WPT Industrial REIT
WSP Global Inc.
RIO
RIPLEY
RCI.B
RON
FALAB
SLB
SMF
SJR.B
SLW
SJ
STB
STKL
SPN
T
TCM
TWC
X
TOG
TOT
TCW
TBE
UNS
U
VZ
VET
VIC
WALMEX V
WEF
WIR.U
WSP
VS194
M13
G, I, N1, S, T, U
T
M13
J, V19
VS127
G, I, S, T, U
V25
J, T
G, I, U
J, T, VS31
V19
G, I, J, T, U
VS100
I
D28, I, S15
I
J
J, T, VS103
G, I, U
H.P.72, T
G, I, U
H.P.230
P
T
M13, T
G, I, P, U
G, I, U
G, I, J, T, U
208
Each Research Analyst named in this report or any subsection of this report certifies that (1) the views expressed in this report in connection
with securities or issuers that he or she analyzes accurately reflect his or her personal views; and (2) no part of his or her compensation was, is,
or will be directly or indirectly, related to the specific recommendations or views expressed by him or her in this report.
This research report was prepared by employees of Scotia Capital Inc. and/or its affiliates who have the title of Analyst.
All pricing of securities in reports is based on the closing price of the securities’ principal marketplace on the night before the publication date,
unless otherwise explicitly stated.
All Equity Research Analysts report to the Head of Equity Research. The Head of Equity Research reports to the Managing Director, Head of
Institutional Equity Sales, Trading and Research, who is not and does not report to the Head of the Investment Banking Department.
Scotiabank, Global Banking and Markets has policies that are reasonably designed to prevent or control the sharing of material non-public
information across internal information barriers, such as between Investment Banking and Research.
The compensation of the research analyst who prepared this report is based on several factors, including but not limited to, the overall
profitability of Scotiabank, Global Banking and Markets and the revenues generated from its various departments, including investment banking.
Furthermore, the research analyst’s compensation is charged as an expense to various Scotiabank, Global Banking and Markets d epartments,
including investment banking. Research Analysts may not receive compensation from the companies they cover.
Non-U.S. analysts may not be associated persons of Scotia Capital (USA) Inc. and therefore may not be subject to FINRA Rule 2711
restrictions on communications with subject company, public appearances and trading securities held by the analysts.
For Scotiabank, Global Banking and Markets Research analyst standards and disclosure policies, please visit
http://www.gbm.scotiabank.com/disclosures
Scotiabank, Global Banking and Markets Research, 40 King Street West, 33rd Floor, Toronto, Ontario, M5H 1H1.
*
Legend
B25
Paul D. Sobey is a director of Crombie REIT and is a director of The Bank of Nova Scotia.
B26
Thomas C. O'Neill is a director of BCE Inc. and is Chairman of the Board of The Bank of Nova Scotia.
B27
Thomas C. O'Neill is a director of Loblaw Companies Limited and is Chairman of the Board of The Bank of Nova Scotia.
B40
Thomas C. O'Neill is a director of Loblaw Companies Limited and is Chairman of the Board of The Bank of Nova Scotia. Choice
Properties Real Estate Investment Trust is a subsidiary of Loblaw Companies.
B8
Ronald Brenneman is a director of BCE Inc and is a director of The Bank of Nova Scotia.
B9
N. Ashleigh Everett is a director of Manitoba Telecom Services Inc. and is a director of The Bank of Nova Scotia.
D28
Jeffrey Heath, Executive Vice President & Group Treasurer of The Bank of Nova Scotia, is a member of the Board of Directors o f
TMX Group Limited.
G
Scotia Capital (USA) Inc. or its affiliates has managed or co-managed a public offering in the past 12 months.
H.P.230
Jay Oduwole, a member of Jay Oduwole's household and/or an account related to Jay Oduwole own securities of this issuer.
H.P.241
Bill Sanchez, a member of Bill Sanchez's household and/or an account related to Bill Sanchez own securities of this issuer.
H.P.72
Anthony Zicha, a member of Anthony Zicha's household and/or an account related to Anthony Zicha own securities of this issuer .
I
Scotia Capital (USA) Inc. or its affiliates has received compensation for investment banking services in the past 12 months.
J
Scotia Capital (USA) Inc. or its affiliates expects to receive or intends to seek compensation for investment banking service s in
the next 3 months.
209
M12
Ivan Hernandez, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A.,
which forms a part of Grupo Financiero Scotiabank Inverlat.
M13
Karla Pena, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A., which
forms a part of Grupo Financiero Scotiabank Inverlat.
M4
Andres Coello, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A.,
which forms a part of Grupo Financiero Scotiabank Inverlat.
M8
Ezequiel Fernandez Lopez, an analyst, prepared this report and is an employee of the Research Department of Scotia Corredora
de Bolsa Chile S.A.
N1
Scotia Capital (USA) Inc. had an investment banking services client relationship during the past 12 months.
N2
Scotia Capital (USA) Inc. had a non-investment banking securities-related services client relationship during the past 12 months.
P
This issuer paid a portion of the travel-related expenses incurred by the Fundamental Research Analyst/Associate to visit
material operations of this issuer.
S
Scotia Capital Inc. and its affiliates collectively beneficially own in excess of 1% of one or more classes of the issued and
outstanding equity securities of this issuer.
S15
Scotia Capital Inc. or an affiliate thereof owns or controls an equity interest in TMX Group Limited and in excess of 1% of the
issued and outstanding equity securities thereof. In addition, an affiliate of Scotia Capital Inc. is a lender to TMX Group L imited
under its credit facilities. As such, Scotia Capital Inc. may be considered to have an economic interest in TMX Group Limited.
S6
Dream Office REIT is a Related Issuer of Scotia Capital Inc.
T
The Fundamental Research Analyst/Associate has visited material operations of this issuer.
U
Within the last 12 months, Scotia Capital Inc. and/or its affiliates have undertaken an underwriting liability with respect t o equity or
debt securities of, or have provided advice for a fee with respect to, this issuer.
V10
Two putative class action lawsuits have been filed, the first in June 2011 with the Ontario Superior Court of Justice at Windso r,
Ontario, Canada, and the second in July 2011 with the Ontario Superior Court of Justice at London, Ontario, Canada, against
Armtec Infrastructure Inc. ('Armtec') and others by purported purchasers of Armtec common shares pursuant to an April 2011
public offering. The lawsuits are still pending. Certain underwriters, including Scotia Capital Inc., are among those named as
defendants in the lawsuits.
V19
Howard Weil is a Division of Scotia Capital (USA) Inc., a U.S. registered broker-dealer and a member of the New York Stock
Exchange and FINRA. Scotia Capital (USA) Inc. is a wholly owned subsidiary of Scotia Capital Inc., a Canadian registered
investment dealer, and indirectly owned by The Bank of Nova Scotia. Howard Weil Research Analysts and Scotiabank Research
Analysts are independent from one another and their respective coverage of issuers are different. In addition, because they are
independent from one another, Howard Weil Research Analysts and Scotiabank Research Analysts may have different opinions
on the short-term and long-term outlooks of local and global markets and economies.
V25
Scotiabank acted as a financial advisor for HudBay Minerals Inc. in a precious metals stream transaction with Silver Wheaton
Corp.
V76
Scotiabank is acting as a financial advisor to Algonquin Power & Utilities Corp. in its acquisition of Park Water Company.
VS100
Our Research Analyst visited Mt. Milligan, an operating mine, on October 9, 2013 and August 19, 2014. Partial payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS103
Our Research Analyst visited TCW's Marcellus operation, a drilling operation, on September 30, 2013. Partial payment was
VS107
Our Research Analyst visited the Ekati mine, an operating diamond mine, on October 29, 2013. Partial payment was received
from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS110
Our Research Analyst visited Encantada, La Parrilla, and Del Toro, silver producing mines, o n November 18-21, 2013. Partial
payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
210
VS112
Our Research Analyst visited McArthur River Uranium Mine, an operating mine, on September 18, 2013. Partial payment was
VS119
Our Research Analyst visited Fort McKay and Mildred Lake, parts and service facilities, on June 26, 2013. No payme nt was
VS120
Our Research Analyst visited the Calgary John Deere location, an agricultural equipment dealership branch, on November 28,
2013. No payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS126
Our Research Analyst visited the Otjikoto gold project, a mine under development, on January 29, 2014. Partial payment was
VS127
Our Research Analyst visited Mana, an operating mine, on February 3-4, 2014. Partial payment was received from the issuer for
the travel-related expenses incurred by the Research Analyst to visit this site.
VS133
Our Research Analyst visited Masbate, an operating mine, on March 22, 2014. Partial payment was received from the issuer for
VS144
Our Research Analyst visited the head office and dealership, located in Edmonton, Alberta, on September 6, 2013. No payment
was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS145
Our Research Analyst visited the head office and dealership, located in Edmonton, Alberta, on September 6, 2013. No payment
VS179
Our Research Analyst visited various U.S. industrial and retail assets, operating assets in New Jersey and Los Angeles, on
January and March, 2014, respectively. Partial payment was received from the issuer for the travel-related expenses incurred by
the Research Analyst to visit this site.
VS180
Our Research Analyst visited various U.S. office assets, operating office buildings in New York, Los Angeles, and Houston, on
August 2013, March 2014, and June 2013, respectively. No payment was received from the issuer for the travel-related
expenses incurred by the Research Analyst to visit this site.
VS181
Our Research Analyst visited various properties in the London, UK, office portfolio, operating office buildings, on October 2012.
Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS182
Our Research Analyst visited the Runcorn and Nottingham, U.K., plant facilities, on September 18, 2014. Partial payment was
VS194
Our Research Analyst visited La Arena and Shahuindo, an operating mine and a mine under development, respectively, on
October 22 and 23. Partial payment was received from the issuer for the travel-related expenses incurred by the Research
Analyst to visit this site.
VS27
Our Research Analyst visited Eagle Ford and Austin Chalk, exploration, development & production properties, on April 8-9, 2013.
No payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS30
Our Research Analyst visited the Edwards and Twister facilities, two manufacturing plants, on October 29, 2012. No payment
VS31
Our Research Analyst visited the Hope, Oat Fiber, SunOpta Aseptic, Ingredients, and Dahlgren Sunflower facilities, which are
handling and processing facilities, on September 25, 2012. No payment was received from the issuer for the travel-related
expenses incurred by the Research Analyst to visit this site.
VS50
Our Research Analyst visited Cardinal Power, an operating power plant, on November 29, 20 12. No payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS54
Our Research Analyst visited La Libertad and Limon, both operating mines, on May 22-24, 2013. Partial payment was received
from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS56
Our Research Analyst visited San Martin, La Parrilla and Del Toro, silver producing mines, on June 10-11, 2013. Partial payment
211
VS61
Our Research Associate visited the Westwood project, a development project soon to enter commercial production, on
September 11, 2013. Full payment was received from the issuer for the travel-related expenses incurred by the Research
Associate to visit this site.
VS62
Our Research Associate visited several OXXO locations, convenience stores, on November 2012. No payment was received
from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
VS63
Our Research Analyst visited the Calgary facility, a laundry and linen processing facility, on September 12, 2012. No payment
VS7
Our Research Analyst visited Cote Gold, a development project, on October 22, 2012. Full payment was received from the issuer
for the travel-related expenses incurred by the Research Analyst to visit this site.
VS89
Our Research Analyst visited Perimeter Aviation HQ at Winnipeg Airport, the primary hub for Calm Air, on June 19, 2012. No
VS92
Our Research Analyst visited Stamford, CT, head office, on November 28, 2012. No payment was received from the issuer for
VS93
Our Research Analyst visited Crabtree Mill, a manufacturing mill, on November 2, 2012. Full payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS95
Our Research Analyst visited Key Lake Mill, a mine and mill, on September 18, 2013. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS96
Our Research Analyst visited the Calgary apartment portfolio, income-producing apartment buildings, on July 10, 2012. Partial
VS97
Our Research Analyst visited the Calgary facility, a laundry and linen processing facility, on September 12, 2012. No payment
212
Definition of Scotiabank, Global Banking and Markets Equity Research Ratings & Risk Rankings
We have a four-tiered rating system, with ratings of Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform. Each analyst assigns a rating
that is relative to his or her coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst.
Our risk ranking system provides transparency as to the underlying financial and operational risk of each stock covered. Stat istical and judgmental factors
considered are: historical financial results, share price volatility, liquidity of the shares, credit ratings, analyst forecasts, consistency and predictability of
earnings, EPS growth, dividends, cash flow from operations, and strength of balance sheet. The Director of Research and the Supervisory Analyst jointly
make the final determination of all risk rankings.
The rating assigned to each security covered in this report is based on the Scotiabank, Global Banking and Markets research a nalyst’s
12-month view on the security. Analysts may sometimes express to traders, salespeople and certain clients their shorter-term views on these securities that
differ from their 12-month view due to several factors, including but not limited to the inherent volatility of the marketplace.
Ratings
Risk Rankings
Focus Stock (FS)
Low
The stock represents an analyst’s best idea(s); stocks in this category are Low financial and operational risk, high predictability of financial results,
expected to significantly outperform the average 12-month total return of the low stock volatility.
analyst’s coverage universe or an index identified by the analyst that includes,
Medium
but is not limited to, stocks covered by the analyst.
Moderate financial and operational risk, moderate predictability of financial
Sector Outperform (SO)
results, moderate stock volatility.
The stock is expected to outperform the average 12-month total return of the
High
High financial and/or operational risk, low predictability of financial results,
high stock volatility.
Sector Perform (SP)
Speculative
The stock is expected to perform approximately in line with the average 12month total return of the analyst’s coverage universe or an index identified by Exceptionally high financial and/or operational risk, exceptionally low predictability
of financial results, exceptionally high stock volatility. For risk-tolerant investors
the analyst that includes, but is not limited to, stocks covered by the analyst.
only.
Sector Underperform (SU)
The stock is expected to underperform the average 12-month total return of the
Other Ratings
Tender – Investors are guided to tender to the terms of the takeover offer.
Under Review – The rating has been temporarily placed under review, until
sufficient information has been received and assessed by the analyst.
Scotiabank, Global Banking and Markets Equity Research Ratings Distribution*
Distribution by Ratings and Equity and Equity-Related Financings*
Percentage of companies covered by Scotiabank, Global Banking
and Markets Equity Research within each rating category.
Percentage of companies within each rating category for which
Scotiabank, Global Banking and Markets has undertaken an
underwriting liability or has provided advice for a fee within the last
12 months.
Source: Scotiabank GBM.
For the purposes of the ratings distribution disclosure FINRA requires members who use a ratings system with terms different than “bu y,” “hold/neutral” and
“sell,” to equate their own ratings into these categories. Our Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform ratings are based
on the criteria above, but for this purpose could be equated to strong buy, buy, neutral and sell ratings, respectively.
213
General Disclosures
This report has been prepared by analysts who are employed by the Research Department of Scotiabank, Global Banking and Markets. Scotiabank, together
with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets bu sinesses of The Bank of
Nova Scotia and certain of its affiliates in the countries where they operate, including Scotia Capital Inc.
All other trademarks are acknowledged as belonging to their respective owners and the display of such trademarks is for infor mational use only.
Scotiabank, Global Banking and Markets Research produces research reports under a single marketing identity referred to as “Globally-branded research”
under U.S. rules. This research is produced on a single global research platform with one set of rules which meet the most st ringent standards set by
regulators in the various jurisdictions in which the research reports are produced. In addition, the analysts who produce the research reports, regardless of
location, are subject to one set of policies designed to meet the most stringent rules established by regulators in the various jurisdictions where the research
reports are produced.
Scotia Capital Inc. or an affiliate thereof owns or controls an equity interest in TMX Group Limited and in excess of 1% of t he issued and outstanding equity
securities thereof. In addition, an affiliate of Scotia Capital Inc. is a lender to TMX Group Limited under its credit facili ties. As such, Scotia Capital Inc. may be
considered to have an economic interest in TMX Group Limited.
This report is provided to you for informational purposes only. This report is not, and is not to be construed as, an offer to sell or solicitati on of an offer to buy
any securities and/or commodity futures contracts.
The securities mentioned in this report may neither be suitable for all investors nor eligible for sale in some jurisdictions where the report is distributed.
The information and opinions contained herein have been compiled or arrived at from sources believed reliable, however, Scotiabank, Global Banking and
Markets makes no representation or warranty, express or implied, as to their accuracy or completeness.
Scotiabank, Global Banking and Markets has policies designed to make best efforts to ensure that the information contained in this report is current as of the
date of this report, unless otherwise specified.
Any prices that are stated in this report are for informational purposes only. Scotiabank, Global Banking and Markets makes no representation that any
transaction may be or could have been effected at those prices.
Any opinions expressed herein are those of the author(s) and are subject to change without notice and may differ or be contra ry from the opinions expressed
by other departments of Scotiabank, Global Banking and Markets or any of its affiliates.
Neither Scotiabank, Global Banking and Markets nor its affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this
report or its contents.
Equity research reports published by Scotiabank, Global Banking and Markets are available electronically via: Bloomberg, Thomson Financial/First Call Research Direct, Reuters, Capital IQ, and FactSet. Institutional clients with questions regarding distribution of equity rese arch should contact us at 1-800-2087666.
This report and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part,
or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without the prior express consent of
Scotiabank, Global Banking and Markets.
Additional Disclosures
Canada: This report is distributed by Scotia Capital Inc., a subsidiary of The Bank of Nova Scotia. Scotia Capital Inc. is a member of the Canadian Investor
Protection Fund and the Investment Industry Regulatory Organization of Canada.
Chile: This report is distributed by Scotia Corredora de Bolsa Chile S.A., a subsidiary of The Bank of Nova Scotia.
Hong Kong: This report is distributed by The Bank of Nova Scotia Hong Kong Branch, which is authorized by the Securities and Future Commission to
conduct Type 1, Type 4 and Type 6 regulated activities and regulated by the Hong Kong Monetary Authority.
Mexico: This report is distributed by Scotia Inverlat Casa de Bolsa S.A. de C.V., a subsidiary of the Bank of Nova Scotia.
Peru: This report is distributed by Scotia Sociedad Agente de Bolsa S.A., a subsidiary of The Bank of Nova Scotia.
Singapore: This report is distributed by The Bank of Nova Scotia Asia Limited, a subsidiary of The Bank of Nova Scotia. The Bank of Nova Scotia Asia
Limited is authorised and regulated by the Monetary Authority of Singapore, and exempted under Section 99(1)(a),and (b), (c) and (d) of the Securities and
Futures Act to conduct regulated activities.
United Kingdom and the rest of Europe: Except as otherwise specified herein, this report is distributed by Scotiabank Europe plc, a subsidiary of The Bank of Nova
Scotia. Scotiabank Europe plc is authorized by the Prudential Regulation Authority (PRA) and regulated by the PRA and the Financial Conduct Authority (FCA).
Scotiabank Europe plc complies with all FCA requirements concerning research and the associated disclosures and these are indicated on the research where
applicable.
United States: This report is distributed by Scotia Capital (USA) Inc., a subsidiary of Scotia Capital Inc., and a registered U.S. broker-dealer. All transactions
by a U.S. investor of securities mentioned in this report must be effected through Scotia Capital (USA) Inc.
Non-U.S. investors wishing to effect a transaction in the securities discussed in this report should contact a Scotiabank, Global Banking and Markets entity in
their local jurisdiction unless governing law permits otherwise.

  Pertinent Revision Summary Edge at a Glance

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