  Pertinent Revision Summary Edge at a Glance

Transcription

1
Investment Views
Wednesday, November 19, 2014
Click to view full story

Click to view synopsis

Pertinent Revision Summary
3

Edge at a Glance
7

Industry Comments
Diversified Financials
2015 Outlook & Rolling Over Targets
Phil Hardie
14
 
Global Fertilizers
Russian Potash Mine Flood Should be
Positive for 2015 Outlook
Ben Isaacson
22
 
Mutual Fund Industry
October Mutual Fund Flows - Net LTA
Sales Remain Resilient, Up 72% YOY
Phil Hardie
26
 
Trevor Turnbull
53
 
Mike Hocking
57
 
Patricia A. Baker
62
 
Craig Johnston
66
 
Vladislav C. Vlad
70
 
Long-Term Plan Focused on Core
Assets
Patrick Bryden
75
 
Tightening Its Belt
Christine Healy
79
 
Jason Bouvier
84
 
Gavin Wylie
89
 
Andres Coello
46
 
Paul Figueroa
Mantero &
Alfonso Salazar
55
 
Mike Hocking
57
 
Company Comments
Canada
Centerra Gold Inc.
CG-T
Continental Gold Limited
CNL-T
George Weston Limited
WN-T
Lucara Diamond Corp.
LUC-T
Newalta Corporation
NAL-T
Penn West Exploration
PWT-T, PWE-N
Rogers Sugar Inc.
RSI-T
Suncor Energy Inc.
SU-T, SU-N
WesternZagros Resources Ltd.
WZR-V
Kumtor JV Agreements Drafted: We
Remain Cautiously Optimistic
Initial Look at Buriticá PEA
WN: Q3 As Expected; Stock Is Cheap
Life After the Special Divvie
A Closer Look at Possible Valuation
Rerating
Holding Steady
Rights Offering Closes
Latin America
Axtel
AXTEL CPO-MX
Compañía Minera Milpo SAA
MILPOC1-LM
CNL-T
Alestra: Would It Rescue Axtel? At
What Price?
Q3/14 Results Highlights
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
Equity Event: Mining Conference 2014
94

3
(For Rating Changes: 24-Hour SC Pro Personal Trading Restriction Applies)
1-Yr
Rating
Risk
Key Data
Target
Year 1
Year 2
Year 3
Valuation
AGF Management Limited (SP) (AGF.B-T C$10.38)
New --
--
$11.00
--
--
Old --
--
$12.00
--
--
---
---
Operating EPS16E: 5.6x 2016E EBITDA, 3.5% EV/Retail AUM, 1$0.81 year out.
Operating EPS16E: -- 6.25x 2015E EBITDA, 4% EV/Retail AUM, 1year out.
Valuation: 5.6x 2016E EBITDA, 3.5% EV/Retail AUM, 1-year out.
Key Risks to Price Target: AUM loss, margin and competitive pressures
Aston Hill Financial Inc. (SO) (AHF-T C$0.80)
New -Old --
---
---
Adj. EPS16E: $0.041
Adj. EPS16E: --
---
Valuation: 2.2% EV/AUM, One-Year Out
Key Risks to Price Target: AUM loss, relative investment performance, sub-advisory relationships, key personnel
CI Financial Corp. (SP) (CIX-T C$34.37)
New --
--
$39.00
--
--
Old --
--
$37.00
--
--
Operating EPS16E: 10x 2016E EBITDA, 10.2% EV/MFA, 1-year out.
$2.52
Operating EPS16E: -- 10.9x 2015E EBITDA, 9.6% EV/MFA, 1-year
out.
Valuation: 10x 2016E EBITDA, 10.2% EV/MFA, 1-year out.
Key Risks to Price Target: Capital markets levels, margin and competitive pressures
Continental Gold Limited (SP) (CNL-T C$2.53)
New -Old --
---
$4.50
$5.30
EPS16E: US$-0.02
EPS16E: US$0.75
---
-- 1x NAV
-- 0.92x NAV
Valuation: 1x NAV
Key Risks to Price Target: Mining dilution, permitting, mineral resource estimate assumptions, commodity prices, exploration risk, financing risk, political risk, multiple contraction
Element Financial Corporation (SO) (EFN-T C$14.00)
New --
--
--
--
--
Old --
--
--
--
--
-- 9.4x 2016E Pre-Tax Op. EPS, 13.1x 2016E Op.
EPS
-- 13x 2015E Pre-Tax Op. EPS, 18.4x 2015E Op.
EPS
Valuation: 9.4x 2016E Pre-Tax Op. EPS, 13.1x 2016E Op. EPS
Key Risks to Price Target: Lease origination volumes, interest margins, industry competition, credit performance, and managing high level of growth
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.
4
Equitable Group Inc. (SP) (EQB-T C$68.00)
New -Old --
---
$78.00
$67.00
---
---
-- 9.2x 2016E Adj. EPS
-- 9.3x 2015E Adj. EPS
Valuation: 9.2x 2016E Adj. EPS
Key Risks to Price Target: Decline in real estate values, mortgage origination volumes and credit performance
Fiera Capital Corporation (SO) (FSZ-T C$13.64)
New -Old --
---
---
---
-- Cash Op EPS16E: $1.04 --Cash Op EPS16E: -- --
Valuation: 1.35% EV/AUM, 1-yr forward
Key Risks to Price Target: Relative investment performance, net inflows, cost containment, integration risk
First National Financial Corporation (SP) (FN-T C$23.40)
New -Old --
---
$26.00
$24.00
---
---
-- 9.8x 2016E EPS
-- 10.1x 2015E EPS
---
-- 10.6x 2016E Op. EPS, 1.2x Q3/15E BVPS
-- 10.7x 2015E Op. EPS, 1.1x Q3/15E BVPS
Valuation: 9.8x 2016E EPS
Key Risks to Price Target: Lower mortgage origination volumes, tighter funding spreads
Genworth MI Canada Inc. (SP) (MIC-T C$40.89)
New -Old --
---
$44.00
$42.00
---
Valuation: 10.6x 2016E Op. EPS, 1.2x Q3/15E BVPS
Key Risks to Price Target: Weaker-than-expected labour markets, Decline in residential home prices, Regulatory changes.
George Weston Limited (SO) (WN-T C$94.60)
New -Old --
---
$110.00
$93.00
Cash Op EPS14E: $5.14 Cash Op EPS15E: $6.14 Cash Op EPS16E: $6.99 -Cash Op EPS14E: $5.10 Cash Op EPS15E: $6.16 Cash Op EPS16E: $7.01 --
Valuation: NAV
Key Risks to Price Target: Ultimate deployment of large cash position, operating performance at Loblaw, commodity price fluctuations
Gluskin Sheff + Associates Inc. (SP) (GS-T C$28.21)
New --
--
$34.00
--
EPS16E: $2.38
Old --
--
$32.00
--
EPS16E: $2.46
Valuation: 10.25x CY2016E Base EBITDA plus NPV of Performance Fees, 11% EV/AUM (NTM)
Key Risks to Price Target: Relative investment performance, net inflows, capital market conditions
EPS17E: $2.85 10.25x CY2016E Base EBITDA plus NPV of
Performance Fees, 11% EV/AUM (NTM)
EPS17E: -- 11.1x CY2015E Base EBITDA plus NPV of
Performance Fees, 10.2% EV/AUM (NTM)
5
Guardian Capital Group Limited (SP) (GCG.A-T C$18.27)
New -Old --
---
---
---
---
EPS16E: $1.11 -EPS16E: -- --
Valuation: 29.5% discount to target NAV of $28.37
Key Risks to Price Target: Weak BMO share price, Decline in AUM, NAV discount ascribed by market
Home Capital Group Inc. (SP) (HCG-T C$50.83)
New -Old --
---
$59.00
$52.00
---
---
-- 10.2x 2016E Adj. EPS
-- 10.7x 2015E Adj. EPS
IGM Financial Inc. (SO) (IGM-T C$47.74)
New --
--
$57.00
--
--
Old --
--
$55.00
--
--
Operating EPS16E: 7.6x 2016E EBITDA, 9.9% EV/MFA, 1-year out.
$4.08
Operating EPS16E: -- 8.25x 2015E EBITDA, 9.5% EV/MFA, 1-year
out.
Valuation: 7.6x 2016E EBITDA, 9.9% EV/MFA, 1-year out.
Lucara Diamond Corp. (SP) (LUC-T C$2.39)
New -Old --
---
$2.55
$2.50
Adj. EPS14E: US$0.27 Adj. EPS15E: US$0.21
Adj. EPS14E: US$0.26 Adj. EPS15E: US$0.19
-- 1.23x NAV
-- 1.25x NAV
Valuation: 1.23x NAV
Key Risks to Price Target: Diamond prices; development risk; technical and operational risk; multiple contraction; and geopol itical risk
Power Corporation of Canada (SO) (POW-T C$31.32)
New --
--
$36.50
--
--
Old --
--
$36.00
--
--
Operating EPS16E: 15.6% Discount to one-year NAVPS of $43.23,
$3.42 10.7x 2016E EPS.
Operating EPS16E: -- 15.7% Discount to one-year NAVPS of $42.73,
11.5x 2015E EPS.
Valuation: 15.6% Discount to one-year NAVPS of $43.23, 10.7x 2016E EPS.
Key Risks to Price Target: Economic, systemic, interest rate, regulatory and counterparty failures
Power Financial Corporation (SP) (PWF-T C$34.85)
New --
--
$39.50
--
--
Old --
--
$39.00
--
--
Operating EPS16E: 10.6% Discount to one-year NAVPS of $44.20,
$3.63 10.9x 2016E EPS.
Operating EPS16E: -- 10.9% Discount to one-year NAVPS of $43.78,
11.7x 2015E EPS.
6
Rogers Sugar Inc. (SP) (RSI-T C$4.78)
Tightening Its Belt
New -Old --
---
---
Adj EBITDA15E: $66.8 Adj EBITDA16E: $68.6
Adj EBITDA15E: $65.8
Adj EBITDA16E: --
-- --- --
Valuation: 9.0x FTM EBITDA (one-year forward)
Key Risks to Price Target: Competition, changes in government regulation/foreign trade policies, rise in natural gas prices, weather
Sprott Inc. (SP) (SII-T C$2.54)
New --
--
--
--
--
Old --
--
--
--
--
EPS16E: $0.14 9x 2016E Adj EBITDA plus NAV of resource
lending business
EPS16E: -- 10x 2015E Adj EBITDA plus NAV of resource
lending business
Valuation: 9x 2016E Adj EBITDA plus NAV of resource lending business
Key Risks to Price Target: Capital market levels, margin and competitive pressures
Suncor Energy Inc. (SO) (SU-T C$39.17)
Holding Steady
New -Old --
---
---
CFPS14E: $6.32
CFPS14E: $6.36
CFPS15E: $7.10
CFPS15E: $7.30
-- --- --
Valuation: 1.0x our risked 2P+RU (Risked Upside) NAV less annual dividends
Key Risks to Price Target: Commodity prices, crack spreads, timing of projects, and project execution.
TMX Group Ltd. (SP) (X-T C$53.18)
New -Old --
---
---
---
---
-- 9.5x EV/EBITDA on 2016E EBITDA
-- 10.5x EV/EBITDA on 2015E EBITDA
Valuation: 9.5x EV/EBITDA on 2016E EBITDA
Key Risks to Price Target: Declining revenue from lost market share and pricing pressure, Lack of growth from derivatives platform
WesternZagros Resources Ltd. (SP) (WZR-V C$0.64)
New -Old --
---
$1.25
$1.65
---
---
-- Based on our risked NAV of $1.24/share.
-- Based on our risked NAV of $1.69/share.
Valuation: Based on our risked NAV of $1.24/share.
Key Risks to Price Target: Commodity prices, exploration, project execution, political/regulatory.
Source: Reuters; Scotiabank GBM estimates.
Table of Contents
7
Edge at a Glance
Edge at a Glance
Phil Hardie, P.Eng., MBA, CFA - (416) 8637430
(Scotia Capital Inc. - Canada)
Event
■ We provide an outlook for 2015 along with our positioning. We have also made a number
of target adjustments as we roll target multiples into 2016.
Implications
■ We have a constructive outlook for 2015 as many of the sector's key characteristics are
likely to be increasingly sought out by investors given some unique challenges posed by the
evolving investment environment.
■ Stocks with a solid growth profile, healthy yield, relatively low market volatility, and
diversification benefits are likely to be well rewarded by investors. The majority of the
stocks within the Diversified Financials universe are growth-oriented companies, which are
likely to continue to benefit from an attractive growth profile over our forecast period.
■ We also like bottom-up plays with the potential for accretive acquisitions serving as
possible catalysts.
■ On the small cap side the sector provides diversification from the heavily resource -weighted
Canadian small cap index, while the mid to large cap names provide diversification against
the S&P/TSX Financials Index that is strongly influenced by performance of the banks.
Recommendation
■ We are projecting an average one-year rate of return of 20% for our coverage universe, with
the small cap names generating an ROR of just under 24% and the mid-to-large cap names
generating an average return of 17%.
Global Fertilizers
Russian Potash Mine Flood Should be Positive for 2015 Outlook
Ben Isaacson, MBA, CFA - (416) 945-5310
Event
■ URKA's Solikamsk-2 mine, 3% of global supply and 17% of our 2015E Uralkali production
estimate, is flooding to the point where all work in the mine has been suspended, and all
personnel have been evacuated.
Implications
■ We look back at the impact of several brine inflow situations in the potash market over the
past decade - some positive and some neutral. While it's still too early to tell what will
happen with Solikamsk-2, the removal of all personnel, as well as the closure of the mine,
tells us it must be serious.
■ We run through the math under two 2015 scenarios, assuming the mine is lost. The Scotia
scenario suggests a 17% tightening of the S/D imbalance next year, while our avg. corporate
scenario suggests a 50% improvement.
Recommendation
■ The bottom line is that we see this as a very positive development for the commodity,
especially given the timing of the Chinese contract negotiation - likely in the peak
discussion period. In fact, if we see a $20/mt increase in global potash prices due to this
(highly likely), then URKA could be economically indifferent on the mine flood!
■ 2015E EBITDA exposure to potash: IPI @ 100%, POT @ 62%, K+S @ 58%, SQM @46%,
MOS @ 42% and AGU @ 14%. From a margin leverage point of view, higher cost
producers like IPI and K+S will benefit more from rising prices than all others. We're
buying the space today.
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.
8
Edge at a Glance
Phil Hardie, P.Eng., MBA, CFA - (416) 8637430
October Mutual Fund Flows - Net LTA Sales Remain Resilient, Up 72%
YOY
Event
■ IFIC reported mutual fund flows for October 2014. Net LTA sales (ex. Money Market
funds) were relatively solid, with YTD sales increasing 48.5% over last year.
■ Total industry net LTA sales in October were $2.0B versus $3.0B in September, and $1.2B
a year earlier. Total industry net sales in October were $1.9B versus $2.7B in September
and $0.8B a year ago.
Implications
■ Despite the market sell-off in October, net LTA sales remain resilient, increasing 72%
YOY. The YOY increase in net LTA sales were primarily due to improved Fixed Income
flows.
■ Fixed Income funds flows were positive with Global and Domestic Fixed Income funds
posting inflows, improving YOY.
■ Balanced funds continue to attract the majority of fund flows, with Global Balanced
remaining the bestseller. Domestic Balanced funds recorded positive flows but declined
from the previous month.
■ Equity funds flows were negative in October. U.S. Equity funds recorded inflows, while
Domestic, Global and Sector Equity funds posted net redemptions.
■ Industry AUM of $1 trillion was up 0.5% MOM and 15.4% YOY, largely driven by positive
fund flows and market appreciation.
Recommendation
■ We expect to publish our Mutual Fund Quarterly Review for Q3/14 at the end of November.
Axtel (AXTEL CPO-MX MXN 3.37)
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
Event
Pertinent Data
■ In this report we explore scenarios for a potential Alestra-Axtel merger.
Implications
■ As of Q3/14, Axtel's net debt was nearly three times that of Alestra (2.81x and likely to
rise as Axtel keeps burning cash). Meanwhile, the EBITDA levels of both entities will
probably converge. As we see it, more than a merger between equals, Alestra would be
rescuing Axtel.
■ In our view, if Alfa was to require a 6.0x EV/EBITDA valuation for Alestra, Axtel
would need to increase the number of CPOs outstanding by at least 211% at Axtel's
market value (not too bad if compared to Maxcom's 287% increase). Under these
circumstances, Alestra would control 67.9% of the merged entity. Valuing Alestra at
5.0x, Axtel would increase shares by 165%, with Alestra retaining a 62.3% stake.
■ Alfa could spin off Alestra to avoid polluting valuation and net debt levels. The risk for
Alfa would be if Alestra is subtracted from valuation at the conglomerate level (~10.0x
EV/EBITDA.) That said, we think the potential spinoff of Sigma and Nemak are a
priority over Alestra.
■ We don't argue against the potential to create synergies with Axtel, but we see most of
them ending up in the pockets of Alfa's shareholders.
Recommendation
■ In our opinion, value creation for Axtel, if any, would depend on three factors: (1)
dilution to accommodate the Alestra stake; (2) potential to create synergies; and (3) the
new entity's valuation. If we were Alfa, we would wait for Axtel to fall into financial
distress. Sell.
Rating:
SU
Risk:
Target:
1-Yr
Speculative
Alestra: Would It Rescue Axtel? At What Price?
MXN 0.01
EBITDA14E:
2,540
EBITDA15E:
2,424
EBITDA16E:
2,299
Valuation:
DCF - 5 years results, 8.8% WACC (including
lower Mexico risk), terminal growth rate of
0.0%
Key Risks to Target:
Medium-term bankruptcy risk; Obsolescence
of WiMAX technology
Div. (NTM)
Div. (Curr.)
0.00
0.00
Yield (Curr.)
0.0%
9
Edge at a Glance
Centerra Gold Inc. (CG-T C$5.88)
Trevor Turnbull, MBA, MSc - (416) 863-7427
Kumtor JV Agreements Drafted: We Remain Cautiously Optimistic
Event
Pertinent Data
■ Kyrgyz media are reporting that the government has submitted to Centerra JV
agreements necessary for Kumtor gold mine restructuring.
Implications
■ In February, the Kyrgyz Parliament approved a non-binding heads of agreement in
support of a restructuring whereby the country's 32.7% stake in Centerra would be
exchanged for a 50% interest in Kumtor. However, it made recommendations for audits
and environmental claims that were incompatible with a mutually agreeable resolution.
Following negotiations, Parliament set a December 15 deadline for an agreement.
■ We are encouraged by this progress but remain focused on the upcoming December 10
Moscow Arbitration Court date which will appeal an earlier decision by the arbitration
tribunal of the Moscow Chamber of Commerce (MCC). Recall that the MCC decision
served as the basis for an October 10 Ontario Superior Court decision to issue an
injunction against 47 million Centerra shares in favour of Stans Energy.
■ A positive court resolution should pave the way to proceed with the restructuring, while
conversely a seizure of Centerra shares (something we believe Stans may be pursuing)
would be negative for the process.
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.
Rating:
Risk:
Target:
1-Yr
Compañía Minera Milpo SAA (MILPOC1-LM PEN 2.43)
Adj. EPS14E:
Adj. EPS15E:
Adj. EPS16E:
SP
High
C$7.00
US$0.06
US$-0.04
US$-0.02
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
2.7%
Paul Figueroa Mantero, MSc, MBA - +511-211-5918
(Scotia Sociedad Agente de Bolsa SA)
Alfonso Salazar, MSc - +52 (55) 5123 2869
Event
Pertinent Data
■ EPS came in 6.9% below our estimate at $0.0187. Difference was mainly explained by
higher than expected mining costs at Cerro Lindo given increasing maintenance and
non-recurrent costs.
Implications
■ Production of zinc, copper and lead concentrates increased 5%, 14% and 17% YOY.
Higher output was due to an increase in ore treated (7%). Silver content expanded 4%
YOY, reaching 1.7 million ounces during the period.
■ Milpo posted an EBITDA margin of 33.4%, below our 38.7% estimate. Declining
profitability due to non-recurrent expenses at Milpo's flagship project, Cerro Lindo,
explains the difference (mining costs increased 23% YOY to $33.7/t from $27.4/t).
Milpo has increased maintenance and development costs, anticipating a production
expansion capacity at Cerro Lindo from 15,000 tpd to18,000 tpd.
■ The company plans to acquire zinc projects Aripuana and Bongara from its controlling
shareholder, Votorantim. The company has not disclosed much information as this
transaction has not been completed. Milpo also announced that Ms. Claudia Torres
Beltran has been appointed as the new Chief Financial Officer of the company, replacing
Persio Morassutti who will continue his career at the Votorantim Group.
Recommendation
■ We maintain our Sector Outperform rating and a one-year target price of PEN 3.45.
Rating:
Risk:
Target:
1-Yr
SO
High
PEN 3.45
EBITDAPS13E:
US$0.21
EBITDAPS14E:
US$0.23
EBITDAPS15E:
US$0.32
Valuation:
DCF @ 8%
Commodity prices, operational risk, rising of
social conflicts, environmental risk, political
risk.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.02
$0.02
1.8%
10
Edge at a Glance
Continental Gold Limited (CNL-T C$2.53)
Mike Hocking, MSc, P.Geo. - (416) 945-5228
Event
Pertinent Data
■ CNL released a preliminary economic assessment (PEA) for Buriticá.
Implications
■ The PEA outlined an 18 year mine life with annual production of ~271,000 oz of gold
(eq.) at all in sustaining costs of US$502/oz (including by-product Ag); at $1200/oz Au
and $17/Ag prices, the project generates an after-tax NPV5% of $1.1B, an IRR of 31.5%
and a 2.8 year payback. Our previously published assumptions and the PEA estimates
are presented in Exhibit 1. The PEA assumes an average mill head grade of 7.8 g/t Au
compared with our estimate of 7.7 g/t Au. The PEA has outlined an initial throughput of
2,000 tpd increasing to 3,500 tpd, a fairly large underground gold mine utilizing longhole stoping methods. Given the narrow width of the veins, we had assumed a much
more limited 750 tpd, increasing to 2,000 tpd over a 3 year period, largely requiring cut
and fill methods. It appears CNL used a subset of their resource at a higher COG before
dilution to calculate the resourced used in the PEA (and we expect that a significant
portion of these tonnes are classified as inferred); thus, the company assume d higher
dilution than our estimates (58% vs. 30%) but diluted processing grade was in-line. Our
primary concern remains dilution and throughput. The PEA has outlined a very large
mine on mineralization hosted largely in narrow veins. We have updated our target price
and we will review our recommendation after more technical data is made available.
Recommendation
■ We rate CNL Sector Perform with a $4.50 target price, down from $5.30.
George Weston Limited (WN-T C$94.60)
New
Rating:
Risk:
Target:
1-Yr
Old
-SP
-- Speculative
$4.50
$5.30
EPS16E
US$-0.02
US$0.75
New Valuation:
1x NAV
Old Valuation:
0.92x NAV
Mining dilution, permitting, mineral resource
estimate assumptions, commodity prices,
exploration risk, financing risk, political risk,
multiple contraction
Div. (NTM)
$0.00
Div. (Curr.)
Yield (Curr.)
$0.00
0.0%
Patricia A. Baker, MBA, PhD - (514) 287-4535
Event
■ WN Q3 EPS in line at $1.54. WN Foods sales $574M, +2.1% YOY, in line with $572M
forecast. Adjusted EBITDA flattish YOY at $102M, in line with our $100M estimate.
Implications
■ WN saw + volumes across each baking segment. Margins impacted by input and plant
start-up costs. Q3 had combined negative impact of pricing and mix shifts. Mix reflects
seasonality with higher proportion of pie (frozen) and wafer (biscuit) sales with lower
margins than fresh.
■ In general, there is a decelerating impact from headwinds on the business. Q3 decline in
EBIT margin of 119bps compares favourably to the nine month trend of a decline of
214bps.
■ With its Q4 release, WF will unveil a new strategic plan for the broader positioning of its
business as a result of a lengthy and comprehensive review of the NA baking industry
with an eye to determine where best to focus on products and customers for growth. This
plan, we believe, will provide a good renewed medium-to-long term strategy for this
multi-faceted business.
Recommendation
■ WN share price has not kept pace with the nice advance in Loblaw. The implied value of
the baking business is near a multi-year low. Challenges evident in F2014 should abate
and the strategic work will serve to provide a "fresh" look and bring some promise of
growth. Target is revised to $110 and stock rating is maintained SO.
Pertinent Data
New
Old
Rating:
--
SO
Risk:
Target:
1-Yr
--
Med
$110.00
$93.00
Cash Op EPS14E
$5.14
$5.10
Cash Op EPS15E
$6.14
$6.16
Cash Op EPS16E
$6.99
$7.01
New Valuation:
-Old Valuation:
NAV
Ultimate deployment of large cash position,
operating performance at Loblaw, commodity
price fluctuations
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.68
$1.67
1.8%
11
Edge at a Glance
Lucara Diamond Corp. (LUC-T C$2.39)
Craig Johnston, CPA, CA - (416) 860-1659
Event
Pertinent Data
■ We are updating our estimates following Q3/14 results, and the announcement of the
$0.04 special dividend.
Implications
■ Overall, we believe the Q3/14 results were positive as production and operating costs
beat our estimates. Year-to-date proceeds total $241.4 million and therefore the
company expects to exceed the higher end of its 2014 revenue guidance ($240-$250
million).
■ The recovery of special stones declined in the quarter to 3.6% of production, from 7.1%
of production in Q2/14, as the company mined more material from the North Lobe.
Since the beginning of 2013, we calculate 4.48% of production has been recovered via
special stones, compared to the feasibility study estimate of below 4%, and our current
modelling assumption of 4.2% for the South and Centre Lobes.
■ Our NAV5% has increased 4% to $2.01 per share, as we have reduced our assumed tax
payments for Karowe based on a revised interpretation of the variable tax rate in
Botswana. We have increased our one-year target price to $2.55 per share (up from
$2.50).
Recommendation
■ In our opinion, LUC's clean balance sheet, impressive margins, experienced
management team, and continued recovery of exceptional stones warrant its premium
valuation. Unfortunately, we believe the shares are relatively fair valued at current
levels, but would be watching for dips in the share price to opportunistically accumulate
shares.
Newalta Corporation (NAL-T C$21.46)
A Closer Look at Possible Valuation Rerating
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
High
$2.55
$2.50
Adj. EPS14E
US$0.27
US$0.26
Adj. EPS15E
US$0.21
US$0.19
Adj. EPS16E
-US$0.18
New Valuation:
1.23x NAV
Old Valuation:
1.25x NAV
Diamond prices; development risk; technical
and operational risk; multiple contraction; and
geopolitical risk
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
C$0.04
C$0.04
1.7%
Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759
Event
Pertinent Data
■ Previously, once the Industrial division was officially for sale, we were of the opinion
the process would take time and that a partial sale of the division was more likely. Eight
months later, the review process is nearing its conclusion. Given management's tone and
comments regarding possible U.S. acquisition, we are inclined to believe that the entire
division may get sold. In this piece, we provide a framework on these transactions and
do the math on possible valuation rerating.
Implications
■ First off, we suspect the sale of industrial division might leave 2015E EV/EBITDA
unchanged at 8.2x. This suggests there is valuation upside as NAL repositions itself as
an energy services company. We do not anticipate NAL will trade at SES' level of 10.6x
(currently), but a 9x handle is possible, implying roughly 10% upside. See pages 2 and
3.
■ U.S. acquisition could provide additional upside. While no guidance on target size was
given, we run a case where the bulk of the Industrial proceeds are used for the purchase;
we believe 2015E EV / EBITDA could trend to 7.7x. See pages 4 and 5.
■ 2016 price target rollover could also have a meaningful impact. Unlike most OFS
providers, NAL is not materially exposed to drill-bit related activities as 75% of its
processing volumes come from production waste, which is less sensitive to volatility in
commodities.
Recommendation
■ SO rating maintained; we see upside to our PT. Execution risk remains.
Rating:
Risk:
Target:
1-Yr
SO
High
C$27.00
EBITDA14E:
$177
EBITDA15E:
$216
EBITDA16E:
$239
Valuation:
9.7x our 2015 EV/EBITDA estimate.
Customer acceptance of onsite, commodities,
labour, regulatory, weather, and FX.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.50
$0.50
2.3%
12
Edge at a Glance
Patrick Bryden, CFA - (403) 213-7750
Penn West Exploration (PWT-T C$4.76)
Long-Term Plan Focused on Core Assets
Event
Pertinent Data
■ Penn West formally released its 2015 capital budget and guidance.
Implications
■ 2015 guidance announced. The Penn West board of directors has approved a 2015
capital budget of $840 mm and expects average production to be in the range of 95,000105,000 boe/d. Our estimates include an $840 mm 2015E capital budget and production
of 95,635 boe/d.
■ Development in core areas to drive 2015 production. Total budgeted development
capital for 2015 is $750 mm. Approximately $585 mm of this budgeted development
capital is focused on light oil in the company's three core plays, including $370 mm
directed to the Cardium, $125 mm to the Viking, and $90 mm to the Slave Point play.
The company plans to spud approximately 225 wells during the year, consisting of 78
Cardium, 107 Viking, and 14 Slave Point wells.
■ Waterflood programs to help moderate corporate decline rate. Penn West has announced
plans to invest in the advancement of the company's waterflood programs, which, in our
view, will help to moderate the overall decline rate of the company as new production is
added and may help to improve its sustainability metrics.
Recommendation
■ We maintain our Sector Perform rating and one-year price target of $6.50/share.
Rating:
Risk:
Target:
1-Yr
Rogers Sugar Inc. (RSI-T C$4.78)
Tightening Its Belt
SP
High
C$6.50
CFPS14E:
CFPS15E:
CFPS16E:
$1.97
$1.68
$1.78
Valuation:
0.4x our 2P NAV plus risked upside.
Crude oil and natural gas prices; CAD/USD
exchange rate; drilling program success
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.56
$0.56
11.8%
Christine Healy, CPA, CA - (416) 863-7902
Event
■ RSI reported better-than-expected Q4/14 results, with higher realized gross margin per
tonne more than offsetting the impact of higher SG&A costs. An initial outlook for
F2015 was provided.
Implications
■ In F2015, we expect belt tightening to offset weaker volumes. Beginning in F2015, RSI
expects to save ~$5M/year from recent workforce reductions and ~$1.8M/year in energy
costs through a new contract. Ongoing capital investments and lower natural gas costs
(~25% of volume is unhedged) could also result in further savings. RSI expects the
impact of lower costs to be largely offset in F2015 by lower liquid and export sales
volume, and lower realized margin. In F2015, we forecast adjusted EBITDA to grow 5%
to $66.8M.
■ We see improved earnings post-2016. RSI is focused on securing additional export sales,
but we expect this could take a couple of years to achieve. We see potential for more
material earnings growth beyond F2015 if major trade agreements (e.g., CETA, TPP) are
ratified.
■ No near-term changes expected to dividend. While we forecast a dividend payout of
98% in F2015, RSI expects this to be short term. The RSI Board looks out several years.
In the long term, RSI targets a payout of 90%-95% (we forecast 95% in F2016).
■ Earnings revisions. We made minor revisions to our F2015 estimates.
Recommendation
■ We maintain our one-year target price of $5.00 per share and SP rating.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
Med
--
$5.00
Adj EBITDA15E
$66.8
$65.8
Adj EBITDA16E
$68.6
N/A
New Valuation:
-Old Valuation:
9.0x FTM EBITDA (one-year forward)
Competition, changes in government
regulation/foreign trade policies, rise in natural
gas prices, weather
Div. (NTM)
$0.36
Div. (Curr.)
Yield (Curr.)
$0.36
7.5%
13
Edge at a Glance
Suncor Energy Inc. (SU-T C$39.17)
Holding Steady
Event
■ Suncor's 2015 budget was announced, mostly in line with expectations.
Implications
■ Capex of $7.2B-$7.8B (+10% from 2014 guidance) was in line with our $7.6B estimate
and SU's prior long-term outlook. General trends vs. 2014 included a 33% increase oil
sands growth capex, which was expected given the multitude of projects moving ahead.
Canadian E&P spending (primarily offshore) was 3% higher. SU's corporate capex
reduction of 26% was driven by reduced discretionary investments and appears to show
favourable capital discipline.
■ Production guidance of 540-585 mbbl/d excluded potential volumes from Libya given
the challenging political environment (despite having successfully sold 4.1 mbbl/d in
Q3/14). Our prior estimates, excluding Libya, saw 582 mboe/d, which was in line across
most producing segments. However, we had rosier projections for the North Sea (63.4
mboe/d) than in SU's guidance (45-51 mboe/d) on account of a faster ramp-up of Golden
Eagle and better Buzzard performance. We have pulled down our 2015 production
estimates accordingly.
■ Other factors were largely in line, with 1%-2% improvements in oil sands cash costs,
and favourable reductions in royalties and taxes versus our estimates due to SU's $85
Brent and $78 WTI price assumptions.
Recommendation
■ We maintain our Sector Outperform rating and $54 target price (to be reviewed with the
commodity price deck in the next few weeks.)
WesternZagros Resources Ltd. (WZR-V C$0.64)
Event
■ WesternZagros announced the successful completion of its equity financing with gross
proceeds of $200M, which should help advance the company's development plans at
Garmian and Kurdamir.
Implications
■ Overall, we see the offering as challenged by regional turmoil and weak oil market
fundaments, which led proceeds to come in at the lower end of initial expectations.
■ With production expected to come on line from Sarquala-1 and potentially Hasira-1 over
the next three months, we see WesternZagros' story as gaining some additional
momentum and could evolve into a more compelling investment thesis.
■ We reaffirm our Sector Perform rating and trimmed our one-year price target to $1.25
(vs. $1.65) based on our revised risked NAVPS of $1.24 (vs. $1.69).
Recommendation
■ We continue to see WesternZagros as attractively valued and offering significant upside
although regional tensions with Baghdad and ISIS could act as an overhang on the stock
in the near term.
Jason Bouvier, CFA - (403) 213-7345
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
Med
--
$54.00
CFPS14E
$6.32
$6.36
CFPS15E
$7.10
$7.30
New Valuation:
-Old Valuation:
1.0x our risked 2P+RU (Risked Upside) NAV
less annual dividends
Commodity prices, crack spreads, timing of
projects, and project execution.
Div. (NTM)
$1.12
Div. (Curr.)
Yield (Curr.)
$1.12
2.9%
Gavin Wylie - (403) 213-7333
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
-SP
-- Speculative
$1.25
$1.65
CFPS14E
-- US$-0.04
CFPS15E
-US$0.02
New Valuation:
Based on our risked NAV of $1.24/share.
Old Valuation:
Commodity prices, exploration, project
execution, political/regulatory.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
C$0.00
C$0.00
0.0%
14
Industry Comment
Tuesday, November 18, 2014, After Close
2015 Outlook & Rolling Over
Targets
Phil Hardie, P.Eng., MBA, CFA - (416) 863-7430
phil.hardie@scotiabank.com
Michael Lee, CPA, CA - (416) 863-7826
michaelj.lee@scotiabank.com
Beam Ukarapong, MBA - (416) 945-4528
beam.ukarapong@scotiabank.com
Event
■ We provide an outlook for 2015 along with our positioning. We have also
made a number of target adjustments as we roll target multiples into 2016.
ScotiaView Analyst Link
Implications
■ We have a constructive outlook for 2015 as many of the sector's key
characteristics are likely to be increasingly sought out by investors given
some unique challenges posed by the evolving investment environment.
■ Stocks with a solid growth profile, healthy yield, relatively low market
volatility, and diversification benefits are likely to be well rewarded by
investors. The majority of the stocks within the Diversified Financials
universe are growth-oriented companies, which are likely to continue to
benefit from an attractive growth profile over our forecast period.
■ We also like bottom-up plays with the potential for accretive acquisitions
serving as possible catalysts.
■ On the small cap side the sector provides diversification from the heavily
resource-weighted Canadian small cap index, while the mid to large cap
names provide diversification against the S&P/TSX Financials Index that is
strongly influenced by performance of the banks.
Recommendation
■ We are projecting an average one-year rate of return of 20% for our
coverage universe, with the small cap names generating an ROR of just
under 24% and the mid-to-large cap names generating an average return of
17%.
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.
15
Sector Has Attributes Likely to Be Increasingly Sought Out By Investors
■ Constructive outlook for 2015 as many of the sector’s key investment characteristics
are likely to be increasingly sought out by investors. Our Diversified Financials universe
includes 20 companies across six-subsectors broadly defined as asset managers, mortgages
services, financial conglomerates, property and casualty (P&C) insurance, specialty financial
services, and capital markets. Historically, a number of these stocks have fallen below the
radar screens of many portfolio managers. That said, we believe they warrant a greater level
of attention given they share a number of key investment characteristics that are likely to be
increasingly sought by investors. These include:
1. Attractive risk/reward profile and relatively low market volatility.
2. Strong growth profile or high yield supported by strong cash flow.
3. High ROE.
4. Solid balance sheet and low financial leverage.
5. Diversification from heavily resource-weighted Canadian Small Cap index.
■ Stocks with a solid growth profile, healthy yield, relatively low market volatility and
diversification benefits are likely to be well rewarded by investors. Increased market
volatility, weakness across the commodities space, lingering macroeconomic uncertainties
and slow global growth despite a strengthening U.S. recovery have created unique
challenges for Canadian equity investors. Stocks with a solid growth profile, healthy yield,
relatively low market volatility and diversification benefits are likely to be well rewarded by
investors in 2015.
■ Solid growth prospects in a low-growth world likely to support a sustainable valuation
premium. A myriad of factors has likely contributed to an environment where finding
quality companies with above-average growth has become increasingly challenging. That
said, the majority of the stocks within the Diversified Financials universe are growthoriented companies that are likely to continue to benefit from an attractive growth profile
over our forecast period. Element Financial is projected to sustain an extremely strong
growth profile through the end of 2016, while the non-prime lenders are expected to generate
average growth of roughly 15% over the next two years, despite a widely anticipated
slowdown in housing activity. For the fundcos we are expecting EBITDA/sh to grow at an
annual average growth rate of 10% over the next two years. Intact is also projected to sustain
an average growth rate in the double digits through our forecast period. The ability to sustain
a strong growth profile is likely to support a sustainable valuation premium and help mitigate
the risk associated with relatively elevated valuation multiples.
■ Diversification an increasingly attractive attribute, in our view. Controlling
diversification and correlating factors continue to play a key role in alpha generation and
investment risk management. We expect stock correlations across our coverage universe to
remain low through 2015. On the small cap side the sector provides diversification from the
heavily resource-weighted Canadian Small cap index, while the mid to large cap names
provide diversification against the S&P/TSX Financials Index that is strongly influenced by
performance of the banks.
■ We also like bottom-up plays with the potential for accretive acquisitions serving as
possible catalysts. Looking into 2015, we see the potential acquisitions as catalysts for
Intact Financial, Fiera Capital, and Element Financial. We also see the potential for tuck-in
acquisitions in the broader wealth management sector augmenting growth and diversification
across the asset management space.
■ Introducing 2016 estimates for the asset management space and Power Group. We are
forecasting 11% YOY EBITDA/sh growth in 2016 by the fundcos, with the small cap
segment experiencing double-digit growth. For 2016 we are forecasting Power Financial and
Power Corp to grow their EPS by 9.3% and 9.6% over 2015. Exhibit 1 summarizes our
changes.
■ Taking up targets across the mortgage services and asset management sectors. As we
close out 2014 we are rolling over our target multiples into 2016. We are subsequently
raising our targets across the mortgage services sector and most of the asset management
sector. Exhibit 2 summarizes our ratings, targets, valuation assumptions and one-year
expected rate of returns for each stock in our universe.
16
Exhibit 1 – Estimate Revisions
Mutual Fund Asset Managers
EPS Estimates
CI Financial
New
Old
CIX
IGM Financial
New
Old
IGM
AGF Management
New
Old
AGF
EBITDA Per Share Estimates
One-year
Target
F2014E
F2015E
F2016E
F2014E
F2015E
F2016E
$39.00
$37.00
$1.84
$1.84
$2.16
$2.16
$2.52
-
$3.16
$3.16
$3.70
$3.70
$4.27
-
$57.00
$55.00
$3.30
$3.30
$3.67
$3.67
$4.08
-
$5.70
$5.70
$6.27
$6.27
$7.07
-
$11.00
$12.00
$0.71
$0.71
$0.73
$0.73
$0.81
-
$1.86
$1.86
$1.93
$1.93
$2.02
-
Small Cap Asset Managers
EPS Estimates
Aston Hill Financial
New
Old
AHF
Fiera Capital1
New
Old
FSZ
Gluskin-Sheff2
New
Old
GS
Guardian Capital
New
Old
EBITDA Per Share Estimates
One-year
Target
F2014E
F2015E
F2016E
F2017E
F2014E
F2015E
F2016E
F2017E
$1.40
$1.40
$0.025
$0.025
$0.037
$0.037
$0.041
-
-
$0.131
$0.131
$0.129
$0.129
$0.135
-
-
$16.00
$16.00
$0.93
$0.93
$0.96
$0.96
$1.04
-
-
$1.12
$1.12
$1.25
$1.25
$1.38
-
-
$34.00
$32.00
$3.65
$3.65
$1.92
$1.92
$2.38
$2.46
$2.85
-
$1.45
$1.45
$1.97
$1.97
$2.39
$2.47
$2.75
-
$20.00
$20.00
$1.15
$1.15
$1.04
$1.04
$1.11
-
-
$0.85
$0.85
$0.89
$0.89
$0.95
-
-
$0.14
-
-
$0.16
$0.16
$0.17
$0.17
$0.20
-
-
GCG/A
Sprott Inc.
SII
New
$2.75
$0.10
$0.12
Old
$2.75
$0.10
$0.12
1
FSZ estimates based on Cash Adjusted EPS, and Core EBITDA Per Share.
2
Actual GS EPS and EBITDA for F2014, GS estimates based on Base EBITDA Per Share
EPS Estimates
Power Corporation
New
Old
POW
Power Financial
New
Old
PWF
One-year
Target
F2014E
F2015E
F2016E
$36.50
$36.00
$2.68
$2.68
$3.12
$3.12
$3.42
-
$39.50
$39.00
$3.00
$3.00
$3.32
$3.32
$3.63
-
Source: Company reports; Scotiabank GBM estimates.
17
Exhibit 2 – Ratings, Price Targets, ROR, Valuations Across our Coverage Universe
GBM Rating
Expected
1-yr
Target
Valuation
1-yr Target
Mortgage Services Providers
Equitable Group Inc.
Old
SP
New
SP
Old
New
$67.00 $78.00
15.8%
9.2x 2016E Adj. EPS
Home Capital Group Inc.
First National Financial Corp.
Genworth MI Canada Inc.
SP
SP
SP
SP
SP
SP
$52.00 $59.00
$24.00 $26.00
$42.00 $44.00
17.6%
17.5%
11.4%
10.2x 2016E Adj. EPS
9.8x 2016E EPS
10.6x 2016E Op. EPS, 1.2x
Q3/15E BVPS
Average
P&C Insurance
Intact Financial Corporation
GBM
Rating
Capital Markets
TMX Group
Old
SP
1-yr Target
New
Old
New
SP $60.00 $60.00
Average
Valuation
15.8%
9.5x EV/EBITDA on 2016E EBITDA
15.8%
15.6%
Old
SO
New
SO
Old
New
$84.00 $84.00
Average
6.7%
Valuation
2x Q3/15E BVPS
6.7%
Specialty Financial Services
Morneau Shepell Inc.
Old
SP
DH Corporation
Element Financial Corporation
R
SO
New
Old
New
SP $18.00 $18.00
R
SO
R
R
$18.00 $18.00
Average
Mutual Funds
AGF Management Ltd.
Expected
1-yr Target
Old
SP
New
SP
Old
New
$12.00 $11.00
16.4%
CI Financial Corp.
SP
SP
$37.00 $39.00
17.1%
IGM Financial Inc.
SO
SO
$55.00 $57.00
24.1%
Average
Valuation
5.6x 2016E EBITDA, 3.5%
EV/Retail AUM 1-year out
10x 2016E EBITDA, 10.2%
EV/MFA, 1-year out
7.6x 2016E EBITDA, 9.9%
EV/MFA, 1-year out
19.2%
Small Cap Asset Managers
Aston Hill Financial
Fiera Capital Corp.
Gluskin Sheff + Associates Inc.
Old
SO
SO
SP
New
SO
SO
SP
Old
New
$1.40 $1.40
$16.00 $16.00
$32.00 $34.00
82.5%
20.8%
23.7%
Guardian Capital Group Limited
SP
SP
$20.00 $20.00
10.9%
Sprott Inc.
SP
SP
$2.75
13.0%
Average
Average (M.C. > $500M)
R = Restricted.
Source: Scotiabank GBM estimates.
$2.75
30.2%
17.1%
Valuation
2.2% EV/AUM, 1-year out
1.35% EV/AUM, 1-year out
10.25x CY2016E Base EBITDA
plus NPV of Performance Fees,
11% EV/AUM(NTM)
29.5% discount to target NAV of
$28.37
9x 2016E Adj. EBITDA plus NAV
of resource lending business
12.9%
R
28.6%
Valuation
10x EV/EBITDA on NTM EBITDA 1 year
forward
R
9.4x 2016E Pre-Tax Op. EPS, 13.1x 2016E
Op. EPS
20.7%
Financial Conglomerates
Onex Corporation
Old
SP
New
Old
New
SP $68.00 $68.00
Power Corporation
SO
SO
$36.00 $36.50
20.2%
Power Financial
SP
SP
$39.00 $39.50
17.4%
7.0%
Average
14.9%
Universe Average
Small Cap Average (M.C. < $2B)
Large Cap Average (M.C. > $2B)
23.7%
16.6%
Universe Average
20.0%
Valuation
8.8% discount to one-year forecast
enterprise NAV of $74.55 per share
15.6% Discount to One-Year NAVPS of
$43.23, 10.7x 2016E EPS
10.6% Discount to One-Year NAVPS of
$44.20, 10.9x 2016E EPS
18
Universe of Coverage
Price
AGF.B-T
AHF-T
CIX-T
DH-T
EFN-T
EQB-T
FN-T
FSZ-T
GCG.A-T
GS-T
HCG-T
IFC-T
IGM-T
MIC-T
MSI-T
OCX-T
POW-T
PWF-T
SII-T
X-T
C$10.38
C$0.80
C$34.37
C$36.43
C$14.00
C$68.00
C$23.40
C$13.64
C$18.27
C$28.21
C$50.83
C$80.50
C$47.74
C$40.89
C$16.60
C$63.75
C$31.32
C$34.85
C$2.54
C$53.18
Rating
Risk
SP
SO
SP
Restricted
SO
SP
SP
SO
SP
SP
SP
SO
SO
SP
SP
SP
SO
SP
SP
SP
High
High
Medium
N/A
High
Medium
Medium
High
Medium
Medium
Medium
Medium
Medium
Medium
Medium
Medium
Low
Low
High
Medium
1-Yr
ROR
$11.00
$1.40
$39.00
N/A
$18.00
$78.00
$26.00
$16.00
$20.00
$34.00
$59.00
$84.00
$57.00
$44.00
$18.00
$68.00
$36.50
$39.50
$2.75
$60.00
16.4%
82.6%
17.4%
N/A
28.6%
15.8%
17.8%
21.1%
10.9%
24.0%
17.7%
6.8%
24.2%
11.5%
13.1%
7.0%
20.3%
17.5%
13.0%
15.8%
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
AGF Management Limited (AGF.B-T)
New
$11.00
Operating EPS16E: 5.6x 2016E EBITDA, 3.5% EV/Retail AUM, 1-year out.
$0.81
Old
$12.00
6.25x 2015E EBITDA, 4% EV/Retail AUM, 1-year out.
Aston Hill Financial Inc. (AHF-T)
New
Adj. EPS16E: $0.041
Old
Valuation: 2.2% EV/AUM, One-Year Out
Key Risks to Price Target: AUM loss, relative investment performance, sub-advisory relationships, key personnel
CI Financial Corp. (CIX-T)
New
$39.00
Operating EPS16E: 10x 2016E EBITDA, 10.2% EV/MFA, 1-year out.
$2.52
Old
$37.00
10.9x 2015E EBITDA, 9.6% EV/MFA, 1-year out.
Element Financial Corporation (EFN-T)
New
9.4x 2016E Pre-Tax Op. EPS, 13.1x 2016E Op. EPS
Old
13x 2015E Pre-Tax Op. EPS, 18.4x 2015E Op. EPS
Valuation: 9.4x 2016E Pre-Tax Op. EPS, 13.1x 2016E Op. EPS
Key Risks to Price Target: Lease origination volumes, interest margins, industry competition, credit performance, and managing high level of growth
19
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Equitable Group Inc. (EQB-T)
New
$78.00
9.2x 2016E Adj. EPS
Old
$67.00
9.3x 2015E Adj. EPS
First National Financial Corporation (FN-T)
New
$26.00
9.8x 2016E EPS
Old
$24.00
10.1x 2015E EPS
Valuation: 9.8x 2016E EPS
Key Risks to Price Target: Lower mortgage origination volumes, tighter funding spreads
Fiera Capital Corporation (FSZ-T)
New
Cash Op EPS16E:
$1.04
Old
Valuation: 1.35% EV/AUM, 1-yr forward
Key Risks to Price Target: Relative investment performance, net inflows, cost containment, integration risk
Guardian Capital Group Limited (GCG.A-T)
New
EPS16E: $1.11
Old
Valuation: 29.5% discount to target NAV of $28.37
Key Risks to Price Target: Weak BMO share price, Decline in AUM, NAV discount ascribed by market
Gluskin Sheff + Associates Inc. (GS-T)
New
$34.00
EPS16E: $2.38
Old
$32.00
EPS16E: $2.46
EPS17E: $2.85 10.25x CY2016E Base EBITDA plus NPV of Performance
Fees, 11% EV/AUM (NTM)
11.1x CY2015E Base EBITDA plus NPV of Performance
Fees, 10.2% EV/AUM (NTM)
Valuation: 10.25x CY2016E Base EBITDA plus NPV of Performance Fees, 11% EV/AUM (NTM)
Key Risks to Price Target: Relative investment performance, net inflows, capital market conditions
Home Capital Group Inc. (HCG-T)
New
$59.00
Old
$52.00
Intact Financial Corporation (IFC-T)
Valuation: 2x Q3/15E BVPS
Key Risks to Price Target: Frequency/severity of catastrophic events, Unfavourable regulatory changes, Inadequate loss reserves
20
IGM Financial Inc. (IGM-T)
New
$57.00
Old
$55.00
Operating EPS16E: 7.6x 2016E EBITDA, 9.9% EV/MFA, 1-year out.
$4.08
8.25x 2015E EBITDA, 9.5% EV/MFA, 1-year out.
Genworth MI Canada Inc. (MIC-T)
New
$44.00
10.6x 2016E Op. EPS, 1.2x Q3/15E BVPS
Old
$42.00
10.7x 2015E Op. EPS, 1.1x Q3/15E BVPS
Valuation: 10.6x 2016E Op. EPS, 1.2x Q3/15E BVPS
Key Risks to Price Target: Weaker-than-expected labour markets, Decline in residential home prices, Regulatory changes.
Morneau Shepell Inc. (MSI-T)
Valuation: 10x EV/EBITDA on NTM EBITDA 1 year forward
Key Risks to Price Target: Potential loss of long-term service contracts, Slower-than-expected EAP growth, Direct competition from US peers
Onex Corporation (OCX-T)
Valuation: 8.8% discount to one-year forecast enterprise NAV of $74.55 per share
Key Risks to Price Target: Economic conditions, competitive environment for operating companies, health of capital markets.
Power Corporation of Canada (POW-T)
New
$36.50
Operating EPS16E: 15.6% Discount to one-year NAVPS of $43.23, 10.7x 2016E
$3.42 EPS.
Old
$36.00
15.7% Discount to one-year NAVPS of $42.73, 11.5x 2015E
EPS.
Power Financial Corporation (PWF-T)
New
$39.50
Operating EPS16E: 10.6% Discount to one-year NAVPS of $44.20, 10.9x 2016E
$3.63 EPS.
Old
$39.00
10.9% Discount to one-year NAVPS of $43.78, 11.7x 2015E
EPS.
Sprott Inc. (SII-T)
New
Old
Valuation: 9x 2016E Adj EBITDA plus NAV of resource lending business
Key Risks to Price Target: Capital market levels, margin and competitive pressures
EPS16E: $0.14 9x 2016E Adj EBITDA plus NAV of resource lending
business
10x 2015E Adj EBITDA plus NAV of resource lending
business
21
TMX Group Ltd. (X-T)
New
Old
Valuation: 9.5x EV/EBITDA on 2016E EBITDA
Key Risks to Price Target: Declining revenue from lost market share and pricing pressure, Lack of growth from derivatives platform
22
Intraday Flash
Tuesday, November 18, 2014 @ 12:01:10 PM (ET)
Global Fertilizers
Russian Potash Mine Flood Should
be Positive for 2015 Outlook
Ben Isaacson, MBA, CFA - (416) 945-5310
ben.isaacson@scotiabank.com
Carl Chen - (416) 863-7184
carl.chen@scotiabank.com
Event
■ URKA's Solikamsk-2 mine, 3% of global supply and 17% of our 2015E
Uralkali production estimate, is flooding to the point where all work in the
mine has been suspended, and all personnel have been evacuated.
Implications
■ We look back at the impact of several brine inflow situations in the potash
market over the past decade - some positive and some neutral. While it's still
too early to tell what will happen with Solikamsk-2, the removal of all
personnel, as well as the closure of the mine, tells us it must be serious.
■ We run through the math under two 2015 scenarios, assuming the mine is
lost. The Scotia scenario suggests a 17% tightening of the S/D imbalance
next year, while our avg. corporate scenario suggests a 50% improvement.
Recommendation
■ The bottom line is that we see this as a very positive development for the
commodity, especially given the timing of the Chinese contract negotiation likely in the peak discussion period. In fact, if we see a $20/mt increase in
global potash prices due to this (highly likely), then URKA could be
economically indifferent on the mine flood!
■ 2015E EBITDA exposure to potash: IPI @ 100%, POT @ 62%, K+S @
58%, SQM @46%, MOS @ 42% and AGU @ 14%. From a margin
leverage point of view, higher cost producers like IPI and K+S will benefit
more from rising prices than all others. We're buying the space today.
Price
AGU-N
CF-N
IPI-N
MOS-N
NPK-T
POT-N
SDF-DE
SQM-N
YAR-OL
US$103.45
US$269.34
US$14.12
US$46.86
C$0.54
US$35.57
€23.50
US$24.85
322.70kr
Rating
Risk
SO
SO
SP
SO
SP
SP
SP
SP
SP
Medium
High
High
High
Speculative
High
High
Medium
High
1-Yr
ROR
$120.00
$300.00
$13.50
$52.00
$1.10
$34.00
€23.00
$28.00
300.00kr
19.0%
13.6%
-4.4%
13.1%
103.7%
-0.5%
-0.8%
15.0%
-4.8%
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.
23
Russian Potash Mine Flood
■ A quick history lesson. On October 19, 2006 Uralkali’s Berezniki-1 flooded, which
removed 1.4M mt of supply out of an already tight market. The flood occurred following a
break in a section of an old part of the mine, which caused an “inflow of brine” and
hydrogen sulphide emissions. Exhibit 1 highlights the subsequent sinkhole. A brine inflow is
exactly what Uralkali is once again talking about. At the time, this led to a 22% and 17%
rally in POT and MOS over the subsequent month, respectively (Exhibit 2).
Exhibit 1 – 2006 Berezniki-1 Sinkhole
Exhibit 2 – Oct 18 to Nov 17, 2006 Stock Performance
25%
22%
20%
17%
15%
10%
10%
5%
5%
n.a.
0%
-1%
-5%
POT
Source: Itar-Tass.
MOS
K+S
AGU
SQM
IPI
Source: Bloomberg; Scotiabank GBM.
■ Another history lesson. In 2011, one of Belaruskali’s mines flooded. North American
producers sent technical teams to Belarus to help contain the flood, which they did
successfully. Mosaic has been managing a brine inflow at Esterhazy, the largest potash mine
in the world, for years. Both situations have not impacted production, as far as we know.
Therefore, not all potash brine inflow situations are positive catalysts for equity
outperformance. While it’s still too early to tell what will happen with Solikamsk-2, the
removal of all personnel, as well as the closure of the mine, tells us it must be serious.
■ Solikamsk-2. The mine was rated at 2.3M mt in 2013, and may be higher following some
debottlenecking, potentially as much as 2.4M mt. After planned maintenance, we assume the
granular and standard grade mine produces 2M mt annually, which equates to about 3% of
global supply, and about 17% of our assumed 2015E Uralkali production of 12M mt.
■ Impact to 2014. For 2014, we estimate the supply/demand imbalance to be ~3M mt
(assuming 57M mt of demand), and potentially as tight as 1M mt if we use the average
corporate demand forecast of 59M mt. The removal of 2M mt of production could
temporarily push potash into a demand-driven market, something we haven’t seen in years,
and a very bullish sign. However, as 2014 is effectively behind us, how does 2015 look?
■ Impact to 2015 – Scotia estimates. We believe the 2015 supply/demand imbalance is 4.5M
mt, assuming 54M mt of demand (lower y/y for several reasons) – see Exhibit 3. The
removal of 2M mt should push potash into a slighter tighter (-17%) situation in 2015 than in
2014. However, 2015 demand is likely more price elastic than 2014, given weaker crop
fundamentals. Therefore, the impact of this mine flood should be considered less severe to
N/T market fundamentals today, than had the flood occurred 9-12 months ago. However, we
do not want to understate that the impact is obviously quite positive in the Scotia scenario.
■ Impact to 2015 – average corporate. Based on average corporate 2014E demand at 59M
mt, our 2015 S/D imbalance could now drop to 0.5M mt (Exhibit 4), which means the
market could be 50% tighter next year. Accordingly, in the average corporate scenario, we
think a very bullish case can be built, potentially even bordering on a demand driven market.
■ Bottom line. The bottom line is that we see this as a very positive development for the
commodity, especially given the timing of the Chinese contract negotiation – likely in the
peak discussion period. In fact, if we see a $20/mt increase in global potash prices due to
this (highly likely), then URKA could be economically indifferent on the mine flood!
■ Leverage. 2015E EBITDA exposure to potash is: IPI @ 100%, POT @ 62%, K+S @ 58%,
SQM @46%, MOS @ 42% and AGU @ 14%. From a margin leverage point of view, higher
cost producers like IPI and K+S will benefit more from rising prices than all others. Until we
know more, we’re buying the space today.
24
Exhibit 3 – Potential Mine Flood Impact – Using Scotia 2014E Demand of 57M mt
Producer
GBM Est.
2014E
(M mt)
Canpotex
POT
MOS
AGU
9.1
8.7
1.0
18.8
Former BPC
BELA
URKA
9.0
11.5
20.5
POT's Equities
ICL
SQM
APC
QSLP (China)
5.3
1.7
2.2
4.0
13.2
IPI
K+S
VALE
China/All other
1.0
3.2
0.3
3.0
7.5
2014E Supply
60.0
Independent
1.
2.
3.
4.
5.
6a.
6b.
7.
Distributor restocking should be over
U.S. restocking could overshoot on logistics fears
The Indians have been stock-piling
Potash application rates could fall next year (Brazil/U.S.)
AGU will offer more product next year
Belaruskali destocking complete
Global supplier destocking complete
Forward buying in 2014
GBM Est.
2014E
(M mt)
North America
China
India
SE Asia
Europe & FSU
Brazil
ROW
10.0
12.2
3.2
8.2
10.5
9.2
3.7
Pre-flood
Excess Supply?
2014E Demand
57.0
3.0
-1.5
0.5
-0.5
-1.0
1.0
-1.5
-1.0
+50%
-17%
-0.5
2015E Supply
58.5
2015E Demand
54.0
4.5
-
2.0
=
Less:
Mine flood
2.5
Post-flood
Excess Supply?
Source: Itar-Tass; Scotiabank GBM estimates.
Exhibit 4 – Potential Mine Flood Impact – Using Average Corporate 2014E Demand of 59M mt
Producer
GBM Est.
2014E
(M mt)
Canpotex
POT
MOS
AGU
9.1
8.7
1.0
18.8
Former BPC
BELA
URKA
9.0
11.5
20.5
POT's Equities
ICL
SQM
APC
QSLP (China)
5.3
1.7
2.2
4.0
13.2
IPI
K+S
VALE
China/All other
1.0
3.2
0.3
3.0
7.5
2014E Supply
60.0
Independent
1.
2.
3.
4.
5.
6a.
6b.
7.
Distributor restocking should be over
U.S. restocking could overshoot on logistics fears
The Indians have been stock-piling
Potash application rates could fall next year (Brazil/U.S.)
AGU will offer more product next year
Belaruskali destocking complete
Global supplier destocking complete
Forward buying in 2014
2015E Supply
Corporate
2014E
(M mt)
Pre-flood
Excess Supply?
2014E Demand
59.0
-1.5
0.5
-0.5
-1.0
1.0
-1.5
-1.0
1.0
+150
-50%
-0.5
58.5
2015E Demand
56.0
2.5
-
2.0
Less:
Mine flood
=
0.5
Post-flood
Excess Supply?
25
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Agrium Inc. (AGU-N)
Valuation: 7.5x 2016E EBITDA, 13x 2016E EPS, DCF @ 10%, 65% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
CF Industries Holdings, Inc. (CF-N)
Valuation: 7x 2015E EBITDA, 14.5x 2015E EPS, DCF @ 9%, 70% RCN
Intrepid Potash, Inc. (IPI-N)
Valuation: 12x 2015E EBITDA, DCF @ 10%, 40% RCN
The Mosaic Company (MOS-N)
Valuation: 8.5x 2015E EBITDA, 16x 2015E EPS, DCF @ 9.5%, 45% RCN
Verde Potash plc (NPK-T)
Valuation: 0.3x NAV
Key Risks to Price Target: Financing, development progress, potash supply/demand
Potash Corporation of Saskatchewan, Inc. (POT-N)
Valuation: 9.5x 2015E EBITDA, 17.5x 2015E EPS, DCF @ 9.5%, 50% RCN
K+S AG (SDF-DE)
Valuation: 7x 2015E EBITDA, 13x 2015E EPS, DCF @ 10%, 25% RCN
Sociedad Quimica y Minera de Chile (SQM-N)
Valuation: 11x 2015E EBITDA, 20x 2015E EPS, DCF @ 10.5%
Yara International ASA (YAR-OL)
Valuation: 5.5x 2015E EBITDA, 11.5x 2015E EPS, DCF @ 10.5%, 45% RCN
26
Industry Comment
October Mutual Fund Flows - Net
LTA Sales Remain Resilient, Up
72% YOY
Phil Hardie, P.Eng., MBA, CFA - (416) 863-7430
phil.hardie@scotiabank.com
Michael Lee, CPA, CA - (416) 863-7826
michaelj.lee@scotiabank.com
Beam Ukarapong, MBA - (416) 945-4528
beam.ukarapong@scotiabank.com
Event
■ IFIC reported mutual fund flows for October 2014. Net LTA sales (ex.
Money Market funds) were relatively solid, with YTD sales increasing
48.5% over last year.
■ Total industry net LTA sales in October were $2.0B versus $3.0B in
September, and $1.2B a year earlier. Total industry net sales in October
were $1.9B versus $2.7B in September and $0.8B a year ago.
Implications
■ Despite the market sell-off in October, net LTA sales remain resilient,
increasing 72% YOY. The YOY increase in net LTA sales were primarily
due to improved Fixed Income flows.
■ Fixed Income funds flows were positive with Global and Domestic Fixed
Income funds posting inflows, improving YOY.
■ Balanced funds continue to attract the majority of fund flows, with Global
Balanced remaining the bestseller. Domestic Balanced funds recorded
positive flows but declined from the previous month.
■ Equity funds flows were negative in October. U.S. Equity funds recorded
inflows, while Domestic, Global and Sector Equity funds posted net
redemptions.
■ Industry AUM of $1 trillion was up 0.5% MOM and 15.4% YOY, largely
driven by positive fund flows and market appreciation.
Recommendation
■ We expect to publish our Mutual Fund Quarterly Review for Q3/14 at the
end of November.
Price
AGF.B-T
CIX-T
IGM-T
C$10.38
C$34.37
C$47.74
Rating
Risk
SP
SP
SO
High
Medium
Medium
1-Yr
ROR
$11.00
$39.00
$57.00
16.4%
17.4%
24.2%
27
October Mutual Fund Flows – Net LTA Sales Remain Resilient, Up 72%
YOY
■ YTD net LTA sales were up 48.5% from the previous year. The Investment Funds
Institute of Canada (IFIC) reported mutual fund flows for October 2014. Net LTA sales,
which exclude Money Market funds, were relatively solid with YTD sales higher than 2013
by 48.5%. Total industry net LTA sales in October were $2.0B versus $3.0B in September,
and $1.2B a year earlier. Total industry net sales in October were $1.9B versus $2.7B in
September and $0.8B a year ago. Industry AUM of $1.0 trillion increased 0.6% MOM and
was up 15.4% YOY. The increase in AUM was largely driven by positive net sales and
market appreciation.
■ Global balanced fund flows remain strong. Balanced funds recorded inflows of $1.8
billion, driven by strong inflows in Global Balanced funds. Global Balanced funds inflows of
$1.2 billion were down from inflows of $2.0 billion in the previous month and from inflows
of $1.8 billion a year earlier. Domestic Balanced funds posted inflows of $592 million, down
from inflows of $1.2 billion in the previous month but improved from outflows of $62
million in the previous year.
■ Global and Domestic Fixed Income funds flows improved YOY. Global Fixed Income
inflows of $294 million declined from inflows of $314 million last month but improved from
inflows of $2 million in the previous year. Domestic Fixed Income fund flows turned
positive in October, with net inflow of $87 million. This compared with outflows of $780
million in the previous month and outflows of $1.6 billion a year ago. Note that Domestic
Fixed Income fund flows were impacted by the portfolio rebalancing at MD Management in
September. Money Market funds posted outflows of $136 million, compared with outflows
of $324 million in the previous month and outflows of $350 million a year ago.
■ Domestic Equity fund flows remain in net redemptions. Equity funds posted outflows of
$181 million, down from inflows of $620 million in September and from inflows of $990
million a year earlier. Note that September fund flows were impacted by the portfolio
rebalancing at MD Management, resulting in significant inflows into Global Equity funds
and unusually large outflows from Domestic Equity, U.S. Equity and Domestic Fixed
Income funds. Global Equity funds outflows of $15 million were down from inflows of $2.8
billion in the previous month and inflows of $448 million a year ago. Domestic Equity funds
recorded outflows of $469 million, improved from outflows of $1.2 billion last month but
down from outflows of $28 million a year ago. Following two consecutive months of
outflows, U.S. Equity posted inflows of $387 million, compared with outflows of $809
million in September and inflows of $679 million last year. Dividend and Income Equity
funds (a sub-category of Domestic Equity funds) recorded net redemptions of $102 million.
Sector Equity funds posted outflows of $84 million.
■ Net LTA sales increased YOY, as growth in gross LTA sales outpaced that of LTA
redemptions. Gross LTA sales in October were $15.1 billion, up 28.4% YOY. Gross LTA
redemptions in October were $13.1 billion, up 27.7% YOY. The LTA redemption rate was at
16.1% in October, up from 15.7% in the previous month and up 14.6% a year ago. The
redemption rate on a 12-month trailing basis was 13.5%, remaining relatively flat compared to
the previous month but down from14.9% a year earlier.
■ Following downward trend through most of 2014, redemption rates ticked up over the
last two months. On a month over month basis, net LTA sales declined 34%, likely
reflecting a recent increase in redemption rate and seasonally lower gross sales. The LTA
redemption rate has ticked up since September and is now at 16.1%.
■ Industry AUM increased 0.5% over last month, largely reflecting positive net sales and
market appreciation. Industry AUM at the end of October was estimated at $1.0 trillion, up
0.5% from the previous month and 15.4% YOY. The increase in AUM was primarily driven
by positive net flows and market appreciation. On a total return basis the S&P/TSX declined
2.1%, while S&P 500, NASDAQ and MSCI World (CAD) increased 2.4%, 3.1% and 0.7%
MOM, respectively in October. Year-over-year on a total return basis, the S&P/TSX, S&P
500, NASDAQ and MSCI World (CAD) increased 12.6%, 17.3%, 19.6%, and 9.4%,
respectively.
■ CIX experienced a 0.4% growth in AUM, while AUM for IGM and AGF declined from
the previous month. The publicly traded fundcos released their monthly AUM earlier this
month (see Exhibit 31). CIX AUM increased 0.4% from last month, while IGM mutual fund
28
AUM declined 0.3%. AGF mutual fund AUM growth lagged its peers, with AUM declining
1% MOM.
Mutual Fund Quarterly Review for Q3/14 to be Published in November
■ IFIC releases detailed monthly data by fund company on a quarterly basis. We expect to
release our Mutual Fund Quarterly Review for Q3/14 at the end of November.
29
Exhibit 1 - Industry Net Sales
Mutual Fund Net Sales
1991 - October 2014
(C$million)
9,000
7,000
5,000
3,000
1,000
-1,000
-3,000
-5,000
-7,000
-9,000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: IFIC; Scotiabank GBM
Phil Hardie, P.Eng., MBA, CFA
2008 - October 2014
($M)
7,226
7,038
6,086
5,695
7,000
5,989
5,607
4,622
3,042
2,488
2,580
1,022
674
1,738
1,085
1,076
953
1,447
663
461
435
168 208
89
1,916
1,756
1,430
1,463
1,0451,427
1,015
790
1,252
3,7943,954
3,450
2,960
2,706
802
508
142
1,000
-1,000
(86)
(844)
(1,263)
3,000
1,906
1,770
1,354
(83)
(132) (100)
(241)
(449)
(751)
(980)
(1,394)
(686)
(969)
(761)
779
477
225
541418
1,662
1,698
1,462
1,044
3,163
3,141
2,920
2,804
2,447
2,345
2,129
1,888
3,930
3,662
3,345
5,000
4,089
4,006
3,408
-3,000
-5,000
(4,554)
-7,000
-9,000
J
A
2008
J
O
J
A
J
2009
Source: IFIC; Scotiabank GBM.
O
J
A
2010
J
O
J
A
2011
J
O
J
A
2012
J
O
J
A
J
2013
O
J
A
2014
J
O
30
1979 - October 2014
C$billion
Net Sales
66.0
% AUM
35%
30%
49.2
45.9
25%
43.2
39.8
32.634.0
30.9
30.4
25.5
23.1
19.3
27.127.4
22.2
15.9
10.613.6
5.0 5.2
0.6
2.5
Note: Net sales include net transfers beginning in 1995
14 YTD
13
13 YTD
12
11
10
09
08
07
06
05
04
02
01
00
99
98
97
96
95
94
93
92
91
90
-3.9
89
88
87
86
85
84
83
82
81
80
5%
1.8 1.9
0%
-0.2
79
10%
8.2
3.1
Mutual Fund Net Sales Momentum
LTM % Change
1998 - October 2014
(% change)
480%
420%
360%
300%
240%
180%
120%
60%
0%
-60%
-120%
-180%
1999
2000
2001
2002
2003
2004
2005
-5%
Exhibit 4 - Mutual Fund Net Sales Momentum
1998
20%
15%
14.8
8.1
03
0.1 0.2 0.2 0.3 1.0 1.0 1.9
40%
2006
2007
2008
2009
2010
2011
2012
2013
2014
31
Exhibit 5 - Mutual Fund Net Sales as a % of AUM
Mutual Fund
Net Sales as % of AUM - LTM
1991 - October 2014
% of AUM
45%
40%
35%
30%
30%
25%
20%
15%
12%
10%
5%
0%
-5%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Note: LTM Average AUM. Net Sales include transfers beginning 1995.
Source: Company reports; Scotia Capital estimates.
Exhibit 6 - Industry Long Term Asset Net Sales
Mutual Fund
Net Sales of Long-Term Assets
1991 - October 2014
(C$million)
9,000
7,000
5,000
3,000
1,000
-1,000
-3,000
-5,000
-7,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
32
Mutual Fund Net Sales of Long-Term Assets
2008 - October 2014
($M)
6,627
7,000
6,620
6,401
6,133
6,000
5,372
4,819 4,876
4,526
4,244
4,047
3,950
3,651
3,085
2,805
3,301
3,273
71.8%
(106)
691
402
1,905
1,798
1,127 1,242
931
584
1,871
2,311
2,135 2,141
1,928
1,708
1,453
4,000
3,281
1,867
1,583
1,256
835
1,106
860
562
267183
5,000
3,582
3,427
3,321
2,283
2,094
803
681
316
29
3,496
4,471
4,119 4,183
3,023
2,996
2,870
2581
2,376 2,503
2,159
2,035
1,961
1,920
1,855
$838.78
9,000
8,000
7,397
2,008
1,725
3,000
2,000
1,169
1,000
613
288
0
(163)
(234)
(685)
(27)
(402)
-1,000
(1,016)
-2,000
(1,960)
(2,378)
(2,519)
-3,000
-4,000
-5,000
(4,629)
-6,000
-7,000
(6,495)
J
A
J
O
J
A
J
O
J
J
O
J
A
J
O
J
2011
2010
2009
2008
A
A
J
O
J
A
J
O
J
J
O
2014
2013
2012
A
Phil Ha rdie, P.Eng., MBA, CFA
Mutual Fund
Net Sales of Long-Term Assets
1991 - October 2014
C$billion
51.1
42.4
33.6
33.2
29.3
28.5
27.3
25.2
25.6 26.7
28.8
28.6
22.2
19.6
19.1
10.8
18.5
11.7
9.6
6.8
4.5
27.2
2.6
5.3
-15.1
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
13
14
YTD YTD
33
Exhibit 9 – Net Sales Performance by Asset Class
Net Sales Performance
Oct-14, C$million
1 Month
Current Assets
Net
Sales
% AUM
$169,393
$84,536
$50,556
$11,766
$233,856
$293,284
$88,208
$42,376
$7,306
$21,323
(469)
(15)
387
(84)
592
1,171
87
294
68
(136)
Domestic Equity
Global Equity
U.S. Equity
Sector Equity
Domestic Balanced
Global Balanced
Domestic Fixed Income
Global Fixed Income
Specialty Funds
Money Market
Total Mutual Fund Industry
$1,002,605
3 Months
% Mix
Net
Sales
% AUM
(0.3%)
(0.0%)
0.8%
(0.7%)
0.3%
0.4%
0.1%
0.7%
0.9%
(0.6%)
(25%)
(1%)
20%
(4%)
31%
62%
5%
16%
4%
(7%)
(1,800)
2,714
(464)
(264)
3,251
4,980
(908)
849
78
(496)
0.2%
100%
7,939
1,895
12 Months
% Mix
Net
Sales
% AUM
(1.1%)
3.2%
(0.9%)
(2.2%)
1.4%
1.7%
(1.0%)
2.0%
1.1%
(2.3%)
(23%)
34%
(6%)
(3%)
41%
63%
(11%)
11%
1%
(6%)
(1,303)
5,447
1,427
(773)
13,120
31,624
(4,905)
4,836
638
(2,795)
0.8%
100%
47,315
YTD
% Mix
Net
Sales
% AUM
% Mix
(0.8%)
6.4%
2.8%
(6.6%)
5.6%
10.8%
(5.6%)
11.4%
8.7%
(13.1%)
(3%)
12%
3%
(2%)
28%
67%
(10%)
10%
1%
(6%)
(1,842)
5,001
913
(469)
12,049
26,850
(2,737)
4,378
489
(2,686)
(1.1%)
5.9%
1.8%
(4.0%)
5.2%
9.2%
(3.1%)
10.3%
6.7%
(12.6%)
(4%)
12%
2%
(1%)
29%
64%
(7%)
10%
1%
(6%)
4.7%
100%
41,945
4.2%
100%
Note: Data based on Fund Admin View .
Exhibit 10 – Net Sales by Asset Class
Net Sales by Asset Class
Month of October
C$million
2013
1,835
2014
1,171
679
448
592
387
294
87
(15)
(28)
(108) (84)
2
137 68
(62)
(136)
(350)
(469)
(1,593)
Domestic
Equity
Global
Equity
U.S. Equity
Sector
Equity
Note: Data based on Fund Admin View.
Domestic
Balanced
Global
Balanced
Domestic Global Fixed Specialty
Fixed
Income
Funds
Income
Money
Market
34
Year-to-Date October
C$million
26,850
2013
22,383
2014
12,049
7,152
6,520
5,001
4,378
3,337
1,063 489
913
(1,173)
(1,842)
(69)
(1,058)(469)
(2,686)
(2,993)
(2,737)
(7,765)
Domestic
Equity
Global
Equity
U.S. Equity
Sector
Equity
Domestic
Balanced
Global
Balanced
Fixed
Income
Funds
Income
Money
Market
% of Total Net Sales
Month of October
191.3%
70.7%
31.2%
20.4%
-0.8%
2014
61.8%
46.7%
-2.9%
-24.8%
2013
15.5% 14.3%3.6%
4.6% 0.2%
-11.3%-4.4% -6.5%
-7.2%
-36.5%
-166.0%
Domestic
Equity
Global
Equity
U.S. Equity
Sector
Equity
Domestic
Balanced
Global
Balanced
Fixed
Income
Funds
Income
Money
Market
35
% of Total Net Sales
Year-to-Date October
81.7%
2013
2014
64.0%
28.7%
23.8%
26.1%
12.2%10.4%
11.9%
3.9% 1.2%
2.2%
-4.3%-4.4%
-0.3%
-3.9%-1.1%
-6.4%
-10.9%
-6.5%
-28.3%
Domestic
Equity
Global
Equity
U.S. Equity
Sector
Equity
Domestic
Balanced
Global
Balanced
Fixed
Income
Funds
Income
Money
Market
Exhibit 14 - Mutual Fund Net Sales Domestic Equity
Mutual Fund Net Sales Domestic Equity
2007- October 2014
($) Millions
1,300
1,123
944
800
572
367
165
304
235
152
117
3 37 30
34
3
(35)
(144)
(203) (199)
(288)
(327)
(309)
(333)
(360)
(366) (408)
(334)
(452)
(454)
(533)
(618) (578)
(607)
(611)
(632)
(692)
(734)
(792)
(73)
(3)
(71)
(264) (354)
(374)
(28)
(44)
(130)(95)
(153)
(209)
(244)
(245)
(305)
(322)
(349)
(354)
(366)
(390)
(399)
(415)(392)
(415)
(450)
(455)
(458)
(467)
(521)
(529) (561)
(609)
(611)
(613)
(619)
(651)
(771)
(781)
(786)
(793)
(826)
(845)
(854)
(82)
(135)
300
91
94
(85)
(161)
(175)
(97)
(200)
(378)
(469)
(700)
(1,200)
(1,233)
(1,332)
(1,395)
(1,700)
(2,055)
(2,200)
J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S
2007
2008
2009
2010
2011
Note: January 2011 inflows of $313M adjusted for the impact of MD Management;
Data based on Fund Admin View.
2012
2013
2014
36
Exhibit 15 - Mutual Fund Net Sales Canadian Dividend & Income Equity
Mutual Fund Net Sales Dividend & Income Equity
2007 - October 2014
($) Millions
1,400
1,200
1,000
746
480
206
438 457
421
308 278
304
296
295
270
205
121
115
103
95
83
74
4628
800
713
617
606
370
305
294 273
239
224
221
215 204
204
202
190
174
168
136
123
110 119
106
69
60
58
33
-20 242 7
20 7
285 253
155
71
250
303
153
149 151
600
449
335
117
400
335
197
101
186
165 174
151
123
98
4840
9
200
0
-166
-7
-39
-15
-57
-117
-148
-212
-31
-49
-143
-217
-91
-102
-200
-400
-428
-430
-600
-624
-800
J
A
J
O
2007
J
A
J
O
2008
J
A
J
O
J
A
J
2010
2009
O
J
A
J
O
2011
J
A
J
O
2012
J
A
J
O
J
2013
A
J
O
2014
Exhibit 16 - Mutual Fund Net Sales Global Equity
Mutual Fund Net Sales Global Equity
2007- October 2014
($) Millions
3,256
2,774
1,900
1,497
1,008
1,089
639
539
305
229
226
161
26
43
15
(51)
(55)
(62)
(64)
(77)
(100)
(152)
(166)
(93)
(232)
(233)
(233)
(239)
(242)
(252)(427)
(262)
(303) (335)
(304) (312)
(308)
(318)
(323)
(334)
(338)(406)
(345)
(460)
(352)
(355)
(374)
(391)
(401)
(408)
(409)
(425)
(428)
(431)
(452)
(453)
(461) (523)
(464)
(497)
(506)
(514)
(561)
(566)
(589)
(602)
(609) (601)
(615)
(646)
(580)
(641)
(655)
(787)
(916)
(1,061)
(1,176)
755
566
448 383 502
281
236
213
191
182
60
(3)
(16)
(120)
(45) (15)
(1,513)
2007
2008
2009
2010
2011
Note: January 2011 outflows of $259M adjusted for the impact of MD Management;
2012
2013
2014
37
Exhibit 17 - Mutual Fund Net Sales U.S. Equity
Mutual Fund Net Sales U.S. Equity
2007- October 2014
($) Millions
1,136
1,032
850
754
682
549
523
482
360
460
394
379
241
178
112
177 132
7
3
104
28 6
25
11
(70)
67
4 21
(25) (10)
(84)
(153)
(189)
4
(30)
(46)
59 74 86
(0)
(47)
(84)
(99)(129)
(10)
(121)
75
4011
102
(20)
(85)
(61)
(3)
(31)(7)
(27)
(71)
(121)
387
312
299
198
187
138
88
128
113
57
79 77
51
4 2319
3545
790
738
720
679
683
5
14
(9)
(22)
(63)
(74)
(161)
(43)
(197)
(555)
(809)
(1,112)
2007
2008
2010
2009
2011
2013
2012
Note: January 2011 inflows of $142M adjusted for the impact of MD Management;
2014
Phil Hardie, P.Eng., MBA,CFA
Exhibit 18 - Mutual Fund Net Sales Domestic Balanced
Mutual Fund Net Sales Domestic Balanced
2007- October 2014
($) Millions
2,533
2,096
2,016
1,926
1,8431,836
1,701
1,623
1,514
1,483
1,3241,346
1,313
1,177
1,485
1,021
1,008
1,059
614
650
528
478
413
1,124
1,040
1,224
1,204
738
701
650
517
572
148281
141
116
221
(106)
(494)
750
671
514 515
416
398
287
442
813
684 726
590
592
490
387
379
244
162
(60)
(126)
(210)(178)
(272)
953
773
259 280
184
151
97
866
480
417
254
209
1,172
925
990
766 855
711 754
877
614
1,090
1,165 1,202
1,269
1,249
(62)
(140)
(582)
(788)
(1,078)
(1,613)
2007
2008
2009
2010
2011
2012
2013
2014
Phi l Hardie, P.Eng., MBA, CFA
38
Exhibit 19 - Mutual Fund Net Sales Global Balanced
Mutual Fund Net Sales Global Balanced
2007- October 2014
($) Millions
5,016
4,115
3,556
3,510
3,164
2,921
2,761
2,526
2,305
2,094
1,890
2,074
1,891
1,719
1,542
1,353 1,377
1,299
1,781
1,672
1,510
1,555
1,274
1,178
787
609
762
670
619
1,211 1,218
1,133
880
972
751
711
675
632
614
593
572
557
361 423
360
252 225
148 123
600
574
475
446
296
275
(71)
2,369
1,445
1,028
2,563
2,472
2,414
2,340
1,981
1,827
1,952
1,820 1,835
1,574
1,612
730
723
560 535
380
237
2,516
2,259
2,418
2,277
1,260
1,189
1,158
1,051
963
899
857
821
753
1,171
(101)
(168)
(369)
(1,123)
2007
2010
2009
2008
2012
2011
2013
2014
Exhibit 20 - Mutual Fund Net Sales Domestic Fixed Income
Mutual Fund Net Sales Domestic Fixed Income
2007- October 2014
($) Millions
2,083
1,899
1,459
1,358
1,310
1,301
872
785 802
592
440
324
319
11670
11
4520 62
13
(21)
(109) (108) (108)
(226) (257) (175)
(303)
75
947
1,038
1,318
1,201
1,139
1,108
961
857
1,005
866
712
652
831
677
505
389
234
556
452
19
15
1,050
1,000
108
(47)
(157)(109)
214
907
778
644
473 528
584
564
274
109
87
(83) (95)
(264)(216)
(358)
(555)
(783)(810)
(699)
(178)
(261)(280) (214)
(459)(457)
(487)
(648)
(718)
(1,274)
(870)
(957)
(780)
(1,211)
(1,378)
(1,515) (1,388)
(1,593)
2007
2008
2009
2010
2011
2012
Note: January 2011 outflows of $232M adjusted for the impact of MD Management;
2013
2014
Phil Hardi e, P.Eng., MBA, CFA
39
Exhibit 21 - Mutual Fund Net Sales Global Fixed Income
Mutual Fund Net Sales Global Fixed Income
2007- October 2014
($) Millions
786
771
696
687
648
501
462
441
345
298
284
246
328
302
250
231
119 199
384
346
74
3449
4
555
536
517 534
413
356
348
282
259
256
234
254
217
267
266
228
196
314
287 294
241
240
218
148
134
98
56
137
96
196
7
2
(5)
(36) (31)
(13)
(43)
(66)
(18)
(65)
424
374
687
584
527
498 511
446
409
501
468 459
295
247
1756831
139
613
603
595
589
(16)
(36)
(18)
(33)
(102)
(83)
(85)
(223)
2008
2007
2010
2009
2013
2012
2011
2014
Exhibit 22 - Mutual Fund Net Sales Specialty Funds
Mutual Fund Net Sales Specialty Funds
2007- October 2014
($) Millions
326
262
226
195
183
171
151
139
139
139
117
142
134
129
96
85
74
87
50
27
118
4547 32
26
14
11
14
4
(3)
(12) (7)
(16)
(48) (42)
18
(46)
(60)
47
46
40
36
30
26
2627 26 21
1819
16 2022 1220
11
10
7
(9)
103
88
85 80
74
33
(21)
137
115 118
111
105
103
102
103
89 84
68
49
(660)
19
46
47
48
26
15
27
(18)
(22)
(37)
(50)
(99)
(122)
(164)
2007
2008
2009
2010
2011
2012
2013
2014
40
Exhibit 23 - Mutual Fund Net Sales Money Market
Mutual Fund Net Sales Money Market
2007- October 2014
($) Millions
4,809
3,235
2,553 2,647
1,874
1,894
1,213
1,455
1,362
1,232
1,451 1,489
1,318
944
563
308 549
394
355
328
943
512
56
(119)
(24)
(403)
(916)
(1,091)
(1,881)
48
(54)
(113)
(36)(136)
(39)
(50)
(131) (228)
(157) (144)
(205)
(208) (233) (242) (242)(177)
(275)
(100)
(358) (328)
(372)
(408) (324)
(440)
(440)
(669)
(530)(500) (222)(350) (593)
(831)
(590)(529)
(484)
(665)
(835) (703)
(717) (554)(813)
(916) (840)(570)
(809)
(852)
(1,101)
(1,131)
(950)
(1,270)(1,340)
(1,538)
(1,973)
(2,047)
(2,318)(2,299)
(2,616) (2,352)
(2,637)(2,542)
(2,918)(2,798)
(2,462)
(3,321)
2007
2008
2009
2010
2011
2012
2013
2014
Exhibit 24 - Industry Long-Term Asset Gross Sales
Canadian Mutual Fund Industry
Gross Sales of Long-Term Assets
1999 - October 2014
($M)
20,000
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: IFIC, Scotia
41
Exhibit 25 - Industry Long-Term Asset Gross Sales
Gross Sales of Long-Term Assets
1991 - October 2014
($B)
155.0
149.6
125.7
100.4
129.2
116.8 114.8
115.5
105.3
94.6
88.1
81.0
77.9
77.5
76.8
63.8
58.1 59.0
52.3
51.8
45.4 46.5
26.4
20.2
9.3
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014
YTD YTD
Exhibit 26 - Industry Long-Term Asset Redemptions
Canadian Mutual Fund Industry
Redemptions of Long-Term Assets
1999 - October 2014
($M)
14,000
12,000
10,000
8,000
6,000
4,000
2,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
42
Exhibit 27 - Industry Long-Term Asset Redemptions
Redemptions of Long-Term Assets
1991 - October 2014
($B)
119.3
105.1
105.0
94.6
89.4
97.3
98.8
90.8
83.6
75.3
73.1
61.2
51.3
55.4
46.6
42.5
26.9
50.7
47.0
31.2
23.0 23.2
16.1
9.4
4.8
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013 2014
YTD YTD
Exhibit 28 - Industry Long-Term Asset Redemption Rates
Mutual Fund Redemption Rates
Long-Term Assets - 12-Month Trailing
1999 - October 2014
19%
18%
17%
16%
15%
14%
13%
12%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
43
Exhibit 29 - Industry Mutual Fund Asset Growth
Mutual Fund Assets
1993 - October 2014
$1100
($B)
(%) Growth Rates
105%
$950
95%
Growth Rate
85%
Total Mutual Fund Assets
$800
75%
$650
65%
Performance Growth
55%
$500
45%
$350
35%
25%
$200
15%
$50
5%
-5%
-$100
-15%
Net Sales
-$250
-25%
1993199419951996199719981999200020012002200320042005200620072008200920102011201220132014
Phil Hardie, P.Eng., MFA, CFA
Exhibit
30 - Industry
Growth
Source: Company
reports;Mutual
Scotia Fund
CapitalAsset
estimates.
Mutual Fund Asset Growth
1980 - October 2014
100%
1980
1990
2000
2005
70%
72%
-
Average
2014
20%
2014
19%
2014
7%
2014
7%
1980
1990
2000
2005
-
CAGRs
2014
17%
2014
16%
2014
6%
2014
6%
52%
45%
41%
34%
35%
33%
17%
17%
16%
17%
17%
11% 15%
13%6%
8%
18%
15% 16%
12%13%
6%
2%
2%
17%
12%
10%
7%
(0%)
(3%)
(8%)
(20%)
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
P hil Hardie, P.Eng., MBA, CFA
44
Exhibit 31 – Mutual Fund AUM Growth and Total Return
Mutual Fund AUM Growth and Total Return
October 2014
(25%)
(15%)
(5%)
5%
15%
25%
-1.0%
-2.6%
AGF MFA
0.4%
CIX MFA
14.4%
-0.3%
IGM MFA
8.9%
0.5%
Industry MFA
15.4%
-2.1%
S&P/TSX Index
12.6%
2.4%
S&P 500 Index
17.3%
3.1%
NASDAQ Index
19.6%
0.7%
MSCI World Index
MOM
9.4%
YOY
Source: Bloomberg; IFIC; Company reports; Scotiabank GBM .
Exhibit 32 – Mutual Fund Average Return by Asset Class
Mutual Fund Average Return by Asset Class
(25%)
Avg. Domestic Equity-MF
(15%)
(5%)
5%
15%
-1.5%
Source: Company reports; Scotia
Avg. Capital
Globalestimates.
Equity-MF
1.1%
2.8%
Avg. Sector Equity-MF
2.4%
-0.5%
21.0%
22.7%
9.5%
10.8%
0.4%
4.5%
Avg. Domestic Fixed Income-MF
0.6%
Avg. Global Fixed Income-MF
MOM
Source: PALTRak; Scotiabank GBM .
12.8%
0.6%
Avg. Global Balanced-MF
35%
11.7%
Avg. US Equity-MF
Avg. Domestic Balanced-MF
25%
5.7%
YOY
45
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
AGF Management Limited (AGF.B-T)
CI Financial Corp. (CIX-T)
IGM Financial Inc. (IGM-T)
46
Company Comment
Wednesday, November 19, 2014, Pre-Market
(AXTEL CPO-MX MXN
3.37)
Axtel
Alestra: Would It Rescue Axtel? At What Price?
Andres Coello - +52 (55) 5123 2852
andres.coello@scotiabank.com
Ivan Hernandez - +52 (55) 5123 2876
ivanb.hernandez@scotiabank.com
Rating: Sector Underperform
Target 1-Yr: MXN 0.01 ROR 1-Yr: -99.7%
Risk Ranking: Speculative
Valuation: DCF - 5 years results, 8.8% WACC (including lower Mexico risk), terminal growth rate of 0.0 %
Key Risks to Target: Medium-term bankruptcy risk; Obsolescence of WiMAX technology
Div. (NTM)
Div. (Curr.)
0.00
0.00
Yield (Curr.)
0.0%
Event
■ In this report we explore scenarios for a potential Alestra-Axtel merger.
Implications
■ As of Q3/14, Axtel's net debt was nearly three times that of Alestra
(2.81x and likely to rise as Axtel keeps burning cash). Meanwhile, the
EBITDA levels of both entities will probably converge. As we see it,
more than a merger between equals, Alestra would be rescuing Axtel.
■ In our view, if Alfa was to require a 6.0x EV/EBITDA valuation for
Alestra, Axtel would need to increase the number of CPOs outstanding
by at least 211% at Axtel's market value (not too bad if compared to
Maxcom's 287% increase). Under these circumstances, Alestra would
control 67.9% of the merged entity. Valuing Alestra at 5.0x, Axtel
would increase shares by 165%, with Alestra retaining a 62.3% stake.
■ Alfa could spin off Alestra to avoid polluting valuation and net debt
levels. The risk for Alfa would be if Alestra is subtracted from valuation
at the conglomerate level (~10.0x EV/EBITDA.) That said, we think the
potential spinoff of Sigma and Nemak are a priority over Alestra.
■ We don't argue against the potential to create synergies with Axtel, but
we see most of them ending up in the pockets of Alfa's shareholders.
Recommendation
■ In our opinion, value creation for Axtel, if any, would depend on three
factors: (1) dilution to accommodate the Alestra stake; (2) potential to
create synergies; and (3) the new entity's valuation. If we were Alfa, we
would wait for Axtel to fall into financial distress. Sell.
Qtly EBITDA (M)
2011A
2012A
2013A
2014E
(FY-Dec.)
Earnings/Share
Revenues (M)
EBITDA (M)
EBITDA/Int. Exp
Q1
Q2
Q3
Q4
Year
819 A
759 A
672 A
729 A
935 A
703 A
701 A
739 A
919 A
704 A
750 A
769 A
901 A
571 A
749 A
303
3,575
2,737
2,872
2,540
EV /
EBITDA
4.8x
6.0x
5.1x
5.8x
2012A
-47.10
10,189
2,737
2.6x
2013A
1.92
9,774
2,872
-9.1x
2014E
-0.77
9,419
2,540
3.7x
2015E
-0.94
8,991
2,424
2.9x
2016E
-1.03
8,528
2,299
2.7x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
BVPS14E: 4.39
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in MXN unless otherwise indicated. ^ Limited Voting
4,222
14,625
11,715
1,253
499
47
Alestra: Exploring Latest Trends
■ Before we go into the details regarding valuation scenarios for a potential Alestra-Axtel
merger, we would like to take this opportunity to briefly describe Alestra’s trends. We
recently visited the Sperto Center in Mexico City, where Alfa provided guidance regarding
the company’s strategy.
■ Revenues and EBITDA in Q3/14 grew 8.0% and 8.3% YOY, respectively. Following the
investments related to the construction of the data center in Queretaro (awarded ICREA 5,
with self-sufficient energy supply and three power redundancies), Alestra’s leverage levels
increased modestly, to 1.3x in Q3/14 from 1.1x as at Q4/13 (see Exhibit 1).
■ Alestra’s strategy for the past years has been to migrate away from long distance into the
value-added data, IT and cloud-services segments. So far, the shift in strategy has been fairly
successful. The company went from operating 550 m2 of data centers to 4,800 today. As of
Q3/14, 84.6% of sales were related to value-added services. The company recently
announced the construction of two new data centers in 2015. The company’s CEO, Rolando
Zubiran, said to Reforma that additional investments will be made to expand the capacity in
the Queretaro center.
■ In short, rather than being a small player in telecom, Alestra is becoming an IT leader
capable of offering data and telecom services, fully oriented to the corporate segment.
■ Alestra expects IT revenues in Mexico to expand 157.4% in the next four years. Although the
elimination of long distance by Q4/14 could impact sales in the short term (~10.8% of
revenues in 2014E), Alestra's advantage in IT should help the company offset the risk while
taking advantage of the weakness of voice-dependent rivals.
■ Following recent trends, including the elimination of domestic long distance but also t he
strong growth reported in the data segment, we expect Alestra to reach annualized EBITDA
of approximately MXN 2.4B by 2H/15 (run rate). This is relevant for M&A purposes as it
means that Alestra’s EBITDA could be on its way of converging with Axtel’s. Exhibit 1
shows how Alestra has been improving EBITDA consistently throughout 2014.
■ The company currently has an agreement with SAP to provide ERP services; we think it may
eventually make sense to explore buying ERP assets in order to consolidate vertically.
However, Alestra is not guiding the acquisition of software assets.
Exhibit 1 - Alestra's Results since Q1/13 (in MXN Million Unless Otherwise Stated)
Q1/13
Q2/13
Q3/13
Q4/13
Q1/14
Q2/14
Q3/14
1,033
1,014
1,048
1,155
1,113
1,129
1,150
186
209
210
212
201
208
211
Revenues
Domestic LD as a % of revenues
1,219
10.7%
1,223
12.0%
1,259
11.7%
1,366
10.9%
1,314
10.7%
1,336
10.9%
1,360
10.9%
EBITDA
EBITDA Margin%
465
38.1%
698
57.1%
518
41.1%
485
35.5%
510
38.8%
534
40.0%
561
41.3%
Net Debt (USD)
Net Debt (MXN)
142
1,754
130
1,715
159
2,081
175
2,290
172
2,250
211
2,749
203
2,726
VAS
Long Distance Services
Source: Company reports; Scotiabank GBM.
48
Axtel: Potentially Heading to Financial Distress
■ On the conference call to discuss Q3/14 results, Axtel’s management explained that the
elimination of domestic long-distance charges should impact sales and EBITDA in a range of
between MXN 20M and MXN 25M per month or MXN 240M and MXN 300M per year. We
estimate this amount represents from 24% to 30% of the total amount of domestic longdistance sales of the past 12 months (Q3/13-Q3/14).
■ We understand that management is expecting that by re-pricing other types of calls, it will
offset the impact of eliminating long-distance charges. However, if cable operators like
Televisa pass onto consumers the benefits of the elimination of domestic LD charges (as it is
already happening in Mexico City’s metropolitan area with Izzi), companies like Axtel,
Maxcom, and even Telmex may see increased competitive pressure in a core segment of their
business.
■ Supposing the impact was “only” MXN 300M per year, and all else remaining equal (e.g.,
using the 2014 EBITDA guidance of MXN2.95B), EBITDA in 2015 would be in the
neighborhood of ~MXN 2.65B. The interest rate of the 2020 notes will increase to 9.0% from
8.0% as of Q1/15 (~MXN 900M of net interest), leaving MXN 1.75B for capex and working
capital. As of Q3/14, 66.6% of “broadband” customers were still served by the obsolete
WiMAX network, so we don’t think Axtel can afford cutting capex by ~40% next year.
■ Supposing capex was the same as in 2014, Axtel could face a MXN 1.1B cash deficit next
year (and this is excluding working capital needs), accelerating the spiral of debt in which the
company is already immersed, in our view (financial debt in Q3/14 rose 38.9% YOY.)
According to this, we think net debt to EBITDA could rise to 3.4x next year from 2.6x in
Q3/14 (see Exhibit 2.)
■ Given the latest developments in fixed-line pricing, as well as cheaper mobile rates, we
believe that Axtel’s annualized EBITDA will converge with Alestra’s at some point in 2015
(that said, there could be a risk of Axtel not booking sufficient bad-debt provisions to boost
EBITDA artificially; we currently have reservations about the quality of Axtel's reporting
standards, particularly in regards to provisioning).
■ As Axtel burns cash, its net debt by Q4/15 could more than triple that of Alestra. This is
crucial to understand why, in case of a merger between both entities, Alestra is likely to
emerge as the controlling party from an equity perspective.
Exhibit 2 – Axtel: Cash Burn Could Lead to Financial Distress (in MXN Million Unless Otherwise Stated)
EBITDA guided for 2014
Minus: impact of elimination of domestic LD
$2,950
$300
2015 EBITDA
Less: interest @ 9.0% rate for 2020 notes
Cash available for capex and working capital
2014 capex (US$210M @ 13.50 per USD)
Cash deficit supposing 2015's capex equal to 2014's
Estimated net debt as of Q4/14
Estimated net debt as of Q4/15
Net debt to EBITDA, current
Estimated net debt to EBITDA, 2015E
$2,650
900
$1,750
2,835
-1,085
$7,870
8,955
2.6x
3.4x
49
A Merger or a Rescue?
■ While both Axtel and Alestra are based in Monterrey and both address the corporate niche, a
merger between the two would greatly reverse Alestra’s migration away from traditional
voice services and drive the company back into the residential business (see Exhibit 3). In
other words, it would imply a shift in Alfa’s strategy. However, with AT&T buying Iusacell
and AMX in the process of divesting a substantial portion of its Mexican assets, we expect
M&A activity to increase. This is why we are giving consideration to the Alestra-Axtel
merger.
■ As we explained previously, we believe Axtel is heading to financial distress; in our opinion,
time is playing against the company, so we expect management to seek vigorously an accord
that could save the company from bankruptcy. The discussion regarding a potential merger
with Alestra has been on the table for years. In fact, in its latest corporate presentation, Axtel
mentions that the “potential AMX divestiture could represent the entrance of an international
player with intentions to act as a consolidator. Axtel’s network, customers platform and
ongoing operation might represent an attractive asset for a major player in this new
environment. In sum, Axtel’s economic and strategic prospects could significantly improve as
a standalone entity or as a combined one if conditions are appropriate.”
■ Exhibit 3 shows how the new entity would look like based on LTM figures (actual numbers).
For comparison purposes, we are also including an adjustment to reflect the elimination of
domestic long distance by January 1, 2015. In short, the sales and EBITDA of the combined
entity would be 48.0% and 70.0% higher than if compared to Axtel on a standalone basis.
Net debt would increase 35.5%, while the net debt to EBITDA ratio would decrease from
2.6x currently to 2.0x (or 2.2x adjusted).
■ The controlling company of Alestra, Alfa, is currently undertaking a sizable capital increase
to play the energy reform in Mexico (MXN 15.3B or US$1.1B). Given the implied dilution
of this move, we do not believe that Alfa’s shareholders would welcome an increase in net
debt of as much as MXN 7.7B (US$570M) related to a merger with Axtel. As such, we
believe that the merger would be preceded by a spinoff of Alestra from Alfa (e.g., a sort of
“dividend” for the Alfa shareholders.) That said, we estimate that Alfa is currently trading
above 10.0x LTM EV/EBITDA. Hence, by spinning off Alestra, Alfa shareholders could risk
losing more value than whatever synergies are created by merging with Axtel.
■ In our opinion, the following are among the key variables to take into consideration when
exploring the merger: (1) the valuation that Alfa would require for Alestra in the
negotiations; (2) the valuation of the Axtel assets (at market value or under another valuation
metric); (3) the potential to create synergies; and (4) the valuation that the Street would pay
for the combined entity.
■ In this report we explore 30 different combinations under two basic valuations for Alestra.
Exhibit 3 - Basic Pro-Forma Metrics Regarding an Alestra-Axtel Merger (in MXN Million)
Value-added services
Others
Sales
Value-added as a % of sales
Costs & Expenses
EBITDA
EBITDA margin
Minus: Elimination of LD
Adjusted EBITDA
Adjusted EBITDA margin
Axtel
1,273
9,929
11,202
11.4%
8,217
2,985
26.6%
300
2,685
24.6%
Alestra
4,546
831
5,377
84.5%
3,287
2,090
38.9%
150
1,940
37.1%
Axtel + Alestra
5,819
10,760
16,579
35.1%
11,504
5,075
30.6%
450
4,625
28.7%
Change vs. Axtel
357.1%
8.4%
48.0%
2,373
40.0%
70.0%
396
50.0%
72.3%
405
Net Debt
Net Debt / EBITDA
Net Debt / Adjusted EBITDA
7,671
2.6
2.9
2,726
1.3
1.4
10,397
2.0
2.2
35.5%
-20.3%
-21.3%
50
First Scenario: Alestra Is Valued at 6.0x EV/EBITDA
■ Exhibit 4 shows the basic assumptions of this scenario, in which Alestra would be valued at
6.0x EV/EBITDA (LTM figures but adjusted for the elimination of domestic long distance; if
we were to use historical figures without the adjustment, dilution levels for Axtel would be
even worse). Under this scenario, Axtel would need to increase the number of CPOs
outstanding by 211% at current market value (e.g., this increase would come on top of the
current shares outstanding). As a remainder, the Ventura rescue of Maxcom included a
capital increase of 287% in the number of shares outstanding. We don’t see why Alfa would
be more generous with Axtel than Ventura was with Maxcom.
■ Under this scenario, Alestra would gain a 67.9% equity participation in the combined entity,
while Axtel’s current shareholders would retain a 32.1% stake.
■ Regarding synergies, we are working with 5 scenarios, going from 10.0% of Alestra’s costs
to 30.0% (synergies of between MXN 329M and MXN 986M). Putting these numbers into
context, we estimate that Telefonica Brasil will generate revenue and opex synergies
equivalent to 22.0% of GVT’s costs by 2016E. Following the tower sale, Axtel already layed
off a significant number of employees; 66.6% of its “broadband” customers are still on
WiMAX. In our view, rather than resulting in reductions in capex, the merger would allow
Axtel to carry out the investments needed to protect its customer base from defecting to other
companies.
■ Finally, we are assuming three valuation scenarios for the new entity: (1) 4.5x EV/EBITDA;
(2) 5.0x EV/EBITDA; and (3) 5.5.x EV/EBITDA.
■ Under these assumptions, we obtained a per-share valuation of between MXN
3.05/CPO and MXN 5.25/CPO. The average valuation of the 15 targets that we obtained
was MXN 4.11/CPO.
Exhibit 4 - First Scenario: Alestra @ 6.0x LTM EV/EBITDA (in MXN Million Unless Otherwise Stated)
Alestra
Adjusted EBITDA
6.0x EV/EBITDA multiple
Less Net Debt
Equity value
CPOs to be issued @ 3.37 per share
Axtel, current CPOs outstanding
Increase in CPOs (on top of current)
Alestra's stake in new entity
Axtel's stake in new entity
LTM
1,940
11,640
2,726
8,914
2,645
1,253
211.1%
67.9%
32.1%
Synergies
As a % of Alestra's Costs, LTM
Adjusted post-merger EBITDA with synergies
10.0%
329
4,954
15.0%
493
5,118
20.0%
657
5,282
25.0%
822
5,447
30.0%
986
5,611
Enterprise value: EV / EBITDA @ 4.5x
22,292
24,769
27,245
23,031
25,590
28,149
23,771
26,412
29,053
24,510
27,234
29,957
25,250
28,056
30,861
Less: combined net debt @ 4.5x EV/EBITDA
11,895
14,371
16,848
12,634
15,193
17,752
13,374
16,015
18,656
14,113
16,837
19,560
14,853
17,658
20,464
3.05
3.69
4.32
3.24
3.90
4.55
3.43
4.11
4.79
3.62
4.32
5.02
3.81
4.53
5.25
Price per CPO @ 4.5x EV/EBITDA
51
Second Scenario: Alestra Is Valued at 5.0x LTM EV/EBITDA
■ Supposing Alfa was willing to accept a 5.0x LTM EV/EBITDA valuation for Alestra
(adjusted for the elimination of domestic LD), Axtel would need to increase the number of
shares outstanding by 165%. Under this scenario, Alestra would have a 62.3% stake in the
new entity, while Axtel would have a 37.7% stake.
■ Using a similar approach to synergies and post-merger valuations as in Scenario 1 (from
10.0% to 30.0% of Alestra’s LTM costs, and from 4.5x to 5.5x EV/EBITDA for the new
entity), we obtained a per-share valuation of between MXN 3.58/CPO and MXN 6.16/CPO,
with an average price of MXN 4.82/CPO.
■ Conclusion. Given current leverage levels and Axtel’s ongoing cash burn, a merger with
Alestra would likely be dilutive for the Axtel shareholders. The potential to create value
would depend on a number of factors, including synergies and the market valuation of the
merged entity. Our valuation exercises suggest that there could be upside to the current
share price under certain scenarios, but this could vanish as Axtel keeps burning cash.
We don’t believe that playing a potential merger with Alestra makes sense in view of Axtel’s
bankruptcy risk. In any case, we would rather wait to see the final terms of the agreement and
the dilution levels to minorities. We reiterate our Sector Underperform rating on Axtel.
Exhibit 5 - Second Scenario: Alestra @ 5.0x LTM EV/EBITDA (in MXN Million Unless Otherwise Stated)
Alestra
LTM
Adjusted EBITDA
1,940
5.0x EV/EBITDA multiple
9,700
Less Net Debt
2,726
Equity value
6,974
CPOs to be issued @ 3.37 per share
2,069
Axtel, current CPOs outstanding
1,253
Increase in CPOs (on top of current)
165.2%
Alestra's stake in new entity
62.3%
Axtel's stake in new entity
37.7%
Synergies
10.0%
15.0%
20.0%
25.0%
30.0%
329
493
657
822
986
Adjusted post-merger EBITDA with synergies
4,953.7
5,118
5,282
5,447
5,611.1
22,292
23,031
23,771
24,510
25,250
24,769
25,590
26,412
27,234
28,056
27,245
28,149
29,053
29,957
30,861
11,895
12,634
13,374
14,113
14,853
14,371
15,193
16,015
16,837
17,658
16,848
17,752
18,656
19,560
20,464
3.58
3.80
4.03
4.25
4.47
4.33
4.57
4.82
5.07
5.31
5.07
5.34
5.62
5.89
6.16
As a % of Alestra's Costs; LTM
52
LatAm Telecom, Media and Software Multiples
Exhibit 6 - Comps
P/E
Recommendation
AMX
Sector Perform
Axtel
Sector Underperform
Entel
Sector Outperform
Maxcom
Sector Perform
Megacable Sector Perform
Televisa
Sector Underperform
Totvs
Sector Perform
TSU
Sector Perform
VIV
Sector Outperform
Target Price
USD 19.00
MXN 0.01
CLP 9,200
MXN 3.30
MXN 47.00
USD 28.00
BRL 45.00
USD 21.00
USD 26.00
2014E
13.7x
N/A
11.3x
N/A
21.7x
57.5x
21.2x
20.4x
12.4x
2015E
14.0x
N/A
8.9x
N/A
20.5x
34.3x
18.2x
21.3x
15.1x
EV/EBITDA
2014E
2015E
6.7x
6.3x
4.0x*
5.2x
5.7x
5.2x
4.2x
4.0x
10.4x
9.6x
11.7x
10.9x
10.0x
8.7x
5.6x
5.8x
5.9x
6.2x
Dividend Yield
2014E
2015E
1.5%
1.5%
0.0%
0.0%
4.5%
4.5%
0.0%
0.0%
3.8%
4.2%
0.4x
1.0x
2.9%
3.5%
3.0%
3.0%
9.0%
6.1%
Net Debt to
EBITDA 2014E
2.1x
2.6x
2.4x
1.4x
0.0x
1.3x
-0.2x
0.5x
0.5x
Source: Scotiabank GBM estimates. *Based on guidance.
53
Intraday Flash
(CG-T C$5.88)
Centerra Gold Inc.
Kumtor JV Agreements Drafted: We Remain
Cautiously Optimistic
Trevor Turnbull, MBA, MSc - (416) 863-7427
trevor.turnbull@scotiabank.com
Rating: Sector Perform
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:
21.8%
Div. (NTM)
Div. (Curr.)
C$0.16
C$0.16
Yield (Curr.)
2.7%
Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s
Event
■ Kyrgyz media are reporting that the government has submitted to
Centerra JV agreements necessary for Kumtor gold mine restructuring.
Implications
■ In February, the Kyrgyz Parliament approved a non-binding heads of
agreement in support of a restructuring whereby the country's 32.7%
stake in Centerra would be exchanged for a 50% interest in Kumtor.
However, it made recommendations for audits and environmental claims
that were incompatible with a mutually agreeable resolution. Following
negotiations, Parliament set a December 15 deadline for an agreement.
■ We are encouraged by this progress but remain focused on the
upcoming December 10 Moscow Arbitration Court date which will
appeal an earlier decision by the arbitration tribunal of the Moscow
Chamber of Commerce (MCC). Recall that the MCC decision served as
the basis for an October 10 Ontario Superior Court decision to issue an
injunction against 47 million Centerra shares in favour of Stans Energy.
■ A positive court resolution should pave the way to proceed with the
restructuring, while conversely a seizure of Centerra shares (something
we believe Stans may be pursuing) would be negative for the process.
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
84.5x
n.m.
n.m.
2013A
$0.68
6.0x
$2.11
1.9x
$610
690.7
$404
$913
2014E
$0.06
84.5x
$1.36
3.8x
$252
634.8
$396
$912
2015E
$-0.04
n.m.
$0.95
5.5x
$206
658.6
$548
$923
2016E
$-0.02
n.m.
$0.99
5.3x
$212
677.4
$583
$997
2017E
$0.58
8.9x
$1.74
3.0x
$333
776.2
$400
$902
BVPS14E: $7.21
ROE14E: 0.92%
NAVPS:
P/NAV:
C$9.45
0.62x
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
All values in US$ unless otherwise indicated.
C$943
$-328
C$572
160
159
54
Exhibit 1 - Operational and Financial Summary
2015E
($6)
($6)
($0.04)
n.m.
$152
$0.95
5.8x
2016E
($3)
($3)
($0.02)
n.m.
$157
$0.99
5.6x
$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)
$2.07
P/CF (bf. ch. in WC) (x)
2.7x
Income Statement Items (US$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
2.4x
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%
55
Company Comment
(MILPOC1-LM PEN 2.43)
Paul Figueroa Mantero, MSc, MBA - +511-211-5918
(Scotia Sociedad Agente de Bolsa SA)
paul.figueroa@scotiabank.com.pe
Rating: Sector Outperform
Risk Ranking: High
Target 1-Yr:
Alfonso Salazar, MSc - +52 (55) 5123 2869
alfonso.salazar@scotiabank.com
PEN 3.45
ROR 1-Yr:
43.9%
Valuation: DCF @ 8%
Key Risks to Target: Commodity prices, operational risk, rising of social conflicts, environmental risk, political risk .
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.02
$0.02
1.8%
Event
■ EPS came in 6.9% below our estimate at $0.0187. Difference was
mainly explained by higher than expected mining costs at Cerro Lindo
given increasing maintenance and non-recurrent costs.
Implications
■ Production of zinc, copper and lead concentrates increased 5%, 14%
and 17% YOY. Higher output was due to an increase in ore treated
(7%). Silver content expanded 4% YOY, reaching 1.7 million ounces
during the period.
■ Milpo posted an EBITDA margin of 33.4%, below our 38.7% estimate.
Declining profitability due to non-recurrent expenses at Milpo's flagship
project, Cerro Lindo, explains the difference (mining costs increased
23% YOY to $33.7/t from $27.4/t). Milpo has increased maintenance
and development costs, anticipating a production expansion capacity at
Cerro Lindo from 15,000 tpd to18,000 tpd.
■ The company plans to acquire zinc projects Aripuana and Bongara from
its controlling shareholder, Votorantim. The company has not disclosed
much information as this transaction has not been completed. Milpo
also announced that Ms. Claudia Torres Beltran has been appointed as
the new Chief Financial Officer of the company, replacing Persio
Morassutti who will continue his career at the Votorantim Group.
Recommendation
■ We maintain our Sector Outperform rating and a one-year target price of
PEN 3.45.
Qtly EBITDA/Share (Basic)
2013A
2014E
2015E
2016E
Q1
Q2
Q3
Q4
Year
$0.05 A
$0.07 A
$0.08
$0.09
$0.05 A
$0.06 A
$0.08
$0.09
$0.05 A
$0.05 A
$0.08
$0.10
$0.06 A
$0.05
$0.08
$0.10
$0.21
$0.23
$0.32
$0.38
EV /
EBITDA
4.4x
4.3x
3.5x
3.0x
2012A
$0.02
$-0.08
60.9x
3.7x
$691
$236.45
1.2x
13.3x
2013A
$0.06
$0.21
11.9x
0.7x
$720
$270.60
3.0x
15.2x
2014E
$0.10
$0.11
8.7x
0.5x
$753
$339.30
3.7x
19.1x
2015E
$0.10
$0.11
8.3x
0.5x
$848
$418.09
4.6x
25.2x
2016E
$0.13
$0.13
6.5x
0.4x
$935
$483.60
5.7x
30.2x
(FY-Dec.)
Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
BVPS14E: $0.49
ROE14E: 19.11%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
PEN 2,699
$-53
PEN 3,751
1,111
556
56
Milpo Q3/14 Results
Exhibit 1 - Milpo Q3/14 Results - Actual vs. Estimates
Exhibit 2 - Milpo vs. Peers
Source: Bloomberg consensus; company reports; Scotiabank GBM.
Recommendation
■ We maintain our Sector Outperform rating and one-year target price of PEN 3.45. Our
recommendation is based on Milpo’s excellent exposure to zinc, its appealing valuation
(EV/EBITDA 2015E of 3.0x vs. peers at 5.4x) and the company’s strong balance sheet (Net
Debt to EBITDA of -0.2x vs. peers at 2.3x).
57
Company Comment
(CNL-T C$2.53)
Mike Hocking, MSc, P.Geo. - (416) 945-5228
mike.hocking@scotiabank.com
Amir Ahmad - (416) 862-3875
amir.ahmad@scotiabank.com
Target 1-Yr:
C$4.50
ROR 1-Yr:
77.9%
Valuation: 1x NAV
Key Risks to Target: Mining dilution, permitting, mineral resource estimate assumptions,
commodity prices, exploration risk, financing risk, political risk, multiple contraction
Event
■ CNL released a preliminary economic assessment (PEA) for Buriticá.
Div. (NTM)
Div. (Curr.)
$0.00
$0.00
Yield (Curr.)
0.0%
Pertinent Revisions
Implications
■ The PEA outlined an 18 year mine life with annual production of
~271,000 oz of gold (eq.) at all in sustaining costs of US$502/oz
(including by-product Ag); at $1200/oz Au and $17/Ag prices, the
project generates an after-tax NPV5% of $1.1B, an IRR of 31.5% and a
2.8 year payback. Our previously published assumptions and the PEA
estimates are presented in Exhibit 1. The PEA assumes an average mill
head grade of 7.8 g/t Au compared with our estimate of 7.7 g/t Au. The
PEA has outlined an initial throughput of 2,000 tpd increasing to 3,500
tpd, a fairly large underground gold mine utilizing long-hole stoping
methods. Given the narrow width of the veins, we had assumed a much
more limited 750 tpd, increasing to 2,000 tpd over a 3 year period,
largely requiring cut and fill methods. It appears CNL used a subset of
their resource at a higher COG before dilution to calculate the resourced
used in the PEA (and we expect that a significant portion of these
tonnes are classified as inferred); thus, the company assumed higher
dilution than our estimates (58% vs. 30%) but diluted processing grade
was in-line. Our primary concern remains dilution and throughput. The
PEA has outlined a very large mine on mineralization hosted largely in
narrow veins. We have updated our target price and we will review our
recommendation after more technical data is made available.
New
Target:
1-Yr
$4.50
EPS16E
US$-0.02
New Valuation:
1x NAV
Old Valuation:
0.92x NAV
Old
$5.30
US$0.75
Recommendation
■ We rate CNL Sector Perform with a $4.50 target price, down from $5.30.
Qtly EPS (FD)
2011A
2012A
2013A
2014E
Q1
$0.04 A
$-0.02 A
$-0.02 A
$-0.03
(FY-Dec.)
Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
Current Ratio
Q2
$0.04 A
$-0.02 A
$-0.02 A
$-0.03
Q3
$0.04 A
$-0.02 A
$-0.02 A
$-0.03
Q4
$0.04 A
$-0.02 A
$-0.02 A
$-0.03
Year
$0.16
$-0.07
$-0.07
$-0.14
P/E
46.2x
n.m.
n.m.
n.m.
2012A
$-0.07
$-0.05
n.m.
n.m.
$0
68.1x
2013A
$-0.07
$-0.02
n.m.
n.m.
$0
21.1x
2014A
$-0.14
$-0.05
n.m.
n.m.
$0
9.5x
2015A
$-0.04
$-0.04
n.m.
n.m.
$0
30.7x
2016E
$-0.02
$-0.02
n.m.
n.m.
$0
33.4x
BVPS14E: $2.09
NAVPS:
P/NAV:
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$4.47
0.50x
C$331
$-72
C$249
131
107
58
Initial Impressions
■ Robust headline numbers. CNL and M3 Engineering have produced a PEA with reasonably
robust economics. Key PEA metrics along with our previous and updated estimates are
presented in Exhibit 1. In general the initial project capital, operating costs and diluted
grade were largely in line with our estimates; however, we had assumed a more
conservative throughput at a the same mine life for lower total production.
■ Dilution and throughput concerns remain. Our primary concern remains dilution and
throughput. The mine plan appears to use a relatively small component (33%) of the
resource at a significantly higher cut-off grade than the 3 g/t used for the resource with a
substantial portion of tonnes likely coming from the inferred category. The PEA
anticipates that long-hole stoping will be the primary mining method. We expect that this
method was selected because of the near vertical orientation of the veins and ability to
increase the daily throughput relative to other more selective methods (i.e. cut and fill), a
common aspiration for many projects; however, given the narrow width of the veins (vein
domains average 1.3m) and average mining width of 2.5 – 3.1m (1.6m minimum mining
width) we expect that dilution will be harder control than in deposits with broader veins
(see Exhibit 2). We also expect that the narrow widths will likely lead to increase operating
costs and sustaining capital requirements relative to other projects (see Exhibit 2). The
grade of the wall rock is currently unknown and sampling prior to the 2015 PFS will
hopefully provide some indication of dilution grades.
■ Model estimates. In Exhibit 2 we compare the Buriticá PEA with three mines in Latin
America that utilize bulk underground mining methods to extract ore from wide vein
systems with large stope sizes, which leads to low unit costs. Given the narrow widths of
the veins of Buriticá we have escalated the mining costs to be more in line with comparable
projects. We have escalated the initial capital by 5% and substantially increased the
sustaining capital to bring the value closer to the average of underground operation in this
throughput range. We have also capped the throughput at 3,000 tpd, as we expect the
narrow veins will ultimately require a mix of long-hole stoping and lower throughput cutand-fill mining methods; we have also increased the unit costs to account for the narrow
veins.
■ Valuation. Our fully funded NAV8% using our LT gold price of US$1300/oz and LT silver
price of $19/oz is presented in Exhibit 3. Our NAV at spot prices is presented in Exhibit 4.
■ Neutral rating. We continue to rate Continental Gold as a Sector Perform. The implied
return to our current target price is substantial and we feel that the updated model
parameters are reasonable when compared with operating assets; however, we are not
currently recommending the stock as we don’t have a clear understanding of a number of
the technical risks; we will re-evaluate our rating once more technical information is
available.
Throughput and Dilution
■ Narrow veins. The mineralized veins at Buriticá are reasonably narrow (veins widths
average ~1m with vein domain in the resource model averaging 1.3m). We have a better
understanding of the Yaraguá veins as existing small scale mine workings have been
excavated on the upper portion of the deposit. In many places the veins are less than a meter
in width and have been diluted with wall rock to form a 1m minimum composite intervals.
We know less about the mineralization at Veta Sur but channel sampling at Vein 51 and Vein
62 suggests that there are some zones with robust widths and grades that could be amenable
to bulk underground mining methods (see our research note from October 28th).
■ Either the cut-off grade or the stated dilution number appears to be incorrect. The PEA
news release has outlined a resource of 20.1Mt at a diluted head grade of 7.8 g/t Au and 19.4
g/t Ag at a stated COG of 3 g/t and total dilution of 58% at a nil grade. This implies that the
mine plan incorporates a small subset (33%) of the total resource at a much higher cut-off
grade than 3g/t used for the resource or that the mill feed has a lower quantity of dilution than
the stated 58%. CNL management can’t confirm either way until the technical report is filed
59
on SEDAR. If it is indeed a smaller subset of the resource we estimate that the undiluted ore
tonnes total 8.4Mt at 18.6 g/t Au and 46.1 g/t Ag for 5 Moz Au and 12.5 Moz Ag, before
recoveries. This implies that the remaining 16.7Mt, containing 2Moz in the resource have an
uneconomic undiluted grade of 3.6 g/t Au and 16.5 g/t Ag and will not be included in our
valuation, even as near term option value (i.e. on a $/oz basis).
■ Waste tonnes in production schedule table are development ore not dilution waste. A
table at the bottom of the news release outlined the production schedule and listed waste
tonnes. The ‘waste’ tonnes are not material that are processed through the mill rather they
are development tonnes.
Exhibit 1 – Key project metrics from the CNL PEA along with previous and current Scotiabank GBM estimates.
SGBM Estimate
Previous
Date
LoM. Average
Project Basics
Ownership Percentage
Location
Stage
Expected Commercial Production
Mining Method
Capital Costs
Pre-production CapEx
Sustaining CapEx (+Exploration)
Annual sustaining capex
CapEx per Daily Throughput
CapEx per LOM Production
Sustaining CapEx per Annual Throughput
Production Metrics
Mine Life
Assumed Dilution*
LOM Recovered Ounces (AuEq)
Annual Production (Au Only)
Annual Production (AuEq)*
Gold:Silver Ratio
Initial Throughput
Full Throughput
Average Throughput
Ramp-up Period
Diluted mill head grade
Gold Recovery
Operating Metrics
Mining Cost
Processing Cost
G&A
Total Operating Cost
Royalty
Gold Price
Silver Price
Operating Cash Cost (net of by-product)
Project All-in Sustaing Cost
Project Economics
NPV5%
NPV8%
IRR
Payback period
100%
2016
CF
(US$M)
(US$M)
(US$M)
(US$/tpd)
(US$/oz)
(US$/t)
(yrs)
(%)
(Koz Au)
(Koz Au)
(Koz Au)
(tpd)
(tpd)
(tpd)
(yrs)
(g/t Au)
(%)
($/t mined)
($t/milled)
($t/milled)
($t/milled)
(%)
($/oz)
($/oz)
($/oz)
($/oz)
(US$M)
(US$M)
%
(years)
SGBM Estimate
New
100%
Antioquia, Colombia
PEA
2018
CF and LH
CNL PEA
Nov-17-14
100%
n.a.
LH
$350
$255
$14
$184,211
$122
$20
$412
$547
$26
$152,756
$85
$26
$390
$347
$19
$118,273
$80
$16
18.0
30%
2,861
155
159
65
750
2,000
1,900
3.0
7.7
95.0%
21
59%
4,830
226
231
68
1,500
3,000
2,700
4.0
7.4
95.0%
18.0
58%
4,877
265
271
71
2,000
3,500
3,300
3.0
7.8
95.0%
$61.19
$23.46
$18.36
$103.00
4.0%
$1,310
$20.19
$402
$491
$51.23
$39.25
$18.29
$108.77
3.2%
$1,300
$19.00
$552
$715
$44.55
$37.38
$17.42
$99.35
3.2%
$1,200
$17.00
$431
$502
$551
$359
20.0%
2.90
$769
$479
23.0%
5.50
$1,080
na
31.0%
2.80
* Note that CNL appears to have used a subset of of their resources at a higher COG before dilution to calculate their PEA; our dilution
number were based on average grades from the resource estimate. Mining Methods: CF = cut and fill, LH = long hole
60
Exhibit 2 - Comparable projects in Latin America utilizing bulk underground mining methods on precious metal bearing veins
El Penon
Escobal (Tahoe Juancipio (MAG
(Yamana)
Resources)
Silver)**
Chile
Guatemala
Mexico
4,500
4,500
2,330
Average1
SC Estimates
for CNL*
CNL PEA*
Location
Throughput Capacity
(tpd)
3,777
3,500
3,000
M&I resource grade
(g/t)
8.0
346.0 g/t Ag
511.0 g/t Ag
6.8
10.3
10.3
2P Gold Reserve Grade
(g/t)
5.8
0.3
1.3
2.5
n.a.
n.a.
2P Silver Reserve Grade
Current or expected diluted mill head grade
Estimated or stated dilution
(g/t)
(g/t)
%
192 g/t Ag
6.2**
55.0%
350 g/t Ag
585.0
31%
416 g/t Ag
416.0
19%
319 g/t Ag
6.9
35%
n.a.
7.8
58%
n.a.
7.4
59%
2014E Gold (eq) Production
(Koz)
407**
18-21M oz Ag
n.a.
347
n.a.
n.a.
Nominal annual prouction
(Koz)
440
17
29
162
271
231
Estimated Mining Cost
$t/ore
$77.00
$37.23
$46.12
$53.45
$44.55
$51.23
Estimated Processing Cost
$t/ore
$36.92
$22.83
$20.14
$26.63
$37.38
$39.25
Estimated G+A
$t/ore
$15.00
$15.06
$3.63
$11.23
$17.42
$18.29
Smelting Refining/Transportation
$t/ore
$26.64
$41.00
$110.89
$99.35
$108.77
Cost per tonne processed technical report
2014E Cost Per Tonne Processed
2014E Total Cash Costs
(US$/tonne)
(US$/tonne)
(US$oz)
$128.92
$147.52
537**
$101.76
$105.59
5.95/oz Ag
(0.36)/oz Ag
$113.86
$126.56
537
431
$552
(US$oz)
n.a.
9.35/oz Ag
3.80/oz Ag
n.a.
502
$715
Sustaining capital - annual
(US$Mln)
80**
17
24
40
19
$26
Sustaining capital - LOM
(US$Mln)
n.a.
326
524
425
347
$547
$/tpd
49
10
28
29
16
$26
<1m to 20m
up to 50m wide
average = 5m
average = 1.3m
average = 1.3m
Orebody Orientation
2400m lateral by
<1-4km strike,
1200m vertical in Dip 60 degrees to
350m down dip,
four zones, 60-75
Sw
55-85 degree dip
degree dip
Subvertical
Subvertical
Stope dimensions
1-6m wide, 616m high by 15m
long
25mx10m x
variable to 25m x
10m x variable
2m (min.) x 15m
(Vertical) x 24m
(long)
2.5 - 3.1m wide
2.5 - 3.1m wide
BF
LHS, LHTS
LHS
LHS
CF and LHS
2014E AISC
Sustaining capital per throughput
Orebody Thickness
Mining method
2
* Nominal Figure
** - Yamana estimate from Scotiabank GBM Analyst Tanya Jakusconek; MAG Silver estimates from Scotiabank GBM Analyst Trevor Turnbull
1
Gold:Silver Ratio of 68:1
2
BHS = Blast hole stoping; BF = Bench and Fill; C&F = Cut & fill; LHS = Longhole stoping; LHTS = Longhole transversal stoping; LHRS = Longhole retreat stoping
61
Exhibit 3 – Updated NAV at LT Gold and Silver prices
Net Asset Value (NAV) based on unlevered after-tax free cash flows
After-tax
NPV
479
-
NPV
per share
2.45
-
Gross asset value
479
2.45
- Debt
+ Cash
+ Cash from project financing
+/- Adjustments
Net asset value (US$Mln)
Fully diluted shares outstanding
Fully diluted, fully funded shares
Net asset value per share (USD)
CAD/USD exchange rate
Net asset value per share (CAD)
Price/Net asset value
72
262
0.37
0%
9%
-
0%
Asset
Location
Ownership
Buritica
Exploration
Colombia
Colombia
100%
100%
Discount
rate
8%
In-situ
Asset
multiple
1.0x
$0/oz
NPV
Corporate
%
NAV %
100%
59%
0%
0%
100%
59%
813
130.7
195.6
4.16
0.93
4.47
0.59x
Exhibit 4 - Updated NAV at spot metal prices
Net Asset Value (NAV) based on unlevered after-tax free cash flows
After-tax
NPV
361
-
NPV
per share
1.85
-
Gross asset value
361
1.85
- Debt
+ Cash
+ Cash from project financing
+/- Adjustments
Net asset value (US$Mln)
Fully diluted shares outstanding
Fully diluted, fully funded shares
Net asset value per share (USD)
CAD/USD exchange rate
Net asset value per share (CAD)
Price/Net asset value
72
262
0.37
0%
10%
-
0%
Asset
Location
Ownership
Buritica
Exploration
Colombia
Colombia
100%
100%
Discount
rate
8%
In-situ
Asset
multiple
1.0x
$0/oz
NPV
Corporate
%
NAV %
100%
52%
0%
0%
100%
695
130.7
195.6
3.55
0.93
3.82
0.69x
52%
62
Company Comment
(WN-T C$94.60)
Patricia A. Baker, MBA, PhD - (514) 287-4535
patricia.baker@scotiabank.com
Risk Ranking: Medium
Target 1-Yr:
Jean Marc Ayas - (514) 287-3626
jeanmarc.ayas@scotiabank.com
C$110.00
ROR 1-Yr:
18.1%
Valuation: NAV
Key Risks to Target: Ultimate deployment of large cash position, operating performance at Loblaw, commodity price fluctuation s
Event
■ WN Q3 EPS in line at $1.54. WN Foods sales $574M, +2.1% YOY, in
line with $572M forecast. Adjusted EBITDA flattish YOY at $102M, in
line with our $100M estimate.
Implications
■ WN saw + volumes across each baking segment. Margins impacted by
input and plant start-up costs. Q3 had combined negative impact of
pricing and mix shifts. Mix reflects seasonality with higher proportion
of pie (frozen) and wafer (biscuit) sales with lower margins than fresh.
■ In general, there is a decelerating impact from headwinds on the
business. Q3 decline in EBIT margin of 119bps compares favourably to
the nine month trend of a decline of 214bps.
■ With its Q4 release, WF will unveil a new strategic plan for the broader
positioning of its business as a result of a lengthy and comprehensive
review of the NA baking industry with an eye to determine where best
to focus on products and customers for growth. This plan, we believe,
will provide a good renewed medium-to-long term strategy for this
multi-faceted business.
Recommendation
■ WN share price has not kept pace with the nice advance in Loblaw. The
implied value of the baking business is near a multi-year low. Challenges
evident in F2014 should abate and the strategic work will serve to provide
a "fresh" look and bring some promise of growth. Target is revised to
$110 and stock rating is maintained SO.
Qtly Cash Op EPS (Basic)
2013A
2014E
2015E
2016E
Q1
$0.83 A
$0.77 A
$1.20
$1.38
(FY-Dec.)
Cash Op Earnings/Share
Dividends/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
EBITDA Margin
Q2
$1.06 A
$1.23 A
$1.50
$1.69
Q3
$1.32 A
$1.54 A
$1.74
$1.99
Q4
$1.10 A
$1.60
$1.70
$1.93
Year
$4.31
$5.14
$6.14
$6.99
P/E
18.0x
18.4x
15.4x
13.5x
2012A
$4.17
$1.46
16.9x
0.9x
$32,742
$2,347
7.2%
2013A
$4.31
$1.63
18.0x
0.6x
$33,582
$2,456
7.3%
2014E
$5.14
$1.68
18.4x
0.7x
$43,882
$3,416
7.8%
2015E
$6.14
$1.68
15.4x
0.6x
$46,460
$3,998
8.6%
2016E
$6.99
$1.68
13.5x
0.5x
$47,602
$4,261
9.0%
BVPS14E: $58.71
ROE14E: 9.51%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.68
$1.67
1.8%
Pertinent Revisions
Target:
1-Yr
Cash Op
EPS14E
Cash Op
EPS15E
Cash Op
EPS16E
New
Old
$110.00
$5.14
$93.00
$5.10
$6.14
$6.16
$6.99
$7.01
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$12,116
$11,815
$32,098
All values in C$ unless otherwise indicated.
128
47
63
Weston Foods Working Towards Positioning for Growth
■ With the release of Q4 results on March 5, 2015, Weston Foods will unveil a new strategic
plan for the broader positioning of its business. This comes as a result of a lengthy and
comprehensive review of the North American baking industry, with an eye to determine
where best for Weston Foods to focus with respect to products, customers and importantly
how to capture growth. We believe the plan, once revealed, will provide a solid and renewed
medium-to-long term plan for this multi-faceted business.
Meanwhile Baking Assets are Significantly Undervalued
■ It is worth noting that WN shares (+22.1% YTD) have not kept pace with the appreciation
of L shares (+41.7% YTD) and, as such, we are seeing the implied value of the baking
business very near a multi-year low (Exhibit 1).
■ Currently, when both the Loblaw and Choice REIT ownerships are stripped out of the WN
share price, the residual baking business looks to be valued at only $4.75 per share. This
compares to an average value of $10.57 over the last year and $17.31 over the last five years.
At the same time, this implies the baking business is being valued at an EV/EBITDA mutiple
of only 4.4x when peers are trading at double-digit mutiples (Exhibit 4). Given its strong
margin profile, LFY EBIT was 14.3%; this does suggest the bakery assets are “going cheap”
in the context of the current WN share price.
Exhibit 1 – Implied Value of Baking Business Near a Low!
Weston Foods Stub ValuePer Share
$35
$30
$25
5-yr avg. = $17.31
$20
$15
$10
1-yr avg. = $10.57
$5
$4.75
Nov '14
Aug '14
May '14
Feb '14
Nov '13
Aug '13
May '13
Feb '13
Nov '12
Aug '12
May '12
Feb '12
Nov '11
Aug '11
May '11
Feb '11
Nov '10
Aug '10
May '10
Feb '10
Nov '09
$0
■ It is true the baking business has faced challenges over the past year, particularly on the
cost and growth fronts. However, we believe looking forward that challenges evident in
F2014 will begin to recede. Indeed that has already commenced. Note the margin decrease in
Q3 of 119bps compares favourably to the nine months trend of 214bps. As we move through
to F2015 and as the baking margins stabilize, we expect this business to receive a more
favourable view.
64
Taking Target Higher
■ While we rate L shares SP ($65 TP) on strong price appreciation and near-term risk, we rate
WN shares SO as they have lagged L’s performance significantly (22.1% vs. 41.7% YTD)
and the baking business looks undervalued. With L shares trading at $60.07, close to their
52-wk high, WN's stake in Loblaw equates to $88.20 per share. Taking into consideration the
value of CHP trust units, this implies a value of $4.75 for the Weston Foods business, near a
long-term low. We certainly see a decoupling here and believe WN shares have moved
disproportionately YTD to their relative ownership stake in L. Our revised NAV shows WN
at $115.63 pre-holdco discount and $109.84 post, supporting a $110 target. Given we expect
improved conditions with respect to cost challenges evident in F2014, as well as a positive
catalyst to come with the strategic work underway, we are comfortable with the higher target.
Exhibit 2 – George Weston NAV Snapshot
Weston Foods Segm ent
Loblaw Segm ent
Choice Properties Segm ent
Weston Foods F15E EBITDA (M)
$339
L shares ow ned by WN (M)
EV / EBITDA multiple
9.5x
Scotia's 1-yr Price Target for L
Enterprise value (M)
$3,216
Less: F15 WF Net Debt (M)
Less: F15 WF Preferred Equity (M)
WF m arket value (M)
WN shares O/S in F15 (M)
Market value per share
Consolidated
187.8
CHP trust units ow ned by WN (M)
21.1
$65.00
Scotia's 1-yr Price Target for CHP
$11.25
(55)
(817)
$2,344
L MV, ow ned by WN (M)
$12,208
127.9
REIT MV, ow ned by WN (M)
127.9
$18.33
$95.44
$237
Total m arket value (M)
$14,789
WN im plied 1-yr value
$115.63
127.9
127.9
$1.85
Holdco. discount
WN 1-yr price target
5%
$109.84
Source: Company reports; Scotiabank GBM estimates (WN and L by P. Baker, CHP.UN by P. Bir).
Exhibit 3 – Bakery Comparable Valuations
Ticker
Bakeries
George Weston
Flower Foods
Snyder's-Lance
Grupo Bimbo
Average
WN-CA
FLO-US
LNCE-US
BIMBOA
Rating Curr.
SO
NR
NR
NR
CAD
USD
USD
MEX
11/18/2014
EPS (Calendar)
Price
2013 2014E 2015E
$94.60
$19.45
$29.72
$37.29
4.31
1.21
1.15
1.39
5.10
0.88
1.09
1.28
6.16
0.98
1.21
1.66
P/E (Calendar)
EV/EBITDA (Calendar)
2013 2014E 2015E
2013 2014E 2015E
21.9
16.1
25.9
26.7
19.5
18.5
22.0
27.3
29.1
20.8
15.4
19.7
24.5
22.5
17.6
8.3
10.7
12.7
12.2
9.9
8.5
11.6
12.9
11.8
10.1
7.6
10.7
11.7
10.0
9.0
na = not available, nm = not material/meaningful
*Indicates companies with non-calendar year-ends
Source: Company reports; Scotiabank GBM estimates (WN and L by P. Baker, CHP.UN by P. Bir).
Third Quarter Highlights
■ The following discussion relates primarily to the Weston Foods Division of George Weston
Ltd. For additional details on the Loblaw division, please refer to our Nov 14th comment on
Loblaw Companies Ltd. entitled “Loblaw Q3: In Line, And That’s Fine”.
■ Weston Foods sales increased 2.1% YOY to $574M, in line with our forecast of $572M.
Foreign currency translation provided the entirety of the growth, as increased volumes across
all categories were offset by the combined negative impact of pricing and changes in sales
mix. Note that since Q2/F14, the company no longer breaks down segment sales for Fresh,
Frozen and Biscuits.
PEG
1.1
nm
nm
3.0
Div.
Yield
12/31/13
Close
Year-to-date
Performance
1.8%
2.6%
2.2%
0.6%
1.8%
$77.50
$21.47
$28.66
$40.20
22.1%
-9.4%
3.7%
-7.2%
-4.3%
65
■ Weston Foods adjusted operating income was $81M in Q3, down 5.8% YOY. Adjusted
EBIT margin contracted 119bps YOY to 14.1%, attributable to the impact of higher
commodity and other input costs, as well as start-up costs related to new Toronto fresh
facility (Exhibit 4). On the latter, we see a minimal impact in Q4 and in F2015 going
forward. The quarter also saw a combined negative impact from pricing and mix shifts, such
as higher sales of lower margin pies (Frozen segment) and wafers (Biscuit segment). These
negative impacts were slightly offset by a positive contribution from foreign currency
translation. Adjusted EBITDA was down 2.9% YOY to $102M, in line with our $100M
forecast, while EBITDA margins were down 91bps YOY to 17.8%, continuing the recent
trend but showing a significant slowdown in pace (Exhibit 5).
Exhibit 4 – WF Q3 EBIT Variance Analysis
in $M
Commodity and input costs
Fresh facility start-up costs
Foreign currency translation
(4)
(2)
1
$ change YOY in WF adj. EBIT
(5)
Source: Company reports.
Exhibit 5 – Higher Input Costs and Start-Up Expenses Still Weigh on Margin but with Declining Impact
Δ WF adj. EBITDA margin (YOY)
450bps
300bps
217bps
199bps
148bps
150bps
113bps
100bps
50bps
0bps
(20bps)
(38bps)
(150bps)
(91bps)
(116bps)
(155bps)
(160bps)
(239bps)
(257bps)
(300bps)
(358bps)
(450bps)
Q1
Q2
Q3
Q4
Q1
F11
Q2
Q3
F12
Q4
Q1
Q2
Q3
F13
Q4
Q1
Q2
Q3
F14
■ WN reported Q3/F14 adjusted EPS of $1.54, up 16.7% from adjusted $1.32 last year. The
Street was looking for EPS of $1.50, while our forecast was $1.48 ($1.51 after updating for
Loblaw Q3 results).
■ The company expects a slight decline in adjusted EBIT in Q4/F14, before including the
positive impact of the 53 rd week.
Valuation and Key Risks to Target
Loblaw Companies Limited (L - T $60.30)
Valuation
NAV
Key Risks to
Target
Heightened competitive pricing pressures, prolonged deflation, disruption to ops from Supply Chain & IT
overhaul and merger integration
66
Company Comment
(LUC-T C$2.39)
Lucara Diamond Corp.
Craig Johnston, CPA, CA - (416) 860-1659
craig.johnston@scotiabank.com
Risk Ranking: High
James Steels - (416) 945-4527
james.steels@scotiabank.com
Target 1-Yr:
C$2.55
ROR 1-Yr:
8.4%
Key Risks to Target: Diamond prices; development risk; technical and operational risk; multiple contraction; and geopolitical ris k
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
C$0.04
C$0.04
1.7%
Event
■ We are updating our estimates following Q3/14 results, and the
announcement of the $0.04 special dividend.
Pertinent Revisions
Implications
■ Overall, we believe the Q3/14 results were positive as production and
operating costs beat our estimates. Year-to-date proceeds total $241.4
million and therefore the company expects to exceed the higher end of
its 2014 revenue guidance ($240-$250 million).
■ The recovery of special stones declined in the quarter to 3.6% of
production, from 7.1% of production in Q2/14, as the company mined
more material from the North Lobe. Since the beginning of 2013, we
calculate 4.48% of production has been recovered via special stones,
compared to the feasibility study estimate of below 4%, and our current
modelling assumption of 4.2% for the South and Centre Lobes.
■ Our NAV5% has increased 4% to $2.01 per share, as we have reduced
our assumed tax payments for Karowe based on a revised interpretation
of the variable tax rate in Botswana. We have increased our one-year
target price to $2.55 per share (up from $2.50).
$2.55
US$0.27
US$0.21
New
Target:
1-Yr
Adj. EPS14E
Adj. EPS15E
New Valuation:
1.23x NAV
Old Valuation:
1.25x NAV
Old
$2.50
US$0.26
US$0.19
Recommendation
■ In our opinion, LUC's clean balance sheet, impressive margins,
experienced management team, and continued recovery of exceptional
stones warrant its premium valuation. Unfortunately, we believe the
shares are relatively fair valued at current levels, but would be watching
for dips in the share price to opportunistically accumulate shares.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.02 A
$0.01 A
$0.06
$0.05
(FY-Dec.)
Diamond Prod (ct) (000)
Diamond Price (/ct)
Cash Cost ($/ct)
All-In Sustaining Cost ($/ct)
Adj Earnings/Share
Cash Flow/Share
Free Cash Flow/Share
Price/Cash Flow
Q2
$0.06 A
$0.06 A
$0.05
$0.05
Q3
$0.04 A
$0.10 A
$0.05
$0.04
Q4
$0.06 A
$0.09
$0.05
$0.04
Year
$0.17
$0.27
$0.21
$0.18
P/E
9.6x
8.0x
10.2x
11.7x
2013A
441
$411
$100
$178
$0.17
$0.26
$0.24
6.2x
2014E
417
$657
$129
$264
$0.27
$0.40
$0.24
5.3x
2015E
472
$523
$169
$310
$0.21
$0.28
$0.17
7.6x
2016E
440
$519
$199
$365
$0.18
$0.25
$0.14
8.3x
2017E
428
$495
$224
$394
$0.15
$0.23
$0.12
9.2x
BVPS14E: $0.72
ROE14E: 42.50%
NAVPS:
P/NAV:
C$2.01
1.19x
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
C$906
$-133
C$773
379
311
67
NAV Breakdown and Target Price Generation
■ Our net asset valuation has increased 4% to $2.01 per share as we have reduced our assumed
tax rate at Karowe based on a revised interpretation of the variable tax rate in Botswana. We
now estimate the government of Botswana will receive 49% (55% previously) of the FCF
from Karowe over the life of the mine. We made other minor adjustments to our modelling
assumptions.
■ We have also reduced our target multiple on Karowe to 1.25x, from 1.30x, as we believe the
premium associated (in our opinion) with the much anticipated inaugural special dividend,
will be slightly reduced now that the announcement has taken place. That being said, we
continue to believe Lucara shares warrant a premium to its net asset valuation given its very
clean balance sheet, impressive high margins, experienced management team and continued
recovery of special diamonds.
Exhibit 1 - NAV Breakdown and Target Price Generation
Karowe (@5% discount rate)
Mothae
Exploration
Mining Assets
Cash and Cash Equivalents
Working Capital - (Non-Mining)
Cash from exercise of options
Debt
Corporate G&A
Corporate Adjustments
Current
Q3/15E
NAV (US$M) NAV (US$M)
$674
$637
$21
$21
$5
$5
$700
$663
$133
$152
($29)
($14)
$2
$2
$0
$0
($105)
($97)
$2
$43
Net Asset Value
Forecast USD/CAD
Projected Value (C$M)
Fully Diluted (ITM) Shares (M)
Projected Value (C$/sh)
One-year Target Price (C$)
$702
$706
1.09
$765
381.4
$2.01
1.12
$793
381.4
$2.08
%
NAV
90%
3%
1%
94%
22%
-2%
0%
0%
-14%
6%
100%
Project
Projected
Multiple Value (US$M)
1.25x
$796
1.00x
$21
1.00x
$5
1.24x
$822
1.00x
$152
1.00x
($14)
1.00x
$2
1.00x
$0
1.00x
($97)
1.00x
$43
1.23x
$865
1.12
$972
381.4
$2.55
$2.55
■ In Exhibit 2, we illustrate net asset valuation sensitivities based on % changes to our current
diamond prices, and in Exhibit 3, we illustrate net asset valuation sensitivities to annual real
diamond price escalation (we currently assume 2% LOM and 5% in 2014).
Exhibit 2 - NAV Sensitivities to Change in Diamond Prices
-4%
3%
$2.23
$2.13
5%
$2.01
$1.91
8%
$1.73
$1.65
-3%
-2%
-1%
0%
1%
2%
3%
4%
$2.15
$2.18
$2.21
$2.23
$2.26
$2.29
$2.31
$2.34
$1.94
$1.96
$1.98
$2.01
$2.03
$2.05
$2.07
$2.10
$1.67
$1.69
$1.71
$1.73
$1.75
$1.77
$1.79
$1.81
NAV
Exhibit 3 - NAV Sensitivities to Real Price Escalation
NAV
0%
1%
2%
3%
4%
5%
6%
7%
8%
3%
$2.23
$1.90
$2.06
$2.23
$2.42
$2.62
$2.83
$3.06
$3.31
$3.57
5%
$2.01
$1.72
$1.86
$2.01
$2.16
$2.33
$2.51
$2.70
$2.91
$3.13
8%
$1.73
$1.51
$1.62
$1.73
$1.85
$1.99
$2.13
$2.28
$2.44
$2.61
68
Appendix 1 - Lucara Diamond Corp. Income Statement (US$000) - December Year-End
Diamond Revenue
Cost of Sales
Costs of Sales
Royalty expenses
Sales and marketing
Depletion, Depreciation & Amortization
Total Production Cost
Gross Profit
2013A
$180,507
2014E
$268,755
2015E
$246,538
2016E
$228,285
2017E
$211,878
2018E
$214,103
$43,835
$18,051
$3,523
$14,979
$80,388
$50,627
$26,875
$3,845
$15,166
$96,513
$58,729
$24,654
$3,945
$22,173
$109,501
$58,321
$22,829
$3,653
$23,670
$108,472
$64,743
$21,188
$3,390
$26,583
$115,904
$66,331
$21,410
$3,426
$29,369
$120,536
$100,119
$172,242
$137,037
$119,813
$95,973
$93,567
Expenses
Administration expenses
Exploration expenses
Share-based payment
Accretion expense on decommissioning liability
Loss (gain) on sale of assets
Foreign exchange loss (gain)
Total Expenses
$11,429
$1,323
$0
$0
($584)
$3,953
$16,121
$10,888
$1,102
$20
$300
$0
$6,228
$18,538
$10,600
$2,600
$80
$1,200
$0
$0
$14,480
$10,600
$2,600
$80
$1,200
$0
$0
$14,480
$10,600
$2,600
$80
$1,200
$0
$0
$14,480
$10,600
$600
$80
$1,200
$0
$0
$12,480
Income from operations
$83,998
$153,704
$122,557
$105,333
$81,493
$81,087
Other Income (expenses)
Finance expenses
Interest and other income
Total Other Income
($3,785)
$0
($3,785)
$31
$133
$164
$0
$515
$515
$0
$713
$713
$0
$867
$867
$0
$1,001
$1,001
Income (loss) before taxes
Current income tax
Deferred income tax
$80,213
$96
$14,895
$153,868
$29,575
$26,528
$123,073
$40,779
$3,639
$106,046
$34,105
$2,935
$82,361
$22,723
$1,311
$82,088
$21,118
$1,326
Net Income
$65,222
$97,765
$78,655
$69,006
$58,327
$59,643
Adjustments (FX, One-time items)
Adjusted Net Income
$0
$65,222
$3,179
$100,944
$0
$78,655
$0
$69,006
$0
$58,327
$0
$59,643
$102,930
$0.17
$177,514
$0.27
$144,730
$0.21
$129,003
$0.18
$108,077
$0.15
$110,457
$0.16
2017E
2018E
Adj. EBITDA
Adjusted EPS (FD)
Appendix 2 - Lucara Diamond Corp. Cash Flow Statement (US$000) - December Year-End
2013A
2014E
2015E
2016E
Cash Provided From Operations
Net Income
Amortization
Deferred income tax expense (recovery)
Finance expense
Share-based payment
Other, incl. foreign exchange
Operating Cash Flow
$65,222
$15,402
$14,895
$3,527
$517
$0
$99,563
$97,765
$15,452
$26,528
$138
$296
$10,434
$150,912
$78,655
$22,173
$3,639
$0
$80
$485
$106,232
$69,006
$23,670
$2,935
$0
$80
$287
$97,178
$58,327
$26,583
$1,311
$0
$80
$133
$87,634
$59,643
$29,369
$1,326
$0
$80
($1)
$91,618
Changes in non-cash working capital
Net Operating Cash Flow
($1,000)
$98,563
($4,291)
$146,621
($5,113)
$101,118
($9,675)
$87,503
($6,429)
$81,205
($1,825)
$89,793
Cash Provided From Investing
Acquisition of PP&E and mineral properties
Interest income
Other
Net Cash Used in Investing Activities
($7,865)
$0
$54
($7,811)
($55,829)
$133
$0
($55,696)
($35,780)
$515
$0
($35,264)
($33,352)
$713
$0
($32,638)
($34,938)
$867
$0
($34,070)
($39,491)
$1,001
$0
($38,490)
$530
($54,500)
$0
$0
($53,970)
$1,548
$0
($27,616)
($2,495)
($28,563)
$0
$0
($13,568)
$0
($13,568)
$0
$0
($13,643)
$0
($13,643)
$0
$0
($13,795)
$0
($13,795)
$0
$0
($13,795)
$0
($13,795)
($679)
$36,103
$13,261
$49,364
($1,608)
$60,754
$49,364
$110,118
$0
$52,286
$110,118
$162,405
$0
$41,221
$162,405
$203,626
$0
$33,340
$203,626
$236,966
$0
$37,508
$236,966
$274,473
Cash Provided From Financing
Share issuance (net of transaction costs)
Long-term debt (net of costs)
Dividend payments
Other
Net Cash Provided by Continuing Financing Activities
Foreign exchange (loss)/gain
Increase (decrease) in cash
Cash at beginning of period
Cash at end of period
69
Appendix 3 - Lucara Diamond Corp. Balance Sheet (US$000) - December Year-End
2013A
Current Assets
Cash and cash equivalents
Investments
Accounts Receivable
Prepaid expenses
Inventory
Other - current
Total Current Assets
2014E
2015E
2016E
2017E
2018E
$49,364
$90
$3,593
$0
$21,132
$0
$74,179
$110,118
$66
$5,611
$199
$29,456
$0
$145,451
$162,405
$66
$4,728
$236
$36,298
$0
$203,733
$203,626
$66
$4,378
$259
$44,039
$0
$252,368
$236,966
$66
$4,063
$274
$48,765
$0
$290,134
$274,473
$66
$4,372
$269
$52,557
$0
$331,737
Long-Term Assets
Mineral properties, incl. PPE
Future income taxes
Other
Total Long-Term Assets
$172,947
$0
$62
$173,009
$204,264
$0
$2,475
$206,739
$216,670
$0
$2,475
$219,145
$225,152
$0
$2,475
$227,627
$232,306
$0
$2,475
$234,781
$241,228
$0
$2,475
$243,703
TOTAL ASSETS
$247,188
$352,190
$422,878
$479,995
$524,916
$575,440
Current Liabilities
Accounts payable
Income tax liability
Total Current Liabilities
$0
$15,491
$0
$15,491
$0
$11,951
$13,605
$25,557
$0
$14,147
$12,291
$26,438
$0
$15,568
$8,610
$24,177
$0
$16,434
$5,741
$22,175
$0
$16,147
$8,298
$24,445
Long-Term Liabilities
Long-term debt
Deferred income taxes
Asset retirement obligation
Total Long-Term Liabilities
$0
$14,258
$14,515
$28,773
$0
$39,150
$15,092
$54,242
$0
$42,789
$16,292
$59,081
$0
$45,724
$17,492
$63,216
$0
$47,035
$18,692
$65,727
$0
$48,361
$19,892
$68,253
TOTAL LIABILITIES
$44,264
$79,798
$85,519
$87,393
$87,902
$92,698
SHAREHOLDERS' EQUITY
Share capital
Contributed surplus
Accumulated other comprehensive income
Retained earnings
TOTAL SHAREHOLDERS' EQUITY
Non-controlling interests
TOTAL EQUITY
$283,609
$5,108
($41,820)
($45,516)
$201,381
$1,543
$202,924
$285,784
$4,777
($44,193)
$24,686
$271,054
$1,338
$272,392
$285,784
$4,857
($44,193)
$89,773
$336,221
$1,138
$337,359
$285,784
$4,937
($44,193)
$145,136
$391,664
$938
$392,602
$285,784
$5,017
($44,193)
$189,668
$436,276
$738
$437,014
$285,784
$5,097
($44,193)
$235,516
$482,204
$538
$482,742
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY
$247,188
$352,190
$422,878
$479,995
$524,916
$575,440
70
Company Comment
(NAL-T C$21.46)
Newalta Corporation
A Closer Look at Possible Valuation Rerating
Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759
vladislav.vlad@scotiabank.com
Risk Ranking: High
Target 1-Yr:
Sam Devlin, CFA - (403) 213-7332
sam.devlin@scotiabank.com
C$27.00
ROR 1-Yr:
28.1%
Valuation: 9.7x our 2015 EV/EBITDA estimate.
Key Risks to Target: Customer acceptance of onsite, commodities, labour, regulatory, weather, and FX.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.50
$0.50
2.3%
Event
■ Previously, once the Industrial division was officially for sale, we were
of the opinion the process would take time and that a partial sale of the
division was more likely. Eight months later, the review process is
nearing its conclusion. Given management's tone and comments
regarding possible U.S. acquisition, we are inclined to believe that the
entire division may get sold. In this piece, we provide a framework on
these transactions and do the math on possible valuation rerating.
Implications
■ First off, we suspect the sale of industrial division might leave 2015E
EV/EBITDA unchanged at 8.2x. This suggests there is valuation
upside as NAL repositions itself as an energy services company. We do
not anticipate NAL will trade at SES' level of 10.6x (currently), but a 9x
handle is possible, implying roughly 10% upside. See pages 2 and 3.
■ U.S. acquisition could provide additional upside. While no guidance
on target size was given, we run a case where the bulk of the Industrial
proceeds are used for the purchase; we believe 2015E EV / EBITDA
could trend to 7.7x. See pages 4 and 5.
■ 2016 price target rollover could also have a meaningful impact.
Unlike most OFS providers, NAL is not materially exposed to drill-bit
related activities as 75% of its processing volumes come from
production waste, which is less sensitive to volatility in commodities.
Recommendation
■ SO rating maintained; we see upside to our PT. Execution risk remains.
Qtly EBITDA (M)
2012A
2013A
2014E
2015E
Q1
Q2
Q3
Q4
Year
$36 A
$28 A
$28 A
$47
$30 A
$38 A
$44 A
$48
$43 A
$51 A
$58 A
$64
$33 A
$33 A
$47
$57
$142
$150
$177
$216
EV /
EBITDA
8.5x
9.2x
9.8x
8.2x
2013A
$121
$171
$-50
19.2%
7.5%
3.0x
$0.89
$0.43
2014E
$142
$180
$-38
20.6%
8.0%
3.3x
$0.96
$0.48
2015E
$186
$190
$-4
22.7%
11.2%
2.7x
$1.40
$0.50
2016E
$206
$196
$10
23.1%
11.1%
2.5x
$1.51
$0.50
2017E
$228
$212
$16
23.6%
12.2%
2.3x
$1.80
$0.50
(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: $11.49
ROE14E: 7.98%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$1,274
$450
$1,724
59
59
71
Valuation Re-Rating Story in the Making
■ Below is how we could see NAL’s story unfold should the Industrial strategic review process
result in the sale of the entire division by year-end. We provide sensitivities where applicable.
1. If we assume Industrial is sold as one unit at a 6.0x multiple on $50M 2014 EBITDA, we
arrive at $300M of proceeds. We suspect proceeds could be in a range of $250M to $400M.
■ Our Industrial EBITDA assumption is based on our $75M 1 estimate less $25M of
G&A. Below is a sensitivity of proceeds on EBITDA and purchase multiple:
■
Exhibit 1 - Sensitivity - Industrial Sale Proceeds
EBITDA ($M)
Purchase Price Multiple
5.0x
5.5x
6.0x
6.5x
7.0x
7.5x
8.0x
$40
$200
$220
$240
$260
$280
$300
$320
$45
$225
$248
$270
$293
$315
$338
$360
$50
$250
$275
$300
$325
$350
$375
$400
$55
$275
$303
$330
$358
$385
$413
$440
$60
$300
$330
$360
$390
$420
$450
$480
■ However, if the Industrial division is not sold as one unit, proceeds would obviously be
less. See our analysis on the sale of VSC and North Van from March (link). Given
management’s tone, we get the sense the entire division could be sold, which would be
preferred as it would remove the valuation overhang, in theory.
2. We now build up to 2015 EBITDA assuming sale of the Industrial division:
■ 2014E EBITDA = NAL EBITDA Guidance 2 – Industrial EBITDA
= $187M – $50M
= $137M
Looking forward to 2015, management expects to see $40M to $50M of incremental
EBITDA contribution from their planned $145M growth spending:
■ 2015E EBITDA = 2014E EBITDA + Midpoint NAL Growth Guidance
= $137M + $45M
= $182M3
1
$75M divisional EBITDA includes $9.4M of add-back for one-time restructuring charges.
Based on guidance for 20% EBITDA growth adjusted for one-time restructuring charges. SGBM
estimate of $177M plus $9.4M of one-time charges to arrive at $187M.
3
Result is 10% higher than our current model, which would imply $165M EBITDA post-Industrial
sale. Current model is based on the lower end of 15% to 20% EBITDA growth guidance.
2
72
3. Stepping back to enterprise value, if we assume full sale at $300M we arrive at 2015E net
debt of $212M:
■ 2015E Net Debt = 2014E Net Debt + 2015E Capex – 2015E CF 4 – Sale Proceeds
= $462M + $200M – $150M – $300M
= $212M
■ 2015E EV
= 2015E Market Cap (at $21.46/share) + 2015E Net Debt (New)
= $1,281M + $212M
= $1,493M
4. We estimate 2015E EV / EBITDA could be unchanged at 8.2x post-industrial sale
(versus our current model); this suggests there is valuation upside as NAL repositions itself
into energy services. NAL trades at a 2.4x discount to Secure, a competitor that would
arguably be a close comparable following removal of the Industrial business line. While we
acknowledge Secure has demonstrated a higher level of performance and execution
historically, a 2.4x discount appears overly punitive in our view, particularly with NAL’s
leverage position set to improve to ~1.2x ND / EBITDA in this scenario (vs. Secure at 1.4x).
Furthermore, unlike most OFS providers, we do not expect earnings to be significantly
impacted by lower commodity prices. Recall, management noted potential for a $10M
impact to EBITDA if they applied current Q4/14 commodity price estimates through 2015.
5. Taking a closer look at the numbers reveals capital efficiencies are in line with NAL’s
guidance for their New Markets (NM) and Oilfield (OFS) divisions. Management plans to
add roughly five satellite facilities per year going forward.
■ These facilities have been pegged at a capital cost of $8M to $10M per facility, yielding
similar annualized revenue and a three-year payback period, implying 35% margins;
this suggests annualized EBITDA contribution of $15M, or $3M per facility.
At five facilities per year this would require $45M capex. We currently model $200M
capex in 2015, including $35M for maintenance. This suggests $120M of growth
spending to get the remaining $30M EBITDA growth, or four-year payback (via Heavy
Oil onsite, MFT); recall, $45M targeted growth less $15M expected from satellites.
Management return expectations seem feasible given the recent results from its NM and
OFS business lines.
■ To recap, by 2014 year-end, NAL will have 13 satellites operating, which provides
them with confidence regarding return expectations for planned capital spending.
In the U.S., NAL has three satellite facilities in operation (one Eagle Ford facility
established in Q3/13 and two Bakken facilities established in Q1/14). The company
plans to add four to five satellites over the next 18 months, and roughly three per year
thereafter.
In OFS, NAL has 10 satellites and plans to add two per year (all in Canada).
4
Assumes 0.82:1 ratio of CF to EBITDA.
73
6. Potential U.S. acquisition provides additional upside to our valuation re-rating story. While
we do not know what the purchase could ultimately look like from a size perspective, we
believe it could be accretive from a multiple perspective given valuations outside of Canada
(see below). The concept is to add value by bringing NAL’s technologies / processes (i.e.,
centrifuges, thermomechanical cuttings cleaners [TCC], etc.) to waste streams that are
currently being underserviced.
Exhibit 2 – Comparable Company Analysis
GBM
Share
1
Company
Ticker Exchange Analyst Rating
Price
Waste & Environmental
Newalta
NAL
TSX
VV
SO
$21.46
Secure Energy Services
SES
TSX
VV
SO
$18.91
Gibson Energy
GEI
TSX
MA
SP
$31.01
Nuverra Environmental
NES
NYSE
10
$8.24
Clean Harbors
CLH
NYSE
10
$49.01
US Ecology
ECOL NASDAQ
6
$39.42
Veolia Environmental
VIE EURONEXT
18
€ 14.14
Average - Waste & Environmental
Average - SGBM OFS Coverage**
Target
Price
Total
Return
$27.00
$28.00
$36.00
28%
49%
20%
2
Div. Mkt Cap EV/EBITDA
Yield
($M)
2014E 2015E
2.3%
1.1%
3.9%
0.0%
0.0%
1.8%
5.0%
2.0%
4.2%
$1,281
$2,435
$3,850
$225
$2,938
$853
€ 7,951
9.8x
13.0x
10.5x
8.0x
7.6x
7.3x
7.9x
9.2x
6.9x
8.2x
10.6x
9.4x
6.4x
6.9x
5.5x
6.6x
7.7x
5.8x
Notes:
1. Number of analysts who make up consensus (i.e., Scotiabank GBM does not cover the name) or our rating.
2. Adjusted for stock-based compensation and non-recurring items.
3. Figures for U.S.-listed companies are in U.S. dollars.
**Excludes GFS.
Analyst legend: VV = Vladislav Vlad, MA = Matthew Akman.
Ratings legend: FS = Focus Stock, SO = Sector Outperform, SP = Sector Perform, SU = Sector Underperform.
Source: Bloomberg; Company reports; FactSet; Scotiabank GBM estimates for NAL, SES, GEI (rating and target only for GEI).
In Exhibit 3, we highlight potential U.S. acquisition metrics under a number of EBITDA and
purchase multiple scenarios, while in Exhibit 4 we provide NAL’s valuation sensitivity.
Exhibit 3 - Sensitivity – Acquisition Metrics
EBITDA ($M)
Purchase Price Multiple
5.5x
6.0x
6.5x
7.0x
7.5x
8.0x
$35
$193
$210
$228
$245
$263
$280
$40
$220
$240
$260
$280
$300
$320
$45
$248
$270
$293
$315
$338
$360
$50
$275
$300
$325
$350
$375
$400
$55
$303
$330
$358
$385
$413
$440
P/CF
74
Exhibit 4 - Sensitivity – NAL Valuation Under Acquisition Scenarios
8.0x
7.9x
Implied 2015E EV / EBITDA
7.8x
7.7x
7.6x
7.5x
7.4x
7.3x
5.5x
6.0x
6.5x
Purchase Multiple
$25M EBITDA
$35M EBITDA
$45M EBITDA
$55M EBITDA
7. As a sensitivity, if we assume NAL uses the bulk of proceeds from the Industrial sale to
make a purchase in the U.S., we arrive at 2015E EBITDA and EV as follows:
■ New 2015E EBITDA
= 2015E EBITDA + Acquired EBITDA
= $182M + $45M
= $227M
■ New 2015E EV
= 2015E EV + Acq. Cost – Acq. CF 5
= $1,493M + $293M – $37M
= $ 1,749M
The result is a compelling valuation of 7.7x 2015E EV/EBITDA on a more strategically
aligned company with greater growth potential. The transaction would essentially amount to
a swap of the underperforming industrial division for increased U.S. exposure in NAL’s
core business lines.
5
Assumes 0.82:1 ratio of CF to EBITDA.
75
Company Comment
(PWT-T C$4.76)
(PWE-N US$4.21)
Penn West Exploration
Long-Term Plan Focused on Core Assets
Patrick Bryden, CFA - (403) 213-7750
patrick.bryden@scotiabank.com
Riley Hicks, CA, MBA - (403) 213-7760
Justin Strong, MBA - (403) 213-7328
Target 1-Yr:
Risk Ranking: High
Valuation: 0.4x our 2P NAV plus risked upside.
C$6.50
ROR 1-Yr:
48.3%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.56
$0.56
11.8%
Key Risks to Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program succes s
Event
■ Penn West formally released its 2015 capital budget and guidance.
Implications
■ 2015 guidance announced. The Penn West board of directors has
approved a 2015 capital budget of $840 mm and expects average
production to be in the range of 95,000-105,000 boe/d. Our estimates
include an $840 mm 2015E capital budget and production of 95,635
boe/d.
■ Development in core areas to drive 2015 production. Total budgeted
development capital for 2015 is $750 mm. Approximately $585 mm of
this budgeted development capital is focused on light oil in the
company's three core plays, including $370 mm directed to the
Cardium, $125 mm to the Viking, and $90 mm to the Slave Point play.
The company plans to spud approximately 225 wells during the year,
consisting of 78 Cardium, 107 Viking, and 14 Slave Point wells.
■ Waterflood programs to help moderate corporate decline rate. Penn
West has announced plans to invest in the advancement of the
company's waterflood programs, which, in our view, will help to
moderate the overall decline rate of the company as new production is
added and may help to improve its sustainability metrics.
Recommendation
■ We maintain our Sector Perform rating and one-year price target of
$6.50/share.
Qtly CFPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.52 A
$0.52 A
$0.40
$0.41
(FY-Dec.)
Cash Flow/Share
Dividends/Share
Price/Cash Flow
Pre-tax Cash Yield
Q2
$0.56 A
$0.59 A
$0.39
$0.41
Q3
$0.55 A
$0.44 A
$0.39
$0.42
Q4
$0.27 A
$0.41
$0.39
$0.43
Year
$1.89
$1.97
$1.68
$1.78
P/CF
4.7x
2.4x
2.8x
2.7x
2012A
$2.29
$1.08
4.7x
10.0%
2013A
$1.89
$0.82
4.7x
9.2%
2014E
$1.97
$0.56
2.4x
11.8%
2015E
$1.68
$0.56
2.8x
11.8%
2016E
$1.78
$0.56
2.7x
11.8%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
BVPS14E: $14.92
ROE14E: 1.28%
$2,363
$2,221
$4,585
496
496
76
Update on Operational Performance
■ Well performance of key plays is varied. We have included a brief review of well pulls
from the company’s three plays, which we have summarized below.
■ Viking performance looks good. Exhibit 1 - PWT Dodsland Viking Well Performance
Production from the Dodsland area is
ahead of our type curve assumption and
management
has
become
more
favourable of the area given positive
performance and economics. Exhibit 1
depicts the well performance in the
Dodsland Viking area.
80
Oil (bbl/d; calendar day)
70
60
50
40
30
20
■ Pembina Cardium on Track. From our
standpoint, these area wells appear to be
on track and reasonable versus our type
curve. Exhibit 2 reflects the well
performance of the company’s Pembina
Cardium wells.
10
0
4
7
10
13
3,000
Raw boe (boe/d; calendar day)
2,500
GOR (scf/bbl)
2,000
■ Williseden Green Cardium. The 2014
wells also appear to be consistent with
our curves and more in line versus 2013
outperformance that was based on a
smaller set. Exhibit 3 depicts the well
performance of the Willisden Green
Cardium wells.
1,500
1,000
500
16
19
Month
22
25
90
80
80
70
70
60
60
40
4
7
10
13
16 19 22
Month
SC Type Curve (54 mboe)
25
28
31
34
1 Month
6 Months
12 Months
40
30
18 Months
20
20
24 Months
10
0
0
1
31
30
10
0
28
50
50
Wells
1
1
34
Total (296 wells)
4
7
10
13
16 19 22
Month
2014 (73 wells)
25
28
31
2011
34
2013 (62 wells)
2012
2012 (26 wells)
2013
2014
2011 (72 wells)
Source: Company reports; GeoScout; Scotiabank GBM estimates.
Exhibit 2 - PWT Pembina Cardium Well Performance
Exhibit 3 - PWT Willisden Green Cardium Well Performance
160
300
140
250
120
100
80
60
200
150
100
40
50
20
0
10
13
16
19
Month
22
25
180
2,500
28
31
1 Month
1,000
500
20
140
6 Months
4
7
10
15
100
80
12 Months
10
18 Months
60
40
5
24 Months
350
14,000
300
0
0
1
4
7
10
13
16
19 22
Month
25
28
31
34
37
Total (67 wells)
16
19
Month
22
25
28
31
34
1
4
7
10
13
2014 (16 wells)
16
19 22
Month
25
28
31
2013 (12 wells)
34
2011
37
2012
2013
2014
10,000
8,000
6,000
4,000
2011 (6 wells)
150
10
13
16 19 22
Month
25
28
31
34
Total (61 wells)
18 Months
5
0
7
12 Months
10
100
0
4
6 Months
15
200
50
20
250
2,000
1
2012 (23 wells)
25
1 Month
20
0
13
16,000
12,000
120
Wells
GOR (scf/bbl)
1,500
1
25
160
2,000
0
34
Wells
7
4
GOR (scf/bbl)
1
24 Months
0
1
4
7
10
13
2014 (14 wells)
16 19 22
Month
25
28
31
2013 (4 wells)
2011
34
2012 (23 wells)
■ Slave Point wells show mixed results. Performance of the Slave Point wells in the Red
Earth, Sawn Lake and Evi/Otter areas have shown mixed results to date, with well
2012
2013
2014
2011 (14 wells)
77
performance ranging from below our type curve to a slight
type curve outperformance. We will continue to monitor Exhibit 4 - PWT Sawn Lake Slave Point Well Performance
the performance of these wells as production in the area
increases. Exhibits 4-6 depict the well performance in the
Slave Point area.
250
■ Management has made significant efforts to reposition
the company with staff levels reduced 55% from peak
levels and approximately $1 bn in assets sold to date. We
continue to monitor operational execution and refer our
readers to our third quarter research comment for
sensitivity analysis to lower commodity price assumptions.
Exhibit 5 - PWT Red Earth Slave Point Well Performance
100
50
0
1
4
7
10
13
1,400
300
1,200
250
16
19
Month
22
25
28
31
34
9
1 Month
8
800
600
400
7
6 Months
6
200
5
Wells
1,000
GOR (scf/bbl)
■ Investment thesis remains the same. We maintain our
Sector Perform rating and one-year price target of $6.50 per
share. Our price target represents a 2015E EV/DACF of
6.0x, which compares to the peer group at 9.3x. Penn West
currently trades at a 2015E EV/DACF of 5.3 versus the peer
group at 7.4x. Please refer to Exhibit 7 for our financial and
operating forecast.
150
Investment Recommendation
200
150
2
50
7
10
13
16 19 22
Month
25
28
31
0
1
34
24 Months
1
0
0
4
18 Months
3
100
200
1
12 Months
4
4
Total (25 wells)
7
10
13
16 19 22
Month
2014 (7 wells)
25
28
31
2011
34
2013 (8 wells)
2012
2012 (6 wells)
2013
2014
2011 (4 wells)
Exhibit 6 - PWT Evi/Otter Slave Point Well Performance
300
400
350
250
300
250
200
150
200
150
100
100
50
50
0
0
10
13
19
Month
22
25
400
300
28
31
3
150
100
50
4
7
10
300
6 Months
250
2
200
12 Months
1
150
100
18 Months
1
24 Months
13
16
19
Month
22
25
1,200
300
30
1,000
250
25
200
20
28
31
34
1 Month
1 Month
2
Wells
200
1
34
350
250
GOR (scf/bbl)
16
800
600
400
200
6 Months
Wells
7
4
GOR (scf/bbl)
1
150
12 Months
15
100
10
50
5
0
0
18 Months
24 Months
50
0
0
1
4
7
10
13
16 19 22
Month
25
28
31
34
Total (6 wells)
0
0
1
4
7
10
13
2014 (2 wells)
16 19 22
Month
25
28
31
2013 (0 wells)
2011
34
2012 (1 wells)
2012
2013
2011 (2 wells)
2014
1
4
7
10
13
16 19 22
Month
25
28
31
34
Total (55 wells)
1
4
7
10
13
2014 (7 wells)
16 19 22
Month
25
28
2013 (3 wells)
31
34
2011
2012 (24 wells)
2012
2013
2014
2011 (15 wells)
78
Exhibit 7 - Financial and Operating Forecast
Fiscal Year End - December 31
2011A
2012A
restated
2013A
restated
Q1/14A
restated
Q2/14A
Q3/14A
Q4/14E
2014E
2015E
2016E
Price Deck Assumptions
WTI
Edmonton Par
WCS
Nymex Natural Gas
AECO 30-Day Spot
Exchange Rate
US$/B
C$/B
C$/B
US$/Mcf
C$/Mcf
US$/C$
$94.72
$95.37
$73.73
$4.01
$3.64
$1.01
$94.09
$87.12
$70.55
$2.76
$2.39
$1.00
$98.01
$93.42
$75.11
$3.72
$3.17
$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
$0.90
Daily Production
Total Oil & Liquids
Natural Gas
Total Production
Change in Total Production
Percentage Natural Gas
B/d
Mmcf/d
Boe/d
%
%
103,208
359.3
163,094
-1%
37%
104,144
342.3
161,195
-1%
35%
85,097
300.0
135,092
-16%
37%
71,639
239.0
111,472
-10%
36%
69,408
224.0
106,741
-4%
35%
64,687
216.9
100,839
-6%
36%
64,651
198.3
97,703
-3%
34%
67,569
219.4
104,142
-23%
35%
65,096
183.2
95,635
-8%
32%
65,635
187.1
96,823
1%
32%
Financial Estimates
Cash Flow from Operations
Investment Cash Flows - Internal
Investment Cash Flows - M&A
Financing Cash Flows
Dist/Div (actuals net of DRIP)
[$mm]
[$mm]
[$mm]
[$mm]
[$mm]
$1,456.0
-$1,846.0
$100.0
$226.0
-$328.0
$1,090.0
-$1,752.0
$1,615.0
-$822.0
-$395.0
$919.0
-$816.0
$525.0
-$633.0
-$360.0
$256.0
-$195.0
$213.0
-$234.0
-$54.0
$291.0
-$65.0
-$1.0
-$93.0
-$54.0
$219.0
-$225.0
$3.0
-$180.0
-$55.0
$203.1
-$325.0
$355.0
-$233.1
-$69.4
$969.1
-$810.0
$570.0
-$740.1
-$232.4
$786.0
-$840.0
$0.0
$54.0
-$279.7
$845.0
-$1,000.0
$0.0
$155.0
-$283.0
Cash Flow Per Share - FD
EBITDA
EPS
Distribution - Basic
$/Share
$/Share
$/Share
$/Share
$3.08
$3.81
$1.35
$1.08
$2.29
$4.06
$0.26
$1.08
$1.89
$2.29
-$1.20
$0.82
$0.52
$0.35
($0.18)
$0.14
$0.59
$0.82
$0.29
$0.14
$0.44
$0.47
($0.03)
$0.14
$0.41
$0.57
$0.11
$0.14
$1.97
$2.22
$0.19
$0.56
$1.68
$2.01
$0.23
$0.56
$1.78
$2.11
$0.31
$0.56
Netbacks
Revenue (pre-hedging)
Hedging Gains (Losses)
Royalties
Operating Costs
Transportation Costs
Field Netback
After-Tax Netback
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
$61.02
-$1.06
-$11.10
-$17.40
-$0.49
$30.96
$25.14
$53.60
$1.77
-$8.37
-$20.10
-$0.49
$26.41
$19.90
$57.71
$0.16
-$8.23
-$20.79
-$0.59
$28.26
$20.51
$68.59
-$1.99
-$10.17
-$20.33
-$0.60
$35.50
$26.83
$69.75
-$2.99
-$11.53
-$15.13
-$0.62
$39.48
$30.52
$63.49
-$0.65
-$8.95
-$20.80
-$0.65
$32.44
$24.79
$63.78
-$2.32
-$10.07
-$19.54
-$0.62
$31.23
$23.89
$66.50
-$2.00
-$10.20
-$18.93
-$0.62
$34.76
$26.58
$63.60
-$2.04
-$10.10
-$19.72
-$0.58
$31.16
$23.82
$62.64
$0.00
-$9.92
-$19.68
-$0.59
$32.45
$25.21
Valuation Measures
EV/DACF
EV/EBITDA
P/E
D/P
EV per Boe/d
x
x
x
%
$/Boe/d
8.2
7.5
3.4
23%
82,497
6.3
4.2
17.6
23%
50,017
6.4
6.4
n/a
18%
52,485
4.1
7.0
n/a
12%
43,775
3.5
2.9
4.0
12%
43,677
4.6
5.0
n/a
12%
46,842
4.8
4.0
10.3
12%
46,212
4.0
4.1
24.0
12%
43,349
5.3
5.1
20.2
12%
50,365
5.4
5.2
15.0
12%
53,941
Credit Capacity
Credit facility
% Drawn
[$mm]
%
$2,750
45%
$3,000
27%
$3,000
18%
$3,000
12%
$1,700
22%
$1,700
6%
$1,700
-4%
$1,700
-4%
$1,700
28%
$1,200
94%
Net Debt & Debentures
Net Debt & Debentures
EBITDA
Cash Flow
Net Debt, Debentures & Equity
EV
$/Share
x
x
x
%
$8.35
2.2
2.7
0.3
29%
$6.02
1.5
2.6
0.3
36%
$5.63
2.5
3.0
0.3
39%
$5.33
3.8
2.6
0.3
54%
$4.80
1.5
2.0
0.2
51%
$4.92
2.6
2.8
0.2
52%
$4.47
2.0
2.7
0.2
49%
$4.47
2.0
2.3
0.2
49%
$4.97
2.7
3.2
0.3
52%
$5.66
2.9
3.4
0.3
55%
Sustainability
Payout Ratio - Simple
Payout Ratio - Effective
Capital Expenditures / Cash Flow
%
%
%
35%
161%
127%
47%
208%
161%
43%
132%
89%
27%
103%
76%
24%
46%
22%
32%
134%
103%
34%
194%
160%
29%
112%
84%
36%
142%
107%
33%
152%
118%
Hedging
Percentage of Light & Medium Oil
Percentage of Heavy Crude Oil
Percentage of Natural Gas Production
Percentage of Total Production
%
%
%
%
-----
-----
-----
-----
-----
-----
86%
0%
64%
66%
28%
0%
88%
45%
0%
0%
38%
12%
0%
0%
38%
12%
79
Company Comment
(RSI-T C$4.78)
Rogers Sugar Inc.
Tightening Its Belt
Christine Healy, CPA, CA - (416) 863-7902
christine.healy@scotiabank.com
Alexandru Palivan - (416) 863-7940
alexandru.palivan@scotiabank.com
Target 1-Yr:
C$5.00
ROR
1-Yr:
12.1%
Valuation: 9.0x FTM EBITDA (one-year forward)
Key Risks to Target: Competition, changes in government regulation/foreign trade policies, rise in natural gas prices, weather
Event
■ RSI reported better-than-expected Q4/14 results, with higher realized
gross margin per tonne more than offsetting the impact of higher SG&A
costs. An initial outlook for F2015 was provided.
Implications
■ In F2015, we expect belt tightening to offset weaker volumes.
Beginning in F2015, RSI expects to save ~$5M/year from recent
workforce reductions and ~$1.8M/year in energy costs through a new
contract. Ongoing capital investments and lower natural gas costs
(~25% of volume is unhedged) could also result in further savings. RSI
expects the impact of lower costs to be largely offset in F2015 by lower
liquid and export sales volume, and lower realized margin. In F2015,
we forecast adjusted EBITDA to grow 5% to $66.8M.
■ We see improved earnings post-2016. RSI is focused on securing
additional export sales, but we expect this could take a couple of years
to achieve. We see potential for more material earnings growth beyond
F2015 if major trade agreements (e.g., CETA, TPP) are ratified.
■ No near-term changes expected to dividend. While we forecast a
dividend payout of 98% in F2015, RSI expects this to be short term.
The RSI Board looks out several years. In the long term, RSI targets a
payout of 90%-95% (we forecast 95% in F2016).
■ Earnings revisions. We made minor revisions to our F2015 estimates.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.36
$0.36
7.5%
Pertinent Revisions
Adj
EBITDA15E
Adj
EBITDA16E
New
$66.8
Old
$65.8
$68.6
N/A
Recommendation
■ We maintain our one-year target price of $5.00 per share and SP rating.
Qtly Adj EBITDA (M)
2013A
2014A
2015E
2016E
Q1
Q2
Q3
Q4
Year
$25.7 A
$21.0 A
$22.4
$16.0 A
$11.4 A
$13.2
$12.1 A
$12.9 A
$13.4
$15.4 A
$18.3 A
$17.7
$69.2
$63.6
$66.8
$68.6
EV/Adj
EBITDA
11.3x
9.6x
9.1x
8.9x
2012A
$0.49
$0.35
13.7x
$86.8
2013A
$0.35
$0.36
11.5x
$69.2
2014A
$0.32
$0.36
13.8x
$63.6
2015E
$0.33
$0.36
8.5x
$66.8
2016E
$0.34
$0.36
8.8x
$68.6
(FY-Sep.)
Adj Earnings/Share
Dividends/Share
Price/Cash Flow
Adjusted EBITDA (M)
BVPS15E:
ROE15E:
$2.28
13.17%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$522
$192
$715
109
82
80
Earnings Outlook
■ Rogers Sugar is focused on cost reduction to defend margins. In fiscal 2014, Rogers
Sugar was faced with increased margin pressure given a less favourable sales mix (lower
export volumes) and a very competitive marketplace. Management expects these conditions
to continue into fiscal 2015 and has taken actions to defend margins through cost cutting and
increased capital investments. As a result of an ongoing review of the cost structure of its
Montreal plant by a process improvement consulting firm (expected to be completed by the
end of Q1/F15), Rogers Sugar reduced its workforce in September. This is expected to result in
annual savings of approximately $5.0 million starting in fiscal 2015. On the capital investment
front, Rogers Sugar installed an automatic palletizer at its Vancouver refinery, which is
expected to deliver cost savings starting in Q2/F15. Furthermore, Rogers Sugar is installing a
new special packaging machine at its Vancouver refinery (expected to generate modest
savings beginning in fiscal 2016) and has expanded its refined sugar storage capacity at its
Montreal facility (expected to lower use of external storage). Lastly, management recently
signed a firm gas supply contract, which is expected to yield approximately $1.8 million in
savings relative to fiscal 2014 by assuring there are no more cold weather interruptions.
■ We expect modest earnings improvement in fiscal 2015. In fiscal 2014, Rogers Sugar’s
volumes declined slightly year-over-year and gross margins per tonne remained fairly flat despite
strong realized margins per tonne in Q4/F14 given lower export volumes (higher margin), retail
competitive pressures, and one-time costs. In fiscal 2015, we forecast sales volumes to fall
slightly by 1% as a result of lower expected sugar exports and liquid volumes, partially offset by
higher forecast consumer volumes. We expect minimal exports to Mexico given abundant local
supplies and lower exports to the U.S. due to an ongoing sugar trade dispute between the U.S. and
Mexico, which management expects will constrain exports (see Exhibit 1). In fiscal 2015, we
expect that benefits from cost savings and the non-recurrence of certain one-time costs in fiscal
2014 (e.g., unplanned maintenance costs) will largely be offset by lower volumes and margins.
We expect lower margins per tonne given a less favourable sales mix (less export volumes) and
lower consumer margins due to expected lower negotiated contracts. In fiscal 2015, we forecast
adjusted EBITDA to grow 5% to $66.8 million (see Exhibit 2).
■ Modestly improved results expected in fiscal 2016. In fiscal 2016, we forecast volumes and
margins to improve slightly due to a modest expected recovery in exports volumes given the
intensified focus of Rogers Sugar to penetrate new markets. Rogers Sugar is pursuing new sales
in niche speciality products, which typically generate much higher margins than regular sugar
export sales. We forecast adjusted EBITDA to grow by 3% to $68.6 million.
Exhibit 2 - Rogers Sugar EBITDA Forecast
3.5
600
400
3.0
200
2.5
0
2011
2012
2013
U.S.
2014E
Mexico
Source: USDA; Scotiabank GBM.
2015E
Mexico
(M tonnes)
U.S. (M tonnes)
Exhibit 1 – Refined Sugar Exports to the U.S. and Mexico
100
75
69.2
66.8
63.6
68.6
670
660
50
650
25
640
0
630
F2013
F2014A
Adj. EBITDA ($M)
F2015E
F2016E
RSI Sugar Volumes (000 tonnes)
Valuation and Recommendation
■ We maintain our target price. We kept our one-year target price of $5.00 per share, which
continues to be based on applying a 9.0x multiple to our FTM EBITDA estimate (one-year
forward) less net debt.
■ We rate the shares Sector Perform. We maintain our rating of Sector Perform given a
sluggish earnings outlook driven by tough industry conditions (highly competitive retail
sector, lower export opportunities). We continue to view the dividend yield of 7.5% as
attractive and believe that Rogers Sugar is highly motivated to maintain it.
81
Q4/F14 Results Summary
■ Q4/F14 earnings beat. Rogers Sugar reported Q4/F14 adjusted EBITDA of $18.3 million
and adjusted EPS of $0.10, which was above our estimates of $14.2 million and $0.07,
respectively. We adjusted EBITDA and EPS to exclude the one-time impact of consulting
fees and severance costs totalling $2.5 million. The beat was driven largely by higher
adjusted gross margins per tonne, as well as a lower tax rate, but partially offset by higher
administrative expenses (higher marketing costs and a non-cash pension adjustment charge).
Adjusted gross margin per tonne of $140.47 was 39% higher than we expected, in part due to
a “one-time” profit of $1.9 million ($11.13 per tonne) booked for an early sugar vessel
shipment and a more favourable sales mix (lower liquid volumes and higher consumer
volumes). Margins were also 41% above prior year given that Q4/F13 margins were
impacted by a higher cost of raw material at Taber, an equipment breakdown at its
Vancouver plant, and a pension charge. In F2014, adjusted gross margin per tonne of
$126.76 was relatively in line with F2013.
■ Lower volumes. Sugar sales volumes in Q4/F14 were slightly lower than our forecast and
3% below Q3/13 largely as a result of lower liquid volumes (declined 4,800 tonnes yearover-year due to the end of a HFCS substitutable contract in March 2014) and lower
industrial volumes (declined 2,000 tonnes year-over-year due mainly to timing of sales). This
was partially offset by an increase in consumer volumes due to the timing of customer
promotions. Total sugar volumes in F2014 were fairly flat with F2013 given higher industrial
and consumer volumes (new customer contracts) largely offset a decline in exports to
Mexico.
■ Exhibit 3 summarizes the fourth fiscal quarter results of Rogers Sugar and provides a
comparison with our estimates and prior year.
Exhibit 3 - Rogers Sugar Q4/F14 Financial Results Summary
($000's)
Q4/F14
Actuals Estimates % change
Q4/F13A % change
Total Sugar Volume (MT)
170,767
171,342
0%
176,641
-3%
Revenue
Adj. COGS 1
Adj. Gross Margin 1
% margin
Adj. margin / MT
139,688
115,700
23,988
17.2%
$140.47
140,131
122,805
17,325
12.4%
$101.11
0%
-6%
38%
145,840
128,083
17,757
12.2%
$99.31
-4%
-10%
35%
6,738
2,133
3,139
18,256
13.1%
3,941
2,227
3,055
14,212
10.1%
71%
-4%
3%
28%
3,379
2,166
3,152
15,364
10.5%
99%
-2%
0%
19%
$0.10
$0.07
35%
$0.07
39%
Administration & Selling
Distribution
Add: D&A
Adjusted EBITDA 1
% margin
Adjusted EPS 1
1
Adjusted for hedging
39%
41%
82
Earnings Revisions
■ We made minor revisions to our F2015 forecast. In F2015, we increased our adjusted EPS
estimate slightly to $0.33 from $0.32 previously, and increased our adjusted EBITDA estimate by
1% to reflect slightly higher expected margins per tonne. This change was made to reflect lower
expected energy costs given the signing of an uninterruptable gas contract in Quebec, and a higher
margin assumption for the fourth quarter to reflect an expected normalized margin. Lower
forecast volumes partially offset the impact of higher forecast margins.
■ We introduce our F2016 estimates. In F2016, we forecast Rogers Sugar to realize adjusted
EBITDA of $68.6 million and and adjusted EPS of $0.34, which would represent slight growth of
3% and 4%, respectively, from F2015.
■ We summarize the revisions we made to our earnings estimates in Exhibit 4.
Exhibit 4 - Rogers Sugar Earnings Revisions Summary
F2015
F2016
Current % change
Current
($000's)
Previous
Total Sugar Volume (MT)
645,204
637,356
-1%
639,268
Revenue
Adj. Gross Margin 1
Adj. margin / MT
542,903
79,473
$123.2
532,461
79,890
$125.3
-2%
1%
2%
560,181
81,476
$127.5
Adjusted EBITDA 1
% margin
Adjusted EPS 1
1
65,846
12.1%
$0.32
Adjusted for hedging
66,769
12.5%
$0.33
1%
3%
0%
68,592
12.2%
$0.34
83
Exhibit 5 - Rogers Sugar Financial Summary
Rogers Sugar Inc.
Rating:
Risk:
Price (11/18/2014):
Avg. Volume (000):
Sector Perform
Medium
$4.78
250
1-yr Target:
1-yr Return:
Ticker:
Basic Shares Outstanding (M):
Fully Diluted Shares Outstanding (M):
Market Cap FD ($M):
Enterprise Value ($M):
$5.00
12%
RSI
94.0
109.3
522
715
All figures in $M, unless otherwise stated
Financial Summary
FY Sept. 30
Current Capitalization
2013A
2014A
2015E
Income Statement
Revenues
COGS
Adj. Gross Margin
SG&A + Distribution
D&A (incl. in COGS)
Adj. EBITDA1
Other D&A
Adj. EBIT1
Interest expense
Adj. EBT1
Taxes
Net Income (reported)
Hedging impact
Non-recurring
Adj. Net Income1
558.4
475.7
82.8
26.2
12.6
69.2
56.6
9.1
47.5
13.1
37.0
2.7
(0.8)
33.6
532.3
450.4
81.9
33.1
12.2
63.6
51.3
9.8
41.5
10.0
32.4
1.0
0.5
32.0
532.5
452.6
79.9
26.1
12.9
66.8
53.8
10.1
43.7
10.9
32.8
32.8
560.2
478.7
81.5
26.0
13.1
68.6
55.5
10.0
45.5
11.4
34.1
34.1
Balance Sheet
Cash & S.T. Inv.
Working Capital
PP&E
Short-term + Long-term Debt
Convertible Debentures
Net Debt
Shareholders' Equity
3.2
86.9
177.4
75.0
105.9
177.7
254.9
0.1
89.7
177.0
85.0
106.7
191.6
250.1
1.3
85.9
177.1
80.0
106.7
185.4
249.0
3.8
81.7
174.0
75.0
106.7
177.9
249.3
Cash Flow
Operating CF
Financing CF
Capex
Free Cash Flow
37.7
(53.2)
(9.1)
28.5
32.0
(23.5)
(11.6)
20.4
53.0
(38.9)
(13.0)
40.0
51.4
(38.9)
(10.0)
41.4
Per Share Estimates
FY Sept. 30
2013A
2014A
2015E
2016E
0.35
0.28
0.72
0.32
0.20
0.36
0.33
0.37
0.36
0.34
0.38
0.36
Adj. EPS1
FCFPS
Dividends/share
2015 Quarterly Financial Summary
FY Sept. 30
Q1E
Revenues
Adj. Gross Margin1
Adj. EBITDA1
Adj. Net Income1
Adj. EPS1
1
128.0
25.8
22.4
12.5
0.12
Market cap.
Plus: Net debt
Enterprise value
125.9
16.9
13.2
5.5
0.06
Q3E
133.1
16.9
13.4
5.7
0.06
Adjusted income statement items exclude any hedging impact
Source: Bloomberg; Company reports; Scotiabank GBM estimates.
522
192
715
Valuation Metrics
FY Sept. 30
2013A
2014A
2015E
2016E
Adj. EV/EBITDA
P/E
P/CF
P/BV
Dividend yield
Dividend payout ratio
FCF yield
8.8x
13.7x
17.0x
2.0x
7.5%
nmf
5.9%
9.6x
14.9x
23.8x
2.1x
7.5%
nmf
4.2%
9.1x
14.7x
13.0x
2.1x
7.5%
98%
7.7%
8.9x
14.1x
12.6x
2.1x
7.5%
95%
7.9%
Performance Metrics
FY Sept. 30
2013A
2014A
2015E
2016E
Profitability (%)
ROA
ROE
6.1%
13.2%
5.6%
12.8%
5.8%
13.2%
6.1%
13.7%
(9.7%)
(20.3%)
(4.7%)
(8.1%)
0.0%
5.1%
5.2%
2.7%
Margin (%)
Gross margin
EBITDA margin
14.8%
12.4%
15.4%
11.9%
15.0%
12.5%
14.5%
12.2%
Credit Metrics
FY Sept. 30
2013A
2014A
2015E
2016E
2.6x
2.6x
7.6x
42%
3.0x
3.0x
6.5x
43%
2.8x
2.8x
6.6x
43%
2.6x
2.6x
6.8x
42%
2013A
2014A
2015E
2016E
Growth (%)
Sales
EBITDA
Total debt / EBITDA
Net debt / EBITDA
EBITDA / interest exp.
Debt / book cap.
Key Assumptions
FY Sept. 30
Q2E
Q4/F14A
2016E
Q4E
145.5
20.2
17.7
9.1
0.09
Total Volume (MT)
649,274
#11 Raw Sugar (US$/MT)
$397
Avg. margins per tonne
$126.48
646,376
$370
$126.76
637,356
$372
$125.35
639,268
$419
$127.45
84
Company Comment
(SU-T C$39.17)
(SU-N US$34.69)
Suncor Energy Inc.
Holding Steady
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$54.00 ROR 1-Yr:
Valuation: 1.0x our risked 2P+RU (Risked Upside) NAV less annual dividends
40.7%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.12
$1.12
2.9%
Key Risks to Target: Commodity prices, crack spreads, timing of projects, and project execution.
Event
Pertinent Revisions
■ Suncor's 2015 budget was announced, mostly in line with expectations.
Implications
■ Capex of $7.2B-$7.8B (+10% from 2014 guidance) was in line with our
$7.6B estimate and SU's prior long-term outlook. General trends vs.
2014 included a 33% increase oil sands growth capex, which was
expected given the multitude of projects moving ahead. Canadian E&P
spending (primarily offshore) was 3% higher. SU's corporate capex
reduction of 26% was driven by reduced discretionary investments and
appears to show favourable capital discipline.
■ Production guidance of 540-585 mbbl/d excluded potential volumes
from Libya given the challenging political environment (despite having
successfully sold 4.1 mbbl/d in Q3/14). Our prior estimates, excluding
Libya, saw 582 mboe/d, which was in line across most producing
segments. However, we had rosier projections for the North Sea (63.4
mboe/d) than in SU's guidance (45-51 mboe/d) on account of a faster
ramp-up of Golden Eagle and better Buzzard performance. We have
pulled down our 2015 production estimates accordingly.
■ Other factors were largely in line, with 1%-2% improvements in oil
sands cash costs, and favourable reductions in royalties and taxes versus
our estimates due to SU's $85 Brent and $78 WTI price assumptions.
CFPS14E
CFPS15E
New
$6.32
$7.10
Old
$6.36
$7.30
Recommendation
■ We maintain our Sector Outperform rating and $54 target price (to be
reviewed with the commodity price deck in the next few weeks.)
Qtly CFPS (Basic)
2012A
2013A
2014E
2015E
Q1
$1.55 A
$1.50 A
$1.96 A
$1.67
(FY-Dec.)
Prod-Equiv (mboe/d)
Natural Gas
Cash Flow (M)
Net Cap Exp (M)
Free Cash Flow (M)
Net Debt/Cash Flow
Earnings/Share
Price/Earnings
Q2
$1.50 A
$1.49 A
$1.63 A
$1.79
Q3
$1.78 A
$1.69 A
$1.56
$1.78
Q4
$1.46 A
$1.58 A
$1.17
$1.85
Year
$6.30
$6.26
$6.32
$7.10
P/CF
5.2x
5.9x
6.2x
5.5x
2011A
544
13%
$9,746
$-6,876
$2,870
0.6x
$3.61
8.1x
2012A
549
9%
$9,745
$-6,598
$3,147
0.5x
$3.16
10.4x
2013A
562
6%
$9,412
$-6,777
$2,635
0.6x
$2.71
13.7x
2014E
541
1%
$9,274
$-6,800
$2,474
0.7x
$3.36
11.7x
2015E
568
0%
$10,308
$-7,528
$2,780
0.6x
$3.81
10.3x
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$57,053
$6,617
$63,670
1,457
1,457
85
Exhibit 1 - 2014 versus 2015 Guidance
Capital Expenditures ($MM)
Oil Sands
Oil Sands Ventures
Oil Sands Total
E&P
Downstream
Corporate
Total
Production (mboe/d)
Oil Sands
Syncrude
E&P Canada
E&P International
Total
Oil Sands Cash Opex ($/bbl)
2014 Guidance
Sustaining
Growth
$1,995
$320
$240
$1,290
$2,235
$1,610
$65
$1,675
$770
$190
$130
$125
$3,200
$3,600
Total
$2,315
$1,530
$3,845
$1,740
$960
$255
$6,800
2014 Guidance
Low
Mid
400
415
32
34
53
56
40
43
525
548
High
430
36
58
46
570
Low
410
32
53
45
540
$34.50
$31.00
$31.50
Excludes Capitalized Interest
$33.00
2015E (Midpoint)
Sustaining
Growth
$2,200
$550
$178
$1,598
$2,378
$2,148
$90
$1,710
$889
$99
$66
$122
$3,422
$4,078
Total
$2,750
$1,775
$4,525
$1,800
$988
$188
$7,500
Sustaining
10%
-26%
6%
38%
15%
-50%
7%
Y/Y Change
Growth
72%
24%
33%
2%
-48%
-3%
13%
Total
19%
16%
18%
3%
3%
-26%
10%
2015E
Mid
425
34
56
48
563
High
440
36
58
51
585
Low
2%
0%
0%
13%
3%
Y/Y Change
Mid
2%
0%
0%
12%
3%
High
2%
0%
0%
11%
3%
$32.50
$34.00
-2%
-2%
-1%
86
Exhibit 2 - NAVPS Sensitivity
$100
Downstream
$90
International
$80
East Coast
1-Year Target
$70
$60
Fort Hills
$50
Other SAGD
$40
Syncrude
$30
Share Price
Upgraders
$20
Firebag
$10
$0
Mines
($10)
Unrisked
Risked
Low Case
-$20/bbl WTI, -$1.00/mcf Henry Hub
Unrisked
Risked
Scotiabank GBM
Current Price Deck
Unrisked
Risked
High Case
+$20/bbl WTI, +$1.00/mcf Henry Hub
Net Debt &
Other
87
Exhibit 3 - NAVPS Details
88
Exhibit 4 - Financial & Operating Summary
89
Intraday Flash
(WZR-V C$0.64)
Gavin Wylie - (403) 213-7333
gavin.wylie@scotiabank.com
Jenna Halwa, M. Econ - (403) 213-7762
jenna.halwa@scotiabank.com
Target 1-Yr:
C$1.25
ROR 1-Yr:
95.3%
Valuation: Based on our risked NAV of $1.24/share.
Key Risks to Target: Commodity prices, exploration, project execution, political/regulatory.
Event
■ WesternZagros announced the successful completion of its equity
financing with gross proceeds of $200M, which should help advance
the company's development plans at Garmian and Kurdamir.
Implications
■ Overall, we see the offering as challenged by regional turmoil and weak
oil market fundaments, which led proceeds to come in at the lower end
of initial expectations.
■ With production expected to come on line from Sarquala-1 and
potentially Hasira-1 over the next three months, we see WesternZagros'
story as gaining some additional momentum and could evolve into a
more compelling investment thesis.
■ We reaffirm our Sector Perform rating and trimmed our one-year price
target to $1.25 (vs. $1.65) based on our revised risked NAVPS of $1.24
(vs. $1.69).
Recommendation
■ We continue to see WesternZagros as attractively valued and offering
significant upside although regional tensions with Baghdad and ISIS
could act as an overhang on the stock in the near term.
Qtly CFPS (FD)
2012A
2013A
2014E
2015E
Q1
$-0.01 A
$-0.01 A
$-0.01 A
$0.00
(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
$0.00
$-0.01 A
$-0.01 A
$0.00
Q3
$-0.01
$0.00 A
$-0.01
$0.01
Q4
$-0.01 A
$-0.01 A
$-0.01
$0.01
Year
$-0.02
$-0.02
$-0.04
$0.02
P/CF
n.m.
n.m.
n.m.
35.5x
2011A
$-0.02
$-0.02
n.m.
n.m.
0.0
0.0
$-6
$72
2012A
$-0.03
$-0.02
n.m.
n.m.
2.2
0.0
$-8
$-32
2013A
$0.00
$-0.02
n.m.
n.m.
0.0
0.0
$-10
$165
2014E
$-0.05
$-0.04
n.m.
n.m.
0.4
0.0
$-19
$127
2015E
$0.01
$0.02
20.3x
67.1x
3.6
0.0
$13
$135
NAVPS:
P/NAV:
C$2.25
0.28x
Div. (NTM)
Div. (Curr.)
C$0.00
C$0.00
Yield (Curr.)
0.0%
Pertinent Revisions
New
Old
Target:
1-Yr
$1.25
$1.65
New Valuation:
Old Valuation:
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
C$503
$-14
C$390
787
544
90
■ WesternZagros announced the successful completion of its equity financing with gross
proceeds of $200M, which should help advance the company’s development plans at
Garmian and Kurdamir. Overall, we see the offering as challenged by regional turmoil and
weak oil market fundaments, which led proceeds to come in at the lower end of initial
expectations. That said, with production expected to come on line from Sarquala-1 and
potentially Hasira-1 over the next three months, we see WesternZagros’ story as gaining
some additional momentum and could evolve into a more compelling investment thesis. The
company’s initial development focus will be centered on Garmian, where testing is scheduled
to wrap up at Hasira-1 in December. We see these results as important not only to give initial
indications for incremental production, but to further demonstrate the overall potential of the
block. As we move into 2015, we will be looking for gross production to track the facility
size of 15,000 bbl/d, although we recognize there may be some learning involved with initial
volumes. Regarding Kurdimar, we are more cautious given the KRG plans to further review
the development plan, which led WesternZagros to defer drilling Kurdamir-4 and potentially
could lead to delays to initial production (originally expected in late 2015). A detailed
summary of WesternZagros’ Development Plans and Estimated Expenditures is
provided in Exhibit 1.
■ WesternZagros plans to report Q3/14 financial results on November 27 prior to market
open, which will also include a more comprehensive operations update.
■ We continue to see WesternZagros as attractively valued and offering significant upside
although regional tensions with Baghdad and ISIS could act as an overhang on the
stock in the near term. We see WesternZagros as fully funded through 2015 in the context
of estimated capital expenditures of $135M and the company’s estimated Q4/2014E balance
sheet of $188M in cash (including net proceeds from the rights offering). The funds should
also allow WesternZagros to accelerate plans at Kurdamir once the KRG approve the
development plan. That said, we will be looking for consistent sales / payments to allow the
company to build cash flow and maintain a strong balance sheet.
■ We reaffirm our Sector Perform rating and trimmed our one-year price target to
$1.25 (vs. $1.65) based on our revised risked NAVPS of $1.24 (vs. $1.69).
■ NAV impact - ~27% dilutive. We estimate the impact of the equity raise is 27%
dilutive to our risked NAVPS and 33% dilutive to our unrisked NAVPS. That said, we
believe the story is now fully contingent upon the company’s ability to execute and
gain back some of the valuation discount we see.
■ Upcoming catalysts –First Production/Sales. We see WesternZagros’ ability to book first
sales and grow production as the most important upcoming catalyst. Pending final approval
of the Garmain development plan, the company should be able to start-up production with
initial capacity expected to be around 15,000 bbl/d. We have taken a more conservative view
on production at Garmian and estimate production will average 1,500 bbl/d and 3,630 bbl/d
(net) in Q4/2014E and 2015E, respectively. That said, our estimates might prove
conservative with Sarquala-1 testing >10,000 bbl/d (gross) and Hasira-1 potentially to be
tied-in prior to year-end.
■ Outside of operations updates, we see improved geo-political tensions as the most
important catalysts particularly as it relates to the ability to export Kurdistan crude.
With substantial amounts of volume expected to come on line in Kurdistan over the nextone
to two years, we see moves towards export agreements between the Iraqi government and the
KRG as increasingly important. Recently, Baghdad and the KRG announced an agreement
where the Iraqi state marketing entity (SOMO) will sell 150,000 bbl/d of Kurdistan crude at
the Port of Ceyhan. In exchange, Baghdad will resume budget payments to the KRG starting
with $500M in October and further payments in November. Not only do we see further
agreements on exports as necessary to find additional investor support, we see the
agreements as essential to ensure oil companies are able to achieve consistent sales and
payments. Further, without the backdrop of Iraq threatening legal action against buyers of the
crude, we see the potential for realized prices to converge toward international averages,
although we recognize this will take some time to achieve.
91
Exhibit 1 - WZR - Use of Proceeds
Source: Company reports.
92
Exhibit 2 - WZR - NAVPS Summary
$/Share
P/NAV
$6.00
60%
54%
$5.22
52%
$4.00
40%
Unbooked
Upside
34%
28%
$2.00
20%
15%
12%
$0.00
Crude Project 5
Crude Project 5
Crude 4
Kurdamir (Oligocene Gas) Prospect (P50 + 2C)
Mil Qasim (Upper Fars Gas) Prospect (P50)
Garmian Block - Hasira Prospect (P50)
Garmian Block - Mil Qasim Prospect (P90)
Garmian Block - Sarqala Prospect (P90)
Garmian Block - Mil Qasim Prospect (P50)
Sarqala (Jeribe Gas) Prospect (P50 + 2C)
Kurdamir Block - Kurdamir (Bawanoor) Prospect (P50 +
2C)
Garmian Block - Sarqala (Kalar) Prospect (P50 + 2C)
Kurdimir Block - Kurdamir Prospect (P90 + 1C)
Balance Sheet/Land/Fx
Current Price
Target Price
P/NAV
Base
Strip
Base P90 NAV
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.02
$0.01
$0.22
$0.14
$0.00
$0.00
$0.00
$0.00
Base
Strip
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.35
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.35
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$1.80
$0.22
$0.64
$1.25
28%
$0.00
$1.50
$0.22
$0.64
$1.25
34%
$0.00
$0.67
$0.22
$0.64
$1.25
52%
$0.00
$0.62
$0.22
$0.64
$1.25
54%
$0.00
$3.13
$0.22
$0.64
$1.25
12%
$0.00
$2.75
$0.22
$0.64
$1.25
15%
Risked NAV
Base
Strip
All-In Identified Projects (P50)
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.14
$0.13
$0.00
$0.00
$0.74
$0.46
$0.00
$0.00
$0.76
$0.67
$0.16
$0.10
$0.06
$0.05
0%
93
Exhibit 3 - WZR - Snapshot
2008
2009
2010
2011
2012
2013
2014E
2015E
Crude Oil & NGLs (bbl/d)
0
0
0
0
2,238
0
378
3,629
Natural Gas (mcf/d)
0
0
0
0
0
0
0
0
Equivalent (boe/d)
0
0
0
0
2,238
0
378
3,629
% BOE growth
0%
0%
0%
0%
0%
0%
0%
860%
% Natural Gas
0%
0%
0%
0%
0%
0%
0%
0%
% Crude Oil
0%
0%
0%
0%
100%
0%
100%
100%
Price Assumptions ($/boe)
0.00
0.00
0.00
0.00
0.00
0.00
60.00
77.92
Operating Netbacks ($/bbl)
0.00
0.00
0.00
0.00
0.00
0.00
38.00
55.41
2P Reserves (gross) mmboe
N/A
N/A
N/A
N/A
N/A
N/A
5.0
N/A
Cash balance US$M
90.0
76.7
31.5
64.5
146.8
140.7
188.1
65.8
US$000's unless otherwise noted
Production
Operating Cash Flow US$M
(8.6)
(2.4)
(3.4)
(6.5)
(7.6)
(10.1)
(19.0)
12.6
Financing Cash Flow US$M
37.5
40.0
0.0
88.1
57.5
169.7
192.7
0.0
($0.04)
($0.01)
($0.02)
($0.02)
($0.02)
($0.02)
($0.04)
$0.02
-33%
-72%
43%
32%
-9%
9%
69%
-144%
CFPS (D)
CFPS growth
Net Capital spending (US$M)
$44
$54
$43
$72
($32)
$165
$127
$135
Free cash flow (US$M)
($53)
($57)
($46)
($78)
$24
($175)
($146)
($122)
ROACE (%)
-5%
-2%
-3%
-3%
-3%
1%
-2%
3%
P/CF
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
-17.0x
38.6x
Debt Adjusted Cash Flow (US$M)
-8.56
-2.40
-3.42
-6.50
-7.65
-3.39
-6.00
25.45
Debt-adj CF multiple
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
-65.5x
20.3x
D/CF
14.6x
28.1x
11.0x
6.3x
10.4x
1.3x
4.8x
2.5x
Net Debt/Cap
-124%
-43%
-21%
-16%
-29%
-3%
-18%
5%
Shares Outstanding (000)
207464
207464
207464
371209
412101
475099
786650
786650
Net Debt (Year End) (US$M)
-124.72
-67.44
-37.65
-41.01
-79.64
-13.53
-91.29
31.07
Valuation
Equity Event
Wednesday, October 15, 2014
Xs 2 Xs2
Equity Event: Mining Conference 2014
Insert graphic here
95
Equity Event
XXX, XXX XX, XXXX
96
Disclosures and Disclaimers
Appendix A: Important Disclosures
Company
AGF Management Limited
Agrium Inc.
America Movil
Aston Hill Financial Inc.
Axtel
Centerra Gold Inc.
Choice Properties REIT
CI Financial Corp.
DH Corporation
Element Financial Corporation
Entel Chile
Equitable Group Inc.
Fiera Capital Corporation
First National Financial Corporation
Genworth MI Canada Inc.
Gibson Energy Inc.
Gluskin Sheff + Associates Inc.
Grupo Televisa, SAB
Home Capital Group Inc.
IGM Financial Inc.
Intact Financial Corporation
Intrepid Potash, Inc.
K+S AG
Loblaw Companies Limited
Maxcom Telecomunicaciones
Megacable Holdings
Newalta Corporation
Potash Corporation of Saskatchewan, Inc.
Power Corporation of Canada
Power Financial Corporation
Rogers Sugar Inc.
Secure Energy Services Inc.
Sociedad Quimica y Minera de Chile
Sprott Inc.
Telefonica Brasil SA
The Mosaic Company
TIM Participações SA
TMX Group Ltd.
Totvs SA
Verde Potash plc
Yara International ASA
Ticker
AGF.B
AGU
AMX
AHF
AXTEL CPO
CG
CHP.UN
CIX
MILPOC1
CNL
DH
EFN
ENTEL
EQB
FSZ
FN
MIC
WN
GEI
GS
TV
HCG
IGM
IFC
IPI
SDF
L
MAXCOM CPO
MEGA CPO
NAL
POT
POW
PWF
RSI
SES
SQM
SII
VIV
MOS
TSU
X
TOTS3
NPK
WZR
YAR
Disclosures (see legend below)*
S
T
M12, M4, T
I
M12, M4
P, T
B40, G, I, U
G, I, S, U
M14, M6, M9
VS18, VS148
I, T
G, I, U
I, M12, M4
G, I, U
I, J
G, I, U
G, I, T, U
G, I, S, U
G, I, N1, P, T, U
I, J
M12, M4, T
I, J
S
S
P, T
T
B27, I, T
M12, M4
M12, M4
G, I, U, VS33, VS158
G, I, N1, T, U
I, S
G, I, S, U
I, T
G, I, U
G, N1, P, T, U
G, I, U
M12, M4
I, N1, T
M12, M4
D28, I, S15
M12, M4
T
P, T
T
97
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
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.
D28
Jeffrey Heath, Executive Vice President & Group Treasurer of The Bank of Nova Scotia, is a member of the Board of Directors of
TMX Group Limited.
G
Scotia Capital (USA) Inc. or its affiliates has managed or co-managed a public offering in the past 12 months.
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 services in the
next 3 months.
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.
M14
Christian Castillo Landi, 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.
M6
Paul Figueroa Mantero, an analyst, prepared this report and is an employee of the Research Department of Scotia Sociedad
Agente de Bolsa S.A., which is a fully owned subsidiary of Scotiabank Peru.
98
M9
Alfonso Salazar, 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.
N1
Scotia Capital (USA) Inc. had an investment banking 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.
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 to equity or
debt securities of, or have provided advice for a fee with respect to, this issuer.
VS148
Our Research Associate visited the Buritica site, a gold mine development project, on May 15-16, 2014. Partial payment was
received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
VS158
Our Research Associate visited the MacKay River SAGD Onsite Project, SAGD operations with onsite waste processing, on June
10, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Associate to visit
this site.
VS18
Our Research Analyst visited the Buritica mine/exploration site and company core shack, an exploration and development site for
a larger gold mining project, on March 23-24, 2013. Partial payment was received from the issuer for the travel-related expenses
incurred by the Research Analyst to visit this site.
VS33
Our Research Analyst visited Drayton Valley Facility and Niton Junction Facility, oilfield waste processing facilities, on June 11,
2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this
site.
99
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 foreca sts, 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 rese arch analyst’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)
The stock represents an analyst’s best idea(s); stocks in this category are
expected to significantly outperform the average 12-month total return of the
analyst’s coverage universe or an index identified by the analyst that includes,
but is not limited to, stocks covered by the analyst.
Low
Low financial and operational risk, high predictability of financial results,
low stock volatility.
Sector Outperform (SO)
The stock is expected to outperform the average 12-month total return of the
Sector Perform (SP)
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
the analyst that includes, but is not limited to, stocks covered by the analyst.
Sector Underperform (SU)
The stock is expected to underperform the average 12-month total return of the
Medium
Moderate financial and operational risk, moderate predictability of financial
results, moderate stock volatility.
High
High financial and/or operational risk, low predictability of financial results,
high stock volatility.
Speculative
Exceptionally high financial and/or operational risk, exceptionally low predictability
of financial results, exceptionally high stock volatility. For risk-tolerant investors
only.
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 “buy,” “hold/neutral” and
“sell,” to equate their own ratings into these categories. Our Focus Stock, Sector Outperform, Sector Perform, and Sector Und erperform ratings are based
on the criteria above, but for this purpose could be equated to strong buy, buy, neutral and sell ratings, respectively.
100
General Disclosures
This report has been prepared by analysts who are employed by the Research Department of Scotiabank, Global Banking and Marke ts. Scotiabank,
together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses 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 informational 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 stringent
standards set by regulators in the various jurisdictions in which the research reports are produced. In addition, the analyst s 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 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.
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 solicitation 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 contrary 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 research should contact us
at 1-800-208-7666.
This report and all the information, opinions, and conclusions contained in it are protected by copyright. This report may no t 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 refer red 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

Transcription

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