1 Investment Views Friday, May 15, 2015 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. Click to view full story Click to view synopsis Pertinent Revision Summary 4 Edge at a Glance 10 Industry Comments Railroads Buying Opportunity for Two Great Franchises Turan Quettawala 29 Company Comments Canada Absolute Software Corporation ABT-T Initiatives Aimed at Improving Sales Execution Paul Steep 35 Africa Oil Corp. AOI-T Q1 - Near-Term Upside via EWT and Drilling Gavin Wylie 38 Boardwalk REIT BEI.UN-T Q1 Glance: Good Start; Guidance Boosted by 2% Mario Saric 42 Canadian Energy Services & Technology Corp. CEU-T First Look: Q1 Beat, Gaining Market Share in U.S. Vladislav C. Vlad 44 Canadian Tire Corporation Limited CTC.A-T Marketing Machine Drives Q1/F15 Sales Patricia A. Baker 46 CanElson Drilling Inc. CDI-T Q1 Beat on Margin Outperformance Vladislav C. Vlad 47 Cequence Energy Ltd. CQE-T Q1 Cash Flow Behind; Montney Drilling on Hold Cameron Bean 57 Cervus Equipment Corporation CVL-T Q1/15 Results - First Take Christine Healy 62 Chemtrade Logistics Income Fund CHE.UN-T First Take: Q1/15 in Line Benoit Laprade 64 Chorus Aviation Inc. CHR.B-T Shares in Fair Value Range Turan Quettawala 67 DHX Media Ltd. DHX.B-T Q3 Beat Led by Solid Distribution Revenues Paul Steep 72 EnerCare Inc. ECI-T Lower Q1 on Seasonality; Integration as Planned George Doumet 75 Freehold Royalties Ltd. FRU-T Cash Flow Ahead on Improved Cost Management Patrick Bryden 84 Gabriel Resources Ltd. GBU-T Discontinuing Coverage Trevor Turnbull 86 Gildan Activewear Inc. GIL-T, GIL-N Q1/15 Results in Line; On Track for a Solid 2016 Anthony Zicha 87
Transcript
1
Investment Views
Friday, May 15, 2015
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.
Click to view full story
Click to view synopsis
Pertinent Revision Summary 4
Edge at a Glance 10
Industry Comments
Railroads Buying Opportunity for Two Great Franchises
Turan Quettawala 29
Company Comments
Canada
Absolute Software Corporation
ABT-T
Initiatives Aimed at Improving Sales Execution
Paul Steep 35
Africa Oil Corp.
AOI-T
Q1 - Near-Term Upside via EWT and Drilling
Gavin Wylie 38
Boardwalk REIT
BEI.UN-T
Q1 Glance: Good Start; Guidance Boosted by 2%
Mario Saric 42
Canadian Energy Services &
Technology Corp.
CEU-T
First Look: Q1 Beat, Gaining Market Share in U.S.
Vladislav C. Vlad 44
Canadian Tire Corporation Limited
CTC.A-T
Marketing Machine Drives Q1/F15 Sales
Patricia A. Baker 46
CanElson Drilling Inc.
CDI-T
Q1 Beat on Margin Outperformance Vladislav C. Vlad 47
Cequence Energy Ltd.
CQE-T
Q1 Cash Flow Behind; Montney Drilling on Hold
Cameron Bean 57
Cervus Equipment Corporation
CVL-T
Q1/15 Results - First Take Christine Healy 62
Chemtrade Logistics Income Fund
CHE.UN-T
First Take: Q1/15 in Line Benoit Laprade 64
Chorus Aviation Inc.
CHR.B-T
Shares in Fair Value Range Turan Quettawala 67
DHX Media Ltd.
DHX.B-T
Q3 Beat Led by Solid Distribution Revenues
Paul Steep 72
EnerCare Inc.
ECI-T
Lower Q1 on Seasonality; Integration as Planned
George Doumet 75
Freehold Royalties Ltd.
FRU-T
Cash Flow Ahead on Improved Cost Management
Patrick Bryden 84
Gabriel Resources Ltd.
GBU-T
Discontinuing Coverage Trevor Turnbull 86
Gildan Activewear Inc.
GIL-T, GIL-N
Q1/15 Results in Line; On Track for a Solid 2016
Anthony Zicha 87
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Investment Views
Friday, May 15, 2015
Golden Star Resources Ltd.
GSS-A, GSC-T
Gold Stream Fixes Near-term Finances, but Valuation and Margins Decline and Debt Remains
Trevor Turnbull 91
Guardian Capital Group Limited
GCG.A-T
BMO Share Price Has Played Surprising Minor Role in Historical Stock Performance
View Maintained Post Q1 (However, There Are Big Moving Parts That Could Prove Us Wrong)
Patrick Bryden 126
Power Financial Corporation
PWF-T
Solid Start to 2015 with 27% EPS Growth YOY
Phil Hardie 132
Pure Industrial REIT
AAR.UN-T
Q1 Initial Take: In Line, Steady Results Pammi Bir 137
RMP Energy Inc.
RMP-T
Q1/15 In Line; Costs Keep Getting Better
Cameron Bean 138
Rubicon Minerals Corporation
RMX-T, RBY-A
Debt Facility Secured: Insurance or a Necessity?
Mike Hocking 142
Spartan Energy Corp.
SPE-T
Q1/15 Results in Line; Staying Strong Cameron Bean 148
Stantec Inc.
STN-T, STN-N
Q1/15 Results In Line Anthony Zicha 153
Trevali Mining Corporation
TV-T, TV-LM
Q1/15 Financials - All Focus Remains on Caribou
Mark Turner 159
U.S.
The Mosaic Company
MOS-N
$1.5B Buyback Announced Ben Isaacson 158
WPT Industrial REIT
WIR.U-T
Well Equipped for Higher Rates; Buy the Dip
Pammi Bir 164
Latin America
CEMEX SAB de CV
CX-N, CEMEX CPO-MX
New Brownfield Project in the Philippines; In Line with Our Replacement Cost Analysis
Francisco Suarez 55
Copasa
CSMG3-SA
Soft Pricing But Opex Cuts Matter More Ezequiel Fernández
López 69
Entel Chile
ENTEL-SN
Dethrones Telefonica as Chile's EBITDA Leader
Andres Coello 78
Grupo Aeroportuario Centro Norte,
SAB de CV
OMAB-Q, OMA B-MX
Lower Fees to Its Technical Partner: Getting Part of the Economics, But Not the Oversight (Yet)
Francisco Suarez 93
Pacific Rubiales Energy Corp.
PRE-T, PREC-CN
Q1 - Light Oil Increases and Cost Decreases
Gavin Wylie 116
Sabesp
SBSP3-SA, SBS-N
Doomsday Scenario Fading Ezequiel Fernández
López 145
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Investment Views
Friday, May 15, 2015
Trevali Mining Corporation
TV-T, TV-LM
Q1/15 Financials - All Focus Remains on Caribou
Mark Turner 159
Equity Event: Re-Building Confidence in Mid-Tier Precious
Metals Miners: Delivering New Mines & Executing on
Guidance
169
Equity Event: Retail Real Estate Lunch & Panel
Discussion
170
Equity Event: Scotiabank Senior Canadian Precious
Metals Panel Luncheon
171
Equity Event: Spring Growth Conference 172
Equity Event: Financials Summit 2015 173
4
Pertinent Revision Summary
Friday, May 15, 2015
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.
Pertinent Revision Summary
(For Rating Changes: 24-Hour SC Pro Personal Trading Restriction Applies)
Key Risks to Price Target: Govmnt. regulation, troubled domestic airlines
Guardian Capital Group Limited (SP) (GCG.A-T C$18.50)
BMO Share Price Has Played Surprising Minor Role in Historical Stock Performance
New -- -- $20.50 EPS15E: $1.04 EPS16E: $1.11 -- 29.5% discount to target NAV of $29.10
Old -- -- $20.00 EPS15E: $1.05 EPS16E: $1.10 -- 29.8% discount to target NAV of $28.48
Valuation: 29.5% discount to target NAV of $29.10
Key Risks to Price Target: Weak BMO share price, Decline in AUM, NAV discount ascribed by market
Innergex Renewable Energy Inc. (SP) (INE-T C$11.02)
Water in the West
New -- -- -- CFPS15E: $0.56 CFPS16E: $1.14 -- 5.7% 2015E Free Cash Yield and 18.8x 2015E EV/EBITDA
Old -- -- -- CFPS15E: $1.08 CFPS16E: $1.15 -- 5.2% 2015E Free Cash Yield and 18.7x 2015E EV/EBITDA
Valuation: 5.7% 2015E Free Cash Yield and 18.8x 2015E EV/EBITDA
Key Risks to Price Target: Government Support for Renewables; Credit Spreads; Hydrology; Growth Projects
Kelt Exploration Ltd. (SO) (KEL-T C$8.64)
Q1/15 Results in Line; Shifting Capital to NE BC
New -- -- -- CFPS15E: $0.56 CFPS16E: $0.90 -- --
Old -- -- -- CFPS15E: $0.57 CFPS16E: $0.87 -- --
Valuation: 1.0x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Lucara Diamond Corp. (SO) (LUC-T C$2.15)
Q1/15 Conference Call Highlights
New -- -- $2.50 Adj. EPS15E: US$0.19 -- -- --
Old -- -- $2.65 Adj. EPS15E: US$0.21 -- -- --
Valuation: 1x NAV
Key Risks to Price Target: Diamond prices; development risk; technical and operational risk; multiple contraction; and geopol itical risk
Pacific Rubiales Energy Corp. (SP) (PRE-T C$6.01)
Q1 - Light Oil Increases and Cost Decreases
New -- -- -- CFPS15E: US$2.29 CFPS16E: US$1.86 -- Based on our risked NAVPS ($4.74) that also equates to 7.7x 2015E debt-adjusted CF and 2.04x our 2P NAV.
Old -- -- -- CFPS15E: US$2.07 CFPS16E: US$2.00 -- Based on our risked NAVPS ($4.70) that also equates to 8.4x 2015E debt-adjusted CF and 2.0x our 2P NAV.
Valuation: Based on our risked NAVPS ($4.74) that also equates to 7.7x 2015E debt-adjusted CF and 2.04x our 2P NAV.
Valuation: DCF, 7yr explicit period and 2.0% LT growth
Key Risks to Price Target: Regulatory risk, hydrology
Spartan Energy Corp. (SO) (SPE-T C$3.40)
Q1/15 Results in Line; Staying Strong
New -- -- -- CFPS15E: $0.24 -- -- --
Old -- -- -- CFPS15E: $0.25 -- -- --
Valuation: 1.1x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; drilling program success.
Stantec Inc. (SO) (STN-T C$34.52)
Q1/15 Results In Line
New -- -- -- EPS15E: $1.88 -- -- --
Old -- -- -- EPS15E: $1.89 -- -- --
Valuation: 19.0x P/E on 2016E
Key Risks to Price Target: Slower than anticipated recovery in residential and commercial construction; lower commodity price s
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Pertinent Revision Summary
Friday, May 15, 2015
Trevali Mining Corporation (SP) (TV-T C$1.17)
Q1/15 Financials - All Focus Remains on Caribou
New -- -- -- CFPS15E: $0.05 -- -- --
Old -- -- -- CFPS15E: $0.06 -- -- --
Valuation: 50/50 mix of 5.5x 2016E EV/EBITDA & 0.8x Mine Site NAV8% + 1.0x Net Cash Items
Key Risks to Price Target: Commodity price, operating, and technical risks; environmental and legal risks
Source: Reuters; Scotiabank GBM estimates.
Table of Contents
10
Edge at a Glance
Friday, May 15, 2015
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.
Edge at a Glance
Railroads
Turan Quettawala, MBA, CFA - (416) 863-7065 (Scotia Capital Inc. - Canada)
Buying Opportunity for Two Great Franchises
Event
■ We are raising our rating on CNR to Sector Outperform on share price weakness, although our Q2 estimates are revised down.
Implications
■ Volume growth is coming in softer than expected for both Canadian rails, and we estimate that if current weekly average RTMs are maintained for the balance of Q2, CNR will be down 5% YOY and CP will be down 3% YOY. Our estimates are revised -4% for CNR and -2% for CP.
■ We have also taken a second look at our volume growth numbers for 2H/15 and have checked back expectations, mainly on the back of grain and CBR. As a result, our 2015 EPS estimates are revised down by ~3%-4% to $4.11 for CNR and $10.80 for CP - this brings us to the low end of guidance. While a lot will depend on volumes, we still see a better chance for CP to outperform vs. expectations due to a better cost/margin opportunity.
Recommendation
■ The reaction in share prices has been fairly violent as the sector is down ~14% from Q1 highs. The Canadian rails are now trading at 16x (CNR) and 17x (CP) our revised 2016E EPS. The next few weeks will remain tough for volumes and, admittedly, earnings may still have some downside. The biggest risk remains ongoing weakness on the macro front. That said, we think that falling share prices present a great buying opportunity for two phenomenal rail franchises. We are raising CNR to Sector Outperform and maintaining our Sector Outperform rating on CP.
Absolute Software Corporation (ABT-T C$9.87)
Paul Steep, MBA - (416) 945-4310 (Scotia Capital Inc. - Canada)
Key Risks to Target: Rise of alternative solutions (encryption); Slower-than-expected PC upgrade cycle
Div. (NTM) $0.30
Div. (Curr.) $0.25
Yield (Curr.) 2.5%
■ Absolute reported their Q3 results with the firm reporting sales contracts of $21.2M and cash flow from operations of $5.3M compared with our estimates of $23.7M and $6.0M, respectively.
Implications
■ In our view, Absolute's Q3/15 results continued to reflect progress in working to improve the consistency of sales execution as the firm continues to implement a new go-to-market strategy. The firm's results were partially impacted due to seasonality, as Q3 is historically a slower sales period for the firm.
■ We remain of the view that F2015 is a transition year for the firm as management seeks to implement a more focused strategy. The firm is in the process of implementing a series of sweeping changes to its operations that has it more clearly focusing its sales, product and marketing efforts to take advantage of Absolute's core technology assets.
Recommendation
■ Our recommendation remains Sector Outperform given that Absolute is positioned to continue to execute on a standalone basis or potentially as a unit of a larger organization. Catalysts for the firm relate to Absolute's ability to leverage its partnerships, ongoing client wins, and release of its unified product suite.
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Edge at a Glance
Friday, May 15, 2015
Africa Oil Corp. (AOI-T C$2.63)
Gavin Wylie - (403) 213-7333 (Scotia Capital Inc. - Canada)
New Valuation: Based on our risked NAV of $4.30/share
Old Valuation: Based on our risked NAV of $4.68/share
Key Risks to Target: Commodity prices, exploration, project execution, political/regulatory.
Div. (NTM) C$0.00
Div. (Curr.) C$0.00
Yield (Curr.) 0.0%
■ Africa Oil's Q1 update reiterated the company's increasing confidence around current discovered resources, with what appears to be a growing positive bias with incremental test data and recent drilling results.
Implications
■ Africa Oil remains on track to submit a Field Development Plan by year-end 2015 on the back of additional technical work completed over the coming quarters.
■ Recent success on its Amosing-1 & 2A (5,600-6,000 bbl/d rates) extended well tests (EWT) is helping to further de-risk the existing 2C resources (~59 mmbbl net) and potentially look to increase recovery factors when combined with its ongoing special core analysis.
■ We see a potential 2H/15 contingent resource update as a potential near-term catalyst as it continues to move the region well above the commercial threshold.
Recommendation
■ We reiterate our Sector Outperform rating on Africa Oil and have lowered our one-year target price to $4.50 (vs. $5.00) per share based on our revised risked NAVPS estimate of $4.30 (vs $4.68).
■ We see Africa Oil entering into an interesting period that could hold several high-impact items including: results at Amosing-4; results from the EWT at Amosing; commencing an EWT at Ngamia; and pipeline definition and further clarity on the capital gains tax.
Boardwalk REIT (BEI.UN-T C$58.98)
Mario Saric, CPA, CA, CFA - (416) 863-7824 (Scotia Capital Inc. - Canada)
Q1 Glance: Good Start; Guidance Boosted by 2%
Event Pertinent Data
Rating: SP
Risk: Med
Target: 1-Yr C$68.50
FFOPU15E: $3.52 FFOPU16E: $3.75
Valuation: 19.75x AFFO (F'16 estimate)
Key Risks to Target: Alberta condo oversupply, rising interest rates
CDPU (NTM) $2.13
CDPU (Curr.) $2.04
Yield (Curr.) 3.5%
■ Reported FFOPU was $0.85 vs. $0.76 YOY, above our $0.81 and $0.82 consensus (range=$0.80-$0.86). SP NOI was +4.9% YOY (vs. +2.9% in Q4); revenue +3.2% (3.7%) & expenses +0.6% (5.0%).
Implications
■ Good start to the year. The positive variance was roughly evenly split between higher NOI and lower deferred financing costs, with the positive NOI surprise coming from lower-than-expected expenses, as top-line revenue growth came in modestly below our forecast, see Ex 1. Calgary SP NOI was a solid +10.2% YOY (+9% in Q4) & Edmonton was +10.4% (+4.9%); Fort Mac was -13.4% (-12.3%). Total portfolio/Alberta occupied rent was +0.7%/+1% QOQ while market rent was +0.2%/+0.2%, respectively. Total portfolio revenue was +0.1% QOQ. NOI margin was +170bp YOY to 60.1%. BEI rental revenue cycle is unchanged QOQ.
■ BEI 2015 FFOPU guidance is boosted by 2% (mid-point); 1%-4% SP NOI target intact (vs. our 1.8%). The mid-point of the revised $3.48-$3.65 FFOPU guidance is ~1% above previous $3.52 consensus (we're also at $3.52). Underlying operating assumptions are unchanged.
■ Disclosed NAVPU is +$0.55 (0.8%) QOQ to $69.81. IFRS cap rate is -2bp QOQ @ 5.46% on modest declines in SW Ontario and Quebec City. Forecast IFRS NOI was +0.3% QOQ to $317.3M.
Recommendation
■ Full update post c/c on Fri, May 15 @ 11:00am ET. #1-888-231-8191.
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Edge at a Glance
Friday, May 15, 2015
Canadian Energy Services & Technology Corp. (CEU-T C$5.61)
Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759 (Scotia Capital Inc. - Canada)
First Look: Q1 Beat, Gaining Market Share in U.S.
Event Pertinent Data
Rating: FS
Risk: High
Target: 1-Yr C$9.50
EBITDA15E: $120 EBITDA16E: $155
Valuation: 5.3% 2016E Free Cash Flow Yield.
Key Risks to Target: Commodity prices, lack of acquisition synergy, labour supply, access to supplies, weather, contract risk, and FX.
Div. (NTM) $0.33
Div. (Curr.) $0.33
Yield (Curr.) 5.9%
■ EBITDA of $39.2M was 11% ahead of our $35.4M estimate.
Implications
■ Margin beat highlights resilient business model, but real story is growing U.S. market share (in both business lines). Q1 EBITDA came in 19% lower sequentially, which compares favourably to our OFS coverage universe at -41%. The beat was driven by lower-than-expected G&A, which led to a 145 bps beat on EBITDA margin (-57 bps QOQ) despite revenue coming in line. Interestingly, management highlighted flat U.S. drilling fluid revenue YOY. Key customers in the Eagle Ford and Marcellus / Utica remained relatively active during the quarter, allowing CEU to increase market share in the country to 10% (in line, but up from 9% QOQ). On the specialty chemicals side, management notes JACAM's overall sales grew QOQ despite a drop-off in frac chemistry demand. Our read is that CEU's differentiated product offering and voluntary price concessions are allowing them to hold accounts and pick up market share despite the macro environment.
■ Limited outlook. Management notes they are offering price discounts across all business lines, which will impact revenue and margins going forward. That said, CEU expects specialty chemicals to grow in the downturn as they look to pick up market share in a growing market.
Recommendation
■ We will update our estimates post 11:00am ET call. 1-877-291-4570.
Canadian Tire Corporation Limited (CTC.A-T C$127.65)
Patricia A. Baker, MBA, PhD - (514) 287-4535 (Scotia Capital Inc. - Canada)
Marketing Machine Drives Q1/F15 Sales
Event Pertinent Data
New Old
Rating: -- SP
Risk: -- Low
Target: 1-Yr -- $139.00
EPS15E $7.98 $8.19 EPS16E $8.78 $8.84
New Valuation: --
Old Valuation: NAV
Key Risks to Target: Higher than expected Discret. Spend, Unexpected improvement in Unemployment; Improvement in net write-off rate
Div. (NTM) $2.15
Div. (Curr.) $2.03
Yield (Curr.) 1.7%
■ CTC Q1 EPS $0.88 in line with consensus, flat YOY. Two heroes for CTC.A start to F15: 1) top-line growth, 2) record CTFS performance.
Implications
■ Revenue in retail segment -3.7% on lower gas prices, but ex-gas +1%. SSS growth strong across all banners: CTR +4.7%, FGL +8.6%, and Mark's +5.5%, due to exceptional marketing campaigns and CTR strength in Automotive and Living. Weather was supportive of seasonal merchandise and early spring sell-through in West. At Mark's, strong sales in denim more than offset soft industrial wear sales.
■ Retail GM $ +3.2% YOY, related to Petroleum. Ex-Petroleum, GM rate improved 52 bps, on + mix shift, partially offset by clearances at Mark's and C$ depreciation.
■ Retail SG&A expenses +4.8% on higher personnel costs relating to digital strategy, greater number of corporate stores at FGL and higher D&A, with partial offset from lower back-office costs. Cons. EBITDA expanded 15.5% YOY to $245.3M, ahead of $239M forecast.
■ CTFS revenue and GAAR up +7.5% / +6.8% YOY. GM rate +245 bps on higher balances and yield. Pre-tax income up an impressive 22.6%.
Recommendation
■ These results mark a very good start to F15 with solid momentum and a good balance. Execution is starting to move in a great direction, keeping pace with the efforts well evidenced in CTC's marketing strategies. 2015 and 2016E EPS adjust modestly to $7.98 and $8.78, TP maintained.
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Edge at a Glance
Friday, May 15, 2015
CanElson Drilling Inc. (CDI-T C$4.00)
Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759 (Scotia Capital Inc. - Canada)
Q1 Beat on Margin Outperformance
Event Pertinent Data
New Old
Rating: -- SP
Risk: -- High
Target: 1-Yr -- $4.50
EBITDA15E $42 $41 EBITDA16E $49 $48
New Valuation: 9.1x our 2016 EV/EBITDA estimate.
Old Valuation: 9.4x our 2016 EV/EBITDA estimate.
Key Risks to Target: Commodity prices, labour supply, political risk, weather, and FX.
Div. (NTM) $0.12
Div. (Curr.) $0.12
Yield (Curr.) 3.0%
■ EBITDA of $18.4M was 10% ahead our $16.6M estimate.
Implications
■ Solid Q1 driven by margin resiliency. Revenue was in line with our estimate as better Canadian day rates (+7% our estimate and 5% lower QOQ) were offset by a 5% miss in the United States. NAM operating days were in line. Management notes base rig rates averaged 10% lower QOQ and currently sit 15% below Q4 levels. CDI also revised its U.S. performance-based contracts to daywork which contributed to lower day rates (but limited impact on cash margin). Cost control efforts led to the beat as gross margin came in 330 bps above our estimate.
■ Improving outlook. In Canada, CDI has maintained relatively strong activity in AB and BC during break-up (six currently active rigs); Customer commentary also suggests an earlier start in SK and MB than previously thought. In the U.S., CDI has six active rigs in the Permian, and a seventh collecting standby. In North Dakota, the outlook appears to be improving as customers are looking to increase activity post break-up. In Mexico, minimal activity levels are expected for the rest of 2015 (one service rig currently active). Capex for 2015 was increased slightly (+$2.1M) for maintenance and upgrade spending.
Recommendation
■ SP rating unchanged. While we like CDI's proactive management and best-in-class balance sheet, the stock trades at a 0.8x premium to Canadian peers on 2016E EV/EBITDA.
CEMEX SAB de CV (CX-N US$10.26)
Francisco Suarez - +52 (55) 9179 5209 (Scotiabank Inverlat)
New Brownfield Project in the Philippines; In Line with Our Replacement Cost Analysis
Event Pertinent Data
Rating: SO
Risk: High
Target: 1-Yr US$13.00
EBITDA15E: $3,027
Valuation: DCF: COE of 10.3%, WACC of 7.8%
Key Risks to Target: Downturn in the United States, market risk on convertible debt currently in-the-money
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
■ Cemex will invest US$300 million in a new 1.5M ton integrated cement production line at its Solid Plant in the Philippines.
Implications
■ The new production line in-line with our replacement cost analysis. In our note A Deep Dive into Replacement Cost Analysis: CPAC and CX Appear Undervalued we estimate the replacement cost per million tons of yearly cement installed capacity for emerging markets at US$200 million for brownfields, the same cost per ton as CX's new line.
■ Why the Philippines? Adding exposure to emerging markets. The cement market in the Philippines has benefited from favourable economic conditions such as stable inflation and mortgages rates. In addition, healthy remittances continue to support activity in the residential sector. Cement volumes grew 8% and 11% YOY in 2013 and 2014, respectively. Prices were up 5% and 3% in local currencies in 2013 and 2014, respectively. The outlook for the industry is also positive: CX expects volumes to increase 14% YOY for 2015.
■ EBITDA margin in the Asia region was 23.3% in 2014, just below that of LatAm excluding Mexico (33.1%) and Mexico (31.4%).
■ Replacement costs can vary significantly among countries and according to whether projects are greenfield or brownfield (Ex. 1).
Recommendation
■ We rate CX shares Sector Outperform.
14
Edge at a Glance
Friday, May 15, 2015
Cequence Energy Ltd. (CQE-T C$0.94)
Cameron Bean - (403) 218-6786 (Scotia Capital Inc. - Canada)
Q1 Cash Flow Behind; Montney Drilling on Hold
Event Pertinent Data
New Old
Rating: -- SP
Risk: -- High
Target: 1-Yr -- $1.15
CFPS15E $0.17 $0.18 CFPS16E -- $0.20
New Valuation: --
Old Valuation: 0.9x our 1P NAV.
Key Risks to Target: Oil and natural gas prices; Drilling program success.
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
■ Cequence announced Q1/15 results.
Implications
■ Q1/15 Cash Flow Behind. Production of 11.2 mboe/d was modestly behind CQE's guidance of 11.5 mboe/d, while cash flow of $8.3M ($0.04/sh) was ~17% behind guidance ($10M) and ~15% behind our forecast on moderately higher cash costs (opex and transportation; G&A was lower than expected), lower production and lower realized pricing. Capital Expenditures of $22.6M ($19.6M net of disposition) were in line with expectations as CQE completed its 13 well winter drilling program and Simonette facility expansion.
■ Montney Drilling on Hold. CQE's two recent 15-15 pad Montney wells averaged 6 mmcf/d and 32 bbl/mmcf over their first 30 days. These early results are above our type curve (see our March 6 note) and suggest the possibility of improved productivity from the play. However, with continuing commodity price weakness, CQE is deferring further Montney drilling until the outlook improves. The company plans to resume drilling in the summer with a Dunvegan oil well (50% WI).
■ Guidance Confirmed. CQE confirmed its $60M capital budget and production guidance of 11.5 mboe/d, however with Montney drilling on hold and the company managing production levels due to TCPL issues and weak gas prices, we believe future revisions are possible.
Recommendation
■ We maintain our SP rating.
Cervus Equipment Corporation (CVL-T C$18.12)
Christine Healy, CPA, CA - (416) 863-7902 (Scotia Capital Inc. - Canada)
■ CVL reported a Q1/15 loss of $0.18/share, below our forecast loss of $0.09/share and consensus loss of $0.05/share. When we adjust for an unrealized FX loss, we estimate adj. EBITDA of $5.5M and an adj. loss of $0.10/share, which is fairly in line with our estimates. While revenue beat our forecast by 14%, this was offset by modestly lower gross margin and higher SG&A and finance expenses.
Implications
■ Agricultural beat. In Q1/15, segment sales of $140.1M were 19% above our forecast and grew 36% YoY. The growth was driven by acquisitions (same-store sales rose 1% YoY). Segment EBITDA of $3.6M was above our estimate of $1.2M mainly due to higher sales.
■ Transportation and Commercial & Industrial missed. Combined segment sales of $98.3M were 8% above our forecast and 54% higher than in Q1/14 due to the POI acquisition (same-store sales declined 19% YoY). Combined segment adj. EBITDA of $1.9M missed our estimate of $4.1M due to lower gross margin and higher SG&A costs, which was driven largely by the acquisition of POI. Overall same-store gross margin was 26.4% in Q1/15 compared with 25.2% in Q1/14.
■ We will update model post-call. CVL will host a call today at 11:00 am EDT to discuss results. Dial-in: 1-888-231-8191 or 647-427-7450.
Recommendation
■ We maintain our one-year target price of $19.00/share and our SP rating.
15
Edge at a Glance
Friday, May 15, 2015
Chemtrade Logistics Income Fund (CHE.UN-T C$21.08)
Benoit Laprade, CPA, CA, CFA - (514) 287-3627 (Scotia Capital Inc. - Canada)
First Take: Q1/15 in Line
Event Pertinent Data
New Old
Rating: -- SP
Risk: -- High
Target: 1-Yr -- $23.00
DCPU15E $2.15 $2.17 DCPU16E $2.19 $2.17
New Valuation: --
Old Valuation: 9.25% DCPU yield
Key Risks to Target: Lower-than-expected GDP, lower-than-expected prices and volumes
CDPU (NTM) $1.20
CDPU (Curr.) $1.20
Yield (Curr.) 5.7%
■ Chemtrade reported adj. EBITDA of $58.1M, compared to our estimate of $56.7M and the consensus forecast of $57.6M. Distributable cash after maintenance capex came in at $41.7M ($0.61/unit), which compares to our estimate of $33.5M ($0.49/unit).
Implications
■ The EBITDA variance stems from higher-than-expected SPPC ($3M), WSSC ($2M) and International ($1M) results, partially offset by higher-than-expected corporate costs ($5M). The DCPU beat was helped by the timing of maintenance capex, which was very low in the quarter at $3.7M ($50M guidance for 2015 remains).
■ Chemtrade's balance sheet remains in solid shape at 2.4x Sr Net Debt to LTM EBITDA and Total Debt/LTM EBITDA of 3.6x (including two series of "in-the-money" converts maturing in 2017 and 2018). We continue to believe the company has the financial flexibility to execute on acquisitions should opportunities arise.
■ Distributions remain in good shape as well. The company's payout ratio for the quarter came in at 49%, helped by lower maintenance capex. We forecast payout ratios of 55% for all of 2015E and 2016E.
Recommendation
■ We reiterate our SP rating and $23.00 target. We continue to like Chemtrade's stable/low risk business model, solid operational performance, and sustainable dividend, supported by a low payout ratio and risk sharing contracts.
Chorus Aviation Inc. (CHR.B-T C$5.89)
Turan Quettawala, MBA, CFA - (416) 863-7065 (Scotia Capital Inc. - Canada)
Shares in Fair Value Range
Event Pertinent Data
New Old
Rating: -- SP
Risk: -- High
Target: 1-Yr $5.75 $6.00
EBITDAR15E $300 $330 EBITDAR16E $309 $337
New Valuation: 6x EV/NTM EBITDAR (one-year fwd.)
Old Valuation: 5.75x EV/NTM EBITDAR (one-year fwd.)
Key Risks to Target: Lower-than-expected traffic and yield improvement, increased competition.
Div. (NTM) $0.48
Div. (Curr.) $0.48
Yield (Curr.) 8.2%
■ CHR's Q1 adjusted EBITDA of $40M missed our $56M estimate but was in line with the street at $40M.
Implications
■ The major non-recurring items are $10M for the ALPA signing bonus & $2M for the advisory fees. Stock-based compensation at $5M was also much higher than normal. We reduced our EBITDA forecasts and are now looking for $202M in annual EBITDA in 2015 which includes the contribution from the Voyageur acquisition. Based on the new CPA arrangement with Air Canada, EBIT should remain flattish at these levels until 2020 unless there is an increase in the covered aircraft, which we don't think is likely.
■ CHR management was quite upbeat about diversification/growth prospects from both the leasing arm and Voyageur. In our view, for the leasing business to stand on its own, we need to see some diversification in terms of both customers and aircraft. While management is scouting for further diversification opportunities, we feel that meaningful acquisitions are unlikely at this stage.
Recommendation
■ CHR shares have run-up after the change in the CPA and are now trading at 6.3x EV/2016 EBITDAR, which is in line with their US comp group even though CHR is considerably less diversified. Our TP is down slightly to $5.75 due to lower EBITDA estimates which is partially offset by a slightly higher multiple. While the yield is still relatively attractive, we see no capital upside and are maintaining our SP rating.
16
Edge at a Glance
Friday, May 15, 2015
Copasa (CSMG3-SA R$17.65)
Ezequiel Fernández López, CFA - +56 9 9991 9152 (Scotia Corredora de Bolsa Chile SA)
Old Valuation: 7yr explicit period DCF and 2.0% LT growth
Key Risks to Target: Regulation, concessions, hydrology
Div. (NTM) R$0.63
Div. (Curr.) R$0.87
Yield (Curr.) 4.9%
■ Copasa reported Q1/15 EBITDA of R$233M (-24% YOY), in line with our estimate. Quarterly EPS disappointed us on a large FX one-off.
Implications
■ Given our view of Copasa's relatively low valuation levels and that the depressed results are temporary in nature, we do not consider the headline earnings as a cause for great concern. However, we highlight three important quarterly updates.
■ First, the Rev/m3 ratio unexpectedly contracted 1.5% YOY. While we expected a soft reading, it appears the reduced water consumption is making customers "automatically" migrate to lower price bands. Although we expect this to be a temporary effect, it should pressure 2015 cash flows more than we originally anticipated.
■ Second, Copasa effectively addressed cost concerns. The new CEO sent a strong message by cutting opex & capex, sensible in our view. The "Services" opex line normalized after several quarters of unusually high readings while headcount was kept flat QOQ.
■ Finally, water consumption per customer decreased 8% YOY, below the 30% mark quoted as "desirable" by the new CEO in January. We are operating under the assumption that Copasa customers should lower consumption by "only" 15% until the new rainy season starts (Nov).
Recommendation
■ We highlight the positive opex update and we maintain our Sector Outperform rating on valuation (0.39x PBV, 4.8x 2015E EV/EBITDA).
DHX Media Ltd. (DHX.B-T C$9.40)
Paul Steep, MBA - (416) 945-4310 (Scotia Capital Inc. - Canada)
Key Risks to Target: Lumpy Sales; Content Licensing Deals; Pick and Pay TV Model
Div. (NTM) $0.06
Div. (Curr.) $0.05
Yield (Curr.) 0.6%
■ DHX reported strong Q3/15 results with revenues of $85.6M and Adjusted EBITDA of $29.8M, compared with our estimates of $67.7M and $23.6M (consensus $69.1M and $23.5M).
Implications
■ DHX's Q3/15 results exceeded consensus expectations, with the firm delivering strong revenue growth in Distribution and Production revenues based on a combination of organic growth and acquisitions. EBITDA margins were sustained in the quarter given the firm's ongoing efforts to generate operational efficiencies.
■ We expect that DHX will continue to rapidly de-lever as the firm positions itself to be an active acquirer of children's content. We believe the firm will continue to focus on signing new international distribution and licensing deals for its content library and brands (more than 11,000 half-hours of content) to diversify its revenues away from the broadcast business.
Recommendation
■ We remain Sector Underperform on the stock given challenges facing the firm's broadcast business, including the loss of the Disney output contract and the upcoming implementation of the CRTC's Pick and Pay decision in 2016. Our target price moves to $8.50 based on updating our estimates and rolling forward our valuation period, with no change to the valuation multiple.
17
Edge at a Glance
Friday, May 15, 2015
EnerCare Inc. (ECI-T C$14.87)
George Doumet - (514) 350-7788 (Scotia Capital Inc. - Canada)
Lower Q1 on Seasonality; Integration as Planned
Event Pertinent Data
New Old
Rating: -- SP
Risk: -- Med
Target: 1-Yr -- $15.00
Adj EBITDA15E $230 $233 Adj EBITDA16E $242 $245
New Valuation: --
Old Valuation: 8.5x EV/Adj. EBITDA on 2016E
Key Risks to Target: Attrition; shifts in public policy; competition; acquisition integration
Div. (NTM) $0.84
Div. (Curr.) $0.84
Yield (Curr.) 5.6%
■ EnerCare reported Q1/15 Adjusted EBITDA of $54.0M vs. our estimate and consensus of $56.6M.
Implications
■ The modestly softer results vis-à-vis our estimates are mainly the result of lower-than-expected contribution from OHCS driven largely by seasonality and HVAC rental/sales mix.
■ Attrition for the quarter came in at 9k units, in line with our estimates and with last year. This marks the fifth consecutive quarter of attrition at or below the 11k level. Moving forward, we are looking for attrition of 39k units in 2015 and 36k units in 2016 driven by continued company-specific initiatives and the enactment of Bill 55.
■ The Sub-metering segment performed ahead of expectations: EBITDA came in at $3.0M vs. our estimate of $2.8M ($2.6M in Q4/14). Moving forward, we are looking for EBITDA of $11.5M (Adj. FCF of $4.8M) in 2015 and EBITDA of $13.7M (Adj. FCF of $7.1M) in 2016.
Recommendation
■ ECI trades at 8.9x EV/EBITDA (15E), at a premium to its leasing and servicing peer group despite its similar leverage, capital intensity, and free cash flow profile. While we see benefits from the OHCS acquisition (better control on pricing and access to the customer), we remain neutral on the shares given the high relative valuation and lack of visibility on improving return metrics in the face of rising capital intensity.
Entel Chile (ENTEL-SN CLP 7,087)
Andres Coello - +52 (55) 5123 2852 (Scotiabank Inverlat)
Dethrones Telefonica as Chile's EBITDA Leader
Event Pertinent Data
New Old
Rating: -- SO
Risk: -- Med
Target: 1-Yr 9,400 9,200
EBITDA15E 396 383 EBITDA16E 483 478
New Valuation: --
Old Valuation: DCF - 5 years results, 7.4% WACC, terminal growth rate of 3.6%
Key Risks to Target: Execution of Entel Peru; Competition in Chile
Div. (NTM) 150.00
Div. (Curr.) 150.00
Yield (Curr.) 2.1%
■ In Q1/15 and for the first time in history, Entel's EBITDA in Chile was greater than that of Telefonica (including fixed and mobile divisions, making it all the more remarkable), effectively driving Entel to the position of leader in Latin America's most advanced telecom market.
■ We are raising our 2015 EBITDA projection for Chile by 2.3%. We believe the current share price implies less than zero value for Peru (as if Entel were destroying, not creating, value.) We are lifting our DCF-based target from CLP 9,200/share to CLP 9,400/share.
Implications
■ Entel's Q1 ARPU in Chile was 24.2% higher than the industry average, churn was 27.7% lower, and its EBITDA margin ~750 bp higher.
■ Entel's dominance of Chile's postpaid market (45.9%) is greater than that of Vivo in Brazil and is one of the highest in the LatAm space. From a regulatory perspective, it may be better for Entel to let TEF be the biggest player in terms of total wireless subs (by a mere 0.6M).
■ Quality metrics in Chile (see Exhibit 2) and portability results in Peru (see Exhibit 3) denote who has been milking the market and who has taken the most care of customers; whereas Entel's combined capex for Chile and Peru in Q1was 20.9% of sales, TEF invested 14.8%.
Recommendation
■ Even if we value Peru at zero, Entel's shares would be worth CLP 8,775 under a 6.0x 2015E EV/EBITDA valuation for Chile (see Exhibit 4). If we value each sub in Peru at US$300, shares would be worth CLP10,912.
18
Edge at a Glance
Friday, May 15, 2015
Freehold Royalties Ltd. (FRU-T C$17.75)
Patrick Bryden, CFA - (403) 213-7750 (Scotia Capital Inc. - Canada)
Cash Flow Ahead on Improved Cost Management
Event Pertinent Data
New Old
Rating: -- SP
Risk: -- Med
Target: 1-Yr -- $20.00
CFPS15E $1.07 $1.00 CFPS16E $1.17 $1.13
New Valuation: --
Old Valuation: 2.4x our 2P blow-down NAV.
Key Risks to Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program success
Div. (NTM) $1.08
Div. (Curr.) $1.08
Yield (Curr.) 6.1%
■ Freehold released first quarter results, highlighting a cash flow beat of 14% on lower-than-expected operating costs.
Implications
■ Production in line as cash flow ahead of estimates. First quarter production of 10,058 boe/d was in line with our estimate of 10,114 boe/d and consensus of 10,167 boe/d. Cash flow was ahead of expectations at $0.29/share versus our estimate of $0.25/share. The cause of the beat was lower-than-expected operating costs of $5.25/boe versus our estimate of $5.93/boe.
■ Land base increased by subsequent acquisition. Freehold previously announced an agreement to purchase a gross overriding royalty (GORR) in addition to royalty interests and mineral title lands in exchange for $321M from Penn West. The GORR consists of an 8.5% royalty interest in a portion of Penn Wes's Viking play operations in the Dodsland area of Saskatchewan.
■ Continued A&D activity expected. In our view, Freehold is well positioned within the marketplace, with a 2015E D/CF of 1.3x and a 2015E effective payout ratio of 131%. The strong balance sheet should allow the company to pursue further acquisitions, as challenged E&P peers look to monetize assets.
Recommendation
■ We maintain our Sector Perform rating and price target of $20.00/share.
Gabriel Resources Ltd. (GBU-T C$0.39)
Trevor Turnbull, MBA, MSc - (416) 863-7427 (Scotia Capital Inc. - Canada)
Discontinuing Coverage
Event Pertinent Data
New Old
Rating: DC SP
Key Risks to Target: --
Div. (NTM) --
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
■ We are discontinuing coverage of Gabriel Resources Ltd.
Implications
■ The discontinuation follows nine months without significant permitting developments. In addition, Gabriel reports that Romanian authorities have chosen not to respond to invitations for dialogue.
■ Our final rating for Gabriel was Sector Perform.
■ Our previous rating, price target, and estimates should no longer be relied upon.
Recommendation
■ We have revised our rating to Discontinued Coverage.
19
Edge at a Glance
Friday, May 15, 2015
Gildan Activewear Inc. (GIL-T C$39.36)
Anthony Zicha - (514) 350-7748 (Scotia Capital Inc. - Canada)
Q1/15 Results in Line; On Track for a Solid 2016
Event Pertinent Data
New Old
Rating: -- SO
Risk: -- Med
Target: 1-Yr $45.00 $42.00
EPS15E US$1.51 US$1.54 EPS16E -- US$1.88
New Valuation: 19.0x P/E on 2016E
Old Valuation: 18.0x P/E on 2016E
Key Risks to Target: Slower than anticipated recovery in retail sales; changes to cotton price; country specific risk.
Div. (NTM) $0.26
Div. (Curr.) $0.26
Yield (Curr.) 0.8%
■ Results in Line. Gildan reported Q1/15 adjusted EPS of $0.24, in line with of our expectation of $0.22, company guidance range of $0.22 to $0.24 and consensus of $0.23.
Implications
■ Narrows Guidance. Gildan narrowed its 2015 earnings guidance range of $1.50 to $1.55 per share from $1.50 to $1.57 previously.
■ Strategy on Track. Pricing strategies stimulated solid volume growth within the Printwear segment. Furthermore, supported by its retail initiatives, the company continues to target a 10% market share position (in men's underwear) by the end of 2015.
■ Looking to 2016. We expect Gildan to continue to sustain its price leadership, market share expansion, and continued roll-out of low cost manufacturing facilities. While recent pricing initiatives are expected to limit earnings growth over the next quarter, we expect capex investments to generate a targeted $100 million in cost savings. Additionally, when combined with better aligned cotton costs, should support growth in 2016. Furthermore, we believe the company could execute additional accretive acquisitions.
Recommendation
■ We rate Gildan shares Sector Outperform with a new one-year target price of C$45.00 (previously C$42.00). To value Gildan shares we apply a P/E multiple of 19.0x (in line with peer group) as well as a FX assumption (US$/C$) of $1.25 to our 2016 EPS estimate of $1.88.
Golden Star Resources Ltd. (GSS-A US$0.35)
Trevor Turnbull, MBA, MSc - (416) 863-7427 (Scotia Capital Inc. - Canada)
Gold Stream Fixes Near-term Finances, but Valuation and Margins Decline and Debt Remains
Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
■ Golden Star released its Wassa feasibility study; we fully incorporated the data and the Royal Gold streaming deal.
Implications
■ We have adjusted our model for the open pit and underground mine plans from the technical report into our model. We also include about 20% upside or 137,000 oz to the Wassa underground reserve.
■ The streaming agreements significantly impact the net present value of both Wassa's and Prestea's non-refractory operations. However, the deal provides much needed financing and lowers Golden Star's cost of capital in the process. Without the agreement we doubt the Wassa and Prestea underground mines could be beneficially developed.
■ Our net asset valuation (NAV5%) decreases to $0.35 from $0.46 per share at a 5% discount rate. Nonetheless, we view the transaction positively as it enables Golden Star to transition to lower-cost non-refractory production. Due to the improved balance sheet we also are applying a 5% discount rate to Golden Star versus 8% previously.
Recommendation
■ We upgraded to Sector Perform following the announcement of the Royal Gold financing, and Golden Star is becoming an investible choice for leverage to rising gold prices. However, we remain cautious given that there are $77.5 million in 5% convertible debentures maturing in June 2017 that need to be dealt with.
20
Edge at a Glance
Friday, May 15, 2015
Grupo Aeroportuario Centro Norte, SAB de CV (OMAB-Q US$40.64)
Francisco Suarez - +52 (55) 9179 5209 (Scotiabank Inverlat)
Lower Fees to Its Technical Partner: Getting Part of the Economics, But Not the Oversight (Yet)
Key Risks to Target: Govmnt. regulation, troubled domestic airlines
Div. (NTM) US$1.62
Div. (Curr.) (ADS) US$1.62
Yield (Curr.) 4.0%
■ Oma announced it signed an amendment to the Technical Assistance Agreement (TAA) to cut the technical assistance fee from 5% of EBITDA to 4% for the next three years, and from 4% of EBITDA to 3% for the last two years of the contract.
Implications
■ Getting part of the economics, but not the oversight (yet). We believe the aim of last month's debate on the elimination of the TAA, led by Aberdeen, was to improve Oma's corporate governance in addition to the economics (see our note: "Barbarians at the Gates! A Single Share Class Structure in Sight?"). However, it is encouraging to see that the controlling group SETA (74.5% ICA; 25.5% Aéroports de Paris) is willing to address the market's concerns.
■ Marginal impact on our estimates. We now expect 2015E EBITDA of MXN 2,288M, an increase of 0.8% versus our previous estimate. For 2016 we increased our EBITDA estimate by 1% to MXN 2,583M.
Recommendation
■ As a result, we have increased our target price from US$43.00 to US$44.00 (from MXN 81.00 to MXN 83.00 in local shares). We maintain our Sector Perform rating.
Guardian Capital Group Limited (GCG.A-T C$18.50)
Phil Hardie, P.Eng., MBA, CFA - (416) 863-7430 (Scotia Capital Inc. - Canada)
BMO Share Price Has Played Surprising Minor Role in Historical Stock Performance
Event Pertinent Data
New Old
Rating: -- SP
Risk: -- Med
Target: 1-Yr $20.50 $20.00
EPS15E $1.04 $1.05 EPS16E $1.11 $1.10
New Valuation: 29.5% discount to target NAV of $29.10
Old Valuation: 29.8% discount to target NAV of $28.48
Key Risks to Target: Weak BMO share price, Decline in AUM, NAV discount ascribed by market
Div. (NTM) $0.32
Div. (Curr.) $0.30
Yield (Curr.) 1.6%
■ Q1/15 operating earnings of $10.5M were in line with our expectations.
Implications
■ Another solid quarter for Guardian with continued AUM growth and operating earnings coming in as we had anticipated. Stronger-than-anticipated revenues were offset by higher-than-expected opex.
■ Investors may be surprised to see that BMO share price appreciation has had a relatively minor contribution to Guardian's 5-year historical stock performance. This is likely to come as a source of comfort for value-oriented investors who have potential concerns over the near-term stock performance of BMO. More importantly this analysis demonstrates the "value add" outside of BMO share price gains.
■ We estimate the market is ascribing a value of $4.06 per share for the company's investment management operations, which we currently value at $13.29 per share. We believe that a continued trend toward generating more meaningful earnings from its underlying operations will serve as a catalyst to structurally reduce its NAV discount.
Recommendation
■ Raising target price to $20.50 (was $20.00) and maintaining our Sector Perform rating. Significant embedded optionality and wide NAV discount makes Guardian an attractive core holding for value-oriented investors.
21
Edge at a Glance
Friday, May 15, 2015
Innergex Renewable Energy Inc. (INE-T C$11.02)
Matthew Akman, MBA - (416) 863-7798 (Scotia Capital Inc. - Canada)
Water in the West
Event Pertinent Data
New Old
Rating: -- SP
Risk: -- Low
Target: 1-Yr -- $12.50
CFPS15E $0.56 $1.08 CFPS16E $1.14 $1.15
New Valuation: 5.7% 2015E Free Cash Yield and 18.8x 2015E EV/EBITDA
Old Valuation: 5.2% 2015E Free Cash Yield and 18.7x 2015E EV/EBITDA
Key Risks to Target: Government Support for Renewables; Credit Spreads; Hydrology; Growth Projects
Div. (NTM) $0.63
Div. (Curr.) $0.62
Yield (Curr.) 5.6%
■ INE reported Q1/15 adj. EBITDA of $43M vs. our $31M estimate and $25M in Q1/14.
Implications
■ The positive result came directly from favorable hydrology in B.C. where production achieved 176% of LTA compared with 49% in Q1/14. We think the high production will be partially offset by a weaker Q2 due to less snow in the past winter relative to the prior year. Our annual adj. EBITDA estimate was revised up by ~$5M.
■ Construction projects are well underway with financing completed for Upper Lillooet and Boulder, and Mesgi'g Ugju's'n to start in a week. INE is experienced in project execution and financing which were helpful in securing favorable contract terms and interest rates.
■ We like INE's growth strategy - Europe for wind and solar and Latin America for small hydro. Regional markets and potential partners have been identified, a further step toward post-2017 growth.
Recommendation
■ We remain optimistic that INE will extend growth beyond 2017 as it implements international expansion. Announcement of new projects with visible returns (high teens) could be a catalyst for the stock. However, we are doubtful valuation will improve significantly until more detailed development and/or acquisition plans emerge. We maintain our $12.50 target price and Sector Perform rating at this time.
Kelt Exploration Ltd. (KEL-T C$8.64)
Cameron Bean - (403) 218-6786 (Scotia Capital Inc. - Canada)
Q1/15 Results in Line; Shifting Capital to NE BC
Event Pertinent Data
New Old
Rating: -- SO
Risk: -- High
Target: 1-Yr -- $11.00
CFPS15E $0.56 $0.57 CFPS16E $0.90 $0.87
New Valuation: --
Old Valuation: 1.0x our 2P NAV plus risked upside.
Key Risks to Target: Oil and natural gas prices; Drilling program success.
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
■ Kelt announced its Q1/15 results.
Implications
■ Q1/15 Results in Line. Production of 16 mboe/d and CFPS of $0.11 were in line with our estimate and consensus. The company reduced its Q1/15 G&A by 14% QOQ on a per boe basis to $0.47/boe. During the quarter, KEL spent $77.7M, including $37.6M drilling seven (5.5 net) wells, $29.4M on facilities, well equipping and pipelines, and $10.7M on land and asset acquisitions.
■ Shifting Capital to NE BC. With a string of strong results from Inga/Fireweed and the political uncertainty in Alberta, KEL plans to shift capital toward NE BC over the balance of 2015. The remaining spending in Alberta will target re-completions, non-op working interest activities, pipeline connections, and potential acquisitions. We view Inga/Fireweed as KEL's key play (and largest portion of our risked upside estimate) and believe that shifting capital toward it is the right move for the company (see Page 3).
■ 2015 Guidance Confirmed. KEL confirmed its $150M capital budget and average production guidance of 20 mboe/d (59% natural gas). We expect the company to consider additional opportunistic acquisitions as the year progresses and believe it is well positioned to execute given its low cost of capital and solid balance sheet.
Recommendation
■ We maintain our SO rating.
22
Edge at a Glance
Friday, May 15, 2015
Lucara Diamond Corp. (LUC-T C$2.15)
Craig Johnston, CPA, CA - (416) 860-1659 (Scotia Capital Inc. - Canada)
Key Risks to Target: Diamond prices; development risk; technical and operational risk; multiple contraction; and geopolitical risk
Div. (NTM) C$0.04
Div. (Curr.) C$0.04
Yield (Curr.) 1.9%
■ We are updating our estimates following the release of Q1/15 financial results and conference call.
Implications
■ The plant upgrade is progressing well with construction work at site largely complete. The XRT circuit has functioned well and shown exceptional recovery during the testing phase.
■ The company currently has 13 or 14 stones which could be sold via an EST, including the 342ct stone announced last month. Given the considerable lead time required, the company expects to likely host its first EST of 2015 in early July (previous GBM assumption was Q2/15).
■ Management also indicated it is more likely that they will hold only two ESTs in 2015, compared to the three originally planned (with likely higher value sales). In our view, we do not see this as a concern for reaching revenue guidance (as this was re-iterated), but we think this may reduce the likelihood of a material revenue beat on the year.
■ We have updated our estimates to reflect the items above, as well as Q1/15 financial results. There were no material changes to our NAV, however, we have updated our Q1/16E USD/CAD estimates (in line with Scotiabank GBM Economics) to 1.26 (from 1.33) and as a result, our target price is now $2.50 per share.
Recommendation
■ We continue to look forward to H2/15 for the processing of the South Lobe material through the upgraded plant. Re-iterate Sector Outperform.
Pacific Rubiales Energy Corp. (PRE-T C$6.01)
Gavin Wylie - (403) 213-7333 (Scotia Capital Inc. - Canada)
Q1 - Light Oil Increases and Cost Decreases
Event Pertinent Data
New Old
Rating: -- SP
Risk: -- High
Target: 1-Yr -- $5.50
CFPS15E US$2.29 US$2.07 CFPS16E US$1.86 US$2.00
New Valuation: Based on our risked NAVPS ($4.74) that also equates to 7.7x 2015E debt-adjusted CF and 2.04x our 2P NAV.
Old Valuation: Based on our risked NAVPS ($4.70) that also equates to 8.4x 2015E debt-adjusted CF and 2.0x our 2P NAV.
Key Risks to Target: Commodity prices, exploration, project execution, political/regulatory.
Div. (NTM) C$0.00
Div. (Curr.) C$0.00
Yield (Curr.) 0.0%
■ Pacific Rubiales reported weaker than expected CFPS on a higher than expected overlift charge ($4.34/bbl), but made additional progression on its operating costs and material reductions to its G&A.
Implications
■ CFPS came in 13% below our estimate at $0.50 ($159M) versus our $0.58 ($182M) and 18% below consensus of $0.61.
■ The miss is not overly disappointing given the timing of underlifts/overlifts can be difficult to predict and add volatility to earnings and cash flow.
■ Current production is averaging >155,000 boe/d versus the Q1/15 average of 152,650 boe/d.
■ Pacific Rubiales announced that it has employed financial advisors to conduct an independent evaluation of the takeover offer from Alfa, S.A.B de C.V. and Harbour Energy.
Recommendation
■ Maintain Sector Perform and our price target of $5.50.
■ We remain somewhat cautious on the proposed takeover offer at this stage given the public opposition from core shareholders and the potential for the definitive offer to be a few weeks out.
23
Edge at a Glance
Friday, May 15, 2015
Paladin Energy Ltd. (PDN-T C$0.34)
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526 (Scotia Capital Inc. - Canada)
Key Risks to Target: Uranium prices; F/X rates; balance sheet
Div. (NTM) C$0.00
Div. (Curr.) C$0.00
Yield (Curr.) 0.0%
■ Paladin reported its FQ3/15 financial results.
Implications
■ Paladin reported a FQ3/15 EPS loss of $0.01, in line with our estimate and consensus of a loss of $0.01. We note that the results are not particularly meaningful as the company had pre-released its operating results in late April.
■ The company reiterated its FY2015 U308 production guidance of 5.0M-5.2M lbs, which implies FQ4/15 production of 1.3-1.5M lbs.
■ The company's balance sheet remains highly leveraged, although we see sufficient liquidity for at least 18 months.
Recommendation
■ Given the company's relatively high debt leverage in the context of the current weak uranium price environment, we continue to rate Paladin Sector Perform. Our 12-month target of C$0.40 per share is based on 1.0x our 8% NAV estimate of C$0.44.
Perpetual Energy Inc. (PMT-T C$0.96)
Patrick Bryden, CFA - (403) 213-7750 (Scotia Capital Inc. - Canada)
View Maintained Post Q1 (However, There Are Big Moving Parts That Could Prove Us Wrong)
Event Pertinent Data
New Old
Rating: -- SU
Risk: -- High
Target: 1-Yr -- $1.00
CFPS15E $0.01 $0.06 CFPS16E $0.07 $0.13
New Valuation: --
Old Valuation: 0.7x our 2P NAV plus risked upside.
Key Risks to Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program success
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
■ Perpetual released first quarter results.
Implications
■ Production in line as cash flow slightly behind. Perpetual achieved first quarter production of 22,819 boe/d, relatively in line with our estimate of 23,450 boe/d and consensus of 23,536 boe/d. Cash flow, however, was slightly behind estimates at -$0.01/share versus our estimate of $0.03/share and consensus of $0.02/share. Marginally higher realized liquids differential as well as operating and transportation costs were the cause of the miss.
■ Capital budget heavily front-weighted to complete Edson development program. Perpetual spent $46.9 mm in the first quarter, with the majority being directed towards the Edson area and, in particular, the East Edson gas plant, scheduled for start-up in Q3/15.
■ 2015 guidance sees minimal activity for remainder of year. Perpetual expects capital spending for the remainder of 2015 to be $20 - $25 mm. The majority (88%) of the 2015 budget will be directed towards the Edson area liquids-rich gas development program. We estimate 2015 average production will be ~18,400 boe/d.
Recommendation
■ We maintain our SU rating and one-year price target of $1.00 per share.
24
Edge at a Glance
Friday, May 15, 2015
Power Financial Corporation (PWF-T C$36.42)
Phil Hardie, P.Eng., MBA, CFA - (416) 863-7430 (Scotia Capital Inc. - Canada)
New Valuation: 10.7% Discount to one-year NAVPS of $46.48, 11.8x 2016E EPS.
Old Valuation: 11% Discount to one-year NAVPS of $46.05, 11.8x 2016E EPS.
Key Risks to Target: Economic, systemic, interest rate, regulatory and counterparty failures
Div. (NTM) $1.52
Div. (Curr.) $1.49
Yield (Curr.) 4.1%
■ PWF reported Q1/15 operating EPS of $0.79, above consensus and our estimate of $0.76.
Implications
■ Q1/15 operating results were above expectations largely resulting from higher-than-anticipated contributions from GWO and IGM earnings, partially offset by weaker-than-forecast contributions from PARG.
■ Operating EPS was up 27% YOY, largely driven by 20.4% and 2.6% increases in earnings contributions from GWO and IGM, respectively.
■ We have made upward revisions to our 2015 and 2016 estimates reflecting updated consensus estimates for GWO, PARG, and our IGM forecast.
■ We expect Power Financial's NAV discount to revert towards its long-term historical average. We estimate PWF's NAV discount at 14.6%, above its 15-year average of 10.6%.
Recommendation
■ We have raise our target price to $41.50 (was $41.00) and maintain our Sector Perform rating.
Pure Industrial REIT (AAR.UN-T C$4.84)
Pammi Bir, CPA, CA, CFA - (416) 863-7218 (Scotia Capital Inc. - Canada)
Q1 Initial Take: In Line, Steady Results
Event Pertinent Data
Rating: SP
Risk: Med
Target: 1-Yr C$5.25
FFOPU15E: $0.42 FFOPU16E: $0.43
Valuation: 14x AFFO (F'16 estimate)
Key Risks to Target: Exposure to single-tenant properties, tenant concentration, inability to execute growth
CDPU (NTM) $0.31
CDPU (Curr.) $0.31
Yield (Curr.) 6.4%
■ AAR reported Q1/15 FFOPU of $0.10 vs. $0.10 last year, in line with our $0.10 estimate and consensus ($0.10).
Implications
■ Minor variances, but in line overall. NOI was a bit light vs. our call and taxes were a touch heavier, but offset by lower interest costs. YOY FFO growth was impacted by the timing difference between the equity issued to fund the FedEx portfolio purchase & the acquisition's closing and development completions, coupled with non-core asset sales.
■ Operationally stable; expect near-term moderation in SP NOI. SP NOI rose 2.1% YOY from 1.5% higher rents and the ContainerWorld expansion, offset by a 170bp drop in occupancy. AAR reiterated its call for a moderation of near-term SP NOI growth due to temporary increase in vacancy in 1H/15, with a partial offset from higher renewal rents. Geographically, SP NOI growth was led by MB (+13.1%), followed by BC (+7.3%) and AB (+1.3%), with ON (-1%) lagging. Economic occupancy was 96% (-130bp QOQ, -50bp YOY) with committed at 96.6% (-110bp, -80bp). Renewal leasing spreads were solid at +15.9% driven by a Vaughan property, with in place rents 4.6% below market.
■ IFRS cap rate steady at 6.54% (+2bp QOQ, +2bp YOY), in line with our 6.55% NAV cap rate and slightly above 6.4% implied cap. AAR expects NAV to rise in Q2 as appraisals on FedEx portfolio are updated.
Recommendation
■ Full update post today's conference call (3 p.m. ET; 1-888-390-0546).
25
Edge at a Glance
Friday, May 15, 2015
RMP Energy Inc. (RMP-T C$2.93)
Cameron Bean - (403) 218-6786 (Scotia Capital Inc. - Canada)
Q1/15 In Line; Costs Keep Getting Better
Event Pertinent Data
Rating: SP
Risk: High
Target: 1-Yr C$4.25
CFPS15E: $0.75 CFPS16E: $0.79
Valuation: 1.0x our 2P NAV plus risked upside.
Key Risks to Target: Oil and natural gas prices; Drilling program success.
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
■ RMP announced Q1/15 results.
Implications
■ Q1/15 In Line; Costs Keep Getting Better. Production of 12,250 boe/d was pre-announced and CFPS of $0.20 was in line with our estimate and consensus. During Q1/15 RMP spent ~$47M drilling five wells and constructing its second Ante Creek production facility (online April 2, 2015). The company's already low operating costs decreased further to $5.67/boe (down 4% QoQ and 16% YoY). G&A expenses were also down 38% YoY (18% on a total cash basis) to $1.51/boe.
■ New Area. RMP has accumulated 32 net sections (20,480 acres) in a new area outside of its Ante Creek/Waskahigan core. The company plans to continue adding land in the area and begin drilling as part of its next winter program.
■ Ante Creek Update. RMP plans to drill a delineation well to the south of its core six section Ante Creek block in Q4/15. The company also announced that it has begun engineering work for a pilot secondary recovery project at Ante Creek that could be online by Q1/16. We believe this is the right move, given the increasing gas to oil ratio in the production profile and lower than expected primary recovery factor (8.2%) applied to the light oil resource base.
Recommendation
■ We maintain our SP rating.
Rubicon Minerals Corporation (RMX-T C$1.39)
Mike Hocking, MSc, P.Geo. - (416) 945-5228 (Scotia Capital Inc. - Canada)
Key Risks to Target: Commodity risk, multiple contraction, project development risk, mineral resource and exploration risk
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
■ RMX secures $50M loan facility and issues 10M warrants with CPPIB.
Implications
■ RMX are to receive the full $50M upon close (not draw-down). The loan has a five-year term, maturing in May 2020. It has a cash interest rate of 7.5% annually, compounded quarterly. It can be prepaid at a premium ranging from 1%-6%. The proceeds are to provide operational flexibility during the ramp-up phase. RMX also issued 10M warrants (five-year expiry) at an exercise price of C$1.715. They remain on track to achieve first production by mid-2015, with still no guidance provided on when it will achieve commercial production.
■ Neutral. Overall, we view the agreement as neutral (well-known that they were looking for a debt facility of this size) but it highlights the increased risk to the project and company. We are concerned with the increased balance sheet risk and that the full C$50M had to be drawn now, potentially indicating an increase in required capital. We had previously modelled the debt facility in Q2/15 and now factor in dilution from a warrant exercise. We have also made other minor adjustments to our model (FX and Q1/15 financials), resulting in a lower NAVPS estimate. For full details, please see the next page.
Recommendation
■ We rate RMX Sector Perform with little upside at our base case, and maintain our target price of C$1.50.
26
Edge at a Glance
Friday, May 15, 2015
Sabesp (SBSP3-SA R$19.55)
Ezequiel Fernández López, CFA - +56 9 9991 9152 (Scotia Corredora de Bolsa Chile SA)
Old Valuation: DCF, 7yr explicit period and 2.0% LT growth
Key Risks to Target: Regulatory risk, hydrology
Div. (NTM) R$0.37
Div. (Curr.) R$0.70
Yield (Curr.) 3.6%
■ Sabesp reported Q1/15 Adj. EBITDA of R$660M (-35% YOY), in line with our estimate. EPS was plagued by one-offs, but in line.
Implications
■ Operational results for Sabesp were positive, as softer-than-expected pricing was offset by good progress on the opex front. Moreover, it seems that water pressure reduction initiatives are not hurting volumes as much as expected, while reservoirs maintain decent volumes.
■ Water consumption per customer dropped 14% YOY, versus our estimate of 17%. However, pricing was softer than expected, as quarterly Rev/m3 closed at R$2.28 (-8% YOY) driven by a stronger-than-expected impact from the bonus program.
■ On the cost side, we saw QOQ reductions in most items, but the large "Other Expenses" reduction was related to a change in lawsuit provisions. Bear in mind that Sabesp booked, as an operational cost offset, a R$696M positive charge related to a legal settlement with the State of Sao Paulo, which artificially boosted headline EBITDA.
■ Quarterly EPS was also hit by a R$884M FX one-off, but was helped by a R$160M positive tax adjustment. Earnings calls to take place May 19 at 9:30 am ET (Portuguese) and 1:00 pm ET (English). Dial in +55 11 3127 4999 (code 549817455) and +1 412 317 0088 (code 10063466).
Recommendation
■ Good opex news and lower-than-expected volume contraction; maintain Sector Outperform on Sabesp and Copasa.
Spartan Energy Corp. (SPE-T C$3.40)
Cameron Bean - (403) 218-6786 (Scotia Capital Inc. - Canada)
Q1/15 Results in Line; Staying Strong
Event Pertinent Data
New Old
Rating: -- SO
Risk: -- High
Target: 1-Yr -- $4.50
CFPS15E $0.24 $0.25 CFPS16E -- $0.36
New Valuation: --
Old Valuation: 1.1x our 2P NAV plus risked upside.
Key Risks to Target: Oil and natural gas prices; drilling program success.
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
■ Spartan announced its Q1/15 results.
Implications
■ Q1/15 results in line. Production of 9.4 mboe/d and CFPS of $0.05 were in line with expectations. Operating and G&A expenses were down 2.1% and 19.0% QoQ, respectively. SPE drilled 19 (15.8 net) wells during the quarter as part of its $22.7 million capital program. The company has seen DC&T costs for its open-hole Mississippian wells decrease by 10% to less than $1 million on the back of industry-wide service cost reductions. SPE expects to resume drilling in June 2015.
■ Capital budget update pending. SPE noted that it plans to update its capital program later in Q2/15 based on its assessment of commodity prices and service costs. The company continues to target a cash flow budget for the year. Recall that the company's current guidance calls for a $105M capital budget and production of 9.2 mboe/d (annual) and 9.9 mboe/d (exit) pegged at US$65/bbl WTI.
Recommendation
■ With a strong cost of capital and ample financial flexibility (over $150M available on a $250M line), we view SPE as well positioned to pursue opportunistic acquisitions during the downturn and to thrive when oil prices recover. We maintain our SO rating.
27
Edge at a Glance
Friday, May 15, 2015
Stantec Inc. (STN-T C$34.52)
Anthony Zicha - (514) 350-7748 (Scotia Capital Inc. - Canada)
Q1/15 Results In Line
Event Pertinent Data
New Old
Rating: -- SO
Risk: -- Med
Target: 1-Yr -- $40.00
EPS15E $1.88 $1.89 EPS16E -- $2.10
New Valuation: --
Old Valuation: 19.0x P/E on 2016E
Key Risks to Target: Slower than anticipated recovery in residential and commercial construction; lower commodity prices
Div. (NTM) $0.42
Div. (Curr.) $0.42
Yield (Curr.) 1.2%
■ Stantec Inc. reported Q1/15 EPS of $0.40 in line with consensus estimate of $0.40 and above our estimate of $0.38.
Implications
■ Record Backlog Levels. Q1/15 backlog increased sequentially 11.0% to a record ~$2.0 billion and compares to Q1/14 backlog of $1.6 billion.
■ 2015 Guidance Maintained. The company continues to expect a moderate increase of 3% organic revenue growth in 2015.
■ Positive 2015 Outlook. We expect organic growth to be mainly supported by: 1) a healthy pipeline of projects within the Buildings and Infrastructure segment, and 2) an improving US economy driven by commercial real estate, transportation, and water treatment sectors.
■ Weak Energy Outlook. The company has revised its 2015 Energy & Resources organic growth outlook to retraction from stable. The company expects a decline in the Canadian Oil & Gas sector in Q2/15 with a stable outlook for the balance of 2015.
■ Maintained Target Price. To value Stantec Inc. shares we continue to use a 19.0x multiple on our 2016E EPS of $2.10. We believe Stantec's valuation multiple premium to its peer group average of 15.0x P/E (on 2015E) is justified given its superior EBITDA margin and ROE.
Recommendation
■ We are buyers of Stantec shares given the company's solid long-term growth outlook, earnings profitability, and potential earnings upside stemming from acquisitions.
The Mosaic Company (MOS-N US$45.56)
Ben Isaacson, MBA, CFA - (416) 945-5310 (Scotia Capital Inc. - Canada)
Key Risks to Target: Fertilizer supply/demand, crop and energy prices, weather
Div. (NTM) $1.10
Div. (Curr.) $1.10
Yield (Curr.) 2.4%
■ MOS announced a new $1.5B share buyback authorization, which includes the cancellation of ~$150M remaining in the existing program (i.e., a net increase of ~$1.35B).
Implications
■ The $1.5B buyback authorization has no specific expiration date, although management expects to complete the program over the next two to three years. Additionally, MOS intends to accelerate the repurchase of $0.5B of shares by September.
■ MOS has $2.5B of cash that should easily cover the initial $0.5B, and the remaining $1B is spread out over two to three years. MOS currently stands at 1.7x adjusted debt to EBITDA, which is within the 1.5x to 2.0x target range, so we don't expect MOS to alter its capital structure because of this buyback.
Recommendation
■ We think the move should lift the stock by 1% to 2%.
Mark Turner, MBA, P.Eng. - (416) 863-7484 (Scotia Capital Inc. - Canada)
Q1/15 Financials - All Focus Remains on Caribou
Event Pertinent Data
New Old
Rating: -- SP
Risk: -- Speculative
Target: 1-Yr -- $1.25
CFPS15E $0.05 $0.06 CFPS16E -- $0.22
New Valuation: --
Old Valuation: 50/50 mix of 5.5x 2016E EV/EBITDA & 0.8x Mine Site NAV8% + 1.0x Net Cash Items
Key Risks to Target: Commodity price, operating, and technical risks; environmental and legal risks
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
■ We view Q1/15 financial results generally in line with our estimates and consensus. Detailed production volumes had been previously released.
Implications
■ Q1/15 adjusted EPS loss of $0.01 was modestly below our $0.01 estimate and consensus of nil. OCFPS of $0.01 was in line with our estimate and consensus. The slight miss to our EPS estimate owes primarily to timing of sales, as payable metal sales were slightly below (2% to 6%) payable metal production in the quarter (see Exhibit 1).
■ Santander's site operating cash cost of US$0.39/payable pound of zinc equivalent production was a 5% increase QOQ but in line with our US$0.38 estimate. Increased head grades and recoveries QOQ offset modestly increased costs on a per-tonne-milled basis. An average site cost of $48.88/t milled was achieved, slightly above the 2014 average of $47.31/t, and at the low end of the 2015 guidance for US$48-$51/t.
■ Focus for the company and the stock remain on the Caribou mine and mill restart, which is on schedule for commissioning this quarter, in line with expectations. We look to the investor conference call for additional detail and the status of capex.
Recommendation
■ We rate TV SP with a $1.25/sh target price based on a 50/50 mix of 5.5x 2016E EV/EBITDA (implies $1.30 target price), and 0.8x P/NAV8% mine site assets plus 1.0x net cash items (implies $1.01 target price).
WPT Industrial REIT (WIR.U-T US$11.30)
Pammi Bir, CPA, CA, CFA - (416) 863-7218 (Scotia Capital Inc. - Canada)
Well Equipped for Higher Rates; Buy the Dip
Event Pertinent Data
Rating: SO
Risk: Med
Target: 1-Yr US$12.50
FFOPU15E: $1.04 FFOPU16E: $1.10
Valuation: 14x AFFO (F'16 estimate)
Key Risks to Target: Significant unitholder, inability to execute growth, rising interest rates
CDPU (NTM) $0.70
CDPU (Curr.) $0.70
Yield (Curr.) 6.2%
■ Q1 FFO $0.25 vs. $0.25 YOY, bit ahead of our $0.24E, in line w/Street.
Implications
■ Good start, with organic growth momentum expected to build. SP NOI on the IPO portfolio rose a solid 2.6% YOY, with the pace expected to persist through 2015. Moreover, an attractive organic NOI story continues to form with 54% of GLA rolling from 2016-2018 at below market rents that we estimate could add ~10% to AFFOPU.
■ It's hot out there: tougher to acquire, but quality always is. As domestic and global institutions continue to chase U.S. industrial, the acquisition climate remains heated, prompting us to slightly trim our 2015E acquisitions. That said, amid still active deal flow, we expect management to leverage its relationships for transactions and are encouraged by its disciplined focus on higher-quality additions.
■ Estimates tweaked; attractive growth profile intact. Our 2014A-16E AFFO CAGR is a solid 7.4%, in line with its CDN industrial comps and above our universe (5.6%), albeit below the U.S. industrial peers (11%).
Recommendation
■ SO, $12.50 target intact. With a healthy growth profile, best-in-class assets, and a visible path to a lower equity risk premium, we see current levels (13.9x 2015E AFFO/6.8% implied cap) as attractive for an early stage growth story that's well equipped to navigate rising bond yields. We recommend investors capitalize on recent weakness and build positions.
29
Intraday Flash
Thursday, May 14, 2015 @ 1:49:37 PM (ET)
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.
■ We are raising our rating on CNR to Sector Outperform on share price weakness, although our Q2 estimates are revised down.
Implications
■ Volume growth is coming in softer than expected for both Canadian rails, and we estimate that if current weekly average RTMs are maintained for the balance of Q2, CNR will be down 5% YOY and CP will be down 3% YOY. Our estimates are revised -4% for CNR and -2% for CP.
■ We have also taken a second look at our volume growth numbers for 2H/15 and have checked back expectations, mainly on the back of grain and CBR. As a result, our 2015 EPS estimates are revised down by ~3%-4% to $4.11 for CNR and $10.80 for CP - this brings us to the low end of guidance. While a lot will depend on volumes, we still see a better chance for CP to outperform vs. expectations due to a better cost/margin opportunity.
Recommendation
■ The reaction in share prices has been fairly violent as the sector is down ~14% from Q1 highs. The Canadian rails are now trading at 16x (CNR) and 17x (CP) our revised 2016E EPS. The next few weeks will remain tough for volumes and, admittedly, earnings may still have some downside. The biggest risk remains ongoing weakness on the macro front. That said, we think that falling share prices present a great buying opportunity for two phenomenal rail franchises. We are raising CNR to Sector Outperform and maintaining our Sector Outperform rating on CP.
Universe of Coverage
Price Rating Risk 1-Yr ROR
CNR-T C$73.95 SO Medium $85.50 17.4% CP-T C$214.40 SO Medium $242.00 13.6% WTE-T C$33.25 SP Medium $34.00 6.2%
Source: Company reports; Scotiabank GBM estimates.
YOY Change
CNR Total Carloads Week 18 Q2TD
Automotive 1.8% 7.7%
Coal -28.4% -28.5%
Grain -9.7% -15.3%
Food & Kindred Products -18.6% -18.2%
Forest Products -2.1% 2.5%
Metals & Minerals -1.1% 4.5%
Petroleum & Chemicals -9.8% -1.2%
Other Carloads -11.5% -15.4%
Intermodal 5.1% 7.0%
Total -3.6% -0.8%
CNR RTMs Week 18 Q2TD
RTMs -9.7% -7.6%
YOY Change
Exhibit 2 - CP - Q2TD Carloads and RTMs
Source: Company reports; Scotiabank GBM estimates.
■ We are reducing our volume forecast for both Canadian rails. On a Q2-TD basis, RTMs are down 7.6% and 4.6% for CNR and CP. While average weekly RTMs are still holding up, growth is negative due to tough lap periods. We knew the laps were getting tougher but there are some areas where volumes are underperforming expectations. Growth is negative in several areas, such as Grain and CBR, for both CNR and CP. Q2-TD volumes are detailed in Exhibits 1 & 2. If the average weekly RTMs remain close to current levels for the balance of Q2, CNR’s and CP’s Q2 RTM growth will be -5% and -3%, respectively – our estimates are revised down to -4% for CNR and -2% for CP as CP’s laps will be easier in June. We are also reducing our volume outlook for both rails in 2H/15 mainly in CBR and Grain. As a result, our Q2 EPS estimates are revised down to $1.05 for CNR and $2.57 for CP (Exhibits 3 & 4).
■ CP’s domestic IM volume is down. While IM remains very strong for CNR at +7%, CP has seen a couple of tough weeks on IM and the weakness is stemming in the domestic business (US mid-west to Alberta moves). While this could be transitory, we think that it is worthwhile to watch if this becomes a trend as it could signal weakness driven by the Alberta economy.
■ Coal remains resilient for CP, but could that change? On the other hand, CP’s coal volumes have remained very resilient vs. all other rails, which have seen significant declines. This is mainly due to the fact that majority of CP’s volumes are from Teck, which has been very resilient. However, with coal prices continuing to be weak, we worry that Teck’s volumes may see some decline.
■ Operations still running strong for both rails. Operating metrics are coming in solid for both Canadian rails but especially for CP, where they are outperforming even last year’s strong metrics. While it is tough to completely offset the impact of weak volumes on margins, both rails are strong operators and should downshift resources to reduce the impact on margins. Nonetheless, our OR estimates are adjusted up a little to 61.8% and 60.1% for CNR and CP in 2015. The C$ should still be a tailwind on a YOY basis (down 11% YOY in Q2); however, it has appreciated since the lows reached during Q1 so the tailwind is slower than it was in Q1. On the flipside, lower share prices should also provide a tailwind on stock-comp expense in Q2 if we assume that shares remain at current levels.
31
Exhibit 3 - CNR - Earnings Model
Source: Company reports; Scotiabank GBM estimates.
Canadian National Railway Co
CNR
1-Year Target: $85.50 Last Price: $73.93
1-Year Return: 17.4% Shares O/S: 814
Market Cap: $60,201
NTM Dividend: $1.31
FY End: Dec-31
Rating: Sector Outperform Risk: Medium
Valuation: Equally w td. DCF and 17.5x NTM EPS (one-year fw d.)
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.
Absolute Software Corporation (ABT-T C$9.87)
Initiatives Aimed at Improving Sales Execution
Paul Steep, MBA - (416) 945-4310 (Scotia Capital Inc. - Canada) [email protected]
Udhay Gill, MBA - (416) 863-7993 (Scotia Capital Inc. - Canada)
■ Absolute reported their Q3 results with the firm reporting sales contracts of $21.2M and cash flow from operations of $5.3M compared with our estimates of $23.7M and $6.0M, respectively.
Implications
■ In our view, Absolute's Q3/15 results continued to reflect progress in working to improve the consistency of sales execution as the firm continues to implement a new go-to-market strategy. The firm's results were partially impacted due to seasonality, as Q3 is historically a slower sales period for the firm.
■ We remain of the view that F2015 is a transition year for the firm as management seeks to implement a more focused strategy. The firm is in the process of implementing a series of sweeping changes to its operations that has it more clearly focusing its sales, product and marketing efforts to take advantage of Absolute's core technology assets.
Recommendation
■ Our recommendation remains Sector Outperform given that Absolute is positioned to continue to execute on a standalone basis or potentially as a unit of a larger organization. Catalysts for the firm relate to Absolute's ability to leverage its partnerships, ongoing client wins, and release of its unified product suite.
Qtly EPS (FD) Q1 Q2 Q3 Q4 Year P/E Capitalization Market Cap (M) $458 Net Debt + Pref. (M) $-65 Enterprise Value (M) $393 Shares O/S (M) 46
Float O/S (M) 41
ScotiaView Analyst Link
2014A $0.03 A $0.01 A $0.03 A $0.02 A $0.08 83.4x 2015E $0.01 A $0.05 A $0.06 A $0.04 $0.15 64.8x 2016E $0.05 $0.05 $0.02 $0.05 $0.18 56.3x 2017E $-0.04 $0.04 $0.07 $0.06 $0.13 74.7x
■ In our view, the firm’s Q3/15 results reflected slightly weaker performance compared to expectations in terms of Sales Contracts and Cash Flow from Operations (see Exhibit 1). Absolute’s sales contracts increased 3% given the firm’s ongoing efforts to improve sales execution and continued demand in the combined corporate and healthcare verticals (see Exhibit 2). The company's device management and data security products increased 15% year over year and Theft Management increased 11%. The firm’s device management and data security products represented ~38% of commercial sales contracts, in line with the prior year (see Exhibit 3).
■ In the quarter, Absolute reported commercial sales contracts in North America increased 10% to $19.6 million (up from $16.5M in Q3/14) based on strength of the firm’s Computrace sales (up 9% from Q3/14). The firm reported a 20% decline in international sales contracts (down 24% for international commercial sales contracts).
■ Ongoing shareholder value initiatives. Our expectation is that Absolute will continue to return capital to shareholders in the form of share repurchases and its dividend. Management indicated that in the medium to long term it is still looking to utilize cash to pursue acquisitions in adjacent markets or to further enhance its technology offerings. Under the current buyback beginning in July 2014, the company has repurchased 328,801 shares for ~$2.2 million representing 8.6% of the maximum under the buyback plan (negligible amount of shares repurchased in Q3). Our expectation is that Absolute will continue to redeploy cash toward internal product investment and selectively repurchasing stock. At the end of Q3/15, the firm had net cash of $1.87/share vs. $1.71/share in Q3/14 and $1.82/share in Q2/15.
■ Efforts to improve sales execution. The company continues to invest in growing its sales organization and has evolved its account coverage model over the past six months. Absolute has assigned a greater number of client renewals to its inside sales team enabling outside sales reps to better target new opportunities.
■ Continued focus on new partnership agreements. Absolute announced a number of new partnership agreements in Q3 with a strong focus on Latin America. New partnerships include agreements with: Latin American reseller GM Security Technologies, Miami-based device maker YEZZ, rugged computer maker Getac, Mexico-based electronics manufacturer Lanix, and mobile device manufacturer Prestigio.
■ Management appointments. In the quarter, the firm named former McAfee CTO Christopher Bolin as Chief Product Officer. The position will be responsible for Absolute’s global product strategy. Absolute also announced the appointment of Thierry Regnier as Vice President, Asia Pacific and Japan. Mr Regnier was formerly a Dell global alliances and partner marketing director for Asia Pacific. The firm announced Art Coviello, former Chairman of RSA and Executive Vice President of EMC, as Advisor to the company.
■ Revising estimates. We have updated our estimates to reflect the Q3/15 results and details from the firm’s conference call (see Exhibit 4). The company reiterated its guidance outlook for F2015 indicating the firm continues to expect sales contracts and cash flow from operations to increase over F2014 levels.
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.
Africa Oil Corp. (AOI-T C$2.63)
Q1 - Near-Term Upside via EWT and Drilling
Gavin Wylie - (403) 213-7333 (Scotia Capital Inc. - Canada) [email protected]
Jenna Halwa, M. Econ - (403) 213-7762 (Scotia Capital Inc. - Canada)
New Valuation: Based on our risked NAV of $4.30/share
Old Valuation: Based on our risked NAV of $4.68/share
■ Africa Oil's Q1 update reiterated the company’s increasing confidence around current discovered resources, with what appears to be a growing positive bias with incremental test data and recent drilling results.
Implications
■ Africa Oil remains on track to submit a Field Development Plan by year-end 2015 on the back of additional technical work completed over the coming quarters.
■ Recent success on its Amosing-1 & 2A (5,600-6,000 bbl/d rates) extended well tests (EWT) is helping to further de-risk the existing 2C resources (~59 mmbbl net) and potentially look to increase recovery factors when combined with its ongoing special core analysis.
■ We see a potential 2H/15 contingent resource update as a potential near-term catalyst as it continues to move the region well above the commercial threshold.
Recommendation
■ We reiterate our Sector Outperform rating on Africa Oil and have lowered our one-year target price to $4.50 (vs. $5.00) per share based on our revised risked NAVPS estimate of $4.30 (vs $4.68).
■ We see Africa Oil entering into an interesting period that could hold several high-impact items including: results at Amosing-4; results from the EWT at Amosing; commencing an EWT at Ngamia; and pipeline definition and further clarity on the capital gains tax.
Qtly CFPS (FD) Q1 Q2 Q3 Q4 Year P/CF Capitalization Market Cap (M) $939 Net Debt + Pref. (M) $-440 Enterprise Value (M) $872 Shares O/S (M) 430
Float O/S (M) 430
ScotiaView Analyst Link
2013A $0.00 A $-0.01 A $-0.01 A $-0.02 A $-0.04 n.m. 2014A $-0.01 A $-0.01 A $-0.01 A $-0.01 A $-0.03 n.m. 2015E $0.00 A $0.00 $0.00 $0.00 $0.00 n.m. 2016E $0.00 $0.00 $0.00 $0.00 $-0.01 n.m.
■ Africa Oil’s Q1 update reiterated the company’s increasing confidence around current discovered resources, with what appears to be a growing positive bias with incremental test data and recent drilling results. In our view, the company’s recent success on its Amosing-1 & 2A (5,600-6,000 bbl/d rates) extended well tests (EWT) is helping to further de-risk the existing 2C resources (~59 mmbbl net) and potentially look to increase recovery factors when combined with its ongoing special core analysis. Current 2C resources are estimated at 26%, but could increase to >30% as more technical data is incorporated into the assessment, which would see gross resources grow beyond the current >600 mmbbl (~300 mmbbl net). In addition, the previously announced results of Ngamia-7 point toward a potential eastern extension of the Ngamia pool that is currently not reflected in the 2C resources of 170 mmbbl net. That said, we see a potential 2H/15 contingent resource update as a potential near-term catalyst as it continues to move the region well above the commercial threshold.
■ Africa Oil remains on track to submit a Field Development Plan by year-end 2015 on the back of additional technical work completed over the coming quarters. The partners and governments of Uganda and Kenya have been working jointly with a third-party advisor on a potential regional export pipeline that could have a route decided as soon as Q3/15. We see this as another important milestone toward full field development of what could be a multi-hundred thousand barrel per day region.
■ We reiterate our Sector Outperform rating on Africa Oil and have lowered our one-year target price to $4.50 (vs. $5.00) per share based on our revised risked NAVPS estimate of $4.30 (vs $4.68). Our revised NAV reflects the company’s updated balance sheets and dilution from its recent equity raises that added 54 million common shares.
■ Based on our revised 2C NAV of $4.70 (vs. $5.30), Africa Oil is trading at an attractive 2C P/NAV ratio of 61%. In our view, the valuation gap will likely close as the company delivers on key milestones as it moves to first oil. (i.e., FDP submission at the end of 2015).
■ Upcoming Catalysts – We see Africa Oil entering an interesting period that could hold several high-impact items and significantly add to the company’s operating momentum. The most important catalysts are expected to be as follows:
■ Drilling Amosing-4. The well is currently drilling ahead to test the SE extension toward the Ekosowan well that although tight had over 900 m of additional oil shows. With the additional 3D seismic over the core South Lokichar being processed, new prospects are also being firmed up, including the Amosing North prospect (potential pool extension well updip of Ngamia). Evaluation of the Etom seismic has also identified the initial well was drilled on a structurally low Graben zone that is situated between two large prospects that could be moved forward rather quickly to drill-ready.
■ Next EWT Milestone in Q2/2015. We anticipate the next major catalyst for the company will be EWT results at Amosing. Initial testing was pre-released with Amosing-1 and Amosing-2A flowing 31 to 38 degree API dry oil naturally at a maximum rate of 5,600 bbl/d from five zones and 6,000 bbl/d from four zones (of five completed zones), respectively. Static pressure results also indicate connectivity between the Amosing 1, 2, 2A and 3 wells in multiple zones.
■ Ngamia EWT – Further investigating reservoir deliverability. Also in Q2/15E, Africa Oil will kick off its EWT at Ngamia with initial flow testing to begin around mid-year. We will be looking for flow rates to be on par with Amosing and for results to indicate pressure communication exists between the wells to further define the areal extent of the field.
■ Pipeline Definition. We will also be looking for pipeline development plans to move forward as we see pipeline sanction as vital for the company to position the South Lokichar for development by the end of 2016.
40
■ Capital Gains Tax. News on potential reductions to the capital gains tax could begin to surface as early as June with possibility for passage prior to year-end. That said, we remain cautious on the development given the potential for delays or the government to look to increase its take through other means.
■ Balance Sheet – Cashed up. At quarter-end, Africa Oil had cash of $187.4M and net working capital of $53.2M. The company also executed a non-brokered private placement of 53.6M shares at C$2.31 per share for gross proceeds of C$121.6 (US$100), which should allow the company to fully fund capital spending programs in 2015 and into 2016 based on spending of ~$200M in 2015 and 2016, respectively. That said, we anticipate additional funding will be needed prior to year-end 2016 and potentially earlier should the partners elect to increase appraisal and exploration activity.
41
Exhibit 1 - AOI - NAVPS Summary
Source: Company reports; Scotiabank GBM estimates.
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.
Boardwalk REIT (BEI.UN-T C$58.98)
Q1 Glance: Good Start; Guidance Boosted by 2%
Mario Saric, CPA, CA, CFA - (416) 863-7824 (Scotia Capital Inc. - Canada) [email protected]
Trevor Thompson-Harry - (416) 863-7986 (Scotia Capital Inc. - Canada)
Key Risks to Target: Alberta condo oversupply, rising interest rates
CDPU (NTM) $2.13
CDPU (Curr.) $2.04
Yield (Curr.) 3.5%
Event ■ Reported FFOPU was $0.85 vs. $0.76 YOY, above our $0.81 and $0.82
consensus (range=$0.80-$0.86). SP NOI was +4.9% YOY (vs. +2.9% in Q4); revenue +3.2% (3.7%) & expenses +0.6% (5.0%).
Implications
■ Good start to the year. The positive variance was roughly evenly split between higher NOI and lower deferred financing costs, with the positive NOI surprise coming from lower-than-expected expenses, as top-line revenue growth came in modestly below our forecast, see Ex 1. Calgary SP NOI was a solid +10.2% YOY (+9% in Q4) & Edmonton was +10.4% (+4.9%); Fort Mac was -13.4% (-12.3%). Total portfolio/Alberta occupied rent was +0.7%/+1% QOQ while market rent was +0.2%/+0.2%, respectively. Total portfolio revenue was +0.1% QOQ. NOI margin was +170bp YOY to 60.1%. BEI rental revenue cycle is unchanged QOQ.
■ BEI 2015 FFOPU guidance is boosted by 2% (mid-point); 1%-4% SP NOI target intact (vs. our 1.8%). The mid-point of the revised $3.48-$3.65 FFOPU guidance is ~1% above previous $3.52 consensus (we're also at $3.52). Underlying operating assumptions are unchanged.
■ Disclosed NAVPU is +$0.55 (0.8%) QOQ to $69.81. IFRS cap rate is -2bp QOQ @ 5.46% on modest declines in SW Ontario and Quebec City. Forecast IFRS NOI was +0.3% QOQ to $317.3M.
Recommendation
■ Full update post c/c on Fri, May 15 @ 11:00am ET. #1-888-231-8191.
Qtly FFOPU (FD) Q1 Q2 Q3 Q4 Year P/FFO Capitalization
Market Cap (M) $2,809 Net Debt + Pref. (M) $2,030 Enterprise Value (M) $4,839 Units O/S (M) 48
Float O/S (M) 36
ScotiaView Analyst Link
2013A $0.75 A $0.81 A $0.86 A $0.80 A $3.22 18.6x 2014A $0.76 A $0.86 A $0.91 A $0.87 A $3.40 18.1x 2015E $0.81 $0.90 $0.93 $0.88 $3.52 16.7x 2016E $0.86 $0.95 $0.99 $0.94 $3.75 15.7x
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.
Canadian Energy Services & Technology
Corp.
(CEU-T C$5.61)
First Look: Q1 Beat, Gaining Market Share in U.S.
Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759 (Scotia Capital Inc. - Canada) [email protected]
Sam Devlin, CFA - (403) 213-7332 (Scotia Capital Inc. - Canada) Barry Liang - (403) 213-7346
Key Risks to Target: Commodity pr ices, lack of acqu is ition synergy, labour supply, access to supp lies, weather, contract r isk, and FX .
Div. (NTM) $0.33
Div. (Curr.) $0.33
Yield (Curr.) 5.9%
Event ■ EBITDA of $39.2M was 11% ahead of our $35.4M estimate.
Implications
■ Margin beat highlights resilient business model, but real story is growing U.S. market share (in both business lines). Q1 EBITDA came in 19% lower sequentially, which compares favourably to our OFS coverage universe at -41%. The beat was driven by lower-than-expected G&A, which led to a 145 bps beat on EBITDA margin (-57 bps QOQ) despite revenue coming in line. Interestingly, management highlighted flat U.S. drilling fluid revenue YOY. Key customers in the Eagle Ford and Marcellus / Utica remained relatively active during the quarter, allowing CEU to increase market share in the country to 10% (in line, but up from 9% QOQ). On the specialty chemicals side, management notes JACAM's overall sales grew QOQ despite a drop-off in frac chemistry demand. Our read is that CEU's differentiated product offering and voluntary price concessions are allowing them to hold accounts and pick up market share despite the macro environment.
■ Limited outlook. Management notes they are offering price discounts across all business lines, which will impact revenue and margins going forward. That said, CEU expects specialty chemicals to grow in the downturn as they look to pick up market share in a growing market.
Recommendation
■ We will update our estimates post 11:00am ET call. 1-877-291-4570.
Qtly EBITDA (M) Q1 Q2 Q3 Q4 Year EV / EBITDA
Capitalization Market Cap (M) $1,273 Net Debt + Pref. (M) $376 Enterprise Value (M) $1,648 Shares O/S (M) 227
Float O/S (M) 227
ScotiaView Analyst Link
2013A $24 A $17 A $33 A $37 A $110 17.7x 2014A $44 A $31 A $54 A $48 A $178 10.2x 2015E $35 $20 $29 $36 $120 13.4x 2016E $39 $30 $38 $48 $155 10.6x
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.
Canadian Tire Corporation Limited (CTC.A-T C$127.65)
Marketing Machine Drives Q1/F15 Sales
Patricia A. Baker, MBA, PhD - (514) 287-4535 (Scotia Capital Inc. - Canada) [email protected]
Jean Marc Ayas - (514) 287-3626 (Scotia Capital Inc. - Canada)
Key Risks to Target: H igher than expected Discre t. Spend, Unexpected improvement in Unemployment; Improvement in net wr ite -off rate
Div. (NTM) $2.15
Div. (Curr.) $2.03
Yield (Curr.) 1.7%
Event
Pertinent Revisions
New Old
EPS15E $7.98 $8.19 EPS16E $8.78 $8.84
■ CTC Q1 EPS $0.88 in line with consensus, flat YOY. Two heroes for CTC.A start to F15: 1) top-line growth, 2) record CTFS performance.
Implications
■ Revenue in retail segment -3.7% on lower gas prices, but ex-gas +1%. SSS growth strong across all banners: CTR +4.7%, FGL +8.6%, and Mark's +5.5%, due to exceptional marketing campaigns and CTR strength in Automotive and Living. Weather was supportive of seasonal merchandise and early spring sell-through in West. At Mark's, strong sales in denim more than offset soft industrial wear sales.
■ Retail GM $ +3.2% YOY, related to Petroleum. Ex-Petroleum, GM rate improved 52 bps, on + mix shift, partially offset by clearances at Mark's and C$ depreciation.
■ Retail SG&A expenses +4.8% on higher personnel costs relating to digital strategy, greater number of corporate stores at FGL and higher D&A, with partial offset from lower back-office costs. Cons. EBITDA expanded 15.5% YOY to $245.3M, ahead of $239M forecast.
■ CTFS revenue and GAAR up +7.5% / +6.8% YOY. GM rate +245 bps on higher balances and yield. Pre-tax income up an impressive 22.6%.
Recommendation
■ These results mark a very good start to F15 with solid momentum and a good balance. Execution is starting to move in a great direction, keeping pace with the efforts well evidenced in CTC's marketing strategies. 2015 and 2016E EPS adjust modestly to $7.98 and $8.78, TP maintained.
Qtly EPS (FD) Q1 Q2 Q3 Q4 Year P/E Capitalization Market Cap (M) $9,886 Net Debt + Pref. (M) $2,980 Enterprise Value (M) $11,668 Shares O/S (M) 77
Float O/S (M) 71
ScotiaView Analyst Link
2013A $0.90 A $1.92 A $1.86 A $2.35 A $7.03 14.1x 2014A $0.88 A $2.12 A $2.17 A $2.65 A $7.82 15.7x 2015E $0.88 A $2.15 $2.08 $2.87 $7.98 15.6x 2016E $0.99 $2.35 $2.28 $3.16 $8.78 14.4x
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.
CanElson Drilling Inc. (CDI-T C$4.00)
Q1 Beat on Margin Outperformance
Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759 (Scotia Capital Inc. - Canada) [email protected]
Sam Devlin, CFA - (403) 213-7332 (Scotia Capital Inc. - Canada) Barry Liang - (403) 213-7346
Key Risks to Target: Commodity prices, labour supply, political risk, weather, and FX.
Div. (NTM) $0.12
Div. (Curr.) $0.12
Yield (Curr.) 3.0%
Event
Pertinent Revisions
New Old
EBITDA15E $42 $41 EBITDA16E $49 $48
New Valuation: 9.1x our 2016 EV/EBITDA estimate.
Old Valuation: 9.4x our 2016 EV/EBITDA estimate.
■ EBITDA of $18.4M was 10% ahead our $16.6M estimate.
Implications
■ Solid Q1 driven by margin resiliency. Revenue was in line with our estimate as better Canadian day rates (+7% our estimate and 5% lower QOQ) were offset by a 5% miss in the United States. NAM operating days were in line. Management notes base rig rates averaged 10% lower QOQ and currently sit 15% below Q4 levels. CDI also revised its U.S. performance-based contracts to daywork which contributed to lower day rates (but limited impact on cash margin). Cost control efforts led to the beat as gross margin came in 330 bps above our estimate.
■ Improving outlook. In Canada, CDI has maintained relatively strong activity in AB and BC during break-up (six currently active rigs); Customer commentary also suggests an earlier start in SK and MB than previously thought. In the U.S., CDI has six active rigs in the Permian, and a seventh collecting standby. In North Dakota, the outlook appears to be improving as customers are looking to increase activity post break-up. In Mexico, minimal activity levels are expected for the rest of 2015 (one service rig currently active). Capex for 2015 was increased slightly (+$2.1M) for maintenance and upgrade spending.
Recommendation
■ SP rating unchanged. While we like CDI’s proactive management and best-in-class balance sheet, the stock trades at a 0.8x premium to Canadian peers on 2016E EV/EBITDA.
Qtly EBITDA (M) Q1 Q2 Q3 Q4 Year EV / EBITDA
Capitalization Market Cap (M) $393 Net Debt + Pref. (M) $48 Enterprise Value (M) $441 Shares O/S (M) 98
Float O/S (M) 98
ScotiaView Analyst Link
2013A $27 A $9 A $23 A $26 A $86 8.2x 2014A $32 A $16 A $28 A $29 A $105 4.3x 2015E $18 A $4 $8 $11 $42 9.9x 2016E $13 $7 $12 $17 $49 8.1x
Exhibit 3 – Forward Year EV/EBITDA - Consensus Estimates
Source: Bloomberg; Company reports; Scotiabank GBM estimates.
2.5x
3.5x
4.5x
5.5x
6.5x
7.5x
8.5x
2.5x
3.5x
4.5x
5.5x
6.5x
7.5x
8.5x
Aug
.11
Oct
.11
Dec
.11
Feb
.12
May
.12
Jul.1
2
Sep
.12
Dec
.12
Feb
.13
Apr
.13
Jul.1
3
Sep
.13
Nov
.13
Jan.
14
Apr
.14
Jun.
14
Aug
.14
Nov
.14
Jan.
15
Mar
.15
CDI GBM Drillers - 1 σ CDI + 1 σ CDI
Exhibit 4 – Comparable Company Analysis
Notes: 1. Number of analysts who make up consensus (i.e., Scotiabank GBM does not cover the name) or our rating (*Howard Weil). 2. Adjusted for stock-based compensation and non-recurring items. 3. Figures for U.S.-listed companies are in U.S. dollars. Analyst legend: VV = Vladislav Vlad, BH=Blake Hutchinson, DW=Dave Wilson Ratings legend: FS = Focus Stock, SO = Sector Outperform, SP = Sector Perform, SU = Sector Underperform. Source: Bloomberg; Company reports; FactSet; Scotiabank GBM estimates (CDI, ESI, PD, SVY, TDG, WRG); Howard Weil estimates (r atings and targets only for BAS, HP, NBR, PTEN).
Average - United States 1.8% 9.6x 8.5x 5.1x 6.2x 23.6x nmf
Premium Valuation
■ We are maintaining our one-year price target of $4.50. Our one-year target price is predicated on 9.1x our 2016 EV/EBITDA estimate and is supported by comparative valuation. Our target price multiple compares with our one standard deviation historical trading band of 3.8x to 6.1x (see Exhibit 3).
■ CanElson is currently trading at 8.1x 2016E EV/EBITDA versus its Canadian peer group average of 7.3x (see Exhibit 4).
51
Exhibit 5 – Operational Summary
Source: Company reports; Scotiabank GBM estimates.
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.
CEMEX SAB de CV (CX-N US$10.26)
(CEMEX CPO-MX MXN
15.46)
New Brownfield Project in the Philippines; In Line
Key Risks to Target: Downturn in the United States, market risk on convertible debt currently in -the-money
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
Event ■ Cemex will invest US$300 million in a new 1.5M ton integrated cement
production line at its Solid Plant in the Philippines.
Implications
■ The new production line in-line with our replacement cost analysis. In our note “A Deep Dive into Replacement Cost Analysis: CPAC and CX Appear Undervalued” we estimate the replacement cost per million tons of yearly cement installed capacity for emerging markets at US$200 million for brownfields, the same cost per ton as CX's new line.
■ Why the Philippines? Adding exposure to emerging markets. The cement market in the Philippines has benefited from favourable economic conditions such as stable inflation and mortgages rates. In addition, healthy remittances continue to support activity in the residential sector. Cement volumes grew 8% and 11% YOY in 2013 and 2014, respectively. Prices were up 5% and 3% in local currencies in 2013 and 2014, respectively. The outlook for the industry is also positive: CX expects volumes to increase 14% YOY for 2015.
■ EBITDA margin in the Asia region was 23.3% in 2014, just below that of LatAm excluding Mexico (33.1%) and Mexico (31.4%).
■ Replacement costs can vary significantly among countries and according to whether projects are greenfield or brownfield (Ex. 1).
Recommendation
■ We rate CX shares Sector Outperform.
Qtly EBITDA (M) Q1 Q2 Q3 Q4 Year EV / EBITDA
Capitalization Market Cap (M) $12,757 Net Debt + Pref. (B) $16 Enterprise Value (B) $30 Shares O/S (M) 1,244
Float O/S (M) 1,182
ScotiaView Analyst Link
2012A $567 A $706 A $734 A $625 A $2,632 9.7x 2013A $521 A $729 A $705 A $688 A $2,643 11.0x 2014A $535 A $747 A $767 A $701 A $2,740 10.7x 2015E $611 $845 $944 $627 $3,027 10.0x
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.
Cequence Energy Ltd. (CQE-T C$0.94)
Q1 Cash Flow Behind; Montney Drilling on Hold
Cameron Bean - (403) 218-6786 (Scotia Capital Inc. - Canada) [email protected]
Erik Kuhn, CFA - (403) 213-7349 (Scotia Capital Inc. - Canada)
Key Risks to Target: Oil and natural gas prices; Drilling program success.
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
Event
Pertinent Revisions
New Old
CFPS15E $0.17 $0.18
■ Cequence announced Q1/15 results.
Implications
■ Q1/15 Cash Flow Behind. Production of 11.2 mboe/d was modestly behind CQE's guidance of 11.5 mboe/d, while cash flow of $8.3M ($0.04/sh) was ~17% behind guidance ($10M) and ~15% behind our forecast on moderately higher cash costs (opex and transportation; G&A was lower than expected), lower production and lower realized pricing. Capital Expenditures of $22.6M ($19.6M net of disposition) were in line with expectations as CQE completed its 13 well winter drilling program and Simonette facility expansion.
■ Montney Drilling on Hold. CQE's two recent 15-15 pad Montney wells averaged 6 mmcf/d and 32 bbl/mmcf over their first 30 days. These early results are above our type curve (see our March 6 note) and suggest the possibility of improved productivity from the play. However, with continuing commodity price weakness, CQE is deferring further Montney drilling until the outlook improves. The company plans to resume drilling in the summer with a Dunvegan oil well (50% WI).
■ Guidance Confirmed. CQE confirmed its $60M capital budget and production guidance of 11.5 mboe/d, however with Montney drilling on hold and the company managing production levels due to TCPL issues and weak gas prices, we believe future revisions are possible.
Recommendation
■ We maintain our SP rating.
Qtly CFPS (FD) Q1 Q2 Q3 Q4 Year P/CF Capitalization Market Cap (M) $219 Net Debt + Pref. (M) $81 Enterprise Value (M) $300 Shares O/S (M) 233
Float O/S (M) 156
ScotiaView Analyst Link
2013A $0.05 A $0.07 A $0.05 A $0.07 A $0.25 7.3x 2014A $0.11 A $0.09 A $0.06 A $0.06 A $0.33 3.2x 2015E $0.04 A $0.04 $0.04 $0.05 $0.17 5.5x 2016E $0.20 4.8x
Value Buildup $925,662 $587,476 $2.52 $488,900 $2.10
Target Price $1.15
Notes:
1. Assumes 89.0 net sections (86% prospective) and 3 wells per section.
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Blowdown NAV NAV + Risked Upside NAV+ Unrisked Upside
PDP NAV
1P NAV
2P NAV
Simonette Upper Montney
Simonette Dunvegan
Simonette Wilrich/Falher
Share Price:
$0.94
Target Price: 0.9x
1P NAV
Notes:1) The "Blow Down" includes all undeveloped land in base NAV, while other cases include portion not considered in upside evaluations.2) The "Risked Upside" and "Unrisked Upside" cases both account for PV of the Drill Program;3) See our NAV Plus Risked Upside Methodology for further details.
Target Price and Valuation Rationale
■ We have updated our NAV and risked upside estimates for CQE’s year-end 2014 disclosures. We are maintaining our Sector Perform rating and one-year target price to $1.15/share. Our target price is set at 0.9x our estimate of CQE’s year-end 2014 1P NAV.
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.
Cervus Equipment Corporation (CVL-T C$18.12)
Q1/15 Results - First Take
Christine Healy, CPA, CA - (416) 863-7902 (Scotia Capital Inc. - Canada) [email protected]
Event ■ CVL reported a Q1/15 loss of $0.18/share, below our forecast loss of
$0.09/share and consensus loss of $0.05/share. When we adjust for an unrealized FX loss, we estimate adj. EBITDA of $5.5M and an adj. loss of $0.10/share, which is fairly in line with our estimates. While revenue beat our forecast by 14%, this was offset by modestly lower gross margin and higher SG&A and finance expenses.
Implications
■ Agricultural beat. In Q1/15, segment sales of $140.1M were 19% above our forecast and grew 36% YoY. The growth was driven by acquisitions (same-store sales rose 1% YoY). Segment EBITDA of $3.6M was above our estimate of $1.2M mainly due to higher sales.
■ Transportation and Commercial & Industrial missed. Combined segment sales of $98.3M were 8% above our forecast and 54% higher than in Q1/14 due to the POI acquisition (same-store sales declined 19% YoY). Combined segment adj. EBITDA of $1.9M missed our estimate of $4.1M due to lower gross margin and higher SG&A costs, which was driven largely by the acquisition of POI. Overall same-store gross margin was 26.4% in Q1/15 compared with 25.2% in Q1/14.
■ We will update model post-call. CVL will host a call today at 11:00 am EDT to discuss results. Dial-in: 1-888-231-8191 or 647-427-7450.
Recommendation
■ We maintain our one-year target price of $19.00/share and our SP rating.
Qtly Adj. EPS (FD) Q1 Q2 Q3 Q4 Year P/E Capitalization Market Cap (M) $293 Net Debt + Pref. (M) $122 Enterprise Value (M) $415 Shares O/S (M) 16
Float O/S (M) 11
ScotiaView Analyst Link
2013A $-0.01 A $0.53 A $0.56 A $0.39 A $1.47 16.3x 2014A $-0.05 A $0.35 A $0.49 A $0.37 A $1.15 17.8x 2015E $-0.09 $0.37 $0.58 $0.53 $1.41 12.9x 2016E $1.69 10.7x
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.
Chemtrade Logistics Income Fund (CHE.UN-T C$21.08)
First Take: Q1/15 in Line
Benoit Laprade, CPA, CA, CFA - (514) 287-3627 (Scotia Capital Inc. - Canada) [email protected]
Luis Pardo Figueroa - (514) 287-3613 (Scotia Capital Inc. - Canada)
Key Risks to Target: Lower-than-expected GDP, lower-than-expected prices and volumes
CDPU (NTM) $1.20
CDPU (Curr.) $1.20
Yield (Curr.) 5.7%
Event
Pertinent Revisions
New Old
DCPU15E $2.15 $2.17 DCPU16E $2.19 $2.17
■ Chemtrade reported adj. EBITDA of $58.1M, compared to our estimate of $56.7M and the consensus forecast of $57.6M. Distributable cash after maintenance capex came in at $41.7M ($0.61/unit), which compares to our estimate of $33.5M ($0.49/unit).
Implications
■ The EBITDA variance stems from higher-than-expected SPPC ($3M), WSSC ($2M) and International ($1M) results, partially offset by higher-than-expected corporate costs ($5M). The DCPU beat was helped by the timing of maintenance capex, which was very low in the quarter at $3.7M ($50M guidance for 2015 remains).
■ Chemtrade's balance sheet remains in solid shape at 2.4x Sr Net Debt to LTM EBITDA and Total Debt/LTM EBITDA of 3.6x (including two series of "in-the-money" converts maturing in 2017 and 2018). We continue to believe the company has the financial flexibility to execute on acquisitions should opportunities arise.
■ Distributions remain in good shape as well. The company's payout ratio for the quarter came in at 49%, helped by lower maintenance capex. We forecast payout ratios of 55% for all of 2015E and 2016E.
Recommendation
■ We reiterate our SP rating and $23.00 target. We continue to like Chemtrade's stable/low risk business model, solid operational performance, and sustainable dividend, supported by a low payout ratio and risk sharing contracts.
Qtly DCPU (FD) Q1 Q2 Q3 Q4 Year Price/DCPU
Capitalization
Market Cap (M) $1,446 Net Debt + Pref. (M) $868 Enterprise Value (M) $2,313 Units O/S (M) 69
Float O/S (M) 69
ScotiaView Analyst Link
2013A $0.65 A $0.51 A $0.57 A $0.08 A $1.81 10.8x 2014A $0.26 A $0.62 A $0.83 A $0.38 A $2.08 9.9x 2015E $0.61 A $0.55 $0.54 $0.45 $2.15 9.8x 2016E $0.54 $0.58 $0.58 $0.49 $2.19 9.6x
■ Chemtrade reported adj. EBITDA of $58.1M, compared to our estimate of $56.7M and the consensus forecast of $57.6M. This compares to adj. EBITDA of $23.8M during the same period last year and $61.5M last quarter.
■ The EBITDA variance with our estimates was driven by higher-than-expected SPPC ($3M), WSSC ($2M) and International ($1M) results, partially offset by higher-than-expected corporate costs ($5M).
■ Distributable cash after maintenance capex came in at $41.7M ($0.61/unit), which compares to our estimate of $33.5M ($0.49/unit), the $14.3M ($0.26/unit) reported last year and the $24.4M ($0.38/unit) reported last quarter.
■ The variance with our distributable cash estimate was mainly driven by lower-than-expected maintenance capital expenditures ($8.8M).
■ SPPC revenue came in at $160.7M, 17% higher than the same period last year, while adj. EBITDA was $9.8M higher at $40.8M. This increase in revenue and EBITDA was driven by the contributions from the General Chem acquisition. Recall, Q1/14 only included 2 months of profits from General Chem. Additionally, the stronger US$ contributed ~$3.6M to the segment’s results.
■ WSSC reported revenue and adj. EBITDA of $108.3M and $29.1M, respectively. This compares with revenue and adj. EBITDA of $87.8M and $24.9M last year. This year’s improvement was driven mostly by the inclusion of a full Gen Chem quarter. The stronger US$ contributed ~$2.4M during the quarter.
■ International reported revenue of $57.0M and EBITDA of $4.8M compared to revenue $40.5M and EBITDA $3.4M during the same period last year. This year’s improvement was driven by increased volumes and higher prices for sulphuric acid in international markets. The stronger US$ had a positive impact on results of $0.8M.
66
■ Corporate costs came in at $27.3M vs. $34.9M last year. Excluding unrealized FX gains/losses, net finance costs and income taxes, this quarter’s corporate expense were $18.8M lower than last year due mostly to the $17.7M in costs related to the Gen Chem acquisition incurred in Q1/14. Management guidance for corporate costs (excluding unrealized FX losses) remains ~$45M per annum.
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.
Chorus Aviation Inc. (CHR.B-T C$5.89)
Shares in Fair Value Range
Turan Quettawala, MBA, CFA - (416) 863-7065 (Scotia Capital Inc. - Canada) [email protected]
Milan Posarac - (416) 863-7532 (Scotia Capital Inc. - Canada) Arnav Gupta - (416) 863-7996 (Scotia Capital Inc. - Canada)
Key Risks to Target: Lower-than-expected traffic and yield improvement, increased competition.
Div. (NTM) $0.48
Div. (Curr.) $0.48
Yield (Curr.) 8.2%
Event
Pertinent Revisions
New Old
Target: 1-Yr $5.75 $6.00
EBITDAR15E $300 $330 EBITDAR16E $309 $337
New Valuation: 6x EV/NTM EBITDAR (one-year fwd.)
Old Valuation: 5.75x EV/NTM EBITDAR (one-year fwd.)
■ CHR's Q1 adjusted EBITDA of $40M missed our $56M estimate but was in line with the street at $40M.
Implications
■ The major non-recurring items are $10M for the ALPA signing bonus & $2M for the advisory fees. Stock-based compensation at $5M was also much higher than normal. We reduced our EBITDA forecasts and are now looking for $202M in annual EBITDA in 2015 which includes the contribution from the Voyageur acquisition. Based on the new CPA arrangement with Air Canada, EBIT should remain flattish at these levels until 2020 unless there is an increase in the covered aircraft, which we don't think is likely.
■ CHR management was quite upbeat about diversification/growth prospects from both the leasing arm and Voyageur. In our view, for the leasing business to stand on its own, we need to see some diversification in terms of both customers and aircraft. While management is scouting for further diversification opportunities, we feel that meaningful acquisitions are unlikely at this stage.
Recommendation
■ CHR shares have run-up after the change in the CPA and are now trading at 6.3x EV/2016 EBITDAR, which is in line with their US comp group even though CHR is considerably less diversified. Our TP is down slightly to $5.75 due to lower EBITDA estimates which is partially offset by a slightly higher multiple. While the yield is still relatively attractive, we see no capital upside and are maintaining our SP rating.
Qtly EBITDAR (M) Q1 Q2 Q3 Q4 Year EV / EBITDAR
Capitalization Market Cap (M) $718 Net Debt + Pref. (M) $475 Enterprise Value (M) $1,193 Shares O/S (M) 122
Float O/S (M) 122
ScotiaView Analyst Link
2013A $57 A $70 A $78 A $72 A $277 5.3x 2014A $74 A $78 A $82 A $75 A $309 5.0x 2015E $66 A $73 $81 $79 $300 6.3x 2016E $66 $76 $83 $84 $309 6.3x
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.
Copasa (CSMG3-SA R$17.65)
Soft Pricing But Opex Cuts Matter More
Ezequiel Fernández López, CFA - +56 9 9991 9152 (Scotia Corredora de Bolsa Chile SA) [email protected]
■ Copasa reported Q1/15 EBITDA of R$233M (-24% YOY), in line with our estimate. Quarterly EPS disappointed us on a large FX one-off.
Implications
■ Given our view of Copasa’s relatively low valuation levels and that the depressed results are temporary in nature, we do not consider the headline earnings as a cause for great concern. However, we highlight three important quarterly updates.
■ First, the Rev/m3 ratio unexpectedly contracted 1.5% YOY. While we expected a soft reading, it appears the reduced water consumption is making customers "automatically" migrate to lower price bands. Although we expect this to be a temporary effect, it should pressure 2015 cash flows more than we originally anticipated.
■ Second, Copasa effectively addressed cost concerns. The new CEO sent a strong message by cutting opex & capex, sensible in our view. The "Services" opex line normalized after several quarters of unusually high readings while headcount was kept flat QOQ.
■ Finally, water consumption per customer decreased 8% YOY, below the 30% mark quoted as "desirable" by the new CEO in January. We are operating under the assumption that Copasa customers should lower consumption by "only" 15% until the new rainy season starts (Nov).
Recommendation
■ We highlight the positive opex update and we maintain our Sector Outperform rating on valuation (0.39x PBV, 4.8x 2015E EV/EBITDA).
Qtly EPS (FD) Q1 Q2 Q3 Q4 Year P/E Capitalization
Market Cap (M) R$2,106 Net Debt + Pref. (M) R$3,106 Enterprise Value (M) R$5,212 Shares O/S (M) 119
Float O/S (M) 61
ScotiaView Analyst Link
2012A R$1.04 A R$0.91 A R$1.07 A R$1.05 A R$4.07 10.7x 2013A R$0.98 A R$0.64 A R$1.05 A R$0.85 A R$3.53 10.5x 2014A R$0.98 A R$0.69 A R$0.82 A R$0.18 A R$2.67 9.4x 2015E R$0.14 A R$0.24 R$0.50 R$0.41 R$1.29 13.6x
Net Income, R$M 116.6 21.5 16.5 -23.5% -85.9% 48.8 -66.3%
EPS, R$ 0.98 0.18 0.14 -23.5% -85.9% 0.41 -66.3%
Copasa Q1/15: Soft Pricing But Opex Cuts Matter More
Earnings Takeaways
■ Quarterly Rev/m3 closed at R$2.68, contracting 1.5% YOY despite the 6% net tariff hike seen last year. While we expected soft pricing, it appears that the reduced water consumption is making customers "automatically" migrate to lower price bands due to lower consumption. This should be a temporary effect, but it will most likely pressure 2015 cash flows more than we originally expected.
■ Copasa effectively addressed costs concerns during Q1/15, lowering opex more aggressively than we anticipated. Particularly, the "Services" line posted the lowest reading since 2012, after several quarters of unusually high readings Additionally, headcount was kept flat QOQ, a positive highlight considering that during Q4/14 (the last quarter attributable to the previous political administration) headcount increased by 400 employees.
■ The combined reservoir level continued to be stable at 39%, without considering technical reserves. This is better than what was expected at the beginning of 2015, in our view, and supports our forecast of a reduction in consumption below the “ideal” 30% mark. A good question for management during the Q1/15 earnings call could be at what reservoir level formal rationing might be considered. Additionally, it was stated in the quarterly press release that as long as the flow of the Rio Das Velhas river remains above 20m3/s, water provisions to the Belo Horizonte area were not as risk.
■ The electricity costs came in line with our view and averaged R$0.30/m3, 20% higher than in Q1/14 and highlighted the material increase in this type of costs for all Brazilian industries due to the application of bandeiras tarifarias. In this sense, Q2/15 should bring additional increases due to the extraordinary tariffs review performed by the ANEEL during April 2015.
■ Net Debt to EBITDA closed the quarter at 3.1x, which could mean some problems related to covenants, either now or in upcoming quarters, if results continue to disappoint. However, we expect waivers to be granted.
■ A capex guidance of R$600M for Copasa consolidated operations was set forward and another R$95M for the socially-oriented Copanor subsidiary. We understand that the Copanor budget should come from state coffers, but we will confirm this during the earnings call. The earnings call is scheduled for Monday May 18, at 2PM ET. Dial in +1 646 843 6054, passcode COPASA.
71
Exhibit 2 – Copasa Summary
Source: Company reports; Scotiabank GBM estimates, Bloomberg.
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.
DHX Media Ltd. (DHX.B-T C$9.40)
Q3 Beat Led by Solid Distribution Revenues
Paul Steep, MBA - (416) 945-4310 (Scotia Capital Inc. - Canada) [email protected]
Udhay Gill, MBA - (416) 863-7993 (Scotia Capital Inc. - Canada)
■ DHX reported strong Q3/15 results with revenues of $85.6M and Adjusted EBITDA of $29.8M, compared with our estimates of $67.7M and $23.6M (consensus $69.1M and $23.5M).
Implications
■ DHX's Q3/15 results exceeded consensus expectations, with the firm delivering strong revenue growth in Distribution and Production revenues based on a combination of organic growth and acquisitions. EBITDA margins were sustained in the quarter given the firm's ongoing efforts to generate operational efficiencies.
■ We expect that DHX will continue to rapidly de-lever as the firm positions itself to be an active acquirer of children's content. We believe the firm will continue to focus on signing new international distribution and licensing deals for its content library and brands (more than 11,000 half-hours of content) to diversify its revenues away from the broadcast business.
Recommendation
■ We remain Sector Underperform on the stock given challenges facing the firm's broadcast business, including the loss of the Disney output contract and the upcoming implementation of the CRTC's Pick and Pay decision in 2016. Our target price moves to $8.50 based on updating our estimates and rolling forward our valuation period, with no change to the valuation multiple.
Qtly Revenues (M) Q1 Q2 Q3 Q4 Year Price/ Revenue
Capitalization Market Cap (M) $1,159 Net Debt + Pref. (M) $252 Enterprise Value (M) $1,412 Shares O/S (M) 123
Float O/S (M) 71
ScotiaView Analyst Link
2014A $27.0 A $30.4 A $29.0 A $29.7 A $116.1 6.65x 2015E $43.0 A $64.3 A $85.6 A $67.4 $260.3 4.56x 2016E $64.3 $72.6 $67.7 $65.0 $269.7 4.40x 2017E $57.5 $65.7 $70.3 $68.1 $261.5 4.54x
■ DHX’s Q3/15 results were well above our expectations, primarily due to significant growth in the firm’s Distribution revenues (see Exhibit 1). The firm’s total revenues increased 195% year over year, primarily as a result of the acquisition of Family Channel ($20.4M) and higher Distribution revenues from strong streaming revenues of Degrassi ($30.5M total Distribution revenues including $12.8M from Degrassi). The Degrassi streaming revenue included a catch-up portion from calendar 2014. The firm’s EBITDA margins were sustained in the quarter given management’s ongoing focus on integrating acquisitions and a solid mix of higher-margin broadcast revenues from DHX Television. Net income benefited from foreign exchange gains of $8M in the quarter (~$0.07 positive impact to EPS).
■ Slugterra promotion announced with Burger King. Subsequent to the end of the quarter, the firm announced a promotional agreement with Burger King. Toys based on characters from Slugterra will be offered to customers at Burger King over the next several weeks, ahead of Slugterra’s Season Three, which will debut this summer. Financial details of the agreement were not disclosed but were indicated as being immaterial.
■ Ongoing progress in YouTube business. DHX indicated that net contribution in advertising and sVOD revenues was up to $1.88 million in Q3 from $1.76 million in Q2, and $1.00 million in Q3/14.
■ The firm indicated they closed a number of distribution deals in the quarter with Netflix, Hulu, Amazon, and The Orchard. The agreement with The Orchard included over 8,000 episodes from DHX’s library and over 2,000 tracks of children’s music. The agreement will allow for The Orchard to distribute the media in multiple languages in the U.S., Latin America, South Africa, Europe, and Australia and New Zealand.
■ Updated F2015 outlook. DHX raised the lower end of its F2015 financial outlook with the firm forecasting revenues between $247 million to $263 million and modestly lowered gross margins to 48% to 53% (see Exhibit 2). DHX reiterated that the firm expects to generate cost savings from the DHX Television business in the range of $10-14 million in F2016.
74
Exhibit 3 - Updated Estimates
Source: Scotiabank GBM estimates.
(FYE June 30; C$000 except EPS; IFRS)
2015E 2016E 2017E
New Prev. New Prev. New Prev. New Prev.
Total Revenue $67,407 $70,062 $260,276 $245,029 $269,727 $254,143 $261,535 $241,563
■ The firm ended Q3 with a net debt position of $252.3 million, down from $256.2 million in Q2/15. The firm’s Q3/15 pro forma Net Debt/Adjusted EBITDA ratio 2.7x, down from 3.5x in Q2/15. In our view, the firm will look to rapidly de-lever as DHX continues to examine the potential for additional M&A to further build the firm’s proprietary content library.
■ Revised estimates. We have revised our estimates to reflect the firm’s solid Q3/15 results and details from the conference call (see Exhibit 3). Our target price moves to $8.50 per share (previously $7.00 per share) based on updates to our estimates, rolling forward our valuation period, and no change to our valuation multiple.
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.
EnerCare Inc. (ECI-T C$14.87)
Lower Q1 on Seasonality; Integration as Planned
George Doumet - (514) 350-7788 (Scotia Capital Inc. - Canada) [email protected]
Reinis Krams - (514) 287-4554 (Scotia Capital Inc. - Canada) [email protected]
Key Risks to Target: Attrition; shifts in public policy; competition; acquisition integration
Div. (NTM) $0.84
Div. (Curr.) $0.84
Yield (Curr.) 5.6%
Event
Pertinent Revisions
New Old
Adj EBITDA15E
$230 $233
Adj EBITDA16E
$242 $245
■ EnerCare reported Q1/15 Adjusted EBITDA of $54.0M vs. our estimate and consensus of $56.6M.
Implications
■ The modestly softer results vis-à-vis our estimates are mainly the result of lower-than-expected contribution from OHCS driven largely by seasonality and HVAC rental/sales mix.
■ Attrition for the quarter came in at 9k units, in line with our estimates and with last year. This marks the fifth consecutive quarter of attrition at or below the 11k level. Moving forward, we are looking for attrition of 39k units in 2015 and 36k units in 2016 driven by continued company-specific initiatives and the enactment of Bill 55.
■ The Sub-metering segment performed ahead of expectations: EBITDA came in at $3.0M vs. our estimate of $2.8M ($2.6M in Q4/14). Moving forward, we are looking for EBITDA of $11.5M (Adj. FCF of $4.8M) in 2015 and EBITDA of $13.7M (Adj. FCF of $7.1M) in 2016.
Recommendation
■ ECI trades at 8.9x EV/EBITDA (15E), at a premium to its leasing and servicing peer group despite its similar leverage, capital intensity, and free cash flow profile. While we see benefits from the OHCS acquisition (better control on pricing and access to the customer), we remain neutral on the shares given the high relative valuation and lack of visibility on improving return metrics in the face of rising capital intensity.
Q1/15 a Little Light; OHCS Integration Remains on Track
■ EnerCare reported Q1/15 Adjusted EBITDA of $54.0M vs. our estimate and consensus of $56.6M (see Exhibit 1) driven by: (1) lower-than-expected contribution from OHCS (HVAC and protection plans) driven largely by seasonality, and (2) higher-than-expected rentals of HVAC (vis-à-vis) expected outright sales. While rentals have the impact of reducing near-term profitability, we expect the conversion of sales into rentals to be accretive to the shares in the longer term.
■ ECI incurred $0.6M of one-time costs related to the OHCS acquisition in the quarter.
Attrition Normalization; Are Further Improvements on the Horizon?
■ Attrition came in at 9k units, in line with our estimates and with last year. This marks the fifth consecutive quarter of attrition at or below the 11k level. Moving forward, we expect the recently enacted (April 1, 2015) Bill 55, to continue to sustain ECI’s improving attrition trend by deterring door-to-door competitive practices. We are modelling gross attrition of 10k units for Q2/15 and for Q3/15 (with natural attrition expected in the 4k to 5k area). We expect additional, but more gradual, improvements in attrition to be driven by: (1) higher mix towards lower attrition HVAC units and (2) higher proportion of customers under the buy-out contract (currently at 30%). Exhibit 3 illustrates sensitivities of our one-year target price based on attrition assumptions and valuation multiple.
■ Recall the focus of Bill 55 is to help fight off door-to-door competition by: (1) doubling the 10-day cooling off period, (2) introducing more consumer friendly cancellation terms, and (3) implementing more rigid monitoring/enforcement policies.
Sub-Metering FCF Positive in 2015; To Scale up in 2016
■ The Sub-metering segment performed better than expected: EBITDA came in at $3.0M vs. our estimate of $2.8M and up from $2.6M in Q4/14. This was driven by: (1) higher billable units, (2) the impact of the revenue assurance program and the LEAN initiatives. EnerCare expects to be cash flow positive by year-end. We are modelling sub-metering EBITDA of $11.5M for 2015 and $13.7M for 2016.
■ Q1/15 adj. FCF came in at an estimated $1.2M vs. $0.8M last quarter and $0.0M in Q3/14 (see Exhibit 4 future estimates). We expect continued positive momentum in FCF driven mainly by improving productivity, operating efficiencies and scale. We are looking for FCF of $4.8M in 2015 and $7.1M in 2016.
OHCS: Integration Going as Planned; Decoupling & Brand Transitioning on Tap
■ According to ECI, the OHCS integration is going as planned. The first phase of IT decoupling from DE is on schedule and is expected to be completed in the 1H/15. The company’s rebranding initiatives (co-branding on customer invoices, sales literature and advertising) began early 2015 and will continue through 2015.
■ We continue to expect meaningful synergies from the OHCS acquisition, most notably: (1) conversion of HVAC sales into financing/leasing transactions in the near term and, (2) leveraging direct access to the customer to generate incremental revenue opportunities (i.e., plumbing, duct cleaning & energy audits, etc.), in the longer term.
77
Exhibit 5 – Rental Rate Increases… But at the Expense of Capital Costs
Source: Company reports; Scotiabank GBM estimates.
$972
$1,494
$1,981
$1,551
$1,940
$1,790
$2,053
$231 $271 $344 $315 $322
$372
$481
24%
18% 17%
20%
17%
21%
23%
2012 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015
Average Cost per Addition Average Rental Rate per Addition Rental Rate/ Rental Additions CAPEX
Exhibit 7 – ECI Leasing and Servicing Comps Table
Source: Company reports; FactSet; Scotiabank GBM estimates for ECI.
Exhibit 6 – Stable Capital Intensity
Source: Company reports; Scotiabank GBM estimates.
14.0%
15.0%
16.0%
17.0%
18.0%
19.0%
20.0%
21.0%
Adj. FCF to Tangible Assets
Keeping an Eye on Capital Intensity
■ While we have seen material increases in rental rates (see Exhibit 4) resulting from a higher proportion of HVAC units, we expect this to come at the expense of higher capital costs (up 20% YOY on a capital cost per addition basis). Exhibit 6 outlines EnerCare’s Adj. FCF returns adjusted for revenue sustaining capital intensity.
Valuation: Maintaining $15.00 Target
■ We have made modest adjustments to our 2015 and 2016 estimates, relating largely to OHCS seasonality and HVAC rental/sale mix. Our valuation multiple and target remain unchanged.
■ Following the OHCS acquisition, we believe ECI should trade at a slight premium (given safer, less-cyclical cash flows, and lower capital intensity) to selected leasing and servicing companies. We believe Aggreko plc (AGK-GB; not covered) is the closest public comparable to ECI as AGK rents power generators and provides temperature control solutions. ECI and AGK both have similar capital intensity metrics with FCF/sales at 21.6% and 25.5%, while sales/FA are at 1.2x and 1.3x, respectively.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S.
Valuation: DCF - 5 years results, 7.4% WACC, terminal growth rate of 3.6%
Key Risks to Target: Execution of Entel Peru; Competition in Chile
Div. (NTM) 150.00
Div. (Curr.) 150.00
Yield (Curr.) 2.1%
Event
Pertinent Revisions
New Old
Target: 1-Yr 9,400 9,200
EBITDA15E 396 383 EBITDA16E 483 478
■ In Q1/15 and for the first time in history, Entel's EBITDA in Chile was greater than that of Telefonica (including fixed and mobile divisions, making it all the more remarkable), effectively driving Entel to the position of leader in Latin America's most advanced telecom market.
■ We are raising our 2015 EBITDA projection for Chile by 2.3%. We believe the current share price implies less than zero value for Peru (as if Entel were destroying, not creating, value.) We are lifting our DCF-based target from CLP 9,200/share to CLP 9,400/share.
Implications
■ Entel's Q1 ARPU in Chile was 24.2% higher than the industry average, churn was 27.7% lower, and its EBITDA margin ~750 bp higher.
■ Entel's dominance of Chile's postpaid market (45.9%) is greater than that of Vivo in Brazil and is one of the highest in the LatAm space. From a regulatory perspective, it may be better for Entel to let TEF be the biggest player in terms of total wireless subs (by a mere 0.6M).
■ Quality metrics in Chile (see Exhibit 2) and portability results in Peru (see Exhibit 3) denote who has been milking the market and who has taken the most care of customers; whereas Entel's combined capex for Chile and Peru in Q1was 20.9% of sales, TEF invested 14.8%.
Recommendation
■ Even if we value Peru at zero, Entel's shares would be worth CLP 8,775 under a 6.0x 2015E EV/EBITDA valuation for Chile (see Exhibit 4). If we value each sub in Peru at US$300, shares would be worth CLP10,912.
Qtly EBITDA (B) Q1 Q2 Q3 Q4 Year EV / EBITDA
Capitalization
Market Cap (M) 1676005 Net Debt + Pref. (M) 1,046 Enterprise Value (M) 1677051 Shares O/S (M) 237
Float O/S (M) 66
ScotiaView Analyst Link
2013A 124 A 119 A 117 A 107 A 467 5.6x 2014A 116 A 102 A 93 A 59 A 370 7.2x 2015E 101 A 103 98 94 396 6.9x 2016E 118 122 124 119 483 5.8x
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.
Freehold Royalties Ltd. (FRU-T C$17.75)
Cash Flow Ahead on Improved Cost Management
Patrick Bryden, CFA - (403) 213-7750 (Scotia Capital Inc. - Canada) [email protected]
Riley Hicks, CA, MBA - (403) 213-7760 (Scotia Capital Inc. - Canada)
Justin Strong, MBA, - (403) 213-7328 (Scotia Capital Inc. - Canada)
Key Risks to Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program succes s
Div. (NTM) $1.08
Div. (Curr.) $1.08
Yield (Curr.) 6.1%
Event
Pertinent Revisions
New Old
CFPS15E $1.07 $1.00 CFPS16E $1.17 $1.13
■ Freehold released first quarter results, highlighting a cash flow beat of 14% on lower-than-expected operating costs.
Implications
■ Production in line as cash flow ahead of estimates. First quarter production of 10,058 boe/d was in line with our estimate of 10,114 boe/d and consensus of 10,167 boe/d. Cash flow was ahead of expectations at $0.29/share versus our estimate of $0.25/share. The cause of the beat was lower-than-expected operating costs of $5.25/boe versus our estimate of $5.93/boe.
■ Land base increased by subsequent acquisition. Freehold previously announced an agreement to purchase a gross overriding royalty (GORR) in addition to royalty interests and mineral title lands in exchange for $321M from Penn West. The GORR consists of an 8.5% royalty interest in a portion of Penn Wes's Viking play operations in the Dodsland area of Saskatchewan.
■ Continued A&D activity expected. In our view, Freehold is well positioned within the marketplace, with a 2015E D/CF of 1.3x and a 2015E effective payout ratio of 131%. The strong balance sheet should allow the company to pursue further acquisitions, as challenged E&P peers look to monetize assets.
Recommendation
■ We maintain our Sector Perform rating and price target of $20.00/share.
Qtly CFPS (FD) Q1 Q2 Q3 Q4 Year P/CF Capitalization Market Cap (M) $1,763 Net Debt + Pref. (M) $121 Enterprise Value (M) $1,884 Shares O/S (M) 99
Float O/S (M) 99
ScotiaView Analyst Link
2013A $0.36 A $0.45 A $0.54 A $0.43 A $1.79 12.4x 2014A $0.45 A $0.55 A $0.54 A $0.41 A $1.95 9.8x 2015E $0.29 A $0.23 $0.26 $0.28 $1.07 16.6x 2016E $0.30 $0.30 $0.29 $0.29 $1.17 15.1x
Percentage of Light & Medium Oil % -- -- -- -- 0% 0% 0% 0% 0%
Percentage of Heavy Crude Oil % -- -- -- -- 0% 0% 0% 0% 0%
Percentage of Natural Gas Production % -- -- -- -- 0% 0% 0% 0% 0%
Percentage of Total Production % -- -- -- -- 0% 0% 0% 0% 0%
86
Company Comment
Thursday, May 14, 2015, After Close
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.
Gabriel Resources Ltd. (GBU-T C$0.39)
Discontinuing Coverage
Trevor Turnbull, MBA, MSc - (416) 863-7427 (Scotia Capital Inc. - Canada) [email protected]
Alex Watt, MBA - (416) 860-1429 (Scotia Capital Inc. - Canada)
■ We are discontinuing coverage of Gabriel Resources Ltd.
Implications
■ The discontinuation follows nine months without significant permitting developments. In addition, Gabriel reports that Romanian authorities have chosen not to respond to invitations for dialogue.
■ Our final rating for Gabriel was Sector Perform.
■ Our previous rating, price target, and estimates should no longer be relied upon.
Recommendation
■ We have revised our rating to Discontinued Coverage.
Qtly Adj. EPS (FD) Q1 Q2 Q3 Q4 Year P/E Capitalization Market Cap (M) $151 Net Debt + Pref. (M) $-15 Enterprise Value (M) $136 Shares O/S (M) 387
Float O/S (M) 384
ScotiaView Analyst Link
2013A $-0.01 A $0.00 A $0.01 A $0.00 A $-0.01 n.m. 2014A $-0.01 A $0.00 A $0.00 A $0.00 A $-0.02 n.m. 2015E 2016E
(FY-Dec.) 2013A 2014A 2015E 2016E 2017E
Adj Earnings/Share $-0.01 $-0.02 Cash Flow/Share $0.00 $-0.02 Working Capital (M) $32 $37 Long-Term Debt (M) $0 $29
BVPS: -- NAVPS: -- ROE: -- P/NAV: --
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
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.
Gildan Activewear Inc. (GIL-T C$39.36)
(GIL-N US$32.81)
Q1/15 Results in Line; On Track for a Solid 2016
Anthony Zicha - (514) 350-7748 (Scotia Capital Inc. - Canada) [email protected]
Sami Abboud, MBA - (514) 350-7737 (Scotia Capital Inc. - Canada)
Vincent Perri, CPA, CA, CFA - (514) 287-4990 (Scotia Capital Inc. - Canada)
Key Risks to Target: Slower than anticipated recovery in retail sales; changes to cotton price; country specific risk .
Div. (NTM) $0.26
Div. (Curr.) $0.26
Yield (Curr.) 0.8%
Event
Pertinent Revisions
New Old
Target: 1-Yr $45.00 $42.00
EPS15E US$1.51 US$1.54
New Valuation: 19.0x P/E on 2016E
Old Valuation: 18.0x P/E on 2016E
■ Results in Line. Gildan reported Q1/15 adjusted EPS of $0.24, in line with of our expectation of $0.22, company guidance range of $0.22 to $0.24 and consensus of $0.23.
Implications
■ Narrows Guidance. Gildan narrowed its 2015 earnings guidance range of $1.50 to $1.55 per share from $1.50 to $1.57 previously.
■ Strategy on Track. Pricing strategies stimulated solid volume growth within the Printwear segment. Furthermore, supported by its retail initiatives, the company continues to target a 10% market share position (in men's underwear) by the end of 2015.
■ Looking to 2016. We expect Gildan to continue to sustain its price leadership, market share expansion, and continued roll-out of low cost manufacturing facilities. While recent pricing initiatives are expected to limit earnings growth over the next quarter, we expect capex investments to generate a targeted $100 million in cost savings. Additionally, when combined with better aligned cotton costs, should support growth in 2016. Furthermore, we believe the company could execute additional accretive acquisitions.
Recommendation
■ We rate Gildan shares Sector Outperform with a new one-year target price of C$45.00 (previously C$42.00). To value Gildan shares we apply a P/E multiple of 19.0x (in line with peer group) as well as a FX assumption (US$/C$) of $1.25 to our 2016 EPS estimate of $1.88.
Qtly EPS (FD) Q1 Q2 Q3 Q4 Year P/E Capitalization
Market Cap (M) $7,944 Net Debt + Pref. (M) $314 Enterprise Value (M) $8,258 Shares O/S (M) 242
Float O/S (M) 236
ScotiaView Analyst Link
2013A $0.30 A $0.47 A $0.41 A $0.18 A $1.36 19.6x 2014A $0.32 A $0.47 A $0.50 A $-0.15 A $1.14 24.9x 2015E $0.24 A $0.43 $0.58 $0.27 $1.51 21.7x 2016E $0.36 $0.57 $0.68 $0.26 $1.88 17.5x
(in $M except per share amounts) Q1/15 Q1/14 Change
Printwear Sales $431.3 $378.5 13.9%
Branded Apparel Sales $204.9 $170.3 20.4%
Total Net Sales $636.2 $548.8 15.9%
Gross Profit $139.9 $153.2 -8.7%
Gross Margin 22.0% 27.9% -593 bp
SG&A $77.1 $69.3 11.2%
% of Revenue 12.1% 12.6% -51 bp
Operating Income $62.9 $83.9 -25.1%
Segment Operating margin 9.9% 15.3% -542 bp
Adj. Net Earnings $57.5 $79.2 -27.4%
Adj. Net Margin % 9.0% 14.4% -540 bp
Unusual items ($1.5) ($0.0)
Net Earnings $56.0 $79.2 -29.2%
Net Margin % 8.8% 14.4% -562 bp
Adjusted EPS (fd) $0.24 $0.32 -26.7%
EPS (fd) $0.23 $0.32 -28.6%
In-Line Quarter
■ Gildan reported Q1/15 adjusted EPS of $0.24 in line with of our expectation of $0.22, company guidance range of $0.22 to $0.24 and consensus of $0.23. This compares to an adjusted EPS of $0.32 last year (see Exhibit 1).
o As expected, lower gross margins in both operating segments offset the higher sales revenues. The anticipated decline is due to lower selling prices in Printwear and the consumption of higher cost inventories.
■ Total sales increased by 15.9% to reach $636.2 million in the quarter, slightly ahead of our expectations of $631.7 million and company guidance for net sales in excess of $630 million.
Printwear: Rebound in sales growth – Pricing strategy delivers
■ Sales for the Printwear segment increased to $431.3 million or 13.9% over last year mainly due strong unit volumes growth in both the U.S. and international markets and favourable product mix. This was partially offset by lower net selling prices (due strategic pricing actions implemented in Dec. 2014) and unfavourable FX.
o Management noted good growth in high-valued activewear products supported by seasonally colder weather and an increase presence in fashion basics category.
o Following some higher-than-normal distributor destocking in the month of December (due to the change in Gildan’s incentive structure), the company benefited from anticipated inventory replenishment by U.S. distributors.
o International printwear sales were up 25% due to continued penetration in Europe and Asia as well as recent entry into new markets in Latin America.
o The company also benefited from one month of sales from the Comfort Colors acquisition, which added roughly $6 million to the top line.
■ Sales in the Branded Apparel segment increased by 20.4% to reach $204.9 million as the company benefitted from the acquisition of Doris, organic sales growth of Gildan and Gold Toe branded sales program and growth in licensed and lifestyle brands. This was partially offset by lower sales of private label and retailer inventory destocking.
o We note that the company is currently negotiating new strategic retail programs for 2016. Furthermore, the company has been successful at converting retail private label programs to Gildan branded sales.
o Sales of the Gildan branded products increase by roughly 20%.
o Net of the Doris acquisition, organic growth was roughly 10.8% in the quarter.
o The company’s continues to hold its number 3 market share position (for men’s underwear) which stood at 7.5% during the quarter.
o The company is targeting a 10% market share position for the year. We believe this is a reasonable target. We expect new retail programs to support these objectives.
Anticipated margin pressure
■ The company recorded an operating income of $62.9 million, which is down 25.1% versus last year at $83.9 million. The anticipated decline is due to lower selling prices in Printwear and the consumption of higher cost inventories in the Branded Apparel segment.
89
o We expect this margin to improve in 2H/15 as the company benefits from enhanced manufacturing efficiencies from the company’s yarn spinning investments and other capital projects as well as lower cotton costs.
■ SG&A expenses were $77.1 million, up 11.2% over last year. The increase in SG&A expenses was mainly due to the Doris acquisition as well as higher volume-driven distribution expenses in the Branded Apparel segment and higher legal and professional fees. This was partially offset by a favourable FX impact for corporate head office expenses. SG&A expenses as a percentage of sales were slightly lower in the quarter at 12.1% compared to 12.6% in the prior year mainly due to volume leverage.
Narrows 2015 Guidance
■ Gildan narrowed its 2015 earnings guidance range of $1.50 to $1.55 per share from $1.50 to $1.57 previously. The changed reflects the impact from the continued devaluation on international currencies. Earnings guidance reflects sales guidance (which remains unchanged) to be slightly in excess of $2.65 billion up from net sales.
■ Q2/15 guidance relatively in line. The company also provided guidance for Q2/15 with a projected adjusted EPS of $0.43 to $0.45 with net sales expected at roughly $750 million (implies an 8.1% increase over last year). This compares to our previous Q2/15 EPS of $0.46 (consensus $0.46) and our previous net sales estimate of $765.9 million (consensus $748.8 million).
o Consistent with previous projections and our views, the company expects results in 1H/15 will continue to be negatively impacted by the misalignment between the timing of lower Printwear selling prices and the benefits of lower manufacturing and cotton costs.
■ Look to 2016. We continue to expect capex investments to generate a targeted $100 million in cost savings, which combined with better aligned cotton costs, should support growth in 2016. Roughly $25 million in synergies are expected to be realized by the end of 2015.
■ CAPEX guidance unchanged. The company continues to expect its capex spending to range between $250 million and $300 million in 2015. By the end of the year, management expects the bulk of the capital investment in the new yarn-spinning facilities will be completed. We note that the second Salisbury facility has begun production and the Mocksville facility is expected to begin production in Q3/15.
Valuation and Recommendation
■ Adjusting estimates. We have adjusted our estimates to reflect company guidance. Accordingly, we have modestly reduced our 2015 EPS estimate to $1.51 (from $1.54) which remains within company EPS guidance range of $1.50 to $1.55. Our F2016 EPS estimate remains unchanged at $1.88.
■ Increasing Target; Reiterating our Sector Outperform rating. We rate Gildan shares Sector Outperform with a new one-year target price of C$45.00 (previously C$42.00). To value Gildan shares we apply a P/E multiple of 19.0x (in line with peer group) as well as a FX assumption (US$/C$) of $1.25 to our 2016 EPS estimate of $1.88.
o We note that Gildan shares are currently trading at 21.8x our 2015 estimates of $1.51 (see Exhibit 2). We believe our valuation multiple is justified given (1) the continued growth and increased FCF generation beyond our forecast horizon, driven by market share gains and margin expansion in retail, current capacity expansion initiatives, and decreased capital expenditures as capacity is put in place; and (2) the company’s financial flexibility and related ability to execute acquisitions.
90
Exhibit 2 – Gildan Activewear Inc. Comp Table
Source: FactSet; Company reports; Scotiabank GBM estimates.
Price Market Enterprise
Company Name (YE) Ticker 14-May-15 Cap (M) Value (M) 2015E 2016E 2015E 2016E
Delta Apparel, Inc. ( Sep ) DLA-USA $14.28 $113 $247 22.0 x 14.3 x 8.8 x 9.3 xEnnis, Inc. ( Feb ) EBF-USA $16.64 $429 $517 11.8 x 11.6 x 6.8 x 6.8 xHanesbrands Inc. ( Jan ) HBI-USA $31.10 $12,492 $14,460 18.9 x 16.7 x 14.8 x 13.7 x
Quiksilver, Inc. ( Oct ) ZQK-USA $1.55 $266 $1,011 na na 14.3 x 9.9 xV.F. Corporation ( Jan ) VFC-USA $70.58 $29,995 $32,334 22.0 x 19.1 x 14.8 x 13.0 xBjorn Borg AB ( Dec ) BORG-OME SEK 34.00 SEK 855 SEK 820 na na 11.9 x 11.1 xAverage: 18.7 x 15.4 x 11.9 x 10.6 x
Gildan Activewear Inc. ( Dec ) GIL-CA C$39.36 $8,013 $8,571 21.8 x 17.5 x 16.4 x 13.3 x
EBITDA Net Debt / Net Debt /
Company Name (YE) Currency EBITDA EPS Margin (LTM) EBITDA (LTM) Total Cap ROE (LTM) Yield
Delta Apparel, Inc. ( Sep ) USD (5.0%) 53.8% na na 49.3% na 0.0%Ennis, Inc. ( Feb ) USD (0.1%) 1.5% 12.4% 1.3 x 23.3% na 4.2%Hanesbrands Inc. ( Jan ) USD 8.1% 13.4% 16.2% 2.0 x 51.6% 30.9% 1.3%Quiksilver, Inc. ( Oct ) USD 43.8% (52.7%) 1.1% 42.5 x 89.3% na 0.0%V.F. Corporation ( Jan ) USD 13.4% 14.9% 17.4% 0.2 x 6.7% 17.9% 1.8%Bjorn Borg AB ( Dec ) SEK 7.2% (97.8%) 11.0% -0.5 x (6.4%) 16.7% 0.0%Average: 11.2% (11.1%) 11.6% 9.1 x 35.6% 21.8% 1.2%
Gildan Activewear Inc. ( Dec ) CAD 35.6% 32.4% 15.5% 1.5 x 22.4% 13.5% 0.9%
Source: Company reports; FactSet; Scotiabank GBM estimates. For companies with FYE other than Dec., we have included their results in the nearest calendar
year. For GIL-CA we are using our C2015/C2016 estimates.
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.
Golden Star Resources Ltd. (GSS-A US$0.35)
(GSC-T C$0.44)
Gold Stream Fixes Near-term Finances, but
Valuation and Margins Decline and Debt Remains
Trevor Turnbull, MBA, MSc - (416) 863-7427 (Scotia Capital Inc. - Canada) [email protected]
Alex Watt, MBA - (416) 860-1429 (Scotia Capital Inc. - Canada)
■ Golden Star released its Wassa feasibility study; we fully incorporated the data and the Royal Gold streaming deal.
Implications
■ We have adjusted our model for the open pit and underground mine plans from the technical report into our model. We also include about 20% upside or 137,000 oz to the Wassa underground reserve.
■ The streaming agreements significantly impact the net present value of both Wassa's and Prestea's non-refractory operations. However, the deal provides much needed financing and lowers Golden Star's cost of capital in the process. Without the agreement we doubt the Wassa and Prestea underground mines could be beneficially developed.
■ Our net asset valuation (NAV5%) decreases to $0.35 from $0.46 per share at a 5% discount rate. Nonetheless, we view the transaction positively as it enables Golden Star to transition to lower-cost non-refractory production. Due to the improved balance sheet we also are applying a 5% discount rate to Golden Star versus 8% previously.
Recommendation
■ We upgraded to Sector Perform following the announcement of the Royal Gold financing, and Golden Star is becoming an investible choice for leverage to rising gold prices. However, we remain cautious given that there are $77.5 million in 5% convertible debentures maturing in June 2017 that need to be dealt with.
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.
■ Oma announced it signed an amendment to the Technical Assistance Agreement (TAA) to cut the technical assistance fee from 5% of EBITDA to 4% for the next three years, and from 4% of EBITDA to 3% for the last two years of the contract.
Implications
■ Getting part of the economics, but not the oversight (yet). We believe the aim of last month's debate on the elimination of the TAA, led by Aberdeen, was to improve Oma's corporate governance in addition to the economics (see our note: "Barbarians at the Gates! A Single Share Class Structure in Sight?"). However, it is encouraging to see that the controlling group SETA (74.5% ICA; 25.5% Aéroports de Paris) is willing to address the market's concerns.
■ Marginal impact on our estimates. We now expect 2015E EBITDA of MXN 2,288M, an increase of 0.8% versus our previous estimate. For 2016 we increased our EBITDA estimate by 1% to MXN 2,583M.
Recommendation
■ As a result, we have increased our target price from US$43.00 to US$44.00 (from MXN 81.00 to MXN 83.00 in local shares). We maintain our Sector Perform rating.
Qtly EBITDA (M) Q1 Q2 Q3 Q4 Year EV / EBITDA
Capitalization Market Cap (B) 31 Net Debt + Pref. (M) 1,703 Enterprise Value (B) 32 Shares O/S (M) (ADS)
49
Float O/S (M) 20
ScotiaView Analyst Link
2014A 404 A 460 A 545 A 483 A 1,893 15.2x 2015E 536 A 547 631 574 2,288 14.2x 2016E 608 619 709 647 2,583 12.6x 2017E 664 676 773 709 2,823 11.7x
■ Oma: Sector Perform. We arrive at our 12-month target price of MXN 83.00 for Oma local shares and US$44.00 per ADR through a two-step process. First, we utilize our DCF valuation methodology, with a cost of equity of 10.4% and a WACC of 8.1%, which results in a preliminary target price of MXN 84.00 per share. Second, we apply a target NTM EV/EBITDA multiple of 13.0x, which results in a preliminary target price of MXN 82.00. The final blended valuation, 50% DCF-driven and 50% EV/EBITDA multiple, results in a target price of MXN 83.00, or US$44.00, an increase from our previous target price of US$43.00 per ADR.
95
ScotiaView Analyst Link
Exhibit 2 - Company Snapshot
Source: Company reports; Bloomberg; Scotiabank GBM estimates. Prices as at May 13, 2015
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.
Guardian Capital Group Limited (GCG.A-T C$18.50)
BMO Share Price Has Played Surprising Minor
Role in Historical Stock Performance
Phil Hardie, P.Eng., MBA, CFA - (416) 863-7430 (Scotia Capital Inc. - Canada) [email protected]
Michael Lee, CPA, CA - (416) 863-7826 (Scotia Capital Inc. - Canada)
Beam Ukarapong, MBA - (416) 945-4528 (Scotia Capital Inc. - Canada)
Key Risks to Target: Weak BMO share price, Decline in AUM, NAV discount ascribed by market
Div. (NTM) $0.32
Div. (Curr.) $0.30
Yield (Curr.) 1.6%
Event
Pertinent Revisions
New Old
Target: 1-Yr $20.50 $20.00
EPS15E $1.04 $1.05 EPS16E $1.11 $1.10
New Valuation: 29.5% discount to target NAV of $29.10
Old Valuation: 29.8% discount to target NAV of $28.48
■ Q1/15 operating earnings of $10.5M were in line with our expectations.
Implications
■ Another solid quarter for Guardian with continued AUM growth and operating earnings coming in as we had anticipated. Stronger-than-anticipated revenues were offset by higher-than-expected opex.
■ Investors may be surprised to see that BMO share price appreciation has had a relatively minor contribution to Guardian's 5-year historical stock performance. This is likely to come as a source of comfort for value-oriented investors who have potential concerns over the near-term stock performance of BMO. More importantly this analysis demonstrates the "value add" outside of BMO share price gains.
■ We estimate the market is ascribing a value of $4.06 per share for the company's investment management operations, which we currently value at $13.29 per share. We believe that a continued trend toward generating more meaningful earnings from its underlying operations will serve as a catalyst to structurally reduce its NAV discount.
Recommendation
■ Raising target price to $20.50 (was $20.00) and maintaining our Sector Perform rating. Significant embedded optionality and wide NAV discount makes Guardian an attractive core holding for value-oriented investors.
Qtly EPS (FD) Q1 Q2 Q3 Q4 Year P/E Capitalization Market Cap (M) $590 Net Debt + Pref. (M) $-12 Enterprise Value (M) $578 Shares O/S (M) 32
Float O/S (M) 21
ScotiaView Analyst Link
2013A $0.16 A $0.20 A $0.27 A $0.47 A $1.10 14.1x 2014A $0.33 A $0.32 A $0.25 A $0.27 A $1.17 15.3x 2015E $0.27 A $0.25 $0.26 $0.26 $1.04 17.9x 2016E $0.26 $0.28 $0.28 $0.29 $1.11 16.7x
(FY-Dec.) 2012A 2013A 2014A 2015E 2016E
Total AUM (M) $18,832 $22,228 $24,968 $27,092 $29,043 Total AUM Growth 18.2% 18.0% 12.3% 8.5% 7.2% Total AUA (M) $9,918 $11,559 $13,126 $14,627 $15,524 Total AUA Growth 14.6% 16.5% 13.6% 11.4% 6.1%
BVPS15E: $15.57 ROE15E: 7.10%
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated. ^ Non-Voting
Exhibit 2 – GCG/A and BMO 5-Year Total Return Analysis
Source: Bloomberg; Scotiabank GBM estimates.
146.7%
59.1%
Guardian Capital Bank of Montreal
TRA ReturnExhibit 1 – 5-Year Stock Performance Contribution Analysis
Source: Company reports; Bloomberg; Scotiabank GBM estimates.
$0.00
$4.00
$8.00
$12.00
$16.00
$20.00
May 14, 2010 BMO NAV GrowthContribution
Other CorporateNAV Contribution
Implied ValueAscribed to Asset
Management
May 14, 2015
5-Y
ear
Sto
ck P
erf
orm
ance
Co
ntr
ibu
tio
n A
nal
ysis
$8.10
$18.51$4.20
$3.86
$2.35
Est $0.52/sh redeployedfrom sale of BMO shares
Outlook & Valuation
■ Factors outside of BMO share price appreciation have been primary drivers of Guardian’s historical stock performance. Guardian is a unique play within our asset management group given that we value the company using net asset value rather than on forward earnings. This is a result of both the significant value of the holdings in its corporate portfolio and earnings contribution from its BMO dividend, and historically limited earnings from its operating companies. That said, investors may be surprised to see that BMO share price appreciation has had a relatively minor contribution to Guardian’s 5-year historical stock performance (see Exhibit 1). This is likely to come as a source of comfort for value-oriented investors who have potential concerns over the near-term stock performance of BMO. More importantly, we believe this analysis demonstrates the “value add” outside of share price movements from BMO. Over the past 5 years the total return for Guardian shareholders has far surpassed that of BMO (see Exhibit 2).
■ High level of embedded optionality and significant upside potential make Guardian an attractive core holding for value-oriented investors. In our February 23, 2015 note, “Top Value Ideas in the Asset Management Sector”, we highlighted a series of scenarios available to Guardian that include selling its BMO holdings and redeploying capital in the form of significant share buybacks, acquisition of another institutional platform, streamlining operations to become a pure play institutional manager, and financial restructuring. We believe that various combinations of these scenarios, coupled with its steep NAV discount, could significantly increase Guardian’s share price. We estimate Guardian’s NAV discount is currently at 33.3%, slightly tighter than its historical mean of 35.1% (see Exhibit 3). Management has demonstrated willingness to sell BMO shares and use proceeds to re-invest in core operations. Since mid-2013, Guardian has sold 225,000 BMO shares (4.5% of its initial position). The proceeds from the sale were used to seed a new real estate fund and finance the acquisition of Zephyr, a small U.K.-based asset management firm focused on Emerging Markets. We believe key catalysts for share price upside include: 1) BMO share price appreciation, 2) AUM growth and increased earnings contribution from operating companies, and 3) further capital redeployment or share buybacks.
Exhibit 3 - Historical Estimated NAV and Share Price Discount to NAV
Source: Company reports; Bloomberg; Scotiabank GBM estimates.
5%
15%
25%
35%
45%
55%
65%
75%
$7
$10
$13
$16
$19
$22
$25
$28
$31
Ap
r-0
2
Ju
n-0
2
Se
p-0
2
De
c-0
2
Ma
r-0
3
Ju
n-0
3
Se
p-0
3
No
v-0
3
Fe
b-0
4
Ma
y-0
4
Au
g-0
4
No
v-0
4
Fe
b-0
5
Ap
r-0
5
Ju
l-0
5
Oct-
05
Ja
n-0
6
Ap
r-0
6
Ju
n-0
6
Se
p-0
6
De
c-0
6
Ma
r-0
7
Ma
y-0
7
Au
g-0
7
No
v-0
7
Fe
b-0
8
Ma
y-0
8
Ju
l-0
8
Oct-
08
Ja
n-0
9
Ap
r-0
9
Ju
l-0
9
Se
p-0
9
De
c-0
9
Ma
r-1
0
Ju
n-1
0
Au
g-1
0
No
v-1
0
Fe
b-1
1
Ma
y-1
1
Ju
l-1
1
Oct-
11
Ja
n-1
2
Ap
r-1
2
Ju
n-1
2
Se
p-1
2
De
c-1
2
Ma
r-1
3
Ju
n-1
3
Au
g-1
3
No
v-1
3
Fe
b-1
4
Ma
y-1
4
Ju
l-1
4
Oct-
14
Ja
n-1
5
Ap
r-1
5
GCG Net Asset Value Discount to NAV Historical NAV Discount Average
Guardian Capital Group LimitedDiscount to Net Asset Value
April 2002 - May 14, 2015
Net Asset Value Per Share Discount to NAVPS
35.1%Historical Average Discount:
+1 SD
-1 SD
33.3%
Exhibit 4 – Q1/15 AUM Mix
Source: Company reports; Scotiabank GBM.
Canadian Equities
57%Global
Equities13%
Fixed Income
30%
■ Guardian is on track to achieve its strategic focus on sustainable growth. We believe Guardian has made significant strides to achieve its key strategic objectives of focusing on sustainable growth, diversifying its investment capabilities and product base as well as building a global footprint. Recent developments include deploying capital from its first real estate fund to acquire one property and developing new initiatives focused on growing global equity capabilities through its presence in the U.K. Management noted that for its next stage of growth, it will leverage of the success of its current operating platform and invest in new capabilities. On the acquisition front, it continues to look for consolidation opportunities for smaller competitors as an additional source of growth in its life insurance Managing General Agency (MGA) business. While the development of new initiatives is likely to lead to greater long-term growth potential and shareholder value, this will require investment that could weigh on near-term earnings.
■ We believe that the market is valuing Guardian’s investment management operations at $4.06 per share. At current prices, we estimate that shares of Guardian trade at $4.06/sh above the estimated NAV per share of its corporate investment portfolio of $14.45 (see Exhibit 9). Consequently, the market is ascribing a value of $4.06 per share for the company’s investment management operations, which we currently value at $13.29 per share. We believe that generating more meaningful earnings from its underlying operations will serve as a catalyst to structurally reduce its NAV discount.
■ Solid AUM growth benefiting from market appreciation and continued sales momentum. Q1/15 AUM grew by 4.5% sequentially and 12.3% YOY, driven by positive market returns and solid net sales. Management noted that net sales in the quarter were strong, driven by net additions from existing and new clients with particular success in the retail intermediary client area. Given weaker bond market returns since the end of Q1/15 and Guardian’s roughly 30% AUM exposure to fixed income, we are forecasting sequential AUM growth of just under 1%. Following three consecutive years of solid net sales
99
Exhibit 7 – Revision Summary
Source: Scotiabank GBM estimates.
Old New Old New
Op. EPS (Ex-Gains) $1.05 $1.04 $1.10 $1.11
EBITDA/Share $1.00 $1.00 $1.08 $1.09
2015E 2016E
Exhibit 6 – Financial Advisory Profitability
Source: Company reports; Scotiabank GBM estimates.
-$6
-$4
-$2
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
-$0.06
-$0.02
$0.02
$0.06
$0.10
$0.14
$0.18
Q1
-10
Q2
-10
Q3
-10
Q4
-10
Q1
-11
Q2
-11
Q3
-11
Q4
-11
Q1
-12
Q2
-12
Q3
-12
Q4
-12
Q1
-13
Q2
-13
Q3
-13
Q4
-13
Q1
-14
Q2
-14
Q3
-14
Q4
-14
Q1
-15
AU
A (
$B
)
Fin
an
cia
l A
dv
iso
ry O
pera
tin
g E
arn
ing
s
($/S
hare
)
AUA Financial Advisory Operating Earnings
Exhibit 5 – Operating Earnings Ex-BMO Dividend & Net Gains on Securities
Source: Company reports; Scotiabank GBM estimates.
-$4
$0
$4
$8
$12
$17
$21
$25
$29
-$0.06
$0.00
$0.06
$0.12
$0.18
$0.24
$0.30
$0.36
$0.42
Q1
-10
Q2
-10
Q3
-10
Q4
-10
Q1
-11
Q2
-11
Q3
-11
Q4
-11
Q1
-12
Q2
-12
Q3
-12
Q4
-12
Q1
-13
Q2
-13
Q3
-13
Q4
-13
Q1
-14
Q2
-14
Q3
-14
Q4
-14
Q1
-15
AU
M (
$B
)
Op
era
tin
g E
arn
ing
s E
x-B
MO
Div
iden
d a
nd
Net
Gain
s o
n
Secu
riti
es (
$/S
hare
)
AUM Operating Earnings Ex-BMO Dividend and Net Gains on Securities
and with relatively weaker investment performance, we expect net flows in 2015 to moderate but remain robust.
■ Profitability of the Financial Advisory segment remains solid, contributing positively to Guardian’s solid earnings growth. In Q1/15 all three segments generated positive operating earnings contribution with the Financial Advisory segment (World Source Wealth Management) experiencing solid YOY growth in profitability (see Exhibits 5and 6). AUA grew 15% YOY, benefiting from market appreciation and solid net sales from existing advisors and net new independent advisors. The life insurance Managing General Agency (MGA) had positive improvement with a 28% increase in the annual premium sold compared to the previous year. In April 2015, IDC Worldsource Insurance Network Inc., Guardian’s MGA subsidiary, announced that it had signed a letter of intent to purchase First Prairie Financial Inc., a regional MGA based in Alberta. We were pleased to see YOY growth coming from the investment management platform. Increased management fees continued to drive strong earnings growth from Guardian’s investment management operations. Over time, we expect that more meaningful earnings contribution from Guardian’s operating business is likely to lead to a structurally tighter NAV discount.
■ Minor revisions to 2015 and 2016 estimates. With the quarter coming in line with our expectations, we have made modest revisions to our 2015 and 2016 estimates. Our estimate revisions are summarized in Exhibit 7.
■ Raising target price to $20.50 (was $20.00) and maintaining our Sector Perform rating. Our $20.50 target price is derived using a NAV model assuming a 12-month price target for BMO shares of $82.00, based on Scotiabank GBM’s current one-year share price target, and a 29.5% discount to our estimated one-year NAV of $29.10 per share (see Exhibit 9).
Q1/15 Highlights
■ Operating results came in line with our expectations. Q1/15 operating earnings of $10.5 million came in as we had anticipated, with stronger-than-anticipated top line offset by higher-than-expected opex. Operating EPS (before held for sale securities gains/losses) of $0.27 came in a touch below our expectation of $0.28. Q1/15 reported EPS of $0.37 was ahead of our estimate of $0.29. Reported EPS was impacted by net gains on securities held for sale of $3 million (est. $0.10/sh). CFO per share (before change in non-cash working capital) was $0.27, below our estimate of $0.34 (see Exhibit 8).
■ Quarter-end AUM was up sequentially and YOY. Q1/15 AUM of $26.1B was a touch above our expectation of $25.9B, representing sequential growth of 4.5% and YOY growth of 12.3%. Management noted the increase was primarily driven by market appreciation and net additions from existing and new clients, with particular success in the retail intermediary
100
Exhibit 8 - Quarterly Financial Summary
Source: Company reports; Scotiabank GBM estimates.
Guardian Capital
Quarterly Highlights
(FYE Dec 31; CAD$millions except EPS)
Q1-15A Q4-14A Q1-14A Q/Q Y/Y
Revenue
Net Commissission Revenue $8.1 $8.1 $6.3 (0.4%) 28.6%
Management and Other fees $16.5 $15.6 $14.5 5.4% 14.0%
Administrative Services Income $3.1 $2.8 $2.6 10.6% 17.1%
Investment income & other income $4.7 $5.0 $4.4 (5.8%) 7.3%
Cash Flow per Share1 $0.27 $0.32 $0.24 (15.9%) 12.6%
Assets Under Management
Institutional $23,841 $22,831 $21,367 4.4% 11.6%
Private Client $2,252 $2,137 $1,870 5.4% 20.4%
Total AUM $26,093 $24,968 $23,237 4.5% 12.3%
Assets Under Administration $14,057 $13,126 $12,227 7.1% 15.0%
1 Cash flow from operations before change in non-cash working capital.
Change
client area. AUA from its retail financial advisory platform of $14.1B was above with our estimate of $13.5B and was up 7.1% from Q4/14 and 15% from a year ago. Management stated that growth in AUA was driven by positive market performance and strong net sales from existing advisors and net new independent advisors.
101
Exhibit 9 - Estimated NAV ($M except per share amounts)
Source: Company reports; Bloomberg, Scotiabank GBM estimates.
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.
Innergex Renewable Energy Inc. (INE-T C$11.02)
Water in the West
Matthew Akman, MBA - (416) 863-7798 (Scotia Capital Inc. - Canada) [email protected]
Dario Neimarlija, CA, CFA - (416) 863-2852 (Scotia Capital Inc. - Canada)
Keith Sandor - (416) 865-6337 (Scotia Capital Inc. - Canada)
Valuation: 5.7% 2015E Free Cash Yield and 18.8x 2015E EV/EBITDA
Key Risks to Target: Government Support for Renewables; Credit Spreads; Hydrology; Growth Project s
Div. (NTM) $0.63
Div. (Curr.) $0.62
Yield (Curr.) 5.6%
Event
Pertinent Revisions
New Old
CFPS15E $0.56 $1.08 CFPS16E $1.14 $1.15
New Valuation: 5.7% 2015E Free Cash Yield and 18.8x 2015E EV/EBITDA
Old Valuation: 5.2% 2015E Free Cash Yield and 18.7x 2015E EV/EBITDA
■ INE reported Q1/15 adj. EBITDA of $43M vs. our $31M estimate and $25M in Q1/14.
Implications
■ The positive result came directly from favorable hydrology in B.C. where production achieved 176% of LTA compared with 49% in Q1/14. We think the high production will be partially offset by a weaker Q2 due to less snow in the past winter relative to the prior year. Our annual adj. EBITDA estimate was revised up by ~$5M.
■ Construction projects are well underway with financing completed for Upper Lillooet and Boulder, and Mesgi'g Ugju's'n to start in a week. INE is experienced in project execution and financing which were helpful in securing favorable contract terms and interest rates.
■ We like INE's growth strategy - Europe for wind and solar and Latin America for small hydro. Regional markets and potential partners have been identified, a further step toward post-2017 growth.
Recommendation
■ We remain optimistic that INE will extend growth beyond 2017 as it implements international expansion. Announcement of new projects with visible returns (high teens) could be a catalyst for the stock. However, we are doubtful valuation will improve significantly until more detailed development and/or acquisition plans emerge. We maintain our $12.50 target price and Sector Perform rating at this time.
Qtly CFPS (FD) Q1 Q2 Q3 Q4 Year P/CF Capitalization Market Cap (M) $1,114 Net Debt + Pref. (M) $1,964 Enterprise Value (M) $3,111 Shares O/S (M) 101
Float O/S (M) 89
ScotiaView Analyst Link
2013A $0.15 A $0.36 A $0.34 A $0.13 A $0.97 10.9x 2014A $0.05 A $0.39 A $0.24 A $0.34 A $1.02 11.1x 2015E $-0.42 A $0.36 $0.30 $0.33 $0.56 19.6x 2016E $1.14 9.6x
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.
Kelt Exploration Ltd. (KEL-T C$8.64)
Q1/15 Results in Line; Shifting Capital to NE BC
Cameron Bean - (403) 218-6786 (Scotia Capital Inc. - Canada) [email protected]
Erik Kuhn, CFA - (403) 213-7349 (Scotia Capital Inc. - Canada)
Key Risks to Target: Oil and natural gas prices; Drilling program success.
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
Event
Pertinent Revisions
New Old
CFPS15E $0.56 $0.57 CFPS16E $0.90 $0.87
■ Kelt announced its Q1/15 results.
Implications
■ Q1/15 Results in Line. Production of 16 mboe/d and CFPS of $0.11 were in line with our estimate and consensus. The company reduced its Q1/15 G&A by 14% QOQ on a per boe basis to $0.47/boe. During the quarter, KEL spent $77.7M, including $37.6M drilling seven (5.5 net) wells, $29.4M on facilities, well equipping and pipelines, and $10.7M on land and asset acquisitions.
■ Shifting Capital to NE BC. With a string of strong results from Inga/Fireweed and the political uncertainty in Alberta, KEL plans to shift capital toward NE BC over the balance of 2015. The remaining spending in Alberta will target re-completions, non-op working interest activities, pipeline connections, and potential acquisitions. We view Inga/Fireweed as KEL's key play (and largest portion of our risked upside estimate) and believe that shifting capital toward it is the right move for the company (see Page 3).
■ 2015 Guidance Confirmed. KEL confirmed its $150M capital budget and average production guidance of 20 mboe/d (59% natural gas). We expect the company to consider additional opportunistic acquisitions as the year progresses and believe it is well positioned to execute given its low cost of capital and solid balance sheet.
Recommendation
■ We maintain our SO rating.
Qtly CFPS (FD) Q1 Q2 Q3 Q4 Year P/CF Capitalization Market Cap (M) $1,421 Net Debt + Pref. (M) $222 Enterprise Value (M) $1,644 Shares O/S (M) 165
Float O/S (M) 97
ScotiaView Analyst Link
2013A $0.03 A $0.08 A $0.06 A $0.09 A $0.32 29.8x 2014A $0.23 A $0.22 A $0.25 A $0.23 A $0.93 7.5x 2015E $0.11 A $0.12 $0.14 $0.18 $0.56 15.4x 2016E $0.90 9.6x
■ KEL’s two recent Fireweed Montney wells (A-006-A and A-065-I) have shown strong initial results, with 30-day IP rates above 900 boe/d and >55% free condensate volumes (see Exhibit 2). While early in the life of the play, these wells suggest strong economic potential – particularly under improved commodity prices (see Exhibit 3).
■ KEL recently brought an Inga Montney well (B07-29) onstream at what it described as similar initial characteristics to the above-mentioned Fireweed Montney wells, but noted that the well has not been onstream long enough to determine productivity. The well is ~12 miles southwest of the Fireweed wells and offsets some of the company’s stronger Doig wells.
108
Exhibit 4 - Capital Spending and Commodity Price Sensitivities of our 2015 Estimates
Source: Company reports; Scotiabank GBM estimates.
Value Buildup $3,593,858 $2,275,664 $13.84 $1,778,957 $10.82
Target Price $11.00
Notes:
1. Assumes 40.0 net sections (75% prospective) and 4 wells per section.
2. Assumes 157.0 net sections (55% prospective) and 4 wells per section.
3. Assumes 49.1 net sections (50% prospective) and 3 wells per section.
4. Assumes 20.0 net sections (75% prospective) and 8 wells per section.
5. Assumes 72.5 net sections (30% prospective) and 3 wells per section.
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
$11.00
$12.00
$13.00
$14.00
$15.00
Blowdown NAV NAV + Risked Upside NAV+ Unrisked Upside
PDP NAV
1P NAV
2P NAV
Inga/Fireweed Doig Rich Gas
Inga/Fireweed Montney Rich Gas
Karr Montney Oil
Pouce Coupe/Progress Montney
Valhalla Montney Oil
Target Price: 1.0x NAV + Risked
Upside
Share Price:
Notes:1) The "Blow Down" includes all undeveloped land in base NAV, while other cases include portion not considered in upside evaluations.2) The "Risked Upside" and "Unrisked Upside" cases both account for PV of the Drill Program;
Target Price and Valuation Rationale
■ We have updated our NAV and risked upside estimates for KEL’s year-end 2014 disclosures. We are maintaining our Sector Outperform rating and one-year target price of $11.00/share. Our target price is set at 1.0x our estimate of KEL’s year-end 2014 2P NAV plus risked upside.
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.
Lucara Diamond Corp. (LUC-T C$2.15)
Q1/15 Conference Call Highlights
Craig Johnston, CPA, CA - (416) 860-1659 (Scotia Capital Inc. - Canada) [email protected]
James Steels - (416) 945-4527 (Scotia Capital Inc. - Canada) [email protected]
Key R isks to Target: D iamond p rices; development r isk; technical and opera tiona l r isk; mu lt ip le contraction ; and geopo lit ical ris k
Div. (NTM) C$0.04
Div. (Curr.) C$0.04
Yield (Curr.) 1.9%
Event
Pertinent Revisions
New Old
Target: 1-Yr $2.50 $2.65
Adj. EPS15E US$0.19 US$0.21
■ We are updating our estimates following the release of Q1/15 financial results and conference call.
Implications
■ The plant upgrade is progressing well with construction work at site largely complete. The XRT circuit has functioned well and shown exceptional recovery during the testing phase.
■ The company currently has 13 or 14 stones which could be sold via an EST, including the 342ct stone announced last month. Given the considerable lead time required, the company expects to likely host its first EST of 2015 in early July (previous GBM assumption was Q2/15).
■ Management also indicated it is more likely that they will hold only two ESTs in 2015, compared to the three originally planned (with likely higher value sales). In our view, we do not see this as a concern for reaching revenue guidance (as this was re-iterated), but we think this may reduce the likelihood of a material revenue beat on the year.
■ We have updated our estimates to reflect the items above, as well as Q1/15 financial results. There were no material changes to our NAV, however, we have updated our Q1/16E USD/CAD estimates (in line with Scotiabank GBM Economics) to 1.26 (from 1.33) and as a result, our target price is now $2.50 per share.
Recommendation
■ We continue to look forward to H2/15 for the processing of the South Lobe material through the upgraded plant. Re-iterate Sector Outperform.
Qtly Adj. EPS (FD) Q1 Q2 Q3 Q4 Year P/E Capitalization Market Cap (M) $682 Net Debt + Pref. (M) $-87 Enterprise Value (M) $609 Shares O/S (M) 379
Float O/S (M) 312
ScotiaView Analyst Link
2013A $0.02 A $0.06 A $0.04 A $0.06 A $0.17 9.6x 2014A $0.01 A $0.06 A $0.10 A $0.05 A $0.24 7.9x 2015E $0.02 A $0.02 $0.08 $0.08 $0.19 9.6x 2016E $0.05 $0.05 $0.05 $0.05 $0.21 8.5x
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.
Pacific Rubiales Energy Corp. (PRE-T C$6.01)
(PREC-CN COP 11940.00)
Q1 - Light Oil Increases and Cost Decreases
Gavin Wylie - (403) 213-7333 (Scotia Capital Inc. - Canada) [email protected]
Jenna Halwa, M. Econ - (403) 213-7762 (Scotia Capital Inc. - Canada)
Valuation: Based on our risked NAVPS ($4.74) that also equates to 7.7x 2015E debt -adjusted CF and 2.04x our 2P NAV .
Key Risks to Target: Commodity prices, exploration, project execution, political/regulatory.
Div. (NTM) C$0.00
Div. (Curr.) C$0.00
Yield (Curr.) 0.0%
Event
Pertinent Revisions
New Old
CFPS15E US$2.29 US$2.07 CFPS16E US$1.86 US$2.00
New Valuation: Based on our risked NAVPS ($4.74) that also equates to 7.7x 2015E debt-adjusted CF and 2.04x our 2P NAV.
Old Valuation: Based on our risked NAVPS ($4.70) that also equates to 8.4x 2015E debt-adjusted CF and 2.0x our 2P NAV.
■ Pacific Rubiales reported weaker than expected CFPS on a higher than expected overlift charge ($4.34/bbl), but made additional progression on its operating costs and material reductions to its G&A.
Implications
■ CFPS came in 13% below our estimate at $0.50 ($159M) versus our $0.58 ($182M) and 18% below consensus of $0.61.
■ The miss is not overly disappointing given the timing of underlifts/overlifts can be difficult to predict and add volatility to earnings and cash flow.
■ Current production is averaging >155,000 boe/d versus the Q1/15 average of 152,650 boe/d.
■ Pacific Rubiales announced that it has employed financial advisors to conduct an independent evaluation of the takeover offer from Alfa, S.A.B de C.V. and Harbour Energy.
Recommendation
■ Maintain Sector Perform and our price target of $5.50.
■ We remain somewhat cautious on the proposed takeover offer at this stage given the public opposition from core shareholders and the potential for the definitive offer to be a few weeks out.
Qtly CFPS (FD) Q1 Q2 Q3 Q4 Year P/CF Capitalization
Market Cap (M) $1,585 Net Debt + Pref. (M) $3,917 Enterprise Value (M) $8,490 Shares O/S (M) 316
Float O/S (M) 224
ScotiaView Analyst Link
2013A $1.55 A $1.46 A $1.40 A $1.48 A $5.88 2.9x 2014A $1.48 A $1.69 A $1.92 A $1.30 A $6.41 1.0x 2015E $0.50 A $0.58 $0.66 $0.55 $2.29 2.2x 2016E $0.55 $0.52 $0.37 $0.42 $1.86 2.7x
■ Pacific Rubiales reported weaker than expected CFPS on a higher than expected overlift charge ($4.34/bbl), but made additional progression on its operating costs and material reductions to its G&A. In our view, the miss is not overly disappointing, given the timing of underlifts / overlifts can be difficult to predict and can add volatility to earnings and cash flow. That said, Q1 overlift of 14,000 bbl/d was greater than usual and resulted in a $61M ($0.19/sh pre-tax) increase in operating expenses. Excluding the overlift, operating and G&A expenses were reduced by 40% and 22% QOQ, respectively, while current production is averaging >155,000 boe/d versus the Q1/15 average of 152,650 boe/d. The company further noted that it was able to add ~10,000 bbl/d of light oil production from exploration success in the Llanos Basin (largely Guatiquia / Avispa). That said, we continue to see the company facing significant headwinds post Q2/15E that will relate to potentially significant declines at the Rubiales field as it nears expiry and due to the lack of progression in receiving the environmental permits for the Agrocascada water disposal project that appears to be slipping past previous guidance of Q2/15 resolution.
■ We maintain our Sector Perform rating and maintain our one-year target price of $5.50 per share based our revised risked NAVPS of $4.74 (vs. $4.70) and given our view that there is still risk around a definitive offer. Our revised NAV reflects some moderate improvements in operating / G&A costs that had been previously factored in to some extent and the company’s updated balance sheet. The balance sheet adjustment for the quarter was significant, with long-term debt increasing to $5.3B vs. $4.3B (Q4/14), partially offset by the increase in net working capital.
■ In context of our unchanged 2P NAVPS estimate of $2.69, Pacific Rubiales is trading at a P/NAV ratio of 223% and a 2015 DACF multiple of 7.5x relative to its International peer group at 119% and 7.6x, respectively.
■ In our view, the most important information in the release was that the company has employed financial advisors to conduct an independent evaluation of the takeover offer from Alfa, S.A.B de C.V. and Harbour Energy. We see this as an important step for the parties to enter into a definitive agreement and move toward a shareholder’s vote. That said, management noted that the “process will evolve over the next month or two”, which could imply that we are still weeks away from any definitive offer. We remain somewhat cautious on the deal at this stage, given the public opposition from the O’Hara group of shareholders who combine control ~19.18%. We see the reported offer price of $6.50/sh a more than reasonable in the context of a ~25% premium to the reserve evaluators 2P NPV10 value of ~$6B, and given the in-line metrics on an EV/flowing and EV/2P Boe metric basis for Latin American energy transactions.
■ See our recently published note for our analysis of the offer.
■ Balance Sheet. At quarter-end, Pacific Rubiales had cash on hand of $860M and a net working capital deficit of $17M. Total debt now stands at $5.3B (~98% drawn on total capacity), up from $4.3B at year-end. The cash / debt position reflect the company has fully drawn down its $1B revolving credit facility to repay short-term bank debt and maintain a strong cash position to maintain activity and its $1.1B capital budget (vs. our 2015E cash flow of $724M).
■ To manage its near-term financial situation, Pacific Rubiales sold forward 6 million barrels in March for $200M in upfront/partial payment, but noted that it will participate fully in any price upside.
■ Upcoming catalysts – 12 wells remaining for the year. Pacific Rubiales outlined plans to drill 11 exploration and 9 appraisal wells in 2015, with 8 wells drilled during Q1 – including 5 exploration / 3 appraisal for an overall success rate of 75%. Plans for Q2/Q3 program in Colombia includes an additional 2 wells on Guatiquia to follow-up on the recent Avispa success, and 2 wells per quarter at Corcel that can be quickly converted to cash flow. Two wells have also been planned for CPO-17.
■ CFPS came in 13% below our estimate at $0.50 ($159M) versus our $0.58 ($182M) and 18% below consensus of $0.61. The major source of variation were costs associated with an over lift of ~ 14,000 bbl/d in the quarter which amounted to $4.34/bbl.
■ Q1/15 production was pre-released at 150,000 to 154,000 boe/d and came in at 152,650 boe/d (+4% QOQ) and in-line with our estimate of 152,205 boe/d. No surprises on sales which were reported at 164,562 boe/d once trading volumes were removed and were pre-released at 164,000 to 169,000 boe/d. Of note was that Rubiales represents 35% of total production vs. 37% in Q4 as declines continue to set in at the field and delays continue on water handling permits for Agrocascada.
■ Oil operating netbacks amounted to $22.48/bbl (55% of realized sales price) compared to $28.82/bbl in Q4/14 driven by a 40% reduction in operating costs QOQ. Combined netbacks came in at $22.73/boe vs. $38.36/boe in Q4/14. Overall, the cost improvements were driven by field cost improvements and the depreciation of the Colombian Peso against the US Dollar.
119
Exhibit 1 - PRE - NAVPS Summary
Source: Company reports; Scotiabank GBM estimates.
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.
Paladin Energy Ltd. (PDN-T C$0.34)
(PDN-AX A$0.34)
In-Line FQ3/15 Results
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526 (Scotia Capital Inc. - Canada) [email protected]
Dalton Baretto, MBA, CFA - (416) 863-7623 (Scotia Capital Inc. - Canada) [email protected]
Key Risks to Target: Uranium prices; F/X rates; balance sheet
Div. (NTM) C$0.00
Div. (Curr.) C$0.00
Yield (Curr.) 0.0%
Event ■ Paladin reported its FQ3/15 financial results.
Implications
■ Paladin reported a FQ3/15 EPS loss of $0.01, in line with our estimate and consensus of a loss of $0.01. We note that the results are not particularly meaningful as the company had pre-released its operating results in late April.
■ The company reiterated its FY2015 U308 production guidance of 5.0M-5.2M lbs, which implies FQ4/15 production of 1.3-1.5M lbs.
■ The company's balance sheet remains highly leveraged, although we see sufficient liquidity for at least 18 months.
Recommendation
■ Given the company's relatively high debt leverage in the context of the current weak uranium price environment, we continue to rate Paladin Sector Perform. Our 12-month target of C$0.40 per share is based on 1.0x our 8% NAV estimate of C$0.44.
Market Cap (M) $474 Net Debt + Pref. (M) $366 Enterprise Value (M) $840 Shares O/S (M) 1,667
Float O/S (M) 1,379
ScotiaView Analyst Link
2013A $-0.02 A $-0.09 A $-0.02 A $-0.14 A $-0.28 n.m. 2014A $-0.04 A $0.01 A $-0.02 A $-0.07 A $-0.11 n.m. 2015E $-0.04 A $-0.02 A $-0.01 A $-0.01 $-0.06 n.m. 2016E $0.00 $0.00 $0.00 $0.00 $-0.02 n.m.
■ Paladin reported its financial results for the fiscal quarter ended March 31, 2015 (FQ3/15). The FQ3/15 loss of $0.01 per share was in line with our estimate and the consensus of a loss of $0.01, and compared with the FQ2/15 and FQ3/14 losses of $0.02 per share. We note that the company previously reported its operating results for the quarter on April 24 – for a detailed review, please see our note dated April 27, titled “PDN – Weak FQ3/15 results”.
■ Total FQ3/15 revenue of $17.1 million was marginally higher than our estimate of $16.7 million, while gross margin of $3.7 million exceeded our estimate of $2.2 million due to better-than-expected costs. However, the gross margin declined from the $7.1 million earned in both FQ2/15 and FQ3/14, due to lower sales. As previously disclosed, sales were well below production levels as the company was building inventory for a bulk shipment to CNNC in April.
Balance Sheet Weak But No Near-Term Liquidity Issues Expected
■ As at March 31, 2015, the company had $470 million in cash and $829 million in debt, resulting in a considerable net debt balance of $359 million (or $0.22 per share). We note that ~$295 million of the March 31 cash balance will be used to retire the company’s 3.625% unsecured convertible bonds (due November 2015) in the current quarter. We forecast Paladin to exit FY2015 (June 30) with a materially lower cash balance of $167 million and a net debt balance of $364 million (or $0.22 per share).
■ In FY2016, we forecast the company to generate $23 million in operating cash flow, based on an average spot U3O8 price of $43/lb, sales of 5.1 million lbs, and average unit production costs of $29/lb. However, we forecast negative free cash flow of $7 million, as we ant icipate LHM will incur $30 million in sustaining capital expenditures over the fiscal year. We forecast the company to exit FY2016 with an essentially unchanged net debt balance of $380 million (or $0.23 per share). However, we forecast the company’s balance sheet will get progressively weaker into the end of the decade. We profile our forecast EBITDA, cash flows, net debt, and debt to capitalization in Exhibits 2-5 below.
124
Exhibit 6 - Estimated Sensitivity to U3O8 Prices
Source: Company reports; Scotiabank GBM estimates. Note - base case assumes a $43/lb
■ We have revised our estimates based on the company’s FQ3/15 results. While we have made no changes to our production forecast, we have reduced our FY2016 unit production cost estimate at LHM to $29/lb, from $30/lb previously.
■ Our FY2015–FY2017 EPS estimates are essentially unchanged, as are our FY15-FY17 CFPS estimates. However, our 8% NAVPS estimate is now C$0.44 per share (was C$0.40 per share).
■ We present our estimate of the company’s sensitivity to the U3O8 spot price in Exhibit 6, and a breakdown of our NAV estimate in Exhibit 7.
Conclusions
■ We view the FQ3/15 results as in line. As the company pre-released operating results and with no change in guidance, the results are not particularly meaningful in our view.
Valuation
■ PDN trades at a 0.79x multiple to its 8% NAVPS, versus its peer group average of 0.95x. On an EV/EBITDA basis, the company trades at 17.3x 2015E EBITDA and 12.4x 2016E EBITDA versus Cameco at 10.1x and 9.1x respectively.
Recommendation
■ Given the company's relatively high debt leverage in the context of the current weak uranium price environment, we continue to rate Paladin Sector Perform. Our 12-month target of C$0.40 per share is based on 1.0x our 8% NAV estimate of C$0.44.
125
Exhibit 8 - PDN Financial and Operating Summary
Source: Company reports; Scotiabank GBM estimates.
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.
Perpetual Energy Inc. (PMT-T C$0.96)
View Maintained Post Q1 (However, There Are
Big Moving Parts That Could Prove Us Wrong)
Patrick Bryden, CFA - (403) 213-7750 (Scotia Capital Inc. - Canada) [email protected]
Riley Hicks, CA, MBA - (403) 213-7760 (Scotia Capital Inc. - Canada)
Justin Strong, MBA, - (403) 213-7328 (Scotia Capital Inc. - Canada)
Key Risks to Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program succes s
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
Event
Pertinent Revisions
New Old
CFPS15E $0.01 $0.06 CFPS16E $0.07 $0.13
■ Perpetual released first quarter results.
Implications
■ Production in line as cash flow slightly behind. Perpetual achieved first quarter production of 22,819 boe/d, relatively in line with our estimate of 23,450 boe/d and consensus of 23,536 boe/d. Cash flow, however, was slightly behind estimates at -$0.01/share versus our estimate of $0.03/share and consensus of $0.02/share. Marginally higher realized liquids differential as well as operating and transportation costs were the cause of the miss.
■ Capital budget heavily front-weighted to complete Edson development program. Perpetual spent $46.9 mm in the first quarter, with the majority being directed towards the Edson area and, in particular, the East Edson gas plant, scheduled for start-up in Q3/15.
■ 2015 guidance sees minimal activity for remainder of year. Perpetual expects capital spending for the remainder of 2015 to be $20 - $25 mm. The majority (88%) of the 2015 budget will be directed towards the Edson area liquids-rich gas development program. We estimate 2015 average production will be ~18,400 boe/d.
Recommendation
■ We maintain our SU rating and one-year price target of $1.00 per share.
Qtly CFPS (FD) Q1 Q2 Q3 Q4 Year P/CF Capitalization Market Cap (M) $144 Net Debt + Pref. (M) $326 Enterprise Value (M) $471 Shares O/S (M) 150
Float O/S (M) 150
ScotiaView Analyst Link
2013A $0.05 A $0.11 A $0.12 A $0.08 A $0.35 3.1x 2014A $0.12 A $0.23 A $0.13 A $0.10 A $0.59 1.9x 2015E $-0.01 A $0.01 $0.00 $0.01 $0.01 78.0x 2016E $0.02 $0.01 $0.01 $0.03 $0.07 13.1x
Development to Continue in Edson Despite Eroding Margins
■ Edson area is the focus of first quarter development program. During the first quarter, Perpetual spent $43.3 on E&D activities in West Central Alberta, drilling 1.5 net gas wells at West Edson and 3.0 net gas wells at East Edson. A total of $15.6 mm was spent completing 4.0 net wells at Edson and tying in substantially all of the remaining wells drilled in Q4/14. Wells drilled and completed at West Edson during the first quarter are included in the disposition of West Edson assets to Tourmaline which is effective April 1, 2015.
■ East Edson gas plant construction on schedule. Perpetual continued construction of its East Edson gas plant, directing $14.2 mm towards the project over the first quarter. Management also decided, subsequent to the quarter, to expand the plant capacity to 45 mmcf/d (from 30 mmcf/d). The upsizing of the plant is expected to require an additional, cost effective $2.7 mm for additional compression. The targeted completion and start-up date of the gas plant is July 1, 2015. The plant is expected to be operating at full capacity by the end of Q3/15. Completion of 4.0 net gas wells at East Edson have been deferred due to insufficient processing capacity that the gas plant is expected to provide.
■ Mannville waterflood, shallow gas, Panny bitumen programs attract minimal capital. Perpetual spent $0.7 mm over the first quarter in the Manville heavy oil area to convert and equip a source water well, convert one injector well, source surface equipment and complete preliminary pipeline work. At Panny, PMT spent $1.9 mm on two observation wells to advance the Low-Pressure Electro-Thermal Assisted Drive (LEAD) bitumen development program. There was $0.9 mm was spent on Perpetual’s shallow gas-related facility optimization program.
■ 2015 guidance scaled back up, sees minimal activity for remainder of year. Recall prior to the West Edson asset sale to Tourmaline Perpetual had released a 2015 capital budget of $50 mm. When the disposition was released Perpetual had revised its capital program for 2015 down to $45 mm. Now Perpetual expects capital spending for the remainder of 2015 to be $20 - $25 mm for a total of $67 - $72 mm over 2015. The majority (88%) of the 2015 budget will be directed towards the Edson area liquids-rich gas development program. Perpetual expects to fund the planned capital program through additional borrowing and further asset or investment dispositions if needed. We estimate 2015 average production will be ~18,400 boe/d.
Recent Transactions Improve Balance Sheet
■ West Edson disposition transaction completed. On April 1, Perpetual closed the previously announced arrangement to swap its interest in the West Edson asset in exchange for 6.75 mm shares of Tourmaline, which currently have a market value of ~$271 mm. The disposition includes all West Edson land, infrastructure, and approximately 5,750 boe/d of current production. In addition, the 1.5 net wells drilled and 1.0 net well completed at West Edson during the first quarter have been included in the disposition.
■ Tourmaline shares to be retained for now. Management has indicated that it will retain the Tourmaline shares for the time being, opting to utilize the potential proceeds when required to fund further development plans or provide future financial flexibility. Management has indicated a desire to maintain the shares as it retains the company's exposure to the West Edson asset, while mitigating the associated potential risks. In our view, it is likely that the proceeds from the sale of the acquired shares will be used to reduce current debt levels and bolster the strength of the balance sheet.
128
■ Perpetual closed the sale of fee simple lands in east central Alberta on April 10. The previously announced transaction involves 206,712 net acres of fee simple lands and 165 mboe of royalty associated reserves. The reserves are estimated at 82% gas. This implies transactions metrics of $102/acre or $127/boe, without considering other items in each respective case. In addition to royalty interests, Perpetual sold its 75% ownership interest in 1,013 square km of 3D proprietary seismic and 3,917 km of 2D proprietary seismic.
Scenario Analysis Makes Us Think Deeply; The Stock is Rubik’s Cube
■ Formal view has not changed but admittedly there is much more to contemplate now. Our initial view of the West Edson disposition was that it represented the idea of an “isomorphic replacement” for West Edson within PMT through TOU stock and the analogy of a solid solution, in part, to the risks posed to the company from recent commodity price and market weakness (see our March 13, 2015, publication Roses, Gemstones, and Debt Riddles: I Walk the Line With an Isomorphous Replacement for further details). Specifically, we regarded the transfer of West Edson out of the company in return for an equivalent value of Tourmaline stock neutral to NAV. While true, in hindsight, the ability to hold TOU stock as a marketable security provides a great deal more financial flexibility than we may have initially appreciated. We were initially incorrect in our treatment of the net interest cost post the disposition, so our cash flow estimates are now lower than our prior forecast. While negative with respect to near term cash flows, which are negligible in 2015 and somewhat higher in our 2016 estimates due to higher commodity price assumptions year-over-year, in our view the company arguably has much stronger financial flexibility as we look ahead. We have chosen to stay the course in our view for now but we have also started to think more carefully about “what if” scenarios and how these might playout over the next couple years.
■ Accounting analysis, financial analysis and scenario analysis. From an accounting standpoint, if one contemplates current debt and debentures, the financial leverage of the company remains very high and the burden of interest costs at low commodity price assumptions severely constrains cash flows. However, we expect the TOU stock to be treated as a marketable security in current assets on the balance sheet once Q2/15 is reported. When the value of the stock is incorporated, the net debt to cash flow on the of financial analysis basis becomes less onerous but still remains high, per the new line in Exhibit 2 that compares “Net Debt and Debentures” to “Cash Flow w/ Marketable Securities” – this is step one to contemplate. We then consider what the enterprise might look like if stock is sold to settle its convertible debentures towards the end of this year, and to also take out its 2011-issued $150 mm senior notes, which represent over 50% of the term debt (the $125 mm 2014-issued senior notes mature in 2019 and cannot be called for a couple years yet) – this is step two to contemplate. Included in Exhibit 3 is a scenario where we take out the debentures and the 2011-issued notes and one can see that this results in more than a doubling of cash flow in 2016, along with materially improved net debt to cash flow when the residual marketable securities are considered (note: we assume the debentures and 2011-issues senior note settlements are funded by TOU stock sales). Our pause is that the interim remains tough and it also continues to be in the context of a challenged commodity environment, so the stock is not necessarily out of the woods yet, so to speak, as evidenced by our cash flow estimate for 2015E that is a sum total of $1.8 mm. However, we acknowledge the creativity of the step towards greater financial flexibility and the potential improvement for prospects to find the enterprise’s way out from under the debt rock that has encumbered the stock for a long time. The last thing to consider is what can be done in the interim - these are steps three and beyond to contemplate. If TOU stock outperforms, the financial health of the business benefits commensurately. While one could argue a holding company discount could apply with respect to the value of TOU stock held within PMT, per Exhibit 1 Tourmaline has demonstrated a highly attractive track record of returns in the marketplace that Perpetual could benefit from prospectively. We have elected to not get ahead of ourselves at this point but there is risk to our viewpoint, per the steps outlined above, that were not present previously. In this regard, outperformance or even a takeover of TOU would have material implications for PMT and the company may also now be able to
Exhibit 1 - PMT (LHS) and TOU (RHS) 5-Year Stock Returns and Alpha Generation
Source: Company reports; Bloomberg; Scotiabank GBM estimates.
contemplate other business transactions today that were not likely possible a few months ago. Moreover, any eventual sales of TOU stock will likely be tax neutral given loss pools that can be applied against any potential capital gains.
Investment Recommendation
■ Investment thesis maintained amid increased budget. We have maintained our rating of Sector Underperform and our one-year price target of $1.00 per share as we endeavour to further assess the company’s ability to navigate the current downturn in commodity prices. Our target price represents a 2015E EV/DACF of 16.0x, which compares to the peer group average of 11.4x. Perpetual currently trades at a 2015E EV/DACF of 15.9x, and a 2015E D/CF of 30.5x, which compares to the peer group averages of 10.2x, and 3.6x, respectively.
130
Exhibit 2 - Financial & Operating Summary
Source: Company reports; Scotiabank GBM estimates.
Fiscal Year End - December 31 2013A 2014A Q1/15A Q2/15E Q3/15E Q4/15E 2015E 2016E
Percentage of Light & Medium Oil % -- -- -- 25% 41% 44% 36% 69%
Percentage of Heavy Crude Oil % -- -- -- 0% 0% 0% 0% 0%
Percentage of Natural Gas Production % -- -- -- 99% 95% 38% 72% 16%
Percentage of Total Production % -- -- -- 88% 87% 39% 67% 22%
Note: Hedged amounts include call options, basis and differential hedges.
132
Company Comment
Thursday, May 14, 2015, After Close
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.
Power Financial Corporation (PWF-T C$36.42)
Solid Start to 2015 with 27% EPS Growth YOY
Phil Hardie, P.Eng., MBA, CFA - (416) 863-7430 (Scotia Capital Inc. - Canada) [email protected]
Michael Lee, CPA, CA - (416) 863-7826 (Scotia Capital Inc. - Canada)
Beam Ukarapong, MBA - (416) 945-4528 (Scotia Capital Inc. - Canada)
Valuation: 10.7% Discount to one-year NAVPS of $46.48, 11.8x 2016E EPS.
Key Risks to Target: Economic, systemic, interest rate, regulatory and counterparty failures
Div. (NTM) $1.52
Div. (Curr.) $1.49
Yield (Curr.) 4.1%
Event
Pertinent Revisions
New Old
Target: 1-Yr $41.50 $41.00
Operating EPS15E
$3.29 $3.26
Operating EPS16E
$3.53 $3.48
New Valuation: 10.7% Discount to one-year NAVPS of $46.48, 11.8x 2016E EPS.
Old Valuation: 11% Discount to one-year NAVPS of $46.05, 11.8x 2016E EPS.
■ PWF reported Q1/15 operating EPS of $0.79, above consensus and our estimate of $0.76.
Implications
■ Q1/15 operating results were above expectations largely resulting from higher-than-anticipated contributions from GWO and IGM earnings, partially offset by weaker-than-forecast contributions from PARG.
■ Operating EPS was up 27% YOY, largely driven by 20.4% and 2.6% increases in earnings contributions from GWO and IGM, respectively.
■ We have made upward revisions to our 2015 and 2016 estimates reflecting updated consensus estimates for GWO, PARG, and our IGM forecast.
■ We expect Power Financial's NAV discount to revert towards its long-term historical average. We estimate PWF's NAV discount at 14.6%, above its 15-year average of 10.6%.
Recommendation
■ We have raise our target price to $41.50 (was $41.00) and maintain our Sector Perform rating.
Market Cap (M) $25,976 Net Debt + Pref. (M) $32 Enterprise Value (M) $26,008 Shares O/S (M) 713
Float O/S (M) 242
ScotiaView Analyst Link
2013A $0.57 A $0.65 A $0.67 A $0.64 A $2.53 14.2x 2014A $0.62 A $0.77 A $0.83 A $0.74 A $2.96 12.2x 2015E $0.79 A $0.83 $0.83 $0.83 $3.29 11.1x 2016E $0.84 $0.89 $0.90 $0.90 $3.53 10.3x
Operating Earnings After Preferreds $0.79 $0.74 $0.62 27.0%
Net Reported Earnings After Preferreds $0.80 $0.71 $0.66 21.3%
Valuation & Outlook
■ PWF Q1/15 Op. EPS came in above Street expectations and our estimates. PWF reported Q1/15 core operating EPS of $0.79, higher than consensus and our estimate of $0.76. Operating EPS was up 27% YOY, largely driven by 20.4% and 2.6% increases in earnings contributions from GWO and IGM, respectively. The earnings beat was largely due to higher-than-expected contributions from GWO and IGM, partially offset by weaker-than-anticipated contribution from PARG. See Exhibit 1 for details on earnings contribution to PWF from its subsidiaries for the quarter.
o GWO: Q1/15 EPS for GWO came in above consensus expectations and was up 19% YOY, driven by earnings growth in U.S. and Europe. Operating earnings from the Canadian segment were up 2% YOY. Performance in Individual Insurance and Wealth Management was solid while Group Insurance earnings remained relatively flat YOY. U.S. operating earnings were up 195% YOY, reflecting solid YOY improvement in Financial Services earnings and a positive contribution from Putnam. While net flows remain positive, Putnam has lost some momentum in the past two quarters following five consecutive quarters of solid net flows. Earnings from the European segment were up 4% sequentially and 10% YOY. Contribution from Irish Life was up strongly from a year ago and improved from the previous quarter.
o IGM: Overall a clean quarter, with earnings in line with consensus but above our estimate. Earnings were ahead of our forecast, primarily driven by higher-than-anticipated net investment income related to mortgage banking operations. We are encouraged to see an improvement in cost containment with expense growth rate consistent with a YOY increase in average AUM. Continued momentum at Investors Group was also a standout, with net flows improving YOY. Management noted that gross sales in Q1 were the highest level on record. It was a bit of a disappointing quarter for mutual fund flows at Mackenzie. Mackenzie appears to be making strong inroads in global balanced funds but experiencing a headwind given investors’ shift away from value-style investment funds. Total net inflows of $970 million (0.7% of beg. AUM) were down from inflow of $1.1 billion (0.8% of beg. AUM) a year ago. Total mutual fund inflows of $537 million (0.4% of beg. AUM) were down from inflows of $802 million a year ago. Investors Group and Counsel recorded positive flows, while Mackenzie posted mutual fund outflows. Institutional inflows of $433 million improved from inflows of $300 million in the previous year.
o Pargesa: Pargesa’s earnings in Q1/15 improved from the previous year, primarily due to net gains of CHF 10.9 million related to mark-to-market adjustments on call options embedded in bonds exchangeable for shares of portfolio investments of GBL and in bonds convertible into GBL shares. GBL issued series of exchangeable and convertible bonds in 2012 and 2013 with maturities in 2015, 2017 and 2018. Earnings are likely to continue to be impacted by mark-to-market adjustments to the bonds depending on share price movement of Suez Environmental and GDF Suez, as well as any redemptions of the bonds. Pargesa received all its dividends from GBL in euros. Excluding the impact of net gains, operating results were down from the previous year, largely driven by a YOY decline in contribution from private-equity activities and other funds.
■ We have made upward revisions to our estimates. Reflecting better-than-expected Q1/15 results and higher consensus estimates for GWO, we have made upward revisions to our
134
Exhibit 2 – Estimate Revision Summary
Source: Scotiabank GBM estimates.
PWF
Old New Old New
Operating EPS $3.26 $3.29 $3.48 $3.53
2015E 2016E
Exhibit 3 – PWF Historical NAV
Source: Bloomberg; Company reports; Scotiabank GBM estimates.
2015 and 2016 estimates. The changes to our estimates are summarized in Exhibit 2 with forecast details shown in Exhibit 4.
■ Raising one-year target price to $41.50 (was $41.00) and maintaining our Sector Perform rating. We have adjusted our forecast NAV for PWF to reflect Q1/15 results. We have raised our one-year target price for PWF to $41.50 (was $41.00). We estimate that the NAV discount for PWF currently stands at 14.6%, close to one standard deviation above its long-term average, and expect the NAV to revert back closer toward its 15-year average of 10.6% over the next twelve months (see Exhibit 3). Our one-year target price of $41.50 per share is derived using a 10.7% discount to our one-year NAV forecast of $46.48 per share (see Exhibit 5), representing an 11.8x multiple of our 2016 EPS estimate.
135
Exhibit 4 – PWF Financial Summary
Source: Company reports; Scotiabank GBM estimates.
Power Financial CorporationFINANCIAL SUMMARY
Earnings Contribution Summary
(Cdn $ millions except where noted) F2013A Q1-14A Q2-14A Q3-14A Q4-14A F2014A Q1-15A Q2-15E Q3-15E Q4-15E F2015E F2016E
(Mar) (Jun) (Sep) (Dec) (Mar) (Jun) (Sep) (Dec)
Earnings Contributions
Great West Lifeco $1,464 $393 $413 $462 $442 $1,710 $473 $462 $476 $482 $1,892 $2,027
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.
Pure Industrial REIT (AAR.UN-T C$4.84)
Q1 Initial Take: In Line, Steady Results
Pammi Bir, CPA, CA, CFA - (416) 863-7218 (Scotia Capital Inc. - Canada) [email protected]
Ganan Thurairajah, MBA - (416) 863-2899 (Scotia Capital Inc. - Canada)
Key Risks to Target: Exposure to single-tenant properties, tenant concentration, inability to execute growth
CDPU (NTM) $0.31
CDPU (Curr.) $0.31
Yield (Curr.) 6.4%
Event ■ AAR reported Q1/15 FFOPU of $0.10 vs. $0.10 last year, in line with
our $0.10 estimate and consensus ($0.10).
Implications
■ Minor variances, but in line overall. NOI was a bit light vs. our call and taxes were a touch heavier, but offset by lower interest costs. YOY FFO growth was impacted by the timing difference between the equity issued to fund the FedEx portfolio purchase & the acquisition's closing and development completions, coupled with non-core asset sales.
■ Operationally stable; expect near-term moderation in SP NOI. SP NOI rose 2.1% YOY from 1.5% higher rents and the ContainerWorld expansion, offset by a 170bp drop in occupancy. AAR reiterated its call for a moderation of near-term SP NOI growth due to temporary increase in vacancy in 1H/15, with a partial offset from higher renewal rents. Geographically, SP NOI growth was led by MB (+13.1%), followed by BC (+7.3%) and AB (+1.3%), with ON (-1%) lagging. Economic occupancy was 96% (-130bp QOQ, -50bp YOY) with committed at 96.6% (-110bp, -80bp). Renewal leasing spreads were solid at +15.9% driven by a Vaughan property, with in place rents 4.6% below market.
■ IFRS cap rate steady at 6.54% (+2bp QOQ, +2bp YOY), in line with our 6.55% NAV cap rate and slightly above 6.4% implied cap. AAR expects NAV to rise in Q2 as appraisals on FedEx portfolio are updated.
Recommendation
■ Full update post today's conference call (3 p.m. ET; 1-888-390-0546).
Qtly FFOPU (FD) Q1 Q2 Q3 Q4 Year P/FFO Capitalization Market Cap (M) $929 Net Debt + Pref. (M) $841 Enterprise Value (M) $1,770 Units O/S (M) 192
Float O/S (M) 189
ScotiaView Analyst Link
2013A $0.09 A $0.10 A $0.11 A $0.09 A $0.40 12.1x 2014A $0.10 A $0.09 A $0.09 A $0.09 A $0.37 12.0x 2015E $0.10 $0.11 $0.11 $0.10 $0.42 11.6x 2016E $0.11 $0.11 $0.11 $0.11 $0.43 11.2x
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.
RMP Energy Inc. (RMP-T C$2.93)
Q1/15 In Line; Costs Keep Getting Better
Cameron Bean - (403) 218-6786 (Scotia Capital Inc. - Canada) [email protected]
Erik Kuhn, CFA - (403) 213-7349 (Scotia Capital Inc. - Canada)
Key Risks to Target: Oil and natural gas prices; Drilling program success.
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
Event ■ RMP announced Q1/15 results.
Implications
■ Q1/15 In Line; Costs Keep Getting Better. Production of 12,250 boe/d was pre-announced and CFPS of $0.20 was in line with our estimate and consensus. During Q1/15 RMP spent ~$47M drilling five wells and constructing its second Ante Creek production facility (online April 2, 2015). The company's already low operating costs decreased further to $5.67/boe (down 4% QoQ and 16% YoY). G&A expenses were also down 38% YoY (18% on a total cash basis) to $1.51/boe.
■ New Area. RMP has accumulated 32 net sections (20,480 acres) in a new area outside of its Ante Creek/Waskahigan core. The company plans to continue adding land in the area and begin drilling as part of its next winter program.
■ Ante Creek Update. RMP plans to drill a delineation well to the south of its core six section Ante Creek block in Q4/15. The company also announced that it has begun engineering work for a pilot secondary recovery project at Ante Creek that could be online by Q1/16. We believe this is the right move, given the increasing gas to oil ratio in the production profile and lower than expected primary recovery factor (8.2%) applied to the light oil resource base.
Recommendation
■ We maintain our SP rating.
Qtly CFPS (FD) Q1 Q2 Q3 Q4 Year P/CF Capitalization
Market Cap (M) $394 Net Debt + Pref. (M) $139 Enterprise Value (M) $533 Shares O/S (M) 135
Float O/S (M) 120
ScotiaView Analyst Link
2013A $0.18 A $0.19 A $0.15 A $0.16 A $0.68 8.3x 2014A $0.28 A $0.38 A $0.38 A $0.25 A $1.30 3.5x 2015E $0.20 A $0.17 $0.19 $0.19 $0.75 3.9x 2016E $0.79 3.7x
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.
Rubicon Minerals Corporation (RMX-T C$1.39)
(RBY-A US$1.15)
Debt Facility Secured: Insurance or a Necessity?
Mike Hocking, MSc, P.Geo. - (416) 945-5228 (Scotia Capital Inc. - Canada) [email protected]
Amir Ahmad - (416) 862-3875 (Scotia Capital Inc. - Canada)
Key Risks to Target: Commodity risk, multiple contraction, project development risk, mineral resource and exploration risk
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
Event
Pertinent Revisions
New Old
EPS15E $-0.06 $-0.05 EPS16E $-0.02 $-0.01
■ RMX secures $50M loan facility and issues 10M warrants with CPPIB.
Implications
■ RMX are to receive the full $50M upon close (not draw-down). The loan has a five-year term, maturing in May 2020. It has a cash interest rate of 7.5% annually, compounded quarterly. It can be prepaid at a premium ranging from 1%-6%. The proceeds are to provide operational flexibility during the ramp-up phase. RMX also issued 10M warrants (five-year expiry) at an exercise price of C$1.715. They remain on track to achieve first production by mid-2015, with still no guidance provided on when it will achieve commercial production.
■ Neutral. Overall, we view the agreement as neutral (well-known that they were looking for a debt facility of this size) but it highlights the increased risk to the project and company. We are concerned with the increased balance sheet risk and that the full C$50M had to be drawn now, potentially indicating an increase in required capital. We had previously modelled the debt facility in Q2/15 and now factor in dilution from a warrant exercise. We have also made other minor adjustments to our model (FX and Q1/15 financials), resulting in a lower NAVPS estimate. For full details, please see the next page.
Recommendation
■ We rate RMX Sector Perform with little upside at our base case, and maintain our target price of C$1.50.
Qtly EPS (FD) Q1 Q2 Q3 Q4 Year P/E Capitalization
Market Cap (M) $515 Net Debt + Pref. (M) $-47 Enterprise Value (M) $468 Shares O/S (M) 371
Float O/S (M) 367
ScotiaView Analyst Link
2013A $-0.01 A $-0.01 A $-0.01 A $-0.01 A $-0.03 n.m. 2014A $-0.01 A $-0.01 A $0.00 A $-0.01 A $-0.03 n.m. 2015E $-0.03 A $-0.01 $-0.01 $-0.01 $-0.06 n.m. 2016E $-0.02 n.m.
■ Reported to be on track. RMX has begun to process low-grade material and remains on schedule for initial production in mid-2015 (guidance for commercial production not given; commercial production defined as 60 days of 875 tpd or 70% of full capacity).
■ Potential capex overrun. At this time we have not made any adjustments to our model in terms of capital overlays. However, we are concerned that RMX could potentially increase their capital budget given their recent $30M flow-through financing (which is to be used for underground development), followed by this financing agreement.
■ Balance sheet risk. The debt facility adds a heightened degree of risk to a firm that is producing no substantial revenues at the present time. We find it concerning that the full C$50M was required at this time and believe it does not send a strong degree of confidence in terms of meeting its financial targets.
Model Adjustments & Valuation
■ We already assumed a debt facility. The debt facility was well telegraphed in the market as the firm had previously indicated they were looking to secure a facility of that size. We had previously modelled a C$50M facility in Q2/15, but with an 8% interest rate (now lowered to 7.5%).
■ Q1/15 financials. We have updated our model to reflect the latest financial statements. As of Q1/15 end, RMX’s cash position was C$57.9M, lower than our projected C$66.3M, largely due to changes in working capital (increases in prepaid expenses, inventories and decrease in accounts payable). We now estimate a year-end cash position of C$97M.
■ FX adjustment. Given the recently higher oil prices, we have adjusted our near-term CAD/USD FX assumptions in line with the latest forecast from Scotiabank Economics. Our long-term FX rate remains at $0.82.
■ Dilution. The exercise price of the warrants is 14% higher than our current target. Provided the company remains on schedule and given the long exercise period, we assume the warrants will eventually be exercised as NAV will increase as it is rolled over.
■ Little upside. Little upside remains at our target price, based on US$1,300/oz gold (Exhibit 1). The current spot price is around US$1,222/oz. At spot gold prices and FX assumptions, our NAVPS estimate is lowered to $1.22. Given the current price, the stock is slightly overvalued at spot (Exhibit 2).
144
Exhibit 2 - Rubicon Minerals NAVPS Estimate at Spot Gold and CAD/USD FX
Source: Company reports; Scotiabank GBM estimates.
Net Asset Value (NAV) based on unlevered after-tax free cash flows
■ Proceeds. The proceeds of the loan facility will be used for buffering working capital, mine optimization at their 100% Phoenix Gold Project, and for unexpected costs and overruns during the ramp-up period.
■ Loan facility. The $50M loan facility has been fully received and is not a draw-down facility. The loan facility has a five-year term that will mature on May 12, 2020 with the entire principal due at maturity. It bears an annual cash interest rate of 7.5%, compounded quarterly (7.71% effective pre-tax).
■ Prepayment. The loan can be prepaid early at various premiums. Any prepayment prior to 18 months after the closing date results in a 6% premium; between 18 and 30 months, 3%; and between 30 and 42 months, 1%.
■ Warrants. In consideration for the loan facility, RMX has also issued 10M warrants to CPPIB (five-year expiry) at an exercise price of C$1.715 (30% premium to five-day VWAP); they are exercisable after a four-month holding period. These warrants represent 2.5% of current shares outstanding.
Q1/15 MD&A – Project Update
■ Mill update. Piping, electrical and surface conveyer construction is near complete. RMX has commenced commissioning on the following areas: SAG and ball mills, sulfur dioxide plant, elution circuit, mill thickener, service and process water tanks, reagent area and control room equipment.
■ Stopes. RMX has eight stopes under development, between the 122- and 305-metre levels. They have stockpiled ~11.6Kt of material (as announced on April 14) with longhole drilling underway on the first trial stope. As announced on April 14, RMX has completed ~85% of the original underground development plan (90% when you factor in off-ramp reductions). In addition, the tailings facility is ready for two years of tailings.
■ Capital budget. $33M in initial capital spend left (no change from April 14 press release).
■ Exploration. RMX continues definition drilling at the 244m level, which will further tighten the drill hole spacing by 12.5m or less. RMX has completed a 9.6km regional exploration program on the potential of the northern extension of the F2 deposit, with assay results due to be released. The target areas are located within 1km of planned underground development.
■ Surety bond. On April 10, RMX replaced a restricted deposit with a surety bond (C$3.5M) as security for reclamation and closure obligations of the project with the Ontario Ministry of Northern Development and Mines. The annual premium on the bond is 2.75%. A previously provided security for $3.4M was refunded.
145
Company Comment
Friday, May 15, 2015, Pre-Market
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.
Sabesp (SBSP3-SA R$19.55)
(SBS-N US$6.47)
Doomsday Scenario Fading
Ezequiel Fernández López, CFA - +56 9 9991 9152 (Scotia Corredora de Bolsa Chile SA) [email protected]
■ Sabesp reported Q1/15 Adj. EBITDA of R$660M (-35% YOY), in line with our estimate. EPS was plagued by one-offs, but in line.
Implications
■ Operational results for Sabesp were positive, as softer-than-expected pricing was offset by good progress on the opex front. Moreover, it seems that water pressure reduction initiatives are not hurting volumes as much as expected, while reservoirs maintain decent volumes.
■ Water consumption per customer dropped 14% YOY, versus our estimate of 17%. However, pricing was softer than expected, as quarterly Rev/m3 closed at R$2.28 (-8% YOY) driven by a stronger-than-expected impact from the bonus program.
■ On the cost side, we saw QOQ reductions in most items, but the large "Other Expenses" reduction was related to a change in lawsuit provisions. Bear in mind that Sabesp booked, as an operational cost offset, a R$696M positive charge related to a legal settlement with the State of Sao Paulo, which artificially boosted headline EBITDA.
■ Quarterly EPS was also hit by a R$884M FX one-off, but was helped by a R$160M positive tax adjustment. Earnings calls to take place May 19 at 9:30 am ET (Portuguese) and 1:00 pm ET (English). Dial in +55 11 3127 4999 (code 549817455) and +1 412 317 0088 (code 10063466).
Recommendation
■ Good opex news and lower-than-expected volume contraction; maintain Sector Outperform on Sabesp and Copasa.
Qtly EPS (FD) Q1 Q2 Q3 Q4 Year P/E Capitalization
Market Cap (M) R$13,363 Net Debt + Pref. (M) R$9,063 Enterprise Value (M) R$22,425 Shares O/S (M) 684
Float O/S (M) 340
ScotiaView Analyst Link
2012A R$0.72 A R$0.43 A R$0.53 A R$1.12 A R$2.80 10.4x 2013A R$0.73 A R$0.53 A R$0.69 A R$0.86 A R$2.81 9.4x 2014A R$0.70 A R$0.44 A R$0.13 A R$0.05 A R$1.32 12.9x 2015E R$0.47 A R$0.35 R$0.24 R$0.56 R$1.61 12.2x
■ Quarterly Rev/m3 closed at R$2.28, contracting 8% YOY due to a higher-than-expected impact from the bonus program. This should be a temporary effect, but… when could the São Paulo government eliminate the pricing bonus program? It could be hard to see this happening before the 2016 elections, so a full normalization is only likely to materialize in 2017, even under a better hydrological scenario.
■ Sabesp made good progress in regards to costs in Q1/15, lowering opex more than what we had expected. Although some part of this is related to provisions management (especially the “Other Expenses” line), the 4% QOQ reduction in headcount, for example, attests to progress made.
■ The combined main reservoirs level continued at 33%, including technical reserves. This is better than what was expected at the beginning of 2015, and supports our forecast of a reduction in consumption per customer of 18% YOY for the remainder of 2015. Far from a “doomsday” scenario.
■ Electricity costs were in line with our view and averaged R$0.16/m3, 15% higher than in Q1/14 and highlighting the material increase in this type of cost for all Brazilian industries due to the application of bandeiras tarifarias. In this sense, Q2/15 should bring additional increases due to the extraordinary tariffs review by the ANEEL in April 2015.
■ Net Debt to EBITDA closed the quarter at 3.9x, which could signal some problems regarding covenants, either now or in upcoming quarters if results remain challenged. However, we expect waivers to be granted.
■ The company provided capex guidance of R$2,400M, in line with expectations. Earnings calls to take place on May 19 at 9:30 am ET (Portuguese) and 1:00 pm ET (English). Dial in +55 11 3127 4999 (code 549817455) and +1 412 317 0088 (code 10063466).
147
Exhibit 2 – Sabesp Summary
Source: Company reports; Scotiabank GBM estimates, Bloomberg.
BRL million 2011 2012 2013 2014 2015E 2016E 2017E 2018E
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.
h
Spartan Energy Corp. (SPE-T C$3.40)
Q1/15 Results in Line; Staying Strong
Cameron Bean - (403) 218-6786 (Scotia Capital Inc. - Canada) [email protected]
Erik Kuhn, CFA - (403) 213-7349 (Scotia Capital Inc. - Canada)
Key Risks to Target: Oil and natural gas prices; drilling program success.
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
Event
Pertinent Revisions
New Old
CFPS15E $0.24 $0.25
■ Spartan announced its Q1/15 results.
Implications
■ Q1/15 results in line. Production of 9.4 mboe/d and CFPS of $0.05 were in line with expectations. Operating and G&A expenses were down 2.1% and 19.0% QoQ, respectively. SPE drilled 19 (15.8 net) wells during the quarter as part of its $22.7 million capital program. The company has seen DC&T costs for its open-hole Mississippian wells decrease by 10% to less than $1 million on the back of industry-wide service cost reductions. SPE expects to resume drilling in June 2015.
■ Capital budget update pending. SPE noted that it plans to update its capital program later in Q2/15 based on its assessment of commodity prices and service costs. The company continues to target a cash flow budget for the year. Recall that the company's current guidance calls for a $105M capital budget and production of 9.2 mboe/d (annual) and 9.9 mboe/d (exit) pegged at US$65/bbl WTI.
Recommendation
■ With a strong cost of capital and ample financial flexibility (over $150M available on a $250M line), we view SPE as well positioned to pursue opportunistic acquisitions during the downturn and to thrive when oil prices recover. We maintain our SO rating.
Qtly CFPS (FD) Q1 Q2 Q3 Q4 Year P/CF Capitalization Market Cap (M) $1,047 Net Debt + Pref. (M) $89 Enterprise Value (M) $1,136 Shares O/S (M) 308
Float O/S (M) 214
ScotiaView Analyst Link
2013A $0.12 A $0.12 A $0.15 A $0.04 A $0.38 8.3x 2014A $0.00 A $0.09 A $0.10 A $0.10 A $0.35 8.0x 2015E $0.05 A $0.05 $0.07 $0.08 $0.24 14.1x 2016E $0.36 9.5x
Value Buildup $1,311,596 $1,140,557 $3.74 $1,082,188 $3.55
Target Price $4.50
Notes:
Well counts based on current company identified drilling locations.
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
Blowdown NAV NAV + Risked Upside NAV+ Unrisked Upside
PDP NAV
1P NAV
2P NAV
SE SK Mississippian (Open Hole)
SE SK Midale (Frac'd)
SW SK Viking
Share Price:
$3.38
Target Price: 1.3x NAV + Risked
Upside
Notes:1) The "Blow Down" includes all undeveloped land in base NAV, while other cases include portion not considered in upside evaluations.2) The "Risked Upside" and "Unrisked Upside" cases both account for PV of the Drill Program;
Target Price and Valuation Rationale
■ We have updated our NAV and risked upside estimates for SPE’s year-end 2014 disclosures. We are maintaining our Sector Outperform rating and one-year target price of $4.50/share. Our target price is set at 1.3x our estimate of SPE’s year-end 2014 2P NAV plus risked upside. We believe the premium valuation is justified due to the company’s financial flexibility, strong costs of capital, solid management team, and high leverage to improving oil prices. We also believe that SPE is well positioned to be opportunistic in what may be a very attractive A&D market as the commodity price slump drags on.
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.
Stantec Inc. (STN-T C$34.52)
(STN-N US$28.79)
Q1/15 Results In Line
Anthony Zicha - (514) 350-7748 (Scotia Capital Inc. - Canada) [email protected]
Sami Abboud, MBA - (514) 350-7737 (Scotia Capital Inc. - Canada)
Vincent Perri, CPA, CA, CFA - (514) 287-4990 (Scotia Capital Inc. - Canada)
Key Risks to Target: Slower than anticipated recovery in residential and commercial construction; lower commodity prices
Div. (NTM) $0.42
Div. (Curr.) $0.42
Yield (Curr.) 1.2%
Event
Pertinent Revisions
New Old
EPS15E $1.88 $1.89
■ Stantec Inc. reported Q1/15 EPS of $0.40 in line with consensus estimate of $0.40 and above our estimate of $0.38.
Implications
■ Record Backlog Levels. Q1/15 backlog increased sequentially 11.0% to a record ~$2.0 billion and compares to Q1/14 backlog of $1.6 billion.
■ 2015 Guidance Maintained. The company continues to expect a moderate increase of 3% organic revenue growth in 2015.
■ Positive 2015 Outlook. We expect organic growth to be mainly supported by: 1) a healthy pipeline of projects within the Buildings and Infrastructure segment, and 2) an improving US economy driven by commercial real estate, transportation, and water treatment sectors.
■ Weak Energy Outlook. The company has revised its 2015 Energy & Resources organic growth outlook to retraction from stable. The company expects a decline in the Canadian Oil & Gas sector in Q2/15 with a stable outlook for the balance of 2015.
■ Maintained Target Price. To value Stantec Inc. shares we continue to use a 19.0x multiple on our 2016E EPS of $2.10. We believe Stantec's valuation multiple premium to its peer group average of 15.0x P/E (on 2015E) is justified given its superior EBITDA margin and ROE.
Recommendation
■ We are buyers of Stantec shares given the company's solid long-term growth outlook, earnings profitability, and potential earnings upside stemming from acquisitions.
Qtly EPS (FD) Q1 Q2 Q3 Q4 Year P/E Capitalization Market Cap (M) $3,260 Net Debt + Pref. (M) $433 Enterprise Value (M) $3,692 Shares O/S (M) 94
Float O/S (M) 94
ScotiaView Analyst Link
2013A $0.31 A $0.39 A $0.49 A $0.38 A $1.57 21.0x 2014A $0.36 A $0.47 A $0.51 A $0.40 A $1.74 18.3x 2015E $0.40 A $0.50 $0.54 $0.44 $1.88 18.4x 2016E $0.44 $0.55 $0.62 $0.49 $2.10 16.4x
■ Stantec Inc. reported Q1/15 EPS (fd) of $0.40 in line with consensus estimate of $0.40 and above our estimate of $0.38 (see Exhibit 1).
■ Infrastructure & Building Drive Organic Growth. The results reflect a 1.7% organic growth in gross revenues and 2.1% organic growth in net revenues. Stantec’s Building and Infrastructure business operating units both grew 7.3% organically (see Exhibit 2). As expected, the Energy & Resources business operating unit gross revenues declined 6.0% organically.
■ Record Backlog Levels. Q1/15 backlog increased sequentially 11.0% to a record ~$2.0 billion. This compares to $1.6 billion at the end of Q1/14 (see Exhibit 3). We believe backlog growth is a solid indicator of future earnings power. The backlog increase was mainly driven by recent project wins, FX rate, and acquisitions completed in Q1/15.
■ Solid FCF Generator. Stantec generated FCF of $50.4 million or $0.53 per share. We believe Stantec’s solid FCF generation profile (see Exhibit 4), superior ROE of 16.3%, and healthy balance sheet (Q1/15 net debt to EBITDA of 1.50x) should support the company’s long-term targeted gross revenue growth of 15% annually (organic and acquisition).
■ 2015 Guidance Maintained. The company continues to expect a moderate increase of 3% organic revenue growth in 2015 compared to 2014 (3.9% organic growth). Moreover, going forward, the company continues to expect to achieve a long-term average annual compound gross revenue growth of 15% (organic + acquisition).
■ Dessau Acquisition Fully Integrated. The Dessau acquisition announced in September 2014 was completed in January 2015. We estimate Dessau contributed $28.3 million (8.8% growth) to gross revenue growth in Q1/15. Moreover, on the Q1/15 results conference call, management indicated that they expect Dessau to contribute $130 million of net revenues in 2015 (or ~5.5% of our 2015E).
Results & Outlook
■ Canadian Organic Growth Declined. Stantec’s Canadian operations (~51% of LTM gross revenue) experienced their second consecutive quarter of organic revenue declines (3.8% decline) mainly reflecting the substantial completion of certain projects within the Oil & Gas Sector (see Exhibit 5). Moreover, the company is experiencing a slowdown and increased competition and pricing pressures on new project awards.
o Stable 2015 Outlook. The company expects organic gross revenues to be stable (0% to 2%) for 2015 but may retract in H1/15 and stabilizing in H2/15. The H1/15 decline is expected to stem from weakness in the oil and gas sector.
155
Exhibit 4 – Solid FCF Generator
Source: Company reports; Scotiabank GBM estimates.
We expect P3 activity levels to remain elevated and consistent with the past few years. Moreover, we could expect an increase in the P3 projects at the municipal level especially in transportation, water, and airports. We note that Stantec’s proven experience in P3 projects provides the company a solid competitive advantage.
However, we believe the decline in energy prices has lowered growth opportunities within the oil and gas sectors. We note that Stantec’s oil and gas exposure is mainly towards midstream and frontend planning and permitting on large multiyear projects. We expect oil and gas project awards to decline in 2015.
■ Solid US Organic Growth. Stantec’s Q1/15 US operations (~45% of gross revenue) delivered organic revenue growth of 10.2% with growth experienced in all business operating units and in most sectors. However, Mining experienced stable organic growth while organic revenues declined in Oil & Gas (see Exhibit 5).
o Positive 2015 Outlook. The company expects moderate (2% to 5%) organic gross revenue growth in 2015 mainly driven by an improving US economy. We expect an improving outlook for business investment driven by an improving credit market.
We expect 2015 growth drivers to include: 1) increased residential and non-residential construction spending, including investment in commercial buildings and manufacturing 2) increased investment in chemicals and metals processing facilities, and 3) increased environmental services work.
Furthermore, we believe alternative project delivery methods such as public-private partnerships (P3s) are becoming more popular in the US stemming from long-term funding constraints and budget tightness. We view the emergence of P3 projects as a long-term catalyst for Stantec’s earnings growth.
■ International Organic Revenues Declined. Stantec’s Q1/15 International operations (~4% of gross revenue) organic revenues declined 6.4% (see Exhibit 5). The decline was mainly riven by weakness in the company’s Mining sector given the weak global commodity market. However, on a positive note, the company’s international Building organic revenues increased mainly driven by healthcare projects recently secured in Qatar. We note that the company’s International operations are mainly within the Buildings and Mining segment.
156
o The company expects moderate organic gross revenue growth in 2015 in International operations. We believe organic growth is expected to be supported mainly by the Buildings segment.
Energy & Resources 2015 Outlook
■ The company has revised its 2015 Energy & Resources organic growth outlook to retraction from stable. However, the company continues to expect organic gross revenue for the Energy & Resource segment potentially retract in H1/15 and stabilize in H2/15. The company defines ‘stable’ growth to be between -2% and 2%. We believe the Energy & Resource segment could be impacted by:
o Slow decision making by midstream energy clients resulting in delays in project awards of new, rehabilitated, or repurposed large capital infrastructure projects.
We note that the company’s Energy & Resource segment (~42% of LTM gross revenues) comprises Oil & Gas, Mining, and Power of which we estimate Oil & Gas to represent 60% and midstream projects to be the majority. Furthermore, as at Q1/15, the company estimates ~50% of Oil & Gas revenue is related to engineering work and the balance to environmental services.
Valuation and Recommendation
■ Premium to Comps. To value Stantec Inc. shares, we continue to use a 19.0x multiple on our 2016E EPS of $2.10. Our valuation multiple reflects a significant premium to the current comp group average of 15.0x P/E on 2015E. We believe Stantec’s valuation multiple premium to its comps is justified given its superior EBITDA margin and ROE (see Exhibit 6).
o We believe Stantec’s comp group average reflects their significant exposure to upstream and downstream oil and gas activity. We believe the majority of Stantec’s exposure to the oil and gas sector is within midstream investments. We believe midstream investment activity is less volatile comparable to upstream or downstream activity.
o Moreover, we believe US midstream oil & gas is at the beginning of a major pipeline investment cycle that could span three to five years, stemming from additional capacity from increased US shale oil & gas and Canadian oil sands production.
o Since Mid-2012 Stantec’s P/E (NTM) valuation multiple has traded at a ~+2.2x premium to the comp group average (see Exhibit 7).
■ We are buyers of Stantec shares given the company's solid long-term growth outlook, earnings profitability, and potential earnings upside stemming from acquisitions.
157
Exhibit 6 – Stantec Inc. Comparables Table
Source: FactSet; Company reports; Scotiabank GBM estimates.
Price Market Enterprise
Company Name (YE) Ticker 14-May-15 Cap (M) Value (M) 2015E 2016E 2015E 2016E
WSP Global Inc. ( Dec ) WSP-TSE C$44.60 C$3,998 C$4,626 21.7 x 17.2 x 11.1 x 9.8 xFluor Corporation ( Dec ) FLR-USA $59.94 $8,837 $8,197 13.5 x 13.4 x 6.3 x 6.5 xJacobs Engineering Group Inc. ( Sep ) JEC-USA $44.29 $5,562 $5,930 14.4 x 13.7 x 8.1 x 7.7 xTetra Tech, Inc. ( Sep ) TTEK-USA $26.51 $1,597 $1,768 16.0 x 14.3 x 8.6 x 7.8 xWS Atkins plc ( Mar ) ATK-GB £13.72 £1,374 £1,223 13.5 x 12.6 x 7.5 x 7.1 xAECOM ( Sep ) ACM-USA $33.86 $5,264 $9,324 10.9 x na 8.2 x 7.9 xAverage: 15.0 x 14.2 x 8.3 x 7.8 xMedian: 14.0x 13.7x 8.1x 7.8x
Stantec Inc. ( Dec ) STN-CA C$34.52 C$3,262 C$3,695 18.4 x 16.4 x 11.0 x 10.4 x
EBITDA Net Debt / Net Debt /
Company Name (YE) Currency EBITDA EPS Margin (LTM) EBITDA (LTM) Total Cap ROE (LTM) Yield
WSP Global Inc. ( Dec ) CAD 13.0% 26.2% 8.2% 2.7 x 21.5% 4.0% 3.4%Fluor Corporation ( Dec ) USD (2.3%) 0.4% 6.7% -0.7 x (22.9%) 21.0% 1.4%Jacobs Engineering Group Inc. ( Sep ) USD 4.8% 5.3% 6.5% 0.4 x 5.7% 7.6% 0.0%Tetra Tech, Inc. ( Sep ) USD 10.1% 12.2% 7.9% 0.7 x 8.5% 10.6% 1.2%WS Atkins plc ( Mar ) GBP 5.8% 7.2% 8.5% -1.0 x (52.3%) na 2.5%AECOM ( Sep ) USD 3.8% na 5.4% 7.4 x 49.8% 2.5% 0.0%Average: 5.9% 10.2% 6.8% 1.1 x (2.2%) 15.5% 1.5%Median: 5.3% 7.2% 6.7% 0.4 x 5.7% 9.1% 1.4%
Stantec Inc. ( Dec ) CAD 5.7% 11.7% 14.0% 1.4 x 27.1% 15.9% 1.3%
P/E EV/EBITDA
2016E/2015E Growth
ScotiaView Analyst Link
Exhibit 7 – Stantec P/E (NTM) At Premium to Comps Since Mid-2012
Source: FactSet; Scotiabank GBM.
Note: Engineering & Design group includes: URS Corp. (URS-US), Stantec Inc. (STN-CA), KBR Inc. (KBR-US),
Jacobs Engineering Group (JEC-US), AECOM Technology Corp. (ACM-US), Tetra Tech Inc. (TTEK-US), Fluor
Corp. (FLR-US), WSP Global Inc, (WSP-CA), IBI Group (IBG-CA), Amec Foster Wheeler plc (AMFW-LON)
Jan 2
005
Jan 2
006
Jan 2
007
Jan 2
008
Jan 2
009
Jan 2
010
Jan 2
011
Jan 2
012
Jan 2
013
Jan 2
014
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
16.31
8.03
28.43
Engineering Comps Historical P/E (NTM) vs. Stantec Inc. P/E (NTM)
Average P/E Minimum P/E (NTM) Maximum Stantec Inc. P/E (NTM)
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.
The Mosaic Company (MOS-N US$45.56)
$1.5B Buyback Announced
Ben Isaacson, MBA, CFA - (416) 945-5310 (Scotia Capital Inc. - Canada) [email protected]
Carl Chen - (416) 863-7184 (Scotia Capital Inc. - Canada)
Oliver Rowe, MBA - (416) 863-5907 (Scotia Capital Inc. - Canada)
Key Risks to Target: Fertilizer supply/demand, crop and energy prices, weather
Div. (NTM) $1.10
Div. (Curr.) $1.10
Yield (Curr.) 2.4%
Event ■ MOS announced a new $1.5B share buyback authorization, which
includes the cancellation of ~$150M remaining in the existing program (i.e., a net increase of ~$1.35B).
Implications
■ The $1.5B buyback authorization has no specific expiration date, although management expects to complete the program over the next two to three years. Additionally, MOS intends to accelerate the repurchase of $0.5B of shares by September.
■ MOS has $2.5B of cash that should easily cover the initial $0.5B, and the remaining $1B is spread out over two to three years. MOS currently stands at 1.7x adjusted debt to EBITDA, which is within the 1.5x to 2.0x target range, so we don't expect MOS to alter its capital structure because of this buyback.
Recommendation
■ We think the move should lift the stock by 1% to 2%.
Qtly Adj EPS (FD) Q1 Q2 Q3 Q4 Year P/E Capitalization Market Cap (M) $16,762 Net Debt + Pref. (M) $1,309 Enterprise Value (M) $18,071 Shares O/S (M) 368
Float O/S (M) 349
ScotiaView Analyst Link
2013A $0.95 A $1.02 A $0.51 A $0.36 A $2.84 8.3x 2014A $0.52 A $0.70 A $0.55 A $0.87 A $2.64 17.3x 2015E $0.70 A $0.90 $0.72 $0.89 $3.21 14.2x 2016E $0.77 $1.00 $0.77 $0.88 $3.42 13.3x
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.
Trevali Mining Corporation (TV-T C$1.17)
(TV-LM PEN 0.97)
Q1/15 Financials - All Focus Remains on Caribou
Mark Turner, MBA, P.Eng. - (416) 863-7484 (Scotia Capital Inc. - Canada) [email protected]
Brandon Throop - (416) 863-7284 (Scotia Capital Inc. - Canada)
Valuation: 50/50 mix of 5.5x 2016E EV/EBITDA & 0.8x Mine Site NAV8% + 1.0x Net Cash Items
Key Risks to Target: Commodity price, operating, and technical risks; environmental and legal risk s
Div. (NTM) $0.00
Div. (Curr.) $0.00
Yield (Curr.) 0.0%
Event
Pertinent Revisions
New Old
CFPS15E $0.05 $0.06
■ We view Q1/15 financial results generally in line with our estimates and consensus. Detailed production volumes had been previously released.
Implications
■ Q1/15 adjusted EPS loss of $0.01 was modestly below our $0.01 estimate and consensus of nil. OCFPS of $0.01 was in line with our estimate and consensus. The slight miss to our EPS estimate owes primarily to timing of sales, as payable metal sales were slightly below (2% to 6%) payable metal production in the quarter (see Exhibit 1).
■ Santander's site operating cash cost of US$0.39/payable pound of zinc equivalent production was a 5% increase QOQ but in line with our US$0.38 estimate. Increased head grades and recoveries QOQ offset modestly increased costs on a per-tonne-milled basis. An average site cost of $48.88/t milled was achieved, slightly above the 2014 average of $47.31/t, and at the low end of the 2015 guidance for US$48-$51/t.
■ Focus for the company and the stock remain on the Caribou mine and mill restart, which is on schedule for commissioning this quarter, in line with expectations. We look to the investor conference call for additional detail and the status of capex.
Recommendation
■ We rate TV SP with a $1.25/sh target price based on a 50/50 mix of 5.5x 2016E EV/EBITDA (implies $1.30 target price), and 0.8x P/NAV8% mine site assets plus 1.0x net cash items (implies $1.01 target price).
Qtly CFPS (FD) Q1 Q2 Q3 Q4 Year P/CF Capitalization
Market Cap (M) $335 Net Debt + Pref. (M) $77 Enterprise Value (M) $412 Shares O/S (M) (Basic)
286
Float O/S (M) (Basic) 286
ScotiaView Analyst Link
2013A $-0.01 A $-0.01 A $0.00 A $-0.01 A $-0.02 n.m. 2014A $0.02 A $0.01 A $0.02 A $-0.01 A $0.04 30.2x 2015E $0.01 A $0.01 $0.02 $0.02 $0.05 21.7x 2016E $0.04 $0.05 $0.06 $0.07 $0.22 5.3x
Adjusted operating cash flow (before working capital changes) $3.2 M $4.1 M -22% ($1.8 M) 272% $4.5 M -30%
Adjusted CFPS (before working capital changes; FD) $0.01 $0.01 0% -$0.01 200% $0.02 -39%
Cash and equivalents $18.0 M $29.6 M -39% $24.7 M -27% $27.6 M -35%
Working capital position $23.2 M $23.0 M 1% $35.0 M -34% ($7.3 M) 418%
Net debt $88.3 M $67.3 M 31% $75.2 M 17% $59.2 M 49%
Production volumes
previously reported
Additional Q1/15 Details
■ Reported Q1/15 earnings were a net loss of $2.8M or -$0.01/sh, which included a $1.3M non-reoccurring expense to settle litigation brought against Maple Minerals Corporation (Maple) in May 2012, prior to TV announcing acquisition of Maple in November 2012. The plaintiffs claimed a 24.5% interest in Maple and/or the underlying assets – the Caribou complex. TV settled the action in April 2015 by issuance of 1M common shares (subject to a four-month hold period), 0.5M two-year warrants with an exercise price of $1.04/sh, and $60,000 of the plaintiff’s legal fees. We have adjusted operating cash flow before working capital to include interest charges to be consistent across our coverage universe.
■ Capitalization of $10.5M for the purchase of PP&E was in line with our expectation of $10.6M. Timing of sales (i.e., accounts receivable being greater than we estimated), along with $3.4M set aside as restricted cash and for reclamation bonding, resulted in the Q1/15 ending cash balance of $18.0M being below the $29.6M we estimated and a 27% decrease QOQ. Working capital of $23.2M was in line with our estimate of $23.0M though a 34% decrease QOQ, as capital is spent on the refurbishment of Caribou ahead of the Q2/15 commissioning.
161
Exhibit 2 – Production and Cost Guidance, and Scotiabank GBM Estimates – Both Unchanged
Source: Company reports; Scotiabank GBM estimates.
2015 Company 2015 BNS
Production and Cash Costs Guidance Estimate
Zinc (payable Mlb) 48 - 50 50.9
Lead (payable Mlb) 23 - 25 26.2
Silver (payable kozs) 850 - 950 953
Zn equivalent (Mlb) - 90.7
Site cash operating cost per tonnes milled (US$/t) $48 - $51 $48
Site cash cost (US$/payable lb Zn equivalent produced) - $0.39
C1 cash cost (US$/payable lb Zn produced, net of by-products) - $0.42
■ 2015 production and cash cost guidance unchanged – aiming to repeat 2014 at Santander. We have made no changes to our production or opex assumptions. Mill feed is expected to be sourced primarily from the Magistral North-Rosa and Magistral South zones during Q2/15 with additional feed from the Central zone during 2H/15. Head grades are expected to average 4.2%-4.4% zinc, 1.8%-2.1% lead, and 1.5-1.8 oz/t silver.
■ The ~6,000 m underground drill program is set to commence this quarter with the goal of converting inferred tonnes to a higher confidence category, as well as to continue to define the Magistral North-Rosa and Magistral Central-Fatima lead-silver-zinc zones at depth.
Gearing Up for the Caribou Ramp-Up
■ The Caribou mine and mill re-start remains on schedule for a Q2/15 start to commissioning. We model first concentrate production (pre-commercial) in late Q2/15 with commercial production being declared for the start of 2016. Mill refurbishment continued in Q1/15 with a focus on the milling and zinc-lead flotation circuits.
■ As previously announced, mining has begun with ore being stockpiled at surface. Approximately 18 kt of run-of-mine ore is on the coarse ore pad as of early April. TV aims to increase the working stockpile to ~60-80 kt prior to commencing mill commissioning. Underground refurbishment continued with an estimated 1 Mt of mineralized material available for initial production.
■ Highlighting the working relationship with its off-take partner, to de-risk commissioning of the Caribou mill as best possible, TV’s mill operations team visited Glencore’s Mount Isa and McArthur River zinc operations for insights and best practices in IsaMill operation, fine grind flotation performance, and maintenance practices. Glencore’s IsaMill operational specialists are to be made available to assist TV’s technical team onsite during mill commissioning and ramp-up. Additionally, a specialist metallurgy and plant operations group (DRA Americas Inc.) has been retained to provide additional expertise during commissioning and ramp-up.
Investor Conference Call
■ Conference call details: Friday, May 15, 2015 at 10:30 am ET. Dial-in numbers are (800) 355-4959 in North America and (416) 340-8527 internationally. Live audio webcast at: http://www.gowebcasting.com/6486.
Minesite NAV and Corporate G&A $462 $399 $1.53 116%
Cash and equivalents $26 $26 $0.09 7%
Debt and leases ($103) ($103) ($0.34) (26%)
Cash from exercise of options $13 $13 $0.04 3%
Investments $0 $0 $0.00 0%
Net Cash Items ($65) ($65) ($0.21) (16%)
Net Asset Value
Total NAV $397 $334 $1.32
NAVPS (C$/share) $1.32 $1.11
NAVPS (US$/share) $1.05 0.89$
Net Asset Value (C$M) NAV8%
NAV10%
NAVPS8%
(%)
Operating Assets (after taxes)
Santander $112 $104 $0.37 27%
Caribou $272 $250 $0.90 66%
Halfmile/Stratmat $136 $98 $0.45 33%
Other $5 $5 $0.02 1%
Minesite NAV $525 $458 $1.74 128%
Corporate adjustments ($60) ($56) ($0.20) (15%)
Minesite NAV and Corporate G&A $465 $402 $1.54 113%
Cash and equivalents $26 $26 $0.09 6%
Debt and leases ($94) ($94) ($0.31) (23%)
Cash from exercise of options $13 $13 $0.04 3%
Investments $0 $0 $0.00 0%
Net Cash Items ($55) ($55) ($0.18) (13%)
Net Asset Value
Total NAV $410 $347 $1.36
NAVPS (C$/share) $1.36 $1.15
NAVPS (US$/share) $1.09 0.92$
Exhibit 4 - Target Price Methodology
Source: Scotiabank GBM estimates.
C$M
Target
Multiple
Per FD
Share Comment
Minesite NAV8%
and corporate adjustments $462 0.8x $1.23 Minesite NAV8%
26% attributable to producing Santander operation
Net cash items ($65) 1.0x ($0.21)
Implied NAV based target price $397 $1.01
Implied 2016 EV/EBITDA based target price $82 5.5x $1.30
Implied target price per FD share $1.15 Based on 50% 2016E EV/EBITDA & 50% Adjusted NAV
One-year target price $1.25
Valuation and Recommendation
■ We rate TV Sector Perform with a $1.25/sh target price. Our target price continues to be based 50/50 on 5.5x 2016E EV/EBITDA (implying a $1.30/sh target price), and P/NAV8% of 0.8x to mine site assets plus 1.0x net cash items (implying a $1.01/sh target price). Our 0.8x mine site NAV8% target multiple is based on the weighted average of 1.0x applied to the producing Santander operation, 0.9x to the soon-to-be restarted Caribou complex, and 0.3x our DCF modeling of the Halfmile mine and the Stratmat deposit being developed into a 4,000 tpd operation by end of decade.
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.
WPT Industrial REIT (WIR.U-T US$11.30)
Well Equipped for Higher Rates; Buy the Dip
Pammi Bir, CPA, CA, CFA - (416) 863-7218 (Scotia Capital Inc. - Canada) [email protected]
Ganan Thurairajah, MBA - (416) 863-2899 (Scotia Capital Inc. - Canada)
Key Risks to Target: Significant unitholder, inability to execute growth, rising interest rates
CDPU (NTM) $0.70
CDPU (Curr.) $0.70
Yield (Curr.) 6.2%
Event ■ Q1 FFO $0.25 vs. $0.25 YOY, bit ahead of our $0.24E, in line w/Street.
Implications
■ Good start, with organic growth momentum expected to build. SP NOI on the IPO portfolio rose a solid 2.6% YOY, with the pace expected to persist through 2015. Moreover, an attractive organic NOI story continues to form with 54% of GLA rolling from 2016-2018 at below market rents that we estimate could add ~10% to AFFOPU.
■ It's hot out there: tougher to acquire, but quality always is. As domestic and global institutions continue to chase U.S. industrial, the acquisition climate remains heated, prompting us to slightly trim our 2015E acquisitions. That said, amid still active deal flow, we expect management to leverage its relationships for transactions and are encouraged by its disciplined focus on higher-quality additions.
■ Estimates tweaked; attractive growth profile intact. Our 2014A-16E AFFO CAGR is a solid 7.4%, in line with its CDN industrial comps and above our universe (5.6%), albeit below the U.S. industrial peers (11%).
Recommendation
■ SO, $12.50 target intact. With a healthy growth profile, best-in-class assets, and a visible path to a lower equity risk premium, we see current levels (13.9x 2015E AFFO/6.8% implied cap) as attractive for an early stage growth story that's well equipped to navigate rising bond yields. We recommend investors capitalize on recent weakness and build positions.
Qtly FFOPU (FD) Q1 Q2 Q3 Q4 Year P/FFO Capitalization
Market Cap (M) $381 Net Debt + Pref. (M) $359 Enterprise Value (M) $741 Units O/S (M) 34
Float O/S (M) 18
ScotiaView Analyst Link
2013A $0.18 A $0.24 A $0.24 A $0.66 13.1x 2014A $0.25 A $0.24 A $0.25 A $0.25 A $0.99 11.0x 2015E $0.25 A $0.25 $0.27 $0.27 $1.04 10.9x 2016E $0.27 $0.28 $0.28 $0.28 $1.10 10.2x
Exhibit 1 – We Expect Further Compression in WPT’s Discount Over Time as Strategic Growth Initiatives Executed
Source: Company reports; Scotiabank GBM estimates.
13
.5x
10
.8x
13
.6x
13
.9x
12
.6x
15
.1x 19
.8x
8.6
%
7.3
%
6.4
%
6.8
%
7.4
%
6.5
%
6.7
%
0.6
%
-17
.0%
4.5
%
-1.2
%
-4.0
%
-1.8
%
-6.7
%
5.3
%
4.6
%
11
.0%
7.4
%
7.0
%
5.6
% 10
.9%
-17
-13
-9
-5
-1
3
7
11
15
19
23
GRT DIR AAR WIR Industrial REITPeers
CDN REIT Sector US Ind. REITs
2014E P/AFFO Implied Cap Rate Prem/(Disc) to NAV 2013A-15E AFFO CAGR2015E P/AFFO Implied Cap Rate Prem/(Disc) to NAV 2014A-16E AFFO CAGR
(5.0x)
(4.0x)
(3.0x)
(2.0x)
(1.0x)
-
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
WPT vs. REIT SectorCurrent = -1.2xAverage = -2.5x
P/AFFO
-16%
-12%
-8%
-4%
0%
4%
8%
12%
16%
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
NAV Prem/(Disc)
WPT vs. REIT SectorCurrent = -1.4%Average = -1.9%
0
20
40
60
80
100
120
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Implied CapRate Spread (bp)
WPT vs. REIT SectorCurrent = 29bpAverage = 65bp
Exhibit 2 – Our NAVPU Rose 2.4% Sequentially; Trading Relatively In Line
Source: Company reports; Scotiabank GBM estimates.
WPT Industrial NAVPU (US$000s) as at March 31, 2015
Cash N12M Net Operating Income 51,070 51,070 51,070
Capitalization Rate 6.50% 6.75% 7.00%
Value Range
Assets
Investment properties 785,698 756,598 729,577
Other assets 12,020 12,020 12,020
797,718 768,618 741,597
Liabilities
Mortgages payable 318,895 318,895 318,895
Bank indebtedness 49,900 49,900 49,900
Other liabilities 13,819 13,819 13,819
382,614 382,614 382,614
Estimated net asset value 415,104 386,004 358,983
Estimated net asset value / unit 12.30 11.44 10.64
Current unit price 11.30 11.30 11.30
Premium/(Discount) to NAV -8.1% -1.2% 6.2%
Current implied cap rate 6.8%
Net debt/market value 46.0% 47.8% 49.5%
Impact of 25 bp change in cap rate 7.5% na -7.0%
Better Entry on Offer for Early Stage Growth Story; Well Positioned for
Potentially Less Favourable Rate Cycle Ahead
■ Maintaining Sector Outperform and $12.50 target; good upside remains. Post good Q1 results, our thesis on WPT remains positive. Organic growth from the IPO assets was strong at +2.6% YOY, with the pace expected to persist through the balance of the year. In addition, against a backdrop of improving U.S. economic momentum, we see strong support for an extended period of robust organic growth ahead. With 54% of GLA maturing from 2016-18 at rents that remain ~10% below market, WPT is among the better positioned REITs in our universe to navigate a rising bond yield environment. Indeed, as Exhibit 3 highlights, about half of our forecast growth is from organic sources, not simply through acquisitions. On this latter driver, the acquisition climate remains heated as domestic and foreign institutional capital continues to chase new generation industrial for its attractive cyclical attributes. Though certainly a more challenging environment, we expect management’s ability to leverage its relationships and off market opportunities will continue to bear fruit ($87M already acquired this year). On the flipside, in an environment where quality remains scarce, we believe the REIT’s assets would be attractive to other public and private institutions. Since hitting a recent high on Mar. 23 ($12.06), the units have pulled back 6.3% vs. -7.6% for the RMZ and -1.2% for the SPRTRE. At current levels, we recommend investors capitalize on the weakness and build positions in an early stage growth story that’s well suited for a potentially less favourable rate cycle ahead.
■ Valuation discount to CDN and U.S. peers has compressed, but high quality leaves room for further upside. WPT is trading at 13.9x 2015E AFFO vs. 12.6x for its CDN industrial peers, 15.1x for the CDN sector, and 19.8x for its U.S. industrial counterparts. As shown in Exhibit 1, its discount vs. the CDN sector has compressed across all relevant valuation metrics. Its 5.9x discount to its U.S. peers has also narrowed since Oct. 2014 (-7.6x), but nonetheless remains wide (note that CDN REIT sector’s trading at a 4x discount to the U.S). Our unchanged 14x target multiple reflects a 1.5x discount to our coverage universe, a level that we believe reasonably balances its best in class assets, healthy growth profile, and economically aligned management, partly offset by its limited track record, small cap status, and external management. Looking ahead, we see room for further compression in WPT’s spreads, particularly given the superior quality of its portfolio
166
Exhibit 3 – Well Positioned to Navigate Rising Rate Environment with ~50% of Growth from Internal Sources
Source: Company reports; Scotiabank GBM estimates.
$0.00
$0.02
$0.04
$0.06
$0.08
$0.10
$0.12
$0.14
2015E 2016E 2014A-16E
Composition of YOY AFFOPU Growth
Acquisitions
Debt Refinancing
Combined AFFOPU Impact
SP NOI
Base case (incl. full impact of announced transactions)
$0.045
$0.073
$0.118Not just an external growth story: Approx. 50% of our forecast growth through 2016 is driven by organic sources.
Exhibit 4 – Attractive Internal Growth Opportunity as Lease Expiries Accelerate from 2016-2018
Source: Company reports; Cushman & Wakefield, CBRE, Scotiabank GBM estimates.
16.3% 20.3% 17.2% 6.7% 17.8% 3.5% 13.6%0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
0%
5%
10%
15%
20%
25%
MTM 2015 2016 2017 2018 2019 2020 2021 2022 2023+
Estimated Annual AFFOPU Upside from Marking Rents to Market
Incremental AFFOPU Upside (%) over 2015E from marking rents to market (RS)
Attractive internal growth opportunity with 54% of GLA expiring from 2016-18 at rents that we estimate are ~10% below market.
amid investor concerns over rising bond yields. As its size, liquidity, and diversification expand over time, we see support for a lower equity risk premium. In addition, we view WPT’s portfolio as better insulated from potential cap rate expansion and NAV erosion risk. The units are trading at a 1.2% discount to our $11.44 NAVPU (Exhibit 2) vs. a 1.8% CDN REIT discount and 6.7% discount for the U.S. comps. Leverage neutral, it’s trading at a 6.8% implied cap rate, above the 6.5% CDN REIT average, and slightly higher than the approx. 6.7% of its U.S. peers.
■ Estimates largely unchanged with healthy growth profile intact. Our 2015E-16E AFFOPU held relatively firm at $0.82 (-$0.01) and $0.89 (flat). As noted below, we modestly reduced our 2015 acquisition assumptions and pushed them further back in the year, coupled with higher G&A costs. These adjustments were largely offset by a higher NOI run rate and lower interest costs. Our 2014A-16E AFFO CAGR remains solid at 7.4%, in line with the 7% average of its CDN industrial peers and above our universe’s 5.6%, albeit below the 11% average of its U.S. industrial counterparts.
Key Points: Front Lines Solid with Good Internal
Growth Opportunity Ahead; Tougher to Acquire, but
Quality Always Is
■ Fundamentals sound as attractive internal growth opportunity forms for 2016-18. Occupancy held relatively firm at 98.9% (-20bp QOQ, +280bp YOY). On the same-property IPO portfolio, we estimate NOI rose a solid 2.6% YOY from higher occupancy and increased recoveries. Our 2015E-16E are relatively consistent at +2.8% and +2.1% mainly from embedded rent steps and +5% renewal spreads. Indeed, with 54% of GLA maturing from 2016-18 (4.2 year lease term), we continue to see an attractive tailwind forming for internal growth over the next three years. As Exhibit 4 illustrates, we estimate renewing tenants at rates closer to market levels from 2016-18 could add approx. 10% ($0.08/unit) cumulatively to our 2015E AFFOPU. Renewal discussions are progressing well on the balance of its 2015 maturities along with preliminary talks for 2016-17 expiries, with an update expected with Q2 results. With respect to its 649K sf lease with CEVA Logistics (3.6% of rents; 2016 maturity) in Memphis, management remains optimistic of renewal given the tenant’s track record (10+ years at the location), though a firm outcome won’t be unknown until CEVA has visibility on its contract renewal with Microsoft.
■ Acquisition outlook trimmed on heated bidding for quality, but still expecting a decent clip. In Q1, WPT completed its previously announced $87M (7.1% cap rate, $37/sf) purchase of six fully-occupied class-A distribution properties in Memphis, TN (Exhibit 5). Additional details of the transaction can be found in our Feb. 2 comment, “Taking a Trip to Graceland; Units Remain on Sale”. Although there’s no shortage of product available on the market, bidding for higher-quality assets remains heated. Indeed, as traction in fundamentals builds alongside the economy, the appetite for U.S. industrial among domestic and global institutions remains robust. Prologis’ (PLD-N) purchase of KTR Capital provides the latest example, with PLD acquiring KTR’s real estate and operating platform for $5.9B via a 55%/45% JV with Norges Bank Investment Management. On a stabilized basis, the cap rate on the transaction was low at 5.5% (5.2% going-in; vs. WPT’s 6.8% implied cap rate),
Exhibit 5 – Memphis Portfolio Acquisition: Well-Occupied, Modern Industrial Properties with High Clear Heights and Strong Locations
Source: Company reports; Scotiabank GBM estimates.
Distance to Memphis
Property Dock Clear % of Year Avg. Lease Int'l Airport & FedEX
Name Address Type Height (ft) GLA (sf) Total Occupancy Built/Age Term (yrs) Superhub (km) Major Tenants
Eastpark I 5300 Hickory Hill Road Cross-dock 32 888,262 38% 100% 1999 2.2 11.5 United Stationers Supply, Pacific Paper
Products, Expeditors International of
Washington
Eastpark II 5405 Hickory Hill Road Cross-dock 32 338,000 15% 100% 2000 6.4 11.4 Bryce Corporation
Chickasaw A 5950 Freeport Avenue Rear-load 24 108,250 5% 100% 2000 3.1 11.1 TricorBraun, PSS World Medical, UPS
Supply Chain Solutions, Linkex
Chickasaw H 6190 Freeport Avenue Rear-load 30 283,756 12% 100% 2000 5.4 11.8 HD Supply Distribution Services
Southpoint IV 4800 Pleasant Hill Road Side/Rear-load 28 60,000 3% 100% 1998 4.4 7.4 CEVA Freight
Southpoint XIX 5166 Pleasant Hill Road Cross-dock 32 648,750 28% 100% 2001 1.3 8.1 CEVA Logistics US
Total / weighted average 31 2,327,018 100% 100% 15.2 3.0 10.2
reflecting both the coastal market locations of the properties and a portfolio premium. Nonetheless, as noted in our Apr. 20 comment, “Peer Transaction Supportive of WPT Valuation”, we believe WPT’s portfolio stacks up well given its younger vintage (13 years), higher occupancy (98.9%), and high clear heights (31 ft.). Bottom line, the transaction is supportive of the REIT’s valuation, in our view, and also removed a competitor from the landscape. Still, in light of an aggressive environment, we modestly trimmed our assumed acquisitions for the balance of 2015 to $150M (-$15M), but continue to expect management to leverage its relationships for both on and off market purchases. Management noted it will have to work harder to find off market opportunities and smaller portfolios of less interest to large institutions. Recall that nearly half of Welsh’s acquisitions over time have taken place off market. Importantly, we’re pleased with management’s lack of interest in moving down the quality spectrum, as we view its higher-quality strategy as more supportive of multiple expansion, rather than chasing short-term growth. Our 2016 acquisition assumptions are intact at $200M (6.6%-6.8% cap rates).
■ Leverage in good form; sufficient liquidity to fund ~$50M of purchases. Our net debt/NAV asset sits at 48% with our 2015E net debt/EBITDA at a healthy 7.6x (below 8.3x sector average). Available liquidity from cash ($7.5M) and undrawn lines ($25.1M) is reasonable at $33M, sufficient to fund ~$50M of purchases on a leverage neutral basis. However, given our assumed acquisition activity, our model reflects $68M of further equity issuance this year.
Q1/15 Recap: In Line Results
■ A bit ahead of our call on higher NOI, but overall in line. WPT reported Q1/15 FFOPU of $0.25 vs. $0.25 last year (Exhibit 6), slightly ahead of our $0.24 estimate and in line with consensus ($0.25). The +$0.005/unit variance to our estimate came from modestly higher NOI, partially offset by higher G&A. YOY FFOPU growth from higher SP NOI and acquisitions was mostly offset by a timing lag in capital deployment and financing dilution.
Africa Oil Corp. AOI VS99 Bank of Montreal BMO G, I, S, U Basic Energy Services, Inc. BAS V19 Boardwalk REIT BEI.UN VS96
Cameco Corporation CCO G, I, U, VS300 Canadian Energy Services & Technology Corp. CEU G, I, U, VS196 Canadian National Railway Company CNR G, I, N1, U, VS191 Canadian Pacific Railway Limited CP G, I, N1, U, VS281, VS282
Canadian Tire Corporation Limited CTC.A S CanElson Drilling Inc. CDI VS59 CEMEX SAB de CV CX M10, M11, VS150, VS151 Cervus Equipment Corporation CVL VS120 Chemtrade Logistics Income Fund CHE.UN G, I, U
Chorus Aviation Inc. CHR.B J Copasa CSMG3 M8 DHX Media Ltd. DHX.B I EnerCare Inc. ECI G, I, U
Ensign Energy Services Inc. ESI J Entel Chile ENTEL M4 Freehold Royalties Ltd. FRU G, I, U Gabriel Resources Ltd. GBU VS217, VS218
Gildan Activewear Inc. GIL VS111 Golden Star Resources Ltd. GSS J Granite REIT GRT.UN G, I, U Grupo Aeroportuario Centro Norte, SAB de CV OMAB M10, M11
Helmerich & Payne, Inc. HP V19 Kelt Exploration Ltd. KEL I Nabors Industries, Inc. NBR V19 Pacific Rubiales Energy Corp. PRE VS225 Paladin Energy Ltd. PDN VS299
Patterson-UTI Energy, Inc. PTEN V19 Perpetual Energy Inc. PMT G, I, U Power Financial Corporation PWF I, S Precision Drilling Corp. PD G, I, N1, U, VS102
Pure Industrial REIT AAR.UN G, I, U, VS272 RMP Energy Inc. RMP I Rubicon Minerals Corporation RMX I, VS168 Sabesp SBSP3 M8
Savanna Energy Services Corp. SVY J, VS161 Spartan Energy Corp. SPE G, I, U The Mosaic Company MOS VS247 Tourmaline Oil Corp. TOU G, I, U
Trevali Mining Corporation TV VS198, VS199, VS200, VS201, VS202 Trinidad Drilling Ltd. TDG I Western Energy Services Corp. WRG VS32, VS58 WPT Industrial REIT WIR.U I, VS235
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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.
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* Legend
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.
M10 Francisco Suarez, 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.
M11 Ramon Obeso, 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., wh ich forms a part of Grupo Financiero Scotiabank Inverlat.
M8 Ezequiel Fernandez Lopez, an analyst, prepared this report and is an employee of the Research Department of Scotia Corredora de Bolsa Chile S.A.
N1 Scotia Capital (USA) Inc. had an investment banking services client relationship during the past 12 months.
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.
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.
V19 Scotia Howard Weil is a Division of Scotia Capital (USA) Inc., a U.S. registered broker-dealer and a member of the New York Stock Exchange and FINRA. Scotia Capital (USA) Inc. is a wholly owned subsidiary of Scotia Capital Inc., a Canadian registered investment dealer, and indirectly owned by The Bank of Nova Scotia. Scotia Howard Weil Research Analysts and Scotiabank Research Analysts are independent from one another and their respective coverage of issuers is different. In addition, because they are independent from one another, Scotia Howard Weil Research Analysts and Scotiabank Research Analysts may have different opinions on the short-term and long-term outlooks of local and global markets and economies.
VS102 Our Research Analyst visited PD's Marcellus operation, a drilling operation, on October 1, 2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS111 Our Research Analyst visited several of Gildan's textile and sewing facilities, located in Honduras, on December 2 to 4, 2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS120 Our Research Analyst visited the Calgary John Deere location, an agricultural equipment dealership branch, on November 28,
2013. No payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS150 Our Research Analyst visited the New Braunfels, Texas, cement facilities, on November 20, 2012. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS151 Our Research Analyst visited the Monterrey, Mexico, cement facilities, on January 23, 2013. No payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS161 Our Research Analyst visited Australian Operations, including various corporate offices in Brisbane (Savanna, APLNG, Santos), Toowoomba, Gladstone, and a Talinga field tour, on June 9 to June 14, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS168 Our Research Analyst visited the Phoenix Gold project, an underground mine development project, on April 9 and December 5, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS191 Our Research Associate visited the Chicago yard, CN's rail yards and training facilities, on September 24, 2014. No payment was received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
VS196 Our Research Analyst visited the JACAM facility and offices, a chemicals manufacturing plant, on October 22, 2014, and April 21, 2015 . Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS198 Our Research Analyst visited the Halfmile mine and Stratmat deposit, a mine under development, on November 2, 2011. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS199 Our Research Analyst visited the Santander mine, an operating mine, on January 26 and 27, 2011, and on September 9, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS200 Our Research Analyst visited the Caribou mine and mill, a mine under development, on September 24, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS201 Our Research Associate visited the Santander mine, an operating mine, on September 10, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
VS202 Our Research Associate visited the Caribou mine and mill, a mine under development, on September 24, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
VS217 Our Research Analyst visited the Rosia Montana project, a mine under development, on November 23, 2006, and April 16 to 17, 2011. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
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Disclosures and Disclaimers
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VS218 Our Research Analyst visited the Rosia Montana project, a mine under development, on November 23, 2006, and April 16 to 17, 2011. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS225 Our Research Analyst visited the Rubiales field and the Bogota office, oil drilling operations and local office, on September 2010 and April 2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS235 Our Research Analyst visited various properties in Indianapolis, income-producing industrial properties, on September 30 to
October 1, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS247 Our Research Analyst visited the Esterhazy potash mine, an operating mine, on June 2014. No payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS272 Our Research Analyst visited the FedEx ground assets, income-producing industrial properties, on January 19 and 20, 2015. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS281 Our Research Analyst visited Ogden Yards, rail facilities, on December 17, 2013. No payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS282 Our Research Analyst visited Ogden Yard, rail facilities, on December 17, 2013. No payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS299 Our Research Analyst visited the Langer-Henrich and Kayelekera mines, operating mines, on February 2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS300 Our Research Analyst visited the McArthur River mine, an operating mine, on 2012. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS32 Our Research Analyst visited Rig 51 at Nisku, Alberta, a drilling rig, on September 6, 2013. Full payment was received from t he issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS58 Our Research Associate visited Rig 51 at Nisku, Alberta, a drilling rig, on September 6, 2013. Full payment was received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
VS59 Our Research Associate visited the Nisku Facility, a rig construction facility, on August 28, 2012. Full payment was received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
VS96 Our Research Analyst visited the Calgary apartment portfolio, income-producing apartment buildings, on July 10, 2012. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS99 Our Research Analyst visited Block 10BB in Kenya, an exploration well, on October 2-4, 2012. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
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Definition of Scotiabank, Global Banking and Markets Equity Research Ratings & Risk Rankings
We have a four-tiered rating system, with ratings of Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform. Each analyst assigns a rating
that is relative to his or her coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst.
Our risk ranking system provides transparency as to the underlying financial and operational risk of each stock covered. Stat istical and judgmental factors
considered are: historical financial results, share price volatility, liquidity of the shares, credit ratings, analyst forecasts, cons istency and predictability of earnings, EPS growth, dividends, cash flow from operations, and strength of balance sheet. The Director of Research and the Supervisory Analyst jointly make the final determination of all risk rankings.
The rating assigned to each security covered in this report is based on the Scotiabank, Global Banking and Markets research a nalyst’s 12-month view on the security. Analysts may sometimes express to traders, salespeople and certain clients their shorter-term views on these securities that
differ from their 12-month view due to several factors, including but not limited to the inherent volatility of the marketplace.
Ratings Risk Rankings
Focus Stock (FS)
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.
Sector Outperform (SO) The stock is expected to 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.
Sector Perform (SP) The stock is expected to perform approximately in line with 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.
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The stock is expected to underperform 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.
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.
Low Low financial and operational risk, high predictability of financial results, low stock volatility.
Medium Moderate financial and operational risk, moderate predictability of financial results, moderate stock volatility.
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only.
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 Underperform ratings are based on the criteria above, but for this purpose could be equated to strong buy, buy, neutral and sell ratings, respectively.
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Disclosures and Disclaimers
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