VOTED THE WORLD’S BEST INVESTMENT ADVISORY By Mark Halpern L et me begin by wishing you and your family a hap- py, healthy and prosper- ous new year. Business owners and incorporated profes- sionals may not be aware of Ot- tawa’s latest tactic to collect more taxes by changing the rules re- garding tax on passive income. Examples of passive income in- clude rental income and any busi- ness activities in which the earner does not materially participate during the year. Passive income differs from active income, which is any earned income including all the taxable income and wages the earner gets from working. Passive income can include things such as rental income, interest income, royalties, dividends or pensions. New rules: The tax rules that became effective on Jan. 1, 2019 target Canadian-controlled pri- vate corporations (CCPCs). The hardest-hit are business owners, entrepreneurs and incorporated professionals such as doctors, lawyers and accountants. Corporations with more than $50,000 of annual passive income will now lose all or part of their Small Business Deduction and then get highly taxed for every dol- lar of excess passive income. This could amount to an additional tax grab of $55,000 to $70,000 unless you plan now. In brief, the federal govern- ment set an annual maximum of $50,000 of annual passive income for CCPCs. Failure to stay below that amount could be costly. Now, for every $1 of passive income over $50,000, the small business deduc- tion level of $500,000 will be re- duced by $5. This equates to a full reduction of the small business deduction when passive income is greater than or equal to $150,000. The good news is that the amount resets the following year with no carryover. Even better, there are a few tax-efficient strate- gies that can help you keep more income for yourself and your fam- ily instead of the tax department. Here are some of them: Individual Pension Plans (IPPs) let you deposit significant corporate funds for the sharehold- ers’ benefit. These deposits are tax-deductible for the CCPC, a non-taxable benefit to the share- holder and provide tax-effective access to money from a corpora- tion when you retire. You can save significantly more with an IPP than under current RRSP rules – up to 65 per cent more – depending on your T4 in- come and years of prior service. I hold financial professionals who recommend monetary gold to their clients in the highest esteem. It is their sage advice that will protect in- vestors from the unprecedented dangers they face today in the markets. However, many advisors are no longer permitted to recom- mend physical gold or precious metals in client portfolios as a re- sult of the new rules defining risk in mutual funds. Many clients who had been holding gold for years were forced to reduce their positions last year by their investment advisor’s deal- er. The timing for this couldn’t have been worse, as the resulting rise in their gold holdings would have reduced the losses in their portfolios from the market car- nage we have witnessed since late September. The equity selloff that began in October is intensifying and threat- ens advisors, MFDA (Mutual Fund Dealers Association) dealers and investors with a high probability of a 50 per cent to 70 per cent loss of capital and a corresponding loss of income in 2019. A decline of this magnitude will have devastating effects on retirement portfolios. Many investors will not recover in their lifetimes. This could snowball into advi- sors and investment dealers no longer being viable. The Every- thing Bubble appears to be burst- ing and, as history has shown, investors’ fears can easily grow into a panic. The final quarter in 2018 was a textbook display of why investors must own gold. There is no liquid asset more negatively correlated to the financial markets. Investors who do not own monetary gold may find themselves dangerously exposed to market volatility with- out the much-needed divers- ification/portfolio insurance that gold offers. If the current down- turn in the market continues, as the world’s leading financial ex- perts predict, this asset may be the only form of wealth preserva- tion that works. Experienced financial profes- sionals understand that gold bul- lion is an alternative to cash. Ray Dalio, chairman of the largest hedge fund in the world (Bridge- water & Associates), once stated, "If you don’t own gold…there is no sensible reason other than you don’t know history or you don’t know the economics of it." In the final quarter of 2018, in Canadian dollars, the price of moved upward by 13.8 per cent. The NASDAQ return was -12.8 per cent and S&P 500 return was -8.9 per cent over the same period, while the return on the TSX was - 10.1 per cent. Based on those figures, securi- ties regulators have made a grave mistake in re-rating monetary gold to a medium-high risk rela- tive to ‘Know Your Client’ (KYC) forms. These regulators, fund dealers and, by extension, their various compliance enforcement departments have ignored the fact that the Bank for International Settlements (BIS), which sets the rules for central banks and com- mercial banks, has stated that "monetary gold is a risk-free asset on par with U.S. Treasuries and U.S. dollars." They have also ham- strung investment professionals Devastating losses are coming By Doug Young and Gary Ho L ooking back on the Canadi- an financial sector in 2018, the life insurance compa- nies lagged the banks, con- trary to our call, while the asset managers underperformed both. Desjardins Capital Markets’ finan- cial sector "top picks" this year are Sun Life Financial Inc. (SLF-TSX, $48.02; SLF-NYSE, US$35.97) (life insurers, or lifecos), Toronto-Do- minion Bank (TD-TSX, $72.20; TD- NYSE, US$54.10) (banks) and Alaris Royalty Corp. (AD-TSX, $18.80) (al- ternative lenders). For the Canadian banks, the fo- cus in fiscal 2019 will be acutely on credit and whether we finally see credit trends start to turn, given we are arguably in the late stages of the credit cycle and household debt levels are elevated. Otherwise, net interest margin (NIM) expansion should continue (partially offset by deposit betas and increased competition in the commercial segment), and we be- lieve the banks will further reduce expense ratios in order to offset slowing loan growth. For the lifecos, a sustained in- crease in 10- and 30-year bond yields would be favourable, and we What is your advisor doing about it? New tax rules hit entrepreneurs hardest See Halpern on page 46 M arket watch- ers continue to debate whether or not cannabis is a long- term play. Cannabis stocks have certainly had something of a rocky start post-legalization in Canada, but many play- ers are intrepidly forging ahead to establish a clear brand identity and hope- fully gain an advantage among consumers. A major game changer will be the legislation on edibles and other refined cannabis products taking effect on Oct. 17, 2019 (when the second year of marijuana legalization begins). Makers of cannabis-infused prod- ucts are already forming relationships with leading beverage companies (such as the HEXO Cannabis Corp. deal with Molson Coors Inc., and the Coca-Cola Co. invest- ment in Aurora Cannabis Inc.), inspiring thrilling speculation about the possibilities, among pot consumers and investors. At HEXO’s annual gen- eral meeting Jan. 16, CEO Sébastien St-Louis was keen to discuss promo- tional opportunities (such as offering samples at music festivals) and for- ays into green cuisine (it has developed a THC ex- tract powder that can be added directly to food). He and his colleagues were keen to underline HEXO’s international ex- pansion efforts as well, pointing to another path toward growth for mid- range pot stocks. – R.P. 2019 OUTLOOK Banks banking on credit trends continuing EDITOR’ S NOTES These are some stubborn bulls. After a very brief spell in second place, they retake the largest share of our Senti- ment Pie with a 45.4 per cent slice, up from 34.8 per cent two weeks ago. Last issue’s dominant group, the un- sure, shrink back to 33.3 per cent from 35.8 per cent. The bears, which put up a good fight last time, when they jumped to 29.4 per cent of the pie, have since receded to 21.3 per cent. Source: Investor’s Intelligence. THE SENTIMENT PIE February 8, 2019 Vol. 51, No. 3. Pages 45-64 $6.00 See Barisheff on page 47 See Young and Ho on page 46 NICK BARISHEFF Bulls 45.4% Unsure 33.3% Bears 21.3%
Transcript
V O T E D T H E W O R L D ’ S B E S T I N V E S T M E N T A D V I S O R Y
By Mark Halpern
Let me begin by wishingyou and your family a hap-py, healthy and prosper-ous new year. Business
owners and incorporated profes-sionals may not be aware of Ot-tawa’s latest tactic to collect moretaxes by changing the rules re-garding tax on passive income.
Examples of passive income in-clude rental income and any busi-ness activities in which the earnerdoes not materially participateduring the year. Passive incomediffers from active income, whichis any earned income including all
the taxable income and wages theearner gets from working. Passiveincome can include things such asrental income, interest income,royalties, dividends or pensions.
New rules: The tax rules thatbecame effective on Jan. 1, 2019target Canadian-controlled pri-vate corporations (CCPCs). Thehardest-hit are business owners,entrepreneurs and incorporatedprofessionals such as doctors,lawyers and accountants.
Corporations with more than$50,000 of annual passive incomewill now lose all or part of theirSmall Business Deduction andthen get highly taxed for every dol-lar of excess passive income. Thiscould amount to an additional taxgrab of $55,000 to $70,000 unlessyou plan now.
In brief, the federal govern-ment set an annual maximum of$50,000 of annual passive incomefor CCPCs. Failure to stay belowthat amount could be costly. Now,for every $1 of passive income over$50,000, the small business deduc-
tion level of $500,000 will be re-duced by $5. This equates to a fullreduction of the small businessdeduction when passive income isgreater than or equal to $150,000.
The good news is that theamount resets the following yearwith no carryover. Even better,there are a few tax-efficient strate-gies that can help you keep moreincome for yourself and your fam-ily instead of the tax department.Here are some of them:
Individual Pension Plans(IPPs) let you deposit significantcorporate funds for the sharehold-ers’ benefit. These deposits aretax-deductible for the CCPC, anon-taxable benefit to the share-holder and provide tax-effectiveaccess to money from a corpora-tion when you retire.
You can save significantly morewith an IPP than under currentRRSP rules – up to 65 per centmore – depending on your T4 in-come and years of prior service.
Ihold financial professionalswho recommend monetarygold to their clients in thehighest esteem. It is their
sage advice that will protect in-vestors from the unprecedenteddangers they face today in themarkets. However, many advisorsare no longer permitted to recom-mend physical gold or preciousmetals in client portfolios as a re-sult of the new rules defining riskin mutual funds.
Many clients who had beenholding gold for years were forcedto reduce their positions last yearby their investment advisor’s deal-er. The timing for this couldn’thave been worse, as the resultingrise in their gold holdings wouldhave reduced the losses in theirportfolios from the market car-nage we have witnessed since lateSeptember.
The equity selloff that began inOctober is intensifying and threat-ens advisors, MFDA (Mutual FundDealers Association) dealers andinvestors with a high probability ofa 50 per cent to 70 per cent loss ofcapital and a corresponding loss ofincome in 2019. A decline of thismagnitude will have devastatingeffects on retirement portfolios.Many investors will not recover intheir lifetimes.
This could snowball into advi-
sors and investment dealers nolonger being viable. The Every-thing Bubble appears to be burst-ing and, as history has shown,investors’ fears can easily growinto a panic.
The final quarter in 2018 was atextbook display of why investorsmust own gold. There is no liquidasset more negatively correlatedto the financial markets. Investorswho do not own monetary goldmay find themselves dangerouslyexposed to market volatility with-out the much-needed divers-ification/portfolio insurance thatgold offers. If the current down-turn in the market continues, asthe world’s leading financial ex-perts predict, this asset may bethe only form of wealth preserva-tion that works.
Experienced financial profes-sionals understand that gold bul-lion is an alternative to cash. RayDalio, chairman of the largesthedge fund in the world (Bridge-water & Associates), once stated,"If you don’t own gold…there isno sensible reason other than youdon’t know history or you don’tknow the economics of it."
In the final quarter of 2018, inCanadian dollars, the price ofmoved upward by 13.8 per cent.The NASDAQ return was -12.8 percent and S&P 500 return was -8.9per cent over the same period,while the return on the TSX was -10.1 per cent.
Based on those figures, securi-ties regulators have made a gravemistake in re-rating monetarygold to a medium-high risk rela-tive to ‘Know Your Client’ (KYC)forms. These regulators, funddealers and, by extension, theirvarious compliance enforcementdepartments have ignored the factthat the Bank for InternationalSettlements (BIS), which sets therules for central banks and com-mercial banks, has stated that"monetary gold is a risk-free asseton par with U.S. Treasuries andU.S. dollars." They have also ham-strung investment professionals
Devastating losses are coming
By Doug Young and Gary Ho
Looking back on the Canadi-an financial sector in 2018,the life insurance compa-nies lagged the banks, con-
trary to our call, while the assetmanagers underperformed both.Desjardins Capital Markets’ finan-cial sector "top picks" this year areSun Life Financial Inc. (SLF-TSX,$48.02; SLF-NYSE, US$35.97) (lifeinsurers, or lifecos), Toronto-Do-minion Bank (TD-TSX, $72.20; TD-NYSE, US$54.10) (banks) and AlarisRoyalty Corp. (AD-TSX, $18.80) (al-ternative lenders).
For the Canadian banks, the fo-cus in fiscal 2019 will be acutely oncredit and whether we finally seecredit trends start to turn, given weare arguably in the late stages of thecredit cycle and household debtlevels are elevated.
Otherwise, net interest margin(NIM) expansion should continue(partially offset by deposit betasand increased competition in thecommercial segment), and we be-lieve the banks will further reduceexpense ratios in order to offsetslowing loan growth.
For the lifecos, a sustained in-crease in 10- and 30-year bondyields would be favourable, and we
What is your advisor doing about it?
New tax rules hit entrepreneurs hardest
See Halpern on page 46
Market watch-ers continueto debatewhether or
not cannabis is a long-term play. Cannabisstocks have certainly hadsomething of a rockystart post-legalization inCanada, but many play-ers are intrepidly forgingahead to establish a clearbrand identity and hope-fully gain an advantageamong consumers.
A major game changerwill be the legislation onedibles and other refinedcannabis products takingeffect on Oct. 17, 2019(when the second year ofmarijuana legalizationbegins). Makers ofcannabis-infused prod-ucts are already formingrelationships with leadingbeverage companies(such as the HEXOCannabis Corp. deal withMolson Coors Inc., andthe Coca-Cola Co. invest-ment in Aurora CannabisInc.), inspiring thrillingspeculation about thepossibilities, among potconsumers and investors.
At HEXO’s annual gen-eral meeting Jan. 16, CEOSébastien St-Louis waskeen to discuss promo-tional opportunities (suchas offering samples atmusic festivals) and for-ays into green cuisine (ithas developed a THC ex-tract powder that can beadded directly to food).
He and his colleagueswere keen to underlineHEXO’s international ex-pansion efforts as well,pointing to another pathtoward growth for mid-range pot stocks. – R.P.
2019 OUTLOOK
Banks banking on
credit trendscontinuing
EDITOR’SNOTES
These are some stubborn bulls. After avery brief spell in second place, theyretake the largest share of our Senti-ment Pie with a 45.4 per cent slice, upfrom 34.8 per cent two weeks ago.Last issue’s dominant group, the un-sure, shrink back to 33.3 per cent from35.8 per cent. The bears, which put upa good fight last time, when theyjumped to 29.4 per cent of the pie,have since receded to 21.3 per cent.Source: Investor’s Intelligence.
THE SENTIMENT PIE
February 8, 2019 Vol. 51, No. 3. Pages 45-64 $6.00
See Barisheff on page 47 See Young and Ho on page 46
NICK BARISHEFF
Bulls45.4% Unsure
33.3%
Bears21.3%
One of the unique char-acteristics of an IPP is thatit can act either as a de-fined benefit pension planor a defined contributionplan, and you can switchevery year depending onyour company’s cash flow.
Take the example of Brenda, a55-year-old business owner, incor-porated for 10 years. She has saved$285,715 in RRSPs and plans tomake the maximum contributionsevery year until she turns 65. Stay-ing in RRSPs, she will accumulate atotal of $1,570,905 by the time sheturns 65. But if she invests in an IPPinstead and makes the higher an-nual contributions, she will havemore than $2,272,000 at age 65.That’s 45 per cent more than hadshe used only RRSPs to save for re-tirement, a big difference that can’tbe ignored.
Unlike her RRSP, IPP assets en-joy greater creditor protectionfrom provincial legislation. On topof that, she will have access to awider selection of investment vehi-cles, and options not allowable inan RRSP, including shares of pri-vate businesses and real estate.
Many unmarried Canadians,whether they’re single, divorced, orwidowed, don’t realize their RRSPsavings will be fully taxed whenthey die. So, a $1,000,000 RRSPwould only be worth $460,000 toheirs other than a spouse. An RRSPcan only be rolled over on a tax-de-ferred basis to a spouse or disabledchild. For married taxpayers, thesame thing occurs on the death ofthe second spouse.
With an IPP, if your spouse orchildren are employed in your
business and earning T4income, they are eligibleto become members ofyour IPP, and those IPP as-sets can pass to the nextgeneration without incur-ring tax or probate fees.
Shared Ownership Crit-ical Illness (CI) Insurancecan provide important pro-
tection for the business owner, theirfamilies and their business, and de-liver a substantial guaranteed returnon investment.
Often confused with DisabilityInsurance, CI covers more than twodozen conditions like heart attack,cancer, stroke and bypass surgery,and pays up to $2 million in a tax-free, lump sum 30 days after the di-agnosis of a covered condition.There are no strings attached onhow you use that money.
If you buy the Return of Premi-um (ROP) rider and don’t make aclaim, you can get back all themoney you paid for those premi-ums after 15 years. It’s a forced sav-ings bundled with vital protection.
You can designate your compa-ny (rather than the insured owner)and its shareholders, key peopleand executives, as the beneficiaryof the CI policy. Using this strate-gy, your corporation pays the in-surance premiums for the CIbenefit only, using tax-effectivecorporate dollars. The insured in-dividual pays only the premiumfor the ROP rider with their after-tax personal income.
Let’s take the example ofRichard, a 45-year-old dentist witha professional corporation whowants to buy $500,000 of CI insur-ance. Ninety per cent of the totalpremiums can be paid by his com-pany, and he pays the balance per-
sonally for the remaining 10 percent that covers the ROP rider. Af-ter 15 years, just for remaininghealthy, the insurance companywill return to Richard all the mon-ey he paid for that ROP rider, plusall the premiums that his corpora-tion paid for the insurance.
Using this CI shared ownershipstrategy, shareholders can receivesignificant funds from their corpo-ration in a tax-effective manner.The rates of return are high, cur-rently in the range of 15 per cent to30 per cent, with no interest raterisk or exposure to the volatilestock market.
In Richard’s case, if he gets di-agnosed with a covered conditionalong the way, the $500,000 will bepaid into his corporation andwould have to come out as a tax-able dividend or salary. If he hasany shareholder loans, then itcomes out tax-free.
You may prefer to use a differentownership structure — perhapsowning the policy individually orcorporately in its entirety, or in ashared ownership arrangement.Those options should be consid-ered only after consulting with aprofessional.
Tax-Exempt Corporate-OwnedLife Insurance is a no-limit TFSAfor your company.
Investor’s Digest readers use TF-SAs because investments growwithout being taxed, and funds canbe accessed tax-free, but you candeposit no more than $6,000 a year.
Corporate-Owned Life Insuranceenjoys the tax-exempt attributes of aTFSA, with no upper limit.
Life Insurance continues to en-joy unique treatment under Cana-
see a few catalysts that shoulddrive core earnings per share (EPS)growth; however, sentiment couldbe negatively impacted if equitymarket volatility remains elevated.
For the asset managers, we ex-pect industry net flows to be flat-to-slightly higher than in 2018,ETFs to continue their momen-tum, and investors to pay greaterattention to both alternative assetsand expense management.
Our ‘top picks’ in detail
There are four drivers behindour positive views on Sun Life.
First, we anticipate core EPSgrowth of nine per cent in 2019(in line with management’s medi-um-term EPS growth target ofeight per cent to 10 per cent),driven by U.S. group insurance,Canadian operations (includingexpense actions), getting to scalein more Asian markets, and capi-tal deployment.
Second, the company hasabout $4.1 billion in excess capitaland debt capacity, by our math.This includes $2.2 billion of excessholding company cash, $900 mil-lion of excess operating companycapital assuming a 125 per cent LI-CAT (Life Insurance Capital Ade-quacy Test, a measure used byfinancial regulators) ratio and
roughly $1 billion in debt capacity,assuming a 25 per cent debt-to-capital ratio.
It also generates about $800million of excess capital a year netof dividends and funding organicgrowth. If this is put to work, coreEPS growth could surpass ourforecast. And we believe SLF couldbuy back about $800 million ofstock in 2019, which at the currentstock price equates to roughlythree per cent EPS accretion.
Third, we acknowledge MFSnet flows have been hurt by cer-tain popular funds being capped,along with a shift to passive (ver-sus active) strategies as well as ashift to fixed income (from equity)mandates.
To cut to the chase, MFS remitsbetween $400 million and $500million of cash to SLF annually,and even if earnings flatline, man-agement believes the eight percent to 10 per cent medium-termEPS growth target is achievable.
Fourth, we believe SLF has themost attractive Canadian insur-ance franchise of the group.
We set a target share price of$58 for Sun Life.
There are five drivers behindour positive view on TD. First, welike its scale in Canadian personaland commercial banking, with theopportunity to build market sharein certain areas such as commer-cial lending (currently No. 3) and
mortgages (currently No. 2). Ofnote, TD has about 22 per cent ofall demand and notice deposits inCanada, a strong tie to consumers.
Second, in our view, TD hashigh-quality franchises in Canadaand the U.S. (both in terms of per-sonal and commercial banking aswell as wealth management).
Third, it offers higher relativeexposure to U.S. markets com-pared to its Canadian peers.
Fourth, it has lower exposureto capital markets versus peers, abusiness we believe should com-mand a lower valuation multiple.
Fifth, it has the highest CET1ratio of the group, which positionsit well from a defensive perspec-tive, but also offensively if acquisi-tion opportunities arise (forexample, in the U.S.).
TD gets an $82-per-share tar-get price.
Alaris Royalty has a diverseportfolio, solid track record of divi-dend growth, and deployed capitalstrongly in 2018 (which we expectto continue into 2019). In addition,within our coverage, Alaris standsout as a name that benefits from arising interest rate environment(reduces competition for deals byprivate equity firms and mezza-nine-debt alternatives).
Our bullish thesis is predicatedon several factors: noise related toits underperforming files is largelybehind it; our belief that the envi-
ronment is changing in Alaris’favour, with interest rate hikes in-creasing the appeal of its royaltystructure; net capital deploymentcould pick up, reducing the pay-out ratio to 80 per cent by year-end; and its valuation is attractive,trading at 1.1 times price-to-bookvalue (compared to a historical av-erage of 1.6 times), with a com-pelling 9.1 per cent dividend yield.
We assign a price target of$21.50 per share for Alaris.
Doug Young and Gary Ho are fi-nancial analysts at DesjardinsCapital Markets in Toronto.
46 / February 8, 2019 I N V E S T O R ’ S D I G E S T Issue 3 / 19
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IN THIS ISSUEAGT Food and Ingredients .........................57Alaris Royalty................................................45AltaGas..........................................................52Altura Energy................................................57Andrew Peller ...............................................52Aphria............................................................59Apollo Global Management LLC................62Auxly Cannabis Group ................................54Bank of America...........................................62Barkerville Gold Mines................................58Barrick Gold .................................................59Blackstone Group LP...................................62BMO Junior Oil Index ETF..........................63Bristol-Myers Squibb ..................................61Cameco.........................................................63Canadian Natural Resources......................63CannTrust Holdings....................................53Canopy Rivers ..............................................56CareTrust REIT.............................................61CGI Group ....................................................60Chemtrade Logistics Income Fund ...........50Ciena .............................................................63Cisco Systems...............................................62Cohen & Steers Infrastructure Fund..........63ConocoPhillips.............................................62Constellation Software................................57Correvio Pharma..........................................58CPS Technologies ........................................62Devon Energy...............................................62Domtar..........................................................61Double Line Floating Rate
Class 1 Shares...........................................63Dynasil Corp. of America............................62EnCana .........................................................63Endeavour Silver..........................................57Energy Fuels .................................................63EOG Resources.............................................62Equinox Gold ...............................................56Essential Energy Services............................58EXFO .............................................................57FedEx.............................................................62Flower One Holdings ..................................55Galaxy Gaming.............................................62General Motors ............................................61Global X Funds.............................................63Goldcorp.......................................................63Goldman Sachs Group................................62GT Gold.........................................................56HCP REIT......................................................61Hi-Crush Partners LP ..................................61Horizons S&P/TSX Capped Energy
Index ETF .................................................63iAnthus Capital Holdings............................57Invesco DB Oil Fund ...................................62iQIYI ..............................................................62iShares S&P/TSX Capped Energy
Index ETF .................................................63iShares U.S. Oil & Gas Exploration &
Production ETF........................................62Iteris ..............................................................62Knight Therapeutics....................................59Kraft Heinz ...................................................62Kraken Robotics...........................................59Leagold Mining ............................................59Lockheed Martin .........................................62Neo Performance Materials .......................52Newmont Mining ........................................63Nokia.............................................................61Northrop Grumman....................................62Nutrien..........................................................54Obsidian Energy ..........................................58ON Semiconductor......................................63Painted Pony Energy ...................................59Pembina Pipeline ........................................52People ...........................................................54Performance Food Group...........................63Petrus Resources..........................................55Pollard Banknote .........................................58PrairieSky Royalty........................................63PRO REIT ......................................................50Purpose Marijuana Opportunities Fund ..55Purpose Premium Yield Fund....................55Questor Technology....................................56Raytheon.......................................................62Sangoma Technologies...............................60SEMAFO........................................................57Seven Generations Energy..........................63SilverCrest Metals ........................................55Smith-Midland ............................................62Socket Mobile...............................................62Stingray Group.............................................53Summit Industrial Income REIT................50Sun Life Financial ........................................45TAL Education Group .................................62Theratechnologies.......................................56Toronto-Dominion Bank............................45Tourmaline Oil.............................................63UGI ................................................................63United States Oil Fund LP ..........................62Valens GroWorks .........................................56Village Farms International........................52VirTra ............................................................62WCM Focused International
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Next issue February 22
Funded by theGovernment
of Canada
IPPs have better creditor protection than RRSPs
Young and Ho from front page
TD: Higher U.S. exposure than peers
Halpern from front page
See Halpern on page 47
Mark Halpern
da’s Income Tax Act, in contrast toevery other financial investment(stocks, bonds, GICs, real estate,cryptocurrencies, other portfolioinvestments, etc.).
Why would a business ownerwant it?
Business owners use corporate-owned life insurance as a tax-effec-tive way to accumulate passivewealth inside a company, to accessthat wealth tax-free and to transferit tax-free to surviving beneficia-ries. It can also be used to fundbuy-sell agreements when othershareholders are involved.
Businesses usually invest re-tained profits or surplus cash intaxable investments. This usuallyoccurs when the business ownerdoesn’t need the extra incomeand has a higher marginal tax ratethan their business. They take ad-vantage of the low corporate taxrates on active business incomeby saving money in their corpora-tions, if they don’t require it forpersonal purposes.
This accomplishes a tax deferralonly. Eventually, these assets willcome out of the corporation and betaxed at high dividend tax rates.
Invest some of the retained
profits in tax-exempt permanentlife insurance. There are twomain benefits to making such aninvestment.
The savings component of thelife insurance policy can grow on atax-free basis and a significant por-tion, if not all, of the policy pro-ceeds payable at death can be paidto the shareholder’s estate as a tax-free capital dividend.
Other income tax advantages:Premiums are paid with corporateafter-tax dollars, which are taxed ata much lower rate than the indi-vidual shareholder’s personal rate.The corporate tax rate applicableto active business income in On-tario is approximately 15 per centand to investment income is 50 percent. The top individual marginaltax rate in Ontario is approximate-ly 53.5 per cent.
Upon death, an individual isdeemed to dispose of his or herproperty at its fair market value. Asit pertains to shares of a corpora-tion that owns a life insurance pol-icy, the Income Tax Act dictates tovalue the life insurance policy at itscash surrender value immediatelybefore death. This value will typi-cally be significantly less than thepolicy’s payout following death,and far less than the value of the
property that would have other-wise been accumulated by the cor-poration had it not purchased thelife insurance policy.
As a result, purchasing life in-surance can reduce the taxpayable at death in respect ofshares of a private corporation, asit usually leads to a lower valua-tion for the corporate shares thanhad no life insurance been pur-chased. (Please see my September2018 article, "Business Owner? GetLife Insurance")
An Immediate Financing Ar-rangement (IFA) is a strategy to getLife Insurance without tying upyour money paying premiums, se-curing your tax and estate planningliquidity needs.
It is most commonly used bybusiness owners, real estate in-vestors and developers, high-in-come professionals, and peoplewith substantial investment port-folios.
A 65-year-old business ownerneeded Permanent Life Insurancebut wasn’t prepared to pay the pre-miums. He was earning over 20 percent annually on his business in-vestments and reluctant to reducehis returns to buy Life Insurance.
We structured an IFA to cover100 per cent of his insurance pre-
miums. He continues to invest hismoney in his business. The effec-tive net cost of his Life Insurance isthe tax-deductible interest costonly, amounting to two per centannually of the true premium.
The insurance policy serves ascollateral to secure a loan with aCanadian chartered bank. The loanis used to pay the premiums and theinsured pays only the interest on theloan, which is tax-deductible. Theloan will be paid off at death withthe Life Insurance proceeds. Thebalance will go to his family andcharity, virtually tax-free.
Other benefits to consider• Convert fully taxable divi-
dends into tax free dividendsthrough the Capital Dividend Ac-count (CDA) less the adjusted costbase.
• Make charitable gifts withoutaffecting cash flow or the capacityto make investments.
• Increase an estate and transferwealth tax-free.
Don’t do this alone. Get advice from an experienced
team that includes your accountant,lawyer and a Certified FinancialPlanner or Trust & Estate Practition-er. Our advisors across Canada areavailable to help you. Contact us fora free, no-obligation consultation.
Mark Halpern is one of Canada’stop life insurance advisors, a Cer-tified Financial Planner (CFP),Trust and Estate Practitioner(TEP) and CEO of WEALTHinsur-ance.com®. He guides successfulbusiness owners, who are alreadychallenged for time, through thecomplex process of ensuring thepeople and organizations theycare about are taken care of. If youare like his other successful busi-ness owner clients, you are lookingto reduce your tax obligations,preserve your wealth and leave alegacy. Incompletions rob us of en-ergy. Mark collaborates with yourprofessional advisory team toachieve your desired outcomes.His approach is simple. He makessure what is important to you getsdone. He gets you organized, pro-vides a big picture view of your fi-nancial affairs, determines yourstrategy and helps you act. He willsimplify the complicated, so youand your family can rest easy. Hecan be reached at 416-364-2929,toll-free at 1-866-566-2001 [email protected] WEALTHinsurance.com. Getyour FREE Estate Planning Toolkitat WEALTHinsurance.com/toolk-its.html. VisitMarkHalpernBlog.com.
and their clients from protectingthemselves with an asset that hasdone just that for over 3,000 years.
For a concrete case, in spite ofnothing having changed withinfunds from BMG, my company, thenew rules mandated by the provin-cial regulators across the countryraised our official risk rating, mak-ing BMG funds unsuitable to manyclients who have held these fundsfor years.
An investor in a typical bal-anced portfolio should be con-cerned with not being properlydiversified. For example, an equityportfolio can be diversified by style,capitalization and sector – but allequities are categorized as thesame asset class. Gold, however, isan asset class unto itself with nosubstitute, no counterparty risk, nomanagement risk and no defaultrisk. Therefore, concentration lim-its in the traditional sense do notapply to monetary gold.
There is no issue if a clientchooses to hold 100 per cent of hisor her portfolio in a money marketfund. It should be equally risk-rat-ed for an investor to hold 100 percent of their portfolio in the BMGGold Fund. Currently, investorswould be prevented from holdingmore than 20 per cent in theirMFDA portfolio.
The only choice investorswould have is to move their ac-count to a discount brokerage ac-count, and purchase Class D units.Class D units have a 1.5 per centmanagement fee instead of the re-tail fee of 2.25 per cent, which in-cludes a one per cent trailer fee tothe advisor.
Financial advisors are under themicroscope for the unpalatablecommission fees they receive.Many investors have already lefttheir advisors due to this andswitched to a do-it-yourself (DIY)discount brokerage account. Theyswitched into fund classes (such asD-class) where they aren’t payinghigh commissions to an advisor.
When an investor is told thatthey cannot hold the investmentsthey want because of obtuse rulesand are compelled to pay highfees to an advisor for financialproducts they don’t want (or, al-ternatively, should have a greaterallocation to), it leaves the in-vestor wondering why they havean advisor in the first place.
In addition, the last year hasbeen infuriating for investors andfinancial professionals due to thearbitrary, misguided and potential-ly disastrous rule changes relatingto measuring investment risk. Es-sentially, many investors were toldthey were no longer in control oftheir own wealth and were barredfrom holding monetary gold. Insummary, the regulators mandat-ed that the sole criterion for mea-suring an investment’s level of riskwas Standard Deviation. This ele-mentary investment tool measuresboth upside and downside moves,over a 10-year period, and finds anaverage of the two.
The irony is, of course, that in-vestors do not consider positive re-turns as risk – that is the objective.Investors only worry about down-side risk. Investors are now beingpenalized for above-average re-turns even if downside risk is ex-tremely low. I am not alone in theview that downside risk is the best
way to gauge the level of risk in aninvestment. Gold has a very lowrisk when measured this way.
This presents an irreconcilableparadox for an advisor who hadrecommended this asset for yearsas an essential component of a bal-anced and diversified approach towealth preservation. Gold’s abilityto offset losses in traditional assetclasses (such as stocks and bonds)in times of uncertainty, like we seetoday, is a key reason to own it.These rules were implementedwith protecting the investor but areactually the exact opposite, andnow put the investor at risk.
“Gold’s ability to offsetlosses (elsewhere) is a key
reason to own it.”
The unfortunate timing of lastyear’s rule change flies in the faceof reason as we witnessed an equi-ty bull market achieve three timesthe size of the last two bull marketsand global debt reach an alarmingUS$241 trillion – over three timesglobal GDP. Mean reversion is in-evitable, and the magnitude of amarket unwind is unthinkable tothe average investor today.
Financial professionals weretold that if they did not comply withthe new risk-rating rules that theycould be terminated – meaningthat they would lose their clientsand livelihood. In many instances,this was the case. In conjunctionwith the financial professional’sdilemma, many investors were lividupon being told that they had to re-duce or redeem all of their physicalprecious metals investments.
Some investors, who wereforced to switch to another advisor,or a discount brokerage accountafter theirs had been forcibly ter-minated, had their entire gold po-sition liquidated. These activitieshave the makings of a class-actionlawsuit, as investors’ portfolioswere made less diversified and leftinvestors more exposed to marketrisks and losses.
The advisor’s position, andrightly so, was that one of thetenets of modern portfolio theory ispredicated on the notion of diver-sification – that is, a blend of assetsthat move in different directions.Investors who were forced to selltheir gold remained in overvaluedstocks and bonds, which studiessuggest are more positively corre-lated now than ever.
Gold is well-known as a safe-haven asset during times of uncer-tainty. Since late September, it hasoutperformed all traditional assetclasses. This trend is likely to con-tinue for the foreseeable future, asthe world’s central banks seek tounwind the effects of their un-precedented and deleterious mon-etary policies introduced after thelast financial crisis. Those who ig-nore what is happening right noware placing their financial well-be-ing in harm’s way.
If your financial advisor, in ad-dition to recommending monetarygold for diversification purposes,continues to advise on estate plan-ning, tax planning, insurance op-t i o n s a n d o t h e r f i n a n c i a lrecommendations, then you arebeing guided by a true financialprofessional worth their trailingcommission compensation.
If you don’t feel like your advisor
offers you any real value, then whydo you continue to pay them out ofyour fund’s management fee?
Investors need to be very waryof financial advice that does not fol-low, or runs contrary to, these em-pirically proven risk-managementpractices. You have a choice. If yourinvestment advisor, as a result ofthese new restrictions, cannot im-plement an effective risk manage-ment strategy, or fails to grasp thebasics of modern portfolio theory,then I strongly recommend thatyou contact us about DIY investingand BMG Class D funds.
The headwinds investors andadvisors face regarding the outlookfor 2019 and beyond is dauntingenough. They don’t need theadded problem of restricted advicenot based on financial acumen buton arbitrary rules and faulty logic.
You have worked your entirelife for your vision of a retirementlifestyle. Don’t let the regulatorsand fund dealers tell you that youaren’t in charge of your own mon-ey and leave you unprotectedagainst the greatest threat to yourretirement dreams in 2019.
Nick Barisheff is the founder, pres-ident and CEO of BMG Group, acompany dedicated to providinginvestors with a secure, cost-effec-tive, transparent way to purchaseand hold physical bullion. BMG isan Associate Member of the Lon-don Bullion Market Association(LBMA) and an Associate Memberof the Responsible Investment As-sociation (RIA) as well signatory tothe Six Principles of ResponsibleInvestments (United Nations-en-dorsed Principles for ResponsibleInvestment – PRI).
Issue 3 / 19 I N V E S T O R ’ S D I G E S T February 8, 2019 / 47
RECENT CHANGES DEFY REASON IN LIGHT OF EQUITY BULL MARKET’S SCALE
Risk rules restrict both advisors and investorsBarisheff from front page
Corporate tax rates far lower than individuals’Halpern from page 46
I N V E S T O R ’ S D I G E S T
INVESTING 101EXPANDING YOUR INVESTMENT KNOWLEDGE
Reprinted by permission of publisher. All rights reserved.
Avast body of knowledgehas been generated bybusiness cholars and re-searchers investigating
how successful family enterprisesremain robust across generations.My goal is to consolidate this in-formation, giving you and yourfamily a useful entry point forbuilding a multigenerational fam-ily enterprise. I’ll also share sug-gestions, tips and strategies basedon the common patterns foundwithin successful families.
In the decades over which mycareer developed, I began to focuson the topic of how successfulfamily enterprises thrive for gen-erations. As a chartered accoun-tant working with other familieswho, like my own, had used thetraditional tax- and control-driv-en tools to deal with family enter-prise transitions, resulting incomplex family corporate struc-tures that often included trustsand holdcos, and later, as a fami-ly enterprise advisor, I started tosee that successful famil iesshared a number of traits. How-ever, in so much of the informa-tion flooding the market on thesubject of successful multigener-ational family enterprises, thesetraits seemed lost in a sea of un-necessary complications.
The importance of a mission ora vision—and more specifically, Iwould add, a shared vision—can’tbe overstated in the context of asuccessful family enterprise. Astrong, compelling, shared visionwill energize a unified, committedownership base. With a unifiedownership base, harmony isachieved, which means a familybusiness is less likely to be tornapart by the seeds of discontent. Icompare the work a family doeshere to a game of tug-of-war.When family members are on thesame side of the table, pulling inthe same direction, they will winthe game. When family membersstart pulling in opposite direc-tions, they will lose, ending up inthe mud. An epic battle in a high-profile family is the stuff of storiesof failed family business transi-tions that gain significant, oftenembarrassing, media attention.
As you move from privatelyowning your business toward cre-
ating a multigenerational familyenterprise, I’d like to pass alongsomething a friend of mine,Chelsea Welch, once said to me:"It’s not that the grass is greeneron the other side. It’s that thegrass is greener where you fertilizeit." In other words, it’s not thatother family enterprises are coin-cidentally successful.
It’s that the family members insuccessful family enterprisesproactively tackle, through theprocess of working together, theprimary reasons for failure bystrengthening trust and commu-nication within the family, prepar-ing the upcoming generation fortheir potential future roles and re-sponsibilities, and creating a com-pelling and energizing shared vi-sion. Family enterprises that fer-tilize the grass in this way have afar greater likelihood of achievinga multigenerational family enter-prise that sprawls across acres ofluscious, rolling green lawns.
A family business leader issomeone who has aspired to andearned the leadership role. It’sthat person’s name at the top ofyour family business organiza-tional chart. They’re the individu-al ultimately accountable for thesuccess or failure of the business,and they play an integral role insuccessful family business transi-tion plans.
From a business perspective,this is the person who has likelycharted a life course to earn theirrole as leader of the family busi-ness ownership and/or manage-ment group, gaining leadershipskills inside and/or outside thefamily business, reading bookswritten by the greats, pursuing anapplicable education like a pro-fessional business degree, joininga peer-to-peer leadership organi-zation, working with a mentor or acoach, etc. The family leader, onthe other hand, is the glue in aunited family.
Unity is something a multigen-erational family can’t have toomuch of. And yet the importanceof a family leader is often over-looked, not recognized until thefamily begins to rupture at itsweakest points when the currentfamily leader is gone. Familymembers follow a family leadernot because of coercion but out ofrespect and loyalty for everythingthe family leader has done to sup-
port individual family membersand the family as a whole.
No one is born to leadership,and this is just as true for familyleaders. One of the challenges forthe family leader is that those inlater generations may not auto-matically follow the leader as thesecond generation (children) of-ten does of the first generation(parents). Children follow parentsfirst out of a need for security andsafety and later, for some, as a re-sult of a lifetime habit. In latergenerations, a family leader is lesslikely to enjoy such unquestion-ing acceptance.
Your Business, Your Family,Their Future: How to Ensure
Your Family Enterprise Thrives for Generations
By Emily Griffiths-Hamilton
Figure 1 PublishingCopyright 2018$25, 168 pages
Members of a larger, more di-verse cousin group may questionand challenge decisions beingmade—and this is actually goodnews. The family enterprise isstrengthened when the upcominggeneration is open-minded andquestions the status quo. A goodfamily leader will encourage thisquestioning from those who haveearned a voice, understanding thatdiffering talents and expertise willbe the building blocks for the suc-cess of their multigenerationalfamily enterprise.
The upcoming family leaderwill have to earn followers. Theskill set of a family business lead-er is fairly easy to assess. The skills
of the family leader, on the otherhand, are harder to evaluate, butby gaining the family members’trust, the family leader can earntheir respect. Without trust, fam-ily members will not follow thefamily leader.
The role of the family leader is athoughtful and sometimes emo-tional one, something not enteredinto lightly—in fact, many familyleaders discover doing the rightthing is not always the easy thing.Being an effective family leadermeans putting the needs of the en-tire family, as well as of individualfamily members, before their own.It means nurturing the develop-ment of each family member whilemaintaining a focus on the collec-tive good. It means showing youhave everyone’s back by ensuringaccountability to whatever thefamily’s collective goal might be. Itmeans having tough conversationswith individuals who threaten thegood of the collective family, not topunish them but to help them toget back on course.
Family enterprises are specialentities. To run them successfullyrequires paying attention to thethree fundamental systems atwork: the family, family businessownership and family businessmanagement. Management is thesystem that is most easily ad-dressed, since it is taught in busi-ness schools across the globe. Lessattention has been devoted toownership, but that system toocan be easily handled once thecritical role of ownership is un-derstood. The family factor ismore challenging because emo-tions can get in the way of makinggood decisions. However, by hav-
ing family enterprise leaders whoensure that family members at thetable have earned a qualified voiceand schedule regular family meet-ings to manage the expectationsof the upcoming generation, edu-cate the upcoming generation andprovide a forum to deal with fam-ily issues outside of the familybusiness, the family factor canalso be effectively managed. Suc-cess can be achieved.
Understanding the cycle ofcommunication—which includesintent, action and effect—can bevery useful. It might interest you toknow that every conversation weenter into stands a two-thirdschance of being misunderstood.When we are communicating, onlyone-third of our communicationprocess, the action part, is public:the words we speak or write, thegestures we make.
The other two-thirds, our intentas the communicator and the ef-fect our communication has on thelistener and the listener’s assump-tions, is private. In other words, intwo-thirds of communication, youdon’t know the thinking behindwhat the speaker is saying and thespeaker can’t read the listener’smind, including knowing the as-sumptions the listener is makingabout the speaker’s intentions.
For instance, let’s say you arethe family member responsible fordrafting and circulating minutesafter each family meeting. One se-nior family member always re-minds you to get this job done on atimely basis. Let’s look at this se-nior family member’s possible in-tent, what they might be thinking:
"Hey, I know how easy itwould’ve been for me to forgetsomething like this at your age.Maybe a little reminder from mewill help." That doesn’t sound sobad, right? But what if the seniorfamily member communicates thiswith a snappy comment like "Don’tforget to get the minutes out ASAP."Yikes! The effect on you could besomething like an irritated and de-fensive, "Does he think I’m useless?I always get the minutes out fast!"Do you see where I’m going here?The effect our communicationdoes not necessarily line up withour intentions.
Communication easily breaksdown when we, as listeners, startby assuming the intention behindsomeone’s words is negative. How-ever, when, as speakers, we pay at-tention to the effects of our com-munication and when, as listeners,we assume positive intentions, weincrease the likelihood of havingpositive, dynamic conversations.
It’s important to recognize theeffect that various forms of com-munication have on trust. Firingoff texts and short emails can workwell when trust is high and every-one assumes that everyone has thebest of intentions. However, whentrust is low or a particularly thornyissue needs to be resolved, it’s bestto meet in a face-to-face environ-ment where there is less chance ofmiscommunication. Furthermore,showing up in person and demon-strating a genuine commitment toworking together to resolve trickyissues gives family members anopportunity to build trust.
Ensuring the next generation
builds on thelast’s good workFormer Vancouver Canucks co-owner and
chartered accountant Emily Griffiths-Hamiltonshares lessons from her career and firsthand
50 / February 8, 2019 Issue 3 / 19I N V E S T O R ’ S D I G E S T
INCOME TRUST INSIDER
Jan. 21 52 - wk Market Distributions $ Yield % 2017 PayoutIncome Trust Symbol Price $ Range $ Cap (m) $ 2017A 2018E 2019E 2017A 2018E 2019E Ratio %
Essential information on the most widely covered income trusts by leading analysts across Canada
Explanation of TermsMarket Capitalization is calculated by multiplying the current unit price by the number of units outstanding as of January 2019.Distribution is the amount of cash the income trust pays or is expected to pay annually. Yield is the annual distribution expressed asa percentage of the latest unit price. Payout ratio is the proportion of earnings paid out as dividends to shareholders.
*Distribution and unit price listed in U.S. dollars.
INCOME TRUST LAB
Essential information on the most widely covered income trusts by leading analysts across CanadaJan. 21 52 - wk Market Distributions $ Yield % 2017 Payout
Income Trust Symbol Price $ Range $ Cap (m) $ 2017A 2018E 2019E 2017A 2018E 2019E Ratio %
REITS
Chemtrade LogisticsGlobal slowdown worries
lead to target cutCiting concerns about a global
slowdown in the chemicals space, CIBCWorld Markets analysts Jacob Bout, RahulMalhotra and Ioan Ilea substantially cuttheir target price for Chemtrade LogisticsIncome Fund (CHE.UN-TSX, $10.80).
I n a d d i t i o n t o r e d u c i n g t h e i rrecommendation to “neutral” from“outperformer,” the analysts slash their12-month target price to $14 per sharefrom $20. They also lower their earningsbefore interest, taxes, depreciation andamortization (EBITDA) projection.
“Similar to the rest of our chemicalscoverage, we are taking down our targetmultiple to reflect ongoing concerns of aglobal slowdown (target multiple goesfrom 8.5 times to seven times), along witht h e c u r r e n t u n c e r t a i n e c o n o m i cenvironment / cyclicality of chlor-alkali,”say Messrs. Bout, Malhotra and Ilea in aJan. 9, 2019 research note.
“Leverage also remains a concern, withnet-debt-to-EBITDA multiple of 4.1 timesas of the third quarter of 2018. We believethat CHE.UN will continue to be a ‘showm e ’ s t o r y , g i v e n t h e n u m b e r o foperational/WSSC (Water Solutions andSpecialty Chemicals) legal reserve issuesin 2018.”
Getting back to their EBITDA projection,the analysts reduce the number to $75million from $78 million for the fourthquarter of 2018, and they cut their 2019EBITDA estimate to $348 million from $372million. Their initial EBITDA estimate for2020 is $365 million.
The analysts, after conducting a stresstest, also suggest that Chemtrade’s dividend
may very well be at risk.“Chemtrade’s current annual dividend
of $1.20 per share is yielding about 11 percent,” they say. “While free cash flow (FCF)covers dividend in our base case (payout ofapproximately 70 per cent), there is a risk ofinadequate FCF generation to cover thedividend in our downside scenario.
“We do not anticipate the firm breakingits financial covenants; net debt-to-EBITDA(excluding $627 million in convertible debt)remains well clear of the five timescovenant.”
Summit Industrial IncomeREIT closes out the year strongly
with industrial portfolio buysIn a Dec. 12, 2018 research note, IA
Securities analysts Brad Sturges, CarlBurton and Ian Ho cover Summit IndustrialIncome REIT’s (SMU.UN-TSX, $9.50) dealto buy three industrial portfolios for around$329 million as well as its move to issueapproximately 15.1 million units as part of acommon equity offering that raised grossproceeds of about $140 million.
The three industrial portfolios, whichinclude 15 industrial facilities, are located inthe Greater Toronto Area, Ottawa, Montrealand Alberta.
“The three Canadian industrialportfolios include a strong mix of recentlyconstructed Class A industrial facilities,enhancing the REIT’s portfolio quality,” sayMessrs. Sturges, Burton and Ho. “Averagein-place rents for the 15 industrial assets tobe purchased by Summit are belowestimated market rents. Furthermore, thelease-up of vacant space in the Ottawa-based assets provides further rental incomeupside potential.”
The analysts rate the REIT a “buy,” andthey boost their 12-month target price to$10.75 from $10. Summit’s units, they add,
are trading at 15.1 times 2019 their fundsfrom operations per unit ($0.63),approximately six per cent above theirprojected net asset value (NAV) of $9.
“Summit is the only Canadian-listedREIT that provides investors with focusede x p o s u r e t o i m p r o v i n g C a n a d i a n(particularly GTA) industrial real estatesector fundamentals, combined with aniche investment in the development ofCanadian data centre properties,” say theanalysts.
“Summit offers investors an attractivelong-term NAV per unit growth profile,reflecting the potential for further Canadianindustrial cap rate compression, acceleratingrent growth, and the stabilization of its initialdata centre investments (approximately sixper cent of 2018 year-to-date NOI).”
PRO REIT REIT lands ‘special situations’ top pick
PRO REIT (PRV.UN-TSX/VEN, $1.98)nets the top spot in Haywood Securities’“Special Situations” space due to some cata-lysts expected this year, says analyst ColinHealey in a Dec. 12, 2018 research note.
“North American equity markets experi-enced rising volatility in 2018 as the nearlydecade-long bull market wavers in the faceof tightening monetary policy and a deterio-rating growth outlook. We believe thatgreater equity market volatility in the comingquarters should increase the payoff frombottom-up fundamental analysis in stock se-lection as the results of passive investmentstrategies deteriorate. Sectors with moredeep value include REITs as they remain in astrong upward trend.
“Upcoming catalysts over the next fewmonths include closing of latest transac-tions that will bring it through the $500 mil-lion gross book value (GBV) threshold; in-
ternalization of its property managementfunction to allow for greater scalability andcost savings; and graduation to the TorontoStock Exchange from the TSX Venture,” saysthe analyst.
“Combined with accelerating per-unit ac-cretion, an improving payout ratio, and a sta-ble balance sheet, we believe these catalystsshould drive PRV.UN to deliver strong risk-adjusted returns in 2019.
“PRO’s portfolio as of third-quarter2018 consists of 76 properties (will be 84upon close of the most recent transactions)comprising three million square feet ofgross leasable area (will be approximately3.7 million square feet) with a 98 per centoccupancy rate, 6.5-year average leaseterm, and approximately 50 per cent expo-sure to investment grade tenants. Base rentexposure by asset class as of the third quar-ter was roughly 54 per cent retail, 13 percent mixed-use, seven per cent office, and26 per cent industrial; along with 51 percent Maritimes, 20 per cent Quebec, 22 percent Western Canada, and seven per centOntario.”
Mr. Healey notes that the REIT’s debt-to-GBV for the third quarter of 2018 was 51 percent, which was better than the 60 per centfigure the quarter prior. The analyst, more-over, models this figure going to 58 per centby the end of 2019.
“We model $85 million of new acquisi-tions being done throughout 2019, financedthrough a combination of free cash flow,mortgage debt ($55 million), and an equityissuance ($27 million),” says the analyst.“This supports adjusted funds from opera-tions (AFFO) of $27 million (up 85 per centyear-over-year) and AFFO per unit of $0.28(up 47 per cent).”
In addition to reiterating his “buy” rec-ommendation, the analyst sticks with his tar-get price of $2.55.
AltaGas Ltd.ALA-TSX, $14.10 ($25.14*)
AltaGas Ltd.’s entry into defini-tive agreements with Kelt Explo-ration Ltd. to provide an energy in-frastructure solution for the liquids-rich Inga Montney development innortheast British Columbia was thetopic up for discussion in a Sept. 5,2018 research note by IA Securitiesanalyst Michael Charlton.
AltaGas said that commercialarrangements underpinned the ex-pansion of its Townsend Complex,including the addition of 198 mil-lion cubic feet per day of process-ing capacity at the Townsend DeepCut Facility. Commercial opera-tions were set to commence in thefourth quarter of 2019.
Mr. Charlton reiterated his“buy” recommendation and his$29.50 per share target price.
In a Jan. 11, 2019 research note,IA Securities analysts Elias Fosco-los, Chelsea Bedrejo and MatthewWeekes say that they expect thatthe company, with a new CEO atthe helm and after closing itsmerger with WGL Holdings Inc.,will execute well in 2019.
“Looking into 2019, AltaGas of-fers investors tremendous upsidebut simultaneously carries a signif-icant amount of execution risk interms of asset sale valuations andoperational performance,” say theanalysts. “Over the next two quar-ters we are expecting to see a sig-nificant contribution to EBITDAfrom WGL along with the tailwindboost from the commissioning ofthe Ridley Island Propane ExportTerminal.”
Messrs. Foscolos and Weekes aswell as Ms. Bedrejo stick with their“buy” recommendation and $21target price.
Village Farms International Inc. VFF-TSX, $5.57 ($6.17*)
Village Farms International ap-pointed Mandesh Dosanjh to thepresident and CEO posts atcannabis joint venture Pure SunFarms (PSF), according to BeaconSecurities analysts Doug Cooperand David Kideckel in an Aug. 21,2018 research note.
“We believe this an excellenthire,” said the analysts. “The ap-pointment of Mr. Dosanjh marriesthe two most important aspects ofthe business. The current manage-ment team of Village Farms has,without a doubt, the greatest expe-rience in terms of agriculturalgrowing. Village Farms also has ex-perience in branding, packagingand selling produce through retailchannels.”
The analysts added that the ap-pointment could, among otherthings, point to a substantial strat-egy shift for PSF to a vertically inte-grated producer from a purewholesaler.
Messrs. Cooper and Kideckelreiterated their “buy” recommen-dation but boosted their 12-month target share price to $13.50from $12.
Fast-forwarding a few monthslater, Mr. Cooper and fellow Bea-con Securities analyst Susan Xu sayin a Dec. 13, 2018 research note
that the 2018 Farm Bill was recent-ly okayed by the U.S. Congress.
“The U.S. Congress approvedthe 2018 Farm Bill and has beenpassed by President Trump,” saythe analysts.
“As part of the bill, hemp withlow amounts of THC (0.3 percent) will be removed from theControlled Substances Act, whichwill open-up interstate commercefor hemp products includingcannabidiol (CBD) as well asbanking capabilities. We believethis is a hugely positive develop-ment for the industry and VillageFarms in particular.
“In a press release this morning,the company indicated that the fulland unambiguous legalization ofhemp, and especially hemp-de-rived CBD products, creates atremendous global opportunityand Village Farms intends to be aleader in the nascent industry.
“We continue to believe Village
Farms will be one of the mostmeaningful suppliers.”
Mr. Cooper and Ms. Xu — whosay that the company’s stock doesnot adequately reflect the worth ofits Canadian holdings and doesnot reflect any of the value of itsU.S. assets — stick with their “buy”recommendation and $13.50 tar-get price.
When Raymond James Finan-cial analyst David Novak coveredZymeworks in a Sept. 5, 2018 re-search note, he said that the Van-couver-based biotechnology com-pany disclosed that Eli Lilly & Co.had earlier that same month sentin an investigational new drug(IND) for a bispecific antibody de-veloped using Zymework’s Azy-metric platform.
The analyst said that the devel-
opment triggered a US$2 millionmilestone payment as requireddue to the 2013 agreement be-tween the two aforementionedcompanies. Mr. Novak reiteratedhis “outperform” recommenda-tion and 12-month target shareprice of US$27.
In a research note on Dec. 10,2018, Mr. Novak and fellow Ray-mond James Financial analyst Ar-chit Kshetrapal cover a develop-ment that saw Zymeworks shedsome light on recent studies.
“On Saturday, ZYME presentedits Good Lab Practice toxicologyand IND-enabling efficacy studiesutilizing its HER2-targeted bi-paratopic ADC, ZW49, at SABCS18,”say the analysts.
“The data contains incrementalnew insights into the preclinicalcharacterization of ZW49 support-ing its potential of representing abest in class HER2-targeted anti-body drug conjugate.”
The analysts, who stick withtheir “outperform” recommenda-tion with “high risk/speculation”rating, add that the company’s an-nouncement was a positive.
“Overall, we view the preclinicaldata presented by ZYME asstrongly supporting ZW49’s poten-tial position in the clinic as a best-in-class HER2-targeted ADC,” sayMessrs. Novak and Kshetrapal.
“In the press release, ZYMEonce again reiterated that its INDhas been filed, in-line with formerguidance and as articulated onNov. 27, 2018. We anticipate firstpatient dosed within the first quar-ter of 2019 and believe recruitmentis likely to be more rapid than wewould typically expect for a newclinical therapeutic, as ZYME willlikely be able to leverage the cur-rent clinical sites involved in theZW25 ongoing trial.”
THREE-MONTH FOLLOWUP
How September research has faredUpdated recommendations from our Oct. 5, 2018 edition
52 / February 8, 2019 WHAT THE BROKERS SAY ABOUT CANADIAN STOCKS Issue 3 / 19
I N V E S T O R ’ S D I G E S T
Neo Performance Materials Inc. NEO-TSX, $16.59 ($17.90*)
Neo Performance Materials of-ficially joined CIBC World Markets’coverage universe when, in a Jan. 3,2018 research note, analyst ScottFromson kicked off coverage witha “neutral” recommendation and a$19 price target.
The analyst explained that therewere substantial opportunities forthe company to grow revenues andcash flow in the rare earth space.He explained that his view wastempered by NEO’s exposure toChina, which he said was by far theworld’s largest rare earths player.
Said Mr. Fromson, “NEO’sgrowth strategy is three-pronged:Organic growth from market sharegains and new product applica-tions; new products, leveragingNEO’s research and developmentcapabilities and strong customerrelationships; and acquisitions fi-nanced with its cash-positive bal-ance sheet.”
In a followup research note onDec. 18, 2018, Mr. Fromson andfellow CIBC analyst Ace Mirali cov-er the friendly deal between NEOand Luxfer Holdings PLC, a U.K.-based producer of highly engi-neered advanced material.
“NEO and Luxfer Holdings an-nounced a friendly cash and sharedeal today, with the latter as thesurviving entity,” explain the ana-lysts. “In the current environment– a jittery market (particularly forsmall caps), an unrelentingU.S./China trade dispute and asoftening vehicle sales outlook – wesee the deal as positive for NEOand its shareholders.
“We are reducing our price tar-get from $20.50 to $18, in line withimplied transaction valuation.
Further, we are downgrading thestock from ‘outperformer’ to ‘neu-tral’ to account for a potentiallyprolonged deal closing, as well asour limited familiarity withLuxfer’s business prospects. Whileour new price target implies an ap-proximately nine per cent returnfrom the current price (approxi-mately 16 per cent on an annual-ized basis, assuming an end of sec-ond quarter 2019 deal closing), wesee the investment case as onebetter suited to investors withhigher-risk tolerances.”
When IA Securities coveredPembina Pipeline in a Jan. 3, 2018research note, analyst Elias Fosco-los said that the Calgary-based en-ergy infrastructure company hadadded four new positions to its ex-ecutive team due to enhancedscale and scope at the company.
With the announcement,Pembina doubled the size of itsexecutive team to eight membersfrom four members, adding fournewly-created senior vice-presi-dent positions.
Mr. Foscolos, who reiterated his“buy” recommendation but re-frained from issuing a target shareprice, interpreted the news as apositive sign of Pembina’s progressin integrating operations withVeresen Inc. The two companiesmerged in October 2018.
In a followup research note onDec. 11, 2018, Mr. Foscolos,Chelsea Bedrejo and MatthewWeekes cover Pembina’s capitalprogram and its 2019 earningsbefore interest, taxes deprecia-tion and amortization (EBITDA)guidance.
“Pembina reported a capitalbudget for 2019 of $1.6 billion, ofwhich approximately $1.25 billionis sanctioned projects and $350million is unsanctioned,” say theanalysts.”The variance in our esti-mate of $975 million for unsanc-tioned projects is primarily due tothe timing of Pipeline projectscoming online.
“The capital budget is weighted53 per cent towards the Pipeline di-vision, 25 per cent to the Facilitiesdivision, and six per cent to themarketing and new ventures divi-sion. The pipeline capital spendingwill be allocated to the Phase VIand Phase VII expansions of thePeace Pipeline to be in service inthe second half of 2019 and the firsthalf of 2021, respectively.”
The company also reported ad-justed EBITDA guidance for 2019of between $2.8 billion and $3 bil-lion, which is in line with the ana-lysts’ and the consensus estimateof $2.9 billion.
The analysts reiterate their“strong buy” recommendation.
Andrew Peller Ltd. ADW.A-TSX, $14.45 ($16.25*)
In a Jan. 10, 2018 research note,Acumen Capital analyst Brian Powsaid that Andrew Peller saw mar-gin expansion driven by organicgrowth and operational improve-ments.
With regards to sales, the ana-lyst noted that they benefited“from solid growth across the ma-jority of Andrew Peller’s tradechannels, selective price increases,and the introduction of new prod-ucts and new product categories.”
According to the analyst, thecompany wrapped up the acquisi-tions of three wineries located inBritish Columbia in October 2018.
The acquisitions catapulted thecompany into the top spot in termsof producers of official Ontariowines in the province.
“We spoke with managementabout the integration of the threewineries in British Columbia,” saidMr. Pow. “Management indicatedthat they are extremely happy withthe acquisitions, the integration ison track, and the financial perfor-mance to-date is in line with previ-ous expectations.”
Andrew Peller’s results for thesecond quarter of 2018 were southof what the analyst expected. Mr.Pow added that he expected an-other solid quarter with the thirdquarter of 2018, which wrapped upon Dec. 31, 2017.
Mr. Pow opted for a “buy” rec-ommendation and $17.25 targetprice.
In a followup research note onJan. 10, 2019, Mr. Pow says that An-drew Peller demonstrated strongperformance in 2018.
“Andrew Peller showed strongoperational improvements in2018 from a focus on higher pricedpremium wines and spirits,” hesays. “Although this drove grossmargin improvements, a step upin operating expenses resulted inweaker than expected EBITDAperformance.
“A big focus for the companywas also the integration of the threeB.C. wineries acquired October2017. The efforts by managementto rationalize the portfolio shouldhave lasting positive effects on mar-gin performance that will createvalue as the company scales.”
The analyst keeps his “buy”recommendation and $19 targetshare price.
ANNUAL FOLLOWUP
What was said 12 months agoUpdated recommendations from our Feb. 9, 2018 edition
* Price one year ago
* Price three months ago
Issue 3 / 19 I N V E S T O R ’ S D I G E S T February 8, 2019 / 53
VIEWS OF LEADINGCANADIAN ANALYSTSVIEWS OF LEADING
CANADIAN ANALYSTS
WSP GlobalRAYMOND JAMES FINANCIALWhat’s in store for 2019Digested from a Jan. 9 report by analysts Frederic Bastien and Ben Cherniavsky
Messrs. Bastien and Cherniavskysay they are comfortable signing upfor what promises to be a volatile2019 with WSP Global Inc. (WSP-TSX, $60.57).
They assert, “Critical to our se-lection process was the above-av-erage visibility on revenue growththat this pure-play engineeringfirm currently offers. For one,WSP’s ongoing role as trusted advi-sor on some of the world’s mostcomplex and long-cycle trans-portation projects, combined withits limited exposure to highly cycli-cal energy and resource sectors,provide a supportive backdrop forcontinued organic growth.
“What’s more, the companycan count on newly acquired LouisBerger to contribute an incremen-tal 10 per cent to its top-line thisyear, leaving very little in our fi-nancial forecasts to chance.”
As such the analysts give thestock an “outperform” rating and$80 target share price.
With regards to Canadian engi-neering companies, the analystsdid point out that, “On balance,our view is that the group will con-tinue to capitalize on powerfullong-term trends favouring infras-tructure investments, increased ur-banization and connectivity.
“We also believe there is a lotmore consolidation to be done,which should provide WSP Glob-al, Stantec and SNC-Lavalin withopportunities to further their lead-ership of the sector. But with ris-ing interest rates and trade fric-tions pointing to a global growthslowdown, we expect design andengineering activity levels to fol-low suit in 2019.
Putting aside the fact that allfour engineering stocks we coverlook deceivingly attractive at cur-rent valuations, we believe in-vestors will be best served owninglarge-cap companies with solidtrack records of revenue and earn-ings growth, pristine balancesheets, diversified revenues andproven management. Enter WSP,our Best Pick for 2019, which we es-timate has a clear path to mid-teenrevenue growth and room for con-tinued margin improvement.
“For proof consider that of the$7 billion in net revenues we pro-ject for 2019, only about $100 mil-lion (less than two per cent) stemsfrom additional tuck-ins we expectWSP to complete in the second halfof 2019. That may ultimately proveconservative, in our view, consid-ering the strength of the firm’s bal-ance sheet.
“On the home front, WSP isshortlisted for a number of P3 pro-jects that will soon be awarded.These include the Trillium andConfederations light rail transit ex-tensions in Ottawa as well as theexpansion of Highway 401 in
Toronto, providing the basis forparticularly strong organic growthin Ontario.
“We expect further momentumin the Americas, with the U.S.transportation markets still in greatshape and the Latin American op-erations now better aligned follow-ing last year’s integration of thePoch, Concol and legacy Genivarbusinesses.
“Across the pond WSP has beenretained for the integration ofCrossrail’s complex railway sys-tems, a large mandate that not onlyeases concerns over Brexit and de-celerating economic growth in theNordics, but also supports a posi-tive outlook for the EMEIA region.Similarly, we take some comfort inknowing WSP is operating pru-dently in Asia and the Middle East,where visibility on growth is oftenas clear as mud. This is allowing thecompany to outperform its peerson both margins and DSOs, and at-tract new talent.
“We are increasing our adjustedEPS forecasts for the fourth quarterof 2018 and 2019 to the tune of$0.01 and $0.05, respectively, to0.81 and $3.70.”
WSP is one of the world’s leadingprofessional services firms, workingwith governments, businesses ar-chitects and planners and provid-ing integrated solutions acrossmany disciplines.
Stingray GroupCIBC WORLD MARKETSMusic streamer lands Altice USA
Digested from a Jan. 2 report by analysts Robert Bek and Kulveer Grewal
Stingray Group Inc.’s (RAY.A-TSX, $6.68) new deal with AlticeUSA is a strong positive lever for fur-ther organic growth in the yearsahead, as per Messrs Bek and Grew-al. While the company’s the failureto acquire Music Choice Co. wasdisappointing to the analysts, theydo assert it reduces some near-termrisk. The analysts give the stock an“outperformer” recommendationand $11 target share price.
Providing further details the an-alysts note, “In the final hours of2018, Stingray announced a newcontent deal with Altice USA, theformer Cablevision base and thefourth-largest U.S. multiple sys-tems operator (MSO). Stingray willbring its 50 music channels andhundreds of on-demand musicvideos to Altice USA’s subscribers.
“Altice USA also gets rights toother Stingray offerings, such aslinear music, streaming video ondemand (SVOD) and TV apps. Thisis a strong deal for Stingray, as itmaterially expands its reach in theU.S. cable market, which is a key el-ement of our positive thesis on thecompany. We have not adjustednumbers specifically, but we be-lieve that our inherent organicgrowth assumptions are now wellsupported.
“In addition to the Altice USAdeal, Stingray has announced that
it is abandoning pursuit of MusicChoice (in whole or in part), its pri-mary competitor in the U.S. mar-ket. Although the lack of success onMusic Choice is disappointing, wehad not built in positive expecta-tions that Stingray would receivemore than a token ownership posi-tion at this point; therefore, this an-nouncement is certainly not an is-sue for the story. In fact, given themanagement focus required to in-tegrate Newfoundland CapitalCorp., and the pursuit of organicgrowth (such as Altice USA), wewould regard the abandoned Mu-sic Choice deal as a positive for thestory right now.
“Stingray continues to generatestrong revenue growth (bolsteredby an active and targeted M&Astrategy), with strong flow-throughto FCF given operating leverage inthe business model and limitedcapex requirements.
“We continue to see runway forthe company to materially growFCF over the next few years, andsee the acquisition of NCC (and itsstrong FCF) acting as a funding ve-hicle for future growth opportuni-ties, both organic and acquired.”
Stingray is a leading business-to-business multi-platform musicand in-store media solutionsprovider operating on a globalscale, reaching an estimated 400million Pay-TV subscribers (orhouseholds) in 152 countries.Geared towards individuals andbusinesses alike, Stingray’s productsinclude the leading digital musicand video services. Stingray also of-fers various business solutions, in-cluding music and digital display-based solutions through its StingrayBusiness division, and is now a ma-terial player in the terrestrial radiomarket given its acquisition of NCC.
CannTrustHoldingsBEACON SECURITIESComing to AmericaDigested from a Jan. 8 report by analyst Russell Stanley
CannTrust Holdings Inc.(TRST-TSX, $7.24) - a licensedproducer of cannabis products -announced it has applied for aNew York Stock Exchange (NYSE)listing. The company had previ-ously indicated plans to pursuesuch a listing, but its announce-ment is still positive as it demon-strates to Mr. Stanley that progressis being made. He keeps his “buy”recommendation and $21-per-share target price.
“TRST has lagged its closestpeers of late: HEXO Corp. is up 23per cent over the last month, whileOrganiGram Holdings Inc. is up 17per cent. Over the same period,TRST is down seven per cent, sothe stock is due for a rally just tokeep pace with the peers. Progresson the NYSE listing should put acharge into the stock.
“A U.S. exchange listing wouldsignificantly expand the compa-
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54 / February 8, 2019 WHAT THE BROKERS SAY ABOUT CANADIAN STOCKS Issue 3 / 19
I N V E S T O R ’ S D I G E S T
ny’s profile and investor audience,and should support meaningfulmultiple expansion for TRST.There are currently just five Cana-dian licensed producers trading onU.S. exchanges. The multiple rangeis considerable, ranging from eighttimes the earnings forecast forAphria Inc. on the low end up to187 times for Tilray Inc., withCanopy Growth Corp. at 38 times,Cronos Group Inc. at 38 times, andAurora Cannabis Inc. at a multipleof 20 rounding out the group.
“We already view CannTrust assignificantly undervalued. It cur-rently trades at approximately sixtimes our 2020 estimated earningsbefore interest, taxes, depreciationand amortization (EBITDA) fore-cast, a 62 per cent discount to themultiple of 17 (average) for thebroad peer group, and an 82 percent discount to the 35-multipleaverage amongst companies withover $1 billion of market capital-ization (until the recent stock sell-off, TRST was a part of this group).
“A successful U.S. listing shouldbenefit TRST on scarcity alone inthe near-term, and mid/long-termthrough the development of amuch broader and deeper investorpool. With its large-scale produc-tion platform of current annual-ized capacity of 50,000 kilograms,and fully-funded expansion plan to100,000 kilograms underway, youshould invest.
“Other reasons to invest areTRST’s leadership in value-addedproducts, with 64 per cent ofcannabis revenue from higher val-ue (that is, non-dried flower) prod-ucts; and multiple near-term cata-lysts – such as the potential U.S. ex-change listing, logistical partner-ships, and strong quarterly results.
“Also, on Dec. 28, the companydisclosed that it has appointed BigFour auditor KPMG LLP as the newauditor of the company in order tofacilitate the transition to theNYSE. We view the transition to aBig 4 auditor positively, as itdemonstrates the company’sgrowth and it supports buildingadditional credibility with existingand new investors.”
CannTrust Holdings is a li-
censed producer of cannabis prod-ucts, including dried flower, oilsand capsules.
NutrienCIBC WORLD MARKETSWell-positioned to delivergrowth
Digested from a Jan. 8 report by analysts Jacob Bout, RahulMalhotra, and Ioan Ilea
Subsequent to the merger withAgrium and PotashCorp, NutrienLtd. (NTR-TSX, $65.31; NTR-NYSE,US$47.74) is now the largest cropnutrient company in the world.Analysts Jacob Bout, Rahul Malho-tra, and Ioan Ilea, believe the com-pany is set for a strong 2019 and2020 and have rolled out their 2020EBITDA (earnings before interest,taxes, depreciation, and amortiza-tion) estimate of US$5.1 billion – a30 per cent increase compared to2018. They maintain their “outper-former” recommendation and 12-month target price of US$70.
While the analysts have takendown their 2018 fourth quarter es-timates slightly to account for aweaker fall application, these arestill at the higher end of the 2018guidance. They have increased the2019 EBITDA from US$4.69 billionto US$4.81 billion due to a slightlyhigher potash and nitrogen priceforecast and the fall application de-mand moving to spring of 2019.The increased 2020 EBITDA isbased on higher potash volumes,full realization of synergies, and aramp up in U.S. retail acquisitions.
Nutrien announced in mid-De-cember its intention to increase itsNCIB (normal-course issuer bid) torepurchase up to 50.4 millionshares from 32.2 million that havealready been purchased. At thecurrent share price, the analystsstate that the additional 18.2 mil-lion shares would cost approxi-mately US$820 million.
The analysts think that Nutrienis in a good position to”deliver ongrowth and increase shareholderreturns” based on several factors.First, fertilizer fundamentals are
positive (specifically potash at ap-proximately 40 per cent EBITDA).Second, Nutrien will receive aboutUS$5 billion in cash in the 2018fourth quarter from equity salesand internally generated FCF (freecash flow). Lastly, the 2019 run-rate$600 million “synergy target isachievable and should benefitprofitability” as the year progress-es. With Nutrien’s diversified busi-ness model (nitrogen and retailadding defensiveness) and strongbalance sheet, the analysts believethat the company will stand strongeven if there is a global slowdown.
With its head office in Saskatoonand corporate offices in, Saskatoonand Calgary, Nutrien is the largestcrop nutrient company in the worldand the third largest natural re-source company in Canada.
Digested from a Jan. 7 report by analyst David Kideckel
Mr. Kideckel’s first impressionof Auxly Cannabis Group Inc.(XLY-TSX/VEN, $0.87) is positive,as he says this vertically-integratedcannabis business (founded in2017 under the name CannabisWheaton Income Corp.) with as-sets and operations across eachsegment of the value chain has ex-posure to high-margin segments.His initial recommendation for it is“outperform” with a $1.50-per-share target price.
Mr. Kideckel says that Auxly’soperations are diverse and offeroptionality (that is, it can pick andchoose which industries it needsto focus on) which he says is im-portant for a budding cannabiscompany.
“Although Auxly’s business en-compasses upstream, midstreamand downstream activities, we be-lieve their midstream and down-stream activities will be the majordrivers of value, including brand-
ing, value-added product manu-facturing, research and develop-ment, and distribution.
“We believe Auxly’s businessmodel positions the company forsuccess in the rapidly evolvingcannabis market, offering investors’exposure to value-added activitiesthat are expected to drive higherand more defensible margins.
“The strategy is focused onowning the activities that are ex-pected to drive greater margin,specifically the midstream anddownstream (i.e. distribution) ac-tivities, while offloading the major-ity of the operational risks associ-ated with the upstream (i.e. culti-vation) activities, which are ex-pected to generate lower margins,as the market develops.
“What we believe to be the cen-terpiece of Auxly’s midstream busi-ness strategy is Dosecann, theirwholly-owned subsidiary, and Li-censed Dealer, located in Charlot-tetown, PEI...The Dosecann asset ispivotal to Auxly’s ability to drivevalue in the mid-stream vertical,and add significant margin to theirsupply of raw cannabis by produc-ing branded derivative products.
“The site has been retrofittedwith capabilities to manufacturehigher-margin products such asvape cartridges, edibles, capsulesand others. The facility is designedto be Good Manufacturing Prac-tices compliant, and the companyhas indicated they expect to re-ceive their certification sometimein 2019.
While the facility is primarily in-tended to be leveraged internally inorder to manufacture higher-mar-gin products for their own productofferings, the site is also equippedto provide extraction and white la-bel manufacturing services to thirdparties, providing an additionalrevenue stream for the company.”
The analyst continues, “Auxly’sbusiness model provides the busi-ness with a de-risked supplychain, compared to many othervertically-integrated producers,who have operational risk con-centrated within a single cultiva-tion or production site. Auxly’s di-versified supply chain, via theirstreaming agreements and whol-ly-owned subsidiaries, sourcesraw product from over a dozenpartners located across the coun-try, and internationally.
“In addition, the streamingmodel allows for scalability andoptionality, as the company mayelect to purchase product for use inits own production of brandedproducts, or direct the supply tothe distribution channels that al-low them to achieve the highestmargins.
“We view the company’s man-agement favourably, as one of themore experienced teams in thesector. Led by CEO Chuck Rifici,co-founder of Tweed MarijuanaInc, the predecessor of CanopyGrowth, and a pioneer of the Cana-dian cannabis industry...the com-pany’s management has global ex-perience and proven track recordsof executing in the cannabis, phar-maceutical and consumer pack-aged goods industries.
“Auxly’s team has taken steps todevelop international distributionchannels for their products, as wellas off-take agreements, and a pro-duction asset in Uruguay forcannabidiol-extract products.While our model only assumesmarginal revenues from theUruguayan operation, this leaves
significant upside in our estimatesshould the company announce fu-ture supply agreements for inter-national markets.”
Auxly Cannabis Group is an in-vestment and merchant company.It seeks to provide investor returnsthrough streams and capital appre-ciation in the cannabis industry ofCanada.
PeopleACUMEN CAPITALAnalysts’ ‘top idea’ in2019? Just trust People
Digested from a Jan. 10 report by analysts Brian Pow and Nick Corcoran
People Corp. (PEO-TSX/VEN,$7.64) finished 2018 on a solid noteand built strong momentum enter-ing 2019, say Messrs. Pow and Cor-coran, who tout the human re-sources company as their “topidea” in 2019.
Messrs. Pow and Corcoran reit-erate that investors should “buy”People. They also stand by theirprevious target share price of $9.50for the company.
The analysts say, “People is nowin the top 3 in Canada in terms ofbenefit books, with annual benefitpremiums of $1.7 billion.”
According to Messrs. Pow andCorcoran, “The growth of People’sbook has benefited from leveragingtheir third-party administrator(TPA) platforms, which make up 65per cent to 70 per cent of their busi-ness, and their value proposition.
They add that People hasdemonstrated solid organic growthwhile taking over other companiesat a healthy clip.
“Management remains com-fortable with an annual organicrevenue growth rate of five per centto 10 per cent, supported by pre-mium inflation and the company’ssales initiatives, which target togain new clients and increaseproduct and service penetrationwith existing clients.
“The company continues tobenefit from a strong acquisitionpipeline, reflecting increasedawareness of People’s credibility asan acquirer and solid business de-velopment execution.
“We expect People to continueto be active in the consolidation ofthe industry which will help driverevenue and EBITDA (earningsbefore interest, taxes, deprecia-tion and amortization) growth inthe future.
“Management expects anotherthree years to five years of runwayin Canada as the market remainsfragmented with many indepen-dent brokers.
“Based on fourth-quarter fiscal2018 results (quarter ended Aug. 31,2018), People had an unused ac-quisition credit facility of $63.8 mil-lion to fund future acquisitions thatcould add $8 million of EBITDA.”
Reflecting on key companyhighlights in 2018, Messrs. Powand Corcoran point to the acquisi-tion of Lane Quinn Benefit Consul-tants Ltd. in May, along with around of financing and thetakeover of the Silverberg Group,formally known as Silverberg & As-sociates Inc., in August.
People acquired 100 per cent ofLane Quinn shares for $19.5 mil-lion. Based in Calgary, Lane Quinnserves more than 500 clients in Al-
Continued from preceding page
Keith Richards speaks about Technical Analysis and the Current Market Outlook
Speaking Engagements with Keith Richards, CMT, CIM, FCSI, Portfolio Manager and TechnicalAnalyst: ValueTrend Wealth Management, Worldsource Securities Inc., member Canadian InvestorProtection Fund and sponsoring investment dealer of Keith Richards.
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Keith Richards, Portfolio Manager, can be contacted at [email protected]. He may hold positions in the securities mentioned.Worldsource Securities Inc. - Member: Canadian Investor Protection Fund, and sponsoring investment dealer of Keith Richards. The opinionsexpressed are solely those of Keith Richards and may not necessarily reflect that of Worldsource Securities, its employees or affiliates. Thecontents are for information purposes only and do not represent investment advice.
Issue 3 / 19 WHAT THE BROKERS SAY ABOUT CANADIAN STOCKS February 8, 2019 / 55
I N V E S T O R ’ S D I G E S T
berta and British Columbia.Several months later, the com-
pany bought 100 per cent of Sil-verberg’s voting shares and a 75per cent economic interest for $29million. It offers employee groupbenefits consulting to more than800 businesses through offices inCalgary, Edmonton, and Leth-bridge, Alta.
People raised gross proceeds of$40.4 million through its August fi-nancing, announced alongside theSilverberg acquisition. It issued 5.2million shares priced at $7.70 each.
People is a Winnipeg-basedcompany supplying employeegroup benefit consulting, third-par-ty benefits administration, retire-ment consulting, human resourceconsulting, and recruitment ser-vices, generally to small and mid-sized companies. It has built a na-tional presence through a series ofacquisitions.
Flower OneMACKIE RESEARCHSize and place mattersDigested from a Dec. 18 report by analysts Greg McLeish and Nicola McFadden
The analysts initiate coverage ofFlower One Holdings Inc. (FONE-CSE, $1.37; FLOOF-OTC, US$1.03)– a vertically-integrated cannabiscompany that is targeting the med-ical and recreational cannabismarkets in the state of Nevada - iscurrently in the process ofretrofitting its 455,000 square-footNLV Greenhouse into a cannabiscultivation and production facility(producing more than 63,500 kilo-grams of cannabis per year).
When it is completed in the firstquarter of 2019, it will be the largestcannabis production facility inNevada. Flower One is currentlyusing leading technology andknowledge of high-density agricul-ture to accelerate its scale-up ofcannabis cultivation to a commer-cial, high-volume capacity.
Mr. McLeish and Ms. McFad-den also note that Nevada contin-ues to experience strong marketgrowth post legalization; and Flow-er One is positioned for stronggrowth in higher-margin cannabisproducts. The analysts give a “buy”recommendation with a $4.50-per-share target price.
They comment, “Since original-ly legalized for recreational use inJuly 2017, the market for cannabisin Nevada has been booming. Rev-enue for the first fiscal year totalledUS$529.9 million, includingUS$424.9 million for recreationalalone, and state officials continueto predict future growth (with an-nual tourism traffic totalling morethan 55 million people per year).
“We believe that market dy-namics will remain strong throughour forecast period and we esti-mate that the value of the Nevadacannabis market in 2020 to be ap-proximately US$750 million. If theNevada market follows some of thetrends seen in the U.S. states whererecreational cannabis is legal,products derived from cannabisoils should become a large andgrowing segment of the market.
“Flower One is currently in theprocess for building out a cannabisoil processing facility that will po-sition the company for growth in(higher-margin) cannabis oils andderivative products.
“This facility is scheduled tocome online in the second quarterof 2019 and it will have processingcapacity of up to 420,000 pounds ofcannabis, with the ability to pro-duce up to 20,000 litres of distillate,50,000 litres of concentrates, 60,000pounds of wax, 12 million auto-fillpackages and 61 million pre-rolls.”
Flower One Holdings is an expe-rienced greenhouse operator in thestate of Nevada.
PetrusResourcesRAYMOND JAMES FINANCIALCautious and flexible inthe 2019 energy market
Digested from a Jan. 7 report by analyst Jeremy McCrea
Petrus Resources Ltd. (PRQ-TSX, $0.61) is riding on the Canadi-an mid-cap energy industry themeof being “cautious and flexible in2019”. Shifting away from the tra-ditional approach of announcingthe full-year capital budget, Petrusinstead announced its first-quarter2019 capital budget only, with theintent to determine successivequarterly capital investment as theyear unfolds.
Mr. McCrea maintains his“outperform” recommendation,hoping sentiment improves for thesector, and his $1.25-per-share tar-get price.
With Petrus taking a price as-sumption of US$53.03 per barrel ofWest Texas Intermediate crude oil,$1.31 per gigajoules of Alberta En-ergy Company crude, and aUS$7.55 per barrel Canadian differ-ential, Petrus expects to generatefunds flow in the range of $10 mil-lion to $11 million in the first quar-ter of 2019. According to Mr. Mc-Crea, this should allow for two netwells against capital spending ofbetween $8 million and $10 million.
Additionally, continuing on its2018 push to lower debt, the com-pany plans to reduce its debt in therange of about $1-to-$2 million inthe quarter.
“Considering the volatility inboth oil and gas markets, we be-lieve the bigger takeaway with thepress release was the recent Ferri-er Cardium well results (with aver-age condensate rates at 345 barrelsper day). With high condensaterates, overall production mixshould continue to increase,weighted likely at about 37 per centin 2019 (versus about 33 per cent in2018 and about 28 per cent in2017),” Mr. McCrea says.
“Overall, with Petrus keeping its2019 capital-expenditure spendingwithin expected funds flow - that isexpected to keep production flatyear-over-year – we believe thecompany is remaining prudent inlight of the current volatility. Withhigh economic well results andplenty of inventory, we do believethere remains upside when overallsentiment improves for the sector.”
Speaking on the operations up-date, as announced during thethird-quarter 2018 release, the an-alyst highlights five (2.9 net) Cardi-um wells drilled in the second halfof 2018, completed with 76 stagesper mile (average) of a frac design –which the analyst says is a mean-ingful step up from prior well com-pletion designs.
“Overall, these wells came onproduction at 345 barrels per dayof condensate (or 690 barrels of oilequivalent per day including othernatural gas liquids and gas). Con-sidering third-quarter 2018 lightoil/condensate production was1,243 barrels per day, we think theinitial combined production test(14 days) rate of 1,000 barrels perday for the 2.9 net wells is ratherencouraging. Ultimately, we willsee how these wells decline overthe next few months but we thinkinvestors should be relativelypleased with the results.”
Petrus Resources is a Calgary-based natural-gas producer with aproduction base in the Ferrier areafocused on Cardium Development.
SilverCrestMetalsPI FINANCIALSuccess in expanding Area 51
Digested from a Jan. 7 report by analysts Philip Ker and Neehal Upadhyaya
SilverCrest Metals Inc.’s (SIL-TSX/VEN, $3.87) on-going explo-ration success continues to definenew high-grade mineralized zones,the analysts say. Meanwhile its def-inition drilling of the Area 51 zonecontinues to expand on knownzones of high-grade mineralizationat the company’s Las Chispasproperty in Mexico.
Messrs. Ker and Upadhyayamaintain their “buy” recommen-dation, “speculative” risk rating,and $5.65-per share target price.
They say, “As further success isdemonstrated with infill drilling, weanticipate SilverCrest to increaseresource confidence from inferredto indicated, and with further high-grade hits, we expect the overallgrade to increase and add tonnesvia additional intercepts whichcontinue to exceed average widthsmodelled in the existing resource.”
SilverCrest has been completingits Phase 3 infill drill program cur-rently with nine rigs in order to in-crease the overall resource confi-dence on 25-metre spacing. Ap-proximately 5,000-to-10,000 metresof new drilling is planned to be in-cluded in an updated resource ex-pected in the first quarter of 2019.
The analysts elaborate, “Thetighter drill spacing is aiding inidentifying mineralized shootssuch as Shoot 51 and Shoot 43which have returned multi-kilo-gram silver-equivalent average in-tercepts in recent assay results.The on-going success continues tosupport a greater average veinwidth compared to the current re-source estimate.
“Of the 28 holes completed atthe zone, average estimated truewidths and grades are now 3.9 me-tres of 11.36 grams of gold pertonne of ore and 1,064 grams of sil-ver per tonne of ore, compared tothe current resource model of 2.7metres wide of 7.13 grams of goldper tonne of ore and 614 grams ofsilver per tonne of ore.
“Highlight intercepts from to-day’s batch of assay results at Area51 include: 9.3 metres of 39.66grams gold per tonne of ore and3,361 grams of silver per tonne of
Analysts follow as many as 20 stocks, most of which are rated“buys”. Of those buys, an analyst has one or two special favouritesseen as most suitable for new buying. This column is devoted to thoseone or two favourite “best buys”.
Financial professional and frequent BNN Bloomberg mediapersonality Greg Taylor says he has focused on growthstrategies throughout his career; nevertheless, value is at thetop of his mind at the moment.
Asked if he believes volatility since last fall indicates the arrivalof a long-term, secular bear market, he responds, “That’s the big de-bate among everybody right now.”
In any case, he advises, “Investors need to get used to the volatil-ity.” Mr. Taylor argues that recent rockiness could reflect a seachange in the markets, one that would leave runaway speculativegrowth-oriented prospects in the dust.
Mr. Taylor is a portfolio manager, chartered investment manag-er (CIM), and chartered financial analyst (CFA) at Purpose Invest-ments in Toronto, which he joined in December 2017. He began hiscareer in 1999 at Aurion Capital, which was acquired by the Bank ofNova Scotia in 2014. In 2016, he moved to Front Street Capital aspart of a fund divestment by Scotiabank; Front Street later evolvedinto LOGIQ Asset Management, then Purpose Investments.
In the decade since the global economic crisis, central bankshave aimed to create stability through quantitative easing (whencentral banks purchase government bonds or other assets to raiseliquidity), by keeping interest rates very low, and even by giving“dovish” statements about the possibility and pace of rate hikes inan effort to keep the capital markets calm. Mr. Taylor argues that,since economic data has become stronger, central banks havepulled back and offered more hawkish remarks about interest in-creases to “let the markets walk on their own.”
Nevertheless, he concedes, “We’ve had a good rebound in thelast few weeks,” since U.S. Federal Reserve Chair Jerome Powell’sgentler followup to relatively aggressive interest-related commen-tary in January. The analyst says investors witnessed “a really nar-row market in the last year dominated by the FAANG names.” How-ever, he adds, “We’ve seen a bit of a crack in that trade,” such aswhen Apple Inc. shares plummeted after giving bad guidance.
In the last few months, technology has retreated from the frontof the stock market pack. “We’ve had a bit of a rotation toward val-ue. Value-oriented stocks had been doing badly for the last fewyears.” As growth-focused businesses struggle, investors are be-coming more willing to pick up undervalued companies again.
Cyclical sectors of the market, such as the financial, materials,and energy segments, boast solid potential.
Poor U.S. dollar performance could speed up sector rotation to-ward commodities, the analyst adds. “The U.S. dollar has becomekind of a crowded trade.”
Mr. Taylor also notes, “Canadian small caps have been ignoredand left for dead and that’s created a lot of volatility in that sectorand also setting up some opportunities….but it might be a little ear-ly to tell on some of those.”
Mr. Taylor recommends his first “best buy”, the Purpose Pre-mium Yield Fund (PYF-TSX, $18.76), because of the safety and sta-bility of its underlying assets.
“It’s a good diversifier…that has a little more safety built into it.” The analyst explains that the fund includes a combination of
stocks with covered calls and cash-covered put options to protectagainst volatility. Made up of options tied to larger-cap U.S. com-panies, the fund tends to perform well when the market is restless.It also offers a yield of 5.3 per cent annually.
Mr. Taylor’s second “best buy”, the Purpose Marijuana Oppor-tunities Fund (MJJ-NEO, $27.04) is based on “the one” growth areain Canadian markets recently, cannabis.
“There’s a lot of excitement about it…but people are going aboutit the wrong way,” says the analyst, who points out that MJJ is thefirst actively-managed cannabis fund in the world.
Many have purchased Horizons ETFs’ passive marijuana indexfund (trading under HMMJ on the TSX) or bought individual stocks,says Mr. Taylor. That leaves investors either over- or underexposedto the major marijuana names.
MJJ, on the other hand, is made up of about 30 per cent U.S.cannabis companies and 60 per cent Canadian peers, plus around10 per cent in cash at present. However, that allocation can shiftcompletely as necessary; the fund takes profits and holds onto theextra cash from gains so it can purchase more pot company shareswhen they retreat anew. “The sector does have the periods where itgoes parabolic,” says Mr. Taylor. Since it started trading on Feb. 1,2018, the fund has been about 40 per cent ahead of HMMJ.
The fund includes such dominant marijuana names as CanopyGrowth Corp. and Tilray Inc., but the rest of the underlying compa-nies have smaller capitalizations, such as HEXO Cannabis Corp. andOrganiGram Holdings Inc. and thus more room to grow.
‘Best Buys’ fromleading analysts
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56 / February 8, 2019 WHAT THE BROKERS SAY ABOUT CANADIAN STOCKS Issue 3 / 19
ore; 2.4 metres of 4.3 grams of goldper tonne of ore and 1,572 grams ofsilver per tonne of ore; and threemetres of 5.37 grams of gold pertonne of ore and 998 grams of silverper tonne of ore.”
SilverCrest Metals is a precious-metals exploration company that isfocused on new discoveries, value-added acquisitions and targetingproduction in Mexico’s historic pre-cious metal districts.
ValensGroWorksALTACORP CAPITALFlying under the radar,until now…
Digested from a Jan. 7 report by analyst David Kideckel
Valens GroWorks Corp. (VGW-CSE, $1.76) is one of the premiercannabis companies when itcomes to extracting active medicalingredients from marijuana, thenmanufacturing products from thesame, asserts Mr. Kideckel.
At the same time, he says, “Wealso view Valens as amongst themost undervalued businesses inthe cannabis sector, offering in-vestors extremely favourable grossmargins and EBITDA (earnings be-fore interest, taxes, depreciationand amortization) margins, as wellas a capital-light model that, basedon our estimates, will generate sig-nificant free cash flows on an an-nual basis beginning in fiscal 2020(year beginning Dec. 1, 2019).”
This perfect storm is enough topush Mr. Kideckel to start cover-ing ValensGroWorks on behalf ofAltaCorp. The analyst assignsValens GroWorks an initial recom-mendation of “outperform” and a12-to-18-month target price of $5per share.
The analyst comments:“Valens is a best-in-class ex-
traction and manufacturing com-pany focused on advanced R&Dand analytical testing, proprietaryextraction processes, product de-velopment and cultivation activi-ties within the cannabis sector.
“We believe that the company isideally positioned to benefit fromthe expected evolution of cannabisconsumer consumption patterns,namely, the shift from dried flowertowards consumer packaged goods(CPG) extract products, such asvape pens, edibles, and beverages.”
Elaborating on Valens’ valua-tion relative to its earning ability,he says, “We forecast that Valenswill generate one of the most at-tractive EBITDA margin profiles wehave seen in the sector, with mar-gins of 47 per cent in fiscal 2019, 58per cent in fiscal 2020, and 52 percent by fiscal 2021.
“In addition, the company’sbusiness model requires relativelylow capital investment in compar-ison those of most vertically inte-grated cannabis producers, allow-ing them to generate meaningfulfree cash flows by fiscal 2020.
Valens has received its dealer’slicence (May 2017) under the Con-trolled Drugs and Substances Act,its licensed producer (LP) status forcultivation and oil production (Oc-tober 2018) from Health Canadaunder the Access to Cannabis forMedical Purposes Regulations
(ACMPR), and its standard pro-cessing and standard cultivation li-cences under the Cannabis Act(November 2018), allowing it to be-gin sales to other cannabis compa-nies licensed under the CannabisAct, and execute on its contract ex-traction business.
Mr. Kideckel stresses, “It is oneof the only companies to hold bothlicences, which is a nod to man-agement’s ability to identify a keydifferentiation strategy amongstpeers in the cannabis sector.”
The analyst points out that thecompany has formed key relation-ships with two industry-leadingbusinesses in Thermo Fisher Sci-entific Inc., a laboratory equipmentand medical instrument manufac-turer, and Tarukino Inc., a U.S.-based private cannabis beveragemanufacturer and leader in emul-sification technology.
Valens has been named a “cen-tre of excellence in plant-based sci-ence” by Thermo Fisher, and hasobtained the exclusive Canadianrights to use Tarukino’s Sorseemulsification technology andbeverage brands, he adds.
“Given the relatively high mar-gins on extraction services, largercannabis producers are incen-tivized to internalize these pro-cesses,” suggests Mr. Kideckel.
“With our view of Valens as anindustry leader, we see them as anattractive takeover target by largercannabis companies looking to ac-quire industry-leading extractionand laboratory testing capabilities.”
As to the prospect of the com-pany’s early-mover advantage fad-ing in the future, the analyst says,“We expect that over time, new en-trants will move into the (extrac-tion) segment and potentiallydrive margins lower. To guardagainst this, Valens has developedbuilt-in optionality through a di-versified strategy that allows themto shift into further downstreamactivities, specifically, the develop-ment and marketing of their ownbranded products.”
Valens GroWorks was incorpo-rated in 2014, and began operationsthe same year, as a dealer’s licenceapplicant under the Narcotic Con-trol Regulations. In 2016, the com-
pany entered into a binding com-mitment to execute a reversetakeover of a shell company, and of-ficially began trading as ValensGroWorks on the Canadian Securi-ties Exchange in November 2016.
Thera-technologiesMACKIE RESEARCHHold tightDigested from a Jan. 9 report by analysts André Uddin and Yue Toby Ma
Messrs. Uddin and Ma aredowngrading their recommenda-tion for Theratechnologies Inc.(TH-TSX, $9.18) as they lower salesestimates for medications Egriftaand Trogarzo. The analysts give thestock a “hold” recommendationand make a substantial decrease totheir target share price down to$10.20 from a previous $19.50.
As to why the analysts remainless than optimistic about thestock’s future, the analysts note, “,Egrifta’s total Rx volume in the U.S.has flatlined. The F4 formulation(more concentrated, less adminis-tration volume) of Egrifta was ap-proved by the FDA in November2018 – we expect Theratechnolo-gies to switch patients to the F4 for-mulation which should be moreuser friendly.
“Massachusetts General Hospi-tal is conducting a NAFLD-NASHtrial with Egrifta, with results ex-pected in the first half of 2019 –positive outcomes of this studyshould drive the off-label use ofEgrifta to treat NASH. To be con-servative, we are lowering ourEgrifta sales estimates from fiscal2019 to 2023
“Trogarzo (Theratechnologies’key growth driver) was launched inthe U.S. in May 2018. The uptake ofTrogarzo has been increasing –however, the rate is slower thanour original expectations - likelydue to lack of sufficient reimburse-ment that is expected to take fulleffect in 2019.
“Theratechnologies incurred
Continued from preceding page
PI FINANCIAL
GT Gold Corp. (GTT-TSX/VEN, $0.74)unveiled drill results for thefinal, “outstanding” and deepest hole at Saddle North (TTD109) innorthern B.C. Analysts Chris Thompson and Justin Stevens’ say thenumbers support their view of Saddle North’s tonnage and grade.They maintain a “buy” stance on GT and target share price of $3.70.
Hole 109 demonstrates the existence of “high-grade mineraliza-tion extents at depths” (including 0.5 per cent copper for 538 metresand 1.04 grams of gold per tonne of ore from 624 metres). These re-sults are similar to the nearby Red Chris deposit’s reserve grades –0.36 per cent copper and 0.27 grams of gold per tonne of ore. The an-alysts state the results back their modelled tonnage estimate.
While mineralization was seen over an expanded length of 600metres and to a depth of more than 1,100 metres, the results are stillcomparable with the modelled resource of about 200,000 metrictonnes. Additional results from 22 holes at Saddle South (epithermalvein target) are expected by the end of January 2019.
ACUMEN CAPITAL
Questor Technology Inc. (QST-TSX/VEN, $3.92) has earned a$5.8-million purchase order to supply incinerator units along withaccompanying power generators that use waste heat as fuel at threeoil facilities in Mexico (from a single client).
The generators will power the facilities, which are off the grid,while users of the technology in Mexico receive “Green” (environ-mentally-friendly) certificates. The sale comes on the back of updat-ed initiatives in Mexico, including a 75 per cent reduction target formethane emissions by 2025. This is Questor’s first commercial saleof waste heat-to-power units, a division management says has sig-nificant upside in areas of the world that are off the grid or face pow-er shortages, analyst Trevor Reynolds notes.
“The sale results in upward revisions to our estimates while thebusiness potential in Mexico is significant given new (Green) regula-tions,” he agrees. He increases his target price to $5.35 per share from$4.75, and keeps his “buy” recommendation for Questor.
PI FINANCIAL
Canopy Rivers Inc. (RIV-TSX/VEN, $4.49) has made a $9-millioninvestment in a plant-based food and beverage company, Green-house Juice Co. The investment goes towards Greenhouse’s expan-sion and development of health and wellness beverages infused withcannabidiol (CBD). Analysts Devin Schilling and Jason Zandberg saythis is positive since CBD-infused products are a large opportunityin the Natural Health and Wellness market. The analysts maintaintheir “buy” recommendation and target price of $9 per share.
Canopy’s financing package consists of secured and unsecureddebt, warrant coverage, and board representation rights. It includesa $6-million senior (that is, to be repaid first) secured convertibledebenture with a 12 per cent yield for a three-year term and fixedconversion price, and a $3-million unsecured convertible debenturewith an automatic conversion mechanism based on Greenhouse’ssales milestones. Canopy Rivers will also receive incremental war-rants allowing an increase in its Greenhouse stake.
Greenhouse, founded in January 2014, has grown from one retailoutlet to 15 corporate-owned stores in the Greater Toronto Area. Itsdistribution network also reaches hundreds of other locations.
RAYMOND JAMES FINANCIAL
Equinox Gold Corp.’s (EQX-TSX/VEN, $1.04) guidance for 2019calls for the commissioning of its Aurizona gold mine in Brazil andmore production from Mesquite in California than analysts TaraHassan and Jeremy Poon forecast. While the guidance fell short ofMs. Hassan and Mr. Poon’s expectations overall, they maintain theirposition that the company is stepping into “a potentially catalyst-heavy period” and reiterate an “outperform” recommendation for itwith a 12-month target share price of $2.
The Aurizona gold mine is set to start commercial production atthe end of 2019’s first quarter. Equinox expects the mine to produce85,000 to 105,000 ounces annually. Mesquite’s production guidanceincludes a year-over-year increase target of four per cent to 14 percent, with a focus on exploring opportunities to increase production,decrease operating costs, and extend mine life. Castle Mountain’sconstruction starts in the second half of 2019.
Ending 2018 with a strong cash balance, the analysts say they ex-pect Equinox Gold will revise that balance in the first quarter of 2019to reflect adjustments related to the Mesquite acquisition.
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Issue 3 / 19 WHAT THE BROKERS SAY ABOUT CANADIAN STOCKS February 8, 2019 / 57
I N V E S T O R ’ S D I G E S T
net losses in fiscal 2017 – and likelyin fiscal 2018 as well – as the com-pany ramped up its preparation ef-forts for the Trogarzo launch. Webelieve the launches of Trogarzo inthe U.S. and Europe should startbringing profits back to Theratech-nology in 2019. Our adjusted EBIT-DA and fully diluted EPS forecastsfor Theratechnology in fourthquarter of fiscal 2018 and the fol-lowing years have been significant-ly lowered.”
Theratechnologies is an emerg-ing specialty pharma company spe-cialized in the HIV field. Theratech-nologies launched its multi-drugresistant HIV drug Trogarzo in theU.S. in late April 2018. The compa-ny also sells Egrifta, the only ap-proved drug for HIV-relatedlipodystrophy, in the U.S.
SEMAFOHAYWOOD SECURITIESA golden stock pickDigested from a Dec. 12 report by analyst Kerry Smith
SEMAFO Inc. (SMF-TSX, $2.52)boosts its Boungou full-year pro-duction targets for 2019, which willinevitably drive cash-flow growth.Also, SMF is one of Mr. Smith’s“top picks” given its strong balancesheet, production growth and in-expensive valuation, adding thatSEMAFO provides investors withexposure to unhedged gold pro-duction (three mines in six years)from West Africa.
The analyst estimates produc-tion will grow from 255,000 ouncesof gold this year to 415,000 ouncesnext year with all-in-sustainingcosts dropping 25 per cent fromUS$985 per ounce to US$740 perounce. He reiterates his “buy” rec-ommendation and $6-per-sharetarget price.
SEMAFO recently released amaiden reserve estimate for theSiou Underground Zone as well asthe results of a pre-feasibilitystudy at Mana that incorporatesthe Burkina Faso zone into themine plan.
The new mine plan providesvisibility on the production profileat Mana with a current eight-yearreserve life and improves on Hay-wood’s previously modelled pro-duction profile, with an average of413,000 ounces from both Manaand Boungou over the 2019-to-2023 timeframe.
With the analyst expecting cashflow to total US$215 million in2019, he says SEMAFO is well posi-tioned to further strengthen its bal-ance sheet. At spot gold price ofUS$1,255 per ounce, he claims SE-MAFO will generate US$195 mil-lion of cash flow in 2019.
He comments further, “As ofSept. 30, 2018, SEMAFO’s cash bal-ance stood at US$101 million, andits debt balance stood at US$120million, with quarterly repaymentsof US$15 million starting March 31,2019. SEMAFO currently trades at aconsensus estimate 2019 shareprice-to-cash flow per share multi-ple of 2.5.
The peer group currently tradesat a multiple of 4.9. Boungou willdeliver its first full quarter of pro-duction in the fourth quarter, anda full production year in 2019should close this valuation gap.
“We recommend investors ac-cumulate shares now ahead of2019 guidance in February and the
increased cash flow from an ap-proximate 75 per cent increase inproduction, which should becomemore tangible with the release offirst-quarter 2019 results. The cur-rent valuation is lower than justi-fied given the production, cash-flow growth and declining costsoffset by increased security and po-litical risk in Burkina Faso.”
SEMAFO has two gold mines inBurkina Faso – the Mana andBoungou operations plus explo-ration assets in Burkina Faso andIvory Coast.
Digested from a Dec. 24 report by analyst Kirk Wilson
Altura Energy Inc. (ATU-TSX/VEN, $0.37) provides a fourth-quarter 2018 production guidance,with the company expecting De-cember production to be only 600barrels of oil equivalent (BOE) perday due to the shut-in of volumesin response to weak Western Cana-dian Select (WCS) crude oil prices.Mr. Wilson drops his target priceby a nickel to $0.80 a share butkeeps his “buy” recommendation.
Altura’s 2018 fourth-quarter(between October and December)guidance of 1,400 BOE per day islower than the analyst’s expecta-tion of 1,840 BOE per day. Howev-er, he notes the WCS price has re-covered as of late, and Altura’smanagement expects to be pro-ducing at full capacity in January.For context, the analyst also notesproduction reached an average of2,053 BOE per day in October.
“Our current 2019 forecast doesnot include any wells to be drilleduntil spring break-up ends in June.An active summer program shoulddrive significant growth in the sec-ond half of 2019.
“While we foresee a stronger oilmarket next year relative to cur-rent due to influence from OPEC(Organization of the Petroleum Ex-porting Companies) and the Al-berta government, we believe it ispossible that the company under-takes a more conservative budgetthan we forecast as balance-sheetstrength is a key focus for Altura,”Mr. Wilson says.
Alberta Premier Rachel Notleyannounced that her administra-tion would slash oil productiontemporarily by 8.7 per cent startingin January, amounting to about325,000 barrels per day. With thelower level of Altura’s productionin the fourth quarter, it inherentlybrings a lower level of cash flowand a higher level of year-end netdebt for the small-cap company(which the analyst describes as be-ing “well-capitalized”).
Based on an interim review ofAltura’s reserves after the addition-al seven wells that were brought onproduction from the summerdrilling program, the credit facilitywas increased from $3 million to $6million, which should allow thecompany to complete its 2019 pro-gram, the analyst states. He expectsthe company’s 2019 guidanceshould be released fairly soon.
Risks that could negatively af-fect Altura in 2019 include com-modity-price fluctuations; foreign-exchange and interest-rate fluctu-
ations; cost overruns; weather andseasonal factors; fluctuations inroyalty or tax rates; and overall wellperformance.
Altura Energy is a small-cap oil-and-gas company primarily fo-cused on exploration and develop-ment of Upper Mannville forma-tions in east and central Alberta.
AGT Food and IngredientsCIBC WORLD MARKETSDepressed lentil pricingmakes for gloomy outlook
Digested from a Jan. 8 report by analysts Jacob Bout, Rahul Malhotra and Ioan Ilea
According to Messrs. Bout, Mal-hotra and Ilea, the focus for AGTFood and Ingredients Inc. (AGT-TSX, $17.28) in 2019 will remain onthe proposal from AGT’s insiders toprivatize AGT for consideration of$18 in cash for each commonshare. The analysts also believethat fundamentally the depressedlentil markets will likely continueto weigh on profitability over thecourse of 2019.
Going into further detail the an-alysts say, “A special meeting ofAGT’s shareholders is to be heldearly this year to vote on the pro-posed transaction.
“The prospective buyer group,which includes the Arslan family,CEO, and Point North, representapproximately 27 per cent of AGT’scurrent shares outstanding. But wenote that the top three non-insid-ers currently have a 30 per cent in-terest. This is important as thetransaction requires that two-thirds of the vote cast by all com-mon shareholders at the meeting,as well as a simple majority of AGTpublic shareholders, agree to thetransaction.”
Other concerns regarding thecompany include, “A weak Indianrabi crop may be the necessary cat-alyst to see India return to pulsemarkets, but it remains unclear atthis point whether such an eventwill transpire.
“Given high leverage, large debtrefinancing in 2020, and a delayedlentil market recovery, we believeour price target of $18, decreasedfrom $19, is closer to fair value. Weremain ‘neutral’ rated.
“So far, Indian lentil rabi plant-ing is three per cent behind year-over-year, but still eight per centabove the five-year average. Butprecipitation has been dismal,which could impact yields. In thescenario that India does return tothe market at some point in 2019,there would be intense competi-tion from other former supplierssuch as Australia and the U.S. thathave also accumulated relativelylarge carryovers, and hence pricingimprovement may be limited.
“Our fourth-quarter 2018 esti-mate of $20 million is unchangedbut we are taking down our 2019EBITDA estimate to $80 millionfrom $89 million to reflect the de-layed recovery in lentil markets.With this report, we are rollingout our 2020 EBITDA estimate of$91 million.
“We assume that the pulseoversupply situation modestly im-prove but still below what we saw
Continued on next page
CIBC WORLD MARKETS
EXFO Inc.’s (EXF-TSX, $4.08; EXFO-NASDAQ, US$3.10) resultsand outlook were largely in line with analysts Todd Coupland andAmy Dyck’s forecasts. Bookings of US$81.2 million, the second-high-est in the company’s history, are particularly encouraging, they add.However, the analysts say they continue to expect exposure to the 5Gwireless upgrade cycle will not take place until late 2019 at the earli-est (EXFO’s shipments for these upgrades should begin then).
For that reason, they do not advise buying the stock for now,keeping their “neutral” recommendation and US$3.50-per-share tar-get price. First-quarter (period ended November 2018) fiscal 2019sales were about US$69 million, versus the CIBC expectation ofUS$70 million and consensus of US$68.5 million. Revenue growthwas flat quarter-over-quarter, but up 9.2 per cent year-over-year.
According to the analysts, EXFO’s strong bookings were due tocalendar year-end spending from U.S. communications serviceproviders, with robust demand for 100G test solutions for ongoing fi-bre deployment, high-speed upgrades, and data-centre growth.
PI FINANCIAL
Endeavour Silver Corp. (EDR-TSX, $3.01; EXK-NYSE, US$2.27) re-ported actual fourth-quarter 2018 production that was seven per centbelow the company’s guidance, analysts Chris Thompson and JustinStevens point out. The analysts blame the shortfall on delayed com-mercial production at El Compas; lower-than-expected gold gradesat Bolañitos; and lower mine production at Guanacevi (all three sitesare in Mexico).
Endeavour delivered 1.418 million ounces of silver and 14,900ounces of gold in the quarter, slightly less than PI Financial’s estimateof 1.572 million ounces of silver and 15,000 ounces of gold. At ElCompas, a ball-mill-pinion failure in late December stopped all plantoperations. Production at Guanacevi and Bolañitos showed lower-than-anticipated throughput and grades, though management ex-pects grades to improve with steady production through 2019.
Management has not revealed fourth-quarter costs as of yet.However, the company intends to release financial results for the pe-riod by Feb. 25. The analysts keep their “buy” recommendation and$3.75-per-share target price unchanged.
BEACON SECURITIES
On Dec. 30, 2018, iAnthus Capital Holdings Inc. (IAN-CSE, $5.96)opened the first marijuana dispensary in Brooklyn. Analysts RussellStanley and Susan Xu make no material changes to their $16 shareprice target and “buy” recommendation, saying they had already in-cluded New York operations in their valuation.
Operating under the Citiva brand, the dispensary is located acrossfrom the Barclays Center and Atlantic Terminal. Being the first toopen in Brooklyn positions iAnthus well in a 2.6-million-strong mar-ket (the New York City area has a total population of about 20 mil-lion). The company plans to open its second New York dispensary inWappingers Falls in late January, with locations in Staten Island andChemung County planned for later in 2019. The company will alsolaunch a delivery service covering Brooklyn, expanding its market.
New York is currently a medical-only market, but Gov. AndrewCuomo’s administration has placed an emphasis on legalizing recre-ational marijuana. Ten companies are licensed to operate in thestate, iAnthus among them, with each allowed four dispensaries.
CIBC WORLD MARKETS
Constellation Software Inc. (CSU-TSX, $877) has expanded itscredit facility to US$700 million from US$460 million. AnalystsStephanie Price and Varun Choyah say this signals an improvingmergers-and-acquisitions (M&A) environment. They retain their“outperformer” recommendation and $1,350-per-share price target.
They say, “Constellation is one of the few companies under ourcoverage that increased its M&A spend year-over-year in 2018, witha new ‘keep your capital’ focus giving operating groups more M&Aautonomy. Given market volatility, we expect the M&A environmentto continue to improve and see Constellation as well-positioned.
“Constellation has noted a difficult M&A environment for the pastseveral years – with valuations stretched given the low interest rateenvironment and prevalence of competing private equity acquirers.”
Ms. Price and Mr. Choyah reported that, as of Dec. 20, Constella-tion’s acquisition spending was up significantly year-to-date, atUS$459 million versus US$178 million in the year-ago period. Con-stellation has significantly staffed up its M&A team, they also noted.
Briefly Noted
58 / February 8, 2019 WHAT THE BROKERS SAY ABOUT CANADIAN STOCKS Issue 3 / 19
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in 2015 and 2016. Our 2020 esti-mates also assume modest volumeand margin expansion within theother segments.”
AGT is a global leader in pulseprocessing and distribution, withover 40 facilities in Canada, U.S.,Turkey, Australia, Europe, India,South Africa and China. The compa-ny operates through three segments:Pulses & Grains Processing, BulkHandling and Distribution, andFood Ingredients & Packaged Foods.
PollardBanknoteACUMEN CAPITALPositive 2019 outlook Digested from a Jan. 10 report by analysts Brian Pow and Nick Corcoran
Pollard Banknote Ltd. (PBL-TSX, $21.91) returns as Messrs. Powand Corcoran’s top pick list in 2019.With North American instant ticketretail sales growing at a compoundannual growth rate of six per centfrom 1995 to 2016, Pollard will con-tinue to benefit from industry mo-mentum. The analysts maintaintheir “buy” rating and give the stocka $27.50 target share price.
Providing further details the an-alysts say, “Pollard completed twoacquisitions in 2018 that help sup-port growth in 2019 and beyond.Demand for instant tickets has his-torically not been impacted byslower economic periods. Instanttickets drive north of 80 per cent ofPollard’s revenue.
“Pollard earns a significantportion of its revenue from itsU.S. operations with Pollard’sshare of the U.S. instant ticketmarket approaching approxi-mately 22 per cent.
“On Oct. 31, 2018, Pollard ac-quired Schafer Systems Inc. forUS$23.5 million (approximately$30.6 million) which will contributetwo months to the 2018 results.
“Pollard has contracts as a pri-mary or secondary supplier of in-stant tickets for 27 of the 44 U.S.
lotteries that sell instant tickets.With the acquisition of Schafer,Pollard receives many existinglong-term relationships and acomplementary product to its in-stant ticket division.
“Pollard offers a compelling val-uation and attractive return to ourtarget price. The shares have trad-ed off almost 26.5 per cent sincereaching a high of $27.93 achievedin early November 2018 followinga strong third quarter 2018 report.Pollard is currently trading at 9.5times 2019 EBITDA.”
Pollard Banknote providesproducts and services to lottery andcharitable gaming industriesaround the world. Pollard Ban-knote maintains a dominant mar-ket position for instant-win scratchtickets in Canada, and is the secondlargest producer of instant tickets inthe world.
CorrevioPharmaMACKIE RESEARCHGetting coldDigested from a Jan. 9 report by analysts André Uddin and Yue Toby Ma
As they do not expect CorrevioPharma Corp. (CORV-TSX, $3;CORV-NASDAQ, US$2.25) to turnprofitable in the near future,Messrs. Uddin and Ma downgradetheir stock rating. The analysts giveCorrevio a “hold” recommenda-tion and a US$2.70 target shareprice, down from US$4.70.
Other reasons giving the ana-lysts cause to turn from the stockinclude them expecting, “Correvioto conduct up to a US$30 millionequity financing in 2019 that wouldcause equity dilution. We are alsolowering our sales outlook for thecompany.
“On Correvio’s balance sheet,the company had $16.8 million incash and $40.7 million in debt bythe third quarter of 2018 end – debtprincipal repayments would beginin June 2020 and Correvio wouldhave to pay off its debt in 2022. Thecompany has been incurring loss-
es – we do not expect Correvio tohave positive cash flow in 2019 ei-ther. Thus, we believe it should belogic to assume Correvio wouldconduct a $30 million equity fi-nancing in the second half of 2019at a price of US$2. We have also as-sumed the company would raise$15 million and $10 million in 2021and 2022, respectively, via equityofferings.”
Correvio Pharma (formerly Car-diome Pharma) is a commercial-stage specialty pharmaceuticalcompany specialized in cardiologywith a key marketing focus on theEU markets.
Obsidian EnergyALTACORP CAPITALCardium drilling programahead of schedule
Digested from a Dec. 17 report by analysts Thomas Matthewsand Nick Koch
Obsidian Energy Ltd. (OBE-TSX, $0.60) is ahead of schedule onits Cardium drilling program, sayMessrs. Matthews and Koch.
The analysts, who stick withtheir “outperform” recommenda-tion but reduce their 12-month tar-get share price to $1.50 from $2.15,note that the company recently an-nounced a second half of 2018 sta-tus report on its drilling programfor the asset.
“Overall, production continuesto meet type-curve expectationwith average individual well rateson two pads producing 419 to 587barrels of oil equivalent (BOE) perday (69 per cent– 83 per cent oil),with another five wells expected tobe on production by mid to lateDecember,” say the analysts.
“The expectation for 10 wells onproduction by year end is higherthan initially forecast as the initialexpectation was early 2019.
“Although this will not havemuch bearing on 2018 productionvolumes, we believe it is positive asit indicates Obisidan can met andexceed guidance targets, and com-pletion costs are less than initiallyanticipated allowing the company
to push ahead with its program.”The analyst stress that the re-
lease was positive as the initial pro-duction rates and oil cuts and alllined up with expectations – andexpenses were actually south of ex-pectations.
According to the analysts, thecompany, at its investor day inNovember, detailed a capital bud-get for 2019 of approximately $120million. It also announced the op-tion of boosting its spending for thesecond half of 2019 by $40 millionif prices improve.
“At strip, we believe that Obsid-ian will be competitive in 2019,”say the analysts.”Based on the $120million assumption, we forecastObsidian to grow CFPS by 52 percent, ranking it fourth behind se-lect higher cost heavy oil produc-ers. In addition, we are of the viewthat Obsidian’s 2019 budget re-mains conservative with a payoutratio of approximately 77 per centand show risks to other operatorsgiven current budget estimates.”
Obsidian Energy is a mid-sizedoil and natural gas productioncompany based in Calgary.
EssentialEnergy ServicesRAYMOND JAMES FINANCIALLower budget and estimates; still undervalued
Digested from a Jan. 9 report by analysts Andrew Bradford and Michael Shaw
According to analysts Messrs.Bradford and Shaw, it doesn’t takefancy arithmetic to conclude Es-sential Energy Services Ltd.’s(ESN-TSX, $0.33) stock is wildly un-dervalued at $0.325. However,lower energy prices will result insharp reductions in rig counts,along with lower revenue andearnings forecasts. The analystskeep their “outperform” recom-mendation and reduce his targetprice to $0.65 from $1.05 per share.
Speaking on its stock being un-dervalued, Messrs. Bradford andShaw reveal Essential has $0.45 pershare of working capital, which af-ter deducting $0.17 in total debtper share, still leaves shareholderswith $0.28 of net working capitalper share. The remaining $0.04 pershare difference between the shareprice and net working capital is allthat remains for Essential’s prop-erty, plant and equipment (valuedat $6 million).
Commenting further, they say,“Regardless of the carrying value orwhat ESN paid, even the stingiestof investors would have to concedeassets that generated $7 million ofearnings before interest, tax, de-preciation and amortization (EBIT-DA) in third-quarter 2018 alone areprobably worth more than $6 mil-lion, irrespective of their outlook.
“Tactically, consensus estimateswill come down, but we doubt thiswill have much impact on the stockas it’s already down 35 per centover the last 90 days (Toronto StockExchange index is down 11 percent). We appreciate not all in-vestors can avail themselves of a$46-million market-cap company,but for those who can, we recom-mend buying these shares.”
Speaking on the productionand budget forecast, they say, “We
are reducing our 2019 rig count to160. The entirety of the change isthe consequence of curtailments(producers don’t need to drill newwells if they are curtailing the pro-duction). The magnitude of thisimpact has proven difficult togauge ahead of time but becausethe curtailments are temporary,implications for going concern val-ue should be near-zero.
“We are reducing our 2019EBITDA estimate to $14 millionfrom our prior $32 million forecast.This implies a 35 per cent sequen-tial drop from our 2018 estimatedEBITDA, a 24 per cent drop from2017, and is almost 50 per cent be-low the current consensus.
“Also, Essential set its 2019 cap-ital budget at $6 million - downfrom an expected $16 million inspending in 2018. The reduction ishardly surprising given most of itsexplorer-and-producer customershave yet to outline their ownspending plans for 2019 - which isa good indicator their spending willbe down as well.”
Essential Energy Services pro-vides well production and comple-tion services via coil tubing, fluidpumpers and nitrogen units. Thecompany also provides downholetool services and rentals.
Digested from a Jan. 8 report by analyst Philip Ker
Calling Barkerville Gold MinesLtd.’s (BGM-TSX/VEN, $0.41) Cari-boo Gold project one of the only“3-million-ounce gold (or more)deposits capable of producing over250,000 ounces per year, while hav-ing the potential to attract the ap-petite of a mid-to-large cap goldproducer”, Mr. Ker initiates cover-age of BGM with a “buy” recom-mendation and $1.30-per-sharetarget price.
“Barkerville is at the top of ashort list of multimillion-ouncegold development plays in Canada.With an updated resource estimateand feasibility study expected fordelivery in 2019, in addition tomore expansion and definitiondrilling, Barkerville should be onthe radar of investors as its CaribooGold project advances towardsconstruction. With a limited poolof attractive, multi-million ouncedevelopment projects in Canada,Barkerville is positioning them-selves to become an attractivetakeover candidate.
“The Cariboo district has an ex-tensive mining history dating backto the mid-1800’s. Barkerville hasalready completed test-mining op-erations at a small scale rate ofabout 30,000 ounces a year fromBonanza Ledge, with the goal ofbringing Cow and Island Mountainonline by 2021 (BGM recently com-pleted a $29.5-million equity fi-nancing to further drill there).
“Barkerville currently has a per-mitted and operating mill whichthey plan to use for initial process-ing of Cariboo ore.
“The project scope calls for anew mill to be built at site butcould alternatively expand the QRproject. We expect the project fea-
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Issue 3 / 19 WHAT THE BROKERS SAY ABOUT CANADIAN STOCKS February 8, 2019 / 59
I N V E S T O R ’ S D I G E S T
sibility study to fully evaluate thosetrade-off studies.
“Additionally, mineralized veincorridors comprising the resourcehave an average width of 4.5 me-tres with a near-vertical dip mak-ing them amenable to long-holestope mining.
“Recent results from the Cari-boo 2018 campaign demonstratedthe down-dip potential to expandand define new vein corridorswhere assays returned 10.5 gramsof gold per tonne of ore (g/t) over7.8 metres located 50 metresdown-dip of a hole with 9.33 g/tover 2.7 metres. Clearly, significantpotential exists to find new veincorridors; use their 3D litho-struc-tural model which controls miner-alization across the district 67-kilo-metre long strike length; upon re-ceipt of their mining permit, devel-op underground drill stations totest down-dip of known vein corri-dors; and use favorable soil sampledata in the southeast extension forfuture upside.
“In early 2018, Barkervilletabled an impressive 3.75 millionounce resource and have sincecompleted another 123,000 metresof primarily infill drilling. This newdata should help support increasedconfidence of measured and in-ferred resources and conversion ofinferred ounces en route to our tar-get of 5 million ounces over thenext 18 months (from 1.6 million to2 million ounces). This size of re-source considerably distinguishesthem from its peers both globallyand within Canada.”
Barkerville Gold Mines is en-gaged in the production and sale ofgold - along with the exploration,development, and acquisition ofmineral properties in BritishColumbia.
AphriaHAYWOOD SECURITIESCould be taking over thegreen world
Digested from a Dec. 28 report by analysts Neal Gilmer and Ethan Spence
Green Growth Brands Inc.(GGB) has proposed taking overAphria Inc. (APHA-TSX, $7.57;APHA-NYSE, US$5.57). The ana-lysts suggest the merger would pro-vide a strategic fit for both compa-nies and create a global force in thecannabis space.
They recommend risk-tolerantinvestors “buy” shares of Aphria asthey expect either this transactionto close or another bidder toemerge. However, Messrs. Gilmerand Spence lower their price targetto $17 per share from $13, as theybelieve that the approximate $11-per share offer undervalues thefundamental valuation of Aphria.
The all-stock offer would pro-vide Aphria shareholders with1.5714 common shares of GreenGrowth Brands (with an impliedpriced at $7 per share) for eachcommon share of Aphria. This of-fer translates to a 45.5 per cent pre-mium to the closing price of Aphriaon Dec. 24, 2018 and a 46 per centpremium to Aphria’s 10-day vol-ume-weighted average price on theToronto Stock Exchange, assumingan implied price of GGB of $7.
“This would value Aphria at ap-proximately $2.8 billion based on$7 per share for GGB. In addition,
GGB announced that it expects tocomplete a private placement toraise $300 million at a price of $7 toshow support for the valuation,”the analysts say.
“We believe that Aphria willtrade close to the implied $11share price based on both shortcovering but also potential for ahigher price in GGB following thisannouncement. This has poten-tially put Aphria in play at de-pressed valuation levels and doesnot eliminate the possibility of an-other suitor emerging. However,we think GGB is in the driver’s seatand presents excellent synergywith Aphria and potential to exe-cute a friendly transaction subjectto further discussions.”
Aphria is a licensed producerwith greenhouse operations in On-tario. The company has current ca-pacity of 30,000 kilograms with ex-pansion plans towards 250,000kilograms per year including itsstrategic partnership.
KrakenRoboticsBEACON SECURITIESCashed up to execute onstrong order pipeline
Digested from a Jan. 8 report by analyst Gabriel Leung
Analyst Gabriel Leung updateshis estimates for Kraken RoboticsInc. (PNG-TSX/VEN, $0.39) esti-mates to reflect the company’s re-cent equity financing and to pro-vide an update on operations. Theanalyst gives the stock a “buy”recommendation and downgradetheir target share price to $0.70from a previous $0.75. The pricedowngrade is largely due to dilu-tion from the financing, Mr. Le-ung explains.
Providing further commentary,the analyst notes, “On Dec. 20, thecompany announced the close ofan equity financing where it raised$6 million at $0.40 per share. Posttransaction, we estimate that thecompany has about 137 million ba-sic shares outstanding and approx-imately 15 million options andwarrants. We also estimate thecompany’s current cash position atapproximately $6 million.
“Looking into the fourth quar-ter of 2018 and beyond, the com-pany is sitting with a $13-millionbacklog (and approximately $4million in business where the com-pany has been notified it has beenawarded), which should help tosupport our financial forecast overthe near-term. Included in thisbacklog is approximately $9 mil-lion in batteries to Ocean Infinityand AquaPix sonar sensors to mili-tary and commercial customers.
“The company also continuesto operate with a large pipeline ofopportunities, particularly acrossNorth American and EuropeanNavies for mine-hunting sonars.The company is also preparing tosubmit a three-year, $30 millioncontract to provide ultra-high def-inition seabed and subsea assetdata via the Canadian Ocean Su-percluster initiative.
Newfoundland-based Kraken is amarine technology company provid-ing ultra-high resolution, softwarecentric-sensors and underwaterrobotic systems. Kraken was foundedwith the objective of commercializ-
ing a software-centric version of Syn-thetic Aperture Sonar (SAS) to com-pete with more hardware-dependentand expensive SAS solutions.
KnightTherapeuticsMACKIE RESEARCH Taking a restDigested from a Jan. 9 report by analysts André Uddin and Yue Toby Ma
In what seems like a series ofdowngrades, Messrs. Uddin andMa advise investors to take a “hold”position on Knight TherapeuticsInc. (GUD-TSX, $7.79). The ana-lysts downgraded their recommen-dation from a previous “buy” andreduce their target price for thestock to $8, from $10.65.
Providing further colour, the an-alyst notes, “we expect the compa-ny to go through a period of flatgrowth in 2019, and we do not ex-pect the company to conduct ma-jor BD transactions as manage-ment is still awaiting product ac-quisition prices to drop – Knightmay in-license/acquire small prod-ucts down the road.
“Probuphine was launched inOct. 2018. Iluvien, Netildex, Myte-si, TX-004/001 and tenapanor areslated to be launched between2019 and 2020 – among which webelieve TX-004/001 should be themost important one. Our productsales estimates suggest Knightwould have flat growth in 2019 rel-ative to 2018 – the momentumshould come back in 2020 follow-ing the launch of TX-004/001.
“By the third quarter of 2018end, Knight had $651 million infree cash ($4.56 free cash per share)which can be deployed to ac-quire/in-license products. Howev-er, Knight’s management is pricesensitive and is still awaiting prod-uct acquisition prices to cooldown. We expect no major trans-actions for the company in 2019.
“However, we believe Knightcould serve as a defensive play forinvestors during a market down-turn as Knight has arguably thestrongest balance sheet in theCanadian specialty pharma sector.”
Knight Therapeutics is a com-mercial-stage specialty pharmaceu-tical company focused primarily onthe Canadian market, as well as,other lower competitive rest of theworld jurisdictions.
Digested from a Dec. 18 report by analysts Patrick O’Rourke and Kyle Styner
Messrs. O’Rourke and Stynersay that Painted Pony EnergyLtd.’s (PONY-TSX, $1.33) 2019guidance and capital budget wasmodestly negative. But they addthat management is doing the rightthing despite a difficult macroeco-nomic environment for gas pro-ducers in Canada.
“PONY has announced a 2019capital budget of $95 million to
$110 million which it expects to ap-proximate its 2019 cash flow(somewhat thematic across indus-try), this compares with our previ-ous estimate for fiscal 2019 capitalspending of $118.2 million andconsensus of $125.3 million,” saythe analysts. “Cash flow guidancefor 2019 of $95 million $110 millioncompares with our previous esti-mate of $116.8 million (albeit usinghigher commodity input price as-sumptions) and consensus of$115.8 million.
“With this note we have mademodel adjustments which see ourfiscal 2019 cash flow go to $109 mil-lion on our current (but dated)price deck, and $91 million on cur-rent strip pricing in 2019.
“PONY has provided guidancefor 2019 production of 54,000 to56,000 barrels of oil equivalent(BOE) per day, slightly below ourprevious estimate of 57,300 BOEper day and consensus of 58,100BOE per day – with this note wehave revised our 2019 productionestimate to 54,700 BOE per day.
“PONY expects a 2019 liquidsweighting of nine per cent, inlinewith estimate of nine per cent butslightly below consensus of 10 percent. Our 2019 modeling now indi-cates an approximately five percent decline in production pershare relative to 2018.”
Messrs. O’Rourke and Styner,who are adjusting their projectionsto take into account the updatedguidance for 2019, reiterate their
“sector perform” recommenda-tion. But they also reduce their 12-month target share price to $2.25from $3.
Painted Pony Energy is agrowth-oriented public natural gasproducer, operating in the Montneyformation in Northeast BritishColumbia.
Leagold MiningCIBC WORLD MARKETSBetter costs; upward earnings revisions
Digested from a Jan. 4 report byanalysts Bryce Adams and EveHurowitz
Leagold Mining Corp. (LMC-TSX, $1.92) recently reported its2018 fourth-quarter production.With the announcement of theseresults, analysts Bryce Adams andEve Hurowitz have updated theirmodel for the fourth quarter andlowered their cost expectations.They maintain their “outper-former” rating and 12-to-18-month target price of $3.50.
The production results thisquarter came in at 93,800 ounces,which were directly in line with theestimated 93,700 ounces.Manage-ment noted that the all-in sustain-ing costs (AISC) for the full year will
Barrick GoldCIBC WORLD MARKETS
New era for a new BarrickDigested from a Jan. 2 report by analysts Anita Soni and Terry Tsui
As an investment thesis, Ms. Soni and Mr. Tsui state the 2018 merg-er of Barrick Gold Corp. (ABX-TSX, $18.43; ABX-NYSE, US$13.54) andRandgold Resources Ltd. has created the world’s largest gold produc-er by all relevant metrics. The newly combined company will create aplatform of the highest concentration of Tier 1 assets, combined witha strong management team known for delivering industry-leading re-turns for investors.
“While Barrick shares have outperformed peers by 11 per cent sincethe deal announcement, there remains a 26 per cent return to our pricetarget at current multiples, and the potential for further upside op-portunity with delivery of the strategic plan,” the analysts say as theyresume coverage of Barrick Gold with a recommendation upgrade of“outperform” and a target price boost to US$17 per share fromUS$14.50.
Barrick owns five of the world’s top-10 Tier 1 gold assets and ex-tensive land positions in major gold districts. The diverse asset portfo-lio of 21 mines and six projects across North and South America, Aus-tralasia and Africa “offers significant opportunities for productiongrowth, asset rationalization, operational improvement, and opti-mization through exploration additions and mineral resources man-agement,” according to the analysts.
These Tier 1 gold assets (that is, 500,000 ounces of gold per annum,with over 10-year mine life) include Goldstrike, Kibali, Pueblo Viejo,Loulo-Gounkoto and Cortez. The combination of Barrick and Rand-gold provides an industry-leading platform for Barrick to maintain aproduction profile of 4.5-to-5 million ounces of gold.
The analysts expect new CEO Mark Bristow “to continue his disci-plined approach to assessing new projects, with high after-tax hurdlerates, which should drive improved shareholder returns”. The Rand-gold team delivered an industry-leading return on invested capital of9.4 per cent, on average, between the years 2013 to 2017, consistentlyoutperforming other North American seniors.
The new management team has reiterated the company’s drive forfurther improvement in efficiency through ongoing business processimprovements, supply-chain management, technological innovationsand corporate-cost containment.
Noteworthy to Ms. Soni and Mr. Tsui is that Barrick is now amongstthe lower-cost senior gold producers with all-in-sustaining costs esti-mates below U$800 per ounces, compared to the peer average of a per-ounce price in the mid-US$800s.
Barrick Gold is the world’s largest gold producer.
Of Special InterestContinued on next page
60 / February 8, 2019 WHAT THE BROKERS SAY ABOUT CANADIAN STOCKS Issue 3 / 19
I N V E S T O R ’ S D I G E S T
be in line with US$979 per ounce.The analysts’ full-year AISC esti-mate is now at US$986 per ounce.
Leagold’s Los Filos mine inMexico had a strong quarter with58,200 ounces, compared to the es-timated 55,300 ounces due to con-sistent recovery rates in December.The RDM mine in Brazil producedlower than expected results at4,900 ounces against the estimated7,400 ounces. Fazenda and Pilarmines (also in Brazil) both deliv-ered in line with the analysts’ mod-el – 19,000 ounces and 11,600ounces, respectively.
Over the course of the year,Leagold Mining has produced302,600 ounces, achieving the high-er end of the company’s revisedguidance of 295,000 to 305,000ounces. The guidance was updatedin August to take into account theBrio assets’ acquisition and reviseddownwards in November due toRDM’s temporary shut-down.
A technical study is expectedsoon for a CIL plant at Los Filos forthe underground ore with the2019 guidance to follow shortlythereafter.
It is expected that Leagold Min-ing will refinance corporate debtthis year, which could “improvethe balance sheet and refocus thestory on operational improve-ments and production growth”.
Given that the nature of miningis risky, there can be key risks to thetarget price such as commodityprices, exchange rate, technical, or
political issues, which can affectoperations.The analysts clarify thattheir target price is based on min-ing operations continuing withoutinterruptions.
Based in Vancouver, LeagoldMining is building a mid-tier goldproducer with focus on Latin Amer-ica. The company has four minesplus two developing projects, inMexico and Brazil.
SangomaTechnologiesACUMEN CAPITALBig leap with Digium pays off
Digested from a Jan. 10 report by analysts Nick Corcoran and Brian Pow
Messrs. Corcoran and Pow toutSangoma Technologies Corp.(STC-TSX/VEN, $1.24) as thestrongest performer in their cover-age universe in 2018 with a 77.1 percent return. The analysts see thepositive momentum continuing in2019 since the financial results re-flect the transformative acquisitionof software company Digium Inc.As such, the analysts give the stocka “buy” recommendation and a$2.30 target share price.
With regards to financial resultsin 2019 the analysts go on to high-light, “EBITDA (earnings before in-terest, taxes, depreciation and
amortization) margins in the firstquarter of fiscal 2019 (quarter end-ed Oct. 31, 2018) were strongerthan anticipated. We view this aspositive given that the first-quarterresults included only one month ofthe higher contribution fromDigium. Based on our estimates,we believe that organic growth infiscal 2018 was above 12 per cent.
“Management reiterated itsguidance for fiscal 2019 and fiscal2020 with the first quarter of fiscal2019 results. For fiscal 2019, rev-enue is expected to be $100 millionwith EBITDA margins of 10 percent (35 per cent recurring/ser-vices revenue). For fiscal 2020,EBITDA margins are expected toimprove to 13 per cent. We believethat Sangoma is tracking ahead ofits guidance.
“The sales split from highermargin; recurring revenue forcloud-based services is expected togrow through 2019. This is expect-ed from the full contribution ofDigium (estimated to be 40 percent services), and continuedgrowth in Sangoma’s existing ser-vices segment. This was partiallyreflected in the first quarter results.
“While mergers and acquisi-tions activity has slowed as Sango-ma integrates Digium, we believethat acquisitions remain a core pil-lar of Sangoma’s strategy.
“Acquisition costs related toDigium were $2.1 million in fiscal2019’s first quarter. This includeslegal, financing, and other closingcosts. Management indicated thatmost of the one-time costs associ-
ated with the acquisition of Digiumwere accounted for in the firstquarter. However, the companywill likely have additional integra-tion costs associated with the ac-quisition of $500,000 to $700,000 inthe second fiscal quarter of 2019.
Sangoma Technologies is aprovider of unified communica-tions solutions based out ofMarkham, Ontario. The Companyhas developed or acquired productsand services that offer a unifiedcommunications solution targetingsmall- to mid-size businesses, en-terprises and telecom providers.
CGI GroupRAYMOND JAMES FINANCIALDoes strong cash generationspell dividend?
Digested from a Jan. 8 report by analyst Steven Li
Since fiscal 2014, CGI GroupInc.’s (GIB.A-TSX, $81.89; GIB-NYSE, US$62.88) strong cash gen-eration/growth has been strong,making new highs in fiscal 2018with $1.5 billion of cash flow fromoperating activities (CFO) and$1.35 billion of free cash flow. In re-cent years, CGI has been payingdown debt, but as Mr. Li looks atCGI’s upcoming debt maturities,there is not much debt repaymentscheduled in the next few years.
CGI has also been quite active
buying back its shares. Mr. Li seesthat there is room to remain op-portunistic in its buybacks goingforward, but the level of buybackmay be a little more muted asshares creep higher. The analystgives the stock an “outperform”rating and $94 target share price.
Mr. Li goes on to further high-light, “CGI is going to start accu-mulating cash quickly on its bal-ance sheet. CGI has always publiclystated that they constantly reviewtheir priorities how to deploy freecash flow and we think a discus-sion around a dividend is probablytimely now.
“We compare CGI versus theS&P/TSX Canadian Dividend Aris-tocrats Index. What yield? We thinkit is more likely CGI would start inthe bottom quartile, like OTEX didwhen it initiated its dividend in2013, and grow the dividend con-sistently over the years. We think a$1 per share dividend would be astart (approximately 1.2 per centyield costing $290 million or about19 per cent of CFO).
“How would a dividend-payingCGI stack up? Its free cash flow,compound annual growth rate(over 10 years) at 16 per cent wouldrank 12 out of 75 (versus Aristocratsconstituents) which could bodewell for future dividend growth.”
CGI provides a full range of ITservices including traditional IToutsourcing, systems integration, ITconsulting and BPO across a num-ber of different industry verticalsand geographic regions.
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Issue 3 / 19 WHAT THE BROKERS SAY ABOUT U.S. STOCKS February 8, 2019 / 61
I N V E S T O R ’ S D I G E S T
Dividends are a big part ofany corporation’s re-sponsibility to its share-holders. When a com-
pany has a good year, its profitmust be paid out to its sharehold-ers to reflect their importancewithin the company.
GENERAL MOTORSGM-NYSE, $33.33
BMO Capital MarketsRichard Carlson
Analyst Mr. Carlson upgradeshis view of the shares of GeneralMotors Co. from “market perform”to “outperform” while raising histarget price to $41 per share from$38. The two key factors to hismore constructive view are: An ex-pectation of a brighter spotlight tobe placed on GM Cruise (a depart-ment of autonomous driving tech-nology) in 2019, leading to a moreappropriate value for this businessbeing priced into the shares; andrestructuring efforts that will drivebetter profitability and free cashflow, as well as improve cyclical re-silience.
Speaking on the auto industryas a whole, Mr. Carlson says, “Weentered the past two years quitebullish...With macro uncertaintyhigh and investor sentiment low,we are now making a bit of shift toa more tactical approach (but stillfavour the auto industry). We be-lieve a higher weighting should beplaced on companies that have al-ready built momentum for nearer-term profit performance thanthose that would still be waiting foran inflection point even in a morestable end-market environment.”
BRISTOL-MYERS SQUIBBBMY-NYSE, $45.12
BMO Capital MarketsVamil Divan
Surprising the Street, Bristol-Myers Squibb Co. delivered a sur-prise when announcing its intentto acquire Celgene Corp. and gavethe analyst cause for positivity. Thedeal is expected to close in thethird quarter of 2019, and uponclosure BMY shareholders will rep-resent 69 per cent of the combinedcompany.
Providing further commentary,the analyst says, “BMY sharehold-ers reacted negatively to the dealtoday Jan. 3, with BMY down be-tween 10 to 15 per cent on heavytrading volume. However, the dealdoes what many investors havebeen looking for BMY to do, ex-panding the near-term pipelinebeyond just new Opdivo (cancermedication) indications. On theother hand, buying Celgene raisesnew questions, comes with its ownrisks, and is not a complete solu-tion to the issues that we believeBristol has been facing.
“We and investors have many
questions about this deal, but afterspeaking with the company ouroverall view is that this deal lookslike it could be a positive move forthe company, although the degreeof success will be heavily depen-dent on both execution of thepipeline as well as the ability tosuccessfully integrate Celgene andextract the estimated synergies. “
Bristol-Myers is the eight largestdrug developer in the UnitedStates, with an annual revenue of$20.8 billion in 2017. Celgene isninth largest with 2017 revenue of$13 billion. Combined the compa-nies have nine different drugs, sixfrom BMY and three from Celgene.
The analyst gives the sotck a“neutral” rating and a $59 targetshare price.
CARETRUSTCTRE-NASDAQ, $18.91BMO Capital Markets
John Kim
Although the skilled-nursing fa-cilities (SNF) sector continues toface structural headwinds, analystJohn Kim believes CareTrust REITis well-protected with a strong cashrent coverage ratio. This is high-lighted by excellent coverage fromits largest tenant and former par-ent, Ensign Group, a strong, well-funded operator. As such the ana-lyst upgrades the stock to an “out-perform” rating with a $22 targetshare price.
T h e a n a l y s t h i g h l i g h t s ,“CareTrust has a strong balancesheet (3.6 times net debt to EBIT-DA), and thus we believe acquisi-tion volume increases to $265 mil-lion average annually in 2019 to2020, up from $108 million in 2018,leading to accelerated funds fromoperations per share growth in2019 to 2020, to 8.9 per cent.
“CareTrust's management hasdeep experience in the industryand is selectively acquiring assetsat attractive yield spreads.
“We estimate CareTrust's for-ward net asset value at $14.85 uti-lizing an 8.5 per cent cap rate. Ourdiscounted cash flow estimate is$23.26, which values five-year freecash flow to equity, using an ap-proximately six per cent equity riskpremium (plus a 1.75 per centsmall cap premium) and a threeper cent perpetuity growth rate.”
NOKIA NOK-NYSE, $5.74
BMO Capital MarketsTim Long
With the telecommunicationsspending environment improving,analyst Tim Long sees Nokia Corp.as well positioned to take advan-tage of this dynamic in 2019, par-ticularly as 5G begins to take shape.
The analyst also notes that therecent Huawei controversy mayfree up billions in telecommunica-tions capital expenditure thatNokia can seize upon. Mr. Long isupgrading his recommendationfrom “market perform” to “outper-form”, and raises the target shareprice to $7.50 from $5.
The analyst goes on to high-light, “After a better than-expected2018, we anticipate two per centyear-over-year growth in telecom-munication spending for 2019,with some of this growth stemmingfrom initial 5G deployments inNorth America and parts of Asia.This better capex environment
stands to benefit many of theequipment vendors in our cover-age, particularly Nokia, whoseportfolio is diversified across bothradio-access-network and wireline.
“We believe the ongoingHuawei controversy presents a sig-nificant opportunity for Nokia totake share over the next few years.Several Tier-1 service providershave signaled their intent to aban-don Huawei as a vendor, freeingup billions of dollars for Nokia tocapture.
“We estimate that Nokia couldgain an additional $1 billion in in-cremental sales, aiding top-linegrowth after two years of declines.
“Both Nokia’s IP Routing andOptical Networks segments are po-sitioned well for a strong 2019. De-mand appears to be growing fromboth telco and non-telco cus-tomers, and new products like theFP4 and PSE-3 chipsets shoulddrive further momentum.
“In the Optical segment we an-ticipate increased demand fromweb scale customers.
“The current trading levels pre-sent an attractive buying opportu-nity for Nokia shares. We are rais-ing our 2019 EPS estimate to $0.40from $0.38, and introducing 2020EPS of $0.50.
“While we aren't as optimistic,Nokia believes that 5G will rampsooner than expected - targetingacceleration in 2019, particularly atthe network edge - spurring recov-ery in this struggling Networks seg-ment should these opportunitiesmaterialize.”
HCPHCP-NYSE, $28.61
BMO Capital MarketsJohn Kim
Analyst John Kim upgrades hisHCP REIT Inc.’s stock rating to“outperform” from a previous“market perform” and raising thetarget share price to $33 from aprevious $30. This comes fromHCP’s balance sheet improvementwhere net debt to EBITDA is 5.5
times. With the recent $1 billion
Mountain View asset sale toGoogle; its asset base has beenrepositioned under new manage-ment to represent a healthy mix ofsenior housing, life sciences, andMedical Office.
HI-CRUSH PARTNERSHCLP-NYSE, $3.66AltaCorp Capital
Tim Monachello and Patrick Tang
Soft fourth-quarter 2018 vol-umes and uncertain marketsprompt Hi-Crush Partners LP tosuspend its distribution as of Jan. 7– forcing the analysts Messrs.Monachello and Tang to reducetheir target price to $3.50 per sharefrom $6.50 and keeping their “un-derperform” recommendation.
The analysts reduce their for-ward estimates based on their ex-pectation for meaningful pricingreductions for Hi-Crush's “in-basin” production from its Kermitfacilities (in the Permian Basin ofTexas) during the first half of 2019.
Analysts believe a full suspen-sion (as opposed to a reduction) ofits $0.225-per share quarterly dis-tribution is a prudent decision“given the high level of uncertaintyregarding proppant demand, sup-ply and pricing at this juncture”.
“Hi-Crush's soft fourth-quar-ter volumes were at least, in part,caused by transitory factorswhich negatively impacted de-mand and 2019 is likely to providea material rebound in Hi-Crush'ssales volumes.
“We believe the most impor-tant consideration for investors to-day is the negative momentumbuilding in proppant pricing in-cluding on Hi-Crush's fixed pricein-basin proppant contracts; webelieve this dynamic presents sig-nificant risk to 2019 cash flow. Giv-en this risk we believe the suspen-sion of Hi-Crush's distribution wasa prudent and disciplined decisionby its board.
“Hi-Crush reported roughly 2
million tons of sand sold in thefourth quarter, down 29 per centquarter-over-quarter from 2.8 mil-lion tons and below managemen-t's guidance of between 2.3 millionand 2.5 million tons.
“As a reflection of Hi-Crush'slower-than-expected sales vol-umes we are reducing our fourth-quarter operating profit estimateby roughly $10 million to end with$13 million (was $46 million in thethird quarter and $84 million in thequarter before that).”
DOMTARUFS-NYSE, $44
CIBC World MarketsHamir Patel and Roshni Luthra
Commodity price erosion hasthe analysts more cautious on theirposition of Domtar Corp. Domtaris the largest North American pro-ducer of white papers, a majormarket pulp producer and manu-facturer of personal care products.
The analysts say, “With Domtarrecently trading below what wehad previously deemed a down-side scenario valuation of $36, wehave also trimmed our price targetto $47 from a previous $51. This isdue to the increased uncertainty inglobal pulp markets (due to China).Concerns on the pulp side are notthat surprising when one considersthat China is expected to representapproximately 75 per cent of pro-jected softwood pulp demandgrowth over the next five years.
“The Pulp and Paper IndustryIntelligence reported unabatedpricing erosion in China wherepulp buyers (traders and mills)have forced price cuts from suppli-ers given weak demand and ‘mas-sive national downtime.’
“At the same time, the trademagazine noted that many Chi-nese buyers have reduced pur-chase volumes, with some evendeclining their contracted pur-chase volumes over the past twomonths.”
The analysts maintain a “neu-tral” recommendation.
Micron Technology Inc.’s guid-ance of the fiscal second quarter of2019 was quite a bit worse thanwhat the analyst expected. The an-alysts also see oversupply head-winds continuing through the first half of 2019. Thespot of encouraging news comes from Micron’smanagement reacting swiftly by reducing capitalspending and planned bit shipment output. This,along with capital expenditure push-outs by othermemory suppliers, should set up for a recoverystarting in mid-2019.
The analyst goes on to highlight, “While the paceof demand recovery is debatable, we also note thatMicron is likely to be much more profitable at thebottom of this cycle - we model trough earnings pershare (EPS) at approximately $1.50 in the fiscal thirdquarter of 2019 - than previous cycles. With bookvalue likely going up, we believe Micron is an at-tractive investment over a 12-month period. Wemaintain our ‘buy’ rating but lower our price targetto $48 from a previous $60.
“Micron executed well in the first fiscal quarterof 2019 with record revenues in its mobile, auto andindustrial end markets. In the NAND storage tech-nology department, mix shift continues to move to-wards high-value solutions, with over 50 per cent ofNAND bits shipped in high-value solutions, sup-porting a NAND gross margin of over 45 per centdespite the market oversupply.
“Fiscal first quarter (endedNovember) revenues and EPSof $7.91 billion and $2.97 wereconsistent with prean-nounced results, as compared
to our estimate of $7.95 billion and $2.88 andStreet's $8 billion and $2.94 respectively. Micron ex-pects fiscal second quarter 2019 (ending Feb.) rev-enues of $5.7 to $6.3 billion, which is below oursand the Street’s estimates of $7.17 billion and $7.27billion due to a combination of inventory adjust-ments, CPU shortages and pricing decline.
“As the oversupply situation worsened duringthe quarter, MU was quick to make strategic deci-sion to cut fiscal 2019 capital expenditure from$10.5 billion to $9-9.5 billion, while significantly re-ducing bit shipment for the second fiscal quarter(now expect bit shipment to decline quarter-over-quarter) and for calendar 2019. The company ishopeful that demand will recover in second half ofcalendar 2019 based on solid demand growth, de-pleted inventory and price elasticity.
“Overall EPS guidance of approximately $1.75 iswell below Deutsche Bank and the Street’s esti-mates at about $2.40 and also below buyside whis-per of about $2. On the second fiscal quarter of2019’s guidance, we lower our EPS estimates from$2.40 to $1.80, calendar year 2019 estimates from$8.50 to $7.20 and calendar year 2020 estimatesfrom $8.50 to $7.60.”
Resetting expectationsMICRON TECHNOLOGY
MU-NASDAQ, $34.11Deutsche Bank
Sidney Ho
NOTA BENEMPL’s Investment Planning
Committee recommendsthat around 25 per cent of aCanadian investor’s stockportfolio be in U.S. equities.This allows greater diversifica-tion. But when investing in theU.S., the focus should be oncompanies that Canada lacksor has in short supply.
62 / February 8, 2019 I N V E S T O R ’ S D I G E S T Issue 3 / 19
WHAT THE MARKET LETTERS SAY
Th e m a r k e t s a r e n ’ t a sbullish nowadays, and theToronto Stock Exchange ishardly an exception. In
mid-December, it reached its low-est mark in two years. Greater oilprice differentials between crudeoil in the U.S. and Canada, alongwith falling crude prices overall arewidely cited as the biggest cause fora weak Canadian stock market.However, energy still offers pathsto profit, such as investing in one ofNorth America’s fastest-growingindependent marketers of fuel andpetroleum, Parkland Fuel Corp.Though its stock has gained 55 percent since January 2018, Keystone’sIncome remains bullish. – E.A.
The Bowser Report, P.O. Box 5156,Williamsburg, VA, 23188, U.S.A.,(757)-877-5979, US$59 a year.www.thebowserreport.com
Major indexes rallied for thefourth consecutive week (as of Jan.18) and the Dow Jones IndustrialAverage led the way (up three percent for the week). Banks kicked offthe earnings season, with Gold-man Sachs Group Inc. (GS-NYSE,US$199.09) and Bank of AmericaCorp. (BAC-NYSE, US$28.99)reporting outstanding financialresults. These strong earnings andthe recent trade headlines resultedin a continuation from equities.Bowser stocks (up 1.8 per cent forthe week) slightly underperformeddespite having another positiveweek. Galaxy Gaming Inc. (GLXZ-OTC, US$1.65) was the week's topgainer and hit a new 52-week high.The stock gained 24 per cent on theweek and is now up 148 per centsince Bowser's recommendation inMay 2017. “While small caps didunderperform as a whole, the 2019rally has yet to lose steam,” theadvisory suggests. In other news,Dynasil Corp. of America (DYSL-NASDAQ, US$1.06) announcedthat its Evaporated Metal FilmsCorp. subsidiary achieved ISO9001:2015 certification for its orig-inal manufacturing location inIthaca, NY. Iteris Inc. (ITI-NAS-DAQ, US$3.97) announced astrategic partnership with Cisco
Systems Inc. (CSCO-NASDAQ,US$44.21) that will promote Cis-co’s Connected Roadway solutionthrough several initiatives betweenthe two companies. Socket MobileInc. (SCKT-NASDAQ, US$2.03)announced the expansion of theDuraCase product line to supportApple's iPhone and iPhone Plusmobile phones. CPS TechnologiesCorp. (CPSH-NASDAQ, US$1.44)announced that it expects rev-enues for the fourth quarter endedDec. 29, 2018 will approximateUS$6 million, compared withUS$3.8 million in the fourth quar-ter of 2017. Smith-Midland Corp.(SMID-OTC, US$6.88) was chosento manufacture and install a Slen-derWall envelope system for a newproject in Weehawken, NJ. Thisproject marks the largest deploy-ment of SlenderWall panels in theproduct's 27-year history. VirTraInc. (VTSI-NASDAQ, US$3.85)updated its operational progressand set its 2019 strategic priorities.VTSI intends to focus more of itsresources on enhancing and diver-sifying its technological suite aswell as expanding its sales pres-ence and footprint in the militarymarket in 2019.
Wall Street's Best Daily, P.O. Box2049, 176 North Street, Salem, MA01970 U.S.A., (978) 745-5532.cabotwealth.com/daily
After cratering in the last threemonths of 2018, crude oil prices areback on the rise, poking their headabove US$50 a barrel after dippingas low as US$43 a barrel on Christ-mas Eve. Oil ETFs are starting tolook appealing again after gettingpummeled during the recent mar-ket correction. Oil is becoming agood momentum play again, andthe most efficient way to play it isthrough an oil ETF. One oil ETF tobuy is iShares U.S. Oil & GasExploration & Production ETF(IEO-BATS, US$58.41). As thename suggests, this ETF holds oiland gas companies specificallyfocused on exploration and pro-duction. It counts ConocoPhillips(COP-NYSE, US$67.06), DevonEnergy Corp. (DVN-NYSE,US$26.39) and EOG Resources Inc.(EOG-NYSE, US$99.05) among its10 largest holdings (out of 100). IEOis up 20 per cent in the last threeweeks (as of Jan. 21), rising toUS$57 after bottoming at US$47 onChristmas Eve. A second oil ETF tobuy is the United States Oil FundLP (USO-NYSE/Arca, US$11.03).USO is the best pure-play fund thattracks crude oil prices; it’s thelargest, most liquid of futures-backed oil ETFs, with 23 millionshares exchanging hands daily androughly US$2 billion in assets. TheUSO is up more than 17 per cent inthe last three weeks – riding thecoattails of the big run-up in oilprices. In fact, over the past fiveyears USO has had a 0.96 correla-tion (1.0 is the highest) with crude.That’s a good thing now that oilprices are surging again. A third oilETF to buy is Invesco DB Oil Fund(DBO-NYSE, US$9.64). This one’s abit more niche, but it’s based on
the value of crude oil futures con-tracts, which is where the DBOinvests all of its assets. Lately, thatstrategy has been working: theDBO is up 17 per cent in the lastthree weeks. This one tends tomove fast when oil prices are onthe rise, advancing 60 per cent inthe year prior to the collapse incrude that began in October.
The biggest concern that newchief analyst of Cabot EmergingMarkets Investor, Carl Delfeldhears from investors about emerg-ing markets is they pose too muchrisk. But the fact is, in the markets,many supposedly “safe” stocks(and markets) that attract conser-vative investors actually pose morerisk than believed. To highlight hiscase, he points to two of America’sbluest blue chips - Kraft HeinzCo. (KHC-NASDAQ, US$47.08)and FedEx Corp. (FDX-NYSE,US$173.27). Mr. Delfeld states,“These are truly great companies.But both stocks have faced steepdeclines in their share prices as thecompanies have warned aboutslowing growth. Kraft Heinz hasgone from US$80 a share to the lowUS$40s and FedEx has lost a shock-ing US$100 per share in the lastyear to trade at around $165!” Forlong-term investors, both FedExand Kraft Heinz are probably solidideas, though odds favor bothstocks need bottoming processesbefore getting going. “That is exact-ly what I’m seeing in emergingmarkets, with Chinese stocks inparticular getting hit (the Shanghaicomposite index lost 25 per cent in2018). This pullback has resulted in
a bushel of Chinese stocks thathave begun what I call 'valuebounces' in early 2019.” One of hisexamples of a “value bounce” ideais iQIYI Inc. (IQ-NASDAQ,US$17.56), the subsidiary of BaiduInc. that he owned for part of lastyear. IQ provides online entertain-ment services and operates a plat-form that provides a collection ofInternet video content. Its shareprice went from around US$40 ashare in June 2018 to just US$15 inlate 2018. Since then, like manyother Chinese stocks, it has begunan uptrend - rising to US$19.Another one of his “value bounce”examples is a new recommenda-tion - TAL Education Group (TAL-NYSE, US$29.76)—which fell fromUS$47 in June to US$21 in October,and after steadying itself for a fewweeks, is back up to US$29.
Analyst Crista Huff frequentlymentions the benefits of buyingbig-dividend stocks while theirprices have been temporarilypushed down by bearish stockmarket trends. In that light, thecompany with the biggest currentyield on her “waiting-in-the-wings” Buy List is Apollo GlobalManagement LLC (APO-NYSE,US$27.88), an alternative invest-ment company that operates in asimilar fashion to BlackstoneGroup LP (BX-NYSE, US$32.64)within her Growth & Income Port-folio. It is the world’s largest andmost diversified alternative assetmanager with US$456.7 billion inclient assets. Speculative investorshave an opportunity for outsizedcapital gains if BX converts from an
L.P. to a C-corp. next year. Divi-dend investors should lock in thisextraordinary BX yield, thus it isone of Ms. Huff's “strong buy”.Apollo’s assets under managementtotal US$270 billion, broken downas follows: credit (68 per cent), pri-vate equity (27 per cent) and realestate (five per cent). APO is a mid-cap stock with a market capitaliza-tion of US$4.9 billion. For compar-ison, BX has a market cap of US$36billion. The most recent four quar-terly dividend payouts totaledUS$1.93. At a share price ofUS$23.95, the stock is thereforeyielding 8.06 per cent. What’smore, the stock traded as high asUS$35.50 in October, so there’s 48per cent capital gain potential fornew investors if the stockrebounds to its 2018 highs. “As thedividend yield increases in relationto the falling share price, theprospect of owning APO sharesbecomes more compelling forboth individual and institutionalinvestors. During the last week of2018, Tiger Global ManagementLLC reported a recent purchase of1.1 million APO shares at anapproximate cost of US$26 mil-lion. APO joins Ms. Huff's Growth& Income Portfolio today, with thecaveat that the share price willlikely continue to stagnate for awhile. She's giving APO a “buy”recommendation and encourag-ing income investors and patientgrowth investors to buy now.”
Short takes, pro, con, maybe:The Canadian big banks areexpected to earn more thisyear and next, but their
earnings per share are expected togrow by a slower rate this year,according to The MoneyLetteradvisory. That’s because they like-ly face some headwinds in fiscal2019. More stringent regulationsare making mortgages more diffi-cult for consumers to obtain. Thisreduces profits from this lucrativemarket. Then, too, low oil pricescould push some oil and gas com-panies, as well as their employees,over the brink. The banks then mayhave to eat rising loan losses if peo-ple lose their jobs.
Canadian MoneySaver, 55 KingStreet West, Suite 700, Kitchener,ON N2G 4W1, 519-772-7632,$24.95 a year for nine issues.www.canadianmoneysaver.ca
Investors with holdings in theCanadian energy sector have lostmoney on even the safest bets. Aglobal oil glut, partly fueled byincreased U.S. energy production,has depressed oil prices around theworld. In Canada, where oppositionto new pipelines has made it difficultfor oil and gas producers to get theirproducts to market, the slump hasbeen especially painful. Figures atOilPrice.com show global oil pricesare at a long-term low, with theslump especially painful in Canada,where pipeline opponents currentlyhold sway. As a result, Canadiancrude oil futures trade at only a frac-tion of West Texas Intermediate(WTI). As of early December, the
Markets bounce back from late 2018 downturn
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INVESTOR’S DEFENCE AGAINST RECESSION
Mind Over Markets, C/O Investing Daily, 7600A Leesburg Pike, WestBuilding, Suite 300, Falls Church, VA 22043 U.S.A., (800) 832-2330.
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When thinking about the most reliable equity names outthere, we were led to the defense sector. It’s a shame, butour species will always be at conflict. Regardless of eco-nomic outlooks, technological advances, or government
treaties, robust defense spending will remain a constant throughout.Indeed, the Pentagon currently enjoys huge budget increases, despitegrowing federal deficits.
When looking at some of the largest public companies in thedefense sector, they performed relatively well during the Great Reces-sion as illustrated by these three industry giants: Lockheed MartinCorp. (LMT-NYSE, US$278.80), whose operations encompass every-thing from aircraft and missile systems to space operations and energy,grew earnings per share (EPS) by six per cent in 2008 and three per centin 2009; Raytheon Co. (RTN-NYSE, US$162.84), best known for its mis-sile defense systems and cyber warfare assets, posted EPS growth of 23per cent in 2008 and 20 per cent in 2009; and Northrop GrummanCorp. (NOC-NYSE, US$264.08), which makes the famous B-2 stealthbomber and command and control systems, saw its EPS grow by twoper cent in 2008, and fall by just seven per cent in 2009, only to recoverwith a huge 39 per cent growth year in 2010.
All three of these names continue to be leaders in their respectivefields. Their sales and earnings are fairly predictable due to massivegovernment spending in defense, something that should only increasewith President Trump asking NATO allies to up their defense budgets.They also trade at bargain levels, down double digits from 2018 highs.
Issue 3 / 19 I N V E S T O R ’ S D I G E S T February 8, 2019 / 63
WHAT THE MARKET LETTERS SAY
price for Western Canadian Select(WCS) oil was just US$26 per barrel,less than half the US$53 WTI priceand near its 2016 lows, the site says.As of early December CanadianNatural Resources Ltd. (CNQ-TSX,$36.51) and EnCana Corp. (ECA-TSX, $9.34) were at their lowest since2016, Tourmaline Oil Corp. (TOU-TSX, $19.18) was trading at less thanthe $20 price at which it went publicin 2010 and both Seven GenerationsEnergy Ltd. (VII-TSX, $10.58) andPrairieSky Royalty Ltd. (PSK-TSX,$19.62) were below their 2014 issueprices. Some companies in the ener-gy sector appear to be goodturnaround candidates for risk-tol-erant investors who can afford towait for a recovery. The recentrecord low price for most of the ETFslooks like a good buying-in point,but the risk is high — the fundscould still go much lower. Here is alook at a few ETFs. The largest ener-gy fund in Canada with $768-millionin assets is iShares S&P/TSXCapped Energy Index ETF (XEG-TSX, $9.78). The fund had 37 hold-ings, with fully 24.8 per cent of itsassets in Suncor Energy Inc. and 23per cent in CNQ. The 12-monthtrailing yield of 2.16 per cent is eligi-ble for a dividend reinvestment plan(DRIP) the iShares site says. Othersrecommended are the “thinly-trad-ed” BMO Junior Oil Index ETF (ZJO-TSX, $9.62) with $70.8-million in netassets and its annualized distribu-tion yield of 0.4 per cent. HorizonsS&P/TSX Capped Energy Index ETF(HXE-TSX, $16.53). This fund’s unitswere $25 when it launched in 2013,fell to a low near $15 in 2016 andhave slipped again to near $16. Thefund has about $21.7-million inassets as of Nov. 30. The fund offi-cially pays no distributions, whichthe Horizons site points out is a taxadvantage.
Sh o r t t a k e s , p r o , c o n ,maybe: Despite a near-10per cent drop in theS&P/TSX 60 index last
quarter, 56 per cent of advisorshave maintained their bullish out-look on Canadian equities goinginto the first quarter of 2019. Near-ly two-in-three investors arebullish on gold bullion, and 48 percent are bullish on silver bullion(both of which delivered positivereturns last quarter). Bullish senti-
ment on energy dropped signifi-cantly for both advisors andinvestors, which can be attributedto stalled energy infrastructureprojects across the country. - TheInvestment Executive
Energy & Income Advisor, c/o Cap-italist Times, LLC, 6841 Elm St.#1057 McLean, VA 22101, (877)-302-0749, US$649 annually or$194 quarterly. www.energyand-incomeadvisor.com
The energy sector rally thatbegan in the last days of 2018 hascontinued into early January. Thelong-suffering Alerian MLP Index is15 per cent higher than its post-Christmas Day low. The S&P 500Energy Index is better by almost 14per cent, as is North American oilbenchmark West Texas Intermedi-ate (WTI) Cushing. Natural gas bythe Henry Hub benchmark is flatafter plunging more than one-thirdlast month. But by and large, buy-ers are pushing up prices of energystocks, including many of the high-er yielding fare that took thebiggest hits in late 2018. Is this arally with legs? Or will it prove to bejust a bounce in a continuingdecline? There are several encour-aging signs that the energy sectorhas not only bottomed, but will bea strong outperformer in the NewYear. “Certainly not every sectorstock will prosper. For example,since our last EIA issue, two Endan-gered Dividends List membershave eliminated distributions. Anda company third is set to do thesame later this month,” says ana-lyst Elliot Gue. “With North Ameri-can oil and gas drilling activityexpected to wane in the first half ofthe year, the door to accessing cap-ital markets on economic termsremains slammed shut in the facesof all but the largest and strongestenergy companies. That’s forcingcompanies to self-fund virtually allcapital spending, and in many cas-es debt refinancing as well.” Thegood news for investors is four-and-a-half years after oil crackedunder US$100 a barrel, the sur-vivors of this battered industry aredoing the job. Shale focused pro-ducers will adjust output with priceswings. “But the big capital invest-ments continue to move forward,
driving sector earnings and divi-dend paying power. The only ques-tion is when a critical mass ofinvestor dollars will flood back tothe energy sector.”
Dow Theory Forecasts, 7412Calumet Ave., Hammond, IN46324-2692, U.S.A., (800)-233-5922, US$289 a year.www.dowtheory.com
Large-caps have been sitting atthe lead table for five years. Don’tcount on that trend continuingforever. The lower volatility ofmid-caps gives them a higherreturn/risk ratio. Midcaps offermuch of the nimbleness andgrowth of small-caps, but benefitfrom the stability of larger, moreestablished businesses. Somemidcaps have become leaders intheir markets and consistentgrowers, a fact that inspired thephrase “light-blue chips.” Four arereviewed below: Ciena Corp.(CIEN-NYSE, US$38.04), a makerof computer-network equipment,encouraged by record orders andbookings that exceeded revenue,plus management’s projection ofthree years of 20 per cent-plusgrowth in per-share earnings, ana-lysts expect continued gains and israted an “upside best buy”. ONSemiconductor Corp. (ON-NAS-DAQ, US$17.82) fell 45 per cent inthe seven months ended Oct. 22,feeling the heat along with the restof the industry, including Ciena.Since the October low, the shareshave risen 21 per cent, though theride along the way has beenbumpy but is still considered a“long-term buy”. PerformanceFood Group Co. (PFGC-NYSE,US$33.71) , the third-largestwhole-sale food distributor in theU.S., serving over 150,000 cus-tomers, grew per-share profits andoperating cash flow at least 30 percent in the 12 months endedSeptember. The consensus pro-jects flat profits for the Decemberquarter but growth of 15 per centfor full-year 2018 and 13 per centfor 2019. The company’s aggres-sive expansion into new geo-graphic markets is driving muchof that growth, and is rated as an“upside best buy”. UGI Corp.(UGI-NYSE, US$55.35) operates a
natural-gas utility that servesabout 640,000 customers in Penn-sylvania, but the traditional utilitycontributes only about 10 per centof the company’s revenue, versus70 per cent from the sale ofpropane, half in the U.S. and halfin Europe. The remaining 20 percent of revenue comes from a mixof power generation, power mar-keting, and pipeline or storageoperations. UGI is a “long-termbuy” with a 1.9 per cent yield.
The Energy Letter, C/O InvestingDaily, 7600A Leesburg Pike, WestBuilding, Suite 300, Falls Church,VA 22043 U.S.A., (703)-394-4931,US$399 a year. www.investing-daily.com/the-energy-letter
Uranium is one of the mostspecialized chemical elements onthe planet. Its commercial use islimited to fueling power plantsand making weapons. The nucle-ar energy sector has undergoneconsiderable change during thepast decade. You may recall thata nuclear power plant in Fukushi-ma, Japan melted down in 2011.As a result, many countries cutback or curtailed their plans toexpand nuclear energy. The priceof uranium fell steadily over thenext several years, bottoming outbelow $20 a pound in November2016. In addition, demand for alltypes of power, including nucle-ar, is expected to surge in Asiaover the next 10 years. By 2035,the demand for electricity is pro-jected to increase by 50 per centover recent levels. Six countriesaccount for nearly 90 per cent ofthe world’s uranium production.Of those, we prefer companiesoperating primarily in NorthAmerica and Australia. Avoid com-panies operating in Africa andRussia due to increased securitythreats and political instability.Below are the advisory's picks forthe best uranium stocks to buynow. Cameco Corp. (CCO-TSX,$15.73; CCJ-NYSE, US$11.83), aCanadian miner with strong ties toChina. Cameco has partnered withChina, which has 17 nuclear reac-tors in development. China’sreliance on coal to fuel its powerplants has resulted in some of theworst smog conditions in theworld. Now, the country is spend-ing heavily on nuclear power toprovide a much cleaner alternativeto coal. Second is Energy FuelsI n c . ( U U U U - N Y S E / A r c a ,US$2.87), a Colorado companywith an inside track on U.S.defense spending. The U.S. gov-ernment is putting enormouspressure on other countries to dis-continue their uranium produc-tion, to reduce the risk of nuclearweapons falling into the wronghands. Instead, the U.S. would pre-fer that uranium for nuclear ener-gy be obtained only from trustedsources (i.e. from within the U.S.)Lastly there is Global X Funds (LIT-NYSE/Arca, US$28.18), a uraniumexchange-traded fund (ETF) thatprovides diversification. Mining foruranium is an inherently riskybusiness, so owning an ETF ofdozens of companies reduces theoverall volatility of your portfolio. Italso ensures that you will partici-pate in an uptick in global demandfor uranium products.
Bob Carlson's RetirementWatch, P.O. Box 9009, Wal-dorf, MD 20604-9009, (800)-552-1152, US$99 a year.www.retirementwatch.com
Market volatilitycontinued inthe last monthof 2018, and
most of that volatility hasbeen on the downside.Floating rate bonds (orleveraged loans) joined thenegative trend.
Editor Bob Carlson ownsthem through Double LineFloating Rate Class 1Shares (DBFRX-NASDAQ,US$9.67), and for him, thefund has been a reliablediversifier for his portfoliosthe last few years. Compa-nies that issue leveragedloans tend to have lowercredit ratings. DBFRX, how-ever, seeks safety of princi-pal first. During the down-turn, it has been among thetop-performing funds in thefloating-rate bond category.Though down 1.98 per centin December, it still man-ages a 1.9 per cent returnfor 2018. For now, Mr. Carl-son recommends “selling”DBFRX, and putting pro-ceeds towards conservativenear-cash investments. Herecommends VanguardTreasury Money MarketFund (VUSXX) with a cur-rent yield of 2.22 per cent,or even certificates ofdeposit from your localbank. Mr. Carlson then sug-gests owning global growthstocks through WCMFocused InternationalGrowth Fund (WCMRX-NASDAQ, US$14.59). Thefund is down 5.16 per centfor December and six percent for 2018, but likeDBFRX, it is ahead of mostfunds in its category.
“It holds companies thatit believes are great long-term investments, with lowor no debt, and high returnson capital,” Mr. Carlsonremarks. The fund owns 33stocks and has 26 per centannual turnover. He recom-mends “holding” WCMRXas it is “one of the top fundsin good and bad markets.”For those betting on infras-tructure stocks (i.e.pipelines, utilities, cell tow-ers, etc.), Mr. Carlson sug-gests the closed-ended fundCohen & Steers Infrastruc-ture Fund Inc. (UTF-NYSE,US$21.99). The fund uses 30per cent leverage and yields8.67 per cent. Of note, thefund hasn't made anyreturn of capital distribu-tions this year or last.
LETTER OF THEWEEKN
ewmont Mining Corp. (NEM-NYSE,US$31.62) is acquiring Goldcorp Inc. (G-TSX, $13.78; GG-NYSE, US$10.34). Theshareholders of both companies should
profit, says editor Marc Johnson. The acquisitionwill create the world’s largest gold producer, withproduction of six-to-seven million ounces of goldfor years to come and even more as it develops newmines. Newmont will issue 0.328 of its own sharesfor each of your Goldcorp shares.
This “represents a 17 per cent premium basedon the companies’ 20-day volume weighted aver-age share prices”. Also, Goldcorp shareholderswill get a better management team. Newmontchief executive officer Gary Goldberg said, “Thecombination is expected to be immediately accre-tive to Newmont’s net asset value and cash flowper share.” Also, newly named Newmont Gold-
corp will develop most of its future mines in min-ing-tolerant jurisdictions governed by rule of law.
Of the company’s reserves and resources,three-quarters are in the Americas, 15 per cent inAustralia and 10 per cent in Ghana, which is amember of the Commonwealth. Newmont Gold-corp will start by developing the mines with thelargest potential returns and the lowest level ofrisk. It will also divest assets of US$1-to-US$1.5billion over the next couple of years.
The divestments are thought to include someof Goldcorp’s less-productive Canadian mines.The company believes this will “optimize goldproduction”. Newmont Goldcorp also expects itsintegration to save up to US$100 million a year incosts, before income taxes. This should enableNewmont to retain its investment-grade creditrating, and lift share prices and earnings.
NEWMONT REPLACES BARRICK AS WORLD'S LARGEST GOLD MINER
The Investment Reporter, MPL Communications, 133 Richmond St. W., Toronto, ON M5H 3M8, (800) 804-8846, $337 a year. www.investmentreporter.com
Issue 3 / 19 I N V E S T O R ’ S D I G E S T February 8, 2019 / INDX1
3M 483
58.com 218
A&W Revenue Royalties Income Fund 42AbbVie 194ABcann Global 228, 286Aberdeen Asia-Pacific Income Inestment Co.
19Absolute Software 364Acasti Pharma 300Acerus Pharmaceuticals 170, 340Acreage Holdings 16Activision Blizzard 237, 417Adobe Systems 173, 305Advance Auto Parts 261, 413, 525Advanced Disposal Services 525Advantage Oil & Gas 209, 366, 387Adventus Zinc 344Aecon Group 254, 367, 422, 483AES 262, 395Aetna 62, 151, 175Aflac 17, 219, 458Ag Growth International 22, 57, 195, 258AGF Management 76AGL Energy 283Agnico Eagle Mines 57, 285, 409Aimia 389Air Canada 307, 522Air Products & Chemicals 193AirBoss of America 257, 428Akita Drilling 455, 498Akumin 408, 417Alacer Gold 67, 213Alamos Gold 10, 168Alaris Royalty 52, 145, 187, 497Alaska Air Group 17, 19Alcanna 417, 524Alcoa 241Aldershot Resources 419Aleafia Health 9, 298, 408Alerian MLP ETF 238Alexion Pharmaceuticals 18, 150Algold Resources 365Algonquin Power & Utilities 13, 15, 140,
256, 347, 478Baidu 218, 306, 326, 438, 483Ball 17, 481Balmoral Resources 189Banco Santander S.A. 42Bank of America 85, 458Bank of Montreal 37, 276, 283, 287, 323, 405Bank of Nova Scotia 12, 42, 43, 86, 154,
176, 287, 409, 459, 495, 526Bank of NY Mellon 18Barkerville Gold Mines 76, 391Barrick Gold 18, 19, 120, 213, 285, 527Bausch Health 437Baytex Energy 38, 301, 388BCE 125, 150, 451, 497Beazer Homes USA 457Becton Dickinson & Co. 194Bed Bath & Beyond 307Beleave 286Bellatrix Exploration 164, 516Bellus Health 77, 521Bengal Energy 302Best Buy Co. 149, 327, 413BeWhere Holdings 274BHP Billiton PLC 243Big Lots 263Bilibili Inc. ADR 395BioSig Technologies 239Birchcliff Energy 70, 124, 256Bird Construction 13, 365, 522Bird River Resources 177Black Diamond Group 233, 347, 454BlackBerry 9, 52, 67, 169, 243, 323, 399,
452, 505Blackline Safety 155, 185, 316, 453BlackPearl Resources 303, 478Blackstone Group LP 19Bloom Energy 393Blueknight Energy Partners LP 370Bluestone Resources 233BMO Aggregate Bond Index ETF 110BMO Covered Call Canadian
Banks ETF 363BMO Dow Jones Industrial Average
Hedged-to-CAD Index ETF 55BMO Equal Weight Banks Index ETF 110,
395BMO Equal Weight U.S. Banks
CAD-Hedged Index ETF 3BMO Equal Weight U.S. Banks
Hedged-to-CAD ETF 487BMO Equal Weight Utilities
Index ETF 110, 373BMO Global Consumer Staples
CAD-Hedged Index ETF 3BMO S&P 500 ETF un-hedged
Canadian Dollar 110BMO S&P/TSX Capped Composite
Index ETF 110BMO S&P/TSX Equal Weight Banks
Index ETF 154BMO S&P/TSX Equal Weight Global Base
Metals Hedged-to-CAD Index ETF 99BMO S&P/TSX Equal Weight Global Gold
12 - MONTH COMPANIES INDEX (FEBRUARY 2018 - JANUARY 2019)
This index covers the previous 12-month period to thecurrent date.Bold-faced page numbers refer to 2019 issues, while all other page numbers refer to issues published in 2018.
INDX2 / February 8, 2019 I N V E S T O R ’ S D I G E S T Issue 3 / 19
Group 351Newcrest Mining 243Newell Brands 35Newmont Mining 41Nexa Resources SA 321, 450NexGen Energy 38, 307NexJ Systems 40NextEra Energy 63, 86
Nexus REIT 270NFI Group 39, 435NGL Energy Partners LP 351Nickel PJSC 130Nielsen Holdings PLC 217Nighthawk Gold 166Nike 173, 325, 457NIO 526Noble Energy 306, 307, 439Nokia 327Norbord 232Noront Resources 297North American Construction Group 234, 431North American Energy Partners 100, 155North West Co. 169, 296, 434Northern Dynasty Minerals 40, 52Northland Power 439Northview Apartment REIT 79, 138Nouveau Monde Graphite 517Nova Leap Health 11Nova LifeStyle 87Nucor 502NuStar Energy Partners LP 62Nutrien 32, 101, 174, 234, 239, 367, 496NuVista Energy 3, 97, 120, 135, 158, 202,
334, 431Nvidia 130, 153
Oasis Petroleum 18, 105ObsEva SA 305Obsidian Energy 278, 394, 523OceanaGold 22, 477Omnicom Group 129ON Semiconductor 415Onex 103Open Text 67, 279, 433Orca Gold 276Orezone Gold 479Organigram Holdings 34, 38, 141, 286Orla Mining 407Osisko Mining 57, 171, 344Otis Gold 155, 364Overstock.com 195
Packaging Corp. of America 194Painted Pony Energy 141Pan American Silver 10, 198, 241, 522Pan Orient Energy 252Paramount Resources 56, 259ParcelPal Technology 89Parex Resources 101, 233, 307, 344Park Lawn 38, 47, 191, 317Parkland Fuel 19, 415, 451Parsley Energy 106Party City Holdco 173Pason Systems 43, 362, 499Pattern Energy Group 10, 142Paychex 63Paypal 105PBF Energy 150Pembina Pipeline 46, 59, 63, 213, 228,
275, 415, 439, 454, 503Pengrowth Energy 234, 321People 34, 47, 208, 322Petrobras Brazil ADR 502Petroleo Brasileiro SA 482Peyto Exploration & Development 2, 79,
Sienna Senior Living 8, 12, 174, 368Signature Bank 217Signet Jewelers 43Silvercorp Metals 67SilverCrest Metals 22, 189, 277, 451Singing Machine 63, 526SiriusXM 369Siyata Mobile 8, 233, 410Skechers USA 175Skeena Resources 19Sky PLC 218Sleep Country Canada Holdings 15, 363SmartCentres REIT 402SNC-Lavalin Group 80, 169, 228, 351,
366, 473Sociedad Quimica y Minera de Chile 174, 239Solar Alliance Energy 370SolGold PLC 243Source Energy Services 275, 474South32 282Southcross Energy Partners LP 351, 370Southwest Gas Holdings 527Spark Therapeutics 61SPDR Communication Services Select
Sector Fund 417, 527SPDR Consumer Descretionary Select
Sector Fund 417SPDR Consumer Discretionary Select
Sector Fund 374, 527SPDR Consumer Staples Select
Sector Fund 3, 373, 431SPDR Energy Select Sector ETF 350SPDR Energy Select Sector Fund 527SPDR Financial Select Sector Fund 527SPDR Health Care Select Sector Fund 527SPDR Materials Select Sector Fund 527SPDR S&P 500 ETF 110, 350SPDR S&P 500 ETF Trust 502SPDR S&P Bank ETF 374SPDR S&P Insurance ETF 374SPDR Technology Select Sector ETF 65, 485SPDR Technology Select Sector Fund
479, 503Stingray Digital 77StorageVault Canada 8, 9, 254STORE Capital 106, 130Storm Resources 145, 390Stornaway Diamond 97Strad Energy Services 449Stratabound Resources 285Stuart Olson 167Sturm Ruger & Co. 174Summit Industrial Income REIT 6, 314Summit Midstream Partners LP 370Sun Life Financial 126, 255, 384Suncor Energy 26, 43, 55, 96, 114, 135,
169, 303, 334, 466, 503SunEdison 107Sunniva 345Sunoco LP 370, 415SunPower 437Superior Gold 16, 155, 187, 241, 276Superior Plus 54, 351SuperValu 349Supreme Cannabis Co. 101, 272, 286Supremex 232, 473Surge Energy 171, 364, 497Suzano Papel e Celulose SA 150Sylogist 371, 494Symbility Solutions 38, 208, 407Synchrony Financial 414Synopsis 219
T. Rowe Price Group 458TAG Oil 146, 316Tahoe Resources 233, 408Taitron Components 263TAL Education Group ADR 351Tamarack Valley Energy 76, 185, 432Target 18, 327Teck Resources 11, 125, 210, 433Tecsys 345, 435Telefonica SA 327Telus 128, 150, 362Tencent Holdings 370, 459Teranga Gold 82Terra Firma Capital 189, 409TerraForm Power 107, 238, 327Tervita 385Tesco PLC 459Tesla 130, 219, 243, 397, 438, 457, 485Teva Pharmaceuticals Industries 107Texas Roadhouse 123, 149TFI International 13, 122, 184The BMO Equal Weight Banks
Index ETF 486The Gap 393The Hershey Co. 194, 501Theratechnologies 21, 57, 96, 144, 316theScore 37, 79, 187, 322, 472Thomson Reuters 35, 406Thor Industries 282Tidewater Midstream and Infrastructure
246, 452Tiffany & Co. 263, 307Tiffany and Co. 413Tilray 42, 458Timbercreek Financial 476Time Warner 218Titanium Transportation Group 256, 367, 496TiVo 526TMX Group 36, 100Toachi Mining 219TORC Oil & Gas 145Torex Gold Resources 306Toromont Industries 342Toronto-Dominion Bank 15, 19, 124, 257,
276, 287, 327, 415Total Energy Services 386Touchstone Exploration 54Touquoise Hill Resources 497Tourmaline Oil 2, 120Toyota Motor 219, 501TransAlta 35TransAlta Renewables 35Transat A.T. 101Transat AT 37, 167, 322, 432TransCanada 351, 503TransCanada Pipelines LP 174, 415Transcontinental 39, 140, 394, 451Tree Island Steel 232, 500TRI Pointe Group 325TripAdvisor 61, 223Troilus Gold 81, 320, 477True Leaf Medicine International 89TVA Group 498Twitter 417Tyson Foods 502
U.S. Foods Holding 173U.S. Global Jets ETF 19U.S. Gold Corp. 45Ubisoft Enertainment SA 174UGE International 370Under Armour 223Uni-Select 57, 188, 389United Continental Holdings 502United Natural Foods 41United Technologies 43United Therapeutics 193UnitedHealth Group 175Uniti Group 238Universal Electronics 526Urbana 111US Auto Parts Network 283US Steel 281USA Compression Partners 415USA Compression Partners LP 370Utilities Select SPDR 43
Vale SA 130, 174
Valeant Pharmaceuticals International 195,221
Valens Groworks 431Valeura Energy 36, 99VanEck Vectors BDC Income ETF 238VanEck Vectors Mortgage REIT ETF 238Vanguard Balanced Portfolio ETF 407, 519Vanguard Canadian Aggregate Bond
Index ETF 110Vanguard Conservative Portfolio ETF 407,
519Vanguard Growth Portfolio ETF 407, 519Vanguard Health Care ETF 371Vanguard High Dividend Yield ETF 503Vanguard International Growth 218Vanguard Short-Term Bond Index ETF 414Vanguard Strategic Small-Cap Equity 218Vanguard Total Bond Market 459Vanguard U.S. Total Market Index ETF 363Vecima Networks 453Vectren 218Verizon 343Verizon Communications 42, 438Vermilion Energy 12, 81, 135, 187, 214,
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