1. business and industrial
2. company
3. merger and acquisition

1
Investment Views
Friday, October 10, 2014
Click to view full story
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Click to view synopsis
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Pertinent Revision Summary
2
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Edge at a Glance
3
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Rodrigo Echagaray
8
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Cameron Bean
13
 
Daniel Chan
17
 
Encana (Mostly) Washes Its Hands of
Clearwater
Jason Bouvier
20
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Q3/14 Results Preview; AOS Group
Acquisition
Anthony Zicha
25
 
Impressive Q3/14 Operating Results
Craig Johnston
30
 
Q1/F15 First Glance: In-Line Quarter
George Doumet
38
 
Daniel Chan
39
 
Anthony Zicha
43
 
Craig Johnston
30
 
Andres Coello
33
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Equity Event: Telecom and Transportation Conferences
48
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Equity Event: Transportation & Aerospace 2014
49
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Equity Event: Canadian Energy Infrastructure Conference
50
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Equity Event: Mining Conference 2014
51
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Industry Comments
LatAm Retail
SSS September Recap: Negative
Calendar Impacting Sales
Company Comments
Canada
Arcan Resources Ltd.
ARN-V
DragonWave Inc.
DWI-T, DRWI-Q
Encana Corporation
ECA-N, ECA-T
FirstService Corporation
FSV-T, FSRV-O
Fortuna Silver Mines Inc.
FSM-N, FVI-T
Performance Sports Group Ltd.
PSG-T, PSG-N
Sandvine Corporation
SVC-T
SNC-Lavalin Group Inc.
SNC-T
Off Restriction: Where to from Here?
Q2/F15: India Weighs on Margin,
Provides Growth
Q3/14: IBM Becomes a Significant
Customer
Investor Day Highlights
Latin America
Fortuna Silver Mines Inc.
FSM-N, FVI-T
Grupo Televisa, SAB
TV-N, TLEVISA CPO-MX
Impressive Q3/14 Operating Results
Analysis of Television Ratings in LatAm
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by
non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S.
2
Pertinent Revision Summary
Friday, October 10, 2014
Pertinent Revision Summary
(For Rating Changes: 24-Hour SC Pro Personal Trading Restriction Applies)
1-Yr
Rating
Risk
Key Data
Target
Year 1
Year 2
Year 3
Valuation
CFPS14E: $0.38
CFPS14E: $0.44
CFPS15E: $0.34
CFPS15E: $0.41
-- 0.4x our 1P NAV.
-- 0.5x our 1P NAV.
EPS15E: $-0.30
EPS15E: $-0.28
EPS16E: $-0.15
EPS16E: $-0.08
-- 0.4x CY2015 EV/Sales
-- 0.55x F2016 EV/Sales
CFPS14E: $4.37
CFPS14E: $4.76
CFPS15E: $4.40
CFPS15E: $4.52
-- --- --
Arcan Resources Ltd. (SU) (ARN-V C$0.17)
Off Restriction: Where to from Here?
New -Old --
Speculative
High
$0.15
$0.25
Valuation: 0.4x our 1P NAV.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
DragonWave Inc. (SU) (DWI-T C$1.31)
Q2/F15: India Weighs on Margin, Provides Growth
New -Old --
---
$1.30
$1.80
Valuation: 0.4x CY2015 EV/Sales
Key Risks to Price Target: Revenue growth may not recover
Encana Corporation (SP) (ECA-N US$21.09)
Encana (Mostly) Washes Its Hands of Clearwater
New -Old --
---
---
Valuation: 1.0x our risked 2P+2C NAV less annual dividends
Key Risks to Price Target: Commodity prices, timing of projects, and project execution.
FirstService Corporation (SO) (FSV-T C$60.46)
Q3/14 Results Preview; AOS Group Acquisition
New --
--
$75.00
Old --
--
$71.00
Adj EBITDA14E:
US$230
Adj EBITDA14E:
US$223
Adj EBITDA15E:
US$275
Adj EBITDA15E:
US$265
Adj EBITDA16E: (CRE: 9.5x EV/EBITDA; RPM: 11.0x
US$295 EV/EBITDA; PS: 8.5x EV/EBITDA) on 2016E
Adj EBITDA16E: -- (CRE: 10.5x EV/EBITDA; RPM: 11.0x
EV/EBITDA; PS: 8.5x EV/EBITDA) on 2015E
Valuation: (CRE: 9.5x EV/EBITDA; RPM: 11.0x EV/EBITDA; PS: 8.5x EV/EBITDA) on 2016E
Key Risks to Price Target: Declining commercial real estate property values, declining homeownership rate, decreased investor and consumer sentiment
Fortuna Silver Mines Inc. (SP) (FSM-N US$4.12)
Impressive Q3/14 Operating Results
New -Old --
---
---
Adj. EPS14E: $0.17
Adj. EPS14E: $0.13
---
-- --- --
Valuation: 1.30x Q2/15E NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Source: Reuters; Scotiabank GBM estimates.
Table of Contents
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates
are not registered/qualified as research analysts with FINRA in the U.S.
3
Edge at a Glance
Friday, October 10, 2014
Edge at a Glance
LatAm Retail
SSS September Recap: Negative Calendar Impacting Sales
Rodrigo Echagaray, MBA, CFA - (416) 945-4405
(Scotia Capital Inc. - Canada)
Event
■ Mexico's Retail Association (ANTAD) reported that SSS declined 2.1% YOY in
September. Total ANTAD sales grew 2.3% YOY.
Implications
■ The negative SSS read was in part driven by a negative calendar effect: 1) there was one
less Sunday vs. September of last year, and 2) paydays took place at the beginning of the
week this year, which reduces weekend spending (when most people tend to go grocery
shopping).
■ Self-service stores reported a SSS decline of 3.3% vs. Walmex's -2.7% SSS. Walmex was
able to gain share on an aggregate basis despite a sharp underperformance at SAM 's. We
think smaller store formats such as Bodega Aurrera Express are offsetting to some extent
weakness at SAM's.
■ Comerci mentioned SSS were slightly negative during September, while Soriana mentioned
a mid-single digit decline in SSS, underscoring its ongoing execution and SAP challenges.
Finally, it is worth mentioning department stores SSS outperformed self-service stores SSS
by a wide margin during the month (see Exhibit 2).
Recommendation
■ We expect a slow improvement in SSS in Mexico retail in 2H. Our top pick remains
FEMSA. From the food retailers, we think Walmex is the best alternative due to relative
valuations, though we remain neutral on the stock.
Arcan Resources Ltd. (ARN-V C$0.17)
Off Restriction: Where to from Here?
Event
■ We are off restriction on Arcan. While we were restricted, Arcan's security holders rejected
Aspenleaf Energy's (Private) takeover bid.
Implications
■ Facing Serious Challenges. During the run-up to the security holder vote, ARN's
management explicitly stated that the status quo was not a viable alternative for the
company. Management pointed to ARN's debt level, upcoming borrowing base review,
capital constraints, inability to retire its 2016 convertible debentures with cash, and staff
retention concerns as serious challenges to the company's sustainability.
■ Bank Line Review Underway. ARN's $180M bank line borrowing base will be reviewed by
the end of October 2014 (and the line will need to be renewed by May 28, 2015). ARN is
currently ~$145M drawn; however, the line could be reduced.
■ Where to From Here? In the absence of another takeover bid, we see ARN carrying on in a
capital-constrained manner and retiring its 2016 convertible debentures (and possibly
paying the debenture interest) with shares. We expect that this would lead to a decline in the
share price as the maturity date approaches and leave the 2016 debenture holders with a
significant majority of ARN's equity value (if circumstances remained the same, the process
would repeat in 2018).
Recommendation
■ We are reducing our target price to $0.15/share (from $0.25/share) and increasing our risk
ranking to Speculative. We maintain our SU rating.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed
by non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S.
Full Story
ScotiaView Analyst Link
Table of Contents
Cameron Bean - (403) 218-6786
(Scotia Capital Inc. - Canada)
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
-Speculative
SU
High
$0.15
$0.25
CFPS14E
$0.38
$0.44
CFPS15E
$0.34
$0.41
New Valuation:
0.4x our 1P NAV.
Old Valuation:
0.5x our 1P NAV.
Key Risks to Target:
Oil and natural gas prices; Drilling
program success.
Full Story
ScotiaView Analyst Link
Table of Contents
4
Edge at a Glance
Friday, October 10, 2014
DragonWave Inc. (DWI-T C$1.31)
Q2/F15: India Weighs on Margin, Provides Growth
Daniel Chan, MBA - (416) 863-7552
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ DragonWave held its Q2/F15 conference call.
Implications
■ Revenue of $37.9M and adjusted loss per share of $0.10 was slightly below our
expectations. We were looking for revenue of $39.2M, whereas the Street was looking for
$36.7M. Loss per share was higher than expected largely due to lower gross margin. DWI
took an inventory impairment charge of $1.2M. Adjusting for the charge puts gross margin
at 18.8%, still lower than the anticipated 20%. The contribution from Reliance Jio drove
gross margin lower than expected. Nokia represented 60% of sales, consistent with recent
trends.
■ Cash grows on equity issue and more debt. The company raised cash of $24M from the
equity financing and took on an additional $1.5M in debt to end the quarter with gross cash
of $33.6M (net cash of $14.0M). Excluding the equity raise, net cash declined by $6.4M in
the quarter.
■ Guiding for sequential revenue growth of 20%-30%. The momentum from the past two
quarters seems to be continuing, driven by strength in India. The guidance implies Q3 sales
of $45.5M-$49.3M, above our estimate for $43.4M and the Street at $41.1M. We expect
growth will be driven by lower gross margin projects.
Recommendation
■ Maintain Sector Underperform. The opportunities in India will likely drive top line growth,
but due to a tough pricing environment, we believe margins will remain depressed. We
remain Sector Underperform.
Encana Corporation (ECA-N US$21.09)
Encana (Mostly) Washes Its Hands of Clearwater
New
Rating:
Risk:
Target:
1-Yr
Old
-SU
-- Speculative
$1.30
$1.80
EPS15E
$-0.30
$-0.28
EPS16E
$-0.15
$-0.08
New Valuation:
0.4x CY2015 EV/Sales
Old Valuation:
0.55x F2016 EV/Sales
Key Risks to Target:
Revenue growth may not recover
Full Story
ScotiaView Analyst Link
Table of Contents
Jason Bouvier, CFA - (403) 213-7345
(Scotia Capital Inc. - Canada)
Event
■ Encana announced the disposition of the majority of its Clearwater assets to Ember
Resources.
Implications
■ The sale of most of the Clearwater assets for C$605M removed 180 mmcfe/d of mostly dry
gas production, working out to a reasonable $20,200/boe/d. We had estimated the remaining
Clearwater assets post PrairieSky to be worth ~US$750M, and accounting for land and
production remaining with Encana, the deal was generally in line with our estimates.
■ We estimate that ECA retains roughly 60 mmcf/d + 2.5 mbbl/d of Clearwater exposure
going forward in addition to 1.1M acres, which is primarily related to its JV with Toyota
Tsusho. We have updated our estimates accordingly.
■ The deal continues to sharpen ECA's focus on core liquids-rich plays (Montney, Eagle Ford,
DJ and Permian, plus earlier stage SJ, Duvernay, and TMS) and marks an exit from a noncore region we saw requiring ~$5/mcf breakeven in Horseshoe Canyon CBM and higher in
the Mannville due to de-watering costs.
Recommendation
■ We maintain our target price at $28/sh and maintain our Sector Perform rating.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
Med
--
$28.00
CFPS14E
$4.37
$4.76
CFPS15E
$4.40
$4.52
New Valuation:
-Old Valuation:
1.0x our risked 2P+2C NAV less annual
dividends
Key Risks to Target:
Commodity prices, timing of projects,
and project execution.
Full Story
ScotiaView Analyst Link
Table of Contents
5
Edge at a Glance
Friday, October 10, 2014
FirstService Corporation (FSV-T C$60.46)
Anthony Zicha - (514) 350-7748
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
Q3/14 Results Preview; AOS Group Acquisition
■ FirstService is expected to report its Q3/14 results on October 28, 2014.
■ The company acquired a controlling interest in Paris-based AOS Group.
Implications
■ We are looking for EBITDA of $62.1M, below consensus estimate of $72.4 million and
compares to $55.4 million in Q3/13.
■ We believe Colliers and FS Brands will continue to be the main driver of FirstService
profitability growth. We believe the strong results driving Q3 results include: 1) continued
strength within the US and UK commercial real estate (CRE) markets, 2) strong organic
growth in Residential Property Management and, 3) increased consumer spending on home
improvements.
■ Increased Target. We have rolled forward our valuation based on our newly introduced
2016E and a sum-of-the parts blended 10.0x (previously 10.5x) EV/EBITDA multiple.
Consequently, our one year target price is increased to $75.00 per share.
Recommendation
■ We are buyers of FirstService shares. Underpinned by an improving US and European
economic backdrop, we believe the company's strong earnings power is supported by: (1)
solid Colliers margin expansion stemming from increased operating leverage, (2) market
share gains and seizing new growth opportunities within the RPM segment, and (3) PS
segment margin improvement driven by increased consumer confidence and US economic
expansion.
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
Med
$75.00
$71.00
Adj
US$230
US$223
EBITDA14E
Adj
US$275
US$265
EBITDA15E
Adj
US$295
N/A
EBITDA16E
New Valuation:
(CRE: 9.5x EV/EBITDA; RPM: 11.0x
EV/EBITDA; PS: 8.5x EV/EBITDA) on
2016E
Old Valuation:
(CRE: 10.5x EV/EBITDA; RPM: 11.0x
EV/EBITDA; PS: 8.5x EV/EBITDA) on
2015E
Key Risks to Target:
Declining commercial real estate
property values, declining
homeownership rate, decreased investor
and consumer sentiment
Full Story
ScotiaView Analyst Link
Table of Contents
Fortuna Silver Mines Inc. (FSM-N US$4.12)
Impressive Q3/14 Operating Results
Craig Johnston, CPA, CA - (416) 860-1659
(Scotia Capital Inc. - Canada)
Event
■ Fortuna announced Q3/14 operating results for its San Jose mine in Mexico and Caylloma
mine in Peru.
Implications
■ Q3/14 consolidated silver production of 1.8 Moz, was 17% ahead of our estimate driven by
higher-than-budgeted grades at both operations. Based on current production results, and
our Q4/14 estimates, we expect Fortuna to exceed its 2014 silver production by 9%, or
~600koz.
■ At San Jose, silver production of 1.2 Moz beat our estimate by 17%, as average head grade
of 239 g/t was 15% above budget, as the company mined in areas of the stockwork zone
with higher grade concentration relative to the current resource model.
■ At Caylloma, silver production exceeded our estimates by 16%, but zinc production stole
the show, exceeding our estimate by 43%, as the company steered production to base metal
zones, given the lower silver prices.
■ Our Q3/14 EPS estimate has increased to $0.07 (up from $0.04), and our CFPS estimate has
increased to $0.14 (up from $0.10) based on the operating results.
Recommendation
■ We continue to believe Fortuna represents one of the best internally funded growth stories in
the silver space, but believe shares to be fairly valued at current levels. Sector Perform.
Pertinent Data
Rating:
Risk:
Target:
1-Yr
New
---
Old
SP
High
--
$5.25
Adj. EPS14E
$0.17
$0.13
Adj. EPS15E
-$0.49
Adj. EPS16E
-$0.61
New Valuation:
-Old Valuation:
1.30x Q2/15E NAV
Key Risks to Target:
Multiple contraction, commodity prices,
technical and operational risks, and
geopolitical risks
Full Story
ScotiaView Analyst Link
Table of Contents
6
Edge at a Glance
Friday, October 10, 2014
Grupo Televisa, SAB (TV-N US$34.82)
Analysis of Television Ratings in LatAm
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
Event
Pertinent Data
■ Lamac disclosed Q3/14 trends based on IBOPE Media.
Implications
■ Despite the World Cup matches in July, FTA ratings in Q3 were down in all countries but
Argentina. Brazil and Mexico posted the worst results in September, -9.1% and -8.8%
YOY, respectively. The case of Mexico is special because 09/14 was fully supported by
must-carry rules, vs. 19 days in 2013. Hence, we expect sharper drops in the future.
■ In our opinion, not only are television audiences falling, they are getting older and poorer
too. According to Lamac, free-to-air audiences in the 18-49 middle and high-income group
in Mexico are substantially lower and falling more rapidly than in the rest of the population.
■ Admittedly, Televisa's dominancy of the pay-TV market could help the company offset
some of the legacy decline in broadcasting. However, ratings of pay-TV channels in Mexico
as reported by Lamac were down 0.3% YOY in Q3, suggesting OTT substitution is already
taking place.
■ In any case, we understand that new broadcasting networks in Mexico will have access to
pay-TV homes thanks to must-carry rules, so competition is set to increase. We think Canal
13 in Chile provides a good example of the damage that falling ratings can have on
financials.
Recommendation
■ Assuming trends don't worsen, we think FTA ratings in Mexico by the end of this decade
will be about half of what they are today. But based on our numbers, TV is trading at nearly
33 years of 2015 earnings. Sell.
Rating:
Risk:
Target:
1-Yr
US$28.00
EPS14E:
EPS15E:
EPS16E:
MXN 1.70
MXN 2.85
MXN 2.74
Performance Sports Group Ltd. (PSG-T C$18.17)
Q1/F15 First Glance: In-Line Quarter
SU
High
Valuation:
DCF - 5 years results, 7.4% WACC,
terminal growth rate of 3.6%
Key Risks to Target:
Decline of broadcast ratings in Mexico
and the U.S.; expensive acquisitions
Full Story
ScotiaView Analyst Link
Table of Contents
George Doumet - (514) 350-7788
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ PSG reported Q1/F15 Adjusted EBITDA of $39.9M vs. our estimate of $40.9M and
consensus of $40.8M. Adjusted EPS came in at $0.51 vs. our estimate of $0.49 and
consensus of $0.51.
Implications
■ Revenues came in largely in line at $197.1M (vs. our estimate of $187.4 and consensus of
$186.7M). Revenues were up 28%; excluding EASTON and forex, organic growth for the
quarter was 10.5%. Hockey revenues were up 8% (11% constant currency), led largely by a
22% increase in sticks (lower margin), 41% growth in apparel, and 9% growth in helmets.
Lacrosse revenues increased by 7%.
■ Limited incremental information was provided on the Easton acquisition. PSG reiterated
$2M of synergies and stated that "the integration continues to progress as planned."
■ PSG announced a profitability enhancement initiative targeting improvements of $30M to
its annual pre-tax profits over the next five years. An estimated 2/3 is expected from cost
reductions and the rest from improved efficiencies, such as inventory management. The
company also hired Paul Gibson to the new role of Chief Supply Chain Officer.
Recommendation
■ We expect the focus of the conference call (@10AM ET at 888-504-7963) to be around the
Easton acquisition and reacceleration of growth at the legacy business. We will review our
estimates, price target and rating following the call.
Rating:
Risk:
Target:
1-Yr
Adj
EBITDA15E:
Adj
EBITDA16E:
SO
High
C$19.00
US$106
US$112
Valuation:
10.0 x EV/EBITDA on F2016E
Key Risks to Target:
Acquisition and Integration; high debt
levels; shifting consumer preferences
Full Story
ScotiaView Analyst Link
Table of Contents
7
Edge at a Glance
Friday, October 10, 2014
Sandvine Corporation (SVC-T C$2.64)
Q3/14: IBM Becomes a Significant Customer
Daniel Chan, MBA - (416) 863-7552
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ Sandvine reported Q3 results.
Implications
■ No surprises in the quarter. Revenue of $27.9M and EPS of $0.02 is in line with
expectations following the revenue warning last month. Gross margin came in significantly
better due to revenue mix and the company ended the quarter with $151M in cash.
■ Valuation is low. Sandvine continues to trade at a discount to peers and historical multiples.
SVC trades at a NTM P/E of 11.4x despite growing EPS by 73% this YTD. Moreover, with
C$1.11 in cash per share, 42% of the share price is in cash.
■ IBM becomes a significant customer. IBM's sales of Sandvine products have increased
significantly over the last year. IBM now generates over 10% of Sandvine's sales. We also
believe Sandvine's technology can integrate with some of IBM's solutions. Given
Sandvine's low valuation, high cash balance, and synergies with IBM, we believe IBM
could be a potential acquirer of Sandvine.
Recommendation
■ Maintain Sector Outperform. Despite the hiccup this quarter, we believe Sandvine will
continue to display strong customer traction and improving operating leverage. We believe
the recent pullback presents a good buying opportunity.
Rating:
Risk:
Target:
1-Yr
EPS14E:
EPS15E:
SO
Speculative
C$4.80
US$0.16
US$0.23
Valuation:
19x FY15 P/E
Key Risks to Target:
Revenue outlook highly uncertain
Full Story
ScotiaView Analyst Link
Table of Contents
SNC-Lavalin Group Inc. (SNC-T C$49.88)
Anthony Zicha - (514) 350-7748
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ SNC-Lavalin hosted an investor day on Oct. 9, 2014, in Toronto, showcasing its
management team and different operating segments. The event was well attended with each
team presenting their segment's prospects and outlook.
Implications
■ Key takeaways include: 1) a solid management team with depth of knowledge and
experience, 2) Kentz acquisition provides opportunity to lever expertise across all SNC
divisions, 3) sale of mature concessions expected to continue, 4) no fundamental risk
change to their settlement position with the government, and 5) expectation of continued
bolt-on acquisitions.
■ The presentations delivered a clear roadmap (by segment) on how SNC could achieve its
goal to deliver earnings growth, improve return on invested capital, and maximize
shareholder value. However, we believe investors were disappointed that no announcement
or update was made relating to SNC's potential H407 sale.
Recommendation
■ We are buyers of SNC-Lavalin shares. Supported by the Kentz acquisition, we believe SNCLavalin should deliver solid core engineering profitability.
Rating:
Risk:
SO
Med
Target:
1-Yr
C$71.00
Investor Day Highlights
Adj. EPS14E:
Adj. EPS15E:
$0.45
$2.75
Valuation:
15x P/E 2015E + 407 ETR: $14.00 NPV
+ AltaLink: ($19.50-$13.80) + $3.50
Excess Cash +$6.50 Other Concessions
Key Risks to Target:
Lower commodity prices; country specific
risk.
Full Story
ScotiaView Analyst Link
Table of Contents
8
Industry Comment
Friday, October 10, 2014, Pre-Market
LatAm Retail
SSS September Recap: Negative
Calendar Impacting Sales
Rodrigo Echagaray, MBA, CFA - (416) 945-4405
(Scotia Capital Inc. - Canada)
rodrigo.echagaray@scotiabank.com
Karla B. Peña - +52 (55) 9179 5211
(Scotiabank Inverlat)
karla.pena@scotiabank.com
Event
ScotiaView Analyst Link
■ Mexico's Retail Association (ANTAD) reported that SSS declined 2.1%
YOY in September. Total ANTAD sales grew 2.3% YOY.
Implications
■ The negative SSS read was in part driven by a negative calendar effect: 1)
there was one less Sunday vs. September of last year, and 2) paydays took
place at the beginning of the week this year, which reduces weekend
spending (when most people tend to go grocery shopping).
■ Self-service stores reported a SSS decline of 3.3% vs. Walmex's -2.7% SSS.
Walmex was able to gain share on an aggregate basis despite a sharp
underperformance at SAM's. We think smaller store formats such as Bodega
Aurrera Express are offsetting to some extent weakness at SAM's.
■ Comerci mentioned SSS were slightly negative during September, while
Soriana mentioned a mid-single digit decline in SSS, underscoring its
ongoing execution and SAP challenges. Finally, it is worth mentioning
department stores SSS outperformed self-service stores SSS by a wide
margin during the month (see Exhibit 2).
Recommendation
■ We expect a slow improvement in SSS in Mexico retail in 2H. Our top pick
remains FEMSA. From the food retailers, we think Walmex is the best
alternative due to relative valuations, though we remain neutral on the stock.
Universe of Coverage
Price
CENCOSUD-SN
CHDRAUI B-MX
COMERCI UBC-MX
FALAB-SN
FMX-N
RIPLEY-SN
SORIANA B-MX
WALMEX V-MX
CLP 1684.60
MXN 43.49
MXN 51.25
CLP 4308.20
US$91.25
CLP 335.00
MXN 43.17
MXN 32.78
Rating
Risk
SP
SU
SP
SO
SO
SP
SU
SP
Medium
Medium
Medium
Medium
Medium
High
Medium
Low
1-Yr
ROR
2,100
41.00
54.00
5,600
$108.00
475.00
36.00
37.00
25.8%
-4.6%
6.1%
31.4%
22.7%
43.4%
-16.0%
15.8%
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
9
Exhibit 1 – ANTAD - SSS growth per Store Format
Total
Self-service
Department Stores
Specialized
15.0%
10.0%
5.0%
0.0%
-5.0%
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
-10.0%
Source: ANTAD.
Exhibit 2 – Quarterly SSS growth per Store Format
ANTAD Total
Self Service
Department Stores
Specialized
Source: ANTAD.
Q3/14
Q2/14
Q1/14
Q4/13
Q3/13
Q2/13
Q1/13
Q4/12
Q3/12
Q2/12
Q1/12
Q4/11
Q3/11
Q2/11
Q1/11
15%
13%
11%
9%
7%
5%
3%
1%
-1%
-3%
10
Exhibit 3 – Walmex SSS Outperformance vs. ANTAD Self-Service Stores
1.3%
0.8%
0.3%
-0.2%
-0.7%
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
-1.2%
Source: Company Reports, ANTAD.
Exhibit 4 – Department Stores SSS Outperformance vs. Self-Service Stores
15.5%
13.5%
11.5%
9.5%
7.5%
5.5%
3.5%
1.5%
-0.5%
Source: ANTAD.
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
-2.5%
11
Exhibit 5 - – Specialized Stores SSS Outperformance vs. Self-Service Stores
5.5%
4.5%
3.5%
2.5%
1.5%
0.5%
-0.5%
-1.5%
Source: ANTAD.
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
-2.5%
12
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Cencosud, SA (CENCOSUD-SN)
Valuation: 21x (NTM) adj P/E
Key Risks to Price Target: Pension funds concentration, foreign ops, potential dilution
Grupo Comercial Chedraui, SAB de CV (CHDRAUI B-MX)
Valuation: 2014E-2020E DCF w/ 9.3% WACC; 9x (NTM) EV/EBITDA; 18X (NTM) P/U
Key Risks to Price Target: Operating performance, consumer behavior, tax reforms
Controladora Comercial Mexicana, SAB de CV (COMERCI UBC-MX)
Valuation: Sum of the parts; Retail (NTM)11x EV/EBITDA & (NTM) 21x P/E.
Key Risks to Price Target: Operating performance, consumer behaviour, tax reforms
SACI Falabella (FALAB-SN)
Valuation: 2014E-2020E DCF w/ 9% WACC; 14x (NTM) EV/EBITDA; 23x (NTM) P/E
Key Risks to Price Target: Pension funds overhang, foreign ops
FEMSA, SAB de CV (FMX-N)
Valuation: Sum of the Parts
Key Risks to Price Target: Operating performance, consumer behaviour, FX Exposure
Ripley Corp SA (RIPLEY-SN)
Valuation: 2014E-2020E DCF w/ 10% WACC; SOTP
Key Risks to Price Target: Pension funds overhang, foreign ops
Organización Soriana, SAB de CV (SORIANA B-MX)
Valuation: 2014E-2020E DCF w/ 10.3% WACC; 8x (NTM) EV/EBITDA; 17X (NTM) P/U
Key Risks to Price Target: Operating performance, consumer behavior, tax reforms
Wal-Mart de México y Centroamerica, SAB de CV (WALMEX V-MX)
Valuation: 2014E-2020E DCF w/ 9.1% WACC; 13x (NTM) EV/EBITDA
Key Risks to Price Target: Operating performance, consumer behavior, tax reforms
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
13
Company Comment
Thursday, October 9, 2014, After Close
(ARN-V C$0.17)
Arcan Resources Ltd.
Off Restriction: Where to from Here?
Cameron Bean - (403) 218-6786
(Scotia Capital Inc. - Canada)
cameron.bean@scotiabank.com
Rating: Sector Underperform
Risk Ranking: Speculative
Erik Kuhn, MM - (403) 213-7349
(Scotia Capital Inc. - Canada)
erik.kuhn@scotiabank.com
Target 1-Yr:
C$0.15
ROR 1-Yr:
-11.8%
Valuation: 0.4x our 1P NAV.
Key Risks to Target: Oil and natural gas prices; Drilling program success.
Event
■ We are off restriction on Arcan. While we were restricted, Arcan's
security holders rejected Aspenleaf Energy's (Private) takeover bid.
Implications
■ Facing Serious Challenges. During the run-up to the security holder
vote, ARN's management explicitly stated that the status quo was not a
viable alternative for the company. Management pointed to ARN's debt
level, upcoming borrowing base review, capital constraints, inability to
retire its 2016 convertible debentures with cash, and staff retention
concerns as serious challenges to the company's sustainability.
■ Bank Line Review Underway. ARN's $180M bank line borrowing
base will be reviewed by the end of October 2014 (and the line will
need to be renewed by May 28, 2015). ARN is currently ~$145M
drawn; however, the line could be reduced.
■ Where to From Here? In the absence of another takeover bid, we see
ARN carrying on in a capital-constrained manner and retiring its 2016
convertible debentures (and possibly paying the debenture interest) with
shares. We expect that this would lead to a decline in the share price as
the maturity date approaches and leave the 2016 debenture holders with
a significant majority of ARN's equity value (if circumstances remained
the same, the process would repeat in 2018).
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Pertinent Revisions
New
Risk:
Speculative
Target:
1-Yr
$0.15
CFPS14E
$0.38
CFPS15E
$0.34
New Valuation:
0.4x our 1P NAV.
Old Valuation:
0.5x our 1P NAV.
Old
High
$0.25
$0.44
$0.41
Recommendation
■ We are reducing our target price to $0.15/share (from $0.25/share) and
increasing our risk ranking to Speculative. We maintain our SU rating.
Qtly CFPS (FD)
2012A
2013A
2014E
2015E
Q1
$0.19 A
$0.10 A
$0.11 A
(FY-Dec.)
Oil Price (WTI, /bbl) (US$)
Nat Gas (HH, /mmBtu) (US$)
Prod-Equiv (mboe/d)
Production Growth (%)
Prod/Share Growth
Production (% gas)
CF from Ops (M)
Net Cap Exp (M)
Q2
$0.15 A
$0.13 A
$0.08 A
2011A
$95.06
$3.99
3.28
46%
-62%
5%
$44.47
$226.4
Q3
$-0.02 A
$0.10 A
$0.11
2012A
$94.09
$2.76
4.50
37%
-12%
1%
$40.10
$181.9
Q4
$0.08 A
$0.06 A
$0.09
2013A
$98.01
$3.72
3.85
-15%
-14%
2%
$39.43
$42.7
Year
$0.41
$0.40
$0.38
$0.34
P/CF
2.5x
0.8x
0.4x
0.5x
2014E
$98.06
$4.40
3.92
2%
5%
3%
$37.19
$40.3
2015E
$92.00
$4.00
3.72
-5%
-4%
3%
$33.37
$30.0
NAVPS:
P/NAV:
$1.46
0.12x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$17
$324
$341
100
62
14
Exhibit 1 - Financial and Operating Summary
Arcan Resources Ltd. (TSX-V: ARN, Sector Underperform)
October 9, 2014
Company Profile
Production and Financial Summary
Alberta
Grande
Prairie
McLeod
Swan Hills
Edmonton
Target Zone(s)
Beaverhill Lake
Company Management
Terry McCoy, CEO
Douglas Penner, President
Andy Fisher, Executive VP
Mark Smith, COO
Graeme Ryder, VP Finance & CFO
Kevin Gunning, VP Engineering
Depth [m]
2,350
2013 Reserves
Proven
Probable
P+P
Proved Developed Producing
Proved Non-Producing
Proved Undeveloped
Probable
Reserve Engineers
Type
Hz Multi-Frac
Prior Companies
Burlington Resources Canada
Range Energy, Tempest Energy
GEOCAN Energy Inc
Baytex Energy, Burlington Resources
Open Range Energy, Tempest Energy
Pengrowth
Mgmt & Board Ownership
[US$/bbl]
[C$/bbl]
[C$/bbl]
[C$/bbl]
[US$/mcf]
[C$/mcf]
2012A
$94.09
$87.12
$70.56
$75.29
$2.76
$2.39
2013A
$98.01
$93.40
$75.05
$76.23
$3.72
$3.17
2014E
$98.06
$100.22
$84.90
$85.52
$4.40
$4.60
2015E
$92.00
$95.56
$81.78
$82.78
$4.00
$4.00
Production Estimates
Oil & Liquids
Natural Gas
Total
% Gas
YoY Growth
YoY Per Share Prod. Growth
[bbl/d]
[mmcf/d]
[boe/d]
[%]
[%]
[%]
2012A
4,436
0.4
4,502
1%
37%
-12%
2013A
3,781
0.4
3,848
2%
-15%
-14%
2014E
3,807
0.7
3,920
3%
2%
5%
2015E
3,613
0.6
3,720
3%
-5%
-4%
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
2012A
$81.29
$0.33
($12.64)
$0.00
($20.14)
$48.84
($8.35)
($9.19)
$0.00
$0.00
$31.29
2013A
$87.46
($1.42)
($16.64)
$0.00
($17.84)
$51.56
($7.25)
($12.67)
$0.00
$0.00
$31.64
2014E
$92.72
($8.72)
($17.08)
$0.00
($17.02)
$49.91
($7.94)
($12.80)
$0.00
$0.00
$29.16
2015E
$89.74
($7.03)
($18.84)
$0.00
($17.19)
$46.67
($8.40)
($13.78)
$0.00
$0.00
$24.50
[%]
[%]
16%
89%
19%
65%
18%
100%
21%
64%
[$000]
[$000]
[$000]
[$000]
[$000]
[$/share]
2012A
$40,100
$159,590
($181,881)
$30,786
$55,209
$0.41
2013A
$39,434
$1
($42,733)
$14,334
$57,235
$0.40
2014E
$37,190
($9,553)
($40,256)
$5,709
$55,508
$0.38
2015E
$33,372
($3,372)
($30,000)
$0
$52,078
$0.34
[x]
[x]
4.5x
8.4x
1.1x
8.5x
1.1x
8.7x
0.9x
9.6x
2011A
126,857
$42.52
$25.71
1.4x
2012A
68,000
$47.67
nmf
nmf
2013A
56,170
$47.67
nmf
nmf
Netbacks
Revenue
Hedging
Royalties
Transportation Costs
Operating Costs
Calgary
Core Areas
Swan Hills
Commodity Price Assumptions
WTI
Edmonton Par
Western Canadian Select
Bow River
Henry Hub
AECO
Royalties
Hedged Prod. (go-forward)
Cash Flows
Cash Flow from Operations
Financing Cash Flows
Investment Cash Flows - Internal
Investment Cash Flows - M&A
DACF
CFPS
3%
Oil [mbbl]
24,047
Gas [mmcf]
5,482
Total [mboe]
24,961
[% Gas]
4%
13,421
37,468
3,735
9,217
14,044
39,004
4%
4%
% of 1P Res.
44%
2%
55%
% of 2P Res.
28%
1%
35%
36%
GLJ
RLI (P+P)
G&A
Interest
Other
Cash Taxes
Corporate Netback
30.5x
Internal Capex / CF
Net Debt / CF
NAVPS Estimates (year-end 2013 blow-down)
PDP
[$/share]
1P
[$/share]
2P
[$/share]
Historical Operational Metrics
Net Undeveloped Land
FD&A Proven
FD&A P+P
Recycle Ratio (P+P, excl. hedg.)
[acres]
[$/boe]
[$/boe]
[x]
Share Price:
$0.17
Target:
1-Yr:
$0.15
Shares Outstanding (f.d.)
Market Cap (f.d.)
[mm]
[$mm]
Q4/14E
99,687
$17
Bank Debt
Working Capital Deficit (Surplus)
Convertible Debentures
High Yield Debt
Net Debt
[$mm]
[$mm]
[$mm]
[$mm]
[$mm]
$150
$3
$171
$0
$324
Enterprise Value
[$mm]
$341
Comparable Trading Statistics
Valuation Metrics
P/CF
EV/DACF
EV/Production
D/CF
P/NAVPS (Scotia)
EV/Reserves (P+P)
Peer Group Valuation Metrics
P/CF
EV/DACF
EV/Production
D/CF
P/NAVPS (Scotia)
EV/Reserves (P+P)
2010A
115,449
$34.89
$25.05
2.7x
Capital Structure
2014E
2015E
[x]
[x]
[$/boe/d]
0.4x
6.1x
$87,086
0.5x
6.5x
$90,855
[x]
[x]
[$/boe]
8.7x
0.1x
$20.56
9.6x
[x]
[x]
[$/boe/d]
[x]
[x]
[$/boe]
2014E
4.0x
6.0x
$97,071
2.8x
0.9x
$27.95
2015E
3.1x
5.0x
$77,070
2.7x
Source: Company reports; Scotiabank GBM estimates.
-$0.43
$0.38
$1.46
ROR:
-12%
Facility
Size
Room
[$mm]
Room
[%]
$180
$30
17%
15
Facing Serious Challenges
■ Bank Line Review Underway. ARN’s $180M bank line borrowing base will be reviewed
by the end of October 2014. The line will need to be renewed by May 28, 2015 to remain in
place. ARN is currently ~$145M drawn; however, the line could be reduced, constraining the
company’s ability to direct capital toward drilling.
■ Capital Constrained. Given its debt concerns, we expect that ARN will need to run its
capital programs at or near its cash flow level for the foreseeable future. While the
company’s 2014 drilling has yielded strong results and its base production has held in well,
we expect that such a program would likely lead to a flat production profile, at best. ARN
also noted during the sale process that it will need to direct capital toward its waterfloods
(important for keeping production declines in check).
■ Personnel Concerns. ARN also noted concerns about retaining and attracting technical and
operational personal. In an effort to address the issues, ARN has allocated $3.4M for
retention bonuses, payable in two tranches in 2015 (~5% of our estimated operating income
for the year).
■ Debentures Loom Large. While we see potential for the company to manage its bank debt
obligations and keep its production relatively flat over the near term, we do not see a feasible
means for it to retire its 2016 convertible debentures with cash. This leaves ARN with the
alternative of paying out the $86.25M face value with common shares (priced at 95% of
market). We also note that the debenture agreements open the possibility for the company to
begin paying its interest obligations (~$11M/year for both tranches) in shares as well –
something we view as possible if ARN is squeezed on its bank line borrowing base.
Common Share Debenture Conversion Scenario
■ Under a common share retirement scenario for the 2016 convertible debentures, we expect
that ARN’s shares would trade down significantly, in advance of the conversion date and
large equity issuance. Exhibit 2 shows sensitivities for the number of shares to be issued,
percent of post conversion shares held by the debenture holders, and implied EV/DACF of
the company at different share prices under a conversion scenario.
Exhibit 2 – The Conversion of ARN’s 2016 Debentures with Shares would give Debenture Holders a Significant Majority of the Company’s Equity.
Conversion Shares (000s)
% of Outstanding Shares
Potential 2016E EV/DACF*
$0.20
453,947
82%
6.1x
$0.15
605,263
86%
6.0x
Pre Conversion Market Price ($/share)
$0.10
$0.08
$0.05
$0.04
$0.03
907,895 1,134,868 1,815,789 2,269,737 3,026,316
90%
93%
95%
96%
97%
5.9x
5.9x
5.8x
5.8x
5.8x
*Potential 2016E EV/DACF based on 3,500 boe/d, $35M Capex and $39M Cash Flow
Source: Company reports; Scotiabank GBM estimates.
■ Such a conversion event would likely give 2016 convertible debenture holders control of
>80% of ARN’s equity. Under this scenario (assuming capital spending within cash flow and
moderately declining production), the company would still have a sizable debt burden (>5x
CF), capital constraints, and the possibility of a repeat of the scenario with the 2018
convertible debentures ($85M face value; maturing on October 31, 2018)
$0.02
4,539,474
98%
5.8x
$0.01
9,078,947
99%
5.8x
16
Another Takeover Bid?
■ The company has noted that all three groups of security holders rejected Aspenleaf’s
takeover bid. The rejected bid would have paid the convertible debenture holders $0.825 on
the dollar for the debentures and given the equity holders a share in a spin-out company
holding a 12.5% interest in ARN’s asset base and $10M of ARN’s debt. The terms of the
transaction implied a spin-out share price of ~$0.43/share, although ARN’s stock traded
down to <$0.30/share in the days following the initial announcement. Based on the terms, we
estimate the implied value of the bid for ARN’s entire asset base at ~$330M.
■ With each group of security holders rejecting the bid, we expect that it would take a superior
offer to successfully sell the company. Using $330M as a baseline bid, we have calculated
the potential share price at a series of bid levels and debenture redemption percentages (see
Exhibit 3). We estimate that it would take a bid ~5% above that from Aspenleaf to offer the
convertible debenture holders face value and shareholders a premium to the current market
price. We note that such a bid would not guarantee security holder acceptance and that during
the previous sale process such a bid did not emerge. As such, we believe that while possible,
the prospect of a successful premium takeover bid ahead of the 2016 convertible debenture
retirement does not provide a compelling reason to own the stock.
Exhibit 3 – Potential Takeover Bid Share Prices and Debenture Conversion Rates
Debenture
Conversion
Value (%)
Premium to Aspenleaf Bid
2015E Bid/DACF
2015E Bid/Op. Income
0.357
85.0%
90.0%
95.0%
100.0%
105.0%
0%
6.3x
5.2x
3%
6.5x
5.4x
6%
6.7x
5.5x
9%
6.9x
5.7x
12%
7.1x
5.8x
$330.0
$0.31
$0.23
$0.14
$0.06
-$0.03
$340.0
$0.41
$0.33
$0.24
$0.16
$0.07
Bid Value
$350.0
$0.51
$0.43
$0.34
$0.26
$0.17
$360.0
$0.61
$0.53
$0.44
$0.36
$0.27
$370.0
$0.71
$0.63
$0.54
$0.46
$0.37
Note: Bid value and share price based on $152.2M of YE14E bank debt plus working capital deficit
Source: Company reports; Scotiabank GBM estimates.
Reducing Target Price
■ Given that we currently place a low probability on a successful premium takeover bid and
expect a significant decrease in the share price if ARN’s 2016 debentures are retired with
equity, we are lowering our target price to $0.15. We are also increasing our risk ranking to
Speculative. We maintain our Sector Underperform rating.
ScotiaView Analyst Link
17
Company Comment
Friday, October 10, 2014, Pre-Market
(DWI-T C$1.31)
(DRWI-Q US$1.18)
DragonWave Inc.
Q2/F15: India Weighs on Margin, Provides Growth
Daniel Chan, MBA - (416) 863-7552
(Scotia Capital Inc. - Canada)
daniel.chan@scotiabank.com
Rating: Sector Underperform
Risk Ranking: Speculative
John MaGee - (416) 863-7237
(Scotia Capital Inc. - Canada)
john.magee@scotiabank.com
Target 1-Yr:
C$1.30
ROR 1-Yr:
-0.8%
Valuation: 0.4x CY2015 EV/Sales
Key Risks to Target: Revenue growth may not recover
Event
■ DragonWave held its Q2/F15 conference call.
Div. (NTM)
Div. (Curr.)
$0.00
$0.00
Yield (Curr.)
0.0%
Pertinent Revisions
Implications
■ Revenue of $37.9M and adjusted loss per share of $0.10 was slightly
below our expectations. We were looking for revenue of $39.2M,
whereas the Street was looking for $36.7M. Loss per share was higher
than expected largely due to lower gross margin. DWI took an
inventory impairment charge of $1.2M. Adjusting for the charge puts
gross margin at 18.8%, still lower than the anticipated 20%. The
contribution from Reliance Jio drove gross margin lower than expected.
Nokia represented 60% of sales, consistent with recent trends.
■ Cash grows on equity issue and more debt. The company raised cash
of $24M from the equity financing and took on an additional $1.5M in
debt to end the quarter with gross cash of $33.6M (net cash of $14.0M).
Excluding the equity raise, net cash declined by $6.4M in the quarter.
■ Guiding for sequential revenue growth of 20% -30%. The
momentum from the past two quarters seems to be continuing, driven
by strength in India. The guidance implies Q3 sales of $45.5M-$49.3M,
above our estimate for $43.4M and the Street at $41.1M. We expect
growth will be driven by lower gross margin projects.
New
Target:
1-Yr
$1.30
EPS15E
$-0.30
EPS16E
$-0.15
New Valuation:
0.4x CY2015 EV/Sales
Old Valuation:
0.55x F2016 EV/Sales
Old
$1.80
$-0.28
$-0.08
Recommendation
■ Maintain Sector Underperform. The opportunities in India will likely
drive top line growth, but due to a tough pricing environment, we believe
margins will remain depressed. We remain Sector Underperform.
Qtly EPS (FD)
2013A
2014A
2015E
2016E
Q1
$-0.28 A
$-0.31 A
$-0.12 A
$-0.06
(FY-Feb.)
Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q2
$-0.45 A
$-0.28 A
$-0.10 A
$-0.05
Q3
$-0.37 A
$-0.26 A
$-0.05
$-0.03
Q4
$-0.46 A
$-0.18 A
$-0.03
$-0.02
Year
$-1.57
$-1.03
$-0.30
$-0.15
P/E
n.m.
n.m.
n.m.
n.m.
2012A
$-1.08
$-0.92
n.m.
n.m.
$46
$-33
6.1x
n.m.
2013A
$-1.57
$-1.32
n.m.
n.m.
$124
$-48
1.5x
n.m.
2014A
$-1.03
$-0.87
n.m.
n.m.
$90
$-34
2.2x
n.m.
2015E
$-0.30
$-0.24
n.m.
n.m.
$170
$-13
2.2x
n.m.
2016E
$-0.15
$-0.10
n.m.
n.m.
$199
$-5
1.8x
n.m.
BVPS15E: $0.67
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$99
$-14
$85
75
52
18
Recommendation
■ Maintain Sector Underperform. The opportunities for DragonWave give the company
hope for a recovery. The inflection in revenue has been encouraging and the continued
rollout of LTE in India presents a real growth opportunity. However, we believe the
microwave market is extremely competitive and a tough pricing environment will continue to
keep margins low. We believe significant top line growth is required to generate operating
profits. Ceragon and Aviat generate over 3x the revenue of DragonWave, but gross margin
fell from the 30% level last year to the low to mid-20s this year. Despite the higher revenue,
Aviat continues to generate operating losses. Overall, the LTE rollout in India is a big
opportunity for DragonWave, but is likely to continue to drive margin pressure. DragonWave
will need to grow its revenue significantly and expand its margin to generate breakeven
results. Given the challenging industry, we remain Sector Underperform on the name.
Reliance Jio Revenue Begins
■ Strong revenue growth. Exhibit 1 outlines the results for the quarter. Revenue contribution
from Reliance Jio of $6.6M (or 17% of revenue) and strength out of the Nokia channel drove
revenue to grow by 49% YOY. Sales through the Nokia channel were $22.6M or 60% of
revenue.
Exhibit 1 - Q2 Results
US$ (000)
Revenue
Gross Margin (%)
EBITDA
EBITDA Margin (%)
EBIT
EBIT Margin (%)
EPS from Cont. Ops ($)
Q2/15A
37,933
18.8%
(4,391)
-12%
(5,388)
(14.2)%
($0.10)
Q2/15E
39,171
20.0%
(3,752)
-10%
(4,816)
(12.3)%
($0.08)
B/ (W) %
(3.2)%
(17.0)%
(11.9)%
(26.8)%
Q2/14A
25,453
11.2%
(8,263)
-32%
(10,026)
(39.4)%
($0.28)
B/ (W) %
49.0%
46.9%
96.3%
63.3%
Q1/15A
28,771
20.8%
(5,383)
-19%
(6,429)
(22.3)%
($0.12)
B/ (W) %
31.8%
Source: Company reports; Scotiabank GBM estimates.
■ Gross margins are lower due to regional mix. Gross margin of 18.8% was below our
expectation and was largely the cause of the EPS miss. The company took an inventory
impairment charge of $1.2M. The large contribution of revenue from India was the primary
reason for the lower gross margin. Opex remained relatively flat on a sequential and YOY
basis, which helped operating margin, though still negative, improve to -14%.
■ Cash drain slows. The company ended the quarter with gross cash of $33.6M and net cash
of $7.4M (after deducting the $6.6M termination fee liability to Nokia). DragonWave will be
paying off this termination fee at about $1M per quarter for the next six quarters, which is
why we netted it against the cash. Adjusting for the $24M in equity financing completed in
the quarter, net debt increased by approximately $4.9M.
India Remains the Largest Near-Term Catalyst
■ Guiding for 20%-30% sequential revenue growth. The Reliance Jio contract for 5,000
links is expected to be completed in Q3. Following that, there is opportunity for follow-on
orders in Q4. Moreover, Bharti, Vodafone, and Idea are expected to select their backhaul
vendors by the end of the calendar year, implying there may be some impact from the
beginning of these programs in 2014, but the majority should show up in 2015. As a result of
continued strength out of India, we expect gross margins will continue to be compressed.
Spending from Sprint is expected to be delayed, following its failed attempt at merging with
T-Mobile and due to some recent restructuring.
Factset
Q2/15A
36,720
18.4%
21.6%
11.0%
($0.08)
19
Exhibit 2 - Changes to Our Model
New
Q3/15E
Old
Delta
New
FY2015E
Old
Delta
New
FY2016E
Old
Delta
Sales
47,400
43,354
9.3%
169,563
161,606
4.9%
198,900
198,893
0.0%
Gross Margin (%)
EBITDA
EBITDA (%)
EPS Cont. Oper. ($)
Cash per share ($)
18.8%
(2,495)
(5.3)%
($0.05)
$0.16
22.5%
(1,769)
(4.1)%
($0.05)
$0.20
19.5%
(13,152)
(7.8)%
($0.30)
$0.17
21.6%
(11,793)
(7.3)%
($0.28)
$0.18
21.7%
(5,488)
(2.8)%
($0.15)
$0.18
24.9%
1,659
0.8%
($0.08)
$0.23
US$ (000)
-41.1%
-23.6%
-11.5%
-8.0%
-4.9%
FY2017E
-430.8%
-84.4%
-25.0%
Source: Company reports; Scotiabank GBM estimates.
■ Targeting operating cash flow breakeven by the
end of FQ4. DragonWave believes it can achieve Exhibit 3 - Valuation Table
cash flow breakeven from operations by Q4 of this
fiscal year. With the equity financing and additional US$ (M) except per share data
debt, DragonWave is far better capitalized now than
it was a quarter ago. Cash drain is expected to Current Price
continue in Q3 and management guided to a cash S O/S (M)
balance of $30M at the end of the quarter. The Market Cap
company is depending on increasing receivables to Float
Year-End
increase its credit line to fund its working capital Sales (LTM)
needs. DragonWave has drawn $19M of its $40M EBITDA (LTM)
credit facility and currently has access to another EBITDA%
Net Income (LTM)
$2M-$3M.
Valuation
■ Valuation more in line, but fundamentals lag
peers. Exhibit 3 highlights DragonWave’s valuation
compared to its peers. With the recent share price
decline, DWI now trades in line with its peers;
however, it has less scale and is less profitable.
Furthermore, we believe that the competitors are
benefiting from the same opportunities as DWI, so
it’s not as if some of these growth opportunities are
unique to DWI. Currently, DWI is trading at an
EV/NTM Sales of 0.4x. Applying this multiple to
our CY15 Sales estimate, we arrive at a new target
price of C$1.30.
US$
DRWI
US$
CRNT
US$
AVNW
ROS
$1.18
75.2
$89
$83
28-Feb
$107
($26)
(24.7)%
($36)
(33.4)%
$2.10
76.6
$161
$140
31-Dec
$343
$110
27.9%
($26)
(7.7)%
$1.90
62.2
$118
$114
30-Jun
$347
$92
24.7%
($35)
(10.2)%
EPS
2013A
LTM-A
NTM-E
2014E
2015E
($1.31)
($0.65)
($0.19)
($0.45)
($0.16)
($0.53)
($0.56)
$0.04
($0.32)
$0.17
($0.25)
($0.57)
($0.09)
($0.38)
$0.06
P/E
P/E 2013A
P/E Next 12
P/E 2014E
P/E 2015E
n.m.
n.m.
n.m.
n.m.
n.m.
60.0
n.m.
12.7
n.m.
n.m.
n.m.
30.8
Enterprise Value
Market Cap
Net Debt
EV
$89
($14)
$75
$161
$6
$167
$118
$31
$149
Sales per Share
2013A
LTM-A
NTM-E
2014E
2015E
$1.90
$1.42
$2.60
$1.75
$2.68
$8.29
$6.53
$5.34
$4.75
$5.61
$6.58
$5.60
$5.97
$5.54
$6.32
0.5
0.4
0.6
0.4
0.3
0.4
0.5
0.4
0.4
0.4
0.4
0.4
$0.78
1.5
$2.27
1.0
$1.67
1.1
EV/S
EV/S 2013A
EV/S Next 12
EV/S 2014E
EV/S 2015E
BVPS
P/BVPS
Source: Company reports; Scotiabank GBM estimates; Factset (AVNW, CRNT)
20
Company Comment
Thursday, October 9, 2014, Pre-Market
(ECA-N US$21.09)
(ECA-T C$23.43)
Encana Corporation
Encana (Mostly) Washes Its Hands of Clearwater
Jason Bouvier, CFA - (403) 213-7345
(Scotia Capital Inc. - Canada)
jason.bouvier@scotiabank.com
Ryan Galloway, CFA, CMA - (403) 213-7768
(Scotia Capital Inc. - Canada)
Jason McDougall, MBA, P.Eng. - (403) 213-7329
(Scotia Capital Inc. - Canada)
Rating: Sector Perform
Target 1-Yr: US$28.00
Risk Ranking: Medium
Valuation: 1.0x our risked 2P+2C NAV less annual dividends
ROR 1-Yr:
34.1%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.28
$0.28
1.3%
Key Risks to Target: Commodity prices, timing of projects, and project execution.
Event
Pertinent Revisions
■ Encana announced the disposition of the majority of its Clearwater
assets to Ember Resources.
Implications
■ The sale of most of the Clearwater assets for C$605M removed 180
mmcfe/d of mostly dry gas production, working out to a reasonable
$20,200/boe/d. We had estimated the remaining Clearwater assets post
PrairieSky to be worth ~US$750M, and accounting for land and
production remaining with Encana, the deal was generally in line with
our estimates.
■ We estimate that ECA retains roughly 60 mmcf/d + 2.5 mbbl/d of
Clearwater exposure going forward in addition to 1.1M acres, which is
primarily related to its JV with Toyota Tsusho. We have updated our
estimates accordingly.
■ The deal continues to sharpen ECA's focus on core liquids-rich plays
(Montney, Eagle Ford, DJ and Permian, plus earlier stage SJ, Duvernay,
and TMS) and marks an exit from a non-core region we saw requiring
~$5/mcf breakeven in Horseshoe Canyon CBM and higher in the
Mannville due to de-watering costs.
CFPS14E
CFPS15E
New
$4.37
$4.40
Old
$4.76
$4.52
Recommendation
■ We maintain our target price at $28/sh and maintain our Sector Perform
rating.
Qtly CFPS (Basic)
2012A
2013A
2014E
2015E
Q1
$1.39 A
$0.75 A
$1.48 A
$1.11
(FY-Dec.)
Prod-Equiv (mboe/d)
Natural Gas
Cash Flow (M)
Net Cap Exp (M)
Free Cash Flow (M)
Net Debt/Cash Flow
Earnings/Share
Price/Earnings
Q2
$1.07 A
$0.89 A
$0.89 A
$1.04
Q3
$1.23 A
$0.88 A
$1.11
$1.09
Q4
$1.10 A
$0.90 A
$0.90
$1.16
Year
$4.79
$3.43
$4.37
$4.40
P/CF
4.1x
5.3x
4.8x
4.8x
2011A
583
95%
$4,175
$-4,578
$-403
1.3x
$0.54
34.3x
2012A
528
94%
$3,530
$-3,476
$54
1.2x
$1.35
14.6x
2013A
517
90%
$2,527
$-2,712
$-185
1.9x
$-0.17
n.m.
2014E
484
82%
$3,240
$-2,621
$619
1.5x
$2.59
8.1x
2015E
458
68%
$3,268
$-3,598
$-330
1.8x
$2.49
8.5x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
$15,611
$4,166
$19,777
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
740
740
21
Exhibit 1 - ECA's Clearwater Acreage Acquired by Ember
Source: Ember Resources
22
Exhibit 2 – NAVPS Sensitivity
$70
Permian
$65
Eagle Ford
$60
TMS
$55
San Juan
$50
DJ Basin
$45
Duvernay
$40
Montney
$35
Deep Panuke
$30
Other United States
$25
Other Onshore Canada
$20
Other
$15
Net Debt
$10
$5
$0
($5)
($10)
($15)
Unrisked
Risked
Source: Company reports; Scotiabank GBM estimates.
Unrisked
Risked
Unrisked
Risked
23
Exhibit 3 - NAVPS Details
Source: Company reports; Scotiabank GBM estimates.
24
Exhibit 4 - Operating & Financial Summary
ScotiaView Analyst Link
Source: Company reports; Scotiabank GBM estimates.
25
Company Comment
Friday, October 10, 2014, Pre-Market
(FSV-T C$60.46)
(FSRV-O US$54.22)
FirstService Corporation
Q3/14 Results Preview; AOS Group Acquisition
Anthony Zicha - (514) 350-7748
(Scotia Capital Inc. - Canada)
anthony.zicha@scotiabank.com
Sami Abboud, MBA - (514) 350-7737
(Scotia Capital Inc. - Canada)
Vincent Perri, CPA, CA, CFA - (514) 287-4990
(Scotia Capital Inc. - Canada)
Rating: Sector Outperform
Target 1-Yr:
C$75.00 ROR 1-Yr:
24.8%
Risk Ranking: Medium
Valuation: (CRE: 9.5x EV/EBITDA; RPM: 11.0x EV/EBITDA; PS: 8.5x EV/EBITDA) on 2016 E
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.40
$0.40
0.7%
Key Risks to Target: Declining commercial real estate property values, declining homeownership rate, decreased investor and consumer sentiment
Event
Pertinent Revisions
■ FirstService is expected to report its Q3/14 results on October 28, 2014.
■ The company acquired a controlling interest in Paris-based AOS Group.
New
Old
Target:
1-Yr
$75.00
$71.00
Adj
US$230
US$223
EBITDA14E
Adj
US$275
US$265
EBITDA15E
Adj
US$295
N/A
EBITDA16E
New Valuation:
(CRE: 9.5x EV/EBITDA; RPM: 11.0x
EV/EBITDA; PS: 8.5x EV/EBITDA) on
2016E
Old Valuation:
(CRE: 10.5x EV/EBITDA; RPM: 11.0x
EV/EBITDA; PS: 8.5x EV/EBITDA) on
2015E
Implications
■ We are looking for EBITDA of $62.1M, below consensus estimate of
$72.4 million and compares to $55.4 million in Q3/13.
■ We believe Colliers and FS Brands will continue to be the main driver
of FirstService profitability growth. We believe the strong results
driving Q3 results include: 1) continued strength within the US and UK
commercial real estate (CRE) markets, 2) strong organic growth in
Residential Property Management and, 3) increased consumer spending
on home improvements.
■ Increased Target. We have rolled forward our valuation based on our
newly introduced 2016E and a sum-of-the parts blended 10.0x
(previously 10.5x) EV/EBITDA multiple. Consequently, our one year
target price is increased to $75.00 per share.
Recommendation
■ We are buyers of FirstService shares. Underpinned by an improving
US and European economic backdrop, we believe the company's strong
earnings power is supported by: (1) solid Colliers margin expansion
stemming from increased operating leverage, (2) market share gains and
seizing new growth opportunities within the RPM segment, and (3) PS
segment margin improvement driven by increased consumer confidence
and US economic expansion.
Qtly Adj EBITDA (M)
2013A
2014E
2015E
2016E
(FY-Dec.)
Revenues (M)
Adjusted EBITDA (M)
Adj EPS
Cash Flow/Share
Price/Cash Flow
Current Ratio
EBITDA/Int. Exp
Q1
Q2
Q3
Q4
Year
$10 A
$23 A
$27
$29
$45 A
$60 A
$70
$75
$55 A
$62
$79
$87
$73 A
$86
$99
$105
$184
$230
$275
$295
EV /
EBITDA
9.0x
10.0x
8.1x
7.2x
2012A
$2,246
$159
$1.76
$2.74
10.3x
1.1x
4.4x
2013A
$2,358
$184
$2.15
$2.87
15.0x
1.1x
3.8x
2014E
$2,701
$230
$2.62
$4.35
12.5x
1.2x
7.1x
2015E
$2,973
$275
$3.24
$5.28
10.3x
1.3x
8.0x
2016E
$3,141
$295
$3.46
$5.66
9.6x
1.5x
9.3x
BVPS14E: $7.55
ROE14E: 34.84%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
C$2,186
$384
C$2,860
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated. ^ Subordinate Voting Note: EBITDA does not include
stock-based compensation expense
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
36
34
26
Colliers and FS Brands to Drive Solid Q3/14
■ FirstService is expected to report its Q3/14 results on October
28, 2014. We are looking for EBITDA of $62.1M, below Exhibit 1 – Q3/14 Estimated Results
consensus estimate of $72.4 million and compared to $55.4 (in millions USD except per share items)
million in Q3/13 (+12% YOY) (see Exhibit 1). We believe the Revenues
difference compared to consensus estimates is mainly due to Adjusted EBITDA
lower expected revenues and operating margins.
Adjusted EBITDA Margin
o Consensus estimates $743 million in revenues and Adjusted EPS (fd)
consolidated EBITDA margin of 9.7% (8.9%
CRE (Colliers)
Scotiabank GBM estimate).
Revenues
■ We believe Colliers and FS Brands will continue to be the main
Adjusted EBITDA
Adjusted EBITDA Margin
drivers of FirstService profitability growth. We believe the
strong results driving Q3 results include: 1) continued strength RPM
within the US and UK commercial real estate (CRE) markets, 2)
Revenues
strong organic growth in Residential Property Management, and Adjusted EBITDA
Adjusted EBITDA Margin
3) increased consumer spending on home improvements.
PS (FS Brands)
Revenues
Adjusted EBITDA
Adjusted EBITDA Margin
Q3/14E
$699
Q3/13
$608
Change
14.9%
$62
8.9%
$55
9.1%
12.2%
-21 bp
$0.85
$0.68
24.3%
$385
$35
9.0%
$323
$27
8.2%
19.0%
30.1%
77 bp
$248
$15
6.1%
$244
$20
8.2%
1.8%
-23.8%
-205 bp
$65
$41
$14
33.2%
59.9%
27.5%
-672 bp
$17
Commercial Real Estate (Colliers) – 57% of LTM
26.5%
Revenue
Corporate Costs
($5)
■ We expect continued Colliers revenue growth in Q3 with 18.0%
organic growth to reach $385 million. We believe this strength Source: Company reports; Scotiabank GBM estimates.
was driven by continued strong investment sales activity and a
strengthening leasing environment in North America and Europe. We note that Colliers
delivered 16.0% organic growth in Q2/14 and 18.0% in Q1/14 mainly driven by revenue
increases in Europe and record investment sales in the US and Canada.
o US commercial real estate (CRE) credit conditions continue to ease and solid
growth in CRE loans should support continued strength.
o Furthermore, in the UK real estate market, increased occupier demand,
(especially office and industrial), liquidity and investor confidence is resulting
in lower vacancy rates, and an increase of 6.7% in average capital values over
the six months to August 2014, according to IPD.
■ Furthermore, we are modeling a 9.0% EBITDA margin (+80bp increase YOY) and believe
there could be upside to our estimate. We believe increased operating leverage stemming
from increased commercial real estate activity compared to last year should drive Colliers
margin higher.
Residential Property Management (RPM) – 37% of LTM Revenue
■ We expect RPM revenues to increase 10.0% organically to $248 million from Q3/13. We
note that as in Q2/14, Service America (estimated $50 million in annual sales) previously
under RPM will be reported in the Property Services business segment. We believe new
contract wins, a transition by communities from self-management to professional
management, and management fee revenue increases should be the main growth drivers.
■ However, we expect a 180 bp decline in margin to 7.5% from 9.3% in Q3/13 to be mainly
driven by lower property transfer and disclosure revenues (higher margin ancillary revenues)
and increased labour costs relating to escalating health benefits. Our estimates also
incorporate planned IT-related expenses that should pressure margins by 140 bp (or
approximately $3.5 million).
Property Services (PS) – 6% of LTM Revenue
■ We expect revenues from FS Brands to increase 11.0% to $65.4 million. We expect FS
Brands to benefit from increased consumer spending on home improvements driven by
increased consumer confidence as the US economy improves. Furthermore, we believe
($5)
0.0%
27
increased home sales could support demand for home remodelling services. We are
modeling EBITDA margins of 26.5% or 670 bp lower than 33.2% in Q3/13. We believe
Q3/13 margins driven by strong operating leverage could be a high quarterly watermark and
challenging to achieve this quarter.
Acquisition of AOS Group
■ FirstService announced it has acquired a controlling interest in Paris-based AOS Group,
which will be immediately rebranded as Colliers International.
■ We estimate the cost at ~$60 million (est. 6.0x EV/EBITDA; historically paid 5.0x to 6.0x)
and could add at least $100 million in revenues (~4.0% of LTM revenues). Terms of the
transaction were not disclosed.
■ We believe the acquisition of AOS Group provides Colliers with a new base of operations in
France and Belgium and augments existing commercial real estate service operations in
Spain, Morocco, the UK, the Netherlands, and Switzerland. Furthermore, we expect this
acquisition, along with Colliers UK (acquired in March 2012) and Colliers Germany
(acquired in March 2013), to improve FirstService’s long-term competitive advantage in
Western Europe.
■ AOS Group provides enhanced service offerings in tenant representation, project
management, and workplace consulting. The company employs 450 employees including
commercial and institutional real estate consultants, engineers, architects and designers,
project managers, and financial analysts.
Valuation and Recommendation
■ Increased Target; Reiterating Sector
Outperform. We have rolled forward our Exhibit 2 – FirstService Corp. – Scotiabank GBM Forecasts
2013-2014 2014-2015
valuation based on our newly introduced
millions USD)
2013A
2014E
2015E
2016E
Change
Change
2016E and a sum-of-the parts blended (in
Revenues
$2,358
$2,723
$2,996
$3,166
15.5%
10.0%
10.0x (previously 10.5x) EV/EBITDA Adjusted EBITDA
$184
$234
$282
$299
26.7%
20.9%
multiple. This is in line with the blended
7.8%
8.6%
9.4%
9.4%
76 bp
85 bp
comp group average multiple of 9.9x. Adjusted EBITDA Margin
Consequently, our one year target price is CRE (Colliers)
Revenues
$1,316
$1,591
$1,781
$1,870
20.9%
11.9%
increased to $75.00 per share.
Adjusted EBITDA
$115
$161
$179
$188
39.5%
11.4%
o Our new sum-of-the parts Adjusted EBITDA Margin
8.8%
10.1%
10.1%
10.1%
135 bp
-5 bp
valuation includes a 9.5x RPM
multiple
for
Colliers Revenues
$883
$927
$992
$1,061
4.9%
7.0%
$56
$48
$75
$80
-13.7%
54.6%
(previously 10.5x), 11.0x Adjusted EBITDA
6.3%
5.2%
7.5%
7.5%
-112 bp
232 bp
multiple for Residential Adjusted EBITDA Margin
Property
Management PS (FS Brands)
$159
$205
$224
$235
28.9%
9.0%
(unchanged), and 8.5x Revenues
EBITDA
$30
$41
$45
$47
36.2%
10.2%
multiple
for
Property Adjusted
Adjusted EBITDA Margin
18.9%
20.0%
20.2%
20.2%
108 bp
22 bp
Services (unchanged).
Corporate expenses
($17)
($17)
($17)
($17)
o We have lowered our Stock Compensation expenses
$13
*
*
*
Colliers multiple to reflect
increased global economic *Note:
We do not estimate stock compensation expenses.
risk and geographic risk * PS 2013 segment revenues includes revenues from Field Asset Services that was sold in October 2013
associated with Russia and * PS 2014 segment revenues include revenues from Service America (run-rate $50 million per year) previously included in RPM
the Middle East. However, Source: Company reports; Scotiabank GBM estimates.
our valuation multiple
remains above the current
commercial real estate comps group of 9.0x on 2015E but in line with the
average of CBRE (CBG-USA) and Jones Lang Lasalle (JLL-USA) (see
Exhibit 3).
2015-2016
Change
5.7%
5.8%
2 bp
5.0%
5.0%
0 bp
7.0%
7.0%
0 bp
5.0%
5.0%
0 bp
28
o
We note that the historical average EV/EBITDA (NTM) multiple for the CRE,
RPM, and PS industry players is 13.8x, 13.0x, and 7.8x, respectively (see
Exhibit 4).
Exhibit 3 – FirstService Corp. Comp Group Table
Company Name (YE)
Commercial Property Managers
CBRE Group, Inc. Class A ( Dec )
Jones Lang LaSalle Incorporated ( Dec )
Altus Group Limited ( Dec )
Savills plc ( Dec )
HFF, Inc. Class A ( Dec )
Average:
Median:
Residential Property Managers
Morguard Corporation ( Dec )
Capital Senior Living Corporation ( Dec )
Brookdale Senior Living Inc. ( Dec )
Average:
Median:
Property Services
ABM Industries Incorporated ( Oct )
Comfort Systems USA, Inc. ( Dec )
Rentokil Initial plc ( Dec )
Rollins, Inc. ( Dec )
MITIE Group PLC ( Mar )
Average:
Median:
FirstService Corp.
Ticker
Price
9-Oct-14
Market
Cap (M)
Enterprise
Value (M)
CBG-USA
JLL-USA
AIF-TSE
SVS-LON
HF-USA
$29.20
$124.45
C$19.28
£5.97
$28.39
$9,698
$5,577
C$612
£805
$1,070
MRC-TSE
CSU-USA
BKD-USA
C$140.12
$21.44
$32.14
ABM-USA
FIX-USA
RTO-LON
ROL-US
MTO-LON
FSV-CA
Commercial Property Managers
CBRE Group, Inc. Class A ( Dec )
Jones Lang LaSalle Incorporated ( Dec )
Altus Group Limited ( Dec )
Savills plc ( Dec )
HFF, Inc. Class A ( Dec )
Residential Property Managers
Morguard Corporation ( Dec )
Capital Senior Living Corporation ( Dec )
Brookdale Senior Living Inc. ( Dec )
Property Services
ABM Industries Incorporated ( Oct )
Comfort Systems USA, Inc. ( Dec )
Rentokil Initial plc ( Dec )
Rollins, Inc. ( Dec )
MITIE Group PLC ( Mar )
Average:
FirstService Corp.
EV/EBITDA
2015E
2014E
2015E
$12,363
$6,381
C$717
£814
$1,159
17.7 x
16.4 x
17.5 x
12.3 x
17.5 x
16.3 x
17.5 x
15.4 x
14.5 x
14.5 x
10.5 x
14.9 x
14.0 x
14.5 x
10.7 x
11.2 x
10.5 x
8.3 x
10.1 x
10.2 x
10.5 x
9.6 x
10.1 x
9.0 x
6.8 x
8.9 x
8.9 x
9.0 x
C$1,750
$623
$5,850
C$4,035
$1,212
$6,662
10.5 x
na
na
10.5 x
10.5 x
8.4 x
na
na
8.4 x
8.4 x
15.9 x
17.8 x
9.9 x
14.6 x
15.9 x
15.6 x
15.1 x
6.8 x
12.5 x
15.1 x
$25.75
$12.85
£1.14
$28.75
£2.85
$1,435
$485
£2,074
$4,190
£1,050
$1,782
$517
£2,975
$4,094
£1,241
25.3 x
21.4 x
14.1 x
27.3 x
11.3 x
19.9 x
21.4 x
22.9 x
14.1 x
12.8 x
24.5 x
10.2 x
16.9 x
14.1 x
8.1 x
8.7 x
7.2 x
15.7 x
7.9 x
9.5 x
8.1 x
7.7 x
6.5 x
6.9 x
14.3 x
7.5 x
8.6 x
7.5 x
C$60.67
$1,985
$2,591
19.2 x
15.6 x
11.1 x
9.2 x
ROE (LTM)
Yield
2015E/2014E Growth
Company Name (YE)
P/E
2014E
Currency
EBITDA
EPS
EBITDA
Margin (LTM)
USD
USD
CAD
GBP
USD
11.4%
11.3%
17.1%
22.6%
13.4%
14.9%
13.0%
20.7%
17.1%
17.5%
12.3%
na
19.5%
9.1%
na
2.5 x
na
2.5 x
0.0 x
na
48.4%
21.1%
42.5%
(0.7%)
17.5%
19.0%
14.0%
7.8%
na
37.8%
0.0%
0.4%
3.1%
1.8%
0.0%
CAD
USD
USD
2.1%
18.5%
46.9%
24.4%
348.9%
na
na
15.4%
16.1%
na
10.6 x
5.4 x
47.4%
76.0%
69.6%
9.8%
(16.5%)
(0.7%)
0.4%
0.0%
0.0%
USD
USD
GBP
USD
GBP
6.2%
34.6%
4.3%
9.5%
6.4%
15.7%
10.6%
51.7%
10.2%
11.3%
11.1%
46.0%
3.7%
4.3%
22.4%
18.0%
6.9%
12.8%
1.6 x
0.1 x
1.9 x
-0.4 x
1.2 x
2.5 x
22.7%
0.9%
87.4%
(21.3%)
26.5%
33.7%
7.8%
7.6%
na
30.4%
12.0%
11.7%
2.4%
1.7%
2.1%
1.5%
3.8%
1.3%
CAD
20.9%
23.2%
8.4%
1.8 x
61.0%
37.9%
0.7%
Source: FactSet; Company reports; Scotiabank GBM estimates for FSV.
Net Debt /
Net Debt /
EBITDA (LTM) Total Cap
29
Exhibit 4 – Historical EV/EBITDA (NTM) by Segment
Commercial Real Estate Service Providers Historical EV/EBITDA
18.0x
ScotiaView
Analyst Link
17.46
16.0x
14.0x
13.76
12.0x
10.0x
8.44
8.0x
Average
Minimum
EV/EBITDA (NTM)
Jan 2014
Jan 2013
Jan 2012
Jan 2011
Jan 2010
Jan 2009
Jan 2008
Jan 2007
Jan 2006
Jan 2005
6.0x
Maximum
Comparable companies included are: Jones Lang LaSalle Inc. (JLL-USA), CBRE Group, Inc. (CBG-USA), Altus Group Limited (AIF-TSE), HFF Inc. (HF-USA), Savills Plc. (SVS-LON)
Residential Property Managers Historical EV/EBITDA
24.0x
22.0x
21.72
20.0x
18.0x
16.0x
14.0x
13.02
12.0x
10.0x
8.82
Average
Minimum
EV/EBITDA (NTM)
Jan 2014
Jan 2013
Jan 2012
Jan 2011
Jan 2010
Jan 2009
Jan 2008
Jan 2007
Jan 2006
Jan 2005
8.0x
Maximum
Comparable companies included are: Morguard Corporation (MRC-TSE), Capital Senior Living Corporation (CSU-USA), Brookdale Senior Living Inc. (BKD-USA)
Property Services Historical EV/EBITDA
10.5x
10.0x
9.96
9.5x
9.0x
8.5x
8.0x
7.79
7.5x
7.0x
6.5x
6.0x
5.95
Average
Minimum
EV/EBITDA (NTM)
Jan 2014
Jan 2013
Jan 2012
Jan 2011
Jan 2010
Jan 2009
Jan 2008
Jan 2007
Jan 2006
Jan 2005
5.5x
Maximum
Comparable companies included are: ABM Industried Inc. (ABM-USA), Comfort Systems USA, Inc. (FIX-USA), Rentokil Initial Plc (RTO-LON), Rollins, Inc. (ROL-US), and MITIE Group Plc. (MTO-LON)
Source: FactSet; Scotiabank GBM.
30
Intraday Flash
Thursday, October 9, 2014 @ 3:20:53 PM (ET)
(FSM-N US$4.12)
(FVI-T C$4.62)
Fortuna Silver Mines Inc.
Impressive Q3/14 Operating Results
Craig Johnston, CPA, CA - (416) 860-1659
(Scotia Capital Inc. - Canada)
craig.johnston@scotiabank.com
Rating: Sector Perform
Risk Ranking: High
Valuation: 1.30x Q2/15E NAV
Target 1-Yr:
US$5.25
ROR 1-Yr:
27.4%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s
Event
Pertinent Revisions
■ Fortuna announced Q3/14 operating results for its San Jose mine in
Mexico and Caylloma mine in Peru.
Adj. EPS14E
Implications
■ Q3/14 consolidated silver production of 1.8 Moz, was 17% ahead of our
estimate driven by higher-than-budgeted grades at both operations.
Based on current production results, and our Q4/14 estimates, we
expect Fortuna to exceed its 2014 silver production by 9%, or ~600koz.
■ At San Jose, silver production of 1.2 Moz beat our estimate by 17%, as
average head grade of 239 g/t was 15% above budget, as the company
mined in areas of the stockwork zone with higher grade concentration
relative to the current resource model.
■ At Caylloma, silver production exceeded our estimates by 16%, but
zinc production stole the show, exceeding our estimate by 43%, as the
company steered production to base metal zones, given the lower silver
prices.
■ Our Q3/14 EPS estimate has increased to $0.07 (up from $0.04), and
our CFPS estimate has increased to $0.14 (up from $0.10) based on the
operating results.
New
$0.17
Old
$0.13
Recommendation
■ We continue to believe Fortuna represents one of the best internally
funded growth stories in the silver space, but believe shares to be fairly
valued at current levels. Sector Perform.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.05 A
$0.04 A
$0.12
$0.15
(FY-Dec.)
Adj Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA (M)
Production (Moz)
Tot. Cash Cost ($/oz)
All-In Sust. Cost ($/oz)
Q2
$0.00 A
$0.02 A
$0.12
$0.15
Q3
$0.00 A
$0.07
$0.12
$0.15
Q4
$0.02 A
$0.04
$0.12
$0.15
Year
$0.07
$0.17
$0.49
$0.61
P/E
38.5x
23.7x
8.5x
6.7x
2013A
$0.07
38.5x
$0.36
8.1x
$41
4.6
$7.03
$20.45
2014E
$0.17
23.7x
$0.49
8.4x
$65
6.6
$4.57
$15.31
2015E
$0.49
8.5x
$0.72
5.7x
$127
7.3
$2.48
$9.26
2016E
$0.61
6.7x
$0.88
4.7x
$155
7.5
$1.58
$7.48
2017E
$0.41
10.1x
$0.70
5.9x
$118
7.7
$2.40
$7.90
BVPS14E: $2.16
ROE14E: 8.41%
NAVPS:
P/NAV:
$4.14
0.99x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$540
$-60
$480
131
131
31
Q3/14 Operating Results – Exceeds Expectations
■ At San Jose (the company's growth driver), silver production totalled 1.2 Moz, beating our
estimate by 17%, as average head grade of 239 g/t was 15% above budget, as the company
mined in areas of the stockwork zone with higher grade concentration relative to the resource
model. Gold production also outperformed budget and our estimates due to grade. Operating
costs of $62.60 per tonne was 7% below our estimate and budget, driven by a strong US
dollar relative to the Mexican Peso, and increased throughput.
■ At Caylloma, silver production of 589 koz, exceeded our expectations by 16%, as average
grade of 181 g/t was 7% above budget, and silver recovery of 86%, was 5% higher than plan.
Zinc production far exceeded our estimates, driven by significantly higher zinc grades than
planned of 3.05%, which was a result of a higher contribution of mining coming from levels
10 and 12 in the Animas silver-polymetalic vein. Costs of $91.10 per tonne were relatively in
line with our estimates.
Exhibit 1 - Q3/14 Operating Results vs. Scotiabank GBM Estimates
Caylloma
Silver Production
Gold Production
Lead Production
Zinc Production
Operating cost per tonne
San Jose
Silver Production
Gold Production
Operating cost per tonne
Consolidated Total
Silver Production
Gold Production
Lead Production
Zinc Production
oz
oz
Mlbs
Mlbs
US$/t
oz
oz
US$/t
oz
oz
Mlbs
Mlbs
Fortuna
Q3/14A
Scotia
Q3/14E
%
Δ
Fortuna
Q2/14A
%
Δ (QoQ)
588,727
399
4.21
7.15
$91.10
508,254
475
4.15
4.99
$89.00
16%
(16%)
2%
43%
2%
529,011
580
3.96
6.70
$91.70
11%
(31%)
6%
7%
(1%)
1,215,100
9,352
$62.60
1,036,548
7,651
$67.16
17%
22%
(7%)
1,101,411
7,957
$64.08
10%
18%
(2%)
1,803,827
9,751
4.21
7.15
1,544,802
8,126
4.15
4.99
17%
20%
2%
43%
1,630,422
8,537
3.96
6.70
11%
14%
6%
7%
Source: Company reports; Scotiabank GBM estimates.
Reviewing Estimates vs. Guidance
■ We expect Fortuna to exceed its 2014 silver production guidance by 9%.
Exhibit 2 - Reviewing Estimates vs. Guidance
2014 Guidance vs. Scotia Estimates
Caylloma, Peru
Silver Production
Gold Production
Lead Production
Zinc Production
Cash cost per tonne
San Jose, Mexico
Silver Production
Gold Production
Cash cost per tonne
Consolidated Total
Silver Production
Gold Production
Lead Production
Zinc Production
Source: Company reports; Scotiabank GBM estimates.
Moz
oz
Mlbs
Mlbs
US$/t
Moz
koz
US$/t
Moz
koz
Mlbs
Mlbs
Fortuna
Guidance
Scotia Estimates
2014E
%∆
2.0
1.9
16.6
22.6
$88.3
2.2
1.9
16.5
26.5
$89.8
8%
1%
-1%
17%
2%
4.0
30.4
$67.1
4.4
33.3
$65.1
10%
10%
-3%
6.0
32.3
16.6
22.6
6.6
35.2
16.5
26.5
9%
9%
-1%
17%
32
Reviewing Cost per Tonne at Both Operations
Exhibit 3 – Cost per tonne at San Jose
San Jose (Mexico)
$90
(US$/tonne)
Cost per Tonne
$80
Company
Guidance*
$70
$60
Actual Costs
$50
$40
Q4/11
Q1/12
Q2/12
Q3/12
Q4/12
Q1/13
Q2/13
Q3/13
Q4/13
Q1/14
Q2/14
Q3/14
Q4/14
*3 Year (2014-2016) cost per tonne company guidance is $65/tonne.
Source: Company reports; Scotiabank GBM estimates.
Exhibit 4 – Cost per tonne at Caylloma
Caylloma (Peru)
$100
Cost per Tonne (US$/tonne)
Company
Guidance*
$90
$80
$70
$60
Actual Costs
$50
$40
Q1/10
Q2/10
Q3/10
Q4/10
Q1/11
Q2/11
Q3/11
Q4/11
Q1/12
Q2/12
Q3/12
Q4/12
Q1/13
Q2/13
Q3/13
Q4/13
Q1/14
Q2/14
Q3/14
*3 Year (2014-2016) cost per tonne company guidance is $85/tonne.
Source: Company reports; Scotiabank GBM estimates.
Upcoming Catalysts
■ Q3/14 financial results – November 10, 2014.
■ San Jose step-out drill results – Q4/14.
■ Construction decision on mill expansion to 3,000 tpd – Q4/14.
ScotiaView Analyst Link
Q4/14
33
Company Comment
Thursday, October 9, 2014, After Close
(TV-N US$34.82)
(TLEVISA CPO-MX MXN
93.61)
Grupo Televisa, SAB
Analysis of Television Ratings in LatAm
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
andres.coello@scotiabank.com
Rating: Sector Underperform
Risk Ranking: High
Target 1-Yr: US$28.00
1-Yr: MXN 74.00
ROR 1-Yr:
-19.4%
Valuation: DCF - 5 years results, 7.4% WACC, terminal growth rate of 3.6%
Key Risks to Target: Decline of broadcast ratings in Mexico and the U.S.; expensive acquisitions
Div. (NTM)
Div. (Curr.)
(ADS)
Yield (Curr.)
US$0.07
US$0.07
0.2%
Event
■ Lamac disclosed Q3/14 trends based on IBOPE Media.
Implications
■ Despite the World Cup matches in July, FTA ratings in Q3 were down
in all countries but Argentina. Brazil and Mexico posted the worst
results in September, -9.1% and -8.8% YOY, respectively. The case of
Mexico is special because 09/14 was fully supported by must-carry
rules, vs. 19 days in 2013. Hence, we expect sharper drops in the future.
■ In our opinion, not only are television audiences falling, they are getting
older and poorer too. According to Lamac, free-to-air audiences in the
18-49 middle and high-income group in Mexico are substantially lower
and falling more rapidly than in the rest of the population.
■ Admittedly, Televisa's dominancy of the pay-TV market could help the
company offset some of the legacy decline in broadcasting. However,
ratings of pay-TV channels in Mexico as reported by Lamac were down
0.3% YOY in Q3, suggesting OTT substitution is already taking place.
■ In any case, we understand that new broadcasting networks in Mexico
will have access to pay-TV homes thanks to must-carry rules, so
competition is set to increase. We think Canal 13 in Chile provides a
good example of the damage that falling ratings can have on financials.
Recommendation
■ Assuming trends don't worsen, we think FTA ratings in Mexico by the
end of this decade will be about half of what they are today. But based on
our numbers, TV is trading at nearly 33 years of 2015 earnings. Sell.
Qtly EPS (FD)
2011A
2012A
2013A
2014E
(FY-Dec.)
Earnings/Share
Free Cash Flow/Share
EV/EBITDA
Price/Earnings/Share
Price/FCF
Revenues (M)
EBITDA (M)
Q1
0.31 A
0.53 A
0.38 A
0.30 A
Q2
0.64 A
0.49 A
0.63 A
0.77 A
Q3
0.77 A
0.79 A
0.84 A
-0.25
Q4
0.72 A
1.05 A
0.86 A
0.88
Year
2.44
3.07
2.71
1.70
P/E
22.2x
22.1x
33.4x
44.0x
2012A
3.07
3.28
8.9x
22.1x
18.3x
69,290
27,264
2013A
2.71
2.53
11.4x
33.4x
35.8x
73,791
28,668
2014E
1.70
0.16
9.3x
44.0x
n.m.
80,410
30,184
2015E
2.85
3.69
8.6x
26.3x
20.3x
86,944
32,310
2016E
2.74
3.42
8.6x
27.4x
22.0x
89,114
32,295
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
(ADS)
Float O/S (M) (ADS)
US$20,140
US$4,958
US$21,137
BVPS14E: 29.47
ROE14E: 5.96%
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
All values in MXN unless otherwise indicated. ^ Limited Voting
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
578
416
34
Q3: Performance of Free-To-Air Ratings
■ Exhibits 1 to 10 show some of the information that Lamac discloses on its website on a
monthly basis (we invite investors to visit Lamac’s website: www.lamac.org; make sure you
select the country). We understand that the percentages are the number of people that tuned
free-to-air or pay-TV channels in the studied period. Lamac doesn’t provide the breakdown
between specific networks (for example, between Televisa and Televisión Azteca).
■ In Mexico, September 2014 was fully supported by the implementation of must-carry rules,
by which pay-TV networks (cable and satellite) were forced to carry the free-to-air channels.
■ For example, in September of 2013, Dish carried the Televisa and Azteca free-to-air channels
for only 19 days, compared to a full month in 2014. As must-offer was enforced in Mexico as
of September 11, 2013, the YOY comparison of FTA ratings was positively impacted during
part of 2013 and the first nine months of 2014. This is why the 8.8% drop in September in
2014 is especially negative and why we would expect larger drops in months to come.
■ Also, some World Cup matches were transmitted during the first two weeks of July of 2014,
despite which Q3/14 ratings were down in every country but Argentina (see Exhibits 11-20.)
Exhibit 1 - Mexico – Q3 FTA Ratings Total Population
2013
10.40%
10.15%
9.80%
3.9%
2014
8.00%
7.00%
10.00%
9.60%
2013
2014
10.20%
9.80%
Exhibit 2 - Mexico – Q3 FTA Ratings: 18- 49 Segment, High-Middle Income
-8.8%
5.1%
6.27%
6.59%
-3.7%
6.28%
7.34%
-14.3%
6.29%
6.05%
6.00%
5.00%
9.43%
9.40%
-1.6%
9.26%
9.15%
9.20%
4.00%
3.00%
9.00%
9.00%
2.00%
8.80%
1.00%
8.60%
0.00%
8.40%
July
August
Exhibit 3 - Brazil – Q3 FTA Ratings Total Population
12.00%
2013
11.69%
10.50%
-2.1%
10.27%
10.05%
11.77%
10.00%
11.65%
2013
2014
9.98%
-7.9%
-8.0%
11.50%
-9.1%
11.00%
September
Exhibit 4 - Brazil – Q3 FTA Ratings: 18- 49 Segment, High-Middle Income
2014
-2.5%
11.99%
August
Source: LAMAC, based on IBOPE Media
Source: LAMAC, based on IBOPE Media
12.50%
July
September
9.78%
-8.8%
9.50%
9.19%
10.83%
10.59%
8.92%
9.00%
10.50%
8.50%
10.00%
9.50%
8.00%
July
Source: LAMAC, based on IBOPE Media
August
September
July
Source: LAMAC, based on IBOPE Media
August
September
35
Exhibit 5 - Argentina – Q3 FTA Ratings Total Population
2013
9.60%
Exhibit 6 - Argentina – Q3 FTA Ratings: 18- 49 Segment, High-Middle Income
2014
9.40%
7.40%
6.7%
9.14%
9.20%
9.14%
-4.5%
9.00%
2013
7.60%
9.45%
-1.8%
8.98%
7.20%
2.8%
7.32%
2014
7.34%
7.26%
7.12%
-7.2%
-12.5%
7.00%
6.74%
6.80%
8.86%
8.73%
8.80%
6.60%
6.42%
6.40%
8.60%
6.20%
8.40%
6.00%
8.20%
5.80%
July
August
September
Source: LAMAC, based on IBOPE Media
Exhibit 7 - Colombia – Q3 FTA Ratings Total Population
2013
8.00%
7.80%
7.78%
-2.7%
August
September
Exhibit 8 - Colombia – Q3 FTA Ratings: 18- 49 Segment, High-Middle Income
2014
7.70%
2013
6.60%
6.40%
7.70%
7.57%
7.60%
July
Source: LAMAC, based on IBOPE Media
-5.8%
6.20%
2014
6.44%
2.1%
6.31%
6.19%
6.18%
-10.1%
-8.8%
-8.6%
6.00%
7.40%
7.25%
5.79%
5.80%
7.20%
5.66%
7.02%
7.00%
5.60%
6.80%
5.40%
5.20%
6.60%
July
August
2013
-4.9%
11.00%
September
Exhibit 10 - Chile – Q3 FTA Ratings: 18- 49 Segment, High-Middle Income
Exhibit 9 - Chile – Q3 FTA Ratings Total Population
11.32%
August
Source: LAMAC, based on IBOPE Media
Source: LAMAC, based on IBOPE Media
11.50%
July
September
2013
9.20%
2014
9.00%
11.15%
8.96%
-4.9%
2014
8.87%
8.80%
10.76%
-7.8%
8.60%
8.52%
-10.4%
8.40%
10.50%
10.28%
10.13%
-2.0%
9.93%
10.00%
8.20%
-0.4%
7.95%
8.00%
7.78%
7.80%
7.75%
7.60%
9.50%
7.40%
7.20%
9.00%
7.00%
July
Source: LAMAC, based on IBOPE Media
August
September
July
Source: LAMAC, based on IBOPE Media
August
September
36
Q3: Comparing Pay-Tv and Free-to-Air Ratings
Exhibit 11 - Mexico – Q3 FTA vs. Pay-TV Ratings Total Population
FTA
12.00%
Pay-TV
Exhibit 12 - Mexico – Q3 FTA vs. Pay-TV Ratings: 18- 49 Segment, High-Middle
Income
7.00%
10.00%
-2.3%
9.57%
9.35%
FTA
6.62%
6.31%
-4.7%
6.00%
8.00%
Pay-TV
4.98%
4.90%
5.00%
1.6%
4.00%
6.00%
3.62%
4.00%
3.61%
-0.3%
3.00%
2.00%
2.00%
1.00%
0.00%
0.00%
Q3/13
Q3/14
Q3/13
Source: LAMAC, based on IBOPE Media
Source: LAMAC, based on IBOPE Media
Exhibit 13 - Brazil – Q3 FTA vs. Pay-TV Ratings Total Population
FTA
14.00%
12.00%
Q3/14
11.80%
Exhibit 14 - Brazil – Q3 FTA vs. Pay-TV Ratings: 18- 49 Segment, High-Middle
Income
Pay-TV
FTA
12.00%
-6.4%
11.04%
Pay-TV
10.01%
9.39%
10.00%
10.00%
-6.2%
8.00%
8.00%
6.00%
6.00%
4.00%
2.41%
3.06%
27.0%
2.34%
3.09%
32.1%
2.00%
2.00%
0.00%
0.00%
Q3/13
Source: LAMAC, based on IBOPE Media
Q3/14
FTA
9.10%
9.04%
Q3/13
Q3/14
Source: LAMAC, based on IBOPE Media
Exhibit 15 - Argentina – Q3 FTA vs. Pay-TV Ratings Total Population
9.05%
4.00%
Pay-TV
9.06%
Exhibit 16 - Argentina – Q3 FTA vs. Pay-TV Ratings: 18- 49 Segment, HighMiddle Income
FTA
8.50%
0.2%
Pay-TV
8.11%
9.00%
-5.7%
8.00%
8.95%
7.60%
8.95%
7.50%
8.90%
8.85%
-1.3%
8.83%
7.24%
7.00%
6.83%
-6.3%
8.80%
6.50%
8.75%
8.70%
Q3/13
Source: LAMAC, based on IBOPE Media
6.00%
Q3/14
Q3/13
Source: LAMAC, based on IBOPE Media
Q3/14
37
Exhibit 17 - Colombia – Q3 FTA vs. Pay-TV Ratings Total Population
FTA
9.00%
8.00%
7.73%
7.00%
Pay-TV
FTA
-5.8%
6.43%
Exhibit 18 - Colombia – Q3 FTA vs. Pay-TV Ratings: 18- 49 Segment, HighMiddle Income
6.60%
7.28%
-6.1%
6.04%
6.42%
6.40%
6.30%
5.00%
6.27%
6.20%
4.00%
6.10%
3.00%
6.00%
5.92%
-1.4%
5.90%
2.00%
5.80%
1.00%
5.70%
0.00%
5.60%
Q3/13
Source: LAMAC, based on IBOPE Media
Q3/14
Q3/13
Q3/14
Source: LAMAC, based on IBOPE Media
Exhibit 19 - Chile – Q3 FTA vs. Pay-TV Ratings Total Population
FTA
10.87%
Exhibit 20 - Chile – Q3 FTA vs. Pay-TV Ratings: 18- 49 Segment, High-Middle
Income
Pay-TV
-5.0%
9.00%
10.33%
10.00%
FTA
8.55%
Pay-TV
8.08%
8.00%
-5.5%
7.00%
8.00%
6.00%
6.00%
-5.6%
6.50%
6.00%
12.00%
Pay-TV
6.51%
5.01%
18.2%
5.92%
5.07%
9.1%
5.53%
5.00%
4.00%
4.00%
3.00%
2.00%
2.00%
1.00%
0.00%
Q3/13
Source: LAMAC, based on IBOPE Media
0.00%
Q3/14
Q3/13
Q3/14
Source: LAMAC, based on IBOPE Media
ScotiaView Analyst Link
38
Company Comment
Thursday, October 9, 2014, After Close
(PSG-T C$18.17)
(PSG-N US$16.30)
Performance Sports Group Ltd.
Q1/F15 First Glance: In-Line Quarter
George Doumet - (514) 350-7788
(Scotia Capital Inc. - Canada)
george.doumet@scotiabank.com
Rating: Sector Outperform
Risk Ranking: High
Reinis Krams - (514) 287-4554
(Scotia Capital Inc. - Canada)
reinis.krams@scotiabank.com
Target 1-Yr:
C$19.00
ROR 1-Yr:
4.6%
Valuation: 10.0 x EV/EBITDA on F2016E
Key Risks to Target: Acquisition and Integration; high debt levels; shifting consumer preferences
Div. (NTM)
Div. (Curr.)
C$0.00
C$0.00
Yield (Curr.)
0.0%
Event
■ PSG reported Q1/F15 Adjusted EBITDA of $39.9M vs. our estimate of
$40.9M and consensus of $40.8M. Adjusted EPS came in at $0.51 vs.
our estimate of $0.49 and consensus of $0.51.
Implications
■ Revenues came in largely in line at $197.1M (vs. our estimate of $187.4
and consensus of $186.7M). Revenues were up 28%; excluding
EASTON and forex, organic growth for the quarter was 10.5%. Hockey
revenues were up 8% (11% constant currency), led largely by a 22%
increase in sticks (lower margin), 41% growth in apparel, and 9%
growth in helmets. Lacrosse revenues increased by 7%.
■ Limited incremental information was provided on the Easton
acquisition. PSG reiterated $2M of synergies and stated that "the
integration continues to progress as planned."
■ PSG announced a profitability enhancement initiative targeting
improvements of $30M to its annual pre-tax profits over the next five years.
An estimated 2/3 is expected from cost reductions and the rest from
improved efficiencies, such as inventory management. The company also
hired Paul Gibson to the new role of Chief Supply Chain Officer.
Recommendation
■ We expect the focus of the conference call (@10AM ET at 888-5047963) to be around the Easton acquisition and reacceleration of growth at
the legacy business. We will review our estimates, price target and rating
following the call.
Qtly Adj EBITDA (M)
2013A
2014A
2015E
2016E
Q1
Q2
Q3
Q4
Year
$37.9 A
$36.9 A
$40.9
$44.0
$14.2 A
$13.9 A
$20.6
$21.5
$-3.8 A
$-3.0 A
$14.1
$15.3
$14.0 A
$21.3 A
$30.1
$31.7
$62.4
$69.1
$105.6
$112.5
EV /
EBITDA
11.7x
25.4x
10.3x
9.3x
2012A
$0.94
$0.77
8.4x
$375
$51
$52
$0.46
2013A
$0.71
$0.93
15.1x
$400
$48
$62
$0.22
2014A
$0.54
$1.00
25.5x
$446
$41
$69
$0.15
2015E
$1.15
$1.15
14.2x
$626
$106
$106
$1.03
2016E
$1.30
$1.30
12.5x
$654
$112
$112
$1.06
(FY-May.)
Earnings/Share
Adj Earnings/Share
Price/Earnings
Revenues (M)
EBITDA (M)
Adjusted EBITDA (M)
Free Cash Flow/Share
BVPS15E: $8.74
ROE15E: 16.37%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
C$830
$388
C$1,261
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
46
42
39
Company Comment
Friday, October 10, 2014, Pre-Market
(SVC-T C$2.64)
Sandvine Corporation
Q3/14: IBM Becomes a Significant Customer
Daniel Chan, MBA - (416) 863-7552
(Scotia Capital Inc. - Canada)
daniel.chan@scotiabank.com
Rating: Sector Outperform
Risk Ranking: Speculative
John MaGee - (416) 863-7237
(Scotia Capital Inc. - Canada)
john.magee@scotiabank.com
Target 1-Yr:
C$4.80
ROR 1-Yr:
81.8%
Div. (NTM)
Div. (Curr.)
C$0.00
C$0.00
Yield (Curr.)
Valuation: 19x FY15 P/E
Key Risks to Target: Revenue outlook highly uncertain
0.0%
Event
■ Sandvine reported Q3 results.
Implications
■ No surprises in the quarter. Revenue of $27.9M and EPS of $0.02 is
in line with expectations following the revenue warning last month.
Gross margin came in significantly better due to revenue mix and the
company ended the quarter with $151M in cash.
■ Valuation is low. Sandvine continues to trade at a discount to peers and
historical multiples. SVC trades at a NTM P/E of 11.4x despite growing
EPS by 73% this YTD. Moreover, with C$1.11 in cash per share, 42%
of the share price is in cash.
■ IBM becomes a significant customer. IBM's sales of Sandvine
products have increased significantly over the last year. IBM now
generates over 10% of Sandvine's sales. We also believe Sandvine's
technology can integrate with some of IBM's solutions. Given
Sandvine's low valuation, high cash balance, and synergies with IBM,
we believe IBM could be a potential acquirer of Sandvine.
Recommendation
■ Maintain Sector Outperform. Despite the hiccup this quarter, we
believe Sandvine will continue to display strong customer traction and
improving operating leverage. We believe the recent pullback presents a
good buying opportunity.
Qtly EPS (FD)
2012A
2013A
2014E
2015E
Q1
$-0.01 A
$0.02 A
$0.05 A
$0.05
(FY-Nov.)
Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q2
$-0.03 A
$0.01 A
$0.03 A
$0.04
Q3
$0.00 A
$0.04 A
$0.02 A
$0.06
Q4
$0.05 A
$0.04 A
$0.06
$0.08
Year
$0.01
$0.10
$0.16
$0.23
P/E
n.m.
24.1x
14.7x
10.2x
2011A
$-0.02
$0.01
n.m.
n.m.
$89
$4
5.9x
n.m.
2012A
$0.01
$0.01
n.m.
n.m.
$88
$7
5.9x
n.m.
2013A
$0.10
$0.13
24.1x
0.8x
$107
$27
4.7x
50.5x
2014E
$0.16
$0.19
14.7x
0.6x
$126
$37
6.4x
141.5x
2015E
$0.23
$0.26
10.2x
0.4x
$156
$48
8.0x
269.1x
BVPS14E: $1.15
ROE14E: 15.77%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
C$397
$-151
C$229
150
150
40
Recommendation: Buy the Pullback
■ Remain Sector Outperform. Sandvine’s Q3 results were far from stellar, but we believe the
fundamental story is still intact. We believe Sandvine will be able to continue to exhibit
strong growth and that investors should buy the shares for 3 main reasons:
1. Despite the Q3 blip, fundamentals are still strong. YTD, Sandvine’s revenue has
grown 18%, whereas EPS has grown 73%. The company’s ability to grow revenue
while keeping expenses flat have helped generate significant margin expansion.
2. Valuation is cheap. SVC is trading at only 11.4x forward EPS, putting it at a
significant discount to its peers and historical average. We believe this multiple is
unjustified, despite the macro backdrop, given EPS has grown 73% and we expect it
to grow another 39% next year.
3. Cheap valuation, high cash balance, and increasing business from IBM sets up
Sandvine for a potential transaction. In addition to the cheap valuation, Sandvine
maintains $151M in cash, or approximately 42% of its share price in cash. This
implies the company has an EV of C$230M and is trading at a trailing EV/S multiple
of 1.7x. Over the last year other transactions in the space have gone for approximately
4.0x trailing EV/S. IBM now contributes more than 10% of Sandvine’s revenue. The
fact that IBM is able to sell a growing amount of Sandvine’s products alongside its
own implies there are synergies. Moreover, we believe Sandvine’s technology
complements IBM’s technologies in analytics/big data. We believe a takeout by IBM
would make sense.
IBM Becomes a 10% Customer, Sets up IBM to be a Suitable Acquirer
■ Quarter comes in as expected after the revenue warning in September. Exhibit 1
highlights the results for the quarter. Sales and EPS came in line with the revised
expectations after the quarterly update in September. The weaker than expected revenue
growth comes from a couple of orders that were delayed in the quarter; however, one of the
orders, that likely made up the majority of the revenue miss, already closed as reported in a
recent press release. The other deal is expected to close in December or January. The
company also displaced a competitor at another tier 1 cable operator. Displacing an existing
installation is very challenging and is a testament to Sandvine’s competitiveness in the space.
The company is now installed in 8 of the top 10 and 5 of the top 6 cable operators in North
America. Book to bill was greater than 1.
Exhibit 1 - Q3 Results
US$ (000)
Revenue
Products
Cable
DSL
Wireless /Mobile /FTTx
Services
Total Revenue
Gross Margin (%)
EBITDA
EBITDA Margin (%)
EBIT
EBIT Margin (%)
EPS ($)
Q3 14A
Scotia
Q3 14E
B/ (W) %
Q3 13A
B/ (W) %
Q2 14A
B/ (W) %
Facstet
Q3 14E
15,911
2,387
5,569
7,796
11,986
27,897
17,698
5,419
6,826
5,452
10,104
27,802
(10.1%)
(56.0%)
(18.4%)
43.0%
18.6%
0.3%
17,838
5,173
5,708
6,957
9,345
27,183
(10.8%)
(53.9%)
(2.4%)
12.1%
28.3%
2.6%
19,820
5,530
6,501
7,789
9,906
29,726
(19.7%)
(56.8%)
(14.3%)
0.1%
21.0%
(6.2%)
27,900
78.7%
8,444
30.3%
7,080
25.4%
$0.02
76.5%
4,951
17.8%
3,590
12.9%
$0.02
Source: Company reports; Scotiabank GBM estimates.
70.5%
97.2%
12.8%
76.5%
6,692
24.6%
5,255
19.3%
$0.04
26.2%
34.7%
(40.9)%
76.4%
6,438
21.7%
5,068
17.0%
$0.03
31.2%
39.7%
(30.2)%
$0.02
41
12.0%
10.0%
8.0%
6.0%
4.0%
% of Revenue
Revenue (USD Ks)
■ Gross margin strong from a higher proportion of software revenue. The delayed product
revenues helped gross margin increase in the quarter to 79% as a result of a higher proportion
of software sales as well as improved service margins. Opex was lower than usual due to the
recognition of $3.2M in investment tax credits (ITCs). Excluding the effects of the ITC and
non-repayable governement funding, opex was $18.3M, slightly higher than last year due to
some product development costs. The company continues to believe that it can maintain
similar opex levels in FY14 to FY13.
■ IBM is now a significant customer. Revenue from IBM represented 10.4% of FQ3 sales.
IBM revenue has been increasing steadily since the end of FY13 after Sandvine’s products
became fully productized with IBM. Revenue from this channel is expected to continue
growing. Sandvine can work more synergistically with IBM than it can with some of its other
distributors. Part of Sandvine’s value proposition is allowing service providers to delay capex
spend; this does not work well for equipment manufacturers that also distribute Sandvine
products, such as Alcatel Lucent and Juniper. This “co-opetition” relationship obviously has
its limits, whereas a relationship with IBM is far more beneficial to both parties.
■ As IBM becomes a larger customer, its prospects as
an acquirer increase. The fact that revenue through Exhibit 2 - Sales through IBM Have Been Growing
IBM is increasing implies there are synergies in selling
3,000
both Sandvine and IBM solutions together. As
discussed above, we believe IBM’s role as a reseller
2,500
will increase over time; however, beyond a simple
distribution partnership, we believe Sandvine’s DPI
2,000
technology fits well with IBM’s analytics/big data
endeavours. Sandvine is now looking for ways for its
technology to feed some of IBM’s technology. As this
1,500
integration gets tighter and IBM is able to understand
how it can monetise Sandvine’s technology as a part
1,000
of IBM’s systems, it becomes more compelling for
IBM to acquire Sandvine. With the recent share price
500
declines and with cash at 42% of the market cap, we
believe IBM could acquire Sandvine for a relatively
0
inexpensive price. Sandvine’s current enterprise value
3Q13
4Q13
1Q14
2Q14
3Q14
is only C$230M, implying a trailing EV/S of 1.7x.
IBM Revenue
IBM Revenue Contribution (%)
■ Cash increases to $150.6M. Share repurchase plan
approved. Sandvine’s cash balance increased by $6M Source: Company reports; Scotiabank GBM estimates.
in the quarter to $151M, or $1.00 per share. The
company’s share repurchase program to buy back 9%
of shares outstanding has been approved and it will be executed through an automatic share
purchase program beginning October 14. Management expects to use the excess cash
primarily for share buybacks and M&A, though we believe a large cash balance makes it an
attractive acquisition target.
2.0%
0.0%
Exhibit 3 - Changes to Our Model
US$ (000)
Total Sales
Gross Margin (%)
OPEX $
OPEX (%)
EBITDA
EBITDA (%)
EPS ($)
Cash per share ($)
New
37,176
76.5%
16,364
44.0%
12,075
32.5%
$0.06
$1.04
Source: Company reports; Scotiabank GBM estimates.
Q4/14E
Old
37,195
76.4%
16,366
44.0%
12,047
32.4%
$0.06
$1.00
Delta
-0.1%
0.0%
0.2%
0.0%
4.4%
New
126,346
77.5%
61,257
48.5%
36,684
29.0%
$0.16
$1.04
FY2014E
Old
126,270
77.0%
64,064
50.7%
33,163
26.3%
$0.16
$1.00
Delta
0.1%
-4.4%
10.6%
1.6%
4.4%
New
155,924
76.0%
70,177
45.0%
48,325
31.0%
$0.23
$1.21
FY2015E
Old
155,884
76.0%
69,867
44.8%
48,605
31.2%
$0.23
$1.15
F
Delta
0.0%
0.4%
-0.6%
0.0%
5.2%
42
Exhibit 4 - Valuation Table
Expecting a Return to Normal Seasonality in Q4
■ Catch-up from delayed Q3 orders is not expected.
Though one delayed order has already closed and the other is US$ (M) except per share
expected to close before January, management does not Current Price (SVC in CAD)
expect sales in Q4 will make up for lost revenue in Q3. Market Cap (SVC in CAD)
Resources allocated to closing those delayed deals would Sales (LTM)
(LTM)
normally have been used to originate other deals; therefore EBITDA
EBITDA%
we don’t expect an outsized Q4 will offset the Q3 weakness. Net Income (LTM)
2H is typically stronger than 1H and we expect that trend to ROS
continue this year. Q4 revenue would have to grow by 8%
YOY to make 2H/F14 flat to 1H/F14, but with 1H revenue EPS
growing 26%, we believe Q4 revenue will show strong NTM-E
growth to maintain typical 2H over 1H seasonality.
2014E
■ Some sales and marketing spend may need to increase in 2015E
FY15. Although the company expects to maintain flat opex P/E
this year, management believes it may need to start investing P/E 2013A
in some sales and marketing in FY15. Nonetheless, it is P/E Next 12
expected that revenue growth will outpace the expense P/E 2014E
growth and continue to drive margins higher. In the first 9 P/E 2015E
months of the FY, net income has grown 84% while sales
have only grown 18%.
P/S
Valuation
■ Trades at a discount. Sandvine continues to trade at a
discount to peers despite showing strong growth and far
better profitability. Sandvine’s displacement of a competitor
is a testament to Sandvine’s competitiveness in the space.
With the recent pullback in share price, the shares now trade
at only 11.4x forward EPS. This compares to its historical
average of 25x. We realise that a lot of this may be a result
of macro trends, but it’s difficult to ignore the 73% growth
in EPS YTD. Going forward, we are estimating EPS to grow
by 39% in FY15 and adding to that, the company holds
C$1.11 per share in cash (or 42% of market cap). We think
the shares look cheap at these levels.
US$
SVC-CAN
$2.64
$397
$120
$37
30.4%
$21
17.1%
US$
ALLT-US
$10.53
$350
$102
$7
7.2%
($7)
(6.7)%
US$
PKT-US
$8.55
$177
$78
($1)
(0.9)%
($13)
(16.6)%
C$
$0.21
$0.16
$0.23
$0.40
$0.31
$0.62
$0.22
$0.01
$0.31
22.9
11.4
14.7
10.2
86.9
26.2
34.3
17.1
n.m.
39.7
977.1
27.3
P/S 2013A
P/S Next 12-E
P/S 2014E
P/S 2015E
3.1
2.4
2.8
2.3
3.5
2.9
3.0
2.6
2.3
1.9
2.1
1.8
EV/EBITDA
EV/EBITDA 2013A
EV/EBITDA Next 12-E
EV/EBITDA 2014E
EV/EBITDA 2015E
7.6
4.7
5.6
4.3
33.5
11.8
15.7
8.8
n.m.
25.9
n.m.
10.6
BVPS
P/BVPS
$1.10
2.2
$5.14
2.0
$7.06
1.2
Net cash per share
Net cash as % of share price
C$1.11
42%
$3.71
35%
$5.18
61%
Source: Company reports; Scotiabank GBM estimates; Factset (ALLT, PKT)
Exhibit 5 - Historical Average Forward P/E Multiple Is 25x
40
35
30
Price/BEst EPS
25
20
15
10
5
SVC
Source: Bloomberg.
SVC 5 year Avg
+1 STDEV
-1 STDEV
Sep-14
Jul-14
Aug-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Jul-13
Aug-13
Jun-13
Apr-13
May-13
Mar-13
Jan-13
Feb-13
0
43
Company Comment
Friday, October 10, 2014, Pre-Market
(SNC-T C$49.88)
SNC-Lavalin Group Inc.
Investor Day Highlights
Anthony Zicha - (514) 350-7748
(Scotia Capital Inc. - Canada)
anthony.zicha@scotiabank.com
Sami Abboud, MBA - (514) 350-7737
(Scotia Capital Inc. - Canada)
Vincent Perri, CPA, CA, CFA - (514) 287-4990
(Scotia Capital Inc. - Canada)
Rating: Sector Outperform
Target 1-Yr:
C$71.00 ROR 1-Yr:
44.3%
Risk Ranking: Medium
Valuation: 15x P/E 2015E + 407 ETR: $14.00 NPV + AltaLink: ($19.50-$13.80) + $3.50 Excess Cash +$6.50 Other Concessions
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.96
$0.92
1.8%
Key Risks to Target: Lower commodity prices; country specific risk.
Event
■ SNC-Lavalin hosted an investor day on Oct. 9, 2014, in Toronto,
showcasing its management team and different operating segments. The
event was well attended with each team presenting their segment's
prospects and outlook.
Implications
■ Key takeaways include: 1) a solid management team with depth of
knowledge and experience, 2) Kentz acquisition provides opportunity to
lever expertise across all SNC divisions, 3) sale of mature concessions
expected to continue, 4) no fundamental risk change to their settlement
position with the government, and 5) expectation of continued bolt-on
acquisitions.
■ The presentations delivered a clear roadmap (by segment) on how SNC
could achieve its goal to deliver earnings growth, improve return on
invested capital, and maximize shareholder value. However, we believe
investors were disappointed that no announcement or update was made
relating to SNC's potential H407 sale.
Recommendation
■ We are buyers of SNC-Lavalin shares. Supported by the Kentz
acquisition, we believe SNC-Lavalin should deliver solid core
engineering profitability.
Qtly Adj. EPS (FD)
2012A
2013A
2014E
2015E
Q1
$0.27 A
$0.45 A
$-0.03 A
$0.38
(FY-Dec.)
Adj EPS
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
Tot. Debt/(Tot.Dbt+Eq.)
Q2
$0.01 A
$0.22 A
$-0.14 A
$0.52
Q3
$0.55 A
$0.21 A
$0.25
$0.93
Q4
$0.15 A
$-0.17 A
$0.36
$0.92
Year
$0.98
$0.71
$0.45
$2.75
P/E
40.9x
67.6x
n.m.
18.1x
2011A
$1.63
$3.78
31.4x
2.2x
$7,210
$736
1.0x
0.54x
2012A
$0.98
$3.93
40.9x
2.2x
$8,091
$660
1.0x
0.58x
2013A
$0.71
$1.33
67.6x
2.2x
$7,913
$763
0.9x
0.67x
2014E
$0.45
$5.61
n.m.
n.m.
$8,023
$639
1.2x
0.65x
2015E
$2.75
$5.62
18.1x
0.7x
$10,649
$845
1.2x
0.62x
BVPS14E: $15.52
ROE14E: 3.11%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
$7,608
$-760
$10,662
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
153
152
44
Investor Day Highlights
■ SNC-Lavalin hosted an investor day on Oct. 9, 2014, in Toronto, showcasing its management
team and different operating segments. The event was well attended with each team
presenting their segment’s prospects and outlook.
■ We believe SNC’s current management team brings to the table depth of knowledge and
experience required to successfully minimize risk, deliver earnings growth, improve return
on invested capital, and maximize shareholder value. We note management is targeting:
o Return On Invested Capital (ROIC) of ~17% (7.5% 2014 forecast; 2.8% at
2013).
o Dividend Policy: Yield of ~2%; payout ratio of ~20% to 30%.
o Debt to EBITDA less than 3.25x.
o Debt to Equity less than 30%.
■ We believe SNC could pursue bolt-on acquisitions within the next six to nine months.
Potential targets include companies with at least 500 employees and within the offshore oil
and gas sector.
o We believe several targets have already been identified and we estimate
potential costs of $50 million per target of 500 employees. Our estimate assumes
a transaction multiple of 8.0x EV/EBITDA and EBITDA margins of 12%.
■ We believe the Kentz acquisition provides opportunities to: 1) leverage SNC-Lavalin’s
capabilities through continued engineering expansion and enhanced regional growth in
Canada, the Middle East, and Latin America; and 2) combining engineering services and
construction capabilities to offer a fully integrated solution at all stages (capex and opex) of
the asset life cycle.
■ Management indicated that there was no fundamental risk change to their settlement position
with the government. Recently, a positive event that could support an improved settlement
outcome for SNC-Lavalin is the acquisition of Dessau assets by Stantec.
■ We believe upcoming catalysts include the continued sale of mature concessions, including
the monetization of the H407. We believe the next concession that could be sold is the Malta
Airport.
■ Management reiterated their five-year vision (see Exhibit 1), which was introduced at the
company’s Annual General Meeting in 2013:
Exhibit 1 - SNC-Lavalin Five-Year Vision
Source: Company reports.
45
Market Direction and Drivers
Exhibit 2 – Oil and Gas Market Direction
■ Management teams identified the following key opportunities within their industry
markets:
o Oil & Gas (Christian Brown, President, Oil & Gas):
 Macro Drivers (see Exhibit 2): Both oil and gas production
will need to increase to meet demand.
 LNG capacity expected to double by 2020, providing both
capex and opex opportunities for SNC-Lavalin.
 Shale gas developments require over $300 million spend in
North America alone over the next 20 years.
 Refining & chemical spending has slowed; however, annual
spend remains over $500 billion.
 Offshore oil leads the majority of upstream spend for
conventional oil.
o Mining & Metallurgy (Dale Clarke, Executive Vice-President,
Mining & Metallurgy):
Source: Company reports.
 Stable demand growth for fertilizer; however, P- and Nbased fertilizer segments are healthier than K-based
fertilizer.
Exhibit 3 – Mining & Metallurgy Market Direction
 Supply deficits along with positive price movements in Zinc
provide opportunities.
 Prospect pipeline includes:
 Intercontinental Potash – Ochoa, USA
 Grupo Mexico – Empalme SAP, Mexico
 Samarco – Iron Ore Beneficiation, Brazil
 Barrick Gold – Zaldivar SAP Chile
 KGHM – Sierra Gorda Expansion, Chile
 Alacer Gold – Copler Expansion, Turkey
 Saudi Aramco – Sulphur Railcar Loading, KSA
 Dubal – PL 1-3 Energy Optimization, UAE
 Ma’aden – Phosphate Plant, Saudi Arabia
 GLOBEX – ZUARI Fertilizer Project, UAE
Source: Company reports.
 Borg Al-Arab – Black Carbon Plant, Egypt
 Freeport McMoRan – PM/CM for Smelter, Indonesia
o Environment & Water (Gordon Johnson, Managing Director, Exhibit 4 – Environment & Water Market Direction
Environment & Water):
 Tight oil and gas exploration and production provides
increased opportunities for water resources and geosciences
work. Kentz acquisition provides new potential targets for
SNC-Lavalin
 Permitting and stakeholder consultation requirements are
driving increased demands for environmental consulting
services.
 Water resources are a critical component of resource
development projects
o Power (Sandy Taylor, President, Power) :
 Ageing infrastructure, congestion, new loads, new supply,
and export and smart grid provide opportunities for
investment in transmission and distribution systems.
Source: Company reports.
46






Stricter regulations and replacement of coal by gas Exhibit 5 – Power Market Direction
are leading to new builds within the thermal power
industry.
Increased demand for wind, solar, and biothermal
energy.
Key nuclear power project opportunities:
 Bruce Power Unit 4 Main Component
Replacement, Canada
 AECL Restructuring, Canada
 Darlington Nuclear Generating Station
Balance of Plant Rehabilitation Program,
Canada
 CANMOX Project, United Kingdom
 Cernavoda Units 3 & 4, Romania
Source: Company reports.
 Atucha 3, Argentina
 Advanced Fuel CANDU Reactor, China
Key hydro power project opportunities:
 Site C Clean Energy Project, Canada
 New Brunswick Power Mactaquac Rehabilitation, Canada
 Elko Expansion Project, Canada
 Santa Maria Hydro Project, Panama
 Master Services Agreements, Latin America
 Perak Small Hydro, Malaysia
 Nengirri Hydroelectric Project, Malaysia
 Upper Pedas Hydroelectric Project, Malaysia
 Bistrica Pumped Storage, Serbia
Key thermal power project opportunities:
 Keys Energy Center 735 MW Combined Cycle Project,
Maryland, USA
 FGE Texas I and Texas II Projects (each 750 MW)
Combined Cycle, Texas, USA
 Sunbury Repower Project Repower
Coal Plant with 550 MW Combined Exhibit 6 – Infrastructure Market Direction
Cycle), Pennsylvania, USA
 Astoria 500 MW Fast Start Combined
Cycle Power Project, New York, USA
 Arecibo Waste-to-Energy Project 80
MW,
2100
ton/day
Resource
Recovery Plant, Puerto Rico
 Transgas Project 150 MW Combined
Cycle Power Plant, Dominican
Republic
 Zeran Project 450 MW Combined
Cycle Power Plant, Poland
Key
transmission
and
distribution
opportunities:
 AESO Fort McMurray West Project
(P3)
 TWE HVDC
Source: Company reports.
47
o
Infrastructure (Hisham Mahmoud, President, Infrastructure):
 Continued migration toward alternative financing and private sector
participation resulting in increased infrastructure concession (ICI)
investment opportunities
 Global demand for new infrastructure, rehabilitation of aging
infrastructure and sustainable infrastructure
 Greater outsourcing of services and move to P3 concession model in
various markets
 ICI prospects:
 407 East Phase 2
 Community Mail Boxes – Canada Post
 District Cooling
 Edmonton Valley LRT
 Eglinton Crosstown LRT
 Integrated Real-Estate Services for PWGSC and Bell Canada
 New Bridge St. Lawrence (Replacement of Champlain
Bridge)
 Regina Bypass
 Turcot Interchange
 White Rose Extension
ScotiaView Analyst Link
Equity Event
Wednesday, September 10, 2014
Equity Event: Telecom and Transportation
Conferences
Insert graphic here
49
Equity Event
XXX, XXX XX, XXXX
Equity Event: Transportation & Aerospace 2014
Insert graphic here
50
Equity Event
XXX, XXX XX, XXXX
xx
z
Insert graphic here
51
Equity Event
XXX, XXX XX, XXXX
Xs 2
Equity Event: Mining Conference 2014
Insert graphic here
52
Disclosures and Disclaimers
Friday, October 10, 2014
Appendix A: Important Disclosures
Company
Arcan Resources Ltd.
Cencosud, SA
Controladora Comercial Mexicana, SAB de CV
Encana Corporation
FEMSA, SAB de CV
Fortuna Silver Mines Inc.
Grupo Comercial Chedraui, SAB de CV
Grupo Televisa, SAB
Organización Soriana, SAB de CV
Ripley Corp SA
SACI Falabella
Sandvine Corporation
SNC-Lavalin Group Inc.
Wal-Mart de México y Centroamerica, SAB de CV
Ticker
ARN
CENCOSUD
COMERCI
UBC
ECA
FMX
FSM
CHDRAUI B
TV
SORIANA B
RIPLEY
FALAB
SVC
SNC
WALMEX V
Disclosures (see legend below)*
I, U
M13
M13, S
S, U
M13, T, VS62
P, T, VS22
M13, T
M12, M4, T
M13, T
M13
M13
T
I, T
M13, T
Each Research Analyst named in this report or any subsection of this report certifies that (1) the views expressed in this report in connection
with securities or issuers that he or she analyzes accurately reflect his or her personal views; and (2) no part of his or her compensation was, is,
or will be directly or indirectly, related to the specific recommendations or views expressed by him or her in this report.
This research report was prepared by employees of Scotia Capital Inc. and/or its affiliates who have the title of Analyst.
All pricing of securities in reports is based on the closing price of the securities’ principal marketplace on the night before the publication date,
unless otherwise explicitly stated.
All Equity Research Analysts report to the Head of Equity Research. The Head of Equity Research reports to the Managing Director, Head of
Institutional Equity Sales, Trading and Research, who is not and does not report to the Head of the Investment Banking Depart ment.
Scotiabank, Global Banking and Markets has policies that are reasonably designed to prevent or control the sharing of material non-public
information across internal information barriers, such as between Investment Banking and Research.
The compensation of the research analyst who prepared this report is based on several factors, including but not limited to, the overall
profitability of Scotiabank, Global Banking and Markets and the revenues generated from its various departments, including investment banking.
Furthermore, the research analyst’s compensation is charged as an expense to various Scotiabank, Global Banking and Markets departments,
including investment banking. Research Analysts may not receive compensation from the companies they cover.
Non-U.S. analysts may not be associated persons of Scotia Capital (USA) Inc. and therefore may not be subject to FINRA Rule 2711
restrictions on communications with subject company, public appearances and trading securities held by the analysts.
For Scotiabank, Global Banking and Markets Research analyst standards and disclosure policies, please visit
http://www.gbm.scotiabank.com/disclosures
Scotiabank, Global Banking and Markets Research, 40 King Street West, 33rd Floor, Toronto, Ontario, M5H 1H1.
*
Legend
I
Scotia Capital (USA) Inc. or its affiliates has received compensation for investment banking services in the past 12 months.
M12
Ivan Hernandez, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A.,
which forms a part of Grupo Financiero Scotiabank Inverlat.
M13
Karla Pena, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A., which
forms a part of Grupo Financiero Scotiabank Inverlat.
M4
Andres Coello, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A., which
forms a part of Grupo Financiero Scotiabank Inverlat.
53
Disclosures and Disclaimers
Friday, October 10, 2014
P
This issuer paid a portion of the travel-related expenses incurred by the Fundamental Research Analyst/Associate to visit material
operations of this issuer.
S
Scotia Capital Inc. and its affiliates collectively beneficially own in excess of 1% of one or more classes of the issued and
outstanding equity securities of this issuer.
T
The Fundamental Research Analyst/Associate has visited material operations of this issuer.
U
Within the last 12 months, Scotia Capital Inc. and/or its affiliates have undertaken an underwriting liability with respect to equity or
debt securities of, or have provided advice for a fee with respect to, this issuer.
VS22
Our Research Analyst visited San Jose mine, an operating mine, on September 10, 2013. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS62
Our Research Associate visited several OXXO locations, convenience stores, on November 2012. No payment was received from
the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
54
Disclosures and Disclaimers
Friday, October 10, 2014
Definition of Scotiabank, Global Banking and Markets Equity Research Ratings & Risk Rankings
We have a four-tiered rating system, with ratings of Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform. Each analyst assigns a rating
that is relative to his or her coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst.
Our risk ranking system provides transparency as to the underlying financial and operational risk of each stock covered. Stat istical and judgmental factors
considered are: historical financial results, share price volatility, liquidity of the shares, credit ratings, analyst forecasts, consistency and predictability of
earnings, EPS growth, dividends, cash flow from operations, and strength of balance sheet. The Director of Research and the Supervisory Analyst jointly
make the final determination of all risk rankings.
The rating assigned to each security covered in this report is based on the Scotiabank, Global Banking and Markets research a nalyst’s
12-month view on the security. Analysts may sometimes express to traders, salespeople and certain clients their shorter-term views on these securities that
differ from their 12-month view due to several factors, including but not limited to the inherent volatility of the marketplace.
Ratings
Risk Rankings
Focus Stock (FS)
The stock represents an analyst’s best idea(s); stocks in this category are
expected to significantly outperform the average 12-month total return of the
analyst’s coverage universe or an index identified by the analyst that includes,
but is not limited to, stocks covered by the analyst.
Low
Low financial and operational risk, high predictability of financial results,
low stock volatility.
Sector Outperform (SO)
The stock is expected to outperform the average 12-month total return of the
analyst’s coverage universe or an index identified by the analyst that includes,
but is not limited to, stocks covered by the analyst.
Sector Perform (SP)
The stock is expected to perform approximately in line with the average 12month total return of the analyst’s coverage universe or an index identified by
the analyst that includes, but is not limited to, stocks covered by the analyst.
Sector Underperform (SU)
The stock is expected to underperform the average 12-month total return of the
analyst’s coverage universe or an index identified by the analyst that includes,
but is not limited to, stocks covered by the analyst.
Medium
Moderate financial and operational risk, moderate predictability of financial
results, moderate stock volatility.
High
High financial and/or operational risk, low predictability of financial results,
high stock volatility.
Speculative
Exceptionally high financial and/or operational risk, exceptionally low predictability
of financial results, exceptionally high stock volatility. For risk-tolerant investors
only.
Other Ratings
Tender – Investors are guided to tender to the terms of the takeover offer.
Under Review – The rating has been temporarily placed under review, until
sufficient information has been received and assessed by the analyst.
Scotiabank, Global Banking and Markets Equity Research Ratings Distribution*
Distribution by Ratings and Equity and Equity-Related Financings*
Percentage of companies covered by Scotiabank, Global Banking
and Markets Equity Research within each rating category.
Percentage of companies within each rating category for which
Scotiabank, Global Banking and Markets has undertaken an
underwriting liability or has provided advice for a fee within the last
12 months.
Source: Scotiabank GBM.
For the purposes of the ratings distribution disclosure FINRA requires members who use a ratings system with terms different than “buy,” “hold/neutra l” and
“sell,” to equate their own ratings into these categories. Our Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform ratings are based
on the criteria above, but for this purpose could be equated to strong buy, buy, neutral and sell ratings, respectively.
55
Disclosures and Disclaimers
Friday, October 10, 2014
General Disclosures
This report has been prepared by analysts who are employed by the Research Department of Scotiabank, Global Banking and Marke ts. Scotiabank,
together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of
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jurisdictions where the research reports are produced.
Scotia Capital Inc. or an affiliate thereof owns or controls an equity interest in TMX Group Limited and in excess of 1% of the issued and outstanding
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Capital Inc. may be considered to have an economic interest in TMX Group Limited.
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transactions by a U.S. investor of securities mentioned in this report must be effected through Scotia Capital (USA) Inc.
Non-U.S. investors wishing to effect a transaction in the securities discussed in this report should contact a Scotiabank, Global Banking and Markets
entity in their local jurisdiction unless governing law permits otherwise.