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1
Investment Views
Wednesday, November 12, 2014
Click to view full story

Click to view synopsis

Pertinent Revision Summary
3

Edge at a Glance
5

Industry Comments
LatAm Retail
October SSS: Macro Not Yet
Supportive of Consumption
Railroads
Rails Monthly - November 2014
Rodrigo Echagaray
17
 
Turan Quettawala
21
 
Mario Saric
23
 
Anthony Zicha
25
 
Trevor Turnbull
26
 
Q3/14 Initial Glance: Roughly in Line
Mario Saric
31
 
A Bit More Positive View as
Development Pipeline Begins to Take
Form
Pammi Bir
33
 
Q1/15 Preview - Inclusion of Family
Channel and New Production Deals
Paul Steep
38
 
Q3 In Line; New President & CEO
Appointed
Pammi Bir
41
 
SJ Expansion Sounds Like a Go
Craig Johnston
50
 
Q2/F15 Results Miss: First Take
Anthony Zicha
53
 
Q3/14 Results - On the Right Track
Anthony Zicha
54
 
Q3/14 Results In Line; Positive Infill
Assays from Siou Bode Well for
Upcoming Reserve Update
Ovais Habib
60
 
Christine Healy
66
 
Orest Wowkodaw
70
 
Matthew Akman
78
 
Company Comments
Canada
Allied Properties REIT
AP.UN-T
Armtec Infrastructure Inc.
ARF-T
AuRico Gold Inc.
AUQ-N, AUQ-T
CAP REIT
CAR.UN-T
Choice Properties REIT
CHP.UN-T
DHX Media Ltd.
DHX.B-T
Dream Industrial REIT
DIR.UN-T
Fortuna Silver Mines Inc.
FSM-N, FVI-T
GLV Inc.
GLV.A-T
RONA Inc.
RON-T
SEMAFO Inc.
SMF-T
SunOpta Inc.
STKL-Q, SOY-T
Thompson Creek Metals Company
Inc.
TCM-T, TC-N
TransAlta Corporation
TA-T, TAC-N
Q3 Glance: Solid Q; Some Progress at
250 Front
Q3/14 Results Miss
Taking Interest in Lynn Lake, MB, Gold
Project
Q3/14 Results Miss - First Take
Q3/14 Results Above Forecast Due to
Lower Depreciation/Tax; Mt. Milligan
Struggles Continue
Shining Light on Sundance
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by
non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S.
2
Investment Views
Wednesday, November 12, 2014
Vicwest Inc.
Vicwest Sold to Kingspan and Ag
Growth
Anthony Zicha
82
 
Mark Neville
84
 
Patrick Bryden
87
 
Orest Wowkodaw
70
 
Pammi Bir
83
 
Benoit Laprade
42
 
Andres Coello
45
 
Craig Johnston
50
 
Rodrigo Echagaray
58
 
Andres Coello
68
 
Equity Event: Telecom & Cable 2015
91

Equity Event: Transportation & Aerospace 2014
92

Equity Event: Canadian Energy Infrastructure Conference
93

Equity Event: Mining Conference 2014
94

VIC-T
WSP Global Inc.
WSP-T
Zargon Oil & Gas
ZAR-T
Q3 Beat: Lots of Growth
Q3 In Line as Little Bow ASP Ramp-Up
Nears Amid Uncertain Commodity
Prices
U.S.
Thompson Creek Metals Company
Inc.
TCM-T, TC-N
WPT Industrial REIT
WIR.U-T
Q3/14 Results Above Forecast Due to
Lower Depreciation/Tax; Mt. Milligan
Struggles Continue
Q3 Peek: In Line, Strong Fundamentals
& Growth
Latin America
Empresas CMPC SA
CMPC-SN
Entel Chile
ENTEL-SN
Fortuna Silver Mines Inc.
FSM-N, FVI-T
SACI Falabella
FALAB-SN
Telefonica Brasil SA
VIV-N, VIVT4-SA
In-Line Q3/14
Investor Day: All We Saw
SJ Expansion Sounds Like a Go
Solid Q3 Report Despite Macro
Challenges in Chile
Q3: Solid Postpaid, Good EBITDA
Growth
3
Pertinent Revision Summary
Wednesday, November 12, 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
Armtec Infrastructure Inc. (SP) (ARF-T C$0.41)
Q3/14 Results Miss
New -Old --
---
---
EBITDA14E: $30
EBITDA14E: $31
---
-- --- --
FFOPU15E: $0.92
FFOPU15E: $0.93
FFOPU16E: $0.94 -FFOPU16E: $0.93 --
Valuation: 4.75x EV/EBITDA on 2015E
Key Risks to Price Target: Slower than anticipated recovery in residential and commercial construction.
Choice Properties REIT (SP) (CHP.UN-T C$10.66)
A Bit More Positive View as Development Pipeline Begins to Take Form
New -Old --
---
---
---
Valuation: 14.75x AFFO (F'16 estimate)
Key Risks to Price Target: Significant tenant concentration in Loblaw, majority unitholder
Empresas CMPC SA (SP) (CMPC-SN CLP 1440.10)
In-Line Q3/14
New -Old --
---
---
EBITDA14E: US$987 EBITDA15E: US$1,049 EBITDA16E: US$1,333
EBITDA14E: US$983 EBITDA15E: US$1,051 EBITDA16E: US$1,341
---
Valuation: 8.5x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected pulp prices and demand, FX
Fortuna Silver Mines Inc. (SP) (FSM-N US$4.42)
SJ Expansion Sounds Like a Go
New -Old --
---
$5.15
$4.95
---
---
-- --- --
Valuation: 1.30x Q3/15E NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
RONA Inc. (SP) (RON-T C$13.85)
Q3/14 Results - On the Right Track
New -Old --
---
$14.50
$13.00
Adj. EPS14E: $0.66
Adj. EPS14E: $0.71
Adj. EPS15E: $0.90
Adj. EPS15E: $0.98
Adj. EPS16E: $1.03
Adj. EPS16E: $0.00
14.0x P/E on 2016E
13.0x P/E on 2015E
Valuation: 14.0x P/E on 2016E
Key Risks to Price Target: Housing recovery stalls; identifying and integrating potential acquisitions.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates
are not registered/qualified as research analysts with FINRA in the U.S.
4
Pertinent Revision Summary
Wednesday, November 12, 2014
SACI Falabella (SO) (FALAB-SN CLP 4291.70)
Solid Q3 Report Despite Macro Challenges in Chile
New -Old --
---
---
EBITDA14E: 989
EBITDA14E: 1,030
EBITDA15E: 1,098
EBITDA15E: 1,165
EBITDA16E: 1,261
EBITDA16E: 1,340
---
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
SEMAFO Inc. (SO) (SMF-T C$3.15)
Q3/14 Results In Line; Positive Infill Assays from Siou Bode Well for Upcoming Reserve Update
New -Old --
---
---
Adj. EPS14E: US$0.08 Adj. EPS15E: US$0.22
Adj. EPS14E: US$0.09 Adj. EPS15E: US$0.26
-- --- --
Valuation: 1.20x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Thompson Creek Metals Company Inc. (SP) (TCM-T C$2.44)
Q3/14 Results Above Forecast Due to Lower Depreciation/Tax; Mt. Milligan Struggles Continue
New -Old --
---
---
Adj. EPS14E: US$0.32 Adj. EPS15E: US$-0.08 Adj. EPS16E: US$0.06
Adj. EPS14E: US$0.17 Adj. EPS15E: US$-0.14 Adj. EPS16E: US$0.00
---
Valuation: 50% of 7.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Price Target: Commodity, operating, development, balance sheet
Vicwest Inc. (T) (VIC-T C$12.66)
Vicwest Sold to Kingspan and Ag Growth
New T
Old SO
---
$12.70
$14.00
---
---
EBITDA16E: $50
EBITDA16E: $51
6.5x EV/EBITDA on our 2016E.
6.8x EV/EBITDA on our 2016E.
Valuation: 6.5x EV/EBITDA on our 2016E.
Key Risks to Price Target: Decline in grain prices; slower-than-anticipated recovery in residential and commercial construction.
WSP Global Inc. (SO) (WSP-T C$36.00)
Q3 Beat: Lots of Growth
New -Old --
---
---
EBITDA14E: $248
EBITDA14E: $250
EBITDA15E: $405
EBITDA15E: $414
EBITDA16E: $464
EBITDA16E: $458
---
Valuation: 10.0x EV/EBITDA on 2016E
Key Risks to Price Target: Integration risk; slower-than-anticipated recovery in commercial and residential construction.
Zargon Oil & Gas (SP) (ZAR-T C$5.94)
Q3 In Line as Little Bow ASP Ramp-Up Nears Amid Uncertain Commodity Prices
New -Old --
---
$7.50
$10.00
CFPS14E: $1.71
CFPS14E: $1.79
CFPS15E: $1.78
CFPS15E: $1.81
CFPS16E: $2.17 0.7x our 2P NAV plus risked upside.
CFPS16E: $2.16 0.9x our 2P NAV plus risked upside.
Valuation: 0.7x our 2P NAV plus risked upside.
Key Risks to Price Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program success
Source: Reuters; Scotiabank GBM estimates.
Table of Contents
5
Edge at a Glance
Wednesday, November 12, 2014
Edge at a Glance
LatAm Retail
October SSS: Macro Not Yet Supportive of Consumption
Rodrigo Echagaray, MBA, CFA - (416) 945-4405
(Scotia Capital Inc. - Canada)
Event
■ Mexico's Retail Association (ANTAD) reported that SSS were 2.1% higher in October
while total ANTAD sales increased 6.5% YOY.
Implications
■ Macro trends in Mexico continue to be mixed: Industrial production remains solid on the
back of encouraging manufacturing trends and healthier trends in construction activity.
However, consumer spending remains under pressure due to declining real wages and a
sharp contraction in lending.
■ Walmex continued to gain share in the self-service segment despite a sharp
underperformance from SAM's. A significant part of those share gains are explained by a
solid performance in the smaller formats (i.e., Bodega Aurrera Express). Albeit small,
October marks the fourth consecutive month in which Walmex gains share in that segment
(i.e., likely means the SAM's sales are not falling as much). See Exhibit 8.
■ Department Stores' outperformance vs. Self-service stores accelerated during October
(Exhibit 9). However, we should keep in mind that "El Buen Fin" (Mexico's Black Friday)
will take place from November 14th -17th, and that should be an important factor in
determining the performance for November across the board.
Recommendation
■ It looks like consumer confidence in Mexico is about to turn after more than a year of sharp
declines. And although we are disappointed with the pace of the recovery in Mexico, we still
believe there will be one. In that context, we continue to think of Walmex as the best to
participate in that recovery among the food retailers. Femsa remains our top consumer pick
in Mexico.
Railroads
Rails Monthly - November 2014
Turan Quettawala, MBA, CFA - (416) 863-7065
(Scotia Capital Inc. - Canada)
Event
■ We have published our Rails Monthly report: "CNR Going Strong in Q4." The full report is
available on ScotiaView.
Implications
■ Both rails have been reporting strong RTM data through week 45, with CNR and CP up
8.1% and 4.8%, respectively. Crude and Intermodal (domestic for CP) have been leading
the way for both rails, while frac sand demand continues to grow.
■ We attended Union Pacific's investor day, and provide some key takeaways for the
Canadian rails regarding the intermodal growth opportunity and prospective dividend
payout ratio levels.
Recommendation
■ CP remains our preferred Canadian rail pick. Shares are now trading at 21x 2015 P/E (1.5
points above CNR) after the 12% bounce-back post CBR related concerns in October. The
P/E premium for both Canadian rails has come in recently as, in our view, U.S. rails are
building in some potential M&A premium.
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.
6
Edge at a Glance
Wednesday, November 12, 2014
Allied Properties REIT (AP.UN-T C$36.00)
Q3 Glance: Solid Q; Some Progress at 250 Front
Mario Saric, CPA, CA, CFA - (416) 863-7824
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ Q3/14 FFOPU was $0.536 vs. $0.51 QOQ and $0.50 YOY, above our and consensus
$0.52 (range = $0.50-$0.54). Same-property (SP) NOI was +9.3% YOY (vs. +5% YOY
in Q2).
Implications
■ NOI growth drives solid results. The beat vs. us was driven by higher-than-expected
NOI; see Ex. 1. Most of the impressive SP NOI growth was rate-driven, with AP
achieving a 7% rent bump on expiring leases. Occupancy was +80bp QOQ to 91.6% (vs.
flat QOQ at 94.6% ex. upgrades), while q-end economic occupancy was 88% (-60bp
QOQ). The acquisition of 555 Richmond W reduced occupancy by 20bp, all else equal.
At QRC West, Sapient leased an additional 12,000sf (half-floor), while AP is close to
finalizing lease-up of the top two floors (~47,000sf), which would increase total leased
area to 98%. Other highlights include an inaugural credit rating (DBRS launched
yesterday at BBB low), which we believe was well telegraphed, and the strategic
acquisition of 485 King Street West (right in AP's front yard) for $8M.
■ Some progress at 250 Front Street; discussion pipeline intact QOQ at 70,000sf. Allied
leased 39,500sf QOQ (at target net rent), bringing occupancy up to 35% (total GLA =
168,000sf). With another 109,000sf to go, Allied's discussion pipeline is unchanged
QOQ at 70,000sf.
■ Avg. IFRS cap rate flat QOQ at 6.3%.
Recommendation
■ Full update post c/c on Wed, Nov. 12 at 12:00 pm ET. #1-866-530-1553.
Rating:
Risk:
Target:
1-Yr
Armtec Infrastructure Inc. (ARF-T C$0.41)
Q3/14 Results Miss
Event
■ Armtec Infrastructure Inc. reported Q3/14 EBITDA of $16.0M, below our estimate of
$17.0M and consensus of $18.0M, and below their target of $20M.
Implications
■ Backlog Increases. Backlog ended Q3/14 at $140M or 31% higher sequentially from
$107M. The increase is mainly due to the recently announced $70M Central Ontario
soundwall contract.
■ Margin Declines. Operating (EBITDA) margins declined 290 bp to 10.2%, mainly
driven by increased competition in plastic products and higher raw material costs. We
expect these challenges to continue to impact performance of the Drainage business unit.
■ Weak Outlook. We expect weakness in the Drainage Solutions business to continue.
Factors include: (1) increased competition in the corrugated steel pipe market, and (2)
rising raw material costs. On a positive note, we believe the US recovery and increased
Western Canadian forestry, residential, commercial, and infrastructure construction
activity could provide opportunities. We could expect a decrease in Western Canadian
project awards should the weak oil price environment continue.
Recommendation
■ We are neutral on Armtec shares and believe the risks outweigh potential rewards.
SO
Med
C$38.00
FFOPU14E:
$2.08
FFOPU15E:
$2.45
FFOPU16E:
$2.61
Valuation:
16.5x AFFO (F'16 estimate)
Key Risks to Target:
Toronto new supply, rising interest rates,
inability to lease 250 Front St. West
CDPU (NTM)
$1.41
CDPU (Curr.)
Yield (Curr.)
$1.41
3.9%
Anthony Zicha - (514) 350-7748
(Scotia Capital Inc. - Canada)
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
-SP
-- Speculative
--
$0.70
EBITDA14E
$30
$31
EBITDA15E
-$50
New Valuation:
-Old Valuation:
4.75x EV/EBITDA on 2015E
Key Risks to Target:
Slower than anticipated recovery in residential
and commercial construction.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
7
Edge at a Glance
Wednesday, November 12, 2014
AuRico Gold Inc. (AUQ-N US$3.57)
Taking Interest in Lynn Lake, MB, Gold Project
Trevor Turnbull, MBA, MSc - (416) 863-7427
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ AuRico announced that it has agreed to subscribe for 70.6 million shares of Carlisle
Goldfields Limited at C$0.08, representing 19.9% of the outstanding common shares of
Carlisle on a non-diluted basis.
Implications
■ Concurrently, AuRico has entered into a joint venture (JV) for Carlisle's open-pit Lynn
Lake projects in Manitoba, allowing it to acquire a 25% interest for C$5 million and a
60% interest if AuRico funds C$20 million over three years and delivers a feasibility
study.
■ Using the initial C$5 million JV consideration, we calculate a buy-in of C$13/oz based
on the in-pit ore in Carlisle's Preliminary Economic Assessment (PEA). The PEA
indicates an after-tax net present value (NPV5%) of $257 million and an IRR of 26% at
a $1,100/oz gold price.
■ Lynn Lake is an historic district and the project comprises two open-pit gold mines
located over 30 km apart. Initial capital for the 7,500 tpd mill project is $185 million
(including a $35 million contingency), yielding average annual production of 145,000 oz
of gold over a 12-year mine life at all-in sustaining costs of $644/oz.
■ Our net asset valuation (NAV3%) est. is unchanged at $4.21 per share.
Recommendation
■ We continue to rate AuRico Sector Outperform and note the shares gained significantly
more than the peer group on the news, possibly indicating that investors see this as
testament to the smooth ramp-up at Young-Davidson which allows AuRico to consider
additional investments.
Rating:
Risk:
Target:
1-Yr
CAP REIT (CAR.UN-T C$24.70)
Q3/14 Initial Glance: Roughly in Line
SO
High
US$5.50
Adj. EPS14E:
Adj. EPS15E:
Adj. EPS16E:
$-0.17
$-0.08
$-0.04
Valuation:
1.26x NAV
Key Risks to Target:
Multiple contraction, commodity prices,
technical and operational risks, and
geopolitical risks
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.02
0.4%
Mario Saric, CPA, CA, CFA - (416) 863-7824
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ Reported FFOPU was $0.42 vs. $0.43 YOY, roughly in line with our $0.425 and slightly
below $0.44 consensus (range=$0.425-$0.45). Same-property (SP) NOI was +3.7%
YOY (Q2/14= +5.4%); revenue/expenses were +2.4%/0.4% (Q2/14 = +2.8% / -1.2%).
Implications
■ Higher interest expense offsets solid top line. NOI was ~$0.01 above our forecast
(higher-than-expected revenue partially offset by higher expenses), which was more than
offset by higher-than-expected interest expense; see Exhibit 1. Tenants are paying for
hydro in 49.6% of its sub-metered suites in ONT/AB, +260bp QOQ, helping drive a
modest 70bp YOY SP NOI margin growth to 61.5% (Q2/14 was +160bp YOY).
Leverage was -40bp QOQ on debt/FV (flat on debt/cost).
■ Decent rent growth; AGIs ramp up again. Near-max SP apartment occupancy of 98.6%
(+10bp YOY) drove 1.6% & 3.4% YOY avg. monthly rent (AMR) growth on lease
renewal & turnover (Q2/14 = 1.6%/ 3.2%). AMR growth was highest in the mid-tier
portfolio (+2.8%), followed by luxury (+2.3%), and affordable (+0.9%). Outstanding
above guideline increase (AGI) applications were +11% QOQ to 15,658 suites (vs.
+1.7% QOQ avg. in 2013).
■ IFRS cap rate -7bp QOQ. The Q3/14 fee simple cap rate was 4.93%, below CAR's 5.4%
implied cap rate and our 5.45% NAV cap rate.
Recommendation
■ Full update post c/c on Wed., Nov 12th at 10:00 am. ET. #866-225-0198.
Rating:
Risk:
SP
Med
Target:
1-Yr
C$25.00
FFOPU14E:
$1.59
FFOPU15E:
$1.67
FFOPU16E:
$1.72
Valuation:
16.25x AFFO (F'16 estimate)
Key Risks to Target:
Capex requirements, excess Toronto condo
supply, CMHC restructuring
CDPU (NTM)
CDPU (Curr.)
Yield (Curr.)
$1.19
$1.18
4.8%
8
Edge at a Glance
Wednesday, November 12, 2014
Choice Properties REIT (CHP.UN-T C$10.66)
Pammi Bir, CPA, CA, CFA - (416) 863-7218
(Scotia Capital Inc. - Canada)
A Bit More Positive View as Development Pipeline Begins to Take Form
Event
■ Ex $2.4M (~$0.005/unit) of non-recurring internalization costs, Q3 FFO was $0.23 vs.
$0.22 last year, in line with our $0.23E and consensus.
Implications
■ No surprise, as operationally sound. Portfolio occupancy remains high at 97.9%, with
tenant retention at a solid 85%, and moderate 3.6% leasing spreads. Though the strong
operating metrics will likely limit near-term SP NOI gains, management's focus on
leasing up the 82.6% occupied ancillary space provides a means to improve organic
growth.
■ As development pipeline takes form, we're a little more enthused. Developments are
ramping up with $260M (>7% targeted yields) of planned investments across 860K sf
over the next 2-3 years, prompting us to raise our forecast completions. The better
visibility leaves us a bit more encouraged about CHP's ability to drive AFFO and NAV
growth.
■ Estimates tweaked; growth remains below peers and group. Our 2014E-16E AFFO
CAGR edged up 70bp to 2.2%, but remains below the 4.2% average of its retail peers
and 5.5% for our coverage universe.
Recommendation
■ SP, $11.25. We believe CHP remains in good form with highly visible cash flows
supporting an attractive yield. At 14.2x 2015E AFFO/6.3% implied cap rate/in line with
NAV, we view the units as fairly valued. All else equal, we recommend building
positions more actively below $10.00.
DHX Media Ltd. (DHX.B-T C$9.39)
Q1/15 Preview - Inclusion of Family Channel and New Production Deals
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
Med
--
$11.25
FFOPU14E
-$0.91
FFOPU15E
$0.92
$0.93
FFOPU16E
$0.94
$0.93
New Valuation:
-Old Valuation:
14.75x AFFO (F'16 estimate)
Key Risks to Target:
Significant tenant concentration in Loblaw,
majority unitholder
CDPU (NTM)
$0.65
CDPU (Curr.)
Yield (Curr.)
$0.65
6.1%
Paul Steep, MBA - (416) 945-4310
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ DHX will report Q1/15 results on November 14 at 8:30 a.m. ET, dial-in: 1-888-2318191. We forecast revenues of $49.4M and Adj. EBITDA of $18.0M (cons. $50.8M and
$16.5M).
Implications
■ Our view is that DHX's Q1/15 results will reflect stronger distribution and M&L
revenues as well as a partial quarter with the inclusion of Family Channel (DHX
Television) in the financial results. In the quarter, we expect solid adjusted EBITDA
margins will be sustained given operational efficiency and new digital distribution deals.
■ The acquisition of the Family channel business is transformational for DHX, in our
view, moving the company into the broadcasting business. Our focus remains on the
upcoming renewal of the Disney output deal in August 2015, which should be a key
milestone as well as a risk factor for the stock. We expect DHX will be successful in
securing a renewal of the Disney agreement for another three- to five-year term with a
modest increase in the content cost.
Recommendation
■ We believe DHX will continue to benefit from increased size and scale of the underlying
business, along with ongoing growth opportunities in its core kids content.
Rating:
Risk:
Target:
1-Yr
SP
Speculative
C$9.00
Revenues15E:
Revenues16E:
$238
$263
Valuation:
13x NTM EV/Adj. EBITDA 1-yr fwd
Key Risks to Target:
Lumpy Sales; Disney Renewal; CRTC TV
Review
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.05
$0.05
0.5%
9
Edge at a Glance
Wednesday, November 12, 2014
Dream Industrial REIT (DIR.UN-T C$9.04)
Q3 In Line; New President & CEO Appointed
Pammi Bir, CPA, CA, CFA - (416) 863-7218
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ DIR reported Q3/14 FFOPU of $0.23 vs. $0.24 last year, in line with our $0.23 estimate
and consensus ($0.235).
Implications
■ Results as expected across line items. FFOPU was flat YOY (-1%) as growth from SP
NOI and acquisitions was offset by financing dilution.
■ Front lines steady, with healthy YOY internal growth. Occupancy remains solid with
committed at 95.5% (-10bp QOQ, +40bp YOY) and economic at 93.9% (-10bp, -20bp).
SP NOI rose 2.4% YOY (+2.7% YTD) with W. CDA (+5.1%) continuing to outpace
Central/E. CDA (+0.3%) from higher occupancy and rents. QOQ, SP NOI was down
0.8% on lower average occupancy. Renewal leasing spreads were strong at +6.3% with
69% tenant retention (66% YTD), a bit below DIR's typical 70%-75%. Market rents
remain 5% above in place, with W. CDA (37% of NOI) at +10% vs. Central/E. CDA
(63%) at +2%.
■ Brent Chapman appointed President and CEO effective Jan. 5/15. Mr. Chapman has over
28 years of real estate experience and joins DIR from Guardian Capital Real Estate
where he is Managing Director. Prior roles incl. President and CEO of GPM Investment
Management and senior positions at Oxford Properties and Talisker Corporation.
■ IFRS cap rate steady QOQ and YOY at 6.71%, in line with our 6.75% NAV cap rate but
modestly below its current 7.2% implied cap.
Recommendation
■ Full update post Nov. 12th c/c (2 p.m. ET; 1-866-229-4144; 9411711#).
Rating:
Risk:
Target:
1-Yr
Empresas CMPC SA (CMPC-SN CLP 1,440)
In-Line Q3/14
SP
Med
C$10.25
FFOPU14E:
FFOPU15E:
FFOPU16E:
$0.95
$0.98
$1.01
Valuation:
12.25x AFFO (F'16 estimate)
Key Risks to Target:
Inability to execute growth, significant
unitholder, rising interest rates
CDPU (NTM)
CDPU (Curr.)
Yield (Curr.)
$0.70
$0.70
7.7%
Benoit Laprade, CPA, CA, CFA - (514) 287-3627
(Scotia Capital Inc. - Canada)
Event
■ CMPC reported EBITDA of $251M, compared with our $251M estimate and consensus
of $247M.
Implications
■ By segment, Forestry, Pulp, and Paper EBITDA came in lower than expected by $1M,
$3M, and $6M, respectively, while Tissue and Other EBITDA came in higher than
expected by $7M and $3M, respectively.
■ The company reported a solid operational quarter driven by strong performances at its
tissue and pulp operations. These segments benefited from investments and FX
tailwinds, which drove costs lower and margins higher.
■ Net debt to EBITDA remained unchanged sequentially at 3.1x as the company continues
to build its Guaiba II pulp mill. The company noted that the project remained on
schedule and on budget, with ~$1.3B spent and 79% of construction completed by the
end of Q3/14. Recall that CMPC expects Guaiba II to be operational by Q2/15 and fully
ramped up by the end of 2015.
Recommendation
■ We reiterate our Sector Perform rating and our target price of CLP 1,600. Although we
like CMPC's solid operational performance and growth prospects, we see limited upside
to our target, especially when considering the risks relating to the successful completion
of Guaiba.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
High
--
1,600
EBITDA14E
US$987
US$983
EBITDA15E
US$1,049 US$1,051
EBITDA16E
US$1,333 US$1,341
New Valuation:
-Old Valuation:
8.5x NTM EV/EBITDA 1-Year Forward
Key Risks to Target:
Lower-than-expected pulp prices and demand,
FX
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
CLP 10.18
CLP 10.18
0.7%
10
Edge at a Glance
Wednesday, November 12, 2014
Entel Chile (ENTEL-SN CLP 6,211)
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
Event
Pertinent Data
■ We participated in Entel's Investor Day in Lima, Peru. In this report we share all our
notes (See details on page 2 to 5).
Implications
■ Numbers in Peru are impressive across the board. The graphs on the sales performance
for the two weeks following the 4G launch (+200%) were staggering. Portability results
(97% of net lines going to Entel) show how quickly the company is positioning the
brand. Mass products, and a wireless residential offering will be launched within 8
months.
■ Although gross margins in Peru are as high as 60% (similar to Chile), the company made
it clear that the more successful they are in Peru in the short term, the worse the
EBITDA performance will be. The company expects to assume a less bullish handset
subsidy policy by 1H/15, so we may see a gradual recovery in EBITDA; however,
positive EBITDA is not expected until 2016 or 2017. Guidance was left unchanged: 30%
of wireless revenues in the long term.
■ CEO Antonio Buchi made it clear that the company is not contemplating a capital
increase, but that the controlling group is supportive of the Peruvian strategy. In our
view, an IPO of Entel Peru would be a success given potential demand by local pension
funds. We understand that the controlling company (Almendral) plans to pay down its
debt, potentially freeing capital resources.
Recommendation
■ Entel is a high-conviction name for us. Buy.
Rating:
Risk:
Target:
1-Yr
Investor Day: All We Saw
Fortuna Silver Mines Inc. (FSM-N US$4.42)
SJ Expansion Sounds Like a Go
SO
Med
CLP 9,200
EPS14E:
592.48
Valuation:
DCF - 5 years results, 9.1% WACC, terminal
growth rate of 3.6%
Key Risks to Target:
Execution of Nextel Peru; Competition in Chile
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
300.00
300.00
4.8%
Craig Johnston, CPA, CA - (416) 860-1659
(Scotia Capital Inc. - Canada)
Event
■ We are updating our estimates following the Q3/14 conference call, including relatively
material revisions to our estimates for San Jose.
Implications
■ In our opinion, management commentary on the conference call indicated the company
is likely to go ahead with the expansion to 3,000 tpd at its San Jose mine (currently
2,000 tpd). Management noted that at $14/oz silver, the expansion project still yields a
+20% return. A construction decision is not expected for a month or so, however we
have updated our estimates to reflect the expansion. Fortuna expects to be able to
commission the expanded mill by Q3 2016.
■ Given the capital outlay required for the 3,000 tpd expansion project, management noted
that development of Trinidad North (which we previously expected in 2015) would
likely be delayed until 2016. We have made this adjustment within our estimates as well.
■ We have also lowered our unit cost estimates at San Jose and increased our unit cost
estimates at Caylloma based on recent results. Overall, our NAV3% has increased 4% to
$3.89 per share (based on $19/oz Ag and $1,300/oz Au) and our target price has
increased to $5.15 per share.
Recommendation
■ The market responded well to Fortuna's Q3 results with shares up 16% yesterday, as we
believe investors are drawn to its healthy balance sheet and peer leading all-in sustaining
costs. Unfortunately, our enthusiasm is relatively muted by valuation at spot prices
relative to its gold peers. SP.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
High
$5.15
$4.95
Adj. EPS14E
-$0.14
Adj. EPS15E
-$0.21
Adj. EPS16E
-$0.27
New Valuation:
-Old Valuation:
1.30x Q3/15E NAV
Key Risks to Target:
Multiple contraction, commodity prices,
technical and operational risks, and
geopolitical risks
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
11
Edge at a Glance
Wednesday, November 12, 2014
GLV Inc. (GLV.A-T C$2.10)
Q2/F15 Results Miss: First Take
Anthony Zicha - (514) 350-7748
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ GLV reported Q2/F15 EBITDA $5.3M compared to our estimate of $5.7M and
consensus of $5.5M. However, Adjusted EPS loss of $0.03 missed our and consensus
estimates of $0.03.
Implications
■ Backlog Flat. Consolidated backlog of $259M was flat sequentially. Ovivo backlogs
declined 2% sequentially to $281.6M (third consecutive quarter). Pulp & Paper (P&P)
backlogs increased 12.2% to $68.5M.
■ Organic Growth Declines. Organic revenues declined 2.2% compared to Q2/F14 mainly
driven by a 7.4% organic revenue decline in Ovivo. The decline was partially offset by
solid P&P organic growth of 8.6%. The decline stems mainly from lower Ovivo new
equipment sales and lower revenues from certain legacy projects (prior to refocusing
plan).
■ Margin Decline. Adjusted EBITDA margins declined 40 bp to 3.5% mainly due to a 180
bp decline in the Ovivo margin to 4.4% and a 70 bp decline in the P&P margin to 5.8%.
Margin contraction mainly stems from investments made under Ovivo's strategic plan as
well as slight margin compression on certain Ovivo Energy contracts. P&P margins
contracted mainly due to revenue mix (higher new equipment sales).
Recommendation
■ We will review our estimates and target price after the conference call on November 12
at 9AM ET. Dial-in #: 1-888-231-8191.
Rating:
Risk:
Target:
1-Yr
RONA Inc. (RON-T C$13.85)
Q3/14 Results - On the Right Track
Event
■ EPS in line with consensus. RONA reported Q3/14 results with an adjusted EPS of
$0.33 in line with consensus of $0.34 and below our expectations of $0.36. This
compares to an adj. EPS of $0.25 last year
Implications
■ Turning its focus on growth. With its restructuring plan completed, the company has
turned its focus on growth. In fact, the company is focusing more of its efforts on
merchandising strategies and programs that supported its same store sales growth.
■ Store expansion plans for 2015. The company also announced plans for expanding its
network with five new stores to be opened in 2015. We believe this provides a new
growth vector that we have not seen for the last several years.
■ Too early to tell. While we positively view the company's strategic shift to store
expansion, we believe it's still too early to tell whether these initiatives should translate
into improved earnings power, considering the competitive retail environment.
Moreover, we believe a pickup in housing starts, particularly in Quebec, will be required
to support growth (SSSG).
Recommendation
■ Rating maintained; increasing target to $14.50. We continue to rate RONA shares a
Sector Perform with a new target price of $14.50 (up from $13.00). To value RONA
shares we use a 14x P/E multiple (up from 13x) on our newly introduced 2016 EPS
estimate of $1.03.
SP
High
C$3.50
Adj. EPS15E:
Adj. EPS16E:
$0.02
$0.07
Valuation:
8.5x EV/EBITDA on F2016E
Key Risks to Target:
Reduced municipal infrastructure spending;
further reductions in pulp and paper sector
capital investment.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Anthony Zicha - (514) 350-7748
(Scotia Capital Inc. - Canada)
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
Med
$14.50
$13.00
Adj. EPS14E
$0.66
$0.71
Adj. EPS15E
$0.90
$0.98
Adj. EPS16E
$1.03
$0.00
New Valuation:
14.0x P/E on 2016E
Old Valuation:
13.0x P/E on 2015E
Key Risks to Target:
Housing recovery stalls; identifying and
integrating potential acquisitions.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.14
$0.14
1.0%
12
Edge at a Glance
Wednesday, November 12, 2014
SACI Falabella (FALAB-SN CLP 4,292)
Solid Q3 Report Despite Macro Challenges in Chile
Rodrigo Echagaray, MBA, CFA - (416) 945-4405
(Scotia Capital Inc. - Canada)
Event
■ Falabella reported solid Q3 earnings above estimates despite a challenging macro
environment in Chile. Sales came in line at CLP1,771 bn (+ 10.5% YOY). EBITDA
increased 10.2% to CLP208 bn (5% ahead of our estimate and 3.4% ahead of
consensus). Net income increased 6% to CLP81.5 bn (6% ahead of our CLP77 bn
estimate).
Implications
■ Department stores SSS in Chile in Q3 (-4.5%) are representative of the macroeconomic
slowdown. Yet, positive SSS in nearly all formats and countries, sales floor expansion
of ~6% YOY, and two-digit growth in banking revenues (+15.9% YOY) led to a healthy
consolidated revenue growth. Of note, int'l ops were more than 40% of sales in Q3.
■ Gross margins increased 30 basis points on higher margins in the banking division
(lower funding costs, stable NPLs). However, SG&A increased ahead of sales mainly
due to higher expenses at Sodimac: 1) pre-operating expenses at Uruguay; 2) Ramp up
of operations in Brazil, and 3) the closure of the Maestro acquisition in Peru. Net debt to
EBITDA increased to 3.3x (from 2.6x a year prior) as Falabella consolidated Maestro's
balance sheet as at Q3, but not it's P&L.
Recommendation
■ Falabella's solid Q3 report underscores our overweight rating on the stock. We think
valuations look appealing at ~19x P/E 2015E, a significant discount to its 25x NTM P/E
historic average multiples.
SEMAFO Inc. (SMF-T C$3.15)
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
Med
--
5,600
EBITDA14E
989
1,030
EBITDA15E
1,098
1,165
EBITDA16E
1,261
1,340
New Valuation:
-Old Valuation:
2014E-2020E DCF w/ 9% WACC; 14x (NTM)
EV/EBITDA; 23x (NTM) P/E
Key Risks to Target:
Pension funds overhang, foreign ops
Div. (NTM)
62.59
Div. (Curr.)
Yield (Curr.)
0.00
0.0%
Ovais Habib - (416) 863-7141
(Scotia Capital Inc. - Canada)
Q3/14 Results In Line; Positive Infill Assays from Siou Bode Well for Upcoming Reserve Update
Event
■ SEMAFO reported Q3/14 EPS of $0.04, slightly below our estimate of $0.05 and
consensus of $0.06.
Implications
■ The financial results were broadly in line as many third quarter items had been prereleased, including production of 64.7 koz Au, a total cash cost range of $555-$565/oz,
and a quarter-end cash position of $112M (+$19M from the end of Q2/14).
■ It appears that Burkina Faso is beginning to stabilize after recent civil unrest that
culminated in former President Compaoré's resignation. Mana operations continued
uninterrupted during the unrest, as did gold sales and the delivery of spare parts and
consumables to site. Timing for a transition back to civilian rule remains uncertain,
however.
■ The company also released a few highlight holes from ongoing infill drilling at Siou
which intersected high gold grades over good widths in the Siou Zone 9 south ore shoot
at a vertical depth of ~230 m. We believe these results will help SEMAFO achieve its
goal of replacing production and expanding Siou reserves by year-end and estimate that
a 1-year mine life extension at Siou would increase our NAV estimate for the company
by 8.5%.
Recommendation
■ We rate SEMAFO Sector Outperform with a C$4.50 1-year target price.
Pertinent Data
New
Old
Rating:
--
Risk:
Target:
1-Yr
-- Speculative
--
SO
$4.50
Adj. EPS14E
US$0.08
US$0.09
Adj. EPS15E
US$0.22
US$0.26
Adj. EPS16E
-US$0.22
New Valuation:
-Old Valuation:
1.20x NAVPS
Key Risks to Target:
Multiple contraction, commodity prices,
technical and operational risks, and
geopolitical risks
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
13
Edge at a Glance
Wednesday, November 12, 2014
SunOpta Inc. (STKL-Q US$13.81)
Q3/14 Results Miss - First Take
Christine Healy, CPA, CA - (416) 863-7902
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ STKL reported Q3/14 adj. EBITDA of $18.1M and adj. EPS of $0.11 (excluding
Mascoma impairment charge and FX gain), below our est. of $22.9M/$0.13 and the
Street at $21.6M/$0.11. The miss was largely due to lower-than-expected revenue across
all segments (decline in commodity prices, FX, plant downtime), and weaker margins in
Consumer Products and Opta Minerals. A lower tax rate partially offset.
Implications
■ SunOpta Foods missed expectations. Revenue of $283M was 5% below our forecast, but
6% above Q3/13. Operating income of $15.1M (5.3% margin) was 12% below our
forecast of $17.1M (5.7% margin).
■ Lower margins in Consumer Products led the miss. Segment revenue of $101M and
operating income of $6.1M were below our estimates of $114M and $8.9M. Revenue
and margins were hurt by down-time at both aseptic plants (for upgrades), weaker
margins in resealable pouches, and costs related to the retrofit of a juice plant.
■ Opta Minerals (OPM) was weak. OPM reported weaker margins than expected (2.5% vs.
our est. of 6.5%). The strategic review is ongoing.
■ Mascoma impairment. On Oct. 31/14, Mascoma sold assets related to its yeast business.
STKL wrote down its investment by $8.4M.
■ We will update model post-call. STKL will host a call on Nov. 12/14 at 10:00 am EST to
discuss results (1-877-312-9198 or 631-291-4622).
Recommendation
■ We maintain our one-year target of $13.00/share and our SP rating.
Rating:
Risk:
Target:
1-Yr
Adj EBITDA14E:
Adj EBITDA15E:
SP
High
US$13.00
$85.5
$104.7
Valuation:
10.5x Food, 6.0x Opta Minerals FTM EBITDA
(one-year forward)
Key Risks to Target:
consumer demand, project execution,
weather, commodity prices
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Telefonica Brasil SA (VIV-N US$19.18)
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
Event
Pertinent Data
■ VIV reported revenues of R$8.72B (up 1.2% YOY and slightly above our R$8.71B
estimate), EBITDA of R$2.55B (up 7.0% YOY, slightly below our R$2.57B estimate),
and net income of R$1.0B (above our R$0.97B estimate).
Implications
■ With more than 1.0M additions in Q3, VIV is delivering postpaid growth comparable
only to that of the leading operators in developed markets. In fact, with 34.0% of its base
already under contract, VIV surpassed Entel Chile as Latin America's most postpaid
operator, a tremendous achievement, in our view.
■ MOU expanded 6.1% YOY, while churn came down slightly on a yearly basis. Despite
the MTR cut, ARPU at R$23.6 grew 0.9% sequentially and remained close to flat
against the prior year (-0.2%). Data revenues expanded 20.6% YOY, helping service
revenues to grow 3.5% YOY and offsetting the decline in wireline.
■ The EBITDA margin expanded 157 bp on a YOY on the back of good cost controls. Of
note, VIV grew EBITDA more than TSU (7.0% vs. 6.4% YOY). Net income was
supported by lower depreciation thanks to a recent revision in the life of assets. Net debt
closed the quarter at only 0.14x LTM EBITDA.
Recommendation
■ We believe that after the merger with GVT, VIV will emerge as one of the best telecom
stories in emerging markets. Buy.
Rating:
SO
Risk:
Target:
1-Yr
Med
Q3: Solid Postpaid, Good EBITDA Growth
US$26.00
Revenues14E:
$15,192
Revenues15E:
$15,611
Revenues16E:
$16,709
Valuation:
DCF - 5 years results, 8.6% WACC in US$,
terminal growth rate of 4.0%
Key Risks to Target:
Lower-than-guided synergies from GVT
merger; expensive acquisitions
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.18
$1.18
6.2%
14
Edge at a Glance
Wednesday, November 12, 2014
Thompson Creek Metals Company Inc. (TCM-T C$2.44)
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526
(Scotia Capital Inc. - Canada)
Q3/14 Results Above Forecast Due to Lower Depreciation/Tax; Mt. Milligan Struggles Continue
Event
Pertinent Data
■ Thompson Creek released its Q3/14 financial results.
Implications
■ TCM reported Q3/14 adjusted EPS of $0.17, well above our estimate of $0.06 and
consensus of $0.08 due to markedly lower depreciation and taxes. While
production/sales results were pre-released, cash costs of $0.77/lb Cu and $6.77/lb Mo
were in line with our estimates.
■ The company re-affirmed all of its 2014 guidance, including Mt Milligan reaching a
sustainable operating level of ~80% of design by year-end. However, the operation
achieved average throughput of only 42,340 tpd in October (71% of design), up slightly
from 67% in Q3/14.
■ TCM plans to make a decision on the secondary crusher ($50M-$75M budget) at Mt
Milligan in January 2015. The company also confirmed that it plans to proceed with the
scaled strip project at the Thompson Creek mine upon closure at year-end. We note that
our estimates already assume that the company proceeds with both projects.
Recommendation
■ In our view, a high debt level, ongoing ramp-up risk at Mt. Milligan, a poor outlook for
molybdenum, and an unattractive relative valuation are likely to overhang the shares.
However, the company's liquidity is reasonable. TCM is rated Sector Perform with a 12
month target of C$2.10 per share. Our C$2.10 target is based on a 50/50 mix of 7.0x our
2015E EV/EBITDA (C$2.36) and 1.0x our 8% NAV estimate (C$1.93).
TransAlta Corporation (TA-T C$11.00)
Shining Light on Sundance
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
High
--
$2.10
Adj. EPS14E
US$0.32
US$0.17
Adj. EPS15E
US$-0.08 US$-0.14
Adj. EPS16E
US$0.06
US$0.00
New Valuation:
-Old Valuation:
50% of 7.0x 2015E EV/EBITDA + 50% of 8%
NAV
Key Risks to Target:
Commodity, operating, development, balance
sheet
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Matthew Akman, MBA - (416) 863-7798
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ TA is holding an analyst meeting and tour of its Sundance Power Plant facilities and coal
mine on Friday.
Implications
■ The Alberta coal plants probably have more hidden value than any of the other assets in
the company's portfolio. The renewables have a lot of value but that is already common
knowledge and perception.
■ In a research report dated April 9 ("Coal Conundrum"), we reasoned that the coal plants
were undervalued in the stock because they generate so little free cash at this time.
■ Yet, they could generate $300M - $400M of additional annual EBITDA post-2020 even
under conservative power price assumptions. But realizing this value requires that the
plants operate properly at that time.
■ We believe the Sundance plant tour is meant to raise confidence in the longevity of the
coal plants and to dispel concerns that the assets lack the ability to run until their
legislated end-of-life (late-2020s).
Recommendation
■ If the plants can run through the end of their legislated life, we believe the stock is
undervalued by 30%+ relative to its NAV. Other concerns linger (SO2 regulations,
credit ratings) but regardless of the outcome on these matters, asset value should surface
one way or the other. We maintain our Sector Outperform rating and $14 target price.
Rating:
SO
Risk:
Target:
1-Yr
Med
C$14.00
EBITDA14E:
$1,009
EBITDA15E:
$1,025
EBITDA16E:
$1,025
Valuation:
7.3% 2015E Free Cash Yield and 9.1x 2015E
EV/EBITDA
Key Risks to Target:
Power Prices; Interest Rates; Environmental
Regulations; Re-contracting
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.72
$0.72
6.5%
15
Edge at a Glance
Wednesday, November 12, 2014
Anthony Zicha - (514) 350-7748
(Scotia Capital Inc. - Canada)
Vicwest Inc. (VIC-T C$12.66)
Vicwest Sold to Kingspan and Ag Growth
Event
Pertinent Data
■ Vicwest Inc. announced that it has agreed to be acquired for $12.70 per share ($350
million enterprise value; $224 million to shareholders).
■ Kingspan Group plc (KGP-L; not covered) is expected to acquire the Building Products
division for $154.5 million inclusive of debt and reorganisation costs.
■ Ag Growth International (AFN-T; restricted) is expected to acquire the Westeel division
for $221.5 million (enterprise value of $210 million and $11.5 million attributed to
assets acquired at closing).
Implications
■ The sale price represents a premium of 25.6% to the 20-day volume-weighted average
price of Vicwest shares as of November 10, 2014.
■ The transaction is subject to a number of conditions, including the approval of at least
66.67% of the votes as well as customary court and regulatory approvals. The special
meeting of Vicwest shareholders is expected to be held in January 2015.
■ We note that holders of approximately 15.6% of outstanding Vicwest common shares,
including all of Vicwest's directors and officers, have agreed to vote their common
shares in favour of the arrangement.
Recommendation
■ We have lowered our target price to $12.70 per share. This implies an EV/EBITDA
multiple of 6.5x on our 2016E. We have changed our rating on Vicwest Inc. shares to
Tender from Sector Outperform.
WPT Industrial REIT (WIR.U-T US$10.34)
Q3 Peek: In Line, Strong Fundamentals & Growth
New
Rating:
Risk:
Target:
1-Yr
Old
T
--
SO
High
$12.70
$14.00
EBITDA14E
-$29
EBITDA15E
-$42
EBITDA16E
$50
$51
New Valuation:
6.5x EV/EBITDA on our 2016E.
Old Valuation:
6.8x EV/EBITDA on our 2016E.
Key Risks to Target:
Decline in grain prices; slower-than-anticipated
recovery in residential and commercial
construction.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.60
$0.60
4.7%
Pammi Bir, CPA, CA, CFA - (416) 863-7218
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ WPT reported Q3/14 FFOPU of $0.25 vs. $0.24 last year, in line with our $0.25 estimate
and consensus ($0.25).
Implications
■ In line with minor variances. G&A was $0.01/unit below our forecast, but offset by
higher interest costs. The 6.9% YOY FFOPU growth was driven by acquisitions, higher
occupancy in the IPO properties, and lower G&A costs, partly offset by dilution from
financing activities.
■ Fundamentals solid as occupancy climbs up. Occupancy improved to a solid 98.9%
(+190bp QOQ, +200bp YOY). We believe the bulk of the increase relates to Honeywell
International's 160K sf (1.3% of GLA) expansion into vacant space at 6766 Pontius Rd.
(Columbus, OH).
■ Liquidity modestly increased post-Q3; leverage improves. Available liquidity from
undrawn lines is expected to rise to $15M-$20M (vs. $5M at Q3) with two
unencumbered properties to be added to the borrowing base. D/GBV sits at a reasonable
51.3%, down from 52.7% at Q2.
■ IFRS terminal cap rate down 19bp QOQ to 7.1% (-46bp YTD), with the drop
attributable to modest cap rate compression. Units are trading at a current 6.9% implied
cap rate, in line with our 6.9% NAV cap.
Recommendation
■ Full update post Nov. 12th conference call (11 a.m. ET; 1-866-605-3851).
Rating:
Risk:
SO
Med
Target:
1-Yr
US$11.50
FFOPU14E:
$1.00
FFOPU15E:
$1.05
FFOPU16E:
$1.04
Valuation:
13.5x AFFO (F'16 estimate)
Key Risks to Target:
Significant unitholder, inability to execute
growth, rising interest rates
CDPU (NTM)
$0.70
CDPU (Curr.)
Yield (Curr.)
$0.70
6.8%
16
Edge at a Glance
Wednesday, November 12, 2014
WSP Global Inc. (WSP-T C$36.00)
Mark Neville, CFA - (514) 350-7756
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
Q3 Beat: Lots of Growth
■ WSP reported better-than-expected Q3 results: EBITDA came in at $66.4 million vs.
consensus of $64.0 million and our estimate of $60.4 million.
Implications
■ The company benefited from strong global organic growth (+6.0%) and FX tailwinds
(+6.3%), and generated better-than-expected margins. Furthermore, the company
indicated its Canadian operations (ex. Focus) were seeing signs of stabilization, while
Focus continued to generate strong results (+9.4% organic growth).
■ In the context of the Parsons Brinckerhoff (PB) acquisition, WSP reported (1) 12.3%
organic growth in the United States, (2) 16.5% organic growth in the UK, and (3) 2.2%
organic growth in Australia. Given we expect PB's U.S. operations to generate
approximately 78% of PB's 2015 EBITDA, and its U.K. and Australian operations to
improve from near break-even levels, we believe these positive underlying trends should
be supportive of our view that WSP could see similar benefits from the PB acquisition as
it did from the WSP transaction (e.g., timing, improving regional operations, and
synergies).
■ We have made modest changes to our estimates. Our $45.00/share target and Sector
Outperform rating are unchanged.
Recommendation
■ We view WSP as a proven acquirer, having generated superior growth and returns
metrics through well-timed strategic acquisitions.
Zargon Oil & Gas (ZAR-T C$5.94)
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
Med
--
$45.00
EBITDA14E
$248
$250
EBITDA15E
$405
$414
EBITDA16E
$464
$458
New Valuation:
-Old Valuation:
10.0x EV/EBITDA on 2016E
Key Risks to Target:
Integration risk; slower-than-anticipated
recovery in commercial and residential
construction.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.50
$1.50
4.2%
Patrick Bryden, CFA - (403) 213-7750
(Scotia Capital Inc. - Canada)
Q3 In Line as Little Bow ASP Ramp-Up Nears Amid Uncertain Commodity Prices
Event
■ Zargon released third quarter results and an update on the Little Bow ASP project.
Implications
■ Q3 results in line. Zargon's third quarter production averaged 6,054 boe/d, in line with
our estimate of 6,000 boe/d and consensus estimate of 5,951 boe/d. Cash flow per share
of $0.36 was also in line with our estimate of $0.39 and consensus estimate of $0.37.
■ Little Bow ASP sees production response. Increased injection pressures at seven of the
eight ASP injection wells have been observed, which may be an indication that the oil
bank within the reservoir has a higher than expected viscosity and EUR. ASP fluid
movement and minor oil production responses have provided a positive indicator to ASP
injections.
■ Guidance updated. Production guidance for Q4/14 was decreased modestly to 5,150
boe/d and 5,250 boe/d due to regulatory and third-party shut in in addition to delays in
starting the fall drilling program. Initial 2015 production guidance forecasts non-ASP
production of 4,000 bbl/d of oil and 6.4 mmcf/d of gas (5,067 boe/d).
Recommendation
■ We maintain our SP rating but have elected to reduce our target price by 25% to
$7.50/share given the impact of a lower commodity price environment.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
High
$7.50
$10.00
CFPS14E
$1.71
$1.79
CFPS15E
$1.78
$1.81
CFPS16E
$2.17
$2.16
New Valuation:
0.7x our 2P NAV plus risked upside.
Old Valuation:
0.9x our 2P NAV plus risked upside.
Key Risks to Target:
Crude oil and natural gas prices; CAD/USD
exchange rate; drilling program success
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.72
$0.72
12.1%
17
Industry Comment
Wednesday, November 12, 2014, Pre-Market
LatAm Retail
Rodrigo Echagaray, MBA, CFA - (416) 945-4405
(Scotia Capital Inc. - Canada)
rodrigo.echagaray@scotiabank.com
October SSS: Macro Not Yet
Supportive of Consumption
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 were 2.1% higher
in October while total ANTAD sales increased 6.5% YOY.
Implications
■ Macro trends in Mexico continue to be mixed: Industrial production remains
solid on the back of encouraging manufacturing trends and healthier trends
in construction activity. However, consumer spending remains under
pressure due to declining real wages and a sharp contraction in lending.
■ Walmex continued to gain share in the self-service segment despite a sharp
underperformance from SAM's. A significant part of those share gains are
explained by a solid performance in the smaller formats (i.e., Bodega
Aurrera Express). Albeit small, October marks the fourth consecutive month
in which Walmex gains share in that segment (i.e., likely means the SAM's
sales are not falling as much). See Exhibit 8.
■ Department Stores' outperformance vs. Self-service stores accelerated
during October (Exhibit 9). However, we should keep in mind that "El
Buen Fin" (Mexico's Black Friday) will take place from November 14th 17th, and that should be an important factor in determining the performance
for November across the board.
Recommendation
■ It looks like consumer confidence in Mexico is about to turn after more than
a year of sharp declines. And although we are disappointed with the pace of
the recovery in Mexico, we still believe there will be one. In that context,
we continue to think of Walmex as the best to participate in that recovery
among the food retailers. Femsa remains our top consumer pick in Mexico.
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 1629.00
MXN 45.22
MXN 51.74
CLP 4291.70
US$96.22
CLP 316.98
MXN 43.36
MXN 30.33
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
30.1%
-9.3%
5.6%
31.9%
16.4%
51.6%
-16.3%
25.2%
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.
18
Exhibit 1 – Industrial Production
Exhibit 2 – Consumer Confidence
Source: INEGI.
Source: INEGI
Exhibit 3 – Components of Consumer Confidence – Seasonally Adjusted
Exhibit 4 – Real Wages
Source: INEGI.
Source: INEGI, Secretariat of Labour.
19
Exhibit 5 – Consumer Credit
Exhibit 6 – As % of ANTAD Self Service Retail Revenues, 2013
Source: Banco de México.
Source: ANTAD, Company reports; Scotiabank GBM estimates. * Only Mexico Operations.
Exhibit 7 – ANTAD – Monthly SSS
Source: ANTAD.
Exhibit 8 – Walmex SSS – ANTAD Self Service SSS
(Walmex outperformance in Self-service Segment)
Exhibit 9 – Department Stores SSS – Self Service SSS
(Department stores outperformance vs. Self-Service Stores)
Source: Company reports; ANTAD.
Source: ANTAD.
20
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
21
Intraday Flash
Tuesday, November 11, 2014 @ 12:43:50 PM (ET)
Railroads
Rails Monthly - November 2014
Turan Quettawala, MBA, CFA - (416) 863-7065
(Scotia Capital Inc. - Canada)
turan.quettawala@scotiabank.com
Milan Posarac - (416) 863-7532
(Scotia Capital Inc. - Canada)
milan.posarac@scotiabank.com
Event
ScotiaView Analyst Link
■ We have published our Rails Monthly report: "CNR Going Strong in Q4."
The full report is available on ScotiaView.
Implications
■ Both rails have been reporting strong RTM data through week 45, with
CNR and CP up 8.1% and 4.8%, respectively. Crude and Intermodal
(domestic for CP) have been leading the way for both rails, while frac sand
demand continues to grow.
■ We attended Union Pacific's investor day, and provide some key takeaways
for the Canadian rails regarding the intermodal growth opportunity and
prospective dividend payout ratio levels.
Recommendation
■ CP remains our preferred Canadian rail pick. Shares are now trading at 21x
2015 P/E (1.5 points above CNR) after the 12% bounce-back post CBR
related concerns in October. The P/E premium for both Canadian rails has
come in recently as, in our view, U.S. rails are building in some potential
M&A premium.
Universe of Coverage
Price
CNR-T
CP-T
WTE-T
C$80.71
C$238.57
C$34.33
Rating
Risk
SO
SO
SU
Medium
Medium
Medium
1-Yr
ROR
$82.00
$250.00
$35.50
3.0%
5.4%
7.3%
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.
22
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Canadian National Railway Company (CNR-T)
Valuation: Equally wtd. DCF and 17x NTM EPS (one-year fwd.)
Key Risks to Price Target: Slower economic growth and regulatory changes.
Canadian Pacific Railway Limited (CP-T)
Valuation: Equally wtd. DCF and 18x NTM EPS (one-year fwd.)
Key Risks to Price Target: Slower economic growth and regulatory changes.
Westshore Terminals Investment Corporation (WTE-T)
Valuation: Equally wtd. DCF and 13.5x EV/NTM EBITDA (one-year fwd.)
Key Risks to Price Target: Decline in coal exports and slower-than-expected economic growth
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
23
Company Comment
Tuesday, November 11, 2014, After Close
(AP.UN-T C$36.00)
Allied Properties REIT
Q3 Glance: Solid Q; Some Progress at 250 Front
Mario Saric, CPA, CA, CFA - (416) 863-7824
(Scotia Capital Inc. - Canada)
mario.saric@scotiabank.com
Rating: Sector Outperform
Risk Ranking: Medium
Trevor Thompson-Harry - (416) 863-7986
(Scotia Capital Inc. - Canada)
trevor.thompsonharry@scotiabank.com
Target 1-Yr:
C$38.00
ROR 1-Yr:
9.5%
Valuation: 16.5x AFFO (F'16 estimate)
Key Risks to Target: Toronto new supply, rising interest rates, inability to lease 250 Front St. West
CDPU (NTM)
CDPU (Curr.)
Yield (Curr.)
$1.41
$1.41
3.9%
Event
■ Q3/14 FFOPU was $0.536 vs. $0.51 QOQ and $0.50 YOY, above our
and consensus $0.52 (range = $0.50-$0.54). Same-property (SP) NOI
was +9.3% YOY (vs. +5% YOY in Q2).
Implications
■ NOI growth drives solid results. The beat vs. us was driven by higherthan-expected NOI; see Ex. 1. Most of the impressive SP NOI growth
was rate-driven, with AP achieving a 7% rent bump on expiring leases.
Occupancy was +80bp QOQ to 91.6% (vs. flat QOQ at 94.6% ex.
upgrades), while q-end economic occupancy was 88% (-60bp QOQ).
The acquisition of 555 Richmond W reduced occupancy by 20bp, all
else equal. At QRC West, Sapient leased an additional 12,000sf (halffloor), while AP is close to finalizing lease-up of the top two floors
(~47,000sf), which would increase total leased area to 98%. Other
highlights include an inaugural credit rating (DBRS launched yesterday
at BBB low), which we believe was well telegraphed, and the strategic
acquisition of 485 King Street West (right in AP's front yard) for $8M.
■ Some progress at 250 Front Street; discussion pipeline intact QOQ
at 70,000sf. Allied leased 39,500sf QOQ (at target net rent), bringing
occupancy up to 35% (total GLA = 168,000sf). With another 109,000sf
to go, Allied's discussion pipeline is unchanged QOQ at 70,000sf.
■ Avg. IFRS cap rate flat QOQ at 6.3%.
Recommendation
■ Full update post c/c on Wed, Nov. 12 at 12:00 pm ET. #1-866-530-1553.
Qtly FFOPU (FD)
2013A
2014E
2015E
2016E
Q1
$0.45 A
$0.51 A
$0.60
$0.64
(FY-Dec.)
Funds from Ops/Unit
Adj. Funds from Ops/Unit
Price/AFFO
EV/EBITDA
EBITDA (M)
EBITDA Margin
EBITDA/Int. Exp
Q2
$0.48 A
$0.51 A
$0.60
$0.65
Q3
$0.50 A
$0.52
$0.63
$0.66
Q4
$0.51 A
$0.54
$0.63
$0.66
Year
$1.94
$2.08
$2.45
$2.61
P/FFO
16.9x
17.3x
14.7x
13.8x
2012A
$1.79
$1.48
22.3x
21.7x
$144
55.6%
3.3x
2013A
$1.94
$1.67
19.6x
19.8x
$173
57.2%
4.1x
2014E
$2.08
$1.79
20.1x
20.8x
$194
59.7%
3.9x
2015E
$2.45
$2.14
16.8x
20.1x
$200
62.0%
4.2x
2016E
$2.61
$2.29
15.7x
20.3x
$198
61.3%
4.3x
BVPU14E: $30.56
ROE14E: 5.89%
NAVPU:
P/NAV:
$32.00
1.13x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Units O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ 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.
$2,681
$1,345
$4,025
74
74
24
Q3/14 Initial Glance: Solid Quarter; Some Progress at 250 Front
Exhibit 1 - Scotiabank - Allied Properties Q3/14 Variance Analysis
All in $000s, except for per unit figures
Q3/14A
Scotia
Q3/14E
QOQ
Q2/14A
Actual
vs. Scotia
A vs. E
FFOPU
Commercial Property NOI - Cash basis
$52,334
$49,738
$48,971
$2,596
$0.036
Commercial Property NOI - Acquisitions
Total Commercial Property NOI - Cash basis
$0
$1,960
$0
-$1,960
-$0.027
$52,334
$51,697
$48,971
$637
$0.009
Commercial Property - straight line rent - non cash
$1,388
$1,600
$1,597
-$212
-$0.003
Amortization of tenant improvements - non-cash
-$2,494
-$2,000
-$2,457
-$494
-$0.007
Total Commercial Property NOI
$51,228
$51,297
$48,111
-$69
-$0.001
Amortization of tenant improvements - non-cash
$2,494
$2,000
$2,457
$494
$0.007
Total Commercial Property NOI
$53,722
$53,297
$50,568
$425
$0.006
Commercial property debt expense
-$13,500
-$13,632
-$13,180
$132
G&A
-$1,740
-$1,778
-$1,882
$38
Operating Income
$38,482
$37,887
$35,506
$595
Other amortization
-$253
-$331
-$233
$78
FFO - fully diluted
$38,229
$37,556
$35,273
$673
Unit count (fully diluted)
71,371
71,706
69,670
$0.536
$0.524
$0.506
$0.012
Straight-line rent
-$1,388
-$1,600
-$1,597
$212
-$53
-$25
-$9
-$28
Non-revenue enhancing capex
-$1,191
-$1,187
-$1,150
-$3
Tenant installation costs
-$2,552
-$2,544
-$2,465
-$7
AFFO
$33,045
$32,199
$30,052
$846
$0.46
$0.45
$0.43
$0.01
Committed occupancy (quarter-end - excluding upgrades)
94.6%
95.6%
94.6%
-1.0%
Economic occupancy (quarter-end)
88.0%
n/a
88.6%
n/a
Economic occupancy (quarter-average)
86.8%
n/a
88.0%
n/a
Same-property NOI (YOY)
9.3%
n/a
5.0%
n/a
In-Place Portfolio Rent vs. Market (through 2016)
-7.1%
n/a
-7.9%
n/a
Leasing costs/incentives per sf. Leased
$7.52
$7.50
$8.11
$0.02
AFFOPU - diluted
$0.009
(335)
FFOPU - diluted
Amortization of debt mark-to-market
$0.008
Operating Metrics
IFRS NAV cap rate (change = QOQ)
Total properties under development (PUDs), GLA
6.30%
708,235
6.3%
n/a
6.30%
0.00%
772,219
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
25
Company Comment
Tuesday, November 11, 2014, After Close
(ARF-T C$0.41)
Armtec Infrastructure Inc.
Q3/14 Results Miss
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 Perform
Target 1-Yr:
Risk Ranking: Speculative
Valuation: 4.75x EV/EBITDA on 2015E
C$0.70
ROR 1-Yr:
72.8%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Key Risks to Target: Slower than anticipated recovery in residential and commercial construction.
Event
Pertinent Revisions
■ Armtec Infrastructure Inc. reported Q3/14 EBITDA of $16.0M, below
our estimate of $17.0M and consensus of $18.0M, and below their
target of $20M.
Implications
■ Backlog Increases. Backlog ended Q3/14 at $140M or 31% higher
sequentially from $107M. The increase is mainly due to the recently
announced $70M Central Ontario soundwall contract.
■ Margin Declines. Operating (EBITDA) margins declined 290 bp to
10.2%, mainly driven by increased competition in plastic products and
higher raw material costs. We expect these challenges to continue to
impact performance of the Drainage business unit.
■ Weak Outlook. We expect weakness in the Drainage Solutions
business to continue. Factors include: (1) increased competition in the
corrugated steel pipe market, and (2) rising raw material costs. On a
positive note, we believe the US recovery and increased Western
Canadian forestry, residential, commercial, and infrastructure
construction activity could provide opportunities. We could expect a
decrease in Western Canadian project awards should the weak oil price
environment continue.
Recommendation
■ We are neutral on Armtec shares and believe the risks outweigh potential
rewards.
Qtly EBITDA (M)
2012A
2013A
2014E
2015E
Q1
Q2
Q3
Q4
Year
$0 A
$0 A
$-8 A
$0
$18 A
$15 A
$12 A
$17
$18 A
$19 A
$16 A
$23
$28 A
$6 A
$10
$10
$64
$40
$30
$50
EV /
EBITDA
5.4x
8.4x
10.2x
4.6x
2011A
$-2.03
$0.40
153.7%
19.5%
$454
$15
3.4%
15.4x
2012A
$-1.06
$0.00
0.0%
0.0%
$457
$64
14.0%
4.5x
2013A
$-0.12
$0.00
0.0%
0.0%
$456
$40
8.8%
7.6x
2014E
$-0.45
$0.00
0.0%
0.0%
$469
$30
6.4%
9.8x
2015E
$0.17
$0.00
0.0%
0.0%
$516
$50
9.8%
4.4x
(FY-Dec.)
Adj EPS
Dividends/Share
Payout Ratio
Pre-tax Cash Yield
Revenues (M)
EBITDA (M)
EBITDA Margin
Net Debt/EBITDA
EBITDA14E
New
$30
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ 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.
Old
$31
$10
$335
$344
24
23
26
Intraday Flash
Tuesday, November 11, 2014 @ 12:57:35 PM (ET)
(AUQ-N US$3.57)
(AUQ-T C$4.05)
AuRico Gold Inc.
Taking Interest in Lynn Lake, MB, Gold Project
Trevor Turnbull, MBA, MSc - (416) 863-7427
(Scotia Capital Inc. - Canada)
trevor.turnbull@scotiabank.com
Rating: Sector Outperform
Risk Ranking: High
Valuation: 1.26x NAV
Target 1-Yr:
Vitali Mossounov, CPA, CA - (416) 862-3910
(Scotia Capital Inc. - Canada)
Alex Watt, MBA - (416) 860-1429
(Scotia Capital Inc. - Canada)
US$5.50
ROR 1-Yr:
54.3%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.02
0.4%
Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s
Event
■ AuRico announced that it has agreed to subscribe for 70.6 million
shares of Carlisle Goldfields Limited at C$0.08, representing 19.9% of
the outstanding common shares of Carlisle on a non-diluted basis.
Implications
■ Concurrently, AuRico has entered into a joint venture (JV) for Carlisle's
open-pit Lynn Lake projects in Manitoba, allowing it to acquire a 25%
interest for C$5 million and a 60% interest if AuRico funds C$20
million over three years and delivers a feasibility study.
■ Using the initial C$5 million JV consideration, we calculate a buy-in of
C$13/oz based on the in-pit ore in Carlisle's Preliminary Economic
Assessment (PEA). The PEA indicates an after-tax net present value
(NPV5%) of $257 million and an IRR of 26% at a $1,100/oz gold price.
■ Lynn Lake is an historic district and the project comprises two open-pit
gold mines located over 30 km apart. Initial capital for the 7,500 tpd
mill project is $185 million (including a $35 million contingency),
yielding average annual production of 145,000 oz of gold over a 12year mine life at all-in sustaining costs of $644/oz.
■ Our net asset valuation (NAV3%) est. is unchanged at $4.21 per share.
Recommendation
■ We continue to rate AuRico Sector Outperform and note the shares gained
significantly more than the peer group on the news, possibly indicating that
investors see this as testament to the smooth ramp-up at Young-Davidson
which allows AuRico to consider additional investments.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.04 A
$-0.03 A
$-0.01
$-0.01
(FY-Dec.)
Adj Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA (M)
Gold Equiv. Prod. (oz) (000)
Tot. Cash Cost ($/oz)
All-In Sust. Cost ($/oz)
Q2
$0.02 A
$-0.06 A
$-0.02
$-0.01
Q3
$0.00 A
$-0.02 A
$-0.02
$-0.01
Q4
$-0.02 A
$-0.05
$-0.02
$-0.01
Year
$0.04
$-0.17
$-0.08
$-0.04
P/E
96.7x
n.m.
n.m.
n.m.
2013A
$0.04
96.7x
$0.28
12.9x
$50
163,195
$676
$1,181
2014E
$-0.17
n.m.
$0.29
12.3x
$82
233,530
$695
$1,179
2015E
$-0.08
n.m.
$0.42
8.5x
$116
262,817
$773
$1,172
2016E
$-0.04
n.m.
$0.53
6.7x
$150
296,377
$721
$1,075
2017E
$-0.06
n.m.
$0.64
5.6x
$181
296,377
$721
$1,075
BVPS14E: $6.87
NAVPS:
P/NAV:
$4.21
0.85x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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.
$889
$215
$1,104
249
249
27
Carlisle and Lynn Gold Camp Details
■ A 2014 optimized Preliminary Economic Assessment (PEA) outlined a $257 million
after-tax NPV and a 26% IRR at an $1,100/oz gold price. At a $1,300/oz gold price, the
after-tax NPV increases to $400 million and the IRR to 35%. See Exhibit 1.
Exhibit 1 – Project Economics
Source: Company reports; Scotiabank GBM estimates.
■ Average life-of-mine (LOM) gold production is 145,000 oz (total 1.74 Moz) with a peak
of 230,000 oz in year five. The PEA is based on a milling operation with initial throughput
of 3,750 tpd, ramping up to 7,500 tpd in year five, processing an average head grade of 2.2
g/t. While the grade is certainly impressive for an open-pit project in Canada, we do note the
relatively high strip ratio of 7.8:1. See Exhibit 2 for additional details.
■ Initial capital costs are estimated at $185 million, inclusive of a $35 million contingency.
All-in sustaining costs (AISC) are an impressive $644/oz of gold (net of by-product credits)
while average total cash costs were estimated to be $530/oz.
Exhibit 2 – Production Parameters
Source: Company reports; Scotiabank GBM estimates.
28
■ The Lynn gold camp in northwestern Manitoba comprises the Farley and MacLellan
gold projects. The two open-pit gold projects are located in a district of historical mining
and exploration and are about 20 km away from each other. Both properties can be accessed
by existing road infrastructure running to the town of Lynn Lake about 45 km away. See
Exhibit 3.
Exhibit 3 – Property Location
Source: Company reports; Scotiabank GBM estimates.
■ The projects’ total Measured and Indicated (M&I) resources are 38,298,000 tonnes at
2.13 g/t Au for 2,628,100 oz. These were calculated at a gold price of $1,446/oz for
MacLellan and $1,650/oz for Farley, both using a cut-off grade of 0.40 g/t. A gold price of
$1,241/oz was used in the PEA pit optimization with a cut-off grade varying between
0.59 g/t and 0.67 g/t (Exhibit 4).
Exhibit 4 – Optimized M&I Resources
Source: Company reports; Scotiabank GBM estimates.
29
■ Additional details in Carlisle’s press release.
■ A 51% interest in the project can be earned by spending C$20 million towards the
advancement of a feasibility study within a three-year earn-in period.
■ AuRico can earn an additional 9% (60% in total) by delivering a feasibility study
within that three-year period.
■ During the period, exploration beyond the scope of the feasibility study will be
operated by Carlisle and funded equally by the two companies with a maximum of $2.0
million per year from AuRico, unless otherwise agreed.
■ AuRico will be the operator of the JV.
30
Exhibit 5 - Operating and Financial Forecasts
Ratio Analysis
Net Income (US$mm)
Net Income Adjusted (US$mm)
EPS (f.d.) (US$/sh)
P/E (x)
Operating CF bf. ch. in WC (US$mm)
CFPS bf. ch. in WC (US$/sh)
P/CF (bf. ch. in WC) (x)
Free Cash Flow to Firm (US$/sh)
Free CaSh Flow to Equity (US$/sh)
Income Statement Items (US$mm)
Total Revenue
Operating Costs
Exploration
SG&A
Depreciation
Interest Expense
Other - gain (loss)
EBITDA
EBIT
EBT
Taxes - recovery (expense)
Effective Tax Rate
Earnings bf. Minority Interests
Reported Net Earnings
Reported EPS (f.d.) (US$/sh)
Adjusted EPS (f.d.) (US$/sh)
Cash Flow Statement Items (US$mm)
Net Earnings
DD&A
Deferred Taxes
Other
Operating CF bf. ch. in WC
CF from Operating Activities
CF from Financing Activities
CAPEX
CF from Investing Activities
Net Change in Cash
CFPS bf. ch. in WC (f.d.) (US$/sh)
Balance Sheet Items (US$mm)
Cash
Current Assets
Long-term Assets
Total Assets
Short-term Debt
Current Liabilities
Long-term Debt
Total Liabilities
Shareholders' Equity
Total Liabilities & Shareholders' Equity
Working Capital
Mine Reserves and Resources
Gold (Moz)
Copper (Mlbs)
2013A
($177)
$19
$0.04
93.0x
$26
$0.28
12.4x
($0.76)
($0.49)
2014E 2015E 2016E
($75)
($19)
($10)
($42)
($19)
($10)
($0.17) ($0.08) ($0.04)
n.m.
n.m.
n.m.
$228
$329
$382
$0.29
$0.42
$0.53
12.2x
8.4x
6.6x
($0.84) ($0.02)
$0.04
($0.70) ($0.04)
$0.03
$228
($149)
($1)
($28)
($66)
($3)
($145)
$50
($15)
($163)
($14)
9%
($177)
($177)
($0.64)
$0.04
$298
$342
$385
($188) ($203) ($214)
($1)
($2)
($2)
($27)
($20)
($20)
($123) ($107) ($132)
($21)
($25)
($25)
($12)
$1
$0
$82
$116
$150
($40)
$9
$18
($73)
($15)
($7)
($2)
($4)
($4)
3%
24%
52%
($75)
($19)
($10)
($75)
($19)
($10)
($0.23) ($0.06) ($0.03)
($0.17) ($0.08) ($0.04)
($177)
$66
$12
$125
$26
$63
($251)
($249)
($272)
($460)
$0.28
($75)
$123
$1
$180
$228
$60
$30
($175)
($140)
($50)
$0.22
($19)
$107
$241
$329
$106
($25)
($112)
($112)
($32)
$0.32
($10)
$132
$260
$382
$135
($28)
($122)
($122)
($15)
$0.41
$143
$292
$2,170
$2,462
$7
$114
$244
$675
$1,788
$2,462
$178
$92
$205
$2,181
$2,386
$5
$47
$322
$672
$1,714
$2,386
$158
2P
6.5
619
$61
$173
$2,186
$2,359
$3
$45
$319
$667
$1,692
$2,359
$129
M&I
2.5
347
$46
$159
$2,175
$2,334
$1
$42
$319
$664
$1,670
$2,334
$117
Inf.
0.5
46
Average Share Price
S/O (mm)
Realized Gold Price (US$/oz)
Spot Gold Price Actual/Forecast (US$/oz)
Production and Costs
El Chanate Production ('000 oz)
Young-Davidson Production ('000 oz)
Total Production ('000 oz)
Cash Costs (US$/oz)
All-in Sustaining Costs (US$/oz)
All-in Costs (US$/oz)
2013A 2014E
$5.21
$5.50
250.4
248.7
$1,411 $1,271
$1,411 $1,271
2015E
$5.50
249.4
$1,300
$1,300
2016E
$5.50
249.4
$1,300
$1,300
73
72
121
158
194
230
$676
$695
$1,181 $1,179
$2,237 $1,501
86
177
263
$773
$1,172
$1,283
86
210
296
$721
$1,075
$1,206
400
2,000
350
300
1,500
250
200
1,000
150
100
500
50
-
0
2013A
2014E
2015E
2016E
2017E
Young-Davidson Production ('000 oz)
El Chanate Production ('000 oz)
Cash Costs (US$/oz)
All-in Sustaining Costs (US$/oz)
All-in Costs (US$/oz)
Additional Ratio Analysis
Gross Margin
ROE
ROA
EV/EBITDA (x)
Net Debt/Equity
Book Value (US$/sh)
2013A
1.7
n.m.
n.m.
27.9x
6%
$7.14
2014E
1.6
n.m.
n.m.
19.4x
13%
$6.89
2015E
1.6
n.m.
n.m.
14.0x
15%
$6.79
2016E
1.6
n.m.
n.m.
11.0x
16%
$6.70
NAV Analysis
Operating Mining Assets (US$mm)
Young-Davidson (3% discount rate)
El Chanate (3% discount rate)
YD West (3% discount rate)
Kemess
Total Assets
US$M US$/Sh
$1,072
$4.29
$200
$0.80
$25
$0.10
$38
$0.15
$1,335
$5.35
%
102%
19%
2%
4%
127%
Net Debt
Working Capital (Net of cash and short term debt)
In-the-Money Instruments
G&A, Expl, Reclamation
Net Asset Value
Target Multiple
Target Price and Implied Return
($215) ($0.86)
$71
$0.29
$1
$0.00
($141) ($0.57)
$1,050
$4.21
1.26x
$5.50
(21%)
7%
0%
(13%)
100%
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
56%
31
Company Comment
Wednesday, November 12, 2014, Pre-Market
(CAR.UN-T C$24.70)
CAP REIT
Q3/14 Initial Glance: Roughly in Line
Mario Saric, CPA, CA, CFA - (416) 863-7824
(Scotia Capital Inc. - Canada)
mario.saric@scotiabank.com
Rating: Sector Perform
Risk Ranking: Medium
Trevor Thompson-Harry - (416) 863-7986
(Scotia Capital Inc. - Canada)
trevor.thompsonharry@scotiabank.com
Target 1-Yr:
C$25.00
ROR 1-Yr:
6.0%
Valuation: 16.25x AFFO (F'16 estimate)
Key Risks to Target: Capex requirements, excess Toronto condo supply, CMHC restructuring
CDPU (NTM)
CDPU (Curr.)
Yield (Curr.)
$1.19
$1.18
4.8%
Event
■ Reported FFOPU was $0.42 vs. $0.43 YOY, roughly in line with our
$0.425 and slightly below $0.44 consensus (range=$0.425-$0.45).
Same-property (SP) NOI was +3.7% YOY (Q2/14= +5.4%);
revenue/expenses were +2.4%/0.4% (Q2/14 = +2.8% / -1.2%).
Implications
■ Higher interest expense offsets solid top line. NOI was ~$0.01 above
our forecast (higher-than-expected revenue partially offset by higher
expenses), which was more than offset by higher-than-expected interest
expense; see Exhibit 1. Tenants are paying for hydro in 49.6% of its
sub-metered suites in ONT/AB, +260bp QOQ, helping drive a modest
70bp YOY SP NOI margin growth to 61.5% (Q2/14 was +160bp
YOY). Leverage was -40bp QOQ on debt/FV (flat on debt/cost).
■ Decent rent growth; AGIs ramp up again. Near-max SP apartment
occupancy of 98.6% (+10bp YOY) drove 1.6% & 3.4% YOY avg.
monthly rent (AMR) growth on lease renewal & turnover (Q2/14 =
1.6%/ 3.2%). AMR growth was highest in the mid-tier portfolio
(+2.8%), followed by luxury (+2.3%), and affordable (+0.9%).
Outstanding above guideline increase (AGI) applications were +11%
QOQ to 15,658 suites (vs. +1.7% QOQ avg. in 2013).
■ IFRS cap rate -7bp QOQ. The Q3/14 fee simple cap rate was 4.93%,
below CAR's 5.4% implied cap rate and our 5.45% NAV cap rate.
Recommendation
■ Full update post c/c on Wed., Nov 12th at 10:00 am. ET. #866-225-0198.
Qtly FFOPU (FD)
2013A
2014E
2015E
2016E
Q1
$0.36 A
$0.37 A
$0.38
$0.39
(FY-Dec.)
Funds from Ops/Unit
Adj. Funds from Ops/Unit
Price/AFFO
EV/EBITDA
EBITDA (M)
EBITDA Margin
EBITDA/Int. Exp
Q2
$0.42 A
$0.43 A
$0.44
$0.46
Q3
$0.43 A
$0.43
$0.45
$0.46
Q4
$0.34 A
$0.39
$0.40
$0.41
Year
$1.55
$1.59
$1.67
$1.72
P/FFO
13.7x
15.5x
14.8x
14.4x
2012A
$1.47
$1.29
19.2x
20.3x
$224
54.3%
2.4x
2013A
$1.55
$1.35
15.7x
19.4x
$255
53.4%
2.5x
2014E
$1.59
$1.44
17.2x
19.6x
$275
55.2%
2.7x
2015E
$1.67
$1.49
16.5x
19.2x
$280
55.7%
2.8x
2016E
$1.72
$1.55
16.0x
18.7x
$289
55.8%
2.8x
BVPU14E: $25.42
ROE14E: 5.64%
NAVPU:
NAV
Prem/(Disc):
$24.50
0.82%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Units O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ 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.
$2,695
$2,694
$5,389
109
109
32
Q3/14 Initial Glance: Roughly in Line
Exhibit 1 - CAR: Q3/14 Results Summary
All in $000s, except for per share figures
Scotia
Q3/14E
Q3/14A
YOY
Q3/13A
Actual
vs. Scotia
3,220
A vs. Scotia
FFOPU
Rental revenue
$ 119,845
$
116,625
$ 112,682
$
Ancillary income
$
6,474
$
7,073
$
7,254
$
Straight-line rent
$
37
$
25
$
59
$
12
Total Revenue
$ 126,356
$
123,723
$ 119,995
$
2,633
Operating costs
$
(24,879)
$
(24,120)
$ (24,573)
$
(759)
Utilities
$
(9,554)
$
(8,844)
$
(8,684)
$
(710)
Property taxes
$
(14,308)
$
(14,181)
$ (13,883)
$
(127)
Total Operating Expenses
$
(48,741)
$
(47,144)
$ (47,140)
$
(1,597)
-$0.014
NOI
$
77,615
$
76,578
$ 72,855
$
1,037
$0.009
Forecast Acquisition NOI
$
-
$
-
$
$
-
Total NOI
$
77,615
$
76,578
$ 72,855
$
1,037
$0.009
G&A (excludes amort of FV of Unit-Based Comp)
$
(4,602)
$
(4,905)
$
$
303
$0.003
EBITDA
$
73,013
$
71,673
$ 68,662
$
1,340
$0.012
Financing costs, including deferred costs
$
(26,725)
$
(24,921)
$ (25,458)
$
(1,804)
-$0.016
Net mortgage prepayment costs
$
-
$
-
$
98
$
-
Other Income*
$
600
$
-
$
796
$
600
Net other FFO adjustments
$
(181)
$
328
$
165
$
(509)
(599)
$0.03
-$0.01
$0.024
Operating Expenses
Normalized FFO - diluted
$46,707
Units outstanding
$47,080
111,333
FFOPU - diluted
(4,193)
$44,263
110,726
$0.420
-
-$373
101,832
$0.425
-$0.003
607
$0.43
-$0.006
Maintenance capex reserve provision
$
(3,878)
$
(5,176)
$
(3,749)
$
Straight-line revenue (not included in reported)
$
(37)
$
(25)
$
(59)
$
(12)
Amortization of FV of Unit Based Compensation
$
1,019
$
500
$
675
$
519
AFFO - Reported
$
43,811
$
$ 41,130
$
AFFOPU - diluted
$0.39
42,379
$0.38
$0.005
$0.40
1,298
1,432
$0.01
Operating Results
Apartment Occupancy (quarter end)
98.6%
98.4%
98.5%
0.2%
Estimated Occupied apartment rent per suite (average)
$
1,095
$
1,093
$
1,074
$
Average apartment rent per suite
$
1,080
$
1,076
$
1,058
$
Same-property NOI (YOY)
3.7%
n/a
2
4
3.7%
0.0%
NOI Margin
61.4%
61.9%
60.7%
-0.5%
Operating expenses as a % of revenue
19.7%
19.5%
20.5%
0.2%
Utility costs as a % of revenue
7.6%
7.2%
7.2%
Property taxes (per suite)
G&A as a % of revenue
$
422
3.6%
$
415
4.0%
$
415
3.5%
0.4%
$
7
-0.4%
*Net of a $1.6M adjustment for income from equity accounted investments.
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
33
Intraday Flash
Tuesday, November 11, 2014 @ 4:30:23 PM (ET)
(CHP.UN-T C$10.66)
Choice Properties REIT
A Bit More Positive View as Development
Pipeline Begins to Take Form
Pammi Bir, CPA, CA, CFA - (416) 863-7218
(Scotia Capital Inc. - Canada)
pammi.bir@scotiabank.com
Rating: Sector Perform
Risk Ranking: Medium
Ganan Thurairajah, MBA - (416) 863-2899
(Scotia Capital Inc. - Canada)
ganan.thurairajah@scotiabank.com
Target 1-Yr:
C$11.25
ROR 1-Yr:
11.6%
Valuation: 14.75x AFFO (F'16 estimate)
Key Risks to Target: Significant tenant concentration in Loblaw, majority unitholder
Event
■ Ex $2.4M (~$0.005/unit) of non-recurring internalization costs, Q3 FFO
was $0.23 vs. $0.22 last year, in line with our $0.23E and consensus.
Implications
■ No surprise, as operationally sound. Portfolio occupancy remains
high at 97.9%, with tenant retention at a solid 85%, and moderate 3.6%
leasing spreads. Though the strong operating metrics will likely limit
near-term SP NOI gains, management's focus on leasing up the 82.6%
occupied ancillary space provides a means to improve organic growth.
■ As development pipeline takes form, we're a little more enthused.
Developments are ramping up with $260M (>7% targeted yields) of
planned investments across 860K sf over the next 2-3 years, prompting
us to raise our forecast completions. The better visibility leaves us a bit
more encouraged about CHP's ability to drive AFFO and NAV growth.
■ Estimates tweaked; growth remains below peers and group. Our
2014E-16E AFFO CAGR edged up 70bp to 2.2%, but remains below
the 4.2% average of its retail peers and 5.5% for our coverage universe.
CDPU (NTM)
CDPU (Curr.)
Yield (Curr.)
$0.65
$0.65
6.1%
Pertinent Revisions
FFOPU15E
FFOPU16E
New
$0.92
$0.94
Old
$0.93
$0.93
Recommendation
■ SP, $11.25. We believe CHP remains in good form with highly visible
cash flows supporting an attractive yield. At 14.2x 2015E AFFO/6.3%
implied cap rate/in line with NAV, we view the units as fairly valued. All
else equal, we recommend building positions more actively below $10.00.
Qtly FFOPU (FD)
2013A
2014E
2015E
2016E
Q1
Q2
$0.22 A
$0.22
$0.23
$0.23 A
$0.23
$0.23
(FY-Dec.)
Funds from Ops/Unit
Adj. Funds from Ops/Unit
Price/AFFO
EV/EBITDA
EBITDA Margin
EBITDA/Int. Exp
AFFO Payout Ratio
2012A
Q3
$0.21 A
$0.23 A
$0.23
$0.24
Q4
$0.22 A
$0.23
$0.23
$0.24
Year
$0.44
$0.91
$0.92
$0.94
P/FFO
11.9x
11.8x
11.6x
11.4x
2013A
$0.44
$0.35
14.6x
15.8x
71.1%
3.4x
89.9%
2014E
$0.91
$0.73
14.6x
16.1x
71.2%
3.5x
89.3%
2015E
$0.92
$0.74
14.4x
16.0x
71.1%
3.4x
88.0%
2016E
$0.94
$0.76
14.0x
15.6x
71.1%
3.3x
85.4%
BVPU14E: $10.47
Cap Rate: 6.25%
NAVPU:
NAV
Prem/(Disc):
$10.53
1.23%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Units O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ 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.
$4,094
$3,506
$7,600
384
46
34
10.8%
19.4x
na
2.3%
-2.1%
5.5%
14.1x
6.6%
-2.3%
-6.2%
-8.1%
4.2%
15.7x
6.2%
16.9x
5.8%
4.9%
4.3%
0.2%
4.7%
17.9x
5.9%
3.9%
13.7x
6.7%
3.8%
14.4x
6.3%
-0.2%
Chg since IPO = 0.0x
Source: Company reports; Scotiabank GBM estimates.
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Feb-14
Mar-14
Jan-14
Dec-13
Oct-13
Nov-13
Sep-13
Aug-13
Jul-13
12.0x
Operationally Sound, as Expected; Better Visibility
and Accelerating Development Activities Should
Provide a Modest Boost to Growth
Source: Company reports; Scotiabank GBM estimates.
■ Operationally steady; focus remains on lease-up of ancillary
space. Occupancy ticked up to 97.9% (+20bp QOQ, +30bp
YOY) as leasing momentum accelerated to 235K sf (vs. 167K in Exhibit 3 – Choice is Trading Relatively in Line with our NAVPU
Q2 and 50K in Q1). Though L-tenanted space is 100% occupied,
as at September 30, 2014
the 82.6% occupancy (+220bp QOQ, +300bp YOY) in the Choice Properties REIT NAVPU
remaining 4.4M sf of ancillary space provides a modest internal Assumed cap rate
6.00%
6.25%
6.50%
growth opportunity, with management focused on backfilling NTM net operating income
475,990
475,990
475,990
this space. Tenant retention remains strong at 85% (80% YTD),
Value Range ($000s)
though renewal spreads decelerated to +3.6% (5.7% YTD) as 3 Investment properties
7,946,791
7,629,464
7,336,547
large format tenants renewed at relatively flat rates. SP NOI Other assets
234,987
234,987
234,987
grew 3.8% YOY, but mostly due to last year’s shorter post-IPO Total Assets
8,181,778
7,864,451
7,571,534
quarter (and also due to a $353K of higher capex recovery). Mortgages payable
With an average remaining lease term of 12.1 years, a near fully Transferor notes
2,550,000
2,550,000
2,550,000
occupied portfolio, and <2.5% of GLA expiring through 2016, Debentures payable
925,000
925,000
925,000
we expect modest internal growth through our forecast period Class C LP units
Other debt
344,839
344,839
344,839
mostly from embedded rents steps. Our 2015E-16E SP NOI are Total liabilities ($000s)
3,819,839
3,819,839
3,819,839
+0.8% annually from 35bp-50bp of occupancy gains and 7.5%
4,361,939
4,044,612
3,751,695
ancillary tenant renewal spreads. On the property management Estimated net asset value
$11.36
$10.53
$9.77
internationalization, the process is expected to wrap up by the Estimated NAVPU
Current
Unit
Price
$10.51
$10.51
$10.51
start of 2015. The build-out of leasing and property management
-7.5%
-0.2%
7.6%
teams is nearly complete, with the ERP system implementation Premium/(Discount) to NAV
Current implied cap rate
6.3%
completed in Q3.
Nov-14
2.2%
14.2x
6.3%
Incrementally More Positive View as Development Pipeline Begins to
Take Shape; Valuation Remains Reasonable
■ Maintaining Sector Perform, $11.25 one-year
target. Though Q3 results were largely as Exhibit 1 – In Our View, Choice’s Valuation Appears Reasonable Relative to Retail Peers
expected, our outlook for CHP has slightly
Implied Cap Rate
Prem/(Disc) to NAV
2014E-16E AFFO CAGR
2015E P/AFFO
improved with better visibility on the 24
development pipeline prompting us to raise our 20
16
estimated completions. As a result, our 2014E- 12
8
16E AFFO CAGR ticked up by 70bp to 2.2%.
That said, growth remains below the 4.2% 4
average of its retail peers and the 5.5% of our -40
overall universe. Operationally, the portfolio -8
*Averages exclude CHP.un
remains sound, with high occupancy and long- -12
term leases underpinning cash flow stability. -16
CHP
CWT
CRR
FCR
REI
CDN Retail
CDN REIT
US Shopping
REITs*
Sector
Centre REITs
Moreover, leasing up vacant ancillary space
provides an opportunity to modestly improve Source: Company reports; Scotiabank GBM estimates.
growth. Nonetheless, we continue to look for
more compelling growth to form a more
constructive view. The units are trading at 14.2x 2015E
AFFO/6.3% implied cap rate/in line with NAV (Exhibits 1-3) vs. Exhibit 2 – Choice is Trading in Line with Historical Average P/AFFO
17.9x/5.9%/0.2% for FCR and 14.1x/6.6%/-2.1% for the sector
Retail REITs (ex CHP)
(its P/AFFO spread to FCR and the sector are both in line with 17.0x
Average (NTM) = 16.0x
Chg since CHP IPO = -0.5x
historical levels). Our 14.75x target multiple is unchanged and
15.7x
continues to reflect a 4x discount to FCR, a level that we believe 16.0x
fairly balances CHP’s predictable cash flows, strategic ties to
Loblaw (L), and lower leverage, against its high single tenant 15.0x
14.2x
concentration, slower growth, lower liquidity, and low urban
market penetration. At current levels, we see the units as fairly 14.0x
CDN REIT Sector
valued, and recommend investors buy more actively below
Choice Prop. REIT
14.1x
Average (NTM) = 14.5x
13.0x Average (NTM) = 14.5x
$10.00.
Chg since CHP IPO = -0.5x
35
Cap Rate
■ Development activities set to accelerate, with better
visibility on pipeline. As a reminder, CHP identified 3.5M sf Exhibit 4 – Better Visibility Provided on Development Pipeline
of at grade expansion opportunities at the time of the IPO. Of
Q4/14
2015
2016
Total
this amount, it expects to develop 1M sf across 25 sites over Potential Development GLA (sf)(1)
15,000
304,000
591,000
910,000
$3,000
$92,000
$165,000
$260,000
the next 3-5 years. At Q3, 600K sf was in various stages of Potential Capital ($)
(1)
2015/2016
GLA
incl.
~250K
sf
of
space
gained
from
post-Q3/14
acquisitions.
pre-development. Visibility has further improved, with
$260M of anticipated investment in up to 860K sf (2.3% of Source: Company reports; Scotiabank GBM estimates.
GLA) over the next 2-3 years (Exhibit 4). The projects are
mostly in ON and W. CDA and relate to retail expansions and
additions to existing sites, though mixed-use opportunities are
also being reviewed. With targeted yields >7% (incl. the Exhibit 5 – Acquisitions Yield Modest Accretion on Leverage Neutral Basis
impact of the site intensification fee payable to L), we expect
Assumed Acquisitions ($000s)
0 100,000 200,000 300,000 400,000 500,000 600,000
the pipeline to provide an incremental source of AFFO and
5.50%
(0.001)
(0.001)
(0.002)
(0.002)
(0.003)
(0.004)
NAV growth. In Q4, CHP expects to start a $42M expansion
6.00%
0.001
0.001
0.002
0.002
0.003
0.003
(7.5% yield) of its recently acquired L-tenanted warehouse in
6.50%
0.002
0.004
0.005
0.007
0.009
0.010
Boucherville, QC. In light of the expected ramp-up in
7.00%
0.003
0.006
0.009
0.012
0.014
0.017
development activities, we raised our 2015E-16E completions
7.50%
0.004
0.008
0.012
0.016
0.020
0.024
8.00%
0.005
0.011
0.016
0.021
0.026
0.031
to ~$260M from $100M. In Q3, CHP completed the
8.50%
0.007
0.013
0.019
0.026
0.032
0.038
previously noted projects in Toronto (addition of LCBO and
Dollarama to Brown’s Line property) and Stoney Creek Assumptions:
(Fortino’s) at a cost of $10M. Work at the Real Canadian (1) Acquisitions funded with 60% debt/40% equity. (2) Assumed interest
Superstore in Surrey continues, with completion scheduled rate = 4.25%. (3) Maintenance capex and TIs = 5% of revenue.
for 1H/15. Post-Q3, CHP acquired a 70% interest in 21 acres
of land in Brampton from PenEquity Realty for $18M. The Source: Company reports; Scotiabank GBM estimates.
site is expected to house a 200K sf L-bannered retail store
within the next 3 years, with a targeted 7.25% yield.
Exhibit 6 – Portfolio Acquisition Summary
Address
City
61 Main St.
Sackville
Prov.
NB
Type
Banner
Year
Built
Age
Retail
Save Easy
1960
2000
2013
1998
Ancillary
GLA
54
14,512
-
14
1
16
13
315,961
43,000
27,516
386,477
0
Total
GLA
% of Total
GLA
Occup.
14,512
1%
100%
315,961
43,000
27,516
386,477
25%
3%
2%
31%
100%
100%
100%
100%
180 Chemin du Tremblay Boucherville
55 Jacques-Cartier Sud Sherbrooke
480 boul. Sainte-Anne
Ste-Anne-Des-Plaines
Subtotal
QC
QC
QC
QC
30 King St. South
124 Clair Rd. East
449 Carlaw Ave.
2187 Bloor St. W.
720 Broadview Ave.
Subtotal
Alliston
Guelph
Toronto
Toronto
Toronto
ON
ON
ON
ON
ON
ON
Retail
Retail
Retail
Retail
Retail
Zehrs
Zehrs
No Frills
No Frills
Loblaws
2000
2014
1954
1990
1970
14
0
60
24
44
36
72,247
39,956
94,478
13,972
20,192
240,845
31,293
1,806
12,971
46,070
72,247
39,956
125,771
15,778
33,163
286,915
6%
3%
10%
1%
3%
23%
100%
100%
98%
100%
100%
99%
3193 Portage Ave.
Winnipeg
MB
Retail
Real Canadian
Superstore
1996
18
124,829
22,629
147,458
12%
85%
2815 Wanuskewin Rd.
Saskatoon
SK
Retail
Extra Foods
1997
17
48,754
-
48,754
4%
100%
16 Superior St.
7613-100th Ave.
Subtotal
Devon
Peace River
AB
AB
AB
Retail
Retail
Extra Foods
No Frills
1997
1994
17
20
19
30,918
58,225
89,143
0
30,918
58,225
89,143
2%
5%
7%
100%
100%
100%
2855 Gladwin Rd.
Abbotsford
BC
Retail
Real Canadian
Superstore
1989
25
141,487
-
141,487
11%
100%
250 Old Airport Rd.
Yellowknife
NT
Retail
Extra Foods
1995
19
60,970
-
60,970
5%
100%
2270-2nd Ave.
Whitehorse
YT
Retail
Real Canadian
Superstore
2003
11
90,211
-
90,211
7%
100%
22
1,197,228
95%
68,699
5%
1,265,927
100%
100%
98.1%
Total/weighted average
% of total
Source: Company reports; Scotiabank GBM estimates.
Warehouse Distribution Centre
Retail
Provigo
Retail
Provigo
Loblaw
GLA
36
■ Acquisition assumptions raised as pace of deal flow from L will likely mimic 2014. As
noted in our Oct. 9th comment, “Basket Refilled with Another $212M Purchase”, CHP
acquired a 16-property, 1.3M sf portfolio from L for $212M at a 6.6% cap rate or $164/sf (ex
$4M for land parcel). The properties (Exhibit 6) are mostly in QC, ON, BC, and MB (75% of
GLA), with the rest spread across AB, NB, and even Yukon and the Northwest Territories.
Occupancy is virtually full at 98.1% with L and its various banners accounting for 95% of
rents under lease terms of 15-20 years (retail has 7.7% rent bumps every 5 years).
Intensification could add another 280K sf (+22%) within 5 years with the 3 Toronto sites
offering mid-to longer-term opportunities for possible mixed use redevelopment. Pro-forma
the transaction, we estimate L’s remaining portfolio at ~$1.8B (~8.5M sf), which will likely
be sold down to the REIT over the next 5-7 years. The deal brings 2014 YTD acquisitions to
$426M (6.6% cap rate). With more than a year now under its belt, management’s
commentary on the call suggests a similar level of annual activity going forward. We raised
our 2015E-16E to $480M and $400M (from $250M), though the impact on our estimates is
limited on a leverage neutral basis (Exhibit 5). Post quarter-end, the REIT entered an
agreement to acquire a 921K sf L-tenanted warehouse in Pickering, ON for $81.5M (6.5%
cap rate, $88/sf), with the deal expected to close in Q1/15.
■ Leverage in good form with ample available liquidity. D/GBV sits at 46% with 2014E net
debt/EBITDA at 7.7x (vs. the sector at 48% and 8.4x, respectively). Though D/GBV has
trended down since the IPO due to the Class B LP units issued to L on acquisitions, we
expect a modest uptick through our forecast period as management works toward its longer
term 50% target. Liquidity is ample with $430M from cash and undrawn lines, though we
assume $170M of equity issuance in 2015 in 2015 to partially fund additional acquisitions.
Q3/14 Recap: Minor Variance, but Overall In Line Results
■ Overall, an in line delivery. Ex $2.4M (~$0.005/unit) of non-recurring internalization costs,
Q3 FFO was $0.23 vs. $0.22 last year, in line with our $0.23 estimate and consensus (Exhibit
7). A modest NOI shortfall was more than offset by lower-than-expected G&A. The 3.9%
YOY FFOPU growth was partially due to last year’s slightly shorter post-IPO quarter, along
with acquisitions, and lower G&A, partly offset by dilution from financing activities.
37
Exhibit 7 – Forecast Summary, Condensed Variance Analysis, Leverage Snapshot
Forecasts
2013
2014E
2015E
2016E
Estimates ($, fully diluted)
FFOPU
AFFOPU
Distributions per unit
FFO payout ratio
AFFO payout ratio
0.44
0.35
0.32
73%
90%
0.91
0.73
0.65
72%
89%
0.92
0.74
0.65
71%
88%
0.94
0.76
0.65
69%
85%
Valuation
P/FFOPU
P/AFFOPU
EV/EBITDA
Distribution yield
AFFOPU yield
11.5x
14.2x
14.8x
6.5%
7.0%
11.6x
14.4x
15.5x
6.3%
6.9%
11.5x
14.2x
14.9x
6.2%
7.0%
11.2x
13.8x
14.6x
6.2%
7.2%
$10.53
-0.2%
6.25%
6.26%
682
509
486
75%
71%
735
548
523
75%
71%
Pre-tax NAV / Cap rate
Current NAV Premium / Implied Cap Rate
Income Statement ($ millions)
Rental revenue
Net operating income
EBITDA
NOI margin
EBITDA margin
Balance Sheet ($ millions)
Total assets
Net debt
319
239
227
75%
71%
7,448
3,328
8,022
3,615
8,666
3,968
801
597
569
75%
71%
9,306
4,300
Leverage
Net debt/EV
Debt/GBV
Net Debt/EBITDA
EBITDA/net interest
46%
47%
7.8x
3.4x
47%
46%
7.7x
3.5x
48%
46%
7.9x
3.4x
49%
47%
7.8x
3.3x
Forecast Assumptions
($MM, except where noted)
2013
2014E
2015E
2016E
Same-store NOI growth
Acquisitions
Assumed cap rate
Completed developments
Assumed cap rate
G&A expenses
% of revenues
Maintenance capex
% of revenues
Leasing costs
% of revenues
na
189
6.6%
na
12
3.8%
15
4.6%
1
0.4%
0.5%
426
6.6%
13
5.6%
23
3.4%
31
4.5%
3
0.4%
0.8%
482
6.7%
92
7.5%
26
3.5%
34
4.6%
3
0.4%
0.8%
400
7.0%
165
7.5%
28
3.5%
37
4.6%
3
0.4%
Condensed Quarterly
Variance Analysis ($000s)
Q3/14A
Q3/13A
% chg
Scotia
Q3/14E
Variance
per unit
Revenue
Operating expenses
NOI
NOI margin
170,293
43,166
127,127
74.7%
153,655
10.8%
37,387
15.5%
116,268
9.3%
75.7% -102 bp
175,037
46,823
128,213
73.2%
(0.012)
(0.010)
(0.003)
140 bp
General & administration
% of revenue
EBITDA
EBITDA margin
6,411
3.8%
120,716
70.9%
7,445
-13.9%
4.8% -108 bp
108,823
10.9%
70.8%
6 bp
6,750
3.9%
121,463
69.4%
(0.006)
-9 bp
0.003
149 bp
Net interest expense
FV changes of investment properties
FV adjustment on exchangeable units
Transaction costs
Current and future taxes
(Gains)/losses on dispositions
Non-controlling interest
Other
Net income/(loss)
82,698
15,612
(100,414)
450
64
122,306
75,027
(75,539)
35,425
284
73,626
10.2%
nm
nm
nm
nm
nm
nm
nm
nm
34,717
132
86,614
0.000
nm
nm
nm
nm
nm
nm
nm
nm
FFO adjustments:
Amortization
Class B LP distributions
Fair value (gains)/losses
FV adj. - exchangeable units
FV adj. - unit based comp
Acquisition transaction costs
Future taxes
Non-controlling interest
Non-recurring, unusual items
FFO
FFOPU - fully diluted
2
47,993
15,612
(100,414)
(322)
450
2,372
87,999
0.229
42,623
(75,539)
35,425
(7)
2,974
79,102
0.220
nm
nm
nm
nm
nm
nm
nm
nm
nm
11.2%
3.9%
2
86,616
0.226
nm
nm
nm
nm
nm
nm
nm
nm
nm
1.6%
0.003
Leverage/Liquidity Snapshot @
Q3/14
Q3/14
Debt/GBV
Max limit
Net debt/EV
Debt/NAV assets
45.8%
60.0%
46.5%
46.5%
Liquidity ($000s)
Credit facility capacity
Undrawn amounts
Cash on hand
Available liquidity
Debt Profile
% due pre-2017
Average in-place debt cost
Weighted average term (years)
2014E refinancing rate
2015E refinancing rate
19.6%
3.6%
5.6
4.0%
4.8%
Assumed Equity Issuance
2014E issuance
2014E timing
na
2015E issuance
170,000
2015E timing
Q2/15 & Q4/15
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
500,000
422,651
8,262
430,913
38
Company Comment
Wednesday, November 12, 2014, Pre-Market
(DHX.B-T C$9.39)
DHX Media Ltd.
Q1/15 Preview - Inclusion of Family Channel and
New Production Deals
Paul Steep, MBA - (416) 945-4310
(Scotia Capital Inc. - Canada)
paul.steep@scotiabank.com
Rating: Sector Perform
Risk Ranking: Speculative
Andy Ko, CFA, MBA - (416) 863-7993
(Scotia Capital Inc. - Canada)
andy.ko@scotiabank.com
Target 1-Yr:
C$9.00
ROR 1-Yr:
-3.6%
Valuation: 13x NTM EV/Adj. EBITDA 1-yr fwd
Key Risks to Target: Lumpy Sales; Disney Renewal; CRTC TV Review
Div. (NTM)
Div. (Curr.)
$0.05
$0.05
Yield (Curr.)
0.5%
Event
■ DHX will report Q1/15 results on November 14 at 8:30 a.m. ET, dialin: 1-888-231-8191. We forecast revenues of $49.4M and Adj.
EBITDA of $18.0M (cons. $50.8M and $16.5M).
Implications
■ Our view is that DHX's Q1/15 results will reflect stronger distribution
and M&L revenues as well as a partial quarter with the inclusion of
Family Channel (DHX Television) in the financial results. In the
quarter, we expect solid adjusted EBITDA margins will be sustained
given operational efficiency and new digital distribution deals.
■ The acquisition of the Family channel business is transformational for
DHX, in our view, moving the company into the broadcasting business.
Our focus remains on the upcoming renewal of the Disney output deal
in August 2015, which should be a key milestone as well as a risk factor
for the stock. We expect DHX will be successful in securing a renewal
of the Disney agreement for another three- to five-year term with a
modest increase in the content cost.
Recommendation
■ We believe DHX will continue to benefit from increased size and scale of
the underlying business, along with ongoing growth opportunities in its
core kids content.
Qtly Revenues (M)
2013A
2014A
2015E
2016E
Q1
Q2
Q3
Q4
Year
$13.5 A
$27.0 A
$49.4
$60.0
$26.4 A
$30.4 A
$63.4
$68.4
$31.2 A
$29.0 A
$62.5
$67.5
$26.2 A
$29.7 A
$62.7
$67.4
$97.3
$116.1
$238.0
$263.3
Price/Rev
enue
2.93x
6.65x
4.84x
4.38x
2012A
$0.07
$0.25
16.4x
0.9x
$73
$9
2.2x
2013A
$0.09
$-0.12
35.6x
1.2x
$97
$23
1.8x
2014A
$0.11
$0.05
60.9x
2.3x
$116
$37
2.1x
2015E
$0.27
$0.52
34.7x
1.3x
$238
$81
1.7x
2016E
$0.36
$0.82
26.2x
1.0x
$263
$94
1.9x
(FY-Jun.)
Adj EPS
Cash Flow from Ops
Price/Earnings
Relative P/E
Revenues (M)
Adjusted EBITDA (M)
Current Ratio
BVPS15E: $1.97
ROE15E: 13.84%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ 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.
$1,125
$49
$1,173
120
69
39
Q1/15 Preview
■ We anticipate DHX’s Q1/15 results will reflect stronger distribution and M&L revenues and
sustain a meaningful increase in the EBITDA margins seen in Q4/14, supported by improved
operational efficiency and higher margins on new digital distribution deals. This quarter
represents the first partial quarter (acquisition closed on July 31, 2014) with the inclusion of
Family Channel in the financial results.
Exhibit 1 – Inclusion of Family Channel and Sequentially Sustained Margins in Q1
(FYE June 30; C$000 except EPS; IFRS)
Production revenue
Distribution revenue
Producer and service fee revenue
Merchandising, licensing and other revenue
Family Channel Business
Total Revenue
Q1/15E
$10,560
$11,470
$4,518
$9,308
$13,535
$49,390
Q1/14A
$10,581
$6,962
$4,107
$5,352
Adj. EBITDA
Adj. EBITDA margin
$17,972
36.4%
Net income
EPS - fully diluted
Adj. EPS
Consensus
Q1/15E
% Diff.
-0.2%
64.8%
10.0%
73.9%
Q4/14A
$1,748
$14,614
$3,915
$9,468
% Diff.
504.1%
-21.5%
15.4%
-1.7%
$27,002
82.9%
$29,745
66.0%
$50,800
$7,801
28.9%
130.4%
$10,192
34.3%
76.3%
$16,500
-$2,687
$2,158
-224.5%
$1,040
-358.4%
($0.02)
$0.05
$0.02
$0.03
-208.1%
68.7%
$0.01
$0.03
-358.0%
96.7%
$0.05
Source: Company reports; IBES; Scotiabank GBM estimates.
■ New Yo Gabba Gabba! Live! Tour. DHX recently announced a 30-city North American fall
tour of the new Yo Gabba Gabba! Live! show (50-60 shows) starting October 14.
Management indicated that it is contemplating a winter 2015/spring 2015 tour and will report
progress on these plans in Q1 and the coming quarters.
■ New Production Agreements. DHX continues to secure additional deals to produce
animated television series for leading studios and broadcasters. The firm announced an
agreement with Sony Pictures Animation to produce a television version of Cloudy with a
Chance of Meatballs. DHX will produce twenty-six 22-minute animated episodes (with
global television and non-U.S. home entertainment rights) and represent merchandising for
the series on a worldwide basis.
Exhibit 2 – Busy Production Schedule
Show
Dr. Dimension Pants
You and Me - Series I
Looped
Inspector Gadget 2.0
Johnny Test
Open Heart
Hank Zipzer - Series 2
Degrassi
Twirlywoos
Supernoobs
Teletubbies
Cloudy with a Chance of Meatballs: The Series
Age Group
6 to 11
Preschool
6 to 11
6 to 11
6 to 11
Teens
6 to 11
Family
Preschool
6 to 11
Preschool
6 to 11
Type
Animation
Mixed
Animation
Animation
Animation
Live action
Live action
Live action
Live action
Animation
Live action
Animation
# of Shows Runtime (mins)
26
11
17
11
26
30
26
22
13
30
12
30
13
22
28
30
50
11
26
22
60
25
26
22
Core Broadcaster
Teletoon
CBC
Teletoon
Teletoon
Teletoon
Teen Nick/YTV/MTV Canada
BBC
Teen Nick/YTV/MTV Canada
BBC
Teletoon
BBC
Estimated Delivery
September 2014
October 2014
November 2014
November 2014
Fall 2014
January 2015
February 2015
July 2015
2015
January 2016
Source: Company reports; Scotiabank GBM.
■ The firm also announced a new contract with UK broadcaster CBeebies to produce 50
episodes of preschool series Twirlywoos (and a master toy deal to be launched in 2016). The
new production will be handled by Ragdoll Productions, which DHX acquired in September
40
2013. Exhibit 2 provides a partial list of the firm’s commissioned shows that are currently in
production at various DHX studios.
■ DHX continues to be active in expanding and building up its own library of proprietary
content. Exhibit 3 provides an overview of the firm’s existing content library aggregated by
age cohort and production type. The company has seen a gradual shift in the mix of its library
with a slight increase in the number of live action titles and a relatively consistent mix across
various age groups.
Exhibit 3 – Active in Expanding Content Catalogue
2 to 11
4 to 7
6 to 11
6 to 9
8 to 12
Family
Preschool
Teens
Grand Total
Animation
17
2
114
2
8
18
47
3
211
Live action
1
3
9
Mixed
2
1
10
Stop motion
6
20
12
17
7
69
3
1
6
9
23
15
Grand Total
26
6
133
2
31
31
79
10
318
Source: Company reports; Scotiabank GBM.
■ Active in Licensing Transactions. The firm appointed Character Options to act as global
master toy partner for Teletubbies with the new series currently in production.
■ New Distribution Agreement. DHX Media has entered into an agreement with China
National Television (CNTV), the new-media broadcast division of CCTV, to launch a new
children's content platform nationally in China. In the revenue-sharing deal, DHX will
initially provide more than 700 half-hours of Mandarin content for the new service.
ScotiaView Analyst Link
41
Company Comment
Wednesday, November 12, 2014, Pre-Market
(DIR.UN-T C$9.04)
Dream Industrial REIT
Q3 In Line; New President & CEO Appointed
Pammi Bir, CPA, CA, CFA - (416) 863-7218
(Scotia Capital Inc. - Canada)
pammi.bir@scotiabank.com
Rating: Sector Perform
Risk Ranking: Medium
Ganan Thurairajah, MBA - (416) 863-2899
(Scotia Capital Inc. - Canada)
ganan.thurairajah@scotiabank.com
Target 1-Yr:
C$10.25
ROR 1-Yr:
21.1%
Valuation: 12.25x AFFO (F'16 estimate)
Key Risks to Target: Inability to execute growth, significant unitholder, rising interest rate s
CDPU (NTM)
CDPU (Curr.)
$0.70
$0.70
Yield (Curr.)
7.7%
Event
■ DIR reported Q3/14 FFOPU of $0.23 vs. $0.24 last year, in line with
our $0.23 estimate and consensus ($0.235).
Implications
■ Results as expected across line items. FFOPU was flat YOY (-1%) as
growth from SP NOI and acquisitions was offset by financing dilution.
■ Front lines steady, with healthy YOY internal growth. Occupancy
remains solid with committed at 95.5% (-10bp QOQ, +40bp YOY) and
economic at 93.9% (-10bp, -20bp). SP NOI rose 2.4% YOY (+2.7%
YTD) with W. CDA (+5.1%) continuing to outpace Central/E. CDA
(+0.3%) from higher occupancy and rents. QOQ, SP NOI was down
0.8% on lower average occupancy. Renewal leasing spreads were
strong at +6.3% with 69% tenant retention (66% YTD), a bit below
DIR’s typical 70%-75%. Market rents remain 5% above in place, with
W. CDA (37% of NOI) at +10% vs. Central/E. CDA (63%) at +2%.
■ Brent Chapman appointed President and CEO effective Jan. 5/15.
Mr. Chapman has over 28 years of real estate experience and joins DIR
from Guardian Capital Real Estate where he is Managing Director.
Prior roles incl. President and CEO of GPM Investment Management
and senior positions at Oxford Properties and Talisker Corporation.
■ IFRS cap rate steady QOQ and YOY at 6.71%, in line with our
6.75% NAV cap rate but modestly below its current 7.2% implied cap.
Recommendation
■ Full update post Nov. 12th c/c (2 p.m. ET; 1-866-229-4144; 9411711#).
Qtly FFOPU (FD)
2013A
2014E
2015E
2016E
Q1
$0.22 A
$0.23 A
$0.24
$0.25
(FY-Dec.)
Funds from Ops/Unit
Adj. Funds from Ops/Unit
Cash Distributions/Unit
Price/AFFO
EV/EBITDA
EBITDA Margin
EBITDA/Int. Exp
AFFO Payout Ratio
Q2
$0.23 A
$0.24 A
$0.25
$0.25
Q3
$0.24 A
$0.23
$0.25
$0.25
Q4
$0.23 A
$0.24
$0.25
$0.25
Year
$0.91
$0.95
$0.98
$1.01
P/FFO
9.7x
9.5x
9.2x
9.0x
2012A
2013A
$0.91
$0.74
$0.69
12.0x
16.1x
63.9%
3.1x
94.2%
2014E
$0.95
$0.78
$0.70
11.5x
15.3x
63.0%
3.1x
89.4%
2015E
$0.98
$0.82
$0.70
11.0x
14.4x
63.2%
3.0x
85.2%
2016E
$1.01
$0.84
$0.72
10.8x
14.1x
63.3%
2.9x
85.8%
BVPU14E: $10.33
Cap Rate: 6.75%
NAVPU:
NAV
Prem/(Disc):
$10.45
-13.50%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Units O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ 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.
$692
$849
$1,541
77
58
42
Intraday Flash
Tuesday, November 11, 2014 @ 11:51:24 AM (ET)
(CMPC-SN CLP 1,440)
Empresas CMPC SA
In-Line Q3/14
Benoit Laprade, CPA, CA, CFA - (514) 287-3627
(Scotia Capital Inc. - Canada)
benoit.laprade@scotiabank.com
Rating: Sector Perform
Risk Ranking: High
Luis Pardo Figueroa - (514) 287-3613
(Scotia Capital Inc. - Canada)
luis.pardofigueroa@scotiabank.com
Target 1-Yr: CLP 1,600
ROR 1-Yr:
11.8%
Valuation: 8.5x NTM EV/EBITDA 1-Year Forward
Key Risks to Target: Lower-than-expected pulp prices and demand, FX
Event
■ CMPC reported EBITDA of $251M, compared with our $251M
estimate and consensus of $247M.
Implications
■ By segment, Forestry, Pulp, and Paper EBITDA came in lower than
expected by $1M, $3M, and $6M, respectively, while Tissue and Other
EBITDA came in higher than expected by $7M and $3M, respectively.
■ The company reported a solid operational quarter driven by strong
performances at its tissue and pulp operations. These segments
benefited from investments and FX tailwinds, which drove costs lower
and margins higher.
■ Net debt to EBITDA remained unchanged sequentially at 3.1x as the
company continues to build its Guaiba II pulp mill. The company noted
that the project remained on schedule and on budget, with ~$1.3B spent
and 79% of construction completed by the end of Q3/14. Recall that
CMPC expects Guaiba II to be operational by Q2/15 and fully ramped
up by the end of 2015.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
CLP 10.18
CLP 10.18
0.7%
Pertinent Revisions
EBITDA14E
EBITDA15E
EBITDA16E
New
US$987
US$1,049
US$1,333
Old
US$983
US$1,051
US$1,341
Recommendation
■ We reiterate our Sector Perform rating and our target price of CLP 1,600.
Although we like CMPC's solid operational performance and growth
prospects, we see limited upside to our target, especially when
considering the risks relating to the successful completion of Guaiba.
Qtly EBITDA (M)
2013A
2014E
2015E
2016E
Q1
Q2
Q3
Q4
Year
$212 A
$250 A
$225
$298
$239 A
$244 A
$248
$330
$258 A
$251 A
$280
$347
$254 A
$242
$297
$358
$964
$987
$1,049
$1,333
EV /
EBITDA
9.1x
9.8x
9.8x
7.6x
2012A
$0.09
$0.38
39.3x
2.4x
$4,759
$914
12.0x
6.6x
2013A
$0.08
$0.35
29.2x
1.8x
$4,975
$964
9.1x
6.3x
2014E
$0.07
$0.33
34.8x
2.1x
$4,874
$987
9.8x
6.4x
2015E
$0.13
$0.31
18.5x
1.1x
$5,059
$1,049
9.8x
7.2x
2016E
$0.22
$0.39
11.3x
0.7x
$5,679
$1,333
7.6x
8.9x
(FY-Dec.)
Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
EV/EBITDA
EBITDA/Int. Exp
Capitalization
Market Cap (B)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
CLP 3,515
$0
CLP 3514981
ScotiaView Analyst Link
BVPS14E: $3.43
ROE14E: 2.02%
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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.
2,441
976
43
Q3/14 Highlights
■ CMPC reported EBITDA of $251M, compared
with our $251M estimate and consensus of Exhibit 1 - Quarterly Highlights
$247M. The company reported $244M in the $ million, except per share data Q3/14a Q3/14e Chg % Q3/13a
previous quarter and $258M last year (Exhibit 1).
Sales:
Forestry
$158
$146
8.0%
$138
■ By segment, Forestry, Pulp, and Paper EBITDA
Pulp
$360
$352
2.3%
$374
came in lower than expected by $1M, $3M, and
Paper
$234
$241
(3.0%)
$170
$6M respectively. While Tissue and Other
Tissue
$486
$498
(2.4%)
$467
EBITDA came in higher than expected by $7M
Other
$0
$0
n.m.
$0
Total Sales
$1,238 $1,238
0.0% $1,231
and $3M, respectively.
■ Segmented results:
EBITDA:
Forestry
$38
$39
(3.2%)
$42
■ Forestry: EBITDA rose $3M sequentially,
Pulp
$126
$129
(2.2%)
$130
driven mainly by higher plywood volumes as
Paper
$32
$38 (15.7%)
$34
well as lower harvesting, transportation, and
Tissue
$57
$50
14.9%
$58
energy costs. Volumes rose 6% over the
Other
($2)
($5)
n.m.
($6)
$251
$251
0.1%
$258
previous quarter driven by higher shipments Total EBITDA
20.3% 20.3%
2 bp 21.0%
of pulpwood (+82%), plywood (+19%), and EBITDA Margin
sawing logs (+15%). These positives were Source: Company reports; Scotiabank GBM estimates.
partially offset by lower sawn wood (-11%)
and remanufactured wood (-2%) shipments.
Pulpwood sales were driven by higher domestic sales, while sawing log volumes
benefitted from the company’s trading program. The higher plywood shipments were a
result of the ramp-up of CMPC’s new plywood line, which drove a 42% increase in
export volumes this quarter. The decline in sawn wood and remanufactured wood
shipments was a result of a slowdown in construction activity in Chile. Average
realizations during the quarter decreased 5% sequentially, driven by a less favourable
sales mix with a higher proportion of pulpwood and sawing logs.
■ Pulp: EBITDA rose $6M from last quarter driven by lower direct costs, including
lower energy and chemical prices, as well as improved operating rates, which were
partially offset by lower quarterly revenue (-$14M). Volumes for the quarter decreased
3% sequentially as softwood volumes declined 5% and hardwood volumes decreased
2%. Softwood volumes declined due to lower exports to Europe, Asia (ex. China), and
Latin America, partially offset by higher shipments to China. While hardwood volumes
saw lower export shipments to China, Latin American, and the Middle East, partially
offset by increased volumes to the U.S., Europe, and other Asian countries. Average
selling prices during the quarter decreased 2% from last quarter.
■ Paper: EBITDA declined $7M when compared with last quarter, driven mainly by
lower sales and higher operating costs, including higher energy due to the end of
electric contracts at December 2013. Shipments for the quarter rose 1% sequentially,
driven by higher corrugated paper sales (+43%) due to seasonality in preparation for the
summer fruit season. This was offset by a 47% QOQ decline in molded pulp tray
volumes due to the end of the apple season, a 19% drop in corrugated boxes due to the
weaker industrial, wine and fruit demand, and a 5% drop in paper bags as well as a 1%
decline in boxboard shipments. Realized prices for the quarter declined 5% from
Q2/14, as a result of lower corrugated paper, boxes and paper bag prices.
■ Tissue: EBITDA rose $4M QOQ due mostly to higher sales volumes and lower energy
costs, which more than offset lower tissue paper prices in US$. Volumes roses 6%
QOQ due to higher volumes in Argentina, Chile, Brazil, Peru, Mexico, and Ecuador,
driven by increased volumes for home consumption tissue paper. Average selling prices
for tissue paper (in US$) for the quarter declined 2% sequentially, while prices for
sanitary products (in US$) rose 3% QOQ. The depreciation of the local Latin American
currencies vs. the US$ had a negative impact on the segment’s realized prices. An
increase in local currency prices provided a partial offset to the appreciation of the US$.
■ At the end of Q3/14, the company’s net debt/EBITDA ratio remained unchanged from last
quarter at 3.1x. This compares with 3.0x at the end of Q3/13. The company’s cash balance
during the quarter rose 51% to US$1,619M due to the issuance of an 144A-S international
Y/Y Chg % Q2/14a Q/Q Chg %
14.5%
$145
(3.7%)
$374
37.6%
$245
4.1%
$467
n.m.
$0
0.6% $1,231
9.0%
(3.7%)
(4.5%)
4.1%
n.m.
0.6%
(9.5%)
$35
(3.1%)
$120
(5.9%)
$39
(1.7%)
$53
n.m.
$0
(2.9%)
$244
(73 bp) 19.8%
8.6%
5.0%
(17.9%)
7.5%
n.m.
2.9%
45 bp
44
US$500M bond in September 2014 (which was disbursed to prepay for a US$400M
syndicated loan in October 2014) and the US$250M capital increase in July 2014. The
company noted that there will be no incremental capital raises for the Guaiba II project and
that therefore it expects the leverage ratio to increase as the project reaches completion.
Additionally, CMPC expects to be in line with its financial policy debt ratio of by the end of
2016. We estimate that with the additional EBITDA from Guaiba II, CMPC should exit
2016E with a net debt/EBITDA ratio of ~3x. In the meantime, we expect the ratio to peak at
~4.2x by mid-2015.
Valuation
■ We reiterate our Sector Perform rating and our target price of CLP 1,600. Although we like
CMPC’s solid operational performance and growth prospects, we see limited upside to our
target, especially when considering the risks relating to the successful completion of Guaiba.
Exhibit 2 - Comps Table
Company Name
Ticker
Price
Currency 10-Nov-14
Market
Cap (M)
Enterprise
Value (M)
P/E
2014E 2015E 2016E
2014E
EV/EBITDA
2015E 2016E
Net Debt/
2014E EBITDA
Dividend
Yield
Estimate Source
Pulp
Canfor Pulp Products Inc.
Empresas CMPC S.A.*
Fibria Celulose S.A. Sponsored ADR**
ENCE Energia y Celulosa SA
Mercer International Inc.
Suzano Papel e Celulose SA Pfd A
Tembec Inc.
Average
CFX-CA
CMPC-SGO
FBR-US
ENC-ES
MERC-US
SUZB5-BSP
TMB-CA
CAD
CLP/USD
USD/BRL
EUR
USD
BRL
CAD
13.20
1,451.50
12.05
1.67
13.40
10.60
3.00
937
6,204
6,675
417
861
7,802
300
949
9,435
24,031
655
1,490
21,285
815
10.0x 10.0x 8.2x
n.m. 18.7x 11.4x
n.m. n.m. n.m.
n.m.
n.m. 11.5x
13.2x 14.0x 15.9x
n.m. 15.7x 12.5x
n.m. 8.0x
5.0x
11.6x 13.3x 10.8x
4.9x
9.6x
9.6x
13.0x
6.5x
9.0x
9.6x
8.9x
4.8x
9.0x
9.0x
5.7x
6.5x
7.2x
5.4x
6.8x
4.2x
7.1x
7.6x
4.9x
6.6x
6.8x
4.4x
6.0x
0.1x
3.3x
2.8x
4.4x
3.2x
4.1x
5.4x
3.3x
1.9%
1.1%
n.a.
1.4%
n.a.
1.1%
n.a.
1.4%
Scotiabank GBM
Scotiabank GBM
Scotiabank GBM
Consensus
Consensus
Consensus
Scotiabank GBM
Other Diversified
Domtar
Empresas Copec S.A.*
International Paper Company
Kimberly-Clark Corporation
Stora Enso Oyj Class R
UPM-Kymmene Oyj
Average
UFS-US
COPEC-SGO
IP-US
KMB-US
STERV-HEL
UPM1V-HEL
USD
CLP/USD
USD
USD
EUR
EUR
40.95
7,161.30
53.66
113.92
6.63
12.51
2,654
15,874
22,731
42,430
5,224
6,657
3,895
21,266
31,154
47,999
8,763
9,931
13.7x 11.2x 11.6x
15.5x 13.5x 12.1x
16.0x 13.4x 12.3x
19.8x 18.8x 17.7x
13.4x 11.0x 10.2x
11.6x 11.9x 11.3x
15.3x 13.7x 12.7x
5.2x
10.1x
7.4x
11.0x
6.8x
7.6x
8.6x
4.7x
9.0x
7.1x
10.9x
6.4x
7.4x
8.2x
4.7x
8.4x
6.9x
10.6x
6.3x
7.4x
7.9x
1.6x
2.6x
1.9x
1.1x
2.6x
2.5x
2.1x
3.7%
1.8%
3.0%
2.9%
4.5%
4.8%
3.4%
Scotiabank GBM
Scotiabank GBM
Consensus
Consensus
Consensus
Consensus
8.5x
7.2x
6.6x
2.7x
2.6%
Average
14.2x
13.3x
11.7x
*Price in CLP. The rest in USD.
**Price & Market Cap in USD. The rest in BRL
Note: For Empresas Copec S.A. the P/E and EV/EBITDA multiples exclude the value assigned to the company's other investments of US$0.23 (CLP 135)
Source: Company reports; FactSet; Scotiabank GBM estimates.
ScotiaView Analyst Link
45
Company Comment
Wednesday, November 12, 2014, Pre-Market
(ENTEL-SN CLP 6,211)
Entel Chile
Investor Day: All We Saw
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
andres.coello@scotiabank.com
Rating: Sector Outperform
Risk Ranking: Medium
Ivan Hernandez - +52 (55) 5123 2876
(Scotiabank Inverlat)
ivanb.hernandez@scotiabank.com
Target 1-Yr: CLP 9,200
ROR 1-Yr:
53.0%
Valuation: DCF - 5 years results, 9.1% WACC, terminal growth rate of 3.6%
Key Risks to Target: Execution of Nextel Peru; Competition in Chile
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
300.00
300.00
4.8%
Event
■ We participated in Entel's Investor Day in Lima, Peru. In this report we
share all our notes (See details on page 2 to 5).
Implications
■ Numbers in Peru are impressive across the board. The graphs on the
sales performance for the two weeks following the 4G launch (+200%)
were staggering. Portability results (97% of net lines going to Entel)
show how quickly the company is positioning the brand. Mass products,
and a wireless residential offering will be launched within 8 months.
■ Although gross margins in Peru are as high as 60% (similar to Chile),
the company made it clear that the more successful they are in Peru in
the short term, the worse the EBITDA performance will be. The
company expects to assume a less bullish handset subsidy policy by
1H/15, so we may see a gradual recovery in EBITDA; however,
positive EBITDA is not expected until 2016 or 2017. Guidance was left
unchanged: 30% of wireless revenues in the long term.
■ CEO Antonio Buchi made it clear that the company is not
contemplating a capital increase, but that the controlling group is
supportive of the Peruvian strategy. In our view, an IPO of Entel Peru
would be a success given potential demand by local pension funds. We
understand that the controlling company (Almendral) plans to pay down
its debt, potentially freeing capital resources.
Recommendation
■ Entel is a high-conviction name for us. Buy.
Qtly EPS (FD)
2011A
2012A
2013A
2014E
Q1
212.67 A
221.88 A
158.96 A
143.00 A
(FY-Dec.)
Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (B)
EBITDA (B)
Current Ratio
EBITDA/Int. Exp
Q2
226.18 A
181.00 A
162.29 A
111.00 A
Q3
195.33 A
204.86 A
171.00 A
18.00 A
Q4
130.08 A
157.00 A
130.00 A
320.48
Year
764.26
760.00
622.25
592.48
P/E
11.7x
12.0x
13.7x
11.5x
2010A
731.81
731.58
13.6x
0.6x
1,087
446
1.0x
45.1x
2011A
764.26
565.81
11.7x
0.9x
1,241
515
0.8x
61.5x
2012A
760.00
536.00
12.0x
0.8x
1,399
557
0.8x
77.0x
2013A
622.25
-214.00
13.7x
0.7x
1,645
467
0.8x
19.7x
2014E
592.48
-482.07
11.5x
0.6x
1,775
468
1.0x
10.0x
BVPS14E: 4,101.09
ROE14E: 15.14%
Capitalization
Market Cap (B)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
1,469
2,612
1469592
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in CLP 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.
237
66
46
Exhibit 1 – Peru - Projected Number of Sites
Exhibit 2 - Peru - Customer Perception Points
3,500
December 2013
80
70
3,000
3,000
2,500
60
40
1,500
69
43.8%
1,600
71
34.0%
50
2,400
2,000
53
48
30
1,000
500
August 2014
20
800
10
0
0
Q2/13
October 2014
Q2/15E
Exhibit 3 - Peru - Revenue Contribution per Service
2G/3G, MBB
Retail
Source: Entel’s Investor Day.
Source: Entel’s Investor Day, Scotiabank GBM estimates.
100%
Corporate
Q4/15E
Exhibit 4 - Peru - Net Portability Winners October 2014
PPT
2%
90%
+4,100 bp
80%
659
2.9%
43%
70%
60%
50%
98%
40%
30%
57%
20%
10%
22,174
97.1%
0%
Q3/13
Q3/14
Source: Entel’s Investor Day.
Source: Osiptel.
Exhibit 6 – Peru – iPhone Sales Market Share
Exhibit 5 - Peru - Mass Media Advertising Spending
100%
90%
17%
70%
+2,100 bp
38%
80%
31%
60%
50%
24%
50%
40%
30%
52%
20%
36%
10%
0%
Q1/14
Source: Entel’s Investor Day.
Currently
Source: Entel’s Investor Day.
50%
Others
47
Feedback: Sebastian Dominguez, CEO Entel Peru
■ After doubling the number of sites since taking over the company, Entel is currently building
100 per month in Peru, which is a similar number to all the sites that NIHD was building on a
yearly basis. In 2013, the company built 736 sites, of which 500 are now on air. Entel expects
to build 100 sites per month for the next 18 months. The company already has the best LTE
coverage in Peru (324 districts). 100% of the network in Peru was renovated. In Lima, the
company currently has 25 fibre links. The transport network is being reinforced with the
leasing of more capacity.
■ The number of client centres went from 356 in August of 2013 to 575 in 2014. Entel
currently operates 60 stores. The company wants to make sure that wherever there is a
competitor store or kiosk, there is also an Entel store, so that customers can compare the
offering. A higher focus is currently being put on enhancing customer attention. In the
corporate niche, customer perception improved from 48 points in December 2013 to 69 as of
August 2014 (before the LTE launch). In the retail segment, the improvement went from 53
points to 71. The customer experience in the company's stores went from 42 to 66 among
corporates and 46 to 63 among the retail segment.
■ Entel Peru currently has capacity to manage 3.0 million clients, basically twice the number of
clients today.
■ On the regulatory front, Osiptel has been supportive, implementing in record time changes to
portability rules. The regulator is working to improve installation time for radiobases and in
implementing national roaming. Also, mobile termination rates are due to be revised in
March 2015. Entel is pushing for a 50% reduction in the termination rate.
■ We understand that the number of lines sold to corporates increased by 210% in Q3/14 if
compared to the prior year; by 290% in the postpaid segment and 470% in prepaid.
■ Whereas in Q3/13 98% of Peru's sales were related to PTT, today this percentage is at 57%.
Only between June of 2014 and September 2014, sales in Peru increased 8.0%.
■ The company is aggressively pushing advertising campaigns in mass media. In Q1/14, 17.0%
of television ads were paid by Entel, 52.0% by Movistar and 31.0% by AMX. Currently,
Entel is the number one with 38.0% of ads, 36% Movistar and 24% AMX. There has been a
lot of good press following the Entel launch.
■ 50% of all iPhones in Peru are being sold by Entel. Handset subsidies are expected to remain
high at least until Q1/15. The CEO said that "EBITDA could be positive tomorrow if we
wanted to." However, given the company's strategy, EBITDA could be negative until 2016 or
2017. Current handset subsidies and cost of sales per new client is in the neighborhood of
PEN 500 (US$170.5) in postpaid and much lower in prepaid. As the company is loading
30,000 postpaid customers on a monthly basis (90,000 per quarter), most of the EBITDA
pressure is related to the strong growth.
■ Currently, 75% of new customers have ARPUs above PEN 100.00. To address the mass and
middle niche, the company expects to launch cheaper offers in the future.
■ We understood that credit requests increased from an average of 40,000 per month in the past
to 177,521 in November, an impressive increase. In the first week after the 4G launch, sales
to new customers increased 154%, increasing a further 7.0% in the second week. Regarding
ported numbers, sales increased 2,729% in the first week and a further 87% in the second.
All in, sales in the first week increased 221% and a further 26% in the second. Basically all
portability additions in Peru went to Entel in October (22,174 of a total of 22,833).
■ Entel Peru is currently delivering 3G data speeds of 5 Mbps or 10 Mbps in areas covered with
LTE. The company will launch residential wireline and broadband products that will be powered
by the wireless network. Demand for this product in Peru is expected to be better than in Chile.
■ Entel currently has 5,000 employees in Peru.
■ The company reiterated that it expects to gain a revenue share in Peru's wireless market of 30%.
■ Employees are now aware that rather than being a distant third-player, Entel's ambition is to
become an industry leader. As such, we sensed that employee morale is rising. We
understand that employees from other telecom companies are migrating to Entel given the
better growth prospects.
48
Feedback: Antonio Buchi, CEO
■ The level of disclosure was, in our view, unusual for a company relatively discrete as Entel.
As discussions in this presentation switched rapidly from one subject to another, here we are
throwing all the information that we consider was relevant or original.
■ Entel currently has a market share of revenues in Chile of 32%. Market share in the mobile
segment stands at 46%. We understand that the company can sustain current margins so long
as the market share in mobile stands above 40.0%.
■ 35% of the subscriber base is in postpaid (this number is important as it is not directly
disclosed in the press release). This was slightly above the 34% we calculated previously.
■ Capex this year will be equivalent to 29.5% of revenues. Of this, 3.4% is related to spectrum
obligations in Chile; 1.2% is related to the Hogar product and 8.0% to Peru. Normalized,
capex as a percentage of sales would currently stand in the neighborhood of 16.9% (mostly in
line with global peers).
■ The company has expanded significantly its spectrum holdings in both Chile and Peru.
Today, Entel Chile holds 150 MHz, up from 80 MHz in 2012. In Peru, the company holds
156.5 MHz from 81.5 MHz before.
■ In Chile, the infrastructure priority for the company at this point is to expand in-building
coverage. This year the company has expanded coverage to 1.8 million square metres inside
buildings, which compares to the estimated 300,000 metres of new real state constructed in
Chile every year. The size of the data center at this point is 6,900 metres and 600 more in
Peru.
■ In Chile, Entel's subscribers are currently consuming 1.7GB per month, compared to 4.7GB
for the industry average in the United States. Back in 2011, data consumption was 0.82GB
per month, which means that subscribers in Chile more than doubled their consumption in
the past three years.
■ The margin on mobile termination in Chile was only 15%. The cut to the MTR impacted
EBITDA by 25.0%.
■ The regulator Subtel is currently working on allowing operators to access buildings
(apparently, some buildings have exclusivity agreements). The regulator is also working on
improving portability rules and quality (the company is particularly excited about portability
trends, to which Entel attributes strong gains in revenue share). The recent ruling on
commercial bundling was ''lighter'' than originally perceived: it means mostly that operators
must offer services on a standalone basis. Management is not concerned about its impact on
financials. It appears to us that, when it comes to regulation, Subtel and the Ministry of
Communications are more interested on quality than anything else. Direct regulation of data
rates (or even voice) is not under consideration currently.
■ The ARPU of prepaid customers in Chile currently stands at US$8.6, among the highest in
the industry. However, although 41% of Entel's base already has a smartphone, only 9.3% are
consuming data (excluding WiFi downloads). Hence, there is still solid potential for data
consumption in Chile.
■ Among the postpaid base, the percentage of customers with limited data plans (e.g., clients
have a certain allotment of data; once they surpass it, the company continues delivering but
charges more) is now at 34% from 9% in 2013. This figure is very important as it shows that
data is becoming the most relevant driver in the customer experience. Entel prefers to charge
customers rather than promising unlimited data plans where subscribers actually see a sharp
reduction of speeds once they surpass a certain amount of megabytes. Postpaid clients not
using data are now only 39% compared to 50% the year before.
■ Smartphone penetration in Peru currently stands at 17%, compared to 27% in LatAm.
■ Entel's CEO was asked if he would consider a capital increase in case Peru growth was
higher than expected and the company's leverage increases beyond the current guidance of
2.6x net debt to EBITDA. He said that: (1) the company does not believe currently that there
is any specific need to raise capital; (2) the company wants to maintain solid credit ratings;
49
and (3) the controlling families (Almendral) have been quite supportive of the company's
projects and he would expect the same in case there was a capital increase (however, he
made it clear that he cannot speak on behalf of shareholders). We understand that the
controlling company, Almendral, plans to repay its outstanding debt, leaving room to inject
capital in Entel if needed (or, perhaps, pay higher dividends).
■ We understand that Entel may consider selling certain assets if the price makes sense;
another option could be to IPO the Peruvian subsidiary given potential demand by local
pension funds. As such, it appears to us that the possibility of a capital increase at the Entel
level appears low at this point.
Exhibit 7 – Entel’s Spectrum Holdings Evolution
180
2012
120
Currently
4.7 GB
4.5
3.5
3
100
80
Currently
4
92.0%
87.5%
2011
5
156.5 MHz
150 MHz
160
140
Exhibit 8 – Entel Chile Average Monthly Data Consumption
80 MHz
81.5 MHz
2.5
107.3%
1.7 GB
2
60
1.5
40
1
20
0.82 GB
0.5
0
Chile
Source: Entel’s Investor Day.
Peru
0
Chile
USA
Source: Entel’s Investor Day.
ScotiaView Analyst Link
50
Company Comment
Wednesday, November 12, 2014, Pre-Market
(FSM-N US$4.42)
(FVI-T C$5.00)
Fortuna Silver Mines Inc.
SJ Expansion Sounds Like a Go
Craig Johnston, CPA, CA - (416) 860-1659
(Scotia Capital Inc. - Canada)
craig.johnston@scotiabank.com
Rating: Sector Perform
Risk Ranking: High
Valuation: 1.30x Q3/15E NAV
Target 1-Yr:
US$5.15
ROR 1-Yr:
16.5%
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
■ We are updating our estimates following the Q3/14 conference call,
including relatively material revisions to our estimates for San Jose.
Implications
■ In our opinion, management commentary on the conference call
indicated the company is likely to go ahead with the expansion to 3,000
tpd at its San Jose mine (currently 2,000 tpd). Management noted that at
$14/oz silver, the expansion project still yields a +20% return. A
construction decision is not expected for a month or so, however we
have updated our estimates to reflect the expansion. Fortuna expects to
be able to commission the expanded mill by Q3 2016.
■ Given the capital outlay required for the 3,000 tpd expansion project,
management noted that development of Trinidad North (which we
previously expected in 2015) would likely be delayed until 2016. We
have made this adjustment within our estimates as well.
■ We have also lowered our unit cost estimates at San Jose and increased
our unit cost estimates at Caylloma based on recent results. Overall, our
NAV3% has increased 4% to $3.89 per share (based on $19/oz Ag and
$1,300/oz Au) and our target price has increased to $5.15 per share.
Target:
1-Yr
New
Old
$5.15
$4.95
Recommendation
■ The market responded well to Fortuna's Q3 results with shares up 16%
yesterday, as we believe investors are drawn to its healthy balance sheet
and peer leading all-in sustaining costs. Unfortunately, our enthusiasm is
relatively muted by valuation at spot prices relative to its gold peers. SP.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.05 A
$0.04 A
$0.05
$0.05
(FY-Dec.)
Adj Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA (M)
Production (Moz)
Tot. Cash Cost ($/oz)
All-In Sust. Cost ($/oz)
Q2
$0.00 A
$0.02 A
$0.05
$0.05
Q3
$0.00 A
$0.05 A
$0.05
$0.07
Q4
$0.02 A
$0.02
$0.05
$0.09
Year
$0.07
$0.14
$0.21
$0.27
P/E
38.5x
31.7x
20.8x
16.6x
2013A
$0.07
38.5x
$0.36
8.1x
$41
4.6
$7.03
$20.45
2014E
$0.14
31.7x
$0.42
10.5x
$60
6.6
$4.58
$15.00
2015E
$0.21
20.8x
$0.43
10.3x
$70
6.8
$3.56
$11.39
2016E
$0.27
16.6x
$0.55
8.0x
$90
7.8
$2.69
$8.80
2017E
$0.34
13.0x
$0.66
6.7x
$115
9.4
$2.42
$7.37
BVPS14E: $2.12
ROE14E: 6.83%
NAVPS:
P/NAV:
$3.89
1.14x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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.
$581
$-72
$509
131
131
51
San Jose – Revising Estimates to Encompass 3,000 tpd Expansion
■ Based on management’s commentary on the conference call, we have made the following
changes to our estimates for San Jose:
o 3,000 tpd Expansion – We have assumed management will go forward with
this expansion project, and assume commissioning of the expanded mill in Q3
2016. We estimate expansion capital of $40 million. Our previous estimates
incorporated 2,000 tpd only.
o Trinidad North Development – We have pushed the development of
Trinidad North until 2016, given the capital outlay required for the expansion
project, and the fact the company has 2-2.5 years in accessible ore via the
current underground mine. We have also revised our breakdown of capital for
the development of Trinidad North to 50% development and 50% sustaining
(previously 100% development).
o Operating Costs – We have reduced our operating cost per tonne estimates in
2015 to $62.38/tonne down from $64.51/tonne as management noted that
current unit costs achieved are sustainable. We estimate unit costs will reduce
further with the economies of scale from the increase to 3,000 tpd.
o We made other minor adjustments to our estimates for San Jose.
Exhibit 1 - New vs. Previous San Jose Estimates
NEW
Operating Param eters
2014E
2015E
2016E
2017E
2018E
1,910
1,950
2,313
2,950
2,950
Mill Throughput
tpd
Silver Grade
g/t
229
225
236
240
240
Gold Grade
g/t
1.73
1.75
1.77
1.77
1.77
89%
Silver Recovery
Silver Payable Production
Gold Recovery
Gold Payable Production
%
89%
89%
89%
89%
Moz
4.2
4.2
5.2
6.8
6.8
%
90%
90%
90%
90%
90%
koz
32.1
28.5
34.2
43.6
43.6
Financial Param eters
Operating Cash Cost (net of by-products)
US$/oz
$2.43
$1.75
$1.25
$0.84
$0.84
Sustaining Capital
US$M
$29
$20
$15
$14
$14
Development Capital
US$M
$1
$37
$18
$5
$5
2014E
2015E
2016E
2017E
2018E
Mill Throughput
tpd
1,903
1,925
1,925
1,925
1,925
Silver Grade
g/t
Gold Grade
g/t
1.72
1.80
1.90
2.00
2.00
Silver Recovery
%
89%
89%
89%
89%
89%
Previous
Operating Param eters
Silver Payable Production
Gold Recovery
Gold Payable Production
228
255
270
280
280
Moz
4.2
4.8
5.1
5.3
5.3
%
90%
90%
90%
90%
90%
koz
31.3
31.4
33.1
34.9
34.9
($0.01)
($0.01)
Financial Param eters
Operating Cash Cost (net of by-products)
US$/oz
$2.13
$0.94
$0.44
Sustaining Capital
US$M
$26
$21
$16
$12
$12
Development Capital
US$M
$6
$24
$10
$10
$0
Source: Company reports; Scotiabank GBM estimates.
52
NAV Breakdown & Target Price Generation
■ Other estimate revisions:
o Caylloma – We have increased our cost per tonne estimates to $87.85/tonne
up from $84.85, as Fortuna has struggled to reach 2014 annual guidance of
$88.30/tonne, due to increased energy costs given a dryer year in Peru.
o Corporate G&A – We had previously assumed significant reductions to
corporate general and administrative expenses in 2015 onward (i.e. $13
million per annum), however, management noted on the conference call that
following the reductions to head count at corporate office and in Peru, they
expect corporate general and administrative expenses to average $17 million
going forward.
■ Our net asset valuation has increased 4% to $3.89 per share, and we have increased our target
to $5.15 per share. We note our target price and net asset valuation are based on $19.00 per
ounce silver and $1,300 per ounce gold. Our net asset valuation at spot prices is $2.33 per
share, and therefore estimate Fortuna is trading at 1.9x NAV 3%, compared to its gold peers at
1.15x NAV3% . Therefore, we re-iterate our Sector Perform, despite Fortuna’s healthy balance
sheet and peer-leading all-in sustaining costs ($11.85/oz in Q3/14).
Exhibit 2 - New & Previous NAV & Target Price Generation
NEW
Current Est.
Q3/15E
%
Project
Projected
San Jose
Caylloma
Total Mining Assets
Cash and Cash Equivalents
Working Capital
NAV (US$M)
$457
$67
$524
$72
$6
NAV (US$M)
$478
$60
$538
$60
$9
NAV
92%
12%
104%
12%
2%
Multiple
1.30x
1.30x
1.30x
1.00x
1.00x
Value (US$M)
$621
$78
$699
$60
$9
$0
$0
$16
($108)
($13)
$0
$0
$16
($105)
($20)
0%
0%
3%
-20%
-4%
1.00x
1.00x
1.00x
1.00x
1.00x
$0
$0
$16
($105)
($20)
$512
$519
100%
1.31x
$680
131.4
$3.89
131.4
$3.95
Long-term Debt
Marketable Securities
In-the-money instruments
Corporate G&A
Corporate Assets
Net Asset Value
Fully Diluted (ITM) Shares (M)
Projected Value (US$/sh)
One-year Target Price (US$)
131.4
$5.17
$5.15
PREVIOUS
Current Est.
Q2/15E
%
Project
Projected
San Jose
Caylloma
Total Mining Assets
Cash and Cash Equivalents
Working Capital
NAV (US$M)
$417
$80
$497
$60
$13
NAV (US$M)
$417
$74
$491
$76
$9
NAV
84%
15%
98%
15%
2%
Multiple
1.30x
1.30x
1.30x
1.00x
1.00x
Value (US$M)
$542
$96
$638
$76
$9
Long-term Debt
Marketable Securities
In-the-money instruments
Corporate G&A
Corporate Assets
$0
$0
$16
($96)
($7)
$0
$0
$16
($94)
$8
0%
0%
3%
-19%
2%
1.00x
1.00x
1.00x
1.00x
1.00x
$0
$0
$16
($94)
$8
Net Asset Value
$490
$499
100%
1.30x
$646
131.1
$3.74
131.1
$3.81
Fully Diluted (ITM) Shares (M)
Projected Value (US$/sh)
One-year Target Price (US$)
Source: Company reports; Scotiabank GBM estimates.
131.1
$4.93
$4.95
53
Company Comment
Wednesday, November 12, 2014, Pre-Market
(GLV.A-T C$2.10)
GLV Inc.
Q2/F15 Results Miss: First Take
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 Perform
Target 1-Yr:
Risk Ranking: High
Valuation: 8.5x EV/EBITDA on F2016E
C$3.50
ROR 1-Yr:
66.7%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Key Risks to Target: Reduced municipal infrastructure spending; further reductions in pulp and paper sector capital investment.
Event
■ GLV reported Q2/F15 EBITDA $5.3M compared to our estimate of
$5.7M and consensus of $5.5M. However, Adjusted EPS loss of $0.03
missed our and consensus estimates of $0.03.
Implications
■ Backlog Flat. Consolidated backlog of $259M was flat sequentially.
Ovivo backlogs declined 2% sequentially to $281.6M (third consecutive
quarter). Pulp & Paper (P&P) backlogs increased 12.2% to $68.5M.
■ Organic Growth Declines. Organic revenues declined 2.2% compared
to Q2/F14 mainly driven by a 7.4% organic revenue decline in Ovivo.
The decline was partially offset by solid P&P organic growth of 8.6%.
The decline stems mainly from lower Ovivo new equipment sales and
lower revenues from certain legacy projects (prior to refocusing plan).
■ Margin Decline. Adjusted EBITDA margins declined 40 bp to 3.5%
mainly due to a 180 bp decline in the Ovivo margin to 4.4% and a 70 bp
decline in the P&P margin to 5.8%. Margin contraction mainly stems
from investments made under Ovivo's strategic plan as well as slight
margin compression on certain Ovivo Energy contracts. P&P margins
contracted mainly due to revenue mix (higher new equipment sales).
Recommendation
■ We will review our estimates and target price after the conference call on
November 12 at 9AM ET. Dial-in #: 1-888-231-8191.
Qtly Adj. EPS (FD)
2013A
2014A
2015E
2016E
(FY-Mar.)
Adj Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q1
$-0.09 A
$0.04 A
$-0.03 A
$0.02
Q2
$-0.07 A
$0.06 A
$0.03
$0.04
Q3
$0.09 A
$0.03 A
$0.03
$0.04
Q4
$0.08 A
$0.04 A
$-0.01
$-0.02
Year
$0.01
$0.16
$0.02
$0.07
P/E
n.m.
23.9x
98.5x
28.6x
2012A
$-0.38
$0.32
n.m.
n.m.
$643
$12
1.5x
1.2x
2013A
$0.01
$-0.08
n.m.
n.m.
$585
$24
1.4x
3.0x
2014A
$0.16
$0.78
23.9x
0.9x
$635
$25
1.5x
4.1x
2015E
$0.02
$0.28
98.5x
3.8x
$602
$19
1.6x
3.3x
2016E
$0.07
$0.37
28.6x
1.1x
$463
$17
1.7x
2.8x
BVPS15E: $3.89
ROE15E: 0.55%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated. ^ Subordinate 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.
$93
$26
$118
44
39
54
Company Comment
Wednesday, November 12, 2014, Pre-Market
(RON-T C$13.85)
RONA Inc.
Q3/14 Results - On the Right Track
Anthony Zicha - (514) 350-7748
(Scotia Capital Inc. - Canada)
anthony.zicha@scotiabank.com
Rating: Sector Perform
Risk Ranking: Medium
Valuation: 14.0x P/E on 2016E
Sami Abboud, MBA - (514) 350-7737
(Scotia Capital Inc. - Canada)
Vincent Perri, CPA, CA, CFA - (514) 287-4990
(Scotia Capital Inc. - Canada)
Target 1-Yr:
C$14.50
ROR 1-Yr:
5.7%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.14
$0.14
1.0%
Key Risks to Target: Housing recovery stalls; identifying and integrating potential acquisitions .
Event
Pertinent Revisions
■ EPS in line with consensus. RONA reported Q3/14 results with an
adjusted EPS of $0.33 in line with consensus of $0.34 and below our
expectations of $0.36. This compares to an adj. EPS of $0.25 last year
Implications
■ Turning its focus on growth. With its restructuring plan completed,
the company has turned its focus on growth. In fact, the company is
focusing more of its efforts on merchandising strategies and programs
that supported its same store sales growth.
■ Store expansion plans for 2015. The company also announced plans
for expanding its network with five new stores to be opened in 2015.
We believe this provides a new growth vector that we have not seen for
the last several years.
■ Too early to tell. While we positively view the company's strategic
shift to store expansion, we believe it's still too early to tell whether
these initiatives should translate into improved earnings power,
considering the competitive retail environment. Moreover, we believe a
pickup in housing starts, particularly in Quebec, will be required to
support growth (SSSG).
New
Target:
1-Yr
$14.50
Adj. EPS14E
$0.66
Adj. EPS15E
$0.90
Adj. EPS16E
$1.03
New Valuation:
14.0x P/E on 2016E
Old Valuation:
13.0x P/E on 2015E
Old
$13.00
$0.71
$0.98
$0.00
Recommendation
■ Rating maintained; increasing target to $14.50. We continue to rate
RONA shares a Sector Perform with a new target price of $14.50 (up
from $13.00). To value RONA shares we use a 14x P/E multiple (up from
13x) on our newly introduced 2016 EPS estimate of $1.03.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$-0.15 A
$-0.12 A
$-0.09
$-0.09
(FY-Dec.)
Adj EPS
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
Adjusted EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q2
$0.28 A
$0.35 A
$0.44
$0.44
Q3
$0.25 A
$0.33 A
$0.42
$0.42
Q4
$0.04 A
$0.10
$0.13
$0.13
Year
$0.41
$0.66
$0.90
$1.03
P/E
32.3x
21.1x
15.4x
13.4x
2012A
$0.58
$1.15
18.4x
1.0x
$4,884
$229
1.9x
11.2x
2013A
$0.41
$0.89
32.3x
1.0x
$4,192
$185
2.5x
15.3x
2014E
$0.66
$1.46
21.1x
0.8x
$4,060
$227
2.7x
15.3x
2015E
$0.90
$1.66
15.4x
0.6x
$4,190
$254
2.8x
25.0x
2016E
$1.03
$1.80
13.4x
0.5x
$4,344
$275
3.0x
33.7x
BVPS14E: $14.19
ROE14E: 4.70%
Capitalization
Market Cap (M)
Float Value (M)
TSX Weight
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ 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.
$1,607
$1,597
0.1%
116
115
55
Q3/14 Results
■ EPS in line with consensus. RONA reported Q3/14
results with an adjusted EPS of $0.33 in line with Exhibit 1 – RONA Inc. Q3/14 Results
consensus of $0.34 and below our expectations of $0.36. (millions, except EPS)
Q3/14
This compares to an adjusted EPS of $0.25 last year.
Retail
$845.1
Same Store Sales
2.0%
■ Positive same store sales. Total sales for the quarter
were $1.17 billion, reflecting same store sales growth of Distribution
$322.1
3.0% (2.0% at Retail & 8.3% for Distribution segment)
Same Store Sales
8.3%
offset by the impact from the closure of underperforming Revenues
$1,167.3
stores.
Same Store Sales
3.0%
o Retail Segment. We note that same store
$294.4
sales for the retail segment increased by Adjusted Gross Profit
Gross Margin
25.2%
2.0%. Management cited the strong
western Canadian economy, successful Adjusted SG&A
$210.5
repositioning of the Totem and Reno- % of revs
18.0%
Depot banners, a revised merchandising
$72.4
strategy targeting contractors in Western Retail
Adjusted EBITDA %
8.6%
Canada and Ontario, as well as its
$11.4
building-material merchandising strategy Distribution
Adjusted EBITDA %
3.5%
for the entire network.
Adjusted EBITDA
$83.8
o Distribution Segment. The Distribution Adjusted EBITDA %
7.2%
segment experienced a strong increase of
8.3% in same store sales. The company EBITDA
$83.7
did benefit from a shift in sales from the
Q2 period (impacted by late spring) into Adjusted EPS (fd)
$0.33
Q3 period. Furthermore, management also EPS (as reported)
$0.32
cited its merchandising strategy for both
contractors and dealer-owners supported Source: Company reports; Scotiabank GBM.
growth during the quarter.
■ Gross margin pressure. Adjusted gross margin declined by 2.0% as the company
experienced some margin pressure. In fact, adjusted gross margins declined by 50 bps from
25.7% in Q3/2013 to 25.2% in Q3/2014. The company cited the impact from a competitive
environment and pricing pressures on certain categories at the retail level partially offset by
better procurement management.
o The company also noted that it revised its merchandise strategy for contractors
in Western Canada and Ontario.
o Strategies weigh in on margins. While such strategies supported organic
growth, it also resulted in some near-term pressure on margins. Management
expects their strategy should increase its dealer-owners competitive position
and in turn translate into incremental volume to more than offset the shortfall.
■ Lower SG&A. Supported by its cost reduction initiatives, the company reduced its SG&A
by roughly $19.2 million in the quarter over last year. Most of the decrease was attributed to
the company’s recovery plan, which included a decrease in logistical expenses, operational
cost as well as a reduction in advertising and marketing. As a percentage of revenues, this
represents a decrease of roughly 160bps.
■ Margins improve. The company recorded an adjusted EBITDA margin of 7.2% or $83.8
million. This was a bit light compared to our expectations of $85.5 million or 7.3%
(consensus $85 million) but trending positively nonetheless. In fact this compares to an
adjusted EBITDA margin of 6.0% or $70.7 million last year. The improvement reflects same
store growth and the company’s cost savings initiatives.
■ Turning Focus on Growth. With its restructuring plan completed, the company has turned
its focus on growth. In fact, the company is focusing more of its efforts on merchandising
strategies and programs that supported its same store sales growth in the quarter.
Q3/13
$862.4
(2.3%)
$306.8
(2.4%)
$1,169.2
(2.3%)
$300.4
25.7%
$229.7
19.6%
$59.5
Change
(2.0%)
na
5.0%
na
(0.2%)
na
(2.0%)
-48 bp
(8.3%)
-161 bp
6.0%
21.8%
168 bp
0.9%
-14 bp
18.5%
113 bp
$70.7
18.4%
6.9%
$11.3
3.7%
$70.7
$0.25
$0.25
32.0%
28.0%
56
o
o
Announces Store Expansion. Furthermore, the company also announced
plans for expanding its network with five new stores to be opened in 2015.
This includes two stores under the Reno-Depot concept outside of Quebec.
More specifically, the two new Reno-Depot stores will be located in Calgary
North, Alberta and in Aurora, Ontario. We note that these two locations are reopenings of previously closed locations that will be downsized to roughly 70K
sq. ft.
The company also plans to retrofit its Drummondville store into a Reno-Depot,
from 47K sq. ft. to 77 sq. ft. Other locations include a 35K sq. ft. store in
Halifax and a 50K sq. ft. store in British Columbia.
■ Debt level stable. At the end of the quarter, total net debt to total capital stood at 10%
compared to 17% last year (Q3/13) and 10% in the previous quarter (Q2/14). Net debt to
adjusted EBITDA stood at 0.86x at the end of the quarter down from 1.85x last year (Q3/13)
as the company used the proceeds from the sale of the Commercial and Professional division
of $214 million to reduce debt and relatively unchanged from 0.90x in the previous quarter
(Q2/14).
o Cash flow funds share buyback. During the quarter, most of the company
free cash flow of $40 million was used to buy back $35.2 million worth of
shares (or 2.56 million shares). Since initiating its NCIB in November 2013,
we estimate that the company has purchased over 6.0 million shares at a value
of roughly $77 million. This accounts for over 70% of the company’s NCIB.
■ NCIB renewal. Furthermore, the company also announced it has renewed its share buyback
program (NCIB) and could acquire up to 9.2 million shares (10% of public float or roughly
8% of shares outstanding).
■ Adjusting estimates. We have adjusted our estimates to reflect Q3 results, a lower margin
assumption, and the company’s store expansion plans. Accordingly, we are reducing our
2014 EBITDA estimate to $227.1 million (previously $230.0 million) while our 2014
adjusted EPS estimate decreases to $0.66 (previously $0.71). We are also reducing our 2015
EBITDA estimate to $253.9 million (previously $263.5 million) and our EPS estimate to
$0.90 (previously $0.98).
o We are also introducing our 2016 estimates with an EBITDA of $274 million
and an EPS of $1.03.
Valuation & Recommendation
■ Rating maintained; increasing target to $14.50. We continue to rate RONA shares a
Sector Perform with a new target price of $14.50 (up from $13.00). To value RONA shares
we use a 14x P/E multiple (up from 13x) on our newly introduced 2016 EPS estimate of
$1.03. As the company has completed its restructuring plan and now turns its focus on
growth, we believe an increase in our valuation multiple is justified albeit still below that of
its peers. Furthermore, we note that the company has a solid balance sheet.
■ We also note that RONA share are currently trading at 15.4x our F2015 estimates, which is at
a discount to its peers, namely Home Depot at 18.8x (2015E) and Lowe’s at 16.1x (2015E).
57
Exhibit 2 – RONA Inc. Comps Table
Company Name (YE)
Canadian Specialty Retail Companies
Canadian Tire Corporation, Limited Class A ( Dec )
Loblaw Companies Limited ( Dec )
Jean Coutu Group (PJC) Inc. Class A ( Mar )
Richelieu Hardware Ltd ( Nov )
Uni-Select Inc. ( Dec )
Metro Inc. ( Sep )
Average:
Median:
U.S. Specialty Retail Companies
Home Depot, Inc. ( Feb )
Lowe's Companies, Inc. ( Jan )
Watsco, Inc. ( Dec )
Central Garden & Pet Company ( Sep )
Kingfisher Plc ( Feb )
Average:
Median:
Ticker
Price
11-Nov-14
Market
Cap (M)
Enterprise
Value (M)
CTC.A-TSE
L-TSE
PJC.A-TSE
RCH-CA
UNS-TSE
MRU-TSE
C$123.85
C$58.12
C$26.50
C$56.01
C$27.90
C$78.99
C$9,674
C$23,986
C$4,949
C$1,111
C$593
C$6,661
HD-USA
LOW-USA
WSO-USA
CENT-USA
$98.14
$58.00
$102.46
$7.95
KGF-LON
P/E
EV/EBITDA
2014E
2015E
2014E
2015E
C$13,325
C$35,405
C$4,866
C$989
C$830
C$7,974
16.2 x
19.3 x
21.9 x
21.7 x
9.6 x
15.6 x
17.4 x
17.7 x
15.6 x
16.5 x
20.5 x
19.7 x
9.0 x
14.1 x
15.9 x
16.1 x
9.9 x
10.9 x
14.2 x
12.9 x
7.6 x
10.1 x
10.9 x
10.5 x
9.5 x
9.5 x
13.6 x
11.7 x
7.1 x
9.7 x
10.2 x
9.6 x
$132,089
$57,252
$3,585
$401
$145,330
$66,587
$3,937
$804
21.8 x
19.5 x
21.2 x
na
18.8 x
16.3 x
18.0 x
na
12.0 x
10.6 x
12.3 x
8.6 x
11.1 x
9.8 x
11.0 x
7.3 x
£2.94
£6,931.30
£6,656.88
7.4 x
17.5 x
20.3 x
6.6 x
14.9 x
17.2 x
6.8 x
10.1 x
10.6 x
3.5 x
8.5 x
9.8 x
C$13.85
C$1,607
C$1,811
21.1 x
15.4 x
8.0 x
7.1 x
RONA Inc.
RON-CA
Company Name (YE)
Currency
EBITDA
EPS
EBITDA
Margin (LTM)
Canadian Specialty Retail Companies
Canadian Tire Corporation, Limited Class A ( Dec )
Loblaw Companies Limited ( Dec )
Jean Coutu Group (PJC) Inc. Class A ( Mar )
Richelieu Hardware Ltd ( Nov )
Uni-Select Inc. ( Dec )
Metro Inc. ( Sep )
CAD
CAD
CAD
CAD
CAD
CAD
4.5%
14.5%
4.7%
10.0%
7.0%
3.8%
3.2%
17.1%
6.7%
10.2%
7.1%
10.6%
10.6%
4.2%
12.3%
11.9%
5.5%
6.9%
2.5 x
8.0 x
-0.2 x
-0.4 x
2.9 x
1.1 x
35.2%
46.1%
(8.3%)
(8.6%)
35.0%
24.8%
11.7%
(0.6%)
20.3%
16.8%
9.9%
15.1%
1.7%
1.7%
1.5%
1.1%
2.2%
1.5%
U.S. Specialty Retail Companies
Home Depot, Inc. ( Feb )
Lowe's Companies, Inc. ( Jan )
Watsco, Inc. ( Dec )
Central Garden & Pet Company ( Sep )
USD
USD
USD
USD
8.4%
8.5%
11.5%
17.0%
15.6%
19.2%
17.6%
na
14.3%
11.2%
7.9%
4.5%
1.1 x
1.5 x
1.1 x
5.6 x
44.4%
42.1%
26.7%
42.9%
43.0%
20.2%
14.9%
(2.0%)
1.9%
1.6%
2.3%
0.0%
Kingfisher Plc ( Feb )
Average:
GBP
94.4%
16.8%
11.5%
11.9%
8.6%
8.9%
-0.3 x
2.1 x
(4.8%)
25.0%
8.6%
14.4%
3.4%
1.7%
RONA Inc.
CAD
11.8%
36.8%
7.0%
0.6 x
10.0%
3.9%
1.0%
2015E/2014E Growth
Net Debt / Net Debt /
EBITDA (LTM) Total Cap
ROE (LTM) Yield
Source: Company reports; FactSet; Scotiabank GBM estimates. For companies with FYE other than Dec., we have included their results in the nearest calendar year
Source: FactSet; Company reports; Scotiabank GBM estimates for RON.
ScotiaView Analyst Link
58
Company Comment
Wednesday, November 12, 2014, Pre-Market
(FALAB-SN CLP 4,292)
SACI Falabella
Solid Q3 Report Despite Macro Challenges in
Chile
Rodrigo Echagaray, MBA, CFA - (416) 945-4405
(Scotia Capital Inc. - Canada)
rodrigo.echagaray@scotiabank.com
Rating: Sector Outperform
Risk Ranking: Medium
Karla B. Peña - +52 (55) 9179 5211
(Scotiabank Inverlat)
karla.pena@scotiabank.com
Target 1-Yr: CLP 5,600
ROR 1-Yr:
31.9%
Valuation: 2014E-2020E DCF w/ 9% WACC; 14x (NTM) EV/EBITDA; 23x (NTM) P/E
Key Risks to Target: Pension funds overhang, foreign ops
Event
■ Falabella reported solid Q3 earnings above estimates despite a
challenging macro environment in Chile. Sales came in line at
CLP1,771 bn (+ 10.5% YOY). EBITDA increased 10.2% to CLP208 bn
(5% ahead of our estimate and 3.4% ahead of consensus). Net income
increased 6% to CLP81.5 bn (6% ahead of our CLP77 bn estimate).
Div. (NTM)
Div. (Curr.)
62.59
0.00
Yield (Curr.)
0.0%
Pertinent Revisions
EBITDA14E
EBITDA15E
EBITDA16E
New
989
1,098
1,261
Old
1,030
1,165
1,340
Implications
■ Department stores SSS in Chile in Q3 (-4.5%) are representative of the
macroeconomic slowdown. Yet, positive SSS in nearly all formats and
countries, sales floor expansion of ~6% YOY, and two-digit growth in
banking revenues (+15.9% YOY) led to a healthy consolidated revenue
growth. Of note, int'l ops were more than 40% of sales in Q3.
■ Gross margins increased 30 basis points on higher margins in the
banking division (lower funding costs, stable NPLs). However, SG&A
increased ahead of sales mainly due to higher expenses at Sodimac: 1)
pre-operating expenses at Uruguay; 2) Ramp up of operations in Brazil,
and 3) the closure of the Maestro acquisition in Peru. Net debt to
EBITDA increased to 3.3x (from 2.6x a year prior) as Falabella
consolidated Maestro's balance sheet as at Q3, but not it's P&L.
Recommendation
■ Falabella's solid Q3 report underscores our overweight rating on the
stock. We think valuations look appealing at ~19x P/E 2015E, a
significant discount to its 25x NTM P/E historic average multiples.
Qtly EBITDA (B)
2012A
2013A
2014E
2015E
Q1
Q2
Q3
Q4
Year
152 A
188 A
214 A
244
184 A
215 A
237 A
262
165 A
187 A
208 A
230
266 A
208 A
330
361
766
902
989
1,098
EV /
EBITDA
18.5x
15.5x
13.4x
12.5x
2012A
154.0
32.0x
18.5x
5,930
766
12.9%
2013A
157.2
30.0x
15.5x
6,660
902
13.5%
2014E
193.1
22.2x
13.4x
7,521
989
13.0%
2015E
227.1
18.9x
12.5x
8,355
1,098
13.1%
2016E
260.9
16.5x
11.1x
9,357
1,261
13.5%
(FY-Dec.)
Earnings/Share
Price/Earnings
EV/EBITDA
Revenues (B)
EBITDA (B)
EBITDA Margin
BVPS14E: 1,785.93
ROE14E: 13.74%
Capitalization
Market Cap (B)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
10,445
2,759
10447438
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in CLP unless otherwise indicated.
o
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.
2,434
341
59
Exhibit 1 - Falabella Q3/14 results
Source: Company reports; Scotiabank GBM estimates, Bloomberg.
ScotiaView Analyst Link
60
Intraday Flash
Tuesday, November 11, 2014 @ 1:42:48 PM (ET)
(SMF-T C$3.15)
SEMAFO Inc.
Q3/14 Results In Line; Positive Infill Assays from
Siou Bode Well for Upcoming Reserve Update
Ovais Habib - (416) 863-7141
(Scotia Capital Inc. - Canada)
ovais.habib@scotiabank.com
Ciara Sawicki - (416) 862-3738
(Scotia Capital Inc. - Canada)
ciara.sawicki@scotiabank.com
Rating: Sector Outperform
Risk Ranking: Speculative
Target 1-Yr:
C$4.50
ROR 1-Yr:
42.9%
Valuation: 1.20x NAVPS
Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s
Event
■ SEMAFO reported Q3/14 EPS of $0.04, slightly below our estimate of
$0.05 and consensus of $0.06.
Implications
■ The financial results were broadly in line as many third quarter items
had been pre-released, including production of 64.7 koz Au, a total cash
cost range of $555-$565/oz, and a quarter-end cash position of $112M
(+$19M from the end of Q2/14).
■ It appears that Burkina Faso is beginning to stabilize after recent civil
unrest that culminated in former President Compaoré's resignation.
Mana operations continued uninterrupted during the unrest, as did gold
sales and the delivery of spare parts and consumables to site. Timing for
a transition back to civilian rule remains uncertain, however.
■ The company also released a few highlight holes from ongoing infill
drilling at Siou which intersected high gold grades over good widths in
the Siou Zone 9 south ore shoot at a vertical depth of ~230 m. We
believe these results will help SEMAFO achieve its goal of replacing
production and expanding Siou reserves by year-end and estimate that a
1-year mine life extension at Siou would increase our NAV estimate for
the company by 8.5%.
Div. (NTM)
Div. (Curr.)
$0.00
$0.00
Yield (Curr.)
0.0%
Pertinent Revisions
Adj. EPS14E
Adj. EPS15E
New
US$0.08
US$0.22
Old
US$0.09
US$0.26
Recommendation
■ We rate SEMAFO Sector Outperform with a C$4.50 1-year target price.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.04 A
$-0.05 A
$0.04
$0.06
(FY-Dec.)
Adj Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA (M)
Production (oz) (000)
Tot. Cash Cost ($/oz)
Rlzd. Gold Price ($/oz)
Q2
$0.02 A
$0.05 A
$0.06
$0.06
Q3
$0.00 A
$0.04 A
$0.06
$0.05
Q4
$-0.03 A
$0.04
$0.06
$0.05
Year
$0.04
$0.08
$0.22
$0.22
P/E
69.2x
36.8x
12.5x
12.6x
2012A
$0.28
12.0x
$0.57
6.0x
$94
236.1
$799
$1,680
2013A
$0.04
69.2x
$0.28
9.3x
$77
158.6
$777
$1,408
2014E
$0.08
36.8x
$0.41
6.8x
$116
232.9
$665
$1,261
2015E
$0.22
12.5x
$0.55
5.0x
$165
265.7
$571
$1,300
2016E
$0.22
12.6x
$0.49
5.7x
$147
253.2
$607
$1,300
BVPS14E: $1.77
ROE14E: 4.33%
NAVPS:
P/NAV:
C$3.70
0.85x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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$909
$-121
C$772
289
288
61
Q3/14 Financial Results Broadly In Line; Many Items Pre-Reported
■ SEMAFO’s Q3/14 EPS of $0.04 came in slightly below our estimate of $0.05 and
consensus of $0.06, with the miss vs. our estimate mainly due to 3% lower than expected
revenue (5% lower sales and a 2% lower realized gold price) and higher current and deferred
taxes. See Exhibit 1 for a detailed comparison of the Q3/14 financial results to comparable
quarters and our prior estimates.
■ Recall that the company pre-released third quarter gold production of 64.7 koz, a total
cash cost range of $555-$565/oz, and its quarter-end cash balance of $112M. For
additional details on the third quarter operating results, please see our Daily Edge comment
from October 14, “SEMAFO Tests M&A Waters with Hostile Non-Binding Proposal for
Orbis Gold”.
Exhibit 1 - SEMAFO's Q3/14 Results vs. Comparable Quarters and Our Prior Estimates
Q3/14A
Mana Mine
Ore mined (tonnes)
Waste mined (tonnes)
Pre-stripping waste (tonnes)
Operating strip ratio (w:o)
Total strip ratio (w:o)
Ore processed (tonnes)
Head grade (g/t)
Recovery (%)
Gold produced (oz)
Gold sold (oz)
Cash operating cost ($/oz)
Cash operating cost ($/tonne)
Total cash cost ($/oz)
Financial Statistics
Average realized selling price ($/oz)
Revenue - gold sales ($M)
Operating income ($M)
Net Income ($M)
EPS ($/sh, diluted)
Cash flow from operations ($M)
Cash at end of period ($M)
SEMAFO's Reported Figures
Q2/14A
%
Q3/13A*
516,900
617,700
4,038,000 4,537,100
2,913,600 2,732,000
7.8
7.3
13.4
11.8
750,300
723,900
2.91
3.37
92%
93%
64,700
72,700
64,100
68,200
$549
$475
$47
$48
$555
$602
$1,260
$84.5
$25.5
$11.2
$0.04
$40.6
$112.2
$1,287
$87.8
$20.7
$13.0
$0.05
$37.6
$93.2
%
SC Estimates
Q3/14E
%
-16%
-11%
7%
6%
14%
4%
-14%
-1%
-11%
-6%
16%
-2%
-8%
618,500
2,326,200
6,522,500
3.8
14.3
714,400
1.82
85%
38,700
36,900
$746
$41
$799
-16%
74%
-55%
108%
-6%
5%
60%
8%
67%
74%
-26%
15%
-31%
750,300
7,326,680
3,038,715
9.8
13.8
750,300
2.91
90%
64,700
67,700
$535
$46
$563
-31%
-45%
-4%
-20%
-3%
0%
2%
-5%
3%
2%
-2%
-2%
-4%
23%
-14%
-20%
8%
20%
$1,341
$49.5
($2.9)
($0.8)
$0.00
$16.2
n.a.
-6%
71%
n.m.
n.m.
n.m.
151%
-
$1,282
$86.8
$22.0
$14.1
$0.05
$38.7
$112.4
-2%
-3%
16%
-20%
-22%
5%
-0%
* Financial amounts restated to reflect continuing operations only.
Source: Company reports; Scotiabank GBM estimates.
2014 Guidance Maintained After Positive Revision in October
■ In October, SEMAFO increased its 2014 guidance to 230-235 koz Au (+9% from 200225 koz) with a corresponding decrease in total cash costs to $660-$675/oz (from $695$745/oz). Capex guidance for 2014 was revised slightly higher to $58.5M from $48.5M,
mainly reflecting higher capitalized stripping costs due to the increased production guidance.
o We now model 2014 production of 233 koz Au at a total cash cost of
$665/oz and estimate Q4/14 production of 60.4 koz at $607/oz. The 2014
guidance implies Q4/14 production of 57.5-62.5 koz, roughly on par with the
third quarter as SEMAFO anticipates processing slightly more ore tonnes from
the lower-grade Wona-Kona deposit.
62
o
Mana SAG mill shell replacement still scheduled for Q1/15. The company
expects to run on ball mills only processing principally softer, higher-grade ore
from the Siou and Fofina deposits in order to minimize the impact of the SAG
mill maintenance to its 2015 production profile.
Siou Infill Drill Results Positive for Year-End Reserve Update
■ Positive infill assays from Siou. As part of its ongoing infill drilling at Siou, SEMAFO
released a few highlight holes, including hole WDC-873 which intersected 14.46 g/t Au over
18.0 m and hole WDC-864 which intersected 6.75 g/t Au over 14.1 m in the Siou Zone 9
south ore shoot at a vertical depth of ~230 m (see Exhibit 2). Company management
reiterated on the conference call that it feels confident it can replace gold ounces mined in
2014 at Siou and grow the reserve base. We expect the company will release an updated
reserve estimate for Siou in early 2015.
o We estimate that adding one additional year of mine life at Siou while
maintaining the reserve grade would increase our NAVPS estimate by
~8.5% to C$4.02 from C$3.70 (note that our published NAVPS estimate of
C$3.70 does not currently incorporate any upside to mineral reserves at Siou).
Exhibit 2 – Potential Pit Extensions at the Siou Deposit
Source: Company reports.
■ Initial results from RC drilling around the Siou intrusive promising, but more drilling
is needed. RC drilling has started up again after the rainy season to expand on results from
the east contact of the Siou intrusive and within the South Apex; however, the company notes
that further drilling will be required to better understand the geological controls and
continuity of the mineralization (see Exhibit 3).
63
Exhibit 3 – Exploration Priority Targets in the Siou Intrusive Area
Source: Company reports.
Burkina Faso Beginning to Stabilize After Recent Civil Unrest
■ Former Burkina Faso President Blaise Compaoré was forced from power on October
31, 2014, following civilian protests against his plan to seek re-election and extend his 27year rule by amending the country’s constitution.
■ Lieutenant-Colonel Isaac Zida was installed by the military to lead the nation after
Compaoré fled. According to the Burkina Faso constitution, the nation is required to hold
elections within 90 days, but with the military having suspended the constitution, it is unclear
when Burkina will be returned to civilian rule.
■ The African Union originally issued an ultimatum requiring a return to civilian rule
with a two week deadline but this ultimatum was recently rejected by the country’s military
leadership.
■ Operations at Mana were uninterrupted by the protests, which occurred mainly in the
capital city of Ouagadougou, ~260 km from the mine. All of SEMAFO’s on-site
employees are accounted for and safe, and the company notes that Mana’s power supply is
independently secured by a series of on-site diesel generators.
■ Supply chain unaffected, only a slight delay to Mana’s grid power connection. On the
conference call, SEMAFO indicated that gold shipments and deliveries of spare parts and
consumables continue as normal. There has been a delay in getting consultants to oversee the
final commissioning of the substation for Mana’s grid power connection but the company
expects that if the grid power connection is not complete by the end of 2014, it will be by
early 2015 (SEMAFO anticipates ~$50/oz cost savings from the transition).
64
AGM Deadline Approaching for SEMAFO’s Orbis Gold Hostile Bid
■ Orbis Gold’s AGM is scheduled for November 28 at 9:00 a.m. AEST in Brisbane,
Australia. This corresponds to Thursday, November 27, at 6:00 p.m. Eastern Time. At the
AGM, Orbis shareholders will be voting on an A$20M rights issue (priced at A$0.60/sh).
■ In its November 6 press release, SEMAFO states that if Orbis shareholders vote in favour
of the A$20M rights issue, it would effectively be a vote for Orbis to continue as a standalone company. One of SEMAFO’s bid conditions (announced October 15, 2014) was that
there be no prescribed occurrences including the issuance of shares by Orbis other than those
shares issued as a result of the exercise of Orbis options on issue as at the announcement
date.
SEMAFO’s Share Price Offers Attractive Entry Point – Reiterate SO Rating
■ We reiterate our Sector Outperform rating and C$4.50 one-year target price following
SEMAFO’s announcement of a non-binding proposal for Orbis Gold. Our NAVPS
decreases slightly to C$3.70 (-1%) as we have updated our model for the Q3/14 financial
results. We have not updated our valuation for Natougou pending the outcome of SEMAFO’s
hostile bid for Orbis Gold.
■ We view the proposed Orbis transaction positively as it is 12.7% NAV accretive based
on our scenario analysis using conservative modelling assumptions for Natougou.
Higher grades at Natougou in years 1 and 2 of production are also a good strategic fit for
SEMAFO, in our view, as we currently see the high-grade Siou and Fofina deposits at the
company’s Mana mine being depleted by 2019. However, given that Orbis’ board of
directors has rejected SEMAFO’s proposal saying that it undervalues the company, for
SEMAFO to be successful in a bid for Orbis we believe it may need to sweeten the deal,
which could be done by increasing the purchase price, adding a share component to the allcash offer, or by offering to spin out Orbis’ exploration assets (Nabanga, Bantou, Korhogo in
Cote d’Ivoire, and other smaller regional exploration properties) into a funded SpinCo entity.
■ With the outcome of SEMAFO’s Orbis bid uncertain, we continue to believe that nearterm upside to our valuation is likely to come from either a discovery at Pompoi Nord
as part of the $20 million 2014 exploration program or the company successfully
extending the mine life at Siou without decreasing the reserve grade.
■ No argument that SEMAFO is a top-tier junior producer, current valuation offers
attractive entry point. We view SEMAFO as a top-tier company based on (1) its strong
management team, (2) a solid track record of meeting guidance (over the last six years), (3)
its ability to generate significant estimated positive free cash flow of $37 million in 2014 and
$85 million in 2015 at spot gold prices, and (4) near- and long-term production growth
prospects from Siou, Fofina, and other potential discoveries.
o Now is the opportunity to gain exposure to a high-quality gold producer
at a good price. SEMAFO tends to trade at a steep premium to peers but is
currently trading at 0.85x P/NAV and 5.0x 2015E P/CF vs. peers at 0.78x and
6.4x, respectively.
■ Upcoming potential share price catalysts.
o November 27 – Orbis Gold’s AGM (9:00 a.m. on November 28 in Brisbane,
Australia; 6:00 p.m. on November 27, Eastern Time).
o Q4/14 - Exploration results from auger and reverse circulation drilling along
the Kokoi Trend and eastern contact of the Siou intrusive.
o Q4/14 – Results of deep diamond drilling at Siou. Two core rigs arrived on
site in June 2014 to carry out infill drilling between 180 and 225 meters of
vertical depth.
o Late 2014 – Mana expected to be connected to the national power grid.
65
Exhibit 4 – SEMAFO Free Cash Flow Forecast at $1,160/oz Spot Gold (2014E to 2018E)
SEMAFO Inc.
SC Gold Price Forecast
2014E
($/oz)
Production/Cost Profile
$1,256
2015E
$1,160
2016E
$1,160
2017E
$1,160
2018E
$1,160
2014E
2015E
2016E
2017E
2018E
Gold Production
(koz)
233
266
253
228
265
Cash Costs (US$/oz)
($/oz)
$664
$566
$602
$644
$549
2014E
2015E
2016E
2017E
2018E
Cash Flow Profile
Net Operating Cash Flow
($M)
$115
$123
$106
$92
$125
Capital Expenditures
($M)
($78)
($38)
($28)
($28)
($17)
Net Cash Provided by Financing Activities
($M)
$6
$0
$0
$0
$0
Increase in Cash and Cash Equivalents
($M)
$36
$85
$78
$64
$108
Cash at Beginning of Period
($M)
$83
$118
$203
$281
$345
Cash at End of Period
($M)
$118
$203
$281
$345
$454
Free Cash Flow
($M)
$37
$85
$78
$64
$108
Free Cash Flow per Share
($/sh)
$0.13
$0.31
$0.28
$0.23
$0.39
(x)
23.6x
10.3x
11.2x
13.7x
8.1x
P/FCF
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
66
Company Comment
Tuesday, November 11, 2014, After Close
(STKL-Q US$13.81)
(SOY-T C$15.60)
SunOpta Inc.
Q3/14 Results Miss - First Take
Christine Healy, CPA, CA - (416) 863-7902
(Scotia Capital Inc. - Canada)
christine.healy@scotiabank.com
Rating: Sector Perform
Risk Ranking: High
Alexandru Palivan - (416) 863-7940
(Scotia Capital Inc. - Canada)
alexandru.palivan@scotiabank.com
Target 1-Yr:
US$13.00
ROR 1-Yr:
-5.9%
Valuation: 10.5x Food, 6.0x Opta Minerals FTM EBITDA (one-year forward)
Key Risks to Target: consumer demand, project execution, weather, commodity prices
Div. (NTM)
Div. (Curr.)
$0.00
$0.00
Yield (Curr.)
0.0%
Event
■ STKL reported Q3/14 adj. EBITDA of $18.1M and adj. EPS of $0.11
(excluding Mascoma impairment charge and FX gain), below our est. of
$22.9M/$0.13 and the Street at $21.6M/$0.11. The miss was largely
due to lower-than-expected revenue across all segments (decline in
commodity prices, FX, plant downtime), and weaker margins in
Consumer Products and Opta Minerals. A lower tax rate partially offset.
Implications
■ SunOpta Foods missed expectations. Revenue of $283M was 5%
below our forecast, but 6% above Q3/13. Operating income of $15.1M
(5.3% margin) was 12% below our forecast of $17.1M (5.7% margin).
■ Lower margins in Consumer Products led the miss. Segment
revenue of $101M and operating income of $6.1M were below our
estimates of $114M and $8.9M. Revenue and margins were hurt by
down-time at both aseptic plants (for upgrades), weaker margins in
resealable pouches, and costs related to the retrofit of a juice plant.
■ Opta Minerals (OPM) was weak. OPM reported weaker margins than
expected (2.5% vs. our est. of 6.5%). The strategic review is ongoing.
■ Mascoma impairment. On Oct. 31/14, Mascoma sold assets related to
its yeast business. STKL wrote down its investment by $8.4M.
■ We will update model post-call. STKL will host a call on Nov. 12/14
at 10:00 am EST to discuss results (1-877-312-9198 or 631-291-4622).
Recommendation
■ We maintain our one-year target of $13.00/share and our SP rating.
Qtly Adj EBITDA (M)
2012A
2013A
2014E
2015E
Q1
Q2
Q3
Q4
Year
$17.7 A
$15.5 A
$17.6 A
$25.2
$20.3 A
$18.4 A
$23.2 A
$27.6
$17.7 A
$15.1 A
$22.9
$26.8
$12.0 A
$10.9 A
$21.8
$25.1
$67.7
$59.9
$85.5
$104.7
EV /
EBITDA
8.4x
14.2x
13.1x
10.8x
2011A
$0.10
$-0.08
47.7x
$52.8
$1,020
2012A
$0.36
$0.47
15.6x
$67.7
$1,091
2013A
$0.27
$0.45
37.7x
$59.9
$1,182
2014E
$0.46
$0.74
29.8x
$85.5
$1,326
2015E
$0.60
$0.86
22.9x
$104.7
$1,429
(FY-Dec.)
Adj Earnings/Share
Cash Flow/Share
Price/Earnings
Adj EBITDA (M)
Revenues (M)
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
BVPS14E: $5.62
ROE14E: 8.40%
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
All values in US$ 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.
$945
$167
$1,130
68
59
67
Summary of Q3/14 Results
■ Exhibit 1 summarizes SunOpta’s third quarter results and provides a comparison with our
estimates and prior year results.
Exhibit 1 - SunOpta Q3/14 Results Summary
($M, except per share)
Revenue
COGS
Gross margin
Gross margin (%)
SG&A
1
Adj. EBITDA
margin (%)
Adj. EPS 1
1
Q3/14
Actuals Estimates % change
318.5
280.8
37.7
11.8%
24.6
335.8
291.8
44.0
13.1%
26.0
-5%
-4%
-14%
18.1
5.7%
$0.11
22.9
6.8%
$0.13
-21%
-5%
-11%
Q3/13A % change
302.7
271.2
31.5
10.4%
20.7
15.1
5.0%
$0.07
5%
4%
20%
19%
19%
61%
Adjusted to exclude FX gains/losses, non-recurring items, and results from discontinued operations
Source: Company reports; Scotiabank GBM estimates.
■ We have summarized the quarterly financial results of the individual segments and provided
a comparison to our estimates and prior-year results in Exhibit 2.
Exhibit 2 - SunOpta Q3/14 Segmented Results Summary
($M)
Global Sourcing and Supply
Revenue
Operating Income
Margin (%)
Q3/14
Actuals Estimates % change
Q3/13A % change
146.1
6.4
4.4%
147.7
6.2
4.2%
-1%
3%
136.1
1.1
0.8%
7%
nmf
Value Added Ingredients
Revenue
Operating Income
Margin (%)
35.4
2.6
7.3%
37.1
2.0
5.5%
-4%
27%
34.1
2.0
5.9%
4%
27%
Consumer Products
Revenue
Operating Income
Margin (%)
101.2
6.1
6.0%
114.0
8.9
7.8%
-11%
-32%
97.6
7.3
7.4%
4%
-16%
SunOpta Foods
Revenue
Operating Income
Margin (%)
282.7
15.1
5.3%
298.8
17.1
5.7%
-5%
-12%
267.8
10.4
3.9%
6%
44%
Opta Minerals
Revenue
Operating Income
Margin (%)
35.9
0.9
2.5%
37.0
2.4
6.5%
-3%
-63%
34.9
1.7
4.9%
3%
-47%
-3.3
-2.6
nmf
-2.3
nmf
Corporate Services
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
68
Company Comment
Tuesday, November 11, 2014, Pre-Market
(VIV-N US$19.18)
(VIVT4-SA R$48.76)
Telefonica Brasil SA
Q3: Solid Postpaid, Good EBITDA Growth
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
andres.coello@scotiabank.com
Rating: Sector Outperform
Risk Ranking: Medium
Ivan Hernandez - +52 (55) 5123 2876
(Scotiabank Inverlat)
ivanb.hernandez@scotiabank.com
Target 1-Yr:
US$26.00
ROR 1-Yr:
41.7%
Valuation: DCF - 5 years results, 8.6% WACC in US$, terminal growth rate of 4.0%
Key Risks to Target: Lower-than-guided synergies from GVT merger; expensive acquisitions
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.18
$1.18
6.2%
Event
■ VIV reported revenues of R$8.72B (up 1.2% YOY and slightly above
our R$8.71B estimate), EBITDA of R$2.55B (up 7.0% YOY, slightly
below our R$2.57B estimate), and net income of R$1.0B (above our
R$0.97B estimate).
Implications
■ With more than 1.0M additions in Q3, VIV is delivering postpaid
growth comparable only to that of the leading operators in developed
markets. In fact, with 34.0% of its base already under contract, VIV
surpassed Entel Chile as Latin America's most postpaid operator, a
tremendous achievement, in our view.
■ MOU expanded 6.1% YOY, while churn came down slightly on a
yearly basis. Despite the MTR cut, ARPU at R$23.6 grew 0.9%
sequentially and remained close to flat against the prior year (-0.2%).
Data revenues expanded 20.6% YOY, helping service revenues to grow
3.5% YOY and offsetting the decline in wireline.
■ The EBITDA margin expanded 157 bp on a YOY on the back of good
cost controls. Of note, VIV grew EBITDA more than TSU (7.0% vs.
6.4% YOY). Net income was supported by lower depreciation thanks to
a recent revision in the life of assets. Net debt closed the quarter at only
0.14x LTM EBITDA.
Recommendation
■ We believe that after the merger with GVT, VIV will emerge as one of
the best telecom stories in emerging markets. Buy.
Qtly Revenues (M)
2013A
2014E
2015E
2016E
(FY-Dec.)
Earnings (ADS)/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q1
Q2
Q3
Q4
Year
$4,185 A
$3,649 A
$3,647
$4,119
$4,015 A
$3,864 A
$3,486
$4,090
$3,768 A
$3,843 A
$4,113
$4,120
$3,982 A
$3,835
$4,365
$4,380
$15,950
$15,192
$15,611
$16,709
Price/Rev
enue
1.35x
1.42x
2.03x
1.89x
2012A
$2.00
12.0x
0.7x
$17,197
$6,439
1.2x
14.5x
2013A
$1.51
12.7x
0.8x
$15,950
$4,866
1.3x
13.5x
2014E
$1.74
11.0x
0.7x
$15,192
$4,469
0.9x
9.8x
2015E
$1.20
16.0x
1.0x
$15,611
$5,095
1.0x
12.3x
2016E
$1.40
13.7x
0.8x
$16,709
$5,862
1.0x
12.9x
BVPS14E: $11.11
ROE14E: 10.37%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
(ADS)
Float O/S (M) (ADS)
$31,625
$2,117
$33,742
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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.
1,649
432
69
Highlights of VIV's Q3/14 Results
Exhibit 1 - Highlights of Telefonica Brasil's Q3/14 Results (in BRL million unless otherwise stated)
Revenues
Q3/14A
Q3/14E
Act. Vs. Est.
Q2/14A
Q3/13A
QoQ%
YoY%
Voice
3,419
3,491
-2.1%
3,405
3,650
0.4%
-6.3%
Data
2,125
2,082
2.1%
2,013
1,762
5.5%
20.6%
86
55
57.3%
112
26
-23.6%
227.9%
309
301
2.6%
294
301
5.0%
2.7%
Total Mobile revenues
5,938
5,928
0.2%
5,824
5,739
2.0%
3.5%
Fixed-line voice revenues
1,374
1,368
0.4%
1,393
1,525
-1.3%
-9.9%
Fixed-line interconnection revenues
100
111
-9.7%
106
118
-5.3%
-15.2%
Data
925
926
-0.1%
915
904
1.1%
2.3%
Pay-TV
153
152
0.2%
145
124
5.2%
23.3%
Other services
Equipment revenues
Other services
234
230
1.9%
234
208
0.0%
12.4%
Total fixed-line revenues
2,786
2,787
0.0%
2,793
2,879
-0.2%
-3.2%
Total revenues
8,724
8,715
0.1%
8,617
8,618
1.2%
1.2%
Total operational costs
6,176
6,141
0.6%
6,071
6,237
1.7%
-1.0%
EBITDA
2,548
2,574
-1.0%
2,546
2,381
0.1%
7.0%
EBITDA margin
29.2%
29.5%
-33
29.5%
27.6%
-34
157
EBITDA in US$
1,122
1,134
-1.0%
1,142
1,041
-1.7%
7.8%
Net income
1,022
967
5.7%
1,993
760
-48.7%
34.5%
EPS (in R$)
0.91
0.86
5.7%
1.77
0.68
-48.7%
34.5%
EPADR (in US$)
0.40
0.38
5.7%
0.79
0.30
-49.6%
35.5%
Net adds prepaid
-548
-350
56.6%
-365
-1,039
50.1%
-47.3%
Net adds postpaid
1,014
900
12.7%
1,257
1,453
-19.3%
-30.2%
466
550
-15.3%
892
414
-47.8%
12.6%
Total wireless net additions
Fixed voice accesses
13
5
168.0%
98
61
-86.7%
-78.7%
Fixed broadband
17
50
-66.0%
-51
46
-133.3%
-63.0%
Pay TV
40
43
-7.0%
43
51
-7.0%
-21.6%
Total wireline net additions
70
98
-28.5%
90
158
-22.2%
-55.7%
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
70
Intraday Flash
Tuesday, November 11, 2014 @ 3:39:50 PM (ET)
Thompson Creek Metals Company Inc.
(TCM-T C$2.44)
(TC-N US$2.15)
Q3/14 Results Above Forecast Due to Lower
Depreciation/Tax; Mt. Milligan Struggles Continue
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526
(Scotia Capital Inc. - Canada)
orest.wowkodaw@scotiabank.com
Rating: Sector Perform
Risk Ranking: High
Target 1-Yr:
Dalton Baretto, MBA, CFA - (416) 863-7623
(Scotia Capital Inc. - Canada)
dalton.baretto@scotiabank.com
C$2.10
ROR 1-Yr:
-13.9%
Valuation: 50% of 7.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Target: Commodity, operating, development, balance sheet
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Event
■ Thompson Creek released its Q3/14 financial results.
Pertinent Revisions
Implications
Adj. EPS14E
Adj. EPS15E
Adj. EPS16E
■ TCM reported Q3/14 adjusted EPS of $0.17, well above our estimate of
$0.06 and consensus of $0.08 due to markedly lower depreciation and
taxes. While production/sales results were pre-released, cash costs of
$0.77/lb Cu and $6.77/lb Mo were in line with our estimates.
■ The company re-affirmed all of its 2014 guidance, including Mt
Milligan reaching a sustainable operating level of ~80% of design by
year-end. However, the operation achieved average throughput of only
42,340 tpd in October (71% of design), up slightly from 67% in Q3/14.
■ TCM plans to make a decision on the secondary crusher ($50M-$75M
budget) at Mt Milligan in January 2015. The company also confirmed
that it plans to proceed with the scaled strip project at the Thompson
Creek mine upon closure at year-end. We note that our estimates
already assume that the company proceeds with both projects.
Recommendation
■ In our view, a high debt level, ongoing ramp-up risk at Mt. Milligan, a
poor outlook for molybdenum, and an unattractive relative valuation are
likely to overhang the shares. However, the company's liquidity is
reasonable. TCM is rated Sector Perform with a 12 month target of
C$2.10 per share. Our C$2.10 target is based on a 50/50 mix of 7.0x our
2015E EV/EBITDA (C$2.36) and 1.0x our 8% NAV estimate (C$1.93).
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.00 A
$0.02 A
$-0.03
$0.00
(FY-Dec.)
Adj EPS
Cash Flow/Share
Price/Earnings
Revenues (M)
EBITDA (M)
Q2
$0.06 A
$0.10 A
$-0.03
$0.01
Q3
$-0.04 A
$0.17 A
$-0.01
$0.02
Q4
$-0.17 A
$0.01
$0.00
$0.03
Year
$-0.03
$0.32
$-0.08
$0.06
P/E
n.m.
6.7x
n.m.
35.5x
2014E
$0.32
$0.83
6.7x
$838
$249
2015E
$-0.08
$0.22
n.m.
$799
$154
2016E
$0.06
$0.35
35.5x
$870
$198
2017E
$0.16
$0.45
13.5x
$928
$230
2018E
$0.30
$0.52
7.3x
$1,088
$274
BVPS14E: $5.01
ROE14E: 5.62%
NAVPS:
P/NAV:
New
US$0.32
US$-0.08
US$0.06
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
Old
US$0.17
US$-0.14
US$0.00
C$528
$498
C$1,091
C$1.93
1.26x
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
ScotiaView Analyst Link
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.
216
44
71
Q3/14 Results Well above Forecast due to lower depreciation and taxes
■ Thompson Creek Metals reported a headline Q3/14 earnings loss of $11.1 million, or $0.05
per share. However, after excluding a $49.4 million non-cash after-tax F/X loss, the company
reported adjusted earnings of $38.3 million or $0.17 fd, which was well above our estimate
of $12.9 million or $0.06 per share and the consensus estimate of $0.08 per share (range
$0.06 to $0.13). The results benefited from markedly lower-than-expected depreciation and
taxes, as the company’s gross margin (before depreciation) of $95.9 million was only
marginally above our forecast of $90.3 million. We note that production and sales volumes
Exhibit 1 - TCM Q3/14 Variances
Reported
Q3/14A
BNS
Q3/14E
Variance
with Est.
% Change
Reported
Q2/14A
Variance
Qtr-over-Qtr
% Change
Reported
Q3/13A
Variance
Yr-over-Yr
% Change
Production:
Total Molybdenum (000 lbs)
Thompson Creek
Endako
Copper (000 lbs)
Gold (000 ozs)
6,560
4,073
2,487
16,267
60,366
6,600
4,100
2,500
16,300
60,400
-0.6%
-0.7%
-0.5%
-0.2%
-0.1%
7,481
5,108
2,373
16,035
37,030
-12.3%
-20.3%
4.8%
1.4%
63.0%
8,536
5,716
2,820
1,021
1,937
-23.1%
-28.7%
-11.8%
NM
NM
Sales:
Molybdenum (000 lbs)
Thompson Creek
Endako
Purchased and processed product
Copper (000 lbs)
Gold (000 ozs)
8,913
4,026
2,706
2,181
16,500
57,900
9,200
4,000
2,700
2,500
16,500
57,900
-3.1%
0.6%
0.2%
-12.8%
0.0%
0.0%
9,689
5,469
1,970
2,250
21,939
51,983
-8.0%
-26.4%
37.4%
-3.1%
-24.8%
11.4%
8,320
5,519
1,913
888
1,021
1,937
7.1%
-27.1%
41.5%
145.6%
NM
NM
Costs:
Molybdenum cash cost (per lb)
Thompson Creek
Endako
Copper cash cost (per lb)
$6.77
$4.54
$10.42
$0.77
$6.99
$4.60
$10.90
$0.73
-3.1%
-1.3%
-4.4%
5.6%
$6.25
$3.97
$11.17
$0.33
8.2%
14.4%
-6.7%
133.3%
$5.93
$4.30
$9.23
nm
14.2%
5.6%
12.9%
nm
Prices:
Realized molybdenum price (per lb)
Realized copper price (per lb)
$13.94
$3.02
$12.67
$3.07
10.0%
-1.8%
$13.03
$3.20
7.0%
-5.6%
$10.30
3.23
35.3%
-6.5%
124,300
100,700
4,300
229,300
133,400
22,700
156,100
116,576
110,557
3,000
230,133
139,823
31,155
170,978
6.6%
-8.9%
43.3%
-0.4%
-4.6%
-27.1%
-8.7%
126,300
118,900
3,200
248,400
148,200
33,000
181,200
-1.6%
-15.3%
34.4%
-7.7%
-10.0%
-31.2%
-13.9%
85,700
5,100
90,800
64,100
14,400
78,500
45.0%
NM
-15.7%
152.5%
108.1%
57.6%
98.9%
73,200
47%
59,155
35%
23.7%
35.5%
67,200
37%
8.9%
26.4%
12,300
16%
495.1%
199.3%
3,100
900
5,100
300
165,500
63,800
79,700
(15,900)
(4,800)
30.2%
(11,100)
49,400
38,300
3,500
500
6,000
500
(40)
181,438
48,695
20,717
27,977
15,061
53.8%
12,916
12,916
-11.4%
80.0%
-15.0%
NM
-40.0%
NM
-8.8%
31.0%
284.7%
NM
NM
-43.9%
NM
NM
196.5%
3,600
900
5,200
200
191,100
57,300
(18,800)
76,100
14,500
19.1%
61,600
(39,600)
22,000
-13.9%
0.0%
-1.9%
NM
50.0%
NM
-13.4%
11.3%
NM
NM
NM
58.4%
NM
NM
74.1%
1,400
600
5,100
700
86,300
4,500
(13,500)
18,000
4,200
23.3%
13,800
(21,400)
(7,600)
121.4%
50.0%
0.0%
NM
-57.1%
NM
91.8%
NM
NM
NM
NM
29.4%
NM
NM
NM
($0.05)
$0.18
($0.05)
$0.17
$0.06
$0.06
$0.06
$0.06
NM
196.5%
NM
194.5%
$0.35
$0.13
$0.28
$0.10
NM
42.0%
NM
74.0%
$0.08
($0.04)
$0.06
($0.04)
NM
NM
NM
NM
INCOME STATEMENT (US$000s)
Molybdenum sales
Copper and Gold sales
Tolling, Calcining and other
Total Revenues
Operating expenses
Depreciation, depletion and amortization
Total Costs of sales
Gross Margin
Gross Margin %
Selling and marketing
Accretion expense
General and administrative
Acquisition costs
Exploration
Other
Total Costs and Expenses
Operating Income
Other expenses (income)
Income Before Taxes
Income tax
Tax rate
Net Income
Adjustments
Adjusted Net Income
Basic earnings per share
Adjusted basic earnings per share
Diluted earnings per share
Adjusted diluted earnings per share
Source: Company reports; Scotiabank GBM estimates.
72
were pre-released on October 14th (please see our note from October 14th titled ‘Q3/14
Operating Results – Mt. Milligan Throughput Struggles Continue’). We have detailed the
variances to our estimates in Exhibit 1.
■ The results improved from the Q2/14 adjusted earnings of $22.0 million (or $0.10 per share),
also largely due to lower depreciation and taxes, and from the Q3/13 adjusted loss of $7.6
million (or $0.04 per share) principally on the back of the ramp-up at Mt. Milligan.
■ Total revenue of $229.3 million was in line with our estimate of $230.1 million; however, the
company’s gross margin (before depreciation) of $95.9 million (or 42%) was slightly above
our estimate of $90.3 million (or 39%) despite unit operating costs that were largely in line.
■ The Q3/14 gross margin (before depreciation) of $95.9 million (or 42%) declined slightly
from the Q2/14 level of $100.2 million (or 40%) on lower metal sales, but markedly
improved from the Q3/13 level of only $26.7 million (or 29%) largely due to the ramp up at
Mt. Milligan.
Mt Milligan: ramp up continues to struggle in October
■ As previously reported, in its fourth full quarter of operation, Mt. Milligan produced 16.3
million lbs of payable copper, up only 1.4% from Q2/14 levels. However, production of
60,400 ozs of payable gold, increased by 63.0% QOQ due to markedly higher grades.
■ Mt Milligan throughput averaged only 40,455 tpd (or 67% of design) in Q3/14 which was
only slightly above the Q2/14 level of 38,543 tpd (or 64% of design). Throughput was
negatively impacted by downtime related to various adjustments required to the grinding and
flotation circuits, as well as some minor mechanical and electrical issues. In the earnings
release, the company disclosed that the operation achieved only marginally better average
throughput of 42,340 tpd in October (or 71% of design), due to various shutdowns for
maintenance and repair. Despite the relatively weak October throughput levels, TCM
reiterated its previous guidance of Mt. Milligan achieving a sustainable throughput rate of
~80% of design by year-end (this appears to be a relatively optimistic target in our view).
■ The company continues to conduct testing to validate the need for a secondary crusher
(estimated capital cost of $50 million-$75 million). A decision on the secondary crusher project
is now expected in January 2015 (previously year-end 2014). Our estimates already assume the
company moves forward with a secondary crusher in 1H/15 at a capital cost of $65 million.
Exhibit 2 - Mt. Milligan forecast production and cash cost profile
70,000
$3.00
60,000
$2.50
50,000
$2.00
40,000
$1.50
30,000
$1.00
20,000
$0.50
10,000
0
$-
Q4/13
Q1/14
Q2/14
Q3/14
Q4/14 E
Q1/15 E
Copper production (000s lbs)
Source: Company reports; Scotiabank GBM estimates.
Q2/15 E
Q3/15 E
Gold production (oz)
Q4/15 E
Q1/16 E
Copper cash costs ($/lb)
Q2/16 E
Q3/16 E
Q4/16 E
73
■ Q3/14 copper and gold recoveries of 83% and 67% compare to our forecast of 81% and 67%,
and the Q2/14 levels of 80% and 65%, respectively. Head grades of 0.25% Cu and 0.79 g/t
were also in line with our estimates of 0.26% Cu and 0.78 g/t. We note that the gold head
grade compared to only 0.52 g/t in Q2/14. Head grades are expected to decline moving
forward.
■ YTD 2014 payable copper production of 46.5 million lbs represents 71% of the low end of
the company’s reiterated full-year guidance range of 65.0 million-75.0 million lbs, implying
that the mine will need to further ramp-up in November and December to achieve even the
low end of guidance. YTD 2014 payable gold production of 136,639 ozs represents 74% of
the low end of the reiterated guidance range of 185,000 – 195,000 ozs.
■ Q3/14 cash costs at Mt. Milligan of $0.77/lb were in line with our estimate of $0.73/lb. Cash
costs increased from the very low Q2/14 costs of $0.33/lb (which were distorted by catch up
gold sales from previous quarters). We continue to note that unit cash costs are not
particularly meaningful given the relatively early stage of the ramp-up. Nevertheless, the
company reiterated its full-year cash cost guidance to $1.00-$1.50/lb (costs are $1.14/lb
YTD).
■ Copper and gold sales for the quarter, as previously disclosed, totalled 16.5 million lbs and
57,900 ounces, in line with production levels. The company realized an average copper price
of $3.02/lb in Q3/14, which was in line with our forecast of $3.07/lb.
Molybdenum Operations: Thompson Creek reduced scale stripping
program confirmed; Endako under pressure
■ As previously reported, the company produced 6.6 million lbs of molybdenum in Q3/14,
down 12.3% from the Q2/14 level of 7.5 million lbs, and 23.1% from the Q3/13 level of 8.5
million lbs. However, YTD 2014 molybdenum production of 21.9 million lbs represents 86%
of the mid-point of the company’s reiterated full-year guidance range of 24.0 million-27.0
million lbs, reflecting the wind-down of the Thomson Creek mine in Q4/14.
■ Q3/14 cash costs of $6.77/lb were in line with our estimate of $6.99/lb. We note that the
YTD 2014 cash costs of $6.23/lb are 8% below the bottom end of the reiterated full-year
guidance of $6.75-$7.75/lb, implying significantly higher unit costs in Q4/14, we presume
due to the impending wind down of production at Thomson Creek.
■ Cash costs at Thompson Creek of $4.54/lb were in line with our estimate of $4.60/lb, but
were modestly higher than the Q2/14 level of $3.97/lb and the Q3/13 level of $4.30/lb. We
note that costs at the Thompson Creek mine remain unsustainably low due to the company’s
decision in October 2012 to cease stripping activities associated with Phase 8 of the mine
plan.
■ The company confirmed that it plans to initiate a scaled stripping program for Phase 8 at
Thompson Creek in conjunction with the care and maintenance program scheduled to begin
in early 2015. The modest stripping program is expected to cost $8 million-$10 million per
year (versus the total stripping capital cost guidance of $80 million-$100 million required to
re-start production), and is in addition to the care and maintenance cost guidance of $6
million-$8 million per year. In addition, the company intends to continue with the tailings
wall slope management program, at a cost of $35 million in 2015/2016. The stripping
program can be accelerated once market conditions improve, and therefore provides
significant flexibility. The Phase 8 stripping program is estimated to take ~15 months at full
effort; on the other side of the spectrum, it would take ~10 years to complete the program if
the low strip program was maintained indefinitely. Our estimates assume the low strip
program is maintained in 2015 and 2016, before materially accelerating in 2017, with the
mine resuming operations in 2018.
■ The operating performance at Endako continues to struggle, with mill head grades and
recoveries both lower than our estimates as well as Q2/14 and Q3/13 levels. However, the
company indicates that the mine’s historical inability to provide a consistent feed supply
from the mine to the mill has been tackled through a series of technical improvements and
adjustments, and mill availability has begun to improve as a result of these changes. While
74
Exhibit 3 - Thompson Creek forecast total molybdenum production and cash cost profile
12,000
$18.00
$16.00
10,000
$14.00
$12.00
$10.00
($/lb)
(000s lbs)
8,000
6,000
$8.00
4,000
$6.00
$4.00
2,000
$2.00
0
$Q1/11
Q2/11
Q3/11
Q4/11
Q1/12
Q2/12
Q3/12
Q4/12
Q1/13
Q2/13
Q3/13
Thompson Creek
Q4/13
Q1/14
Endako
Q2/14
Q3/14
Q4/14 E
Q1/15 E
Q2/15 E
Q3/15 E
Molybdenum cash costs
Source: Company reports; Scotiabank GBM estimates.
these improvements are encouraging, we continue to adopt a wait-and-see approach prior to
modelling further throughput improvements.
■ Q3/14 cash costs of $10.42/lb were in line with our estimate of $10.90/lb, and compare to
cash costs of $11.17/lb in Q2/14 and $9.23/lb in Q3/13. While the mine has benefited from
the weakening of the Canadian dollar this year, we note that the Q3/14 cash costs of
$10.42/lb are markedly higher than the current molybdenum spot price of ~$9.20/lb as well
as our 2015 forecast of $10.00/lb, even before considering the cash flow impact of sustaining
capital. Given the relatively high cost structure of the mine, the company disclosed that it is
reviewing options for Endako, which may include a temporary closure until molybdenum
prices improve.
■ The company sold 8.9 million lbs of molybdenum in Q3/14, 3.1% below our forecast of 9.2
million lbs. As sales from Thompson Creek and Endako were previously disclosed, the
variance versus our estimate is due to markedly lower-than-expected sales of purchased and
processed product. However, more than offsetting the lower sales, TCM realized a
surprisingly high average molybdenum price of $13.94/lb for the quarter, $1.27/lb or 10.0%
above our forecast of $12.67/lb.
Over-levered balance sheet, but liquidity looks fine
■ As at the end of Q3/14, Thompson Creek had cash (including restricted cash) of $268 million
and total debt of $903 million, resulting in a relatively weak net debt position of $629 million
(or $2.94 per share). This compares to a net debt position $680 million (or $3.90 per share) as
at June 30th, 2014. The company’s total debt to capitalization ratio stood at a relatively high
45.8% as at the end of Q3/14. We forecast the company to exit 2014 with a cash balance of
$287 million, resulting in a slightly lower net debt balance of $611 million (or $2.85 per
share). Our forecast trough cash balance remains comfortably above the company’s
minimum cash balance target of $75 million-$100 million. While the company has an
overleveraged balance sheet, we view the potential for a near-term liquidity crisis as low. Our
estimates assume that the company refinances $300 million of debt in 2017 and $230 million
in 2018 to meet its debt obligations due in the 2017 to 2019 periods.
Q4/15 E
Q1/16 E
Q2/16 E
Q3/16 E
Q4/16 E
75
Exhibit 4 - Thompson Creek forecast cash balance by quarter (excludes restricted cash)
600
560
527
500
469
410
400
365
403
360
303
323
295
300
285
267
234
200
203
216
Q1/14
Q2/14
266
238
213
206
163
100
0
Q1/11
Q2/11
Q3/11
Q4/11
Q1/12
Q2/12
Q3/12
Q4/12
Q1/13
Q2/13
Q3/13
Q4/13
Q3/14
Q4/14 E Q1/15 E Q2/15 E Q3/15 E Q4/15 E
Cash Balance ($MMs)
Source: Company reports; Scotiabank GBM estimates.
Exhibit 5 - TCM Forecast Debt to Capitalization
50%
45%
46%
Exhibit 6 - TCM Forecast Net Debt (Cash) per share
46%
$5.00
46%
43%
45%
$3.97
$4.00
40%
40%
$2.85
$3.00
35%
$3.09
$2.98
$2.95
2015E
2016E
2017E
$2.19
$2.00
30%
25%
$1.00
20%
$0.20
17%
$-
15%
2010A
2012A
2013A
2014E
$(1.00)
10%
5%
2011A
$(2.00)
2%
$(2.03)
0%
2010A
2011A
2012A
2013A
2014E
2015E
2016E
$(3.00)
2017E
Source: Company reports; Scotiabank GBM estimates.
Source: Company reports; Scotiabank GBM estimates.
Exhibit 7 - TCM Forecast Operating and Free Cash Flow per share
$1.50
$1.00
$0.50
$0.00
2013A
2014E
2015E
2016E
2017E
-$0.50
-$1.00
-$1.50
-$2.00
-$2.50
OCFPS
Source: Company reports; Scotiabank GBM estimates.
FCFPS
2018E
2019E
2020E
76
Revisions to Estimates
■ We have made no material changes to our 2014-2016 production and cash cost estimates
following the Q3 results. However, we have adjusted our depreciation assumptions at Endako
following the company’s adjustment to its depreciation schedules at the mine. In addition, we
have adjusted our capital and ramp-up assumptions at the Thompson Creek mine following
the updated guidance on stripping costs.
■ Our revised 2014-2016 EPS estimates of $0.32, $(0.08), and $0.06 compare to our previous
estimates of $0.17, $(0.14), and $(0.00). Our revised CFPS estimates of $0.83, $0.22, and
$0.35 compare to our previous estimates of $0.48, $0.27, and $0.37, with the change in 2014
largely due to changes in our working capital assumptions. Our revised 8% NAVPS is
C$1.93 (versus our previous NAVPS of C$2.13). Our revised 10% NAV is C$1.37. Our
estimates of TCM’s sensitivities to copper and molybdenum prices are detailed in Exhibits 8
and 9.
Exhibit 8 - Thompson Creek sensitivity to copper prices
Exhibit 9 - Thompson Creek sensitivity to molybdenum prices
-20%
($0.23)
-203%
-10%
($0.15)
-102%
0%
($0.08)
10%
$0.00
102%
20%
$0.08
203%
EPS - 2015
CFPS - 2015
$0.05
-77%
$0.13
-38%
$0.22
$0.30
38%
$0.38
77%
EBITDA - 2015
102
-34%
128
-17%
154
180
17%
8% NAVPS (C$)
$0.23
-88%
$1.08
-44%
$1.93
$2.78
44%
EPS - 2015
Source: Scotiabank GBM estimates – based on a $3.15/lb 2015 copper price
-20%
($0.15)
-92%
-10%
($0.11)
-46%
0%
($0.08)
10%
($0.04)
46%
20%
($0.01)
92%
CFPS - 2015
$0.14
-37%
$0.18
-19%
$0.22
$0.26
19%
$0.30
37%
206
34%
EBITDA - 2015
131
-15%
142
-8%
154
166
8%
178
15%
$3.63
88%
8% NAVPS (C$)
$0.89
-54%
$1.39
-28%
$1.93
$2.47
28%
$3.00
56%
Source: Scotiabank GBM estimates – based on an $10.00/lb 2015 moly price
Conclusions
■ While the Q3/14 results were well above our forecast, we view the quality of the earnings
beat as relatively poor as it was driven by markedly lower depreciation and taxes, rather than
operating performance. In our view, at Mt. Milligan, meeting the low end of 2014 copper
production guidance and the year-end throughput exit rate of ~80% of design will likely both
be a challenge. The ongoing throughput struggles at Mt. Milligan provide further evidence
that a secondary crusher is likely required for the operation to reach anywhere near the full
nameplate capacity of 60,000 tpd. Finally, in our view, the staged plan to re-start prestripping at Thompson Creek is a prudent investment as it provides restart optionality.
However, given the relative cost position, Endako is now on the brink of closure as well (we
forecast the mine to generate negative free cash flow of $6 million in 2015 based on a
molybdenum price of $10.00/lb).
Valuation
■ Thompson Creek currently trades at a 2015E and 2016E EV/EBITDA of 7.0x and 5.9x
respectively, versus the peer group average of 5.9x and 4.0x. In addition, the company trades
at 1.27x our 8% NAV of C$1.93 per share, versus the peer group average of 0.71x.
Recommendation
■ In our view, a high debt level, ongoing ramp-up risk at Mt. Milligan, a poor outlook for
molybdenum, and an unattractive relative valuation are likely to overhang the shares.
However, the company’s liquidity is reasonable. TCM is rated Sector Perform with a 12
month target of C$2.10 per share. Our C$2.10 target is based on a 50/50 mix of 7.0x our
2015E EV/EBITDA (C$2.36) and 1.0x our 8% NAV estimate (C$1.93).
77
Exhibit 10 - Thompson Creek Metals Financial and Operating Summary
Annual Growth Profile
METAL PRICE FORECAST (per LB)
Molybdenum
LME copper
LME gold (per oz)
PRODUCTION FORECAST
Molybdenum (M lbs) - Contained
Copper (M lbs) - Payable
Gold ('000 ozs) - Payable
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
$15.88
$3.42
$1,226
$15.81
$4.00
$1,572
$12.65
$3.61
$1,669
$10.21
$3.33
$1,414
$11.85
$3.14
$1,271
$10.00
$3.15
$1,300
$10.50
$3.40
$1,300
$11.50
$3.60
$1,300
$12.50
$3.85
$1,300
$12.50
$4.00
$1,300
$12.50
$4.00
$1,300
16%
-6%
-10%
-16%
0%
2%
5%
8%
0%
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
33
28
22.4
-
29.9
10
20
26.7
66
189
10.8
82
204
10.8
83
237
10.7
87
233
20.5
78
250
17.2
76
273
14.0
88
217
-11%
NM
NM
-60%
25%
8%
0%
1%
16%
-
-
UNIT COST FORECAST (per LB)
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
Average Molybdenum Cash Cost
Average Copper Cash Cost
$5.96
$0.00
$7.94
$0.00
$10.09
NA
$6.49
$0.00
$6.54
$1.11
$10.02
$1.08
$9.95
$0.89
$9.95
$0.98
$10.05
$0.82
$9.86
$0.56
$8.40
$1.07
1%
NM
53%
-2%
-1%
-18%
INCOME STATEMENT FORECAST (in millions)
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
Net Sales
Cost of Sales and Operating Expenses
Depreciation and Depletion
Selling, General, and Administrative
Exploration
Operating Earnings
Interest Expenses
Other Expenses (Income)
Income and Mining Taxes (Recovery)
Minority Interest
Net Earnings
595
316
50
31
9
$189
1
54
20
669
400
67
36
14
$151
5
(157)
11
401
380
64
36
2
($80)
14
563
(111)
$434
319
61
31
1
$22
26
275
(63)
838
521
111
37
1
$168
93
(0)
2
799
568
101
38
1
$90
86
21
870
590
102
38
1
$139
85
42
928
616
106
38
1
$166
78
53
1,088
729
111
38
1
$208
71
71
1,021
641
104
38
1
$237
57
89
972
593
112
38
1
$228
48
83
$114
$292
($546)
($215)
$73
($17)
$13
$35
$65
$91
$96
93%
64%
81%
20%
-43%
NM
266%
NM
NM
NM
NM
-5%
9%
-8%
2%
63%
-47%
-8%
NM
NM
NM
NM
9%
4%
0%
0%
-8%
55%
-2%
NM
101%
NM
NM
Adjusted Net Earnings
$114
$124
($35)
($5)
$67
($17)
$13
$35
$65
$91
$96
NM
NM
NM
Net Earnings Per Common Share (FD)
$0.75
$1.73
($3.24)
($1.26)
$0.07
($0.08)
$0.06
$0.16
$0.30
$0.41
$0.44
NM
NM
NM
EBITDA
$0.75
239
$0.73
218
($0.20)
(16)
($0.03)
$82
$0.32
249
($0.08)
154
$0.06
198
$0.16
230
$0.30
274
$0.41
291
$0.44
300
NM
202%
NM
-38%
NM
29%
CASH FLOW FORECAST (in millions)
Adjusted Net Earnings Per Common Share
(FD)
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
Net Earnings
Depreciation, Deferred Taxes, & Minority Interest
Cashflow From Operations
114
44
$157
292
(89)
$203
(546)
464
($83)
($215)
260
$45
14
159
$172
(17)
64
$48
13
64
$77
35
64
$99
65
48
$114
91
79
$171
96
93
$190
NM
-39%
285%
NM
-59%
-72%
NM
-1%
61%
Cashflow Per Share (FD)
Sustaining Capital
Project Capital Expenditures
Free Cashflow to Firm
$1.03
($67)
(147)
($56)
$1.20
($72)
(629)
($498)
($0.49)
($39)
(725)
($846)
$0.21
($10)
(494)
($459)
$0.83
($27)
(56)
$90
$0.22
($54)
(65)
($71)
$0.35
($52)
$25
$0.45
($93)
$6
$0.52
($24)
$90
$0.77
($45)
$126
$0.86
($22)
$168
301%
NM
NM
NM
-74%
NM
NM
NM
61%
NM
NM
NM
Free Cashflow to Firm Per Share (FD)
Net Financing Activities (Ex. Equity/Dividends)
Free Cashflow to Equity
($0.37)
$228
$172
($2.95)
$470
($28)
($5.02)
$858
$12
($2.12)
$110
($349)
$0.43
($26)
$64
($0.32)
($8)
($79)
$0.11
$0
$25
$0.03
($48)
($42)
$0.41
($120)
($30)
$0.57
($200)
($74)
$0.76
$0
$168
NM
NM
NM
NM
NM
NM
NM
NM
NM
Free Cashflow to Equity Per Share (FD)
Equity Issues (Repurchases)
Dividends
All Other Sources (Uses) of Cash
Net Source (Use) of Cash
$1.13
$8
(22)
$158
($0.17)
$26
(20)
($22)
$0.07
$220
38
$269
($1.61)
$1
21
($328)
$0.31
$0
(13)
$50
($0.36)
$0
($79)
$0.11
$0
0
$25
($0.19)
$0
($42)
($0.14)
$0
($30)
($0.34)
$0
($74)
$0.76
$0
$168
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
BALANCE SHEET FORECAST (in millions)
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
Cash and marketable securities
Accounts Receivable
Inventories
Other Current Assets
Total Current Assets
Property, Plant and Equipment
Other Assets
Total Assets
$316
73
107
21
$517
1,696
105
$2,318
$295
79
114
15
$502
2,359
133
$2,994
$564
59
159
22
$804
2,539
67
$3,410
$236
54
188
18
$496
2,538
52
$3,086
$287
70
150
6
$513
2,369
89
$2,970
$208
74
159
6
$446
2,386
89
$2,922
$232
77
166
6
$482
2,337
89
$2,907
$190
81
174
6
$452
2,324
89
$2,865
$160
95
204
6
$465
2,237
89
$2,791
$85
89
191
6
$373
2,178
89
$2,639
$253
85
182
6
$527
2,088
89
$2,703
21%
29%
-20%
-64%
3%
-7%
72%
-4%
-28%
6%
6%
0%
-13%
1%
0%
-2%
12%
4%
4%
0%
8%
-2%
0%
0%
Accounts payable and accrued liabilities
Other current liabilities
Total Current Liabilities
Long-term debt debt
Deferred Taxes
Deferred Revenue
Other Liabilities
Shareholders' Equity
Total Liabilities & Shareholders' Equity
65
17
82
17
337
453
1,430
$2,318
186
32
218
361
262
365
59
1,730
$2,994
129
51
180
922
138
670
100
1,402
$3,410
105
76
181
907
13
759
119
1,106
$3,086
80
92
172
899
16
710
102
1,072
$2,970
85
96
181
890
21
673
102
1,055
$2,922
88
100
188
890
30
630
102
1,068
$2,907
93
100
192
842
38
587
102
1,103
$2,865
109
100
208
722
48
542
102
1,169
$2,791
102
100
202
522
62
492
102
1,260
$2,639
97
100
197
522
74
452
102
1,356
$2,703
-24%
22%
-5%
-1%
21%
-6%
-15%
-3%
-4%
6%
4%
5%
-1%
32%
-5%
0%
-2%
-2%
4%
4%
4%
0%
39%
-6%
0%
1%
0%
Source: Company reports; Scotiabank GBM estimates.
78
Company Comment
Wednesday, November 12, 2014, Pre-Market
(TA-T C$11.00)
(TAC-N US$9.73)
TransAlta Corporation
Shining Light on Sundance
Matthew Akman, MBA - (416) 863-7798
(Scotia Capital Inc. - Canada)
matthew.akman@scotiabank.com
Lukasz Michalowski, MBA - (416) 863-5915
(Scotia Capital Inc. - Canada)
Dario Neimarlija, CA, CFA - (416) 863-2852
(Scotia Capital Inc. - Canada)
Rating: Sector Outperform
Target 1-Yr:
C$14.00 ROR 1-Yr:
Risk Ranking: Medium
Valuation: 7.3% 2015E Free Cash Yield and 9.1x 2015E EV/EBITDA
33.8%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.72
$0.72
6.5%
Key Risks to Target: Power Prices; Interest Rates; Environmental Regulations; Re-contracting
Event
■ TA is holding an analyst meeting and tour of its Sundance Power Plant
facilities and coal mine on Friday.
Implications
■ The Alberta coal plants probably have more hidden value than any of
the other assets in the company's portfolio. The renewables have a lot of
value but that is already common knowledge and perception.
■ In a research report dated April 9 ("Coal Conundrum"), we reasoned
that the coal plants were undervalued in the stock because they generate
so little free cash at this time.
■ Yet, they could generate $300M - $400M of additional annual EBITDA
post-2020 even under conservative power price assumptions. But
realizing this value requires that the plants operate properly at that time.
■ We believe the Sundance plant tour is meant to raise confidence in the
longevity of the coal plants and to dispel concerns that the assets lack
the ability to run until their legislated end-of-life (late-2020s).
Recommendation
■ If the plants can run through the end of their legislated life, we believe the
stock is undervalued by 30%+ relative to its NAV. Other concerns linger
(SO2 regulations, credit ratings) but regardless of the outcome on these
matters, asset value should surface one way or the other. We maintain our
Sector Outperform rating and $14 target price.
Qtly EBITDA (M)
2013A
2014E
2015E
2016E
Q1
Q2
Q3
Q4
Year
$267 A
$310 A
$257
$247 A
$213 A
$283
$266 A
$212 A
$249
$242 A
$274
$236
$1,023
$1,009
$1,025
$1,025
EV /
EBITDA
9.0x
8.4x
8.3x
8.4x
2012A
$0.91
$1.16
9.0x
128%
$1,015
4.2x
56%
$9,152
2013A
$0.57
$1.16
9.0x
205%
$1,023
4.2x
56%
$9,193
2014E
$1.03
$0.72
8.4x
70%
$1,009
4.1x
53%
$8,472
2015E
$1.02
$0.72
8.3x
70%
$1,025
4.1x
54%
$8,466
2016E
$1.02
$0.72
8.4x
71%
$1,025
4.3x
56%
$8,570
(FY-Dec.)
Free Cash Flow/Share
Dividends/Share
EV/EBITDA
Payout Ratio
EBITDA (M)
Debt/EBITDA
Tot. Debt/(Tot.Dbt+Eq.)
Enterprise Value (M)
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ 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.
$3,007
$4,862
$8,450
273
273
79
Shining Light on Sundance
■ Seven years ago investors built large positions in TA and drove the stock up above $35 on
the notion that there was hidden value in the Alberta coal plants once the PPAs expired in
2020. Oddly, seven years later, everybody seems to think upside beyond the PPA expiry is
too far out to reflect in the share price. Or, perhaps instead confidence has been lost in the
integrity of the plants and their ability to operate with sufficient reliability to actually capture
that value.
■ Some loss of confidence would be justified based on plant operating performance. It has been
about 10 years and about 20 unplanned outages since TA conducted a tour of its Alberta coal
plants. The most material of these outages occurred at Sundance 1 & 2 which the company
deemed “economically destroyed” due to boiler fatigue. But the other Sundance units have
experienced their fair share of problems, including some temporary and not terribly material
unplanned outages just last quarter.
■ Outages cannot be avoided completely but management clearly wants to leave the analyst
community with the impression that any outages will be just that – temporary and
immaterial. And part of the convincing lies in tangible evidence the company has been
investing and will continue to invest sufficient capital to avoid major problems. How else to
explain agenda items for the upcoming tour such as “View Sundance 5 & 6 New ICMS Unit
in Control Room” and “View Spare Stator For Installation 2015”. Whether these investments
achieve their objectives remains to be seen but it should not be an intellectual stretch to think
that spending $350M/year on maintenance capital is sufficient to extend the plant lives.
■ Many of the recent investor fears surround TA’s credit rating as opposed to its plant
operations. In February Moody’s placed the Baa3 senior unsecured credit rating on watch
with negative implications. The rating agency targeted a 19% FFO-to-debt ratio as required
for maintenance of the investment grade rating and quantified the probability of a downgrade
at 1-in-3. We believe investors are concerned the company may further reduce its common
share dividend in order to protect the credit rating.
■ We concur that unless there are further changes in company structure, TA will likely fall
short of the 19% Moody’s target. Our 2015 forecasts imply year-end ratios of only about
17%-18%. Accelerating drop-downs (asset sales) to RNW might be the only realistic way of
achieving the Moody’s target ratios in the 12-month timeframe. In our estimation, asset sales
of $500M - $750M (enterprise value) would likely be required in order to maintain
investment grade. Such sales would likely be about 10% dilutive to free cash per share but
should not threaten the dividend as we now estimate excess coverage of about 30%.
■ A better question than how to meet the Moody’s target is why the company would want to
meet it. The peer U.S. companies such as NRG, Calpine and Dynegy are all non-investmentgrade. They function well and trade at premium valuations to TA (about 10x EV/EBITDA
vs. 8.3x for TA). The shares of U.S. peers have performed much better than TA in recent
years despite that some of them maintain significant coal fleets and inferior credit ratings.
■ Management of TA noted on the 3Q’14 conference call that the company wants to maintain
an investment grade credit rating in support of its growth strategy. The thought apparently is
that industrial counterparties will not contract with TA for new capacity if it is noninvestment-grade. Whether this is true or not, we believe shareholders are best served by first
surfacing the value of existing assets and then worrying about adding value through growth
later. Raising equity (or selling assets on a dilutive basis which is tantamount to the same
thing) could destroy more value. If anything, the company should be buying back stock, not
issuing stock or paying down large amounts of debt, while it trades below NAV.
■ Furthermore, the Moody’s target simply demonstrates that unless the company can turn debt
and equity investor sentiment around in the next year, the value of TA’s assets are likely best
maximized in the hands of a larger and/or more stable company. In the hands of a more
stable entity, we believe ratings agencies would require a much lower coverage ratio on these
assets than 19% in order to maintain investment grade.
■ Most of our companies maintain solid BBB or better credits with only 10%-15% required
coverage ratios. And many of those companies such as EMA and TRP have significant
80
■
■
■
■
■
■
unregulated power assets. With contracted cash flows and visible significant upside later in
the decade, and considering the low level of bond yields, we believe catering to an
unreasonable 19% coverage ratio would be a mistake for this company and its shareholders.
Other recent fears have arisen around the exceptionally weak cash flows from Centralia
lately. In 2012 the plant contributed about $200M of gross margin and has only contributed
$83M in the first nine months of this year. But that is surely old news. In a report from
November 1 2012 (“Ahead of the Fundamentals”) we quantified a potential $100M+ gross
margin headwind as a result of hedges rolling off, which is exactly what has occurred.
But that’s the point – it has already occurred and Centralia’s gross margin and cash flow are
bottoming out now, in our opinion. Much of the plant’s contribution is derived from contracts
for the sale of power. With contracts, the company can make money during periods of high
power prices by selling its open capacity and also during periods of very low prices by
purchasing power in the market and delivering into its contracts. A contract with local utility
Puget Energy ramps up from 180 MW in 2015 to 380 MW by 2017 and will protect any
further downside while creating opportunity for material upside in our view. We would not
be surprised if there is no improvement in 2015 but over the next few years we now see more
upside than downside from Centralia.
Similarly, we believe Alberta power prices and therefore cash flow from the Alberta plants
are more-or-less bottoming out. Normally the power price should reflect what is required for
construction of new plants. We have reasoned in the past that this price is ~$60/MW-hr and
should escalate with inflation. The wildcard is whether market participants will overbuild,
thereby depressing prices for several years below that level. Yet all of the major companies
have publicly expressed their views that $70/MW-hr+ power is required to entice new build.
So in the absence of a big uptick in the forward curve from today’s ~$50/MW-hr level, we
assume most of the large proposed new projects will be delayed or cancelled.
Following that logic, even CPX has stated in its recent investor presentation that timing on
construction of its 50% contracted Genesee 4 & 5 (G4/5) units will “depend on load growth
in the province”. CPX has published a ~$80/MW-hr Alberta power price forecast for the end
of the decade so we assume if forward 2017/18 prices don’t start pushing well north of
$60/MW-hr by 2016 then G4/5 will be delayed from its 2018-2020 timeframe. Furthermore,
though the G4/5 contract with Calgary electric utility Enmax was not disclosed, we assume it
implies $70/MW-hr+ power because this price is consistent with the CPX forecast and stated
threshold for building new capacity. If this assumption is correct, it signals that at least one
major customer in Alberta (Enmax) is willing to hedge into the medium-term at prices that
are much higher than today’s near-term forward curve.
Pricing concerns aside, incremental bad news may come on the need for investment in
pollution abatement equipment. However, in our opinion that is already more than reflected
in the stock. The Alberta government hasn’t yet responded to a divided stakeholder report
(CASA) on whether to alter provincial SO2 and NOx emission rules. But in a report dated
September 16 (“Scrubbing Coal Plants and NAV”), we presented analysis showing that the
NAV would likely not fall below $15/share even assuming the regulation is not changed in
TA’s favour.
TA’s investor day may begin to allay fears that the future value prospective company buyers
saw back in 2007 is still there. At the same time, we are hopeful the board and management
are in the mindset of surfacing asset value for shareholders rather than destroying it to
appease rating agencies. And while we see no material improvement in financial
performance for two years, we see little downside and a lot of upside starting in 2017/18.
Therefore, we stand by our recent upgrade to Sector Outperform and maintain our $14 target
price in advance of TA’s investor day later this week.
81
Exhibit 1 – TransAlta Corporation Financial Statement Summary
Earnings and Per Share Data ($M)
2013
2014E
2015E
2016E
Generation
Energy Marketing
Corporate and Other
Adjusted EBITDA
Depreciation, Amortization & Other
Other income (expense)
Net interest charges
Earnings before tax & minority interest
Income tax rate
Income tax
Non-controlling interests
Equity earnings
Preferred securities distributions
Discontinued operations (operating)
Operating earnings
Unusual /non-recurring items
Net earnings for common
$1,029
$61
($67)
$1,023
($584)
$1
($256)
$184
14%
($26)
($29)
($10)
($38)
$0
$81
($152)
($71)
$1,004
$62
($56)
$1,009
($594)
($5)
($248)
$162
13%
($21)
($43)
$0
($41)
$0
$57
($29)
$28
$1,020
$50
($45)
$1,025
($600)
$0
($236)
$189
20%
($37)
($47)
$0
($47)
$0
$59
$0
$59
$1,021
$50
($46)
$1,025
($600)
$0
($227)
$198
20%
($39)
($47)
$0
($47)
$0
$66
$0
$66
Earnings per share -reported
Earnings per share - operating
Dividends per share
($0.27)
$0.31
$1.16
$0.10
$0.21
$0.72
$0.21
$0.21
$0.72
$0.23
$0.23
$0.72
2013
2014E
2015E
2016E
Change in non-cash working capital
Cash from Operating Activities
($71)
$585
$177
$691
$74
$765
$28
$592
$120
$740
($29)
$711
$59
$600
$110
$769
($29)
$740
$66
$600
$114
$780
$0
$780
Additions to capital assets
Other & Asset Sales
Cash Used in Investing Activities
($561)
($142)
($703)
($390)
$98
($292)
($531)
($14)
($545)
($679)
($14)
($693)
Dividends on common shares
Other Financing Activities
Cash Used in Financing Activities
Effect of translation on foreign cash
($306)
$259
($47)
$0
($224)
($30)
($255)
$0
($201)
$93
($108)
$0
($207)
$103
($104)
$0
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
$15
$27
$42
$164
$42
$207
$87
$207
$294
($16)
$294
$278
Balance Sheet ($M)
2013
2014E
2015E
2016E
Cash Flow Statement ($M)
Net Income
Depreciation and amortization
Other items (inc. NCI, Pref. dividends)
Cash & Equivalents
Other Current Assets
Net PP&E
Other Assets
Total Assets
$42
$705
$7,193
$1,843
$9,783
$207
$616
$7,176
$1,521
$9,520
$294
$616
$7,121
$1,478
$9,509
$278
$616
$7,214
$1,458
$9,566
Current Portion of Long Term Debt
Other Current Liabilities
Long Term Debt
Other Liabilities
Non-Controlling Interest
Preferred Equity
Total Liabilities
Common Equity
Total Liabilities & Shareholders' Equity
$209
$643
$4,113
$1,395
$517
$781
$7,658
$2,125
$9,783
$716
$497
$3,410
$1,218
$581
$943
$7,364
$2,156
$9,520
$716
$434
$3,528
$1,272
$456
$943
$7,348
$2,161
$9,509
$716
$463
$3,653
$1,290
$331
$943
$7,396
$2,170
$9,566
Source: Company reports; Scotiabank GBM estimates.
82
Company Comment
Tuesday, November 11, 2014, After Close
(VIC-T C$12.66)
Vicwest Inc.
Vicwest Sold to Kingspan and Ag Growth
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: Tender
Target 1-Yr:
Risk Ranking: High
Valuation: 6.5x EV/EBITDA on our 2016E.
C$12.70
ROR 1-Yr:
5.1%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.60
$0.60
4.7%
Key Risks to Target: Decline in grain prices; slower-than-anticipated recovery in residential and commercial construction .
Event
Pertinent Revisions
■ Vicwest Inc. announced that it has agreed to be acquired for $12.70 per
share ($350 million enterprise value; $224 million to shareholders).
■ Kingspan Group plc (KGP-L; not covered) is expected to acquire the
Building Products division for $154.5 million inclusive of debt and
reorganisation costs.
■ Ag Growth International (AFN-T; restricted) is expected to acquire the
Westeel division for $221.5 million (enterprise value of $210 million
and $11.5 million attributed to assets acquired at closing).
Implications
■ The sale price represents a premium of 25.6% to the 20-day volumeweighted average price of Vicwest shares as of November 10, 2014.
■ The transaction is subject to a number of conditions, including the
approval of at least 66.67% of the votes as well as customary court and
regulatory approvals. The special meeting of Vicwest shareholders is
expected to be held in January 2015.
■ We note that holders of approximately 15.6% of outstanding Vicwest
common shares, including all of Vicwest's directors and officers, have
agreed to vote their common shares in favour of the arrangement.
Recommendation
■ We have lowered our target price to $12.70 per share. This implies an
EV/EBITDA multiple of 6.5x on our 2016E. We have changed our rating
on Vicwest Inc. shares to Tender from Sector Outperform.
Qtly EBITDA (M)
2013A
2014E
2015E
2016E
Q1
Q2
Q3
Q4
Year
$-2 A
$-3 A
$9
$13
$7 A
$6 A
$11
$12
$12 A
$13 A
$10
$11
$2 A
$13
$12
$14
$18
$29
$42
$50
EV /
EBITDA
19.3x
11.4x
8.1x
6.4x
2012A
$412
$34
$0.68
$1.40
$2.60
4.8x
8.1%
2.60x
2013A
$395
$18
$-0.28
$0.39
$1.98
6.6x
4.7%
9.46x
2014E
$463
$29
$0.28
$1.04
$1.94
6.5x
6.3%
3.67x
2015E
$504
$42
$0.88
$1.56
$2.29
5.5x
8.2%
2.56x
2016E
$562
$50
$1.24
$1.91
$2.99
4.2x
8.9%
1.84x
(FY-Dec.)
Revenues (M)
EBITDA (M)
Adj EPS
Cash Flow/Share
Book Value/Share
Price/Book
EBITDA Margin
Net Debt/EBITDA/Share
BVPS14E: $1.94
New
Rating:
T
Target:
1-Yr
$12.70
EBITDA16E
$50
New Valuation:
6.5x EV/EBITDA on our 2016E.
Old Valuation:
6.8x EV/EBITDA on our 2016E.
Old
SO
$14.00
$51
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ 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.
$223
$118
$348
18
18
83
Company Comment
Tuesday, November 11, 2014, After Close
(WIR.U-T US$10.34)
WPT Industrial REIT
Q3 Peek: In Line, Strong Fundamentals & Growth
Pammi Bir, CPA, CA, CFA - (416) 863-7218
(Scotia Capital Inc. - Canada)
pammi.bir@scotiabank.com
Rating: Sector Outperform
Risk Ranking: Medium
Ganan Thurairajah, MBA - (416) 863-2899
(Scotia Capital Inc. - Canada)
ganan.thurairajah@scotiabank.com
Target 1-Yr:
US$11.50
ROR 1-Yr:
18.0%
Valuation: 13.5x AFFO (F'16 estimate)
Key Risks to Target: Significant unitholder, inability to execute growth, rising interest rates
CDPU (NTM)
CDPU (Curr.)
Yield (Curr.)
$0.70
$0.70
6.8%
Event
■ WPT reported Q3/14 FFOPU of $0.25 vs. $0.24 last year, in line with
our $0.25 estimate and consensus ($0.25).
Implications
■ In line with minor variances. G&A was $0.01/unit below our forecast,
but offset by higher interest costs. The 6.9% YOY FFOPU growth was
driven by acquisitions, higher occupancy in the IPO properties, and
lower G&A costs, partly offset by dilution from financing activities.
■ Fundamentals solid as occupancy climbs up. Occupancy improved to
a solid 98.9% (+190bp QOQ, +200bp YOY). We believe the bulk of the
increase relates to Honeywell International's 160K sf (1.3% of GLA)
expansion into vacant space at 6766 Pontius Rd. (Columbus, OH).
■ Liquidity modestly increased post-Q3; leverage improves. Available
liquidity from undrawn lines is expected to rise to $15M-$20M (vs. $5M
at Q3) with two unencumbered properties to be added to the borrowing
base. D/GBV sits at a reasonable 51.3%, down from 52.7% at Q2.
■ IFRS terminal cap rate down 19bp QOQ to 7.1% (-46bp YTD), with
the drop attributable to modest cap rate compression. Units are trading
at a current 6.9% implied cap rate, in line with our 6.9% NAV cap.
Recommendation
■ Full update post Nov. 12th conference call (11 a.m. ET; 1-866-605-3851).
Qtly FFOPU (FD)
2013A
2014E
2015E
2016E
Q1
$0.25 A
$0.27
$0.26
(FY-Dec.)
Funds from Ops/Unit
Adj. Funds from Ops/Unit
Cash Distributions/Unit
Price/AFFO
EV/EBITDA
EBITDA Margin
EBITDA/Int. Exp
AFFO Payout Ratio
Q2
$0.18 A
$0.24 A
$0.26
$0.26
Q3
$0.24 A
$0.25
$0.26
$0.26
Q4
$0.24 A
$0.26
$0.26
$0.26
Year
$0.66
$1.00
$1.05
$1.04
P/FFO
13.1x
10.3x
9.8x
9.9x
2012A
2013A
$0.66
$0.50
$0.48
17.2x
20.8x
66.1%
3.3x
94.9%
2014E
$1.00
$0.77
$0.70
13.4x
17.1x
67.0%
3.4x
90.6%
2015E
$1.05
$0.83
$0.70
12.4x
16.4x
67.8%
3.3x
83.9%
2016E
$1.04
$0.84
$0.71
12.3x
15.9x
68.4%
3.2x
84.6%
BVPU14E: $9.98
Cap Rate: 6.90%
NAVPU:
NAV
Prem/(Disc):
$10.47
-1.24%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Units O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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.
$304
$322
$627
29
13
84
Company Comment
Tuesday, November 11, 2014, After Close
(WSP-T C$36.00)
WSP Global Inc.
Q3 Beat: Lots of Growth
Mark Neville, CFA - (514) 350-7756
(Scotia Capital Inc. - Canada)
mark.neville@scotiabank.com
Rating: Sector Outperform
Risk Ranking: Medium
Michael Doumet, CFA - (514) 350-7778
(Scotia Capital Inc. - Canada)
michael.doumet@scotiabank.com
Target 1-Yr:
C$45.00
ROR 1-Yr:
29.2%
Valuation: 10.0x EV/EBITDA on 2016E
Key Risks to Target: Integration risk; slower-than-anticipated recovery in commercial and residential construction .
Event
■ WSP reported better-than-expected Q3 results: EBITDA came in at
$66.4 million vs. consensus of $64.0 million and our estimate of $60.4
million.
Implications
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.50
$1.50
4.2%
Pertinent Revisions
EBITDA14E
EBITDA15E
EBITDA16E
New
$248
$405
$464
Old
$250
$414
$458
■ The company benefited from strong global organic growth (+6.0%) and
FX tailwinds (+6.3%), and generated better-than-expected margins.
Furthermore, the company indicated its Canadian operations (ex. Focus)
were seeing signs of stabilization, while Focus continued to generate
strong results (+9.4% organic growth).
■ In the context of the Parsons Brinckerhoff (PB) acquisition, WSP
reported (1) 12.3% organic growth in the United States, (2) 16.5%
organic growth in the UK, and (3) 2.2% organic growth in Australia.
Given we expect PB's U.S. operations to generate approximately 78%
of PB's 2015 EBITDA, and its U.K. and Australian operations to
improve from near break-even levels, we believe these positive
underlying trends should be supportive of our view that WSP could see
similar benefits from the PB acquisition as it did from the WSP
transaction (e.g., timing, improving regional operations, and synergies).
■ We have made modest changes to our estimates. Our $45.00/share
target and Sector Outperform rating are unchanged.
Recommendation
■ We view WSP as a proven acquirer, having generated superior growth
and returns metrics through well-timed strategic acquisitions.
Qtly EBITDA (M)
2013A
2014E
2015E
2016E
Q1
Q2
Q3
Q4
Year
$37 A
$42 A
$94
$107
$43 A
$55 A
$99
$115
$47 A
$66 A
$108
$125
$45 A
$85
$104
$117
$172
$248
$405
$464
EV /
EBITDA
9.6x
9.4x
8.0x
7.1x
2012A
$1.86
$1.50
80.7%
$1,020
$113
11.1%
1.11x
2013A
$1.84
$1.50
81.5%
$1,677
$172
10.2%
0.68x
2014E
$2.04
$1.50
73.5%
$2,352
$248
10.6%
2.87x
2015E
$2.07
$1.50
72.4%
$4,246
$405
9.5%
1.45x
2016E
$2.58
$1.50
58.1%
$4,392
$464
10.6%
0.88x
(FY-Dec.)
Free Cash Flow/Share
Dividends/Share
Payout Ratio
Revenues (M)
EBITDA (M)
EBITDA Margin
Net Debt/EBITDA
BVPS14E: $33.96
ROE14E: 6.42%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ 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.
$3,152
$696
$3,848
88
57
85
Q3 Results Beat
■ WSP’s Q3 came in above our estimates and consensus:
EBITDA came in at $66.4 million vs. consensus of Exhibit 1 - Results Beat
$64.0 million and our estimate of $60.4 million (see
Exhibit 1).
 Results beat our estimates on both top
Revenue
line and margins.
Strong Global Growth
EBITDA
EBITDA Margin %
Q3/14
Actuals
Scotiabank
$537.4M
$66.4M
12.4%
$509.2M
$60.4M
11.9%
■ Organic revenue growth, on a constant currency basis,
came in at 6.0% driven by continued strength in the U.S. EPS
$0.47
$0.47
(+12.3%), UK (+16.5%), and ROW (+17.6%).
FCF (before WC)
$0.70
$0.52
 Organic sales growth in the U.S. was
driven by strength in the Buildings and EBITDA Margin %
Canada
17.8%
15.6%
Infrastructure
markets.
The
U.S.
United
States
14.2%
14.0%
operations also benefited from favorable
United Kingdom
10.7%
9.5%
FX (+12.2%).
Northern Europe
10.9%
13.0%
 The company continues to add headcount
Rest of World
9.8%
8.5%
in the U.K. (+300 employees YTD) in
support of robust activity levels: London Source: Company reports; Scotiabank GBM estimates.
metropolitan area very active + witnessed
a healthy increase in levels of bidding
outside of London. FX also had a +14.9% impact in the Q.
 ROW results were driven by WSP’s Middle East and Asian operations where
the biggest challenges are staffing, project selection, and working capital
management. Columbia and Australia also positive organic growth.
 On Australia, the company indicated that (1) organic growth was
2.2% in Q3, (2) WSP and PB both secured meaningful contracts
recently, and (3) the operations were profitable.
 WSP’s European operations also posted positive organic growth (+2.9%),
despite continued contraction in the company’s German operations.
Signs of Stabilization in Canada
■ The company indicated its Canadian operations (ex. Focus) were seeing signs of
stabilization, declining 4.4% YOY compared to the previous two quarters when the regions
experienced YOY declines in excess of 10% – the decline was once again driven by the
Industrial and Energy sectors in Eastern Canada.
 Focus had another strong quarter, delivering +9.4% organic growth.
 EBITDA margin came in well above expectations on reduced administrative
expenses (the company reduced headcount by
Exhibit 2 – Securing a Larger Book of Business
approximately 200 employees in the quarter).
Backlog Up
■ At the end of Q3, backlog stood at $1,881.8 million (up 2.7%
sequentially), representing 9.2 months of work. The company
also had $587.8 million of soft backlog (see Exhibit 2).
 Q3 book-to-bill came in at 1.1x. On a
sequential basis, backlog was up in the U.S.,
Europe, and ROW, but down in Canada and
the UK (likely an anomaly as we expect the
region to continue to grow).
Expect More M&A
■ The company closed the acquisition of Parsons Brinckerhoff
on October 31, 2014 – see our September 22 DE comment,
Source: Company reports; Scotiabank GBM.
+/$28.2M
$6.0M
0.5%
($0.01)
$0.18
2.2%
0.2%
1.2%
(2.1%)
1.3%
Consensus
$522.0M
$64.0M
12.3%
$0.52
86
“A Move Fit for Big Ambitions”, for a full discussion/our views on the transaction.
■ At the end of Q4 we estimate net debt-to-EBITDA (pro forma) at 2.0x, in line with the
company’s target of 1.5x to 2.0x. Furthermore, we estimate the company will have over $400
million available on its credit facilities (and term loan) to fund additional strategic growth
opportunities.
 On November 6, WSP announced the acquisition of Texas Energy Partners
(ccrd), a 200-person engineering firm in Houston, Texas – ccrd is a building
systems provider in the healthcare and energy sectors. The acquisition, while
small, complements WSP's service offering, adds technical expertise in
healthcare and science & tech. markets, and expands its geographic footprint.
Dividend Well Covered
■ While the company is levered at 2.0x, we expect this to decline to 1.4x by the end of 2015 as
we expect excess FCF to go towards debt repayment, in the absence of M&A activity.
 We are forecasting a 72% payout ratio in 2015. Inclusive of the DRIP, we
estimate the “payout ratio” at 37%.
Target and Rating Unchanged
■ We have made modest changes to our estimates. Our $45.00/share target and Sector
Outperform rating are unchanged.
ScotiaView Analyst Link
87
Company Comment
Wednesday, November 12, 2014, Pre-Market
(ZAR-T C$5.94)
Zargon Oil & Gas
Q3 In Line as Little Bow ASP Ramp-Up Nears
Amid Uncertain Commodity Prices
Patrick Bryden, CFA - (403) 213-7750
(Scotia Capital Inc. - Canada)
patrick.bryden@scotiabank.com
Riley Hicks, CA, MBA - (403) 213-7760
(Scotia Capital Inc. - Canada)
Justin Strong, MBA - (403) 213-7328
(Scotia Capital Inc. - Canada)
Rating: Sector Perform
Target 1-Yr:
C$7.50 ROR 1-Yr:
38.4%
Risk Ranking: High
Valuation: 0.7x our 2P NAV plus risked upside.
Key Risks to Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program succes s
Event
■ Zargon released third quarter results and an update on the Little Bow
ASP project.
Implications
■ Q3 results in line. Zargon's third quarter production averaged 6,054
boe/d, in line with our estimate of 6,000 boe/d and consensus estimate
of 5,951 boe/d. Cash flow per share of $0.36 was also in line with our
estimate of $0.39 and consensus estimate of $0.37.
■ Little Bow ASP sees production response. Increased injection
pressures at seven of the eight ASP injection wells have been observed,
which may be an indication that the oil bank within the reservoir has a
higher than expected viscosity and EUR. ASP fluid movement and
minor oil production responses have provided a positive indicator to
ASP injections.
■ Guidance updated. Production guidance for Q4/14 was decreased
modestly to 5,150 boe/d and 5,250 boe/d due to regulatory and thirdparty shut in in addition to delays in starting the fall drilling program.
Initial 2015 production guidance forecasts non-ASP production of
4,000 bbl/d of oil and 6.4 mmcf/d of gas (5,067 boe/d).
Recommendation
■ We maintain our SP rating but have elected to reduce our target price by
25% to $7.50/share given the impact of a lower commodity price
environment.
Qtly CFPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.46 A
$0.50 A
$0.38
$0.49
(FY-Dec.)
Cash Flow/Share
Dividends/Share
Price/Cash Flow
Pre-tax Cash Yield
Q2
$0.53 A
$0.39 A
$0.42
$0.55
Q3
$0.55 A
$0.36 A
$0.46
$0.55
Q4
$0.40 A
$0.43
$0.50
$0.55
Year
$1.97
$1.71
$1.78
$2.17
P/CF
4.3x
3.5x
3.3x
2.7x
2012A
$1.91
$1.08
4.4x
12.9%
2013A
$1.97
$0.72
4.3x
8.5%
2014E
$1.71
$0.72
3.5x
12.1%
2015E
$1.78
$0.72
3.3x
12.1%
2016E
$2.17
$0.72
2.7x
12.1%
Div. (NTM)
Div. (Curr.)
$0.72
$0.72
Yield (Curr.)
12.1%
Pertinent Revisions
New
Old
Target:
1-Yr
$7.50
$10.00
CFPS14E
$1.71
$1.79
CFPS15E
$1.78
$1.81
CFPS16E
$2.17
$2.16
New Valuation:
0.7x our 2P NAV plus risked upside.
Old Valuation:
0.9x our 2P NAV plus risked upside.
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
BVPS14E: $5.16
ROE14E: 0.90%
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
ScotiaView Analyst Link
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.
$177
$128
$305
30
30
88
Third Quarter In Line
■ Q3 results in line. Zargon’s third quarter production averaged 6,054 boe/d, in line with our
estimate of 6,000 boe/d and consensus estimate of 5,951 boe/d. Cash flow per share of $0.36
was also in line with our estimate of $0.39 and consensus estimate of $0.37.
■ Bellshill Lake and Taber update provided. Zargon spent $7.7 mm in the third quarter on
facility upgrade, battery improvements and well completions at the company’s conventional
oil exploration locations. Zargon plans to drill two wells at Taber targeting Sunburst and
three wells in the Williston Basin targeting the Mississippian over the fourth quarter.
■ Disposition of legacy gas assets. Zargon previously announced the disposition of 5.6
mmcf/d of legacy gas assets in exchange for proceeds of $6.6 mm, which represents
$7,071/boe/d. Management has indicated the 2014 disposition program is now complete.
Little Bow ASP
■ Little Bow ASP sees production response. Increased injection pressures at seven of the
eight ASP injection wells have been observed, which may be an indication that the oil bank
within the reservoir has a higher than expected viscosity and EUR. ASP fluid movement and
minor oil production responses have provided a positive indicator to ASP injections. For
2015 oil production from Little Bow is expected to be 700 bbl/d.
■ Preparations for oil production phase underway. Zargon continues to optimize
completion intervals of producer and injector wells with the aim of achieving optimal
conformance and recovery. While current production volumes are less than the 250 bbl/d
baseline for pre-ASP project, significant ramp up of production at Little Bow is expected
over the next few months. Zargon expects to report 2014 exit production volumes in midJanuary. Expected 2016 volumes remain unchanged at 1,550 bbl/d.
Guidance Highlights Flexibility of Capital Program
■ 2014 production guidance updated. Production guidance for Q4/14 was decreased
modestly to 5,150 boe/d and 5,250 boe/d due to regulatory and third-party shut in in addition
to delays in starting the fall drilling program. Management reaffirms their belief that year-end
exit production will exceed 4,200 bbl/d of oil and 6.8 mmcf/d of gas (5,333 boe/d).
■ Initial 2015 budget unchanged but flexibility exists in face of uncertain commodity
prices. Initial 2015 production guidance forecasts non-ASP production of 4,000 bbl/d of oil
and 6.4 mmcf/d of gas (5,067 boe/d). Management takes care to note that these production
levels are dependent on the 2015 capital budget and the production profile of Little Bow.
Capital from non-core capital programs may be channeled to ASP capital programs and
dividends should low oil prices persist. The 2015 capital program will be revisited in the first
quarter at which time new guidance may be provided.
Investment Thesis
■ Scenario analysis. At US $80/bbl WTI and US $3.50/mcf HH, we see net debt to cash flow
of 3.9x and an effective payout ratio of 170%. Should WTI prices hold level at US$80/bbl
through 2015, we view the sustainability metrics of the business as challenged.
89
■ A further word about our price deck assumptions.` Our estimates still reflect WTI price
assumptions that are higher than current market prices. Our price deck is typically subject to
quarterly update, which can impact our coverage universe target prices and ratings. While we
have not revised our commodity price deck that was released in late September, given
material deterioration in crude oil prices recently, we refer our readers to our Thursday,
October 16 update Running WTI Scenarios: Commodity Prices Put Sector Under Pressure
for scenario and sensitivity analysis for our income-focused oil and gas research coverage.
We further include sensitivity tables in Exhibit 1, which provide a sense for how CFPS,
D/CF and effective payout.
Exhibit 1 - Sensitivity Analysis
CFPS Sensitivities
Current Scotia Deck
Estimate:
$1.78
Henry
$2.00
Hub
$2.50
$3.00
$3.50
$4.00
$4.50
$70
$0.89
$0.93
$0.96
$0.99
$1.02
$1.06
$75
$1.07
$1.10
$1.13
$1.16
$1.19
$1.23
$80
$1.24
$1.27
$1.30
$1.33
$1.37
$1.40
D/CF Sensitivities
Current Scotia Deck
Estimate:
2.7x
Henry
$2.00
Hub
$2.50
$3.00
$3.50
$4.00
$4.50
$70
6.3x
6.1x
5.8x
5.6x
5.4x
5.2x
$75
5.1x
5.0x
4.8x
4.6x
4.5x
4.3x
$80
4.3x
4.2x
4.0x
3.9x
3.8x
3.7x
$75
213%
207%
201%
195%
190%
185%
$80
183%
179%
174%
170%
166%
162%
WTI
$85
$1.41
$1.44
$1.47
$1.51
$1.54
$1.57
$90
$1.58
$1.61
$1.64
$1.68
$1.71
$1.74
$95
$1.75
$1.78
$1.82
$1.85
$1.88
$1.91
$85
3.6x
3.5x
3.4x
3.3x
3.3x
3.2x
$90
3.1x
3.1x
3.0x
2.9x
2.8x
2.8x
$95
2.7x
2.7x
2.6x
2.5x
2.5x
2.4x
$85
161%
157%
154%
151%
148%
144%
$90
144%
141%
138%
135%
133%
130%
$95
130%
127%
125%
123%
121%
119%
WTI
Effective Payout Sensitivities
Current Scotia Deck
Estimate:
128%
$70
Henry
$2.00
254%
Hub
$2.50
245%
$3.00
237%
$3.50
229%
$4.00
222%
$4.50
215%
WTI
Note: All other Scotiabank price deck assumptions unchanged in sensitivities.
Source: Company reports; Scotiabank GBM estimates.
■ Rating and target price moderated. We have reduced our target price by approximately
25% to $7.50 and our rating to Sector Perform given the potential impact of a lower
commodity price environment. Our target price represents a 2015E EV/DACF of 5.9x, which
compares to the peer group average of 9.3x. ZAR currently trades at a 2015E EV/DACF of
5.3x, which compares to the peer group average of 7.4x. Exhibit 2 shows our financial and
operating summary for ZAR.
90
Exhibit 2 - Financial & Operating Summary
Fiscal Year End - December 31
2011A
2012A
2013A
Q1/14A
Q2/14A
Q3/14A
Q4/14E
2014E
2015E
2016E
Price Deck Assumptions
WTI
Edmonton Par
WCS
Nymex Natural Gas
AECO 30-Day Spot
Exchange Rate
US$/B
C$/B
C$/B
US$/Mcf
C$/Mcf
US$/C$
$94.72
$95.37
$77.28
$4.01
$3.64
$1.01
$94.09
$87.12
$70.55
$2.76
$2.39
$1.00
$98.01
$93.42
$75.11
$3.72
$3.17
$0.97
$98.65
$99.51
$83.18
$5.06
$5.49
$0.91
$103.15
$106.67
$90.47
$4.53
$4.69
$0.92
$97.69
$98.31
$83.84
$3.93
$4.03
$0.92
$92.00
$96.39
$81.78
$4.10
$4.22
$0.90
$97.85
$100.21
$84.81
$4.40
$4.60
$0.91
$92.00
$95.56
$81.78
$4.00
$4.00
$0.90
$91.00
$94.44
$80.89
$4.00
$4.00
$0.90
Daily Production
Total Oil & Liquids
Natural Gas
Total Production
Change in Total Production
Percentage Natural Gas
B/d
Mmcf/d
Boe/d
%
%
5,468
22.0
9,130
-8%
40%
5,255
17.2
8,117
-11%
35%
4,870
15.6
7,468
-8%
35%
4,320
14.1
6,662
-8%
35%
4,096
14.8
6,558
-2%
38%
4,194
11.2
6,054
-8%
31%
4,118
6.8
5,253
-13%
22%
4,181
11.7
6,127
-18%
32%
4,689
6.4
5,756
-6%
19%
5,572
7.2
6,780
18%
18%
Financial Estimates
Cash Flow from Operations
Investment Cash Flows - Internal*
Investment Cash Flows - M&A
Financing Cash Flows
Dist/Div
[$mm]
[$mm]
[$mm]
[$mm]
[$mm]
$60.7
-$81.1
$32.4
-$20.3
-$38.1
$56.7
-$67.0
$36.8
-$29.6
-$27.3
$58.5
-$41.4
$34.9
-$16.1
-$20.4
$15.3
-$9.5
$1.5
$5.2
-$5.4
$11.9
-$11.7
$3.3
$0.4
-$5.4
$10.9
-$7.7
$6.7
-$2.3
-$5.4
$13.0
-$7.0
$0.0
-$1.7
-$5.4
$51.1
-$36.0
$11.5
$1.5
-$21.7
$53.0
-$25.0
$0.0
-$7.0
-$21.7
$64.9
-$25.0
$0.0
-$19.4
-$21.7
Cash Flow Per Share - FD
EBITDA
EPS
Distribution - Basic
$/Share
$/Share
$/Share
$/Share
$2.12
$2.65
$0.36
$1.56
$1.91
$1.66
($0.18)
$1.08
$1.97
$1.55
($0.20)
$0.72
$0.50
$0.48
$0.01
$0.18
$0.39
$0.40
($0.07)
$0.18
$0.36
$0.46
$0.00
$0.18
$0.43
$0.51
$0.11
$0.18
$1.71
$1.87
$0.05
$0.72
$1.78
$2.10
$0.37
$0.72
$2.17
$2.52
$0.48
$0.72
Netbacks
Revenue (pre-hedging)
Hedging Gains (Losses)
Royalties
Operating Costs
Transportation Costs
Field Netback
After-Tax Netback
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
$57.32
-$3.55
-$10.19
-$16.68
-$0.51
$26.39
$19.20
$53.16
-$0.05
-$10.14
-$15.92
-$0.53
$26.52
$19.40
$58.20
-$0.17
-$10.76
-$16.96
-$0.65
$29.66
$21.95
$67.16
-$3.83
-$11.21
-$17.04
-$0.85
$34.22
$26.61
$68.48
-$6.26
-$13.73
-$19.07
-$0.63
$28.78
$20.77
$67.17
-$3.71
-$13.38
-$17.71
-$0.70
$31.67
$20.66
$71.31
-$0.02
-$13.79
-$18.66
-$0.78
$38.06
$28.35
$68.41
-$3.62
-$12.98
-$18.10
-$0.74
$32.96
$23.94
$69.65
$0.16
-$13.55
-$18.89
-$0.81
$36.57
$26.48
$69.31
-$0.04
-$13.49
-$18.94
-$0.82
$36.01
$27.28
Valuation Measures
EV/DACF
EV/EBITDA
P/E
D/P
EV per Boe/d
x
x
x
%
$/Boe/d
7.8
6.8
16.4
26%
56,391
5.7
7.2
-32.9
18%
43,570
5.8
8.1
-30.1
12%
50,198
6.3
7.2
435.0
12%
63,456
7.2
8.1
-31.4
12%
59,247
6.1
5.5
449.0
12%
50,221
5.2
5.0
14.0
12%
58,591
5.4
5.5
122.1
12%
50,227
5.4
5.1
16.2
12%
56,018
4.5
4.3
12.3
12%
47,905
Credit Capacity
Credit facility
% Drawn
[$mm]
%
$180
52%
$165
22%
$165
24%
$165
31%
$165
34%
$165
36%
$165
36%
$165
36%
$165
45%
$165
46%
Net Debt & Debentures
Net Debt & Debentures
EBITDA
Cash Flow
Net Debt, Debentures & Equity
EV
$/Share
x
x
x
%
$3.91
1.5
1.9
0.3
22%
$3.64
2.2
1.9
0.4
31%
$4.03
2.6
2.1
0.4
32%
$4.31
2.2
2.1
0.4
31%
$4.46
2.8
2.8
0.5
35%
$4.10
2.2
2.8
0.4
41%
$4.23
2.1
2.4
0.5
41%
$4.23
2.3
2.5
0.5
41%
$4.71
2.3
2.7
0.5
44%
$4.79
1.9
2.2
0.5
45%
%
%
57%
175%
175%
118%
37%
108%
168%
131%
35%
98%
147%
111%
46%
145%
186%
140%
50%
121%
168%
118%
42%
96%
129%
87%
42%
113%
156%
113%
41%
88%
128%
47%
33%
72%
101%
39%
-----
-----
-----
-----
-----
73%
0%
42%
66%
72%
0%
55%
66%
15%
0%
11%
14%
0%
0%
0%
0%
Sustainability
Payout Ratio - Simple
Payout Ratio - Effective (no ASP)
Payout Ratio - Effective (Including ASP)
Capital Expenditures (Inc ASP)/ Cash Flow
%
63%
197%
197%
134%
Hedging
Percentage of Light & Medium Oil
Percentage of Heavy Crude Oil
Percentage of Natural Gas Production
Percentage of Total Production
%
%
%
%
-----
*ASP spending included as separate project financing & included in forecasts
Source: Company reports; Scotiabank GBM estimates.
Equity Event
Wednesday, October 15, 2014
Equity Event: Telecom & Cable 2015
Insert graphic here
92
Equity Event
XXX, XXX XX, XXXX
Equity Event: Transportation & Aerospace 2014
Insert graphic here
93
Equity Event
XXX, XXX XX, XXXX
Equity Event: Canadian Energy Infrastructure
Conference
Insert graphic here
94
Equity Event
XXX, XXX XX, XXXX
Xs 2 Xs2
Equity Event: Mining Conference 2014
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95
Equity Event
XXX, XXX XX, XXXX
96
Disclosures and Disclaimers
Wednesday, November 12, 2014
Appendix A: Important Disclosures
Company
Allied Properties REIT
Armtec Infrastructure Inc.
AuRico Gold Inc.
Calloway REIT
Canadian National Railway Company
Canadian Pacific Railway Limited
Canfor Pulp Products Inc.
CAP REIT
Capital Power Corporation
Cencosud, SA
Choice Properties REIT
Controladora Comercial Mexicana, SAB de CV
Crombie REIT
DHX Media Ltd.
Domtar Corporation
Emera Incorporated
Empresas CMPC SA
Empresas Copec SA
Entel Chile
FEMSA, SAB de CV
Fibria Celulose SA
First Capital Realty Inc.
Fortuna Silver Mines Inc.
GLV Inc.
Grupo Comercial Chedraui, SAB de CV
Organización Soriana, SAB de CV
RioCan REIT
Ripley Corp SA
RONA Inc.
SACI Falabella
SEMAFO Inc.
SunOpta Inc.
Telefonica Brasil SA
Thompson Creek Metals Company Inc.
TransAlta Corporation
TransAlta Renewables Inc.
TransCanada Corporation
Vicwest Inc.
Wal-Mart de México y Centroamerica, SAB de CV
WPT Industrial REIT
WSP Global Inc.
Ticker
AP.UN
ARF
AUQ
CWT.UN
CNR
CP
CFX
CAR.UN
CPX
CENCOSUD
CHP.UN
COMERCI
UBC
CRR.UN
DHX.B
UFS
EMA
CMPC
COPEC
ENTEL
FMX
FBR
FCR
FSM
GLV.A
CHDRAUI B
SORIANA B
REI.UN
RIPLEY
RON
FALAB
SMF
STKL
VIV
TCM
TA
RNW
TRP
VIC
WALMEX V
WIR.U
WSP
Disclosures (see legend below)*
G, I, T, U
T, V10
G, I, N1, P, T, U, VS190
G, I, U
G, I, S, T, U, VS191
T
P, T, VS85
I, S, T
I, T
M13
B40, G, I, U
M13, S
B25, G, I, U
G, I, U
G, I, N1, U
G, I, S, T, U
VS83, VS84, VS146
VS171, VS172
I, M12, M4
M13, T, VS62
P, T
G, I, U
P, T, VS22
T
M13, T
M13, T
G, I, U
M13
T
M13, N1
VS127
J, T, VS31
M12, M4
VS100
G, I, S, T, U
G, I, U
G, I, S, U
T
M13, T
G, I, U
G, I, J, T, U
97
Disclosures and Disclaimers
Wednesday, November 12, 2014
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
B25
Paul D. Sobey is a director of Crombie REIT and is a director of The Bank of Nova Scotia.
B40
Thomas C. O'Neill is a director of Loblaw Companies Limited and is Chairman of the Board of The Bank of Nova Scotia. Choice
Properties Real Estate Investment Trust is a subsidiary of Loblaw Companies.
G
Scotia Capital (USA) Inc. or its affiliates has managed or co-managed a public offering in the past 12 months.
I
Scotia Capital (USA) Inc. or its affiliates has received compensation for investment banking services in the past 12 months.
J
Scotia Capital (USA) Inc. or its affiliates expects to receive or intends to seek compensation for investment banking service s in the
next 3 months.
M12
Ivan Hernandez, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A.,
which forms a part of Grupo Financiero Scotiabank Inverlat.
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., wh ich
forms a part of Grupo Financiero Scotiabank Inverlat.
N1
Scotia Capital (USA) Inc. had an investment banking services client relationship during the past 12 months.
P
This issuer paid a portion of the travel-related expenses incurred by the Fundamental Research Analyst/Associate to visit material
operations of this issuer.
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Disclosures and Disclaimers
Wednesday, November 12, 2014
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 t o equity or
debt securities of, or have provided advice for a fee with respect to, this issuer.
V10
Two putative class action lawsuits have been filed, the first in June 2011 with the Ontario Superior Court of Justice at Windsor,
Ontario, Canada, and the second in July 2011 with the Ontario Superior Court of Justice at London, Ontario, Canada, against
Armtec Infrastructure Inc. ('Armtec') and others by purported purchasers of Armtec common shares pursuant to an April 2011
public offering. The lawsuits are still pending. Certain underwriters, including Scotia Capital Inc., are among those named as
defendants in the lawsuits.
VS100
Our Research Analyst visited Mt. Milligan, an operating mine, on October 9, 2013 and August 19, 2014. Partial payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS127
Our Research Analyst visited Mana, an operating mine, on February 3-4, 2014. Partial payment was received from the issuer for
the travel-related expenses incurred by the Research Analyst to visit this site.
VS146
Our Research Analyst visited the Talagante plant, a tissue plant, on April 24, 2014. Partial payment was received from the issuer
for the travel-related expenses incurred by the Research Analyst to visit this site.
VS171
Our Research Analyst visited Empresas Copec SA, the company's head office, on April 21-25, 2014. No payment was received
from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS172
Our Research Analyst visited Nueva Aldea, an operating pulp mill, on April 23, 2014. Full payment was received from the issuer
for the travel-related expenses incurred by the Research Analyst to visit this site.
VS190
Our Research Analyst visited the Young-Davidson Gold Mine, an operating underground gold mine and mill, on October 15, 2014.
Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS191
Our Research Associate visited the Chicago yard, CN's rail yards and training facilities, on September 24, 2014. No payment w as
received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
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.
VS31
Our Research Analyst visited the Hope, Oat Fiber, SunOpta Aseptic, Ingredients, and Dahlgren Sunflower facilities, which are
handling and processing facilities, on September 25, 2012. No payment was received from the issuer for the travel-related
expenses incurred by the Research Analyst to visit this site.
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.
VS83
Our Research Analyst visited Empresas CMPC, the company's head office, on April 3-5, 2013. No payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS84
Our Research Analyst visited the Laja Mininco pulp mill, an operating mill, on April 3-5, 2013. No payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS85
Our Research Analyst visited the Northwood Pulp Mill, an NBSK pulp mill, on September 2013. Partial payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
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Disclosures and Disclaimers
Wednesday, November 12, 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. Statistical and judgmental factors
considered are: historical financial results, share price volatility, liquidity of the shares, credit ratings, analyst foreca sts, consistency and predictability of
earnings, EPS growth, dividends, cash flow from operations, and strength of balance sheet. The Director of Research and the Supervisory Analyst jointly
make the final determination of all risk rankings.
The rating assigned to each security covered in this report is based on the Scotiabank, Global Banking and Markets research analyst’s
12-month view on the security. Analysts may sometimes express to traders, salespeople and certain clients their shorter-term views on these securities that
differ from their 12-month view due to several factors, including but not limited to the inherent volatility of the marketplace.
Ratings
Risk Rankings
Focus Stock (FS)
The stock represents an analyst’s best idea(s); stocks in this category are
expected to significantly outperform the average 12-month total return of the
analyst’s coverage universe or an index identified by the analyst that includes,
but is not limited to, stocks covered by the analyst.
Low
Low financial and operational risk, high predictability of financial results,
low stock volatility.
Sector Outperform (SO)
The stock is expected to outperform the average 12-month total return of the
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/neutral” and
“sell,” to equate their own ratings into these categories. Our Focus Stock, Sector Outperform, Sector Perform, and Sector Und erperform ratings are based
on the criteria above, but for this purpose could be equated to strong buy, buy, neutral and sell ratings, respectively.
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Disclosures and Disclaimers
Wednesday, November 12, 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
The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including Scotia Capital Inc.
All other trademarks are acknowledged as belonging to their respective owners and the display of such trademarks is for informational use only.
Scotiabank, Global Banking and Markets Research produces research reports under a single marketing identity referred to as “Globally-branded
research” under U.S. rules. This research is produced on a single global research platform with one set of rules which meet the most stringen t
standards set by regulators in the various jurisdictions in which the research reports are produced. In addition, the analyst s who produce the research
reports, regardless of location, are subject to one set of policies designed to meet the most stringent rules established by regulators in the various
jurisdictions where the research reports are produced.
Scotia Capital Inc. or an affiliate thereof owns or controls an equity interest in TMX Group Limited and in excess of 1% of the issued and outstanding
equity securities thereof. In addition, an affiliate of Scotia Capital Inc. is a lender to TMX Group Limited under its credit facilities. As such, Scotia
Capital Inc. may be considered to have an economic interest in TMX Group Limited.
This report is provided to you for informational purposes only. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer
to buy any securities and/or commodity futures contracts.
The securities mentioned in this report may neither be suitable for all investors nor eligible for sale in some jurisdictions where the report is
distributed.
The information and opinions contained herein have been compiled or arrived at from sources believed reliable, however, Scotiabank, Global Banking
and Markets makes no representation or warranty, express or implied, as to their accuracy or completeness.
Scotiabank, Global Banking and Markets has policies designed to make best efforts to ensure that the information contained in this report is current as
of the date of this report, unless otherwise specified.
Any prices that are stated in this report are for informational purposes only. Scotiabank, Global Banking and Markets makes no representation that any
transaction may be or could have been effected at those prices.
Any opinions expressed herein are those of the author(s) and are subject to change without notice and may differ or be contrary from the opinions
expressed by other departments of Scotiabank, Global Banking and Markets or any of its affiliates.
Neither Scotiabank, Global Banking and Markets nor its affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of
this report or its contents.
Equity research reports published by Scotiabank, Global Banking and Markets are available electronically via: Bloomberg, Thomson Financial/First
Call - Research Direct, Reuters, Capital IQ, and FactSet. Institutional clients with questions regarding distribution of equity research should contact us
at 1-800-208-7666.
This report and all the information, opinions, and conclusions contained in it are protected by copyright. This report may no t be reproduced in whole or
in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be refer red to without the prior
express consent of Scotiabank, Global Banking and Markets.
Additional Disclosures
Canada: This report is distributed by Scotia Capital Inc., a subsidiary of The Bank of Nova Scotia. Scotia Capital Inc. is a member of the Canadian
Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
Chile: This report is distributed by Scotia Corredora de Bolsa Chile S.A., a subsidiary of The Bank of Nova Scotia.
Hong Kong: This report is distributed by The Bank of Nova Scotia Hong Kong Branch, which is authorized by the Securities and Future Commission
to conduct Type 1, Type 4 and Type 6 regulated activities and regulated by the Hong Kong Monetary Authority.
Mexico: This report is distributed by Scotia Inverlat Casa de Bolsa S.A. de C.V., a subsidiary of the Bank of Nova Scotia.
Peru: This report is distributed by Scotia Sociedad Agente de Bolsa S.A., a subsidiary of The Bank of Nova Scotia.
Singapore: This report is distributed by The Bank of Nova Scotia Asia Limited, a subsidiary of The Bank of Nova Scotia. The Bank of Nova Scotia
Asia Limited is authorised and regulated by the Monetary Authority of Singapore, and exempted under Section 99(1)(a),and (b), (c) and (d) of the
Securities and Futures Act to conduct regulated activities.
United Kingdom and the rest of Europe: Except as otherwise specified herein, this report is distributed by Scotiabank Europe plc, a subsidiary of The Bank of
Nova Scotia. Scotiabank Europe plc is authorized by the Prudential Regulation Authority (PRA) and regulated by the PRA and the Financial Conduct Authority
(FCA). Scotiabank Europe plc complies with all FCA requirements concerning research and the associated disclosures and these are indicated on the
research where applicable.
United States: This report is distributed by Scotia Capital (USA) Inc., a subsidiary of Scotia Capital Inc., and a registered U.S. broker-dealer. All
transactions by a U.S. investor of securities mentioned in this report must be effected through Scotia Capital (USA) Inc.
Non-U.S. investors wishing to effect a transaction in the securities discussed in this report should contact a Scotiabank, Global Banking and Markets
entity in their local jurisdiction unless governing law permits otherwise.