1. business and industrial

EQUITY RESEARCH
CANADIAN RESEARCH AT A GLANCE
November 18, 2014
Price Target Revisions
! AuRico Gold Inc.
! Transcontinental Inc.
Summary
Young-Davidson to drive gradual re-rating
Summary
Sells consumer magazines to TVA for $56MM
Summary
PEA highlights underlying potential of Buritica
Summary
Field Trip Day 1 – Revealing the Secret Sauce...
Summary
Analyst Day Highlights: Continued focus on operational efficiencies
Summary
On the road with Clearwater
Summary
Investor Day: Near-term and long-term projects drive visible dividend growth
Summary
Q3/14 - Behind pipe Entice volumes key to exit target
Summary
Reaffirms 2015 Outlook and Long-Term Plan
Summary
Q4 expected to improve investor sentiment
Summary
Acquires consumer magazines from Transcontinental for $56MM
! Energy Insights
! Global Mining Trends & Values
! Integrated Oil and Senior E&P
! Paper & Packaging
! Precious Metals & Minerals Weekly
Summary
How OPEC’s Release Might Read
!
First Glance Notes
! Continental Gold Limited
! Parex Resources Inc.
Company Comments
! Bonavista Energy Corporation
! Clearwater Paper Corporation
! Inter Pipeline Ltd.
! Manitok Energy Inc.
! Penn West Petroleum Ltd.
! Redknee Solutions Inc.
! TVA Group Inc.
Industry Comments
Valuation Tables
RBC International E&P Daily
Summary
Summary
So what WTIE price are the large caps discounting?
Summary
Containerboard stats: 2nd consecutive month of box shipment growth encouraging
Summary
Chart of the Week: The status of lines of credit and levels of debt
Summary
PXT; PMO; LUPE; ENQ
In-Depth Reports
! RBC Capital Markets US Equity Small
Summary
Cap Focus List and Monthly Outlook
Priced as of prior day's market close, EST (unless otherwise noted).
For Required Non-U.S. Analyst and Conflicts Disclosures, see Page 13.
EQUITY RESEARCH
U.S. RESEARCH AT A GLANCE
November 18, 2014
Initiations
! OM Asset Management Limited
Summary
Initiating with an Outperform rating - distinct model helping drive growth
Summary
Raising Price Target; Enterprise Ramps and Buybacks on the Horizon
Summary
WSJ Reports INTC May Combine PCCG and Mobile Groups
Summary
Analyst day takeaways
Summary
Highlights from IR Seminar in Oslo
Summary
Third Quarter Earnings and Cheat Sheet
Summary
Stepping up to the plate: Strong October sales round out Q2
Summary
On the road with Clearwater
Summary
Reaffirms 2015 Outlook and Long-Term Plan
Summary
Missing margin
Summary
More than just chicken
! Card Issuer Trust Trends – October
Summary
Credit Largely Favorable, Loan Growth Cools for Most
!
! Global Aerospace & Defense
! Integrated Oil and Senior E&P
! Paper & Packaging
! Precious Metals & Minerals Weekly
Summary
How OPEC’s Release Might Read
Summary
3Q14 Earnings Wrap
Summary
So what WTIE price are the large caps discounting?
Summary
Containerboard stats: 2nd consecutive month of box shipment growth encouraging
Summary
Chart of the Week: The status of lines of credit and levels of debt
!
! RBC HDD Model: Solid Sep-qtr TAM,
Summary
Smiths revenue under pressure; HAL/BHI Weir read; IMI forecasts cut
Summary
Expect Dec-qtr TAM to come in at ~145M, with improving mix
!
! The Best 'Nets For Your Holiday
Summary
PXT; PMO; LUPE; ENQ
Summary
Top Internet Sector Picks Post Q3 Results
!
Summary
Spot Ethylene Flat as Buyers Remain on Sidelines
Summary
Stability Amid Transformation
Price Target Revisions
! Seagate Technology
First Glance Notes
! Intel Corporation
! Regency Energy Partners L.P.
! Statoil ASA
Earnings Preview
! Autodesk, Inc.
Company Comments
! Casey's General Stores, Inc.
! Clearwater Paper Corporation
! Penn West Petroleum Ltd.
! SABMiller plc
! Tyson Foods, Inc.
Industry Comments
2014
Energy Insights
Valuation Tables
RBC European Industrials Daily
Dec-qtr to benefit from enterprise
RBC International E&P Daily
Shopping List
US Chemicals Weekly Watch
In-Depth Reports
! Reynolds American, Inc.
2
EQUITY RESEARCH
UK & European Research at a Glance
November 18, 2014
Company Comments
! InternetQ PLC
! SABMiller plc
Summary
Tweaking estimates
Summary
Missing margin
Summary
How OPEC’s Release Might Read
Summary
3Q14 Earnings Wrap
Industry Comments
! Energy Insights
! Global Aerospace & Defense
! Global Mining Trends & Values
! Precious Metals & Minerals Weekly
Summary
Summary
Chart of the Week: The status of lines of credit and levels of debt
Valuation Tables
Find our Research at:
RBC Insight (www.rbcinsight.com): RBC's global research destination on the web. Contact your RBC Capital Markets' sales representative to
access our global research site, or use our iPad App "RBC Research"
Thomson Reuters (www.thomsononeanalytics.com)
Bloomberg (RBCR GO)
SNL Financial (www.snl.com)
FactSet (www.factset.com)
3
Price Target Revisions
AuRico Gold Inc.(NYSE: AUQ; 3.78; TSX: AUQ.TO)
Dan Rollins, CFA (Analyst)
(416) 842-9893; dan.rollins@rbccm.com
Mark Mihaljevic (Associate)
(416) 842-3804; mark.mihaljevic@rbccm.com
Rating:
Price Target:
52 WEEKS
22NOV13 - 14NOV14
Outperform
5.00 ▲ 4.75
Young-Davidson to drive gradual re-rating
We expect AuRico to undergo a gradual re-rating as underground throughput
at Young-Davidson nears steady-state, unit costs decline with economies of
scale, and capital intensity wanes. Given the potential to deliver fundamental
improvements and increased cash flow, we expect AuRico to outperform its
peers.
4.95
4.50
4.05
3.60
3.15
15000
10000
5000
N
2013
D
J
F
M
A
Close
M
2014
J
J
A
Rel. S&P 500
EPS, Adj Diluted Prev.
2013A
0.05
2014E
(0.13)↑
(0.20)
2015E
(0.01)↑
(0.16)
2016E
0.01↓
0.03
S
O
N
MA 40 weeks
P/E
80.6x
All values in USD unless otherwise noted.
Transcontinental Inc.(TSX: TCL.A; 15.38)
Haran Posner (Analyst)
(416) 842-7832; haran.posner@rbccm.com
Drew McReynolds, CFA, CA (Analyst)
(416) 842-3805; drew.mcreynolds@rbccm.com
17.00
52 WEEKS
• Young-Davidson ramp-up expected to drive re-rating. We expect the ongoing
ramp-up of underground operations at Young-Davidson to be the primary driver
of a gradual re-rating. With the underground operation expected to exit 2016
at 8 Ktpd (4 Ktpd at the end of 2014), we believe AuRico is well positioned
to benefit from improving fundamentals over the next couple of years even at
current prices.
• Free cash flow expected to gradually improve. Unlike many of its peers that
are paring back capital expenditures at their mines, AuRico continues to invest
in Young-Davidson, which, in our view, does not put the long-term potential of
its flagship mine at risk for short-term optics. Once at full throughput, capital
expenditures should decline, which when coupled with higher production and
lower cash costs bodes well for improving free cash flow.
• Additional financing unlikely at spot metal prices/currencies. Given the
company's improving fundamentals, we do not expect AuRico to require
additional funding, at spot prices, to bring underground operations at YoungDavidson up to design levels. Longer-term, we believe AuRico will likely need to
refinance a portion of its $315 million of debt which matures in 2020. Refinancing
is a likely scenario in our view given that even at spot prices, AuRico is expected
to be free cash flow positive beginning in 2017. Should metal prices remain
weak, AuRico could gain additional financial flexibility by suspending/reducing its
dividend (20% of cash flow), deferring discretionary capital, reducing exploration
spending, or drawing down on its line of credit ($150 million).
Rating:
Price Target:
22NOV13 - 14NOV14
Sector Perform
17.00 ▲ 16.00
Sells consumer magazines to TVA for $56MM
We incorporated the pending sale of TCL's consumer magazines into our forecast,
and we made modest tweaks to our estimates ahead of 4Q. Our price target
increases to $17 and we maintain our Sector Perform rating.
16.50
16.00
15.50
15.00
14.50
14.00
13.50
1600
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400
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2013
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M
2014
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S
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Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Diluted Prev.
2013A
2.01
2014E
2.05↓
2.09
2015E
2.19↓
2.24
2016E
2.28
All values in CAD unless otherwise noted.
P/E
7.7x
7.5x
7.0x
6.7x
N
• Sells consumer magazines to TVA. Transcontinental announced the sale of
its consumer magazines produced in Montreal and Toronto, along with their
associated websites to TVA Group for $55.5MM in cash. The sale is subject
to approval by regulators, including the Competition Bureau. As part of the
transaction, TCL has signed an agreement with TVA to continue printing these
magazines for 7 years, and to extend the contracts signed in December 2013 to
print other TVA magazines to the end of June 2022.
• Strategic rationale - a focus on local media. Given the ongoing migration of
national advertising dollars towards digital media, TCL will now focus on the local
advertising market. We believe revenue associated with the divested magazines
are ~$95MM, with EBITDA in the $7-8MM range. This maps to a relatively high
transaction EV/EBITDA multiple of ~7.4x (pre-synergies), versus the 4.0x multiple
our NAV applies for TC Media (we expect the transaction multiple for TVA will
4
decrease to a 4-5.5x range post-synergies). TCL will look to offset the divested
EBITDA with additional cost savings across the organization.
• Price target increases to $17. We have incorporated the transaction assuming
it closes April 1, 2015 (mid-2Q). We have also made modest changes to our
underlying revenue growth and margin assumptions for Printing and Media. The
modest decrease in our EBITDA estimates is offset by the sale proceeds and a
rolling forward of our valuation.
First Glance Notes
Continental Gold Limited(TSX: CNL; 2.27)
Dan Rollins, CFA (Analyst)
(416) 842-9893; dan.rollins@rbccm.com
Mark Mihaljevic (Associate)
(416) 842-3804; mark.mihaljevic@rbccm.com
Rating:
Outperform
Risk Qualifier: Speculative Risk
52 WEEKS
22NOV13 - 14NOV14
5.00
PEA highlights underlying potential of Buritica
Continental released a positive PEA on its high-grade Buritica project which, in
our view, outlines the strong underlying economics of the project and ability to
withstand lower metal prices and/or higher operating/capital costs.
4.00
3.00
Preliminary economic assessment highlights underlying potential
of Buritica
2.00
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2013
D
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Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
All market data in CAD; all financial data in USD.
• The preliminary economic assessment (PEA) on Continental's high-grade Buritica
project in Colombia demonstrates the strong underlying economics of the
project. Given the projected after tax returns of 31.5% at $1,200/oz and 24.1%
at $1,000/oz gold, the PEA in our view highlights the potential for Buritica to
withstand lower metal prices and/or higher operating and capital costs should
costs increase in the future.
• Based on an upfront capital cost of $390 million, Buritica is forecast to produce
265 Koz of gold and 394 Koz of silver annually over a period of 18 years at a total
cash cost of $431/oz and an average mine-site sustaining cash cost of $504/oz
(based on sustaining capital of $347 million).
Results stack up relatively well to our forecasts
• The PEA compares favourably to our forecast of 226 Koz of gold and 275 Koz of
silver over 15 years at an average cash cost of $528/oz and sustaining cash cost
of $655/oz. We had assumed upfront capital costs of $350 million and sustaining
costs of $437 million.
• The major differences between our production forecasts is due to the company
planning to expand throughput to 3,500 tpd from 2,000 tpd initially, compared
to our forecast for an expansion to 3,000 tpd.
Parex Resources Inc.(TSX: PXT; 9.60)
Nathan Piper (Analyst)
+44 131 222 3649; nathan.piper@rbccm.com
Haydn Rodgers, CA (Associate)
+44 131 222 4911; haydn.rodgers@rbccm.com
52 WEEKS
Rating:
Field Trip Day 1 – Revealing the Secret Sauce...
22NOV13 - 14NOV14
14.00
12.00
10.00
8.00
6.00
7500
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2013
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Outperform
A
S
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Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
N
• Parex underlined its success, based on relentless cost control, rapid decisionmaking, and assessing near-term commercial viability of exploration.
• Development risk maintains production to 2016/17: Parex has established
a reputation for consistent q-o-q production growth. Swing producing fields
(Kona and latterly Akira) allow delivery despite inevitable Colombian vagaries of
transportation challenges, community issues, and timings of approvals. Internal
estimates indicate that the current 26–30,000b/d production base could be
maintained until late 2017 on development of existing reserves. Conservative
growth assumptions (10–20% CAGR) could see this reach 40–50,000b/d in 3–4
years. Based on historical exploration success (60%), there is upside potential.
There are 40 wells (17 exploration) planned for 2015 based on the constrained
$330m capex plan (could expanded to $400–450m on higher oil prices)
All market data in CAD; all financial data in USD.
5
Company Comments
Bonavista Energy Corporation(TSX: BNP; 10.75)
Michael Harvey, P.Eng. (Analyst)
403 299 6998; michael.harvey@rbccm.com
Eric Gallie (Associate)
(403) 299-7434; eric.gallie@rbccm.com
52 WEEKS
Rating:
Price Target:
22NOV13 - 14NOV14
Sector Perform
15.00
Analyst Day Highlights: Continued focus on operational efficiencies
Bonavista's 2015 analyst day highlighted the company's continued commitment
to improved operational efficiencies, in tandem with maintaining a stable
financial position. The company's 5-year plan remains intact, pointing to a 5-year
volume CAGR of 8%.
16.00
14.00
12.00
10.00
16000
12000
8000
4000
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2013
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2013A
2014E
2015E
2016E
M
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Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
CFPS Diluted
2.40
2.70
2.84
3.09
P/CFPS
4.5x
4.0x
3.8x
3.5x
All values in CAD unless otherwise noted.
Clearwater Paper Corporation(NYSE: CLW; 66.36)
Paul C. Quinn (Analyst)
(604) 257-7048; paul.c.quinn@rbccm.com
Hamir Patel (Analyst)
(604) 257-7145; hamir.patel@rbccm.com
52 WEEKS
• 2015 program focused on continued strong efficiencies. Bonavista provided a
detailed breakdown of its previously released 2015 program that includes net
investment of $450 million ($550 million in E&D and $100 million of divestitures).
A total of 121 wells are to be drilled next year with the majority of the allocation
to the Glauconite (62 wells) and the Spirit River (33 wells). Operations are
expected to drive production of 83,500 boe/d (midpoint), which equates to a
capital efficiency below $25,000/boe/d, in line with prior years.
• Five-year growth outlook intact, with the Spirit River accelerated. Bonavista
updated its 5-year outlook with a 5-year production CAGR of 8% remaining intact.
Adjustments to the plan include: 1) the inclusion of planned dispositions totaling
8,000 boe/d, 2) the drilling of 617 wells (was 804 wells) as better production rates
and 2 mile horizontals reduce the rolling requirement; and 3) capital spending
assumptions falling slightly due to the reduced well count. The largest move came
from the Ellerslie, with BNP including 29 wells in its 5-year plan, versus 138 wells
previously. The Spirit River saw the largest increase as 189 wells are now planned
(previously 115 wells), with recent Falher results looking quite strong.
Rating:
Price Target:
22NOV13 - 14NOV14
Outperform
79.00
On the road with Clearwater
Takeaways from three days of marketing recently with CLW's CFO John Hertz and
Robin Yim (VP, Investor Relations).
70.00
65.00
60.00
55.00
50.00
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EPS, Adj Diluted Prev.
2013A
2.00
2014E
3.70
2015E
5.44↑
5.22
2016E
6.87↑
6.45
All values in USD unless otherwise noted.
Robert Kwan, CFA (Analyst)
J
A
Rel. S&P 500
S
O
MA 40 weeks
P/E
33.2x
17.9x
12.2x
9.7x
N
• Tissue EBITDA margin goal of 17%; improvement to come from four buckets –
With tissue margins hovering around 11% and the Shelby ramp-up largely behind
it, Clearwater is focused on increasing profitability in tissue. First, Clearwater
has an initiative at five of its lowest-performing tissue operations. Second, the
company is looking to reduce its low-margin product offerings (SKU's). Third,
Clearwater wants to standardize its converting lines to improve product flexibility
and decrease handling and transportation costs. We estimate that these first
three initiatives could deliver 1% to 2% of improvement over the next two
years. Lastly, the company has started to undertake a number of supply chain
improvements that we believe will deliver margin gains of 2% to 3%.
• MLP conversion would be additional upside to our valuation – Management
received a number of client questions on its MLP potential during our trip.
Clearwater continues to explore this possibility, although the IRS currently has a
moratorium on the issuance of private letter rulings. We believe the company's
pulp/paperboard operations have as much validity to qualify for MLP status as
kraft linerboard (and frankly the tissue paper machines would probably stand a
good chance, too). In the event that forestry MLP's are possible, we would expect
a valuation lift for Clearwater even if its small size precludes a partial conversion,
as we suspect the "MLP-able" assets would likely become acquisition targets for
larger MLP's looking for growth.
Inter Pipeline Ltd.(TSX: IPL; 34.19)
6
Rating:
Price Target:
(604) 257-7611; robert.kwan@rbccm.com
Michelle Zuliani (Associate)
604 257 7064; michelle.zuliani@rbccm.com
52 WEEKS
Outperform
41.00
Investor Day: Near-term and long-term projects drive visible dividend growth
22NOV13 - 14NOV14
38.00
36.00
34.00
32.00
While largely informational, the Investor Day presentation supports our positive
thesis for the stock by underscoring our view that Inter Pipe has an attractive
pipeline footprint that has the ability to drive near-term and long-term cash flow
growth that we expect to translate to above-average dividend growth.
30.00
28.00
26.00
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4000
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Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
ACFFO/Sh Diluted
2013A
1.35
2014E
1.42
2015E
1.90
2016E
2.08
All values in CAD unless otherwise noted.
Manitok Energy Inc.(TSXV: MEI; 1.61)
Shailender Randhawa, CFA (Analyst)
(403) 299-6576; shailender.randhawa@rbccm.com
Keith Mackey, CFA (Associate)
403 299 6958; keith.mackey@rbccm.com
52 WEEKS
• Attractive line of sight into future dividend growth. We believe that the
combination of long-term oil sands (i.e., Cold Lake and Polaris) contracts that
should contribute a roughly $300 million run-rate of EBITDA by early 2015
coupled with very high-return growth from the Conventional Pipeline business
has the potential to underpin above-average dividend growth into the future.
• Oil sands pipelines: the cash is on its way. With the first phase of the Polaris
condensate expansion in service several months ago, Inter Pipe is set to place the
Cold Lake dilbit expansion into service in early 2015. These two projects coupled
with smaller connections are set to add roughly $300 million to annual EBITDA
under long-term take-or-pay contracts.
• Conventional pipelines: the high return driver of expected near-term growth.
Primarily levering off of oil production growth in the Viking play, Inter Pipe's
Conventional pipeline system has attracted 4 to 10-year take-or-pay contracts
that are expected to generate roughly $25-30 million of annual EBITDA,
underpinning less than half of the capacity of the $100 million expansion. If Viking
production continues to grow, we believe that this type of high-return capital
investment has the potential to drive continued double digit dividend growth.
22NOV13 - 14NOV14
3.00
Rating:
Outperform
Risk Qualifier: Speculative Risk
Price Target: 2.75
Q3/14 - Behind pipe Entice volumes key to exit target
Manitok Exploration's Q3/14 results were marked by an expected 11% sequential
production decline with CFPS matching RBC and Consensus estimates. Tie-in
of 2,000 boe/d of behind pipe volumes at Entice is key for Manitok to achieve
its 2014 exit target and maintain balance sheet flexibility given the lower price
environment.
2.70
2.40
2.10
1.80
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2013
D
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2013A
2014E
2015E
2016E
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Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Total (boe/d) Prev.
4,113
4,750↓
4,775
6,000
7,000↓
7,250
All values in CAD unless otherwise noted.
Greg Pardy, CFA (Analyst)
(416) 842-7848; greg.pardy@rbccm.com
Dillon Culhane, CFA, CA (Analyst)
N
• Entice tie-in key to achieving near-term operational and financial targets.
Management estimates that its behind-pipe volumes total approximately 2,300
boe/d versus recent production of 4,800 boe/d exclusively from the Foothills.
In response to an increasingly capital constrained environment, Manitok plans
a single rig program at Entice in H1/15, which we estimate will keep H1/15
production volumes between 5,500 to 6,000 boe/d compared to its 6,100 to
6,500 boe/d 2014 exit target guidance. On its conference call, management
indicated moving to two rigs at Entice in the second half of 2015 with roughly 80%
of activity directed to lower risk development plus testing a new Glauc channel
system at North Entice.
• Discounted valuation reflects past operational surprises. At current levels,
Manitok is trading at a 3.4x 2015E EV/DACF multiple (vs. <15,000 boe/d peers at
5.5x) and a P/NAV of 0.5x (vs. peers at 0.9x) at RBC's price deck.
• Maintain Outperform, Speculative Risk rating and $2.75 price target. Our 12month price target is driven by our expectations of Manitok delivering improved
Cardium Foothills execution, the 96,800 net acre Entice farm-in moving from
delineation to development in 2015, with a stable financial outlook.
Penn West Petroleum Ltd.(TSX: PWT; 4.72; NYSE: PWE)
Rating:
Sector Perform
7
Price Target:
(416) 842-7915; dillon.culhane@rbccm.com
Franz Hargo Muljo, CA (Associate)
416 842 8588; franz.muljo@rbccm.com
10.00
Reaffirms 2015 Outlook and Long-Term Plan
52 WEEKS
22NOV13 - 14NOV14
10.00
8.00
Penn West reaffirmed its 2015 production guidance of 95,000–105,000 boe/d
and capital budget of $840 million. The company remains on track with its longterm plan, which is focused on debt reduction, profitable growth, execution, and
cost control, and it is targeting an additional $500 million in non-producing asset
dispositions by year-end 2015.
6.00
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12000
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N
2013
D
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2013A
2014E
2015E
2016E
M
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Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
CFPS Diluted Prev.
1.89
1.95
1.81↓
1.84
1.95↑
1.83
P/CFPS
2.5x
2.4x
2.6x
2.4x
All values in CAD unless otherwise noted.
• 2015 Guidance: Light Oil Focus. Roughly 70% of Penn West’s 2015 budget is
focused on its three core light oil plays, with 44% allocated to the Cardium,
15% to the Viking, and 11% to the Slave Point. Our revised 2015 production
outlook of 100,000 boe/d (vs. 98,500 boe/d previously) is at the midpoint of Penn
West’s guidance and reflects its quarterly seasonality outlook. Our revised 2016
production outlook of 109,000 boe/d (vs. 101,200 boe/d) and capital spending
of $1.2 billion (vs. $950 million) are in line with the company’s long-term outlook
presentation.
• Long-Term Plan. Under its long-term plan, Penn West is targeting average annual
production growth of more than 8% (2015–19 CAGR), driving funds flow growth
above 20% for the same period. The company pegs its 2015 oil & liquids
weighting at 69%, with 40% of its production coming from core areas, and
expects to boost these figures to 78% and 65%, respectively, by 2019.
• Non-Core Asset Sales. Penn West is targeting $500 million in non-producing asset
sales by year-end 2015, including its Duvernay shale position at Willesden Green
(151,000 net acres), where it hopes to capture $4,000–5,000 per acre. Its Peace
River Oil Partnership assets could also constitute a potential sale candidate.
Redknee Solutions Inc.(TSX: RKN; 3.70)
Paul Treiber, CFA (Analyst)
(416) 842-7811; paul.treiber@rbccm.com
Sean Ray, P.Eng. (Associate)
(416) 842-6133; sean.ray@rbccm.com
Rating:
Price Target:
52 WEEKS
22NOV13 - 14NOV14
Outperform
5.50
Q4 expected to improve investor sentiment
We are reiterating our Outperform recommendation on Redknee shares ahead of
Q4 results. We believe Q4 results will help improve investor sentiment and raise
visibility to post-NSN BSS margin expansion and cash flow. Our outlook calls for a
sequential improvement in EBITDA margins, the first quarter of positive cash flow
in more than one year, and 10% Y/Y growth in backlog.
7.00
6.00
5.00
4.00
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2013
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2013A
2014E
2015E
2016E
M
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J
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Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Revenue
142.0
258.1
267.0
274.3
All market data in CAD; all financial data in USD.
N
• Expect healthy Q4 results. Redknee is reporting Q4/FY14 results on November
19. We expect $61MM revenue (+7% Y/Y), essentially in line with the street
($62MM). We’re looking for -$0.07 GAAP EPS on $8.75MM restructuring charge.
Street EPS estimates are inconsistent on restructuring charges; street average
EPS is -$0.03, with a range from -$0.11 to +$0.03.
• Margin rebound, positive cash flow may help improve sentiment. Our outlook
calls for adj. EBITDA to rise to $4.2MM (6.8% adj. EBITDA margin) up from
-$3.2MM (-5.0% margin) Q3 on an improved mix of license vs. professional
services. We’re looking for +$9MM operating cash flow, an increase from $17.5MM Q3, on improved profitability and working capital. We expect backlog
to rise 10% Y/Y to $176MM, up from $173MM Q3; Redknee has press released
$44MM new contracts Q4/FY14E, up from $9MM Q3.
• Catalysts on the horizon. Redknee is expected to close a large multi-million
dollar deal by the end of CY14. Q1/FY15 (quarter ended December) is expected
to benefit from recognition of the $9MM delayed software deal. Redknee’s
restructuring (announced August 6) was implemented Q4 and is expected to
drive $30-35MM annualized opex savings by FY16.
• Valuation remains near trough levels. Redknee is now trading at 2.4x FTM
maintenance, well below the 3x rule-of-thumb trough valuation for software
companies. Additionally, Redknee is trading at 8.6x FTM EV/EBITDA, in line with
8
peers at 8.6x. Since April, the valuation of peers has increased from 7.3x FTM EV/
EBITDA, whereas Redknee’s valuation has declined from 13x FTM EV/EBITDA.
TVA Group Inc.(TSX: TVA.B; 7.75)
Haran Posner (Analyst)
(416) 842-7832; haran.posner@rbccm.com
Drew McReynolds, CFA, CA (Analyst)
(416) 842-3805; drew.mcreynolds@rbccm.com
52 WEEKS
22NOV13 - 14NOV14
9.90
Rating:
Sector Perform
Risk Qualifier: Speculative Risk
Price Target: 8.00
Acquires consumer magazines from Transcontinental for $56MM
We incorporated the pending purchase of Transcontinental's consumer magazines
into our forecast. Although we anticipate meaningful synergies, the increase in our
EBITDA estimates is offset by the increase in net debt. Our $8 target is unchanged.
9.45
9.00
8.55
8.10
100
N
2013
D
J
Close
F
M
A
M
2014
J
J
A
S
O
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Diluted Prev.
2013A
0.59
2014E
0.20
2015E
0.34↑
0.25
2016E
0.60↑
0.45
P/E
13.1x
38.8x
22.8x
12.9x
All values in CAD unless otherwise noted.
N
• Acquires TCL's consumer magazines. TVA agreed to acquire 15 magazines from
Transcontinental for $55.5MM in cash. The deal is subject to Competition Bureau
approval. In contrast to the recently announced acquisition of Vision Globale
("VG"), which was mainly about transforming the asset mix, we believe this deal
is mostly about synergies.
• Expecting $10-14MM of incremental EBITDA. We believe the revenue
associated with the acquired magazines is ~$95MM, with EBITDA in the $7-8MM
range. This maps to a relatively high transaction EV/EBITDA multiple of ~7.4x
(pre-synergies), versus the 3.5x multiple our NAV applies for TVA's Magazine
segment. However, TVA expects the acquisition to contribute $10-14MM of
EBITDA including synergies, which would lower the implied multiple to ~4-5.5x.
• Our price target and SP rating are unchanged. We are incorporating the
proposed transaction into our forecast assuming it closes April 1, 2015. Reflecting
the acquired EBITDA and our expectation for cost synergies, our 2015E and
2016E EBITDA estimates increase from $51.4MM and $59.1MM, respectively, to
$57.9MM and $69.8MM. The increase in our EBITDA forecast is offset by higher
net debt associated with funding the acquisition. Proforma the purchases of VG
and TCL's magazines (including the expected $100MM rights offering), we now
forecast net debt/EBITDA of 1.9x exiting 2015E (versus 1.5x in 3Q14). Our $8.00
price target and Sector Perform, Speculative risk rating remain unchanged.
Industry Comments
Greg Pardy, CFA (Analyst)
(416) 842-7848; greg.pardy@rbccm.com
Energy Insights
Leo P. Mariani, CFA (Analyst)
(512) 708-6381; leo.mariani@rbccm.com
• We have reduced our probability of an announced OPEC production cut of 0.5–
0.6 million b/d on November 27 from 50% to 35%, in the context of $75-$80/b
Brent prices. There is no change in our view that Saudi Arabia requires a $100/b
Brent price over the long haul to fund its fiscal requirements, but the kingdom
appears willing to accept lower prices in the near term as it resets Brent price
expectations.
• OPEC’s forthcoming (ordinary) meeting on November 27 in Vienna has taken
on a degree of importance not seen since the organization announced deep
production cuts in December 2008. Indeed, over the past five years, OPEC
meetings have largely been non-events, mainly because output disruptions
in the Gulf region have been oil price supportive. Despite America’s tight oil
growth, geopolitical events within OPEC, predominantly in Iran and Libya, have
engendered oil market order, with Saudi Arabia bridging output gaps as needed.
• Saudi Arabia’s conspicuous silence amid the sharp retreat in Brent prices during
October and November has fueled market expectations that the kingdom is no
longer willing to serve as the oil market’s de facto central bank – and that US
tight oil has become the global swing producer. Such contentions are flawed in
our minds.
Helima Croft (Analyst)
212 618 7798; helima.croft@rbccm.com
Dillon Culhane, CFA, CA (Analyst)
(416) 842-7915; dillon.culhane@rbccm.com
All values in USD unless otherwise noted.
How OPEC’s Release Might Read
9
• In our eyes, Saudi Arabia has not abandoned its long-term role as the oil market’s
ballast of stability, but it may desire that the responsibility for such be more
broadly shared.
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; fraser.phillips@rbccm.com
Chris Drew, CFA (Analyst)
+61 2 9033 3060; chris.drew@rbccm.com
Timothy Huff (Analyst)
+44 20 7653 4866; timothy.huff@rbccm.com
Des Kilalea (Analyst)
+44 20 7653 4538; des.kilalea@rbccm.com
Ken Tham, CFA (Analyst)
+61 2 9033 3064; ken.tham@rbccm.com
Global Mining Trends & Values
Commodity Price Performance:
• Metal prices were up on average 1.5% last week. Uranium was the best
performer up 13.6%, followed by silver up 3.3%, thermal coal up 1.9%, lead
up 1.4%, gold up 0.9%, zinc up 0.7%, coking coal up 0.4%, and nickel up 0.4%.
Aluminium was the worst performer down 2.7%, followed by moly down 1.1%,
copper down 0.4%, and iron ore down 0.3%.
Mining Share Price Performance:
• Mining shares were down on average 1.3% last week. The best performing group
was uranium up 12.7%, followed by nickel up 5.6%, aluminium up 3.7%, copper
up 1.1%, miscellaneous down 2.2%, the diversified group down 2.7%, mineral
sands down 6.8%, coal down 7.5%, and iron ore down 8.7%.
Valuation:
• Mining shares are now trading at an 11.5% discount to NAV at forward curve
prices, versus an 11.3% discount one week ago.
Long/Short Metal Positions:
• RBC CM's proprietary data for the LME shows that the net short positions in nickel
and lead decreased last week, while net short positions in copper increased last
week. Net short positions in aluminium and zinc were unchanged last week.
Exchange Inventories:
• Total exchange inventories of aluminium, copper, and zinc decreased last week,
while total inventories of nickel increased last week.
Greg Pardy, CFA (Analyst)
(416) 842-7848; greg.pardy@rbccm.com
Integrated Oil and Senior E&P
Dillon Culhane, CFA, CA (Analyst)
(416) 842-7915; dillon.culhane@rbccm.com
• Based on our net asset value analysis, our large cap independent and integrated
coverage universe is currently discounting a long-term escalated WTI equivalent
(WTIE) price of US$73/boe, unchanged from last week, and a long-term WTI price
of US$88/b, also unchanged from last week.
• Current WTIE implied prices would compare with prior 2009–2014 YTD peak
and trough levels of US$84/boe and US$61/boe, respectively, while current WTI
implied prices would compare with peak and trough levels of US$102/b and US
$62/b, respectively.
• Spot WTIE prices of US$64/boe (vs. US$65/boe) were down 2% from last week.
Long-dated (2015–2018) WTIE prices of US$65/boe (vs. US$66/boe) were also
down 2% from last week.
• Our implied WTIE price (defined as an equivalent barrel economically weighted
approximately 75% to WTI crude oil and 25% to Henry Hub natural gas) is the
long-term price incorporated into our collective net asset value analysis, which
equates current share prices for our group to a P/NAV ratio of 100%. This analysis
incorporates an 8.5% after-tax discount rate. Please refer to Exhibit 1 for our WTI
equivalent price analysis.
Franz Hargo Muljo, CA (Associate)
416 842 8588; franz.muljo@rbccm.com
All values in USD unless otherwise noted.
Paul C. Quinn (Analyst)
(604) 257-7048; paul.c.quinn@rbccm.com
Hamir Patel (Analyst)
(604) 257-7145; hamir.patel@rbccm.com
All values in USD unless otherwise noted.
So what WTIE price are the large caps discounting?
Paper & Packaging
Containerboard stats: 2nd consecutive month of box shipment growth
encouraging
• Slightly positive. Fibre Box and AF&PA US containerboard stats for the month of
October were released. With the ISM index up at 59.0 (vs. 56.6 a year ago), and
positive commentary by the major integrateds on October volumes, we were not
all that surprised by the 2.9% increase in average weekly shipments.
10
• Inventories fell in October – US producer (combined mill and box plant)
inventories decreased 2.5% m/m (-60K tons) to 2,331K tons, compared to the
average inventory drawdown over the last 10 years in October of 52K tons.
• Lower operating rates – The overall US containerboard mill operating rate
(production divided by stated capacity) decreased from 97.8% in September to
96.9% in October.
• Prices for kraft linerboard stable, but continued discounts in recycled grades
(particularly medium) – Three/four grades have been trading below last year's
levels (~$30 for recycled grades), while kraft linerboard prices have managed
to hold steady. Northeast and Midwest discounts continue in response to an
increase in capacity and aggressive start-up pricing. So far, it appears that major
integrateds (IP/RKT/GP/PCA) have held firm at the expense of volume. RISI
expects annual US box shipment growth of 1.9% in 2015 and 2.2% in 2016,
supported by inshoring (energy costs make the US attractive for manufacturing
while China's labor costs rise). RISI expects prices to remain flat for the balance
of 2014 with a 20-30% chance of a $50-60/ton hike in 2015 (potential upside to
our deck for flat prices into 2015/16).
Stephen D. Walker (Analyst)
(416) 842-4120; stephen.walker@rbccm.com
Precious Metals & Minerals Weekly Valuation Tables
Dan Rollins, CFA (Analyst)
(416) 842-9893; dan.rollins@rbccm.com
In this week's piece we analyze North American Tier I, II and III gold producer
balance sheets and levels of credit line utilization.
Sam Crittenden, P.Eng., CFA (Analyst)
(416) 842-7886; sam.crittenden@rbccm.com
Jamie Kasprowicz, P.Eng., CFA (Analyst)
(416) 842-8934; jamie.kasprowicz@rbccm.com
Akbar Badri (Associate)
416 842 7840; akbar.badri@rbccm.com
Mark Mihaljevic (Associate)
(416) 842-3804; mark.mihaljevic@rbccm.com
Paul Hissey (Analyst)
+61 3 8688 6512; paul.hissey@rbccm.com
Cameron Klutke (Associate)
+61 3 8688 6551; cameron.klutke@rbccm.com
Jonathan Guy (Analyst)
+44 20 7653 4603; jonathan.guy@rbccm.com
Chart of the Week: The status of lines of credit and levels of debt
• Exhibit 1 highlights the evolution of producer balance sheets since 2000, with
the Tier I producers standing out as they added significant levels of debt (~10x
increase in net debt over 5 years) that were employed to expand existing
operations and build new mines as the gold price rose.
• Exhibit 2 highlights Goldcorp, Eldorado, Alacer, Alamos, Argonaut, Klondex and
Timmins superior balance sheet positioning vs their peers when considering debt
to total capital and debt to EBITDA. Goldcorp, Agnico-Eagle, B2 Gold, Yamana
and Dundee have drawn down significant amounts of the Lines of Credit. As
management focuses on margins vs production growth, the divestment of high
cost non-core assets and cost-cutting at existing mines has improved AISC costs.
We believe this will likely continue and it is expected to help strengthen balance
sheets over the next few years, assuming gold prices stabilize at the current
levels.
Timothy Huff (Analyst)
+44 20 7653 4866; timothy.huff@rbccm.com
Richard Hatch, ACA (Analyst)
+44 20 7002 2111; richard.hatch@rbccm.com
Ioannis Masvoulas, CFA (Associate)
+44 20 7653 4647; ioannis.masvoulas@rbccm.com
All values in USD unless otherwise noted.
Al Stanton (Analyst)
+44 131 222 3638; al.stanton@rbccm.com
RBC International E&P Daily
Nathan Piper (Analyst)
+44 131 222 3649; nathan.piper@rbccm.com
PXT.TO: Field Trip Day 1 – Revealing the Secret Sauce; PMO.L: Kenyan drilling now
expected to start in January; Iraqi Oil Sales Through Kurdistan; LUPE:ST/ENQ.L: Dry
hole offshore Sabah, Malaysia; Energy Insights - How OPEC’s Release Might Read
Haydn Rodgers, CA (Associate)
+44 131 222 4911; haydn.rodgers@rbccm.com
PXT; PMO; LUPE; ENQ
Victoria McCulloch, CA (Analyst)
+44 131 222 4909; victoria.mcculloch@rbccm.com
All values in USD unless otherwise noted.
11
In-Depth Reports
RBCCM Global Research
(416) 842-7800; rbccm-ie-publishing@rbccm.com
RBC Capital Markets US Equity Small Cap Focus List and Monthly
Outlook
Paul C. Quinn (Analyst)
(604) 257-7048; paul.c.quinn@rbccm.com
Jason Arnold, CFA (Analyst)
(415) 633-8594; jason.arnold@rbccm.com
Gary Bisbee, CFA (Analyst)
(212) 299-9842; gary.bisbee@rbccm.com
Daniel R. Perlin, CFA (Analyst)
(410) 625-6130; daniel.perlin@rbccm.com
Matthew Hedberg (Analyst)
(612) 313-1293; matthew.hedberg@rbccm.com
Jonathan Atkin (Analyst)
(415) 633-8589; jonathan.atkin@rbccm.com
Scott Hanold (Analyst)
(512) 708-6354; scott.hanold@rbccm.com
Amit Daryanani, CFA (Analyst)
(415) 633-8659; amit.daryanani@rbccm.com
Robert Wetenhall (Analyst)
(212) 618-3251; robert.wetenhall@rbccm.com
Jake Civiello (Analyst)
(617) 725-2152; jake.civiello@rbccm.com
John Barnes (Analyst)
(804) 782-4020; john.barnes@rbccm.com
Rohit Kulkarni (Analyst)
(415) 633-8652; rohit.kulkarni@rbccm.com
David Francis (Analyst)
615 372 1337; david.francis@rbccm.com
Joe Morford (Analyst)
(415) 633-8518; joe.morford@rbccm.com
Glenn Novarro (Analyst)
(212) 428-6411; glenn.novarro@rbccm.com
12
Required disclosures
Non-U.S. analyst disclosure
Al Stanton;Nathan Piper;Haydn Rodgers;Victoria McCulloch;Michael Harvey;Eric Gallie;Greg Pardy;Dillon Culhane;Franz Hargo
Muljo;Robert Kwan;Michelle Zuliani;Paul Treiber;Sean Ray;Paul C. Quinn;Hamir Patel;Dan Rollins;Mark Mihaljevic;Shailender
Randhawa;Keith Mackey;Haran Posner;Drew McReynolds;Sam Crittenden;Jamie Kasprowicz;Akbar Badri;Paul Hissey;Cameron
Klutke;Jonathan Guy;Timothy Huff;Richard Hatch;Ioannis Masvoulas;Fraser Phillips;Chris Drew;Des Kilalea;Ken Tham (i) are not
registered/qualified as research analysts with the NYSE and/or FINRA and (ii) may not be associated persons of the RBC Capital
Markets, LLC and therefore may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with a
subject company, public appearances and trading securities held by a research analyst account.
Conflicts disclosures
This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses
to provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies,
clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to
RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.
Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in, this report.
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including
total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated
by investment banking activities of the member companies of RBC Capital Markets and its affiliates.
Distribution of ratings
For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories
- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/
Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,
the meanings are not the same because our ratings are determined on a relative basis (as described below).
Distribution of ratings
RBC Capital Markets, Equity Research
As of 30-Sep-2014
Rating
BUY [Top Pick & Outperform]
HOLD [Sector Perform]
SELL [Underperform]
Count
858
683
98
Percent
52.35
41.67
5.98
Investment Banking
Serv./Past 12 Mos.
Count
Percent
308
35.90
151
22.11
8
8.16
Conflicts policy
RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.
To access our current policy, clients should refer to
https://www.rbccm.com/global/file-414164.pdf
or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South
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14
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15