1. business and industrial

EQUITY RESEARCH
CANADIAN RESEARCH AT A GLANCE
March 6, 2015
Ratings Revisions
! Canfor Corporation
! Norbord Inc.
Summary
Reducing rating to Sector Perform
Summary
Upgrading to Outperform
Summary
Challenging Outlook
Summary
Finishing Strong
Summary
A bigger "bet" on Alberta, oil and interest rates
Summary
Positioned to Seize Opportunities
Summary
Q4/14 - Increasing target on sound execution and reserves growth
Summary
Q1 First Glance: Solid quarter
Summary
Q4/14 results below consensus
Summary
First Glance: Musreau ramp appears largely on track
Summary
Revising our commodity deck for a weaker loonie and euro
Summary
Q4/14; Recycle ratio analysis shows strong outlook
Summary
2015 focus is Bristol Water's regulatory review
Summary
Buy ahead of guidance based on superior expected growth and dividend coverage
Summary
Q4/14 - A decent quarter, outlook unchanged
Summary
Expanding the kitchen:WN to increase capacity to satisfy growing customer appetites
Summary
Strategic initiatives in progress; Keeping an eye on the operating backdrop
Summary
What's good for America should be good for MST
Summary
Fully funded and ready to grow
Summary
Sizing Up a Shaw Media-Corus Transaction
Summary
Disappointing F15 outlook but sum of the parts still calls for valuation upside
Summary
Maintain Sector Perform following largely in line Q4/14
Summary
Delivering the goods, rain or shine
Summary
Slight beat on Q4 CFPS; 2P reserves increase 33%
Summary
Hitting reset: A big cap review
Summary
Railroad news + February carload data
Price Target Revisions
! Black Diamond Group Ltd.
! Canadian Natural Resources
! Canadian Western Bank
! Canyon Services Group Inc.
! TORC Oil and Gas Ltd
First Glance Notes
! Enghouse Systems Limited
! Labrador Iron Ore Royalty Corp.
! Paramount Resources
Earnings Preview
! Paper & Forest Products
Company Comments
! Baytex Energy Corporation
! Capstone Infrastructure Corp.
! Enbridge Inc.
! Freehold Royalties Ltd.
! George Weston Limited
! Liquor Stores N.A. Ltd.
! Milestone Apartments REIT
! Northland Power Inc.
! Shaw Communications Inc.
! SNC-Lavalin Group Inc.
! Sprott Inc.
! The Descartes Systems Group Inc.
! Trilogy Energy Corp.
Industry Comments
! ASX Energy
! RBC Compass
! - Action-Oriented Research
Priced as of prior day's market close, EST (unless otherwise noted).
For Required Non-U.S. Analyst and Conflicts Disclosures, see Page 22.
EQUITY RESEARCH
! RBC Diamond Conference feedback
! RBC European Utilities
! RBC International E&P Daily
! The Weekly Haul
! Timber Takeaways
Summary
Prices pick up in early 2015 sales; sector remains financially robust
Summary
Spanish Regulated Utilities: Something for everyone
Summary
PMO; FOGL; LUPE; TGL; GENL; DNO; CNE; PXT; SIA; BNK; WZR
Summary
Airfreight & Surface Transportation
Summary
Red scare - PNW log prices in retreat
Quantitative Research
! What's In Style - S&P/TSX Composite
Summary
Technical Research
! Buying the pullback - Equity ideas as
Summary
stock markets ‘pause’
In-Depth Reports
! Corus Entertainment Inc.
Summary
Sizing Up a Shaw Media-Corus Transaction
2
EQUITY RESEARCH
U.S. RESEARCH AT A GLANCE
March 6, 2015
Initiations
! Physicians Realty Trust
Summary
Initiating coverage with Outperform rating and $19 price target
Summary
Downgrade to Sector Perform
Summary
Raising to Sector Perform with Accelerating SS/AFFO Growth Expected in ‘15
Summary
Optimistic Earnings Call Bodes Well for 2015
Summary
Finishing Strong
Summary
Earnings: Strong datacom, mixed telecom, possible consolidation
Summary
Commodity markets continue to weigh
Summary
4Q14 Preview
Summary
Thoughts from the road with NORD; revisiting the upside case
Summary
Near-Term Build-Out, Recycling Expected to Support Strong Growth in '16
Summary
Rolling out cash earnings model and increase PT to $33
Summary
Sets Sweeping Goals to 2019 But Near-Term Still Looks Bumpy
Summary
Site Visit Preview - Buly Development & Mara Underground Progress Key
Summary
Revising our commodity deck for a weaker loonie and euro
Summary
v8 penetrates 70% of MWC'15 smartphones
Summary
Takeways from dinner with AVGO management and MWC 2015
Summary
Dodd-Frank Stress Test Results Show Improvement
Summary
Q4/14; Recycle ratio analysis shows strong outlook
Summary
Perspective from Constellation Brand’s Beer Division Gold Network Summit
Summary
4Q14 In-Line; Dramatically Reduces Drilling Activity & Suspends 2015 Guidance
Summary
Focus of Analyst Day - Growth, Cost Cuts & Federation
Summary
Buy ahead of guidance based on superior expected growth and dividend coverage
Summary
Pumping Brakes In '15, But Primed For Cycle Rebound
Summary
Miss and guide-down, but accretion from M&A could offset long-term
Summary
Sizing Up a Shaw Media-Corus Transaction
Summary
Delivering the goods, rain or shine
Ratings Revisions
! Credit Suisse Group AG
! Piedmont Office Realty Trust
Price Target Revisions
! Ares Management, L.P.
! Canadian Natural Resources
! Finisar Corporation
! Joy Global Inc.
! Metaldyne Performance Group Inc.
! Nord Anglia Education, Inc.
! Parkway Properties, Inc
! SunEdison, Inc.
! WESCO International Inc.
Earnings Preview
! Acacia Mining Plc
! Paper & Forest Products
Company Comments
! ARM Holdings plc
! Avago Technologies Ltd.
! Bank of America Corp.
! Baytex Energy Corporation
! Constellation Brands, Inc.
! Eclipse Resources Corporation
! EMC Corporation
! Enbridge Inc.
! Independence Contract Drilling Inc.
! Semtech Corporation
! Shaw Communications Inc.
! The Descartes Systems Group Inc.
3
EQUITY RESEARCH
Industry Comments
! 2015 DFAST - The Banking Industry
Summary
Quantitative Results Should Lead to Approval of Nearly All Capital Return Plans
!
! Ciccarelli's Check Points
! Generally Speaking
! Highlights From Norwest Venture
Summary
Updated SaaS Customer Acquisition Cost Analysis
!
! RBC Diamond Conference feedback
! RBC European Industrials Daily
! RBC European Utilities
! RBC International E&P Daily
! The Weekly Haul
! Timber Takeaways
! US E&P Valuation Weekly
Continues to Build Strength
Application Software
Capital Investor Summit
Picture of the Week Vol. 10
Summary
Summary
Defence Budgets – Europe
Summary
Internet Sector
Summary
Winter Weather Advisory
Summary
Prices pick up in early 2015 sales; sector remains financially robust
Summary
Weir takeover talks resurface, MRO on acquisition trail
Summary
Spanish Regulated Utilities: Something for everyone
Summary
PMO; FOGL; LUPE; TGL; GENL; DNO; CNE; PXT; SIA; BNK; WZR
Summary
Airfreight & Surface Transportation
Summary
Red scare - PNW log prices in retreat
Summary
4Q14 Earnings Season Wraps Up Next Week; 2015 CapEx Budgets Down 37% YoY
Quantitative Research
! What's In Style - S&P/TSX Composite
Summary
Technical Research
! Buying the pullback - Equity ideas as
Summary
stock markets ‘pause’
4
EQUITY RESEARCH
UK & European Research at a Glance
March 6, 2015
Price Target Revisions
! Fresnillo Plc
! InterXion Holding N.V.
! Michael Page International PLC
Summary
EPS Miss due to taxes but project rescheduling more significant
Summary
4Q14 Results Match Pre-Announcement, 2015 Guidance Above Expectations
Summary
FY due 11 March: Anticipate strong underlying trading, but fx headwind clear
Summary
Await delivery: salesforce briefing feedback
Summary
2014 results beat RBC and consensus forecasts
Summary
Reassuringly in-line
Summary
Continues to deliver
Summary
Site Visit Preview - Buly Development & Mara Underground Progress Key
Summary
v8 penetrates 70% of MWC'15 smartphones
Summary
Housekeeping post FY figures: returns continue to trend down
Summary
2014 results: lots of moving parts but in line with our expectations
Summary
On the acquisition trail
Summary
Moving forecasts for currency as flagged. Thesis remain intact. Top Pick.
Summary
A380neo, orders, new bomber, GD
Summary
Hitting reset: A big cap review
Summary
ABI (Outperform, PT €115) – North America's warming up
Summary
Spirax (Outperform) continues to deliver, IMI mgt to sales feedback
Summary
Spanish Regulated Utilities: Something for everyone
Summary
GENL; PMO; DETNOR; EGY
Summary
RBC European Utilities Daily
First Glance Notes
! IMI Plc
! Schroders Plc
! SCOR SE
! Spirax-Sarco Engineering Plc
Earnings Preview
! Acacia Mining Plc
Company Comments
! ARM Holdings plc
! Capita PLC
! London Stock Exchange Group
! Melrose Industries Plc
! Rentokil Initial PLC
Industry Comments
! A&D Morning Headlines
! ASX Energy
! RBC European consumer staples
! RBC European Industrials Daily
! RBC European Utilities
! RBC International E&P Daily
! The Morning Lightbulb
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)
5
Ratings Revisions
Canfor Corporation(TSX: CFP; 28.21)
Paul C. Quinn (Analyst)
(604) 257-7048; paul.c.quinn@rbccm.com
Hamir Patel (Analyst)
(604) 257-7145; hamir.patel@rbccm.com
Rating:
Price Target:
52 WEEKS
21FEB14 - 09FEB15
Reducing rating to Sector Perform
Reducing rating to Sector Perform (from Outperform) as valuation seems lofty at
a time when the company is seeing escalating log costs in BC (CFP has the highest
exposure), pulp markets weaken and with export tax uncertainty as the SLA expires
in October. We are also decreasing our target to $30 (from $35) with a reduction in
our blended multiple to 7.0x (from 7.75x).
30.00
28.00
26.00
24.00
22.00
3000
2000
1000
F
M
A
M
Close
J
J
2014
A
S
O
N
D
2015
J
F
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Adj Diluted Prev.
2013A
1.64
2014A
1.38
2015E
1.49↓
2.06
2016E
2.60↓
3.24
P/E
17.2x
20.4x
18.9x
10.9x
All values in CAD unless otherwise noted.
• Lofty valuation vs. peers – Canfor is trading at 9.4x 2015E EBITDA, a premium to
West Fraser at 9.0x and Interfor at 7.9x.
• Lowering our lumber price deck for 2015/16 – We have reduced our W. SPF
lumber price forecast for 2015, 2016 and trend by US$30/mfbm (-8%), US$45
(-11%) and US$15 (-5%), respectively. Prices ended March 3 at US$299/mfbm,
down 12% over the last two months largely due to the weaker loonie, as well as
seasonally slower demand and less export takeaway. With ~45% of NA lumber
capacity based in Canada, a depreciating C$ improves the competitiveness of
Canadian production and tends to weaken US$ lumber pricing.
• Reducing our pulp price assumptions for 2015/16 – We also reduced our NBSK
list price forecast for 2015, 2016 and trend by US$60/tonne (-6%), US$50 (-5%)
and US$75 (-8%), respectively. On Monday, Canfor reduced its NA price for March
by US$20/tonne to US$980.
• BC lumber exposure a potential headwind on two fronts – 1) With 70% of
Canfor's lumber production coming out of its BC Interior mills, Canfor is most
adversely affected by high log cost inflation in the province. 2) With 77% of its
lumber production in Canada, CFP also has the most downside exposure to a
potentially more punitive export tax regime when the current Softwood Lumber
Agreement with the United States expires in October.
Norbord Inc.(TSX: NBD; 26.43)
Paul C. Quinn (Analyst)
(604) 257-7048; paul.c.quinn@rbccm.com
Hamir Patel (Analyst)
(604) 257-7145; hamir.patel@rbccm.com
32.00
Sector Perform (prev: Outperform)
30.00 ▼ 35.00
Rating:
Price Target:
52 WEEKS
21FEB14 - 09FEB15
Outperform (prev: Sector Perform)
30.00 ▲ 28.00
Upgrading to Outperform
Upgrading to Outperform (from Sector Perform) and increasing target to $30 (from
$28) as we raise our blended multiple to 6.25x (from 6.0x). We believe the recent
pullback in the share price over the last three weeks provides an attractive entry
point. We expect the Ainsworth merger to be completed by the end of March, and
remain confident mgmt will deliver on targeted synergies.
30.00
28.00
26.00
24.00
22.00
2000
1500
1000
500
F
M
A
Close
M
J
J
2014
A
S
O
N
D
2015
J
F
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Adj Diluted Prev.
2013A
2.75
2014A
0.35
2015E
0.15↓
0.34
2016E
2.09↓
2.62
P/E
7.7x
60.5x
10.1x
All market data in CAD; all financial data in USD; dividends paid in
CAD.
• Significant growth potential for Norbord – Through its combination with
Ainsworth, we believe Norbord will be well positioned to take advantage of the
recovering US housing market and growing OSB demand in Europe and Asia.
The geographically diversified operating platform should also better position the
company to weather market cycles.
• Attractive valuation vs. peers – Norbord is trading at 6.6x our pro-forma 2016E
EBITDA, a discount to LP at 7.8x. On a trend basis, Norbord is trading at only 5.1x
compared to LP at 5.2x and the major Canadian lumber producers (CFP, IFP, WFT)
at 7.0x.
• Lowering our OSB price deck for 2015/16 – We have reduced our South East
OSB price forecast for 2015, 2016 and trend by $5/msf, $10 and $10, respectively.
We now see SE prices averaging $195/msf over 2015 (+4% y/y), $230 over 2016
6
(+18% y/y) and $220 on a trend basis. Prices ended March 3 at $172/msf, down
7% over the last two months due to seasonally slower demand and excess
capacity in the market.
Price Target Revisions
Black Diamond Group Ltd.(TSX: BDI; 13.71)
Dan MacDonald, CFA (Analyst)
(403) 299-2394; dan.macdonald@rbccm.com
Matthew McKellar (Associate)
403 299 5045; matthew.mckellar@rbccm.com
35.00
30.00
Rating:
Price Target:
52 WEEKS
21FEB14 - 09FEB15
Sector Perform
15.00 ▼ 17.00
Challenging Outlook
While we view BDI as a high quality company with a strong management team,
we expect challenging supply/demand dynamics for remote accommodations in
Canada to continue. Large resource projects, particularly oil sands, are seeing
deferrals due to low commodity prices. However, with an ~7% yield, which
mgmt sees as sustainable, the stock should remain attractive to income oriented
investors.
25.00
20.00
15.00
10.00
1500
1000
500
F
M
A
M
Close
J
J
2014
A
S
O
N
D
2015
J
F
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EBITDA Prev.
141.2
138.2↓
141.4
78.9↓
106.8
99.0↓
138.2
2013A
2014A
2015E
2016E
All values in CAD unless otherwise noted.
Canadian Natural Resources(TSX: CNQ; 38.64; NYSE: CNQ)
Greg Pardy, CFA (Analyst)
(416) 842-7848; greg.pardy@rbccm.com
Franz Hargo Muljo, CA (Associate)
416 842 8588; franz.muljo@rbccm.com
Tom Callaghan, CA, CPA (Associate)
(416) 842-7915; tom.callaghan@rbccm.com
Rating:
Price Target:
21FEB14 - 09FEB15
48.00
46.00
44.00
42.00
40.00
38.00
36.00
34.00
32.00
30000
20000
10000
M
A
Close
M
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Diluted Prev.
2013A
2.23
2014A
3.47↑
3.37
2015E
0.23↑
(0.06)
2016E
2.42↑
2.32
All values in CAD unless otherwise noted.
Outperform
43.00 ▲ 41.00
Finishing Strong
52 WEEKS
F
• Estimates reduced, price target now $15, maintain Sector Perform
recommendation. We have further reduced our 2015 /2016 expectations,
given the ongoing decline in N.Am. activity levels and its corresponding effect
across BDI's multiple business lines, but primarily driven by lower forecast
accommodations utilization and margins.
• Financial flexibility is good, mgmt sees dividend as sustainable. Importantly, BDI
has the capital structure to weather the downturn, with debt/cap of 36% and
a forecast D/EBITDA of 2.6x at YE15. Mgmt has stated they see the dividend
as sustainable in the current environment, and we forecast a total payout ratio
(dividends + capex / CFO) of 146% in 2015.
• Revenue visibility falls as clients migrate to shorter term camp commitments.
Interestingly, BDI has seen clients migrate to shorter term commitments as camp
contracts expire, highlighting E&Ps' non-committal nature to capital spending
currently. Of note, contracted revenue in its Structures segment fell 29% y/y to
$90.6MM at YE14 while its logistics segment dropped 48% to $35.7MM.
P/E
17.3x
11.1x
NM
16.0x
F
Canadian Natural Resources delivered solid fourth-quarter results amid 2% lower
upstream production of 860,900 boe/d and cash taxes which fell below our
expectations. Not to be overlooked was CNQ’s election to raise its common share
dividend by 2% to an annual rate of $0.92 per share (2.4% yield) – a move reflective
of its long-term confidence.
• In connection with a reshaped turnaround at its Horizon oil sands project, CNQ
reduced its 2015 capital spending program by 2% to $6.04 billion, and raised its
mid-point production outlook by 1% to 873,500 boe/d. The company’s balance
sheet remains in good shape, with an average net debt-to-trailing cash flow ratio
of 2.3x in 2015 and 1.8x in 2016 on our estimates. Our production outlook for
CNQ is now 873,400 boe/d (vs. 863,500 boe/d) (10% growth) in 2015 and 828,100
boe/d (vs. 837,100 boe/d) (-5% growth) in 2016.
• Well Backlog. CNQ also signaled that it has a backlog of some 161 wells that
have been drilled but not completed, awaiting higher oil prices. This well count
is expected to remain stable over the course of 2015, and would support initial
production rates of 20,000 boe/d (50% crude oil, mainly heavier grades).
7
• Horizon – Modified Turnaround. CNQ has reduced the scope of a planned 35-day
turnaround at its Horizon oil sands operation to 6 days. The lion’s share of this
turnaround should occur in May 2016. As a result, CNQ raised its 2015 Horizon oil
sands guidance by 10,000 b/d to a range of 121,000–131,000 b/d, and reduced
operating costs by 6% to $33.50/b.
Canadian Western Bank(TSX: CWB; 27.00)
Darko Mihelic, CFA (Analyst)
416 842 4128; darko.mihelic@rbccm.com
Brendon Sattich (Associate)
416 842 7804; brendon.sattich@rbccm.com
Vanessa Wan (Associate)
416 842 5638; vanessa.wan@rbccm.com
Rating:
Price Target:
Sector Perform
28.00 ▼ 30.00
A bigger "bet" on Alberta, oil and interest rates
52 WEEKS
21FEB14 - 09FEB15
42.00
40.00
38.00
36.00
34.00
32.00
We view CWB's pivot in strategy as a bigger bet on lending in Western Canada at
a time of elevated risk. We have lowered our target multiple to 10.0x 2016E EPS
from 10.5x to reflect this higher risk. Our price target falls to $28 from $30. Sector
Perform maintained.
• We have reduced our price target to $28 from $30 previously and maintain our
Sector Perform rating on CWB.
30.00
28.00
26.00
3000
2000
1000
F
M
A
M
Close
J
J
2014
A
S
O
N
D
2015
J
F
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Rpt Diluted Prev.
P/Rpt EPS
2013A
2.35
11.5x
2014A
2.54↓
2.70
10.6x
2015E
4.00↑
2.77
6.8x
2016E
2.76↓
2.86
9.8x
All values in CAD unless otherwise noted.
Canyon Services Group Inc.(TSX: FRC; 6.95)
Dan MacDonald, CFA (Analyst)
(403) 299-2394; dan.macdonald@rbccm.com
Matthew McKellar (Associate)
403 299 5045; matthew.mckellar@rbccm.com
20.00
18.00
16.00
14.00
Rating:
Price Target:
52 WEEKS
21FEB14 - 09FEB15
Outperform
9.00 ▼ 10.00
Positioned to Seize Opportunities
While falling demand and margin compression will be the norm in 2015 for pressure
pumping services in Canada, this reality has been priced into the stocks, in our
view. We see FRC's excellent balance sheet as the key versus peers leaving it the
best positioned to weather the current downturn, while also potentially taking
advantage of acquisition opportunities to emerge stronger from the slowdown.
12.00
10.00
8.00
6000
4500
3000
1500
F
M
A
Close
M
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Rpt Diluted Prev.
P/Rpt EPS
2013A
(0.07)
NM
2014E
0.74↓
0.78
9.4x
2015E
(0.14)↓
0.29
NM
2016E
0.49↓
0.60
14.2x
All values in CAD unless otherwise noted.
F
• FRC reported in-line Q4/14 results, as EBITDA of $44.6MM compared to our
estimate of $46.8MM and consensus of $49.0MM. See page 3 for details.
• Lowering estimates, target price now $9. We have further reduced our estimates
driven by lower forecast completion activity in Canada in 2015, and in-line with
our revised assumptions for FRC's fracturing peers who have already reported
Q4/14 results. Our price target is based on an EV/EBITDA multiple of 6.1x our
2016 estimates, compared to the long term average of 6.2x for the Canadian
pressure pumping group.
• Balance sheet the advantage versus peers. With balance sheets and financial
flexibility of paramount importance in severe downturns such as the one being
seen in N.Am. today, we view FRC's essentially un-levered balance sheet as
a key differentiator. As of YE14, FRC has net debt of only $21MM for a net
debt/capitalization of ~5% and we forecast FCF generation of ~$11.6MM (post
dividends) in 2015 despite our reduced estimates. This leaves ample room for
opportunistic acquisitions and/or early mover organic expansion as the market
outlook becomes clearer for 2016.
8
TORC Oil and Gas Ltd(TSX: TOG; 10.17)
Shailender Randhawa, CFA (Analyst)
(403) 299-6576; shailender.randhawa@rbccm.com
Keith Mackey, CFA (Associate)
403 299 6958; keith.mackey@rbccm.com
16.00
52 WEEKS
Rating:
Price Target:
21FEB14 - 09FEB15
Outperform
13.00 ▲ 11.00
Q4/14 - Increasing target on sound execution and reserves growth
TORC Oil & Gas' Q4/14 results were marked by a 7% CFPS beat vs RBC on 2%
better than expected volumes, while posting solid 23% YoY reserves per share
(f.d.) growth. In our opinion, TORC remains a sound execution story with aboveaverage unbooked resource upside and a healthy balance sheet outlook.
14.00
12.00
10.00
8.00
7500
6000
4500
3000
1500
F
M
A
M
Close
2013A
2014A
2015E
2016E
J
J
2014
A
S
O
N
D
2015
J
F
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Total (boe/d) Prev.
6,121
11,264↑
11,200
13,000
13,600
All values in CAD unless otherwise noted.
Sound execution. Q4/14 production volumes of 11,957 boe/d (85% liquids) were
2% ahead of our 11,703 boe/d (85% liquids) target. TORC generated $0.43 fullydiluted CFPS versus our $0.40 estimate, which was a penny below the Street
consensus at $0.41. Key sources of variation for the CFPS beat include 3% higher
realized pricing, 21% lower unit transportation expense and a larger hedging gain
partially offset by 7% higher royalties and 9% higher unit G&A. The company took
a $72.6 million non-cash impairment charge on its exploration acreage in Southern
Alberta, which is not material to our valuation. TORC confirmed its 2015 guidance
targets of 13,000 boe/d for average volumes and $125 million capital program. The
release noted that oilfield service cost savings of 5-10% experienced so far have not
been factored into its projections, providing some operational flexibility for tuckins or program acceleration down the road.
• Premium valuation reflects above-average resource potential and healthy
financial outlook. At current levels, TORC is trading at a 2015E EV/DACF multiple
of 12.4x (vs. oil-weighted peers at 9.7x) and a P/NAV of 1.1x (vs. 0.7x for oilweighted peers) at RBC's price deck.
• Increasing price target to $13.00 ($11.00 previously) on solid execution and
reserves growth. Our Outperform rating remains unchanged. Our 12-month
price target reflects a 1.0x multiple (Prev: 0.9x) of the sum of our adjusted base
NAV of $8.64/share plus $3.95/share of risked upside from future development.
First Glance Notes
Enghouse Systems Limited(TSX: ESL; 46.72)
Paul Treiber, CFA (Analyst)
(416) 842-7811; paul.treiber@rbccm.com
Sean Ray, P.Eng. (Associate)
416 842 6133; sean.ray@rbccm.com
42.00
Rating:
Q1 First Glance: Solid quarter
52 WEEKS
21FEB14 - 09FEB15
40.00
38.00
36.00
34.00
32.00
30.00
400
200
F
M
A
Close
M
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
All values in CAD unless otherwise noted.
Outperform
F
• Revenue and EBITDA above expectations. Adj. EBITDA was $16.2MM (+33%
Y/Y), above the Street ($14.9MM) and RBC ($15.8MM). Excluding litigation
settlement (-$0.25) and lower than expected tax rate (+$0.05), EPS was $0.30,
in line with RBC ($0.29) and the Street ($0.30). Revenue was $63.0MM (+33%
Y/Y), above the Street $60.8MM and slightly above RBC ($62.5MM). FX added
$1.1MM (+2% Y/Y). Reported GAAP EPS was $0.09.
• Organic growth strengthens. We estimate constant currency organic growth rose
to 5% Y/Y Q1, above our 4% estimate and up from 4% Q4. License revenue rose
24% Y/Y to $19.6MM, and hosted and maintenance revenue increased 29% Y/
Y to $32.3MM, both of which were in line with RBC ($19.4MM and $32.5MM
respectively). Professional services revenue was also in line at $8.9MM (74% Y/
Y, RBC at $8.8MM). Hardware revenue rose 41% Y/Y to $2.2MM, slightly above
RBC ($1.9MM).
• Margins exceed expectations, cashflow healthy. Q1 adj. EBITDA margins rose
60bps Q/Q to 25.7%, above the Street (24.6%) and RBC (25.2%), likely on FX
(accretive to margins) and integration of recent acquisitions. Gross margins
dipped 50bps Q/Q to 68.6%, below RBC at 69.2% on lower than expected service
margins (59.2% vs. RBC at 60.0%). Opex declined $0.2MM Q/Q to $27.0MM,
slightly below RBC at $27.5MM. Operating cashflow was $18MM, slightly above
our $17MM estimate. Enghouse deployed $0MM capital on acquisitions Q1,
in line. Net cash rose to $102MM ($3.78/share) from $85MM Q4. Enghouse
announced a 20% increase in its quarterly dividend to $0.12/share.
9
Labrador Iron Ore Royalty Corp.(TSX: LIF; 16.95)
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; fraser.phillips@rbccm.com
Steve Bristo, CFA (Associate)
(416) 842-7826; steve.bristo@rbccm.com
Thomas Klein (Associate)
(416) 842-5339; thomas.klein@rbccm.com
Rating:
52 WEEKS
21FEB14 - 09FEB15
32.00
30.00
28.00
26.00
24.00
22.00
20.00
18.00
16.00
3000
2000
1000
F
M
A
M
Close
J
J
2014
A
S
O
N
D
2015
J
F
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
All values in CAD unless otherwise noted.
Rating:
21FEB14 - 09FEB15
42.00
36.00
30.00
24.00
6000
4500
3000
1500
M
A
Close
M
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
All values in CAD unless otherwise noted.
Sector Perform
First Glance: Musreau ramp appears largely on track
52 WEEKS
F
• Bottom line: LIF reported Q4/14 results essentially in line with our estimate
but well below consensus. Guidance for 2016 concentrate and pellet production
is above our current estimates. Finally, LIF declared a dividend of $0.25 per
share for Q1/15, in line with our sensitivity analysis, which indicates that LIF can
maintain an annual dividend of $1.15 at $65.00/tonne iron ore. We view the
results as neutral to our outlook, but given the shortfall relative to consensus the
shares are likely to come under pressure.
• Q4/14 results essentially in line with our estimate but below consensus: LIF
reported Q4/14 EPS of $0.19. Our estimate was $0.21 and consensus was $0.27.
• 2016 production guidance above our assumptions: LIF expects the
refurbishment of the IOC pellet plant to be finished and capacity back up to
12–13 million tonnes by mid-year. LIF indicated that, assuming "normal" winter
weather, 2016 concentrate production is expected to be 20 million tonnes and
pellet production 12.5 million tonnes versus our current estimates of 17.941
million tonnes and 10.465 million tonnes, respectively.
• Q1/15 dividend in line with our estimate at $65/tonne iron ore: LIF declared
a Q1/15 dividend of $0.25 per share. This is well below our base case estimate
of $0.43 assuming $80/tonne iron ore. However, the $0.25 dividend is roughly
in line with our sensitivity analysis, which indicates that LIF could pay an annual
dividend of $1.15 at $65/tonne iron ore assuming a 90% payout ratio. The iron
ore price has averaged $65.25/tonne thus far in 2015.
Paramount Resources(TSX: POU; 31.20)
Michael Harvey, P.Eng. (Analyst)
403 299 6998; michael.harvey@rbccm.com
Luke Davis (Associate)
403 299 5042; luke.davis@rbccm.com
66.00
60.00
54.00
48.00
Outperform
Q4/14 results below consensus
F
• Q4/14 production in-line but CFPS misses on mix and realizations. Paramount's
production volumes of 34,430 boe/d came in slightly higher than our estimate of
33,000 boe/d but CFPS of $0.40 was 25% lower than our estimate of $0.53 (Street
$0.61) as the mix was gassier than expected (30% liquids vs. 40% expectation)
and realizations were low.
• Solid reserves additions – skewed to PUD/Probable. 2P reserves increased by
159% (140%/share) to 347 mmboe, with a conventional F&D cost of roughly $14/
bbl. PDP, 1P, and 2P grew by 48%, 159%, and 159%, respectively, as FDC increased
materially to $3.0 billion ($570 million at YE2013). Of note, booked 2P liquids
increased to 164 mmboe (up 183%).
• Outlook remains largely intact. Paramount also provided an operational update
highlighting sales volumes which reached 40,000 boe/d in February, in line
with our Q1/15 estimate of 40,500 boe/d. The company has also maintained
production guidance of 50,000–65,000 boe/d in 2015 (also in line with our
prior estimate), contingent on completion of third-party de-ethanization facility
expansions. Capital guidance was announced at $400 million, in line with our
expectation.
• Reasonable liquidity through 2015. Based on our current estimates, we forecast
POU to be 81% drawn (including working capital) on its $900 million credit facility
at year-end 2015 with net debt mapping to $1.5 billion, or 5.2x TTM cash flows
(peers 3.7x). There are no covenants on the company's existing bank facility and
notes.
Earnings Preview
Paul C. Quinn (Analyst)
(604) 257-7048; paul.c.quinn@rbccm.com
Hamir Patel (Analyst)
(604) 257-7145; hamir.patel@rbccm.com
Paper & Forest Products
Paper & Forest Products
New FX environment for the forestry world
10
• When we had last revised our deck on January 8 we were assuming a forest
product world with the loonie at $0.86 in 2015 and $0.84 in 2016, and a Euro
at $1.25 in both years. Given the recent collapse in oil prices, the state of
the Eurozone and the strengthening US economy, we now assume the loonie
averages $0.80 in both 2015 and 2016, while we see the Euro at $1.11 in both
years.
• For our Canadian coverage universe, the net impact is almost always positive
as weaker prices are more than offset by strong currency tailwinds. For our US
coverage, the impact is mixed as companies with capacity in the right places
(MERC and UFS) benefit, while the timber REITs face increased pricing/volume
pressure in the PNW
Rating changes (2)
• We have upgraded NBD to Outperform (from Sector Perform) and reduced our
rating on CFP to Sector Perform (from Outperform).
Price target changes (13)
• Increases (8) – ADN (from C$16 to C$17), ANS (from C$3.30 to C$4.00), CAS (from
C$8.50 to C$10.00), KPT (from C$19 to C$20), KS (from $36 to $38), LPX (from
$14 to $15), NBD (from C$28 to C$30) and UFS (from $45 to $50).
• Decreases (5) – CLW (from $79 to $75), CFP (from C$35 to C$30), CFX (from C$15
to C$14), PCH (from $47 to $44) and WY (from $42 to $40).
Company Comments
Baytex Energy Corporation(TSX: BTE; 17.43; NYSE: BTE)
Mark J. Friesen, CFA (Analyst)
(403) 299-2389; mark.j.friesen@rbccm.com
Luke Davis (Associate)
403 299 5042; luke.davis@rbccm.com
48.00
42.00
Rating:
Price Target:
52 WEEKS
21FEB14 - 09FEB15
Outperform
30.00
Q4/14; Recycle ratio analysis shows strong outlook
Based on our recycle ratio analysis at strip pricing, we believe that Baytex is
among the best of its peers. While the company has higher debt ratios than usual
as a result of financing the Aurora acquisition, we are not concerned with debt
covenants nor financial liquidity. There were no surprises in the fourth quarter.
36.00
30.00
24.00
18.00
20000
15000
10000
5000
F
M
A
Close
2013A
2014A
2015E
2016E
M
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Prod (boe/d) Prev.
57,196
78,321↑
77,077
84,544↑
84,219
91,059↑
88,785
All values in CAD unless otherwise noted.
Nelson Ng, CFA (Analyst)
(604) 257-7617; nelson.ng@rbccm.com
Kelsey Roste (Associate)
(604) 257-7383; kelsey.roste@rbccm.com
Melissa Oliphant (Associate)
604 665 5534; melissa.oliphant@rbccm.com
F
• Reiterating Outperform; maintaining price target. We believe the stock should
outperform its oil weighted peers based on improved netbacks, stable yield and
visible NAV upside. We maintain the price target of $30.00/share,.
• No surprises in Q4. Funds flow from operations of $1.47 per share (diluted) was
in-line with our estimate of $1.46 (consensus $1.47). Production of 92,220 boe/
d was down 2% sequentially due to asset divestitures, but was slightly ahead of
guidance.
• Recycle ratio reflects transitional year and strong outlook. Remember, we look
for CF recycle ratios of >1.5x as an indication of core value creation. Based on
strip pricing and corporate F&D (ex revisions), our estimates indicate that a cf
recycle ratio of 1.7x is possible in 2015 and we see corporate cf recycle ratios >2x
at >US$60/bbl WTI making Baytex one of the strongest performing companies
among the peers.
Capstone Infrastructure Corp.(TSX: CSE; 3.46)
Rating:
Price Target:
Sector Perform
4.00
2015 focus is Bristol Water's regulatory review
Capstone Infrastructure had a strong finish to 2014, and we believe the resolution
of Bristol Water's regulatory review (likely in Q3/15) will be the next catalyst for
the shares to trade higher.
• Bristol Water CMA review is a key priority for 2015. As expected, Bristol Water's
final determination was referred to the Competition and Markets Authority
11
4.50
52 WEEKS
21FEB14 - 09FEB15
4.20
3.90
•
3.60
3.30
3.00
4000
3000
2000
1000
F
M
A
M
Close
J
J
2014
A
S
O
N
D
2015
J
F
•
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
ACFFO/Sh Diluted Prev.
2013A
0.63
2014E
0.70↑
0.67
2015E
0.41
2016E
0.47
•
All values in CAD unless otherwise noted.
•
(CMA). The CMA review process is expected to conclude in Q3/15, at which time
we anticipate a favourable outcome. Management noted that any revised price
determination would come into effect in April 2016.
Q4/14 results above expectations. Capstone Infrastructure's Q4/14 Adjusted
EBITDA of $47 million surpassed our estimate of $42 million and consensus of
$42 million. The Q4/14 ACFFO/share was $0.23, which exceeded our estimate of
$0.20 and compared to $0.18 in Q4/13. The Q4 EBITDA variance was primarily
attributable to lower-than-expected overhead costs (reversal of accrued sharebased compensation in Q4/14 due to the share price decline), and slightly higherthan-expected contributions from Cardinal.
Focus on growth through development projects. Given the competitive M&A
market for operating assets, management sees greater opportunity in potential
acquisitions of development projects. The company's existing wind development
pipeline is progressing well.
Whitecourt arrangement ensures the facility remains economic. The
Whitecourt facility reached a new 15-year supply agreement in March 2015,
which would ensure that the facility would generate positive EBITDA even in
a depressed power price environment. In return some of the upside would be
shared with the biomass suppliers.
Leaving estimates unchanged. We remain comfortable with our 2015 and 2016
ACFFO/share estimates of $0.41, and $0.47, respectively. Our 2015 Adjusted
EBITDA forecast is $122 million, which is at the higher end of management's
guidance of $115 - $125 million.
Enbridge Inc.(TSX: ENB; 58.07; NYSE: ENB)
Robert Kwan, CFA (Analyst)
(604) 257-7611; robert.kwan@rbccm.com
Kelsey Roste (Associate)
(604) 257-7383; kelsey.roste@rbccm.com
Rating:
Price Target:
52 WEEKS
21FEB14 - 09FEB15
64.00
62.00
60.00
58.00
56.00
54.00
52.00
50.00
Outperform
71.00
Buy ahead of guidance based on superior expected growth and dividend
coverage
We believe that the stock is being held back by the lack of updated guidance with
respect to free cash flow growth and dividend coverage following the proposed
restructuring. With this, we see a buying opportunity based on the numbers that
Enbridge has already disclosed, which implies attractive dividend coverage and
free cash flow growth.
48.00
16000
12000
8000
4000
F
M
A
M
Close
EPS, Adj Diluted
2013A
1.78
2014A
1.90
2015E
2.35
2016E
2.72
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
P/AEPS
32.6x
30.6x
24.7x
21.3x
All values in CAD unless otherwise noted.
Shailender Randhawa, CFA (Analyst)
(403) 299-6576; shailender.randhawa@rbccm.com
F
• Our take: We believe that the stock is being held back by the lack of updated
guidance with respect to free cash flow growth and dividend coverage following
the proposed restructuring. With this, we see a buying opportunity based on the
numbers that Enbridge has already disclosed, which implies attractive dividend
coverage and free cash flow growth.
• The numbers point to 1.9x dividend coverage, which we see as attractive
relative to U.S. peers and Canadian midstreamers. While Enbridge has not
disclosed expected dividend coverage following the proposed restructuring, our
analysis of the company's disclosures indicates that average distributable cash
flow coverage of the dividend should be roughly 1.9x through 2018 (or a 53%
payout ratio), assuming a 15% annual increase in the dividend. These levels
would compare favourably to U.S. infrastructure peers (some with coverage in
the 1.2-1.5x range). This level is also attractive versus Canadian midstream peers
with expected payout ratios generally in the 55-80% range. Please see Exhibit 2
on page 3 for our analysis.
• The 25% free cash flow CAGR seems achievable post-restructuring; our
conservative estimate is at least a 20% CAGR. Our analysis based on available
guidance (please see Exhibit 3 on page 4) leads us to believe that the 25% free
cash flow CAGR provided at the Investor Day in September 2014 is likely to be
reiterated. We have used conservative assumptions that lead us to believe that
the free cash flow CAGR following the proposed restructuring will be at least 20%.
Freehold Royalties Ltd.(TSX: FRU; 18.04)
12
Rating:
Price Target:
Keith Mackey, CFA (Associate)
403 299 6958; keith.mackey@rbccm.com
28.00
52 WEEKS
21FEB14 - 09FEB15
Sector Perform
20.00
Q4/14 - A decent quarter, outlook unchanged
Freehold Royalties reported Q4/14 CFPS of $0.41 vs RBC/Street estimates of $0.39/
$0.37 respectively. With a 50% drop in drilling activity anticipated on its lands in
2015, we expect Freehold's focus to remain on accretive royalty acquisitions to
augment its portfolio.
26.00
24.00
22.00
20.00
18.00
2500
2000
1500
1000
500
F
M
A
M
Close
2013A
2014A
2015E
2016E
J
J
2014
A
S
O
N
D
2015
J
F
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Prod (boe/d) Prev.
8,913
9,178↑
9,100
9,800
9,350↓
9,500
All values in CAD unless otherwise noted.
George Weston Limited(TSX: WN; 104.98)
Irene Nattel (Analyst)
(514) 878-7262; irene.nattel@rbccm.com
Martin Gravel, CFA (Associate)
(514) 878-7264; martin.gravel@rbccm.com
Alex Carette (Associate)
(514) 878-7254; alexandre.carette@rbccm.com
52 WEEKS
• A decent quarter, outlook unchanged. Q4/14 volumes of 9,836 boe/d exceeded
our 9,523 boe/d estimate by 3% while CFPS of $0.41 was two cents better than
our estimate, which was a penny above the Street. Royalty interest and working
interest volumes were up 4% and 6% respectively on a sequential basis. As shown
in Exhibit 3, key sources of variation to our estimates include lower unit royalty
expense and lower G&A and Interest costs. Freehold has already put its balance
sheet to work in 2015 with the previously announced $35 million Anderson
Energy acquisition extending its cash tax horizon and $12.4 million royalty tuckin that adds 72 boe/d (60% gas) and 35,600 mineral title acres in Q1. Freehold
left its 9,800 boe/d 2015 volume outlook unchanged based on its US$60/bbl WTI
budget assumption, which is currently 10% above the futures curve.
• Maintaining Sector Perform rating and $20.00 price target. Our DCF-based price
target reflects a visible FCF generating portfolio, a 6.5% discount rate to reflect
Freehold’s low capital intensity royalty model, and a 1.1x target multiple given
above-average financial flexibility and commodity price leverage.
Rating:
Price Target:
Outperform
118.00
Expanding the kitchen:WN to increase capacity to satisfy growing customer
appetites
21FEB14 - 09FEB15
100.00
95.00
90.00
85.00
80.00
1200
800
400
We maintain our constructive view on WN based on our favourable outlook
for both Loblaw and Weston Foods, which remains focused on restoring growth
notwithstanding the challenging environment. 2015 outlook is for lower operating
income at WN Foods due to planned investments in growth, with anticipated
earnings recovery in 2016. In our view, current valuation provides attractive entry
point.
WN Foods delivers solid operating earnings
F
M
A
M
Close
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Diluted
2013A
4.27
2014A
5.27
2015E
5.68
2016E
6.83
All values in CAD unless otherwise noted.
P/E
24.6x
19.9x
18.5x
15.4x
F
• Q4 EPS and results from the Food Processing segment released this morning
were solid and in line with forecast on an adjusted 12-week basis (Q4 included an
extra week), reflecting good cost management against the backdrop of ongoing
competitive intensity and higher input costs.
A good problem to have: 2015-2016 outlook
• WN spent a good part of 2014 doing a thorough analysis of its North American
baking business with the goal of developing a strategic plan to drive future
growth. The Company determined its business base is solid, but lacks sufficient
capacity to satisfy customer appetite for higher volumes in key categories,
notably those related to in-store baking. As part of WN Foods' updated strategic
plan, the Company plans to step up investment in both PP&E and people/
innovation in 2015/16. Capex will rise to $300 MM in 2015 and $170 MM in 2016,
and along with the investment in innovation, staffing, etc, WN is anticipating
a decline in 2015 EBIT in excess of the $17 MM decline (excl. extra week) in
2014. WN's ongoing optimization of the production platform, relentless focus
on operating efficiency and an effective commodity input cost hedging program
13
should enable WN Foods to continue to deliver industry-leading performance
metrics, with growth anticipated to resume in 2016.
Liquor Stores N.A. Ltd.(TSX: LIQ; 14.38)
Sabahat Khan (Analyst)
(416) 842-7880; sabahat.khan@rbccm.com
52 WEEKS
21FEB14 - 09FEB15
16.00
Rating:
Price Target:
Sector Perform
14.00
Strategic initiatives in progress; Keeping an eye on the operating backdrop
14.00
LIQ reported better-than-expected top-line growth in Q4 and earnings were
in line with our forecasts. Looking forward, we expect 2015 results to reflect
continued progress on the company's strategic initiatives and the impact of softer
economic growth in western Canada and Alaska. Reiterate $14 price target and
Sector Perform rating.
12.00
10.00
1200
900
600
300
F
M
A
M
Close
J
J
2014
A
S
O
N
D
2015
J
F
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Diluted Prev.
2013A
0.88
2014E
0.59↓
0.60
2015E
0.68↑
0.66
2016E
0.70↓
0.76
All values in CAD unless otherwise noted.
Milestone Apartments REIT(TSX: MST.un; 13.57)
Neil Downey, CFA, CA (Analyst)
(416) 842-7835; neil.downey@rbccm.com
Kevin Cheng, CFA (Associate)
(416) 842-3803; kevin.cheng@rbccm.com
Michael Smith, CFA (Analyst)
(416) 842-7805; michael.smith-tor@rbccm.com
Matt Logan (Associate)
416 842 3770; matt.logan@rbccm.com
Ben Halm, CPA, CA (Associate)
416 842 8720; ben.halm@rbccm.com
52 WEEKS
• Progress on strategic initiatives underway – Over the course of 2014, LIQ has
made progress on a number of initiatives including renovating 5% of its store
base, improving its marketing/merchandising practices, and opening new stores.
Over the next year we expect progress on the SAP implementation, further store
renovations, and increased penetration of private label sales.
• Weaker operating backdrop could impact H2/15 results – Given the strong comps
reported in H2/14 and the cautious outlook in Western Canada, LIQ's results
could be impacted by the weaker operating backdrop in H2/15. We expect the
initial impact on the smaller geographies reliant on the resource industries (i.e.
Red Deere); however, an extended period of weak economic growth in Alberta
could eventually impact LIQ's larger markets in Edmonton and Calgary.
• Expecting capex of ~$30MM in 2015 – Major capital expenditures over the course
of 2015 are expected to include store renovations, initial phases of the SAP
implementation, replacement of in-store hardware, and new store openings. We
estimate ~$27MM of dividend payments over the course of 2015. We note that
LIQ maintains ~$90MM of un-drawn credit on its credit facility.
• Revising estimates slightly lower – We are revising our estimates to reflect slightly
lower comp sales and margin expectations beginning in H2/15. Our 2015E/2016E
EBITDA estimates are $41.4MM/$45.0MM ($43.8MM/$48.8MM previously).
Rating:
Price Target:
Outperform
14.50
What's good for America should be good for MST
21FEB14 - 09FEB15
Milestone Apartments REIT ("MST") has posted in-line Q4/14 results. Representing
20% of suites, the Houston exposure cannot be overlooked, although we believe
the MSA could still post job growth this year. The counter-balance for MST is in the
wider U.S. macro-picture of economic growth, more jobs, and relief at the pump.
We maintain our $14.50 price target and Outperform rating on the units.
13.00
12.00
11.00
10.00
2000
1000
F
M
A
Close
2013A
2014A
2015E
M
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
FFO/Unit Prev.
0.81
1.01↑
0.99
1.04↑
1.00
F
• Q4/14 results “in-line” – Q4/14 FFO/unit of $0.25 was -1% from Q4/13’s $0.25
and in line with our $0.25E.
• Solid operating metrics; flow-through lacking – Q4/14 same-property
occupancy of 95.2% was +70bps YoY, closely aligning with the total portfolio
stats. Solid same-property revenue growth (+4.9%) and above inflation expense
growth (+6.1%) drove same-property NOI growth of 4.8%. Supplemented by
notable acquisitions, Q4/14 total NOI of $26.4MM was +19% YoY, yet flowthrough to EBITDA (+18% YoY) was stunted by G&A expense growth of 33%.
• Honing in on Houston – With 3,900 suites located in the energy industry levered
MSA, investors are rightly sensitive to downside risks. Q4/14 occupancy was
firm (94.1%) and we think Houston might continue to post job growth this year.
Important counter-balance for MST exists in the wider U.S. macro-economic
picture.
14
2016E
1.07↑
1.03
All market data in CAD; all financial data in USD; dividends paid in
CAD.
• Financial metrics trending favourably – Q4/14 D/GBV of 51% was -500bps YoY.
We estimate that 2014 IFRS FV marks of $108MM accounted for ~350bps of the
decline, with capital raisings driving the balance. AFFO growth and FX changes
helped push the Q4/14 AFFO payout ratio to 68% from 75% in Q4/13.
• FFO estimates tweaked higher/change in basis – Our 2015E–16E FFO/unit are
+$0.04 each, to $1.04/$1.07. One-third of the increase stems from a change in
the basis of deriving FFO (implemented retroactively in Q4/14), with the balance
being a true-up of our business forecast. 2015–16E AFFO shift by a lesser +$0.01/
$0.02, to $0.87/$0.91.
• $14.50 price target and Outperform rating reiterated
Northland Power Inc.(TSX: NPI; 16.94)
Nelson Ng, CFA (Analyst)
(604) 257-7617; nelson.ng@rbccm.com
Kelsey Roste (Associate)
(604) 257-7383; kelsey.roste@rbccm.com
Melissa Oliphant (Associate)
604 665 5534; melissa.oliphant@rbccm.com
Rating:
Price Target:
Sector Perform
19.00
Fully funded and ready to grow
52 WEEKS
21FEB14 - 09FEB15
18.00
17.00
With the equity overhang out of the way, investors can now focus on the two
transformational offshore wind developments. We believe there are limited nearterm catalysts as construction progresses, but investors are getting paid to wait
(6.4% dividend yield).
16.00
15.00
3000
2000
1000
F
M
A
M
Close
J
J
2014
A
S
O
N
D
2015
J
F
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
ACFFO/Sh Diluted Prev.
2013A
1.26
2014A
1.45
2015E
1.24↓
1.35
2016E
1.29↓
1.42
All values in CAD unless otherwise noted.
Shaw Communications Inc.(TSX: SJR.B; 28.98; NYSE: SJR)
Drew McReynolds, CFA, CA (Analyst)
(416) 842-3805; drew.mcreynolds@rbccm.com
Jie He (Associate)
416 842 4123; jie.he@rbccm.com
Haran Posner (Analyst)
(416) 842-7832; haran.posner@rbccm.com
52 WEEKS
• Fully funded. Northland Power closed its $231 million public common equity
offering and $50 million common equity private placement to Mr. James Temerty,
the founder and Chairman of Northland Power. Together with the $157.5 million
convertible debt issued in January, the capital raised in Q1/15 totals $438.5
million (gross), which should be sufficient to fund the Nordsee One offshore wind
and Grand Bend onshore wind developments.
• Getting paid to wait for offshore wind upside. We believe the shares of
Northland are ideal for income investors who are satisfied with the current 6.4%
dividend yield, are comfortable with offshore wind development exposure, and
have the patience to wait until late 2017 for the completion of two offshore wind
developments. At that time, we expect shareholders to be rewarded with a 15%
+ dividend increase. In addition, we expect the shares to gradually trade higher
if the two offshore wind projects are tracking on time and within schedule.
• Reducing estimates to reflect equity offering. We have reduced our 2015 and
2016 ACFFO/share forecast to $1.24 and $1.29, respectively (from $1.35 and
$1.42, respectively) to reflect the equity offering, and our assumption that
Northland Power will invest $420 million in Nordsee One in Q2/15.
Rating:
Price Target:
Sector Perform
30.00
Sizing Up a Shaw Media-Corus Transaction
21FEB14 - 09FEB15
30.00
We see growth in linear broadcasting coming under increased pressure in the
coming years driven by structural and regulatory headwinds. In trying to determine
credible strategic options for Shaw Media, we believe a "merger-of-equals" of Shaw
Media and Corus can create value for shareholders.
28.00
26.00
7500
6000
4500
3000
1500
F
M
A
M
Close
2013A
Revenue
5,142.0
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
F
• For the full report, please see today's report on Corus Entertainment entitled
"Sizing Up a Shaw Media-Corus Transaction".
• "Merger-of-equals" could be a win-win for Shaw and Corus. Our "merger-ofequals" scenario is not a panacea for growth headwinds facing linear broadcast.
Nevertheless, we believe it can be a win-win for Shaw and Corus, allowing
the companies to realize significant strategic and financial benefits without
directly investing additional capital into broadcasting. Furthermore, we believe
the merits of this scenario are largely independent of the pace of secular and/or
15
2014A
2015E
2016E
regulatory change, and we feel our construct leaves Shaw with ample strategic
flexibility with respect to broadcast and content ownership going forward.
5,239.0
5,572.0
5,758.0
All values in CAD unless otherwise noted.
SNC-Lavalin Group Inc.(TSX: SNC; 36.97)
Sara O'Brien, CFA, CA (Analyst)
(514) 878-7256; sara.obrien@rbccm.com
Juliane Szeto (Associate)
(416) 842-3806; juliane.szeto@rbccm.com
52 WEEKS
21FEB14 - 09FEB15
56.00
Rating:
Outperform
Risk Qualifier: Speculative Risk
Price Target: 50.00
Disappointing F15 outlook but sum of the parts still calls for valuation upside
We believe SNC will face an overhang of criminal charges to its valuation for the
near term. We do not see liquidity as a concern at SNC and we view the upside
opportunity outweighing the downside risk. While timing is uncertain, we view
potential catalysts as: monetizing concessions, large public contract wins, non
material financial settlement with governments re investigations, charges.
52.00
48.00
44.00
40.00
4500
3000
1500
F
M
A
M
Close
J
J
2014
A
S
O
N
D
2015
J
F
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Rpt Diluted Prev.
P/E Reported
2013A
0.24
157.0x
2014A
8.74↑
5.77
4.2x
2015E
1.90↓
2.69
19.4x
2016E
2.80↓
3.53
13.2x
All values in CAD unless otherwise noted.
• 407 Int'l concession sale on track for this year. SNC commented it has made
good progress to a sale this year and is happy with the direction it is going
while it has been a more challenging process than the sale of AltaLink. We
believe management is pleased with potential value and we expect there could
be upside to our $15/SNC share value for its 17% stake in the asset. We continue
to see significant upside to SNC given its current depressed valuation, key 407
infrastructure asset, $1.3B in net cash and significant credit available. We expect
private equity could also view SNC as an attractive investment at current price
range.
• Kentz business performing well, not a factor in weak F15 guidance. We expect
Kentz will contribute most of the core Adj. E&C earnings guidance of $1.30-$1.60
in F15. We expect this weak F15 guidance results from 1) infrastructure and
construction group expected to remain in loss position in F15 as co transitions
out of legacy challenges, 2) caution re potential for some cost overruns, warranty
issues 3) conservatism. We have revised our F15/F16 Adj. core E&C EPS estimates
down to $1.60/$1.95 from $2.09/$2.39 previously.
• SNC sees itself well positioned for large infrastructure deals near term. Co is
bidding on Champlain bridge and Eglinton LRT, 2 multi-billion dollar PPPs up for
award in Q2 F15.
• Co seeking a settlement option with government re criminal charges, where
message could be sent without impacting the viability of SNC.
Sprott Inc.(TSX: SII; 2.66)
Geoffrey Kwan, CFA (Analyst)
(604) 257-7195; geoffrey.kwan@rbccm.com
Charan Sanghera (Associate)
604 257 7657; charan.sanghera@rbccm.com
Rating:
Price Target:
52 WEEKS
21FEB14 - 09FEB15
Sector Perform
3.00
Maintain Sector Perform following largely in line Q4/14
Sprott continues to make progress diversifying its AUM towards non-resource
assets, which should reduce variability in AUM and earnings growth while still
retaining its reputation as a premier resource-oriented investment firm. Sprott's
shares offer significant upside to a recovery in the resource/energy market, but our
Sector Perform rating reflects a total return that while double-digit, is in line with
the average of our coverage.
3.60
3.30
3.00
2.70
2.40
7500
6000
4500
3000
1500
F
M
A
Close
2013A
2014A
2015E
M
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Revenue Prev.
114.2
128.6↑
121.1
133.3↑
130.4
F
Maintain Sector Perform rating and 12-month target of $3.00/share. Our financial
forecasts largely unchanged. Sprott continues to make progress diversifying its
AUM towards non-resource assets, which should reduce variability in AUM and
earnings growth while still retaining its reputation as a premier resource-oriented
investment firm. Our Sector Perform rating reflects a total return that while doubledigit, is in line with the average of our coverage.
16
2016E
155.5↑
Q4/14 normalized EPS of $0.03 was in line with our forecast and consensus.
Q4/14 Base Business EBITDA of $10.8MM was ahead of our $9.6MM, partly due to
higher-than-forecast F/X gains. Q4/14 saw net redemptions of -$54MM, below our
forecast of +$37MM in net sales.
154.3
All values in CAD unless otherwise noted.
Conference call key takeaways: (1) Sprott is looking to launch ~6-7 new funds this
year across its various categories [e.g., resource, non-resource, alternatives, real
assets]; (2) resource lending book continues to perform well; and (3) investment
losses relating to closed funds in Q1/15 appear unlikely to be material to earnings
in our view.
Maintain Sector Perform rating and 12-month target of $3.00/share. Our financial
forecasts remain largely unchanged.
The Descartes Systems Group Inc.(NASDAQ: DSGX; 14.72; TSX: DSG)
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
21FEB14 - 09FEB15
Outperform
18.00
Delivering the goods, rain or shine
Descartes reported a solid quarter, with EBITDA above expectations, despite a
large FX headwind. We believe the quarter shows the resiliency and network
effects of Descartes' business model, which prioritizes profitability and cash flow.
Looking forward, management sees organic growth opportunities and does not see
a slowdown in acquisition momentum. Remain Outperform.
15.50
15.00
14.50
14.00
13.50
13.00
12.50
2000
1500
1000
500
F
M
A
Close
2014A
2015A
2016E
2017E
M
J
J
2014
A
S
O
Rel. S&P 500
Revenue Prev.
151.3
170.9↓
171.6
191.6↓
193.3
225.3↓
227.0
All values in USD unless otherwise noted.
Michael Harvey, P.Eng. (Analyst)
403 299 6998; michael.harvey@rbccm.com
Luke Davis (Associate)
403 299 5042; luke.davis@rbccm.com
N
D
2015
J
MA 40 weeks
F
• Q4 EBITDA beat. Adj. EBITDA was $13.9MM or $0.18/share, above RBC
($13.3MM, $0.17/share) and the street ($13.4MM, $0.18/share). Revenue was
$44.3MM (10% Y/Y, 16% constant currency), slightly below RBC ($45.1MM) and
the street ($44.9MM), on FX ($2.5MM Y/Y headwind).
• Q1 baseline EBITDA in line with expectations. Descartes set Q1 adj. EBITDA
baseline calibration at $10.5MM, in line with our expectations for $10.6MM. In
comparison, street estimates call for $14.2MM Q1 EBITDA; however, the gap
between street estimates and baseline is essentially in line with the historical
$3.3MM gap between baseline and actuals. FX will have a nominal impact to
EBITDA. For revenue, Q1 baseline was $42.0MM, slightly below our expectations
for $42.4MM on FX. The higher than expected FX headwind to revenue and the
historical gap between baseline and actuals ($3.7MM) largely bridge to Q1 street
estimates ($46.2MM revenue).
• Target margin model raised 300bps on operating leverage and FX. Descartes
raised its adj. EBITDA margin target to 28-33%, up from 25-30% previously. We
believe Descartes' target margin model is conservative and reflects the potential
near-term dilution from future acquisitions. Q4 adj. EBITDA margins increased
to 31.3%, above our 29.5% estimate and up from 30.6% Q3. Operating cash flow
was $13.1MM, above our expectations for $10MM.
• Encouraging organic growth outlook, large acquisition pipeline. Management
is optimistic on the opportunity to expand its global trade offerings into export
filings. The export market may represent a sizable new greenfield opportunity.
In addition, management is very encouraged by opportunities in omni-channel
retailing.
Trilogy Energy Corp.(TSX: TET; 7.29)
Rating:
Price Target:
Sector Perform
10.00
Slight beat on Q4 CFPS; 2P reserves increase 33%
Q4/14 financial results were slightly better than expected. The company's 33% 2P
reserve increase was also better than we had anticipated, though skewed to PUD
17
30.00
25.00
52 WEEKS
21FEB14 - 09FEB15
and Probable categories (the PDP category increased by 2%). We've retained our
Sector Perform rating and $10 target price.
20.00
15.00
10.00
4500
3000
1500
F
M
A
Close
2013A
2014A
2015E
2016E
M
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
CFPS Diluted Prev.
2.32
2.75↑
2.71
0.88↑
0.78
1.47↑
1.35
P/CFPS
3.1x
2.7x
8.3x
5.0x
All values in CAD unless otherwise noted.
F
• Q4 results largely pre-released - realizations better. Trilogy reported Q4 results
with pre-released production of 35,900 boe/d driving CFPS of $0.62 (RBC $0.57)
which beat our numbers on the back of better than expected liquids realizations.
• 2P reserves up 33%, PDP increases 2%. 2P reserves increased to 140 mmboe
(+33%, +31%/sh), with an associated finding cost (FD&A) of roughly $21/bbl.
Most of the increase came from the PUD (+1321%) and Probable (+60%)
categories, with proved producing (PDP) up 2%.
• FDC moves up as reserve breakdown shifts more toward future drilling. Future
development costs increased materially to over $466 million (vs $47 million at
year-end 2013), which makes sense in the context of the PUD and Probable
increases.
• 2015 guidance maintained, CRA dispute settled. 2015 guidance was maintained
at the planned $100mm capital program resulting in production of roughly
30,000 boe/d (-14% YoY). Also of note, the CRA proposed a reassessment in
January 2014 that would disallow $728mm in tax pools accumulated between
2010-2014. TET has come to a resolution resulting in a write down of deferred
tax assets of $82mm.
• Duvernay results updated - though little incremental new data. TET provided
one new Duvernay result and a selection of updated production results from
historical wells as noted in Exhibit 4. While results have been variable given a
range of geography/geology, liquids ratios have generally remained consistent/
strong as producers continue to delineate the play.
Industry Comments
Andrew Williams (Analyst)
+61 3 8688 6578; andrew.williams@rbccm.com
ASX Energy
Nira Sonah (Associate)
+61 3 86886571; nira.sonah@rbccm.com
• A post reporting review of the Australian Energy large cap space: 2015E earnings
will be materially lower and likely overhang the stocks, which will probably rebase
at lower prices.
• We upgrade STO to Sector Perform (TP $8.50), we maintain OSH at Outperform
(TP $9.50) and leave WPL unchanged (TP $37.00, Underperform)
• OSH is the 2015 story with growth and re-rating events on gas expansion; we
believe STO has short-terms issues (real and perceived) on financing and project
delivery...but GLNG is the wildcard and a 2016 opportunity is evolving; WPL is
out of the yield window and has longer-dated growth options from 2017.
All values in AUD unless otherwise noted.
Hitting reset: A big cap review
Walter Spracklin, CFA (Analyst)
(416) 842-7877; walter.spracklin@rbccm.com
RBC Compass
John Barnes (Analyst)
(804) 782-4020; john.barnes@rbccm.com
• Labour disruption, severe weather, and sector headwinds weigh on February
traffic. February was a challenging month for the Class 1 railroads as supply
constraints (West Coast port labour dispute, CP strike, severe winter storms)
were compounded by growing headwinds in key sectors (displacement of coal at
utilities, slowing crude-by-rail demand). As a result, average weekly intermodal,
petroleum products, and coal traffic fell -7%M/M, -7%M/M, and -9%M/M
respectively, driving total volumes down -6%M/M (-3%Y/Y).
Mike Fountaine (Associate)
(804) 782-4013; mike.fountaine@rbccm.com
Erin Lytollis, CFA (Associate)
(416) 842-7862; erin.lytollis@rbccm.com
Railroad news + February carload data
All values in CAD unless otherwise noted.
Des Kilalea (Analyst)
+44 20 7653 4538; des.kilalea@rbccm.com
RBC Diamond Conference feedback
Richard Hatch, ACA (Analyst)
+44 20 7002 2111; richard.hatch@rbccm.com
• RBC Diamond Conference hears of slow market conditions near-term and robust
growth medium term from a sector which boasts strong balance sheets and
dividend paying companies.
All values in USD unless otherwise noted.
Maurice Choy (Analyst)
Prices pick up in early 2015 sales; sector remains financially robust
RBC European Utilities
18
+44 207 653 4198; maurice.choy@rbccm.com
Spanish Regulated Utilities: Something for everyone
Martin Young (Analyst)
+44 20 7653 4481; martin.c.young@rbccm.com
We admit that a report on two Sector Perform-rated stocks isn't entirely the
most exciting read. However, these two Spanish regulated utilities do have slightly
different offerings, meaning there is something for everyone.
John Musk (Analyst)
+44 20 7029 0856; john.musk@rbccm.com
All values in EUR unless otherwise noted.
• REE offers an average 5% dividend yield, which is in line with the SX6P average
but comes arguably at a lower risk. With the regulatory reform now substantially
complete, there are few catalysts ahead, hence we believe REE offers stability
and safety with a steady 2% RAB CAGR and it is managed by a competent
management team. Just what investors ought to expect from a traditional utilities
company.
• ENG offers a slightly more attractive 5.5% average dividend yield, a premium
to compensate investors as the company embarks on a more ambitious
international expansion programme (both in LatAm and in Europe), as domestic
Spanish capex begins to wind down (-1% RAB CAGR). A deployment of capital
over and above those guided in the Strategic Plan is possible given the company's
success in LatAm to date. There is strong competition for new projects and hence
this success isn't priced-in at the moment. However if ENG does deliver this, we
could see a share price outperformance.
In this report, we discuss REE and ENG's Spanish market capex, their international
expansion and balance sheet health.
Victoria McCulloch, CA (Analyst)
+44 131 222 4909; victoria.mcculloch@rbccm.com
RBC International E&P Daily
Nathan Piper (Analyst)
+44 131 222 3649; nathan.piper@rbccm.com
• PMO.L/ FOGL.L: Start drilling in Falklands exploration campaign; LUPE.ST:
Christmas present comes with fault; GENL.L/DNO.OL: Local sales and revenues
guidance ; TGL.TO: Cautious approach to spending; Week Ahead; Statoil targeting
FPSO for Johan Castberg field development in the Barents Sea
Al Stanton (Analyst)
+44 131 222 3638; al.stanton@rbccm.com
PMO; FOGL; LUPE; TGL; GENL; DNO; CNE; PXT; SIA; BNK; WZR
Haydn Rodgers, CA (Associate)
+44 131 222 4911; haydn.rodgers@rbccm.com
Adam Naughton (Associate)
+441312223695; adam.naughton@rbccm.com
All values in USD unless otherwise noted.
John Barnes (Analyst)
(804) 782-4020; john.barnes@rbccm.com
The Weekly Haul
Mike Fountaine (Associate)
(804) 782-4013; mike.fountaine@rbccm.com
• In this week's Feature Commentary, we discuss the recent spate of preannouncments coming from our coverage universe.
• Takeaways from the news include: Ports of LA, Long Beach say they’ll be back to
normal in 3 months; preliminary Class 8 net orders remained solid in February;
FMCSA moves up projected publication date for final ELD Rule; FMCSA again
targets training-standards rule for entry-level commercial vehicle drivers; box
line reliability reaches new low; Suez Canal development could reach $15B; and
overtime is 61% of ILA hours in NY-NJ port
• Key macro data points for the week ahead include MDI & OHD on Monday,
Wholesale Inventories on Tuesday, Retail Sales & Business Inventories on
Thursday, and PPI on Friday.
Todd Maiden (Associate)
(804) 782-4014; todd.maiden@rbccm.com
All values in USD unless otherwise noted.
Airfreight & Surface Transportation
Paul C. Quinn (Analyst)
(604) 257-7048; paul.c.quinn@rbccm.com
Timber Takeaways
Hamir Patel (Analyst)
(604) 257-7145; hamir.patel@rbccm.com
• Log pricing data negative in West – RISI's Log Lines delivered log price index
for February showed domestic PNW sawlog prices down 3.6% y/y (+0.3% m/m),
while export prices fell 13.0% y/y (-0.8% m/m) reflecting major export headwinds
in China (largely due to the devalued Russian ruble).
• High log inventories in China a concern – We note that New Zealand, the US,
Canada and most recently Russia have significantly increased log shipments over
All values in USD unless otherwise noted.
Red scare - PNW log prices in retreat
19
the past few years (see Exhibit #11). Given high log inventories in China, timber
REIT Rayonier noted last month that it expects log realizations into China could
deteriorate further from current levels before recovering somewhat later in the
year.
• Russian log and lumber producers increase exports to China - The 45%
devaluation in the Russian ruble sine July 2014 (relative to the US$) has almost
doubled the price of Russian logs and lumber allowing for a sharp increase in
economically accessible timber and production (see Exhibits #12 & 14).
• Seeing the forest from the island – Two weeks ago, we attended the University of
Georgia's Timberland Investment Conference on Amelia Island, FL - a major trade
event attended by almost all the senior leaders of NA TIMOs and timber REITs.
The mood was optimistic for Southern timberland owners, with the continued
expectation for a material rise in SYP sawlog prices (though not as definitive on
when!).
Quantitative Research
Chad McAlpine, CFA (Analyst)
(416) 842-7869; chad.mcalpine@rbccm.com
Bish Koziol (Associate)
(416) 842-7866; bish.koziol@rbccm.com
What's In Style - S&P/TSX Composite
What’s In Style highlights the 15 best-ranked stocks in the S&P/TSX Composite
based on our Value, Growth, Momentum and Predictability style-composite
models.
Included in each of the four summary tables presented in this report are select
fundamental metrics such as forward looking price-to-earnings, price-to-book and
forecast earnings growth.
Additionally, an indication is given when a company ranks in the top 15 positions
of the index based on more than one investment discipline.
Technical Research
Robert Sluymer, CFA (Analyst)
(212) 858-7066; robert.sluymer@rbccm.com
Anna Drotman (Associate)
(212) 858-7065; anna.drotman@rbccm.com
Buying the pullback - Equity ideas as stock markets ‘pause’
• EQUITIES - We continue to expect the unfolding pullback to be shallow given
equity markets are in the early stages of emerging from multi-month/multiquarter trading ranges that developed during the 2014 European/Emerging
Market/Commodity macro headwinds.
• OTHER MACRO - US 10-year bond yield – Re-challenging key upside level at 2.16%
after bouncing from 50-dma near 1.97%. Oil (WTI) – Consolidation continues
around its 50-dma near $50. Initial resistance is at $54.66. USD Index – Advanced
uptrend intact as DXY positively resolves 5-6 week trading range. Closing in on
next resistance at 96.94.
• THEMES & STOCK IDEAS - After February’s equity surge many/most stocks are
well advanced in the short term and are less ‘timely’ at current levels. Select
ideas of interest within Financials, Healthcare, Discretionary and Technology are
highlighted below.
• (+) Financials – Discount Brokers (ETFC, AMTD) remain attractive as they emerge
from 2014 trading ranges. (+) Biotech – Leadership intact and reaccelerating:
Favor (+) BIIB, REGN, VRTX, ALNY, MDVN, INCY over (-) ISRG, ABBV. (+)
Discretionary – Longer-term reversal candidates: AEO, GME, CAB and DKS. (+)
Technology – FB and GOOGL reaccelerating, IACI and EBAY emerging – RAX and
CY reaccelerating after 4-month pauses. (=) Energy – Select long ideas in Energy:
LNG (leader), PTEN (potential bottoming profile).
In-Depth Reports
Haran Posner (Analyst)
(416) 842-7832; haran.posner@rbccm.com
Drew McReynolds, CFA, CA (Analyst)
Corus Entertainment Inc.(TSX: CJR.B; 21.68)
20
(416) 842-3805; drew.mcreynolds@rbccm.com
26.00
52 WEEKS
21FEB14 - 09FEB15
25.00
Rating:
Price Target:
Sector Perform
22.00
Sizing Up a Shaw Media-Corus Transaction
While Corus remains a higher-quality name in our media coverage, we have
been struggling with soft organic growth, and downward estimate and guidance
revisions in the last couple of years. In trying to determine credible strategic
options that can create value for shareholders, this report examines a potential
merger with Shaw Media.
24.00
23.00
22.00
21.00
2000
1500
1000
500
F
M
A
M
Close
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Diluted
2013A
1.65
2014A
1.77
2015E
1.85
2016E
1.98
All values in CAD unless otherwise noted.
P/E
13.1x
12.2x
11.7x
10.9x
F
• Sizing up a Shaw Media-Corus transaction. We see growth in linear broadcasting
coming under increased pressure in the coming years driven by structural and
regulatory headwinds. Corus does not have its head in the sand, but the industry
backdrop could make it difficult to grow organically, and CRTC rules limit Corus’s
ability to grow through acquisitions. As an interim solution, we examine a
merger-of-equals scenario between Shaw Media and Corus. We see a number
of key benefits including: 1) substantial cost synergies utilizing Corus Quay ($60–
70MM); 2) revenue synergies anchored around women/co-view demographics;
3) critical mass in program buying, Cancon, carriage, and promotion; 4) greater
financial strength to pursue growth strategies and compete for premium content;
and 5) no major regulatory hurdles and a potential to avoid CRTC-tangible
benefits. While it is not a panacea for the TV industry's challenges, this mergerof-equals construct allows the companies to realize significant strategic and
financial benefits without directly investing additional capital in to broadcasting.
Our analysis points to EPS, FCF, and NAV accretion in the mid to high single digit
range, with a healthy MergeCo balance sheet (~1x net debt/EBITDA) that could
support growth initiatives and/or returning capital to shareholders.
21
Required disclosures
Non-U.S. analyst disclosure
Michael Harvey;Luke Davis;Dan MacDonald;Matthew McKellar;Maurice Choy;Martin Young;John Musk;Geoffrey Kwan;Charan
Sanghera;Sara O'Brien;Juliane Szeto;Robert Kwan;Kelsey Roste;Shailender Randhawa;Keith Mackey;Sabahat Khan;Fraser
Phillips;Steve Bristo;Thomas Klein;Paul Treiber;Sean Ray;Drew McReynolds;Jie He;Haran Posner;Mark J. Friesen;Neil
Downey;Kevin Cheng;Michael Smith;Matt Logan;Ben Halm;Paul C. Quinn;Hamir Patel;Nelson Ng;Melissa Oliphant;Irene
Nattel;Martin Gravel;Alex Carette;Walter Spracklin;Erin Lytollis;Andrew Williams;Nira Sonah;Chad McAlpine;Bish Koziol;Victoria
McCulloch;Nathan Piper;Al Stanton;Haydn Rodgers;Adam Naughton;Darko Mihelic;Brendon Sattich;Vanessa Wan;Des
Kilalea;Richard Hatch;Greg Pardy;Franz Hargo Muljo;Tom Callaghan (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 31-Dec-2014
Rating
BUY [Top Pick & Outperform]
HOLD [Sector Perform]
SELL [Underperform]
Count
897
686
112
Percent
52.92
40.47
6.61
Investment Banking
Serv./Past 12 Mos.
Count
Percent
290
32.33
137
19.97
6
5.36
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
Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time.
Dissemination of research and short-term trade ideas
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regard to local time zones in overseas jurisdictions. RBC Capital Markets' equity research is posted to our proprietary website
to ensure eligible clients receive coverage initiations and changes in ratings, targets and opinions in a timely manner. Additional
distribution may be done by the sales personnel via email, fax, or other electronic means, or regular mail. Clients may also
receive our research via third party vendors. RBC Capital Markets also provides eligible clients with access to SPARC on the Firms
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proprietary INSIGHT website, via email and via third-party vendors. SPARC contains market color and commentary regarding
subject companies on which the Firm currently provides equity research coverage. Research Analysts may, from time to time,
include short-term trade ideas in research reports and / or in SPARC. A short-term trade idea offers a short-term view on
how a security may trade, based on market and trading events, and the resulting trading opportunity that may be available. A
short-term trade idea may differ from the price targets and recommendations in our published research reports reflecting the
research analyst's views of the longer-term (one year) prospects of the subject company, as a result of the differing time horizons,
methodologies and/or other factors. Thus, it is possible that a subject company's common equity that is considered a long-term
'Sector Perform' or even an 'Underperform' might present a short-term buying opportunity as a result of temporary selling pressure
in the market; conversely, a subject company's common equity rated a long-term 'Outperform' could be considered susceptible
to a short-term downward price correction. Short-term trade ideas are not ratings, nor are they part of any ratings system, and
the firm generally does not intend, nor undertakes any obligation, to maintain or update short-term trade ideas. Short-term trade
ideas may not be suitable for all investors and have not been tailored to individual investor circumstances and objectives, and
investors should make their own independent decisions regarding any securities or strategies discussed herein. Please contact
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Analyst certification
All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of
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indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.
Disclaimer
RBC Capital Markets is the business name used by certain branches and subsidiaries of the Royal Bank of Canada, including RBC Dominion Securities Inc., RBC
Capital Markets, LLC, RBC Europe Limited, RBC Capital Markets (Hong Kong) Limited, Royal Bank of Canada, Hong Kong Branch and Royal Bank of Canada, Sydney
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express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. All
opinions and estimates contained in this report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice and
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To Canadian Residents:
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this material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisition
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To Japanese Residents:
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.® Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license.
Copyright © RBC Capital Markets, LLC 2015 - Member SIPC
Copyright © RBC Dominion Securities Inc. 2015 - Member CIPF
Copyright © RBC Europe Limited 2015
Copyright © Royal Bank of Canada 2015
All rights reserved
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