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