EQUITY RESEARCH
CANADIAN RESEARCH AT A GLANCE
October 9, 2014
Price Target Revisions
! AGF Management Ltd.
! CI Financial
! EXFO Inc.
! Franco-Nevada Corp.
! Gluskin Sheff + Associates Inc
! IGM Financial
! Lydian International Ltd.
! Power Corporation of Canada
! Power Financial Corporation
! Sprott Inc.
! Stuart Olson Inc.
Summary
Reducing price target to $10 on equity market weakness
Summary
Best idea within fundcos; pullback presents an attractive buying opportunity
Summary
FQ4/14 results below expectations; FQ1/15E outlook also shy of forecast
Summary
Candelaria Stream Transaction Adds Long-Life Asset with Potential Mine Life Upside
Summary
Best idea within asset managers; pullback is a buying opportunity
Summary
A bit of patience we think will be rewarded
Summary
Amulsar site visit - Good progress, permitting key catalyst
Summary
Price target trimmed to reflect PWF/IGM target decreases
Summary
Trimming price target to reflect change to IGM target
Summary
Reducing target to $3/share. Shares remain fairly valued.
Summary
Moderating target to $9 post financing and Broda sale in September
Summary
First uranium concentrate produced from Cigar Lake
Summary
FY14 production guidance cut to 12,500boe/d on shut-in at Causeway
Summary
Q3/14 production improves, but meeting guidance will be a stretch
Summary
Sustainable Rx: Q2 results solid, outlook unchanged
! Canadian Telecommunication
Summary
Telecom valuations: Hitting a ceiling?
!
Summary
First Glance Notes
! Cameco Corporation
! Ithaca Energy
Company Comments
! Centamin PLC
! Jean Coutu Group (PJC) Inc.
Industry Comments
!
!
Services
CommTech: Capex flush less likely,
Juniper and Ciena need a jolt
IT Hardware: Minnesota Supreme
Court Ruling - Impact to WDC and
STX
RBC International E&P Daily
Summary
Summary
IAE; ENQ; LUPE; PMO; WZR; IGAS
Summary
A two-discipline look at IAG and IFP. Removing AGU. Stopped out on COS.
Summary
A two-discipline look at IAG and IFP. Removing AGU. Stopped out on COS.
Quantitative Research
! Bi-Modal Stock Picks: Quant +
Technical
Technical Research
! Bi-Modal Stock Picks: Quant +
Technical
! - Action-Oriented Research
Priced as of prior day's market close, EST (unless otherwise noted).
For Required Non-U.S. Analyst and Conflicts Disclosures, see Page 14.
EQUITY RESEARCH
U.S. RESEARCH AT A GLANCE
October 9, 2014
Initiations
! Axiall Corporation
! E.I. du Pont de Nemours & Co.
! LyondellBasell Industries NV
! Olin Corporation
! PPG Industries, Inc.
! Sherwin-Williams Company
! The Dow Chemical Company
! The Valspar Corporation
! Westlake Chemical Corporation
Summary
Short ethylene position, low ECU and weak housing: Initiating with Underperform
Summary
Slowing Ag and Construction: Initiating with Sector Perform
Summary
The ethylene ATM and low-risk growth; initiating with Top Pick
Summary
Chlor-Alkali in holding pattern, initiating with Sector Perform
Summary
Firing on all cylinders, initiating coverage with Outperform
Summary
Leverage to National Accounts and the Contractor: Initiating with Outperform
Summary
Ethylene, growth & portfolio catalysts; initiating with Outperform
Summary
Performing better but fairly valued; Initiating coverage with Sector Perform
Summary
Integration has its benefits; Initiating with Outperform
Summary
Changing to Sector Perform, key data appears far out YE15/16 and new orals likely coming
Summary
FQ4/14 results below expectations; FQ1/15E outlook also shy of forecast
Summary
Port Hedland: inter-port upgrades and shiploaders in focus
Summary
Watchman gains narrow victory; Expectations were low going into AdComm Panel
Summary
First uranium concentrate produced from Cigar Lake
Summary
Project In-line 3Q Sales and EPS
Summary
Q3 Earnings Preview & Cheat Sheet
Summary
Q3 Earnings Preview and Cheat Sheet
Summary
We preview ALTR, BRCM, CY, DLG, MXIM, PSMI and TXN
Summary
Strong Q3/14 results; Q4/14 likely weaker
Summary
Adjusting estimates lower
Summary
Adjusting for light Q3 cat losses
Summary
Adjusting for mild Q3 wind season
Summary
Splitsville part deux
Summary
Adjusting Q3 estimates for light cat loss activity
Summary
Adjusting Q3 estimates for light cat loss activity
Summary
Thinking on NACF and what matters & looking at early-stage competitors like Pro-QR
Summary
Adjusting Q3 for light cat losses
Ratings Revisions
! Arrowhead Research Corp.
Price Target Revisions
! EXFO Inc.
First Glance Notes
! BHP Billiton
! Boston Scientific Corp.
! Cameco Corporation
Earnings Preview
! Abbott Laboratories
! Freescale Semiconductor
! SanDisk Corporation
! Semiconductor Q3 2014 Earnings
Preview
Company Comments
! Alcoa Inc.
! Arthur J. Gallagher & Co.
! PartnerRe, Ltd.
! RenaissanceRe Holdings, Ltd.
! Symantec Corp.
! The Allstate Corporation
! The Travelers Companies, Inc.
! Vertex Pharmaceuticals Inc.
! XL Group plc
2
EQUITY RESEARCH
! Yum! Brands, Inc.
Summary
Recovery year...coming one year later?
! 3Q14 Non-life Insurance Preview
! Canadian Telecommunication
Summary
Potential rewards for non-weather upsides
Summary
Telecom valuations: Hitting a ceiling?
!
Summary
Industry Comments
!
!
Services
CommTech: Capex flush less likely,
Juniper and Ciena need a jolt
Global PC Shipments Continues To
Surprise On Upside. Q3:14 Shipment
Flattish
IT Hardware: Minnesota Supreme
Court Ruling - Impact to WDC and
STX
RBC European Industrials Daily
!
! RBC International E&P Daily
! US Chemicals
Summary
Gartner Releases Q3/14 PC Preliminary Results
Summary
Summary
Alcoa raises US heavy truck expectations (+ve IMI)
Summary
IAE; ENQ; LUPE; PMO; WZR; IGAS
Summary
Initiating Coverage: Shale Gas Boom Drives Overweight View on US Chemicals
3
EQUITY RESEARCH
UK & European Research at a Glance
October 9, 2014
Price Target Revisions
! FirstGroup PLC
Summary
Then there were two (rail contracts)
Summary
Port Hedland: inter-port upgrades and shiploaders in focus
! Canadian Telecommunication
Summary
Telecom valuations: Hitting a ceiling?
!
Summary
First Glance Notes
! BHP Billiton
Industry Comments
!
!
Services
CommTech: Capex flush less likely,
Juniper and Ciena need a jolt
IT Hardware: Minnesota Supreme
Court Ruling - Impact to WDC and
STX
UK Fixed Telecoms
Summary
Summary
3Q… promotions, price rises and fibre
Find our Research at:
RBC Insight (www.rbcinsight.com): RBC's global research destination on the web. Contact your RBC Capital Markets' sales representative to
access our global research site, or use our iPad App "RBC Research"
Thomson Reuters (www.thomsononeanalytics.com)
Bloomberg (RBCR GO)
SNL Financial (www.snl.com)
FactSet (www.factset.com)
4
Price Target Revisions
AGF Management Ltd.(TSX: AGF.B; 10.61)
Geoffrey Kwan, CFA (Analyst)
(604) 257-7195; [email protected]
Charan Sanghera (Associate)
604 257 7657; [email protected]
Rating:
Price Target:
52 WEEKS
18OCT13 - 08OCT14
Underperform
10.00 ▼ 12.00
Reducing price target to $10 on equity market weakness
We are reducing our 12-month price target to $10/share (was $12), but maintain
our Underperform rating. The recent pullback in equity markets could further delay
the turnaround at AGF given its higher exposure vs. peers to equities in its AUM
base and lower economies of scale. With the absence of an early positive catalyst
emerging, we see better value elsewhere in our coverage.
14.00
13.00
12.00
11.00
3000
2000
1000
O
2013
N
D
J
Close
F
M
A
2014
M
J
J
A
S
O
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Revenue Prev.
484.5
468.6↓
471.6
459.7↓
484.6
474.2↓
499.8
2013A
2014E
2015E
2016E
All values in CAD unless otherwise noted.
CI Financial(TSX: CIX; 32.67)
Geoffrey Kwan, CFA (Analyst)
(604) 257-7195; [email protected]
Charan Sanghera (Associate)
604 257 7657; [email protected]
37.00
• The price target reduction reflects both lower financial forecasts due to the
recent equity market pullback and an across-the-board reduction in target
multiples for our asset manager coverage universe reflecting lower EPS growth
forecasts.
• Business improving very slowly, but several potential risks remain: (1) Retail and
institutional business remain challenged; (2) AGF is the most vulnerable in our
view vs. fundco peers to upcoming and potential regulatory changes within the
mutual fund industry given AGF’s lack of distribution ownership, overall higher
fees vs. peers and fund performance that has been below average in recent years;
and (3) likely deletion from the S&P/TSX Dividend Aristocrats Index later this year,
which could result in almost 5MM shares for sale [~6% of shares outstanding].
Rating:
Price Target:
52 WEEKS
18OCT13 - 08OCT14
Outperform
38.00 ▼ 41.00
Best idea within fundcos; pullback presents an attractive buying opportunity
Target reduced to $38/share (was $41), but Outperform rating maintained. CIX is
our favourite fundco as fundamentals remain strong (net sales, fund performance)
and with the pullback in the share price, now has a valuation that is actually in line
with its historical average. With an attractive valuation, we believe CIX is the lower
risk play within the larger cap fundcos over the next 12 months.
36.00
35.00
34.00
33.00
32.00
12000
10000
8000
6000
4000
2000
O
2013
N
D
Close
2013A
2014E
2015E
2016E
J
F
M
A
2014
M
J
J
A
S
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Revenue Prev.
1,616.7
1,872.7↓
1,890.3
2,013.7↓
2,114.8
2,228.7↓
2,341.6
All values in CAD unless otherwise noted.
Steve Arthur, CFA (Analyst)
(416) 842-7844; [email protected]
Anthony Jin, CFA, P.Eng. (Analyst)
(416) 842-5338; [email protected]
O
• We are reducing our 12-month target to $38/share (was $41), but are
maintaining our Outperform rating. The target price reduction reflects both
lower financial forecasts due to the recent equity market pullback and an acrossthe-board reduction in target multiples for our asset manager coverage universe
reflecting lower EPS growth forecasts.
• Our Outperform rating reflects our view that share price outperformance is
likely to be driven by higher expected EPS growth. Furthermore, with a strong
balance sheet and FCF generation, we believe CIX is in a good position to return
capital to shareholders via share buybacks and further dividend increases. Finally,
with a valuation that is in line with its historical average, we believe the total
return potential makes it attractive for investors looking to gain exposure to an
asset manager delivering strong fundamentals and a solid dividend yield (3.7%).
EXFO Inc.(NASDAQ: EXFO; 3.86; TSX: EXF)
Rating:
Price Target:
Sector Perform
4.75 ▼ 5.00
FQ4/14 results below expectations; FQ1/15E outlook also shy of forecast
FQ4/14 results continued to reflect challenged and uncertain end-market
conditions. Revenue growth remained elusive, and the forward outlook was
5
52 WEEKS
18OCT13 - 08OCT14
5.85
5.40
4.95
4.50
4.05
600
400
200
O
2013
N
D
J
F
Close
M
A
2014
M
J
J
Rel. S&P 500
A
S
O
MA 40 weeks
Revenue Prev.
230.8↓
234.6
241.0↓
256.6
257.2↓
275.5
269.6
2014A
2015E
2016E
2017E
All values in USD unless otherwise noted.
below expectations at the midpoint. While the share price has weakened, we
maintain our Sector Perform rating pending evidence of a return to sustainable
growth in revenue and margins. Our target declines to $4.75 (from $5.00) on
revised earnings.
• No growth seen in FQ4/14 results: Revenues of $59.7MM (-2% y/y), were below
our $63.6MM forecast and consensus of $63.2MM. Adjusted EPS of $0.05 was a
penny shy of our and consensus expectations of $0.06.
• FQ1/15E outlook reflects challenges: FQ1/15E outlook calls for flattish
sequential revenue growth of $58-62MM in revenues and adjusted EPS of $0.01$0.05. At the mid-point, this is below prior consensus expectations of $62MM
and $0.05. Bookings were $57.3MM for a book-to-bill ratio of 0.96x. For F2015E,
management guided towards 63-65% in gross margins, 34-36% in SG&A and
18-20% in R&D expenses as a percent of revenues.
• F2014 a year of positive cash flows; Healthy balance sheet provides options:
Net cash on hand increased to $59.8MM, compared to $52.7MM last quarter,
largely due to gains from working capital of $6.7MM. In each of the last four
quarters, EXFO has delivered positive FCFs ($7.1MM Q4/14, $11.9MM LTM). On
the conference call, management indicated their priority for cash use remains the
pursuit of a strategic acquisition which may make a difference in the company’s
growth profile. A secondary priority is to repurchase shares given the lower share
price and cash on hand.
• Maintain Sector Perform rating. Target to $4.75 (from $5.00): EXFO shares
currently trade at 11.x C2016E EPS and 5.7x C2016E EV/EBITDA. Valuation makes
it interesting, but at this stage we maintain our Sector Perform rating pending
evidence of a return to sustainable growth in revenue and margins.
Franco-Nevada Corp.(TSX: FNV; 52.69)
Stephen D. Walker (Analyst)
(416) 842-4120; [email protected]
Jamie Kasprowicz, P.Eng., CFA (Analyst)
(416) 842-8934; [email protected]
Mark Mihaljevic (Associate)
(416) 842-3804; [email protected]
Rating:
Price Target:
Outperform
77.00 ▲ 70.00
Candelaria Stream Transaction Adds Long-Life Asset with Potential Mine Life
Upside
52 WEEKS
18OCT13 - 08OCT14
65.00
60.00
55.00
50.00
We are raising our Target to $77 from $70 and reiterate our Outperform rating
following the $648MM purchase of 68% of the gold and silver production from
the Candelaria mine in Chile. We estimate an IRR of ~5.1% for the stream at
$1,250/oz, in line with previous Franco streaming transactions (e.g. Karma) where
some of the estimated value lies in longer-term production upside.
45.00
40.00
3000
2000
1000
O
2013
N
D
Close
J
F
M
A
2014
M
J
J
A
S
O
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Adj Diluted Prev.
2013A
0.95
2014E
0.92↑
0.91
2015E
0.98↑
0.97
2016E
1.02↑
1.00
• We estimate the Candelaria transaction to be accretive to our EPS, CFPS, and NAV
estimate at a 7% discount rate (Exhibit 3), and forecast the stream to contribute
net FCF of $75MM in 2015 and $66MM in 2016 at $1,250/oz gold.
• Similar to past Franco streaming transactions, we expect a portion of the upside
at Candelaria to lie in: (1) the potential for mine life extension past 2028, based on
converting the existing ~2.4Moz GEO M&I Resource, and (2) evidence of further
exploration upside in the 150km2 land package.
All market data in CAD; all financial data in USD; dividends paid in
CAD.
Geoffrey Kwan, CFA (Analyst)
(604) 257-7195; [email protected]
Charan Sanghera (Associate)
604 257 7657; [email protected]
Gluskin Sheff + Associates Inc(TSX: GS; 28.89)
Rating:
Price Target:
Outperform
36.00 ▼ 40.00
Best idea within asset managers; pullback is a buying opportunity
Reducing 12-month target to $36/share (was $40), but maintaining Outperform
rating. Gluskin Sheff is our best idea within the asset managers reflecting the best
6
34.00
32.00
30.00
28.00
52 WEEKS
18OCT13 - 08OCT14
26.00
fundamentals (net sales and AUM growth); positive exposure to performance feedriven special dividends (almost $4/share in the past 2 years); higher expected longterm growth vs. fundco peers; and not impacted by potential regulatory changes
impacting fundcos.
24.00
22.00
20.00
1200
900
600
300
O
2013
N
D
J
Close
F
M
A
2014
M
J
J
A
S
O
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Revenue Prev.
125.0
247.5
172.3↓
181.1
189.8↓
205.0
2013A
2014A
2015E
2016E
All values in CAD unless otherwise noted.
• The target price reduction reflects both lower financial forecasts due to the
recent equity market pullback and an across-the-board reduction in target
multiples for our asset manager coverage universe reflecting lower EPS growth
forecasts.
• Historically, during times of significant equity market declines, Gluskin Sheff’s
share price tended to underperform asset manager peers, which we attribute
to investors likely perceiving lower performance fee generation over the
subsequent 12 months. As a result, we believe for investors with a longer-term
investment horizon, these pullbacks provide attractive buying opportunities.
• We also believe underperformance during equity market declines also unfairly
neglects that unlike its fundco peers, Gluskin Sheff has hedge funds (~35% of
AUM today) that can short securities and therefore better mitigate the AUM
erosion impact of weaker markets.
IGM Financial(TSX: IGM; 44.86)
Geoffrey Kwan, CFA (Analyst)
(604) 257-7195; [email protected]
Charan Sanghera (Associate)
604 257 7657; [email protected]
Rating:
Price Target:
52 WEEKS
18OCT13 - 08OCT14
56.00
Outperform
50.00 ▼ 62.00
A bit of patience we think will be rewarded
Maintain Outperform, but 12-month target reduced to $50 (was $62). Significant
share price underperformance 2014 YTD is disappointing, but with a slightly
cheaper vs. historical valuation, ~5% dividend yield (and potential increase in early
2015), IGM is best-suited for investors willing to look out beyond 6 months when
we believe it is more likely to see more definitive signs of a Mackenzie turnaround.
54.00
52.00
50.00
48.00
46.00
44.00
1600
1200
800
400
O
2013
N
D
J
Close
F
M
A
2014
M
J
J
A
S
O
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Revenue Prev.
2,690.0
2,923.4↓
2,957.9
3,042.5↓
3,233.8
3,301.5↓
3,521.5
2013A
2014E
2015E
2016E
• Outperform maintained, with 12-month target reduction to $50 (was $62)
reflecting: (1) lower EPS forecasts given the recent pullback in equity markets;
(2) a lower valuation multiple due to both lower forecasted growth and slightly
reduced visibility on the timing of a turnaround at Mackenzie.
• Mackenzie fee cuts reduced our 2015E EPS by $0.04 (1%). The fee cuts impacted
~25% of Mackenzie’s mutual funds, with 15-25bps management fee cuts and/
or reductions in the administration fees charged, which became effective
September 29, 2014.
All values in CAD unless otherwise noted.
Lydian International Ltd.(TSX: LYD; 0.70)
Jonathan Guy (Analyst)
+44 20 7653 4603; [email protected]
Richard Hatch, ACA (Analyst)
+44 20 7002 2111; [email protected]
52 WEEKS
18OCT13 - 08OCT14
Rating:
Sector Perform
Risk Qualifier: Speculative Risk
Price Target: 1.30 ▲ 1.00
1.40
Amulsar site visit - Good progress, permitting key catalyst
1.20
After a difficult 2013 that saw challenges with permitting and management
changes, Lydian has re-established good project momentum with publication of the
feasibility study and the progress with the environmental and other permits, which
should be completed over the coming quarter with financing and development
scheduled for 2015.
1.00
0.80
3000
2000
1000
O
2013
N
D
J
Close
EPS, Adj Diluted
F
M
A
2014
M
J
J
A
S
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
O
• Site visit to Amulsar - We have visited Lydian's 100% owned Amulsar gold
development project in southern Armenia. The company has recently published
an updated feasibility study for Amulsar that should be developed as a 10 Mt/
year open pit heap leach mine that should produce an average of 200koz/year
7
2013A
2014E
2015E
2016E
(0.07)
(0.09)
(0.05)
(0.08)
All market data in CAD; all financial data in GBP; dividends paid in
GBp.
of gold over a mine life of at least 10 years, with higher production during the
first five years of operation. The project should have an initial capital cost of US
$426 million, including owner operated fleet, with relatively low all in sustaining
costs of US$701/oz gold.
• Permitting key, project appears to have good local support - Lydian submitted
the mining right application for Amulsar in mid June 2014 and has held two
phases of public meetings with additional feedback from the relevant ministries.
Management hope to have the Environmental Impact Assessment approved over
the next month. While this schedule appears optimistic, should this happen
we would view this as a significant and positive catalyst for the stock. The
project appears to have good support at a local community level but with
some opposition from NGOs and national level environmentalist politicians.
Management expect the broader approval process to be completed in early
2015, which would, finance permitting, allow for project development to
commence next year once the snows have melted.
Power Corporation of Canada(TSX: POW; 30.23)
Geoffrey Kwan, CFA (Analyst)
(604) 257-7195; [email protected]
Charan Sanghera (Associate)
604 257 7657; [email protected]
Rating:
Price Target:
52 WEEKS
18OCT13 - 08OCT14
Outperform
33.00 ▼ 36.00
Price target trimmed to reflect PWF/IGM target decreases
Reducing price target to $33/share (was $36) to reflect price target revisions for IGM
Financial and Power Financial, but maintaining our Outperform rating as we believe
POW continues to offer an attractive double-digit 12-month total return. However,
we have a slight preference for PWF vs. POW, due to a better projected total return
(17% vs. 13%), with primarily the same underlying investment exposure.
32.00
31.00
30.00
29.00
6000
4500
3000
1500
O
2013
N
D
Close
2013A
2014E
2015E
2016E
J
F
M
A
2014
M
J
J
A
S
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Basic Prev.
2.08
2.41↓
2.43
2.67↓
2.77
3.00↓
3.11
All values in CAD unless otherwise noted.
Geoffrey Kwan, CFA (Analyst)
(604) 257-7195; [email protected]
Charan Sanghera (Associate)
604 257 7657; [email protected]
O
• Reducing 12-month target to $33/share (was $36), but maintaining our
Outperform rating. The target price reduction is a result of lowering our price
target on Power Financial to $37/share (was $40), which in turn was driven
by a decrease in our 12-month price target for IGM Financial to $50/share
(was $62). PWF represents approximately 83% of POW’s gross asset value, with
IGM Financial and Great-West Lifeco representing ~22% and ~69% of PWF’s
gross asset value, respectively. Our 12-month price target for Power Corporation
primarily reflects our price target for Power Financial ($37/share) and we also
value CITIC Pacific using the current share price and estimate the NAV of nonpublic investments. We then apply a 19.3% discount to our target NAV, which is
higher than the 10-year historical average of 18.0% but in line with the 5-year
average. POW’s shares currently trade at a 17.7% discount to NAV.
• Our Outperform rating reflects our view that POW's shares continue to offer
an attractive double digit total return driven primarily by: 1) improving NAV
growth at PWF (via an expected increase in the value of PWF’s IGM and GWO
stakes, along with a slight narrowing of the wider than historical discount to NAV
at PWF) and 2) POW’s 3.8% dividend yield.
Power Financial Corporation(TSX: PWF; 32.90)
Rating:
Price Target:
Outperform
37.00 ▼ 40.00
Trimming price target to reflect change to IGM target
We are trimming Power Financial’s 12-month price target to $37/share (was $40) to
reflect our recent price target and estimate revision for IGM ($50/share, was $62),
but maintain our Outperform rating as we continue to believe NAV growth and a
4.3% dividend yield will drive an attractive double-digit total return over the next
12 months.
8
52 WEEKS
18OCT13 - 08OCT14
36.00
35.00
34.00
33.00
3000
2000
1000
O
2013
N
D
J
Close
2013A
2014E
2015E
2016E
F
M
A
2014
M
J
J
A
S
O
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Basic Prev.
2.40
2.84↓
2.86
3.15↓
3.24
3.47↓
3.58
• Reducing 12-month price target to $37/share (was $40), but maintaining
our Outperform rating. The price target reduction reflects our reduction of
IGM Financial’s 12-month price target to $50/share (was $62). IGM Financial
represents ~22% of PWF's gross asset value. Our 12-month price target for PWF
primarily reflects price targets for Great-West Lifeco ($34/share; CP $31.28) and
IGM Financial ($50/share; CP $44.86), which combined comprise more than 90%
of PWF's gross NAV. We then apply an 11.8% discount to our NAV, which is
~300bps wider than the 10-year historical average of 8.9% and slightly narrower
to the current discount to NAV of 14.1%.
• Our Outperform rating reflects our view that valuation upside will be driven
primarily by: 1) NAV growth from an expected increase in the value of the IGM
and GWO stakes; 2) PWF’s 4.3% dividend yield; and to a lesser extent 3) a slight
narrowing of the discount to NAV.
All values in CAD unless otherwise noted.
Sprott Inc.(TSX: SII; 2.65)
Geoffrey Kwan, CFA (Analyst)
(604) 257-7195; [email protected]
Charan Sanghera (Associate)
604 257 7657; [email protected]
Rating:
Price Target:
52 WEEKS
18OCT13 - 08OCT14
3.75
Sector Perform
3.00 ▼ 3.50
Reducing target to $3/share. Shares remain fairly valued.
Reducing 12-month target to $3.00/share (was $3.50), but maintaining Sector
Perform rating. We believe the shares are fairly valued and until we see sustained
early signs of significant improvements in investment performance (absolute
and ideally also vs. performance fee benchmarks), we believe there are better
opportunities elsewhere within our coverage universe.
3.50
3.25
3.00
2.75
2.50
4500
3000
1500
O
2013
N
D
Close
2013A
2014E
2015E
2016E
J
F
M
A
2014
M
J
J
A
S
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Revenue Prev.
114.2
132.5↓
135.7
146.6↓
162.9
167.1↓
187.7
All values in CAD unless otherwise noted.
O
The target price reduction reflects both lower financial forecasts due to the recent
equity market pullback and an across-the-board reduction in target multiples for
our asset manager coverage universe reflecting lower EPS growth forecasts.
Fundamentals remain challenging and with Sprott being a resource-focused asset
manager, the near-term outlook continues to be muted. Spot prices for gold were
down almost 10% in Q3/14 with silver down almost 20%. Sprott’s net sales in recent
quarters despite the lacklustre overall fund performance of resource investment
products have been better than we expected, but are not meaningful enough to
positively impact the stock in our view.
Our Sector Perform rating reflects our view that Sprott’s shares are fairly valued,
and that significant improvements in resource and precious metal valuations are
required to be a positive catalyst for the stock.
Sara O'Brien, CFA, CA (Analyst)
(514) 878-7256; [email protected]
Juliane Szeto (Associate)
(416) 842-3806; [email protected]
Stuart Olson Inc.(TSX: SOX; 8.44)
Rating:
Sector Perform
Risk Qualifier: Speculative Risk
Price Target: 9.00 ▼ 10.00
Moderating target to $9 post financing and Broda sale in September
We continue to expect SOX will see EBITDA margin expansion at a gradual pace,
however with risk of time line to improvement and with SOX trading in line with
Canadian peers, we see shares as fairly valued.
• Moderating target to $9 on lower estimates post financing and Broda sale. Our
new F15/F16 EBITDA estimates are $51/$57M down from $60/$66M previously
9
11.50
52 WEEKS
18OCT13 - 08OCT14
11.00
10.50
10.00
9.50
9.00
8.50
400
300
200
100
O
2013
N
D
J
Close
F
M
A
2014
M
J
J
A
S
O
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Diluted Prev.
2013A
0.20
2014E
0.20↓
0.23
2015E
0.59↓
0.67
2016E
0.75↓
0.83
P/E
42.2x
42.2x
14.3x
11.3x
All values in CAD unless otherwise noted.
(to account for sale of Broda) and our F14/F15 EPS estimates are now $0.59/
$0.75 down from $0.67/$0.83, largely from issuance of convertible debentures.
• $80.5M convertible debenture to refinance debt. In September 2014 SOX closed
$80.5M public offering of convertible unsecured subordinated debentures.
SOX plans to use the net proceeds to refinance at maturity a portion of the
outstanding $86M 6% convertible debentures due June 30, 2015, and in the
interim to repay debt under its revolving credit facility.
• Sale of Broda Construction - impacts EBITDA but not material to continuing
earnings. SOX sold its Broda subsidiary in September for gross cash proceeds of
$39M. Co expects a non-cash loss of ~$20M (~0.80/share) on the transaction to
be recorded in Q3/14. We estimate Broda contributed ~$55M to revenue and ~
$9M to EBITDA annually, with larger portion seasonally in Q3.
• SOX positioned for Western Canadian infrastructure growth. This week
we published our Engineering & Construction - Positioning for Canadian
infrastructure growth, focus on E&C firm strategies report, where we examine
the outlook for Canadian public and private infrastructure and E&C firm
strategies, including SOX'.
First Glance Notes
Cameco Corporation(TSX: CCO; 18.79; NYSE: CCJ)
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; [email protected]
Steve Bristo, CFA (Associate)
(416) 842-7826; [email protected]
Thomas Klein (Associate)
416 842 5339; [email protected]
28.00
Rating:
Outperform
First uranium concentrate produced from Cigar Lake
52 WEEKS
18OCT13 - 08OCT14
26.00
24.00
22.00
20.00
• Production from Cigar Lake has begun as expected: Cameco announced that the
first uranium concentrate has been produced at the McClean Lake mill from ore
mined at its 50%-owned Cigar Lake operation in Saskatchewan, where mining
commenced in March 2014.
• Production guidance maintained: Although mining at Cigar Lake was halted
in July to allow the ore body to freeze more thoroughly, mining resumed in
September and 2014 uranium concentrate production guidance is unchanged.
Cameco expects production on a 100% basis of 1 million pounds in 2014, ramping
up to 18 million pounds of full production by 2018.
18.00
10000
8000
6000
4000
2000
O
2013
N
D
J
Close
F
M
A
2014
M
J
J
A
S
O
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
All values in CAD unless otherwise noted.
Ithaca Energy(TSX: IAE; 1.92; AIM: IAE)
Nathan Piper (Analyst)
+44 131 222 3649; [email protected]
Victoria McCulloch, CA (Analyst)
+44 131 222 4909; [email protected]
Haydn Rodgers, CA (Associate)
+44 131 222 4911; [email protected]
52 WEEKS
Rating:
Outperform
FY14 production guidance cut to 12,500boe/d on shut-in at Causeway
18OCT13 - 08OCT14
2.80
2.60
2.40
2.20
Full year production downgrade due to unexpected Causeway shut-in: Full
year production is expected to be 12,600boe/d, below the 13,500boe/d bottom
end of previous guidance. This is due to a pump failure at the TAQA-operated
host facilities, which has shut-in Causeway, deferring ~1,400boe/d annualised
production. This has also delayed the start of water-injection facilities on the field.
The pump is expected to be replaced during Q4/14 with production return limiting
any impact on FY15 production.
2.00
20000
15000
10000
5000
O
2013
N
D
Close
J
F
M
A
2014
M
J
J
A
S
O
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
All market data in CAD; all financial data in USD.
10
Company Comments
Centamin PLC(LSE: CEY; 57.75; TSX: CEE)
Jonathan Guy (Analyst)
+44 20 7653 4603; [email protected]
Richard Hatch, ACA (Analyst)
+44 20 7002 2111; [email protected]
52 WEEKS
18OCT13 - 08OCT14
Rating:
Outperform
Risk Qualifier: Speculative Risk
Price Target: 70.00
72.00
Q3/14 production improves, but meeting guidance will be a stretch
66.00
Weaker production vs. our forecast leaves Centamin needing a very strong Q4 to
meet its 420koz production guidance. We have lowered our production forecasts
for the year to 393koz. We believe the stock will be weaker on the news.
60.00
54.00
48.00
42.00
40000
20000
O
2013
N
D
J
F
Close
M
A
2014
M
J
J
Rel. FT ALL-SHARE
A
S
O
MA 40 weeks
EPS, Adj Diluted Prev.
2013A
0.17
2014E
0.10↓
0.12
2015E
0.14↑
0.13
2016E
0.14
• Centamin reported Q3/14 production of 93.6koz, up 15% vs. Q2 and a 10%
increase vs. Q3/13. However, the production came in lower than our 124koz
forecast, driven by, we believe, weaker grades vs. our model. The company has
retained its FY14E production guidance of 420koz in light of strong exit rates and
better expected grades from both the open pit and underground operations.
However, with YTD production standing at 249koz, the company would need to
post Q4 production of ~171koz which we believe is achievable, but difficult. We
have therefore taken a conservative view on Q4 production and assumed that
while throughput and grades improve, the company produces 143koz in Q4. This
takes FY14E production to 393koz.
All market data in GBp; all financial data in USD.
Jean Coutu Group (PJC) Inc.(TSX: PJC.A; 24.99)
Irene Nattel (Analyst)
(514) 878-7262; [email protected]
Martin Gravel, CFA (Associate)
(514) 878-7264; [email protected]
Alex Carette (Associate)
514 878 7254; [email protected]
Rating:
Price Target:
Sector Perform
24.00
Sustainable Rx: Q2 results solid, outlook unchanged
52 WEEKS
18OCT13 - 08OCT14
24.00
22.00
Q2/F15 results underscore both the stability of PJC's business model and the
challenge of driving growth in the retail segment in the current environment. EPS
of $0.28 grew +17%, reflecting 5% EBITDA growth, with Franchising segment +1%,
Generics +16%, and 11% reduction in Y/Y share count. Actual EPS $0.01 shy of
forecast due to slightly higher than expected tax rate.
20.00
Bottom line
18.00
2500
2000
1500
1000
500
O
2013
N
D
J
Close
F
M
A
2014
M
J
J
A
S
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Diluted
2014A
1.10
2015E
1.23
2016E
1.37
2017E
1.50
All values in CAD unless otherwise noted.
P/E
22.7x
20.3x
18.2x
16.7x
O
• Although the environment in front-of-store is getting increasingly competitive,
PJC remains a regional powerhouse enjoying a 33% share of all prescription
dispenses in Quebec and trend toward rising generic penetration plays to PJC's
generic drug manufacturing unit. Strategy going forward is to continue to extend
its footprint, focus on driving front-store sales through a heightened promotional
calendar and private label products geared to improve relative competitive
position while driving contribution from generic drugs. Despite a very clean
balance sheet, acquisitions remain challenging but shareholder value has been
created over time through stable to modestly higher earnings, augmented by
annual dividend increase and ongoing share buyback of 10% of the float.
Some key themes on the conference call
• i) Front-of-store sales driven by stepped up promotional activity and new
products geared to compete with the dollar store category, ii) M&A opportunities
remain elusive, iii) SSS growth was driven by both basket size and traffic, iv)
Expect Rx SSS growth for H2 to look like Q2.
Free cash flow likely to be deployed to dividend growth and NCIB
11
• Free cash flow likely to be deployed to a combination of rising dividends and
share repurchase. Our model incorporates ongoing buyback of 10% of public
float annually (3-4% of total shares outstanding).
Industry Comments
Drew McReynolds, CFA, CA (Analyst)
(416) 842-3805; [email protected]
Canadian Telecommunication Services
Jie He (Associate)
416 842 4123; [email protected]
• After outperforming from 2010 to 2013, Canadian telecom stocks are
underperforming the broader market year to date in 2014. Given this
underperformance and in light of the pullback in most Canadian telecom stocks
since the spring, investors are trying to put Canadian telecom valuations into
a fresh perspective. In this report, we look at Canadian telecom valuations
from four perspectives: (i) fundamental valuation (FCF yield, EV/EBITDA, P/E); (ii)
relative valuation; (iii) other valuation factors, such as interest rates, fund flows
and off balance sheet liabilities; and (iv) what the credit market is saying. Our
valuation conclusions in this report are consistent with our investment thesis
for the sector.
Haran Posner (Analyst)
(416) 842-7832; [email protected]
Andrew Calder, CFA (Analyst)
(416) 842-4522; [email protected]
Irina Idrissova, CFA (Analyst)
(416) 842-7883; [email protected]
Mark Sue (Analyst)
(212) 428-6491; [email protected]
Ameet Prabhu (Associate)
(212) 618-3330; [email protected]
All values in USD unless otherwise noted.
Amit Daryanani, CFA (Analyst)
(415) 633-8659; [email protected]
Mitch Steves (Associate)
(415) 633-8535; [email protected]
Karl Ackerman, CFA (Associate)
(415) 633-8533; [email protected]
All values in CAD unless otherwise noted.
Telecom valuations: Hitting a ceiling?
CommTech: Capex flush less likely, Juniper and Ciena need a jolt
• Material capex flush unlikely. Considering the mixed trends in North America
wireline capex and moving parts related to European upgrades, we're taking a
cautious stance on wireline equipment stocks. With carriers hunkering down
and M&A concerns persisting, we’re unlikely to see material capex flush in
4Q and are reducing our estimates for both Ciena and Juniper. Both stocks
have underperformed this year but now reaching a valuation point which gets
interesting. The positive catalysts or sentiment reversal is what we’re still waiting
for. Until then we’re at Sector Perform and cutting our targets.
• Carrier M&A near-term implies a level of uncertainty in capex linearity. Juniper
and Ciena both are selling more into Web 2.0 data centers and enterprises
yet the vast amount remains carrier-centric. Juniper derives ~2/3 of revenues
from service providers. Ciena is mostly carrier with AT&T a key customer,
which recently drove Ciena’s margins lower. Domestic capex linearity is further
diverging from traditional patterns and while typically 25%-30% is left for 4Q,
indications we’re getting are that it may be closer to ~22-25% for the likes of
AT&T, Sprint, Verizon, etc.
IT Hardware: Minnesota Supreme Court Ruling - Impact to WDC
and STX
• ALL YOU NEED TO KNOW: With the Minnesota Supreme Court affirming the
decision against WDC the Company will now pay $525M in arbitration, plus preaward interest of $105.4M (total $630.4M) and accrued interest from January 24,
2012 to the final award date (we estimate aggregate payment of ~$750-800M).
Notably, WDC has accrued $758M for this matter as of June-2014 and the
arbitration is to be paid using cash held outside of the USA (no impact on
dividends/buybacks). The benefit for STX to accept cash outside the US would be
that they don’t have to use these proceeds as an offset to their NOL’s in the US
(currently at ~$2.9B Federal, $1.8B State).
Nathan Piper (Analyst)
+44 131 222 3649; [email protected]
RBC International E&P Daily
Al Stanton (Analyst)
+44 131 222 3638; [email protected]
IAE.L/IAE.TO: FY14 production guidance cut to 12,500boe/d on shut-in at
Causeway; ENQ.L: Ythan development approved and first oil in Q2/15 ahead of
expectation; RAK Petroleum - Looking to list in Oslo; LUPE.SS: Spuds 33/2-1 well
targeting Storm prospect; PMO.L: Rig secured for Badada well in Kenya expected
to spud around year end; WZR.V: Rights offering schedule; IGAS.L: Trading update;
Dart acquisition nears completion
Haydn Rodgers, CA (Associate)
+44 131 222 4911; [email protected]
Victoria McCulloch, CA (Analyst)
IAE; ENQ; LUPE; PMO; WZR; IGAS
12
+44 131 222 4909; [email protected]
All values in USD unless otherwise noted.
Quantitative Research
Javed Mirza, CFA, CMT (Analyst)
(416) 842-8744; [email protected]
Bi-Modal Stock Picks: Quant + Technical
Bish Koziol (Associate)
(416) 842-7866; [email protected]
• A two-discipline look at IAG and IFP. Removing AGU.
• Stopped out on COS.
A two-discipline look at IAG and IFP. Removing AGU. Stopped out on COS.
Technical Research
Javed Mirza, CFA, CMT (Analyst)
(416) 842-8744; [email protected]
Bi-Modal Stock Picks: Quant + Technical
Bish Koziol (Associate)
(416) 842-7866; [email protected]
• A two-discipline look at IAG and IFP. Removing AGU.
• Stopped out on COS.
A two-discipline look at IAG and IFP. Removing AGU. Stopped out on COS.
13
Required disclosures
Non-U.S. analyst disclosure
Nathan Piper;Al Stanton;Haydn Rodgers;Victoria McCulloch;Geoffrey Kwan;Charan Sanghera;Jonathan Guy;Richard Hatch;Steve
Arthur;Anthony Jin;Javed Mirza;Bish Koziol;Drew McReynolds;Jie He;Haran Posner;Irene Nattel;Martin Gravel;Alex Carette;Fraser
Phillips;Steve Bristo;Thomas Klein;Sara O'Brien;Juliane Szeto;Jamie Kasprowicz;Mark Mihaljevic (i) are not registered/qualified
as research analysts with the NYSE and/or FINRA and (ii) may not be associated persons of the RBC Capital Markets, LLC and
therefore may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company,
public appearances and trading securities held by a research analyst account.
Conflicts disclosures
This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses
to provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies,
clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to
RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.
Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in, this report.
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including
total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated
by investment banking activities of the member companies of RBC Capital Markets and its affiliates.
Distribution of ratings
For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories
- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/
Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,
the meanings are not the same because our ratings are determined on a relative basis (as described below).
Distribution of ratings
RBC Capital Markets, Equity Research
As of 30-Sep-2014
Rating
BUY [Top Pick & Outperform]
HOLD [Sector Perform]
SELL [Underperform]
Count
858
683
98
Percent
52.35
41.67
5.98
Investment Banking
Serv./Past 12 Mos.
Count
Percent
308
35.90
151
22.11
8
8.16
Conflicts policy
RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.
To access our current policy, clients should refer to
https://www.rbccm.com/global/file-414164.pdf
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16