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1
Investment Views
Monday, October 27, 2014
Click to view full story
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Click to view synopsis
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Pertinent Revision Summary
3
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Edge at a Glance
7
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16
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20
 
Ezequiel Fernández
López
24
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Pammi Bir
45
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Act II
Ben Isaacson
48
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Q3/14 First Look: Solid Portfolio Growth
Jeffery Coles
53
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Matthew Akman
54
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Tanya Jakusconek
56
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George Doumet
66
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Patrick Bryden
72
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Ovais Habib
76
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Turan Quettawala
84
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Daniel Chan
57
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Companies Reporting
Industry Comments
LatAm Airports
LatAm Utilities
Real Estate & REITs
Upping Estimates on Oma on Strong
Rodrigo Echagaray
Q3 Results; Remains Our Top Pick in a
Richly Valued Sector
Q3/14 Preview - Small Is Beautiful
Hip to Be Square: Initiating Coverage
on Four Industrial REITs and One
Diversified REIT
Company Comments
Canada
Agrium Inc.
AGU-N, AGU-T
Atrium Mortgage Investment
Corporation
AI-T
Capital Power Corporation
CPX-T
Eldorado Gold Corporation
EGO-N, ELD-T
MTY Food Group Inc.
MTY-T
Penn West Exploration
PWT-T, PWE-N
Rio Alto Mining Ltd.
Sundance Rains On Solid Quarter
Drilling Update from China and Greece
Wok'in into the US Market
Further Asset Sale Highlights Execution
of Strategic Refocusing
RIO-T, RIOM-N
Peru Site Trip Highlights RIO's
Expertise
Westshore Terminals Investment
Corporation
Q3 Beats But Capex Plan Pushed Out
Slightly
WTE-T
U.S.
Flextronics International Ltd.
FLEX-O
Q2/F15 preview: CTG weighs on the
top line
Latin America
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by
non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S.
2
Investment Views
Monday, October 27, 2014
America Movil
Andres Coello &
Jeff Fan
52
 
Paul Figueroa
Mantero
61
 
Claudia Benavente
A.
64
 
Andres Coello
65
 
New Corporate Image, Same Results:
EBITDA Declines 12% in Q3, SSS Falls Rodrigo Echagaray
5.4%
70
 
Peru Site Trip Highlights RIO's
Expertise
76
 
Equity Event: Telecom & Cable 2015
86

Equity Event: Transportation & Aerospace 2014
87

Equity Event: Canadian Energy Infrastructure Conference
88

Equity Event: Mining Conference 2014
89

AMX-N, AMX L-MX
Graña y Montero SAA
GRAM-N, GRAMONC1-LM
Q3: Conference Call Highlights
GRAM Q3/14 Preview
Grupo Financiero Banorte, SAB de CV Q3/14 Earnings Call Highlights:
Positives Offsetting Negatives
GFNORTE O-MX
Grupo Televisa, SAB
TV-N, TLEVISA CPO-MX
Organización Soriana, SAB de CV
SORIANA B-MX
Rio Alto Mining Ltd.
RIO-T, RIOM-N
Q3 Call Highlights: Not Meeting Content
Guidance
Ovais Habib
3
Pertinent Revision Summary
Monday, October 27, 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
AES Gener SA (SO) (AESGENER-SN CLP 318.96)
Q3/14 Preview - Small Is Beautiful
New -Old --
---
---
EPS14E: US$0.024
EPS14E: US$0.016
---
---
FFOPU15E: $1.25
FFOPU15E: --
FFOPU16E: $1.27
FFOPU16E: --
---
Valuation: 7yr DCF explicit period and 2.5% LT growth
Key Risks to Price Target: Capex execution, regulatory risk, hydrology
Agellan Commercial REIT (SP) (ACR.UN-T C$9.19)
Hip to Be Square: Initiating Coverage on Four Industrial REITs and One Diversified REIT
New SP
Old --
Medium
--
$10.25
--
FFOPU14E: $1.18
FFOPU14E: --
11x AFFO (F'15 estimate)
--
Valuation: 11x AFFO (F'15 estimate)
Key Risks to Price Target: Significant unitholder, inability to execute growth, rising interest rates
Aguas Andinas SA (SP) (AGUAS-A-SN CLP 345.08)
Q3/14 Preview - Small Is Beautiful
New -Old --
---
---
EPS14E: 20.29
EPS14E: 19.09
---
---
---
9.5% 2015E Free Cash Yield and 10.3x 2015E
EV/EBITDA
9.6% 2015E Free Cash Yield and 10.3x 2015E
EV/EBITDA
Valuation: 7yr explicit period DCF, 2.0% LT growth
Key Risks to Price Target: Regulatory risk, interest rates
Capital Power Corporation (SO) (CPX-T C$25.87)
Sundance Rains On Solid Quarter
New --
--
--
EBITDA14E: $425
--
--
Old --
--
--
EBITDA14E: $434
--
--
---
---
Valuation: 9.5% 2015E Free Cash Yield and 10.3x 2015E EV/EBITDA
Key Risks to Price Target: Power Prices; Growth Projects Entering Service; Environmental Regulations
Colbun SA (SU) (COLBUN-SN CLP 156.98)
Q3/14 Preview - Small Is Beautiful
New -Old --
---
---
EPS14E: US$0.015
EPS14E: US$0.007
---
Valuation: 7yr DCF explicit period and 2.5% LT growth
Key Risks to Price Target: Hydrology, commodity prices, operational issues
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates
are not registered/qualified as research analysts with FINRA in the U.S.
4
Pertinent Revision Summary
Monday, October 27, 2014
COPASA (SO) (CSMG3-SA R$29.23)
Q3/14 Preview - Small Is Beautiful
New -Old --
---
---
EPS14E: R$3.62
EPS14E: R$3.69
EPS15E: R$4.66
EPS15E: R$4.64
---
---
Valuation: 7yr explicit period DCF and 2.0% LT growth
Key Risks to Price Target: Regulation, concessions, hydrology
Dream Industrial REIT (SP) (DIR.UN-T C$9.45)
Hip to Be Square: Initiating Coverage on Four Industrial REITs and One Diversified REIT
New SP
Old --
Medium
--
$10.25
--
FFOPU14E: $0.95
FFOPU14E: --
FFOPU15E: $0.98
FFOPU15E: --
FFOPU16E: $1.01
FFOPU16E: --
12.5x AFFO (F'15 estimate)
--
Valuation: 12.5x AFFO (F'15 estimate)
Key Risks to Price Target: Inability to execute growth, significant unitholder, rising interest rates
E.CL SA (SO) (ECL-SN CLP 832.54)
Q3/14 Preview - Small Is Beautiful
New -Old --
---
---
EPS14E: US$0.07
EPS14E: US$0.04
---
---
---
---
---
---
FFOPU15E: $3.44
FFOPU15E: --
FFOPU16E: $3.56
FFOPU16E: --
Valuation: DCF, 7yr explicit period and 2.5% LT growth
Key Risks to Price Target: Mining Sector Activity, Spot Market Exposure, Commodity Prices
Empresa Nacional de Electricidad SA (SP) (ENDESA-SN CLP 884.28)
Q3/14 Preview - Small Is Beautiful
New -Old --
---
---
EPS14E: US$0.073
EPS14E: US$0.062
Valuation: SOTP DCF Model
Key Risks to Price Target: Asset restructuring, hydrology, commodity exposure.
Granite REIT (SO) (GRT.UN-T C$39.79)
Hip to Be Square: Initiating Coverage on Four Industrial REITs and One Diversified REIT
New SO
Old --
Medium
--
$44.00
--
FFOPU14E: $3.22
FFOPU14E: --
13.75x AFFO (F'15 estimate)
--
Valuation: 13.75x AFFO (F'15 estimate)
Key Risks to Price Target: Significant tenant concentration in Magna, inability to execute growth, foreign currency exposure
Graña y Montero SAA (SO) (GRAM-N US$13.69)
GRAM Q3/14 Preview
New -Old --
---
---
EPS14E: PEN 0.40
EPS14E: PEN 0.42
Valuation: Sum of the parts, Implied ~7.6x EV/EBITDA 2015E Multiple
Key Risks to Price Target: Rising of social conflicts, political risk
EPS15E: PEN 0.51
EPS15E: PEN 0.50
EPS16E: PEN 0.60
EPS16E: PEN 0.59
---
5
Pertinent Revision Summary
Monday, October 27, 2014
Grupo Aeroportuario Centro Norte, SAB de CV (SO) (OMAB-Q US$37.76)
Upping Estimates on Oma on Strong Q3 Results; Remains Our Top Pick in a Richly Valued Sector
New -Old --
---
$36.00
$32.00
EBITDA14E: MXN 1,892 EBITDA15E: MXN 2,126 EBITDA16E: MXN 2,351
EBITDA14E: MXN 1,805 EBITDA15E: MXN 2,047 EBITDA16E: MXN 2,267
---
Valuation: 2014-2020 50%-DCF w/ 8.3% WACC & 50%-10x EV/EBITDA
Key Risks to Price Target: Govmnt. regulation, troubled domestic airlines
Grupo Aeroportuario del Pacífico, SAB de CV (SP) (PAC-N US$70.22)
Upping Estimates on Oma on Strong Q3 Results; Remains Our Top Pick in a Richly Valued Sector
New -Old --
---
---
EBITDA14E: MXN 3,692 EBITDA15E: MXN 4,094 EBITDA16E: MXN 4,445
EBITDA14E: MXN 3,713 EBITDA15E: MXN 4,127 EBITDA16E: MXN 4,480
---
Valuation: 2013-2020 DCF w/ 9.7% WACC; 11x NTM EV/EBITDA
Key Risks to Price Target: Govmnt. regulation, troubled domestic airlines
Grupo Financiero Banorte, SAB de CV (SO) (GFNORTE O-MX MXN 84.90)
Q3/14 Earnings Call Highlights: Positives Offsetting Negatives
New -Old --
---
---
---
---
---
15.9x 2015 EPS estimate
16.8x 2014 EPS estimate
EBITDA15E: $52.3
EBITDA15E: $50.1
EBITDA16E: $52.6
EBITDA16E: $50.3
---
EBITDA15E: 7,808
EBITDA15E: 8,047
---
---
CFPS15E: $1.50
CFPS15E: $1.36
---
---
Valuation: 15.9x 2015 EPS estimate
Key Risks to Price Target: Political, economic, capital flows, systemic, regulatory, interest rates, and credit.
MTY Food Group Inc. (SO) (MTY-T C$30.50)
Wok'in into the US Market
New -Old --
---
$36.00
$35.00
---
Valuation: 13.0x EV/EBITDA on 2016E
Key Risks to Price Target: Identifying and integrating acquisitions, macroeconomic environment, succession issues
Organización Soriana, SAB de CV (SU) (SORIANA B-MX MXN 43.86)
New Corporate Image, Same Results: EBITDA Declines 12% in Q3, SSS Falls 5.4%
New -Old --
---
---
EBITDA14E: 7,166
EBITDA14E: 7,182
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
Penn West Exploration (SP) (PWT-T C$5.31)
Further Asset Sale Highlights Execution of Strategic Refocusing
New -Old --
---
---
CFPS14E: $1.94
CFPS14E: $1.92
Valuation: 0.6x our 2P NAV plus risked upside.
Key Risks to Price Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program success
6
Pertinent Revision Summary
Monday, October 27, 2014
Pure Industrial REIT (SP) (AAR.UN-T C$4.40)
Hip to Be Square: Initiating Coverage on Four Industrial REITs and One Diversified REIT
New SP
Old --
Medium
--
$5.00
--
FFOPU14E: $0.37
FFOPU14E: --
FFOPU15E: $0.42
FFOPU15E: --
FFOPU16E: $0.41
FFOPU16E: --
14.25x AFFO (F'15 estimate)
--
Valuation: 14.25x AFFO (F'15 estimate)
Key Risks to Price Target: Exposure to single-tenant properties, tenant concentration, inability to execute growth
SABESP (SP) (SBSP3-SA R$18.30)
Q3/14 Preview - Small Is Beautiful
New -Old --
---
---
EPS14E: R$1.98
EPS14E: R$1.99
EPS15E: R$1.83
EPS15E: R$1.98
---
---
EPS15E: $1.79
EPS15E: $1.76
---
---
Valuation: DCF, 7yr explicit period and 2.0% LT growth
Key Risks to Price Target: Regulatory risk, hydrology
Westshore Terminals Investment Corporation (SU) (WTE-T C$33.99)
Q3 Beats But Capex Plan Pushed Out Slightly
New -Old --
---
$35.50
$35.00
EPS14E: $1.69
EPS14E: $1.65
Valuation: Equally wtd. DCF and 13.5x EV/NTM EBITDA (one-year fwd.)
Key Risks to Price Target: Decline in coal exports and slower-than-expected economic growth
WPT Industrial REIT (SO) (WIR.U-T US$9.95)
Hip to Be Square: Initiating Coverage on Four Industrial REITs and One Diversified REIT
New SO
Old --
Medium
--
$11.50
--
FFOPU14E: $1.00
FFOPU14E: --
FFOPU15E: $1.05
FFOPU15E: --
FFOPU16E: $1.05
FFOPU16E: --
13.75x AFFO (F'15 estimate)
--
Valuation: 13.75x AFFO (F'15 estimate)
Key Risks to Price Target: Significant unitholder, inability to execute growth, rising interest rates
Source: Reuters; Scotiabank GBM estimates.
Table of Contents
7
Edge at a Glance
Monday, October 27, 2014
Edge at a Glance
LatAm Airports
Rodrigo Echagaray, MBA, CFA - (416) 945-4405
(Scotia Capital Inc. - Canada)
Upping Estimates on Oma on Strong Q3 Results; Remains Our Top Pick
in a Richly Valued Sector
Event
■ We have adjusted our models to reflect Q3 results in the sector. We are increasing our price
target on Oma from US$32 to US$36 to reflect strong Q3 results ahead of estimates. We
continue to think Oma remains the most appealing alternative in a richly valued sector.
Implications
■ Oma reported the strongest results in the sector on remarkable EBITDA growth of 23%
YOY (vs. our +16% estimate). Management increased guidance in both PAX and EBITDA;
our new EBITDA growth estimate for 2014E (+13.4%) is roughly in line with
management's new guidance.
■ Gap and Asur reported broadly in line with estimates, with EBITDA growing 8% and 9%
YOY, respectively. Our thesis on Gap remains unchanged: we believe the risk of overhang
has increased recently as a result of transactions within the controlling group and hence
remain cautious on the stock. As for Asur, we continue to think commercial revenues
should be under pressure due to limited terminal capacity in Cancun, and expect SG&A
pressure going forward as new terminal space in Cancun is built.
Recommendation
■ At 13.2x EV/EBITDA 2015E Oma remains the best alternative in the sector, in our view.
We remain neutral on Gap (~13.1x EV/EBITDA 2015E), and maintain our sell rating on
Asur (14.3x EV/EBITDA 2015E) despite a sharp underperformance YTD (Oma +47%, Gap
+36%, Asur +7%).
LatAm Utilities
Q3/14 Preview - Small Is Beautiful
Ezequiel Fernández López, CFA - +56 9 9991 9152
(Scotia Corredora de Bolsa Chile SA)
Event
■ We expect small & mid-sized gencos to lead Q3/14 growth, on favorable FX and solid
operational stats. Heavyweights ENI and SBS should lag.
Implications
■ The main themes for Andean power stocks during the third quarter include better hydro in
Chile, the good hydrology and high spot price combo in Colombia, the continued challenges
in Brazil, and the worrying volume contraction in Argentina.
■ We expect AES Gener, Colbun, and ECL to post solid bottom-line growth, while Endesa
and especially Enersis should face tough comps and continued weak performance at
Brazilian discos.
■ The LatAm Water space is dominated by Sabesp's critical stance regarding reservoir levels.
However, Copasa added volume softness to the prognosis. The game for Brazil water plays
now seems to be about when "cheap" becomes "just too cheap." Aguas/A appears to be a
safe haven, with the benefit of an improved entry point.
■ Finally, the Chilean SVS announced that non-cash losses stemming from changes in Chile
taxes should by-pass the P&L and flow straight to equity. We have tweaked our estimates to
reflect this and the latest operational data.
Recommendation
■ Within Andean Power, we believe the Q3/14 earnings outlook favors our preference for
ECL and AES Gener. Also, Copasa shares have been overly punished on political fears in
our view and we maintain our SO 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.
8
Edge at a Glance
Monday, October 27, 2014
Real Estate & REITs
Pammi Bir, CPA, CA, CFA - (416) 863-7218
(Scotia Capital Inc. - Canada)
Hip to Be Square: Initiating Coverage on Four Industrial REITs and One
Diversified REIT
Event
■ Please see our full report "Hip to Be Square" on ScotiaView.
Implications
■ Granite REIT (GRT.UN-T, GRP.U-N, SO, $44.00). In our view, current levels offer a
compelling entry to GRT's sector leading balance sheet, and superior AFFOPU and
distribution growth profile. We expect acquisitions to support multiple expansion and
recommend investors build positions.
■ WPT Industrial REIT (WIR.U-T, SO, US$11.50). We see WPT as well-positioned for
potentially less favourable rates with a best-in-class portfolio and above average growth.
We expect its discount valuation to compress as its size and liquidity expand and
recommend investors build positions.
■ Pure Industrial REIT (AAR.UN-T, SP, $5.00). Pure offers investors exposure to a high
quality, internally managed and mostly CDN industrial assets, with significant
representation in major markets. For longer-term players, we see a fair entry to its steady
growth and visible cash flows.
■ Dream Industrial REIT (DIR.UN-T, SP, $10.25). We believe DIR is in good form for
potentially higher rates with decent organic growth prospects via its shorter duration leases,
below market rents, and occupancy upside. Its sizable NAV discount and high yield offer a
fair spot to selectively add.
■ Agellan Commercial REIT (ACR.UN-T, SP, $10.25). ACR's diversified office and
industrial assets offer exposure to the U.S. recovery wave. We recommend the units to
patient investors seeking a high, fully covered yield.
Recommendation
■ Our top picks are GRT and WPT. See full report for details.
Agrium Inc. (AGU-N US$92.82)
Act II
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ A well-respected $14B activist investor, ValueAct Capital, has taken a 5.7% stake in
AGU.
Implications
■ Do not expect ValueAct to undertake a public shouting match with AGU, nor a quick
trade - it's not their style. ValueAct is methodical, and can be involved in a stock for
years (think Valeant). Accordingly, don't look for a massive stock re-rating tomorrow, it
will take time.
■ Ultimately, what ValueAct wants is no different than what AGU management and
shareholders want: to create sustainable value. Why now? Why not? The stock is down
25% from peaking at $114 before Jana's proxy contest, there is a management team
transition underway (new CEO, new CFO, new Head of Retail), the stock is under
pressure on the back of a weaker outlook into 2015, and perhaps the peak of the fertilizer
investment cycle is in the rear view mirror. Most importantly, AGU is set to generate a
lot of free cash over the coming years.
Recommendation
■ We revisit several value creation ideas, and discuss the recent underperformance of
AGU. Ultimately, shareholders should view this as a positive development that should
receive little resistance by management. There are no sides to take, as the AGU thesis is
about 'when' value is created, not 'if' value is created. ValueAct's collaborative and
value-enhancing track-record speaks for itself. Buy AGU.
Rating:
Risk:
Target:
1-Yr
Adj. EPS14E:
Adj. EPS15E:
SO
Med
US$105.00
$5.61
$7.25
Valuation:
7.5x 2015E EBITDA, 14.5x 2015E EPS, DCF
@ 10%, 60% RCN
Key Risks to Target:
Fertilizer supply/demand, crop and energy
prices, weather
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$3.00
$3.00
3.2%
9
Edge at a Glance
Monday, October 27, 2014
America Movil (AMX-N US$23.52)
Q3: Conference Call Highlights
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
Jeff Fan, CPA, CA, CFA - (416) 863-7780
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ We listened to AMX's Q3/14 conference call.
Implications
■ The company provided vague comments about the breakup process and stated that they
were negotiating with "big" players but no decision has been reached. We understood
that AMX expects the tower spinoff to occur by Q2/15, with the breakup to be a "2015
event", which is in line with our expectations of a complex and perhaps lengthy process.
■ Also, the company clarified that it won't participate in the coming FTA auction in
Mexico, but that they are addressing the advertising opportunity through the CIE
division they bought last year. In our view, AMX may look for a partnership with one of
the successful bidders of the television auction (especially once the breakup plan is
approved).
■ Management did not quantify the impact of the coming elimination of domestic LD in
Mexico (which we estimate at about 10% of wireline and wireless revenues.) However,
they said that postpaid clients are being migrated to packages where long distance has
been eliminated and that elasticity should help to make up the loss in the long term.
■ The stake in KPN will be reduced to ~20% to preserve voting rights (from 21.4%).
However, we didn't sense overwhelming conviction in retaining this stake, particularly
as AMX guided to reduce net debt to EBITDA to 1.5x.
Recommendation
■ Reiterate neutral on AMX.
Rating:
Risk:
Target:
1-Yr
US$19.00
EPS14E:
EPS15E:
MXN 1.24
MXN 1.27
Atrium Mortgage Investment Corporation (AI-T C$11.72)
Q3/14 First Look: Solid Portfolio Growth
SP
Med
Valuation:
DCF - 5 years results, 8.3% WACC, terminal
growth rate of 1.0%
Key Risks to Target:
Regulation in Mexico
Div. (NTM)
Div. (Curr.) (ADS)
Yield (Curr.)
US$0.37
US$0.37
1.6%
Jeffery Coles, MBA, CFA - (416) 863-7067
(Scotia Capital Inc. - Canada)
Event
■ Atrium reported Q3/14 adj. EPS of $0.23 vs. $0.22 last year, slightly below us and the
Street at $0.238 and $0.235, respectively.
Implications
■ Excl. the increase to general provision for mortgage losses ($0.013/sh), results were
marginally better than expected on higher mortgage interest income (+0.01/sh), partially
offset by higher interest expenses (-$0.006/sh). The 4.5% YOY adjusted EPS growth
was driven by mortgage portfolio growth.
■ Solid operating quarter; excellent portfolio growth. Mortgage growth was excellent, with
the portfolio reaching $412.8M (+8% QOQ; +49% YOY), well ahead of our $392M
estimate. LTV ratio remains in good form at 64.4% (flat; +1.8%) though the proportion
of conv. 1st mortgages slipped to 80.5% (-2.3%; -4.8%). The weighted average
mortgage rate increased to 8.77%, up 7 bp QOQ and YOY, with the weighted average
term to maturity holding firm at 1.1 years.
■ General provision for mortgage losses increased to 40 bp (+10 bp). We will be seeking
details on the call about the reasons for increase, but with management expecting full
repayment of the two loans in default and no specific provisions, it appears to be
conservative management.
■ Change to board of directors. Michael Cooper has stepped down from the board of
directors and will be replaced by Andrew Grant.
Recommendation
■ Full update post Oct. 27 conf. call at 4 p.m. ET (dial-in: 888-241-0551).
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
SO
Med
$12.25
Adj. EPS14E
$0.93
$0.94
Adj. EPS15E
$0.95
Adj. EPS16E
Valuation:
13.0x Adj. EPS (2016E)
Key Risks to Target:
Declining real estate prices, origination
volumes, and credit quality
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.91
$0.82
7.0%
10
Edge at a Glance
Monday, October 27, 2014
Capital Power Corporation (CPX-T C$25.87)
Sundance Rains On Solid Quarter
Matthew Akman, MBA - (416) 863-7798
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ CPX reported Q3/14 adjusted FFO of $83M vs. our estimate of $68M and $125M in
Q3/13.
Implications
■ Results were below our expectations on EBITDA but above on cash flow (lower cash
taxes). Gas-fired power EBITDA did not offset the pre-announced Sundance losses to
the extent we anticipated. As gas prices soften, gas-fired peaker profit should improve in
the event of future market upset resulting in price spikes.
■ The updated hedge book supports our view that the Alberta power market is bottoming
out. Forward hedge prices are unchanged in the mid-$50s/MW-hr. However, since the
last quarter, the hedged proportion is up 6% and 3% for 2015/2016 (now 92% and 49%
respectively).
■ Plant availability remains impressively high at the baseload coal plants. The Genesee 1
and 2 plants were both available nearly 100% of the time during Q3. And the major
growth projects, including Shepard Energy Centre ($821M) and K2 Wind ($310M)
remain on track for commercial operations in early and late 2015.
Recommendation
■ The free cash yield at CPX remains attractive despite the unusually weak 3Q result. With
a conservative payout (~50%) and manageable growth program, the company has
accumulated an additional $88M of cash YoY. We would continue accumulating for
value, yield and dividend growth.
Eldorado Gold Corporation (EGO-N US$6.93)
Drilling Update from China and Greece
New
Old
Rating:
--
SO
Risk:
Target:
1-Yr
--
Med
--
$32.00
EBITDA14E
$425
$434
EBITDA15E
-$553
EBITDA16E
-$549
New Valuation:
9.5% 2015E Free Cash Yield and 10.3x 2015E
EV/EBITDA
Old Valuation:
9.6% 2015E Free Cash Yield and 10.3x 2015E
EV/EBITDA
Key Risks to Target:
Power Prices; Growth Projects Entering
Service; Environmental Regulations
Div. (NTM)
$1.36
Div. (Curr.)
Yield (Curr.)
$1.36
5.3%
Tanya Jakusconek, MSc, Applied - (416) 945-4083
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ ELD released drill results from its White Mountain and Jinfeng projects in China and the
Piavitsa project in Greece.
Implications
■ White Mountain - Over 7.5 km of exploration drilling and 12.4 km of delineation
drilling has been completed year-to-date (YTD). Three areas (Central Zone, North Zone
and Northern Deeps Zone) were targeted and encountered mineralization outside of the
current resource model.
■ Jinfeng - YTD, a total of 3.6 km of drilling has been completed, (targeting segments of
the F2, F6 and F7 mineralized fault zones) intended to convert existing inferred
resources into the M&I category.
■ Piavitsa - YTD, over 6 km of exploration drilling has been completed. ELD has targeted
the wide data gaps within the 2km strike length over which the deposit has been defined
(particularly in the western part of the deposit). Most holes intersected mineralization
with grades and thicknesses similar to previous drilling, confirming continuity of the
mineralization.
Recommendation
■ We are likely to see resource conversions (from inferred to M&I categories) at Jinfeng
and increases to resources at White Mountain and Piavitsa when ELD reports its updated
reserve and resource statement in early 2015. Sector Outperform.
Rating:
Risk:
Target:
1-Yr
Adj. EPS14E:
Adj. EPS15E:
Adj. EPS16E:
SO
High
US$10.00
$0.20
$0.25
$0.32
Valuation:
1.35x NAV
Key Risks to Target:
Commodity prices; technical and operational
risk; geopolitical risk.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.03
$0.03
0.4%
11
Edge at a Glance
Monday, October 27, 2014
Flextronics International Ltd. (FLEX-O US$9.33)
Daniel Chan, MBA - (416) 863-7552
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ FLEX is scheduled to report Q2 results on Wednesday October 29. A call is scheduled
for 5:00 p.m. at 888-790-2010, passcode: Q2Flex.
Implications
■ Expect slowing QOQ growth as Motorola uncertainty weighs on top line to drive
revenue of $6.4B and EPS of $0.25. CTG is expected to decline 8% QOQ as new
product announcements are expected to slow demand. We expect CTG weakness to be
offset by continued strength in IEI and HRS. Productivity improvements in the
components and CTG businesses should help drive gross margin up 20bps QOQ and
YOY. We expect this to translate into FLEX achieving the highest operating margin in
two years at 2.9%. We anticipate strong free cash generation of $233M in the quarter,
ending Q2 with $636M in net debt.
■ Anticipate flat revenue guidance of $6.4B, as CTG weakness continues, and EPS of
$0.26. With continued uncertainty concerning the Lenovo relationship, we believe
Flextronics will deliver conservative CTG guidance despite many new Motorola devices
hitting the market. We are forecasting a 28% YOY decline in CTG. CTG weakness is
expected to be offset by strength in IEI and HRS. We anticipate profitability to be flat
QOQ driven by stable opex. Share buybacks are expected to lift EPS to $0.26.
Recommendation
■ Maintain Sector Perform. We believe Flextronics is more exposed to the risks of the
consumer end-market than its peers. Also recent stock performance has increased
relative valuation, leaving us SP on the name.
Rating:
Risk:
SP
Med
Target:
1-Yr
US$11.70
Q2/F15 preview: CTG weighs on the top line
Graña y Montero SAA (GRAM-N US$13.69)
GRAM Q3/14 Preview
EPS15E:
EPS16E:
$0.97
$1.15
Valuation:
5.5x forward EV to FY16E EBITDA
Key Risks to Target:
Margin pressure could lower EPS
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Paul Figueroa Mantero, MSc, MBA - +511-211-5918
(Scotia Sociedad Agente de Bolsa SA)
Event
■ Graña y Montero will report Q3/14 results on October 30.
Implications
■ GRAM's third quarter revenues should be strong. We expect revenue growth of 16.6%
YOY, backed by a sound performance from the Infrastructure business line, which we
forecast to post growth of 32.0%. The most relevant business line, Engineering &
Construction (E&C), should post activity growth of 14.7%.
■ The EBITDA margin should decrease ~220 bps on lower profitability coming from the
E&C division given higher civil works costs. Thus, we forecast EBITDA to reach PEN
~211.5 million, implying a decrease of 2% YOY. We expect GRAM to post EPS of PEN
0.074, below last year's mark of PEN 0.125. In conjunction with lower margins, bottom
line results will be pressured by a currency exchange loss (PEN ~24 million vs. a gain of
PEN 65 million in Q3/13).
■ We expect the backlog to decrease 7.7% YOY, to reach US$ ~3.67 billion as no material
contacts were signed during the quarter.
■ We expect GRAM to post a Total Debt-to-EBITDA ratio of 1.35x and a Net Debt to
EBITDA ratio of 0.22x.
Recommendation
■ We reiterate our SO rating and our 1-year TP of US$19.80 per ADR.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
Med
--
$19.80
EPS14E
PEN 0.40 PEN 0.42
EPS15E
PEN 0.51 PEN 0.50
EPS16E
PEN 0.60 PEN 0.59
New Valuation:
-Old Valuation:
Sum of the parts, Implied ~7.6x EV/EBITDA
2015E Multiple
Key Risks to Target:
Rising of social conflicts, political risk
Div. (NTM)
US$0.04
Div. (Curr.)
Yield (Curr.)
US$0.15
0.6%
12
Edge at a Glance
Monday, October 27, 2014
Grupo Financiero Banorte, SAB de CV (GFNORTE O-MX MXN 84.90)
Q3/14 Earnings Call Highlights: Positives Offsetting Negatives
Claudia Benavente A. - +562 2692 6568
(Scotia Corredora de Bolsa Chile SA)
Event
■ Banorte held its Q3/14 earnings conference call today and provided further guidance on
what to expect for the remainder of the year.
Implications
■ Management indicated that NIM should continue to grow, as the bank's focus on
increasing demand deposits should continue to improve the cost of funding.
■ Although Banorte posted its best-ever efficiency ratio in Q3/14 (47.8% vs. 49.1% in
Q2/14 and 53.9% in Q3/13), management expects non-interest expenses to grow as the
cost of IT investments begins to be amortized; management expects most of these costs
to be offset by a continuing increase in fees.
■ Corporate prepayments are causing a slowdown in loan growth and were characterized
as a system-wide issue. However, Banorte's business diversification has helped to offset
the effect.
■ In line with our view, Banorte's CEO explained that, while the bank has no M&A plans
in the short term, it certainly would evaluate opportunities in the future but that any
potential transaction would have to be approved by the majority of shareholders.
Recommendation
■ As most of the uncertainties regarding changes at Banorte's board of directors are now in
the past, we believe the stock will continue to trade upwards, regaining its previous
valuation levels. Buy Banorte.
Pertinent Data
New
Old
Rating:
--
SO
Risk:
Target:
1-Yr
--
Med
--
111.00
EPS14E
-5.77
EPS15E
-6.93
EPS16E
-8.41
New Valuation:
15.9x 2015 EPS estimate
Old Valuation:
16.8x 2014 EPS estimate
Key Risks to Target:
Political, economic, capital flows, systemic,
regulatory, interest rates, and credit.
Div. (NTM)
1.04
Div. (Curr.)
Yield (Curr.)
0.98
1.2%
Grupo Televisa, SAB (TV-N US$34.31)
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
Event
Pertinent Data
■ Televisa held its Q3/14 earnings call.
Implications
■ The company explained that it is unlikely to meet its content guidance for the year. In
response to the 6.4% YOY drop in ad revenues in Q3, Televisa launched a cost-cutting
strategy aimed at reaching its 44.0% margin guidance.
■ Management recognized that free-to-air ratings were down slightly on a yearly basis,
which seems to be in line with the IBOPE information published by Lamac. In our view,
cutting costs could worsen the performance of ratings in the future, accelerating growth
of restricted channels and online substitutes, in our view.
■ TV clarified that the Q3 royalties from Univision were positively impacted by a one-off
item, without which growth would have been ~10.0% vs. the 22.4% reported by the
company.
■ Televisa explained that it exited Iusacell because it wanted to merge the asset with
Telefonica, a view not shared with its former partner. However, the company remains
interested in mobility and mentioned the possibility of creating an MVNO. Management
remains interested in consolidating cable. Margins for Bestel and for Cablecom were
strong and management feels confident in maintaining them.
Recommendation
■ Our rating remains unchanged.
Rating:
SU
Risk:
Target:
1-Yr
High
Q3 Call Highlights: Not Meeting Content Guidance
US$28.00
EPS14E:
MXN 1.70
EPS15E:
MXN 2.85
EPS16E:
MXN 2.74
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%
13
Edge at a Glance
Monday, October 27, 2014
George Doumet - (514) 350-7788
(Scotia Capital Inc. - Canada)
MTY Food Group Inc. (MTY-T C$30.50)
Wok'in into the US Market
Event
Pertinent Data
■ MTY entered into a binding agreement to acquire the assets of a group of companies that
own and operate Manchu Wok, Wasabi Grill & Noodles, and SenseAsian. Total
considerations of $7.9M will be funded via cash and the transaction is expected to close
before Dec 16, 2014.
Implications
■ The group has 133 stores which are located in Canada (68 franchised & 14 corporate)
and the United States (46 franchised & 5 corporate). The network generated $95M of
SWS in the most recent fiscal year.
■ We estimate the transaction multiple at ~4.5x EBITDA C13 vs. the company's current
trading multiple of 11.4x F15. We estimate F15 accretion in the range of 4% to 5% on
EBITDA and FCF. From a strategic point of view, we like the acquisition given its
potential distribution synergies and continued roll-out of operations in the US.
■ The pace of acquisitions is accelerating. This marks the fifth acquisition in the LTM
(~$100M deployed vs. ~$40M from 2011 to 2013). We believe the appetite for largescale M&A is present and estimate that a ~$117M levered acquisition (1.5x EBITDA
[NTM]) would be accretive by ~34% and ~22% to EBITDA and EPS, respectively.
Recommendation
■ Raising target to $36. We continue to like MTY for: (1) continued growth via accretive
acquisitions, (2) an under-levered balance sheet (0.3x net debt/EBITDA vs. peers at
~1.9x) lending itself to potentially large M&A, and (3) industry-leading FCF profile and
return metrics.
Organización Soriana, SAB de CV (SORIANA B-MX MXN 43.86)
New
Old
Rating:
--
SO
Risk:
Target:
1-Yr
--
Med
$36.00
$35.00
EBITDA14E
-$43.0
EBITDA15E
$52.3
$50.1
EBITDA16E
$52.6
$50.3
New Valuation:
-Old Valuation:
13.0x EV/EBITDA on 2016E
Key Risks to Target:
Identifying and integrating acquisitions,
macroeconomic environment, succession
issues
Div. (NTM)
$0.34
Div. (Curr.)
Yield (Curr.)
$0.34
1.1%
Rodrigo Echagaray, MBA, CFA - (416) 945-4405
(Scotia Capital Inc. - Canada)
New Corporate Image, Same Results: EBITDA Declines 12% in Q3, SSS Falls 5.4%
Event
■ Soriana posted weak results for the quarter, as expected. EBITDA declined 12% YOY
(we anticipated an EBITDA decline of 11% YOY).
Implications
■ Revenues fell 4% due to a SSS decline of -5.4% (the lowest in the sector). Soriana
attributes this to: (1) the temporary closure of some stores due to remodeling and (2) lost
sales in 5 stores due to hurricane Odile. We would add to that significant market share
losses to HEB (according to our channel checks) and structural negative traffic trends.
■ Soriana was apparently not as promotional in Q3, which led to gross margin expansion.
However, a higher service focus at stores (more headcount at some stores) coupled with
the remodeling efforts, led to an EBITDA margin contraction of 60 basis points.
Financial expenses declined along with leverage (40% lower YOY). Due to a lowerthan-expected effective tax rate (unexpected deferred tax benefit) net income increased
2.3% YOY (we anticipated a net income decline of 14%).
Recommendation
■ The company's remodelling efforts, higher focus on service and perishables, and the
SAP installation (likely to be finished in Q1/15) are all positive initiatives. However, we
think it will take time before customers realize these changes and traffic to the stores to
improve. We maintain a Sector Underperform rating on Soriana.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
EBITDA14E
EBITDA15E
Old
---
SU
Med
--
36.00
7,166
7,808
7,182
8,047
New Valuation:
-Old Valuation:
2014E-2020E DCF w/ 10.3% WACC; 8x
(NTM) EV/EBITDA; 17X (NTM) P/U
Key Risks to Target:
Operating performance, consumer behavior,
tax reforms
Div. (NTM)
Div. (Curr.)
0.28
0.00
Yield (Curr.)
0.0%
14
Edge at a Glance
Monday, October 27, 2014
Penn West Exploration (PWT-T C$5.31)
Further Asset Sale Highlights Execution of Strategic Refocusing
Event
■ Penn West announced the sale of non-core assets in south central Alberta for $355
million.
Implications
■ Non-core producing asset disposition. Penn West disposed of 7,500 boe/d of non-core
assets located in south central Alberta. The assets, which are 80% weighted to natural
gas and NGLs, were sold for $355 million. The transaction implies a valuation of
~$47,000/boe/d and includes less than 5% of the company's total 2013 2P reserve base
of 625 mmboe.
■ Deal in line with planned strategic realignment. In November 2013 Penn West
announced asset base consolidation plans with the aim of debt reduction and focusing
operations on core areas. Those plans called for non-core asset sales of $1.5 billion-$2.0
billion before 2015. Penn West has disposed of ~$1.0 billion in assets since the
announcement of its strategic repositioning.
■ Production guidance reaffirmed. Penn West maintains its annual average production
estimate of 101,000-106,000 boe/d. Management has indicated that they expect
production to skew towards the higher end of the guidance range due to solid
performance from base production as well as new production growth.
Recommendation
■ We maintain our SP rating and one-year price target of $9.75/share.
Rio Alto Mining Ltd. (RIO-T C$2.70)
Peru Site Trip Highlights RIO's Expertise
Patrick Bryden, CFA - (403) 213-7750
(Scotia Capital Inc. - Canada)
Pertinent Data
New
Old
Rating:
--
SP
Risk:
Target:
1-Yr
--
High
--
$9.75
CFPS14E
$1.94
$1.92
CFPS15E
$1.50
$1.36
New Valuation:
-Old Valuation:
0.6x our 2P NAV plus risked upside.
Key Risks to Target:
Crude oil and natural gas prices; CAD/USD
exchange rate; drilling program success
Div. (NTM)
Div. (Curr.)
$0.56
$0.56
Yield (Curr.)
10.5%
Ovais Habib - (416) 863-7141
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ We visited RIO's 100%-owned La Arena gold mine and Shahuindo gold project in Peru
on October 22 and 23.
Implications
■ Overall we were impressed with RIO's achievements at La Arena, especially given the
challenging topography, and believe that after La Arena, Shahuindo should be fairly
straightforward for RIO's team.
■ At Shahuindo, RIO has now acquired 100% of the surface land rights needed to support
a 10,000 tpd operation, which is a very positive development in our view. Met work
anticipated to be completed in Q1/15 and a 4 Mt starter heap leach pad (construction to
begin in Q3/15E) will help RIO optimize crush, leach, and geotech parameters for the
full-scale pad while providing a quick path to cash flow. RIO is focused on reducing or
eliminating the need for two-stage crushing.
■ La Arena is now operating on full grid power after the changeover on October 23,
reducing power costs from 40¢/kWhr to ~7¢/kWh (cash cost savings of ~$10-$12/oz).
Watch for a new reserve estimate in early 2015, which we expect will show an increase
in contained gold net of depletion after RIO's exploration success in 2014.
■ Shahuindo represents 48% of our asset NAV estimate for RIO, with La Arena making up
the remaining 52% (38% oxides and 15% sulphides).
Recommendation
■ We rate RIO Sector Outperform with a C$3.00 one-year target price.
Rating:
SO
Risk:
Target:
1-Yr
High
C$3.00
Adj. EPS14E:
US$0.21
Adj. EPS15E:
US$0.12
Adj. EPS16E:
US$0.13
Valuation:
1.00x NAVPS
Key Risks to Target:
Multiple contraction, commodity prices,
technical and operational risks, and
geopolitical risks
Div. (NTM)
Div. (Curr.)
$0.00
$0.00
Yield (Curr.)
0.0%
15
Edge at a Glance
Monday, October 27, 2014
Westshore Terminals Investment Corporation (WTE-T C$33.99)
Q3 Beats But Capex Plan Pushed Out Slightly
Turan Quettawala, MBA, CFA - (416) 863-7065
(Scotia Capital Inc. - Canada)
Event
■ WTE's Q3 adj EPS of 50¢ was in line with consensus (51¢).
Implications
■ Both coal throughput (8.6Mt) and loading rate ($10.03/tonne) were up 5% YOY, with
revenues up 9% to $88.5M. Loading rates were supported by a weaker C$. EBITDA of
$53.5M was up 22% YOY, with strong margin expansion (650 bps to 60.4%) that was
helped by lower operating costs. 2014 throughput guidance of 31-32Mt is unchanged
while completion of the $270M capital project - which includes 2-3Mt expansion - has
been pushed back from 2018 to early 2019.
■ We increased our 2015 EBITDA estimate by a touch to reflect better-than-expected
loading rates - now looking for $10.06/t (3% YOY rate growth). We note that the
positive impact of the weaker C$ should start to reduce significantly starting in Q4
unless there is another leg down in the C$. Our 32.7M throughput assumption for 2015
remains unchanged.
Recommendation
■ WTE shares have been volatile recently mainly due to the market. On a YTD basis, the
shares are basically flat. While we do not expect WTE to be negatively impacted by the
coal price weakness due to the contracted nature of its volumes, we also think that there
is little upside potential to earnings or dividends in the NT. Our view is unchanged as is
our SU rating as we believe there are other better opportunities for upside in our
coverage universe.
Pertinent Data
New
Old
Rating:
--
SU
Risk:
Target:
1-Yr
--
Med
$35.50
$35.00
EPS14E
$1.69
$1.65
EPS15E
$1.79
$1.76
New Valuation:
-Old Valuation:
Equally wtd. DCF and 13.5x EV/NTM EBITDA
(one-year fwd.)
Key Risks to Target:
Decline in coal exports and slower-thanexpected economic growth
Div. (NTM)
Div. (Curr.)
$1.32
$1.32
Yield (Curr.)
3.9%
16
Companies Reporting
Monday, October 27, 2014
Companies Reporting
Reporting
Date
Conference Call Details
(time, number, pass code)
Agellan Commercial REIT (ACR.UN-T)1
Wednesday, May-07, 2014 at 2:00 PM EST. Dial In: 416-340-2217 / 866-696-5910
27-OCT-14
(Code:4880154) Replay: 905-694-9451 / 800-408-3053 (Code: 6689122)
Est.
for
Qtr
Earnings
Last
Year’s
Qtr
Most
Recent
Qtr
Year
End
Qtr
Dec
3
$0.29
$0.31
$0.29
3
$1.09
$0.93
$1.15
Dec
3
$0.06
$0.05
$0.03
Dec
3
$0.50
$0.56
$0.37
Dec
2
$0.25
$0.22
$0.23
Dec
3
$0.65
$0.79
$0.59
DH Corporation (DH-T)2
Conference call on October 28 at 10:00 a.m. ET, dial-in 647-427-7450 or 1-888-231-8191
27-OCT-14
Dec
Replay: 416-849-0833 or 1-855-859-2056 passcode 10276078
 The conference call will also be available at www.newswire.ca/webcast/.
IEnova (IENOVA *-MX)
27-OCT-14
No Details
Toromont Industries Ltd. (TIH-T)3
Conf. call on Oct. 28, 2014 at 8:30AM EST. Dial-in: 1-866-223-7781 or 416-340-2216
27-OCT-14
(Toronto) Webcast: www.toromont.com.
 Earnings to be released after market close.
Winpak Ltd. (WPK-T)
27-OCT-14
NA
Freeport-McMoRan Inc. (FCX-N)3
28-OCT-14
Results before market open.
 Conference call at 10:00am EST on Tuesday, October 28. Dial in: 1.800.403.5770 or +1.706.679.8487. Conference ID 91923233.
First National Financial Corporation (FN-T)
Conference call on October 29 at 10:00 a.m. ET, dial-in 1-866-530-1554 or 416-849-1847
28-OCT-14
Replay: 647-436-0148 passcode 6090692
Barrick Gold Corporation (ABX-N)3
Results AMC. Conference call next morning at 9:30pm ET: 888-789-9572 (N. America),
29-OCT-14
416-695-7806 (Intl), Passcode: 8055612.
Dec
3
$0.63
$0.63
$0.44
Dec
3
$0.16
$0.58
$0.14
Dec
3
$0.69
$0.73
$0.49
Dec
3
$0.13
$0.35
$0.28
Dec
3
$0.03
$0.09
$0.05
Dec
3
-$0.05
-$0.01
-$0.13
Dec
3
$0.43
$0.43
$0.32
ATCO Ltd. (ACO.X-T)3
29-OCT-14
No Call
Agnico Eagle Mines Limited (AEM-N)3
Results AMC. Conference call next morning at 11:00am ET: 416-847-6330 or 866-53029-OCT-14
1553.
Yamana Gold Inc. (AUY-N)3
Results AMC. Conference call next morning at 8:30am ET: 866-225-0198 (N. America) or
29-OCT-14
416-340-2218 (Intl).
Centerra Gold Inc. (CG-T)3
29-OCT-14
Conference call: October 30, 11:00am EST. (416) 359-3130 or (800) 675-6207.
 After Market Close
Canadian Utilities Limited (CU-T)3
29-OCT-14
No Call
17
Companies Reporting
Monday, October 27, 2014
Reporting
Date
Conference Call Details
(time, number, pass code)
Est.
for
Qtr
Earnings
Last
Year’s
Qtr
Most
Recent
Qtr
Year
End
Qtr
Mar
3
$0.26
$0.22
$0.22
Dec
3
$0.06
$0.03
-$0.00
Dec
3
$0.05
$0.05
$0.07
Dec
3
$0.60
$1.22
$0.94
Dec
4
-$0.17
-$0.13
-$0.12
3
$0.28
$0.44
$0.13
Dec
3
$0.14
$0.21
$0.22
Dec
3
$0.10
$0.09
$0.10
Dec
3
$1.95
$1.87
$1.76
Dec
3
$0.20
$0.27
$0.16
Dec
3
$0.56
$0.52
$0.54
Dec
3
$0.05
$0.08
$0.05
Flextronics International Ltd. (FLEX-O)
29-OCT-14
5:00 p.m. EDT, Dail in: 888-790-2010 Passcode: Q2Flex
HudBay Minerals Inc. (HBM-T)3
29-OCT-14
Results after market close.
 Conference call TBD on Thursday, October 30. Dial in: TBD.
Lundin Mining Corporation (LUN-T)3
29-OCT-14
Results after market close.
 Conference call TBD on Thursday, October 30. Dial in: TBD
Methanex Corporation (MEOH-Q)3
29-OCT-14
Sherritt International Corporation (S-T)3
29-OCT-14
Results before market opens.
 Conference Call at 2:00pm ESTon Wednesday, October 29. Dial in: 1.866.530.1553 or 416.847.6330.
Teck Resources Limited (TCK.B-T)3
29-OCT-14
Results before market open.
Dec
 Conference call at 11:00am EST on Wednesday, October 29. Dial in: 416.340.2216 or 1.866.225.0198.
AltaGas Ltd. (ALA-T)3
30-OCT-14
October 30, 11:00 AM ET, 866-852-2121
Bombardier Inc. (BBD.B-T)
30-OCT-14
Conference call at 8AM ET at 866-240-8954
Bunge Limited (BG-N)3
Conf. call on Oct. 30, 2014 at 10:00AM EST. Dial-in: (866) 436-9172 or (630) 691-2760
30-OCT-14
(international). Code: 38313526. Webcast: www.bunge.com.
 Earnings to be released before market open.
Compañía de Minas Buenaventura SAA (BVN-N)3
Results AMC. Conference call next morning at 11:00am ET: 800-311-9401 or 334-32330-OCT-14
7224. Passcode: 15403
Catamaran Corporation (CTRX-Q)
30-OCT-14
Conference call at 8:30 a.m., dial-in: 1-888-277-7138
Eldorado Gold Corporation (EGO-N)3
Results AMC. Conference call next morning at 11:30am ET: 416-340-8527 or 800-44630-OCT-14
4472.
18
Companies Reporting
Monday, October 27, 2014
First Quantum Minerals Ltd. (FM-T)3
30-OCT-14
Results after market close.
Dec
3
$0.28
$0.24
$0.23
 Conference call at 9:00am EST on Friday, October 31. Dial in: 1.800.750.5857 (North America) or 44 207 855 8972 (UK)
Goldcorp Inc. (GG-N)3
30-OCT-14
Results BMO. Conference call at 1:00pm ET: 800-355-4959 or 416-695-6617.
Dec
3
$0.16
$0.23
$0.20
Dec
3
$1.39
$1.29
$1.43
MacDonald, Dettwiler and Associates Ltd. (MDA-T)
30-OCT-14
conference call at 5:30pm (EST) at 1-888-390-0546
 The conference call will also be Webcast live and then archived at:
available at http://www.mdacorporation.com/corporate/investor/events.cfm
Maple Leaf Foods Inc. (MFI-T)4
Conference call on Oct. 30, 2014 at 2:30PM EST. Dial-in numbers: 416-340-9432 or 80030-OCT-14
952-4972. Webcast: www.mapleleaffoods.com
Dec
3
$17.49
$55.57
$5.96
Dec
3
$0.57
$0.51
$0.70
3
$0.17
$0.53
$0.20
Dec
3
$0.02
$0.04
$0.02
Dec
3
$0.19
$0.20
$0.11
Jun
1
$0.26
$0.21
$0.23
Dec
3
$249.11
$266.31
$213.00
Dec
3
$0.49
$0.38
$0.48
Dec
3
$0.46
$0.48
$0.51
Dec
3
$0.68
$0.90
$0.87
Dec
2
n.a.
n.a.
n.a.
 Earnings to be released before market open.
The Mosaic Company (MOS-N)
30-OCT-14
Newmont Mining Corporation (NEM-N)3
Results on AMC. Conference call next morning at 10:00am ET: 888-469-0880 or 415-22830-OCT-14
Dec
3922 (Intl). Passcode: Newmont.
New Gold Inc. (NGD-A)3
30-OCT-14
Conference call: October 30, 9:00am EST. (647) 427-7450 or 1-888-231-8191.
 Before Market Open
NuVista Energy Ltd. (NVA-T)5
30-OCT-14
Royal Gold Inc. (RGLD-Q)3
Results BMO. Conference call at 12:00pm ET: 866-270-1533(US) or 855-669-9657 (Cda)
30-OCT-14
or 412-317-0797 (Intl). Passcode: Royal Gold.
TransAlta Corporation (TA-T)2
30-OCT-14
October 30, 3:00 PM ET, 1-800-319-4610
TransForce Inc. (TFI-T)
30-OCT-14
Conference call on Oct 31 at 9AM ET at 888-231-8191
Thomson Reuters Corporation (TRI-T)
30-OCT-14
Conference call at 8:30 a.m. EST Dial-in 888-276-0006; International: 612-332-0335
 Simultaneous webcast of conference call via corporate website (www.thomsonreuters.com)
Lightstream Resources Ltd. (LTS-T)5
31-OCT-14
Pattern Energy Group Inc. (PEGI-Q)5
31-OCT-14
October 31, 10:30 AM, (647) 427-7450 or (888) 231-8191
19
Companies Reporting
Monday, October 27, 2014
TransAlta Renewables Inc. (RNW-T)5
31-OCT-14
No Call
Dec
2
n.a.
n.a.
n.a.
Source: Scotiabank GBM estimates.
Table of Contents
1
Funds From Operations
2
EBITDA
3
Adj Earnings
4
Adj EBITDA
5
Cash Flow
20
Industry Comment
Monday, October 27, 2014, Pre-Market
LatAm Airports
Rodrigo Echagaray, MBA, CFA - (416) 945-4405
(Scotia Capital Inc. - Canada)
Upping Estimates on Oma on
Strong Q3 Results; Remains Our
Top Pick in a Richly Valued Sector
[email protected]
Karla B. Peña - +52 (55) 9179 5211
(Scotiabank Inverlat)
[email protected]
Event
■ We have adjusted our models to reflect Q3 results in the sector. We are
increasing our price target on Oma from US$32 to US$36 to reflect strong
Q3 results ahead of estimates. We continue to think Oma remains the most
appealing alternative in a richly valued sector.
ScotiaView Analyst Link
Implications
■ Oma reported the strongest results in the sector on remarkable EBITDA
growth of 23% YOY (vs. our +16% estimate). Management increased
guidance in both PAX and EBITDA; our new EBITDA growth estimate for
2014E (+13.4%) is roughly in line with management's new guidance.
■ Gap and Asur reported broadly in line with estimates, with EBITDA
growing 8% and 9% YOY, respectively. Our thesis on Gap remains
unchanged: we believe the risk of overhang has increased recently as a
result of transactions within the controlling group and hence remain
cautious on the stock. As for Asur, we continue to think commercial
revenues should be under pressure due to limited terminal capacity in
Cancun, and expect SG&A pressure going forward as new terminal space in
Cancun is built.
Recommendation
■ At 13.2x EV/EBITDA 2015E Oma remains the best alternative in the sector,
in our view. We remain neutral on Gap (~13.1x EV/EBITDA 2015E), and
maintain our sell rating on Asur (14.3x EV/EBITDA 2015E) despite a sharp
underperformance YTD (Oma +47%, Gap +36%, Asur +7%).
Universe of Coverage
Price
ASR-N
OMAB-Q
PAC-N
US$128.80
US$37.76
US$70.22
Rating
Risk
SU
SO
SP
Medium
Medium
Medium
1-Yr
ROR
$106.00
$36.00
$67.00
-15.3%
1.1%
-1.9%
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.
21
LatAm Airports: Q3/13 Results Summary
■ Oma posted the best quarterly earnings of the sector after reporting EBITDA growth
of 23% YOY, 6% higher than our estimates. Total PAX increased 9.2% YOY, which led
to aeronautical revenues growing 12.8% YOY. Commercial revenues per PAX continued
with the slower trend that began in Q2 of this year, though this is explained by tough comps
(commercial revenues per PAX increased 10% last year). Net income increased 19% (12%
above estimates) on a strong operating profitability and despite increasing financing costs:
Net debt went from MXN1 billion to MXN2 billion, but Net debt to EBITDA remains at a
very healthy 1.2x as at Q3/14. Finally, Oma updated its guidance for the year: PAX growth
between 8% and 10% (from 6%-8%), Revenues growing between 10% and 12% (from 9%11%), Adjusted EBITDA margins between 54% and 56% (from 52%-54%) – our new
estimates are roughly in line with management’s new guidance.
■ Gap’s Q3 results were affected by hurricane Odile, which resulted in PAX growth of
only 3%. That in turn led to revenue growth of 6.4%. It is worth noting the positive
performance on commercial revenues per PAX, which increased 8% YOY. In fact, this is
the third quarter in a row where Gap increases commercial revenues per PAX at a high
single-digit rate. This is mostly due to in-house initiatives such as convenience stores,
advertising, and VIP lounges’ operations. Despite lower PAX due to hurricane Odile, Gap
managed to increase EBITDA margins YOY, which resulted in EBITDA growth of 8%
(in line with estimates). Net income increased 15% YOY and substantially above estimates
on a lower-than-expected effective tax rate (i.e., higher deferred income taxes).
■ On the back of PAX growth of 9%, Asur increased total revenues only 8.8% YOY.
Stagnant revenues on a PAX basis are due to: (1) lower aeronautical tariffs established in
Asur's most recent Master Development Plan, and (2) a limited terminal capacity at Cancun
airport. We expect this pressure on commercial revenues to continue until the new terminal
is built (i.e., duty free revenues declined 3% YOY). EBITDA for the quarter increased
9% YOY (vs. our +7% estimate). Net income grew nearly 14% YOY (ahead of estimates)
despite higher FX losses (US$-denominated debt and a weaker MXN) due to lower taxes and
a higher-than-expected contribution from the Puerto Rico JV (MXN21.3 million).
Passengers at Puerto Rico increased 3.7% YOY.
Exhibit 1 – Summary of Sector Results (PAX growth, Revenue growth, EBITDA growth)
25%
23%
20%
15%
12%
10%
9%
9%
5%
9%
9%
8%
8%
3%
0%
PAX
REVENUE
ASUR
Source: Company reports.
OMA
EBITDA
GAP
22
Exhibit 2 – Asur Q3/13 Results
Asur, MXN million
Passengers (000')
Total Revenues ex-construction
EBITDA
EBITDA margin
EPS
Q3/13
5,284
1,197
806
67.3%
1.70
Scotia
5,756
1,289
863
66.9%
1.75
Q3/14e
Consensus
na
na
857
na
1.83
Q3/14a
Q3/14a
5,756
1,302
880
67.6%
1.94
YOY, %
8.9%
8.8%
9.2%
27.8bps
13.8%
Actual /
Scotia
Consensus
1.0%
1.9%
63.6bps
10.8%
na
3%
na
6%
Source: Company reports; Scotiabank GBM estimates, Bloomberg.
Exhibit 3 – Oma Q3/13 Results
OMA, MXN million
Passengers (000')
Total Revenues ex-construction
EBITDA
Adj. EBITDA margin
Net Income
EPS
Q3/13
3,620
817
444
54.3%
227
0.57
Scotia
3,579
914
514
56.2%
241
0.61
Q3/14e
Consensus
na
na
414
na
na
0.58
Q3/14a
3,953
912
545
59.8%
270
0.68
Q3/14a
YOY, %
9.2%
11.6%
23.0%
550bps
18.6%
19.6%
Scotia
na
-0.2%
6.1%
356bps
11.9%
11.7%
Actual /
Consensus
na
na
31.7%
na
na
18.3%
Scotia
6,129
1,296
874
67.4%
440
0.78
Q3/14e
Consensus
na
na
903
na
418
0.80
Q3/14a
6,129
1,291
875
67.8%
534
0.95
YOY, %
3.1%
7.6%
8.1%
33 b ps
14.9%
14.9%
Scotia
0%
0%
0%
35 b ps
21%
21%
Actual /
Consensus
na
na
-3%
na
28%
19%
Source: Company reports; Scotiabank GBM estimates, Bloomberg.
Exhibit 4 – Gap Q3/13 Results
GAP, MXN million
Passengers (000')
Total Revenues ex-construction
EBITDA
EBITDA margin ex. construction
Net Income, MXN million
EPS
Q3/13
5,948
1,200
809
67.5%
465
0.83
Source: Company reports; Scotiabank GBM estimates, Bloomberg.
Exhibit 5 – Oma Estimates, Old vs. New
OMA
Total PAX
Revenue
EBITDA
Net Income
2014E
Old
New
14,357
14,520
3,387
3,406
1,805
1,892
906
968
Source: Company reports; Scotiabank GBM estimates.
% Diff
1.1%
0.6%
4.9%
6.8%
2015E
Old
New
15,207
15,380
3,765
3,785
2,047
2,126
977
1,049
% Diff
1.1%
0.5%
3.9%
7.4%
23
Pertinent Data
Rating Risk
1-Yr
Target
Key Data
Year 2
Year 1
Year 3
Valuation
Grupo Aeroportuario del Sureste, SAB de CV (ASR-N)
Valuation: 2014-2020 DCF w/ 9.4% WACC; 11x NTM EV/EBITDA
Key Risks to Price Target: RM Airport, hurricanes, Government regulation
Grupo Aeroportuario Centro Norte, SAB de CV (OMAB-Q)
New
$36.00
EBITDA14E: MXN
1,892
EBITDA15E: MXN
2,126
EBITDA16E: MXN
2,351
Old
$32.00
EBITDA14E: MXN
1,805
EBITDA15E: MXN
2,047
EBITDA16E: MXN
2,267
Valuation: 2014-2020 50%-DCF w/ 8.3% WACC & 50%-10x EV/EBITDA
Key Risks to Price Target: Govmnt. regulation, troubled domestic airlines
Grupo Aeroportuario del Pacífico, SAB de CV (PAC-N)
New
EBITDA14E: MXN
3,692
EBITDA15E: MXN
4,094
EBITDA16E: MXN
4,445
Old
EBITDA14E: MXN
3,713
EBITDA15E: MXN
4,127
EBITDA16E: MXN
4,480
Valuation: 2013-2020 DCF w/ 9.7% WACC; 11x NTM EV/EBITDA
Key Risks to Price Target: Govmnt. regulation, troubled domestic airlines
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
Industry Comment
Monday, October 27, 2014, Pre-Market
LatAm Utilities
Ezequiel Fernández López, CFA - +56 9 9991 9152
(Scotia Corredora de Bolsa Chile SA)
Q3/14 Preview - Small Is Beautiful
[email protected]
Event
■ We expect small & mid-sized gencos to lead Q3/14 growth, on favorable
FX and solid operational stats. Heavyweights ENI and SBS should lag.
ScotiaView Analyst Link
Implications
■ The main themes for Andean power stocks during the third quarter include
better hydro in Chile, the good hydrology and high spot price combo in
Colombia, the continued challenges in Brazil, and the worrying volume
contraction in Argentina.
■ We expect AES Gener, Colbun, and ECL to post solid bottom-line growth,
while Endesa and especially Enersis should face tough comps and continued
weak performance at Brazilian discos.
■ The LatAm Water space is dominated by Sabesp's critical stance regarding
reservoir levels. However, Copasa added volume softness to the prognosis.
The game for Brazil water plays now seems to be about when "cheap"
becomes "just too cheap." Aguas/A appears to be a safe haven, with the
benefit of an improved entry point.
■ Finally, the Chilean SVS announced that non-cash losses stemming from
changes in Chile taxes should by-pass the P&L and flow straight to equity.
We have tweaked our estimates to reflect this and the latest operational data.
Recommendation
■ Within Andean Power, we believe the Q3/14 earnings outlook favors our
preference for ECL and AES Gener. Also, Copasa shares have been overly
punished on political fears in our view and we maintain our SO rating.
Universe of Coverage
Price
AESGENER-SN
AGUAS-A-SN
COLBUN-SN
CSMG3-SA
ECL-SN
ENDESA-SN
ENERSIS-SN
IENOVA *-MX
SBSP3-SA
CLP 318.96
CLP 345.08
CLP 156.98
R$29.23
CLP 832.54
CLP 884.28
CLP 183.14
MXN 80.71
R$18.30
Rating
Risk
SO
SP
SU
SO
SO
SP
SP
SP
SP
Medium
Low
High
Medium
Medium
Medium
Medium
Medium
Medium
1-Yr
ROR
350.00
375.00
145.00
R$39.00
925.00
850.00
195.00
80.00
R$21.00
13.9%
14.4%
-7.3%
37.0%
16.1%
-0.5%
11.0%
1.4%
20.1%
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.
Q3/14 Preview – Small Is Beautiful
■ The main sector themes for Andean Power during the quarter were the pickup in hydrology
in Chile, the profitable combination of high spot prices and solid hydro output in Colombia,
the continued challenges in Brazil regarding “involuntary spot market exposure” for discos,
and, finally, the worrying contraction signals in Argentina.
■ Small and medium-sized Chilean gencos should be in the spotlight in Q3/14. We expect AES
Gener, ECL, and Colbun to post solid YOY improvements on the bottom line, measured
both in CLP (relevant for valuation) and USD (relevant for gauging performance). FX
tailwinds, higher hydro output, and better pricing should help the sector lightweights post the
best growth results in our space.
■ Large caps Endesa and Enersis should show a more mixed picture. While quarterly Adjusted
EBITDA should post decent growth (at least for Endesa) when measured in CLP, we expect to
see both Enersis and Endesa posting YOY Adj. EBITDA contractions when measured in USD.
We believe that the higher hydro output in Chile and Colombia will not be enough to offset a
tough comparison base for Endesa. Of note, during Q3/13 the company recorded US$147M in
“Other Revenues” and it remains unclear to us how much of this is re-occurring in nature.
■ Within LatAm Water, Aguas Andinas looks poised to be the Q3/14 winner. The company
should be the only water play in LatAm to post YOY growth on the bottom line (measured in
CLP). Brazilian water plays remain in a delicate situation. First, Copasa volumes per customer
show weak performance on an unfavorable calendar days effect and, likely, climatic factors.
Second, the discount-induced rationing measures at Sabesp are hammering results. For both
Sabesp and Copasa, the game is now gauging when “cheap” becomes “too cheap”.
■ Regarding the impact of the Chile corporate tax changes, we have tweaked our estimates.
Originally, Chilean utilities guided to sizeable non-cash losses to be booked on the P&L in
Q3/14, accompanied by a commensurate increase in tax liabilities. However, the Chilean
SVS recently announced that according to IFRS guidelines the adjustment should by-pass
the P&L and that corresponding charges should be booked directly against equity.
Accordingly, we eliminated the P&L impact.
■ Overall, we believe that Q3/14 earnings prospects support our Sector Outperform
recommendation for ECL and AES Gener. Moreover, and despite the solid YOY
improvement, we believe that they also sustain our Sector Underperform recommendation
for Colbun. With the highest quarterly load factors in the last four years, Colbun EBITDA
appears unlikely to surpass US$150M.
Exhibit 1 – LatAm Utilities Q3/14 Earnings Preview (excluding IEnova, already reported on Oct 22).
Source: Company reports; Scotiabank GBM estimates.
Exhibit 2 – LatAm Utilities Coverage Q3/14 Earnings Preview (in USD)
Source: Company reports; Scotiabank GBM estimates.
Exhibit 3 – Coverage Valuation Summary
Pricing as of Thursday 23, October 2014.
Source: Bloomberg; Company reports; Scotiabank GBM estimates.
AES Gener (Sector Outperform, CLP350 price target)
Report Date: November 6, AMC
■ For Q3/14, AES Gener should see a 23% YOY jump in Adj. EBITDA, thanks to the
normalization of results in Chile’s SIC and solid hydro output in Chivor, the Colombia
operation.
■ We believe there are two main issues to analyze for Q3/14 results. The first is related to the
way SING units are coping with the so-called “system overcosts.” In this sense, AES
Gene’sr Q3 operational data does not point in a favorable direction, as high gas output in the
GasAtacama and CTM3 facilities preview difficulties. Second, we also consider it important
to track the overall impact of varying FX and commodity prices on Chile energy pricing.
■ With expansion plans progressing, we believe that results are currently the main value driver
for AES Gener shares. Good Q3/14 results should anchor positive expectations and act as a
catalyst.
Exhibit 5 – AES Gener Colombia Hydro Output
Exhibit 4 – SIC Efficient Ouput vs. Contracted Level
Source: XM.
Source: CDEC SIC, CDEC SING.
Exhibit 6 – AES Gener Q3/14 Earnings Preview
Q3/13A
Q2/14A
Q3/14E
QOQ Chg.
YOY Chg.
Revenues, US$M
540
626
607
-2.9%
12.4%
EBITDA, US$M
141
158
181
14.8%
28.1%
Ownership Adj. EBITDA, US$M
162
173
199
15.2%
22.8%
Chile
85
121
108
-10.7%
26.8%
Argentina
15
6
7
4.6%
-55.3%
Colombia
63
46
85
84.4%
35.9%
Net Income, US$M
50
46
74
60.3%
45.8%
EPS x 1,000 - US$
6.25
5.46
8.76
60.3%
40.1%
Note: ownership adjusted EBITDA includes 50% of Guacolda EBITDA.
Source: Company reports; Scotiabank GBM estimates.
Exhibit 7 – AES Gener Summary
Operational Stats
2010
2011
2012
2013
2014E
2015E
2016E
Capacity, MW
3,674
4,202
4,202
4,472
4,472
4,472
4,492
5,342
Net Generation, GWh
15,993
19,466
21,167
20,449
20,475
21,489
21,684
25,244
Hydro Mix,%
30%
33%
28%
23%
26%
25%
27%
23%
Thermal Mix, %
70%
67%
72%
77%
74%
75%
73%
77%
19,432
21,493
24,595
24,721
25,688
24,663
24,629
28,005
Sales, GWh
2017E
Rev per MWh, US$
86.0
91.8
88.3
85.8
86.2
82.6
85.0
89.5
Fuel Cost per MWh, US$
-49.1
-44.4
-48.7
-46.7
-49.1
-41.9
-40.1
-40.0
Profit per MWh, US$
36.9
47.4
39.6
39.1
37.1
40.7
44.9
49.5
P&L
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Revenues, US$M
1,802
2,130
2,328
2,245
2,342
2,183
2,241
2,623
9.0%
18.2%
9.3%
-3.6%
4.3%
-6.8%
2.7%
17.0%
YOY, %
EBITDA, US$M
474
737
660
649
633
667
758
976
Chile
230
466
355
377
359
356
418
629
Colombia
204
221
244
212
242
274
303
311
Argentina
40
50
61
61
31
37
37
36
EBITDA Margin, %
26.3%
34.6%
28.4%
28.9%
27.0%
30.5%
33.8%
37.2%
YOY, %
28.7%
-10.3%
55.7%
-10.5%
-1.7%
-2.5%
5.4%
13.7%
Net Income, US$M
162
326
210
201
203
226
267
337
EPS x 1,000 - US$
21.0
40.4
26.0
24.9
24.3
26.9
31.8
40.1
-1.8%
YOY, %
-49%
25.0%
21.1%
0.2%
-49.1%
20.9%
-1.7%
DPS, US$
19.8
39.7
39.2
26.0
24.0
14.5
16.1
19.1
Payout, %
48%
189%
97%
100%
96%
60%
60%
60%
EPS, CLP
10.2
19.5
12.5
12.9
13.9
15.9
18.9
23.9
DPS, CLP
10.1
19.2
18.8
13.4
13.8
8.6
9.6
11.4
Balance Sheet & KPIs
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Assets, US$M
5,657
5,829
5,831
6,592
6,932
7,688
8,595
9,084
Liabilities, US$M
3,108
3,300
3,350
3,954
4,305
5,042
5,808
6,112
Equity, US$M
2,549
2,529
2,478
2,543
2,526
2,467
2,586
2,739
Cash, US$M
Net Debt, US$M
663
562
421
816
437
337
394
549
1,535
1,831
1,975
2,054
2,563
3,363
4,356
4,451
Net Debt to EBITDA
3.2
2.5
3.0
3.2
4.1
5.0
5.7
4.6
Own. Adj. EBITDA, US$M
561
813
718
715
712
759
881
1,085
Capex, US$M
356
436
385
584
889
1,058
1,029
514
FCF, US$M
26
139
136
-78
-379
-518
-424
260
ROIC
6.5%
9.8%
6.4%
6.8%
6.2%
5.5%
5.7%
6.7%
ROE
6.4%
12.8%
8.5%
7.9%
7.6%
8.5%
11.1%
13.2%
Market Indicators
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Share Price, CLP
255
275
306
289
-
-
-
-
Share Price, US$
0.55
0.53
0.64
0.55
-
-
-
-
Market Cap, US$ billion
4.4
4.3
5.1
4.4
-
-
-
-
ADTV, US$M
2.4
2.2
2.5
2.5
1.6
Avg PE, LTM
15.0
19.5
19.1
25.6
23.3
20.4
17.1
13.5
Avg PBV
1.52
1.71
1.87
2.09
1.84
1.86
1.76
1.66
Avg Own-Adj. EV/EBITDA
9.4
9.3
9.3
10.3
10.6
10.8
10.3
8.5
Avg Own-Adj. EV/MW, US$M
1.44
1.48
1.52
1.55
1.55
1.70
1.87
1.89
Avg Discount to NRV
37%
35%
33%
30%
37%
35%
29%
29%
Dividend Yield
3.6%
7.5%
6.1%
4.7%
4.4%
2.7%
3.0%
3.5%
Source: Bloomberg; company reports; Scotiabank GBM estimates.
Aguas Andinas (Sector Perform, CLP375 price target)
Report Date: Last Week of November, AMC (estimated).
■ We expect to see Aguas Andinas expand its Adj. EBITDA by a healthy 5.8% YOY during
Q3/14. Although this might look soft after the 13% YOY jump seen during 1H/13, we note
that the superior growth stemmed from easy comps. In particular, during 1H/13 Aguas
Andinas faced fines regarding the water shortage episodes that occurred during the summer
of 2013.
■ For Q3/14 results, we will focus our attention on performance growth of the non-regulated
business and on capex levels, which should start trending up as work on safety storage tanks
ramps up.
■ A three-year trend in declining Chilean interest rates and compressing spreads seems to have
been pretty favorable for Aguas Andinas valuation, as would be expected from a dividend
yield play. The current spread between the central bank BCP one-year yield and the one-year
Prime Rate stands at ~560bps, almost in line with the four-year average and pointing to
neutral conditions.
Exhibit 8 – Chile 1yr Interest Rates (Nominal)
Exhibit 9 – Aguas PE vs. Chile Credit Spread Proxy
7.0%
22
6.0%
20
Aguas/A LTM PE
18
5.0%
16
4.0%
14
3.0%
R² = 56.1%
BCP 1yr interest rate
1yr Prime Rate
12
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
2.0%
10
-0.5%
1yr BCP / Prime Rate
Spread
0.0%
0.5%
1.0%
1.5%
2.0%
Monthly observations from Dec-11 to Sep-14
Source: Bloomberg, Chile Central Bank, Scotiabank GBM est.
BCP refers to Chile Central bank notes.
Source: Chile Central Bank
Exhibit 10 – Aguas Andinas Q3/14 Earnings Preview
Q3/13A
Q2/14A
Q3/14E
QOQ Chg.
YOY Chg.
Revenues, CLP billion
88.8
102.3
95.2
-6.9%
7.2%
EBITDA, CLP billion
51.6
60.2
55.1
-8.5%
6.9%
Ownership Adj. EBITDA, CLP billion
49.2
57.4
52.1
-9.3%
5.8%
46.6
54.2
49.1
-9.4%
5.4%
2.7
3.2
3.0
-6.7%
13.5%
18
23
22
-4.1%
24.0%
2.94
3.80
3.64
-4.1%
24.0%
Santiago Area
Essal
Net Income, CLP billion
EPS, CLP
Note: Ownership Adjusted EBITDA deducts 46.5% of ESSAL EBITDA.
Source: Company reports; Scotiabank GBM estimates.
Exhibit 11 – Aguas Andinas Summary
P&L Driver, CLP billion
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Customers, thousands
3,775
3,879
3,928
4,039
4,130
4,233
4,307
4,382
Water
1,909
1,966
1,984
2,039
2,090
2,132
2,164
2,197
Sewage
1,866
1,913
1,944
1,999
2,039
2,101
2,143
2,185
YoY
2.0%
2.8%
1.2%
2.8%
2.3%
2.5%
1.7%
1.7%
Net Revenues
329
364
383
403
438
462
485
507
YoY
0.3%
10.6%
5.3%
5.2%
8.7%
5.6%
4.9%
4.4%
Revenue per Customer, CLP
75.9
82.1
84.0
85.5
91.3
94.8
100.6
103.4
EBITDA
204
227
243
248
271
284
299
312
YoY
-0.6%
11.3%
6.8%
2.1%
9.2%
5.0%
5.1%
4.5%
EBITDA Margin, %
62.1%
62.5%
63.4%
61.6%
61.9%
61.5%
61.1%
61.1%
54.1
58.6
61.8
61.4
65.6
67.2
69.4
71.3
EBITDA per Customer, CLP
NOPAT
128
141
152
149
163
166
168
171
NOPAT per Customer, CLP
33.9
36.3
38.7
36.9
39.4
39.3
39.0
39.1
Net Income
105
112
122
120
127
136
137
141
EPS, CLP
17.0
18.2
19.8
19.1
20.3
21.7
21.9
22.6
EPS, YoY
-15.7%
6.9%
8.6%
-1.7%
6.5%
6.8%
1.0%
2.9%
Payout, %
100%
100%
100%
100%
100%
100%
100%
100%
DPS, CLP
20.6
17.5
18.9
14.6
19.8
20.3
21.7
21.9
BS Sheet & KPIs
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Customers per Employee
1,962
2,149
2,137
2,180
2,174
2,160
2,165
2,170
Total Losses Ratio, %
29.9%
30.3%
29.8%
28.6%
28.3%
28.1%
27.8%
27.6%
ROIC, %
14.5%
15.1%
15.3%
14.5%
15.2%
15.6%
15.6%
15.6%
ROE, %
17.2%
18.2%
19.4%
18.7%
19.6%
20.4%
20.1%
20.6%
Net Debt
565
621
659
681
681
680
708
754
Net Debt to EBITDA
2.77
2.73
2.71
2.75
2.52
2.39
2.37
2.41
Capex
Capex over Revs, %
FCF
Market Data
69
145
94
86
70
122
127
134
21.1%
39.9%
24.5%
21.3%
16.0%
26.3%
26.2%
26.4%
93
90
98
137
120
147
117
119
2010
2011
2012
2013
2014E
2015E
2016E
2017E
-
Share Price, CLP
245
298
340
339
-
-
-
Share Price, US$
0.52
0.57
0.71
0.65
-
-
-
-
3.2
3.5
4.3
4.0
-
-
-
-
Market Cap, US$B
0.3
5.3
3.4
4.2
-
-
-
-
Avg PE
ADTV, US$M
12.8
14.9
16.1
18.8
16.9
15.8
15.7
15.2
Avg PBV
3.13
2.39
2.59
3.04
3.51
3.18
3.15
3.15
Avg Own-Adj. EV/EBITDA
9.9
10.5
11.1
12.3
10.6
10.1
9.7
9.5
Avg EV/Customer, CLP 000
519
560
644
714
670
653
648
647
Dividend Yield
8.4%
5.9%
5.6%
4.3%
5.7%
5.9%
6.3%
6.4%
Source: Bloomberg; company reports; Scotiabank GBM estimates.
Colbun (Sector Underperform, CLP145 price target)
Report Date: October 29, AMC (estimated).
■ Colbun should post six times the quarterly EBITDA it posted in Q3/13, on the back of new
capacity (Angostura), lower energy commitments, stronger hydro output, and better gas
access. But the question remains, is it enough to validate the rich multiples?
■ In Colbun’s Q3/14 report, we will especially look for the Rev/MWh that the company
realized in the spot market. Importantly, if hydro output continues at this level during 2015,
the higher contract sales to be faced by Colbun during 2015 should be good news. However,
if hydrology falters, the past four years’ headaches could be re-lived.
■ Colbun shares have been closely following hydrological news in Chile. From quite a positive
outlook, we have transitioned to a more moderated one in the last two months. However,
during the last week, the CDEC delivered an update on the snow melting season that was
marginally better than the previous one. We stick to our view that a return to past long-term
averages for hydro output is difficult, given the impact of global warming in Chile.
Exhibit 12 – Colbun Hydro Load Factors
Exhibit 13 – Colbun Dam Volumes September 30, hm3
Source: CDEC SIC.
Source: CNE.
Exhibit 14 – Colbun Q3/14 Earnings Preview
Q3/13A
Q2/14A
Q3/14A
QOQ Chg.
YOY Chg.
Revenues, US$M
461.1
408.0
365.0
-10.5%
-20.8%
EBITDA, US$M
25.9
140.8
148.4
5.4%
472.4%
Net Income, US$M
-10.1
71.6
65.9
-7.9%
-751.2%
EPS x 1,000 - US$
-0.58
4.08
3.76
-7.9%
NM
Source: Company reports, Scotiabank GBM estimates.
Exhibit 15 – Colbun Summary
Operational Stats
2010
2011
Capacity, MW
2,620
2,620
2,962
2,962
3,278
3,278
3,278
3,278
Generation, GWh
9,402
9,781
11,570
11,253
13,121
13,034
13,093
13,294
Hydro Mix, %
59.2%
55.8%
45.2%
43.2%
50.1%
52.1%
53.3%
52.4%
9,437
10,850
11,389
12,824
12,921
13,282
13,094
13,291
Sales, GWh
2012
2013
2014E
2015E
2016E
2017E
Net Spot Position, GWh
504
-933
1,476
-1,225
815
444
331
528
Rev per MWh, US$
98.3
108.0
99.9
111.5
100.7
103.3
105.2
107.0
Fuel Cost per MWh, US$
-52.2
-82.0
-72.1
-79.2
-48.4
-49.9
-47.8
-52.2
Profit per MWh, US$
46.1
26.0
27.8
32.3
52.3
53.4
57.5
54.8
P&L
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Revenues, US$M
1,025
1,333
1,409
1,632
1,502
1,567
1,576
1,627
-11.6%
30.1%
5.7%
15.8%
-8.0%
4.4%
0.5%
3.3%
332
205
284
288
539
546
584
554
EBITDA Margin, %
32.4%
15.4%
20.2%
17.7%
35.9%
34.8%
37.1%
34.1%
YOY, %
EBITDA, US$M
YOY, %
-1.2%
-38.2%
38.7%
1.5%
87.0%
1.3%
7.0%
-5.1%
D&A, US$M
124
125
136
163
183
190
182
185
EBIT, US$M
208
80
148
126
356
356
402
370
EBIT Margin, %
20.3%
6.0%
10.5%
7.7%
23.7%
22.7%
25.5%
22.7%
Net Income, US$M
113
5
110
63
271
237
258
230
EPS x 1,000 - US$
6.4
0.3
6.3
3.6
15.4
13.5
14.7
13.1
YOY, %
-51.7%
-95.3%
1971.1%
-42.9%
330.7%
-12.4%
9.0%
-11.0%
DPS, US$
4.3
2.1
0.0
0.8
1.0
7.7
6.8
7.4
32%
33%
0%
12%
30%
50%
50%
50%
EBITDA, CLP billion
161
100
138
143
310
319
343
328
EPS, CLP
3.1
0.1
3.1
1.8
8.9
8.7
7.7
8.2
DPS, CLP
2.1
1.0
0.0
0.4
0.6
4.5
4.0
4.4
Assets, US$M
5,764
5,620
6,003
6,066
6,264
6,379
6,526
6,537
Liabilities, US$M
2,288
2,157
2,491
2,509
2,447
2,460
2,467
2,377
Equity, US$M
3,476
3,462
3,513
3,556
3,817
3,919
4,059
4,159
Cash, US$M
556
296
218
261
614
777
825
765
Net Debt, US$M
980
1,172
1,486
1,432
986
823
775
735
Net Debt to EBITDA
3.0
5.7
5.2
5.0
1.8
1.5
1.3
1.3
Capex, US$M
406
305
449
355
106
116
239
231
Payout, %
Balance Sheet & Ratios
FCF, US$M
-114
-115
-195
-91
365
350
249
229
ROIC
3.9%
1.5%
2.5%
2.1%
6.0%
6.1%
6.8%
6.0%
ROE
3.4%
0.2%
3.2%
1.9%
7.5%
6.3%
6.7%
5.8%
Market Indicators
Share Price, CLP
134
133
120
120
-
-
-
-
Share Price, US$
0.29
0.26
0.25
0.23
-
-
-
-
Market Cap, US$ billion
5,021
4,484
4,389
4,002
Avg PE, LTM
21.5
-199.5
264.3
35.6
10.9
20.0
18.2
20.3
Avg PBV
1.33
1.35
1.38
1.37
1.27
1.21
1.16
1.12
Avg EV EBITDA, LTM
14.0
27.3
27.7
19.7
10.8
10.1
9.3
9.7
Avg EV MW, US$M
2.09
2.21
2.29
2.10
1.75
1.68
1.65
1.64
Avg Discount to NRV
-3%
2%
3%
9%
17%
20%
22%
24%
Dividend Yield
1.5%
0.8%
0.0%
0.4%
0.4%
2.9%
2.5%
2.8%
Source: Bloomberg; company reports; Scotiabank GBM estimates.
Copasa (Sector Outperform, R$39 price target)
Report Date: October 31, AMC.
■ We expect Copasa to post soft YOY EBITDA growth due to weak volumes during Q3/14.
Hard comps in terms of working days and lower demand stemming from climatic factors
should provide the headwinds.
■ In the Q3/13 report, we will scrutinize the Rev/m3 ratio. Despite a solid net tariff adjustment
of 6.2% in April, Q2/14 revenues seemed to not benefit fully due to various reasons. We
expect Q3/14 to provide more light on this and a better reading.
■ At these valuation levels, profitability in its current form should be not a concern. Copasa is
trading quite cheaply (5.7x 2014E EV/EBITDA and 0.90x PBV) while it exhibits good ratios
(ROI and ROE at ~10%). Markets seem to be more worried about the eventual impact of the
change in administration following the recent PT win in the state elections. We note that
Copasa by-laws provide certain protection for minorities, while it also seems that the PSMB
(a PT ally during the ballots and a more historically center-leaning political party) might get
the Copasa control.
Exhibit 16 – Copasa Customer Base YOY Growth
Exhibit 17 – Copasa Volume YOY Growth
Source: Company reports.
Source: Company reports.
Exhibit 18 – Copasa Q3/14 Earnings Preview
Q3/13A
Q2/14A
Q3/14E
QOQ Chg.
YOY Chg.
Net Revenues, R$M
770.6
768.6
820.0
6.7%
6.4%
EBITDA, R$M
306.1
272.6
305.0
11.9%
-0.4%
Net Income, R$M
125.8
82.2
110.0
33.8%
-12.6%
1.05
0.69
0.92
33.8%
-12.6%
EPS, R$
Source: Company reports, Scotiabank GBM estimates.
Exhibit 19 – Copasa Summary
P&L Driver, BRL $M
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Customers, thousands
5,457
5,746
6,038
6,320
6,577
6,844
7,116
7,364
Water
3,501
3,635
3,779
3,916
4,053
4,175
4,300
4,407
Sewage
1,956
2,111
2,259
2,404
2,524
2,669
2,816
2,957
YoY
4.1%
5.3%
5.1%
4.7%
4.1%
4.1%
4.0%
3.5%
2,311
2,510
2,768
3,009
3,237
3,577
3,862
4,156
5.3%
8.6%
10.3%
8.7%
7.6%
10.5%
8.0%
7.6%
430
446
468
485
500
530
553
574
1,669
Revenues
YoY
Revenue per Customer, R$
EBITDA
925
1,042
1,141
1,153
1,212
1,403
1,526
YoY
-0.3%
12.7%
9.5%
1.1%
5.1%
15.7%
8.8%
9.4%
EBITDA Margin, %
40.0%
41.5%
41.2%
38.3%
37.5%
39.2%
39.5%
40.2%
264
287
302
294
299
336
1420
1515
433
487
507
480
488
596
697
775
79
85
84
76
74
87
98
105
677
470
486
421
432
556
605
685
EBITDA per Customer, R$
NOPAT
NOPAT per Customer, R$
Net Income
EPS, BRL
5.68
3.94
4.07
3.53
3.62
4.66
5.07
5.74
EPS, YoY
27.7%
-30.5%
3.3%
-13.4%
2.7%
28.6%
8.7%
13.2%
42%
23%
34%
29%
30%
30%
35%
35%
1.88
1.28
1.34
1.17
1.06
1.09
1.63
1.77
Payout, %
DPS, BRL
Balance Sheet (BRL $M) & KPIs
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Assets
7,266
8,274
8,993
9,456
9,765
10,327
10,771
11,242
Liabilities
4,184
4,426
4,964
5,337
5,376
5,509
5,542
5,541
Equity
3,081
3,848
4,029
4,119
4,389
4,819
5,228
5,701
Customers per Employee
Water Losses Ratio, %
477
498
520
533
550
570
580
590
29.6%
28.8%
29.7%
29.7%
29.1%
28.8%
28.5%
28.3%
ROIC, %
12.8%
12.6%
11.9%
10.4%
10.0%
11.3%
12.0%
12.4%
ROE, %
21.2%
13.9%
12.1%
10.1%
10.2%
12.1%
12.0%
12.5%
Net Debt to EBITDA
2.14
2.46
2.23
2.51
2.50
2.23
2.12
1.91
Capex
838
683
755
909
907
940
1,060
900
36.3%
27.2%
27.3%
30.2%
28.0%
26.3%
27.4%
21.7%
-90
23
154
-279
297
126
126
398
2010
2011
2012
2013
2014E
2015E
2016E
2017E
-
-
-
Capex over Revs, %
FCF
Market Data
Share Price, BRL
28.7
33.4
43.8
37.2
Share Price, USD
17.3
17.9
21.3
15.7
Market Cap, US$M
2.1
2.1
2.5
1.8
-
ADTV, US$M
3.5
3.9
6.1
4.9
3.0
EV/EBITDA, LTM
5.7
5.9
7.1
6.1
5.5
4.8
4.5
4.1
PE, LTM
6.8
5.8
11.2
9.7
8.4
6.5
6.0
5.3
PBV
1.04
1.14
1.30
1.02
0.82
0.75
0.69
0.63
EV/Customer, R$
Dividend Yield, %
984
6.5%
1,084
3.8%
1,284
3.1%
1,127
3.6%
1,011
3.5%
985
3.6%
963
5.4%
923
5.9%
Source: Bloomberg; company reports; Scotiabank GBM estimates.
ECL (Sector Outperform, CLP925 price target)
Report Date: October 29, AMC.
■ ECL’s EBITDA should remain almost flat YOY when measured in USD, but we are far
from considering this concerning. At these levels, results ensure cash accumulation, adequate
ROE, and keep multiples at very attractive levels. We believe Q3/14 results should bring all
sorts of good news: recuperated coal load factors, lower spot market purchases, and still
solid realized prices.
■ During earnings we will pay special attention to the level of gas sales and “system
overcosts.” Additionally, the changes for guidance on contracted energy and capex merit an
eye as well.
■ ECL shares should continue outperforming, both on earnings momentum and positive
signalling regarding its TEN (SIC-SING interconnection line) and Mejillones (750MW,
coal) projects. We expect the good Q3/14 numbers to keep the “value + project upside” story
alive. By year-end the CNE should provide further news regarding the interconnection.
Exhibit 20 – ECL Coal Load Factors
Exhibit 21 – ECL Net Spot Position, GWh
100%
100
90%
50
80%
0
70%
-50
60%
-100
50%
-150
40%
Source: CDEC SING.
Source: CDEC SING.
Exhibit 22 – ECL Q3/14 Earnings Preview
Revenues, US$M
Q2/13A
Q2/14A
Q3/14A
QOQ Chg.
YOY Chg.
302.9
302.4
305.5
1.0%
0.8%
EBITDA, US$M
73.1
71.9
74.8
4.0%
2.3%
Net Income, US$M
14.4
19.5
22.6
15.8%
57.1%
EPS, US$
0.014
0.018
0.021
15.8%
57.1%
Source: Company reports, Scotiabank GBM estimates.
Sep-14
May-14
Jan-14
Sep-13
Jan-13
May-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Sep-14
May-14
Jan-14
Sep-13
Jan-13
May-13
Sep-12
May-12
Jan-12
Sep-11
Jan-11
May-11
Jan-11
-200
30%
Exhibit 23 – ECL Summary
Operational Stats
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Capacity, MW
1,792
2,056
2,056
2,122
2,122
2,122
2,122
2,122
Net Generation, GWh
7,228
6,705
8,501
8,846
8,900
9,004
9,197
9,172
70%
74%
78%
79%
77%
78%
76%
76%
Sales, GWh
7,334
7,480
9,174
9,706
9,219
9,606
9,406
9,333
Net Spot Position, GWh
-219
-885
-756
-936
-751
-730
-401
-359
Rev per MWh, US$
138.1
151.5
113.3
109.1
117.3
116.4
119.6
123.1
Fuel Cost per MWh, US$
-78.9
-87.2
-65.7
-62.6
-66.3
-65.1
-64.1
-65.4
Profit per MWh, US$
59.1
64.3
47.6
46.4
51.0
51.2
55.5
57.7
P&L
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Revenues, US$M
1,121
1,194
1,130
1,207
1,242
1,280
1,291
1,319
6.4%
6.5%
-5.3%
6.8%
2.9%
3.0%
0.9%
2.2%
340
302
235
252
282
290
319
330
EBITDA Margin, %
30.3%
25.3%
20.8%
20.8%
22.7%
22.7%
24.7%
25.1%
3.7%
Coal Mix, %
YOY, %
EBITDA, US$M
YOY, %
-5.6%
-11.0%
-22.4%
7.2%
12.0%
3.1%
9.8%
D&A, US$M
98
114
136
134
133
132
131
132
EBIT, US$M
240
192
99
120
151
158
187
199
EBIT Margin, %
21.4%
16.1%
8.7%
9.9%
12.2%
12.4%
14.5%
15.1%
Net Income, US$M
200
179
56
39
78
80
101
108
EPS, US$
0.189
0.169
0.053
0.037
0.074
0.076
0.095
0.102
YOY, %
-23.3%
-10.3%
-68.5%
-30.0%
99.1%
2.5%
25.5%
7.1%
DPS, US$
0.075
0.118
0.061
0.053
0.037
0.074
0.076
0.095
31%
63%
36%
100%
100%
100%
100%
100%
EPS, CLP
Payout, %
96
82
26
18
42
44
56
60
DPS, CLP
38
57
30
26
21
43
45
56
Balance Sheet & Ratios
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Assets, US$M
2,812
2,811
2,891
2,997
3,038
3,050
3,062
3,083
Liabilities, US$M
1,183
1,133
1,206
1,190
1,213
1,214
1,196
1,200
Equity, US$M
1,629
1,678
1,685
1,807
1,825
1,836
1,866
1,883
Cash, US$M
149
193
184
213
299
312
392
462
Net Debt, US$M
569
509
611
548
451
438
358
288
Net Debt to EBITDA
1.68
1.68
2.60
2.18
1.60
1.51
1.12
0.87
Capex, US$M
188
151
161
124
116
124
67
78
FCF, US$M
104
116
54
104
142
131
206
201
ROIC
10.7%
9.1%
5.4%
5.7%
7.0%
7.3%
8.4%
8.7%
ROE
16.1%
14.4%
5.2%
4.6%
9.5%
7.0%
8.2%
8.5%
Market Indicators
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Share Price, CLP
1,216
1,381
1,124
679
-
-
-
-
Share Price, US$
2.60
2.66
2.34
1.29
-
-
-
-
Market Cap, US$ billion
2.8
2.8
2.5
1.4
-
-
-
-
ADTV, US$M
0.9
5.7
2.8
2.4
2.0
-
-
-
Avg PE, LTM
8.9
14.7
31.1
NM
12.9
19.2
15.1
14.0
Avg PBV
1.42
1.69
1.56
1.13
0.92
0.89
0.87
0.86
Avg EV EBITDA, LTM
7.7
10.3
11.7
11.8
7.6
6.8
5.9
5.5
Avg EV MW, US$M
1.60
1.73
1.51
1.22
1.01
0.93
0.89
0.85
Avg Discount to NRV
40%
26%
32%
45%
53%
56%
59%
60%
Dividend Yield
2.9%
4.4%
2.6%
3.8%
2.5%
5.1%
5.3%
6.6%
Source: Bloomberg; company reports; Scotiabank GBM estimates.
Endesa (Sector Perform, CLP850 price target)
Report Date: October 27, AMC. Conference call to be held October 29, 9am ET.
■ We expect Endesa ownership-adjusted EBITDA to contract 5% YOY in USD, but expand
7% YOY in CLP thanks to the weakening peso. We note that despite the solid hydro output
in Chile and Colombia during Q3/14, Endesa booked US$145M during Q3/13 in non-core
revenues, which makes the comparison base tough. Moreover, there is little visibility
regarding the reoccurring nature of such sources of income.
■ For Q3/14 results we will pay special attention to the performance in Chile and the
evolution of Brazilian units, where involuntary spot market exposure for discos continues to
give troubles.
■ Endesa shares have followed partly the Chile hydrological news but also the developments at
the Enel-Enersis level. Enel’s stated intention to eventually acquire 5% of Endesa through
Enersis has also fueled speculation about a possible delisting of Endesa through a share
swap. In general, when such views gain momentum, Endesa shares tend to benefit.
Exhibit 24 – Endesa Hydro Output, GWh - 3m rolling
Exhibit 25 – Endesa Dams Vol. (Chile), Sep 30 - hm3
Source: CDEC SIC, XM, COES, CAMMESA.
Source: CNE.
Exhibit 26 – Endesa Q3/14 Earnings Preview
Q3/13A
Q2/14A
Q3/14A
QOQ
YOY
Revenues, US$M
869
1,113
1,133
1.8%
30.3%
EBITDA, US$M
583
434
629
45.1%
7.9%
Ownership Adj. EBITDA, US$M
465
248
443
78.5%
-4.8%
Chile
285
67
250
271.8%
-12.4%
Colombia
53
67
70
4.8%
31.6%
Brazil
67
45
57
27.8%
-14.6%
Peru
43
51
48
-5.4%
12.5%
Argentina
16
18
17
-4.1%
5.5%
Net Income
225
103
213
108.0%
-5.3%
EPS, US$ - ADR
0.82
0.38
0.78
108.0%
-5.3%
Note: Ownership Adjusted EBITDA accounts for equity participation in subsidiaries.
Source: Company reports, Scotiabank GBM estimates.
Exhibit 27 – Endesa Summary
Operational Stats
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Capacity, MW
13,969
13,969
13,969
13,929
14,710
15,110
15,110
15,110
Net Generation, GWh
51,603
52,766
53,517
51,417
51,758
55,132
58,251
58,092
58.6%
57.9%
58.5%
55.4%
61.7%
59.6%
59.9%
59.9%
Sales, GWh
56,641
58,012
59,020
57,754
57,385
63,385
62,423
61,950
Hydro Load Factor, %
42.8%
43.2%
44.2%
40.3%
45.2%
44.8%
46.9%
46.9%
Hydro Mix, %
Rev per MWh, US$
81.0
83.2
77.4
64.7
69.3
69.7
72.6
74.8
Fuel Cost per MWh, US$
-30.0
-34.8
-36.9
-19.4
-22.5
-23.4
-19.7
-19.8
Profit per MWh, US$
51.1
48.5
40.6
45.3
46.8
46.3
53.0
55.0
4,834
P&L
Revenues, US$M
YOY, %
EBITDA, US$M
Chile
4,775
4,974
4,871
4,061
4,285
4,610
4,730
10.5%
4.2%
-2.1%
-16.6%
5.5%
7.6%
2.6%
2.2%
2,106
2,021
1,721
1,951
1,985
2,032
2,383
2,466
1,372
1,219
815
922
868
870
1,165
1,234
Colombia
513
523
694
735
814
861
897
904
Peru
137
216
207
226
243
253
266
273
Argentina
83
63
5
68
60
48
55
56
EBITDA Margin, %
44.1%
40.6%
35.3%
48.0%
46.3%
44.1%
50.4%
51.0%
Own-Adj. EBITDA
1,870
1,799
1,334
1,488
1,385
1,393
1,730
1,810
Net Income, US$M
1,046
924
481
715
599
623
742
752
EPS x ADR, US$
3.83
3.38
1.76
2.61
2.19
2.28
2.71
2.75
-6.7%
-11.6%
-47.9%
48.4%
-16.2%
4.1%
19.0%
1.5%
1.12
1.88
1.71
0.82
1.57
1.31
1.37
2.17
27.4%
49.1%
50.5%
46.4%
60.0%
60.0%
60.0%
80.0%
YOY, %
DPS x ADR, US$
Payout, %
EBITDA, CLP billion
1,070
978
838
967
1,118
1,188
1,401
1,457
EPS, CLP
63.8
55.0
28.5
43.8
6.3
53.2
54.2
58.1
Assets, US$M
12,895
12,639
13,519
12,890
13,503
13,990
14,481
14,666
Liabilities, US$M
6,261
6,011
6,363
6,051
6,225
6,217
6,172
5,948
Equity, US$M
6,634
6,628
7,156
6,839
7,279
7,773
8,309
8,718
Cash, US$M
712
813
629
663
1,046
1,226
1,441
1,471
Net Debt, US$M
806
862
786
723
721
797
778
795
Net Debt to EBITDA
1.48
1.54
1.98
1.64
1.69
1.56
1.24
1.11
Balance Sheet & Ratios
Capex, US$M
363
609
596
773
697
580
655
544
FCF, US$M
1,487
599
823
786
494
917
1,131
1,289
ROIC
16.6%
13.5%
10.0%
12.9%
13.0%
12.2%
13.5%
13.4%
ROE
24.4%
18.9%
9.6%
14.1%
12.0%
11.7%
13.3%
13.3%
Market Indicators
Share Price, CLP
877
766
778
782
-
-
-
-
ADR Price, US$
56.2
44.4
48.8
44.6
-
-
-
-
Market Cap, US$ billion
15.4
12.1
13.3
12.2
-
-
-
-
Avg PE, LTM
13.7
13.3
16.6
25.8
21.1
19.8
16.4
16.1
Avg PBV
3.24
2.74
2.60
2.44
2.22
2.13
2.11
2.10
Avg Own-Adj. EV EBITDA, LTM
8.3
8.8
9.6
11.2
10.8
10.4
8.2
7.7
Avg EV/MW, US$M
1.31
1.24
1.26
1.17
1.09
1.05
1.04
1.04
Avg Discount to NRV
26%
28%
Dividend Yield
2.0%
4.2%
Source: Bloomberg; company reports; Scotiabank GBM estimates.
33%
45%
40%
42%
44%
46%
3.8%
1.9%
3.4%
2.9%
3.1%
4.9%
Enersis (Sector Perform, CLP195 price target)
Report Date: October 27, AMC. Conference call to be held October 29, 11am ET.
■ Enersis ownership-adjusted EBITDA (excluding Edesur) should contract 7.4% YOY during
Q3/14, on a combination of factors: FX headwinds, soft electricity demand growth across
LatAm, tough comps in the Chile generation business, and Brazil disco weakness.
■ For Q4/13 results we will scrutinize performance at Brazilian operations and try to gain
insights into the “involuntary” spot market exposure level for Ampla and Coelce. Realized
distribution tariffs following FX changes should also be under the lens of investors.
■ Markets seem to have virtually forgotten Enersis M&A operations, but the company still
holds US$2.0B in its war chest. News regarding bids for additional stakes in Edegel, Edelnor
or Endesa stakes could re-spark focus on the matter.
Exhibit 28 – South LatAm Power Generation
Exhibit 29 – Copasa Volume YOY Growth
12%
120,000
Generation, GWh
YOY
100,000
10%
80,000
8%
60,000
6%
40,000
4%
20,000
2%
0
0%
Sep-14
Jan-14
May-14
Sep-13
Jan-13
May-13
Sep-12
Jan-12
May-12
Sep-11
Jan-11
-2%
May-11
-20,000
Argentina, Brazil, Colombia, Peru and Chile aggregate.
Source: XM, CAMMESA, CDEC, COES, ONS.
Source: XM, CDEC, CCEE.
Exhibit 30 – Enersis Q3/14 Earnings Preview
Q3/13A
Q2/14A
Q3/14A
QOQ
YOY
Revenues, US$M
2,814
3,262
3,085
-5.4%
9.6%
EBITDA, US$M
1,077
926
1,015
9.7%
-5.7%
Ownership Adj. EBITDA, US$M
657
559
587
5.0%
-10.7%
Chile
264
146
224
53.4%
-15.2%
Colombia
133
147
152
3.5%
14.1%
Brazil
208
141
167
17.8%
-19.9%
Peru
71
90
82
-8.9%
15.7%
Argentina
-19
35
-38
NM
NM
686
535
635
18.7%
-7.4%
Own. Adj. EBITDA excl. Edesur, US$M
Net Income
285
207
251
21.5%
-11.9%
EPS, US$ - ADR
0.29
0.21
0.26
21.5%
-11.9%
Note: Ownership Adjusted EBITDA accounts for equity participation in subsidiaries.
Source: Company reports, Scotiabank GBM estimates.
Exhibit 31 – Enersis Summary
Operational Stats
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Generation Sales, GW
63,431
64,840
66,311
64,580
64,416
70,417
69,455
68,982
Distribution Sales, GW
67,274
69,552
72,744
75,443
78,177
80,868
83,744
86,781
Genco Profit per MW, US$
44.2
43.4
41.5
45.4
46.5
46.2
52.3
54.2
Disco Profit per MW, US$
45.1
44.7
44.5
41.1
33.7
35.2
36.3
37.0
Total Profit per MWh, US$
44.7
44.1
43.1
43.1
39.5
40.4
43.6
44.7
P&L
2010
2011
2012
2013
2014E
2015E
2016E
2017E
14,450
Revenues, US$M
12,864
13,514
13,518
12,259
12,377
13,180
13,832
Genco
5,450
5,584
5,457
4,791
5,097
5,383
5,512
5,626
Disco
8,609
9,197
9,165
8,497
8,306
8,933
9,514
10,074
Others & Adj.
-1,250
-1,195
-1,267
-1,104
-1,029
-1,027
-1,136
-1,195
YOY, %
-7.3%
5.0%
0.0%
-9.3%
1.0%
6.5%
4.9%
4.5%
EBITDA, US$M
4,433
4,399
4,075
4,154
3,720
3,971
4,481
4,698
Genco
2,538
2,482
2,028
2,271
2,278
2,314
2,675
2,763
Disco
1,927
1,943
1,971
1,823
1,389
1,602
1,754
1,883
Others
-32
-26
75
61
53
54
52
52
EBITDA Margin, %
34.5%
32.6%
30.1%
33.9%
30.1%
30.1%
32.4%
32.5%
YOY, %
-17.0%
-0.8%
-7.4%
1.9%
-10.5%
6.7%
12.9%
4.9%
-
2,161
1,839
2,354
2,139
2,316
2,616
2,767
1,177
Own-Adj. EBITDA, U$M
Net Income, US$M
953
776
775
1,171
860
1,053
1,132
EPAdr, US$
1.46
1.19
1.19
1.28
0.88
1.07
1.15
1.20
YOY, %
-35.0%
-18.5%
-0.1%
8.2%
-31.8%
22.4%
7.5%
4.0%
DPAdr, US$
0.45
0.73
0.59
0.43
0.83
0.45
0.81
0.87
Payout, %
50%
50%
50%
36%
64%
52%
75%
75%
EBITDA, CLP
2,262
2,127
1,982
2,067
2,100
2,323
2,634
2,776
EPS, CLP
14.9
11.5
11.5
12.8
9.9
12.5
13.6
14.2
DPS, CLP
4.6
7.4
5.7
4.2
8.2
5.1
9.5
10.2
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Assets, US$M
27,790
26,452
27,748
28,931
26,265
26,524
29,840
30,644
Liabilities, US$M
13,871
13,170
13,238
12,715
10,460
10,491
13,062
13,140
Equity, US$M
13,919
13,282
14,509
16,217
15,805
16,032
16,778
17,504
Cash, US$M
2,071
2,351
2,192
4,623
3,184
2,514
3,253
3,713
Net Debt, US$M
5,793
5,244
5,305
2,424
4,016
4,686
4,247
3,787
Net Debt to EBITDA
1.31
1.19
1.30
0.58
1.08
1.18
0.95
0.81
Capex, US$M
1,355
1,400
1,422
1,774
1,521
1,514
1,588
1,470
Balance Sheet & Ratios
FCF, US$M
2,076
2,027
1,730
1,443
1,350
1,511
1,887
2,179
ROIC
13.0%
12.2%
10.8%
11.1%
10.2%
10.8%
11.1%
11.4%
ROE
13.0%
10.0%
9.9%
10.4%
7.3%
9.0%
9.6%
9.7%
Market Indicators
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Share Price, CLP
212
178
171
158
-
-
-
-
ADR Price, US$
23.1
17.6
18.2
15.0
-
-
-
-
-
-
-
-
Market Cap, US$B
14.8
11.2
11.6
14.7
ADTV, US$M
21.4
18.2
17.2
22.7
Avg PE, LTM
12.9
12.8
16.1
16.0
20.4
15.9
14.5
13.9
Avg PBV
1.96
1.60
1.45
1.38
1.34
1.32
1.27
1.22
Avg Own-Adj. EV EBITDA
7.5
7.3
6.9
7.5
8.1
7.3
6.4
6.0
2.2%
4.2%
3.4%
2.6%
4.5%
2.8%
5.2%
5.6%
Dividend Yield, %
Source: Bloomberg; company reports; Scotiabank GBM estimates.
Sabesp (Sector Perform, R$21 price target)
Report Date: November 13, AMC.
■ We expect Sabesp EBITDA to contract 31% YOY, on both lower volumes and discount to
tariffs. Net Income should take an even harder hit on the operational difficulties and the BRL
weakness (37% of Sabesp debt is denominated in foreign currencies, unhedged).
■ In the Q3/14 report we will scrutinize water consumption per capita and the impact of price
discounts on the Rev/m3 ratio. The “Services” cost line also deserves attention, as it has hurt
margins materially during Q2/14.
■ Sabesp valuation is currently all about reservoir levels. Recently, local company shares
tested new lows after the ANA (Brazilian Federal Water Regulator) hammered Sabesp crisis
management. Although with valid points, the critique must be taken with a grain of salt, as
we believe it to be impacted by the presidential election race.
Exhibit 32 – Normal Supply Reservoir Mix for SP Area
Exhibit 33 – Reservoir Levels, 20th of October
Source: Sabesp 2013 20-F
Source: Sabesp Website
Exhibit 34 – Sabesp Q3/14 Earnings Preview
Q3/13A
Q2/14A
Q3/14A
QoQ
Net Revenues, R$M
2,221
2,075
2,175
4.8%
-2.1%
EBITDA, R$M
1,040
662
715
8.0%
-31.3%
Net Income, R$M
475
302
226
-25.3%
-52.5%
EPS, R$
0.69
0.44
0.33
-25.3%
-52.5%
EPS (ADR), US$
0.30
0.20
0.15
-26.8%
-52.2%
Source: Company reports, Scotiabank GBM estimates.
YoY
Exhibit 35 – Sabesp Summary
P&L Driver, R$M
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Customers, thousands
13,013
13,402
13,807
14,228
14,821
15,184
15,488
15,798
Water
7,295
7,481
7,679
7,888
8,164
8,327
8,494
8,664
Sewage
5,718
5,921
6,128
6,340
6,657
6,857
6,994
7,134
YoY
3.0%
3.0%
3.0%
3.0%
4.2%
2.4%
2.0%
2.0%
Net Revenues
7,100
7,703
8,273
8,871
8,515
8,774
10,819
11,452
YoY
7.7%
8.5%
7.4%
7.2%
-4.0%
3.0%
23.3%
5.9%
Revenue per Customer, R$
569
597
627
652
603
603
747
785
EBITDA
3,224
3,217
3,611
4,004
3,253
3,494
4,740
5,027
YoY
18.2%
-0.2%
12.3%
10.9%
-18.8%
7.4%
35.7%
6.1%
EBITDA Margin, %
45.4%
41.8%
43.7%
45.1%
38.2%
39.8%
43.8%
43.9%
248
240
262
281
219
230
306
318
1,870
1,714
2,011
2,193
1,597
1,690
2,366
2,536
144
128
146
154
108
111
153
161
Net Income
1,631
1,224
1,912
1,924
1,352
1,254
1,947
2,175
EPS, BRL
2.39
1.79
2.80
2.81
1.98
1.83
2.85
3.18
EPS, YoY
8.2%
-25.0%
56.3%
0.6%
-29.7%
-7.2%
55.3%
11.7%
Payout, %
26%
26%
47%
26%
35%
35%
35%
40%
DPS, BRL
0.58
0.62
0.85
0.73
0.98
0.69
0.64
1.14
Dividend Yield, %
4.1%
3.6%
2.9%
3.1%
5.4%
3.8%
3.5%
6.3%
BS & Key Ratios Driver, R$M
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Total Assets
23,293
25,019
26,476
28,274
29,164
29,861
32,049
34,066
Total Liabilities
13,611
14,473
15,220
15,344
15,597
15,513
16,193
16,814
Total Equity
9,682
10,546
11,257
12,931
13,567
14,348
15,856
17,252
ROIC, %
16.3%
14.2%
15.1%
14.9%
9.6%
9.3%
12.3%
12.7%
ROE, %
18.0%
12.1%
17.3%
15.9%
10.0%
9.0%
12.9%
13.1%
Cash
1,988
2,142
1,916
1,782
1,140
367
1,171
2,135
Net Debt
6,221
6,281
6,959
7,668
8,360
9,133
8,829
8,365
1.93
1.95
1.93
1.91
2.57
2.60
1.86
1.66
2,211
2,448
2,677
2,781
2,797
2,400
2,250
2,306
EBITDA per Customer, R$
NOPAT
NOPAT per Customer, R$
Net Debt to EBITDA
Capex
31.1%
31.8%
32.4%
31.3%
32.9%
27.4%
20.8%
20.1%
FCF
Capex over Revs, %
265
174
194
-335
-184
410
1,482
1,687
Customers per Employee
849
900
919
948
1,000
1,030
1,050
1,060
34.8%
33.7%
33.6%
31.8%
30.0%
29.7%
29.3%
28.9%
Avg Share Price, R$
11.8
15.2
25.0
25.9
-
-
-
-
ADR Price, US$
6.8
9.2
12.9
12.2
-
-
-
-
5,513
5,822
9,428
6,887
-
-
-
-
ADTV, US$M
15.8
19.8
36.0
39.2
33.0
-
-
-
Avg EV/EBITDA, LTM
5.3
5.9
6.8
6.7
6.4
6.2
4.5
4.1
Water Losses Ratio, %
Market Data
Market Cap, US$M
Avg PE, LTM
5.2
6.9
11.9
9.0
9.2
9.9
6.4
5.7
Avg PBV
0.90
1.03
1.55
1.50
0.92
0.87
0.78
0.72
1,101
1,253
1,732
1,778
1,403
1,421
1,373
1,317
0.68
0.74
0.97
0.90
0.69
0.69
0.66
0.63
Avg EV/Customer, R$
Avg EV/Adj.RAB
Source: Bloomberg; company reports; Scotiabank GBM estimates.
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
AES Gener SA (AESGENER-SN)
New
EPS14E: US$0.024
Old
EPS14E: US$0.016
Valuation: 7yr DCF explicit period and 2.5% LT growth
Key Risks to Price Target: Capex execution, regulatory risk, hydrology
Aguas Andinas SA (AGUAS-A-SN)
New
EPS14E: 20.29
Old
EPS14E: 19.09
Valuation: 7yr explicit period DCF, 2.0% LT growth
Key Risks to Price Target: Regulatory risk, interest rates
Colbun SA (COLBUN-SN)
New
EPS14E: US$0.015
Old
EPS14E: US$0.007
Valuation: 7yr DCF explicit period and 2.5% LT growth
Key Risks to Price Target: Hydrology, commodity prices, operational issues
COPASA (CSMG3-SA)
New
EPS14E: R$3.62
EPS15E: R$4.66
Old
EPS14E: R$3.69
EPS15E: R$4.64
Valuation: 7yr explicit period DCF and 2.0% LT growth
Key Risks to Price Target: Regulation, concessions, hydrology
E.CL SA (ECL-SN)
New
EPS14E: US$0.07
Old
EPS14E: US$0.04
Valuation: DCF, 7yr explicit period and 2.5% LT growth
Key Risks to Price Target: Mining Sector Activity, Spot Market Exposure, Commodity Prices
Empresa Nacional de Electricidad SA (ENDESA-SN)
New
EPS14E: US$0.073
Old
EPS14E: US$0.062
Valuation: SOTP DCF Model
Key Risks to Price Target: Asset restructuring, hydrology, commodity exposure.
ENERSIS SA (ENERSIS-SN)
Valuation: SOTP DCF Model, 10% Holding Discount
Key Risks to Price Target: Regulatory, M&A, concession renewals, hydrology
IEnova (IENOVA *-MX)
Valuation: SOTP DCF, 7yr explicit period & 2.5% LT growth
Key Risks to Price Target: Auction risks, regulation, earnings visibility
Year 3
Valuation
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
SABESP (SBSP3-SA)
New
EPS14E: R$1.98
EPS15E: R$1.83
Old
EPS14E: R$1.99
EPS15E: R$1.98
Valuation: DCF, 7yr explicit period and 2.0% LT growth
Key Risks to Price Target: Regulatory risk, hydrology
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
45
Industry Comment
Monday, October 27, 2014, Pre-Market
Real Estate & REITs
Hip to Be Square: Initiating
Coverage on Four Industrial REITs
and One Diversified REIT
Pammi Bir, CPA, CA, CFA - (416) 863-7218
(Scotia Capital Inc. - Canada)
[email protected]
Ganan Thurairajah, MBA - (416) 863-2899
(Scotia Capital Inc. - Canada)
Event
■ Please see our full report “Hip to Be Square” on ScotiaView.
[email protected]
ScotiaView Analyst Link
Implications
■ Granite REIT (GRT.UN-T, GRP.U-N, SO, $44.00). In our view, current
levels offer a compelling entry to GRT’s sector leading balance sheet, and
superior AFFOPU and distribution growth profile. We expect acquisitions
to support multiple expansion and recommend investors build positions.
■ WPT Industrial REIT (WIR.U-T, SO, US$11.50). We see WPT as wellpositioned for potentially less favourable rates with a best-in-class portfolio
and above average growth. We expect its discount valuation to compress as
its size and liquidity expand and recommend investors build positions.
■ Pure Industrial REIT (AAR.UN-T, SP, $5.00). Pure offers investors
exposure to a high quality, internally managed and mostly CDN industrial
assets, with significant representation in major markets. For longer-term
players, we see a fair entry to its steady growth and visible cash flows.
■ Dream Industrial REIT (DIR.UN-T, SP, $10.25). We believe DIR is in
good form for potentially higher rates with decent organic growth prospects
via its shorter duration leases, below market rents, and occupancy upside. Its
sizable NAV discount and high yield offer a fair spot to selectively add.
■ Agellan Commercial REIT (ACR.UN-T, SP, $10.25). ACR’s diversified
office and industrial assets offer exposure to the U.S. recovery wave. We
recommend the units to patient investors seeking a high, fully covered yield.
Recommendation
■ Our top picks are GRT and WPT. See full report for details.
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
Universe of Coverage
Price
AAR.UN-T
ACR.UN-T
CHP.UN-T
CRR.UN-T
CSH.UN-T
CUF.UN-T
CWT.UN-T
DIR.UN-T
DRG.UN-T
FCR-T
GRT.UN-T
LW-T
MRT.UN-T
REF.UN-T
REI.UN-T
WIR.U-T
C$4.40
C$9.19
C$10.43
C$13.09
C$11.24
C$18.97
C$27.77
C$9.45
C$9.26
C$18.30
C$39.79
C$13.85
C$18.18
C$49.23
C$26.48
US$9.95
Rating
Risk
SP
SP
SP
SP
SO
SP
SP
SP
SP
SP
SO
SP
SP
SO
SP
SO
Medium
Medium
Medium
Medium
Medium
Medium
Medium
Medium
Medium
Medium
Medium
High
Medium
Medium
Medium
Medium
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
1-Yr
ROR
$5.00
$10.25
$11.25
$14.75
$11.75
$21.00
$29.00
$10.25
$10.00
$19.75
$44.00
$13.75
$19.25
$49.00
$29.00
$11.50
20.7%
20.0%
14.1%
19.5%
9.3%
18.4%
10.1%
15.9%
16.6%
12.6%
16.2%
5.8%
11.2%
3.1%
14.9%
22.6%
Year 3
Valuation
Pure Industrial REIT (AAR.UN-T)
New SP
Medium
$5.00
FFOPU14E: $0.37
FFOPU15E: $0.42
FFOPU16E: $0.41
14.25x AFFO (F'15 estimate)
Old
Valuation: 14.25x AFFO (F'15 estimate)
Key Risks to Price Target: Exposure to single-tenant properties, tenant concentration, inability to execute growth
Agellan Commercial REIT (ACR.UN-T)
New SP
Medium
$10.25
FFOPU14E: $1.18
FFOPU15E: $1.25
FFOPU16E: $1.27
11x AFFO (F'15 estimate)
Old
Valuation: 11x AFFO (F'15 estimate)
Key Risks to Price Target: Significant unitholder, inability to execute growth, rising interest rates
Choice Properties REIT (CHP.UN-T)
Valuation: 15x AFFO (2015E)
Key Risks to Price Target: Significant tenant concentration in Loblaw, majority unitholder
Crombie REIT (CRR.UN-T)
Valuation: 15.5x AFFO (F'15 estimate)
Key Risks to Price Target: Geographic concentration, material exposure to Sobeys, potential for conflicts of interest.
Chartwell Retirement Residences (CSH.UN-T)
Valuation: 14.5x AFFO (F'15 estimate)
Key Risks to Price Target: Significant weakening of housing markets, new supply, regulatory environment.
Cominar REIT (CUF.UN-T)
Valuation: 12.5x AFFO (F'15 estimate)
Key Risks to Price Target: Geographic concentration, construction delays/cost overruns, prolonged economic recovery.
Calloway REIT (CWT.UN-T)
Valuation: 15.5x AFFO (F'15 estimate)
Key Risks to Price Target: Material exposure to Wal-Mart Canada, potential for conflicts of interest.
47
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Dream Industrial REIT (DIR.UN-T)
New SP
Medium
$10.25
FFOPU14E: $0.95
FFOPU15E: $0.98
FFOPU16E: $1.01
12.5x AFFO (F'15 estimate)
Old
Valuation: 12.5x AFFO (F'15 estimate)
Key Risks to Price Target: Inability to execute growth, significant unitholder, rising interest rates
Dream Global REIT (DRG.UN-T)
Valuation: 13x AFFO (F'15 estimate)
Key Risks to Price Target: Tenant concentration (Deutsche Post), exposure to European debt crisis
First Capital Realty Inc. (FCR-T)
Valuation: 19.25x AFFO (F'15 estimate)
Key Risks to Price Target: Grocery tenant concentration, construction delays/cost overruns, significant shareholder.
Granite REIT (GRT.UN-T)
New SO
Medium
$44.00
FFOPU14E: $3.22
FFOPU15E: $3.44
FFOPU16E: $3.56
13.75x AFFO (F'15 estimate)
Old
Valuation: 13.75x AFFO (F'15 estimate)
Key Risks to Price Target: Significant tenant concentration in Magna, inability to execute growth, foreign currency exposure
Leisureworld Senior Care Corporation (LW-T)
Valuation: 10.25x AFFO (F'15 estimate)
Key Risks to Price Target: Government regulation, redevelopment risks, refinancing risks
Morguard REIT (MRT.UN-T)
Valuation: 14.25x AFFO (F'15 estimate)
Key Risks to Price Target: Competition from new-format retail, tenant specific risks, significant shareholder.
Canadian Real Estate Inv. Trust (REF.UN-T)
Valuation: 17.75x AFFO (F'15 estimate)
Key Risks to Price Target: Mezzanine loan exposure with Hopewell, new supply pressures in key markets.
RioCan REIT (REI.UN-T)
Valuation: 18.5x AFFO (F'15 estimate)
Key Risks to Price Target: Rising interest rates, construction delays/cost overruns, key personnel.
WPT Industrial REIT (WIR.U-T)
New SO
Medium
$11.50
FFOPU14E: $1.00
FFOPU15E: $1.05
FFOPU16E: $1.05
13.75x AFFO (F'15 estimate)
Old
Valuation: 13.75x AFFO (F'15 estimate)
Key Risks to Price Target: Significant unitholder, inability to execute growth, rising interest rates
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
48
Company Comment
Monday, October 27, 2014, Pre-Market
Agrium Inc.
(AGU-N US$92.82)
(AGU-T C$104.33)
Act II
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
Carl Chen - (416) 863-7184
(Scotia Capital Inc. - Canada)
Christine Munroe, CPA, CA - (416) 863-5907
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Outperform
Risk Ranking: Medium
Target 1-Yr: US$105.00
ROR 1-Yr:
16.4%
Valuation: 7.5x 2015E EBITDA, 14.5x 2015E EPS, DCF @ 10%, 60% RCN
Div. (NTM)
Div. (Curr.)
$3.00
$3.00
Yield (Curr.)
3.2%
Key Risks to Target: Fertilizer supply/demand, crop and energy prices, weather
Event
■ A well-respected $14B activist investor, ValueAct Capital, has taken a
5.7% stake in AGU.
Implications
■ Do not expect ValueAct to undertake a public shouting match with
AGU, nor a quick trade - it's not their style. ValueAct is methodical,
and can be involved in a stock for years (think Valeant). Accordingly,
don't look for a massive stock re-rating tomorrow, it will take time.
■ Ultimately, what ValueAct wants is no different than what AGU
management and shareholders want: to create sustainable value. Why
now? Why not? The stock is down 25% from peaking at $114 before
Jana's proxy contest, there is a management team transition underway
(new CEO, new CFO, new Head of Retail), the stock is under pressure
on the back of a weaker outlook into 2015, and perhaps the peak of the
fertilizer investment cycle is in the rear view mirror. Most importantly,
AGU is set to generate a lot of free cash over the coming years.
Recommendation
■ We revisit several value creation ideas, and discuss the recent
underperformance of AGU. Ultimately, shareholders should view this as
a positive development that should receive little resistance by
management. There are no sides to take, as the AGU thesis is about
'when' value is created, not 'if' value is created. ValueAct's collaborative
and value-enhancing track-record speaks for itself. Buy AGU.
Qtly Adj. EPS (FD)
2012A
2013A
2014E
2015E
Q1
$1.34 A
$1.03 A
$0.07 A
$0.39
(FY-Dec.)
Adj Earnings/Share
Cash Flow/Share
EBITDA (M)
Price/Earnings
Relative P/E
Yield
Q2
$5.04 A
$4.94 A
$4.37 A
$4.62
Q3
$1.34 A
$0.50 A
$0.50
$0.96
Q4
$2.16 A
$0.87 A
$0.66
$1.28
Year
$9.88
$7.34
$5.61
$7.25
P/E
10.1x
12.5x
16.5x
12.8x
2011A
$9.82
$12.25
$2,604
6.8x
0.5x
2.2%
2012A
$9.88
$13.01
$2,573
10.1x
0.6x
2.0%
2013A
$7.34
$9.90
$2,099
12.5x
0.8x
2.5%
2014E
$5.61
$10.70
$1,835
16.5x
1.0x
3.2%
2015E
$7.25
$12.09
$2,338
12.8x
0.8x
3.2%
BVPS14E:
ROE14E:
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
$13,366
$3,557
$16,923
$49.51
11.44%
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
144
144
49
Act II
■ What happened on Friday? ValueAct Capital (VA) filed
with the SEC a 5.7% ownership stake in AGU – about 8.2M Exhibit 1 – Fertilizer Sector Performance on Friday, October 24
8% 7.5%
shares. The stock closed up 7.5% on the day, with the rest of
7%
the NA fert stocks catching a 2% to 4% bid. Several minutes
prior to close, Bloomberg highlighted an e-mail statement
6%
from VA’s CEO, with phrases like:
5%
4.4%
3.8%
o FCF explodes in 2016 and beyond
4%
3%
o AGU is poised to gain from crop price recovery
2.2% 2.2% 2.1%
1.8%
2%
o VA sees significant strategic value in Agrium
0.7%
1%
0.4%
■ Who is VA? The $14B hedge fund concentrates on acquiring
0%
significant ownership stakes in a limited number of
-0.3%
-1%
companies that it believes are undervalued. VA is very FCF
-0.9% -0.9%
-1.2%
-2%
focused. Activist Investing ranks VA as the #2 activist worldAGU POT IPI ICL MOS SQM CF S&P TSX URKA YAR K+S PHOR
wide, behind Carl Icahn. According to its website:
500
o ValueAct Capital is typically one of the largest
independent shareholders at each of its core Source: Bloomberg; Scotiabank GBM.
investments. The goal in each investment is to work
constructively with management and/or the company's
board to implement a strategy or strategies that
Exhibit 2 – MSO Share Price Appreciation during Ownership
maximize returns for all shareholders.
40
o Such companies may be temporarily mispriced for a
VA Sold MSO
variety of reasons, including perceived unfavorable
35
industry conditions, poor business performance,
30
changes
in
management
or
ownership,
reorganizations, or other external factors.
25
VA Bought MSO
■ What’s VA’s modus operandi? VA is known as the ‘friendly
20
ImClone Scandal
activist’, as it seeks to work collaboratively with management
behind the scenes, rather than engage in a public battle. Do
15
not expect a chest thumping, shouting match with
10
management. If we don’t hear from VA again, then they are
probably happy with the progress of value creation.
5
■ What is VA’s track record? According to the Wall Street
Jeffrey Ubben becomes Chairman
0
Journal, ValueAct has posted an average annualized return of
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
about 17% since its inception in 2000, after fees. Last year, it
climbed about 30%, compared to the 16% gain by activists on Source: Bloomberg; Scotiabank GBM.
average. Exhibit 2 highlights how VA actively helped turn
Martha Stewart Living around following the ImClone
scandal. VA’s founder took over MSO as Chairman.
Exhibit 3 – VA’s Holdings
■ Where does AGU fit into VA’s portfolio? We believe AGU
th
is VA’s 8 largest holding at about $0.7B. VA typically holds
between 10 and 18 core company investments (Exhibit 3).
Ownership
Market Board
Stake
Value
Seat?
■ Will VA seek a board seat on Agrium? Of the ~70 Rank Company
(%)
($B)
companies VA has been engaged with, they have had a board
seat on about half. VA recently made headlines when it
1 Microsoft Corp.
0.9%
$3.3
Yes
secured a board seat on Microsoft, despite holding less than
2 Valeant Pharmaceuticals
5.7%
$2.4
Yes
1% of the stock. We understand this was the first time MSFT
3 Motorola Solutions
11.5%
$1.8
Yes
appointed a director that was not solely at its discretion. VA
4 Adobe Systems
4.8%
$1.6
Yes
has a board seat at all but one of its holdings that are larger
5 CBRE Group
9.7%
$1.0
Yes
than its AGU stake. Accordingly, we think VA will seek a
6 Rockwell Collins
8.3%
$0.9
No
board seat, over time. If we’re wrong, VA is familiar with
7 Willis Group
10.3%
$0.7
Yes
David Everitt, who sits on the board of both AGU and ALSN
8 Agrium
5.7%
$0.7
?
– the #9 holding for VA.
Source: Bloomberg; Scotiabank GBM.
50
■ What does VA see in AGU? In our view, there is nothing
magical VA sees that we don’t all see ourselves. We believe Exhibit 4 – The FCF Potential for AGU is Huge
$2,000
$12
VA sees a massive FCF growth story over the next three
years, as capex winds down (Exhibit 4). Additionally, there is
$10
an undervalued retail business that needs a better appreciation
$1,500
by the investment community. We think the value in both the
FCF and the retail stories has been trapped by a weakening
$8
$7.34
$7.25
$1,000
ag cycle, operational hiccups in the nitrogen business,
$5.61
Vanscoy cost and timing setbacks, and management turnover.
$678
$6
■ How compelling could the FCF story be? We think AGU
$500
can generate ~$12/sh in FCF by 2017, assuming no major
$238
$4
changes to fertilizer commodity prices and natural gas costs.
$0
What is $12/sh of FCF worth? If we look at the fertilizer
$2
sector today, and include chemical/seed peers like MON and
-$294
DD, then the group is trading at a 2016 FCF yield of 6.9%.
-$500
$0
2013
2014E
2015E
2016E
2017E
Even if we take out K+S, which is deeply FCF negative, as
well as the Russians/Chileans, we still end up with a 6.9% Source: Scotiabank GBM estimates.
yield (Exhibit 5). This implies a nearly $175 stock price, over
time. Even if we only get 50% of this theoretical upside, or a
stock price of $133, we’re talking about a nearly 50% return
before dividends over a couple of years. Not bad. Based on Exhibit 5 – 2016 FCF Yields of Major AGU’s Peers
20%
AGU’s closing share price prior to VA’s filing, the implied
Group: 6.9%
2016E FCF yield was a miserable 14%.
15.5%
Group ex (Russian/Chileans and negative K+S: 6.9%
15%
■ What’s the caveat with the above analysis? One could argue
12.1%
the FCF yield already reflects future FCF expectations. In
9.5%
8.6%
10%
other words, if AGU stopped announcing growth projects post
6.8% 7.3%
6.1% 6.4% 6.4%
2016, the stock should trade at a higher FCF yield (ex rising
5%
commodity prices). We agree with this thesis. However, the
current peer FCF yield chart largely reflects this. CF, IPI and
0%
SQM don’t have any projects in the pipeline post 2016, and
are already running at full capacity. Perhaps, this is why they
-5%
are trading at a higher FCF yield. Meanwhile, MOS, POT and
YAR are trading below average. Why? While it’s true that
-10%
MOS and POT have nearly finished their capacity expansion
-9.5%
projects, they have idle capacity, which can bring on FCF
-15%
growth quickly. Yara’s acquisition-rich strategy has likely
SDF DD MOS POT YAR CF
IPI URKA PHOR SQM
kept future FCF growth expectations high.
■ Why is VA moving into AGU now? Why not? The stock is Source: Bloomberg; Scotiabank GBM.
down nearly 25% since AGU’s January 28, 2013 investor day
(i.e., weeks before the proxy contest), while its nitrogen peers,
CF and YAR, are up 12% and 4% over the same period,
respectively (Exhibit 5). It’s true, almost all other fertilizer Exhibit 6 – Performance since AGU’s Jan 28, 2013 Investor Day
stocks are down much more than AGU, on average, but those
20% 14%
12%
are all potash-focused companies, which collapsed following
10%
4%
Russian potash cartel break-up
the break-up of the Russian potash marketing association,
0%
BPC. Therefore, one could argue AGU stands alone in its
underperformance of non-potash centric fertilizer stocks over
-10%
the past two years.
-20%
■ Does this really just boil down to a retail/wholesale split?
-23%
-24%
-30%
We don’t think it’s necessary that retail needs to be split from
-31%
Nitrogen majors
-40%
wholesale for full value realization to occur, but all options
-37%
-41%
will likely be left on the table until the stock starts to
-50%
-47%
‘outperform’. To be clear, VA is not publicly advocating for
-60%
-57% -59%
any change to AGU’s business model. In our minds, AGU and
-70%
Jana seemed to agree the retail business was undervalued;
SPTSX
CF YAR AGU
POT MOS K+S IPI ICL URKA SQM
where they disagreed on the issue was by what magnitude,
and how to best unlock the value.
Free Cash Flow (LHS)
2016E FCF Yield
Source: Bloomberg; Scotiabank GBM.
Adjusted EPS ($/sh)
Free Cash Flow ($M)
Adjusted EPS (RHS)
51
■ What is the potential upside for the Retail business? There
are several ways to estimate what the retail business is trading
at. The easy way is to take pure play (or reasonably close)
companies and put their trading multiples (we prefer forward
EV/EBITDA) into AGU’s wholesale segments, and then
determine what the implied retail business is trading at prior
to VA’s filing (i.e., $86/sh). Doing this analysis yields retail
trading at 6.9x 2015E EBITDA (Exhibit 7). Taking a more
traditional rule-of-thumb view of L/T fertilizer valuation
multiples (N @ 5x, P @ 6x, K @ 7x) results in retail
conservatively trading at 7.8x 2015E EBITDA (Exhibit 8).
So, what is the upside? In June 2011, then-CEO Mike Wilson
stated the retail business should be valued at 11x EBITDA. If
we look at some of the comps that have been used for AGU’s
retail business, they are trading at 10.2x 2015E EBITDA
today (Exhibit 9). In fairness, stocks have been beaten up as of
late, and so we think it’s not unreasonable to also consider 11x
EBITDA. In our view, the potential uplift from a retail rerating is therefore an AGU stock price of $106 (+23%) to
$121 (+40%), all of which exceed our target price of $105
(Exhibit 10).
■ Is management at risk? Almost certainly not, in our view.
Given the management team is relatively new (in fact, the
CFO hasn’t even started yet), time is on their side to create
value. However, it should be known that VA is not afraid of
management change. We understand that of the 32 companies
in which VA joined the board, half changed their CEOs after
VA joined.
■ Should the dividend be higher? We think so, but over time.
AGU’s dividend policy is to pay 25% to 35% of FCF out as
dividends over a business cycle. The current dividend is $3/sh,
or about $430M. Given that FCF is negative this year, and
only ramping up next year (not to mention a weak ag cycle),
it’s understandable why there hasn’t been much movement
recently. Additionally, we think AGU perhaps increased its
dividend too quickly in the past couple of years, likely due to
pressure from the previous activist. We think $4 is the right
divy (if one believes in $12 FCF in 2017), and which should
grow with retail growth, as that is where the stable and
predictable FCF is generated. Additionally, if/when AGU sees
the fertilizer investment cycle winding down, the company may
be willing to increase its dividend payout toward 50% of FCF,
resulting in closer to a $6 dividend.
■ Does this have anything to do with Yara/CF? Indirectly,
yes. Both the wholesale and the retail fertilizer industries are
undergoing consolidation, and AGU has assets and capital
available to participate in a meaningful way. Whether that
means buying or selling wholesale assets is yet to be
determined. Clearly, there are buyers and sellers of wholesale
assets out there right now, but the bid-ask spread may too
wide as the M/T outlook is uncertain.
■ What should we do with AGU? We’re buying AGU, with
more upside to our target than downside. The stock remains
undervalued, and VA should help shareholders realize value,
hopefully sooner rather than later.
■ What levers are there to pull if value isn’t created? We see
several, but beyond the scope of this note.
Exhibit 7 – Retail Could be Trading at 6.8x – 7.8x 2015E EBITDA
Segment
Agrium
EV/EBITDA
2015E
EBITDA
2015E
Weight
Weighted
Multiple
[x]
[$M]
[%]
[x]
27%
1.8x
Nitrogen
6.4x
~640
Phosphate
6.5x
~137
6%
0.4x
Potash
7.6x
~322
14%
1.0x
Retail
6.9x
1,200
51%
3.5x
Other
Total
8.0x
39
2,338
2%
100%
0.1x
6.8x
Agrium Price Value Calculation
($M)
2015E EBITDA
AGU EV/EBITDA Multiple*
Implied EV
2,338
6.8x
15,996
Net Debt
Equity Value
3,557
12,439
FD Shares O/S (M)
144.0
Implied Price Value
$86.38
Source: Scotiabank GBM estimates.
Exhibit 8 – Retail Could be Trading at 6.8x – 7.8x 2015E EBITDA
Segment
Agrium
EV/EBITDA
2015E
EBITDA
2015E
Weight
Weighted
Multiple
[x]
[$M]
[%]
[x]
Nitrogen
5.0x
~640
27%
1.4x
Phosphate
6.0x
~137
6%
0.4x
Potash
7.0x
~322
14%
1.0x
Retail
7.8x
1,200
51%
4.0x
Other
Total
8.0x
39
2,338
2%
100%
0.1x
6.8x
Agrium Price Value Calculation
($M)
2015E EBITDA
AGU EV/EBITDA Multiple*
Implied EV
2,338
6.8x
15,973
Net Debt
Equity Value
3,557
12,416
FD Shares O/S (M)
Implied Price Value
144.0
$86.22
Source: Scotiabank GBM estimates.
Exhibit 9 – Retail Comps are Trading at 10.2 EBITDA
Source: Bloomberg; Scotiabank GBM.
Exhibit 10 – A Retail Re-Rating Could See AGU Worth Up to $121
Retail now
Base Case
6.8x
Conservative Case
7.8x
Retail potential
10.2x
11.0x
10.2x
11.0x
Stock potential
$114
+32%
$121
+40%
$106
+23%
$113
+31%
$106 - $121
Source: Scotiabank GBM estimates.
52
Intraday Flash
Friday, October 24, 2014 @ 12:31:32 PM (ET)
America Movil
(AMX-N US$23.52)
(AMX L-MX MXN 15.96)
Q3: Conference Call Highlights
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
Jeff Fan, CPA, CA, CFA - (416) 863-7780
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Perform
Risk Ranking: Medium
[email protected]
Target 1-Yr: US$19.00
1-Yr: MXN 12.40
ROR 1-Yr:
-17.6%
Valuation: DCF - 5 years results, 8.3% WACC, terminal growth rate of 1.0%
Div. (NTM)
Div. (Curr.)
(ADS)
Yield (Curr.)
US$0.37
US$0.37
1.6%
Key Risks to Target: Regulation in Mexico
Event
■ We listened to AMX's Q3/14 conference call.
Implications
■ The company provided vague comments about the breakup process and
stated that they were negotiating with "big" players but no decision has
been reached. We understood that AMX expects the tower spinoff to
occur by Q2/15, with the breakup to be a "2015 event", which is in line
with our expectations of a complex and perhaps lengthy process.
■ Also, the company clarified that it won't participate in the coming FTA
auction in Mexico, but that they are addressing the advertising
opportunity through the CIE division they bought last year. In our view,
AMX may look for a partnership with one of the successful bidders of
the television auction (especially once the breakup plan is approved).
■ Management did not quantify the impact of the coming elimination of
domestic LD in Mexico (which we estimate at about 10% of wireline
and wireless revenues.) However, they said that postpaid clients are
being migrated to packages where long distance has been eliminated
and that elasticity should help to make up the loss in the long term.
■ The stake in KPN will be reduced to ~20% to preserve voting rights
(from 21.4%). However, we didn't sense overwhelming conviction in
retaining this stake, particularly as AMX guided to reduce net debt to
EBITDA to 1.5x.
Recommendation
■ Reiterate neutral on AMX.
Qtly EPS (FD)
2011A
2012A
2013A
2014E
Q1
0.29 A
0.42 A
0.36 A
0.20 A
(FY-Dec.)
Earnings/Share
Cash Flow/Share
Price/Earnings
Revenues (M)
EBITDA (M)
EBITDA/Int. Exp
Q2
0.31 A
0.17 A
0.19 A
0.27 A
Q3
0.24 A
0.40 A
0.23 A
0.15 A
Q4
0.22 A
0.20 A
0.24 A
0.62
Year
1.06
1.20
1.03
1.24
P/E
14.9x
12.4x
14.8x
12.8x
2011A
1.06
0.06
14.9x
731,418
259,813
16.6x
2012A
1.20
0.11
12.4x
777,941
260,895
13.6x
2013A
1.03
0.91
14.8x
786,100
255,699
8.4x
2014E
1.24
0.50
12.8x
855,196
273,300
7.2x
2015E
1.27
1.05
12.5x
871,226
274,853
6.7x
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
US$82,320
US$33,792
US$102,357
ScotiaView Analyst Link
All values in MXN unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
3,500
1,722
53
Company Comment
Friday, October 24, 2014, Pre-Market
(AI-T C$11.72)
Atrium Mortgage Investment Corporation
Q3/14 First Look: Solid Portfolio Growth
Jeffery Coles, MBA, CFA - (416) 863-7067
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Outperform
Risk Ranking: Medium
Target 1-Yr:
C$12.25
ROR 1-Yr:
12.3%
Valuation: 13.0x Adj. EPS (2016E)
Div. (NTM)
Div. (Curr.)
$0.91
$0.82
Yield (Curr.)
7.0%
Key Risks to Target: Declining real estate prices, origination volumes, and credit quality
Event
■ Atrium reported Q3/14 adj. EPS of $0.23 vs. $0.22 last year, slightly
below us and the Street at $0.238 and $0.235, respectively.
Implications
■ Excl. the increase to general provision for mortgage losses
($0.013/sh), results were marginally better than expected on higher
mortgage interest income (+0.01/sh), partially offset by higher interest
expenses (-$0.006/sh). The 4.5% YOY adjusted EPS growth was driven
by mortgage portfolio growth.
■ Solid operating quarter; excellent portfolio growth. Mortgage
growth was excellent, with the portfolio reaching $412.8M (+8% QOQ;
+49% YOY), well ahead of our $392M estimate. LTV ratio remains in
good form at 64.4% (flat; +1.8%) though the proportion of conv. 1st
mortgages slipped to 80.5% (-2.3%; -4.8%). The weighted average
mortgage rate increased to 8.77%, up 7 bp QOQ and YOY, with the
weighted average term to maturity holding firm at 1.1 years.
■ General provision for mortgage losses increased to 40 bp (+10 bp).
We will be seeking details on the call about the reasons for increase, but
with management expecting full repayment of the two loans in default
and no specific provisions, it appears to be conservative management.
■ Change to board of directors. Michael Cooper has stepped down from
the board of directors and will be replaced by Andrew Grant.
Recommendation
■ Full update post Oct. 27 conf. call at 4 p.m. ET (dial-in: 888-241-0551).
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.20 A
$0.23 A
$0.23
$0.24
(FY-Dec.)
Adj EPS
Earnings/Share
Price/Earnings
Yield
Revenues (M)
Q2
$0.22 A
$0.23 A
$0.23
$0.24
Q3
$0.22 A
$0.24
$0.24
$0.24
Q4
$0.22 A
$0.23
$0.24
$0.24
Year
$0.85
$0.93
$0.94
$0.95
P/E
12.8x
12.7x
12.4x
12.4x
2012A
$0.86
$0.86
12.7x
7.9%
$18.8
2013A
$0.85
$0.85
12.8x
7.8%
$26.2
2014E
$0.93
$0.93
12.7x
7.8%
$37.3
2015E
$0.94
$0.94
12.4x
8.2%
$44.0
2016E
$0.95
$0.95
12.4x
8.2%
$48.4
BVPS14E:
ROE14E:
$10.06
9.49%
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$285
$167
$452
24
24
54
Company Comment
Monday, October 27, 2014, Pre-Market
Capital Power Corporation
(CPX-T C$25.87)
Sundance Rains On Solid Quarter
Matthew Akman, MBA - (416) 863-7798
(Scotia Capital Inc. - Canada)
Lukasz Michalowski, MBA - (416) 863-5915
(Scotia Capital Inc. - Canada)
Dario Neimarlija, CA, CFA - (416) 863-2852
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Outperform
Risk Ranking: Medium
Target 1-Yr:
C$32.00
ROR 1-Yr:
29.0%
Valuation: 9.5% 2015E Free Cash Yield and 10.3x 2015E EV/EBITDA
Div. (NTM)
Div. (Curr.)
$1.36
$1.36
Yield (Curr.)
5.3%
Key Risks to Target: Power Prices; Growth Projects Entering Service; Environmental Regulations
Event
■ CPX reported Q3/14 adjusted FFO of $83M vs. our estimate of $68M
and $125M in Q3/13.
Implications
■ Results were below our expectations on EBITDA but above on cash
flow (lower cash taxes). Gas-fired power EBITDA did not offset the
pre-announced Sundance losses to the extent we anticipated. As gas
prices soften, gas-fired peaker profit should improve in the event of
future market upset resulting in price spikes.
■ The updated hedge book supports our view that the Alberta power
market is bottoming out. Forward hedge prices are unchanged in the
mid-$50s/MW-hr. However, since the last quarter, the hedged
proportion is up 6% and 3% for 2015/2016 (now 92% and 49%
respectively).
■ Plant availability remains impressively high at the baseload coal plants.
The Genesee 1 and 2 plants were both available nearly 100% of the
time during Q3. And the major growth projects, including Shepard
Energy Centre ($821M) and K2 Wind ($310M) remain on track for
commercial operations in early and late 2015.
Pertinent Revisions
New
Old
EBITDA14E
$425
$434
New Valuation:
9.5% 2015E Free Cash Yield and 10.3x
2015E EV/EBITDA
Old Valuation:
9.6% 2015E Free Cash Yield and 10.3x
2015E EV/EBITDA
Recommendation
■ The free cash yield at CPX remains attractive despite the unusually weak
3Q result. With a conservative payout (~50%) and manageable growth
program, the company has accumulated an additional $88M of cash YoY.
We would continue accumulating for value, yield and dividend growth.
Qtly EBITDA (M)
2013A
2014E
2015E
2016E
(FY-Dec.)
Free Cash Flow/Share
Price/Earnings
EV/EBITDA
Payout Ratio
EBITDA (M)
Debt/EBITDA
Tot. Debt/(Tot.Dbt+Eq.)
Q1
Q2
Q3
Q4
Year
$135 A
$113 A
$139
$104 A
$78 A
$115
$151 A
$91 A
$135
$119 A
$144
$164
$509
$425
$553
$549
EV /
EBITDA
9.0x
12.1x
9.1x
9.3x
2012A
$2.62
25.7x
11.2x
48%
$441
3.8x
38%
2013A
$3.24
17.1x
9.0x
39%
$509
3.0x
34%
2014E
$2.43
31.4x
12.1x
54%
$425
3.6x
34%
2015E
$3.06
18.2x
9.1x
45%
$553
2.8x
34%
2016E
$3.24
18.8x
9.3x
42%
$549
2.8x
35%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated. Note: EPCOR has 19% economic interest
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.
$2,636
$1,957
$5,159
102
83
55
Exhibit 1 – Capital Power Corporation Financial Statements Summary
Income Statement ($M)
2013A
2014E
2015E
2016E
Revenues
Fuel & Energy Purchases,O&M and Other
Corporate
Adjusted EBITDA
Depreciation & Amortization
Financing Expense
Other
Income (Loss) Before Income Taxes & Non-controlling Interests
Income Taxes
Preferred Share Dividends
Non-Controlling Interest in CPLP
Normalized Net Income
Adjustments & Unusual Items
Reported Net Income
$1,393
$763
$121
$509
$222
$78
$32
$177
($11)
$20
$45
$123
$32
$155
$1,063
$539
$99
$425
$187
$57
$20
$162
$37
$22
$19
$83
($51)
$32
$1,225
$573
$100
$553
$214
$81
$0
$257
$59
$22
$32
$143
$0
$143
$1,224
$575
$101
$549
$214
$81
$0
$253
$58
$22
$34
$139
$0
$139
Normalized earnings per share
Weighted Average Share Count (CPX shares)
$1.69
72.8
$1.01
82.0
$1.72
83.2
$1.81
76.5
Cash Flow Statement ($M)
2013A
2014E
2015E
2016E
$155
$222
$49
$426
$71
$497
$32
$187
$159
$378
$0
$378
$143
$214
$100
$457
$0
$457
$139
$214
$103
$456
$0
$456
Property, Plant And Equipment And Other Assets
Other Investing Activities
Cash Provided By Investing Activities
($943)
$595
($348)
($275)
$11
($264)
($178)
$8
($170)
($107)
$8
($99)
Common Share Dividends
Other Financing Activities
Cash Provided By Financing Activities
($92)
($9)
($101)
($107)
($74)
($181)
($113)
($96)
($209)
($104)
($306)
($410)
Foreign Exchange (Loss) Gain
Increase (Decrease) In Cash And Cash Equivalents
Cash And Cash Equivalents, Beginning Of Year
Cash And Cash Equivalents, End Of Year
Balance Sheet ($M)
($1)
$47
$53
$100
2013A
$0
($67)
$100
$34
2014E
$0
$78
$34
$112
2015E
$0
($53)
$112
$59
2016E
Cash & Equivalents
Other Current Assets
PP&E
Intangibles & Goodwill
Other Assets
Total Assets
$100
$341
$3,525
$333
$920
$5,219
$34
$326
$3,637
$338
$839
$5,174
$112
$326
$3,657
$338
$831
$5,264
$59
$326
$3,606
$338
$823
$5,151
Current Liabilities
Long Term Debt
Other Liabilities
Total Liabilities
Preferred Shares
Common Equity
Total Shareholders' Equity
Total Liabilities & Shareholders' Equity
$261
$1,527
$1,014
$2,802
$464
$1,953
$2,417
$5,219
$207
$1,527
$1,074
$2,808
$464
$1,901
$2,365
$5,174
$227
$1,527
$1,078
$2,832
$464
$1,968
$2,432
$5,264
$247
$1,527
$1,085
$2,859
$464
$1,828
$2,292
$5,151
Net Income
Depreciation, Amortization, And Asset Retirement Accretion
Other Operating Activities
Change In Non-Cash Operating Working Capital
Cash Provided By Operating Activities
Source: Company reports; Scotiabank GBM estimates.
56
Company Comment
Friday, October 24, 2014, Pre-Market
Eldorado Gold Corporation
(EGO-N US$6.93)
(ELD-T C$7.79)
Drilling Update from China and Greece
Tanya Jakusconek, MSc, Applied - (416) 945-4083
(Scotia Capital Inc. - Canada)
Joanne van Ballegooie - (416) 863-7431
(Scotia Capital Inc. - Canada)
James Bender, CPA, CA - (416) 945-4648
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Outperform
Risk Ranking: High
Target 1-Yr:
US$10.00
ROR 1-Yr:
44.7%
Valuation: 1.35x NAV
Div. (NTM)
Div. (Curr.)
$0.03
$0.03
Yield (Curr.)
0.4%
Key Risks to Target: Commodity prices; technical and operational risk; geopolitical risk.
Event
■ ELD released drill results from its White Mountain and Jinfeng projects
in China and the Piavitsa project in Greece.
Implications
■ White Mountain - Over 7.5 km of exploration drilling and 12.4 km of
delineation drilling has been completed year-to-date (YTD). Three areas
(Central Zone, North Zone and Northern Deeps Zone) were targeted
and encountered mineralization outside of the current resource model.
■ Jinfeng - YTD, a total of 3.6 km of drilling has been completed,
(targeting segments of the F2, F6 and F7 mineralized fault zones)
intended to convert existing inferred resources into the M&I category.
■ Piavitsa - YTD, over 6 km of exploration drilling has been completed.
ELD has targeted the wide data gaps within the 2km strike length over
which the deposit has been defined (particularly in the western part of
the deposit). Most holes intersected mineralization with grades and
thicknesses similar to previous drilling, confirming continuity of the
mineralization.
Recommendation
■ We are likely to see resource conversions (from inferred to M&I
categories) at Jinfeng and increases to resources at White Mountain and
Piavitsa when ELD reports its updated reserve and resource statement in
early 2015. Sector Outperform.
Qtly Adj. EPS (FD)
2011A
2012A
2013A
2014E
Q1
$0.12 A
$0.14 A
$0.12 A
$0.04 A
(FY-Dec.)
Gold Price (/oz)
Gold Prod (oz) (000)
Total Cash Cost ($/oz)
All-In Sust. Cost ($/oz)
Adj Earnings/Share
Cash Flow/Share
Free Cash Flow/Share
Price/Cash Flow
Q2
$0.14 A
$0.08 A
$0.07 A
$0.05 A
Q3
$0.19 A
$0.11 A
$0.08 A
2012A
$1,696
622
$543
$941
$0.50
$0.65
$0.43
19.9x
2013A
$1,278
684
$538
$968
$0.27
$0.53
$-0.31
10.7x
Q4
$0.16 A
$0.17 A
$0.00 A
2014E
$1,270
747
$540
$933
$0.20
$0.48
$-0.19
14.3x
Year
$0.61
$0.50
$0.27
$0.20
P/E
22.5x
25.8x
21.1x
35.0x
2015E
$1,300
703
$543
$952
$0.25
$0.53
$-0.33
13.1x
2016E
$1,300
906
$531
$846
$0.32
$0.73
$0.17
9.5x
NAVPS:
P/NAV:
$7.50
0.92x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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.
$4,964
$13
$5,263
716
709
57
Company Comment
Monday, October 27, 2014, Pre-Market
Flextronics International Ltd.
(FLEX-O US$9.33)
Q2/F15 preview: CTG weighs on the top line
Daniel Chan, MBA - (416) 863-7552
(Scotia Capital Inc. - Canada)
John MaGee - (416) 863-7237
(Scotia Capital Inc. - Canada)
[email protected]
[email protected]
Rating: Sector Perform
Risk Ranking: Medium
Target 1-Yr:
US$11.70
ROR 1-Yr:
25.4%
Valuation: 5.5x forward EV to FY16E EBITDA
Div. (NTM)
Div. (Curr.)
$0.00
$0.00
Yield (Curr.)
0.0%
Key Risks to Target: Margin pressure could lower EPS
Event
■ FLEX is scheduled to report Q2 results on Wednesday October 29. A
call is scheduled for 5:00 p.m. at 888-790-2010, passcode: Q2Flex.
Implications
■ Expect slowing QOQ growth as Motorola uncertainty weighs on
top line to drive revenue of $6.4B and EPS of $0.25. CTG is expected
to decline 8% QOQ as new product announcements are expected to
slow demand. We expect CTG weakness to be offset by continued
strength in IEI and HRS. Productivity improvements in the components
and CTG businesses should help drive gross margin up 20bps QOQ and
YOY. We expect this to translate into FLEX achieving the highest
operating margin in two years at 2.9%. We anticipate strong free cash
generation of $233M in the quarter, ending Q2 with $636M in net debt.
■ Anticipate flat revenue guidance of $6.4B, as CTG weakness
continues, and EPS of $0.26. With continued uncertainty concerning
the Lenovo relationship, we believe Flextronics will deliver
conservative CTG guidance despite many new Motorola devices hitting
the market. We are forecasting a 28% YOY decline in CTG. CTG
weakness is expected to be offset by strength in IEI and HRS. We
anticipate profitability to be flat QOQ driven by stable opex. Share
buybacks are expected to lift EPS to $0.26.
Recommendation
■ Maintain Sector Perform. We believe Flextronics is more exposed to
the risks of the consumer end-market than its peers. Also recent stock
performance has increased relative valuation, leaving us SP on the name.
Qtly EPS (FD)
2013A
2014A
2015E
2016E
Q1
$0.22 A
$0.18 A
$0.25 A
$0.27
(FY-Mar.)
Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q2
$0.26 A
$0.22 A
$0.25
$0.30
Q3
$0.22 A
$0.26 A
$0.26
$0.31
Q4
$0.13 A
$0.24 A
$0.22
$0.27
Year
$0.84
$0.89
$0.97
$1.15
P/E
8.0x
10.4x
9.6x
8.1x
2012A
$0.84
$1.50
8.6x
0.5x
$29,388
$1,105
1.4x
68.9x
2013A
$0.84
$1.69
8.0x
0.5x
$23,569
$1,148
1.3x
-128.6x
2014A
$0.89
$1.62
10.4x
0.6x
$26,109
$1,090
1.2x
16.9x
2015E
$0.97
$1.77
9.6x
0.6x
$25,647
$1,168
1.3x
14.0x
2016E
$1.15
$2.04
8.1x
0.5x
$26,562
$1,274
1.4x
14.9x
BVPS15E:
ROE15E:
$4.30
24.90%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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.
$5,503
$800
$6,303
590
588
58
Recommendation
■ Maintain Sector Perform. Flextronics has been the most consistent grower in our EMS
coverage over the last 12 months driven by the success of the Google, Motorola, and Xbox
businesses. Given the significant build out of these programs over the last year, we expect
growth to gradually slow in the Consumer Technology Group (CTG) over the coming 12
months. Further, we believe the weakening in IT spending that occurred over the summer is
likely to continue over the remainder of the calendar year, weighing on the INS segment.
Similarly, with the closing of Lenovo’s takeover of IBM’s commodity server business, there
is potential to see further softening in the space should Lenovo insource production. We
believe these weaknesses will be somewhat offset by growth in IEI, as more industries look
to outsource, and HRS, led by Automotive and Medical end-markets. From a valuation
standpoint, FLEX currently trades at 5.3x forward EV/EBITDA, a premium to JBL at 4.5x,
and CLS at 4.6x. With our expectation for slowing growth and a high valuation to peers, we
remain Sector Perform on the name.
CTG May Come in Better Than Expected. We See IEI Being the Key
Growth Driver
■ Expect flat YOY revenue as CTG slow down offsets IEI and HRS growth. Exhibit 1
highlights our expectations for the quarter. Overall, we are expecting revenue to be flat YOY
at $6.4B. Sequentially, we are expecting slowing growth out of CTG, driven by conservative
Motorola guidance, and INS, driven by weaker spending in communications, to drive a 3%
decline. We expect this softness to be somewhat offset by growth in IEI and HRS. We look
at the separate operating segments below.
Exhibit 1 - Q2/F15 Expectations
US$
Q2 15E
Integrated Network Solutions
2,459
Industrial and Emerging industries 1,147
High Reliability Solutions
856
Consumer Technology Group
1,992
Sales (M)
6,453
Gross Profit
495
Gross Margin (%)
6.0%
EBITDA (M)
295
EBITDA Margin (%)
4.6%
EBIT
184
EBIT Margin (%)
2.9%
Adjusted EPS ($)
$0.25
Q2 14A
2,588
940
785
2,097
6,410
471
5.8%
259
4.0%
159
2.5%
$0.22
B/ (W) %
-5.0%
22.0%
9.0%
-5.0%
0.7%
5.1%
13.8%
16.0%
14.6%
Q1 15A
2,503
1,134
846
2,160
6,643
493
5.8%
294
4.4%
183
2.8%
$0.25
B/ (W) %
-1.8%
1.1%
1.1%
-7.8%
-2.9%
0.3%
Factset Q2 15E
2,449
1,139
850
2,012
6,438
Guidance
6,200 - 6,600
$0.24
$0.22-$0.26
0.3%
0.4%
0.0%
Source: Company reports; Scotiabank GBM estimates; Factset.
■ CTG – lapping tougher comps but new Motorola models could drive better-thanexpected results. Flextronics is beginning to lap key quarters in its Motorola integration.
This time last year Motorola had just rolled out its Moto X and Google had just released the
Chromecast, two products which drove significant growth for the CTG business. Since then,
Motorola has released two lower end phones the Moto G (November 2013) and the Moto E
(May 2014) which have received relatively strong adoption. The new models of the Moto X
and G were announced in September this year and are unlikely to show much volume until
next quarter. Similarly, the Moto 360 smartwatch was also released in September. The
anticipation for these devices may have caused some declines in demand over 2Q leading to
some weakness on a YOY basis. Although, the company did state that guidance was
conservative due to the Lenovo acquisition of Motorola and the uncertainty around potential
insourcing. The acquisition has yet to close.
■ Integrated Network Solutions (INS) – Expect weakness in communications with Cisco and
Juniper delivering lackluster performance. With its EMS peers and key customers
highlighting significant weakening in the U.S. telecom market in September, we believe
there is an opportunity for the INS business to decline more than the mid-single digit declines
59
■
■
■
■
the company guided to. We expect storage programs to remain strong as the company is
seeing strength in its ODM-like business, offsetting some of the weakness in
communications. The server segment is a relatively small part of the business, but with
Lenovo buying IBM’s System X business, a key program for FLEX, there is much
uncertainty over the outlook for the business as there is potential for insourcing of the
program.
High Reliability Solutions (HRS) – Forecasting steady growth in A&D and Medical;
final quarter of RIWISA bump. We expect the HRS segment to continue its mid to high
single-digit YOY growth driven by strength in medical (last year, diabetes programs were
weak), the final quarter of RIWISA’s integration, and growth in A&D. Sequentially,
automotive is expected to exhibit seasonal weakness offset by continued strength in medical.
Industrial and Emerging Industries (IEI) – anticipate semicap weakness to be offset by
strength in appliances and energy. Flextronics described the strength in semicap last
quarter as bubbly and indicated it was unlikely to show again in Q2. The company expects
new ramps and broad-based demand to offset semicap weakness, keeping revenue flat
sequentially. On a YOY basis, new program wins are expected to drive strong double-digit
growth.
Profitability expected to expand YOY and QOQ on improved components business,
better mix, and cost reductions. Gross margin is expected to improve 20bps YOY and
QOQ. We expect YOY strength to stem from improved profitability in the components
business and better mix. We are forecasting the non-communications/IT businesses to
contribute 31% of revenue vs. 27% last year. Sequentially, we believe improved mix and
improved profitability in the Google business will lift gross margins. We are forecasting
Flextronics to deliver its highest operating margin in two years at 2.9%, driven largely by
improved gross margin and keeping opex at $200M. EPS is expected to grow $0.03 YOY on
better profitability and a reduced share count, but flat QOQ due to a lower top line.
Expect continued growth in cash: positive working capital flows offset by share
repurchases. We are forecasting net debt to decline $163M in the quarter driven by earnings
of $140M and positive working capital flows of $50M. We expect this strength to be offset
by share repurchases of $74M. We are forecasting Flextronics to end the quarter with $636M
in net debt.
Anticipate Significant Annual Declines in CTG to Drive Q3 Guidance Down
■ Expecting Q3 revenue guidance of $6.4B: Motorola uncertainty and lower Xbox sales
may cause YOY revenue decline, new models could drive upside. We believe the next
generation Moto X and G will continue to build on the strong market traction of their
predecessors as initial reviews are quite positive. Similarly, Google recently announced that
Motorola would be manufacturing its latest edition of the Nexus smartphone line. The Nexus
line is usually a smaller production run but does help build brand awareness as it showcases
the latest version of the Android operating system. We also expect the Motorola 360
smartwatch to be a relatively muted holiday hit as the form factor has yet to be proven out;
however, according to reviews, it should outperform peers. Offsetting these trends is a
significant decline in Xbox and Chromecast sales as we lap the initial holiday season in
which they were released.
■ INS - anticipate continued decline YOY, but Exhibit 2 - Q3/F15 Guidance Expectations
budget flush helps drive QOQ growth. We
Q3 15E
Q3 14A
expect the telecom space to continue to be US$
Integrated Network Solutions
2,533
2,598
lackluster from a YOY perspective. Sequentially,
Industrial and Emerging industries 1,008
933
we expect enterprise spending to improve server
High Reliability Solutions
848
823
and storage performance, more than offsetting our
Consumer Technology Group
2,037
2,829
negative outlook for telecoms.
Sales (M)
6,426
7,183
6.0%
5.6%
■ IEI - looking for continued YOY strength. Gross Margin (%)
EBITDA (M)
298
299
Semicap may drive results lower QOQ. We
EBITDA Margin (%)
4.6%
4.2%
expect YOY growth to slow to the high single
$0.26
$0.26
digits as we lap the RIWISA acquisition. Growth is Adjusted EPS ($)
expected to be sustained by new programs coming Source: Company reports; Scotiabank GBM estimates; Factset.
on line. We expect semicap declines to lead
B/ (W) %
-2.5%
8.0%
3.0%
-28.0%
-10.6%
Factset
2,522
1,138
883
2,079
6,558
-0.4%
-2.7%
$0.26
60
revenues down 12% QOQ.
Exhibit 3 - Valuation Table
■ HRS - expect consistent single-digit YOY growth to continue.
The longer lifecycle nature of the HRS business should help $US M
support slow, but steady, growth in the space as the company Current Price
continues to layer on further medical and A&D business and Sales (LTM)
expand current programs. Sequentially, we expect automotive to EBITDA (LTM)
EBITDA%
pick up from a lighter CQ3.
Net Income (LTM)
■ Anticipate flat profitability QOQ, despite declining revenue, as
production efficiencies continue to be realized. YOY growth EPS
may be driven by improved Google/Motorola business. Over the Last 12 MonthsA
last year, the company’s gross margin has been impacted by Next 12 MonthsE
difficulties in ramping the Motorola business, the company has 2014E
made continued improvements over the ramp and we expect that to 2015E
EPS Growth
continue. The stronger gross margin is the main factor in driving NTM-E over LTM-A
flat EPS performance YOY, despite significantly lower revenue.
2014E/2013A
■ Expect stable cash as earnings are offset by negative working 2015E/2014E
capital flows. Due to our strong Q2 cash flow expectations, we P/E Next 12 E
expect the working capital flows to move against FLEX in the P/E 2014E
coming quarter as accounts payable payments drain cash. We P/E 2015E
expect these flows to be offset by earnings of $143M. We are
forecasting free cash flow of $72M to be consumed by $74M of Enterprise Value
Cap
share repurchases. As a result we expect cash to be relatively flat Market
Net Debt
QOQ.
EV
Valuation Is Looking Rich Given Uncertainty
■ At 5.3x EV/EBITDA we believe FLEX is fairly valued given the
risk around Motorola and server programs. Exhibits 3 and 4
highlight Flextronics’ valuation compared to
peers and
historically. FLEX’s peer-leading growth over the last 12 months
has allowed it to trade at a significant premium to peers; however,
there is uncertainty surrounding Lenovo’s manufacturing plans for
its recently acquired server and Motorola businesses. We believe
the customization features of the Moto X provide some shelter for
FLEX; however, the more popular low-end handsets, the Moto G
and E, could be insourced. Further, Flextronics is trading at the
high end of its historical range. Given the potential risks and high
valuation, relative to peers and historically, we remain Sector
Perform on the name.
FLEX
JBL
CLS
$9.33
$26,960
$1,136
4.2%
$592
$19.43
$16,031
$824
5.1%
$125
$10.42
$5,644
$263
4.7%
$184
$0.96
$1.00
$0.99
$1.11
$0.60
$1.89
$0.57
$2.04
$1.01
$1.04
$1.01
$1.11
3.9%
25.7%
12.4%
213.7%
(74.3)%
258.7%
3.2%
21.4%
9.3%
9.3
9.4
8.4
10.3
34.1
9.5
10.0
10.3
9.4
$5,503
$800
$6,303
$3,848
$715
$4,563
$1,871
($578)
$1,293
$1,186
$1,170
$1,253
$1,007
$783
$1,079
$279
$266
$290
4.4%
12.6%
7.0%
22.2%
(31.0)%
37.9%
6.0%
8.6%
9.1%
EV/EBITDA Next 12
EV/EBITDA 2014E
EV/EBITDA 2015E
5.3
5.4
5.0
4.5
5.8
4.2
4.6
4.9
4.5
BVPS
P/BVPS
P/tBVPS
3.80
2.5
3.0
11.32
1.7
2.4
8.13
1.3
1.4
EBITDA Next 12 Months
EBITDA 2014E
EBITDA 2015E
EBITDA Growth
NTM-E over LTM-A
2014E/2013A
2015E/2014E
Source: Company reports; Scotiabank GBM estimates.
Exhibit 4 - FLEX's Historical EV/EBITDA
6.5
Forward EV/EBITDA
6
5.5
5
4.5
4
3.5
3
EV/EBITDA
Source: Factset.
EV/EBITDA 5-yr avg.
+1 ST Dev
-1 ST Dev
61
Company Comment
Friday, October 24, 2014, After Close
Graña y Montero SAA
(GRAM-N US$13.69)
(GRAMONC1-LM PEN 7.90)
GRAM Q3/14 Preview
Paul Figueroa Mantero, MSc, MBA - +511-211-5918
(Scotia Sociedad Agente de Bolsa SA)
Juan Jose Guzman - +511-211-6851
(Scotia Sociedad Agente de Bolsa SA)
[email protected]
Rating: Sector Outperform
Risk Ranking: Medium
[email protected]
Target 1-Yr: US$19.80
1-Yr: PEN 10.90
ROR 1-Yr:
44.9%
Div. (NTM)
Div. (Curr.)
US$0.04
US$0.15
Yield (Curr.)
Valuation: Sum of the parts, Implied ~7.6x EV/EBITDA 2015E Multiple
0.6%
Key Risks to Target: Rising of social conflicts, political risk
Event
■ Graña y Montero will report Q3/14 results on October 30.
Pertinent Revisions
Implications
■ GRAM’s third quarter revenues should be strong. We expect revenue
growth of 16.6% YOY, backed by a sound performance from the
Infrastructure business line, which we forecast to post growth of 32.0%.
The most relevant business line, Engineering & Construction (E&C),
should post activity growth of 14.7%.
■ The EBITDA margin should decrease ~220 bps on lower profitability
coming from the E&C division given higher civil works costs. Thus, we
forecast EBITDA to reach PEN ~211.5 million, implying a decrease of
2% YOY. We expect GRAM to post EPS of PEN 0.074, below last
year's mark of PEN 0.125. In conjunction with lower margins, bottom
line results will be pressured by a currency exchange loss (PEN ~24
million vs. a gain of PEN 65 million in Q3/13).
■ We expect the backlog to decrease 7.7% YOY, to reach US$ ~3.67
billion as no material contacts were signed during the quarter.
■ We expect GRAM to post a Total Debt-to-EBITDA ratio of 1.35x and a
Net Debt to EBITDA ratio of 0.22x.
EPS14E
EPS15E
EPS16E
New
PEN 0.40
PEN 0.51
PEN 0.60
Old
PEN 0.42
PEN 0.50
PEN 0.59
Recommendation
■ We reiterate our SO rating and our 1-year TP of US$19.80 per ADR.
Qtly EPS (Basic)
2011A
2012A
2013A
2014E
Q1
0.12 A
0.10 A
0.09 A
0.11 A
(FY-Dec.)
Earnings/Share
EBITDA (M)
Price/Earnings
Relative P/E
Revenues (M)
Net Income (M)
Backlog (M) (US$)
Return on Equity
Q2
0.13 A
0.10 A
0.09 A
0.10 A
Q3
0.12 A
0.12 A
0.13 A
0.07
Q4
0.15 A
0.17 A
0.17 A
0.12
Year
0.52
0.52
0.48
0.40
P/E
n.m.
n.m.
24.5x
20.0x
2013A
0.48
938.75
24.5x
1.5x
5,967
320
US$3,93
5
12.1%
2014E
0.40
837.01
20.0x
1.2x
6,897
262
US$3,72
2
8.0%
2015E
0.51
1,043.71
15.6x
1.0x
7,679
337
US$4,31
2
9.8%
2016E
0.60
1,189.40
13.3x
0.8x
8,661
394
US$5,68
9
10.9%
2017E
0.66
1,270.79
12.1x
0.7x
9,616
434
US$6,370
BVPS14E:
ROE14E:
5.07
8.01%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
(ADS)
Float O/S (M) (ADS)
US$1,807
134
US$1,853
11.4%
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in PEN unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
132
102
62
GRAM Q3/14 Preview
■ GRAM’s third quarter revenues should be strong. We expect a 16.6% YOY revenue
expansion, backed on a sound performance of the Infrastructure business line. We estimate
this business line to post activity growth of 32%, underpinned by increasing revenues in
GYM Ferrovias (additional number of operating trains) and on good results at Norvial due to
increasing traffic and extraordinary revenues given the expansion of the Ancon-HuachoPativilca road lane. The most relevant business line, Engineering & Construction (E&C),
should post activity growth of 14.7%. (See Exhibit 2 for Q3/14 Income Statement preview).
■ The EBITDA margin should decrease ~220 bps on lower profitability coming from the E&C
division given higher civil works costs. Thus, we forecast EBITDA to reach PEN ~211.5
million, implying a decrease of 2% YOY. We expect GRAM to post EPS of PEN 0.074,
below last year’s mark of PEN 0.125. In conjunction with lower margins, bottom line results
will be pressured by a currency exchange loss (PEN ~24 million vs. a gain of PEN 65 million
in Q3/13). Translation loss will be attributed to the PEN depreciation of 3.37% against the
U.S dollar in the quarter (~57% of GRAM’s debt is U.S dollar denominated).
■ We expect the backlog to decrease 7.7% YOY, to reach US$ ~3.67 billion as no material
contacts were signed during the quarter.
■ We expect GRAM to post a Total Debt-to-EBITDA ratio of 1.35x and a Net Debt to
EBITDA ratio of 0.22x. Figures should remain below peers’ average (see Exhibit 1).
Exhibit 1 - GRAM vs. Peers
Company / Ticker
Mkt Cap
(USD
Million)
Graña y Montero SAA
GRAMONC1 PE
Empresas ICA SAB de CV ICA* MM
Salfacorp SA
SALFACOR CI
Besalco SA
BESALCO CI
Conconcreto SA
CONCONC CB
Comps Average
Comps Median
Sample Max
Sample Min
Comps Cap-Weighted Average
EV/EBITDA EV/EBITDA
P/E 2014E
2014E
2015E
P/E 2015E
ROE LF
ROIC LF
EBITDA
Mgn 3Yr
Avg LF
Net Debt to Debt to
EBITDA LF EBITDA LF
$2,227.4
$1,131.5
$390.5
$473.6
$673.8
6.1x
9.5x
9.8x
10.5x
13.4x
5.5x
8.8x
9.3x
8.2x
10.0x
15.7x
21.0x
7.3x
11.6x
22.1x
14.3x
13.0x
6.8x
8.2x
14.6x
15.8%
4.1%
7.1%
5.3%
6.2%
11.7%
n.d.
5.0%
n.d.
5.1%
15.3%
10.8%
5.3%
11.8%
n.d.
0.26x
7.70x
6.94x
7.51x
1.48x
1.32x
9.19x
7.90x
7.92x
2.02x
$667.4
$573.7
$2,227.4
$390.5
$790.8
10.8x
10.2x
13.4x
6.1x
10.7x
9.0x
9.0x
10.0x
5.5x
9.0x
15.5x
16.3x
22.1x
7.3x
17.6x
10.7x
10.6x
14.6x
6.8x
11.7x
5.7%
5.7%
15.8%
4.1%
5.3%
5.1%
5.1%
11.7%
5.0%
5.1%
9.3%
10.8%
15.3%
5.3%
10.0%
5.91x
7.23x
7.70x
0.26x
5.99x
6.76x
7.91x
9.19x
1.32x
6.97x
Pricing as of October 24th.
LF: Data as of Last Filing Date.
Source: Bloomberg Consensus; Company reports; Scotiabank GBM estimates.
63
Exhibit 2 - GRAM - Q3/14 Income Statement Estimates
Consolidated Income Statement (PEN Th)
D YoY %
Q3/13A
Q4/13A
Q1/14A
Q2/14A
Q3/14E
1,111,907
315,813
176,932
55,459
1,144,942
357,667
230,469
83,532
1,104,921
246,202
164,354
53,620
1,147,030
271,765
171,827
45,727
1,274,805
336,244
233,524
61,005
14.7%
6.5%
32.0%
10.0%
1,563,590
1,721,807
1,522,062
1,562,652
1,823,494
16.6%
100.0%
100.0%
100.0%
1,320,315
1,422,137
1,294,874
1,361,217
1,588,862
20.3%
84.4%
87.1%
87.1%
243,275
299,670
227,188
201,435
234,632
-3.6%
15.6%
12.9%
12.9%
94,354
(6,611)
87,743
97,662
(9,520)
88,142
96,511
(3,747)
92,764
99,630
(9,556)
90,074
107,299
(10,292)
97,008
13.7%
55.7%
10.6%
6.0%
-0.4%
5.6%
6.4%
-0.6%
5.8%
5.9%
-0.6%
5.3%
Operating Income
Net Interest Exp.
Other Non-Operating Inc. (Exp.)
155,532
(78,181)
78,442
211,528
(13,611)
959
134,424
(3,347)
(7,853)
111,361
(7,104)
10,636
137,624
(29,176)
(17,362)
-11.5%
-62.7%
n.m.
9.9%
-5.0%
5.0%
7.1%
-0.5%
0.7%
7.5%
-1.6%
-1.0%
EBT Excl. Unusual Items
Income Tax Expense
155,793
49,309
198,876
53,914
123,224
39,833
114,893
33,653
91,086
30,514
-41.5%
-38.1%
10.0%
3.2%
7.4%
2.2%
5.0%
1.7%
Net Income to Company
Minority Int. in Earnings
106,484
(23,919)
144,962
(30,138)
83,391
(12,297)
81,240
(17,271)
60,572
(12,002)
-43.1%
-49.8%
6.8%
-1.5%
5.2%
-1.1%
3.3%
-0.7%
82,565
0.125
114,824
0.174
71,094
0.108
63,969
0.097
48,570
0.074
-41.2%
-41.2%
5.3%
4.1%
2.7%
215,736
279,187
194,200
176,088
211,450
-2.0%
13.8%
11.3%
11.6%
17,505
0.027
114,824
0.174
85,061
0.129
61,878
0.094
72,813
0.110
316.0%
316.0%
1.1%
4.0%
4.0%
+ Activity
Engineering & Construction
Services
Infrastructure
Real Estate
Total Revenue
Cost Of Goods Sold
Gross Profit
Selling General & Admin Exp.
Other Operating Expense/(Income)
Other Operating Exp., Total
Net Income
EPS
EBITDA
Adjusted Net Income *
Adjusted EPS *
* Excludes Currency Exchange Effect
Source: Company reports; Scotiabank GBM estimates.
Mg Q3/13A Mg Q2/14A Mg Q3/14E
64
Intraday Flash
Friday, October 24, 2014 @ 1:50:36 PM (ET)
(GFNORTE O-MX MXN
84.90)
Grupo Financiero Banorte, SAB de CV
Q3/14 Earnings Call Highlights: Positives
Offsetting Negatives
Claudia Benavente A. - +562 2692 6568
(Scotia Corredora de Bolsa Chile SA)
Diego Ciconi - +562 2692 6292
(Scotia Corredora de Bolsa Chile SA)
[email protected]
Rating: Sector Outperform
Risk Ranking: Medium
[email protected]
Target 1-Yr:MXN 111.00
ROR 1-Yr:
32.1%
Valuation: 15.9x 2015 EPS estimate
Div. (NTM)
Div. (Curr.)
1.04
0.98
Yield (Curr.)
1.2%
Key Risks to Target: Political, economic, capital flows, systemic, regulatory, interest rates, and credit.
Event
■ Banorte held its Q3/14 earnings conference call today and provided
further guidance on what to expect for the remainder of the year.
Implications
■ Management indicated that NIM should continue to grow, as the bank's
focus on increasing demand deposits should continue to improve the
cost of funding.
■ Although Banorte posted its best-ever efficiency ratio in Q3/14 (47.8%
vs. 49.1% in Q2/14 and 53.9% in Q3/13), management expects noninterest expenses to grow as the cost of IT investments begins to be
amortized; management expects most of these costs to be offset by a
continuing increase in fees.
■ Corporate prepayments are causing a slowdown in loan growth and
were characterized as a system-wide issue. However, Banorte's business
diversification has helped to offset the effect.
■ In line with our view, Banorte's CEO explained that, while the bank has
no M&A plans in the short term, it certainly would evaluate
opportunities in the future but that any potential transaction would have
to be approved by the majority of shareholders.
Pertinent Revisions
New
New Valuation:
15.9x 2015 EPS estimate
Old Valuation:
16.8x 2014 EPS estimate
Old
Recommendation
■ As most of the uncertainties regarding changes at Banorte's board of
directors are now in the past, we believe the stock will continue to trade
upwards, regaining its previous valuation levels. Buy Banorte.
Qtly EPS (FD)
2013A
2014E
2015E
2016E
Q1
1.35 A
1.31 A
1.83
(FY-Dec.)
Return on TCE
Return on Equity
Return on Assets
Return on RWA
TCE to RWA
PCLs % of Loans
Q2
1.39 A
1.35 A
1.67
2012A
19.5%
14.3%
1.25%
2.78%
15.5%
1.29%
Curr. BVPS:
Curr. ROE:
Q3
1.39 A
1.46 A
1.57
2013A
3.2%
14.4%
1.41%
3.17%
18.3%
1.78%
Q4
1.31 A
1.68
1.87
2014E
3.3%
14.0%
1.52%
3.26%
18.7%
2.15%
Year
5.31
5.77
6.93
8.41
P/E
17.2x
14.7x
12.2x
10.1x
2015E
3.5%
14.8%
1.65%
3.48%
19.0%
2.14%
2016E
3.7%
15.8%
1.77%
3.71%
18.8%
1.92%
Capitalization
Market Cap (M)
CET1
TCE/TA
Shares O/S (M)
Float O/S (M)
235,326
13%
9%
41.67
13.18%
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
All values in MXN unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
2,774
2,444
65
Intraday Flash
Friday, October 24, 2014 @ 10:28:54 AM (ET)
Grupo Televisa, SAB
(TV-N US$34.31)
(TLEVISA CPO-MX MXN
93.25)
Q3 Call Highlights: Not Meeting Content
Guidance
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:
-18.2%
Valuation: DCF - 5 years results, 7.4% WACC, terminal growth rate of 3.6%
Div. (NTM)
Div. (Curr.)
(ADS)
Yield (Curr.)
US$0.07
US$0.07
0.2%
Key Risks to Target: Decline of broadcast ratings in Mexico and the U.S.; expensive acquisitions
Event
■ Televisa held its Q3/14 earnings call.
Implications
■ The company explained that it is unlikely to meet its content guidance
for the year. In response to the 6.4% YOY drop in ad revenues in Q3,
Televisa launched a cost-cutting strategy aimed at reaching its 44.0%
margin guidance.
■ Management recognized that free-to-air ratings were down slightly on a
yearly basis, which seems to be in line with the IBOPE information
published by Lamac. In our view, cutting costs could worsen the
performance of ratings in the future, accelerating growth of restricted
channels and online substitutes, in our view.
■ TV clarified that the Q3 royalties from Univision were positively
impacted by a one-off item, without which growth would have been
~10.0% vs. the 22.4% reported by the company.
■ Televisa explained that it exited Iusacell because it wanted to merge the
asset with Telefonica, a view not shared with its former partner.
However, the company remains interested in mobility and mentioned
the possibility of creating an MVNO. Management remains interested
in consolidating cable. Margins for Bestel and for Cablecom were
strong and management feels confident in maintaining them.
Recommendation
■ Our rating remains unchanged.
Qtly EPS (FD)
2011A
2012A
2013A
2014E
(FY-Dec.)
Earnings/Share
Free Cash Flow/Share
EV/EBITDA
Price/Earnings
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
-0.06 A
Q4
0.72 A
1.05 A
0.86 A
0.69
Year
2.44
3.07
2.71
1.70
P/E
24.1x
22.4x
29.1x
54.6x
2012A
3.07
3.28
8.8x
22.4x
21.0x
69,290
27,264
2013A
2.71
2.53
9.7x
29.1x
31.2x
73,791
28,668
2014E
1.70
0.16
11.1x
54.6x
n.m.
80,410
30,184
2015E
2.85
3.69
10.2x
32.6x
25.2x
86,944
32,310
2016E
2.74
3.42
10.2x
33.9x
27.2x
89,114
32,295
BVPS14E:
ROE14E:
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
(ADS)
Float O/S (M) (ADS)
US$19,845
US$4,958
US$21,137
29.47
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
66
Intraday Flash
Friday, October 24, 2014 @ 3:08:15 PM (ET)
MTY Food Group Inc.
(MTY-T C$30.50)
Wok'in into the US Market
George Doumet - (514) 350-7788
(Scotia Capital Inc. - Canada)
Reinis Krams - (514) 287-4554
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Outperform
Risk Ranking: Medium
[email protected]
Target 1-Yr:
C$36.00
ROR 1-Yr:
19.1%
Valuation: 13.0x EV/EBITDA on 2016E
Div. (NTM)
Div. (Curr.)
$0.34
$0.34
Yield (Curr.)
1.1%
Key Risks to Target: Identifying and integrating acquisitions, macroeconomic environment, succession issues
Event
■ MTY entered into a binding agreement to acquire the assets of a group
of companies that own and operate Manchu Wok, Wasabi Grill &
Noodles, and SenseAsian. Total considerations of $7.9M will be funded
via cash and the transaction is expected to close before Dec 16, 2014.
Implications
■ The group has 133 stores which are located in Canada (68 franchised &
14 corporate) and the United States (46 franchised & 5 corporate). The
network generated $95M of SWS in the most recent fiscal year.
■ We estimate the transaction multiple at ~4.5x EBITDA C13 vs. the
company's current trading multiple of 11.4x F15. We estimate F15
accretion in the range of 4% to 5% on EBITDA and FCF. From a
strategic point of view, we like the acquisition given its potential
distribution synergies and continued roll-out of operations in the US.
■ The pace of acquisitions is accelerating. This marks the fifth acquisition
in the LTM (~$100M deployed vs. ~$40M from 2011 to 2013). We
believe the appetite for large-scale M&A is present and estimate that a
~$117M levered acquisition (1.5x EBITDA [NTM]) would be accretive
by ~34% and ~22% to EBITDA and EPS, respectively.
Pertinent Revisions
Target:
1-Yr
EBITDA15E
EBITDA16E
New
Old
$36.00
$52.3
$52.6
$35.00
$50.1
$50.3
Recommendation
■ Raising target to $36. We continue to like MTY for: (1) continued growth
via accretive acquisitions, (2) an under-levered balance sheet (0.3x net
debt/EBITDA vs. peers at ~1.9x) lending itself to potentially large M&A,
and (3) industry-leading FCF profile and return metrics.
Qtly EBITDA (M)
2013A
2014E
2015E
2016E
Q1
Q2
Q3
Q4
Year
$8.8 A
$9.5 A
$12.0
$12.0
$9.6 A
$11.3 A
$13.3
$13.3
$10.5 A
$10.5 A
$14.0
$14.2
$10.4 A
$11.6
$13.0
$13.2
$39.2
$43.0
$52.3
$52.6
EV /
EBITDA
15.7x
13.5x
10.9x
10.2x
2012A
$1.54
$96
1.1%
36.3%
$1.15
17.5x
$689
2013A
$1.40
$101
-2.0%
38.7%
$1.34
23.4x
$726
2014E
$1.84
$117
-1.7%
36.8%
$1.41
21.6x
$879
2015E
$2.04
$145
-0.5%
36.1%
$1.69
18.1x
$1,040
2016E
$2.04
$145
0.0%
36.2%
$1.72
17.7x
$1,043
(FY-Nov.)
Free Cash Flow/Share
Revenues (M)
Same-Store Sales Grth
EBITDA Margin
Earnings/Share
Price/Earnings
System-Wide Sales (M)
BVPS14E:
ROE14E:
$9.74
15.02%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ 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.
$583
$7
$590
19
13
67
MTY acquires assets of Manchu Wok & Co. for $7.9M
About the Acquisition
■ Deal details. MTY entered into a binding agreement to acquire the assets of a group
of companies that own and operate Manchu Wok, Wasabi Grill & Noodles, and Exhibit 1 –Acquisition Highlights
SenseAsian. Total considerations of $7.9M will be funded via cash on hand and the
Manchu Wok & Group
transaction is expected to close before Dec 16, 2014. No additional financials were # of Locations
133
disclosed.
System Wide Sales ($M)
$95.0
Total Consideration ($M)
$7.9
■ US presence; High relative corporate mix. The group has 133 stores which are Franchised
114
located in Canada (68 franchised & 14 corporate) and United States (46 franchised Corporate
19
& 5 corporate). The network generated $95M of system-wide sales in the most Implied SWS Multiple
0.08x
4.5x
recent fiscal year. We note the restaurant group has a significantly higher proportion Implied EBITDA Multiple
of corporate stores (15%) than MTY (1%) (see Exhibit 1).
SWS Per Location ($M)
$0.71
■ Multiple point differential: 7.1x on EBITDA. Taking into consideration a Source: Company reports; Scotiabank GBM estimates.
materially higher corporate store mix, we estimate the $7.9M total consideration
equates to ~4.5x EV/EBITDA (C13). Relative to historical acquisitions, this one is at a lower
multiple in terms of purchase multiple, and significantly higher (7.1x vs. 3.4x historical
average) in terms of multiple point differential (see Exhibit 2).
■ Strategic & accretive. From a strategic point of view, we like the acquisition given its: (1)
potential distribution synergies and (2) continued roll-out of franchising operations in the
US. We estimate F15 accretion in the range of 4% to 5% on EBITDA and FCF. Following
the close of the acquisition, we expect: (1) divestiture of some corporate stores and (2)
operations to be relocated into MTY’s offices.
Exhibit 2 – Material Valuation Gap on Acquisitions Continues
MTY Premium (EV/EBITDA [NTM])
3.2x
Acquisition (EV/EBITDA [LTM])
4.6x
2,586
25
0.32x
6.5x
$0.27
Exhibit 3 – Accelerating Growth Using the Balance Sheet?
F2014E
6.2x
5.2x
F2015E
7.1x
Average Acquisition Multiple = 6.3x LTM EBITDA (pre-synergies)
(3.4 point average acquisition discount to MTY)
2.0x
2.3x
3.5x
MTY
$105.6M
4.6x
3.5x
1.0x
3.8x
3.6x
1.2x
$39.9M
6.9x
6.5x
7.3x
9.1x
8.5x
6.5x
3.5x
8.7x
4.6x
4.5x
($13.3M)
$33.6M
7.0x
6.0x
6.8x
($11.4M)
4.5x
4.1x
($5.9M)
($13.6M)
($12.0M)
$15.9M
Sushi
Shop
Koya
Japan
Tutti Frutti Taco Time Country Valentine Jugo Juice Mr. Sub Koryo BBQ
Mr.
- MFA
Style
Souvlaki
SushiGo
Extreme Madisons
Café
Brandz New York Depot &
Grill & Bar Others
Manchu
Wok &
Others
$10.0M
$6.1M
2013 End
Cash
Source: Company reports; FactSet; Scotiabank GBM estimates.
CFO 14E
Acquisitions Dividends &
(ex.
Other
Holdbacks)
- Cashflow from Operations
Revolver
2014E End
Cash
CFO 14E
- Uses of cash (Acquisitions, CAPEX, Dividends)
Source: Company reports; Scotiabank GBM estimates.
About Assets Acquired
Exhibit 4 – Manchu Wok Locations
■ We believe that Manchu Wok (see Exhibit 4 for locations)
accounts for the majority of the stores in the acquired group with
one SenseAsian store (concourse level of the Scotia Plaza in
Toronto) and two Wasabi Grill and Noodle stores in Ontario. The
group of stores was previously owned by Café de Coral Holdings
Ltd. (341-HKG – not covered) listed on the Hong Kong stock
exchange. As per Café de Coral financial statements, the company
had 143 stores in March 2012 and experienced a slight decline to
today’s levels of 133.
Source: Manchu Wok Website
Acquisitions Dividends &
(ex.
Other
Holdbacks)
- Cash End of Period
Revolver
2015E End Est. Leverage
Cash
Capacity (1.5x
NTM EBITDA)
68
Pace of Acquisitions Accelerating; Can We Soon See Debt-Funded Growth?
■ The pace (size and frequency) of acquisitions is accelerating. This marks the fifth acquisition
in the last 12 months (~$100M deployed vs ~$40M from 2011 to 2013). We see MTY
reaching a net cash position as early as Q2/F15 (1 quarter after the close of the acquisition).
■ Time to supersize? Assuming the company were to continue to use their balance sheet and
make acquisitions of ~$117M, representing leverage of 1.5x EBITDA (NTM in Q4/F15), we
estimate this would translate into EBITDA, EPS, and FCF accretion of ~34%, ~22%, and
~27%, respectively (see Exhibit 5 and Exhibit 6 for sensitivities). We assume an acquisition
multiple of 8.0x EBITDA LTM vs. historical acquisitions closer to 6.5x LTM.
■ Recall, the company’s acquisition criteria are for targets/banners that (1) have a high
proportion of franchised operations, (2) are strong in regional brand recognition, (3) are
profitable, and (4) are easily scalable into MTY’s purchasing platform.
Exhibit 5 – 1.5x Debt-Funded Acquisition: 22% FCFPS Accretion
Illustrative Acquisition
Illustrative Pro Form a MTY (F16E)
(figures in CAD millions)
Total Consideration for Acquisition
Target EBITDA (@ 8.0x EV/EBITDA)
$117.0
$14.6
Assumed Leverage (as multiple of EBITDA):
MTY EBITDA (F16E)
Target EBITDA (LTM)
Synergies - integration w ithin MTY
Pro Forma EBITDA (F16E)
EBITDA Accretion
1.5x
$52.6
$14.6
$3.1
$70.4
33.7%
Debt Outstanding End Q4/F15E
$105.6
Total Consideration for Acquisition
$117.0
MTY Revenues
Target Revenues (assuming 40% EBITDA margins)
Pro Forma Revenues
$145.4
$34.8
$180.3
Implied Target SWS
$292.5
MTY EBIT
Target EBIT
Pro Forma EBIT
$45.3
$13.3
$58.7
Interest Expense (3.5%)
Tax Expense
Net Income
$3.2
$15.3
$40.2
EPS (F16E)
EPS Accretion
$2.10
22.3%
Source: Company reports; Scotiabank GBM estimates.
Exhibit 6 – EBITDA Sensitivity to Acquisition Size and Multiple ($M)
MTY EV/EBITDA MULTIPLE
6.0x
7.0x
8.0x
9.0x
10.0x
1.0x
$68.9
$66.1
$64.1
$62.6
$61.5
$75.7
1.2x
$72.6
$69.0
$66.5
$64.7
$63.3
$91.3
1.4x
$76.7
$72.1
$69.0
$66.8
$65.1
$108.1
1.5x
$78.9
$73.8
$70.4
$67.9
$66.1
$117.0
1.6x
$81.2
$75.6
$71.8
$69.1
$67.0
$126.2
1.8x
$86.4
$79.4
$74.8
$71.5
$69.1
$145.9
2.0x
$92.2
$83.6
$78.0
$74.2
$71.3
$167.3
Source: Company reports; Scotiabank GBM estimates.
Acquisition Size ($M)
Leverage (NTM)
Acquisition EV/EBITDA (LTM)
###
69
Valuation: Raising Target to $36.00/share
■ We have raised our 2015 and 2016 EBITDA estimates to $52.3M (from $50.1M) and
$52.6M (from $50.3M), respectively, to account for the acquisition of the group of banners.
Our new one-year target goes to $36.00/share.
■ MTY commands a premium valuation. MTY is trading at 11.4x EV/EBITDA (F15E)
versus its peer group, trading at 11.9x (see Exhibit 7). We believe MTY should trade at a
premium given:
o (1) its expectations for continued growth via accretive acquisitions and an
under-levered balance sheet (0.3x net debt/EBITDA vs. peers at ~1.9x),
o (2) industry-leading free cash flow profile (6.7% yield in F2015E versus peer
group at 4.0%) and operational metrics (ROIC of 21% versus peer average of
15%), and
o (3) significant operational leverage (increase in organic royalties comes at
~75% EBITDA margin contribution versus ~39% consolidated margins in
F13).
Exhibit 7 – MTY Comps Table
*Capital Structure as at Q1/F15E for MTY
Source: Company Reports; FactSet; Scotiabank GBM estimates for MTY.
ScotiaView Analyst Link
70
Company Comment
Monday, October 27, 2014, Pre-Market
Organización Soriana, SAB de CV
(SORIANA B-MX MXN
43.86)
New Corporate Image, Same Results: EBITDA
Declines 12% in Q3, SSS Falls 5.4%
Rodrigo Echagaray, MBA, CFA - (416) 945-4405
(Scotia Capital Inc. - Canada)
Karla B. Peña - +52 (55) 9179 5211
(Scotiabank Inverlat)
[email protected]
Rating: Sector Underperform
Risk Ranking: Medium
[email protected]
Target 1-Yr: MXN 36.00
ROR 1-Yr:
-17.3%
Valuation: 2014E-2020E DCF w/ 10.3% WACC; 8x (NTM) EV/EBITDA; 17X (NTM) P/U
Div. (NTM)
Div. (Curr.)
0.28
0.00
Yield (Curr.)
0.0%
Key Risks to Target: Operating performance, consumer behavior, tax reforms
Event
■ Soriana posted weak results for the quarter, as expected. EBITDA
declined 12% YOY (we anticipated an EBITDA decline of 11% YOY).
Implications
■ Revenues fell 4% due to a SSS decline of -5.4% (the lowest in the
sector). Soriana attributes this to: (1) the temporary closure of some
stores due to remodeling and (2) lost sales in 5 stores due to hurricane
Odile. We would add to that significant market share losses to HEB
(according to our channel checks) and structural negative traffic trends.
■ Soriana was apparently not as promotional in Q3, which led to gross
margin expansion. However, a higher service focus at stores (more
headcount at some stores) coupled with the remodeling efforts, led to an
EBITDA margin contraction of 60 basis points. Financial expenses
declined along with leverage (40% lower YOY). Due to a lower-thanexpected effective tax rate (unexpected deferred tax benefit) net income
increased 2.3% YOY (we anticipated a net income decline of 14%).
Pertinent Revisions
EBITDA14E
EBITDA15E
New
7,166
7,808
Old
7,182
8,047
Recommendation
■ The company's remodelling efforts, higher focus on service and
perishables, and the SAP installation (likely to be finished in Q1/15) are
all positive initiatives. However, we think it will take time before
customers realize these changes and traffic to the stores to improve. We
maintain a Sector Underperform rating on Soriana.
Qtly EBITDA (M)
2012A
2013A
2014E
2015E
Q1
Q2
Q3
Q4
Year
1,887 A
1,978 A
1,732 A
1,903
1,784 A
1,708 A
1,770 A
1,734
1,639 A
1,669 A
1,466 A
1,714
2,105 A
2,175 A
2,198
2,458
7,414
7,531
7,166
7,808
EV /
EBITDA
12.2x
11.2x
11.3x
10.3x
2011A
1.79
18.8x
8.9x
96,197
7,168
7.5%
2012A
1.98
24.9x
12.2x
104,635
7,414
7.1%
2013A
1.73
26.9x
11.2x
105,027
7,531
7.2%
2014E
2.22
19.8x
11.3x
103,305
7,166
6.9%
2015E
2.03
21.6x
10.3x
112,331
7,808
7.0%
(FY-Dec.)
Earnings/Share
Price/Earnings
EV/EBITDA
Revenues (M)
EBITDA (M)
EBITDA Margin
BVPS14E:
ROE14E:
25.95
8.86%
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 MXN 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.
78,948
282
79,230
1,800
252
71
Conference Call Highlights
■ Management indicated the lower sales are also due to lower sales to institutional clients. We
believe they are referring to their Club format (City Club), which is likely losing share to
regional wholesalers as is the case with SAM’s. Management also mentioned that five stores
(with significant sales productivity) were closed due to hurricane Odile – these stores seem to
be fully operational now. That and internal execution challenges, as well as negative traffic
trends, help explain the sharp underperformance versus peers this quarter, in our view.
■ On higher SG&A, the company pointed to higher energy costs (+6%) and higher wage costs
due to a focus on a higher level of service at stores (i.e., higher headcount at some stores).
■ On their most recent commercial initiatives and store remodelling program, management
indicated: (1) 12 additional stores should be remodeled in 1H/15; (2) they have announced
aggressive promotions in roughly 10,000 products in order to regain traffic – they hope that
as a result of the remodeling of stores, customers that return in search of promotions will
remain customers in the long run; and (3) regaining traffic has been a challenge (in fact, 80%
of the issues with SSS has to do with traffic).
■ The positive effect of deferred taxes in Q3 should also take place in Q4. Also, Soriana
expects to finish the year with negative net debt.
Exhibit 1 – Soriana’s Change in Corporate Image
Source: Company reports.
Exhibit 2 – Soriana’s Q3/14 results
Soriana, MXN million
Total revenues
EBITDA
EBITDA margin
Majority net Income
EPS, MXN per share
Q3/13
25,404
1,669
6.6%
799
0.44
Scotia
24,776
1,483
6.0%
684
0.38
Q3/14e
Consensus
25,401
1,690
6.7%
828
0.44
Q3/14a
24,381
1,466
6.0%
818
0.45
YOY, %
-4.0%
-12.2%
-56 bps
2.3%
2.3%
Actual /
Scotia
Consensus
-2%
-4%
-1.1%
-13%
3 bps
-64 bps
20%
-1%
20%
3%
Source: Company reports; Scotiabank GBM estimates, Bloomberg.
ScotiaView Analyst Link
72
Intraday Flash
Friday, October 24, 2014 @ 3:13:05 PM (ET)
Penn West Exploration
(PWT-T C$5.31)
(PWE-N US$4.73)
Further Asset Sale Highlights Execution of
Strategic Refocusing
Patrick Bryden, CFA - (403) 213-7750
(Scotia Capital Inc. - Canada)
Riley Hicks, CA, MBA - (403) 213-7760
(Scotia Capital Inc. - Canada)
Justin Strong, MBA - (403) 213-7328
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Perform
Risk Ranking: High
Target 1-Yr:
C$9.75
ROR 1-Yr:
94.2%
Valuation: 0.6x our 2P NAV plus risked upside.
Div. (NTM)
Div. (Curr.)
$0.56
$0.56
Yield (Curr.)
10.5%
Key Risks to Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program success
Event
■ Penn West announced the sale of non-core assets in south central
Alberta for $355 million.
Implications
■ Non-core producing asset disposition. Penn West disposed of 7,500
boe/d of non-core assets located in south central Alberta. The assets,
which are 80% weighted to natural gas and NGLs, were sold for $355
million. The transaction implies a valuation of ~$47,000/boe/d and
includes less than 5% of the company's total 2013 2P reserve base of
625 mmboe.
■ Deal in line with planned strategic realignment. In November 2013
Penn West announced asset base consolidation plans with the aim of
debt reduction and focusing operations on core areas. Those plans
called for non-core asset sales of $1.5 billion-$2.0 billion before 2015.
Penn West has disposed of ~$1.0 billion in assets since the
announcement of its strategic repositioning.
■ Production guidance reaffirmed. Penn West maintains its annual
average production estimate of 101,000-106,000 boe/d. Management
has indicated that they expect production to skew towards the higher
end of the guidance range due to solid performance from base
production as well as new production growth.
Pertinent Revisions
CFPS14E
CFPS15E
New
$1.94
$1.50
Old
$1.92
$1.36
Recommendation
■ We maintain our SP rating and one-year price target of $9.75/share.
Qtly CFPS (FD)
2012A
2013A
2014E
2015E
Q1
$0.66 A
$0.52 A
$0.52 A
$0.38
(FY-Dec.)
Cash Flow/Share
Dividends/Share
Price/Cash Flow
Pre-tax Cash Yield
Q2
$0.54 A
$0.56 A
$0.59 A
$0.37
Q3
$0.68 A
$0.55 A
$0.43
$0.37
Q4
$0.41 A
$0.27 A
$0.40
$0.38
Year
$2.29
$1.89
$1.94
$1.50
P/CF
4.7x
4.7x
2.7x
3.5x
2011A
$3.08
$1.08
6.6x
5.3%
2012A
$2.29
$1.08
4.7x
10.0%
2013A
$1.89
$0.82
4.7x
9.2%
2014E
$1.94
$0.56
2.7x
10.5%
2015E
$1.50
$0.56
3.5x
10.5%
BVPS14E:
ROE14E:
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
$14.66
0.23%
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
ScotiaView Analyst Link
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$2,644
$2,400
$5,044
498
498
73
Transaction Implications
■ Non-core producing asset disposition. Penn West disposed of 7,500 boe/d of non-core
assets located in south central Alberta. The assets, which are 80% weighted to natural gas
and NGLs, were sold for $355 million. The transaction implies a valuation of ~$47,000/boe/d
and includes less than 5% of the company’s total 2013 2P reserve base of 625 mmboe. The
sale is expected to close in early December.
■ Deal in line with planned strategic realignment. Penn West announced a strategic review
process in November 2013, centered around a plan to consolidate its asset base with the aim
of reducing debt and refocusing operations on the company’s core areas. The strategic plan
called for non-core asset dispositions in the range of $1.5 billion to $2.0 billion prior to 2015.
Penn West has disposed of approximately $1.0 billion in assets since the announcement of its
strategic repositioning.
■ Well bore count reduced. Through the transaction, Penn West will dispose of ~2,250 gross
wells with the result of lower asset retirement obligations, which is directionally positive
from a sustainability perspective. Recall that Penn West announced the sale of ~1,800 well
bores in Q1/14 – combined this reduces the company’s standing well bores by more than
20%, one-third of which were non-producing.
■ Long-term plan resilient in face of decreased oil prices. The strategic refocusing of asset
base was predicated on oil prices of $87.50/bbl for 2015-2017 and a long-term price of
$85.00/bbl. We view this as encouraging as we enter a period of volatile commodity prices
and market uncertainty; however, it is prudent to note that PWT does not currently have any
oil hedges in place.
■ Further dispositions expected throughout 2015. Our pro forma Q4/14 asset sale estimate
was $400 million in exchange for 10,000 boe/d (implied valuation of $40,000 /boe/d). Given
the better-than-expected price per flowing barrel, our 2014E CFPS estimate has increased
from $1.92/share to $1.96/share, assuming that no further asset dispositions occur during
fiscal 2014. Consequently, we expect further focus on the A&D market throughout the early
stages of 2015, with PWT continuing to refine its core asset base and strengthen its balance
sheet. Management has indicated that they expect to dispose of an additional $300 million$500 million during the middle stages of 2015, with the priority being the disposition of
Duvernay assets. A disposition in mid-2015 would allow the company to provide potential
bidders with an enhanced view of operational performance in Duvernay, and could
potentially result in increased valuation metrics in a resulting disposition.
Operational Updates
■ Balance sheet strength remains a concern. Despite asset dispositions in the previous 12
months totaling approximately $1.0 billion, Penn West’s balance sheet remains constrained,
with 2015E D/CF at 3.6x, which compares with the peer group average 2.0x. We are of the
view that management will continue to assess the balance sheet constraints through the A&D
market during 2015, with a stated short-term goal of lowering D/CF below 2.0x and a longerterm goal in the 1.0x-1.5x D/CF range.
■ Production guidance reaffirmed, indicating strong base production performance. Penn
West has maintained its annual average production estimate of 101,000-106,000 boe/d, with
management indicating that actual production results will be towards the higher end of the
guidance range. This indicates solid performance from base production as well as new
production growth during the year. Notably, type curve outperformance in the Viking and
Cardium oil plays has led the increase in overall base production throughout the year, as
indicated in Exhibit 1.
74
Exhibit 1 - Penn West Type Curve Outperformance
300
PWT Central Pembina Cardium Hz.
Average Per Well Production
140
250
SC Type Curve (360 mboe)
Total (55 wells)
2014 (14 wells)
200
2013 (4 wells)
2012 (23 wells)
2011 (14 wells)
150
SC Type Curve (211 mboe)
Oil (bbl/d; calendar day)
Oil (bbl/d; calendar day)
160
PWT Willesden Green/Ferrier Cardium Hz.
Average Per Well Production
100
Total (51 wells)
120
2014 (10 wells)
2013 (12 wells)
100
2012 (23 wells)
2011 (6 wells)
80
60
40
50
20
0
0
1
4
7
10
13
16
19
22
25
28
31
34
1
4
7
10
13
Month
16
19
22
25
Month
80
PWT Dodsland Viking Hz.
Average Per Well Production
70
Oil (bbl/d; calendar day)
SC Type Curve (54 mboe)
Total (194 wells)
60
2014 (34 wells)
2013 (62 wells)
50
2012 (26 wells)
2011 (72 wells)
40
30
20
10
0
1
4
7
10
13
16
19
22
25
28
31
34
Month
Source: Company reports; GeoScout; Scotiabank GBM estimates.
Investment Thesis
■ Operational improvements are positive, but we still expect the early stages of 2015 to be
noisy. Drilling improvements and type curve outperformance in the company’s core areas, as
well as the continued progression of the strategic realignment, are positive developments;
however, we still see challenges ahead. It remains to be seen if recent improvements can
result in a positive inflection point in operational momentum, and ultimately production and
cash flow growth. Additionally, we continue to monitor the legal situation surrounding the
company, which resulted from the identification of improper accounting practices – we view
this situation as likely to cloud any positive operational news for the time being.
■ Thesis and target price maintained. While this transaction represents further execution of
the long-term plan set out by management, we view it as in line with market expectations.
We are maintaining our rating of Sector Perform and one-year target price of $9.75/share.
See Exhibit 2 for our financial and operational forecasts.
28
31
34
75
Exhibit 2 - Financial and Operating Forecasts
Fiscal Year End - December 31
2011A
2012A
restated
2013A
restated
Q1/14A
restated
Q2/14A
Q3/14E
Q4/14E
2014E
2015E
2016E
Price Deck Assumptions
WTI
Edmonton Par
WCS
Nymex Natural Gas
AECO 30-Day Spot
Exchange Rate
US$/B
C$/B
C$/B
US$/Mcf
C$/Mcf
US$/C$
$94.72
$95.37
$73.73
$4.01
$3.64
$1.01
$94.09
$87.12
$70.55
$2.76
$2.39
$1.00
$98.01
$93.42
$75.11
$3.72
$3.17
$0.97
$98.65
$99.51
$83.18
$5.06
$5.49
$0.91
$103.15
$106.67
$90.47
$4.53
$4.69
$0.92
$98.52
$98.29
$84.12
$3.94
$4.04
$0.92
$92.00
$96.39
$81.78
$4.10
$4.22
$0.90
$98.06
$100.20
$84.88
$4.40
$4.60
$0.91
$92.00
$95.56
$81.78
$4.00
$4.00
$0.90
$91.00
$94.44
$80.89
$4.00
$4.00
$0.90
Daily Production
Total Oil & Liquids
Natural Gas
Total Production
Change in Total Production
Percentage Natural Gas
B/d
Mmcf/d
Boe/d
%
%
103,208
359.3
163,094
-1%
37%
104,144
342.3
161,195
-1%
35%
85,097
300.0
135,092
-16%
37%
71,639
239.0
111,472
-10%
36%
69,408
224.0
106,741
-4%
35%
64,777
208.3
99,487
-7%
35%
64,655
198.3
97,709
-2%
34%
67,593
217.3
103,803
-23%
35%
63,765
177.2
93,298
-10%
32%
64,822
183.0
95,325
2%
32%
Financial Estimates
Cash Flow from Operations
Investment Cash Flows - Internal
Investment Cash Flows - M&A
Financing Cash Flows
Dist/Div (actuals net of DRIP)
[$mm]
[$mm]
[$mm]
[$mm]
[$mm]
$1,456.0
-$1,846.0
$100.0
$226.0
-$328.0
$1,090.0
-$1,752.0
$1,615.0
-$822.0
-$395.0
$919.0
-$816.0
$525.0
-$633.0
-$360.0
$256.0
-$205.0
$213.0
-$224.0
-$54.0
$291.0
-$65.0
-$1.0
-$93.0
-$54.0
$213.1
-$225.5
$0.0
$12.4
-$69.4
$199.6
-$324.5
$355.0
-$230.1
-$69.6
$959.7
-$820.0
$567.0
-$534.7
-$247.0
$752.5
-$865.0
$0.0
$112.5
-$280.5
$885.2
-$1,000.0
$0.0
$114.8
-$283.8
Cash Flow Per Share - FD
EBITDA
EPS
Distribution - Basic
$/Share
$/Share
$/Share
$/Share
$3.08
$3.81
$1.35
$1.08
$2.29
$4.06
$0.26
$1.08
$1.89
$2.29
-$1.20
$0.82
$0.52
$0.35
($0.18)
$0.14
$0.59
$0.82
$0.29
$0.14
$0.43
$0.51
($0.00)
$0.14
$0.40
$0.41
($0.07)
$0.14
$1.94
$2.09
$0.03
$0.56
$1.50
$1.82
-$0.07
$0.56
$1.75
$2.06
$0.18
$0.56
Netbacks
Revenue (pre-hedging)
Hedging Gains (Losses)
Royalties
Operating Costs
Transportation Costs
Field Netback
After-Tax Netback
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
[C$/boe]
$61.02
-$1.06
-$11.10
-$17.40
-$0.49
$30.96
$25.14
$53.60
$1.77
-$8.37
-$20.10
-$0.49
$26.41
$19.90
$57.71
$0.16
-$8.23
-$20.79
-$0.59
$28.26
$20.51
$68.59
-$1.99
-$10.17
-$20.33
-$0.60
$35.50
$26.83
$69.75
-$2.99
-$11.53
-$15.13
-$0.62
$39.48
$30.52
$64.03
-$1.63
-$9.98
-$19.50
-$0.47
$32.45
$24.28
$63.78
-$2.32
-$9.92
-$19.50
-$0.46
$31.58
$23.20
$66.64
-$2.24
-$10.41
-$18.60
-$0.54
$34.85
$26.30
$64.10
-$2.09
-$10.00
-$19.50
-$0.43
$32.08
$23.10
$63.13
$0.00
-$9.81
-$19.50
-$0.44
$33.38
$26.44
Valuation Measures
EV/DACF
EV/EBITDA
P/E
D/P
EV per Boe/d
x
x
x
%
$/Boe/d
8.2
7.5
4.1
20%
82,497
6.3
4.2
20.9
20%
50,017
6.4
6.4
n/a
15%
52,485
4.6
7.9
n/a
10%
49,175
3.9
3.2
4.7
10%
48,576
5.3
5.2
n/a
10%
52,925
5.5
6.3
n/a
10%
52,589
4.6
4.9
162.4
10%
48,912
6.2
6.0
n/a
10%
58,347
5.8
5.6
29.8
10%
61,008
Credit Capacity
Credit facility
% Drawn
[$mm]
%
$2,750
45%
$3,000
27%
$3,000
18%
$3,000
12%
$1,700
22%
$1,700
26%
$1,700
16%
$1,700
16%
$1,700
52%
$1,200
124%
Net Debt & Debentures
Net Debt & Debentures
EBITDA
Cash Flow
Net Debt, Debentures & Equity
EV
$/Share
x
x
x
%
$8.35
2.2
2.7
0.3
29%
$6.02
1.5
2.6
0.3
36%
$5.63
2.5
3.0
0.3
39%
$5.68
4.0
2.7
0.3
51%
$4.97
1.5
2.1
0.2
47%
$5.11
2.5
3.0
0.3
48%
$4.82
3.0
3.0
0.2
47%
$4.70
2.3
2.4
0.2
46%
$5.31
2.9
3.6
0.3
49%
$5.91
2.9
3.4
0.3
52%
Sustainability
Payout Ratio - Simple
Payout Ratio - Effective
Capital Expenditures / Cash Flow
%
%
%
35%
161%
127%
47%
208%
161%
43%
132%
89%
27%
107%
80%
24%
46%
22%
33%
138%
106%
35%
197%
163%
29%
114%
85%
37%
152%
115%
32%
145%
113%
Hedging
Percentage of Light & Medium Oil
Percentage of Heavy Crude Oil
Percentage of Natural Gas Production
Percentage of Total Production
%
%
%
%
-----
-----
-----
-----
-----
80%
0%
59%
227%
86%
0%
64%
241%
28%
0%
97%
318%
0%
0%
0%
0%
0%
0%
0%
0%
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
76
Intraday Flash
Friday, October 24, 2014 @ 11:46:55 AM (ET)
Rio Alto Mining Ltd.
(RIO-T C$2.70)
(RIOM-N US$2.41)
Peru Site Trip Highlights RIO's Expertise
Ovais Habib - (416) 863-7141
(Scotia Capital Inc. - Canada)
Ciara Sawicki - (416) 862-3738
(Scotia Capital Inc. - Canada)
[email protected]
[email protected]
Rating: Sector Outperform
Risk Ranking: High
Target 1-Yr:
C$3.00
ROR 1-Yr:
11.1%
Valuation: 1.00x NAVPS
Div. (NTM)
Div. (Curr.)
$0.00
$0.00
Yield (Curr.)
0.0%
Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Event
■ We visited RIO's 100%-owned La Arena gold mine and Shahuindo gold
project in Peru on October 22 and 23.
Implications
■ Overall we were impressed with RIO's achievements at La Arena,
especially given the challenging topography, and believe that after La
Arena, Shahuindo should be fairly straightforward for RIO's team.
■ At Shahuindo, RIO has now acquired 100% of the surface land rights
needed to support a 10,000 tpd operation, which is a very positive
development in our view. Met work anticipated to be completed in
Q1/15 and a 4 Mt starter heap leach pad (construction to begin in
Q3/15E) will help RIO optimize crush, leach, and geotech parameters
for the full-scale pad while providing a quick path to cash flow. RIO is
focused on reducing or eliminating the need for two-stage crushing.
■ La Arena is now operating on full grid power after the changeover on
October 23, reducing power costs from 40¢/kWhr to ~7¢/kWh (cash
cost savings of ~$10-$12/oz). Watch for a new reserve estimate in early
2015, which we expect will show an increase in contained gold net of
depletion after RIO's exploration success in 2014.
■ Shahuindo represents 48% of our asset NAV estimate for RIO, with La
Arena making up the remaining 52% (38% oxides and 15% sulphides).
Recommendation
■ We rate RIO Sector Outperform with a C$3.00 one-year target price.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.04 A
$0.07 A
$0.03
$0.02
(FY-Dec.)
Adj EPS
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA (M)
Production (oz) (000)
Tot. Cash Cost ($/oz)
Rlzd. Gold Price ($/oz)
Q2
$0.06 A
$0.09 A
$0.03
$0.02
Q3
$0.10 A
$0.05
$0.03
$0.04
Q4
$0.06 A
$0.03
$0.03
$0.04
Year
$0.26
$0.21
$0.12
$0.13
P/E
6.4x
11.2x
20.8x
17.9x
2013A
$0.26
6.4x
$0.46
3.6x
$129
214.5
$648
$1,412
2014E
$0.21
11.2x
$0.30
8.0x
$122
218.6
$611
$1,270
2015E
$0.12
20.8x
$0.23
10.2x
$114
193.4
$633
$1,300
2016E
$0.13
17.9x
$0.30
7.9x
$142
217.5
$562
$1,300
2017E
$0.14
17.4x
$0.33
7.4x
$149
237.9
$585
$1,300
BVPS14E:
ROE14E:
$0.89
18.54%
NAVPS:
P/NAV:
C$3.09
0.87x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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$965
$-35
C$925
357
336
77
RIO in Peru – Asset Overview and Background
■ We visited RIO’s 100%-owned La Arena gold mine and Shahuindo gold project in Peru
on October 22 and October 23, 2014. La Arena is located in Peru’s Huamachuco District in
the eastern slope of the Western Cordillera at an average altitude of 3,400 metres above sea
level and encompasses the operating La Arena Oxide mine and the La Arena Sulphide
project. Access to La Arena is via a 165 km national roadway from the coastal city of
Trujillo. Shahuindo is located about 80 km southeast of the town of Cajamarca, or about ~
2.5 hours by road from La Arena (see Exhibit 1).
■ RIO acquired Shahuindo through its acquisition of Sulliden Gold Corporation that
closed in August 2014. For a full analysis of the transaction, please see our DailyEdge
comment from August 6, “The Future Is Golden”.
Exhibit 1 – Location of RIO’s La Arena Mine and Shahuindo Project in Peru
Source: Company reports.
■ Shahuindo expected to replace oxide production at La Arena as the heap leach
operation gradually winds down over the next ~6 years; however, we haven’t
discounted the potential for exploration success. See Exhibit 2 for our La Arena Oxide and
Shahuindo production and per-ounce cost forecasts.
78
450
$900
400
$800
350
$700
300
$600
250
$500
200
$400
150
$300
100
$200
50
$100
0
$0
2014E
2015E
La Arena Oxide
2016E
2017E
Shahuindo
2018E
TCC (RHS)
2019E
2020E
AISC (RHS)
Source: Scotiabank GBM estimates.
RIO’s Plans for Shahuindo Beginning to Solidify
■ RIO has now acquired 100% of the surface land rights needed to support a 10,000 tpd
operation which is a very positive development, in our view. Also, land ownership for a
new access road to site is 90% complete (completion of the road expected by mid-2015). The
company is now working on buying land beyond the proposed leach pad and waste dump
areas for a potential mine expansion to 30,000-36,000 tpd. The left photo in Exhibit 3 shows
RIO’s planned location for the new access road.
Exhibit 3 – Shahuindo – Site Access Road (left); Flat Area for Starter Heap Leach Pad (right)
Source: Scotiabank GBM.
Per-Ounce Cost Metrics (US$/oz)
Gold Production (koz)
Exhibit 2 – Consolidated RIO Production and Per-Ounce Cost Forecasts (2014E to 2020E)
79
■ Updated mineral resource estimate for Shahuindo expected in mid-2015. Global mineral
resources (oxide + mixed material) for Shahuindo currently stand at 2.56 Moz Au and 34.7
Moz Ag (157 Mt at 0.51 g/t Au and 6.9 g/t Ag). This estimate was prepared by Sulliden for
its 2012 feasibility study, but RIO is undertaking work to support an updated mineral
resource estimate expected to be completed by mid-2015. Work includes re-logging old core
and RC holes to build a new geological model and block model, completing a bulk
metallurgical sample, and planned drilling for geotechnical and grade control purposes.
o RIO plans to complete the new resource estimate using a gold price of
$1,200/oz along with new operating cost parameters. Sulliden’s old
estimate assumed a gold price of $1,300/oz and $25/oz for silver.
o Recall that the current mineral reserve estimate for Shahuindo of 1.0 Moz Au
and 11.6 Moz Ag (37.6 Mt at 0.84 g/t Au and 9.4 g/t Ag) represents only 40%
of the M&I oxide resource and is based on a ~$675/oz Au pit shell. The
seemingly low conversion rate from resources to reserves was due to
Sulliden’s decision to cap the mine life at 10 years in order to minimize initial
capital requirements. We expect Shahuindo reserves will increase due to
RIO’s new estimation parameters.
■ Planned infill and exploration drilling could help quantify positive grade reconciliation
anticipated at Shahuindo. RIO has planned a substantial drill program (budget/final m to be
approved) to start in Q1/15 with a goal of infill drilling the proposed starter pit area and
getting some step out assays both near the main Shahuindo pit and in the North Corridor. We
believe infill drilling on 25 m by 25 m spacing could help quantify potential positive grade
reconciliation. Recall that Barrick Gold’s (ABX-CN, Tanya Jakusconek) Lagunas Norte
mine saw 20% positive grade reconciliation in its first year of production.
■ RIO’s plan is to get a small starter heap leach pad (~4 Mt) operating as quickly as
possible so it can use it to optimize crush, leach, and geotech parameters for the full
scale pad and begin generating cash flow. Construction of the starter pad is expected to
begin in Q3/15 once RIO has the necessary permits in hand. The photo on the right in Exhibit
3 shows the flat area where RIO plans to build the starter pad and the left photo in Exhibit 4
shows the valley where RIO plans to put the full-scale leach pad. Waste rock will initially be
deposited in the valley to even out the topography before the leach pad liner is installed.
■ Optimizing crush and agglomeration parameters is a major focus. RIO wants to avoid or
reduce the need for two-stage crushing and agglomeration and thinks they can accomplish
this by blending hard rock with fines; however, we think that because of the silica content
(~50% of the rock is considered hard), some crushing will be required to avoid hurting gold
recoveries. Met testing is in progress, with results expected in Q1/15.
Exhibit 4 – Shahuindo – Leach Pad Location (left); Electrical Substation Construction on Hold (right)
Source: Scotiabank GBM.
80
■ RIO has identified $7M to $8M of additional capex savings by deciding to move the
generators to Shahuindo from La Arena. La Arena is now operating on full grid power
(changeover occurred on October 23 during the site tour) and no longer requires the two 1.3
MW diesel generators installed at the mine. Shahuindo power requirements are estimated at
1.5 MW and RIO has stopped construction of the Shahuindo electrical substation (see the
right photo in Exhibit 4).
■ Initial results of the Shahuindo re-engineering study including RIO’s estimated capex
for the project are expected in Q4/14, likely in late November or early December.
■ Exhibit 5 shows our key modelling assumptions for Shahuindo. Pending the results of
RIO’s re-engineering studies for the project which we expect later this year, we continue to
use conservative modelling assumptions for Shahuindo (NPV5% of C$499 million) largely
based on Sulliden’s plan outlined in the September 2012 feasibility study.
Exhibit 5 – Shahuindo Key Modelling Assumptions
Shahuindo
SC gold price forecast
SC Forecast
LOM Avg.
2014E
2015E
2016E
2017E
(US$/oz)
$1,300
$1,270
$1,300
$1,300
$1,300
Daily ore stacked on pad
(tpd)
25,638
-
-
10,000
10,000
Strip ratio
(w:o)
1.62
-
-
2.90
1.85
Gold grade of placed material
(g/t)
0.74
-
-
1.02
1.10
Gold recovery
(%)
85.0%
-
-
85.0%
85.0%
(koz)
174
-
-
51
110
Mining cost per tonne mined
(US$/t)
$2.05
-
-
$2.25
$2.25
Pad operations
(US$/t)
$4.86
-
-
$5.00
$5.00
Mine G&A
(US$/t)
$1.86
-
-
$2.00
$2.00
Gold poured / sold
Operating cost per tonne stacked
(US$/t)
$12.08
-
-
$15.78
$13.41
Total cash cost (by-product)
(US$/oz)
$571
-
-
$542
$440
Mine all-in sustaining cost*
(US$/oz)
$607
-
-
$610
$500
(yrs)
Total
9.2
$205
$10.0
$110.0
$10.0
$30.0
-
-
$3.5
$6.5
Estimated mine life
Development capital
(US$M)
Sustaining capital
(US$M)
$62
(C$M )
$499
5%
NPV
*Excludes corporate G&A.
Source: Scotiabank GBM estimates.
La Arena Oxides – Low-Cost Mine with Potential Upside
■ Mine operating smoothly. The company guides to 2014 production of 200-220 koz Au at a
cash cost of $629-$695/oz, which implies Q4/14 production of 36-56 koz based on
production for the first nine months of 2014 of 164 koz at La Arena. We currently model
2014 production of 219 koz at $611/oz. See Exhibit 6 for our key La Arena Oxide modelling
assumptions.
81
Exhibit 6 – La Arena Oxide Key Modelling Assumptions
La Arena Oxide
SC Forecast
LOM Avg.
Q1/14A
Q2/14A
Q3/14E
Q4/14E
2014E
2015E
2016E
2017E
(US$/oz)
$1,293
$1,283
$1,276
$1,282
$1,216
$1,264
$1,300
$1,300
$1,300
Daily ore stacked on pad
(tpd)
33,850
38,870
43,333
48,298
50,000
45,164
38,750
32,250
36,130
Strip ratio
(w:o)
0.79
1.69
1.01
0.86
0.60
1.00
1.03
0.72
0.57
Gold grade of placed material
(g/t)
0.43
0.52
0.51
0.47
0.43
0.48
0.50
0.51
0.35
SC gold price forecast
Gold recovery
Gold poured / sold
Operating cost per tonne stacked
(%)
87.1%
86.0%
86.0%
84.1%
85.0%
86.1%
85.2%
85.4%
85.6%
(koz)
134
53.5
54.5
56.4
54.3
219
193
166
128
(US$/t)
$7.42
$9.48
$7.06
$7.45
$6.88
$7.63
$8.18
$7.32
$6.93
Total cash cost
(US$/oz)
$661
$651
$569
$611
$615
$611
$633
$568
$710
Mine all-in sustaining cost*
(US$/oz)
$731
$742
$709
$744
$735
$733
$675
$616
$772
(yrs)
Total
5.6
Development Capital
(US$M)
$13.4
$6.9
$3.5
$1.5
$1.5
$13.4
$0.0
$0.0
$0.0
Sustaining Capital
(US$M)
$65.5
$4.9
$7.6
$7.5
$6.5
$26.5
$8.0
$8.0
$8.0
(C$M )
$394
Estimated mine life
3%
NPV
*Excludes corporate G&A.
Source: Company reports; Scotiabank GBM estimates.
■ Successful cost reduction programs led management to lower the mining cut-off grade
earlier in 2014. As a result, lower-grade material that was previously considered waste is
now economic and is being stacked on the leach pads. This explains what at first glance
seems to be negative grade reconciliation in RIO’s La Arena production for the first nine
months of 2014. See Exhibit 7 for views of the main open pit.
Exhibit 7 – La Arena – Calaorco Open Pit (left); Calaorco Pit Wall Pushback to the Northwest in Progress (right; left-hand side of the photo)
Source: Scotiabank GBM.
82
■ Costs expected to fall even further in 2015 with La Arena now operating on full grid
power. La Arena was previously powered by diesel generators with a fuel cost of ~$3.90 per
gallon but the mine has now switched to grid power, resulting in power costs decreasing to
$0.07/kWh from $0.40/kWh (~$10-$12/oz cash cost savings).
o RIO may also be able to negotiate the mining cost lower. RIO believes it
could negotiate the $2.07/t mining cost at La Arena lower if it also awards the
mining contract for Shahuindo to the same contractor.
■ Possibility of improving silver recoveries identified. RIO is seeing ~300 ppm copper in
solution which is preventing some silver from being recovered. The company plans to try
adding formic acid at the desorption stage to remove copper from the carbon and improve
silver recoveries. Reagent consumption averages 0.08 kg/t sodium cyanide and 1.0 kg/t of
lime in order to produce an ultimate gold recovery of ~85%.
■ La Arena resource and reserve update expected in early 2015 – we expect RIO will
increase reserves net of depletion and estimate that a two-year increase would bump our
project NPV by 20% (RIO NAV estimate by 6.5%). We currently value the La Arena oxides
at C$394M based on a 5.6-year mine life. A 15,000 metre RC drill program is planned for
2015 but has not yet been approved.
■ Recently released assays suggested the potential for RIO to increase La Arena reserves
at the northwest end of the pit. Highlight hole CA-R14-022 intersected 0.38 g/t Au over
168 m including 1.54 g/t Au over 14 m, and hole 039 also intersected 0.38 g/t Au over 152 m
(incl. 1.32 g/t Au over 16 m), both outside the current reserve pit shell. RIO indicates it
would be comfortable taking the pit deeper by ~100 metres which would increase the strip
ratio from ~0.8 to 1.0.
■ Ample space to construct more leach pad capacity but pit wall pushback will require a
new leach pad. Pad 4A (see Exhibit 8) could be extended for an additional 70 Mt of capacity
but since RIO plans to do another pit wall pushback a new leach pad will be required. The
company plans to put ~30 Mt of leach pad capacity on top of waste dump #2 (see Exhibit 8)
Permits to construct the new pad are expected in December 2014.
Exhibit 8 – Liner Exposed for Leach Pad 4A at La Arena (left); La Arena Waste Rock Dump #2 (right)
Source: Scotiabank GBM.
83
Valuation and Recommendation – Reiterating our SO Rating
■ We rate RIO Sector Outperform with a C$3.00 one-year target price. We expect the
shares will continue to re-rate higher as (1) investors recognize Shahuindo’s upside potential
(expansion, exploration), (2) management provides a clear path to production, and (3) final
permits and authorizations are awarded to advance Shahuindo to construction.
o RIO is currently trading at 0.87x P/NAV and 8.0x 2014E P/CF vs. peers
that are trading at 1.12x and 8.0x respectively.
o Our NAV estimate of C$3.09 is unchanged as we made no modelling revisions
following the site visit. We continue to use conservative modelling
assumptions at both Shahuindo and La Arena ahead of the planned updates in
late 2014 and early 2015.
■ Our Sector Outperform rating for RIO is based on three key elements:
o RIO’s ability to leverage its experience with La Arena and strong financial
position to develop the feasibility-stage Shahuindo project. Above a gold
price of ~$1,210/oz, we estimate RIO can use internally generated cash flow to
accelerate Shahuindo’s development and expansion beyond 10,000 tpd. We
believe RIO’s successful track record at La Arena and synergies between the
two properties should allow management to add incremental value beyond that
generated by our conservative modelling assumptions.
o Base-case organic production growth of ~10% over the next three years.
We model production of 219 koz Au in 2014 climbing to 238 koz in 2017 with
the start-up of Shahuindo in mid-2016 (see Exhibit 2). We anticipate a 4%
decline in total cash costs over the same period as lower-cost production at
Shahuindo offsets higher costs at La Arena as the operation ages. Additional
upside could come from positive grade reconciliation at Shahuindo, which
bears geological similarities to La Arena (positive grade reconciliation of ~8%
to date).
o The potential for RIO to unlock the full value of its combined Peruvian land
package. Oxide mineralization remains open along strike and at depth at both
Shahuindo and the Calaorco pit (main pit at La Arena). We expect La Arena
reserves will increase net of depletion in Q1/15 and estimate that a two-year
increase would bump our project NPV estimate by 20% (RIO NAV estimate by
6.5%). Numerous regional targets at both La Arena and Shahuindo remain largely
unexplored and represent longer-dated upside potential, in our view.
■ Upcoming potential share price catalysts:
o Q4/14 – Grid power connection at La Arena expected to translate into lower
operating costs moving forward (upside to our current assumptions). La Arena
switched to full grid power on October 23, 2014.
o Q4/14 – Results of RIO’s Shahuindo re-engineering studies.
o Early 2015 – Mineral resource and reserve update for La Arena Phase I and
updated feasibility results for the La Arena Phase II copper-gold sulphide
project.
o Mid-2015 – Construction permits for Shahuindo.
ScotiaView Analyst Link
84
Intraday Flash
Friday, October 24, 2014 @ 1:39:02 PM (ET)
(WTE-T C$33.99)
Westshore Terminals Investment
Corporation
Q3 Beats But Capex Plan Pushed Out Slightly
Turan Quettawala, MBA, CFA - (416) 863-7065
(Scotia Capital Inc. - Canada)
Milan Posarac - (416) 863-7532
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Underperform
Risk Ranking: Medium
[email protected]
Target 1-Yr:
C$35.50
ROR 1-Yr:
8.3%
Valuation: Equally wtd. DCF and 13.5x EV/NTM EBITDA (one-year fwd.)
Div. (NTM)
Div. (Curr.)
$1.32
$1.32
Yield (Curr.)
3.9%
Key Risks to Target: Decline in coal exports and slower-than-expected economic growth
Event
■ WTE's Q3 adj EPS of 50¢ was in line with consensus (51¢).
Pertinent Revisions
Implications
■ Both coal throughput (8.6Mt) and loading rate ($10.03/tonne) were up
5% YOY, with revenues up 9% to $88.5M. Loading rates were
supported by a weaker C$. EBITDA of $53.5M was up 22% YOY, with
strong margin expansion (650 bps to 60.4%) that was helped by lower
operating costs. 2014 throughput guidance of 31-32Mt is unchanged
while completion of the $270M capital project - which includes 2-3Mt
expansion - has been pushed back from 2018 to early 2019.
■ We increased our 2015 EBITDA estimate by a touch to reflect betterthan-expected loading rates - now looking for $10.06/t (3% YOY rate
growth). We note that the positive impact of the weaker C$ should start
to reduce significantly starting in Q4 unless there is another leg down in
the C$. Our 32.7M throughput assumption for 2015 remains unchanged.
Target:
1-Yr
EPS14E
EPS15E
New
Old
$35.50
$1.69
$1.79
$35.00
$1.65
$1.76
Recommendation
■ WTE shares have been volatile recently mainly due to the market. On a
YTD basis, the shares are basically flat. While we do not expect WTE to
be negatively impacted by the coal price weakness due to the contracted
nature of its volumes, we also think that there is little upside potential to
earnings or dividends in the NT. Our view is unchanged as is our SU
rating as we believe there are other better opportunities for upside in our
coverage universe.
Qtly EPS (FD)
2012A
2013A
2014E
2015E
Q1
$0.05 A
$0.24 A
$0.30 A
$0.38
(FY-Dec.)
Earnings/Share
Free Cash Flow/Share
Price/Earnings
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q2
$0.21 A
$0.47 A
$0.49 A
$0.47
Q3
$0.38 A
$0.40 A
$0.50 A
$0.49
Q4
$0.25 A
$0.36 A
$0.40
$0.44
Year
$0.89
$1.46
$1.69
$1.79
P/E
31.0x
23.6x
20.1x
19.0x
2011A
$0.58
$1.32
39.5x
$213
$108
1.4x
1.7x
2012A
$0.89
$0.51
31.0x
$241
$119
1.0x
4.1x
2013A
$1.46
$1.91
23.6x
$296
$162
1.1x
n.m.
2014E
$1.69
$1.31
20.1x
$321
$183
1.4x
260.4x
2015E
$1.79
$0.91
19.0x
$336
$195
1.6x
51.7x
ROE14E:
ROIC14E:
25.50%
31.00%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ 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.
$2,524
$-75
$2,449
74
64
85
Exhibit 1 - WTE - Earnings Model
Westshore Terminals Investment Corporation
WTE
1-Year Target:
$35.50
1-Year Return:
8.3%
NTM Dividend:
1.32
Rating:
Last Price:
Sector Underperform
$33.99
Shares O/S:
74.25
Market Cap:
$2,524
FY End:
Dec-31
Risk:
Medium
Valuation:
Financial
EPS (recurring)
Q3/2013
Q3/2014
2013
2014E
2015E
2012
2013
2014E
2015E
Operating Ratio (adjusted)
0.50
0.43
0.49
0.46
0.46
Q1
$0.05
$0.24
$0.30
$0.38
Days Receivable
23.4
21.9
22.5
29.1
30.6
Q2
$0.21
$0.47
$0.49
$0.47
Days Inventory
22.6
32.5
28.8
27.8
28.9
Q3
$0.38
$0.40
$0.50
$0.49
Free Cash Flow per Share (after w c, diluted)
0.69
0.64
1.91
1.31
0.91
Q4
$0.25
$0.36
$0.40
$0.44
Book value per Share
6.28
6.80
6.40
6.87
7.33
Total
$0.89
$1.46
$1.69
$1.79
Free Cash Yield (%)
0.02
0.02
0.05
0.04
0.03
Incom e Statem ent Consolidated ($thousand)
Coal loading revenue
Q3/2013
Q3/2014
78,415
86,715
2013
286,703
2014E
313,514
2015E
328,782
Other revenue
2,932
1,759
9,022
7,004
7,398
Total revenue
81,347
88,474
295,725
320,518
336,179
EBITDA (Recurring)
43,830
53,482
161,865
183,422
195,237
Total operating expenses
36,734
34,253
132,159
134,146
137,935
Total expenses
40,303
37,660
145,388
148,021
153,563
Q3/2013
Q3/2014
Q3/2013
Q3/2014
2013
2014E
2015E
Cash and cash equivalents
64,079
74,727
61,408
69,898
71,383
Net Total Debt/ LTM EBITDA
(0.23)
(0.41)
(0.38)
(0.33)
(0.14)
Accounts receivable
20,686
21,101
18,218
25,572
28,225
Net Total Debt/Total Assets
(0.05)
(0.11)
(0.10)
(0.09)
(0.04)
9,010
12,114
10,439
10,229
10,926
EBITDA Margin
53.9%
60.4%
54.7%
57.2%
58.1%
Operating Ratio (adjusted)
0.50
0.43
0.49
0.46
0.46
LTM Return on Assets
0.19
0.21
0.21
0.21
0.18
LTM Return on Equity
0.26
0.27
0.28
0.27
0.24
Balance Sheet ($thousand)
Inventories
Total current assets
Accumulated depreciation
Share capital
Ratios ($M, Except per Share Items)
2013
2014E
2015E
96,204
110,511
91,093
89,950
103,702
(449,799)
(459,884)
(453,161)
(462,907)
(476,833)
1,706,265
1,706,265
1,706,265
1,706,265
1,706,265
Total assets
637,775
658,693
632,994
653,665
725,524
Diluted Recurring Earnings per Share
0.40
0.59
1.80
1.84
1.79
Total liabilities
171,146
154,012
157,727
143,880
180,919
Dividend per Share
0.33
0.33
1.32
1.32
1.32
Total liabilities and equity
637,774
658,689
632,991
653,638
725,524
Operational Statistics
Cash Flow Statem ent ($thousand)
Net earnings for the period
Q3/2013
Q3/2013
Q3/2014
29,470
43,787
2013
133,426
2014E
136,732
2015E
132,857
2013
2014E
2015E
Metallurgical coal
5.1
Q3/2014
5.2
18.1
18.6
19.4
Thermal coal
3.0
3.3
11.7
12.6
12.9
Depreciation
2,786
2,668
11,528
10,924
12,620
Petroleum coke
0.1
0.1
0.3
0.3
Income tax paid
5,234
(9,750)
(14,365)
(56,665)
(49,014)
Total Throughput
8.2
8.6
30.1
31.5
32.7
Additions to property, plant and equipment, net
(3,400)
(3,132)
(33,935)
(25,836)
(77,321)
Average Total Loading Rate (CAD/tonne)
9.52
10.03
9.53
9.75
10.06
Cash flow from operations
54,523
50,611
176,053
122,853
144,897
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
0.3
Equity Event
Wednesday, October 15, 2014
Equity Event: Telecom & Cable 2015
Insert graphic here
87
Equity Event
XXX, XXX XX, XXXX
Equity Event: Transportation & Aerospace 2014
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Equity Event
XXX, XXX XX, XXXX
xx
Equity Event: Canadian Energy Infrastructure
Conference
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Equity Event
XXX, XXX XX, XXXX
Xs2
Equity Event: Mining Conference 2014
Insert graphic here
90
Disclosures and Disclaimers
Monday, October 27, 2014
Appendix A: Important Disclosures
Company
AES Gener SA
Agellan Commercial REIT
Agnico Eagle Mines Limited
Agrium Inc.
Aguas Andinas SA
AltaGas Ltd.
America Movil
ATCO Ltd.
Atrium Mortgage Investment Corporation
Barrick Gold Corporation
Bombardier Inc.
Ticker
AESGENER
ACR.UN
AEM
AGU
AGUAS-A
ALA
AMX
ACO.X
AI
ABX
BBD.B
Bunge Limited
Calloway REIT
Canadian Real Estate Inv. Trust
Canadian Utilities Limited
Capital Power Corporation
Catamaran Corporation
Celestica Inc.
Centerra Gold Inc.
Chartwell Retirement Residences
Choice Properties REIT
Colbun SA
Cominar REIT
Compañía de Minas Buenaventura SAA
COPASA
Crombie REIT
DH Corporation
Dream Global REIT
Dream Industrial REIT
E.CL SA
Eldorado Gold Corporation
Empresa Nacional de Electricidad SA
ENERSIS SA
First Capital Realty Inc.
First National Financial Corporation
First Quantum Minerals Ltd.
Flextronics International Ltd.
Goldcorp Inc.
Granite REIT
Graña y Montero SAA
Grupo Aeroportuario Centro Norte, SAB de CV
Grupo Aeroportuario del Pacífico, SAB de CV
Grupo Aeroportuario del Sureste, SAB de CV
Grupo Financiero Banorte, SAB de CV
Grupo Televisa, SAB
HudBay Minerals Inc.
BG
CWT.UN
REF.UN
CU
CPX
CTRX
CLS
CG
CSH.UN
CHP.UN
COLBUN
CUF.UN
BVN
CSMG3
CRR.UN
DH
DRG.UN
DIR.UN
ECL
EGO
ENDESA
ENERSIS
FCR
FN
FM
FLEX
GG
GRT.UN
GRAM
OMAB
PAC
ASR
GFNORTE O
TV
HBM
IEnova
IENOVA *
Disclosures (see legend below)*
M8
I
P, T, VS170, VS185, VS60, VS149
T
M8
G, I, S, U
M12, M4, T
S
G, I, U
G, I, P, T, U, VS5, VS178
G, I, N1, T, U, VS46, VS47, VS48, VS122,
VS164, VS183, VS184
T
G, I, U
G, I, U
B33, G, I, S, U
I, T
J, T
V30
P, T
T
B40, G, I, U
I, M8, N1
G, I, U
P, T
M8
B25, G, I, U
I, T
I, T
I
M8
P, T, VS6
M8
M8
G, I, U
G, I, U
T, VS124
L, N2
D26, G, I, N1, P, T, U, VS8, VS82
G, I, U
M6, VS25
M13, T
M13, T
M13, T
M7
M12, M4, T
G, I, N1, T, U, V25, VS66, VS101, VS174,
VS69
M8
91
Disclosures and Disclaimers
Monday, October 27, 2014
Leisureworld Senior Care Corporation
Lundin Mining Corporation
MacDonald, Dettwiler and Associates Ltd.
Maple Leaf Foods Inc.
Methanex Corporation
Morguard REIT
New Gold Inc.
Newmont Mining Corporation
NuVista Energy Ltd.
Organización Soriana, SAB de CV
Pattern Energy Group Inc.
Pure Industrial REIT
Rio Alto Mining Ltd.
RioCan REIT
SABESP
Sherritt International Corporation
Teck Resources Limited
The Mosaic Company
Thomson Reuters Corporation
TransAlta Corporation
TransAlta Renewables Inc.
TransForce Inc.
Winpak Ltd.
WPT Industrial REIT
Yamana Gold Inc.
LW
LUN
MDA
MFI
MEOH
MRT.UN
NGD
NEM
NVA
SORIANA B
PEGI
AAR.UN
RIO
REI.UN
SBSP3
S
TCK.B
MOS
TRI
TA
RNW
TFI
WPK
WIR.U
AUY
I
T, VS67
I, VS80
T
J, S
I
P, T
P, T
G, I, U
M13, T
G, I, U
G, I, U
VS194
G, I, U
M8
G, U, VS141
T, VS68
G, I, N1, T, U
S, S2, T
G, I, S, T, U
G, I, U
T
J, VS43, VS90
G, I, U
G, I, N1, P, T, U, VS186
Each Research Analyst named in this report or any subsection of this report certifies that (1) the views expressed in this report in connection
with securities or issuers that he or she analyzes accurately reflect his or her personal views; and (2) no part of his or her compensation was, is,
or will be directly or indirectly, related to the specific recommendations or views expressed by him or her in this report.
This research report was prepared by employees of Scotia Capital Inc. and/or its affiliates who have the title of Analyst.
All pricing of securities in reports is based on the closing price of the securities’ principal marketplace on the night before the publication date,
unless otherwise explicitly stated.
All Equity Research Analysts report to the Head of Equity Research. The Head of Equity Research reports to the Managing Director, Head of
Institutional Equity Sales, Trading and Research, who is not and does not report to the Head of the Investment Banking Department.
Scotiabank, Global Banking and Markets has policies that are reasonably designed to prevent or control the sharing of material non-public
information across internal information barriers, such as between Investment Banking and Research.
The compensation of the research analyst who prepared this report is based on several factors, including but not limited to, the overall
profitability of Scotiabank, Global Banking and Markets and the revenues generated from its various departments, including investment banking.
Furthermore, the research analyst’s compensation is charged as an expense to various Scotiabank, Global Banking and Markets departments,
including investment banking. Research Analysts may not receive compensation from the companies they cover.
Non-U.S. analysts may not be associated persons of Scotia Capital (USA) Inc. and therefore may not be subject to FINRA Rule 2711
restrictions on communications with subject company, public appearances and trading securities held by the analysts.
For Scotiabank, Global Banking and Markets Research analyst standards and disclosure policies, please visit
http://www.gbm.scotiabank.com/disclosures
Scotiabank, Global Banking and Markets Research, 40 King Street West, 33rd Floor, Toronto, Ontario, M5H 1H1.
92
Disclosures and Disclaimers
Monday, October 27, 2014
*
Legend
B25
Paul D. Sobey is a director of Crombie REIT and is a director of The Bank of Nova Scotia.
B33
David A. Dodge is a director of Canadian Utilities Limited and is a director of The Bank of Nova Scotia.
B40
Thomas C. O'Neill is a director of Loblaw Companies Limited and is Chairman of the Board of The Bank of Nova Scotia. Choice
Properties Real Estate Investment Trust is a subsidiary of Loblaw Companies.
D26
Tanya Jakusconek is a Director of Equity Research for Scotiabank, Global Banking and Markets and is a member of the board of
directors for Tahoe Resources Inc. Goldcorp Inc. is a significant shareholder of Tahoe Resources Inc.
G
Scotia Capital (USA) Inc. or its affiliates has managed or co-managed a public offering in the past 12 months.
I
Scotia Capital (USA) Inc. or its affiliates has received compensation for investment banking services in the past 12 months.
J
Scotia Capital (USA) Inc. or its affiliates expects to receive or intends to seek compensation for investment banking services in the
next 3 months.
L
Scotia Capital (USA) Inc. has received compensation for non-investment banking services during 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.
M6
Paul Figueroa Mantero, an analyst, prepared this report and is an employee of the Research Department of Scotia Sociedad
Agente de Bolsa S.A., which is a fully owned subsidiary of Scotiabank Peru.
M7
Claudia Benavente A., an analyst, prepared this report and is an employee of the Research Department of Scotia Corredores de
Bolsa Chile S.A.
M8
Ezequiel Fernandez Lopez, an analyst, prepared this report and is an employee of the Research Department of Scotia Corredora
de Bolsa Chile S.A.
N1
Scotia Capital (USA) Inc. had an investment banking services client relationship during the past 12 months.
N2
Scotia Capital (USA) Inc. had a non-investment banking securities-related services client relationship during the past 12 months.
P
This issuer paid a portion of the travel-related expenses incurred by the Fundamental Research Analyst/Associate to visit material
operations of this issuer.
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.
S2
Scotia Capital Inc. is an affiliate of The Bank of Nova Scotia Trust Company (“Scotiatrust”). Under the estate arrangements of the
late Kenneth R. Thomson, Scotiatrust is Trustee of the 2003 TIL Settlement (“TIL Settlement”), a trust of which members of the
Thomson family are beneficiaries. The TIL Settlement holds holding company shares of The Woodbridge Company Limited
(“Woodbridge”), who is the principal shareholder and controlling shareholder of Thomson Reuters Corporation. Under the estate
arrangements, the directors and officers of Woodbridge are responsible for its business and operations. In certain limited
circumstances, including a very substantial disposition of Thomson Reuters Corporation common shares by Woodbridge,
Scotiatrust's approval may be required.
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.
V25
Scotiabank acted as a financial advisor for HudBay Minerals Inc. in a precious metals stream transaction with Silver Wheaton
Corp.
93
Disclosures and Disclaimers
Monday, October 27, 2014
V30
Scotia Capital Inc. has been retained by Celestica Inc. as the sole dealer manager with respect to its substantial issuer bid (the
'Bid'), and has provided a liquidity opinion with respect to that Bid.
VS101
Our Research Analyst visited Constancia, a mine under development, on October 2, 2013. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS122
Our Research Analyst visited the Sahagun and Queretaro facilities, manufacturing plants for BT and BA, respectively, on January
13-15, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit
this site.
VS124
Our Research Analyst visited the Kansanshi and Sentinel mines, a copper mine and mine under development, respectively, on
February 6-7, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research
Analyst to visit this site.
VS141
Our Research Analyst visited Ambatovy, a nickel mine, on March 28-29, 2014. Partial payment was received from the issuer for
the travel-related expenses incurred by the Research Analyst to visit this site.
VS149
Our Research Associate visited LaRonde and Goldex, underground mines and processing facilities, on May 21, 2014. Full
payment was received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
VS164
Our Research Analyst visited BT's Derby plant, a plane and train manufacturing plant, on July 14, 2014. Partial payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS170
Our Research Analyst visited Meliadine, a mine under development, on August 26. 2014. Full payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS174
Our Research Analyst visited the Constancia project, a copper mine, on September 8, 2014. Partial payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS178
Our Research Analyst visited Goldstrike, Cortez, and Goldrush, producing mines and exploration property, on September 17-18,
2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this
site.
VS183
Our Research Analyst visited Belfast aerostructures plant, a manufacturing plant, on September 25, 2014. No payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS184
Our Research Analyst visited BT's Henningsdorf plant, a trains plant, on September 24, 2014. No payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS185
Our Research Analyst visited Canadian Malartic, a producing mine, on September 30, 2014. Full payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS186
Our Research Analyst visited Canadian Malartic, a producing mine, on September 30, 2014. Full payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS194
Our Research Analyst visited La Arena and Shahuindo, an operating mine and a mine under development, respectively, on
October 22 and 23. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst
to visit this site.
VS25
Our Research Analyst visited Lima Metro, a construction site, on September 27, 2013. No payment was received from the issuer
for the travel-related expenses incurred by the Research Analyst to visit this site.
VS43
Our Research Associate visited Winpak Heat Seal, an integrated lid extrusion and conversion facility, on March 26, 2013. No
payment was received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
VS46
Our Research Analyst visited BT's Derby facility, a manufacturing plant and servicing centre for trains, on July 11, 2012. No
payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS47
Our Research Analyst visited Bombardier Sifang Transportation and Bombardier CPC Propulsion System Co., both JVs with
Bombardier Inc., on October 15-19, 2012. Partial payment was received from the issuer for the travel-related expenses incurred by
the Research Analyst to visit this site.
94
Disclosures and Disclaimers
Monday, October 27, 2014
VS48
Our Research Analyst visited Bombardier Transportation, a production facility for commuter/regional trains, on June 19, 2013.
Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS5
Our Research Analyst visited Pueblo Viejo, an operating mine, on February 28, 2013. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS6
Our Research Analyst visited Efemcukuru, Kisladag, Perama Hill, Olympias, Skouries, Piavitsa, and Stratoni, operating mines and
projects under development, on October 1-5, 2012. Partial payment was received from the issuer for the travel-related expenses
incurred by the Research Analyst to visit this site.
VS60
Our Research Associate visited La India, a gold mine, on September 20-21, 2013. Full payment was received from the issuer for
the travel-related expenses incurred by the Research Associate to visit this site.
VS66
Our Research Analyst visited mining assets at Flin Flon, Manitoba, on April 15-17, 2013. No payment was received from the issuer
for the travel-related expenses incurred by the Research Analyst to visit this site.
VS67
Our Research Analyst visited the Eagle project, a development mine, on September 26, 2013. Partial payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS68
Our Research Analyst visited Highland Valley, an operating mine, on September 4, 2013. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS69
Our Research Associate visited 777, Lalor, Reed, the Flin Flon complex, and Snow Lake, mines and processing plants, on July 810, 2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Associate to visit
this site.
VS8
Our Research Analyst visited Pueblo Viejo, an operating mine, on February 28, 2013. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS80
Our Research Analyst visited SS/L Manufacturing Plant, a manufacturing facility, on May 30, 2013. No payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS82
Our Research Associate visited the Red Lake mine, an operating mine, on September 5, 2012. Full payment was received from
the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
VS90
Our Research Analyst visited Winpak Heat Seal, an integrated lid extrusion and conversion facility, on March 26, 2013. No
payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
95
Disclosures and Disclaimers
Monday, October 27, 2014
Definition of Scotiabank, Global Banking and Markets Equity Research Ratings & Risk Rankings
We have a four-tiered rating system, with ratings of Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform. Each analyst assigns a rating
that is relative to his or her coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst.
Our risk ranking system provides transparency as to the underlying financial and operational risk of each stock covered. Statistical and judgmental factors
considered are: historical financial results, share price volatility, liquidity of the shares, credit ratings, analyst 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 analyst’s
12-month view on the security. Analysts may sometimes express to traders, salespeople and certain clients their shorter-term views on these securities that
differ from their 12-month view due to several factors, including but not limited to the inherent volatility of the marketplace.
Ratings
Risk Rankings
Focus Stock (FS)
The stock represents an analyst’s best idea(s); stocks in this category are
expected to significantly outperform the average 12-month total return of the
analyst’s coverage universe or an index identified by the analyst that includes,
but is not limited to, stocks covered by the analyst.
Low
Low financial and operational risk, high predictability of financial results,
low stock volatility.
Sector Outperform (SO)
The stock is expected to outperform the average 12-month total return of the
analyst’s coverage universe or an index identified by the analyst that includes,
but is not limited to, stocks covered by the analyst.
Sector Perform (SP)
The stock is expected to perform approximately in line with the average 12month total return of the analyst’s coverage universe or an index identified by
the analyst that includes, but is not limited to, stocks covered by the analyst.
Sector Underperform (SU)
The stock is expected to underperform the average 12-month total return of the
analyst’s coverage universe or an index identified by the analyst that includes,
but is not limited to, stocks covered by the analyst.
Medium
Moderate financial and operational risk, moderate predictability of financial
results, moderate stock volatility.
High
High financial and/or operational risk, low predictability of financial results,
high stock volatility.
Speculative
Exceptionally high financial and/or operational risk, exceptionally low predictability
of financial results, exceptionally high stock volatility. For risk-tolerant investors
only.
Other Ratings
Tender – Investors are guided to tender to the terms of the takeover offer.
Under Review – The rating has been temporarily placed under review, until
sufficient information has been received and assessed by the analyst.
Scotiabank, Global Banking and Markets Equity Research Ratings Distribution*
Distribution by Ratings and Equity and Equity-Related Financings*
Percentage of companies covered by Scotiabank, Global Banking
and Markets Equity Research within each rating category.
Percentage of companies within each rating category for which
Scotiabank, Global Banking and Markets has undertaken an
underwriting liability or has provided advice for a fee within the last
12 months.
Source: Scotiabank GBM.
For the purposes of the ratings distribution disclosure FINRA requires members who use a ratings system with terms different than “buy,” “hold/neutral” and
“sell,” to equate their own ratings into these categories. Our Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform ratings are based
on the criteria above, but for this purpose could be equated to strong buy, buy, neutral and sell ratings, respectively.
96
Disclosures and Disclaimers
Monday, October 27, 2014
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