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EQUITY RESEARCH
CANADIAN RESEARCH AT A GLANCE
October 22, 2014
Price Target Revisions
! Enbridge Income Fund Holdings Inc
! Thomson Reuters Corporation
! True Gold Mining Inc.
Summary
Kicking the dividend up a notch, or two, or 12
Summary
Q3/14 Preview - NAV Growth Story Intact
Summary
North Kao study adds 310koz to Karma, further optimization likely to enhance
Summary
Sustainability of cash costs in focus
Summary
Transitional vacancy impacting results; Leveraging to drive FFO/unit growth
Summary
Solid Q3/14 result
Summary
Robust outlook maintained; Management sees strong case for rail M&A
Summary
Miss Communications
Summary
See flattish Q3 offering attractive entry point for value focused investors
! Bulking Up – RBC's Weekly Review
! Cdn Oilfield Services: Sifting through
Summary
China's import taxes weigh on Australian coal prices
Summary
A look at risk/reward
!
! Integrated Oil and Senior E&P
! Intermediate Oil Sands and E&P
Summary
Industry update and channel checks; Q3 Previews for FTT, TIH, WJX, RME, CVL
Summary
Updated Estimates & 3Q Earnings Preview
!
! Paper & Forest Products
! Precious Metals & Minerals Weekly
Summary
P&W paper stats: imports continue to weigh on uncoated freesheet market
Summary
Newsprint Stats: closures should keep the East balanced for a little while
Summary
Chart of the Week: Lower yields and positive seasonality tailwinds for gold
!
Summary
Earnings Preview
! NA Precious Metal Equities: Q3/14
Preview
Company Comments
! Brookfield Canada Office Properties
! Canadian National Railway
! Canadian Pacific Railway
! Celestica Inc.
! Uni-Select Inc.
Industry Comments
the rubble - Pressure Pumpers
Dealership Dynamics
Weekly Valuation Tables
Paper & Forest Products
Valuation Tables
Q4/14 Global Mining Best Ideas
Portfolio
RBC International E&P Daily
Summary
!
! Steel: September global output at
Summary
AMER; PPC; FPM; TLW; PRE
Summary
Daily output rate higher at 4.48mt/day
!
Summary
Ux spot price unchanged at $35.65/lb; TradeTech unchanged at $35.50/lb
134.4mt, daily rate improves
Uranium Weekly
! - Action-Oriented Research
Priced as of prior day's market close, EST (unless otherwise noted).
For Required Non-U.S. Analyst and Conflicts Disclosures, see Page 15.
EQUITY RESEARCH
U.S. RESEARCH AT A GLANCE
October 22, 2014
Initiations
! Contango Oil & Gas Company
! Microsemi Corporation
Summary
Initiating Coverage: Oily, Onshore Growth At Gassy Offshore Price
Summary
Initiating coverage: Inflection points are visible that could lift valuation
Summary
Opportunity knocking
Summary
A good quarter, but market conditions grow more challenging
Summary
3Q14 beats estimates, remains a fundamental favorite
Summary
Clear Roads Ahead - Reiterate Outperform
Summary
3Q14 – Marmite quarter
Summary
Quarter Exceeds Expectations. Raising PT to $540
Summary
3Q14 – Mixed bag
Summary
Strong Operational Momentum Continues; Highlights From Meetings With Management
Summary
Another "beat and raise" quarter; Outperform
Summary
Q3/14 Preview - NAV Growth Story Intact
Summary
3Q14 – Greg flags the '15 headwinds
Summary
Although disappointing, we're sticking with VMW
Summary
Q3 Better Than Feared…And Possibly A Bit More
Summary
We like AMGN for pipeline but won't likely split up company due to key tax reasons
Summary
1Q15 Production: Petroleum strong and iron ore in-line
Summary
Get Ready for "New Development" Conference Call Tomorrow Morning
! Amazon.com
! Cameron International Corp.
! Fortinet, Inc.
! NA Precious Metal Equities: Q3/14
Summary
Q3 Preview & Cheat Sheet
Summary
3Q Preview – Focus on the Outlook
Summary
Third Quarter Earnings Preview
Summary
Sustainability of cash costs in focus
!
! The Ultimate Software Group, Inc.
Summary
Sue did your homework: capex and margins
Summary
3Q14 Earnings Preview
Summary
Holding its own, with room to improve in 2015
Summary
3Q core EPS $0.32 - Another solid fundamental quarter. BSA/AML progress continues.
Summary
Competitive quarter
Summary
A Leverage Generating Machine: Long-term OM% Continues to Go Up
Price Target Revisions
! ARM Holdings plc
! Brown & Brown, Inc.
! Discover Financial Services
! Harley-Davidson, Inc.
! Hexcel
! Intuitive Surgical Inc
! Lockheed Martin Corp.
! Rex Energy Corporation
! Robert Half International, Inc.
! Thomson Reuters Corporation
! United Technologies Corp.
! VMware, Inc.
! Yahoo! Inc.
First Glance Notes
! Amgen Inc.
! BHP Billiton
! EMC Corporation
Earnings Preview
Preview
LM Ericsson Telephone Company
Company Comments
! B&G Foods Inc.
! BancorpSouth, Inc.
! Brinker International, Inc.
! Broadcom Corporation
2
EQUITY RESEARCH
! Canadian National Railway
! Canadian Pacific Railway
! Cathay General Bancorp, Inc.
! Celestica Inc.
! Cubist Pharmaceuticals
! ManpowerGroup
! McDonald's Corporation
! Newcrest Mining Limited
! Regions Financial Corporation
! Reynolds American, Inc.
! The Travelers Companies, Inc.
! U.S. Silica Holdings Inc.
! Verizon Communications
Summary
Solid Q3/14 result
Summary
Robust outlook maintained; Management sees strong case for rail M&A
Summary
3Q14: Growth Trends Pick Up While Costs Remain In Check
Summary
Miss Communications
Summary
Cubicin is growing; resolution of litigation could unlock value
Summary
Good Q3, but earnings to decelerate sharply
Summary
Searching for stabilization in 2015
Summary
NCM 1Q15 - production in-line (pre-released), while costs were better
Summary
3Q14: Invincible Capital Level but Growth Sputtered in Quarter
Summary
Reiterating Top Pick
Summary
Good core margin performance
Summary
Frac Sand Demand Surge Continues Despite Oil Price Uncertainty
Summary
3Q14 Results In Line; Strong Postpaid Net Adds; Capex to Trend Near High End
! Bulking Up – RBC's Weekly Review
! Integrated Oil and Senior E&P
! Paper & Forest Products
! Paper & Forest Products
! RBC Crane Survey, Volume 22
! RBC European Industrials Daily
! RBC International E&P Daily
! September WK Sales data: CBST,
Summary
China's import taxes weigh on Australian coal prices
Summary
Updated Estimates & 3Q Earnings Preview
Summary
P&W paper stats: imports continue to weigh on uncoated freesheet market
Summary
Newsprint Stats: closures should keep the East balanced for a little while
Summary
International the highlight (surprise) of September quarter
Summary
ABB - strong Q3 orders; +ve Q3 OFS reports; Project push-outs
Summary
AMER; PPC; FPM; TLW; PRE
Summary
Angiomax(in-line), Erivedge (- to in-line), Fusilev (+), Kadcyla (-)
!
Summary
Industry Comments
CRIS, DRTX, IMGN, MDCO, SPPI
WK Sept Sales: GILD, PCYC, BIIB,
AMGN, CELG
3
EQUITY RESEARCH
UK & European Research at a Glance
October 22, 2014
Price Target Revisions
! ARM Holdings plc
! Henderson Group Plc
! President Energy PLC
Summary
Opportunity knocking
Summary
Reducing forecasts and price target heading into the Q3 IMS
Summary
Close to producing Paraguay's first discovery
Summary
1Q15 Production: Petroleum strong and iron ore in-line
! NA Precious Metal Equities: Q3/14
Summary
Sustainability of cash costs in focus
!
Summary
Sue did your homework: capex and margins
Summary
Quality operator at a discount price
Summary
Needs to steady the ship; 1H due 13 November
Summary
CMD 30 October; Q3 IMS due 14 November
Summary
Looking good value
! Bulking Up – RBC's Weekly Review
! Integrated Oil and Senior E&P
! Steel: September global output at
Summary
China's import taxes weigh on Australian coal prices
Summary
Updated Estimates & 3Q Earnings Preview
Summary
Daily output rate higher at 4.48mt/day
!
Summary
All the components of a marriage
First Glance Notes
! BHP Billiton
Earnings Preview
Preview
LM Ericsson Telephone Company
Company Comments
! Adecco SA
! Electrocomponents PLC
! Premier Farnell PLC
! Randstad Holding NV
Industry Comments
134.4mt, daily rate improves
UK Component Distributors
Find our Research at:
RBC Insight (www.rbcinsight.com): RBC's global research destination on the web. Contact your RBC Capital Markets' sales representative to
access our global research site, or use our iPad App "RBC Research"
Thomson Reuters (www.thomsononeanalytics.com)
Bloomberg (RBCR GO)
SNL Financial (www.snl.com)
FactSet (www.factset.com)
4
Price Target Revisions
Enbridge Income Fund Holdings Inc(TSX: ENF; 29.55)
Robert Kwan, CFA (Analyst)
(604) 257-7611; [email protected]
Michelle Zuliani (Associate)
604 257 7064; [email protected]
Rating:
Price Target:
52 WEEKS
01NOV13 - 20OCT14
32.00
Sector Perform
32.00 ▲ 30.00
Kicking the dividend up a notch, or two, or 12
We positively view the dropdown of Southern Lights and Alliance (U.S.) into
Enbridge Income Fund (ENF) due to the significant forecast cash flow accretion
more than adequately underpinning a 12% increase in the annual dividend coupled
with delivering an increasing tilt of cash flows towards liquids infrastructure.
30.00
28.00
26.00
24.00
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400
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Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
ACFFO/Sh Diluted Prev.
2013A
1.88
2014E
1.98↑
1.95
2015E
2.07↑
1.79
2016E
2.03↑
1.80
All values in CAD unless otherwise noted.
Thomson Reuters Corporation(NYSE: TRI; 36.37; TSX: TRI)
Drew McReynolds, CFA, CA (Analyst)
(416) 842-3805; [email protected]
Jie He (Associate)
416 842 4123; [email protected]
Haran Posner (Analyst)
(416) 842-7832; [email protected]
52 WEEKS
• Big dividend increase underpinned by solid cash flow accretion. As part of the
transaction, ENF announced an intention to increase the annual dividend by
12% to $1.54/share (up roughly $0.16/share) underpinned by expected cash flow
accretion. As shown in Exhibit 2 on page 3, we estimate that the transaction
could add $0.28/share to 2015 ACFFO and while we expect accretion to moderate
over time due to the phase-in of cash taxes, we expect long-term cash flow to
adequately cover the increased dividend. Of note, management's guidance of
$150 million of cash flow before interest expense incorporates the expected cash
flows from Alliance in 2016 following the expiration of the existing contracts.
• Reinforcing the dropdown story. The most recent dropdown confirms Enbridge
Inc.'s commitment to ENF as a dropdown vehicle for modest sized transactions
(net of ENB's retained interest).
• Increasing estimates to reflect transaction accretion. Based on expected
accretion from the transaction, we have increased our 2014, 2015 and 2016
ACFFO/share estimates to $1.98, $2.07 and $2.03, respectively (up from $1.95,
$1.79 and $1.80).
• Increasing price target to $32.00 (up from $30.00). Our new price target reflects
a combination of accretion from the transaction in addition to a 1x EV/EBITDA
increase in our valuation multiple consistent with the increase for other energy
infrastructure stocks with dividend growth that we already published during our
restriction period.
Rating:
Price Target:
Outperform
40.00 ▼ 41.00
Q3/14 Preview - NAV Growth Story Intact
01NOV13 - 20OCT14
The company will report Q3/14 results on Thursday, October 30th and host an
8:30am EST call (dial-in #800-276-0006).
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EPS, Ops Diluted Prev.
2012A
1.37
2013A
0.77
2014E
1.08↓
1.09
2015E
1.47↓
1.55
All values in USD unless otherwise noted.
A
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MA 40 weeks
P/E
26.5x
47.2x
33.7x
24.7x
O
• NAV growth story intact. We continue to see a leg up for the stock driven by
the realization of significant cost savings as well as positive operating leverage
to an eventual recovery in organic revenue growth. Our forecast translates to
a 2015E – 2018E NAV CAGR of 11%, which is at the upper end of the range
for our Canadian telecom and media coverage universe. Although our organic
revenue growth expectations remain modest (i.e., +0.2% in 2014E and +1.8% in
2015E), improving net sales across all segments is adding much needed visibility
to the revenue outlook and bodes well for an eventual uptick in organic revenue
growth.
• Modest cyclical tailwind appears to be emerging. For the first time since 2007,
management commentary points to the emergence of a modest cyclical tailwind.
Given the current business mix, structural headwinds in print and desktop and
what still appears to be a choppy global economic environment, we would expect
any tailwind to be much weaker compared to previous cycles. Nevertheless, a
5
tailwind potentially sets up for a phase of positive earnings surprises relative to
expectations beginning in 2015E/2016E.
True Gold Mining Inc.(TSXV: TGM; 0.32)
Jonathan Guy (Analyst)
+44 20 7653 4603; [email protected]
Richard Hatch, ACA (Analyst)
+44 20 7002 2111; [email protected]
52 WEEKS
01NOV13 - 20OCT14
Rating:
Outperform
Risk Qualifier: Speculative Risk
Price Target: 0.70 ▲ 0.65
North Kao study adds 310koz to Karma, further optimization likely to enhance
The completion of the PEA for the North Kao deposit at Karma is, in our view,
value accretive and adds 310koz to Karma's production profile towards the
end of the mine's life with the potential to bring these ounces in earlier as
additional drilling is completed. We retain our Outperform, Speculative Risk
recommendation and increase our target price from 65cps to 70cps.
0.40
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EPS, Adj Diluted Prev.
2013A
(0.15)
2014E
(0.04)
2015E
(0.02)
2016E
0.15↓
0.16
All values in CAD unless otherwise noted.
O
• True Gold has released the Preliminary Economic Assessment for the North Kao
area of its Karma project in northern Burkina Faso. North Kao has an Inferred
Resource of 9.9Mt at an average grade of 0.98g/t hosting 312koz of gold. Based
on the study, the project should produce 118koz/year over a 2.5-year period
towards the end of mine life with an initial capital cost of US$17.5 million and a
strip ratio of 3.4:1. Unit costs are broadly in line with the rest of the deposit at US
$1.81/t mining, US$8.09/t processing and G&A at US$2.27/t. We have assumed
lower recoveries than the company at 85% compared to 94.6%, which results
in lower production and higher per ounce costs. Despite this, we believe that
this project is value accretive, increasing our NAV from US$263 million (C$0.64/
share) for Karma to US$288 (C$0.71/share).
• Management plans to carry out further work at North Kao to upgrade the
Resource from Inferred and bring the material earlier into the mine life; probably
year six rather than year nine. This would displace some lower grade material to
later years and would potentially increase our NAV from US$288 million to US
$296 million and our target price from C$0.70/share to C$0.75/share.
Earnings Preview
Stephen D. Walker (Analyst)
(416) 842-4120; [email protected]
Dan Rollins, CFA (Analyst)
(416) 842-9893; [email protected]
Sam Crittenden, P.Eng., CFA (Analyst)
(416) 842-7886; [email protected]
NA Precious Metal Equities: Q3/14 Preview
NA Precious Metal Equities: Q3/14 Preview
• We preview Q2/14 financial results for the North American gold producers in our
coverage universe
• With precious metal prices relatively flat quarter-over-quarter and many of the
producers having already delivered meaningful cost savings, we expect Q3 results
to be fairly uneventful from an earnings perspective.
• However, if gold and silver prices remain at current low levels, conference call
questions could be directed towards the ability for companies to re-work mine
plans, reduce costs further, maintain healthy balance sheets and in some cases
the ability to sustain current dividends.
Positive and negative surprise potential for Q3/14
• Positive surprise potential: Goldcorp and New Gold.
• Negative surprise potential: B2Gold, Detour, and Alamos.
Key drivers for precious metal producers in Q3/14
• Stable gold and silver prices
• Timing shipments for seasonal strength
• Marginally weaker currencies
• Stronger base metal prices
Companies that can demonstrate improving fundamentals, capital discipline and
consistent strategy should continue to attract favorable interest from investors.
6
Those with deteriorating balance sheets and fundamentals are likely to struggle to
find new investors within the current metal price environment.
Q3/14 earnings themes and drivers
•
•
•
•
•
Stable sustaining cash costs
Impact of weaker local currencies unlikely until Q4
Lag effect of lower fuel prices
Balance sheets
Heavy rains in Mexico
Company Comments
Brookfield Canada Office Properties(TSX: BOX.UN; 26.80)
Neil Downey, CFA, CA (Analyst)
(416) 842-7835; [email protected]
Michael Smith, CFA (Analyst)
(416) 842-7805; [email protected]
Kevin Cheng, CFA (Associate)
(416) 842-3803; [email protected]
Leslie Cho, CPA, CA (Associate)
416 842 7894; [email protected]
29.00
52 WEEKS
Rating:
Price Target:
Sector Perform
30.00
Transitional vacancy impacting results; Leveraging to drive FFO/unit growth
01NOV13 - 20OCT14
28.00
Brookfield Canada Office Properties ("BOX") reported Q3/14 results that were,
on an underlying basis, slightly short of expectations. Thematically, unplanned
vacancies continue to suppress FFO. Despite competitive office dynamics, the
expected back-filling of space, rent spread capture and a levering of the balance
sheet (via BAE & BPCE) should allow BOX to produce above-average FFO/unit
growth through 2016. We reiterate our Sector Perform rating.
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2014E
2015E
2016E
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FFO/Unit Prev.
1.55
1.67
1.75↓
1.76
1.88
All values in CAD unless otherwise noted.
Walter Spracklin, CFA (Analyst)
(416) 842-7877; [email protected]
Erin Lytollis, CFA (Associate)
(416) 842-7862; [email protected]
O
• Transitional vacancy/other factors continue to impact results – Q3/14 FFO/
unit of $0.41 was +14% from Q3/13’s $0.36, and $0.01 above our $0.40E.
NOI included $3.6MM (~$0.04/unit) in non-operating items. Thus underlying
results were ~$0.03/unit short. Thematically, BOX continues to be impacted by
unanticipated vacancies that arose in early 2014, while certain non-recoverable
operating costs also hit Q3/14.
• Mixed operating trends; a turn for the better not far off – Q3/14 same-property
NOI deteriorated 8.2%, which compared to a decline of 5.3% in Q2/14. With
Q3/14 leasing of 948,000 sf (238,000 sf of new leases + 710,000 sf of renewals) at
spreads that were a sizable +33% (Y1 new lease rate of $22.72/sf versus expiries
at $17.05/sf) we expect a less negative same-property NOI result in Q4/14,
and a return to organic growth commencing in Q1/15. Back-filling several highrent, unanticipated vacancies in Brookfield Place Toronto and Bay Adelaide West
remain a priority and a future (2015+) source of NOI and FFO growth.
• BPCE “forward purchase” – Within this note we devote a number of pages to
BOX’s Oct-14 purchase of Brookfield Place Calgary East (“BPCE”) from Brookfield
Property Partners LP (“BPY”). Principally via the use of latent balance sheet
capacity (43% debt to gross assets at Q3/14; ~50% pro-forma BPCE completion)
the deal could add $0.19 to FFO/unit (13% accretion) when stabilized (H2/17).
• $30 price target and Sector Perform rating reiterated
Canadian National Railway(TSX: CNR; 75.68; NYSE: CNI)
Rating:
Price Target:
Outperform
92.00
Solid Q3/14 result
CNR posted another record quarter, both in terms of revenue and margin, which
is driving estimated ~20% EPS growth this year. We expect shareholder-friendly
announcements to result, with the increase in share buyback announced yesterday
and what we expect to be a +20% dividend increase next year. We see continued
momentum driving further multiple expansion. Maintain Outperform.
7
52 WEEKS
01NOV13 - 20OCT14
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EPS, Ops Diluted
2013A
3.05
2014E
3.65
2015E
4.22
2016E
4.74
P/E
24.8x
20.7x
17.9x
16.0x
All values in CAD unless otherwise noted.
Canadian Pacific Railway(TSX: CP; 224.58; NYSE: CP)
Walter Spracklin, CFA (Analyst)
(416) 842-7877; [email protected]
Erin Lytollis, CFA (Associate)
(416) 842-7862; [email protected]
52 WEEKS
• Solid Q3/14 result. CNR delivered revenue growth of +16%Y/Y in Q3/14, which
we expect to be double the average rate of revenue growth for the peer group in
Q3/14. This strong top-line result reflects robust volumes (+13%Y/Y RTMs) and
steady yield (+2.6%Y/Y). The O/R was also very impressive at 58.8% coming in
~60bps ahead of our forecast and ~110bps better than Q3/13. As a result, EPS
increased +21%Y/Y to $1.04, in-line with our estimate ($1.04) and consensus
($1.05).
• Buyback increased with significant dividend hike expected to follow. In
conjunction with the release of Q3/14 results, CNR's Board announced a
meaningful increase to its share repurchase program with up to 28MM shares
(~3.9% of float) authorized for repurchase over the coming year. With $1.7B
initially earmarked for the buyback, the new NCIB represents an increase of more
than 20% over the prior program. We expect this announcement to be followed
by a 20% dividend increase in 2015.
• Reiterate Outperform. We believe that momentum will continue into 2015 and
we expect management to provide solid guidance with substantial room for
upside if market conditions warrant. The Company's strong earnings potential
combined with solid shareholder returns in the form of increasing share
repurchases and dividends is expected to sustain a higher multiple, in our view.
Accordingly, CNR remains our preferred stock in the railroad space and we
reiterate our Outperform rating on the shares.
Rating:
Price Target:
01NOV13 - 20OCT14
240.00
Sector Perform
222.00
Robust outlook maintained; Management sees strong case for rail M&A
Third quarter results missed expectations; however, a strong outlook for Q4/14
prompted us to leave our full-year estimates largely unchanged. Management
made a case for rail mergers, but we do not see near-term implications for CP
following the termination of discussions with CSX. With the shares trading close to
our $222 target, we maintain our Sector Perform rating on CP shares.
225.00
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EPS, Ops Diluted Prev.
2013A
6.46
2014E
8.51↓
8.53
2015E
10.72
2016E
12.01
P/E
34.8x
26.4x
20.9x
18.7x
All values in CAD unless otherwise noted.
Amit Daryanani, CFA (Analyst)
(415) 633-8659; [email protected]
Mitch Steves (Associate)
(415) 633-8535; [email protected]
Karl Ackerman, CFA (Associate)
(415) 633-8533; [email protected]
O
• Guidance unchanged; Fourth quarter trends are strong. Despite recent
commodity price volatility, CP reiterated the near-term and long-term financial
targets outlined at the Company's Investor Day earlier this month. Notably, CP
also maintained their crude guidance with ~40% of volumes locked into take-orpay agreements and ~300,000 carloads of terminal capacity coming on-line next
year. Furthermore, management indicated that CP is on track to deliver record
revenue in October and pointed to +4% core pricing growth next year based on
the outcomes of recent discussions. In this context, we remain confident in our
earnings outlook for CP despite Q3 coming in below expectations.
• Target and rating unchanged, but upside case is compelling. We are maintaining
our $222 price target and Sector Perform rating; however we point to our $286
upside target should top-line growth come in closer to management’s forecasts
and note the interesting share price upside under that scenario.
Celestica Inc.(NYSE: CLS; 9.99; TSX: CLS)
Rating:
Price Target:
Sector Perform
11.00
Miss Communications
CLS reported revenue slightly below expectations due to softness in the
communication sector (customer-specific issues at end of quarter) but
outperformed on the EPS line due to gross margin strength and a near $1M FX
benefit on the OPEX line.
8
13.00
52 WEEKS
01NOV13 - 20OCT14
12.00
11.00
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ALL YOU NEED TO KNOW: CLS reported another quarter in which EPS continued
to surprise despite revenue shortfalls. Sales came in below expectations at $1.42B
(Street at 1.46B), reflecting headwinds in communication segment (driven by
telecom softness), but EPS of 26c exceeded Street expectations of 24c, reflecting
better cost control, mix, and buyback benefits. Going forward, CLS is guiding Decqtr sales to be flat q/q at $1.425B (Street at $1.5B) and EPS at $0.24 (Street at
$0.26). We maintain our Sector Perform rating and $11 price target as we await for
tangible signs of revenue growth, which remain elusive.
O
MA 40 weeks
EPS, Ops Diluted Prev.
2012A
0.98
2013A
0.83
2014E
1.01↑
1.00
2015E
1.04↓
1.05
P/E
10.2x
12.0x
9.9x
9.6x
All values in USD unless otherwise noted.
Uni-Select Inc.(TSX: UNS; 28.06)
Sara O'Brien, CFA, CA (Analyst)
(514) 878-7256; [email protected]
Juliane Szeto (Associate)
(416) 842-3806; [email protected]
Rating:
Price Target:
52 WEEKS
01NOV13 - 20OCT14
Outperform
36.00
See flattish Q3 offering attractive entry point for value focused investors
We believe UNS is on the right track to reshaping its US operations for higher
profitability and we expect that rightsizing its US footprint will drive solid earnings
growth into F15. With improving margins over the next quarters, we think
UNS will see a positive multiple re-rating to historical levels as investors gain
confidence in management's execution of the US restructuring plan.
30.00
28.00
26.00
24.00
600
400
200
N
2013
D
J
Close
F
M
A
2014
M
J
J
A
S
O
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Diluted Prev.
2013A
2.36↓
2.37
2014E
2.53
2015E
2.84↓
2.85
2016E
3.07↓
3.09
P/E
10.6x
9.9x
8.8x
8.2x
All market data in CAD; all financial data in USD; dividends paid in
CAD.
• Attractive valuation entry point, solid FCF. UNS trades close to BV at 1.1x and
a low 8.8x P/E on our F15 EPS estimate, well below US peers and below UNS
own historical 1-3 yr avg range (Details). UNS is also trading at a low 11x our
F15 FCF estimate. We continue to expect improved results into F15 will drive a
positive multiple re-rating to UNS; we also expect UNS could be viewed as a takeout target given its commercial market share and its compelling valuation in a
consolidating automotive aftermarket industry. We maintained our Outperform
rating and would view any weakness off Q3 reporting as an attractive entry point.
• Adjusting Q3 growth down on tough comp YoY. We are revising our Q3 estimates
down to account for the strong comp performance in Q3 F13 including from
subsidiary FinishMaster, which benefited from special sales initiatives. We expect
revenue decline of 2% YoY including from weaker Canadian sales from CAD/
US FX translation (UNS reports in USD which is up ~10% YoY). We forecast an
EBITDA margin of 6.6% up 10bps YoY as UNS reshapes its US operations for higher
profitability. Our new Q3/14 EPS is US$0.71 vs. US$0.73 prior and below Street
at $0.75.
• Uni-select reports Q3 October 30th, conference call at 3pm ET. Dial-in:
1-866-696-5910 passcode: 4101473.
Industry Comments
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; [email protected]
Bulking Up – RBC's Weekly Review
Melissa Oliphant (Associate)
416 842 4126; [email protected]
• What's Hot: Iron ore freight rates to China from Australia and Brazil both rose
by 14% today.
• What's Not: Australian coal prices declined following China's re-introduction of
import taxes.
• Our View: As of October 15 China is taxing coal imports, at 3% for met coal
and anthracite, 6% for thermal coal, and 5% for lignite. We expect this to result
Ken Tham, CFA (Analyst)
+61 2 9033 3064; [email protected]
Chris Drew, CFA (Analyst)
+61 2 9033 3060; [email protected]
China's import taxes weigh on Australian coal prices
9
All values in USD unless otherwise noted.
•
•
•
•
•
•
in modest (perhaps $1–2/t) reductions in FOB prices. We do not expect similar
moves to be introduced to help iron ore miners; the cost to steelmakers would
offset a benefit to domestic miners.
China's GDP growth rate hit a five-year low of 7.3% YoY for July–September. The
prospect of an increase in government stimulus could lend support to iron ore.
Chinese iron ore and steel inventories declined.
Metallurgical coal: Premium prices declined this week, including LV FOB
Australia (-1.2%). A growing preference for cheaper, lower-quality coals among
steelmakers boosted second-tier prices in Asia.
Thermal coal: FOB Newcastle fell by 2.5%; Richards Bay and CIF ARA prices
increased by 2.0% and 0.1%, respectively. South African material was sold into
the European market as port congestion in India hindered buying, although an
uptick in demand ahead of India's Deepavali holiday provided support.
Iron ore: IODEX declined to $82.00/t (-1.8%). The prospect of mandated cuts to
sintering around Beijing ahead of an APEC meeting deterred buying of fines but
boosted the lump premium, up 20% this week.
Steel: Rebar prices increased slightly. HRC fell in North America and China but
rose in Europe.
Dan MacDonald, CFA (Analyst)
(403) 299-2394; [email protected]
Cdn Oilfield Services: Sifting through the rubble - Pressure
Pumpers
Matthew McKellar (Associate)
403 299 5045; [email protected]
A look at risk/reward
All values in CAD unless otherwise noted.
• As commodities go, so will oilfield service stocks: Given the strong historical
correlation to commodities, and in particular oil currently, the stocks will remain
volatile until stability returns to the commodity complex.
• Past cycles suggest out-sized gains on a rebound: For pressure pumpers, the
stocks tend to rise and fall by greater than the broader Canadian OFS peer
group, which has certainly been the case this time around, driven in part by the
high fixed cost nature of the business versus other service lines. This provides
opportunity for patient investors looking to play a rebound in the group.
• Stocks implying 25%-40% downside to 2015 expectations: Using a range of
average to peak cycle EV/EBITDA multiples, gives implied downside for the
pumping stocks of 25%-40%. We would view this as fair given commodity driven
concerns for E&P spending in 2015, but towards the bearish side at this point.
Sara O'Brien, CFA, CA (Analyst)
(514) 878-7256; [email protected]
Dealership Dynamics
Juliane Szeto (Associate)
(416) 842-3806; [email protected]
• See FTT as compelling Buy on recent pull back. Among our dealership coverage,
we view Outperform rated Finning as most compelling for earnings growth
and stock upside. Last week we published a full report examining FTT earnings
correlations (historically low) with crude and copper, Chile's positive economic
outlook and sensitivity analysis to our estimates. Because of these points, our
expectation for FTT Canadian Action plan to improve EBIT margins, and the close
to 20% share pullback since early Sept, we believe investors should buy FTT.
• Our take into Q3: In line quarters for FTT, TIH, WJX, cautious on Ag dealers RME
and CVL. For Ag dealers RME and CVL our estimates are well below the Street
with -3% EPS growth for RME but -15% YoY for CVL on margin pressure. For longer
term investors, we do see current valuations as attractive for RME and CVL given
long term prospects. We maintain our Sector Perform rating on both CVL and
RME given near term headwinds for earnings relative to Street.
• Investor Focus for Q3 reporting season: FX and pricing, outlook for product
support given weaker commodities. We believe investors are first focused on
impact of softer commodity pricing and weaker CAD on 1) ability to pass through
pricing increases to CAD customers based on USD based equipment and parts
pricing and 2) any impact to product support given lower cash flow outlook for
mining customers of FTT, WJX, TIH.
All values in CAD unless otherwise noted.
Greg Pardy, CFA (Analyst)
Industry update and channel checks; Q3 Previews for FTT, TIH, WJX, RME, CVL
Integrated Oil and Senior E&P
10
(416) 842-7848; [email protected]
Updated Estimates & 3Q Earnings Preview
Dillon Culhane, CFA, CA (Analyst)
(416) 842-7915; [email protected]
• We have released revised earnings/cash flow estimates for our Canadian
integrated oil and independent coverage group, which reflects our updated
commodity price outlook, as published in our October 21 Energy Insights Report.
On average, we have trimmed our one-year price targets by 5% in connection
with a reduced WTI outlook. Our recommendations remain unchanged across
the board.
• We continue to favor producers with well-defined growth plans, above-average
execution capability, and solid balance sheets. With one-year potential returns
averaging 48% for our coverage group, our favorite stocks are Suncor Energy
(integrated oil), Canadian Natural Resources and Encana Corporation (E&P),
with Cenovus Energy, Husky Energy, Enerplus Corporation, Vermilion Energy
and Oryx Petroleum rounding out our Outperform roster. Despite attractive
one-year potential returns for Talisman and Penn West, their balance sheets
continue to give us pause.
• 3Q Preview – Sequentially Lower. The 3Q earnings parade is set to get underway
with both Cenovus and Husky slated to release their results on October 23. Our
earnings/cash flow estimates are generally below IBES consensus, with only COS,
Cenovus, Husky, Talisman and Penn West having released analyst surveys.
• We anticipate negative third-quarter sequential CFPS growth across most of
our coverage group, largely in connection with lower crude oil and natural gas
prices. The best-positioned producers in the third quarter possess sequential
production growth (Imperial Oil & Canadian Oil Sands) and/or rising oil &
liquids exposure (Encana).
Franz Hargo Muljo, CA (Associate)
416 842 8588; [email protected]
All values in CAD unless otherwise noted.
Mark J. Friesen, CFA (Analyst)
(403) 299-2389; [email protected]
Luke Davis (Associate)
(403) 299-5042; [email protected]
Intermediate Oil Sands and E&P Weekly Valuation Tables
RBC has revised its commodity price assumptions for Q4/14, 2015 and 2016.
• Our WTI estimates have dropped by 10% in 2015 and 5% in 2016. We highlight
that our Canadian heavy oil pricing assumption for 2015 has held up relatively
well due to a slightly lower CAD/US exchange rate. Our heavy oil pricing dropped
by 9% in 2015 and 5% in 2016, now sitting at C$82.59/bbl and C$80.34/bbl,
respectively.
• In our opinion, companies that are financially strong are those that we believe
are best able to manage debt loads and are well financed for 2015. These include
MEG, Baytex, Northern Blizzard, Athabasca and Gear. Despite Gear’s relatively
high draw on its credit facility, we expect the company to receive a material
increase to its credit facility in the New Year due to the company’s mid year asset
acquisition and our expectation for strong reserve additions in other core areas.
• Dividend paying companies that are able to maintain effective payout ratios at
or below 100% include Northern Blizzard and Twin Butte.
• Finally, we highlight that our long term commodity price assumptions remain
unchanged.
Paul C. Quinn (Analyst)
(604) 257-7048; [email protected]
Paper & Forest Products
Hamir Patel (Analyst)
(604) 257-7145; [email protected]
• Shipments decreased by 3% y/y – P&W shipments in September were down by
2.7% on a y/y basis (+3.7% m/m).
• P&W demand lower for all grades – Total P&W demand declined 3.4% on a y/
y basis (+4.2% m/m). Demand for UGW was down 6.1% y/y and CGW demand
was 1.4% lower. Groundwood markets have had to absorb ~10% annual declines
in NA newsprint demand.
• Overall inventories lower m/m – NA inventories decreased 5.7% m/m (-82K
tonnes) to 1,363K tonnes. We note that September inventories have declined in
all of the last ten years (average 75K tonne decrease).
• UFS op. rates constrained by growing imports (despite capacity reductions) –
While NA UFS demand is declining 3–4%/yr, industry op. rates averaged 91% in
2013, supported by producers having taken out ~495K tpy of capacity in 2012 and
1,053K tpy (9.5% of NA capacity) shut over Q413–Q114, from Boise International
11
All values in USD unless otherwise noted.
P&W paper stats: imports continue to weigh on uncoated freesheet market
Falls (113K tpy in October 2013), GP Crossett (93K tpy in November 2013),
Lincoln Paper (78K tpy in December 2013) and International Paper. IP closed its
Courtland, AL mill, removing 765K tpy of UFS capacity. IP shut one UFS machine
(~240K tpy) in November 2013, with the remaining 525K tpy of UFS capacity shut
in February 2014. RISI expects UFS op. rates to average 93% over 2014, 92% in
2015 and 90% in 2016. RISI assumes UFS demand declines 4.9% in 2014, 2.1% in
2015 and 3.1% in 2016.
Paul C. Quinn (Analyst)
(604) 257-7048; [email protected]
Paper & Forest Products
Hamir Patel (Analyst)
(604) 257-7145; [email protected]
• Shipments decreased by 10% compared to a year ago – NA shipments were
down 10.3% y/y and 5.1% lower m/m. NA demand decreased 11.1% y/y, an
acceleration on the 7.7% decline YTD. Commercial printing demand increased
4.0% y/y while demand from newspapers fell 15.3%.
• Exports decreased 9% y/y – Offshore shipments were 8.7% lower compared
to a year ago (-6.1% 9-Mo YTD). Offshore volumes represented 31% of total
shipments. While a wave of capacity closures in Europe in 2013 (~1MM tpy) and
a strong Euro helped NA producers win back share in export markets (+12% in
2013), the Russian capacity that was idle in H113 is running hard this year with
a weaker rouble to assist.
• Lower operating rates – The NA adjusted operating rate (prod-to-operating
capacity) of 88% (86% in Canada and 92% in the US) was down 400 bps from last
month. Production fell 12.3% m/m in the US and Canadian production was 8.3%
lower than the month prior.
• Inventories 6.4% lower m/m – Total mill stocks decreased in September by 19K
tonnes m/m, with stocks for export down 7K tonnes while stocks for domestic
customers were 12K tonnes lower.
All values in USD unless otherwise noted.
Newsprint Stats: closures should keep the East balanced for a little while
Stephen D. Walker (Analyst)
(416) 842-4120; [email protected]
Precious Metals & Minerals Weekly Valuation Tables
Dan Rollins, CFA (Analyst)
(416) 842-9893; [email protected]
This week, we highlight recent trends in 10 year US yields and gold prices, following
the largest daily decline in the former in almost half a decade observed earlier this
week.
Sam Crittenden, P.Eng., CFA (Analyst)
(416) 842-7886; [email protected]
Jonathan Guy (Analyst)
+44 20 7653 4603; [email protected]
Jamie Kasprowicz, P.Eng., CFA (Analyst)
(416) 842-8934; [email protected]
Timothy Huff (Analyst)
+44 20 7653 4866; [email protected]
Mark Mihaljevic (Associate)
(416) 842-3804; [email protected]
Akbar Badri (Associate)
416 842 7840; [email protected]
Richard Hatch, ACA (Analyst)
+44 20 7002 2111; [email protected]
Paul Hissey (Analyst)
+61 3 8688 6512; [email protected]
Ioannis Masvoulas, CFA (Associate)
+44 20 7653 4647; [email protected]
Cameron Klutke (Associate)
+61 3 8688 6551; [email protected]
Chart of the Week: Lower yields and positive seasonality tailwinds for gold
Tepid economic releases drive yields lower
• Gold prices have historically exhibited a strong inverse correlation to yields driven
predominantly by safe-haven demand (Exhibit 1). A lackluster mid-week retail
sales print (0.3% drop following a 0.6% gain in August) stemming from a broadbased decline in motor vehicles, gasoline (-0.8%) and building materials (-1.1%),
in conjunction with producer prices unexpectedly falling 0.1% lent credence to
the uneven-recovery theme and heightened belief amongst market participants
that a potential deferral of fed rate hikes to the back half of 2015 could occur (as
witnessed by the VIX which spiked to a near 2.5 year high). 10 year yields lowered
to 1.873% post the releases on Wednesday, before ameliorating modestly to the
2.18% mark to close out the week following a modest beat on housing starts and
initial jobless claims.
• Whilst inflation expectations over a 10-year horizon have ticked lower from
2.23% at the beginning of August to 1.93%, a potential delay in rate hikes could
serve to boost the buy-case for gold in the near-term given the lower opportunity
cost incurred in holding the asset. Furthermore, statements by the President
of the Federal Reserve Bank of St Louis, James Bullard, regarding considering a
continuation of the bond-buying program could accentuate investor appetite for
gold.
All values in USD unless otherwise noted.
Stephen D. Walker (Analyst)
(416) 842-4120; [email protected]
Q4/14 Global Mining Best Ideas Portfolio
12
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; [email protected]
Dan Rollins, CFA (Analyst)
(416) 842-9893; [email protected]
• We are publishing our weekly update to our Global Mining Best Ideas portfolio.
• For the quarter-to-date, the Q4/14 Global Mining Best Ideas List is down 4%
compared to the MSCI World Metals & Mining Index, which is down 4%.
Sam Crittenden, P.Eng., CFA (Analyst)
(416) 842-7886; [email protected]
Timothy Huff (Analyst)
+44 20 7653 4866; [email protected]
Des Kilalea (Analyst)
+44 20 7653 4538; [email protected]
Chris Drew, CFA (Analyst)
+61 2 9033 3060; [email protected]
Jonathan Guy (Analyst)
+44 20 7653 4603; [email protected]
Andrew D. Wong (Analyst)
(416) 842-7830; [email protected]
All values in USD unless otherwise noted.
Nathan Piper (Analyst)
+44 131 222 3649; [email protected]
RBC International E&P Daily
Al Stanton (Analyst)
+44 131 222 3638; [email protected]
AMER.L: Adds New Block in Putumayo; PPC.L: Close to producing Paraguay's first
discovery; FPM.L: Stavanger Update; TLW.L: Moody's lowers Tullow's rating to Ba3;
PRE.TO: Raptor-1 encounters hydrocarbon
Haydn Rodgers, CA (Associate)
+44 131 222 4911; [email protected]
AMER; PPC; FPM; TLW; PRE
Victoria McCulloch, CA (Analyst)
+44 131 222 4909; [email protected]
All values in USD unless otherwise noted.
Timothy Huff (Analyst)
+44 20 7653 4866; [email protected]
Steel: September global output at 134.4mt, daily rate improves
Ioannis Masvoulas, CFA (Associate)
+44 20 7653 4647; [email protected]
• The World Steel Association (WSA) announced September 2014 global steel
output at 134.4mt, down 0.6% from 135.2mt in August. However, on a daily
production rate basis, September steel output was up 2.8% at 4.48mt/day.
• Global capacity utilisation stood at 76.1% in September 2014, up from 74.2% in
August 2014.
• Chinese production came in at 67.5mt in September 2014, or 2.25mt/day on a
daily rate basis. The daily production rate was up 1.3% mom and flat yoy.
• European production came in at 17.2mt or 0.57mt/day in September 2014. The
daily production rate was up 17% sequentially, in line with the typical recovery
post the weak summer activity. The key countries of Germany (0.12mt/d), Italy
(0.07mt/d), France (0.05mt/d) and Spain (0.04mt/d) accounted for 48% of total
European output.
All values in USD unless otherwise noted.
Daily output rate higher at 4.48mt/day
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; [email protected]
Uranium Weekly
Steve Bristo, CFA (Associate)
(416) 842-7826; [email protected]
• Ux spot price indicator was unchanged at $35.65/lb and TradeTech was
unchanged at $35.50/lb.
• Ux term price indicator was unchanged at $45.00/lb, and TradeTech was
unchanged at $45.00/lb (quoted monthly at month-end).
• Uranium Participation Corp. (UPC) traded down 1.2% over the past week to close
at C$4.96 per share (vs. S&P/TSX +0.8%).
• We estimate UPC is discounting a uranium price of $33.19/lb, a 6.9% discount to
spot. Last week we estimated that UPC discounted a uranium price of $33.58/lb,
a 5.8% discount to the then-prevailing spot price.
Thomas Klein (Associate)
416 842 5339; [email protected]
All values in USD unless otherwise noted.
Ux spot price unchanged at $35.65/lb; TradeTech unchanged at $35.50/lb
13
• We rate Uranium Participation Corp. Outperform with a target price of C$5.75
per share.
14
Required disclosures
Non-U.S. analyst disclosure
Nathan Piper;Al Stanton;Haydn Rodgers;Victoria McCulloch;Dan Rollins;Sam Crittenden;Paul C. Quinn;Hamir Patel;Sara
O'Brien;Juliane Szeto;Walter Spracklin;Erin Lytollis;Mark J. Friesen;Luke Davis;Greg Pardy;Dillon Culhane;Franz Hargo Muljo;Fraser
Phillips;Melissa Oliphant;Ken Tham;Chris Drew;Drew McReynolds;Jie He;Haran Posner;Dan MacDonald;Matthew McKellar;Neil
Downey;Michael Smith;Kevin Cheng;Leslie Cho;Robert Kwan;Michelle Zuliani;Timothy Huff;Ioannis Masvoulas;Jonathan
Guy;Jamie Kasprowicz;Mark Mihaljevic;Akbar Badri;Richard Hatch;Paul Hissey;Cameron Klutke;Des Kilalea;Andrew D. Wong;Steve
Bristo;Thomas Klein (i) are not registered/qualified as research analysts with the NYSE and/or FINRA and (ii) may not be associated
persons of the RBC Capital Markets, LLC and therefore may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on
communications with a subject company, public appearances and trading securities held by a research analyst account.
Conflicts disclosures
This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses
to provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies,
clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to
RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.
Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in, this report.
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including
total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated
by investment banking activities of the member companies of RBC Capital Markets and its affiliates.
Distribution of ratings
For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories
- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/
Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,
the meanings are not the same because our ratings are determined on a relative basis (as described below).
Distribution of ratings
RBC Capital Markets, Equity Research
As of 30-Sep-2014
Rating
BUY [Top Pick & Outperform]
HOLD [Sector Perform]
SELL [Underperform]
Count
858
683
98
Percent
52.35
41.67
5.98
Investment Banking
Serv./Past 12 Mos.
Count
Percent
308
35.90
151
22.11
8
8.16
Conflicts policy
RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.
To access our current policy, clients should refer to
https://www.rbccm.com/global/file-414164.pdf
or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South
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15
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based on market and trading events. A Short-Term Trade Idea may differ from the price targets and/or recommendations in our
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as a result of the differing time horizons, methodologies and/or other factors. Thus, it is possible that the security of a subject
company that is considered a long-term 'Sector Perform' or even an 'Underperform' might be a short-term buying opportunity
as a result of temporary selling pressure in the market; conversely, the security of a subject company that is rated a long-term
'Outperform' could be considered susceptible to a short-term downward price correction. Short-Term Trade Ideas are not ratings,
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This publication has been approved by RBC Dominion Securities Inc.(member IIROC). Any Canadian recipient of this report that is not a Designated Institution in
Ontario, an Accredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and
that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBC
Dominion Securities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada.
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This publication has been approved by RBC Europe Limited ('RBCEL') which is authorized by the Prudential Regulation Authority and regulated by the Financial
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To Persons Receiving This Advice in Australia:
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This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880, AFSL No. 246521). This material has been prepared
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Copyright © RBC Capital Markets, LLC 2014 - Member SIPC
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