1 Investment Views Wednesday, November 12, 2014 Click to view full story Click to view synopsis Pertinent Revision Summary 3 Edge at a Glance 5 Industry Comments LatAm Retail October SSS: Macro Not Yet Supportive of Consumption Railroads Rails Monthly - November 2014 Rodrigo Echagaray 17 Turan Quettawala 21 Mario Saric 23 Anthony Zicha 25 Trevor Turnbull 26 Q3/14 Initial Glance: Roughly in Line Mario Saric 31 A Bit More Positive View as Development Pipeline Begins to Take Form Pammi Bir 33 Q1/15 Preview - Inclusion of Family Channel and New Production Deals Paul Steep 38 Q3 In Line; New President & CEO Appointed Pammi Bir 41 SJ Expansion Sounds Like a Go Craig Johnston 50 Q2/F15 Results Miss: First Take Anthony Zicha 53 Q3/14 Results - On the Right Track Anthony Zicha 54 Q3/14 Results In Line; Positive Infill Assays from Siou Bode Well for Upcoming Reserve Update Ovais Habib 60 Christine Healy 66 Orest Wowkodaw 70 Matthew Akman 78 Company Comments Canada Allied Properties REIT AP.UN-T Armtec Infrastructure Inc. ARF-T AuRico Gold Inc. AUQ-N, AUQ-T CAP REIT CAR.UN-T Choice Properties REIT CHP.UN-T DHX Media Ltd. DHX.B-T Dream Industrial REIT DIR.UN-T Fortuna Silver Mines Inc. FSM-N, FVI-T GLV Inc. GLV.A-T RONA Inc. RON-T SEMAFO Inc. SMF-T SunOpta Inc. STKL-Q, SOY-T Thompson Creek Metals Company Inc. TCM-T, TC-N TransAlta Corporation TA-T, TAC-N Q3 Glance: Solid Q; Some Progress at 250 Front Q3/14 Results Miss Taking Interest in Lynn Lake, MB, Gold Project Q3/14 Results Miss - First Take Q3/14 Results Above Forecast Due to Lower Depreciation/Tax; Mt. Milligan Struggles Continue Shining Light on Sundance 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 Wednesday, November 12, 2014 Vicwest Inc. Vicwest Sold to Kingspan and Ag Growth Anthony Zicha 82 Mark Neville 84 Patrick Bryden 87 Orest Wowkodaw 70 Pammi Bir 83 Benoit Laprade 42 Andres Coello 45 Craig Johnston 50 Rodrigo Echagaray 58 Andres Coello 68 Equity Event: Telecom & Cable 2015 91 Equity Event: Transportation & Aerospace 2014 92 Equity Event: Canadian Energy Infrastructure Conference 93 Equity Event: Mining Conference 2014 94 VIC-T WSP Global Inc. WSP-T Zargon Oil & Gas ZAR-T Q3 Beat: Lots of Growth Q3 In Line as Little Bow ASP Ramp-Up Nears Amid Uncertain Commodity Prices U.S. Thompson Creek Metals Company Inc. TCM-T, TC-N WPT Industrial REIT WIR.U-T Q3/14 Results Above Forecast Due to Lower Depreciation/Tax; Mt. Milligan Struggles Continue Q3 Peek: In Line, Strong Fundamentals & Growth Latin America Empresas CMPC SA CMPC-SN Entel Chile ENTEL-SN Fortuna Silver Mines Inc. FSM-N, FVI-T SACI Falabella FALAB-SN Telefonica Brasil SA VIV-N, VIVT4-SA In-Line Q3/14 Investor Day: All We Saw SJ Expansion Sounds Like a Go Solid Q3 Report Despite Macro Challenges in Chile Q3: Solid Postpaid, Good EBITDA Growth 3 Pertinent Revision Summary Wednesday, November 12, 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 Armtec Infrastructure Inc. (SP) (ARF-T C$0.41) Q3/14 Results Miss New -Old -- --- --- EBITDA14E: $30 EBITDA14E: $31 --- -- --- -- FFOPU15E: $0.92 FFOPU15E: $0.93 FFOPU16E: $0.94 -FFOPU16E: $0.93 -- Valuation: 4.75x EV/EBITDA on 2015E Key Risks to Price Target: Slower than anticipated recovery in residential and commercial construction. Choice Properties REIT (SP) (CHP.UN-T C$10.66) A Bit More Positive View as Development Pipeline Begins to Take Form New -Old -- --- --- --- Valuation: 14.75x AFFO (F'16 estimate) Key Risks to Price Target: Significant tenant concentration in Loblaw, majority unitholder Empresas CMPC SA (SP) (CMPC-SN CLP 1440.10) In-Line Q3/14 New -Old -- --- --- EBITDA14E: US$987 EBITDA15E: US$1,049 EBITDA16E: US$1,333 EBITDA14E: US$983 EBITDA15E: US$1,051 EBITDA16E: US$1,341 --- Valuation: 8.5x NTM EV/EBITDA 1-Year Forward Key Risks to Price Target: Lower-than-expected pulp prices and demand, FX Fortuna Silver Mines Inc. (SP) (FSM-N US$4.42) SJ Expansion Sounds Like a Go New -Old -- --- $5.15 $4.95 --- --- -- --- -- Valuation: 1.30x Q3/15E NAV Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks RONA Inc. (SP) (RON-T C$13.85) Q3/14 Results - On the Right Track New -Old -- --- $14.50 $13.00 Adj. EPS14E: $0.66 Adj. EPS14E: $0.71 Adj. EPS15E: $0.90 Adj. EPS15E: $0.98 Adj. EPS16E: $1.03 Adj. EPS16E: $0.00 14.0x P/E on 2016E 13.0x P/E on 2015E Valuation: 14.0x P/E on 2016E Key Risks to Price Target: Housing recovery stalls; identifying and integrating potential acquisitions. 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 Wednesday, November 12, 2014 SACI Falabella (SO) (FALAB-SN CLP 4291.70) Solid Q3 Report Despite Macro Challenges in Chile New -Old -- --- --- EBITDA14E: 989 EBITDA14E: 1,030 EBITDA15E: 1,098 EBITDA15E: 1,165 EBITDA16E: 1,261 EBITDA16E: 1,340 --- Valuation: 2014E-2020E DCF w/ 9% WACC; 14x (NTM) EV/EBITDA; 23x (NTM) P/E Key Risks to Price Target: Pension funds overhang, foreign ops SEMAFO Inc. (SO) (SMF-T C$3.15) Q3/14 Results In Line; Positive Infill Assays from Siou Bode Well for Upcoming Reserve Update New -Old -- --- --- Adj. EPS14E: US$0.08 Adj. EPS15E: US$0.22 Adj. EPS14E: US$0.09 Adj. EPS15E: US$0.26 -- --- -- Valuation: 1.20x NAVPS Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks Thompson Creek Metals Company Inc. (SP) (TCM-T C$2.44) Q3/14 Results Above Forecast Due to Lower Depreciation/Tax; Mt. Milligan Struggles Continue New -Old -- --- --- Adj. EPS14E: US$0.32 Adj. EPS15E: US$-0.08 Adj. EPS16E: US$0.06 Adj. EPS14E: US$0.17 Adj. EPS15E: US$-0.14 Adj. EPS16E: US$0.00 --- Valuation: 50% of 7.0x 2015E EV/EBITDA + 50% of 8% NAV Key Risks to Price Target: Commodity, operating, development, balance sheet Vicwest Inc. (T) (VIC-T C$12.66) Vicwest Sold to Kingspan and Ag Growth New T Old SO --- $12.70 $14.00 --- --- EBITDA16E: $50 EBITDA16E: $51 6.5x EV/EBITDA on our 2016E. 6.8x EV/EBITDA on our 2016E. Valuation: 6.5x EV/EBITDA on our 2016E. Key Risks to Price Target: Decline in grain prices; slower-than-anticipated recovery in residential and commercial construction. WSP Global Inc. (SO) (WSP-T C$36.00) Q3 Beat: Lots of Growth New -Old -- --- --- EBITDA14E: $248 EBITDA14E: $250 EBITDA15E: $405 EBITDA15E: $414 EBITDA16E: $464 EBITDA16E: $458 --- Valuation: 10.0x EV/EBITDA on 2016E Key Risks to Price Target: Integration risk; slower-than-anticipated recovery in commercial and residential construction. Zargon Oil & Gas (SP) (ZAR-T C$5.94) Q3 In Line as Little Bow ASP Ramp-Up Nears Amid Uncertain Commodity Prices New -Old -- --- $7.50 $10.00 CFPS14E: $1.71 CFPS14E: $1.79 CFPS15E: $1.78 CFPS15E: $1.81 CFPS16E: $2.17 0.7x our 2P NAV plus risked upside. CFPS16E: $2.16 0.9x our 2P NAV plus risked upside. Valuation: 0.7x our 2P NAV plus risked upside. Key Risks to Price Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program success Source: Reuters; Scotiabank GBM estimates. Table of Contents 5 Edge at a Glance Wednesday, November 12, 2014 Edge at a Glance LatAm Retail October SSS: Macro Not Yet Supportive of Consumption Rodrigo Echagaray, MBA, CFA - (416) 945-4405 (Scotia Capital Inc. - Canada) Event ■ Mexico's Retail Association (ANTAD) reported that SSS were 2.1% higher in October while total ANTAD sales increased 6.5% YOY. Implications ■ Macro trends in Mexico continue to be mixed: Industrial production remains solid on the back of encouraging manufacturing trends and healthier trends in construction activity. However, consumer spending remains under pressure due to declining real wages and a sharp contraction in lending. ■ Walmex continued to gain share in the self-service segment despite a sharp underperformance from SAM's. A significant part of those share gains are explained by a solid performance in the smaller formats (i.e., Bodega Aurrera Express). Albeit small, October marks the fourth consecutive month in which Walmex gains share in that segment (i.e., likely means the SAM's sales are not falling as much). See Exhibit 8. ■ Department Stores' outperformance vs. Self-service stores accelerated during October (Exhibit 9). However, we should keep in mind that "El Buen Fin" (Mexico's Black Friday) will take place from November 14th -17th, and that should be an important factor in determining the performance for November across the board. Recommendation ■ It looks like consumer confidence in Mexico is about to turn after more than a year of sharp declines. And although we are disappointed with the pace of the recovery in Mexico, we still believe there will be one. In that context, we continue to think of Walmex as the best to participate in that recovery among the food retailers. Femsa remains our top consumer pick in Mexico. Railroads Rails Monthly - November 2014 Turan Quettawala, MBA, CFA - (416) 863-7065 (Scotia Capital Inc. - Canada) Event ■ We have published our Rails Monthly report: "CNR Going Strong in Q4." The full report is available on ScotiaView. Implications ■ Both rails have been reporting strong RTM data through week 45, with CNR and CP up 8.1% and 4.8%, respectively. Crude and Intermodal (domestic for CP) have been leading the way for both rails, while frac sand demand continues to grow. ■ We attended Union Pacific's investor day, and provide some key takeaways for the Canadian rails regarding the intermodal growth opportunity and prospective dividend payout ratio levels. Recommendation ■ CP remains our preferred Canadian rail pick. Shares are now trading at 21x 2015 P/E (1.5 points above CNR) after the 12% bounce-back post CBR related concerns in October. The P/E premium for both Canadian rails has come in recently as, in our view, U.S. rails are building in some potential M&A premium. 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. 6 Edge at a Glance Wednesday, November 12, 2014 Allied Properties REIT (AP.UN-T C$36.00) Q3 Glance: Solid Q; Some Progress at 250 Front Mario Saric, CPA, CA, CFA - (416) 863-7824 (Scotia Capital Inc. - Canada) Event Pertinent Data ■ Q3/14 FFOPU was $0.536 vs. $0.51 QOQ and $0.50 YOY, above our and consensus $0.52 (range = $0.50-$0.54). Same-property (SP) NOI was +9.3% YOY (vs. +5% YOY in Q2). Implications ■ NOI growth drives solid results. The beat vs. us was driven by higher-than-expected NOI; see Ex. 1. Most of the impressive SP NOI growth was rate-driven, with AP achieving a 7% rent bump on expiring leases. Occupancy was +80bp QOQ to 91.6% (vs. flat QOQ at 94.6% ex. upgrades), while q-end economic occupancy was 88% (-60bp QOQ). The acquisition of 555 Richmond W reduced occupancy by 20bp, all else equal. At QRC West, Sapient leased an additional 12,000sf (half-floor), while AP is close to finalizing lease-up of the top two floors (~47,000sf), which would increase total leased area to 98%. Other highlights include an inaugural credit rating (DBRS launched yesterday at BBB low), which we believe was well telegraphed, and the strategic acquisition of 485 King Street West (right in AP's front yard) for $8M. ■ Some progress at 250 Front Street; discussion pipeline intact QOQ at 70,000sf. Allied leased 39,500sf QOQ (at target net rent), bringing occupancy up to 35% (total GLA = 168,000sf). With another 109,000sf to go, Allied's discussion pipeline is unchanged QOQ at 70,000sf. ■ Avg. IFRS cap rate flat QOQ at 6.3%. Recommendation ■ Full update post c/c on Wed, Nov. 12 at 12:00 pm ET. #1-866-530-1553. Rating: Risk: Target: 1-Yr Armtec Infrastructure Inc. (ARF-T C$0.41) Q3/14 Results Miss Event ■ Armtec Infrastructure Inc. reported Q3/14 EBITDA of $16.0M, below our estimate of $17.0M and consensus of $18.0M, and below their target of $20M. Implications ■ Backlog Increases. Backlog ended Q3/14 at $140M or 31% higher sequentially from $107M. The increase is mainly due to the recently announced $70M Central Ontario soundwall contract. ■ Margin Declines. Operating (EBITDA) margins declined 290 bp to 10.2%, mainly driven by increased competition in plastic products and higher raw material costs. We expect these challenges to continue to impact performance of the Drainage business unit. ■ Weak Outlook. We expect weakness in the Drainage Solutions business to continue. Factors include: (1) increased competition in the corrugated steel pipe market, and (2) rising raw material costs. On a positive note, we believe the US recovery and increased Western Canadian forestry, residential, commercial, and infrastructure construction activity could provide opportunities. We could expect a decrease in Western Canadian project awards should the weak oil price environment continue. Recommendation ■ We are neutral on Armtec shares and believe the risks outweigh potential rewards. SO Med C$38.00 FFOPU14E: $2.08 FFOPU15E: $2.45 FFOPU16E: $2.61 Valuation: 16.5x AFFO (F'16 estimate) Key Risks to Target: Toronto new supply, rising interest rates, inability to lease 250 Front St. West CDPU (NTM) $1.41 CDPU (Curr.) Yield (Curr.) $1.41 3.9% Anthony Zicha - (514) 350-7748 (Scotia Capital Inc. - Canada) Pertinent Data New Rating: Risk: Target: 1-Yr Old -SP -- Speculative -- $0.70 EBITDA14E $30 $31 EBITDA15E -$50 New Valuation: -Old Valuation: 4.75x EV/EBITDA on 2015E Key Risks to Target: Slower than anticipated recovery in residential and commercial construction. Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.00 0.0% 7 Edge at a Glance Wednesday, November 12, 2014 AuRico Gold Inc. (AUQ-N US$3.57) Taking Interest in Lynn Lake, MB, Gold Project Trevor Turnbull, MBA, MSc - (416) 863-7427 (Scotia Capital Inc. - Canada) Event Pertinent Data ■ AuRico announced that it has agreed to subscribe for 70.6 million shares of Carlisle Goldfields Limited at C$0.08, representing 19.9% of the outstanding common shares of Carlisle on a non-diluted basis. Implications ■ Concurrently, AuRico has entered into a joint venture (JV) for Carlisle's open-pit Lynn Lake projects in Manitoba, allowing it to acquire a 25% interest for C$5 million and a 60% interest if AuRico funds C$20 million over three years and delivers a feasibility study. ■ Using the initial C$5 million JV consideration, we calculate a buy-in of C$13/oz based on the in-pit ore in Carlisle's Preliminary Economic Assessment (PEA). The PEA indicates an after-tax net present value (NPV5%) of $257 million and an IRR of 26% at a $1,100/oz gold price. ■ Lynn Lake is an historic district and the project comprises two open-pit gold mines located over 30 km apart. Initial capital for the 7,500 tpd mill project is $185 million (including a $35 million contingency), yielding average annual production of 145,000 oz of gold over a 12-year mine life at all-in sustaining costs of $644/oz. ■ Our net asset valuation (NAV3%) est. is unchanged at $4.21 per share. Recommendation ■ We continue to rate AuRico Sector Outperform and note the shares gained significantly more than the peer group on the news, possibly indicating that investors see this as testament to the smooth ramp-up at Young-Davidson which allows AuRico to consider additional investments. Rating: Risk: Target: 1-Yr CAP REIT (CAR.UN-T C$24.70) Q3/14 Initial Glance: Roughly in Line SO High US$5.50 Adj. EPS14E: Adj. EPS15E: Adj. EPS16E: $-0.17 $-0.08 $-0.04 Valuation: 1.26x NAV Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.02 0.4% Mario Saric, CPA, CA, CFA - (416) 863-7824 (Scotia Capital Inc. - Canada) Event Pertinent Data ■ Reported FFOPU was $0.42 vs. $0.43 YOY, roughly in line with our $0.425 and slightly below $0.44 consensus (range=$0.425-$0.45). Same-property (SP) NOI was +3.7% YOY (Q2/14= +5.4%); revenue/expenses were +2.4%/0.4% (Q2/14 = +2.8% / -1.2%). Implications ■ Higher interest expense offsets solid top line. NOI was ~$0.01 above our forecast (higher-than-expected revenue partially offset by higher expenses), which was more than offset by higher-than-expected interest expense; see Exhibit 1. Tenants are paying for hydro in 49.6% of its sub-metered suites in ONT/AB, +260bp QOQ, helping drive a modest 70bp YOY SP NOI margin growth to 61.5% (Q2/14 was +160bp YOY). Leverage was -40bp QOQ on debt/FV (flat on debt/cost). ■ Decent rent growth; AGIs ramp up again. Near-max SP apartment occupancy of 98.6% (+10bp YOY) drove 1.6% & 3.4% YOY avg. monthly rent (AMR) growth on lease renewal & turnover (Q2/14 = 1.6%/ 3.2%). AMR growth was highest in the mid-tier portfolio (+2.8%), followed by luxury (+2.3%), and affordable (+0.9%). Outstanding above guideline increase (AGI) applications were +11% QOQ to 15,658 suites (vs. +1.7% QOQ avg. in 2013). ■ IFRS cap rate -7bp QOQ. The Q3/14 fee simple cap rate was 4.93%, below CAR's 5.4% implied cap rate and our 5.45% NAV cap rate. Recommendation ■ Full update post c/c on Wed., Nov 12th at 10:00 am. ET. #866-225-0198. Rating: Risk: SP Med Target: 1-Yr C$25.00 FFOPU14E: $1.59 FFOPU15E: $1.67 FFOPU16E: $1.72 Valuation: 16.25x AFFO (F'16 estimate) Key Risks to Target: Capex requirements, excess Toronto condo supply, CMHC restructuring CDPU (NTM) CDPU (Curr.) Yield (Curr.) $1.19 $1.18 4.8% 8 Edge at a Glance Wednesday, November 12, 2014 Choice Properties REIT (CHP.UN-T C$10.66) Pammi Bir, CPA, CA, CFA - (416) 863-7218 (Scotia Capital Inc. - Canada) A Bit More Positive View as Development Pipeline Begins to Take Form Event ■ Ex $2.4M (~$0.005/unit) of non-recurring internalization costs, Q3 FFO was $0.23 vs. $0.22 last year, in line with our $0.23E and consensus. Implications ■ No surprise, as operationally sound. Portfolio occupancy remains high at 97.9%, with tenant retention at a solid 85%, and moderate 3.6% leasing spreads. Though the strong operating metrics will likely limit near-term SP NOI gains, management's focus on leasing up the 82.6% occupied ancillary space provides a means to improve organic growth. ■ As development pipeline takes form, we're a little more enthused. Developments are ramping up with $260M (>7% targeted yields) of planned investments across 860K sf over the next 2-3 years, prompting us to raise our forecast completions. The better visibility leaves us a bit more encouraged about CHP's ability to drive AFFO and NAV growth. ■ Estimates tweaked; growth remains below peers and group. Our 2014E-16E AFFO CAGR edged up 70bp to 2.2%, but remains below the 4.2% average of its retail peers and 5.5% for our coverage universe. Recommendation ■ SP, $11.25. We believe CHP remains in good form with highly visible cash flows supporting an attractive yield. At 14.2x 2015E AFFO/6.3% implied cap rate/in line with NAV, we view the units as fairly valued. All else equal, we recommend building positions more actively below $10.00. DHX Media Ltd. (DHX.B-T C$9.39) Q1/15 Preview - Inclusion of Family Channel and New Production Deals Pertinent Data New Rating: Risk: Target: 1-Yr Old --- SP Med -- $11.25 FFOPU14E -$0.91 FFOPU15E $0.92 $0.93 FFOPU16E $0.94 $0.93 New Valuation: -Old Valuation: 14.75x AFFO (F'16 estimate) Key Risks to Target: Significant tenant concentration in Loblaw, majority unitholder CDPU (NTM) $0.65 CDPU (Curr.) Yield (Curr.) $0.65 6.1% Paul Steep, MBA - (416) 945-4310 (Scotia Capital Inc. - Canada) Event Pertinent Data ■ DHX will report Q1/15 results on November 14 at 8:30 a.m. ET, dial-in: 1-888-2318191. We forecast revenues of $49.4M and Adj. EBITDA of $18.0M (cons. $50.8M and $16.5M). Implications ■ Our view is that DHX's Q1/15 results will reflect stronger distribution and M&L revenues as well as a partial quarter with the inclusion of Family Channel (DHX Television) in the financial results. In the quarter, we expect solid adjusted EBITDA margins will be sustained given operational efficiency and new digital distribution deals. ■ The acquisition of the Family channel business is transformational for DHX, in our view, moving the company into the broadcasting business. Our focus remains on the upcoming renewal of the Disney output deal in August 2015, which should be a key milestone as well as a risk factor for the stock. We expect DHX will be successful in securing a renewal of the Disney agreement for another three- to five-year term with a modest increase in the content cost. Recommendation ■ We believe DHX will continue to benefit from increased size and scale of the underlying business, along with ongoing growth opportunities in its core kids content. Rating: Risk: Target: 1-Yr SP Speculative C$9.00 Revenues15E: Revenues16E: $238 $263 Valuation: 13x NTM EV/Adj. EBITDA 1-yr fwd Key Risks to Target: Lumpy Sales; Disney Renewal; CRTC TV Review Div. (NTM) Div. (Curr.) Yield (Curr.) $0.05 $0.05 0.5% 9 Edge at a Glance Wednesday, November 12, 2014 Dream Industrial REIT (DIR.UN-T C$9.04) Q3 In Line; New President & CEO Appointed Pammi Bir, CPA, CA, CFA - (416) 863-7218 (Scotia Capital Inc. - Canada) Event Pertinent Data ■ DIR reported Q3/14 FFOPU of $0.23 vs. $0.24 last year, in line with our $0.23 estimate and consensus ($0.235). Implications ■ Results as expected across line items. FFOPU was flat YOY (-1%) as growth from SP NOI and acquisitions was offset by financing dilution. ■ Front lines steady, with healthy YOY internal growth. Occupancy remains solid with committed at 95.5% (-10bp QOQ, +40bp YOY) and economic at 93.9% (-10bp, -20bp). SP NOI rose 2.4% YOY (+2.7% YTD) with W. CDA (+5.1%) continuing to outpace Central/E. CDA (+0.3%) from higher occupancy and rents. QOQ, SP NOI was down 0.8% on lower average occupancy. Renewal leasing spreads were strong at +6.3% with 69% tenant retention (66% YTD), a bit below DIR's typical 70%-75%. Market rents remain 5% above in place, with W. CDA (37% of NOI) at +10% vs. Central/E. CDA (63%) at +2%. ■ Brent Chapman appointed President and CEO effective Jan. 5/15. Mr. Chapman has over 28 years of real estate experience and joins DIR from Guardian Capital Real Estate where he is Managing Director. Prior roles incl. President and CEO of GPM Investment Management and senior positions at Oxford Properties and Talisker Corporation. ■ IFRS cap rate steady QOQ and YOY at 6.71%, in line with our 6.75% NAV cap rate but modestly below its current 7.2% implied cap. Recommendation ■ Full update post Nov. 12th c/c (2 p.m. ET; 1-866-229-4144; 9411711#). Rating: Risk: Target: 1-Yr Empresas CMPC SA (CMPC-SN CLP 1,440) In-Line Q3/14 SP Med C$10.25 FFOPU14E: FFOPU15E: FFOPU16E: $0.95 $0.98 $1.01 Valuation: 12.25x AFFO (F'16 estimate) Key Risks to Target: Inability to execute growth, significant unitholder, rising interest rates CDPU (NTM) CDPU (Curr.) Yield (Curr.) $0.70 $0.70 7.7% Benoit Laprade, CPA, CA, CFA - (514) 287-3627 (Scotia Capital Inc. - Canada) Event ■ CMPC reported EBITDA of $251M, compared with our $251M estimate and consensus of $247M. Implications ■ By segment, Forestry, Pulp, and Paper EBITDA came in lower than expected by $1M, $3M, and $6M, respectively, while Tissue and Other EBITDA came in higher than expected by $7M and $3M, respectively. ■ The company reported a solid operational quarter driven by strong performances at its tissue and pulp operations. These segments benefited from investments and FX tailwinds, which drove costs lower and margins higher. ■ Net debt to EBITDA remained unchanged sequentially at 3.1x as the company continues to build its Guaiba II pulp mill. The company noted that the project remained on schedule and on budget, with ~$1.3B spent and 79% of construction completed by the end of Q3/14. Recall that CMPC expects Guaiba II to be operational by Q2/15 and fully ramped up by the end of 2015. Recommendation ■ We reiterate our Sector Perform rating and our target price of CLP 1,600. Although we like CMPC's solid operational performance and growth prospects, we see limited upside to our target, especially when considering the risks relating to the successful completion of Guaiba. Pertinent Data New Rating: Risk: Target: 1-Yr Old --- SP High -- 1,600 EBITDA14E US$987 US$983 EBITDA15E US$1,049 US$1,051 EBITDA16E US$1,333 US$1,341 New Valuation: -Old Valuation: 8.5x NTM EV/EBITDA 1-Year Forward Key Risks to Target: Lower-than-expected pulp prices and demand, FX Div. (NTM) Div. (Curr.) Yield (Curr.) CLP 10.18 CLP 10.18 0.7% 10 Edge at a Glance Wednesday, November 12, 2014 Entel Chile (ENTEL-SN CLP 6,211) Andres Coello - +52 (55) 5123 2852 (Scotiabank Inverlat) Event Pertinent Data ■ We participated in Entel's Investor Day in Lima, Peru. In this report we share all our notes (See details on page 2 to 5). Implications ■ Numbers in Peru are impressive across the board. The graphs on the sales performance for the two weeks following the 4G launch (+200%) were staggering. Portability results (97% of net lines going to Entel) show how quickly the company is positioning the brand. Mass products, and a wireless residential offering will be launched within 8 months. ■ Although gross margins in Peru are as high as 60% (similar to Chile), the company made it clear that the more successful they are in Peru in the short term, the worse the EBITDA performance will be. The company expects to assume a less bullish handset subsidy policy by 1H/15, so we may see a gradual recovery in EBITDA; however, positive EBITDA is not expected until 2016 or 2017. Guidance was left unchanged: 30% of wireless revenues in the long term. ■ CEO Antonio Buchi made it clear that the company is not contemplating a capital increase, but that the controlling group is supportive of the Peruvian strategy. In our view, an IPO of Entel Peru would be a success given potential demand by local pension funds. We understand that the controlling company (Almendral) plans to pay down its debt, potentially freeing capital resources. Recommendation ■ Entel is a high-conviction name for us. Buy. Rating: Risk: Target: 1-Yr Investor Day: All We Saw Fortuna Silver Mines Inc. (FSM-N US$4.42) SJ Expansion Sounds Like a Go SO Med CLP 9,200 EPS14E: 592.48 Valuation: DCF - 5 years results, 9.1% WACC, terminal growth rate of 3.6% Key Risks to Target: Execution of Nextel Peru; Competition in Chile Div. (NTM) Div. (Curr.) Yield (Curr.) 300.00 300.00 4.8% Craig Johnston, CPA, CA - (416) 860-1659 (Scotia Capital Inc. - Canada) Event ■ We are updating our estimates following the Q3/14 conference call, including relatively material revisions to our estimates for San Jose. Implications ■ In our opinion, management commentary on the conference call indicated the company is likely to go ahead with the expansion to 3,000 tpd at its San Jose mine (currently 2,000 tpd). Management noted that at $14/oz silver, the expansion project still yields a +20% return. A construction decision is not expected for a month or so, however we have updated our estimates to reflect the expansion. Fortuna expects to be able to commission the expanded mill by Q3 2016. ■ Given the capital outlay required for the 3,000 tpd expansion project, management noted that development of Trinidad North (which we previously expected in 2015) would likely be delayed until 2016. We have made this adjustment within our estimates as well. ■ We have also lowered our unit cost estimates at San Jose and increased our unit cost estimates at Caylloma based on recent results. Overall, our NAV3% has increased 4% to $3.89 per share (based on $19/oz Ag and $1,300/oz Au) and our target price has increased to $5.15 per share. Recommendation ■ The market responded well to Fortuna's Q3 results with shares up 16% yesterday, as we believe investors are drawn to its healthy balance sheet and peer leading all-in sustaining costs. Unfortunately, our enthusiasm is relatively muted by valuation at spot prices relative to its gold peers. SP. Pertinent Data New Rating: Risk: Target: 1-Yr Old --- SP High $5.15 $4.95 Adj. EPS14E -$0.14 Adj. EPS15E -$0.21 Adj. EPS16E -$0.27 New Valuation: -Old Valuation: 1.30x Q3/15E NAV Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.00 0.0% 11 Edge at a Glance Wednesday, November 12, 2014 GLV Inc. (GLV.A-T C$2.10) Q2/F15 Results Miss: First Take Anthony Zicha - (514) 350-7748 (Scotia Capital Inc. - Canada) Event Pertinent Data ■ GLV reported Q2/F15 EBITDA $5.3M compared to our estimate of $5.7M and consensus of $5.5M. However, Adjusted EPS loss of $0.03 missed our and consensus estimates of $0.03. Implications ■ Backlog Flat. Consolidated backlog of $259M was flat sequentially. Ovivo backlogs declined 2% sequentially to $281.6M (third consecutive quarter). Pulp & Paper (P&P) backlogs increased 12.2% to $68.5M. ■ Organic Growth Declines. Organic revenues declined 2.2% compared to Q2/F14 mainly driven by a 7.4% organic revenue decline in Ovivo. The decline was partially offset by solid P&P organic growth of 8.6%. The decline stems mainly from lower Ovivo new equipment sales and lower revenues from certain legacy projects (prior to refocusing plan). ■ Margin Decline. Adjusted EBITDA margins declined 40 bp to 3.5% mainly due to a 180 bp decline in the Ovivo margin to 4.4% and a 70 bp decline in the P&P margin to 5.8%. Margin contraction mainly stems from investments made under Ovivo's strategic plan as well as slight margin compression on certain Ovivo Energy contracts. P&P margins contracted mainly due to revenue mix (higher new equipment sales). Recommendation ■ We will review our estimates and target price after the conference call on November 12 at 9AM ET. Dial-in #: 1-888-231-8191. Rating: Risk: Target: 1-Yr RONA Inc. (RON-T C$13.85) Q3/14 Results - On the Right Track Event ■ EPS in line with consensus. RONA reported Q3/14 results with an adjusted EPS of $0.33 in line with consensus of $0.34 and below our expectations of $0.36. This compares to an adj. EPS of $0.25 last year Implications ■ Turning its focus on growth. With its restructuring plan completed, the company has turned its focus on growth. In fact, the company is focusing more of its efforts on merchandising strategies and programs that supported its same store sales growth. ■ Store expansion plans for 2015. The company also announced plans for expanding its network with five new stores to be opened in 2015. We believe this provides a new growth vector that we have not seen for the last several years. ■ Too early to tell. While we positively view the company's strategic shift to store expansion, we believe it's still too early to tell whether these initiatives should translate into improved earnings power, considering the competitive retail environment. Moreover, we believe a pickup in housing starts, particularly in Quebec, will be required to support growth (SSSG). Recommendation ■ Rating maintained; increasing target to $14.50. We continue to rate RONA shares a Sector Perform with a new target price of $14.50 (up from $13.00). To value RONA shares we use a 14x P/E multiple (up from 13x) on our newly introduced 2016 EPS estimate of $1.03. SP High C$3.50 Adj. EPS15E: Adj. EPS16E: $0.02 $0.07 Valuation: 8.5x EV/EBITDA on F2016E Key Risks to Target: Reduced municipal infrastructure spending; further reductions in pulp and paper sector capital investment. Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.00 0.0% Anthony Zicha - (514) 350-7748 (Scotia Capital Inc. - Canada) Pertinent Data New Rating: Risk: Target: 1-Yr Old --- SP Med $14.50 $13.00 Adj. EPS14E $0.66 $0.71 Adj. EPS15E $0.90 $0.98 Adj. EPS16E $1.03 $0.00 New Valuation: 14.0x P/E on 2016E Old Valuation: 13.0x P/E on 2015E Key Risks to Target: Housing recovery stalls; identifying and integrating potential acquisitions. Div. (NTM) Div. (Curr.) Yield (Curr.) $0.14 $0.14 1.0% 12 Edge at a Glance Wednesday, November 12, 2014 SACI Falabella (FALAB-SN CLP 4,292) Solid Q3 Report Despite Macro Challenges in Chile Rodrigo Echagaray, MBA, CFA - (416) 945-4405 (Scotia Capital Inc. - Canada) Event ■ Falabella reported solid Q3 earnings above estimates despite a challenging macro environment in Chile. Sales came in line at CLP1,771 bn (+ 10.5% YOY). EBITDA increased 10.2% to CLP208 bn (5% ahead of our estimate and 3.4% ahead of consensus). Net income increased 6% to CLP81.5 bn (6% ahead of our CLP77 bn estimate). Implications ■ Department stores SSS in Chile in Q3 (-4.5%) are representative of the macroeconomic slowdown. Yet, positive SSS in nearly all formats and countries, sales floor expansion of ~6% YOY, and two-digit growth in banking revenues (+15.9% YOY) led to a healthy consolidated revenue growth. Of note, int'l ops were more than 40% of sales in Q3. ■ Gross margins increased 30 basis points on higher margins in the banking division (lower funding costs, stable NPLs). However, SG&A increased ahead of sales mainly due to higher expenses at Sodimac: 1) pre-operating expenses at Uruguay; 2) Ramp up of operations in Brazil, and 3) the closure of the Maestro acquisition in Peru. Net debt to EBITDA increased to 3.3x (from 2.6x a year prior) as Falabella consolidated Maestro's balance sheet as at Q3, but not it's P&L. Recommendation ■ Falabella's solid Q3 report underscores our overweight rating on the stock. We think valuations look appealing at ~19x P/E 2015E, a significant discount to its 25x NTM P/E historic average multiples. SEMAFO Inc. (SMF-T C$3.15) Pertinent Data New Rating: Risk: Target: 1-Yr Old --- SO Med -- 5,600 EBITDA14E 989 1,030 EBITDA15E 1,098 1,165 EBITDA16E 1,261 1,340 New Valuation: -Old Valuation: 2014E-2020E DCF w/ 9% WACC; 14x (NTM) EV/EBITDA; 23x (NTM) P/E Key Risks to Target: Pension funds overhang, foreign ops Div. (NTM) 62.59 Div. (Curr.) Yield (Curr.) 0.00 0.0% Ovais Habib - (416) 863-7141 (Scotia Capital Inc. - Canada) Q3/14 Results In Line; Positive Infill Assays from Siou Bode Well for Upcoming Reserve Update Event ■ SEMAFO reported Q3/14 EPS of $0.04, slightly below our estimate of $0.05 and consensus of $0.06. Implications ■ The financial results were broadly in line as many third quarter items had been prereleased, including production of 64.7 koz Au, a total cash cost range of $555-$565/oz, and a quarter-end cash position of $112M (+$19M from the end of Q2/14). ■ It appears that Burkina Faso is beginning to stabilize after recent civil unrest that culminated in former President Compaoré's resignation. Mana operations continued uninterrupted during the unrest, as did gold sales and the delivery of spare parts and consumables to site. Timing for a transition back to civilian rule remains uncertain, however. ■ The company also released a few highlight holes from ongoing infill drilling at Siou which intersected high gold grades over good widths in the Siou Zone 9 south ore shoot at a vertical depth of ~230 m. We believe these results will help SEMAFO achieve its goal of replacing production and expanding Siou reserves by year-end and estimate that a 1-year mine life extension at Siou would increase our NAV estimate for the company by 8.5%. Recommendation ■ We rate SEMAFO Sector Outperform with a C$4.50 1-year target price. Pertinent Data New Old Rating: -- Risk: Target: 1-Yr -- Speculative -- SO $4.50 Adj. EPS14E US$0.08 US$0.09 Adj. EPS15E US$0.22 US$0.26 Adj. EPS16E -US$0.22 New Valuation: -Old Valuation: 1.20x NAVPS Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.00 0.0% 13 Edge at a Glance Wednesday, November 12, 2014 SunOpta Inc. (STKL-Q US$13.81) Q3/14 Results Miss - First Take Christine Healy, CPA, CA - (416) 863-7902 (Scotia Capital Inc. - Canada) Event Pertinent Data ■ STKL reported Q3/14 adj. EBITDA of $18.1M and adj. EPS of $0.11 (excluding Mascoma impairment charge and FX gain), below our est. of $22.9M/$0.13 and the Street at $21.6M/$0.11. The miss was largely due to lower-than-expected revenue across all segments (decline in commodity prices, FX, plant downtime), and weaker margins in Consumer Products and Opta Minerals. A lower tax rate partially offset. Implications ■ SunOpta Foods missed expectations. Revenue of $283M was 5% below our forecast, but 6% above Q3/13. Operating income of $15.1M (5.3% margin) was 12% below our forecast of $17.1M (5.7% margin). ■ Lower margins in Consumer Products led the miss. Segment revenue of $101M and operating income of $6.1M were below our estimates of $114M and $8.9M. Revenue and margins were hurt by down-time at both aseptic plants (for upgrades), weaker margins in resealable pouches, and costs related to the retrofit of a juice plant. ■ Opta Minerals (OPM) was weak. OPM reported weaker margins than expected (2.5% vs. our est. of 6.5%). The strategic review is ongoing. ■ Mascoma impairment. On Oct. 31/14, Mascoma sold assets related to its yeast business. STKL wrote down its investment by $8.4M. ■ We will update model post-call. STKL will host a call on Nov. 12/14 at 10:00 am EST to discuss results (1-877-312-9198 or 631-291-4622). Recommendation ■ We maintain our one-year target of $13.00/share and our SP rating. Rating: Risk: Target: 1-Yr Adj EBITDA14E: Adj EBITDA15E: SP High US$13.00 $85.5 $104.7 Valuation: 10.5x Food, 6.0x Opta Minerals FTM EBITDA (one-year forward) Key Risks to Target: consumer demand, project execution, weather, commodity prices Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.00 0.0% Telefonica Brasil SA (VIV-N US$19.18) Andres Coello - +52 (55) 5123 2852 (Scotiabank Inverlat) Event Pertinent Data ■ VIV reported revenues of R$8.72B (up 1.2% YOY and slightly above our R$8.71B estimate), EBITDA of R$2.55B (up 7.0% YOY, slightly below our R$2.57B estimate), and net income of R$1.0B (above our R$0.97B estimate). Implications ■ With more than 1.0M additions in Q3, VIV is delivering postpaid growth comparable only to that of the leading operators in developed markets. In fact, with 34.0% of its base already under contract, VIV surpassed Entel Chile as Latin America's most postpaid operator, a tremendous achievement, in our view. ■ MOU expanded 6.1% YOY, while churn came down slightly on a yearly basis. Despite the MTR cut, ARPU at R$23.6 grew 0.9% sequentially and remained close to flat against the prior year (-0.2%). Data revenues expanded 20.6% YOY, helping service revenues to grow 3.5% YOY and offsetting the decline in wireline. ■ The EBITDA margin expanded 157 bp on a YOY on the back of good cost controls. Of note, VIV grew EBITDA more than TSU (7.0% vs. 6.4% YOY). Net income was supported by lower depreciation thanks to a recent revision in the life of assets. Net debt closed the quarter at only 0.14x LTM EBITDA. Recommendation ■ We believe that after the merger with GVT, VIV will emerge as one of the best telecom stories in emerging markets. Buy. Rating: SO Risk: Target: 1-Yr Med Q3: Solid Postpaid, Good EBITDA Growth US$26.00 Revenues14E: $15,192 Revenues15E: $15,611 Revenues16E: $16,709 Valuation: DCF - 5 years results, 8.6% WACC in US$, terminal growth rate of 4.0% Key Risks to Target: Lower-than-guided synergies from GVT merger; expensive acquisitions Div. (NTM) Div. (Curr.) Yield (Curr.) $1.18 $1.18 6.2% 14 Edge at a Glance Wednesday, November 12, 2014 Thompson Creek Metals Company Inc. (TCM-T C$2.44) Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526 (Scotia Capital Inc. - Canada) Q3/14 Results Above Forecast Due to Lower Depreciation/Tax; Mt. Milligan Struggles Continue Event Pertinent Data ■ Thompson Creek released its Q3/14 financial results. Implications ■ TCM reported Q3/14 adjusted EPS of $0.17, well above our estimate of $0.06 and consensus of $0.08 due to markedly lower depreciation and taxes. While production/sales results were pre-released, cash costs of $0.77/lb Cu and $6.77/lb Mo were in line with our estimates. ■ The company re-affirmed all of its 2014 guidance, including Mt Milligan reaching a sustainable operating level of ~80% of design by year-end. However, the operation achieved average throughput of only 42,340 tpd in October (71% of design), up slightly from 67% in Q3/14. ■ TCM plans to make a decision on the secondary crusher ($50M-$75M budget) at Mt Milligan in January 2015. The company also confirmed that it plans to proceed with the scaled strip project at the Thompson Creek mine upon closure at year-end. We note that our estimates already assume that the company proceeds with both projects. Recommendation ■ In our view, a high debt level, ongoing ramp-up risk at Mt. Milligan, a poor outlook for molybdenum, and an unattractive relative valuation are likely to overhang the shares. However, the company's liquidity is reasonable. TCM is rated Sector Perform with a 12 month target of C$2.10 per share. Our C$2.10 target is based on a 50/50 mix of 7.0x our 2015E EV/EBITDA (C$2.36) and 1.0x our 8% NAV estimate (C$1.93). TransAlta Corporation (TA-T C$11.00) Shining Light on Sundance New Rating: Risk: Target: 1-Yr Old --- SP High -- $2.10 Adj. EPS14E US$0.32 US$0.17 Adj. EPS15E US$-0.08 US$-0.14 Adj. EPS16E US$0.06 US$0.00 New Valuation: -Old Valuation: 50% of 7.0x 2015E EV/EBITDA + 50% of 8% NAV Key Risks to Target: Commodity, operating, development, balance sheet Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.00 0.0% Matthew Akman, MBA - (416) 863-7798 (Scotia Capital Inc. - Canada) Event Pertinent Data ■ TA is holding an analyst meeting and tour of its Sundance Power Plant facilities and coal mine on Friday. Implications ■ The Alberta coal plants probably have more hidden value than any of the other assets in the company's portfolio. The renewables have a lot of value but that is already common knowledge and perception. ■ In a research report dated April 9 ("Coal Conundrum"), we reasoned that the coal plants were undervalued in the stock because they generate so little free cash at this time. ■ Yet, they could generate $300M - $400M of additional annual EBITDA post-2020 even under conservative power price assumptions. But realizing this value requires that the plants operate properly at that time. ■ We believe the Sundance plant tour is meant to raise confidence in the longevity of the coal plants and to dispel concerns that the assets lack the ability to run until their legislated end-of-life (late-2020s). Recommendation ■ If the plants can run through the end of their legislated life, we believe the stock is undervalued by 30%+ relative to its NAV. Other concerns linger (SO2 regulations, credit ratings) but regardless of the outcome on these matters, asset value should surface one way or the other. We maintain our Sector Outperform rating and $14 target price. Rating: SO Risk: Target: 1-Yr Med C$14.00 EBITDA14E: $1,009 EBITDA15E: $1,025 EBITDA16E: $1,025 Valuation: 7.3% 2015E Free Cash Yield and 9.1x 2015E EV/EBITDA Key Risks to Target: Power Prices; Interest Rates; Environmental Regulations; Re-contracting Div. (NTM) Div. (Curr.) Yield (Curr.) $0.72 $0.72 6.5% 15 Edge at a Glance Wednesday, November 12, 2014 Anthony Zicha - (514) 350-7748 (Scotia Capital Inc. - Canada) Vicwest Inc. (VIC-T C$12.66) Vicwest Sold to Kingspan and Ag Growth Event Pertinent Data ■ Vicwest Inc. announced that it has agreed to be acquired for $12.70 per share ($350 million enterprise value; $224 million to shareholders). ■ Kingspan Group plc (KGP-L; not covered) is expected to acquire the Building Products division for $154.5 million inclusive of debt and reorganisation costs. ■ Ag Growth International (AFN-T; restricted) is expected to acquire the Westeel division for $221.5 million (enterprise value of $210 million and $11.5 million attributed to assets acquired at closing). Implications ■ The sale price represents a premium of 25.6% to the 20-day volume-weighted average price of Vicwest shares as of November 10, 2014. ■ The transaction is subject to a number of conditions, including the approval of at least 66.67% of the votes as well as customary court and regulatory approvals. The special meeting of Vicwest shareholders is expected to be held in January 2015. ■ We note that holders of approximately 15.6% of outstanding Vicwest common shares, including all of Vicwest's directors and officers, have agreed to vote their common shares in favour of the arrangement. Recommendation ■ We have lowered our target price to $12.70 per share. This implies an EV/EBITDA multiple of 6.5x on our 2016E. We have changed our rating on Vicwest Inc. shares to Tender from Sector Outperform. WPT Industrial REIT (WIR.U-T US$10.34) Q3 Peek: In Line, Strong Fundamentals & Growth New Rating: Risk: Target: 1-Yr Old T -- SO High $12.70 $14.00 EBITDA14E -$29 EBITDA15E -$42 EBITDA16E $50 $51 New Valuation: 6.5x EV/EBITDA on our 2016E. Old Valuation: 6.8x EV/EBITDA on our 2016E. Key Risks to Target: Decline in grain prices; slower-than-anticipated recovery in residential and commercial construction. Div. (NTM) Div. (Curr.) Yield (Curr.) $0.60 $0.60 4.7% Pammi Bir, CPA, CA, CFA - (416) 863-7218 (Scotia Capital Inc. - Canada) Event Pertinent Data ■ WPT reported Q3/14 FFOPU of $0.25 vs. $0.24 last year, in line with our $0.25 estimate and consensus ($0.25). Implications ■ In line with minor variances. G&A was $0.01/unit below our forecast, but offset by higher interest costs. The 6.9% YOY FFOPU growth was driven by acquisitions, higher occupancy in the IPO properties, and lower G&A costs, partly offset by dilution from financing activities. ■ Fundamentals solid as occupancy climbs up. Occupancy improved to a solid 98.9% (+190bp QOQ, +200bp YOY). We believe the bulk of the increase relates to Honeywell International's 160K sf (1.3% of GLA) expansion into vacant space at 6766 Pontius Rd. (Columbus, OH). ■ Liquidity modestly increased post-Q3; leverage improves. Available liquidity from undrawn lines is expected to rise to $15M-$20M (vs. $5M at Q3) with two unencumbered properties to be added to the borrowing base. D/GBV sits at a reasonable 51.3%, down from 52.7% at Q2. ■ IFRS terminal cap rate down 19bp QOQ to 7.1% (-46bp YTD), with the drop attributable to modest cap rate compression. Units are trading at a current 6.9% implied cap rate, in line with our 6.9% NAV cap. Recommendation ■ Full update post Nov. 12th conference call (11 a.m. ET; 1-866-605-3851). Rating: Risk: SO Med Target: 1-Yr US$11.50 FFOPU14E: $1.00 FFOPU15E: $1.05 FFOPU16E: $1.04 Valuation: 13.5x AFFO (F'16 estimate) Key Risks to Target: Significant unitholder, inability to execute growth, rising interest rates CDPU (NTM) $0.70 CDPU (Curr.) Yield (Curr.) $0.70 6.8% 16 Edge at a Glance Wednesday, November 12, 2014 WSP Global Inc. (WSP-T C$36.00) Mark Neville, CFA - (514) 350-7756 (Scotia Capital Inc. - Canada) Event Pertinent Data Q3 Beat: Lots of Growth ■ WSP reported better-than-expected Q3 results: EBITDA came in at $66.4 million vs. consensus of $64.0 million and our estimate of $60.4 million. Implications ■ The company benefited from strong global organic growth (+6.0%) and FX tailwinds (+6.3%), and generated better-than-expected margins. Furthermore, the company indicated its Canadian operations (ex. Focus) were seeing signs of stabilization, while Focus continued to generate strong results (+9.4% organic growth). ■ In the context of the Parsons Brinckerhoff (PB) acquisition, WSP reported (1) 12.3% organic growth in the United States, (2) 16.5% organic growth in the UK, and (3) 2.2% organic growth in Australia. Given we expect PB's U.S. operations to generate approximately 78% of PB's 2015 EBITDA, and its U.K. and Australian operations to improve from near break-even levels, we believe these positive underlying trends should be supportive of our view that WSP could see similar benefits from the PB acquisition as it did from the WSP transaction (e.g., timing, improving regional operations, and synergies). ■ We have made modest changes to our estimates. Our $45.00/share target and Sector Outperform rating are unchanged. Recommendation ■ We view WSP as a proven acquirer, having generated superior growth and returns metrics through well-timed strategic acquisitions. Zargon Oil & Gas (ZAR-T C$5.94) New Rating: Risk: Target: 1-Yr Old --- SO Med -- $45.00 EBITDA14E $248 $250 EBITDA15E $405 $414 EBITDA16E $464 $458 New Valuation: -Old Valuation: 10.0x EV/EBITDA on 2016E Key Risks to Target: Integration risk; slower-than-anticipated recovery in commercial and residential construction. Div. (NTM) Div. (Curr.) Yield (Curr.) $1.50 $1.50 4.2% Patrick Bryden, CFA - (403) 213-7750 (Scotia Capital Inc. - Canada) Q3 In Line as Little Bow ASP Ramp-Up Nears Amid Uncertain Commodity Prices Event ■ Zargon released third quarter results and an update on the Little Bow ASP project. Implications ■ Q3 results in line. Zargon's third quarter production averaged 6,054 boe/d, in line with our estimate of 6,000 boe/d and consensus estimate of 5,951 boe/d. Cash flow per share of $0.36 was also in line with our estimate of $0.39 and consensus estimate of $0.37. ■ Little Bow ASP sees production response. Increased injection pressures at seven of the eight ASP injection wells have been observed, which may be an indication that the oil bank within the reservoir has a higher than expected viscosity and EUR. ASP fluid movement and minor oil production responses have provided a positive indicator to ASP injections. ■ Guidance updated. Production guidance for Q4/14 was decreased modestly to 5,150 boe/d and 5,250 boe/d due to regulatory and third-party shut in in addition to delays in starting the fall drilling program. Initial 2015 production guidance forecasts non-ASP production of 4,000 bbl/d of oil and 6.4 mmcf/d of gas (5,067 boe/d). Recommendation ■ We maintain our SP rating but have elected to reduce our target price by 25% to $7.50/share given the impact of a lower commodity price environment. Pertinent Data New Rating: Risk: Target: 1-Yr Old --- SP High $7.50 $10.00 CFPS14E $1.71 $1.79 CFPS15E $1.78 $1.81 CFPS16E $2.17 $2.16 New Valuation: 0.7x our 2P NAV plus risked upside. Old Valuation: 0.9x 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.) Yield (Curr.) $0.72 $0.72 12.1% 17 Industry Comment Wednesday, November 12, 2014, Pre-Market LatAm Retail Rodrigo Echagaray, MBA, CFA - (416) 945-4405 (Scotia Capital Inc. - Canada) [email protected] October SSS: Macro Not Yet Supportive of Consumption Karla B. Peña - +52 (55) 9179 5211 (Scotiabank Inverlat) [email protected] Event ScotiaView Analyst Link ■ Mexico's Retail Association (ANTAD) reported that SSS were 2.1% higher in October while total ANTAD sales increased 6.5% YOY. Implications ■ Macro trends in Mexico continue to be mixed: Industrial production remains solid on the back of encouraging manufacturing trends and healthier trends in construction activity. However, consumer spending remains under pressure due to declining real wages and a sharp contraction in lending. ■ Walmex continued to gain share in the self-service segment despite a sharp underperformance from SAM's. A significant part of those share gains are explained by a solid performance in the smaller formats (i.e., Bodega Aurrera Express). Albeit small, October marks the fourth consecutive month in which Walmex gains share in that segment (i.e., likely means the SAM's sales are not falling as much). See Exhibit 8. ■ Department Stores' outperformance vs. Self-service stores accelerated during October (Exhibit 9). However, we should keep in mind that "El Buen Fin" (Mexico's Black Friday) will take place from November 14th 17th, and that should be an important factor in determining the performance for November across the board. Recommendation ■ It looks like consumer confidence in Mexico is about to turn after more than a year of sharp declines. And although we are disappointed with the pace of the recovery in Mexico, we still believe there will be one. In that context, we continue to think of Walmex as the best to participate in that recovery among the food retailers. Femsa remains our top consumer pick in Mexico. Universe of Coverage Price CENCOSUD-SN CHDRAUI B-MX COMERCI UBC-MX FALAB-SN FMX-N RIPLEY-SN SORIANA B-MX WALMEX V-MX CLP 1629.00 MXN 45.22 MXN 51.74 CLP 4291.70 US$96.22 CLP 316.98 MXN 43.36 MXN 30.33 Rating Risk SP SU SP SO SO SP SU SP Medium Medium Medium Medium Medium High Medium Low 1-Yr ROR 2,100 41.00 54.00 5,600 $108.00 475.00 36.00 37.00 30.1% -9.3% 5.6% 31.9% 16.4% 51.6% -16.3% 25.2% 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. 18 Exhibit 1 – Industrial Production Exhibit 2 – Consumer Confidence Source: INEGI. Source: INEGI Exhibit 3 – Components of Consumer Confidence – Seasonally Adjusted Exhibit 4 – Real Wages Source: INEGI. Source: INEGI, Secretariat of Labour. 19 Exhibit 5 – Consumer Credit Exhibit 6 – As % of ANTAD Self Service Retail Revenues, 2013 Source: Banco de México. Source: ANTAD, Company reports; Scotiabank GBM estimates. * Only Mexico Operations. Exhibit 7 – ANTAD – Monthly SSS Source: ANTAD. Exhibit 8 – Walmex SSS – ANTAD Self Service SSS (Walmex outperformance in Self-service Segment) Exhibit 9 – Department Stores SSS – Self Service SSS (Department stores outperformance vs. Self-Service Stores) Source: Company reports; ANTAD. Source: ANTAD. 20 Pertinent Data Rating Risk 1-Yr Target Year 1 Key Data Year 2 Year 3 Valuation Cencosud, SA (CENCOSUD-SN) Valuation: 21x (NTM) adj P/E Key Risks to Price Target: Pension funds concentration, foreign ops, potential dilution Grupo Comercial Chedraui, SAB de CV (CHDRAUI B-MX) Valuation: 2014E-2020E DCF w/ 9.3% WACC; 9x (NTM) EV/EBITDA; 18X (NTM) P/U Key Risks to Price Target: Operating performance, consumer behavior, tax reforms Controladora Comercial Mexicana, SAB de CV (COMERCI UBC-MX) Valuation: Sum of the parts; Retail (NTM)11x EV/EBITDA & (NTM) 21x P/E. Key Risks to Price Target: Operating performance, consumer behaviour, tax reforms SACI Falabella (FALAB-SN) Valuation: 2014E-2020E DCF w/ 9% WACC; 14x (NTM) EV/EBITDA; 23x (NTM) P/E Key Risks to Price Target: Pension funds overhang, foreign ops FEMSA, SAB de CV (FMX-N) Valuation: Sum of the Parts Key Risks to Price Target: Operating performance, consumer behaviour, FX Exposure Ripley Corp SA (RIPLEY-SN) Valuation: 2014E-2020E DCF w/ 10% WACC; SOTP Key Risks to Price Target: Pension funds overhang, foreign ops Organización Soriana, SAB de CV (SORIANA B-MX) Valuation: 2014E-2020E DCF w/ 10.3% WACC; 8x (NTM) EV/EBITDA; 17X (NTM) P/U Key Risks to Price Target: Operating performance, consumer behavior, tax reforms Wal-Mart de México y Centroamerica, SAB de CV (WALMEX V-MX) Valuation: 2014E-2020E DCF w/ 9.1% WACC; 13x (NTM) EV/EBITDA Key Risks to Price Target: Operating performance, consumer behavior, tax reforms Source: Scotiabank GBM estimates. ScotiaView Analyst Link 21 Intraday Flash Tuesday, November 11, 2014 @ 12:43:50 PM (ET) Railroads Rails Monthly - November 2014 Turan Quettawala, MBA, CFA - (416) 863-7065 (Scotia Capital Inc. - Canada) [email protected] Milan Posarac - (416) 863-7532 (Scotia Capital Inc. - Canada) [email protected] Event ScotiaView Analyst Link ■ We have published our Rails Monthly report: "CNR Going Strong in Q4." The full report is available on ScotiaView. Implications ■ Both rails have been reporting strong RTM data through week 45, with CNR and CP up 8.1% and 4.8%, respectively. Crude and Intermodal (domestic for CP) have been leading the way for both rails, while frac sand demand continues to grow. ■ We attended Union Pacific's investor day, and provide some key takeaways for the Canadian rails regarding the intermodal growth opportunity and prospective dividend payout ratio levels. Recommendation ■ CP remains our preferred Canadian rail pick. Shares are now trading at 21x 2015 P/E (1.5 points above CNR) after the 12% bounce-back post CBR related concerns in October. The P/E premium for both Canadian rails has come in recently as, in our view, U.S. rails are building in some potential M&A premium. Universe of Coverage Price CNR-T CP-T WTE-T C$80.71 C$238.57 C$34.33 Rating Risk SO SO SU Medium Medium Medium 1-Yr ROR $82.00 $250.00 $35.50 3.0% 5.4% 7.3% 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. 22 Pertinent Data Rating Risk 1-Yr Target Year 1 Key Data Year 2 Year 3 Valuation Canadian National Railway Company (CNR-T) Valuation: Equally wtd. DCF and 17x NTM EPS (one-year fwd.) Key Risks to Price Target: Slower economic growth and regulatory changes. Canadian Pacific Railway Limited (CP-T) Valuation: Equally wtd. DCF and 18x NTM EPS (one-year fwd.) Key Risks to Price Target: Slower economic growth and regulatory changes. Westshore Terminals Investment Corporation (WTE-T) 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 Source: Scotiabank GBM estimates. ScotiaView Analyst Link 23 Company Comment Tuesday, November 11, 2014, After Close (AP.UN-T C$36.00) Allied Properties REIT Q3 Glance: Solid Q; Some Progress at 250 Front Mario Saric, CPA, CA, CFA - (416) 863-7824 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Outperform Risk Ranking: Medium Trevor Thompson-Harry - (416) 863-7986 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: C$38.00 ROR 1-Yr: 9.5% Valuation: 16.5x AFFO (F'16 estimate) Key Risks to Target: Toronto new supply, rising interest rates, inability to lease 250 Front St. West CDPU (NTM) CDPU (Curr.) Yield (Curr.) $1.41 $1.41 3.9% Event ■ Q3/14 FFOPU was $0.536 vs. $0.51 QOQ and $0.50 YOY, above our and consensus $0.52 (range = $0.50-$0.54). Same-property (SP) NOI was +9.3% YOY (vs. +5% YOY in Q2). Implications ■ NOI growth drives solid results. The beat vs. us was driven by higherthan-expected NOI; see Ex. 1. Most of the impressive SP NOI growth was rate-driven, with AP achieving a 7% rent bump on expiring leases. Occupancy was +80bp QOQ to 91.6% (vs. flat QOQ at 94.6% ex. upgrades), while q-end economic occupancy was 88% (-60bp QOQ). The acquisition of 555 Richmond W reduced occupancy by 20bp, all else equal. At QRC West, Sapient leased an additional 12,000sf (halffloor), while AP is close to finalizing lease-up of the top two floors (~47,000sf), which would increase total leased area to 98%. Other highlights include an inaugural credit rating (DBRS launched yesterday at BBB low), which we believe was well telegraphed, and the strategic acquisition of 485 King Street West (right in AP's front yard) for $8M. ■ Some progress at 250 Front Street; discussion pipeline intact QOQ at 70,000sf. Allied leased 39,500sf QOQ (at target net rent), bringing occupancy up to 35% (total GLA = 168,000sf). With another 109,000sf to go, Allied's discussion pipeline is unchanged QOQ at 70,000sf. ■ Avg. IFRS cap rate flat QOQ at 6.3%. Recommendation ■ Full update post c/c on Wed, Nov. 12 at 12:00 pm ET. #1-866-530-1553. Qtly FFOPU (FD) 2013A 2014E 2015E 2016E Q1 $0.45 A $0.51 A $0.60 $0.64 (FY-Dec.) Funds from Ops/Unit Adj. Funds from Ops/Unit Price/AFFO EV/EBITDA EBITDA (M) EBITDA Margin EBITDA/Int. Exp Q2 $0.48 A $0.51 A $0.60 $0.65 Q3 $0.50 A $0.52 $0.63 $0.66 Q4 $0.51 A $0.54 $0.63 $0.66 Year $1.94 $2.08 $2.45 $2.61 P/FFO 16.9x 17.3x 14.7x 13.8x 2012A $1.79 $1.48 22.3x 21.7x $144 55.6% 3.3x 2013A $1.94 $1.67 19.6x 19.8x $173 57.2% 4.1x 2014E $2.08 $1.79 20.1x 20.8x $194 59.7% 3.9x 2015E $2.45 $2.14 16.8x 20.1x $200 62.0% 4.2x 2016E $2.61 $2.29 15.7x 20.3x $198 61.3% 4.3x BVPU14E: $30.56 ROE14E: 5.89% NAVPU: P/NAV: $32.00 1.13x Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Units O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $2,681 $1,345 $4,025 74 74 24 Q3/14 Initial Glance: Solid Quarter; Some Progress at 250 Front Exhibit 1 - Scotiabank - Allied Properties Q3/14 Variance Analysis All in $000s, except for per unit figures Q3/14A Scotia Q3/14E QOQ Q2/14A Actual vs. Scotia A vs. E FFOPU Commercial Property NOI - Cash basis $52,334 $49,738 $48,971 $2,596 $0.036 Commercial Property NOI - Acquisitions Total Commercial Property NOI - Cash basis $0 $1,960 $0 -$1,960 -$0.027 $52,334 $51,697 $48,971 $637 $0.009 Commercial Property - straight line rent - non cash $1,388 $1,600 $1,597 -$212 -$0.003 Amortization of tenant improvements - non-cash -$2,494 -$2,000 -$2,457 -$494 -$0.007 Total Commercial Property NOI $51,228 $51,297 $48,111 -$69 -$0.001 Amortization of tenant improvements - non-cash $2,494 $2,000 $2,457 $494 $0.007 Total Commercial Property NOI $53,722 $53,297 $50,568 $425 $0.006 Commercial property debt expense -$13,500 -$13,632 -$13,180 $132 G&A -$1,740 -$1,778 -$1,882 $38 Operating Income $38,482 $37,887 $35,506 $595 Other amortization -$253 -$331 -$233 $78 FFO - fully diluted $38,229 $37,556 $35,273 $673 Unit count (fully diluted) 71,371 71,706 69,670 $0.536 $0.524 $0.506 $0.012 Straight-line rent -$1,388 -$1,600 -$1,597 $212 -$53 -$25 -$9 -$28 Non-revenue enhancing capex -$1,191 -$1,187 -$1,150 -$3 Tenant installation costs -$2,552 -$2,544 -$2,465 -$7 AFFO $33,045 $32,199 $30,052 $846 $0.46 $0.45 $0.43 $0.01 Committed occupancy (quarter-end - excluding upgrades) 94.6% 95.6% 94.6% -1.0% Economic occupancy (quarter-end) 88.0% n/a 88.6% n/a Economic occupancy (quarter-average) 86.8% n/a 88.0% n/a Same-property NOI (YOY) 9.3% n/a 5.0% n/a In-Place Portfolio Rent vs. Market (through 2016) -7.1% n/a -7.9% n/a Leasing costs/incentives per sf. Leased $7.52 $7.50 $8.11 $0.02 AFFOPU - diluted $0.009 (335) FFOPU - diluted Amortization of debt mark-to-market $0.008 Operating Metrics IFRS NAV cap rate (change = QOQ) Total properties under development (PUDs), GLA 6.30% 708,235 6.3% n/a 6.30% 0.00% 772,219 Source: Company reports; Scotiabank GBM estimates. ScotiaView Analyst Link 25 Company Comment Tuesday, November 11, 2014, After Close (ARF-T C$0.41) Armtec Infrastructure Inc. Q3/14 Results Miss Anthony Zicha - (514) 350-7748 (Scotia Capital Inc. - Canada) [email protected] Sami Abboud, MBA - (514) 350-7737 (Scotia Capital Inc. - Canada) Vincent Perri, CPA, CA, CFA - (514) 287-4990 (Scotia Capital Inc. - Canada) Rating: Sector Perform Target 1-Yr: Risk Ranking: Speculative Valuation: 4.75x EV/EBITDA on 2015E C$0.70 ROR 1-Yr: 72.8% Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.00 0.0% Key Risks to Target: Slower than anticipated recovery in residential and commercial construction. Event Pertinent Revisions ■ Armtec Infrastructure Inc. reported Q3/14 EBITDA of $16.0M, below our estimate of $17.0M and consensus of $18.0M, and below their target of $20M. Implications ■ Backlog Increases. Backlog ended Q3/14 at $140M or 31% higher sequentially from $107M. The increase is mainly due to the recently announced $70M Central Ontario soundwall contract. ■ Margin Declines. Operating (EBITDA) margins declined 290 bp to 10.2%, mainly driven by increased competition in plastic products and higher raw material costs. We expect these challenges to continue to impact performance of the Drainage business unit. ■ Weak Outlook. We expect weakness in the Drainage Solutions business to continue. Factors include: (1) increased competition in the corrugated steel pipe market, and (2) rising raw material costs. On a positive note, we believe the US recovery and increased Western Canadian forestry, residential, commercial, and infrastructure construction activity could provide opportunities. We could expect a decrease in Western Canadian project awards should the weak oil price environment continue. Recommendation ■ We are neutral on Armtec shares and believe the risks outweigh potential rewards. Qtly EBITDA (M) 2012A 2013A 2014E 2015E Q1 Q2 Q3 Q4 Year $0 A $0 A $-8 A $0 $18 A $15 A $12 A $17 $18 A $19 A $16 A $23 $28 A $6 A $10 $10 $64 $40 $30 $50 EV / EBITDA 5.4x 8.4x 10.2x 4.6x 2011A $-2.03 $0.40 153.7% 19.5% $454 $15 3.4% 15.4x 2012A $-1.06 $0.00 0.0% 0.0% $457 $64 14.0% 4.5x 2013A $-0.12 $0.00 0.0% 0.0% $456 $40 8.8% 7.6x 2014E $-0.45 $0.00 0.0% 0.0% $469 $30 6.4% 9.8x 2015E $0.17 $0.00 0.0% 0.0% $516 $50 9.8% 4.4x (FY-Dec.) Adj EPS Dividends/Share Payout Ratio Pre-tax Cash Yield Revenues (M) EBITDA (M) EBITDA Margin Net Debt/EBITDA EBITDA14E New $30 Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. Old $31 $10 $335 $344 24 23 26 Intraday Flash Tuesday, November 11, 2014 @ 12:57:35 PM (ET) (AUQ-N US$3.57) (AUQ-T C$4.05) AuRico Gold Inc. Taking Interest in Lynn Lake, MB, Gold Project Trevor Turnbull, MBA, MSc - (416) 863-7427 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Outperform Risk Ranking: High Valuation: 1.26x NAV Target 1-Yr: Vitali Mossounov, CPA, CA - (416) 862-3910 (Scotia Capital Inc. - Canada) Alex Watt, MBA - (416) 860-1429 (Scotia Capital Inc. - Canada) US$5.50 ROR 1-Yr: 54.3% Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.02 0.4% Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s Event ■ AuRico announced that it has agreed to subscribe for 70.6 million shares of Carlisle Goldfields Limited at C$0.08, representing 19.9% of the outstanding common shares of Carlisle on a non-diluted basis. Implications ■ Concurrently, AuRico has entered into a joint venture (JV) for Carlisle's open-pit Lynn Lake projects in Manitoba, allowing it to acquire a 25% interest for C$5 million and a 60% interest if AuRico funds C$20 million over three years and delivers a feasibility study. ■ Using the initial C$5 million JV consideration, we calculate a buy-in of C$13/oz based on the in-pit ore in Carlisle's Preliminary Economic Assessment (PEA). The PEA indicates an after-tax net present value (NPV5%) of $257 million and an IRR of 26% at a $1,100/oz gold price. ■ Lynn Lake is an historic district and the project comprises two open-pit gold mines located over 30 km apart. Initial capital for the 7,500 tpd mill project is $185 million (including a $35 million contingency), yielding average annual production of 145,000 oz of gold over a 12year mine life at all-in sustaining costs of $644/oz. ■ Our net asset valuation (NAV3%) est. is unchanged at $4.21 per share. Recommendation ■ We continue to rate AuRico Sector Outperform and note the shares gained significantly more than the peer group on the news, possibly indicating that investors see this as testament to the smooth ramp-up at Young-Davidson which allows AuRico to consider additional investments. Qtly Adj. EPS (FD) 2013A 2014E 2015E 2016E Q1 $0.04 A $-0.03 A $-0.01 $-0.01 (FY-Dec.) Adj Earnings/Share Price/Earnings Cash Flow/Share Price/Cash Flow EBITDA (M) Gold Equiv. Prod. (oz) (000) Tot. Cash Cost ($/oz) All-In Sust. Cost ($/oz) Q2 $0.02 A $-0.06 A $-0.02 $-0.01 Q3 $0.00 A $-0.02 A $-0.02 $-0.01 Q4 $-0.02 A $-0.05 $-0.02 $-0.01 Year $0.04 $-0.17 $-0.08 $-0.04 P/E 96.7x n.m. n.m. n.m. 2013A $0.04 96.7x $0.28 12.9x $50 163,195 $676 $1,181 2014E $-0.17 n.m. $0.29 12.3x $82 233,530 $695 $1,179 2015E $-0.08 n.m. $0.42 8.5x $116 262,817 $773 $1,172 2016E $-0.04 n.m. $0.53 6.7x $150 296,377 $721 $1,075 2017E $-0.06 n.m. $0.64 5.6x $181 296,377 $721 $1,075 BVPS14E: $6.87 NAVPS: P/NAV: $4.21 0.85x Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in US$ 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. $889 $215 $1,104 249 249 27 Carlisle and Lynn Gold Camp Details ■ A 2014 optimized Preliminary Economic Assessment (PEA) outlined a $257 million after-tax NPV and a 26% IRR at an $1,100/oz gold price. At a $1,300/oz gold price, the after-tax NPV increases to $400 million and the IRR to 35%. See Exhibit 1. Exhibit 1 – Project Economics Source: Company reports; Scotiabank GBM estimates. ■ Average life-of-mine (LOM) gold production is 145,000 oz (total 1.74 Moz) with a peak of 230,000 oz in year five. The PEA is based on a milling operation with initial throughput of 3,750 tpd, ramping up to 7,500 tpd in year five, processing an average head grade of 2.2 g/t. While the grade is certainly impressive for an open-pit project in Canada, we do note the relatively high strip ratio of 7.8:1. See Exhibit 2 for additional details. ■ Initial capital costs are estimated at $185 million, inclusive of a $35 million contingency. All-in sustaining costs (AISC) are an impressive $644/oz of gold (net of by-product credits) while average total cash costs were estimated to be $530/oz. Exhibit 2 – Production Parameters Source: Company reports; Scotiabank GBM estimates. 28 ■ The Lynn gold camp in northwestern Manitoba comprises the Farley and MacLellan gold projects. The two open-pit gold projects are located in a district of historical mining and exploration and are about 20 km away from each other. Both properties can be accessed by existing road infrastructure running to the town of Lynn Lake about 45 km away. See Exhibit 3. Exhibit 3 – Property Location Source: Company reports; Scotiabank GBM estimates. ■ The projects’ total Measured and Indicated (M&I) resources are 38,298,000 tonnes at 2.13 g/t Au for 2,628,100 oz. These were calculated at a gold price of $1,446/oz for MacLellan and $1,650/oz for Farley, both using a cut-off grade of 0.40 g/t. A gold price of $1,241/oz was used in the PEA pit optimization with a cut-off grade varying between 0.59 g/t and 0.67 g/t (Exhibit 4). Exhibit 4 – Optimized M&I Resources Source: Company reports; Scotiabank GBM estimates. 29 ■ Additional details in Carlisle’s press release. ■ A 51% interest in the project can be earned by spending C$20 million towards the advancement of a feasibility study within a three-year earn-in period. ■ AuRico can earn an additional 9% (60% in total) by delivering a feasibility study within that three-year period. ■ During the period, exploration beyond the scope of the feasibility study will be operated by Carlisle and funded equally by the two companies with a maximum of $2.0 million per year from AuRico, unless otherwise agreed. ■ AuRico will be the operator of the JV. 30 Exhibit 5 - Operating and Financial Forecasts Ratio Analysis Net Income (US$mm) Net Income Adjusted (US$mm) EPS (f.d.) (US$/sh) P/E (x) Operating CF bf. ch. in WC (US$mm) CFPS bf. ch. in WC (US$/sh) P/CF (bf. ch. in WC) (x) Free Cash Flow to Firm (US$/sh) Free CaSh Flow to Equity (US$/sh) Income Statement Items (US$mm) Total Revenue Operating Costs Exploration SG&A Depreciation Interest Expense Other - gain (loss) EBITDA EBIT EBT Taxes - recovery (expense) Effective Tax Rate Earnings bf. Minority Interests Reported Net Earnings Reported EPS (f.d.) (US$/sh) Adjusted EPS (f.d.) (US$/sh) Cash Flow Statement Items (US$mm) Net Earnings DD&A Deferred Taxes Other Operating CF bf. ch. in WC CF from Operating Activities CF from Financing Activities CAPEX CF from Investing Activities Net Change in Cash CFPS bf. ch. in WC (f.d.) (US$/sh) Balance Sheet Items (US$mm) Cash Current Assets Long-term Assets Total Assets Short-term Debt Current Liabilities Long-term Debt Total Liabilities Shareholders' Equity Total Liabilities & Shareholders' Equity Working Capital Mine Reserves and Resources Gold (Moz) Copper (Mlbs) 2013A ($177) $19 $0.04 93.0x $26 $0.28 12.4x ($0.76) ($0.49) 2014E 2015E 2016E ($75) ($19) ($10) ($42) ($19) ($10) ($0.17) ($0.08) ($0.04) n.m. n.m. n.m. $228 $329 $382 $0.29 $0.42 $0.53 12.2x 8.4x 6.6x ($0.84) ($0.02) $0.04 ($0.70) ($0.04) $0.03 $228 ($149) ($1) ($28) ($66) ($3) ($145) $50 ($15) ($163) ($14) 9% ($177) ($177) ($0.64) $0.04 $298 $342 $385 ($188) ($203) ($214) ($1) ($2) ($2) ($27) ($20) ($20) ($123) ($107) ($132) ($21) ($25) ($25) ($12) $1 $0 $82 $116 $150 ($40) $9 $18 ($73) ($15) ($7) ($2) ($4) ($4) 3% 24% 52% ($75) ($19) ($10) ($75) ($19) ($10) ($0.23) ($0.06) ($0.03) ($0.17) ($0.08) ($0.04) ($177) $66 $12 $125 $26 $63 ($251) ($249) ($272) ($460) $0.28 ($75) $123 $1 $180 $228 $60 $30 ($175) ($140) ($50) $0.22 ($19) $107 $241 $329 $106 ($25) ($112) ($112) ($32) $0.32 ($10) $132 $260 $382 $135 ($28) ($122) ($122) ($15) $0.41 $143 $292 $2,170 $2,462 $7 $114 $244 $675 $1,788 $2,462 $178 $92 $205 $2,181 $2,386 $5 $47 $322 $672 $1,714 $2,386 $158 2P 6.5 619 $61 $173 $2,186 $2,359 $3 $45 $319 $667 $1,692 $2,359 $129 M&I 2.5 347 $46 $159 $2,175 $2,334 $1 $42 $319 $664 $1,670 $2,334 $117 Inf. 0.5 46 Average Share Price S/O (mm) Realized Gold Price (US$/oz) Spot Gold Price Actual/Forecast (US$/oz) Production and Costs El Chanate Production ('000 oz) Young-Davidson Production ('000 oz) Total Production ('000 oz) Cash Costs (US$/oz) All-in Sustaining Costs (US$/oz) All-in Costs (US$/oz) 2013A 2014E $5.21 $5.50 250.4 248.7 $1,411 $1,271 $1,411 $1,271 2015E $5.50 249.4 $1,300 $1,300 2016E $5.50 249.4 $1,300 $1,300 73 72 121 158 194 230 $676 $695 $1,181 $1,179 $2,237 $1,501 86 177 263 $773 $1,172 $1,283 86 210 296 $721 $1,075 $1,206 400 2,000 350 300 1,500 250 200 1,000 150 100 500 50 - 0 2013A 2014E 2015E 2016E 2017E Young-Davidson Production ('000 oz) El Chanate Production ('000 oz) Cash Costs (US$/oz) All-in Sustaining Costs (US$/oz) All-in Costs (US$/oz) Additional Ratio Analysis Gross Margin ROE ROA EV/EBITDA (x) Net Debt/Equity Book Value (US$/sh) 2013A 1.7 n.m. n.m. 27.9x 6% $7.14 2014E 1.6 n.m. n.m. 19.4x 13% $6.89 2015E 1.6 n.m. n.m. 14.0x 15% $6.79 2016E 1.6 n.m. n.m. 11.0x 16% $6.70 NAV Analysis Operating Mining Assets (US$mm) Young-Davidson (3% discount rate) El Chanate (3% discount rate) YD West (3% discount rate) Kemess Total Assets US$M US$/Sh $1,072 $4.29 $200 $0.80 $25 $0.10 $38 $0.15 $1,335 $5.35 % 102% 19% 2% 4% 127% Net Debt Working Capital (Net of cash and short term debt) In-the-Money Instruments G&A, Expl, Reclamation Net Asset Value Target Multiple Target Price and Implied Return ($215) ($0.86) $71 $0.29 $1 $0.00 ($141) ($0.57) $1,050 $4.21 1.26x $5.50 (21%) 7% 0% (13%) 100% Source: Company reports; Scotiabank GBM estimates. ScotiaView Analyst Link 56% 31 Company Comment Wednesday, November 12, 2014, Pre-Market (CAR.UN-T C$24.70) CAP REIT Q3/14 Initial Glance: Roughly in Line Mario Saric, CPA, CA, CFA - (416) 863-7824 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: Medium Trevor Thompson-Harry - (416) 863-7986 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: C$25.00 ROR 1-Yr: 6.0% Valuation: 16.25x AFFO (F'16 estimate) Key Risks to Target: Capex requirements, excess Toronto condo supply, CMHC restructuring CDPU (NTM) CDPU (Curr.) Yield (Curr.) $1.19 $1.18 4.8% Event ■ Reported FFOPU was $0.42 vs. $0.43 YOY, roughly in line with our $0.425 and slightly below $0.44 consensus (range=$0.425-$0.45). Same-property (SP) NOI was +3.7% YOY (Q2/14= +5.4%); revenue/expenses were +2.4%/0.4% (Q2/14 = +2.8% / -1.2%). Implications ■ Higher interest expense offsets solid top line. NOI was ~$0.01 above our forecast (higher-than-expected revenue partially offset by higher expenses), which was more than offset by higher-than-expected interest expense; see Exhibit 1. Tenants are paying for hydro in 49.6% of its sub-metered suites in ONT/AB, +260bp QOQ, helping drive a modest 70bp YOY SP NOI margin growth to 61.5% (Q2/14 was +160bp YOY). Leverage was -40bp QOQ on debt/FV (flat on debt/cost). ■ Decent rent growth; AGIs ramp up again. Near-max SP apartment occupancy of 98.6% (+10bp YOY) drove 1.6% & 3.4% YOY avg. monthly rent (AMR) growth on lease renewal & turnover (Q2/14 = 1.6%/ 3.2%). AMR growth was highest in the mid-tier portfolio (+2.8%), followed by luxury (+2.3%), and affordable (+0.9%). Outstanding above guideline increase (AGI) applications were +11% QOQ to 15,658 suites (vs. +1.7% QOQ avg. in 2013). ■ IFRS cap rate -7bp QOQ. The Q3/14 fee simple cap rate was 4.93%, below CAR's 5.4% implied cap rate and our 5.45% NAV cap rate. Recommendation ■ Full update post c/c on Wed., Nov 12th at 10:00 am. ET. #866-225-0198. Qtly FFOPU (FD) 2013A 2014E 2015E 2016E Q1 $0.36 A $0.37 A $0.38 $0.39 (FY-Dec.) Funds from Ops/Unit Adj. Funds from Ops/Unit Price/AFFO EV/EBITDA EBITDA (M) EBITDA Margin EBITDA/Int. Exp Q2 $0.42 A $0.43 A $0.44 $0.46 Q3 $0.43 A $0.43 $0.45 $0.46 Q4 $0.34 A $0.39 $0.40 $0.41 Year $1.55 $1.59 $1.67 $1.72 P/FFO 13.7x 15.5x 14.8x 14.4x 2012A $1.47 $1.29 19.2x 20.3x $224 54.3% 2.4x 2013A $1.55 $1.35 15.7x 19.4x $255 53.4% 2.5x 2014E $1.59 $1.44 17.2x 19.6x $275 55.2% 2.7x 2015E $1.67 $1.49 16.5x 19.2x $280 55.7% 2.8x 2016E $1.72 $1.55 16.0x 18.7x $289 55.8% 2.8x BVPU14E: $25.42 ROE14E: 5.64% NAVPU: NAV Prem/(Disc): $24.50 0.82% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Units O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $2,695 $2,694 $5,389 109 109 32 Q3/14 Initial Glance: Roughly in Line Exhibit 1 - CAR: Q3/14 Results Summary All in $000s, except for per share figures Scotia Q3/14E Q3/14A YOY Q3/13A Actual vs. Scotia 3,220 A vs. Scotia FFOPU Rental revenue $ 119,845 $ 116,625 $ 112,682 $ Ancillary income $ 6,474 $ 7,073 $ 7,254 $ Straight-line rent $ 37 $ 25 $ 59 $ 12 Total Revenue $ 126,356 $ 123,723 $ 119,995 $ 2,633 Operating costs $ (24,879) $ (24,120) $ (24,573) $ (759) Utilities $ (9,554) $ (8,844) $ (8,684) $ (710) Property taxes $ (14,308) $ (14,181) $ (13,883) $ (127) Total Operating Expenses $ (48,741) $ (47,144) $ (47,140) $ (1,597) -$0.014 NOI $ 77,615 $ 76,578 $ 72,855 $ 1,037 $0.009 Forecast Acquisition NOI $ - $ - $ $ - Total NOI $ 77,615 $ 76,578 $ 72,855 $ 1,037 $0.009 G&A (excludes amort of FV of Unit-Based Comp) $ (4,602) $ (4,905) $ $ 303 $0.003 EBITDA $ 73,013 $ 71,673 $ 68,662 $ 1,340 $0.012 Financing costs, including deferred costs $ (26,725) $ (24,921) $ (25,458) $ (1,804) -$0.016 Net mortgage prepayment costs $ - $ - $ 98 $ - Other Income* $ 600 $ - $ 796 $ 600 Net other FFO adjustments $ (181) $ 328 $ 165 $ (509) (599) $0.03 -$0.01 $0.024 Operating Expenses Normalized FFO - diluted $46,707 Units outstanding $47,080 111,333 FFOPU - diluted (4,193) $44,263 110,726 $0.420 - -$373 101,832 $0.425 -$0.003 607 $0.43 -$0.006 Maintenance capex reserve provision $ (3,878) $ (5,176) $ (3,749) $ Straight-line revenue (not included in reported) $ (37) $ (25) $ (59) $ (12) Amortization of FV of Unit Based Compensation $ 1,019 $ 500 $ 675 $ 519 AFFO - Reported $ 43,811 $ $ 41,130 $ AFFOPU - diluted $0.39 42,379 $0.38 $0.005 $0.40 1,298 1,432 $0.01 Operating Results Apartment Occupancy (quarter end) 98.6% 98.4% 98.5% 0.2% Estimated Occupied apartment rent per suite (average) $ 1,095 $ 1,093 $ 1,074 $ Average apartment rent per suite $ 1,080 $ 1,076 $ 1,058 $ Same-property NOI (YOY) 3.7% n/a 2 4 3.7% 0.0% NOI Margin 61.4% 61.9% 60.7% -0.5% Operating expenses as a % of revenue 19.7% 19.5% 20.5% 0.2% Utility costs as a % of revenue 7.6% 7.2% 7.2% Property taxes (per suite) G&A as a % of revenue $ 422 3.6% $ 415 4.0% $ 415 3.5% 0.4% $ 7 -0.4% *Net of a $1.6M adjustment for income from equity accounted investments. Source: Company reports; Scotiabank GBM estimates. ScotiaView Analyst Link 33 Intraday Flash Tuesday, November 11, 2014 @ 4:30:23 PM (ET) (CHP.UN-T C$10.66) Choice Properties REIT A Bit More Positive View as Development Pipeline Begins to Take Form Pammi Bir, CPA, CA, CFA - (416) 863-7218 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: Medium Ganan Thurairajah, MBA - (416) 863-2899 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: C$11.25 ROR 1-Yr: 11.6% Valuation: 14.75x AFFO (F'16 estimate) Key Risks to Target: Significant tenant concentration in Loblaw, majority unitholder Event ■ Ex $2.4M (~$0.005/unit) of non-recurring internalization costs, Q3 FFO was $0.23 vs. $0.22 last year, in line with our $0.23E and consensus. Implications ■ No surprise, as operationally sound. Portfolio occupancy remains high at 97.9%, with tenant retention at a solid 85%, and moderate 3.6% leasing spreads. Though the strong operating metrics will likely limit near-term SP NOI gains, management's focus on leasing up the 82.6% occupied ancillary space provides a means to improve organic growth. ■ As development pipeline takes form, we're a little more enthused. Developments are ramping up with $260M (>7% targeted yields) of planned investments across 860K sf over the next 2-3 years, prompting us to raise our forecast completions. The better visibility leaves us a bit more encouraged about CHP's ability to drive AFFO and NAV growth. ■ Estimates tweaked; growth remains below peers and group. Our 2014E-16E AFFO CAGR edged up 70bp to 2.2%, but remains below the 4.2% average of its retail peers and 5.5% for our coverage universe. CDPU (NTM) CDPU (Curr.) Yield (Curr.) $0.65 $0.65 6.1% Pertinent Revisions FFOPU15E FFOPU16E New $0.92 $0.94 Old $0.93 $0.93 Recommendation ■ SP, $11.25. We believe CHP remains in good form with highly visible cash flows supporting an attractive yield. At 14.2x 2015E AFFO/6.3% implied cap rate/in line with NAV, we view the units as fairly valued. All else equal, we recommend building positions more actively below $10.00. Qtly FFOPU (FD) 2013A 2014E 2015E 2016E Q1 Q2 $0.22 A $0.22 $0.23 $0.23 A $0.23 $0.23 (FY-Dec.) Funds from Ops/Unit Adj. Funds from Ops/Unit Price/AFFO EV/EBITDA EBITDA Margin EBITDA/Int. Exp AFFO Payout Ratio 2012A Q3 $0.21 A $0.23 A $0.23 $0.24 Q4 $0.22 A $0.23 $0.23 $0.24 Year $0.44 $0.91 $0.92 $0.94 P/FFO 11.9x 11.8x 11.6x 11.4x 2013A $0.44 $0.35 14.6x 15.8x 71.1% 3.4x 89.9% 2014E $0.91 $0.73 14.6x 16.1x 71.2% 3.5x 89.3% 2015E $0.92 $0.74 14.4x 16.0x 71.1% 3.4x 88.0% 2016E $0.94 $0.76 14.0x 15.6x 71.1% 3.3x 85.4% BVPU14E: $10.47 Cap Rate: 6.25% NAVPU: NAV Prem/(Disc): $10.53 1.23% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Units O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $4,094 $3,506 $7,600 384 46 34 10.8% 19.4x na 2.3% -2.1% 5.5% 14.1x 6.6% -2.3% -6.2% -8.1% 4.2% 15.7x 6.2% 16.9x 5.8% 4.9% 4.3% 0.2% 4.7% 17.9x 5.9% 3.9% 13.7x 6.7% 3.8% 14.4x 6.3% -0.2% Chg since IPO = 0.0x Source: Company reports; Scotiabank GBM estimates. Oct-14 Sep-14 Aug-14 Jul-14 Jun-14 May-14 Apr-14 Feb-14 Mar-14 Jan-14 Dec-13 Oct-13 Nov-13 Sep-13 Aug-13 Jul-13 12.0x Operationally Sound, as Expected; Better Visibility and Accelerating Development Activities Should Provide a Modest Boost to Growth Source: Company reports; Scotiabank GBM estimates. ■ Operationally steady; focus remains on lease-up of ancillary space. Occupancy ticked up to 97.9% (+20bp QOQ, +30bp YOY) as leasing momentum accelerated to 235K sf (vs. 167K in Exhibit 3 – Choice is Trading Relatively in Line with our NAVPU Q2 and 50K in Q1). Though L-tenanted space is 100% occupied, as at September 30, 2014 the 82.6% occupancy (+220bp QOQ, +300bp YOY) in the Choice Properties REIT NAVPU remaining 4.4M sf of ancillary space provides a modest internal Assumed cap rate 6.00% 6.25% 6.50% growth opportunity, with management focused on backfilling NTM net operating income 475,990 475,990 475,990 this space. Tenant retention remains strong at 85% (80% YTD), Value Range ($000s) though renewal spreads decelerated to +3.6% (5.7% YTD) as 3 Investment properties 7,946,791 7,629,464 7,336,547 large format tenants renewed at relatively flat rates. SP NOI Other assets 234,987 234,987 234,987 grew 3.8% YOY, but mostly due to last year’s shorter post-IPO Total Assets 8,181,778 7,864,451 7,571,534 quarter (and also due to a $353K of higher capex recovery). Mortgages payable With an average remaining lease term of 12.1 years, a near fully Transferor notes 2,550,000 2,550,000 2,550,000 occupied portfolio, and <2.5% of GLA expiring through 2016, Debentures payable 925,000 925,000 925,000 we expect modest internal growth through our forecast period Class C LP units Other debt 344,839 344,839 344,839 mostly from embedded rents steps. Our 2015E-16E SP NOI are Total liabilities ($000s) 3,819,839 3,819,839 3,819,839 +0.8% annually from 35bp-50bp of occupancy gains and 7.5% 4,361,939 4,044,612 3,751,695 ancillary tenant renewal spreads. On the property management Estimated net asset value $11.36 $10.53 $9.77 internationalization, the process is expected to wrap up by the Estimated NAVPU Current Unit Price $10.51 $10.51 $10.51 start of 2015. The build-out of leasing and property management -7.5% -0.2% 7.6% teams is nearly complete, with the ERP system implementation Premium/(Discount) to NAV Current implied cap rate 6.3% completed in Q3. Nov-14 2.2% 14.2x 6.3% Incrementally More Positive View as Development Pipeline Begins to Take Shape; Valuation Remains Reasonable ■ Maintaining Sector Perform, $11.25 one-year target. Though Q3 results were largely as Exhibit 1 – In Our View, Choice’s Valuation Appears Reasonable Relative to Retail Peers expected, our outlook for CHP has slightly Implied Cap Rate Prem/(Disc) to NAV 2014E-16E AFFO CAGR 2015E P/AFFO improved with better visibility on the 24 development pipeline prompting us to raise our 20 16 estimated completions. As a result, our 2014E- 12 8 16E AFFO CAGR ticked up by 70bp to 2.2%. That said, growth remains below the 4.2% 4 average of its retail peers and the 5.5% of our -40 overall universe. Operationally, the portfolio -8 *Averages exclude CHP.un remains sound, with high occupancy and long- -12 term leases underpinning cash flow stability. -16 CHP CWT CRR FCR REI CDN Retail CDN REIT US Shopping REITs* Sector Centre REITs Moreover, leasing up vacant ancillary space provides an opportunity to modestly improve Source: Company reports; Scotiabank GBM estimates. growth. Nonetheless, we continue to look for more compelling growth to form a more constructive view. The units are trading at 14.2x 2015E AFFO/6.3% implied cap rate/in line with NAV (Exhibits 1-3) vs. Exhibit 2 – Choice is Trading in Line with Historical Average P/AFFO 17.9x/5.9%/0.2% for FCR and 14.1x/6.6%/-2.1% for the sector Retail REITs (ex CHP) (its P/AFFO spread to FCR and the sector are both in line with 17.0x Average (NTM) = 16.0x Chg since CHP IPO = -0.5x historical levels). Our 14.75x target multiple is unchanged and 15.7x continues to reflect a 4x discount to FCR, a level that we believe 16.0x fairly balances CHP’s predictable cash flows, strategic ties to Loblaw (L), and lower leverage, against its high single tenant 15.0x 14.2x concentration, slower growth, lower liquidity, and low urban market penetration. At current levels, we see the units as fairly 14.0x CDN REIT Sector valued, and recommend investors buy more actively below Choice Prop. REIT 14.1x Average (NTM) = 14.5x 13.0x Average (NTM) = 14.5x $10.00. Chg since CHP IPO = -0.5x 35 Cap Rate ■ Development activities set to accelerate, with better visibility on pipeline. As a reminder, CHP identified 3.5M sf Exhibit 4 – Better Visibility Provided on Development Pipeline of at grade expansion opportunities at the time of the IPO. Of Q4/14 2015 2016 Total this amount, it expects to develop 1M sf across 25 sites over Potential Development GLA (sf)(1) 15,000 304,000 591,000 910,000 $3,000 $92,000 $165,000 $260,000 the next 3-5 years. At Q3, 600K sf was in various stages of Potential Capital ($) (1) 2015/2016 GLA incl. ~250K sf of space gained from post-Q3/14 acquisitions. pre-development. Visibility has further improved, with $260M of anticipated investment in up to 860K sf (2.3% of Source: Company reports; Scotiabank GBM estimates. GLA) over the next 2-3 years (Exhibit 4). The projects are mostly in ON and W. CDA and relate to retail expansions and additions to existing sites, though mixed-use opportunities are also being reviewed. With targeted yields >7% (incl. the Exhibit 5 – Acquisitions Yield Modest Accretion on Leverage Neutral Basis impact of the site intensification fee payable to L), we expect Assumed Acquisitions ($000s) 0 100,000 200,000 300,000 400,000 500,000 600,000 the pipeline to provide an incremental source of AFFO and 5.50% (0.001) (0.001) (0.002) (0.002) (0.003) (0.004) NAV growth. In Q4, CHP expects to start a $42M expansion 6.00% 0.001 0.001 0.002 0.002 0.003 0.003 (7.5% yield) of its recently acquired L-tenanted warehouse in 6.50% 0.002 0.004 0.005 0.007 0.009 0.010 Boucherville, QC. In light of the expected ramp-up in 7.00% 0.003 0.006 0.009 0.012 0.014 0.017 development activities, we raised our 2015E-16E completions 7.50% 0.004 0.008 0.012 0.016 0.020 0.024 8.00% 0.005 0.011 0.016 0.021 0.026 0.031 to ~$260M from $100M. In Q3, CHP completed the 8.50% 0.007 0.013 0.019 0.026 0.032 0.038 previously noted projects in Toronto (addition of LCBO and Dollarama to Brown’s Line property) and Stoney Creek Assumptions: (Fortino’s) at a cost of $10M. Work at the Real Canadian (1) Acquisitions funded with 60% debt/40% equity. (2) Assumed interest Superstore in Surrey continues, with completion scheduled rate = 4.25%. (3) Maintenance capex and TIs = 5% of revenue. for 1H/15. Post-Q3, CHP acquired a 70% interest in 21 acres of land in Brampton from PenEquity Realty for $18M. The Source: Company reports; Scotiabank GBM estimates. site is expected to house a 200K sf L-bannered retail store within the next 3 years, with a targeted 7.25% yield. Exhibit 6 – Portfolio Acquisition Summary Address City 61 Main St. Sackville Prov. NB Type Banner Year Built Age Retail Save Easy 1960 2000 2013 1998 Ancillary GLA 54 14,512 - 14 1 16 13 315,961 43,000 27,516 386,477 0 Total GLA % of Total GLA Occup. 14,512 1% 100% 315,961 43,000 27,516 386,477 25% 3% 2% 31% 100% 100% 100% 100% 180 Chemin du Tremblay Boucherville 55 Jacques-Cartier Sud Sherbrooke 480 boul. Sainte-Anne Ste-Anne-Des-Plaines Subtotal QC QC QC QC 30 King St. South 124 Clair Rd. East 449 Carlaw Ave. 2187 Bloor St. W. 720 Broadview Ave. Subtotal Alliston Guelph Toronto Toronto Toronto ON ON ON ON ON ON Retail Retail Retail Retail Retail Zehrs Zehrs No Frills No Frills Loblaws 2000 2014 1954 1990 1970 14 0 60 24 44 36 72,247 39,956 94,478 13,972 20,192 240,845 31,293 1,806 12,971 46,070 72,247 39,956 125,771 15,778 33,163 286,915 6% 3% 10% 1% 3% 23% 100% 100% 98% 100% 100% 99% 3193 Portage Ave. Winnipeg MB Retail Real Canadian Superstore 1996 18 124,829 22,629 147,458 12% 85% 2815 Wanuskewin Rd. Saskatoon SK Retail Extra Foods 1997 17 48,754 - 48,754 4% 100% 16 Superior St. 7613-100th Ave. Subtotal Devon Peace River AB AB AB Retail Retail Extra Foods No Frills 1997 1994 17 20 19 30,918 58,225 89,143 0 30,918 58,225 89,143 2% 5% 7% 100% 100% 100% 2855 Gladwin Rd. Abbotsford BC Retail Real Canadian Superstore 1989 25 141,487 - 141,487 11% 100% 250 Old Airport Rd. Yellowknife NT Retail Extra Foods 1995 19 60,970 - 60,970 5% 100% 2270-2nd Ave. Whitehorse YT Retail Real Canadian Superstore 2003 11 90,211 - 90,211 7% 100% 22 1,197,228 95% 68,699 5% 1,265,927 100% 100% 98.1% Total/weighted average % of total Source: Company reports; Scotiabank GBM estimates. Warehouse Distribution Centre Retail Provigo Retail Provigo Loblaw GLA 36 ■ Acquisition assumptions raised as pace of deal flow from L will likely mimic 2014. As noted in our Oct. 9th comment, “Basket Refilled with Another $212M Purchase”, CHP acquired a 16-property, 1.3M sf portfolio from L for $212M at a 6.6% cap rate or $164/sf (ex $4M for land parcel). The properties (Exhibit 6) are mostly in QC, ON, BC, and MB (75% of GLA), with the rest spread across AB, NB, and even Yukon and the Northwest Territories. Occupancy is virtually full at 98.1% with L and its various banners accounting for 95% of rents under lease terms of 15-20 years (retail has 7.7% rent bumps every 5 years). Intensification could add another 280K sf (+22%) within 5 years with the 3 Toronto sites offering mid-to longer-term opportunities for possible mixed use redevelopment. Pro-forma the transaction, we estimate L’s remaining portfolio at ~$1.8B (~8.5M sf), which will likely be sold down to the REIT over the next 5-7 years. The deal brings 2014 YTD acquisitions to $426M (6.6% cap rate). With more than a year now under its belt, management’s commentary on the call suggests a similar level of annual activity going forward. We raised our 2015E-16E to $480M and $400M (from $250M), though the impact on our estimates is limited on a leverage neutral basis (Exhibit 5). Post quarter-end, the REIT entered an agreement to acquire a 921K sf L-tenanted warehouse in Pickering, ON for $81.5M (6.5% cap rate, $88/sf), with the deal expected to close in Q1/15. ■ Leverage in good form with ample available liquidity. D/GBV sits at 46% with 2014E net debt/EBITDA at 7.7x (vs. the sector at 48% and 8.4x, respectively). Though D/GBV has trended down since the IPO due to the Class B LP units issued to L on acquisitions, we expect a modest uptick through our forecast period as management works toward its longer term 50% target. Liquidity is ample with $430M from cash and undrawn lines, though we assume $170M of equity issuance in 2015 in 2015 to partially fund additional acquisitions. Q3/14 Recap: Minor Variance, but Overall In Line Results ■ Overall, an in line delivery. Ex $2.4M (~$0.005/unit) of non-recurring internalization costs, Q3 FFO was $0.23 vs. $0.22 last year, in line with our $0.23 estimate and consensus (Exhibit 7). A modest NOI shortfall was more than offset by lower-than-expected G&A. The 3.9% YOY FFOPU growth was partially due to last year’s slightly shorter post-IPO quarter, along with acquisitions, and lower G&A, partly offset by dilution from financing activities. 37 Exhibit 7 – Forecast Summary, Condensed Variance Analysis, Leverage Snapshot Forecasts 2013 2014E 2015E 2016E Estimates ($, fully diluted) FFOPU AFFOPU Distributions per unit FFO payout ratio AFFO payout ratio 0.44 0.35 0.32 73% 90% 0.91 0.73 0.65 72% 89% 0.92 0.74 0.65 71% 88% 0.94 0.76 0.65 69% 85% Valuation P/FFOPU P/AFFOPU EV/EBITDA Distribution yield AFFOPU yield 11.5x 14.2x 14.8x 6.5% 7.0% 11.6x 14.4x 15.5x 6.3% 6.9% 11.5x 14.2x 14.9x 6.2% 7.0% 11.2x 13.8x 14.6x 6.2% 7.2% $10.53 -0.2% 6.25% 6.26% 682 509 486 75% 71% 735 548 523 75% 71% Pre-tax NAV / Cap rate Current NAV Premium / Implied Cap Rate Income Statement ($ millions) Rental revenue Net operating income EBITDA NOI margin EBITDA margin Balance Sheet ($ millions) Total assets Net debt 319 239 227 75% 71% 7,448 3,328 8,022 3,615 8,666 3,968 801 597 569 75% 71% 9,306 4,300 Leverage Net debt/EV Debt/GBV Net Debt/EBITDA EBITDA/net interest 46% 47% 7.8x 3.4x 47% 46% 7.7x 3.5x 48% 46% 7.9x 3.4x 49% 47% 7.8x 3.3x Forecast Assumptions ($MM, except where noted) 2013 2014E 2015E 2016E Same-store NOI growth Acquisitions Assumed cap rate Completed developments Assumed cap rate G&A expenses % of revenues Maintenance capex % of revenues Leasing costs % of revenues na 189 6.6% na 12 3.8% 15 4.6% 1 0.4% 0.5% 426 6.6% 13 5.6% 23 3.4% 31 4.5% 3 0.4% 0.8% 482 6.7% 92 7.5% 26 3.5% 34 4.6% 3 0.4% 0.8% 400 7.0% 165 7.5% 28 3.5% 37 4.6% 3 0.4% Condensed Quarterly Variance Analysis ($000s) Q3/14A Q3/13A % chg Scotia Q3/14E Variance per unit Revenue Operating expenses NOI NOI margin 170,293 43,166 127,127 74.7% 153,655 10.8% 37,387 15.5% 116,268 9.3% 75.7% -102 bp 175,037 46,823 128,213 73.2% (0.012) (0.010) (0.003) 140 bp General & administration % of revenue EBITDA EBITDA margin 6,411 3.8% 120,716 70.9% 7,445 -13.9% 4.8% -108 bp 108,823 10.9% 70.8% 6 bp 6,750 3.9% 121,463 69.4% (0.006) -9 bp 0.003 149 bp Net interest expense FV changes of investment properties FV adjustment on exchangeable units Transaction costs Current and future taxes (Gains)/losses on dispositions Non-controlling interest Other Net income/(loss) 82,698 15,612 (100,414) 450 64 122,306 75,027 (75,539) 35,425 284 73,626 10.2% nm nm nm nm nm nm nm nm 34,717 132 86,614 0.000 nm nm nm nm nm nm nm nm FFO adjustments: Amortization Class B LP distributions Fair value (gains)/losses FV adj. - exchangeable units FV adj. - unit based comp Acquisition transaction costs Future taxes Non-controlling interest Non-recurring, unusual items FFO FFOPU - fully diluted 2 47,993 15,612 (100,414) (322) 450 2,372 87,999 0.229 42,623 (75,539) 35,425 (7) 2,974 79,102 0.220 nm nm nm nm nm nm nm nm nm 11.2% 3.9% 2 86,616 0.226 nm nm nm nm nm nm nm nm nm 1.6% 0.003 Leverage/Liquidity Snapshot @ Q3/14 Q3/14 Debt/GBV Max limit Net debt/EV Debt/NAV assets 45.8% 60.0% 46.5% 46.5% Liquidity ($000s) Credit facility capacity Undrawn amounts Cash on hand Available liquidity Debt Profile % due pre-2017 Average in-place debt cost Weighted average term (years) 2014E refinancing rate 2015E refinancing rate 19.6% 3.6% 5.6 4.0% 4.8% Assumed Equity Issuance 2014E issuance 2014E timing na 2015E issuance 170,000 2015E timing Q2/15 & Q4/15 Source: Company reports; Scotiabank GBM estimates. ScotiaView Analyst Link 500,000 422,651 8,262 430,913 38 Company Comment Wednesday, November 12, 2014, Pre-Market (DHX.B-T C$9.39) DHX Media Ltd. Q1/15 Preview - Inclusion of Family Channel and New Production Deals Paul Steep, MBA - (416) 945-4310 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: Speculative Andy Ko, CFA, MBA - (416) 863-7993 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: C$9.00 ROR 1-Yr: -3.6% Valuation: 13x NTM EV/Adj. EBITDA 1-yr fwd Key Risks to Target: Lumpy Sales; Disney Renewal; CRTC TV Review Div. (NTM) Div. (Curr.) $0.05 $0.05 Yield (Curr.) 0.5% Event ■ DHX will report Q1/15 results on November 14 at 8:30 a.m. ET, dialin: 1-888-231-8191. We forecast revenues of $49.4M and Adj. EBITDA of $18.0M (cons. $50.8M and $16.5M). Implications ■ Our view is that DHX's Q1/15 results will reflect stronger distribution and M&L revenues as well as a partial quarter with the inclusion of Family Channel (DHX Television) in the financial results. In the quarter, we expect solid adjusted EBITDA margins will be sustained given operational efficiency and new digital distribution deals. ■ The acquisition of the Family channel business is transformational for DHX, in our view, moving the company into the broadcasting business. Our focus remains on the upcoming renewal of the Disney output deal in August 2015, which should be a key milestone as well as a risk factor for the stock. We expect DHX will be successful in securing a renewal of the Disney agreement for another three- to five-year term with a modest increase in the content cost. Recommendation ■ We believe DHX will continue to benefit from increased size and scale of the underlying business, along with ongoing growth opportunities in its core kids content. Qtly Revenues (M) 2013A 2014A 2015E 2016E Q1 Q2 Q3 Q4 Year $13.5 A $27.0 A $49.4 $60.0 $26.4 A $30.4 A $63.4 $68.4 $31.2 A $29.0 A $62.5 $67.5 $26.2 A $29.7 A $62.7 $67.4 $97.3 $116.1 $238.0 $263.3 Price/Rev enue 2.93x 6.65x 4.84x 4.38x 2012A $0.07 $0.25 16.4x 0.9x $73 $9 2.2x 2013A $0.09 $-0.12 35.6x 1.2x $97 $23 1.8x 2014A $0.11 $0.05 60.9x 2.3x $116 $37 2.1x 2015E $0.27 $0.52 34.7x 1.3x $238 $81 1.7x 2016E $0.36 $0.82 26.2x 1.0x $263 $94 1.9x (FY-Jun.) Adj EPS Cash Flow from Ops Price/Earnings Relative P/E Revenues (M) Adjusted EBITDA (M) Current Ratio BVPS15E: $1.97 ROE15E: 13.84% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $1,125 $49 $1,173 120 69 39 Q1/15 Preview ■ We anticipate DHX’s Q1/15 results will reflect stronger distribution and M&L revenues and sustain a meaningful increase in the EBITDA margins seen in Q4/14, supported by improved operational efficiency and higher margins on new digital distribution deals. This quarter represents the first partial quarter (acquisition closed on July 31, 2014) with the inclusion of Family Channel in the financial results. Exhibit 1 – Inclusion of Family Channel and Sequentially Sustained Margins in Q1 (FYE June 30; C$000 except EPS; IFRS) Production revenue Distribution revenue Producer and service fee revenue Merchandising, licensing and other revenue Family Channel Business Total Revenue Q1/15E $10,560 $11,470 $4,518 $9,308 $13,535 $49,390 Q1/14A $10,581 $6,962 $4,107 $5,352 Adj. EBITDA Adj. EBITDA margin $17,972 36.4% Net income EPS - fully diluted Adj. EPS Consensus Q1/15E % Diff. -0.2% 64.8% 10.0% 73.9% Q4/14A $1,748 $14,614 $3,915 $9,468 % Diff. 504.1% -21.5% 15.4% -1.7% $27,002 82.9% $29,745 66.0% $50,800 $7,801 28.9% 130.4% $10,192 34.3% 76.3% $16,500 -$2,687 $2,158 -224.5% $1,040 -358.4% ($0.02) $0.05 $0.02 $0.03 -208.1% 68.7% $0.01 $0.03 -358.0% 96.7% $0.05 Source: Company reports; IBES; Scotiabank GBM estimates. ■ New Yo Gabba Gabba! Live! Tour. DHX recently announced a 30-city North American fall tour of the new Yo Gabba Gabba! Live! show (50-60 shows) starting October 14. Management indicated that it is contemplating a winter 2015/spring 2015 tour and will report progress on these plans in Q1 and the coming quarters. ■ New Production Agreements. DHX continues to secure additional deals to produce animated television series for leading studios and broadcasters. The firm announced an agreement with Sony Pictures Animation to produce a television version of Cloudy with a Chance of Meatballs. DHX will produce twenty-six 22-minute animated episodes (with global television and non-U.S. home entertainment rights) and represent merchandising for the series on a worldwide basis. Exhibit 2 – Busy Production Schedule Show Dr. Dimension Pants You and Me - Series I Looped Inspector Gadget 2.0 Johnny Test Open Heart Hank Zipzer - Series 2 Degrassi Twirlywoos Supernoobs Teletubbies Cloudy with a Chance of Meatballs: The Series Age Group 6 to 11 Preschool 6 to 11 6 to 11 6 to 11 Teens 6 to 11 Family Preschool 6 to 11 Preschool 6 to 11 Type Animation Mixed Animation Animation Animation Live action Live action Live action Live action Animation Live action Animation # of Shows Runtime (mins) 26 11 17 11 26 30 26 22 13 30 12 30 13 22 28 30 50 11 26 22 60 25 26 22 Core Broadcaster Teletoon CBC Teletoon Teletoon Teletoon Teen Nick/YTV/MTV Canada BBC Teen Nick/YTV/MTV Canada BBC Teletoon BBC Estimated Delivery September 2014 October 2014 November 2014 November 2014 Fall 2014 January 2015 February 2015 July 2015 2015 January 2016 Source: Company reports; Scotiabank GBM. ■ The firm also announced a new contract with UK broadcaster CBeebies to produce 50 episodes of preschool series Twirlywoos (and a master toy deal to be launched in 2016). The new production will be handled by Ragdoll Productions, which DHX acquired in September 40 2013. Exhibit 2 provides a partial list of the firm’s commissioned shows that are currently in production at various DHX studios. ■ DHX continues to be active in expanding and building up its own library of proprietary content. Exhibit 3 provides an overview of the firm’s existing content library aggregated by age cohort and production type. The company has seen a gradual shift in the mix of its library with a slight increase in the number of live action titles and a relatively consistent mix across various age groups. Exhibit 3 – Active in Expanding Content Catalogue 2 to 11 4 to 7 6 to 11 6 to 9 8 to 12 Family Preschool Teens Grand Total Animation 17 2 114 2 8 18 47 3 211 Live action 1 3 9 Mixed 2 1 10 Stop motion 6 20 12 17 7 69 3 1 6 9 23 15 Grand Total 26 6 133 2 31 31 79 10 318 Source: Company reports; Scotiabank GBM. ■ Active in Licensing Transactions. The firm appointed Character Options to act as global master toy partner for Teletubbies with the new series currently in production. ■ New Distribution Agreement. DHX Media has entered into an agreement with China National Television (CNTV), the new-media broadcast division of CCTV, to launch a new children's content platform nationally in China. In the revenue-sharing deal, DHX will initially provide more than 700 half-hours of Mandarin content for the new service. ScotiaView Analyst Link 41 Company Comment Wednesday, November 12, 2014, Pre-Market (DIR.UN-T C$9.04) Dream Industrial REIT Q3 In Line; New President & CEO Appointed Pammi Bir, CPA, CA, CFA - (416) 863-7218 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: Medium Ganan Thurairajah, MBA - (416) 863-2899 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: C$10.25 ROR 1-Yr: 21.1% Valuation: 12.25x AFFO (F'16 estimate) Key Risks to Target: Inability to execute growth, significant unitholder, rising interest rate s CDPU (NTM) CDPU (Curr.) $0.70 $0.70 Yield (Curr.) 7.7% Event ■ DIR reported Q3/14 FFOPU of $0.23 vs. $0.24 last year, in line with our $0.23 estimate and consensus ($0.235). Implications ■ Results as expected across line items. FFOPU was flat YOY (-1%) as growth from SP NOI and acquisitions was offset by financing dilution. ■ Front lines steady, with healthy YOY internal growth. Occupancy remains solid with committed at 95.5% (-10bp QOQ, +40bp YOY) and economic at 93.9% (-10bp, -20bp). SP NOI rose 2.4% YOY (+2.7% YTD) with W. CDA (+5.1%) continuing to outpace Central/E. CDA (+0.3%) from higher occupancy and rents. QOQ, SP NOI was down 0.8% on lower average occupancy. Renewal leasing spreads were strong at +6.3% with 69% tenant retention (66% YTD), a bit below DIR’s typical 70%-75%. Market rents remain 5% above in place, with W. CDA (37% of NOI) at +10% vs. Central/E. CDA (63%) at +2%. ■ Brent Chapman appointed President and CEO effective Jan. 5/15. Mr. Chapman has over 28 years of real estate experience and joins DIR from Guardian Capital Real Estate where he is Managing Director. Prior roles incl. President and CEO of GPM Investment Management and senior positions at Oxford Properties and Talisker Corporation. ■ IFRS cap rate steady QOQ and YOY at 6.71%, in line with our 6.75% NAV cap rate but modestly below its current 7.2% implied cap. Recommendation ■ Full update post Nov. 12th c/c (2 p.m. ET; 1-866-229-4144; 9411711#). Qtly FFOPU (FD) 2013A 2014E 2015E 2016E Q1 $0.22 A $0.23 A $0.24 $0.25 (FY-Dec.) Funds from Ops/Unit Adj. Funds from Ops/Unit Cash Distributions/Unit Price/AFFO EV/EBITDA EBITDA Margin EBITDA/Int. Exp AFFO Payout Ratio Q2 $0.23 A $0.24 A $0.25 $0.25 Q3 $0.24 A $0.23 $0.25 $0.25 Q4 $0.23 A $0.24 $0.25 $0.25 Year $0.91 $0.95 $0.98 $1.01 P/FFO 9.7x 9.5x 9.2x 9.0x 2012A 2013A $0.91 $0.74 $0.69 12.0x 16.1x 63.9% 3.1x 94.2% 2014E $0.95 $0.78 $0.70 11.5x 15.3x 63.0% 3.1x 89.4% 2015E $0.98 $0.82 $0.70 11.0x 14.4x 63.2% 3.0x 85.2% 2016E $1.01 $0.84 $0.72 10.8x 14.1x 63.3% 2.9x 85.8% BVPU14E: $10.33 Cap Rate: 6.75% NAVPU: NAV Prem/(Disc): $10.45 -13.50% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Units O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $692 $849 $1,541 77 58 42 Intraday Flash Tuesday, November 11, 2014 @ 11:51:24 AM (ET) (CMPC-SN CLP 1,440) Empresas CMPC SA In-Line Q3/14 Benoit Laprade, CPA, CA, CFA - (514) 287-3627 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: High Luis Pardo Figueroa - (514) 287-3613 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: CLP 1,600 ROR 1-Yr: 11.8% Valuation: 8.5x NTM EV/EBITDA 1-Year Forward Key Risks to Target: Lower-than-expected pulp prices and demand, FX Event ■ CMPC reported EBITDA of $251M, compared with our $251M estimate and consensus of $247M. Implications ■ By segment, Forestry, Pulp, and Paper EBITDA came in lower than expected by $1M, $3M, and $6M, respectively, while Tissue and Other EBITDA came in higher than expected by $7M and $3M, respectively. ■ The company reported a solid operational quarter driven by strong performances at its tissue and pulp operations. These segments benefited from investments and FX tailwinds, which drove costs lower and margins higher. ■ Net debt to EBITDA remained unchanged sequentially at 3.1x as the company continues to build its Guaiba II pulp mill. The company noted that the project remained on schedule and on budget, with ~$1.3B spent and 79% of construction completed by the end of Q3/14. Recall that CMPC expects Guaiba II to be operational by Q2/15 and fully ramped up by the end of 2015. Div. (NTM) Div. (Curr.) Yield (Curr.) CLP 10.18 CLP 10.18 0.7% Pertinent Revisions EBITDA14E EBITDA15E EBITDA16E New US$987 US$1,049 US$1,333 Old US$983 US$1,051 US$1,341 Recommendation ■ We reiterate our Sector Perform rating and our target price of CLP 1,600. Although we like CMPC's solid operational performance and growth prospects, we see limited upside to our target, especially when considering the risks relating to the successful completion of Guaiba. Qtly EBITDA (M) 2013A 2014E 2015E 2016E Q1 Q2 Q3 Q4 Year $212 A $250 A $225 $298 $239 A $244 A $248 $330 $258 A $251 A $280 $347 $254 A $242 $297 $358 $964 $987 $1,049 $1,333 EV / EBITDA 9.1x 9.8x 9.8x 7.6x 2012A $0.09 $0.38 39.3x 2.4x $4,759 $914 12.0x 6.6x 2013A $0.08 $0.35 29.2x 1.8x $4,975 $964 9.1x 6.3x 2014E $0.07 $0.33 34.8x 2.1x $4,874 $987 9.8x 6.4x 2015E $0.13 $0.31 18.5x 1.1x $5,059 $1,049 9.8x 7.2x 2016E $0.22 $0.39 11.3x 0.7x $5,679 $1,333 7.6x 8.9x (FY-Dec.) Earnings/Share Cash Flow/Share Price/Earnings Relative P/E Revenues (M) EBITDA (M) EV/EBITDA EBITDA/Int. Exp Capitalization Market Cap (B) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) CLP 3,515 $0 CLP 3514981 ScotiaView Analyst Link BVPS14E: $3.43 ROE14E: 2.02% Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in US$ 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. 2,441 976 43 Q3/14 Highlights ■ CMPC reported EBITDA of $251M, compared with our $251M estimate and consensus of Exhibit 1 - Quarterly Highlights $247M. The company reported $244M in the $ million, except per share data Q3/14a Q3/14e Chg % Q3/13a previous quarter and $258M last year (Exhibit 1). Sales: Forestry $158 $146 8.0% $138 ■ By segment, Forestry, Pulp, and Paper EBITDA Pulp $360 $352 2.3% $374 came in lower than expected by $1M, $3M, and Paper $234 $241 (3.0%) $170 $6M respectively. While Tissue and Other Tissue $486 $498 (2.4%) $467 EBITDA came in higher than expected by $7M Other $0 $0 n.m. $0 Total Sales $1,238 $1,238 0.0% $1,231 and $3M, respectively. ■ Segmented results: EBITDA: Forestry $38 $39 (3.2%) $42 ■ Forestry: EBITDA rose $3M sequentially, Pulp $126 $129 (2.2%) $130 driven mainly by higher plywood volumes as Paper $32 $38 (15.7%) $34 well as lower harvesting, transportation, and Tissue $57 $50 14.9% $58 energy costs. Volumes rose 6% over the Other ($2) ($5) n.m. ($6) $251 $251 0.1% $258 previous quarter driven by higher shipments Total EBITDA 20.3% 20.3% 2 bp 21.0% of pulpwood (+82%), plywood (+19%), and EBITDA Margin sawing logs (+15%). These positives were Source: Company reports; Scotiabank GBM estimates. partially offset by lower sawn wood (-11%) and remanufactured wood (-2%) shipments. Pulpwood sales were driven by higher domestic sales, while sawing log volumes benefitted from the company’s trading program. The higher plywood shipments were a result of the ramp-up of CMPC’s new plywood line, which drove a 42% increase in export volumes this quarter. The decline in sawn wood and remanufactured wood shipments was a result of a slowdown in construction activity in Chile. Average realizations during the quarter decreased 5% sequentially, driven by a less favourable sales mix with a higher proportion of pulpwood and sawing logs. ■ Pulp: EBITDA rose $6M from last quarter driven by lower direct costs, including lower energy and chemical prices, as well as improved operating rates, which were partially offset by lower quarterly revenue (-$14M). Volumes for the quarter decreased 3% sequentially as softwood volumes declined 5% and hardwood volumes decreased 2%. Softwood volumes declined due to lower exports to Europe, Asia (ex. China), and Latin America, partially offset by higher shipments to China. While hardwood volumes saw lower export shipments to China, Latin American, and the Middle East, partially offset by increased volumes to the U.S., Europe, and other Asian countries. Average selling prices during the quarter decreased 2% from last quarter. ■ Paper: EBITDA declined $7M when compared with last quarter, driven mainly by lower sales and higher operating costs, including higher energy due to the end of electric contracts at December 2013. Shipments for the quarter rose 1% sequentially, driven by higher corrugated paper sales (+43%) due to seasonality in preparation for the summer fruit season. This was offset by a 47% QOQ decline in molded pulp tray volumes due to the end of the apple season, a 19% drop in corrugated boxes due to the weaker industrial, wine and fruit demand, and a 5% drop in paper bags as well as a 1% decline in boxboard shipments. Realized prices for the quarter declined 5% from Q2/14, as a result of lower corrugated paper, boxes and paper bag prices. ■ Tissue: EBITDA rose $4M QOQ due mostly to higher sales volumes and lower energy costs, which more than offset lower tissue paper prices in US$. Volumes roses 6% QOQ due to higher volumes in Argentina, Chile, Brazil, Peru, Mexico, and Ecuador, driven by increased volumes for home consumption tissue paper. Average selling prices for tissue paper (in US$) for the quarter declined 2% sequentially, while prices for sanitary products (in US$) rose 3% QOQ. The depreciation of the local Latin American currencies vs. the US$ had a negative impact on the segment’s realized prices. An increase in local currency prices provided a partial offset to the appreciation of the US$. ■ At the end of Q3/14, the company’s net debt/EBITDA ratio remained unchanged from last quarter at 3.1x. This compares with 3.0x at the end of Q3/13. The company’s cash balance during the quarter rose 51% to US$1,619M due to the issuance of an 144A-S international Y/Y Chg % Q2/14a Q/Q Chg % 14.5% $145 (3.7%) $374 37.6% $245 4.1% $467 n.m. $0 0.6% $1,231 9.0% (3.7%) (4.5%) 4.1% n.m. 0.6% (9.5%) $35 (3.1%) $120 (5.9%) $39 (1.7%) $53 n.m. $0 (2.9%) $244 (73 bp) 19.8% 8.6% 5.0% (17.9%) 7.5% n.m. 2.9% 45 bp 44 US$500M bond in September 2014 (which was disbursed to prepay for a US$400M syndicated loan in October 2014) and the US$250M capital increase in July 2014. The company noted that there will be no incremental capital raises for the Guaiba II project and that therefore it expects the leverage ratio to increase as the project reaches completion. Additionally, CMPC expects to be in line with its financial policy debt ratio of by the end of 2016. We estimate that with the additional EBITDA from Guaiba II, CMPC should exit 2016E with a net debt/EBITDA ratio of ~3x. In the meantime, we expect the ratio to peak at ~4.2x by mid-2015. Valuation ■ We reiterate our Sector Perform rating and our target price of CLP 1,600. Although we like CMPC’s solid operational performance and growth prospects, we see limited upside to our target, especially when considering the risks relating to the successful completion of Guaiba. Exhibit 2 - Comps Table Company Name Ticker Price Currency 10-Nov-14 Market Cap (M) Enterprise Value (M) P/E 2014E 2015E 2016E 2014E EV/EBITDA 2015E 2016E Net Debt/ 2014E EBITDA Dividend Yield Estimate Source Pulp Canfor Pulp Products Inc. Empresas CMPC S.A.* Fibria Celulose S.A. Sponsored ADR** ENCE Energia y Celulosa SA Mercer International Inc. Suzano Papel e Celulose SA Pfd A Tembec Inc. Average CFX-CA CMPC-SGO FBR-US ENC-ES MERC-US SUZB5-BSP TMB-CA CAD CLP/USD USD/BRL EUR USD BRL CAD 13.20 1,451.50 12.05 1.67 13.40 10.60 3.00 937 6,204 6,675 417 861 7,802 300 949 9,435 24,031 655 1,490 21,285 815 10.0x 10.0x 8.2x n.m. 18.7x 11.4x n.m. n.m. n.m. n.m. n.m. 11.5x 13.2x 14.0x 15.9x n.m. 15.7x 12.5x n.m. 8.0x 5.0x 11.6x 13.3x 10.8x 4.9x 9.6x 9.6x 13.0x 6.5x 9.0x 9.6x 8.9x 4.8x 9.0x 9.0x 5.7x 6.5x 7.2x 5.4x 6.8x 4.2x 7.1x 7.6x 4.9x 6.6x 6.8x 4.4x 6.0x 0.1x 3.3x 2.8x 4.4x 3.2x 4.1x 5.4x 3.3x 1.9% 1.1% n.a. 1.4% n.a. 1.1% n.a. 1.4% Scotiabank GBM Scotiabank GBM Scotiabank GBM Consensus Consensus Consensus Scotiabank GBM Other Diversified Domtar Empresas Copec S.A.* International Paper Company Kimberly-Clark Corporation Stora Enso Oyj Class R UPM-Kymmene Oyj Average UFS-US COPEC-SGO IP-US KMB-US STERV-HEL UPM1V-HEL USD CLP/USD USD USD EUR EUR 40.95 7,161.30 53.66 113.92 6.63 12.51 2,654 15,874 22,731 42,430 5,224 6,657 3,895 21,266 31,154 47,999 8,763 9,931 13.7x 11.2x 11.6x 15.5x 13.5x 12.1x 16.0x 13.4x 12.3x 19.8x 18.8x 17.7x 13.4x 11.0x 10.2x 11.6x 11.9x 11.3x 15.3x 13.7x 12.7x 5.2x 10.1x 7.4x 11.0x 6.8x 7.6x 8.6x 4.7x 9.0x 7.1x 10.9x 6.4x 7.4x 8.2x 4.7x 8.4x 6.9x 10.6x 6.3x 7.4x 7.9x 1.6x 2.6x 1.9x 1.1x 2.6x 2.5x 2.1x 3.7% 1.8% 3.0% 2.9% 4.5% 4.8% 3.4% Scotiabank GBM Scotiabank GBM Consensus Consensus Consensus Consensus 8.5x 7.2x 6.6x 2.7x 2.6% Average 14.2x 13.3x 11.7x *Price in CLP. The rest in USD. **Price & Market Cap in USD. The rest in BRL Note: For Empresas Copec S.A. the P/E and EV/EBITDA multiples exclude the value assigned to the company's other investments of US$0.23 (CLP 135) Source: Company reports; FactSet; Scotiabank GBM estimates. ScotiaView Analyst Link 45 Company Comment Wednesday, November 12, 2014, Pre-Market (ENTEL-SN CLP 6,211) Entel Chile Investor Day: All We Saw Andres Coello - +52 (55) 5123 2852 (Scotiabank Inverlat) [email protected] Rating: Sector Outperform Risk Ranking: Medium Ivan Hernandez - +52 (55) 5123 2876 (Scotiabank Inverlat) [email protected] Target 1-Yr: CLP 9,200 ROR 1-Yr: 53.0% Valuation: DCF - 5 years results, 9.1% WACC, terminal growth rate of 3.6% Key Risks to Target: Execution of Nextel Peru; Competition in Chile Div. (NTM) Div. (Curr.) Yield (Curr.) 300.00 300.00 4.8% Event ■ We participated in Entel's Investor Day in Lima, Peru. In this report we share all our notes (See details on page 2 to 5). Implications ■ Numbers in Peru are impressive across the board. The graphs on the sales performance for the two weeks following the 4G launch (+200%) were staggering. Portability results (97% of net lines going to Entel) show how quickly the company is positioning the brand. Mass products, and a wireless residential offering will be launched within 8 months. ■ Although gross margins in Peru are as high as 60% (similar to Chile), the company made it clear that the more successful they are in Peru in the short term, the worse the EBITDA performance will be. The company expects to assume a less bullish handset subsidy policy by 1H/15, so we may see a gradual recovery in EBITDA; however, positive EBITDA is not expected until 2016 or 2017. Guidance was left unchanged: 30% of wireless revenues in the long term. ■ CEO Antonio Buchi made it clear that the company is not contemplating a capital increase, but that the controlling group is supportive of the Peruvian strategy. In our view, an IPO of Entel Peru would be a success given potential demand by local pension funds. We understand that the controlling company (Almendral) plans to pay down its debt, potentially freeing capital resources. Recommendation ■ Entel is a high-conviction name for us. Buy. Qtly EPS (FD) 2011A 2012A 2013A 2014E Q1 212.67 A 221.88 A 158.96 A 143.00 A (FY-Dec.) Earnings/Share Cash Flow/Share Price/Earnings Relative P/E Revenues (B) EBITDA (B) Current Ratio EBITDA/Int. Exp Q2 226.18 A 181.00 A 162.29 A 111.00 A Q3 195.33 A 204.86 A 171.00 A 18.00 A Q4 130.08 A 157.00 A 130.00 A 320.48 Year 764.26 760.00 622.25 592.48 P/E 11.7x 12.0x 13.7x 11.5x 2010A 731.81 731.58 13.6x 0.6x 1,087 446 1.0x 45.1x 2011A 764.26 565.81 11.7x 0.9x 1,241 515 0.8x 61.5x 2012A 760.00 536.00 12.0x 0.8x 1,399 557 0.8x 77.0x 2013A 622.25 -214.00 13.7x 0.7x 1,645 467 0.8x 19.7x 2014E 592.48 -482.07 11.5x 0.6x 1,775 468 1.0x 10.0x BVPS14E: 4,101.09 ROE14E: 15.14% Capitalization Market Cap (B) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) 1,469 2,612 1469592 ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in CLP 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. 237 66 46 Exhibit 1 – Peru - Projected Number of Sites Exhibit 2 - Peru - Customer Perception Points 3,500 December 2013 80 70 3,000 3,000 2,500 60 40 1,500 69 43.8% 1,600 71 34.0% 50 2,400 2,000 53 48 30 1,000 500 August 2014 20 800 10 0 0 Q2/13 October 2014 Q2/15E Exhibit 3 - Peru - Revenue Contribution per Service 2G/3G, MBB Retail Source: Entel’s Investor Day. Source: Entel’s Investor Day, Scotiabank GBM estimates. 100% Corporate Q4/15E Exhibit 4 - Peru - Net Portability Winners October 2014 PPT 2% 90% +4,100 bp 80% 659 2.9% 43% 70% 60% 50% 98% 40% 30% 57% 20% 10% 22,174 97.1% 0% Q3/13 Q3/14 Source: Entel’s Investor Day. Source: Osiptel. Exhibit 6 – Peru – iPhone Sales Market Share Exhibit 5 - Peru - Mass Media Advertising Spending 100% 90% 17% 70% +2,100 bp 38% 80% 31% 60% 50% 24% 50% 40% 30% 52% 20% 36% 10% 0% Q1/14 Source: Entel’s Investor Day. Currently Source: Entel’s Investor Day. 50% Others 47 Feedback: Sebastian Dominguez, CEO Entel Peru ■ After doubling the number of sites since taking over the company, Entel is currently building 100 per month in Peru, which is a similar number to all the sites that NIHD was building on a yearly basis. In 2013, the company built 736 sites, of which 500 are now on air. Entel expects to build 100 sites per month for the next 18 months. The company already has the best LTE coverage in Peru (324 districts). 100% of the network in Peru was renovated. In Lima, the company currently has 25 fibre links. The transport network is being reinforced with the leasing of more capacity. ■ The number of client centres went from 356 in August of 2013 to 575 in 2014. Entel currently operates 60 stores. The company wants to make sure that wherever there is a competitor store or kiosk, there is also an Entel store, so that customers can compare the offering. A higher focus is currently being put on enhancing customer attention. In the corporate niche, customer perception improved from 48 points in December 2013 to 69 as of August 2014 (before the LTE launch). In the retail segment, the improvement went from 53 points to 71. The customer experience in the company's stores went from 42 to 66 among corporates and 46 to 63 among the retail segment. ■ Entel Peru currently has capacity to manage 3.0 million clients, basically twice the number of clients today. ■ On the regulatory front, Osiptel has been supportive, implementing in record time changes to portability rules. The regulator is working to improve installation time for radiobases and in implementing national roaming. Also, mobile termination rates are due to be revised in March 2015. Entel is pushing for a 50% reduction in the termination rate. ■ We understand that the number of lines sold to corporates increased by 210% in Q3/14 if compared to the prior year; by 290% in the postpaid segment and 470% in prepaid. ■ Whereas in Q3/13 98% of Peru's sales were related to PTT, today this percentage is at 57%. Only between June of 2014 and September 2014, sales in Peru increased 8.0%. ■ The company is aggressively pushing advertising campaigns in mass media. In Q1/14, 17.0% of television ads were paid by Entel, 52.0% by Movistar and 31.0% by AMX. Currently, Entel is the number one with 38.0% of ads, 36% Movistar and 24% AMX. There has been a lot of good press following the Entel launch. ■ 50% of all iPhones in Peru are being sold by Entel. Handset subsidies are expected to remain high at least until Q1/15. The CEO said that "EBITDA could be positive tomorrow if we wanted to." However, given the company's strategy, EBITDA could be negative until 2016 or 2017. Current handset subsidies and cost of sales per new client is in the neighborhood of PEN 500 (US$170.5) in postpaid and much lower in prepaid. As the company is loading 30,000 postpaid customers on a monthly basis (90,000 per quarter), most of the EBITDA pressure is related to the strong growth. ■ Currently, 75% of new customers have ARPUs above PEN 100.00. To address the mass and middle niche, the company expects to launch cheaper offers in the future. ■ We understood that credit requests increased from an average of 40,000 per month in the past to 177,521 in November, an impressive increase. In the first week after the 4G launch, sales to new customers increased 154%, increasing a further 7.0% in the second week. Regarding ported numbers, sales increased 2,729% in the first week and a further 87% in the second. All in, sales in the first week increased 221% and a further 26% in the second. Basically all portability additions in Peru went to Entel in October (22,174 of a total of 22,833). ■ Entel Peru is currently delivering 3G data speeds of 5 Mbps or 10 Mbps in areas covered with LTE. The company will launch residential wireline and broadband products that will be powered by the wireless network. Demand for this product in Peru is expected to be better than in Chile. ■ Entel currently has 5,000 employees in Peru. ■ The company reiterated that it expects to gain a revenue share in Peru's wireless market of 30%. ■ Employees are now aware that rather than being a distant third-player, Entel's ambition is to become an industry leader. As such, we sensed that employee morale is rising. We understand that employees from other telecom companies are migrating to Entel given the better growth prospects. 48 Feedback: Antonio Buchi, CEO ■ The level of disclosure was, in our view, unusual for a company relatively discrete as Entel. As discussions in this presentation switched rapidly from one subject to another, here we are throwing all the information that we consider was relevant or original. ■ Entel currently has a market share of revenues in Chile of 32%. Market share in the mobile segment stands at 46%. We understand that the company can sustain current margins so long as the market share in mobile stands above 40.0%. ■ 35% of the subscriber base is in postpaid (this number is important as it is not directly disclosed in the press release). This was slightly above the 34% we calculated previously. ■ Capex this year will be equivalent to 29.5% of revenues. Of this, 3.4% is related to spectrum obligations in Chile; 1.2% is related to the Hogar product and 8.0% to Peru. Normalized, capex as a percentage of sales would currently stand in the neighborhood of 16.9% (mostly in line with global peers). ■ The company has expanded significantly its spectrum holdings in both Chile and Peru. Today, Entel Chile holds 150 MHz, up from 80 MHz in 2012. In Peru, the company holds 156.5 MHz from 81.5 MHz before. ■ In Chile, the infrastructure priority for the company at this point is to expand in-building coverage. This year the company has expanded coverage to 1.8 million square metres inside buildings, which compares to the estimated 300,000 metres of new real state constructed in Chile every year. The size of the data center at this point is 6,900 metres and 600 more in Peru. ■ In Chile, Entel's subscribers are currently consuming 1.7GB per month, compared to 4.7GB for the industry average in the United States. Back in 2011, data consumption was 0.82GB per month, which means that subscribers in Chile more than doubled their consumption in the past three years. ■ The margin on mobile termination in Chile was only 15%. The cut to the MTR impacted EBITDA by 25.0%. ■ The regulator Subtel is currently working on allowing operators to access buildings (apparently, some buildings have exclusivity agreements). The regulator is also working on improving portability rules and quality (the company is particularly excited about portability trends, to which Entel attributes strong gains in revenue share). The recent ruling on commercial bundling was ''lighter'' than originally perceived: it means mostly that operators must offer services on a standalone basis. Management is not concerned about its impact on financials. It appears to us that, when it comes to regulation, Subtel and the Ministry of Communications are more interested on quality than anything else. Direct regulation of data rates (or even voice) is not under consideration currently. ■ The ARPU of prepaid customers in Chile currently stands at US$8.6, among the highest in the industry. However, although 41% of Entel's base already has a smartphone, only 9.3% are consuming data (excluding WiFi downloads). Hence, there is still solid potential for data consumption in Chile. ■ Among the postpaid base, the percentage of customers with limited data plans (e.g., clients have a certain allotment of data; once they surpass it, the company continues delivering but charges more) is now at 34% from 9% in 2013. This figure is very important as it shows that data is becoming the most relevant driver in the customer experience. Entel prefers to charge customers rather than promising unlimited data plans where subscribers actually see a sharp reduction of speeds once they surpass a certain amount of megabytes. Postpaid clients not using data are now only 39% compared to 50% the year before. ■ Smartphone penetration in Peru currently stands at 17%, compared to 27% in LatAm. ■ Entel's CEO was asked if he would consider a capital increase in case Peru growth was higher than expected and the company's leverage increases beyond the current guidance of 2.6x net debt to EBITDA. He said that: (1) the company does not believe currently that there is any specific need to raise capital; (2) the company wants to maintain solid credit ratings; 49 and (3) the controlling families (Almendral) have been quite supportive of the company's projects and he would expect the same in case there was a capital increase (however, he made it clear that he cannot speak on behalf of shareholders). We understand that the controlling company, Almendral, plans to repay its outstanding debt, leaving room to inject capital in Entel if needed (or, perhaps, pay higher dividends). ■ We understand that Entel may consider selling certain assets if the price makes sense; another option could be to IPO the Peruvian subsidiary given potential demand by local pension funds. As such, it appears to us that the possibility of a capital increase at the Entel level appears low at this point. Exhibit 7 – Entel’s Spectrum Holdings Evolution 180 2012 120 Currently 4.7 GB 4.5 3.5 3 100 80 Currently 4 92.0% 87.5% 2011 5 156.5 MHz 150 MHz 160 140 Exhibit 8 – Entel Chile Average Monthly Data Consumption 80 MHz 81.5 MHz 2.5 107.3% 1.7 GB 2 60 1.5 40 1 20 0.82 GB 0.5 0 Chile Source: Entel’s Investor Day. Peru 0 Chile USA Source: Entel’s Investor Day. ScotiaView Analyst Link 50 Company Comment Wednesday, November 12, 2014, Pre-Market (FSM-N US$4.42) (FVI-T C$5.00) Fortuna Silver Mines Inc. SJ Expansion Sounds Like a Go Craig Johnston, CPA, CA - (416) 860-1659 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: High Valuation: 1.30x Q3/15E NAV Target 1-Yr: US$5.15 ROR 1-Yr: 16.5% Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.00 0.0% Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s Event Pertinent Revisions ■ We are updating our estimates following the Q3/14 conference call, including relatively material revisions to our estimates for San Jose. Implications ■ In our opinion, management commentary on the conference call indicated the company is likely to go ahead with the expansion to 3,000 tpd at its San Jose mine (currently 2,000 tpd). Management noted that at $14/oz silver, the expansion project still yields a +20% return. A construction decision is not expected for a month or so, however we have updated our estimates to reflect the expansion. Fortuna expects to be able to commission the expanded mill by Q3 2016. ■ Given the capital outlay required for the 3,000 tpd expansion project, management noted that development of Trinidad North (which we previously expected in 2015) would likely be delayed until 2016. We have made this adjustment within our estimates as well. ■ We have also lowered our unit cost estimates at San Jose and increased our unit cost estimates at Caylloma based on recent results. Overall, our NAV3% has increased 4% to $3.89 per share (based on $19/oz Ag and $1,300/oz Au) and our target price has increased to $5.15 per share. Target: 1-Yr New Old $5.15 $4.95 Recommendation ■ The market responded well to Fortuna's Q3 results with shares up 16% yesterday, as we believe investors are drawn to its healthy balance sheet and peer leading all-in sustaining costs. Unfortunately, our enthusiasm is relatively muted by valuation at spot prices relative to its gold peers. SP. Qtly Adj. EPS (FD) 2013A 2014E 2015E 2016E Q1 $0.05 A $0.04 A $0.05 $0.05 (FY-Dec.) Adj Earnings/Share Price/Earnings Cash Flow/Share Price/Cash Flow EBITDA (M) Production (Moz) Tot. Cash Cost ($/oz) All-In Sust. Cost ($/oz) Q2 $0.00 A $0.02 A $0.05 $0.05 Q3 $0.00 A $0.05 A $0.05 $0.07 Q4 $0.02 A $0.02 $0.05 $0.09 Year $0.07 $0.14 $0.21 $0.27 P/E 38.5x 31.7x 20.8x 16.6x 2013A $0.07 38.5x $0.36 8.1x $41 4.6 $7.03 $20.45 2014E $0.14 31.7x $0.42 10.5x $60 6.6 $4.58 $15.00 2015E $0.21 20.8x $0.43 10.3x $70 6.8 $3.56 $11.39 2016E $0.27 16.6x $0.55 8.0x $90 7.8 $2.69 $8.80 2017E $0.34 13.0x $0.66 6.7x $115 9.4 $2.42 $7.37 BVPS14E: $2.12 ROE14E: 6.83% NAVPS: P/NAV: $3.89 1.14x Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in US$ 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. $581 $-72 $509 131 131 51 San Jose – Revising Estimates to Encompass 3,000 tpd Expansion ■ Based on management’s commentary on the conference call, we have made the following changes to our estimates for San Jose: o 3,000 tpd Expansion – We have assumed management will go forward with this expansion project, and assume commissioning of the expanded mill in Q3 2016. We estimate expansion capital of $40 million. Our previous estimates incorporated 2,000 tpd only. o Trinidad North Development – We have pushed the development of Trinidad North until 2016, given the capital outlay required for the expansion project, and the fact the company has 2-2.5 years in accessible ore via the current underground mine. We have also revised our breakdown of capital for the development of Trinidad North to 50% development and 50% sustaining (previously 100% development). o Operating Costs – We have reduced our operating cost per tonne estimates in 2015 to $62.38/tonne down from $64.51/tonne as management noted that current unit costs achieved are sustainable. We estimate unit costs will reduce further with the economies of scale from the increase to 3,000 tpd. o We made other minor adjustments to our estimates for San Jose. Exhibit 1 - New vs. Previous San Jose Estimates NEW Operating Param eters 2014E 2015E 2016E 2017E 2018E 1,910 1,950 2,313 2,950 2,950 Mill Throughput tpd Silver Grade g/t 229 225 236 240 240 Gold Grade g/t 1.73 1.75 1.77 1.77 1.77 89% Silver Recovery Silver Payable Production Gold Recovery Gold Payable Production % 89% 89% 89% 89% Moz 4.2 4.2 5.2 6.8 6.8 % 90% 90% 90% 90% 90% koz 32.1 28.5 34.2 43.6 43.6 Financial Param eters Operating Cash Cost (net of by-products) US$/oz $2.43 $1.75 $1.25 $0.84 $0.84 Sustaining Capital US$M $29 $20 $15 $14 $14 Development Capital US$M $1 $37 $18 $5 $5 2014E 2015E 2016E 2017E 2018E Mill Throughput tpd 1,903 1,925 1,925 1,925 1,925 Silver Grade g/t Gold Grade g/t 1.72 1.80 1.90 2.00 2.00 Silver Recovery % 89% 89% 89% 89% 89% Previous Operating Param eters Silver Payable Production Gold Recovery Gold Payable Production 228 255 270 280 280 Moz 4.2 4.8 5.1 5.3 5.3 % 90% 90% 90% 90% 90% koz 31.3 31.4 33.1 34.9 34.9 ($0.01) ($0.01) Financial Param eters Operating Cash Cost (net of by-products) US$/oz $2.13 $0.94 $0.44 Sustaining Capital US$M $26 $21 $16 $12 $12 Development Capital US$M $6 $24 $10 $10 $0 Source: Company reports; Scotiabank GBM estimates. 52 NAV Breakdown & Target Price Generation ■ Other estimate revisions: o Caylloma – We have increased our cost per tonne estimates to $87.85/tonne up from $84.85, as Fortuna has struggled to reach 2014 annual guidance of $88.30/tonne, due to increased energy costs given a dryer year in Peru. o Corporate G&A – We had previously assumed significant reductions to corporate general and administrative expenses in 2015 onward (i.e. $13 million per annum), however, management noted on the conference call that following the reductions to head count at corporate office and in Peru, they expect corporate general and administrative expenses to average $17 million going forward. ■ Our net asset valuation has increased 4% to $3.89 per share, and we have increased our target to $5.15 per share. We note our target price and net asset valuation are based on $19.00 per ounce silver and $1,300 per ounce gold. Our net asset valuation at spot prices is $2.33 per share, and therefore estimate Fortuna is trading at 1.9x NAV 3%, compared to its gold peers at 1.15x NAV3% . Therefore, we re-iterate our Sector Perform, despite Fortuna’s healthy balance sheet and peer-leading all-in sustaining costs ($11.85/oz in Q3/14). Exhibit 2 - New & Previous NAV & Target Price Generation NEW Current Est. Q3/15E % Project Projected San Jose Caylloma Total Mining Assets Cash and Cash Equivalents Working Capital NAV (US$M) $457 $67 $524 $72 $6 NAV (US$M) $478 $60 $538 $60 $9 NAV 92% 12% 104% 12% 2% Multiple 1.30x 1.30x 1.30x 1.00x 1.00x Value (US$M) $621 $78 $699 $60 $9 $0 $0 $16 ($108) ($13) $0 $0 $16 ($105) ($20) 0% 0% 3% -20% -4% 1.00x 1.00x 1.00x 1.00x 1.00x $0 $0 $16 ($105) ($20) $512 $519 100% 1.31x $680 131.4 $3.89 131.4 $3.95 Long-term Debt Marketable Securities In-the-money instruments Corporate G&A Corporate Assets Net Asset Value Fully Diluted (ITM) Shares (M) Projected Value (US$/sh) One-year Target Price (US$) 131.4 $5.17 $5.15 PREVIOUS Current Est. Q2/15E % Project Projected San Jose Caylloma Total Mining Assets Cash and Cash Equivalents Working Capital NAV (US$M) $417 $80 $497 $60 $13 NAV (US$M) $417 $74 $491 $76 $9 NAV 84% 15% 98% 15% 2% Multiple 1.30x 1.30x 1.30x 1.00x 1.00x Value (US$M) $542 $96 $638 $76 $9 Long-term Debt Marketable Securities In-the-money instruments Corporate G&A Corporate Assets $0 $0 $16 ($96) ($7) $0 $0 $16 ($94) $8 0% 0% 3% -19% 2% 1.00x 1.00x 1.00x 1.00x 1.00x $0 $0 $16 ($94) $8 Net Asset Value $490 $499 100% 1.30x $646 131.1 $3.74 131.1 $3.81 Fully Diluted (ITM) Shares (M) Projected Value (US$/sh) One-year Target Price (US$) Source: Company reports; Scotiabank GBM estimates. 131.1 $4.93 $4.95 53 Company Comment Wednesday, November 12, 2014, Pre-Market (GLV.A-T C$2.10) GLV Inc. Q2/F15 Results Miss: First Take Anthony Zicha - (514) 350-7748 (Scotia Capital Inc. - Canada) [email protected] Sami Abboud, MBA - (514) 350-7737 (Scotia Capital Inc. - Canada) Vincent Perri, CPA, CA, CFA - (514) 287-4990 (Scotia Capital Inc. - Canada) Rating: Sector Perform Target 1-Yr: Risk Ranking: High Valuation: 8.5x EV/EBITDA on F2016E C$3.50 ROR 1-Yr: 66.7% Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.00 0.0% Key Risks to Target: Reduced municipal infrastructure spending; further reductions in pulp and paper sector capital investment. Event ■ GLV reported Q2/F15 EBITDA $5.3M compared to our estimate of $5.7M and consensus of $5.5M. However, Adjusted EPS loss of $0.03 missed our and consensus estimates of $0.03. Implications ■ Backlog Flat. Consolidated backlog of $259M was flat sequentially. Ovivo backlogs declined 2% sequentially to $281.6M (third consecutive quarter). Pulp & Paper (P&P) backlogs increased 12.2% to $68.5M. ■ Organic Growth Declines. Organic revenues declined 2.2% compared to Q2/F14 mainly driven by a 7.4% organic revenue decline in Ovivo. The decline was partially offset by solid P&P organic growth of 8.6%. The decline stems mainly from lower Ovivo new equipment sales and lower revenues from certain legacy projects (prior to refocusing plan). ■ Margin Decline. Adjusted EBITDA margins declined 40 bp to 3.5% mainly due to a 180 bp decline in the Ovivo margin to 4.4% and a 70 bp decline in the P&P margin to 5.8%. Margin contraction mainly stems from investments made under Ovivo's strategic plan as well as slight margin compression on certain Ovivo Energy contracts. P&P margins contracted mainly due to revenue mix (higher new equipment sales). Recommendation ■ We will review our estimates and target price after the conference call on November 12 at 9AM ET. Dial-in #: 1-888-231-8191. Qtly Adj. EPS (FD) 2013A 2014A 2015E 2016E (FY-Mar.) Adj Earnings/Share Cash Flow/Share Price/Earnings Relative P/E Revenues (M) EBITDA (M) Current Ratio EBITDA/Int. Exp Q1 $-0.09 A $0.04 A $-0.03 A $0.02 Q2 $-0.07 A $0.06 A $0.03 $0.04 Q3 $0.09 A $0.03 A $0.03 $0.04 Q4 $0.08 A $0.04 A $-0.01 $-0.02 Year $0.01 $0.16 $0.02 $0.07 P/E n.m. 23.9x 98.5x 28.6x 2012A $-0.38 $0.32 n.m. n.m. $643 $12 1.5x 1.2x 2013A $0.01 $-0.08 n.m. n.m. $585 $24 1.4x 3.0x 2014A $0.16 $0.78 23.9x 0.9x $635 $25 1.5x 4.1x 2015E $0.02 $0.28 98.5x 3.8x $602 $19 1.6x 3.3x 2016E $0.07 $0.37 28.6x 1.1x $463 $17 1.7x 2.8x BVPS15E: $3.89 ROE15E: 0.55% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ unless otherwise indicated. ^ Subordinate 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. $93 $26 $118 44 39 54 Company Comment Wednesday, November 12, 2014, Pre-Market (RON-T C$13.85) RONA Inc. Q3/14 Results - On the Right Track Anthony Zicha - (514) 350-7748 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: Medium Valuation: 14.0x P/E on 2016E Sami Abboud, MBA - (514) 350-7737 (Scotia Capital Inc. - Canada) Vincent Perri, CPA, CA, CFA - (514) 287-4990 (Scotia Capital Inc. - Canada) Target 1-Yr: C$14.50 ROR 1-Yr: 5.7% Div. (NTM) Div. (Curr.) Yield (Curr.) $0.14 $0.14 1.0% Key Risks to Target: Housing recovery stalls; identifying and integrating potential acquisitions . Event Pertinent Revisions ■ EPS in line with consensus. RONA reported Q3/14 results with an adjusted EPS of $0.33 in line with consensus of $0.34 and below our expectations of $0.36. This compares to an adj. EPS of $0.25 last year Implications ■ Turning its focus on growth. With its restructuring plan completed, the company has turned its focus on growth. In fact, the company is focusing more of its efforts on merchandising strategies and programs that supported its same store sales growth. ■ Store expansion plans for 2015. The company also announced plans for expanding its network with five new stores to be opened in 2015. We believe this provides a new growth vector that we have not seen for the last several years. ■ Too early to tell. While we positively view the company's strategic shift to store expansion, we believe it's still too early to tell whether these initiatives should translate into improved earnings power, considering the competitive retail environment. Moreover, we believe a pickup in housing starts, particularly in Quebec, will be required to support growth (SSSG). New Target: 1-Yr $14.50 Adj. EPS14E $0.66 Adj. EPS15E $0.90 Adj. EPS16E $1.03 New Valuation: 14.0x P/E on 2016E Old Valuation: 13.0x P/E on 2015E Old $13.00 $0.71 $0.98 $0.00 Recommendation ■ Rating maintained; increasing target to $14.50. We continue to rate RONA shares a Sector Perform with a new target price of $14.50 (up from $13.00). To value RONA shares we use a 14x P/E multiple (up from 13x) on our newly introduced 2016 EPS estimate of $1.03. Qtly Adj. EPS (FD) 2013A 2014E 2015E 2016E Q1 $-0.15 A $-0.12 A $-0.09 $-0.09 (FY-Dec.) Adj EPS Cash Flow/Share Price/Earnings Relative P/E Revenues (M) Adjusted EBITDA (M) Current Ratio EBITDA/Int. Exp Q2 $0.28 A $0.35 A $0.44 $0.44 Q3 $0.25 A $0.33 A $0.42 $0.42 Q4 $0.04 A $0.10 $0.13 $0.13 Year $0.41 $0.66 $0.90 $1.03 P/E 32.3x 21.1x 15.4x 13.4x 2012A $0.58 $1.15 18.4x 1.0x $4,884 $229 1.9x 11.2x 2013A $0.41 $0.89 32.3x 1.0x $4,192 $185 2.5x 15.3x 2014E $0.66 $1.46 21.1x 0.8x $4,060 $227 2.7x 15.3x 2015E $0.90 $1.66 15.4x 0.6x $4,190 $254 2.8x 25.0x 2016E $1.03 $1.80 13.4x 0.5x $4,344 $275 3.0x 33.7x BVPS14E: $14.19 ROE14E: 4.70% Capitalization Market Cap (M) Float Value (M) TSX Weight Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $1,607 $1,597 0.1% 116 115 55 Q3/14 Results ■ EPS in line with consensus. RONA reported Q3/14 results with an adjusted EPS of $0.33 in line with Exhibit 1 – RONA Inc. Q3/14 Results consensus of $0.34 and below our expectations of $0.36. (millions, except EPS) Q3/14 This compares to an adjusted EPS of $0.25 last year. Retail $845.1 Same Store Sales 2.0% ■ Positive same store sales. Total sales for the quarter were $1.17 billion, reflecting same store sales growth of Distribution $322.1 3.0% (2.0% at Retail & 8.3% for Distribution segment) Same Store Sales 8.3% offset by the impact from the closure of underperforming Revenues $1,167.3 stores. Same Store Sales 3.0% o Retail Segment. We note that same store $294.4 sales for the retail segment increased by Adjusted Gross Profit Gross Margin 25.2% 2.0%. Management cited the strong western Canadian economy, successful Adjusted SG&A $210.5 repositioning of the Totem and Reno- % of revs 18.0% Depot banners, a revised merchandising $72.4 strategy targeting contractors in Western Retail Adjusted EBITDA % 8.6% Canada and Ontario, as well as its $11.4 building-material merchandising strategy Distribution Adjusted EBITDA % 3.5% for the entire network. Adjusted EBITDA $83.8 o Distribution Segment. The Distribution Adjusted EBITDA % 7.2% segment experienced a strong increase of 8.3% in same store sales. The company EBITDA $83.7 did benefit from a shift in sales from the Q2 period (impacted by late spring) into Adjusted EPS (fd) $0.33 Q3 period. Furthermore, management also EPS (as reported) $0.32 cited its merchandising strategy for both contractors and dealer-owners supported Source: Company reports; Scotiabank GBM. growth during the quarter. ■ Gross margin pressure. Adjusted gross margin declined by 2.0% as the company experienced some margin pressure. In fact, adjusted gross margins declined by 50 bps from 25.7% in Q3/2013 to 25.2% in Q3/2014. The company cited the impact from a competitive environment and pricing pressures on certain categories at the retail level partially offset by better procurement management. o The company also noted that it revised its merchandise strategy for contractors in Western Canada and Ontario. o Strategies weigh in on margins. While such strategies supported organic growth, it also resulted in some near-term pressure on margins. Management expects their strategy should increase its dealer-owners competitive position and in turn translate into incremental volume to more than offset the shortfall. ■ Lower SG&A. Supported by its cost reduction initiatives, the company reduced its SG&A by roughly $19.2 million in the quarter over last year. Most of the decrease was attributed to the company’s recovery plan, which included a decrease in logistical expenses, operational cost as well as a reduction in advertising and marketing. As a percentage of revenues, this represents a decrease of roughly 160bps. ■ Margins improve. The company recorded an adjusted EBITDA margin of 7.2% or $83.8 million. This was a bit light compared to our expectations of $85.5 million or 7.3% (consensus $85 million) but trending positively nonetheless. In fact this compares to an adjusted EBITDA margin of 6.0% or $70.7 million last year. The improvement reflects same store growth and the company’s cost savings initiatives. ■ Turning Focus on Growth. With its restructuring plan completed, the company has turned its focus on growth. In fact, the company is focusing more of its efforts on merchandising strategies and programs that supported its same store sales growth in the quarter. Q3/13 $862.4 (2.3%) $306.8 (2.4%) $1,169.2 (2.3%) $300.4 25.7% $229.7 19.6% $59.5 Change (2.0%) na 5.0% na (0.2%) na (2.0%) -48 bp (8.3%) -161 bp 6.0% 21.8% 168 bp 0.9% -14 bp 18.5% 113 bp $70.7 18.4% 6.9% $11.3 3.7% $70.7 $0.25 $0.25 32.0% 28.0% 56 o o Announces Store Expansion. Furthermore, the company also announced plans for expanding its network with five new stores to be opened in 2015. This includes two stores under the Reno-Depot concept outside of Quebec. More specifically, the two new Reno-Depot stores will be located in Calgary North, Alberta and in Aurora, Ontario. We note that these two locations are reopenings of previously closed locations that will be downsized to roughly 70K sq. ft. The company also plans to retrofit its Drummondville store into a Reno-Depot, from 47K sq. ft. to 77 sq. ft. Other locations include a 35K sq. ft. store in Halifax and a 50K sq. ft. store in British Columbia. ■ Debt level stable. At the end of the quarter, total net debt to total capital stood at 10% compared to 17% last year (Q3/13) and 10% in the previous quarter (Q2/14). Net debt to adjusted EBITDA stood at 0.86x at the end of the quarter down from 1.85x last year (Q3/13) as the company used the proceeds from the sale of the Commercial and Professional division of $214 million to reduce debt and relatively unchanged from 0.90x in the previous quarter (Q2/14). o Cash flow funds share buyback. During the quarter, most of the company free cash flow of $40 million was used to buy back $35.2 million worth of shares (or 2.56 million shares). Since initiating its NCIB in November 2013, we estimate that the company has purchased over 6.0 million shares at a value of roughly $77 million. This accounts for over 70% of the company’s NCIB. ■ NCIB renewal. Furthermore, the company also announced it has renewed its share buyback program (NCIB) and could acquire up to 9.2 million shares (10% of public float or roughly 8% of shares outstanding). ■ Adjusting estimates. We have adjusted our estimates to reflect Q3 results, a lower margin assumption, and the company’s store expansion plans. Accordingly, we are reducing our 2014 EBITDA estimate to $227.1 million (previously $230.0 million) while our 2014 adjusted EPS estimate decreases to $0.66 (previously $0.71). We are also reducing our 2015 EBITDA estimate to $253.9 million (previously $263.5 million) and our EPS estimate to $0.90 (previously $0.98). o We are also introducing our 2016 estimates with an EBITDA of $274 million and an EPS of $1.03. Valuation & Recommendation ■ Rating maintained; increasing target to $14.50. We continue to rate RONA shares a Sector Perform with a new target price of $14.50 (up from $13.00). To value RONA shares we use a 14x P/E multiple (up from 13x) on our newly introduced 2016 EPS estimate of $1.03. As the company has completed its restructuring plan and now turns its focus on growth, we believe an increase in our valuation multiple is justified albeit still below that of its peers. Furthermore, we note that the company has a solid balance sheet. ■ We also note that RONA share are currently trading at 15.4x our F2015 estimates, which is at a discount to its peers, namely Home Depot at 18.8x (2015E) and Lowe’s at 16.1x (2015E). 57 Exhibit 2 – RONA Inc. Comps Table Company Name (YE) Canadian Specialty Retail Companies Canadian Tire Corporation, Limited Class A ( Dec ) Loblaw Companies Limited ( Dec ) Jean Coutu Group (PJC) Inc. Class A ( Mar ) Richelieu Hardware Ltd ( Nov ) Uni-Select Inc. ( Dec ) Metro Inc. ( Sep ) Average: Median: U.S. Specialty Retail Companies Home Depot, Inc. ( Feb ) Lowe's Companies, Inc. ( Jan ) Watsco, Inc. ( Dec ) Central Garden & Pet Company ( Sep ) Kingfisher Plc ( Feb ) Average: Median: Ticker Price 11-Nov-14 Market Cap (M) Enterprise Value (M) CTC.A-TSE L-TSE PJC.A-TSE RCH-CA UNS-TSE MRU-TSE C$123.85 C$58.12 C$26.50 C$56.01 C$27.90 C$78.99 C$9,674 C$23,986 C$4,949 C$1,111 C$593 C$6,661 HD-USA LOW-USA WSO-USA CENT-USA $98.14 $58.00 $102.46 $7.95 KGF-LON P/E EV/EBITDA 2014E 2015E 2014E 2015E C$13,325 C$35,405 C$4,866 C$989 C$830 C$7,974 16.2 x 19.3 x 21.9 x 21.7 x 9.6 x 15.6 x 17.4 x 17.7 x 15.6 x 16.5 x 20.5 x 19.7 x 9.0 x 14.1 x 15.9 x 16.1 x 9.9 x 10.9 x 14.2 x 12.9 x 7.6 x 10.1 x 10.9 x 10.5 x 9.5 x 9.5 x 13.6 x 11.7 x 7.1 x 9.7 x 10.2 x 9.6 x $132,089 $57,252 $3,585 $401 $145,330 $66,587 $3,937 $804 21.8 x 19.5 x 21.2 x na 18.8 x 16.3 x 18.0 x na 12.0 x 10.6 x 12.3 x 8.6 x 11.1 x 9.8 x 11.0 x 7.3 x £2.94 £6,931.30 £6,656.88 7.4 x 17.5 x 20.3 x 6.6 x 14.9 x 17.2 x 6.8 x 10.1 x 10.6 x 3.5 x 8.5 x 9.8 x C$13.85 C$1,607 C$1,811 21.1 x 15.4 x 8.0 x 7.1 x RONA Inc. RON-CA Company Name (YE) Currency EBITDA EPS EBITDA Margin (LTM) Canadian Specialty Retail Companies Canadian Tire Corporation, Limited Class A ( Dec ) Loblaw Companies Limited ( Dec ) Jean Coutu Group (PJC) Inc. Class A ( Mar ) Richelieu Hardware Ltd ( Nov ) Uni-Select Inc. ( Dec ) Metro Inc. ( Sep ) CAD CAD CAD CAD CAD CAD 4.5% 14.5% 4.7% 10.0% 7.0% 3.8% 3.2% 17.1% 6.7% 10.2% 7.1% 10.6% 10.6% 4.2% 12.3% 11.9% 5.5% 6.9% 2.5 x 8.0 x -0.2 x -0.4 x 2.9 x 1.1 x 35.2% 46.1% (8.3%) (8.6%) 35.0% 24.8% 11.7% (0.6%) 20.3% 16.8% 9.9% 15.1% 1.7% 1.7% 1.5% 1.1% 2.2% 1.5% U.S. Specialty Retail Companies Home Depot, Inc. ( Feb ) Lowe's Companies, Inc. ( Jan ) Watsco, Inc. ( Dec ) Central Garden & Pet Company ( Sep ) USD USD USD USD 8.4% 8.5% 11.5% 17.0% 15.6% 19.2% 17.6% na 14.3% 11.2% 7.9% 4.5% 1.1 x 1.5 x 1.1 x 5.6 x 44.4% 42.1% 26.7% 42.9% 43.0% 20.2% 14.9% (2.0%) 1.9% 1.6% 2.3% 0.0% Kingfisher Plc ( Feb ) Average: GBP 94.4% 16.8% 11.5% 11.9% 8.6% 8.9% -0.3 x 2.1 x (4.8%) 25.0% 8.6% 14.4% 3.4% 1.7% RONA Inc. CAD 11.8% 36.8% 7.0% 0.6 x 10.0% 3.9% 1.0% 2015E/2014E Growth Net Debt / Net Debt / EBITDA (LTM) Total Cap ROE (LTM) Yield Source: Company reports; FactSet; Scotiabank GBM estimates. For companies with FYE other than Dec., we have included their results in the nearest calendar year Source: FactSet; Company reports; Scotiabank GBM estimates for RON. ScotiaView Analyst Link 58 Company Comment Wednesday, November 12, 2014, Pre-Market (FALAB-SN CLP 4,292) SACI Falabella Solid Q3 Report Despite Macro Challenges in Chile Rodrigo Echagaray, MBA, CFA - (416) 945-4405 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Outperform Risk Ranking: Medium Karla B. Peña - +52 (55) 9179 5211 (Scotiabank Inverlat) [email protected] Target 1-Yr: CLP 5,600 ROR 1-Yr: 31.9% Valuation: 2014E-2020E DCF w/ 9% WACC; 14x (NTM) EV/EBITDA; 23x (NTM) P/E Key Risks to Target: Pension funds overhang, foreign ops Event ■ Falabella reported solid Q3 earnings above estimates despite a challenging macro environment in Chile. Sales came in line at CLP1,771 bn (+ 10.5% YOY). EBITDA increased 10.2% to CLP208 bn (5% ahead of our estimate and 3.4% ahead of consensus). Net income increased 6% to CLP81.5 bn (6% ahead of our CLP77 bn estimate). Div. (NTM) Div. (Curr.) 62.59 0.00 Yield (Curr.) 0.0% Pertinent Revisions EBITDA14E EBITDA15E EBITDA16E New 989 1,098 1,261 Old 1,030 1,165 1,340 Implications ■ Department stores SSS in Chile in Q3 (-4.5%) are representative of the macroeconomic slowdown. Yet, positive SSS in nearly all formats and countries, sales floor expansion of ~6% YOY, and two-digit growth in banking revenues (+15.9% YOY) led to a healthy consolidated revenue growth. Of note, int'l ops were more than 40% of sales in Q3. ■ Gross margins increased 30 basis points on higher margins in the banking division (lower funding costs, stable NPLs). However, SG&A increased ahead of sales mainly due to higher expenses at Sodimac: 1) pre-operating expenses at Uruguay; 2) Ramp up of operations in Brazil, and 3) the closure of the Maestro acquisition in Peru. Net debt to EBITDA increased to 3.3x (from 2.6x a year prior) as Falabella consolidated Maestro's balance sheet as at Q3, but not it's P&L. Recommendation ■ Falabella's solid Q3 report underscores our overweight rating on the stock. We think valuations look appealing at ~19x P/E 2015E, a significant discount to its 25x NTM P/E historic average multiples. Qtly EBITDA (B) 2012A 2013A 2014E 2015E Q1 Q2 Q3 Q4 Year 152 A 188 A 214 A 244 184 A 215 A 237 A 262 165 A 187 A 208 A 230 266 A 208 A 330 361 766 902 989 1,098 EV / EBITDA 18.5x 15.5x 13.4x 12.5x 2012A 154.0 32.0x 18.5x 5,930 766 12.9% 2013A 157.2 30.0x 15.5x 6,660 902 13.5% 2014E 193.1 22.2x 13.4x 7,521 989 13.0% 2015E 227.1 18.9x 12.5x 8,355 1,098 13.1% 2016E 260.9 16.5x 11.1x 9,357 1,261 13.5% (FY-Dec.) Earnings/Share Price/Earnings EV/EBITDA Revenues (B) EBITDA (B) EBITDA Margin BVPS14E: 1,785.93 ROE14E: 13.74% Capitalization Market Cap (B) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) 10,445 2,759 10447438 ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in CLP unless otherwise indicated. o 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. 2,434 341 59 Exhibit 1 - Falabella Q3/14 results Source: Company reports; Scotiabank GBM estimates, Bloomberg. ScotiaView Analyst Link 60 Intraday Flash Tuesday, November 11, 2014 @ 1:42:48 PM (ET) (SMF-T C$3.15) SEMAFO Inc. Q3/14 Results In Line; Positive Infill Assays from Siou Bode Well for Upcoming Reserve Update Ovais Habib - (416) 863-7141 (Scotia Capital Inc. - Canada) [email protected] Ciara Sawicki - (416) 862-3738 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Outperform Risk Ranking: Speculative Target 1-Yr: C$4.50 ROR 1-Yr: 42.9% Valuation: 1.20x NAVPS Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s Event ■ SEMAFO reported Q3/14 EPS of $0.04, slightly below our estimate of $0.05 and consensus of $0.06. Implications ■ The financial results were broadly in line as many third quarter items had been pre-released, including production of 64.7 koz Au, a total cash cost range of $555-$565/oz, and a quarter-end cash position of $112M (+$19M from the end of Q2/14). ■ It appears that Burkina Faso is beginning to stabilize after recent civil unrest that culminated in former President Compaoré's resignation. Mana operations continued uninterrupted during the unrest, as did gold sales and the delivery of spare parts and consumables to site. Timing for a transition back to civilian rule remains uncertain, however. ■ The company also released a few highlight holes from ongoing infill drilling at Siou which intersected high gold grades over good widths in the Siou Zone 9 south ore shoot at a vertical depth of ~230 m. We believe these results will help SEMAFO achieve its goal of replacing production and expanding Siou reserves by year-end and estimate that a 1-year mine life extension at Siou would increase our NAV estimate for the company by 8.5%. Div. (NTM) Div. (Curr.) $0.00 $0.00 Yield (Curr.) 0.0% Pertinent Revisions Adj. EPS14E Adj. EPS15E New US$0.08 US$0.22 Old US$0.09 US$0.26 Recommendation ■ We rate SEMAFO Sector Outperform with a C$4.50 1-year target price. Qtly Adj. EPS (FD) 2013A 2014E 2015E 2016E Q1 $0.04 A $-0.05 A $0.04 $0.06 (FY-Dec.) Adj Earnings/Share Price/Earnings Cash Flow/Share Price/Cash Flow EBITDA (M) Production (oz) (000) Tot. Cash Cost ($/oz) Rlzd. Gold Price ($/oz) Q2 $0.02 A $0.05 A $0.06 $0.06 Q3 $0.00 A $0.04 A $0.06 $0.05 Q4 $-0.03 A $0.04 $0.06 $0.05 Year $0.04 $0.08 $0.22 $0.22 P/E 69.2x 36.8x 12.5x 12.6x 2012A $0.28 12.0x $0.57 6.0x $94 236.1 $799 $1,680 2013A $0.04 69.2x $0.28 9.3x $77 158.6 $777 $1,408 2014E $0.08 36.8x $0.41 6.8x $116 232.9 $665 $1,261 2015E $0.22 12.5x $0.55 5.0x $165 265.7 $571 $1,300 2016E $0.22 12.6x $0.49 5.7x $147 253.2 $607 $1,300 BVPS14E: $1.77 ROE14E: 4.33% NAVPS: P/NAV: C$3.70 0.85x Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in US$ 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$909 $-121 C$772 289 288 61 Q3/14 Financial Results Broadly In Line; Many Items Pre-Reported ■ SEMAFO’s Q3/14 EPS of $0.04 came in slightly below our estimate of $0.05 and consensus of $0.06, with the miss vs. our estimate mainly due to 3% lower than expected revenue (5% lower sales and a 2% lower realized gold price) and higher current and deferred taxes. See Exhibit 1 for a detailed comparison of the Q3/14 financial results to comparable quarters and our prior estimates. ■ Recall that the company pre-released third quarter gold production of 64.7 koz, a total cash cost range of $555-$565/oz, and its quarter-end cash balance of $112M. For additional details on the third quarter operating results, please see our Daily Edge comment from October 14, “SEMAFO Tests M&A Waters with Hostile Non-Binding Proposal for Orbis Gold”. Exhibit 1 - SEMAFO's Q3/14 Results vs. Comparable Quarters and Our Prior Estimates Q3/14A Mana Mine Ore mined (tonnes) Waste mined (tonnes) Pre-stripping waste (tonnes) Operating strip ratio (w:o) Total strip ratio (w:o) Ore processed (tonnes) Head grade (g/t) Recovery (%) Gold produced (oz) Gold sold (oz) Cash operating cost ($/oz) Cash operating cost ($/tonne) Total cash cost ($/oz) Financial Statistics Average realized selling price ($/oz) Revenue - gold sales ($M) Operating income ($M) Net Income ($M) EPS ($/sh, diluted) Cash flow from operations ($M) Cash at end of period ($M) SEMAFO's Reported Figures Q2/14A % Q3/13A* 516,900 617,700 4,038,000 4,537,100 2,913,600 2,732,000 7.8 7.3 13.4 11.8 750,300 723,900 2.91 3.37 92% 93% 64,700 72,700 64,100 68,200 $549 $475 $47 $48 $555 $602 $1,260 $84.5 $25.5 $11.2 $0.04 $40.6 $112.2 $1,287 $87.8 $20.7 $13.0 $0.05 $37.6 $93.2 % SC Estimates Q3/14E % -16% -11% 7% 6% 14% 4% -14% -1% -11% -6% 16% -2% -8% 618,500 2,326,200 6,522,500 3.8 14.3 714,400 1.82 85% 38,700 36,900 $746 $41 $799 -16% 74% -55% 108% -6% 5% 60% 8% 67% 74% -26% 15% -31% 750,300 7,326,680 3,038,715 9.8 13.8 750,300 2.91 90% 64,700 67,700 $535 $46 $563 -31% -45% -4% -20% -3% 0% 2% -5% 3% 2% -2% -2% -4% 23% -14% -20% 8% 20% $1,341 $49.5 ($2.9) ($0.8) $0.00 $16.2 n.a. -6% 71% n.m. n.m. n.m. 151% - $1,282 $86.8 $22.0 $14.1 $0.05 $38.7 $112.4 -2% -3% 16% -20% -22% 5% -0% * Financial amounts restated to reflect continuing operations only. Source: Company reports; Scotiabank GBM estimates. 2014 Guidance Maintained After Positive Revision in October ■ In October, SEMAFO increased its 2014 guidance to 230-235 koz Au (+9% from 200225 koz) with a corresponding decrease in total cash costs to $660-$675/oz (from $695$745/oz). Capex guidance for 2014 was revised slightly higher to $58.5M from $48.5M, mainly reflecting higher capitalized stripping costs due to the increased production guidance. o We now model 2014 production of 233 koz Au at a total cash cost of $665/oz and estimate Q4/14 production of 60.4 koz at $607/oz. The 2014 guidance implies Q4/14 production of 57.5-62.5 koz, roughly on par with the third quarter as SEMAFO anticipates processing slightly more ore tonnes from the lower-grade Wona-Kona deposit. 62 o Mana SAG mill shell replacement still scheduled for Q1/15. The company expects to run on ball mills only processing principally softer, higher-grade ore from the Siou and Fofina deposits in order to minimize the impact of the SAG mill maintenance to its 2015 production profile. Siou Infill Drill Results Positive for Year-End Reserve Update ■ Positive infill assays from Siou. As part of its ongoing infill drilling at Siou, SEMAFO released a few highlight holes, including hole WDC-873 which intersected 14.46 g/t Au over 18.0 m and hole WDC-864 which intersected 6.75 g/t Au over 14.1 m in the Siou Zone 9 south ore shoot at a vertical depth of ~230 m (see Exhibit 2). Company management reiterated on the conference call that it feels confident it can replace gold ounces mined in 2014 at Siou and grow the reserve base. We expect the company will release an updated reserve estimate for Siou in early 2015. o We estimate that adding one additional year of mine life at Siou while maintaining the reserve grade would increase our NAVPS estimate by ~8.5% to C$4.02 from C$3.70 (note that our published NAVPS estimate of C$3.70 does not currently incorporate any upside to mineral reserves at Siou). Exhibit 2 – Potential Pit Extensions at the Siou Deposit Source: Company reports. ■ Initial results from RC drilling around the Siou intrusive promising, but more drilling is needed. RC drilling has started up again after the rainy season to expand on results from the east contact of the Siou intrusive and within the South Apex; however, the company notes that further drilling will be required to better understand the geological controls and continuity of the mineralization (see Exhibit 3). 63 Exhibit 3 – Exploration Priority Targets in the Siou Intrusive Area Source: Company reports. Burkina Faso Beginning to Stabilize After Recent Civil Unrest ■ Former Burkina Faso President Blaise Compaoré was forced from power on October 31, 2014, following civilian protests against his plan to seek re-election and extend his 27year rule by amending the country’s constitution. ■ Lieutenant-Colonel Isaac Zida was installed by the military to lead the nation after Compaoré fled. According to the Burkina Faso constitution, the nation is required to hold elections within 90 days, but with the military having suspended the constitution, it is unclear when Burkina will be returned to civilian rule. ■ The African Union originally issued an ultimatum requiring a return to civilian rule with a two week deadline but this ultimatum was recently rejected by the country’s military leadership. ■ Operations at Mana were uninterrupted by the protests, which occurred mainly in the capital city of Ouagadougou, ~260 km from the mine. All of SEMAFO’s on-site employees are accounted for and safe, and the company notes that Mana’s power supply is independently secured by a series of on-site diesel generators. ■ Supply chain unaffected, only a slight delay to Mana’s grid power connection. On the conference call, SEMAFO indicated that gold shipments and deliveries of spare parts and consumables continue as normal. There has been a delay in getting consultants to oversee the final commissioning of the substation for Mana’s grid power connection but the company expects that if the grid power connection is not complete by the end of 2014, it will be by early 2015 (SEMAFO anticipates ~$50/oz cost savings from the transition). 64 AGM Deadline Approaching for SEMAFO’s Orbis Gold Hostile Bid ■ Orbis Gold’s AGM is scheduled for November 28 at 9:00 a.m. AEST in Brisbane, Australia. This corresponds to Thursday, November 27, at 6:00 p.m. Eastern Time. At the AGM, Orbis shareholders will be voting on an A$20M rights issue (priced at A$0.60/sh). ■ In its November 6 press release, SEMAFO states that if Orbis shareholders vote in favour of the A$20M rights issue, it would effectively be a vote for Orbis to continue as a standalone company. One of SEMAFO’s bid conditions (announced October 15, 2014) was that there be no prescribed occurrences including the issuance of shares by Orbis other than those shares issued as a result of the exercise of Orbis options on issue as at the announcement date. SEMAFO’s Share Price Offers Attractive Entry Point – Reiterate SO Rating ■ We reiterate our Sector Outperform rating and C$4.50 one-year target price following SEMAFO’s announcement of a non-binding proposal for Orbis Gold. Our NAVPS decreases slightly to C$3.70 (-1%) as we have updated our model for the Q3/14 financial results. We have not updated our valuation for Natougou pending the outcome of SEMAFO’s hostile bid for Orbis Gold. ■ We view the proposed Orbis transaction positively as it is 12.7% NAV accretive based on our scenario analysis using conservative modelling assumptions for Natougou. Higher grades at Natougou in years 1 and 2 of production are also a good strategic fit for SEMAFO, in our view, as we currently see the high-grade Siou and Fofina deposits at the company’s Mana mine being depleted by 2019. However, given that Orbis’ board of directors has rejected SEMAFO’s proposal saying that it undervalues the company, for SEMAFO to be successful in a bid for Orbis we believe it may need to sweeten the deal, which could be done by increasing the purchase price, adding a share component to the allcash offer, or by offering to spin out Orbis’ exploration assets (Nabanga, Bantou, Korhogo in Cote d’Ivoire, and other smaller regional exploration properties) into a funded SpinCo entity. ■ With the outcome of SEMAFO’s Orbis bid uncertain, we continue to believe that nearterm upside to our valuation is likely to come from either a discovery at Pompoi Nord as part of the $20 million 2014 exploration program or the company successfully extending the mine life at Siou without decreasing the reserve grade. ■ No argument that SEMAFO is a top-tier junior producer, current valuation offers attractive entry point. We view SEMAFO as a top-tier company based on (1) its strong management team, (2) a solid track record of meeting guidance (over the last six years), (3) its ability to generate significant estimated positive free cash flow of $37 million in 2014 and $85 million in 2015 at spot gold prices, and (4) near- and long-term production growth prospects from Siou, Fofina, and other potential discoveries. o Now is the opportunity to gain exposure to a high-quality gold producer at a good price. SEMAFO tends to trade at a steep premium to peers but is currently trading at 0.85x P/NAV and 5.0x 2015E P/CF vs. peers at 0.78x and 6.4x, respectively. ■ Upcoming potential share price catalysts. o November 27 – Orbis Gold’s AGM (9:00 a.m. on November 28 in Brisbane, Australia; 6:00 p.m. on November 27, Eastern Time). o Q4/14 - Exploration results from auger and reverse circulation drilling along the Kokoi Trend and eastern contact of the Siou intrusive. o Q4/14 – Results of deep diamond drilling at Siou. Two core rigs arrived on site in June 2014 to carry out infill drilling between 180 and 225 meters of vertical depth. o Late 2014 – Mana expected to be connected to the national power grid. 65 Exhibit 4 – SEMAFO Free Cash Flow Forecast at $1,160/oz Spot Gold (2014E to 2018E) SEMAFO Inc. SC Gold Price Forecast 2014E ($/oz) Production/Cost Profile $1,256 2015E $1,160 2016E $1,160 2017E $1,160 2018E $1,160 2014E 2015E 2016E 2017E 2018E Gold Production (koz) 233 266 253 228 265 Cash Costs (US$/oz) ($/oz) $664 $566 $602 $644 $549 2014E 2015E 2016E 2017E 2018E Cash Flow Profile Net Operating Cash Flow ($M) $115 $123 $106 $92 $125 Capital Expenditures ($M) ($78) ($38) ($28) ($28) ($17) Net Cash Provided by Financing Activities ($M) $6 $0 $0 $0 $0 Increase in Cash and Cash Equivalents ($M) $36 $85 $78 $64 $108 Cash at Beginning of Period ($M) $83 $118 $203 $281 $345 Cash at End of Period ($M) $118 $203 $281 $345 $454 Free Cash Flow ($M) $37 $85 $78 $64 $108 Free Cash Flow per Share ($/sh) $0.13 $0.31 $0.28 $0.23 $0.39 (x) 23.6x 10.3x 11.2x 13.7x 8.1x P/FCF Source: Scotiabank GBM estimates. ScotiaView Analyst Link 66 Company Comment Tuesday, November 11, 2014, After Close (STKL-Q US$13.81) (SOY-T C$15.60) SunOpta Inc. Q3/14 Results Miss - First Take Christine Healy, CPA, CA - (416) 863-7902 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: High Alexandru Palivan - (416) 863-7940 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: US$13.00 ROR 1-Yr: -5.9% Valuation: 10.5x Food, 6.0x Opta Minerals FTM EBITDA (one-year forward) Key Risks to Target: consumer demand, project execution, weather, commodity prices Div. (NTM) Div. (Curr.) $0.00 $0.00 Yield (Curr.) 0.0% Event ■ STKL reported Q3/14 adj. EBITDA of $18.1M and adj. EPS of $0.11 (excluding Mascoma impairment charge and FX gain), below our est. of $22.9M/$0.13 and the Street at $21.6M/$0.11. The miss was largely due to lower-than-expected revenue across all segments (decline in commodity prices, FX, plant downtime), and weaker margins in Consumer Products and Opta Minerals. A lower tax rate partially offset. Implications ■ SunOpta Foods missed expectations. Revenue of $283M was 5% below our forecast, but 6% above Q3/13. Operating income of $15.1M (5.3% margin) was 12% below our forecast of $17.1M (5.7% margin). ■ Lower margins in Consumer Products led the miss. Segment revenue of $101M and operating income of $6.1M were below our estimates of $114M and $8.9M. Revenue and margins were hurt by down-time at both aseptic plants (for upgrades), weaker margins in resealable pouches, and costs related to the retrofit of a juice plant. ■ Opta Minerals (OPM) was weak. OPM reported weaker margins than expected (2.5% vs. our est. of 6.5%). The strategic review is ongoing. ■ Mascoma impairment. On Oct. 31/14, Mascoma sold assets related to its yeast business. STKL wrote down its investment by $8.4M. ■ We will update model post-call. STKL will host a call on Nov. 12/14 at 10:00 am EST to discuss results (1-877-312-9198 or 631-291-4622). Recommendation ■ We maintain our one-year target of $13.00/share and our SP rating. Qtly Adj EBITDA (M) 2012A 2013A 2014E 2015E Q1 Q2 Q3 Q4 Year $17.7 A $15.5 A $17.6 A $25.2 $20.3 A $18.4 A $23.2 A $27.6 $17.7 A $15.1 A $22.9 $26.8 $12.0 A $10.9 A $21.8 $25.1 $67.7 $59.9 $85.5 $104.7 EV / EBITDA 8.4x 14.2x 13.1x 10.8x 2011A $0.10 $-0.08 47.7x $52.8 $1,020 2012A $0.36 $0.47 15.6x $67.7 $1,091 2013A $0.27 $0.45 37.7x $59.9 $1,182 2014E $0.46 $0.74 29.8x $85.5 $1,326 2015E $0.60 $0.86 22.9x $104.7 $1,429 (FY-Dec.) Adj Earnings/Share Cash Flow/Share Price/Earnings Adj EBITDA (M) Revenues (M) Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) BVPS14E: $5.62 ROE14E: 8.40% Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. ScotiaView Analyst Link All values in US$ 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. $945 $167 $1,130 68 59 67 Summary of Q3/14 Results ■ Exhibit 1 summarizes SunOpta’s third quarter results and provides a comparison with our estimates and prior year results. Exhibit 1 - SunOpta Q3/14 Results Summary ($M, except per share) Revenue COGS Gross margin Gross margin (%) SG&A 1 Adj. EBITDA margin (%) Adj. EPS 1 1 Q3/14 Actuals Estimates % change 318.5 280.8 37.7 11.8% 24.6 335.8 291.8 44.0 13.1% 26.0 -5% -4% -14% 18.1 5.7% $0.11 22.9 6.8% $0.13 -21% -5% -11% Q3/13A % change 302.7 271.2 31.5 10.4% 20.7 15.1 5.0% $0.07 5% 4% 20% 19% 19% 61% Adjusted to exclude FX gains/losses, non-recurring items, and results from discontinued operations Source: Company reports; Scotiabank GBM estimates. ■ We have summarized the quarterly financial results of the individual segments and provided a comparison to our estimates and prior-year results in Exhibit 2. Exhibit 2 - SunOpta Q3/14 Segmented Results Summary ($M) Global Sourcing and Supply Revenue Operating Income Margin (%) Q3/14 Actuals Estimates % change Q3/13A % change 146.1 6.4 4.4% 147.7 6.2 4.2% -1% 3% 136.1 1.1 0.8% 7% nmf Value Added Ingredients Revenue Operating Income Margin (%) 35.4 2.6 7.3% 37.1 2.0 5.5% -4% 27% 34.1 2.0 5.9% 4% 27% Consumer Products Revenue Operating Income Margin (%) 101.2 6.1 6.0% 114.0 8.9 7.8% -11% -32% 97.6 7.3 7.4% 4% -16% SunOpta Foods Revenue Operating Income Margin (%) 282.7 15.1 5.3% 298.8 17.1 5.7% -5% -12% 267.8 10.4 3.9% 6% 44% Opta Minerals Revenue Operating Income Margin (%) 35.9 0.9 2.5% 37.0 2.4 6.5% -3% -63% 34.9 1.7 4.9% 3% -47% -3.3 -2.6 nmf -2.3 nmf Corporate Services Source: Company reports; Scotiabank GBM estimates. ScotiaView Analyst Link 68 Company Comment Tuesday, November 11, 2014, Pre-Market (VIV-N US$19.18) (VIVT4-SA R$48.76) Telefonica Brasil SA Q3: Solid Postpaid, Good EBITDA Growth Andres Coello - +52 (55) 5123 2852 (Scotiabank Inverlat) [email protected] Rating: Sector Outperform Risk Ranking: Medium Ivan Hernandez - +52 (55) 5123 2876 (Scotiabank Inverlat) [email protected] Target 1-Yr: US$26.00 ROR 1-Yr: 41.7% Valuation: DCF - 5 years results, 8.6% WACC in US$, terminal growth rate of 4.0% Key Risks to Target: Lower-than-guided synergies from GVT merger; expensive acquisitions Div. (NTM) Div. (Curr.) Yield (Curr.) $1.18 $1.18 6.2% Event ■ VIV reported revenues of R$8.72B (up 1.2% YOY and slightly above our R$8.71B estimate), EBITDA of R$2.55B (up 7.0% YOY, slightly below our R$2.57B estimate), and net income of R$1.0B (above our R$0.97B estimate). Implications ■ With more than 1.0M additions in Q3, VIV is delivering postpaid growth comparable only to that of the leading operators in developed markets. In fact, with 34.0% of its base already under contract, VIV surpassed Entel Chile as Latin America's most postpaid operator, a tremendous achievement, in our view. ■ MOU expanded 6.1% YOY, while churn came down slightly on a yearly basis. Despite the MTR cut, ARPU at R$23.6 grew 0.9% sequentially and remained close to flat against the prior year (-0.2%). Data revenues expanded 20.6% YOY, helping service revenues to grow 3.5% YOY and offsetting the decline in wireline. ■ The EBITDA margin expanded 157 bp on a YOY on the back of good cost controls. Of note, VIV grew EBITDA more than TSU (7.0% vs. 6.4% YOY). Net income was supported by lower depreciation thanks to a recent revision in the life of assets. Net debt closed the quarter at only 0.14x LTM EBITDA. Recommendation ■ We believe that after the merger with GVT, VIV will emerge as one of the best telecom stories in emerging markets. Buy. Qtly Revenues (M) 2013A 2014E 2015E 2016E (FY-Dec.) Earnings (ADS)/Share Price/Earnings Relative P/E Revenues (M) EBITDA (M) Current Ratio EBITDA/Int. Exp Q1 Q2 Q3 Q4 Year $4,185 A $3,649 A $3,647 $4,119 $4,015 A $3,864 A $3,486 $4,090 $3,768 A $3,843 A $4,113 $4,120 $3,982 A $3,835 $4,365 $4,380 $15,950 $15,192 $15,611 $16,709 Price/Rev enue 1.35x 1.42x 2.03x 1.89x 2012A $2.00 12.0x 0.7x $17,197 $6,439 1.2x 14.5x 2013A $1.51 12.7x 0.8x $15,950 $4,866 1.3x 13.5x 2014E $1.74 11.0x 0.7x $15,192 $4,469 0.9x 9.8x 2015E $1.20 16.0x 1.0x $15,611 $5,095 1.0x 12.3x 2016E $1.40 13.7x 0.8x $16,709 $5,862 1.0x 12.9x BVPS14E: $11.11 ROE14E: 10.37% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) (ADS) Float O/S (M) (ADS) $31,625 $2,117 $33,742 ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in US$ 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. 1,649 432 69 Highlights of VIV's Q3/14 Results Exhibit 1 - Highlights of Telefonica Brasil's Q3/14 Results (in BRL million unless otherwise stated) Revenues Q3/14A Q3/14E Act. Vs. Est. Q2/14A Q3/13A QoQ% YoY% Voice 3,419 3,491 -2.1% 3,405 3,650 0.4% -6.3% Data 2,125 2,082 2.1% 2,013 1,762 5.5% 20.6% 86 55 57.3% 112 26 -23.6% 227.9% 309 301 2.6% 294 301 5.0% 2.7% Total Mobile revenues 5,938 5,928 0.2% 5,824 5,739 2.0% 3.5% Fixed-line voice revenues 1,374 1,368 0.4% 1,393 1,525 -1.3% -9.9% Fixed-line interconnection revenues 100 111 -9.7% 106 118 -5.3% -15.2% Data 925 926 -0.1% 915 904 1.1% 2.3% Pay-TV 153 152 0.2% 145 124 5.2% 23.3% Other services Equipment revenues Other services 234 230 1.9% 234 208 0.0% 12.4% Total fixed-line revenues 2,786 2,787 0.0% 2,793 2,879 -0.2% -3.2% Total revenues 8,724 8,715 0.1% 8,617 8,618 1.2% 1.2% Total operational costs 6,176 6,141 0.6% 6,071 6,237 1.7% -1.0% EBITDA 2,548 2,574 -1.0% 2,546 2,381 0.1% 7.0% EBITDA margin 29.2% 29.5% -33 29.5% 27.6% -34 157 EBITDA in US$ 1,122 1,134 -1.0% 1,142 1,041 -1.7% 7.8% Net income 1,022 967 5.7% 1,993 760 -48.7% 34.5% EPS (in R$) 0.91 0.86 5.7% 1.77 0.68 -48.7% 34.5% EPADR (in US$) 0.40 0.38 5.7% 0.79 0.30 -49.6% 35.5% Net adds prepaid -548 -350 56.6% -365 -1,039 50.1% -47.3% Net adds postpaid 1,014 900 12.7% 1,257 1,453 -19.3% -30.2% 466 550 -15.3% 892 414 -47.8% 12.6% Total wireless net additions Fixed voice accesses 13 5 168.0% 98 61 -86.7% -78.7% Fixed broadband 17 50 -66.0% -51 46 -133.3% -63.0% Pay TV 40 43 -7.0% 43 51 -7.0% -21.6% Total wireline net additions 70 98 -28.5% 90 158 -22.2% -55.7% Source: Company reports; Scotiabank GBM estimates. ScotiaView Analyst Link 70 Intraday Flash Tuesday, November 11, 2014 @ 3:39:50 PM (ET) Thompson Creek Metals Company Inc. (TCM-T C$2.44) (TC-N US$2.15) Q3/14 Results Above Forecast Due to Lower Depreciation/Tax; Mt. Milligan Struggles Continue Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: High Target 1-Yr: Dalton Baretto, MBA, CFA - (416) 863-7623 (Scotia Capital Inc. - Canada) [email protected] C$2.10 ROR 1-Yr: -13.9% Valuation: 50% of 7.0x 2015E EV/EBITDA + 50% of 8% NAV Key Risks to Target: Commodity, operating, development, balance sheet Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.00 0.0% Event ■ Thompson Creek released its Q3/14 financial results. Pertinent Revisions Implications Adj. EPS14E Adj. EPS15E Adj. EPS16E ■ TCM reported Q3/14 adjusted EPS of $0.17, well above our estimate of $0.06 and consensus of $0.08 due to markedly lower depreciation and taxes. While production/sales results were pre-released, cash costs of $0.77/lb Cu and $6.77/lb Mo were in line with our estimates. ■ The company re-affirmed all of its 2014 guidance, including Mt Milligan reaching a sustainable operating level of ~80% of design by year-end. However, the operation achieved average throughput of only 42,340 tpd in October (71% of design), up slightly from 67% in Q3/14. ■ TCM plans to make a decision on the secondary crusher ($50M-$75M budget) at Mt Milligan in January 2015. The company also confirmed that it plans to proceed with the scaled strip project at the Thompson Creek mine upon closure at year-end. We note that our estimates already assume that the company proceeds with both projects. Recommendation ■ In our view, a high debt level, ongoing ramp-up risk at Mt. Milligan, a poor outlook for molybdenum, and an unattractive relative valuation are likely to overhang the shares. However, the company's liquidity is reasonable. TCM is rated Sector Perform with a 12 month target of C$2.10 per share. Our C$2.10 target is based on a 50/50 mix of 7.0x our 2015E EV/EBITDA (C$2.36) and 1.0x our 8% NAV estimate (C$1.93). Qtly Adj. EPS (FD) 2013A 2014E 2015E 2016E Q1 $0.00 A $0.02 A $-0.03 $0.00 (FY-Dec.) Adj EPS Cash Flow/Share Price/Earnings Revenues (M) EBITDA (M) Q2 $0.06 A $0.10 A $-0.03 $0.01 Q3 $-0.04 A $0.17 A $-0.01 $0.02 Q4 $-0.17 A $0.01 $0.00 $0.03 Year $-0.03 $0.32 $-0.08 $0.06 P/E n.m. 6.7x n.m. 35.5x 2014E $0.32 $0.83 6.7x $838 $249 2015E $-0.08 $0.22 n.m. $799 $154 2016E $0.06 $0.35 35.5x $870 $198 2017E $0.16 $0.45 13.5x $928 $230 2018E $0.30 $0.52 7.3x $1,088 $274 BVPS14E: $5.01 ROE14E: 5.62% NAVPS: P/NAV: New US$0.32 US$-0.08 US$0.06 Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) Old US$0.17 US$-0.14 US$0.00 C$528 $498 C$1,091 C$1.93 1.26x Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in US$ 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. 216 44 71 Q3/14 Results Well above Forecast due to lower depreciation and taxes ■ Thompson Creek Metals reported a headline Q3/14 earnings loss of $11.1 million, or $0.05 per share. However, after excluding a $49.4 million non-cash after-tax F/X loss, the company reported adjusted earnings of $38.3 million or $0.17 fd, which was well above our estimate of $12.9 million or $0.06 per share and the consensus estimate of $0.08 per share (range $0.06 to $0.13). The results benefited from markedly lower-than-expected depreciation and taxes, as the company’s gross margin (before depreciation) of $95.9 million was only marginally above our forecast of $90.3 million. We note that production and sales volumes Exhibit 1 - TCM Q3/14 Variances Reported Q3/14A BNS Q3/14E Variance with Est. % Change Reported Q2/14A Variance Qtr-over-Qtr % Change Reported Q3/13A Variance Yr-over-Yr % Change Production: Total Molybdenum (000 lbs) Thompson Creek Endako Copper (000 lbs) Gold (000 ozs) 6,560 4,073 2,487 16,267 60,366 6,600 4,100 2,500 16,300 60,400 -0.6% -0.7% -0.5% -0.2% -0.1% 7,481 5,108 2,373 16,035 37,030 -12.3% -20.3% 4.8% 1.4% 63.0% 8,536 5,716 2,820 1,021 1,937 -23.1% -28.7% -11.8% NM NM Sales: Molybdenum (000 lbs) Thompson Creek Endako Purchased and processed product Copper (000 lbs) Gold (000 ozs) 8,913 4,026 2,706 2,181 16,500 57,900 9,200 4,000 2,700 2,500 16,500 57,900 -3.1% 0.6% 0.2% -12.8% 0.0% 0.0% 9,689 5,469 1,970 2,250 21,939 51,983 -8.0% -26.4% 37.4% -3.1% -24.8% 11.4% 8,320 5,519 1,913 888 1,021 1,937 7.1% -27.1% 41.5% 145.6% NM NM Costs: Molybdenum cash cost (per lb) Thompson Creek Endako Copper cash cost (per lb) $6.77 $4.54 $10.42 $0.77 $6.99 $4.60 $10.90 $0.73 -3.1% -1.3% -4.4% 5.6% $6.25 $3.97 $11.17 $0.33 8.2% 14.4% -6.7% 133.3% $5.93 $4.30 $9.23 nm 14.2% 5.6% 12.9% nm Prices: Realized molybdenum price (per lb) Realized copper price (per lb) $13.94 $3.02 $12.67 $3.07 10.0% -1.8% $13.03 $3.20 7.0% -5.6% $10.30 3.23 35.3% -6.5% 124,300 100,700 4,300 229,300 133,400 22,700 156,100 116,576 110,557 3,000 230,133 139,823 31,155 170,978 6.6% -8.9% 43.3% -0.4% -4.6% -27.1% -8.7% 126,300 118,900 3,200 248,400 148,200 33,000 181,200 -1.6% -15.3% 34.4% -7.7% -10.0% -31.2% -13.9% 85,700 5,100 90,800 64,100 14,400 78,500 45.0% NM -15.7% 152.5% 108.1% 57.6% 98.9% 73,200 47% 59,155 35% 23.7% 35.5% 67,200 37% 8.9% 26.4% 12,300 16% 495.1% 199.3% 3,100 900 5,100 300 165,500 63,800 79,700 (15,900) (4,800) 30.2% (11,100) 49,400 38,300 3,500 500 6,000 500 (40) 181,438 48,695 20,717 27,977 15,061 53.8% 12,916 12,916 -11.4% 80.0% -15.0% NM -40.0% NM -8.8% 31.0% 284.7% NM NM -43.9% NM NM 196.5% 3,600 900 5,200 200 191,100 57,300 (18,800) 76,100 14,500 19.1% 61,600 (39,600) 22,000 -13.9% 0.0% -1.9% NM 50.0% NM -13.4% 11.3% NM NM NM 58.4% NM NM 74.1% 1,400 600 5,100 700 86,300 4,500 (13,500) 18,000 4,200 23.3% 13,800 (21,400) (7,600) 121.4% 50.0% 0.0% NM -57.1% NM 91.8% NM NM NM NM 29.4% NM NM NM ($0.05) $0.18 ($0.05) $0.17 $0.06 $0.06 $0.06 $0.06 NM 196.5% NM 194.5% $0.35 $0.13 $0.28 $0.10 NM 42.0% NM 74.0% $0.08 ($0.04) $0.06 ($0.04) NM NM NM NM INCOME STATEMENT (US$000s) Molybdenum sales Copper and Gold sales Tolling, Calcining and other Total Revenues Operating expenses Depreciation, depletion and amortization Total Costs of sales Gross Margin Gross Margin % Selling and marketing Accretion expense General and administrative Acquisition costs Exploration Other Total Costs and Expenses Operating Income Other expenses (income) Income Before Taxes Income tax Tax rate Net Income Adjustments Adjusted Net Income Basic earnings per share Adjusted basic earnings per share Diluted earnings per share Adjusted diluted earnings per share Source: Company reports; Scotiabank GBM estimates. 72 were pre-released on October 14th (please see our note from October 14th titled ‘Q3/14 Operating Results – Mt. Milligan Throughput Struggles Continue’). We have detailed the variances to our estimates in Exhibit 1. ■ The results improved from the Q2/14 adjusted earnings of $22.0 million (or $0.10 per share), also largely due to lower depreciation and taxes, and from the Q3/13 adjusted loss of $7.6 million (or $0.04 per share) principally on the back of the ramp-up at Mt. Milligan. ■ Total revenue of $229.3 million was in line with our estimate of $230.1 million; however, the company’s gross margin (before depreciation) of $95.9 million (or 42%) was slightly above our estimate of $90.3 million (or 39%) despite unit operating costs that were largely in line. ■ The Q3/14 gross margin (before depreciation) of $95.9 million (or 42%) declined slightly from the Q2/14 level of $100.2 million (or 40%) on lower metal sales, but markedly improved from the Q3/13 level of only $26.7 million (or 29%) largely due to the ramp up at Mt. Milligan. Mt Milligan: ramp up continues to struggle in October ■ As previously reported, in its fourth full quarter of operation, Mt. Milligan produced 16.3 million lbs of payable copper, up only 1.4% from Q2/14 levels. However, production of 60,400 ozs of payable gold, increased by 63.0% QOQ due to markedly higher grades. ■ Mt Milligan throughput averaged only 40,455 tpd (or 67% of design) in Q3/14 which was only slightly above the Q2/14 level of 38,543 tpd (or 64% of design). Throughput was negatively impacted by downtime related to various adjustments required to the grinding and flotation circuits, as well as some minor mechanical and electrical issues. In the earnings release, the company disclosed that the operation achieved only marginally better average throughput of 42,340 tpd in October (or 71% of design), due to various shutdowns for maintenance and repair. Despite the relatively weak October throughput levels, TCM reiterated its previous guidance of Mt. Milligan achieving a sustainable throughput rate of ~80% of design by year-end (this appears to be a relatively optimistic target in our view). ■ The company continues to conduct testing to validate the need for a secondary crusher (estimated capital cost of $50 million-$75 million). A decision on the secondary crusher project is now expected in January 2015 (previously year-end 2014). Our estimates already assume the company moves forward with a secondary crusher in 1H/15 at a capital cost of $65 million. Exhibit 2 - Mt. Milligan forecast production and cash cost profile 70,000 $3.00 60,000 $2.50 50,000 $2.00 40,000 $1.50 30,000 $1.00 20,000 $0.50 10,000 0 $- Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 E Q1/15 E Copper production (000s lbs) Source: Company reports; Scotiabank GBM estimates. Q2/15 E Q3/15 E Gold production (oz) Q4/15 E Q1/16 E Copper cash costs ($/lb) Q2/16 E Q3/16 E Q4/16 E 73 ■ Q3/14 copper and gold recoveries of 83% and 67% compare to our forecast of 81% and 67%, and the Q2/14 levels of 80% and 65%, respectively. Head grades of 0.25% Cu and 0.79 g/t were also in line with our estimates of 0.26% Cu and 0.78 g/t. We note that the gold head grade compared to only 0.52 g/t in Q2/14. Head grades are expected to decline moving forward. ■ YTD 2014 payable copper production of 46.5 million lbs represents 71% of the low end of the company’s reiterated full-year guidance range of 65.0 million-75.0 million lbs, implying that the mine will need to further ramp-up in November and December to achieve even the low end of guidance. YTD 2014 payable gold production of 136,639 ozs represents 74% of the low end of the reiterated guidance range of 185,000 – 195,000 ozs. ■ Q3/14 cash costs at Mt. Milligan of $0.77/lb were in line with our estimate of $0.73/lb. Cash costs increased from the very low Q2/14 costs of $0.33/lb (which were distorted by catch up gold sales from previous quarters). We continue to note that unit cash costs are not particularly meaningful given the relatively early stage of the ramp-up. Nevertheless, the company reiterated its full-year cash cost guidance to $1.00-$1.50/lb (costs are $1.14/lb YTD). ■ Copper and gold sales for the quarter, as previously disclosed, totalled 16.5 million lbs and 57,900 ounces, in line with production levels. The company realized an average copper price of $3.02/lb in Q3/14, which was in line with our forecast of $3.07/lb. Molybdenum Operations: Thompson Creek reduced scale stripping program confirmed; Endako under pressure ■ As previously reported, the company produced 6.6 million lbs of molybdenum in Q3/14, down 12.3% from the Q2/14 level of 7.5 million lbs, and 23.1% from the Q3/13 level of 8.5 million lbs. However, YTD 2014 molybdenum production of 21.9 million lbs represents 86% of the mid-point of the company’s reiterated full-year guidance range of 24.0 million-27.0 million lbs, reflecting the wind-down of the Thomson Creek mine in Q4/14. ■ Q3/14 cash costs of $6.77/lb were in line with our estimate of $6.99/lb. We note that the YTD 2014 cash costs of $6.23/lb are 8% below the bottom end of the reiterated full-year guidance of $6.75-$7.75/lb, implying significantly higher unit costs in Q4/14, we presume due to the impending wind down of production at Thomson Creek. ■ Cash costs at Thompson Creek of $4.54/lb were in line with our estimate of $4.60/lb, but were modestly higher than the Q2/14 level of $3.97/lb and the Q3/13 level of $4.30/lb. We note that costs at the Thompson Creek mine remain unsustainably low due to the company’s decision in October 2012 to cease stripping activities associated with Phase 8 of the mine plan. ■ The company confirmed that it plans to initiate a scaled stripping program for Phase 8 at Thompson Creek in conjunction with the care and maintenance program scheduled to begin in early 2015. The modest stripping program is expected to cost $8 million-$10 million per year (versus the total stripping capital cost guidance of $80 million-$100 million required to re-start production), and is in addition to the care and maintenance cost guidance of $6 million-$8 million per year. In addition, the company intends to continue with the tailings wall slope management program, at a cost of $35 million in 2015/2016. The stripping program can be accelerated once market conditions improve, and therefore provides significant flexibility. The Phase 8 stripping program is estimated to take ~15 months at full effort; on the other side of the spectrum, it would take ~10 years to complete the program if the low strip program was maintained indefinitely. Our estimates assume the low strip program is maintained in 2015 and 2016, before materially accelerating in 2017, with the mine resuming operations in 2018. ■ The operating performance at Endako continues to struggle, with mill head grades and recoveries both lower than our estimates as well as Q2/14 and Q3/13 levels. However, the company indicates that the mine’s historical inability to provide a consistent feed supply from the mine to the mill has been tackled through a series of technical improvements and adjustments, and mill availability has begun to improve as a result of these changes. While 74 Exhibit 3 - Thompson Creek forecast total molybdenum production and cash cost profile 12,000 $18.00 $16.00 10,000 $14.00 $12.00 $10.00 ($/lb) (000s lbs) 8,000 6,000 $8.00 4,000 $6.00 $4.00 2,000 $2.00 0 $Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Thompson Creek Q4/13 Q1/14 Endako Q2/14 Q3/14 Q4/14 E Q1/15 E Q2/15 E Q3/15 E Molybdenum cash costs Source: Company reports; Scotiabank GBM estimates. these improvements are encouraging, we continue to adopt a wait-and-see approach prior to modelling further throughput improvements. ■ Q3/14 cash costs of $10.42/lb were in line with our estimate of $10.90/lb, and compare to cash costs of $11.17/lb in Q2/14 and $9.23/lb in Q3/13. While the mine has benefited from the weakening of the Canadian dollar this year, we note that the Q3/14 cash costs of $10.42/lb are markedly higher than the current molybdenum spot price of ~$9.20/lb as well as our 2015 forecast of $10.00/lb, even before considering the cash flow impact of sustaining capital. Given the relatively high cost structure of the mine, the company disclosed that it is reviewing options for Endako, which may include a temporary closure until molybdenum prices improve. ■ The company sold 8.9 million lbs of molybdenum in Q3/14, 3.1% below our forecast of 9.2 million lbs. As sales from Thompson Creek and Endako were previously disclosed, the variance versus our estimate is due to markedly lower-than-expected sales of purchased and processed product. However, more than offsetting the lower sales, TCM realized a surprisingly high average molybdenum price of $13.94/lb for the quarter, $1.27/lb or 10.0% above our forecast of $12.67/lb. Over-levered balance sheet, but liquidity looks fine ■ As at the end of Q3/14, Thompson Creek had cash (including restricted cash) of $268 million and total debt of $903 million, resulting in a relatively weak net debt position of $629 million (or $2.94 per share). This compares to a net debt position $680 million (or $3.90 per share) as at June 30th, 2014. The company’s total debt to capitalization ratio stood at a relatively high 45.8% as at the end of Q3/14. We forecast the company to exit 2014 with a cash balance of $287 million, resulting in a slightly lower net debt balance of $611 million (or $2.85 per share). Our forecast trough cash balance remains comfortably above the company’s minimum cash balance target of $75 million-$100 million. While the company has an overleveraged balance sheet, we view the potential for a near-term liquidity crisis as low. Our estimates assume that the company refinances $300 million of debt in 2017 and $230 million in 2018 to meet its debt obligations due in the 2017 to 2019 periods. Q4/15 E Q1/16 E Q2/16 E Q3/16 E Q4/16 E 75 Exhibit 4 - Thompson Creek forecast cash balance by quarter (excludes restricted cash) 600 560 527 500 469 410 400 365 403 360 303 323 295 300 285 267 234 200 203 216 Q1/14 Q2/14 266 238 213 206 163 100 0 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q3/14 Q4/14 E Q1/15 E Q2/15 E Q3/15 E Q4/15 E Cash Balance ($MMs) Source: Company reports; Scotiabank GBM estimates. Exhibit 5 - TCM Forecast Debt to Capitalization 50% 45% 46% Exhibit 6 - TCM Forecast Net Debt (Cash) per share 46% $5.00 46% 43% 45% $3.97 $4.00 40% 40% $2.85 $3.00 35% $3.09 $2.98 $2.95 2015E 2016E 2017E $2.19 $2.00 30% 25% $1.00 20% $0.20 17% $- 15% 2010A 2012A 2013A 2014E $(1.00) 10% 5% 2011A $(2.00) 2% $(2.03) 0% 2010A 2011A 2012A 2013A 2014E 2015E 2016E $(3.00) 2017E Source: Company reports; Scotiabank GBM estimates. Source: Company reports; Scotiabank GBM estimates. Exhibit 7 - TCM Forecast Operating and Free Cash Flow per share $1.50 $1.00 $0.50 $0.00 2013A 2014E 2015E 2016E 2017E -$0.50 -$1.00 -$1.50 -$2.00 -$2.50 OCFPS Source: Company reports; Scotiabank GBM estimates. FCFPS 2018E 2019E 2020E 76 Revisions to Estimates ■ We have made no material changes to our 2014-2016 production and cash cost estimates following the Q3 results. However, we have adjusted our depreciation assumptions at Endako following the company’s adjustment to its depreciation schedules at the mine. In addition, we have adjusted our capital and ramp-up assumptions at the Thompson Creek mine following the updated guidance on stripping costs. ■ Our revised 2014-2016 EPS estimates of $0.32, $(0.08), and $0.06 compare to our previous estimates of $0.17, $(0.14), and $(0.00). Our revised CFPS estimates of $0.83, $0.22, and $0.35 compare to our previous estimates of $0.48, $0.27, and $0.37, with the change in 2014 largely due to changes in our working capital assumptions. Our revised 8% NAVPS is C$1.93 (versus our previous NAVPS of C$2.13). Our revised 10% NAV is C$1.37. Our estimates of TCM’s sensitivities to copper and molybdenum prices are detailed in Exhibits 8 and 9. Exhibit 8 - Thompson Creek sensitivity to copper prices Exhibit 9 - Thompson Creek sensitivity to molybdenum prices -20% ($0.23) -203% -10% ($0.15) -102% 0% ($0.08) 10% $0.00 102% 20% $0.08 203% EPS - 2015 CFPS - 2015 $0.05 -77% $0.13 -38% $0.22 $0.30 38% $0.38 77% EBITDA - 2015 102 -34% 128 -17% 154 180 17% 8% NAVPS (C$) $0.23 -88% $1.08 -44% $1.93 $2.78 44% EPS - 2015 Source: Scotiabank GBM estimates – based on a $3.15/lb 2015 copper price -20% ($0.15) -92% -10% ($0.11) -46% 0% ($0.08) 10% ($0.04) 46% 20% ($0.01) 92% CFPS - 2015 $0.14 -37% $0.18 -19% $0.22 $0.26 19% $0.30 37% 206 34% EBITDA - 2015 131 -15% 142 -8% 154 166 8% 178 15% $3.63 88% 8% NAVPS (C$) $0.89 -54% $1.39 -28% $1.93 $2.47 28% $3.00 56% Source: Scotiabank GBM estimates – based on an $10.00/lb 2015 moly price Conclusions ■ While the Q3/14 results were well above our forecast, we view the quality of the earnings beat as relatively poor as it was driven by markedly lower depreciation and taxes, rather than operating performance. In our view, at Mt. Milligan, meeting the low end of 2014 copper production guidance and the year-end throughput exit rate of ~80% of design will likely both be a challenge. The ongoing throughput struggles at Mt. Milligan provide further evidence that a secondary crusher is likely required for the operation to reach anywhere near the full nameplate capacity of 60,000 tpd. Finally, in our view, the staged plan to re-start prestripping at Thompson Creek is a prudent investment as it provides restart optionality. However, given the relative cost position, Endako is now on the brink of closure as well (we forecast the mine to generate negative free cash flow of $6 million in 2015 based on a molybdenum price of $10.00/lb). Valuation ■ Thompson Creek currently trades at a 2015E and 2016E EV/EBITDA of 7.0x and 5.9x respectively, versus the peer group average of 5.9x and 4.0x. In addition, the company trades at 1.27x our 8% NAV of C$1.93 per share, versus the peer group average of 0.71x. Recommendation ■ In our view, a high debt level, ongoing ramp-up risk at Mt. Milligan, a poor outlook for molybdenum, and an unattractive relative valuation are likely to overhang the shares. However, the company’s liquidity is reasonable. TCM is rated Sector Perform with a 12 month target of C$2.10 per share. Our C$2.10 target is based on a 50/50 mix of 7.0x our 2015E EV/EBITDA (C$2.36) and 1.0x our 8% NAV estimate (C$1.93). 77 Exhibit 10 - Thompson Creek Metals Financial and Operating Summary Annual Growth Profile METAL PRICE FORECAST (per LB) Molybdenum LME copper LME gold (per oz) PRODUCTION FORECAST Molybdenum (M lbs) - Contained Copper (M lbs) - Payable Gold ('000 ozs) - Payable 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2014E 2015E 2016E $15.88 $3.42 $1,226 $15.81 $4.00 $1,572 $12.65 $3.61 $1,669 $10.21 $3.33 $1,414 $11.85 $3.14 $1,271 $10.00 $3.15 $1,300 $10.50 $3.40 $1,300 $11.50 $3.60 $1,300 $12.50 $3.85 $1,300 $12.50 $4.00 $1,300 $12.50 $4.00 $1,300 16% -6% -10% -16% 0% 2% 5% 8% 0% 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2014E 2015E 2016E 33 28 22.4 - 29.9 10 20 26.7 66 189 10.8 82 204 10.8 83 237 10.7 87 233 20.5 78 250 17.2 76 273 14.0 88 217 -11% NM NM -60% 25% 8% 0% 1% 16% - - UNIT COST FORECAST (per LB) 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2014E 2015E 2016E Average Molybdenum Cash Cost Average Copper Cash Cost $5.96 $0.00 $7.94 $0.00 $10.09 NA $6.49 $0.00 $6.54 $1.11 $10.02 $1.08 $9.95 $0.89 $9.95 $0.98 $10.05 $0.82 $9.86 $0.56 $8.40 $1.07 1% NM 53% -2% -1% -18% INCOME STATEMENT FORECAST (in millions) 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2014E 2015E 2016E Net Sales Cost of Sales and Operating Expenses Depreciation and Depletion Selling, General, and Administrative Exploration Operating Earnings Interest Expenses Other Expenses (Income) Income and Mining Taxes (Recovery) Minority Interest Net Earnings 595 316 50 31 9 $189 1 54 20 669 400 67 36 14 $151 5 (157) 11 401 380 64 36 2 ($80) 14 563 (111) $434 319 61 31 1 $22 26 275 (63) 838 521 111 37 1 $168 93 (0) 2 799 568 101 38 1 $90 86 21 870 590 102 38 1 $139 85 42 928 616 106 38 1 $166 78 53 1,088 729 111 38 1 $208 71 71 1,021 641 104 38 1 $237 57 89 972 593 112 38 1 $228 48 83 $114 $292 ($546) ($215) $73 ($17) $13 $35 $65 $91 $96 93% 64% 81% 20% -43% NM 266% NM NM NM NM -5% 9% -8% 2% 63% -47% -8% NM NM NM NM 9% 4% 0% 0% -8% 55% -2% NM 101% NM NM Adjusted Net Earnings $114 $124 ($35) ($5) $67 ($17) $13 $35 $65 $91 $96 NM NM NM Net Earnings Per Common Share (FD) $0.75 $1.73 ($3.24) ($1.26) $0.07 ($0.08) $0.06 $0.16 $0.30 $0.41 $0.44 NM NM NM EBITDA $0.75 239 $0.73 218 ($0.20) (16) ($0.03) $82 $0.32 249 ($0.08) 154 $0.06 198 $0.16 230 $0.30 274 $0.41 291 $0.44 300 NM 202% NM -38% NM 29% CASH FLOW FORECAST (in millions) Adjusted Net Earnings Per Common Share (FD) 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2014E 2015E 2016E Net Earnings Depreciation, Deferred Taxes, & Minority Interest Cashflow From Operations 114 44 $157 292 (89) $203 (546) 464 ($83) ($215) 260 $45 14 159 $172 (17) 64 $48 13 64 $77 35 64 $99 65 48 $114 91 79 $171 96 93 $190 NM -39% 285% NM -59% -72% NM -1% 61% Cashflow Per Share (FD) Sustaining Capital Project Capital Expenditures Free Cashflow to Firm $1.03 ($67) (147) ($56) $1.20 ($72) (629) ($498) ($0.49) ($39) (725) ($846) $0.21 ($10) (494) ($459) $0.83 ($27) (56) $90 $0.22 ($54) (65) ($71) $0.35 ($52) $25 $0.45 ($93) $6 $0.52 ($24) $90 $0.77 ($45) $126 $0.86 ($22) $168 301% NM NM NM -74% NM NM NM 61% NM NM NM Free Cashflow to Firm Per Share (FD) Net Financing Activities (Ex. Equity/Dividends) Free Cashflow to Equity ($0.37) $228 $172 ($2.95) $470 ($28) ($5.02) $858 $12 ($2.12) $110 ($349) $0.43 ($26) $64 ($0.32) ($8) ($79) $0.11 $0 $25 $0.03 ($48) ($42) $0.41 ($120) ($30) $0.57 ($200) ($74) $0.76 $0 $168 NM NM NM NM NM NM NM NM NM Free Cashflow to Equity Per Share (FD) Equity Issues (Repurchases) Dividends All Other Sources (Uses) of Cash Net Source (Use) of Cash $1.13 $8 (22) $158 ($0.17) $26 (20) ($22) $0.07 $220 38 $269 ($1.61) $1 21 ($328) $0.31 $0 (13) $50 ($0.36) $0 ($79) $0.11 $0 0 $25 ($0.19) $0 ($42) ($0.14) $0 ($30) ($0.34) $0 ($74) $0.76 $0 $168 NM NM NM NM NM NM NM NM NM NM NM NM NM NM NM BALANCE SHEET FORECAST (in millions) 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2014E 2015E 2016E Cash and marketable securities Accounts Receivable Inventories Other Current Assets Total Current Assets Property, Plant and Equipment Other Assets Total Assets $316 73 107 21 $517 1,696 105 $2,318 $295 79 114 15 $502 2,359 133 $2,994 $564 59 159 22 $804 2,539 67 $3,410 $236 54 188 18 $496 2,538 52 $3,086 $287 70 150 6 $513 2,369 89 $2,970 $208 74 159 6 $446 2,386 89 $2,922 $232 77 166 6 $482 2,337 89 $2,907 $190 81 174 6 $452 2,324 89 $2,865 $160 95 204 6 $465 2,237 89 $2,791 $85 89 191 6 $373 2,178 89 $2,639 $253 85 182 6 $527 2,088 89 $2,703 21% 29% -20% -64% 3% -7% 72% -4% -28% 6% 6% 0% -13% 1% 0% -2% 12% 4% 4% 0% 8% -2% 0% 0% Accounts payable and accrued liabilities Other current liabilities Total Current Liabilities Long-term debt debt Deferred Taxes Deferred Revenue Other Liabilities Shareholders' Equity Total Liabilities & Shareholders' Equity 65 17 82 17 337 453 1,430 $2,318 186 32 218 361 262 365 59 1,730 $2,994 129 51 180 922 138 670 100 1,402 $3,410 105 76 181 907 13 759 119 1,106 $3,086 80 92 172 899 16 710 102 1,072 $2,970 85 96 181 890 21 673 102 1,055 $2,922 88 100 188 890 30 630 102 1,068 $2,907 93 100 192 842 38 587 102 1,103 $2,865 109 100 208 722 48 542 102 1,169 $2,791 102 100 202 522 62 492 102 1,260 $2,639 97 100 197 522 74 452 102 1,356 $2,703 -24% 22% -5% -1% 21% -6% -15% -3% -4% 6% 4% 5% -1% 32% -5% 0% -2% -2% 4% 4% 4% 0% 39% -6% 0% 1% 0% Source: Company reports; Scotiabank GBM estimates. 78 Company Comment Wednesday, November 12, 2014, Pre-Market (TA-T C$11.00) (TAC-N US$9.73) TransAlta Corporation Shining Light on Sundance Matthew Akman, MBA - (416) 863-7798 (Scotia Capital Inc. - Canada) [email protected] Lukasz Michalowski, MBA - (416) 863-5915 (Scotia Capital Inc. - Canada) Dario Neimarlija, CA, CFA - (416) 863-2852 (Scotia Capital Inc. - Canada) Rating: Sector Outperform Target 1-Yr: C$14.00 ROR 1-Yr: Risk Ranking: Medium Valuation: 7.3% 2015E Free Cash Yield and 9.1x 2015E EV/EBITDA 33.8% Div. (NTM) Div. (Curr.) Yield (Curr.) $0.72 $0.72 6.5% Key Risks to Target: Power Prices; Interest Rates; Environmental Regulations; Re-contracting Event ■ TA is holding an analyst meeting and tour of its Sundance Power Plant facilities and coal mine on Friday. Implications ■ The Alberta coal plants probably have more hidden value than any of the other assets in the company's portfolio. The renewables have a lot of value but that is already common knowledge and perception. ■ In a research report dated April 9 ("Coal Conundrum"), we reasoned that the coal plants were undervalued in the stock because they generate so little free cash at this time. ■ Yet, they could generate $300M - $400M of additional annual EBITDA post-2020 even under conservative power price assumptions. But realizing this value requires that the plants operate properly at that time. ■ We believe the Sundance plant tour is meant to raise confidence in the longevity of the coal plants and to dispel concerns that the assets lack the ability to run until their legislated end-of-life (late-2020s). Recommendation ■ If the plants can run through the end of their legislated life, we believe the stock is undervalued by 30%+ relative to its NAV. Other concerns linger (SO2 regulations, credit ratings) but regardless of the outcome on these matters, asset value should surface one way or the other. We maintain our Sector Outperform rating and $14 target price. Qtly EBITDA (M) 2013A 2014E 2015E 2016E Q1 Q2 Q3 Q4 Year $267 A $310 A $257 $247 A $213 A $283 $266 A $212 A $249 $242 A $274 $236 $1,023 $1,009 $1,025 $1,025 EV / EBITDA 9.0x 8.4x 8.3x 8.4x 2012A $0.91 $1.16 9.0x 128% $1,015 4.2x 56% $9,152 2013A $0.57 $1.16 9.0x 205% $1,023 4.2x 56% $9,193 2014E $1.03 $0.72 8.4x 70% $1,009 4.1x 53% $8,472 2015E $1.02 $0.72 8.3x 70% $1,025 4.1x 54% $8,466 2016E $1.02 $0.72 8.4x 71% $1,025 4.3x 56% $8,570 (FY-Dec.) Free Cash Flow/Share Dividends/Share EV/EBITDA Payout Ratio EBITDA (M) Debt/EBITDA Tot. Debt/(Tot.Dbt+Eq.) Enterprise Value (M) Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $3,007 $4,862 $8,450 273 273 79 Shining Light on Sundance ■ Seven years ago investors built large positions in TA and drove the stock up above $35 on the notion that there was hidden value in the Alberta coal plants once the PPAs expired in 2020. Oddly, seven years later, everybody seems to think upside beyond the PPA expiry is too far out to reflect in the share price. Or, perhaps instead confidence has been lost in the integrity of the plants and their ability to operate with sufficient reliability to actually capture that value. ■ Some loss of confidence would be justified based on plant operating performance. It has been about 10 years and about 20 unplanned outages since TA conducted a tour of its Alberta coal plants. The most material of these outages occurred at Sundance 1 & 2 which the company deemed “economically destroyed” due to boiler fatigue. But the other Sundance units have experienced their fair share of problems, including some temporary and not terribly material unplanned outages just last quarter. ■ Outages cannot be avoided completely but management clearly wants to leave the analyst community with the impression that any outages will be just that – temporary and immaterial. And part of the convincing lies in tangible evidence the company has been investing and will continue to invest sufficient capital to avoid major problems. How else to explain agenda items for the upcoming tour such as “View Sundance 5 & 6 New ICMS Unit in Control Room” and “View Spare Stator For Installation 2015”. Whether these investments achieve their objectives remains to be seen but it should not be an intellectual stretch to think that spending $350M/year on maintenance capital is sufficient to extend the plant lives. ■ Many of the recent investor fears surround TA’s credit rating as opposed to its plant operations. In February Moody’s placed the Baa3 senior unsecured credit rating on watch with negative implications. The rating agency targeted a 19% FFO-to-debt ratio as required for maintenance of the investment grade rating and quantified the probability of a downgrade at 1-in-3. We believe investors are concerned the company may further reduce its common share dividend in order to protect the credit rating. ■ We concur that unless there are further changes in company structure, TA will likely fall short of the 19% Moody’s target. Our 2015 forecasts imply year-end ratios of only about 17%-18%. Accelerating drop-downs (asset sales) to RNW might be the only realistic way of achieving the Moody’s target ratios in the 12-month timeframe. In our estimation, asset sales of $500M - $750M (enterprise value) would likely be required in order to maintain investment grade. Such sales would likely be about 10% dilutive to free cash per share but should not threaten the dividend as we now estimate excess coverage of about 30%. ■ A better question than how to meet the Moody’s target is why the company would want to meet it. The peer U.S. companies such as NRG, Calpine and Dynegy are all non-investmentgrade. They function well and trade at premium valuations to TA (about 10x EV/EBITDA vs. 8.3x for TA). The shares of U.S. peers have performed much better than TA in recent years despite that some of them maintain significant coal fleets and inferior credit ratings. ■ Management of TA noted on the 3Q’14 conference call that the company wants to maintain an investment grade credit rating in support of its growth strategy. The thought apparently is that industrial counterparties will not contract with TA for new capacity if it is noninvestment-grade. Whether this is true or not, we believe shareholders are best served by first surfacing the value of existing assets and then worrying about adding value through growth later. Raising equity (or selling assets on a dilutive basis which is tantamount to the same thing) could destroy more value. If anything, the company should be buying back stock, not issuing stock or paying down large amounts of debt, while it trades below NAV. ■ Furthermore, the Moody’s target simply demonstrates that unless the company can turn debt and equity investor sentiment around in the next year, the value of TA’s assets are likely best maximized in the hands of a larger and/or more stable company. In the hands of a more stable entity, we believe ratings agencies would require a much lower coverage ratio on these assets than 19% in order to maintain investment grade. ■ Most of our companies maintain solid BBB or better credits with only 10%-15% required coverage ratios. And many of those companies such as EMA and TRP have significant 80 ■ ■ ■ ■ ■ ■ unregulated power assets. With contracted cash flows and visible significant upside later in the decade, and considering the low level of bond yields, we believe catering to an unreasonable 19% coverage ratio would be a mistake for this company and its shareholders. Other recent fears have arisen around the exceptionally weak cash flows from Centralia lately. In 2012 the plant contributed about $200M of gross margin and has only contributed $83M in the first nine months of this year. But that is surely old news. In a report from November 1 2012 (“Ahead of the Fundamentals”) we quantified a potential $100M+ gross margin headwind as a result of hedges rolling off, which is exactly what has occurred. But that’s the point – it has already occurred and Centralia’s gross margin and cash flow are bottoming out now, in our opinion. Much of the plant’s contribution is derived from contracts for the sale of power. With contracts, the company can make money during periods of high power prices by selling its open capacity and also during periods of very low prices by purchasing power in the market and delivering into its contracts. A contract with local utility Puget Energy ramps up from 180 MW in 2015 to 380 MW by 2017 and will protect any further downside while creating opportunity for material upside in our view. We would not be surprised if there is no improvement in 2015 but over the next few years we now see more upside than downside from Centralia. Similarly, we believe Alberta power prices and therefore cash flow from the Alberta plants are more-or-less bottoming out. Normally the power price should reflect what is required for construction of new plants. We have reasoned in the past that this price is ~$60/MW-hr and should escalate with inflation. The wildcard is whether market participants will overbuild, thereby depressing prices for several years below that level. Yet all of the major companies have publicly expressed their views that $70/MW-hr+ power is required to entice new build. So in the absence of a big uptick in the forward curve from today’s ~$50/MW-hr level, we assume most of the large proposed new projects will be delayed or cancelled. Following that logic, even CPX has stated in its recent investor presentation that timing on construction of its 50% contracted Genesee 4 & 5 (G4/5) units will “depend on load growth in the province”. CPX has published a ~$80/MW-hr Alberta power price forecast for the end of the decade so we assume if forward 2017/18 prices don’t start pushing well north of $60/MW-hr by 2016 then G4/5 will be delayed from its 2018-2020 timeframe. Furthermore, though the G4/5 contract with Calgary electric utility Enmax was not disclosed, we assume it implies $70/MW-hr+ power because this price is consistent with the CPX forecast and stated threshold for building new capacity. If this assumption is correct, it signals that at least one major customer in Alberta (Enmax) is willing to hedge into the medium-term at prices that are much higher than today’s near-term forward curve. Pricing concerns aside, incremental bad news may come on the need for investment in pollution abatement equipment. However, in our opinion that is already more than reflected in the stock. The Alberta government hasn’t yet responded to a divided stakeholder report (CASA) on whether to alter provincial SO2 and NOx emission rules. But in a report dated September 16 (“Scrubbing Coal Plants and NAV”), we presented analysis showing that the NAV would likely not fall below $15/share even assuming the regulation is not changed in TA’s favour. TA’s investor day may begin to allay fears that the future value prospective company buyers saw back in 2007 is still there. At the same time, we are hopeful the board and management are in the mindset of surfacing asset value for shareholders rather than destroying it to appease rating agencies. And while we see no material improvement in financial performance for two years, we see little downside and a lot of upside starting in 2017/18. Therefore, we stand by our recent upgrade to Sector Outperform and maintain our $14 target price in advance of TA’s investor day later this week. 81 Exhibit 1 – TransAlta Corporation Financial Statement Summary Earnings and Per Share Data ($M) 2013 2014E 2015E 2016E Generation Energy Marketing Corporate and Other Adjusted EBITDA Depreciation, Amortization & Other Other income (expense) Net interest charges Earnings before tax & minority interest Income tax rate Income tax Non-controlling interests Equity earnings Preferred securities distributions Discontinued operations (operating) Operating earnings Unusual /non-recurring items Net earnings for common $1,029 $61 ($67) $1,023 ($584) $1 ($256) $184 14% ($26) ($29) ($10) ($38) $0 $81 ($152) ($71) $1,004 $62 ($56) $1,009 ($594) ($5) ($248) $162 13% ($21) ($43) $0 ($41) $0 $57 ($29) $28 $1,020 $50 ($45) $1,025 ($600) $0 ($236) $189 20% ($37) ($47) $0 ($47) $0 $59 $0 $59 $1,021 $50 ($46) $1,025 ($600) $0 ($227) $198 20% ($39) ($47) $0 ($47) $0 $66 $0 $66 Earnings per share -reported Earnings per share - operating Dividends per share ($0.27) $0.31 $1.16 $0.10 $0.21 $0.72 $0.21 $0.21 $0.72 $0.23 $0.23 $0.72 2013 2014E 2015E 2016E Change in non-cash working capital Cash from Operating Activities ($71) $585 $177 $691 $74 $765 $28 $592 $120 $740 ($29) $711 $59 $600 $110 $769 ($29) $740 $66 $600 $114 $780 $0 $780 Additions to capital assets Other & Asset Sales Cash Used in Investing Activities ($561) ($142) ($703) ($390) $98 ($292) ($531) ($14) ($545) ($679) ($14) ($693) Dividends on common shares Other Financing Activities Cash Used in Financing Activities Effect of translation on foreign cash ($306) $259 ($47) $0 ($224) ($30) ($255) $0 ($201) $93 ($108) $0 ($207) $103 ($104) $0 Increase (decrease) in cash Cash at beginning of year Cash at end of year $15 $27 $42 $164 $42 $207 $87 $207 $294 ($16) $294 $278 Balance Sheet ($M) 2013 2014E 2015E 2016E Cash Flow Statement ($M) Net Income Depreciation and amortization Other items (inc. NCI, Pref. dividends) Cash & Equivalents Other Current Assets Net PP&E Other Assets Total Assets $42 $705 $7,193 $1,843 $9,783 $207 $616 $7,176 $1,521 $9,520 $294 $616 $7,121 $1,478 $9,509 $278 $616 $7,214 $1,458 $9,566 Current Portion of Long Term Debt Other Current Liabilities Long Term Debt Other Liabilities Non-Controlling Interest Preferred Equity Total Liabilities Common Equity Total Liabilities & Shareholders' Equity $209 $643 $4,113 $1,395 $517 $781 $7,658 $2,125 $9,783 $716 $497 $3,410 $1,218 $581 $943 $7,364 $2,156 $9,520 $716 $434 $3,528 $1,272 $456 $943 $7,348 $2,161 $9,509 $716 $463 $3,653 $1,290 $331 $943 $7,396 $2,170 $9,566 Source: Company reports; Scotiabank GBM estimates. 82 Company Comment Tuesday, November 11, 2014, After Close (VIC-T C$12.66) Vicwest Inc. Vicwest Sold to Kingspan and Ag Growth Anthony Zicha - (514) 350-7748 (Scotia Capital Inc. - Canada) [email protected] Sami Abboud, MBA - (514) 350-7737 (Scotia Capital Inc. - Canada) Vincent Perri, CPA, CA, CFA - (514) 287-4990 (Scotia Capital Inc. - Canada) Rating: Tender Target 1-Yr: Risk Ranking: High Valuation: 6.5x EV/EBITDA on our 2016E. C$12.70 ROR 1-Yr: 5.1% Div. (NTM) Div. (Curr.) Yield (Curr.) $0.60 $0.60 4.7% Key Risks to Target: Decline in grain prices; slower-than-anticipated recovery in residential and commercial construction . Event Pertinent Revisions ■ Vicwest Inc. announced that it has agreed to be acquired for $12.70 per share ($350 million enterprise value; $224 million to shareholders). ■ Kingspan Group plc (KGP-L; not covered) is expected to acquire the Building Products division for $154.5 million inclusive of debt and reorganisation costs. ■ Ag Growth International (AFN-T; restricted) is expected to acquire the Westeel division for $221.5 million (enterprise value of $210 million and $11.5 million attributed to assets acquired at closing). Implications ■ The sale price represents a premium of 25.6% to the 20-day volumeweighted average price of Vicwest shares as of November 10, 2014. ■ The transaction is subject to a number of conditions, including the approval of at least 66.67% of the votes as well as customary court and regulatory approvals. The special meeting of Vicwest shareholders is expected to be held in January 2015. ■ We note that holders of approximately 15.6% of outstanding Vicwest common shares, including all of Vicwest's directors and officers, have agreed to vote their common shares in favour of the arrangement. Recommendation ■ We have lowered our target price to $12.70 per share. This implies an EV/EBITDA multiple of 6.5x on our 2016E. We have changed our rating on Vicwest Inc. shares to Tender from Sector Outperform. Qtly EBITDA (M) 2013A 2014E 2015E 2016E Q1 Q2 Q3 Q4 Year $-2 A $-3 A $9 $13 $7 A $6 A $11 $12 $12 A $13 A $10 $11 $2 A $13 $12 $14 $18 $29 $42 $50 EV / EBITDA 19.3x 11.4x 8.1x 6.4x 2012A $412 $34 $0.68 $1.40 $2.60 4.8x 8.1% 2.60x 2013A $395 $18 $-0.28 $0.39 $1.98 6.6x 4.7% 9.46x 2014E $463 $29 $0.28 $1.04 $1.94 6.5x 6.3% 3.67x 2015E $504 $42 $0.88 $1.56 $2.29 5.5x 8.2% 2.56x 2016E $562 $50 $1.24 $1.91 $2.99 4.2x 8.9% 1.84x (FY-Dec.) Revenues (M) EBITDA (M) Adj EPS Cash Flow/Share Book Value/Share Price/Book EBITDA Margin Net Debt/EBITDA/Share BVPS14E: $1.94 New Rating: T Target: 1-Yr $12.70 EBITDA16E $50 New Valuation: 6.5x EV/EBITDA on our 2016E. Old Valuation: 6.8x EV/EBITDA on our 2016E. Old SO $14.00 $51 Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $223 $118 $348 18 18 83 Company Comment Tuesday, November 11, 2014, After Close (WIR.U-T US$10.34) WPT Industrial REIT Q3 Peek: In Line, Strong Fundamentals & Growth Pammi Bir, CPA, CA, CFA - (416) 863-7218 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Outperform Risk Ranking: Medium Ganan Thurairajah, MBA - (416) 863-2899 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: US$11.50 ROR 1-Yr: 18.0% Valuation: 13.5x AFFO (F'16 estimate) Key Risks to Target: Significant unitholder, inability to execute growth, rising interest rates CDPU (NTM) CDPU (Curr.) Yield (Curr.) $0.70 $0.70 6.8% Event ■ WPT reported Q3/14 FFOPU of $0.25 vs. $0.24 last year, in line with our $0.25 estimate and consensus ($0.25). Implications ■ In line with minor variances. G&A was $0.01/unit below our forecast, but offset by higher interest costs. The 6.9% YOY FFOPU growth was driven by acquisitions, higher occupancy in the IPO properties, and lower G&A costs, partly offset by dilution from financing activities. ■ Fundamentals solid as occupancy climbs up. Occupancy improved to a solid 98.9% (+190bp QOQ, +200bp YOY). We believe the bulk of the increase relates to Honeywell International's 160K sf (1.3% of GLA) expansion into vacant space at 6766 Pontius Rd. (Columbus, OH). ■ Liquidity modestly increased post-Q3; leverage improves. Available liquidity from undrawn lines is expected to rise to $15M-$20M (vs. $5M at Q3) with two unencumbered properties to be added to the borrowing base. D/GBV sits at a reasonable 51.3%, down from 52.7% at Q2. ■ IFRS terminal cap rate down 19bp QOQ to 7.1% (-46bp YTD), with the drop attributable to modest cap rate compression. Units are trading at a current 6.9% implied cap rate, in line with our 6.9% NAV cap. Recommendation ■ Full update post Nov. 12th conference call (11 a.m. ET; 1-866-605-3851). Qtly FFOPU (FD) 2013A 2014E 2015E 2016E Q1 $0.25 A $0.27 $0.26 (FY-Dec.) Funds from Ops/Unit Adj. Funds from Ops/Unit Cash Distributions/Unit Price/AFFO EV/EBITDA EBITDA Margin EBITDA/Int. Exp AFFO Payout Ratio Q2 $0.18 A $0.24 A $0.26 $0.26 Q3 $0.24 A $0.25 $0.26 $0.26 Q4 $0.24 A $0.26 $0.26 $0.26 Year $0.66 $1.00 $1.05 $1.04 P/FFO 13.1x 10.3x 9.8x 9.9x 2012A 2013A $0.66 $0.50 $0.48 17.2x 20.8x 66.1% 3.3x 94.9% 2014E $1.00 $0.77 $0.70 13.4x 17.1x 67.0% 3.4x 90.6% 2015E $1.05 $0.83 $0.70 12.4x 16.4x 67.8% 3.3x 83.9% 2016E $1.04 $0.84 $0.71 12.3x 15.9x 68.4% 3.2x 84.6% BVPU14E: $9.98 Cap Rate: 6.90% NAVPU: NAV Prem/(Disc): $10.47 -1.24% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Units O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in US$ 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. $304 $322 $627 29 13 84 Company Comment Tuesday, November 11, 2014, After Close (WSP-T C$36.00) WSP Global Inc. Q3 Beat: Lots of Growth Mark Neville, CFA - (514) 350-7756 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Outperform Risk Ranking: Medium Michael Doumet, CFA - (514) 350-7778 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: C$45.00 ROR 1-Yr: 29.2% Valuation: 10.0x EV/EBITDA on 2016E Key Risks to Target: Integration risk; slower-than-anticipated recovery in commercial and residential construction . Event ■ WSP reported better-than-expected Q3 results: EBITDA came in at $66.4 million vs. consensus of $64.0 million and our estimate of $60.4 million. Implications Div. (NTM) Div. (Curr.) Yield (Curr.) $1.50 $1.50 4.2% Pertinent Revisions EBITDA14E EBITDA15E EBITDA16E New $248 $405 $464 Old $250 $414 $458 ■ The company benefited from strong global organic growth (+6.0%) and FX tailwinds (+6.3%), and generated better-than-expected margins. Furthermore, the company indicated its Canadian operations (ex. Focus) were seeing signs of stabilization, while Focus continued to generate strong results (+9.4% organic growth). ■ In the context of the Parsons Brinckerhoff (PB) acquisition, WSP reported (1) 12.3% organic growth in the United States, (2) 16.5% organic growth in the UK, and (3) 2.2% organic growth in Australia. Given we expect PB's U.S. operations to generate approximately 78% of PB's 2015 EBITDA, and its U.K. and Australian operations to improve from near break-even levels, we believe these positive underlying trends should be supportive of our view that WSP could see similar benefits from the PB acquisition as it did from the WSP transaction (e.g., timing, improving regional operations, and synergies). ■ We have made modest changes to our estimates. Our $45.00/share target and Sector Outperform rating are unchanged. Recommendation ■ We view WSP as a proven acquirer, having generated superior growth and returns metrics through well-timed strategic acquisitions. Qtly EBITDA (M) 2013A 2014E 2015E 2016E Q1 Q2 Q3 Q4 Year $37 A $42 A $94 $107 $43 A $55 A $99 $115 $47 A $66 A $108 $125 $45 A $85 $104 $117 $172 $248 $405 $464 EV / EBITDA 9.6x 9.4x 8.0x 7.1x 2012A $1.86 $1.50 80.7% $1,020 $113 11.1% 1.11x 2013A $1.84 $1.50 81.5% $1,677 $172 10.2% 0.68x 2014E $2.04 $1.50 73.5% $2,352 $248 10.6% 2.87x 2015E $2.07 $1.50 72.4% $4,246 $405 9.5% 1.45x 2016E $2.58 $1.50 58.1% $4,392 $464 10.6% 0.88x (FY-Dec.) Free Cash Flow/Share Dividends/Share Payout Ratio Revenues (M) EBITDA (M) EBITDA Margin Net Debt/EBITDA BVPS14E: $33.96 ROE14E: 6.42% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $3,152 $696 $3,848 88 57 85 Q3 Results Beat ■ WSP’s Q3 came in above our estimates and consensus: EBITDA came in at $66.4 million vs. consensus of Exhibit 1 - Results Beat $64.0 million and our estimate of $60.4 million (see Exhibit 1). Results beat our estimates on both top Revenue line and margins. Strong Global Growth EBITDA EBITDA Margin % Q3/14 Actuals Scotiabank $537.4M $66.4M 12.4% $509.2M $60.4M 11.9% ■ Organic revenue growth, on a constant currency basis, came in at 6.0% driven by continued strength in the U.S. EPS $0.47 $0.47 (+12.3%), UK (+16.5%), and ROW (+17.6%). FCF (before WC) $0.70 $0.52 Organic sales growth in the U.S. was driven by strength in the Buildings and EBITDA Margin % Canada 17.8% 15.6% Infrastructure markets. The U.S. United States 14.2% 14.0% operations also benefited from favorable United Kingdom 10.7% 9.5% FX (+12.2%). Northern Europe 10.9% 13.0% The company continues to add headcount Rest of World 9.8% 8.5% in the U.K. (+300 employees YTD) in support of robust activity levels: London Source: Company reports; Scotiabank GBM estimates. metropolitan area very active + witnessed a healthy increase in levels of bidding outside of London. FX also had a +14.9% impact in the Q. ROW results were driven by WSP’s Middle East and Asian operations where the biggest challenges are staffing, project selection, and working capital management. Columbia and Australia also positive organic growth. On Australia, the company indicated that (1) organic growth was 2.2% in Q3, (2) WSP and PB both secured meaningful contracts recently, and (3) the operations were profitable. WSP’s European operations also posted positive organic growth (+2.9%), despite continued contraction in the company’s German operations. Signs of Stabilization in Canada ■ The company indicated its Canadian operations (ex. Focus) were seeing signs of stabilization, declining 4.4% YOY compared to the previous two quarters when the regions experienced YOY declines in excess of 10% – the decline was once again driven by the Industrial and Energy sectors in Eastern Canada. Focus had another strong quarter, delivering +9.4% organic growth. EBITDA margin came in well above expectations on reduced administrative expenses (the company reduced headcount by Exhibit 2 – Securing a Larger Book of Business approximately 200 employees in the quarter). Backlog Up ■ At the end of Q3, backlog stood at $1,881.8 million (up 2.7% sequentially), representing 9.2 months of work. The company also had $587.8 million of soft backlog (see Exhibit 2). Q3 book-to-bill came in at 1.1x. On a sequential basis, backlog was up in the U.S., Europe, and ROW, but down in Canada and the UK (likely an anomaly as we expect the region to continue to grow). Expect More M&A ■ The company closed the acquisition of Parsons Brinckerhoff on October 31, 2014 – see our September 22 DE comment, Source: Company reports; Scotiabank GBM. +/$28.2M $6.0M 0.5% ($0.01) $0.18 2.2% 0.2% 1.2% (2.1%) 1.3% Consensus $522.0M $64.0M 12.3% $0.52 86 “A Move Fit for Big Ambitions”, for a full discussion/our views on the transaction. ■ At the end of Q4 we estimate net debt-to-EBITDA (pro forma) at 2.0x, in line with the company’s target of 1.5x to 2.0x. Furthermore, we estimate the company will have over $400 million available on its credit facilities (and term loan) to fund additional strategic growth opportunities. On November 6, WSP announced the acquisition of Texas Energy Partners (ccrd), a 200-person engineering firm in Houston, Texas – ccrd is a building systems provider in the healthcare and energy sectors. The acquisition, while small, complements WSP's service offering, adds technical expertise in healthcare and science & tech. markets, and expands its geographic footprint. Dividend Well Covered ■ While the company is levered at 2.0x, we expect this to decline to 1.4x by the end of 2015 as we expect excess FCF to go towards debt repayment, in the absence of M&A activity. We are forecasting a 72% payout ratio in 2015. Inclusive of the DRIP, we estimate the “payout ratio” at 37%. Target and Rating Unchanged ■ We have made modest changes to our estimates. Our $45.00/share target and Sector Outperform rating are unchanged. ScotiaView Analyst Link 87 Company Comment Wednesday, November 12, 2014, Pre-Market (ZAR-T C$5.94) Zargon Oil & Gas Q3 In Line as Little Bow ASP Ramp-Up Nears Amid Uncertain Commodity Prices Patrick Bryden, CFA - (403) 213-7750 (Scotia Capital Inc. - Canada) [email protected] Riley Hicks, CA, MBA - (403) 213-7760 (Scotia Capital Inc. - Canada) Justin Strong, MBA - (403) 213-7328 (Scotia Capital Inc. - Canada) Rating: Sector Perform Target 1-Yr: C$7.50 ROR 1-Yr: 38.4% Risk Ranking: High Valuation: 0.7x our 2P NAV plus risked upside. Key Risks to Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program succes s Event ■ Zargon released third quarter results and an update on the Little Bow ASP project. Implications ■ Q3 results in line. Zargon's third quarter production averaged 6,054 boe/d, in line with our estimate of 6,000 boe/d and consensus estimate of 5,951 boe/d. Cash flow per share of $0.36 was also in line with our estimate of $0.39 and consensus estimate of $0.37. ■ Little Bow ASP sees production response. Increased injection pressures at seven of the eight ASP injection wells have been observed, which may be an indication that the oil bank within the reservoir has a higher than expected viscosity and EUR. ASP fluid movement and minor oil production responses have provided a positive indicator to ASP injections. ■ Guidance updated. Production guidance for Q4/14 was decreased modestly to 5,150 boe/d and 5,250 boe/d due to regulatory and thirdparty shut in in addition to delays in starting the fall drilling program. Initial 2015 production guidance forecasts non-ASP production of 4,000 bbl/d of oil and 6.4 mmcf/d of gas (5,067 boe/d). Recommendation ■ We maintain our SP rating but have elected to reduce our target price by 25% to $7.50/share given the impact of a lower commodity price environment. Qtly CFPS (FD) 2013A 2014E 2015E 2016E Q1 $0.46 A $0.50 A $0.38 $0.49 (FY-Dec.) Cash Flow/Share Dividends/Share Price/Cash Flow Pre-tax Cash Yield Q2 $0.53 A $0.39 A $0.42 $0.55 Q3 $0.55 A $0.36 A $0.46 $0.55 Q4 $0.40 A $0.43 $0.50 $0.55 Year $1.97 $1.71 $1.78 $2.17 P/CF 4.3x 3.5x 3.3x 2.7x 2012A $1.91 $1.08 4.4x 12.9% 2013A $1.97 $0.72 4.3x 8.5% 2014E $1.71 $0.72 3.5x 12.1% 2015E $1.78 $0.72 3.3x 12.1% 2016E $2.17 $0.72 2.7x 12.1% Div. (NTM) Div. (Curr.) $0.72 $0.72 Yield (Curr.) 12.1% Pertinent Revisions New Old Target: 1-Yr $7.50 $10.00 CFPS14E $1.71 $1.79 CFPS15E $1.78 $1.81 CFPS16E $2.17 $2.16 New Valuation: 0.7x our 2P NAV plus risked upside. Old Valuation: 0.9x our 2P NAV plus risked upside. Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) BVPS14E: $5.16 ROE14E: 0.90% Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $177 $128 $305 30 30 88 Third Quarter In Line ■ Q3 results in line. Zargon’s third quarter production averaged 6,054 boe/d, in line with our estimate of 6,000 boe/d and consensus estimate of 5,951 boe/d. Cash flow per share of $0.36 was also in line with our estimate of $0.39 and consensus estimate of $0.37. ■ Bellshill Lake and Taber update provided. Zargon spent $7.7 mm in the third quarter on facility upgrade, battery improvements and well completions at the company’s conventional oil exploration locations. Zargon plans to drill two wells at Taber targeting Sunburst and three wells in the Williston Basin targeting the Mississippian over the fourth quarter. ■ Disposition of legacy gas assets. Zargon previously announced the disposition of 5.6 mmcf/d of legacy gas assets in exchange for proceeds of $6.6 mm, which represents $7,071/boe/d. Management has indicated the 2014 disposition program is now complete. Little Bow ASP ■ Little Bow ASP sees production response. Increased injection pressures at seven of the eight ASP injection wells have been observed, which may be an indication that the oil bank within the reservoir has a higher than expected viscosity and EUR. ASP fluid movement and minor oil production responses have provided a positive indicator to ASP injections. For 2015 oil production from Little Bow is expected to be 700 bbl/d. ■ Preparations for oil production phase underway. Zargon continues to optimize completion intervals of producer and injector wells with the aim of achieving optimal conformance and recovery. While current production volumes are less than the 250 bbl/d baseline for pre-ASP project, significant ramp up of production at Little Bow is expected over the next few months. Zargon expects to report 2014 exit production volumes in midJanuary. Expected 2016 volumes remain unchanged at 1,550 bbl/d. Guidance Highlights Flexibility of Capital Program ■ 2014 production guidance updated. Production guidance for Q4/14 was decreased modestly to 5,150 boe/d and 5,250 boe/d due to regulatory and third-party shut in in addition to delays in starting the fall drilling program. Management reaffirms their belief that year-end exit production will exceed 4,200 bbl/d of oil and 6.8 mmcf/d of gas (5,333 boe/d). ■ Initial 2015 budget unchanged but flexibility exists in face of uncertain commodity prices. Initial 2015 production guidance forecasts non-ASP production of 4,000 bbl/d of oil and 6.4 mmcf/d of gas (5,067 boe/d). Management takes care to note that these production levels are dependent on the 2015 capital budget and the production profile of Little Bow. Capital from non-core capital programs may be channeled to ASP capital programs and dividends should low oil prices persist. The 2015 capital program will be revisited in the first quarter at which time new guidance may be provided. Investment Thesis ■ Scenario analysis. At US $80/bbl WTI and US $3.50/mcf HH, we see net debt to cash flow of 3.9x and an effective payout ratio of 170%. Should WTI prices hold level at US$80/bbl through 2015, we view the sustainability metrics of the business as challenged. 89 ■ A further word about our price deck assumptions.` Our estimates still reflect WTI price assumptions that are higher than current market prices. Our price deck is typically subject to quarterly update, which can impact our coverage universe target prices and ratings. While we have not revised our commodity price deck that was released in late September, given material deterioration in crude oil prices recently, we refer our readers to our Thursday, October 16 update Running WTI Scenarios: Commodity Prices Put Sector Under Pressure for scenario and sensitivity analysis for our income-focused oil and gas research coverage. We further include sensitivity tables in Exhibit 1, which provide a sense for how CFPS, D/CF and effective payout. Exhibit 1 - Sensitivity Analysis CFPS Sensitivities Current Scotia Deck Estimate: $1.78 Henry $2.00 Hub $2.50 $3.00 $3.50 $4.00 $4.50 $70 $0.89 $0.93 $0.96 $0.99 $1.02 $1.06 $75 $1.07 $1.10 $1.13 $1.16 $1.19 $1.23 $80 $1.24 $1.27 $1.30 $1.33 $1.37 $1.40 D/CF Sensitivities Current Scotia Deck Estimate: 2.7x Henry $2.00 Hub $2.50 $3.00 $3.50 $4.00 $4.50 $70 6.3x 6.1x 5.8x 5.6x 5.4x 5.2x $75 5.1x 5.0x 4.8x 4.6x 4.5x 4.3x $80 4.3x 4.2x 4.0x 3.9x 3.8x 3.7x $75 213% 207% 201% 195% 190% 185% $80 183% 179% 174% 170% 166% 162% WTI $85 $1.41 $1.44 $1.47 $1.51 $1.54 $1.57 $90 $1.58 $1.61 $1.64 $1.68 $1.71 $1.74 $95 $1.75 $1.78 $1.82 $1.85 $1.88 $1.91 $85 3.6x 3.5x 3.4x 3.3x 3.3x 3.2x $90 3.1x 3.1x 3.0x 2.9x 2.8x 2.8x $95 2.7x 2.7x 2.6x 2.5x 2.5x 2.4x $85 161% 157% 154% 151% 148% 144% $90 144% 141% 138% 135% 133% 130% $95 130% 127% 125% 123% 121% 119% WTI Effective Payout Sensitivities Current Scotia Deck Estimate: 128% $70 Henry $2.00 254% Hub $2.50 245% $3.00 237% $3.50 229% $4.00 222% $4.50 215% WTI Note: All other Scotiabank price deck assumptions unchanged in sensitivities. Source: Company reports; Scotiabank GBM estimates. ■ Rating and target price moderated. We have reduced our target price by approximately 25% to $7.50 and our rating to Sector Perform given the potential impact of a lower commodity price environment. Our target price represents a 2015E EV/DACF of 5.9x, which compares to the peer group average of 9.3x. ZAR currently trades at a 2015E EV/DACF of 5.3x, which compares to the peer group average of 7.4x. Exhibit 2 shows our financial and operating summary for ZAR. 90 Exhibit 2 - Financial & Operating Summary Fiscal Year End - December 31 2011A 2012A 2013A Q1/14A Q2/14A Q3/14A Q4/14E 2014E 2015E 2016E Price Deck Assumptions WTI Edmonton Par WCS Nymex Natural Gas AECO 30-Day Spot Exchange Rate US$/B C$/B C$/B US$/Mcf C$/Mcf US$/C$ $94.72 $95.37 $77.28 $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 $97.69 $98.31 $83.84 $3.93 $4.03 $0.92 $92.00 $96.39 $81.78 $4.10 $4.22 $0.90 $97.85 $100.21 $84.81 $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 $0.90 Daily Production Total Oil & Liquids Natural Gas Total Production Change in Total Production Percentage Natural Gas B/d Mmcf/d Boe/d % % 5,468 22.0 9,130 -8% 40% 5,255 17.2 8,117 -11% 35% 4,870 15.6 7,468 -8% 35% 4,320 14.1 6,662 -8% 35% 4,096 14.8 6,558 -2% 38% 4,194 11.2 6,054 -8% 31% 4,118 6.8 5,253 -13% 22% 4,181 11.7 6,127 -18% 32% 4,689 6.4 5,756 -6% 19% 5,572 7.2 6,780 18% 18% Financial Estimates Cash Flow from Operations Investment Cash Flows - Internal* Investment Cash Flows - M&A Financing Cash Flows Dist/Div [$mm] [$mm] [$mm] [$mm] [$mm] $60.7 -$81.1 $32.4 -$20.3 -$38.1 $56.7 -$67.0 $36.8 -$29.6 -$27.3 $58.5 -$41.4 $34.9 -$16.1 -$20.4 $15.3 -$9.5 $1.5 $5.2 -$5.4 $11.9 -$11.7 $3.3 $0.4 -$5.4 $10.9 -$7.7 $6.7 -$2.3 -$5.4 $13.0 -$7.0 $0.0 -$1.7 -$5.4 $51.1 -$36.0 $11.5 $1.5 -$21.7 $53.0 -$25.0 $0.0 -$7.0 -$21.7 $64.9 -$25.0 $0.0 -$19.4 -$21.7 Cash Flow Per Share - FD EBITDA EPS Distribution - Basic $/Share $/Share $/Share $/Share $2.12 $2.65 $0.36 $1.56 $1.91 $1.66 ($0.18) $1.08 $1.97 $1.55 ($0.20) $0.72 $0.50 $0.48 $0.01 $0.18 $0.39 $0.40 ($0.07) $0.18 $0.36 $0.46 $0.00 $0.18 $0.43 $0.51 $0.11 $0.18 $1.71 $1.87 $0.05 $0.72 $1.78 $2.10 $0.37 $0.72 $2.17 $2.52 $0.48 $0.72 Netbacks Revenue (pre-hedging) Hedging Gains (Losses) Royalties Operating Costs Transportation Costs Field Netback After-Tax Netback [C$/boe] [C$/boe] [C$/boe] [C$/boe] [C$/boe] [C$/boe] [C$/boe] $57.32 -$3.55 -$10.19 -$16.68 -$0.51 $26.39 $19.20 $53.16 -$0.05 -$10.14 -$15.92 -$0.53 $26.52 $19.40 $58.20 -$0.17 -$10.76 -$16.96 -$0.65 $29.66 $21.95 $67.16 -$3.83 -$11.21 -$17.04 -$0.85 $34.22 $26.61 $68.48 -$6.26 -$13.73 -$19.07 -$0.63 $28.78 $20.77 $67.17 -$3.71 -$13.38 -$17.71 -$0.70 $31.67 $20.66 $71.31 -$0.02 -$13.79 -$18.66 -$0.78 $38.06 $28.35 $68.41 -$3.62 -$12.98 -$18.10 -$0.74 $32.96 $23.94 $69.65 $0.16 -$13.55 -$18.89 -$0.81 $36.57 $26.48 $69.31 -$0.04 -$13.49 -$18.94 -$0.82 $36.01 $27.28 Valuation Measures EV/DACF EV/EBITDA P/E D/P EV per Boe/d x x x % $/Boe/d 7.8 6.8 16.4 26% 56,391 5.7 7.2 -32.9 18% 43,570 5.8 8.1 -30.1 12% 50,198 6.3 7.2 435.0 12% 63,456 7.2 8.1 -31.4 12% 59,247 6.1 5.5 449.0 12% 50,221 5.2 5.0 14.0 12% 58,591 5.4 5.5 122.1 12% 50,227 5.4 5.1 16.2 12% 56,018 4.5 4.3 12.3 12% 47,905 Credit Capacity Credit facility % Drawn [$mm] % $180 52% $165 22% $165 24% $165 31% $165 34% $165 36% $165 36% $165 36% $165 45% $165 46% Net Debt & Debentures Net Debt & Debentures EBITDA Cash Flow Net Debt, Debentures & Equity EV $/Share x x x % $3.91 1.5 1.9 0.3 22% $3.64 2.2 1.9 0.4 31% $4.03 2.6 2.1 0.4 32% $4.31 2.2 2.1 0.4 31% $4.46 2.8 2.8 0.5 35% $4.10 2.2 2.8 0.4 41% $4.23 2.1 2.4 0.5 41% $4.23 2.3 2.5 0.5 41% $4.71 2.3 2.7 0.5 44% $4.79 1.9 2.2 0.5 45% % % 57% 175% 175% 118% 37% 108% 168% 131% 35% 98% 147% 111% 46% 145% 186% 140% 50% 121% 168% 118% 42% 96% 129% 87% 42% 113% 156% 113% 41% 88% 128% 47% 33% 72% 101% 39% ----- ----- ----- ----- ----- 73% 0% 42% 66% 72% 0% 55% 66% 15% 0% 11% 14% 0% 0% 0% 0% Sustainability Payout Ratio - Simple Payout Ratio - Effective (no ASP) Payout Ratio - Effective (Including ASP) Capital Expenditures (Inc ASP)/ Cash Flow % 63% 197% 197% 134% Hedging Percentage of Light & Medium Oil Percentage of Heavy Crude Oil Percentage of Natural Gas Production Percentage of Total Production % % % % ----- *ASP spending included as separate project financing & included in forecasts Source: Company reports; Scotiabank GBM estimates. Equity Event Wednesday, October 15, 2014 Equity Event: Telecom & Cable 2015 Insert graphic here 92 Equity Event XXX, XXX XX, XXXX Equity Event: Transportation & Aerospace 2014 Insert graphic here 93 Equity Event XXX, XXX XX, XXXX Equity Event: Canadian Energy Infrastructure Conference Insert graphic here 94 Equity Event XXX, XXX XX, XXXX Xs 2 Xs2 Equity Event: Mining Conference 2014 Insert graphic here 95 Equity Event XXX, XXX XX, XXXX 96 Disclosures and Disclaimers Wednesday, November 12, 2014 Appendix A: Important Disclosures Company Allied Properties REIT Armtec Infrastructure Inc. AuRico Gold Inc. Calloway REIT Canadian National Railway Company Canadian Pacific Railway Limited Canfor Pulp Products Inc. CAP REIT Capital Power Corporation Cencosud, SA Choice Properties REIT Controladora Comercial Mexicana, SAB de CV Crombie REIT DHX Media Ltd. Domtar Corporation Emera Incorporated Empresas CMPC SA Empresas Copec SA Entel Chile FEMSA, SAB de CV Fibria Celulose SA First Capital Realty Inc. Fortuna Silver Mines Inc. GLV Inc. Grupo Comercial Chedraui, SAB de CV Organización Soriana, SAB de CV RioCan REIT Ripley Corp SA RONA Inc. SACI Falabella SEMAFO Inc. SunOpta Inc. Telefonica Brasil SA Thompson Creek Metals Company Inc. TransAlta Corporation TransAlta Renewables Inc. TransCanada Corporation Vicwest Inc. Wal-Mart de México y Centroamerica, SAB de CV WPT Industrial REIT WSP Global Inc. Ticker AP.UN ARF AUQ CWT.UN CNR CP CFX CAR.UN CPX CENCOSUD CHP.UN COMERCI UBC CRR.UN DHX.B UFS EMA CMPC COPEC ENTEL FMX FBR FCR FSM GLV.A CHDRAUI B SORIANA B REI.UN RIPLEY RON FALAB SMF STKL VIV TCM TA RNW TRP VIC WALMEX V WIR.U WSP Disclosures (see legend below)* G, I, T, U T, V10 G, I, N1, P, T, U, VS190 G, I, U G, I, S, T, U, VS191 T P, T, VS85 I, S, T I, T M13 B40, G, I, U M13, S B25, G, I, U G, I, U G, I, N1, U G, I, S, T, U VS83, VS84, VS146 VS171, VS172 I, M12, M4 M13, T, VS62 P, T G, I, U P, T, VS22 T M13, T M13, T G, I, U M13 T M13, N1 VS127 J, T, VS31 M12, M4 VS100 G, I, S, T, U G, I, U G, I, S, U T M13, T G, I, U G, I, J, T, U 97 Disclosures and Disclaimers Wednesday, November 12, 2014 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 Depart ment. 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. * Legend B25 Paul D. Sobey is a director of Crombie REIT 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. 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 service s in the next 3 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., wh ich forms a part of Grupo Financiero Scotiabank Inverlat. N1 Scotia Capital (USA) Inc. had an investment banking 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. 98 Disclosures and Disclaimers Wednesday, November 12, 2014 S Scotia Capital Inc. and its affiliates collectively beneficially own in excess of 1% of one or more classes of the issued and outstanding equity securities of this issuer. T The Fundamental Research Analyst/Associate has visited material operations of this issuer. U Within the last 12 months, Scotia Capital Inc. and/or its affiliates have undertaken an underwriting liability with respect t o equity or debt securities of, or have provided advice for a fee with respect to, this issuer. V10 Two putative class action lawsuits have been filed, the first in June 2011 with the Ontario Superior Court of Justice at Windsor, Ontario, Canada, and the second in July 2011 with the Ontario Superior Court of Justice at London, Ontario, Canada, against Armtec Infrastructure Inc. ('Armtec') and others by purported purchasers of Armtec common shares pursuant to an April 2011 public offering. The lawsuits are still pending. Certain underwriters, including Scotia Capital Inc., are among those named as defendants in the lawsuits. VS100 Our Research Analyst visited Mt. Milligan, an operating mine, on October 9, 2013 and August 19, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS127 Our Research Analyst visited Mana, an operating mine, on February 3-4, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS146 Our Research Analyst visited the Talagante plant, a tissue plant, on April 24, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS171 Our Research Analyst visited Empresas Copec SA, the company's head office, on April 21-25, 2014. No payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS172 Our Research Analyst visited Nueva Aldea, an operating pulp mill, on April 23, 2014. Full payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS190 Our Research Analyst visited the Young-Davidson Gold Mine, an operating underground gold mine and mill, on October 15, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS191 Our Research Associate visited the Chicago yard, CN's rail yards and training facilities, on September 24, 2014. No payment w as received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site. VS22 Our Research Analyst visited San Jose mine, an operating mine, on September 10, 2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS31 Our Research Analyst visited the Hope, Oat Fiber, SunOpta Aseptic, Ingredients, and Dahlgren Sunflower facilities, which are handling and processing facilities, on September 25, 2012. No payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS62 Our Research Associate visited several OXXO locations, convenience stores, on November 2012. No payment was received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site. VS83 Our Research Analyst visited Empresas CMPC, the company's head office, on April 3-5, 2013. No payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS84 Our Research Analyst visited the Laja Mininco pulp mill, an operating mill, on April 3-5, 2013. No payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS85 Our Research Analyst visited the Northwood Pulp Mill, an NBSK pulp mill, on September 2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. 99 Disclosures and Disclaimers Wednesday, November 12, 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 foreca sts, 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 Und erperform ratings are based on the criteria above, but for this purpose could be equated to strong buy, buy, neutral and sell ratings, respectively. 100 Disclosures and Disclaimers Wednesday, November 12, 2014 General Disclosures This report has been prepared by analysts who are employed by the Research Department of Scotiabank, Global Banking and Marke ts. Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including Scotia Capital Inc. All other trademarks are acknowledged as belonging to their respective owners and the display of such trademarks is for informational use only. Scotiabank, Global Banking and Markets Research produces research reports under a single marketing identity referred to as “Globally-branded research” under U.S. rules. This research is produced on a single global research platform with one set of rules which meet the most stringen t standards set by regulators in the various jurisdictions in which the research reports are produced. In addition, the analyst s who produce the research reports, regardless of location, are subject to one set of policies designed to meet the most stringent rules established by regulators in the various jurisdictions where the research reports are produced. Scotia Capital Inc. or an affiliate thereof owns or controls an equity interest in TMX Group Limited and in excess of 1% of the issued and outstanding equity securities thereof. In addition, an affiliate of Scotia Capital Inc. is a lender to TMX Group Limited under its credit facilities. As such, Scotia Capital Inc. may be considered to have an economic interest in TMX Group Limited. This report is provided to you for informational purposes only. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. The securities mentioned in this report may neither be suitable for all investors nor eligible for sale in some jurisdictions where the report is distributed. The information and opinions contained herein have been compiled or arrived at from sources believed reliable, however, Scotiabank, Global Banking and Markets makes no representation or warranty, express or implied, as to their accuracy or completeness. Scotiabank, Global Banking and Markets has policies designed to make best efforts to ensure that the information contained in this report is current as of the date of this report, unless otherwise specified. 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