1. business and industrial

EQUITY RESEARCH
CANADIAN RESEARCH AT A GLANCE
January 15, 2015
Initiations
! The Descartes Systems Group Inc.
Summary
The sum is greater than the parts
Summary
Dividend cut preserves long-term sustainability
Summary
Share price weakness unwarranted given significant beats on key metrics
Summary
2015 guidance below consensus, but share price reaction was too severe
Summary
2015E outlook below consensus on FX, but in line with our estimates
Summary
Strong Q2 results; full-year outlook remains positive
Summary
Mixed Q1/15 Results Below Expectations
Summary
Delivering Another Solid Quarter
Summary
Positive catalysts expected to push shares higher
Summary
2015 plan targets flexibility
Summary
A Stronger H2/15 and Improving F2016 FCF Outlook Should Underpin the Stock
Price Target Revisions
! Freehold Royalties Ltd.
! Gluskin Sheff + Associates Inc
! Magna International Inc.
First Glance Notes
! Magna International Inc.
! Performance Sports Group Ltd.
! Shaw Communications Inc.
Company Comments
! Cogeco Cable Inc.
! Continental Gold Limited
! DeeThree Exploration Ltd.
! Shaw Communications Inc.
Industry Comments
! Copper Valuations and Financial Risk
! Paper & Forest Products Weekly
! RBC International E&P Daily
Summary
Summary
Summary
TLW; PRE; PPC
Summary
New CPA framework a value enhancer
In-Depth Reports
! Air Canada
Priced as of prior day's market close, EST (unless otherwise noted).
For Required Non-U.S. Analyst and Conflicts Disclosures, see Page 12.
EQUITY RESEARCH
U.S. RESEARCH AT A GLANCE
January 15, 2015
Initiations
! The Descartes Systems Group Inc.
Summary
The sum is greater than the parts
Summary
Some puts and takes in management commentary - Thesis unchanged
Summary
2015 guidance below consensus, but share price reaction was too severe
Summary
F1Q15: Mixed Operating Trends
Summary
7 things from our mtg...we're (still) very bullish on this big, innovative pipeline
Summary
7 things from our meeting...Lots of noise on the stock, should quiet down...
Summary
Strong Q2 results; full-year outlook remains positive
Summary
A top mid-cap idea affirmed again this week, we think upcoming data looks good - Outperform
Summary
FY15 guidance brackets consensus at high end; more M&A, cheaper fuel upside drivers
Summary
Growth story on track after solid Q1; Outperform
Summary
Pondering frequently asked questions over lunch with management
Summary
A Stronger H2/15 and Improving F2016 FCF Outlook Should Underpin the Stock
Price Target Revisions
! CSX Corp
! Magna International Inc.
! Washington Federal, Inc.
First Glance Notes
! Biogen Idec Inc.
! Gilead Sciences
! Performance Sports Group Ltd.
Company Comments
! Dyax Corp.
! Envision Healthcare Holdings, Inc.
! Nord Anglia Education, Inc.
! Regeneron Pharmaceuticals, Inc
! Shaw Communications Inc.
Industry Comments
! Bakken Heat Map: November 2014
! Copper Valuations and Financial Risk
! Health Care Services
! Paper & Forest Products Weekly
! RBC European Industrials Daily
! RBC International E&P Daily
! RBC Metals & Mining
Summary
Summary
Summary
Data Update: Open Enrollment Trends Remain on Track
Summary
Summary
Weir - bottom in sight; US Q4 preview
Summary
TLW; PRE; PPC
Summary
Carve out in Copper
Summary
4Q14: Uneasy Lies the Head that Wears the Crown
In-Depth Reports
! JPMorgan Chase & Co.
2
EQUITY RESEARCH
UK & European Research at a Glance
January 15, 2015
Ratings Revisions
! Aegon NV
! Delta Lloyd NV
! Hannover Re
! Lancashire Holdings Limited
! Legal & General Group Plc
! Swiss Re Ltd.
! UK Mail Group PLC
Summary
Laying the mortality issue to rest
Summary
Highly unusual disagreement
Summary
2014 outperformance looks overdone: Downgrade to Underperform
Summary
Market conditions to prove more difficult in 2015
Summary
Bulking up
Summary
Changing tack in 2015
Summary
Lifting to Outperform, option value on market share gain
Summary
Left waiting new momentum
Price Target Revisions
! Air France-KLM SA
Industry Comments
! Copper Valuations and Financial Risk
! European Insurance
! RBC Metals & Mining
! Turkey/Russia Telcos - FX Factor
Summary
Summary
May the Fourth be with you
Summary
Carve out in Copper
Summary
Find our Research at:
RBC Insight (www.rbcinsight.com): RBC's global research destination on the web. Contact your RBC Capital Markets' sales representative to
access our global research site, or use our iPad App "RBC Research"
Thomson Reuters (www.thomsononeanalytics.com)
Bloomberg (RBCR GO)
SNL Financial (www.snl.com)
FactSet (www.factset.com)
3
Initiations
The Descartes Systems Group Inc.(NASDAQ: DSGX; 15.42; TSX: DSG)
Paul Treiber, CFA (Analyst)
(416) 842-7811; [email protected]
Sean Ray, P.Eng. (Associate)
416 842 6133; [email protected]
Rating:
Price Target:
52 WEEKS
24JAN14 - 14JAN15
Outperform
18.00
The sum is greater than the parts
We are initiating coverage on Descartes with an Outperform recommendation
and $18.00 price target. We believe the network effects inherent in Descartes’
business model are unique among the consolidators in our universe. Descartes has
delivered 21% ROIC over the last 4 years and has a large war chest available to
fuel acquisitions; our outlook calls for 13% per annum EBITDA per share growth
between FY15E and FY17E.
15.50
15.00
14.50
14.00
13.50
13.00
12.50
2000
1500
1000
500
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2014
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Rel. S&P 500
N
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MA 40 weeks
Revenue
151.3
171.6
193.3
227.0
2014A
2015E
2016E
2017E
All values in USD unless otherwise noted.
• More than a roll-up: acquisitions + networks effects. Descartes is a provider of
SaaS logistics and SCM (supply chain management) solutions. The company's
growth through acquisition strategy yields revenue and cost synergies through
the network effects of its transaction-oriented business model. As a result,
Descartes has delivered 21% return on invested capital (ROIC) over the last four
years. Descartes has a large war chest available to fuel acquisitions.
• Networks effects drive consistent margin expansion and cashflow. Descartes
has delivered 18% per annum adj. EBITDA per share growth between FY06
and FY15E, which validates the synergies in Descartes' model following 29
acquisitions. Looking forward, our outlook calls for Descartes’ adj. EBITDA per
share to rise 13% per annum from $0.72 FY15E to $0.92 FY17E, in line with
management's targets (10–15%).
• Large, untapped acquisition opportunity. Descartes is the global leader in
the $0.4B transportation management system segment of the supply chain
management (SCM) market. From this attractive position, Descartes is expanding
into the broader ~$13B global digital logistics, trade, and supply chain planning/
execution market.
• Initiating coverage with $18.00 target price. Our $18.00 price target is calculated
using 18x CY16E EV/EBITDA on our $70MM CY16E EBITDA estimate. Our target
EV/EBITDA multiple is in line with Descartes' current valuation (18.2x) and below
supply chain & fleet management peers at 22x. Our target multiple is justified
below supply chain & fleet management peers, given Descartes’ EBITDA growth
lags its peers (14% FTM vs. peers at 26%), and reflects acquired, as opposed to
organic growth.
Price Target Revisions
Freehold Royalties Ltd.(TSX: FRU; 17.05)
Shailender Randhawa, CFA (Analyst)
(403) 299-6576; [email protected]
Keith Mackey, CFA (Associate)
403 299 6958; [email protected]
28.00
52 WEEKS
Rating:
Price Target:
24JAN14 - 14JAN15
Sector Perform
20.00 ▼ 21.00
Dividend cut preserves long-term sustainability
Freehold Royalties announced a 36% dividend cut along with changes to its
2015 outlook in response to the rapid downward move in both crude and E&P
budgets. We view the cut as a prudent step to preserve the integrity of Freehold's
capital structure and growth plans. Accordingly, a reactionary sell-off represents
an attractive entry point for long-term oriented investors with a preference for
income, in our view.
26.00
24.00
22.00
20.00
18.00
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Prev.
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• Freehold's recent move to extend its tax horizon insulates some of the impact
of weaker oil prices, but crude's rapid drop in recent weeks clearly places the
dividend on the balance sheet in the near term, with debt levels already above
management's comfort zone. The revised dividend payout and capex reduction
4
2013A
2014E
2015E
2016E
8,913
9,100
9,800↓
9,500↓
maps to a 80% effective payout ratio, net of stable 25% DRIP utilization, at our
current US$65/bbl WTI outlook.
• In terms of balance sheet impact, Freehold's revised outlook and payout ratio
map to a 1.4x net-debt-to-trailing-cash-flow ratio at RBC's price deck. At strip
prices, leverage rises to 2.6x assuming no change to outflows, which in our view
would compromise Freehold's costs of capital advantage vs E&P's and potentially
undermine its ability to underwrite new GORR's/JV's.
• Maintaining Sector Perform rating with a reduced $20.00 price target. Our DCFbased price target reflects a visible FCF generating portfolio, a 6.5% discount rate
to reflect Freehold’s low capital intensity royalty model, and a 1.2x target multiple
given above-average financial flexibility and commodity price leverage.
10,100
10,000
All values in CAD unless otherwise noted.
Gluskin Sheff + Associates Inc(TSX: GS; 23.70)
Geoffrey Kwan, CFA (Analyst)
(604) 257-7195; [email protected]
Charan Sanghera (Associate)
604 257 7657; [email protected]
34.00
Rating:
Price Target:
52 WEEKS
24JAN14 - 14JAN15
Outperform
36.00 ▲ 35.00
Share price weakness unwarranted given significant beats on key metrics
We expect GS’ share price to be up significantly following significant beats on
Q2/15 net sales, AUM and performance fees, which we believe demonstrates the
recent significant share price underperformance was unwarranted (since October
30, 2014, GS share price -20% vs. CIX -4%, IGM -3%, AGF.b -28% and SII +17%). GS
remains our best long-term investment idea within our asset manager coverage.
32.00
30.00
28.00
26.00
24.00
900
600
300
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2014A
2015E
2016E
A
M
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2014
J
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Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Revenue Prev.
125.0
247.5
173.1↑
154.2
173.0↑
165.7
All values in CAD unless otherwise noted.
Steve Arthur, CFA (Analyst)
(416) 842-7844; [email protected]
Ben Holton, CFA (Analyst)
(416) 842-9949; [email protected]
Joseph Spak, CFA (Analyst)
(212) 428-2364; [email protected]
Jacob Hughes (Associate)
(212) 618-5594; [email protected]
J
• Significant beats across the board, particularly positive net sales (we expected
significant net redemptions). Q2/15 preliminary estimates for AUM ($8.2B beat
vs. RBC at $7.9B); net sales (+$116MM beat vs. RBC at -$75MM. Of the +
$116MM, +$84MM was from high-net worth and +$32MM from institutional
clients); and performance fee revenues ($41MM beat vs. RBC at $25MM) were
all well ahead of our forecasts.
• We estimate that the $41MM in performance fees could translate into a
$0.65/share special dividend assuming Gluskin Sheff pays out 100% of after-tax
performance fees.
• Increasing 12-month target to $36/share (was $35), but maintaining
Outperform rating.
• GS is one of our favourite stocks over the next 12 months and our best longterm idea within our asset manager coverage reflecting higher expected growth
in the high net worth market and exposure to performance fee-driven special
dividends. Furthermore, we believe GS is not impacted by the regulatory issues
facing the mutual fund companies.
Magna International Inc.(NYSE: MGA; 97.02; TSX: MG)
Rating:
Price Target:
Outperform
124.00 ▼ 125.00
2015 guidance below consensus, but share price reaction was too severe
Magna’s 2015E outlook was in line with our forecast, although below consensus
largely on FX swings. The 6% decline in the share price was too severe a reaction,
in our view. The outlook reflected solid progress in margins, new business wins,
and long-term growth. Further, balance sheet targets were reiterated, implying that
aggressive share buyback activity should continue. At 5.3x 2016E EBITDA, we see
attractive value.
• Magna’s 2015E outlook was in line with our forecast, although below consensus
largely on FX swings. The 6% decline in the share price was too severe a reaction,
in our view.
• 2015E revenue guidance below consensus…Total revenue guidance of $34.4–
36.1B was in line with our $35.8B forecast, although below consensus $37.6.B.
5
52 WEEKS
24JAN14 - 14JAN15
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100.00
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•
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MA 40 weeks
Revenue Prev.
34.8
36.2
35.1↓
35.8
37.0↓
37.5
2013A
2014E
2015E
2016E
•
All values in USD unless otherwise noted.
The shortfall vs. consensus is largely FX-related (Euro/USD) but likely also due to
lower revenue from the Chrysler minivan program (a #2 program for Magna) and
lower volumes at Magna Styer.
…but longer-term (2017E) growth outlook ahead of expectations: Importantly,
Magna’s initial 2017E outlook was ahead of our forecast, calling for ~$5B growth
in production revenue over that time frame.
Operating margins remain on track: North American margins are expected at
“about 10%”, better than the prior 9.5–10% range. Europe and International
markets continue to improve, with 2016E targets reiterated.
Reiterates balance sheet targets – acquisitions being evaluated, aggressive
buyback activity to continue: Magna reiterated its objective of reaching adj
debt/EBITDA of 1.0–1.5x by the end of 2015. By our calculation, this implies
deploying ~$2.5–4.2B through 2015.
Attractive value for solid performance and growth outlook: We view
Wednesday’s share price decline as an over-reaction to the 2015 outlook. The
business continues to perform well, and the shares now trade at 5.3x 2016E
EBITDA, below the peer average of 5.8x.
First Glance Notes
Magna International Inc.(NYSE: MGA; 102.99; TSX: MG)
Steve Arthur, CFA (Analyst)
(416) 842-7844; [email protected]
Ben Holton, CFA (Analyst)
(416) 842-9949; [email protected]
Joseph Spak, CFA (Analyst)
(212) 428-2364; [email protected]
Jacob Hughes (Associate)
(212) 618-5594; [email protected]
Rating:
2015E guidance was below consensus (as we expected).
52 WEEKS
24JAN14 - 14JAN15
110.00
105.00
100.00
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All values in USD unless otherwise noted.
Outperform
2015E outlook below consensus on FX, but in line with our estimates
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• Total revenue guidance of $34.4-36.1B was in line with our $35.8B forecast, but
below consensus of $37.6B, primarily on a weaker Euro.
• Operating margin outlook for ‘low 7% range’, consistent with our 7.4%.
• Expect more on deployment of the Balance Sheet in the presentation, supportive
of further growth initiatives and share buybacks.
North American production volume & sales in line with expectations: MGA’s
forecast of 17.3MM units was in line with our 17.2MM, and slightly below IHS
(17.4MM). Implied content per vehicle ($1,017- $1,052) is just below our forecast
of $1,054. This yields production revenue guidance of $17.6-18.2B, which puts our
$18.2B forecast at the top end of the range.
European production volume in line; production sales impacted by the falling
Euro. Guidance of 20.3MM units is just below our 20.5MM forecast, but in line with
IHS’ 20.3MM. Implied content per vehicle ($443-$463) is slightly ahead of our $438
forecast. Production revenue guidance ($9.0-9.4B) was in line to slightly above our
estimate of $9.0B.
Operating margins inline with our expectation, and highlights continued margin
improvement. MGA’s guidance of the “Low 7% range” is as expected.
Initial outlook for 2017E is above our forecast: MGA’s forecast for 2017E light
vehicle production in North America is 18.2MM, above our 17.7MM estimate, while
their forecast for Europe of 21.9MM was also above our 21.7MM forecast. The
company’s 2017E production revenue forecast range of $34.2-35.5B is above our
$33.3B forecast.
Sabahat Khan (Analyst)
(416) 842-7880; [email protected]
Performance Sports Group Ltd.(NYSE: PSG; 18.02; TSX: PSG)
Rating:
Outperform
Strong Q2 results; full-year outlook remains positive
• Q2 sales well ahead of forecasts. Q2 sales of $172.3MM (+47.1% y/y) were above
our forecast of $161.8MM (consensus: $160.3MM), driven by stronger-thanexpected growth in ice hockey and strong contribution from Easton Baseball/
6
52 WEEKS
24JAN14 - 14JAN15
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All values in USD unless otherwise noted.
•
Shaw Communications Inc.(TSX: SJR.B; 31.36; NYSE: SJR)
Drew McReynolds, CFA, CA (Analyst)
(416) 842-3805; [email protected]
Jie He (Associate)
416 842 4123; [email protected]
Haran Posner (Analyst)
(416) 842-7832; [email protected]
52 WEEKS
Rating:
24JAN14 - 14JAN15
28.00
26.00
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Sector Perform
Mixed Q1/15 Results Below Expectations
30.00
J
Softball ("EBS"). Excluding the impact of F/X and the EBS acquisition, organic sales
increased 10.2% y/y (EBS contributed $47.3MM).
Operating income was ahead of expectations. Adjusted EBIT of $20.9MM was
above our $18.1MM forecast, driven by strong sales growth and higher-thanexpected gross profit. Adjusted gross margin of 36.0% (+243 bps y/y) was above
our forecast of 35.8% (+225 bps y/y).
Adjusted EPS was well above forecasts. Higher-than-expected adjusted EBIT was
partially offset by higher-than-forecast interest and tax expense, driving adjusted
diluted EPS of $0.24, versus $0.20 last year (RBC: $0.21; consensus: $0.20).
Profitability outlook remains optimistic. We continue to expect PSG to deliver
on its goal of growing profitability more quickly than revenues. Excluding the
impact of F/X, the company still expects improved Y/Y margins in the coming
quarters, driven by: 1) more favorable mix in hockey; 2) addition of higher-margin
EBS sales; and 3) contribution from the supply-chain improvement initiatives.
Conference call on January 15 at 10AM ET. Dial-in 888-510-1785; conference
ID 5887099. We expect key topics of discussion on the call to be: 1) further
discussion of the expected impact of F/X on sales/margins; 2) additional
commentary on the cost outlook; 3) management's commentary on sales trends
to-date in baseball/softball; and 4) the expected rollout of BAUER Hockey retail
locations.
N
D
• Mixed Q1/15 results below expectations. Revenues and EBITDA were
$1,389MM (+2.0% YoY, or -2.1% excluding the ViaWest acquisition) and
$606MM (-0.3%, or -3.8% excluding ViaWest), respectively, versus our estimates
of $1,446MM and $645MM (consensus was $1,420MM and $638MM).
Consolidated EBITDA margins of 43.6% (-101bps YoY) were slightly below our
estimate of 44.6%. Adjusted EPS of $0.46 was below our $0.52 estimate
(consensus $0.52). We expected Q1/15 results to be mixed but results were
softer than expected.
• What to look for on the 3:30pm ET call (#877-881-1303). (i) extent to which there
is seasonality at ViaWest; (ii) sustainability of Internet subscriber growth; and (iii)
advertising outlook for the rest of the year.
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
All values in CAD unless otherwise noted.
Company Comments
Drew McReynolds, CFA, CA (Analyst)
(416) 842-3805; [email protected]
Jie He (Associate)
416 842 4123; [email protected]
Haran Posner (Analyst)
(416) 842-7832; [email protected]
Cogeco Cable Inc.(TSX: CCA; 73.44)
Rating:
Price Target:
Outperform
75.00
Delivering Another Solid Quarter
Q1/15 results were slightly better than expected on strong RGU growth and
healthy Canadian Cable Services margins.
• Remains one of our best ideas for 2015. In an environment of increased wireless
competition and/or rising bond yields, we believe Cogeco Cable would stand
out within the group, reflecting: (i) a low-risk profile given the lack of wireless
exposure; and (ii) less sensitivity to interest rates. The stock trades at a FTM
EV/EBITDA multiple of 6.4x (versus the group average of 7.1x) and at a FTM
FCF yield of 7.5% (versus the group average of 6.1%). We believe this discount
adequately reflects the execution risk associated with further acquisitions and
increased IPTV competition in Canada. Although we do not expect this valuation
7
75.00
52 WEEKS
24JAN14 - 14JAN15
70.00
65.00
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55.00
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gap to close entirely, a return to double-digit data hosting revenue growth within
Enterprise, a growing track record of stable FCF generation (>$270MM), and a
steady de-levering of the balance sheet could further narrow the gap in 2015.
• Appetite for acquisitions is now growing. With leverage at 2.7x by the end of
F2015E, management acknowledged that its appetite for further acquisitions
is now growing. While this appetite raises execution risk looking into F2015/
F2016, we are hopeful that: (i) any data hosting acquisitions are able to generate
synergies within the Enterprise segment; and (ii) investor sentiment around the
M&A strategy has improved given the recent track record of making successful
acquisitions. At the moment, management indicated that it sees no need to issue
equity given the availability and cost of debt.
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Revenue Prev.
1,692.0
1,948.0
2,047.0↑
2,031.0
2,108.0
2013A
2014A
2015E
2016E
All values in CAD unless otherwise noted.
Continental Gold Limited(TSX: CNL; 2.19)
Dan Rollins, CFA (Analyst)
(416) 842-9893; [email protected]
Mark Mihaljevic (Associate)
(416) 842-3804; [email protected]
52 WEEKS
24JAN14 - 14JAN15
Rating:
Outperform
Risk Qualifier: Speculative Risk
Price Target: 4.50
5.00
Positive catalysts expected to push shares higher
4.00
Continental is a promising exploration/development stage company given the
high-grade nature of its Buritica project, underlying exploration potential and
healthy balance sheet. With the recent PEA highlighting the potential for Buritica
to deliver solid returns, we expect ongoing exploration success and receipt of
an amended environmental license are likely to push the company’s share price
higher.
3.00
2.00
12000
8000
4000
Recent PEA outlines economic potential of Buritica
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EPS, Adj Diluted
2013A
(0.08)
2014E
(0.10)
2015E
(0.08)
2016E
(0.08)
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P/E
All market data in CAD; all financial data in USD.
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• As outlined in the recent preliminary economic assessment (PEA), Continental’s
Buritica project has the potential to be developed into a low cost producer of
gold/silver. With a projected after-tax return of 31.5% at $1,200/oz, the PEA not
only highlighted the project's economic potential, but also it's ability to withstand
more conservative assumptions.
Potential for improved dilution and higher grades
• We expect ongoing channel sampling and in-fill drilling is likely to result in
higher grades than currently outlined in the PEA. Recent channel sampling has
highlighted the continuity of a number of veins at Yaragua and Veta Sur and
identified a number of smaller veins/veinlets not currently assumed within the
resource model.
Receipt of environmental permit expected to be key catalyst
• The key catalyst for Continental in 2015 is expected to be receipt of the amended
environmental license for Buritica. Based on our discussions with management,
the company remains confident the amended license could be granted mid-year.
Once in hand, Continental would have all the major permits needed to begin
construction of the project.
A promising exploration/development stage company
• Continental is one of the more promising exploration/development stage
companies within our coverage given the high-grade nature of Buritica,
underlying exploration potential and favourable prospects to be developed
into an economic mine. With key permits expected this year and ongoing
8
exploration results, we expect Continental’s shares are likely to benefit from
positive tailwinds in 2015.
DeeThree Exploration Ltd.(TSX: DTX; 4.99)
Shailender Randhawa, CFA (Analyst)
(403) 299-6576; [email protected]
Keith Mackey, CFA (Associate)
403 299 6958; [email protected]
12.00
52 WEEKS
Rating:
Price Target:
24JAN14 - 14JAN15
Outperform
11.00
2015 plan targets flexibility
DeeThree Exploration's $160 million capital budget targets 13,300 boe/d in 2015
in a energy market squarely focused on balance sheet leverage over growth.
With roughly 60% of spending weighted to the back half of the year and strong
management alignment with shareholders, we think DeeThree has additional
flexibility to navigate oil price weakness.
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Prod (boe/d) Prev.
7,184
11,289↓
11,365
13,300↑
12,750
14,500↑
13,750
All values in CAD unless otherwise noted.
Shaw Communications Inc.(TSX: SJR.B; 30.17; NYSE: SJR)
Drew McReynolds, CFA, CA (Analyst)
(416) 842-3805; [email protected]
Jie He (Associate)
416 842 4123; [email protected]
Haran Posner (Analyst)
(416) 842-7832; [email protected]
52 WEEKS
Rating:
Price Target:
24JAN14 - 14JAN15
28.00
26.00
7500
6000
4500
3000
1500
F
M
Close
2013A
2014A
2015E
2016E
A
M
J
2014
J
A
S
O
N
D
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Revenue Prev.
5,142.0
5,239.0↓
5,241.0
5,572.0↓
5,612.9
5,758.0
All values in CAD unless otherwise noted.
Sector Perform
30.00
A Stronger H2/15 and Improving F2016 FCF Outlook Should Underpin the Stock
30.00
J
• DeeThree Exploration's $160 million capital budget targets 13,300 boe/d in 2015
in a energy market squarely focused on balance sheet leverage over growth.
With roughly 60% of spending weighted to the back half of the year and strong
management alignment with shareholders, we think DeeThree has additional
flexibility to navigate oil price weakness.
• Few commitments and 2014 infrastructure provide operational flexibility. The
activity set features 29 net wells with two rigs currently running in the Belly River
and one in the AB Bakken. Operationally, the game plan is centered around flat
production volumes in the AB Bakken, where it plans to expand its EOR scheme,
plus continued growth in the Belly River from lower-risk drilling, primarily in the
C and D blanket sands. DeeThree indicated that only a handful of Belly River wells
relates to prior land earning commitments, providing flexibility to drop another
rig if oil prices remain weak post break-up.
• Stress testing the balance sheet. At our US$65/bbl WTI price outlook for
calendar 2015, DeeThree's current plan results in 2015E trailing net-debt-totrailing-cash-flow ratio of 1.3x, with absolute debt rising by about $19 million
YoY. Projected liquidity remains healthy, with the company's $310 million bank
line approximately 50% undrawn at year-end. At strip oil prices, leverage rises
to 3.3x, with an absolute funding gap of $83 million still covered by the bank
line. However, we would expect the company to trim its capital to keep leverage
between 1.0x to 1.5x in order preserve future funding capacity.
J
Q1/15 results were weaker than expected. While we remain concerned around
the longer-term outlook for media and satellite, we expect a stronger H2/15 and
improving F2016 FCF outlook to underpin the stock at current levels.
• No change to our investment thesis or $30 price target. We believe Shaw
continues to execute in a maturing but rational competitive environment. While
we expect continued basic cable subscriber losses, we are encouraged by
the improvement in RGU performance over the past few quarters. With the
accelerated capital fund that includes investments in WiFi, all-IP, and the business
market as well as ongoing efficiency program, the company is laying a stronger
foundation to deliver low to mid-single-digit organic revenue and EBITDA growth
in what is now a more mature Canadian telecom market. At 8.3x FTM EV/EBITDA
versus the group average of 7.1x, we would remain patient for more attractive
and/or timely entry points.
• A weaker than expected start to the year but growth to pick up in H2/15. We
attribute the bulk of the Q1/15 shortfall versus our estimates to the delayed
timing of price increases. Management has “great confidence” in its ability to
meet F2015 guidance as: (i) the impact of price increases flows-through (in
9
both consumer and business network services); (ii) the ramping up of two new
data hosting facilities at ViaWest from 2014 along with improved efficiencies;
(iii) a return to more robust EBITDA growth for business network services
(management is targeting double-digit EBITDA growth in H2/15 under new
leadership/improved execution); and (iv) the flow-through of “material” costefficiencies in H2/15.
Industry Comments
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; [email protected]
Steve Bristo, CFA (Associate)
(416) 842-7826; [email protected]
Melissa Oliphant (Associate)
416 842 4126; [email protected]
Thomas Klein (Associate)
(416) 842-5339; [email protected]
All values in USD unless otherwise noted.
Paul C. Quinn (Analyst)
(604) 257-7048; [email protected]
Hamir Patel (Analyst)
(604) 257-7145; [email protected]
Copper Valuations and Financial Risk
• Given the sharp drop in copper prices over the past two days and attendant
collapse in copper equity values, we have updated our trough of cycle valuation
work and financial risk analysis for our North American coverage universe.
• The report examines current valuations and downside risk based on our historical
NAV analysis, and EV/EBITDA and NAVs at a marginal cost-based copper price
assumption and spot prices for all other commodities and currencies. We have
also screened each of the companies' cash flow statements and balance sheets to
identify companies whose financial position could become strained and at what
prices. The appendix includes the financial risk analysis for each company under
four scenarios: our base case, spot commodity prices and currencies, $2.40/lb
copper with spot commodity prices and currencies, and $2.25/lb copper with
spot commodity prices and currencies.
• Copper prices have fallen almost to marginal cost support.
• Shares in the sector are trading at or below historical trough of cycle valuation
levels, in some cases at valuations not seen since 2008/2009.
Paper & Forest Products Weekly
• Comparable valuation tables, commodity prices, and total return performance
for our North American Paper & Forest Products coverage universe.
Nathan Piper (Analyst)
+44 131 222 3649; [email protected]
RBC International E&P Daily
Al Stanton (Analyst)
+44 131 222 3638; [email protected]
TLW.L: Chips Away at 2015 Spuds; PRE.TO: $200-$400m capital spend reduction;
PPC.L: Management Changes; PCI.L: Operating update; PMA.V: Closes C$3m Private
Placement and amends debenture agreement
Victoria McCulloch, CA (Analyst)
+44 131 222 4909; [email protected]
TLW; PRE; PPC
Haydn Rodgers, CA (Associate)
+44 131 222 4911; [email protected]
All values in USD unless otherwise noted.
In-Depth Reports
Walter Spracklin, CFA (Analyst)
(416) 842-7877; [email protected]
Derek Spronck (Analyst)
(416) 842-7833; [email protected]
Air Canada(TSX: AC; 11.95; TSX: )
Rating:
Outperform
Risk Qualifier: Speculative Risk
Price Target: 18.00
New CPA framework a value enhancer
The capacity purchase agreement (CPA) between Air Canada and Chorus Aviation
has inherent inefficiencies as it stands today. Coupled with CHR's higher cost base,
Air Canada was facing ~30% cost disadvantage in the regional segment. With the
announcement of an amended CPA contract being agreed to, Air Canada has the
potential to close this cost base differential and realize significant savings and
valuation upside.
10
52 WEEKS
24JAN14 - 14JAN15
12.00
10.00
8.00
6.00
30000
20000
10000
J
F
M
A
M
Close
2013A
2014E
2015E
2016E
J
2014
J
A
S
O
N
D
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Revenue
12,382.0
13,246.0
13,735.0
14,193.0
All values in CAD unless otherwise noted.
J
• Amended CPA a win-win scenario. Following the announcement that Air Canada
(AC) and Chorus Aviation (CHR) reached an agreement to amend the current CPA
contract, much of the focus centered around the sustainability of CHR's dividend
and the contract extension. However, we believe investors did not fully take into
consideration the cost savings that AC could potentially realize. In this note, we
take a deeper look and quantify what we believe could be total potential annual
cost savings between $215MM-$380MM for AC.
• Upfront savings could add $1+ in valuation. If all conditions for the CPA to
ratify are met, we expect both CHR and AC would begin to realize the benefits
immediately. We assume that roughly 1/3rd of the total cost savings could be
realized in the first two years of the amended CPA, pointing to annual savings of
$75MM per year and valuation upside of $1+ per share for AC.
• No change to estimates until details disclosed, reiterate Outperform. We are
maintaining our current estimates for AC until we get confirmation that CHR has
secured a ratified contract with its pilot union. However, we believe Air Canada is
not only set to achieve its targeted 15% unit cost savings, we see another leg of
cost savings that have yet to be factored into valuations. With significant upside
potential and strong underlying trends, we continue to recommend the AC shares
at current valuations.
11
Required disclosures
Non-U.S. analyst disclosure
Nathan Piper;Al Stanton;Victoria McCulloch;Haydn Rodgers;Walter Spracklin;Derek Spronck;Drew McReynolds;Jie He;Haran
Posner;Sabahat Khan;Shailender Randhawa;Keith Mackey;Dan Rollins;Mark Mihaljevic;Fraser Phillips;Steve Bristo;Melissa
Oliphant;Thomas Klein;Geoffrey Kwan;Charan Sanghera;Steve Arthur;Ben Holton;Paul Treiber;Sean Ray;Paul C. Quinn;Hamir Patel
(i) are not registered/qualified as research analysts with the NYSE and/or FINRA and (ii) may not be associated persons of the RBC
Capital Markets, LLC and therefore may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with
a subject company, public appearances and trading securities held by a research analyst account.
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Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in, this report.
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Distribution of ratings
For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories
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the meanings are not the same because our ratings are determined on a relative basis (as described below).
Distribution of ratings
RBC Capital Markets, Equity Research
As of 31-Dec-2014
Rating
BUY [Top Pick & Outperform]
HOLD [Sector Perform]
SELL [Underperform]
Count
897
686
112
Percent
52.92
40.47
6.61
Investment Banking
Serv./Past 12 Mos.
Count
Percent
290
32.33
137
19.97
6
5.36
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12
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