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Action ListOur Best Ideas
January 1, 2012
Equity Research
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Introduction The Action List is a monthly publication that identifies our analysts’ top investment recommendations. As well, it provides a list of important industry milestones to watch for in the coming month and an update on our sector stances. The report also includes updates from our Strategy and Quantitative research teams. While it is always difficult for compendium publications to be both timely and informative, we believe that our product strikes a good balance compared to the quarterly products offered by many of our competitors. At times, if we are not bullish on a particular sector, we may not have an Action List pick in that space. The performance of our Action List picks is monitored on an ongoing basis against the relevant S&P/TSX benchmarks. J. P. Benson, CFA Head of Research Please see pages 95 to 99 for important disclosure information, including disclosures on Quantitative Research. This report is strictly a summary. It should not be used as the sole basis for investment decision-making. For information relating to Justification of Target Price and Key Risks to Target Price please visit our website at https://www.tdsresearch.com/equities/disclosures.
YOUR ATTENTION IS DIRECTED TO THE IMPORTANT DISCLOSURES IN APPENDIX A.
TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.
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Table of Contents TD Securities Action List (as of December 30, 2011).............................................4 Action List Additions and Deletions Since Our Last Edition ..................................5 Performance Review ...............................................................................................6 Investment Strategy.................................................................................................8 Quantitative Analysis ............................................................................................11 Alternative Energy ................................................................................................18 Banks.....................................................................................................................21 Biotechnology & Health Care ...............................................................................24 Chemicals & Fertilizers.........................................................................................26 Communications ...................................................................................................29 Consumer Discretionary........................................................................................32 Consumer Staples..................................................................................................35 Diversified Financials ...........................................................................................38 Energy Producers – Intermediate ..........................................................................41 Energy Producers – International ..........................................................................44 Energy Producers – Senior & Unconventional .....................................................47 Energy Services.....................................................................................................50 Gold & Precious Minerals.....................................................................................53 Industrial Products ................................................................................................56 Insurance ...............................................................................................................59 Media ....................................................................................................................62 Metals & Minerals.................................................................................................65 Multi-Industry .......................................................................................................68 Paper & Forest Products........................................................................................70 Pipelines, Power & Utilities ..................................................................................73 Real Estate.............................................................................................................76 Special Situations ..................................................................................................79 Technology............................................................................................................82 Transportation – Aerospace ..................................................................................85 Transportation – Railroads ....................................................................................88 Upcoming Events ..................................................................................................93 Action List Rules...................................................................................................94 Appendix A. Important Disclosures......................................................................95
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TD Securities Action List (as of December 30, 2011)
Share TargetPage Sector Action List Pick Ticker Price Price18 Alternative Energy None — — —21 Banks Canadian Imperial Bank of Commerce CM-T, N $73.79 $94.0024 Biotechnology & Health Care None — — —26 Chemicals & Fertilizers Agrium Inc. AGU-N US$67.11 US$115.0029 Communications Thomson Reuters Corp. TRI-T $27.23 $43.00
Manitoba Telecom Services Inc. MBT-T $29.67 $40.0032 Consumer Discretionary None — — —35 Consumer Staples Alimentation Couche-Tard Inc. ATD.B-T $31.70 $38.00
Loblaw Companies Ltd. L-T $38.48 $50.0038 Diversified Financials None — — —41 Energy Producers – Intermediate None — — —44 Energy Producers – International Bankers Petroleum Ltd. BNK-T, L $4.44 $11.5047 Energy Producers – Senior & Unconventional Canadian Natural Resources Ltd. CNQ-T, N $38.15 $53.00
Talisman Energy Inc. TLM-T, N $12.75 $21.0050 Energy Services Trican Well Service Ltd. TCW-T $17.55 $30.0053 Gold & Precious Minerals None — — —56 Industrial Products SNC-Lavalin Group Inc. SNC-T $51.08 $69.0059 Insurance None — — —62 Media Corus Entertainment Inc. CJR.B-T; CJR-N $20.52 $24.0065 Metals & Minerals Teck Resources Ltd. TCK.B-T $35.91 $58.00
First Quantum Minerals Ltd. FM-T $20.05 $27.0068 Multi-Industry None — — —70 Paper & Forest Products None — — —73 Pipelines, Power & Utilities ATCO Ltd. ACO.X-T $60.24 $78.0076 Real Estate None — — —79 Special Situations TransForce Inc. TFI-T $12.95 $19.0082 Technology None — — —85 Transportation – Aerospace Chorus Aviation Inc. CHR.A CHR.B-T $3.17 $5.0088 Transportation – Railroads None — — —
Additions to the Action List since our last edition.
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Action List Additions and Deletions Since Our Last Edition Additions Chorus Aviation Inc. (CHR.A CHR.B-T; effective December 19, 2011) We added Chorus to the Action List as its shares have underperformed comparables over the past several months, resulting in an extremely compelling valuation, in our view. The dividend yield is 19%, the free cash flow yield is 29%, and the company is trading at a 22% discount to comps on 2012 EBITDAR. We believe that the market is discounting excessive risk related to the ongoing benchmarking and rate reset processes with Air Canada. We like the earnings and cash flow stability of the business, the downside protection provided by the CPA with Air Canada, and the dividend yield. Talisman Energy Inc. (TLM-T, N; effective December 19, 2011) We added Talisman Energy to the Action List on December 19. This upgrade comes on the back of the three following reasons: 1) it is now trading at a 30% discount to its 2P NAV, 2) it is now only trading at about a 1x premium to its 2008 lows, a time when oil prices were lower, and 3) we contend that fears related to its 2012 guidance release are overblown. As such, barring a major correction in oil prices, we believe that there is limited downside from current levels. Deletions Sandvine Corp. (SVC-T; effective December 7, 2011) We removed Sandvine from the Action List on December 6 following its Q4 warning, as temporary headwinds with four specific customers each drove a multi-million dollar revenue hit. The macro story is likely intact, but the fact that this was the second warning in fiscal 2011 raises credibility concerns. The significant discount to comparable Allot likely provides some downside protection, but the market is unlikely to pay more for Sandvine until revenue reflects the bullish comments by management, and leverage shows on earnings. Canaccord Financial Inc. (CF-T; effective December 16, 2011) The proposed Collins Stewart Hawkpoint acquisition adds some uncertainty to Canaccord’s outlook. Though this diversifies its platform into U.K. wealth management, complements its U.K. and U.S. capital markets divisions, and valuation seems fair, we see both execution and market risk in this sizeable deal. This affects the valuation multiples we use in deriving our target price. However, our BUY rating reflects our view that Canaccord remains well capitalized, has leverage to improving market conditions, and current valuation is attractive.
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Performance Review December was a mixed month for equity markets. Despite a rally of close to 2% in the month’s final trading days, the S&P/TSX Composite closed down 1.7%, with only 43% of stocks posting positive returns. Excluding the financial crisis of 2008, there has not been a negative December since 1996, when it was down 1.2%, or a decline this large since 1981, when the Index shed 2.3%. Despite the negative month, the strong October rally of 5.6% contributed to a positive fourth quarter of 3.6%. In the U.S., the S&P 500 and Dow Jones Industrial Average finished up 1.0% and 1.4%, respectively, while the NASDAQ Composite dropped slightly by 0.6%. Market breadth was also slightly better, with 55% of S&P 500 stocks posting positive returns. In Q4, the S&P 500 was up a whopping 11.8%, and as in Canada, October’s 10.9% gain significantly boosted returns, making it the best Q4 since 2003, when the market was up 12.2%. At the sector level in Canada, on a price basis, Telecoms and Industrials were the best performing sectors, up 4.8% and 3.0%, respectively, while Materials (particularly Gold and Precious Metals & Minerals) and Information Technology were the worst performers, down 11.6% and 10.2%, respectively. In the U.S., Telecoms and Utilities led the way up with respective 3.7% and 3.0% gains, while resource stocks Materials and Energy were the worst. Overall, it was a challenging year for the Materials sector, posting 2011 returns of -21.8% in Canada and -11.6% in the U.S. However, its relatively larger index weight in Canada of 21.1% versus 3.5% in the U.S. helps explain the yearly return difference of -8.7% for the S&P/TSX Composite and the S&P 500 return of 2.1%. Our Action List returned -2.0% on the month, slightly underperforming the S&P/TSX Composite by 30 bps. Our best performing group for the month in which we had a selection was Media. On the year, our Action List returned -3.8%, outperforming the S&P/TSX Composite by 490 bps. Our best performing group was Gold & Precious Metals.
Total Return (%)Indices 1-Month Year-to-Date
Action List -2.0 -3.8S&P/TSX Composite -1.7 -8.7Equal-Weight Benchmark -0.6 -8.9S&P 500 1.0 2.1NASDAQ Composite* -0.6 -1.8Dow Jones Industrial Average* 1.4 5.5 * Price return only.
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TD Securities – Action List Performance* December 2011 Year-to-Date
-2.0
0.0
8.8
10.7
0.0
6.4
0.7
1.1
0.0
-4.2
0.0
0.0
-1.7
2.2
-2.6
1.4
2.4
0.0
0.0
0.0
0.0
-1.2
-2.9
-12.8
-31.5
-25.8
-1.7
-15.3
0.5
4.5
-6.0
1.9
-1.5
-0.3
-1.2
-5.1
-0.7
-0.6
-2.1
1.8
-2.1
2.0
3.1
0.8
0.9
2.7
4.5
4.3
3.5
-1.2
-10.2
0.1
-50 -30 -10 10 30 50
TD Securities Action List
Gold & Precious Metals
Media
Transportation - Aerospace
Paper & Forest Products
Consumer Staples
Energy Producers - Senior &Unconventional
Energy Services
Energy Producers - Intermediates
Fertilizers & Chemicals
Health Care
Consumer Discretionary
Special Situations
Industrial Products
Metals & Minerals
Real Estate
Banks
Multi-Industry
Alternative Energy
Insurance
Transportation - Railroads
Communications
Pipelines, Power, & Utilities
Energy Producers – International
Technology
Diversified Financials
Action List Comp Group
-3.8
25.5
-18.2
53.2
-1.6
22.0
8.2
0.0
0.0
-4.2
7.3
-4.8
-6.3
9.1
-26.8
1.9
0.0
-26.3
-2.0
0.0
10.2
-14.7
0.0
0.0
-47.3
-8.7
-18.4
-52.5
21.7
-32.2
-6.0
-19.3
-20.9
-17.7
-19.3
-6.8
-15.5
-16.4
6.8
-29.0
1.1
5.4
-18.0
7.5
10.5
24.1
-0.7
19.3
50.4
3.4
-73.8
-74.0
-100 -50 0 50 100
TD Securities Action List
Gold & Precious Metals
Technology
Real Estate
Media
Consumer Discretionary
Transportation - Aerospace
Insurance
Energy Producers - Intermediates
Fertilizers & Chemicals
Industrial Products
Energy Producers - Senior &Unconventional
Special Situations
Consumer Staples
Metals & Minerals
Banks
Paper & Forest Products
Multi-Industry
Energy Producers – International
Communications
Alternative Energy
Pipelines, Power, & Utilities
Energy Services
Transportation - Railroads
Health Care
Diversified Financials
Action List Comp Group
*% total return.
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Investment Strategy John Aitkens 416 307 9366 [email protected] Three more countries – Australia, China and Japan – recorded a PMI above 50 in December. Of the 22 countries that we track, 8 now have PMIs above 50. Only five posted declining PMIs in December, and these declines were no more than 1 point. Most countries showed PMI gains in the month, some quite large. These countries were Australia, India, Taiwan, and the U.K. This PMI data reinforces our view that the global economy is shifting from deceleration (soft landing) to re-acceleration. As we see it, almost all countries should have a PMI above 50 by the spring, with European nations being the obvious laggards. The details behind the better-than-expected US ISM PMI (53.9 exp 53.5) were also very encouraging. The US employment index jumped to a six-month high of 55.1. This will be an ‘employment rich’ re-acceleration, because productivity has slowed, as it always does at this point in the recovery. Employment growth will likely make the recovery self-sustaining and contribute to a faster-than-expected decline in the U.S. government deficit. The US inventory index dropped to 47.1, and, impressively, the customer inventory index dropped sharply to a seven-month low of 42.5. Both suggest tight inventories, which is why U.S. production is rebounding as companies attempt to rebuild inventory. The shift to inventory rebuilding has been an important driver of all past re-accelerations. The U.S. new orders index increased to 57.6, an eight-month high. This forward looking indicator suggests that the big decline in shipments some expect in early 2012, as bonus depreciation drops to 50% from 100%, will not materialize. U.S. new export orders continued to rise, and is now at 53.0, suggesting any weakness in exports to Europe is being more than offset by strength elsewhere. The re-acceleration is global in scope. Europe is lagging, but not preventing, the re-acceleration of the global economy. We continue to believe that the transition in the global economy from soft landing to re-acceleration is under way, and will be complete by the spring. We therefore continue to recommend an overweight in stocks and an underweight in bonds. We recommend overweighting higher beta sectors (resources, technology, industrials, consumer discretionary), while underweighting defensive sectors (utilities, telecom, consumer staples).
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TSX Group Weightings Overweight Market Weight Underweight Energy Gold Consumer Staples Materials ex Gold Health Care Telecom Industrials Financials Utilities Consumer Discretionary Technology Exhibit 1.
Global PMI's
Sep 11 Oct 11 Nov 11 Dec 11 change
Australia 42.3 47.4 47.8 50.2 2.4Austria 48.7 48.0 47.6 49.0 1.4Brazil 45.5 46.5 48.7 49.1 0.4Canada 55.1 53.7 53.3 54.0 0.7China HSBC 49.9 51.0 47.7 48.7 1.0China NBS 51.2 50.4 49.0 50.3 1.3Czech 52.3 51.7 48.6 49.2 0.6France 48.2 48.5 47.3 48.9 1.6Germany 50.3 49.1 47.9 48.4 0.5Greece 43.2 40.5 40.9 42.0 1.1India 50.4 52.0 51.0 54.2 3.2Ireland 47.3 50.1 48.5 48.6 0.1Italy 48.3 43.3 44.0 44.3 0.3Japan 49.3 50.6 49.1 50.2 1.1Korea 47.5 48.0 47.1 46.4 -0.7Netherlands 48.9 48.0 46.0 46.2 0.2Poland 50.2 51.7 49.5 48.8 -0.7Russia 50.0 50.4 52.6 51.6 -1.0Spain 43.7 43.9 43.8 43.7 -0.1Taiw an 44.5 43.7 43.9 47.1 3.2Turkey 51.5 53.3 52.3 52.0 -0.3UK 50.8 47.8 47.7 49.6 1.9US 51.6 50.8 52.7 53.9 1.2
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Exhibit 2.
U.S. Purchasing Managers' IndexISM
Shaded Areas Represent U.S. Economic RecessionsM431 DEC 2011
70 70
60 60
50 50
40 40
30 3082 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
53.9
Exhibit 3.
Purchasing Managers' New Orders Index
Shaded Areas Represent U.S. Economic RecessionsM659 DEC 2011
80 80
70 70
60 60
50 50
40 40
30 30
20 2082 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
57.6
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Quantitative Analysis Chris Dutton, CFA 416 308 1554 [email protected] January 2012 Looking into 2012, we see several negative trends that can make it difficult for the Canadian market to achieve a sustained recovery. Most important, from our quantitative perspective, is the decline in the earnings cycle. Both trailing and forward earnings momentum peaked late last year, and we expect both to continue to decline into the first half of 2012. With the possibility of further earnings disappointments and downward estimate revisions, multiple expansion will not come easily for stocks, particularly in such an uncertain global macro environment (Exhibit 1). Given this view, we believe that four investment styles will continue to outperform: growth over value, non-cyclical over cyclical, large cap over small cap, and income. In periods of slow growth, stocks with the ability to grow attract premiums. U.S. technology is, for example, a growth sector that we believe will continue to outperform. Within each sector, stocks that have a better relative growth profile should also receive a relative premium. Similarly, non-cyclical stocks should outperform cyclical stocks. We believe that deep or late cyclicals such as base metals, energy, and industrials (ex transports) are likely to underperform, given their higher sensitivity to the global economy. With Europe likely entering a recession, and, with China growth slowing, we believe that economically sensitive commodities are at risk through 2012. Indeed, the Chinese stocks and commodities’ recent weakness should be of particular concern for the TSX, given its recent track record of leading both indices (Exhibit 2) However, with the U.S. economy demonstrating an increasingly well defined recovery, early cycle cyclicals, such as consumer discretionary, transports, and banks with U.S. exposure could perform relatively well. Over the next year, we could see a combination where both defensive sectors such as consumer staples and early cycle consumer discretionary both perform relatively well. Unlike the 2009-2010 ‘top down’ recovery, we believe that 2012 and beyond will be a more traditional ‘bottom-up’, consumer-led recovery. It is important to note that if the U.S. can continue its relative recovery into 2012, we should also expect the U.S. dollar to recover, as investors rotate further into U.S. stocks. This could put added pressure on commodity prices, including gold. A declining Canadian dollar could also cause foreign investment in Canadian stocks to be withdrawn. The current environment also typically favours large cap stocks over small cap stocks. If global growth can re-accelerate, we would consider taking on greater risk through smaller cap names. In today’s highly volatile trading environment, small caps are very risky, in our view. Finally, with interest rates likely to stay low through 2012, a premium may also be placed on income. We would, however, prefer non-cyclical yield over cyclical yield at this stage.
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Materials We reduced our gold position last month in favour of banks, when several gold stocks retested their previous highs. As noted above, with the U.S. economy recovering, the U.S. dollar’s outlook has improved. It will be difficult for gold to rally, if U.S. economic conditions continue to improve into 2012. However, if the U.S. economy stalls and/or investors become concerned about U.S. debt levels, as we saw this past spring/summer, gold could stage a significant recovery. Energy We believe that oil prices near $100/bbl are fundamentally too high in a slowing global growth environment. U.S. inventory data, which was bullish through the fall, has turned negative in the past month. The backwardation in Brent oil futures suggest that the market continue to price in near-term supply risk, likely due to geopolitical uncertainty. If Brent futures spreads reverse into contango, an oil correction back toward $75/bbl becomes likely. This could be an important catalyst for re-accelerating earnings in the non-energy cyclical sectors. In the energy sector, we believe that the premium on income has become dangerously high. Relative valuation spreads are too wide, in our view (Exhibit 4). Low income energy stocks are, in our view, already pricing in an oil correction. Industrials Last month, we removed our position in Canadian Pacific Railway Ltd. (CP-T, $66), given its relatively high exposure to bulk commodities, while maintaining our position in Canadian National Railway Co. (CNR-T, $78, portfolio weight 5.5%). In what we believe will be a slow economic recovery, rails are likely to perform better than the more cyclical sectors. CNR also gives us excellent exposure to a potential U.S. recovery. Consumers Defensive consumer stocks have rallied, we believe, as a result of rising market risks. However, in Canada, the premium paid for this defensive exposure appears to be coming at too high a cost. We may consider buying U.S. consumer staples. Consumer discretionary is another sector that we are also looking to add to. Information Technology, Telecommunication Services Technology remains one of our preferred sectors in the U.S., as we still see very strong earnings momentum. It continues to offer positive earnings momentum, and is also one of the more undervalued sectors, in our view. In a market where earnings growth may be increasingly difficult to find, technology should hold up, relative to other, more cyclical sectors.
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Financials, Utilities We recently raised the banks to slight overweight and have very little life insurance exposure. Following better than expected Q4 results in what is traditionally a weak quarter, we added to the Canadian Banks. Given the relative strength of U.S. regional banks, we would prefer Canadian banks with U.S. exposure, such as Bank of Montreal (BMO-T, $50, portfolio weight 3%). We continue to favour the REITs, through RioCan REIT (REI.UN-T, $26, portfolio weight 3%). We believe that REITs are less economically sensitive than most financials, and should benefit more in a low interest rate environment. Quantitative Model Portfolio Revisions in December 2011 Large Cap Stocks Added/Increased Stocks Removed/Decreased Astral Media Inc. (1.0%) Goldcorp Inc. (4.0% from 6.0%) Bank of Montreal (3.0% from 2.0%) Canadian Pacific Railway Ltd. Canadian Oil Sands Ltd. (1.5% from 2.5%) Bonavista Energy Corp. (1.0% from 2.0%) For complete details of our Canadian Earnings Momentum Model please visit our website at www.tdsecurities.com.
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Exhibit 1.
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 20150
5
10
15
20
25
30
35
40
45
-30
-20
-10
0
10
20
30
40
50
60
S&P 500 Trailing Operating P/ES&P 500 Trailing Earnings Momentum (Yr/Yr%)
13x
11x9x
7x6x
We believe that we have seen the peak of the earnings momentum cycle. Estimate revision momentum (i.e., rate of change) also turned negative following Q3 earnings. We believe that we could see year-over-year trailing earnings growth turn negative in late 2012. At that point, the market will likely discount an earnings recovery, and multiples could expand. Until such time, large cap, non-cyclical growth stocks will likely continue to outperform.
Multiples compress when the earnings cycle peaks.
Exhibit 2.
2007 2008 2009 2010 2011 20124000
6000
8000
10000
12000
14000
16000
18000
4000
6000
8000
10000
12000
14000
16000
18000
TSX CompositeShenzhen Stock IndexGS Commodity Index
China
TSX
Commodities
We believe that the recent weakness in the Chinese stock market, and, in turn, the Chinese economy, is a major risk for commodities and the S&P/TSX. The Chinese market has consistently led both indices in recent years. To overweight commodities again, we need to see a recovery in China first.
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Exhibit 3.
1970 1975 1980 1985 1990 1995 2000 2005 20100.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18WTI Oil Relative to GS Commodity Index
Another risk is the high price of oil relative to other commodities. Relatively high oil prices compress the non-energy related resources and manufacturers' margins.
Conversely, a large drop in oil would raise margins.
Exhibit 4.
2003 2004 2005 2006 2007 2008 2009 2010 20110.0
0.2
0.4
0.6
0.8
1.0
1.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
TCW Relative to TRP - CloseTCW Relative to TRP - 12Month Forward Consensus EPS
The quest for yield has created some major distortions in relative value and earnings momentum. This has become most evident in the energy sector. As an example, the gap between the relative price of TCW/TRP and forward earnings is extreme, in our view. TRP trades at 18x forward earnings with declining estimates, while TCW trades at 7x with rising estimates.
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Exhibit 5.
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q12008 2009 2010 2011
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
600
800
1000
1200
1400
1600
1800
2000
USD Trade Weighted IndexGold - Closest Contract
The rotation into "safe haven" U.S. dollars and treasuries has had a negative impact on gold prices. If the U.S. recovery falters and/or the market becomes concerned again with U.S. debt levels, we could see a significant rotation back to gold in the new year.
Exhibit 6.
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20116
8
10
12
14
16
18
20
22
6
8
10
12
14
16
18
20
22
TSX Banks - Average 12 Month Forward P/ETSX Pipelines - Average 12Month Forward P/ETSX Utilities - Average 12month Forward P/E
The spread in forward P/Es between pipelines and utilities versus banks is at the same level as it was during the 2008 financial crisis.
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Quantitative Model Portfolio: LargeCap (December 30, 2011) Quantitative Model Portfolio: LargeCap
Company Name Symbol Yield Date Added Average Price Current Price S&P/TSX Comp Weight Current Weight
Rel. to S&P/TSX
Comp
Percent Return from Date Added
Energy 27.2% 19.7% 0.7x 56.89%Suncor Energy SU 1.50% 12/03/2010 $35.54 $29.38 3.2% 5.7% 1.7x -17.33%Enbridge ENB 2.97% 04/20/2009 $18.36 $38.09 2.1% 5.2% 2.5x 107.46%Cenovus Energy CVE 2.37% 10/11/2011 $34.01 $33.83 1.8% 2.9% 1.6x -0.53%Trican Well Service TCW 0.57% 08/12/2010 $17.39 $17.55 0.2% 1.9% 10.4x 0.90%Vermilion Energy VET 5.03% 09/16/2011 $44.08 $45.37 0.3% 1.5% 4.9x 2.93%Canadian Oil Sands COS 5.16% 03/08/2011 $32.33 $23.25 0.8% 1.5% 2.0x -28.09%Bonavista Energy BNP 5.52% 06/14/2011 $28.48 $26.07 0.3% 1.0% 3.8x -8.46%
Materials 21.1% 16.0% 0.8x -23.03%Barrick Gold ABX 1.33% 07/25/2007 $41.49 $46.15 3.3% 4.4% 1.4x 11.24%Goldcorp G 1.22% 05/16/2011 $46.73 $45.21 2.5% 3.4% 1.3x -3.25%Franco-Nevada FNV 1.26% 08/08/2011 $40.46 $38.78 0.4% 2.9% 7.6x -4.14%Agrium AGU 0.67% 07/22/2011 $83.73 $68.38 0.8% 2.6% 3.4x -18.33%Potash Corp. POT 0.68% 09/28/2009 $43.41 $42.11 2.6% 1.7% 0.7x -2.99%First Quantum FM 0.87% 10/31/2011 $21.23 $20.05 0.7% 0.9% 1.5x -5.56%
Industrials 5.7% 6.9% 1.2x 37.34%Canadian National Railway CNR 1.62% 12/01/2008 $51.77 $80.15 2.5% 5.4% 2.2x 54.81%SNC Lavalin SNC 1.64% 02/09/2011 $61.89 $51.08 0.5% 1.4% 2.7x -17.47%
Consumer Discretionary 4.0% 6.6% 1.6x -6.91%Shaw Communications SJR.B 4.54% 08/11/2011 $20.86 $20.25 0.5% 2.8% 5.5x -2.92%Magna International MG 3.00% 11/05/2009 $32.51 $34.00 0.6% 1.5% 2.7x 4.58%Thomson Reuters TRI 4.65% 10/11/2011 $29.32 $27.23 0.7% 1.3% 1.9x -7.13%Astral Media ACM.A 2.82% 12/20/2011 $36.01 $35.49 0.1% 0.9% 7.1x -1.44%
Consumer Staples 2.8% 1.1% 0.4x 9.97%Loblaw L 2.18% 09/13/2011 $34.99 $38.48 0.3% 1.1% 4.0x 9.97%
Health Care 1.4% 1.6% 1.2x 7.68%Valeant VRX 0.00% 11/15/2011 $44.26 $47.66 1.0% 1.6% 1.6x 7.68%
Financials 29.3% 24.3% 0.8x 66.12%Royal Bank of Canada RY 4.16% 02/24/2011 $56.26 $51.98 5.2% 6.4% 1.2x -7.61%CIBC CM 4.88% 10/27/2008 $58.00 $73.79 2.1% 5.5% 2.6x 27.23%Bank of Nova Scotia BNS 4.09% 12/09/2003 $34.75 $50.83 3.9% 4.9% 1.3x 46.29%RioCan REIT REI.UN 5.22% 10/13/2010 $22.87 $26.43 0.5% 3.2% 6.3x 15.57%Bank of Montreal BMO 5.01% 12/02/2011 $57.75 $55.88 2.5% 3.0% 1.2x -3.24%Manulife Financial MFC 4.79% 10/11/2011 $12.35 $10.85 1.4% 1.3% 1.0x -12.12%
Information Technology 1.3% 7.9% 6.2x 1.80%Technology Select SPDR XLK 1.41% 02/08/2010 $23.92 $25.99 NA 6.0% NA 8.65%CGI Group GIB.A 0.00% 02/08/2011 $20.61 $19.20 0.3% 2.0% 6.4x -6.85%
Telecommunication Services 5.2% 5.0% 1.0x 41.16%TELUS T 4.03% 06/14/2010 $39.49 $57.64 1.3% 2.8% 2.1x 45.95%Manitoba Telecom MBT 5.73% 04/05/2011 $30.18 $29.67 0.1% 2.2% 15.9x -1.68%
Utilities 2.0% 2.8% 1.4x -1.56%TransAlta TA 5.52% 04/29/2011 $21.35 $21.02 0.3% 2.8% 8.6x -1.56%
Cash Totals: 8.1% Portfolio Yield: 2.69%Equity Totals: 91.9%
Performance1-Week 4-Week 6-Month 1-Year Since Inception
(9/12/2000)Quantitative Portfolio % 0.322% -0.471% -6.948% -11.464% 128.558%S&P/TSX Comp Cap (10%) % 0.238% -0.994% -10.118% -11.070% 31.712%S&P/TSX 60 Cap (10%) % 0.401% -0.812% -10.869% -11.420% 41.018%S&P/TSX Completion % -0.209% -1.486% -8.067% -10.256% 28.348%S&P/TSX SmallCap % -0.109% -2.004% -13.754% -18.389% 23.218%S&P 500 % -0.611% 1.070% -6.126% -0.003% -15.141%NASDAQ Comp % -0.515% -0.829% -7.489% -1.799% -32.325%Dow Jones Industrial Ave. % -0.622% 1.648% -2.902% 5.528% 8.763%
Turnover: 78.9% CAGR: 7.592%
7.856%11.152% -0.003%
-1.799%11.951% 5.528%
-10.256%-18.389%
5.066%5.185%
Year-to-Date (2011)
-11.420%-11.070%
3-Month
2.850%2.069%
2.907% -11.464%
All views expressed are the opinions of Quantitative Research based on historical company fundamentals and market statistics. No guarantee of outcome is implied. Due to the quantitative and technical nature of this report, the issuers or securities recommended or discussed in the report are not continuously followed and opinions may change without notice. TDSI is under no obligation to inform you of such a change. As such, investors may not want to base their investment decision solely on this report. TD Securities Inc. may publish fundamental research on the securities of these issuers which expresses differing opinions. Clients should contact their TD Securities Inc. representative to request such material. Sources: Global Insight, Thomson Financial, CPMS, Bloomberg, S&P/TSX Index Services, S&P Index Services, TSX, NYSE, NASD, company reports.
18
Alternative Energy
1M 3M 6M 12M YTD Cum.1
Action List 0.0 0.0 0.0 0.0 0.0 0.0Comp. Group* 0.9 (1.4) 6.8 10.5 10.5 22.2S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 34.3* S&P/TSX Independent Power Producers & Energy Traders (Subindustry)¹ Since October 21, 2008
Total Return %
7090
110130150170
Oct
08
Jan0
9
Apr0
9
Jul0
9
Oct
09
Jan1
0
Apr1
0
Jul1
0
Oct
10
Jan1
1
Apr1
1
Jul1
1
Oct
11
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month Stocks of senior operators in the Canadian renewable energy sector, which make up our coverage universe, generally outperformed both broader equity markets and riskier renewable energy equities (prospective developers, smaller-scale operators and technology-focused companies) in December. Companies in the senior operators group are generally larger-cap, lower-risk, renewable energy power producers with stable dividends; on average, the senior operators’ share prices were flat on the month. Junior operators’ share prices were down 6.9% in December. The shares of prospective developers fell by 6.2%, while technology-focused stocks fell by 2.1%. The WilderHill New Energy Global Innovation Index (a global renewable energy composite, abbreviated NEX) declined by 6.8% in December. These moves compare with the S&P/TSX Composite Index’s return of -1.7% and the S&P/TSX Clean Technology Index’s return of 2.3%. Within our coverage universe, Brookfield Renewable Energy Partners L.P. was the best performing stock, gaining 7.4% in December. Capstone Infrastructure Corp. posted the largest decline, falling 35.9% during the month, after revising its 2012 guidance and announcing that it expected to cut its dividend in 2012. Things to Watch For in the Coming Month The comment period for the review of the Ontario feed-in tariff (FIT) program concluded on December 14, with the government receiving over 2,900 responses to the review (it was launched on October 31). The government previously suggested that the results of the review will likely be available in the first half of 2012. The OPA has indicated that, similar to the original FIT rules, the results of the review could be accompanied with a brief comment period for draft changes in the program. The review is focused on issues that include a likely reduction in FIT rates, ensuring the long-term sustainability of clean energy procurement, clean energy job creation, the consideration of new technologies, and local consultation regulations.
Sean Steuart, CFA 416 308 3399 [email protected]
19
We believe that the government could use this opportunity to conduct a broader review of electricity policy – particularly in the context of a new Minister of Energy, a minority government, and rising ratepayer costs. We believe that the review could result in a shift to an RFP-style procurement process for large-scale renewable projects, while leaving the FIT in place for small scale projects. The FIT is likely to see price reductions, particularly for solar projects, given the significant decline in solar panel prices since FIT prices were set over two years ago. It is also worth noting that the Commission on the Reform of Ontario’s Public Services (led by Don Drummond, previously TD Bank’s Chief Economist) is widely expected to release its report before Ontario’s March budget; this commission could recommend changes to the FIT, or to Ontario’s energy sector (such as a restructuring of the OPA) that could further affect either the review process or the FIT program itself. Companies in our coverage universe are expected to start reporting Q4/11 results in February. The timing of Q4 results tends to vary widely among these companies; Brookfield Renewable is normally the first to report in early February, while some companies report well toward the end of March. Our Sector Stance We recommend that investors take a market weight sector position. We consider the sector to be fairly valued at current levels; however, we see an opportunity for outperformance in select cases, particularly in light of recent market volatility. Within the sector, we prefer Algonquin Power & Utilities Corp., Innergex Renewable Energy Inc., and Boralex Inc. Our top pick in the sector is Algonquin Power, which we consider to be a rare combination of 1) a conservative mid-term payout ratio (implying an ability to fund a portion of growth from internal cash reserves and residual operating cash flow) and 2) relatively inexpensive valuation based on forward earnings expectations.
20
A
ltern
ativ
e En
ergy
Uni
vers
e
AL
BUY
= Ac
tion
List
BU
Y
Ana
lyst
(s):
SS
= S
ean
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art,
CFA
416
308
339
9
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r.Ye
ar-
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tal
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k
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bol
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End
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Cap
(mm
)D
ist.
Yiel
d20
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Deb
tEV
2010
A20
11E
2012
E20
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2011
E20
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Targ
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atin
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atin
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naly
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wer
& U
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orp.
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ield
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rtner
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P/E
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21
Banks
1M 3M 6M 12M YTD Cum.1
Action List 2.4 1.8 1.9 1.9 1.9 21.5Comp. Group* 3.1 2.5 (5.7) 1.1 1.1 13.1S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) (5.0)* S&P/TSX Commercial Banks (Industry)¹ Since October 11, 2007
Total Return %
406080
100120140
Oct
07
Feb0
8
Jun0
8
Oct
08
Feb0
9
Jun0
9
Oct
09
Feb1
0
Jun1
0
Oct
10
Feb1
1
Jun1
1
Oct
11
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month On average, the S&P/TSX Commercial Banks (Industry) was up 3.1% on the month, outperforming the S&P/TSX Composite Index, which was down 1.7%. U.S. banks (based on our list), including U.S. Money Center and Super Regional banks, outperformed their Canadian counterparts, and were up an average of 3.2% month over month. Things to Watch For in the Coming Month The U.S. banks are set to begin reporting Q4/11 results at the end of next week. The U.S. banks’ results will affect Canadian banks like BMO, which have significant U.S. retail exposure. (Royal Bank has largely sold its U.S. Retail operations, which should close on March 2012.) The operating environment remains under pressure, and retail operating trends should continue to moderate, with some weak spots in evidence in PCL trends. U.S. earnings will likely continue to see a focus around investment banking/trading revenues (which will likely be under pressure) and the impact of regulatory issues (including capital). The Canadian banks recently completed its Q4/11 reporting results last month. In the end, the quarter was largely better than feared. Most earnings beat estimates and underlying trends were generally good, while Wholesale results largely beat lowered expectations. The slower revenue picture continues to evolve on the back of continued moderation in volume growth (but holding in better than expected), while margins were slightly lower than expected. Credit performance was a bit mixed during Q4/11, but generally trends are levelling off. Further, given the softer revenue environment, all of the banks have begun to highlight efforts to manage expense growth, and that should remain a key focus in 2012.
Jason Bilodeau, CFA 416 308 3741 [email protected]
22
Our Sector Stance Overall, we remain comfortable that the group can post reasonable earnings growth in 2012, and, to us, the stocks are more than 15% undervalued here. We believe that the core business trends remain reasonable, although somewhat modest by historical standards. Further, we see significant upside in the earnings potential, should markets recover and interest rates move higher for H2/12-2013. Both scenarios have good chances, in our view. It is on this basis that we remain fairly constructive on the group. We believe near-term earnings pressure will be manageable, and earnings (and dividends) should continue to grow further in 2012. With the stocks currently trading at what we view as reasonably attractive valuations, we see total returns on the order of 30% over the coming 12 to 16 months. Canadian Imperial Bank of Commerce (CM-T, N; $73.79); 12 Month Target $94.00 Jason Bilodeau, CFA 416 308 3741 We upgraded CIBC to an Action List BUY on July 25 (for detail, see our Action Note of that date) on the view that the shares were aggressively discounting what we thought to be a very reasonable operating outlook. The strong Q3/11 and Q4/11 results supported that view, and we remain comfortable with our above-Consensus view on earnings. We continue to believe that the shares offer very good value at current levels. The bank has largely de-risked its Wholesale operations and is a Retail focused business (with upside potential in 2012 from its addition of American Century). CIBC remains well capitalized and we see further dividend increases in 2012. Ultimately, CIBC does not, in our view, have the highest quality medium-term growth prospects in the group, but earnings have been coming on well, and the stock is trading at what we view as still attractive valuations (including a 4.9% dividend yield). We reiterate our Action List BUY.
23
B
anks
Uni
vers
e
Fi
nanc
ial S
ervi
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– In
sura
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L BU
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24
Biotechnology & Health Care
1M 3M 6M 12M YTD Cum.1
Action List 0.0 0.0 0.0 0.0 0.0 (38.0)Comp. Group* (0.7) 14.9 (3.8) 50.4 50.4 74.6S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 35.4* S&P/TSX Health Care (Sector)¹ Since July 27, 2005
Total Return %
3080
130180230
Jul0
5
Jan0
6
Jul0
6
Jan0
7
Jul0
7
Jan0
8
Jul0
8
Jan0
9
Jul0
9
Jan1
0
Jul1
0
Jan1
1
Jul1
1
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month The S&P/TSX Health Care sector declined by 0.7% in December. Paladin Labs (PLB-T) was our most notable outperformer in the month, gaining 8.4%, on continued demonstration of strong financial performance and operational execution (DigiFab launch – December 12). Valeant Pharmaceuticals (VRX-T, VRX-N) was also topical, gaining 1.0%, on a flurry of business development activity. During the month, the company 1) closed four acquisitions – Afexa Life Sciences, Ortho Dermatologics, Dermik and iNova; 2) initiated a $327 million hostile bid for ISTA Pharmaceuticals (ISTA-Q, not rated), a branded ophthalmic Specialty Pharma company; and 3) closed $500 million of incremental term loans. Things to Watch For in the Coming Month 1) Valeant 2012 guidance call – January 6, 2012 2) Valeant’s expiration of ISTA bid – January 31, 2012 3) CML – MOH notification regarding termination of Year 2 performance-based
funding 4) CML – appointment of a permanent CEO Beyond the month, we expect: 1) Valeant’s U.S. Potiga launch – Q1/12 2) For SXC, Cigna (CI-N, not rated) notification to CMS regarding PBM switch
– April 2012 3) Nordion versus AECL/Government of Canada – resolution expected 2012 Our Sector Stance We are market weight the Canadian Biotechnology and Health Care sector. We favour companies that have 1) strong competitive positions in their respective businesses; 2) favourable pharmacoeconomic (and health care economic) profiles; 3) favourable reimbursement footings; and 4) little or no need for short-term borrowing.
Lennox Gibbs 416 308 2213 [email protected]
25
B
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logy
& H
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26
Chemicals & Fertilizers
1M 3M 6M 12M YTD Cum.1
Action List (4.2) (4.2) (4.2) (4.2) (4.2) (43.7)Comp. Group* (5.1) (5.0) (22.1) (19.3) (19.3) 58.3S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 0.6* S&P/TSX Chemicals (Industry)¹ Since April 24, 2007
Total Return %
050
100150200250300
Apr0
7
Oct
07
Apr0
8
Oct
08
Apr0
9
Oct
09
Apr1
0
Oct
10
Apr1
1
Oct
11
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month Fertilizer producer stocks were weaker in December, likely due to weaker sentiment toward the sector, as production cuts have been announced. Specifically, Agrium (AGU-N, T) and Potash Corp. (POT-N, T) both decreased by 4% and 5%, respectively. Migao (MGO-T) increased by 31%, albeit from a very low stock price level at the end of November. We speculate that some reduced doubt about the long-term supply agreement with Potash Export Co. (PEC) and overall improved sentiment on the name may be the reasons for the bounce. Methanex (MEOH-Q, MX-T) decreased by 7%, likely reflecting global economic growth concerns. Fertilizer prices mostly lower in December. Urea and DAP prices were both down about 18% and 22%, respectively. Demand has been essentially non-existent, as buyers are cautious, due to macroeconomic concerns. However, inventories are estimated to be relatively low, and purchases for the spring planting season are still expected in early Q1/12. The domestic potash price dropped nominally by 1%. Meanwhile, methanol increased by 4%, but on light volume. Potash inventory update. The North American potash inventory increased by 24% sequentially in November to 1.375 million tons (K2O basis), and is 26% higher year over year. The inventory level is now 5% below the 2001-2010 average of 1.441 million tons for November. For context, North American potash production of 1.040 million short tons (K2O basis) in November 2011 is 17% higher sequentially, but 5% lower year over year. We attribute the sequential increase in inventory to continued buyer caution and seasonality. We expect the flow of product to improve domestically with spring demand, while offshore volumes are likely to be soft, until price clarity is gained from the China/India contract negotiations in February/March. China’s methanol net imports strong. China’s methanol net import data suggest demand has not waned. The most recent Chinese methanol net import data for November 2011 of 514,000 tonnes is 4% lower sequentially, but still 18% higher year over year. Year to date, net imports of 5.2 million tonnes are 11% higher year over year, which suggests strong demand growth.
Paul D’Amico, CFA 416 983 2755 [email protected]
27
Methanol price retraces slightly from high level. Methanex’s North American non-discounted methanol reference price (NDRP) for January 2012 has been lowered to US$1.34/gal, which is 3% lower from the US$1.38/gal over August to December 2011. Similarly, its Asian Posted Contract Price (APCP) has been lowered to US$440/tonne for January 2012, from US$470/tonne. Despite the slight reduction, prices remain at relatively strong levels. Potash Corp. curtails production and expresses interest in increasing ICL stake. The company has announced a ‘market-related’ production cutback, consistent with the company's “practice of matching supply with demand”. As well, Potash Corp. has also expressed interest in increasing its equity ownership in Israel Chemicals (ICL-TV; not rated) to 25.0% from 13.9%. We were not surprised by either event, and do not believe that they will have any notable impact. Our long-term fundamental view remains positive – especially given the current attractive valuation. Our BUY rating is unchanged. Target lowered on Migao, BUY unchanged. We reduced our EPS estimates and target price to $7 from $8, due to weaker SOP pricing in China, as reported by CRU, a fertilizer industry publication. However, our BUY rating is unchanged, as we continue to see attractive value at current stock price levels. Things to Watch For in the Coming Month Investors should watch price movements in major crops (defined by acreage usage and fertilizer requirement intensity), such as corn and soybeans, as well as the major fertilizers – ammonia, urea, DAP and potash. Methanol trade data is neither timely nor frequent; therefore, news flow is essentially anecdotal from trade publications. Our Sector Stance Our view on major crops is positive, given the low stocks-to-use ratio for corn, expected time lag to replenish stocks, strong overall farmer profitability, and continued global demand growth. Similarly, we recommend an overweight stance for the fertilizer sector, given 1) prevailing positive fundamentals supporting pricing, 2) healthy profit margins, 3) producer discipline, 4) relatively attractive stock price valuations, and 5) continued strong global demand/requirement of nutrients for crop yield improvement. Agrium Inc. (AGU-N, US$67.11); 12-Month Target: US$115.00 Paul D’Amico, CFA 416 983 2755 In mid-December, Agrium announced that it will quadruple its dividend. We believe this provides several positives: 1) the current dividend yield of about 0.7% is now somewhat more competitive with peers; 2) demonstrates shareholder friendliness in answering requests for such an increase, sooner than we expected; and 3) implies management confidence in sustainable free cash flow strength, as, in our view, increased retail segment improves relative stability. Agrium is still in growth mode, and, in our view, this increased dividend does not impede its ability to maintain a strong balance sheet or implement its growth strategy, including acquisitions and expansion. We maintain our Action List BUY rating on Agrium.
28
C
hem
ical
s an
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29
Communications
1M 3M 6M 12M YTD Cum.1
Action List (1.2) (4.0) (11.5) (2.0) (2.0) 1943.7Comp. Group* 4.3 6.2 1.9 7.5 7.5 76.7S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 97.9* S&P/TSX Div. Telecom. Services, Media (Industries),Commercial Printing (Subindustry)¹ Since April 26, 2002
Total Return %
0500
1,0001,5002,0002,500
Apr0
2
Apr0
3
Apr0
4
Apr0
5
Apr0
6
Apr0
7
Apr0
8
Apr0
9
Apr1
0
Apr1
1
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month Yet again this month, there was tremendous disparity of returns in our space. BCE and Quebecor were up over 6%, but Shaw, Cogeco Inc., Thomson Reuters and TeraGo finished in negative territory. Quebecor’s rise came on the back of a rough November, when the shares were down 6%. On an equal-weighted basis, the group’s average return was slightly more than 1% positive. Things to Watch For in the Coming Month Shaw AGM and Q1 results – January 12 Cogeco Cable Inc. and Cogeco Inc. AGM and Q1 results – January 26
Our Sector Stance We maintain our underweight stance on the sector. In the wireless market, new entrants continued to relentlessly discount plans and handsets over the holiday season in an effort to attract new customers. The price promotion has not gone unnoticed by the incumbents, and they have been forced to react. Hesitant to compete directly on price, the incumbents have offered: 1) increased handset subsidies, and 2) free long distance. Bloomberg reported that an end to the price wars may be in sight in its report entitled “Globalive said to be in talks to buy Rival Mobilicity”, dated December 20. However, despite the ostensible immediate benefits, we believe the combination of WIND and Mobilicity could actually have negative implications for Rogers, BCE and TELUS. The transaction could lead to the emergence of one strong new entrant, with the capability to invest in better spectrum (700 MHz), better networks (LTE), and better devices (iPhone and its associated subsidy model). As a result, competitive disruption could also migrate up from the low end prepaid and talk & text segment, into the more lucrative smartphone segment.
Vince Valentini, CFA 416 944 7012 [email protected]
30
Manitoba Telecom Services Inc. (MBT-T, $29.67); 12-Month Target C$40.00 Vince Valentini, CFA 416 944 7012 We believe that the turnaround at Allstream remains intact. Pension fears have been overblown, and we are confident that management will be able to deliver on its guidance for either zero cash pension solvency funding or flat capex in 2012. Improving and undervalued fundamentals, which could lead to a dividend growth story by 2013, are the primary reason why we like MBT shares, but we note that potential changes in foreign ownership rules this fall could spark an M&A catalyst for the stock (see our research report of November 30, 2011), which, we believe, enhances the risk-reward profile. Thomson Reuters Corp. (TRI-T, $27.23); 12-Month Target C$43.00 Vince Valentini, CFA 416 944 7012 We doubt that TRI shares will break out to the upside in the near term if the economic news flow out of Europe remains volatile. However, we remain convinced of its long-term upside, and view the stock as heavily oversold and undervalued. A dividend increase with the Q4 results in February, combined with confirmation that the lengthy integration of Reuters is finally complete, should reverse sentiment on the stock.
31
C
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32
Consumer Discretionary
1M 3M 6M 12M YTD Cum.1
Action List 0.0 0.0 0.0 22.0 22.0 (47.6)Comp. Group* (0.6) 3.1 (6.2) (6.0) (6.0) (8.7)S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) (0.7)* S&P/TSX Durables & Apparel, Retailing (Industry Groups)¹ Since April 1, 2008
Total Return %
30
60
90
120Ap
r08
Aug0
8
Dec
08
Apr0
9
Aug0
9
Dec
09
Apr1
0
Aug1
0
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Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month Over the past month, the comparable group of discretionary stocks declined by 0.6%, outperforming the S&P/TSX Composite Index, which declined by 1.7%. Our consumer discretionary stocks under coverage recorded a weighted average decline of 1.0%. Things to Watch For in the Coming Month January 26: Richelieu Hardware (RCH-T) Q4/11 results. We are looking for EPS of C$0.51 versus C$0.48 and consensus of C$0.51.
Our Sector Stance Looking into 2012, our long-term outlook for the consumer discretionary space remains generally positive, and we recommend an overweight stance. Admittedly, recent market uncertainty has certainly affected sentiment on our sector, which has been hit harder than sectors with more ‘defensive’ characteristics. We agree with our colleague, TD Securities’ Investment Strategist John Aitkens, who still believes that equity markets are oversold, valuations are inexpensive, and that a recession will be avoided. His recommendation remains to overweight higher beta sectors, including consumer discretionary. We share his opinion, as indicated by the fact that we have BUY recommendations on most of the stocks that we cover. As the uncertainties of recent events pass, a move into consumer discretionary stocks is likely, especially with corporate earnings growth re-accelerating into 2012, leading to valuation recovery.
In our view, during H1/12, uncertainty surrounding the financial situation in Europe will likely negatively affect growth, confidence and spending in both the U.S. and Canada. The outcome of the crisis in Europe admittedly represents a major downside risk to economic growth in North America.
Most companies under our coverage generate a significant portion of their business in the U.S., with the exception of Canadian Tire, RONA and Dollarama. The economy had been on a slow recovery pace before the U.S. debt ceiling debate, euro zone debt woes, and the financial market fallout jolted consumer and business
Jessy Hayem, CFA 514 289 0385 [email protected]
33
confidence in the economy. Consumer confidence bounced back strongly in November, after sinking to its lowest level since March 2009. However, confidence remains well below historical levels and job growth is likely to remain subdued. While the economy is likely to continue to grow in 2012, tepid income growth and pending headwinds from Europe could lead to slower spending in H1/12. We anticipate that after slowing in H1/12, and as confidence recovers, consumer spending should re-accelerate in H2. In Canada, consumer spending may have been fuelled by increased discounting at retail in Q4. However, a soft labour market, slow wage growth, growing household debt, combined with rising gasoline and food prices, suggest that looking into 2012, low interest rates may not represent the same catalyst for spending as it did in 2010. These factors, combined with the recent volatility in the financial markets and uncertainty surrounding the global economy, lead us to expect soft retail spending into H1/12.
In our view, 1) if economic conditions weaken or remain uncertain, stocks in our coverage universe that may best weather the storm are Dollarama and Canadian Tire, and among the small caps, Uni-Select; or 2) in a soft landing scenario, our top pick coming out of the current slump would be Gildan Activewear, which has a solid long-term strategy for growth, and Atrium and Dorel in the small cap space. Garda World also has the potential to recover meaningfully, though we maintain a HIGH risk rating on this stock.
In the consumer discretionary space, we continue to favour stocks that have: 1) room to grow earnings through operational improvements over and above the potential lift from an eventual market recovery; 2) strong balance sheets, and significant free cash flows that can be redeployed in value-added opportunities such as acquisitions and/or share buybacks and dividend introductions/increases; and 3) valuations close to historical lows.
34
C
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1.6%
$1.6
5$1
.35
$2.2
2$2
79$3
12$2
6413
.9x
8.5x
7.9x
9.3x
$25.
0032
%BU
YHI
GH
JH
RONA
Inc.
(1)
RON
T$9
.74
Dec
C$
131.
1$1
,277
$0.1
41.
4%$1
.04
$0.6
6$0
.82
$335
$272
$308
14.8
x11
.9x
5.8x
5.1x
$11.
0014
%HO
LD
MED
IUM
JH
Ove
rall
Cur
r.Ye
ar-
Rep
.Sh
ares
Mar
ket
Ind.
EPS
EBIT
DA
(mm
)P/
E (x
)EV
/EB
ITD
A (x
)12
-Mon
thTo
tal
Ris
k
Stoc
k N
ame
Sym
bol
Exch
.Pr
ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)D
iv.
Yiel
d20
10A
2011
E20
12E
2010
A20
11E
2012
E20
11E
2012
E20
11E
2012
ETa
rget
Ret
urn
Rat
ing
Rat
ing
Anal
yst
Atriu
m In
nova
tions
Inc.
(1)
ATB
T$1
1.88
Dec
US$
33.0
$392
$0.0
00.
0%$1
.44
$1.7
4$1
.86
$84
$96
$105
6.7x
6.3x
6.0x
5.4x
$17.
5047
%BU
YM
EDIU
MJH
Gar
da W
orld
Sec
urity
Cor
p. (1
), (2
)G
WT
$7.3
1Ja
nC
$32
.3$2
36$0
.00
0.0%
$0.9
0$0
.85
$1.0
5$1
26$1
32$1
468.
6x7.
0x6.
3x5.
7x$1
3.00
78%
BUY
HIG
HJH
Rich
elie
u Ha
rdwa
re L
td.
RCH
T$2
8.71
Nov
C$
21.1
$606
$0.4
41.
5%$1
.78
$1.8
4$1
.93
$64
$67
$69
15.6
x14
.9x
9.0x
8.7x
$29.
003%
HOLD
MED
IUM
JH
Uni-S
élec
t Inc
. (1)
UNS
T$2
6.25
Dec
US$
22.9
$601
$0.4
81.
8%$2
.33
$2.7
8$3
.02
$78
$111
$125
9.2x
8.5x
8.3x
7.4x
$32.
0024
%BU
YM
EDIU
MJH
(1) F
inan
cial
figu
res
for 2
010A
wer
e ad
just
ed p
er T
D c
alcu
latio
ns to
refle
ct c
hang
es m
ade
rela
ted
to IF
RS.
(2) F
inan
cial
figu
res
depi
ct fi
scal
yea
r clo
sest
to c
alen
dar y
ear e
nd.
Note
: Cur
r. Pr
ice,
Mar
ket C
ap, a
nd In
d. D
iv. fo
r DII.
B, G
IL, a
nd A
TB a
re in
C$.
35
Consumer Staples
1M 3M 6M 12M YTD Cum.1
Action List 6.4 3.2 6.9 9.1 9.1 23.2Comp. Group* 1.9 2.9 2.0 6.8 6.8 9.6S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 37.9* S&P/TSX Consumer Staples (Sector)¹ Since July 21, 2005
Total Return %
60
100
140
180
Jul0
5
Jan0
6
Jul0
6
Jan0
7
Jul0
7
Jan0
8
Jul0
8
Jan0
9
Jul0
9
Jan1
0
Jul1
0
Jan1
1
Jul1
1
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month Over the past month, the S&P/TSX Consumer Staples Index grew by 1.9%, while the S&P/TSX Composite Index declined by 1.7%. With an average return of 1.5%, our consumer staples stocks under coverage outperformed the S&P/TSX Composite Index, but underperformed the Consumer Staples index. Things to Watch For in the Coming Month January 6: The Jean Coutu Group (PJC) Inc. (PJC.A-T) fiscal Q3/12 results. We are looking for EPS (f.d.) of $0.22 versus $0.21 a year ago. Consensus is also at $0.22 (range of $0.22–0.23). January 18: Viterra Inc. (VT-T) fiscal Q4/11 results. We are looking for EBITDA of $109 million versus $138 million a year ago. Consensus EBITDA estimate is $111 million (range of $89–134 million). January 31: Metro Inc. (MRU.A-T) fiscal Q1/12 results. We are looking for EPS (f.d.) of $0.97 versus $0.88 a year ago. Consensus is also at $0.97 (range of $0.95–1.00). Its AGM is on the same date January 20: Statistics Canada December CPI release. Our Sector Stance Substantially higher fuel and food prices, coupled with the troubled economy, have forced consumers to review how they allocate their spending. Consumers on both sides of the border have been making a greater percentage of their purchases on promotion, avoiding unnecessary driving, and cutting back on discretionary spending – although discretionary spending in Q4/11 seems to be a little more encouraging. Consequently, the companies under our coverage generally need to battle daily for meaningful top-line growth, keeping the retail environment highly promotional. All are strong operators, although some stand out more than others. Moreover, not all are at the same stage of execution on internal programs, and this tends to lead to varying degrees of growth and operational efficiency opportunities. Sector valuations have contracted considerably, but catalysts are still lacking to drive share prices materially higher without a corresponding move in the general markets. The focus of our investment strategy remains on companies that either:
Michael Van Aelst, CFA 514 289 0518 [email protected] Cherilyn Radbourne, CA, CFA 416 308 3403 [email protected] Derek J. Lessard 514 289 0384 [email protected]
36
1) have extremely strong balance sheets, with sufficient FCF to make accretive acquisitions (using low-cost capital) when they become available, and pursue a more active normal-course issuer bid than usual while they wait; and/or 2) have above-average growth and internal efficiency programs that should permit them to grow earnings meaningfully in excess of their sector peers; and 3) have valuations close to historical lows. Alimentation Couche-Tard Inc. (ATD.B-T, $31.70) 12-month Target: $38.00 Michael Van Aelst 514 289 0518 We expect double-digit growth in the high-margin fresh food category; a tight grip on operating costs; roughly 5% annual share-count reduction (via the company’s normal course issuer bid); and accretion from previously announced acquisitions to combine to drive 15–20% annual EPS growth for the foreseeable future. We expect this to help the company achieve our Street-high estimates for both fiscal 2012 and 2013. Couple this with what we view as a clean balance sheet, below average valuation, and an exceptional 10% FCF yield in fiscal 2013, and we remain confident in maintaining Couche-Tard as our top pick in the sector. Loblaw Companies Ltd. (L-T, $38.48) 12-month Target: $50.00 Michael Van Aelst 514 289 0518 While the anticipated completion date for the IT integration seems to be ever-extending (SAP store installs are now expected to be mostly complete by the end of 2013), the added caution has at least enabled the supply chain and IT integration to progress without any major hiccups. As well, EPS has continued to grow, despite the substantial related expenses (management reconfirmed that IT expenses would peak in 2012). Market sentiment could very well remain soured in the near term by the extension of the IT integration at store level into 2014, but we argue that significant progress is still being made. EPS growth should extend its streak of 14 straight growth quarters, with the pace accelerating as IT expenses start to tail off. At the very least, we believe that downside is limited, by an estimated $34 per share minimum real estate value. Strong gross margin improvement and very tight control on non-IT operating expenses should combine with anticipated share gains by H2/12 to drive much stronger earnings growth over the next few years, accelerating in 2013 as IT spending starts to decline. Food price inflation (in the retailer’s basket), assumed at 1.5–2.0% for 2012, should help to offset operating cost inflation, and, in Loblaw’s case, add to the gross margin expansion trend already under way from improvements in private label and general merchandise. Loblaw remains rated an Action List BUY.
37
C
onsu
mer
Sta
ples
Uni
vers
e
AL
BUY
= Ac
tion
List
BU
Y
Ana
lyst
(s):
MV
= M
icha
el V
an A
elst
, CFA
514
289
051
8; C
R =
Che
rilyn
Rad
bour
ne, C
A, C
FA, 4
16 3
08 3
403;
DL
= D
erek
J. L
essa
rd 5
14 2
89 0
384
Ove
rall
Cur
r.Ye
ar-
Rep
.Sh
ares
Mar
ket
Ind.
EPS
EBIT
DA
(mm
)P/
E (x
)EV
/EB
ITD
A (x
)12
-Mon
thTo
tal
Ris
k
Stoc
k N
ame
Sym
bol
Exch
.Pr
ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)D
iv.
Yiel
d20
10A
2011
E20
12E
2010
A20
11E
2012
E20
11E
2012
E20
11E
2012
ETa
rget
Ret
urn
Rat
ing
Rat
ing
Anal
yst
Alim
enta
tion
Cou
che-
Tard
Inc.
ATD
.BT
$31.
70Ap
rUS
$18
3.0
$5,8
01$0
.30
0.9%
$1.5
3$1
.97
$2.2
8$6
26$7
35$8
0216
.4x
14.2
x8.
2x7.
5x$3
8.00
21%
AL B
UYM
EDIU
MM
V
Lobl
aw C
ompa
nies
Ltd
.L
T$3
8.48
Dec
C$
281.
0$1
0,81
3$0
.84
2.2%
$2.6
2$2
.85
$3.2
5$2
,025
$2,1
20$2
,340
13.5
x11
.8x
7.2x
6.5x
$50.
0032
%AL
BUY
MED
IUM
MV
Col
abor
Gro
up In
c.G
CL
T$1
0.62
Dec
C$
22.8
$242
$1.0
810
.1%
$0.8
0$0
.57
$0.8
3$3
7$4
4$5
318
.6x
12.8
x10
.0x
8.2x
$11.
0014
%HO
LDM
EDIU
MD
L
Empi
re C
ompa
ny L
td.
EMP.
AT
$59.
11Ap
rC
$68
.0$4
,019
$0.9
01.
5%$4
.15
$4.4
3$4
.61
$819
$833
$800
13.0
x12
.5x
5.6x
5.8x
$62.
006%
HOLD
MED
IUM
MV
The
Jean
Cou
tu G
roup
(PJC
) Inc
.PJ
C.A
T$1
2.75
Feb
C$
227.
3$2
,898
$0.2
41.
9%$0
.69
$0.7
8$0
.86
$269
$291
$305
15.3
x13
.8x
10.7
x10
.3x
$13.
004%
HOLD
MED
IUM
MV
Map
le L
eaf f
oods
Inc.
MFI
T$1
0.83
Dec
C$
140.
0$1
,516
$0.1
61.
5%$0
.73
$1.0
3$1
.17
$360
$419
$459
10.5
x9.
3x6.
1x5.
5x$1
5.00
40%
BUY
HIG
HM
V
Met
ro In
c.M
RU.A
T$5
4.00
Sep
C$
102.
1$5
,513
$0.7
71.
4%$3
.56
$3.8
7$4
.30
$788
$794
$826
14.0
x12
.6x
7.9x
7.6x
$56.
005%
BUY
MED
IUM
MV
North
Wes
t Com
pany
Inc.
NWC
T$2
0.15
Jan
C$
48.3
$973
$1.0
55.
2%$1
.58
$1.2
3$1
.32
$125
$128
$136
16.4
x15
.3x
8.9x
8.4x
$21.
009%
HOLD
MED
IUM
MV
Pizz
a Pi
zza
Roya
lty In
com
e Fu
ndPZ
A.UN
T$8
.55
Dec
C$
29.6
$253
$0.7
08.
2%$0
.88
$0.7
7$0
.79
$31
$30
$31
11.1
x10
.8x
10.1
x9.
7x$9
.50
19%
HOLD
MED
IUM
DL
Roge
rs S
ugar
Inc.
RSI
T$5
.26
Sep
C$
88.8
$467
$0.3
46.
5%$0
.51
$0.3
7$0
.45
$71
$66
$79
14.2
x11
.7x
9.7x
8.1x
$5.2
56%
HOLD
MED
IUM
MV
Sapu
to In
c.SA
PT
$39.
03M
arC
$20
6.4
$8,0
56$0
.76
1.9%
$1.8
3$2
.22
$2.4
7$6
92$7
91$8
4117
.6x
15.8
x10
.8x
10.2
x$4
5.00
17%
HOLD
MED
IUM
MV
Shop
pers
Dru
g M
art C
orp.
SCT
$41.
14D
ecC
$21
7.4
$8,9
44$1
.00
2.4%
$2.7
2$2
.84
$2.9
8$1
,180
$1,2
12$1
,238
14.5
x13
.8x
8.2x
8.0x
$46.
0014
%HO
LDM
EDIU
MM
V
Tim
Hor
tons
Inc.
THI
T$4
9.36
Dec
C$
160.
0$7
,898
$0.6
81.
4%$2
.04
$2.3
6$2
.74
$688
$683
$739
20.9
x18
.0x
12.1
x11
.2x
$57.
0017
%BU
YM
EDIU
MM
V
Vite
rra
Inc.
VTT
$10.
74O
ctC
$37
1.7
$3,9
92$0
.10
0.9%
$0.4
6$0
.74
$0.7
1$5
18$7
00$6
6214
.5x
15.1
x8.
0x8.
5x$1
2.50
17%
BUY
MED
IUM
CR
Note
1: C
urr.
Pric
e, M
arke
t Cap
, and
Ind.
Div.
for A
TD.B
are
in C
$.No
te 2
. EPS
figu
res
for N
WC
and
GC
L ar
e fu
lly ta
xed.
38
Diversified Financials
1M 3M 6M 12M YTD Cum.1
Action List (25.8) (24.0) (40.7) (47.3) (47.3) (13.7)Comp. Group* 0.1 2.1 (9.7) 3.4 3.4 41.6S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 58.4* S&P/TSX Diversified Financials (Industry Group)¹ Since January 6, 2005
Total Return %
4080
120160200
Jan0
5
Jan0
6
Jan0
7
Jan0
8
Jan0
9
Jan1
0
Jan1
1
Action List Comp Group* S&P/TSX
Industry Overview On average, our asset management coverage group fell by 2.2% in December, in line with the S&P/TSX Composite (down 1.7%), but underperforming the S&P/TSX Capped Financials Index (up 2.5%). Among the larger cap mutual fund companies, CI Financial (CIX-T) was the top performer, with its shares up 2.9%, while IGM Financial (IGM-T) shares were up as well by 2.1%, as were AGF Management (AGF-T) shares by a more modest 0.8%. Sprott (SII-T) shares were down a considerable 19.7% in December, due to the weakness in bullion and gold/silver equities. Gluskin Sheff & Associates (GS-T) was up 2.8% by comparison. Canaccord Financial (CF-T) shares were down a significant 19.4% in December, illustrating investor skepticism toward its announced acquisition of Collins Stewart Hawkpoint in the U.K. Larger cap names Power Corp. of Canada (POW-T) and Power Financial Corp. (PWF-T) were up a healthy 6.9% and 4.1%, respectively. TMX Group (X-T) shares were down 6.2%. Among income yielding names, Morneau Shepell (MSI-T) was up 9.8%, while First National Financial (FN-T) was also up 15.6%. We recently launched coverage of Alt-A mortgage lender Equitable Group (ETC-T), which was down 4.2% in December. Things to Watch For in the Coming Month During the first week of January, TMX will release December trading and financing statistics, and we also expect to publish our Monthly Brokerage Overview. In mid-January, the Investment Funds Institute of Canada (IFIC) will release monthly mutual fund AUM and net sales data. We are expecting AGF Management to report fiscal Q4/11 results on Friday, January 27. Our Sector Stance Our view on the asset management space remains neutral. We expect equity fund net outflows and inflows into lower risk balanced and bond funds to continue over the near term. Industry margins will likely be compressed over the near future due to the recent market contraction, and, by default, declining assets under management (AUM). Canadian banks are taking net flows/AUM market share due to their strong
Doug Young, CFA 416 308 2361 [email protected] Graham Ryding 416 308 4416 [email protected]
39
distribution platforms and broad offerings in fund of funds/wraps, and balanced/bond funds products that are attracting the bulk of flows. We believe that only asset managers with strong fund performance and distribution platforms (proprietary, partnerships, and independent advisors’ support) will be able to compete effectively. In our view, CI Financial has some of the strongest fundamentals among the independents, and we rate it a BUY. We believe Canaccord Financial’s proposed acquisition of the U.K. based brokerage, Collins Stewart Hawkpoint, adds some uncertainty to its outlook, given the associated market risk and integration execution risk. However, we rate Canaccord a BUY, given our belief that it has significant leverage to improving market activity one year out, with its focus on the commodity sector and smaller cap names, and the addition of Genuity to its platform. We also have a BUY rating on Morneau Shepell; new business wins in 2011 have led to an improved earnings outlook, in our view, and we value its highly recurring revenue model. Lastly, we have a BUY rating on Equitable Group, given that we see attractive upside potential for it over the next 12 months, while assuming minimal valuation expansion (1.1x BVPS, versus 1.0x currently). We have attempted to be conservative with our estimates, which are below consensus, given the downside risk to the Canadian residential market.
40
D
iver
sifie
d Fi
nanc
ials
Uni
vers
e
AL
BUY
= Ac
tion
List
BU
Y
Ana
lyst
(s):D
Y =
Dou
g Y
oung
, CFA
416
308
236
1; G
R =
Gra
ham
Ryd
ing
416
308
4416
Ent.
Ove
rall
Cur
r.Ye
arR
ep.
Mar
ket
Valu
e (2
)D
iv.
EV/
P/
12-M
onth
Tota
lR
isk
Mut
ual F
und
Com
pani
esSy
mbo
lEx
ch.
Pric
eEn
dC
urr.
Cap
(mm
)($
mm
)Yi
eld
AUM
FCF
(3)
2011
E20
12E
2011
E20
12E
Targ
etR
etur
nR
atin
gR
atin
gAn
alys
tC
I Fin
anci
al
CIX
T$2
1.10
Dec
C$
$6,0
08$6
,502
4.3%
9.2%
15.8
x16
.2x
15.7
x9.
6x9.
3x$2
4.00
18%
BUY
MED
IUM
DY
IGM
Fin
anci
al In
c.
IGM
T$4
4.23
Dec
C$
$11,
387
$10,
642
4.9%
8.8%
17.4
x13
.7x
14.4
x8.
0x8.
3x$4
8.00
13%
HOLD
MED
IUM
DY
AGF
Man
agem
ent L
td.
AGF.
BT
$15.
82No
vC
$$1
,506
$1,3
276.
8%3.
0%9.
5x11
.6x
12.3
x5.
9x6.
2x$1
7.50
17%
HOLD
MED
IUM
DY
Glu
skin
She
ff +
Asso
ciat
es (1
)G
ST
$14.
91Ju
nC
$$4
34$3
504.
4%6.
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.0x
10.4
x11
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5.5x
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$21.
0045
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LDM
EDIU
MD
YSp
rott
Inc.
SI
IT
$5.7
9D
ecC
$$9
81$7
952.
1%7.
7%11
.6x
15.6
x10
.1x
7.8x
5.2x
$9.0
058
%HO
LDHI
GH
DY
(1) G
S's
fisca
l yea
r end
s Ju
ne 3
0th.
EPS
& E
BITD
A in
tabl
e re
pres
ent c
alen
dar y
ear e
stim
ates
. (2
) Ent
erpr
ise
valu
e ex
clud
es n
on-m
utua
l fun
d bu
sine
sses
. (3)
Fre
e ca
sh fl
ow is
an
estim
ate
of fo
ur q
uarte
rs fo
rwar
d.
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rall
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r.Ye
arR
ep.
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arke
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12-M
onth
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lR
isk
Bro
kera
ges
Sym
bol
Exch
.Pr
ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)D
iv.
Yiel
dB
VPS
2011
E20
12E
2011
E20
12E
Targ
etR
etur
nR
atin
gR
atin
gAn
alys
tC
anac
cord
Fin
anci
al (1
)C
FT
$7.8
0M
arC
$83
.3$6
50$0
.40
5.1%
0.9x
$0.6
0$0
.82
13.0
x9.
5x$1
1.00
46%
BUY
HIG
HG
R(1
) CC
I's F
isca
l Yea
r End
s M
arch
31s
t. E
PS in
tabl
e re
pres
ents
nor
mal
ized
cal
enda
r yea
r est
imat
es.
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rall
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r.Ye
arR
ep.
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esM
arke
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isc.
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12-M
onth
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lR
isk
Pow
er G
roup
of C
ompa
nies
Sym
bol
Exch
.Pr
ice
End
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r.O
/S (m
m)
Cap
(mm
)Yi
eld
to N
AVB
VPS
2011
E20
12E
2011
E20
12E
Targ
etR
etur
nR
atin
gR
atin
gAn
alys
tPo
wer C
orpo
ratio
n of
Can
ada
POW
T$2
3.82
Dec
C$
459.
9$1
0,95
54.
9%18
.9%
1.2x
$2.6
0$2
.36
9.2x
10.1
x$2
8.00
22%
BUY
LOW
D
YPo
wer F
inan
cial
Cor
pora
tion
PWF
T$2
5.54
Dec
C$
708.
0$1
8,08
35.
5%7.
4%1.
6x$2
.50
$2.5
310
.2x
10.1
x$3
0.00
23%
BUY
LOW
D
Y
Ove
rall
Cur
r.Ye
arR
ep.
Shar
esM
arke
tEn
t.EV
/12
-Mon
thTo
tal
Ris
kFi
nanc
ial E
xcha
nges
Sym
bol
Exch
.Pr
ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)Va
lue
Yiel
dEB
ITD
A (1
)20
11E
2012
E20
11E
2012
ETa
rget
Ret
urn
Rat
ing
Rat
ing
Anal
yst
TMX
Gro
up In
c.X
T$4
1.69
Dec
C$
74.6
$3,1
10$3
,125
3.8%
(1) LT
M b
asis
, exc
lude
s in
vest
men
t inc
ome;
(2) E
PS e
stim
ate
base
d on
list
ing
fees
rece
ived
on a
cas
h ba
sis
(IFRS
acc
ount
ing)
.
Ove
rall
Cur
r.Ye
arR
ep.
Uni
tsM
arke
tEn
t.EV
/12
-Mon
thTo
tal
Ris
kD
iver
sifie
d Fi
nanc
ials
Sym
bol
Exch
.Pr
ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)Va
lue
Yiel
dEB
ITD
A (1
)20
11E
2012
E20
11E
2012
ETa
rget
Ret
urn
Rat
ing
Rat
ing
Anal
yst
Mor
neau
She
pell I
nc. (
2)M
SIT
$10.
44D
ecC
$47
.9$5
00$7
147.
5%10
.4x
$0.5
0$0
.61
21.0
x17
.1x
$12.
0022
%BU
YM
EDIU
MG
REq
uita
ble
Gro
up In
c.ET
CT
$25.
00D
ecC
$15
.0$3
75$4
341.
9%na
$4.1
2$4
.55
6.1x
5.5x
$35.
0042
%BU
YHI
GH
GR
Firs
t Nat
iona
l Fin
anci
al C
orp.
(3)
FNT
$17.
45D
ecC
$60
.0$1
,046
$1,2
247.
2%na
$1.3
7$1
.74
12.7
x10
.1x
$18.
5013
%HO
LDHI
GH
GR
(1) LT
M b
asis
(2) F
orm
erly
Mor
neau
Sob
eco
Inco
me
Fund
, (3)
form
erly
Firs
t Nat
iona
l Fin
anci
al In
com
e Fu
nd.
P/EP
SEV
/MFE
BIT
DA
EPS
(1)
P/E
EPS
P/E
EPS
P/E
EPS
(2)
P/E
Res
tric
ted
41
Energy Producers – Intermediate
1M 3M 6M 12M YTD Cum.1
Action List 0.0 0.0 0.0 0.0 0.0 820.1Comp. Group* (1.2) 12.6 (14.1) (17.7) (17.7) 232.2S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 82.0* S&P/TSX Capped Energy TrustOil & Gas Exploration & Production (Subindustries)¹ Since February 19, 2001
Total Return %
50250450650850
1,050Fe
b01
Feb0
2
Feb0
3
Feb0
4
Feb0
5
Feb0
6
Feb0
7
Feb0
8
Feb0
9
Feb1
0
Feb1
1
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month Following minor losses in November (-0.7%), our intermediate E&P coverage group was up slightly (about 1%) in December, beating the S&P/TSX Index. Petrobakken (PBN-T) and Westfire (WFE-T) led the pack, posting gains of 28% and 22%, respectively. The gains followed press releases from the companies – from Petrobakken that it will exceed its exit guidance for 2011 and implement a DRIP; and from Westfire that it is reviewing strategic options. On the other end of the spectrum were Advantage (AAV-T) and Progress (PRQ-T), down 11% and 8%, respectively. Both companies have high natural gas weightings, with little liquids production. Things to Watch For in January Consensus (and TD Securities) 2012 production and cash flow estimates factor in a gas price recovery, which may or may not materialize. Consensus average estimate for 2012 AECO is currently $3.85/mscf, implying over 30% improvement from current prices. While a handful of companies provided 2012 capital budgets to date, we expect more capital budgets to be released through Janaury, and possibly a few common themes will be articulated in these budgets to account for the current gas price environment. With the forward 12-month AECO pricing currently averaging about $2.92/msf, we believe that there are a few levers available to companies under a $3.00/mcf AECO price environment, where sector coverage cash flow drops by about $1 billion, or 9%. With lower cash flow in 2012, we believe that most companies releasing budgets will talk about (in order): 1) relying on the balance sheet to get through the low gas prices; 2) reallocating capital to liquids plays; 3) asset sales; 4) reducing capex (and lower growth); and/or 5) reducing dividends. Sector Stance In our view, valuations today are still at the high end of the historical range, based on our commodity price outlook. Accordingly, we are maintaining our market weight sector weighting.
Roger Serin, P. Eng. 403 299 7964 [email protected] Travis Wood 403 292 1222 [email protected] Juan Jarrah, P.Eng. 403 299 3494 [email protected]
42
The sector trades at a P/NAVMG of 83% using year-end 2010 reserves, December 1, 2011 strip pricing, and an 8% after tax discount rate. Using TD Securities’ commodity price forecasts, we calculate an average 2012E EV/DACF multiple of 7.9x for the sector. Both metrics are at the middle to higher end of the historical range.
43
En
ergy
Pro
duce
rs –
Inte
rmed
iate
Uni
vers
e
AL
BUY
= Ac
tion
List
BU
Y
A
naly
st(s
): R
S =
Rog
er S
erin
, P. E
ng. 4
03 2
99 7
964;
TW
= T
ravi
s W
ood
403
292
1222
; JJ
= Ju
an J
arra
h, P
.Eng
. 403
299
349
4
Ove
rall
Cur
r.Ye
ar-
Rep
.Sh
ares
Mar
ket
EV/D
ACF
Deb
t/CF
% G
asYi
eld
12-M
thTo
tal
Ris
k
Stoc
k N
ame
Sym
bol
Exch
.Pr
ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)20
11E
2012
A20
12E
2012
EPr
od'n
2012
E20
11E
2012
ETa
rget
Ret
urn
Rat
ing
Rat
ing
Anal
yst
Adva
ntag
e O
il &
Gas
Ltd
.AA
VT
$4.2
4D
ecC
$16
5.9
$704
$0.9
0$1
.00
5.3x
1.6x
92%
0%13
1%90
%$7
.00
65%
BUY
HIG
HRS
ARC
Res
ourc
es L
td.
ARX
T$2
5.10
Dec
C$
292.
4$7
,340
$3.0
3$3
.15
8.7x
1.0x
60%
5%11
2%10
9%$2
9.00
20%
BUY
HIG
HRS
Bona
vista
Ene
rgy
Cor
p.BN
PT
$26.
07D
ecC
$16
6.1
$4,3
30$3
.33
$3.5
48.
6x1.
9x60
%6%
119%
106%
$33.
0032
%BU
YHI
GH
RS
Bayt
ex E
nerg
y C
orp.
BTE
T$5
6.97
Dec
C$
118.
8$6
,766
$4.7
6$5
.33
11.1
x1.
0x15
%5%
102%
101%
$62.
0013
%BU
YHI
GH
TW
Cel
tic E
xplo
ratio
n Lt
d.C
LTT
$22.
87D
ecC
$10
4.7
$2,3
95$1
.41
$2.4
09.
9x0.
9x80
%0%
230%
143%
$29.
0027
%HO
LDHI
GH
RS
Cre
scen
t Poi
nt E
nerg
y C
orp.
CPG
T$4
4.90
Dec
C$
301.
5$1
3,53
6$4
.61
$4.6
110
.4x
1.0x
10%
6%11
8%10
3%$5
1.00
20%
BUY
HIG
HRS
Cre
w En
ergy
Inc.
CR
T$1
1.25
Dec
C$
119.
6$1
,345
$1.5
6$2
.21
6.0x
1.3x
49%
0%21
6%11
2%$1
6.00
42%
BUY
HIG
HRS
Ener
plus
Cor
p.ER
FT
$25.
85D
ecC
$18
3.6
$4,7
47$3
.26
$4.5
56.
9x1.
6x54
%8%
186%
128%
$33.
0036
%BU
YHI
GH
RS
Free
hold
Roy
altie
s Lt
d.FR
UT
$19.
41D
ecC
$63
.2$1
,227
$2.0
1$2
.08
9.8x
0.5x
37%
9%75
%77
%$1
9.00
7%HO
LDHI
GH
RS
Lega
cy O
il an
d G
as In
cLE
GT
$10.
48D
ecC
$14
3.3
$1,5
01$1
.33
$1.5
57.
8x2.
1x18
%0%
172%
124%
$16.
0053
%BU
YHI
GH
TW
Lone
Pin
e Re
sour
ces
LPR
T$7
.21
Dec
C$
85.0
$613
$1.6
0$2
.62
3.9x
1.4x
64%
0%19
4%90
%$1
1.00
53%
BUY
HIG
HRS
NAL
Ener
gy C
orp.
NAE
T$7
.88
Dec
C$
153.
7$1
,211
$1.8
4$1
.80
5.5x
2.2x
51%
11%
122%
117%
$9.0
025
%HO
LDHI
GH
TW
NuVi
sta
Ener
gy L
td.
NVA
T$5
.24
Dec
C$
99.5
$521
$1.5
4$1
.95
3.9x
1.5x
67%
0%11
1%88
%$1
0.50
100%
BUY
HIG
HRS
Peyt
o Ex
plor
atio
n C
orp.
PEY
T$2
4.39
Dec
C$
138.
0$3
,365
$2.3
9$2
.66
10.6
x1.
7x91
%3%
146%
150%
$31.
0030
%BU
YHI
GH
TW
Peng
rowt
h En
ergy
Cor
p.PG
FT
$10.
76D
ecC
$36
6.0
$3,9
38$1
.83
$1.7
87.
2x1.
8x46
%8%
139%
118%
$12.
0019
%BU
YHI
GH
RS
Perp
etua
l Ene
rgy
Inc.
PMT
T$1
.17
Dec
C$
147.
2$1
72$0
.48
$0.6
25.
8x6.
0x86
%0%
244%
92%
$1.7
550
%HO
LDHI
GH
RS
Para
mou
nt R
esou
rces
Ltd
.PO
UT
$42.
50D
ecC
$85
.2$3
,620
$1.3
5$2
.37
16.6
x2.
0x78
%0%
414%
187%
$48.
0013
%HO
LDHI
GH
RS
Prog
ress
Ene
rgy
Reso
urce
s C
orp.
PRQ
T$1
3.24
Dec
C$
234.
1$3
,099
$1.0
1$1
.27
11.5
x1.
9x86
%3%
193%
179%
$16.
5028
%HO
LDHI
GH
RS
Penn
Wes
t Exp
lora
tion
PWT
T$2
0.19
Dec
C$
479.
7$9
,686
$3.1
4$3
.77
6.8x
2.1x
32%
5%12
9%11
2%$2
3.00
19%
BUY
HIG
HRS
Surg
e En
ergy
Inc
SGY
T$8
.94
Dec
C$
71.3
$637
$1.0
1$1
.84
5.8x
1.0x
26%
0%22
6%11
7%$1
4.50
62%
BUY
HIG
HTW
Tour
mal
ine
Oil
Cor
p.TO
UT
$26.
63D
ecC
$15
8.0
$4,2
08$1
.70
$2.6
010
.6x
0.4x
85%
0%24
0%12
2%$4
0.00
50%
BUY
HIG
HRS
Verm
ilion
Ener
gy In
c.VE
TT
$45.
37D
ecC
$97
.6$4
,429
$5.0
8$5
.52
8.6x
1.1x
36%
5%14
1%10
6%$5
3.00
22%
BUY
HIG
HTW
Wes
tfire
Ene
rgy
WFE
T$5
.70
Dec
C$
83.0
$473
$1.1
1$1
.40
4.8x
1.6x
31%
0%18
9%13
3%$8
.50
49%
BUY
HIG
HJJ
Wild
Stre
am E
xplo
ratio
n In
c.W
SXV
$8.9
1D
ecC
$68
.3$6
09$1
.22
$1.7
05.
9x1.
0x7%
0%18
8%11
8%$1
4.00
57%
BUY
HIG
HJJ
Zarg
on O
il &
Gas
Ltd
.ZA
RT
$13.
63D
ecC
$29
.7$4
04$2
.17
$2.5
66.
9x1.
9x36
%9%
173%
158%
$16.
5030
%HO
LDHI
GH
RS
Petro
Bakk
en E
nerg
y Lt
d.PB
NT
$12.
83D
ecC
$RS
Trilo
gy E
nerg
y In
c.TE
TT
$37.
57D
ecC
$RS
Com
mod
ity P
rice
Assu
mpt
ions
2007
A20
08A
2009
A20
10A
2011
E20
12E
2013
EW
TI (U
S$/b
bl)
$72.
23$9
9.92
$61.
97$7
9.50
$93.
00$9
3.00
$90.
00
NYM
EX (U
S$/m
cf)
$6.9
7$8
.89
$4.1
6$4
.36
$4.1
5$4
.50
$4.7
5
AEC
O (C
$/m
cf)
$6.4
6$8
.20
$4.0
0$3
.99
$3.7
5$4
.00
$4.0
0
CFP
SPa
yout
Rat
io
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
--Re
stric
ted-
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
-
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
--Re
stric
ted-
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
-
44
Energy Producers – International
1M 3M 6M 12M YTD Cum.1
Action List (12.8) 26.9 (29.9) (26.3) (26.3) (25.2)Comp. Group* (1.2) 12.6 (14.1) (18.0) (18.0) (5.8)S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 4.8* S&P/TSX Oil & Gas Exploration & Production (Subindustry)¹ Since August 4, 2010
Total Return %
306090
120150
Aug1
0
Oct
10
Dec
10
Feb1
1
Apr1
1
Jun1
1
Aug1
1
Oct
11
Dec
11
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month Share prices for the International E&P companies under coverage decreased by 7% on average in December. Colombia-focused companies outperformed the group, with an average decrease of 3%, during a month when WTI and Brent was down 1%. Europe, Middle Eastern, and Asia-focused companies were down an average of 12% in December. The top performer in the group was Canacol Energy Ltd. (CNE-T), up 22%. On the other end of the spectrum, Porto Energy Corp. (PEC-V) was the weakest performer in our coverage, posting a loss of 48%. Things to Watch For in the Coming Month We expect Brent crude, which we see as more important for International E&Ps as a benchmark than WTI, to continue trading at a premium to WTI, likely remaining above US$90/bbl in the short term. However, in our opinion, crude prices will remain volatile, with short-term fluctuations driven largely by geopolitics and movements in the U.S. dollar. Following Q3/11 reporting, we expect strong quarter-over-quarter growth in CFPS, predominantly due to higher margins on the back of higher oil prices (as well as improved netbacks for some companies that have grown production). In addition, we anticipate a regular stream of news flow regarding ongoing exploration and appraisal drilling from the International E&Ps in our coverage. We expect the companies that have yet to announce 2012 budgets and production guidance to do so in January. Our Sector Stance Over the long term, we expect International E&Ps to outperform due to access to large resources, oil pricing linked to Brent, and oil prices that are likely to remain above historical norms. We expect valuations to improve, if companies are able to report positive drilling and operational updates. The International E&Ps in our coverage are currently trading at around 0.39x Fully-risked NAVPS, well below long-run average valuation for the sector, which we estimate at 0.70–0.75x. If markets become less risk averse, International E&Ps will likely outperform other sectors. We recommend an overweight sector stance.
Jamie Somerville 403 299 8586 [email protected] Wael B. Halaoui 403 292 2804 [email protected]
45
Bankers Petroleum Ltd. (BNK-T, C$4.44); 12-Month Target: C$11.50 Jamie Somerville 403 299 8586 We added Bankers Petroleum to the Action List on March 30. Bankers Petroleum is developing the Patos Marinza heavy oil field in Albania, Europe’s largest onshore oil field estimated to hold 7.5 billion barrels of OOIP. We expect the company’s management to grow reserves and production through implementation of modern heavy oil technology prior to considering a potential corporate sale. Bankers trades at 0.57x Base NAVPS, a 69% discount to other producers in our coverage of International E&Ps.
46
En
ergy
Pro
duce
rs –
Inte
rnat
iona
l Uni
vers
e
AL
BU
Y =
Act
ion
List
BU
Y
An
alys
t(s):
JS =
Jam
ie S
omer
ville
403
299
858
6; W
H =
Wae
l B. H
alao
ui 4
03 2
92 2
804
Ove
rall
Cur
r.Ye
ar-
Rep
.Sh
ares
Mar
ket
EV/D
ACF
% G
asD
ebt/C
F12
-Mon
thTo
tal
Ris
kSy
mbo
lEx
ch.
Pric
eEn
dC
urr.
O/S
(mm
)C
ap (m
m)
2010
A20
11E
2012
E20
10A
2011
E20
12E
2012
E20
10E
2011
ETa
rget
Ret
urn
Rat
ing
Rat
ing
Anal
yst
Bank
ers
Petro
leum
Ltd
.BN
KT,
L$4
.44
Dec
US$
247.
5$1
,099
$0.0
6$0
.19
$0.2
8$0
.30
$0.6
3$0
.94
4.0x
0%nm
f$1
1.50
159%
AL B
UYHI
GH
JS
BNK
Petro
leum
Inc.
BKX
T$1
.55
Dec
US$
144.
3$2
24$0
.00
$0.0
0$0
.04
$0.0
6$0
.06
$0.1
013
.6x
84%
nmf
$5.5
025
5%BU
YHI
GH
JS
Can
acol
Ene
rgy
Ltd.
C
NEV,
BVC
$0.7
7Ju
nUS
$61
9.1
$477
($0.
02)
$0.0
9$0
.09
$0.0
8$0
.19
$0.1
93.
4x31
%nm
f$1
.35
75%
BUY
HIG
HJS
C&C
Ene
rgia
Ltd
.C
ZET
$7.5
7D
ecUS
$63
.8$4
83$0
.61
$1.0
6$1
.36
$1.6
0$2
.17
$2.8
11.
9x0%
nmf
$13.
5078
%BU
YHI
GH
JS
Gra
n Ti
erra
Ene
rgy
Inc.
GTE
T, N
$4.9
2D
ecUS
$27
7.6
$1,3
66$0
.14
$0.4
4$0
.94
$0.7
7$1
.21
$1.4
22.
3x-2
1%nm
f$9
.00
83%
BUY
HIG
HJS
Niko
Res
ourc
es L
td.
NKO
T$4
8.23
Mar
US$
51.6
$2,4
89$2
.30
($1.
19)
$2.0
5$5
.45
$4.4
8$3
.47
14.2
x96
%1.
0x$8
5.00
77%
BUY
HIG
HJS
Paci
fic R
ubia
les
Ener
gy C
orp.
PRE
T, B
VC$1
8.73
Dec
US$
271.
6$5
,088
$0.7
5$2
.32
$2.9
7$2
.28
$5.0
5$5
.44
2.9x
7%0.
0x$3
5.00
89%
BUY
HIG
HJS
Pare
x Re
sour
ces
Inc.
PX
TV
$6.9
7D
ecUS
$10
8.2
$754
($0.
20)
$0.3
5$1
.17
($0.
12)
$0.8
6$2
.05
3.3x
0%nm
f$9
.00
29%
HOLD
HIG
HJS
Petro
dora
do E
nerg
y Lt
d.
PDQ
V$0
.21
Dec
US$
482.
5$9
9($
0.02
)($
0.01
)$0
.01
($0.
01)
($0.
00)
$0.0
211
.2x
1%22
.5x
$0.6
521
7%SP
EC B
UYSP
ECJS
Petro
min
eral
es L
td.
PMG
T$1
6.56
Dec
US$
100.
6$1
,667
$2.2
9$4
.27
$3.8
6$5
.44
$7.0
1$7
.88
2.2x
0%0.
6x$3
2.00
96%
BUY
HIG
HJS
Porto
Ene
rgy
Cor
p.PE
CV
$0.1
2Au
gUS
$19
9.0
$24
($0.
06)
($0.
04)
($0.
04)
($0.
03)
($0.
02)
($0.
01)
nmf
43%
nmf
$0.5
031
7%SP
EC B
UYSP
ECJS
ShaM
aran
Pet
role
um C
orp.
SNM
V, O
MX
$0.3
6D
ecUS
$80
8.0
$287
($0.
00)
($0.
01)
$0.0
0($
0.00
)($
0.00
)$0
.00
nmf
0%nm
f$0
.60
69%
SPEC
BUY
SPEC
WH
Tran
sAtla
ntic
Pet
role
um L
td.
TNP
T, N
$1.3
6D
ecUS
$36
5.7
$497
($0.
23)
($0.
22)
$0.1
0$0
.05
$0.1
8$0
.28
5.5x
52%
2.1x
$3.0
012
1%BU
YHI
GH
JS
Wes
tern
Zagr
os R
esou
rces
Ltd
.W
ZRV
$0.6
7D
ecUS
$37
1.1
$249
($0.
03)
($0.
01)
$0.0
5($
0.02
)($
0.01
)$0
.06
10.6
x0%
13.3
x$1
.25
87%
SPEC
BUY
SPEC
WH
EPS
(f.d)
CFP
S (f.
d)
47
Energy Producers – Senior & Unconventional
1M 3M 6M 12M YTD Cum.1
Action List 0.7 25.4 (4.3) (4.8) (4.8) (4.8)Comp. Group* (1.5) 11.7 (13.8) (15.5) (15.5) (0.0)S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 10.1* S&P/TSX Oil & Gas Integrated,Oil & Gas Exploration & Production (Subindustries)¹ Since December 7, 2009
Total Return %
6080
100120140
Dec
09
Feb1
0
Apr1
0
Jun1
0
Aug1
0
Oct
10
Dec
10
Feb1
1
Apr1
1
Jun1
1
Aug1
1
Oct
11
Dec
11
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month Petrobank Energy & Resources Ltd. (PBG-T) was the top performer among the Senior, Integrated and Oil Sands producers in December, posting a return of 15%. The weakest performer in our space was BlackPearl Resources Inc. (PXX-T), which was down 8%. Things to Watch For in the Coming Month For the week ended December 23, U.S. DOE total crude complex inventories rose by 4.4 mmbbls to 685.5 mmbbls. Although inventory levels are below the top end of the five-year range, excess domestic supply remains an issue, as does underlying demand. Meanwhile, the Brent premium to WTI continues to narrow, with MENA (namely Libya) and North Sea production gradually coming back on-stream. We believe anticipation of the upcoming Seaway pipeline reversal (slated for Q2/12) is also playing a role in this narrowing. The Brent-WTI spread at month-end stood at US$8.75/bbl, down from US$9.85/bbl at the end of November. In North America, synthetic crude oil (SCO) continues to trade at a premium to WTI, although this premium is rapidly shrinking. The Syncrude Sweet Blend (SSB) differential to WTI averaged US$2.94/bbl in December (compared to a 2010 average discount of US$1.19/bbl). Although this is much smaller than it was in prior quarters, we expect this modest SSB premium to remain in effect until the Cushing inventory issue is debottlenecked entirely. We continue to track Canadian heavy differentials closely, given the rapidly changing supply/demand dynamic for heavies and their clear impact on Canadian bitumen and heavy oil producers. The WCS/WTI differential averaged 15.1% in December, compared with 12.5% in November and 20.9% in December 2010. We are currently forecasting a very conservative 2012 WCS/WTI heavy differential of 21% (and 23% longer term). Lastly, the U.S. mid-continent (USMC) 321 crack spread closed at US$12.28/bbl in December, averaging US$11.97/bbl for the month. This is below the November average of US$18.94/bbl, and only marginally higher than the December 2010
Menno Hulshof, CFA 403 299 8658 [email protected]
48
average of US$10.52/bbl. The decrease in mid-continent (PADD II) crack spreads for the month was due to the up-tick in WTI pricing relative to Brent; again, we believe this is being driven by increasing MENA/North Sea volumes and news relating to the reversal of the Seaway pipeline. The ‘cheap feedstock’ advantage for PADD II refiners appears to be quickly disappearing. Our Sector Stance Our sector stance is unchanged at market weight. We continue to believe that global US$90/bbl oil prices are sustainable in the long term. The land-locked nature of WTI has resulted in discount pricing relative to its waterborne equivalents (e.g., Brent and LLS) although this discount is quickly disappearing. That said, we see Brent continuing to trade at a US$5–10/bbl premium until the Cushing bottleneck is resolved entirely (e.g., Seaway reversal in Q2/12 and Wrangler in 2013). Although the injection season is now behind us, natural gas prices remain weak, given the current supply glut and warmer winter temperatures. We envision a near-term cap of US$4.00–4.50/mmBtu on natural gas prices, given the amount of gas that would make its way into the market once prices test this limit (on the basis of marginal supply cost estimates). Long term, LNG exports are the only legitimate solution to weak pricing, in our view. We do not expect to see meaningful LNG exports out of Canada until 2016 (and that assumes that the first phase of Kitimat comes on-stream in the late 2015 timeframe). Canadian Natural Resources Ltd. (CNQ-T, C$38.15); 12-Month Target: C$53.00 Menno Hulshof, CFA 403 299 8658 We added Canadian Natural Resources to the Action List on May 18. The January fire at its Horizon Upgrader and subsequent sell-off in its shares has created a unique entry point, in our view. With expectations of a return to full productive capacity at Horizon in 2012, we contend that the outlook is positive. The company also stands to benefit most from the recent narrowing in heavy differentials, a trend that is likely to persist for the foreseeable future. Talisman Energy Inc. (TLM-N, US$12.75); 12-Month Target: US$21.00 Menno Hulshof, CFA 403 299 8658 We added Talisman Energy to the Action List on December 19. This upgrade comes on the back of the three following reasons: 1) it is now trading at a 30% discount to its 2P NAV (and only a 14% premium to its 1P NAV), 2) it is now only trading at about a 1x premium to its 2008 lows (on a consensus P/CF basis), a time when oil prices were clearly much lower than they are now, and 3) we contend that fears related to its 2012 guidance release (to be issued on January 10) are overblown. As such (and barring a major correction in oil prices), we believe that there is limited downside from current levels.
49
Ener
gy P
rodu
cers
– S
enio
r & U
ncon
vent
iona
l Uni
vers
e
AL
BUY
= Ac
tion
List
BU
Y
Ana
lyst
(s):M
H =
Men
no H
ulsh
of, C
FA 4
03 2
99 8
658
Seni
or P
rodu
cers
Ove
rall
Cur
r.Ye
ar-
Rep
.Sh
ares
Mar
ket
EV/D
AC
F%
Gas
Deb
t/CF
12-M
onth
Tota
lR
isk
Sym
bol
Exch
.Pr
ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)20
10A
2011
E20
12E
2010
A20
11E
2012
E20
12E
2012
E20
12E
Targ
etR
etur
nR
atin
gR
atin
gA
naly
stC
anad
ian
Nat
ural
Res
ourc
es L
td.
CN
QT,
N$3
8.15
Dec
C$
1,09
4.7
$41,
765
$2.3
2$2
.21
$3.5
2$5
.70
$5.6
7$7
.29
6.0x
31%
1.0x
$53.
0040
%AL
BU
YH
IGH
MH
Talis
man
Ene
rgy
Inc.
TLM
T, N
$12.
75D
ecU
S$1,
021.
7$1
3,02
7$0
.32
$0.7
9$1
.27
$2.7
6$3
.45
$4.0
14.
1x56
%1.
3x$2
1.00
67%
AL B
UY
HIG
HM
H
Enca
na C
orp.
EC
AT,
N$1
8.53
Dec
US$
736.
3$1
3,64
4$0
.89
$0.6
1$0
.96
$6.0
1$5
.77
$5.8
24.
4x95
%2.
1x$2
4.00
34%
HO
LDH
IGH
MH
Nex
en In
c.N
XYT,
N$1
6.21
Dec
C$
527.
4$8
,549
$2.2
6$2
.23
$2.6
5$4
.01
$4.3
7$5
.02
4.2x
17%
1.5x
$20.
0025
%H
OLD
HIG
HM
H
Inte
grat
eds
Ove
rall
Cur
r.Ye
ar-
Rep
.Sh
ares
Mar
ket
EV/D
AC
F%
Gas
Deb
t/CF
12-M
onth
Tota
lR
isk
Sym
bol
Exch
.Pr
ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)20
10A
2011
E20
12E
2010
A20
11E
2012
E20
12E
2012
E20
12E
Targ
etR
etur
nR
atin
gR
atin
gA
naly
stC
enov
us E
nerg
y In
c.C
VET,
N$3
3.83
Dec
C$
754.
3$2
5,51
9$1
.06
$1.8
0$2
.01
$3.2
0$4
.29
$4.0
68.
4x37
%1.
1x$4
1.00
24%
HO
LDH
IGH
MH
Hus
ky E
nerg
y In
c.H
SET
$24.
55D
ecC
$94
8.9
$23,
294
$1.3
5$2
.40
$1.4
2$4
.09
$5.6
4$4
.24
5.6x
33%
0.4x
$29.
0023
%H
OLD
HIG
HM
HIm
peria
l Oil
Ltd.
IMO
T, N
$45.
39D
ecC
$84
7.6
$38,
473
$2.5
9$3
.57
$2.4
0$3
.53
$4.3
9$3
.30
14.2
x14
%1.
1x$4
5.00
0%H
OLD
MED
IUM
MH
Sunc
or E
nerg
y In
c.SU
T, N
$29.
38D
ecC
$1,
569.
8$4
6,12
0$1
.63
$3.4
0$2
.78
$4.0
8$6
.21
$5.5
05.
6x12
%0.
7x$4
8.00
65%
BUY
HIG
HM
H
Unc
onve
ntio
nals
Ove
rall
Cur
r.Ye
ar-
Rep
.Sh
ares
Mar
ket
EV/D
AC
F%
Gas
Deb
t/CF
12-M
onth
Tota
lR
isk
Sym
bol
Exch
.Pr
ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)20
10A
2011
E20
12E
2010
A20
11E
2012
E20
12E
2012
E20
12E
Targ
etR
etur
nR
atin
gR
atin
gA
naly
stAu
rora
Oil
& G
as L
td.
AEF
T$3
.53
Dec
US$
411.
1$1
,451
NM
F$0
.10
$0.3
5N
MF
$0.1
1$0
.46
7.1x
23%
NM
F$4
.25
20%
BUY
HIG
HM
H
Blac
kPea
rl R
esou
rces
Inc.
PXX
T$4
.11
Dec
C$
284.
7$1
,170
($0.
11)
$0.0
3$0
.11
$0.2
1$0
.24
$0.3
510
.6x
1%N
MF
$6.5
058
%SP
EC B
UY
SPEC
MH
Can
adia
n O
il Sa
nds
Ltd.
CO
ST
$23.
25D
ecC
$48
4.5
$11,
265
$1.8
3$2
.33
$3.0
2$2
.39
$3.9
7$3
.43
6.9x
0%0.
5x$2
9.00
30%
BUY
HIG
HM
H
MEG
Ene
rgy
Cor
p.M
EGT
$41.
57D
ecC
$19
2.9
$8,0
19$0
.07
$0.3
9$0
.47
$0.8
8$1
.23
$1.2
824
.2x
0%6.
9x$5
7.00
37%
BUY
HIG
HM
H
Petro
bank
Ene
rgy
& R
esou
rces
Ltd
.PB
GT
$10.
58D
ecC
$M
H
EPS
(f.d)
CFP
S (f.
d)
EPS
(f.d)
CFP
S (f.
d)
EPS
(f.d)
CFP
S (f.
d)
------
------
------
------
------
------
------
------
------
------
------
------
------
------
------
------
------
Res
trict
ed --
------
------
------
------
------
------
------
------
------
------
------
------
------
------
------
-
50
Energy Services
1M 3M 6M 12M YTD Cum.1
Action List 1.1 18.4 (22.3) (14.7) (14.7) (54.5)Comp. Group* (0.3) 17.1 (13.7) (0.7) (0.7) 37.0S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 61.9* S&P/TSX Energy Equipment & Services (Industry)¹ Since November 12, 2004
Total Return %
04080
120160200
Nov
04
Nov
05
Nov
06
Nov
07
Nov
08
Nov
09
Nov
10
Nov
11
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month Following a strong rebound in October, flowing into the first couple weeks of November, the S&P/TSX Energy Equipment & Services Index has cooled somewhat and realized a 0.3% loss for December. This compares to the broader Capped Energy Index, which shed 1.8%, and the S&P/TSX Composite Index, which fell 2.0% (total return basis). Our coverage group slipped 1.9% on the month, supported higher by the transportation and infrastructure companies, fuelled by ShawCor’s 14.2% surge for the month. Service companies Precision (PD-T) and GasFrac (GFS-T) were the largest drags on our coverage universe, shedding 10.9% and 9.8%, respectively. On average, transportation and infrastructure companies were up 4.6%, followed by the large cap pumpers’ increase of 1.9%, while the drillers shed 5.1%, and the small caps were down 5.4%. Things to Watch For in the Coming Month Despite macro uncertainty, we believe that the sector’s performance and outlook remains robust, supported by strong activity, contracts, and backlogs. We expect further clarity on producer capital spending in 2012 in December; early data points indicate a small (under 5%) increase in overall spending. However, we expect commodity price strength, the shift in spending from land to drilling, and the injection of JV partner capital to drive the drilling and completions spending solidly above 2011 levels. Our Sector Stance We are market weight the Canadian oil service sector. Share prices of many of the oil service companies under our coverage continue to trade well below their historical long-term valuations on our 2012 estimates.
Scott Treadwell, P. Eng. 403 299 3296 [email protected]
51
Trican Well Service Ltd. (TCW-T; C$17.55); 12-Month Target: C$34.00 Scott Treadwell, P. Eng. 403 299 3296 In line with our preference for the pressure pumpers, and based on relative valuation and industry fundamentals, Trican is our Action List BUY. We remain bullish on the North American pumping market, driven by increasing activity in existing plays (driven by longer horizontal wells and more stages pumped), as well as the forecast for key new plays (Duvernay and Muskwa oil in Canada). With a likely acceleration of activity in Horn River in late 2012 and into 2013, pumping fundamentals continue to support our bullish stance on the space. We believe Trican is having ongoing success in promoting itself as a technical leader in the U.S. pumping market, and job value and margins should continue to increase as a result. Furthermore, its spend on infrastructure in the U.S. has obviously affected margins. Even if pricing and operating margins do not move materially higher in 2012, the absence of start-up costs and lower early utilization on new assets should combine to raise Trican’s margins in the U.S. Based on our estimates, we expect the company to realize roughly 25% annual growth in EPS in the period 2010 to 2012.
52
En
ergy
Ser
vice
s U
nive
rse
AL
BUY
= Ac
tion
List
BU
Y
Ana
lyst
(s):
ST
= S
cott
Trea
dwel
l, P
. Eng
. 403
299
329
6
Ove
rall
Cur
r.Ye
ar-
Rep
.In
d.12
-Mo
Tota
lR
isk
Stoc
k N
ame
Sym
bol
Exch
.Pr
ice
End
Cur
r.(m
m)
(mm
)D
iv.
Yiel
d20
10A
2011
E20
12E
2010
A20
11E
2012
E(x
)(x
)('1
1E-'1
2E)
Targ
etR
etur
nR
atin
gR
atin
gAn
alys
t
Tric
an W
ell S
ervic
e Lt
d.TC
WT
$17.
55D
ecC
$15
1.9
$2,4
35$0
.10
0.6%
$1.0
9$2
.25
$2.5
8$3
30$6
09$7
726.
8x3.
5x15
%$3
4.00
94%
AL B
UYHI
GH
ST
Cal
frac
Wel
l Ser
vices
Ltd
.C
FWT
$28.
50D
ecC
$46
.9$1
,172
$0.2
00.
7%$1
.23
$3.8
5$4
.89
$185
$387
$476
5.8x
3.1x
27%
$59.
0010
8%BU
YHI
GH
ST
Ensi
gn E
nerg
y Se
rvic
es In
c.ES
IT
$16.
25D
ecC
$16
3.8
$2,2
84$0
.38
2.3%
$0.7
9$1
.50
$1.8
5$3
10$5
09$6
358.
8x4.
6x24
%$2
3.00
44%
BUY
HIG
HST
Flin
t Ene
rgy
Serv
ices
Ltd
.FE
ST
$12.
77D
ecC
$50
.5$5
57$0
.00
0.0%
$0.7
2$0
.65
$1.9
0$1
20$1
31$2
236.
7x3.
2x19
1%$1
7.50
37%
BUY
HIG
HST
Can
yon
Serv
ice
Gro
upFR
CT
$11.
95D
ecC
$63
.4$7
20$0
.25
2.1%
$0.9
3$1
.36
$2.0
6$9
0$1
43$2
195.
8x3.
3x51
%$2
2.00
86%
BUY
HIG
HST
Gas
Frac
Ene
rgy
Serv
ices
GFS
T$6
.98
Dec
C$
63.3
$416
$0.0
00.
0%$0
.12
$0.0
4$1
.06
$16
$20
$121
6.6x
3.3x
2521
%$1
4.00
101%
BUY
HIG
HST
Mul
len
Gro
up L
td.
MTL
T$1
9.65
Dec
C$
82.7
$1,5
54$1
.00
5.1%
$0.9
8$1
.36
$1.7
0$2
02$2
84$3
2711
.6x
6.2x
26%
$26.
0037
%BU
YHI
GH
ST
Prec
isio
n D
rillin
g C
orpo
ratio
nPD
T, N
$10.
50D
ecC
$29
4.4
$2,6
96$0
.00
0.0%
$0.2
2$0
.59
$1.3
4$4
35$6
56$8
387.
8x4.
1x12
6%$1
5.00
43%
BUY
HIG
HST
Shaw
Cor
Ltd
.SC
L'A
T$2
8.88
Dec
C$
71.4
$1,9
16$0
.32
1.1%
$1.2
2$0
.65
$2.2
9$1
84$1
20$2
6512
.6x
7.0x
253%
$32.
0012
%BU
YHI
GH
ST
Secu
re E
nerg
y Se
rvic
esSE
ST
$6.8
7D
ecC
$93
.3$5
88$0
.00
0.0%
$0.0
7$0
.30
$0.5
8$2
3$6
1$1
0711
.9x
5.6x
91%
$11.
0060
%BU
YHI
GH
ST
Sava
nna
Ener
gy S
ervic
es C
orp.
SVY
T$7
.45
Dec
C$
85.6
$599
$0.0
00.
0%$0
.10
$0.5
8$0
.92
$70
$133
$179
8.1x
4.1x
59%
$11.
0048
%BU
YHI
GH
ST
Trin
idad
Dril
ling
Ltd.
TDG
T$7
.77
Dec
C$
124.
8$8
57$0
.20
2.6%
($0.
68)
$0.6
0$0
.85
$194
$250
$320
9.1x
4.5x
41%
$12.
5063
%BU
YHI
GH
ST
Tota
l Ene
rgy
Serv
ices
TOT
T$1
7.36
Dec
C$
32.9
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$0.1
60.
9%$1
.27
$1.9
6$2
.24
$68
$117
$134
7.8x
4.2x
14%
$23.
0033
%BU
YHI
GH
ST
EPS
Gro
wth
EPS
(f.d.
)EB
ITD
A (m
m)
Shar
esO
/SM
arke
tC
apP/
E20
12E
EV/E
BIT
DA
2012
E
53
Gold & Precious Minerals
1M 3M 6M 12M YTD Cum.1
Action List 0.0 0.0 29.3 25.5 25.5 97.7Comp. Group* (15.3) (10.1) (5.9) (18.4) (18.4) 22.8S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 3.0* S&P/TSX Gold, Precious Metals & Minerals (Subindustries)¹ Since March 26, 2007
Total Return %
4080
120160200
Mar
07
Sep0
7
Mar
08
Sep0
8
Mar
09
Sep0
9
Mar
10
Sep1
0
Mar
11
Sep1
1
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month Gold averaged US$1,643/oz in December, down US$95 or 5.5% from November’s average of US$1,738/oz. The U.S. Dollar Index continued to climb, increasing by 2.29%. The S&P/TSX Gold Index underperformed the metal, decreasing by 15.6% on a U.S. dollar basis compared to gold, which decreased by 10.5%. The best performers were European Goldfields (EGU-T, not rated) and Romarco Minerals (R-T, not rated), up 26.8% and 13.7%, respectively. The poorest performers were Eldorado Gold (ELD-T, BUY) and NovaGold (NG-T, not rated), down 19.1% and 20.9%, respectively. Things to Watch For in the Coming Month In the near term, we expect gold to trade higher, as investors continue to diversify away from equities, and European sovereign debt concerns persist. Our Sector Stance We remain positive on gold’s medium- to longer-term outlook and recommend an overweight sector stance. The fundamental factors that have underpinned the 11-year bull market for gold remain intact in our view, including: • central banks will likely remain net buyers of gold, as emerging economies
look to diversify their reserve holdings; • investment demand for gold (at the institutional and retail level) should remain
strong, as individuals look to diversify their positions; • ETF demand for gold bullion continues to grow; • questions remain about the long-term viability of the U.S. dollar as the world’s
reserve currency; • continued improvement in the U.S. economic outlook could lead to accelerated
inflation fears; • global currency and trade imbalances remain; • gold mine supply remains challenged over the longer term; and • increased demand for labour and materials, further challenging the cost base to
produce an ounce of gold.
Steven Green, CFA 416 307 6304 [email protected] Greg Barnes, 416 983 9588 [email protected] Daniel Earle, 416 308 7906 [email protected] Scott Parsons, CFA, 416 308 3404 [email protected]
54
We forecast that gold will average US$1,700/oz in 2012, US$1,500/oz in 2013, and US$1,500/oz in 2014. We project a long-term price of US$1,500/oz, based on our new spot-gold valuation methodology. We believe that investors are increasingly valuing gold equities on a spot basis. Given the unique nature of gold as a monetary asset, traditional supply and consumption flows are less informative for gold than they are for base metals.
55
G
old
& P
reci
ous
Met
als
Uni
vers
e
Serv
ice
Uni
vers
e
AL
BUY
= Ac
tion
List
BU
Y
Ana
lyst
(s):
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= S
teve
n J.
Gre
en, C
FA 4
16 3
07 6
304;
GB
= G
reg
Bar
nes
416
983
9588
; DE
= D
anie
l Ear
le, 4
16 3
08 7
906;
SP
= S
cott
Par
sons
, 416
308
340
4
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rall
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m)
(US$
mm
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v.Yi
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2010
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2012
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2011
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drill
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T$2
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56
Industrial Products
1M 3M 6M 12M YTD Cum.1
Action List 2.2 16.5 7.3 7.3 7.3 625.4Comp. Group* 1.8 15.1 (10.3) (6.8) (6.8) 233.8S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 72.5* S&P/TSX Construction & Engineering, Machinery,Trading Co's & Distributors (Industries)¹ Since December 29, 2000
Total Return %
50250450650850
1,0501,250
Dec
00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month Armtec Infrastructure Inc. (ARF-T) was the strongest performer in our coverage universe in December, up 39.5%. Finning International Inc. (FTT-T), down 4.8%, was the worst. Russel Metals Inc.’s (RUS-T) stock price decreased by 4%. The HRC spot price is US$695/ton for February deliveries, up almost 9% from the US$640/ton November average. The HRC price has shown noticeable improvement, as we expected, given recently announced price increases and lengthening order lead times. Russel BUY-rating unchanged, and near-term trading looks positive. As investor sentiment for steel equities closely follows the direction of the benchmark HRC price, near-term trading for Russel is likely to be positive. As well, we believe that its dividend is safe due to a strong balance sheet and a healthy free cash flow cushion, which should provide stock price support in the longer term. Our BUY rating is unchanged. Steels: The November 2011 U.S. steel inventory dropped to 8.10 million tons, about 3.3% lower than the 8.38 million tons in October, but still 11% higher year over year. We are not surprised to see some destocking through November, with the aggressive liquidation selling evident since June, and the benchmark HRC price hitting a low of US$600/ton in November confirming that. However, spot transaction pricing has improved to US$695/ton, with potentially more room to move up, given that list price is currently US$720–740/ton. Things to Watch For in the Coming Month • January 9: Canadian Building Permits • January 18: Architectural Billings Index • January 26: Caterpillar Inc.’s (CAT-N) Q4/11 results
Michael Tupholme, CFA, 416 307 9389 [email protected] Cherilyn Radbourne, CA, CFA 416 308 3403 [email protected] Tim James, CFA, 416 308 9773 [email protected] Paul D’Amico, CFA 416 983 2755 [email protected]
57
Our Sector Stance Engineering and Construction: Our longer-term macro outlook for this sector is generally favourable. We believe public-sector spending trends remain positive, supported by P3s and megaprojects, which are important segments for the companies that we cover. With governments looking to tackle record fiscal deficits, we expect spending to be down substantially from the peaks during the stimulus program. However, infrastructure spending levels can nonetheless be expected to be strong on a historical basis. Looking forward, 2012-2013 is expected to be the first full post-stimulus year, with budgeted infrastructure spending above the last pre-stimulus year (2008-2009). In terms of the private sector, we are encouraged by the improved level of new contract awards over the last few quarters. However, given the prospect of slower than previously forecast economic growth, there is admittedly increased uncertainty surrounding the potential for continued private sector gains. A number of companies in our coverage universe have exposure to industrial markets, including oil & gas and mining markets. At this point, activity levels in these end markets, which have improved since the last downturn, appear to be holding up well, though falling commodity prices pose a risk. Commercial markets have not fully recovered since the last downturn. Strong commercial permit readings during May through July have given us reason to be optimistic, although permit values have slipped back since then, with October representing a six-month low. Residential permit values have been steady over the past several months, well above levels recorded in 2009 – although October also represented a six-month low. Looking forward, TD Economics is forecasting that housing starts will decline modestly in 2012, and more substantially in 2013. In general, margin compression has been a noteworthy theme for the E&C sector over the last several quarters. For several companies that we cover, recent margin performance has been well below previous highs, driven largely by a more negative mix of work. In the short term, we generally expect margins to remain weaker. However, at this point, our forecasts continue to call for margins of most companies that we cover to gradually rise over the coming quarters, as they work off weaker-margin projects awarded during the downturn, and begin to derive a greater proportion of revenue from more recently awarded work. SNC-Lavalin Group Inc. (SNC-T, $51.08); 12-Month Target C$69.00 Michael Tupholme, CFA 416 307 9389 While SNC-Lavalin reported Q3/11 core EPS in line with our estimate, core earnings fell 7% short of Street expectations. Despite the shortfall versus consensus, we remain positive on its outlook, on account of 1) overall backlog strength and a favourable backlog mix (we estimate that it has an all-time high level of gross margin embedded in backlog); 2) a healthy level of awarded work that has not yet been included in backlog; and 3) what appears to be a robust opportunity pipeline for new awards across most segments. We reiterate our Action List BUY recommendation.
58
Indu
stria
l Pro
duct
s U
nive
rse
AL
BUY
= Ac
tion
List
BU
Y
Ana
lyst
(s):
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upho
lme,
CFA
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307
938
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bour
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08 3
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, 416
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40%
BUY
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2/12
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Waj
ax C
orp.
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T$3
8.56
Dec
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16.6
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$2.4
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MT
Finn
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515
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Stan
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LDM
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(1) A
ll fig
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are
in U
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EPS
P/E
59
Insurance
1M 3M 6M 12M YTD Cum.1
Action List 0.0 0.0 0.0 0.0 0.0 75.7Comp. Group* 2.7 (5.6) (21.4) (20.9) (20.9) (0.1)S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 72.5* S&P/TSX Insurance (Industry Group)¹ Since December 29, 2000
Total Return %
50
100
150
200
Dec
00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
Action List Comp Group* S&P/TSX
Industry Overview
Performance Summary for the Month In the Lifeco sector, our group of four companies appreciated on average 1.2% in December, led higher by Great-West Lifeco (GWO-T) and Sun Life Financial (SLF-T) with gains of 4.3% and 2.4%, respectively, while Industrial Alliance (IAG-T) and Manulife Financial (MFC-T) declined by 0.5% and 1.3%. For context, the Lifecos, as a group, outperformed the S&P/TSX Composite, which was down 1.7%, but underperformed the S&P/TSX Capped Financials Index which gained 2.5%. Intact Financial Corp. (IFC-T) gained 2.9% on the month. Things to Watch For in the Coming Month Two themes to focus on in the near term for lifecos is the impact from 1) development around IFRS phase II, and 2) regulatory capital rule changes. On the P&C side, we continue to pay close attention to the development around fraud and abuse in Ontario Auto insurance, and Ontario Auto Reform overall. Sector Stance Over the next 12 to 24 months, the Lifecos may provide decent returns; however, we expect a bumpy ride over the near term. We remain market weight on the sector. In terms of potential positives, rising interest rates and equity markets could provide a good footing for the sector. As well, if macro conditions stabilize, we could see a re-rating of the sector on the back of reduced earnings volatility and a steady build up of excess capital. We believe the sector is under-owned; therefore, if we do get a rotation back in, it could add a further push to Lifeco stock prices. Lastly, Lifecos have been raising prices and scaling back features offered on certain products, which we believe should help boost new business margins. However, current macro conditions will weigh on the Lifecos’ share prices near term. Some legacy businesses cannot be re-priced and will likely weigh on earnings and ROEs for years. We are also awaiting clarity on what high level
Doug Young, CFA 416 308 2361 [email protected]
60
changes OSFI might make to Lifeco regulatory capital requirements (and when). The eventual adoption of IFRS Phase 2 remains an overhang for the sector as well. The P&C sector is cyclical, and while the pricing signals are mixed currently, we anticipate a hardening (increasing) pricing environment in 2012, primarily in the personal (not commercial) market. As well, P&C insurers have historically held up relatively well in challenging macro conditions. Meanwhile, we are encouraged by the steps laid out in the recent Ontario budget to combat auto insurance fraud and abuse. We favour companies with a strong management team, reserving track record, solid capital position, and leading market share, such as Intact Financial. But, in our view, its stock is fairly valued at current levels.
61
In
sura
nce
Uni
vers
e
AL
BUY
= Ac
tion
List
BU
Y
Ana
lyst
(s):
DY
= D
oug
You
ng, C
FA 4
16 3
08 2
361
Ove
rall
Cur
r.Ye
ar-
Rep
.Sh
ares
Mar
ket
Ind.
EPS
12-M
onth
Tota
lR
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k N
ame
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(bln
)D
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d20
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c.SL
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N$1
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(1) E
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62
Media
1M 3M 6M 12M YTD Cum.1
Action List 8.8 5.1 (3.7) (1.6) (1.6) 547.8Comp. Group* 0.5 (0.7) (23.8) (32.2) (32.2) (24.9)S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 72.5* S&P/TSX Broadcasting, Publishing (Subindustries)¹ Since December 29, 2000
Total Return %
0200400600800
1,000D
ec00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month Our Action List performed well in December, gaining 8.8% versus the comp group and the S&P/TSX Composite, which were up 0.5% and 1.7%, respectively. The performance of our Action List was driven by our lone pick, Corus Entertainment. While there was little news from the company during the month, we believe that the market is becoming more comfortable that the OTT threat is better defined and less worrisome than it was earlier in the year, helping to restore confidence on this front. Things to Watch For in the Coming Month January brings Q1 results from most of the companies in our coverage with fiscal year ends, including Corus, Canadian Satellite Radio and Postmedia. We will have a preview report out on these names in early January with detail, but are generally looking for a stronger H2/12 than H1/12, and therefore expect some of the pressure we saw on certain media verticals in Q4 to continue. We publish our annual industry report in January, and host the Taste of Media Luncheon to accompany that. This will be later in the month than usual this year, due to the timing of the holidays and reporting season. Stay tuned for more detail and personal invitations to the event. Our Sector Stance: Overweight Most media companies have some exposure to the advertising market, which is, in turn, driven by the overall economy. We remain upbeat about some advertising demand metrics – online and specialty television, in particular. Other media, such as print, are definitely more challenged at this point in the cycle. Accordingly, we believe that investors should focus more on stock specific ideas than sector rotation when it comes to media. Our top pick, Corus Entertainment, is a case in point, with lots of exposure to both specialty television and radio, two components of the advertising economy that are faring much better than others.
Scott Cuthbertson 416 983 3954 [email protected] Michael Elkins, CA, CFA 416 983 6809 [email protected]
63
Corus Entertainment Inc. CJR.B-T, $20.52) 12-Month Target :$24.00 Scott Cuthbertson 416 983-3954 Corus is our Action List pick for several reasons: • Solid business fundamentals. Corus has good exposure to specialty
television, which is one of the healthiest components of the advertising market. We expect it to grow in the mid to high single digit range this year. A good radio franchise and valuable content operation round out the company’s asset stable.
• Strong balance sheet. Levered at 1.9x, Corus has significant financial flexibility.
• An attractive and potentially growing dividend. Corus currently pays $0.87 in annual dividends, and we believe it is poised to increase this, as free cash flow has grown nicely over the last year. With the company’s AGM slated for January 10, there could be an announcement on this front as early as that date.
• Netflix threat has abated. With the signing of the NBCUniversal output deal, Corus does not have any more pay TV content renewals until 2013. In addition, we expect significant innovation on the pay television front some time in calendar 2012, which may help to underpin that business and grow the revenue base.
We like the overall momentum, valuation and relative defensiveness of the mix of media properties in the stable. Action List BUY.
64
B
road
cast
ing
Uni
vers
e
Publ
ishi
ng C
ompa
nies
Prin
ting
Com
pani
es
Film
Com
pani
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Prod
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n C
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BUY
= Ac
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Ana
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(s):
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ice
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Cur
r.O
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m)
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(mm
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iv.
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2011
A/E
2012
E20
10A
2011
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2012
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E20
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2011
A/E
2012
ETa
rget
Ret
urn
Rat
ing
Rat
ing
Anal
yst
Cor
us E
nter
tain
men
t Inc
. C
JR.B
, CJR
T, N
$20.
52Au
gC
$82
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,700
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53.
7%$1
.56
$1.6
9$1
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87.5
$303
.212
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11.2
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8x7.
4x$2
4.00
20.6
%AL
BUY
MED
IUM
SC
Astra
l Med
ia In
c.
ACM
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$35.
49Au
gC
$56
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$0.7
52.
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5$3
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$336
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17.6
%BU
YM
EDIU
MSC
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Gro
up In
c.
TVA.
BT
$8.7
7D
ecC
$23
.8$2
08$0
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2.3%
$1.7
2$1
.45
$1.1
3$7
6.2
$65.
6$5
7.8
6.1x
7.8x
3.9x
5.1x
$11.
0027
.7%
HOLD
MED
IUM
SC
Newf
ound
land
Cap
ital C
orp.
Ltd
.NC
C.A
T$7
.97
Dec
C$
30.3
$241
$0.3
03.
8%$0
.38
$0.5
1$0
.65
$27.
6$3
3.3
$37.
815
.8x
12.2
x10
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7.6x
$9.0
016
.7%
HOLD
MED
IUM
SC
Can
adia
n Sa
tellit
e Ra
dio
Hold
ings
XSR
T$3
.20
Aug
C$
122.
9$3
93$0
.00
0.0%
($0.
88)
($0.
84)
$0.2
4($
11.2
)($
7.3)
$48.
4nm
13.4
xnm
10.7
x$4
.50
40.6
%BU
YHI
GH
SC
Ove
rall
Cur
r.Ye
ar-
Rep
.Sh
ares
Mar
ket
Ind.
EPS
EBIT
DA
($m
m)
P/E
(x)
EV/E
BIT
DA
(x)
12-M
onth
Tota
lR
isk
Stoc
k N
ame
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bol
Exch
.Pr
ice
End
Curr
.O
/S (m
m)
Cap
(mm
)D
iv.
Yiel
d20
10A
2011
E20
12E
2010
A20
11E
2012
E20
11A/
E20
12E
2011
E20
12E
Targ
etR
etur
nR
atin
gRa
ting
Anal
yst
Tors
tar C
orp.
TS.B
T$8
.28
Dec
.C
$80
.1$6
64$0
.50
6.0%
$1.6
0$1
.69
$1.7
2$2
50.3
$238
.8$2
43.0
4.9x
4.8x
3.2x
3.1x
$14.
0075
.1%
BUY
MED
IUM
SC
Yello
w M
edia
Inc.
YLO
T$0
.19
Dec
C$
516.
1$9
5$0
.00
0.0%
$0.9
4$0
.59
$0.6
2$8
50.3
$694
.0$6
17.8
0.3x
0.3x
3.8x
4.3x
nana
RED
UCE
HIG
HSC
Gla
cier
Med
iaG
VCT
$2.1
0D
ec.
C$
89.4
$188
$0.0
62.
9%$0
.28
$0.2
3$0
.35
$44.
1$5
0.8
$69.
59.
0x6.
0x6.
3x4.
0x$2
.75
33.8
%BU
YM
EDIU
MSC
Post
Med
ia N
etwo
rkPN
C.B
T$7
.40
Aug
C$
40.3
$298
$0.0
00.
0%na
$1.1
3$1
.20
$191
.1$2
01.1
$180
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5x6.
2x4.
7x4.
9x$1
0.00
35.1
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LDHI
GH
SC
Ove
rall
Cur
r.Ye
ar-
Rep
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ares
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ket
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EPS
EBIT
DA
($m
m)
P/E
(x)
EV/E
BIT
DA
(x)
12-M
onth
Tota
lR
isk
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k N
ame
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bol
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ice
End
Cur
r.O
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m)
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(mm
)D
iv.
Yiel
d20
10A
2011
A/E
2012
E20
10A
2011
A/E
2012
E20
11A/
E20
12E
2011
A/E
2012
ETa
rget
Ret
urn
Rat
ing
Rat
ing
Anal
yst
Tran
scon
tinen
tal I
ncTC
L.A
T$1
2.61
Oct
C$
81.0
$1,0
21$0
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3.5%
$1.8
9$1
.36
$2.1
7$3
82.0
$378
.1$3
99.1
9.2x
5.8x
4.3x
4.0x
$15.
0022
.4%
BUY
MED
IUM
SC
QUA
D G
raph
ics
QUA
DT
$14.
34D
ec.
US$
47.2
$677
$0.0
00.
0%na
$2.1
7$2
.34
$683
.7$6
15.0
$607
.96.
6x6.
1x3.
9x3.
9x$1
5.00
4.6%
HOLD
HIG
HSC
Ove
rall
Cur
r.Ye
ar-
Rep
.Sh
ares
Mar
ket
Ind.
EPS
EBIT
DA
($m
m)
P/E
(x)
EV/E
BIT
DA
(x)
12-M
onth
Tota
lR
isk
Stoc
k N
ame
Sym
bol
Exch
.Pr
ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)D
iv.
Yiel
d20
10A
2011
E20
12E
2010
A20
11E
2012
E20
11E
2012
E20
11E
2012
ETa
rget
Ret
urn
Rat
ing
Rat
ing
Anal
yst
Cin
eple
x In
cC
GX
T$2
5.72
Dec
C$
62.7
$1,6
12$1
.29
5.0%
$1.1
5$1
.10
$1.4
1$1
71.3
$177
.6$1
92.4
23.3
x18
.2x
10.2
x9.
4x$2
5.00
2.2%
HOLD
MED
ME
Ove
rall
Cur
r.Ye
ar-
Rep
.Sh
ares
Mar
ket
Ind.
EPS
EBIT
DA
($m
m)
P/E
(x)
EV/E
BIT
DA
(x)
12-M
onth
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isk
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k N
ame
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bol
Exch
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ice
End
Curr
.O
/S (m
m)
Cap
(mm
)D
iv.
Yiel
d20
10A
2011
A20
12E
2010
A20
11A
2012
E20
11A
2012
E20
11A
2012
ETa
rget
Ret
urn
Rat
ing
Rat
ing
Anal
yst
DHX
Med
ia L
td.
DHX
T$0
.73
Jun
C$
61.0
$45
$0.0
00.
0%($
0.01
)$0
.03
$0.0
5$2
.9$6
.8$8
.726
.9x
15.8
x4.
4x3.
5x$1
.00
37.0
%HO
LDHI
GH
ME
65
Metals & Minerals
1M 3M 6M 12M YTD Cum.1
Action List (2.6) 30.9 (26.2) (26.8) (26.8) (7.9)Comp. Group* (2.1) 27.2 (24.2) (29.0) (29.0) 154.0S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 20.2* S&P/TSX Div. Metals & Minerals, Aluminum (Subindustries)¹ Since January 23, 2006
Total Return %
0100200300400
Jan0
6
Jul0
6
Jan0
7
Jul0
7
Jan0
8
Jul0
8
Jan0
9
Jul0
9
Jan1
0
Jul1
0
Jan1
1
Jul1
1
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month The S&P/TSX Div. Metals & Minerals, Aluminum (Subindustries) was down 2.1% in December, after being down 2.8% in November. In December, First Quantum Minerals Ltd. (FM-T) was the best performer among the large cap producers, with a negative 2.7% return, while Cameco Corp. (CCO-T, CCJ-N) was the weakest, with a negative 4.7% return. Among the small to intermediate cap producers, Quadra FNX Mining Ltd. (QUX-T) performed best with a 36.5% return, while Mercator Minerals (ML-T) trailed at negative 17.5%. Among the developers, Macarthur Minerals Ltd. (MMS-T) was the best performer with a 2.8% return, while Nautilus (NUS-T) was the weakest, with a negative 20.7% return. Things to Watch For in the Coming Month We expect continued volatility in commodity prices in the coming months, as investors grapple with concerns related to the debt crises in Europe and the U.S. However, investors should begin to be more forward-looking and focus on an improving demand outlook, as well as the fundamental outlook for metals entering 2012. We believe that the supply challenges facing mining companies have been intensified by the events of the past several years, which is likely to lead to continued strength in metal prices longer term, as the supply response lags structurally higher demand. As well, increased inflation pressures dogging new project development are expected to be a significant factor behind the sustainability of elevated metal prices. Our Sector Stance Our long-term view remains bullish, and we recommend an overweight in the sector. We see structurally higher demand over the long term, driven by urbanization and modernization in the developing world. Mine production will likely struggle to meet higher structural demand. In fact, Brook Hunt forecasts suggest that mine production could decline over the next 15 years, particularly that of zinc and copper. We believe that 1) developing world industrialization and urbanization will continue to drive metal-intensive demand; 2) the global financial crisis has resulted in a two-year delay (at least) in the progress of new projects; and
Greg Barnes, 416 983 9588 [email protected] Craig Miller, 416 982 2753 [email protected] Steven J. Green, CFA 416 307 6304 [email protected] Craig Hutchison, 416 982 3474 [email protected]
66
3) increasing sovereign risks could further hamper the mining industry’s ability to respond to higher metal prices. Teck Resources Ltd. (TCK.B-T, $35.91) 12-Month Target: $58.00 Greg Barnes, 416 983 9588 Our two favourite commodities are coking coal and copper, both key focuses for Teck Resources, which is our large cap Action List pick in the base metals sector. We expect Teck to potentially benefit from strong pricing for those two commodities in 2012 and beyond. We are, however, more bullish on copper, given strong Asian demand and potential supply challenges over the medium and longer term. There is increasing concern that copper supply will be constrained over the medium term, as a lack of projects in the development pipeline has been exacerbated by the global financial crisis. Over the long term, the lack of high-quality, large-scale copper projects could drive up the marginal cost of production, and, in turn, lead to higher copper prices. We are valuing Teck based upon target multiples of 6.0x our EV/2012 EBITDA estimate (60% weighting) and 1.3x our net asset value (40% weighting). We believe that Teck’s strong growth profile, low technical and political risk profile and substantial free cash flow make it a core investment in the Canadian base metals sector. First Quantum Minerals Ltd. (FM-T, $20.05) 12-Month Target: $27.00 Greg Barnes, 416 983 9588 We believe First Quantum has the potential to be a 1 million tonnes per year (tpy) copper producer. With the Sentinel project rapidly emerging as a world-class copper discovery, and plans for a 67% production increase at Kansanshi, we believe that First Quantum has the necessary projects to become the next global major copper producer, with production of 1 million tpy, i.e., over three times 2011 production of approximately 300,000 tons, being possible by 2017. Our target price is based upon an EV/2012E EBITDA multiple of 5.0x (60% weighting) and a 1.30x multiple to our NAV10% (40% weighting). We believe that First Quantum’s suite of large copper projects, its commanding position on the Zambian Copperbelt, and its diversified asset base, could move it to the top of the acquisition target list for any major mining company or state mining company seeking to position itself as a significant participant in the copper market.
67
M
etal
s &
Min
eral
s U
nive
rse
M
etal
s In
com
e Tr
ust U
nive
rse
TDSI
Met
al P
rice
Fore
cast
s (U
S$/lb
)
AL
BUY
= Ac
tion
List
BU
Y
Ana
lyst
(s):
GB
= G
reg
Bar
nes,
416
983
958
8; S
G =
Ste
ven
Gre
en, C
FA 4
16 3
07 6
304;
CM
= C
raig
Mill
er, 4
16 9
82 2
753;
CH
= C
raig
Hut
chis
on, 4
16 9
82 3
474
Ove
rall
Curr
.Ye
ar-
Rep.
Shar
esM
arke
tIn
d.EP
UDC
PUP/
EPU
(x)
P/D
CPU
(x)
12-M
thTo
tal
Ris
k
Stoc
k N
ame
Sym
bol
Exch
.Pr
ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)Yi
eld
2010
A20
11E
2012
E20
10A
2011
E20
12E
2011
E20
12E
2011
E20
12E
Targ
etRe
turn
Ratin
gRa
ting
Anal
yst
Nor
anda
Inco
me
Fund
NIF
.UN
T$5
.68
Dec
. 31
C$
50.0
$284
8.8%
$0.5
6$0
.71
$0.7
9$1
.04
$0.8
6$0
.83
8.0x
7.2x
6.6x
6.8x
$8.0
050
%BU
YH
IGH
SG
Wes
tsho
re T
erm
inal
sW
TE.U
NT
$22.
88D
ec. 3
1C
$74
.3$1
,699
9.0%
$1.2
5$0
.52
$0.5
8$0
.00
$1.2
0$1
.11
43.6
x39
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19.1
x20
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$20.
00-5
%H
OLD
HIG
HG
B
TDSI
Met
al P
rice
Fore
cast
s (U
S$/lb
)
2004
A20
05A
2006
A20
07A
2008
A20
09A
2010
A20
11A
2012
E
Alu
min
um$0
.78
$0.8
6$1
.17
$1.2
0$1
.17
$0.7
6$0
.99
$0.9
3$0
.90
Cop
per
$1.3
0$1
.67
$3.0
6$3
.23
$3.1
6$2
.34
$3.4
3$4
.00
$3.7
5
Lead
$0.4
0$0
.44
$0.5
8$1
.77
$0.9
5$0
.78
$0.9
8$1
.09
$1.0
0
Nic
kel
$6.2
9$6
.71
$10.
96$1
6.87
$9.6
0$6
.66
$9.9
3$1
0.38
$8.7
5
Zinc
$0.4
8$0
.63
$1.4
8$1
.47
$0.8
5$0
.75
$0.9
8$0
.99
$0.9
5
Ura
nium
$18.
27$2
8.08
$47.
91$9
8.54
$63.
83$4
6.80
$46.
48$5
7.10
$62.
50
C$/
US
$$0
.78
$0.8
4$0
.88
$0.9
3$0
.94
$0.8
8$0
.98
$1.0
1$1
.00
Ove
rall
C
urr.
Year
-R
ep.
Shar
esM
arke
tIn
d.EP
SC
FPS
P/E
(x)
P/C
F (x
)12
-Mth
Tota
lR
isk
Stoc
k N
ame
Sym
bol
Exch
.Pr
ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)Yi
eld
2010
A20
11E
2012
E20
10A
2011
E20
12E
2011
E20
12E
2011
E20
12E
Targ
etR
etur
nR
atin
gR
atin
gA
naly
stLa
rge
cap.
Fi
rst Q
uant
um M
iner
als
Ltd.
FMT
$20.
05D
ec. 3
1U
S$47
6.3
9,55
00.
8%$1
.40
$1.3
1$1
.35
$2.2
4$1
.83
$2.3
215
.0x
14.7
x10
.8x
8.5x
$27.
0035
%AL
BU
YH
IGH
GB
Teck
Res
ourc
es L
td.
TCK.
B, T
CK
T, N
$35.
91D
ec. 3
1C
$59
0.8
21,2
162.
2%$2
.72
$4.3
6$4
.30
$4.6
6$7
.50
$7.0
48.
2x8.
3x4.
8x5.
1x$5
8.00
64%
AL B
UY
HIG
HG
B
Cam
eco
Cor
p.C
CO
, CC
JT,
N$1
8.41
Dec
. 31
C$
395.
47,
279
2.2%
$1.2
8$1
.04
$1.2
8$1
.97
$1.7
2$1
.80
17.7
x14
.4x
10.7
x10
.2x
$29.
0060
%BU
YH
IGH
GB
Inte
rmed
iate
-Sm
all C
ap.
Cap
ston
e M
inin
g C
orp.
CS
T$2
.78
Dec
. 31
US$
375.
01,
043
n/a
$0.2
4$0
.19
$0.2
1$0
.38
$0.4
4$0
.33
14.3
x13
.0x
6.1x
8.1x
$4.7
571
%BU
YH
IGH
CM
Clin
e M
inin
g C
orpo
ratio
nC
MK
T$1
.61
Nov
. 30
C$
208.
633
6n/
a($
0.09
)($
0.02
)$0
.15
($0.
03)
($0.
02)
$0.2
3n/
a10
.9x
n/a
6.9x
$2.7
571
%Sp
ec B
UY
SPEC
CH
Den
ison
Min
es C
orp.
D
ML,
DN
NT,
A$1
.27
Dec
. 31
US$
384.
748
9n/
a($
0.06
)($
0.12
)($
0.09
)$0
.12
($0.
00)
$0.0
3n/
an/
an/
an/
a$1
.50
18%
HO
LDSP
ECC
M
Hud
Bay
Min
eral
s In
c.H
BMT
$10.
14D
ec. 3
1C
$17
1.9
1,74
32.
0%$0
.50
$0.7
3$0
.21
$1.3
2$1
.14
$0.8
413
.9x
48.4
x8.
9x12
.1x
$12.
5025
%H
OLD
HIG
HG
B
Impe
rial M
etal
sIII
T$1
2.50
Dec
. 31
C$
74.0
925
n/a
$1.3
5$1
.00
$0.7
6$1
.89
$2.0
8$1
.18
12.5
x16
.5x
6.0x
10.6
x$1
5.50
24%
BUY
HIG
HC
M
Inm
et M
inin
g C
orp.
IMN
T$6
5.50
Dec
. 31
C$
69.3
4,54
10.
3%$5
.53
$4.2
3$5
.73
$7.4
4$5
.79
$6.8
115
.5x
11.4
x11
.3x
9.6x
$80.
0022
%BU
YH
IGH
GB
Lund
in M
inin
g C
orp.
LUN
T$3
.87
Dec
. 31
US$
583.
42,
258
n/a
$0.5
5$0
.32
$0.2
3$0
.52
$0.3
4$0
.45
11.7
x16
.0x
10.9
x8.
3x$5
.00
29%
BUY
HIG
HG
B
Mer
cato
r Min
eral
sM
LT
$1.5
1D
ec. 3
1U
S$25
8.4
390
n/a
$0.1
0$0
.03
$0.2
8$0
.14
$0.1
2$0
.36
45.0
x5.
3x12
.2x
4.1x
$3.7
514
8%BU
YH
IGH
CM
Qua
dra
FNX
Min
ing
Ltd.
QU
XT
$15.
08D
ec. 3
1U
S$19
2.8
2,90
7n/
a$1
.41
$0.8
3$1
.01
$2.1
6$1
.61
$1.5
617
.6x
14.5
x9.
1x9.
4x$1
7.00
13%
HO
LDH
IGH
GB
Tase
ko M
ines
Ltd
.TK
O, T
GB
T, A
$2.7
9D
ec. 3
1C
$19
5.4
545
n/a
$0.5
0$0
.18
$0.3
1$0
.57
$0.1
2$0
.41
15.2
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0x23
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6.7x
$6.0
011
5%BU
YH
IGH
CM
Thom
pson
Cre
ek M
etal
sTC
M, T
CT,
N$7
.12
Dec
. 31
US$
167.
91,
195
n/a
$1.1
2$0
.76
$0.5
4$1
.62
$1.2
7$1
.03
9.0x
12.8
x5.
4x6.
7x$1
1.00
54%
BUY
HIG
HC
M
Dev
elop
ers
Augu
sta
Res
ourc
e C
orp.
AZC
T, A
$3.1
7D
ec. 3
1U
S$14
3.8
456
n/a
($0.
04)
$0.1
0($
0.04
)($
0.04
)($
0.04
)$0
.07
30.1
xn/
an/
a42
.2x
$7.0
012
1%Sp
ec B
UY
SPE
CC
M
Entré
e G
old
Inc.
ETG
, EG
IT,
A$1
.25
Dec
. 31
US$
114.
814
4n/
a($
0.19
)($
0.14
)($
0.06
)($
0.16
)($
0.17
)($
0.06
)n/
an/
an/
an/
a$3
.50
180%
Spec
BU
YSP
ECC
M
Ivan
hoe
Min
es L
td.
IVN
T, N
$18.
09D
ec. 3
1U
S$71
1.0
12,8
62n/
a($
0.05
)($
0.76
)($
0.18
)($
0.11
)($
0.29
)($
0.18
)n/
an/
an/
an/
a$1
8.50
2%H
OLD
SPEC
CM
Mac
arth
ur M
iner
als
Ltd.
MM
ST,
$1
.12
Mar
. 31
AUD
$44
.850
n/a
n/a
($0.
10)
($0.
07)
n/a
($0.
07)
($0.
06)
n/a
n/a
n/a
n/a
$3.0
016
8%Sp
ec B
UY
SPEC
CM
Nau
tilus
Min
eral
sN
US
T$1
.80
Dec
. 31
US$
195.
735
2n/
a($
0.26
)($
0.14
)($
0.07
)($
0.26
)($
0.13
)($
0.07
)n/
an/
an/
an/
a$3
.00
67%
HO
LDSP
ECC
M
Nor
ther
n D
ynas
ty M
iner
als
Ltd.
ND
M, N
AKT,
A$6
.15
Dec
. 31
C$
95.0
584
n/a
($0.
15)
($0.
20)
($0.
08)
($0.
07)
($0.
07)
($0.
08)
n/a
n/a
n/a
n/a
$38.
0051
8%Sp
ec B
UY
SPEC
CM
68
Multi-Industry
1M 3M 6M 12M YTD Cum.1
Action List 0.0 0.0 0.0 0.0 0.0 0.0Comp. Group* 0.8 2.4 (1.8) 5.4 5.4 87.3S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 49.8* S&P/TSX Diversified Financials, Real Estate & Utilities (Industry Groups)¹ Since December 16, 2008
Total Return %
80100120140160180200
Dec
08
Mar
09
Jun0
9
Sep0
9
Dec
09
Mar
10
Jun1
0
Sep1
0
Dec
10
Mar
11
Jun1
1
Sep1
1
Dec
11
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month In December, on average, our multi-industry coverage group outperformed the S&P/TSX Composite, which decreased by 1.7%. In particular, Brookfield Asset Management Inc. (BAM) decreased by 0.9%, and Brookfield Infrastructure Partners L.P. (BIP) increased by 8.0%. Meanwhile, Onex Corp. decreased by 4.9%. Things to Watch For in the Coming Month We will continue to watch how the broader economic environment unfolds and the impact on various industries and sectors worldwide. Signs of improvement in economic conditions and the health of capital markets should support improved business performance and transaction activity.
Linda Ezergailis, P. Eng. 416 983 7784 [email protected] Jason Bilodeau, CFA 416 308 3741 [email protected] Cherilyn Radbourne, CA, CFA 416 308 3403 [email protected]
69
M
ulti-
Indu
stry
Uni
vers
e
AL
BUY
= Ac
tion
List
BU
Y
Ana
lyst
(s):
LE =
Lin
da E
zerg
ailis
, P. E
ng. 4
16 9
83 7
784;
JB
= J
ason
Bilo
deau
, CFA
416
308
374
1; C
R =
Che
rilyn
Rad
bour
ne, C
A, C
FA, 4
16 3
08 3
403
Ove
rall
Cur
r.Ye
ar-
Rep
.Sh
ares
Mar
ket
Ind.
Boo
kA
OC
F Pe
r Sha
reP/
AO
CF
12-M
onth
Tota
lR
isk
Stoc
k N
ame
Sym
bol
Exch
.Pr
ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)D
iv.
Yiel
dVa
lue
P/B
V20
09A
2010
A20
11E
2012
E20
09A
2010
A20
11E
2012
ETa
rget
Ret
urn
Rat
ing
Rat
ing
Ana
lyst
Broo
kfie
ld A
sset
Man
agem
ent I
nc.
BAM
.A, B
AMT,
N$2
7.48
Dec
US$
658.
2$1
8,08
7.3
$0.5
21.
9%$2
5.19
1.1
$1.6
1$1
.50
$1.4
8$2
.06
17.1
x18
.3x
18.6
x13
.4x
$32.
0018
.3%
BUY
MED
IUM
LE
Ove
rall
Cur
r.Ye
ar-
Rep
.U
nits
Mar
ket
Ind.
Dis
t.FF
O P
er U
nit
P/FF
O12
-Mon
thTo
tal
Ris
k
Uni
t Nam
eSy
mbo
lEx
ch.
Pric
eEn
dC
urr.
O/S
(mm
)C
ap (m
m)
Dis
t.Yi
eld
2011
EYi
eld
2009
A20
10A
2011
E20
12E
2009
A20
10A
2011
E20
12E
Targ
etR
etur
nR
atin
gR
atin
gA
naly
st
Broo
kfie
ld In
frast
ruct
ure
Partn
ers
L.P.
BIP
, BIP
.UN
N, T
$27.
70D
ecU
S$18
5.1
$5,1
27.3
$1.4
05.
1%$1
.32
4.8%
$1.7
0$2
.30
$2.3
7$2
.82
16.3
x12
.0x
11.7
x9.
8x$3
0.00
13.4
%BU
YM
EDIU
MC
R
Ove
rall
Cur
r.Ye
arR
ep.
Shar
esM
arke
tIn
d.In
d.M
gmt
12-M
onth
Tota
lR
isk
Stoc
k N
ame
Pric
eEn
dC
urr.
O/S
(mm
)C
ap (m
m)
Div
.Yi
eld
Fore
.D
isc.
Impl
ied
Fee
Targ
etR
etur
nR
atin
gR
atin
gA
naly
st
One
x C
orp.
O
CX
T$3
3.18
Dec
US$
117.
0$3
,882
$0.1
10.
3%$3
8.93
5%$3
6.98
2.25
$41.
0023
.9%
BUY
MED
IUM
JB
NA
V
PV
2.50
Car
ried
Inte
rest
s
70
Paper & Forest Products
1M 3M 6M 12M YTD Cum.1
Action List 0.0 0.0 0.0 (73.8) (73.8) (81.9)Comp. Group* (6.0) 3.3 (34.6) (74.0) (74.0) (78.5)S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 72.5* S&P/TSX Paper & Forest Products (Industry)¹ Since December 29, 2000
Total Return %
050
100150200
Dec
00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month The S&P/TSX Paper & Forest Products (Industry) Index decreased by 6.0% during December, compared to a decrease of 1.7% for the S&P/TSX Composite Index. We note that the S&P/TSX Paper & Forest Products (Industry) Index comprises just two lumber-weighted stocks (West Fraser and Canfor). Our brief thoughts on P&FP commodity markets are: Market Pulp: Negative global pulp price momentum slowed in December and several producers have announced list price increases for January, in an effort to stabilize markets. The January list price for North American NBSK pulp is US$890/tonne. We believe that spot prices in all major markets are close to, and in some cases below cash costs for marginal producers. To date, producers have announced modest levels of market-related downtime, but we expect more curtailments. Newsprint: North American newsprint prices have been stable at US$640/tonne since August 2010. Overall market conditions remain challenging, with accelerating rates of consumption decline in North America and sluggish offshore demand. Producers idled approximately 9% of North American newsprint capacity in 2011, helping to balance supply with demand. Uncoated Freesheet: Price momentum turned negative in December for copy paper (copy prices have trended lower since August 2011), while prices for offset rolls remain stable. The current transaction prices for 20-lb. cut-size paper and 50-lb. offset rolls are US$1,055/ton and US$920/ton, respectively. Wood Products: The current Western SPF lumber price is US$261/Mfbm; prices reached a trough mid-November and have been trending higher since then, but we would characterize the overall momentum as stable. The current North Central OSB price is US$192/Msf (7/16” basis). Fundamental demand for OSB tied to the U.S. housing market remains poor; prices remained within a narrow band in 2011. Prices remain below our view of trend levels for both lumber and OSB.
Sean Steuart, CFA 416 308 3399 [email protected] Graham Meagher, CFA 416 982 5777 [email protected]
71
Things to Watch For in the Coming Month Price momentum for most pulp and paper commodities is generally negative. Producers have announced price increases for groundwood paper (publishing) grades; we will monitor the success of implementation through Q1/12. The global pulp market is weak and price momentum remains negative, but effective transaction prices have begun to stabilize. We believe that spot prices are close to the bottom, but expect list prices to continue to adjust downwards through the winter months, before resuming positive momentum during Q2/12. We expect a flood of capacity curtailments over the next several months, as spot prices are below cash costs for marginal producers. In 2006, Canada and the U.S. entered into the most recent iteration of the Softwood Lumber Agreement (SLA). On January 18, 2011, the U.S. delivered a Request for Arbitration claiming that B.C. has not properly applied the timber pricing system that was grandfathered under the SLA in the B.C. Interior. On November 16, 2011, Canada filed a comprehensive response. Canada’s position is that the increase in the proportion of Grade 4 logs scaled was due to the deterioration in the quality of timber caused by the Mountain Pine Beetle. The U.S. is seeking up to $499 million in remedy via a temporary export charge of 30.6% (in addition to the current 15% export tax) on B.C. lumber exported to the U.S. from April 2012 to October 2013 (or whenever $499 million is collected). A hearing at the London Court of International Arbitration is scheduled to begin February 27, 2012 and a final decision is expected during Q2/12. Our Sector Stance We encourage investors with a 12- to 24-month investment horizon to adopt a market weight position in North American P&FP equities. Global economic risks have increased, but we believe that the market has priced excessive risk into several equities. Within the wood products group, we prefer West Fraser Timber Co. Ltd. (WFT-T), Interfor Ltd. (IFP.A-T), and Norbord Inc. (NBD-T) over Canfor Corp. (CFP-T) and Louisiana-Pacific (LPX-N). Our top picks among pulp and paper producers, in descending order, are Domtar Corp. (UFS-N, T), Mercer International Inc (MERC-Q), Boise Inc. (BZ-N), and Clearwater Paper Corp (CLW-N).
72
Pa
per &
For
est P
rodu
cts
Uni
vers
e
AL
BUY
= Ac
tion
List
BU
Y
Ana
lyst
(s):
SS
= S
ean
Steu
art,
CFA
416
308
339
9; G
M =
Gra
ham
Mea
gher
, CFA
416
982
577
7
Ove
rall
Cur
r.Ye
ar-
Rep
.Sh
ares
Mar
ket
Ind.
EPS
P/E
(x)
TEV/
EBIT
DA
12-M
onth
Tota
lR
isk
Can
adia
n C
ompa
nies
Sym
bol
Exch
.Pr
ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)D
iv.
Yiel
d20
10A
2011
E20
12E
2010
A20
11E
2012
E20
11E
2012
E20
11E
2012
ETa
rget
(7)
Ret
urn
Rat
ing
Rat
ing
Ana
lyst
Con
ifex
Tim
ber I
nc. (
1)C
FFV
$7.2
5D
ecC
$17
.3$1
25$0
.00
0.0%
($0.
71)
($0.
03)
$0.8
4($
1.2)
$10.
0$2
9.5
NM
F8.
7x19
.1x
6.5x
$11.
0052
%BU
YH
IGH
GM
Nor
bord
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(2)
NBD
T$8
.10
Dec
US$
44.2
$358
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00.
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0.23
)$0
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2$4
2.1
$89.
8$1
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42%
BUY
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cade
s In
c.C
AST
$4.4
3D
ecC
$95
.3$4
22$0
.16
3.6%
$0.0
1$0
.37
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0$2
70.3
$335
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11.9
x8.
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.00
39%
BUY
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Tem
bec
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(1)
TMB
T$2
.79
Sep
C$
100.
0$2
79$0
.00
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04)
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6$0
.55
$95.
0$1
02.2
$136
.910
.8x
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$3.7
534
%BU
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IGH
GM
Inte
rnat
iona
l For
est P
rodu
cts
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(1)
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AT
$4.3
0D
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$55
.9$2
40$0
.00
0.0%
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10)
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1$0
.40
$49.
1$6
9.6
$81.
620
.2x
10.8
x4.
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.50
28%
BUY
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HG
M
Dom
tar C
orp.
(3)
UFS
N, T
$79.
96D
ecU
S$38
.1$3
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$1.4
01.
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0.47
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4$9
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70.9
$881
.6$1
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$100
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27%
BUY
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HSS
Wes
t Fra
ser T
imbe
r Co.
Ltd
. (1)
WFT
T$4
1.40
Dec
C$
43.2
$1,7
87$0
.56
1.4%
$0.6
1$1
.32
$3.5
2$2
38.3
$277
.5$4
12.7
31.5
x11
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6.8x
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$52.
0027
%BU
YH
IGH
SS
Acad
ian
Tim
ber C
orp.
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T$1
0.33
Dec
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16.6
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$0.8
1$0
.84
$16.
1$1
8.7
$19.
212
.7x
12.3
x12
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12.5
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1.00
15%
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GM
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ess
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r Ltd
.FT
PT
$26.
59D
ecC
$15
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06$0
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0.0%
($1.
34)
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9$3
.88
$4.2
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9$1
15.7
13.3
x6.
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8x4.
2x$3
0.00
13%
HO
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IGH
SS
Can
for P
ulp
Prod
ucts
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(5) (
6)C
FXT
$12.
42D
ecC
$71
.3$8
85$0
.95
7.6%
$1.9
3$1
.30
$2.2
1$2
22.2
$144
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9.5x
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$13.
0012
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OLD
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M
Can
for C
orp.
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T$1
0.65
Dec
C$
142.
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00.
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0.04
)$0
.05
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7$2
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3%H
OLD
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alys
t Pap
er C
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Dec
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381.
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27)
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M
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est C
orp.
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.38
Dec
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246.
1$3
38$0
.00
0.0%
SUSP
.-
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er In
c. (1
) (3)
(9)
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N, T
$14.
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,413
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00.
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ek In
c.FB
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$1.0
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0.1
$131
$0.0
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M
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rall
Cur
r.Ye
ar-
Rep
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ares
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ket
Ind.
EPS
P/E
(x)
TEV/
EBIT
DA
12-M
onth
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lR
isk
U.S
. Com
pani
esSy
mbo
lEx
ch.
Pric
eEn
dC
urr.
O/S
(mm
)C
ap (m
m)
Div
.Yi
eld
2010
A20
11E
2012
E20
10A
2011
E20
12E
2011
E20
12E
2011
E20
12E
Targ
et (7
)R
etur
nR
atin
gR
atin
gA
naly
st
Mer
cer I
nter
natio
nal I
nc. (
4)M
ERC
- QN
$6.1
0D
ecE
ur56
.0$3
42$0
.00
0.0%
€ 0.
96€
0.24
€ 1.
23€
180.
7€
118.
1€
198.
718
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3.6x
6.8x
4.0x
$8.5
039
%BU
YH
IGH
GM
Cle
arw
ater
Pap
er C
orp.
(3)
CLW
N$3
5.61
Dec
US$
23.5
$836
$0.0
00.
0%$1
.90
$3.9
4$3
.87
$194
.2$2
65.0
$265
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0x9.
2x4.
7x4.
7x$4
7.50
33%
BUY
HIG
HG
M
Bois
e In
c. (3
)BZ
N$7
.12
Dec
US$
108.
9$7
75$0
.00
0.0%
$0.7
4$0
.56
$0.6
9$3
36.8
$306
.7$3
31.1
12.8
x10
.3x
4.8x
4.5x
$7.5
05%
BUY
HIG
HG
M
KapS
tone
Pap
er &
Pac
kagi
ng C
orp.
(3)
KS
N$1
5.74
Dec
US$
48.3
$760
$0.0
00.
0%$1
.37
$1.7
5$1
.77
$163
.7$2
15.1
$215
.09.
0x8.
9x5.
2x5.
2x$1
7.50
11%
HO
LDH
IGH
GM
Loui
sian
a-Pa
cific
Cor
p. (3
)LP
XN
$8.0
7D
ecU
S$13
4.5
$1,0
85$0
.00
0.0%
($0.
78)
($0.
43)
($0.
16)
-$7.
7$5
2.6
$108
.8nm
fnm
f18
.0x
8.7x
$6.5
0-1
9%R
EDU
CE
HIG
HG
M
(1) E
arni
ngs
fore
cast
s re
flect
regi
onal
lum
ber e
xpor
t tax
es in
201
1 an
d 20
12.
(2) N
orbo
rd s
hare
pric
e is
Can
adia
n do
llar d
enom
inat
ed; e
arni
ngs
estim
ates
are
U.S
. dol
lar d
enom
inat
ed.
(3) A
bitib
iBow
ater
Inc.
, Boi
se In
c., C
lear
wat
er P
aper
Cor
p., D
omta
r Cor
p., K
apSt
one
Pape
r & P
acka
ging
Cor
p., a
nd L
ouis
iana
-Pac
ific
shar
e pr
ice
and
finan
cial
dat
a ar
e U
.S. d
olla
r den
omin
ated
.
(4) M
erce
r Int
erna
tiona
l sha
re p
rice
is U
.S. d
olla
r den
omin
ated
; fin
anci
al d
ata
is e
uro-
deno
min
ated
.
(5) C
FX In
d. D
iv. r
efle
cts
the
2012
fore
cast
ed d
istri
butio
n fro
m C
PLP
to C
PPI.
(6) E
PS
for C
anfo
r Pul
p Pr
oduc
ts In
c. is
DC
PU.
(7) T
arge
t pric
es a
re in
the
sam
e cu
rren
cy a
s cu
rren
t pric
es.
(8) W
e ha
ve s
uspe
nded
our
targ
et p
rice,
reco
mm
enda
tion,
and
est
imat
es fo
r Sin
o-Fo
rest
Cor
p. S
hare
pric
e re
fere
nces
US
OTC
mar
kets
and
is U
S$-
deno
min
ated
.
(9) A
bitib
iBow
ater
Inc.
has
cha
nged
its
nam
e to
Res
olut
e Fo
rest
Pro
duct
s. T
he le
gal n
ame
chan
ge w
ill ta
ke p
lace
in 2
012,
follo
win
g sh
areh
olde
r app
rova
l at t
he a
nnua
l gen
eral
mee
ting.
Ass
umpt
ions
2010
A20
11A
2012
E20
13E
NBS
K Pu
lp (U
S$ p
er m
etric
tonn
e)$9
59$9
77$8
75$9
70
New
sprin
t (U
S$
per m
etric
tonn
e)$6
06$6
40$6
40$6
60
Unc
oate
d Fr
eesh
eet:
50-lb
. offs
et ro
lls (U
S$ p
er s
hort
ton)
$904
$930
$898
$920
Line
rboa
rd: 4
2-lb
. unb
leac
hed
kraf
t (U
S$ p
er s
hort
ton)
$620
$635
$650
$665
Lum
ber:
Wes
tern
SPF
(US$
per
Mfb
m)
$254
$255
$280
$310
OSB
: 7/1
6" N
orth
Cen
tral (
US$
per
Msf
)$2
20$1
86$1
95$2
20
Exch
ange
Rat
e (U
S$/C
$)$0
.97
$1.0
1$0
.99
$0.9
9
EBIT
DA
EBIT
DA
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
Res
trict
ed --
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
--
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
Res
trict
ed --
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
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--
----
----
----
----
----
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----
----
----
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- Sus
pend
ed --
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
-
73
Pipelines, Power & Utilities
1M 3M 6M 12M YTD Cum.1
Action List (2.9) (1.2) 4.3 10.2 10.2 279.7Comp. Group* 3.5 8.0 12.3 24.1 24.1 201.0S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 112.9* S&P/TSX Utilities (Sector),Oil & Gas Storage & Transportation (Subindustry)¹ Since June 2, 2003
Total Return %
0100200300400
Jun0
3
Jun0
4
Jun0
5
Jun0
6
Jun0
7
Jun0
8
Jun0
9
Jun1
0
Jun1
1
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month In December, the S&P/TSX Utilities Index outperformed the S&P/TSX Composite, which decreased by 1.7%. The Government of Canada 10-year bond yield, a key metric for valuations in the sector, ended the month at 1.9%, down from the previous month’s close of 2.2%. Valuations for our covered large-cap utility names increased, as price-to-forward-earnings multiples ended the month at 18.6x, compared to 18.4x last month. Things to Watch For in the Coming Month On January 19, the Alberta Utilities Commission will be holding a hearing on a settlement reached between the Market Surveillance Administrator and TransAlta (TA-T, TAC-N). Our Sector Stance: Overweight We believe that sector valuations are attractive, relative to government bond yields. Given the essential nature of energy infrastructure, we believe that the outlook remains bright in just about any economic environment, and recommend an overweight sector stance. Financial risk remains low, in our view – given continued investor demand for yield. Indeed, even during the financial crisis a few years ago, companies in our coverage universe had continued access to debt and equity capital markets. While the growth outlook of regulated utilities servicing industrial customers could become more muted in an economic slowdown, existing earnings are largely based on returns on historical cost of investments. Therefore, in our view, business risks have not increased materially. In the long term, we encourage investors to focus on names with solid growth potential through energy infrastructure investment opportunities, such as ATCO (ACO.X-T).
Linda Ezergailis, P. Eng. 416 983 7784 [email protected] Robert Hope, CFA 416 983 9717 [email protected]
74
ATCO Ltd. (ACO.X-T, C$60.24); 12-Month Target: C$78.00 Linda Ezergailis, P. Eng. 416 983 7784 ATCO is a diversified utility holding company, with a 52.8% stake in Canadian Utilities Ltd., as well as an Industrials business that manufactures modular buildings and provides industrial noise solutions. The company utilizes a dual share structure, and is effectively controlled by R.D. Southern. We believe that the long-term outlook for ATCO is positive, largely driven by its 52.8% interest in CU. ATCO, through CU, is expected to benefit from the high-level of electric transmission investment that is required in Alberta, which should result in strong, low-risk regulated earnings growth. Given the attractive potential returns and valuations relative to comparable stocks, we rate ATCO an Action List BUY.
75
Pi
pelin
es, P
ower
& U
tiliti
es U
nive
rse
AL
BUY
= Ac
tion
List
BU
Y
Ana
lyst
(s):
LE =
Lin
da E
zerg
ailis
, P. E
ng. 4
16 9
83 7
784;
RH
= R
ober
t Hop
e, C
FA 4
16 9
83 9
717
Ove
rall
Cur
r.Ye
ar-
Rep
.Sh
ares
Mar
ket
Ind.
Boo
kEP
SP/
E12
-Mon
thTo
tal
Ris
k
Stoc
k N
ame
Sym
bol
Exch
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ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)D
iv.
Yiel
dVa
lue
P/B
V20
10A
2011
E20
12E
2013
E20
10A
2011
E20
12E
2013
ETa
rget
Ret
urn
Rat
ing
Rat
ing
Ana
lyst
ATC
O L
td.
ACO
.XT
$60.
24D
ecC
$57
.8$3
,481
.9$1
.14
1.9%
36.4
3
1.
7$4
.88
$5.4
4$5
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$5.9
712
.3x
11.1
x10
.3x
10.1
x$7
8.00
31%
AL B
UY
LOW
LE
Can
adia
n U
tiliti
es L
td.
CU
T$6
1.54
Dec
C$
127.
5$7
,846
.4$1
.61
2.6%
24.4
3
2.
5$3
.28
$3.6
9$4
.04
$4.1
718
.8x
16.7
x15
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14.7
x$6
9.00
15%
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LE
Cap
ital P
ower
Cor
p.C
PXT
$25.
12D
ecC
$97
.1$2
,439
.2$1
.26
5.0%
22.9
4
1.
1$1
.38
$1.2
2$1
.56
$1.7
518
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20.6
x16
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MED
IUM
LE
Emer
a In
c.EM
AT
$33.
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$12
3.6
$4,0
83.7
$1.3
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$1.6
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$37.
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Tran
sCan
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$1.6
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idge
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02D
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8$1
.25
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.37
23.9
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x15
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$22.
0010
.2%
HO
LDM
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age
3.9%
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r.Ye
ar-
Rep
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ares
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ket
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thTo
tal
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k
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k N
ame
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bol
Exch
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End
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/S (m
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(mm
)D
iv.
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d20
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2011
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2013
E20
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2011
E20
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2013
ETa
rget
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urn
Rat
ing
Rat
ing
Ana
lyst
Alta
Gas
Ltd
.AL
AT
$31.
84D
ecC
$89
.7$2
,856
.4$1
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4.3%
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7$2
.30
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9$3
.11
14.7
x13
.8x
11.4
x10
.2x
$33.
008%
BUY
MED
IUM
LE
Gib
son
Ener
gy In
c.G
EIT
$19.
02D
ecC
$96
.0$1
,825
.9$0
.96
5.0%
0.96
5.0%
$0.3
2$1
.33
$1.4
6$1
.57
nmf
14.3
x13
.0x
12.1
x$2
1.00
15%
BUY
MED
IUM
RH
Prov
iden
t Ene
rgy
Ltd.
PVE,
PVX
T, N
$9.8
5D
ecC
$27
2.0
$2,6
79.2
$0.5
45.
5%0.
545.
5%$0
.68
$0.8
1$0
.88
$0.9
614
.5x
12.1
x11
.2x
10.2
x$1
0.00
7%BU
YM
EDIU
MLE
Vere
sen
Inc.
VSN
T$1
5.30
Dec
C$
195.
1$2
,985
.0$1
.00
6.5%
1.00
6.5%
$1.2
3$1
.21
$1.3
4$1
.40
12.5
x12
.6x
11.4
x11
.0x
$16.
5014
%BU
YM
EDIU
MLE
Enbr
idge
Inco
me
Fund
Hol
ding
s In
c.EN
FT
$20.
10D
ecC
$39
.7$7
98.0
$1.2
46.
2%1.
246.
1%$1
.38
$1.4
2$1
.75
$1.9
014
.6x
14.2
x11
.5x
10.6
x$1
9.00
1%H
OLD
MED
IUM
LE
Inte
r Pip
elin
e Fu
ndIP
L.U
NT
$18.
63D
ecC
$26
0.5
$4,8
53.1
$1.0
55.
6%1.
055.
6%$1
.23
$1.4
2$1
.44
$1.4
815
.1x
13.2
x12
.9x
12.6
x$1
8.00
2%H
OLD
MED
IUM
LE
Vale
ner I
nc.
VNR
T$1
5.98
Sept
C$
37.4
$596
.9$1
.00
6.3%
1.00
6.3%
$2.2
8$2
.04
$2.1
0$2
.00
7.0x
7.8x
7.6x
8.0x
$17.
0013
%H
OLD
LOW
RH
Keye
ra C
orp.
KEY
T$5
0.00
Dec
C$
71.9
$3,5
95.0
$2.0
44.
1%2.
054.
1%$2
.98
$3.1
1$3
.14
$3.1
916
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16.1
x15
.9x
15.7
x$3
9.00
-18%
RED
UC
EM
EDIU
MLE
Pem
bina
Pip
elin
e C
orp.
PPL
T$2
9.66
Dec
C$
168.
2$4
,988
.8$1
.56
5.3%
1.56
5.3%
$1.5
7$1
.83
$1.8
9$1
.92
18.9
x16
.2x
15.7
x15
.4x
$22.
00-2
1%R
EDU
CE
MED
IUM
LE
Aver
age
5.4%
5.4%
14.3
x13
.4x
12.3
x11
.7x
76
Real Estate
1M 3M 6M 12M YTD Cum.1
Action List 1.4 42.6 40.8 53.2 53.2 92.4Comp. Group* 2.0 6.3 6.2 21.7 21.7 257.9S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 72.5* S&P/TSX Real Estate (Industry), S&P/TSX Capped REIT¹ Since December 29, 2000
Total Return %
50100150200250300350
Dec
00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month In December 2011, Canadian real estate equities outperformed the broad market. The S&P/TSX Capped REIT Index was up 2.0%, bringing the 2011 return to +21.7%, versus the S&P/TSX Composite’s decline of 1.7% in December and 8.7% loss for the year. Canadian REITs underperformed relative to their U.S. counterparts for the month with the MSCI U.S. REIT Index posting a 4.7% gain. For the year, Canadian REITs outperformed their U.S. counterparts whose 2011 return was 8.7%. In December, the average FFO Yield Spread for the REIT sector (non-hotel) increased to 5.01% from the previous month’s 4.83%, as the FFO Yield (inverted P/FFO) decreased by 3 bps to 6.95%, and the 10-year Government of Canada bond yield decreased by 21 bps to 1.94%. The LTM range for the FFO Yield Spread is 3.6–5.0%, and the range since 1997 is 2.1–10.9%. 2011 Leaders and Laggards – In our coverage universe, on a total return basis, the top three performers for 2011 were Mainstreet Equity Corp. (+61%), CANMARC REIT (+53%), and Canadian Apartment Properties REIT (+36%). The bottom three were InnVest REIT (-31%), Royal Host Inc. (-15%), and Brookfield Office Properties (-8%). Things to Watch For in the Coming Month Results of the holiday season retail sales and its effect on retail REITs, as well as annual RevPAR growth statistics for 2011 from STR/HVS. Sector Fundamentals Office – Canada’s national office vacancy rate of 8.1% in Q4/11 was down slightly from Q3/11’s 8.2%, and from the recession high of 10.2% in Q2/10 (Source: CBRE). Retail – We maintain our view that this sector could potentially be one of the first to stage a meaningful recovery, should the economy continue to improve. According to Statistics Canada, Canadian retail sales growth remained consistent at 1.0% in October with gains well spread across the country. Retailer demand has bounced off the bottom, and shopping centre vacancy rates have been falling. Announcements including those by Target Corp., Nordstrom Inc., and Tanger
Sam Damiani, CFA 416 983 9640 [email protected] Jonathan Kelcher, CFA 416 307 9931 [email protected]
77
Outlets reinforced our stance that more U.S. retailers have or are expected to announce plans to expand into Canada. Further, we see the potential for increased retailer demand from the expansion of existing U.S. retailers in Canada, including J. Crew Group Inc. and Limited Brands Inc. (Victoria’s Secret, Pink, Bath and Body Works). In all, we continue to believe that these could represent significant space demand that would tighten vacancy rates further and potentially help bring a resurgence of new development. Multi-residential – According to CMHC, the national vacancy rate decreased to 2.2% in October 2011, from 2.6% in October 2010. Average rents for two-bedroom apartments in existing structures increased by 2.2%. Looking ahead, we see rental demand remaining relatively flat (but positive) near term in central and eastern Canada, assuming employment growth remains constrained, although a softening housing market could benefit at the margin. In western Canada, we expect improving rental demand conditions to continue into 2012. Note that the Ontario government has announced a 3.1% rent increase guideline for 2012. Lodging – According to STR/HVS, RevPAR grew 5.6% year over year in 2010, rebounding from the 12.2% decrease in 2009. Between STR/HVS and PKF Consulting, the average Canadian RevPAR growth is forecast to be 1.3% and 4.4% in 2011 and 2012, respectively. In the U.S., STR/HVS forecasts a 7.7% increase for 2011 and a 3.9% increase in 2012. Our Sector Stance We have seen continued cap rate compression over the past 20 months, which we believe is a result of the current low government bond yield environment and availability of capital in general. Valuations currently allow for acquisitions to be accretive. We believe that valuations are vulnerable if bond yields rise significantly over a short period of time, or if the economy heads into another recession, neither of which we expect. On availability of capital, we expect continued strong investor demand for high-yield investments, as long as the yield curve remains low. Overall, we are maintaining our market-weight sector rating. Since early 2009, valuations have recovered to well above mid-cycle levels. We continue to favour names with one or more of the following: track record of value creation, visible growth drivers, stable or improving demand/supply fundamentals, balance sheets with reasonable or low debt and ample liquidity, and/or unusual relative undervaluation. We believe that the low interest rate environment and increased attention to the space by pension funds increases the possibility of another round of M&A activity.
78
Rea
l Est
ate
Cor
pora
tions
Uni
vers
e
Rea
l Est
ate
Inve
stm
ent T
rust
s U
nive
rse
AL
BUY
= Ac
tion
List
BU
Y
Ana
lyst
(s):
SD =
Sam
Dam
iani
, CFA
416
983
964
0; J
K =
Jona
than
Kel
cher
, CFA
416
307
993
1
AFF
OO
vera
llC
urr.
Year
-R
ep.
Shar
esM
arke
tC
urr.
AFF
O/S
h (f.
d.)
P/A
FFO
(x)
Payo
ut12
-Mon
thTo
tal
Ris
k
Sym
bol
Exch
.Pr
ice
End
Cur
r.O
/S (m
m)
Cap
(mm
)D
iv.
Yiel
d20
11E
2012
E20
13E
2011
E20
12E
2013
EN
AV
P/N
AV
Rat
ioTa
rget
Ret
urn
Rat
ing
Rat
ing
Ana
lyst
Firs
t Cap
ital R
ealty
FCR
T$1
7.30
Dec
C$
171.
4$2
,965
$0.8
04.
6%$0
.84
$0.8
9$0
.93
20.6
x19
.4x
18.6
x$1
8.10
96%
90%
$20.
0020
%BU
YM
EDIU
MSD
Leis
urew
orld
Sen
ior C
are
Cor
p.
LWT
$11.
28D
ecC
$24
.5$2
76$0
.85
7.5%
$0.9
7$0
.98
$1.0
111
.6x
11.5
x11
.2x
$10.
5010
7%87
%$1
2.00
14%
BUY
MED
IUM
JK
Killa
m P
rope
rties
Inc.
KMP
T$1
1.57
Dec
C$
49.2
$569
$0.5
85.
0%$0
.58
$0.6
4$0
.70
19.9
x18
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16.5
x$1
2.50
93%
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$12.
5013
%BU
YM
EDIU
MJK
Mai
nstre
et E
quiti
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Dec
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$1,7
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79
Special Situations
1M 3M 6M 12M YTD Cum.1
Action List (1.7) 3.4 (6.6) (6.3) (6.3) 166.8Comp. Group* (2.1) 5.9 (12.7) (16.4) (16.4) 33.8S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 74.5* S&P/TSX SmallCap¹ Since June 9, 2004
Total Return %
0
100
200
300
Jun0
4
Jun0
5
Jun0
6
Jun0
7
Jun0
8
Jun0
9
Jun1
0
Jun1
1
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month In December, AG Growth (AFN-T), Vicwest Inc. (VIC-T) and Just Energy (JE-T), were up 19.8%, 12.1% and 11.8%, respectively, posting the highest positive price returns in our coverage universe. At the lower end were Progressive Waste Solutions (BIN-T), Great Canadian Gaming (GC-T) and GLV (GLV.A-T), which shed 4.9%, 6.2% and 21.3%, respectively. Notable events in December included: • Progressive Waste (BIN-T) announced an updated normal course issuer bid
(increased by 3.5 million shares). The company may purchase up to 7.5 million common shares, or approximately 6.3% of the total public float, by August 18, 2012.
• EnerCare (ECI-T) received multiple requests for a special meeting of EnerCare shareholders from Octavian Advisors LP, which is one of its largest shareholders, with 13% of the outstanding common shares. Octavian is displeased with the company’s performance and is requesting the nomination of four additional directors to the current board of six. Also, it is requesting a shareholder meeting no later than February 10, 2012.
Things to Watch For in the Coming Month • Updates on Octavian’s demands for an EnerCare shareholder meeting. Our Sector Stance Although the pace of the economic recovery appears to be moderating over the near term, we believe that some transportation names, TransForce in particular (which is our top pick), offers good leverage to an extended upturn. TransForce should generate material upside over the next few years, driven by the acquisition of DHL Canada’s Canadian operations (Loomis Express) and increasing profitability in the Specialized Services division. Progressive Waste also remains among our top picks, as we believe that it offers above-average opportunities for both organic and acquisition-based growth. Currently, all the transportation names (all BUY rated) that we cover have over 35% plus total potential returns. Other names we would like to highlight with 30% plus total potential returns are Just Energy and Superior Plus.
Damir Gunja 416 983 4186 [email protected] Michael Elkins, CA, CFA 416 983 6809 [email protected]
80
TransForce Inc. (TFI-T, $12.95); 12-Month Target: $19.00 Damir Gunja 416 983 4186 TransForce is a North American leader in the transportation and logistics industry, with operations across Canada and the U.S. The company operates four business segments: Package and Courier; Less-than-truckload; Truckload; Specialized Services. We believe TransForce is the premier trucking investment vehicle in Canada, with exposure to a broad cross-section of the Canadian, and to a lesser extent, U.S. economies (both geographically and by industry). We expect the Package and Courier and Specialized Services divisions to be the primary drivers of growth, which should more than offset softness in the Less-than-truckload division. We believe that the valuation will migrate higher as the higher-growth Package and Courier and Specialized Services divisions garner higher multiples (versus lower trucking multiples). Our price target of $19.00 is based on 7.0x our fiscal 2012 EBITDA forecast.
81
Sp
ecia
l Situ
atio
ns U
nive
rse
Tran
spor
tatio
n
AL
BUY
= Ac
tion
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OLD
ME
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EBIT
DA
(mm
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SEV
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ITD
AD
ivid
ends
P/E
82
Technology
1M 3M 6M 12M YTD Cum.1
Action List (31.5) (18.2) (18.2) (18.2) (18.2) (35.4)Comp. Group* (10.2) (15.5) (31.4) (52.5) (52.5) (25.9)S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 126.5* S&P/TSX Technology (Sector)¹ Since January 31, 2003
Total Return %
075
150225300375
Jan0
3
Jan0
4
Jan0
5
Jan0
6
Jan0
7
Jan0
8
Jan0
9
Jan1
0
Jan1
1
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month The S&P/TSX Information Technology Index decreased by just over 10% last month. The comparable S&P 500 Information Technology Index decreased by 1%. Things to Watch For in the Coming Month In January, we will receive new technology industry data points from software bellwethers Microsoft and SAP; hardware vendors Apple, EMC, Intel, Texas Instruments and Juniper Networks; and services providers IBM, Infosys, TCS and Wipro. Additionally, we are expecting quarterly updates from the following companies under coverage: - EXFO Inc. (EXF-T, EXFO-Q) on January 11 - Sandvine Corp. (SVC-T) on January 12 - DragonWave Inc. (DWI-T, DRWI-Q) on January 12 - 20-20 Technologies, Inc. (TWT-T) in mid-January Our Sector Stance: Market Weight The early indicators for Q4 IT spending provided through the November results of bellwethers Oracle and Accenture were more mixed than recent quarters. Following a long trend of outperforming expectations, Oracle shares declined 12% after the company missed expectations and provided guidance slightly below the Street. Oracle management attributed the softer performance to longer selling cycles caused by customers’ additional last-minute approval requirements. However, management views this as a short-term phenomenon, and not an indication of softening IT budgets. Accenture provided guidance that was in line with the Street, as strength in financial services and health care verticals offset relative weakness and uncertainty in Europe. The company did not see any changes in client behavior, and also noted that it did not believe IT budgets were declining, even if they are not rising significantly this year. That Accenture intends to hire 60,000 employees this year testifies to management’s positive outlook.
Scott Penner, CFA 416 308 3406 [email protected] Doug Taylor, CFA 416 983 2664 [email protected]
83
We continue to recommend a market weight stance on the technology sector. Open Text (OTEX-Q, OTC-T) is our top large cap pick. Among small cap names, our top picks include Enghouse (ESL-T) and Descartes (DSGX-Q, DSG-T).
84
Te
chno
logy
AL
BUY
= Ac
tion
List
BU
Y
Ana
lyst
(s):
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= Sc
ott P
enne
r, C
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85
Transportation – Aerospace
1M 3M 6M 12M YTD Cum.1
Action List 10.7 10.7 10.7 8.2 8.2 136.5Comp. Group* 4.5 3.2 (35.0) (19.3) (19.3) (5.1)S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 150.4* S&P/TSX Aerospace & Defense (Subindustry),Airlines (Industry)¹ Since October 11, 2002
Total Return %
50100150200250300
Oct
02
Oct
03
Oct
04
Oct
05
Oct
06
Oct
07
Oct
08
Oct
09
Oct
10
Oct
11
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month In November, the S&P/TSX Aerospace, Defense (Subindustry) and Airlines (Industry Group) Index was up 4.5%. Things to Watch For in the Coming Month • Certain Aerospace and Air Transportation comparables are scheduled to report
Q4/11 results during the month. • We believe that Bombardier may disclose aircraft deliveries for Q4/11 and
provide 2012 delivery guidance. Our Sector Stance Air Transportation – Overweight: Air travel demand remains strong for Canadian airlines. Traffic growth, while moderating, remains positive and load factors are holding up well in the face of rising fares, increased industry capacity and slowing economic growth. WestJet and Air Canada have been reasonably successful at passing along rising fuel costs, although we expect this to become more challenging. We forecast that demand will soften heading into 2012, despite what we view as encouraging commentary from U.S. and Canadian airlines regarding the near-term demand environment. Despite growing risk to the economic outlook and stock market volatility, we anticipate considerable upside in the sector. WestJet is currently trading below trough 2009 multiples, despite a stronger balance sheet and a superior earnings outlook. Air Canada is expected to benefit from the continued deleveraging of the balance sheet, the successful resolution of labour negotiations, and improved confidence in the sustainability of record EBITDAR. We believe that Chorus Aviation offers the most attractive risk-adjusted upside among the Canadian airlines and is our Action List pick for the group. Aerospace – Overweight: The outlook for regional commercial and business aircraft has started to improve, and large commercial aircraft demand remains strong. Commercial aircraft orders have more than doubled through November, and business jet orders are stable. We believe there is growing risk that the
Tim James, CFA, 416 308 9773 [email protected]
86
recovery in the business jet market will be further delayed, but see limited risk to production plans at Boeing and Airbus at this point. Bombardier had a good start to the year, reporting a material increase in business jet orders and gaining much needed traction on the CSeries. However, management has signalled that the risk of a delay on the program is increasing and there have been no new firm CSeries orders since June. The company’s regional aircraft backlog continues to decline, while competitors secure the majority of new aircraft orders, and we believe that there is growing risk to the business jet outlook, given economic uncertainty. Regardless, we maintain that the compelling valuation, the potential for aircraft orders, and the long-term outlook for the transportation and business jet businesses justify a positive view on the stock. We believe that CAE’s broad civil market exposure and global footprint position the company extremely well to benefit from the ongoing civil aerospace recovery. While governments around the world have shown a growing determination to reduce defense spending, we believe that CAE’s military products and services are well shielded from cutbacks in the long term, and actually represent a tool that enables customers to reduce training expenses. We prefer CAE to Bombardier on a risk-adjusted basis. We believe that the small cap aerospace suppliers are trading at very low valuations due to concerns over the impact of military spending restraint, caution regarding the weakening economic growth on the civil market and, in the case of Northstar Aerospace, financial risk. Héroux-Devtek, our lowest risk buy rated stock in the group, has an attractive valuation, strong balance sheet, track record of operational execution, broad civil aerospace exposure, and there could be potential upside from an acquisition. Chorus Aviation Inc. (CHR.B-T, $3.17); 12-Month Target: $5.00 Tim James 416 308 9771 We upgraded Chorus Aviation to an Action List BUY on December 19. Chorus shares have underperformed comparables over the past several months, resulting in an extremely compelling valuation in our view. The dividend yield is 19%, the free cash flow yield is 29%, and the company is trading at a 22% discount to comps on 2012 EBITDAR. We believe that the market is discounting excessive risk related to 1) the ongoing benchmarking and rate reset processes with Air Canada, and 2) the solvency and liquidity of Air Canada. We estimate that the market is discounting a dividend cut of nearly 40% and a realized CPA mark-up of 5.9–6.4% in 2012 which we view as unreasonable and a highly unlikely outcome. We continue to like the earnings and cash flow stability of the business, the downside protection provided by the CPA with Air Canada, and the dividend yield. The recent disclosure that a shareholder with Board representation had increased its stake in the company to over 10% is encouraging, in our view.
87
Tr
ansp
orta
tion/
Aer
ospa
ce U
nive
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AL
BUY
= Ac
tion
List
BU
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lyst
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Tim
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FA, 4
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08 9
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k N
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CH
R.A
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88
Transportation – Railroads
1M 3M 6M 12M YTD Cum.1
Action List 0.0 0.0 0.0 0.0 0.0 0.0Comp. Group* 4.5 19.7 7.3 19.3 19.3 35.1S&P/TSX Comp. (1.7) 3.6 (8.9) (8.7) (8.7) 8.3* S&P/TSX Railroads (Subindustry),¹ Since June 8, 2010
Total Return %
8090
100110120130140
Jun1
0
Aug1
0
Oct
10
Dec
10
Feb1
1
Apr1
1
Jun1
1
Aug1
1
Oct
11
Dec
11
Action List Comp Group* S&P/TSX
Industry Overview Performance Summary for the Month The Big Five Public Class I rail stocks’ share price performance ranged from down 4% to up 12% in December. Canadian Pacific Railway Ltd. (CP; CP-T, N) led the gainers, rising 12%, followed by Union Pacific Corp. (UNP-N), which rose 4%. Canadian National Railway Co. (CN; CNR-T, CNI-N) advanced 2%, while CSX Corp. (CSX-N) and Norfolk Southern Corp. (NSC-N) declined by 3% and 4%, respectively. Things to Watch For in the Coming Month Union Pacific will kick off the Q4/11 reporting season on January 19.
January 19: Union Pacific – our forecast: US$1.83, consensus: US$1.79, Q4/10: US$1.56. January 23: CSX – our forecast: US$0.44, consensus: US$0.44, Q4/10: US$0.38. January 24: CN – our forecast: $1.23, consensus: $1.27, Q4/10: $1.08. January 24: Norfolk Southern – our forecast: US$1.39, consensus: US$1.38, Q4/10: US$1.00. January 26: CP – our forecast: $1.15, consensus: $1.13, Q4/10: $1.12. Volume Gains Led by Merchandise: With only one week of carload data still to be released, total Big Six Class I carloads were on track to post a 4% year-over-year gain in the fourth quarter. Traffic growth during the quarter was led by merchandise, which we define as total carloads, excluding intermodal, coke and coal, grain and grain mill products. Merchandise carloads were up a robust 9% year-over-year in the fourth quarter, with particular strength in motor vehicles and equipment, metals and products, and petroleum products. Intermodal carloads were up 5% year-over-year, with weakness in international traffic masking gains in domestic intermodal.
Cherilyn Radbourne, CA, CFA 416 308 3403 [email protected]
89
After spending most of the year in negative territory, coal carloads were up 2% year-over-year in the fourth quarter, although high rates of natural gas substitution continue to exert a drag. Grain carloads were down 9% year-over-year, largely reflecting weakness in U.S. grain exports, with the return of the Black Sea region to the export market. Pricing Gains Strong and Stable: In general, core/same-store pricing gains for the U.S. rails have been consistent, in the range of 5–7%. Pricing gains have been more muted but stable in Canada, as expected, in the range of 2–4%. We view tightness in the truck market as being supportive of rail pricing in intermodal and other truck-competitive segments. Cost Variability: For an industry that has a high proportion of fixed network costs (about 50% of total costs), we would argue that the rails as a group have demonstrated impressive cost variability in response to large volume swings, both upward (the 2010 recovery) and downward (the 2008-2009 global recession). Free Cash Flow Deployment: Dividend payout ratios across the industry seem to be trending higher, toward the 30% range. Opportunistic share repurchases were a theme in Q3/11, particularly at CSX and Norfolk Southern. We expect share buybacks to contribute low single-digit EPS growth for all of the rails, except CP. Regulatory Landscape: Regulatory risk is always present, but does not seem particularly elevated. Valuation: The rails are trading at an average P/FTM EPS multiple of 13.9x, which is in line with the group’s historical average P/FTM EPS multiple of 14.0x (range of 12.3-15.7x); however, that average of 13.9x masks a historically wide valuation gap between the U.S. rails and Canadian rails, a gap that became more exaggerated based on CP’s share price performance in late December. CP is trading at 16.7x our FTM EPS estimate and is the most highly-valued stock in the group, followed by CN at 15.3x. The U.S. rails are trading at an average P/FTM EPS multiple of 12.6x, and the valuation gap between the Canadian rails and the U.S. rails stands at 3.4x multiple points. The U.S. rails are trading towards the low-end of the group's historical valuation range, while CP in particular is trading above the high-end of the range. Historically, the Canadian rails have traded at a 0.4x multiple point discount to the U.S. rails.
Our Sector Stance We have an overweight sector recommendation. Our BUY-rated stocks are CN, CSX, Norfolk Southern, and Union Pacific. We rate CP as HOLD. We see better upside in the U.S. rails, given the valuation gap. Medium to long term, we believe that the rails are positioned to gain modal share from trucks, based on rising fuel prices, increasing highway congestion, and more stringent environmental regulations.
90
Tr
ansp
orta
tion
– R
ailro
ads
Uni
vers
e
AL
BUY
= Ac
tion
List
BU
Y
Ana
lyst
(s):
CR
= C
heril
yn R
adbo
urne
, CA,
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Notes
93
Upcoming Events Date Host Event Location Additional Info*
January 10, 2012 Agnico-Eagle Mines Ltd. Institutional Marketing New York Jan. 10–11January 11, 2012 Pengrowth Energy Corp. Institutional Marketing Frankfurt Jan. 11–13January 12, 2012 Baytex Energy Institutional Marketing London —January 12, 2012 Provident Energy Institutional Marketing Stockholm —January 12, 2012 ARC Resources Ltd. Institutional Marketing Frankfurt —January 12, 2012 Southern Pacific Resources Institutional Marketing Zurich —January 13, 2012 Penn West Petroleum Ltd. Institutional Marketing Zurich —January 13, 2012 ARC Resources Ltd. Institutional Marketing London —January 13, 2012 Southern Pacific Resources Institutional Marketing Paris —January 16, 2012 London Energy Conference 2012 Conference London Jan. 16–18January 17, 2012 Provident Energy Ltd. Institutional Marketing Zurich —January 17, 2012 Bonavista Energy Corp. Institutional Marketing London —January 17, 2012 Enerplus Corp. Institutional Marketing Zurich —January 17, 2012 Laracina Energy Ltd. Institutional Marketing Paris —January 17, 2012 Enerplus Corp. Institutional Marketing London —January 17, 2012 Imperial Oil Limited Institutional Marketing London —January 17, 2012 Canadian Natural Resources Ltd. Institutional Marketing London —January 17, 2012 Cenovus Energy Inc. Institutional Marketing London —January 17, 2012 Vermilion Energy Inc. Institutional Marketing Paris —January 18, 2012 Vermilion Energy Inc. Institutional Marketing Zurich —January 18, 2012 Enerplus Corp. Institutional Marketing Frankfurt —January 18, 2012 Laracina Energy Ltd. Institutional Marketing Zurich —January 18, 2012 Husky Energy Inc. Institutional Marketing Paris —January 19, 2012 TransGlobe REIT Institutional Marketing New York —January 19, 2012 Laracina Energy Ltd. Institutional Marketing Zurich —January 19, 2012 Husky Energy Inc. Institutional Marketing Zurich —January 20, 2012 Husky Energy Inc. Institutional Marketing Frankfurt —January 24, 2012 TD Securities 2012 Mining Conference Conference Toronto Jan. 24–25 * For additional information, contact your institutional sales representative.
94
Action List Rules • The maximum number of companies allowed on the Action List for any sector
will normally be limited to the lesser of five companies or 20% of the number of companies in the universe of coverage.
• Equal weightings are assumed for all Action List stocks. • All return calculations are total-return calculations. • Returns do not assume taxes or commissions. • Dividends are included the day the stock goes ex-dividend. • If there are no stocks in an Action List, a 0% return is assumed. • Stocks traded mainly in U.S. dollars are converted to Canadian dollars for
return calculations using The Globe and Mail’s quoted exchange rate for the day after the closing price. Dividends are converted the day the stock goes ex-dividend, using the next day’s Globe and Mail quoted exchange rate.
• When changes to the Action List are made, the price used to update returns is
the closing price on the day the associated Action Note is issued. If the Action Note is issued after 16:00 EST, the next day’s closing price is used.
Examples: (1) if an Action Note comes out Tuesday before 16:00, Tuesday’s close will be used. (2) if an Action Note comes out Tuesday at 16:30, Wednesday’s close will be used. • If an analyst becomes restricted on a stock, the stock may not be added or
deleted from the Action List.
95
Appendix A. Important Disclosures Alternative Energy Algonquin Power & Utilities Corp. (AQN-T) 1, 2, 4 Atlantic Power Corp. (ATP-T) 1, 2, 4, 9 Boralex Inc. (BLX-T) 2 Brookfield Renewable Energy Partners L.P. (BEP.UN-T) 1, 2, 4 Capstone Infrastructure Corp. (CSE-T) 1, 2, 4 Innergex Renewable Energy Inc. (INE-T) 1, 2, 4, 10 Northland Power Inc. (NPI-T) 2 Banks Bank of Montreal (BMO-T, BMO-N) 1, 2, 4, 9, 10 Bank of Nova Scotia (The) (BNS-T, BNS-N) 2, 4, 9, 10 Canadian Imperial Bank of Commerce (CM-T, CM-N) 2, 4, 9, 10 Canadian Western Bank (CWB-T) 2, 4, 9, 10 Genworth MI Canada Inc. (MIC-T) 9 Laurentian Bank of Canada (LB-T) 10 National Bank of Canada (NA-T) 2, 4, 9, 10 Royal Bank of Canada (RY-T, RY-N) 1, 2, 4, 9, 10 Toronto-Dominion Bank (The) (TD-T, TD-N) 1, 2, 4, 5, 9 Biotechnology & Health Care CML Healthcare Inc. (CLC-T) 2, 4, 9 Nordion Inc. (NDZ-N, NDN-T) 2, 4, 9 Paladin Labs Inc. (PLB-T) 1, 2, 4 Valeant Pharmaceuticals International Inc. (VRX-N, VRX-T) 5, 9 Chemicals and Fertilizers Agrium Inc. (AGU-N, AGU-T) 2, 4, 9, 10 Methanex Corp. (MEOH-Q, MX-T) 9 Migao Corp. (MGO-T) 9 Potash Corp. of Saskatechwan Inc. (POT-N, POT-T) 9 Communications BCE Inc. (BCE-T, BCE-N) 1, 2, 4, 9, 10 Bell Aliant Inc. (BA-T) 1, 2, 4, 9 Cogeco Cable Inc. (CCA-T) 9, 12 Cogeco Inc. (CGO-T) 12 Manitoba Telecom Services Inc. (MBT-T) 9, 10 Quebecor Inc. (QBR.B-T) 1, 2, 4, 12 Rogers Communications Inc. (RCI.B-T, RCI-N) 1, 2, 4, 9, 14 Shaw Communications Inc. (SJR.B-T, SJR-N) 1, 2, 4, 9, 10, 14 TELUS Corp. (T.A-T, TU-N) 1, 2, 4, 9, 10, 14 Thomson Reuters Corp.¹ (TRI-T, TRI-N) 2, 4, 9 Consumer Discretionary Atrium Innovations Inc. (ATB-T) 1, 2, 4 Canadian Tire Corporation, Ltd. (CTC.A-T) 2, 9, 10 Dollarama Inc. (DOL-T) 9 Dorel Industries Inc. (DII.B-T) 12, 15 Garda World Security Corp. (GW-T) 1, 2, 4, 9 Gildan Activewear Inc. (GIL-T, GIL-N) 2, 5, 9 RONA Inc. (RON-T) 1, 2, 4, 9, 10 Uni-Select Inc. (UNS-T) 2, 4 Consumer Staples Alimentation Couche-Tard Inc. (ATD.B-T) 9, 12 Colabor Group Inc. (GCL-T) 2 Empire Company Ltd. (EMP.A-T) 14, 15 Jean Coutu Group (PJC) Inc. (The) (PJC.A-T) 9, 12 Loblaw Companies Ltd. (L-T) 9 Maple Leaf Foods Inc. (MFI-T) 1, 2, 4, 9 Metro Inc.¹ (MRU.A-T) 9, 12 Rogers Sugar Inc. (RSI-T) 1, 2, 4 Saputo Inc. (SAP-T) 9 Shoppers Drug Mart Corp. (SC-T) 2, 9, 10 Tim Hortons Inc. (THI-T, THI-N) 2, 4, 9 Diversified Financials AGF Management Ltd.¹ (AGF.B-T) 2, 9, 14 CI Financial Corp.¹ (CIX-T) 2, 9 First National Financial Corp. (FN-T) 2, 4 Gluskin Sheff + Associates¹ (GS-T) n/a IGM Financial Inc.¹ (IGM-T) 9 Onex Corp. (OCX-T) 9, 12
Power Corp. of Canada (POW-T) 9, 12 Power Financial Corp. (PWF-T) 2, 9 Sprott Inc.¹ (SII-T) n/a TMX Group Inc.~ (X-T) 9 Energy Producers - Intermediate Advantage Oil & Gas Ltd. (AAV-T, AAV-N) 9 ARC Resources Ltd. (ARX-T) 2, 4, 9 Baytex Energy Corp. (BTE-T, BTE-N) 2, 4, 5, 9 Bonavista Energy Corp. (BNP-T) 2, 4, 9 Canadian Oil Sands Ltd. (COS-T) 2, 9 Celtic Exploration Ltd. (CLT-T) 1, 2, 4, 9 Crescent Point Energy Corp. (CPG-T) 1, 2, 4, 9 Crew Energy Inc. (CR-T) 1, 2, 4, 9 Daylight Energy Ltd. (DAY-T) 2, 9 Enerplus Corp. (ERF-T, ERF-N) 2, 4, 9, 10 Legacy Oil + Gas Inc. (LEG-T) 9 Lone Pine Resources Inc. (LPR-T) 1, 2, 4 NAL Energy Corp. (NAE-T) 9 NuVista Energy Ltd. (NVA-T) 1, 2, 4, 9 Paramount Resources Ltd. (POU-T) 1, 2, 4, 9 Pengrowth Energy Corp. (PGF-T, PGH-N) 1, 2, 4, 9 Penn West Petroleum Ltd. (PWT-T) 2, 4, 9 Perpetual Energy Inc. (PMT-T) 2, 4, 9 PetroBakken Energy Ltd. (PBN-T) 2, 4, 9 Peyto Exploration & Development Corp. (PEY-T) 1, 2, 4, 9 Progress Energy Resources Corp. (PRQ-T) 2, 4, 9 Tourmaline Oil Corp. (TOU-T) 1, 2, 4, 9 Trilogy Energy Corp. (TET-T) 1, 2, 4, 9 Vermilion Energy Inc. (VET-T) 1, 2, 4, 5, 9 WestFire Energy Ltd. (WFE) 2, 14 Zargon Oil & Gas Ltd. (ZAR-T) 1, 2, 4 Energy Producers - International Bankers Petroleum Ltd. (BNK-T, BNK-L) 9 C&C Energia Ltd. (CZE-T) 1, 2, 4 Canacol Energy Ltd. (CNE-T, CNEC-CB) 1, 2, 4 Gran Tierra Energy Inc. (GTE-T, GTE-A) 9 Niko Resources Ltd. (NKO-T) 9 Pacific Rubiales Energy Corp. (PRE-T, PREC-CB) 9, 10 Parex Resources Inc. (PXT-V) 1, 2, 4 Petrodorado Energy Ltd. (PDQ-V) 1, 2, 4 Petrominerales Ltd. (PMG-T) 2, 4, 9 Porto Energy Corp. (PEC-V) 1, 2, 4 ShaMaran Petroleum Corp. (SNM-V) 15 WesternZagros Resources Ltd. (WZR-V) 1, 2, 4 Energy Producers - Senior & Unconventional Aurora Oil & Gas Ltd. (AEF-T, AUT-A) 1, 2, 4 BlackPearl Resources Inc. (PXX-T) 1, 2, 4, 9 Canadian Natural Resources Ltd. (CNQ-T, CNQ-N) 2, 4, 9, 10 Cenovus Energy Inc. (CVE-T, CVE-N) 9 Encana Corp. (ECA-N, ECA-T) 2, 4, 9 Husky Energy Inc. (HSE-T) 1, 2, 4, 9 Imperial Oil Ltd. (IMO-T) 9 Nexen Inc. (NXY-T, NXY-N) 2, 4, 9 Petrobank Energy & Resources Ltd. (PBG-T) 2, 4, 9, 10 Suncor Energy Inc. (SU-T, SU-N) 9, 10 Talisman Energy Inc. (TLM-N, TLM-T) 1, 2, 4, 9 Energy Services Canyon Services Group Inc. (FRC-T) 9 Ensign Energy Services Inc. (ESI-T) 9 Mullen Group Ltd. (MTL-T) 9 Precision Drilling Corp. (PD-T, PDS-N) 1, 2, 4, 9 Savanna Energy Services Corp. (SVY-T) 1, 2, 4 ShawCor Ltd. (SCL.A-T) 2, 10, 12 Trican Well Service Ltd. (TCW-T) 9 Trinidad Drilling Ltd. (TDG-T) 1, 2, 4, 9 Gold & Precious Metals Agnico-Eagle Mines Ltd.¹ (AEM-N, AEM-T) 2, 4, 9 Alamos Gold Inc. (AGI-T) 9 AuRico Gold Inc. (AUQ-T, AUQ-N) 9 Barrick Gold Corp. (ABX-N, ABX-T) 2, 4, 9
Belo Sun Mining Corp. (BSX-V) 1, 2, 4 Canaco Resources Inc. (CAN-V) 1, 2, 4 Centerra Gold Inc. (CG-T) 9 Continental Gold Ltd. (CNL-T) 1, 2, 4, 9 Detour Gold Corp. (DGC-T) 1, 2, 4, 9 Eldorado Gold Corp. (ELD-T, EGO-N) 9 Energold Drilling Corp. (EGD-V) 1, 2, 4, 5 Exeter Resource Corp. (XRC-T, XRA-A) 2, 4, 9 Extorre Gold Mines Ltd. (XG-T) 1, 2, 4 Franco-Nevada Corp. (FNV-T) 1, 2, 4, 9 Goldcorp Inc. (GG-N, G-T) 9, 10 Guyana Goldfields Inc. (GUY-T) 9 IAMGOLD Corp. (IMG-T, IAG-N) 9 Jaguar Mining Inc. (JAG-T) 9 Kinross Gold Corp. (KGC-N, K-T) 2, 9 Lake Shore Gold Corp.¹ (LSG-T) 2, 4 Major Drilling Group International Inc. (MDI-T) 1, 2, 4 Minefinders Corp. Ltd. (MFL-T, MFN-A) 9 New Gold Inc. (NGD-A, NGD-T) 9 Osisko Mining Corp. (OSK-T) 9 Primero Mining Corp. (P-T) 2, 4 Rubicon Minerals Corp. (RMX-T, RBY-A) 1, 2, 4, 9 San Gold Corp. (SGR-T) 2, 4 Yamana Gold Inc. (AUY-N, YRI-T) 2, 9, 10 Industrial Products Aecon Group Inc. (ARE-T) 2, 9 Armtec Infrastructure Inc. (ARF-T) 1, 2, 4 ATS Automation Tooling Systems Inc. (ATA-T) 9 Churchill Corp. (The) (CUQ-T) 2, 4 Finning International Inc. (FTT-T) 2, 9 IBI Group Inc. (IBG-T) 1, 2, 4 Russel Metals Inc. (RUS-T) 9 SNC-Lavalin Group Inc.¹ (SNC-T) 9 Stantec Inc. (STN-T, STN-N) 9 Toromont Industries Ltd. (TIH-T) 2, 4 Viterra Inc. (VT-T) 1, 2, 4, 9, 10 Insurance Great-West Lifeco Inc.¹ (GWO-T) 1, 2, 4, 9 Industrial-Alliance Life Insurance Co.¹ (IAG-T) 1, 2, 4, 9 Intact Financial Corp.¹ (IFC-T) 1, 2, 4, 9, 16 Manulife Financial Corp.¹ (MFC-T, MFC-N) 1, 2, 4, 5, 9, 10 Sun Life Financial Inc. (SLF-T, SLF-N) 1, 2, 4, 9, 10 Media Astral Media Inc. (ACM.A-T) 9, 14 Cineplex Inc. (CGX-T) 2 Corus Entertainment Inc. (CJR.B-T, CJR-N) 2, 9, 14 DHX Media Ltd. (DHX-T) 10 Newfoundland Capital Corp. Ltd. (NCC.A-T) 12 Postmedia Network Canada Corp. (PNC.B-T) 1, 2, 4, 15, 16 Torstar Corp. (TS.B-T) 2, 14 Transcontinental Inc. (TCL.A-T) 9, 10, 12, 15 TVA Group Inc. (TVA.B-T) 14 Yellow Media Inc. (YLO-T) 2, 4, 9 Metals & Minerals Breakwater Resources Ltd. (BWR-T) 1, 2, 4, 9 Cameco Corp. (CCO-T, CCJ-N) 2, 9, 10 Capstone Mining Corp. (CS-T) 9 Cline Mining Corp. (CMK-T) 1, 2, 4 First Quantum Minerals Ltd. (FM-T) 9 HudBay Minerals Inc. (HBM-T) 2, 9 Inmet Mining Corp. (IMN-T) 9 Ivanhoe Mines Ltd. (IVN-T, IVN-N) 9 Lundin Mining Corp. (LUN-T, LMC-N) 9, 10 Macarthur Minerals Ltd. (MMS-T) 1, 2, 4 Mercator Minerals Ltd. (ML-T) 9 Nevsun Resources Ltd. (NSU-T, NSU-A) 9 Northern Dynasty Minerals Ltd. (NDM-T, NAK-A) 9 Pan American Silver Corp. (PAAS-Q, PAA-T) 9 Quadra FNX Mining Ltd. (QUX-T) 5, 9 SEMAFO Inc. (SMF-T) 9 Silver Wheaton Corp. (SLW-N, SLW-T) 9
96
Appendix A. Important Disclosures Cont’d Taseko Mines Ltd. (TKO-T, TGB-A) 1, 2, 4, 9 Teck Resources Ltd.¹ (TCK.B-T, TCK-N) 2, 9, 12 Thompson Creek Metals Company Inc. (TCM-T, TC-N) 5, 9 Multi-Industry Brookfield Asset Management Inc.¹ (BAM-N, BAM.A-T, BAMA-XEN) 1, 2, 4, 5, 9, 10, 16 Brookfield Infrastructure Partners L.P. (BIP-N, BIP.UN-T) 2, 14 Paper & Forest Products Boise Inc. (BZ-N) 2 Canfor Corp. (CFP-T) 2, 9 Cascades Inc. (CAS-T) 2, 9 Domtar Corp.¹ (UFS-N, UFS-T) 2, 4, 9 Fortress Paper Ltd. (FTP-T) 1, 2, 4 International Forest Products Ltd. (IFP.A-T) 1, 2, 4, 5, 12 Norbord Inc. (NBD-T) 1, 2, 4 Sino-Forest Corp. (TRE-T) 9, 15 Tembec Inc.^ (TMB-T) 5 West Fraser Timber Co. Ltd.¹ (WFT-T) 2 Pipelines, Power & Utilities AltaGas Ltd. (ALA-T) 1, 2, 4, 9 ATCO Ltd. (ACO.X-T) 14 Canadian Utilities Ltd. (CU-T) 1, 2, 4, 9, 14 Capital Power Corp. (CPX-T) 1, 2, 4, 9, 16 Capital Power Income L.P. (CPA.UN-T) 1, 2, 4 Emera Inc. (EMA-T) 1, 2, 4, 9, 10 Enbridge Inc. (ENB-T, ENB-N) 1, 2, 4, 9, 10 Enbridge Income Fund Holdings Inc. (ENF-T) 1, 2, 4 Fortis Inc. (FTS-T) 1, 2, 4, 9, 10 Gibson Energy Inc. (GEI-T) 1, 2, 4 Inter Pipeline Fund (IPL.UN-T) 1, 2, 4 Keyera Corp. (KEY-T) 2, 4, 9
Pembina Pipeline Corp. (PPL-T) 1, 2, 4, 9 Provident Energy Ltd. (PVE-T) 1, 2, 4, 9 TransAlta Corp.¹ (TA-T, TAC-N) 1, 2, 4, 9, 10 TransCanada Corp.¹ (TRP-T, TRP-N) 1, 2, 4, 9, 10 Veresen Inc. (VSN-T) 1, 2, 4, 9 Real Estate Allied Properties REIT (AP.UN-T) 1, 2, 4 Brookfield Office Properties Canada (BOX.UN-T) 1, 2, 4 Brookfield Office Properties Inc. (BPO-N, BPO-T) 1, 2, 4, 9 Calloway REIT (CWT.UN-T) 1, 2, 4, 9 Canadian Apartment Properties REIT (CAR.UN-T) 1, 2, 4 Canadian REIT (REF.UN-T) 2 CANMARC REIT (CMQ.UN-T) 1, 2, 4 Chartwell Seniors Housing REIT (CSH.UN-T) 2, 4, 9 Crombie REIT (CRR.UN-T) 1, 2, 4 Dundee REIT (D.UN-T) 1, 2, 4 Extendicare REIT (EXE.UN-T) 2, 4, 9 Firm Capital Mortgage Investment Corp. (FC-T) 1, 2, 4 First Capital Realty Inc. (FCR-T) 1, 2, 4, 9 H&R REIT (HR.UN-T) 1, 2, 4, 9 InnVest REIT (INN.UN-T) 1, 2, 4 Killam Properties Inc. (KMP-T) 1, 2, 4 Leisureworld Senior Care Corp. (LW-T) 1, 2, 4 Northern Property REIT (NPR.UN-T) 1, 2, 4 Primaris Retail REIT (PMZ.UN-T) 1, 2, 4 RioCan REIT (REI.UN-T) 1, 2, 4, 9 TransGlobe Apartment REIT (TGA.UN-T) 1, 2, 4 Whiterock REIT (WRK.UN-T) 1, 2, 4 Special Situations Chemtrade Logistics Income Fund (CHE.UN-T) 2, 4 Contrans Group Inc. (CSS-T) 2, 4, 12, 15 Enercare Inc. (ECI-T) 2
FirstService Corp. (FSV-T, FSRV-Q) 2, 12 GLV Inc. (GLV.A-T) 12, 15 Great Canadian Gaming Corp. (GC-T) 9 Just Energy Inc. (JE-T) 1, 2, 4, 9 Noranda Income Fund (NIF.UN-T) 2, 4, 10 Parkland Fuel Corp. (PKI-T) 1, 2, 4 Pizza Pizza Royalty Income Fund (PZA.UN-T) 9 Progressive Waste Solutions Ltd. (BIN-N, BIN-T) 2, 9 Superior Plus Corp. (SPB-T) 1, 2, 4, 9 TransForce Inc. (TFI-T) 1, 2, 4, 9 Whistler Blackcomb Holdings Inc. (WB-T) 1, 2, 4 Technology 20-20 Technologies Inc. (TWT-T) 2 CGI Group Inc. (GIB.A-T, GIB-N) 2, 4, 9, 12 Constellation Software Inc. (CSU-T) 1, 2, 4 DragonWave Inc. (DRWI-Q, DWI-T) 9 EXFO Inc. (EXFO-Q, EXF-T) 12 Open Text Corp. (OTEX-Q, OTC-T) 9 RuggedCom Inc. (RCM-T) 2, 4 Transportation - Aerospace, Railroads ACE Aviation Holdings Inc. (ACE.A-T, ACE.B-T) 10, 13 Aimia Inc. (AIM-T) 2, 4, 9 Air Canada (AC.B-T, AC.A-T) 1, 2, 4, 15 Bombardier Inc. (BBD.B-T) 9, 12 CAE Inc. (CAE-T, CGT-N) 2, 9 Canadian National Railway Co.¹ (CNR-T, CNI-N) 2, 4, 9, 10 Canadian Pacific Railway Ltd. (CP-T, CP-N) 1, 2, 4, 9, 10 Chorus Aviation Inc. (CHR.B-T, CHR.A-T) 9 Héroux-Devtek Inc. (HRX-T) 2, 4 Transat A.T. Inc. (TRZ.B-T, TRZ.A-T) 13 WestJet Airlines Ltd.¹ (WJA-T) 9
1. TD Securities Inc., TD Securities (USA) LLC or an affiliated company has managed or co-managed a public offering of securities within the last 12 months with respect to the subject company.
2. TD Securities Inc., TD Securities (USA) LLC or an affiliated company has received compensation for investment banking services within the last 12 months with respect to the subject company.
3. TD Securities Inc., TD Securities (USA) LLC or an affiliated company expects to receive compensation for investment banking services within the next three months with respect to the subject company.
4. TD Securities Inc. or TD Securities (USA) LLC has provided investment banking services within the last 12 months with respect to the subject company.
5. A long position in the securities of the subject company is held by the research analyst, by a member of the research analyst’s household, or in an account over which the research analyst has discretion or control.
6. A short position in the securities of the subject company is held by the research analyst, by a member of the research analyst’s household, or in an account over which the research analyst has discretion or control.
7. A long position in the derivative securities of the subject company is held by the research analyst, by a member of the research analyst’s household, or in an account over which the research analyst has discretion or control.
8. A short position in the derivative securities of the subject company is held by the research analyst, by a member of the research analyst’s household, or in an account over which the research analyst has discretion or control.
9. TD Securities Inc. and/or an affiliated company is a market maker, or is associated with the specialist that makes a market, in the securities of the subject company.
10. TD Securities Inc. and/or affiliated companies own 1% or more of the equity securities of the subject company. 11. A partner, director or officer of TD Securities Inc. or TD Securities (USA) LLC, or a research analyst involved in the
preparation of this report has, during the preceding 12 months, provided services to the subject company for remuneration. 12. Subordinate voting shares. 13. Restricted voting shares. 14. Non-voting shares. 15. Variable voting shares. 16. Limited voting shares.
97
Additional Important Disclosures ~ TD Securities Inc. will be a participating dealer in the establishment of the Alpha Trading System along with other
investment dealers - CIBC World Markets, National Bank Financial, RBC Capital Markets, Canaccord Capital Corp., BMO Nesbitt Burns and Scotia Capital.
^ The Research Analyst responsible for coverage of this stock is related to David J. Steuart, a member of the Board of Directors of Tembec Inc.
─ Carole S. Taylor, Director of BCE Inc., is a member of the board of directors of The Toronto-Dominion Bank. TD Securities
Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank. ─ Nadir Mohamed, President and Chief Executive Officer of Rogers Communications Inc. is a member of the board of
directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank. ─ John M. Thompson, Director of Thomson Reuters Corp., is a member of the board of directors of The Toronto-Dominion
Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank. ─ Pierre H. Lessard, Executive Chairman of the Board of Metro Inc., is a member of the board of directors of The Toronto-
Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank. ─ Pierre H. Lessard, a Director of SNC-Lavalin Group Inc., is a member of the board of directors of The Toronto-Dominion
Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank. ─ Hugh J. Bolton, Director of Teck Resources Ltd., is a member of the board of directors of The Toronto-Dominion Bank. TD
Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank. ─ Frank McKenna, a Director of Brookfield Asset Management Inc., is a Deputy Chair of The Toronto-Dominion Bank. TD
Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank. ─ Brian Levitt, Director of Domtar Corp., is a member of the board of directors of The Toronto-Dominion Bank. TD Securities
Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank. ─ Henry H. Ketcham, Chairman of the Board, President & CEO of West Fraser Timber Co. Ltd., are members of the board of
directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank. ─ William E. Bennett and Hugh J. Bolton, Directors of Capital Power Corp., are members of the board of directors of The
Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank. ─ Karen E. Maidment, Director of TransAlta Corp., is a member of the board of directors of The Toronto-Dominion Bank. TD
Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank. ─ Wendy K. Dobson, Director of TransCanada Corp., is a member of the board of directors of The Toronto-Dominion Bank.
TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank. ─ Hugh J. Bolton, Director of Canadian National Railway Co., is a member of the board of directors of The Toronto-Dominion
Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank. ─ Hugh J. Bolton, Director of WestJet Airlines Ltd., is a member of the board of directors of The Toronto-Dominion Bank. TD
Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank. ─ TD Securities Inc. acts as an agent on behalf of AGF Management Ltd. in the execution of securities transactions. ─ TD Securities Inc. acts as an agent on behalf of CI Financial Corp. in the execution of securities transactions. ─ TD Securities Inc. acts as an agent on behalf of IGM Financial Inc. in the execution of securities transactions. ─ TD Securities Inc. acted as Financial Advisor to Agnico-Eagle Mines Ltd. in the acquisition of Grayd Resource Corp. ─ TD Securities Inc. acts as an agent on behalf of Sprott Inc. in the execution of securities transactions. ─ TD Securities Inc. acts as an agent on behalf of Great-West Lifeco Inc. in the execution of securities transactions. ─ TD Securities Inc. acts as an agent on behalf of Industrial-Alliance Life Insurance Co. in the execution of securities
transactions. ─ TD Securities Inc. acts as an agent on behalf of Intact Financial Corp. in the execution of securities transactions. ─ TD Securities Inc. acts as an agent on behalf of Manulife Financial Corp. in the execution of securities transactions. ─ TD Securities Inc. acts as an agent on behalf of Gluskin Sheff + Associates in the execution of securities transactions. In
addition, TD Securities Inc. has a prime brokerage arrangement with Gluskin Sheff + Associates. ─ TD Securities Inc. has acted as financial advisor to Lake Shore Gold in connection with the strategic review process for the
Mexican exploration portfolio. Price Graphs For full disclosures, please visit our website at https://www.tdsresearch.com/equities/coverage.disclosure.action.
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Research Ratings Action List BUY: The stock’s total return is expected to exceed a minimum of 15%, on a risk-adjusted basis, over the next
12 months and it is a top pick in the Analyst’s sector. BUY: The stock’s total return is expected to exceed a minimum of 15%, on a risk-adjusted basis, over the next
12 months. SPECULATIVE BUY: The stock's total return is expected to exceed 30% over the next 12 months; however, there is material
event risk associated with the investment that could result in significant loss. HOLD: The stock’s total return is expected to be between 0% and 15%, on a risk-adjusted basis, over the next 12
months. TENDER: Investors are advised to tender their shares to a specific offer for the company's securities or to
support a proposed combination reflecting our view that a superior offer is not forthcoming. REDUCE: The stock’s total return is expected to be negative over the next 12 months. Overall Risk Rating in order of increasing risk: Low (6.8% of coverage universe), Medium (33.7%), High (48.7%), Speculative (10.8%) Distribution of Research Ratings
^ Percentage of subject companies under each ratingcategory—BUY (covering Action List BUY, BUY andSpec. BUY ratings), HOLD and REDUCE (coveringTENDER and REDUCE ratings).
* Percentage of subject companies within each of thethree categories (BUY, HOLD and REDUCE) for whichTD Securities Inc. has provided investment bankingservices within the last 12 months.
Current as of January 4, 2012
Investment Banking Services Provided*
30%
67%
2%
0%10%20%30%40%50%60%70%80%
BUY HOLD REDUCE
Distribution of Research Ratings^
HOLD35%
REDUCE2%
BUY63%
Research Dissemination Policy TD Securities makes its research products available in electronic and/or printed formats and simultaneously distributes them to its institutional clients who are entitled to receive them. The Action Notes are distributed by email, and are available in PDF form on First Call, Bloomberg, Reuters, Capital IQ, FactSet and TheMarkets.com. Research Reports are distributed by email; they are also printed and distributed by courier to our entitled clients. PDFs of Reports are available on First Call, Bloomberg and Reuters. All research is available by password to entitled institutional clients at https://www.tdsresearch.com/equities. Quantitative Research Disclosure All views expressed are the opinions of Quantitative Research based on historical company fundamentals and market statistics. No guarantee of outcome is implied. Due to the quantitative and technical nature of this report, the issuers or securities recommended or discussed in the report are not continuously followed and opinions may change without notice. TDSI is under no obligation to inform you of such a change. As such, investors may not want to base their investment decision solely on this report. TD Securities Inc. may publish fundamental research on the securities of these issuers which expresses differing opinions. Clients should contact their TD Securities Inc. representative to request such material. The large cap quantitative model portfolio is created and disseminated by TD Securities Inc. The portfolio is used as the basis for the TD Canadian Quantitative Research Portfolio Fund, managed by First Trust Advisors LP. The research analyst responsible for the quantitative model portfolio, and/or a member of the research analyst’s household, and/or an account over which the research analyst has discretion or control, holds a long position in the TD Canadian Quantitative Research Portfolio Fund.
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Analyst Certification Each analyst of TD Securities Inc. whose name appears on page 1 of the research reports accessible on this website hereby certifies that (i) the recommendations and opinions expressed in the research report accurately reflect the research analyst's personal views about any and all of the securities or issuers discussed herein that are within the analyst's coverage universe and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the provision of specific recommendations or views expressed by the research analyst in the research report. Disclaimer This report is produced entirely by TD Securities Inc. Although the information contained in this report has been obtained from sources that TD Securities Inc. believes to be reliable, we do not guarantee its accuracy, and as such, the information may be incomplete or condensed. All opinions, estimates and other information included in this report constitute our judgment as of the date hereof and are subject to change without notice. TD Securities Inc. will furnish upon request publicly available information on which this report is based. TD Securities (USA) LLC has accepted responsibility in the United States for the contents of this research. TD Securities Limited has accepted responsibility in Europe for the contents this report. Canadian clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of TD Securities Inc. Canadian retail investors are served by TD Waterhouse Canada Inc., a subsidiary of The Toronto-Dominion Bank. U.S. clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of TD Securities (USA) LLC. European clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of TD Securities Limited. Insofar as the information on this report is issued in the U.K. and Europe, it has been issued with the prior approval of TD Securities Limited and only to persons falling within Articles 19 and 49 of the Financial Services & Markets Act 2000 (Financial Promotion) Order 2001, namely persons sufficiently expert to understand the risks involved. This report has been distributed in Hong Kong through The Toronto-Dominion Bank (Hong Kong Branch), which is regulated by the Hong Kong Monetary Authority. TD Securities Limited is providing financial services to wholesale clients in Australia in reliance on Class Order CO 03/1099. No recipient may pass on the information contained in this report to any other person without the prior written consent of TD Securities Inc. TD Securities Inc., TD Securities (USA) LLC and TD Securities Limited are wholly owned subsidiaries of The Toronto-Dominion Bank. TD Securities Limited is authorised and regulated by the Financial Services Authority. Copyright 2012 by TD Securities. All rights reserved. Full disclosures for all companies covered by TD Securities can be viewed at https://www.tdsresearch.com/equities/disclosures by TD Securities institutional equity clients.
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