Pertinent Revision Summary 3 Edge at a Glance 7

Transcription

1
Investment Views
Friday, March 02, 2012
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
Click to view synopsis

Pertinent Revision Summary
3

Edge at a Glance
7

Portfolio Strategy
Asset Mix & Model Portfolios March Update
Vincent Delisle
19
 
Neil Forster
25
 
Ben Isaacson
35
 
Turan Quettawala
37
 
Industry Comments
Autos & Components
February U.S. Auto Sales Kicking into Overdrive
Global Fertilizers
Indian Fert Subsidy Cuts Less
Than Expected
Company Comments
Bombardier Inc.
2012 Guidance Disappoints But
Sell-Off Overdone
Bonavista Energy Corporation
Reserves Increase 11% Year
over Year; Solid FD&A at
$13.39/boe and Q4/11 Results
Released
Patrick Bryden
41
 
Catalyst Paper Corporation
Discontinuing Coverage
Benoit Laprade
46
Cencosud
Board Approves ADS Program
Rodrigo Echagaray
47
 
 
Fortuna Silver Mines Inc.
Initiating Coverage: Fortunate
by Design with Mines in Peru
and Mexico
Trevor Turnbull
48
 
GENIVAR Inc.
Adding to the Reserves
Mark Neville
54
 
Grupo Aeroportuario del Pacífico
Gap Paying Out a Dividend
Yield of 8%, Above our 4%
Estimate
Rodrigo Echagaray
55
 
Hecla Mining Company
Initiating Coverage: 2012: A
Year of Deferred Development
Trevor Turnbull
56
 
Loblaw Companies Limited
L: The Way Forward... Actually
Is Forward
Patricia A. Baker
62
 
National Bank
Q1/12 Solid Beat - Wholesale
Strong - High Security Gain
Kevin R. Choquette
66
 
New Gold Inc.
No Surprises in Strong Q4/11
Financial Results; Adjusting
Blackwater Model for Inflation
Trevor Turnbull
73
 
Pan American Silver Corp.
Initiating Coverage: Feliz
Navidad for Minefinders
Trevor Turnbull
76
 
PDC Energy
Q4 Cash Flow Ahead of
Estimates
William S. Lee
82
 
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by
non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S.
2
Investment Views
Primaris Retail REIT
Q4/11 First Look: Results
Modestly Ahead
Progress Energy Resources Corp.
Pammi Bir
84
 
Q4: Strong Balance Sheet to
Weather Weak Gas
William S. Lee
85
 
RMP Energy Inc.
Waskahigan Land Acquisition
Jason Bouvier
88
 
Royal Bank of Canada
Q1/12 Strong Beat - Trading
Rebounds - Dividend Increased
6%
Kevin R. Choquette
91
 
Silver Wheaton Corp.
Initiating Coverage: From Silver
Stream to Cash Flow Torrent
Trevor Turnbull 100
 
Superior Plus Corp.
Marketing Highlights
Benoit Laprade 106
 
Surge Energy Inc.
Debt-Adjusted Reserves Per
Share Grow 25%
Jason Bouvier 109
 
Toronto-Dominion Bank
Q1/12 Big Beat - TD Canada
Trust Strong, Wholesale
Rebound - Dividend Increased
6%
Kevin R. Choquette 116
 
3
(For Rating Changes: 24-Hour SC Pro Personal Trading Restriction Applies)
Rating Risk
1-Yr
2-Yr
Target
Target
Key Data
Year 1
Year 2
Year 3
Valuation
Bombardier Inc. (BBD.B-T $4.30)
2012 Guidance Disappoints But Sell-Off Overdone
New -Old --
---
C$6.00
C$6.75
C$7.25
C$8.50
EPS12E: US$0.44
EPS12E: US$0.50
EPS13E: US$0.52
EPS13E: US$0.61
-- --- --
Valuation: Equally wtd DCF & Sum-of-the-parts Valuation
Key Risks to Price Target: Slower contract flow at BT; slower recovery in commercial and business aircraft
Bonavista Energy Corporation (BNP-T $22.28)
Reserves Increase 11% Year over Year; Solid FD&A at $13.39/boe and Q4/11 Results Released
New -Old --
---
$26.50
$29.00
$26.50
$29.00
CFPS12E: $3.34
CFPS12E: $3.35
CFPS13E: $3.91
CFPS13E: $3.94
-- 1.1x our 2P NAV plus risked upside.
-- 1.1x our 2P NAV plus risked upside
Valuation: 1.1x our 2P NAV plus risked upside.
Key Risks to Price Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program success
Catalyst Paper Corporation (CTL-T $0.02)
New 7-DC
Old 3-SU
---
---
---
---
---
EPS11E: $0.24
--
EPS12E: $0.43
--
-- --- --
Valuation: -Key Risks to Price Target: --
Fortuna Silver Mines Inc. (FSM-N US$7.10)
Initiating Coverage: Fortunate by Design with Mines in Peru and Mexico
New 2-SP
Old --
High
--
$8.50
--
$8.50
--
EPS13E: $0.53 1.93x NAV
---
Valuation: 1.93x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
GENIVAR Inc. (GNV-T $27.96)
New -Old --
---
---
---
-- EBITDA12E: $105.42 EBITDA13E: $108.01 --- EBITDA12E: $103.75 EBITDA13E: $105.98 --
Valuation: 7.75x EV/EBITDA on 2013E
Key Risks to Price Target: Slower-than-anticipated recovery in commercial and residential construction.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates
are not registered/qualified as research analysts with FINRA in the U.S.
4
Grupo Aeroportuario del Pacífico (PAC-N US$37.96)
Gap Paying Out a Dividend Yield of 8%, Above our 4% Estimate
New -Old --
---
---
---
EPS12E: 2.38
EPS12E: 2.45
EPS13E: 2.78
--
EPS12E: $0.31
EPS13E: $0.60
-- --- --
Valuation: 2010-2021 DCF w/ 12.3% WACC; 9x NTM EV/EBITDA
Key Risks to Price Target: Govmnt. regulation, troubled domestic airlines
Hecla Mining Company (HL-N US$5.05)
Initiating Coverage: 2012: A Year of Deferred Development
New 2-SP
Old --
Caution
Warranted
--
$6.50
$6.50
--
--
--
--
-- 1.35x NAV
-- --
Loblaw Companies Limited (L-T $34.66)
L: The Way Forward... Actually Is Forward
New -Old --
---
$35.00
$36.00
---
EPS12E: $2.56
EPS12E: $2.62
EPS13E: $2.68
EPS13E: $2.77
-- --- --
Valuation: 13x F2013E EPS
Key Risks to Price Target: Heightened competitive pricing pressures, prolonged deflation, disruption to ops from Supply Chain and IT overhaul
National Bank (NA-T $77.48)
Q1/12 Solid Beat - Wholesale Strong - High Security Gain
New -Old --
---
$88.00
$82.00
$98.00
$92.00
EPS12E: $7.75
EPS12E: $7.60
EPS13E: $8.40
EPS13E: $8.30
-- --- --
EPS13E: $0.45
EPS13E: $0.70
-- --- --
Valuation: 10.8x 2012 operating earnings estimate
Key Risks to Price Target: Economic, systemic, interest rate, regulatory and counterparty failures
New Gold Inc. (NGD-A US$11.45)
No Surprises in Strong Q4/11 Financial Results; Adjusting Blackwater Model for Inflation
New -Old --
---
$14.00
$16.00
$14.00
$16.00
EPS12E: $0.42
EPS12E: $0.53
PDC Energy (PETD-O US$34.85)
Q4 Cash Flow Ahead of Estimates
New -Old --
---
---
---
CFPS12E: $7.60
CFPS12E: $7.50
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
CFPS13E: $8.26
CFPS13E: $8.18
-- --- --
5
Pan American Silver Corp. (PAAS-Q US$25.25)
Initiating Coverage: Feliz Navidad for Minefinders
New 1-SO
Old 8-CS
Caution
Warranted
High
$37.00
$37.00
EPS12E: $2.10
$39.00
$39.00
EPS12E: $4.59
EPS13E: $2.18
--
-- 1.10x NAV
-- 1.4x NAV (80%) and 8.5x 2012E CFPS
(20%)
Progress Energy Resources Corp. (PRQ-T $10.78)
Q4: Strong Balance Sheet to Weather Weak Gas
New -Old --
---
---
---
CFPS12E: $1.09
CFPS12E: $1.07
CFPS13E: $1.39
CFPS13E: $1.37
-- --- --
---
---
-- --- --
EPS12E: $4.90
EPS12E: $4.80
EPS13E: $5.30
EPS13E: $5.20
-- --- --
RMP Energy Inc. (RMP-T $2.73)
New -Old --
---
$3.50
$3.25
$4.20
$4.00
Royal Bank of Canada (RY-T $56.80)
Q1/12 Strong Beat - Trading Rebounds - Dividend Increased 6%
New -Old --
---
$68.00
$63.00
$75.00
$70.00
Silver Wheaton Corp. (SLW-N US$38.78)
Initiating Coverage: From Silver Stream to Cash Flow Torrent
New 1-SO
Old --
High
--
$50.00
--
$50.00
--
EPS11E: $1.51
--
EPS12E: $1.86
--
EPS13E: $2.42 1.95x NAV
---
Superior Plus Corp. (SPB-T $7.65)
New --
--
$8.25
$8.25
CFPS12E: $1.74
CFPS13E: $1.88
Old --
--
$7.25
$7.25
CFPS12E: $1.72
CFPS13E: $1.79
Valuation: Average of 7.25x NTM EV/EBITDA (2013E) & 7.5% Yield
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
-- Average of 7.25x NTM EV/EBITDA (2013E)
& 7.5% Yield
-- Average of 7.0x NTM EV/EBITDA (2013E)
& 10.0% Yield
6
Surge Energy Inc. (SGY-T $10.35)
Debt-Adjusted Reserves Per Share Grow 25%
New -Old --
---
$13.50
$12.00
$16.00
$15.00
CFPS11E: $0.97
CFPS11E: $0.96
---
Toronto-Dominion Bank (TD-T $82.00)
Q1/12 Big Beat - TD Canada Trust Strong, Wholesale Rebound - Dividend Increased 6%
New -Old --
---
$100.00
$93.00
$110.00
$105.00
EPS12E: $7.30
EPS12E: $7.10
EPS13E: $8.00
EPS13E: $7.80
-- --- --
Source: Reuters; Scotiabank GBM estimates.
Table of Contents
7
Edge at a Glance
Edge at a Glance
Portfolio Strategy
Asset Mix & Model Portfolios - March Update
Vincent Delisle, CFA - 514-287-3628
(Scotia Capital Inc. - Canada)
Event
■ Monthly asset mix and model portfolio updates. The Strategic Edge Portfolio (SEP) is our
large cap equity portfolio. The U.S. sector portfolio reflects our pure-play sector strategy
views.
Implications
■ The SEP was up 1.9% in February versus a 1.67% gain for the S&P/TSX (total return).
Relative performance is flattish so far in 2012; the SEP is outperforming by +228 bp over
the last six months. The U.S. sector portfolio advanced 4.12% in February (S&P 500 index
+4.06% price only).
■ Our strategy stance remains pro-cyclical, but our recommended asset mix and model
portfolios are carrying lower cyclical exposure than in Q4/11.
Recommendation
■ The "risk-on" theme of the past five months is looking stretched, and we are focused on
monitoring how long equity/cyclical outperformance can be sustained. We believe it is
currently premature to switch to an outright defensive/low beta stance. We expect bond
yields to adjust higher.
■ Seasonality, a positive reversal in equity funds flows, and steady U.S. payroll improvements
should support equity sentiment in the near term.
Autos & Components
February U.S. Auto Sales - Kicking into Overdrive
Full Story
ScotiaView Analyst Link
Table of Contents
Neil Forster, MBA, CFA - 416-863-2899
Event
■ Automotive OEMs reported very strong U.S. vehicle sales for the month of February
yesterday.
Implications
■ The seasonally adjusted annual rate (SAAR) for light vehicles came in at 15.0 million units,
which was well ahead consensus of 14.2 million.
■ We left our industry sales and production volume forecasts unchanged, but believe there
could be upside to our numbers if the current sales pace can be maintained.
Recommendation
■ Our recommendations within our coverage universe remain unchanged.
Full Story
Table of Contents
8
Edge at a Glance
Global Fertilizers
Indian Fert Subsidy Cuts Less Than Expected
Ben Isaacson, MBA, CFA - 416-945-5310
Event
■ India has confirmed its fertilizer subsidies for 2012/13. DAP and MOP subsidies were cut
by 27.4% and 10%, respectively, with no change to urea.
■ Nutrient subsidy rates for N, P, and K were also reduced by 11.6%, 32.6%, and 10.3%,
respectively.
Implications
■ DAP. The new DAP subsidy of INR14,350/mt ($292/mt) is down from INR19,763/mt
($403/mt) this year.
■ MOP. The subsidy for MOP has been set at INR14,440/mt ($294/mt), down from
INR16,054/mt ($327/mt) currently. We view this as a mild positive to the INR13,500/mt
that the Ministry was threatening to impose.
■ Yesterday, we trimmed our 2012 India potash demand forecast by 0.5M mt to 4.2M mt
(2010 and 2011 were 6.3M mt and 4.6M mt).
Recommendation
■ With the potash and phosphate subsidies set, we believe: (1) it is now highly likely that India
will ultimately pay a $20/mt to $30/mt premium over the Chinese potash price and (2) a
DAP contract settlement should emerge shortly for 1H/12 in the $530/mt area.
Bombardier Inc. (BBD.B-T C$4.30)
2012 Guidance Disappoints But Sell-Off Overdone
Full Story
Table of Contents
Turan Quettawala, MBA, CFA - 416-863-7065
Event
■ BBD's Q4 EPS beat but 2012 BA margin guidance disappointed.
Implications
■ In our opinion, 2012 aerospace margin guidance is on the conservative side which has been
the case at least for the last two years since the recession. Nonetheless, we have revised
down our aerospace EBIT margins to 5.6% in 2012 and 6.7% in 2013. Our long-term BA
margin assumptions now flatten out at 9%.
■ There was nothing significant on the CSeries in terms of timing; however, aerospace capex
guidance for 2012 suggests a possibility of overruns. In our opinion, combining 5%
aerospace margins with zero FCF suggests a significant rise in orders (i.e., either margins
are too conservative or there is risk to aerospace FCF guidance).
Recommendation
■ We are maintaining our 1-SO rating with a reduced target price of $6.00. No doubt that the
guidance was disappointing; however, we believe that the sell-off is overdone. Our
sensitivity analysis suggests that the shares would be worth $4.50 even under the unlikely
scenario that aerospace margins remain at 5% over our forecast period.
Pertinent Data
New
Old
Rating:
Risk:
---
1-SO
High
Target:
1-Yr
2-Yr
C$6.00
C$7.25
C$6.75
C$8.50
EPS12E
US$0.44
US$0.50
EPS13E
US$0.52
US$0.61
New Valuation:
-Old Valuation:
Equally wtd DCF & Sum-of-the-parts
Valuation
Key Risks to Target:
Slower contract flow at BT; slower
recovery in commercial and business
aircraft
Full Story
Table of Contents
9
Edge at a Glance
Bonavista Energy Corporation (BNP-T C$22.28)
Patrick Bryden, CFA - 403-213-7750
Reserves Increase 11% Year over Year; Solid FD&A at $13.39/boe and Q4/11 Results Released
Pertinent Data
Event
New
■ Bonavista announced its full year 2011 results and corporate reserves.
Implications
■ Fourth quarter cash flow in line. Bonavista reported Q4 CFPS of $0.88, 2% ahead of our
estimate at $0.87 and consensus at $0.86.
■ Production behind at 73,373 boe/d and midpoint 2012 guidance revised to 74,000 boe/d.
The company's reported Q4 production was 4% behind our estimate of 76,120 boe/d and the
company reduced its 2012 guidance towards a more sustainable level on low gas pricing.
■ Year-end reserves provide 11% year over year volumetric growth and solid year-end FD&A
results. The business has delivered good long-term capital efficiencies and the 2011
reserves book is consistent with this given proved and probable finding, development and
acquisition costs of $13.39/boe, inclusive of FDC, implying a 1.8x recycle ratio, which is a
strong result relative to its peer group.
Recommendation
■ We maintain our 1-SO rating; however we have reduced our one-year target price to
$26.50/share on revised growth and gas price headwinds.
Old
Rating:
-1-SO
Risk:
-High
Target:
1-Yr
$26.50
$29.00
2-Yr
$26.50
$29.00
CFPS12E
$3.34
$3.35
CFPS13E
$3.91
$3.94
New Valuation:
1.1x our 2P NAV plus risked upside.
Old Valuation:
1.1x our 2P NAV plus risked upside
Crude oil and natural gas prices;
CAD/USD exchange rate; drilling
program success
Full Story
Table of Contents
Catalyst Paper Corporation (CTL-T C$0.02)
Benoit Laprade, CA, CFA - 514-287-3627
Event
■ We are discontinuing coverage of the shares of Catalyst Paper.
Implications
■ Catalyst filed for CCAA creditor protection in order to facilitate an orderly restructuring of
its business and operations on January 31, 2012.
■ The shares will be delisted from the TSX March 8, 2012.
Recommendation
■ We have discontinued coverage of the shares of Catalyst Paper. Our previous rating and
target price were 3-Sector Underperform and nil.
Pertinent Data
Rating:
New
Old
7-DC
3-SU
Lower-than-expected prices, strongerthan-expected C$
Full Story
Table of Contents
10
Edge at a Glance
Cencosud (CEN-S CLP3130.00)
Rodrigo Echagaray, MBA - +52 55-9179 5236
(Scotia Inverlat Casa de Bolsa)
Event
Pertinent Data
■ Cencosud's board approved the ADS program.
Rating:
1-SO
Risk:
Med
Target:
1-Yr
CLP3900.00
2-Yr
CLP4212.00
EPS11E:
$126.33
EPS12E:
$191.85
Valuation:
2011E-2022E DCF w/ 8.9% WACC; 13x
(NTM) EV/EBITDA; 21x (NTM) P/E
Pension funds concentration, foreign
ops, potential dilution
Implications
■ The board now has 120 days to determine the pricing. We expect dilution to be close to
12%, or approximately 270 million newly issued shares.
■ We believe Cencosud will use these proceeds to pursue further acquisitions, continue an
ambitious organic growth program, and to some extent reduce its leverage ratios.
■ Moreover, we think the ADS program will increase liquidity and transparency, and will
strengthen the corporate governance of the company, all of which could translate into higher
valuations.
Recommendation
■ We reiterate our 1-SO rating and one-year target price of CLP3,900.
Full Story
Table of Contents
Fortuna Silver Mines Inc. (FSM-N US$7.10)
Trevor Turnbull, MBA, MSc - 416-863-7427
Initiating Coverage: Fortunate by Design with Mines in Peru and Mexico
Event
Pertinent Data
■ We have initiated coverage on Fortuna with a 2-Sector Perform rating and a one-year target
price of $8.50 per share.
Rating:
Risk:
Implications
■ Fortuna is expected to double silver production to 5.0 million ounces annually by 2014 from
its two mines. Growth is anticipated from higher grades being mined at the company's two
operations and from a plant expansion at the San Jose mine in 2013.
■ For at least the next two years, we forecast negative total cash costs as a result of gold, lead,
and zinc credits.
■ Fortuna is trading at a 61% premium to our net asset valuation (NAV3%) of $4.29 per
share. Our target is based on 1.93x NAV3%.
■ For more details, refer to our unabridged report on the silver sector entitled Growing Supply
Tarnishes Outlook; Lustre Found in Equities.
Target:
1-Yr
US$8.50
2-Yr
US$8.50
EPS11E:
US$0.24
EPS12E:
US$0.43
EPS13E:
US$0.53
Valuation:
1.93x NAV
Multiple contraction, commodity prices,
technical and operational risks, and
geopolitical risks
Recommendation
■ We believe Fortuna has high-quality assets and management with excellent potential to
execute on its organic growth plans. We would be unhesitant buyers with slightly greater
returns to our $8.50 target.
Full Story
Table of Contents
2-SP
High
11
Edge at a Glance
Mark Neville, CFA - 514-350-7756
GENIVAR Inc. (GNV-T C$27.96)
Pertinent Data
Event
■ GENIVAR announced the acquisition of GRB Engineering (GRB). GRB is a Calgary-based
oil and gas engineering services and project management firm.
Implications
■ GRB strengthens GENIVAR's position in the oil and gas industry, adding 80 people in
Alberta (brings total headcount to approximately 600 in AB). We believe GENIVAR will
look to further expand its presence in the region; we believe the company could look to
grow its headcount to approximately 1,000.
■ In our view, GRB will strengthen GENIVAR's oil and gas platform. GRB adds expertise in
procurement and construction management, which should be complementary to
GENIVAR's existing offering in the region/end-market (previously, more focused on
engineering/design).
■ We have made modest revisions to our estimates. We estimate the purchase price at $10
million.
Recommendation
■ We like GENIVAR's 5.4% yield and growth potential through acquisition. However, the
shares trade at a (justified) premium to the group. We maintain our 2-Sector Perform rating
on GNV shares.
New
Rating:
Risk:
Target:
1-Yr
2-Yr
EBITDA11E
EBITDA12E
EBITDA13E
Old
---
2-SP
Med
---$105.42
$108.01
$29.00
$29.00
$92.32
$103.75
$105.98
New Valuation:
-Old Valuation:
7.75x EV/EBITDA on 2013E
Slower-than-anticipated recovery in
commercial and residential construction.
Full Story
Table of Contents
Grupo Aeroportuario del Pacífico (PAC-N US$37.96)
Gap Paying Out a Dividend Yield of 8%, Above our 4% Estimate
Event
■ Gap called for a shareholder's meeting to take place on April 16, 2012.
Implications
■ Gap proposed a dividend payment of MXN2.13 per share, excluding repurchased shares to
be paid in May (MXN1.60) and November (MXN0.53). The announcement comes 16%
ahead of our estimates and implies a dividend yield of 4.4%.
■ Additionally, the company proposed a capital reduction of MXN870 million to be paid out
no later than June 30, 2012. This implies a payment of MXN1.64 per share for a yield of
3.4%. All in, these two payments represent a yield of 7.8% on current prices.
■ Also, a total of MXN280 million may be approved for this year's share repurchase program
(at current prices this translates in a yield of 1%).
■ The agenda also includes the ratification of the Board of Directors, the Board report,
approval of the company's net income for the period, and the designation of Series B
representation in the Board, among others.
Recommendation
■ We rate Gap 3-SU on relative valuation and overhang risk.
Pertinent Data
New
Rating:
Risk:
---
Old
3-SU
Med
Target:
1-Yr
-- US$42.00
2-Yr
-- US$45.00
EPS12E
2.38
2.45
EPS13E
2.78
-New Valuation:
-Old Valuation:
2010-2021 DCF w/ 12.3% WACC; 9x
NTM EV/EBITDA
Govmnt. regulation, troubled domestic
airlines
Full Story
Table of Contents
12
Edge at a Glance
Hecla Mining Company (HL-N US$5.05)
Initiating Coverage: 2012: A Year of Deferred Development
Event
Pertinent Data
■ We have initiated coverage on Hecla with a 2-Sector Perform rating and a one-year target
price of $6.50 per share.
Rating:
2-SP
Risk:
Caution
Target:
1-Yr
US$6.50
2-Yr
US$6.50
EPS12E:
US$0.31
EPS13E:
US$0.60
Valuation:
1.35x NAV
geopolitical risks
Implications
■ Hecla's Lucky Friday mine, one of two it operates, is closed for care and maintenance of its
main shaft and 30% of the company's usual 8.0 million to 9.0 million ounces of silver
production is offline until 2013.
■ Once Lucky Friday is producing again, Hecla's normal annual silver production is scheduled
to grow 30% to more than 10 million ounces.
■ Hecla is trading at a 14% premium to our net asset valuation (NAV5%) of $4.77 per share.
Our target is based on 1.35x NAV5%.
Recommendation
■ At the current share price we feel there is not enough reward for the risk associated with a
re-rating that may not fully develop until development and production resume at the Lucky
Friday mine. We also think Hecla is in a riskier position while it relies solely on the Greens
Creek operation.
Loblaw Companies Limited (L-T C$34.66)
Full Story
Table of Contents
Patricia A. Baker, MBA, PhD - 514-287-4535
Event
■ Loblaw President Vicente Trius unveiled plans for his strategy to drive the business forward
and drive it better at an analyst meeting earlier this week.
Implications
■ If a goal of the meeting was to establish credibility for its new President, this was
accomplished. Trius showed himself to be passionate, forthright, and focused, and looks
well up to the challenge of reinvigoration and execution. We again assert his focus square
on the customer is the right one. We should see L spend against that in F12 and we suspect
beyond. It is obvious to us the massive IT and supply chain spend is not sufficient. In our
view, in the absence of a related customer address, the business could not really right itself.
■ We now have a long-awaited and welcome answer as to what changes under Trius: as we
had hoped, it looks to be pace, execution, and more.
Recommendation
■ Although we lowered forecasts post Q4, we see it prudent and necessary to adjust further.
Our F12E moves 6 cents lower to $2.56 and F13E to $2.68. Our 1-yr target moves to $35.
The share price is still discounting 13.6x, while peers are at 8.8x to 12.8x - there is no rush
as yet.
Pertinent Data
New
Old
Rating:
-2-SP
Risk:
-Low
Target:
1-Yr
$35.00
$36.00
2-Yr
-$38.00
EPS12E
$2.56
$2.62
EPS13E
$2.68
$2.77
New Valuation:
-Old Valuation:
13x F2013E EPS
Heightened competitive pricing
pressures, prolonged deflation,
disruption to ops from Supply Chain and
IT overhaul
Full Story
Table of Contents
13
Edge at a Glance
National Bank (NA-T C$77.48)
Q1/12 Solid Beat - Wholesale Strong - High Security Gain
Kevin R. Choquette, CFA - 416-863-2874
Pertinent Data
Event
■ NA cash operating EPS increased 8% YOY to $2.00, above expectations. Operating
earnings were strong, driven by a 13% YOY increase in Wholesale or 63% QOQ, with NA
the only bank to report a YOY earnings increase in the segment thus far. Trading revenue
rebounded 49% from Q4 lows to $127 million and was actually 4% higher YOY.
■ ROE: 21.9%, RRWA: 2.48%, CET1: 7.9%.
Implications
■ Retail earnings growth was strong at 9%, with Wealth declining 21% YOY. Security gains
were high, adding $0.17 per share to earnings.
Recommendation
■ We are increasing our 2012E and 2013E EPS to $7.75 and $8.40 from $7.60 and $8.30,
respectively, due to strong results this quarter. We are increasing our share price target to
$88 from $82 based on higher earnings outlook.
■ Maintain 3-Sector Underperform rating due to high relative valuation versus its earnings mix
and quality of earnings, although the bank has done an excellent job of sustaining its
earnings with low volatility.
New
Old
Rating:
-3-SU
Risk:
-Low
Target:
1-Yr
$88.00
$82.00
2-Yr
$98.00
$92.00
EPS12E
$7.75
$7.60
EPS13E
$8.40
$8.30
New Valuation:
-Old Valuation:
10.8x 2012 operating earnings estimate
Economic, systemic, interest rate,
regulatory and counterparty failures
Full Story
Table of Contents
New Gold Inc. (NGD-A US$11.45)
No Surprises in Strong Q4/11 Financial Results; Adjusting Blackwater Model for Inflation
Event
Pertinent Data
■ New Gold announced Q4/11 EPS of $0.08 in line with our estimate and below consensus of
$0.10. Production was pre-released.
Rating:
Implications
■ New Gold's 2011 production was a record 391,890 oz and 2012 guidance (pre-announced)
is 405,000 oz - 445,000 oz. Total cash costs in 2011 were $553/oz and 2012 guidance (preannounced) is about $420/oz net of by-product copper and silver.
■ Our net asset valuation (NAV3%) is not changed by the Q4 results. However, we have
adjusted out Blackwater modelling to reflect inflationary pressure. As a result our NAV3%
decreased 12% to $8.17 largely due to initial capital and operating cost inflation.
■ Our target multiple remains 1.70x NAV3% and our one-year target is $14.00 per share
implying a 22% return to target.
Recommendation
■ New Gold is still our standout mid-tier pick, and we firmly reiterate our 1-Sector
Outperform recommendation.
New
--
Old
1-SO
Risk:
-Caution
Target:
1-Yr
$14.00
$16.00
2-Yr
$14.00
$16.00
EPS12E
$0.42
$0.53
EPS13E
$0.45
$0.70
New Valuation:
-Old Valuation:
1.70x NAV
geopolitical risks
Full Story
Table of Contents
14
Edge at a Glance
Pan American Silver Corp. (PAAS-Q US$25.25)
Initiating Coverage: Feliz Navidad for Minefinders
Pertinent Data
Event
■ We have initiated coverage on Pan American with a 1-Sector Outperform rating and a oneyear target price of $37.00 per share.
Implications
■ The company is already one of the world's largest primary silver producers generating over
20 million ounces annually, and yet it has the potential to double output by 2016.
■ In addition to the upcoming organic growth, explosive growth is possible. The Navidad and
La Preciosa projects could add 15-20 million ounces and 7 million ounces of annual silver
production, respectively.
■ Pan American is trading at a 2% premium to our net asset valuation (NAV3%) of $24.71
per share. Our target is based on 1.10x NAV3%.
Recommendation
■ We feel the shares are excellent value especially with the high-probability of a successful
close of the Minefinders deal and potential pro-mining changes in Argentina forecast in the
near-term.
New
Old
Rating:
1-SO
8-CS
Risk:
Caution
High
Target:
1-Yr
$37.00
$39.00
2-Yr
$37.00
$39.00
EPS12E
$2.10
$4.59
EPS13E
$2.18
-New Valuation:
1.10x NAV
Old Valuation:
1.4x NAV (80%) and 8.5x 2012E CFPS
(20%)
geopolitical risks
Full Story
Table of Contents
PDC Energy (PETD-Q US$34.85)
William S. Lee, P.Eng. - 403-213-7331
Event
■ PDC Energy announced Q4/11 results.
Implications
■ CFPS ahead of expectations. Previously announced Q4/11 volumes came in at ~147
mmcfe/d (incl. discontinued operations). CFPS for the quarter came in at $2.34 versus the
Street consensus of $2.00. Net proved reserves at year-end 2011 were 1.0 Tcfe (previously
reported), an increase of 18% over 2010 figures.
■ Utica JV remains major catalyst. While its Niobara drilling appears to be delivering positive
results with its latest wells having averaged 30-day IPs of 470 boe/d (~75% liquids), its
potential Utica JV remains the major catalyst. PDC's entry cost including its capex
commitment is ~$3,500/acre and we would not be surprised by JV metrics in the $5,000$10,000/acre range given recent deals.
■ Valuation. While its JV remains a near-term catalyst, we believe PDC is fairly valued as it
trades at 6.7x 2012E EV/DACF under a $3/mcf Henry Hub scenario.
Recommendation
■ We maintain our 2-Sector Perform rating and $42.00/share target.
Pertinent Data
New
Rating:
--
Old
2-SP
Risk:
-High
Target:
1-Yr
-$42.00
2-Yr
-$45.00
CFPS12E
$7.60
$7.50
CFPS13E
$8.26
$8.18
New Valuation:
-Old Valuation:
Oil and natural gas prices; Drilling
program success.
Full Story
Table of Contents
15
Edge at a Glance
Primaris Retail REIT (PMZ.UN-T C$21.87)
Q4/11 First Look: Results Modestly Ahead
Pammi Bir, CA, CFA - 416-863-7218
Event
Pertinent Data
■ Primaris reported Q4/11 FFOPU of $0.41 vs. $0.42 last year, ahead of our $0.39 estimate
and the $0.38 consensus.
Rating:
2-SP
Risk:
Med
Target:
1-Yr
C$22.00
2-Yr
C$22.50
FFOPU11E:
$1.44
FFOPU12E:
$1.46
FFOPU13E:
$1.51
Valuation:
17.25x AFFO (F'13 estimate)
Competition from new-format retail,
repositioning project delays/cost
overruns, tenant specific risks.
Implications
■ A little better than forecast. The $0.015/unit beat to our estimate was mostly from higher
other income ($0.01/unit, incl. ~$0.005 of lease term. fees) and lower interest costs, with
core ops in line. YOY growth from acquisitions and SP NOI was offset by equity dilution,
higher interest, and higher G&A (Q4/10 incl. reversal of over-accrued G&A).
■ Operationally stable; modest internal growth. SP NOI rose 0.5% YOY (+0.7% YTD), with
committed occupancy +60 bp QOQ to 97.1% (flat YOY). Renewal leasing spreads over
expiries were reasonable at +4.3% (+5.7% YTD) or +7.8% (+6.9%) excluding majors.
Same-tenant sales/sq. ft. were $458, down 0.9% YOY (vs. $453 in Q3/11, but incl. two
more malls in Q4) vs. $589 (+4.1% YOY) for the ICSC average.
■ Property fair values based on DCF with 7.3% discount rate (-30 bp QOQ, YOY) and 6.3%
terminal cap rate (-40 bp QOQ, YOY), below our "going-in" 6.75% NAV cap rate and
current 6.4% implied cap rate.
Recommendation
■ Full update post today's 9 a.m. ET conf. call (1-877-240-9772).
Progress Energy Resources Corp. (PRQ-T C$10.78)
Full Story
Table of Contents
Event
■ Q4/11 volumes of 45.7 mboe/d & CFPS of $0.24 (previously released).
Pertinent Data
New
Old
Implications
■ Financially strong. While gas prices remain weak & the near term outlook is bleak, PRQ
maintains a very strong balance sheet on account of steps taken in 2011 coupled with a
recent pragmatic cut to 2012 capex (now $365MM). At $2.50/mcf AECO, we see PRQ
exiting 2012 with 74% (~$483MM) undrawn credit room, excluding proceeds from
Wapiti/Nig assets currently in the market which could fetch ~$50MM.
■ Appetite for top-tier resources. We continue to believe PRQ's assets are top-tier given its
contiguous acreage in the consistent Montney play, which should continue to garner
interest. ECA's recent JV reaffirms the appetite for low cost resource plays; we believe NA
gas is destined for higher markets with players willing to take a longer term view.
■ LNG. In our view, PRQ's primary goal will be to maintain flexibility while proving up its
JV acreage. With targeted spending of ~$2+ Bn over the coming years (PRQ ~12.5%), we
see solid NAV growth resulting in the eventual commencement of a LNG project in 2014.
Rating:
-1-SO
Risk:
-High
Target:
1-Yr
-$20.00
2-Yr
-$30.00
CFPS12E
$1.09
$1.07
CFPS13E
$1.39
$1.37
New Valuation:
-Old Valuation:
program success.
Recommendation
■ PRQ continues to be a favourite gas name. We maintain our SO rating.
Full Story
Table of Contents
16
Edge at a Glance
RMP Energy Inc. (RMP-T C$2.73)
Jason Bouvier, CFA - 403-213-7345
Pertinent Data
Event
New
■ RMP acquired 8.6 net sections southeast of their existing asset base at Waskahigan.
Implications
■ Waskahigan Land Expansion. RMP acquired 12.3 (8.6 net) sections in the Montney oil
fairway for $8.5 million, implying a land value of ~$1,550/acre. RMP has identified up to
40 additional drilling locations on the new lands. The acquisition was funded through $15
million in proceeds from the sale of 38.3 net sections at Resthaven where little capital was
allocated.
■ Building momentum in the Montney oil play. The acquisition increases RMP's land
holdings in the Montney Oil fairway to 61.3 (57.6 net) sections from 49 net sections. Post
the deal, RMP estimates a gross drilling inventory of 160+ wells.
Recommendation
■ We rate RMP 1-SO and have increased our 1-yr target price to $3.50/share based on the
incremental inventory value to the Waskahigan.
Rating:
Risk:
Target:
1-Yr
2-Yr
CFPS11E
CFPS12E
CFPS13E
Old
---
1-SO
High
$3.50
$4.20
----
$3.25
$4.00
$0.20
$0.62
$0.96
New Valuation:
-Old Valuation:
program success.
Full Story
Table of Contents
Royal Bank of Canada (RY-T C$56.80)
Q1/12 Strong Beat - Trading Rebounds - Dividend Increased 6%
Event
■ RY reported cash operating earnings of $1.25 per share, above our expectations of $1.14 per
share and IBES consensus at $1.13 per share. The beat was driven by a strong sequential
improvement in wholesale earnings driven by very strong trading revenues as they
rebounded off perhaps cyclical lows of Q3/11 and Q4/11.
■ Canadian Banking had a strong quarter, with earnings up 7% YOY and 5% QOQ as the
NIM held steady at 2.75% for the third consecutive quarter. Operating ROE: 20.2%,
RRWA: 2.60%, CET1: 7.6%(E).
Implications
■ RY announced a 6% annual dividend increase to $2.28 per share from $2.16 per share. RY's
payout ratio is at 46%, based on our 2012E EPS, within its target range of 40%-50%.
Recommendation
■ We are increasing our 2012E and 2013E EPS by $0.10 each to $4.90 and $5.30 based on the
improved outlook for trading revenue.
■ Increasing price target to $68 from $63. Reiterate 1-SO based on above industry group
profitability and capital, and substantial earnings leverage to normalization of capital
markets, particularly in Europe.
Pertinent Data
New
Rating:
Risk:
---
Old
1-SO
Low
Target:
1-Yr
$68.00
$63.00
2-Yr
$75.00
$70.00
EPS12E
$4.90
$4.80
EPS13E
$5.30
$5.20
New Valuation:
-Old Valuation:
Full Story
Table of Contents
17
Edge at a Glance
Silver Wheaton Corp. (SLW-N US$38.78)
Initiating Coverage: From Silver Stream to Cash Flow Torrent
Event
Pertinent Data
■ We have initiated coverage on Silver Wheaton with a 1-Sector Outperform rating and a oneyear target price of $50.00 per share.
Rating:
1-SO
Risk:
High
Target:
1-Yr
US$50.00
2-Yr
US$50.00
EPS11E:
US$1.51
EPS12E:
US$1.86
EPS13E:
US$2.42
Valuation:
1.95x NAV
geopolitical risks
Implications
■ We believe Silver Wheaton is an exceptional alternative to both mining company shares and
silver exchange traded funds (ETFs). The company's risk profile is nearly as low as bullion's
while retaining the desired upside of a silver producer's growth and exploration potential.
■ The company's margins are protected by its streaming agreements that fix costs at about
$4.00/oz, subject to a 1% annual adjustment.
■ Silver Wheaton is trading at a 50% premium to our net asset valuation (NAV3%) of $25.65
per share. Our target is based on 1.95x NAV3%.
Recommendation
■ We think the company deserves the highest target multiple of its peer group given the strong
upside from growth and insulation from downside factors such as capital cost escalation.
Full Story
Table of Contents
Superior Plus Corp. (SPB-T C$7.65)
Event
■ We held client meetings with Superior management in Toronto.
Implications
■ 2012 guidance (AOCF/share of $1.40-$1.85) does not include any improvements as they
will likely be offset by implementation/ restructuring costs. Benefits should be felt
gradually over 2013-2014. We have marginally increased our 2012 CFPS estimate to $1.74,
and our 2013 estimate to $1.88, giving Superior some of the benefit from margin
improvements in Building Products and Energy Services.
■ CEO Desjardins noted that his first 100 days on the job with Superior have been focused on
developing specific initiatives within each group to improve performance, including
logistics, inbound transportation, cash collections, as well as manpower requirements.
Recommendation
■ We maintain our 2-Sector Perform rating but have increased our one-year target to $8.25
(from $7.25), based on an average 7.25x EV/EBITDA multiple (from 7.0x) and a 7.5% yield
(from 10%). Given low forecasted payout ratios, we believe the market will be willing to
accept a lower yield on SPB shares.
Pertinent Data
New
Rating:
Risk:
---
Old
2-SP
High
Target:
1-Yr
$8.25
$7.25
2-Yr
$8.25
$7.25
CFPS12E
$1.74
$1.72
CFPS13E
$1.88
$1.79
New Valuation:
Average of 7.25x NTM EV/EBITDA
(2013E) & 7.5% Yield
Old Valuation:
(2013E) & 10.0% Yield
Lower-than-expected prices, strongerthan-expected C$
Full Story
Table of Contents
18
Edge at a Glance
Surge Energy Inc. (SGY-T C$10.35)
Pertinent Data
Event
New
■ Surge announced year-end reserves and an operational update.
Implications
■ Strong reserves growth. SGY reported 2P reserves of 32,207 mboe (up 52% YOY and an
impressive 25% on a debt-adj. res/sh basis). Post the Dec/11 acquisition, 2P reserves
increased by 73% and are now 65% liquids weighted (versus 58% in 2010).
■ Attractive FD&A costs. FD&A costs of ~$26/boe (1P) and ~$17/boe (2P) (including change
in undiscounted FDC) drove a 2.3x recycle ratio (2P), which we view as a solid
achievement.
■ 2012 guidance intact. Surge maintained its 2012 exit rate target of 11,000 boe/d (77%
oil/NGL's). We estimate that capex of $155M will result in debt-adj. prod/sh growth of
23%, likely to be top quartile.
■ Valhalla success continues. SGY's ninth hz well had a 7-day test rate of 2,300 boe/d (81%
liquids), the highest recorded test rate to date. A tenth well is currently drilling. At least five
more wells planned in 2012.
Recommendation
■ We maintain our 1-SO rating and have increased our one-year target price to $13.50 (from
$12/sh) on the back of stronger-than-expected FD&A costs, solid reserves growth, and
continued success at Valhalla.
Toronto-Dominion Bank (TD-T C$82.00)
Rating:
Risk:
Target:
1-Yr
2-Yr
CFPS11E
CFPS12E
CFPS13E
Old
---
1-SO
High
$13.50
$16.00
$0.97
---
$12.00
$15.00
$0.96
$1.82
$2.35
New Valuation:
Old Valuation:
program success.
Full Story
Table of Contents
Q1/12 Big Beat - TD Canada Trust Strong, Wholesale Rebound - Dividend Increased 6%
Event
■ TD's cash operating earnings increased 8% YOY to $1.86 per share, above our expectations
of $1.72 per share and IBES consensus of $1.76 per share. Earnings were driven by record
earnings from TDCT and a rebound in wholesale. Earnings quality improved sequentially,
with securities gains representing only $0.03 per share of earnings versus $0.15 per share in
the previous quarter.
■ Operating ROE: 16.8%, RRWA: 2.90%, CET1: 7.1%E.
Implications
■ TD announced a 6% annual dividend increase to $2.88 per share from $2.72 per share.
■ We are increasing our 2012E and 2013E EPS by $0.20 per share each to $7.30 per share and
$8.00 per share, reflecting strong results this quarter. We are increasing our share price
target to $100 from $93 based on higher earnings estimate.
Recommendation
■ Maintain 1-Sector Outperform rating based on an industry-high capital generation rate
(RRWA), low balance sheet risk, low earnings volatility, and a strong competitive
positioning.
Pertinent Data
New
Rating:
Risk:
---
Old
1-SO
Low
Target:
1-Yr
$100.00
$93.00
2-Yr
$110.00
$105.00
EPS12E
$7.30
$7.10
EPS13E
$8.00
$7.80
New Valuation:
-Old Valuation:
Full Story
Table of Contents
19
Portfolio Strategy Comment
Portfolio Strategy
Asset Mix & Model Portfolios March Update
Vincent Delisle, CFA - 514-287-3628
[email protected]
Jean-Michel Gauthier - 514-287-3661
[email protected]
Event
■ Monthly asset mix and model portfolio updates. The Strategic Edge
Portfolio (SEP) is our large cap equity portfolio. The U.S. sector portfolio
reflects our pure-play sector strategy views.
Table of Contents
Implications
■ The SEP was up 1.9% in February versus a 1.67% gain for the S&P/TSX
(total return). Relative performance is flattish so far in 2012; the SEP is
outperforming by +228 bp over the last six months. The U.S. sector
portfolio advanced 4.12% in February (S&P 500 index +4.06% price only).
■ Our strategy stance remains pro-cyclical, but our recommended asset mix
and model portfolios are carrying lower cyclical exposure than in Q4/11.
Recommendation
■ The "risk-on" theme of the past five months is looking stretched, and we are
focused on monitoring how long equity/cyclical outperformance can be
sustained. We believe it is currently premature to switch to an outright
defensive/low beta stance. We expect bond yields to adjust higher.
■ Seasonality, a positive reversal in equity funds flows, and steady U.S.
payroll improvements should support equity sentiment in the near term.
Asset Mix & Model Portfolios - March 2012 Update
Equities Edge Bonds in February, TSX Sector Leadership Broadens
■ Global equities posted another strong showing in February with the MSCI
World AC index advancing 4.8% (in USD). Germany (+8.5%/USD), Brazil
(+6.4%/USD), and Hong Kong (+6.3%/USD) outperformed last month,
while the U.S. (+4.1%), Canada (+3.3%/USD; +1.5%/CAD), and Mexico
(+2.9%/USD; +1.1%/MXN) lagged. Year-to-date, the MSCI World AC is up
10.8% versus 8.6% for the S&P 500 and 9.0% for the TSX (+5.8% in CAD).
■ Equities outperformed bonds for a second consecutive month in February.
The TSX (+1.67%; total return) edged the DEX Universe Bond Index
(-0.4%; total return) by 207 bp last month and the S&P 500's performance
(+4.3%; total return) came in 691 bp ahead of U.S. long-term treasuries
(TLT index -2.6% total return). See Exhibits 1 and 2 for global monthly and
YTD equity performances in C$ and US$.
■ Materials (-1.8%) trailed the TSX in February, while Discretionary-Autos
(+5.5%), Financials (+3.4%), and Energy (+2.5%) outperformed. TSX
leadership was broader with circa 60% of sectors (based on weighting)
outperforming (was 25% in January). U.S. Technology, Energy, Financials,
and Discretionary outpaced the S&P 500 last month. Year-to-date, Utilities
and Telecom are the only two U.S. sectors posting declines. Please refer to
Exhibits 4 and 5 for a breakdown of sector returns.
■ Oil (WTI +8.7%) outperformed the commodity complex in February on the
back of mounting geopolitical tensions and improving global growth outlook.
Natural gas (+4.5%), silver (+4.0%), and copper (+2.1%) also tallied gains.
Gold (-2.3%) bucked the trend. Year-to-date, silver (+24%) is leading.
The Bank of Nova Scotia is the parent company and a related issuer of Scotia Capital Inc. This issuer owns 5% or more
of the total issued share capital of the Bank of Nova Scotia.For Reg AC Certification and important disclosures see
Appendix A of this report. Analysts employed by non-U.S. affiliates are not registered/qualified as research analysts with
FINRA in the U.S.
20
Exhibit 1 - Global Equity Returns (C$) - 2012 (price only; February 29, 2012)
0%
5%
10%
15%
20%
Exhibit 2 - Global Equity Returns (US$) - 2012 (price only; February 29. 2012)
25%
0%
U.K.
U.K.
U.S. (S&P 500)
U.S. (S&P 500)
February
YTD
Canada (TSX)
5%
10%
15%
20%
Canada (TSX)
China
China
MSCI AC World
MSCI AC World
Mexico
Mexico
Australia
Australia
Hong Kong
Hong Kong
MSCI EM
MSCI EM
MSCI LatAm
MSCI LatAm
Germany
Germany
India
India
Brazil
Brazil
0%
5%
10%
15%
20%
25%
Source: Scotiabank GBM, Bloomberg.
0%
-20
-10
0
10
20
30
40
50
Spreads (BAA) (in bp)
U.S. 2-yr (in bp)
U.S. 10-yr (in bp)
CDA LT Bonds Return
U.S. LT Bonds Return
DXY
Silver
Gold
February
Gasoline
YTD
Copper
CAD-USD
25%
20%
15%
10%
5%
0%
-5%
-10%
WTI
5%
Exhibit 3 - Bonds, Currencies & Commodities: February 2012 Performance (as at February 29, 2012)
30%
February
YTD
Japan
Japan
25%
10%
15%
20%
25%
30%
21
Exhibit 4 - TSX Sector Performance - 2012 (price only; February 29, 2012)
-5%
0%
5%
10%
Exhibit 5 - S&P 500 Sector Performance - 2012 (price only; February 29, 2012)
15%
-5%
Telecom
0%
5%
10%
15%
Utilities
Staples
Telecom
Underperformers
Industrials
Staples
Underperformers
Utilities
Gold
Energy
TSX
S&P 500
Energy
YTD
February
Health Care
Technology
Financials
20%
Industrials
YTD
Outperformers
Outperformers
February
Materials
Materials
Discretionary
Discretionary
Financials
Metals & Mining
Technology
Health Care
-5%
0%
5%
10%
-5%
15%
0%
5%
10%
15%
20%
Asset Mix: Reiterate Equity Overweight for Q1/12
■ Following January and February's high beta rally, equity total returns are now expected to be
in the low-single digits (versus 8%-10% at the start of January). "Risk-on" sentiment has
prevailed so far in 2012, and both S&P 500 technicals and seasonality remain supportive.
Low bond yields also point to an equity overweight stance, a signal that is corroborated by
our tactical asset mix model (see Exhibit 7). Still, sustained equity outperformance could be
challenged by slowing U.S. macro momentum post Q1, weaker Chinese data, and Euro
noise. We are sticking to a modest equity overweight bias (see Exhibit 6).
Exhibit 6 - Scotiabank Asset Mix - Q1/2012 (March update)
Equities
Canada (TSX)
U.S. (S&P 500)
Int'l (Europe, Japan)
EM-Asia
EM-LatAm
Bonds
Government
Corporate
Exhibit 7 - Tactical Asset Mix Model* (Recommended Equity Weighting)
5%
20%
18%
10%
6%
22%
19%
9%
7%
6%
Expected
Total Return
Next 12-M
4%
3%
4%
3%
2%
2%
40%
36%
-3%
30%
10%
22%
14%
-4%
2%
0%
2%
1%
Asset Mix
Benchmark Recommended
60%
62%
85%
85%
Overweight Equities
80%
80%
75%
75%
70%
70%
65%
65%
60%
60%
55%
55%
50%
50%
45%
45%
40%
40%
Overweight Bonds
** In US$
*Model Based on ISM, Risk-On/Risk-Off, LEI, S&P500 200 Day MA
Neutral = 60% Equity/40% Bond Split
Feb-12
May-12
Nov-11
Aug-11
Feb-11
May-11
Nov-10
Aug-10
Feb-10
May-10
Nov-09
Aug-09
Feb-09
May-09
Nov-08
Aug-08
Feb-08
May-08
Nov-07
Aug-07
Feb-07
35%
May-07
35%
Nov-06
Cash (91-D Tbills)
22
Strategic Edge Portfolio (SEP) – March Update
■ The Strategic Edge Portfolio (SEP) was up 1.90% in February versus +1.67% for the
S&P/TSX (total return). Relative performance is flattish so far in 2012; the SEP has
outperformed by 228 bp since September. See Exhibit 8 for historical SEP performance.
Exhibit 8 - Strategic Edge Portfolio Performance (Total Return)
Period
February
3-M
6-M
YTD
1-Yr
Performance -- Total Return (%)
SEP
S&P/TSX
Value Added (bp)
1.90%
1.67%
23
4.8%
4.3%
50
2.7%
0.4%
228
6.0%
6.1%
-8
-6.3%
-8.1%
181
3-Yr
Inception (June-05)
24.5%
9.7%
19.2%
6.5%
536
322
2005
2006
2007
2008
2009
2010
2011
13%
16%
11%
-28%
42%
24%
-5%
Annual (%)
15%
17%
10%
-33%
35%
18%
-9%
-156
-144
156
495
704
648
328
29-Feb-12
CAGR (%)
■ February's relative performance. Our Financials/Discretionary-Autos overweight and
Materials-Gold/Mining underweight added value. However, our Energy underweight stance,
MRU overweight, RIM exposure, and absence in the Healthcare space hurt.
■ Strategy view. The "risk-on" rally has produced significant returns since Q3/11, and 2012 is
off to a great start for equities. Risk appetite is more visible and Q1/12 has been a stock
picker's market, unlike the high beta/low beta mantra witnessed last year. In our opinion, the
"risk-on" theme of the past five months is looking stretched, and we are focused on
monitoring how long equity/cyclical outperformance can be sustained. Our Q1/12 strategy
stance remains pro-cyclical, but our recommended asset mix and equity model portfolios are
carrying lower cyclical exposure than in Q4/11. The SEP's beta is currently hovering near 1
versus 1.15'ish last October. Our next tactical move will likely be to further reduce cyclical
exposure, but we believe it is currently premature to switch to an outright defensive/low beta
stance. Seasonality, a positive reversal in equity funds flows, and steady U.S. payroll
improvements should support equity sentiment in the near term.
■ Pros and cons. Among the positive equity/cyclical drivers, the ISM manufacturing Index
and the New Orders-to-Inventory spread are above their Q4 averages, global monetary
policy is easing, the S&P 500 is trading above its 200-day moving average, and equity flows
have turned positive. On the downside, forward earnings revisions are still vulnerable, profit
margins are peaking, and U.S. "positive macro surprises" are poised to moderate. In addition,
our risk-on/risk-off indicator is looking overbought, hinting that the equity over bond
outperformance will moderate. The risk-on/risk-off indicator tracks the three-month S&P
500-to-Bond relative performance (S&P 500 +10%; TLT -1% last three months). The equity
rally looks overbought, but we believe it is currently too early to fight the S&P 500.
■ March SEP update. No sector strategy changes: the SEP has more U.S. beta than
China/commodity beta. We are switching IMN for LUN; reducing POT, redirecting part of
RIM into GIBa, shifting some BBD into MG and FTT, and raising Banks (adding to TD and
RY). We are also reducing MRU, raising SC, and adding to Insurance as we anticipate
(again) a back-up in long-term yields. Please refer to Exhibit 9 for SEP details.
23
Exhibit 9 - Strategic Edge Portfolio (As at February 29, 2012)
February 29, 2012
Sector / Company
S&P/TSX (price-only)
Cash (XSB Short Term Bond ETF)
Weighting
SE Portfolio S&P/TSX
February
Performance
Recommendation
1.5%
1.5%
-0.4%
SEP Sector Strategy (weightings excluding cash holdings)
Financials
RY
TD
CM
BNS
MFC
SLF
AFL-N
REF-u
BPO
34.0%
7.9%
9.1%
4.9%
4.7%
2.0%
1.1%
1.8%
0.9%
1.1%
29.7%
5.4%
4.9%
2.0%
4.0%
1.5%
0.9%
n/a
0.2%
0.2%
3.4%
6.3%
4.2%
0.6%
3.5%
5.7%
8.3%
-2.0%
2.7%
-0.7%
+4.3%
ROYAL BANK OF CANADA
TD BANK
CIBC
BANK OF NOVA SCOTIA
MANULIFE FINANCIAL
SUN LIFE
AFLAC
CANADIAN REIT
BROOKFIELD PROPERTIES
Staples
MRU/A
SC
3.1%
0.9%
2.1%
2.6%
0.3%
0.6%
-1.3%
-6.4%
1.3%
+0.5%
METRO
SHOPPERS DRUG MART
Telecom
RCI/B
QBR/B
T
VZ-N
6.2%
2.4%
1.0%
1.4%
1.4%
4.8%
1.1%
0.1%
0.1%
n/a
-0.2%
-1.6%
1.9%
1.9%
1.2%
+1.4%
ROGERS COMMUNICATIONS
QUEBECOR INC.
TELUS CORPORATION
VERIZON
Utilities & Pipelines
TRP
TRANSCANADA
IPL-u
INTER PIPELINE FUND
ENB
ENBRIDGE
5.8%
2.7%
1.2%
1.7%
7.1%
2.0%
0.3%
2.0%
3.1%
5.6%
8.1%
1.1%
-1.3%
Discretionary
THI
TIM HORTONS
2.0%
1.9%
4.1%
0.6%
5.5%
9.4%
-2.1%
Technology
RIM
RESEARCH IN MOTION
GIB/A
CGI GROUP
2.2%
0.3%
1.9%
1.2%
0.4%
0.3%
-2.1%
-16.1%
4.6%
+1.0%
Energy (Ex-Pipelines)
PGF
PENGROWTH ENERGY
CNQ
CANADIAN NATURAL RESOURCES
TLM
TALISMAN ENERGY INC.
TCW
TRICAN WELL SERVICE
CRESCENT POINT
CPG
SU
SUNCOR
CVE
CENOVUS
20.6%
1.8%
3.3%
2.0%
0.9%
2.8%
5.4%
4.1%
21.8%
0.2%
2.7%
0.9%
0.2%
0.9%
3.7%
1.9%
2.5%
0.4%
-7.5%
13.8%
8.7%
2.2%
3.1%
5.1%
-1.2%
Materials
18.6%
9.7%
3.9%
3.3%
1.1%
1.2%
8.9%
1.6%
1.7%
3.0%
2.6%
21.7%
13.9%
3.1%
2.6%
0.7%
0.4%
7.8%
0.2%
0.7%
2.6%
0.9%
-1.8%
-3.2%
-4.3%
-1.1%
-0.5%
-10.6%
n/a
2.2%
3.1%
-2.0%
4.1%
-3.0%
7.5%
3.1%
1.5%
2.3%
0.4%
5.5%
2.3%
0.3%
0.8%
0.4%
-0.9%
0.8%
5.0%
13.8%
2.4%
Gold & Precious Metals
ABX
G
ELD
IMG
BARRICK GOLD
GOLDCORP
ELDORADO GOLD
IAMGOLD
Materials (Ex-Gold/Precious Metals)
LUN
FM
POT
AGU
LUNDIN MINING CORP
FIRST QUANTUM
POTASH CORP
AGRIUM
Industrials
CANADIAN NATIONAL RAILWAY
CNR
FINNING
FTT
MG
MAGNA
BBD/B BOMBARDIER
Source: Scotiabank GBM.
New Addition
IMN Out
+2.0%
24
U.S. Sector Portfolio
■ The U.S. sector portfolio (+4.12%) performance slightly edged the S&P 500 index (+4.06
price only) in February. See Exhibit 10 for historical performance data since inception
(December 2008).
Exhibit 10 - U.S. Sector Portfolio Historic Performance (as at February 29, 2011)
Performance (%) - price only
Portfolio
S&P500
Value Added (bp)
29-Feb-12
Period
February
3-M
6-M
1-Yr
YTD
2-Yr
3-Yr
Since inception
4.12%
9.55%
12.3%
2.5%
8.7%
24.8%
86.9%
56.4%
4.06%
9.5%
12.0%
2.9%
8.6%
23.6%
85.8%
51.2%
6
3
30
-38
7
115
116
525
■ March changes: No changes. We are carrying a very modest cyclical tilt as we do not see a
compelling high beta opportunity. See Exhibit 11 for model portfolio details.
Exhibit 11 - U.S. Sector Portfolio (as at February 29, 2012)
Sector
Financials
Industrials
Technology
Discretionary
Materials
Energy
Telecom
Health Care
Staples
Utilities
S&P 500
Weighting (%)
Performance
Portfolio S&P 500
14.7%
14.2%
11.3%
10.8%
20.7%
20.2%
11.4%
10.9%
3.1%
3.6%
11.1%
12.1%
3.2%
2.7%
11.3%
11.3%
10.8%
10.8%
2.4%
3.4%
February
4.8%
2.3%
7.2%
4.5%
-0.5%
5.5%
3.7%
1.0%
3.4%
0.0%
4.1%
March-12
Recommendation
0.5%
0.5%
0.5%
0.5%
-0.5%
-1.0%
0.5%
0.0%
0.0%
-1.0%
Change
From Prior
-
25
Industry Comment
Autos & Components
Neil Forster, MBA, CFA - 416-863-2899
February U.S. Auto Sales - Kicking
into Overdrive
[email protected]
Andrew Lee, CA - 416-945-6696
[email protected]
Event
■ Automotive OEMs reported very strong U.S. vehicle sales for the month of
February yesterday.
Table of Contents
Implications
■ The seasonally adjusted annual rate (SAAR) for light vehicles came in at
15.0 million units, which was well ahead consensus of 14.2 million.
■ We left our industry sales and production volume forecasts unchanged, but
believe there could be upside to our numbers if the current sales pace can be
maintained.
Recommendation
■ Our recommendations within our coverage universe remain unchanged.
Universe of Coverage
Price
LNR-T
MGA-N
MRE-T
C$18.24
US$48.87
C$9.70
Rating
Risk
1-Yr
ROR
2-Yr
ROR
1-SO
1-SO
1-SO
High
High
High
$22.50
$61.00
$13.50
25.1%
27.1%
39.2%
$26.00
$70.00
$15.50
46.1%
47.7%
59.8%
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
26
Industry Comment
Big Upside Surprise to U.S. Sales in February
Jul-11
Jan-12
Jan-11
Jul-10
Jul-09
Jan-10
Jul-08
Jan-09
Jan-08
Jul-07
Jul-06
Jan-07
Jul-05
Jan-06
Jul-04
Jan-05
Jan-04
U.S. Light Vehicle Sales (SAAR)
■ February U.S. auto sales shot the lights out. February U.S.
light vehicle sales came in at a SAAR of 15.0M units, up Exhibit 1 - U.S. Light Vehicle Sales (SAAR)
13.5% YOY and 6.4% vs. January, 2012 (Exhibit 1). SAAR
was well ahead of Bloomberg consensus analyst estimates of
Incentives - Employee Discount Given to the Public
22
14.2M units. This marks the sixth consecutive month that
U.S. light vehicle sales exceeded a SAAR of 13.0M units, and
20
the second consecutive month of sales in excess of a 14M unit
18
SAAR.
Cash for Clunkers
■ An improving economy, pent-up demand given average
16
vehicle age at an all-time high (i.e., ~11 years), improving
credit availability, and consumers seeking more fuel-efficient
14
vehicles given rising gasoline prices were the main reasons
12
behind the strong sales performance in February.
■ Chrysler still showing phenomenal growth. Chrysler Group
10
sales were up 40% YOY, reflecting its strongest February
performance since 2008. Sales were ahead of consensus
8
analyst estimates, which called for a 26% gain. Sales were
strong across all brands (i.e., Chrysler – up 114% YOY, Jeep
– up 30% YOY, Dodge – up 27% YOY). Both car and truck
sales were strong, up 126% YOY and 21% YOY,
Source: WardsAuto.com
respectively.
■ Ford also beat consensus expectations reflecting strong
Focus sales. Ford Motor Company sales were up 14% YOY (vs. consensus of a 9% gain).
The solid performance was mainly attributable to strong sales of the Ford Focus, which more
than doubled YOY and contributed ~40% of total Ford Motor Company sales growth.
Trucks and cars performed solidly, up 21% and 16% respectively. Sales of utility vehicles
(SUVs and CUVs) were up 5% YOY.
■ General Motors beat the Street in the face of a tough comparison period. GM registered
a 1% YOY sales increase, ahead of consensus expectations of a 5% drop. Retail sales were
down 4% vs. a very strong February, 2010. The Chevrolet brand was a bright spot for GM,
with sales up 6% YOY. GMC sales were flat, Buick was down 11%, and Cadillac was down
27%. Compact cars were a driver for GM as that segment was up 43% YOY. Even with a
challenging comparison period in part due to heavy incentive spending last February, GM
beat expectations and is optimistic for the remainder of the year.
■ Japanese OEMs continued their recovery from post-earthquake lows. Sales results at
Japan-based OEMs increased in February as inventory restocking efforts following last
March’s earthquake bore fruit. Sales at both Toyota and Honda were up 12% YOY, building
on last month’s strong performance. Nissan’s sales were up 16% YOY.
■ The story at other major OEMs is mainly positive, with sales up 34% at Volkswagen, and
26% at Hyundai/Kia.
■ Cars were the clear winners this month, driven by rising fuel prices. U.S sales growth in
February was driven mainly by cars, which were up 21.6% vs. last year. More specifically,
small and compact cars performed exceptionally well, as rising gasoline prices appear to be
driving a shift in buying patterns towards smaller, more fuel-efficient vehicles. The small car
segment accounted for 20.6% of total industry sales in February vs. 19.9% in January and
16.1% in December 2011. Conversely, trucks were up a more modest 5.4%, and accounted
for 46.6% of total industry sales vs. 48.6% in January and 52.9% in December.
27
Industry Comment
■ Market share trends stable for now. Detroit 3 (D3) market share increased slightly vs. last
month (Exhibit 2), reflecting gains at Chrysler (Exhibit 3) and Ford (Exhibit 4), partially
offset by a decline at GM (Exhibit 5). Market shares at major Japanese OEMs also increased
slightly as Toyota and Honda continued their post-quake recoveries (Exhibits 6 and 7). For
now, we continue to believe that the D3 will face market share headwinds this year, as the
major Asian-based OEMs continue their recovery. This is consistent with the outlook
presented by IHS Automotive at the Detroit Auto Show, and Magna’s outlook for declining
content per vehicle in 2012 due to negative mix, as D3 production grows at a slower pace
than overall North American industry production volumes.
Exhibit 2 - Detroit 3 U.S. Market Share
Exhibit 3 - Chrysler U.S. Market Share
16%
Chrysler U.S. Market Share (%)
60%
55%
50%
45%
12%
10%
8%
Jan-09
Jan-10
Jan-11
Jan-12
Jan-10
Jan-11
Jan-12
35%
GM U.S. Market Share (%)
22%
20%
18%
16%
14%
30%
25%
20%
Jan-06
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-05
15%
12%
Jan-04
Ford U.S. Market Share (%)
Jan-09
Exhibit 5 - GM U.S. Market Share
Jan-08
Exhibit 4 - Ford U.S. Market Share
Jan-08
Jan-07
Jan-07
Jan-06
Jan-04
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
6%
Jan-04
40%
14%
Jan-05
Detroit 3 U.S. Market Share (%)
65%
28
Industry Comment
Exhibit 6 - Toyota U.S. Market Share
Exhibit 7 - Honda U.S. Market Share
14%
Honda U.S. Market Share (%)
18%
16%
14%
12%
10%
8%
■ Industry remains disciplined on incentives. GM estimated on its conference call that
industry incentives declined about 1% year over year. In terms of its own performance,
management indicated that incentive spending in January was 9.5% of average transaction
prices (ATP), down 0.5% month over month and about 3.5% year over year. Ford mentioned
on its call that industry pricing remained flat January to February, and was up ~$500/vehicle
YOY. It also stated that its own incentive spending was stable vs. last year. TrueCar.com, an
online vehicle purchasing website, estimated that incentives rose 0.6% month over month in
February, but declined 4.2% YOY. It also estimates that ATP’s were up ~7% YOY.
Generally, the industry appears to be holding the line on pricing with most participants
acting in a disciplined matter.
Inventories Rise, but Remain Well Below Historical Averages
■ Inventories rising, but the industry remains disciplined1. Inventories have been trending
higher in recent months on both a unit and days sales basis (Exhibits 8 and 9). This is partly
due to Asian-based OEMs rebuilding inventories off of post-earthquake lows (Exhibit 10 and
11), although the trend in D3 inventories is also pointing up (Exhibit 12 and 13).
■ While inventories are rising, they remain well below pre-downturn levels that were marked
by a prolonged period of overproduction. Generally speaking, we believe the industry
remains disciplined in its inventory management.
1
Note: inventory data is as of January 2011.
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
6%
Jan-04
10%
12%
Jan-04
Toyota U.S. Market Share (%)
20%
Source: WardsAuto.com.
1.5
Exhibit 10 - Asian OEM U.S. Light Vehicle Inventory - Units
1.4
1.2
1.0
0.8
0.6
80
70
60
50
40
30
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-11
90
Mar-11
Exhibit 11 - Asian OEM Light Vehicle Inventory - Days Sales
Mar-10
Mar-10
Mar-09
2.0
Mar-08
2.5
Mar-07
3.0
Mar-06
3.5
Mar-05
4.0
Mar-04
4.5
Total U.S. Light Vehicle Inventory (Days
Sales, 3-Month Moving Average)
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Total U.S. Light Vehicle Inventory (Millions of
Units, 3-Month Moving Average)
Exhibit 8 - U.S. Light Vehicle Inventory - Units
Asian OEM U.S. Inventory of Light Vehicles
(Days Sales, 3-Month Moving Average)
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Asian OEM U.S. Inventory of Light Vehicles
(Millions of Units, 3-Month Moving Average)
29
Industry Comment
Exhibit 9 - U.S. Light Vehicle Inventory - Days Sales
90
80
70
60
50
40
30
Industry Comment
70
60
Sales and Production Outlook - Leaving Our Estimates Unchanged For
Now, But Upside Potential Exists If Sales Maintain Their Brisk Pace
■ Forecast unchanged with potential upward bias. We raised our North American industry
vehicle production forecast when we put out our Q4/11 Autos & Components preview a
couple weeks ago (see our Daily Edge comment titled “Q4/11 Preview - The Trend Is Your
Friend” published on ScotiaView on February 16 for more details). We are leaving our
forecast unchanged for now, in part because Magna is still assuming North American light
vehicle industry volumes of 13.8M units for 2012. Another reason is that temporary factors
made it difficult to ascertain whether the strong February sales performance is sustainable.
These factors are described below:
January and February are seasonally weak months, and as such, small changes in unit
sales can have a magnified impact on the SAAR number.
February had an extra selling day, as this is a leap year.
Weather was unseasonably warm, which may have brought more people out to the
showrooms. GM and Ford downplayed this impact on their conference calls, but we
note that the Ford Mustang and Chevrolet Camaro, which are typically seasonally
strong in the spring, sold well in February, up 99% and 11% respectively.
■ We note that both GM and Ford have left their 2012 U.S. vehicle industry sales forecasts
unchanged. GM mentioned on its conference call that it is looking like the industry will
come in at the upper end of its guidance range.
■ We are following the path of GM and Ford and leaving our forecast unchanged for the time
being; we believe there could be upside to our numbers if the industry is able to maintain the
strong sales performance of the last couple months. A graphical depiction of our North
American sales and production forecast is provided on the next page (Exhibits 14 and 15):
Mar-11
Mar-10
Mar-09
50
Mar-08
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
0.5
80
Mar-07
1.0
90
Mar-06
1.5
100
Mar-05
2.0
110
Mar-04
2.5
Detroit 3 U.S. Inventory of Light Vehicles
(Days Sales, 3-Month Moving Average)
Exhibit 13 - Detroit 3 U.S. Light Vehicle Inventory - Days Sales
3.0
Mar-04
Detroit 3 U.S. Inventory of Light Vehicles
(Millions of Units, 3-Month Moving Average)
Exhibit 12 - Detroit 3 U.S. Light Vehicle Inventory - Units
31
Industry Comment
Source: WardsAuto.com; Scotiabank GBM estimates.
NA Prod'n
2.5
2.0
Q1/15E
Q1/14E
Q1/13E
Q1/12E
1.5
Q1/11
2015E
2013E
2011E
2009
2007
2005
2003
2001
1999
1997
7.5
3.0
Q1/10
9.5
3.5
Q1/09
11.5
4.0
Q1/08
North America Prod'n
13.5
U.S Sales
Q1/07
15.5
4.5
Q1/06
U.S. Sales
17.5
NA Sales
5.0
Q1/05
19.5
5.5
Q1/04
North America Sales
North America Light Vehicle Production,
Sales, U.S. Light Vehicle Sales (M Units)
Exhibit 15 - Quarterly Sales and Production
21.5
1995
North America Light Vehicle Production,
Sales, U.S. Light Vehicle Sales (M Units)
Exhibit 14 - Annual Sales and Production
Source: WardsAuto.com; Scotiabank GBM estimates.
The Macro Environment Continues to Co-operate
Source: U.S. Bureau of Economic Analysis.
Jan-12
Jan-09
Jan-06
Jan-03
Jan-00
Jan-97
Jan-94
Jan-91
Jan-88
Jan-85
Jan-82
Jan-79
Jan-76
U.S. SAAR Per Capita (over 16)
New Vehicles per 1,000 Population
■ We have previously stated that we believe substantial pent-up demand for vehicles exists in
the U.S., as evidenced by (1) U.S. per capita vehicle sales that
remain well below the historical average (Exhibit 16), and (2) Exhibit 16 - U.S. Per Capital Light Vehicle Sales
average vehicle age at an all-time high of 10.8 years. We have
also stated that the economy needs to cooperate in order for
120
this pent-up demand to come to market.
■ We believe the economy is cooperating. The U.S. Consumer
100
Confidence Index came in at 70.1 in February, up from 61.5
in January. We note that historically, the U.S. Consumer
Confidence Index and U.S. light vehicle sales have shown a
80
strong positive correlation (Exhibit 17).
■ The unemployment rate has also been coming down in recent
60
months, albeit slowly. We note that historically, auto sales
and the unemployment rate have exhibited a strong inverse
40
correlation (Exhibit 18).
■ We believe that auto sales can continue to thrive in a slower
growth environment given pent-up demand, as long as the
20
economy remains in positive territory. Should a recession
ensue, all bets would be off. However, this is not our
expectation.
32
Industry Comment
Jan-12
Jan-10
Jan-08
Jan-06
Jan-04
Jan-02
Jan-00
Jan-98
Jan-96
Jan-94
-40
Jan-92
8.00
5
5%
Unemployment Rate-->
0
0%
Mar-10
0
Mar-07
10.00
Mar-04
40
U.S. Consumer Confidence Index-->
10%
Mar-01
12.00
10
Mar-98
80
15%
Mar-95
14.00
15
Mar-92
120
Mar-89
16.00
Mar-86
160
20%
<--U.S. Light Vehicle SAAR
Mar-83
18.00
20
Mar-80
200
<--U.S. Light Vehicle SAAR
U.S. Light Vehicle SAAR (3-Month Rolling
Average) vs. U.S. Unemployment Rate
Exhibit 18 - U.S. Light Vehicle Sales vs. the U.S. Unemployment Rate
U.S. Consumer Confidence Index
20.00
Jan-90
U.S. Light Vehicle SAAR (3-Month
Rolling Average)
Exhibit 17 - U.S. Consumer Confidence Index
Source: WardsAuto.com; U.S. Bureau of Labor Statistics.
Source: The Conference Board, WardsAuto.com.
Magna Key Vehicle Outlook
■ Sales of Magna’s key vehicles were up 4.8% vs. last February (Exhibit 19). We believe the
performance is consistent with management’s outlook provided at the Detroit Auto Show,
and reiterated at the time of the Q4/11 results, which calls for lower content per vehicle in
2012 due to negative mix, reflecting a more muted outlook for D3 volume growth vs. total
industry sales growth. Production of Magna’s key vehicles was up 7.2% in January (Exhibit
20).
Exhibit 19 - Magna Key Vehicle Trends - U.S. Sales
Feb-12
Month Ende d
Jan-12
Feb-11 Seq. % Ch YOY% Ch
3-Month Sum for Pe riod Ende d
Feb-12
Feb-11 YOY% Ch
LTM Sum for Pe riod Ende d
Feb-12
Feb-11 YOY% Ch
Pla tform /Ve hicle
General Motors
GMT900 Platform (Full-Size SUVs and Pickups)
Lambda Platform (Buick Enclave, Chevrolet Traverse)
Chevrolet Equinox
GMC Terrain
Chevrolet Cruze
58,133
18,763
17,851
8,086
20,429
49,571
14,634
13,662
5,649
15,050
59,154
22,279
15,434
7,190
18,709
17.3%
28.2%
30.7%
43.1%
35.7%
-1.7%
-15.8%
15.7%
12.5%
9.2%
199,303
55,633
49,708
21,459
52,159
196,187
65,729
51,045
22,862
44,247
1.6%
-15.4%
-2.6%
-6.1%
17.9%
794,263
237,254
196,506
84,732
233,837
754,050
241,848
160,686
65,987
124,124
5.3%
-1.9%
22.3%
28.4%
88.4%
Ford
Edge
Fusion
10,535
21,773
8,315
13,614
10,138
23,111
26.7%
59.9%
3.9%
-5.8%
30,927
57,009
30,348
60,086
1.9%
-5.1%
121,496
245,997
122,756
228,038
-1.0%
7.9%
Chrysler
RT Platform (Chrysler T&C, Dodge Grand Caravan, VW Routan)
Jeep Grand Cherokee
Dodge Ram
22,948
12,724
22,734
14,690
10,683
18,064
19,169
8,667
20,294
56.2%
19.1%
25.9%
19.7%
46.8%
12.0%
59,669
40,753
67,219
59,719
29,032
57,584
-0.1%
40.4%
16.7%
221,001
189,096
264,403
237,293
100,156
226,218
-6.9%
88.8%
16.9%
213,976
163,932
204,145
30.5%
4.8%
633,839
616,839
2.8%
2,588,585
2,261,156
14.5%
TOTAL
Source: WardsAuto.com.
33
Industry Comment
Exhibit 20 - Magna Key Vehicle Trends - North American Production
M on th En de d
Dec -11
Jan-11 S eq. % Ch Y OY % Ch
Jan-12
3-M on th S u m for P e rio d End e d
Jan-12
Jan-11 Y O Y % Ch
L TM S u m for P e rio d
Jan-12
Jan-11
P la tform /V e hicle
G eneral M otors
G M T900 P latform (F ull-S iz e S UV s and P ic k ups )
Lam bda P latform (B uic k E nc lave, Chevrolet Travers e)
Chevrolet E quinox
G M C Terrain
Chevrolet Cruz e
77,661
17,915
21,375
10,831
23,551
62,937
19,459
18,022
8,253
12,436
67,562
22,767
19,099
9,519
22,314
23.4%
-7.9%
18.6%
31.2%
89.4%
14.9%
-21.3%
11.9%
13.8%
5.5%
219,978
54,080
62,436
30,512
55,524
214,692
62,139
57,138
26,098
61,147
2.5%
-13.0%
9.3%
16.9%
-9.2%
1,009,853
275,750
237,673
111,996
284,056
968,532
283,358
187,156
81,460
157,659
F ord
E dge
F us ion
15,445
15,970
12,743
22,694
13,516
25,735
21.2%
-29.6%
14.3%
-37.9%
45,227
64,919
36,899
67,736
22.6%
-4.2%
173,214
284,345
151,255
273,153
Chry s ler
RT P latform (Chry s ler T& C, Dodge G rand Caravan, V W Routan)
Jeep Grand Cherok ee
Dodge Ram
23,779
20,976
33,964
26,323
16,310
25,703
23,990
11,527
27,790
-9.7%
28.6%
32.1%
-0.9%
82.0%
22.2%
78,016
52,976
88,834
63,646
39,290
76,476
22.6%
34.8%
16.2%
300,129
251,326
358,932
328,864
141,950
319,914
261,467
224,880
243,819
16.3%
7.2%
752,502
705,261
6.7%
3,287,274
2,893,301
TO TA L
■ Our comparative valuation table for our auto parts coverage universe is provided below
(Exhibit 21):
Exhibit 21 - Comparative Valuation Table for Auto Parts Stocks
Auto Pa rts Com pa nie s
Com posite a ve ra ge
Magna
Linamar
Martinrea
Johnson Controls
BorgW arner
Lear Corp
Gentex
Autoliv
TRW
Tenneco
American Axle
Meritor
Dana
1
3
Sha re Price :
Ticke r Ma r. 1, 2012
MGA
LNR
MRE
JCI
BW A
LEA
GNTX
ALV
TRW
TEN
AXL
MTOR
DAN
48.87
CAD 18.24
CAD 9.70
33.41
84.19
46.36
24.30
68.03
45.48
38.75
11.85
7.40
16.33
Based on calendar YE 2012E or closest proxy
Last completed year to next year.
2
Divide nd Price /
Yie ld BVPS
2.2
0.7%
2.4%
1.8%
0.0%
1.9%
0.0%
0.0%
2.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
1.4
1.3
1.5
2.1
4.5
1.9
3.4
1.8
2.1
n.m.
n.m.
n.m.
1.3
Adjuste d
EV/
EBITDA²
5.9
4.6
4.1
4.7
8.4
9.7
3.8
9.4
5.3
4.0
5.3
5.9
5.5
3.4
2 Ye a r
2 Ye a r 3 Ye a r
EPS
Sa le s EBITDA
P/E1 Grow th 3 Grow th 3 / Sa le s
10.5
19.4%
11.2%
10.4%
LTM
ROIC
17.0%
10.4
9.6
7.7
12.1
15.4
9.2
19.0
10.7
7.7
11.5
5.9
6.4
8.5
15.9% -15.4%
10.4% 38.8%
10.7% 26.5%
15.9% 33.2%
24.1% 31.6%
22.2% -70.5%
17.1% -83.9%
19.9%
-2.2%
n.m. 18.6%
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
14.9%
-4.5%
8.7%
19.6%
49.3%
17.2%
21.3%
0.6%
15.1%
2.1%
n.m.
26.2%
7.0%
46.0%
38.8%
Adjusted for pension, OPEB and operating leases.
Source: Company reports; Scotiabank GBM estimates for MGA, MRE, LNR; Reuters; Bloomberg.
2.1%
22.1%
31.1%
7.4%
12.4%
3.9%
16.0%
4.7%
7.0%
12.6%
11.0%
4.6%
6.8%
6.2%
12.0%
6.4%
5.8%
13.2%
6.2%
26.7%
11.8%
9.7%
8.4%
13.0%
5.0%
8.2%
De bt/
Ca p
-2.6%
34
Industry Comment
Pertinent Data
Rating
Risk
1-Yr
Target
2-Yr
Target
Year 1
Linamar Corporation (LNR-T)
Valuation: 4.5x Q3/12E EV to Q4/12E - Q3/13E EBITDA
Key Risks to Price Target: Economic, customer concentration, competition, FX
Magna International Inc. (MGA-N)
Key Risks to Price Target: Economic, FX
Martinrea International Inc. (MRE-T)
Key Risks to Price Target: Economic, customer concentration, M&A risk
Source: Scotiabank GBM estimates.
Key Data
Year 2
Year 3
Valuation
Intraday Flash
This Daily Edge comment is a reprint of our Intraday Flash published,
Thursday, March 01, 2012. Pricing has been updated as at the market
close, published Thursday, March 01, 2012.
35
Industry Comment
Global Fertilizers
Ben Isaacson, MBA, CFA - 416-945-5310
Indian Fert Subsidy Cuts Less
Than Expected
[email protected]
Dean Groff - 416-863-7178
[email protected]
Shawn Siddiqui, MBA - 416-863-5907
[email protected]
Event
■ India has confirmed its fertilizer subsidies for 2012/13. DAP and MOP
subsidies were cut by 27.4% and 10%, respectively, with no change to urea.
■ Nutrient subsidy rates for N, P, and K were also reduced by 11.6%, 32.6%,
and 10.3%, respectively.
Table of Contents
Implications
■ DAP. The new DAP subsidy of INR14,350/mt ($292/mt) is down from
INR19,763/mt ($403/mt) this year.
■ MOP. The subsidy for MOP has been set at INR14,440/mt ($294/mt), down
from INR16,054/mt ($327/mt) currently. We view this as a mild positive to
the INR13,500/mt that the Ministry was threatening to impose.
■ Yesterday, we trimmed our 2012 India potash demand forecast by 0.5M mt
to 4.2M mt (2010 and 2011 were 6.3M mt and 4.6M mt).
Recommendation
■ With the potash and phosphate subsidies set, we believe: (1) it is now highly
likely that India will ultimately pay a $20/mt to $30/mt premium over the
Chinese potash price and (2) a DAP contract settlement should emerge
shortly for 1H/12 in the $530/mt area.
Universe of Coverage
Price
AGU-N
CF-N
HF-T
IPI-N
KRN-T
MGO-T
MOS-N
POT-N
SDF-DE
SQM-N
WPX-T
YAR-OL
US$85.98
US$189.23
C$2.96
US$25.72
C$9.25
C$3.65
US$58.01
US$46.91
€38
US$59.63
C$1.37
272kr
Rating
Risk
1-SO
1-SO
3-SU
1-SO
1-SO
2-SP
2-SP
1-SO
3-SU
1-SO
1-SO
2-SP
High
High
Caution
High
Caution
Caution
High
High
High
High
Caution
High
1-Yr
ROR
2-Yr
ROR
$110.00
$215.00
$2.00
$30.00
$14.00
$3.50
$60.00
$56.00
€38
$65.00
$2.20
285kr
28.5%
14.5%
-32.4%
16.6%
51.4%
-4.1%
4.3%
20.6%
4.3%
10.2%
60.6%
7.5%
$120.00
$235.00
N/A
$34.00
N/A
N/A
$60.00
$63.00
€42
$75.00
N/A
310kr
40.6%
25.9%
N/A%
32.2%
N/A%
N/A%
5.2%
36.7%
18.4%
28.2%
N/A%
19.2%
36
Industry Comment
Pertinent Data
Rating
Risk
1-Yr
Target
2-Yr
Target
Year 1
Agrium Inc. (AGU-N)
Valuation: 7.5x 2013E EBITDA, 12x 2013E EPS, DCF @ 11.2%, 75% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
CF Industries Holdings, Inc. (CF-N)
Valuation: 5.5x 2013E EBITDA, 9.5x 2013E EPS, DCF @ 9.9%, 70% RCN
Hanfeng Evergreen Inc. (HF-T)
Valuation: 6.5x 2013E EPS
Key Risks to Price Target: Construction progress, urea sourcing, farmer adoption
Intrepid Potash, Inc. (IPI-N)
Valuation: 9.5x 2013E EBITDA, 15x 2013E EPS, DCF @ 11.1%, 75% RCN
Karnalyte Resources Inc. (KRN-T)
Valuation: 0.47x NAV discounted at 10%
Key Risks to Price Target: Financing, development progress, potash supply/demand
Migao Corporation (MGO-T)
Valuation: 6x 2013E EPS
Key Risks to Price Target: Potash prices, tobacco consumption, competition
The Mosaic Company (MOS-N)
Valuation: 6.5x 2013E EBITDA, 10.5x 2013E EPS, DCF @ 11.5%, 60% RCN
Potash Corporation of Saskatchewan, Inc. (POT-N)
Valuation: 9x 2013E EBITDA, 14x 2013E EPS, DCF @ 10.5%, 80% RCN
K+S AG (SDF-DE)
Valuation: 6x 2013E EBITDA, 9.5x 2013E EPS, DCF @ 11.4%, 50% RCN
Sociedad Quimica y Minera de Chile (SQM-N)
Valuation: 18x 2012E EBITDA, 28x 2012E EPS, DCF @ 10%
Western Potash Corp. (WPX-T)
Valuation: 0.80x Milestone NAV discounted at 10%
Key Risks to Price Target: Financing, drilling results, pre-feasibility results, competition
Yara International ASA (YAR-OL)
Valuation: 5x 2013E EBITDA, 8.5x 2013E EPS, DCF @ 12.4%, 45% RCN
Source: Scotiabank GBM estimates.
Key Data
Year 2
Year 3
Valuation
37
Company Comment
(BBD.B-T C$4.30)
Bombardier Inc.
Turan Quettawala, MBA, CFA - 416-863-7065
Milan Posarac - 416-863-7532
[email protected]
[email protected]
Rating: 1-Sector Outperform
Risk Ranking: High
Target 1-Yr:
2-Yr:
C$6.00
C$7.25
ROR 1-Yr:
2-Yr:
41.9%
73.3%
Est. NTM Div.
Div. (Current)
US$0.10
US$0.10
Yield
Valuation: Equally wtd DCF & Sum-of-the-parts Valuation
2.4%
Key Risks to Target: Slower contract flow at BT; slower recovery in commercial and business aircraft
2012 Guidance Disappoints But Sell-Off
Overdone
Event
■ BBD's Q4 EPS beat but 2012 BA margin guidance disappointed.
Implications
■ In our opinion, 2012 aerospace margin guidance is on the conservative
side which has been the case at least for the last two years since the
recession. Nonetheless, we have revised down our aerospace EBIT
margins to 5.6% in 2012 and 6.7% in 2013. Our long-term BA margin
assumptions now flatten out at 9%.
■ There was nothing significant on the CSeries in terms of timing;
however, aerospace capex guidance for 2012 suggests a possibility of
overruns. In our opinion, combining 5% aerospace margins with zero
FCF suggests a significant rise in orders (i.e., either margins are too
conservative or there is risk to aerospace FCF guidance).
Capitalization
Shares O/S (M)
Total Value (C$M)
Float O/S (M)
Float Value (C$M)
TSX Weight
Next Reporting Date
1,737.0
7,469
1,476.4
6,349
0.47%
Jun-12
Recommendation
■ We are maintaining our 1-SO rating with a reduced target price of
$6.00. No doubt that the guidance was disappointing; however, we
believe that the sell-off is overdone. Our sensitivity analysis suggests
that the shares would be worth $4.50 even under the unlikely scenario
that aerospace margins remain at 5% over our forecast period.
Qtly EPS (FD)
2010A
2011A
2012E
2013E
Q1
$0.08 A
$0.12 A
$0.10
$0.12
(FY-Dec.)
Revenues
Adj EBIT (BT) (M)
Adj EBIT (BA) (M)
Current Ratio
EBITDA/Int. Exp
IBES Estimates
EPS 2012E: $0.50
EPS 2013E: N/A
BVPS12E
ROE12E
Q2
$0.08 A
$0.12 A
$0.12
$0.14
Q3
$0.09 A
$0.11 A
$0.12
$0.13
Q4
$0.16 A
$0.12 A
$0.11
$0.13
Year
$0.43
$0.47
$0.44
$0.52
P/E
11.72
8.52
9.82
8.42
2009A
$19,366
$657
$473
1.1
8.9
2010A
$17,712
$665
$448
1.0
9.2
2011A
$18,347
$700
$502
1.1
9.5
2012E
$18,567
$773
$474
1.1
7.5
2013E
$19,216
$798
$608
1.1
8.7
Pertinent Revisions
New
Target:
1-Yr
2-Yr
EPS12E
EPS13E
C$6.00
C$7.25
US$0.44
US$0.52
Old
C$6.75
C$8.50
US$0.50
US$0.61
Table of Contents
0.73
79.6%
Historical price multiple calculations use FYE prices. Source: Reuters; Company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated. ^ Subordinate Voting Note: EPS is before non-recurring
items. Due to Y/E change, we have relabelled all years on a calendar basis. All years before (and
including 2010) have a Jan. 31 Y/E. 2011 is an 11-month year ending Dec. 31, 2011, while 2012 and
beyond are full calendar years ending Dec. 31. Numbers for 2011 and beyond are based on IFRS.
38
Company Comment
Lowering Target to $6; Maintaining Outperform
EBIT Margins
■ We are maintaining our 1-SO rating with a $6.00 one-year target. We continue to believe
that there is long-term value in BBD shares but the ride is likely to be bumpy due to various
risks. We have reduced our one-year target to $6 per share on the back of lower estimates
which we think are fairly conservative. Our valuation multiples of 6.5x for aerospace and 6x
for transport are also slightly below the comp group averages. Based on these multiples, we
believe that BT is worth around $3 per share and the biz jet business is worth around $2 per
share. We believe that the sell-off was overdone yesterday and are maintaining our 1-SO
rating. Continued order flow could serve as a near-term catalyst while significant delays on
the CSeries and macro weakness remain risks.
■ Aerospace margin guidance for 2012
disappointed - we are reducing our 2012 Exhibit 1 - Aerospace EBIT Margin Sensitivities Suggest Sell-off is Overdone
estimate to 5.6%. Management's guidance
for 2012 EBIT margins seems conservative
12.00%
to us considering the fact that better priced
backlog will likely be delivered over the
11.00%
next few years and the mix is turning
positive with 77% of total deliveries
Base Case
10.00%
$6.32
comprising business jets in 2012 vs 68% in
$6.12
C2011. We note that BBD's guidance has
been conservative in the last two years since
$5.90
9.00%
the recession. That said, management
pointed out that there are headwinds with
8.00%
$5.53
regard to the C$ as well as pension expenses
$5.29
that are likely to hurt aerospace EBIT by
7.00%
around $150 million. In our view, pricing is
also likely very difficult on some of the
recent RJ and Q400 orders which may also
6.00%
be negatively impacting margins. We have
$4.80
reduced our aerospace margin forecasts for
5.00%
$4.57
our forecast period and are now assuming
that BA will not reach the targeted 10%
4.00%
EBIT margin in this time frame. In Exhibit
2012E
2013E
2014E
2015E
2016-2017
1, we also show sensitivities around
aerospace
margin
assumptions
and
valuation. We believe that BBD is worth Note: Valuation based on average of EV/EBITDA (6.5x for aerospace and 6x for transportation) and DCF (WACC of
$4.57 per share even if aerospace margins 13% and g of 2%).
stay at 5% as long as deliveries come in line
with our expectations, the CSeries is not Source: Company reports; Scotiabank GBM estimates.
significantly delayed, and transport margins
grow to 8% by 2011. The valuation drops to around $4.25 per share if we also reduce our
valuation multiple for aerospace to 5x.
■ Aerospace capex guidance for 2012 at $2 billion was also above our expectations.
Management did not provide clarity around this large number although noted that 2012
would be the peak year. Aerospace FCF is expected to be at zero on the back of higher order
flow and cash flow from operations. In our view, there is a disconnect between aerospace
margin and FCF guidance for 2012 which, in our view, could only mean one of three things:
1. Margin guidance is too conservative.
2. A significant amount of CFO (around $1.2 billion) is expected from advances which is
obviously contingent upon increased order flow.
3. Somewhat related to the last point, there is obviously a risk that BBD's aerospace FCF
may miss guidance if orders underperform expectations again.
■ Transportation remains steady with FCF improvement likely to continue. BT reported
Q4 FCF of $564M which was a significant sequential improvement from Q3 FCF usage of
$346M as European contract deliveries have started. Update on the contract improvements
39
Company Comment
were in line with our expectations except it seems that the SNCF order has stalled again.
Management noted that it will take 4 to 6 quarters for full reversal of FCF, which suggests
that transportation FCF could come in above EBIT of $773 million in 2012. Based on this
view of transportation FCF as well as the fact that there are no major debt maturities near
term, we believe that risks related to the balance sheet will be manageable unless there is a
major delay on the CSeries.
■ Adjustments to our model have resulted in 9.3% and 12.9% decline to 2012 and 2013
EBIT. As explained earlier we have reduced our estimates for aerospace margins to what we
believe are fairly conservative estimates. We also adjusted down our commercial jet delivery
estimates for 2013 and 2014. Our aerospace capex assumption for 2012 is raised to $2 billion
with transportation unchanged at $180 million. We also made some adjustments to our
forecasts for transportation margins, which we assume will reach 8% by 2013 and remain flat
at that level.
Q4 Results Generally in Line with Expectations
■ Total Q4 revenues at BA came in at $2.016 billion (down 13% YOY), slightly ahead of
our $1.999 billion estimate. The YOY decline was mainly due to one less month in
Q4/C2011 which resulted in lower deliveries. Deliveries (pre-announced) were down 24%
YOY for business jets and 75% YOY for commercial aircraft mainly due to the shorter
quarter as well as the fact that CRJ1000 deliveries were bunched up in Q4 last year. BA
EBIT margin fell 90 bps YOY to 6.3% ($127 million) with management guiding lower to a
5% 2012 EBIT margin. Despite an improved mix, EBIT suffered due to margin compression
on commercial aircraft as well as service activities, and an unfavourable mix of business
aircraft. FCF for the quarter came in at $110 million which was better than our expectations
but lower than last year as capex was up and relatively weaker order flow hurt advances.
■ BT total revenue decreased by 7.8% YOY to $2.3 billion and missed our $2.6 billion
estimate. The miss was mostly driven by lower rolling stock revenue due to phasing out of
existing contracts resulting in lower activity as BT prepares to ramp-up production on new
contracts in Europe and Asia (the book-to-bill at BT was a positive surprise at 1.3x for the
quarter and 1x for C2011). This was in line with guidance but above our expectations. The
240 bps decline in BT's EBIT margin was driven by some execution issues in various
contracts as well as higher SG&A expense. Furthermore, margins last year were extremely
high due to some positive catch-ups. Although FCF was down 19% on a YOY basis, it has
started to improve as deliveries on some of the delayed contracts have restarted. We expect
continued improvement over the next few quarters.
■ Q4 EPS came in at $0.12 (down 25% YOY), slightly ahead of our estimate ($0.11).
Lower financing and tax expenses were the major reasons behind the slight beat on EPS. The
effective tax rate for the quarter was 17.7% which is below average and management is
guiding to a 2012 range of 20%-25%.
40
Company Comment
Exhibit 2 - BBD- Forecast Details
Bombardier Inc.
BBD.B
1-Year Target:
$6.00
2-Year Target:
$7.25
1-Year Return:
42%
2-Year Return:
71%
NTM Dividend:
$0.10
Rating:
1-Sector Outperform
Equally wtd DCF & Sum-of-the-parts Valuation
Last Price:
Shares O/S:
Market Cap:
EV:
FY End:
Risk:
$4.30
1,737
$7,469
$8,845
Dec-31
High
EPS
Financial
2010A
Q4 2010
9.4x
4.9x
Q4 2011
9.2x
11.1x
2010
9.4x
4.9x
2011
9.2x
11.1x
2012E
9.7x
5.9x
2013E
8.3x
3.7x
13.8%
3.4%
17.0%
10.0%
8.3%
20.8%
3.5%
16.6%
8.5%
6.8%
21.8%
3.4%
16.4%
9.3%
7.1%
21.5%
3.5%
15.8%
8.4%
6.6%
22.5%
2.9%
16.0%
8.8%
6.7%
19.3%
3.2%
16.4%
9.6%
7.3%
Income Statement Consolidated
Q4 2010
Revenue
$5,586
COGS
$4,636
Gross Profit
$950
EBITDA
$558
EBIT
$462
Net Income
$322
EPS (FD)
$0.18
Q4 2011
$4,316
$3,601
$715
$368
$293
$214
$0.12
2010
$17,892
$14,955
$2,937
$1,655
$1,268
$824
$0.46
2011
$18,347
$15,444
$2,903
$1,535
$1,202
$837
$0.47
2012E
$18,567
$15,588
$2,979
$1,640
$1,246
$792
$0.44
2013E
$19,216
$16,066
$3,151
$1,842
$1,406
$920
$0.52
Q4 2010
$4,195
$3,966
$24,092
Q4 2011
$3,372
$5,032
$23,864
2010
$4,195
$3,966
$24,092
2011
$3,372
$5,032
$23,864
2012E
$4,520
$6,780
$27,597
2013E
$4,661
$7,724
$28,347
$3,246
$4,645
$22,571
$3,210
$4,748
$23,193
$3,246
$4,645
$22,571
$3,210
$4,748
$23,193
$3,682
$5,021
$26,327
$3,690
$4,931
$26,352
$1,521
$671
$1,521
$671
$1,270
$1,995
Business jet deliveries (units)
Business jet average price
Q4 2010
55
25
Q4 2011
48
25
2010
155
26
2011
163
26
2012E
180
27
2013E
191
26
Regional jet deliveries (units)
Regional jet average price
44
22
11
22
97
22
78
22
55
22
62
23
P/E
P/BV
Payout Ratio
ROA
Gross Margin
EBITDA Margin
EBIT Margin
Balance Sheet
Cash & Equivalents
PP&E
Total Assets
Trade and Other Payables
Long-Term Debt
Total Liabilities
Shareholders' Equity
Q1
Q2
Q3
Q4
Total
2011A
2012E
2013E
$0.11
$0.07
$0.09
$0.18
$0.46
$0.12
$0.12
$0.11
$0.12
$0.47
$0.10
$0.12
$0.12
$0.11
$0.44
$0.12
$0.14
$0.13
$0.13
$0.52
2010
4.4x
5.4x
81.0%
BB+
BB+
2011
4.7x
6.7x
89.8%
2012E
4.5x
5.3x
84.3%
Moody's
DBRS
2013E
4.0x
6.1x
77.9%
Ba2
BB
Q4 2010
Q4 2011
2010
2011
2012E
2013E
$1,367
$980
$744
$3,091
$2,609
$482
$288
$222
7.2%
$1,198
$241
$577
$2,016
$1,717
$299
$166
$127
6.3%
$4,041
$2,157
$2,612
$8,810
$7,476
$1,334
$818
$554
6.3%
$4,262
$1,721
$2,611
$8,594
$7,355
$1,239
$697
$502
5.8%
$4,774
$1,224
$2,510
$8,508
$7,287
$1,221
$702
$474
5.6%
$4,986
$1,410
$2,680
$9,076
$7,717
$1,359
$865
$608
6.7%
Q4 2010
$2,495
$2,027
$468
$270
$240
9.6%
Q4 2011
$2,300
$1,884
$416
$202
$166
7.2%
2010
$9,082
$7,479
$1,603
$837
$714
7.9%
2011
$9,753
$8,089
$1,664
$838
$700
7.2%
2012E
$10,059
$8,301
$1,758
$938
$773
7.7%
2013E
$10,140
$8,348
$1,791
$977
$798
7.9%
Q4 2010
$1,793
-$339
-$9
$1,454
Q4 2011
$981
-$391
$107
$590
2010
$1,692
-$1,125
$254
$567
2011
$243
-$1,475
-$227
-$1,232
2012E
$2,709
-$2,142
$580
$567
2013E
$1,781
-$1,380
-$260
$401
Credit Metrics
Net Debt/ EBITDA
Interest Coverage
Debt/ Total Capital
Standard & Poor's
Fitch
Income Statement- Aerospace
Revenue
Business Jet
Commercial
Other
Total
COGS
Gross Profit
EBITDA
EBIT
EBIT Margin
Income Statement- Transportation
Revenue
COGS
Gross Profit
EBITDA
EBIT
EBIT Margin
Operational Statistics
Cash Flow Statement
Operating (post-WC)
CAPEX
Financing
Free Cash Flow
Source: Company reports; Scotiabank GBM estimates.
Table of Contents
41
Company Comment
(BNP-T C$22.28)
Patrick Bryden, CFA - 403-213-7750
Jamie Kubik, CA - 403-213-7760
[email protected]
Risk Ranking: High
[email protected]
Target 1-Yr:
2-Yr:
C$26.50
C$26.50
ROR 1-Yr:
2-Yr:
25.4%
31.9%
Est. NTM Div.
Div. (Current)
C$1.44
C$1.44
Yield
6.5%
Key Risks to Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program success
Reserves Increase 11% Year over Year; Solid
FD&A at $13.39/boe and Q4/11 Results Released
Event
■ Bonavista announced its full year 2011 results and corporate reserves.
Implications
■ Fourth quarter cash flow in line. Bonavista reported Q4 CFPS of
$0.88, 2% ahead of our estimate at $0.87 and consensus at $0.86.
■ Production behind at 73,373 boe/d and midpoint 2012 guidance
revised to 74,000 boe/d. The company's reported Q4 production was
4% behind our estimate of 76,120 boe/d and the company reduced its
2012 guidance towards a more sustainable level on low gas pricing.
■ Year-end reserves provide 11% year over year volumetric growth
and solid year-end FD&A results. The business has delivered good
long-term capital efficiencies and the 2011 reserves book is consistent
with this given proved and probable finding, development and
acquisition costs of $13.39/boe, inclusive of FDC, implying a 1.8x
recycle ratio, which is a strong result relative to its peer group.
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
TSX Weight
Next Reporting Date
166.1
3,701
141.2
3,146
0.22%
Jun-12
Recommendation
■ We maintain our 1-SO rating; however we have reduced our one-year
target price to $26.50/share on revised growth and gas price headwinds.
Qtly CFPS (FD)
2010A
2011A
2012E
2013E
Q1
$0.97 A
$0.77 A
$0.78
(FY-Dec.)
Cash Flow/Share
Dividends/Share
Price/Cash Flow
Pre-tax Cash Yield
IBES Estimates
CFPS 2012E: $3.29
CFPS 2013E: N/A
BVPS12E
ROE12E
Q2
$0.83 A
$0.88 A
$0.82
Q3
$0.76 A
$0.79 A
$0.85
Q4
$0.76 A
$0.88 A
$0.90
Year
$3.30
$3.30
$3.34
$3.91
P/CF
8.72
7.89
6.67
5.70
2009A
$3.37
$2.00
6.6
6.5%
2010A
$3.30
$1.92
8.7
5.0%
2011A
$3.30
$1.44
7.9
5.5%
2012E
$3.34
$1.44
6.7
6.5%
2013E
$3.91
$1.44
5.7
6.5%
$2.32
N/A
Pertinent Revisions
New
Old
Target:
1-Yr
$26.50
$29.00
2-Yr
$26.50
$29.00
CFPS12E
$3.34
$3.35
CFPS13E
$3.91
$3.94
New Valuation:
Old Valuation:
1.1x our 2P NAV plus risked upside
Table of Contents
42
Company Comment
Fourth Quarter Results Announced and Updated 2012 Guidance
■ Fourth quarter cash flow in line. Bonavista reported Q4 CFPS of $0.88 (inclusive of
interest charges), inline with our estimate at $0.87 and consensus at $0.86. The company's
outperformance on lower than expected production volumes appears to be due to higher
realized pricing than anticipated during the quarter.
Exhibit 1 - Production per Share Growth
80,000
800
60,000
600
40,000
400
20,000
200
-
0
■ Keeping dividend at current levels through the use of multiple funding avenues from
asset dispositions and DRIP proceeds to remain financially flexible during eroded
natural gas prices. The company announced it will maintain its dividend at current levels
instead foregoing some growth, anticipated to be ~6% YOY. Additional funding sources
include incremental divestitures of $100-$150 million in 2012 and the recently announced
DRIP, which presently has 35% participation. No additional gas hedges were noted with
corporate production levels remain only 10% protected. We have adjusted our model to
account for the increased DRIP savings along with reduced guidance levels and have also
modified the company's production profile to build more gradually through the year. The
result we see under our price deck currently is relatively neutral from a cash flow perspective
given our $4/mcf HH assumption escalates towards the end of 2012. The reduced production
guidance results in a negligible cash flow effect on our current price deck, however we will
review in greater detail after amending our gas price forecasts.
■ Solid play opportunities abound with good results during 2012 noted across major plays
and BNP's first Duvernay well cored during Q4 with 33 metres being analyzed. The
company's first Duvernay coring from its large position of +400 net sections in the Willesden
Green area is currently being used to advance the company's understanding of the play, with
no other details provided. Other positive operational highlights during 2011 included:
o Glauconite: increased EUR on its Hoadley Glauconite wells by 40 mboe or ~10% on
improved predictability and NGL yields.
o Cardium the company's Willesden Green area included three hz wells delivering an
average 3 month production rate of 415 boe/d with 300 bbls/d of liquids and also noted
its capital allocation to the play was increased to $90 million or by 38%.
Q4/11
Q2/11
Q4/10
Q2/10
Q4/09
Q2/09
Q4/08
Q2/08
Q4/07
Q2/07
Q4/06
Q2/06
Q4/05
■ Midpoint 2012 net capital spending guidance reduced to $350 million
and production volumes to 74,000 boe/d due to continued erosion in
Production (LHS)
Debt & Div. Adj. Production per Share (RHS)
natural gas prices. The company tempered its 2012 net guidance towards a
Debt Adj. Production per Share (RHS)
range of $340-$360 million capex ($410 million gross less $58 million
disposition completed during Q1/12) and 73-75 mboe/d of production. Note: dividend adjusted cumulatively from Jan 1, 2005. Source: Company
Management maintained its shift in spending away from natural gas projects reports; Scotiabank GBM estimates; Reuters.
further devoting 45% of its capital to crude oil, an increase of 33%. The
company does have attractive opportunities in oil and liquids rich inventory in our view,
which provides good rates of return, particularly in its Hoadley, Blueberry, Pine Creek and
Willesden Green areas. Total liquids weighting anticipated for 2012 is expected to reach
42% compared to 39% at the end of 2011, which should help weather some of the cash flow
headwinds on natural gas pricing.
Production per Share
(boe/d/million shares)
July 09 & May 10: Central
AB Asset Acquisitions
Production (boe/d)
■ Production behind at 73,373 boe/d for Q4/11 and midpoint 2012
guidance revised to 74,000 boe/d. The company's reported Q4 production
was 4% behind our estimate of 76,120 boe/d. Capital spending for the
quarter was down 34% compared to other quarters during 2011 bringing
gross spending to $454 mm ($420 mm net with $30 mm in disposals). Full
year production of 69,332 boe/d was 1% below guidance of 70,000 boe/d as
Q4 production was lighter than anticipated. On an annual basis, BNP has
demonstrated good debt- and dividend-adjusted per share production growth
for 2011, per Exhibit 1, at 6% from Q4/10 to Q4/11. On a debt-adjusted
basis over the same period production per share increased by 1%.
43
Company Comment
o Bluesky: Notable results from the Bluesky at Pine Creek included three wells that have
averaged 375 boe/d per well in their first year of production.
o Montney: Four Blueberry wells averaged three month rates of 420 boe/d and NGL
yields of 100 bbls/mmcf of which 50% is free condensate.
■ Shortened pro-forma financial statements issued - full audited statements and MD&A
available during mid-March. We will review the full information provided in the
company's MD&A and financials in greater detail when released..
Reserves and Finding, Development and Acquisition Costs
■ Year-end reserves provide 11% volumetric growth and solid year-end FD&A results.
The business continues to deliver good long-term capital efficiencies and the 2011 reserves
book is consistent with this, delivering proved and probable finding, development and
acquisition costs of $13.39/boe, inclusive of FDC, implying a 1.8x recycle ratio on the
company's estimated netback of $24.53/boe.
24%
20%
2P Reserves [mboe]
■ Reserves per share metrics display good growth year over year. The
2011 reserve bookings displayed 8% per debt and dividend-adjusted Exhibit 2 - Reserves per Share Measures
share growth year over year, which is a good result in our view,
360,000
although slightly less than the previous year of 12%. On a debt adjusted
basis alone, reserves per share increased 4% over the prior year. The
300,000
company's proved-developed-producing reserves as a percentage of 2P
remain at good levels, accounting for 42% of 2P reserves and proven
240,000
reserves amount to 68% of 2P reserves, indicating a fair balance of
180,000
producing versus PUDs in the proven category. The company's fouryear CAGR at 12% on a debt and dividend-adjusted basis is also a solid
120,000
result, in our view.
Overall reserve volume increases appear
60,000
directionally positive for the company and are reflective of the
company's inventory breadth along with its conservatism. We will
0
review the company's reserve reconciliation in greater detail once
2008A
2009A
2010A
available.
Probable (LHS)
16%
12%
8%
4%
0%
2011A
4-Year CAGR
Proved Undeveloped (LHS)
Proved Developed Non-producing (LHS)
Proved Developed Producing (LHS)
Debt Adj. Reserves per Share Growth (RHS)
Debt & Div. Adj. Reserves per Share Growth (RHS)
■ Net asset value to be revisited however reserves increase viewed as
directionally positive as oil and liquids volumes increased by 16%
on 2P reserves year over year. Pre-tax NPV of 2P reserves decreased
by 1% using a 10% discount rate over the prior year (or $65 million) Note: dividend adjusted cumulative from Jan 1, 2008. Source: Company reports;
which appears to primarily be due to reduced gas pricing. We have Scotiabank GBM estimates.
elected to take some more time to fully review year-end reserves and
net asset value with the newly reported data from GLJ. Multiples for NAV cited below are
therefore subject to revision as we more comprehensively review year-end disclosures.
Maintain 1-SO Rating; However Reducing Target Price to $26.50 on
Natural Gas Headwinds
■ We have maintained our 1-Sector Outperform rating however have lowered our target
price to $26.50 per share from $29.00 in light of continued depressed natural gas
pricing. The company's operational positives noted in its key plays continue to be attractive
in our view for investors. We have tempered our target price downwards however due to
continued headwinds expected for natural gas producers. Our target price is set at 1.1x our
NAV plus risked upside, and represents 1.5x our base case NAV and 9.3x 2012E EV/DACF.
These multiples compare with the peer group average multiples of 1.1x NAV plus risked
upside, 1.8x NAV base case, and 9.5x 2012E EV/DACF. Bonavista is currently trading at
8.1x 2012E EV/DACF versus the peer group average of 8.3x.
44
Company Comment
Exhibit 3 - One Year Target Price Rationale
Note
[#]
Wells
[#]
Est'd
Value
per Well
[$000]
NAV (P+P, year-end 2010)
Less: Portion of Land Value
NAV, Excluding Land
Unrisked
Undisc.
Value
[$000]
PV of
Drill
Program
[%]
$2,877,321
($39,701)
$2,837,620
Unbooked Upside
Hoadley Glauconite Hz Gas
Rosevear / Pine Creek Hz Gas
Western Core Cardium Hz Oil
Blueberry Montney Hz Gas
Other Deep Basin
Conventional
1
2
3
4
5
6
Value Buildup
7
229
75
297
110
250
292
$3,404
$3,655
$1,465
$2,097
$2,437
$1,567
$780,719
$274,141
$435,034
$230,616
$609,203
$457,517
75%
80%
55%
40%
45%
60%
$5,624,850
Unrisked
Value
[$000]
Target
Price
Wtg
[%]
Target
Price
Buildup
[$000]
$2,877,321
($39,701)
$2,837,620
100%
$2,837,620
$17.65
$585,539
$219,313
$239,269
$92,246
$274,141
$274,510
90%
75%
50%
25%
60%
75%
$526,985
$164,485
$119,634
$23,062
$164,485
$205,882
$3.28
$1.02
$0.74
$0.14
$1.02
$1.28
$4,042,153
$25.14
Target Price
$26.50
$4,522,639
Target
Price
Buildup
[$/share]
Notes:
(1) Assumes 131 (out of 175) sections at 3.5 Hz w/s = 459 locations, less 230 booked locations.
(2) Assumes 28 (out of 46) sections at 4 Hz w/s = 110 locations, less 35 booked locations.
(6) Assumes 292 locations.
(7) Total of 1684 locations (booked and unbooked) incorporated in evaluation
Exhibit 4 - Summary of Blow-Down NAVPS, Risked NAVPS, and Unrisked NAVPS
$30
Conventional
Other Deep Basin
Target Price
Blueberry Montney Hz Gas
$25
Western Core Cardium Hz Oil
Current Price
Rosevear / Pine Creek Hz Gas
Hoadley Glauconite Hz Gas
$20
NAV 2P Adjusted
$15
Notes:
1) the "Risked Upside" and
"Unrisked Upside" cases both
account for PV of the Drill Program;
$10
2) the "Blow Down" includes all
undeveloped land in base NAV,
while other case include portion not
considered in upside evaluations;
and
$5
3) see NAV Plus Risked Upside
Methodology for further details.
$0
NAV Blow Down
NAV Plus Risked Upside
NAV Plus Unrisked Upside
45
Company Comment
Exhibit 5 - Financial and Operational Summary
Fiscal Year End - December 31
2009A
2010A
Q1/11A
Q2/11A
Q3/11A
Q4/11A
2011A
2012E
2013E
Price Deck Assumptions
WTI
Edmonton Par
WCS
Nymex Natural Gas
AECO 30-Day Spot
Exchange Rate
US$/B
C$/B
C$/B
US$/Mcf
C$/Mcf
US$/C$
$61.97
$66.36
$58.58
$4.16
$3.98
$0.88
$79.13
$76.61
$64.42
$4.35
$3.86
$0.97
$94.11
$88.58
$66.37
$4.17
$3.76
$1.01
$102.56
$102.66
$72.28
$4.36
$3.87
$1.03
$89.71
$93.00
$73.22
$4.12
$3.65
$1.02
$92.58
$97.18
$82.86
$3.39
$3.28
$0.98
$94.72
$95.37
$73.73
$4.01
$3.64
$1.01
$95.00
$95.92
$79.49
$4.00
$3.70
$0.98
$95.00
$95.92
$75.61
$4.50
$4.00
$0.98
Daily Production
Total Oil & Liquids
Natural Gas
Total Production
Change in Total Production
Percentage Natural Gas
B/d
Mmcf/d
Boe/d
%
%
23,484
191
55,299
4%
58%
26,182
240
66,259
20%
60%
25,901
242
66,178
-3%
61%
25,098
246
66,037
0%
62%
27,260
266
71,636
8%
62%
28,738
268
73,373
2%
61%
26,758
255
69,332
5%
61%
30,265
261
73,800
6%
59%
33,488
261
77,000
4%
57%
Financial Estimates
Cash Flow Per Share - FD
EBITDA
EPS
Distribution - Basic
$/Share
$/Share
$/Share
$/Share
$3.37
$2.81
$0.82
$2.00
$3.30
$3.63
$1.30
$1.92
$0.77
$0.74
$0.20
$0.36
$0.88
$1.18
$0.49
$0.36
$0.79
$0.88
$0.19
$0.36
$0.88
$0.73
-$0.02
$0.36
$3.30
$3.51
$0.85
$1.44
$3.34
$3.59
$0.75
$1.44
$3.91
$4.20
$1.18
$1.44
Netbacks and Margins
Gross Revenue
EBITDA
Earnings
Cash Flow (Prior to Change in NC WC)
EBITDA / Gross Revenue
Cash Flow / Gross Revenue
Earnings / Cash Flow
$/Boe
$/Boe
$/Boe
$/Boe
%
%
%
$37.62
$18.00
$5.28
$21.59
48%
57%
24%
$38.82
$23.26
$8.34
$21.14
60%
54%
38%
$40.09
$19.11
$5.38
$20.50
49%
51%
25%
$42.62
$30.72
$12.87
$23.12
73%
54%
55%
$40.11
$21.23
$4.73
$19.54
54%
49%
23%
$42.24
$16.52
-$0.49
$21.46
42%
51%
-2%
$41.27
$21.73
$5.42
$21.13
54%
51%
25%
$41.57
$22.40
$4.67
$20.87
54%
50%
22%
$45.75
$25.94
$7.30
$24.14
57%
53%
30%
Valuation Measures
EV/DACF
EV/EBITDA
P/E
D/P
EV per Boe/d
Net Debt & Debs per Boe/d
Proved Producing
Proved
Proved and Probable
x
x
x
%
$/Boe/d
$/Boe/d
$/Boe
$/Boe
$/Boe
9.4
11.6
27.1
9%
76,225
17,312
$33.69
$21.82
$15.50
10.3
9.8
17.1
9%
83,470
15,416
$39.46
$24.81
$17.80
10.9
12.4
37.0
5%
87,742
16,573
9.3
7.5
11.4
6%
84,753
16,610
8.8
8.6
29.0
6%
69,022
14,767
8.9
11.3
-277.3
6%
74,204
15,424
9.4
9.6
26.3
6%
78,529
16,323
$37.61
$23.23
$15.80
8.1
8.0
29.8
6%
65,774
14,159
6.8
6.7
18.8
6%
63,040
11,755
Net Debt & Debentures
Net Debt & Debentures
EBITDA
Cash Flow
Net Debt, Debentures & Equity
EV
$/Share
x
x
x
%
$6.55
2.6
2.2
0.4
23%
$6.52
1.8
2.0
0.4
18%
$6.99
2.3
2.2
0.5
19%
$6.96
1.5
2.0
0.5
20%
$6.41
1.8
2.1
0.4
21%
$6.84
2.3
2.0
0.4
21%
$6.84
2.0
2.1
0.4
21%
$6.11
1.7
1.9
0.4
22%
$5.15
1.2
1.3
0.4
19%
Sustainability
Payout Ratio - Simple
Payout Ratio - Effective
Capital Expenditures / Cash Flow
%
%
%
50%
97%
47%
49%
118%
68%
40%
162%
122%
35%
114%
78%
39%
135%
96%
36%
92%
56%
37%
124%
87%
43%
116%
73%
37%
99%
63%
Hedging
Percentage of Light & Medium Oil
Percentage of Heavy Crude Oil
Percentage of Natural Gas Production
Percentage of Total Production
%
%
%
%
-----
-----
-----
-----
-----
-----
83%
0%
28%
33%
53%
0%
10%
17%
0%
0%
0%
0%
Table of Contents
Intraday Flash
46
Company Comment
(CTL-T C$0.02)
Cory Brumer, MBA, CFA - 514-287-3613
[email protected]
Rating: 7-Discontinued Coverage
Risk Ranking: --
[email protected]
Target 1-Yr:
2-Yr:
---
ROR 1-Yr:
2-Yr:
---
Est. NTM Div.
Div. (Current)
-C$0.00
Yield
Valuation: --
0.0%
Key Risks to Target: --
Event
■ We are discontinuing coverage of the shares of Catalyst Paper.
Implications
■ Catalyst filed for CCAA creditor protection in order to facilitate an
orderly restructuring of its business and operations on January 31, 2012.
■ The shares will be delisted from the TSX March 8, 2012.
Recommendation
■ We have discontinued coverage of the shares of Catalyst Paper. Our
previous rating and target price were 3-Sector Underperform and nil.
Qtly EPS (FD)
2010A
2011E
2012E
2013E
Q1
$-0.10 A
$-0.06 A
Q3
$-0.03 A
$-0.04 A
Q4
$0.01 A
Year
$-0.23
P/E
n.m.
2009A
$-0.15
$0.02
n.m.
n.m.
$1,202
$121
2.2
1.5
BVPS11E
ROE11E
2010A
$-0.23
$-0.08
n.m.
n.m.
$1,229
$72
1.9
1.0
2011E
2012E
2013E
381.8
5.7
236.7
3.6
Next Reporting Date
Mar-12
Pertinent Revisions
Rating:
(FY-Dec.)
Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues
EBITDA
Current Ratio
EBITDA/Int. Exp
IBES Estimates
EPS 2011E: $-0.26
EPS 2012E: $-0.19
Q2
$-0.11 A
$-0.12 A
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
New
Old
7-DC
3-SU
Table of Contents
---
Intraday Flash
47
Company Comment
Cencosud
(CEN.SN CLP3130.00)
Ezequiel Fernandez - +56 2 692 6251
(Scotia Corredores de Bolsa Chile)
Ana Reynal - +52 55-9179 5211
(Scotiabank Inverlat)
[email protected]
Risk Ranking: Medium
Target 1-Yr:CLP3900.00
2-Yr:CLP4212.00
ROR 1-Yr:
2-Yr:
25.9%
37.1%
Valuation: 2011E-2022E DCF w/ 8.9% WACC; 13x (NTM) EV/EBITDA; 21x (NTM) P/E
Est. NTM Div.
Div. (Current)
39.26
24.26
Yield
0.8%
Key Risks to Target: Pension funds concentration, foreign ops, potential dilution
Event
■ Cencosud's board approved the ADS program.
Implications
■ The board now has 120 days to determine the pricing. We expect
dilution to be close to 12%, or approximately 270 million newly issued
shares.
■ We believe Cencosud will use these proceeds to pursue further
acquisitions, continue an ambitious organic growth program, and to
some extent reduce its leverage ratios.
■ Moreover, we think the ADS program will increase liquidity and
transparency, and will strengthen the corporate governance of the
company, all of which could translate into higher valuations.
Capitalization
Shares O/S (M)
Total Value (B)
Float O/S (M)
Float Value (B)
Next Reporting Date
2,264.1
7,086,643
792.4
2,480,325
Mar-12
Recommendation
■ We reiterate our 1-SO rating and one-year target price of CLP3,900.
Qtly EPS (FD)
2009A
2010A
2011E
2012E
Q1
15.32 A
24.68 A
24.95 A
40.50
(FY-Dec.)
Earnings/Share
Free Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (B)
EBITDA (B)
Gross margin
IBES Estimates: N/A
BVPS12E
ROE12E
Q2
29.12 A
35.07 A
31.30 A
44.36
Q3
16.26 A
22.58 A
22.34 A
45.12
Q4
48.41 A
48.53 A
47.74
61.87
Year
109.11
130.85
126.33
191.85
P/E
15.76
28.12
23.67
16.31
2008A
74.31
-97.21
12.2
0.6
5,936
416
27.2%
2009A
109.11
201.83
15.8
0.2
5,512
392
26.7%
2010A
130.85
51.42
28.1
1.6
6,194
501
28.2%
2011E
126.33
-15.28
23.7
1.6
7,456
608
28.4%
2012E
191.85
16.13
16.3
1.0
9,085
815
28.3%
1543.36
13.8%
Table of Contents
48
Company Comment
(FSM-N US$7.10)
(FVI-T C$7.00)
Craig Johnston, CA - 416-860-1659
[email protected]
Rating: 2-Sector Perform
Risk Ranking: High
[email protected]
Target 1-Yr:
2-Yr:
US$8.50
US$8.50
ROR 1-Yr:
2-Yr:
19.7%
19.7%
Est. NTM Div.
Div. (Current)
US$0.00
US$0.00
Yield
0.0%
Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Initiating Coverage: Fortunate by Design with
Mines in Peru and Mexico
Event
■ We have initiated coverage on Fortuna with a 2-Sector Perform rating
and a one-year target price of $8.50 per share.
Implications
■ Fortuna is expected to double silver production to 5.0 million ounces
annually by 2014 from its two mines. Growth is anticipated from higher
grades being mined at the company's two operations and from a plant
expansion at the San Jose mine in 2013.
■ For at least the next two years, we forecast negative total cash costs as a
result of gold, lead, and zinc credits.
■ Fortuna is trading at a 61% premium to our net asset valuation
(NAV3%) of $4.29 per share. Our target is based on 1.93x NAV3%.
■ For more details, refer to our unabridged report on the silver sector
entitled Growing Supply Tarnishes Outlook; Lustre Found in Equities.
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
TSX Weight
Next Reporting Date
128.8
914.8
128.8
914.8
0.06%
Mar-12
Recommendation
■ We believe Fortuna has high-quality assets and management with
excellent potential to execute on its organic growth plans. We would be
unhesitant buyers with slightly greater returns to our $8.50 target.
Qtly EPS (FD)
2010A
2011E
2012E
2013E
Q1
$0.05 A
$0.04 A
$0.08
$0.12
(FY-Dec.)
Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA
Rlzd Silver Price ($/oz)
Production (Moz)
Tot. Cash Cost ($/oz)
IBES Estimates
EPS 2011E: $0.26
EPS 2012E: $0.48
Q2
$0.05 A
$0.05 A
$0.11
$0.12
Q3
$-0.02 A
$0.08 A
$0.12
$0.12
Q4
$0.04 A
$0.07
$0.12
$0.17
Year
$0.14
$0.24
$0.43
$0.53
P/E
33.24
23.00
16.66
13.38
2009A
$0.01
2010A
$0.14
33.2
$0.20
24.0
$35
$19.05
1.9
$-5.86
2011E
$0.24
23.0
$0.35
15.5
$55
$35.27
2.3
$0.03
2012E
$0.43
16.7
$0.60
11.8
$95
$35.00
3.4
$0.45
2013E
$0.53
13.4
$0.74
9.6
$117
$35.00
3.7
$-2.08
$0.15
$21
$14.65
1.7
$-4.93
BVPS12E
NAV
P/NAV
2.31
$4.29
1.66x
Pertinent Revisions
Rating:
Risk:
Target:
1-Yr
2-Yr
EPS11E
EPS12E
EPS13E
New Valuation:
1.93x NAV
Old Valuation:
N/A
New
Old
2-SP
High
N/A
N/A
$8.50
$8.50
$0.24
$0.43
$0.53
N/A
N/A
N/A
N/A
N/A
Table of Contents
All values in US$. Note: 2010 quarterly EPS figures (based on Canadian GAAP) will not sum to yearend figures (based on IFRS).
49
Company Comment
Investment Highlights
■ Production growth is fully funded through cash flow from operations, and capital
expenditures are minimal now that both mines are completely online. Fortuna’s balance
sheet appears to be in a very strong condition: we project no debt and $71 million in cash at
the end of 2011. We forecast that net free cash flow will continue and we believe the
company could consider a dividend. In addition, with Fortuna trading at a premium to our
NAV3%, an acquisition for shares is possible, with the company’s cash available for
investment following a potential deal.
■ The successful commissioning of the San Jose silver-gold mine in September 2011 is no
surprise to us following our site visit in April 2011. We feel the smooth start-up is further
evidence that the expansion of the underground operation and processing facility to 1,500
tonnes per day (tpd) from 1,000 tpd is low risk. The San Jose plant was designed with a
capacity increase in mind and the compact underground ore body is scheduled to have
sufficient development complete for the expansion by 2013.
■ In 2012, Fortuna expects production to increase nearly 50% from 2011. The company
pre-released 2011 production figures and provided guidance for 2012. Based on this data, we
expect Fortuna to report Q4/11 earnings of $0.07 per share in March. Subsequent quarters
should provide ongoing confirmation that the company’s growth plan is on track. We also
anticipate a resource update this spring, which is likely to add to the current reserve base.
Fortuna’s reserves have grown steadily over the past several years.
■ Fortuna shares are trading at a significant 1.66x premium to our NAV3% and to the
silver producer peer group average of 1.20x as shown in Exhibit 1.We believe this is due
to the company’s self-funded organic growth potential to double silver output within two
years. Much of the expanded production we forecast is expected in 2012. Accordingly, we
feel Fortuna’s achieving our 1.93x target multiple in 2012 will partly be due to this expanded
production. Fortuna also enjoys higher estimated price to 2013 earnings (P/E) and price to
2013 cash flow (P/CF) multiples than the group, potentially reflecting growth and also likely
its diminishing exposure to base-metal prices as the San Jose silver-gold mine expands.
50
Company Comment
Exhibit 1 - Comparable Data for Silver Producers
MARKET & VALUATION DATA
Company
Silver Standard Resources Inc.
Last trade
Shares
F-D
NAV/
U.S.
1-Mar-2012
O/S F-D
Market
Share
Price/
Target
Target
1-Year
Rate of
Symbol
US$
(M)
Cap (US$M)
(US$)
NAV
Multiple
(US$)
Return
Rating
FSM
HL
PAAS
SSRI
SLW
$7.10
$5.05
$25.25
$17.14
$38.78
128.8
309.4
159.1
82.3
358.8
$915
$1,562
$4,018
$1,410
$13,915
$4.29
$4.77
$24.71
$22.26
$25.65
1.66x
1.06x
1.02x
0.77x
1.51x
1.93x
1.35x
1.10x
1.06x
1.95x
$8.50
$6.50
$37.00
$24.00
$50.00
20%
30%
47%
40%
30%
2-Sector Perform
2-Sector Perform
1-Sector Outperform
2-Sector Perform
1-Sector Outperform
1
EV
OPERATIONAL FORECASTS
Production
Total Cash Cost
(000 oz)
(US$/oz)
Reserves & Resources (M)
Company
2012E
2013E
2012E
2013E
P&P
3,408
5,718
23,652
8,032
24,210
3,716
7,890
25,352
15,802
30,356
$0.45
($3.20)
$9.28
$15.13
$4.02
($2.08)
($4.92)
$9.42
$10.71
$4.05
45
148
354
192
942
$5.14
$3.44
Producer Average
M&I + P&P Total Res.
55
277
1,092
1,167
1,284
90
420
1,383
1,571
1,779
% Prod.
EV
1
EV
1
Growth
/2012E Prod.
/Reserve oz
/(P&P+M&I)
11E - 13E
(US$)
(US$)
(US$)
61%
-3%
25%
238%
51%
$247
$228
$150
$95
$548
$18.65
$8.82
$9.99
$3.98
$14.07
$15.17
$4.71
$3.24
$0.65
$10.32
74%
$253.36
$11.10
$6.82
FINANCIAL STATS
Adj. EPS
CFPS
P/E Ratio
P/CF Ratio
LT
Working
Debt
Capital
EV
2012E
1
Company
2012E
2013E
2012E
2013E
2012E
2013E
2012E
2013E
(US$M)
(US$M)
(US$M)
$0.43
$0.31
$2.10
$0.87
$1.86
$0.53
$0.60
$2.18
$2.03
$2.42
$0.60
$0.49
$2.84
$1.37
$2.09
$0.74
$0.81
$2.97
$3.67
$2.68
16.7x
16.1x
12.0x
19.8x
20.9x
13.4x
8.4x
11.6x
8.4x
16.0x
11.8x
10.3x
8.9x
12.5x
18.5x
9.6x
6.3x
8.5x
4.7x
14.5x
$0
$6
$67
$0
$57
$80
$255
$625
$253
$685
$841
$1,302
$3,540
$763
$13,257
17.1x
11.6x
12.4x
8.7x
Producer Average
Notes:
1) EV = Enterprise Value = Market Cap. + Debt + Minority Interests + Preferred Shares - Cash & Cash Equivalents
Gold Price Assumptions: 2012E:$1750, 2013E:$1750, 2014E:$1750, 2015E:$1500, 2016E:$1400, 2017E+$1200
Silver Price Assumptions: 2012E:$35, 2013E:$35, 2014E:$35, 2015E:$30, 2016E:$25, 2017E+$20
Foreign Exchange Rate, US$:C$ =1.03
EBITDA
(US$M) EV/EBITDA
$95
$195
$561
$130
$745
8.9x
6.7x
6.3x
5.9x
17.8x
9.1x
51
Company Comment
Valuation and Target Price Rationale
■ We rate the shares of Fortuna 2-Sector Perform, with a one-year target price of $8.50
per share, implying a 21% return to target. We ascribe a blended 1.93x multiple (1.85x
for operating assets and 1.00x for cash) to our valuation to achieve our target price. The
1.85x multiple for the producing mines is on par with values we ascribe to ramped-up
trouble-free assets in other precious metals companies. We believe Fortuna deserves a higher
multiple than the silver producer group average for the following reasons:
■ Net free cash flow and no debt. We estimate Fortuna has about $71 million in cash and we
project its capital programs will be easily maintained from operating cash flow.
■ Well positioned in silver districts of Mexico and Peru. The San Jose mine is in the
underexplored Taviche mining district of southern Mexico and the Caylloma mine is located
in a district that has historically produced more than 100 million ounces of silver since preColombian times. Both areas are served by infrastructure, supply chains, and skilled labour.
■ Increasing silver exposure and increasing liquidity from NYSE. Just less than 70% of
Fortuna’s 2011 revenue was from precious metals, but by 2014 we expect the growing
operations will increase precious metals revenue to 83% of revenues. We believe this could
generate increased investor interest, especially given the company’s higher profile now on
the NYSE Big Board.
■ Our valuation of $4.29 per share largely consists of a bottom-up cash flow analysis of
Fortuna’s two operations. We use a 3% discount rate for the silver-gold San Jose mine and
a 5% discount rate for the polymetallic Caylloma mine. For silver assets with a significant
base metals revenue component, such as Caylloma, we calculate a weighted-average discount
rate based on the life-of-mine revenue split between precious metals (3% discount rate) and
base metals (8% discount rate). In the case of Caylloma, we estimate just over half of the
life-of-mine revenue comes from precious metals. Therefore, we discount cash flow at 5%
according to the following formula: (0.55 x 3%) + (0.45 x 8%). Our detailed valuation
calculation and target price generation can be found in Exhibit 2.
Exhibit 2 - Net Asset Valuation at 3% Discount Rate and Target Price Calculation
San Jose (3% discount rate)
Caylloma (5% discount rate)
Total Mining Assets
Net Debt
Working Capital (Net of Cash and ST Debt)
In-the-money Instruments
Corporate Adj. for G&A, Expl & Reclamation
Total Other Assets & Liabilities
Total Net Asset Value
US$M
US$/share
% of NAV
$413
$191
$604
$3.20
$1.48
$4.69
75%
35%
109%
$74
$6
$5
($136)
-$51
$0.57
$0.05
$0.04
-$1.06
-$0.40
13%
1%
1%
-25%
-9%
$552
$4.29
100%
Target Price Generation
FSM closing price March 1, 2012
Current Premium to NAV
Target Price NAV Multiple
Target Price
Implied Return based on Target Price
$7.10
1.66x
1.93x
$8.50
20%
52
Company Comment
Financial Analysis and Outlook - No Dilution on Horizon
■ Fortuna is estimated to have $71 million in cash and $2 million of short-term
investments as of Q4/11. The company’s cash position is expected to grow with its two
commercial mines providing net free cash flow. A planned plant expansion at San Jose is
scheduled in late 2013 and should be easily covered by cash flow from operations. Based on
Fortuna’s cash and short-term investments, as noted above, and its undrawn $20 million
revolving credit facility, we do not foresee any further need for capital by the company
unless Fortuna pursues an acquisition.
Risk Factors - Leverage to Silver: Opportunity and Threat
■ Fortuna is not heavily exposed to development risk or inflation threats now that it has
declared commercial production at the San Jose mine. Fluctuations in the price of silver
are probably the greatest threat to our valuation. A 10% decrease in the price of silver would
result in a 13% change in valuation. Conversely, a 10% increase in the price of silver would
enhance our valuation by 14%.
■ In our opinion, there is not a significant impact from the oscillation in price of the other byproduct metals Fortuna produces. For example, a 10% change in our zinc and lead forecast
prices results in only a 3% and 2% change to valuation, respectively. In addition, Fortuna
maintains a small forward-selling program for zinc and lead.
■ Other risks worth noting include the following:
■ Political risk. We believe investors are becoming comfortable with Peru again following the
signing into legislation of new tax and royalty laws for the mining sector. President Ollanta
Humala’s team made an effort to consult resource companies before presenting the bill to the
Peruvian Congress. There are three main components of the new laws, which took effect
October 1, 2011:
o
Special Tax on Mining (STM). This new tax does not apply to Caylloma, which
has a stability agreement until 2017. It is based on operating profit and applies a sliding
scale of 2.0% to 8.4% and is deductible from corporate income tax calculations.
o
Special Levy to the Mining Sector (SLM). This new tax affects projects, such as
Caylloma, that already have mining stability agreements. It applies a sliding scale of
4.00% to 13.12% and is also deductible from corporate income tax calculations.
o
Amendment to the Mining Royalty. This applies a 1% to 12% sliding-scale
royalty to operating margins. However, if a royalty of 1% of sales income is greater than
the sliding-scale calculation on operating margins, then the 1% income royalty applies.
In either case, it is deductible from corporate income tax calculations and the special
levy.
■ We believe the mining industry will continue to thrive in Mexico. Fortuna has worked to
achieve its social licence with the communities closest to the San Jose mine. As part of that
work, the company repaired the sewage treatment plant in Ocotlán de Morelos, just north of
the mine. It is a welcome fix for the community and provides a source of grey water, which
Fortuna pipes to the mine for processing, thereby reducing demand on an already-arid region.
■ Operational risk. As mentioned, we believe development risk is behind Fortuna, but
ongoing operational challenges exist, such as Caylloma’s high elevation of 4,500 metres and
the need for resource expansion from vein exploration in the district. The biggest hurdle for
San Jose is ore control and keeping underground development on top of the shifting
stockwork zones and veins underground. That said, San Jose is a shallow and compact ore
body, with short-haulage requirements. Its grade profile also improves with depth, which
should help drive production increases over the next few years.
53
Company Comment
Exhibit 3 - Production and Financial Forecast
2011E
$30
$29
$0.24
23.1x
$45
$0.35
15.6x
-
2012E
$55
$55
$0.43
16.2x
$78
$0.60
11.5x
-
2013E
$68
$68
$0.53
13.0x
$95
$0.74
9.4x
-
$73
($46)
($1)
($7)
$1
$8
$35
$28
$28
($12)
$119
($74)
($1)
($9)
$1
$11
$55
$45
$45
($16)
$186
($110)
($1)
($19)
$1
$20
$95
$76
$76
($21)
$209
($114)
($1)
($22)
$1
$23
$117
$94
$94
($27)
Effective Tax Rate
Earnings bf. Minority Interests
Minority Interest
Reported Net Earnings
Reported EPS (f.d.) (US$/sh)
Adjusted EPS (f.d.) (US$/sh)
Cash Flow Statement Items (US$mm)
Net Earnings
Depreciation
Deferred Taxes
28%
$16
$16
$0.14
$0.14
28%
$30
$30
$0.24
$0.23
28%
$55
$55
$0.43
$0.43
28%
$68
$68
$0.53
$0.53
$16
$7
$3
$30
$9
$0
$55
$19
-
$68
$22
-
Other
Operating CF bf. ch. in WC
CF from Operating Activities
CF from Financing Activities
CAPEX
CF from Investing Activities
Net Change in Cash
CFPS bf. ch. in WC (f.d.) (US$/sh)
Balance Sheet Items (US$mm)
Cash
Current Assets
Long-term Assets
Total Assets
Dividends Payable
Current Liabilities
Long-term Debt
Total Liabilities
Shareholder's Equity
Total Liabilities & Shareholder's Equity
Working Capital
($4)
$22
$21
$74
($39)
($57)
$40
$0.20
$4
$45
$42
$1
($64)
($41)
$3
$0.35
$4
$78
$76
($56)
($57)
$19
$0.60
$4
$95
$93
($13)
($13)
$79
$0.74
$70
$112
$122
$234
$15
$17
$31
$203
$234
$97
$71
$97
$171
$267
$17
$18
$35
$232
$267
$80
$91
$113
$209
$322
$19
$17
$36
$286
$322
$94
$171
$194
$199
$393
$22
$17
$39
$354
$393
$172
Average share price (US$)
S/O (mm) - Basic
Realized silver price (US$/oz)
Spot silver price (US$/oz)
Mine Gold Production and Costs
San Jose (Moz)
Caylloma (Moz)
Total Production (Moz)
Average cash costs (US$/oz)
Additional Ratio Analysis
Net Interest Coverage (x)
Gross Margin
ROE
ROA
EV/EBITDA (x)
Net Debt/Equity
Book Value (US$/sh)
Free cash flow (US$/sh)
2010A
C$5.61
122.5
$20
$20.18
2011E
$5.51
123.6
$35
$35.27
2012E
$8.50
123.6
$35
$35.00
2013E
$8.50
123.6
$35
$35.00
1.9
1.9
(6)
0.4
1.9
2.3
$0
1.6
1.8
3.4
$0
2.0
1.7
3.7
(2)
39.0x
1.6
8%
7%
23x
n.m.
$1.65
($0.15)
82.7x
1.6
13%
11%
15x
n.m.
$1.88
($0.18)
140.8x
1.6
19%
17%
8x
n.m.
$2.31
$0.16
174.7x
1.5
19%
17%
6x
n.m.
$2.86
$0.65
NAV Analysis
Mining Assets (US$mm)
US$M
San Jose (3% discount rate)
Caylloma (5% discount rate)
Total Assets
Net Debt
Working Capital (Net of Cash and ST Debt)
Net Asset Value:
US$/Sh
%
$413
$191
$604
$3.20
$1.48
$4.69
75%
35%
109%
$74
$6
$5
($136)
$552
$0.57
$0.05
$0.04
-$1.06
$4.29
13%
1%
1%
-25%
100%
Mine Reserves and Resources
Silver Reserves (Moz)
Silver Resources (Moz)
45.1
45.0
$4
$2
4
$0
Caylloma
2
-$2
San Jose
0
2010A
2011E
2012E
2013E
2014E
-$4
Total Cash Costs (US$/oz)
2010A
$16
$16
$0.14
38.8x
$22
$0.20
27.9x
-
Silver Production (Moz)
Ratio Analysis
Net Income (US$mm)
Net Income Adjusted (US$mm)
EPS (f.d.) (US$/sh)
P/E (x)
Operating CF bf. ch. in WC (US$mm)
CFPS bf. ch. in WC (US$/sh)
P/CF (bf. ch. in WC) (x)
Dividend ($/sh)
Dividend Yield
Income Statement Items (US$mm)
Total Revenue
Operating Costs
Exploration and Corporate Exp.
Depreciation
Interest Expense
Other - gain (loss)
EBITDA
EBIT
EBT
Taxes - recovery (expense)
-$6
2015E
Revenue By Metal (2012E)
Gold, 15%
Lead, 10%
Zinc, 11%
Silver, 63%
Table of Contents
Intraday Flash
54
Company Comment
GENIVAR Inc.
(GNV-T C$27.96)
Mark Neville, CFA - 514-350-7756
Michael Doumet - 514-350-7778
[email protected]
[email protected]
Target 1-Yr:
2-Yr:
C$29.00
C$29.00
ROR 1-Yr:
2-Yr:
9.1%
14.4%
Est. NTM Div.
Div. (Current)
C$1.50
C$1.50
Yield
Valuation: 7.75x EV/EBITDA on 2013E
5.4%
Key Risks to Target: Slower-than-anticipated recovery in commercial and residential construction.
Event
■ GENIVAR announced the acquisition of GRB Engineering (GRB).
GRB is a Calgary-based oil and gas engineering services and project
management firm.
Implications
■ GRB strengthens GENIVAR's position in the oil and gas industry,
adding 80 people in Alberta (brings total headcount to approximately
600 in AB). We believe GENIVAR will look to further expand its
presence in the region; we believe the company could look to grow its
headcount to approximately 1,000.
■ In our view, GRB will strengthen GENIVAR's oil and gas platform.
GRB adds expertise in procurement and construction management,
which should be complementary to GENIVAR's existing offering in the
region/end-market (previously, more focused on engineering/design).
■ We have made modest revisions to our estimates. We estimate the
purchase price at $10 million.
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
32.5
909.3
32.5
909.3
Next Reporting Date
26-Mar-12
Recommendation
■ We like GENIVAR's 5.4% yield and growth potential through
acquisition. However, the shares trade at a (justified) premium to the
group. We maintain our 2-Sector Perform rating on GNV shares.
Qtly EBITDA (M)
2010A
2011E
2012E
2013E
(FY-Dec.)
Dividends/Share
Payout Ratio
Revenues
EBITDA
EBITDA Margin
Net Debt/EBITDA
IBES Estimates
CFPS 2011E: $2.34
CFPS 2012E: $2.48
BVPS12E
ROE12E
Q1
Q2
Q3
Q4
Year
$19 A
$20 A
$26
$26
$22 A
$22 A
$27
$27
$24 A
$27 A
$27
$28
$20 A
$24
$26
$26
$85
$92
$105
$108
EV /
EBITDA
7.87
7.47
8.63
8.42
2009A
$1.65
$1.50
91.0%
$395
$79
19.9%
-0.57
2010A
$2.26
$1.50
66.3%
$469
$85
18.1%
0.48
2011E
$2.07
$1.50
72.4%
$531
$92
17.4%
-0.70
2012E
$2.04
$1.50
73.5%
$586
$105
18.0%
-0.60
2013E
$2.10
$1.50
71.4%
$600
$108
18.0%
-0.77
Pertinent Revisions
EBITDA12E
EBITDA13E
New
$105.42
$108.01
Old
$103.75
$105.98
Table of Contents
$15.83
9.6%
55
Company Comment
(PAC-N US$37.96)
(GAP B-MX MXN48.45)
Ana Reynal - +52 55-9179 5211
(Scotiabank Inverlat)
[email protected]
Rating: 3-Sector Underperform
[email protected]
Target 1-Yr:
2-Yr:
US$42.00
US$45.00
ROR 1-Yr:
2-Yr:
18.1%
33.5%
Est. NTM Div.
Div. (Current)
US$2.83
US$1.47
Yield
Valuation: 2010-2021 DCF w/ 12.3% WACC; 9x NTM EV/EBITDA
3.9%
Key Risks to Target: Govmnt. regulation, troubled domestic airlines
Gap Paying Out a Dividend Yield of 8%, Above
our 4% Estimate
Event
■ Gap called for a shareholder's meeting to take place on April 16, 2012.
Implications
■ Gap proposed a dividend payment of MXN2.13 per share, excluding
repurchased shares to be paid in May (MXN1.60) and November
(MXN0.53). The announcement comes 16% ahead of our estimates and
implies a dividend yield of 4.4%.
■ Additionally, the company proposed a capital reduction of MXN870
million to be paid out no later than June 30, 2012. This implies a
payment of MXN1.64 per share for a yield of 3.4%. All in, these two
payments represent a yield of 7.8% on current prices.
■ Also, a total of MXN280 million may be approved for this year's share
repurchase program (at current prices this translates in a yield of 1%).
■ The agenda also includes the ratification of the Board of Directors, the
Board report, approval of the company's net income for the period, and
the designation of Series B representation in the Board, among others.
Capitalization
ADS O/S (M)
Total Value (US$M)
ADS Float O/S (M)
Float Value (US$M)
S&P Weight
Next Reporting Date
56.1
2,130
47.7
1,810
0.01%
Apr-12
Recommendation
■ We rate Gap 3-SU on relative valuation and overhang risk.
Qtly EPS (FD)
2010A
2011A
2012E
2013E
Q1
0.99 A
0.71 A
0.62
0.68
(FY-Dec.)
Earnings/Share
Price/Earnings
Relative P/E
Revenues
EBITDA
IBES Estimates
EPS 2012E: US$1.85
EPS 2013E: N/A
BVPS12E
ROE12E
Q2
0.31 A
0.34 A
0.55
0.65
Q3
0.58 A
0.61 A
0.56
0.68
Q4
0.79 A
0.99 A
0.65
0.77
Year
2.67
2.65
2.38
2.78
P/E
18.77
17.80
20.37
17.44
2009A
2.14
0.14
19.1
0.2
3,266
2,123
2010A
2.67
0.54
18.8
1.1
3,717
2,439
2011A
2.65
0.35
17.8
1.2
3,903
2,588
2012E
2.38
0.68
20.4
1.3
4,321
2,876
2013E
2.78
0.65
17.4
1.1
4,692
3,133
Pertinent Revisions
EPS12E
EPS13E
New
2.38
2.78
Table of Contents
47.57
5.0%
All values in MXP unless otherwise indicated.
Old
2.45
N/A
56
Company Comment
(HL-N US$5.05)
[email protected]
Risk Ranking: High
[email protected]
Target 1-Yr:
2-Yr:
US$6.50
US$6.50
ROR 1-Yr:
2-Yr:
30.1%
31.6%
Est. NTM Div.
Div. (Current)
US$0.07
US$0.07
Yield
1.4%
Initiating Coverage: 2012: A Year of Deferred
Development
Event
■ We have initiated coverage on Hecla with a 2-Sector Perform rating and
a one-year target price of $6.50 per share.
Implications
■ Hecla's Lucky Friday mine, one of two it operates, is closed for care
and maintenance of its main shaft and 30% of the company's usual 8.0
million to 9.0 million ounces of silver production is offline until 2013.
■ Once Lucky Friday is producing again, Hecla's normal annual silver
production is scheduled to grow 30% to more than 10 million ounces.
■ Hecla is trading at a 14% premium to our net asset valuation (NAV5%)
of $4.77 per share. Our target is based on 1.35x NAV5%.
entitled Growing Supply Tarnishes Outlook; Lustre Found in Equities..
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
S&P Weight
Next Reporting Date
309.4
1,562
309.4
1,562
0.01%
Apr-12
Recommendation
■ At the current share price we feel there is not enough reward for the risk
associated with a re-rating that may not fully develop until development
and production resume at the Lucky Friday mine. We also think Hecla is
in a riskier position while it relies solely on the Greens Creek operation.
Qtly EPS (FD)
2010A
2011A
2012E
2013E
Q1
$0.08 A
$0.15 A
$0.07
$0.13
(FY-Dec.)
Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA
Production (Moz)
IBES Estimates
EPS 2012E: $0.35
EPS 2013E: $0.58
BVPS12E
NAV
P/NAV
Q2
$0.05 A
$0.11 A
$0.08
$0.16
Q3
$0.06 A
$0.19 A
$0.08
$0.16
Q4
$-0.05 A
$0.06 A
$0.08
$0.16
Year
$0.13
$0.51
$0.31
$0.60
P/E
85.89
10.29
16.07
8.36
2009A
$0.24
25.8
$0.53
11.7
$132
$15.63
10.99
$1.91
2010A
$0.13
85.9
$0.70
16.0
$215
$20.16
9.36
$-1.46
2011A
$0.51
10.3
$0.79
6.6
$283
$35.11
8.12
$1.15
2012E
$0.31
16.1
$0.49
10.3
$195
$35.00
5.72
$-3.20
2013E
$0.60
8.4
$0.81
6.3
$338
$35.00
7.89
$-4.92
4.47
$4.77
1.06x
Pertinent Revisions
New
Rating:
Risk:
Old
2-SP
Caution
Warranted
N/A
N/A
$6.50
$6.50
$0.31
$0.60
N/A
N/A
N/A
N/A
Target:
1-Yr
2-Yr
EPS12E
EPS13E
New Valuation:
1.35x NAV
Old Valuation:
N/A
Table of Contents
All values in US$. Note: Quarterly EPS may not sum to year-end EPS due to rounding.
57
Company Comment
■ With only the Greens Creek mine operating this year, we still estimate Hecla should
generate about $30 million in net free cash flow and continue to build up its cash
balance. As at the end of 2011, the company had $266 million in cash and no debt. Hecla
management stated the current shutdown of the Lucky Friday mine should not affect its new
silver-linked dividend policy, which is based on the average silver price received in the
preceding period. The quarterly dividend is calculated based on $0.01 per common share if
the average silver price received is greater than $30/oz. The dividend is intended to increase
by $0.01 for each $5/oz increase in the silver price received. The first dividend under this
policy was declared and paid in Q4/11.
■ The Lucky Friday mine is on care and maintenance as Hecla completes safety work in
its shaft directed by the U.S. Federal Mine Health and Safety Administration (MSHA).
The directive came following three serious accidents at the mine since 2011 and is expected
to keep the mine offline until 2013. The three serious accidents included fatalities, but the
rehabilitation work is not directly related to any of the incidents. As a consequence, Hecla is
choosing to not proceed with its new internal shaft development until 2013, when
rehabilitation work is expected to be complete. No production work in the mine is allowed
during this period of maintenance, although development could be continued.
■ Three advanced-stage projects could drive Hecla’s silver output 50% higher over the
next five years and add materially to our valuation. These include the Star mine, a past
producer adjacent to the Lucky Friday mine; the San Juan silver property in southwest
Colorado, also a past producer; and the San Sebastian asset in Durango, Mexico. Updated
resources are pending and several scoping studies are scheduled to be completed this year.
We only value these assets at $200 million ($0.65 per share), but as the resources increase
and development details are announced, we expect our valuation will increase.
■ In 2011, Hecla finalized its environmental obligations with the Coeur d’Alene Basin
settlement in Idaho and in our opinion removed a significant overhang. The U.S. District
Court’s approval of the settlement quantified the company’s payments at $263 million, or
about $159 million net of tax benefits. Until the government’s final acceptance, liabilities
potentially could have reached a multiple of the final amount. Further settlement payments
net of tax benefits include $15 million in 2012, $9 million in 2013, and a final $34 million in
2014. In mid-2014, about 22.7 million deep in-the-money warrants expire, with the average
strike price of about $2.50 each. These should bring in approximately $56 million, more than
offsetting the final settlement payment.
■ Hecla shares are trading nearly in line with our net asset valuation and at lower 2013
price to earnings (P/E) and 2013 price to cash flow (P/CF) multiples than the silver
producer group averages. We feel the company improved its risk profile following the
resolution of its environmental litigation; however, a re-rating may not fully develop until
development work and production resume at the Lucky Friday mine. We expect Hecla to
attain our full 1.35x target multiple and one-year target closer to year-end, when the company
is ready to emerge from its period of care and maintenance with a better and safer mine.
■ We calculate Hecla’s NAV5% growth is 15%, the highest of any of the silver companies
we cover, although much of the growth is attributable to a growing cash balance. This
potential valuation growth, coupled with higher trading multiples as the company returns to
full capacity next year, could cause our target price to expand dramatically to as much as
$8.00 per share. This assumes operations return to normal without significant delay
58
Company Comment
Company
Last trade
Shares
F-D
NAV/
U.S.
1-Mar-2012
O/S F-D
Market
Share
Price/
Target
Target
1-Year
Rate of
Symbol
US$
(M)
Cap (US$M)
(US$)
NAV
Multiple
(US$)
Return
Rating
FSM
HL
PAAS
SSRI
SLW
$7.10
$5.05
$25.25
$17.14
$38.78
128.8
309.4
159.1
82.3
358.8
$915
$1,562
$4,018
$1,410
$13,915
$4.29
$4.77
$24.71
$22.26
$25.65
1.66x
1.06x
1.02x
0.77x
1.51x
1.93x
1.35x
1.10x
1.06x
1.95x
$8.50
$6.50
$37.00
$24.00
$50.00
20%
30%
47%
40%
30%
2-Sector Perform
2-Sector Perform
1-Sector Outperform
2-Sector Perform
1-Sector Outperform
1.20x
1.48x
1
EV
Producer Average
Production
Total Cash Cost
(000 oz)
(US$/oz)
Company
2012E
2013E
2012E
2013E
P&P
3,408
5,718
23,652
8,032
24,210
3,716
7,890
25,352
15,802
30,356
$0.45
($3.20)
$9.28
$15.13
$4.02
($2.08)
($4.92)
$9.42
$10.71
$4.05
45
148
354
192
942
$5.14
$3.44
Producer Average
55
277
1,092
1,167
1,284
90
420
1,383
1,571
1,779
% Prod.
EV
1
EV
1
Growth
/2012E Prod.
/Reserve oz
11E - 13E
(US$)
(US$)
/(P&P+M&I)
(US$)
61%
-3%
25%
238%
51%
$247
$228
$150
$95
$548
$18.65
$8.82
$9.99
$3.98
$14.07
$15.17
$4.71
$3.24
$0.65
$10.32
74%
$253.36
$11.10
$6.82
FINANCIAL STATS
Adj. EPS
CFPS
P/E Ratio
P/CF Ratio
LT
Working
Debt
Capital
EV
2012E
1
Company
2012E
2013E
2012E
2013E
2012E
2013E
2012E
2013E
(US$M)
(US$M)
(US$M)
$0.43
$0.31
$2.10
$0.87
$1.86
$0.53
$0.60
$2.18
$2.03
$2.42
$0.60
$0.49
$2.84
$1.37
$2.09
$0.74
$0.81
$2.97
$3.67
$2.68
16.7x
16.1x
12.0x
19.8x
20.9x
13.4x
8.4x
11.6x
8.4x
16.0x
11.8x
10.3x
8.9x
12.5x
18.5x
9.6x
6.3x
8.5x
4.7x
14.5x
$0
$6
$67
$0
$57
$80
$255
$625
$253
$685
$841
$1,302
$3,540
$763
$13,257
17.1x
11.6x
12.4x
8.7x
Producer Average
Notes:
EBITDA
(US$M) EV/EBITDA
$95
$195
$561
$130
$745
8.9x
6.7x
6.3x
5.9x
17.8x
9.1x
59
Company Comment
■ Hecla trades at a 7% premium to our NAV5% of $4.77 per share, but we believe a large
overhang is successfully removed now that the company’s environmental obligations
have been quantified with the Coeur d’Alene Basin settlement. The company ended 2011
with $266 million in cash following the 2011 settlement payment. We also predict significant
cash accrual going forward given our estimates of negative cash costs net of by-product
credits.
■ We rate the shares of Hecla 2-Sector Perform, with a one-year target price of $6.50 per
share, implying a 20% return to target. In recognition of Hecla’s current operational
shutdown at Lucky Friday and its above-average proportion of base metals revenues, we
assign a relatively modest one-year target price multiple of 1.35x our NAV5% relative to its
peers, to which we apply an average 1.48x target multiple.
■ Hecla shares trade inexpensively, at a discount to our valuation, but we do not agree
that the company is likely to face an opportunistic and hostile offer as some are
speculating. As a U.S.-domiciled company, Hecla should be able to stave off an unwelcome
tender offer with a poison pill provision. Furthermore, we doubt a proxy battle would find
traction at the current share price level.
■ Our valuation of $4.77 per share largely consists of a bottom-up cash flow analysis of
Hecla’s two operations using a 5% discount rate. For silver assets with a significant base
metals revenue component, we calculate a weighted-average discount rate based on the lifeof-mine revenue split between precious metals (3% discount rate) and base metals (8%
discount rate). In the case of Hecla’s mines, we estimate 60% of the life-of-mine revenue
comes from precious metals and 40% from base metals. Therefore, we discount cash flows at
5% according to the following formula: (0.60 x 3%) + (0.40 x 8%). Our detailed valuation
calculation and target price generation can be found in Exhibit 2.
Lucky Friday
Greens Creek
Exploration Properties
Total Mining Assets
US$M
$260
$1,019
$200
$1,479
US$/share
$0.84
$3.29
$0.65
$4.78
% of NAV
18%
69%
14%
100%
Net Debt
Working Capital (Net of Cash & Short Term Debt)
Corporate Adj. for G&A, Expl. & Reclamation
$256
($7)
$63
($317)
$0.83
($0.02)
$0.20
($1.03)
17%
0%
4%
-22%
Net Asset Value
$1,475
$4.77
100%
Closing Price March 1, 2012
Price/Net Asset Value
Target Multiple
Target Price
Implied Return to Target
$5.05
1.06x
1.35x
$6.50
30%
60
Company Comment
Financial Analysis and Outlook
■ We estimate Hecla should generate about $30 million in net free cash flow and continue
to build up its cash balance. Net of its $168 million first payment in the Coeur d’Alene
Basin settlement in Q4/11, the company finished 2011 with $266 million in cash. Further
settlement payments net of tax benefits include $15 million in 2012, $9 million in 2013, and
a final $34 million in 2014. In mid-2014, about 22.7 million deep in-the-money warrants
expire, with the average strike price of about $2.50 each. These should bring in
approximately $56 million, more than offsetting the final settlement payment.
■ Hecla announced a silver-linked quarterly dividend policy that is based on the average
silver price received in the preceding period. The dividend will be calculated based on
$0.01 per common share if the average silver price received is greater than $30/oz. The
dividend will increase by $0.01 for each $5/oz increase in the silver price received. The first
dividend under this policy was declared and paid in Q4/11. Hecla management stated the
current shutdown of the Lucky Friday should not affect its dividend policy.
Risk Factors - Reduced with Basin Settlement
■ We view the environmental litigation settlement for the Coeur d’Alene Basin as a major
risk reduction. However, Hecla shares have not responded as we would have expected. The
possible reasons for this could include some of the following risk factors.
■ Hecla is relying on only one operating mine until 2013, following a year-long shutdown
of the Lucky Friday mine for care and maintenance. The suspension of mining activities
to remove potential safety hazards in the main Silver Shaft follows several incidents in 2011,
three of which that were serious. Two of the underground accidents resulted in fatalities and
the third caused several injuries. None of these was related to the Silver Shaft, but it appears
that MSHA, the U.S. federal agency that regulates mines, is being extremely rigorous with
inspections in the wake of recent events.
■ The company is addressing the problematic ground conditions related to the accidents by
constructing a 750-foot bypass tunnel around the area. In addition, it is removing all built-up
material within its shaft to prevent any danger of it falling and causing injury. This condition
is related to lines that carry sand down the shaft for use in the backfilling process. Buildup
has not been a major concern in the past and the shaft is inspected regularly.
■ We also note that Hecla’s revenue stream contains a greater proportion of base metals
than most of the primary silver producers. Although Scotiabank GBM estimates are
robust for lead and zinc, Hecla’s leverage to non-precious metals production could be a
factor in its lower trading multiple ascribed by investors. The company has hedged 35% to
50% of its zinc and lead production at more than $1/lb over the next two years.
■ Capital cost and inflation risk. We estimate that Hecla will continue to generate significant
net free cash flow, even with the suspension of Lucky Friday’s mining activities this year.
While care and maintenance are ongoing at the mine, capital expenditures will be below
normal, although we expect the company will still generate about $30 million in free cash
flow ($0.10 per share) in 2012. Operating costs are expected to remain low net of by-product
credits and there is no foreign exchange exposure since both mines are located in the United
States. Accordingly, we do not foresee any financing risk given the company’s excellent
balance sheet condition, with significant cash and no debt.
■ Permitting and environmental exposure. At its existing mines, future permitting is mostly
limited to tailings expansion at the Greens Creek mine. This has been successfully done
before and is expected to take time, but it will not have an impact on operations. At Greens
Creek, the underground mine occupies a small footprint, but it is located along Alaska’s
Inside Passage and there is a heightened sense of awareness that probably brings a higher
level of scrutiny from the public than may otherwise be expected. Hecla expects to secure
approval for an expanded tailings facility by year-end. The facility would provide capacity
through at least 2016.
61
Company Comment
Symbol
Share Price (US$)
Shares Outstanding (mm) - Basic
Shares Outstanding (mm) - FD
Market Cap (US$mm)
52-week high (US$)
52-week low (US$)
HL
$5.05
285
309
$1,562
$11.56
$5.57
Ratio Analysis
Net Income (US$mm)
EPS (f.d.) (US$/sh)
P/E (x)
Dividend ($/sh)
Dividend Yield
Total Revenue
Operating Costs
Depreciation
Interest Expense
Other - gain (loss)
EBITDA
EBIT
EBT
2010A
$35
$35
$0.13
48.0x
$190
$0.70
8.9x
-
2011E
$151
$125
$0.51
15.3x
$232
$0.79
9.9x
$0.02
0.26%
2012E
$98
$98
$0.31
16.1x
$151
$0.49
10.3x
$0.07
1.12%
2013E
$187
$187
$0.60
8.4x
$249
$0.81
6.3x
$0.02
0.31%
$419
($470)
($22)
($60)
$2
$288
$215
$153
$156
$124
$478
($280)
($27)
($47)
$3
$113
$283
$236
$239
($82)
$402
($251)
($28)
($46)
$1
$71
$195
$149
$150
($53)
$562
($270)
($20)
($52)
$1
$66
$338
$286
$287
($101)
Effective Tax Rate
Minority Interest
0%
$49
($14)
$35
$0.13
36%
$151
($1)
$151
$0.51
35%
$98
($1)
$98
$0.31
35%
$188
($1)
$187
$0.60
US$M
Lucky Friday (3% discount rate)
Greens Creek (3% discount rate)
Exploration Properties
$260
$1,019
$200
$0.84
$3.29
$0.65
18%
69%
14%
Net Earnings
Depreciation
Deferred Taxes
Other
$0.13
$0.44
$0.32
$0.60
Total Assets
$1,479
$4.78
100%
$35
$60
($142)
$236
$151
$47
$77
($42)
$98
$46
$8
$187
$52
$11
Net Debt
Working Capital (Net of cash and short term debt)
Adj. Corporate G&A, Exploration & Reclamation
$256
($7)
$63
($317)
$0.83
($0.02)
$0.20
($1.03)
17%
0%
4%
-22%
$190
$198
$46
($67)
($65)
$179
$0.70
$232
$70
($7)
($88)
($80)
($17)
$0.79
$151
$171
($46)
($140)
($140)
($15)
$0.49
$249
$269
($38)
($83)
($83)
$148
$0.81
Net Asset Value:
$1,475
$4.77
100%
$284
$432
$950
$1,382
$20
$257
$164
$420
$962
$1,382
$175
$266
$363
$1,033
$1,396
$107
$149
$256
$1,140
$1,396
$255
$252
$339
$1,128
$1,466
$90
$101
$190
$1,276
$1,466
$249
$400
$487
$1,159
$1,646
$86
$99
$185
$1,461
$1,646
$401
Production
2-SP
$6.50
30%
$4.77
$0.07
1.06x
Average share price (C$)
S/O (mm) - Basic
Lucky Friday (M oz)
Greens Creek (M oz)
Total Production (M oz)
Gross Margin
ROE
ROA
EV/EBITDA (x)
Net Debt/Equity
Book Value (US$/sh)
2010A
$6.29
258.5
$105
$20.18
2011A
$7.79
285.3
$109
$35.27
2012E
$6.50
285.3
$113
$35.00
2013E
$6.50
285.3
$125
$35.00
3.1
6.2
9.4
($1.46)
2.8
5.3
8.1
$1.15
5.7
5.7
($3.20)
2.4
5.5
7.9
($4.92)
n.m.
-0.1
4%
3%
5.5x
n.m.
$3.72
$0.50
n.m.
0.4
13%
11%
4.7x
n.m.
$4.00
($0.06)
n.m.
0.4
8%
7%
6.6x
n.m.
$4.47
$0.11
n.m.
0.5
13%
11%
3.4x
n.m.
$5.12
$0.65
NAV Analysis
Silver Reserves (M oz)
Silver Resources (M oz)
US$/Sh
%
147.7
272.5
$2.00
8
$0.00
6
Greens Creek
-$2.00
4
-$4.00
2
-$6.00
Lucky Friday
0
2010A
2011A
2012E
2013E
2014E
$4.00
10
Silver Production (M oz)
CAPEX
Net Change in Cash
Cash
Current Assets
Long-term Assets
Total Assets
Current Derivative Contract Liabilities
Current Liabilities
Long-term Debt
Total Liabilities
Working Capital
Stock Rating
12 Month Target Price (US$)
12 Month Potential Return
NAV/Share (US$)
Dividend / Share ($)
Price/NAV
-$8.00
2015E
100,000
12
90,000
10
70,000
Silver (Moz)
60,000
50,000
6
40,000
4
30,000
Lead & Zinc (tonnes)
80,000
8
20,000
2
10,000
0
2010A
2011
2012
Silver (Ag)
2013
Lead (Pb)
2014
2015
Zinc (Zn)
Table of Contents
62
Company Comment
(L-T C$34.66)
Patricia A. Baker, MBA, PhD - 514-287-4535
Greg Debicki - 416-863-5927
[email protected]
Risk Ranking: Low
[email protected]
Target 1-Yr:
2-Yr:
C$35.00
C$38.00
ROR 1-Yr:
2-Yr:
3.4%
14.5%
Est. NTM Div.
Div. (Current)
C$0.84
C$0.84
Yield
Valuation: 13x F2013E EPS
2.4%
Key Risks to Target: Heightened competitive pricing pressures, prolonged deflation, disruption to ops from Supply Chain and IT overhaul
Event
■ Loblaw President Vicente Trius unveiled plans for his strategy to drive
the business forward and drive it better at an analyst meeting earlier this
week.
Implications
■ If a goal of the meeting was to establish credibility for its new
President, this was accomplished. Trius showed himself to be
passionate, forthright, and focused, and looks well up to the challenge
of reinvigoration and execution. We again assert his focus square on the
customer is the right one. We should see L spend against that in F12
and we suspect beyond. It is obvious to us the massive IT and supply
chain spend is not sufficient. In our view, in the absence of a related
customer address, the business could not really right itself.
■ We now have a long-awaited and welcome answer as to what changes
under Trius: as we had hoped, it looks to be pace, execution, and more.
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
TSX Weight
Next Reporting Date
281.4
9,753
111.8
3,875
0.23%
Mar-12
Recommendation
■ Although we lowered forecasts post Q4, we see it prudent and necessary
to adjust further. Our F12E moves 6 cents lower to $2.56 and F13E to
$2.68. Our 1-yr target moves to $35. The share price is still discounting
13.6x, while peers are at 8.8x to 12.8x - there is no rush as yet.
Qtly EPS (Basic)
2010A
2011A
2012E
2013E
Q1
$0.48 A
$0.58 A
$0.56
(FY-Dec.)
Earnings/Share
Dividends/Share
Price/Earnings
Revenues
EBITDA
EBITDA Margin
IBES Estimates
EPS 2012E: $2.69
EPS 2013E: $2.94
Q2
$0.65 A
$0.70 A
$0.66
2009A
$2.44
$0.84
13.9
$30,735
$1,794
5.8%
BVPS12E
ROE12E
Q3
$0.71 A
$0.80 A
$0.77
2010A
$2.42
$0.84
16.7
$30,836
$1,968
6.4%
Q4
$0.58 A
$0.63 A
$0.57
2011A
$2.71
$0.84
14.2
$31,250
$2,074
6.6%
Year
$2.41
$2.71
$2.56
$2.68
P/E
16.75
14.21
13.54
12.95
2012E
$2.56
$0.84
13.5
$32,162
$2,068
6.4%
2013E
$2.68
$0.84
13.0
$33,053
$2,131
6.4%
Pertinent Revisions
Target:
1-Yr
EPS12E
EPS13E
New
Old
$35.00
$2.56
$2.68
$36.00
$2.62
$2.77
Table of Contents
$23.11
11.5%
affiliates are not registered/qualified as research analysts with FINRA in the U.S. Scotiabank, Global Banking and
Markets is financial advisor to Sobeys Inc., a wholly-owned subsidiary of Empire Company Limited, on the acquisition of
retail gas stations in Atlantic Canada and Quebec.
63
Company Comment
The Way Forward… Embraces the Customer… Finally
■ Loblaw held an investor day that was very much marked by an
enhanced degree of disclosure relative to what we have witnessed
over the past five years – a period which could almost be
characterized as having a disclosure vacuum, in our view. The
meeting served to reinforce the message delivered with its year-end
earnings release of a new focus on the customer and slowed nearterm earnings. Management did provide greater detail on spend
from 2012 to 2016, and indicated that when spend tapers and
associated benefits accrue, there is an incremental 60 bp of margin
that could be achievable – likely in 2016 or later.
■ With the hire of an operationally and merchandising focused leader
and what looks like a commitment to seriously now consider the
customer and defer short-term earnings growth, we are convinced
that Loblaw has both the luxury and the newly formed desire to run
this business seriously for the long term.
The Customer Proposition Cannot Wait
Exhibit 1 - Loblaw Long-Term Strategic Statement
Source: Company reports.
■ The time is more than nigh to put the customer first at Loblaw –
many might argue against this added spend on the “customer Exhibit 2 – Spend Delineated
proposition” at a time when significant IT spend remains elevated.
In our view, it is only this customer spend that will deliver better
sales momentum, tonnage and related leverage. Loblaw cannot
afford to wait until infrastructure spend is behind. That large and
ongoing spend gets at the foundation of the business and righting
the foundation is an imperative.
■ Loblaw is on a path to get more competitive in all divisions at the
same time. The investment against the “customer proposition” we
hope will see dollars invested in service and pricing across
geography and across both discount and conventional stores. At the
same time, we do note that this will likely be a long journey. The
new strategic thrust is undertaken to ensure that very thing – the
long term for the business.
■ The most important aspect of any business is the customer, and
this is especially so in retail. As far as the customer is concerned a Source: Company reports.
retailer is only as good as the last shopping trip and the customer
experience. The customer relationship is firmly embedded in the
store experience. There is no doubt that the shopping experience at Exhibit 3 - What to Expect in 2012
Loblaw has been a tad tarnished over the past few years. Trius did
own up to the company having lost some momentum on that very
front. We see promise with the new focus and new leadership to
warrant an expectation for that to get markedly better. And frankly,
it needs to. Two recent Toronto openings, Maple Leaf Gardens and
a smaller store at Queen and Portland, show there is much in the
way of potential. The MLG store as an impressive flagship also
should serve as a living lab, while the smaller Queen and Portland
store is the one with legs that can show operators and investors
what can be done.
■ In an interesting parallel, we note UK market leader Tesco, also
once held as in a class of its own, now finds itself in a position of Source: Company reports.
having to invest behind its stores and customers having also "lost
much momentum" on that important front. Tesco is currently
putting the final touches to a £300M plan to improve stores and overhaul its customer
service. More than half the funds are expected to be invested in store labour to achieve levels
of service more in line with rivals who have more than caught up on the market giant. And
here too this initiative comes on the heels of a profit warning. Tesco issued an unprecedented
64
Company Comment
warning last month, announcing that operating profit in 2012/13
would be flat, contradicting forecasts pointing to a 10% rise. The Exhibit 4 - And the Path to 2016
fact Tesco's market share recently slipped to its lowest level in
seven years is also behind the stepped-up domestic efforts. Loblaw
too has seen its lead market share erode in recent years, in part as it
was unable to keep pace with space being added. But market share
slippage is also owed to lost focus.
■ Looking to the U.S., we note Kroger posted 2011 results which saw
this grocer grow identical store sales (+4.9%) and grow market
share (+50 bp). KR performance does owe much to its "Customer
First" strategy deployed a few years ago.
We Step Back… Again
■ We have often pointed to three questions we believed to be
paramount for investors to consider on the subject of Loblaw: 1)
What is the ultimate earnings power of the company in the context Source: Company reports.
of its more mature status? 2) What should investors now pay for a
mature grocer? 3) And the most important: What will change under
the new leadership of Vicente Trius? The provision of some Exhibit 5 - L Footage Lags Overall Industry
forward guidance coupled with the investor meeting serve to shed
light on each:
The earnings power we see as much reduced and the reach of
the $3.00-plus has been far extended. We do see the company
achieving this goal, but certainly not within the current
forecast period.
Recognizing the mature nature of the industry, the tough path
to growth, and the growing competition, L should command
a valuation in keeping with its peers. As Exhibit 7 shows,
apart from the likes of Whole Foods, grocers are commanding
P/E multiples in the range of 8.8x to 12.8x; on an
EV/EBITDA basis, multiples of 3.1x to 7.4x. The market at
present is grappling with digesting the decidedly muted Source: Company reports.
outlook on earnings growth for F12 and indeed F13. If we
assign any credibility or validity to actual consensus, prior to the Q4 release
expectations were for +10% and +15% growth in F12 and F13. Current consensus calls
for -1% and +9%. We are of the view that the current consensus reset does not fully
The Consumer L Faces
reflect the trim in earnings we are likely to witness. Gross margins are going to be
Today Is…
pressured, costs are going up, and much needs to be done.
As to Trius ...and is he the one to effect change? All signs point to yes. But, we are
More Value-Focused
mindful this is a journey that will take some time.
More Information
Dec-11
Jun-11
Sep-11
Mar-11
Dec-10
Jun-10
Sep-10
Mar-10
Dec-09
Jun-09
Sep-09
Mar-09
Dec-08
Jun-08
Sep-08
Mar-08
Dec-07
Jun-07
Sep-07
Mar-07
Dec-06
More Demanding
No Room For A Premium
More Health-Conscious
■ While Loblaw shares may have commanded a premium multiple to the peers in the past,
we no longer see room for such a premium. Indeed the market has slowly come to the same
conclusion as we have seen forward multiples contract (rightly) over the past five years after
having peaked at 20.1x one-year forward P/E in June 2007 and now sporting 12.9x based on
consensus.
■ Loblaw shares have underperformed the market over the last 12 Exhibit 6 - L P/E Multiples Have Necessarily Corrected
months posting a decline of 11.1%. Over the last five years, L 21x
shares have lost 25% in value. That loss appears warranted in the 19x
context of many aspects of performance. However, looking 17x
forward, we see the brief for Mr Trius to deliver a credible and 15x
measurable set of plans for the business that will see investors 13x
regain interest in the shares. The F11 results and, more important, 11x
the revised outlook for the next few years have seen a reset of
expectations for the company's nearer-term performance. Given
what we certainly perceived to be quite outpaced expectations up Source: IBES.
65
Company Comment
until then, this reset was necessary. We still believe consensus numbers ($2.69 and $2.94) are
too high, and are a little baffled they did not move more on the 2012 (and beyond) guidance
and post the investor meeting. We believe this will be “a long journey” and in light of this we
have revised our estimates again with F12E moving 6 cents lower to $2.56 and F13E moving
to $2.68. We adjust our one-year target to $35. The shares currently discount 13.5x our F12
forecast and 13x F13 forecast. While we are warming up to the prospects for L shares as the
valuation is correcting, we remain on the sidelines at this time and maintain our 2-SP rating.
Exhibit 7 - Global Food Retail Comparables
Ticker Rating Curr.
Supermarket Comparables
Empire*
EMPa.TO 2-SP CAD
Loblaw
L.TO
2-SP CAD
Metro Inc.*
MRU.TO 2-SP CAD
Kroger Co.*
KR.N
NR
USD
Safeway Inc.*
SWY.N
NR
USD
Supervalu Inc.*
SVU.N
NR
USD
Whole Foods Market *
WFM.O
NR
USD
Average
03/01/12
Price
2011
EPS (Cal)
2012E 2013E
$56.51
$34.66
$50.75
$24.44
$21.65
$6.57
$82.17
4.93
2.71
4.01
1.98
1.72
1.23
2.03
5.26
2.56
4.43
2.24
1.84
1.23
2.42
N/A
2.68
4.75
2.36
1.98
1.31
2.79
11.5
12.8
12.7
12.4
12.6
5.3
40.5
15.4
10.7
13.5
11.5
10.9
11.7
5.3
34.0
14.0
N/A
13.0
10.7
10.3
10.9
5.0
29.5
13.2
5.0
7.1
7.8
5.7
4.9
4.3
15.9
7.2
4.7
7.1
7.4
5.4
5.0
4.5
13.5
6.8
N/A
6.9
7.4
5.3
5.0
4.4
11.9
6.8
2011
P/E (Cal)
2012E 2013E
EV/EBITDA (Cal)
2011
2012E
2013E
Div.
Yield
12/30/11
Close
YTD
Perf.
1.6
4.3
1.4
1.3
1.7
1.8
2.4
1.6%
2.4%
1.7%
1.9%
2.9%
5.5%
0.6%
2.4%
$59.11
$38.48
$54.00
$24.22
$21.04
$8.12
$69.58
-4.4%
-9.9%
-6.0%
0.9%
2.9%
-19.1%
18.1%
PEG
General Merchandise Comparables
Target Corp.*
TGT.N
NR
Wal-Mart Stores*
WMT.N
NR
Average
USD
USD
$56.76
$58.82
4.21
4.45
4.24
4.83
4.77
5.25
13.5
13.2
13.3
13.4
12.2
12.8
11.9
11.2
11.6
7.4
7.3
7.4
7.4
7.0
7.2
7.1
6.7
6.9
2.1
1.5
2.5%
3.1%
2.8%
$51.22
$59.76
10.8%
-1.6%
International Supermarket Comparables
Carrefour
CARR.PA NR
Casino Guichard
CASP.PA NR
Sainsbury*
SBRY.L
NR
Metro
MEOG.DE NR
Morrison W/m*
MRW.L
NR
Tesco
TSCO.L
NR
Average
EUR
EUR
GBP
EUR
GBP
GBP
€ 18.87
€ 73.90
297.01p
€ 29.24
290.47p
317.94p
1.44
5.03
26.65
3.03
25.05
33.62
1.54
5.79
28.46
3.31
28.26
35.34
1.68
6.66
30.80
3.59
31.39
37.83
13.1
14.7
11.1
9.6
11.6
9.5
11.6
12.2
12.8
10.4
8.8
10.3
9.0
10.6
11.2
11.1
9.6
8.2
9.3
8.4
9.6
5.4
3.6
6.1
3.5
6.4
6.6
5.3
5.2
3.1
5.8
3.4
6.0
6.4
5.0
4.9
2.7
5.4
3.3
5.6
6.0
4.6
1.6
1.0
1.5
1.1
1.0
1.6
4.5%
4.7%
0.1%
5.1%
0.0%
0.0%
2.4%
€ 17.62
€ 65.08
302.90p
€ 28.20
326.20p
403.45p
7.1%
13.6%
-1.9%
3.7%
-11.0%
-21.2%
*Indicated companies have non-calendar year-end dates
Source: Reuters; Company reports; Scotiabank GBM estimates.
Table of Contents
66
Company Comment
(NA-T C$77.48)
National Bank
Fadi Habib, MBA - 416-863-7076
Robert Poole - 416-863-7843
[email protected]
Rating: 3-Sector Underperform
Risk Ranking: Low
Target 1-Yr:
2-Yr:
C$88.00
C$98.00
ROR 1-Yr:
2-Yr:
17.5%
34.4%
Est. NTM Div.
Div. (Current)
C$3.06
C$3.00
Yield
3.9%
Key Risks to Target: Economic, systemic, interest rate, regulatory and counterparty failures
Q1/12 Solid Beat - Wholesale Strong - High
Security Gain
Event
■ NA cash operating EPS increased 8% YOY to $2.00, above
expectations. Operating earnings were strong, driven by a 13% YOY
increase in Wholesale or 63% QOQ, with NA the only bank to report a
YOY earnings increase in the segment thus far. Trading revenue
rebounded 49% from Q4 lows to $127 million and was actually 4%
higher YOY.
■ ROE: 21.9%, RRWA: 2.48%, CET1: 7.9%.
Implications
■ Retail earnings growth was strong at 9%, with Wealth declining 21%
YOY. Security gains were high, adding $0.17 per share to earnings.
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
TSX Weight
Next Reporting Date
160.9
12,468
160.9
12,468
0.82%
Jun-12
Recommendation
■ We are increasing our 2012E and 2013E EPS to $7.75 and $8.40 from
$7.60 and $8.30, respectively, due to strong results this quarter. We are
increasing our share price target to $88 from $82 based on higher
earnings outlook.
■ Maintain 3-Sector Underperform rating due to high relative valuation
versus its earnings mix and quality of earnings, although the bank has
done an excellent job of sustaining its earnings with low volatility.
Qtly Cash Op EPS (FD)
2010A
2011A
2012E
2013E
Q1
$1.55 A
$1.86 A
$2.00 A
Q2
$1.50 A
$1.78 A
$1.85
(FY-Oct.)
Cash Op Earnings/Share
Price/Earnings
2009A
$6.22
9.1
IBES Estimates
EPS 2012E: $7.47
EPS 2013E: N/A
$37.28
21.9%
Curr. BVPS
Curr. ROE
Q3
$1.57 A
$1.86 A
$1.90
2010A
$6.25
10.7
Q4
$1.63 A
$1.68 A
$2.00
2011A
$7.18
9.9
Year
$6.25
$7.18
$7.75
$8.40
P/E
10.74
9.91
10.00
9.22
2012E
$7.75
10.0
2013E
$8.40
9.2
Pertinent Revisions
Target:
1-Yr
2-Yr
EPS12E
EPS13E
New
Old
$88.00
$98.00
$7.75
$8.40
$82.00
$92.00
$7.60
$8.30
Table of Contents
67
Company Comment
Items of Note
■ Reported earnings were $1.99 per share, which included a $5 million after-tax or $0.03 per
share charge related to the Wellington West acquisition, and a $3 million after-tax or $0.02
per share gain from MAV restructured notes.
Personal & Commercial Banking Earnings Growth 9%
■ Personal & Commercial Banking earnings increased 9% YOY to $170 million from $156
million a year earlier. Earnings were driven by strong volume growth, partially offset by a
decline in the net interest margin.
■ Average loans and acceptances were up 12% YOY, aided by the acquisition of three credit
portfolios in Q3/11. Retail net interest margin was flat sequentially at 2.26%, but it declined
18 bps YOY.
■ PCLs were $45 million versus $55 million a year earlier and $50 million in the previous
quarter.
■ Revenue increased 2.7% YOY to $642 million, with expenses increasing 3.1% YOY to $364
million for negative operating leverage of 0.4%. The efficiency ratio was 56.7% versus
56.5% a year earlier and 58.6% in the previous quarter.
■ Personal & Commercial Banking represented 50% of total earnings from operations in the
quarter, down from 56% in Q4/11.
Financial Markets Earnings Very Strong
■ Financial Markets earnings were very strong, increasing 13% YOY and 63% QOQ to $129
million from $114 million a year earlier and from $79 million in the previous quarter,
respectively.
■ Financial Markets efficiency ratio improved to 49.1% for the quarter, compared to 59.3% in
the previous quarter and 50.2% a year earlier.
■ Financial Markets represented 38% of total earnings from operations in the quarter, up from
28% in Q4/11.
Trading Revenue Strong - Fixed Income Trading Rebounds
■ Trading revenue was $127 million versus $85 million in the previous quarter and $122
million a year earlier.
■ Fixed income trading was $54 million versus $19 million in the previous quarter and $28
■ Equity trading revenue was $61 million versus $51 million in the previous quarter and $74
million a year earlier. Commodity and foreign exchange revenue declined to $19 million
versus $31 million in the previous quarter and $25 million a year earlier.
■ Trading revenue represented 10% of total revenue in the quarter, unchanged from a year
earlier and up from 7.0% in the previous quarter.
Wealth Management Earnings Weak
■ Wealth Management earnings declined 21% YOY and 22% QOQ to $38 million. Wealth
Management includes two recent acquisitions by the bank, with the Wellington West
acquisition completed on July 15, 2011 (Q3/11), and the HSBC Securities (Canada) Inc.
acquisition completed January 3, 2012. The acquisitions contributed $3.2 million to earnings
in the quarter.
■ Revenue increased 8% YOY, with expenses increasing 17% YOY. Wealth Management
efficiency ratio was 76.9% for the quarter, compared to 72.7% in the previous quarter and
70.6% a year earlier.
■ Mutual fund assets declined 2% YOY to $12.6 billion, with mutual fund revenue stable at
$49 million versus $47 million in the previous quarter and $48 million a year earlier.
■ Wealth Management represented 11% of total earnings from operations in the quarter, down
from 16% in Q4/11.
68
Company Comment
Capital Markets Revenue Stable
■ Capital markets revenue was relatively flat at $156 million versus $160 million in the
previous quarter and $154 million a year earlier. Securities brokerage commissions were $88
million versus $89 million in the previous quarter and $82 million a year earlier.
Underwriting and advisory was $68 million versus $71 million in the previous quarter and
$72 million a year earlier.
Security Gains High
■ Security gains were $41 million or $0.17 per share in the quarter versus $6 million or $0.03
per share in the previous quarter and $37 million or $0.15 per share a year earlier. Security
gains represented 8% of earnings in Q1/12.
Unrealized Security Surplus Increases – Equity Component Up
■ Unrealized securities surplus increased to $454 million ($99 million for equity component)
versus a surplus of $351 million ($67 million for equity component) in the previous quarter.
Provision for Credit Losses 21 bps
■ Specific provision for credit losses was $45 million or 0.21% of loans, versus $50 million or
0.25% of loans the previous quarter and $55 million or 0.30% of loans a year earlier.
Impaired Loan Formations Decline
■ Impaired loan formations were $12 million versus $45 million in the previous quarter and
$65 million a year earlier. The loan formations this quarter comprised $18 million from retail
and recoveries of $6 million from commercial and corporate.
■ Gross impaired loans (GILs) were $387 million or 0.47% of loans in the quarter versus
$407 million or 0.50% of loans in the previous quarter. Net impaired loans (NILs) were
negative $210 million versus negative $201 million in the previous quarter.
Tier 1 Ratio 12.7%, CET1 7.9%
■ Tier 1 ratio declined to 12.7% from 13.6% in the previous quarter and 14.6% a year earlier.
The decline in the Tier 1 capital ratio was due to the acquisition of HSBC Securities, IFRS
transition, the increased deductions for insurance subsidiaries as well as higher RWA due to
the Basel 2.5 market risk amendment.
■ RWA increased 7.9% YOY and 5.6% sequentially, resulting form the implementation of
Basel 2.5 and the associated increase in market risk. Market risk added $3.3 billion to RWA
this quarter, up 32% from $2.5 billion in the previous quarter. Book value increased 10%
YOY to $37.28 per share.
■ The bank estimates that its Common Equity Tier 1 (CET1) ratio under Basel III is 7.9% as at
January 31, 2012, up from 7.6% in the previous quarter.
European Credit Exposure
■ NA's drawn commitments to Europe remain modest at $290 million, or 0.2% of non-retail
exposure and 0.2% of total credit risk exposure.
NA Sells Natcan to Fiera Sceptre
■ On February 27, National Bank and Fiera Sceptre entered into a binding agreement in which
Fiera will acquire Natcan from National for $309.5 million subject to reductions. The bank
will receive a 35% equity interest plus cash, with closing expected April 30, 2012. The
transaction is expected to be earnings neutral for the bank on a recurring basis. NA will
realize a net gain of $177 million or $1.09 per share. The transaction will increase NA's Tier
1 Capital ratio by approximately 20 bps. We view the transaction as positive for NA as
Natcan is a low-margin business that requires scale. Natcan had $25.4 billion in AUM as at
October 31, 2011, and contributed $47.1 million in revenue and $21.2 million in EBITDA to
NA in fiscal 2011. The combined entity will have approximately $54 billion in AUM.
69
Company Comment
Exhibit 1 - National Bank of Canada (NA) First Quarter 2012 Earnings Reconciliation
National Bank of Canada (NA)
Earnings Reconciliation (IFRS)
First Quarter 2012
$M, except per share data
Net Incom e After Preferreds
Pre-tax
After-tax
$322
EPS
$1.99
($8)
$5
($5)
$3
($2)
($0.03)
$0.02
($0.01)
Adjusted For:
Wellington Wes t Acquis ition-Related Charges
MAV res tructured notes
Operating Earnings
$324
Source: Company reports, Scotiabank GBM
Exhibit 2 - National Bank of Canada (NA) European Credit Exposure - AIRB Approach
NA European Credit Exposure - AIRB Approach
C$ million, as at First Quarter January 31
Drawn Commitments
Undrawn Commitments
Repo-Style Transactions
Other Off- Balance
OTC Derivatives
Q4/11
$277
$23
$377
$494
$1,319
Q1/12
$290
$32
$364
$392
$1,401
% Change
5%
39%
-3%
-21%
6%
%1
0.2%
0.0%
0.3%
0.3%
1.2%
%2
0.2%
0.0%
0.2%
0.2%
0.8%
Total
$2,490
$2,479
0%
2.1%
1.4%
1
% of total non-retail credit exposure
2
% of total credit exposure
Source: Company reports
$2.00
70
Company Comment
Exhibit 3 - National Bank (NA) First Quarter Results
First Quarter as at January 31
Net Operating Income - Cash Basis
Cash Operating Earnings Per Share
Reported Cash Earnings per Share
Total Revenue (TEB)
Non-Interest Expense
Specific PCLs
Specific PCLs % Loans
Profit Margin
Trading Revenue
Trading Revenue % Total Revenue
Capital Markets
Capital Markets % Total Revenue
Net Security Gains
Net Security Gains % Total Revenue
Net Security Gains per share
Return on Equity - Operating
Return on Risk Weighted Assets
Segmented Earnings (Cash)
Personal & Commercial Banking
% Mix
Wealth Management
% Mix
Financial Markets
% Mix
Other
Total
Book Value Per Share
Common Equity % RWA
Common Equity less Goodwill % RWA
Tier 1 Capital Ratio
Tier 1 & 2 Capital Ratio
Q1/11
$322
$1.86
$1.86
$1,219
$695
$55
0.30%
26.4%
$122
10.0%
$154
13%
$37
3%
$0.15
22.4%
2.45%
Q1/12
$334
$2.00
$1.99
$1,276
$751
$45
0.21%
26.2%
$127
10.0%
$156
12%
$41
3%
$0.17
21.9%
2.48%
$156
49%
$48
15%
$114
36%
$4
$322
$33.94
11.2%
8.8%
14.6%
18.1%
$170
50%
$38
11%
$129
38%
($3)
$334
$37.28
11.3%
9.3%
12.7%
15.2%
YOY
%Chg
4%
8%
7%
5%
8%
-18%
-0.09%
-0.2%
4%
-0.1%
1%
-0.4%
11%
0.2%
8%
-0.5%
0.03%
Notes: NIL = net impaired loans; PCL = provision for credit losses; RWA = risk w eighted assets.
9%
-21%
13%
n.m.
4%
10%
0.0%
0.5%
-1.9%
-2.8%
71
Company Comment
Exhibit 4 - National Bank (NA) Loan Volume and Asset Growth
National Bank (NA)
Loan Volum e & Asset Grow th
% Chg
C$ billions
Q1/11
Q4/11
Q1/12
QOQ
YOY
Net Loans & Acceptances
Res idential Mortgages
Pers onal & Credit Cards
Total Retail
Bus ines s , Gov. & Acceptances
Total
$25.9
$22.1
$48.0
$25.0
$72.9
$28.9
$24.3
$53.2
$28.2
$81.4
$29.9
$24.8
$54.7
$28.9
$83.7
3.5%
2.1%
2.9%
2.7%
2.8%
16%
12%
14%
16%
15%
Average Loans & Acceptances by Segm ent
Pers onal & Com m ercial
$64.4
Financial Markets
$5.9
$69.9
$6.7
$72.0
$7.2
2.9%
6.4%
12%
22%
Securities Portfolio1
Available for Sale Securities (AFS)
Trading Securities
Total
$14.5
$48.7
$62.3
$9.1
$47.5
$56.6
$9.5
$49.8
$59.3
4.0%
4.9%
4.7%
-34%
2%
-5%
Average Interest-Earning Assets
Risk W eighted Assets
$142.4
$49.3
$147.2
$50.4
$156.1
$53.3
6.0%
5.6%
10%
8%
1
Total based on IFRS but components are CGA A P prior to Q4/11
Exhibit 5 - National Bank (NA) Quarterly Loan Loss Provisions (LLPs)
National Bank of Canada
Quarterly Loan Loss Provisions (LLPs)
Q1/06 - Q1/12
$ Millions
LLPs $millions
% Loans
$50
$46
$45
$38
$29
$22
$17
$23
% of loans
$55
$54
$29
$32
$41
$34
$50
$44
$43
0.4%
$45
0.3%
$37
$36
$28
0.2%
$23 $22
$16
0.1%
$6
0.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2006
2007
Note: IFRS beginning Q1/11
2008
2009
2010
2011
2012
72
Company Comment
Exhibit 6 - National Bank (NA) EPS Momentum
National Bank of Canada
60%
50%
40%
30%
10%
0%
-10%
-20%
-30%
0.26
0.27
0.29
0.29
0.31
0.28
0.33
0.32
0.41
0.38
0.54
0.41
0.45
0.44
0.47
0.48
0.54
0.52
20%
EPS Momentum
$
0.52
0.47
0.56
0.56
0.57
0.58
0.57
0.63
0.62
0.62
0.71
0.74
0.86
0.56
0.73
0.62
0.74
0.77
0.81
0.72
0.87
0.861.04
0.93
0.94
0.96
1.22
1.08
1.18
1.10
1.26
1.23
1.25
1.31
1.43
1.40
1.48
1.34
1.46
1.41
1.52
1.36
1.51
1.53
1.79
1.40
1.55
1.50
1.57
1.63
1.86
1.78
1.86
1.68
2.00
70%
Earnings Momentum
Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
2012
EPS*
Dividends per Share
Earnings Momentum
*Figures are cash EPS from Q1 1999 on.
Exhibit 7 - National Bank (NA) Relative Strength
National Bank Relative Strength
2008 - March 1, 2012
Relative to Bank Index
NA
50 SMA
200 SMA
1.4
1.3
1.2
1.1
1.0
Earnings Release
0.9
0.8
J FM A M J J A S O N D J FMA M J J A S O N D J FMA M J J A S O N D J F MA M J J A S O N D J F M
2008
Source: Bloomberg.
2009
2010
2011
2012
Kevin R. Choquette, CFA
73
Company Comment
(NGD-A US$11.45)
(NGD-T C$11.35)
New Gold Inc.
[email protected]
Risk Ranking: Caution Warranted
[email protected]
Target 1-Yr:
2-Yr:
US$14.00
US$14.00
ROR 1-Yr:
2-Yr:
22.3%
22.3%
Est. NTM Div.
Div. (Current)
US$0.00
US$0.00
Yield
0.0%
No Surprises in Strong Q4/11 Financial Results;
Adjusting Blackwater Model for Inflation
Event
■ New Gold announced Q4/11 EPS of $0.08 in line with our estimate and
below consensus of $0.10. Production was pre-released.
Implications
■ New Gold's 2011 production was a record 391,890 oz and 2012
guidance (pre-announced) is 405,000 oz - 445,000 oz. Total cash costs
in 2011 were $553/oz and 2012 guidance (pre-announced) is about
$420/oz net of by-product copper and silver.
■ Our net asset valuation (NAV3%) is not changed by the Q4 results.
However, we have adjusted out Blackwater modelling to reflect
inflationary pressure. As a result our NAV3% decreased 12% to $8.17
largely due to initial capital and operating cost inflation.
■ Our target multiple remains 1.70x NAV3% and our one-year target is
$14.00 per share implying a 22% return to target.
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
TSX Weight
Next Reporting Date
461.4
5,283
461.4
5,283
0.35%
Mar-12
Recommendation
■ New Gold is still our standout mid-tier pick, and we firmly reiterate our
1-Sector Outperform recommendation.
Qtly EPS (FD)
2010A
2011A
2012E
2013E
Q1
$0.04 A
$0.12 A
$0.10
$0.10
(FY-Dec.)
Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA
Production (oz) (000)
IBES Estimates
EPS 2012E: C$0.62
EPS 2013E: N/A
BVPS12E
NAV
P/NAV
Q2
$0.04 A
$0.12 A
$0.10
$0.12
Q3
$0.07 A
$0.09 A
$0.12
$0.11
Q4
$0.18 A
$0.07 A
$0.10
$0.12
Year
$0.45
$0.40
$0.42
$0.45
P/E
21.80
24.93
27.16
25.65
2009A
$-0.74
n.m.
$0.29
12.5
$53
287
$478
2010A
$0.45
21.8
$0.44
22.1
$129
369
$428
2011A
$0.40
24.9
$0.66
15.3
$258
393
$447
2012E
$0.42
27.2
$0.75
15.3
$291
415
$329
2013E
$0.45
25.6
$1.34
8.5
$335
502
$-111
Pertinent Revisions
Target:
1-Yr
2-Yr
EPS12E
EPS13E
New
Old
$14.00
$14.00
$0.42
$0.45
$16.00
$16.00
$0.53
$0.70
Table of Contents
$6.24
$8.17
1.40x
All values in US$.
74
Company Comment
Adjusting Scale and Estimates for Blackwater Project
■ We are increasing the estimated throughput for the Blackwater plant that we use in our
discounted cash flow model. At the same time, we are adjusting our capital and operating
cost assumptions as follows:
o 60,000 tonnes per day - up from 40,000 tonnes per day in previous model.
o $1.7 billion initial capital - up from $900 million.
o $626/oz life-of-mine total cash cost - up from $503/oz.
o $20 million sustaining capital per annum - up from $5 million.
o 7.5 Moz of mineable gold - up from 6.5 Moz.
■ As a result of our changes the net present value of the project with a 3% discount rate is
$632 million about a 50% decrease from $1.3 billion. We recognize this is a material
change in valuation, but it is a much more conservative view that retains potential upside.
■ We are still firm believers in New Gold and especially its future at Blackwater that we
feel will become its flagship and largest operation by 2017.
75
Company Comment
Exhibit 1 - Operating and Financial Forecast
2011A
$179
$0
$0.40
28.9x
$285
$0.66
17.7x
2012E
$223
$0
$0.42
27.7x
$395
$0.75
15.6x
2013E
$236
$0
$0.45
26.1x
$710
$1.34
8.7x
$530
($389)
($13)
($77)
($1)
$129
$52
$51
($41)
28%
$135
$177
$0.45
$0.34
$696
($428)
($10)
($77)
$258
$181
$181
($79)
28%
$179
$179
$0.40
$0.44
$664
($358)
($16)
($163)
$291
$128
$128
($87)
28%
$223
$223
$0.42
$0.42
$816
($471)
($10)
($474)
($21)
$335
($139)
($161)
($92)
28%
$236
$236
$0.45
$0.45
$177
$77
($17)
($61)
$176
$182
$447
($149)
($417)
$213
$0.44
$179
$77
$25
$4
$285
$275
$5
($414)
($416)
($136)
$0.66
$223
$163
$10
$395
$395
($49)
($360)
($360)
($13)
$0.75
$236
$474
$710
$710
($49)
($273)
($273)
$388
$1.34
$491
$625
$2,113
$2,739
$141
$705
$846
$1,893
$2,739
$485
$309
$461
$2,760
$3,221
$223
$716
$939
$2,282
$3,221
$238
$296
$433
$3,230
$3,663
$223
$562
$785
$2,877
$3,663
$209
$684
$821
$3,689
$4,510
$45
$268
$531
$799
$3,711
$4,510
$553
Silver, 7%
Copper,
7%
S/O (mm) - Basic
Realized gold price (US$/oz)
Spot gold price (US$/oz)
Cerro San Pedro Production ('000 oz)
Peak Mines Production ('000 oz)
Mesquite Mine Production ('000oz)*
New Afton Production ('000 oz)
Total Production ('000 oz)
Net interest coverage (x)
Profit margin
ROE
ROA
EV/EBITDA (x)
Net Debt/Equity
Book Value (US$/sh)
2011A
$14.00
461.4
$1,441
$1,571
2012E
$14.00
461.4
$1,598
$1,750
2013E
$14.00
461.4
$1,625
$1,750
115
85
169
369
$428
144
88
158
390
$447
146
96
145
41
427
$329
153
114
155
81
502
(111)
59x
33%
9%
6%
38x
11%
$6.87
$0.08
n.m.
26%
8%
6%
22x
18%
$6.98
($0.32)
n.m.
34%
8%
6%
19x
9%
$7.94
$0.08
(6x)
29%
6%
5%
16x
n.m.
$9.77
$0.95
US$/Sh
%
NAV Analysis
Operating Assets (US$mm)
US$M
Mesquite
Cerro San Pedro
Peak Mines
New Afton
Blackwater
El Morro
Total Operating Mining Assets
$601
$626
$332
$1,250
$632
$763
$4,204
$1.24
$1.29
$0.69
$2.58
$1.30
$1.57
$8.67
15%
16%
8%
32%
16%
19%
106%
Net Debt
Working Capital
G&A, Expl, Reclamation
Net Asset Value
$103
($71)
$116
($392)
$3,960
$0.21
($0.15)
$0.24
($0.81)
$8.17
3%
(2%)
3%
(10%)
100%
Gold Reserves (mm oz)
Gold M&I Resources (mm oz)
7.9
10.9
$500
600
$400
500
New Afton
$300
400
Peak Mines
$200
300
$100
Mesquite
200
-
100
0
2010A
Gold, 75%
2010A
$14.00
398.8
$1,184
$1,225
(100)
Cerro San Pedro
2011A
2012E
2013E
2014E
2010A
$177
$0
$0.45
26.1x
$176
$0.44
26.5x
Gold Production ('000 oz)
Ratio Analysis
Net Income (US$mm)
EPS (f.d.) (US$/sh)
P/E (x)
CFPS bf. ch. in W C (US$/sh)
Income Statement (US$mm)
Total Revenue
Total Operating Costs
Depreciation
Interest Expense
Other - gain (loss)
EBITDA
EBIT
EBT
Effective Tax Rate
Minority Interest
Cash Flow Statement (US$mm)
Net Earnings
Depreciation
Taxes
Other
CAPEX
Net Change in Cash
CFPS bf. ch. in W C (f.d.) (US$/sh)
Balance Sheet (US$mm)
Cash
Current Assets
Long-term Assets
Total Assets
Short-Term Debt
Current Liabilities
Long-term Liabilities
Total Liabilities
Total Liabilities & Shrhlders' Equity
W orking Capital
(200)
2015E
Table of Contents
76
Company Comment
(PAAS-Q US$25.25)
(PAA-T C$24.97)
[email protected]
Risk Ranking: High
[email protected]
Target 1-Yr:
2-Yr:
US$37.00
US$37.00
ROR 1-Yr:
2-Yr:
46.9%
47.3%
Est. NTM Div.
Div. (Current)
US$0.10
US$0.10
Yield
0.4%
Initiating Coverage: Feliz Navidad for
Minefinders
Event
■ We have initiated coverage on Pan American with a 1-Sector
Outperform rating and a one-year target price of $37.00 per share.
Implications
■ The company is already one of the world's largest primary silver
producers generating over 20 million ounces annually, and yet it has the
potential to double output by 2016.
■ In addition to the upcoming organic growth, explosive growth is
possible. The Navidad and La Preciosa projects could add 15-20 million
ounces and 7 million ounces of annual silver production, respectively.
■ Pan American is trading at a 2% premium to our net asset valuation
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
TSX Weight
Next Reporting Date
159.1
4,018
159.1
4,018
0.17%
Apr-12
Recommendation
■ We feel the shares are excellent value especially with the highprobability of a successful close of the Minefinders deal and potential
pro-mining changes in Argentina forecast in the near-term.
Qtly EPS (FD)
2010A
2011A
2012E
2013E
Q1
$-0.02 A
$0.86 A
$0.45
$0.52
(FY-Dec.)
Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
Working Capital
IBES Estimates
EPS 2012E: $2.59
EPS 2013E: $2.54
BVPS12E
NAV
P/NAV
Q2
$-0.03 A
$1.04 A
$0.52
$0.52
Q3
$-0.05 A
$0.48 A
$0.56
$0.57
Q4
$0.24 A
$0.89 A
$0.57
$0.57
Year
$0.13
$3.29
$2.10
$2.18
P/E
n.m.
6.63
12.02
11.60
2009A
$0.71
33.5
$1.32
18.0
$5.53
$0
2010A
$0.13
n.m.
$2.03
20.3
$5.69
$430
2011A
$3.29
6.6
$3.70
5.9
$9.19
$566
2012E
$2.10
12.0
$2.84
8.9
$9.28
$708
2013E
$2.18
11.6
$2.97
8.5
$9.42
$568
$12.31
$24.71
1.02x
All values in US$.
Pertinent Revisions
New
Rating:
Risk:
1-SO
Caution
Warranted
Old
8-CS
High
Target:
1-Yr
$37.00
$39.00
2-Yr
$37.00
$39.00
EPS12E
$2.10
$4.59
EPS13E
$2.18
N/A
New Valuation:
1.10x NAV
Old Valuation:
1.4x NAV (80%) and 8.5x 2012E CFPS
(20%)
Table of Contents
77
Company Comment
■ We value the Navidad project as the average of a $2.00 per recoverable silver ounce
assumption ($551 million), and a full cash flow model using a 3% discount rate ($881
million). In our view, the market is reluctant to pay full value for Navidad, one of the world’s
largest undeveloped silver deposits, because of a ban on open-pit mining in the province of
Chubut, Argentina, where the project is located.
■ We calculate that the pending Minefinders Corporation Ltd. (MFN-N) deal would be
8.2% accretive to Pan American’s NAV3% while adding growth and diversification. The
transaction would add the operating Dolores gold and silver heap-leach mine in Mexico,
which has annual silver-equivalent production of over 7.0 million ounces. This would boost
Pan American’s silver-equivalent output by over 30% on a full-year basis. There is also
growth embedded in the Dolores mill option, which can be funded through Minefinders’ own
cash flow. In addition, we believe it is positive that a greater proportion of the company’s
assets are shifting to North America and away from the worrisome Argentinean economy.
Exhibit 1: Merger Metrics for Pan American’s Proposed Acquisition of Minefinders
Shares - Basic (Millions)
Shares - FDITM (Millions)
PAAS
106
106
MFN
90
96
PAAS with MFN
155
159
Variance
47%
50%
Cash & Short-Term Investments (US$M) *
Debt (US$M)***
$491
$36
$239
$30
$545
$67
11%
100%
$2,669
$2,214
$1,481
$1,272
$4,006
$3,527
50%
59%
2013E Silver Production (Moz)
2013E Silver Eq. Production (Moz)
21.2
24.6
4.2
7.6
25.4
32.3
20%
31%
Silver Reserves (Moz)
Silver M&I Resources (Moz)
Silver Inferred Resources (Moz)
231
715
245
119
27
20
350
742
265
52%
4%
8%
$22.84
$16.31
$24.71
8.2%
Reserve Ounces per share
2.18
1.24
2.20
1.0%
2013E EPS
2013E CFPS
$2.09
$3.06
$1.16
$1.39
$2.18
$2.97
4%
-3%
Market Capitalization (US$M)**
Enterprise Value (US$M)**
NAV 3% per share
* PAAS with MFN total net of cash paid as part of deal.
** Based on February 22, 2012 close price.
***PAAS Debt refers to Other Long-Term Liabilities
78
Company Comment
■ We believe Pan American’s shares are attractively priced at a 2% premium to our
NAV3%. We feel this is a result of the pending Minefinders transaction and investors’
uncertainty over permits for the Navidad project. In recognition of this, our one-year target of
$37.00 per share is based on 1.40x our value for the company’s operating assets and 1.00x
for development assets such as Navidad. The overall target multiple of 1.10x is below the
peer group average of 1.48x, reflecting our view that Pan American has slightly higher
political risk exposure, as 30% of our NAV3% is in Bolivia and Argentina.
■ Nonetheless, we think Pan American can trade up to our target multiple with the closing of
the Minefinders deal and progress in obtaining permits in Argentina. With a change in the
provincial mining law in Chubut to allow open-pit mining, Navidad would be worth $5.54
per share, raising our overall NAV3% by 4%.
Company
Last trade
Shares
F-D
NAV/
U.S.
1-Mar-2012
O/S F-D
Market
Share
Price/
Target
Target
1-Year
Rate of
Symbol
US$
(M)
Cap (US$M)
(US$)
NAV
Multiple
(US$)
Return
Rating
FSM
HL
PAAS
SSRI
SLW
$7.10
$5.05
$25.25
$17.14
$38.78
128.8
309.4
159.1
82.3
358.8
$915
$1,562
$4,018
$1,410
$13,915
$4.29
$4.77
$24.71
$22.26
$25.65
1.66x
1.06x
1.02x
0.77x
1.51x
1.93x
1.35x
1.10x
1.06x
1.95x
$8.50
$6.50
$37.00
$24.00
$50.00
20%
30%
47%
40%
30%
2-Sector Perform
2-Sector Perform
1-Sector Outperform
2-Sector Perform
1-Sector Outperform
1.20x
1.48x
1
EV
Producer Average
Production
Total Cash Cost
(000 oz)
(US$/oz)
Company
2012E
2013E
2012E
2013E
P&P
3,408
5,718
23,652
8,032
24,210
3,716
7,890
25,352
15,802
30,356
$0.45
($3.20)
$9.28
$15.13
$4.02
($2.08)
($4.92)
$9.42
$10.71
$4.05
45
148
354
192
942
$5.14
$3.44
Producer Average
55
277
1,092
1,167
1,284
90
420
1,383
1,571
1,779
% Prod.
EV
1
EV
1
Growth
/2012E Prod.
/Reserve oz
/(P&P+M&I)
11E - 13E
(US$)
(US$)
(US$)
61%
-3%
25%
238%
51%
$247
$228
$150
$95
$548
$18.65
$8.82
$9.99
$3.98
$14.07
$15.17
$4.71
$3.24
$0.65
$10.32
74%
$253.36
$11.10
$6.82
FINANCIAL STATS
Adj. EPS
CFPS
P/E Ratio
P/CF Ratio
LT
Working
Debt
Capital
EV
2012E
1
Company
2012E
2013E
2012E
2013E
2012E
2013E
2012E
2013E
(US$M)
(US$M)
(US$M)
$0.43
$0.31
$2.10
$0.87
$1.86
$0.53
$0.60
$2.18
$2.03
$2.42
$0.60
$0.49
$2.84
$1.37
$2.09
$0.74
$0.81
$2.97
$3.67
$2.68
16.7x
16.1x
12.0x
19.8x
20.9x
13.4x
8.4x
11.6x
8.4x
16.0x
11.8x
10.3x
8.9x
12.5x
18.5x
9.6x
6.3x
8.5x
4.7x
14.5x
$0
$6
$67
$0
$57
$80
$255
$625
$253
$685
$841
$1,302
$3,540
$763
$13,257
17.1x
11.6x
12.4x
8.7x
Producer Average
Notes:
EBITDA
(US$M) EV/EBITDA
$95
$195
$561
$130
$745
8.9x
6.7x
6.3x
5.9x
17.8x
9.1x
79
Company Comment
Valuation and Target Price Rationale - Accretive Minefinders Deal
■ We rate the shares of Pan American 1-Sector Outperform with a one-year target price
of $37.00 per share, implying a 47% return to target. Our NAV3% of $24.71 does not
incorporate full value for the undeveloped Navidad project, but uses a weighted-average
value of $716 million based on our discounted cash flow model of $881 million and a $2.00
per recoverable ounce valuation of $551 million.
■ We assume the proposed merger with Minefinders will be completed, and we calculate
that it is accretive to our valuation by 8.2%. Not surprisingly, if one ascribes more value
to Navidad, the transaction becomes less accretive as the worth of Pan American’s shares
increases.
■ We incorporate a bottom-up cash flow analysis of Minefinders’ Dolores mine and La
Bolsa project, as well as Pan American’s operations and the La Preciosa JV. For silver
assets with a significant base metals revenue component, we calculate a weighted-average
discount rate based on the life-of-mine revenue split between precious (3% discount rate) and
base metals (8% discount rate). The discount rates we use for Pan American’s mines range
from 3% to 6% based on the formula above.
■ In our view, Pan American’s shares are attractively priced at their current 2%
premium to our valuation, inclusive of the Minefinders acquisition. This is based on the
58% projected production growth from existing mines, La Preciosa, and the Dolores mill
through 2015. However, we believe the potential for Navidad to add an additional 15 million
to 20 million ounces of silver and more than double its production from today’s levels is even
more compelling. Therefore, we rate Pan American 1-Sector Outperform and our detailed
valuation calculation and target price generation can be found in Exhibit 3.
C$M
C$/share
% of NAV
$411
$2.58
10%
Closing Price March 1, 2012
Huaron
Morococha (92.2%)
La Colorada
Manantial Espejo
San Vicente (95%)
La Preciosa
Navidad
Dolores
La Bolsa
MFN Exploration
Total Mining Assets
$159
$103
$350
$193
$289
$211
$716
$1,217
$143
$50
$3,841
$1.00
$0.64
$2.20
$1.21
$1.81
$1.32
$4.50
$7.64
$0.90
$0.31
$24.11
4%
3%
9%
5%
7%
5%
18%
31%
4%
1%
98%
Target Multiple
Net Debt
Working Capital (Net Cash & Short Term Debt)
In-the-Money Instruments
$479
$80
$84
($546)
$3.00
$0.50
$0.53
($3.43)
12%
2%
2%
-14%
Net Asset Value
$3,938
$24.71
100%
Alamo Dorado
Target Price
$25.25
1.02x
1.10x
$37.00
47%
80
Company Comment
Financial Analysis and Outlook
■ We expect Pan American’s cash and short-term investments will have grown to over
$500 million by 2011 year-end. The company reported its highest ever cash and working
balances at the end of Q3/11, although it was not a high-water mark for production. Pan
American does not have any long-term debt and it maintains a $150 million undrawn credit
facility. The combined entity with Minefinders would look similar, albeit with slightly more
cash on hand, even after paying C$176 million as part of the takeover consideration.
■ Pan American has halted its share re-purchasing initiative since the Minefinders
acquisition; however, it has recently increased its quarterly dividend to $0.0375 per
share. The company’s dividend policy is determined by the board of directors on an ongoing
basis. Pan American stated that it will be able to maintain its dividend if it is successful in
acquiring Minefinders.
■ It appears the company has sufficient internal cash flow generation to fully fund the
construction of its Navidad project. In addition, the Dolores mine should be able to fund its
own mill expansion if that is approved by Pan American going forward.
Risk Factors - Progress Could Lag in Argentina
■ Pan American is one of the largest primary silver producers, with the potential to
become the biggest if it can permit its Navidad deposit in Argentina. If the project is
modelled on a discounted cash flow basis, our valuation increases 60% to $881 million
($5.49 per share), versus using $2.00 per recoverable ounce $551 million ($3.43 per share).
We value the asset at the midpoint of $716 million, which assumes a 50% chance of
permitting in the near future and production in 2016.
■ For the aforementioned reasons, permitting is a risk but an obvious opportunity for
Pan American. Of singular importance is a ban on open-pit mining in the province of
Chubut, Argentina, where the Navidad ore body is located. There is also a ban on the use of
cyanide, but Pan American plans to use a flotation process to generate concentrates instead.
■ Following the re-election of President Kirchner and her pro-development and pro-mining
FPV party, attitudes towards mineral development have improved in Argentina. For example,
Chubut’s neighbouring province to the north, Rio Negro, revised its mining law to allow the
use of cyanide where once it was banned. The new governor of Chubut, Martin Buzzi, is a
member of President Kirchner’s FPV party and is considering mining as a way to diversify
the provincial economy and to help it recover from volcanic ash fall damage.
■ More generally, there are also political risks for Pan American, as it operates in Mexico,
Peru, Argentina, and Bolivia. We believe the geographic diversification of the company
helps mitigate risks to a degree, and the proposed acquisition of Minefinders would shift a
much greater proportion of Pan American’s value to Mexico. We would view this as
positive, as Mexico, in our opinion, is a more stable mining jurisdiction despite the
increasing rhetoric surrounding the upcoming Mexican general election on July 1.
■ In Peru, we believe investors are becoming comfortable with Peru again following the
signature of new tax and royalty laws for the mining sector that took effect on October 1,
2011. Bolivia remains unpopular with investors, but it only represents 7% of our mining asset
valuation, or 5% post the Minefinders deal.
■ Like all mine operators, Pan American is facing rising capital and operating costs. This is of
particular significance in Argentina, where the company plans to invest in the order of $1.0
billion while economists are estimating inflation is more than double the official rate of
10.5%. Pan American also has commodity price exposure, but with the Minefinders
transaction, less than 10% of revenue will be derived from base metals.
■ The proposed Minefinders deal is exposed to interference from a third party. We
believe there is enough value in Minefinders to justify a competing bid. However, we do not
believe this is a likely outcome. In the event of a second bid for Minefinders, Pan American
could potentially pay more and risk the deal becoming dilutive. Without the merger going
through at current levels, our valuation for Pan American would decrease about 8%.
81
Company Comment
Ratio Analysis
Net Income (US$mm)
EPS (f.d.) (US$/sh)
P/E (x)
Dividend ($/sh)
Dividend Yield
Total Revenue
Operating Costs
Depreciation
Interest Expense
Other - gain (loss)
EBITDA
EBIT
EBT
Effective Tax Rate
Minority Interest
PAAS-Q - PAA-T
$25.25
155
159
$4,024
$4,024
$41.20
$20.44
Stock Rating
12 Month Target Price (C$)
NAV/Share (C$)
Dividend / Share ($)
Price/NAV
1-SO
$37.00
47%
$24.71
$0.11
1.02x
2010A
$14
$106
$0.13
214.1x
$218
$2.03
12.4x
$0.08
0.27%
2011A
$352
$252
$3.29
9.6x
$398
$3.70
6.8x
$0.11
0.34%
2012E
$327
$327
$2.10
12.0x
$440
$2.84
8.9x
$0.15
0.41%
2013E
$364
$364
$2.18
11.6x
$495
$2.97
8.5x
$0.15
0.41%
$647
($447)
($25)
($86)
$6
$106
$281
$195
$195
($90)
28%
$16
($2)
$14
$0.13
$0.99
$855
($492)
($28)
($83)
$6
$126
$462
$379
$382
($117)
28%
$354
($2)
$352
$3.29
$2.35
1$076
($618)
($24)
($103)
$4
$127
$561
$458
$459
($128)
28%
$329
($2)
$327
$2.10
$2.10
1$207
($698)
($30)
($123)
$4
$153
$631
$508
$510
($142)
28%
$365
($2)
$364
$2.18
$2.18
Net Earnings
Depreciation
Deferred Taxes
Other
CAPEX
Net Change in Cash
$14
$86
$17
$101
$218
$242
$3
($83)
($166)
$79
$2.03
$352
$83
$64
($101)
$398
$359
($84)
($139)
($193)
$83
$3.70
$327
$103
$9
$440
$420
($21)
($329)
($275)
$124
$2.84
$364
$123
$9
$495
$475
($23)
($592)
($592)
($140)
$2.97
Cash
Current Assets
Long-term Assets
Total Assets
Dividends Payable
Current Liabilities
$180
$541
$1,198
$1,739
$111
$263
$742
$1,210
$1,952
$176
$386
$831
$1,375
$2,206
$123
$247
$691
$1,844
$2,535
$123
Net Debt
Working Capital (Net of Cash & Short-term Debt)
G&A, Explor & Reclamation
Long-term Debt
Total Liabilities
Working Capital
$278
$389
$1,350
$1,739
$430
$174
$350
$1,602
$1,952
$566
$174
$296
$1,910
$2,206
$708
$174
$297
$2,239
$2,535
$568
Silver Reserves (M oz)
Silver Resources (M oz)
Average share price (C$)
S/O (mm) - Basic
Alamo Dorado (M oz)
Huaron (M oz)
Morococha (92.2%) (M oz)
La Colorada (M oz)
Manantial Espejo (M oz)
San Vicente (95%) (M oz)
La Preciosa (M oz)
Dolores (M oz)
Total Production (M oz)
Gross Margin
ROE
ROA
EV/EBITDA (x)
Net Debt/Equity
Book Value (US$/sh)
2010A
$27.29
107.0
$20.14
$20.18
2011A
$31.66
106.4
$35.27
$35.27
2012E
$37.00
142.7
$35.00
$35.00
2013E
$37.00
155.1
$35.00
$35.00
6.7
2.7
2.5
3.5
4.0
3.0
n.m.
22.4
$5.69
5.3
2.5
1.6
4.1
3.8
3.0
n.m.
20.2
$9.19
5.2
2.5
1.5
4.0
4.3
3.2
3.0
23.7
$9.28
4.0
2.5
1.6
4.0
4.4
4.7
4.2
25.4
$9.42
n.m
1.7
1%
1%
10.0x
0.1
$12.62
$1.49
n.m.
1.6
22%
18%
5.6x
n.m.
$15.05
$2.07
n.m.
1.6
17%
15%
6.0x
n.m.
$13.38
$0.64
n.m.
1.6
16%
14%
6.1x
n.m.
$14.44
($0.75)
NAV Analysis
Lead
2%
Copper
3%
10%
4%
3%
9%
5%
7%
5%
18%
31%
4%
1%
Total Assets
$3,841.44
$24.11
98%
$478.68
$79.83
$83.71
($546)
$3.00
$0.50
$0.53
($3)
12%
2%
2%
-14%
$3,937.74
$24.71
100%
Net Asset Value:
354
1,029
35
$16
30
$14
$12
25
Dolores
La Preciosa
20
San Vicente
15
$10
$8
Manantial Espejo
$6
10
La Colorada
Morococha
Huaron
5
Silver
71%
%
$2.58
$1.00
$0.64
$2.20
$1.21
$1.81
$1.32
$4.50
$7.64
$0.90
$0.31
Zinc
5%
US$/Sh
$411.17
$158.61
$102.78
$349.89
$192.97
$288.92
$210.53
$716.34
$1,216.76
$143.48
$50.00
Gold
19%
US$M
Alamo Dorado (3% discount rate)
Huaron (6% discount rate)
Morococha (92.2%) (6% discount rate)
La Colorada (3% discount rate)
Manantial Espejo (3% discount rate)
San Vicente (95%) (4% discount rate)
La Preciosa (3% discount rate)
Navidad (4% discount rate)
Dolores (3% discount rate)
La Bolsa (3% discount rate)
MFN Exploration
$4
Symbol
Share Price (C$)
Market Cap (C$mm)
Market Cap (US$mm)
52-week high (C$)
52-week low (C$)
$2
Alamo Dorado
0
2010A
2011A
2012E
2013E
2014E
$0
2015E
Table of Contents
82
Company Comment
(PETD-Q US$34.85)
PDC Energy
Jennifer Dowdell - 403-213-7754
[email protected]
Risk Ranking: High
[email protected]
Target 1-Yr:
2-Yr:
US$42.00
US$45.00
ROR 1-Yr:
2-Yr:
20.5%
29.1%
Est. NTM Div.
Div. (Current)
US$0.00
US$0.00
Yield
0.0%
Key Risks to Target: Oil and natural gas prices; Drilling program success.
Event
■ PDC Energy announced Q4/11 results.
Implications
■ CFPS ahead of expectations. Previously announced Q4/11 volumes
came in at ~147 mmcfe/d (incl. discontinued operations). CFPS for the
quarter came in at $2.34 versus the Street consensus of $2.00. Net
proved reserves at year-end 2011 were 1.0 Tcfe (previously reported),
an increase of 18% over 2010 figures.
■ Utica JV remains major catalyst. While its Niobara drilling appears to
be delivering positive results with its latest wells having averaged 30day IPs of 470 boe/d (~75% liquids), its potential Utica JV remains the
major catalyst. PDC's entry cost including its capex commitment is
~$3,500/acre and we would not be surprised by JV metrics in the
$5,000-$10,000/acre range given recent deals.
■ Valuation. While its JV remains a near-term catalyst, we believe PDC
is fairly valued as it trades at 6.7x 2012E EV/DACF under a $3/mcf
Henry Hub scenario.
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
24.2
843.8
21.9
764.2
Next Reporting Date
Mar-12
Recommendation
■ We maintain our 2-Sector Perform rating and $42.00/share target.
Qtly CFPS (FD)
2010A
2011A
2012E
2013E
Q1
$2.56 A
$1.11 A
$1.71
(FY-Dec.)
Oil Price (WTI, US$/bbl)
Nat Gas (HH, US$/mmBtu)
Prod-Equiv (mmcfe/d)
Prod Growth
Prod/Share Growth
Natural Gas (%)
Cash Flow from Ops
Net Cap Exp
IBES Estimates
CFPS 2012E: $7.68
CFPS 2013E: N/A
BVPS12E
NAV
P/NAV
Q2
$1.50 A
$1.44 A
$1.91
Q3
$1.22 A
$2.14 A
$1.96
Q4
$1.45 A
$2.34 A
$2.03
Year
$6.67
$6.96
$7.60
$8.26
P/CF
6.33
5.04
4.58
4.22
2009A
$61.84
$3.92
119
12%
28%
82%
$170.2
$143.0
2010A
$79.39
$4.38
100
-16%
-28%
76%
$132.3
$162.7
2011A
$94.72
$4.01
130
30%
-10%
65%
$166.2
$334.5
2012E
$95.00
$4.00
145
12%
19%
67%
$179.7
$280.0
2013E
$95.00
$4.50
159
9%
5%
68%
$195.3
$247.1
Pertinent Revisions
CFPS12E
CFPS13E
New
$7.60
$8.26
Table of Contents
N/A
$23.66
1.47x
All values in US$.
Old
$7.50
$8.18
83
Company Comment
Exhibit 1 - Production and Financial Summary
Petroleum Development Corp (NASDAQ: PETD, 2-Sector Perform)
Company Profile
Production and Financial Summary
Rocky Mountains
Pittsburgh
Denver
Marcellus Shale
Piceance
NECO
Wattenberg
March 1, 2012
Commodity Price Assumptions
WTI
Henry Hub
[US$/bbl]
[US$/mcf]
2010A
$79.39
$4.38
2011E
$94.72
$4.01
2012E
$95.00
$4.00
2013E
$95.00
$4.50
Production Estimates
Oil & Liquids
Natural Gas
Total
% Gas
[mbbl/d]
[mmcf/d]
[mmcfe/d]
[%]
2010A
4
76
100
76%
2011E
8
85
130
65%
2012E
8
97
145
67%
2013E
8
108
159
68%
[%]
[%]
-16%
-28%
30%
-10%
12%
19%
9%
5%
[$/mcfe]
[$/mcfe]
[$/mcfe]
[$/mcfe]
[$/mcfe]
2010A
$5.74
$1.29
($0.32)
($1.50)
$5.21
2011E
$5.83
$0.37
($0.38)
($1.07)
$4.74
2012E
$6.40
$0.31
($0.45)
($1.20)
$5.06
2013E
$6.59
$0.20
($0.46)
($1.19)
$5.15
[$mm]
[$mm]
[$mm]
[%]
$9,041
$0
$9,041.0
100%
$6,846
$0
$6,846.0
100%
$8,000
$0
$8,000.0
100%
$0
$0
$0.0
nmf
[%]
68%
22%
62%
41%
Cash Flows
Cash Flow from Operations
Financ ing Cash Flows
Investment Cash Flows - Internal
Investment Cash Flows - M&A
DACF
CFPS (f.d.)
Internal Capex / CF
Net Debt / CF
[$mm]
[$mm]
[$mm]
[$mm]
[$mm]
[$/share]
[x]
[x]
2010A
$132,257
$171,547
($162,723)
($158,051)
$165,436
$6.67
1.2x
2.2x
2011E
$166,225
$243,433
($334,496)
($122,754)
$203,163
$6.96
2.0x
3.5x
2012E
$179,695
($82,933)
($280,000)
$175,000
$215,676
$7.60
1.6x
2.9x
2013E
$195,324
$51,744
($247,068)
$0
$231,947
$8.26
1.3x
2.9x
Earnings
EPS (f.d.)
[$/share]
$0.31
$0.56
$1.72
$1.84
[%]
nmf
80%
205%
7%
3 Yr Avg
YoY Growth
YoY Per Share Prod. Growth
Oklahoma City
Upstream Netbacks
Revenue
Hedging
Production Taxes
Operating Costs
Field Netback
Fort
Worth
Houston
Core Areas
Watternberg Field
NECO
Piceance
WV, PA, NY
Target Zone(s)
Niobrara, Codell, J Sand
Niobrara
Mesaverde Williams
Marcellus Shale
Depth [m]
2,100 - 2,500
500 - 915
2,100 - 2,900
1,400-2,600
Type
Vertical, Hz Multi-Frac
Vertical, Hz Multi-Frac
Vertical
Hz Multi-Frac
Midstream Operating Income
Revenues
Oil & Gas Purchases
Midstream Operating Income
Mids tream Profit Margin
Hedged Prod. (go-forward)
Company Management
James M. Trimble, President & CEO
Gysle R. Shellum, CFO
Barton R. Brookman, Sr. VP Exploration & Prod.
Daniel W. Amidon, General Couns el
Lance A. Lauck, Sr. VP Business Development
1%
Mgmt & Board Ownership
2010 Reserves
Proven - Developed
Proven - Undeveloped
Proven
Proved Developed Producing
Proved Undeveloped
Prior Companies
Grand Gulf Energy, Elysium Energy, Tex-Cal Energy
CrossTex Energy, Financial Trade Solutions
Patina O&G, Snyder Oil
Wheeling-Pittsburgh Steel, JL Specialty Steel
Quantum Resources Mgmt, Anadarko Petroleum
YoY Growth
Oil [mbbl]
12,300
21,585
Gas [mmcf]
227,341
429,965
Total [bcfe]
301
559
[% Gas]
75%
77%
33,885
657,306
861
76%
NAVPS Estimates (year-end 2010 blow-down)
Scotia Capital Price Deck
[$/share]
Futures Price Deck
[$/share]
Historical Operational Metrics
Net Undeveloped Land
% of 1P Res.
35%
65%
Recycle Ratio (Proven, excl. hedg.)
Reserve Engineers
Ryder S., Wright
RLI (Proven)
EV/Production
D/CF
P/NAVPS (Scotia)
EV/Reserves (Proven)
Peer Group Valuation Metrics
P/CF
EV/DACF
EV/Production
D/CF
P/NAVPS (Scotia)
EV/Reserves (Proven)
2008A
200,163
2009A
224,800
2010A
195,800
[x]
0.0x
0.0x
0.0x
Capital Structure
[x]
[x]
2012E
4.6x
6.2x
2013E
4.2x
6.0x
[$/boe/d]
[x]
[x]
[$/boe]
$56,274
2.9x
1.5x
$16.82
$53,548
2.9x
[x]
2012E
4.6x
2013E
4.1x
[x]
[$/boe/d]
[x]
[x]
[$/boe]
6.5x
$66,095
2.9x
2.1x
$19.88
5.7x
$61,639
2.6x
[acres]
19.3x
Comparable Trading Statistics
Valuation Metrics
P/CF
EV/DACF
$23.66
#REF!
Share Price:
Target:
$34.79
1-Yr:
2-Yr:
$42.00
$45.00
[mm]
Q4/11A
24,212
Market Cap (f.d.)
[$mm]
$842,346
Bank Debt
[$mm]
$233,000
Working Capital Deficit (Surplus)
Convertible Debentures
Senior Notes
Net Debt
[$mm]
[$mm]
[$mm]
[$mm]
$54,831
$97,921
$201,236
$586,988
Preferred Stock
[$mm]
$0
Enterprise Value
[$mm]
$1,429,334
Shares Outstanding (f.d.)
ROR:
21%
29%
Facility
Size
Room
[$mm]
Room
[%]
$400,000
$167,000
42%
84
Company Comment
(PMZ.UN-T C$21.87)
Pammi Bir, CA, CFA - 416-863-7218
Jeffery Coles, MBA - 416-863-7067
[email protected]
[email protected]
Target 1-Yr:
2-Yr:
C$22.00
C$22.50
ROR 1-Yr:
2-Yr:
6.2%
14.0%
Est. NTM CDPU
CDPU (Curr.)
C$1.22
C$1.22
Yield
Valuation: 17.25x AFFO (F'13 estimate)
5.6%
Key Risks to Target: Competition from new-format retail, repositioning project delays/cost overruns, tenant specific risks.
Q4/11 First Look: Results Modestly Ahead
Event
■ Primaris reported Q4/11 FFOPU of $0.41 vs. $0.42 last year, ahead of
our $0.39 estimate and the $0.38 consensus.
Implications
■ A little better than forecast. The $0.015/unit beat to our estimate was
mostly from higher other income ($0.01/unit, incl. ~$0.005 of lease
term. fees) and lower interest costs, with core ops in line. YOY growth
from acquisitions and SP NOI was offset by equity dilution, higher
interest, and higher G&A (Q4/10 incl. reversal of over-accrued G&A).
■ Operationally stable; modest internal growth. SP NOI rose 0.5%
YOY (+0.7% YTD), with committed occupancy +60 bp QOQ to 97.1%
(flat YOY). Renewal leasing spreads over expiries were reasonable at
+4.3% (+5.7% YTD) or +7.8% (+6.9%) excluding majors. Same-tenant
sales/sq. ft. were $458, down 0.9% YOY (vs. $453 in Q3/11, but incl.
two more malls in Q4) vs. $589 (+4.1% YOY) for the ICSC average.
■ Property fair values based on DCF with 7.3% discount rate (-30 bp
QOQ, YOY) and 6.3% terminal cap rate (-40 bp QOQ, YOY), below
our "going-in" 6.75% NAV cap rate and current 6.4% implied cap rate.
Capitalization
Units O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
TSX Weight
Next Reporting Date
82.5
1,805
82.5
1,805
0.12%
01-Mar-12
Recommendation
■ Full update post today's 9 a.m. ET conf. call (1-877-240-9772).
Qtly FFOPU (FD)
2010A
2011E
2012E
2013E
Q1
$0.35 A
$0.35 A
$0.35
$0.36
(FY-Dec.)
Funds from Ops/Unit
Adj. Funds from Ops/Unit
Price/AFFO
EV/EBITDA
EBITDA Margin
EBITDA/Int. Exp
AFFO Payout Ratio
IBES Estimates
FFOPU 2011E: $1.39
FFOPU 2012E: $1.47
BVPU12E
NAV
Cap Rate Used
NAV Prem/(Disc)
Q2
$0.35 A
$0.34 A
$0.35
$0.37
Q3
$0.34 A
$0.35 A
$0.36
$0.37
Q4
$0.40 A
$0.39
$0.39
$0.41
Year
$1.46
$1.44
$1.46
$1.51
P/FFOPU
13.4x
14.3x
15.0x
14.5x
2009A
$1.28
$1.04
15.6
16.3
51.0%
2.4
117.8%
2010A
$1.46
$1.20
16.2
15.2
54.7%
2.3
101.4%
2011E
$1.44
$1.21
17.0
17.0
54.2%
2.2
100.8%
2012E
$1.46
$1.22
18.0
16.4
54.1%
2.3
100.1%
2013E
$1.51
$1.27
17.3
16.1
54.1%
2.3
96.2%
$19.93
$19.49
6.75%
12.2%
Table of Contents
85
Company Comment
(PRQ-T C$10.78)
Jennifer Dowdell - 403-213-7754
[email protected]
Risk Ranking: High
[email protected]
Target 1-Yr:
2-Yr:
C$20.00
C$30.00
ROR 1-Yr:
89.2%
2-Yr: 185.7%
Est. NTM Div.
Div. (Current)
C$0.40
C$0.40
Yield
3.7%
Event
■ Q4/11 volumes of 45.7 mboe/d & CFPS of $0.24 (previously released).
Implications
■ Financially strong. While gas prices remain weak & the near term
outlook is bleak, PRQ maintains a very strong balance sheet on account
of steps taken in 2011 coupled with a recent pragmatic cut to 2012
capex (now $365MM). At $2.50/mcf AECO, we see PRQ exiting 2012
with 74% (~$483MM) undrawn credit room, excluding proceeds from
Wapiti/Nig assets currently in the market which could fetch ~$50MM.
■ Appetite for top-tier resources. We continue to believe PRQ's assets
are top-tier given its contiguous acreage in the consistent Montney play,
which should continue to garner interest. ECA's recent JV reaffirms the
appetite for low cost resource plays; we believe NA gas is destined for
higher markets with players willing to take a longer term view.
■ LNG. In our view, PRQ's primary goal will be to maintain flexibility
while proving up its JV acreage. With targeted spending of ~$2+ Bn
over the coming years (PRQ ~12.5%), we see solid NAV growth
resulting in the eventual commencement of a LNG project in 2014.
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
TSX Weight
Next Reporting Date
241.4
2,602
173.2
1,867
0.13%
May-12
Recommendation
■ PRQ continues to be a favourite gas name. We maintain our SO rating.
Qtly CFPS (FD)
2010A
2011A
2012E
2013E
Q1
$0.29 A
$0.29 A
$0.26
(FY-Dec.)
Oil Price (WTI, /bbl) (US$)
Nat Gas (HH, /mmBtu) (US$)
Prod-Equiv (mboe/d)
Prod Growth
Prod/Share Growth
Natural Gas (%)
Cash Flow from Ops
Net Cap Exp
IBES Estimates
CFPS 2012E: $0.88
CFPS 2013E: N/A
BVPS12E
NAV
P/NAV
Q2
$0.24 A
$0.24 A
$0.26
Q3
$0.21 A
$0.22 A
$0.26
Q4
$0.28 A
$0.24 A
$0.30
Year
$1.01
$0.99
$1.09
$1.39
P/CF
12.57
13.42
9.93
7.77
2009A
$61.84
$3.92
32.11
31%
-19%
87%
$153.3
$191.8
2010A
$79.39
$4.38
40.93
27%
7%
87%
$204.3
$366.3
2011A
$94.72
$4.01
43.44
6%
4%
87%
$226.7
$421.8
2012E
$95.00
$4.00
46.15
6%
-2%
86%
$255.8
$365.0
2013E
$95.00
$4.50
57.52
25%
15%
88%
$331.0
$500.0
Pertinent Revisions
CFPS12E
CFPS13E
New
$1.09
$1.39
Table of Contents
N/A
$9.45
1.14x
Old
$1.07
$1.37
86
Company Comment
Progress Energy Resources Corp. (TSX: PRQ, 1-Sector Outperform)
Company Profile
B ritis h C olum bia
WTI
Edmonton Par
Western Canadian Select
Bow River
Henry Hub
AECO
Sa sk atch ew an
A lber ta
[US$/bbl]
[C$/bbl]
[C$/bbl]
[C$/bbl]
[US$/mcf]
[C$/mcf]
2010A
$79.39
$77.58
$66.39
$68.11
$4.38
$3.99
2011E
$94.72
$95.41
$77.31
$77.70
$4.01
$3.64
2012E
$95.00
$95.92
$79.49
$81.49
$4.00
$3.70
2013E
$95.00
$95.92
$75.61
$76.61
$4.50
$4.00
[bbl/d]
[mmcf/d]
[boe/d]
[% ]
[% ]
[% ]
2010A
5,321
213.7
40,931
87%
27%
7%
2011E
5,710
226.4
43,444
87%
6%
4%
2012E
6,321
238.9
46,146
86%
6%
-2%
2013E
6,880
303.8
57,521
88%
25%
15%
Netbacks
Revenue
[$/boe]
2010A
$29.62
2011E
$29.65
2012E
$29.86
2013E
$30.36
Hedging
Royalties
Transportation Costs
Operating Costs
Field Netback
G&A
Interest
Other
Cash Taxes
Corporate Netback
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
$1.08
($4.57)
($3.19)
($6.08)
$16.86
($0.95)
($2.62)
$0.38
$0.00
$13.67
$0.11
($3.57)
($3.40)
($5.51)
$17.28
($0.97)
($1.84)
($0.17)
$0.00
$14.29
($0.28)
($3.61)
($3.00)
($5.51)
$17.46
($0.84)
($1.44)
$0.00
$0.00
$15.19
$0.00
($3.48)
($3.25)
($5.52)
$18.11
($0.69)
($1.65)
$0.00
$0.00
$15.77
[% ]
[% ]
15%
15%
12%
23%
12%
19%
11%
0%
[$000]
[$000]
[$000]
[$000]
[$000]
[$/share]
2010A
$204,283
$501,472
($366,318)
($346,379)
$243,372
$1.01
2011E
$226,657
($59,205)
($421,811)
$34,623
$255,856
$0.99
2012E
$255,788
$38,352
($365,000)
$0
$279,996
$1.09
2013E
$331,043
$168,957
($500,000)
$0
$365,772
$1.39
[x]
[x]
1.8x
2.9x
1.9x
1.5x
1.4x
2.0x
1.5x
2.2x
2009A
1,116,000
$26.96
$19.68
0.7x
2010A
1,277,000
$16.06
$12.38
1.3x
3 Yr Avg
Oil & Liquids
Natural Gas
Total
% Gas
YoY Growth
Fort St. John
Grande
Prairie
Foothills
March 1, 2012
Deep Ba sin
Edmonton
Saskatoon
Calgary
R egina
Core Areas
Northeast B.C. - Foothills
Northeast B.C. - Foothills
Alberta Deep Basin
Alberta Deep Basin
Target Zone(s)
Montney
Halfway
Nikanassin
Multi-zone
Depth [m]
1,900
1,750
3,500
2,000 - 2,500
Prior Companies
Encal Energy
NXT Energy, Renaissance Energy
Calpine Natural Gas Trust, Encal Energy
EnCana
Qatar Petroleum, Fletcher Challenge Energy
Various
NAL Resources, Apac he Canada
Company Management
Michael Culbert, President & CEO
Daniel Topolinsky, Executive VP, E&D
Art MacNichol, VP Finance & CFO
Greg Kist, VP IR & Marketing
Gary Miller, VP Operations
Cindy Rutherford,VP Land
Jim Stannard, VP Engineering
2011 Reserves
Proven
Probable
P+P
Proved Non-Producing
Proved Undeveloped
Probable
Reserve Engineers
Type
Hz Multi-Frac
Vertical
Vertical
Vertical
10%
Oil [mbbl]
22,803
14,225
37,028
Gas [mm cf]
996,790
721,388
1,718,178
% of 1P Res.
48%
4%
48%
% of 2P Res.
28%
2%
28%
42%
GLJ
Total [mboe]
188,935
134,456
323,391
RLI (P+P)
[% Gas]
88%
89%
89%
19.4x
Royalties
Cash Flows
Financing Cash Flows
DACF
CFPS
Internal Capex / CF
Net Debt / CF
[$/share]
$9.45
Futures Price Deck
[$/share]
#REF!
[acres]
[$/boe]
[$/boe]
[x]
2008A
567,000
$15.73
$14.36
2.5x
FD&A Proven
FD&A P+P
Recycle Ratio (P+P, excl. hedg.)
Valuation Metrics
P/CF
EV/DACF
EV/Production
D/CF
P/NAVPS (Scotia)
EV/Reserves (P+P)
P/CF
EV/DACF
EV/Production
D/CF
P/NAVPS (Scotia)
EV/Reserves (P+P)
Capital Structure
[x]
[x]
2012E
9.9x
10.9x
2013E
7.8x
9.0x
[$/boe/d]
[x]
[x]
[$/boe]
$67,439
2.0x
1.1x
$16.63
$57,947
2.2x
[x]
2012E
9.7x
2013E
7.6x
[x]
[$/boe/d]
[x]
[x]
[$/boe]
10.7x
$84,857
1.7x
2.1x
$34.90
8.7x
$73,367
1.6x
$20.26
$15.20
Share Price:
Target:
$10.78
1-Yr:
2-Yr:
$20.00
$30.00
Market Cap (f.d.)
[mm]
[$mm]
Q4/11A
241,407
$2,602
Bank Debt
[$mm]
$0
High Yield Debt
Net Debt
[$mm]
[$mm]
[$mm]
[$mm]
($12)
$356
$0
$344
Enterprise Value
[$mm]
$2,946
ROR:
86%
178%
Facility
Siz e
Room
[$m m]
Room
[%]
$650
$650
100%
87
Company Comment
Dunvegan Light Oil: Recent Wells Show Encouraging Test Rates
■ In PRQ's Dunvegan light oil play in northwest Alberta, the company recently completed 4
(3.5 net) new wells, bringing the total to seven hz oil wells completed to date. Two of the
recent wells tested at strong rates, leading management to expect that stabilized production
rates will meet or exceed PRQ's Dunvegan hz average of 300 boe/d with on-stream
production expected in Q1/12.
■ Another two wells have extended the play 15km to the northeast; both wells are now on
production with expected rates of 1 mmcf/d natural gas and 140 bbl/d liquids.
■ During Q1/12, PRQ will participate in 4 (2.5 net) additional wells and expects that net
production from the play will reach 1,800 boe/d by quarter-end. An additional 6 net hz wells
are planned for H2/12.
One-Year Target Price Maintained at $20.00/share
■ We maintain our one-year target price at $20.00/share and our 1-Sector Outperform rating.
We will update our 2P NAV plus risked upside with our commodity price deck change in
April, once the complete AIF is filed.
Exhibit 2 - One-Year Target Price Build-Up
Wells
[#]
Est'd
Value
per Well
[$000]
PV of
Drill
Program
[%]
$1,243,610
($180,300)
$1,063,310
NAV, Excluding Land
JV Proceeds
Cash
PV of JV
Subtotal
Unbooked Upside
Town - Montney
NE BC - Montney Upper
NE BC - Montney Lower
NE BC - Halfway
NW AB - Deep Basin
Deep Basin Ojay - Nikinassin
Deep Basin Dunvegan Oil
Less: Dividends Paid
Unrisked
Undisc.
Value
[$000]
$267,500
$802,500
218
2,844
3,200
240
281
26
130
Value Buildup
$2,839
$2,530
$2,530
$0
$1,933
$2,903
$4,388
$618,581
$7,196,202
$8,096,992
$0
$542,299
$75,477
$570,440
($94,552)
$19,138,750
90%
75%
35%
30%
70%
75%
75%
60%
Unrisked
Value
[$000]
Unrisked
Value
[$/share]
Target
Price
Wtg
[%]
Target
Price
Buildup
[$000]
Target
Price
Buildup
[$/share]
$1,243,610
($180,300)
$1,063,310
$4.50
100%
$1,063,310
$4.50
$267,500
$722,250
$1.13
$3.06
100%
100%
$267,500
$722,250
$1.13
$3.06
$4.19
$463,936
$2,518,671
$2,429,098
$0
$406,724
$56,608
$342,264
($94,552)
$1.96
$10.66
$10.28
$0.00
$1.72
$0.24
$1.45
($0.40)
75%
50%
25%
75%
75%
25%
50%
$347,952
$1,259,335
$607,274
$0
$305,043
$14,152
$171,132
($94,552)
$1.47
$5.33
$2.57
$0.00
$1.29
$0.06
$0.72
($0.40)
$8,175,809
$34.59
$4,663,397
$19.73
Target Price
$20.00
Table of Contents
88
Company Comment
(RMP-T C$2.73)
RMP Energy Inc.
Jeanie Wu, P.Eng - 403-213-7328
[email protected]
Risk Ranking: High
[email protected]
Target 1-Yr:
2-Yr:
C$3.50
C$4.20
ROR 1-Yr:
2-Yr:
28.2%
53.8%
Est. NTM Div.
Div. (Current)
C$0.00
C$0.00
Yield
0.0%
Event
■ RMP acquired 8.6 net sections southeast of their existing asset base at
Waskahigan.
Implications
■ Waskahigan Land Expansion. RMP acquired 12.3 (8.6 net) sections
in the Montney oil fairway for $8.5 million, implying a land value of
~$1,550/acre. RMP has identified up to 40 additional drilling locations
on the new lands. The acquisition was funded through $15 million in
proceeds from the sale of 38.3 net sections at Resthaven where little
capital was allocated.
■ Building momentum in the Montney oil play. The acquisition
increases RMP's land holdings in the Montney Oil fairway to 61.3 (57.6
net) sections from 49 net sections. Post the deal, RMP estimates a gross
drilling inventory of 160+ wells.
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
107.4
293.3
94.5
258.0
Next Reporting Date
Mar-12
Recommendation
■ We rate RMP 1-SO and have increased our 1-yr target price to
$3.50/share based on the incremental inventory value to the
Waskahigan.
Qtly CFPS (FD)
2010A
2011E
2012E
2013E
Q1
Q2
Q3
Q4
$0.05 A
$0.13
$0.22
$0.06 A
$0.13
$0.21
$0.06 A
$0.16
$0.24
2009A
$61.84
$3.92
3.92
n.m.
n.m.
82%
$15.2
$45.7
2010A
$79.39
$4.38
3.73
-5%
-9%
82%
$27.5
$52.3
(FY-Dec.)
Prod-Equiv (mboe/d)
Prod Growth
Prod/Share Growth
Natural Gas (%)
Cash Flow from Ops
Net Cap Exp
IBES Estimates
CFPS 2011E: $0.22
CFPS 2012E: $0.58
BVPS11E
NAV
P/NAV
$0.09
$0.20
$0.29
Year
$0.42
$0.20
$0.62
$0.96
P/CF
5.90
11.02
4.38
2.84
2011E
$94.72
$4.01
3.40
-9%
-37%
76%
$16.2
$109.0
2012E
$95.00
$4.00
5.23
54%
29%
60%
$60.0
$75.0
2013E
$95.00
$4.50
6.91
32%
27%
52%
$92.6
$104.8
Pertinent Revisions
Target:
1-Yr
2-Yr
New
Old
$3.50
$4.20
$3.25
$4.00
Table of Contents
N/A
$1.70
1.6x
89
Company Comment
Exhibit 1 - Waskahigan Montney Wells
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
User-Format Well ID
100/16-30-063-22W5/00
102/12-17-063-23W5/00
100/03-23-063-23W5/00
100/05-25-063-23W5/00
102/12-34-063-23W5/00
100/09-35-063-23W5/00
100/04-36-063-23W5/00
100/09-02-064-23W5/02
100/01-03-064-23W5/00
100/16-26-063-23W5/00
100/13-27-063-23W5/00
100/01-26-063-23W5/00
100/05-27-063-23W5/00
100/12-33-063-23W5/00
100/01-35-063-23W5/00
100/01-02-064-23W5/00
100/12-03-064-23W5/00
100/04-34-063-23W5/00
100/13-34-063-23W5/00
100/05-34-063-23W5/00
100/08-35-063-23W5/00
100/16-35-063-23W5/00
100/09-36-063-23W5/00
100/05-03-064-23W5/00
100/13-03-064-23W5/00
100/16-10-064-23W5/00
100/14-16-064-23W5/00
100/08-30-063-22W5/00
100/12-25-063-23W5/00
Vertical
Depth
[m]
2,146
2,282
2,207
2,182
2,182
2,174
2,158
2,130
2,225
2,193
2,206
2,199
2,209
2,247
2,188
2,142
2,148
-
Measured
Depth
[m]
3,720
3,645
3,943
3,510
3,462
3,680
3,532
3,774
3,953
3,669
3,643
3,824
3,617
3,861
3,990
3,817
3,847
-
[bbl/d]
67
3
32
99
54
76
412
384.47
0
0
471.56
---------------
Last Month
[mcf/d]
190
104
295
146
212
1,884
1,280
649.32
0
0
809.5
---------------
[scf/bbl]
2,817
38,841
9,244
1,479
1,292
2,175
3,906
24,950
3,108
1,795
2,133
1689
441
2054
1717
---------------
Well Status
Pumping Oil
Flowing Gas
Pumping Oil
Pumping Oil
Pumping Oil
Pumping Oil
Pumping Oil
Pumping Oil
Pumping Oil
Pumping Oil
Pumping Oil
Pumping Oil
Pumping Oil
Pumping Oil
Pumping Oil
Pumping Oil
Pumping Oil
Location
Location
Location
Location
Location
Location
Location
Location
Location
Location
Location
Location
Cumulative Production
[mcf]
[bbl]
45,652
10,160
211,592
2,425
161,642
22,792
133,077
72,817
15,926
11,047
59,789
29,147
231,412
51,916
184,014
6,611
71,087
25,501
34,152
18,707
11,195
2,661
14,691
8,699
3,631
1,601
1,395
679
11,805
6,877
-----------------------------
Comments
--IP 30
295 boe/d
IP 30
535 boe/d
IP 30
520 boe/d
IP 30
180 boe/d
IP 30
420 boe/d
IP 30
525 boe/d
IP 30
650 boe/d
IP 30
575 boe/d
IP 30
325 boe/d
---------------------------------------
Target Price Increased to $3.50/share
■ We have increased our one-year target price to $3.50/share from $3.25/share based on the
additional Waskahigan Montney oil inventory and maintain our 1-Sector Outperform rating.
Exhibit 2 - One-Year Target Price Build-Up
Note
[#]
Wells
[#]
Est'd
Value
per Well
[$000]
NAV, Excluding Land
Unbooked Upside
Waskahigan - Hz Montney Oil
Ante Creek - Hz Montney Oil
Kaybob - Hz Montney Gas
Pine Creek - Hz Wilrich Gas
Ricinus - Deep Basin Gas
Big Muddy - Bakken Oil
Unrisked
Undisc.
Value
[$000]
PV of
Drill
Program
[%]
$182,679
($43,357)
$139,322
1
2
3
4
5
6
118
16
27
10
47
162
$2,826
$2,243
$1,205
$4,002
$2,796
$2,647
Value Buildup
Target Price
Notes:
(1) Assumes 4 wells/section, 65% of land assumed to be prospective.
$332,550
$34,992
$32,780
$41,019
$131,511
$428,785
$1,140,958
75%
90%
40%
80%
20%
20%
Unrisked Value
[$000]
[$/share]
Target
Price
Wtg
[%]
Target Price
Buildup
[$000]
[$/share]
$182,679
($43,357)
$139,322
$1.70
($0.40)
$1.30
100%
$139,322
$1.30
$249,412
$31,493
$13,112
$32,815
$26,302
$85,757
$2.32
$0.29
$0.12
$0.31
$0.24
$0.80
60%
50%
85%
65%
15%
15%
$149,647
$15,747
$11,145
$21,330
$3,945
$12,864
$1.39
$0.15
$0.10
$0.20
$0.04
$0.12
$578,213
$5.38
$354,000
$3.30
$3.50
90
Company Comment
RMP Energy Inc ( TSX: RMP Energy Inc, 1-Sector Outperform)
Company Profile
British Columbia
March 1, 2012
Saskatchewan
Alberta
WTI
Edmonton Par
Bow River
Henry Hub
AECO
[US$/bbl]
[C$/bbl]
[C$/bbl]
[C$/bbl]
[US$/mcf]
[C$/mcf]
2010A
$79.39
$77.58
$66.39
$68.11
$4.38
$3.99
2011E
$94.72
$95.41
$77.31
$77.70
$4.01
$3.64
2012E
$95.00
$95.92
$79.49
$81.49
$4.00
$3.70
2013E
$95.00
$95.92
$75.61
$76.61
$4.50
$4.00
Oil & Liquids
Natural Gas
Total
% Gas
YoY Growth
[bbl/d]
[mmcf/d]
[boe/d]
[%]
[%]
[%]
2010A
681
18.3
3,735
82%
-5%
-9%
2011E
833
15.4
3,400
76%
-9%
-37%
2012E
2,118
18.7
5,231
60%
54%
29%
2013E
3,283
21.8
6,912
52%
32%
27%
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
2010A
$32.77
$2.28
($2.65)
($0.89)
($8.18)
$23.32
($2.08)
($1.09)
$0.00
$0.00
$20.15
2011E
$38.79
$0.00
($6.36)
($1.19)
($10.17)
$21.07
($3.46)
($0.58)
$0.00
$0.00
$17.04
2012E
$50.80
$0.44
($6.10)
($1.51)
($9.11)
$34.51
($2.27)
($0.84)
$0.00
$0.00
$31.41
2013E
$56.50
$0.00
($6.79)
($1.54)
($8.75)
$39.41
($1.86)
($0.86)
$0.00
$0.00
$36.69
[%]
[%]
8%
0%
16%
0%
12%
13%
12%
0%
[$000]
[$000]
[$000]
[$000]
[$000]
[$/share]
2010A
$27,465
($34,185)
($52,343)
$40,444
$28,955
$0.42
2011E
$16,211
$48,230
($108,982)
$10,669
$16,933
$0.20
2012E
$59,962
$8,573
($75,034)
$6,500
$61,559
$0.62
2013E
$92,568
$12,192
($104,760)
$0
$94,746
$0.96
[x]
[x]
1.9x
0.3x
6.7x
3.1x
1.3x
1.0x
1.1x
0.8x
2008A
n/a
nmf
nmf
nmf
2009A
n/a
nmf
nmf
nmf
2010A
216,785
nmf
nmf
nmf
Fort St. John
Resthaven/Bilbo
Waskahigan/Ante Creek,
Kaybob & Pine Creek
Edmonton
Saskatoon
Ricinus
Calgary
Regina
Big Muddy
Core Areas
Waskahigan/Ante Creek
Kaybob
Pine Creek
Ante Creek
Target Zone(s)
Montney Oil
Montney Gas
Wilrich
Montney Oil
Company Management
Craig Stewart, Executive Chairman & Director
John Ferguson, President & CEO
Dean Berhard, VP Finance & CFO
Brent DesBrisay, VP Geosciences
Jon Grimwood, VP Exploration
Ross MacDonald, VP Engineering
Bruce McFarlane, VP Business Development
Probable
P+P
Proved Undeveloped
Probable
Reserve Engineers
Type
Hz multi-frac
Hz multi-frac
Hz multi-frac
Hz multi-frac
Prior Companies
Rider Resources Ltd, Meota Resources Corp.
Orleans Energy, E3 Energy Inc.
Galleon Energy, Rider Resources
12%
2010 Reserves
Proven
Depth [m]
2,000 - 2,300
2,000 - 2,500
2,500 - 2,800
1,900 - 2,200
Oil [mbbl]
1,726
Gas [mmcf]
54,805
Total [mboe]
10,860
[% Gas]
84%
1,348
3,075
30,485
85,290
6,429
17,290
79%
82%
% of 1P Res.
42%
1%
57%
% of 2P Res.
26%
1%
36%
37%
Sproule
RLI (P+P)
18.2x
Netbacks
Revenue
Hedging
Royalties
Operating Costs
Field Netback
G&A
Interest
Other
Cash Taxes
Corporate Netback
Royalties
Cash Flows
DACF
CFPS
Internal Capex / CF
Net Debt / CF
[$/share]
Futures Price Deck
[$/share]
$1.70
#REF!
FD&A Proven
FD&A P+P
2007A
n/a
nmf
nmf
nmf
Valuation Metrics
P/CF
EV/DACF
EV/Production
D/CF
P/NAVPS (Scotia)
EV/Reserves (P+P)
P/CF
EV/DACF
EV/Production
D/CF
P/NAVPS (Scotia)
EV/Reserves (P+P)
Capital Structure
[x]
[x]
[$/boe/d]
[x]
[x]
[$/boe]
2012E
4.4x
5.2x
$66,661
1.0x
1.6x
$25.82
2013E
2.8x
3.5x
$52,212
0.8x
[x]
[x]
[$/boe/d]
[x]
[x]
[$/boe]
2012E
4.4x
5.5x
$74,191
1.4x
1.6x
$35.77
2013E
3.6x
4.6x
$63,682
1.2x
Source: Scotia Capital Estimates, Company Reports
[acres]
[$/boe]
[$/boe]
[x]
Share Price:
Target:
$2.73
1-Yr:
2-Yr:
$3.50
$4.00
Market Cap (f.d.)
[mm]
[$mm]
Q4/11E
107,434
$293
Bank Debt
High Yield Debt
Net Debt
[$mm]
[$mm]
[$mm]
[$mm]
[$mm]
$24
$26
$0
$0
$50
Enterprise Value
[$mm]
$343
ROR:
ROR:
28%
47%
Facility
Size
Room
[$mm]
Room
[%]
$80
$56
70%
91
Company Comment
(RY-T C$56.80)
(RY-N US$57.58)
[email protected]
Risk Ranking: Low
[email protected]
Target 1-Yr:
2-Yr:
C$68.00
C$75.00
ROR 1-Yr:
2-Yr:
23.7%
39.9%
Est. NTM Div.
Div. (Current)
C$2.24
C$2.16
Yield
3.8%
Q1/12 Strong Beat - Trading Rebounds - Dividend
Increased 6%
Event
■ RY reported cash operating earnings of $1.25 per share, above our
expectations of $1.14 per share and IBES consensus at $1.13 per share.
The beat was driven by a strong sequential improvement in wholesale
earnings driven by very strong trading revenues as they rebounded off
perhaps cyclical lows of Q3/11 and Q4/11.
■ Canadian Banking had a strong quarter, with earnings up 7% YOY and
5% QOQ as the NIM held steady at 2.75% for the third consecutive
quarter. Operating ROE: 20.2%, RRWA: 2.60%, CET1: 7.6%(E).
Implications
■ RY announced a 6% annual dividend increase to $2.28 per share from
$2.16 per share. RY's payout ratio is at 46%, based on our 2012E EPS,
within its target range of 40%-50%.
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
TSX Weight
Next Reporting Date
1,438.4
81,700
1,438.4
81,700
5.39%
24-May-12
Recommendation
■ We are increasing our 2012E and 2013E EPS by $0.10 each to $4.90
and $5.30 based on the improved outlook for trading revenue.
■ Increasing price target to $68 from $63. Reiterate 1-SO based on above
industry group profitability and capital, and substantial earnings
leverage to normalization of capital markets, particularly in Europe.
2010A
2011A
2012E
2013E
Q1
$1.07 A
$1.33 A
$1.25 A
Q2
$1.02 A
$1.12 A
$1.14
Q3
$0.94 A
$1.12 A
$1.22
Q4
$0.93 A
$1.09 A
$1.29
Year
$3.96
$4.66
$4.90
$5.30
P/E
13.73
10.44
11.59
10.72
(FY-Oct.)
Price/Earnings
2009A
$4.98
11.0
2010A
$3.96
13.7
2011A
$4.66
10.4
2012E
$4.90
11.6
2013E
$5.30
10.7
IBES Estimates
EPS 2012E: $4.66
EPS 2013E: $5.05
$25.09
20.2%
Curr. BVPS
Curr. ROE
Pertinent Revisions
Target:
1-Yr
2-Yr
EPS12E
EPS13E
New
Old
$68.00
$75.00
$4.90
$5.30
$63.00
$70.00
$4.80
$5.20
Table of Contents
affiliates are not registered/qualified as research analysts with FINRA in the U.S. This issuer owns 5% or more of the
total issued share capital of the Bank of Nova Scotia.
92
Company Comment
Canadian Banking Record Earnings - Increase 5%
■ Canadian Banking earnings increased 5% to $994 million from $933 million a year earlier.
■ Retail net interest margin held stable for the third consecutive quarter at 2.75% but declined a
moderate 5 bps YOY, driven by competitive pressures and the low interest rate environment.
■ Canadian Banking average loans and acceptances increased 7% YOY, with mortgages up
7%, personal loans up 9%, commercial loans up 8%, with credit cards disappointing, down
3%. Deposit growth was strong at 12%. We believe RY and TD continue to gain market
share in commercial loans with growth of 8% and 14%, respectively, versus BMO at 3.5%.
■ Revenue growth was 3.0%, with expense growth of 4.6% YOY for negative operating
leverage of 1.6%. However, management indicated that one-third of expense growth was
related to one-time compensation costs in the quarter. The efficiency ratio improved to
44.9% from 45.7% in the previous quarter but weakened slightly from 44.1% a year earlier.
■ Provisions for credit losses (PCLs) were relatively stable at $243 million versus $234 million
in the previous quarter and $272 million a year earlier.
■ Earning from Canadian Banking represented 53% of total cash operating earnings in the
quarter, up from 46% in the prior year.
RBC Capital Markets Earnings Bounce Back Sequentially
■ RBC Capital Markets (RBCCM) earnings rebounded sequentially to $448 million versus
$154 million in the prior quarter, but remain below the strong Q1/11 results of $637 million.
The sequential earnings improvement was driven by a strong improvement in trading revenue
from perhaps the cyclical lows of Q3/11 and Q4/11.
■ RBCCM productivity ratio was 60.5% versus 74.9% in the previous quarter and 54.7% a
year earlier.
■ Earnings from Capital Markets represented 24% of total cash operating earnings in the
quarter, down from 32% in the prior year, but up from 15% last quarter.
■ Return of equity (ROE) was 14.9% versus 30.7% in the prior year and 5.8% last quarter.
ROE was negatively impacted by a change in RY's capital allocation methodology, which
resulted in additional capital allocated to the segment. Capital allocated to the segment
increased $2.2 billion to $11.5 billion.
Trading Revenue - A Return to a More Normal Trading Environment
■ Trading revenue (TEB) in Capital Markets was $847 million in the quarter, up from $213
million in the prior quarter, although down from a very strong Q1/11 at $1,092 million. The
sequential improvement in trading was driven by solid interest rate and credit trading of $495
million, up from a loss of $36 million in the prior quarter. The improved outlook in Europe
and some pent-up demand was a factor.
■ FX and commodities trading revenue improved to $136 million from $93 million in the
previous quarter and $100 million a year earlier.
■ Equity trading revenue was $216 million versus $156 million in the prior quarter and $336
■ Trading revenue included a gain of $58 million relating to credit valuation adjustments, a
loss of $53 million in BOLI (bank-owned life insurance), and a $9 million gain on the fair
value adjustment (FVA) on RBC debt. Thus, trading excluding these items was $816 million
versus $257 million in the previous quarter and $918 million a year earlier on a comparable
basis.
■ Trading revenue represented 13% of total revenue in the quarter versus 4% in the previous
quarter and 16% a year earlier.
Capital Markets Revenue - Slight Decline
■ Capital markets revenue was $581 million versus $608 million in the previous quarter and
$844 million a year earlier. Underwriting and advisory fees were $294 million, down 40%
93
Company Comment
from a very strong Q1/11, and up 6% QOQ. Securities brokerage commissions decreased
18% YOY and 13% QOQ to $287 million.
■ Capital markets revenue represented 9% of total revenue in the quarter versus 10% in the
prior quarter and 12% the prior year.
Wealth Management Earnings Down YOY and Flat Sequentially
■ Wealth Management earnings were $188 million in the quarter, down 12% from the prior
year and up slightly from $179 million in the prior quarter. Results continue to be impacted
by low transaction volumes, given the continued market and investor uncertainty in the early
part of the quarter.
■ Revenue was flat, with operating expenses increasing 6.2% from a year earlier for negative
operating leverage of 6.2%.
■ Canadian Wealth Management revenue declined 2.5% with Global Asset Management
revenue increasing 20%, primarily reflecting the acquisition of BlueBay. U.S. &
International Wealth Management revenue declined 6%.
■ Mutual fund revenue increased 13% from a year earlier to $499 million. Mutual fund assets
increased 1% from a year earlier to $111.3 billion, including PH&N.
Insurance Earnings Strong
■ Insurance earnings were strong at $190 million versus $200 million in the previous quarter
and $136 million a year earlier.
International Banking - PCL Improves - Earnings Negligible
■ International Banking earnings from continuing operations were $24 million versus $68
million a year earlier and $10 million in the previous quarter.
■ PCLs declined to $8 million from $36 million in the previous quarter and $14 million in the
prior year, reflecting improved credit quality in the Caribbean retail and commercial
portfolios.
■ The efficiency ratio was 87.4% versus 88.1% in the previous quarter and 71.7% in the prior
year.
Overall Net Interest Margin
■ The bank’s overall net interest margin improved 5 bps from the previous quarter and 11 bps
from a year earlier to 1.96%.
Revenue Growth
■ Total revenue was down 4.6% YOY with operating expenses flat, resulting in negative
operating leverage of 4.6%. The overall efficiency ratio improved to 56.1% versus 58.8% in
the previous quarter but weakened from 53.5% a year earlier.
Security Gains Negligible
■ Security gains were $15 million or $0.01 per share versus $0.00 per share in the previous
quarter and a loss of $0.01 per share a year earlier. Unrealized security surplus increased to
$406 million ($162 million equity component) versus $359 million ($179 million equity
component) in the previous quarter.
Provision for Credit Losses
■ Specific provision for credit losses (PCLs) were $267 million or 0.28% of loans versus $276
million or 0.30% of loans in the previous quarter, reflecting lower PCL in Caribbean
banking. PCLs in the prior year were $264 million or 0.30% of loans.
Gross Impaired Loan Formations Continue to Decline
■ Gross impaired loan formations declined to $373 million from $411 million in the previous
quarter. Net impaired loan formations declined to $296 million from $368 million in the
previous quarter.
94
Company Comment
■ Gross impaired loans were stable at $2,323 million or 0.62% of loans versus $2,327 million
or 0.65% of loans in the previous quarter. Net impaired loans were flat at $267 million or
0.07% of loans versus $269 million or 0.07% of loans in the previous quarter.
Effective Tax Rate
■ RY’s effective tax rate (TEB) in the quarter was 26.2% versus 23.5% in the previous quarter
and 30.1% a year earlier.
Tier 1 Ratio Down 110 Basis Points
■ Tier 1 capital was 12.2%, down 110 bps from the prior quarter due to regulatory changes in
the treatment of investments in Insurance subsidiaries, higher RWA from the Basel 2.5 and
the phase-in of the transition to IFRS.
■ Risk-Weighted Assets (RWA) increased 7% sequentially to $285.5 billion, driven by the
revised Basel 2.5 market risk framework, which increased market risk RWA to $33.5 billion,
a 57% increase QOQ.
■ Upon the closing of RBC Bank (USA), the Tier 1 ratio is expected to increase by
approximately 100 bps.
Common Equity Tier 1 (Basel III) – 7.6(E)
■ The bank estimates that its Common Equity Tier 1 (CET1) ratio under Basel III already
meets the 2019 minimum of 7% even without the benefit of the phase-in of capital
deductions outlined in the Basel guidelines. We estimate the CET1 at 7.6%.
Capital Allocation - Beginning the Transition to Basel III
■ The bank indicated that starting this quarter it is revising its capital allocation methodology.
The new methodology replaces the pro rata allocation of unallocated capital that was used in
2011 and is being implemented in anticipation of Basel III requirements in 2013. This
resulted in a $2.2 billion increase in capital allocated to the Capital Markets segment to $11.5
billion.
European Credit Exposure - Down 5% QOQ - Very Manageable
■ The bank provided an update to its exposure to Europe (see Exhibits 2, 3 and 4). Net
exposure came down 5% to $41.2 billion, mainly driven by a reduction in European trading
securities in the quarter.
95
Company Comment
Exhibit 1 - Royal Bank (RY) First Quarter 2012 Earnings Reconciliation
First Quarter 2012
Net Income (Reported) after Preferreds
Dilutive impact of exchangeable shares
Goodwill adjustment
Reported Cash Earnings
Pre Tax
Cash Operating Earnings
After-tax
$1,787
$13
$29
$1,816
EPS
$1.22
$0.01
$0.02
$1.25
$1,816
$1.25
Exhibit 2 - Royal Bank (RY) Credit Exposure to Europe
RY Credit Exposure to Europe
C$ million, as at January 31, 2012
Gross Exposure
Less:
Collateral for Repo-Style Transactions
Potential Future Credit Exposure Amount
Undrawn Commitments
Loans & Acceptances
Undrawn
1
Drawn
$8,140
$6,968
-
Other
Total
OTC
LC's &
Repo-style
Securities2 Guarantees Transactions Derivatives3
$18,237
$9,299
$72,767
$26,780 $142,191
$6,968
-
$9,299
$71,353
-
$14,664
-
$71,353
$14,664
$16,267
Gross Drawn Exposure4
Less:
Collateral for derivatives
Add:
Trading Securities
$8,140
-
$18,237
-
$1,414
$12,116
$39,907
-
-
-
-
-
$5,461
$7,879
-
-
$11,826
-
-
-
$9,127
Net Exposure5
$8,140
-
$30,063
-
$1,414
$6,655
$41,155
1
Comprised of undraw n commitments of $5,163 million to corporate entities, $1,743 million to financial entities and $62 million to sovereign entities. On
a country basis, exposure is comprised of $3.1 billion to U.K., $1.3 billion to France, $492 million to Germany, $198 million to Ireland, $80 million to
Spain and $17 million to Italy. Of the undraw n commitments, over 90% are to investment grade entities.
2
Securities include $9 billion of AFS securities, $9 billion of trading securities and $9 billion of deposits.
3
Derivative exposures are measured at fair value.
4
Based on RY's interpretation of gross funded exposures as reported by certain U.S. banks, w hich excludes undraw n commitments, potential future
credit exposure amount and collateral.
5
Excludes $0.6 billion (Oct 31, 2011 – $1.5 billion) of exposures to supra-national agencies.
96
Company Comment
Exhibit 3 - Royal Bank (RY) Net Credit Exposure to Europe
RY Net Credit Exposure to Europe 1
Loans &
U.K.
Germany
France
Total Core Europe
Repo- Style
OTC
Q4/11
Outstanding Securities2 Transactions Derivatives3 Total
$5,194
$6,989
$1,039
$1,926
$15,148 $15,339
$139
$5,648
$647
$6,434 $6,918
$124
$3,674
$237
$348
$4,383 $4,189
$5,457
$16,311
$1,276
$2,921
$25,965 $26,446
Greece
Ireland
Italy
Portugal
Spain
Total Peripheral
$179
$52
$336
$567
$14
$45
$66
$6
$305
$436
$6
$6
$124
$58
$7
$47
$236
Luxembourg
Netherlands
Norway
Sweden
Switzerland
Other
Total Other Europe
$206
$337
$244
$779
$550
$2,116
$1,609
$3,134
$1,018
$2,204
$1,664
$988
$10,617
$8
$90
$21
$13
$132
$141
$325
$52
$67
$495
$1,080
$1,956 $2,086
$3,804 $3,789
$1,262
$921
$2,346 $2,260
$2,531 $2,787
$2,046 $3,525
$13,945 $15,368
Total Europe4
$8,140
$27,364
$1,414
$4,237
$41,155 $43,253
23%
76%
4%
12%
% of CE
$14
$354
$176
$13
$688
$1,245
114%
$13
$456
$241
$28
$701
$1,439
124%
1
All numbers presented reflect RY's proportionate share of RBC Dexia IS exposures
2
Securities include $9 billion of AFS securities, $9 billion of trading securities and $9 billion of deposits.
3
Derivative exposures are measured at fair value.
4
Excludes $0.6 billion (Oct. 31,2011 – $1.5 billion) of exposures to supra-national agencies.
Exhibit 4 - Royal Bank (RY) Net Credit Exposure to Europe
RY Net Credit Exposure to Europe
U.K.
Other
Core
Total
Germany France Europe Greece Ireland Italy Portugal Spain Peripheral Europe
Financials
$8,460
$4,036
Sovereign
$1,374
$1,857
$919
Corporate
$5,314
$541
$523
$15,148
$6,434
Total
$2,941 $15,437
Total
Europe
Total
Q4/11
-
$158
$79
$9
$322
$568
$9,763 $25,768 $27,256
$4,150
-
$120
$54
-
$102
$276
$1,536
$5,962
$7,150
$6,378
$14
$76
$43
$4
$264
$401
$2,646
$9,425
$8,847
$4,383 $25,965
$14
$354
$176
$13
$688
$1,245
$13,945 $41,155 $43,253
97
Company Comment
Exhibit 5 - Royal Bank (RY) First Quarter Results
First Quarter as at January 31
Cash Operating Net Income
Cash Earnings Per Share
Total Revenue
Non-Interest Expenses
Specific PCLs
Profit Margin
Trading Revenue - Capital Markets
Capital Market Revenue
Capital Market Revenue % Total Revenue
Net Security Gains
Net Security Gains Per Share
Return on Risk Weighted Assets
Canadian Banking
% Mix
Insurance
% Mix
Wealth Management
% Mix
International Banking
% Mix
RBC Capital Markets
% Mix
Corporate Support
Total
NILs
NILs % of loans
Book Value per Share
CE % RWA
CE less Goodwill % RWA
Total Capital Ratio
Assets to Capital Ratio
Q1/11
$1,999
$1.33
$6,795
$3,635
$264
0.30%
29.4%
$1,092
16.1%
$844
12.4%
($16)
($0.01)
24.8%
2.97%
Q1/12
$1,880
$1.25
$6,484
$3,636
$267
0.28%
29.0%
$847
13.1%
$581
9.0%
$15
$0.01
20.2%
2.60%
$933
46%
$136
7%
$228
11%
$79
4%
$634
32%
($11)
$1,999
$1,050
0.30%
$22.22
12.4%
8.7%
13.2%
15.3%
16.3x
$994
53%
$190
11%
$203
11%
$34
2%
$450
24%
$11
$1,882
$267
0.07%
$25.09
12.7%
9.3%
12.2%
14.5%
16.1x
YOY
% Chg
-6%
-6%
-5%
0%
1%
-0.02%
-0.4%
-22%
-3.0%
-31%
-3.5%
n.m.
n.m.
-4.5%
-0.37%
7%
40%
-11%
-57%
-29%
n.m.
-6%
13%
0.3%
0.6%
-1.0%
-0.7%
-0.2x
98
Company Comment
Exhibit 6 - Royal Bank (RY) Loan Volume and Asset Growth
C$ billions
% Chg
QOQ
YOY
Q1/11
Q4/11
$178.8
$79.9
$13.4
$272.1
$2.7
$79.1
($2.8)
$351.1
$188.4
$80.9
$12.9
$282.3
$2.5
$76.4
($2.0)
$359.2
$189.8
$82.1
$12.7
$284.7
$2.4
$86.4
($2.0)
$371.6
0.8%
1.5%
-1.5%
0.9%
-1.3%
13.1%
3.5%
6.2%
2.8%
-4.8%
4.6%
-7.9%
9.2%
5.8%
Average Loans & Acceptances by Segment
Canadian Banking
$280.5
International Banking
$8.5
RBC Capital Markets
$38.6
$295.8
$8.4
$42.6
$300.6
$8.4
$45.2
1.6%
0.0%
6.1%
7.2%
-1.2%
17.1%
Securities Portfolio
Trading
Available-for-sale
Total
$150.3
$52.4
$202.7
$128.1
$38.9
$167.0
$123.6
$41.6
$165.2
-3.6%
7.0%
-1.1%
-17.8%
-20.5%
-18.5%
Average Interest-earning assets
Risk Adjusted Assets
$629.9
$256.0
$633.5
$267.8
$633.8
$285.5
0.0%
6.6%
0.6%
11.5%
Loans & Acceptances
Residential mortgages
Personal
Credit Cards
Total Retail
Small Business
Business, Govt, and Other Loans
Allowances for Credit Losses
Total
Q1/12
Note: Data prior to Q1/11 stated under CGAAP; Q1/11 and Q2/11 include discontinued operations
Exhibit 7 - Royal Bank (RY) Loan Loss Provisions
Quarterly Loan Loss Provisions (LLPs)
Q1/06 - Q1/12
$ Millions
LLPs $millions
% Loans
$454
$349
$334
$293
$263
% of loans
0.7%
0.6%
$439
$434
$409
0.5%
$346
$320
$307
$277
$276$267 0.4%
$283$264$273
$295
$188
$178
$162
$159
$124
$99
$97
0.3%
0.2%
0.1%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2006
2007
2008
2009
2010
Note: LLPs prior to Q3/09 are not restated to exclude impact of the discontinued RBC Bank (USA)
2011
2012
99
Company Comment
Exhibit 8 - Royal Bank (RY) EPS Momentum
$
EPS Momentum
Earnings M o mentum
1.16
0.99
1.08
1.01
1.12
1.03
1.14
1.01
1.29
1.21
1.32
1.17
1.07
1.02
0.94
0.93
1.34
1.13
1.12
1.09
1.25
40%
30%
10%
0%
-10%
-20%
-30%
0.21
0.19
0.20
0.21
0.22
0.21
0.22
0.23
0.25
0.24
0.26
0.27
0.29
0.30
0.32
0.33
0.34
0.34
0.34
0.31
0.34
0.33
0.35
0.37
0.42
0.46
0.47
0.49
0.48
0.50
0.47
0.43
0.53
0.49
0.51
0.49
0.56
0.52
0.59
0.57
0.59
0.59
0.58
0.59
0.76
0.70
0.76
0.82
0.88
0.86
0.91
0.97
20%
-40%
Q1Q3Q1Q3 Q1Q3Q1Q3Q1Q3 Q1Q3Q1Q3Q1Q3 Q1Q3Q1Q3Q1 Q3Q1Q3Q1Q3Q1 Q3Q1Q3Q1Q3Q1 Q3Q1Q3Q1
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20112012
Operating EPS*
Dividends per Share
Earnings Momentum
*Figures are cash EP S fro m Q11999 o n.
So urce: Co mpany repo rts.
Exhibit 9 - Royal Bank (RY) Relative Strength
Royal Bank Share Price
2008 - March 1, 2012
Share Price ($)
RY
50 SMA
200 SMA
65
60
55
50
45
40
35
Earnings Release
30
25
J FM A M J J A S O N D J FMA M J J A S O N D J FM A M J J A S O N D J FMA M J J A S O N D J F M
2008
Source: Bloomberg.
2009
2010
2011
2012
100
Company Comment
(SLW-N US$38.78)
(SLW-T C$38.26)
[email protected]
Risk Ranking: High
[email protected]
Target 1-Yr:
2-Yr:
US$50.00
US$50.00
ROR 1-Yr:
2-Yr:
29.9%
30.8%
Est. NTM Div.
Div. (Current)
US$0.36
US$0.36
Yield
0.9%
Initiating Coverage: From Silver Stream to Cash
Flow Torrent
Event
■ We have initiated coverage on Silver Wheaton with a 1-Sector
Outperform rating and a one-year target price of $50.00 per share.
Implications
■ We believe Silver Wheaton is an exceptional alternative to both mining
company shares and silver exchange traded funds (ETFs). The
company's risk profile is nearly as low as bullion's while retaining the
desired upside of a silver producer's growth and exploration potential.
■ The company's margins are protected by its streaming agreements that
fix costs at about $4.00/oz, subject to a 1% annual adjustment.
■ Silver Wheaton is trading at a 50% premium to our net asset valuation
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
TSX Weight
Next Reporting Date
358.8
13,915
358.8
13,915
0.89%
Mar-12
Recommendation
■ We think the company deserves the highest target multiple of its peer
group given the strong upside from growth and insulation from
downside factors such as capital cost escalation.
Qtly EPS (FD)
2010A
2011E
2012E
2013E
Q1
$0.09 A
$0.34 A
$0.43
$0.50
(FY-Dec.)
Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA
Production (Moz)
IBES Estimates
EPS 2011E: $1.61
EPS 2012E: $2.26
BVPS12E
NAV
P/NAV
Q2
$0.09 A
$0.42 A
$0.44
$0.46
Q3
$0.14 A
$0.38 A
$0.49
$0.73
Q4
$0.21 A
$0.37
$0.49
$0.73
Year
$0.44
$1.51
$1.86
$2.42
P/E
89.19
19.22
20.90
16.05
2009A
$0.39
38.5
$0.54
27.8
$159
$15.02
13.4
$3.97
2010A
$0.44
89.2
$0.92
42.5
$324
$20.18
20.5
$4.03
2011E
$1.51
19.2
$1.72
16.9
$611
$35.27
20.1
$4.05
2012E
$1.86
20.9
$2.09
18.5
$745
$35.00
24.2
$4.02
2013E
$2.42
16.0
$2.68
14.5
$949
$35.00
30.4
$4.05
9.34
$25.65
1.51x
Pertinent Revisions
Rating:
Risk:
Target:
1-Yr
2-Yr
EPS11E
EPS12E
EPS13E
New Valuation:
1.95x NAV
Old Valuation:
N/A
New
Old
1-SO
High
N/A
N/A
$50.00
$50.00
$1.51
$1.86
$2.42
N/A
N/A
N/A
N/A
N/A
Table of Contents
All values in US$. Note: 2010 quarterly EPS figures (based on Canadian GAAP) will not sum to yearend figures (based on IFRS).
101
Company Comment
■ Silver Wheaton's agreements allow it to benefit from production increases and life-ofmine extensions. Nearly all of the silver streams are valid for the entire life of the mine, with
no additional capital required, and the transactions are structured to reduce tax liabilities to
near zero.
■ Through 2015, production is projected to increase about 80% as costs remain largely
constant. The increasing silver output is driven in part by Goldcorp Inc.’s Peñasquito mine
in Mexico as it reaches full capacity and Barrick Gold Corporation’s Pascua-Lama operation,
on the border of Chile and Argentina, which is scheduled to become commercial in 2013.
Silver Wheaton is well diversified, with the largest reserve and resource base of any silver
company, including interests in nine of the 35 largest mines and development projects in the
world. Currently, half of the company’s production comes from the lowest-quartile cost
producers; this proportion is expected to increase to nearly 70% by 2015.
■ As a non-operator, Silver Wheaton’s biggest risk is delayed deliveries because of
operational issues, slower-than-anticipated concentrate shipments to smelters, and force
majeure events. This does make Silver Wheaton slightly more risky than an ETF
investment. However, we feel the company’s dividend and the upside from having life-ofmine agreements on nearly all properties that capture production increases and potential new
reserves more than make up for it. Silver Wheaton is also one of the largest pure-play
precious metals companies, with a market capitalization of more than $14 billion and high
beta to the gold and silver price.
■ Silver Wheaton shares trade at one of the largest premiums to our valuation and the
highest 2013 price to earnings (P/E) and price to cash flow (P/CF) multiples of the silver
producers, as shown in Exhibit 1. We feel this is to be expected for a company that should
achieve free cash flow of $620 million this year. We expect Silver Wheaton to attain an
expansion in its trading premium to our 1.95x target multiple on the back of production
growth of more than 50% between 2011 and 2013. Furthermore, the expanded production
comes without any meaningful change in operating costs, which is something none of the
other silver producers can hope to achieve without a rise in by-product credits to offset
inflation.
102
Company Comment
Company
Last trade
Shares
F-D
NAV/
U.S.
1-Mar-2012
O/S F-D
Market
Share
Price/
Target
Target
1-Year
Rate of
Symbol
US$
(M)
Cap (US$M)
(US$)
NAV
Multiple
(US$)
Return
Rating
FSM
HL
PAAS
SSRI
SLW
$7.10
$5.05
$25.25
$17.14
$38.78
128.8
309.4
159.1
82.3
358.8
$915
$1,562
$4,018
$1,410
$13,915
$4.29
$4.77
$24.71
$22.26
$25.65
1.66x
1.06x
1.02x
0.77x
1.51x
1.93x
1.35x
1.10x
1.06x
1.95x
$8.50
$6.50
$37.00
$24.00
$50.00
20%
30%
47%
40%
30%
2-Sector Perform
2-Sector Perform
1-Sector Outperform
2-Sector Perform
1-Sector Outperform
1.20x
1.48x
1
EV
Producer Average
Production
Total Cash Cost
(000 oz)
(US$/oz)
Company
2012E
2013E
2012E
2013E
P&P
3,408
5,718
23,652
8,032
24,210
3,716
7,890
25,352
15,802
30,356
$0.45
($3.20)
$9.28
$15.13
$4.02
($2.08)
($4.92)
$9.42
$10.71
$4.05
45
148
354
192
942
$5.14
$3.44
Producer Average
55
277
1,092
1,167
1,284
90
420
1,383
1,571
1,779
% Prod.
EV
1
EV
1
Growth
/2012E Prod.
/Reserve oz
11E - 13E
(US$)
(US$)
/(P&P+M&I)
(US$)
61%
-3%
25%
238%
51%
$247
$228
$150
$95
$548
$18.65
$8.82
$9.99
$3.98
$14.07
$15.17
$4.71
$3.24
$0.65
$10.32
74%
$253.36
$11.10
$6.82
FINANCIAL STATS
Adj. EPS
CFPS
P/E Ratio
P/CF Ratio
LT
Working
Debt
Capital
EV
2012E
1
Company
2012E
2013E
2012E
2013E
2012E
2013E
2012E
2013E
(US$M)
(US$M)
(US$M)
$0.43
$0.31
$2.10
$0.87
$1.86
$0.53
$0.60
$2.18
$2.03
$2.42
$0.60
$0.49
$2.84
$1.37
$2.09
$0.74
$0.81
$2.97
$3.67
$2.68
16.7x
16.1x
12.0x
19.8x
20.9x
13.4x
8.4x
11.6x
8.4x
16.0x
11.8x
10.3x
8.9x
12.5x
18.5x
9.6x
6.3x
8.5x
4.7x
14.5x
$0
$6
$67
$0
$57
$80
$255
$625
$253
$685
$841
$1,302
$3,540
$763
$13,257
17.1x
11.6x
12.4x
8.7x
Producer Average
Notes:
EBITDA
(US$M) EV/EBITDA
$95
$195
$561
$130
$745
8.9x
6.7x
6.3x
5.9x
17.8x
9.1x
103
Company Comment
■ Silver Wheaton trades at a 51% premium to our NAV3% of $25.65 per share, but we
still believe it represents excellent value and we rate its shares 1-Sector Outperform.
Our one-year target price of $50.00 per share implies a 30% one-year total return to target.
We ascribe the highest target multiple to Silver Wheaton of any company in our universe
because we feel it is well designed to retain leverage to silver prices with a fraction of the
risk associated with operating companies engaged in mining. In addition, we feel Silver
Wheaton is on track to increase production about 80% by 2015 while returning money to
shareholders and positioning itself to make further acquisitions as opportunities arise.
■ Specifically, our target multiple of 1.95x our NAV3% is a weighted average of 2.10x for
producing assets, 1.80x for development assets, and 1.00x for other elements of the
valuation, such as exploration stage properties, net cash, and corporate adjustments. We
believe the nearly fixed operating costs and lack of capital cost exposure warrant a higher
multiple on producing assets. In addition, we feel the development assets in the hands of
experienced operators such as Goldcorp and Barrick are likely to deliver on time with less
execution risk, hence a higher multiple.
■ Our valuation consists almost entirely of a bottom-up cash flow analysis of Silver
Wheaton’s silver streams using a 3% discount rate. We sum up the net present values
(discounted cash flows) from each of the operating assets, add the net cash or debt position of
the company, and ascribe value for in-the-money options and warrants. In addition, we factor
in an after-tax corporate adjustment that includes discounted income statement items such as
corporate overhead, exploration expenses, and reclamation obligations.
■ Our detailed valuation calculation and target price generation can be found in Exhibit 2. We
only ascribe nominal value of $75 million for Navidad. This is first based on a discounted
cash flow calculation for the minimum one million ounces per annum Silver Wheaton
expects to receive from its share of the Loma de La Plata zone of Pan American Silver’s
Navidad project in Chubut, Argentina. Then, given the permitting uncertainty, we halve our
valuation to reflect our view of a 50:50 positive development outcome pending further
updates.
Peñasquito
San Dimas
Pascua-Lama
Other
Rosemont
Zinkgruvan
Cozamin
Yauliyacu
Minto
Barrick
Navidad
Total Mining Assets
US$M
$2,190
$1,773
$1,585
$1,155
$568
$404
$218
$375
$271
$75
$75
$8,688
US$/share
$6.10
$4.94
$4.42
$3.22
$1.58
$1.13
$0.61
$1.05
$0.75
$0.21
$0.21
$24.21
% of NAV
24%
19%
17%
13%
6%
4%
2%
4%
3%
1%
1%
94%
Net Debt
Working Capital (Net Cash & Short Term Debt)
Marketable Securities
In-the-Money Instruments
Corporate Adj. for G&A, Expl, Reclamation
$630
($2)
$153
$96
($361)
$1.76
($0.01)
$0.43
$0.27
($1.01)
7%
0%
2%
1%
-4%
Net Asset Value
$9,204
$25.65
100%
Closing Price - March 1, 2012
Target Multiple
Target Price
$38.78
1.51x
1.95x
$50.00
30%
104
Company Comment
Financial Analysis and Outlook ─ New Dividend Policy
■ We expect Silver Wheaton to generate approximately $620 million in free cash flow
based on $35/oz silver in 2012. The only significant capital expenditure on the horizon is a
final $138 million payment to Barrick in 2H/12 as part of the Pascua-Lama agreement. With
an estimated cash balance of nearly $900 million at year-end 2011, we feel the company is
well positioned to consider further silver stream agreements and to continue returning cash to
investors.
■ Silver Wheaton’s new dividend policy provides shareholders with 20% of operating
cash flows. The quarterly dividend will be calculated as 20% of the previous quarter’s
operating cash flow, before changes in non-cash working capital. The first dividend under
this policy tripled to $0.09 per share and was paid in December 2011.
■ The Q4/11 financial results are likely to be affected by delayed silver deliveries from
Glencore International’s Yauliyacu mine in Peru. The mine made a change to separate copper
and lead concentrates early in 2011 from the harder-to-market bulk concentrates it had been
producing. A backlog of about 1.8 million ounces was yet to be delivered to Silver Wheaton
by the end of Q3/11. Approximately 900,000 ounces of the un-delivered silver, which were
in bulk concentrates, were to be sold 50% in Q4/11 and the balance this year. Copper
concentrate shipments were anticipated to begin in Q4/12 and lead concentrate offtake
agreements were being finalized in 2012, with no shipments to date.
Risk Factors - Largely Mitigated by Design
■ Silver Wheaton exercises complete control of its operating costs and is not exposed to
capital cost inflation or foreign exchange rates. As a non-operator, it can be affected by
production disruptions, delays in concentrate shipments, and holdups in project development.
Likewise, changes in regulatory frameworks could affect the timing of new projects coming
on line, but Silver Wheaton is insulated from other potential policy changes such as royalty
increases and modifications to tax codes. These risks are borne by the mine operators.
■ Most of the company’s production growth and the bulk of its current silver streams come
from senior operators in the mining business such as Barrick and Goldcorp. We believe this
lowers the chance of significant production delays, although it does not eliminate them all
together
105
Company Comment
SLW
$38.78
353
359
$13,915
$48.00
$25.84
Stock Rating
12 Month Target Price (US$)
NAV/Share (US$)
Dividend / Share (US$)
Price/NAV
Ratio Analysis
Net Income (US$mm)
EPS (f.d.) (US$/sh)
P/E (x)
Dividend ($/sh)
Dividend Yield
Total Revenue
Operating Costs
Depreciation
Interest Expense
Other - gain (loss)
EBITDA
EBIT
EBT
Effective Tax Rate
Minority Interest
Net Earnings
Depreciation
2010A
$153
$276
$0.44
50.9x
$322
$0.92
42.2x
-
2011E
$537
$537
$1.51
23.9x
$612
$1.72
22.6x
$0.18
0.5%
2012E
$666
$666
$1.86
20.9x
$752
$2.09
18.5x
$0.36
0.9%
2013E
$867
$867
$2.42
16.0x
$960
$2.68
14.5x
$0.36
0.7%
$423
($165)
($58)
$66
$324
$266
$266
$10
0%
$153
$153
$0.44
$0.79
$714
($167)
($56)
$0
$63
$611
$555
$555
($8)
0%
$537
$537
$1.51
$1.51
$868
($210)
($78)
$1
$86
$745
$667
$668
($8)
0%
$666
$666
$1.86
$1.86
$1,099
($243)
($19)
$1
($657)
$200
$180
$181
0%
$867
$867
$2.42
$2.42
$153
$58
$537
$56
$666
$78
$867
$19
Deferred Taxes
Other
CAPEX (Silver & Gold Interests)
Net Change in Cash
Cash
Current Assets
($10)
$121
$322
$320
$80
($172)
($201)
$201
$0.92
$8
$11
$612
$615
($84)
($141)
($130)
$400
$1.72
$8
$752
$758
($171)
($138)
($138)
$450
$2.09
$74
$960
$203
($204)
($1)
$2.68
$429
$436
$829
$837
$1,279
$1,286
$2,041
$2,048
Long-term Assets
Total Assets
Income Taxes Payable
Current Liabilities
Long-term Liabilities
Total Liabilities
$2,199
$2,635
$172
$202
$373
$2,262
$2,016
$2,853
$171
$50
$221
$2,632
$2,076
$3,362
$41
$22
$62
$3,300
$2,056
$4,105
$34
$14
$48
$3,444
Working Capital
$2,635
$265
$2,853
$666
$3,362
$1,246
$3,492
$2,015
1-SO
$50.00
29%
$25.65
$0.18
1.51x
2010A
$22.28
352.8
$20.18
$20.18
2011E
$35.94
353.5
$35.27
$35.27
2012E
$50.00
353.5
$35.00
$35.00
2013E
$50.00
353.5
$35.00
$35.00
2.9
5.0
1.7
1.9
1.4
1.6
2.5
3.5
20.5
$4
4.8
5.2
1.1
1.4
1.3
2.9
3.5
20.1
$4
6.5
4.2
2.4
1.7
1.4
3.2
4.9
24.2
$4
6.0
4.4
5.6
2.4
1.7
1.4
3.2
5.7
30.4
$4
n.m.
1.4
7%
6%
42x
n.m.
$6.41
$0.42
n.m.
1.2
20%
19%
21x
n.m.
$7.44
$1.34
n.m.
1.2
20%
20%
17x
n.m.
$9.33
$1.75
n.m.
1.2
25%
21%
59x
n.m.
$9.74
$0.58
Peñasquito (3% discount rate)
Pascua-Lama (3% discount rate)
San Dimas (3% discount rate)
Yauliyacu (3% discount rate)
Zinkgruvan (3% discount rate)
Cozamin (3% discount rate)
Minto (3% discount rate)
Barrick (3% discount rate)
Rosemont (3% discount rate)
Other (3% discount rate)
Navidad
US$M
$2,190
$1,585
$1,773
$375
$404
$218
$271
$75
$568
$1,155
$75
US$/Sh
$6.10
$4.42
$4.94
$1.05
$1.13
$0.61
$0.75
$0.21
$1.58
$3.22
$0.21
%
24%
17%
19%
4%
4%
2%
3%
1%
6%
13%
1%
Total Assets
$8,688
$24.21
94%
Net Debt
Working Capital (Net of cash and ST debt)
Marketable Securities
Corporate Adj. for G&A, Expl, Reclamation
$630
($2)
$153
$96
($361)
$1.76
($0.01)
$0.43
$0.27
($1.01)
7%
0%
2%
1%
-4%
Net Asset Value:
$9,204
$25.65
100%
S/O (mm) - Basic
Peñasquito (Moz)
Pascua-Lama (Moz)
San Dimas (Moz)
Yauliyacu (Moz)
Zinkgruvan (Moz)
Cozamin (Moz)
Minto (Moz)
Barrick (Moz)
Rosemont (Moz)
Other (Moz)
Total Production (Moz)
Profit Margin
ROE
ROA
EV/EBITDA (x)
Net Debt/Equity
Book Value (US$/sh)
NAV Analysis
Gold Reserves (Moz)
Gold Resources (Moz)
942.4
836.4
40
$10
Gold, 4%
Rosemount
35
Other
Silver, 96%
Cozamin
30
25
$8
Zinkgruvan
Barrick
Yauliyacu
Minto
$6
20
$4
15
Pascua-Lama
10
$2
San Dimas
5
0
2010A
Symbol
Share Price (US$)
Market Cap (US$mm) - FD
52-week high (US$)
52-week low (US$)
Peñasquito
2011E
2012E
2013E
2014E
$0
2015E
Total Cash Cost (US$/oz)
Table of Contents
Intraday Flash
106
Company Comment
Superior Plus Corp.
(SPB-T C$7.65)
Cory Brumer, MBA, CFA - 514-287-3613
[email protected]
Risk Ranking: High
[email protected]
Target 1-Yr:
2-Yr:
C$8.25
C$8.25
ROR 1-Yr:
2-Yr:
15.7%
23.5%
Est. NTM Div.
Div. (Current)
C$0.60
C$0.60
Yield
Valuation: Average of 7.25x NTM EV/EBITDA (2013E) & 7.5% Yield
7.8%
Key Risks to Target: Lower-than-expected prices, stronger-than-expected C$
Event
■ We held client meetings with Superior management in Toronto.
Implications
■ 2012 guidance (AOCF/share of $1.40-$1.85) does not include any
improvements as they will likely be offset by implementation/
restructuring costs. Benefits should be felt gradually over 2013-2014.
We have marginally increased our 2012 CFPS estimate to $1.74, and
our 2013 estimate to $1.88, giving Superior some of the benefit from
margin improvements in Building Products and Energy Services.
■ CEO Desjardins noted that his first 100 days on the job with Superior
have been focused on developing specific initiatives within each group
to improve performance, including logistics, inbound transportation,
cash collections, as well as manpower requirements.
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
TSX Weight
Next Reporting Date
110.3
843.9
110.3
843.9
0.06%
May-12
Recommendation
■ We maintain our 2-Sector Perform rating but have increased our oneyear target to $8.25 (from $7.25), based on an average 7.25x
EV/EBITDA multiple (from 7.0x) and a 7.5% yield (from 10%). Given
low forecasted payout ratios, we believe the market will be willing to
accept a lower yield on SPB shares.
Qtly CFPS (FD)
2010A
2011A
2012E
2013E
Q1
$0.53 A
$0.68 A
$0.68
$0.76
(FY-Dec.)
Dividends/Share
Price/Cash Flow
EV/EBITDA
IBES Estimates
EPS 2012E: $0.58
EPS 2013E: $0.66
BVPS12E
ROE12E
Q2
$0.05 A
$0.18 A
$0.19
$0.23
Q3
$0.19 A
$0.21 A
$0.20
$0.18
Q4
$0.52 A
$0.57 A
$0.66
$0.72
Year
$1.30
$1.65
$1.74
$1.88
P/CF
11.8%
28.7%
22.7%
24.6%
2009A
$1.62
8.1
11.4
2010A
$1.62
8.5
11.4
2011A
$1.17
3.5
7.5
2012E
$0.60
4.4
7.3
2013E
$0.60
4.1
6.5
$3.50
24.9%
Pertinent Revisions
New
Target:
1-Yr
$8.25
2-Yr
$8.25
CFPS12E
$1.74
CFPS13E
$1.88
New Valuation:
(2013E) & 7.5% Yield
Old Valuation:
(2013E) & 10.0% Yield
Table of Contents
Old
$7.25
$7.25
$1.72
$1.79
107
Company Comment
■ We held client meetings with Superior Plus management (CEO Luc Desjardins, CFO Wayne
Bingham, and VP Jay Bachman) in Toronto.
■ 2012 guidance (AOCF/share of $1.40-$.185) does not include any improvements as they will
likely be offset by implementation/restructuring costs. Benefits should be felt gradually over
2013-2014. We have marginally increased our 2012 CFPS estimate to $1.74, and our 2013
estimate to $1.88, giving Superior some of the benefit from margin improvements in
Building Products and Energy Services.
■ In terms of fundamentals by segment:
In Energy Services, industrial and oilfield propane demand remains strong in Canada.
U.S. Northeast heating oil demand continues to decline, but propane and commercial
fuels volumes are growing. Customer conservation continues due to an uncertain
economic environment, high commodity prices, and improved energy efficiency. There
continues to be attractive tuck-in acquisition opportunities in Canada and the U.S.
Northeast.
Specialty Chemicals remains relatively strong. Sodium chlorate prices should benefit
from contract renewals completed in 2011 and throughout 2012, partially offset by a
lower average FX hedge rate ($1.05 compared to $1.10 in 2011). Chlorate is virtually
sold out for 2012 with ~85,000 tonnes exported offshore. Chloralkali product demand
is also strong, with a weak US$ and low natgas prices supporting exports, as well as
strong oil and gas drilling activity supporting hydrochloric acid markets. There is
upside potential from HCL capacity additions being analyzed with a decision expected
by the end of Q2/12.
Construction Products results continue to be challenged by ongoing U.S. economic
weakness, albeit showing some signs of improvement. Industrial business spending and
Canadian housing starts are stable.
■ CEO Desjardins has asked each of the 4 businesses (Energy Services split between Canada
and the U.S.) to identify five initiatives to improve profitability/efficiencies over the next 2436 months. The top 3-5 areas in each segment are being reviewed with help from outside
consultants to quantify the impact, and any potential changes to be implemented. This
includes both pricing and cost/efficiency improvements to help margins. The company's
ultimate goal is to grow at a stronger rate than the underlying markets by growing market
share. Specifically:
In Canada, an in-depth review of individual branch profitability will be undertaken to
improve some of the weaker performers. The company is currently analyzing if it is a
pricing/margin issue or an overhead/cost issue. In addition, pricing, margins, and
profitability by customer are being reviewed to ensure the company is compensated for
value-added services provided. The CEO is meeting with counterparts at customers to
support pricing initiatives.
Asset utilization can be improved. The average tank fill in Canada is about 30% versus
about 60% for the U.S. As well, there is potential to enhance asset utilitzation by using
delivery trucks for more than the actual 8 hours per day.
Receivables currently stand at 70 days of sales, with a target of 45 days by the end of
2012 and a stretch target of 35 days by the end of 2013. Management estimates this
could translate into a "one-off" $50M reduction in working capital.
In Construction Products, there exist too many branches and locations; likely closing ~12
locations in both Canada and the U.S. with - hopefully - little impact on revenues as
customers can be served from other locations. The company is also looking to increase
inventory turn significantly. U.S. operations appear not to have been as good on
procurement (e.g., volume rebates), while "inbound" freight currently is handled by a
supplier but paid for by SPB (~$75M in annual expenses).
■ Superior's debt plan remains unchanged. Total Debt/EBITDA at Q4/11 was 5.1x, down
slightly from 5.2x at the previous quarter. The company remains committed to lowering its
overall debt levels towards its 3.5x-4.0x target. Using the midpoint of 2012 guidance
108
Company Comment
($1.62/share), the company estimates a payout ratio of ~52% after all capex, leaving ~$65M
after dividends available for debt repayment. This would lower total debt/EBITDA to 4.6x4.8x by the end of 2012.
■ The company does not expect to revisit (increase) the dividend until debt/EBITDA drops
below 3.5x. The company currently does not expect to have cash taxes in Canada before at
least 2020.
■ With its Q4/11 results, Superior's Board also adopted a shareholder rights plan effective
February 16, 2012. The company notes that although the plan is not being adopted in
response to any proposed takeover bid for Superior, the plan is intended to provide
shareholders and the board adequate time to properly evaluate any potential takeover bids.
The plan sets the terms for a permitted bid, and gives rights holders the opportunity to
acquire common shares at a substantial discount to market value in the event anyone
announces its intention to acquire 20% or more of Superior's common shares without
complying with the permitted bid provisions. The plan has been conditionally approved by
the TSX, and the company expects to seek shareholder approval at its AGM on May 2, 2012.
■ Specific financial impacts of the above initiatives, as well as 2013 guidance, are likely to be
provided at the November 2012 investor day.
Table of Contents
109
Company Comment
(SGY-T C$10.35)
Surge Energy Inc.
Paul Lee, CA, CFA - 403-213-7774
[email protected]
Risk Ranking: High
[email protected]
Target 1-Yr:
2-Yr:
C$13.50
C$16.00
ROR 1-Yr:
2-Yr:
30.4%
54.6%
Est. NTM Div.
Div. (Current)
C$0.00
C$0.00
Yield
0.0%
Event
■ Surge announced year-end reserves and an operational update.
Implications
■ Strong reserves growth. SGY reported 2P reserves of 32,207 mboe
(up 52% YOY and an impressive 25% on a debt-adj. res/sh basis). Post
the Dec/11 acquisition, 2P reserves increased by 73% and are now 65%
liquids weighted (versus 58% in 2010).
■ Attractive FD&A costs. FD&A costs of ~$26/boe (1P) and ~$17/boe
(2P) (including change in undiscounted FDC) drove a 2.3x recycle ratio
(2P), which we view as a solid achievement.
■ 2012 guidance intact. Surge maintained its 2012 exit rate target of
11,000 boe/d (77% oil/NGL's). We estimate that capex of $155M will
result in debt-adj. prod/sh growth of 23%, likely to be top quartile.
■ Valhalla success continues. SGY's ninth hz well had a 7-day test rate
of 2,300 boe/d (81% liquids), the highest recorded test rate to date. A
tenth well is currently drilling. At least five more wells planned in 2012.
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
Next Reporting Date
78.0
806.9
71.2
737.2
Mar-12
Recommendation
■ We maintain our 1-SO rating and have increased our one-year target
price to $13.50 (from $12/sh) on the back of stronger-than-expected
FD&A costs, solid reserves growth, and continued success at Valhalla.
Qtly CFPS (FD)
2010A
2011E
2012E
2013E
Q1
$0.29 A
$0.17 A
$0.41
$0.55
(FY-Dec.)
Prod-Equiv (mboe/d)
Prod Growth
Prod/Share Growth
Natural Gas (%)
Cash Flow from Ops
Net Cap Exp
IBES Estimates
CFPS 2011E: $0.98
CFPS 2012E: $1.79
BVPS11E
NAV
P/NAV
Q2
$0.17 A
$0.21 A
$0.43
$0.53
Q3
$0.15 A
$0.24 A
$0.46
$0.61
Q4
$0.15 A
$0.33
$0.52
$0.66
Year
$0.70
$0.97
$1.82
$2.35
P/CF
10.46
9.20
5.69
4.41
2009A
$61.84
$3.92
2.64
-8%
-6%
44%
$17.5
$17.9
2010A
$79.39
$4.38
3.03
14%
-41%
38%
$25.7
$42.0
2011E
$94.72
$4.01
5.97
97%
21%
39%
$56.9
$138.3
2012E
$95.00
$4.00
9.57
60%
23%
27%
$131.4
$155.4
2013E
$95.00
$4.50
11.10
16%
12%
24%
$169.8
$198.4
Pertinent Revisions
New
Old
Target:
1-Yr
$13.50
$12.00
2-Yr
$16.00
$15.00
CFPS11E
$0.97
$0.96
New Valuation:
Old Valuation:
Table of Contents
N/A
$6.38
1.6x
110
Company Comment
Strong Reserves Growth
■ Debt-adjusted reserves/sh grow 25%. SGY reported 2P reserves of 32,207 mboe (up 52%
YOY and an impressive 25% on a debt-adj. res. per share basis). Post the Dec/11 acquisition,
2P reserves increased by 73% and are now 65% liquids (oil + NGL) weighted (versus 58% in
2010). See Exhibit 1.
Exhibit 1 - 2P Reserves Up 73% YOY and Now 65% Liquids Weighted
Proved Developed Non-Producing
Proved Undeveloped
Total Proved
Probable
Total Proved + Probable
Liquids (Oil + NGL's) as a % of 2P
2011
[mboe]
11,042
1,081
8,400
20,522
11,685
32,207
60%
Acquisition(1)
[mboe]
1,043
112
1,758
2,913
1,548
4,461
100%
2011 Pro-forma
[mboe]
12,085
1,193
10,158
23,435
13,233
36,668
65%
2010
[mboe]
8,269
1,853
4,237
14,359
6,854
21,213
58%
(1) Closed January 6, 2012
Operational Update
Valhalla South (Doig):
o The company's ninth horizontal well at Valhalla (10-7-74-8W6, 100% WI)
was put on production February 21, 2012. The well had an average 7-day flow
rate of 2,300 boe/d (81% light oil and NGL's). On the ninth day of
production, the well improved to ~2,600 boe/d (78% light oil and NGL's).
o The well was completed with 12 frac stages over 1,070 meters of the
horizontal section.
o As shown in Exhibit 2, the test rate for the well was the highest reported rate
to date.
o Surge is currently drilling its tenth horizontal well and has at least five more
planned for the remainder of 2012.
o As at December 31, 2011, the company has identified a total of 19 gross (14.3
net) unbooked locations at Valhalla.
Change
[% YOY]
46%
-36%
140%
63%
93%
73%
111
Company Comment
Exhibit 2 - Valhalla - Strong Results Continue
5-day test
[boe/d]
19-day test
[boe/d]
30-day
rate
[boe/d]
Fracs
[#]
Tonnes
[#]
WI
[%]
1st Hz (16-6-74-8W6)
13
30
100%
2nd Hz (2-7-74-8W6)
7
30
100%
945
n/a
675
85%
3rd Hz (14-19-74-8W6)
10
30
53.5%
1,450
n/a
675
77%
4th Hz (11-18-074-08W6)
10
30
71%
1,979
1,310
1,180
82%
5th Hz (16-07-074-08W6)
9
30
100%
1,992
n/a
1,790
66%
6th Hz (8-31-073-08W6)
n/a
n/a
100%
n/a
n/a
n/a
n/a
7th Hz (11-5-074-08W6)
n/a
n/a
n/a
n/a
n/a
n/a
n/a
8th Hz
n/a
n/a
n/a
n/a
n/a
n/a
n/a
9th Hz (10-7-74-8W6)
12
n/a
100%
2,300 (note 2)
n/a
n/a
81%
See note 1
61%
1) Completed with 13 fracs but only 6 of the intervals were contributing. Initial production rate of ~400 boe/d.
2) Average rate over 7 days. Well improved to 2,900 boe/d (78% oil/NGL's) on ninth day of production.
Oil/NGL's
[%]
112
Company Comment
Nipisi (Slavepoint/Gilwood) - Western Alberta:
■ At Nipisi (which was acquired on January 6, 2012), two vertical Gilwood wells were drilled,
completed and brought on production at a combined initial rate of 300 bbl/d (42° API).
■ The first of two horizontal Slave Point wells was drilled to a lateral length of 1,325 meters
and will be fractured in 13 stages.
■ The second well is currently drilling from the same pad.
■ Completions from these wells are expected before the end of March 2012.
■ At least three more horizontal Slave Point wells are planned for 2012.
Waskada (Spearfish) - Williston Basin:
■ Surge drilled and completed seven horizontal Spearfish light oil (36°) wells in Q1/12:
o Four of the wells were brought on production in February, with the remaining
three wells on production by early March.
o With these wells on in March, Surge expects to have 21 net Spearfish wells
producing to the recently completed batter.
113
Company Comment
Target Price Increased to $13.50
■ On the back of stronger-than-expected FD&A costs, solid reserves growth, and a strong
Valhalla well, we increased our one-year target price to $13.50 (from $12/sh). We plan to
update our NAV + Risked Upside when the AIF is released (April) and our price deck is
reviewed (April)
.
Exhibit 3 - One-Year Target Price Build-up
Note
[#]
Wells
[#]
Est'd
Value
per Well
[$000]
NAV, Excluding Land
Un-booked Upside
Waskada/Pierson/Goodlands - Spearfish (Amaranth) - Crown
Waskada/Pierson/Goodlands - Spearfish (Amaranth) - Freehold
North Dakota - Spearfish (Amaranth) - Prospective
North Dakota - Spearfish (Amaranth) - Exploratory
West Central Alberta (Windfall) - Bluesky
East Central Alberta - Lloydminster (vertical)
Long Coulee - Sunburst and Glauconite
Valhalla South - Doig (Hz)
Valhalla South - Doig (Vt Re-Frac)
Secondary Recovery Potential - Slave Point
Secondary Recovery Potential - Other Zones
Goose River
Less: Land purchased to-date in 2011
Value Buildup
PV of
Drill
Program
[%]
$432,542
($43,541)
$389,001
1
1
2
3
4
5
6
7
8
9
10
11
5.9
93.1
119.9
133.8
37.6
13.0
10.0
22.9
9.5
$1,854
$1,244
$990
$990
$3,893
$834
$1,001
$10,004
$2,791
445.7
Target Price
Notes:
(1) A total of 99 un-booked locations, identified by management.
(9) Assumes gross OOIP of 65 mmbbl and an 12.8% incremental recovery over currently booked reserves.
(10) Assumes gross OOIP of 306 mmbbl and an 8.5% incremental recovery over primary.
(11) Assumes land value of $150 per acre and 80000 net acres.
Unrisked
Undisc.
Value
[$000]
$10,947
$115,825
$118,712
$132,380
$146,372
$10,836
$10,009
$229,101
$26,511
$83,000
$260,100
$12,000
($20,000)
$1,524,792
70%
70%
70%
70%
85%
85%
85%
80%
80%
50%
50%
100%
100%
Unrisked Value
[$000]
[$/share]
Target
Price
Wtg
[%]
Target Price
Buildup
[$000]
[$/share]
$432,542
($43,541)
$389,001
$6.38
($0.64)
$5.74
100%
$389,001
$5.74
$7,663
$81,077
$83,098
$92,666
$124,416
$9,210
$8,507
$183,281
$21,209
$41,500
$130,050
$12,000
($20,000)
$0.11
$1.20
$1.23
$1.37
$1.84
$0.14
$0.13
$2.71
$0.31
$0.61
$1.92
$0.18
($0.30)
80%
80%
70%
20%
50%
75%
35%
60%
50%
75%
35%
100%
100%
$6,130
$64,862
$58,169
$18,533
$62,208
$6,908
$2,978
$109,968
$10,604
$31,125
$45,518
$12,000
($20,000)
$0.09
$0.96
$0.86
$0.27
$0.92
$0.10
$0.04
$1.62
$0.16
$0.46
$0.67
$0.18
($0.30)
$798,003
$11.78
$1,163,678
$17.18
$13.50
114
Company Comment
Exhibit 4 - Summary of Blow-Down NAVPS, and Unrisked NAVPS
$20
Goose River
$18
Long Coulee - Sunburst and
Glauconite
East Central Alberta Lloydminster
Secondary Recovery Potential
$16
West Central Alberta - Bluesky
Waskada/Pierson/Goodlands Spearfish
Valhalla South - Doig
$14
Target Price
$12
North Dakota - Spearfish
Current Price
NAV 2P Bl
D
$10
Notes:
1) the "Risked Upside" and
"Unrisked Upside" cases both
account for PV of the Drill Program;
2) the "Blow Down" includes all
undeveloped land in base NAV,
while other case include portion not
considered in upside evaluations;
and
3) see NAV Plus Risked Upside
Methodology for further details.
$8
$6
$4
$2
$NAV Blow Down
NAV Plus Risked Upside
NAV Plus Unrisked Upside
115
Company Comment
Surge Energy Inc. (TSX: SGY, 1-Sector Outperform)
March 1, 2012
Company Profile
Alberta
Saskatchewan
Manitoba
North West AB:
Hotchkiss
North West AB:
Valhalla South, Nipisi, Goose
River
West Central AB:
Windfall (Bluesky)
Light Oil Play
East Central AB:
Silver Lake, Leela, Sounding Lake,
Gooseberry
Edmonton
Saskatoon
Calgary
Southern AB:
Long Coulee
South West MB/North
Dakota:
Waskada, Pierson,
Goodlands
Regina
Core Areas
Waskada, Manitoba
West Central AB
North West AB
Target Zone(s)
Spearfish (Amaranth)
Bluesky
Valhalla
Company Management
Dan O'Neil, President & CEO
Max Lof, CFO
Dan Brown, COO
Kevin Angus, VP Exploration
Malcolm Adams, VP Corporate Development
Vt. Depth [m]
900-950
2,000
2,050
2011 Reserves (1)
Proven
Probable
P+P
Proved Undeveloped
Probable
Type
Hz
Hz
Hz
Oil [mbbl]
15,347
Gas [mmcf]
48,530
Total [mboe]
23,435
[% Gas]
35%
8,308
23,655
29,548
78,078
13,233
36,668
37%
35%
% of 1P Res.
52%
5%
43%
% of 2P Res.
33%
3%
28%
36%
RLI (P+P)
2011E
$94.72
$95.41
$77.31
$77.70
$4.01
$3.64
2012E
$95.00
$95.92
$79.49
$81.49
$4.00
$3.70
2013E
$95.00
$95.92
$75.61
$76.61
$4.50
$4.00
Oil & Liquids
Natural Gas
Total
% Gas
YoY Growth
[bbl/d]
[mmcf/d]
[boe/d]
[%]
[%]
[%]
2010A
1,871
6.9
3,026
38%
14%
-41%
2011E
3,661
13.8
5,968
39%
97%
21%
2012E
6,941
15.7
9,566
27%
60%
23%
2013E
8,489
15.7
11,103
24%
16%
12%
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
[$/boe]
2010A
$52.45
$2.53
($7.35)
($2.20)
($15.25)
$30.18
($5.60)
($0.90)
($0.09)
$0.00
$23.59
2011E
$60.62
($1.46)
($9.21)
($2.50)
($14.88)
$32.57
($4.62)
($1.87)
$0.09
$0.00
$26.16
2012E
$69.22
($0.82)
($12.50)
($2.37)
($11.29)
$42.25
($3.06)
($1.56)
$0.00
$0.00
$37.63
2013E
$72.90
$0.00
($13.40)
($2.42)
($10.75)
$46.33
($2.69)
($1.74)
$0.00
$0.00
$41.90
14%
15%
21%
18%
21%
18%
0%
[$000]
[$000]
[$000]
[$000]
[$000]
[$/share]
2010A
$25,688
$86,854
($41,996)
($76,352)
$26,686
$0.70
2011E
$56,938
$87,352
($138,289)
($22,118)
$61,021
$0.97
2012E
$131,385
$130,063
($155,448)
($106,000)
$136,837
$1.82
2013E
$169,808
$28,544
($198,352)
$0
$176,864
$2.35
[x]
[x]
1.6x
1.8x
2.4x
1.6x
1.2x
1.2x
1.2x
1.1x
2010A
435,413
$31.74
$22.91
1.2x
2011A
n/a
$26.03
$17.24
2.2x
3 Yr Avg
Cash Flows
DACF
CFPS
4%
(1) Pro-forma Dec/11 acquisition Privateco acquisition.
Reserve Engineers
Sproule
2010A
$79.39
$77.58
$66.39
$68.11
$4.38
$3.99
Royalties
Prior Companies
Breaker Energy, EnCana
Breaker Energy
Breaker Energy, EnCana
Husky
ARC
[US$/bbl]
[C$/bbl]
[C$/bbl]
[C$/bbl]
[US$/mcf]
[C$/mcf]
Netbacks
Revenue
Hedging
Royalties
Operating Costs
Field Netback
G&A
Interest
Other
Cash Taxes
Corporate Netback
Winnipeg
Southern AB:
Cherry
WTI
Edmonton Par
Bow River
Henry Hub
AECO
14.5x
Internal Capex / CF
Net Debt / CF
[$/share]
$6.38
Futures Price Deck
[$/share]
#REF!
[acres]
[$/boe]
[$/boe]
[x]
2009A
420,000
$13.96
$14.03
1.7x
FD&A Proven
FD&A P+P
Valuation Metrics
P/CF
EV/DACF
EV/Production
D/CF
P/NAVPS (Scotia)
EV/Reserves (P+P)
P/CF
EV/DACF
EV/Production
D/CF
P/NAVPS (Scotia)
EV/Reserves (P+P)
$28.42
$21.97
Capital Structure
[x]
[x]
[$/boe/d]
[x]
[x]
[$/boe]
2012E
5.7x
6.7x
$101,438
1.2x
1.6x
$49.38
2013E
4.4x
5.3x
$89,963
1.1x
[x]
[x]
[$/boe/d]
[x]
[x]
[$/boe]
2012E
5.4x
6.4x
$116,512
1.4x
2.2x
$52.81
2013E
4.2x
5.1x
$96,029
1.2x
Source: Scotiabank GBM Estimates, Company Reports
[%]
[%]
Share Price:
Target:
$10.35
1-Yr:
2-Yr:
$13.50
$16.00
Market Cap (f.d.)
[000]
[$mm]
Q1/12E
77,964
$807
Bank Debt
High Yield Debt
Net Debt
[$mm]
[$mm]
[$mm]
[$mm]
[$mm]
$130
$32
$0
$0
$162
Enterprise Value
[$mm]
$969
ROR:
30%
55%
Facility
Size
Room
[$mm]
Room
[%]
$175
$45
26%
116
Company Comment
(TD-T C$82.00)
(TD-N US$83.15)
Robert Poole - 416-863-7843
[email protected]
Risk Ranking: Low
Target 1-Yr:
2-Yr:
C$100.00
C$110.00
ROR 1-Yr:
2-Yr:
25.6%
41.5%
Est. NTM Div.
Div. (Current)
C$3.00
C$2.88
Yield
3.5%
Q1/12 Big Beat - TD Canada Trust Strong,
Wholesale Rebound - Dividend Increased 6%
Event
■ TD's cash operating earnings increased 8% YOY to $1.86 per share,
above our expectations of $1.72 per share and IBES consensus of $1.76
per share. Earnings were driven by record earnings from TDCT and a
rebound in wholesale. Earnings quality improved sequentially, with
securities gains representing only $0.03 per share of earnings versus
$0.15 per share in the previous quarter.
■ Operating ROE: 16.8%, RRWA: 2.90%, CET1: 7.1%E.
Implications
■ TD announced a 6% annual dividend increase to $2.88 per share from
$2.72 per share.
■ We are increasing our 2012E and 2013E EPS by $0.20 per share each to
$7.30 per share and $8.00 per share, reflecting strong results this
quarter. We are increasing our share price target to $100 from $93
based on higher earnings estimate.
Capitalization
Shares O/S (M)
Total Value ($M)
Float O/S (M)
Float Value ($M)
TSX Weight
Next Reporting Date
903.7
74,106
903.7
74,106
4.88%
24-May-12
Recommendation
■ Maintain 1-Sector Outperform rating based on an industry-high capital
generation rate (RRWA), low balance sheet risk, low earnings volatility,
and a strong competitive positioning.
2010A
2011A
2012E
2013E
Q1
$1.60 A
$1.74 A
$1.86
Q2
$1.36 A
$1.59 A
$1.74
(FY-Oct.)
Price/Earnings
2009A
$5.35
11.5
IBES Estimates
EPS 2012E: $6.99
EPS 2013E: $7.59
$45.00
16.8%
Curr. BVPS
Curr. ROE
Q3
$1.43 A
$1.72 A
$1.82
2010A
$5.77
12.7
Q4
$1.38 A
$1.77 A
$1.88
2011A
$6.82
11.0
Year
$5.77
$6.82
$7.30
$8.00
P/E
12.73
11.03
11.23
10.25
2012E
$7.30
11.2
2013E
$8.00
10.3
Pertinent Revisions
New
Target:
1-Yr
2-Yr
EPS12E
EPS13E
$100.00
$110.00
$7.30
$8.00
Old
$93.00
$105.00
$7.10
$7.80
Table of Contents
affiliates are not registered/qualified as research analysts with FINRA in the U.S. This issuer owns 5% or more of the
total issued share capital of the Bank of Nova Scotia.
117
Company Comment
Items of Note
■ Reported cash earnings were $1.62 per share including a $45 million after-tax or $0.05 per
share loss in fair value of derivatives hedging the reclassified portfolio, a $1 million after-tax
or $0.00 per share loss in fair value of CDS hedging the corporate loan book, a $9 million
after-tax or $0.01 per share integration charge relating to U.S. P&C acquisitions, a $5 million
after-tax or $0.00 per share integration charge relating to the Chrysler Financial acquisition, a
$24 million after-tax or $0.02 per share integration charge relating to the MBNA acquisition,
a $171 million after-tax or $0.19 per share charge relating to litigation reserves, and a general
reserve release of $31 million or $0.03 per share.
Resegmentation of Insurance Results
■ Insurance results are no longer included in Canadian P&C and are now included with wealth
management results. The business segment has been renamed “Wealth and Insurance.”
Canadian P&C Earnings Strong – Up 11%
■ Canadian P&C (TDCT) earnings increased 11% YOY to a record $850 million from $769
million a year earlier. The strong results were driven by solid loan growth of 10% YOY,
aided by the acquisition of MBNA and by strong business loan growth, up 14% YOY. Loan
growth excluding MBNA was up 7% YOY. We believe TD is gaining market share in
commercial lending, especially with BMO's commercial loan growth lagging at only 3.5%.
TD is now up to number two or number three in market share, depending on the
measurement.
■ Retail net interest margin improved by 6 bps to 2.77% versus 2.71% in the previous quarter.
However, excluding the impact of MBNA at 12 bps, the NIM declined 4 bps sequentially and
14 bps YOY to 2.67%.
■ Canadian P&C loan growth was strong at 10% YOY.
■ TDCT had revenue growth of 9.8% YOY, with expense growth of 7.7% for positive
operating leverage of 2.2%. TDCT efficiency ratio was a record low of 44.2% versus 48.4%
in the previous quarter and 45.0% a year earlier.
■ Provision for credit losses (PCLs) were $283 million versus $212 million in Q4/11 and $239
million a year earlier. The increase in PCLs was driven mainly by the addition of MBNA,
contributing $73 million to PCLs.
■ Deposit growth was 6.5% YOY, with personal deposits up 4% and business deposits
increasing 12%.
■ Card service revenues were $246 million versus $257 million in the previous quarter and
$219 million a year earlier.
MBNA Canada Credit Card Portfolio included in Canadian P&C
■ TD closed its acquisition of MBNA Canada’s credit card portfolio from Bank of America
(BAC) on December 1, 2011. On closing, the acquisition contributed $7,361 million of loans
to the balance sheet. TD paid a premium of approximately $542 million, allocated to
intangible assets at $422 million and goodwill at $120 million.
Overall Net Interest Margin 2.28%
■ The bank’s overall net interest margin (TEB) declined 4 bps sequentially and 12 bps YOY to
2.28%.
Revenue Growth
■ Total revenue (TEB) growth was 5.9% YOY, with expense growth at 4.2% for positive
operating leverage of 1.7%. The bank’s efficiency ratio was 54.0% versus 57.4% in the
previous quarter and 54.8% a year earlier.
118
Company Comment
U.S. P&C Earnings Solid, Increasing 8%
■ U.S. P&C earnings were solid, increasing 8% YOY to $352 million from $326 million a year
earlier, despite the negative impact of the Durbin amendment. Net interest margin increased
1 basis point sequentially to 3.61%, with loan growth very strong, up 20% YOY, or 10%
excluding acquisitions. The strong volume growth was aided by the high level of mortgage
refinancing as interest rates remain low. Residential mortgage balances increased 33% YOY.
■ Provisions for credit losses were $158 million versus $130 million in the previous quarter
and $207 million in the previous year. The increase QOQ was largely due to higher PCLs in
the acquired credit-impaired portfolio.
■ U.S. P&C earnings represented 20% of earnings from operations.
■ Management reiterated that the Durbin Amendment reduces revenues by $50 million to $60
million per quarter, excluding mitigation strategies. The bank expects to recover this revenue
over the next two years.
Wholesale Banking Earnings Rebound – High-Quality Earnings
■ Wholesale Banking earnings were $194 million versus $280 million ($143 million excluding
securities gains) in the previous quarter and $235 million a year earlier. Wholesale earnings
represented 11% of earnings from operations in the quarter.
Trading Revenue Strong – Major Rebound in Fixed Income
■ Trading revenue was strong at $380 million versus $283 million in the previous quarter and
$370 million a year earlier. Trading revenues in the quarter were driven by a very strong
rebound in interest rate and credit trading revenues at $201 million from $31 million in
Q4/11 and $150 million a year earlier.
■ Equities trading revenue declined to $84 million from $121 million in the previous quarter
and $109 million a year. Foreign exchange trading revenue declined to $95 million from
$131 million in the previous quarter and $111 million a year earlier.
Capital Markets Revenue Stable
■ Capital markets revenue was $339 million versus $337 million in the previous quarter and
$386 million a year earlier. Underwriting and advisory revenue included in capital markets
recovered, rebounding to $99 million versus $70 million in the previous quarter and $108
Security Gains Decline
■ Security gains declined to $39 million or $0.03 per share from a particularly high level of
$201 million or $0.15 per share in the previous quarter and $60 million or $0.05 per share a
year earlier.
■ Unrealized security surplus (equities) increased to $165 million from $158 million in the
previous quarter.
Wealth and Insurance Earnings - Strong
■ Wealth and Insurance earnings, including the bank’s equity share of TD Ameritrade, were up
14% YOY to $349 million.
■ Domestic wealth management earnings increased 11% YOY to $144 million from $130
million a year earlier. Insurance earnings increased 17% YOY to $150 million from $128
■ Operating leverage was positive 3.7%, with revenue increasing 0.7% and expenses declining
3.0%.
■ Mutual fund revenue increased 3% YOY to $239 million, with mutual fund assets under
management increasing 3% YOY to $69.0 billion.
119
Company Comment
TD Ameritrade
■ TD Ameritrade contributed $55 million or $0.06 per share to earnings in the quarter versus
$54 million or $0.06 per share in the previous quarter and $48 million or $0.05 per share a
year earlier. TD Ameritrade’s contribution represented 3% of total bank earnings.
U.S. Platforms Combine to Represent 23% of Earnings
■ U.S. P&C and TD Ameritrade contributed $407 million or $0.45 per share in the quarter,
representing 23% of total bank earnings from operations.
Corporate and Other Segment
■ The Corporate and Other segment earnings were $17 million versus a loss of $15 million the
previous quarter and a loss of $19 million a year earlier. Management expects the corporate
segment to generate losses between $40 million and $80 million on an ongoing basis.
Provision for Credit Losses
■ Specific PCLs declined to $445 million or 0.44% of loans from $340 million or 0.35% of
loans in the previous quarter and from $421 million or 0.47% of loans a year earlier.
Loan Formations
■ Gross impaired loan (GIL) formations increased to $996 million versus $949 million in the
previous quarter. Net impaired loan (NIL) formations increased to $515 million versus $417
million in the previous quarter.
■ GILs were $2,538 million or 0.64% of loans versus $2,493 million or 0.65% of loans in the
previous quarter.
■ Net impaired loans (NILs) were $2,126 million versus $2,063 million the previous quarter.
Effective Tax Rate
■ TD’s effective tax rate (TEB) in the quarter was 23.3%, down from 23.8% the previous
quarter, and from 23.7% a year earlier.
Tier 1 Capital – 11.6%
■ Tier 1 ratio was 11.6% versus 13.0% in the previous quarter and 12.7% a year earlier.
Tangible common equity to risk-weighted assets (TCE/RWA) was 11.1% versus 11.9% in
the previous quarter. The reduction in Tier 1 capital ratio is a result of the IFRS phase-in, the
MBNA transaction, higher deductions for insurance subsidiaries, and Basel 2.5.
■ Book value per share increased 15% from a year earlier to $45.00.
■ Risk-weighted assets increased 22% YOY and 11% QOQ to $243.6 billion, largely due to the
increase in market risk assets as a result of the Basel 2.5 market risk amendment. Market risk
added $20.0 billion to risk-weighted assets in the quarter, up from $5.1 billion in the previous
quarter and $3.6 billion a year earlier.
Common Equity Tier 1 (Basel III) – 7.1%
■ The bank estimates that its Common Equity Tier 1 (CET1) ratio under Basel III is 7.1% as at
January 31, 2012.
European Credit Exposure Update
■ The bank provided an update for its European credit exposure. Total direct exposure to
GIIPS as at January 31, 2012, was $880 million, down from $1,040 million in the previous
quarter. Total direct exposure to Europe was $34.3 billion.
■ The bank also provided details on its entire European credit exposure, with drawn credit at
$24.2 billion or 6.0% of non-retail gross credit risk exposure and 3.2% of its total gross credit
exposure (see Exhibits 2-3).
120
Company Comment
Exhibit 1 - Toronto-Dominion Bank (TD) First Quarter Earnings Reconciliation
First Quarter 2012 Earnings Reconciliation
Net Income after pfds (Reported)
Preferreds
Pre Tax
Reported Cash Earnings
After-Tax
$1,403
$60
EPS
$1.55
$0.07
$1,463
$1.62
Adjusted For:
Change in fair value of derivatives hedging the reclassified portfolio
Integration & restructuring charges relating to U.S. P&C acquisitions
($53)
($11)
($45)
($9)
($0.05)
($0.01)
Change in fair value of CDS hedging the corporate loan book
Integration charges relating to the Chrysler Financial acquisition
Integration charges relating to MBNA Canada
($2)
($6)
($32)
($1)
($5)
($24)
($0.00)
($0.01)
($0.03)
($285)
$41
($348)
($171)
$31
$224
($0.19)
$0.03
$0.25
Litigation Reserve
General Allowance Release
Underlying Cash Operating Earnings
$1,687
$1.86
Exhibit 2 - TD European Gross Credit Risk Exposure
TD European Gross Credit Risk Exposure
First Quarter January 31, C$ million
Q1 2011
Q1 2012
% Change
% Total1
% Total2
$19,718
$24,156
23%
6.0%
3.2%
Undrawn Commitments
$1,531
$1,732
13%
0.4%
0.2%
Repo-Style Transactions
$25,460
$24,682
14%
6.1%
3.3%
$467
$592
23%
0.1%
0.1%
$9,183
$13,180
14%
3.3%
1.8%
$56,359
$64,342
14%
14.3%
8.6%
Drawn Commitments
Other Off- Balance
OTC Derivatives
Total
Note: Gross credit risk exposure is before credit risk mitigants. This table excludes securitization and equity exposures
and equity exposures. 1 % of non-retail gross credit risk exposure.
2
% of total gross credit risk exposure.
121
Company Comment
Exhibit 3 - TD Direct Credit Exposure to Europe
TD Net Credit Exposure to Europe
Loans and Commitments1
Corporate Sovereign Financial
Greece
-
Italy
-
Ireland
-
-
Portugal
-
Spain
$66
Total GIIPS
$66
France
$393
-
$
$5
$4
-
-
$81
-
-
$13
$13
$6
$113
-
$119
$213
-
-
$4
-
$63
$67
$0
$17
$6
$23
$90
-
-
-
-
-
$3
$3
$5
-
$90
-
$54
$68
$3
$81
$116
-
Sweden
$35
-
$156
$14
$90
$237
$18
$71
$464
$80
$421
$1,116
$60
$632
$407
$260
$635
$289
-
$35
-
-
$48
$1
$1
$4
$81
-
Total4
Total
-
$456
Other5
Trading and Investment Portfolio3
-
$375
$378
Total
-
Netherlands
U.K.
-
Germany
Switzerland
Derivatives, Repos and Securities Lending2
Total
$289
$5
$8
$340
$564
$137
$155
$14
$178
$296
$488
$880
$556
$1,057
$51
$1,591
$395
$2,037
$3,558
$6,077
$735
$2,258
$115
$3,007
$65
$3,187
-
$453
$742
$64
$4,956
$1,356
$6,376
$7,753
-
$64
$64
$0
$1,036
$724
$1,760
$1,859
$1,406
$45
$423
$718
$718
$9
$0
$256
$265
$1,499
$240
$181
$1,920
$722
$8
-
$1,985
$2,715
$76
$2,971
$1,961
$5,008
$9,643
$251
$28
$35
$314
$46
$31
$387
$464
$10
$1,736
$600
$2,346
$3,124
Rest of Europe
$3,387
$384
$652
$4,423
$1,544
$1,576
$4,898
$8,018
$325
$15,297
$5,357
$20,979 $33,420
Total Europe
$3,453
$465
$742
$4,660
$1,562
$1,576
$5,035
$8,173
$339
$15,475
$5,653
$21,467 $34,300
GIIPS - Greece, Italy, Ireland, Portugal and Spain. 1 Includes letters of credit, BAs, funded loans and undraw n commitments.
2
Exposures are calculated on a fair value basis and are net of collateral. Derivatives are presented as net exposures w here there is an ISDA master netting agreement
3
Trading portfolio exposures are net of eligible short positions. Deposits of $2.5 billion are included in the Trading and Investment Portfolio.
4
The reported exposures do not include $0.3 billion of protection the Bank purchased via CDS.
5
Remaining European exposures is distributed across 13 countries, each of w hich has a net exposure below $1 billion as at January 31, 2011.
Source: Company Reports.
122
Company Comment
Exhibit 4- Toronto-Dominion Bank (TD) First Quarter Results
YOY
First Quarter as at January 31, 2012
Net Income - cash basis
Q1/11
$1,591
Q1/12
$1,736
Cash Earnings Per Share
Total Revenue (TEB)
Non-Interest Expenses
$1.73
$5,459
$2,993
$1.86
$5,781
$3,119
%Chg
9%
7%
6%
4%
Specific PCLs
$421
0.47%
$445
0.44%
6%
-0.03%
Profit Margin
Trading Revenue
Capital Market Revenue
Capital Market Revenue % Total Revenue
28.2%
$370
6.8%
$386
29.2%
$380
6.6%
$339
0.9%
3%
-0.2%
-12%
Net Security Gains
Net Security Gains Per Share
7.1%
$60
$0.05
5.9%
$39
$0.03
Return on RWA
17.7%
3.07%
16.8%
2.90%
-1.2%
-35.0%
-1.6%
-0.9%
-0.17%
Canadian P&C Banking
Mix %
U.S. Personal & Commercial
Mix %
Wealth (Domestic) & Insurance
Mix %
TD Ameritrade
Mix %
Wholesale Banking
Mix %
$769
47%
$326
20%
$258
16%
$48
3%
$235
14%
$850
49%
$352
20%
$294
17%
$55
3%
$194
11%
($45)
$1,591
($61)
0.0%
$38.99
($9)
$1,736
($39)
0.0%
$45.00
15%
Common Equity % RWA
Tangible Common Equity % RWA
17.3%
10.7%
16.7%
11.1%
-0.6%
0.4%
Total Capital Ratio
12.7%
16.2%
11.6%
14.7%
-1.1%
-1.5%
Other
Total
NILs
NILs % of loans
Book Value Per Share
NIL = net impaired loans; PCL = provision for credit losses; RWA = risk w eighted assets.
11%
8%
14%
15%
-17%
9%
123
Company Comment
Exhibit 5 - Toronto-Dominion Bank (TD) Quarterly Loan Loss Provisions (LLPs)
Quarterly Loan Loss Provision
Q1/06 - Q1/12
$662
$ Millions
LLPs $millions - Total
% of loans
1.2%
1.1%
LLPs $millions - Debt Securities
$550
% Loans
$521$517
$492
1.0%
$425
$445 0.9%
$404$421
0.8%
$380
$349
$340
$339
$288$288
$255
$232
$199
$163$172$171
$142
$109
$97
$93 $116
$76
0.7%
0.6%
0.5%
0.4%
$66
$41
$14
$10 $8
0.3%
-$1$3 $3 $3 $3
0.2%
Q1
Q3
Q1
2006
Q3
Q1
2007
Q3
2008
Q1
Q3
Q1
2009
Q3
Q1
Q3
2010
2011
Source: Company reports, Scotiabank GBM.
Exhibit 6 - Toronto Dominion Bank (TD) Loan Volume and Asset Growth
Toronto Dominion Bank (TD)
Loan Volume & Asset Growth
% Chg
C$ billions
Q1/11
Q4/11
Q1/12
QOQ
YOY
Loans & Acceptances
Mortgage Loans
$140.2
$155.5
$158.4
1.9%
13.0%
Personal Loans 1
Credit Cards
Total Retail
Business, Govt, and Other Loans
Allowances for Credit Losses
Total
$107.4
$9.0
$256.6
$91.0
($2.3)
$345.3
$115.4
$9.0
$279.8
$99.7
($2.3)
$377.2
$115.9
$15.8
$290.1
$104.0
($2.3)
$391.8
0.5%
75.3%
3.7%
4.3%
7.9%
75.4%
13.1%
14.2%
3.9%
13.5%
Average Loans & Acceptances by Segment
Canadian P&C 2
$259.5
$276.6
$285.5
3.2%
10.0%
$67.1
$77.5
$81.9
5.7%
22.1%
Securities Portfolio
Trading4
Available for Sale
Total
$69.8
$90.0
$159.7
$77.9
$93.5
$171.4
$89.3
$97.4
$186.7
14.7%
4.2%
8.9%
27.9%
8.3%
16.9%
Average Interest-earning assets
Risk-Weighted Assets
$570.0
$199.2
$621.0
$218.8
$655.0
$243.6
5.5%
11.4%
21.3%
9.4%
US P&C3
1
Chrysler Financial closed April 1, 2011, w ith loans of US$6.6 billion.
Includes securitization. 3 Excludes debt securities classified as loans.
4
Includes Designated as Trading under the fair value option
2
Q1
2012
124
Company Comment
Exhibit 7 - Toronto-Dominion Bank (TD) EPS Momentum
50%
30%
-30%
0.26
0.25
0.25
0.31
0.28
0.26
0.36
0.36
0.36
0.35
0.37
0.41
0.43
0.39
0.48
0.48
0.48
0.50
0.46
0.37
0.53
0.58
10%
-10%
$
EPS Momentum
0.66
0.62
0.72
0.83
0.79
0.79
0.87
0.790.83
0.78
0.78
0.45
0.43 0.70
0.70
0.69 0.81
0.800.94
0.93
0.91
0.90
1.04
1.00
1.04
1.06
1.15
1.09
1.21
1.20
1.38
1.36
1.60
1.40
1.45
1.28
1.43
1.22
1.27
1.14
1.47
1.46
1.60
1.36
1.43
1.38
1.73
1.63
1.75
1.75
1.86
70%
Earnings Momentum
-50%
Q1 Q3Q1 Q3Q1 Q3 Q1Q3 Q1 Q3Q1 Q3 Q1Q3 Q1 Q3Q1 Q3 Q1Q3 Q1Q3 Q1 Q3Q1 Q3 Q1Q3 Q1 Q3Q1 Q3 Q1Q3 Q1Q3 Q1
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20112012
EPS*
Dividends Per Share
Earnings Momentum
*Figures are cash EPS from Q1 1999 on.
Exhibit 8 - Toronto-Dominion Bank (TD) Relative Strength
Toronto-Dominion Bank Share Price
2008 - March 1, 2012
Share Price ($)
TD
50 SMA
200 SMA
90
80
70
60
Earnings Release
50
40
30
J FM A M J J A S O N D J F MA M J J A S O N D J FMA M J J A S O N D J FM A M J J A S O N D J F M
2008
Source: Bloomberg.
2009
2010
2011
2012
125
Disclosures and Disclaimers
Appendix A: Important Disclosures
Company
Aflac Incorporated
Agrium Inc.
Bank of Nova Scotia
Barrick Gold Corporation
Bombardier Inc.
Brookfield Office Properties
Canadian Imperial Bank of Commerce
Canadian National Railway Company
Canadian Natural Resources Limited
Cencosud
Cenovus Energy Inc.
CGI Group Inc.
Crescent Point Energy Corp.
Empire Company Limited
Enbridge Inc.
Finning International Inc.
First Quantum Minerals Ltd.
GENIVAR Inc.
Hanfeng Evergreen Inc.
IAMGOLD Corporation
Inmet Mining Corporation
Inter Pipeline Fund
Intrepid Potash, Inc.
K+S AG
Karnalyte Resources Inc.
Linamar Corporation
Lundin Mining Corporation
Magna International Inc.
Manulife Financial Corporation
Martinrea International Inc.
Metro Inc.
Migao Corporation
Minefinders Corporation Ltd.
National Bank
New Gold Inc.
PDC Energy
Pengrowth Energy Corporation
Potash Corporation of Saskatchewan, Inc.
Quebecor Inc.
Research In Motion Limited
RMP Energy Inc.
Ticker
AFL
AGU
BNS
ABX
BBD.B
BNP
BPO
CM
CNR
CNQ
CTL
CEN
CVE
GIB.A
CPG
EMP.A
ENB
FTT
FM
FSM
GNV
PAC
HF
HL
IMG
IMN
IPL.UN
IPI
SDF
KRN
LNR
L
LUN
MGA
MFC
MRE
MRU.A
MGO
MFN
NA
NGD
PAAS
PETD
PGF
POT
PMZ.UN
PRQ
QBR.B
RIM
RMP
Disclosures (see legend below)*
T
P, T
G, H.P.24, I, N1, S1, U
G, I, N1, P, T, U
T
G, I, U
G, I, S, T, U
G, H.P.24, H.P.89, I, N1, S, U
G, I, N1, T, U
G, I, U
P, T
M3
I, S
J
G, U
B3, U55
G, I, S, T, U
T
P, T
P, T
J, T
M3, T
T
P, T
P, T
P, T
G, I, S, T, U
P, T
T
I, U
T
B27, I, T
I, P, T
T
G, H.P.186, I, J, S, T, U
T
T
T
I, U
G, N1, S, U
I, P, T
U
I
G, I, U
T
G, I, U
G, I, U
T
N2, T
G, U
126
Rogers Communications Inc.
Shoppers Drug Mart Corporation
Sociedad Quimica y Minera de Chile
Sun Life Financial Inc.
Suncor Energy Inc.
Superior Plus Corp.
Surge Energy Inc.
Talisman Energy Inc.
TELUS Corporation
The Mosaic Company
Tim Hortons Inc.
TransCanada Corporation
Trican Well Service Ltd.
Western Potash Corp.
Yara International ASA
RCI.B
RY
SC
SSRI
SLW
SQM
SLF
SU
SPB
SGY
TLM
T
MOS
THI
TD
TRP
TCW
WPX
YAR
G, I, S, T, U
G, H.P.24, I, S, U, UKO
T
I, P, T
I
P, T
G, I, S, T, U
I
G, I, S, U
G, I, U
I, U
G, I, J, S, T, U, V12
G, N1, U
I, T
G, H.P.24, I, N1, S, U, UKO
D27, I, S, U
J, N1
I
T
Not intended for distribution in the United States.
The following analysts certify that (1) the views expressed in this report in connection with securities or issuers they analyze accurately reflect
their personal views and (2) no part of their compensation was, is, or will be directly or indirectly, related to the specific recommendations or
views expressed by them in this report: Ben Isaacson, Benoit Laprade, Jason Bouvier, Kevin Choquette, Mark Neville, Neil Forster, Pammi Bir,
Patricia Baker, Patrick Bryden, Rodrigo Echagaray, Trevor Turnbull, Turan Quettawala, Vincent Delisle, and William Lee
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*
Legend
B27
Thomas C. O'Neill is a director of Loblaw Companies Limited and is a director of The Bank of Nova Scotia.
B3
Paul D. Sobey is an officer of Empire Company Limited and is a director of The Bank of Nova Scotia.
D27
Rick Waugh, President and Chief Executive Officer for The Bank of Nova Scotia, is a member of the the Board of Directors of
127
TransCanada Corporation.
G
Scotia Capital (USA) Inc. or its affiliates has managed or co-managed a public offering in the past 12 months.
H.P.186
Joanne Smith, a member of Joanne Smith's household and/or an account related to Joanne Smith own securities of this issuer.
H.P.24
Kevin Choquette, a member of Kevin Choquette's household and/or an account related to Kevin Choquette own securities of this
issuer.
H.P.89
Fadi Habib, a member of Fadi Habib's household and/or an account related to Fadi Habib own securities of this issuer.
I
Scotia Capital (USA) Inc. or its affiliates has received compensation for investment banking services in the past 12 months.
J
Scotia Capital (USA) Inc. or its affiliates expects to receive or intends to seek compensation for investment banking services in
the next 3 months.
M3
Rodrigo Echagaray, an analyst, prepared this report and is an employee of the Research Department of Scotia Inverlat Casa de
Bolsa, S.A. de C.V. which forms a part of Grupo Financiero Scotiabank Inverlat.
N1
Scotia Capital (USA) Inc. had an investment banking services client relationship during the past 12 months.
N2
Scotia Capital (USA) Inc. had a non-investment banking securities-related services client relationship during the past 12 months.
P
This issuer paid a portion of the travel-related expenses incurred by the Fundamental Research Analyst/Associate to visit
material operations of this issuer.
S
Scotia Capital Inc. and its affiliates collectively beneficially own in excess of 1% of one or more classes of the issued and
outstanding equity securities of this issuer.
S1
The Bank of Nova Scotia is the parent company and a related issuer of Scotia Capital Inc.
T
The Fundamental Research Analyst/Associate has visited material operations of this issuer.
U
Within the last 12 months, Scotia Capital Inc. and/or its affiliates have undertaken an underwriting liability with respect to equity or
debt securities of, or have provided advice for a fee with respect to, this issuer.
U55
Scotiabank, Global Banking and Markets is financial advisor to Sobeys Inc., a wholly-owned subsidiary of Empire Company
Limited, on the acquisition of retail gas stations in Atlantic Canada and Quebec.
UKO
This issuer owns 5% or more of the total issued share capital of the Bank of Nova Scotia.
V12
Scotiabank was retained by Telus Corporation to provide a fairness opinion with respect to a proposed share conversion.
128
Definition of Scotiabank, Global Banking and Markets Equity Research Ratings & Risk Rankings
We have a three-tiered rating system, with ratings of 1-Sector Outperform, 2-Sector Perform, and 3-Sector Underperform. Each analyst assigns a
rating that is relative to his or her coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the
analyst.
Our risk ranking system provides transparency as to the underlying financial and operational risk of each stock covered. Statistical and judgmental
factors considered are: historical financial results, share price volatility, liquidity of the shares, credit ratings, analyst forecasts, consistency and
predictability of earnings, EPS growth, dividends, cash flow from operations, and strength of balance sheet. The Director of Research and the
Supervisory Analyst jointly make the final determination of all risk rankings.
The rating assigned to each security covered in this report is based on the Scotiabank, Global Banking and Markets research analyst’s 12-month
view on the security. Analysts may sometimes express to traders, salespeople and certain clients their shorter-term views on these securities that
differ from their 12-month view due to several factors, including but not limited to the inherent volatility of the marketplace.
Ratings
Risk Rankings
1-Sector Outperform
The stock is expected to outperform the average 12-month total return of the
analyst’s coverage universe or an index identified by the analyst that
includes, but is not limited to, stocks covered by the analyst.
Low
Low financial and operational risk, high predictability of financial
results, low stock volatility.
2-Sector Perform
The stock is expected to perform approximately in line with the average
12-month total return of the analyst’s coverage universe or an index
identified by the analyst that includes, but is not limited to, stocks covered by
the analyst.
3-Sector Underperform
The stock is expected to underperform the average 12-month total return of
the analyst’s coverage universe or an index identified by the analyst that
includes, but is not limited to, stocks covered by the analyst.
Other Ratings
Tender – Investors are guided to tender to the terms of the takeover offer.
Under Review – The rating has been temporarily placed under review, until
sufficient information has been received and assessed by the analyst.
Medium
Moderate financial and operational risk, moderate predictability of
financial results, moderate stock volatility.
High
High financial and/or operational risk, low predictability of financial
results, high stock volatility.
Caution Warranted
Exceptionally high financial and/or operational risk, exceptionally low
predictability of financial results, exceptionally high stock volatility. For risktolerant investors only.
Venture
Risk and return consistent with Venture Capital. For risk-tolerant investors
only.
Scotiabank, Global Banking and Markets Equity Research Ratings Distribution*
Distribution by Ratings and Equity and Equity-Related Financings*
Percentage of companies covered by Scotiabank, Global Banking
and Markets Equity Research within each rating category.
Percentage of companies within each rating category for which
Scotiabank, Global Banking and Markets has undertaken an
underwriting liability or has provided advice for a fee within the last
12 months.
For the purposes of the ratings distribution disclosure the NASD requires members who use a ratings system with terms different than “buy,”
“hold/neutral” and “sell,” to equate their own ratings into these categories. Our 1-Sector Outperform, 2-Sector Perform, and 3-Sector Underperform
ratings are based on the criteria above, but for this purpose could be equated to buy, neutral and sell ratings, respectively.
129
General Disclosures
This report has been prepared by analysts who are employed by the Research Department of Scotiabank, Global Banking and Markets. Scotiabank,
together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of
The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including Scotia Capital Inc.
All other trademarks are acknowledged as belonging to their respective owners and the display of such trademarks is for informational use only.
Scotiabank, Global Banking and Markets Research produces research reports under a single marketing identity referred to as “Globally-branded
research” under U.S. rules. This research is produced on a single global research platform with one set of rules which meet the most stringent
standards set by regulators in the various jurisdictions in which the research reports are produced. In addition, the analysts who produce the research
reports, regardless of location, are subject to one set of policies designed to meet the most stringent rules established by regulators in the various
jurisdictions where the research reports are produced.
This report is provided to you for informational purposes only. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer
to buy any securities and/or commodity futures contracts.
The securities mentioned in this report may neither be suitable for all investors nor eligible for sale in some jurisdictions where the report is
distributed.
The information and opinions contained herein have been compiled or arrived at from sources believed reliable, however, Scotiabank, Global Banking
and Markets makes no representation or warranty, express or implied, as to their accuracy or completeness.
Scotiabank, Global Banking and Markets has policies designed to make best efforts to ensure that the information contained in this report is current as
of the date of this report, unless otherwise specified.
Any prices that are stated in this report are for informational purposes only. Scotiabank, Global Banking and Markets makes no representation that any
transaction may be or could have been effected at those prices.
Any opinions expressed herein are those of the author(s) and are subject to change without notice and may differ or be contrary from the opinions
expressed by other departments of Scotiabank, Global Banking and Markets or any of its affiliates.
Neither Scotiabank, Global Banking and Markets nor its affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of
this report or its contents.
Equity research reports published by Scotiabank, Global Banking and Markets are available electronically via: Bloomberg, Thomson Financial/First
Call - Research Direct, Reuters, Capital IQ, and FactSet. Institutional clients with questions regarding distribution of equity research should contact us
at 1-800-208-7666.
This report and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or
in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without the prior
express consent of Scotiabank, Global Banking and Markets.
Additional Disclosures
Canada: This report is distributed by Scotia Capital Inc., a subsidiary of The Bank of Nova Scotia. DWM Securities Inc. is a subsidiary of The Bank of
Nova Scotia and an affiliate of Scotia Capital Inc. Scotia Capital Inc. and DWM Securities Inc. are members of the Canadian Investor Protection Fund
and the Investment Industry Regulatory Organization of Canada. DWM Securities Inc. does not provide investment banking services.
Hong Kong: This report is distributed by The Bank of Nova Scotia Hong Kong Branch, which is authorized by the Securities and Future Commission
to conduct Type 1, Type 4 and Type 6 regulated activities and regulated by the Hong Kong Monetary Authority.
Mexico: This report is distributed by Scotia Inverlat Casa de Bolsa S.A. de C.V., a subsidiary of the Bank of Nova Scotia.
Singapore: This report is distributed by The Bank of Nova Scotia Asia Limited, a subsidiary of The Bank of Nova Scotia. The Bank of Nova Scotia
Asia Limited is authorised and regulated by the Monetary Authority of Singapore, and exempted under Section 99(1)(a),and (b), (c) and (d) of the
Securities and Futures Act to conduct regulated activities.
United Kingdom and the rest of Europe: Except as otherwise specified herein, this report is distributed by Scotia Capital (Europe) Limited, a
subsidiary of the Bank of Nova Scotia. Scotia Capital (Europe) Limited is authorized and regulated by the Financial Services Authority (FSA). Scotia
Capital (Europe) Limited research complies with all the FSA requirements and laws concerning disclosures and these are indicated on the research
where applicable. Scotia Capital Inc. is regulated by the FSA for the conduct of investment business in the UK.
United States: This report is distributed by Scotia Capital (USA) Inc., a subsidiary of Scotia Capital Inc., and a registered U.S. broker-dealer. All
transactions by a U.S. investor of securities mentioned in this report must be effected through Scotia Capital (USA) Inc.
Non-U.S. investors wishing to effect a transaction in the securities discussed in this report should contact a Scotiabank, Global Banking and Markets
entity in their local jurisdiction unless governing law permits otherwise.

Pertinent Revision Summary 3 Edge at a Glance 7

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