**December 20th Issue of The JMRD Market Observer**December 22, 2013
In This Week’s Market Observer…
- JMRD Market Strategy Comments
- JMRD All Cap Basket Company Update
- Pembina Pipelines – Extending mid-teens growth rate through 2018 – target up $3 to $42
- NBF Economic and Strategy Group: The Fed announces tapering of its QE program
- 2013 Tax Reminders
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
JMRD Market Strategy Comments
Most major markets moved higher this week despite the US Federal Reserve announcing that it will move ahead with the tapering of its latest stimulus program, which commenced in September 2012. In its commentary, the FED indicated that although the economy and the employment situation are improving, monetary conditions will continue to be accommodative for the foreseeable future. The FED also mentioned that inflation remains tame and that short term interest rates are not expected to go higher until sometime in 2015 at the earliest. As discussed in last week’s Weekly Comment, this continued loose monetary policy, combined with a growing economy, provides a good environment for equity markets as we head into 2014. At the time of writing, the TSX had moved up 325 point on the week to 13,450 or 2.5% and the S&P 500 was higher by 45 points to 1,820, a gain of 2.5%.
JMRD All Cap Basket Company Update
This week we wrap up introducing the basket holdings with Sun-Life Financial (SLF). Sun Life is the third largest Canadian lifeco by market capitalization. The company offers a diverse range of life and health insurance, investment management and retirement products for both individuals and groups. Although SLF’s primary operations are in the United States and Canada, it also has a sizeable presence in the United Kingdom and several Asian markets (China, India, Hong Kong, the Philippines and Indonesia). The company has a dividend yield of 3.86%. The company continues to show strong earnings momentum.
Constellation Software sets its sights on bigger acquisitions (The Globe and Mail) – CSU is held in the All Cap Growth Basket. Originally bought at $180.99, CSU closed at $216.67 on Thursday with a 1.97% dividend yield
There are 18 companies in the basket with a dividend yield of 2.88% . The basket was launched on October 7 and while still very early days, has performed well with a return of 10.5% vs. the TSX Composite Total Return of 5.28% in the same period.
Pembina Pipeline Corporation: Extending mid-teens growth rate through 2018 – target up $3 to $42
Pembina has been a long time holding in the Diversified Income & Growth basket. PPL was originally bought at $20.99. On Friday, Pembina traded at a new year high of $37.05 with a dividend yield of 4.55%
Secures $2-bln Phase III pipeline expansion
n Secures $2-bln Phase III conventional pipeline expansion
PPL has secured 10-year, take-or-pay transportation service agreements for ~230 mbpd (~75% of initial capacity) with 30 customers to underpin the $2-bln, Phase III expansion of its Peace and Northern conventional pipeline systems – online late 2016 to mid-2017, generating $270-300 mln of annual EBITDA (i.e., ~7x multiple vs. current trading multiple of ~14x). Meanwhile, PPL continues to work on securing the remaining capacity and expects further commitments through 2014.
2014 estimates and liquidity update
PPL revised its 2014e capex budget to $1.7 bln from $1.5 bln (i.e., majority of capex related to the $2 bln expansion to be incurred through 2015 / 2016). Overall, our 2014e AFFO/sh remains largely unchanged at $2.39 (was $2.40) – a 2014e AFFO payout ratio of 71%. Meanwhile, with a 2014e D/EBITDA ratio of 4.2x (slightly above the company’s target of 4.0x), we highlight the need for additional preferred equity. Of note, we estimate ~$600 mln of available capacity based on a capital structure of ~10% preferred equity (2014e: ~4%). As such, we do no expect PPL to issue common equity through 2014 beyond DRIP proceeds.
Extending mid-teens growth through 2018: target up $3
In line with the accretion to our DCF valuation, our target moves up $3.00 to $42.00. Meanwhile, with the addition of $270-300 million of EBITDA by late 2017, we now forecast a secured EBITDA growth profile of ~15% per year through 2018e (was ~16% through 2016e). Combined with ~$1.5 billion of remaining unsecured growth opportunities representing a further ~$2.50 (~6%) of unrisked upside to our valuation and a 12-month total return of 26.5% (group avg.: 18.7%), we reiterate our Outperform rating.
NBF Economic and Strategy Group: The Fed announces tapering of its QE program
The Fed announced the start of tapering of its asset purchase program starting January 2014. The reason given is the improvement in economic activity and in the labour market “consistent with growing underlying strength in the broad economy”. The FOMC decided to trim its monthly purchase by US$5bn each for Treasuries and MBS, i.e. it will now buy Treasuries at a pace of US$40/months and MBS at a pace of $35 bn/month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The FOMC pointed out that it is still increasing its holdings of long term securities which should maintain downward pressure on long rates. As the New York Fed mentions on its site, “purchases of agency MBS will continue to be concentrated in newly-issued agency MBS in the To-Be-Announced (TBA) market, and purchases of longer-term Treasury securities will continue to be distributed using the existing set of sectors and approximate weights. These purchase distributions could change if market conditions warrant”.
The Fed is providing new guidance about the fed funds rate by saying “it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent” especially if inflation continues to run below target.
The FOMC made clear that it is maintaining a bias to increase tapering ahead: “If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.” The committee does not rule out the use of other policy tools as appropriate. That said, the FOMC gave itself some flexibility to adjust the pace of asset purchases (i.e. could go down but could also go up) by saying that asset purchases are not on a preset course.
Esther George voted with the majority for the first time. But there was still one dissenter to the final decision, i.e. Eric Rosengren, who thought that changes to the asset purchase program is premature considering the still-elevated jobless rate and below-target inflation.
2013 Tax Reminders
- Last day for Tax Loss selling of Canadian Equities – Tuesday December 24, 2013
- Last day for Tax Loss selling of U.S. Equities – Thursday December 26, 2013 (Canadian Markets closed December 26)
Taking advantage of tax-loss selling http://www.marketwatch.com/story/how-to-cash-in-on-year-end-selling-2013-11-01
- 2013 TFSA contribution deadline – Monday December 31, 2013 – contribution limit $5,500.00
- Note, if you are planning a TFSA withdrawal in early 2014, consider withdrawing the funds by December 31, 2013. The advantage is that you will not have to wait until 2015 to re-contribute that amount. 2014 TFSA contribution limit is $5,500.00.
- 2013 RSP contribution deadline – Monday March 3, 2014. The 2013 maximum RRSP contribution limit is 18% of “earned income” in 2012, to an annual maximum $23,820.
Week at a Glance
Reads of the week
Monday December 23rd – Canadian GDP, U.S. Personal Income, U.S. Personal Spending, U. of Michigan Confidence
Tuesday December 24th – Canadian and U.S. Markets close at 1pm, U.S. Durable Goods Orders, U.S. House Price Index, U.S. New Home Sales
Wednesday December 25th – Canadian and U.S. Markets closed
Thursday December 26th – Canadian Markets Closed, U.S. Initial Jobless Claims
Friday December 27th – None
Monday December 23rd – None
Tuesday December 24th – None
Wednesday December 25th – None
Thursday December 26th – None
Friday December 27th – None
Categorised in: JMRD Updates