JMRD Market Observer for August 21st, 2015 – Market Update

August 21, 2015

**August 21st Issue of The JMRD Market Observer**


In This Week’s JMRD Market Observer


  • JMRD Market Commentary
  • Diversified & Real Estate Yield Equities: Calendar Q2 2015 Recap & Coverage List Snapshot
  • Oil & Gas (Thematic Research) – Industry Cost Reductions Improve Sustainability, But Is It Enough?
  • JMRD Basket Corner
  • Retirement Corner
  • Week at a Glance
  • Reads of the week
  • Economic Calendar
  • Earnings Reports



JMRD Market Commentary


It was another volatile week on the equity markets as concerns over the Chinese stock markets and Chinese economy unnerved global investors yet again. Here in Canada it seems that the market is in liquidation mode.  Large international investors have no appetite for Canadian holdings.  The energy sector, bank stocks and preferred shares have all sold off – nothing has been immune this week, save for gold and gold equities.  As an individual investor, what should be done in this environment?  The answer for most people is probably to do nothing.  The talking heads on TV will tell you to buy this and sell that in an attempt to increase viewership but it’s best to avoid the noise.  The financial markets will recover over time but in the meantime, investors should stick with their financial plans and continue to collect dividends and income on investments until the current situation gets resolved, which it will.  Most markets have reached the official “correction” level defined as a 10% drop from the previous high levels.  Although they never feel pleasant, they are a normal and regular part of the markets and will continue to be in the future.


We will be hosting a conference call on Monday September 14th at 3:00 p.m. to discuss the general market environment, preferred shares and our Baskets.   We will provide call-in details in future email correspondence but please save the date.  If you have any questions or comments that need to be addressed before then, please do not hesitate to call anybody on the team.


The link below provides a good perspective of the US economy and markets.



Diversified & Real Estate Yield Equities: Calendar Q2 2015 Recap & Coverage List Snapshot


A very good summary of the Diversified & Real Eastate Yield equity sectors from NBF analyst Trevor Johnson. Diversified & Real Estate Yield Equities


With calendar Q2 reporting largely behind us we highlight which equities in our diversified coverage list: 1) had the best/worst earnings momentum in the quarter; 2) offer the most compelling yield opportunities; 3) provide the most attractive relative valuation; and from this, 4) are the best positioned to Outperform going forward.


We increased target prices on the four equities with the best Q2/15 earnings momentum, each outpacing NBF/consensus average EBITDA by 18%+:

Just Energy: Target to $8 from $7.25; Downgrading to Sector Perform (was Outperform).

New Flyer: Target to $20 from $18 (Aug. 10th); Reiterate Outperform rating.

Exchange Income: Target to $29 from $26 (Aug. 14th); Reiterate Outperform rating.

Boyd Group: Target to $68 from $60; Reiterate Outperform rating.


The most compelling opportunities for income-oriented investors include:

Exchange Income: 7.8% cash yield vs. 72% 2016e DCPS payout.

Pure Multi-Family: 7.3% cash yield vs. 76% 2016e AFFO payout.

Liquor Stores: 8.2% cash yield vs. 84% 2016e DCPS payout.


Equities providing attractive forward relative valuations include:

Exchange Income: 6.3x EV/EBITDA & 8.2x P/CF (low vs. TSX diversified peers at 10x/13x).

Grenville: 6.4x EV/EBITDA & 9.2x P/CF (low vs. TSX royalty peers (avg. 13x+)).

Alaris Royalty: 11.3x EV/EBITDA & P/CF (low historically (13x+) & vs. TSX royalty peers).


Our top picks at current prices are:

Grenville: Q2 results out Tuesday; Expected to build upon positive earnings momentum.

Alaris: Portfolio growth trajectory back on track; Lowest val’n since picking up coverage in ‘12.

Pure Multi-Family: Portfolio fundamentals and valuation disconnect providing an opportunity.

WPT Industrial: Takeout potential presents favourable risk/reward.

Boyd, DH Corp, Exchange Income, K-Bro, Liquor Stores, Morneau Shepell, New Flyer, Parkland and SmartREIT: all well-positioned to move higher.



Oil & Gas: Industry Cost Reductions Improve Sustainability, But Is It Enough?


A timely update on the Canadian energy sector in light of oil trading at a 6-year low this week. Oil and Gas Update


Within this note we take a closer look at the sustainability of the oil and gas industry in the current commodity price environment, taking into account the industry cost savings realized to date and any dividend/capex adjustments announced with Q2/15 results. In summary, we have seen cash costs come down by ~23% y/y on average which improves overall sustainability; however, based on our current 2016 forecasts we believe many companies may still be required to make further downward revisions to their capital program and/or dividends if commodity prices remain weak for an extended period. Given the challenges that we expect to persist for a while longer in the oil and gas industry, we continue to highlight our defensive Top Picks of CNQ, CJ, PSK, WCP and VET amongst the Yield E&Ps and RRX, SPE, SRX and TOU amongst the Non-Yield E&Ps.


Cash Costs Trend Down ~23% Y/Y

The majority of oil and gas companies are now finished reporting Q2/15 and 1H15 results, and one of the common messages we heard from companies was the reference to industry costs being down over 20% compared with last year. In order to back check these claims, we pulled together a comparison of total cash costs per Boe (excluding taxes) across our E&P coverage universe for the period 1H15 versus 1H14. As can be seen in the charts below, the Yield E&Ps have seen cash costs come down by 21% to ~Cdn$27/boe (including oil sands) while the Non-Yield E&Ps have seen cost savings of 25% down to ~Cdn$19/boe.


More on the Canadian Energy sector: “Brace for more dividend cuts as Canada’s oil patch runs out of cash:” 



JMRD Basket Corner


U.S. Growth Basket


Starbucks (SBUX) – Why Starbucks Prices Went Up as Coffee Beans Got Cheaper” The company’s strategy has created an odd situation this summer: It has increased retail prices for brewed coffee just as coffee prices on world commodities markets have fallen.



Retirement Corner





Week at a Glance


(See attached Week at a Glance report)

Week at a Glance


Reads of the week


  • NBF Economics and Strategy Morning Comment for Thursday August 20: Second round effects, NDP takes the lead (Full report attached) Morning Comment








Economic Reports


Monday August 24th– None

Tuesday August 25th – US New Home Sales, US Consumer Confidence Index

Wednesday August 26th – US Durable Goods Orders

Thursday August 27th – US GDP, US Initial Jobless Claims, US Pending Home Sales

Friday August 28th – US Personal Income and Spending, U of Michigan Consumer Sentiment


Earnings Reports


Monday August 24th– None

Tuesday August 25th – Bank of Montreal, Best Buy

Wednesday August 26th – National Bank, Royal Bank

Thursday August 27th – CIBC, TD Bank

Friday August 28th – Bank of Nova Scotia


Have a good weekend!

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