JMRD Market Observer for February 24, 2017February 24, 2017
In This Week’s JMRD Market Observer
RRSP Contribution deadline
National Bank Estate Planning Series Part 2 of 5
NBFM Monthly Economic Monitor
NBFM Monthly Fixed Income Monitor – March 2017
JMRD Basket Corner
Reads of the week
RRSP Contribution Deadline – Wednesday March 1, 2017
Please take note of the following:
- The 2016 RRSP contribution limit is $25,370. You have until March 1st, 2017 to make your contribution to deduct the amount on your 2016 tax return.
- If you are ahead of the game and want to make your maximum contribution for the 2017 taxation year, the 2017 contribution limit is $26,010.
- The 2017 TFSA contribution limit is $5500 and you can contribute anytime up to December 31, 2017. Note that if you have not maxed out your TFSA in previous years, you are able to carry forward any unused room.
- The 2017 RESP contributions can be made at any time. If you have not maxed out your contributions we can verify any catch up possibilities.
- Other tax notes:
- If you hold foreign property with a cost base greater than $100,000, you must file the foreign income verification statement (CRA Form T1135). As of June 2014, new rules apply to disclosure of this information.
- If you are a U.S. Person for tax purposes, understand your IRS reporting requirements. U.S. Persons (even those who are resident in Canada, have tax reporting requirements in the U.S. For example, U.S. persons are required to report any holdings in Passive Foreign Investment Companies (PFICs), which includes mutual funds and exchange traded funds.
National Bank Estate Planning Series Part 2 of 5
The JMRD Team recently met with one of our partners, National Bank Trust. With a primary focus on Estate Planning, we feel National Bank Trust will play a larger role as part of our business in the coming years. As an introduction, we felt it would be beneficial to provide some basic, but often misunderstood, estate planning information. Over the next five weeks we will attach an article we feel will be of interest to you.
Part two: I am the executor! What do I do?
For many people being asked to be the executor of an estate is regarded as a great honour. When called upon to act, those people quickly learn that being an executor can be onerous and time consuming, not to mention that the executor may be exposed to personal liability. Please see attached
Canadian Banks – Initiating Coverage and Q1 2017 Earnings Preview: Lofty valuations demand growth. Time to deliver.
Earlier this week, new NBF Canadian Financials analyst Gabriel Dechaine released his Q1-2017 preview note for the Canadian bank sector and what to expect.
Lofty valuations demand growth. Time to deliver.
With lofty valuations, the onus falls on EPS revisions to drive performance. A 38% average gain in Big-6 stock prices over the past 12 months has resulted in a sector forward PE multiple of 13.2x that is 18% above the historical average. Despite valuations that appear stretched, we remain positive on the sector, reflecting: (1) a more favourable macro backdrop in 2017 vs. 2016; (2) strong sector capital ratios and a potential lessening of regulatory pressures; and (3) the potential for positive EPS revisions against what we believe to be conservative 2017E Street forecasts. On the latter point, we view potential positive EPS revisions coming from efficiency gains, better than expected credit performance and strong Capital Markets revenues.
We are applying a 12.5x sector multiple on our 2018E EPS and assigning Outperform ratings to BNS, CM and TD. Our valuation multiple is elevated relative to historical standards, but we believe it is reasonable compared to the current sector multiple (i.e. 12.3x on 2018E) and in light of the positive sector attributes discussed above. Our stock selection themes include: (1) EPS revision potential; (2) relative efficiency performance; (3) capital strength; and (4) valuation re-rating potential. In turn, we have assigned Outperform ratings to BNS, CM and TD. See discussion on page 5 for additional details.
Q1/17 Preview: Looking for positive PCLs surprise to supplement expectations of a strong trading quarter. Banks begin reporting Q1/17 results on Feb. 23rd. On average we are forecasting 6% Y/Y EPS growth. Key themes heading into the quarter include: (1) potential trading revenue outperformance, given favourable market conditions; (2) potential improvement in credit performance; and (3) mortgage market growth, notably for CM. We note that credit metrics are more important, in our view, to drive sentiment beyond the quarter as the market is already anticipating strong trading revenues. Lower than forecast PCLs (we are assuming a 5% Y/Y increase for the sector) is a potential source of positive EPS revisions. Despite our favourable sector stance, we believe upside potential during reporting season is limited. The intra-quarter surge in bank stocks represented ~460bps outperformance relative to the S&P/TSX. Historically, outperformance in excess of 200bps has typically resulted in muted stock price reactions during reporting season.
The full report is attached.
NBFM Monthly Economic Monitor – March 2017
- After a disappointing 2016, the global economy seems to have turned the corner. A resurgence in economic activity in the advanced world, led by the U.S., is being complemented by an apparent rebound in China which is lifting emerging markets. That said, major uncertainties threaten to derail global growth including increased trade protectionism, elevated debt levels and political instability in places such as Europe.
- A healthy handoff from last year coupled with upcoming fiscal stimulus puts the U.S. economy in a good position to achieve above-potential growth in 2017. While inflation is likely to hit the Fed’s target for the first time in five years, price pressures should remain contained by unfavourable demographics, a strong dollar and tighter monetary policy by a Fed which is on track to raise interest rates at least twice this year. Any temptation by the Fed to be even more aggressive should be tempered by a likely moderation in the pace of job creation. • Canada’s energy sector is on the mend and its economy is bouncing back nicely as a result. Growth should pick up this year as exports respond to improving U.S. demand and the newly approved Comprehensive Economic and Trade Agreement with Europe. But there are significant downside risks, both domestic (e.g. housing) and foreign (e.g. protectionism) which should not be underestimated given their potential to derail growth. In that regard, the Bank of Canada’s cautious tone, despite improving data, is understandable.
NBFM Monthly Fixed Income Monitor – March 2017
- So while our view of the likely path of the fed funds rate is not that different from the market consensus, our forecast for the 10-year yield exceeds the implied forward rates. This is largely due to our view of the term premium. At this writing, the term premium on a 10-year zero-coupon is 9.5 bps. Our 10-year-yield forecast, assuming a pro-growth fiscal agenda from President Trump and some uncertainty regarding the FOMC’s balance sheet policy, incorporates a term premium moving closer to 20 bps quite soon, toward 40 bps by year end and to 50 bps in 2018. We maintain our view that 10-year Treasuries will close the year trading around 3.0%.
- For Canada, we are maintaining our forecast of last month to the effect that the BoC’s next policy-rate move will be a hike in the first quarter of next year. In our base case scenario for the yield curve, the 2-year yield will drift higher in the second half of this year as the market prices in some normalization of monetary policy in 2018-19 and longer-term yields will continue to move in sympathy with U.S. Treasuries. We see 10-year Canadas trading at around 2.18% at year end.
JMRD Basket Corner
Capital Power (CPX) – CPX reported Q4 adj. EBITDA of $138 mln (excluding $6 mln of unrealized losses), 6% above NBF’s $130 mln estimate primarily due to higher Ontario/B.C. contracted contributions driven by the K2 Wind facility, partly offset by lower than expected Alberta contracted margins. The company also announced a $500 mln acquisition as part of Veresen Inc.’s (VSN) $1.18 bln contracted power asset disposition, with a cash purchase price of $225 mln to be funded with balance sheet capacity, plus the assumption of $275 mln of project level debt. Annual EBITDA expectations of ~$55 mln implies a 9.1x multiple, while annual AFFO/sh (excl. debt repayments) moves up ~7% (closing expected Q2/17). Full report attached.
Keyera (KEY) – Keyera announced that its iso-octane facility (Alberta EnviroFuels: AEF) has been shut down for repairs following an operational issue that developed last weekend. The company discovered a damaged piece of equipment that will require maintenance and is expected to put the facility offline for approximately one month, followed by a standard multi-day start-up period once repairs are complete. Although repair cost estimates were not disclosed, if we assume five weeks of downtime for the 13,600 bpd facility, we estimate a $10-$15 mln impact to our Q1/17 EBITDA estimate (i.e., 5%-10%). Recall, the facility recently completed their once every four year turnaround in September / October 2017.
Royal Bank of Canada (RY) – On Friday, Royal Bank reported Q1/17 core cash EPS of $1.87 vs. NBF and consensus estimate of $1.77. The beat came primarily from lower PCLs (+5c) and better than expected trading revenues (+4c). The result was a ‘neutral’ impact as 1) Strong performance in Canadian P&C banking, including ~3% operating leverage; 2) credit performance was exceptionally strong, driven by oil & gas recoveries; and 3) a 5% dividend increase was larger than expected. “Our Neutral description of the quarter is primarily a reflection of RY’s relative valuation and recent performance, which we believe will limit upside against what is an admittedly strong quarter.”
Veresen (VSN) – Veresen announced the sale of its 625 MW (net) power generation business for $1.18 bln in a suite of three separate agreements, implying a ~12x EBITDA multiple versus our expectation of 10x (i.e., ~$1.0 bln gross proceeds). VSN anticipates to pay a minimal amount of cash taxes as a result of the sale that will be recovered in the following year. Each of the agreements is subject to closing adjustments and conditions with the sale expected to close during Q2/17. Full report attached.
All-Cap Growth Basket
CCL Industries (CCL.b) – CCL’s Q4 results came in above expectations – approximately 5.5% on EBIT – driven by stronger-than-expected results at Checkpoint, as performance across the other business segments was largely in line. The outperformance at Checkpoint was largely attributable to cost savings coming in sooner than expected and higher than expected. In fact, management now expects annual cost savings of “at least” $40 million, and likely delivered “earlier than the previously indicated 2018.” CCL also announced a five-for-one stock split that is expected to take effect on May 26, once approved by shareholders. As of Friday, the shares had traded higher by 7.5% on the week to a new all-time high.
Innergex Renewable (INE) – INE reported Q4 generation of 849 GWh (NBF 864 GWh), revenue of $73.3 mln (NBF $76.2 mln) and EBITDA of $50.3 mln (NBF $56.9 mln, cons. $53.3 mln). Generation was in line at 101% of LTA (hydro at 117% of LTA, wind at 75% of LTA and solar at 103% of LTA), but possibly with help from pre-COD generation on the MU wind farm (at low prices). The company also increased its dividend by 3% to $0.66/share from $0.64/share on an annualized basis. NBF analyst Rupert Merer believes the company’s 2017E payout ratio should still be below the long-term payout ratio target of 70% and it has room to increase the dividend again.
U.S. Growth Basket
Pinnacle Foods (PF) – Pinnacle delivered a strong finish to the year, as 4Q EPS of $0.79 met our Credit Suisse expectations and management raised its EPS guidance for 2017 by $0.09 to $2.55-2.60 (excl. $0.05 benefit related to stock-based compensation). Organic sales rose 1.5% at a time when its food peers are struggling to generate organic growth. Just like peers, management is guiding to a slow start in Q1, but it is doing so for much better reasons. Credit Suisse believes that Pinnacle Foods may be the best positioned out of all of our names for 2017 given strong business execution, a struggling competitor, excellent visibility for gross margin expansion, and the obvious value of its assets in a consolidating food industry. The shares traded to a new all-time high this week, up 6.5% on the week.
Vail Resorts (MTN) – Vermont industry welcomes news of Stowe sale to Vail
XPO Logistics (XPO) – XPO Logistics on Tuesday reported stronger-than-expected profits and revenue, riding a surge in online shopping that drove demand for the company’s logistics and specialized delivery businesses. The Greenwich, Conn.-based company reported net income of $27.3 million in the fourth quarter, or 22 cents a share. That compares with a loss of $62.8 million, or 58 cents a share, a year earlier. Analysts had predicted net income of 11 cents a share, according to FactSet. XPO has in the last few years acquired logistics companies specializing in freight brokerage, trucking and warehouse management, and has signed on large retailers with growing online sales, including IKEA and Inditex SA’s Zara.
Reads of the Week
- Elon Musk Is Really Boring The billionaire visionary is digging in on a tunnel project to skirt gridlock. His Trump-era infrastructure plan has a hole in it.
- Buffett History Signals to Morgan Stanley He May Buy Airline (Note: The Berkshire Hathaway annual report will be release tonight)
Monday February 27th – Pending home sales index
Tuesday February 28th – Agricultural prices
Wednesday March 1st – Markit US Manufacturing
Thursday March 2nd – Initial jobless claims
Friday March 3rd – ISM non-manufacturing
Monday February 27th – PrairieSky Royalty Ltd.
Tuesday February 28th – Bank of Montreal, Bank of Nova Scotia (The)
Wednesday March 1st – National Bank of Canada, WSP Global Inc.,
Thursday March 2nd – Algonquin Power & Utilities Corp., Toronto-Dominion Bank (The), TORC Oil & Gas Ltd.
Friday March 3rd – TransAlta Corporation
Have a good weekend!
Categorised in: JMRD Updates