**March 7th Issue of The JMRD Market Observer**March 10, 2014
In This Week’s Market Observer…
- NBF Monthly Equity Monitor
- Asset Allocation Strategy – Back to square one
- Gibson Energy – Proving Performance; Reiterating outperform on valuation catch-up
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
National Bank Financial Monthly Equity Monitor
NBF’s sector rotation is unchanged this month. In NBF’s view, stronger growth will cause a moderate rise in interest rates that will brake defensive sectors such as Consumer Staples, Telecoms and Utilities. These sectors will also benefit much less than others from weakness of the loonie in 2014. On the other hand, since that weakness is likely to boost the profitability of Energy and Consumer Discretionary companies, NBF is comfortable with its recommendation to overweight them. The Energy sector is also likely to benefit from surging natural gas prices and higher prices for Canadian oil, a cheaper currency and rising geopolitical tensions between Russia and the West.
- Market volatility abated considerably and most indexes resumed climbing after a rough January. At this writing the MSCI All Country index is up 3.7% in February and has essentially regained its January cyclical peak.
- For the emerging countries the economic surprise index is at an upside high unequalled since May 2011. For the developed countries it is at an eight-month downside low. In our view, the U.S. softness is temporary and can be laid to extreme weather. Reassuringly, the global economy shows no sign of widespread weakness at the moment.
- Chinese growth might be slowing, but even at a reduced annual rate of about 7% its effect on commodity demand is formidable. Volume imports of copper, iron ore and crude oil were all at all-time highs in January.
- With demand for commodities strong and sustained, it is hardly surprising that the S&P/TSX has been doing well after two years in which the Canadian benchmark index was egregiously outpaced by the global equity index. The current environment remains favourable to the S&P/TSX and it is not just the domestic investors that are buying. Net foreign purchases of Canadian equities have risen for four consecutive months, for a total of $22.6 billion. This is the best showing in a decade.
- We continue to think that global stock markets are likely to advance further this year, justifying our slightly overweight stance in equities.
NBF Asset Allocation Strategy – Back to square one
Stocks made a comeback in February as fears related to emerging markets and the U.S. weather-related slowdown abated somewhat. Although the month opened with a one-day loss of 2.3% on February 3rd following weaker-than-expected manufacturing data for January, the S&P 500 index managed to finish the month up 4.6%, offsetting the January pullback. In Canada, the S&P/TSX continued to do well on a relative basis ending the month up nearly 3.9%, thanks to a 8.8%-rise in gold mining stocks. Gold remained in vogue, appreciating another 6.7% in US dollar terms in February. Bonds were range-bound with yields on U.S. treasury notes finishing the month where they started, at 2.65%.
Asset allocation strategy
Fixed income: Yields are forming a base near the lower limit of their recent trading range. Keep a short duration with an overweight position in riskier issuers at the expense of government bonds.
Equities: Our biggest overweight position remains for the U.S. market which is expected to benefit from both the improving economy and an appreciation of the greenback. European equities are also attractive and should benefit from a significant amount of support from the ECB shortly. Emerging markets are probably the most under-valued, but the ongoing economic slowdown in many parts of these regions, combined with the scaling back of the Fed’s easing program, leaves developed markets with higher expected risk-adjusted returns.
Commodities: Gold price, presently 5% above its 50-day moving average, could face headwinds should interest rates bounce back from the lower limit of their recent trading range.
Gibson Energy Inc. – Proving performance; reiterate Outperform on valuation catch up
Gibson Energy announced Q4 earnings this week that were in-line with consensus and increased the dividend by 9%, ahead of expectations and better than last year’s 5% increase. The shares traded to an all-time high of $28.82 before pulling back to $28.30 at the time of this writing. Three reasons we would continue to buy GEI: Solid five-year volume-based growth track record, top-tier dividend growth company, attractive valuation and multiple expansion potential. Gibson Energy is owned in the JMRD DIG Basket.
Q4 in line + 9% dividend raise
Q4 in line + 9% dividend raise
GEI reported Q4 2013 AFFO/sh (FD) of $0.48, in line with our estimate of $0.49 and matching consensus on adj. EBITDA of $113 mln vs. our $110 mln (consensus: $108 mln). Meanwhile, GEI increased its dividend by 9% to $1.20/sh, ahead of our estimated 6% increase to $1.17/sh.
Hardisty crude-by-rail nearing arrival
GEI reiterated its 2014 and 2015 growth capex guidance of $340 mln and >$250 mln. Inside, we highlight major developments since our last update – most notably the ~140 mbpd, Hardisty Rail Terminal that is nearing its commissioning, expected in H1 2014.
Estimates intact – bumping divvy growth rate to 9%
Overall, our 2015e AFFO/sh (FD) is unchanged at $2.26 (payout ratio 56%; group avg.: 68%). On the leverage front, our 2015e D/EBITDA nudges down to 1.6x (was 1.7x). Meanwhile, we now forecast a 9% (was 6%) dividend increase to $1.31/sh commencing in Q2 2015.
Target up $1; reiterate OP rating on valuation catch up
Based on the higher dividend increase and lower debt levels, our target bumps up $1 (~3%) to $33. GEI currently trades at a 2015e EV/Free-EBITDA multiple of 9.8x (group avg.: 13.2x) – an overly wide discount, in our view, given the company’s attractive volume-based growth profile, positive exposure to our widening / volatile crude oil differential outlook and a sub-60% payout ratio supporting attractive dividend upside. Combined with a 12-month total return opportunity of 25.9% (group avg.: 10.4%), unrisked valuation upside of ~9% and a stock price currently trading below our base ‘sum-of-the-parts’ valuation of $30.50, we reiterate our Outperform rating.
Week at a Glance
Reads of the week
- NBF Hot Charts: Canada: Why the BoC need not cut rates – The Bank of Canada (BoC) maintained its stance in March. While acknowledging geopolitical uncertainly as a new risk to the outlook, the fact remains that the Canadian economy has performed somewhat better than the BoC expected in recent weeks: GDP has been a bit stronger; inflation a touch higher, and; commodity prices have remained firm. Financial conditions have even eased a bit, courtesy of a cheaper currency. This development will improve the profitability of Canadian corporations, a necessary condition for a rise in business investment. Still, some pundits have argued that the CAD is still way too strong to entice corporations to increase their commitment towards Canada (we are a high cost producer). We disagree. As today’s Hot Charts shows, the real effective exchange rate has already fallen to its lowest level in almost five years. Using KPMG’s exchange rate sensitivity estimates provided in its “Guide to International Business Location Costs”, we calculate that Canada will enjoy a cost advantage over the U.S. that will exceed 5% this year. As shown, this is a first in a decade.
“Money Pours Into Health-Care ETFs Spurred by New Drugs” (Bloomberg) The Healthcare Select Sector ETF (XLV) is held in the JMRD ETF Basket. Money is flooding into exchange-traded funds focused on health care at the fastest rate in at least six years, driven by booming biotechnology and pharmaceutical sectors bringing new products to market.
Monday March 10th – Canadian Housing Starts
Tuesday March 11th – None
Wednesday March 12th – Teranet/National Bank Home Price Index, U.S. Retail Sales
Thursday March 13th – New Housing Price Index,
Friday March 14th – U.S. PPI Final Demand, University of Michigan Confidence
Monday March 10th – Alaris Royalty
Tuesday March 11th – None
Wednesday March 12th – Crescent Point Energy
Thursday March 13th – Bellatrix Exploration, WSP Global, Power Financial
Friday March 14th – Canexus
Categorised in: JMRD Updates