In This Week’s JMRD Market Observer
Tax Season is over!
Pembesen! Pembina acquires Veresen for $18.65/share (23% premium)
Asset Allocation Strategy: Seeing the forest for the trees
JMRD Basket Corner
Week at a Glance
Reads of the Week
Tax Season is over!
We are sure all of you are happy that personal tax season is over for another year. You will now be receiving the “Notice of Assessment” from the CRA. We find the information included on that form very helpful in our effort to make sure all of our client’s investment and financial plans are complete. It includes information on RSP contributions and earned income, among other information. We ask that JMRD clients send copies of this form to your main JMRD advisor so that we can make sure all is in order for 2017. Thank you in advance.
Pembesen! Pembina acquires Veresen for $18.65/sh (23% premium)
There was some good news this week in JMRD’s Diversified Income & Growth Basket when Pembina Pipelines announced they would acquire Veresen for $18.65 per share or a 23% premium. We initially bought Veresen in December and added to the position in January. The company was paying an 8% yield at the time we added it to the DIG Basket. Veresen was transitioning to a pure midstream entity and was in the process of selling its power business, which subsequently was announced in February for $1.2B. With the sale of the power business in place we expected the discounted valuation to its peers would narrow and the company would be well positioned for the next stage of midstream growth, without needing any equity. The takeover by Pembina was a surprise but it’s a very good complementary fit for both companies. We have attached an update on the merger but our view is that the combined entity, with an enterprise value (equity plus debt) of $30B, could be the go-to mid-streamer in Canada for investors.
Asset Allocation Strategy: Seeing the forest for the trees
- Considering the Fed’s continued commitment to monetary policy tightening and potential balance sheet reduction announcements by year-end, we believe that yields will have a tendency to appreciate in the coming quarters and, consequently, we suggest a short duration position.
- In credit, the impressive performance we witnessed in 2016 is now behind us and the potential for further contraction of spreads is now much lower, particularly for ones on the more risky side. As such, we think it is now sensible to keep a neutral position for high yield and favour corporates.
- For crude oil, the downside pressure should be more than compensated by other fundamental factors which point toward improvement in the coming months. Inventories have already started to draw, which is one month earlier than the seasonal norm. This means that not only are we close to a balanced market, but that the OPEC cuts are working.
- Even though the loonie weakened materially since the beginning of the month, we would advise caution before deciding to hedge. The fact is that political imperatives can overshadow any of the best laid plans and push prices beyond what would be reasonable or deemed attractive.
- While the earnings seasons have positively surprised, markets still haven’t found a way to generate any meaningful momentum and they remain in wait-and-see mode. We are still worried about high valuation levels and what they will mean for returns going forward. However, we cannot ignore the current economic environment which remains healthy, and this economy-vs.-valuations conflict is the reason we remain neutral on equities for the time being. We prefer European equities and would suggest a higher allocation to that region compared to their counterparts.
NBFM Forex (May 2017) – Protectionism hits loonie
- The trade-weighted U.S. dollar is struggling to gain traction, registering its fourth straight monthly depreciation this year. We still expect the world’s reserve currency to bounce back courtesy of a more hawkish Fed which is poised to add to last March’s rake hike, more so considering upcoming fiscal stimulus from the Trump administration. But with improving economic data globally, central banks of other major economies may follow the Fed and start the process of removing accommodation. So, any USD rebound may prove temporary. We now expect the trade-weighted USD to peak in Q3 instead of the last quarter of the year.
- The euro notched up another monthly gain against the USD, buoyed by improving economic data and French first round election results. While an upset can never be ruled out in the second round of the elections later this month, polls strongly favour pro-Europe candidate Emmanuel Macron becoming President. In light of the improving economic and political outlook, we have raised slightly our forecasts for EURUSD.
- The Canadian dollar has been unable to capitalize on USD weakness this year. The currency sank for a third consecutive month in April despite improving economic data, hammered by a dovish Bank of Canada, soft oil prices and import duties slapped by the U.S. on Canadian lumber exports. The loonie could remain under pressure over the coming months if, as we expect, incoming data shows a sharp moderation in growth after Q1’s blockbuster performance. But not all is bleak for the Canadian dollar. We expect a more hawkish tone from the Bank of Canada later in the year in response to a second half rebound and the need to cool a hot housing market. As such, we have brought forward by one quarter to Q3 the timeline when we see the loonie hitting a trough.
JMRD Basket Corner
Capital Power (CPX) – CPX reported Q1/17 adj. EBITDA of $134 mln (excl. unrealized losses), 5% ahead of our $126 mln estimate (Street: $127 mln) due to stronger contracted contributions. Following the two M&A transactions year-to-date, including Veresen’s Ontario contracted power assets ($500 mln), and the Alabama-based Decatur Energy Centre ($585 mln), combined with the recently announced Genesee coal mine cost savings agreement, CPX has revised its 2017 AFFO guidance to $340 to $385 mln from $320 to $365 mln, while reiterating its 7% annual dividend growth guidance for 2017 and 2018 (NBF: +7% annual growth through 2020e).
SNC-Lavalin (SNC) – While the company already telegraphed that results would be in line at the time of the financing, the incremental data point was y/y improvement in by-divisional EBIT margin for every segment (hence EBITDA margin is up to 5.6% from 5.2% last year). 1.70-$2.00 core EPS guidance for 2017E is also unchanged. We left our 2017E / 2018E forecasts intact, as a result. SNC’s EPS trajectory is more compelling than global peers (Figure 4), it will close on a transformation acquisition that makes sense, yet the shares are garnering not dissimilar trading multiples (5.7x on 2018E EV/EBITDA) as Aecon (5.2x adjusted for Bermuda), a smaller, construction-heavy entity. Herein lies the opportunity as de-risking is likely to take the following shape: 1) infra contract announcements; 2) Atkins closing; and 3) revenue synergies that should make the EPS / NAV accretion even more compelling. We reiterate $70.00 price target, Outperform.
TransCanada (TRP) – TRP reported Q1 Comparable EBITDA of $1,977 mln, in line with our estimate of $1,926 mln and slightly above consensus of $1,888 mln. Year-over-year increases are attributed primarily to the Natural Gas Pipelines Segment with the inclusion of Columbia mid-year, increased ANR transport revenues and Mexico’s Mazatlan and Topolampo pipelines. Meanwhile, comparable earnings came in at $0.81/sh, 10% higher than NBF and consensus at $0.70/sh due to lower tax expense.
All-Cap Growth Basket
Innergex Renewable (INE) – INE acquires three French wind projects at 119.5 MW. The three projects are under construction (81% complete), with commissioning planned for 2017E. The assets are contracted for 15 years with EDF, producing 278,200 MWh/yr and should achieve full run rate in 2018E. The EV of the acquisition is C$335 mln, with C$76.2 mln of equity and C$258.4 mln in project debt. INE’s share of the equity is $46.4 mln (61%) for ~70% share of the economics.
Savaria (SIS) – Savaria announced on Monday that it has entered into an agreement with Span-America Medical Systems, Inc pursuant to which Savaria will acquire Span-America by way of an all-cash tender offer of US$29.00 per share, for a total transaction consideration of approximately US$80.2 million (or C$109.5 million). Founded in 1970 and based in Greenville, South Carolina, Span-America manufactures and markets a comprehensive offering of therapeutic support surfaces and pressure management products for the medical market. Through its wholly owned subsidiary Span Medical Products Canada Inc. (“Span-Canada”), based in Beamsville, Ontario, it also manufactures and markets medical beds as well as related in-room furnishing products for the long-term care market. Span-America also supplies custom foam and packaging products to the consumer and industrial markets. In the most recently completed trailing twelve months ended December 31, 2016, Span-America recorded net sales of US$61.4 million (or C$83.8 million) and EBITDA of US$7.1 million (or C$9.7 million).
Shopify (SHOP) – Shopify reported Q1 results and traded higher by 13% this week, following the quarterly results. NBF analyst Richard Tse increased his target to US$100 (from US$80) based on “upward (growth) revisions to our DCF valuation model following the Company’s Q1 results which came in ahead of expectations (7/7 “beats” since going public). In our view, the Q1 results reinforced our investment thesis and more importantly we believe the upcoming growth drivers (Shopify Plus, take rate via new merchant services, and international) enhances our expectations for a long growth runway ahead for the name when its market share is still only around 5%. What’s different about this note is that we also provide you some compelling updates on Shopify based on candid discussions with some of our notable industry contacts and what they mean to the stock.” (Report attached) More: Why investors should stick with the hot hand that is Shopify Inc
U.S. Growth Basket
Arista Network (ANET) – Arista Scores More Gains in Sales and Profits
XPO Logistics (XPO) – XPO Logistics Enjoys a Nice Earnings Bounce
Reads of the Week
- Canada Watch: “For sale” signs mushroom in Toronto. Home resale activity cooled in the Greater Toronto Area (GTA) in April. According to the Toronto Real Estate board, sales were down 3.2% from year-ago levels. According to our calculations, this translates into a 13.7% seasonally-adjusted monthly decline, the largest since June 2010. April also saw “for sale” signs mushroom at an unprecedented pace. We estimate the monthly increase at 45% on a seasonally-adjusted basis, a 7.2 standard deviation move. This surge was concentrated in the non-condo segment (80% of the market). Despite this increase, the level of active listings remains low by historical standards, a situation that argues against a significant decline in home prices. Though a slowdown in home price inflation remains the most likely scenario at this juncture, we will need to monitor the potential impact of the new measures announced by the Ontario government at the end of April to curtail speculative activity. See the full article.
- Hot Charts – Canada: Loonie is the ugly duckling of currency world in 2017: The U.S. dollar has been on a trend decline since the start of the year, losing ground against 27 of 31 major currencies. The Canadian dollar has been left of the pack to instead end up virtually alone on the route of further depreciation vs. the greenback. This type of disconnect is extremely rare. As shown in today’s Hot Charts, the correlation between USDCAD and the trend in the broad USD (a trade-weighted index calculated against a basket of 26 currencies) is inverted by the most in over a decade. Growing fear about the housing market, coupled with the threat of U.S. trade sanctions and a dovish Bank of Canada have fueled the negative sentiment against the Canadian currency in recent weeks. This negativity could be exacerbated if our forecast calling for job losses in March is confirmed in tomorrow’s employment report. See the full article.
Monday May 8th – Canada Housing Starts;
Tuesday May 9th – Canada Building Permits
Wednesday May 10th – None
Thursday May 11th – US Initial Jobless Claims
Friday May 12th – Canada Teranet/National Bank Home Price Index; US Retail Sales, US CPI, US Consumer Sentiment
Monday May 8th – Aecon Group, Artis REIT, Chicago Bridge and Iron, Gibson Energy, Colabor Group, Osisko Mining, Open Text Corp., World Point Terminals
Tuesday May 9th – Alaris Royalty, AG Growth Int’l, Airboss Of America, Canadian Apartment Properties, Cardinal Energy, Disney, Extendicare, Franco Nevada, Knight Therapeutics, Innergex, Keyera Corp., Microchip Technology, Newalta, Peyto, Sunlife, Silver Wheaton, Sleep Country
Wednesday May 10th – Pure Industrial REIT, Bird Construction, Birchcliff Energy, Bellatrix, Element Fleet Financial, Fiera Capital, IBI Group, Kelt, New Flyer Industries, Snap(chat) Inc., Torc Oil and Gas, Tamarack Valley, WSP Global
Thursday May 11th – Brookfield Asset Management, Bombardier, Canadian Energy Services, CI Financial, Cipher Pharma, Canadian Tire, Cominar REIT, Medical Facilities, Enbridge, Gamehost, Industrial Alliance, Crius Energy Trust, Magna, Power Financial, Savaria, Student Transportation, Stantec, Tricon Capital, Northwest Healthcare REIT, Telus,
Friday May 12th – Amaya, Boyd Group, Enercare, Power Corp.