**November 22nd Issue of The Market Observer**
In This Week’s Market Observer…
- · JMRD All-Cap Basket Company Update
- · Whitecap Resources: Bolstering exposure in the Viking through the acquisition of Home Quarter
- · Retirement Corner
- · Week at a Glance
- · Reads of the week
- · Economic Calendar
- · Earnings Reports
JMRD All-Cap Basket Company Update
This week’s introduction to the JMRD All-Cap Basket continues with Constellation Software and Canyon Services. Constellation Software trades on the TSX under the symbol CSU. The company is the 3rd largest publicly traded technology companies in Canada with a market capitilzation of $4.1B, has had a terrific year of share appreciation, returning 61% in addition to a 2.1% dividend yet is one of the least known large-cap tech stocks in Canada. CSU provides enterprise software and related professional services and support. It operates in two segments, Public Sector and Private Sector. The company serves government and government related customers, and commercial customers in the United States, Canada, Europe, and internationally. Constellation Software Inc. was founded in 1995 and is headquartered in Toronto, Canada. The last 12 months Return on Equity was a very healthy 36%
Constellation Software Leads Canada Tech Revival:
Canyon Services Group Inc. provides fracturing and chemical stimulation services to companies exploring for and developing petroleum and natural gas resources operating in the Western Canadian Sedimentary Basin. It offers hydrocarbon, water-based, foam, and emulsion fracturing services; nitrogen fracturing services; coiled tubing units; and chemical stimulation and remedial cementing services. The company’s capacity has grown from only 38,000 Hydraulic HorsePower (“HHP”) in 2010 to 225,000 HHP exiting 2012. The company has no debt and $35M on its balance sheet while paying out a monthly dividend with a yield of 5.22%. Canyon’s customers are only in Canada, trades at a discount to its peers and is very well positioned to take advantage from the growth in drilling in Canada for LNG exports.
A company we profiled recently that is held the All-Cap Growth Basket was AutoCanada. The company was profiled by Bloomberg this week and traded to a year high of $43.99. ACQ was originally purchased in the basket at $39.16
AutoCanada Rides Alberta Trucks to 187% Return: Corporate Canada
Whitecap Resources Inc.: Bolstering exposure in the Viking through the acquisition of Home Quarter
Last week we highlighted Whitecap Resources (WCP) was providing a great entry point for investors. This week, the company announced a significant acquisition of a private co, Home Quarter as well as an 8% dividend increase that will take effect in January. WCP traded up 8.5% following the news announced after the close on Wednesday. We remain buyers of WCP which is held in the DIG Basket as the company is expected to continue attract new-yield oriented capital on the basis of its superior sustainability model and premium trading liquidity.
Strategic acquisition and dividend bump
- Deal highlights. WCP announced the acquisition of Home Quarter (private), significantly increasing its position in the Viking trend in Saskatchewan. The company is producing ~4,000 boe/d with an inventory of ~200 gross locations adjacent to WCP’s existing operations. Total consideration is ~$327mln consisting of an equity component of $330mln (27.5mln shares at deemed price of $12.00/sh) and a $3mln working capital surplus. The deal is being completed at attractive transaction metrics relative to WCP’s current trading levels and precedent transactions ($82,000/boed, 4.6x P/CF, 1x 2P NAV, 8.8% FCF yield).
- Asset highlights. The assets are complementary to existing operations and WCP believes the Viking type curve extends from Lucky Hills onto the Whiteside lands (IP30s >100 boe/d). Although declines are high (~55%) sustainability remains in check with high netback production ($57.50/boe) and exceptional capital efficiencies at ~$17,000/boed (IP365).
- Revised 2014 guidance and dividend bump. 2014 production guidance has been increased to ~28,000 boe/d based on a $255mln capital program. WCP has also increased its monthly dividend by 8% to $0.0567 ($0.68/sh annually) effective January. Management is committed to maintaining a total payout <100%. The transaction de-levers the company to ~1x D/CF.
- Outperform rating, target bumped to $15.50, adding the stock back to the NBF Action List. A balanced model, execution at top-tier efficiencies and a track record for smart deals positions WCP as our favourite long-term pick in the yield space.
Reads of the week
NBF Hot Charts: Hot Charts – World: Gold can’t seem to catch a break
Central banks have been aggressive in guiding market expectations for a protracted period of low interest rates. In Europe, the central bank went as far cutting its bank rate. Abundant liquidity conditions notwithstanding, the price of gold can’t seem to catch a break. What’s going on? While it is true that lower interest rates could be supportive of bullion, the current environment is characterized by slowing inflation. Rates might be holding still or declining but not after adjusting for falling inflation. This environment is likely to prevail for much of 2013. Last Friday, the U.S. Environmental Protection Agency proposed for the first time to ease an annual requirement for ethanol in gasoline, saying that levels mandated in a 2007 law are difficult, if not impossible, to meet. As today’s Hot Chart shows, the price of corn has been pummelled in anticipation of this news. We expect this development to have important ramifications on global inflation given the strong correlation between corn and the United Nations’ food price index. As shown, the long-term trend shows that food is deflating for the first time since 1998, a situation that is generally not conducive for rising bullion. Recall that food is an important component of the CPI of many countries – emerging markets in particular – hence the strong relationship with gold.
Monday November 25th – U.S. Pending Home Sales
Tuesday November 26th – U.S. Housing Starts, U.S. Building Permits, U.S. House Price Index, U.S. Consumer Confidence Index
Wednesday November 27th – U.S. Initial Jobless Claims, U.S. Durable Goods Orders, U.S. Leading Index
Thursday November 28th – Canadian Current Account Balance, Canadian Industrial Product Price Index, Canadian Raw Materials Price Index, U.S. Markets closed for Thanksgiving
Friday November 29th – Canadian GDP
Monday November 25th – None
Tuesday November 26th – Alimentation Couche Tard
Wednesday November 27th – None
Thursday November 28th – None
Friday November 29th – None