Mila (concept car division of Magna-Steyr) Alpin, 2008, seen at MOTOR SHOW ESSEN 2010 (Photo credit: Wikipedia)
MGA : NYSE : US$81.16
MG : TSX : C$83.90
Magna is a one of the world’s largest and most diversified Tier 1 automotive components suppliers, active in 25 countries. The company also provides complete vehicle assembly services through its subsidiary, Magna Steyr.
All amounts in US$ unless otherwise noted.
BUY for strong growth story
We continue to recommend BUYing MGA to benefit from good EPS growth from modest sales growth, margin expansion and share buy backs. Margins should especially benefit from European and eventually emerging market (Rest of World or ROW) operating improvements and lower new facility costs.
Net, we expect these factors to drive low double-digit EPS growth/year.
Management meetings reconfirm growth potential
European margin improvement could happen faster than expected, There is upside potential to MGA’s European margin improvement target,
MGA’s product mix seems likely to evolve, but we do not expect it to change substantially, as MGA is already a leader in most of its product areas, and
We expect free cash flows to be spent on acquisitions and/or share buy backs, which should drive EPS growth. We expect acquisition discipline and acquisition opportunities to be lower.
High valuation, but supported by positive growth dynamics MGA’s valuation remains on the high side (see valuation section), but we think it can remain there given positive industry and company dynamics. Such dynamics support good EPS growth and the potential for upside surprises and positive forecast revisions, as per this quarter.
We have maintained our valuation multiple at 6.0x EV/NTM EBITDA, a roughly 1x multiple premium to MGA’s normal range given the positive growth dynamic thesis. The resulting target is moderately above our $83.27 DCF analysis.
Posted by Jack A. Bass on August 19, 2013
rodent of unusual size (Photo credit: JamesCalder)
TCN : TSX : C$6.23
Target $ 7.15
Tricon Capital Group Inc. is a leading asset manager focused on investing in North American residential real estate development and single family homes. The company has $1.4 billion of assets under management and investments spread across six active funds and a growing single-family homes segment. Tricon’s investments are focused on four markets in Canada (Toronto, Vancouver, Calgary, and Edmonton) and a number of markets in the U.S. including California, Phoenix, Atlanta, Houston, Charlotte, and South Florida
Tricon Capital Group acquires majority stake in one of its funds. Tricon recently acquired a 68.4% limited partnership co-investment interest in one of its funds, Tricon IX, for US$261 million. The 2008-vintage fund is currently managed by Tricon on behalf of its limited partners seeking exposure to the U.S. housing market. Tricon IX has produced an actual IRR of 10% from inception to the transaction date, an attractive return for fund partners. Following the transaction, management of Tricon is
expecting to achieve an IRR of 15-20% for Tricon IX, boosted by the extension of certain investment opportunities in the fund.
U.S. housing exposure essentially doubles.
On completion of the acquisition, Tricon’s exposure to the recovering U.S. housing market increases substantially, providing additional upside potential from land development and homebuilding as fundamentals improve.
Cash flowing assets should avoid substantial drag. The assets held within Tricon IX were acquired between 2008 and 2012, and most projects are currently generating some cash flow. In contrast, if Tricon were to invest significant capital in early stage development assets, we would expect substantial dilution for a number of years.
Maintaining BUY rating but reducing target price to C$7.15. We continue to value Tricon on a sum-of-the-parts basis. Following the closing of the equity offering and Tricon IX investment, we have reduced our estimate of NAV per share from $7.84, to $7.13 currently. We are reducing our target price from C$7.90 to C$7.15 to reflect the decline in our estimate of NAV per share. Our target price, combined with an annual dividend of $0.24 per share (current yield of 3.9%) implies a 12-
month forecast total return of 19%.
Posted by Jack A. Bass on August 19, 2013
RRX : TSX : C$4.98
Raging River Exploration Inc. is a junior E&P company focused on the development of the Viking light oil resource play in Saskatchewan, and trades on the TSX under the symbol RRX. The company was created from the spin-out of assets following Crescent Point’s acquisition of Wild Stream Exploration in 2012.
All amounts in C$ unless otherwise noted
Q2 results presented no surprises given the company pre-released its estimated production for the quarter in its operational update on July 16. The principal takeaways were the third consecutive increase to its 2013 guidance and the company’s continuous step-out drilling successes to date. Raging River remains one of our top Junior stock recommendations as it provides investors with a solid strategy of strategic resource capture acutely focused in the Viking resource play in
southwest Saskatchewan, and a best in class management team with a history of value creation and development execution.
We have maintained our BUY rating and C$5.50 target price based on an unchanged 1.1x multiple to NAV and a 7.4x 2014 EV/DACF multiple.
Q2 in line. Second quarter production averaged 4,620 boe/d, in line with our estimate of 4,594 boe/d and consensus of 4,425 boe/d. Operating CFPS came in at $0.15, in line with CG/consensus of $0.15.
Third guidance increase. The company upwardly revised its guidance for a third time this year; although capital spending and production both rose, the company continues to deliver above type curve results.
Management does an enviable job consistently beating expectations. Inventory expansion a key theme. The company recently drilled and tested nine wells at Beadle, seven of which were drilled in previously untested sections. Management estimates the NPV value uplift from this type of inventory expansion to be in the range of $50 to $100 million.
Raging River currently trades at a 1.0x multiple to CNAV estimate, 7.6x EV/DACF, and $163,200/BOEPD based on our 2013 estimates vs. its peer group averages of 0.7x CNAV, 6.1x EV/DACF, and $77,700/BOEPD.
Posted by Jack A. Bass on August 16, 2013
TSX : C$6.66 BUY
Niko Resources Ltd. is a Canadian-based international oil and gas company. Niko’s main producing asset is the D6 block in India (10% WI) where natural gas production is approximately 50 mmcf/d net and oil production is approximately 1,000 bbl/d net. Niko has an immense exploration portfolio spanning multiple countries and targeting very large, company-making prospects.
In our view, Niko appears to have resigned itself to the fact that it cannot afford its high-risk Indonesian drilling campaign. As the MJ-1 discovery offshore India will require further appraisal work, the Indonesia exploration program will likely be postponed. The company has indicated that it will look to sub-lease the Ocean Monarch rig so that it can fulfill its contractual obligations, but those locations will not benefit Niko shareholders.
Quarterly results were in line with expectations, but should improve following a revised gas price formula in India approved for Q2/14.
The company estimates that the MJ-1 discovery offshore India had 125 metres of net pay and an estimated field size of 60 km2. Additional appraisal work is expected to begin this quarter.
The company will reprioritize its high-risk, high reward Indonesian drilling program.
We use a DCF model to estimate a 2014E 2P NAV of approximately C$15/share. We have slightly discounted this to estimate a near-term target of C$13.50/share owing to ongoing financing apprehension.
Niko is a higher-risk investment as near-term cash flow growth is dependent on government approvals in India (which can be
unpredictable). We believe the company will need additional financing in the next fiscal year to maintain its capital program.
Posted by Jack A. Bass on August 15, 2013
Wi-Fi Signal logo (Photo credit: Wikipedia)
WIN : TSX : C$3.41
WILN : NASDAQ
Wi-LAN is a technology development and patent licensing company focused on wireless, wireline and digital video technologies. The company has a growing patent portfolio that is in excess of 3000 issued and pending patents that relate to Wi-Fi, WiMAX, CDMA, DSL, DOCSIS, and V-Chip technologies. The company has licensed its patent portfolio to more than 230 companies and is currently in multiple litigations that could yield significant windfalls
WiLAN reported Q2/13 results beating expectations on the top line driven by new license agreements with Samsung, Dell and Panasonic. Q3/13 revenue guidance was also above consensus. Higher than expected (but unsurprising) litigation expense drove bottom line weakness. We continue to see new licensing potential in 2013/14 as WiLAN currently has 15 active patent litigations against 13 defendants. While we acknowledge political/regulatory risk, we continue to recommend WiLAN given 1) 4%+ dividend yield, 2) recurring license revenue and 4+ years of backlog; 3) upside from an active licensing/litigation pipeline; and 4) an excellent balance sheet with $1.31/share in cash. We maintain our BUY rating and target price of C$6.60.
Q2/F13 and Q3 guide beat on the top line – Revenue was $19.9M (down 4% YoY but up 9% QoQ), beating Street expectations and the company guidance. Adj. EPS of $(-0.01) missed our and consensus estimates of $0.01, mostly driven by higher than expected litigation expense. Q3/F13 guidance for revenue of over $20.7M was above consensus but inline with our $20.5M estimate. Adj EPS guidance range is $(-0.0) to breakeven, below our $0.01 and consensus of $0.02, primarily due to high litigation expense of 13.5-14.5 million expected in Q3.
Dividend policy intact – WiLAN reiterated its intention to channel 40% of its cash flow to shareholders via a dividend which it expects to maintain despite recent cash balance declines.
WiLAN trades at 3.1x C2014E EV/EBITDA, below our $3.75/share estimate of NAV and a discount to the peer average of 7.0x. We base our DCF backed target price on 8x C2014E EV/EBITDA given growth potential in 2014.
Posted by Jack A. Bass on August 12, 2013
Agrium Forgetmenots vs Know Potential-8644 (Photo credit: TMYphoto)
AGU : NYSE : US$87.26
AGU : TSX
Agrium Inc. is a leading global producer and marketer of agricultural nutrients, industrial products, specialty fertilizers, and a major retail supplier of agricultural products and services in North America, South America and Australia.
All amounts in US$ unless otherwise noted.
We continue to prefer the non-potash equities over the potash equities due to an oversupply in the potash market and the added uncertainty that has now arisen as a result of the Uralkali announcement (which has been followed by a lowering of prices into a few markets, and more importantly, the expectation by buyers of a lowering of price into all markets). Monsanto (BUY, US$121.00) remains our top pick, followed by Agrium on a relative trade. We continue to prefer, on a relative basis, the shares of Monsanto here (as the outlook for its seed business in the Americas continues to look positive, providing continued earnings momentum), and Agrium on a relative basis (where its retail segment offers less volatility through a wide range of inputs from seeds to fertilizers to chemicals, as well as exposure to all three wholesale fertilizers) versus those of Mosaic and Potash Corp., where the majority of their business is exposed to potash sales. And given the multiple spread mentioned below, we believe that as the market fundamentals unfold, Agrium will continue to narrow the spread on the potash producers, something that has been occurring since Agrium announced Q1 results in early May.
Agrium reported adjusted Q2/13 EPS of US$4.94 versus guidance of US$4.60-5.40, our estimate of US$4.92 and consensus of US$4.95.
On a P/E multiple basis, the potash equities have historically traded at a 2.5+ point multiple premium to Agrium. That spread widened through the winter, such that Potash Corp.’s multiple spread discrepancy versus Agrium ballooned to 5.7x through the end of April, but has since narrowed to 3.7x. We expect the relative trade to continue to narrow in Agrium’s favour over the next few quarters.
We continue to rate the shares of Agrium a BUY with a 12-month target price of US$106.00 based upon a 10.75x multiple to our blended 2014E/2015E EPS
Posted by Jack A. Bass on August 9, 2013
Target (1985 film) (Photo credit: Wikipedia)
POU : TSX : C$34.35
Paramount has a 35-year history of successful operations in Western Canada. It takes a long-term approach to exploration and development activity of both oil and natural gas, and boasts over 50% insider ownership.Near-term growth is focused in the Deep Basin of Alberta
DOUBLING PRODUCTION AND
TESTING THE MONTNEY LIMITS
Paramount’s second quarter results fell short of expectations, reflecting
a higher than anticipated impact from curtailments at Valhalla and shut
in volumes at Karr. It bumped its capital program by $100 million
primarily given middle Montney success at Karr, and now maintains
~200 MMcf/d of net raw gas behind pipe available for its Musreau deep
cut facility. The principal near term operational catalyst in our view
remains the more than doubling of production volumes expected in early
2014, which should include validation of its material Montney gas and
NGL test rates via long term sustained production performance. POU is
forecast to grow into its valuation over time given its production growth,
and trades at a more reasonable 9.7x EV/DACF on annualized Q4/14
estimates. We have maintained our BUY rating and C$43.00 target
based on an unchanged 1.1x multiple to NAV.
Q2 falls short, but only a bump in the road. Production averaged 20,790 boe/d versus CG/consensus of 22,860/22,922 boe/d. Operating CFPS was $0.21, in line with CG/consensus of $0.22/$0.24.
Advancing commerciality and returns from the Montney. POU continues to test a number of concepts and focuses on cost reductions in its Montney program at Musreau/Resthaven. It recently approved two, ten well pads to be drilled this year and into 2014, which will test multiple concepts, including: 1) orientation differences, 2) interwell spacing, and 3) testing offset wells in the D1 and D2 lobes of the Upper Montney.
Paramount currently trades at a 0.9x multiple to CNAV, 11.2x EV/DACF,and $82,700/BOEPD based on our 2014 estimates, versus peer group averages of 0.8x CNAV, 7.1x EV/DACF, and $68,600/BOEPD.
Posted by Jack A. Bass on August 8, 2013
Manly ferry SS BARAGOOLA and French warship BELLATRIX behind at Morts Dock (Photo credit: Australian National Maritime Museum on The Commons)
BXE : TSX : C$7.12
BXE : NYSE
Bellatrix Exploration is an intermediate sized exploration and production company with operations in Western Canada primarily focused on multi-zone opportunities in west central Alberta.
All amounts in C$ unless otherwise noted.
Bellatrix announced an asset sale and associated $200 million JV with Daewoo and Devonian Natural Resources Private Equity Fund. The deal was $0.50/share accretive to our NAVPS estimate. Capital acceleration continues to be key to re-rating the shares and we see potential for multiple expansion on the stock given its industry-leading growth profile; we forecast 50% YoY production per share growth in 2014.
Fundamentally, Bellatrix remains one of our top stock recommendations
We have maintained our BUY rating but have increased our target to C$10.00 (from C$9.50 target) given the $0.50/share NAVPS uplift associated with the JV transaction. Our target is based on a 1.0x multiple to NAV and reflects a 2014E EV/DACF multiple of 4.8 times.
Attractive “promote” brings in a deep pocketed strategic partner. The $52.5 million asset sale was central to the transaction, providing for capital acceleration potential. This provides a clear benefit to BXE in light of the 50/50 JV structure and brings in a deep pocketed strategic partner. We believe the market may draw comparisons to Daewoo’s entry into West Central Alberta with PETRONAS’ early entry into the Basin whereby it took a modest initial investment and subsequently
followed up with a larger corporate acquisition.
Bellatrix trades at a 0.7x multiple to CNAV, a 5.5x EV/DACF multiple and $41,500 per BOEPD based on our 2013 estimates, compared to peer group averages of 0.8x NAV, 7.3x EV/DACF and $72,500/BOEPD.
Posted by Jack A. Bass on August 2, 2013
TSX : C$4.03 BUY
Long Run Exploration is a junior oil & gas explorer with assets focused largely in Alberta. Long Run is listed on the TSX under the symbol “LRE”
All amounts in C$ unless otherwise noted.
Long Run reports strong Q2; highlights operational success Long run’s Q2/13 production of 24,431 boe/d was slightly ahead of guidance and highlights the company’s continued operational success following the business combination of Westfire and Guide, as production continues to grow from the 2012 exit rate of 23,000 boe/d. LRE is one of our favoured names in the Junior and Intermediate space, as we believe current management has the company heading in the right direction and continued execution will prompt a re-rating of its trading levels
LRE’s production of 24,432 boe/d was slightly ahead of guidance and was up from Q1 levels of 23,600 boe/d. CFPS of 0.50 was ahead of our estimate at $0.46, and well ahead of consensus $0.44.
As highlighted in Exhibit 1, most of the cash flow beat came from lower than expected royalties, due to a GCA credit that was realized during the quarter. During the quarter the company spent ~$39 million (largely in line with our estimate) primarily on the drilling of 4 Montney horizontals at Girouxville and Normandville, and 6 net Viking wells at Redwater. Well results from these areas continue to exceed expectations.
LRE marginally increased its operating budget for the year (from $265 to $275 million) due to a slight increase in incidental costs. The bulk of its $115 million budget for the year will be spent in Q3 as LRE continues to push forward its Montney and Viking programs.
LRE’s Q2 contained little new information, and we do not expect a material reaction from the market to the Q2 release in today’s trading. That said, the company has strung together another solid quarter and in our view is clearly demonstrating that its trading discount is not warranted.
Posted by Jack A. Bass on August 1, 2013
Image via CrunchBase
VRX : NYSE : US$93.60
VRX : TSX
Valeant is a specialty pharmaceutical focused on dermatology, branded generics, and neurology indications in the US, Canada, Latin America, Europe and South East Asia. The company continues to grow through strategic acquisitions highlighted by the $2.6 billion acquisition of Medicis. In 2010, Valeant Pharmaceuticals International and Biovail Corporation completed a merger to form a single Canadian-based specialty pharmaceutical company
We will be closely watching Valeant’s progress integrating this business (which is expected to result in peak run rate synergies in excess of $300 million by year-end). Nonetheless, we anticipate that the recent acquisition of Bausch & Lomb (B+L) is likely to overshadow Valeant will report Q2/13 results on August 7 and will host a conference call at 8:00am that day. The addition of Medicis iw other updates on the Q2 call.
Medicis expected to be a key driver in Q2. We project that Medicis will help drive 32.6% YoY top line growth in the second quarter. However, we anticipate that a significant proportion of projected synergies from Medicis will not be realized until the back half of the year.
Wringing out the synergies. We continue to see ~$765 million in cost synergies from B+L, excluding potential tax savings. Moreover, because our R&D and SG&A synergy projections remain below Valeant’s target, we believe that there remains the potential for upside relative to our estimates.
We see risks to organic growth drivers. We believe that recent updates, including the genericization of Zovirax, safety concerns relating to Potiga, and increased competitive forces in the aesthetics business, highlight some risks for Valeant’s products.
We value Valeant based on a DCF model using a WACC of 8.6% and a terminal growth rate of 1.0%. Based on this analysis, we arrive a 1 2- month target of US$110.00, which supports our BUY rating.
Posted by Jack A. Bass on August 1, 2013