TSX Commentary

Northland Power NPI.UN Q4/09 Results Shy of Expectations

admin — Fri, 26 Feb 2010 15:46:00 +0000

Northland Power (NPI.UN): $12.90 – Q4/09 Results Shy of Expectations
Sector Perform, Average Risk
NPI’s Q4/09 ACFFO/unit was $0.27 compared to RBC CM estimate of $0.35 and $0.33 in Q4/08. Strong contribution from the gas-fired facilities was more than offset by weak wind generation, and higher-than-expected project development and financing costs. The fund will convert to a corporation in late 2010 or early 2011. Management intends to maintain the current $1.08/unit distribution post conversion. The fund continues to make progress on the two SaskPower projects, which were awarded PPAs in late 2009. The Spy Hill project is expected to begin commercial operations by December 2011 and the North Battleford projects is expected to be commissioned in 2013. The fund is also developing a number of renewable energy projects in Ontario and Quebec.

RONA Inc. RON There Is Light: Q4/09 Better Than Expected

admin — Fri, 26 Feb 2010 15:44:53 +0000

RONA Inc. (RON): $15.72 – There Is Light: Q4/09 Better Than Expected
Sector Perform, Average Risk, Price Target: $18.00
RONA reported Q4/09 EPS of $0.24 (-4%), above RBC CM’s forecast of $0.19 and consensus $0.20. Most notably, however, same store sales were positive in the quarter, a marginal +0.7% with trends building through the quarter and continuing into January/February of this year. While overall 2010 is looking to be a far better year than 2009, RBC CM remains somewhat cautious as consumer surveys, including an RBC-Ipsos Reid study done last fall, suggest that consumers moved forward longer term renovation plans to 2009 in order to take advantage of the tax credit, and that renovation intentions for 2010 were lower than in prior years. Subsequent to yesterday’s release RBC CM revised upward its forecasts on RONA to reflect the turnaround in same store sales; on average our 2010/11 forecasts increased by 5% to $1.30 and $1.42.

Calloway REIT CWT.UN Stable Results From Value Retail; Q4/09 As Expected

admin — Fri, 26 Feb 2010 15:43:20 +0000

Calloway REIT (CWT.UN): $19.99 – Stable Results From Value Retail; Q4/09 As Expected
Outperform, Average Risk, Price Target: $21.00
Implied All-In Return: 13% Q4/09 FFO/unit of $0.40, was -14% from Q4/08’s $0.47 and in-line with RBC CM estimates of $0.40E. Calloway’s value-oriented portfolio has been a resilient performer over the past 24 month. President/CEO Simon Nyilassy has offered his view that 2010 will likely be described as the year in which “flat is the new up” (the only likely exceptions will be those property-related businesses which already experienced a significant re-set in their revenues and cash flows in 2008-2009, and are thus once again climbing from a low base). Calloway REIT avoided this experience. A modest lease roll profile, and narrower 2010 leasing spreads (perhaps +5%) should allow for NOI stability, but little growth. Given RBC CM expects flat to modestly higher occupancy through H1/10, and with less challenging comparisons beginning in Q1/10, it seems likely the s-p NOI growth will imminently return to positive territory. Management believes that +1% to 2% can be generated in 2010. Offsetting NOI stability/uptick, higher-cost debt issuance in early-2009 and modest additional equity in H2/09 and Q/10, which is forecast to dilute 2010E FFO/unit below 2009A and push the AFFO payout modestly beyond 100%.

H&R REIT HR.UN Q4/09 Underlying Results As Expected; Kicking Tires Again…

admin — Fri, 26 Feb 2010 15:41:08 +0000

H&R REIT (HR.UN): $16.04 – Q4/09 Underlying Results As Expected; Kicking Tires Again…
Outperform, Average Risk, Price Target: $17.50
H&R reported Q4/09 FFO/unit of $0.34, which was 5% higher than the same period last year. Q4/09 “normalized” FFO/unit of $0.36 was -10% from Q4/08’s $0.39 and in-line with our $0.36E. H&R’s traditional hallmark of stability, Q4/09 portfolio occupancy registered 99%, unchanged from 99% at Q4/08. Management has noted that intends to pursue its acquisition strategy throughout 2010 on a “very select and disciplined basis”. Citing “few opportunities in Canada to acquire high quality properties at attractive pricing”, H&R has instead noted the slow pace of recovery and the financing challenges in the U.S. commercial real estate market “may create acquisition opportunities for the REIT”. RBC CM believes the REIT’s cost of capital has improved meaningfully over the past year and we recognize that H&R has made significant progress in alleviating funding pressures related to its commitment to develop the Bow. This being said, the focal point must remain on delivering steady operating results and flawless execution upon construction of the Bow. Success on both should be drivers of a higher unit price.

Tim Hortons THI Q4/09 Results Solid And In-Line

admin — Fri, 26 Feb 2010 15:39:27 +0000

Tim Hortons (THI): $32.26 – Q4/09 Results Solid And In-Line
Outperform, Average Risk, Price Target: $38.00
THI’s solid value positioning with consumers and focus on controlling costs enabled the Company to deliver 7% operating income growth in Q4, in line with forecast. THI raised its annual dividend from $0.40 to $0.52 (ahead of RBC CM’s expectation
of $0.44/year), representing a payout rate of 30% as part of a revised payout policy of 30-35%, at the high end of Canadian consumer oriented stocks. As expected, the $200 MM share buy-back was also renewed. Since mid-November, equity markets have begun pricing the earnings recovery in the space, boosted by better than expected Q4 results from a number of names, driving the Fast Casual average P/E from 16.5x to 17.4x, more than one multiple point ahead of THI’s own valuation multiple (exhibit 6). Given THI’s relative earnings growth outlook, profitability, returns on equity and capital employed, dividend yield and cash flow profile, we would expect the valuation gap to normalize over time.

National Bank (NA) – $59.73 – Q1/F10 Summary

admin — Fri, 26 Feb 2010 15:38:04 +0000

National Bank (NA) – $59.73 – Q1/F10 Summary
Buy, Intrinsic Value Estimate: $65.00
Veritas states that both on first glance and deeper inspection, it is hard to find too many noteworthy aspects of the National’s solid, steady first quarter. Earnings were in line with Veritas’s expectations, which were themselves slightly above the consensus view. The quarter unfolded pretty much according to script: trading revenues normalized but didn’t melt away, while credit losses increased but didn’t blow out. The bank’s transition from using standardized credit risk calculations to advanced credit risk models for capital purposes, along with internally-generated capital, resulted in a 180bps increase in the Tier 1 capital ratio. Balance sheet and revenue growth was solid if unspectacular. Having missed expectations slightly last quarter, NA delivered just a bit more this quarter – a bit more than last quarter and a bit more than expectations. But, Veritas thinks the results show that the most likely range for NA’s earnings is in the low- to mid-$6/share range this year and mid- to high-$6/share range next year. The bank’s normalized ROE this quarter was 18%, the Tier 1 ratio is 12.5%, and the dividend payout ratio is 40%. Though lower growth deserves a lower multiple, Veritas continues to recommend shares of NA with a $65 intrinsic value.

CIBC CM Q1/F10 Summary

admin — Fri, 26 Feb 2010 15:36:49 +0000

CIBC (CM) – $70.00 – Q1/F10 Summary
Sell, Intrinsic Value Estimate: $69.00
Veritas states that Q1 results were a step in the right direction for CIBC, with the bank taking steps towards delivering on the operating and credit recovery that Veritas consideres already priced into the stock at $70. Reported earnings were $652M [compared to $644M in Q4-F09], and adjusted earnings of $654M were down 1.7% against adjusted earnings a year ago though up 13.5% against Q4. One-time items this quarter netted to between $2M and $20M, but the gross one-time items were material and necessarily complex – gains on improvements in sub-prime valuations and monoline spreads, further complicated by steps taken by the Commerce to unwind its nettlesome sub-prime and non-sub-prime exposures. The case for caution on this name is nevertheless compelling. Veritas remains concerned about the potential performance of the structured credit run off book during a[nother] downturn. Quarter-in, quarter-out through the recovery, the $13B CLO portfolio and its underlying components continue to migrate while the aftershocks of the credit crunch – such as potential litigation from the Lehman estate – and the aftershocks of Enron continue to reverberate at Commerce Court. Veritas concludes that CIBC’s first quarter was positive in the sense that it was the second positive loan loss quarter in a row, the retail business may have bottomed out, and CIBC World Markets continues to generate above expectation earnings. Investors must decide, however, whether CIBC’s P:E discount to peers compensates for the following risks: the structured credit overhang, potential for capital markets earnings normalization, credit risk on cards and a few high-risk, high yield loan portfolios, and a few sharp objects still in its path.

CIBC CM Q1/10 EPS ahead of expectations on credit and wholesale revenues

admin — Fri, 26 Feb 2010 15:35:16 +0000

CIBC (CM): $69.95 – Q1/10 EPS ahead of expectations on credit and wholesale revenues
Sector Perform, Average Risk, Price Target: $82.00
CIBC’s Q1/10 EPS were ahead of expectations on lower loan losses and better than expected wholesale revenues. Capital ratios were higher than our forecast as risk weighted assets declined. Q1/10 cash EPS were $1.60 compared to RBC CM estimate of $1.58, and core cash EPS were approximately $1.65 versus RBC CM estimate of $1.44 and consensus of $1.42. Core retail banking income of $528 million was slightly below our estimate driven by lower than expected revenues, offset by lower than expected expenses. The Tier 1 ratio of 13.0% was above RBC CM 12.2% estimate and up from 12.1% in Q4/09RBC CM increased its 2010 and 2011 core cash EPS forecasts by $0.39 and $0.25, respectively, to $6.20 and $7.20 to reflect lower than previously anticipated credit losses. RBC CM will review its ratings and estimates for all banks it covers as part of the industry review we will publish once all banks have reported.

Baytex Energy Trust BTE.UN F&D Higher Than Expected, but Drilling Results

admin — Wed, 24 Feb 2010 17:47:34 +0000

Baytex Energy Trust (BTE.UN): $32.47 – F&D Higher Than Expected, but Drilling Results
Outperform, Average Risk, Price Target: $33.00 (prev. $30.00)
Baytex reported 2P reserves of 197 mmboe, a 5% increase over 2008, and 1P reserves of 129 mmboe. Heavy oil reserves continued to show strong growth (+15.5% from 2008), while light declined by 4%, NGLs by 22.5% and natural gas by 25%. Finding costs for the year were higher than expected, with 2P F&D (including FDC) of $20.10/boe versus 2008 at $12.09/boe and the three-year average of $11.08/boe. The results reflected: (i) negative revisions to natural gas and NGL reserves; and (ii) a substantial increase to estimated future development capital, which was partially due to revisions to cost estimates for previously booked reserves.

Yellow Pages Income Fund YLO.UN Takeaways from Analyst Meeting and Investor

admin — Wed, 24 Feb 2010 17:46:20 +0000

Yellow Pages Income Fund (YLO.UN) – $5.89 – Takeaways from Analyst Meeting and Investor
Outperform, Average Risk, Price Target: $7.00
Takeaways from analyst meeting and investor luncheon – (i) the roadmap for renewed revenue growth in 2011 under a full-service, integrated marketing services approach was provided; (ii) the company announced the acquisition of a 100% of Clear Sky Media and a 60% equity interest in 411.ca for an estimated ~$25MM; including Restaurantica; these acquisitions bring total unique visitors for the yellowpages.ca network to 9.3MM, or 11.0MM including Trader; and (iii) the conversion to a corporate structure will take place “by the end of 2010″ with the possibility of an “early” conversion. RBC CM expects the stock to trade in the $5-$6 range pending the emergence of a sustainable economic recovery in Canada given current peer valuations as well as public market concerns with the long-term growth outlook for the company. In this respect, RBC CM believes Q2/10 results will represent a crossroad for the stock reflecting: (i) the provision of 2011 guidance; and (ii) early indications of an actual cyclical recovery in directories given the lag in the selling cycle. In the meantime, RBC CM believes a stronger fundamental floor is forming under this $5-$6 range due to: (i) a slowly improving sales environment for directories; (ii) better visibility on a cyclical recovery in vertical; and (iii) the reflation of equity value in RBC CM’s NAV estimate following the distribution cuts. There are no changes to RBC CM’s $7.00 target price.