TSX Commentary

Suncor Energy (SU) – $31.55 – Fire Repairs Unfold at U1
Sector Perform, Average Risk, Price Target; $46.00
On the heels of its assessment of an oil sands fire earlier this month, Suncor Energy anticipates that its 125,000 bbl/d Upgrader 1 should return to production by early April. Suncor does not expect to collect insurance proceeds in connection with the fire at Upgrader 1. RBC CM states that it is not “all that fussed” with Suncor’s remediation plan in its base oil sands operations, but notes that there is not much to cheer about in the near term. RBC CM maintains a Sector Perform rating on Suncor and a one-year target price of $46 per share. Investors seeking to retain oil sands exposure should switch into Canadian Natural Resources (Outperform, $95 Target) – RBC CM’s favourite stock within its coverage group.

CI Financial (CIX) – $21.16 – Q4 In Line; Thoughts On A Potential BNS Transaction
Outperform, Above Average Risk, Price Target: $24.00
CIX reported Q4 normalized EPS of $0.24, in line with both RBC CM’s $0.25 forecast and consensus. On a standalone basis (i.e., excluding the Scotiabank transaction potential), RBC CM believes other asset management stocks (IGM and GS) offer greater valuation upside. CIX trades at 9.8x EV/forward EBITDA, a significant premium to IGM at 7.4x and AGF at 6.2x. RBC CM believes CIX’s valuation premium to IGM is too wide given similar growth and profitability. However, RBC CM’s Outperform rating reflects its view that CIX’s shares still offer a sufficient total return with additional valuation upside from a potential BNS transaction, although RBC CM’s target does not factor in a transaction with BNS. Excluding valuation upside from a potential BNS transaction, RBC CM believes CIX valuation upside is more likely to come from improving financial performance rather than valuation multiple expansion. A transaction with BNS still appears likely, although timing and structure are unclear in RBC CM’s view. CIX indicated it has had frequent discussions with BNS but acknowledged the progress of discussions is slower than expected. RBC CM believes two transaction possibilities are: (1) 2-step with a vend-in of BNS mutual fund assets followed later by a takeover; or (2) an outright takeover.

George Weston Limited (WN) – $71.50 – A Hearty Quarter; Forecasts Unchanged, Tweaking Price Target
Sector Perform, Average Risk, Price Target: $75.00 (prev. $74.00)
WN’s Q4 Operating earning were basically in-line with expectations and margins were higher than forecast due to better than expected productivity gains and lower operating costs in the Food Processing segment. RBC CM’s calculation of EPS
ex-items is $0.81, in-line with forecast and up from adjusted earnings of $0.49 in the prior year. EPS as reported was $0.52. Until RBC CM gets greater insight into deployment of WN’s sizeable cash balance, the key metric investors should be focused on is the underlying performance of the food processing operations. The good news is that EBITDA from Weston Foods was a tick better than expected, implying that RBC CM’s assessment of value for WN ex-Loblaw and ex-cash remains unchanged. As for the deployment of the cash balance, management reiterated on the conference call that it is continuing to assess the options, with no commitments around timing/nature of the ultimate use of the $2.5 billion in proceeds from the sale of its U.S. baking assets, which closed in late January of 2009. Management is looking for real growth opportunities in its core or related businesses and remains committed to price discipline. Based on yesterday’s closing share prices, the implied value of WN’s food processing assets and cash on hand is $22, in-line with RBC CM’s fundamental value calculation of $22. RBC CM is tweaking its WN target from $74 to $75 to reflect the previously published $1 increase in its Loblaw target price.

Finning International Inc. (FTT) – $18.05 – Q4 Backlog & Order Intake Up; EPS Miss on Very Weak Canadian Margins
Sector Perform, Average Risk
Fourth quarter backlog of $0.6B was up 15% from $0.5B in Q3/09 (first increase since 2008) on large mining equipment orders in FINSA. Order intake improved in all operations quarter-over-quarter (up 55% QoQ) especially in mining sector, where FTT expects strength in Canada and FINSA to continue in 2010. Fourth quarter EBIT margin of 2.9% (adjusted for restructuring & IT costs), was below the third quarter results of 3.5% and RBC CM estimate of 4.5%.

TransCanada Corp. (TRP) – $34.93 – Long-Term Outlook Intact
Outperform, Average Risk, Price Target: $41.00
Normalized Q4/09 EPS was $0.48 compared to RBC CM estimate of $0.52 and $0.46 in Q4/08. Lower than forecast Power contribution (mostly realized prices) was partially offset by lower-than-expected interest expense. TRP raised its annual dividend by $0.08/share to a new annualized rate of $1.60/share, which is in line with RBC CM’s estimate. After reviewing its financial forecast, RBC CM modestly reduced its EPS estimates for 2010 and 2011 to $2.09 and $2.40, respectively (from $2.12 and $2.45, respectively). On an absolute basis and also relative to the level of 10-year GoC bond yield, RBC CM believes that the shares of TRP represent good value trading at current levels.

Keyera (KEY.UN) – $26.10 – Results Slightly Below Expectations
Outperform, Average Risk, Price Target: $26.00
Keyera reported Q4 results that were slightly weaker than expected, with ACFFO per unit of $0.64 compared to RBC CM’s estimate of $0.68. Lower Gathering & Processing contribution coupled with higher general & administrative costs were partially offset by strong results from the Marketing segment. Management noted the recent resumption of drilling activity, particularly
near its Strachan, Nordegg River, Brazeau and Rimbey facilities. Several wells were tied into Keyera’s Rimbey facility in December 2009. Unitholder approval for a conversion to a corporation will be sought at Keyera’s annual meeting on May 11, 2010. Subject to obtaining the necessary consents and approvals, the fund expects to implement its new corporate
structure effective January 1, 2011. Due to available tax pools and a low payout ratio, Keyera should be able to maintain its distribution in 2011. Given previous guidance regarding a conversion to a corporation coupled with the maintenance of the distribution at current levels, the conversion to a corporation should not have a material impact on the unit price.

Maple Leaf Foods (MFI) – $11.36 – Earnings Preview
Sector Perform, Above Average Risk, Price Target: $13.00
Maple Leaf will report its Q4 results on Wednesday. RBC CM is forecasting EPS estimate of $0.24, well ahead of the recall-depressed earnings of $0.05 reported in Q4/08 and just ahead of consensus of $0.22. Operating margins should benefit from incremental operating leverage as Maple Leaf continues to close the volume gap in its packaged meats business. RBC CM’s model assumes gradually increasing EBITDA margin estimates for the combined protein operations from 4.3% in 2008 to 6.9% at the end of 2011, which is more conservative than management’s stated goal of 8% – 9%. Each 50 bps improvement in margin could generate incremental EBITDA of about $18 MM or $0.09 / share, all else being equal. But given the capital required to achieve the significantly higher levels of profitability, the associated impact of higher depreciation and financing costs would imply far lower net earnings accretion. Despite ongoing drag from the U.K. business on the frozen bakery segment, consolidated operating margins in the Bakery segment continue to normalize, driven by the North American fresh and frozen bakeries and pasta operations, lower commodity costs and price increases taken during 2008.

George Weston Ltd. (WN) – $70.96 – Waiting for Go-Dough: Q4/09 Preview
Sector Perform, Average Risk, Price Target: $74.00
Given that Loblaw (TSX: L, $32.52; O-Avg), which generates approximately 90% of consolidated EBITDA, reported last week, the focus for tomorrow’s release will be on: 1) operating trends at Weston Foods; and 2) any insight provided into the timing/nature of deployment of WN’s sizeable cash balance. Generally cautious consumer spending moderated top line at Weston Foods through the first nine months of 2009, and RBC CM expects similar performance for Q4. But extensive organizational realignment and focus on cost containment are delivering industry-leading levels of profitability. For Q4, RBC CM forecasts revenues of $371 MM at Weston Foods and EBITDA of $50 MM. As for the deployment of the cash balance, RBC CM believes management will reiterate that it is continuing to assess the options, with no commitments to the Street around timing/nature of the ultimate use of the $2.5 billion in proceeds from the sale of its U.S. baking assets, which closed in late January of 2009. RBC CM’s incorporation of the actual Loblaw Q4 results into its WN model and modification of assumptions for WN Foods drives an increase in Q4/09 EPS from $0.62 to $0.81 and RBC CM’s 2009 EPS estimate from $3.13 to $3.31. Revised RBC CM $C forecasts drive a modest reduction in 2010E/2011E EPS from $3.27 to $3.19 and $4.06 to $3.86, respectively. RBC CM’s target remains unchanged at $74. Based on Friday’s closing prices, the implied value of WN’s non-Loblaw assets is $21, vs. RBC CM’s assessment of fair value of $22.

Enbridge (ENB) – $46.37 – Enbridge Fires Back in Clipper Dispute
Outperform, Average Risk, Price Target: $54.00
Enbridge filed a motion to intervene, protest and request for dismissal of a shipper challenge to the Alberta Clipper project.
The company is seeking the dismissal of Suncor’s petition. Some of the reasons include: (1) Enbridge constructed Alberta Clipper based on an unopposed CAPP settlement. (2) Construction is almost finished and costs are within budget. (3) The challenge is late in the day and Enbridge asserts that Suncor had concerns, but did nothing until now. RBC CM’s view on the issue is unchanged and it recommends using any price weakness as news disseminates as an entry point. With the majority of construction complete, it would be surprising for the FERC to delay the in-service date. A negative decision out of the FERC would defer roughly 5% of Enbridge’s 2011E earnings (about $0.15/share), although Enbridge may have other remedies that would partially, or fully, mitigate any negative decision.

Tim Horton’s (THI) – $31.51 – Let The Games Begin! Q4/09 and Investor Day Preview
Outperform, Average Risk, Price Target: $38.00
Tim Hortons will report its Q4 results on Thursday. RBC CM expects solid results along with a 10% dividend increase and a renewed share buy-back. The results should show a modest acceleration in same store sales trends in Canada to 3.0% from 2.7% in the first nine months of the year, boosted by price increases in the key Ontario market and by the unseasonably warm weather in the period. RBC CM is forecasting EPS of $0.51, 10% above Q4/08 and in-line with consensus. On March 4 and 5, THI management will host its first investor conference since the 2006 IPO, and based on the agenda, it appears that THI will address virtually all of the topics that are uppermost in investors’ minds. Since mid-November, markets have begun pricing in the anticipated earnings recovery in the sector, boosted by better than expected Q4 results from a number of names. Meanwhile, THI’s share price has been relatively flat, widening its discount to the group from 0.9x three months ago to 1.6x currently. Given THI’s relative earnings growth outlook, profitability, returns on equity and capital employed, dividend yield and cash flow profile, RBC CM expects the valuation gap to normalize over time.