TSX Commentary

Russel Metals (RUS) – $18.23 – Upgrading to Outperform on Improving Outlook
Outperform (prev. Sector Perform), Above Average Risk, Price Target: $21.00 (prev. $19.00)
RBC CM is upgrading RUS to Outperform and raising its target price to $21. RBC CM states that positive demand/ pricing will likely drive a rerating in RUS’s multiple. RBC CM believes RUS has seen the worst of earnings in 2009. With signs of slow but sure volume pickup and more firm steel pricing, RBC CM expects that RUS will see earnings quickly recover in 2010, enough to support the $1.00 dividend. RUS ended 2009 with cash and credit available of ~$580M; RBC CM expects RUS will look to buy into volume in its US territory. Q1 is expected to show better margins as average inventory cost has bottomed out and sales pricing has improved into January. RBC CM derives its new one-year price target of $21 ($19 previously) by applying a 15x multiple (previously 13x) on its F11 EPS estimate (~1.6x 2011E book value). The 15x P/E multiple reflects RUS’s acquisition opportunities not currently factored into its estimates. With a 21% implied return to its $21 target price, RBC CM rates RUS Metals Outperform (previously Sector Perform), Above Average Risk, with the risk qualifier based on difficult earnings predictability on the back of highly volatile steel pricing.

Brookfield Asset Management (BAM.A) – $23.25 – A Strong Finish To 2009 With Q4 Results Above Expectations
Outperform, Average Risk, Price Target: $27.00 (prev. $24.00)
Brookfield Asset Management “BAM” reported Q4/09 and 2009 results. Q4/09 CFPS of $0.63 was ahead of expectations, and +55% from Q4/08’s $0.41. Investment/Other Income significantly exceeded forecast. RBC CM suspects this line item benefited from both FX gains and positive marks (GGP distressed debt and/or common shares?). RBC CM believes that 2009 was a year in which management sowed the seeds for many years of future “core” CFPS growth. The Company has ~$4B of “core” liquidity. BAM avoided the dilutive effect of issuing common shares in 2008/2009 and it actually continued to invest capital into existing and new business. As a result, RBC CM believes BAM now owns or manages more assets per share (and has greater capital commitments per share) than it did one, two or three years ago. These factors provide important leverage for CFPS growth over time. With the inclusion of Q4/09 results, and reinforced conviction that BAM should now be working its way through the “earnings valley”, RBC CM has raised its 2010/2011 CFPS estimates by +$0.34/+$0.21 to $1.83/$1.99. RBC CM’s $27 price target is derived via the application of a 15x multiple to its 2011E Adjusted CFPS and it equates to a discount of ~10%-15% to RBC CM’s view of potential pre-tax underlying value per share, one-year hence.

Vertias Research: Telus Corp. (T) – $31.79 – Q4/09 Results Summary
Sell, Intrinsic Value Estimate: $30.00
Telus Inc. reported YoY wireless ARPU decline of 7.7% in Q4-F09 compared to a decline of 5.8% at BCE Inc. (“BCE”) and 6.8% for F09 compared to 4.8% at BCE. As discussed in Veritas’s Telus report, dated December 09, Mike subscribers (9% of
the customer base) are unlikely to latch on to data plans and therefore Veritas expects an ARPU decline rate in excess of the industry average for 2010. Furthermore, given an expectation of rising smartphone subsidies and an increase in competition in Alberta and BC – especially in the second half of 2010 – Veritas believes that the midpoint of the current F10 wireless EBITDA
guidance of $1.975 billion embeds an ARPU decline of 3%. That is an optimistic assumption and Veritas believes that by Q2-F10 Telus will revise its wireless EBITDA guidance downwards to $1.90 billion. With the wireless franchise under duress and the ILEC segment in perpetual decline/restructuring mode, a dividend increase in the near future is neither possible nor desirable. Veritas continues to prefer BCE and Shaw and maintains its SELL recommendation on Telus. Veritas is fine tuning its valuation to $30.00.

Yellow Pages (YLO.UN): $5.67 – Clarity on Path to Conversion Finally Puts Focus on Revenue Growth
Outperform, Average Risk, Price Target: $7.00
Yellow Pages reported Q4/09 results on February 11th and provided clarity on the path to conversion. RBC CM expects the stock to trade in the $5-$6 range pending the emergence of a sustainable economic recovery in Canada given peer valuations and lingering investor concerns with the growth outlook for the company. 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 a 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 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 the NAV following the May 2009 distribution cut and pending January 2011 distribution cut. The trust will convert to a corporation near the end of 2010. The current $0.80 distribution will be maintained through 2010 and commencing January 2011, the dividend will be $0.65 annualized and paid monthly. Based on RBC CM’s current forecast, the $0.65 dividend implies a payout ratio of: (i) 64% of AFFO; (ii) 62% of estimated “cash EPS”; or (iii) 65% of FCF.

Industrial Alliance Insurance (IAG) – $33.30 – Raising EPS Estimates Following Strong Quarter
Sector Perform, Average Risk, Price Target: $38.00
Industrial Alliance reported Q4 core EPS of $0.77 compared to consensus of $0.69. RBC CM raised its EPS estimates for 2010 and 2011 from $2.75 to $2.95 and $3.10 to $3.30, respectively, primarily on better expected results from the company’s individual insurance division owing to lower levels of new business strain and an improved outlook for expected profit. RBC CM’s 12-month target price increases $1 to $38 as RBC CM has raised its estimated 2011 EPS by $0.20 to $3.30. RBC CM expects Industrial Alliance’s ROE to be higher and its earnings less volatile than those of Manulife and Sun Life, but the stock’s P/E valuation already reflects those factors. Industrial Alliance trades at a premium P/E and book value multiple to Manulife and Sun Life, whereas it has historically traded at a discount to Manulife and a similar valuation to Sun Life. While this premium valuation is justified based on the outlook for profitability in 2010 and 2011, RBC CM does not expect material expansion in the relative gap at this time. Industrial Alliance trades at 10.1x RBC CM’s estimate of 2011 EPS, compared to 9.5x and 9.0x for Manulife and Sun Life.

IGM Financial (IGM) – $42.01 – Most Attractive Risk-Reward Profile Within Fundcos
Outperform, Above Average Risk, Price Target: $55.00
Q4/09 results were in line, but segmented results show higher quality earnings, in RBC CM’s view. Mutual fund division expenses again were lower-than-forecast, particularly non-commission expense with mutual fund margins up over 100bps Q-o-Q. RBC CM is maintaining its $55/share target, Outperform rating. EPS forecasts are largely unchanged (slight increases). RBC CM believes IGM’s shares are undervalued and are its best idea within the fundcos. IGM’s shares trade at 7.3x EV/forward EBITDA, a 2.7x discount to CIX at 10.0x and a slight premium to AGF at 6.6x. However, RBC CM believes this valuation gap is too wide (a 0.5x to 1.0x gap is more appropriate). RBC CM believes one reason IGM historically traded at a discount to CIX was that IGM had the highest AUM base in the industry, questioning how much faster IGM could grow than the industry. IGM still has one of the largest retail AUM bases in the industry, but CIX’s retail AUM base is now third largest in Canada, yet IGM trades at a discount, but delivered almost identical growth and profitability (but consistently also higher margins) in the past several years, something RBC CM forecasts to continue. In the near-term, RBC CM believes IGM’s shares offer the most attractive valuation multiple expansion upside relative to CIX and AGF based on its forecasts for growth and net sales trends. Under a bearish scenario, RBC CM believes IGM’s shares are the most defensive, which was demonstrated again in this last equity market downturn.

Fertilizers – Potash Inventories Decline in January Even with Higher Production
The latest inventory data could result in a near-term positive market reaction for global potash producer valuations. The most recent data suggests that potash market conditions are improving. North American potash producers’ potash ending inventory continued to decline in January 2010. Specifically, producer inventories fell 18% (i.e., 552,000 tonnes) below December 2009 levels even though January 2010 production was 72% higher than in December 2009. As a result, potash producer inventories at the end of January 2010 were only 6% higher than the previous five-year average as shown in the chart. In comparison, December 2009 inventories were approximately 50% higher than the previous 5-year average. The potash inventory decline is consistent with RBC CM’s outlook for improving demand heading into spring. RBC CM believes improving demand and declining inventories could lead to higher spot potash prices over time.

Vermilion Energy Trust (VET.UN): $34.20 – Positive Drilling Results in the Netherlands
Outperform, Average Risk, Price Target: $35.00 (prev. $34.00)
Vermilion announced results from its four-well drilling campaign in the Netherlands. Two development wells have access to existing infrastructure and are expected to be brought on at a combined rate of 15 mmcf/d net to Vermilion and add 2,000 boe/d to 2010 production. Two other wells require production permitting, pipeline construction and regulatory approvals, and are expected to be brought on by early to mid-2011. With the success of the program, management expects 2010 production to come in at the high end of its guidance range of 29-31,000 boe/d. An additional 30 prospects have been identified and the permitting process for four to six new wells has commenced for drilling in 2011. Near-term newsflow for Vermilion should include initial results from its Cardium drilling program in the West Pembina area, which should be reported along with Q4/09 results on March 3. RBC CM expects results to be positive given the success of other operators (Berens, Bonterra, Vero) in the area. Due to the successful drilling results, RBC CM increased its target on Vermilion to $35 and maintain our Outperform rating.

Veritas Research: Jean Coutu Group (PJC.A) – $9.59 – Deflecting the Legislative Sword
Buy, Intrinsic Value Estimate: $11.20
This report outlines the impact of pending legislative changes in Ontario on the Jean Coutu Group (PJC), given the fact that changes in Ontario will also affect legislation in Quebec. Quebec benefits from a ‘Most Favoured Nation’ clause which stipulates that the sale price of prescription drugs to Quebec’s public drug plan be no more than that paid by any other province. In other words, where Ontario goes, Quebec will follow with Bill 130, as in 2006, when Ontario enacted Bill 102. Unlike Ontario, Quebec regulates both public and private plans, with professional allowances currently capped at 20% of generic prices. In Ontario,
there is currently no oversight over privately funded drug plans, and professional allowances are currently as high as 88% of generic prices. Lower allowable generic invoice prices will reduce available ‘mark-up’ dollars (6% mark-up) at the wholesale level. At the same time, retail sales will decline, meaning that PJC’s RFFR revenue, calculated at about 7% of sales at the retail level, will be reduced. PJC’s exposure to changes to the drug legislation is muted by its low exposure to generic drugs, relative to other provinces. Veritas’s intrinsic value assumes that the Ontario government moves to reduce generic pricing to 25% of branded prices, versus 50% currently. Veritas expects legislative changes to become effective 2011 (i.e. F2012 for PJC). Veritas maintains its Buy recommendation on Jean Coutu with an intrinsic value estimate of $11.20 per share.

Paladin Energy Ltd. (PDN) – $3.46 – Re-Plumbing the Pipeline: Reducing Target to $4.50/sh
Outperform, Above Average Risk, Price Target: $4.50 (prev. $5.00)
On February 16, 2010, Paladin held a conference call to discuss its financial and operating results, previously released on February 11, 2010. Adjusted EPS for the quarter was $0.01, in-line with both RBC CM’s estimate and the consensus estimate. According to management, the changes that have been made at Kayelekera are allowing the company to bring the mine to nameplate capacities. Management expects the improvements to allow Kayelekera to ramp up to nameplate by the end of March 2010. Given the recent operating history at Kayelekera RBC CM is maintaining a more conservative ramp-up whereby Kayelekera sustainably reaches its nameplate capacity by the end of June 2010. Management reported that Stage 3 development is well under way at Langer Heinrich with the earthworks almost complete and civil works set to start. RBC CM has forecast Stage 3 will reach nameplate capacity in September 2011 (with the ramp up beginning in December 2010). RBC CM has made fairly significant changes to its production forecasts for Paladin driven by the two year delay of the start of the Valhalla project. Based on these changes, RBC CM’s NAV estimate for Paladin has fallen to A$2.89 per share from A$3.46 per share.