TSX Commentary

Boston Pizza Royalties (BPF.UN): $12.69 – Q4 results light; Comp declines moderating
Sector Perform, Average Risk, Price Target: $10.00
BPF.UN reported slightly light Q4 results. BPF.UN delivered comps of -4.4%, below RBC CM’s estimate of -2.5% and flat results last year. BPF delivered comps of -9.6% in Q3 and -5.5% in Q2. The impact of new restaurants and successful promotions could not offset ongoing economic pressures affecting restaurant traffic. AFFO of $0.33 was flat to last year and inline with our $0.34 expectations. The ongoing buyback offset some of the negative cash flow impact of lower comps. No announcement was provided on conversion. RBC CM continues to expect BPF.UN to sustain a post-conversion distribution of $1.00/unit on mid-single digit comps and 15-20 new stores openings per year.

Brookfield Renewable Power Fund (BRC.UN) – Overview of Q4 Results, Veritas Maintains Sell Recommendation
Brookfield Renewable Power Fund reported Q4-09 distributable cash per unit of $0.18 vs. $0.16 for the same period last year, a 10.6% increase. Based on distributions in Q4-09, BRC.UN reported a 175.8% payout ratio for the quarter. On an annual basis, BRC.UN reported DCPU of $1.53 in F09, only slightly higher than the $1.52 reported in F08. Based on its F09 annualized distribution of $1.25, BRC.UN achieved an 81.7% payout ratio, slightly above its stated 80% target. BRC.UN announced a 4.0% increase in its annual distribution, from $1.25 to $1.30. Although modest, BRC.UN’s decision to increase its annual payout is a bold move in the face of looming trust taxation. Taking into account an upward adjustment of $0.05 to our F11E DCPU, from $1.47 to $1.52, based on forecast accretion from the Gosfield wind project (Gosfield), the new $1.30 per annum payout implies an F11 payout ration of 85.5%. Accordingly, although above its 80.0% payout ratio target, Veritas believes the $1.30 annual distribution is sustainable. From a taxation perspective, BRC.UN is expected to switch from an income fund to a corporation later this year, with management guiding towards as late a transition as possible to take full-advantage of the remaining tax holiday. Management believes its existing tax pools, including that associated with Gosfield, will suffice to offset the trust tax to F14. Beyond F14, BRC.UN will focus on acquiring contracted and “shovel-ready” construction projects and existing wind and hydro assets. These assets are particularly attractive due to accelerated tax pools. The valuations afforded Canadian power funds have increased markedly since Q3-09, with the sector market capitalization weighted average P/DCPU increasing 13.7%, from 9.5x to 10.8x. In conjunction with its higher levered free cash flow estimate from Gosfield, a more bullish market comparison analysis increases Veritas’ intrinsic value estimate of BRC.UN to $17.00 per unit, from $13.60. The revised value estimate implies an 11.2x multiple of F11 DCPU, significantly higher than the 7.5x multiple of our F11e DCPU currently implied by the share price of Capital Power Income LP, the top pick in the sector. A higher multiple is appropriate for BRC.UN due to its longer-life assets, lower environmental legislation risk and an absence of fuel cost risk. Nonetheless, Veritas believes the current unit price of BRC.UN is high, and maintains its SELL rating.

Peyto Energy Trust (PEY.UN) – $12.54 – Recognition of Hz Locations Drives 20% Reserves Increase
Sector Perform, Average Risk, Price Target: $12.50 (prev. $12.00)
Peyto announced total P+P reserves of 200 mmboe, a 20% increase over 2008, and proved reserves of 149 mmboe (+17%). Proved producing reserves of 98.6 mmboe were down 1.4% from last year as growth in 1P and 2P reserves was attributable to the undeveloped category. Peyto plans to spend $180 million in development capital in 2010 (up from $73 million in 2009), targeting a mix of horizontal and vertical wells. Five horizontals have been completed to date – three in the Cardium and one each in the Notikewan and Wilrich – and initial production rates have been strong. RBC CM expects the capital program to produce steady volume growth through 2010. Management indicated they plan to maintain their current monthly distribution of $0.12/unit through 2010, as budgeted cash flow plus unused bank lines will be sufficient to fund capital spending and distributions. RBC CM would prefer to see Peyto adopt a more conservative distribution policy in order to fund growth capital; RBC CM estimates factor in a reduction of the distribution to $0.08/unit in mid-2010. RBC CM has increased its target to $12.50/unit and maintains its Sector Perform rating.

TMX Group (X) – $29.15 – Q4/09 a Step in the Right Direction
Underperform, Above Average Risk, Price Target: $32.00 (prev. $31.00)
Q4/09 was ahead of forecast; change in ELP pricing likely a key factor. Normalized EPS of $0.68 was ahead of RBC CM’s $0.57 forecast and $0.58 consensus. In RBC CM’s view, TMX’s Q4/09 results were encouraging as signs of improvement were evident in some businesses, but RBC CM remains concerned in the near term regarding “headline risks” and reduced earnings visibility, which could constrain valuation. RBC CM is increasing its 12-month target to $32 (was $31) on higher financial forecasts, but maintains its Underperform rating. RBC CM reiterates that it likes the long-term growth potential of the TMX Group, with its increasingly diversified platforms for growth and, on an absolute basis, RBC CM believes there is potential positive valuation upside at current levels. Downside risks remain, but are less than before, in RBC CM’s opinion. RBC CM’s Underperform rating reflects its view that relative to its coverage universe, there are other stocks with more attractive risk-reward profiles.

Talisman (TLM) – Veritas Maintains Sell Recommendation Following Q4 Results
Talisman reported Q4 production of 423 thousands of barrels of oil equivalent per day (“mboe/d”), which is below average production of 425 mboe/d for the year. Q4 results were aided by the long-awaited ramp up of the Rev field in Norway, bringing production in the region to nearly 55 mboe/d, though declines are likely to be steep given Talisman’s Norway guidance of 45 mboe/d for 2010. Conventional production declines in North America and the UK, combined with sanctioning delays in Vietnam, underscore Talisman’s increasing reliance on North American shale gas for growth. With Pennsylvania facing a US$450 million revenue shortfall in the coming fiscal year, Governor Rendell recently unveiled a proposal to charge drillers a wellhead tax of more than 5%, starting July 1. Though Penn’s Senate has not yet approved the plan, Veritas estimates the tax would reduce the NPV of a Marcellus well by 13% to 15%, for gas prices between US$6 and US$7 at Henry Hub. This adds further downside risk to valuation. Veritas estimates that Talisman drilled at a rate of 15 net wells per rig per year in Q4 vs. a rate of 21 in Q3. To meet its 2010 Marcellus drilling target of 170 net wells, Talisman will need to drill at a much faster rate. Proved reserves fell 1.6% to 1,410.7 mmboe in 2009, despite 172.6 mmboe of discoveries, additions, and extensions. Over 83% of reserve additions were from natural gas, largely due to shale, while the company was forced to unbook over 75 Bcf of Canadian conventional gas given lower prices and revised development plans over the next 5 years. Veritas expects Talisman to sell a considerable portion of these assets. Although Veritas is maintaining its intrinsic value at C$17 per share (US$80 oil and mid-cycle US$6 gas), the analyst is keeping a close eye on Pennsylvania’s tax proposal and Talisman’s rig productivity in 2010. Given the risks, Veritas currently recommends selling the company’s shares.

Yamana Gold (YRI) – $10.46 – Q4 Preview – Flat to Slight Improvement Expected
Outperform, Average Risk, Price Target: $14.00
Q4 Preview – slightly better gold output, but FX and corporate expense adjustments lead to a slight lowering of RBC CM’s EPS/CFPS estimates. Yamana is expected to report Q4 and full year 2009 results after the close on Wednesday, March 3rd.
Yamana provided Q4 and full year 2009 gold production from the company’s mines back in mid-January. Q4 gold equivalent output( gold and silver converted to gold) of just under 290,000 oz was in-line with the 285,000 oz RBC CM had forecast. Full year output of 1.2 million oz in 2009, including just over 1.0 million oz from continuing operations, was roughly in line with expectations and prior guidance. RBC CM has forecast Q4 cash costs to have been around $342/oz (on a co-product basis), and $365/oz for the full year. With additional revisions to its estimates for corporate expenses, copper sales, and FX gains, RBC CM is lowering its EPS and CFPS estimates slightly for Q4/09, suggesting that financials results are likely to be flat or slightly improved over Q3/09 results. Growth Projects Fully Funded – green lights for 3 new mines, 2 small expansions, and another 2 projects could get green lights later this year. Cash, available debt, and forecasted cash flow are more than sufficient to build all.

Toromont – $27.69 – Results Slightly Weaker Than Expected
Toromont reported Q4 results that were slightly below expectations, with most of the weakness coming from the Equipment division. EPS came in at $0.48, just shy of the consensus of $0.49 but below RBC CM’s estimate of $0.55. Sales dropped by 26% year-over-year to $452.8 million. TIH was able to generate stronger EBIT margins in Compression, despite the drop in sales, but the Equipment Group was hurt by a weaker pricing environment. The company’s guidance suggests that management does not expect meaningful improvement in either Compression or Equipment business in 2010 vs. 2009. The company highlighted that the integration of the Enerflex acquisition is well underway and that synergies are expected in Canada, particularly in eliminating excess fabrication capacity, service facilities and SG&A including public company costs.

Intact Financial (IFC) – $38.24 – Expected ROE improvement should lead to higher P/B multiple
Outperform, Above Average Risk, Price Target: $54.00
Intact will release its Q4 results on February 17. RBC CM expects the company to announce a 9% increase in its quarterly dividend. The results should also highlight Intact’s strong capital position: the company ended Q3/09 with excess capital of $635 million and further debt capacity of $470 million. The company is also likely to establish and conduct share buybacks under a normal course issuer bid in 2010. IFC is well-positioned to benefit from expected improvement in industry profitability. The combination of 1) an erosion in industry capital, 2) lower investment yields and 3) the continued deterioration in underwriting margins should lead to a recovery in P&C insurance pricing over the next 6-12 months, followed by an upturn in underwriting profitability in 12-18 months. Despite recently proposed auto reforms in Ontario, the recent trend of rate increases is expected to continue, as overall industry pricing remains inadequate. The company intends to overcome its recent difficulties in personal property insurance (primarily due to water-related claims) through a combination of improved pricing/segmentation and claims initiatives (targeting a combined 15-point improvement). The payoff will likely flow through to earnings over the next 18 months. Commercial insurance has been the most competitive when it comes to pricing, but there are signs that suggest the market pricing could harden in the near term. The Outperform rating on IFC reflects RBC CM’s view that over the next year pricing conditions will improve, followed by an improvement in underwriting profitability in 12-18 months. As the cycle turns, earnings visibility and attributed P/B multiples should improve. RBC CM expects IFC’s P/B multiple to increase to 2.0x over that period, above today’s 1.5x multiple but below the peak of 2.8x in April 2006.

BHP Billiton plc (LSE: BLT) – H1 F2010 Earnings Preview
Outperform, Average Risk
RBC CM is bumping its H1 F2010 earnings per share forecast from $0.70/sh to $0.87/sh, slightly ahead of consensus at $0.85/sh, mainly on the back of strong production and commodity prices in the half-year. RBC CM’s Cash flow per share estimate increases from $1.20/sh to $1.41, compared with consensus at $1.20/sh. BHP continues to have the strongest balance sheet of the major diversified miners. RBC CM is looking for a net debt-to-total capital ratio of 10% at December 31, 2009. RBC CM will be looking for any detail from the company surrounding the proposed new Australian tax hikes, as well as any update on regulatory review of the proposed iron ore joint venture with Rio Tinto. RBC CM’s £23/sh one-year target price for BHP Billiton remains unchanged. RBC CM’s target price is derived using the average of NAV and EPS multiple valuations; it continues to use a 1.0x multiple to NAV applied to an average of 2010 and 2011 NAV estimates. RBC CM’s 17.0x multiple on 2011E earnings reflects generally improving market multiples and BHP’s track record of trading at a premium relative to its peers. These multiples are towards the middle of historical trading rages, but could expand in the event of a sustained recovery in the diversified miners’ space.

Teck Resources (TCK.B) – $34.50 – Q4/09 Results Fall Short of Expectations
Sector Perform, Average Risk
Teck’s Q4/09 was weaker than expected: Teck reported adjusted Q4/09 EPS from continuing operations of $0.53 versus consensus of $0.65. Excluding prior-period pricing adjustments, EPS was $0.43 versus $0.58 in Q3/09 and $0.95 in Q4/08, well short of RBC CM’s estimate of $0.73. Shortfalls at Teck Coal and Trail and higher costs account for the bulk of the shortfall versus RBC CM’s expectations: Lower coal sales volumes and prices than assumed accounted for $0.13 of the shortfall in EPS and higher SG&A accounted for another $0.08. The remaining difference was due to slightly lower sales at Highland Valley and Red Dog, poorer results at Trail, and higher costs in the copper operations than RBC CM had anticipated. At the end of Q4/09, Teck had cash on hand of $1.3 billion, total debt of $8.0 billion, and net debt/total capitalization of 29.6%. Following the closing of the sale of the Andacollo gold royalty, the Turkish gold properties and the one-third interest in the Waneta Dam in Q1/2010, debt will be reduced a further $1.3 billion to $6.7 billion. Remaining scheduled term loan repayments are expected to be US$440 million in 2010, US$420 million in 2011, and US$280 million in 2012. While Teck is now in a fairly strong financial position following the completion of the asset sales program, there was no mention of reinstating the dividend. Teck will host a conference call on Tuesday, February 9, at 11:00 a.m. ET. Dial-in number: 416-695-6616. While the results fell short of RBC CM’s expectations, RBC CM does not expect to have to significantly reduce its forecast earnings and cash flow at this point. RBC CM will review its estimates and outlook following the conference call.