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May 28, 2010
TODAY'S HIGHLIGHTS
Canada/Int'l
Rating Upgrades Cenovus Energy Estimates/Targets Raised Legend Int'l Holdings Zarlink Semiconductor Estimates/Targets Lowered CIBC Royal Bank TD Bank Potash One Featured Reports
Food Prod.: Key Takeaways and Stock Implications from Our Barbecue Conference
FINANCIALS
Banks Canada CIBC Q2/10 Earnings
Banks Canada CIBC Q2/10 Earnings: Credit and Capital Stronger Than...
Banks Canada Royal Bank Q2/10 Earnings; The Burden of High Expectations
Banks Canada Royal Bank Q2/10 Earnings: A Weak Quarter Relative to...
Banks Canada TD Bank Solid Q2/10 Earnings
Banks Canada TD Bank Q2/10 Earnings: Positive Momentum on the Asset...
ENERGY & UTILITIES
Oil & Gas Sector Comment Alberta Royalty Changes: Another Positive Surprise for...
Integrated Oils Canada Cenovus Energy Upgraded to Outperform; Highlights From Investor...
North American E&P Canada Paramount Resources Updated Resource Evaluation of Hoole Oil Sands Leases
North American E&P Sector Comment Alberta Royalty Curves Finalized; Natural Gas Deep...
MATERIALS
Metals & Mining Sector Comment Mining & Commodity Roundup - May 27, 2010
Fertilizers Int'l Legend Int'l Holdings Still Waiting for Wengfu
Fertilizers Canada Potash One Feasibility Capex/Tonne Rising But All-Inclusive
CONSUMER
Food Prod. Sector Comment Key Takeaways and Stock Implications from Our Barbecue...
TECH/TELECOM/MEDIA
Enterprise Hardware Sector Comment Notes from the Road - Bus Tour Recap
Specialty Hardware Canada Zarlink Semiconductor Q4/10 Revenues Above Forecast and Consensus
HEALTH CARE
Biotech Canada Theratechnologies After Panel, We Expect FDA Approval of Egrifa
MACRO
Quantitative/Technical Market Elements Daily Quantitative Commentary
Quantitative/Technical Relative Strength Filter Asia Credit Watch
Economics A.M. Notes Daily Economic Commentary
This report was prepared by an analyst(s) employ d as a research analyst(s) under FINRA rules. For disclosure statements, including
CIBC (CM-TSX; CM-NYSE) Stock Rating: Market PerformIndustry Rating: Market Perform
M ember of: Top 15 Quantitative Stock Selections
May 28, 2010 Research Comment Toronto, Ontario
John Reucassel, CFA BMO Nesbitt Burns Inc. (416) 359-4379 [email protected] Assoc: John Fong, CFA, FSA
Q2/10 Earnings Price (27-May) $72.02 52-Week High $77.38 Target Price $78.00 52-Week Low $52.25
ed by BMO Nesbitt Burns Inc., and who is (are) not registerethe Analyst's Certification, please refer to pages 6 to 9.
Event CIBC reported cash EPS of $1.61. Excluding unusual items, operating cash EPS
were $1.46. The consensus estimate was $1.49. While results were relatively
clean, we suspect the share sell-off yesterday reflected relatively high
expectations going into the quarter. 5
6
7
8
9
10
CIBC (CM)Price: High,Low,Close Earnings/Share
20
40
60
80
100
Impact Neutral. The Tier 1 ratio was healthy at 13.7% and impaired loan formations
diminished during the quarter. Good results in credit and trading were offset by
lower-than-expected spreads in retail markets.
Forecasts Our 2010E cash EPS are unchanged at $6.35, and we have reduced our 2011E
cash EPS to $7.20 from $7.30 primarily due to lower spread expectations.
Valuation We have reduced our target price to $78 from $80, reflecting 10.8x our 2011E
cash EPS. CM’s valuation could improve over the next few years as it winds
down its structured credit run-off portfolio.
Recommendation Q2/10 confirmed that credit trends remain on a positive trajectory. We believe
that 2011E cash EPS are a reasonable reflection of “normalized” earnings.
Looking through the credit recovery, it is not necessarily apparent that the bank
has above-average growth potential relative to its peer group beyond 2011. CM
remains Market Perform rated.
0
50
100Volume (mln)
0
50
100
2005 2006 2007 2008 200950
100
150CM Relative to S&P/TSX Comp
Last Data Point: May 26, 2010
50
100
150
(FY-Oct.) 2008A 2009A 2010E 2011E EPS - Cash -$5.80 $2.73 $6.35 $7.20P/E 11.3x 10.0x EPS - GAAP -$5.89 $2.64 $6.28 $7.13P/E 11.5x 10.1x Cash ROE n/a 9.4% 20.8% 21.0% Specific Prov. ($mm) $773 $1,505 $1,300 $1,080 Dividend $3.48 $3.48 $3.48 $3.48 Tier One Capital 10.5% 12.1% 14.1% 14.5% Quarterly EPS - Cash Q1 Q2 Q3 Q4 2008A -$4.36 -$2.98 $0.13 $1.09 2009A $0.31 -$0.21 $1.04 $1.59 2010E $1.60a $1.61a $1.56 $1.58 Dividend $3.48 Yield 4.8% Book Value $30.00 Price/Book 2.4x Shares O/S (mm) 388.5 Mkt. Cap ($mm) $27,977 Float O/S (mm) 388.5 Float Cap ($mm) $27,977 Wkly Vol (000s) 8,414 Wkly $ Vol (mm) $542.5 Net Debt ($mm) na Next Rep. Date 25-Aug (E)
Notes: All values in C$; EPS are fully diluted; Cash EPS add back amortization of intangibles throughout Major Shareholders: Widely held First Call Mean Estimates: CANADIAN IMPERIAL BANK COMM (C$) 2010E: $6.28; 2011E: $7.25
Changes Annual EPS Annual EPS Quarterly EPS Target 2011E $7.30 to $7.20 2011E $7.23 to $7.13 Q3/10E $1.57 to $1.56 $80.00 to $78.00 Q4/10E $1.59 to $1.58
This report was prepared by an analyst(s) employ arch analyst(s) under FINRA rules. For disclosure statements, including
CIBC
May 28, 2010 Research Comment Corporate Debt – Banks George Lazarevski, CFA (416) 359-7488 [email protected] Assoc: Gaurav Dhiman
Q2/10 Earnings: Credit and Capital Stronger Than Expected
ed by BMO Nesbitt Burns Inc., and who is (are) not registered as a resethe Analyst's Certification, please refer to pages 7 to 8.
Event: CIBC reported Q2/10 results.
Impact: Neutral.
Key Points: CIBC reported cash earnings of $624 million, or $1.61
per share, compared with a loss of $81 million, or ($0.21) per share,
in the year-ago quarter. Adjusting for certain items, cash earnings of
$1.46 per share came in below the consensus estimate of $1.49 per
share. Overall, we would characterize the CIBC results as neutral
from a corporate debt perspective. The primary contributor to the
underperformance in the quarter was the Wholesale segment, which
saw a significant drop in advisory fees and equity new issue
revenue. In addition, the second quarter results did not include
merchant banking gains similar to Q1/10. On a positive note, asset
quality trends showed some improvement. Loan losses came in
below our expectations and gross impaired loans remained
relatively flat at $2.0 billion. In addition, new impaired loan
formations improved sequentially to $566 million compared to
$686 million in Q1/10. Finally, capital was stronger than expected
with a Tier 1 ratio of 13.7% and TCE ratio of 8.6%.
Credit and Spread Implications
Near Term: The sovereign debt crisis in Europe could result in
increased volatility of Canadian banks spreads over the near term.
Medium Term: The outlook on Canadian bank spreads over the
medium term is highly uncertain given the issues in Europe and the
potential for global growth to decline.
Recommendation
We remain cautious on Canadian bank credit given the uncertainty
in Europe and the potential contagion to other markets. Any
extension of the confidence problems beyond Europe would likely
put additional pressure on Canadian bank credit spreads, which
have widened over 60% since the end of the first quarter. We
recommend a market weight position in CIBC credit.
CIBC Subordinated Debt Indicative Spreads
0
50
100
150
200
250
300
350
400
450
500
550
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
bps
10 Yr
5 Yr
2 Yr
Source: BMO Capital Markets Relative Value
Sector Value: CIBC deposit note spreads in the 5-year part of the
curve are approximately 6 bps back of Royal bank credit and 2 bps
through BMO credit. At these levels we recommend a switch into
BMO credit versus CIBC credit.
Credit Curve: Year to date, average bank 2s-5s and the 5s-10s
curves have steepened 8 bps and 2 bps, respectively, to 20 bps and
33 bps. We prefer the short end of the curve (5-year or less) given
the current uncertainty in the market.
DBRS S&P Moody’s
AA A+ Aa2
Negative Stable Negative
This report was prepared by an analyst(s) employ d as a research analyst(s) under FINRA rules. For disclosure statements, including
Royal Bank (RY-TSX; RY-NYSE) Stock Rating: OutperformIndustry Rating: Market Perform
Member of: Top 15 Large Cap Stock Selections Top 15 Income Stock Selections
May 28, 2010 Research Comment Toronto, Ontario
John Reucassel, CFA BMO Nesbitt Burns Inc. (416) 359-4379 [email protected] Assoc: John Fong, CFA, FSA
Q2/10 Earnings; The Burden of High Expectations Price (27-May) $56.85 52-Week High $62.89 Target Price $63.00 52-Week Low $42.90
ed by BMO Nesbitt Burns Inc., and who is (are) not registerethe Analyst's Certification, please refer to pages 6 to 9.
Event Release of Q2/10 cash EPS of $0.91. Excluding an unfavourable accounting
adjustment and a Visa gain, operating cash EPS were $0.93 versus our estimate
of $1.06 and consensus of $1.10.
2.5
3.0
3.5
4.0
4.5
Royal Bank of Canada (RY)Price: High,Low,Close Earnings/Share
20
30
40
50
60
Impact Negative. Royal reported weaker-than-expected results from some of its core
retail and wealth businesses. Results were partially offset by better-than-
expected capital and credit.
Forecasts We decreased our 2010 and 2011 cash EPS estimates to $4.15 and $4.90 from
$4.35 and $5.15, respectively. The reduced forecasts reflect more modest
expectations from wealth management, narrower projected spreads and lower
corporate contribution, partially offset by lower specific loan loss provisions.
Our quarterly trading revenue forecast of $1 billion is unchanged.
Valuation We decreased our target price to $63 from $67 to reflect our lower earnings
estimates. Our target represents 12.9x 2011E cash EPS.
Recommendation Over the last three quarters, RY’s results have come in below consensus
expectations, which could reflect one of three possibilities: consensus forecasts
overestimate the ultimate earnings power of RY; RY is investing in future
growth initiatives that are dampening current earnings; or some combination of
both. We believe it is some combination of both and the premium valuation
enjoyed by the shares is likely to come under some pressure in the near term.
Nonetheless, we believe that looking through the credit recovery, RY has above-
average growth prospects. RY remains Outperform rated.
0
100
200Volume (mln)
0
100
200
2005 2006 2007 2008 200950
100
150RY Relative to S&P/TSX Comp
Last Data Point: May 26, 2010
50
100
150
(FY-Oct.) 2008A 2009A 2010E 2011E EPS - Cash $3.47 $3.40 $4.15 $4.90P/E 13.7x 11.6x EPS - GAAP $3.38 $2.57 $4.04 $4.79P/E 14.1x 11.9x Cash ROE 18.2% 15.2% 17.6% 18.7% Specific Prov. ($mm)$1,430 $2,785 $2,007 $1,340 Dividend $2.00 $2.00 $2.00 $2.00 Tier One Capital 9.0% 13.0% 13.9% 13.8% Quarterly EPS - Cash Q1 Q2 Q3 Q4 2008A $0.97 $0.72 $0.95 $0.84 2009A $0.81 $0.66 $1.08 $0.85 2010E $1.03a $0.91a $1.08 $1.13 Dividend $2.00 Yield 3.5% Book Value $23.39 Price/Book 2.4x Shares O/S (mm) 1,423.4 Mkt. Cap ($mm) $80,922 Float O/S (mm) 1,423.4 Float Cap ($mm) $80,922 Wkly Vol (000s) 20,912 Wkly $ Vol (mm) $1,121.3 Net Debt ($mm) na Next Rep. Date 26-Aug (E)
Notes: All values in C$; EPS are fully diluted; Cash EPS add back amortization of intangibles throughout Major Shareholders: Widely held First Call Mean Estimates: ROYAL BANK OF CANADA (C$) 2010E: $4.49; 2011E: $5.25
Changes Annual EPS Annual EPS Quarterly EPS Target 2010E $4.35 to $4.15 2010E $4.24 to $4.04 Q3/10E $1.11 to $1.08 $67.00 to $63.00 2011E $5.15 to $4.90 2011E $5.04 to $4.79 Q4/10E $1.15 to $1.13
This report was prepared by an analyst(s) employ arch analyst(s) under FINRA rules. For disclosure statements, including
Royal Bank
May 28, 2010 Research Comment Corporate Debt – Banks George Lazarevski, CFA (416) 359-7488 [email protected] Assoc: Gaurav Dhiman
Q2/10 Earnings: A Weak Quarter Relative to Expectations
ed by BMO Nesbitt Burns Inc., and who is (are) not registered as a resethe Analyst's Certification, please refer to pages 6 to 7.
Event: Royal Bank (RBC) released Q2/10 results.
Impact: Neutral.
Key Points: RBC reported Q2/10 cash earnings of $1.3 billion, or
$0.91 per share, compared to $938 million (excluding the $1 billion
goodwill charge), or $0.66 per share, in the year-ago period.
Excluding certain items, Q2/10 core earnings were $0.94 per share,
which was significantly below the consensus estimate of $1.10.
Overall, it was a relatively weak quarter for RBC. Capital markets
revenues came in lower than expected due to weaker trading
revenues and a 25% decline in corporate and investment banking
revenues. Management indicated that the sovereign debt crisis in
Europe put pressure on volumes in the early part of the quarter. In
addition, Canadian banking earnings came in below our
expectations given margin compression from the narrowing in
Prime-BA spreads. On a positive note, asset quality trends showed
some improvement. Specific loan loss provisions were $477 million
compared to our estimate of $605 million. In addition, capital ratios
improved in the quarter with a Tier 1 ratio of 13.4%.
Credit and Spread Implications
Near Term: Canadian bank credit spreads will likely remain
volatile over the near term given the uncertainty in Europe.
Medium Term: We remain cautious on Canadian bank credit over
the medium term given the lack of clarity of the European sovereign
debt crisis and the potential contagion to other markets.
Recommendation
The sovereign debt crisis in Europe has caused increased volatility
in Canadian bank spreads over the past quarter, as exhibited by the
60% widening in deposit note spreads in the quarter. As a result of
the uncertainty in Europe, we remain cautious on Canadian bank
credit and believe any extension of the confidence problems beyond
Europe would likely put additional pressure on bank credit spreads.
We recommend a market weight position in RBC credit.
Royal Bank of CanadaSubordinated Debt Indicative Spreads
0
50
100
150
200
250
300
350
400
450
500
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
bps
10 Yr
5 Yr
2 Yr
Source: BMO Capital Markets Relative Value
Sector Value: Canadian bank credit spreads have widened over
60% as a result of the sovereign debt crisis in Europe. At current
levels, we recommend an overweight position in BMO credit
given that it trades 8 bps back of Royal Bank credit compared to
flat earlier in the year.
Credit Curve: Year to date, average bank 2s-5s and the 5s-10s
curves have steepened 8 bps and 2 bps, respectively, to 20 bps and
33 bps. We prefer the short end of the curve (5-year or less) given
the current uncertainty in the market.
DBRS S&P Moody’s
AA AA- Aaa
Stable Positive Negative
This report was prepared by an analyst(s) employ d as a research analyst(s) under FINRA rules. For disclosure statements, including
TD Bank (TD-TSX; TD-NYSE) Stock Rating: OutperformIndustry Rating: Market Perform
Member of: Top 15 Large Cap Stock Selections Top 15 Income Stock Selections Top 15 Quantitative Stock Selections
May 28, 2010 Research Comment Toronto, Ontario
John Reucassel, CFA BMO Nesbitt Burns Inc. (416) 359-4379 [email protected] Assoc: John Fong, CFA, FSA
Price (27-May) $73.38 52-Week High $77.37 Target Price $83.00 52-Week Low $51.00 Solid Q2/10 Earnings
ed by BMO Nesbitt Burns Inc., and who is (are) not registerethe Analyst's Certification, please refer to pages 6 to 9.
3.5
4.0
4.5
5.0
5.5
6.0
6.5
Toronto-Dominion Bank (TD)Price: High,Low,Close Earnings/Share
30
40
50
60
70
80
Event TD reported cash operating EPS of $1.36 versus consensus of $1.40. Declining
loan loss provisions helped drive operating EPS growth, offset by a more
modest contribution from TD Securities.
Impact
Neutral.
Forecasts Our 2010E cash EPS are unchanged at $5.80 and we adjusted our 2011E cash
EPS to $6.60 from $6.65 due to more modest spread expectations.
Valuation
Our target price is unchanged at $83, representing 12.6x 2011E cash EPS.
Recommendation Q2/10 results showcased the earnings potential for the Canadian P&C and
wealth management franchises, and provided initial indications of improving
conditions in the U.S. regional bank. While credit trends remain favourable, the
increase in impaired formations in debt securities classified as loans highlights
that there are still credit challenges to overcome. The bank’s Tier 1 capital, at
12% remains healthy, although pro forma the South Financial acquisition Tier 1
could decline to 11.5%. There are tentative signs of increased loan demand in
the U.S. Northeast, which should help TD’s US banking business. Given its
industry average valuation, above-industry-average franchises in Canada and
interesting growth potential in the U.S. through TD Ameritrade and TD USA,
the shares remain Outperform rated.
0
50
100Volume (mln)
0
50
100
2005 2006 2007 2008 200950
100
150TD Relative to S&P/TSX Comp
Last Data Point: May 26, 2010
50
100
150
(FY-Oct.) 2008A 2009A 2010E 2011E EPS - Cash $5.39 $4.19 $5.80 $6.60P/E 12.7x 11.1x EPS - GAAP $5.00 $3.61 $5.24 $6.04P/E 14.0x 12.1x Cash ROE 16.2% 14.2% 14.8% 15.9% Specific Prov. ($mm)$1,063 $2,016 $1,872 $1,210 Dividend $2.36 $2.44 $2.44 $2.44 Tier One Capital 9.8% 11.3% 11.9% 12.4% Quarterly EPS - Cash Q1 Q2 Q3 Q4 2008A $1.42 $1.24 $1.34 $1.38 2009A $0.96 $0.82 $1.16 $1.25 2010E $1.57a $1.44a $1.39 $1.40 Dividend $2.44 Yield 3.3% Book Value $40.35 Price/Book 1.8x Shares O/S (mm) 868.2 Mkt. Cap ($mm) $63,709 Float O/S (mm) 868.2 Float Cap ($mm) $63,709 Wkly Vol (000s) 16,561 Wkly $ Vol (mm) $1,073.5 Net Debt ($mm) na Next Rep. Date 02-Sep (E)
Notes: All values in C$; EPS fd; CEPS add back amort. of intang. & goodwill; 2009 cash EPS has not been restated to reflect adoption of financial instruments admendments. Major Shareholders: Widely held First Call Mean Estimates: TORONTO-DOMINION BANK (C$) 2010E: $5.93; 2011E: $6.79
Changes Annual EPS Annual EPS Quarterly EPS 2011E $6.65 to $6.60 2011E $6.09 to $6.04 Q3/10E $1.41 to $1.39 Q4/10E $1.42 to $1.40
This report was prepared by an analyst(s) employ arch analyst(s) under FINRA rules. For disclosure statements, including
TD Bank
May 28, 2010 Research Comment Corporate Debt – Banks George Lazarevski, CFA (416) 359-7488 [email protected] Assoc: Gaurav Dhiman
Q2/10 Earnings: Positive Momentum on the Asset Quality Front
ed by BMO Nesbitt Burns Inc., and who is (are) not registered as a resethe Analyst's Certification, please refer to pages 6 to 7.
Event: TD Bank released Q2/10 results.
Impact: Neutral.
Key Points: Despite earnings falling short of consensus, we view
this as a solid quarter for TD Bank from a corporate debt
perspective. The Canadian P&C division reported another quarter of
record earnings, the U.S. retail segment exceeded our expectations
due to lower loan loss provisions coupled with improved margins
and asset quality trends showed some improvement in the quarter.
Specific loan loss provisions of $482 million came in below our
expectations of $550 million. The one weak spot in the quarter was
Wholesale, which experienced a quicker moderation in earnings
than we expected. Trading revenues were $402 million, which was
slightly below our expectations of $425 million. The Tier 1 capital
ratio improved in the quarter, up 50 bps to 12.0%.
Credit and Spread Implications
Near Term: We believe Canadian bank credit spreads will remain
volatile over the near term given the continued uncertainty of the
European sovereign debt crisis.
Medium Term: We remain cautious on Canadian bank credit over
the medium term given the lack of clarity of the European sovereign
debt crisis and the potential contagion to other markets.
Recommendation
The sovereign debt crisis in Europe has caused increased volatility
in Canadian bank spreads over the past quarter, as exhibited by the
60% widening in deposit note spreads in the quarter. As a result of
the uncertainty in Europe, we remain cautious on Canadian bank
credit and believe any extension of the confidence problems beyond
Europe would likely put additional pressure on bank credit spreads.
TD Bank remains one of our preferred credits among Canadian
large bank alternatives due to its strong domestic franchise and
robust capital position.
Toronto Dominion Bank Subordinated Debt Indicative Spreads
0
50
100
150
200
250
300
350
400
450
500
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
bps
10 Yr
5 Yr2 Yr
Source: BMO Capital Markets Relative Value
Sector Value: TD Bank trades the tightest among large Canadian
bank alternatives. The current spread differential between TD
credit and BMO credit looks attractive, at 9 bps, compared to
trading in line in the first quarter. We believe the spread widening
in BMO credit is overdone and should outperform relative to other
bank credit.
Credit Curve: YTD, average bank 2s-5s and the 5s-10s curves
have steepened by 8 bps and 2 bps, respectively, to 20 bps and 33
bps. We prefer the short end of the curve (5-year or less) given the
current uncertainty in the market.
DBRS S&P Moody’s
AA AA- Aaa
Stable Stable Negative
This report was prepared by an analyst(s) employed by BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules. For disclosure statements, including the Analyst's Certification, please refer to pages 6 to 7.
Energy - Oil & Gas
Industry Rating: Market Perform
May 28, 2010 Research Comment Calgary, Alberta Randy Ollenberger (403) 515-1502 Mark Leggett, CFA (403) 515-1508
Alberta Royalty Changes: Another Positive Surprise for the Cardium Players
The Government of Alberta finalized royalty curves, which has a minimal
impact. More importantly, several new incentive programs targeting
emerging resources and technologies were also announced, which we expect
will be positively received by industry and the market. Of these programs, we
believe the extension of the 5% initial royalty rate on horizontal oil and
natural gas drilling has the most immediate impact. Other incentives that
were announced included a 5% shale gas royalty rate incentive (over a period
of 36 months with no volume limit) and the adjustment of the Natural Gas
Deep Drilling Program (NGDDP) to include wells with a vertical depth of
2,000 metres (2,500 metres previously).
Summary
The Government of Alberta finalized royalty
curves as part of the follow-up to the Alberta
Competitiveness Review. More importantly,
several new incentive programs targeting
emerging resources and technologies were
also announced, which we expect will be
positively received by industry and the
market.
The extension of the 5% initial royalty rate on
horizontal oil drilling positively impacts our
NAV estimates for the Cardium players,
including Midway, Angle, Vero, Anderson,
PetroBakken and Crew. NuVista also
maintains Cardium acreage. Large Cap
Producers and Integrateds that benefit include
Canadian Natural, Husky, Cenovus and
Talisman.
We believe North American natural gas prices
will remain relatively weak and that the new
royalty incentive programs will likely further
stimulate additional natural gas drilling
activity in Alberta, which could contribute to
the oversupply and weak price environment.
We again expect the impact on equity prices
to be minimal for the natural gas-focused
producers, but positive for Cardium players.
For all new horizontal oil wells spud on or after May 1, 2010, the 5% front
end rate has been extended, depending on the measured depth of the well, to
apply to 50,000–100,000 boe of initial volumes over a time period of 18–48
production months (see Table 1 for details). This announcement positively
impacts our NAV estimates for the Cardium players, including Midway,
Angle, Vero, Anderson, PetroBakken and Crew (see Table 2). NuVista
also maintains Cardium acreage. Other unconventional oil plays that will
benefit include Angle’s Lone Pine oil play, Orleans’ Waskahigan oil play
and, to a lesser extent, Crew’s Princess play given significant freehold land.
On the natural gas side, the extension of the 5% royalty rate benefits lower-
impact plays given that the 0.5 Bcf volume limit was maintained. The shale
gas incentive is positive for Duvernay shale players including Celtic. We
note the shale gas incentive program does not include the Montney.
For the Large Cap Producers and Integrateds, the changes should provide a
modest benefit. In particular, Canadian Natural, Husky and, to a lesser
degree, Cenovus could benefit due to relatively larger proportion of
production and activity related to Alberta oil assets. Talisman could also see
a benefit given its exposure to Cardium oil and deep natural gas drilling.
We believe North American natural gas prices will remain relatively weak and
that the new royalty incentive programs will likely further stimulate additional
natural gas drilling activity in Alberta, which could contribute to the
oversupply and weak price environment. As such, we again expect the impact
on equity prices to be minimal for the natural gas-focused producers, but
positive for Cardium players.
This report was prepared by an analyst(s) employ d as a research analyst(s) under FINRA rules. For disclosure statements, including
Cenovus Energy (CVE-TSX; CVE-NYSE) Stock Rating: OutperformIndustry Rating: Market Perform
May 28, 2010 Research Comment Calgary, Alberta
Randy Ollenberger BMO Nesbitt Burns Inc. (403) 515-1502 [email protected] Assoc: Matthew Brink
Price (27-May) $27.83 52-Week High $32.00 Target Price $32.00 52-Week Low $24.26
Upgraded to Outperform; Highlights From Investor Roadshow
ed by BMO Nesbitt Burns Inc., and who is (are) not registerethe Analyst's Certification, please refer to pages 11 to 14.
1.5
1.6
1.7
1.8
1.9
2.0
2.1
Cenovus Energy Inc. (CVE)Price: High,Low,Close Earnings/Share
24
26
28
30
32
34
Event BMO Capital Markets hosted a series of meetings with investors and company
management, including the company's CEO Brian Ferguson. We came away
from the meetings impressed with the company's opportunity set and the belief
that the depth and breadth of it is not well understood by investors, as it was not
emphasized or exploited under Encana.
Impact
Positive.
Forecasts Our EPS estimate is unchanged at $1.73 in 2010 but increased slightly to $1.82
from $1.79 in 2011. Our estimates are based on production forecasts of 253,300
boe/d in 2010 and rises to 265,200 boe/d in 2011.
Valuation We believe that Cenovus’ shares are attractively valued, offering the
combination of predictable high-margin oil sands growth as well as other
numerous unexploited opportunities on the company's legacy land base,
including Lower Shaunavon, Bakken, Pelican Lake and conventional heavy oil.
At current prices the shares are trading at 7.2x 2010E EV/EBITDA of and a
17% discount to our 2010 net asset value estimate. This is broadly in line with
its peers, despite arguably higher margin growth. Our $32 target price implies a
7.7x 2011E EV/EBITDA and a slight discount to our risked net asset value
estimate of $33.50.
Recommendation We are upgrading Cenovus to Outperform from Market Perform following
recent share price weakness.
0
10
20Volume (mln)
0
10
20
Nov Dec Jan Feb Mar Apr May Jun2009 2010
50
100
150CVE Relative to S&P/TSX Comp
Last Data Point: May 26, 2010
50
100
150
(FY-Dec.) 2008A 2009A 2010E 2011E EPS $2.15 $2.03 $1.73 $1.82P/E 16.1x 15.3x CFPS $4.14 $3.79 $3.67 $3.91P/CFPS 7.6x 7.1x NAV $30.83 $37.28 $33.50 $36.69 EV/EBITDA na 7.0x 7.2x 6.8x ROCE (%) 15% 13% 11% 12% LT Liab. 24% 25% 23% 17% Quarterly EPS Q1 Q2 Q3 Q4 2008A $0.58 $0.96 $0.83 -$0.21 2009A $0.55 $0.68 $0.57 $0.22 2010E $0.47a $0.44 $0.41 $0.42 Dividend $0.80 Yield 2.9% Book Value $13.17 Price/Book 2.1x Shares O/S (mm) 751.7 Mkt. Cap ($mm) $20,920 Float O/S (mm) 751.7 Float Cap ($mm) $20,920 Wkly Vol (000s) 14,748 Wkly $ Vol (mm) $401.2 Net Debt ($mm) $2,777.0 Next Rep. Date Jul (E)
Notes: All values in C$; EPS are diluted based on continuing operations; CFPS is diluted discretionary Major Shareholders: Widely Held First Call Mean Estimates: CENOVUS ENERGY INC (US$) 2010E: $1.56; 2011E: $1.77
Changes Annual EPS Annual CFPS Rating 2011E $1.79 to $1.82 2011E $3.87 to $3.91 Mkt to OP
This report was prepared by an analyst(s) employ d as a research analyst(s) under FINRA rules. For disclosure statements, including
Paramount Resources (POU-TSX) Stock Rating: Market PerformIndustry Rating: Market Perform
May 28, 2010 Research Comment Calgary, Alberta Mark Leggett, CFA BMO Nesbitt Burns Inc. (403) 515-1508 [email protected] Assoc: Jason Chang
Updated Resource Evaluation of Hoole Oil Sands Leases
Price (27-May) $17.47 52-Week High $18.75 Target Price $18.00 52-Week Low $5.73
Paramount Resources (POU)Price: High,Low,Close
0
10
20
30
40
50
0
10
20
30
40
50
ed by BMO Nesbitt Burns Inc., and who is (are) not registerethe Analyst's Certification, please refer to pages 4 to 7.
Event Paramount provided results of an updated resource evaluation on its Hoole oil
sands leases covering 48 sections (100% WI). The property is estimated to
contain roughly 634 MMbbl (best estimate case P50) of contingent bitumen
resources within the Grand Rapids formation, up from the initial evaluation of
458 MMbbl. The third-party evaluator assumes initial production of 25,000 b/d
in 2015 and fully developed production of 70,000 b/d in 2017 under the best
estimate case. Over the past six years, the company has drilled 59 oil sands
evaluation wells. Paramount expects to submit an application for the
commercial development of the Hoole Grand Rapids resource in 2011. We
have updated the contingent resource estimate in our sum-of-parts NAV
analysis. We estimate a value of $495 million (or $6.86 per share unrisked)
based on the updated best estimate contingent resource and a weighted average
transaction metric of $0.78/bbl for undeveloped SAGD projects since 2007. We
have risked this Hoole valuation (25%) in our sum-of-parts NAV, which implies
a risked value of $1.72 per share (up $0.60 from our previous estimate of
$1.11).
Impact
Slightly Positive.
Forecasts Our CFPS estimates of $1.28 in 2010 and $1.25 in 2011 are unchanged. Our
financial estimates are based on production forecasts of 13,667 boe/d in 2010
and 15,820 boe/d in 2011, which are also unchanged.
Valuation
Paramount currently trades at 2011E valuations of 9.7x P/CFPS and 13.8x
EV/EBITDA (excluding equity interests). Our target price is supported by our
updated sum-of-parts analysis of $18.56 (based on flat AECO $5.50/Mcf).
Recommendation
We continue to rate Paramount shares Market Perform.
0
10
20Volume (mln)
0
10
20
2005 2006 2007 2008 20090
200
400POU Relative to S&P/TSX Comp
Last Data Point: May 26, 2010
0
200
400
(FY-Dec.) 2008A 2009A 2010E 2011E CFPS $2.65 $0.90 $1.28 $1.25 P/CFPS 9.5x 9.7x EPS -$1.72 -$1.46 -$1.14 -$1.03 P/E na na CF/boe $35.66 $15.71 $20.65 $17.65 EV/EBITDA 5.9x 26.2x 14.1x 13.8x ROCE -12.0% -11.0% -15.0% -12.0% D/CF 0.4x 1.0x 1.8x 2.6x Quarterly CFPS Q1 Q2 Q3 Q4 2008A $0.36 $0.68 $0.60 $1.01 2009A $0.27 $0.21 $0.15 $0.30 2010E $0.30a $0.29 $0.34 $0.35 Dividend $0.00 Yield 0.0% Book Value $10.54 Price/Book 1.7x Shares O/S (mm) 72.2 Mkt. Cap ($mm) $1,261 Float O/S (mm) 37.5 Float Cap ($mm) $655 Wkly Vol (000s) 510 Wkly $ Vol (mm) $6.8 Net Debt ($mm) $162.8 Next Rep. Date Aug (E)
Notes: All values in C$; EPS (diluted), CFPS (diluted); P/CFPS ex. Paramount's per fd equity interests of $4.84 Major Shareholders: Insiders (>50%) First Call Mean Estimates: PARAMOUNT RESOURCES LTD (C$/CF) 2010E: na; 2011E: na
This report was prepared by an analyst(s) employed by BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules. For disclosure statements, including the Analyst's Certification, please refer to pages 7 to 8.
Energy - Royalty Trusts
Industry Rating: Market Perform
May 27, 2010 Research Comment Calgary, Alberta Gordon Tait, CFA (403) 515-1501 [email protected] Assoc : Chris Bolton, CFA/Peter Kranz, P. Eng.
Alberta Royalty Curves Finalized; Natural Gas Deep Drilling Program Expanded
The Government of Alberta finalized the new royalty curves for conventional
oil and gas production in the province. Changes to the royalty rates were
originally announced on March 11, 2010.
Summary
The Government of Alberta finalized the new
royalty curves for conventional oil and gas
production in the province. Changes to the
royalty rates were originally announced on
March 11, 2010.
The minimum required Total Vertical Depth
(TVD) to qualify for the Natural Gas Deep
Drilling Program was reduced to 2,000m from
2,500m. The Natural Gas Deep Drilling
Program will now pay $625 per metre for
each metre of a well drilled over 2,000m
TVD. Within our coverage universe, we
believe Peyto Energy Trust (Outperform)
has the greatest exposure to deep natural gas
drilling in Alberta.
Overall, the changes were largely as expected.
Consequently, we are leaving estimates,
ratings and target prices unchanged. We have
Outperform ratings on ARC, Baytex,
Bonavista, NAL Oil & Gas, Peyto,
Pengrowth and Vermilion. We are currently
restricted on Crescent Point.
The Government also unveiled the Emerging Resources and Technologies
Initiative (ERTI) to “accelerate new technologies to encourage development
of Alberta’s vast unconventional and deep resource pools”. Most notably, the
minimum required Total Vertical Depth (TVD) to qualify for the Natural Gas
Deep Drilling Program was reduced to 2,000m from 2,500m. The Natural Gas
Deep Drilling Program will now pay $625 per metre for each metre of a well
drilled over 2,000m TVD. For example, the majority of Cardium natural gas
wells in Alberta average TVD of approximately 2,200m. Under the changes,
the drilling program will give producers approximately $125,000 for each new
Cardium well drilled (200 metres over 2,000 metres x $625 per metre). Within
our coverage universe, we believe Peyto Energy Trust (Outperform) has the
greatest exposure to deep natural gas drilling in Alberta.
The ERTI also contains incentives designed to encourage horizontal oil and
natural gas drilling, coalbed methane development and shale gas development.
Most of these initiatives were previously announced, but in some cases the
applicable time period has been extended, which we view as slightly positive.
For more details on the changes, please see the comment published
concurrently by BMO Capital Markets Oil & Gas Producers research team.
Overall, the changes were largely as expected. Consequently, our estimates,
ratings and target prices remain unchanged. We have Outperform ratings on
ARC, Baytex, Bonavista, NAL Oil & Gas, Peyto, Pengrowth and
Vermilion. We are currently restricted on Crescent Point.
This report was prepared in part by analysts emplo bitt Burns Inc., and a UK affiliate, BMO Capital Markets Ltd., authorised and regulated by the Financial Ser ho are not registered as research analysts under FINRA rules. For disclosure statements, including the Analys to 28
Mining & Commodity Roundup
May 27, 2010 Research Comment Bart Melek BMO Nesbitt Burns Inc. (Canada) (416) 359-4906 [email protected] Assoc: Lucas Litwiniuk, CFA
Biggest Commodity Movers
yed by a Canadian affiliavices Authority in the UK
t's Certification, please refer
te, BMO Nes, and wto pages 27
Biggest Stock Movers
Source: Bloomberg, BMO Capital Markets
Meredith Bandy, BMO Capital Markets Corp. (U.S.) (303) 436-1113 Andrew Breichmanas, BMO Nesbitt Burns Inc. (Canada) (416) 359-8387 David Cotterell, BMO Capital Markets Ltd. (U.K.) 44 (0)20 7246 5430 David Haughton, BMO Nesbitt Burns Inc. (Canada) (416) 359-4052 John Hayes, BMO Nesbitt Burns Inc. (Canada) (416) 359-6189
Andrew Kaip, BMO Nesbitt Burns Inc. (Canada) (416) 359-7224 David Radclyffe, BMO Capital Markets Ltd. (U.K.) 44 (0)20 7246 5433 Tony Robson, BMO Nesbitt Burns Inc. (Canada) (416) 359-4034 Edward Sterck, BMO Capital Markets Ltd. (U.K.)(44) (0)20 7246 5421 Data/Project Management: Simona Cheoreanu
The Mining &
Commodity Roundup
highlights the biggest
commodity and mining
stock movers
throughout the most
recent week and
month, and contains
key data and charts. It
also lists minor
changes to mining
equity forecasts and
valuations that may
have resulted due to
changes in key
assumptions.
Featured Report
vs
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Steel Billet
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Thermal Coal
Aluminum
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May 26
Copper
May 19 vs
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Lead
Zinc
Nickel
Palladium
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Uranium
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Thermal
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Baltic Dry
May 26 Apr 25 Top Picks
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Silver
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Gold
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od
itie
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Metals & Mining
Company Ticke r Exposure
Anglo American AAL Diversif ied
Consolidated Thompson CLM Iron Ore
Equinox EQN Copper
Ivanhoe Mines IVN Copper
South Gobi Energy SGQ Coal
Pre cious Me tals
Company Ticke r Exposure
Alamos Gold AGI Gold
Fresnillo FRES Silver
New mont Mining NEM Gold
Osisko Mining OSK Gold
Randgold Resources GOLD Gold
vs
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RIC
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FNX
CG
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RSG
GEMD
BIM
PLZL
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May 19May 26 vs
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Changes Tables
Please see pages 16-26
Please see pages 12-15 for analyst coverage.
This report was prepared by an analyst(s) employ d as a research analyst(s) under FINRA rules. For disclosure statements, including
Legend International Holdings (LGDI-NASDAQB) Stock Rating: Outperform(S)Industry Rating: Outperform
May 27, 2010 Research Comment Toronto, Ontario
Joel Jackson, P.Eng., CFA BMO Nesbitt Burns Inc. (416) 359-4250 [email protected]
Price (26-May) $0.99 52-Week High $1.60 Target Price na 52-Week Low $0.57
Still Waiting for Wengfu
ed by BMO Nesbitt Burns Inc., and who is (are) not registerethe Analyst's Certification, please refer to pages 4 to 6.
-0.20
-0.15
-0.10
-0.05
Legend Int'l Holdings Inc. (LGDI)Price: High,Low,Close Earnings/Share
0
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Event We have revised our model following recent announcements from LGDI, and
LGDI’s presentation at the BMO CM Ag, Protein and Fertilizer conference.
Impact
Neutral.
Forecasts China’s Wengfu is completing a feasibility study focusing on the viability of
phosphoric acid manufacture at LGDI’s Queensland phosphate development
using washed phosphate rock from LGDI’s Paradise North asset. With results
from the study due in late June, the scenario is unconstrained, so we maintain a
phosphate rock-only forecast for now (sales ramp to 4 million tonnes by 2020).
Valuation Factoring in current FX rates and revised cost estimates, our 10% rock-only
NAVPS is $1.25 at $130/t fob long-term rock prices (high end of current spot
prices). A Wengfu phosphoric acid scenario could lead to a higher valuation
for LGDI, depending on a future deal, which, by no means, is certain.
Recommendation We maintain our Outperform (Speculative) rating. LGDI has a long-term
potential to become a phosphoric acid or phosphate fertilizer producer in
conjunction with Wengfu and/or a de facto integrated phosphate rock source
for India’s IFFCO. Execution as well as commitment from one or both of these
parties are key. The Queensland phosphate project schedule is expected to be
based on Wengfu’s feasibility study recommendation, and Wengfu’s support
may be imperative for any project scenario to materialize.
0
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40Volume (mln)
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40
2005 2006 2007 2008 20090
2000
4000LGDI Relative to S&P 500
Last Data Point: May 26, 2010
0
2000
4000
(FY-Dec.) 2008A 2009A 2010E 2011E EPS -$0.09 -$0.17 -$0.13 -$0.07P/E na na CFPS -$0.08 -$0.13 -$0.12 -$0.03P/CFPS na na Rev. ($mm) A$0 A$0 A$0 A$60 EBITDA ($mm) -A$23 -A$40 -A$33 -A$13 Quarterly EPS Q1 Q2 Q3 Q4 2008A -$0.02 -$0.02 -$0.02 -$0.03 2009A -$0.03 -$0.03 -$0.05 -$0.05 2010E -$0.05a -$0.04 -$0.03 -$0.02 Dividend $0.00 Yield 0.0% Book Value $0.38 Price/Book 2.6x Shares O/S (mm) 226.3 Mkt. Cap (US$mm) $224 Float O/S (mm) 130.0 Float Cap (US$mm) $129 Wkly Vol (000s) 1,706 Wkly $ Vol (USmm) $1.5 Net Debt ($mm) -$57.8 Next Rep. Date Aug (E)
Notes: Share price, target price and market capitalization in US$, all other values in A$; (S) in rating denotes Speculative Major Shareholders: Renika Pty Ltd. (22%), IFFCO (15%), Atticus Capital (14%), Soros Fund Management (10%), Chabad House (9%)First Call Mean Estimates: Not Available
Changes Annual EPS Annual CFPS 2011E -A$0.11 to -A$0.07 2011E -A$0.07 to -A$0.03
This report was prepared by an analyst(s) employ d as a research analyst(s) under FINRA rules. For disclosure statements, including
Potash One (KCL-TSX) Stock Rating: Outperform(S)Industry Rating: Outperform
May 27, 2010 Research Comment Toronto, Ontario
Joel Jackson, P.Eng., CFA BMO Nesbitt Burns Inc. (416) 359-4250 [email protected]
Price (27-May) $2.27 52-Week High $3.87 Target Price $3.50 52-Week Low $2.00
Feasibility Capex/Tonne Rising But All-Inclusive
ed by BMO Nesbitt Burns Inc., and who is (are) not registerethe Analyst's Certification, please refer to pages 6 to 8.
Event KCL presented data points last week from its ongoing feasibility study. The
plan was cited as production of 2 million mt at Legacy ramping to 2.85 million
mt in 3–5 years from start-up. Capex was cited as US$2.2–2.4B (US$770–
840/t) versus the pre-feasibility estimate of US$1.9B for 2.5 million mt
(US$760/t) with increases due to FX rates, external infrastructure
considerations (primarily port operations), and greater scale. We understand
prospective partners have little interest in a smaller initial mine (e.g. 1.43
million mt), which could expand later and require lower initial capital, as our
prior scenario had assumed.
-0.25
-0.20
-0.15
-0.10
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0.00
Potash One Inc. (KCL)Price: High,Low,Close Earnings/Share
0
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6
Impact Slightly Negative. Although estimates are still being finalized, capex rises, but
now includes needed infrastructure outside of the mine, and greater scale.
Forecasts
We assume KCL’s targeted H2/13 commissioning for a 2.85 million mt mine.
Valuation We estimate a 10% NAV of $1.6B and a 10% NAVPS of $3.91 at US$450/t
potash (fob Vancouver) assuming 75% foreign debt financing. Despite greater
capex, our NAV rises 13% after assuming a larger initial mine, but our NAVPS
falls 14% due to greater upfront financing needs and associated dilution.
Recommendation With feasibility relatively imminent, KCL is the most advanced Saskatchewan
potash developer with all-inclusive feasibility capex/tonne estimates tracking
lower than some incumbent producer brownfield expansions. Procurement of
considerable project financing in 2010 remains KCL’s key catalyst. We
maintain our Outperform (S) rating but lower our target price to $3.50 from
$4.00.
0
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2005 2006 2007 2008 20090
2000
4000KCL Relative to S&P/TSX Comp
Last Data Point: May 26, 2010
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4000
Dividend $0.00 Yield 0.0% Book Value $1.07 Price/Book 2.1x Shares O/S (mm) 80.8 Mkt. Cap ($mm) $183 Float O/S (mm) 79.6 Float Cap ($mm) $181 Wkly Vol (000s) 4,471 Wkly $ Vol (mm) $12.9 Net Debt ($mm) -$35.3 Next Rep. Date Jun (E)
Notes: All values in C$; (S) in rating denotes Speculative Major Shareholders: Widely held First Call Mean Estimates: POTASH ONE INC (C$) 2010E: -$0.09; 2011E: -$0.01
Changes Target $4.00 to $3.50
Page 1 May 28, 2010
Food
Industry Rating: Outperform
May 28, 2010
Kenneth B. Zaslow, CFABMO Capital Markets Corp.
Key Takeaways and Stock Implications from Our Barbecue Conference Summary
We compiled a list of the key highlights from our
Barbecue conference last week.
We gain greater confidence in our favorable
outlook for TSN and SAFM (and have become
more positive on SFD) as 1) limited global
protein supplies should support higher protein
prices through at least 2011, 2) lower feed costs
should contribute to earnings momentum, 3)
greater financial flexibility has enabled protein
companies to enhance operational efficiencies/
product mix and improve their balance sheets,
and 4) initial signs indicate that foodservice
trends have begun to improve – albeit slowly.
Agribusiness outlook appears in transition.
Despite many unresolved issues, there is a
strong case to be made that many issues can
fall in place in 2011 as 1) farmers will release
their crops (albeit late); 2) companies will deploy
cash toward growth-enhancing acquisitions; 3)
US ethanol and global biodiesel policy may be
favorable; 4) China demand for US SBO may
cushion crush margins, while China demand for
soybeans may contribute to a recovery after the
fall; 5) albeit low/medium probability, China corn
demand may create dislocation opportunities; 6)
the rebound in protein margins should
contribute to SBM demand; and 7) starch
demand should continue to recovery, while
HFCS pricing outlook – albeit still early –
appears promising.
Stock implications from our Barbecue Conference:
TSN: Our above-consensus outlook appears conservative, as 1) protein
margins continue to improve, 2) TSN has allocated capital to structurally
improve its chicken margins, and 3) we would not be surprised if TSN
capitalized on recent volatility to opportunistically repurchase more debt.
SAFM: We remain confident in our $6.00+ EPS in FY2011 reflecting tight
protein supplies, volume growth, and operational improvements.
PPC: While PPC continues to face company-specific challenges from its
past, the strength in chicken fundamentals likely will be realized in FY2011.
SFD: SFD’s management continues to take the appropriate actions of
shifting toward packaged meats, restructuring its hog division, and
deleveraging its balance sheet. Despite “protective hedges,” tight global
supplies and moderating feed costs should create strong hog margins.
MFI: Despite our comfort with MFI’s earnings power of $1.10+, the rapid
and significant increase in pork prices likely creates risk to MFI’s near-term
earnings and may delay its ability to deliver its earnings power.
BG: Despite the unpredictability of quarterly earnings, we believe BG’s
guidance is achievable (even without the deployment of its $2.5 billion of cash),
reflecting ongoing improvement in agribusiness and solid sugar profits.
ADM: Although F4Q10 is a transitional quarter, we believe ADM’s flexible
value-chain model and an improvement in fundamentals likely will enable
ADM to generate more than $2.80 in FY2011 for four consecutive years.
CPO: CPO’s fundamentals continue to improve, while management outlined
a credible growth strategy that appropriately incorporates acquisitions, in our
view.
VT: We continue to expect FY2010 to be a challenging year, while FY2011
will be the first year in which VT’s true earnings power will emerge.
Refer to pages 19 to 20 for Important Disclosures, including Analyst's Certification.
Page 1 May 27, 2010
Enterprise Hardware & Imaging
Industry Rating: Market Perform
May 27, 2010
Keith BachmanBMO Capital Markets Corp.
Jung Pak Corey Meehan213-228-2546 [email protected] [email protected]
Summary
We met with various industry leaders this week
and offer a few comments.
First, we believe XRTX is well positioned with both
storage systems and drive customers. We believe
NTAP’s 50% product growth bodes well for
XRTX, and other storage customers such as Data
Domain, EqualLogic and XIV are tracking well.
In addition, we believe drive vendors have not
changed order patterns despite some softness in
HDDs/PCs. We remain comfortable with our $300
million projection for FY2010. Further, we believe
the potential for new customer wins with various
Japanese drive and component vendors place
material upside tension to our FY2011 EPS
estimates. We reiterate our OUTPERFORM rating
and $24 target price on XRTX.
Second, we look for a potential recovery in
MARKET PERFORM-rated BRCD. We believe
inventory levels are appropriate for both
the Ethernet and SAN businesses. In addition, we
believe new hires in Ethernet could contribute
modestly to the October quarter. While remain
neutral, if BRCD is able to just meet consensus
revenue estimates for two quarters in row, we
believe the stock would benefit. We remain
modestly below consensus revenue estimates for
the October quarter.
In the body of this note, we also offer comments
on OUTPERFORM-rated HPQ, as well as drives
and HBAs, which we wrote on earlier this week.
Notes from the Road – Bus Tour Recap
We met with various industry leaders and offer a few comments.
1. Xyratex – Positive Fundamentals; Attractive Valuation
We believe XRTX is well positioned, and we reiterate our OUTPERFORM
rating and $24 target price.
Storage remains strong. We believe storage customers are all
tracking well. NTAP’s 50% product growth for the April quarter bodes
well for XRTX, in our view. Further, we believe all of Data Domain,
EqualLogic and IBM XIV are also tracking well, so we think our
estimate for NSS growth of close to 60% for this year is reasonable.
NTAP consistent. NTAP’s storage product split between JBL and
XRTX runs through 2011, with XRTX retaining 75% of revenues (or
more accurately COGS). Because of some product launches, we believe
XRTX probably has close to 80% of NTAP’s revenues at present, and
this amount could decline to 75% in FY2011. NTAP’s positive revenue
variance more than offsets any decline in percent distribution from
NTAP, in our view
Some risks with DDUP. If there are any customer risks, we would
suggest that Data Domain’s business could be taken away from XRTX
over the next three years. However, we believe there is a new program
ramping with IBM that is at least as large as the Data Domain business.
Hence, we believe that this risk is manageable.
Refer to pages 7 to 8 for Important Disclosures, including Analyst's Certification.
This report was prepared by an analyst(s) employ d as a research analyst(s) under FINRA rules. For disclosure statements, including
Zarlink Semiconductor (ZL-TSX) Stock Rating: OutperformIndustry Rating: Market Perform
May 27, 2010 Research Comment Toronto, Ontario
Brian Piccioni, CFA BMO Nesbitt Burns Inc. (416) 359-5761 [email protected] Assoc: Rami Nasser
Price (27-May) $1.57 52-Week High $1.98 Target Price $2.50 52-Week Low $0.47 Q4/10 Revenues Above Forecast and Consensus
ed by BMO Nesbitt Burns Inc., and who is (are) not registerethe Analyst's Certification, please refer to pages 6 to 8.
-0.2
-0.1
0.0
0.1
0.2
Zarlink Semiconductor (ZL)Price: High,Low,Close Earnings/Share(US$)
Event Zarlink reported Q4/10 (Mar) revenue of $58.5 million, up 14% y/y and 8%
sequentially, and above our estimate of $57.0 million and the First Call Mean of
$57.1 million. We estimate Q4/10 operating EPS at $0.05 or $6.5 million
(GAAP of $0.05), vs. $0.02 last year, our forecast of $0.05 and the First Call
mean of $0.04. 0
1
2
3
Impact
Positive.
Forecasts We are revising our Q1/11 revenue forecast from $56.1 million to $57.5 million.
Our operating EPS forecast declines from $0.06 ($0.05 GAAP) to $0.05 ($0.09
GAAP). Despite the elimination of the OPG business, our 2011 revenue is
substantially unchanged at $237.4 million and our operating EPS forecast
remains $0.25.
Valuation Despite a sharp, and continuing, run up in the stock price over the past year,
Zarlink is trading at 6.3x our next four quarters Operating EPS forecast.
EV/EBITDA is a modest 2.1x on a forecast basis. A target price of $2.50, or 10x
next four-quarter operating EPS of $0.25, seems conservative.
Recommendation Management continues to make headway in this turnaround story. The only
negative we can cite is lower-than-expected Q1/11 gross margin guidance,
which we consider to be a minor point given the valuation and management’s
comments regarding their expectation of a recovery in gross margin through in
2011. We retain our Outperform rating and $2.50 target price.
0
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2005 2006 2007 2008 20090
100
200ZL Relative to S&P/TSX Comp
Last Data Point: May 26, 2010
0
100
200
(FY-Mar.) 2009A 2010A 2011E 2012E EPS $0.12 $0.20 $0.25 $0.34P/E 6.1x 4.5x CFPS $0.12 $0.29 $0.27 $0.34P/CFPS 5.7x 4.5x Rev. ($mm) $227 $220 $237 $292 Gross Margin 50% 53% 52% 53% R&D % of Sales 19% 20% 19% 19% EBT Margin 8% 12% 14% 15% Quarterly EPS Q1 Q2 Q3 Q4 2009A $0.03 $0.04 $0.04 $0.02 2010A $0.06 $0.05 $0.04 $0.05 2011E $0.05 $0.06 $0.07 $0.07 Dividend $0.00 Yield 0.0% Book Value $0.59 Price/Book 2.6x Shares O/S (mm) 121.5 Mkt. Cap ($mm) $191 Float O/S (mm) 118.7 Float Cap ($mm) $186 Wkly Vol (000s) 1,401 Wkly $ Vol (mm) $1.7 Net Debt ($mm) -$8.4 Next Rep. Date July (E)
Notes: Share price, target price and capitalization in C$, all other values in US$ Major Shareholders: Stonehill Capital (9.0%), T. Rowe Price (8.9%) First Call Mean Estimates: ZARLINK SEMICONDUCTOR INC (US$) 2010E: $0.07; 2011E: $0.18; 2012E: $0.25
Changes Annual EPS Annual CFPS Quarterly EPS 2012E $0.31 to $0.34 2011E $0.28 to $0.27 Q1/11E $0.06 to $0.05 2012E $0.33 to $0.34 Q2/11E $0.07 to $0.06 Q3/11E $0.06 to $0.07 Q4/11E $0.06 to $0.07
Please r cluding the Analyst's Certification.
Theratechnologies (TH-TSX) Stock Rating: Outperform(S)I ndustry Rating: Market Perform
May 27, 2010
Biotechnology
Jason Zhang, Ph.D.BMO Capital Markets Corp.
Alex Arfaei212-885-4033
After Panel, We Expect FDA Approval of Egrifa Securities Info Price (27-May) $2.90 Target Price $852-Wk High/Low $6/$2 Dividend --Mkt Cap (mm) $175 Yield --Shs O/S (mm, BASIC) 60.5 Float O/S (mm) 59.7Options O/S (mm) na ADVol (30-day, 000s) 224
Price Performance
Event Yesterday, FDA’s advisory panel voted unanimously (16 Yes, 0 No, 0
Abstain) that the overall risk-benefit assessment of Egrifa (tesamorelin)
supports its approval for the treatment of excess abdominal fat in HIV-
infected patients with lipodystrophy.
0
100
200
300
400
500
600
THERATECHNOLOGIES INC (TH)Price: High,Low,Close(US$) Relative to S& P 500
0
2
4
6
8
10
12
14
Analysis Although we expected a positive vote, we did not expect that it would beunanimous. The panel agreed that the Phase III trials clearly met the primaryendpoint (decreasing Visceral Adipose Tissue or VAT) for the proposed indication and that was the primary reason for the unanimous positive vote.On the safety side, as we expected, the panel mostly downplayed the risk ofdiabetes as small and manageable, but certainly worth studying in follow-up trials/patient registry. Some even argued against excluding diabetes patientsin the final label because they believe physicians could manage the risk. All panel members were understandably skeptical about the relationship betweenVAT and cardiovascular (CV) benefit and asked for more data to examine this relationship. Interestingly, most of panel acknowledged thatlipohypertrophy is a serious problem from the patients’ perspective (thanks in part to patient testimonials) and that the magnitude of the benefit mayhave not been adequately captured in the trials. With a unanimous vote, theprobability of FDA approval of Egrifa is now significantly higher, pendingnegotiations on final label, risk management, and post marketingcommitments between the company and the FDA.
0
10
20
0
10
20
2005 2006 2007 2008 2009 2010
Volume (mln)
Last Data Point : May 26, 2010
Valuation/Financial Data
(FY-Nov.) 2008A 2009A 2010E 2011E
EPS GAAP -$0.85 -$0.25 $0.21 $0.11 P/E 13.8x 26.4x First Call Cons. $0.02 $0.23
FCF na $0.10 $0.03 -$0.05 P/FCF 96.7x nm EBITDA ($mm) na -$12 $15 $9 EV/EBITDA 7.0x 11.7x Rev. ($mm) na $20 $39 $36 EV/Rev 2.7x 2.9x
Quarterly EPS 1Q 2Q 3Q 4Q
2009A -$0.18 -$0.09 $0.10 -$0.08 2010E -$0.07A -$0.07 $0.37 -$0.02
Balance Sheet Data (02/26/10) Net Debt ($mm) -$70 TotalDebt/EBITDA nm Total Debt ($mm) $0 EBITDA/IntExp na Net Debt/Cap. nm Price/Book 4.5x Notes: All values in US$.
Source: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
Forecasts We expect the FDA to approve Egrifa either on July 27, 2010, or with a few months delay pending upcoming negotiations with the company.
Valuation We value TH shares at $8/share using our portfolio valuation model.
Recommendation We maintain our OUTPERFORM(S) rating on TH shares.
efer to pages 8 to 10 for Important Disclosures, in
Market Elements May 27, 2010 Research Comment Quantitative/Technical Research Mark Steele (416) 359-4641 [email protected] Assoc: Tiberiu Stoichita/Rahul Muralidhar
Equity markets rebounded en masse; every Global, U.S. and European economic sector rose at least 1%.
Flight to quality bonds sold off; Italy (a non-safe haven), part of the PIIGS, was the key mover to the downside; Western European sovereign and European financial default risk measures churned.
Commodity currencies led a broad-based rebound against the dollar and yen; yen carry trade implied volatility fell to 20%, off of the peak of 25% five sessions ago.
Commodities rose across the board; crude oil has had the largest two-day rebound (8.4%) since the December 2008 bottom.
Levels* Currencies (USD per) Commodities Government 10- Yr Benchmark Equity Indices & Sentiment
Symbol H/L Level %Chg Symbol H/L Level %Chg Symbol H/L Level Chg Symbol H/L Level %ChgDXY 86.29 -1.0% 0.17
0.12 0.06 0.05
-1.2% 0.070.08
0.03
0.010.06
0.060.02
0.000.04
DJ UBS 126.65 1.9% U.S. 3.36 S&P 1200 1,219 3.4%EUR 1.2363 1.5% WTI Oil 74.85 4.7% Canada 3.38 S&P 500 1,103 3.3%CHF 0.8688 0.8% NMX Gas 4.32 4.0% Germany 2.70 S&P/TSX 11,749 1.8%GBP 1.4578 1.3% Gold 1,212.5 0.1% France 2.96 Euro STOXX 2,619 3.5%JPYx10 0.1098 Silver 18.52 2.5% Switzerland 1.56 FTSE 100 5,195 3.1%CAD 0.9539 2.2% Platinum 1,562.5 2.8% Italy 4.10 Hang Seng 19,431 1.2%AUD 0.8514 3.6% Palladium 463.5 5.6% Spain 4.23 Topix 870 1.3%NZD 0.6837 3.1% CMX Cu 316.35 3.0% Greece 7.70 S&P/ASX 4,379 1.7%BRL 0.5510 3.0% LME Al 3m 0.94 2.5% U.K. 3.61 Shang/Shen 2,860 1.6%MXNx10 0.7804 2.3% LME Ni 3m 9.89 3.2% Australia 5.39 Sensex30 16,666 1.7%ZAR 0.1322 2.7% LME Zn 3m 0.88 2.6% Hong Kong 2.42 CDX IG 5Yr 119.19 -5.8%KRWx10 0.8271 2.6% Lumber 228.50 1.6% India 7.49 TRIN 0.33 -75%SGD 0.7139 0.7% Corn 373.25 0.5% Japan 1.26 VIX 29.68 -15.2%
Moves Currencies (spot) Commodities Government 10- Yr Benchmarks Equity Indices
India
Greece
Hong Kong
Spain
Japan
France
U.K.
Germany
Australia
Sw itzerland
Italy
Canada
U.S.
0.0% 2.0% 4.0% 6.0%
Gold
Corn
Lumber
DJ UBS
Silver
LME Al 3m
LME Zn 3m
Platinum
CMX Cu
LME Ni 3m
NMX Gas
WTI Oil
Palladium
This report was prepared in part by an analyst(s) employed by BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules. For disclosure statements, including the Analyst's Certification, please refer to pages 9 to 10.
2.0% 0.0% 2.0% 4.0%
JPY
SGD
CHF
GBP
EUR
CAD
MXN
KRW
ZAR
BRL
NZD
AUD
0.0% 1.0% 2.0% 3.0% 4.0%
Hang Seng
Topix
Shang/Shen
S&P/ASX
Sensex30
S&P/TSX
FTSE 100
S&P 500
S&P 1200
Euro STOXX
0.000.050.100.150.20
Sectors S&P Global 1200 S&P Europe 350 S&P 500 S&P/TSX Composite
0.0% 1.0% 2.0% 3.0% 4.0% 5.0%
Hlth Care
Cons Stap
Utilities
Telecom
Cons Disc
Info Tech
Industrials
Financials
Materials
Energy
0.0% 1.0% 2.0% 3.0% 4.0% 5.0%
Hlth Care
Cons Stap
Utilities
Telecom
Industrials
Cons Disc
Info Tech
Materials
Energy
Financials
0.0% 1.0% 2.0% 3.0% 4.0%
Info Tech
Hlth Care
Cons Stap
Telecom
Cons Disc
Utilities
Industrials
Materials
Energy
Financials
0.0% 1.0% 2.0% 3.0% 4.0%
Financials
Hlth Care
Industrials
Cons Disc
Cons Stap
Telecom
Utilities
Info Tech
Materials
Energy
Source for all data and graphics in this publication: BMO Capital Markets, Bloomberg, Thomson * H/L = at a new closing 52- wk High/Low; / = within 10% of the 52- week High/Low; Colour codes are inverted for bond and sentiment indications
Relative Strength Filter May 28, 2010 Research Comment Quantitative/Technical Research
Mark Steele (416) 359-4641 [email protected] Assoc: Tiberiu Stoichita/Rahul Muralidhar
Asia Credit Watch
Close attention is to be paid to China and Asia.
o Currency.
o Default risk.
o Fit to euro woe.
This month, a basket of Asian sovereign default risk started trading: iTraxx SovX Asia Pacific.
o Our stripped down and more focused version is an easier to remember “AsiaDoom.”
Figure 1: Asia Credit Watch at 6:50 a.m. This Morning
Source: BMO Capital Markets, Bloomberg, Thomson, Markit
This report was prepared in part by an analyst(s) employed by BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules. For disclosure statements, including the Analyst's Certification, please refer to pages 2 to 3.
Please refer to page 6 for Disclosure Statements.
Economic Research
May 28, 2010 Research Comment Dr. Sherry Cooper (800) 613-0205 Douglas Porter Benjamin Reitzes Robert Kavcic \
A.M. Notes
Dr. Sherry Cooper, Chief Economist [email protected]
416-359-4112
UNITED STATES – Robert Kavcic
Overnight action… U.S. equity futures point to a modestly higher open after yesterday’s blistering rally that saw the S&P 500 gain 3.3%. Volatility has returned in a big way with the VIX hitting its highest level since the March-2009 bottom in recent days, leaving the S&P 500 down 7% with one more trading day left in the month—this year, selling in May was indeed the right play. Despite yesterday’s strength, both the S&P 500 and the Dow remain stuck just below their 200-day moving averages, so follow through today and into next week will be important from a technical perspective. Meantime, commodity prices are holding firm with oil sitting above $75 and the euro continues to rebound off its Wednesday low, helping the overall risk appetite. Today’s data… Personal income and spending (8:30 am) likely rose 0.4% and 0.2%, respectively, in April. Income remains 1% below pre-recession levels, while spending has more than recouped its decline. As a result, the savings rate has fallen from a peak of 6.4% in May-2009 to 2.7% in March, but likely ticked up to about 3% in April. Core PCE prices likely inched up 0.1% in the in the month, which would pull the annual rate down to 1.1%, the slowest pace since 1963—more reason for inflation concerns to stay on the back burner. Later in the morning, we’ll get the Chicago PMI (9:45 am), which likely slipped to 62 in May from 63.8 in the prior month. Also, the final revision of the University of Michigan Consumer Sentiment Index (10:00 am) should come in at 73 for May, down slightly from the preliminary reading, but still up form last month’s 72.2 level and comfortably above the low of 65.7 set in August-2009. From the headlines… Debt Worries Stall Benefits Bill… “Sprawling legislation that would extend jobless benefits, revive an array of business tax cuts and impose a new levy on hedge-fund executives faltered in the House on Thursday after fiscally conservative Democrats voiced concern the bill would dig the nation deeper into debt.” Wall Street Journal, (Link to Article) Busy Hurricane Season Seen for the Atlantic… “The coming Atlantic hurricane season could be one of the busiest on record, with the possibility of the next six months bringing nearly as many hurricanes as in 2005, when Hurricane Katrina pummeled the Gulf coast, federal forecasters said Thursday.” Wall Street Journal, (Link to Article)
BMO Capital Markets Gameloft
Page 1 April 23, 2010
Important Disclosures Analyst's Certification As to each company covered in this report, the analyst hereby certifies that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients. Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Ltd. are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Company Specific Disclosure For Important Disclosures on the stocks discussed in this report, please go http://researchglobal.bmocapitalmarkets.com/Company_Disclosure_ Public.asp.
Distribution of Ratings (Mar. 31, 2010) Rating
Category
BMO Rating BMOCM US
Universe* BMOCM USIB Clients**
BMOCM USIB Clients***
BMOCM Universe****
BMOCM IB Clients*****
Starmine Universe
Buy Outperform 32.9% 13.1% 36.4% 39.4% 47.9% 53% Hold Market Perform 63.2% 11.9% 63.6% 55.3% 48.5% 41% Sell Underperform 3.9% 0% 0% 5.2% 3.6% 6%
* Reflects rating distribution of all companies covered by BMO Capital Markets Corp. equity research analysts. ** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services as
percentage within ratings category. *** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking
services as percentage of Investment Banking clients. **** Reflects rating distribution of all companies covered by BMO Capital Markets equity research analysts. ***** Reflects rating distribution of all companies from which BMO Capital Markets has received compensation for Investment Banking services as
percentage of Investment Banking clients. Ratings and Sector Key We use the following ratings system definitions: OP = Outperform - Forecast to outperform the market; Mkt = Market Perform - Forecast to perform roughly in line with the market; Und = Underperform - Forecast to underperform the market; (S) = speculative investment; NR = No rating at this time; R = Restricted – Dissemination of research is currently restricted. Market performance is measured by a benchmark index such as the S&P/TSX Composite Index, S&P 500, Nasdaq Composite, as appropriate for each company. BMO Capital Markets eight Top 15 lists guide investors to our best ideas according to different objectives (Canadian large, small, growth, value, income, quantitative; and US large, US small) have replaced the Top Pick rating. Other Important Disclosures For Other Important Disclosures on the stocks discussed in this report, please go to http://researchglobal.bmocapitalmarkets.com/Company_Disclosure_ Public.asp or write to Editorial Department, BMO Capital Markets, 3 Times Square, New York, NY 10036 or Editorial Department, BMO Capital Markets, 1 First Canadian Place, Toronto, Ontario, M5X 1H3. Prior BMO Capital Markets Ratings Systems http://researchglobal.bmocapitalmarkets.com/documents/2009/prior_rating_systems.pdf
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BMO Capital Markets Gameloft
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