Category: Weekly Commentary

18 May 2018

Issue 20 – The Spartan is Holding Back the Vermilion

On April 16, 2018 Vermilion Energy Inc. (TSX:VET) announced that they were buying Spartan Energy Corp (TSX:SPE) for C$1.40 billion. The deal was done at very attractive metrics. This will add 23,000 bbl/d of production, 480,000 net acres of land, 113.5 mmboe of 2P reserves and over 1000 locations. VET paid 4.9x P/CF which is very reasonable for light oil, and high netback assets.

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11 May 2018

Issue 19 – Turning Wind Into Cash Flows

Northland Power Inc (TSX:NPI) reported a strong first quarter that beat consensus estimates. NPI reported an Adjusted EBITDA of C$290M and consensus was at C$257M. The beat came from better results from the offshore assets and lower expense. Furthermore, the company is also off to a great start in 2018. NPI won the contract for an offshore wind project in Taiwan (300MW), and the construction of the Deutsche Bucht offshore wind project continues to be on schedule and under budget.

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04 May 2018

Issue 18 – Manulife Beats to its Own Drum

Earnings season can be quite a hectic time for many companies. Speculation, headlines and surprising results can drastically move stock prices. This earnings season, we were particularly interested in Manulife’s (TSX: MFC) results as there has been a lot of talk lately regarding their long-term care (LTC) business and the new life insurance capital adequacy test or LICAT. Furthermore, Manulife’s stock price has been under pressure since January when GE reported losses of US$6.2 billion on its LTC business.

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27 Apr 2018

Issue 17 – Transcontinental is Transforming

In the past, Transcontinental Inc. (TSX: TCL/A) was known as Canada’s largest printing company. For many years, the company faced falling demand for printed products. We all know that the physical newspaper business is declining and will probably disappear in the coming years. TCL/A has navigated this decline as efficiently as possible. For example, printing revenue has been falling for the last decade, but the company was able to keep its margins stable, and its EBITDA has also declined less than its revenue on a percentage basis. This was achieved by having a disciplined management team, that acted by closing inefficient printing presses, and selling non-core media assets.  Its discipline allowed the company to shore up its balance sheet and make a few small acquisitions in packaging. However, none of them where large enough to transform the company until they announced the US$1.32 billion Coveris Americas acquisition on April 02, 2017.

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20 Apr 2018

Stelco Strong as Steel

We have recently taken a liking to Stelco holdings (TSX: STLC), a producer of value-added steel products with headquarters in Hamilton, Ontario. Stelco is an impressive turnaround story that has successfully emerged from bankruptcy. The company now has a strong capital structure with no long-term debt and over $250 million of cash on hand as at December 31, 2017. STLC also has no pension liabilities, low input costs and has a dividend yield of about 1.70%. Stelco produces steel products using new metals whereas many in the industry use scrap metals. With the increasing prices of scrap metal and synthetic graphite rods, Stelco is well-positioned to compete on price.

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13 Apr 2018

Issue 15 – Take Your Vitamins

Jamieson Wellness Inc (JWEL) has been one of the most successful Initial public offering’s of 2017. JWEL did its IPO on July 5, 2017 at $15.75 and closed 2017 up 41%. The iconic mineral and supplement company is the #1 consumer health brand in Canada with a 25% market share in food and drug stores. The company’s 2017 highlights include revenue growth up 21% to $301 million and EBITDA up 31% to $61 million. Strong performance highlighted by significant free cash flow generation have opened several growth opportunities for Jamieson.

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06 Apr 2018

Issue 14 – Superior is Slimming Down

On April 3, 2018, Superior Plus Corp (TSX:SPB) announced $72 million in non-core dispositions. The sales included their U.S. wholesale refined fuels business and some fuel terminal assets. The dispersal of the lower margin wholesale businesses will allow the company to focus on its significantly higher retail business. Superior also sold some US retail distillate assets. The sale proceeds add to SPB’s war chest. The cash generated will be used to acquire more strategic assets for their core businesses: energy services, specialty chemicals, and construction products distribution.

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23 Mar 2018

Issue 12 – Where Real Estate Meets Technology

Altus Group Ltd (TSX: AIF) is a leading provider of independent advisory, software and data solutions to the global commercial real estate (CRE) industry. The CRE industry is quickly changing as it becomes more institutionalized. Institutions continue to allocate more of their portfolios to real estate. As investors become more sophisticated and act on the global stage, data and analytics become more important. AIF is the leader in big data analytics solutions that help their clients maximize the value of their real estate portfolios. AIF also provide consulting and advisory services. Palos believes that AIF services and technology will continue to be in high demand, as real estate continues to become a larger percentage of institutions asset class allocations. AIF􀂶s flagship ARGUS enterprise software can do it all: valuation, cash flow analysis, budgeting, planning and risk analysis. The SaaS model employed by the company ensures ongoing revenue on a subscription basis.

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16 Mar 2018

Issue 11 – How ‘Bout Them Magnets

The market for rare earth elements (REEs) is set to grow significantly in the coming years. Many research reports are forecasting global demand for these elements to double by 2020. The growth wave is coming from clean energy applications such as wind power. However, the electric vehicle revolution is the largest emerging market for these products. Palos believes that this is a significant change that should not be ignored.

The REEs are primarily refined into two elements neodymium and praseodymium, also known as NdPr. The NdPr is then shipped in oxide form and used to make the lightweight neodymium-iron-boron also known as NdFeB. The NdFeB is the magic ingredient necessary to make permanent magnets inside high-efficiency motors and turbines. Many auto makers like Tesla are using permanent magnet motors because they are lighter, stronger and more efficient. For example, the Tesla Model 3 long range model, probably the most famous EV vehicle on the market, uses permanent magnet.

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09 Mar 2018

Issue 10 – Pollard Banknotes Wins Big

There are over 200 lotteries that operate around the world that source their supply of lottery tickets from just a handful of companies. Pollard Banknotes (TSX:PBL), is one of three instant lottery ticket vendors in North America. PBL is growing significantly faster than its competitors and has been recognized by the industry for its “game changing” innovations. Pollard sells instant scratch tickets to 12 of the top 20 global lotteries and has 50 lotteries signed to long term contracts with renewal options. In 2017, PBL continued to improve its operations with the purchase of a new printing press that has had a positive impact on the company’s margins and printing capacity.

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02 Mar 2018

Issue 9 – Why we Love Canada!

Many economist and strategies on the sell side are bearish on Canada. Their reasoning mostly comes from the overvalued housing market, Canadian indebtedness, and the lack of Canadian energy infrastructure. Palos believes this argument has merits which have lead to negative sentiments on the TSX. These potential headwinds have the TSX is trading at a 2018 forward P/E of 15.16x and a 2019 forward P/E of 13.73x. This compares to S&P 500 that is trading at a 2018 P/E of 17.36x and a 2019 P/E of 15.74x. In our view, the negative sentiment has gone too far. Economists and strategists are ignoring Canada’s favourable positioning on the four great revolutions. Moreover, most Canadian companies that are listed on the TSX have grown their operations in the US and around the globe.

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23 Feb 2018

Issue 8 – No Love for the Bank of Nova Scotia

The Bank of Nova Scotia (TSX:BNS) has been significantly underperforming its peers since January 31, 2018. Palos believes this underperformance is primarily due to NAFTA fears. In our view, this fear is overblown and ignores the bank’s fundamentals and growth opportunities. If Canadian interest rates continue to rise, banks will benefit from margin expansion. However, higher rates are a double-edged sword. With rising rates, you can expect loan originations to slowdown in Canada. Canadian Banks that have low international exposure will struggle to grow their loan book.

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15 Feb 2018

Issue 7 – The Liquor Stores Getting Ready to Distribute Cannabis

On November 30, 2017, I wrote about Liquor Stores N.A. (TSX: LIQ) and stated that the company had a significant opportunity to expand into the cannabis retail market. On February 2, 2018, Aurora Cannabis (TSX: ACB) announced that it will be buying a 19.9% stake in LIQ at a 28% premium ($15.00/share) through a non-brokered private placement. This $103.5 million cash injection has enabled the company to rid its balance sheet of debt and aggressively move forward with Canadian store renovations. This deal will allow LIQ to concentrate on the cannabis retailing opportunities.

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09 Feb 2018

Issue 6 – The Stock Market & U.S. Energy Complex

On most days, no one knows why stocks are up or down. This is particularly true with sudden market moves. I hate to admit it, but we should have seen this one coming. After hitting its highest level in a decade, household confidence in the economy slipped for the third month in a row in January. The University of Michigan’s index is 1.1 points below the 2017 average of 96.8, which was the highest yearly average in two decades. Put simply, it is normal to feel a little less confident about the economic outlook when things are already as good as it gets.

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