Category: Weekly Commentary

19 Oct 2017

Issue 42 – Canadian Pacific Full Speed Ahead

On October 17, 2017, Canadian pacific Railway (TSX:CP) reported its 3rd quarter earnings. Palos was pleased with with CP results as we saw profits rise. CP was able to keep operating expenses in check while operating efficiencies improved. However, what really got Palos excited was CP’s new full year earnings guidance. The full year earnings per share guidance was increased to double-digit figures versus high single figures. Secondly, the increase in guidance come on the back of its core business and not from land sales. The core business, freight shipping, is accelerating. The company now expects mid-single digit volume growth in 2017. This growth is being driven by transports of crude deferential, frac sand, potash, and metallurgical coal. Palos sees more dividend increases as the company executes on growth and efficiency.

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12 Oct 2017

Issue 41 – Los Angeles Orders More Buses

On October 10, 2017, New Flyer Industries (TSX: NFI) announced the introduction of its next generation battery-electric heavy-duty transit bus. The new and improved Xcelsior bus will now be available in 35, 40, and 60-foot models. The new Xcelsior has extended battery range technology that enables travel of 200 miles on a single charge. The motor also has regeneration energy recovery and the highest torque available which makes it compatible for steep grade cities such as San Francisco. In addition to zero emissions, passengers will experience the quietest bus ride possible.

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05 Oct 2017

Issue 40 – Cenovus Drops the Ball and Keyera May Pick it up

On March 30, 2017, Cenovus Energy Inc (TSX: CVE) announced that they were buying ConocoPhillips’ Canadian assets for $17.7 billion. The acquisition was mostly financed by debt, which brought its leverage ratio to new highs. CVE has now decided to sell some assets to bring its debt level back to normal. CVE has been somewhat successful in selling some assets, however, the company has a long way to go before it reaches its debt goal. Thus, we believe that Keyera Corp (TSX: KEY) could buy several gas plants from CVE in the Montney and Duvernay area. We think KEY would be interested in those facilities as they are well located in areas of growth. Secondly, the plants could easily be connected to KEY’s existing networks. If such a transaction occurs, this would bring a credible competitor to the area. Currently, the area is controlled by Pembina (TSX: PPL). Producers would be glad to see a new supplier in this area.

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28 Sep 2017

Issue 39 – Ethereum – Bitcoin 2.0

There has been a lot of hype lately about Bitcoin, blockchain and Ethereum. Despite their popularity, not a lot of people truly understand what they are. Let’s start with Bitcoin. Bitcoin is simply a digital dollar. Anyone can buy and sell Bitcoin, and as such, it serves the same purpose as regular currency. It can be used to purchase goods and services and many online retailers now accept cryptocurrencies as payment. That is however where the similarities end. Thanks to the blockchain technology on which it is exchanged, Bitcoin is not held in a bank account and does not need to be administered by a third party. So, middlemen, such as banks, brokers and bookkeepers, are removed from the equation. Blockchain is essentially a decentralized record (or ledger) of all transactions.

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21 Sep 2017

Issue 38 – Offshore Wind Power

Northland Power Inc (TSX: NPI) is emerging as a leader in wind power. NPI’s operating capacity is 1,754 MW, and of that amount, 696 MW is being attributed to wind. NPI is continuing to expand its wind portfolio, especially offshore. At the end of the year, NPI will be commissioning the Nordsee One offshore project. This will bring about a net increase of 285 MW to the portfolio. NPI is also working on their 252 MW Deutsche Bucht offshore project; its commissioning is planned to take place at the end of 2019. NPI is thriving and becoming a leader in the offshore wind power sector. After speaking with management, we believe the next offshore wind expansion will take place in Asia. We view this positively as this probable expansion would diversify the company’s offshore portfolio away from Europe.

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14 Sep 2017

Issue 37 – Storagevault

StorageVault’s (TSX: SVI) main business is owning, operating and leasing self storage facilities. Since SVI is the only public storage company in Canada, it is the only way for investors to get exposure to this space. We are attracted to this type of real-estate as it is the only one that can achieve 12% growth in net operating income (NOI). At the same time, SVI is consolidating the market by acquisition. Last quarter, SVI acquired a Montreal property for $8 million. Furthermore, on August 01, 2017, SVI announced the closing of the acquisition of Sentinel storage, which is made up of 24 properties, and is in the process of closing on 9 more properties.

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07 Sep 2017

Issue 36 – Gearing Up!!!

On September 5th 2017, Secure Energy Services Inc. (TSX:SES) announced some changes at the management level which we see as positive for the future growth of the company. Mr. Allen Gransch, formerly Chief Financial Officer of SES, will take the roll of Executive Vice President of Corporate Development. This will allow him to spend the majority of his time on acquisitions and green field projects. This change should translate into more deals and growth projects in the coming years. This is also a strategic and prudent way of grooming the future Chief Executive Officer of SES.

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31 Aug 2017

Issue 35 – Hello!!! Propane!!!

Propane has been a sleepy commodity for the past few years and most investors have lost interest in it. However, the fundamentals have been changing in a very unnoticed manner by most. Ever since the US opened its propane business to the world via export terminals, things have been getting a lot tighter for the commodity. We’re always on the lookout for opportunities such as this one where investors have thrown in the towel and driven valuations to compelling levels.

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24 Aug 2017

Issue 34 – Did Someone Say Dividend?!

So far this quarter, two banks have reported their earnings and both have increased their dividend. Royal Bank of Canada (TSX: RY) raised its quarterly dividend by 5% to $0.91, which was higher than expected. CIBC (TSX: CM) raised its quarterly dividend 2.4% to $1.30 from $1.27. In general, over the past few years, Canadian banks have reported strong financials quarter after quarter. However, they are not getting much respect compared to their US competitors. It appears the Canadian housing market and Canadian debt levels have overshadowed the positive news from Canadian banks. Meanwhile, the Canadian economy is firing on all cylinders and even the province of Quebec is experiencing the best economic expansion and unemployment rate in 40 years.

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18 Aug 2017

Issue 33 – The Tide Keeps on Rising

On Tuesday, Tidewater Midstream and Infrastructure Ltd. (TSX: TWM) announced that it will be making the following two acquisitions for $51M:
• Deep Basin and Montney assets;
• 51% interest in a Wapiti Pipeline.

Both assets are in areas where E&P’s are very active and demand for midstream services are high. The two acquisitions are expected to generate approximately $10M in annualized EBITDA, representing a 5x EBITDA multiple ($51M/$10M EBITDA). This is very accretive relative to TWM’s pre-deal evaluation of approximately 7x.

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10 Aug 2017

Issue 32 – On the Canadian Dollar

The exchange value of the Canadian dollar increased in a fast and furious manner in the last few months vis-a-vis the U.S dollar. Since May 4, 2017, the Canadian dollar rose from 72 to 80 US cents a few days ago. That is two cents above our calculated purchasing power parity rate but two cents below its twenty-year average of 82 US cents. At the time of this writing, the loonie was fetching 79 US cents compared to only 68 US cents in January 2016. It appears that the Bank of Canada encouraged the recovery for it sold more than $1.0 billion worth of U.S. dollars in the last six months. Nevertheless, future performance will depend on what will happen to Canadian terms of trade, monetary policy and economic growth.

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03 Aug 2017

Issue 31 – Cineplex (CGX)

The Palos Funds sold their last shares of Cineplex (TSX: CGX) yesterday after the company announced very disappointing second quarter earnings. What is more concerning however, is that the legacy business is under significant stress. Cinema advertising and box office revenue growth was lackluster and quite troubling. The majority of CGX revenue growth came from its acquisitions of TriCorp, Saw, and Dandy, which are amusement businesses. We believe these companies to be more capex intensive and more expensive to run as we expect operating expenses, G&A, and rents to rise considerably.

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27 Jul 2017

Issue 30 – The REIT

Whether interest rates move higher or lower, this REIT will continue to do well. InterRent REIT (TSX: IIP-U) is the best positioned REIT in Canada to fence off any potential rate increases. The reason for its advantageous positioning is that it’s not a traditional REIT where assets are purchased and a minimal amount of maintenance capex is spent. IIP-U is growth-oriented, with the vision of increasing value through acquisition, development, and the refurbishing of legacy assets. This activity allows IIP-U to grow like no other residential REIT in Canada.

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20 Jul 2017

Issue 29 – A Small Cap With a 7% Dividend and Much More

Pivot Technology Solutions Inc. (TSX: PTG) is a small cap dividend payer that is more than just a cash cow. The company has been paying dividends, reducing debt and buying back stock. Not many investors have heard of this company as its market cap is under $100 million. However, this company is expected to generate $1.5 billion USD in revenue and $32M in EBITDA for 2017. The EBITDA margins are currently at 2%, but are expected to expand in the coming years as the company focuses on its managed services. We are expecting managed services to grow from 10% of revenue to 30% in the coming years. Presently, most of the company’s revenue comes from the value-added reseller (VAR) segment. Its VAR business is underpinned by very strong customers, of which approximately 70% are fortune 100 enterprises.

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13 Jul 2017

Issue 28 – Rate Increase

On July 12, 2017, the Bank of Canada (BOC) raised interest rates for the first time in seven years and there is a high probability of a second hike by year-end. The income funds are well-positioned to take advantage of the new interest rate environment. Historically, the materials, industrials, and financials stocks outperformed the broader market under such circumstances.

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