Neptune Technologies Inc.
(NTB:T, $1.97, BUY, PT $7.50)
Q115 Patent Review a Clear Catalyst.
TSO3 Inc.
(TOS-T, $1.42, BUY, PT $3.75)
Global Sterizone VP4 Launch, Partnerships.
FAM REIT
(F.un:TSX, $7.80, BUY, PT $10.00)
Deep Discount and Upcoming Events Leading to Top Pick.
Wanted Technologies Corp.
(WAN:TSXV, $1.37, BUY, PT $1.80)
Top Pick 2015: Unjustified Pessimism.
Computer Modelling Group
(CMG-T, $11.01, BUY, PT $15.00)
Resilience in Downturns, Growth in Upturns.
DHX Media Limited
(DHX.B-T, $8.95, BUY, PT $11.50)
Top Pick for 2015 – It’s Still the Middle Innings! Bullish Content
Thesis Finds Daily Confirmation!
Espial Group Inc.
(ESP-T, $2.52, BUY, PT $4.30)
European Validation - Bullish Thesis Strong. Top Pick Status Carries
over to 2015!
Probe Mines Ltd.
(PRB-TSXV, $5.06, TENDER)
With Borden Consolidated, a Busy Winter Ahead.
.
We present our 2015 Top Picks below, and look forward to addressing their performance as the
year progresses. In the following pages, we present snapshots on the individual names.
We recognize that 2014 was a challenging year — while the overall TSX advanced 7.4% (2013
+9.6%), the performance was far from uniform with Mining down 21.7% on the year following a
24.9% decline in 2013. Moving the 10-year rates down by 97 bps on the year supported gains of
4.2% for the REIT Index, representing a healthy improvement from the 10.5% decline in 2013.
The Health Care Index continued its bullish run, moving ahead 29.2% on the year — a particularly
impressive performance in light of the healthy 40.1% returns recorded for 2013. The Telecom
sector’s modest 8.4% return outperformed the broader TSX while potentially greater returns ran
up against regulatory headwinds and competitive pressures. The 6.2% gain for the Telecom Index
in 2013 fought against the 10-year rates rising by 97 bps. This year, the Information Technology
Index outpaced the Healthcare Index in a winner’s battle, as the IT Index gained a robust 35.9%
for the year showing impressive follow-through on the 34.9% gain in 2013. Euro Pacific’s
commitment to the Canadian Healthcare and Technology sectors has been a clear win.
The TSX-V pains continued with the index down 25.4% on the year following a 23.7% decline in
2013. The TSX-V performance continues to underperform US small cap indices. While the stellar
37% return for the Russell 2000 Index in 2013 was not to be repeated, the index did manage a
3.5% return for 2014 — modestly underperforming the solid 7.5% (26.5% - 2013) and 11.4%
(29.6% - 2013) returns on the DJIA and S&P 500, respectively. Canadian small cap investors are
clearly hoping to realize a measure of the 40% returns for the Russell 2000 over the past two
years while the TSX-V declined by ~50%.
Euro Pacific Canada continues to see the Technology and Healthcare/Life Sciences as leading
sectors, where Canadians are recognized leaders.
We are pleased to enter 2015 continuing to build out our Canadian coverage. We note that
during the past month, the following six initiations have brought our direct coverage to fiftyseven names in addition to the twelve Canadian names under coverage from our partners at
Euro Pacific Capital.
1. Mood Media Corp. (MM-T, $0.56, SPEC. BUY, PT $0.75) – Rob Goff, December 19, 2014
2. Lumenpulse Inc. (LMP-T, $16.04, BUY, PT $20.00) – Andrej Krneta, December 8, 2014
3. Wanted Technologies Corp. (WAN-T, $1.44, BUY, PT $1.80) – Andrej Krneta, January 6, 2015
4. MediaGrif Interactive Technologies Inc. (MDF-T, $18.16, BUY, PT $21.50) – Amr Ezzat, December 2, 2014
5. Pure Industrial REIT (AAR.UN-T, $4.63, BUY, PT $5.20) – Rob Sutherland, January 12, 2015
6. Newstrike Capital Inc. (NES-T, $1.00, SPEC. BUY, PT $1.30) – Ryan Walker, December 9, 2014
Top Picks for 2015
We present our 2015 Top Picks below, and look forward to addressing their
performance as the year progresses. In the following pages, we present snapshots on
the individual names. Please note closing prices and ratings were taken consistent with the
date of issuance for the individual selections.
Company
Stock
Analyst
Neptune Technologies Inc.
NTB:TSX - $1.97
Doug Loe, PhD
TSO3 Inc.
TOS:TSX - $1.42
Doug Loe, PhD
FAM REIT
F.un:TSX - $7.80
Rob Sutherland, FRI(e)
Wanted Technologies Corp.
WAN:TSXV - $1.37
Andrej Krneta, B.Eng, MBA
Computer Modelling Group
CMG:TSX - $11.01
Amr Ezzat, Hon. Finance
DHX Media Ltd.
DHX.B:TSX - $8.95
Rob Goff, CFA
Espial Group Inc.
ESP:TSX - $2.52
Rob Goff, CFA
Probe Mines Ltd.
PRB:TSXV - $5.06
Ryan Walker, MSc
The included reports were issued during the week of January 12, 2015, via individual
reports and within each analyst’s sector weekly.
It is with mixed feelings that we note that Ryan has now moved his Probe rating to
Tender following the $5.00/shr bid by Goldcorp (G-TSX, $28.05, NR), representing a
49% premium to Probe’s closing share price on January 16, 2015. While pleased by the
offer, as Probe was Ryan’s Top Pick for 2013, we wish more investors had the
opportunity to invest in its shares!
We would be pleased to follow-up with any questions that you may have!
We wish you all the best in 2015!
Best Regards!
The Euro Pacific Research Team
Healthcare & Biotechnology
15 January 2015
Milestone Projections
Rimfrost Agreement (est)
Sherbrooke Facility
Commence production in Sherbrooke
Phase II TRiFECTA data (Acasti Pharma)
Douglas W. Loe, PhD MBA | (416) 775-1004 | [email protected]
Siew Ching Yeo (Associate) | [email protected]
$5.0M/Q
$27-28M/Yr
Q2/F15
Q3/F15
Financial Metrics
In C$
Revenue
Adj. EBITDA
Adj. Net Income
Adj. EPS
P/E
EV/EBITDA
2013A
26.0
(1.0)
(8.1)
($0.13)
NA
NA
2014A
20.4
(17.1)
(25.6)
($0.34)
NA
NA
2015E
17.0
(3.8)
(9.8)
($0.13)
NA
NA
2013A
NA
6.7x
NA
20.0x
2014A
NA
9.8x
NA
13.9x
2015E
NA
5.8x
NA
14.8x
Valuation Data
EV/EBITDA
Current
Peers
Current
Peers
P/E
Quarterly Data
EBITDA ($M)
EPS
Q1
(2.7)
(3.8)
(0.07)
(0.07)
2014
2015
2014
2015
Q2
(4.1)
(10.1)
(0.11)
(0.16)
Q3
(3.4)
(1.9)
(0.10)
(0.04)
Q4
(1.5)
0.9
(0.05)
(0.01)
Company Description
Neptune Technologies & Bioressources is a QC-based
manufacturer/marketer of Neptune Krill Oil (NKO), a
proprietary omega-3 phospholipid ester formulation sold
into nutraceutical & medical markets.
$4.50
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
Jan-15
Dec-14
Oct-14
Nov-14
Sep-14
$0.00
Jan-14
Neptune’s US patents can potentially be a sizable profitability driver, but clear risk
to our patent royalty revenue until patent re-review concludes this quarter. While
on the subject of Neptune’s IP estate, we maintain our view that this patent, which
described medical uses for marine-derived omega-3 phospholipid esters, could
certainly stand up to further USPTO scrutiny if only because the Office clearly
believed at the time of original issuance that the claims therein were sufficiently
novel and non-obvious to support patentability. Furthermore, both Aker and
Enzymotec were sufficiently cautious on Neptune’s IP strength that they chose to
settle on the International Trade Commission investigation previously requested by
Neptune back in 2013, rather than to allow the investigation to proceed to
resolution. To be clear, our model assumes that Neptune’s annual royalty revenue
could exceed $10M by F2018, and risk to this element of our valuation will be
moderately high until a final USPTO decision is rendered.
75.0
168.7
148.6
34.6
14.4
$4.00-$1.26
0.3775
Feb-28
Jul-14
Gross margin admittedly soft, but for reasons already addressed through
operational improvements and process innovations at Sherbrooke. Adjusted gross
margin of 8.7% (a bit higher at 15.4% if we consider royalty revenue of $0.37M in
the calculation) was obviously soft and undoubtedly made so by start-up costs of
$0.85M during capacity ramp in Sherbrooke throughout the quarter and perhaps by
some proportion of revenue still derived from lower-margin krill oil sourced from
partner Rimfrost. We assume Neptune resells Rimfrost-sourced material at close to
its own purchase price. Neptune indicated that about 50% of nutritional supplement sales in the quarter were for higher-purity/higher-priced NKO, the rest from
EKO or the equivalent product sourced from Rimfrost. Neptune believes, and our
model already assumes, that gross margin can reach and exceed 40% within the
next few quarters, and adjusted gross margin can be higher than that if we factor in
future patent-related royalty revenues that Neptune could receive from peer firms
Aker Biomarine (AKER-OB, NR) and Enzymotec (ENZY-Q, NR) if the claims within its
seminal ‘351 patent (specifically, US#8,278,351, issued in Oct/12) are upheld on rereview by the USPTO. We expect the Office to render a decision on ‘351 by Mar/15.
Basic Shares O/S (M)
Market capitalization(M)
Enterprise Value
Cash (rec. Q, $M)
Total debt (rec. Q, $M)
52 Week Range
Avg. Daily Volume (M)
Fiscal Year End
Aug-14
Firstly, the firm did separately report FQ315 financial data today showing sequential improvement in nutritional supplement revenue/EBITDA. So independent of
our justification of Neptune’s Top Pick status, the firm reported its FQ315 financial
data for the November-end quarter today that showed solid sequential
improvement on revenue, which at $4.7M for the core nutritional supplement
operation was essentially at our $4.8M forecast (FQ215 revenue was $2.6M), and
on EBITDA which was negative at ($1.9M) as we expected, but less than in most
financial periods since FQ413 and far less so than in FQ215 when cumulative EBITDA
loss was ($10.1M).
Market Data
Jun-14
Investment Thesis: We are identifying Neptune Technologies & Bioressources
(Neptune) as one of our 2015 Top Picks as we maintain our BUY rating and $7.50
PT. Our valuation is based on NPV and multiples of our F2018 EBITDA/EPS forecasts,
all discounted at 15% and with our EV calculation incorporating FQ315 balance
sheet data (adjusted cash of $34.6M, LT debt of $14.4M), to which we add value for
Neptune’s 49.95% equity stake in Acasti Pharma.
Projected Return: 233%
Valuation: 22.5x EPS, 13.5x EV/EBITDA
(F2018 forecasts, 15% disc rate), plus
APO/ACST equity stake
Apr-14
2015 Top Pick
$7.50 Target Price
May-14
Neptune Technologies &
Bioressources
Buy Rating
Feb-14
Mar-14
NTB-TSX: $2.25 | NEPT-NASDAQ: US$1.87
www.epccm.ca
Page 4 of 43
NTB-TSX; NEPT-NASDAQ | 15 January 2015
TEARSHEET - Neptune Technologies & Bioresources (NTB-T, $2.25, BUY, PT: $7.50)
Last Sale Price
50-day MA
1
200-day MA
Company Description
$4.50
0.8
$3.50
0.6
$2.50
0.4
Consensus
Rating:
Buy
Target:
$7.50
Median:
$7.50
High:
$7.50
Low:
$7.50
# Est:
1
Consensus Distribution
Sector Outperform/Buy
Sector Perform/Hold
Sector UnderPerform/Sell
Neptune Technologies & Bioressources is a QC-based manufacturer/
marketer of Neptune Krill Oil (NKO), a proprietary omega-3 phospho-lipid
ester formulation sold into nutraceutical & medical markets
Dec-14
Oct-14
Jun-14
Aug-14
Apr-14
Feb-14
Oct-13
Dec-13
Jun-13
Aug-13
Oct-12
Dec-12
Jun-12
Aug-12
Apr-13
0
Feb-13
0.2
$0.50
Apr-12
$1.50
Volume (M Shares)
Stock Price ($)
$5.50
Return
233.3%
233.3%
233.3%
233.3%
2
0
0
Historical Valuations
LTM EV/EBITDA
Financial Summary/Key Metrics
2012A
2013A
2014A
2015E
2016E
2017E
2018E
19,113.4
0.0
603.5
19,716.9
(5.9%)
19.3
19.3
3,690.0
18.7%
(1.3)
(1.3)
2,691.1
$0.05
($0.05)
($0.05)
41.1x
40.3x
25,180.4
0.0
804.2
25,984.6
31.8%
22.1
22.1
(965.0)
(3.7%)
NA
NA
(8,141.8)
($0.13)
NA
NA
NA
NA
18,995.1
0.0
1,441.8
20,436.9
(21.4%)
21.1
21.1
(17,087.3)
(83.6%)
(19.8)
(19.8)
(25,629.2)
($0.34)
($0.39)
($0.39)
NA
NA
8,706.2
8,047.2
226.8
16,980.3
(16.9%)
16.8
16.8
(3,805.2)
(22.4%)
(24.0)
(1.6)
(9,752.7)
($0.13)
($0.30)
($0.08)
NA
NA
22,250.0
6,737.0
8,467.5
37,454.4
120.6%
32.7
34.6
14,980.5
40.0%
(4.2)
(4.8)
9,832.0
$0.13
($0.07)
($0.05)
17.0x
9.9x
36,200.0
8,758.1
9,293.4
54,251.5
44.8%
45.4
46.2
21,181.9
39.0%
22.2
22.2
16,033.5
$0.22
$0.23
$0.23
10.4x
7.0x
46,805.0
10,525.4
10,206.5
67,536.9
24.5%
59.7
59.1
25,475.2
37.7%
26.6
26.6
20,326.8
$0.27
$0.27
$0.27
8.2x
5.8x
Price/F2018 Earnings Multiple
20.0x
22.5x
Implied value/share1
EV/F2018 EBITDA Multiple
$4.13
12.5x
$4.65
13.5x
$3.44
$3.70
$4.17
C$000's except for per share data
NKO/EKO direct sales
EKO from Rimfrost
Royalties from krill oil peers
Total Revenue
Growth y/y
Cons. (C$MM)
Cons. 3 Mts. Ago (C$MM)
EBITDA
Margin
Cons. (C$MM)
Cons. 3 Mts. Ago (C$MM)
Net Income (ex one-time)
EPS (basic)
Cons.
Cons. 3 Mts. Ago
P/E (fd)
EV/EBITDA
Implied value/share
Value ascribed to core NKO operations
Value ascribed to equity holdings in Acasti (49.95% ownership)
One year Neptune Target Price (C$)1
1
Dec-14
Oct-14
Sep-14
Nov-14
Jul-14
Aug-14
Apr-14
Jan-14
Feb-14
Mar-14
Oct-13
Sep-13
Nov-13
Jul-13
Aug-13
Jun-13
Apr-13
Dec-13
Value
$4.00
177.8%
$1.26
56.0%
0.38
75.0
168.7
14.4
174.4
0.0%
www.neptunebiotech.com
Feb 28
118
52-Wk High:
52-Wk Low:
Avg Vol (3-Mo)
Shares O/S:
Market Cap:
Net Debt ($M):
Ent. Value ($M):
Div Yield:
Website:
FYE:
Employees:
Top Inst. Ownership
25.0x
Perceptive Advisors LLC
Fiera Capital Corporation
Alpine Partners VI, LLC
BluMont Capital Corporation
BMO Investments Inc.
Canada Pension Plan Investment Board
Peconic Partners, LLC
M Shares
6.70
1.03
0.99
0.64
0.41
0.38
0.33
% Held
8.9%
1.4%
1.3%
0.9%
0.5%
0.5%
0.4%
$5.17
15.0x
Cote 100 Inc.
0.18
Susquehanna International Group, LLP, Asset Management Arm
0.16
0.2%
0.2%
$4.09
Desjardins Global Asset Management Inc.
0.07
0.1%
Consensus Valuations
EBITDA
EPS
2014E
2015E
T12
2014E
(19.8)
(24.0)
($0.26)
($0.39)
505.9
537.3
$2.74
$2.84
832.3
806.7
N/A
$5.84
9,143.3 14,429.6 (NOK 20.81) NOK 10.14
2,434.6 3,224.6
NOK 4.03
NOK 2.51
11.1
14.8
$0.17
$0.39
2015E
($0.30)
$3.13
$5.61
NOK 13.44
NOK 6.24
$0.58
$3.06
$7.50
Assumes F2018 NKO rev of $67.5; adj EBITDA of $25.5M, adj EPS of $0.27, discounted by 15%. EV incorporates FQ315 cash of $34.6M, total debt of $14.4M
Comparables and Peer Analysis
Neptune Technologies & Bioressources, Inc.
GNC Holdings Inc.
Herbalife Ltd.
Aker ASA
Austevoll Seafood ASA
Enzymotec Ltd.
Average
Ticker
NTB
GNC
HLF
AKER
AUSS
ENZY
Comparables - Multiples Analysis
Neptune Technologies & Bioressources, Inc.
GNC Holdings Inc.
Herbalife Ltd.
Aker ASA
Austevoll Seafood ASA
Enzymotec Ltd.
Average
1
Aker
Key Statistics
Valuation
1
May-13
Jan-13
Feb-13
Mar-13
Dec-12
Oct-12
Sep-12
Nov-12
Jul-12
Aug-12
Neptune
Apr-12
Dec-14
Nov-14
Oct-14
Sep-14
Jul-14
Jun-14
Aug-14
Apr-14
May-14
Jan-14
Feb-14
Mar-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
Apr-13
May-13
Jan-13
Feb-13
Mar-13
Dec-12
Oct-12
Sep-12
Nov-12
0.0x
Aug-12
0.0x
Jul-12
5.0x
Jun-12
5.0x
May-12
10.0x
Apr-12
10.0x
Jun-14
15.0x
Aker
Jun-12
Neptune
May-12
15.0x
May-14
LTM EV/REV
T12
(23.3%)
6.6%
13.9%
0.0%
21.3%
(2.8%)
Trading Current
Target
Dividend
Market
CCY
Price
Price
Yield
% Return
Cap
CAD
$2.25
$7.50
0.0%
233.3%
178.5
USD
$44.59
$48.42
1.4%
10.0%
4,010.4
USD
$30.92
$63.80
0.0%
106.3%
2,909.1
NOK
NOK 152.00 NOK 208.71
8.6%
45.9% 10,996.6
NOK
NOK 48.10 NOK 57.50
3.3%
22.9%
9,750.7
USD
$7.37
$9.17
0.0%
24.4%
160.8
2.2%
73.8%
FCF Yield
2014E
(23.3%)
6.6%
13.9%
0.0%
21.3%
(2.8%)
2015E
(31.0%)
6.9%
15.4%
0.0%
11.9%
0.0%
Current - EV/EBITDA
T12
2014E
2015E
NA
NA
NA
10.3x
9.7x
10.2x
6.1x
4.6x
4.8x
4.4x
23.0x
1.5x
4.5x
4.3x
4.2x
7.9x
7.6x
8.4x
6.7x
9.8x
5.8x
% Return
Ent.
Value
1-Week 1-Month 3-Month
174.4
6.6%
1.4%
27.8%
5,205.5
(3.6%)
3.6%
19.1%
4,058.9
(2.5%)
(16.8%)
(34.0%)
55,679.6
(3.5%)
5.2%
(6.7%)
16,638.5
3.4%
10.8%
24.9%
130.9
1.5%
(5.0%)
13.3%
0.3%
-0.1%
7.4%
Target - EV/EBITDA
T12
2014E
2015E
NA
NA
NA
10.4x
10.3x
9.7x
6.3x
4.9x
5.0x
14.5x
6.1x
3.9x
6.7x
6.8x
5.2x
10.3x
11.8x
8.8x
9.6x
8.0x
6.5x
T12
11.9x
2.0x
0.8x
1.0x
0.7x
1.7x
3.0x
EV/Revenue
2014E
0.0x
2.0x
0.8x
0.8x
1.2x
2.8x
1.3x
1-Year
(36.4%)
(19.5%)
(61.7%)
(28.1%)
33.6%
NA
-22.4%
T12
(38.1)
499.6
N/A
3,051.0
2,223.2
12.1
2015E
10.4x
1.9x
0.8x
0.7x
1.1x
2.3x
2.9x
T12
NA
16.3x
8.6x
NA
11.9x
43.2x
20.0x
P/E
2014E
NA
15.6x
5.8x
16.3x
16.9x
15.2x
13.9x
2015E
NA
15.7x
5.3x
15.0x
19.2x
18.9x
14.8x
T12
NA
14.9x
NA
8.0x
NA
68.1x
NA
P/CFPS
2014E
0.0x
11.4x
0.0x
NA
5.0x
60.5x
15.4x
2015E
0.0x
12.1x
0.0x
0.9x
7.3x
11.2x
5.2x
Targets, forecasts and valuations reflect consensus estimates derived from Capital IQ
Douglas W. Loe, PhD MBA | (416) 775-1004 | [email protected]
Page 5 of 43
NTB-TSX; NEPT-NASDAQ | 15 January 2015
Strong balance sheet provides financial flexibility to fund new capex or new NKO/EKO marketing
initiatives at company discretion. The firm exited the quarter with gross cash balance of $34.6M and total
debt of $14.4M (new debt obviously escalating in recent quarters to fund growth capex costs for the
expansion facility in Sherbrooke), so its net cash position of $20.2M is comparatively strong, allowing the
firm to fund additional growth capex projects (such as, for example, expanding NKO/EKO production
capacity in Sherbrooke) or new clinical initiatives (such as, for example, NeuroBioPharm’s proposed Phase
I/II studies in mild cognitive impairment or attention deficit hyperactivity disorder with novel omega-3
phospholipid ester formulation MPLIX) at its discretion. On the latter point, we do not expect
NeuroBioPharm to materially advance MPLIX clinical development imminently, at least not while it is in
the process of being re-enveloped into Neptune’s corporate structure during the privatization initiative
that was separately announced today. Taken together, we believe FQ315 financial data were as strong as
we could have reasonably expected during a financial period when NKO/EKO production capacity was still
ramping and during which start-up costs were inevitably going to compress gross margin.
Exhibit 1 – Financial Summary for Neptune
(C$000, except EPS)
NKO/EKO direct sales
2012A
2013A
2014A
2015E
2016E
2017E
2018E
19,113
25,180
18,995
8,706
22,250
36,200
46,805
0
0
0
8,047
6,737
8,758
10,525
604
804
1,442
227
8,467
9,293
10,207
$19,717
$25,985
$20,437
$16,980
$37,454
$54,252
$67,537
Revenue growth (%)
($41%)
32%
($21%)
($17%)
121%
45%
24%
EBITDA
($17,087)
($3,805)
EKO from Rimfrost
Royalties from krill oil peers
Total revenue
$3,690
($965)
$14,980
$21,182
$25,475
EBITDA growth (%)
(45%)
NA
NA
NA
NA
41%
20%
EBITDA margin (%)
19%
NA
NA
NA
40%
39%
38%
Net Income (ex one-time)
$2,691
($8,142)
($25,629)
($9,753)
$9,832
$16,034
$20,327
EPS (basic)
$0.05
($0.13)
($0.34)
($0.13)
$0.13
$0.22
$0.27
EPS (fd)
$0.05
($0.12)
($0.31)
($0.12)
$0.12
$0.19
$0.25
P/E (fd)
41.1x
NA
NA
NA
17.0x
10.4x
8.2x
EV/EBITDA
40.3x
NA
NA
NA
9.9x
7.0x
5.8x
Source: Euro Pacific Canada, Company Reports and Filings
Emerging signals from industry lobbyists and from business development initiatives by Neptune’s larger
peers that the omega-3 market could improve overall in 2015. Our views on the overall omega-3
nutritional supplement market remain positive, and for omega-3 phospholipid ester formulations to grow
market share within the category. The Global Organization for EPA and DHA Omega-3s (GOED – yes, there
is such an organization!) predicts a resurgence in omega-3 unit sales ramp in 2015 after a self-diagnosed
softness in 2013/14. The firm believes that enhanced advocacy for omega-3s through GOED-funded
marketing campaigns (and probably Reckitt Benckiser’s own marketing for krill oil brand MegaRED) are
moving the needle on the perception of positive omega-3 nutritional benefits, and separately, we believe
the negative (and wildly misunderstood, in our view) interpretation of prostate cancer risk ‘data’ from the
SELECT trial is starting to soften. In fact, the European Food Safety Authority formally published its own
views in Oct/14, which included, but were not limited to, an analysis of SELECT, that there was no
evidence for a role for EPA and/or DNA in the development of prostate cancer.
Clear expectations for sequential revenue growth in FQ415 and into F2016. 2014 marked a period of
several transitions for Neptune, including board changes with the addition of former Atrium Innovations
President & CEO Pierre Fitzgibbon as Chairman, and management changes with the installation of Jim
Hamilton as Neptune’s President/CEO, both of whom are experienced individuals in the nutritional
supplements space and will be key in guiding Neptune’s operations forward. As stated above, the firm
resumed formal operations for its krill oil-producing expansion facility in Sherbrooke, QC, after two years
of cutting-and-pasting its income statement together with outsourcing agreements while construction of
the new facility was ongoing. We expect strong sequential NKO/EKO revenue ramp to continue in FQ415
Douglas W. Loe, PhD MBA | (416) 775-1004 | [email protected]
Page 6 of 43
NTB-TSX; NEPT-NASDAQ | 15 January 2015
and into F2016. We were encouraged to hear on the FQ315 conference call today that annual capacity
can gradually grow from 150 MTs by at least 50% just from process refinements and with minimal capex.
Neptune also has commenced production of its krill oil-combination products (NKO Beat, with
ubiquinone/Coenzyme Q10 for CV health; NKO Flex with vitamin D/strontium/zinc for joint health; NKO
Focus with lutein/vitamin A/vitamin B1 for CNS health) during the current quarter and sales should
commence in F2016.
Exhibit 2 – Valuation Summary for Neptune
Price/earnings multiple, F2018
Implied share price
1
EV/EBITDA multiple, F2018
Implied share price 1
10x
15x
20x
22.5x
25x
30x
$2.07
$3.10
$4.13
$4.65
$5.17
$6.20
8x
10x
12.5x
13.5x
15x
17.5x
$2.15
$2.79
$3.44
$3.70
$4.09
$4.74
Value ascribed to core NKO operations
$4.17
Value ascribed to equity holdings in Acasti (49.95% ownership)
$3.06
One-year NTB target price
1
$7.23
1
Assumes F2018 NKO rev of $67.5; adj EBITDA of $25.4M, adj EPS of $0.27, discounted by 15%. EV
incorporates FQ315 cash of $34.6M, total debt of $14.4M
Source: Euro Pacific Canada
We expect Acasti’s CaPre clinical initiatives to advance into formal pivotal studies by end of year.
Separately, we anticipate Neptune’s cardiovascular disease-focused subsidiary Acasti (APO-V, ACST-Q,
SPEC BUY, PT $6.25) to be a step closer to initiating pivotal trials by finalizing the study design necessary
to evaluate the firm’s ultrapure krill oil formulation; CaPre, in hypertriglyceridemic patients in coming
months, with the firm anticipating that an end-of-Phase II meeting with the FDA should transpire some
time during FQ116 (so in Mar-May/15). We separately expect final data from the Phase II TRiFECTA trial
(from which top-line blood lipid profile data were reported last year) in Feb/15, and these data will
obviously be available to the FDA when the two parties convene. We are optimistic that a pivotal,
probably MARINE/EVOLVE-like 200-250-patient severe hypertriglyceridemia study could commence
enrollment by end of calendar 2015 and that CaPre can perform as well in that trial as it did in the prior
Phase II TRiFECTA and COLT studies that were completed last year, with FDA approval and launch by
FH218 still assumed in our model.
Re-privatized drug development subsidiary NeuroBioPharm could formally advance clinical initiatives in
2015. NeuroBioPharm is the private cognitive health-focused (and non-krill oil exclusive) arm of Neptune,
and had been relatively silent while the firm’s krill oil initiatives were dominating at the forefront. As
recent as September 2014, the firm’s investor presentation noted that this subsidiary was ‘preparing and
conducting clinical trials for the management of neurological & cognitive disorders’ and we thus assume
that one or more MPL formulations (probably MPLIX) could advance into formal Phase I/II MCI or ADHD
testing in the next few quarters. Though the company was cautious on clinical timelines when specifically
asked on today’s call, we see no major scientific impediments to advancing MPLIX at company discretion,
and we are actually as positive about the medical prospects for omega-3 phospholipid esters in CNS
disorders as we are of their already-documented impact on blood lipids and cardiovascular health.
Summary & valuation. We are maintaining our BUY rating and $7.50 PT on our TOP PICK Neptune, with
our valuation based on NPV and multiples of our F2018 EBITDA/EPS forecasts, all discounted at 15% and
with our EV calculation incorporating FQ315 balance sheet data (adjusted cash of $34.6M, LT debt of
$14.4M), to which we add value for Neptune’s 49.95% equity stake in Acasti Pharma.
Please see company disclosures on page 35.
Douglas W. Loe, PhD MBA | (416) 775-1004 | [email protected]
Page 7 of 43
Healthcare & Biotechnology
15 January 2015
TOS-TSX: $1.36
TSO3
2015 Top Pick
Event: We are identifying TSO3 as one of our 2015 Top Picks.
Investment Highlights
Imminent global Sterizone VP4 launch even if new channel partnerships take time
to consummate. With the firm’s low temperature ozone-based hospital sterilization
platform Sterizone VP4 finally FDA approved after an extremely protracted review
process, regulatory risk is now virtually eliminated for VP4 key markets in Europe
and North America. The approval now positions the firm to act on consummating
partnerships with regional distributors in geographies where hospital relationships
are strong, including but not limited to Swedish infectious disease-focused
conglomerate Getinge AB (GETI.B-STO, NR) with which a Letter of Intent was signed
in Aug/12, with OH-based Steris (STE-N, NR), and even possibly with J&J (JNJ-N, NR)
or again with 3M Healthcare (MMM-N, NR) with which the firm had a global alliance
back in 2010-2012. Our model assumed that commercial VP4 production could
commence as early as this quarter, and that one or more channel partners could
also be identified before quarter-end.
We believe global hospital sterilization markets will quickly see value in VP4, if
only in the cost advantages that superior load capacity confers. Our VP4 revenue
growth expectations still assume that VP4 has demonstrable advantages over other
low-temperature gas sterilization platforms, including but not limited to operating
costs per sterilization cycle based on superior capacity (up to 75 pounds of
sterilizable instruments compared to 23-25 pounds for other oxidative sterilants,
mainly hydrogen peroxide, as used in J&J’s Sterrad platform, or in Steris’ V-PRO, for
example), flexibility of cycle time, and low toxicity of effluent sterilant gas post-cycle
(really only an advantage when comparing to ethylene oxide-based systems, which
have been steadily displaced by hydrogen peroxide-based systems for years).
Low temperature sterilization market expected to be the fastest growing
segment. We continue to maintain our forecasts that the firm could sell 132 VP4
systems in F2015 (85 to US hospitals, the rest to Canadian/EU hospitals), an
aggressive but, in our view, achievable sales level if new channel partners can be in
place by FH115. Production at this level is still far below maximum capacity of about
240 systems per year that TSO3 can produce itself at its QC-based facilities even
without considering new outsourcing agreements that the firm will need to put in
place to meet VP4 demand implied by our F2016-F2023 revenue projections. We
believe demand can be ramped to 300 systems by F2016, and grow to peak annual
VP4 system placements at or near 900-1,000 by F2023.
VP4 revenue ramp expectations seem reasonable to us based on comparison to
historic uptake by peer devices, and by industry growth projections. Although our
sales ramp may seem aggressive for an entrepreneurial medtech firm with no prior
history of manufacturing low-temperature sterilizers to that scale, we believe
annual market demand is at least that high or even higher, and cumulative systems
sold that year would be consistent with timelines taken by Advanced Sterilization
Products (ASP, since acquired by J&J) to grow its installed base to 5,000 from 19922001, back when ETO systems were still the dominant platform and when daily
Douglas W. Loe, PhD MBA | (416) 775-1004 | [email protected]
Siew Ching Yeo (Associate) | [email protected]
Buy Rating
$3.75 Target Price
Projected Return: 176%
Valuation: NPV, 25x EPS, 15x EV/EBITDA
(F2016 forecasts, 15% disc rate for NPV)
Market Data
Basic Shares O/S (M)
73.4
Market capitalization(M)
102.8
Enterprise Value
95.8
Cash (rec. Q, $M)
6.9
Net Debt (rec. Q, $M)
0.0
52 Week Range
$1.85-$0.40
Avg. Daily Volume (M)
0.6133
Fiscal Year End
Dec-31
Financial Metrics
In C$000's
2013A
Sterizone VP4 systems
2014E
0.0
2015E
462.0 15,246.0
Maint/service/consumables 254.4
462.5
Total revenue
924.5 17,510.2
254.4
EBITDA
(6,931.4) (4,786.0)
EBITDA margin (%)
NA
Net income
Fully-taxed EPS (fd)
2,264.2
3,785.8
NA
21.6%
(9,270.2) (5,259.2)
2,303.7
($0.11)
($0.06)
$0.03
P/E
NA
NA
47.9x
EV/EBITDA
NA
NA
24.5x
Quarterly Data
EBITDA ($M)
EPS (fd)
Q1
Q2
Q3
Q4
2014
(1.4)
(1.2)
(1.3)
(0.8)
2015
(0.1)
1.0
1.3
1.7
2014 ($0.02) ($0.02) ($0.02) ($0.01)
2015 ($0.00)
$0.01
$0.01
$0.02
Company Description
TSO3 is a QC-based low-temperature hospital sterilization
equipment developer, focused on its ozone-based Sterizone VP4 platform; Commercial partnerships pending, but
regulatory approvals granted in North America and
Europe so firm is poised to accelerate revenue/EBITDA
growth trajectory in F2015/16
$2.00
$1.80
$1.60
$1.40
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
Dec-13
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Apr-14
Aug-14
Dec-14
www.epccm.ca
Page 8 of 43
TOS-TSX | 15 January 2015
throughput for sterilizing reprocessed medical devices was not as high as it is now. We
expect an increase in the demand for surgical procedures for geriatric diseases
TEARSHEET - TSO3 (TOS-T, $1.36, BUY, PT: $3.75)
Last Sale Price
50-day MA
1.6
200-day MA
$1.70
1.4
$1.50
1.2
Company Description
Volume (M Shares)
1
$1.30
0.8
$1.10
0.6
$0.90
0.4
Consensus
Rating:
Buy
Target:
$3.00
Median:
$2.88
High:
$3.75
Low:
$2.50
# Est:
4
Consensus Distribution
Sector Outperform/Buy
Sector Perform/Hold
Sector UnderPerform/Sell
TSO3 is a QC-based low-temperature hospital sterilization equipment
developer, focused on its ozone-based Steri-zone VP4 platform;
Commercial partnerships pending, but regulatory approvals granted in
North America and Europe so firm is poised to accelerate
revenue/EBITDA growth trajectory in F2015/16
Nov-14
Jul-14
Sep-14
May-14
Jan-14
Mar-14
Nov-13
Jul-13
Sep-13
May-13
Jan-13
Mar-13
Nov-12
Jul-12
Sep-12
0
May-12
0.2
$0.50
Jan-12
$0.70
Mar-12
Stock Price ($)
$1.90
Return
120.6%
111.4%
175.7%
83.8%
4
0
0
Historical Valuations
NTM EV/EBITDA
200.0x
TSO3
Steris
150.0x
100.0x
50.0x
Financial Summary/Key Metrics
C$000's except for per share data
Total Revenue
Growth y/y
Cons.
Cons. 3 Mts. Ago
EBITDA
Margin
Cons.
Cons. 3 Mts Ago
Net Income
Adjusted EPS
Cons.
Cons. 3 Mts. Ago
Operating Cash Flow
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
3,355
N/A
2,890
2,890
(7,473)
-222.7%
-6,851
-6,851
(7,655)
($0.12)
($0.14)
($0.14)
(8,645)
2,854
(14.9%)
2,189
2,189
(5,519)
-193.4%
-6,886
-6,886
(5,796)
($0.08)
($0.11)
($0.11)
(6,469)
254
(91.1%)
375
375
(6,931)
-2724.9%
-7,036
-7,036
(9,270)
($0.11)
($0.12)
($0.12)
(8,651)
924
263.4%
586
567
(4,786)
-517.7%
-4,857
-4,604
(5,259)
($0.06)
($0.08)
($0.07)
(2,214)
17,510
1794.1%
7,729
13,318
3,786
21.6%
-2,861
582
2,304
$0.03
($0.03)
$0.00
4,379
41,580
137.5%
23,138
31,412
16,385
39.4%
287
7,703
11,123
$0.14
$0.02
$0.08
3,270
64,927
56.1%
48,881
53,219
29,921
46.1%
7,889
19,455
20,598
$0.25
$0.14
$0.17
22,817
86,796
33.7%
65,532
75,043
43,755
50.4%
17,041
30,288
30,282
$0.37
$0.22
$0.27
37,139
Key Statistics
10.0%
$6.10
20.0x
$2.74
10.0x
$2.23
One year TOS Target Price 1
1
Top Inst. Ownership
M Shares
6.71
5.33
1.96
1.37
0.75
Caisse de dépôt et placement du Québec
Pyramis Global Advisors, LLC
IG Investment Management, Ltd.
Fiera Capital Corporation
Formula Growth Limited
Dimensional Fund Advisors LP
AGF Management Limited
Natcan Investment Management Inc.
Swisscanto Asset Management AG
20.0%
$3.48
30.0x
$4.11
20.0x
$4.47
Impax Asset Management Limited
$3.75
136.0%
29.4%
% Held
9.1%
7.3%
2.7%
1.9%
1.0%
NA
NA
NA
NA
NA
Based on fully-taxed F2016 EPS (fd) forecast of $0.14; EBITDA of $16.4M; NPV discounted at 15%; FQ314 cash of $6.9M, no LT debt
Comparables and Peer Analysis
Ticker
TSO3
3M
Balchem Corp
Getinge AB
Ion Beam Applications
Johnson & Johnson
Nanosonics
Steris
Average
Comparables - Multiples Analysis
TSO3
3M
Balchem Corp
Getinge AB
Ion Beam Applications
Johnson & Johnson
Nanosonics
Steris
Average
1
15.0%
$4.55
25.0x
$3.43
15.0x
$3.35
Value
$1.85
$0.40
0.61
73.4
99.8
36.1
95.8
0.0%
www.tso3.com
Dec 31
34
52-Wk High:
52-Wk Low:
Avg Vol (3-Mo)
Shares O/S:
Market Cap:
Net Debt:
Ent. Value:
Div Yield:
Website:
FYE:
Employees:
Valuation
NPV, Discount Rate
Implied value/share1
Price/Earnings Multiple
Implied value/share1
EV/EBITDA Multiple
Implied value/share1
Jan-15
Dec-14
Dec-14
Nov-14
Oct-14
Nov-14
Oct-14
Oct-14
Sep-14
Sep-14
Aug-14
Jul-14
Aug-14
Jul-14
Jun-14
Jun-14
May-14
May-14
May-14
Apr-14
Apr-14
Mar-14
Mar-14
Feb-14
Feb-14
Jan-14
0.0x
TOS
MMM
BCPC
GETI.B
IBAB
JNJ
NAN
STE
Trading Current
Target
CCY
Price
Price
$3.75
CAD
$1.36
$162.53
USD
$158.85
$75.67
USD
$60.86
SEK
SEK 166.00 SEK 181.88
€15.00
EUR
€13.74
$109.82
USD
$103.75
$1.03
AUD
$1.21
$70.57
USD
$63.68
FCF Yield
2013A
2014E
0.0%
5.5%
5.0%
7.8%
0.0%
6.3%
0.3%
7.0%
0.0%
5.5%
0.0%
9.5%
0.0%
7.3%
0.0%
0.0%
2015E
0.0%
5.8%
0.0%
10.5%
0.0%
0.0%
0.0%
0.0%
Div
Yield
Implied
% Return
0.0%
175.7%
2.1%
4.4%
0.5%
24.8%
2.5%
12.0%
0.0%
9.2%
2.7%
8.5%
0.0%
(14.9%)
1.4%
12.2%
1.1%
29.0%
% Return
Market Enterprise
Cap
Value
1-Week 1-Month 3-Month
102.8
95.8
(6.2%)
(11.7%)
25.9%
102,160.7 106,852.7
(0.6%)
1.3%
17.6%
1,884.2
2,200.0
(0.1%)
(3.9%)
5.7%
39,561.6 58,797.6
(3.0%)
0.8%
12.0%
380.7
369.9
(2.6%)
(0.8%)
1.6%
293,234.8 275,500.8
(1.7%)
(0.2%)
7.2%
318.6
305.4 (10.7%)
11.1%
24.9%
3,849.4
4,323.9
(2.1%)
(2.0%)
15.8%
55,186.6
56,055.8
2015E
Target - EV/EBITDA
T12M
2014E
NA
12.6x
22.3x
10.2x
32.4x
10.9x
-162.3x
13.0x
NA
12.5x
17.0x
11.1x
13.1x
10.7x
-284.7x
12.0x
NA
11.9x
13.2x
9.4x
11.7x
10.6x
87.1x
10.9x
N/A
12.6x
22.3x
10.2x
N/A
10.9x
N/A
13.0x
-8.7x
-29.7x
22.1x
13.8x
Current - EV/EBITDA
T12M
2014E
NA
12.5x
17.0x
11.2x
13.3x
10.7x
NA
NA
NA
(3.4%)
2015E
NA
11.9x
13.2x
9.5x
11.8x
10.6x
NA
12.0x
NA
(0.7%)
1-Year
T12
86.3%
-5.1
15.6% 8,467.0
5.8%
98.6
(21.7%) 5,767.0
76.2%
11.4
9.5% 25,171.0
41.8%
-1.9
28.7%
331.9
13.8%
30.3%
EV/Revenue
T12M
2014E
Consensus Valuations
EBITDA
EPS
FY1
FY2
T12
FY1
FY2
-4.9
-2.9
($0.08)
($0.08) ($0.03)
8,537.3 8,955.4
$7.43
$7.48
$8.22
129.2
167.2
$1.47
$2.10
$2.64
5,291.8 6,241.2
SEK 7.02 SEK 6.83 SEK 11.03
28.2
31.6
(€0.08)
€0.70
€0.88
25,757.9 25,908.6
$6.14
$5.96
$6.17
-1.1
3.5
($0.01)
($0.01)
$0.01
359.0
397.5
$2.08
$2.90
$3.34
2015E
Forward P/E
N12M
2015E
2016E
233.3x
3.4x
4.8x
2.3x
1.7x
3.7x
14.2x
2.5x
163.5x
3.4x
4.1x
2.2x
1.7x
3.7x
0.0x
0.0x
12.4x
3.2x
3.2x
2.1x
1.6x
3.7x
10.1x
2.3x
NM
20.0x
23.8x
16.3x
19.8x
17.6x
NM
0.0x
NM
19.5x
23.2x
15.2x
15.8x
17.0x
NM
22.3x
70.0x
17.9x
20.6x
12.8x
14.0x
15.9x
99.4x
19.4x
33.2x
22.3x
4.8x
16.2x
18.8x
33.8x
P/CFPS
T12M
2014E
NA
16.8x
NA
11.6x
8.4x
16.7x
-45.5x
15.2x
NA
2015E
0.0x
16.0x
0.0x
11.8x
0.0x
15.3x
0.0x
0.0x
0.0x
15.2x
0.0x
9.1x
0.0x
13.8x
NM
0.0x
5.4x
5.4x
Targets, forecasts and valuations reflect consensus estimates derived from Capital IQ
Douglas W. Loe, PhD MBA | (416) 775-1004 | [email protected]
Page 9 of 43
TOS-TSX | 15 January 2015
(ophthalmology, orthopedic, and urology procedures, to name three) to drive requirements for sterilized
surgical equipment in those and other markets. A recent report from Transparency Market Research
estimates the sterilization and disinfection devices industry will grow to $9.2B by 2019 at a CAGR of 8.5%
from $5.1B in 2013. From this, the low temperature sterilization market is tapped to be the fastest
growing segment, growing at approximately 10.9% from 2013 to 2019. These growth rates are consistent
with our own expectations for overall category growth, and we clearly believe that VP4 can grow its own
proportionate market share much faster than more mature sterilization technologies that currently define
the category.
Maintaining our investment thesis on VP4 technical superiority compared to alternative sterilization
modalities, and thus on achievable revenue ramp as early as this year. On the milestone watch, we
believe that valuation drivers are now more logistical than regulatory, with VP4 now approved in all major
geographies currently embedded in our forecasts. Clearly we are still anticipating that one or more
channel partners could be identified by end of quarter, but if not, we expect TSO3 to advance its own VP4
production initiatives and generate sales with hospitals familiar with its first-generation Sterizone
platform and/or those that have high-volume sterilization needs for which VP4 could confer a sizable (and
immediate) cost advantage. We endorse TSO3’s strategy to partner regionally rather than globally (which
may have impeded European/Canadian VP4 sales to this point – the device has been approved in those
geographies since 2010) and as an initial guess, it seems plausible to us that Getinge’s European strength
with its steam-formaldehyde-based HS66 platform and Steris’/J&J’s US strength with hydrogen peroxidebased Sterrad NX100/V-PRO make them ideal partners in those respective geographies.
Exhibit 1 – Financial Summary for TSO3
(C$000, except EPS)
Sterizone 125L+ systems
Maint/service/consumables
Total revenue
Revenue growth (%)
Gross margin
Gross margin (%)
EBITDA
EBITDA growth (%)
EBITDA margin (%)
Net Income
Net income, fully-taxed
Fully-taxed EPS (fd)
P/E
EV/EBITDA
2011A
2012A
2013A
0
0
0
2014E
462
2015E
15,246
2016E
34,650
2017E
52,091
2018E
66,413
3,145
1,163
254
462
2,264
6,930
12,836
20,383
$3,355
235%
(125)
(4%)
($7,473)
NA
NA
($7,655)
($7,655)
($0.12)
NA
NA
$2,854
($63%)
1,052
37%
($5,519)
NA
NA
($5,796)
($5,796)
($0.08)
NA
NA
$254
($78%)
(811)
(319%)
($6,931)
NA
NA
($9,270)
($9,270)
($0.11)
NA
NA
$924
263%
(95)
(10%)
($4,786)
NA
NA
($5,259)
($5,259)
($0.06)
NA
NA
$17,510
1,794%
8,906
51%
$3,786
(179%)
22%
$3,291
$2,304
$0.03
47.9x
24.5x
$41,580
137%
21,830
53%
$16,385
333%
39%
$15,890
$11,123
$0.14
9.9x
5.7x
$64,927
56%
35,710
55%
$29,921
83%
46%
$29,426
$20,598
$0.25
5.4x
3.1x
$86,796
34%
49,907
58%
$43,755
46%
50%
$43,260
$30,282
$0.37
3.6x
2.1x
Source: Euro Pacific Canada, Company Reports and Filings
Comprehensively positive FDA regard not just for VP4 but also for consumables required to ensure
sterilization efficacy, and from new Product Code clearly differentiating VP4 from peers. But we are
positive in the extreme that TSO3 was able to (finally!) garner such favourable FDA regard for VP4,
receiving simultaneous approval not only for VP4 itself, but also for the chemical and biological indicators
that will form the basis for TSO3’s consumable recurring revenue embedded in our model. Moreover, we
are equally positive about the fact that VP4 will have its own newly-assigned Product Code, indicating to
us that the FDA regarded VP4’s ‘dual-gas’ sterilization chemistry and overall performance metrics as being
sufficiently novel compared to ethylene oxide or hydrogen peroxide gas plasma or steam formaldehydebased platforms to justify the unique code. We see this as an important signal that VP4 could be
correspondingly discriminated from its peers in the hospital marketplace as well.
Summary & valuation. Our forecasts remain unchanged, we are maintaining our BUY rating and PT of
$3.75, based on the average of three methodologies, including NPV and multiples of F2016 EBITDA/EPS,
with our NPV incorporating a 15% discount rate to reflect reduced regulatory risk infused by the FDA
Douglas W. Loe, PhD MBA | (416) 775-1004 | [email protected]
Page 10 of 43
TOS-TSX | 15 January 2015
approval now granted, and based on a 25x multiple ascribed to both our F2016 EPS forecast of $0.14 and
a 15x multiple ascribed to our F2016 EBITDA forecast of $16.4M. We incorporate FQ314 balance sheet
data into our enterprise value calculation, from which we calculate net cash of $6.9M.
Exhibit 2 – Valuation Summary for TSO3
NPV, discount rate
Implied value per share
5%
10%
15%
20%
25%
30%
$8.40
$6.10
$4.55
$3.48
$2.72
$2.17
Discounted projected share price to year-end 2015
Price/earnings multiple, F2016
Implied share price
1
EV/EBITDA multiple, F2016
Implied share price
1
15x
20x
25x
30x
35x
40x
$2.06
$2.74
$3.43
$4.11
$4.80
$5.49
5x
10x
15x
20x
25x
30x
$1.12
$2.23
$3.35
$4.47
$5.59
$6.70
One-year TSO3 target price
$3.78
1
Based on fully-taxed F2016 EPS (fd) forecast of $0.14; EBITDA of $16.4M; NPV discounted at
15%; FQ314 cash of $6.9M, no LT debt
Source: Euro Pacific Canada
Please see company disclosures on page 36.
Douglas W. Loe, PhD MBA | (416) 775-1004 | [email protected]
Page 11 of 43
Real Estate
12 January 2015
F.un-TSX: $7.88
FAM REIT
Deep Discount and Upcoming Events Leading to Top Pick
Event: We are adding FAM REIT as one of our two 2015 Top Picks.
Reasoning: We are naming FAM REIT as one of our Top Picks for two reasons; the
REIT’s strong discrete acquisition pipeline through both old Huntingdon assets, now
owned by Slate Properties as well as existing Slate Properties office holdings; and
the huge upcoming effect of the REIT’s data centre development which with its
fixed costs, long-term debt and yearly increasing revenue provides quantifiable and
measurable inflation protection.
2015 Themes: Inflation protection is one our key tenets for 2015 and FAM REIT is
ideally situated to both protect and benefit from both expected and unexpected
inflation in the coming quarters. Its MTS Data Centre provides significant inflation
protection and the REIT, after taking on $144M in new mortgages with the Slate
portfolio acquisition provided itself with a huge degree of debt flexibility as all of
the debt is open and can be replaced with significant long-term debt giving the REIT
huge cost certainty for the long term. We do not expect FAM REIT or any other
REITs of its size to be able to sell interest in its portfolio to SWFs or other
institutional investors; however, our other theme of discrete acquisition pipelines is
very much a focus for the REIT. FAM has a sponsor through Slate which we believe
will supply it with a steady flow of off market transactions and believe it will grow
rapidly throughout 2015.
Investment Thesis:
We remain extremely bullish on FAM REIT despite its move from an office focused
REIT to one that is office only. We believe the REIT continues to trade well below its
intrinsic value and NAV. While we acknowledge external management agreements,
smaller market cap and relative illiquidity all create discounts we believe the REIT is
mispriced relative to its strengths and transformative data centre development
which is nearing completion.
Valuation:
We are maintaining our BUY rating and price target of $10.00 derived using a 6%
discount to our NAV of $10.65. We continue to employ a discount to NAV valuation
metric due to the REIT's significant data centre development pipeline which creates
a short-term cash drag which we refuse to penalize. We do not believe an FFO
multiple adequately portrays the health and performance of the REIT while the NAV
does account for the value of the development. We expect to revert to a p/AFFO
multiple post Q115.
Please see company disclosures on page 37.
Buy Rating
$10.00 Target Price
Projected Return: 36.4%
Valuation: 9.8x TP/FFO (F2015)
Market Data
$140.8
17.9
17.7
9.5%
136,126
51.8%
25,350
$6.8 - $9.3
Market Capitalization
Units S/O (M)
Float S/O (M)
Yield
Total Debt (M)
Debt to GBV
Average Volume (3mo)
52 Week Range ($)
Financial Metrics
FY-Dec 31
Quaterly FFO
2013
2014
2015
Annual
FFO
AFFO
Current Multiples
P/FFO
P/AFFO
Target Multiples
Target/FFO
Target/AFFO
Distribution
AFFO Payout
NAV Estimate
Q1
Q2
Q3
$0.30A $0.34A $0.23A
$0.22A $0.22A $0.19A
$0.22E $0.24E $0.29E
13A
14E
$0.96 $0.81
$0.79 $0.69
Q4
$0.23A
$0.18E
$0.30E
15E
$1.02
$0.91
8.2x
10.0x
9.7x
11.4x
7.7x
8.7x
$0.75
95%
12.3x
14.5x
$0.75
109%
9.8x
11.0x
$0.75
82%
$10.65
Company Description
FAM’s $58.8M IPO was in December 2012 with 27
properties covering 1.7M sq.ft. FAM REIT currently owns a
portfolio of 28 properties totalling ~1.8 million sq.ft. with
exposure to multiple sectors, with a focus on Canada’s large
population centres. FAM REIT’s current portfolio trends
towards value-add and core plus properties.
0.24
$9.50
0.20
$9.00
0.16
$8.50
0.12
$8.00
0.08
$7.50
0.04
0.00
Jan-14
Apr-14
Jul-14
Volume (M)
Oct-14
$7.00
Jan-15
Price
Source: Company Reports, Euro Pacific Canada, Capital IQ
Rob Sutherland FRI(e) | 416.933.3353 | [email protected]
Asad Siddiqui | 416.649.4273 | [email protected]
www.epccm.ca
Page 12 of 43
Technology
14 January 2015
WAN-TSXV: $1.44
Wanted Technologies
Top Pick 2015: Unjustified Pessimism
Event: A unique asset (10Y of data), rise of predictive analytics, and adoption of
quant-tools in HR saw the corporate market emerge as the key driver. Yet, the
ongoing shift from reselling data to directly serving corporates goes beyond
leveraging a pocket of strength. We see the transition: (i) reverse the structural risks
that kept buyers at bay in C2014, and (ii) open a second channel by partnering with
suppliers of complementary technology. Thus, we confirm our Buy rating on WAN
(PT: $1.80, 25% upside; Bear-Bull: $1.05-3.25) and make it our top pick for 2015.
 Risks Overstated: The contract terminated in June 2014 left WAN without 13% of
the top line. WAN’s emerging strength in direct sales led to a channel conflict.
Remaining partnerships make for 23-24% of F2014 sales and underpin the key
risks to the story. But, growing direct sales as a percentage in the mix mitigates the
downside. Thus, the ongoing push (EP est.: h/count to rise 40% y/y in F2015e) to
firm up the corporate presence is justified, as it accelerates the reversal of
structural risks. Add in the recent renewals of outstanding resale contracts, and
we see follow-on terminations (if any) pushed to the medium term. Our Bear case
PT of $1.05 sees remaining agreements terminated in F2016-2018e.
 Second Channel Re-rates Growth: Analytics are complementary to the
mainstream HR software (HCM). After seeing results at the front-office,
corporates are looking to analytics to raise ROI elsewhere (HR). The take up of
WAN Analytics at US-based (93.4% of F2014 sales) Fortune 500s confirms its
productivity-driving prowess. Further, WAN’s platform is a natural add-on to the
HCM suite. It can fill the gaps in partners’ portfolios, driving the adoption of
enhanced tools. In turn, the adoption at the partners’ installed base is set to
drive WAN revenue upside. Our Base case scenario sees a Tier-2 partnership in
FH116e (CH215e).
 Why Now? HCM partnerships are set to drive a revenue windfall at WAN. In
our view, near-term channel tie-up is likely to emerge, due to:
− Competition in HCM Intensifies: In C2014 we see Tier-1 vendors struggle to
stave off cannibalization of its on-premise sales (from SaaS). Elsewhere, pureplay SaaS developers are either taking share (from on-premise) or exiting the
market. Thus, HR analytics as a source of differentiation is coming into focus.
− Growing use of WAN Analytics alongside HCM: WAN’s integration of
Analytics into browsers allows corporates to run proof-of-concept trials. The
Company reports a strengthening take-up of the “work-around”. We believe
the bottom-up-driven demand for the API-solution is set to follow.
− New Product Cycle: WAN international product launch (Oct. 2014) is a
response to clients’ demand to replicate North American ROI gains in offshore offices. A tighter footprint at large corporates makes WAN a more
attractive partner to a Tier-1 HCM vendor (basis for Bull Case).
Valuation: WAN’s F2015e nominal sales are set to remain flat y/y. But the 29% y/y
underlying (ex. terminated contract) growth speaks of a firm end market demand.
In our view, a 54% y/y opex ramp is warranted and transitory margin pressures are
reflected in the valuation (2.6x EV/Sales vs 3.2x at peers). Our DCF-derived PT of
$1.80 reflects the Base case sales growth of 22% CAGR (F2014-2017e). Further, the
new product cycle makes WAN more attractive to Teir-1 partners. Thus, the Bull
Buy Rating
$1.80 Target Price
Projected Return: 25%
Valuation: DCF (14% discount, 2% TVG)
Market Data
Market Capitalization
Net Debt
Enterprise Value
Basic Shares O/S
Fully Diluted Shares O/S
Avg. Daily Volume (M)
52 Week Range
Dividend Yield
35.3
-7.1
28.2
24.5
25.1
0.05
$1.46 - $0.88
0.0%
Revisions
2015E Revenue
2015E EBITDA
2015E EPS
Old
10.0
0.6
$0.00
n/c
n/c
n/c
Financial Metrics
FYE - Jun 30
Revenue
EBITDA
EPS
FCF
Net Debt:EBITDA
FCF Yield
F2014A F2015E F2016E
10.1
10.0
14.1
3.7
0.6
3.1
$0.11
$0.00
$0.07
3.7
0.3
1.4
-1.8x -12.4x
-2.8x
12.2%
0.8%
4.1%
9.6x
24.9x
12.7x
29.5x
18.3x
$1.80
12.8x
32.2x
16.8x
37.5x
22.4x
$2.06
15.7x
18.8x
20.7x
12.8x
42.5x
36.9x
47.0x
16.0x
Valuation Data
DCF - Current/Target
EV/EBITDA Current
Peers
Target
P/E
Current
Peers
Target
Quarterly Data
EBITDA
EPS
2014
2015
2014
2015
Q1
Q2
Q3
Q4
0.6
1.2
1.3
0.6
0.3
0.1
0.2
0.1
$0.02 $0.04 $0.03 $0.02
$0.00 $0.00 $0.00 $0.00
Company Description
Wanted Technologies is a leading provider of
business intelligence for the talent marketplace.
Through its Wanted Analytics platform, the Company
provides real-time labour market intelligence to
corporations, staffing agencies, government
agencies, media, and financial institutions. Wanted
Technologies is headquartered in Quebec (QC),
Canada.
$2.00
0.80
$1.50
0.60
$1.00
0.40
$0.50
0.20
$0.00
0.00
Volume (M)
Andrej Krneta, B.Eng, MBA | 416.687.6656 | [email protected]
Mindy Lau, MBA | 416.360.2576 | [email protected]
New
Price
www.epccm.ca
Page 13 of 43
WAN-TSXV | 14 January 2015
case $3.25 PT (126% upside) looks to be a likely outcome. Risks revolve around contract
terminations and substitute solutions at large customers.
Please see company disclosures on page 38.
Andrej Krneta, B.Eng, MBA | 416.933.3351 | [email protected]
Page 14 of 43
WAN-TSXV | 14 January 2015
Wanted Technologies Corporation (WAN.V-T, CAD $1.44) - Data Sheet
$1.80
Last Sale Price
50-Day MA
200-Day MA
$1.60
Stock Price ($)
$1.40
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
BUY | PT: CAD $1.80
Company Description
Volume (M Shares)
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Consensus
Wanted Technologies is a leading provider of business
intelligence for the talent marketplace. Through its Wanted
Analytics platform, the Company provides real-time labour
market intelligence to corporations, staffing agencies,
government agencies, media, and financial institutions.
Wanted has 50 employees with offices in Quebec City and
New York, NY. Wanted Technologies is headquartered in
Quebec (QC), Canada.
3 Mths Ago
Current
Return
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
Rating:
Target:
Median:
High:
Low:
Consensus Distribution
Sector Outperform/Buy
Sector Perform/Hold
Sector Underperform/Sell
# Est
1
1
1
1
Historical Valuations
CAPITAL IQ - CONSENSUS BASED NTM EV/EBITDA
CAPITAL IQ - CONSENSUS BASED NTM EV/SALES
Wanted Technologies
TeradataCorporation
Corporation
53.0x
7.0x
Teradata Corporation
PROS Holdings,PROS
Inc. Holdings, Inc.
Wanted Technologies
Teradata
Corporation
Corporation
Teradata Corporation
PROS Holdings,PROS
Inc. Holdings, Inc.
6.0x
43.0x
5.0x
4.0x
33.0x
3.0x
23.0x
Sep-14
Sep-14
Nov-14
Jul-14
Jul-14
Mar-14
Mar-14
May-14
May-14
Jan-14
Jan-14
Nov-13
Nov-13
May-13
Jul-13
Jul-13
Sep-13
Sep-13
Mar-13
May-13
Jan-13
Mar-13
Nov-12
Jan-13
Jul-12
Sep-12
Sep-12
Nov-12
May-12
Mar-12
Nov-14
Jul-14
Jul-14
Sep-14
Sep-14
May-14
May-14
Jan-14
Jan-14
Mar-14
Mar-14
Nov-13
Nov-13
May-13
Jul-13
Jul-13
Sep-13
Sep-13
Mar-13
May-13
Jan-13
Mar-13
Nov-12
Jan-13
Sep-12
Nov-12
Jul-12
Sep-12
May-12
Jul-12
0.0x
May-12
Mar-12
1.0x
3.0x
May-12
Jul-12
2.0x
13.0x
Key Financial Metrics
Financial Summary/Key Metrics
Consolidated
Net Sales
Growth y/y
Adj. EBITDA
Margin
2013
7.2
20.0%
2014
Q115
10.1
39.1%
2.1
7.8%
Q215E
2.5
4.9%
Q315E
2.6
(13.0%)
Q415E
2.8
2.4%
2015E
10.0
(0.5%)
2016E
14.1
41.1%
2017E
Key Statistics
18.8
33.4%
1.8
25%
3.7
36%
0.3
-7%
0.1
10%
0.2
8%
0.1
7%
0.6
5%
3.1
20%
6.1
31%
EPS
$0.06
$0.11
$0.00
$0.00
$0.00
$0.00
$0.00
$0.07
$0.14
Cash
Net Debt
2.6
(3.0)
4.7
(6.7)
4.2
-7.1
3.8
-6.8
4.3
-7.3
4.2
-7.2
4.2
(7.2)
5.6
(8.7)
9.2
(12.3)
1.3
3.7
0.5
-0.4
0.4
-0.2
0.3
1.4
3.5
Value
$1.48
52-Week High
52-Week Low
Avg Vol (3-Mo)
Shares Outstanding
Market Cap
Net Debt
Enterprise Value
Div Yield
FYE
Employees (FY14)
0.88
0.04
24.5
35
-7
29
0%
Jun-14
50
Top Inst. Ownership
FCF
Venator Capital Mgmt
Manulife AM
Penderfund Capital Mgmt
Ldic Inc.
CI Investments
Timelo Investment Mgmt
Desjardins Bus. Capital
Innovatech Quebec
Northstar AM
Natcan
Operating/Segmented Summary
Canada & International Revenue
% of total
0.6
9%
0.7
7%
0.2
8%
0.2
10%
0.3
10%
0.3
12%
1.0
10%
1.7
12%
2.4
13%
US Revenue
% of total
6.6
91%
9.4
93%
2.0
92%
2.2
90%
2.4
90%
2.4
88%
9.0
90%
12.5
88%
16.4
87%
Recurring Revenue
% of total
6.7
93%
8.5
84%
2.1
97%
2.3
93%
2.5
94%
2.7
96%
9.5
95%
13.6
97%
18.3
97%
EBITDA
Net Change in WC
Capex
FCFF
0.5
7%
1.6
16%
0.1
3%
0.2
7%
0.2
6%
0.1
4%
0.5
3%
0.5
3%
0.5
3%
WACC
Term. Growth Rate
Non-Recurring Revenue
% of total
3%
(39%)
Valuation
M Shares
∆ 6 Mnths
% Held
2.53
1.96
1.30
0.25
NA
NA
NA
NA
NA
NA
0.00
0.00
0.00
0.00
NA
NA
NA
NA
NA
NA
10.3%
8.0%
5.3%
1.0%
NA
NA
NA
NA
NA
NA
F2015E
F2016E
F2017E
0.6
(0.0)
0.6
(0.0)
3.1
(0.0)
0.6
1.6
6.1
(1.9)
0.7
3.6
14.0%
2.0%
Terminal Value PV
Equity Value
DCF Value
Current
1-Yr TGT
14.9
43.6
$1.80
49.7
$2.06
Comparables
Comparables
and Peer Analysis
Wanted Technologies
Tableau
Qlik
Splunk
Microstrategy
Mediagrif
PROS Holdings
Teradata Corporation
Peer Average
Comparables
Multiples Analysis
Wanted Technologies
Tableau
Qlik
Splunk
Microstrategy
Mediagrif
PROS Holdings
Teradata Corporation
Peer Average
Price
Target
Div Yield
Return
$1.44
$85.93
$29.97
$57.31
$158.06
$18.02
$25.91
$42.83
$1.80
$95.36
$32.92
$76.63
$191.00
$21.19
$37.00
$45.39
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
2.2%
0.0%
0.3%
25%
11%
10%
34%
21%
18%
45%
6%
20.6%
F2014
F2015E
C2013
12.2%
0.3%
1.3%
0.3%
3.0%
4.7%
-2.7%
4.3%
1.6%
0.8%
0.7%
0.6%
0.8%
0.0%
7.6%
-0.4%
6.9%
2.3%
3.4x
42.2x
6.3x
31.1x
2.6x
5.1x
5.9x
2.3x
13.6x
Enterprise
Value
29
5,386
2,467
6,193
1,449
309
695
6,052
FCF Yield
Return
Revenue
EBITDA
EPS
1 Week
1 Month
3 Month
YTD
1 Year
F2015E
F2016E
F2015E
F2016E
F2015E
F2016E
10.8%
(12.6%)
(14.9%)
(12.9%)
(15.2%)
0.1%
(12.9%)
(14.9%)
(11.9%)
29.7%
(7.4%)
(11.4%)
(10.8%)
(13.3%)
0.4%
(10.0%)
(10.5%)
(9.0%)
50.0%
14.6%
13.1%
(5.1%)
(3.2%)
2.7%
(4.2%)
(8.0%)
1.4%
7.5%
(12.7%)
(16.5%)
(16.3%)
(16.2%)
(0.1%)
(18.8%)
(15.6%)
(13.8%)
2.9%
15.6%
3.9%
(28.1%)
20.0%
(7.3%)
(38.0%)
(10.5%)
(6.3%)
10.0
554.1
637.6
440.7
623.1
71.4
228.0
2,843.2
14.1
750.5
738.0
581.0
661.5
74.9
259.9
2,967.1
0.6
49.2
56.9
20.0
98.0
28.1
38.4
786.6
3.1
90.1
80.2
29.7
105.5
30.9
45.0
830.8
$0.00
$0.23
$0.35
$0.04
$4.98
$0.95
$0.54
$3.00
$0.07
$0.57
$0.52
$0.11
$5.50
$1.08
$0.73
$3.24
C2014E
C2015E
C2013
C2014E
C2015E
C2013
C2014E
C2015E
C2013
C2014E
C2015E
2.8x
23.2x
5.2x
20.5x
2.5x
4.8x
4.8x
2.2x
9.0x
2.3x
13.7x
4.4x
14.1x
2.4x
4.4x
3.7x
2.2x
6.4x
25%
82%
21%
52%
2%
5%
23%
1%
27%
25%
69%
18%
46%
4%
10%
31%
2%
26%
20%
41%
15%
32%
4%
4%
20%
3%
17%
9.6x
NA
NA
38.5x
NA
6.7x
29.1x
NA
24.8x
12.8x
NA
61.0x
NA
55.8x
11.2x
25.6x
8.0x
32.3x
15.7x
NA
43.3x
NA
14.8x
10.1x
18.1x
7.7x
18.8x
35%
5%
2%
53%
-12%
72%
17%
0%
19%
21%
12%
7%
5%
4%
39%
14%
28%
16%
18%
9%
9%
5%
16%
42%
17%
28%
18%
EV/Sales
Sales Growth (%)
EV/EBITDA
EBITDA Margin (%)
*All financial values in CAD
Source: Euro Pacific Canada, Company Reports and Filings, Capital IQ, Bloomberg
Andrej Krneta, B.Eng, MBA | 416.933.3351 | [email protected]
Page 15 of 43
WAN-TSXV | 14 January 2015
Exhibit 1 – Consolidated Income Statement and Estimates (all figures in thousands of Canadian Dollars except EPS)
Jun-10
2010
Jun-11
2011
Jun-12
2012
Jun-13
2013
4,335
89%
4,624
87%
5,284
88%
6,713
93%
1,900
96%
1,962
83%
534
11%
705
13%
744
12%
518
7%
88
4%
US Revenues
as % of total sales
4,531
93%
4,983
94%
5,520
92%
6,609
91%
Canada Revenues
as % of total sales
337
7%
346
6%
508
8%
Total Revenues
yoy growth (rep.)
4,868
-20%
5,329
9%
6,028
13%
($CAD 000s)
Recurring Revenues
as % of total sales
Non-recurring Revenues
as % of total sales
Cost of sales
Sep-13 Dec-13 Mar-14
Q114
Q214
Q314
Jun-14
Q414
2014
2,202
73%
2,433
90%
8,496
84%
2,087
97%
2,315
93%
399
17%
798
27%
276
10%
1,561
16%
54
3%
1,826
92%
2,200
93%
2,827
94%
2,539
94%
9,393
93%
623
9%
161
8%
161
7%
172
6%
169
6%
7,231
20%
1,987
26%
2,361
37%
3,000
66%
2,709
27%
Sep-14 Dec-14 Mar-15
Q115 Q215e Q315e
Jun-15
Q415e
2015e
Jun-16
2016e
Jun-17
2017e
Jun-18
2018e
2,460
94%
2,654
96%
9,516
95%
13,618
97%
18,324
97%
23,642
98%
162
7%
150
6%
120
4%
486
5%
491
3%
496
3%
501
2%
1,974
92%
2,229
90%
2,354
90%
2,441
88%
8,998
90%
12,458
88%
16,392
87%
20,908
87%
664
7%
168
8%
248
10%
256
10%
333
12%
1,004
10%
1,651
12%
2,428
13%
3,235
13%
10,057
39%
2,142
8%
2,477
5%
2,610
-13%
2,774
2%
10,002
-1%
14,109
41%
18,820
33%
24,144
28%
140
715
575
492
74
76
110
313
573
82
114
143
245
585
843
1088
1569
Gross Profit
Gross margin (%)
4,728
97%
4,614
87%
5,453
90%
6,739
93%
1,914
96%
2,285
97%
2,889
96%
2,396
88%
9,484
94%
2,060
96%
2,363
95%
2,467
95%
2,529
91%
9,418
94%
13,266
94%
17,732
94%
22,574
94%
Salaries and Marketing
as % of total sales
2133
44%
2180
41%
2225
37%
1952
27%
470
24%
530
22%
650
22%
661
24%
2310
23%
675
32%
775
31%
849
33%
956
34%
3256
33%
3999
28%
4900
26%
6060
25%
General and Administrative
as % of total sales
1102
23%
1144
21%
1138
19%
1126
16%
324
16%
470
20%
496
17%
441
16%
1732
17%
562
26%
855
35%
673
26%
730
26%
2820
28%
2892
20%
3101
16%
3380
14%
R&D
as % of total sales
1545
32%
1838
34%
2074
34%
2324
32%
610
31%
227
10%
680
23%
681
25%
2198
22%
757
35%
812
33%
858
33%
879
32%
3306
33%
3735
26%
4133
22%
4877
20%
49
1%
-227
-4%
466
8%
1,817
25%
583
29%
1,216
51%
1,276
43%
585
22%
3,659
36%
287
13%
54
2%
179
7%
58
2%
578
6%
3,110
22%
6,119
33%
8,707
36%
345
412
394
398
108
113
111
106
438
118
123
83
85
409
334
382
405
29
26
24
18
4
5
8
7
24
6
5
7
7
26
27
27
30
-243
-5%
-574
-11%
-8
0%
1,318
18%
506
25%
1,052
45%
1,055
35%
606
22%
3,220
32%
59
3%
-84
-3%
79
3%
-44
-2%
10
0%
2,613
19%
5,571
30%
8,227
34%
EBITDA
EBITDA margin (%)
Depreciation & Amortization
Other Financial Expenses
EBIT
EBIT margin (%)
Interest Expense/ (Income)
23
-2
2
-5
0
0
0
0
-33
-19
-3
-3
-3
-28
-29
-29
-16
FX (Gain)/ Loss
82
90
-56
-83
35
-45
-102
135
22
-104
-10
-10
-10
-134
-136
-139
-45
0
0
0
1
0
0
0
3
3
0
1
1
1
3
3
4
4
Other Interest Expense
Profit before tax
-349
-662
46
1,406
471
1,097
1,157
469
3,228
182
-72
91
-32
168
2,775
5,735
8,284
Tax (credit)/charge
Effective Tax Rate
64
-18.3%
2
-0.4%
60
129.6%
43
3.1%
15
3.2%
83
7.6%
389
33.6%
106
22.7%
593
18.4%
99
54.6%
-25
35.0%
32
35.0%
-11
35.0%
94
56.2%
971
35.0%
2007
35.0%
2900
35.0%
Net Profit
Profit margin (%)
Basic Shares (M)
Diluted Shares (M)
-413
-8%
24
24
-665
-12%
24
24
-14
0%
24
24
1,363
19%
24
24
456
1,014
769
363
24
24
24
25
24
25
24
25
2,635
26%
24
25
82
4%
25
25
-47
-2%
25
25
59
2%
25
25
-21
-1%
25
25
74
1%
25
25
1,803
13%
25
26
3,728
20%
25
26
5,385
22%
25
26
Basic EPS ($)
Diluted EPS ($)
-0.02
-0.02
-0.03
-0.03
0.00
0.00
0.06
0.06
0.02
0.02
0.04
0.04
0.03
0.03
0.01
0.01
0.11
0.11
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.07
0.07
0.15
0.14
0.22
0.21
Source: Euro Pacific Canada, Company Reports and Filings
Page 16 of 43
Special Situations
14 January 2015
CMG-TSX: $10.98
Computer Modelling Group
2015 Euro Pacific Canada Top Picks
Event: We are pleased to introduce Computer Modelling Group (“CMG” or “the
Company”) as one of Euro Pacific Canada’s Research top picks for 2015.
 Resilience during commodity price downturns: We are forecasting y/y revenue
growth of 10.3% and 16.3% over the next two quarters despite the ~55%+
decline in crude oil prices. This is on the back of strong deferred revenue growth
announced last quarter (up 19% y/y). In Exhibit 1, we showcase CMG’s y/y
historical sales growth versus y/y change in WTI crude prices. Note the resilience
of sales during the last commodity downturn of 2008-2009. Likewise, we expect
revenues to remain healthy during the current downtrend as CMG books
deferred revenues into its P&L.
 Margins and returns sustainability: Unlike other companies with exposure to
E&P clientele, we believe CMG’s margins will prove resilient during the current
downturn. We are calling for EBITDA margins to remain in and around 50%,
driving ROE and ROIC levels of ~45-50%. In Exhibit 2, we showcase CMG’s stock
performance in commodity downturns relative to the S&P/TSX Energy index and
the S&P/TSX Energy Services index.
 Ongoing buybacks to provide share price support: Public filings indicate that the
Company continued its share repurchase program during CQ4, buying back
~300K shares during the quarter. In the CQ3 MD&A, management commented
that the buybacks were effected given their “belief that CMG’s Common Shares
were not trading in price ranges that reflected their underlying values”. We
expect buybacks to continue during C2015.

Catalysts on the horizon: CoFlow was demoed at Society of Petroleum Engineers
(SPE) Annual Technical Conference and Exhibition (ATCE) in Amsterdam in October
2014. We note that this was the first time CMG demonstrated the product
capabilities to customers. We are encouraged by this as it speaks to CMG’s
confidence of an impending successful commercialization of the product. The
latest version of CoFlow (R10) will be released to the joint development partners –
Shell (RDSA-ENXTAM, NR) and Petrobras (PETR4-BOVESPA, NR) – in H215 and
“over the next few years” to additional customers.
 Investment thesis intact in light of oil price volatility: We view the recent
pullback in the stock as an opportunity to consolidate a position in a best-ofbreed business. With a 75%+ recurring revenue base, CMG leverages investors
to secular growth trends while providing exceptional defensive characteristics.
We expect CMG’s high free cash flow generation will enable the Company to
grow annual dividends at low double digits. We note that CMG has a low
correlation to oil prices (+0.25 over the last four years); it is thus a great refuge for
investors seeking a more defensive name (in the short run), while keeping leverage
to the secular growth in secondary/tertiary oil production.
 Valuation: We believe the appropriate way to evaluate CMG is with a long-term
discounted cash flow (DCF) analysis given the revenue visibility and secular growth
trends supporting the story. Our DCF analysis calls for a $15.00 target price
without contribution from new products.
Buy Rating
$15.00 Target Price
Projected Total Return: 40.3%
Valuation: DCF (8.5% discount; 3.0% GRIP)
Market Data
Market Capitalization
Net Cash
Enterprise Value
Basic Shares O/S
Fully Diluted Shares O/S
Avg. Daily Volume (K)
52 Week Range
Dividend Yield
863.5
65.4
798.1
78.7
80.0
132.3
$10.06 - $15.74
3.6%
Revisions
New
2015E Revenue
2015E EBITDA
2015E EPS
NA
NA
NA
Financial Metrics
FYE - Mar 31
Revenue
EBITDA
EPS
Old
2015E
83,711
41,578
$0.37
2016E
2017E
92,140 102,748
46,109 51,845
$0.41
$0.46
Valuation Data
FYE - Mar 31
EV/Sales
EV/EBITDA
P/E
2015E
9.5x
19.5x
29.4x
2016E
8.7x
17.4x
26.5x
2017E
7.8x
15.3x
23.7x
Q2
19,731
20,043
9,949
9,933
$0.09
$0.09
Q3
21,198
23,408
10,603
11,753
$0.10
$0.11
Q4
23,230
25,670
11,538
12,803
$0.11
$0.11
Quarterly Data
Rev. '15
Rev. '16
EBITDA '15
EBITDA '16
EPS '15
EPS '16
Q1
19,552
23,019
9,488
11,621
$0.08
$0.10
Company Description
Incorporated in 1996, Computer Modelling Group
develops and licenses reservoir simulation software.
The Company's software helps oil and gas companies
achieve increased recoveries of hydrocarbons from
their reservoirs. CMG is recognized as the leading
supplier of dynamic reservoir modelling software. CMG
has over 550 clients using its software in 58 countries.
The company is headquartered in Calgary, AB and has
approximately 200 employees, half of which are
dedicated to R&D.
$18.00
1.20
$17.00
$16.00
1.00
Vol ume (mm)
Pri ce
$15.00
0.80
$14.00
0.60
$13.00
$12.00
0.40
$11.00
0.20
$10.00
$9.00
Jan-14
Amr Ezzat | 514.905.7944 | [email protected]
Old
83,711
41,578
$0.37
Apr-14
Jul-14
Oct-14
0.00
Jan-15
www.epccm.ca
Page 17 of 43
CMG-TSX | 14 January 2015
Computer Modelling Group Ltd. (CMG-T, $10.98) - Data Sheet
$18.00
Last Sale Price
50-Day MA
200-Day MA
Stock Price ($)
Consensus
3 Mths Ago
Incorporated in 1996, Computer Modelling Group develops
and licenses reservoir simulation software. The Company's
software helps oil and gas companies achieve increased
recoveries of hydrocarbons from their reservoirs. CMG is
recognized as the leading supplier of dynamic reservoir
modelling software. CMG has over 550 clients using its
software in 58 countries. The company is headquartered in
Calgary, AB and has approximately 200 employees, half of
which are dedicated to R&D.
Rating:
Target:
Median:
High:
Low:
Outperform Outperform
$15.14
$13.70
$15.00
$14.00
$19.00
$15.00
$12.00
$10.00
1
0.8
$12.00
0.6
$10.00
0.4
$8.00
0.2
0
$6.00
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Return
Company Description
1.4
1.2
$14.00
Current
1.6
Volume (M Shares)
$16.00
BUY | PT: $15.00
Jul-14
28%
31%
40%
(5%)
Consensus Distribution
Sector Outperform/Buy
Sector Perform/Hold
Sector Underperform/Sell
# Estimates
7
1
1
9
Historical Valuation
CAPITAL IQ - CONSENSUS BASED NTM EV/EBITDA
CAPITAL IQ - CONSENSUS BASED NTM P/E
Computer Modelling G roup Ltd.
Relative to S&P/ TSX Composite Index
Jan-15
Dec-14
Oct-14
3.00x
Nov-14
Jul-14
Dec-13
Aug-13
Jun-13
Mar-13
Jan-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Mar-14
Jan-14
Feb-14
Dec-13
Oct-13
Nov-13
Sep-13
Jul-13
Aug-13
Jun-13
Apr-13
May-13
Feb-13
Mar-13
Sep-14
1.00x
Aug-14
20.0x
Jun-14
1.00x
Apr-14
1.50x
15.0x
May-14
25.0x
Mar-14
2.00x
1.50x
Jan-14
2.00x
17.0x
Feb-14
19.0x
30.0x
Oct-13
2.50x
Nov-13
2.50x
21.0x
Sep-13
35.0x
Jul-13
3.00x
Apr-13
23.0x
Relative to S&P/ TSX Composite Index
May-13
40.0x
Computer Modelling G roup Ltd.
Feb-13
3.50x
25.0x
Key Financial Metrics
Financial Summary
2014
Q115A
Q215A
Q315E
Q415E
2015E
2016E
2017E
Key Statistics
Revenue
Growth y/y
Cons.
Cons. 3 Mts. Ago
EBITDA
Margin
Cons.
Cons. 3 Mts. Ago
Diluted EPS
Growth y/y
Cons.
Cons. 3 Mts. Ago
74.5
8.6%
75.0
75.0
38.4
51.5%
41.7
41.7
0.35
8.8%
0.36
0.36
19.6
7.9%
20.8
20.8
9.5
48.5%
11.3
11.3
0.08
-14.0%
0.12
0.12
19.7
14.8%
19.7
19.7
9.9
50.4%
10.2
9.8
0.09
32.1%
0.09
0.09
21.2
10.3%
20.7
21.2
10.6
50.0%
10.6
10.8
0.10
7.1%
0.10
0.10
23.2
16.3%
22.1
22.4
11.5
49.7%
11.3
11.6
0.11
9.4%
0.11
0.10
83.7
12.4%
82.1
82.4
41.6
49.7%
42.2
43.2
0.37
7.3%
0.37
0.37
92.1
10.1%
91.1
92.3
46.1
50.0%
47.1
48.5
0.41
10.9%
0.42
0.43
102.7
11.5%
104.9
104.3
51.8
50.5%
54.4
53.6
0.46
12.0%
0.46
0.49
52-Week High
52-Week Low
Avg Vol (3-Mo)
Shares Outstanding
Market Cap
Net Debt
Enterprise Value
Div Yield
FYE
Employees
2014
Q115A
Q215E
Q315E
Q415E
2015E
2016E
2017E
57.1
4.7%
86.3%
9.1
7.9%
13.7%
8.3
46.5%
11.1%
16.0
14.4%
91.8%
1.4
(38.6%)
8.2%
2.2
17.9%
11.0%
15.3
16.6%
85.2%
2.7
45.5%
14.8%
1.7
(21.0%)
8.8%
17.2
20.3%
90.0%
1.9
(35.1%)
10.0%
2.1
5.0%
9.9%
18.8
19.2%
90.0%
2.1
5.8%
10.0%
2.4
5.0%
10.2%
67.3
17.7%
89.3%
8.1
(10.9%)
10.7%
8.4
0.9%
10.0%
75.0
11.5%
90.0%
8.3
3.1%
$0.10
8.8
5.0%
9.5%
84.2
12.2%
90.0%
9.4
12.2%
$0.10
9.2
5.0%
9.0%
1 Week
1 Month
3 Month
YTD
1 Year
LTM
NTM
2.2%
3.5%
2.3%
3.0%
7.3%
(1.6%)
(0.3%)
0.6%
0.1%
(1.6%)
1.5%
(1.1%)
10.5%
2.0%
3.3%
3.2%
6.9%
1.5%
(3.7%)
2.9%
0.4%
(3.0%)
2.4%
(5.0%)
17.3%
8.0%
22.9%
13.1%
17.8%
15.0%
(15.3%)
(3.2%)
0.4%
(3.5%)
7.3%
(0.3%)
25.5%
24.6%
53.2%
12.8%
29.4%
21.9%
(6.8%)
(43.9%)
(4.1%)
4.1%
11.7%
(0.3%)
29.9%
28.7%
54.2%
16.4%
27.3%
27.6%
(11.9%)
(44.6%)
(7.3%)
(0.8%)
11.9%
(17.5%)
1,678.0
513.9
158.5
267.5
48.6
45.0
20.1
6.8
22.7
30.7
1,873.9
665.7
375.9
371.9
56.8
69.2
22.7
37.0
30.1
29.9
2.78
2.09
5.01
3.00
0.21
1.14
0.24
(0.39)
0.88
1.09
3.13
3.92
14.57
6.18
0.49
1.49
0.24
0.19
1.02
1.23
38.1
43.7
0.34
0.40
Value
$15.74
$10.06
133k
79
$863.48
-65
$798.08
3.6%
Mar 31
~204
Top Inst. Ownership
Segmented Revenue
Annuity/maintenance licenses
Growth y/y
% of Software Sales
Perpetual licenses
Growth y/y
% of Software Sales
Professional services
Growth y/y
% of Total Sales
Comparables
and Peer Analysis
CGI Group
Open Text
Constellation (CSU-T, Buy)
Macdonald Dettwiler
Descartes
Enghouse
Solium (SUM-T, Buy)
Redknee
Mediagrif
Information Services
Peer Average
CMG (EPC)
Return
EBITDA
EPS
LTM
M Shares
Neuberger Berman Llc
Burgundy
Manulife
T. Rowe Price Group, Inc.
Wasatch Advisors Inc.
Fidelity Investments
Montrusco Bolton
Blackrock, Inc.
Bmo Investments Inc.
Pembroke Management
EV / EBITDA
NTM
LTM
9.5x
14.9x
NM
15.1x
23.8x
21.4x
14.0x
NM
13.5x
9.6x
15.2x
21.1x
NTM
8.5x
11.5x
20.0x
10.9x
20.4x
13.9x
12.4x
8.7x
10.2x
9.9x
12.6x
18.4x
7.62
7.58
5.62
3.47
3.26
2.22
1.89
1.63
1.12
0.87
Price / Earnings
LTM
15.8x
26.8x
NM
30.7x
NM
35.2x
30.0x
NM
20.4x
16.7x
25.1x
33.0x
NTM
14.1x
14.3x
23.4x
14.9x
35.6x
26.8x
29.1x
18.6x
17.7x
14.8x
20.9x
27.6x
43%
(8%)
∆ 6 Mnths
% Held
0.00
0.00
0.28
0.00
0.00
0.22
(0.25)
0.50
0.00
(0.05)
9.7%
9.6%
7.1%
4.4%
4.1%
2.8%
2.4%
2.1%
1.4%
1.1%
Dividend
LTM
Yield
ROIC
1.2%
1.4%
1.4%
1.0%
2.2%
4.4%
1.2%
3.6%
11.7%
9.7%
21.2%
8.7%
4.7%
11.5%
12.7%
(0.2%)
7.9%
19.9%
10.8%
40.1%
Source: Euro Pacific Canada, Company Reports and Filings, Capital IQ
AmrAmr
Ezzat
| 514.905.7944
| [email protected]
Ezzat
| 514.905.7944|
[email protected]
Page 18 of 43
CMG-TSX | 14 January 2015
Exhibit 1 – Quarterly Sales vs. Quarterly Oil Prices
Quarterly
Sales ($mm)
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Y/Y Growth (%)
WTI ($)
11.7
14.4
10.2
9.1
11.7
14.3
12.1
13.3
12.1
14.4
15.9
12.0
15.9
17.2
16.5
16.1
16.8
19.3
18.1
17.2
19.2
20.0
19.6
19.7
Sales
44.60
49.66
69.89
70.61
79.36
83.76
75.63
79.97
91.38
106.72
95.42
79.20
98.83
103.02
84.96
92.19
91.82
97.23
96.56
102.33
98.42
101.58
105.37
91.16
58.8%
60.4%
23.8%
(5.2%)
0.3%
(1.0%)
17.8%
46.8%
3.2%
0.6%
32.2%
(10.0%)
31.8%
19.6%
3.5%
34.2%
5.7%
12.2%
9.7%
6.8%
14.3%
3.6%
8.3%
14.5%
WTI Oil
(53.5%)
(51.1%)
(50.1%)
(29.8%)
77.9%
68.7%
8.2%
13.3%
15.1%
27.4%
26.2%
(1.0%)
8.2%
(3.5%)
(11.0%)
16.4%
(7.1%)
(5.6%)
13.7%
11.0%
7.2%
4.5%
9.1%
(10.9%)
Source: Euro Pacific Canada, Bloomberg, Computer Modelling Group
CMG’s quarterly sales declined 3 times on a y/y basis in the last 24 quarters (12.5% of quarters) versus 10
quarters of declining y/y WTI prices (41.7% of quarters). It is also worth noting the magnitude of the oil
price declines versus the resilience of CMG sales in declining quarters.
Exhibit 2 – Stock Price Performance CMG vs. S&P/TSX Energy vs. S&P/TSX Energy Services
1000%
900%
Energy Index: -29%
Services Index: -48%
CMG: -12%
Energy Index: -59%
Services Index: -63%
CMG: -26%
800%
Energy Index: -20%
Services Index: -25%
CMG: +6%
700%
140%
130%
120%
110%
600%
100%
500%
90%
400%
80%
300%
70%
200%
Energy Index: -32%
Services Index: -32%
CMG: +1%
100%
0%
60%
50%
40%
CMG
S&P/TSX Energy Services
Source: Euro Pacific Canada, Bloomberg
Please see company disclosures on page 39.
AmrAmr
Ezzat
| 514.905.7944
| [email protected]
Ezzat
| 514.905.7944|
[email protected]
Page 19 of 43
Telecom & New Media
14 January 2015
DHX.B-TSX: $9.18
DHX Media Ltd.
BUY Rating
Top Pick for 2015 – It’s Still the Middle Innings! Bullish
Content Thesis Finds Daily Confirmation!
$11.50 Target Price
Event: We are once again selecting DHX Media as one of our Top Recommendations for
Projected Return: 25.9%
2015. While the 73.4% return for C2014 and the current valuation at 15.4/13.0x
C2015/16 EV/EBITDA give pause for deliberation/debate, we remain resolutely bullish.
Valuation: 15.4x EV/C2015 EBITDA
For us, the repeat selection of DHX Media was relatively clear. Our bullish view on
content finds supporting data points on an almost daily basis with releases highlighting
the growth of OTTP providers and digital buys. Supported by this positive backdrop, DHX
Media has displayed consistent discipline and success with its acquisition strategy.
Furthermore, the Company’s growing scale adds to its ability to attract, finance and
bring synergies to acquisitions.
We believe the shares will continue to command double-digit EV/EBITDA valuations.
Beyond acquisitions, we see strong digital and production momentum over the next two
to three years layering into much greater contributions from merchandising where we
believe that the TeleTubbies relaunch has the potential to support merchandising
contributions significantly beyond imbedded expectations.
Upside Catalysts: With the shares down $0.57 or 5.9% since levels prior to the
announcement of DHX’s agreement with China Network Television (CNTV) and China
Central Television (CCTV) in addition to its acquisition of Nerd Corps, we believe current
valuations discount the impact of both moves.
CNTV/CCTV Contract: Through its agreement with CNTV/CCTV, DHX is providing 700+
half-hours of Mandarin content including Teletubbies, Inspector Gadget, Madeline, Sonic
the Hedgehog and Dennis the Menace. DHX looks to launch the service in FQ315 with an
AVOD and SVOD website expanding to IPTV, OTT and Mobile platforms. Content will be
produced at DHX’s studios (Halifax & Vancouver) and co-produced with Chinese
animation partners. While assigning specific revenue forecasts is impossible, we could
see the joint venture following a trajectory similar to the YouTube (GOOG-US, NR)
revenues where annualized revenues for F2015 are approaching $9M within the first
two years. We believe the potential significance of the transaction has been diluted by
the inability to assign revenue targets. We further believe that the significance of the
transaction as a prototype for additional markets has been lost. More in our note.
Market Data
Market Capitalization
Net Debt
Enterprise Value
Basic Shares O/S
Fully Diluted Shares O/S
Avg. Daily Volume (M)
52 Week Range
Dividend Yield
1,100.6
216.5
1,317.1
119.9
119.9
0.47
$4.38 - $10.58
0.6%
Revisions
New
Old
236.7
82.5
$0.17
NC
NC
NC
2014A
116.1
37.0
$0.08
9.1
2.6x
0.9%
2015E
236.7
82.5
$0.17
46.9
2.6x
4.0%
2016E
268.4
94.3
$0.33
68.3
1.7x
5.8%
16.8x
29.9x
20.4x
71.5x
72.3x
89.5x
$10.88
15.4x
9.4x
18.8x
36.6x
18.0x
45.9x
$11.17
13.0x
8.7x
16.0x
26.1x
11.3x
32.7x
2015E Revenue
2015E Adj. EBITDA
2015E EPS
Financial Metrics
FYE - Jun 30
Revenue
Adj. EBITDA
EPS
FCF
Net Debt:EBITDA
FCF Yield
Valuation Data
DCF - Current/Target
EV/EBITDA
Current
Peers
Target
P/E
Current
Peers
Target
Quarterly Data
Q1
Q2
Q3
Q4
2014 27.0
30.4
29.0 29.7
2015 43.0
61.0
69.5 63.1
2014
7.8
9.6
9.4 10.2
2015 13.7
22.0
24.6 22.2
2014 $0.02 $0.03 $0.02 $0.02
2015 ($0.06) $0.07 $0.09 $0.07
Revenue
EBITDA
EPS
Company Description
Rob Goff, CFA | 416.933.3351 | [email protected]
Arjun Datta, MBA | 647.479.8817 | [email protected]
Jan-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Volume (M)
Aug-14
Jun-14
2.50
2.00
1.50
1.00
0.50
0.00
Apr-14
merchandising revenues in excess of €1B through its peak years. For blue-sky potential, we
reference the peak F2002 merchandising and licensing revenues from Teletubbies that
approached £46M. We refrain from forecasting these revenues but their potential
represents option value. In addition to their merchandising potential, DHX’s marquee
properties of Yo Gabba Gabba, Teletubbies and Inspector Gadget have the potential to
significantly outperform our baseline forecasts through OTTP sales, direct streaming
considerations or through SVOD via YouTube or similar platforms.
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
May-14
Focus on Merchandising: We have often referenced that Teletubbies generated
DHX produces and distributes TV and interactive content
for domestic and international markets. The company
focuses on children's and family entertainment with a
library of 9,000+ half-hours of production and 60+ titles
including Caillou, Yo Gabba Gabba!, and Johnny Test. DHX
Media is based in Halifax, Nova Scotia, Canada with
facilities in Halifax, Toronto, Vancouver and London.
Jan-14
acquisition is not reflected in the market. The roughly $0.04/$0.06 to pro forma F2015
EPS and FCF represented a positive $0.50 increase to shareholders based on an arguably
conservative 12% FCF yield on the FCF accretion. However, we believe that a much
greater positive impact lies in the strength of its library and production pipeline. More
details in our note.
Feb-14
Mar-14
Nerd Corps: We believe the immediate and longer-term benefit of the Nerd Corps
Price
www.epccm.ca
Page 20 of 43
DHX.B-TSX |14 January 2015
Valuation: We have DHX shares at 15.4x/13.0x C2015/16 EV/EBITDA while peers Entertainment One
(ETO:LSE, NR), DreamWorks (DWA:NYSE, NR), and Lions Gate Entertainment (LGF:NASDAQGS, NR) are at
10.0x/9.2x, 18.0x/NA and 15.0x/12.7x, respectively. Our PT reflects a 4.0%/5.8% FCF yield against
F2015/F2016 pro forma FCF of $0.51/$0.66 per share. With $0.69/shr of EBITDA, the shares/targets have
significant valuation leverage.
Investment Thesis: We see a prolonged battle for content across the traditional broadcasters, premium
broadcasters, and OTT providers. We expect that large content owners such as DHX will outperform
smaller peers who lack access to the buyers and new digital platforms. We see the value of marquee
properties continuing to outperform as they drive viewership in the AdvOD ecosystem (AdvODs drive
revenues through advertising on demand - YouTube is the prime example) that in turn drives demand for
the content, and in turn, merchandising opportunities. And, it is worth noting that the cycle starts with
production that is 90%+ prefunded by selling linear rights to less than 15% of the market for a finite
period (<5 years) plus various grants. We see animated youth programming at the forefront, given the
value ascribed to its viewer demographics and the global reach of animated programming unencumbered
by linguistic hurdles. The described environment should support organic growth pushing double digits. We
then add the prospective value added through acquisitions where DHX’s scale has been proven to shift
buyer economics with legitimate revenue and cost savings. Over the past two years, DHX has successfully
completed accretive, paradigm shifting acquisitions with Cookie Jar Entertainment ($111M, FQ113), the
recent deal to acquire The Family Channel ($170M, FQ214), and the acquisitions of Ragdoll ($28M,
FQ114), Epitome ($33M, FQ314) and most recently Nerd Corps ($57M, FQ215).
We see continued strong momentum in distribution revenues over the next two to three years reflecting
on digital sales stimulated by SVOD/OTTP (Subscription Video on Demand/Over-the-Top-Provider)
demand and increasing AdvOD demand as YouTube in particular maintains its viewership growth
trajectory and yield rates continue to advance. These channels have an additional role in their brand
building value. Looking out 3+ years, the torque should continue as merchandising ramps up. While the
peak annual Teletubbies merchandising sales of $1B with an implied royalty of $50M are clearly a stretch,
we feel comfortable/conservative with our merchandising and licensing represented revenues at
$15.5M/$16.7M in 2017/18 versus 2014A/15E at $12.2M/$13.3M, respectively. We are optimistic that
Teletubbies and Inspector Gadget could generate significant royalties. The Company’s comments that the
top five Teletubbies episodes generated 230M views over 1.5B minutes over the last 30 days is a powerful
endorsement of the brand’s prospective merchandising power. Our modest upgrade on the
merchandising revenues could prove wrong by orders of magnitude given the potential from known
brands Teletubbies, Inspector Gadget, Elle the Elephant, Yo Gabba Gabba, or prospectively another
emergent property.
We see DHX continuing to deliver its 10%+ organic growth annually complemented by accretive
acquisitions. The platform capabilities of DHX Media serve to shift acquisition economics in its favour.
Please see company disclosures on page 40.
Rob Goff, CFA | 416.933.3351 | [email protected]
Page 21 of 43
DHX Media Ltd. (DHX.B-T, $9.18) - Data Sheet
$12.00
Last Sale Price
50-Day MA
Consensus
7
Volume (M Shares)
$10.00
Stock Price ($)
BUY | PT: $11.50
Company Description
8
200-Day MA
6
$8.00
5
4
$6.00
3
$4.00
2
$2.00
Jan-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
May-…
0
Jun-14
Apr-14
Mar-14
Jan-14
Feb-14
Dec-13
Oct-13
Nov-13
Sep-13
Jul-13
Aug-13
May-…
Apr-13
Feb-13
Mar-13
$0.00
Jun-13
1
DHX produces and distributes TV and interactive content for
domestic and international markets. The company focuses
on children's and family entertainment with a library of
9000+ half-hours of production and 60+ titles including
Caillou, Yo Gabba Gabba!, and Johnny Test. DHX Media is
based in Halifax, Nova Scotia, Canada with facilities in
Halifax, Toronto, Vancouver and London.
3 Mths Ago
Current
Return
0
$0.00
NA
$0.00
NA
Hold
$10.24
$10.00
$11.50
$9.00
12.1%
9.5%
25.9%
-1.4%
Rating:
Target:
Median:
High:
Low:
Consensus Distribution
Sector Outperform/Buy
Sector Perform/Hold
Sector Underperform/Sell
# Est
3
6
1
10
Historical Valuations
CAPITAL IQ - CONSENSUS BASED NTM EV/EBITDA
TSX:DHX.B
18.0x
CAPITAL IQ - CONSENSUS BASED NTM EV/SALES
TSX:CJR.B
6.0x
LSE:ETO
DHX Media Ltd.
Corus Entertainment Inc.
Entertainment One Ltd.
5.0x
4.0x
13.0x
3.0x
2.0x
8.0x
1.0x
Jan-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Mar-14
Jan-14
Feb-14
Dec-13
Oct-13
Nov-13
Sep-13
Jul-13
Aug-13
Jun-13
Apr-13
Feb-13
Mar-13
Jan-15
Dec-14
Oct-14
Nov-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Feb-14
Mar-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Jul-13
Aug-13
Jun-13
Apr-13
May-13
Feb-13
Mar-13
May-13
0.0x
3.0x
Key Financial Metrics
Financial Summary/Key Metrics
Consolidated
Revenue
Growth y/y
Cons.
Cons. 3 Mts. Ago
Pro Forma Revenue
Adj. EBITDA
Growth y/y
Margin
Flow-Through
Cons.
Cons. 3 Mts. Ago
Pro Forma Adj. EBITDA
EPS
Growth y/y
Cons.
Cons. 3 Mts. Ago
Cash
Net Debt
2014
Q115
Q215E
Q315E
Q415E
2015
2016
2017
2018
2019
116.1
19.4%
118.1
118.1
218.4
37.0
58.0%
31.9%
72.1%
36.7
36.7
73.9
$0.08
380.9%
NA
NA
26.7
188.7
43.0
59.4%
49.0
53.0
43.0
13.7
76.0%
31.9%
37.0%
15.6
18.2
13.7
-$0.06
(418.4%)
$0.05
NA
23.9
216.5
61.0
101.0%
64.9
63.3
61.0
22.0
128.4%
36.0%
40.3%
23.6
22.7
22.0
$0.07
148.8%
$0.07
NA
17.7
219.7
69.5
139.5%
67.4
61.1
69.5
24.6
161.2%
35.4%
37.5%
24.7
22.3
24.6
$0.09
487.9%
$0.08
NA
14.0
220.4
63.1
112.2%
67.5
61.4
63.1
22.2
117.5%
35.1%
35.9%
23.5
23.2
22.2
$0.07
310.1%
$0.07
NA
14.7
216.7
236.7
103.8%
244.3
237.3
236.7
82.5
122.7%
34.8%
37.7%
86.2
83.2
82.5
$0.17
107.2%
$0.32
NA
14.7
216.7
268.4
13.4%
282.3
267.6
268.4
94.3
14.4%
35.1%
37.4%
107.2
99.2
94.3
$0.33
89.5%
$0.42
NA
70.4
156.0
292.7
9.0%
284.7
287.1
292.7
106.9
13.3%
36.5%
51.7%
116.6
107.3
106.9
$0.38
14.6%
$0.45
NA
135.4
85.9
322.8
10.3%
303.0
336.8
322.8
122.4
14.5%
37.9%
51.5%
126.7
116.1
122.4
$0.46
23.3%
$0.46
NA
213.5
2.8
356.6
10.5%
299.7
372.0
356.6
140.1
14.5%
39.3%
52.4%
139.6
123.4
140.1
$0.56
20.6%
$0.56
NA
306.8
(95.5)
23.5
34.7%
9.0
40.9
66.5%
28.6
18.4
(11.8%)
8.1
17.3
(19.1%)
9.9
12.2
58.7%
12.2
3.9
(24.4%)
1.7
5.6
-47.5%
3.0
10.0
43.5%
7.2
6.9
69.0%
2.4
2.7
25.1%
2.0
3.0
16.0%
3.0
0.8
40.0%
0.2
14.0
5.0%
7.3
11.0
111.5%
4.1
13.4
40.0%
7.4
5.0
6.5%
2.1
6.8
(7.8%)
4.1
3.3
7.0%
3.1
0.8
39.0%
0.2
20.8
5.0%
12.5
15.5
160.9%
5.4
13.6
37.5%
8.2
6.0
6.5%
2.4
8.9
171.9%
4.9
3.6
7.0%
3.2
1.1
11.7%
0.2
20.8
5.0%
12.5
11.0
528.6%
4.1
19.5
33.0%
11.7
4.2
6.0%
1.7
4.1
(7.3%)
2.5
3.4
7.0%
3.2
1.7
(7.7%)
0.4
19.2
5.0%
11.5
43.1
83.5%
16.5
56.5
38.2%
34.5
22.1
20.4%
8.7
22.6
30.4%
13.5
13.3
8.9%
12.6
4.4
11.2%
1.0
74.8
(14.9%)
43.8
51.9
20.5%
19.9
67.3
19.0%
40.4
23.4
6.0%
9.6
25.3
11.9%
15.1
14.3
8.0%
13.6
2.6
(40.0%)
0.6
83.6
2.5%
49.0
54.2
4.5%
20.8
77.4
15.0%
46.4
24.9
6.0%
10.2
33.1
31.0%
19.8
15.5
8.0%
14.6
1.6
(40.0%)
0.4
86.1
3.0%
50.5
56.7
4.5%
21.8
88.2
14.0%
52.9
26.3
6.0%
10.8
44.5
34.4%
26.5
16.7
8.0%
15.8
1.7
10.0%
0.5
88.7
3.0%
52.0
59.1
4.4%
22.7
100.5
14.0%
60.3
27.7
5.0%
11.3
58.0
30.4%
34.6
18.0
8.0%
17.1
1.9
10.0%
0.5
91.4
3.0%
53.5
Price
Target
Div Yield
Return
1 Week
1 Month
3 Month
YTD
1 Year
F2015E
F2016E
F2015E
F2016E
F2015E
F2016E
$9.18
$22.49
$6.83
£4.51
$22.54
$11.50
$23.20
$7.58
£5.50
$21.36
0.6%
5.2%
0.3%
1.4%
25.9%
8.3%
11.0%
22.3%
(5.2%)
9.1%
(1.5%)
(0.2%)
(1.9%)
(4.5%)
3.8%
(0.7%)
(5.4%)
(0.1%)
(2.6%)
(5.5%)
3.6%
(1.1%)
14.5%
(7.4%)
(15.9%)
(4.1%)
8.2%
(4.8%)
(5.5%)
(2.0%)
(4.3%)
(10.0%)
0.9%
(3.9%)
75.9%
(8.5%)
(25.8%)
(9.0%)
(34.8%)
(19.5%)
237
862
605
1,154
961
268
877
654
1,318
1,170
82
307
51
154
132
94
314
73
171
198
$0.17
$1.91
$0.32
£0.33
$0.85
$0.33
$2.00
$0.58
£0.37
$1.43
Operating/Segmented Summary
Production Revenue
Growth y/y
Gross Margin
Disitribution Revenue
Growth y/y
Gross Margin
Prod. & Service Fee Revenue
Growth y/y
Gross Margin
M&L-owned Revenue
Growth y/y
Gross Margin
M&L-represented Revenue
Growth y/y
Gross Margin
New Media Revenue
Growth y/y
Gross Margin
Family Channel Revenue
Growth y/y
Gross Margin
Key Statistics
Value
52-Week High
52-Week Low
Avg Vol (3-Mo)
Shares Outstanding
Market Cap
Net Debt
Enterprise Value
Div Yield
FYE
Employees
$10.58
$4.38
466
120
1,101
216
1,317
0.6%
Jun 30
123
Top Inst. Ownership
15%
(52%)
M Shares
∆ 6 Mnths
% Held
20.47
15.42
3.06
1.37
1.04
0.93
0.61
0.53
0.19
0.16
NA
10.08
(4.61)
(1.53)
(0.24)
(0.08)
(2.92)
0.08
0.14
(1.40)
17.1%
12.9%
2.6%
1.1%
0.9%
0.8%
0.5%
0.4%
0.2%
0.1%
Valuation
F2014
F2015E
F2016E
Revenue
EBITDA
Depreciation
Capex
Discretionary CF
Discount Rate
Terminal EBITDA Multiple
116.1
32.0
(17.1)
(2.4)
20.2
236.7
62.7
(16.5)
(5.3)
40.5
8.00%
10.50x
268.4
91.6
(18.1)
(4.7)
76.7
Current
1-Yr TGT
1,090.4
1,304.0
$10.88
1,177.7
1,426.8
$11.17
Luxor Capital
Fiera Capital
CI Investments
BMO Investments
Wellington Mgmt
Massachusetts Fin.
Pembroke Management
CI Inv. Consulting
Winnington Capital
Northwest & Ethical Inv.
Terminal Value PV
Equity Value
DCF Value
Comparables
Comparables
and Peer Analysis
DHX Media
Corus
TVA
Entertainment One
Dreamworks Animation
Peer Average
Comparables
Multiples Analysis
DHX Media
Corus
TVA
Entertainment One
Dreamworks Animation
Peer Average
Enterprise
FCF Yield
Return
EV/EBITDA
Revenue
EV/EBITDA - Target
EBITDA
EPS
P/E
P/CFPS
Value
F2015E
F2016E
C2014
C2015E
C2016E
C2014
C2015E
C2016E
C2014
C2015E
C2016E
C2014
C2015E
C2016E
1,317
2,691
227
1,133
2,418
4.0%
9.3%
(27.2%)
(3.2%)
0.1%
(5.2%)
5.8%
9.5%
12.8%
(0.2%)
0.8%
5.7%
16.8x
9.4x
NM
11.5x
68.9x
29.9x
15.4x
8.7x
1.1x
10.0x
18.0x
9.4x
13.0x
8.1x
NA
9.2x
NA
8.7x
20.4x
9.6x
NM
13.5x
65.8x
29.7x
18.8x
8.9x
0.9x
11.7x
17.2x
9.7x
16.0x
8.3x
NA
10.8x
NA
9.6x
71.5x
13.6x
186.3x
17.0x
NM
72.3x
36.6x
11.6x
21.3x
12.5x
26.5x
18.0x
26.1x
11.1x
NA
11.5x
NA
11.3x
35.8x
10.0x
4.6x
28.0x
NM
14.2x
18.8x
10.1x
6.1x
309.8x
47.0x
93.2x
15.0x
9.9x
NA
4.3x
NA
7.1x
*Non-coverage names reflect consensus, 2014 numbers for DHX are based on actual results
Source: Euro Pacific Canada, Company Reports and Filings, Capital IQ
Rob Goff, CFA | 416.933.3351 | [email protected]
Page 22 of 43
Telecom & New Media
14 January 2015
ESP-TSX: $1.53
Espial Group Inc.
European Validation - Bullish Thesis Strong.
Top Pick Status Carries over to 2015!
European Validation: Espial announced that it has signed a contract with a Tier 1
European Cable Operator (1.5M pay-TV subscribers) where Espial has been selected
(from a competitive review) as its primary RDK system integrator and software vendor
for the operators next generation 4K Hybrid DVB-IP set-top boxes. Espial is contracted
to provide system integration, UX customization services, and the Espial G4 STB Client.
We believe the contract is consistent with the contract Espial signed in Q413 with the
major N. American multiple system operator (MSO) covering its ~2M cable
subscribers. The contract represents a critical European validation for Espial’s RDK
service bundle. We expect terms to be similar to the N. American contract.
We originally valued the N. American contract at $21M/$0.75 per share suggesting a
pro rata valuation of roughly $16M/$0.60 per share with the contract (Q314 Cash
$0.56 per share). The enterprise value for Espial at $21.6M is roughly in line with our
assigned value for the first MSO contract leaving additional contracts and the
SmartTV business as upsides. We note that our selection of Espial as a top pick
preceded the European contract win. However, the win clearly gives greater
confidence.
Timelines: Espial anticipates that it will complete its system integration across 2015
with an early 2016 launch. Consequently, we look for system integration revenues of
roughly $1.0-1.5M in 2015. We look for contract economics to be consistent with the
N American contract estimated at $10/household plus $1.50/year/user.
Patience: Espial shares have declined from their 2014 highs of $3.22 (July 30th) as
Espial saw one prospect move from a paid proof of concept (POC) trail to adopt an
alternative solution where we believe it saw a shorter deployment schedule (we
believe a non-RDK solution). Investors have been further disappointed by the lack of
additional client wins. We have been disappointed by the pace of RDK adoptions;
however, we view it as the pace of the industry rather than company specific
consideration. We are aware of three marquee RDK wins. The first win was
announced in Q312 with Liberty Global going with Sea Change. The second win was
Espial’s N. American MSO win announced in Q413. Espial’s announced win yesterday
represents the third contract win that we are aware of across the industry.
Pipeline: With the announcement, Espial’s publicly disclosed pipeline of POC trials will
have at least either one of the original two POC trials announced with Q214 or the
POC trial (1M+ subscriber MSO) announced October 23rd, 2014. At that time, Espial
confirmed that advanced talks with at least six MSOs while having made contact with
20+ of the top 60 MSOs. Espial further indicated the potential for future trials at MSOs
without the POC step; however, it cautioned that one should conservatively allow for
timing that would include a POC. Espial stated on its Q314 investor call that it was
increasingly bullish on MSO adoption of RDK/HTML5 platforms with constant OTTP
streaming announcements a call to action/decision for the MSOs on the RDK/HTML5
decision. We view the accelerating adoption of 4K TVs as a further motivation.
Valuation: Espial shares are currently valued at 7.0x/5.5x 2014/2015 EV/EBITDA,
which our PT brings to 27.3x/9.1x 2015/16 EV/EBITDA. We also see attractive FCF
growth in Espial with 2015/2016 FCF yield at 6.4%/18.5%. We have cumulative
2015-20 FCF at $60.4M or $2.16/shr.
Buy Rating
$4.30 Target Price
Projected Return: 181%
Valuation: 22.9x EV/F2015 EBITDA
Market Data
Market Capitalization
Net Debt
Enterprise Value
Basic Shares O/S
Fully Diluted Shares O/S
Avg. Daily Volume (M)
52 Week Range
Dividend Yield
37.5
-15.8
21.6
24.5
27.9
0.15
$0.87 - $3.23
0.0%
Revisions
New
Old
22.9
3.5
$0.09
NC
NC
NC
2014A
20.1
2.9
$0.07
2.4
NA
6.2%
2015E
22.9
3.5
$0.09
2.7
NA
6.4%
2016E
33.2
9.6
$0.31
7.9
NA
18.5%
7.0x
11.8x
31.3x
22.8x
31.8x
64.1x
1.0x
3.7x
4.5x
$3.70
5.5x
8.4x
27.3x
17.2x
19.3x
48.4x
0.9x
2.0x
4.2x
$4.34
1.1x
6.2x
9.1x
4.9x
13.3x
13.8x
0.3x
1.9x
2.6x
2015E Revenue
2015E EBITDA
2015E EPS
Financial Metrics
FYE - Dec 31
Revenue
Adj. EBITDA
EPS
FCF
Net Debt:EBITDA
FCF Yield
Valuation Data
DCF - Current/Target
EV/EBITDA Current
Peers
Target
P/E
Current
Peers
Target
P/S
Current
Peers
Target
Quarterly Data
Revenue
EBITDA
EPS
Q1
Q2
Q3
Q4
2013
2.5
2.3
3.8
3.9
2014
5.0
4.7
5.1
5.3
2013
-2.4
-1.5
0.4
0.6
2014
1.3
0.6
0.7
0.3
2013 ($0.23) ($0.15) ($0.02) $0.01
2014 $0.05 $0.00 $0.01 $0.01
Company Description
Espial provides standards-based solutions for set-top
box IPTV delivery and Smart TV browsers. The company
has built its IPTV solutions on the RDK and HTML5
standards for increased portability and sells its solutions
to leading Pay-TV operators worldwide. The Company's
HTML5 Smart TV browser is shipped with leading Smart
TV manufacturers and has secured partnerships with
leading chipset manufacturers and content providers.
Espial was founded in 1997 and is headquartered in
Ottawa, Canada.
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
2.50
2.00
1.50
1.00
0.50
0.00
Volume (M)
Rob Goff, CFA | 416.933.3351 | [email protected]
Andrej Krneta, B.Eng, MBA | 416.687.6656 | [email protected]
Price
www.epccm.ca
Page 23 of 43
ESP-TSX | 14 January 2015
Espial Group, Inc. (ESP-T, $1.53) - Data Sheet
$3.50
Last Sale Price
50-Day MA
200-Day MA
2
$2.50
$2.00
1.5
$1.50
1
$1.00
0.5
$0.50
Volume (M Shares)
0
$0.00
Consensus
Indexed Price Movements
Espial Group, Inc.
Current
Return
Buy
$4.27
$4.25
$4.60
$3.90
Buy
$4.18
$4.25
$4.50
$3.70
173%
178%
194%
142%
Consensus Distribution
Sector Outperform/Buy
Sector Perform/Hold
Sector Underperform/Sell
# Est
8
0
0
8
Historical Valuation
CAPITAL IQ - Indexed Price Movements
300%
250%
200%
150%
100%
50%
0%
-50%
-100%
3 Mths Ago
Rating:
Target:
Median:
High:
Low:
Espial provides standards-based solutions for set-top box
IPTV delivery and Smart TV browsers. The company has
built its IPTV solutions on the RDK and HTML5 standards for
increased portability and sells its solutions to leading PayTV operators worldwide. The Company's HTML5 Smart TV
browser is shipped with leading Smart TV manufacturers
and has secured partnerships with leading chipset
manufacturers and content providers. Espial was founded
in 1997 and is headquartered in Ottawa, Canada.
CAPITAL IQ - HISTORICAL LTM EV/SALES
SeaChange International, Inc.
4.5x
TiVo Inc.
Espial Group, Inc.
SeaChange International, Inc.
TiVo Inc.
3.5x
2.5x
1.5x
Jan-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Mar-14
Jan-14
Feb-14
Dec-13
Oct-13
Sep-13
Jul-13
Aug-13
Jun-13
Apr-13
May-13
Mar-13
Jan-13
Feb-13
Dec-12
Jan-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Mar-14
Jan-14
Feb-14
Dec-13
Oct-13
Nov-13
Sep-13
Jul-13
Aug-13
Jun-13
Apr-13
May-13
Mar-13
Jan-13
Feb-13
Dec-12
0.5x
-0.5x
Nov-13
Stock Price ($)
$3.00
BUY | PT: $4.30
Company Description
2.5
Key Financial Metrics
Financial Summary
Consolidated
2013
Q114
Q214
Q314
Q414E
2014E
2015E
2016E
2017E
2018E
Revenue
Growth y/y
Cons.
Cons. 3 Mts. Ago
12.5
(5.5%)
NA
NA
5.0
95.7%
3.5
3.5
4.7
106.7%
4.1
4.1
5.1
32.2%
5.0
5.0
5.3
36.9%
5.1
5.2
20.1
60.1%
20.0
19.9
22.9
14.0%
24.9
26.1
33.2
44.9%
34.2
36.0
42.4
27.7%
43.4
45.9
47.4
11.9%
49.2
50.2
EBITDA
Growth y/y
Margin
Flow-Through
Cons.
Cons. 3 Mts. Ago
(3.0)
295.8%
(23.6%)
302.6%
NA
NA
1.3
(154.0%)
26.2%
153.0%
(0.2)
(0.2)
0.6
(140.7%)
12.8%
85.6%
0.1
0.1
0.7
99.3%
14.2%
29.0%
0.4
0.4
0.3
(51.4%)
5.2%
(20.5%)
0.5
0.4
2.9
(198.2%)
14.5%
77.8%
3.0
2.9
3.5
22.1%
15.5%
22.8%
4.9
5.4
9.6
171.3%
29.0%
59.0%
9.3
9.8
14.7
52.9%
34.7%
55.4%
14.7
16.9
17.0
15.3%
35.8%
44.8%
17.0
16.7
EPS
Growth y/y
Cons.
Cons. 3 Mts. Ago
Cash
Net Debt
FCF
($0.37)
94.3%
NA
NA
$0.05
(122.4%)
($0.04)
($0.04)
$0.00
(103.0%)
($0.13)
($0.13)
$0.01
(145.1%)
$0.01
$0.01
$0.01
(31.3%)
$0.02
$0.01
$0.07
(117.9%)
$0.08
$0.09
$0.09
32.5%
$0.13
$0.16
$0.31
250.7%
$0.29
$0.34
$0.50
59.3%
$0.50
$0.70
$0.51
3.2%
$0.51
$0.61
7.4
(5.0)
(3.5)
7.0
(5.5)
1.2
14.4
(14.4)
0.3
15.8
(15.8)
0.5
18.8
(18.8)
0.3
18.8
(18.8)
2.4
23.1
(23.1)
2.7
32.1
(32.1)
7.9
44.6
(44.6)
12.3
58.5
(58.5)
12.7
7.0
(6.7%)
56.0%
1.3
(40.2%)
10.5%
4.2
18.6%
33.5%
3.4
146.7%
68.9%
0.4
45.4%
7.2%
1.2
31.2%
23.9%
1.1
16.8%
23.5%
2.4
846.5%
51.2%
1.2
10.8%
25.3%
1.3
(41.7%)
25.5%
2.6
427.5%
50.6%
1.2
7.2%
24.0%
1.6
(36.4%)
29.6%
2.5
651.2%
46.2%
1.3
18.9%
24.3%
7.4
5.3%
36.9%
7.8
492.5%
38.8%
4.9
16.3%
24.3%
12.7
71.6%
55.5%
4.6
(40.9%)
20.1%
5.6
14.2%
24.4%
19.4
52.5%
58.4%
6.8
47.6%
20.5%
7.0
25.5%
21.1%
26.0
34.4%
61.5%
7.0
2.9%
16.5%
9.3
33.2%
22.0%
29.2
11.9%
61.5%
5.7
(18.6%)
12.0%
12.5
34.4%
26.5%
Key Statistics
Value
52-Week High
52-Week Low
Avg Vol (3-Mo)
Shares Outstanding
Market Cap
Net Debt
Enterprise Value
Div Yield
FYE
Employees
$3.23
$0.87
NA
24
37
-16
22
0.0%
Dec 31
91
Top Inst. Ownership
111%
(43%)
M Shares
∆ 6 Mnths
% Held
3.44
2.37
2.35
1.27
0.97
0.66
0.65
0.43
0.30
0.13
0.21
0.00
0.66
NA
0.00
0.00
NA
0.00
0.00
0.00
14.1%
9.7%
9.6%
5.2%
3.9%
2.7%
2.7%
1.8%
1.2%
0.5%
F2014E
F2015E
F2016E
20.1
2.9
(0.8)
(0.2)
2.5
22.9
3.5
(0.7)
(0.7)
4.1
18.00%
7.50x
33.2
9.6
(0.7)
(1.0)
8.9
Current
1-Yr TGT
48.7
103.2
$3.70
57.5
118.4
$4.34
JLA Ventures
Covington Capital
Acuity Inv Mgmt
AGF Management
Penderfund Cap Mgmt
Sprott AM
IG Investment Mgmt
1832 AM
Stonecastle IM
Blumont Capital
Operating/Segmented Summary
Software & Licensing Revenue
Growth y/y
% of Total
Professional Services Revenue
Growth y/y
% of Total
Support & Maintenance Revenue
Growth y/y
% of Total
Valuation
Revenue
EBITDA
Depreciation
Capex
Discretionary CF
Discount Rate
Terminal EBITDA Multiple
Terminal Value PV
Equity Value
DCF Value
Comparables
Comparables
and Peer Analysis
Espial
SeaChange International
Alticast
TiVo
Rovi
Opera Software
Peer Average
Comparables
Multiples Analysis
Espial
SeaChange International
Alticast
TiVo
Rovi
Opera Software
Peer Average
Price
Target
Div Yield
Return
$1.53
$6.53
$10.03
$10.58
$23.29
$12.78
$4.30
$10.50
$15.90
$16.32
$25.60
$14.98
0.2%
0.0%
181.0%
60.8%
58.5%
54.3%
9.9%
17.5%
40.2%
Enterprise
FCF Yield
Return
Revenue
EBITDA
EPS
1 Week
1 Month
3 Month
YTD
1 Year
F2014E
F2015E
F2014E
F2015E
F2014E
F2015E
(7.8%)
5.3%
8.3%
(4.7%)
5.5%
(3.0%)
2.3%
4.1%
8.7%
9.3%
(12.1%)
10.8%
7.6%
4.9%
(12.1%)
(8.8%)
(0.2%)
(14.4%)
24.5%
4.3%
1.1%
(10.5%)
2.4%
10.3%
(10.6%)
3.1%
0.1%
1.0%
53.0%
(45.5%)
11.7%
(17.6%)
5.7%
(14.4%)
(12.0%)
20.1
146
71
406
540
438
22.9
116
77
350
552
640
2.9
8
NA
38
230
107
3.5
-10
NA
108
226
166
$0.07
-$0.02
$0.71
$0.13
$1.71
$0.37
$0.09
-$0.40
$0.90
$0.23
$1.76
$0.68
EV/EBITDA
EV/EBITDA - Target
P/E
P/CFPS
Value
F2014E
F2015E
C2014
C2015E
C2016E
C2015E
C2016E
C2017E
C2014
C2015E
C2016E
C2014
C2015E
C2016E
22
115
166
592
2,931
13,960
6.2%
2.4%
NA
33.3%
8.1%
(8.6%)
8.8%
6.4%
(8.5%)
NA
1.6%
7.9%
4.4%
1.3%
7.0x
NM
NA
7.8x
12.0x
15.6x
11.8x
5.5x
NA
NA
6.4x
NA
10.5x
8.4x
1.1x
NA
NA
4.7x
NA
7.8x
6.2x
27.3x
NA
NA
11.1x
NA
12.4x
11.7x
9.1x
NA
NA
8.1x
NA
9.2x
8.7x
5.1x
NA
NA
6.9x
NA
NA
6.9x
22.8x
NM
14.1x
47.1x
13.6x
34.8x
27.4x
17.2x
NM
NA
25.9x
13.2x
18.9x
19.3x
4.9x
NA
NA
16.2x
9.8x
14.0x
13.3x
15.0x
NA
NA
17.2x
13.0x
1.4x
10.5x
12.5x
3.3x
NA
10.5x
12.8x
2.0x
7.2x
4.8x
NA
NA
17.8x
NA
1.8x
9.8x
Source: Euro Pacific Canada, Company Reports and Filings, Capital IQ
Rob Goff, CFA | 416.933.3351 | [email protected]
Page 24 of 43
ESP-TSX | 14 January 2015
Annual Forecasts
We are not fine tuning our forecasts with the announced contract win. With the lumpy nature of contract
wins we continue to describe our forecasts as directional rather than precise.
Core Assumptions:
Smart TVs – We have Smart TV revenues estimated at roughly $1.5M in 2015 advancing to $2.5M in 2020.
The mid-year 2014 broadening of products with SHARP (6573:TSE, NR) together with overall market
growth would suggest that our forecasts are conservative. Industry forecasts have Smart TV shipments
advancing 15-17% CAGR 2014-2020 from the roughly 110M units expected to ship this year.
MSO wins – We expect the just announced win plus the ongoing POC trial plus potential wins from the 6+
MSOs where there are advanced discussions to add 3.3M (vs. 3.5M previously estimated) new subscribers
in 2015. We see the next year’s customer engagements (POCs, commercial trails, and deployments)
resulting in 4M new users added in 2016 with the momentum tapering in 2017/18 with 3.2/2.8M new
additions. With 2.0/1.9M added in 2019/2020, Espial is forecast to realize 17.2M cumulative wins over the
five-year period. We raised our cumulative subscriber add from our previous estimates of 13.1M in 20152020, as the momentum of customer engagements strengthened in Q314 (one new POC trial won in the
quarter). For perspective, the top 15 North American CATV MSOs represent roughly 100M subscribers.
Espial is targeting a much larger international market including satellite providers and wireline telecom
providers. Please refer to Appendix 1 for further details.
Exhibit 2 - Annual Estimates and Forecasts
2013
2014E
2015E
2016E
All figures in $000 CAD, unless otherwise indicated
Consolidated
Act
Est
Est
Est
Revenue
12,549 20,089 22,900 33,192
-5.5%
60.1%
14.0%
44.9%
Growth
0 20,017 24,931 34,244
Cons. Est
Deferred Revenue
4,053
2,702
6,092
7,505
205.3% -33.3% 125.4%
23.2%
Growth
10,250 14,797 17,021 24,526
Gross Profit
81.7%
73.7%
74.3%
73.9%
Margin
-2,960
2,907
3,548
9,625
EBITDA
NM
14.5%
15.5%
29.0%
Margin
NM
NM
22.1% 171.3%
Growth
NM
NM
22.8%
59.0%
Flow-Through
0
3,022
4,870
9,268
Cons. Est
($0.37) $0.06
$0.08
$0.27
EPS (FD)
$0.00
$0.08
$0.13
$0.29
Cons. Est
35
194
687
996
Capex (Incl. Intangibles)
0.3%
1.0%
3.0%
3.0%
Intensity
0
203
247
346
Cons. Est
-3,500
2,419
2,724
7,919
FCF
($0.24) $0.09
$0.10
$0.28
FCF per share (FD)
Segmented
Software & Licensing Revenue
7,031
7,405 12,708 19,382
Growth y/y
-7%
5%
72%
53%
% of Total
56.0%
36.9%
55.5%
58.4%
Professional Services Revenue
1,316
7,796
4,608
6,800
Growth y/y
-40%
493%
-41%
48%
% of Total
10.5%
38.8%
20.1%
20.5%
Support & maintenance revenue
4,202
4,888
5,584
7,011
Growth y/y
19%
16%
14%
26%
% of Total
33%
24%
24%
21%
2017E
2018E
2019E
Est
42,386
27.7%
43,378
7,868
4.8%
30,874
72.8%
14,717
34.7%
52.9%
55.4%
14,700
$0.44
$0.50
1,272
3.0%
844
12,286
$0.44
Est
47,411
11.9%
49,216
9,074
15.3%
34,238
72.2%
16,967
35.8%
15.3%
44.8%
17,000
$0.45
$0.51
1,422
3.0%
889
12,666
$0.45
Est
51,185
8.0%
54,511
10,034
10.6%
36,415
71.1%
18,096
35.4%
6.7%
29.9%
18,096
$0.44
$0.00
1,536
3.0%
981
12,535
$0.45
2020E 2015-20
Comments
CAGR
Est
Est.
52,937 18.2%
3.4%
Expecting 2015/16 subs to hit 3.3M/4.0M before
58,861
trending lower.
11,711 14.0%
16.7%
37,154 16.9% Expecting margin of 73.7% in 2014 trending towards
70.2%
70.2% in 2020.
17,673 37.9%
33.4%
EBITDA positive throughout 2014 with margins at
-2.3%
-24.2%
14.5%, peaking in 2018 at 35.8% then lower software
17,673
& licensing within mix pulling down to 33.4% in 2020.
$0.43
$0.00
1,588
3.0%
Minimal capex software business.
1,036
12,253 35.1% Cumulative 2015-2020 FCF at $60.4M or $2.16 per
$0.44
share.
26,049
34%
61.5%
7,000
3%
16.5%
9,336
33%
22%
29,162
12%
61.5%
5,700
-19%
12.0%
12,549
34%
26%
30,318
4%
59.2%
4,800
-16%
9.4%
16,068
28%
31%
29,315
-3%
55.4%
4,000
-17%
7.6%
19,622
22%
37%
18.2%
-2.8%
Highest margin segment at 80%+ driven by upfront
payments for new TV subscribers and Smart TV
shipments.
Professional services used during lead up to contract
deployments. Target margins ~ 40%.
28.6% Support & maintenance revenues represent ongoing
annual payments for deployed subscribers. Target
margins 50%+.
Capital IQ, Company Filings, Euro Pacific Canada estimates.
Rob Goff, CFA | 416.933.3351 | [email protected]
Page 25 of 43
ESP-TSX | 14 January 2015
Espial Group, Inc. - Valuation Analysis
19.00%
$4.48
$4.35
$4.22
$4.08
$3.95
20.00%
$4.36
$4.23
$4.10
$3.97
$3.84
Historical Indexed EV/SALES
Espial
SeaChange Int.
TiVo
Jul-14
Sep-14
Nov-14
Jan-15
Sep-14
Nov-14
Jan-15
May-14
Jul-14
Jan-14
Mar-14
Nov-13
Jul-13
Sep-13
May-13
Jan-13
Mar-13
Nov-12
4.0x
2.0x
(2.0x)
(4.0x)
Historical Indexed Price Movements
Espial
SeaChange Int.
TiVo
Mar-14
May-14
Jan-14
Nov-13
Sep-13
Jul-13
Mar-13
May-13
Jan-13
400%
200%
0%
-200%
Sep-12
Current
Target
C2014 C2015E C2016E C2015E C2016E
EV/EBITDA - Espial
7.0x
5.5x
1.1x
27.3x
9.1x
SeaChange Int.
NM
NA
NA
NA
NA
TiVo
7.8x
6.4x
4.7x
11.1x
8.1x
Rovi
12.0x
NA
NA
NA
NA
P/S - Espial
1.0x
0.9x
0.3x
5.2x
3.6x
SeaChange Int.
NA
NA
NA
NA
NA
TiVo
2.3x
2.0x
1.9x
4.2x
3.9x
Rovi
5.1x
NA
NA
4.1x
3.5x
P/CFPS - Espial
15.0x
12.5x
4.8x
35.2x
13.5x
FCF Yield - Espial
6.2%
6.4%
18.5%
2.3%
6.6%
SeaChange Int.
-7.6%
NA
NA
NA
NA
TiVo
4.3%
3.5%
7.5%
2.3%
4.9%
Rovi
8.1%
7.9%
9.9%
7.2%
9.0%
*Non-coverage names reflect consensus
Source: Euro Pacific Canada, Company Reports and Filings, Capital IQ
Terminal
EBITDA
Multiple
Nov-12
Multiples
0
8.5x
8.0x
7.5x
7.0x
6.5x
Jul-12
1 Year
53.0%
(45.5%)
(17.6%)
5.7%
8.3%
14.2%
DCF Sensitivity
Discount Rate
16.00%
17.00%
18.00%
$4.90
$4.75
$4.62
$4.75
$4.61
$4.48
$4.59
$4.46
$4.34
$4.44
$4.31
$4.19
$4.29
$4.17
$4.05
Sep-12
YTD
(10.5%)
2.4%
(10.6%)
3.1%
4.2%
9.0%
● For perspective, a 1% change in the discount rate
adds $0.13/share, or 2.9%, to our valuation while a
0.5x increase in the terminal multiple adds
$0.14/share, or 3.3%, to the valuation
May-12
3 Mths
(12.1%)
(8.8%)
(14.4%)
24.5%
22.8%
1.9%
● The DCF produces a current/target valuation of
$3.70/$4.34, from which we derive our $4.30 target
Jul-12
1 Mth
4.1%
8.7%
(12.1%)
10.8%
13.6%
7.4%
● Our DCF valuation is driven by an 18.0% discount
rate and 7.50x terminal EBITDA multiple
$0.13
2.9%
$0.14
3.3%
Mar-12
1Wk
(7.8%)
5.3%
(4.7%)
5.5%
(2.5%)
6.4%
18.0%
$∆ from 1% ∆ in Disc Rate
7.50x
10.73x
$∆ from 0.5x ∆ in Term Mult
62.5%
6.1%
Current 1-Yr TGT 2-Yr TGT
87.4
96.4
105.8
15.8
22.0
29.8
103.2
118.4
135.6
27.9
27.3
27.9
$3.70
$4.34
$4.86
$1.52
$4.30
$4.70
58.9%
0.8%
3.3%
● We prefer DCF valuations for our new media space
over relative valuations, which leave investors
exposed to group revaluations
2019E 13-18 CAGR
51.2
30.5%
18.1
-241.8%
6.7%
(1.1)
(1.5)
Avg.
3.0%
2.2%
(4.4)
13.3
May-12
Recent Performance
Espial
SeaChange Int.
TiVo
Rovi
Opera
Alticast
2018E
47.4
17.0
15.3%
(1.0)
(1.4)
3.0%
(3.1)
13.6
Jan-12
Enterprise Value
Net Debt
Total Equity Value
Shares Outstanding
DCF Value per Share ($)
Current, Target Share Price ($)
Discount % to DCF Value
2017E
42.4
14.7
52.9%
(0.8)
(1.3)
3.0%
(1.4)
12.4
Mar-12
Discount Rate %
Terminal EBITDA Multiple
Terminal FCF Multiple
Terminal Value as % of Equity Value
Implied Perpetual Growth Rate of FCF
2016E
33.2
9.6
171.3%
(0.7)
(1.0)
3.0%
(0.8)
8.9
Jan-12
All figures in $M CAD, unless otherwise indicated
DCF
2013
2014E
2015E
Revenue
12.5
20.1
22.9
Adj. EBITDA
(3.0)
2.9
3.5
Growth %
295.8% -198.2%
22.1%
D&A
(1.3)
(0.8)
(0.7)
Capex
(0.0)
(0.2)
(0.7)
Intensity %
0.3%
1.0%
3.0%
Cash Taxes
(0.3)
(0.1)
(0.2)
Unlevered FCF
(1.1)
2.5
4.1
Rob Goff, CFA | 416.933.3351 | [email protected]
Page 26 of 43
ESP-TSX | 14 January 2015
Appendix 1
Market Size
Espial’s addressable market consists of all Pay TV service operators that will be deploying next generation
IPTV services to their customer base. This includes service providers that currently do not provide IPTV
service as well as those that do, but were early adopters and will eventually want to augment their service
by taking advantage of new technologies such as RDK-based set-top boxes. We focus mostly on the
segment of service providers that will still need to transition to IPTV, as they are the most likely near-term
clients for Espial. This group is most typically the legacy cable providers as the legacy telephone providers
have already introduced video on IP platforms. Research and Markets estimates that over a sample of 97
countries, the number of homes paying for IPTV service will grow to approximately 167M by the end of
2018, up from approximately 69M at the end of 2012. This suggests that IPTV penetration will surpass the
10% milestone at that point, double the 2012 penetration level and be up from the 1% level seen in 2008.
Over the same period, revenue generated from IPTV services is expected to grow to over $21B by 2018
from $12B in 2012 and under $3B in 2008. Below, we list a sample of some of the leading international TV
service providers along with subscriber numbers, giving an idea of the potential market size.
Exhibit 3 – Sampling of International Pay TV Service Providers
Canada/US
Country Subscribers (K) As of date
Comcast
USA
21,690
31-Dec-13
DirecTV
USA
20,253
31-Dec-13
DISH Network
USA
14,057
31-Dec-13
Time Warner Cable
USA
11,197
31-Dec-13
AT&T U-verse
USA
5,442
31-Dec-13
Verizon FiOS
USA
5,262
31-Dec-13
Cox Communications
USA
4,540
31-Dec-12
Charter Communications
USA
4,177
31-Dec-13
Cablevision
USA
2,813
31-Dec-13
Bright House Networks
USA
2,013
31-Dec-12
Suddenlink Communications
USA
1,177
31-Dec-13
Mediacom
USA
945
31-Dec-13
Coverage Universe
BCE
Canada
2,278
31-Dec-13
Rogers
Canada
2,127
31-Dec-13
Shaw
Canada
2,229
30-Nov-13
Quebecor
Canada
1,822
31-Dec-13
Cogeco - Canada
Canada
828
30-Nov-13
Cogeco - US
USA
230
30-Nov-13
TELUS
Canada
815
31-Dec-13
International
Liberty Global
Jiangsu Broadcasting Cable Information Network
China Telecom
Shangdong BCTV Network
Dish TV
Sichuan Cable TV Network
Guangdong Broadcast & TV Network
Hangzhou WASU Digital TV Media Group
DEN Networks
SITI Cable
BSkyB
Tata Sky
Tricolor
Kabel Deutschland
Rostelecom
Net Servicos
Orange
Sky Brasil
Sky Italia
Sky Mexico
Country Subscribers (K)
Multiple
21,800
China
20,900
China
19,404
China
17,479
India
14,700
China
14,628
China
13,325
China
12,959
India
11,220
India
10,500
UK
10,536
India
10,236
Russia
8,790
Germany
8,141
Russia
6,600
Brazil
5,380
France
5,067
Brazil
5,039
Italy
4,836
Mexico
4,813
As of date
31-Dec-13
31-Dec-12
31-Dec-12
31-Dec-12
31-Dec-12
31-Dec-12
31-Dec-12
31-Dec-12
31-Dec-12
31-Dec-12
31-Dec-13
31-Dec-12
31-Dec-12
31-Dec-12
31-Dec-12
31-Dec-12
31-Dec-12
31-Dec-12
31-Dec-12
31-Dec-12
Source: Euro Pacific Canada, Individual Company Reports and Filings, NCTA, SNL Kagan
Exhibit 4 – Sampling of European Pay TV Service Providers
MSO Name
Kabel Deutschland
Virgin Media*
Numericable
Ziggo
Telenet*
Kabel BW
ONO
Com Hem
Cablecom*
Tele Columbus
NOS
Belgacom Group
YouSee A/S (TDC)
Voo
Canal Digital
Vectra S.A
Get
Country of Origin
Germany
UK
France
Netherlands
Belgium
Germany
Spain
Sweden
Switzerland
Germany
Portugal
Belgium
Denmark
Belgium
Norway
Poland
Norway
Subsicribers (M)
8.9
4.7
3.5
3
2.3
2.3
1.8
1.8
1.7
1.7
1.6
1.4
1.2
1
0.9
0.7
0.5
* owned by Liberty Global
Source: Euro Pacific Canada, Individual Company Reports and Filings, NCTA, SNL Kagan
Rob Goff, CFA | 416.933.3351 | [email protected]
Page 27 of 43
ESP-TSX | 14 January 2015
Appendix 2 (taken from our April 25, 2014 initiation)
Economics of a Deal: Case Study of Q413 North American Tier 1
Operator Signing
In Q413, Espial reported that it had signed an agreement with a North American Tier 1 cable operator
having a subscriber base of approximately 2-3M homes, which we will use to illustrate the typical
economics of an agreement signed with a TV service operator. While we maintain our rating and lower
our PT on Espial given baseline estimates, this discussion is well-suited to presenting the optionality
associated with contract wins for Espial. We will also use this discussion as a means to describe the flow of
a contract through Espial’s various reported segments. We preface this discussion with the caveat that
each agreement is different and most aspects of a contract are up for negotiation.
A typical agreement with a service operator can be broken down into primarily two guaranteed revenue
streams and a third likely, but optional, revenue stream. We discuss the individual streams in further
detail below but provide a high-level description and potential for each stream here. The first stream
represents an upfront payment per subscriber added, with potential total revenue in this example of
approximately $20M. The second stream is the recurring revenue stream, which can produce annual
revenue of approximately $3M in our example once the entire subscriber base has been migrated. The
third revenue stream is optional, but highly likely, and relates to integration and set-up fees, representing
approximately $2-3M in our example, to be earned in the timeframe leading up to deployment.
The first guaranteed revenue stream is in the form of an upfront payment for every subscriber that
upgrades to the new platform. This upfront payment is approximately $10/subscriber, having the
potential to add $20M+ in revenue over three to five years for the Tier 1 signing we are considering. This
revenue flows through the Software and Licensing revenue segment for the Company and typically carries
90% gross margins. A typical deployment will see this revenue start to deliver approximately 12 months
after the deal is signed. Although customer migration patterns are out of Espial’s control, agreements
generally include a minimal customer adoption rate within the first year of deployment.
In the past, service providers have typically rolled out next generation hardware over 5+ years, often
letting subscribers naturally migrate to a new platform. Although there are many reasons for this, one
significant business reason was that such hardware was priced at the $300-500 per device range.
Aggressively migrating an entire subscriber base to such a platform would have prohibitive upfront costs
for the service provider, which needs to partially subsidize the migration. It is generally accepted that the
next generation IPTV hardware will be a fraction of the cost of previous hardware, in the $100 range, with
prices continuing to decrease in the coming years with circa $20 levels discussed. This, along with the
vastly improved customer experience, is expected to accelerate customer migration to the new IPTV
platform, with timelines ranging from the three to five years often cited. We note that Danish triple-play
provider Waoo! (Private, 250K homes served) was the first provider to integrate the Netflix (NFLX-US, NR)
app onto its set-top box platform. The new generation box has penetrated 20% of its user base since it
launched last fall. The Waoo! CTO, Mr. Lobel, estimates the box penetration would have been closer to
10-12% without the pull-through impact of Netflix via Waoo!
The second guaranteed revenue stream for Espial after signing an agreement is a recurring revenue
stream. This revenue comes in the form of an annual payment by the service provider for each subscriber
that is using the solution. Although the annual rate varies, it is generally in the range of 15-18% of the
upfront subscriber payment. In our case study, a 15% recurring revenue rate would see the Tier 1
operator pay Espial approximately $1.50/subscriber/year. This revenue stream grows as subscribers
migrate to the new service and for a 2M subscriber base will reach $3M/year once fully migrated. This
revenue flows through the Maintenance and Support segment, typically carrying 60% gross margins.
The third revenue stream flows through as Professional Services that are performed on behalf of the client
and are accompanied by approximately 50% gross margins. Examples of such services may include backend integrations or customizations that may be needed to adapt the look and feel of the UI to the client’s
requests. Such services are usually performed over three to four quarters, once the contract is signed, but
prior to deployment. In a typical contract, such as with the Tier 1 service operator, Professional Services
revenue can reasonably be in the $2-3M range. It is important to note that much of the Professional
Rob Goff, CFA | 416.933.3351 | [email protected]
Page 28 of 43
ESP-TSX | 14 January 2015
Services work is contracted to third parties, allowing Espial to maintain a lean business and avoid taking
excessive risk with respect to the lumpiness of this segment. There is the possibility for margins to come
under slight pressure if many contracts were to be signed at once and the Professional Services segment
saw a large spike in a short period of time. However, we are confident in the Company’s ability to manage
such a situation and the ensuing business that would be generated from such contracts would far
outweigh any short-term margin pressure.
The final element that warrants discussion is the Deferred Revenue line item on Espial’s balance sheet, which
is a leading indicator for the Company’s future revenue. As contracts are signed and part of the revenue is
prepaid, Espial records a liability as Deferred Revenue, which is then drawn against as services are rendered
to the customer, typically over the coming two or three quarters. Although it provides a small window into
future revenue generation, only a portion of a contract flows through as Deferred Revenue given the
uncertainty associated with deployment speed and adoption rates. At the end of Q114, Espial’s Deferred
Revenue balance was $3.9M, which we expect to deplete over a 9-12 month period. We estimate that $2M
of the balance is from MSO signings that we expect to be converted into earned revenue over approximately
three quarters with the remaining $2M being due to prepaid maintenance and support.
Valuation Impact of the North American Tier 1 Operator Signing
At this point, based on the abovementioned discussion, we can generate a sample valuation impact from
the contract. We highlight our conservative approach in omitting any potential impact from the optional
Professional Services revenue likely associated with a contract. In our case study, this upfront set-up
payment is estimated at roughly $2-3M with an EBITDA contribution of $1-1.5M or $0.05/shr.
Furthermore, we note that the discount rate associated with the sample valuation is rather conservative
given that the contract has already been signed and the counterparty is an established service operator
that is highly unlikely to default on payment. We see from the sample valuation that contract wins provide
significant upside to Espial shares.
Exhibit 5 – Sample Contract Valuation
Subscribers (M)
Upfront Payment ($/sub)
Recurring Payment (%)
Recurring Payment ($/sub/year)
Gross Margin - S & L
Gross Margin - M & S
EBITDA Margin - S & L
EBITDA Margin - M & S
Discount Rate
2
$10.00
15%
$1.50
90%
60%
70%
40%
10%
Revenue
Incremental Adoption Rate
Total Subscribers
Incremental Subscribers
Software & Licensing Revenue
Maintenance & Support Revenue
Total Revenue
Perpetual Revenue
5.0
Year 2
30%
1.1
0.6
6.0
0.8
6.8
Year 3
30%
1.7
0.6
6.0
1.7
7.7
Year 4
10%
1.9
0.2
2.0
2.6
4.6
Year 5
5%
2
0.1
1.0
2.9
3.9
Year 6
0%
2
0
0.0
3.0
3.0
Total
100%
2.0
2.0
20.0
10.8
30.8
3.0
Gross Profit - S & L
Gross Profit - M & S
Total Gross Profit
Perpetual Gross Profit
4.5
0.0
4.5
5.4
0.5
5.9
5.4
1.0
6.4
1.8
1.5
3.3
0.9
1.7
2.6
0.0
1.8
1.8
18.0
6.5
24.5
1.8
EBITDA/FCF - S & L
EBITDA/FCF - M & S
Total EBITDA/FCF
Perpetual EBITDA/FCF
3.5
0.0
3.5
4.2
0.3
4.5
4.2
0.7
4.9
1.4
1.0
2.4
0.7
1.1
1.8
0.0
1.2
1.2
14.0
4.3
18.3
1.2
PV FCF
PV Perpetual FCF
Total PV of Contract
3.2
3.7
3.7
1.7
1.1
0.7
14.0
6.8
20.8
Shares Outstanding
Per Share Impact of Contract
Year 1
25%
0.5
0.5
5.0
19.8
$1.05
Source: Euro Pacific Canada, Company Reports and Filings
Rob Goff, CFA | 416.933.3351 | [email protected]
Page 29 of 43
ESP-TSX | 14 January 2015
We felt that given the negotiation process and wide variety of terms that can be agreed upon, it was
relevant to include a sensitivity analysis weighing the impact of the upfront payment, recurring revenue
percentage, and discount rate.
Exhibit 6 – Contract Valuation Sensitivity Analysis
$1.50
14%
Recurring 15%
Revenue
16%
%
17%
18%
$4.00
$0.58
$0.60
$0.62
$0.65
$0.67
Cost Per Activation
$6.00
$8.00
$10.00
$0.86
$1.15
$1.44
$0.90
$1.20
$1.50
$0.93
$1.25
$1.56
$0.97
$1.29
$1.62
$1.00
$1.34
$1.67
Discount Rate: 6.0%
$12.00
$1.73
$1.80
$1.87
$1.94
$2.01
$1.22
14%
Recurring 15%
Revenue
16%
%
17%
18%
$4.00
$0.47
$0.49
$0.51
$0.52
$0.54
Cost Per Activation
$6.00
$8.00
$10.00
$0.71
$0.95
$1.18
$0.73
$0.98
$1.22
$0.76
$1.01
$1.27
$0.78
$1.05
$1.31
$0.81
$1.08
$1.35
Discount Rate: 8.0%
$12.00
$1.42
$1.47
$1.52
$1.57
$1.62
$1.05
14%
Recurring 15%
Revenue
16%
%
17%
18%
$4.00
$0.41
$0.42
$0.43
$0.45
$0.46
Cost Per Activation
$6.00
$8.00
$10.00
$0.61
$0.82
$1.02
$0.63
$0.84
$1.05
$0.65
$0.87
$1.08
$0.67
$0.89
$1.12
$0.69
$0.92
$1.15
Discount Rate: 10.0%
$12.00
$1.22
$1.26
$1.30
$1.34
$1.38
$0.99
14%
Recurring 15%
Revenue
16%
%
17%
18%
$4.00
$0.39
$0.40
$0.41
$0.42
$0.43
Cost Per Activation
$6.00
$8.00
$10.00
$0.58
$0.77
$0.96
$0.60
$0.80
$0.99
$0.61
$0.82
$1.02
$0.63
$0.84
$1.05
$0.65
$0.87
$1.08
Discount Rate: 12.0%
$12.00
$1.16
$1.19
$1.23
$1.27
$1.30
Source: Euro Pacific Canada, Company Reports and Filings
Please see company disclosures on page 41.
Rob Goff, CFA | 416.933.3351 | [email protected]
Page 30 of 43
Precious Metals
12 January 2015
PRB-TSXV: $3.32
Probe Mines Limited
With Borden Consolidated, a Busy Winter Ahead
Event: We are maintaining our Speculative Buy rating and Top Pick status on
Probe Mines Limited. The Company is in the midst of a very aggressive multi-front
winter drill campaign at the Borden Gold project, which we expect to deliver
positive results, especially in the case of the recently acquired Wedge Area.
H214 Performance (+10%): We introduced Probe as our H214 Top Pick on July 14,
2014. During H214, PRB shares turned in a gain of 10%, compared with a 9% decline
in the Comex Gold Futures and a 37% drop in a basket of peers represented by the
Global X Gold Explorers ETF and 31% decline in the BMO Jr. Gold Producers ETF
(Exhibit 1).So far this year, Probe shares are up another 11%.
Key Developments: The most significant recent development for Probe was the
Company’s acquisition of Boises Landrienne Inc. in mid-December 2014, which gave
the Company 100% ownership of mineral rights to 486 patented claims in and
around the Borden Gold deposit - Report. Importantly, the claims include those
within the High-Grade Zone (HGZ), referred to as the Wedge Area, plus a large
package connecting the Borden Gold project and the East Limb project ~22km to
the east (Exhibits2 & 3). The acquisition gives Probe 100% ownership of the
mineral rights over the entire 70km-long Borden Gold Belt.
Spec Buy Rating
$3.75 Target Price
Projected Return: 13.0%
Valuation: DCF (5% discount)
Market Data
Market Capitalization ($M)
Net Debt ($M)
Cash & Equivalents ($M)
Debt ($M)
Enterprise Value ($M)
Basic Shares O/S (M)
Fully Diluted Shares O/S (M)
Avg. Daily Volume (k)
52 Week Range
Key Asset
Borden Gold Project
In-Pit High Grade Core (June 2014)
Cutoff (g/t) Tonnes (M) Gold (g/t) Gold (koz)
Indicated
1.0
27.9
1.5
1,349
Inferred
1.0
0.06
1.4
2
Valuation
Discount
5.0%
Borden Gold Project
Busy Winter at Borden Gold Project: Probe is currently drilling the newly acquired
Wedge Area to test for continuity of the HGZ between sections 1,300mSE and
1,500mSE. Plans call for12 to 15 holes totalling 5,000-6,000m. We estimate the area
could contain ~300,000oz of gold.Meanwhile, the Company also plans to have 12-14
drill rigs sink some 70 holes (~40,000m) in an infill and expansion drill program
southeast along the HGZ from the ice on Borden Lake. Commencement of that
drilling awaits the formation of sufficient ice thickness (at the time of writing ~20”
— 42-44” is required).The $7M drilling program should begin in late January.
Longerterm, Probe also plans drilling from land on the southeast side of Borden
Lake following the ice-based drilling campaign in Q215. Regional exploration
including drilling on the adjoining East Limb project will also begin in Q215.
Well Funded:
Importantly, as something of an anomaly among many of its
exploration/development peers, Probe remains well funded for its near-term
goals, with cash of ~$15M. Additionally, the Company expects to receive a $4M
production milestone payment from Agnico Eagle Mines (AEM:TSX, NR) in Q215.
The payment is the last under the previous Goldex Mine royalty sale. Also, some
5.6M warrants expiring in May 2015 are well in-the-money at $2.10/shr,
representing a potential equity capital inflow of another $11.8M.Under the recent
acquisition, Probe also entered into a $10M credit agreement with RBC.
Potential Share Price Catalysts:





Results from Wedge Area Drilling — Q115;
Results from Ice-based HGZ Drilling — Q115;
Updated Resource Estimate — H115;
Preliminary Economic Assessment — H115; and
Results from Regional Exploration — H115.
Valuation: We are reiterating our Speculative Buy recommendation and $3.75/shr
price target. Exploration success on each front could prove our target conservative.
303.2
na
15.0
0.0
288.2
91.3
104.5
96.0
$1.96 - $3.95
Black Creek Chromite
In Situ
Unadjusted NAV
Corporate Adjustments
Cash & Equivalents (Current)
Options & Warrants (Apr 30/14)
Proceeds from Equity Financing
Adjusted NAV
P/Adjusted NAV
$ (M)
465
$/shr
3.24
10
475
(92)
15
26
110
533
0.07
3.31
(0.64)
0.10
0.18
0.76
3.72
0.89x
Risks
Events/Catalysts
Metallurgical Risk
Financing Risk
Commodity Price Risk
PEA - H214
Infill Drill Results - Q314
Company Description
Probe Mines Limited acquires, explores, and develops
mineral property interests located in Ontario, Canada.
It explores for chromite, nickel, copper, volcanogenic
massive sulphide, gold, and vanadium resources. The
company’s principal project is the Borden Lake gold
project located near the town of Chapleau in
Northeastern Ontario. It also holds interests in
properties located in the Bristol Township and James
Bay Lowlands, Ontario. The company is headquartered
in Toronto, Canada.
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
May-13
Aug-13
Nov-13
Volume
Feb-14
$4.5
$4.0
$3.5
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
May-14
Price
Source: Capital IQ
Ryan Walker, MSc | 416.479.8997 | [email protected]
www.epccm.ca
Page 31 of 43
PRB-TSXV |12 January 2014
Ryan Walker, MSc | 416.479.8997 | [email protected]
Page 32 of 43
PRB-TSXV |12 January 2014
H214 Performance
Exhibit 1 – Probe Mines H214 Relative Performance
20%
20%
Global X Gold Explorers ETF
COMEX Gold
TSXV:PRB
BMO Junior Gold Index ETF
10%
10%
0%
0%
-10%
-10%
-20%
-20%
-30%
-30%
-40%
-40%
-50%
30-Jun-14
31-Jul-14
31-Aug-14
30-Sep-14
31-Oct-14
30-Nov-14
-50%
31-Dec-14
Top Te n G loba l X G old Explore rs ETF a s of Ja nua ry 2 , 2 0 15 - Paramount Gol d & Si l ver (8.41%), News tri ke Capi tal Inc. (7.75%), Guyana
Gol dfi el ds Inc. (7.21%), Seabri dge Gol d Inc. (7.11%), Torex Gol d Res ources Ltd. (6.96%), Novagol d Res ources Inc. (6.93%), Preti um
Res ources Inc. (6.38%), Exeter Res ource Corp. (6.13%), Kami nak Gol d Corp. (5.55%), and As anko Gol d Inc. (4.82%).
Top BMO Jr. G old Inde x ETF Holdingsa a s of Ja nua ry 8 , 2 0 1 5 - Royal Gol d Inc (13.88%), Yamana Gol d Inc. (13.76%), Ki nros s Gol d (13.70%),
New Gol d Inc. (8.45%), B2Gol d Corp (6.41%), Detour Gol d (5.36%), IAMGOLD (4.13%), Alamos Gol d Inc (3.65%), Torex Gol d Res ources (3.38%),
AuRi co Gol d Inc. (3.37%).
Source: CapitalIQ, Global X Funds, BMO Financial Group
Exhibit 2 –The Newly Consolidated Borden Gold Trend (786km2)
Source: Probe Mines Limited
Ryan Walker, MSc | 416.479.8997 | [email protected]
Page 33 of 43
PRB-TSXV |12 January 2014
Exhibit 3 –The Highly Prospective Wedge Area — Bounded by High-Grade
Plan View
Ind: 1.6Moz @ 5.39g/t Au
Inf: 0.43Moz @ 4.37g/t Au
Ind: 2.3Moz @ 1.03g/t Au
Wedge Area
Long Section
Source: Probe Mines Limited, Euro Pacific Canada Annotations
Ryan Walker, MSc | 416.479.8997 | [email protected]
Page 34 of 43
PRB-TSXV |12 January 2014
Exhibit 4 –Valuation Summary
Borden Gold
Black Creek Chromite
Exploration Upside
Unadjusted NAV
Corporate Adjustments
Cash & Equivalents (Current)
Options & Warrants (Apr 30/14)
Proceeds from Equity Financing
Adjusted NAV
Discount
$ Million
$/Share
5.0%
In Situ
In Situ
$465
$10
$0
$475
($92)
$15
$26
$110
$533
$3.24
$0.07
$0.00
$3.31
($0.64)
$0.10
$0.18
$0.76
$3.72
Project NAV
Target Multiple
Unadjusted Valuation
Adjustments
Total Valuation
C$3.32
0.89x
12-Month Target
Implied Return
Current Share Price
P/Adjusted NAV
$/Share
$3.31
1.00x
$3.31
$0.41
$3.72
USD:CAD
1.00
C$3.75
13.0%
Source: Euro Pacific Canada
Exhibit 5 – Target Price Sensitivity
Discount Rate (%)
Long-Term Gold Price (US$/oz)
3.75
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
1,200
2.50
2.25
2.00
1.75
1.75
1.50
1.50
1.25
1.25
1,250
3.50
3.00
2.75
2.50
2.25
2.00
1.75
1.75
1.50
1,300
4.25
3.75
3.25
3.00
2.75
2.50
2.25
2.00
2.00
1,350
5.25
4.50
4.00
3.50
3.25
3.00
2.50
2.50
2.25
1,400
6.25
5.25
4.75
4.25
3.75
3.25
3.00
2.75
2.50
1,450
7.00
6.25
5.50
4.75
4.25
3.75
3.50
3.00
2.75
1,500
8.00
7.00
6.00
5.25
4.75
4.25
3.75
3.50
3.25
1,550
8.75
7.75
6.75
6.00
5.25
4.75
4.25
3.75
3.50
1,600
9.75
8.50
7.50
6.50
5.75
5.25
4.50
4.25
3.75
Source: Euro Pacific Canada
Please see company disclosures on page 42.
Ryan Walker, MSc | 416.479.8997 | [email protected]
Page 35 of 43
Euro Pacific Canada Inc. Research Disclosures
Analyst Certification
Company: Neptune Technologies & Bioressources
Ticker: NTB:TSX, NEPT:NASDAQ
I, Douglas Loe, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not,
am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
http://research.europac.ca/research/disclosures.php
COMPANY SPECIFIC DISCLOSURES
Is this an issuer related or industry related publication?
Issuer
Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject issuer?
If Yes: 1) Is it a long or short position? NA, and, 2) What type of security is it? NA
No
Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer?
No
Does Euro Pacific Canada Inc. or the Analyst have any actual material conflicts of interest with the issuer?
No
Does Euro Pacific Canada Inc. and/or one or more entities affiliated with Euro Pacific Canada Inc. beneficially own common shares (or any other
class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. provided financial advice to and/or, either on its own or as a syndicate member,
participated in a public offering, or private placement of securities of this issuer?
Yes
During the last 12 months, has Euro Pacific Canada Inc. received compensation for having provided investment banking or related services to
this Issuer?
Yes
Has the Analyst had an onsite visit with the Issuer within the last 12 months?
Yes
Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months?
No
Has the Analyst received any compensation from the subject company in the past 12 months?
No
Is Euro Pacific Canada Inc. a market maker in the issuer’s securities at the date of this report?
No
U.K. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund
EURO PACIFIC CANADA INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS.
The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2001. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.
U.S. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Euro Pacific Canada Inc. is not registered as a
broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of
research analysts.
Toronto
Montreal
Vancouver
150 York Street, Suite 1100
1501 McGill College Avenue Suite 1450
900 West Hastings Street, Suite 710
Toronto, ON, M5H 3S5
Montréal, Québec H3A 3M8
Vancouver, BC, V6C 1E5
416-649-4273 | 888-216-9779
514-940-5096 | 888-216-9779
604-453-1382 | 888-216-9779
Page 36 of 43
Euro Pacific Canada Inc. Research Disclosures
Analyst Certification
Company: TSO3
Ticker: TOS:TSX
I, Douglas Loe, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not,
am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
http://research.europac.ca/research/disclosures.php
COMPANY SPECIFIC DISCLOSURES
Is this an issuer related or industry related publication?
Issuer
Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject issuer?
If Yes: 1) Is it a long or short position? Long; and, 2) What type of security is it? Equity
Yes
Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer?
No
Does Euro Pacific Canada Inc. or the Analyst have any actual material conflicts of interest with the issuer?
No
Does Euro Pacific Canada Inc. and/or one or more entities affiliated with Euro Pacific Canada Inc. beneficially own common shares (or any other
class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. provided financial advice to and/or, either on its own or as a syndicate member,
participated in a public offering, or private placement of securities of this issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. received compensation for having provided investment banking or related services to
this Issuer?
No
Has the Analyst had an onsite visit with the Issuer within the last 12 months?
No
Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months?
No
Has the Analyst received any compensation from the subject company in the past 12 months?
No
Is Euro Pacific Canada Inc. a market maker in the issuer’s securities at the date of this report?
No
U.K. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund
EURO PACIFIC CANADA INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS.
The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2001. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.
U.S. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Euro Pacific Canada Inc. is not registered as a
broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of
research analysts.
Toronto
Montreal
Vancouver
150 York Street, Suite 1100
1501 McGill College Avenue Suite 1450
900 West Hastings Street, Suite 710
Toronto, ON, M5H 3S5
Montréal, Québec H3A 3M8
Vancouver, BC, V6C 1E5
416-649-4273 | 888-216-9779
514-940-5096 | 888-216-9779
604-453-1382 | 888-216-9779
Page 37 of 43
Euro Pacific Canada Inc. Research Disclosures
Analyst Certification
Company: FAM REIT
Ticker: F.un-TSX
I, Robert Sutherland, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have
not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
http://research.europac.ca/research/disclosures.php
COMPANY SPECIFIC DISCLOSURES
Is this an issuer related or industry related publication?
Issuer
Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject issuer?
If Yes: 1) Is it a long or short position? NA; and, 2) What type of security is it? NA
No
Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer?
No
Does Euro Pacific Canada Inc. or the Analyst have any actual material conflicts of interest with the issuer?
No
Does Euro Pacific Canada Inc. and/or one or more entities affiliated with Euro Pacific Canada Inc. beneficially own common shares (or any other
class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. provided financial advice to and/or, either on its own or as a syndicate member,
participated in a public offering, or private placement of securities of this issuer?
Yes
During the last 12 months, has Euro Pacific Canada Inc. received compensation for having provided investment banking or related services to
this Issuer?
Yes
Has the Analyst had an onsite visit with the Issuer within the last 12 months?
Yes
Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months?
No
Has the Analyst received any compensation from the subject company in the past 12 months?
No
Is Euro Pacific Canada Inc. a market maker in the issuer’s securities at the date of this report?
No
U.K. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund
EURO PACIFIC CANADA INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS.
The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2001. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.
U.S. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Euro Pacific Canada Inc. is not registered as a
broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of
research analysts.
Toronto
Montreal
Vancouver
150 York Street, Suite 1100
1501 McGill College Avenue Suite 1450
900 West Hastings Street, Suite 710
Toronto, ON, M5H 3S5
Montréal, Québec H3A 3M8
Vancouver, BC, V6C 1E5
416-649-4273 | 888-216-9779
514-940-5096 | 888-216-9779
604-453-1382 | 888-216-9779
Page 38 of 43
Euro Pacific Canada Inc. Research Disclosures
Analyst Certification
Company: Wanted Technologies Inc.
Ticker: WAN: TSXV
I, ANDREJ KRNETA, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have
not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
http://research.europac.ca/research/disclosures.php
COMPANY SPECIFIC DISCLOSURES
Is this an issuer related or industry related publication?
Issuer
Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject issuer?
If Yes: 1) Is it a long or short position? NA; and, 2) What type of security is it? NA
No
Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer?
No
Does Euro Pacific Canada Inc. or the Analyst have any actual material conflicts of interest with the issuer?
No
Does Euro Pacific Canada Inc. and/or one or more entities affiliated with Euro Pacific Canada Inc. beneficially own common shares (or any other
class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. provided financial advice to and/or, either on its own or as a syndicate member,
participated in a public offering, or private placement of securities of this issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. received compensation for having provided investment banking or related services to
this Issuer?
No
Has the Analyst had an onsite visit with the Issuer within the last 12 months?
No
Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months?
No
Has the Analyst received any compensation from the subject company in the past 12 months?
No
Is Euro Pacific Canada Inc. a market maker in the issuer’s securities at the date of this report?
No
U.K. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund
EURO PACIFIC CANADA INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS.
The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2001. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.
U.S. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Euro Pacific Canada Inc. is not registered as a
broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of
research analysts.
Toronto
Montreal
Vancouver
150 York Street, Suite 1100
1501 McGill College Avenue Suite 1450
900 West Hastings Street, Suite 710
Toronto, ON, M5H 3S5
Montréal, Québec H3A 3M8
Vancouver, BC, V6C 1E5
416-649-4273 | 888-216-9779
514-940-5096 | 888-216-9779
604-453-1382 | 888-216-9779
Page 39 of 43
Euro Pacific Canada Inc. Research Disclosures
Analyst Certification
Company: Computer Modelling Group LTD.
Ticker: CMG-TSX
I, Amr Ezzat, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am
not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
Rating Definitions: http://research.europac.ca/research/disclosures.php
COMPANY SPECIFIC DISCLOSURES
Is this an issuer related or industry related publication?
Issuer
Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject issuer?
If Yes: 1) Is it a long or short position? NA; and, 2) What type of security is it? NA
No
Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer?
No
Does Euro Pacific Canada Inc. or the Analyst have any actual material conflicts of interest with the issuer?
No
Does Euro Pacific Canada Inc. and/or one or more entities affiliated with Euro Pacific Canada Inc. beneficially own common shares (or any other
class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. provided financial advice to and/or, either on its own or as a syndicate member,
participated in a public offering, or private placement of securities of this issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. received compensation for having provided investment banking or related services to
this Issuer?
No
Has the Analyst had an onsite visit with the Issuer within the last 12 months?
No
Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months?
No
Has the Analyst received any compensation from the subject company in the past 12 months?
No
Is Euro Pacific Canada Inc. a market maker in the issuer’s securities at the date of this report?
No
U.K. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund
EURO PACIFIC CANADA INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS.
The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2001. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.
U.S. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Euro Pacific Canada Inc. is not registered as a
broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of
research analysts.
Toronto
Montreal
Vancouver
150 York Street, Suite 1100
1501 McGill College Avenue Suite 1450
900 West Hastings Street – Suite 710
Toronto, ON, M5H 3S5
Montréal, Québec H3A 3M8
Vancouver BC V6C 1E5
416-649-4273 | 888-216-9779
514-940-5096 | 888-216-9779
604-453-1382 | 888-216-9779
Page 40 of 43
Euro Pacific Canada Inc. Research Disclosures
Analyst Certification
Company: DHX Media
Ticker: DHX.B-TSX
I, ROBERT GOFF, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not,
am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
http://research.europac.ca/research/disclosures.php
COMPANY SPECIFIC DISCLOSURES
Is this an issuer related or industry related publication?
Issuer
Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject issuer?
If Yes: 1) Is it a long or short position? NA; and, 2) What type of security is it? NA
No
Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer?
No
Does Euro Pacific Canada Inc. or the Analyst have any actual material conflicts of interest with the issuer?
No
Does Euro Pacific Canada Inc. and/or one or more entities affiliated with Euro Pacific Canada Inc. beneficially own common shares (or any other class of
common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. provided financial advice to and/or, either on its own or as a syndicate member, participated in
a public offering, or private placement of securities of this issuer?
Yes
During the last 12 months, has Euro Pacific Canada Inc. received compensation for having provided investment banking or related services to this
Issuer?
Yes
Has the Analyst had an onsite visit with the Issuer within the last 12 months?
Yes
Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months?
No
Has the Analyst received any compensation from the subject company in the past 12 months?
No
Is Euro Pacific Canada Inc. a market maker in the issuer’s securities at the date of this report?
No
U.K. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund
EURO PACIFIC CANADA INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS.
The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2001. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.
U.S. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Euro Pacific Canada Inc. is not registered as a
broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of
research analysts.
Toronto
Montreal
Vancouver
150 York Street, Suite 1100
1501 McGill College Avenue Suite 1450
900 West Hastings Street, Suite 710
Toronto, ON, M5H 3S5
Montréal, Québec H3A 3M8
Vancouver, BC, V6C 1E5
416-649-4273 | 888-216-9779
514-940-5096 | 888-216-9779
604-453-1382 | 888-216-9779
Page 41 of 43
Euro Pacific Canada Inc. Research Disclosures
Analyst Certification
Company: Espial Group Inc.
Ticker: ESP:TSX
I, ROBERT GOFF, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not,
am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
I, ANDREJ KRNETA, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have
not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
http://research.europac.ca/research/disclosures.php
COMPANY SPECIFIC DISCLOSURES
Is this an issuer related or industry related publication?
Issuer
Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject issuer?
If Yes: 1) Is it a long or short position? NA; and, 2) What type of security is it? NA
No
Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer?
No
Does Euro Pacific Canada Inc. or the Analyst have any actual material conflicts of interest with the issuer?
No
Does Euro Pacific Canada Inc. and/or one or more entities affiliated with Euro Pacific Canada Inc. beneficially own common shares (or any other
class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. provided financial advice to and/or, either on its own or as a syndicate member,
participated in a public offering, or private placement of securities of this issuer?
Yes
During the last 12 months, has Euro Pacific Canada Inc. received compensation for having provided investment banking or related services to
this Issuer?
Yes
Has the Analyst had an onsite visit with the Issuer within the last 12 months?
Yes
Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months?
No
Has the Analyst received any compensation from the subject company in the past 12 months?
No
Is Euro Pacific Canada Inc. a market maker in the issuer’s securities at the date of this report?
No
U.K. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund
EURO PACIFIC CANADA INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS.
The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2001. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.
U.S. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Euro Pacific Canada Inc. is not registered as a
broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of
research analysts.
Toronto
Montreal
Vancouver
150 York Street, Suite 1100
1501 McGill College Avenue Suite 1450
900 West Hastings Street, Suite 710
Toronto, ON, M5H 3S5
Montréal, Québec H3A 3M8
Vancouver, BC, V6C 1E5
416-649-4273 | 888-216-9779
514-940-5096 | 888-216-9779
604-453-1382 | 888-216-9779
Page 42 of 43
Euro Pacific Canada Inc. Research Disclosures
Analyst Certification
Company: Probe Mines.
Ticker: TSXV-PRB
I, RYAN WALKER, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have
not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
http://europac.ca/research/disclosures.php
COMPANY SPECIFIC DISCLOSURES
Is this an issuer related or industry related publication?
Issuer
Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject issuer?
If Yes: 1) Is it a long or short position? NA; and, 2) What type of security is it? NA
No
Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer?
No
Does Euro Pacific Canada Inc. or the Analyst have any actual material conflicts of interest with the issuer?
No
Does Euro Pacific Canada Inc. and/or one or more entities affiliated with Euro Pacific Canada Inc. beneficially own common shares (or any other
class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. provided financial advice to and/or, either on its own or as a syndicate member,
participated in a public offering, or private placement of securities of this issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. received compensation for having provided investment banking or related services to
this Issuer?
No
Has the Analyst had an onsite visit with the Issuer within the last 12 months? (Site visit more than 12 months ago)
No
Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months?
No
Has the Analyst received any compensation from the subject company in the past 12 months?
No
Is Euro Pacific Canada Inc. a market maker in the issuer’s securities at the date of this report?
No
U.K. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund
EURO PACIFIC CANADA INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS.
The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2001. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.
U.S. DISCLOSURES
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection
Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Euro Pacific Canada Inc. is not registered as a
broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of
research analysts.
Toronto
Montreal
Vancouver
150 York Street, Suite 1100
1501 McGill College Avenue Suite 1450
900 West Hastings Street, Suite 710
Toronto, ON, M5H 3S5
Montréal, Québec H3A 3M8
Vancouver, BC, V6C 1E5
416-649-4273 | 888-216-9779
514-940-5096 | 888-216-9779
604-453-1382 | 888-216-9779
Page 43 of 43