S e p te m be r 2 8 , 2 0 1 5
I’D BUY THAT FOR A DOLLAR…..I MEAN 60 CENTS!
Companies That Benefit In This Low Loonie Environment
With the Canadian buck hitting an 11 year low last week, and having traded under 85 cents for the past 3 quarters, we thought it
would be a good time to re-examine our MRCC coverage universe in order to determine which companies should benefit the most
from a depressed loonie. Given the length and magnitude of the depreciation of the dollar, we expect the flow through to EPS and
cash flow to be more evident, while we also continue to believe that oil prices and the Fed will have a significant impact on the
Canadian dollar going forward. Each company outlined in this report is discussed in further detail below, with a sensitivity
analysis provided where applicable. Should you have any questions, we encourage you to give the respective analyst a call as
they will be happy to discuss their thoughts in more detail!
Special Sits - Russell Stanley
HWD
Hardwoods Distribution
PHM
Patient Home Monitoring
CXV
Convalo Health Intl
NHC
Nobilis Health
KLS
Kelso Technologies
Energy - Bill Newman, David Ricciardi
GTE
Gran Tierra Energy
PXT
Parex Resources
RE
Rock Energy
HME
Hemisphere Energy
Buy
Buy
Spec Buy
Buy
$20.00
$2.50
$0.90
$12.50
Buy
$8.50
Buy
Buy
Buy
Buy
$4.00
$12.00
$3.75
$0.65
Technology - Nikhil Thadani
ESP
Espial Group
IT
Intertain Group
SEV
Spectra7 Microsystems
Healthcare - Andre Uddin
MPH
Medicure
TH
Theratechnologies
GUD
Knight Therapeutics
Mining - Barry Allan, Ryan Hanley
AGI
Alamos Gold
WDO
Wesdome Gold Mines
Buy
Buy
Spec Buy
$5.50
$27.00
$1.00
Buy
Spec Buy
Buy
$4.50
$3.50
$12.00
Buy
Buy
$8.50
$1.50
Special Sits – Russell Stanley 416.860.8636 (Douglas Ibbitson, Associate 416.860.7618)
Hardwoods Distribution (HWD-TSX, BUY, C$20.00 target)
HWD is one of North America’s largest wholesale distributors of hardwood lumber and related sheet good products, operating
from 33 facilities in the United States and Canada. It reports in CDN, but approximately 79% of its H1/15 revenue came from
sales in the United States. HWD is a net beneficiary from a weaker CDN in three ways:
•
Translation – It increases the translated value of U.S. sales into CDN for financial reporting purposes.
• Pricing – The vast majority of hardwood product is originally sourced from the Eastern U.S., so a weaker CDN means higher
realized pricing on sales to Canadian customers.
• Canadian Exports – With an improving U.S. housing market, a number of HWD’s Canadian customers export their products
to the United States. A weaker CDN improves the competitive position of those customers, which flows back to HWD in the form
of stronger demand.
H1/15 revenue improved by C$58.5 million, of which C$24.7 million can be attributed to the translation benefit from converting
U.S. sales into Canadian dollars for reporting purposes. Moreover, sales in Canada improved C$5.9 million y-y, and we attribute
approximately ½ of that to stronger realized pricing, and secondarily stronger export demand for HWD’s Canadian customers.
Applying a 6.1% EBITDA margin to the combined revenue impact of C$27.7 million implies an EBITDA benefit of C$1.7 million
for H1/15, or C$3.4 million on an annualized basis. See figure below.
This report has been created by analysts who are employed by Mackie Research Capital Corporation, a Canadian Investment Dealer. For further disclosures, please see last page of this report.
www.mackieresearch.com
Focus Report – LOONIE
Page 2
Breakdown of Currency Impact
From Translation of U.S. Revenue for Financial Reporting ($mm)
From Realized Pricing Improvement in Canada ($mm)
H1/15 Revenue Impact ($mm)
EBITDA Margin
H1/15 EBITDA Impact ($mm)
Annualized EBITDA Impact ($mm)
$24.7
$3.0
$27.7
6.1%
$1.7
$3.4
Source
As reported.
MRCC Estimate.
MRCC Estimate.
H1/15A
MRCC Estimate.
MRCC Estimate.
Source: Company reports, Mackie Research Capital
U.S. Operating Companies Reporting in CDN:
These two companies generate essentially all of their revenue in the United States, but report in CDN, and therefore benefit from
FX changes through the translation of their underlying USD-results into CDN for reporting purposes. All else equal, the
relationship should be proportionate. In other words, a 10% appreciation of the USD from current levels would increase their
reported revenue/EBITDA/cash flow by approximately 10%.
Patient Home Monitoring Corp. (PHM-TSXV, BUY, C$2.50 target) provides in-home monitoring and disease management
services to patients in the United States.
Convalo Health International Corp. (CXV-TSXV, SPEC BUY, C$0.90 target) owns and operates substance abuse rehabilitation
centers in the United States, with a current focus on California.
Companies Reporting in USD:
These two companies generate essentially all of their revenue from sales/operations in the United States, and also report in USD.
A declining CDN therefore benefits our multiples-based valuation estimates via translation of USD-reported results on a
proportionate basis. In other words, a 10% increase in our FX estimate for F2016 from current levels would increase our F2016
CDN-equivalent earnings/EBITDA estimates by 10%, and therefore increase our target prices by 10% (all else equal).
Nobilis Health Corp. (NHC-TSX, BUY, C$12.50 target) owns and operates surgical hospitals and ambulatory surgical centers in
Texas and Arizona.
Kelso Technologies (KLS-TSX, BUY, C$8.50 target) designs and manufactures safety components for tank railcars.
Healthcare – Andre Uddin 416.860.8675
Green is the Color of Money: Theratechnologies (TH-T, SPEC BUY, C$3.50 target) and Medicure (MPH-V, BUY, C$4.50 target)
are two small cap Canadian specialty pharma stocks in our universe of coverage which generate most if not all of their current
sales in USD and report their financial results in Canadian dollars. Both Theratechnologies and Medicure would benefit the most
from a strong U.S. dollar. Neither of these companies have a currency hedge in place. Both stocks have performed well since we
initiated coverage on them (TH-T is up over 300% and MPH-V is up over 70%), as each company has a product that is growing at
a decent pace in the U.S. Based on our financial models, we forecast that every $0.01 change to the USD would impact fully
diluted annual EPS by: $0.005 for Theratechnologies and $0.01 for Medicure, respectively.
A Knight Shielded With Greenbacks: Knight Therapeutics (GUD-T, BUY, C$12 target) obtained US$125M from the sale of its
Priority Review Voucher to Gilead (GILD-NASDAQ). Why is this important for Knight? Knight’s management does not have to
worry about currency losses for its foreign venture capital (VC) investments as these will be made in USD and for some of its
future business development being conducted in the U.S. In terms of its investment commitments into VC funds, Knight has USD
commitments in the order of US$72M. Recall that Knight is investing in various VC funds that have historically performed well,
in order to help source products.
Technology – Nikhil Thadani 416.860.6784
For tech companies in our coverage universe reporting in CAD, a weaker CAD generally provides revenue tailwinds as the
majority of revenue is generated outside of Canada, which is in some cases offset by natural hedges. For Canadian tech companies
reporting in USD, a weaker CAD would make relative valuations cheaper as the stocks trade in CAD as well as reduce head office
costs incurred in CAD.
www.mackieresearch.com
Focus Report – LOONIE
Page 3
The Intertain Group Ltd. (IT-T, BUY, C$27.00 target)
Intertain generates the majority of its revenue in Europe. A weaker CAD vs. GBP and EUR should improve reported revenue, as
Intertain reports results in CAD. Since marketing expenses are incurred in local currencies, natural hedges should partially
mitigate FX earnings impact. Spot FX rates at Q2 results would have resulted in a 3¢/sh (~10%) Q2 EPS tailwind. We would
expect a somewhat similar Q3 EPS FX tailwind given the weaker CAD relative to the GBP and EUR during Q3. Currently,
Intertain does not generally utilize any hedging strategies in order to hedge FX exposure.
Espial Group Inc. (ESP-T, BUY, C$5.50 target)
Espial generates the majority of its revenue in North America and Europe and reports results in CAD. A weaker CAD vs. USD and
EUR could improve reported revenue. We estimate a ~300-400 bps Q3 q/q revenue tailwind due to the stronger EUR vs. CAD. As
a large portion of ESP’s expenses are incurred in CAD, improved reported revenue should not be fully offset by higher expenses,
leading to better margins. Espial does not generally utilize any hedging strategies in order to hedge FX exposure.
Spectra7 Microsystems Inc. (SEV-T, SPEC BUY, C$1.00 target)
We expect Spectra7 to generate the majority of its revenue in USD, which is largely naturally hedged as the company reports in USD.
However, around 1/3 of SEV’s employees are located in Canada. The company also incurs certain administrative costs in CAD. For Q3,
we estimate a ~200-300 bps q/q cost benefit.
Mining – Barry Allan 416.860.7612, Ryan Hanley 416.860.8337
Although the price of gold may have declined by ~15% from US$1,350/oz in early 2014 to ~US$1,150/oz near the end of Q3/15, it
is important to note that when examined in Canadian dollar terms, the price of gold has moved from C$1,370/oz to ~C$1,535/oz
over the same period, an increase of ~12%. As a result, we expect to see Canadian focused gold producers outperform peers which
have assets in countries that have seen a decline, or smaller gain, in gold price in local currency terms. With this in mind, we turn
our focus toward Alamos and Wesdome.
Alamos Gold Inc. (AGI-TSX, BUY, C$8.50 target)
We had expected this year to be a transitional one for Alamos, with the Mulatos mine in Mexico moving through a lower grade
phase while the strip ratio was expected to increase. This changed with the acquisition of AuRico Gold in July, bringing the
Young-Davidson mine, located ~60km west of Kirkland Lake, Ontario, into Alamos’ portfolio. As a result, 45% of our forecasted
2H/15 production and 43% of our forecasted 2016E production is expected to come from Young-Davidson, bringing the benefit of
the higher Canadian dollar gold price to Alamos. Alamos is currently trading at 0.7x on a P/NAV basis, in line with the peer
group average.
Wesdome Gold Mines Ltd. (WDO-TSX, BUY, C$1.50 target)
Wesdome operates the Eagle River underground mine and Mishi open pit, with ore from both mines sent to the Eagle River mill,
located ~50km west of Wawa, Ontario. Wesdome is one of the few companies in our coverage universe which has 100% of its
assets in Canada, therefore fully benefiting from the appreciation of the gold price in Canadian dollar terms. In addition to this
benefit, Wesdome has also recently discovered two high-grade parallel zones, labelled the 300 Zone and the 7 Zone (see our
September 17th note). Wesdome currently trades at 0.6x on a P/NAV basis, in line with the peer group average
In summary, these companies should continue to benefit from the continued depreciation of the Canadian dollar, and hence we
believe that they should trade at a premium to their peers which hold assets in other countries where the gold price has
depreciated, or appreciated by a lesser extent, in local currency terms.
Currency NAV Sensitivies
Alamos Gold NAV Sensitivity
C$1.00
C$0.95
C$0.90
C$0.85
C$0.83
C$0.80
C$0.75
C$0.70
$7.05
$7.42
$7.83
$8.29
$8.49
$8.81
$9.40
$10.07
Wesdome Gold Mines NAV Sensitivity
C$1.00
C$0.95
C$0.90
C$0.85
C$0.83
C$0.80
C$0.75
C$0.70
$1.25
$1.32
$1.39
$1.47
$1.50
$1.56
$1.67
$1.79
Source: Company reports, Mackie Research Capital
www.mackieresearch.com
Focus Report – LOONIE
Page 4
ENERGY – Bill Newman 403.260.2460, David Ricciardi 403.260.2462 (Valentino Pintea, Associate 403.260.2461)
Internationals: Many of our international oil and gas names are exploration oriented with limited production and as a result, a
strengthening US dollar versus the Canadian dollar will have a limited impact on cash flow and valuation. However, two of our
Colombia focused names have significant, growing production. Our cash flow valuations will be positivity impacted if the
Canadian dollar continues to weaken (see Figure below).
Parex Resources Inc. (PXT-TSX, BUY, C$12.00 target)
Parex currently produces ~28,000 bbl/d from its large, focused land base in the Llanos basin in Colombia. The company maintains
a strong balance sheet, with no debt and net positive working capital of ~US$90 million as at June 30, 2015. The 2015 capex of
~US$145 million will be funded almost entirely with cash flow which will allow the company to maintain balance sheet strength.
(See our research report dated September 8, 2015).
Gran Tierra Energy Inc. (GTE-TSX, BUY, C$4.00 target)
Gran Tierra has ~19,000 boe/d (99% oil) of production primarily from the Putumayo basin in Colombia. In May 2015, the
company made significant changes to its board of directors and management team. Gary Guidry was appointed President and
CEO and has implemented a new strategy of focusing on its lower-risk projects in Colombia while farming out or monetizing its
higher-risk exploration plays in Peru and Brazil. As at June 30, 2015 Gran Tierra has no debt and net positive working capital of
~US$200 million. (See our research report dated August 5, 2015).
Currency Sensitivies and Valuation Multiples
Gran Tierra
Parex
2016F
Cash Flow
US$/C$ = 0.80
(C$mm)
$227.34
2016F
Cash Flow
US$/C$ =0.70
(C$mm)
$263.50
2016F
CF/fd share
US$/C$ = 0.80
(C$/fd sh)
$0.79
2016F
CF/fd share
US$/C$ =0.70
(C$/fd sh)
$0.92
Change
%
16.0%
P/CF
US$/C$ = 0.80
multiple
3.8x
P/CF
US$/C$ =0.70
multiple
3.3x
EV/DACF
US$/C$ = 0.80
multiple
2.7x
EV/DACF
US$/C$ =0.70
multiple
2.1x
$239.02
$280.63
$1.63
$1.91
17.2%
5.7x
4.8x
5.3x
4.4x
Source: Company reports, Mackie Research Capital
Domestics: All things held constant, a weaker Canadian dollar is a benefit for Western Canadian oil producers and a mixed blessing for
our natural gas producers with a liquids component present in their respective production streams. Regarding natural gas production
(methane), production is sold within Canadian borders and a lower Canadian dollar does not benefit or hamper the revenue stream. For
oil and liquids producers, West Texas Intermediate (WTI) pricing at Cushing, Oklahoma is the benchmark reference price for Canadian
crude prices. Canadian oil prices are based on the WTI price and adjusted for transportation, quality and the currency conversion rates
from the US dollar to Canadian dollar. As such, a weak Canadian dollar boosts the realized price in Canadian dollars, and in turn,
revenue streams. On the liquids front, there are various benchmarks depending on the type of liquid sold (C3 to C5: Propane, Butane
and Pentane); with most benchmarked to Canadian light sweet or WTI. Ergo the same revenue benefit would occur with liquids pricing
as with oil pricing.
All names will benefit with a depressed Canadian dollar, with oil-weighted names benefitting the most as the price for their respective
production is more weighted to the US/Canada exchange rate. Of our domestic names, only two are exclusively oil-weighted, with
Rock Energy Inc. at a 95% oil weighting and Hemisphere Energy Corp. at 77% oil weighting.
Currency Sensitivies and Valuation Multiples
Rock
Hem isphere
2016F
Cash Flow
US$/C$ = 0.80
(C$mm)
$56.00
2016F
Cash Flow
US$/C$ =0.70
(C$mm)
$70.40
2016F
CF/fd share
US$/C$ = 0.80
(C$/fd sh)
$1.09
2016F
CF/fd share
US$/C$ =0.70
(C$/fd sh)
$1.37
Change
%
25.7%
P/CF
US$/C$ = 0.80
multiple
1.4x
P/CF
US$/C$ =0.70
multiple
1.1x
EV/DACF
US$/C$ = 0.80
multiple
2.6x
EV/DACF
US$/C$ =0.70
multiple
1.9x
$13.80
$17.00
$0.17
$0.21
23.5%
1.0x
0.8x
1.8x
1.3x
Source: Company reports, Mackie Research Capital
www.mackieresearch.com
Focus Report – LOONIE
Page 5
RISKS TO TARGET
All risks to target for all companies under coverage discussed in this research report can be found in company research reports which
are available on our web site at www.mackieresearch.com.
RELEVANT DISCLOSURES APPLICABLE TO COMPANIES UNDER COVERAGE
Relevant disclosures required under Rule 3400 applicable to companies under coverage discussed in this research report are
available on our web site at www.mackieresearch.com.
ANALYST CERTIFICATION
Each analyst of Mackie Research Capital Corporation whose name appears in this report hereby certifies that (i) the recommendations
and opinions expressed in this research report accurately reflect the analyst’s personal views and (ii) no part of the research analyst’s
compensation was or will be directly or indirectly related to the specific conclusions or recommendations expressed in this research
report.
Information about Mackie Research Capital Corporation’s Rating System, the distribution of our research to clients and the percentage of recommendations
which are in each of our rating categories is available on our web site at www.mackieresearch.com.
The information contained in this report has been drawn from sources believed to be reliable but its accuracy or completeness is not guaranteed, nor in
providing it does Mackie Research Capital Corporation assume any responsibility or liability. Mackie Research Capital Corporation, its directors, officers and
other employees may, from time to time, have positions in the securities mentioned herein. Contents of this report cannot be reproduced in whole or in part
without the express permission of Mackie Research Capital Corporation. US Institutional Clients - Mackie Research USA Inc., a wholly owned subsidiary of
Mackie Research Capital Corporation, accepts responsibility for the contents of this report subject to the terms and limitations set out above. US firms or
institutions receiving this report should effect transactions in securities discussed in the report th rough Mackie Research USA Inc., a Broker-Dealer registered
with the Financial Industry Regulatory Authority (FINRA).
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Toronto 416.860.7600 - Montreal 514.399.1500 - Vancouver 604.662.1800 - Calgary 403.218.6375 - Regina 306.566.7550 - St. Albert 780.460.6460