Good Earners

It’s an earnings-heavy Portfolio Update this month, as 24 of our 38 Conservative and Aggressive Holdings posted financial and operating results over the past month.

Conservative Holdings AltaGas Ltd (TSX: ALA, OTC: ATGFF), Cineplex Inc (TSX: CGX, OTC: CPXGF), Keyera Corp (TSX: KEY, OTC: KEYUF) and Pembina Pipeline Corp (TSX: PPL, NYSE: PBA) and Aggressive Holdings Newalta Corp (TSX: NAL, OTC: NWLTF) and ShawCor Ltd (TSX: SCL, OTC: SAWLF) announced dividend increases along with first-quarter numbers.

AltaGas boosted its payout by 15.7 percent to an annualized rate of CAD1.77 per share, effective with the May installment of CAD0.1475 to be paid on June 16, 2014, to shareholders of record as of May 26. AltaGas will trade ex-dividend as of May 22.

Cineplex announced a 4.2 percent dividend increase to a monthly rate of CAD0.125 per share and an annualized rate of CAD1.50. The theater operator hasn’t announced the timing of its next monthly payout, but the dividend will be paid sometime in June.

Keyera, meanwhile, raised its dividend by 7.5 percent to CAD0.215 per month and CAD2.58 per year. The new monthly rate of CAD0.215 per share begins with a payment due June 16.

Pembina Pipeline announced a CAD0.145 dividend for May payable on June 13 to shareholders of record as of May 25. Shares will trade ex-dividend as of May 21. The new rate is 3.6 percent higher than the old one.

Newalta announced its fifth dividend increase since August 2010, a 13.6 percent increase to a new yearly rate of CAD0.50 effective with a quarterly payment of CAD0.125 due in mid-July to shareholders of record on June 30. The ex-dividend date is June 26.

ShawCor, which we added to the Aggressive Holdings in the February 2014 issue, has rewarded us with a 20 percent increase to its quarterly dividend rate to CAD0.15 per share. ShawCor has now increased its dividend every year since 2005.

All six posted solid first-quarter results, with outlooks and investment plans that augur more dividend growth.

The Growers: Conservative Holdings

AltaGas Ltd (TSX: ALA, OTC: ATGFF) reported company-record first-quarter normalized earnings of CAD73.7 million, or CAD0.60 per share, up from CAD55.5 million, or CAD0.53 per share, a year ago.

Normalized earnings before interest, taxation, depreciation and amortization (EBITDA) grew by 22.8 percent to CAD179.2 million.

Normalized funds from operations were CAD129.8 million, or CAD1.06 per share, up 6 percent from CAD122.4 million, or CAD1.16 per share, for the prior corresponding period. The payout ratio for the first quarter was 36.2 percent. 

Management noted “strong asset performance” across all of AltaGas’ operating segments, with revenue and earnings growth driven mainly by energy infrastructure assets added over the past two years. A five-year, CAD2.5 billion growth plan promises more revenue, earnings, funds flow and dividend growth to come.

During the quarter AltaGas sanctioned the Alton natural gas storage project in Nova Scotia and the regional liquefied natural gas (LNG) project in Dawson Creek, British Columbia, for approximately CAD125 million, bringing total secured growth capital to over CAD1 billion.

Higher natural gas volumes processed, the partial ownership of Petrogas, the addition of Blythe, colder weather in Michigan, Alberta and Nova Scotia and favorable exchange rates positively influenced first-quarter numbers.

These factors were partially offset by lower earnings from Power in Alberta and higher costs in Gas related to natural gas storage and extraction premiums. And the Blythe facility was on major turnaround during March.

AltaGas is now a buy under USD44.

Cineplex Inc (TSX: CGX, OTC: CPXGF) management noted that nasty winter weather and a slate of offerings from Hollywood that didn’t hold much appeal to Canadian movie-goers hemmed in first-quarter box office and earnings, though those factors weren’t sufficient stop a long-running show based on tent-pole productions and imaginative ancillary revenue growth, as Canada’s largest cinema operator raised its dividend rate for the fourth consecutive May.

Total revenues for the first quarter increased by 12.9 percent to CAD280 million, due largely to the contributions from the 2013 acquisitions of 24 Empire theatres and digital media company EK3 Technologies Inc, subsequently renamed Cineplex Digital Networks.

First-quarter box office revenue was CAD156.2 million, an increase of 7.6 percent.

Media revenue increased by 49.3 percent compared to the first quarter of 2013, driven by the EK3 deal and a 13 percent increase in pre-show and showtime advertising.

Management noted new first-quarter company records for box office revenue per person of CAD9.04 and concession revenue per person of CAD5.05, which were up from CAD8.97 and CAD4.69, respectively, a year ago.

Adjusted EBITDA declined by 2.6 percent due to weather and weak films to CAD30.9 million. Adjusted free cash flow per share declined by 23.9 percent to CAD0.2921. The payout ratio for the period was 123.2 percent.

During the 12 months ended March 31, 2014, Cineplex generated adjusted free cash
flow per share of CAD2.3656, up from CAD1.9784 per share for the prior corresponding period. The payout ratios for these periods were approximately 60.6 percent and 68 percent, respectively.

Cineplex’ SCENE loyalty program added 300,000 members to reach 5.6 million during the quarter, the Cineplex Mobile app has now been downloaded more than 9 million times and management established a national partnership with Tim Hortons Inc (TSX: THI, NYSE: THI) to launch TimsTV in 2,200 existing Tim Hortons locations.

Cineplex’s strong balance sheet, continued investment in new exhibition technologies and the diversification of its business model put it good position for long-term growth. Cineplex is now a buy under USD38.

Keyera Corp (TSX: KEY, OTC: KEYUF) posted first-quarter net earnings of CAD55.2 million, or CAD0.70 per share, up from CAD23.4 million, or CAD0.30 per share, a year ago, as the strength of its fee-generating assets more than offset weaker marketing results and a greater share of cash flow was derived from lower-risk sources.

Earnings before interest, taxation, depreciation and amortization (EBITDA) were CAD107.7 million, up from CAD97.8 million in the first quarter of 2013.

Distributable cash flow was CAD78.2 million, or CAD0.99 per share, compared to CAD83.3 million, or CAD1.07, for the prior corresponding period.

The payout ratio for the period was 60.6 percent.

Keyera’s Gathering and Processing unit was particularly strong, with a 14 percent increase in net throughput due to asset additions and drilling activity around its plants. The unit posted company-record operating margin of CAD48.3 million, up from CAD39.9 million a year ago.

NGL Infrastructure also posted a good result on solid pricing. The segment also delivered record operating margin, CAD39.1 million, up from CAD29 million. Marketing operating margin was CAD36.9 million compared to CAD23.9 million in the first quarter of 2013.

Management boosted its 2014 CAPEX budget by CAD100 million at the midpoint to CAD600 million to CAD700 million, noting higher producer activity. Increased investment should drive long-term value.

Keyera is nearing a decision on whether to exercise its right to participate in the Norlite diluent pipeline as a 30 percent non-operating owner. Moving forward would add another source of stable, long-term cash flow.

Second-quarter results could suffer due to an unusually high level of planned turnaround activity in the Canadian oil and gas sector, but Keyera continues to perform well, growing and improving the quality of its cash flow. We’re raising our buy-under target on Keyera to USD65.

Pembina Pipeline Corp (TSX: PPL, NYSE: PBA) generated a 42 percent increase in net revenue to CAD447 million during the first quarter of 2014 from CAD315 million during the same period of 2013 on strong performance in each of its businesses, particularly in the Midstream unit, as well as returns on new capital investments, including the Saturn I Facility and Phase I Conventional Pipelines expansions.

Pembina generated EBITDA of CAD316 million, up from CAD211 million a year ago due to better results from operating activities in each of the company’s businesses and returns on new assets, expansions and services.

Cash flow from operating activities was CAD261 million, or CAD0.82 per share, up from CAD232 million, or CAD0.78 per share, a year ago. Adjusted cash flow from operating activities was CAD264 million, or CAD0.83 per share, up from CAD202 million, or CAD0.68 per share.

The payout ratio for the period was 50.6 percent.

Conventional Pipelines growth was driven by the Phase I Expansion entering service in late December 2013. Improved revenue was partially offset by higher operating expenses due mainly to volume growth and the Phase I Expansion.

The Phase I Expansion increased crude oil and condensate capacity on the Peace Pipeline by 40,000 barrels per day (bbl/d) and NGL capacity on the Peace Pipeline and Northern System by 52,000 bbl/d.

In Oil Sands & Heavy Oil, increases in net revenue and operating margin were primarily related to higher volumes transported on the Nipisi Pipeline due to the completion of a new pump station on that system, which was placed into service in the second quarter of 2013.

Gas Services’ results were higher because of the new 200 million cubic feet per day Saturn I Facility, which came online in late October 2013, combined with improved plant reliability at the Musreau deep cut facility.

The Midstream unit benefitted from a stronger propane market across North America due to colder-than-average temperatures during the winter and enhanced service offerings.

Pembina Pipeline, based on its dividend increase, is now a buy under USD38.

The Growers: Aggressive Holdings

Newalta Corp (TSX: NAL, OTC: NWLTF) posted 10 percent year-over-year revenue growth to CAD187.8 million, driven by growth capital investments and improved commodity prices, partially offset by the impact of an unusually cold winter on operations. Adjusted EBITDA grew by 16 percent to CAD32.1 million.

Funds from operations for the quarter were CAD24.1 million, or CAD0.43 per share, basically flat year over year. The first-quarter payout ratio was 25.6 percent.

New Markets revenue and gross profit increased 37 percent and 17 percent, respectively, to CAD56.1 million and CAD14.6 million, driven by strong growth in Heavy Oil supported by investments in onsite contracts and contributions from Newalta’s Heavy Oil facilities.

Oilfield revenue and gross profit were up 12 percent and 5 percent, respectively, to CAD54.3 million and CAD20.6 million on contributions from investments, higher waste processing volumes and improved commodity prices, offset by the impact of extreme weather on operating
costs.

Industrial revenue decreased by 6 percent to CAD77.3 million, while gross profit grew by 14 percent to CAD6.4 million.

Onsite services posted strong results, and management’s Rationalization Plan helped drive down costs. These positive factors were offset by lower contributions from oil recycling services and the timing of waste receipts at Newalta’s Stoney Creek Landfill.

First-quarter adjusted selling, general and administrative expenses declined from 12.3 percent of revenue a year ago to 11.1 percent, primarily due to overhead reductions as part of the Rationalization Plan.

CAPEX for the three months ended March 31, 2014, were CAD27.1 million, focused primarily on growth capital projects in New Markets and Oilfield.

As part of the aforementioned Rationalization Plan management closed four facilities, reduced overhead in associated support functions and began redirecting lines of business. Last month Newalta hired RBC Capital Markets to review “a full range of strategic alternatives” for the underperforming Industrial Division, including a potential sale, IPO or spinoff of the division, in whole or in parts.

Newalta is a buy under USD20.

ShawCor Ltd (TSX: SCL, OTC: SAWLF) reported 5 percent year-over-year revenue growth to CAD479.1 million due to increases of 5 percent to CAD436.8 million in the Pipeline and Pipe Services segment and 11 percent to CAD42.8 million in the Petrochemical and Industrial segment. Earnings per share were CAD1.03, up from CAD1.01 and well ahead of consensus expectations of CAD0.71.

The payout ratio for the period was just 11.8 percent.

Pipeline and Pipe Services benefitted from increased activity in North America and the

Europe, Middle East, Africa, Russia (EMAR) region, partially offset by lower revenue in Asia Pacific and Latin America. Petrochemical and Industrial saw higher activity levels in all three regions.

First-quarter operating income was up marginally to CAD89.4 million from CAD89.1 million a year ago on lower SG&A expenses and a net increase in foreign exchange gain, partially offset by a decrease in gross profit of CAD3 million, an increase in amortization of property, plant, equipment and intangible assets of CAD1.9 million and a lower gain on assets held for sale of CAD500,000.

The decrease in gross profit resulted from a 2.9 percentage point decrease in gross margin, attributable to changes in product and project mix compared to the first quarter of 2013, particularly in the Pipeline and Pipe Services segment’s Asia Pacific and Latin America regions, which had benefitted from high gross margins on several large concrete weight coating
projects.

Management has cautioned that with the flowlines project for Inpex’ Ichthys LNG project winding up during the second quarter revenue and earnings in the second half of 2014 will decline compared to the first quarter.

At the same time, ShawCor is in play for a significant share of the large projects that are currently in the bid stage. Management is also pursuing organic growth and acquisition initiatives in the pipeline services and composite pipe businesses.

With a current backlog of CAD642 million (up from CAD617 million as of Dec. 31, 2013) and the value of outstanding bids exceeding CAD800 million, ShawCor is well positioned to post solid growth for the long term.

ShawCor is in as strong a position in its subsector as any company in the How They Rate coverage universe. Other than well-telegraphed softening of results through the course of 2014, the growth signs are plentiful and pointing to record potential earnings in 2015 and 2016.

ShawCor, based on its 20 percent dividend increase, is now a buy under USD52.

REIT Focus

Two of the five Canadian real estate investment trusts (REIT) we recommend among our Conservative Holdings posted first-quarter financial and operating results this week.

Artis REIT (TSX: AX-U, OTC: ARESF) has performed well on the TSX since its Sept. 9, 2013, rising-interest-rate-fear-induced low of CAD13.45, with a total return in local terms of 25.4 percent and a US dollar return of 20 percent.

Results for the first three months of 2014 support the rally, and Artis debt profile suggest it will be able to handle what will likely be a modest rise for official and market rates in North America commensurate with a longer-term, slower-growth trajectory.

Artis posted an 8.1 percent increase in property net operating income (NOI) and 2.8 percent growth in same-property NOI from the prior corresponding period. Revenue for the three months was up 13.7 percent to CAD123.7 million.

Occupancy as of March 31, 2014, was 95.5 percent, 96.3 percent including commitments.

FFO were up 6.4 percent to CAD47.6 million compared to the same period of last year, though FFO per unit declined by 5.3 percent to CAD0.36 due to new-unit issuance. The FFO payout ratio was 75 percent.

Artis also raised CAD125 million through its first offering of unsecured debentures, which along with cash on hand and availability on its credit line provides ample liquidity to sustain operations and take advantage of accretive expansion opportunities.

Mortgage debt-to-gross book value decreased to 44.1 percent as of March 31, 2014, from 45.4 percent as of Dec. 31, 2013. Total debt-to-GBV ticked up to 50 percent from 49 percent due to the unsecured debenture issuance.

Artis’ weighted average interest rate on mortgages and other loans and weighted average term-to-maturity were steady at 4.27 percent and 4.3 years, respectively. Interest coverage improved to 2.83 times from 2.82 times at the end of 2013.

Unhedged floating-rate debt as a percentage of total debt declined to 8.4 percent from 10.2 percent as of Dec. 31, 2013, and 15.9 percent as of March 31, 2013.

Artis, one of the top picks for new money profiled in the April 2014 Best Buys feature, is a buy under USD16.

Dundee REIT
(TSX: D-U, OTC: DRETF) hasn’t seen the same sort of unit-price pop that Artis REIT has enjoyed.

Following the introduction of the word “tapering” to the investor’s lexicon on May 2, 2013, by former Fed Chairman Ben Bernanke Dundee finally hit its low on Dec. 5, CAD27.14 on the TSX. It closed at CAD28.95 on May 8, 2014. Dundee posted 10.2 percent Canadian dollar and 8.2 percent US dollar total returns off its low, but that trails the average loonie gain of 16 percent and greenback gain of 11.3 percent for the five REITs among our Conservative Holdings.

Operating and financial performance remains solid.

Portfolio occupancy as of March 31, 2014, was strong at 94.2 percent, though on a comparative property basis occupancy dipped by 10 basis points from Dec. 31, 2013.

But the Canadian national average occupancy was 89.7 percent, a decline of 60 basis points over the course of the first quarter of 2014.

Leasing activity for the quarter consisted of 218,000 square feet of new leases and 413,000 square feet of renewals, all at higher rates than expiries, which totaled 631,000 square feet. Approximately 404,400 square feet of gross leasable area was committed for future occupancy at quarter’s end.

The REIT has leased 2.1 million square feet for tenants taking occupancy in 2014, which represents 66 percent of total 2014 lease maturities.

Average in-place net rents are 9 percent below market rents despite rising from an average of CAD17.83 per square foot as of Dec. 31, 2013, to CAD17.97 as of March 31, 2014, providing good room for organic growth.

Comparative NOI was up 0.6 percent to CAD106.7 million, driven by increases in western and eastern Canada and Calgary downtown due to higher rental rates on new leasing over the past year and the benefit of step rents, offset by slightly lower occupancy. Total NOI for the quarter was up 8.2 percent to CAD116.1 million, aided by properties acquired in 2013.

Adjusted FFO per unit grew by 1.6 percent to CAD0.62, while FFO per unit was up 1.4 percent to CAD0.73. Distributions were 90.3 percent of AFFO per unit, 76.7 percent of FFO per unit.

Dundee management maintains a strong, conservative balance sheet, with leverage stable at 47.6 percent and an interest coverage ratio of 2.9 times.

Dundee REIT remains a buy under USD39.

Note that Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF), Northern Property REIT (TSX: NPR-U, OTC: NPRUF) and RioCan REIT (TSX: REI-U, OTC: RIOCF) are all scheduled to report first-quarter operating and financial numbers on May 13, 2014.

All remain buys for steady income, CAP REIT up to USD25, Northern Property up to USD30 and RioCan up to USD27.

Conservative Update

Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF) reported that first-quarter cash flow from continuing operations ticked up to CAD5.7 million, or CAD0.44 per share, from CAD5.6 million, or CAD0.44 per share, a year ago. Royalties were up to CAD8.15 million from CAD8.06 million a year ago.

The payout ratio for the quarter was 66.4 percent. Brookfield Real Estate, which offers a stable yield of 8.4 percent, is a buy under USD14.

Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF), coming off a solid 2013, reported that first-quarter proportional generation was up 2.6 percent year over year to 4,756 gigawatt-hours.

Revenue for the period was up 9.8 percent, while FFO per unit grew by 14.7 percent. The first-quarter payout ratio was 55.4 percent.

Well positioned for improving market fundamentals and continuing expansion, Brookfield Renewable Energy is a buy under USD34.


Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF) reported a 55.1 percent surge in first-quarter revenue to CAD266.3 million, as the acquisition of Harland Financial has in fact proved a step-change for the business.

US operations accounted for 46 percent of total revenue, up from 13 percent a year ago. Organic growth in Canada was also solid, as adjusted EBITDA grew by 74.4 percent. The payout ratio for the three months ended March 31, 2014, was 66.7 percent. Davis + Henderson–based on the Harland acquisition and corresponding asset growth–is now a buy under USD28.

Shaw Communications Inc (TSX: SJR/B, NYSE: SJR) reported fiscal 2014 second-quarter revenue grew by 2 percent to CAD1.27 billion, while year-to-date revenue was up 3 percent to CAD2.64 billion.

Management noted solid Cable and Satellite growth, though net income for the current quarter was off by 2 percent and was flat year to date. Shaw also announced a round of job cuts due to consolidation of its TV operations.

The payout ratio for the fiscal second quarter was 70.7 percent. Shaw Communications is a buy under USD24.

Student Transportation Inc (TSX: STB, NSDQ: STB) posted fiscal 2014 third-quarter revenue growth of 14.8 percent to CAD138.3 million, while adjusted EBITDA grew by 3.1 percent to CAD26.7 million and earnings per share ticked up to CAD0.03 from CAD0.02 a year ago.

Management reported deferred revenue due to harsh winter weather of CAD7.2 million, the large majority of which will be collected, based on historical experience, and most of which will flow to adjusted EBITDA.

The payout ratio for the period was 91.3 percent. Student Transportation remains a buy under USD7.

Please note that first-quarter results for TransForce Inc (TSX: TFI, OTC: TFIFF) are discussed in this month’s Best Buys feature.

Aggressive Update

Extendicare Inc (TSX: EXE, OTC: EXETF) reported a 6.1 percent increase in first-quarter revenue to CAD528.2 million, driven by growth in its Canadian operations. US revenue, on the other hand, was down 1.2 percent to USD309.8 million.

Adjusted EBITDA margin improved to 8.1 percent from 6.2 percent for the fourth quarter of 2013 and 7.9 percent a year ago.

Management noted that the sale of its US unit is subject to resolution of a US Dept of Justice investigation of claims submissions by Extendicare Health Services Inc.

The payout ratio for the period was 48.8 percent. Extendicare is a buy under USD7.

Magna International Inc (TSX: MG, NYSE: MGA), a December 2013 addition to the Aggressive Holdings, posted sales of USD8.96 billion for the first quarter, up 7 percent year over year.

Income from operations before income taxes was USD581 million, net income was USD393
million and earnings per share were USD1.76, increases of USD124 million, USD24 million and USD0.19, respectively, compared to the first quarter of 2013.

The payout ratio for the period was 18.2 percent. Magna International, which is up more than 20 percent in both Canadian and US dollar terms since Dec. 6, 2013, is a buy under USD95.


Parkland Fuel Corp (TSX: PKI, OTC: PKIUF) posted 66.9 percent first-quarter revenue growth to CAD2.02 billion, as total fuel volume surged by 62.3 percent on recent acquisitions and solid organic growth. Adjusted EBITDA was up only slightly but reached a company-record CAD61.2 million.

Distributable cash flow was flat at CAD44.6 million, while the payout ratio was a conservative 43 percent. Parkland is a buy under USD18.

Wajax Corp (TSX: WJX, OTC: WJXFF) reported a 1.5 percent decline in first-quarter revenue to CAD331.1 million, as Power Systems sales were impacted by weaker Canadian oil and gas activity. Earnings per share were CAD0.40, down from CAD0.62 a year ago.

Management noted again that it expects a “challenging” 2014. Wajax posted a first-quarter payout ratio of 150 percent. Wajax is a buy under USD35 for aggressive investors.

Note that results for oil and gas exploration and production companies ARC Resources Ltd (TSX: ARX, OTC: AETUF), Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF), Enerplus Corp (TSX: ERF, NYSE: ERF) and Vermilion Energy Inc (TSX: VET, NYSE: VET) are discussed in this month’s In Focus feature.

Peyto Exploration and Development Corp (TSX: PEY, OTC: PEYUF), also profiled in the In Focus feature, will report first-quarter results on or about May 14, 2014.

Lightstream Resources Ltd (TSX: LTS, OTC: LSTMF) is one of this month’s Best Buys, though we recommend it only for aggressive investors who do not already have a position in the stock.

The Rest of the Numbers

Here are estimated and confirmed reporting dates for remaining Canadian Edge Portfolio Holdings. Except where noted, Holdings will be reporting first-quarter 2014 results.

Conservative Holdings

  • Bank of Nova Scotia (TSX: BNS, NYSE: BNS)–May 27, 2014 (FY 2014 Q2, confirmed)
  • Bird Construction Inc (TSX: BDT, OTC: BIRDF)–May 13, 2014 (estimate)
  • Canadian Apartment Properties REIT (TSX: CAR, OTC: CDPYF)–May 13, 2014 (confirmed)
  • EnerCare Inc (TSX: ECI, OTC: CSUWF)–May 12, 2014 (confirmed)
  • Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–May 13, 2014 (confirmed)
  • Northern Property REIT (TSX: NPR, OTC: NPRUF)–May 13, 2014 (confirmed)
  • RioCan REIT (TSX: REI, OTC: RIOCF)–May 13, 2014 (confirmed)

Aggressive Holdings

  • Acadian Timber Corp (TSX: ADN OTC: ACAZF)–May 12, 2014 (confirmed)
  • Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–May 14, 2014 (confirmed)
  • Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–May 13, 2014 (confirmed)
  • Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–May 15, 2014 (confirmed)
  • Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–May 14, 2014 (estimate)

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