Maple Leaf Memo
Potash? Value? At These Levels?
Headline-grabbing food shortages have bolstered demand for potash, pushed per-ton prices soaring and the stocks of those companies that produce it to the moon. But another major player sees more value in companies that produce fertilizer components.
This news was probably baked into stock prices, at least for the lower-market-cap companies, by the heat of rumor, informed or not. But the fact OAO Uralkali, Russia’s second-largest potash producer, is poking around the Canadian potash producers is a decent indication the long-term global demand profile for the fertilizer ingredient is healthy.
Uralkali plans to increase output 300 percent by 2015; the company forecast potash consumption will grow by 10 percent a year in the former Soviet Union. Uralkali is also seeking to lower its costs of delivery to customers in the US and Brazil. A North American acquisition makes sense in that regard, but Uralkali will take its time before inking any deals.
According to the International Fertilizer Industry Association, the six largest potash producers account for 70 percent of the 55 million-metric-ton-a-year market, a breakdown that still suggests room for consolidation. Last week, BHP Billiton (NYSE: BHP), the world’s largest mining company, agreed to buy Canada’s Anglo Potash for CAD284 million.
Uralkali is focused on North American companies that are already in production. Potash Corp of Saskatchewan (NYSE: POT, TSX: POT) and Plymouth, Minn.-based The Mosaic Co (NYSE: MOS) are part of the conversation but may be too big on a market-cap basis for Uralkali to swallow. More likely candidates include Denver-based Intrepid Potash (NYSE: IPI) and Calgary-based Agrium (NYSE: AGU, TSX: AGU), a partner of Potash Corp and Mosaic in the Canpotex marketing business.
No Depression…and a Potentially Useful Plug
Kevin Phillips, a former Nixon staffer widely recognized as the intellectual architect of the Southern Strategy and author of several books on post-World War II America, writes in The Washington Post, teasing his latest work, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism:
My colleagues Yiannis Mostrous and Elliott Gue are co-authors, along with Ivan Martchev, of The Silk Road to Riches: How You Can Profit by Investing in Asia’s Newfound Prosperity. The basic thesis of the book is that the world is on the brink of a new economic age, one led not by the US but by Asia’s emerging nations.
We’ve obviously considered current events in the context of their work; it’s impossible to say with certainty that that’s what’s happening. But take a look at Phillips for the history, and rely on The Silk Road to Riches for the investment plan.
What’s happening in Asia, whether its rise and ongoing US weakness signal an immediate shift in global economic leadership, has serious upside implications for Canada’s resource-based economy, a theme we’ve discussed here and in Canadian Edge. According to Peter Koven of FP Trading Desk, analysts from Wellington West Capital Markets are on board:
Vet the Messengers, Too
When you’re reading your morning paper, tuning into your favorite cable news gabfest or catching up on the Democratic primary squabble, remember to evaluate as well the sources of the information you’re ingesting.
As is his wont, Barry Ritholtz, a nerd so cool even the cheerleaders dig him, points us to good information, this time a Business Week article explaining what it takes before a recession is called by the folks whose judgment actually, you know, counts.
Like most things easy, quick and dirty, mainstream financial media and politicians’ discussion of economic matters can leave you excited but empty, yearning for something long-term, fulfilling and useful.
The National Bureau of Economic Research, the independent group responsible for officially marking recessions’ beginnings and ends, takes account of much more than “two consecutive quarters of declining GDP.” It’s one thing to simplify, another to mislead.
(This item was originally posted to the blog At These Levels.)
Speaking Engagements
Be sure to wear a flower in your hair when you venture west to San Francisco. I’ll be heading to “The City” with Neil George and Elliott Gue Aug. 7-10, 2008, for the San Francisco Money Show.
Neil, Elliott and I will discuss infrastructure, partnerships, utilities, resources and energy, and tell you what to buy and what to sell in 2008.
Click here or call 800-970-4355 and refer to priority code 011362 to attend as our guest.
The Roundup
All Canadian Edge Portfolio recommendations have now reported first quarter 2008 results. On the whole, the numbers were positive, particularly in light of the difficult circumstances plaguing the global economy.
The results are further testimony to the fundamental strength of Canada’s economy and the specific ability of high-quality, well-run businesses to withstand adversity.
Conservative Portfolio
Artis REIT (TSX: AX.UN, OTC: ARESF) reported a 140 percent increase in first quarter funds from operations (FFO) to CAD13 million; on a per-unit basis, FFO was up 43 percent to 40 cents Canadian. Revenue was up 95 percent to CAD34.3 million.
Net operating income (NOI) was up 105 percent to CAD23.8 million. Distributable income rose 124 percent to CAD13.2 million (41 cents Canadian per unit).
Portfolio occupancy increased to 97.5 percent during the first quarter from 97.4 percent at Dec. 31, 2007, as Artis continued to add solid properties in Canada’s burgeoning western provinces. The REIT also earned a 30 percent increase in rents on expiring leases and will earn similar boosts in returns in coming quarters. The payout ratio sank to 65 percent.
As of March 31, 2008, mortgage debt-to-gross book value was 50.1 percent, compared to 49.2 percent at Dec. 31, 2007 and 51.6 percent at Mar. 31, 2007. Still on the right track, Artis REIT is a buy up to USD18.
Atlantic Power Corp (TSX: ATP.UN, OTC: ATPWF) reported a 42 percent increase in distributable cash for the first quarter, from USD21 million a year ago to USD29.8 million in the first three months of 2008. The increase was driven by Atlantic’s receipt of an USD8.2 million distribution from the Gregory project and USD4 million in cash flow based on Atlantic’s increased ownership in the Pasco project. Atlantic Power Corp is a buy up to USD12.
Canadian Apartment Properties REIT (TSX: CAR.UN, OTC: CDPYF) reported first quarter FFO increases of 28.9 percent and 17 percent to CAD16.2 million and 24.8 cents Canadian per unit, respectively, from CAD12.5 million and 21.2 cents Canadian per unit for the same period of 2007. Distributable income was CAD16.6 million (25.5 cents Canadian per unit), up from CAD13 million (21.9 cents Canadian per unit) for the first three months of 2007.
Average monthly rents increased 3.6 percent, and the occupancy rate rose to 98.2 percent. Operating revenue spiked 11 percent to CAD78.1 million because of recent acquisitions as well as higher rents and occupancy across the portfolio. Operating expenses improved to 50.8 percent of operating revenues, down from 53.3 percent a year ago.
NOI rose 17.1 percent to CAD38.4 million from CAD32.8 million in last year’s first quarter. As a percentage of revenues, NOI increased to 49.2 percent compared to 46.7 percent.
Canadian Apartment Properties REIT’s payout ratio came down to 88.1 percent from 102.6 percent a year ago. The ratio of total debt-to-gross book value was 60.03 percent as of March 31, 2008, down from 62.58 percent. Still with plenty of growth potential, Canadian Apartment Properties REIT is a buy up to USD20.
Energy Savings Income Fund (TSX: SIF.UN, OTC: ESIUF) was pinched by the weakening US dollar and economy. But it grew its customer base by 2 percent during the year ended March 31, 2008, and saw a seasonally adjusted 13 percent boost in sales to CAD1.7 billion.
Distributable cash for the three months ended March 31, 2008, was CAD54 million, representing a 2 percent increase from the first quarter of 2007. The payout ratio for the period was 61 percent, up from 54 percent, but it’s still well manageable.
Energy Savings added 54,000 customers in the first quarter, down 13 percent from the fourth quarter of 2007. Sales during the first quarter were up 11 percent over the comparable quarter to CAD652.6 million.
The fund earned 87 cents Canadian per unit, up from 66 cents Canadian a year ago. Battle tested and able to execute a long-term strategy, Energy Savings Income Fund is a buy up to USD18.
Keyera Facilities Income Fund’s (TSX: KEY.UN, OTC: KEYUF) distributable cash flow per share rose 10 percent. The key is the trust’s ability to keep adding fee-generating assets, and it’s off to a good start already this year as well after closing deals on two new midstream facilities. Keyera Facilities Income Fund is a buy up to USD22.
Northern Property REIT’s (TSX: NPR.UN, OTC: NPRUF) distributable cash flow per unit rose 17.9 percent from 39 cents Canadian to 46 cents Canadian for the first quarter. FFO was 47 cents Canadian per unit, up from 41 cents Canadian per unit a year ago. Sales rose more than 33 percent as the trust continued to add new assets and raise rents and occupancy on existing ones.
The REIT’s focus on out-of-the-way markets and government-quality tenants continues to pay off. The payout ratio is now down to 80.5 percent, making a sizeable dividend hike likely. Buy Northern Property REIT up to USD25.
Aggressive Portfolio
Advantage Energy Income Fund (NYSE: AAV, TSX: AVN.UN) reported FFO increased to CAD94.6 million from CAD65.6 million; on a per unit basis, FFO was up 15.3 percent to 68 cents Canadian from 59 cents Canadian. The payout ratio declined to 53 percent.
Daily production of natural gas was 125 million cubic feet per day (mcf/d), up from 114 mcf/d in the previous year. Crude oil and natural gas liquids daily production increased to 12.28 barrels per day (bbls/d) from 9.9 bbls/d a year ago.
Advantage expects 2008 production to be in the range of 32,000 to 34,000 barrels of oil equivalent per day (boe/d). With output rising and realized first quarter selling prices only a little more than USD8 per million British thermal units (MMBtu), gains should be even greater later in the year. Advantage Energy Income Fund remains a strong buy up to USD14.
AG Growth Income Fund (TSX: AFN.UN, OTC: AGGRF) suffered a hit to its profitability in the first quarter because of supply bottlenecks that prevented it from taking advantage of robust sales and order backlog. Management reports that these logistics woes have now been resolved, setting the stage for a powerful recovery the rest of 2008.
For the second quarter in a row, the payout ratio ballooned to more than 100 percent. That’s normally a disqualifier for a trust in my view. But with agricultural equipment and related products in a robust bull market, I’m willing to wait another quarter for AG to return to growth. Those who don’t already own AG Growth Income Fund should buy it up to USD32.
Arctic Glacier Income Fund’s (TSX: AG.UN, OTC: AGUNF) CEO promised us last month that there would be “no surprises” in the trust’s first quarter earnings. And, as this week’s report demonstrated, he delivered.
Sales in the seasonally weak first quarter totaled CAD24.2 million, a decrease of CAD2.1 million (8 percent) compared to the same period in 2007. The decrease was attributable to the stronger Canadian dollar, which reduced sales by CAD3.3 million. Operations acquired during 2007 and the first quarter of 2008 contributed CAD1.1 million to the total, while sales in previously serviced markets increased by CAD100,000 (1 percent) as a result of higher pricing, partially offset by less-than-favorable weather in certain markets.
Arctic’s chief challenge remains legal issues, and unfortunately, there’s no indication the clouds will blow away any time soon. It’s still not a target in the US Dept of Justice investigation of the US ice industry, however, and the acquisition of KoldKist indicates it’s sticking to strategy.
The most important thing about these results is they show Arctic is still executing on its plans, which include growing its way past any 2011 tax liability. That’s why we like the trust. Hold Arctic Glacier Income Fund.
Peyto Energy Trust’s (TSX: PEY.UN, OTC: PEYUF) numbers were basically flat with year-earlier totals, the result of management’s decision to build inventories rather than ramp up output. The good news is that should mean stronger results in future quarters.
FFO declined 9 percent to CAD71 million (67 cents Canadian per unit) from CAD78.3 million (74 cents Canadian per unit), and production declined 5 percent to 20,342 boe/d from 21,305 boe/d. The payout ratio ticked up to 63 percent from 57 percent.
Peyto’s scaled back activity during the trailing 12 months has allowed it to build up its reserves; it now boasts a proved producing reserve life of 13 years, total proved life of 16 years and proved plus probable life of 21 years. Poised for long-term, stable growth, Peyto Energy Trust is a buy up to USD21.
Trinidad Drilling (TSX: TDG, OTC: TDGCF) generated a 6.5 percent surge in revenue but a 7.2 percent decline in net income in its first quarterly report since converting from a trust to a corporation. Trinidad reported net earnings of CAD38.9 million (44 cents Canadian per share), down from CAD41.9 million (49 cents Canadian per share) a year earlier largely because of an unrealized foreign exchange loss and higher depreciation because of a larger rig fleet.
Revenue was CAD219 million, up from CAD206 million during the first three months of 2007. Cash flow from operations—a prime indicator of ability to finance growth—nearly doubled from fourth quarter levels.
Drilling rig utilization in the US rose to 87 percent. Drilling days rose by more than 49 percent. And although the rig count in Canada remained flat, drilling days nearly doubled from fourth quarter levels and were 5 percent above first quarter 2007 tallies. Buy Trinidad Drilling for growth and income up to USD14.
Headline-grabbing food shortages have bolstered demand for potash, pushed per-ton prices soaring and the stocks of those companies that produce it to the moon. But another major player sees more value in companies that produce fertilizer components.
This news was probably baked into stock prices, at least for the lower-market-cap companies, by the heat of rumor, informed or not. But the fact OAO Uralkali, Russia’s second-largest potash producer, is poking around the Canadian potash producers is a decent indication the long-term global demand profile for the fertilizer ingredient is healthy.
Uralkali plans to increase output 300 percent by 2015; the company forecast potash consumption will grow by 10 percent a year in the former Soviet Union. Uralkali is also seeking to lower its costs of delivery to customers in the US and Brazil. A North American acquisition makes sense in that regard, but Uralkali will take its time before inking any deals.
According to the International Fertilizer Industry Association, the six largest potash producers account for 70 percent of the 55 million-metric-ton-a-year market, a breakdown that still suggests room for consolidation. Last week, BHP Billiton (NYSE: BHP), the world’s largest mining company, agreed to buy Canada’s Anglo Potash for CAD284 million.
Uralkali is focused on North American companies that are already in production. Potash Corp of Saskatchewan (NYSE: POT, TSX: POT) and Plymouth, Minn.-based The Mosaic Co (NYSE: MOS) are part of the conversation but may be too big on a market-cap basis for Uralkali to swallow. More likely candidates include Denver-based Intrepid Potash (NYSE: IPI) and Calgary-based Agrium (NYSE: AGU, TSX: AGU), a partner of Potash Corp and Mosaic in the Canpotex marketing business.
No Depression…and a Potentially Useful Plug
Kevin Phillips, a former Nixon staffer widely recognized as the intellectual architect of the Southern Strategy and author of several books on post-World War II America, writes in The Washington Post, teasing his latest work, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism:
Despite the recent stabilization of the economy, some economists fear that the world will soon face the greatest financial crisis since the 1930s.
That analogy is hardly a perfect fit; there’s almost no chance of another sequence like the Great Depression, where the stock market dove 80 percent, joblessness reached 25 percent, and the Great Plains became a dustbowl that forced hundreds of thousands of “Okies” to flee to California. But Americans should worry that the current unrest betokens the sort of global upheaval that upended previous leading world economic powers, most notably Britain.
That analogy is hardly a perfect fit; there’s almost no chance of another sequence like the Great Depression, where the stock market dove 80 percent, joblessness reached 25 percent, and the Great Plains became a dustbowl that forced hundreds of thousands of “Okies” to flee to California. But Americans should worry that the current unrest betokens the sort of global upheaval that upended previous leading world economic powers, most notably Britain.
My colleagues Yiannis Mostrous and Elliott Gue are co-authors, along with Ivan Martchev, of The Silk Road to Riches: How You Can Profit by Investing in Asia’s Newfound Prosperity. The basic thesis of the book is that the world is on the brink of a new economic age, one led not by the US but by Asia’s emerging nations.
We’ve obviously considered current events in the context of their work; it’s impossible to say with certainty that that’s what’s happening. But take a look at Phillips for the history, and rely on The Silk Road to Riches for the investment plan.
What’s happening in Asia, whether its rise and ongoing US weakness signal an immediate shift in global economic leadership, has serious upside implications for Canada’s resource-based economy, a theme we’ve discussed here and in Canadian Edge. According to Peter Koven of FP Trading Desk, analysts from Wellington West Capital Markets are on board:
Wellington West Capital Markets has joined the growing chorus of recent months by raising metal price assumptions, mainly because of rising costs.
The analysts point out that higher energy and acid prices are pushing operating costs higher and increasing barriers to entry for new projects. On the demand side, meanwhile, they argue that China and India have become more relevant in predicting future metal demand than the United States, suggesting a U.S. recession would not sink the metal market.
“China’s GDP is only 24% net export driven, which underscores that much of its appetite for metals is for internal consumption,” they wrote in a note to clients.
And then there are a number of other challenges in the industry, including the labour shortage, long negotiations for permitting, and governments looking to seize a bigger piece of the mining windfall. It all adds up to a long-term secular bull market, and the analysts expect it to last through at least 2012.
Wellington West is now forecasting gold prices of [USD]850 an ounce and silver prices of [USD]15.50 an ounce in each of 2008 and 2009, respectively. Copper is expected to cost [USD]3.50 a pound in 2008 and [USD]3.15 in 2009. Those numbers are all well above their prior forecasts. The only metal the analysts are not bullish on is zinc, because a surplus is expected in 2008.
The analysts point out that higher energy and acid prices are pushing operating costs higher and increasing barriers to entry for new projects. On the demand side, meanwhile, they argue that China and India have become more relevant in predicting future metal demand than the United States, suggesting a U.S. recession would not sink the metal market.
“China’s GDP is only 24% net export driven, which underscores that much of its appetite for metals is for internal consumption,” they wrote in a note to clients.
And then there are a number of other challenges in the industry, including the labour shortage, long negotiations for permitting, and governments looking to seize a bigger piece of the mining windfall. It all adds up to a long-term secular bull market, and the analysts expect it to last through at least 2012.
Wellington West is now forecasting gold prices of [USD]850 an ounce and silver prices of [USD]15.50 an ounce in each of 2008 and 2009, respectively. Copper is expected to cost [USD]3.50 a pound in 2008 and [USD]3.15 in 2009. Those numbers are all well above their prior forecasts. The only metal the analysts are not bullish on is zinc, because a surplus is expected in 2008.
Vet the Messengers, Too
When you’re reading your morning paper, tuning into your favorite cable news gabfest or catching up on the Democratic primary squabble, remember to evaluate as well the sources of the information you’re ingesting.
As is his wont, Barry Ritholtz, a nerd so cool even the cheerleaders dig him, points us to good information, this time a Business Week article explaining what it takes before a recession is called by the folks whose judgment actually, you know, counts.
Like most things easy, quick and dirty, mainstream financial media and politicians’ discussion of economic matters can leave you excited but empty, yearning for something long-term, fulfilling and useful.
The National Bureau of Economic Research, the independent group responsible for officially marking recessions’ beginnings and ends, takes account of much more than “two consecutive quarters of declining GDP.” It’s one thing to simplify, another to mislead.
(This item was originally posted to the blog At These Levels.)
Speaking Engagements
Be sure to wear a flower in your hair when you venture west to San Francisco. I’ll be heading to “The City” with Neil George and Elliott Gue Aug. 7-10, 2008, for the San Francisco Money Show.
Neil, Elliott and I will discuss infrastructure, partnerships, utilities, resources and energy, and tell you what to buy and what to sell in 2008.
Click here or call 800-970-4355 and refer to priority code 011362 to attend as our guest.
The Roundup
All Canadian Edge Portfolio recommendations have now reported first quarter 2008 results. On the whole, the numbers were positive, particularly in light of the difficult circumstances plaguing the global economy.
The results are further testimony to the fundamental strength of Canada’s economy and the specific ability of high-quality, well-run businesses to withstand adversity.
Conservative Portfolio
Artis REIT (TSX: AX.UN, OTC: ARESF) reported a 140 percent increase in first quarter funds from operations (FFO) to CAD13 million; on a per-unit basis, FFO was up 43 percent to 40 cents Canadian. Revenue was up 95 percent to CAD34.3 million.
Net operating income (NOI) was up 105 percent to CAD23.8 million. Distributable income rose 124 percent to CAD13.2 million (41 cents Canadian per unit).
Portfolio occupancy increased to 97.5 percent during the first quarter from 97.4 percent at Dec. 31, 2007, as Artis continued to add solid properties in Canada’s burgeoning western provinces. The REIT also earned a 30 percent increase in rents on expiring leases and will earn similar boosts in returns in coming quarters. The payout ratio sank to 65 percent.
As of March 31, 2008, mortgage debt-to-gross book value was 50.1 percent, compared to 49.2 percent at Dec. 31, 2007 and 51.6 percent at Mar. 31, 2007. Still on the right track, Artis REIT is a buy up to USD18.
Atlantic Power Corp (TSX: ATP.UN, OTC: ATPWF) reported a 42 percent increase in distributable cash for the first quarter, from USD21 million a year ago to USD29.8 million in the first three months of 2008. The increase was driven by Atlantic’s receipt of an USD8.2 million distribution from the Gregory project and USD4 million in cash flow based on Atlantic’s increased ownership in the Pasco project. Atlantic Power Corp is a buy up to USD12.
Canadian Apartment Properties REIT (TSX: CAR.UN, OTC: CDPYF) reported first quarter FFO increases of 28.9 percent and 17 percent to CAD16.2 million and 24.8 cents Canadian per unit, respectively, from CAD12.5 million and 21.2 cents Canadian per unit for the same period of 2007. Distributable income was CAD16.6 million (25.5 cents Canadian per unit), up from CAD13 million (21.9 cents Canadian per unit) for the first three months of 2007.
Average monthly rents increased 3.6 percent, and the occupancy rate rose to 98.2 percent. Operating revenue spiked 11 percent to CAD78.1 million because of recent acquisitions as well as higher rents and occupancy across the portfolio. Operating expenses improved to 50.8 percent of operating revenues, down from 53.3 percent a year ago.
NOI rose 17.1 percent to CAD38.4 million from CAD32.8 million in last year’s first quarter. As a percentage of revenues, NOI increased to 49.2 percent compared to 46.7 percent.
Canadian Apartment Properties REIT’s payout ratio came down to 88.1 percent from 102.6 percent a year ago. The ratio of total debt-to-gross book value was 60.03 percent as of March 31, 2008, down from 62.58 percent. Still with plenty of growth potential, Canadian Apartment Properties REIT is a buy up to USD20.
Energy Savings Income Fund (TSX: SIF.UN, OTC: ESIUF) was pinched by the weakening US dollar and economy. But it grew its customer base by 2 percent during the year ended March 31, 2008, and saw a seasonally adjusted 13 percent boost in sales to CAD1.7 billion.
Distributable cash for the three months ended March 31, 2008, was CAD54 million, representing a 2 percent increase from the first quarter of 2007. The payout ratio for the period was 61 percent, up from 54 percent, but it’s still well manageable.
Energy Savings added 54,000 customers in the first quarter, down 13 percent from the fourth quarter of 2007. Sales during the first quarter were up 11 percent over the comparable quarter to CAD652.6 million.
The fund earned 87 cents Canadian per unit, up from 66 cents Canadian a year ago. Battle tested and able to execute a long-term strategy, Energy Savings Income Fund is a buy up to USD18.
Keyera Facilities Income Fund’s (TSX: KEY.UN, OTC: KEYUF) distributable cash flow per share rose 10 percent. The key is the trust’s ability to keep adding fee-generating assets, and it’s off to a good start already this year as well after closing deals on two new midstream facilities. Keyera Facilities Income Fund is a buy up to USD22.
Northern Property REIT’s (TSX: NPR.UN, OTC: NPRUF) distributable cash flow per unit rose 17.9 percent from 39 cents Canadian to 46 cents Canadian for the first quarter. FFO was 47 cents Canadian per unit, up from 41 cents Canadian per unit a year ago. Sales rose more than 33 percent as the trust continued to add new assets and raise rents and occupancy on existing ones.
The REIT’s focus on out-of-the-way markets and government-quality tenants continues to pay off. The payout ratio is now down to 80.5 percent, making a sizeable dividend hike likely. Buy Northern Property REIT up to USD25.
Aggressive Portfolio
Advantage Energy Income Fund (NYSE: AAV, TSX: AVN.UN) reported FFO increased to CAD94.6 million from CAD65.6 million; on a per unit basis, FFO was up 15.3 percent to 68 cents Canadian from 59 cents Canadian. The payout ratio declined to 53 percent.
Daily production of natural gas was 125 million cubic feet per day (mcf/d), up from 114 mcf/d in the previous year. Crude oil and natural gas liquids daily production increased to 12.28 barrels per day (bbls/d) from 9.9 bbls/d a year ago.
Advantage expects 2008 production to be in the range of 32,000 to 34,000 barrels of oil equivalent per day (boe/d). With output rising and realized first quarter selling prices only a little more than USD8 per million British thermal units (MMBtu), gains should be even greater later in the year. Advantage Energy Income Fund remains a strong buy up to USD14.
AG Growth Income Fund (TSX: AFN.UN, OTC: AGGRF) suffered a hit to its profitability in the first quarter because of supply bottlenecks that prevented it from taking advantage of robust sales and order backlog. Management reports that these logistics woes have now been resolved, setting the stage for a powerful recovery the rest of 2008.
For the second quarter in a row, the payout ratio ballooned to more than 100 percent. That’s normally a disqualifier for a trust in my view. But with agricultural equipment and related products in a robust bull market, I’m willing to wait another quarter for AG to return to growth. Those who don’t already own AG Growth Income Fund should buy it up to USD32.
Arctic Glacier Income Fund’s (TSX: AG.UN, OTC: AGUNF) CEO promised us last month that there would be “no surprises” in the trust’s first quarter earnings. And, as this week’s report demonstrated, he delivered.
Sales in the seasonally weak first quarter totaled CAD24.2 million, a decrease of CAD2.1 million (8 percent) compared to the same period in 2007. The decrease was attributable to the stronger Canadian dollar, which reduced sales by CAD3.3 million. Operations acquired during 2007 and the first quarter of 2008 contributed CAD1.1 million to the total, while sales in previously serviced markets increased by CAD100,000 (1 percent) as a result of higher pricing, partially offset by less-than-favorable weather in certain markets.
Arctic’s chief challenge remains legal issues, and unfortunately, there’s no indication the clouds will blow away any time soon. It’s still not a target in the US Dept of Justice investigation of the US ice industry, however, and the acquisition of KoldKist indicates it’s sticking to strategy.
The most important thing about these results is they show Arctic is still executing on its plans, which include growing its way past any 2011 tax liability. That’s why we like the trust. Hold Arctic Glacier Income Fund.
Peyto Energy Trust’s (TSX: PEY.UN, OTC: PEYUF) numbers were basically flat with year-earlier totals, the result of management’s decision to build inventories rather than ramp up output. The good news is that should mean stronger results in future quarters.
FFO declined 9 percent to CAD71 million (67 cents Canadian per unit) from CAD78.3 million (74 cents Canadian per unit), and production declined 5 percent to 20,342 boe/d from 21,305 boe/d. The payout ratio ticked up to 63 percent from 57 percent.
Peyto’s scaled back activity during the trailing 12 months has allowed it to build up its reserves; it now boasts a proved producing reserve life of 13 years, total proved life of 16 years and proved plus probable life of 21 years. Poised for long-term, stable growth, Peyto Energy Trust is a buy up to USD21.
Trinidad Drilling (TSX: TDG, OTC: TDGCF) generated a 6.5 percent surge in revenue but a 7.2 percent decline in net income in its first quarterly report since converting from a trust to a corporation. Trinidad reported net earnings of CAD38.9 million (44 cents Canadian per share), down from CAD41.9 million (49 cents Canadian per share) a year earlier largely because of an unrealized foreign exchange loss and higher depreciation because of a larger rig fleet.
Revenue was CAD219 million, up from CAD206 million during the first three months of 2007. Cash flow from operations—a prime indicator of ability to finance growth—nearly doubled from fourth quarter levels.
Drilling rig utilization in the US rose to 87 percent. Drilling days rose by more than 49 percent. And although the rig count in Canada remained flat, drilling days nearly doubled from fourth quarter levels and were 5 percent above first quarter 2007 tallies. Buy Trinidad Drilling for growth and income up to USD14.
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