returns on top picks
TRANSCRIPT
TECSYS Inc. (TCS-TSX, $9.91, BUY, PT $11.00) Margin expansion-driven earnings growth is set to outperform that at its closest peers
DHX Media Ltd. (DHX.B-TSX, $7.21, BUY, PT $12.00) Bullish Content Thesis in Middle Innings! Merchandising & Licensing poised for significant gains in 2017
exactEarth Ltd. (XCT-TSXV, $1.29, SPECULATIVE BUY, PT $2.00) Industry leader in a growing market with a favourable risk/return trade-off
Pure Industrial REIT (AAR.un-TSX, $5.33, BUY, PT $5.45) Enormous growth potential backed by increasingly conservative financial metrics
Pure Technologies Ltd. (PUR-TSX, $5.99, BUY, PT $7.25) It is safe to test the waters! Operating leverage to drive best in class earnings growth
Cipher Pharmaceuticals Inc. (CPH-TSX/CPHR-NASDAQ, US$6.85, BUY, PT US$10.50) Dermatology portfolio poised to drive revenue growth from existing pipeline
TSO3 Inc. (TOS-TSX, $3.65, BUY, PT $6.25) Industry-leading sterilization platform poised to drive unit sales in global markets
Victoria Gold Corp. (VIT-TSXV, $0.70, SPECULATIVE BUY, PT $0.90) Eagle prepares for flight in catalyst-rich H2/16
Edgefront REIT (ED.un-TSXV, $1.79, BUY, PT $2.20) Strong covenant Triple-Net leases creates best in class risk adjusted returns
Watch our team presentations
Returns on Top Picks: H116: +52% | 2015: +7% | 2014: +38%
We are pleased to present Echelon Wealth Partners’ Research Top Picks for Mid-Year 2016.
We are very pleased to be reaching out following a time where H1/16 marked significant gains for investors and smaller capitalization stocks in particular. Within this positive context, we are proud to highlight the exceptional performance of our 2016 Top Picks portfolio where our eight selections provided an average return of 51.5%.
By comparison, the overall TSX Composite generated a positive return of 10.4% for the first half, offsetting its decline of 11.1% during 2015. Within the sectors, mining experienced a dramatic H1/16 recovery of 106%, reversing its 41% decline in 2015. Moving the 10-year rates down by 80 bps for H1/16 helped to drive the REIT Index ahead by 20%, very much over-riding the 5.2% negative total return for 2015. Another benefactor of declining rates, the Telecom sector returned 17% for H1/16 outpacing the broader TSX Composite Index. A prior and prospective outperformer, the Health Care Index has recorded an H1/16 decline of 30% more than erasing its 22.5% return for 2015. Elsewhere, the Information Technology Index underperformed declining 5% for the YTD. The impressive YTD outperformance builds on our past outperformance. The portfolio returned 7% in 2015 against the TSX decline of 11%. Looking back to 2014, our portfolio returned 38% when the TSX gained 7%.
In classic contrarian form, as many moved to avoid or reduce small capitalization weightings, the TSX Venture Exchange stormed back, with the composite index up 42.6% for H1/16 following declines of 24.4% and 25.4% in 2015 and 2014, respectively. With its dramatic recovery, the TSX-V finally moved to close its performance gap against US small cap indices, significantly outpacing the Russell 2000 Index, which gained 6.2% during H1/16. The relative outperformance of the TSXV against the Russell for the YTD clearly reflects its heavy exposure to materials shares at 57% of the index. Turning to the broader indices, we note that the DJIA and S&P 500 both gained 5.3% during H1/16, compared with declines of 2.2% and 73bps in 2015.
We look back to the beginning of the year view where we were right to highlight the value of small caps, and where we are now thrilled to have been outpaced by the market recovery. Starting the year, we commented on the prior two years of underperformance by Canadian small caps and our bullish view. We noted both the challenges and potential opportunities resulting from the capital market declines that left premium valuations being accorded late-stage privates relative to public small cap valuations. In our most prescient comments we noted that while it is difficult (and probably naively optimistic) to say this imbalance would quickly correct with a positive revaluation of publics, we saw value in the small cap arena. At that time, and still today, we derive some measure of support from private equity investors who share our view in this regard. We look for increased takeover activity where public markets continue to undervalue high-growth companies that are delivering to plan. Our research team places greater scrutiny on exit scenarios within their small cap coverage given the capital markets conditions. Overleaf, we present coverage names where investors have experienced aggressive gains by take-outs.
Echelon Wealth Partners continues to look for outperformance in the Technology and Healthcare/Life Sciences sectors, where Canadians are recognized leaders. On the natural resource side, we are purposefully focused on gold and technology-focused extraction. We look for continued outperformance by the gold sector with our bias for higher gold prices based on greatly diminished prospects for further interest rate increases by the US Federal reserve, potential Brexit contagion, and generally increased global economic uncertainty and social instability.
H1/16 top picks provided an average return of 51.5% vs TSX Comp of 10.4%
Continued outperformance 2015 top picks returned 7% vs TSX Comp of -11%; 2014 top picks +38% vs TSX Comp +7%
TSX-V +42.6% in H1/16 vs declines in 2015 -24.4% and 2014 -25.4%
We highlighted value of small caps, and our view has been outpaced by the market recovery
We place greater scrutiny on exit scenarios within our small cap coverage given capital markets conditions
Top Picks - H116 Performance Summary
Top Picks – H216 – Returning Names, Additions We present our Mid-year 2016 Top Picks below, and look forward to addressing their performance as the year progresses. We include our Top Pick reports in the following pages following their recent release as individual notes during the weeks of July 11, 2016 and July 18, 2016. These reports have also been included in each analyst’s sector weekly.
Our coverage on many mid and smaller capitalization names carries with it a heightened consideration of exit strategies where take-out prospects are a core part of our analysis. Below, we highlight some of the more recent takeout wins from within our coverage universe.
Ticker Name ate PublisheBeginning Price ( Publish Date)
End Price(Jul 11, 2016)
PerformanceJan 2016
Price Target Current
Price Target
Ryan Walker TSXV:KAM Kaminak Gold Corp. 25/01/2016 0.83$ 2.85$ 243% 1.85$ NADouglas Loe TSX:TOS TSO3 Inc. 22/01/2016 1.86$ 3.30$ 77% 3.10$ 6.25$ Douglas Loe TSX:CPH Cipher Pharmaceuticals Inc. 22/01/2016 5.66$ 6.81$ 20% 13.25$ 10.50$ Rob Sutherland TSX:AAR.un Pure Industrial Real Estate Trust 26/01/2016 4.39$ 5.19$ 22% 5.30$ 5.45$ Rob Goff TSX:DHX.B DHX Media Ltd. 20/01/2016 7.46$ 7.12$ -5% 13.00$ 12.00$ Andrej Krneta TSX:TCS Tecsys Inc. 20/01/2016 7.60$ 9.47$ 25% 11.00$ 11.00$ Amr Ezzat TSX:CMG Computer Modelling Group Ltd. 20/01/2016 8.44$ 9.65$ 14% 15.00$ 13.00$ Fadi Benjamin TSXV:PYR PyroGenesis Canada Inc. 20/01/2016 0.22$ 0.26$ 18% 0.60$ 0.25$
Average Return* 52.0% Excluding KAM 24.7%TSX YTD Return 11.3%
* Average return excluding Kaminak is 24.7%
Additions H216 Ticker Name Share Price Price Target Implied ReturnRyan Walker TSXV:VIT Victoria Gold Corp. 0.60$ 0.90 50%Rob Sutherland TSXV:ED.un Edgefront Real Estate Investment 1.83$ 2.20 29%Amr Ezzat TSX:PUR Pure Technologies Ltd. 5.98$ 7.25 21%Fadi Benjamin TSX:XCT exactEarth Ltd. 1.33$ 2.00 50%
Returning Top Ticker Name Share Price Price Target Implied ReturnDouglas Loe TSX:TOS TSO3 Inc. 3.30$ 6.25$ 89%Douglas Loe TSX:CPH Cipher Pharmaceuticals Inc. 6.81$ 10.50$ 54%Rob Sutherland TSX:AAR.un Pure Industrial Real Estate Trust 5.19$ 5.50$ 12%Rob Goff TSX:DHX.B DHX Media Ltd. 7.12$ 12.00$ 69%Andrej Krneta TSX:TCS Tecsys Inc. 9.47$ 11.00$ 16%
Company Name TickerDate
announ. Rating Price
TargetTakeout Price
(per shr)Prebid Mkt
PricePrebid Mkt Price
Price Target
Ryan WalkerProbe Mines Ltd. TSXV:PRB Jan 19, 2015 SPEC BUY C$4.00 C$5.00 $3.36 48.8% 25.0%Newstrike Capital Inc. TSXV:NES Feb 17, 2015 SPEC BUY C$1.30 C$1.15 $0.96 19.8% -11.5%Romarco Minerals Inc. TSX:R Jul 30, 2015 SPEC BUY C$0.95 C$0.68 $0.38 78.9% -28.4%Kaminak Gold Corp. TSXV:KAM May 12, 2016 SPEC BUY C$2.50 C$2.62 $1.98 32.3% 4.8%
Rob SutherlandLess Mess TSXV:LMS Dec 11, 2015 BUY C$1.30 C$1.42 $1.15 23.0% 8.8%True North Apartment REIT TSX:TN.UN Aug 10, 2015 BUY C$9.00 C$9.00 $7.51 26.9% 7.1%HealthLease Properties REIT TSX:JLP.UN Aug 13, 2014 BUY C$12.50 C$14.20 $10.76 37.8% 19.4%
Douglas LoeTransition Therapeutics TSX:TTH Jun 30, 2016 SPEC BUY C$2.75 US$1.55* $0.89 126.3% -26.8%
Andrej Krneta Wanted Technologies TSXV:WAN Sep 11, 2015 BUY C$1.80 C$1.79 $1.17 53.0% -0.6%
*CAD equivalent of Transition's takeout price was C$2.01/shr
Company Stock Top Pick Highlight Analyst Victoria Gold Corp.
TSXV:VIT, $0.60, PT$0.90
Eagle prepares for flight in catalyst-rich CH216
Ryan Walker, MSc
TSO3 Inc. TSX:TOS, $3.30, PT$6.25
Industry-leading sterilization platform poised to drive unit sales in global markets Doug Loe, PhD
Cipher Pharmaceuticals
TSX:CPH, $6.81, PT$10.50
Dermatology portfolio poised to drive revenue growth from existing pipeline Doug Loe, PhD
Edgefront REIT TSX:ED.un, $1.83, PT$2.20
Strong covenant Triple-Net leases creates best in class risk adjusted returns
Rob Sutherland FRI€
Pure Industrial Real Estate Trust
TSX:AAR.un, $5.19, PT$5.50
Enormous growth potential backed by increasingly conservative financial metrics Rob Sutherland FRI€
DHX Media Ltd. TSX:DHX.B, $7.12, PT$12.00
Merchandising & Licensing poised for significant gains in 2017 Rob Goff, CFA
TECSYS Inc. TSX:TCS, $9.47, PT$11.00
Margin expansion-driven earnings growth is set to outperform that at its closest peers
Andrej Krneta, B.Eng, MBA
Pure Technologies Ltd.
TSX:PUR, $5.98, PT$7.25
It is safe to test the waters! Operating leverage to drive best in class earnings growth
Amr Ezzat, Hon. Fin.
exactEarth Ltd. TSX:XCT, $1.33, PT$2.00
Industry leader in a growing market with a favourable risk/return trade-off
Fadi Benjamin, CFA, P.Eng
Page 6 of 41 Ryan Walker, MSc | 416.479.8997 | [email protected]
18 July 2016 Precious Metals
Victoria Gold Corp. CH216 Top Pick Eagle Prepares for Flight in Catalyst-Rich CH216
Projected Return: 18.4% Discount Rate: 5.0%
Source: Capital IQ
Market DataMarket Capitalization ($M) 338.6Net Debt ($M) naCash & Equivalents ($M) 37.9Debt ($M) 0.0Enterprise Value ($M) 300.6Basic Shares O/S (M) 445.5Fully Diluted Shares O/S (M) 518.5Avg. Daily Volume (k) 1,347.852-Week Range $0.11 - $0.77Key AssetEagle Gold Project, YukonFS HighlightsGold Price US$/C$ NPV8% (C$) IRR PaybackUS$1,325 0.92 273.1 24% 3.1US$1,162 0.92 105.6 15% 4.0US$1,723 0.99 557.6 37% 2.3US$1900 0.92 863.9 49% 1.8
ValuationDiscount $ (M) $/shr
Eagle Gold Project 5.0% 378 0.67
Exploration Upside In Situ 17 0.03Unadjusted NAV 395 0.69
Corporate Adjustments (30) (0.05)Cash & Equivalents 38 0.07Options & Warrants 21 0.04Future Equity Finance Proceeds 30 0.05
Adjusted NAV 455 0.80P/Adjusted NAV 0.95xRisksFinancing Risk Updated FS - CH216General Risk Project Financing - CH216Development/Operating Risk First Production - CQ119Company Description
Pre-tax
Events/Catalysts
Victoria Gold Corp. is a gold exploration anddevelopment company. The Company's Eagle GoldProject in Yukon Canada hosts a National Instrument 43-101 compliant gold Reserve of 2.3Moz . The Eagle GoldProject is shovel-ready and when in production will
produce +200,000oz of gold annually at an operation
cost of approximately $600 per ounce. The Project is
fully permitted for construction and operations.
$0.00$0.10$0.20$0.30$0.40$0.50$0.60$0.70$0.80
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Jul-15 Sep-15 Nov-15 Jan-16 Mar-16May-16
Volume Price
Event: We are pleased to introduce Victoria Gold Corp. as our CH216 Top Pick. VIT shares performed very well during an emerging gold bull market in CH116. Indeed, shares soared ~218%, compared with a 22% increase in gold price, and ~100% increases by a basket of peers represented by the Global X Gold Explorers ETF and BMO Jr. Gold Producers ETF (Exhibit 1). We would expect positive share price performance to persist in C2016 with our bias for higher gold prices based on greatly diminished prospects for further interest rate increases by the US Federal Reserve, potential Brexit contagion, and generally increased global economic uncertainty and social instability. Looking ahead, VIT has already gotten off to a very promising CH216, rising another 25% to $0.76/shr at the time of writing. We note that the recent surge is likely owing to a very bullish write-up in a widely read US-based newsletter following a recent site visit to the Company’s Eagle gold deposit in the Yukon (which we also attended).
A Large De-Risked Canadian Gold Project: VIT affords investors exposure to a potentially low-cost gold producer. Importantly, the Company’s 6.35Moz Eagle project is fully permitted and shovel ready, attributes that cannot be overstated in light of the seemingly ever-extending permitting timelines. We also highlight the 555km2 project’s strategic size (especially in light of precious few recent large discoveries) and situation in geopolitically stable and mining-friendly Canada. And, with financing conditions still generally tight for juniors, and M&A activity quickly consuming what available quality targets there are, Eagle’s scarcity value is ever-increasing. With the abovementioned attributes — a fully permitted multi-Moz deposit situated in a stable jurisdiction, bolstered by substantial exploration potential — we contend that VIT represents a real takeover candidate. And, with senior and intermediate miner share prices greatly appreciating so far this year, and exploration efforts among those generally lagging, increased M&A activity is only accentuated.
Recent Votes of Confidence: We also note the addition of noted resource investor Thomas Kaplan, via the Electrum Strategic Opportunities Fund, as a significant new Victoria shareholder, taking a 13.5% equity interest via a $24M non-brokered private placement that closed on May 10, 2016. Existing large shareholder Sun Valley Gold also increased its stake to ~18% via the deal. We contend that the placement’s high-profile participants provide a meaningful vote of confidence in the Eagle gold project and Victoria’s management team.
Catalyst-Rich CH216: Near-term potential share price catalysts for VIT shares include an updated Feasibility Study (FS) of the Eagle gold project. The updated FS has the potential to deliver lower opex on lower fuel prices, and lower capex on reduced equipment costs (owing to the extended mining sector downturn) than those employed in the existing FS. Importantly, the update will include an initial 43-101 resource estimate of the nearby Olive zone, which has the potential to deliver higher-grade ore for blending with the existing Eagle deposit, thereby offering significant upside to project economics forecast by a May 2015 updated FS (see side bar for those results). We have incorporated ~350,000oz grading 1.2g/t Au at Olive into our production model. We assume such material is mined and blended with Eagle ore for leaching during years 4-7 of operation. We model project financing in CH216. Longer-term catalysts include the commencement of construction (FQ117), and first production (FQ119).
Valuation: We rate VIT shares as a SPECULATIVE BUY rating with a price target of $0.90/shr.
VIT-TSXV: $0.76 Speculative Buy
$0.90 Target
Victoria Gold Corp. (VIT-TSXV) | 18 July 2016
Page 7 of 41 Ryan Walker, MSc | 416.479.8997 | [email protected]
Victoria Gold Corp. (VIT-TSXV) | 18 July 2016
Page 8 of 41 Ryan Walker, MSc | 416.479.8997 | [email protected]
Exhibit 1 — Victoria Gold H116 Share Price Performance Relative to Peer Baskets
Source: Yahoo Finance
Exhibit 2 — Select Junior Exploration and Development Peers — Victoria’s Situation in Geopolitically Stable Canada and Fully Permitted Status Befitting of a Premium
Source: Capital IQ, VIT NAV/shr = EWP Estimates
Comparables Permit Ticker Share Mkt Cap. EV M&I&I (Moz) EV/oz NAV/shr P/NAVAlmaden Minerals Ltd. - TSX:AMM $2.01 $161.2 $156.9 2.0 $79 $2.83 0.71xAtacama Pacific Gold Corporation - TSXV:ATM $0.40 $28.2 $27.3 5.9 $5 $0.38 1.05xAtlantic Gold Corporation x TSXV:AGB $0.79 $126.9 $119.2 2.0 $59 $1.16 0.68xBelo Sun Mining Corp - TSX:BSX $0.91 $348.6 $330.0 6.8 $49 $1.19 0.76xColumbus Gold Corp. - TSX:CGT $0.63 $89.2 $81.5 5.0 $16 $1.10 0.57xContinental Gold Inc. - TSX:CNL $3.79 $535.3 $505.9 9.0 $56 $4.39 0.86xDalradian Resources Inc. - TSX:DNA $1.04 $223.5 $192.4 3.5 $55 $2.14 0.49xEastmain Resources Inc. - TSX:ER $0.62 $98.0 $92.6 1.6 $58 $1.05 0.59xFalco Resources Ltd. - TSXV:FPC $0.98 $110.5 $109.4 4.3 $26 $2.14 0.46xGolden Queen Mining Co. Ltd. x TSX:GQM $1.46 $147.9 $272.2 1.3 $216 $1.75 0.83xKaminak Gold Corp. - TSXV:KAM $2.70 $505.9 $484.3 4.9 $99 $2.58 1.05xLundin Gold Inc. - TSX:LUG $5.63 $564.1 $554.0 9.8 $56 $8.86 0.64xLydian International Limited x TSX:LYD $0.38 $253.1 $254.2 5.0 $50 $0.37 1.03xMarathon Gold Corporation - TSX:MOZ $0.44 $47.2 $45.4 1.3 $36 $0.58 0.76xMidas Gold Corp. - TSX:MAX $1.08 $188.3 $154.3 6.5 $24 $0.67 1.61xNewCastle Gold Ltd. x TSXV:NCA $0.83 $130.7 $130.7 5.0 $26 $1.14 0.73xOrezone Gold Corporation - TSXV:ORE $1.04 $161.0 $152.0 5.1 $30 $1.10 0.95xOsisko Mining Inc. - TSX:OSK $2.58 $325.7 $251.4 3.7 $67 $3.71 0.70xPershimco Resources Inc. - TSXV:PRO $0.22 $68.1 $76.3 0.9 $87 $0.48 0.45xPremier Gold Mines Limited - TSX:PG $4.40 $791.0 $748.1 5.7 $130 $5.02 0.88xRed Eagle Mining Corporation x TSXV:RD $0.79 $175.8 $206.1 0.7 $306 na naRoxgold Inc. x TSXV:ROG $1.56 $572.0 $598.1 1.0 $611 $1.11 1.40xSabina Gold & Silver Corp. - TSX:SBB $1.29 $281.5 $265.5 7.2 $37 $1.65 0.78xTMAC Resources Inc. x TSX:TMR $15.10 $1,181.2 $1,159.3 5.9 $195 $11.13 1.36xWest Kirkland Mining Inc. - TSXV:WKM $0.14 $41.6 $41.0 0.9 $47 $0.25 0.54x
Avg. $97 0.83xVictoria Gold Corp. x TSXV:VIT $0.79 $340.4 $326.3 6.4 $51 $0.80 0.99xSource: Capital IQ, VIT NAV = EWP Estimate
Victoria Gold Corp. (VIT-TSXV) | 18 July 2016
Page 9 of 41 Ryan Walker, MSc | 416.479.8997 | [email protected]
Exhibit 3 — Valuation Summary & Price Target Sensitivities
Source: Echelon Wealth Partners Estimates
Exhibit 4 — Price Target Sensitivities
Source: Echelon Wealth Partners Estimates
Discount $ Million $/Share $/Share
Eagle Gold Project 5.0% $378 $0.67 Project NAV $0.69Exploration Upside In Situ $17 $0.03 Target Multiple 1.10x
Project NAV $395 $0.69 Unadjusted Valuation $0.76Corporate Adjustments ($30) ($0.05) Adjustments $0.10Cash & Equivalents $38 $0.07 Total Valuation $0.87Options & Warrants $21 $0.04Future Equity Finance Proceeds $30 $0.05
Adjusted NAV $455 $0.80
Current Share Price $0.76 12-Month Target $0.90P/Adjusted NAV 0.95x Implied Return 18.4%
0.90 1,100 1,175 1,250 1,325 1,400 1,475 1,550 1,625 1,7001.0% 0.30 0.50 0.70 0.90 1.10 1.30 1.50 1.70 1.902.0% 0.30 0.50 0.70 0.90 1.00 1.20 1.40 1.60 1.803.0% 0.30 0.50 0.60 0.80 1.00 1.20 1.30 1.50 1.704.0% 0.30 0.40 0.60 0.80 0.90 1.10 1.20 1.40 1.605.0% 0.30 0.40 0.60 0.70 0.90 1.00 1.20 1.30 1.506.0% 0.30 0.40 0.50 0.70 0.80 1.00 1.10 1.20 1.407.0% 0.30 0.40 0.50 0.60 0.80 0.90 1.00 1.20 1.308.0% 0.20 0.40 0.50 0.60 0.70 0.90 1.00 1.10 1.209.0% 0.20 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.20
Long-Term Gold Price (US$/oz)
Disc
ount
Rat
e (%
)
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
-20% -15% -10% -5% 0% 5% 10% 15% 20%
Tota
l Adj
uste
d N
AV5%
($/s
hr)
Percent VariationOpex Initial Capex Gold Price Olive Grade (g/t)
Victoria Gold Corp. (VIT-TSXV) | 18 July 2016
Page 10 of 41 Ryan Walker, MSc | 416.479.8997 | [email protected]
Exhibit 5 — Echelon Wealth Partners Modelling Assumptions
Source: Company Reports, Echelon Wealth Partners Estimates
Eagle FS (May 2015)Echelon Wealth
Partners % Difference
Development Start na CQ119 -Commercial Production na CQ119 -
Mineable Resources M tonnes 91.6 102.6 12%Average Gold Grade g/t 0.78 0.84 8%
Stripping Ratio waste:ore 1.45 1.45 0%
Crushing Rate tpd 29,500 29,500Recovery Rate % 72.9% 72.1% -1%
Average LOM Gold Production oz/year 192,000 198,400 3%
Average LOM Operating CostsMining $/t milled 4.77 5.07 6%Processing $/t milled 6.33 7.02 11%G&A $/t milled 1.11 1.15 4%Total Unit Costs $/t milled 12.21 13.24 8%
Average Cash Costs US$/oz $614 $696 13%LT Gold Price Assumption US$/oz $1,325 $1,400 6%
Capital ExpendituresInitial Capex* $M $399.7 $432.6 8%Expansion & Sust. Capex $M $132.9 $159.5 20%Closure $M $84.2 $85.0
LOM Capital Expenditures $M $616.8 $677.1 10%
Notes:C$, uunless otherwise noted. * Excludes $16.9M in pre-stripping cost
Page 11 of 41
13 July 2016 Healthcare & Biotechnology
Douglas W. Loe, PhD MDA | 416.775.1004 | [email protected] Siewching Yeo (associate) | 416.479.8995 | [email protected]
TSO3 Top Pick Mid-Year Update: Seminal US Regulatory Milestone Enhances Our Expectations For Pace Of VP4 Unit Sales Ramp
Target Return: 91.7% Valuation: NPV (20% disc rate), 20x EPS, 12.5x EV/ EBITDA (F2019 ests)
YTD Return: 48.2%
Market DataBasic Shares O/S (M)
Fully-diluted Shares O/S (M)
Market cap (C$M)
Ent Value (C$M)
Pro forma cash (rec. Q, C$M)
Net Debt (rec. Q, C$M)
52 Week Range (C$)
Avg. Daily Volume (M)
Fiscal Year End
Financial Metrics
In US$000's
Sterizone VP4 systems
Maint/service/consumab
Total revenue
EBITDA
EBITDA margin (%)
Net income
Fully-taxed EPS (fd)
P/E
EV/EBITDA
Quarterly Data
EBITDA ($M) 20152016
EPS (fd) 20152016
Company Description
TSO3 is a QC-based low-temperature hospital steriliz-ation equipment developer, focused on its ozone-basedSterizone VP4 platform; alliance partner identified(Getinge AB) & regulatory approvals granted in NorthAmerica and Europe, so firm is poised to acceleraterevenue/EBITDA growth trajectory in F2016/17
$0.01 ($0.01) ($0.00) $0.00
(0.6) (0.6) 0.1 0.6($0.02) ($0.02) ($0.02) ($0.03)
Q1 Q2 Q3 Q4(1.7) (1.6) (1.6) (2.8)
NA 27.9217 11.3x
NA 15.6325 6.6x
($86) $8,495 $20,995
($0.00) $0.09 $0.22
($505) $13,000 $30,857
NA 29.2% 39.2%
2016E 2017E 2018E
$17,312 $44,520 $78,788
$16,051 $38,720 $64,350
$1,261 $5,800 $14,438
91.0
94.9
1.1960
Dec-31
296.7
264.9
31.8
0.0
$3.49-$1.42
0
0.5
1
1.5
2
2.5
3
$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00
Aug-
14
Nov
-14
Feb-
15
May
-15
Aug-
15
Nov
-15
Feb-
16
May
-16
Event: We are maintaining Top Pick status for low-temperature hospital sterilization developer (and now marketer!) TSO3, with our expectations for its lead ozone/hydrogen peroxide-based gas sterilization platform VP4 poised to transition from being a regulatory risk investment into a backlog build-out growth story, and then into a revenue/EBITDA growth story as VP4 captures market share in the 30,000-unit global hospital sterilization market, with partner Getinge AB’s (GETI.B-STO, NR) assistance of course.
Formal FDA recognition of endoscope sterilization capabilities confers differentiated regulatory status on VP4 that we expect to accelerate market share capture: We identified TOS as our top medical technology pick in 2015 as well, during which it generated a return of 45.8%, and so during the period under which TOS was identified as a Top Pick by us, it has generated total return of 113%. The value-enhancing milestones achieved during that era – excluding the formal FDA approval for VP4 granted just before days earlier in Dec/14 – include the signing of the global distribution alliance with Getinge AB back in Nov/15, the VP4 testing initiatives focused on demonstrating effective sterilization of flexible multichannel endoscopes throughout FH116, and then garnering formal recognition of endoscope sterilization capabilities by the FDA itself just days ago, an event that if anything still underappreciated by capital markets despite recent TOS share price strength.
We thus anticipate abundant market value augmentation as TSO3/Getinge drive VP4 unit sales over the next several quarters, and more specifically during FH216 during which our Top Pick period applies. None of TSO3’s sterilization peers (J&J’s [JNJ-NY, NR] Sterrad, Steris’ [STQ-EU, NR] V-Pro, Getinge’s own Noxilizer, and probably 3M Healthcare’s [MMM-NY, NR] legacy ETO-based Steri-Vac) have been specifically recognized as being able to truly sterilize flexible multichannel endoscopes as VP4 now has, and though no other device is specifically precluded from sterilizing endoscopes by the FDA, none have been specifically recognized for that capability either and probably because none have submitted validating endoscope-sterilizing data as TSO3 has.
Infection control leader and VP4 exclusive channel partner Getinge AB is sending out all the positive signals we like to see on partnership commitment: We were encouraged to see that partner Getinge published its own press release earlier this week on VP4’s new FDA regard, indicating therein that it expects to market VP4 not just to US hospitals but to GI clinics and endoscopy suites as well (or more likely, to the sterilization services firms that reprocess endoscopes for them). Rarely does a multinational distributor take the time to recognize milestones achieved by smaller development partners, unless relevant milestones are seen by the distributor as being as transformative to its own commercial profile as to the developer with which it is partnered. We are thus encouraged that Getinge looks to be as committed to marketing VP4 worldwide as TSO3 was committed to developing it (and getting it FDA-approved) in the first place. We already had renewed confidence in Getinge’s commitment to VP4 commercial success through investments in a US-based VP4-specific sales team.
No change in VP4 unit sales ramp or embedded economics in our model: We have summarized our assumed VP4 economics before, but in brief, we project transfer price to Getinge of US$110,000 per device, peak capital equipment gross margin of 40-45%, and with each installed VP4 system generating US$25,000 per year in higher-margin consumable biological/chemical indicators, the economics of which we assume are shared equally by TSO3 and Getinge. We upwardly revised our VP4 unit sales ramp on last week’s FDA expanded-claims-for-endoscopes announcement, and we now believe TSO3/Getinge can sell 352 VP4s in F2017, 585 in F2018, and
TOS-TSX: $3.26 Buy
Target $6.25
TSO3 (TOS-TSX) | 13 July 2016
Page 12 of 41 Douglas W. Loe, PhD MBA | 416.775.1004 | [email protected]
up to 1,143 by F2023, representing 12%/20%/38% of annual sterilization system turnover in the corresponding period, not overly aggressive in our view when considering the limited number of competitors targeting this niche healthcare segment. We are mindful of TSO3’s limited VP4 assembly capacity at its existing facility in QC, but we believe the firm has long recognized the capacity constraints poised to impact operations as early as FH117 and could expand operations either in QC or elsewhere during our forecast period, and perhaps as early as FH216.
Exhibit 1 – Revised Income Statement & Financial Forecast Data for TSO3
Source: TSO3, Echelon Wealth Partners Inc.
Our model assumes F2016 VP4 unit sales of 143, and there is modest risk to achieving revenue from this many units just on logistics of ramping VP4 assembly to that scale in the next 5-6 months, but we are separately confident that backlog will climb up to and beyond that level in the next two quarters. Our $6.25 PT is still based on NPV (20% discount rate) and multiples of our F2019 adjusted EBITDA/EPS projections ($46.0M, $0.33 respectively), and key value-enhancing milestones to end-of-year are expected of course to be: (1) evidence of VP4 unit sales ramp above historic levels (25 VP4 systems shipped in FQ116, probably similar in FQ216) in FH216, and (2) possible expansion of FDA claims on endoscope sterilization to include next-generation duodenoscopes, the category of endoscope for which so many incidence of scope-associated infections have been reported in recent quarters, driving demand for a truly-effective sterilization modality like VP4 to be recognized as such by regulators.
Exhibit 2 – Valuation Scenarios For TSO3
Source: TSO3, Echelon Wealth Partners Inc.
(US$000, except EPS) 2014A 2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E
Sterizone VP4/125L+ systems 0 1,233 16,051 38,720 64,350 80,300 103,180 113,520 119,460
Maint/service/consumables 433 400 1,261 5,800 14,438 23,563 35,288 48,188 61,763
Total revenue $433 $1,633 $17,312 $44,520 $78,788 $103,863 $138,468 $161,708 $181,223Revenue growth (%) 70% 277% 960% 157% 77% 32% 33% 17% 12%VP4 Unit sales NA 22 141 352 585 730 938 1,032 1,086Gross margin (686) (423) 7,151 22,484 41,229 57,341 78,190 94,453 109,343Gross margin (%) (158%) (26%) 41% 51% 52% 55% 56% 58% 60%EBITDA ($5,482) ($7,689) ($505) $13,000 $30,857 $46,000 $65,792 $80,040 $93,673EBITDA growth (%) NA NA NA (2,675%) 137% 49% 43% 22% 17%EBITDA margin (%) NA NA NA 29% 39% 44% 48% 49% 52%Net Income ($5,948) ($8,133) $31 $12,136 $29,993 $45,136 $51,255 $56,028 $65,571Net income, fully-taxed ($5,948) ($8,133) ($86) $8,495 $20,995 $31,595 $45,450 $56,028 $65,571Fully-taxed EPS (fd) ($0.07) ($0.08) ($0.00) $0.09 $0.22 $0.33 $0.48 $0.59 $0.69P/E NA NA NA 27.9x 11.3x 7.5x 5.2x 4.2x 3.6xEV/EBITDA NA NA NA 15.6x 6.6x 4.4x 3.1x 2.5x 2.2x
NPV, discount rate 10% 15% 20% 25% 30% 40%Implied value per share $10.98 $8.41 $5.50 $5.18 $4.17 $2.82
Price/earnings multiple, F2019 10x 15x 20x 25x 30x 40xImplied share price1 $2.31 $3.47 $4.63 $5.78 $6.94 $9.25
EV/EBITDA multiple, F2019 5x 10x 12.5x 15x 17.5x 20xImplied share price1 $1.86 $3.55 $4.39 $5.23 $6.07 $6.91
One-year TSO3 target price (US$) $4.84One-year TSO3 target price (C$) $6.31
Discounted projected share price to mid-2017
1 Based on fully-taxed F2019 EPS (fd) forecast of US$0.33, EBITDA of US$46.0M. Valuation based on NPV (20% disc rate), EV incorporates FQ116 net cash of US$24.4M (no LT debt), fd S/O of 94.9M
TSO3 (TOS-TSX) | 13 July 2016
Page 13 of 41 Douglas W. Loe, PhD MBA | 416.775.1004 | [email protected]
TEARSHEET - TSO3 (TOS-T, $3.26, BUY, PT: $6.25)
Company Description Consensus ReturnRating: BuyTarget: $5.13 57.2%Median: $5.13 57.2%High: $6.25 91.7%Low: $4.00 22.7%# Est: 4Consensus DistributionSector Outperform/Buy 4Sector Perform/Hold 0Sector UnderPerform/Sell 0
Historical Valuations
Financial Summary/Key Metrics 2011 2012 2013 2014A 2015E 2016E 2017E 2018E Key Statistics ValueC$000's except for per share data 52-Wk High: $2.68 82.1%Total Revenue 3,355 2,854 254 433 1,633 17,312 44,520 78,788 52-Wk Low: $1.09 33.4%
Growth y/y N/A (14.9%) (91.1%) 70.2% 277.2% 960.0% 157.2% 77.0% Avg Vol (3-Mo) 1.20Cons. 2,890 2,189 375 417 3,341 17,311 37,748 75,285 Shares O/S: 91.0Cons. 3 Mts. Ago 2,890 2,189 375 417 3,341 20,170 41,863 63,642 Market Cap: 296.7
EBITDA (7,473) (5,519) (6,931) (5,482) (7,689) (505) 13,000 30,857 Net Debt: 36.1Margin -222.7% -193.4% -2724.9% -1266.2% -470.8% -2.9% 29.2% 39.2% Ent. Value: 202.0Cons. -6,851 -6,886 -7,036 -4,857 -5,898 -3,808 1,987 19,304 Div Yield: 0.0%Cons. 3 Mts Ago -6,851 -6,886 -7,036 -4,857 -5,898 -2,050 8,766 15,891 Website: www.tso3.com
Net Income (7,655) (5,796) (9,270) (5,948) (8,133) (86) 8,495 20,995 FYE: Dec 31Adjusted EPS ($0.12) ($0.08) ($0.11) ($0.07) ($0.08) ($0.00) $0.09 $0.22 Employees: 62
Cons. ($0.14) ($0.11) ($0.12) ($0.08) ($0.08) ($0.04) $0.02 $0.12Cons. 3 Mts. Ago ($0.14) ($0.11) ($0.12) ($0.08) ($0.08) ($0.03) $0.08 $0.12
Operating Cash Flow (8,645) (6,469) (8,651) (2,903) (7,045) (4,163) 4,679 20,209 Top Inst. Ownership M Shares % HeldCaisse de dépôt et placement du Québec 9.16 10.1%Fidelity Investments 9.05 9.9%
Valuation Sprott Asset Management, LP 8.11 8.9%NPV, Discount Rate 15.0% 20.0% 25.0% Gilder Gagnon Howe & Co. LLC 4.89 5.4%Implied value/share1 $8.41 $5.50 $5.18 IG Investment Management, Ltd. 2.88 3.2%Price/Earnings Multiple 15.0x 20.0x 25.0x HSBC Global Asset Management (Canada) Limited 1.10 1.2%Implied value/share1 $3.47 $4.63 $5.78 AGF Management Limited 0.94 1.0%EV/EBITDA Multiple 10.0x 12.5x 15.0x Formula Growth Limited 0.70 0.8%Implied value/share1 $3.55 $4.39 $5.23 Desjardins Global Asset Management Inc. 0.15 0.2%One year TOS Target Price1 $6.25 BlackRock, Inc. 0.09 0.1%
Comparables and Peer AnalysisTrading Current Target Div Implied Market Enterprise
Ticker CCY Price Price Yield % Return Cap Value 1-Week 1-Month 3-Month 1-Year T12 2016E 2017E T12 2016E 2017ETSO3 TOS CAD $3.25 $6.25 0.0% 92.3% 294.9 263.3 0.0% 42.5% 39.5% 107.0% -5.1 -2.9 1.5 ($0.05) ($0.03) $0.013M MMM USD $179.44 $172.00 2.5% (1.7%) 108,663.1 118,331.1 2.4% 7.4% 6.7% 14.5% 8,570.0 8,815.9 9,194.1 $7.94 $8.25 $8.93Balchem Corp BCPC USD $63.71 $67.00 0.5% 5.7% 2,000.6 2,313.7 7.0% 4.4% 2.0% 14.9% 129.6 129.1 134.2 $1.80 $2.48 $2.81Getinge AB GETI.B SEK SEK 178.60 SEK 190.88 1.6% 8.4% 42,493.0 62,558.0 4.1% 6.9% (7.2%) (18.0%) 5,532.0 5,752.0 6,595.7 SEK 5.92 SEK 7.29 SEK 10.23Ion Beam Applications IBAB EUR €42.72 €40.07 3.3% (2.9%) 1,227.5 1,177.5 2.4% 11.3% 15.2% 73.4% 28.2 43.1 54.5 €2.17 € 1.12 € 1.41Johnson & Johnson JNJ USD $123.18 $117.83 2.6% (1.7%) 338,108.7 321,632.7 0.4% 5.5% 12.1% 23.5% 22,235.0 25,158.2 26,803.2 $5.56 $6.59 $6.99Nanosonics NAN AUD $2.38 $2.48 0.0% 4.2% 704.3 672.6 5.8% (1.2%) 3.9% 38.8% -10.0 -2.3 6.8 ($0.04) ($0.01) $0.03Steris STE USD $69.75 $86.83 1.4% 25.9% 5,966.7 7,301.5 2.5% 2.0% (2.5%) 2.7% 439.1 432.4 569.9 $1.57 $3.52 $3.92Average 1.5% 16.3% 62,432.4 64,281.3 3.1% 9.8% 8.7% 32.1%
Comparables - Multiples Analysis2015 2016E 2017E T12M 2016E 2017E T12M 2016E 2017E T12M 2016E 2017E N12M 2016E 2017E T12M 2016E 2017E
TSO3 2.6% -3.1% -1.5% NA -90.1x NA N/A NA NA 47.7x 15.2x 7.0x NM NM 173.5x NA 0.0x 0.0x3M 4.4% 4.7% 5.0% 13.8x 13.4x 12.9x 13.8x 13.4x 12.9x 3.9x 3.9x 3.8x 21.6x 21.7x 20.1x 16.8x 16.6x 15.4xBalchem Corp 3.9% 4.4% 4.5% 17.9x 17.9x 17.2x 17.9x 17.9x 17.2x 4.3x 3.8x 3.5x 24.2x 25.6x 22.5x NA 0.0x 0.0xGetinge AB 3.5% 5.6% 6.6% 11.3x 10.9x 9.5x 11.3x 10.9x 9.5x 2.1x 2.1x 2.0x 23.7x 24.4x 17.4x 11.6x 10.6x 9.3xIon Beam Applications 1.2% 5.6% 1.1% 41.8x 27.3x 21.6x N/A NA 21.6x 4.4x 3.6x 3.1x 38.0x 38.0x 30.2x 8.4x 16.6x 29.5xJohnson & Johnson 4.9% 4.9% 5.3% 14.5x 12.8x 12.0x 14.5x 12.8x 12.0x 4.6x 4.5x 4.3x 18.5x 18.6x 17.6x 16.7x 18.6x 15.6xNanosonics -0.3% -1.3% 1.3% NA NA 99.1x N/A NA NA 28.7x 17.0x 12.1x NM NM 93.1x -45.5x NM 89.9xSteris 0.0% 3.3% 5.7% 16.6x 16.9x 12.8x 16.6x NA 12.8x 3.3x 0.0x 2.6x 17.7x 0.0x 17.7x 15.2x 0.0x 0.0xAverage 19.3x 1.3x 26.4x 14.8x NA NA 12.4x 6.3x 4.8x 23.9x 21.4x 49.0x NA 8.9x 20.0x1Targets, forecasts and valuations reflect consensus estimates derived from Capital IQ
P/CFPS
TSO3 is a QC-based low-temperature hospital sterilization equip-mentdeveloper, focused on its ozone-based Sterizone VP4 platform, for whichregulatory approvals have now been granted in all major markets,including the US in Dec-14, and global channel partner Getinge AB isactively building out VP4-specific marketing & support infrastructure todrive unit sales in F2016/17. Specific claims have been granted inCanada & US for sterilizing flexible multichannel endoscopes,differentiating VP4 from other sterilization platforms.
% Return Consensus ValuationsEBITDA EPS
LTM EV/EBITDA
FCF Yield Current - EV/EBITDA Target - EV/EBITDA EV/Revenue Forward P/E
1 Based on fully-taxed F2019 EPS (fd) forecast of US$0.33, EBITDA of US$46.0M. Valuation based on NPV (20% disc rate), EV incorporates FQ116 net cash of US$24.4M (no LT debt), fd S/O of 94.9M
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Steris
Page 14 of 41
13 July 2016 Healthcare & Biotechnology
Douglas W. Loe, PhD MDA | 416.775.1004 | [email protected] Siewching Yeo (associate) | 416.479.8995 | [email protected]
Cipher Pharmaceuticals Top Pick Mid-Year Update: Innocutis’ Aggressive Valuation Does Not Distract Us From Its Commercial Opportunities
Target Return: 83.2% Valuation: 20x EPS, 10x EV/EBITDA (F2018 forecasts) YTD Return: 4.8%
Market DataBasic Shares O/S (M)
Mkt cap (US$M)
Ent Val (US$M)
Cash (US$M)
Total debt (US$M)52 Week Range (US$)Avg. Daily Volume (M)
Fiscal Year End
Financial Metrics
In US$
Revenue ($M)
EBITDA ($M)
Net Income ($M)
EPS
P/EEV/EBITDA
Quarterly Data
In US$M
REVENUE 2014
2015A
Adj EBITDA 2014
2015A
Company Description
5.1 2.5 2.5 0.2
Cipher is an ON-based specialty pharmaceuticalfirm, with early pipeline drugs based on partnerGalephar's CIP platform (Lipofen/(CIP-fenofibrate,ConZip-Durela/CIP-Tramadol, Absorica-Epuris/CIP-isotretinoin), and with active expansion of NorthAmerican dermatology footprint by acquisition,including SC-based Innocutis
7.4 8.8 8.5 9.7
4.8 5.8 4.6 4.5
Q1 Q2 Q3 Q4
7.1 8.0 6.6 7.5
7.8x 15.0x 18.4x
$0.74 $0.08 ($0.15)
7.7x 72.8x NA
19.8 10.4 8.4
18.7 2.0 (4.0)
2014A 2015A 2016E
29.2 34.4 42.9
0.1765
Dec-31
26.2
149.9
156.0
$3.55-$10.2534.9
28.8
0
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$2.00
$4.00
$6.00
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$12.00
$14.00
Jul-1
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-15
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-16
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-16
Event: We believe Cipher Pharmaceuticals’ YTD return of 4.8% is a modest warm-up measured against our forecast return. Our Top Pick status reflects our positive view on where this North American-focused, dermatology-focused specialty pharmaceutical can go if it remains focused on that geography and on that specific ‘ology’ in future periods, building on the brand equity that lead US isotretinoin formulation Absorica has already created, and using the quarterly free cash that Absorica product sales generates to fund strategic product acquisitions as Cipher has done many times in recent quarters.
A former Top Pick has strong potential to perform as well as in 2014: The elephant in the room of course, is the fairly public shareholder challenge to Board configuration described in the Jul/16 early warning announcement, which we will mention here only for the sake of mentioning it here, and will henceforth emphasize elements of Cipher’s dermatology franchise that we still see as attractive and meriting the Top Pick status we previously ascribed to the firm. CFO departure/retirement creates a transient void in executive leadership that we expect to be addressed imminently and does not dissuade us from maintaining out Top Pick status on CPH/CPHR either. Recall that Cipher was a previous Top Pick of ours in 2014, during which CPH (and its previous ticker symbol DND) generated total return of 121.4%.
Innocutis’ EBITDA contribution has been soft since its acquisition, but its marketing infrastructure and dermatology portfolio can be engines for growth, eventually: We have described the Innocutis transaction before (for example, in our May/16 note) and questioned then as we do now the wisdom of funding an at-the-time EBITDA-negative commercial-stage pharmaceutical firm with interest-bearing debt, but however long we might wish to dwell on its valuation (and we have!), we still endorse the strategic decision to establish Cipher-specific dermatology sales infrastructure and the decision to layer on new commercial pipe-line through a combination of acquisition or in-licensing regional marketing rights. On existing pipeline, we will reflect on Absorica separately below, but we remain positive about the collection of singles-and-doubles that Cipher has added to the portfolio since F2012, each with potential to be immediately accretive (Beteflam, Epuris, Dermadexin, Pruridexin, Vaniqa, & Actikerall, with recently-filed ozenoxacin and Phase III-stage CF-101 on the horizon in Canada), or eventually accretive (Sitavig, Nuvail, Bionect in the US) while the legacy CIP portfolio of Lipofen-ConZip/Durela-Absorica generates stabilizing free cash.
US Absorica sales still providing risk-stabilizing free cash to fund future pipeline acquisitions, and expected to do so until at least FQ420: Other dermatology assets could eventually drive free cash flow growth, lead by mucoadhesive acyclovir HSV1 drug Sitavig, but for now the headline drug in Cipher’s portfolio is the Ranbaxy/Sun Pharma (524715-BOM, NR)-marketed orally-active CIP-isotretinoin cystic acne drug Absorica, which though passing through its revenue maturation phase after substantial growth since its Dec/12 launch, is still generating quarterly sales in the US$4.2M-to-US$4.8M range, and this is a level that we expect Cipher to sustain at least until FQ420, when generic drug developer Allergan/Actavis can launch its generic Absorica formulation if it chooses to, as per the agreement reached by Cipher-Ranbaxy/Sun Pharma-Allergan/Actavis back in Oct/15 (which definitively countered wide market perception – not shared by us, by the way - that Absorica was in danger of
CPH-TSX: C$7.20 Buy
Target US$10.50
Cipher Pharmaceuticals (CPH-TSX) | 13 July 2016
Page 15 of 41 Douglas W. Loe, PhD MBA | 416.775.1004 | [email protected]
imminent genericization even though Allergan/Actavis had submitted an Absorica ANDA back in 2013). Absorica has since its Dec/12 launch generated cumulative revenue/free cash of US$56.0M, and our model assumes that cumulative revenue achievable from FQ216-FQ420 of US$99.5M provides valuation support at present levels. RoW regulatory approvals/launches, mainly in Latin America where the drug is already partnered in Chile and Brazil, provide upside to our CIP-isotretinoin royalty revenue projections. As a separate positive, the transparency on Absorica’s free cash flow prospects conferred by the Allergan (AGN-NY, NR)/Actavis agreement last year should mitigate Cipher’s cost-of-capital for any future product acquisitions it may contemplate.
Exhibit 1 – Income Statement & Financial Forecast Data For Cipher
Source: Cipher, Echelon Wealth Partners Inc.
We stand by our view that Sitavig can emerge as a leading acyclovir/HSV1 therapy, even though recent Rx trends have been sequentially flat: As we describe in our Healthcare Weekly, F2016 Sitavig sales-to-date are certainly up solidly y/y but recent weekly Rx volumes have trended flat since the uptick experienced in FQ415 and we will be watching closely for evidence that Cipher’s Sitavig promotional efforts are gaining traction in an HSV1/acyclovir market that is well-populated by generic competitors already, though none with Sitavig’s muco-adhesive formulation and the sustained antiviral activity it engenders. But then so did Absorica, and like Absorica, Sitavig has demonstrably superior patient outcomes based on formulation innovations (initially developed by BioAlliance[Private]) conferring more sustainable anti-viral activity and with fewer cold sore break-out episodes than alternative generic formulations. This feature should resonate with prescribing physicians and patients in time. Our model still assumes US$1.4M-US$1.8M-US$2.2M in FQ216-to-FQ416 Sitavig sales and we still project Sitavig US sales of US$28.5M by F2018, well within range of Cipher’s own projected sales ramp that predicts gross sales of US$100M are achievable by F2020.
Summary & valuation: We are maintaining our BUY rating and PT of US$10.50 on CPH/CPHR with our valuation still based on the average of 20x F2018 fully-taxed EPS (US$0.59/shr) and 10x EV/F2018 adjusted EBITDA (US$33.0M), with our EV calculation now incorporating FQ116 balance sheet data (cash of US$28.8M, total debt of US$34.9M). At current levels, our PT corresponds to a one-year return (excluding the 4.8% return generated YTD) of 83.2%. Share
(US$000, except EPS) 2012A 2013A 2014A 2015A 2016E 2017E 2018E
Revenue, ConZip/Durela 1,278 1,963 1,909 1,658 1,773 1,685 1,694Revenue, Lipofen 4,103 3,317 5,072 4,561 3,309 4,171 4,913Revenue, CIP-isotretinoin (N.Am) 1,945 13,842 20,444 21,111 22,678 23,389 25,452Revenue, CIP-isotretinoin (RoW) 0 0 0 0 954 2,372 2,904Revenue, other Cdn 0 0 0 452 580 849 1,244Revenue (Ozenoxacin) 0 0 0 0 0 318 688Revenue, Sitvig (US) 0 0 0 1,675 6,281 13,943 28,524Revenue, Sitvig (Cda) 0 0 0 0 48 351 968Revenue, Innocutis (non-Sitvig) 0 0 0 3,652 5,618 9,132 13,370Milestone payments, other 1,142 6,870 1,800 1,300 1,620 1,600 0Total revenue $8,469 $25,992 $29,224 $34,409 $42,859 $57,810 $79,758 Revenue growth (%) 135% 207% 12% 18% 25% 35% 38%
Operational expenses 4,798 7,035 9,416 24,059 34,435 37,710 46,761
EBITDA $3,671 $18,957 $19,808 $10,350 $8,424 $20,100 $32,997
EBITDA growth (%) NA 416% 4% (48%) (19%) 139% 64%
EBITDA margin (%) 43.3% 72.9% 67.8% 30.1% 19.7% 34.8% 41.4%
Non-operating expenses $1,273 $1,559 $1,883 $6,633 $8,411 $9,100 $9,100
Net interest expense (income) ($155) ($240) ($441) $3,453 $3,866 $3,426 $3,426
Tax expense, exc carryforwards $777 $42 ($380) ($2,916) $162 $1,893 $5,118
Adj net inc, tax-affected $1,777 $17,595 $18,746 $2,035 ($4,015) $5,680 $15,353
Fully-taxed EPS (basic) $0.07 $0.72 $0.74 $0.08 ($0.15) $0.22 $0.59
Fully-taxed EPS (fd) $0.07 $0.67 $0.70 $0.07 ($0.15) $0.21 $0.56
P/E (basic) 78.7x 8.0x 7.7x 72.8x NA 26.2x 9.7x
EV/EBITDA 42.3x 8.2x 7.8x 15.0x 18.4x 7.7x 4.7x
Cipher Pharmaceuticals (CPH-TSX) | 13 July 2016
Page 16 of 41 Douglas W. Loe, PhD MBA | 416.775.1004 | [email protected]
price catalysts are likely to be revenue/EBITDA-driven – we and capital markets will need to see sustained Absorica revenue stability (a reasonable expectation) coupled with evidence of sequential revenue growth in the Innocutis pipeline (Rx data we have reviewed in FH116 indicated fairly flat Rx performance in FQ216) and perhaps evidence that Cipher’s team can identify new accretive pipeline opportunities on attractive terms.
Cipher Pharmaceuticals (CPH-TSX) | 13 July 2016
Page 17 of 41 Douglas W. Loe, PhD MBA | 416.775.1004 | [email protected]
TEARSHEET - Cipher Pharmaceuticals (CPHR-Q, US$5.73, BUY, PT: US$10.50)
Company Description Consensus ReturnRating: OutperformTarget: $9.25 28.5%Median: $9.25 28.5%High: $11.00 52.8%Low: $7.50 4.2%# Est: 2Consensus DistributionSector Outper/Buy 6Sector Perform/Hold 0Sector UnderPerform/Sell 0
Historical ValuationsNTM EV/EBITDA LTM EV/EBITDA
Financial Summary/Key Metrics 2013 2014 1Q-15 2Q-15 3Q-15 4Q-15 2015 2016E 2017E Key Statistics ValueUS$MM except for per share data 52-Wk High: $10.25Total Revenue 26.0 29.2 7.4 8.8 8.5 9.7 34.4 42.9 57.8 52-Wk Low: $3.67
Growth y/y 382.7% 12.4% 308.6% 442.4% 299.4% 235.0% 17.7% 24.6% 34.9% Avg Vol (3-Mo) $0.18Cons. 22.8 32.0 9.0 11.4 11.8 12.8 22.8 32.0 45.2 Shares O/S: 26.2Cons. 3 Mts. Ago 22.8 32.0 9.0 11.4 11.8 12.8 22.8 32.0 45.2 Market Cap: 188.4
EBITDA 19.0 19.8 5.1 2.5 2.5 0.2 10.4 8.4 20.1 Net Debt: 34.9Margin 72.9% 67.8% 68.7% 28.7% 30.1% 1.9% 30.1% 19.7% 34.8% Ent. Value: 142.5Cons. 14.8 22.3 6.4 4.2 3.0 3.8 14.8 22.3 14.2 Div Yield: 0.0%Cons. 3 Mts Ago 14.8 22.3 6.4 4.2 3.0 3.8 14.8 22.3 14.2 Website: www.cipherpharma.com
Net Income 17.6 18.7 2.7 (0.7) (2.2) 2.3 2.0 (4.0) 7.6 FYE: Dec 31Adjusted EPS $0.72 $0.74 $0.11 ($0.03) ($0.09) $0.09 $0.08 ($0.15) $0.22 Employees: 12
Cons. $0.54 $0.82 $0.18 $0.06 ($0.05) ($0.03) $0.54 $0.82 ($0.03)Cons. 3 Mts. Ago $0.54 $0.82 $0.18 $0.06 ($0.05) ($0.03) $0.54 $0.82 ($0.03) Top Institutional Ownership M Shares % Held
Montrusco Bolton Investments Inc. 2.31 8.8%Grandeur Peak Global Advisors, LLC 2.25 8.6%
Taylor Asset Management, Inc. 1.19 4.6%Valuation Acadian Asset Management, Inc. 0.71 2.7%Price/Earnings Multiple 17.5x 20.0x 22.5x Intact Investment Management Inc. 0.53 2.0%Implied value/share $8.98 $10.26 $11.55 Northwest & Ethical Investments L.P. 0.47 1.8%EV/EBITDA Multiple 9.0x 10.0x 11.0x Raffles Associates LP 0.45 1.7%Implied value/share $9.72 $10.83 $11.93 AWM Investment Company Inc. 0.25 1.0%One year Cipher Pharmaceuticals Target Price (US$) $10.50 1832 Asset Management L.P. 0.21 0.8%
Manulife Asset Management 0.13 0.5%
Comparables and Peer AnalysisTrading Current Target Dividend Market Enterprise
Ticker CCY Price Price Yield % Return Cap Value 1-Week 1-Month 3-Month 1-Year T12M 2016E 2017E T12 2016E 2017ECipher Pharmaceuticals CPH CAD $7.15 $10.50 0.0% 46.9% 177.9 185.8 4.8% (0.7%) (11.1%) (30.9%) 2.2 8.8 15.8 ($0.13) ($0.21) ($0.03)Allergan ACT USD $243.07 $297.59 0.0% 22.4% 94,815.0 140,037.1 2.6% (0.2%) 12.3% (24.3%) 6,573.4 8,062.0 9,484.1 ($6.21) $14.19 $17.48Concordia AGN CAD $26.70 $38.00 1.4% 43.8% 1,385.1 5,441.0 2.9% (10.0%) (13.9%) (74.3%) 363.4 598.2 653.9 ($0.91) $6.19 $7.45Cardinal Health CAH USD $82.12 $90.06 2.2% 11.9% 26,642.3 29,724.3 2.7% 5.0% (2.1%) (4.7%) 3,062.0 3,268.7 3,512.2 $4.22 $5.24 $5.71Celgene CELG USD $102.76 $135.05 0.0% 31.4% 80,101.5 88,640.5 (1.8%) 1.1% (4.0%) (16.4%) 3,237.1 6,158.7 7,516.4 $2.14 $5.68 $7.01Endo Pharmaceuticals ENDP USD $17.48 $29.70 0.0% 69.9% 3,872.1 12,214.8 2.2% 4.8% (35.6%) (79.6%) 575.5 1,594.5 1,810.4 ($2.57) $4.57 $5.09Gilead Sciences GILD USD $86.38 $110.89 2.2% 30.5% 115,375.7 129,707.7 0.8% 2.9% (12.0%) (26.4%) 22,899.0 21,631.7 20,913.3 $12.06 $12.08 $12.35Teva TEVA USD $54.77 $71.44 3.2% 33.7% 47,948.4 55,966.4 8.9% 2.9% (1.7%) (14.0%) 6,386.0 7,745.5 9,775.8 $1.95 $5.28 $6.11Valeant VRX USD $22.37 $42.21 0.0% 88.7% 7,922.5 38,694.7 (3.0%) (5.9%) (30.9%) (90.6%) 4,943.6 4,757.3 5,143.5 ($2.21) $6.62 $7.88Average 1.0% 42.1% 42,026.7 55,623.6 2.2% (0.0%) (11.0%) (40.1%)
Comparables - Multiples Analysis2015 2016E 2017E T12 2016E 2017E T12M 2016E 2017E T12M 2016E 2017E T12 FY1 FY2 2015 2016E 2017E
Cipher Pharmaceuticals 0.3% 2.9% 5.5% NA 17.7x 9.9x N/A 16.2x 9.1x 4.3x 3.3x 2.6x NA NA NA NA 0.0x 0.0xAllergan 6.0% 6.5% 7.4% 21.3x 17.4x 14.8x 21.3x 17.4x 14.8x 8.6x 8.4x 7.6x NA 17.1x 13.8x 23.3x 17.7x 13.5xConcordia 7.6% 35.4% 45.2% NA 7.0x 6.4x 11.5x 7.0x 6.4x 7.1x 4.3x 4.0x NA 3.3x 2.7x 20.6x 1.9x 1.9xCardinal Health 6.8% 7.4% 8.2% 9.7x 9.1x 8.5x 9.7x 9.1x 8.5x 0.3x 0.2x 0.2x 19.5x 15.7x 14.4x 10.3x 8.9x 9.5xCelgene 4.3% 5.5% 6.9% 27.4x NA NA N/A 14.4x 11.8x 9.2x 8.1x 6.8x 47.9x 18.0x 14.6x 30.6x 22.9x 15.7xEndo Pharmaceuticals 3.2% 25.3% 25.7% 21.2x 7.7x 6.7x 21.2x 7.7x 6.7x 3.5x 3.1x 2.9x NA 3.8x 3.4x 80.0x 7.7x 3.6xGilead Sciences 15.2% 14.6% 14.7% 5.7x 6.0x 6.2x 5.7x 6.0x 6.2x 3.9x 4.2x 4.2x 7.2x 7.1x 7.0x 8.4x 7.9x 6.6xTeva 9.2% 11.1% 12.7% 8.8x 7.2x 5.7x 8.9x 7.1x 5.9x 2.9x 2.5x 2.2x 27.9x 10.3x 8.9x 11.0x 11.0x 9.2xValeant 44.2% 44.9% 51.5% 7.7x 8.0x 7.4x 7.8x 8.1x 7.5x 3.6x 3.9x 3.7x NA 3.3x 2.8x 24.8x 3.0x 2.4xAverage 14.5x 10.0x 8.2x 12.3x 10.3x 8.5x 4.8x 4.2x 3.8x 25.6x 9.8x 8.5x NA 9.0x 6.9x1 Targets, forecasts and valuations reflect consensus estimates derived from Capital IQ
FCF Yield
% Return
Cipher Pharmaceuticals is an ON-based specialty pharma-ceuticalfirm, with three already-approved & marketed con-trolled-releaseoral therapies from its legacy portfolio - Lipofen (CIP-fenofibrate),ConZip-Durela (CIP-Tramadol), Absorica-Epuris (CIP-isotretinoin) -plus newly-acquired Innocutis-derived derm-atology therapies inSitavig-Nuvail-Bionect and several licensed dermatology assetsexpected to be accretive by F2017/18 (Dermadexin, Pruridexin,ozenoxacin, CF101)
ForecastEPS
P/CFPSP/EEV/RevenueTarget - EV/EBITDACurrent - EV/EBITDA
EBITDA
2 Based on 10× EV/EBITDA, 20x EPS (F2018 adj forecasts); FQ116 US$28.8M, LT debt of US$34.9M
1 Based on F2018 adjusted fully-taxed EPS forecast of US$0.59; adjusted EBITDA forecast of US$32.9M
0
0.1
0.2
0.3
0.4
0.5
0.6
$0.50$2.50$4.50$6.50$8.50
$10.50$12.50$14.50$16.50$18.50$20.50
Jan-
15
Feb-
15
Mar
-15
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5
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-15
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)
Last Sale Price 50-day MA 200-day MA
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-16
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Cipher Merus
0.0x
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14.0x
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14
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Cipher Merus
Page 18 of 41
19 July 2016 Real Estate
Robert Sutherland, FRI(E) | 416.933.3353 | [email protected]
Edgefront REIT H216 Small Cap Top Pick – Stable, De-Risked, High Yield
Projected Return: 32.8% Valuation: 11.0x TP/FFO (F2016)
Market DataMarket Capitalization $71.7Units S/O (M) 40.3Float S/O (M) 26.7Yield 9.0%Total Debt (M) (1) $81.0
Debt/GBV (1) 50.3%Average Volume (3mo) 17,990 52 Week Range ($) $1.4 - $1.9
Financial Metrics FY-Dec 31 Q1 Q2 Q3 Q4Quaterly FFO
2015 $0.04A $0.04A $0.05A $0.05A2016 $0.05A $0.05E $0.05E $0.05E2017 $0.05E $0.05E $0.05E $0.05E
Annual 15A 16E 17EFFO $0.18 $0.20 $0.22AFFO $0.21 $0.22 $0.25
Current MultiplesP/FFO 10.0x 8.9x 8.1xP/AFFO 8.6x 8.1x 7.1x
Target MultiplesTarget/FFO 12.4x 11.0x 10.0xTarget/AFFO 10.7x 10.0x 8.8x
Distribution $0.16A $0.16E $0.16E
NAV Estimate $2.20
Company Description
Source: Company Reports, S&P Capital IQ(1) As of last reported quarter
$1.00$1.10$1.20$1.30$1.40$1.50$1.60$1.70$1.80$1.90
0.000.020.040.060.080.100.120.140.16
Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16
Volume Price
Edgefront REIT, the successor to Edgefront Realty CapitalCorp. is an owner and operator of commercial real estateproperties in Western Canada and Atlantic Canada with aprimary focus on Indurstrial properties. As of March 31tt
2016, Edgefront owned a 100%-occupied 19 propertyportfolio covering 1.03M sq. ft. in rentable area.
Event: We are naming Edgefront REIT as our Small Cap Top Pick for the REIT sector.
Best-in-Class Risk Adjusted Returns: Edgefront predominantly owns Single-Tenant, Triple-Net leased properties with exceptionally strong tenant covenants all tied to long-term debt commitments. This equates to highly de-risked, stable and escalating cash flows coupled with constant, fixed debt costs, or more succinctly, something approximating an inflation protected bond yielding almost 9%.
While the REIT has a heavy Western Canada focus, its long-term leases with strong tenant covenants mitigate any macro weakness in those markets and do not view these leases as negative in terms of valuations. Many of the REIT’s leases are now ultimately backstopped by the Ontario Municipal Employees Retirement System (OMERS), one of Canada’s largest pension funds. The majority of the remaining leases are held by companies associated with TriWest Capital Partners, the REIT’s largest unit holder which also has direct exposure to the REIT’s external management company. This level of tenant covenant coupled with Triple-Net leases, where the tenant is responsible for all property costs and the REIT has little responsibility other than accepting its rent cheques, have significantly de-risked the REIT’s cash flows. This stability is further bolstered by the fact that the REIT has no lease roll-over until December 2018, no significant lease roll-over until 2025, and no debt maturities until 2019. Until then, barring additional acquisitions, Edgefront is closely approximating an inflation protected bond. A bond yielding almost 9%.
Edgefront, currently an ~$72M market cap REIT, acquired over $50M worth of new properties over the course of 2015 without tapping the Equity Capital Markets. It did this by convincing vendors to take back units in the REIT at an average of 8% premium to the currently trading unit price. We calculated that those vendor take-back transactions saved the REIT ~7.2% of the gross acquisitions costs of these properties. We expect that Edgefront will continue to be able to do similar transactions in the future as well as larger ones utilizing the capital markets.
Edgefront then is unique among its small cap peers in that its risk profile bests many of the most conservative, large cap players in the REIT sector while it continues to pay one of the largest yields (8.8% at time of publishing) in the REIT universe. With a low payout ratio, exceptionally safe cashflows, and the potential for further accretive acquisitions, we name Edgefront REIT as our Small Cap Top Pick for the second half of 2016.
VALUATION – Maintain Buy Rating and Target of $2.20
We are maintaining our 12-month price target of $2.20 and Buy rating and naming Edgefront as a Top Pick. Echelon Wealth Partners estimates NAV/unit of $2.20 (calculated using a 7.5% cap rate). Our target is ~11.0x our 2016E FFO of $0.20/unit (was $0.19/unit) and 10.0x our 2016E AFFO of $0.22/unit (was $0.21/unit). Our 2017E FFO is at $0.22/unit and our 2017E AFFO is at $0.25/unit.
ED.un-TSX: $1.78 Buy
C$2.20 Target
Edgefront REIT (ED.un-TSXV) | 19 July 2016
Page 19 of 41
Robert Sutherland, FRI(E) | 416.933.3353 | [email protected]
Edgefront Real Estate Investment Trust (TSXV:ED.un, $1.78) - Data Sheet
Geography Portfolio Distribution by Area RecommendationRating: BUYTarget: $2.20Last Price: $1.78Price Return: 23.6%Yield: 9.0%Total Return: 32.6%
Stock Price / Volume Chart
Occupancy Lease Expiries by Year
Key Financial Metrics (C$) Market Data As of 18/07/2016Quaterly FFO Q1 Q2 Q3 Q4 TSX TSXV:ED.un
2015 $0.04A $0.04A $0.05A $0.05A Echelon Target Price $2.202016 $0.05A $0.05E $0.05E $0.05E Closing Price Date 18/07/2016 $1.782017 $0.05E $0.05E $0.05E $0.05E 52-Week High $1.90
Annual 15A 16E 17E 52-Week Low $1.40FFO $0.18 $0.20 $0.22 Market Cap ($M) $71.66AFFO $0.21 $0.22 $0.25 NAV $2.20
Current Multiples Current Price Premium/Discount to NAV -19.1%P/FFO 10.0x 8.9x 8.1x Debt/GBV 50.3%P/AFFO 8.6x 8.1x 7.1x Mortgage Weighted Average Interest Rate 3.37%
Target Multiples Current Distribution (p.a.) $0.16Target/FFO 12.4x 11.0x 10.0x Current Distribution Yield (p.a.) 9.0%Target/AFFO 10.7x 10.0x 8.8x
Distribution $0.16 $0.16 $0.16 Consensus 3 Mo. Ago Current ReturnAFFO Payout 78% 73% 64% Rating: Buy BuyCapital Stack Debt Chart Target: $2.18 $2.18 3%
Median: $2.18 $2.18 3%High: $2.20 $2.20 5%Low: $2.15 $2.15 2%NAV/Share: $2.18 $2.13AFFO/Share: $0.16 $0.16Consensus DistributionSector Outperform/Buy 2Sector Perform/Hold 0Sector UnderPerform/Sell 0
Top Holders Shares (000s) % HeldTriWest Capital Partners 10,957.37 27.2%
Comparables Price Performance DCSR Investment Corp 1,000.00 2.5%Hanczyk, Kelly Clark 711.79 1.8%Manziaris, Theodore Peter 547.50 1.4%Forgione, Mario 408.36 1.0% Company Description
Comparables Financial Metric Ticker Unit Market Cap Debt/GBV Yield
AFFO Payout Ratio
Pure Industrial Real Estate Trust TSX:AAR.un $5.22 $1,130.3 43.7% 44.1% 85% Recent Financings Size (Millions)Dream Industrial Real Estate Investm TSX:DIR.un $9.01 $698.7 54.1% 7.8% 87% Jun-27-2014 Follow-on Offering $178.27Summit Industrial Income REIT TSX:SMU.un $6.28 $218.1 55.9% 8.0% 100% Jan-08-2014 Follow-on Offering $74.82WPT Industrial Real Estate Investme OTCPK:WPT $10.91 $442.5 48.6% 6.4% 86% Apr-11-2013 Follow-on Offering $184.10Edgefront Real Estate Investment Tr TSXV:ED.un $1.78 $71.7 50.3% 17.5% 76%
Rob Sutherland, Analyst | 416.933.3353 | [email protected] Source: Echelon Wealth Partners Inc., Company Reports and Fil ings, Capital IQNote: All prices as of Market close 18/07/2016
July 18, 2016
TSXV:ED.un
OTCPK:WPTI.F
TSX:SMU.un
TSX:DIR.un
TSX:AAR.un
0% 10% 20% 30% 40% 50%
6 Month Price Performance
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Volume (M
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)
TSXV:ED.un
OTCPK:WPTI.F
TSX:SMU.un
TSX:DIR.un
TSX:AAR.un
-4% -2% 0% 2% 4% 6% 8%
3 Month Price Performance
TSXV:ED.un
OTCPK:WPTI.F
TSX:SMU.un
TSX:DIR.un
TSX:AAR.un
-15% -10% -5% 0% 5% 10% 15%
12 Month Price Performance
Edgefront REIT, the successor to Edgefront Realty Capital Corp. is an ownerand operator of commercial real estate properties in Western Canada andAtlantic Canada with a primary focus on Indurstrial properties. As of March31st 2015, Edgefront owned a 100%-occupied 19 property portfolio covering1.03M sq. ft. in rentable area.
Edmonton
KamloopsLloydminster
Grand PrairieSaskatoon
Moose JawLethbridge
RycroftClairmont
Calgary
Yellowknife
CharlottetownMiramichi
10%
6%
57%
26%2018-2020
2024
2025
2029
52.2%
15.2%
15.7%
5.9% 0.4%10.6%
Alberta
Saskatchewan
British Columbia
NorthwestTerritoriesPrince EdwardIslandOntario
70.00%75.00%80.00%85.00%90.00%95.00%
100.00%105.00%
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Q4
2014
Q1
2015
Q2
2015
Q3
2015
Q4
2015
Q1
2016
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
$0.0
$10.0
$20.0
$30.0
$40.0
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$60.0
Mill
ions
Debt -Principal &Interest
WeightedAverageInterestRate
$0
$50
$100
$150
$200
MortgagesPayable
RevolvingCreditFacility
InvestmentProperties
Cash andEquivalents
Mill
ions
Page 20 of 41
Robert Sutherland, FRI(E) | 416.933.3353 | [email protected]
19 July 2016 Real Estate
Pure Industrial REIT H216 Large Cap Top Pick – Conservative, Nimble, Growing
Projected Return: 11.4% Valuation: 13.8x TP/FFO (F2017)
Market DataMarket Capitalization $1,146.4Units S/O (M) 219.6Float S/O (M) 215.5Yield 6.0%Total Debt (M) $852Debt/GBV 43.7%Average Volume (3mo) 476,470 52 Week Range ($) $4.1 - $5.27
Financial Metrics FY-Dec 31 Q1 Q2 Q3 Q4Quaterly FFO
2015 $0.10A $0.09A $0.10A $0.10A2016 $0.10A $0.11E $0.10E $0.10E2017 $0.10E $0.10E $0.10E $0.10E
Annual 15A 16E 17EFFO $0.39 $0.41 $0.40AFFO $0.35 $0.37 $0.37
Current MultiplesP/FFO 13.4x 12.7x 13.1xP/AFFO 14.9x 14.1x 14.1x
Target MultiplesTP/FFO 14.1x 13.4x 13.8xTP/AFFO 15.7x 14.9x 14.9x
Distribution $0.31 $0.31 $0.31AFFO Payout Ratio 89% 84% 84%NAV Estimate $5.20
Company Description
Source: Company Reports, S&P Capital IQ, Echelon Wealth Partners Inc.
$3.80
$4.00
$4.20
$4.40
$4.60
$4.80
$5.00
$5.20
$5.40
0.00
0.50
1.00
1.50
2.00
2.50
Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16
Volume (M) Price
Pure Industrial Real Estate Trust is Canada's largest internallymanaged public REIT with its head quarters located inVancouver, BC. PIRET focuses exclusively on Industrialproperties with a portfolio spread across Canada and the US.As of March 31st, 2016, the REIT owned 166 investmentproperties spanning ~15.8M sq. ft. of GLA (effective) inaddition to 2 properties under development comprising of482K sq. ft. and 26.4 acres of land held for development.
Event: We are reiterating PIRET as our Large Cap Top Pick for the REIT sector.
Conservative Underpinnings: We continue to feel that the REITs with strong balance sheets; strong tenant covenants; significant, long-term debt and leases; and US dollar exposure will be the ones best able to weather our current market volatility.
PIRET, with its recent move to further cut its debt/GBV further de-risked its already sound financial metrics and debt profile and perfectly fits our ideal of a conservative but nimble REIT.
The REIT has a solid development pipeline which will create internal growth along with substantial dry powder, the ability to sell non-managing interests in large subsections of its portfolio and strong JV partners. These combine to allow for almost any level of growth through external acquisition.
It has been our argument that PIRET is run more like a Pension Fund compared to many other REITs. While short-term performance is important at the REIT, long-term value creation is paramount, and it must be done in a conservative way to weather storms which invariably brew over a long enough period. PIRET has been incredibly diligent, entering new markets where spreads are better, building when it couldn’t or wouldn’t buy and doing both with conservative leverage coupled to long-term leases with high quality covenants.
The fact that well over 20% of its NOI comes from US properties and 19.8% of its NOI comes from the US portion of its FedEx (FDX-NY, NR) portfolio further strengthens this story against the backdrop of Canada’s stumbling economy.
We feel that the REIT’s FedEx portfolio has not been adequately appreciated by the market as a whole, undervaluing its FedEx covenant, its existing robust cash on cash returns and its ability to unlock capital through a potential non-managing interest partial disposition.
We have previously discussed the REIT’s ability to, if it chooses, drastically increase AUM with minimal or no cash outlays through dispositions of non-managing interests in portfolios. This comes back to PIRET’s Pension Fund-esque management style. Pension Funds and other large, adroit managers have used this technique to increase cash flow back to their coffers, selling other investors on their superior ability to manage and execute on transactions. PIRET has both shown an eagerness and an ability to manage for other parties in a JV and we expect it to continue to do this in the future.
A sale of a 50% non-managing interest in PIRET’s US FedEx portfolio at a 6.3% cap rate and accounting for the current mortgages on the properties could net the REIT ~C$80M. Reinvesting that capital with a JV partner on a 50-50 basis at a 50% LTV could allow the REIT to grow its AUM by ~C$320M.
Assuming a 2% asset management fee, the 50% sell down of the US FedEx portfolio would see the REIT’s cash outlay in the portfolio drop to under ~C$26M while its total NOI and asset
AAR.un-TSX: $5.22 Buy
C$5.50 Target ↑ (prev. $5.45)
Pure Industrial REIT (AAR.un-TSX) | 19 July 2016
Page 21 of 41
Robert Sutherland, FRI(E) | 416.933.3353 | [email protected]
management revenue from the properties would only drop ~17% creating an ~70% annual cash on cash return on the US FedEx portfolio going forward. This might be a conservative REIT but it has the ability to create anything but conservative returns.
While our model assumptions and unit/NAV valuations do not take into account the potential of these prospective disposition/acquisitions or transformational changes in perceived value of FedEx’s cash flow, we feel that the REIT has the potential to fundamentally change its valuation through massive AUM expansion, significant asset management fee onboarding, and the re-pricing of its substantial FedEx-sourced NOI.
VALUATION – Maintain Buy Rating and Increasing Target to $5.50 We are raising our 12-month price target to $5.50 (was $5.45) and reiterating our Top Pick/Buy recommendation. As PIRET continues to grow and further consolidate its conservative underpinnings we feel that incremental multiple expansion is warranted. Our 2016 and 2017 FFO numbers remain $0.41 and $0.40 (was $0.45), respectively, while our 2016 and 2017 AFFO numbers remain $0.37 and $0.37, respectively. Our NAV stays at $5.20. Our target equates to 13.75x our 2017E FFO and represents a 5.7% premium to our NAV indicating the value of the REIT’s platform and management team.
Pure Industrial REIT (AAR.un-TSX) | 19 July 2016
Page 22 of 41
Robert Sutherland, FRI(E) | 416.933.3353 | [email protected]
Pure Industrial Real Estate Trust (TSX:AAR.un, $5.22) - Data Sheet
Geography Portfolio Distribution by Area RecommendationRating: BUYTarget: $5.50Last Price: $5.22Price Return: 5.4%Yield: 6.0%Total Return: 11.3%
Stock Price / Volume Chart
Portfolio Use Occupancy
Key Financial Metrics (C$) Market Data As of 18/07/2016Quaterly FFO Q1 Q2 Q3 Q4 TSX TSX:AAR.un
2015 $0.10A $0.09A $0.10A $0.10A Echelon Target Price $5.502016 $0.10A $0.11E $0.10E $0.10E Closing Price Date 18/07/2016 $5.222017 $0.10E $0.10E $0.10E $0.10E 52-Week High $5.27
Annual 14A 15A 16E 17E 52-Week Low $4.10FFO $0.37 $0.39 $0.41 $0.40 Market Cap ($M) $1,130.34AFFO $0.32 $0.35 $0.37 $0.37 NAV $5.20
Current Multiples Current Price Premium/Discount to NAV 0.4%P/FFO 14.1x 13.4x 12.7x 13.1x Debt/GBV 43.7%P/AFFO 16.3x 14.9x 14.1x 14.1x Average Rate 4.12%
Target Multiples Current Distribution (p.a.) $0.31Target/FFO 14.9x 14.1x 13.4x 13.8x Current Distribution Yield (p.a.) 6.0%Target/AFFO 17.2x 15.7x 14.9x 14.9x
Distribution $0.31 $0.31 $0.31 $0.31 Consensus 3 Mo. Ago Current ReturnAFFO Payout 97% 89% 84% 84% Rating: Outperform OutperformCapital Stack Debt Chart Target: $5.24 $5.40 4%
Median: $5.25 $5.45 5%High: $5.50 $5.50 6%Low: $5.00 $5.25 1%NAV/Share: $5.10 $5.13AFFO/Share: $0.32 $0.32Consensus DistributionSector Outperform/Buy 9Sector Perform/Hold 3Sector UnderPerform/Sell 0
Top Inst. Ownership Shares % HeldRbc Global Asset Management Inc. 15.17 7.0%
Comparables Price Performance Sentry Investments Corp. 9.02 4.2%Bmo Global Asset Management 6.06 2.8%Colonial First State Asset Management (Austra 3.20 1.5%Td Asset Management, Inc. 3.04 1.4%Mackenzie Financial Corporation 1.77 0.8%Stone Asset Management Limited 1.57 0.7%Ig Investment Management, Ltd. 1.36 0.6%1832 Asset Management L.P. 1.32 0.6%Company Description
Comparables Financial Metric Ticker Unit Market Cap Debt/GBV Yield
AFFO Payout Ratio
Granite Real Estate Investment TrustTSX:GRT.un $38.97 $1,834.4 22.1% 5.9% N/ADream Industrial Real Estate Investm TSX:DIR.un $9.01 $698.7 54.1% 7.8% 87%Summit Industrial Income REIT TSX:SMU.un $6.28 $218.1 55.9% 8.0% 100% Recent Financings Size (Millions)WPT Industrial Real Estate Investme OTCPK:WPT $10.91 $442.5 48.6% 6.4% 86% Jun-27-2014 Follow-on Offering $178.27Pure Industrial Real Estate Trust TSX:AAR.un $5.22 $1,130.3 43.7% 6.0% 85% Jan-08-2014 Follow-on Offering $74.82
Apr-11-2013 Follow-on Offering $184.10Rob Sutherland, Analyst | 416.933.3353 | [email protected] Source: Echelon Wealth Partners Inc., Company Reports and Fil ings, Capital IQ
Note: All prices as of Market close 18/07/2016
July 18, 2016
TSX:AAR.un
OTCPK:WPTI.F
TSX:SMU.un
TSX:DIR.un
TSX:GRT.un
0% 10% 20% 30% 40% 50%
6 Month Price Performance
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
$3.50$3.70$3.90$4.10$4.30$4.50$4.70$4.90$5.10$5.30$5.50
Volume (M
Shares)Stoc
k Pr
ice ($
)
TSX:AAR.un
OTCPK:WPTI.F
TSX:SMU.un
TSX:DIR.un
TSX:GRT.un
-4% -2% 0% 2% 4% 6% 8%
3 Month Price Performance
TSX:AAR.un
OTCPK:WPTI.F
TSX:SMU.un
TSX:DIR.un
TSX:GRT.un
-15% -10% -5% 0% 5% 10% 15%
12 Month Price Performance
Pure Industrial Real Estate Trust is Canada's largest internally managedpublic REIT with its head quarters located in Vancouver, BC. PIRET focusesexclusively on Industrial properties with a portfolio spread across Canada andthe US. As of March 31st, 2016, the REIT owned 166 investment propertiesspanning ~15.8M sq. ft. of GLA (effective) in addition to 2 properties underdevelopment comprising of 482K sq. ft. and 26.4 acres of land held fordevelopment.
Alberta
VirginiaCalifornia
Ontario
Illinois
Quebec
New Jersey
Florida
North Carolina
British Columbia
Saskatchewan
$0
$500
$1,000
$1,500
$2,000
$2,500
MortgagesPayable andBank Loans
InvestmentProperties
Cash held intrust
Cash
Mill
ions
14.43%
18.10%
42.04%
17.80%
7.62%
British Columbia
Alberta
Ontario
USA
Other
51%
27%
18%
4%
Warehouse/Distribution
Light Manufacturing
Logistics
Flex 91%92%93%94%95%96%97%98%99%
100%101%
3.67%
3.99%
4.21%3.96%4.34%
4.84%
3.93%4.49%
4.84%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
Mill
ions
TotalMortgageRepayments
OverallWeightedAverageEffective Rate
WeightedAverageEffective Rate
Page 23 of 41
12 July 2016 Telecom & New Media
Rob Goff, CFA | 416.933.3351 | [email protected] Sophia Ren | 416.842.1793 | sophia.ren@ echelonpartners.com
DHX Media Ltd. Partnerships Reflect Platform Strength: Attractive Against Baseline Forecasts leaving Significant Upside from Wildbrain, M&L.
Projected Return: 66.9% Valuation: 9.9x EV/F2016 EBITDA
Market DataMarket CapitalizationNet DebtEnterprise ValueBasic Shares O/SFully Diluted Shares O/SAvg. Daily Volume (M)52 Week RangeDividend Yield
Revisions2016E Revenue2016E Adj. EBITDA2016E EPSFinancial MetricsFYE - Jun 30RevenueAdj. EBITDAEPSFCFNet Debt:EBITDAFCF Yield
Valuation DataDCF - Current/TargetEV/EBITDA Current
PeersTarget
P/E CurrentPeersTarget
Quarterly Data
Revenue 20152016
EBITDA 20152016
EPS 20152016
Company Description
0.43
966.9276.0
1,242.9133.7126.2
$5.99 - $9.640.9%
New OldNC304.2NCNC
2015A 2016E 2017E
108.8$0.33
264.0 304.2 332.690.2 108.8 124.6
$0.15 $0.33 $0.4736.0 12.9 57.02.5x 2.1x 1.6x
4.0% 1.3% 5.8%
$12.77 $12.4510.7x 9.9x 8.7x14.8x 13.7x 6.2x16.8x 15.3x 13.7x30.0x 18.1x 13.9x15.9x 27.9x 12.9x49.8x 30.0x 23.0x
Q1 Q2 Q3 Q4
13.7 23.9 29.8 22.818.4 27.8 32.7 29.9
DHX produces and distributes TV and interactive content fordomestic and international markets. The company focuseson children's and family entertainment with a library of9,000+ half-hours of production and 60+ titles includingCaillou, Yo Gabba Gabba!, and Johnny Test. DHX Media isbased in Halifax, Nova Scotia, Canada with facilities inHalifax, Toronto, Vancouver and London.
($0.06) $0.04 $0.14 $0.03$0.06 $0.09 $0.08 $0.09
43.0 64.3 85.6 71.263.9 81.5 84.1 74.7
0.000.501.001.502.002.503.00
$0.00$2.00$4.00$6.00$8.00
$10.00$12.00
Volume (M) Price
We are pleased to confirm DHX Media as one of Echelon Wealth Partners’ research Top Picks for H216 as part of our mid-year review.
Thesis: We are maintaining DHX Media as our Top Pick for 2016. While disappointed by the 9% YTD decline, we maintain our bullish outlook holding the view that the current valuation significantly baseline forecasts while not reflecting the considerable option value where properties such as Teletubbies but also other names such as Twirlywoos and In The Night Garden realize on their potentially very significant merchandising and licensing (M&L) potential. We look for Wildbrain and M&L to be a focus for C2017.
YTD Performance: We attribute the YTD declines to slowing digital revenue momentum and investor disappointment that DHX has been quiet on the M&A front. We look for improved momentum on digital where the Wildbrain revenues from YouTube have advanced 38% YTD outpacing the overall distribution growth of 6% YTD where “traditional” SVOD business was below expectations. While we similarly await M&A activity, we view the partnerships with DreamWorks (DWA-Nasdaq, NR), Mattel (MAT-Nasdaq, NR) and Iconix (ICON-Nasdaq, NR) as quasi M&A deals. Investors have expressed with the negative FCF from operating activities of $28.8M for the YTD reflecting the $46.8M net change in investments in film and television programs. We view the YTD 19% y/y growth in proprietary half-hours added to the library and higher spending as a positive investment in IP/new productions that are at the core of DHX’s value creation.
Catalysts: We look for positive y/y momentum in distribution revenues with FQ4 y/y growth forecast at 14% to bring the full year revenues to $84.4M just below the midpoint of the full year guidance range of $80-$90M. We note that reported FQ316 distribution revenues were down 21% y/y although essentially flat y/y after adjusting for one-time gains in FQ315. Preliminary guidance for F2017 to be released with mid/late September year-end results is likely to encompass consensus estimates; however, we look for strength in distribution revenue guidance to improve sentiment. M&L revenues guidance on owned properties in F2017 is likely to carry a relatively wide range given the uncertainty of merchandising revenues on Teletubbies in particular. We look for Teletubbies M&L revenues to exceed minimums beginning in Jan/Feb 2017 or FQ317.
Q416 Forecasts, 2017 Forecasts: We forecast FQ416 revenue/EBITDA at $74.7/$29.9M against the consensus at $75.7/$30.2M and FQ415 at $71.2/$22.8M. Our F2017 revenue/EBITDA estimates at $332.6/$124.6M are similarly in line with the consensus at $331.0/$124.0M. We look for the mid-point of preliminary guidance to be released with FQ416 results to surround our forecasts and consensus.
Valuation: DHX shares are currently valued at a 9.9x/8.7x C2016/17 EV/EBITDA with our $12PT at 15.3x/13.7x/11.4x C2016/17/18 EV/EBITDA. Our PT reflects a 1.3%/5.8% FCF yield against F2016/F2017 FCF of $0.10/$0.43 per share. Our PT finds primary support against our five-year DCF forecasts where we have F2015-20 revenue/EBITDA CAGRs of 10.9%/24.1%. We use a discount rate and terminal EV/EBITDA at 7.5%/9.5x to service our current/one year DCF valuations of $12.40/$12.79 per share.
DHX.B-TSX: $7.23 Buy
$12.00 Target
DHX Media Ltd. (DHX.B) | July 12 2016
Page 24 of 41 Rob Goff, CFA | 416.933.3351 | [email protected]
Catalysts M&L: We continue to see significant option value in the M&L prospects from its owned properties where we have F2016 revenues of $25.7M against $20.0M for F2015. We see building traction in F2017/18 where we have revenues of $34.7/$41.6M. For perspective, Teletubbies at its peak would have generated the equivalent of ~$80M annually to DHX in M&L. We refrain from making similarly aggressive forecasts; however, we believe that the upside option value warrants fuller consideration. DHX noted that the first Teletubbies items hit the shelves in the UK mid-January. Management highlighted the strong performance of Twirlywoos and In The Night Garden merchandising. The consensus F2017 and F2018 revenue/EBITDA figures at $331.0M/$124.0M and $355.8M/$138.0M, respectively would appear to understate prospective Teletubbies contributions in F2018. We look for positive revisions and perhaps just as importantly greater confidence in the ramping revenues/contributions.
Not “acquisitions’ but Partnerships: We continue to believe that the FQ216 partnerships with Mattel, DreamWorks and Iconix remain significantly discounted. DHX Media’ previously announced long term partnership with Mattel for the development, production and distribution of new content for the Mattel properties Bob the Builder™, Fireman Sam™, Little People® and Polly Pocket™ represents a significant boost to the company’s international profile. Under the partnership, DHX Media will produce new content across all platforms for the four properties while DHX Media will distribute both new and existing programming for the properties. Essentially, DHX Media is levering its strengths in development, production and distribution while Mattel will continue to play to its strength in toy development and merchandising. Production under the agreement will be consistent with existing margins while the distribution revenues will bring significant revenues albeit with lower margins given an undisclosed revenue sharing agreement. We note that Mattel originally acquired the four properties as part of its $680M acquisition of Hit Entertainment in October, 2011. Two key properties identified with the transaction were Bob the Builder and Thomas the Tank Engine. At the time, Thomas & Friends was put at ~80% of Hit’s profits.
Looking further back, we were modestly surprised at the AGM when the Mattel partnership was presented alongside the pivotal Cookie Jar Acquisition (2012, Enterprise Value $111M) and Family Channel acquisitions ($170M, announced Nov/13.). We believe the importance accorded the partnership reflects longer term potential working with Mattel, Inc. and DHX Media’s strengthened position in structuring similar deals with other content owners such as Marvel (MRVL-NasdaqGS). The partnership followed closely on the December 8th announcement that DHX Media had signed a 5-year, strategic content pact with DreamWorks (See report). We felt that deal itself was clear evidence of DHX’s strong position as a producer, broadcaster and distributor of youth programming. We don’t believe the share performance following the announcement appropriately reflected the positive significance of the DWA partnership for either its validation of DHX’s decision to move away from reselling Disney content or for its reflection on DHX’s global profile.
The deal with Iconix with its Strawberry Shortcake gave further evidence to DHX’s profile as a global leader in both production and distribution of children’s programming.
China: We believe DHX Media has a unique opportunity in China given its moves to work with local partnerships and given the prevailing view and demand for its programming. Teletubbies has historically been exceptionally well received in the Chinese market where we suspect it benefits from its British programming origins and perceived positive/neutral cultural association. DHX has now licensed 5,000 half-hours into China where it continues to explore new relationships and potential new business opportunities. While assigning specific revenue forecasts to the Asian market is impossible, we could see the joint venture following a trajectory similar to YouTube (Private) where annualized revenues approached a $9M run rate within its first three years. We believe the potential significance of the transaction has been diluted by the inability to assign revenue targets. We see these deals as international prototypes. We view the challenges faced by DisneyLife as more of an opportunity for DHX rather than a hurdle. The multi-year licensing agreement with Disney and Alibaba Group saw the service shut “down for an upgrade” in a move that has been associated with government intervention. Where the interventionist view holds merit, we could see a motivation to support DHX Media’s partners in the country.
DHX Media Ltd. (DHX.B) | July 12 2016
Page 25 of 41 Rob Goff, CFA | 416.933.3351 | [email protected]
Guidance Details: A detailed comparison between DHX’s F2016 guidance and results are given below. In addition, we compare our F2016 estimates with DHX’s F2016 guidance, always comparing with the mid-point of the ranges it provides. The Company provided minor revisions with its FQ316 earnings release, to Share based compensation, and Distribution gross margin.
Exhibit 1 – DHX 2016 Guidance versus EPC Estimates
Source: Capital IQ, Company Filings, Echelon Wealth Partners estimates.
2015 F2016 Guidance (Q316) F2016 Guidance (4.26) EWP EWP Actual Low High Mid Low High Mid Estimates Old Estimates
Revenue
Proprietary Production 38.1 40.0 50.0 45.0 40.0 50.0 45.0 44.1 45.7
Producer & Service Fee 32.6 47.5 52.5 50.0 47.5 52.5 50.0 50.2 46.6Combined Production 70.7 87.5 102.5 95.0 87.5 102.5 95.0 94.3 92.3
Distribution 77.7 80.0 90.0 85.0 80.0 90.0 85.0 84.4 87.9M&L - Owned Brands 20.0 23.0 27.0 25.0 23.0 27.0 25.0 25.7 25.1M&L - Represented 14.4 26.0 29.0 27.5 26.0 29.0 27.5 26.8 23.8New Media 5.1 2.0 3.0 2.5 2.0 3.0 2.5 2.6 3.6DHX TV 76.2 67.5 72.5 70.0 67.5 72.5 70.0 70.2 71.4
Total Revenue 264.0 286.0 324.0 305.0 286.0 324.0 305.0 303.9 304.1Gross Margin
Proprietary Production 44.3% 31.0% 37.0% 34.0% 31.0% 37.0% 34.0% 34.2% 36.9%Producer & Service Fee 32.9% 40.0% 45.0% 42.5% 40.0% 45.0% 42.5% 42.2% 39.0%
Combined Production 39.1%Distribution 64.9% 55.0% 70.0% 62.5% 60.0% 70.0% 65.0% 60.6% 64.9%M&L - Owned Brands 61.0% 55.0% 65.0% 60.0% 55.0% 65.0% 60.0% 58.6% 59.9%M&L - Represented 90.4% 95.0% 100.0% 97.5% 95.0% 100.0% 97.5% 96.7% 97.5%New Media 22.3% 20.0% 30.0% 25.0% 20.0% 30.0% 25.0% 49.2% 29.5%
DHX TV 55.0% 60.0% 65.0% 62.5% 60.0% 65.0% 62.5% 60.5% 58.5%
Total Gross Margin 0.0% 53.7% 61.6% 57.9% 55.1% 61.6% 58.6% 56.6% 57.0%Gross Profit
Proprietary Production 16.9 12.4 18.5 15.5 12.4 18.5 15.5 15.1 16.9Producer & Service Fee 10.7 19.0 23.6 21.3 19.0 23.6 21.3 21.2 18.2
Combined Production 27.6 31.4 42.1 36.8 31.4 42.1 36.8 36.2 35.0Distribution 50.4 44.0 63.0 53.5 48.0 63.0 55.5 51.1 57.1M&L - Owned Brands 12.2 12.7 17.6 15.1 12.7 17.6 15.1 15.1 15.0M&L - Represented 13.0 24.7 29.0 26.9 24.7 29.0 26.9 25.9 23.2New Media 1.1 0.4 0.9 0.7 0.4 0.9 0.7 1.3 1.1DHX TV 41.9 40.5 47.1 43.8 40.5 47.1 43.8 42.5 41.8
Total Gross Profit* 146.3 153.7 199.7 176.7 157.7 199.7 178.7 172.1 173.2
SG&A 59.1 66.0 70.0 68.0 66.0 70.0 68.0 73.0 67.1Share-based Compensation 4.3 5.0 6.0 5.5 4.0 5.0 4.5 5.9 4.5Finance Expense 22.5 16.0 18.0 17.0 16.0 18.0 17.0 16.8 16.9Amortization/Development Expense 10.4 24.0 29.0 26.5 24.0 29.0 26.5 25.1 27.8Tangible Benefit Obligation Expense 2.0 4.0 3.0 2.0 4.0 3.0 3.0 3.0Other 4.6 1.5 2.5 2.0 2.0 3.0 2.5 2.0 2.5Total Opex 100.9 112.5 125.5 119.0 112.0 125.0 118.5 122.8 118.8Pre-Tax Profit 45.4 41.2 74.2 57.7 45.7 74.7 60.2 49.2 54.4EBITDA 55.8 65.2 103.2 84.2 69.7 103.7 86.7 74.3 82.1
2016E2016E
DHX Media Ltd. (DHX.B) | July 12 2016
Page 26 of 41 Rob Goff, CFA | 416.933.3351 | [email protected]
F2016+ Forecasts Following FQ316 results and management’s guidance for F2016, we maintained our F2016 revenues/adj. EBITDA at $304.20M/$108.8M. Our forecasts are largely in line with consensus estimates. We view our longer term forecasts as a baseline scenario offering considerable upside from M&L revenues beyond our forecasts. For more, please see Exhibits 2 and 3.
Exhibit 2 – DHX Consolidated Quarterly Trends and Forecasts
Source: Capital IQ, Company Filings, Echelon Wealth Partners estimates.
Exhibit 3 – DHX Consolidated Quarterly Trends and Forecasts
Source: Capital IQ, Company Filings, Echelon Wealth Partners estimates.
2015 Q116 Q216 Q316 Q416E Quarterly Comment 2016E 2017E 2018E 2019E 2020E 20221EAll units in '000 CAD, unless otherwise indicatedFinancial SummaryRevenue 264,039 63,910 81,480 84,095 74,711 304,196 332,566 354,198 400,835 442,299 485,140Growth y/y 131.1% 43.9% 26.7% 2.3% 0.3% 14.9% 7.8% 6.5% 13.2% 10.3% 9.7%Consensus 257,774 58,089 73,667 82,608 75,709 305,359 330,984 355,800 400,800 442,300 485,140
EBITDA 54,812 14,044 27,759 26,713 25,912 94,428 111,233 121,200 145,554 161,531 186,208Adj. EBITDA (DHX Definition) 90,211 18,372 27,759 32,740 29,912 108,783 124,585 135,403 160,680 177,658 203,421Flow-through 36.0% 22.2% 22.6% NM 200.5% 46.3% 55.7% 50.0% 54.2% 40.9% 60.1%Growth y/y 143.6% 33.8% 16.3% 9.9% 31.1% 20.6% 14.5% 8.7% 18.7% 10.6% 14.5%Margin 34.2% 28.7% 34.1% 38.9% 40.0% 35.8% 37.5% 38.2% 40.1% 40.2% 41.9%Consensus 89,390 17,766 24,861 31,859 30,189 109,160 124,031 137,991 160,700 177,700 203,421Capex -4,789 -478 -880 -122 -1,494 -2,974 -5,654 -4,144 -4,690 -5,175 -5,676Intensity -1.8% -0.7% -1.1% -0.1% -2.0% -1.0% -1.7% -1.2% -1.2% -1.2% -1.2%Consensus -5,648 -675 -779 -1,386 -1,498 -2,818 -6,551 -3,881 -4,345 -4,588 -4,838EPS - Diluted $0.15 $0.06 $0.09 $0.08 $0.09 $0.33 $0.47 $0.57 $0.77 $0.91 $1.06Growth y/y 86.0% -194.1% 103.4% -44.2% 212.7% 109.1% 43.3% 21.4% 34.0% 18.8% 16.4%Consensus $0.33 $0.04 $0.07 $0.11 $0.08 $0.34 $0.40 $0.51 NA NA NACFPS $0.34 -$0.18 $0.05 $0.11 $0.13 $0.12 $0.47 $0.63 $0.89 $1.10 $1.31
Growth y/y 225.0% -3650.7% -262.8% -57.6% 76.1% -64.6% 294.4% 34.6% 41.9% 22.8% 19.5%Consensus $0.30 $0.04 $0.05 $0.17 $0.14 $0.13 $0.35 $0.55 $0.89 $1.10 $1.31
FCF 36,013 -22,877 5,821 13,555 16,411 12,910 56,994 80,157 114,974 144,884 178,937FCFPS $0.30 -$0.18 $0.05 $0.11 $0.12 $0.10 $0.43 $0.60 $0.86 $1.06 $1.27
Our FQ416 EBITDA is within $200K of the consensus.
Capex remains a releatively modest amount.
We are essentially in line with consensus.
FCF depressed given production ramp. Proprietary Production half-hours increased 5% for FQ316 and 19% YTD given strong demand.
Our Q416 revenues are $1M below consensus.
Operating/Segmented Summary 2015 Q116 Q216 Q316 Q416E Quarter Comment 2016E 2017E 2018E 2019E 2020E 20221EProduction Revenue 38,080 4,102 20,712 12,106 7,150 44,070 47,150 44,298 50,176 48,832 49,704
Growth y/y 62% -26% 68% -20% 40% 16% 7% -6% 13% -3% 2%% of total 14% 6% 25% 14% 10% 14% 14% 13% 13% 11% 10%Gross Margin ($) 16,884 1,540 6,830 3,470 3,218 15,058 17,446 15,504 17,060 14,650 14,911Gross Margin (%) 44% 38% 33% 29% 45% 34% 37% 35% 34% 30% 30%Output (Half Hours) 224 39 76 63 50 228 230 214 224 218 218
Revenue/Half Hour 170 105 273 192 143 193 205 207 224 224 228Gross Profit/Half Hour 75 39 90 55 64 66 76 72 76 67 68
Distribution Revenue 77,670 14,034 18,577 23,933 27,823 84,367 97,022 109,150 125,522 144,350 166,003Growth y/y 90% 40% 45% -21% 14% 9% 15% 13% 15% 15% 15%% of total 29% 21% 23% 28% 37% 27% 29% 31% 31% 33% 34%Gross Margin ($) 50,424 8,200 8,780 13,690 20,450 51,120 59,668 67,127 77,196 86,610 102,922Gross Margin (%) 65% 58% 47% 57% 74% 61% 62% 62% 62% 60% 62%
Producer and Service Fee Revenue 32,610 14,030 11,487 14,048 10,622 50,187 55,708 59,607 64,376 68,239 72,333Growth y/y 77.5% 102.2% 73.4% 71.2% -2.0% 53.9% 11.0% 7.0% 8.0% 6.0% 6.0%% of total 12.2% 20.6% 14.1% 16.7% 14.2% 16.3% 16.8% 16.8% 16.1% 15.4% 14.9%Gross Margin ($) 10,742 5,060 5,730 8,030 2,337 21,157 24,567 26,287 28,969 27,295 27,486Gross Margin (%) 32.9% 36.1% 49.9% 57.2% 22.0% 42.2% 44.1% 44.1% 45.0% 40.0% 38.0%
M&L-owned Revenue 20,030 4,710 4,342 10,438 6,192 25,682 34,670 41,604 51,173 60,384 66,422
Growth y/y 16% 72% -34% 63% 45% 28% 35% 20% 23% 18% 10%
% of total 7% 7% 5% 12% 8% 8% 10% 12% 13% 14% 14%
Gross Margin ($) 12,217 2,600 2,830 6,340 3,281 15,051 24,269 29,123 35,821 42,269 46,496
Gross Margin (%) 61.0% 55.2% 65.2% 60.7% 53.0% 58.6% 70.0% 70.0% 70.0% 70.0% 70.0%M&L-represented Revenue (CPLG) 14,350 6,707 7,120 7,423 5,593 26,843 29,258 34,525 42,120 50,545 58,126
Growth y/y 17.9% 125.1% 130.4% 112.1% 17.0% 87.1% 9.0% 18.0% 22.0% 20.0% 15.0%% of total 5.3% 9.8% 8.7% 8.8% 7.5% 8.7% 8.8% 9.7% 10.5% 11.4% 12.0%Gross Margin ($) 12,973 6,710 7,120 7,420 4,698 25,948 28,283 33,374 40,716 48,860 56,189Gross Margin (%) 90.4% 100.0% 100.0% 100.0% 84.0% 96.7% 96.7% 96.7% 96.7% 96.7% 96.7%
New Media Revenue 5,110 1,230 460 440 422 2,552 2,041 1,633 1,551 1,396 1,257Growth y/y 30% 46% -48% -23% -85% -50% -20% -20% -5% -10% -10%% of total 2% 2% 1% 1% 1% 1% 1% 0% 0% 0% 0%Gross Margin ($) 1,140 406 420 400 30 1,255 714 572 543 321 289Gross Margin (%) 22% 33% 91% 91% 7% 49% 35% 35% 35% 23% 23%
DHX TV 76,180 18,820 18,780 15,718 16,910 70,228 66,717 63,381 65,916 68,553 71,295Growth y/y -13.3% 5.0% -14.3% -12.8% -24.0% -7.8% -5.0% -5.0% 4.0% 4.0% 4.0%% of total 28.4% 27.6% 23.0% 18.7% 22.6% 22.8% 20.1% 17.9% 16.4% 15.5% 14.7%Gross Margin ($) 41,899 6,218 12,570 11,160 12,513 42,461 42,365 40,247 41,527 43,360 45,629Gross Margin (%) 55.0% 33.0% 66.9% 71.0% 74.0% 60.5% 63.5% 63.5% 63.0% 63.3% 64.0%
Revenue guidance midpoint lowered from $4.0M to $2.5M with last UMIGO delivery.
Revenue guidance midpoint maintained at $71.5M with margin midpoint maintained at
60%. We could be conservative.
Q316 declined 20% due early deliveries in Q216 where y/y revs gained 68%. Guidance
Unchanged - we have positive momentum in Q416.
Guidance unchanged although Q215 margin midpoint moved from 70% to 67.5%. Dist. revs
on quarter flat adj. for Q315 catch up.Q4 forecasts ahead 14% y/y +ve momentum.
Guidance midpoint for revenues at $50M and margins unchanged - we are in line.
We are in line with guidance midpoint of revenues at $25.0M while margins were
maintained at 60%
Guidance for revenues at $27.5 up from beginning of year at $18M and Q216 guidance
at rom $18M to $24.5M with margins maintained at 97.5%.
DHX Media Ltd. (DHX.B) | July 12 2016
Page 27 of 41 Rob Goff, CFA | 416.933.3351 | [email protected]
DHX Media Ltd. (DHX.B-T, $7.23) - Data Sheet BUY | PT: $12.00Company Description Consensus 3 Mths Ago Current Return
Rating: Outperform OutperformTarget: $10.64 $10.36 44.2%Median: $10.25 $10.00 39.2%High: $15.75 $14.00 94.5%Low: $8.10 $8.00 11.5%Consensus DistributionSector Outperform/Buy 9Sector Perform/Hold 2Sector Underperform/Sell 0# Est 11
Historical Valuations
CAPITAL IQ - CONSENSUS BASED NTM EV/EBITDA CAPITAL IQ - CONSENSUS BASED NTM EV/SALES
Key Financial MetricsFinancial Summary/Key Metrics 2015 Q116 Q216 Q316 Q416E 2016E 2017E 2018E 2019E 2020E Key Statistics ValueConsolidated 52-Week High $9.64 33%Revenue 264.0 63.9 81.5 84.1 74.7 304.2 332.6 354.2 400.8 442.3 52-Week Low $5.99 (17%)
Growth y/y 127.4% 48.5% 26.8% (1.7%) 5.0% 15.2% 9.3% 6.5% 13.2% 10.3% Avg Vol (3-Mo) 429Cons. 118.1 49.0 65.0 68.8 65.7 257.8 305.4 331.0 355.8 400.8 Shares Outstanding 134Cons. 3 Mts. Ago 118.1 49.0 65.0 68.8 65.7 257.8 306.6 337.8 351.0 404.7 Market Cap 967Pro Forma Revenue 264.0 63.9 81.5 84.1 74.7 304.2 332.6 354.2 400.8 442.3 Net Debt 276
Adj. EBITDA 90.2 18.4 27.8 32.7 29.9 108.8 124.6 135.4 160.7 177.7 Enterprise Value 1,243Growth y/y 143.6% 33.8% 16.3% 9.9% 31.1% 20.6% 14.5% 8.7% 18.7% 10.6% Div Yield 0.9%Margin 34.2% 28.7% 34.1% 38.9% 40.0% 35.8% 37.5% 38.2% 40.1% 40.2% FYE Jun 30Flow-Through 36.0% 22.2% 22.6% (197.5%) 200.5% 46.3% 55.7% 50.0% 54.2% 40.9% Employees 365Cons. 36.7 15.6 22.4 23.7 22.1 89.4 109.2 124.0 138.0 160.7Cons. 3 Mts. Ago 36.7 15.6 22.4 23.7 22.1 89.4 109.4 127.7 138.8 163.5Pro Forma Adj. EBITDA 97.7 22.9 30.8 32.7 29.9 116.3 124.6 135.4 160.7 177.7
EPS $0.15 $0.06 $0.09 $0.08 $0.09 $0.33 $0.47 $0.57 $0.77 $0.91 Top Inst. Ownership M Shares ∆ 6 Mnths % HeldGrowth y/y 83.5% (192.4%) 105.9% (43.4%) 218.1% 113.9% 43.8% 21.4% 34.0% 18.8% Luxor Capital 32.53 (2.64) 24.3%Cons. NA $0.05 $0.08 $0.08 $0.06 $0.33 $0.34 $0.40 $0.51 NA Fiera Capital 16.87 0.00 12.6%Cons. 3 Mts. Ago NA $0.05 $0.08 $0.08 $0.06 $0.33 $0.40 $0.48 $0.58 NA Fine Capital Partners 15.46 0.00 11.6%
Cash 42.9 25.5 60.6 48.7 17.3 17.3 49.2 123.4 222.1 355.0 Pembroke Management 8.74 1.68 6.5%Net Debt 239.9 262.3 262.0 276.0 240.0 240.0 203.1 123.9 20.3 (117.6) Tybourne Capital Mgmt. 7.88 0.00 5.9%Operating/Segmented Summary 1832 AM 2.56 0.00 1.9%
Production Revenue 38.1 4.1 20.7 12.1 7.2 44.1 47.2 44.3 50.2 0.0 Pleasant Lake 1.84 0.00 1.4%Growth y/y 62.2% -26.2% 67.6% -19.5% 39.8% 15.7% 7.0% -6.0% 13.3% 0.0% Davidson K. Capital 1.71 0.15 1.3%Gross Margin 16.9 1.5 6.8 3.5 3.2 15.1 17.4 15.5 17.1 0.0 CI Investments 1.62 (1.71) 1.2%
Disitribution Revenue 77.7 14.0 18.6 23.9 27.8 84.4 97.0 109.1 125.5 0.0 BMO Investments 1.50 0.00 1.1%Growth y/y 89.9% 40.5% 45.2% (21.5%) 14.0% 8.6% 15.0% 12.5% 15.0% -Gross Margin 50.4 8.2 8.8 13.7 20.4 51.1 59.7 67.1 77.2 0.0
Prod. & Service Fee Revenue 32.6 14.0 11.5 14.0 10.6 50.2 55.7 59.6 64.4 0.0Growth y/y 77.5% 102.2% 73.4% 71.2% (2.0%) 53.9% 11.0% 7.0% 8.0% - Valuation F2015 F2016E F2017EGross Margin 10.7 5.1 5.7 8.0 2.3 21.2 24.6 26.3 29.0 0.0 Revenue 264.0 304.2 332.6
M&L-owned Revenue 20.0 4.7 4.3 10.4 6.2 25.7 34.7 41.6 51.2 0.0 EBITDA 54.8 94.4 111.2Growth y/y 15.8% 71.9% (34.4%) 63.1% 45.0% 28.2% 35.0% 20.0% 23.0% - Depreciation (10.4) (18.5) (20.5)Gross Margin 12.2 2.6 2.8 6.3 3.3 15.1 24.3 29.1 35.8 0.0 Capex (4.8) (3.0) (5.7)
M&L-represented Revenue 14.4 6.7 7.1 7.4 5.6 26.8 29.3 34.5 42.1 0.0 Discretionary CF 22.8 71.9 72.8Growth y/y 17.9% 125.1% 130.4% 112.1% 17.0% 87.1% 9.0% 18.0% 22.0% 0.0% Discount Rate 7.50%Gross Margin 13.0 6.7 7.1 7.4 4.7 25.9 28.3 33.4 40.7 0.0 Terminal EBITDA Multiple 9.55x
New Media Revenue 5.1 1.2 0.5 0.4 0.4 2.6 2.0 1.6 1.6 0.0 Current 1-Yr TGTGrowth y/y 30.0% 46.4% (48.3%) (22.8%) (85.0%) (50.1%) (20.0%) (20.0%) (5.0%) - Terminal Value PV 1,334.3 1,434.4Gross Margin 1.1 0.4 0.4 0.4 0.0 1.3 0.7 0.6 0.5 0.0 Equity Value 1,612.0 1,648.2
Family Channel Revenue 18.8 18.8 15.7 16.9 70.2 66.7 63.4 65.9 0.0 DCF Value $12.77 $12.45Growth y/y 5.0% (14.3%) (12.8%) (24.0%) (7.8%) (5.0%) (5.0%) 4.0% -Gross Margin 6.2 12.6 11.2 12.5 42.5 42.4 40.2 41.5 0.0
ComparablesReturn Revenue EBITDA EPS
1 Week 1 Month 3 Month YTD 1 Year F2016E F2017E F2016E F2017E F2016E F2017EDHX Media $7.23 $12.00 0.9% 66.9% 7.3% 17.8% (0.8%) (14.6%) (25.5%) 304 333 116 125 $0.33 $0.47Corus $13.92 $12.70 8.1% (0.6%) 3.1% 4.6% 16.3% 28.9% (16.2%) 1,201 1,754 435 611 $1.21 $1.42TVA $4.08 $5.28 - 29.3% - 0.2% 1.5% 2.0% (19.7%) 604 610 56 62 $0.35 $0.50Lion's Gate $19.42 $27.23 1.9% 42.1% 1.7% (8.8%) (4.3%) (40.0%) (47.8%) 2,347 2,550 33 259 $0.10 $0.77Entertainment One £2.57 £2.81 0.6% 10.0% 16.7% 3.5% 14.0% 4.4% (54.2%) 1,042 1,247 131 199 £0.11 £0.25Dreamworks Animation $40.97 $39.78 - (2.9%) (0.0%) 2.0% 57.3% 59.0% 60.9% 937 1,067 123 169 $0.53 $0.88Peer Average 2.1% 15.6% 4.3% 0.3% 16.9% 10.8% (15.4%)
Enterprise FCF Yield EV/EBITDA EV/EBITDA - Target P/E P/CFPSValue F2016E F2017E C2015 C2016E C2017E C2016E C2017E C2018E C2016E C2017E C2018E C2016E C2017E C2018E
DHX Media 1,243 1.3% 5.8% 10.7x 9.9x 8.7x 15.3x 13.7x 11.4x 18.1x 13.9x 10.8x 24.7x 13.3x 9.5xCorus 3,286 9.2% 11.6% 7.5x 9.8x 7.5x 8.7x 7.2x NA 10.8x 9.6x NA 6.9x 7.5x NATVA 252 10.1% 15.5% 5.7x 4.7x NA 6.4x NA NA 11.7x NA NA NA NA NALion's Gate 4,448 2.4% 4.2% 49.9x 20.8x 13.3x 32.1x 21.4x 15.2x 32.1x 19.3x 13.6x 28.8x 16.6x 10.8xEntertainment One 1,171 2.9% 1.4% 12.2x 8.7x 7.7x 9.4x 8.7x 7.1x 12.0x 9.3x 7.8x 17.5x NA NADreamworks Animation 3,908 (0.9%) 1.8% 34.0x 31.5x 22.5x 27.0x 22.9x NA 77.1x 46.8x NA 30.1x 19.3x NAPeer Average 4.7% 6.9% 21.9x 15.1x 12.7x 16.7x 15.1x 11.2x 28.7x A 21.3x A 10.7x 20.8x 14.5x 10.8x*Non-coverage names reflect consensus, 2014 numbers for DHX are based on actual resultsSource: Echelon Wealth Partners, Company Reports and Filings, Capital IQ $0.00
ComparablesMultiples Analysis
DHX produces and distributes TV and interactive content fordomestic and international markets. The company focuses onchildren's and family entertainment with a library of 9000+half-hours of production and 60+ titles including Caillou, YoGabba Gabba!, and Johnny Test. DHX Media is based inHalifax, Nova Scotia, Canada with facilities in Halifax,Toronto, Vancouver and London.
Comparables and Peer Analysis Price Target Div Yield Return
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Volume (M
Shares)
Stoc
k Pr
ice
($)
Last Sale Price 50-Day MA 200-Day MA
3.0x5.0x7.0x9.0x
11.0x13.0x15.0x17.0x
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TSX:DHX.B TSX:CJR.B LSE:ETO
0.0x
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6.0x
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DHX Media Ltd. Corus Entertainment Inc. Entertainment One Ltd.
DHX Media Ltd. (DHX.B) | July 12 2016
Page 28 of 41 Rob Goff, CFA | 416.933.3351 | [email protected]
DHX Media Ltd. - Valuation AnalysisAll figures in $M CAD, unless otherwise indicatedDCF
2014 2015 2016E 2017E 2018E 2019E 2020E 15-20 CAGRRevenue 116 264 304 333 354 401 10.9%Adj. EBITDA 32 55 94 111 121 146 24.1%
Growth % 135.5% 71.2% 72.3% 17.8% 9.0% 20.1%D&A -17 -10 -18 -21 -20 -19Capex -2 -5 -3 -6 -4 -5 Avg.
Intensity % 2.1% 1.8% 1.0% 1.7% 1.2% 1.2% 1.3%Cash Taxes -4 -14 -16 -20 -20 -22Unlevered FCF 20 23 72 73 104 115
Discount Rate % 7.5% $∆ from 1% ∆ in Disc RateTerminal EBITDA Multiple 9.55xTerminal FCF Multiple 11.10x $∆ from 0.5x ∆ in Term MultTerminal Value as % of Equity Value 67.9%Implied Perpetual Growth Rate of FCF -1.4%
Current 1-Yr TGT 2-Yr TGT DCF SensitivityEnterprise Value 1,852 1,888 1,929 Discount RateNet Debt (240) (240) (203) 0 6.50% 7.00% 7.50% 8.00% 8.50%Total Equity Value 1,612 1,648 1,726 10.50x $13.93 $13.73 $13.53 $13.34 $13.15Shares Outstanding 126 126 126 Terminal 10.00x $13.35 $13.16 $12.97 $12.78 $12.59DCF Value per Share ($) $12.77 $12.45 $12.79 EBITDA 9.50x $12.77 $12.58 $12.40 $12.22 $12.04Current, Target Share Price ($) $6.69 $12.00 $13.00 Multiple 9.00x $12.18 $12.00 $11.83 $11.66 $11.49Discount % to DCF Value 47.6% 3.6% -1.6% 8.50x $11.60 $11.43 $11.26 $11.10 $10.94
Recent Performance 1Wk 1 Mth 3 Mths YTD 1 Year Consensus Indexed EV/EBITDADHX 4.4% 1.2% (7.2%) (10.6%) (8.7%)Corus (0.4%) 2.2% 13.1% 9.1% (32.8%)Dreamworks 1.6% 8.1% 2.7% 5.6% 5.7%Entertainment One 2.7% 19.7% 16.8% 10.4% (43.1%)TVA (3.4%) 0.3% (3.6%) 0.0% (21.3%)Disney 5.3% 7.2% 7.1% (1.2%) (4.8%)Hasbro 6.1% 12.0% 19.9% 29.8% 21.9%Multiples
Current TargetC2014 C2015E C2016E C2015E C2016E
EV/EBITDA - DHX 12.6x 10.7x 9.9x 16.8x 15.3xCorus 7.2x 7.5x 9.8x 8.1x 8.7x Consensus Indexed P/EDreamworks 129.8x 34.0x 31.5x 33.0x 27.0xEntertainment One 11.3x 12.2x 8.7x 11.8x 9.4x
P/E - DHX 61.0x 30.0x 18.1x 49.8x 30.0xCorus 9.5x 10.7x 10.8x 9.8x 9.9xDreamworks 23.3x 496.5x 77.1x 482.1x 74.9xEntertainment One 26.1x 23.9x 12.0x 26.2x 13.2x
P/CFPS - DHX 33.7x 32.6x 24.7x 54.2x 41.0xFCF Yield - DHX 2.6% 2.6% 3.6% 1.6% 2.2%
Corus 15.2% 13.8% 10.0% 15.1% 11.0%Dreamworks -5.7% 0.8% -0.9% 0.9% -1.0%Entertainment One -3.6% 1.2% 1.8% 1.1% 1.6%
*Non-coverage names reflect consensusSource: Echelon Wealth Partners, Company Reports and Filings, Capital IQ
● We prefer DCF valuations for our new media space over relative valuations, which leave investors exposed to group revaluations
442162
11.0%-18 ● Our DCF valuation is driven by an 7.5% discount rate and
9.55x terminal EBITDA multiple-51.2%
-19 ● The DCF produces a current/target valuation of $12.77/$12.45, from which we derive our $12.00 target139
$0.37 ● For perspective, a 1% change in the discount rate adds $0.37/share, or 3.0%, to our valuation while a 0.5x increase in the terminal multiple adds $0.57/share, or 4.7%, to the valuation
3.0%$0.574.7%
(5.0x)
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DHX Corus Dreamworks
(25.0x)(5.0x)15.0x35.0x
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DHX Corus Dreamworks
Page 29 of 41
12 July 2016 Technology
Andrej Krneta, B. Eng, MBA | 416.687.6656 | [email protected]
TECSYS Inc. Top Pick Mid-year Update: Set for Further Upside
Projected Return: 17% Valuation: 14x EV/EBITDA F2018e
Market DataMarket Capitalization Net Debt Enterprise Value Basic Shares O/SFully Diluted Shares O/SAvg. Daily Volume (M)52 Week RangeDividend Yield
Revisions2017E Revenue2017E EBITDA2017E EPSFinancial MetricsFYE - Apr 15RevenueEBITDAEPSFCFNet Debt:EBITDAFCF Yield
Valuation Data
DCF - Current/TargetEV/EBITDA Current
PeersTarget
P/E CurrentPeersTarget
Quarterly Data
EBITDA 20152016
EPS 20152016
Company Description
C2015 C2016E C2017E$11.00 $12.20
66.0x 12.6x 12.6x
Q4
33.5x 21.9x 18.0x77.2x
117.0-5.1
111.912.312.3
9.2 NC
$10.11 - $6.351.3%
New Old72.1 NC
$0.44 NC
F2015 F2016 F2017E
0.01
6.3%
$0.13 $0.39 $0.44-1.0 1.7 7.3
57.3 67.5 72.14.4 7.2 9.2
Q1 Q2 Q3
95.5x14.7x 14.7x14.8x 11.3x
57.3x 52.2x 39.3x
NA 17.1x 13.1x
-1.3x -3.9x -6.4x
-0.9% 1.5%
TECSYS is a provider of Supply Chain Management(SCM) software. Through its Supply Chain Platform,TECSYS helps corporates manage warehousefacilities, distribution networks and logistics. The key focus is the healthcare vertical where TCS ships intointegrated delivery networks (IDNs) and third-partylogistics providers. TECSYS is headquartered inMontreal, Quebec.
1.0 1.2 1.3 1.00.8 1.2 1.3 3.8
$0.03 $0.04 $0.04 $0.02$0.01 $0.03 $0.04 $0.31
0.000.020.040.060.080.100.12
$0.00$2.00$4.00$6.00$8.00
$10.00$12.00
Event Summary: As a growth-outperformer with an increasingly defensive profile TECSYS is a rare-find in our sector. Recent results (July 6) deepened our conviction in the investment thesis: margin expansion-driven earnings growth is set to outperform that at its closest peers. Structural market drivers in the US healthcare supply chain remain unscathed. Further, the launch of pharma SCM software in late C2016e speaks of new sources of revenue in FH217e. With Healthcare overtaking Complex Distribution (CD) in the sales mix (F2017e: 50%+), lower exposure to cyclical markets looks attractive amid renewed macro malaise. Should macro co-operate, an on-going recovery in CD adds to the list of revenue catalysts in CH216e. We are confirming TCS as our top pick for 2016e despite a market-beating 29% YTD performance.
CH116 tale of the tape (+29% YTD): TCS had a slow start to 2016e. First, macro jitters in early 2016e led CD customers to delay orders. The largely industrial base feared a cyclical macro downturn. Elsewhere, non-cyclical Healthcare revenues fell short of expectations in FQ316 (January 2016 end). Clients delayed orders to March-April in anticipation of a new PoU product cycle. As the next-gen PoU launched revenues caught up to prior expectations, rising 35% q/q in FQ416. With structural end market adoption in the US healthcare space intact, a sustained earnings growth potential at TCS stands confirmed.
Growth drivers in CH216e: We see a set of converging catalysts in CH216e: (i) new PoU product cycle, recovery at CD, and new sources of revenue from pharma supply chain (SC). PoU’s revenue contribution of c. $2.5M in FQ416 established the base for F2017e. Also, Pharma SC software is set to launch in late C2016e with a meaningful sales contribution in FH217e (early C2017e). Early customer deployments in CH216e and growing pipeline (6-7 IDNs) are expected to drive a positive sentiment in the latter half of this calendar year. Healthcare’s growing dominance of the sales mix reduces TCS’s exposure to cyclical end markets (CD). Thus, the earnings growth outperformer (vs. peers) gains a more defensive profile. Should the macro remain stable, management expects a recovery at CD with $7-8M contracts booked in F2017e (vs. $4.5M in F2016e).
Puts and takes: The backlog of $44.6M points to a Professional Services revenue base of $6.5M in FQ117e (9 months in the backlog). Contracts of $25M imply $4M in recurring Services quarterly run-rate and $2.0-2.5M of Product maintenance. We see $16.9M (+13% y/y) in a seasonally slow FQ117 with a typical bookings upside in mid-F2017e. Our F2017e top line of c. $72M (7% y/y) is based on c. $51M booked in the year. With the opex-freeze confirmed, we see EBITDA% expansion of 200bps+ to 12.8% in F2017e.
Valuation: Our current estimates point to EBITDA growth of c. 30% CAGR (F2015-2018e). In turn, TCS’ performance is set to outstrip those at SCM peers (high-teens at Descartes Systems [DSG, NR] and Kinaxis [KSX, NR]). In F2018e, we see TCS reaching a stable mid-teen EBITDA%. We used our new EBITDA forecasts (ex. capitalization) in that year and industry-like 14x EV/EBITDA to derive a new PT of $11. With 16% upside (ex. dividends) our Buy rating remains intact. Risks include protracted sales cycles and macro pressures.
TCS-TSX: $9.50 Buy
$11.00 Target
TECSYS Inc. (TCS-TSX) | July 12 2016
Page 30 of 41 Andrej Krneta, B. Eng, MBA | 416.687.6656 | [email protected]
TECSYS Inc. (TCS-T, CAD $9.50) - Data Sheet BUY | PT: CAD $11.00Company Description Consensus 3 Mths Ago Current Return
Rating: Buy BuyTarget: $10.70 $11.00 17%Median: $11.00 $11.00 17%High: $12.00 $13.50 43%Low: $9.50 $9.50 1%Consensus DistributionSector Outperform/Buy 5Sector Perform/Hold 0Sector Underperform/Sell 0# Est 5
Historical Valuations
CAPITAL IQ - CONSENSUS BASED NTM EV/EBITDA CAPITAL IQ - CONSENSUS BASED NTM EV/SALES
Key Financial MetricsFinancial Summary/Key Metrics 2014 2015 Q116 Q216 Q316 Q416 2016 2017E Key Statistics ValueConsolidated ($M) 52-Week High $10.11 6%Net Sales 46.6 57.3 14.9 15.8 15.6 21.1 67.5 72.1 52-Week Low $6.35 (33%)
Growth y/y 6.4% 23.0% 14.7% 16.3% 4.5% 34.1% 17.8% 6.9% Avg Vol (3-Mo) 0.01 Cons. 46.2 56.3 15.3 15.6 16.6 20.3 66.6 71.4 Shares Outstanding 12.32 Cons. 3 Mts. Ago 46.2 56.3 15.3 15.6 16.6 16.8 63.1 69.2 Market Cap 117.0
Net Debt -5.1EBITDA 4.1 4.4 0.8 1.2 1.3 3.8 7.2 9.2 Enterprise Value 111.9
Margin 9% 8% 6% 7% 9% 18% 11% 13% Div Yield 1%Cons. 4.1 4.9 0.8 1.3 1.5 3.0 6.2 8.3 FYE Apr/15Cons. 3 Mts. Ago 4.1 4.9 0.8 1.3 1.5 1.5 4.8 7.6 Employees 346
EPS $0.16 $0.13 $0.01 $0.03 $0.04 $0.31 $0.39 $0.44 Top Inst. Ownership M Shares ∆ 6 Mnths % HeldCons. $0.16 $0.18 $0.03 $0.06 $0.07 $0.14 $0.24 $0.44 Fiera Capital 1.46 0.00 11.9%Cons. 3 Mts. Ago $0.16 $0.18 $0.03 $0.06 $0.07 $0.06 $0.14 $0.36 Edgepoint 0.62 0.00 5.0%
Mackenzie 0.24 0.00 2.0%Cash 8.8 10.8 11.9 9.1 8.8 9.7 9.7 15.6 Penderfund Capital Mgmt 0.22 0.00 1.8%Net Debt (6.3) (6.0) (7.5) (5.0) (5.1) (6.4) (6.4) (12.3) Pembroke Management 0.21 0.00 1.7%
Front Street 0.05 0.00 0.4%FCF 5.3 (1.0) 1.5 (1.8) 0.4 1.6 1.6 7.3 Ldic Inc. 0.01 0.00 0.1%
Counsel Portfolio 0.01 0.00 0.1%Operating/Segmented Summary ($M) AGF Management 0.00 0.00 0.0%Total Products Revenue 14.9 21.1 4.2 5.1 4.7 9.0 23.0 25.1 Timelo Investment Mgmt NA NA NA
% of total 32% 37% 28% 32% 30% 43% 34% 35%Valuation F2016E F2017E F2018E
Software Products 8.1 12.5 2.1 3.0 2.5 5.9 13.6 14.7 EBITDA 7.2 9.2 10.7% of total 17% 22% 14% 19% 16% 28% 20% 20% Net Change in WC (3.2) 0.7 (1.1)
Capex (1.1) (1.6) (1.8)Third-party Hardware & Software 6.8 8.6 2.1 2.1 2.2 3.1 9.4 10.3 FCFF 2.1 7.0 6.1
% of total 15% 15% 14% 13% 14% 15% 14% 14%WACC 10.9%
Services Revenue 30.2 34.3 10.3 10.2 10.5 11.5 42.5 44.7 Term. Growth Rate 2.0%% of total 65% 60% 69% 65% 67% 54% 63% 62% Current 1-Yr TGT
Terminal Value PV 58.4Reimbursable Expenses 1.5 1.8 0.4 0.5 0.4 0.6 1.9 2.4 Equity Value 135.5 150.3% of total 3% 3% 3% 3% 3% 3% 3% 3% DCF Value $11.00 $12.20
Comparables
1 Week 1 Month 3 Month YTD 1 Year F2016E F2017E F2016E F2017E F2016E F2017ETECSYS Inc. $9.50 $11.00 1.3% 17% 2.2% -4.0% 31.9% 28.9% 5.6% 67.5 72.1 7.2 9.2 $0.39 $0.44Amber Road, Inc. ($US) $7.88 $9.50 0.0% 21% 2.2% 19.4% 52.1% 54.8% 20.5% 83.0 NA -2.3 NA -$0.56 -$0.42Fleetmatics Group PLC ($US) $42.37 $49.43 0.0% 17% (2.2%) (5.7%) 12.4% (16.6%) (4.0%) 405.8 463.0 140.2 166.7 $1.76 $2.12Manhattan Associates, Inc. ($US) $66.46 $72.75 0.0% 9% 3.6% (2.4%) 18.8% 0.4% 11.5% 676.8 738.9 235.7 NA $1.76 $1.97SciQuest, Inc. ($US) $17.66 $17.75 0.0% 1% - (0.1%) 23.6% 36.2% 29.3% 118.9 NA 26.9 NA $0.34 $0.39SPS Commerce, Inc. ($US) $60.10 $69.33 0.0% 15% (0.8%) 5.5% 40.2% (14.4%) (11.7%) 229.6 NA 34.8 NA $0.94 $1.23The Descartes Systems Group Inc $24.48 $22.56 0.0% -8% (0.9%) (8.0%) 0.2% (12.1%) 21.2% 204.6 226.2 69.3 79.4 $0.70 $0.79Kinaxis Inc. $51.53 $40.78 0.0% -21% (0.7%) 1.7% 13.9% 9.8% 87.0% 134.3 159.1 37.5 47.1 $0.81 $0.98Peer Average 4.8% 0.2% 1.5% 23.0% 8.3% 22.0%
FCF Yield EV/Sales Sales Growth (%) EV/EBITDA EBITDA Margin (%)F2015 F2016E C2015 C2016E C2017E C2015 C2016E C2017E C2015 C2016E C2017E C2015 C2016E C2017E
TECSYS Inc. 112 -0.9% 1.5% 1.8x 1.5x 1.5x 15% 21% 0% 66.0x 12.6x 12.6x 3% 12% 12%Amber Road, Inc. ($US) 213 -7.2% -0.9% 3.3x 3.2x 2.9x 4% 10% 13% NA NA NA -34% -8% -3%Fleetmatics Group PLC ($US) 1,527 2.5% 3.9% 6.3x 5.1x 4.3x 23% 21% 18% 21.5x 12.7x 10.4x 24% 34% 35%Manhattan Associates, Inc. ($US) 4,533 2.6% 2.9% 9.0x 8.0x 7.2x 13% 11% 10% 26.2x 21.0x 18.8x 30% 34% 35%SciQuest, Inc. ($US) 386 2.0% 2.5% 3.3x 3.2x 3.1x 3% 4% 8% 41.7x 14.6x 12.5x 8% 21% 23%SPS Commerce, Inc. ($US) 917 0.6% 1.2% 7.2x 5.8x 4.8x 24% 22% 19% 55.3x 35.1x 26.4x 10% 14% 15%The Descartes Systems Group Inc 1,735 2.2% 2.7% 7.7x 9.7x 6.4x -21% 52% 11% 21.8x 18.9x 16.5x 45% 34% 35%Kinaxis Inc. 1,175 2.8% 1.8% 11.4x 12.0x 7.2x -6% 68% 21% 31.3x 26.5x 21.2x 38% 27% 28%Peer Average 0.8% 2.0% 6.9x 6.7x 5.1x 6% 27% 14% 33.0x 21.5x 17.6x 17% 22% 24%*All financial values in CAD unless otherwise notedSource: Echelon Wealth Partners, Company Reports and Filings, Capital IQ, Bloomberg
EBITDA EPSReturn
Enterprise Value
TECSYS Inc. provides supply chain management (SCM) systems that helps corporates manage warehouse facilities, distribution networks, and logistics. The Company offers its solutions to the healthcare, high-volume distribution, and third-party logistics (3PL) industries. TECSYS is headquartered in Montreal, QC.
RevenueComparables and Peer Analysis Price Target Div Yield Return
ComparablesMultiples Analysis
0
0.05
0.1
0.15
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0.25
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$0.00
$2.00
$4.00
$6.00
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$10.00
$12.00
Jun-
14
Jul-1
4
Aug-
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ar-1
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ar-1
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Volume (M
Shares)
Stoc
k Pr
ice
($)
Last Sale Price 50-Day MA 200-Day MA
3.0x
8.0x
13.0x
18.0x
23.0x
28.0x
33.0x
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14
Jul-1
4
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14
Sep-
14
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-14
Nov
-14
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14
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15
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15
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Apr-1
5
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-15
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5
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Nov
-15
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15
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16
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16
Mar
-16
Apr-1
6
May
-16
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Tecsys Inc. Manhattan Associates, Inc. The Descartes Systems Group Inc
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
Jun-
14
Jul-1
4
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14
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-14
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-14
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14
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15
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16
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-16
Apr-1
6
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-16
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16
Tecsys Inc. Manhattan Associates, Inc. The Descartes Systems Group Inc
0
0.05
0.1
0.15
0.2
0.25
0.3
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
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14
Jul-1
4
Aug-
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Sep-
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Feb-
15M
ar-1
5
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5
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-…
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5
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ar-1
6
Apr-1
6
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16
Volume (M
Shares)
Stoc
k Pr
ice
($)
Last Sale Price 50-Day MA 200-Day MA
3.0x
8.0x
13.0x
18.0x
23.0x
28.0x
33.0x
Aug-
13
Oct
-13
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14
Apr-1
4
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Apr-1
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Manhattan Associates, Inc. The Descartes Systems Group Inc Tecsys Inc.
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
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13
Oct
-13
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Manhattan Associates, Inc. The Descartes Systems Group Inc Tecsys Inc.
TECSYS Inc. (TCS-TSX) | July 12 2016
Page 31 of 41
Exhibit 1 – TECSYS Income Statement (all figures in $CAD 000s except EPS)
Source: Echelon Wealth Partners Inc., Company Reports and Filings
Income Statement 2015 Q116 Q216 Q316 Q416e 2016e Q117e Q217e Q317e Q417e 2017e 2018e
($CAD K) Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Apr-17 Apr-18
Products 21,101 4,212 5,092 4,707 9,033 23,044 5,816 5,448 6,085 5,913 23,262 24,892as % of total sales 37% 28% 32% 30% 43% 34% 34% 31% 33% 31% 32% 33%
Services 34,347 10,316 10,172 10,502 11,489 42,479 10,511 11,420 11,794 12,786 46,512 48,810as % of total sales 60% 69% 65% 67% 54% 63% 62% 65% 64% 66% 64% 64%
Reimbursable Expenses 1,836 403 498 420 622 1,943 600 620 550 600 2,370 2,500as % of total sales 3% 3% 3% 3% 3% 3% 4% 4% 3% 3% 3% 3%
Total Revenues 57,284 14,931 15,762 15,629 21,144 67,466 16,927 17,488 18,429 19,299 72,144 76,202yoy growth 23% 15% 16% 4% 34% 18% 13% 11% 18% -9% 7% 6%
Cost of sales 29,711 7,511 7,972 7,710 9,448 32,641 8,253 8,407 9,009 9,118 34,786 36,357
Gross Profit 27,573 7,420 7,790 7,919 11,696 34,825 8,674 9,081 9,421 10,181 37,357 39,845Gross margin (%) 48% 50% 49% 51% 55% 52% 51% 52% 51% 53% 52% 52%
Sales & Marketing 12,727 3,592 3,503 3,601 4,256 14,952 3,620 3,710 3,800 3,670 14,800 15,060as % of total sales 22% 24% 22% 23% 20% 22% 21% 21% 21% 19% 21% 20%
General & Administrative 5,899 1,369 1,391 1,387 1,839 5,986 1,480 1,520 1,560 1,520 6,080 6,540as % of total sales 10% 9% 9% 9% 9% 9% 9% 9% 8% 8% 8% 9%
Research & Development 7,000 2,252 2,395 2,327 2,364 9,338 2,448 2,472 2,472 2,496 9,888 9,984as % of total sales 12% 15% 15% 15% 11% 14% 14% 14% 13% 13% 14% 13%
EBITDA 4,401 831 1,153 1,343 3,840 7,167 1,815 2,033 2,223 3,143 9,214 10,727EBITDA margin (%) 8% 6% 7% 9% 18% 11% 11% 12% 12% 16% 13% 14%
EBITDA (ex. capitalization) 1,559 95 516 843 3,408 4,862 1,278 1,516 1,725 2,645 7,164 9,327EBITDA margin (%) 3% 1% 3% 5% 16% 7% 8% 9% 9% 14% 10% 12%
Depreciation & Amortization 2,468 642 668 674 706 2,690 695 660 640 655 2,650 2,491
EBIT 1,947 207 501 604 3,237 4,549 1,126 1,379 1,589 2,495 6,589 8,261EBIT margin (%) 3% 1% 3% 4% 15% 7% 7% 8% 9% 13% 9% 11%
Net Finance & Other 119 40 32 -49 123 146 35 37 39 39 150 150
Profit before tax 1,828 167 469 653 3,114 4,403 1,091 1,342 1,550 2,456 6,439 8,111
Tax (credit)/charge 313 98 102 110 -711 -401 164 201 232 368 966 1622Effective Tax Rate 17% 59% 22% 17% -23% -9% 15% 15% 15% 15% 15% 20%
Net Profit 1,515 69 367 543 3,825 4,804 927 1,141 1,317 2,088 5,473 6,489Profit margin (%) 3% 0% 2% 3% 18% 7% 5% 7% 7% 11% 8% 9%Basic Shares (M) 12 12 12 12 12 12 12 12 12 12 12 12Diluted Shares (M) 12 12 12 12 12 12 12 12 12 12 12 12
Basic EPS ($) 0.13 0.01 0.03 0.04 0.31 0.39 0.08 0.09 0.11 0.17 0.44 0.53Diluted EPS ($) 0.13 0.01 0.03 0.04 0.31 0.39 0.08 0.09 0.11 0.17 0.44 0.53
Page 32 of 41 Amr Ezzat | 514.905.7944 | [email protected]
12 July 2016 Special Situations
Pure Technologies Ltd. Introducing Pure as Top Pick for H216
Projected Total Return: 23.9% Valuation: DCF (11.0% discount,
4.0% GRIP)
Market DataMarket Capitalization 321.1Net Cash 9.8Enterprise Value 311.3Basic Shares S/O 53.7Fully Diluted Shares S/O 53.9Avg. Daily Volume (K) 44.852 Week Range $3.80 - $7.39Dividend Yield 2.0%
Revisions Current Old2016E Revenue 131.3 NA2016E ADJ. EBITDA 22.2 NA2016E ADJ. FD EPS $0.13 NA
Financial MetricsFYE Dec 31 2015A 2016E 2017E 2018ERevenue 104.4 131.3 156.5 186.6
Growth y/y 34.2% 25.7% 19.2% 19.2%
ADJ. EBITDA 13.3 22.2 28.3 35.5Margin 12.7% 16.9% 18.1% 19.0%
ADJ. EPS FD -0.03 0.13 0.25 0.36Growth y/y NA NA 94.5% 45.0%
Valuation DataFYE Dec 31 2015A 2016E 2017E 2018EEV/Sales 3.0x 2.4x 2.0x 1.7xEV/ADJ. EBITDA 23.4x 14.0x 11.0x 8.8xP/E NA 46.6x 23.9x 16.5x
Quarterly DataQ1 Q2 Q3 Q4
Rev. '15 14.7 29.4 29.6 30.8Rev. '16 25.1 31.0 36.6 38.6EBITDA '15 -2.1 4.6 3.9 6.9EBITDA '16 1.1 5.3 7.6 8.3FD EPS '15 -0.07 0.01 0.01 0.02FD EPS '16 -0.03 0.02 0.07 0.08
Company DescriptionPure Technologies Ltd. is engaged in development andapplication of technologies for inspection, monitoringand managing physical infrastructure, including waterand hydrocarbon pipelines, buildings and bridges. TheCompany's main business streams include sale ofmonitoring systems; technical services utilizing pipe lineinspection , leak detection and condition assessmenttechnologies, and specialized engineering services. TheCompany is based in Calgary, AB.
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
$0.00
$1.00$2.00
$3.00
$4.00
$5.00
$6.00
$7.00$8.00
Jul-15 Oct-15 Jan-16 Apr-16
Volume (mm) Price
We are pleased to introduce Pure Technologies (“PUR”, “Pure”, or “the Company”) as one of Echelon Wealth Partners’ research top picks for H216.
Investment Thesis: As we expanded in our initiation note (initiating note - April 12, 2016), we see the recent share price weakness (down 31% from its March 2015 high) as an opportunity to consolidate a position in a dominant player supported by industry tailwinds.
We attribute the underperformance to lacklustre results through 2015 marked by various concerns, namely the postponement of several anticipated large projects, combined with a temporary slowdown in the recently acquired Wachs Water Services (“WWS” or “Wachs”) core business, resulting in revenue that was below expectations with consequent margin compression; we view these as short-term and non-recurring issues that have no bearing on our long-term bullish thesis.
We urge investors to shrug off the short-term disappointments in favour of the long-term business fundamentals. Given the lumpy nature of the business quarter to quarter, we take a longer-term view when evaluating the merits of an investment in Pure. Namely, in our Target Scenario we see revenue CAGR of 21.4% through 2018 together with considerable operating leverage, driving an impressive 38.8% EBITDA CAGR during the same period. We believe that the Company has a dominant position in a high barrier to entry business, helping sustain its revenue growth and margin profile going forward.
Catalysts and Drivers: We believe share performance will be driven by the Company’s quarterly execution in light of last year’s missteps. Specifically, we look for:
Strong organic growth performance, specifically in Q316 and Q416: We look for 20%+ organic growth rates in the latter quarters of the year (5% ahead of Street estimates) confirming continued traction at PureHM and a turnaround of WWS performance. Q116 sales at PureHM were $4.7M, up from $1.4M last year driven by increased work in the US and increased product acceptance for both the Spectrum XLI and SmartBall technologies for the oil and gas sector. Wachs’ performance seems to have stabilized in Q116 with revenues coming in at $4.2M ($4.3M in Q415), which should come as a relief to investors. We now look for Wachs to contribute to growth.
Considerable margin expansion from current levels: Given the high fixed structure, the second half of the year seasonality imbedded in the business, and good cost control, we see considerable operating leverage going forward. Namely, our Adjusted EBITDA margin expands from 4.4% in Q116 to 21.4% in Q416. We believe delivery of such results will go a long way in restoring the Company’s premium valuation.
Valuation: Pure trades at 11x 2017 EBITDA. Our $7.25 PT implies a 2017 EBITDA multiple of 13x, below the Company’s historical forward multiple of 14x. Given the significant operating leverage and the long-term secular growth trends Pure is exposed to, we opt for a DCF analysis with an 11% discount rate and a 4% GRIP (implied exit multiple of 7.5x) to derive our valuation. Our bullish thesis is supported by robust downside protection (-27%) relative to attractive upside potential (24% for our target case and 57% for our upside case).
PUR-TSX: $5.95 Buy
$7.25 Target
Pure Technologies Ltd. (PUR-TSX) | July 12 2016
Page 33 of 41 Amr Ezzat | 514.905.7944 | [email protected]
Exhibit 1 – DCF Analysis and Sensitivity Analysis
Source: Echelon Wealth Partners Inc.
Pure Technologies Ltd. (PUR-TSX) | July 12 2016
Page 34 of 41 Amr Ezzat | 514.905.7944 | [email protected]
Pure Technologies Ltd. (PUR-T, $5.95) - Data Sheet BUY | PT: $7.25
Company Description Consensus 3 Mths Ago Current ReturnRating: Buy BuyTarget: $7.38 $7.35 26%Median: $7.38 $7.50 28%High: $8.00 $7.50 28%Low: $7.00 $7.00 20%Consensus DistributionSector Outperform/Buy 5Sector Perform/Hold 0Sector Underperform/Sell 0# Estimates 5
Historical Valuation
NTM EV/EBITDA NTM P/E
Key Financial MetricsFinancial Summary 2015A Q116A Q216E Q316E Q416E 2016E 2017E 2018E Key Statistics ValueRevenue 104.4 25.1 31.0 36.6 38.6 131.3 156.5 186.6 52-Week High $7.39 24%
Growth y/y 34.2% 71.3% 5.3% 23.8% 25.4% 25.7% 19.2% 19.2% 52-Week Low $3.80 (36%)Cons. 109.9 20.8 30.3 35.0 36.6 127.1 147.6 177.2 Avg Vol (3-Mo) 45kCons. 3 Mts. Ago 109.9 20.8 34.9 35.0 36.3 125.9 146.9 177.4 Shares Outstanding (FD) 54
Adjusted EBITDA 13.3 1.1 5.3 7.6 8.3 22.2 28.3 35.5 Market Cap $319.47Margin 12.7% 4.4% 17.0% 20.7% 21.4% 16.9% 18.1% 19.0% Net Debt (Net Cash) -10Cons. 12.3 0.3 4.6 7.8 8.2 21.9 28.3 35.5 Enterprise Value $309.71Cons. 3 Mts. Ago 12.3 0.3 6.7 7.4 8.0 22.0 28.3 34.7 Div Yield 2.0%
Diluted Adj. EPS -0.03 -0.03 0.02 0.07 0.08 0.13 0.25 0.36 FYE Dec 31Growth y/y NA NA 30% 342% 300% NA 94% 45% Employees ~500Cons. 0.05 -0.04 0.02 0.07 0.07 0.12 0.24 NACons. 3 Mts. Ago 0.05 -0.04 0.04 0.06 0.07 0.14 0.23 0.34
Top Ownership M Shares ∆ 6 Mnths % HeldSegmented Sales 2015A Q116A Q216E Q316E Q416E 2016E 2017E 2018E Pictet Asset Management Limited 2.40 0.00 4.5%Equipment sales 7.7 0.4 0.6 1.4 1.1 3.5 3.8 4.1 1832 Asset Management L.P. 1.39 0.00 2.6%
Growth y/y -56% -81% -80% 5% 5% -54% 8% 8% Gilder Gagnon Howe & Co. Llc 1.24 0.00 2.3%% Total Sales 7% 2% 2% 4% 3% 3% 2% 2% Cibc Asset Management Inc. 1.10 0.00 2.0%
Inspection and consulting services 87.3 21.8 27.2 32.0 34.5 115.5 138.6 166.3 Pembroke Management Ltd. 1.03 0.00 1.9%Growth y/y 68% 101% 17% 25% 25% 32% 20% 20% Calvert Investment Management, Inc. 0.93 0.00 1.7%% Total Sales 84% 87% 88% 87% 89% 88% 89% 89% Telemark Asset Management, Llc 0.90 0.00 1.7%
Monitoring, licensing and technica 9.4 2.9 3.1 3.2 3.1 12.3 14.1 16.3 Kleinwort Benson Investors Dublin Ltd. 0.83 0.00 1.5%Growth y/y 11% 79% 5% 22% 40% 31% 15% 15%% Total Sales 9% 12% 10% 9% 8% 9% 9% 9%
Total Sales 104.4 25.1 31.0 36.6 38.6 131.3 156.5 186.6Growth y/y 34% 71% 5% 24% 25% 26% 19% 19%% Total Sales 100% 100% 100% 100% 100% 100% 100% 100%
Return EV / Sales EV / EBITDA P / E LTM EBITDA Rev. Growth Dividend LTM1 Week 1 Month 3 Month YTD 1 Year LTM NTM LTM NTM LTM NTM Margin 2016E Yield ROE
Water Technology CompsAmerican Water Works Company, I (2.0%) 6.4% 17.6% 38.0% 62.4% 6.7x 6.4x 14.0x 13.1x 31.3x 28.9x 47.8% 6.4% 1.8% 9.5%Pentair plc 5.9% 4.9% 20.5% 25.8% (2.5%) 2.4x 2.4x 13.6x 12.6x NM 14.5x 17.7% 3.3% 2.1% (1.8%)Xylem Inc. 4.6% 2.2% 13.8% 28.6% 32.6% 2.5x 2.4x 14.9x 13.5x 24.5x 21.9x 16.3% 2.6% 1.3% 16.5%Aqua America Inc. (2.7%) 1.6% 9.2% 15.3% 35.2% 9.7x 9.4x 18.9x 16.3x 29.9x 26.1x 55.6% 2.6% 2.1% 11.9%Flowserve Corp. 1.8% (9.0%) 9.4% 10.0% (6.1%) 1.6x 1.8x 9.9x 11.1x 21.8x 17.8x 16.2% -10.9% 1.7% 16.1%IDEX Corporation 3.1% (1.4%) 3.9% 10.6% 9.8% 3.5x 3.3x 13.9x 13.4x 22.8x 22.1x 25.3% 4.8% 1.6% 19.4%Watts Water Technologies, Inc. 5.2% 6.0% 12.3% 22.7% 21.2% 1.6x 1.7x 17.0x 11.2x NM 21.9x 9.7% -3.6% 1.2% (13.7%)Mueller Water Products, Inc. 3.8% 4.1% 21.6% 37.6% 34.1% 2.0x 1.9x 12.1x 10.7x 31.6x 22.4x 16.5% 1.2% 1.0% 17.3%Itron, Inc. 0.9% (0.9%) 9.3% 20.6% 36.5% 1.0x 1.0x 13.7x 9.8x 130.4x 20.3x 7.4% 2.3% - 2.3%Hyflux Ltd (2.4%) 5.3% 1.7% 6.2% (29.8%) 2.8x 3.0x 18.2x 18.7x NM 46.2x 17.4% 29.4% 2.9% 3.7%Badger Meter Inc. 3.5% (0.2%) 15.7% 27.4% 16.9% 2.9x 2.7x 16.2x 16.0x 35.9x 30.3x 17.6% 9.9% 1.1% 13.1%Aegion Corporation 4.9% 2.9% (1.1%) 5.6% 13.8% 0.7x 0.7x 7.9x 7.0x NM 14.7x 9.0% -3.5% - (2.2%)Lindsay Corporation 1.4% (4.2%) 1.4% (4.3%) (18.7%) 1.5x 1.5x 17.6x 12.3x 84.7x 27.0x 8.7% -11.2% 1.6% 3.3%Median 2.5% 1.4% 1.6% 5.9% (2.4%) 2.1x 2.1x 16.9x 14.1x 60.3x 28.7x 13.2% 3.2% 1.3% 3.5%
Pure Technologies (Street) (3.1%) 2.4% 30.5% 27.4% (13.1%) 2.7x 2.4x 22.7x 13.2x NM 40.1x 11.9% 21.7% 2.0% (0.2%)
Source: Echelon Wealth Partners, Company Reports and Filings, Capital IQ
Pure Technologies Ltd. is engaged in development and application of technologies for inspection, monitoring and managing physical infrastructure, including water and hydrocarbon pipelines, buildings and bridges. The Company's main business streams include sale of monitoring systems; technical services utilizing pipe line inspection , leak detection and condition assessment technologies, and specialized engineering services. The Company is based in Calgary, AB.
0.00
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1.40
$0.00$1.00$2.00$3.00$4.00$5.00$6.00$7.00$8.00$9.00
$10.00
Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16
Volume (M
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ice
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0.0x20.0x40.0x60.0x80.0x
100.0x120.0x
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Page 35 of 41 Fadi Benjamin, CFA, P.Eng. | 416.842.1791 | [email protected]
12 July 2016 Special Situations
exactEarth Ltd. Industry Leader in a Growing Market with a Favourable Risk/Return Trade-off
Projected Return: 53.8% Discount Rate: 18.0%
Terminal Year: 4.0x EV/EBITDA
Source: FactSet
Market DataMarket CapitalizationNet DebtEnterprise ValueBasic Shares O/SFully Dil. Shares O/SAvg. Daily Volume (M)52 Week Range $1.22 - $4.00Dividend YieldFinancial MetricsFYE - Oct 31RevenueAdj. EBITDAEPSFCFNet Debt:EBITDAFCF YieldValuation DataDCF - Current/Target
CurrentPeersTargetCurrentPeersTarget
Quarterly Data
Revenues 20162017
Adj.EBITDA 20162017
Company Description
EV/ Revenues
28.1-19.6
8.521.621.60.07
0.0%
18.89.2 0.6 0.1
2015A 2016E 2017E26.6 18.9
EV/ Adj.EBITDA
0.9x 15.0x 56.7x18.4x
0.9x 1.2x 1.3x
Q1 Q2 Q3
41.7x 158.1x
(11.1)-2.1x -34.7x -131.5x
(23.2%) (39.6%) (5.9%)
(1.7)
3.6x 3.1x 3.1x
($0.09) ($1.53) ($0.22) (6.5)
0.3x 0.4x 0.5x
$2.35 $2.84 $3.16
18.7x 13.1x2.6x
Q46.4 5.2 3.2 4.15.0 4.3 4.2 5.3
exactEarth Ltd. is a leading provider of global maritimevessel data for ship tracking and maritime situationalawareness by detecting AIS transmissions from Spacevia a satellite base maritime surveillance method(Satellite-AIS) across all regions of the world's oceanand unrestricted by terrestrial limitations. TheCompany's supply chain include owned and operatedLEO satellite constellation, receiving ground stations,data processing and distribution centers, and patented decoding algorithms. The Company was established in2009 and is headquartered in Cambridge Ontario.
1.5 (0.2) (0.5) (0.2)0.2 (0.1) (0.2) 0.3
0.0
0.5
1.0
1.5
2.0
Feb-16 Mar-16 Apr-16 May-16 Jun-16$0.0
$1.0
$2.0
$3.0
$4.0
Volume (M) Price
Company Thesis: exactEarth Ltd. (“XCT” or “the Company”) is the undisputed industry leader for satellite-based AIS detection with a leadership position supported by its proprietary technology for high quality detection of AIS transmissions from space. Our thesis is based on the Company’s ability to acquire market share in the largely underserviced maritime information and AIS markets. Specifically, the Company’s technological advantage rests with its ability to offer a high quality, low cost alternative for vessel detection in high density areas and its unique technology for detecting small vessels such as those used by fishing fleets. A transformational deal with Harris Corporation (HRS-US, NR) (“Harris Agreement”) will allow exactEarth to attain real-time continuous global coverage through access to the Iridium (IRDM-NYSE, NR) NEXT constellation and provide a significant competitive advantage versus peers and new entrants. The Company’s competitive advantage, market opportunities, and near-term catalysts support our view that the current share price represents an exceptional entry point with limited downside risk and strong upside potential. We note that XCT shares have 91 cents of cash and only 39 cents of enterprise value for a business that we expect will generate 88 cents of sales per share.
Rough Start in FH116: XCT became a public company last February as result of an acquisition and spinout transaction when its parent company COM DEV got acquired by Honeywell (HON-NYSE, NR). FH116 was a challenging half for the Company even after winning a bid from the Government of Canada (“GoC”) that surprisingly required a small percentage of XCT’s S-AIS capabilities. The contract represented a $6.6M drop in projected annual revenues. In our opinion, the ensuing 50% decrease in the share price is overdone and does not reflect the value of XCT’s technology and the continued traction of its products and services.
Forward Catalysts: We are bullish on the market opportunities to implement S-AIS for maritime situational awareness and in applications ranging from maritime security to combating Illegal Unreported and Unregulated Fishing (IUUF) activity. Catalysts for the stock in the near term include the roll-out of data analytics tools for the SaaS platform in FH216 and booking revenues from these tools by F2017; expanding into the Chinese market with the EV Image exclusivity distribution agreement that should begin contributing to the top line in a meaningful manner in F2017; the launch of the first patch of Iridium NEXT satellites with four XCT S-AIS payloads, increasing XCT’s space assets from 9 to 13, ahead of attaining real-time AIS detection capability by the middle of 2017 after a few more launches; and signing the first customer for small vessel detection by late F2017 to address the IUUF activity.
Valuation: Our one-year target price of $2.00 is based on a five-year DCF with an 18% discount rate and 4.0x terminal EV to EBITDA multiple. Our projections assume 30% organic growth in Subscription Service revenues excluding the impact from the GoC contract, and it also excludes growth opportunities from China and IUUF. We do not account for non-subscription based sales.
Recommendation: We have XCT as our Top Pick for 2016 with a Speculative BUY rating and $2.00 target price. At the current share price we see an attractive risk/reward trade-off for this technology leader that is well positioned in a growing industry. We anticipate these catalysts to take place as F2017 rolls in and shifts investor perspective of XCT.
XCT-TSX: $1.30 Speculative Buy
$2.00 Target
exactEarth Ltd. (XCT-TSX) | 12 July 2016
Page 36 of 41 Fadi Benjamin, CFA, P.Eng. | 416.842.1791 | [email protected]
exactEarth Ltd. (XCT-TSX, $1.30) - Data Sheet Spec BUY | PT: $2.00Company Description Consensus 3 Mths Ago Current Return
Rating: Buy HoldTarget: $4.75 $1.60 23%Median: $5.00 $1.50 15%High: $5.00 $2.00 54%Low: $4.25 $1.40 8%Consensus DistributionSector Outperform/Buy 1Sector Perform/Hold 3Sector Underperform/Sell 0# Est 4
Historical Valuations
FactSet - CONSENSUS BASED NTM EV/EBITDA FactSet - CONSENSUS BASED NTM EV/Sales
Key Financial MetricsFinancial Summary/Key Metrics 2015 Q116 Q216 Q316E Q416E 2016E 2017E 2018E 2019E 2020E Key Statistics ValueSegments 52-Week High $4.00 208%Subscription Services 20.6 5.4 4.1 3.2 4.1 16.8 18.8 24.4 31.7 41.3 52-Week Low $1.22 (6%)
Growth y/y 62.6% 6.5% 6.5% 6.5% 6.5% (18.6%) 12.0% 30.0% 30.0% 30.0% Avg Vol (3-Mo)(000) 67.1Data Products 3.9 0.3 1.0 0.0 0.0 1.3 0.0 0.0 0.0 0.0 Shares Outstanding 22
Growth y/y 162.8% 424.1% 424.1% 424.1% 424.1% (67.8%) (100.0%) NA NA NA Market Cap 28.1Other Products & Services 2.1 0.7 0.2 0.0 0.0 0.9 0.0 0.0 0.0 0.0 Net Debt -19.6
Growth y/y 24.4% 127.5% 127.5% 127.5% 127.5% (56.6%) (100.0%) NA NA NA Enterprise Value 8.5Consolidated Div Yield 0.0%Revenues 26.6 6.4 5.2 3.2 4.1 18.9 18.8 24.4 31.7 41.3 FYE Oct 31
Growth y/y 68.0% 17.8% (12.1%) (58.4%) (45.2%) (28.8%) (0.8%) 30.0% 30.0% 30.0%Consensus 26.6 6.4 5.2 3.8 4.0 19.3 19.4 22.9 31.7 41.3Cons. 3 Mts. Ago 26.6 6.1 6.0 6.1 6.6 25.2 32.3 40.8 - - Top Inst. Ownership M Shares ∆ 6 Mnths % Held
Adjusted EBITDA 9.2 1.5 (0.2) (0.5) (0.2) 0.6 0.1 3.6 4.7 6.1 Hisdesat Servicios Estrategic 5.82 3.00 26.9%Growth y/y 407.8% 68.1% NA NA NA (93.9%) (73.6%) NM 30.6% 30.5% Management 0.10 0.00 0.5%Margin 34.6% 22.8% (3.9%) (16.2%) (3.9%) 3.0% 0.8% 14.7% 14.8% 14.8%Consensus 9.0 1.5 (0.2) (0.8) (0.7) (0.2) (0.2) 2.4 4.7 6.1Cons. 3 Mts. Ago 9.0 0.6 0.4 0.6 1.0 3.5 6.6 10.9 - -
EPS ($0.09) ($0.09) ($1.39) ($0.06) ($0.04) ($1.53) ($0.22) ($0.09) ($0.04) $0.02Growth y/y (71.5%) 4.9% 1712.8% NA NA 1516.0% (85.7%) (59.7%) (54.8%) NAConsensus ($0.09) ($0.08) ($1.39) ($0.10) ($0.09) ($1.74) ($0.26) ($0.15) ($0.04) $0.02Cons. 3 Mts. Ago ($0.09) ($0.04) ($0.05) ($0.04) ($0.03) ($0.18) ($0.00) $0.19 $0.00 $0.00
FCF (6.5) (2.2) 0.4 (7.8) (1.5) (11.1) (1.7) 2.5 3.2 4.8 Growth y/y 314.3% (56.1%) (84.7%) 73.3% NA 70.2% (85.0%) NA 27.9% 49.4%
D&A 5.5 1.4 1.4 0.7 0.7 4.2 4.8 5.5 5.6 5.5 Valuation 2015 2016E 2017ECapex (14.2) (3.3) (1.8) (1.5) (1.5) (8.1) (2.0) (2.0) (2.0) (2.0) Revenue 26.6 18.9 18.8Cash 2.4 1.7 21.6 13.6 11.9 11.9 9.5 11.4 14.2 18.9 Adj. EBITDA 9.2 0.6 0.1Net Debt 44.5 49.1 (19.6) (11.8) (10.2) (10.2) (8.3) (10.8) (14.0) (18.9) Depreciation 5.5 4.2 4.8
Capex (14.2) (8.1) (2.0)Unlevered FCF (6.5) (11.1) (1.7)Discount Rate 18.00%Terminal EBITDA Multiple 4.00x
Current 1-Yr TGT % TotalPV FCF (1.6) 12.5 20.4%PV of Terminal Value 32.7 38.6 62.9%Equity Value 50.7 61.3 100.0%DCF Value $2.35 $2.84
ComparablesReturn Revenue EBITDA EPS
1 Week 1 Month 3 Month YTD 1 Year 2016E 2017E 2016E 2017E 2016E 2017EexactEarth Ltd. $1.30 $2.00 - 53.8% (3.7%) (13.3%) (53.1%) - - 18.9 18.8 0.6 0.1 ($1.53) ($0.22)ORBCOMM Inc. $9.94 $11.56 - 16.3% 3.9% 6.3% (3.6%) 37.3% 50.4% 199.3 224.1 50.2 59.7 ($0.11) ($0.02)DigitalGlobe, Inc. $21.90 $25.00 - 14.2% 10.7% 4.5% 29.1% 39.8% (19.0%) 687.7 721.2 347.6 373.3 $0.24 ($0.17)UrtheCast Corp. $0.95 $4.06 - 327.4% 2.2% (15.9%) (19.5%) (37.1%) (76.4%) 77.4 117.3 2.6 24.0 ($0.19) ($0.08)Kinaxis, Inc. $51.57 $53.13 - 3.0% 3.8% 0.4% 18.3% 9.9% 92.5% 144.5 175.0 39.1 48.9 $1.05 $1.28FleetMatics Group Ltd. $43.28 $49.43 - 14.2% 10.0% 1.0% 9.7% (14.8%) (7.0%) 343.4 405.8 115.1 140.2 $1.75 $2.12Descartes Systems Group Inc. $24.61 $29.01 - 17.9% 1.2% (8.8%) (3.1%) (11.6%) 21.2% 265.5 293.6 89.8 102.9 $0.45 $0.56Numerex Corp. Class A $7.46 $7.88 - 5.6% 4.8% 0.8% 18.6% 16.2% (12.2%) 71.8 78.2 4.3 11.2 ($0.17) $0.14I.D. Systems, Inc. $4.91 $7.25 - 47.8% 3.3% (1.7%) 5.5% 6.6% (15.1%) 45.8 54.5 1.3 5.9 $0.12 $0.44Peer Average - 55.6% 4.0% (3.0%) 0.2% 5.8% 4.3%
Enterprise FCF Yield EV/EBITDA EV/Sales P/E P/CFPSValue 2016 2017 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E
exactEarth Ltd. 8.5 - - 0.9x 15.0x 56.7x 0.3x 0.4x 0.5x NM NM NM NM NM NMORBCOMM Inc. 832.6 - - 19.7x 16.6x 14.0x 4.7x 4.2x 3.7x NM NM NM 19.6x 14.3x 10.8xDigitalGlobe, Inc. 2,458.8 8.5% 4.9% 6.9x 7.1x 6.6x 3.5x 3.6x 3.4x 84.2x 89.9x NM NM NM NMUrtheCast Corp. 101.7 - - -7.9x 38.5x 4.2x 2.5x 1.3x 0.9x NM NM NM NM NM NMKinaxis, Inc. 1,187.5 2.8% 3.2% 28.5x 30.3x 24.3x 9.4x 8.2x 6.8x 55.4x 49.2x 40.3x 24.7x 35.0x 29.5xFleetMatics Group Ltd. 1,555.4 4.1% 4.8% 16.2x 13.5x 11.1x 5.5x 4.5x 3.8x 27.4x 24.7x 20.4x 18.7x 15.6x 13.5xDescartes Systems Group Inc. 1,821.2 4.0% 4.7% 21.6x 20.3x 17.7x 7.1x 6.9x 6.2x 22.2x 54.9x 44.0x 24.3x 22.7x 19.7xNumerex Corp. Class A 149.1 - - 16.0x 34.6x 13.3x 1.7x 2.1x 1.9x NM NM 54.3x NM NM NMI.D. Systems, Inc. 58.6 - - -7.5x 46.0x 10.0x 1.4x 1.3x 1.1x NM 41.7x 11.2x NM NM NMPeer Average 4.8% 4.4% 10.5x 24.6x 17.5x 4.0x 3.6x 3.1x 47.3x 52.1x 34.0x 21.8x 21.9x 18.4x* exactEarth is based on Echelon Wealth Partners Inc. forecasts, all other comparables are based on FactSet consensus estimatesSource: Echelon Wealth Partners Inc., Company Reports and Filings, FactSet
Return
exactEarth Ltd. is a leading provider of global maritime vessel data for ship tracking and maritime situational awareness by detecting AIS transmissions from Space via a satellite base maritime surveillance method (Satellite-AIS) across all regions of the world's ocean and unrestricted by terrestrial limitations. The Company's supply chain include owned and operated LEO satellite constellation, receiving ground stations, data processing and distribution centers, and patented decoding algorithms. The Company was established in 2009 and is headquartered in Cambridge Ontario.
ComparablesMultiples Analysis
Comparables and Peer Analysis Price Target Div Yield
0
0.2
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0.6
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1
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1.4
1.6
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
Feb-
16
Feb-
16
Feb-
16
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Volume (M
Shares)
Stoc
k Pr
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($)
Last Sale Price 50-Day MA 200-Day MA
4.5x
9.5x
14.5x
19.5x
Aug-
14
Sep-
14
Oct
-14
Nov
-14
Dec-
14
Jan-
15
Feb-
15
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-15
Apr-1
5
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-15
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5
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-15
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-15
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16
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-16
Apr-1
6
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-16
Jun-
16
exactEarth Ltd. ORBCOMM Inc. Numerex Corp. Class A
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
Aug-
14
Sep-
14
Oct
-14
Nov
-14
Dec-
14
Jan-
15
Feb-
15
Mar
-15
Apr-1
5
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-15
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Numerex Corp. Class A ORBCOMM Inc. exactEarth Ltd.
exactEarth Ltd. (XCT-TSX) | 12 July 2016
Page 37 of 41 Fadi Benjamin, CFA, P.Eng. | 416.842.1791 | [email protected]
DISCOUNTED CASH FLOW VALUATION
Source: Echelon Wealth Partners Inc.
Fiscal Year Ending October 31 2015A 2016E 2017E 2018E 2019E 2020E 2021E CAGR %All Amounts in thousands of Canadian Dollars 2016 - 2021
Revenues $26,600 $18,929 $18,777 $24,410 $31,733 $41,254 $53,630 43.5%EBITDA 5,609 (28,073) 149 3,587 4,685 6,113 18,695 NAEBIT 571 (31,455) (4,612) (1,881) (908) 589 12,907( - ) Cash Taxes Paid - - - - - - -EBIAT 571 (31,455) (4,612) (1,881) (908) 589 12,907( + ) Depreciation and Amortization 5,476 4,198 4,762 5,468 5,593 5,524 5,788( + ) Share-based Compensation - 164 - - - - -( - ) Capital Expenditures (14,195) (8,108) (2,000) (2,000) (2,000) (2,000) (5,666)( - ) Increase in Non-cash Working Capital 1,059 (4,282) 183 913 511 662 (2,102)Unlevered Free Cash Flow ($6,529) ($11,112) ($1,667) $2,500 $3,196 $4,775 $10,927
PV of UFCF (11,438) (1,454) 1,848 2,002 2,535 4,917Cumulative PV UFCF (11,438) (12,893) (11,045) (9,042) (6,507) (1,591)
VALUATION ASSUMPTIONSDiscount Rate 18%Exit Year EV/EBITDA 4.0xTerminal Enterprise Value 74,781Implied Prepetuaty Growth Rate 3.0%Implied Terminal FCF Multiple 6.8xImplied FCF Yield 14.6%
EBITDA Multiple Valuation Current 1-Yr Target 2-Yr TargetTotal PV of UFCF (1,591) 12,478 14,451Exit Year EBITDA 18,695 18,695 18,695Terminal Value 74,781 74,781 74,781PV of Terminal Value 32,688 38,571 45,514Enterprise Value 31,097 51,050 59,965( - ) Debt (1,955) (1,675) (1,125)( - ) Preferred Securities - - -( - ) Non-Controll ing Interest - - -( + ) Cash 21,581 11,899 9,469( + ) Market Value of Equity Investments - -Equity Value 50,723 61,274 68,309Fully Diluted Shares Outstanding Basic 21,606 21,606 21,606DCF Value/ Share $2.35 $2.84 $3.16Target Share Price $1.30 $2.00 $3.00Discount to DCF Value 44.6% 29.5% 5.1%
Discount Rate$2.84 16.5% 17.0% 17.5% 18.0% 18.5% 19.0% 19.5%
5.5x $3.66 $3.61 $3.55 $3.51 $3.46 $3.41 $3.36Terminal EV/EBITDA 5.0x $3.42 $3.37 $3.33 $3.28 $3.24 $3.19 $3.15
Multiple 4.5x $3.19 $3.14 $3.10 $3.06 $3.02 $2.98 $2.944.0x $2.95 $2.91 $2.87 $2.84 $2.80 $2.76 $2.733.5x $2.72 $2.68 $2.65 $2.61 $2.58 $2.55 $2.513.0x $2.48 $2.45 $2.42 $2.39 $2.36 $2.33 $2.302.5x $2.25 $2.22 $2.19 $2.17 $2.14 $2.12 $2.09
exactEarth Ltd. (XCT-TSX) | 12 July 2016
Page 38 of 41 Fadi Benjamin, CFA, P.Eng. | 416.842.1791 | [email protected]
Source: Company reports, Echelon Wealth Partners Inc.
Source: Company reports, Echelon Wealth Partners Inc.
Source: Company reports, Echelon Wealth Partners Inc.
SUMMARY INCOME STATEMENTSFiscal Year Ending October 31 2015A 1Q16A 2Q16E 3Q16E 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E 1Q18E 2Q18E 3Q18E 4Q18E 2018E 2019E 2020E 2021EThousands of Canadian Dollars, except per share data Oct 31 Jan 31 Apr 30 Jul 31 Oct 31 Oct 31 Jan 31 Apr 30 Jul 31 Oct 31 Oct 31 Jan 31 Apr 30 Jul 31 Oct 31 Oct 31 Oct 31 Oct 31 Oct 31
Subscription Services 20,592 5,382 4,052 3,241 4,087 16,761 4,981 4,270 4,213 5,313 18,777 6,476 5,551 5,477 6,907 24,410 31,733 41,254 53,630Revenues 26,600 6,380 5,222 3,241 4,087 18,929 4,981 4,270 4,213 5,313 18,777 6,476 5,551 5,477 6,907 24,410 31,733 41,254 53,630Growth y/y 68.0% 17.8% (12.1%) (58.4%) (45.2%) (28.8%) (21.9%) (18.2%) 30.0% 30.0% (0.8%) 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%Cost of revenue 10,114 2,628 2,554 1,458 1,839 8,479 2,242 1,922 1,896 2,391 8,450 3,238 2,776 2,738 3,453 12,205 15,867 20,627 21,452Gross Margin 16,486 3,752 2,668 1,782 2,248 10,450 2,740 2,349 2,317 2,922 10,327 3,238 2,776 2,738 3,453 12,205 15,867 20,627 32,178Gross Margin % 62% 59% 51% 55% 55% 55% 55% 55% 55% 55% 55% 50% 50% 50% 50% 50% 50% 50% 60%Operating Expenses
Research and development 62 10 18 19 19 66 19 19 19 19 75 19 19 19 19 75 75 75 75Sell ing, general and administrative 8,953 1,941 2,133 1,900 1,900 7,874 1,900 1,950 2,000 2,000 7,850 1,295 1,110 1,095 1,381 4,882 6,347 8,251 9,385Product development 1,424 453 449 389 490 1,781 598 512 506 638 2,253 971 833 821 1,036 3,662 4,760 6,188 4,022Depreciation and amortization 5,476 1,377 1,435 686 700 4,198 928 1,069 1,385 1,380 4,762 1,374 1,369 1,364 1,360 5,468 5,593 5,524 5,788
Earnings from Operations 571 (29) (1,367) (1,211) (862) (3,468) (705) (1,202) (1,592) (1,114) (4,612) (422) (555) (562) (342) (1,881) (908) 589 12,907Foreign exchange loss 410 678 57 - - 735 - - - - - - - - - - - - -Other expense (income) 28 - 28,067 - - 28,067 - - - - - - - - - - - - -Interest expense 1,188 294 21 12 18 345 16 14 12 10 52 5 1 (3) (6) (3) (58) (118) (173)Income Tax expense - - - - - - - - - - - - - - - - - 187 3,466Net Income (Loss) (1,055) (1,001) (29,512) (1,223) (879) (32,615) (721) (1,216) (1,604) (1,123) (4,664) (427) (556) (559) (336) (1,878) (849) 520 9,614
EPS - Basic ($0.09) ($0.09) ($1.39) ($0.06) ($0.04) ($1.53) ($0.03) ($0.06) ($0.08) ($0.05) ($0.22) ($0.02) ($0.03) ($0.03) ($0.02) ($0.09) ($0.04) $0.02 $0.45EPS - Diluted ($0.09) ($0.09) ($1.39) ($0.06) ($0.04) ($1.53) ($0.03) ($0.06) ($0.08) ($0.05) ($0.22) ($0.02) ($0.03) ($0.03) ($0.02) ($0.09) ($0.04) $0.02 $0.45
Adjusted EBITDA 9,197 1,456 (204) (525) (161) 565 223 (133) (207) 266 149 953 814 803 1,017 3,587 4,685 6,113 18,695Adjusted EBITDA Margin % 34.6% 22.8% (3.9%) (16.2%) (3.9%) 3.0% 4.5% (3.1%) (4.9%) 5.0% 0.8% 14.7% 14.7% 14.7% 14.7% 14.7% 14.8% 14.8% 34.9%Free Cash Flow (6,529) (2,209) 415 (7,782) (1,536) (11,112) (143) (717) (737) (70) (1,667) 1,259 132 238 870 2,500 3,196 4,775 10,927Adjusted FCF Margin % (24.5%) (34.6%) 7.9% (240.2%) (37.6%) (58.7%) (2.9%) (16.8%) (17.5%) (1.3%) (8.9%) 19.4% 2.4% 4.3% 12.6% 10.2% 10.1% 11.6% 20.4%
Growth RatesAdj_EBITA Growth Rate 407.8% 68.1% NA NA NA (93.9%) (84.7%) (35.0%) (60.5%) NA (73.6%) 326.8% NA NA 282.7% NM 30.6% 30.5% 205.8%EPS Growth Rate (71.5%) 4.9% 1712.8% NA NA 1516.0% (62.3%) (95.9%) 31.2% 27.8% (85.7%) (40.8%) (54.3%) (65.2%) (70.1%) (59.7%) (54.8%) NA 1749.3%FCF Growth Rate 314.3% (56.1%) (84.7%) 73.3% NA 70.2% (93.5%) NA (90.5%) (95.4%) (85.0%) NA NA NA NA NA 27.9% 49.4% 128.8%
SUMMARY BALANCE SHEETSFiscal Year Ending October 31 2015A 1Q16A 2Q16E 3Q16E 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E 1Q18E 2Q18E 3Q18E 4Q18E 2018E 2019E 2020E 2021EThousands of Canadian Dollars, except per share data Oct 31 Jan 31 Apr 30 Jul 31 Oct 31 Oct 31 Jan 31 Apr 30 Jul 31 Oct 31 Oct 31 Jan 31 Apr 30 Jul 31 Oct 31 Oct 31 Oct 31 Oct 31 Oct 31
Cash and Equivalents 2,365 1,676 21,581 13,621 11,899 11,899 11,568 10,661 9,732 9,469 9,469 10,537 10,498 10,633 11,400 11,400 14,200 18,919 30,019Trade Account Recievables 3,865 4,581 1,207 2,113 2,665 2,665 3,249 2,879 2,747 3,465 3,465 4,223 3,742 3,572 4,504 4,504 5,856 7,612 9,896Unbilled Revenues 1,954 1,590 796 902 1,138 1,138 1,383 1,226 1,170 1,475 1,475 1,798 1,594 1,521 1,918 1,918 2,494 3,251 4,214Other Current Assets 676 949 823 700 700 700 700 700 700 700 700 700 700 700 700 700 700 700 700Total Current Assets 8,860 8,796 24,407 17,337 16,402 16,402 16,900 15,466 14,350 15,110 15,110 17,259 16,534 16,425 18,523 18,523 23,249 30,482 44,829Property Plant and Equipment 48,538 48,484 30,271 31,415 32,544 32,544 32,445 32,205 31,970 31,741 31,741 31,517 31,298 31,084 30,875 30,875 30,084 29,362 28,702Intangible Assets 24,646 26,622 17,518 17,189 16,860 16,860 16,530 16,201 15,551 14,900 14,900 14,250 13,600 12,949 12,299 12,299 9,497 6,695 7,232Total Assets 82,044 83,902 72,196 65,940 65,805 65,805 65,875 63,872 61,871 61,751 61,751 63,026 61,432 60,459 61,697 61,697 62,830 66,539 80,764
Accounts Payable 10,966 9,672 7,281 2,853 3,598 3,598 4,386 3,886 3,709 4,678 4,678 6,335 5,614 5,358 6,757 6,757 8,784 11,419 11,875Deferred Revenue 1,037 1,305 1,084 645 813 813 988 876 836 1,054 1,054 1,285 1,138 1,086 1,370 1,370 1,781 2,322 3,010Other Current Liabil ities 656 49,404 747 618 561 561 503 444 384 322 322 260 205 184 162 162 71 36 36Total Current Liabil ities 12,659 60,381 9,112 4,116 4,972 4,972 5,877 5,206 4,929 6,054 6,054 7,879 6,957 6,628 8,289 8,289 10,636 13,776 14,921Government Loan 1,436 1,342 1,244 1,223 1,149 1,149 1,074 997 919 839 839 757 674 589 503 503 139 - -Deferred Tax Liabil ity - - - - - - - - - - - - - - - - - 187 3,654Other Non-current Liabil ities 44,883 102 396 380 342 342 303 263 222 181 181 139 105 105 105 105 105 105 105Total Liabilities 58,978 61,825 10,752 5,719 6,464 6,464 7,254 6,466 6,070 7,074 7,074 8,775 7,737 7,323 8,897 8,897 10,880 14,069 18,680
Total Shareholder Equity 23,066 22,077 61,444 60,221 59,342 59,342 58,621 57,405 55,801 54,678 54,678 54,250 53,694 53,136 52,799 52,799 51,950 52,470 62,083Total Liabililites and Shareholder Equity 82,044 83,902 72,196 65,940 65,805 65,805 65,875 63,872 61,871 61,751 61,751 63,026 61,432 60,459 61,697 61,697 62,830 66,539 80,764
Net Debt 44,528 49,070 (19,626) (11,816) (10,224) (10,224) (10,026) (9,256) (8,466) (8,344) (8,344) (9,556) (9,654) (9,895) (10,771) (10,771) (14,026) (18,919) (30,019)
SUMMARY CASH FLOW STATEMENTSFiscal Year Ending October 31 2015A 1Q16A 2Q16E 3Q16E 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E 1Q18E 2Q18E 3Q18E 4Q18E 2018E 2019E 2020E 2021EThousands of Canadian Dollars, except per share data Oct 31 Jan 31 Apr 30 Jul 31 Oct 31 Oct 31 Jan 31 Apr 30 Jul 31 Oct 31 Oct 31 Jan 31 Apr 30 Jul 31 Oct 31 Oct 31 Oct 31 Oct 31 Oct 31
Net Income (1,055) (1,001) (29,512) (1,223) (879) (32,615) (721) (1,216) (1,604) (1,123) (4,664) (427) (556) (559) (336) (1,878) (849) 520 9,614Depreciation & Amortization 5,476 1,377 1,435 686 700 4,198 928 1,069 1,385 1,380 4,762 1,374 1,369 1,364 1,360 5,468 5,593 5,524 5,788Other non-cash items 387 280 27,302 45 42 27,668 38 35 31 28 132 24 20 17 15 76 37 192 3,466Changes in non-cash working capital accounts 1,059 (1,036) 2,385 (5,757) 126 (4,282) 134 (84) (30) 164 183 807 (182) (65) 353 913 511 662 (2,102)Cash Flows from Operating Activities 5,867 (380) 1,610 (6,249) (12) (5,031) 379 (196) (218) 448 413 1,778 652 758 1,391 4,579 5,292 6,898 16,766
Cash Flows from Investing Activities (14,195) (3,307) (1,801) (1,500) (1,500) (8,108) (500) (500) (500) (500) (2,000) (500) (500) (500) (500) (2,000) (2,000) (2,000) (5,666)
Cash Flows from Financing Activities 8,188 2,877 20,288 (211) (211) 22,744 (211) (211) (211) (211) (842) (211) (191) (123) (123) (647) (492) (179) -
Net Change in Cash (140) (810) 20,097 (7,960) (1,722) 9,605 (331) (907) (929) (263) (2,429) 1,068 (39) 135 768 1,931 2,800 4,719 11,100
2016 Mid-year Top Picks Review H216 Top Picks | July 21, 2016
ECHELON WEALTH PARTNERS INC. DISCLOSURES
ANALYST CERTIFICATION(S) I, Rob 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.
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. I, Doug 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. I, Rob 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. 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. I, Fadi Benjamin, 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.echelonpartners.com/research/disclosures.php
Is this an issuer related or industry related publication? INDUSTRY 1) Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject
issuer? If Yes: a) Is it a long or short position? Long b) What type of security is it? Stock 2) Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer? 3) Does Echelon Wealth Partners Inc. or the Analyst have any actual material conflicts of interest with the issuer? 4) Does Echelon Wealth Partners Inc. and/or one or more entities affiliated with Echelon Wealth Partners 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?
5) During the last 12 months, has Echelon Wealth Partners 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?
6) During the last 12 months, has Echelon Wealth Partners Inc. received compensation for having provided investment banking or related services to this Issuer?
7) The analyst had an on-site visit with the Issuer within the last 12 months. 8) Has the Analyst been compensated for travel expenses incurred as a result of an on- site visit with the Issuer within
the last 12 months? 9) Has the Analyst received any compensation from the subject company in the past 12 months? 10) Is Echelon Wealth Partners Inc. a market maker in the issuer’s securities at the date of this report?
Contact Information
Rob Goff, CFA Telecom & Media Analyst 416-933-3351 [email protected]
Douglas W. Loe, PhD Healthcare & Biotech Analyst 416-775-1004 [email protected]
Rob Sutherland Real Estate Analyst 416-933-3353 [email protected]
Richard Ouellette VP, Institutional Sales & Trading 514-905-7928 [email protected]
Lui Barbati VP, Institutional Sales & Trading 416-933-3301 [email protected]
Jonathan Thompson MD, Institutional Equity Trader 416-649-4273 x300 [email protected]
Russell Minor VP, Institutional Sales 416-933-3357 [email protected]
Ryan walker Mining Analyst 416-479-8997 [email protected]
Andrej Krneta Technology Analyst 416-687-6656 [email protected]
Amr Ezzat Special Situation Analyst 514-905-7944 [email protected]
Fadi Benjamin Special Situation Analyst 416.842.1791 [email protected]
Pierre-Yves Terrisse VP, Institutional Sales & Trading 514-905-7927 [email protected]
Bob Magtanong VP, Institutional Equity Trader 416-687-6798 [email protected]
Christine Young VP, Institutional Sales 416-479-8690 [email protected]
Company Name Ticker Disclosures
Victoria Gold Corp. TSXV:VIT 7
TSO3 Inc. TSX:TOS 1
Cipher Pharmaceuticals Inc. TSX:CPH
Edgefront Real Estate Investment Trust TSXV:ED.un
Pure Industrial Real Estate Trust TSX:AAR.un 5,6,7
DHX Media Ltd. TSX:DHX.B 6,7
Tecsys Inc. TSX:TCS
Pure Technologies Ltd. TSX:PUR 7
exactEarth Ltd. TSX:XCT 7
2016 Mid-year Top Picks Review H216 Top Picks | July 21, 2016
2016 Mid-year Top Picks Review H216 Top Picks | July 21, 2016