Institutional Equity
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Volume 2 DECEMBER 2019 DIVERSIFIED DIVERSIFIED TECHNOLOGY SPECIAL SITUATIONS TRANSPORTATION & INFRASTRUCTURE MINING OIL & GAS SPECIAL SITUATIONS REITS INSTITUTIONAL EQUITY 2020 LBS Preferred Picks Our Annual Institutional Equity Preferred Picks report summarizes our best investment ideas for 2020 as well as our outlook for each sector in the Laurentian Bank Securities coverage universe. Year to date, LBS’ 2019 Preferred Picks returned 37.6% (equal-weighted), significantly outperforming the TSX Composite and Small Cap indices by 15.8% and 26.2%, respectively. Our picks for 2019 were CCL Industries Inc. (CCL.B-T) , Nutrien Ltd (NTR-T), Savaria Corp. (SIS-T), Wesdome Gold Mines Ltd. (WDO-T), Argonaut Gold Inc. (AR-T), Whitecap Resources Inc. (WCP-T), BSR REIT (HOM.U-T), People Corp. (PEO-V) and WSP Global Inc. (WSP-T). Among these, gold producer Wesdome generated the highest return (YTD total return of 108.4%), outperforming the S&P TSX Global Gold Index which returned 35.7% over the comparable period, followed by BSR REIT, which returned 56.7% YTD. Our coverage universe returned 18.3%, generating a positive alpha of 6.9% vs. the TSX Small Cap index. Our Preferred Picks and coverage universe outperformance relative to the Small Cap index demonstrates our continued ability to build a basket of fundamentally strong and high-potential early stage companies. Our coverage universe, however, delivered a negative alpha of 3.5% vs. the TSX Composite index due to a lower Consumer Products contribution. As we enter 2020 against a backdrop of solid economic growth, our basket of Preferred Picks, generally speaking, is defined by fundamentally sound companies with healthy balance sheets (for M&A), positive organic growth and earnings leverage. M&A is a central theme in our picks, comprising of both companies that are active in industry consolidation as well as companies that may be attractive targets within their respective industries. Sector Analyst Company Ticker Rating Risk Rating Mkt Cap (M) Price Target Div. Yield 1-yr RoR Diversified Chris Blake Aurora Cannabis Inc. ACB-T Buy High $3,724 $3.44 $4.75 0.0% 38.0% Diversified Technology Nick Agostino TECSYS Inc. T CS-T Buy High $250 $19.07 $23.00 1.3% 21.9% Industrials (Transportation and Infrastructure) Mona Nazir TFI International Inc. TFII-T Buy Medium $3,685 $43.67 $55.00 2.4% 28.3% Mining (International) Ryan Hanley Argonaut Gold Inc. AR-T Buy High $332 $1.85 $3.00 0.0% 62.2% Mining (Domestic) Barry Allan Marathon Gold Corporation MOZ-T Buy High $306 $1.71 $3.00 0.0% 75.4% Mining (Base & Industrial Metals) Jacques Wortman Altius Minerals Corporation ALS-T Buy High $495 $11.58 $16.50 1.7% 44.2% Oil & Gas (Midcap) Todd Kepler Whitecap Resources Inc. WCP-T Buy High $1,934 $4.71 $7.257.3% 61.2% Oil & Gas (Small cap) Jonathan Tempro PetroShale Inc. PSH-V Buy High $111 $0.58 $1.50 0.0% 158.6% Real Estate Investment Trusts Yashwant Sankpal Extendicare Inc. EXE-T Buy Medium $755 $8.45 $10.00 5.7% 24.0% Special Situations Furaz Ahmad Boyd Group Income Fund BYD.UN-T Buy Medium $3,963 $199.40 $230.00 0.3% 13.1% T - Toronto Stock Ex change, V - TSX Venture Stock Ex change Pricing as of December 12, 2019 Source: Thomson Reuters Eikon, LBS Cameron Baker, CFA M.IM.| Head of Equities DECEMBER 2019 i INSTITUTIONAL EQUITY DIVERSIFIED — Chris Blake ........................................................................................................................................................................ 1 Aurora Cannabis Inc. (ACB-T – $3.44) DIVERSIFIED TECHNOLOGY — Nick Agostino ............................................................................................................................................ 3 TECSYS Inc. (TCS-T – $19.07) DOMESTIC MINING — Barry Allan .............................................................................................................................................................. 5 Marathon Gold Corporation (MOZ-T – $1.71) INTERNATIONAL MINING — Ryan Hanley .................................................................................................................................................. 7 Argonaut Gold Inc. (AR-T – $1.85) BASE METALS — Jacques Wortman .......................................................................................................................................................... 8 Altius Minerals Corporation (ALS-T – $11.58) OIL & GAS (Midcap) — Todd Kepler ........................................................................................................................................................... 9 Whitecap Resources Inc. (WCP-T – $4.71) OIL & GAS (Small Cap) —Jonathan Tempro ............................................................................................................................................. 11 PetroShale Inc. (PSH-V – $0.58) REITs — Yashwant Sankpal ...................................................................................................................................................................... 12 Extendicare Inc. (EXE-T – $8.45) SPECIAL SITUATIONS — Furaz Ahmad .................................................................................................................................................... 14 Boyd Group Income Fund (BYD.UN-T – $199.40) TRANSPORTATION & INFRASTRUCTURE — Mona Nazir & Nauman Satti ................................................................................................ 16 TFI International Inc. (TFII-T – $43.67) Appendix I – Coverage Universe............................................................................................................................................................... 18 Appendix II – Important Disclosures ......................................................................................................................................................... 20 All pricing as of December 12, 2019 unless otherwise indicated. DECEMBER 2019 ii INSTITUTIONAL EQUITY Chris Blake, CFA | DIVERSIFIED DIVERSIFIED Chris Blake, CFA | [email protected] 416 865-5876 Our preferred pick is Aurora Cannabis Inc. (ACB-T). Following a year whereby ACB’s shares have underperformed relative to the broader cannabis sector average (-49% vs. -35% for the Horizons Marijuana Life Sciences Index or HMMJ), we believe the shares are poised for a recovery. We attribute the share price underperformance to the following four factors: 1) a slower-than-expected rollout of retail stores across Canada resulting in missed financial targets for F2019; 2) an ambitious capital investment plan that was not quite fully funded, requiring additional funding; 3) regulatory violations by a few operators; and 4) sector valuations compressing, coincident with a 30% reduction to consensus sales estimates for both 2019 and 2020. These headwinds are starting to diminish with production better-reflecting supply/demand fundamentals, stronger balance sheets following recent share issuances and construction curtailments, Ontario’s recent announcement to further expand the number of retail stores, and the introduction of higher margin Cannabis 2.0 products launching in January. Acceleration in Store Openings in Ontario The retail store-rollout in Canada’s two most populous provinces (Ontario and Quebec) has been too slow. Industry sales nationwide are hovering around $350 million/quarter or just 20% of our estimated total market demand, leaving $1.4 billion/quarter in the hands of the black market. By our estimates, these two provinces should be able to support at least another 1,100 stores and well above the combined total of 46 currently operating. However, relief is on the way as the Ontario government recently announced that it will allow 20 new stores per month, starting in April 2020, while the province of Quebec is set to more than double its store count to 48 by Q1/2020. While we expected more stores would be allowed to open, this is a good first step and government officials did not rule out the possibility of raising the monthly limit at a later date. When combined with the 25 stores currently open, and another 40 set to launch in Q1/2020 from a previous lottery, we expect the Ontario store count to reach 250 by the end of 2020. This is important because Ontario accounts for just 26% of industry sales yet accounts for 40% of Canada’s population. This announcement should help close this gap. We believe the current distribution bottleneck will limit industry sales growth in the near term (3–6 months) but will ramp up significantly throughout 2H/2020 and more so into 2021, as these stores open. Pace of Medical Legalization Reform Globally on the Rise Beyond Canada and the United States, the global cannabis legal market is estimated to be currently valued at approximately $1 billion and is expected to grow at a CAGR of 40% through to 2024, to just under $5 billion. Legalization reform across additional countries is expected to fuel this growth, combined with growing adoption of medical cannabis as a treatment of various chronic diseases by physicians and patients. There are 50 countries around the world that have, or are in the midst of implementing some form of access to medical cannabis, with Europe among the most progressive. Very few Canadian LPs have the opportunity to serve these emerging medical markets. This is because most EU countries require that all medical products sold be sourced from GMP-certified facilities or equivalent. There are currently five GMP-certified licensed producers in Canada including: