22 December 2016 Americas/Canada Equity Research Double click here to select a sector.
Canadian Equity Strategy Research Analysts STRATEGY Andrew M. Kuske 416 352 4561 [email protected] Balancing the Barbell; Canadian Commodities Andrew E. Buscaglia 212 325 5870 and Rates Sensitives in Focus for 2017 [email protected] Jason Frew ■ A Balancing Act: Nearly half of the S&P/TSX Composite is directly related 403 476 6022 to a variety of global commodities with a skew to energy. With the recent oil [email protected] price moves along with the current outlook, there are many impacts on the Laurent Grandet 212 538 7901 Canadian market. Another overarching area of interest is changes in trade [email protected] patterns with the new incoming US administration. In any event, we believe Brian Ho there are pockets of opportunities. Most recently, we witnessed rebounding 403 476 6009 equity values and a higher move on bond yields. These factors are shown, [email protected] in part, on Figure 1, which illustrates the relative value of Canadian Mohammad Khan, CPA, CA 416 352 4596 treasuries against the TSX, with equities looking rather attractive. [email protected] Figure 1: Bond versus Stock indices – Canada Allison M. Landry 212 325 3716 500 [email protected] 450 Robert Loebach 403 476 6021 400 [email protected] Alvise Marino 350 212 325 5911 300 [email protected] David Phung 250 403 476 6023 200 [email protected] Ralph M. Profiti, CFA 150 416 352 4563 [email protected] 100 Robert Reynolds, CPA, CA, CFA 50 416 352 4516 [email protected] 0 Dec 91 Dec 95 Dec 99 Dec 03 Dec 07 Dec 11 Dec 15 Anita Soni, P. Eng., CFA 416 352 4587 Canadian Treasuries > 1 Year Toronto Stock Exchange [email protected] Robert Spingarn Source: Credit Suisse IDC, Bloomberg 212 538 1895 [email protected] Selected stocks: With an outlook for 2017, the preferred stocks from Credit Nick Stogdill, CA, CFA Suisse's Canadian Equity Research team are: (a) Consumer: COT.N/BCB; (b) 416 352 4592 Diversified: BBU and EFN; (c) Energy: AAV, ARX, ECA, ERF, IMO, NVA, [email protected] PXT, TOU and VII; (d) Financials: RY; (e) MERC in the forest products sector; Paul Tan (f) AEM and NEM.N in the Gold sector; (g) BBDb, CP and WCN amongst the 416 352 4593 [email protected] Industrials; (h) LUN and TECKb in the Industrial Metals; and, (i) Infrastructure: Yan Truong, CFA BIP.N, EMA (utilities) and TRP (pipelines). Finally, we also note that AEM and 416 352 4584 RY are on Credit Suisse's Global Focus List. [email protected]
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
22 December 2016
Investment summary Our macro starting point is the CS Global Risk Appetite appearing in Figure 2. CS Global risk appetite roughly at a midpoint Figure 2: CS Global Risk Appetite
10 Global Risk Appetite Index Fall of Berlin Wall Oil plummets, EM euphoria 8 equities rally Nikkei Loose 1st Greek downgrade peaks liquidity US housing Asian Tech bubble Saddam Mexican financial bubble bursts Jackson Hole, 6 Continental invades crisis QE2 Illinois run Kuwait crisis
Japan 4 earthquake
2
0
-2
-4 Société Générale Debt ceiling, 1981 Bear S&P downgrade Operation ERM recession Black Monday Russia 9/11, Stearns Desert Storm -6 crisis, defaults, Enron, Euroopea LTCM fails Oil Surprise n WorldCom Mexico peaks Italian downgrade -8 defaults Lehman Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jandefault Jan Jan Jan Jan Jan Jan Jan 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Source: Credit Suisse
Source: CS Global Strategy / IDC
Finally, to consider this metric on a smoothed basis, we provide a five-year moving average in Figure 3 .
Figure 3: CS Global Risk Appetite Five-Year Moving Average 3.0 5yr Moving Average of Global Risk Appetite
2.5
2.0 very high
1.5
1.0
long run 0.5 average
0
-0.5 very low
-1.0
-1.5 Jan 81 Jan 85 Jan 89 Jan 93 Jan 97 Jan 01 Jan 05 Jan 09 Jan 13
Source: CS Global Strategy / IDC
Arguably, this risk appetite is also supported by a historical perspective on interest rates, as partially evidenced in Figure 4 and Figure 5 .
Canadian Equity Strategy 2
22 December 2016
Figure 4: Yields Canada - Short and Long Rates Figure 5: Yields Canada and USA - long rates since Since 2000 2000 % 7.0 7.0
6.0 6.0
5.0 5.0
4.0 4.0
3.0 3.0
2.0 2.0
1.0 1.0 0 0 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 10-year CAD Government Bond 10-year US Treasury Bond 3-month LIBOR CAD 10-year CAD Government Bond 30-year CAD Government Bond 30-year CAD Government Bond 30-year US Treasury Bond Source: Credit Suisse IDC, Bloomberg Source: Credit Suisse IDC, Bloomberg
The interest rate environment continues to be very benign and, for non-domestic investors should also be considered in relation to recent CAD devaluation. The combination of rates differentials and oil price movements highlights potentially meaningful foreign exchange moves for the USD/CAD (Figure 6). Consider Currency Figure 6: Canadian dollar (CAD) vs. USD 1.70 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90
0.80
1/4/1974 1/4/1977 1/4/1980 1/4/1983 1/4/1986 1/4/1989 1/4/1992 1/4/1995 1/4/1998 1/4/2001 1/4/2004 1/4/2007 1/4/2010 1/4/2013 1/4/2016 1/4/1971 Source: Datastream, Credit Suisse / IDC
The dollar and trade The dollar relationship is important with roughly half of Canada's main stock indices being actions of importance directly to a variety of global commodities. The USD/CAD is also extremely important in relation to the economic activity between the two countries―a topic of notable interest in light of the new incoming US administration. Figure 7 give a perspective of the YTD performance for a variety of major equity markets in local currency terms.
Canadian Equity Strategy 3
22 December 2016
Figure 7: Selected stock market performances 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0%
-15.0%
S&P/TSX…
DAXINDEX
MSCICHINA
TOPIXINDEX…
KOSPIINDEX
MSCIWORLD
SHANGHAI SE…
CAC40 INDEX
IBEX INDEX IBEX 35
S&P500 INDEX
Euro Euro Stoxx Pr 50 FTSE 100INDEX
S&P/ASX200 INDEX Source: Bloomberg
On a USD basis, the ranking doesn't change in our sample, but the performance declines to even more disappointing levels (Figure 8).
Figure 8: Developed market YTD performance (USD terms) 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0%
-20.0%
S&P/TSX…
DAXINDEX
MSCICHINA
TOPIXINDEX…
KOSPIINDEX
MSCIWORLD
SHANGHAI SE…
CAC40 INDEX
IBEX INDEX 35
S&P500 INDEX
Euro Euro Stoxx Pr 50 FTSE 100INDEX
S&P/ASX200 INDEX Source: Bloomberg
Over a longer timeframe, a lower valued CAD relative to the USD is generally positive for several export oriented industries. Figure 9 illustrates the percentage of Canadian exports to the US as a total percentage.
Canadian Equity Strategy 4
22 December 2016
Declining CAD Figure 9: Canada exports to US in % of total exports potentially beneficial for exports % 88
86
84
82
80
78
76
74
72 Dec 90 Dec 94 Dec 98 Dec 02 Dec 06 Dec 10 Dec 14
Canada exports to US in % of total exports Source: Datastream, Credit Suisse / IDC
Somewhat notable in the context of Figure 9 is the growth of Canadian energy exports to the US market in both volume and dollar value. So while the US remains large and important for Canada, the overall dependence is less than previous. Clearly, trade issues with the incoming US administration will be critical for dollar levels. Finally, one of our favourite views of the relative value in the Canadian market appears in Figure 10, which illustrates Canadian equities against treasuries.
Figure 10: Bond versus Stock indices – Canada
500
450
400
350
300
250
200
150
100
50
0 Dec 91 Dec 95 Dec 99 Dec 03 Dec 07 Dec 11 Dec 15
Canadian Treasuries > 1 Year Toronto Stock Exchange
Source: Bloomberg, Credit Suisse / IDC
Figure 11 highlights our specific top picks by coverage group.
Canadian Equity Strategy 5
22 December 2016
Figure 11: Top picks by sector Sector Stock Rating Target Consumer Cott Corporation OUTPERFORM US $ 14.00 Diversified Brookfield Business Partners LP OUTPERFORM US $ 29.00 Element Financial Corporation OUTPERFORM C $ 16.00 Energy Advantage Oil & Gas OUTPERFORM C $ 11.00 ARC Resources Ltd. OUTPERFORM C $ 28.00 Encana Corp. OUTPERFORM US $ 14.00 Enerplus Corporation OUTPERFORM C $ 15.00 Imperial Oil Ltd OUTPERFORM C $ 50.00 NuVista Energy OUTPERFORM C $ 9.50 Parex Resources Inc. OUTPERFORM C $ 18.25 Seven Generations Energy Ltd. OUTPERFORM C $ 35.00 Tourmaline Oil Corp OUTPERFORM C $ 47.00 Financials Royal Bank of Canada OUTPERFORM C $ 100.00 Forest Products Mercer International Inc. OUTPERFORM US $ 15.00 Industrials Bombardier Inc (SVS) OUTPERFORM C $ 2.84 Canadian Pacific Railways OUTPERFORM US $ 173.00 Waste Connections OUTPERFORM US $ 87.00 Infrastructure Brookfield Infrastructure Partners LP OUTPERFORM US $ 40.00 Emera Inc. OUTPERFORM C $ 58.00 TransCanada Corp. OUTPERFORM C $ 70.00 Gold Agnico Eagle Mines Limited OUTPERFORM US $ 65.00 Newmont Mining OUTPERFORM US $ 51.00 Industrial Metals Lundin Mining Corp. OUTPERFORM C $ 9.00 Teck Resources Ltd OUTPERFORM C $ 43.00 Source: Credit Suisse estimates
This report is divided into four parts:
■ Canadian macro viewpoint;
■ A HOLT® perspective;
■ Conventional Considerations; and,
■ Sector specifics. Each of these areas is addressed below.
Canadian Equity Strategy 6
22 December 2016
Table of contents
Investment summary 2
Canadian macro viewpoint 9 A macro perspective ...... 9 Foreign Exchange – USD/CAD ...... 18 Commodity concerns ...... 20 An interest rate perspective ...... 23
A HOLT® perspective 26
Conventional Considerations 30
Sector specifics 35 Consumer ...... 35 Beverages 35 Diversified ...... 36 Energy ...... 36 Oil Sands: Dark Clouds Are Lifting ...... 37 Re-initiation of Growth 37 Substantial FCF and a More Capital-Efficient Future 38 Cash Break-evens Have Structurally Improved 39 Key Catalyst – Improving Outlook For Market Access 39 Canadian Heavy Oil Diffs – First a Little Wider, Then Much Narrower? 40 Top Picks 41 Canadian SMID E&P: 42 Top Picks 42 Canadian Natural Gas – The Pressure Continues 43 Widening Basis Differentials 43 Pipeline and AECO Basis Differential Risk 46 Risk of a Recovering Oil Price 46 Canadian International E&P ...... 46 Financials ...... 47 Canadian Banks 47 Canadian Life Insurers 49 Forest Products ...... 49 Industrials ...... 49 Aerospace 49 Environmental Services 50 Transportation 51
Canadian Equity Strategy 7
22 December 2016
Infrastructure ...... 52 M&A Momentum 52 Increased Infrastructure 67 A Tough Transition 68 Brookfield Specifics 68 Brookfield Asset Management 68 Brookfield Business Partners 69 Brookfield Infrastructure Partners 69 Metals and Mining ...... 72 Gold sector 73 Industrial Metals 76
Credit Suisse: Canadian Coverage 83
Canadian Equity Strategy 8
22 December 2016
Canadian macro viewpoint To best address some of the relatively unique aspects of the Canadian equity market, we divided this section into three parts: (a) A macro perspective; (b) Commodity concerns; and; (c) An interest rate perspective. A macro perspective We divided this sub-heading into two specific categories: (a) Reviewing risk appetite; and, (b) economic data points. Reviewing risk appetite Our macro starting point is the CS Global Risk Appetite appearing in Figure 12. CS Global risk appetite roughly at a midpoint Figure 12: CS Global Risk Appetite
10 Global Risk Appetite Index Fall of Berlin Wall Oil plummets, EM euphoria 8 equities rally Nikkei Loose 1st Greek peaks liquidity US housing downgrade Asian Tech bubble Saddam Mexican financial bubble bursts Jackson Hole, 6 Continental invades crisis QE2 Illinois run Kuwait crisis
Japan 4 earthquake
2
0
-2
-4 Société Générale Debt ceiling, 1981 Bear Operation S&P downgrade recession Black Monday ERM Russia 9/11, Stearns Desert Storm -6 crisis, defaults, Enron, Euroopea LTCM fails Oil Surprise n WorldCom Mexico peaks Italian downgrade -8 defaults Lehman Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jandefault Jan Jan Jan Jan Jan Jan Jan 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Source: Credit Suisse
Source: CS Global Strategy / IDC
For additional perspective, Figure 13 highlights the CS Global Risk Appetite and the VIX. Recent upward VIX Figure 13: CS Global Risk Appetite vs VIX moves - albeit modest 6.0 50 Euphoria
4.0 45
40 2.0
35 0 30 -2.0 25
-4.0 20
-6.0 15
Panic -8.0 10 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16 Oct 16 Dec 16 Daily Risk Appetite Euphoria Panic VIX Index (r.h.s.) Source: Bloomberg, CS Global Strategy, / IDC
Canadian Equity Strategy 9
22 December 2016
For an equity specific view, we consider Figure 14 and for a comparative view of the CS Risk appetite and the US Credit Risk Appetite we consider Figure 15.
Figure 15: CS Global Risk Appetite and US Credit Figure 14: CS Equity-Only Risk Appetite Risk Appetite
8 12 Euphoria 10 6 8 4 6
2 4
0 2
0 -2 -2 -4 -4 Panic
-6 -6
-8 -8 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Jan 97 Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11 Jan 13 Jan 15 CS Global Risk Appetite US Credit Risk Appetite Equity-only Risk Appetite Source: CS Global Strategy / IDC Source: CS Global Strategy / IDC
Finally, to consider this metric on a smoothed basis, we provide a five-year moving average in Figure 16 . CS Global Risk Figure 16: CS Global Risk Appetite Five Year Moving Average Appetite 5-yr moving average well below 3.0 5yr Moving Average of Global Risk Appetite long-run average 2.5
2.0 very high
1.5
1.0
long run 0.5 average
0
-0.5 very low
-1.0
-1.5 Jan 81 Jan 85 Jan 89 Jan 93 Jan 97 Jan 01 Jan 05 Jan 09 Jan 13
Source: CS Global Strategy / IDC
For some additional perspective, we highlight the apparent short-term rebound in this risk appetite metric with movements in Global Industrial Production. Specifically, Figure 17 is focused on the percentage quarter-over-quarter change and contributions from developed and emerging markets for Global IP.
Canadian Equity Strategy 10
22 December 2016
Figure 17: Global industrial production growth and contributions – EM vs. DM % QoQ and contributions in percentage points 3.0
2.0
1.0
0
-1.0 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17
Developed markets Emerging markets Global momentum Running estimate
Source: CS Global Strategy / IDC
Positive movements in From a strictly Canadian market perspective, the upward projected movement should be a Global IP positive indicator. To help support that view, Figure 18 highlights Global IP versus industrial metals with a strong upward movement in CSCB Industrial Metals.
Figure 18: Global industrial production versus industrial metals YoY changes in % YoY changes in % 120 15
100 10 80
60 5
40 0 20
0 -5
-20 -10 -40
-60 -15 Jun 99 Jun 01 Jun 03 Jun 05 Jun 07 Jun 09 Jun 11 Jun 13 Jun 15 CSCB Industrial Metals with 3-month lag Global industrial production (IP) (rhs)
Source: Bloomberg, CS IB, Credit Suisse / IDC
After this macro perspective, we now focus on Canadian specific economic data points.
Canadian Equity Strategy 11
22 December 2016
Economic data points To provide a high level perspective of the Canadian economy, we start with Figure 19. which illustrates the Canadian GDP and the Canada composite indicator. Opposite directions for Figure 19: Canada GDP vs. Canada composite indicator GDP and composite indicator QoQ% annualized 3m/3m% annualized
8 15
6 10 4
2 5
0 0 -2
-4 -5
-6 -10 -8
-10 -15 Jun 03 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Canada GDP Canada composite indicator (rhs)
Source: Datastream, Credit Suisse / IDC
Strong upward move in On a similar timeframe, Figure 20 illustrates Canadian industrial production. Canadian IP Figure 20: Canada industrial production 3m/3m%
4.0
2.0
0
-2.0
-4.0
-6.0
-8.0 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16
Canada industrial production
Source: Bloomberg, Datastream, Credit Suisse / IDC
Canadian Equity Strategy 12
22 December 2016
For a bit more specificity on economic activity, Figure 21 and Figure 22 highlights the Manufacturing PMI and the PMI against GDP.
Figure 21: PMI Manufacturing - Canada Figure 22: Canada PMI & GDP
70 Index, 3mma % YoY
70 8 65
65 60 6
55 60 4 50 55 45 2 50 40 0 35 45
30 -2 40
25 35 -4
Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11 Jan 13 Jan 15
Mar 11 Mar 12 Mar Mar 09 Mar 10 Mar 13 Mar 14 Mar 15 Mar 16 Mar
Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep PMI Manufacturing - Canada +/- 1 Std Dev +/- 2 Std Dev Average Ivey PMI GDP (rhs) Source: Bloomberg, Credit Suisse / IDC Source: Bloomberg, Credit Suisse / IDC
Figure 23 illustrates capacity utilization approaching average levels. Canadian capacity utilization approaching Figure 23: Canada capacity utilization average in % 88
86
84
82
80
78
76
74
72 Feb 87 Feb 91 Feb 95 Feb 99 Feb 03 Feb 07 Feb 11 Feb 15 Canada capacity utilization Average (1987 - today)
Source: Datastream, Credit Suisse / IDC
This capacity utilization point is meaningful for many reasons; however, a critical factor to watch will be the pace of US economic growth given the strong relationship between the two economies as illustrated in Figure 24.
Canadian Equity Strategy 13
22 December 2016
Figure 24: US & Canada GDP
QoQ in %
1.5
1.0
0.5
0
-0.5
-1.0
-1.5
-2.0 Strong relationship of Canadian and US -2.5 economic activity 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 USA Canada
Source: Datastream, Credit Suisse / IDC
In addition, to reinforce the Canadian-US economic relationships, Figure 25 and Figure 26 show Canadian real exports versus US real GDP along with a linear view of the US GDP, respectively. That US economic activity is somewhat critical for Canadian exports.
Figure 25: Canada Real Exports vs US Real GDP Figure 26: Canada and US GDP % YoY % YoY % YoY
20 6 6.0
5 15 4.0 4 10 3 2.0 5 2
0 1 0
0 -5 -2.0 -1 -10 -2 -4.0 -15 -3
-20 -4 -6.0 Feb 90 Feb 94 Feb 98 Feb 02 Feb 06 Feb 10 Feb 14 Mar 90 Mar 94 Mar 98 Mar 02 Mar 06 Mar 10 Mar 14 Canada Real Exports US Real GDP (rhs) USA GDP (YoY) Canada GDP (YoY) Source: Datastream, Credit Suisse / IDC Source: Bloomberg, Credit Suisse / IDC
Figure 27 and Figure 28 highlight the significant percentage of Canadian exports to the US as percentage of total exports and the year-over-year change in Canadian exports to the US, respectively. Notably, over these time series charts is the value and volume of oil exported to the US has increased substantially.
Canadian Equity Strategy 14
22 December 2016
Figure 27: Canada exports to US in % of total exports Figure 28: Canada export to US % YoY %, 3M MA 88 40
86 30
20 84
10 82 0 80 -10 78 -20
76 -30
74 -40
72 -50 Dec 90 Dec 94 Dec 98 Dec 02 Dec 06 Dec 10 Dec 14 Mar 91 Mar 95 Mar 99 Mar 03 Mar 07 Mar 11 Mar 15
Canada exports to US in % of total exports Canada Exports to US Source: Datastream, Credit Suisse / IDC Source: Datastream, Credit Suisse / IDC
Clearly, there are many questions regarding changes to major trade agreements with the incoming US Government. Balancing the negative impact for some areas of trade might be the apparent friendly energy policies of the incoming US administration. With increased A variety of important pipeline access, there would be increased volume and value of energy commodities sold trade related questions to the US, which would have a number of impacts to various Canadian sectors, with a on the horizon specific focus on the energy producers. In light of the energy influence in Canadian economic data, Figure 29 and Figure 30 should be considered in relation to energy producer netback pricing.
Figure 29: Canada exports Figure 30: Canada - Exports Growth
YoY % % QoQ
20 15
10 10 5
0 0
-5 -10 -10
-20 -15
-20 -30 -25
-40 -30 Aug 01 Aug 03 Aug 05 Aug 07 Aug 09 Aug 11 Aug 13 Aug 15 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Canada exports Exports (Nominal) Source: Bloomberg Source: Credit Suisse / IDC
Aside from energy exports, the USD/CAD level will have a meaningful longer-term impact on relative competitiveness and export levels. The potential for further CAD devaluation is a positive for relative Canadian competitiveness against the US. A boost to exports may help employment levels. Two different perspectives on employment data are provided in Figure 31 and Figure 32.
Canadian Equity Strategy 15
22 December 2016
Figure 31: Canada - Real GDP vs Unemployment Rate Figure 32: Canada net change in employment
6.0 12.0 thousands, 3mma
60 5.0 11.0 40 4.0 20 3.0 10.0 0 2.0 -20 9.0 1.0 -40
0 8.0 -60
-1.0 -80 7.0 -2.0 -100
-3.0 6.0 -120 Jan 88 Jan 92 Jan 96 Jan 00 Jan 04 Jan 08 Jan 12 Jan 16 Mar 05 Mar 07 Mar 09 Mar 11 Mar 13 Mar 15 CA real GDP (yoy %) CA Unemployment Rate (rhs) Net change in Canadian employment
Source: Datastream, Credit Suisse / IDC Source: Bloomberg, Credit Suisse / IDC
Clearly, the health of the US economy is critical for Canada, but there are some individual Canadian data points to highlight starting with CPI in Figure 33. Core CPI declining and headline accelerating Figure 33: Canada CPI % YoY
5.0
4.0
3.0
2.0
1.0
0
-1.0 Jan 96 Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Canada CPI Core BOC Canada CPI - Headline
Source: Bloomberg, Credit Suisse / IDC
Figure 34 and Figure 35 provide different views of retail sales with near-term momentum trending downward.
Canadian Equity Strategy 16
22 December 2016
Figure 34: Canadian - Retail Sales momentum Figure 35: Canada retail sales
% 3m/3m YoY%
6 12
10 4 8
2 6
4 0 2 -2 0
-4 -2
-4 -6 -6
-8 -8 May 96 May 98 May 00 May 02 May 04 May 06 May 08 May 10 May 12 May 14 May 16 Jan 93 Jan 97 Jan 01 Jan 05 Jan 09 Jan 13 Canada retail sales 6m moving average Canadian Retail Sales 5 yr moving average Source: Datastream, Credit Suisse / IDC Source: Bloomberg, Credit Suisse / IDC
Given this economic background, we note the very interesting trend of declining average hourly earnings as shown in Figure 36. Declining average Figure 36: Canada average hourly earnings hourly earnings % YoY
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0 Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Average hourly earnings 12m moving average Average (1998 - today)
Source: Datastream, Credit Suisse / IDC
Prior to considering the commentary from our FX team, Figure 37 shows a longer-term CAD chart versus the USD.
Canadian Equity Strategy 17
22 December 2016
Figure 37: Canadian dollar (CAD) vs. USD 1.70 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90
0.80
1/4/1974 1/4/1977 1/4/1980 1/4/1983 1/4/1986 1/4/1989 1/4/1992 1/4/1995 1/4/1998 1/4/2001 1/4/2004 1/4/2007 1/4/2010 1/4/2013 1/4/2016 1/4/1971 Source: Datastream, Credit Suisse / IDC Alvise Marino Foreign Exchange – USD/CAD 212-325-5911 alvise.marino@credit- On the FX front, we expect the Canadian dollar to remain weak in 2017 and forecast suisse.com USDCAD to trade at 1.35 in 3 months and 1.37. The following drivers inform our view:
■ Policy divergence. The outlook for central bank policy is likely to remain broadly supportive for the USD in 2017. Our economists expect the Fed to hike twice in 2017, in line with market expectations, against a backdrop of projected policy easing or no change in most G10 countries. In Canada, the OIS market is pricing in a 42% likelihood of a 25bp hike by the Bank of Canada before the end of 2017, a somewhat hawkish bias that gained ground in the aftermath of the 30 November 2016 OPEC deal to cut oil supply.
Figure 38: OIS implied BoC policy rate for end 2017 consistent with higher oil
100% <= 0.25% (1+ cuts) 0.5% (unchanged) 54 90% >= 0.75% (1+ hikes hikes) WTI crude (right) 52 80% 70% 50 60% 48 50% 46 40%
30% 44 20% 42 10% 0% 40 8/1/2016 9/1/2016 10/1/2016 11/1/2016 12/1/2016 Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
■ We do not dispute the hawkish implications of firmer oil prices: removing the possibility of a price war between oil producing countries from the distribution of potential future
Canadian Equity Strategy 18
22 December 2016
outcomes reduces on the margin the likelihood that the Bank of Canada might have to “take out insurance” by cutting rates as it did in early 2015. We, however, see other risks, especially related to financial stability and to trade policy, that have the potential in our view to cause the market to reprice BoC policy expectations in a more dovish direction.
■ Financial stability risks. The recent surge in yields in the wake of the US election might become a source of concern for the Bank of Canada, in the light of the record high levels of household leverage in Canada. The pullback in housing sales in British Columbia since the introduction of a 15% levy on non-resident buyers gives us further reason for pause. The imposition of tighter macro prudential measures creates in our view more elbow space for the BoC to turn more accommodative, if the growth outlook were to warrant it.
■ Poor competitiveness. The long-awaited recovery in investment and in non-energy exports still appears elusive in the data, almost two years since the sharp correction lower in oil prices and in the loonie drove BoC officials to seek rebalancing of the economy away from the energy and mining sectors. This in our view creates a weak backdrop against potential negative shocks to growth from housing and from trade.
■ Protectionist risks. At the time of writing very few details are publicly available with regard to the Trump administration’s plans for trade policy. While campaign promises to fully repeal Nafta might prove arduous to implement due to resistance within the Republican congress camp, this remains a risk we cannot discount, especially since trade policy falls almost entirely under the executive power umbrella and is therefore less subject to control by the legislative branch.
■ The pricing of risks for the Canadian dollar that emerges from implied FX vols is relatively benign. Long-term implied vols are in the middle of the post-GFC range, and notably the entire vol curve is trading at a discount to average G10 vols. Given the idiosyncratic nature of risks related to the external trade outlook, we find the latter somewhat surprising, suggesting that some of these risks might be underpriced. All things considered, this reinforces our bearish bias on the Canadian dollar.
Figure 39: Long-term implied CAD vol is above 2014 Figure 40: USDCAD implied FX vols are inexpensive lows, but still not expensive in historical terms relative to G10 average vols
23 1.60 USDCAD implied vols as ratio to average G10 implied vols 21 USDCAD 1y implied volatilty (%) 1.40 5y Min 5y Max 19 5y Ave Current 17 1.20
15 1.00 13
11 0.80
9 0.60 7
5 0.40 2009 2010 2011 2012 2013 2014 2015 2016 1w 2w 1m 2m 3m 6m 9m 1y 2y
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
Canadian Equity Strategy 19
22 December 2016
Commodity concerns With nearly half of the Canadian equity capital markets being closely related to a variety of commodities, this section starts with Figure 41 one of our favourite charts highlighting equities relative to bonds.
Figure 41: Bond versus Stock indices – Canada
500
450
400
350
300
250
200
150
100
50
0 Dec 91 Dec 95 Dec 99 Dec 03 Dec 07 Dec 11 Dec 15
Canadian Treasuries > 1 Year Toronto Stock Exchange
Source: Bloomberg, Credit Suisse / IDC
Most notably Figure 42 is the outsized performance of Energy and Materials for overall S&P/TSX Composite Index returns.
Energy the weakest sector over the last 12 Figure 42: Performance table months Name 1 Week 1 Month 3 Months 6 Months 9 Months 12 Months Canadian Govt Bonds 10 Year (bps) 10 33 64 73 53 32 Canadian Dollar Spot 1.3% -0.5% 1.0% 2.9% 0.1% -3.2% Bloomberg West Texas Intermedi 0.8% 13.9% 20.6% 12.3% 34.9% 46.1% Henry Hub Natural Gas Spot Pri -7.7% 36.7% 17.9% 32.7% 99.4% 106.2% S&P/TSX COMPOSITE INDEX -0.4% 3.5% 5.5% 9.9% 13.2% 15.8% S&P/TSX CONS DISCRET IDX -0.7% 5.8% 5.1% 8.9% 10.2% 6.9% S&P/TSX CONS STAPLES IDX 0.0% 0.4% -1.8% 5.4% 0.0% 5.3% S&P/TSX ENERGY INDEX 2.0% 6.5% 11.8% 18.1% 22.9% 35.0% S&P/TSX FINANCIALS INDEX 0.4% 6.6% 13.0% 16.1% 17.9% 18.5% S&P/TSX HEALTH CARE IDX -6.6% -18.0% -37.1% -31.9% -49.2% -82.4% S&P/TSX INDUSTRIALS IDX -2.1% 3.0% 6.9% 16.6% 19.5% 21.0% S&P/TSX INFO TECH INDEX 0.8% -0.1% 1.2% 7.2% 8.6% 4.5% S&P/TSX MATERIALS INDEX -5.8% -6.4% -10.6% -8.8% 4.0% 29.6% S&P/TSX TELECOM SERV IDX -1.2% -0.4% -3.5% -0.8% 0.4% 4.5% S&P/TSX UTILITIES INDEX 1.3% 4.4% -0.9% -0.6% 5.9% 13.2%
Source: the BLOOMBERG PROFESSIONAL™ service
More specific on commodities, Figure 43 provides some additional perspective.
Canadian Equity Strategy 20
22 December 2016
Figure 43: Commodity performance overview Performance Over Last 6 Months 80%
60%
40%
20%
0%
-20%
-40%
-60%
Zinc
Gold
Lead
Silver
Nickel
Copper
PalmOil
Platinum
Palladium
ICESugar
Aluminium
LiveCattle
ICECocoa
ICECotton
LeanHogs
RoughRice
CBOTCorn
SoybeanOil
Steel(Billet)
Ethanol(US)
CBOTWheat
Coal(Nymex)
CurdeOil (WTI)
CBOTSoybeans
CrudeOil (Brent)
NaturalGas (US)
Coal(Richards Bay) CIECoffee (Arabica)
Min Max Current Source: Bloomberg, Datastream, Credit Suisse / IDC
Energy has the most significant commodity related weight in the Canadian benchmark. As a result, we believe there is some utility in considering the longer-term perspective of real oil prices as in Figure 44.
Figure 44: Real Oil Prices
Real Oil Prices - 2007 prices 140
120 3 yrs
100
80 9 yrs
60 9 yrs
40 3 yrs 5 yrs
20
28 yrs 15 yrs 19 yrs 11 yrs 0 1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
Source: DataStream, CS Global Strategy / IDC
With Canada's status as a net energy exporter, there is a substantial exposure to the overall Canadian capital market along with the Canadian economy. On a rough basis, the
Canadian Equity Strategy 21
22 December 2016
energy sector contributes about 9.5% of total value add which is a relatively good proxy for GDP. That number is clearly significant, but the Canadian economy is diversified across a number of areas. The metals and mining sector is not as large from an index perspective, however, a clear number of investment opportunities exist arising from better appreciating commodity price moves. Yet, the moves are very divergent for each of the commodities. One of the most watched commodities with a significant index exposure in Canada is gold. On a longer- term basis, Figure 45 provides a pricing perspective for gold in real terms.
Figure 45: Valuation of Gold – real
1'800
1'600 1980: 5.9 sds above long run average 1'400
1'200
1'000
'800
'600
'400
'200
0 1841 1861 1881 1901 1921 1941 1961 1981 2001
Source: Datastream, CS Global Strategy / IDC
Figure 46 illustrates the price of copper since 1970.
Figure 46: Copper since 1970 12'000
10'000
8'000
6'000
4'000
2'000
0 70 74 78 82 86 90 94 98 02 06 10 14
Source: Datastream, CS Global Strategy / IDC
Canadian Equity Strategy 22
22 December 2016
Beyond the two major commodity centric sectors, a very interesting aspect of the overall index performance were the results from Financials and Utilities – both being viewed as rate sensitives. Accordingly, we shift our discussion to interest rates in the next section. An interest rate perspective To help put the current rate environment into perspective, we start with Figure 47 with a longer-term view of US rates. Interest rates low in Figure 47: US long term interest rate (long series) historic terms % 16
14
12
10
8
6
4
2
0 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
US long term treasury interest rate (>10y) Source: S. Homer, R.J. Shiller, Datastream, Credit Suisse / IDC
Figure 48 and Figure 49 give two different views of Canadian rates – a historical time series of central bank rates for Canada and the US along with longer-term rates, respectively.
Figure 48: Macro Data - BoC Fed Rate and CADUSD Figure 49: Yields - Short and Long Rates Since 2000 % USD / CAD % 7.0 7.0 1.70 6.0 6.0 1.60
1.50 5.0 5.0
1.40 4.0 4.0 1.30 3.0 3.0 1.20 2.0 2.0 1.10
1.0 1.00 1.0
0 0.90 0 Jan 96 Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16
Bank of Canada Rate Fed Fund Rate USD / CAD (rhs) 3-month LIBOR CAD 10-year CAD Government Bond 30-year CAD Government Bond
Source: Bank of Canada, Bloomberg, Credit Suisse / IDC Source: Bloomberg, Credit Suisse / IDC
Canadian Equity Strategy 23
22 December 2016
The current Canadian term structure appears in Figure 50 with a notable shift in the curve in recent months. A major shift Canadian Figure 50: Government Bond Yield Curve CAD term structure Yield in % 1.6
1.4
1.2
1.0
0.8
0.6
0.4 0 1 2 3 4 5 6 7 8 9 10 11 Time to Maturity (years) Current 3 months ago 1 year ago
Source: Bloomberg, Credit Suisse / IDC
Rate expectations continue to be rather benign as illustrated in Figure 51. Benign rate Figure 51: Cumulative Interest Rate Expectations over Next 12 Months expectations basis points* 30
25
20
15
10
5
0
-5 Fed ECB BoE SNB BoJ BoC RBA RBNZ Expected change in short-term interest rates over 12 months, current 7 days ago 1 month ago
Source: Bloomberg, Credit Suisse / IDC
Despite the rather frenetic movement upwards in bond yields over the past three months, the overall level of interest rates remains low in any reasonable historical view. Figure 52 partly illustrates that point.
Canadian Equity Strategy 24
22 December 2016
Figure 52: Cdn & US 10-year yields
2.80 Cdn 10-year US 10-year 2.60 2.40 2.20 2.00 A rapid rise in rates % 1.80 after the US election 1.60 1.40 1.20
1.00
11/7/2016 12/5/2016
10/17/2016 10/24/2016 10/31/2016 11/14/2016 11/21/2016 11/28/2016 12/12/2016
Source: the BLOOMBERG PROFESSIONAL™ service
Ongoing yield These types of large moves can motivate near-term funds flows and shorter-term returns. attraction in the market While deferring to the analysts covering the interest sensitive sectors, we note the level of rates still seems favourable for many of these businesses and the dividend yield attraction is high in the market.
Canadian Equity Strategy 25
22 December 2016
A HOLT® perspective Our HOLT® analysis provides a useful time series of data with consistent accounting over an extended period of time. With the importance of the US to the Canadian market, many of the charts below compare these two markets in HOLT's relative wealth view. Figure 53 and Figure 54 provide the aggregate CFROI® levels highlighting the weaker Canadian returns (both historical and forecast).
Figure 53: Canada Aggregate CFROI Figure 54: US Aggregate CFROI
Source: Credit Suisse HOLT Lens™ Source: Credit Suisse HOLT Lens™
Expectations for aggregate asset growth are similar in both Canada and the US as shown in Figure 55 and Figure 56.
Figure 55: Canada Aggregate Asset Growth Figure 56: US Aggregate Asset Growth
Source: Credit Suisse HOLT Lens™ Source: Credit Suisse HOLT Lens™
CFROI® is a critical HOLT® metric and Figure 57 contains the Canadian-US time series comparison. The below chart highlights that the level of returns (CFROI®) priced in for Canada are still well below the long term median level. By way of contrast, market implied expectations for the US are only slightly below the long term median level.
Canadian Equity Strategy 26
22 December 2016
Figure 57: Market-Implied CFROI over time – Canada vs. US
11.00 USA Canada
10.00
9.00
8.00
7.00
6.00 MarketImpliedCFROI
5.00
4.00
1996 2006 2016 2017 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015 1995 Source: Credit Suisse HOLT Lens™
Canada's structurally lower CFROI® levels tend to have wider implied discount rates as show in Figure 58.
Figure 58: Market-Derived Discount Rate: Canada vs. United States 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00
-1.00
MarketImplied Discount Rate (%)
2001-Jul 2012-Jul
2007-Jan
2002-Jun 2013-Jun
1998-Oct 2009-Oct
2004-Apr 2015-Apr
1999-Sep 2006-Feb 2010-Sep
1996-Dec 2007-Dec
2000-Aug 2011-Aug
1997-Nov 2008-Nov
2005-Mar 2016-Mar
2003-May 2014-May
Spread USA Canada
Source: Credit Suisse HOLT Lens™
With that comparative backdrop completed, we believe it is useful to consider the existing CFROI® expectations for each of the Canadian sectors as shown in Figure 59.
Canadian Equity Strategy 27
22 December 2016
Figure 59: Canada sector CFROI® CFROI 10 yr CFROI Last Fiscal Name CFROI Forecast Median Year CAN Financials 11.70 12.52 10.64 CAN Consumer Discretionary 8.66 9.64 9.63 CAN Consumer Staples 8.19 9.19 9.69 CAN Industrials 7.16 7.41 7.61 CAN Information Technology 15.92 6.83 10.30 CAN Real Estate 5.07 5.21 5.82 CAN Utilities 4.56 3.33 3.91 CAN Materials 6.03 1.18 3.30 CAN Energy 3.86 -0.40 2.12 Canada All Sectors 6.80 5.38 6.12
Source: CFROI®, HOLT®
Notably, on HOLT®, the CFROI® expectations for the overall market are slightly positive versus last fiscal year, but still below the 10-year median. On a sector-specific basis, the CFROI® expectations are positive against the 10-year median and the last fiscal year for only Consumer Staples, Industrials, and Real Estate. The most significant positive changes versus last year, include:
■ Financials with a 1.88% negative delta and 1.06% below the 10-year median;
■ Information Technology with a 3.47% positive delta versus last year (but well below the 10-year level);
■ Energy and Materials both with substantially positive deltas versus last year; however, both sectors still being well below historical levels. In light of the overall Canadian sector skew, we provide some additional HOLT® analysis for the Energy, Financials and Materials sectors below. Starting with the Financials, we specifically focused on the Banks sub-sector given some of the index composition issues between S&P/TSX and the S&P 500 for the Financials. In Figure 60 and Figure 61 we highlight HOLT's Relative Wealth Charts for both the Canadian and the US banks, respectively.
Figure 60: Bank – Canada Figure 61: Banks – US
Source: HOLT® Source: HOLT®
From our perspective, the most striking aspect of the comparative CFROI® levels is the structural decline arising from the financial crisis for the US banks versus those in Canada. We naturally defer to our coverage teams; however, the market structure differences and business mix considerations seem to be the major reasons for this divide.
Canadian Equity Strategy 28
22 December 2016
There are similar index composition issues with the Energy sector in light of the pipelines having a large weight in the S&P/TSX. With the existing data, there are greater difficulties in eliminating this skew, however, the fundamental drivers of commodity pricing for all of the remaining constituents is largely similar across the border. Figure 62 and Figure 63 illustrate the HOLT® Relative Wealth Charts for both the Canadian and the US Energy sectors, respectively.
Figure 62: Energy – Canada Figure 63: Energy – USA
Source: HOLT® Source: HOLT®
Our final area of focus is the Materials sector that also has some significant differences in the underlying constituents across the Canada-US border. Notably, the HOLT® Relative Wealth Charts for both the Canadian and the US Materials sectors in Figure 64 and Figure 65, respectively, look to highlight a significant level of return variability for the Canadian sector.
Figure 64: Materials – Canada Figure 65: Materials - USA
Source: HOLT® Source: HOLT®
Clearly, there is a wealth of available information and perspective from HOLT® that is best discussed with that Specialist Team. Before addressing the sector specifics from our Equity Research Team, we briefly turn our attention to some conventional valuation metrics.
Canadian Equity Strategy 29
22 December 2016
Conventional Considerations We do not provide index forecasts for either the S&P/TSX 60 or S&P/TSX Composite, but some insight can be gained from the information appearing below for these benchmarks. A starting point is historical P/E valuations for the 60 and Composite with mean and standard deviation bands appearing in Figure 66 and Figure 67, respectively.
Figure 66: S&P TSX 60 P/E Ratio Figure 67: S&P TSX Composite P/E Ratio
23.0x 25.0x 21.0x 23.0x 19.0x 21.0x 17.0x 19.0x 15.0x 17.0x 13.0x 15.0x 11.0x 13.0x 9.0x 11.0x 9.0x 7.0x 7.0x 5.0x
5.0x
5/1/2010 5/1/2011 9/1/2011 1/1/2013 1/1/2014 5/1/2006 9/1/2006 1/1/2007 5/1/2007 9/1/2007 1/1/2008 5/1/2008 9/1/2008 1/1/2009 5/1/2009 9/1/2009 1/1/2010 9/1/2010 1/1/2011 1/1/2012 5/1/2012 9/1/2012 5/1/2013 9/1/2013 5/1/2014 9/1/2014 1/1/2015 5/1/2015 9/1/2015 1/1/2016 5/1/2016 9/1/2016
1/1/2006
9/1/2009 5/1/2014 5/1/2006 9/1/2006 1/1/2007 5/1/2007 9/1/2007 1/1/2008 5/1/2008 9/1/2008 1/1/2009 5/1/2009 1/1/2010 5/1/2010 9/1/2010 1/1/2011 5/1/2011 9/1/2011 1/1/2012 5/1/2012 9/1/2012 1/1/2013 5/1/2013 9/1/2013 1/1/2014 9/1/2014 1/1/2015 5/1/2015 9/1/2015 1/1/2016 5/1/2016 9/1/2016 1/1/2006 Source: Bloomberg, Credit Suisse RAVE Source: Bloomberg, Credit Suisse RAVE
The underlying data for these charts appears in Figure 68.
Figure 68: P/E statistics 60 Composite Mean 17.0x 18.4x Median 17.2x 18.4x Min 8.8x 8.9x Max 22.1x 23.6x +1 Std Dev 19.7x 21.5x -1 Std Dev 14.2x 15.3x
Source: Bloomberg, Credit Suisse RAVE
In our view, another key valuation framework revolves around price-to-cash flow. Figure 69 and Figure 70 illustrate historical P/CF valuations for the 60 and Composite with mean and standard deviation bands.
Figure 69: S&P TSX 60 P/CF Figure 70: S&P TSX Composite P/CF
12.0x 12.0x 11.0x 11.0x 10.0x 10.0x 9.0x 9.0x 8.0x 8.0x 7.0x 7.0x 6.0x 6.0x 5.0x 5.0x
4.0x 4.0x
5/1/2008 5/1/2009 1/1/2013 1/1/2006 5/1/2006 9/1/2006 1/1/2007 5/1/2007 9/1/2007 1/1/2008 9/1/2008 1/1/2009 9/1/2009 1/1/2010 5/1/2010 9/1/2010 1/1/2011 5/1/2011 9/1/2011 1/1/2012 5/1/2012 9/1/2012 5/1/2013 9/1/2013 1/1/2014 5/1/2014 9/1/2014 1/1/2015 5/1/2015 9/1/2015 1/1/2016 5/1/2016 9/1/2016
9/1/2009 9/1/2010 5/1/2006 9/1/2006 1/1/2007 5/1/2007 9/1/2007 1/1/2008 5/1/2008 9/1/2008 1/1/2009 5/1/2009 1/1/2010 5/1/2010 1/1/2011 5/1/2011 9/1/2011 1/1/2012 5/1/2012 9/1/2012 1/1/2013 5/1/2013 9/1/2013 1/1/2014 5/1/2014 9/1/2014 1/1/2015 5/1/2015 9/1/2015 1/1/2016 5/1/2016 9/1/2016 1/1/2006
Source: Bloomberg, Credit Suisse RAVE Source: Bloomberg, Credit Suisse RAVE
The underlying data for these charts appears in Figure 71.
Canadian Equity Strategy 30
22 December 2016
Figure 71: P/CF statistics 60 Composite Mean 8.6x 8.7x Median 8.7x 8.8x Min 4.6x 4.4x Max 11.1x 10.9x +1 Std Dev 9.6x 9.6x -1 Std Dev 7.6x 7.7x
Source: Bloomberg, Credit Suisse RAVE
Our final valuation summary charts relate to dividend yields for the 60 and Composite with mean and standard deviation bands appearing in Figure 72 and Figure 73, respectively.
Figure 72: S&P TSX 60 - Dividend Yield Figure 73: S&P TSX Composite - Dividend Yield
5.0 5.5 4.5 5.0 4.0 4.5 4.0 3.5
3.5 % 3.0 % 3.0 2.5 2.5 2.0 2.0 1.5 1.5
1.0 1.0
5/1/2006 1/1/2012 5/1/2013 1/1/2006 9/1/2006 1/1/2007 5/1/2007 9/1/2007 1/1/2008 5/1/2008 9/1/2008 1/1/2009 5/1/2009 9/1/2009 1/1/2010 5/1/2010 9/1/2010 1/1/2011 5/1/2011 9/1/2011 5/1/2012 9/1/2012 1/1/2013 9/1/2013 1/1/2014 5/1/2014 9/1/2014 1/1/2015 5/1/2015 9/1/2015 1/1/2016 5/1/2016 9/1/2016
5/1/2009 5/1/2014 5/1/2006 9/1/2006 1/1/2007 5/1/2007 9/1/2007 1/1/2008 5/1/2008 9/1/2008 1/1/2009 9/1/2009 1/1/2010 5/1/2010 9/1/2010 1/1/2011 5/1/2011 9/1/2011 1/1/2012 5/1/2012 9/1/2012 1/1/2013 5/1/2013 9/1/2013 1/1/2014 9/1/2014 1/1/2015 5/1/2015 9/1/2015 1/1/2016 5/1/2016 9/1/2016 1/1/2006 Source: Bloomberg, Credit Suisse RAVE Source: Bloomberg, Credit Suisse RAVE
The underlying data for these charts appears in Figure 74.
Figure 74: Dividend yield statistics 60 Composite Mean 2.73 2.87 Median 2.84 2.85 Min 1.63 1.91 Max 4.41 4.97 +1 Std Dev 3.23 3.29 -1 Std Dev 2.23 2.45
Source: Bloomberg, Credit Suisse RAVE
Utilizing the Bloomberg consensus for the S&P TSX 60 and the S&P TSX Composite, we note the following data points:
■ Earnings (2016): 47.84 / 755.84;
■ Earnings (2017): 58.35 / 946.98;
■ Dividends (2016): 25.65 / 427.54;
■ Dividends (2017): 26.92 / 446.84;
■ CF from Operations (2016): 82.01 / 1,410.42; and,
■ CF from Operations (2017): 96.18 / 1,667.31.
Canadian Equity Strategy 31
22 December 2016
On these consensus figures, the Street estimates imply 22% earnings growth for the 60 on 2017 versus 2016 numbers. In a similar fashion, consensus cash flow growth is 17%. For some specific perspective, we provide a series of matrices for earnings, dividends and cash flow from operations based on the data above that appear in Figure 75, Figure 76, and Figure 77, respectively. To help put these matrices in context, the current S&P/TSX 60 level is 904.24 and the S&P/TSX Composite level is 15,292.96.
Figure 75: Illustrative S&P TSX Composite at various P/E multiple and earnings Earnings (C$) 600 650 700 750 800 850 900 950 1,000 1,050 1,100 8.0x 4,800 5,200 5,600 6,000 6,400 6,800 7,200 7,600 8,000 8,400 8,800 9.0x 5,400 5,850 6,300 6,750 7,200 7,650 8,100 8,550 9,000 9,450 9,900 10.0x 6,000 6,500 7,000 7,500 8,000 8,500 9,000 9,500 10,000 10,500 11,000 11.0x 6,600 7,150 7,700 8,250 8,800 9,350 9,900 10,450 11,000 11,550 12,100 12.0x 7,200 7,800 8,400 9,000 9,600 10,200 10,800 11,400 12,000 12,600 13,200 13.0x 7,800 8,450 9,100 9,750 10,400 11,050 11,700 12,350 13,000 13,650 14,300 14.0x 8,400 9,100 9,800 10,500 11,200 11,900 12,600 13,300 14,000 14,700 15,400 15.0x 9,000 9,750 10,500 11,250 12,000 12,750 13,500 14,250 15,000 15,750 16,500 16.0x 9,600 10,400 11,200 12,000 12,800 13,600 14,400 15,200 16,000 16,800 17,600
P/E Multiple 17.0x 10,200 11,050 11,900 12,750 13,600 14,450 15,300 16,150 17,000 17,850 18,700 18.0x 10,800 11,700 12,600 13,500 14,400 15,300 16,200 17,100 18,000 18,900 19,800 19.0x 11,400 12,350 13,300 14,250 15,200 16,150 17,100 18,050 19,000 19,950 20,900 20.0x 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 21,000 22,000 21.0x 12,600 13,650 14,700 15,750 16,800 17,850 18,900 19,950 21,000 22,050 23,100 22.0x 13,200 14,300 15,400 16,500 17,600 18,700 19,800 20,900 22,000 23,100 24,200 23.0x 13,800 14,950 16,100 17,250 18,400 19,550 20,700 21,850 23,000 24,150 25,300 24.0x 14,400 15,600 16,800 18,000 19,200 20,400 21,600 22,800 24,000 25,200 26,400
Source: Bloomberg, Credit Suisse RAVE
Figure 76: Illustrative S&P TSX Composite at various P/CF multiple and cash flow Cash Flow (C$) 1,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900 2,000 2,100 2,200 4.0x 4,800 5,200 5,600 6,000 6,400 6,800 7,200 7,600 8,000 8,400 8,800 4.5x 5,400 5,850 6,300 6,750 7,200 7,650 8,100 8,550 9,000 9,450 9,900 5.0x 6,000 6,500 7,000 7,500 8,000 8,500 9,000 9,500 10,000 10,500 11,000 5.5x 6,600 7,150 7,700 8,250 8,800 9,350 9,900 10,450 11,000 11,550 12,100 6.0x 7,200 7,800 8,400 9,000 9,600 10,200 10,800 11,400 12,000 12,600 13,200 6.5x 7,800 8,450 9,100 9,750 10,400 11,050 11,700 12,350 13,000 13,650 14,300 7.0x 8,400 9,100 9,800 10,500 11,200 11,900 12,600 13,300 14,000 14,700 15,400 7.5x 9,000 9,750 10,500 11,250 12,000 12,750 13,500 14,250 15,000 15,750 16,500 8.0x 9,600 10,400 11,200 12,000 12,800 13,600 14,400 15,200 16,000 16,800 17,600 8.5x 10,200 11,050 11,900 12,750 13,600 14,450 15,300 16,150 17,000 17,850 18,700
Cash Flow Cash Multiple 9.0x 10,800 11,700 12,600 13,500 14,400 15,300 16,200 17,100 18,000 18,900 19,800 9.5x 11,400 12,350 13,300 14,250 15,200 16,150 17,100 18,050 19,000 19,950 20,900 10.0x 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 21,000 22,000 10.5x 12,600 13,650 14,700 15,750 16,800 17,850 18,900 19,950 21,000 22,050 23,100 11.0x 13,200 14,300 15,400 16,500 17,600 18,700 19,800 20,900 22,000 23,100 24,200 11.5x 13,800 14,950 16,100 17,250 18,400 19,550 20,700 21,850 23,000 24,150 25,300
Source: Bloomberg, Credit Suisse RAVE
Canadian Equity Strategy 32
22 December 2016
Figure 77: Illustrative S&P TSX Composite at various dividend yield and dividends Dividend (C$) 350 375 400 425 450 475 500 525 550 575 600 1.0% 35,000 37,500 40,000 42,500 45,000 47,500 50,000 52,500 55,000 57,500 60,000 1.3% 28,000 30,000 32,000 34,000 36,000 38,000 40,000 42,000 44,000 46,000 48,000 1.5% 23,333 25,000 26,667 28,333 30,000 31,667 33,333 35,000 36,667 38,333 40,000 1.8% 20,000 21,429 22,857 24,286 25,714 27,143 28,571 30,000 31,429 32,857 34,286 2.0% 17,500 18,750 20,000 21,250 22,500 23,750 25,000 26,250 27,500 28,750 30,000 2.3% 15,556 16,667 17,778 18,889 20,000 21,111 22,222 23,333 24,444 25,556 26,667 2.5% 14,000 15,000 16,000 17,000 18,000 19,000 20,000 21,000 22,000 23,000 24,000 2.8% 12,727 13,636 14,545 15,455 16,364 17,273 18,182 19,091 20,000 20,909 21,818 3.0% 11,667 12,500 13,333 14,167 15,000 15,833 16,667 17,500 18,333 19,167 20,000 3.3% 10,769 11,538 12,308 13,077 13,846 14,615 15,385 16,154 16,923 17,692 18,462
Dividend Yield (%) Yield Dividend 3.5% 10,000 10,714 11,429 12,143 12,857 13,571 14,286 15,000 15,714 16,429 17,143 3.8% 9,333 10,000 10,667 11,333 12,000 12,667 13,333 14,000 14,667 15,333 16,000 4.0% 8,750 9,375 10,000 10,625 11,250 11,875 12,500 13,125 13,750 14,375 15,000 4.3% 8,235 8,824 9,412 10,000 10,588 11,176 11,765 12,353 12,941 13,529 14,118 4.5% 7,778 8,333 8,889 9,444 10,000 10,556 11,111 11,667 12,222 12,778 13,333 4.8% 7,368 7,895 8,421 8,947 9,474 10,000 10,526 11,053 11,579 12,105 12,632 5.0% 7,000 7,500 8,000 8,500 9,000 9,500 10,000 10,500 11,000 11,500 12,000
Source: Credit Suisse estimates, Bloomberg
In addition to these Index specific estimates, we performed bottoms-up analyses for both the S&P/TSX 60 and the Composite using consensus data for EPS and DPS. With that data, we applied the various constituent member weights. Naturally, the data has some issues in light of lack of consensus data for selected constituents or rather limited data. Very simply, the bottoms-up consensus information provides a series of observations that include the following:
■ On earnings growth for 2017 versus 2016, Energy earnings growth is currently forecast at 174.2% with Materials at 39.3% as the two major leaders;
■ Over the same 2017 versus 2016 timeframe, double digit earnings growth is forecast for IT, Financials, Industrials, Utilities, Consumer Discretionary, and Consumer Staples;
■ Only Health care has negative earnings outlooks for 2016 and 2017 versus prior years;
■ For dividend growth, Consumer Staples/Discretionary, Industrials, Utilities and Energy forecast the highest levels of year-on-year growth for 2016-17. Figure 78 provides some highlights.
Figure 78: S&P TSX Composite EPS and DPS changes (Consensus) EPS Chg (%) DPS Chg (%) Percentage changes 2016 2017 2016 2017 Financials -0.3% 14.7% 6.3% 5.1% Energy -34.8% 174.2% -5.3% 7.2% Materials 0.6% 39.3% -10.0% -4.0% Industrials -2.0% 12.6% 11.7% 10.7% Consumer Discretionary 11.5% 12.3% 14.0% 8.0% Telecom 6.7% 5.8% 4.6% 4.5% Consumer Staples 21.3% 11.2% 12.6% 7.9% Real Estate -24.2% 14.5% 0.7% 1.7% Utilities 17.0% 12.4% 3.7% 6.7% IT 11.1% 16.0% 6.6% -14.8% Health Care -49.1% -1.0% 1.3% 1.5%
Source: Bloomberg, Credit Suisse RAVE
A few of the notable features of the Canadian market include: Canadian Equity Strategy 33
22 December 2016
■ The impact of commodity movements is often pronounced across multiple sectors;
■ A number of businesses have rather resilient domestic business models with relatively high barriers to entry; and,
■ Redeployment dilemmas often exist with a struggle of attempting to perpetuate growth by moving into more competitive markets versus ongoing capital return objectives.
Canadian Equity Strategy 34
22 December 2016
Sector specifics This section briefly highlights sector commentary with top stock picks for broad areas that include:
■ Consumer;
■ Diversified;
■ Energy;
■ Financials;
■ Forest Products;
■ Industrials;
■ Infrastructure; and,
■ Metals and Mining. Each of these areas is addressed below.
Consumer Laurent Grandet Beverages 212-538-7901 laurent.grandet@credit- Our US beverage team maintains an Outperform rating on Cott Corporation (COT), with a suisse.com US$14 target price. Cott's management has reshaped the company over the past couple years to make it less dependent on the declining, low-margin private-label business by expanding into the faster-growing and more profitable home/office delivery (HOD) business. This dynamic benefits the algorithm longer term and is helped further by management's desire to expand even more into contract manufacturing. We remain positive on the fundamental outlook of the redefined company, but we think upside is likely limited in the near-term as management works through some operational issues. Overall the team sees strong fundamentals for the US beverage sector, but cautions that the macro environment and the new Trump administration could pressure large cap international names. Some specific macro conditions include:
■ Expectation of a rate hike will continue to pressure the group as investors chase yield (average group yield of ~1.5%) ■ US-centric companies considered safer than those with large international exposures with FX to continue to be a meaningful headwind for global companies in 2017 ■ Continued headwinds in emerging economies such as Brazil, Turkey, India, and China Trump policy reform should benefit the sector longer term / some regulatory pressures loom
■ Lower corporate tax rates will positively impact those with the largest domestic exposure (the highest marginal tax rates) ■ Proposed cash repatriation penalty of 10% creates P&L headwind, but provides increased optionality for investment or shareholder return ■ Threat of sugar/ sweetener tax and the resulting impact on consumer sentiment and purchasing habits Valuation multiples remain high, merited by strong relative fundamentals
Canadian Equity Strategy 35
22 December 2016
■ US Beverages trading at a discount to historical average (current 22x P/E, compared to 24.3x over the past three years) ■ Organic growth expectations are higher across beverages compared to other Staples sectors ■ Fundamentals remain strong, supported by organic growth expectations, M&A speculation and cost cutting opportunities Diversified Nick Stogdill Top Pick: Brookfield Business Partners (Outperform, TP US$29) 416-352-4592 nick.stogdill@credit- Brookfield Business Partners (BBU) is Brookfield's flagship private equity arm, which suisse.com operates businesses across a diverse set of global industries. BBU offers investors an attractive combination of downside protection from its ownership of several established, high-quality franchises, while investments in "out of favour" businesses create the potential for meaningful capital appreciation if BBU executes on value enhancing initiatives. Unlike other publicly listed Brookfield entities, BBU appeals to growth investors (versus income investors) given its emphasis on capital appreciation. BBU's current distribution is not expected to grow, and implies a yield of 1%, comparing to an average distribution yield of 5.6% for Brookfield peers. A growth focus On December 13, BBU announced a C$514m equity issuance or C$554m (~$US421m) if over-allotment is exercised. The transaction, which is expected to close Dec. 21, 2016, made no impact to our TP, as dilution from the issuance was offset by an increase in corporate cash. The cash deployment sensitivity from our Note suggests potential returns of 10% to 30% depending on the ROI and WACC used. The potential upside from capital deployment is not included in our US$29 target price.
Top Pick: Element Financial Corporation (Outperform, C$TP16) We remain positive on Element Financial Corporation (EFN), which completed its spin-out from ECN Capital on October 4, 2016. EFN operates the largest Fleet Management Company in North America with approximately 40% market share in the U.S. and Canada. Its large, stable client base generates a predictable revenue stream with low credit losses that we believe will result in strong cash flow generation. After several transformative acquisitions (PHH and GE) and shifts in strategic direction, including the contemplated sale of Canadian C&V and ultimate spin-out of ECN, we believe consistency with respect to strategy and financial objectives of Fleet will lead to a re-rating of shares.
■ Our C$16 Target Price for EFN Fleet is based on a 1.7x P/B multiple on our 2017E BVPS (implying a 2017E P/E of 14.5x), down from our C$17/sh sum-of-the-parts valuation due to a reduction in book value post-split. EFN is currently trading at a 2017 P/E of 11.7x vs. its peers at 15.7x. Energy Our Energy sector commentary is largely divided into three groups:
■ Oil Sands;
■ SMID E&P; and,
■ International E&P. These areas are addressed below.
Canadian Equity Strategy 36
22 December 2016
Oil Sands: Dark Clouds Are Lifting Jason Frew For some time, the Canadian oil sands industry has been weighed down by uncertain 403-476-6022 fiscal terms and climate policy, constraints related to market access, and high project jason.frew@credit- capital. However, governments have responded with certainty and clarity on key issues. suisse.com Producers have also responded with improved cost structures and progress on new technologies. Overall, dark clouds are lifting and investability in the sector is improving. Governments have responded with: Certainty on provincial royalties Clarity on climate change policies Progress on pipelines Producers have responded with: Focus on reliability Structural cost reductions (capital efficiency, opex, sustaining capex) Progress on breakthrough technologies (e.g., solvents) Re-initiation of Growth Back in growth mode With a more investable landscape, producers are looking to reinitiate oil sands growth via (1) completion of stalled projects utilizing existing SAGD technology, (2) brownfield expansions that leverage existing SAGD facilities; and (3) greenfield development utilizing new solvent-assisted SAGD technology. Capital allocation to stalled SAGD oil sands projects is also warranted by material cost reductions as contracts have been rebid, work processes revamped, and facilities re- engineered. Restart of stalled projects should include: Canadian Natural's Kirby North in situ oil sands project Cenovus's Christina Lake Phase G (CL-G) in situ oil sands project Sanction of new greenfield development utilizing solvent-assisted SAGD technology is also warranted by material improvement in capital efficiencies and greenhouse gas intensity associated with lower water usage. Sanction of new greenfield development using new solvent technology should include: Imperial Oil's Aspen in situ oil sands project Bite sized projects for Below we show a range of oil sands projects beyond current committed supply (i.e., 500k bpd of supply Horizon Expansion, Fort Hills, Foster Creek "G," Christina Lake "F") with attractive breakevens, including a mid-teens return. The list is dominated by bite-sized projects, brownfield expansions and debottlenecking but still adds up to over 500kbd of new supply potential. IMO's Aspen is the only new greenfield development of scale. As the industry progresses technical understanding and commercialization of new solvent-based technologies, we expect the list to grow to include more new greenfield developments.
Canadian Equity Strategy 37
22 December 2016
Figure 79: 'The Shape of Oil Sands to Come' (beyond current committed supply)
70
65
60 NL-A
H
-
Cold Lake Lake Cold Expansion
Primrose Expansion FC 55
Aspen Horizon
Debottleneck
Kirby North 50 CL-G Lloyd Thermal Brownfield 45
EM SAGP EM MEG P2B WTI WTI Breakeven (US$/b) 40 HSE CVE CNQ 35 IMO
30 0 50 100 150 200 250 300 350 400 450 500 550 600 Production Capacity (mbd)
Source: Credit Suisse estimates Substantial FCF and a More Capital-Efficient Future FCF growth translating With previously committed large scale mining projects still ramping up or set to come on into capital return stream over the next couple of years, oil sands supply continues to rise rapidly ( notwithstanding wildfire related outages that impacted 2016). However, total oil sands capex is set to continue its downward trajectory, leading to substantial free cash generation for the Canadian majors such as CNQ, IMO and SU where return of cash could accelerate via dividend growth and share buybacks. Going forward a different picture emerges, significantly reduced capital intensity with greater focus on in situ vs. mining, emphasis on debottlenecking of existing facilities and brownfield development, and deployment of capital efficient solvent-based technologies.
Figure 80: Oil Sands Capex and Production Outlook with LT ~US$55WTI
40,000 4,000
35,000 3,500
30,000
3,000 25,000
20,000 2,500 C$mln
15,000 Production (mbd) 2,000
10,000
1,500 5,000
0 1,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Hist. Sustaining Capex Hist. Growth Capex Proj. Sustaing Capex Proj. Growth Capex CAPP Production Forecast CS Production Forecast
Source: Credit Suisse estimates
Canadian Equity Strategy 38
22 December 2016
Cash Break-evens Have Structurally Improved Structural cost savings Optimization, innovation, and a focus on reliability have contributed to falling cash break- evens for the oil sands industry, along with lower cyclical input costs such as natural gas. The US/CAD FX rate has also helped. Greater than 50% of the cost savings could be retained, in our view, as a number of factors including work practices and facilities design have structurally changed.
Figure 81: Oil Sands Operating + Sustaining WTI Breakeven Since Oil Crash
$120
$100
$80
$60 US$/b
$40
$20
$0 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416
SU CVE IMO CNQ WTI
Source: Credit Suisse estimates Key Catalyst – Improving Outlook For Market Access In light of the recent approval of the Line 3 Replacement Project (L3R) and the Trans Mountain Project (TMX) by the Canadian federal government, as well as the potential revival of the Keystone XL (KXL) under the new US administration, we provide some analysis on the potential impact of new pipeline projects on Canadian crude market dynamics. Plentiful pipe on the In the near term, as Western Canadian crude production is expected to rise, production horizon… will continue to outpace current pipe capacity, and rail will play a role to move crude to markets (albeit a more modest role relative to prior expectations – for example, Canadian crude oil exports by rail have ranged between just 40-100kbd in 2016 vs. a range of 80- 160kbd in 2015). Falling conventional oil supply and pipeline capacity creep have helped to free up space in the near term. Longer term, assuming contribution from new pipelines (L3R, KXL, and TMX), Canada could return to excess pipeline capacity as early as 2020. Given setbacks in the past, producers and investors may remain wary of new infrastructure actually materializing to improve takeaway capacity; however, the political landscape has changed materially, in our view, and prospects for broader takeaway have brightened.
Canadian Equity Strategy 39
22 December 2016
Figure 82: Western Canada Supply Outlook & Takeaway Capacity
7,000
6,000
5,000 TMX Enbridge L3R KXL 4,000 AB Clipper US Permit Approved Sturgeon Refinery Existing Local Demand 3,000 TransCanada Keystone Spectra Express Supply/Demand(mbd) Trans Mountain 2,000 Enbridge Mainline (Bakken adj.) Total Western Supply 1,000
0
2020 2016 2017 2018 2019 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Source: Credit Suisse estimates
Canadian Heavy Oil Diffs – First a Little Wider, Then Much Narrower? …leading to future We note that a year ago, when we had no clarity on new pipelines, marginal barrels would differential implications have to clear on rail to the U.S. Gulf Coast, pushing heavy differentials wider to accommodate for more rail economics. Some widening could still occur during 2017-19 as committed supply continues to ramp up. However, an alternate future is beginning to shape out wherein heavy oil differentials could narrow meaningfully toward full pipe economics, with progress now evident on pipelines.
Figure 83: Illustrative Heavy Differentials Scenarios
400 $25.00
200
0 $20.00 Full Rail Economics to USGC -200
-400 $15.00
Net Supply/Demand -600 Full Pipe Economics to USGC Heavy Differentials -800 $10.00
Heavy Differentials Net Supply/Demand(mbd) -1,000 Heavy Differentials (US$/b) (ex. New Pipe)
-1,200 $5.00
-1,400
-1,600 $0.00
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Source: Credit Suisse estimates
To illustrate the potential impact of narrower heavy oil differentials, we re-examine Aspen's NPV/sh in the context of WTI between US$50-70/bbl and WCS diffs between 20-30%. We note that NPV/sh is similarly ~C$5/sh at US$70 WTI with a 30% diff as at US$60 WTI with a 25% diff, or even US$50 WTI with a 20% diff.
Canadian Equity Strategy 40
22 December 2016
Figure 84: IMO's Aspen (2 Phases) NPV/sh with Varying LT Oil Price and Heavy Differentials
$8.00
$7.00
$6.00
$5.00
$4.00
NPV /sh NPV $3.00
$2.00
$1.00
$0.00 30% 25% 20% WCS Diffs as %WTI
$50 $60 $70
Source: Credit Suisse estimates *Assume WACC of 8%
Top Picks Oil Sands: Imperial Oil (J. Frew, Outperform, TP C$50): IMO's FCF after dividends expands materially in 2017+ even while funding growth capital that could add ~25% to the company's production base in 2020+. With the balance sheet moving to a net cash position by 2019, we expect a buyback could be introduced along the way. Beyond currently committed growth in the oil sands, IMO’s Aspen project utilizing solvent-assisted SAGD technology represents the only new greenfield project of scale that will likely be sanctioned in the near term. Aspen is material and could be worth ~C$5.00 to IMO shareholders. Mid & Large Cap: Encana (J. Frew, Outperform, TP US$14): ECA is now poised to grow production and cash flow meaningfully over the medium term with an inventory of over 10k "premium" locations concentrated in the Permian and Montney stacked plays. ECA's premium inventory is conservatively based on (1) proven horizons, (2) oil and condensate hydrocarbons; and, (3) standard spacing. Cash margin growth potential is considerable and should meaningfully outpace underlying production growth. Core four play volume should accelerate mid-2017 and into 2018 as capital is deployed and as new facilities come on-stream in the Montney. Enerplus (J. Frew, Outperform, TP C$15): We continue to expect ERF to grow debt & dividend adjusted CFPS at a relatively robust rate vs. our coverage universe over the next three years while maintaining strong financial metrics. Management has built a solid track record that is evidenced by superior historical debt and dividend adjusted production per share growth and recycle ratios. Recent updates from management provided clear visibility around growth plans and further down spacing tests in the Bakken which could enhance depth of inventory – one of few remaining pushback areas in our view.
Canadian Equity Strategy 41
22 December 2016
Canadian SMID E&P: David Phung 2016 was a volatile year, with high natural gas storage levels driving significantly wide 403-476-6023 AECO basis differentials resulting in pricing below one Canadian dollar for natural gas in david.phung@credit- Western Canada. This volatility was in addition to low oil prices during the year, which suisse.com challenged many producers. That being said, a number of companies have been able to further reduce costs and innovate to boost well productivity, which combined with a strong balance sheet should position those companies to drive higher growth rates in the event of an eventual rebound in commodity prices. Fundamentally, given the risks on the natural gas front, we remain convinced that investors should be selective in Western Canada and adhere to quality balance sheets with assets that either provide liquids optionality or are low cost gas, or a combination of both. Additionally, one of the potential risks to natural gas weighted companies in 2017 may be a rebound in oil prices as the market rebalances, Selectivity is key which could strengthen the CAD to USD foreign exchange rate, while the AECO gas price differential remains stagnant or widens on a USD basis, as well as it would incent greater liquids rich natural gas and associated gas supply, and could also result in industry cost inflation. For all of these reasons, we believe liquids optionality within a portfolio to be relatively important within our coverage space.
Top Picks Our top picks include Seven Generations, NuVista Energy, ARC Resources, Tourmaline and Advantage. These names generally have a strong balance sheet, are either condensate rich to guard against widening gas price differentials, or are low cost gas with liquids optionality. Seven Generations (D. Phung, Outperform, TP C$35): Seven Generations has the one of lowest cost natural gas project in our coverage space and in North America, with its franchise condensate rich Nest 2 Montney asset in Western Canada. It has a strong balance sheet with line of sight to cash flow self-sufficiency, robust play and reinvestment economic returns, as well as still improving well cost and productivity. We believe it is the premier asset to own in the Canadian SMID E&P coverage space. NuVista Energy (D. Phung, Outperform, TP C$9.50): NuVista Energy remains one of the few pure play companies within the condensate rich fairway of the Montney play in Western Canada and is one of few Outperform rated names in our coverage space. Underpinned by a strong balance sheet, strong economics and reinvestment returns, and continuous improvement in both well cost and productivity improvements, the company looks to generate 15%-20% production growth CAGR over the next few years. Tourmaline (D. Phung, Outperform, TP C$47): Tourmaline has one of the lowest cost gas plays at Montney Dawson and Deep Basin wells in sweet spots that are outperforming its competitors. The company’s recent acquisition of Shell’s Montney Gundy and Deep Basin assets could add further scale and augment these economics. Given our cautious view on gas in western Canada, Tourmaline has oil optionality with its Lower Montney condensate rich play and Charlie Lake light oil play that can drive liquids growth, especially in an oil price recovery scenario. We believe these aspects set Tourmaline apart from other gas weighted competitors and view Tourmaline’s current discounted valuation and lower leverage to Canadian peers as an attractive entry point. Over time, Tourmaline's valuation multiple could expand toward Peyto's. Tourmaline closed at 7.3 times 2017E EV/EBIDAX, a discount to Peyto's at 9.1 times. Advantage (D. Phung, Outperform, TP C$11): Advantage is currently one of the lowest cost dry natural gas producers within our coverage space, underpinned by its Montney Glacier asset that we view as both concentrated and scalable, with compelling economic returns and improving well results and lower costs. This asset in turn has resulted in a strong balance sheet and a self-funded growth profile. Advantage's valuation multiple Canadian Equity Strategy 42
22 December 2016
could expand toward Peyto's. Advantage closed at 8.8 times 2017E EV/EBIDAX, a discount to Peyto's at 9.1 times. ARC Resources (J. Frew, Outperform, TP C$28): We continue to view ARX as a measured growth story with a deep inventory of high return projects focused on the Montney play. We also believe ARX's growth profile is fundamentally supported by a strong management team, clean balance sheet, and resilient base assets that deliver steady production and cash flow. Key drivers of growth include the ramp up of new Montney production at Sunrise and Tower, followed by significant expansion at Dawson in 2017, Parkland/Tower facility expansion in 2018/19, and proving up Attachie.
Canadian Natural Gas – The Pressure Continues We believe pressure continues to mount for natural gas producers in Western Canada, largely due to rising competition from US shale gas growth and infrastructure buildout, which has manifested itself in a wider AECO gas price differential over time. However, there continues to be a degree of optimism that some relief may come in the mid-term as negotiations with TransCanada to transport production from Western Canada to Eastern Canada on the mainline, despite the lack of sufficient volume commitments from upstream operators during the open season held in recent months. That said, companies in Western Canada have not stood still and have achieved both cost reductions and well productivity improvements to remain competitive, leading to a year-over-year lower half-cycle breakeven NYMEX price on its well economics. Widening Basis Differentials Widening basis? We have long held our concern over widening basis differentials in Western Canada over time, largely due to limited infrastructure and rising competition from US shale gas, as outlined in our prior Connection Series publications of: - Diving into Western Canada Gas Production Trends and Other Topics - Survival of the Fiscal Fittest - The Montney Stands Tall Although AECO gas price differentials have indeed widened, as shown Figure 85, stock prices within our coverage space have been somewhat resilient. We believe this has been the case for a number of factors, including: - Sector wide trade – natural gas weighted companies have not necessarily traded alongside natural gas prices, but the volatile oil price as well - Productivity improvements – companies have been able to reduce service costs and achieve efficiency gains to lower well costs, while boosting well productivity Our current breakeven NYMEX supply cost boot is shown in Figure 86. When we compare the changes in our breakeven NYMEX price year over year, we find that most plays have been able to reduce their half-cycle breakeven NYMEX, as shown in Figure 87. The plays that have driven their breakeven NYMEX price down the most include Montney Nest 2 (Seven Generations, Outperform C$35 TP) and Montney Bilbo (NuVista Energy, Outperform C$9.50 TP), which are both condensate rich assets that we prefer to guard against the potential of structurally widening AECO basis differentials in Western Canada. Although the achievements here include company specific initiatives, the changes in the Alberta royalty framework in 2016 also benefitted oil/condensate weighted assets that increased the NPV of these plays.
Canadian Equity Strategy 43
22 December 2016
Figure 85: Historical and Strip AECO Pricing
$5.00
90% $4.00
$3.00 80%
$2.00 70% NYMEX AECO $1.00 AECO basis 60% US$/mmBTU AECO % of NYMEX (RHS) $0.00
50% ($1.00)
($2.00) 40%
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Canadian Equity Strategy 44
Strategy Equity Canadian
Figure 86: Breakeven NYMEX (US$/mmBTU) at US$40/bbl WTI Figure 87: Year Over Year Change in Breakeven NYMEX (%)
22 December 2016 22 December
Source: GeoScout, Company data, Credit Suisse estimates Source: GeoScout, Company data, Credit Suisse estimates *Assumes US$5/bbl Edmonton Par differential, US$0.75/mmBTU differential to NYMEX, US$/C$ of 0.80 to attain a 15% IRR
45
22 December 2016
Pipeline and AECO Basis Differential Risk One of the potential developments that remains highly topical and that could alleviate pressure on AECO gas pricing in the midterm include renewal of natural gas transport volumes on TransCanada's mainline that connects Western Canada to Eastern Canada. Successful commitments from upstream producers could provide an additional outlet to reduce supply at AECO. While we defer the specifics and dynamics to our infrastructure research team led by Andrew Kuske, we highlighted in our prior publication (link) that we believe there may be significant challenges, risks and considerations before upstream operators commit, including but not limited to the following: - Longer term commitment versus more flexibility with shorter-term contracts - Committing to a specific market at Dawn versus the flexibility and trading liquidity of AECO - Less ability to hedge risks at Dawn, relative to AECO - Higher cost structure by committing to long haul pipeline tariffs versus lower cost short haul tolls to AECO - Lower cost producers who commit to this proposition takes on additional risk unless buyers on the other end of the pipe offset it by committing to a longer term contract, which may or may not be in the interests of the buyers - Lower cost producers who commit to this proposition may be taking on additional risk while benefitting other higher cost competitors in Western Canada Condensate rich Indeed, the open season held by TransCanada in recent months did not result in sufficient producers are preferred volume commitment to proceed. If the status quo does not change, we believe continued rising competition from US shale gas, including the buildout of infrastructure, remains a clear challenge to the Western Canadian natural gas industry. Therefore we prefer condensate rich assets such as Seven Generations and NuVista Energy, as well as ARC Resources and Tourmaline that has low cost gas with liquids optionality, and Advantage that has one of the lowest cash costs among dry natural gas producers. Additionally, all of these companies sport a strong balance sheet with a self-funded growth profile. Risk of a Recovering Oil Price In addition the structural risks on the natural gas front, natural gas weighted producers in Western Canada may be somewhat sensitive to a rebound in oil prices in 2017. We believe there are a number of risk factors in this scenario, including but not limited to: - Strengthening of the Canadian dollar, while the AECO gas differential may remain constant and/or widen in USD terms - Greater natural gas supply for liquids rich natural gas plays - Greater natural gas supply from oil plays - Industry cost inflation These cyclical risks are in addition to the structural risks, which is why we reaffirm our preference for condensate rich assets in Western Canada, and/or low cost gas assets with some degree of liquids optionality, accompanied by strong balance sheets. Canadian International E&P Parex Resources (Outperform, TP C$18.25) remains our preferred name in the Canadian international E&P coverage space. Its debt free balance sheet, stable base production and fast cycle-time growth projects sets the company apart from its competitors. In the upcoming year, we look forward to well results from its Aguas Blancas drilling program that could reinforce the mid to longer term growth profile. Additionally, further step-out drilling
Canadian Equity Strategy 46
22 December 2016
and delineation on Block LLA-34 could confirm a much larger oil field that combines Jacana and Tigana, which could also provide meaningful upside potential.
Financials Nick Stogdill Our financials coverage is divided into two areas: banks and life insurance. 416-352-4592 nick.stogdill@credit- Canadian Banks suisse.com Our outlook for the Canadian Banks remains positive. Shares have risen 26% in 2016 (best performance since 2000, ex- fin crisis rebound of 54% in 2009) but valuation remains modestly below historical averages (Figure 88) and we expect a continuation of steady mid-single digit EPS growth for the group in 2017E (Figure 89).
Figure 88: Valuation Reasonable - Slightly Below Avg Figure 89: Forecasting Mid-Single Digit EPS Growth
Canadian Bank LTM P/E Multiples Bank Operating Earnings Growth 1998 - December 20, 2016 2002 - 2018E 16 YoY Earnings Growth 30% 15 25% 13.9x 22% 14 20% 16% 18% 16% 12.6x 13 16% 12.5x 15% 12% 12 11% 11.0x 10% 8% 7% 11 6% 5% 5% 5% 4% 10 1% 0% 9 -5% -3% 8 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 -7% -10% -9% Source: Credit Suisse; BLOOMBERG PROFESSIONALTM service. -15% 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E 18E Source: Company reports; Credt Suisse
2017E Earnings Outlook: We are forecasting growth to be led by low double-digit YoY growth in Wealth, high-single digit growth in U.S. / International, and mid-single digit growth in Canadian Banking and Capital Markets. We do not forecast PCLs to be a tailwind in 2017E, however, we do not expect PCLs to be a headwind either, with banks largely through the provisioning related to low oil & gas prices (energy PCLs reduced 2016 core EPS by 2%). Key themes for 2017E:
■ Expense management: Banks continue to focus on operational efficiency to offset slowing top line growth, particularly in Canadian banking which faces ongoing margin pressure and decelerating loan growth. In 2015/2016, banks incurred C$2.5bn of restructuring charges (pre-tax) which are forecast to result in run rate savings of C$2.3bn by 2019. Our 2017E / 2018E forecasts embed 20 bps / 110 bps of efficiency ratio improvement at the consolidated level. A 100 bps improvement in NIX ratios relative to our forecast results in a 3% increase to EPS.
Canadian Equity Strategy 47
22 December 2016
Figure 90: Expecting Improvement in Non-Interest Expense Ratios
Canadian Banks - Non-Interest Expense Ratios 2012 - 2018E 58.5%
57.5%
56.5%
55.5%
54.5%
53.5%
52.5% 2012 2013 2014 2015 2016 2017E 2018E Source: Company Data, Credit Suisse estimates
■ Benefits of stronger U.S. growth and higher rates: In 2016, non-Canadian segments (~20% of bank earnings) delivered the strongest earnings growth for the group, up ~19% (aided by M&A). We expect banks with U.S. platforms (BMO, RY, TD) will benefit from a stronger U.S. macro environment and generate higher relative growth versus other Canadian bank peers. US exposure benefits the Canadian banks Figure 91: 2015 and 2016 Earnings from U.S. Platforms % of Earnings from U.S. Platforms 2015-2016 35%
30% 2015 2016 25%
20%
15%
10%
5%
0% TD BMO RY
Source: Company data, Credit Suisse estimates
Source: Company data, Credit Suisse estimates NB: U.S. Capital Markets earnings for BNS not disclosed; CM acquisition of PVTB pending; NA U.S. earnings immaterial.
Top Pick: Royal Bank of Canada (Outperform, TP C$100) RY continues to be our top pick among the Canadian banks. Its leading platforms in Canada (Retail Banking, Wealth and Capital Markets) better position the bank (vs. peers) to manage through a slower growth environment – its Canadian Banking efficiency ratio is well below peers (43.4% in 2016 vs. 49.4% peer average) and RY is the only bank yet to incur a meaningful restructuring charge. In the U.S., RY's Wealth business has leverage to rising rates and City National is expected to deliver double-digit growth, while U.S. Capital Markets is positioned to benefit from a more favourable U.S. economic backdrop, market dislocation and a potential easing (or lack of tightening) of regulatory requirements. RY's return on equity (2017E 16.1%) is ~130 bps above the peer average. RY is currently trading at 12.7x and 11.7x our 2017E / 2018E EPS, below its long-term trailing average P/E of 13x. Relative to Canadian bank peers, RY is trading at a 7% premium on our 2017E EPS, below the 8% premium over the past 15 years and below its three-year average
Canadian Equity Strategy 48
22 December 2016
premium of 10%. We believe a premium to its historical average given its strategic positioning and business mix discussed above.
Canadian Life Insurers The earnings outlook for the Canadian life insurance sector has become more favourable with Canadian and U.S. 10-year bond yields nearly doubling (up ~80%) post the U.S. election from all-time lows in July. As a result, the Canadian Lifecos have gone from being the worst performing TSX subsector for most of 2016 to the middle of the pack, up ~16%. Valuations are now less favourable at 1.5x price to book, 8% above the post-financial crisis average. However, given significant actions taken by the lifecos to adjust pricing, improve efficiency, increase capital/reduce leverage and strengthen reserves, we believe rates may not need to reach previous levels (i.e., 2.75%-3% U.S. 10-year in 2013) to reach similar valuations (1.6x to 1.8x P/B). Forest Products Andrew M. Kuske With our rather limited and eclectic group of forest products company coverage, our team 416-352-4561 highlights their one currently Outperform rated name: Mercer International (MERC). At this andrew.kuske@credit- point in time, MERC is uniquely positioned as a US company headquartered in Vancouver, suisse.com BC with one mill in British Columbia and two mills in Germany. Simply, that geographical background speaks to the favourable currency dynamics facing MERC at this stage in time. The pace of declines in CAD and EUR cost structures helped MERC's margins at the time of struggling commodity prices for NBSK. Given MERC's unique NBSK market exposure which tends to face favourable trends, we believe the company is very well positioned in the current market environment. Finally, the company's NAFTA claim versus the Canadian Government may have some degree of resolution in 2017 that may further benefit the stock.
Industrials Robert Spingarn Our Industrials sector coverage comes from three different analysts across the Aerospace, 212-538-1895 Transportation and Waste sub-sectors. robert.spingarn@credit -suisse.com Aerospace 2017 is an important stabilization year for Bombardier, and as such, could be the year that brings long-departed traditional long-only investors back to the name. Given the high level of risk, inconsistent execution, poor visibility in end markets, and mismanaged messaging, many investors have been justifiably skeptical about BBD since Alain Bellemare took over as CEO in February 2015. However, with nearly two years under his belt and new executives in nearly every key position, momentum is building for the story.
On the numbers side, we expect the management team to continue to implement the transformation strategy in 2017, ramping CSeries production, capturing efficiencies in the other businesses, further stabilizing bizjet and completing the Global 7000 development program. While we expect some additional orders for CSeries, and hopefully one or two of meaningful size (20 unit or more), we do not see 2017 as being defined by orders. Instead, we look for continued cash flow improvement, to the extent that visibility into a cash flow neutral 2018 is supported. We also look for stabilization in BT margins and sustained modest improvement in margins in the other segments. A boring year numerically would be fine, so long as progress is apparent.
Canadian Equity Strategy 49
22 December 2016
For 2017, sentiment could be more important than the numbers themselves. We think the avoidance of pitfalls, along with small and consistent signs of improvement, will begin to attract traditional investors to the stock. So many investors have been hurt in these shares in the past, they have been slow to return to the fold. However, given that Bombardier is one of the most important, if not the most important, capital goods names in Canada, we think investors will return to the fold, lest they miss a key and highly visible recovery story. Whereas 2015 and 2016 were fraught with risk, including liquidity challenges, 2017 appears more stable, yet the full opportunity is barely priced in at current levels. Any wave of return into the name could itself be a self-fulfilling prophecy, as long as that company backs up new investor confidence with results.
The biggest risk we see this year is anything that would cause 2018 to miss its free cash flow neutral target. This could happen for a few different reasons such as a slower-than- expected ramp in CSeries, delayed development on Global 7000, or some type of end- market disruption for commercial aircraft or transportation. Therefore, 2017 will be a year of trend-watching, and if all goes well, we could see gradual incremental traction in the shares. Our TP of C$2.84 is based on our SOTP of the company’s major program’s projected 2017 EBITDA. As we wrote following last week’s investor day, a longer-term blue sky target based on achievement of management’s 2020 targets could be significantly higher at ~C$9.56. We reiterate our OP rating.
Environmental Services Andrew Buscaglia Waste Connections (WCN: Outperform, TP US$87) 212-325-5870 andrew.buscaglia@cre ■ Executing on Progressive Turnaround is Key to 2017: We continue to favor WCN dit-suisse.com as a best-in-class waste stock with significant upside if it executes on the turnaround of its acquisition of Progressive Waste (closed June'15). WCN's stock moved 30% higher on the deal, although has underperformed peers in the past six months (up ~6% vs. WM/RSG up ~12%) as the market awaits the next catalyst. We think the stock starts to work again in 2017 as we gain clarity on several major initiatives surrounding the Progressive acquisition and have better insight into longer-term EBITDA margin and free cash flow potential. We have confidence in WCN's management team, which we view as arguably the best in the sector based on an impeccable track record that continuously exceeds expectations.
■ Asset Swaps Shaking Out in Q1: WCN expects rationalize ~$225M of revenues and will obtain $100-125M through swaps but with greater EBITDA coming in. This could add 100 bps to margins while lowering capex (as a % of sales), driving higher than expected conversion of EBITDA to FCF, in our view. We think WCN's Q4 call is key as it will provide clarity around a big chunk of EBITDA and we'd expect better insight into full year financials.
■ Progressive Tracking Ahead: Progressive is tracking ahead on all fronts – and we have been surprised with the speed and magnitude of which WCN has been able to make changes. Safety incident frequency is already 40% below pre-acquisition levels. Pricing initiatives within Progressive's footprint are driving faster than expected increases (2.5-3% vs. <1% previously). WCN is shedding unprofitable Progressive volumes and turning the company into a smaller, but much more profitable vessel. WCN is tracking ahead of original free cash flow guidance which is now expected in excess of $700M in 2017. This would imply close to $4.00/share before buybacks (ahead of our original estimate of $3.95). WCN discussed a pathway to $4.50- 4.75/share in 2018 (implying FCF closer to $800M and assuming normal buyback of 2- 3%), which would be further upside to our estimates (we are modeling $764M/$4.61 per share). Canadian Equity Strategy 50
22 December 2016
■ Upside Optionality; Margins Accelerating into 2018: Industry fundamentals are strong with volumes improving (tracking 1-2%) and pricing remaining rational, yet WCN has more upside optionality outside the market that's unique to their business, in our view. We think 2017 will be noisy as asset swaps/divestitures shake out (~100 bps, mostly in Q1). Safety and operational improvements will add 50 bps as well. We expect WCN to be more acquisitive than peers adding further to EBITDA. M&A is heating up and while the company expects over $120M in additional revenue from acquisitions, we think there could be more given the larger addressable market with Progressive. Overall, we see a path to over 32% EBITDA margins in 2017 (ahead of the Street). WCN's guidance does not contemplate any improvement in its E&P segment (~5% of revenues) embedded in targets and any sustainable movement of oil prices could move the needle on EBITDA (E&P has ~35% EBITDA margins). We think if WCN does over 32% margins in 2017, there's now a path to 33-34% by 2018 (CSe 32.5%), especially with higher inflation/commodities, which could surprise the Street.
Transportation Allison Landry Canadian Pacific (CP, Outperform, TP US$173) 212-325-3716 allison.landry@credit- Summary: With the volume backdrop much improved and additional margin improvement suisse.com to be achieved, CP is well set up to return to midteens EPS growth in 2017. Moreover, the company's capital efficient model positions it to generate significant FCF growth into next year, enabling it to increase shareholder returns through buybacks and dividends. In our view, an attractive relative valuation sets the stock up to outperform its peers in 2017. Volumes Well Positioned for Growth Next Year: The investments that CP has made into improving its service should help drive growth in domestic intermodal next year - the relative strength of which has been a point of differentiation for CP relative to its peers during 2016. Additionally, grain shipments could serve as a growth driver into 3Q17 as this year's bumper crop is transported. Management also highlighted that it will be lapping weak comps for potash carloads in 1H17, which should be a point of strength next year. Rising crude prices could also bode well for the now-dormant crude-by-rail franchise that, at its peak, represented 7% of CP's revenues (and at the very least, crude will no longer serve as a year-over-year drag on revenues). Longer term, although the largest opportunity for Canadian Pacific is converting truck to rail, the company also sees an incremental $200-300m of business that should be "repatriated" to its lines over the next few years (particularly in the chemicals, metals, aggregates, pulp and paper franchises) as a result of its improved service offering. More Margin Improvement Left on the Table: While the runway to improving the O.R. may not be as long as it was in the past, there is still room to drive down the O.R. further by leveraging additional productivity improvements. These initiatives include speeding up trains, improving schedules to lower dwell times, and reducing operating costs by taking out switches. The 'next iteration' of cost takeout at CP is a focus on trip plans, which measures the car's performance to the customer, as opposed to the overall train's performance. This will enable CP's marketing team to help customers turn their assets faster and potentially reduce their asset-ownership intensity. Management has noted that it expects to exit 2016 at a mid-50s O.R. run rate (ex-land sales), which should set the company up well for margin improvement in 2017, even independent of volume growth. Although fuel surcharge could serve as an optical headwind to the O.R. (we note that it's offset by higher fuel surcharges), and the company will be lapping significant land sales, the rise in interest rates could soften the year-over- year impact of pension expense. Capital Efficiency to Increase FCF and Capital Returns: Canadian Pacific continues to anticipate capex of $1.1 billion to $1.2 billion over the next few years. Indeed, CP has Canadian Equity Strategy 51
22 December 2016
almost 500 locomotives in storage, which should enable the company to handle volume growth without having to buy additional locomotives through 2018. We anticipate FCF will break previous records and well exceed $1 billion next year, which should support share repurchase and dividend increases in 2017. Faster EPS Growth Profile than Competitors: We anticipate that the combination of healthy volume growth, modest yield growth, improving margins, and increasing returns to shareholders adds up to ~15% EPS growth in '17, which compares to the consensus forecast of +10% y/y on average at the rest of the Class Is. Potential reductions in the U.S. tax rate would be further accretive to CP's EPS growth (though admittedly not as impactful as it would be for its US peers). Given the pace of potential earnings growth next year coupled with the potential for FCF conversion to be in the 80% range, we are somewhat surprised that CP is trading at 16.9x the 2017 consensus EPS compared to the Class I average (ex-KSU) of 18.7x. We think the market is inappropriately discounting CP's EPS growth and FCF profile relative to peers and that the stock is set up to outperform in 2017.
Infrastructure Andrew M. Kuske The past 12-18 months were busy with several high profile deals by Canadian Energy 416-352-4561 Infrastructure companies purchasing US companies. Frankly, we believe the year ahead is andrew.kuske@credit- likely to be less frenetic, but an underlying M&A theme will likely continue to persist. suisse.com Another major theme will be the unleashing of previously gridlocked pipeline proposals, which will be positive for many of the Canadian infrastructure players. Our final major Paul Tan theme is focused on power market transitions, which remain painful in our view. 416-352-4593 paul.tan@credit- Each of these areas is addressed under the following individual headings: suisse.com ■ M&A Momentum;
■ Increased Infrastructure; and,
■ A Tough Transition. Beyond these themes, we continue to believe the Brookfield Group offers unique exposure to various energy themes and will be addressed under an individual heading. M&A Momentum The last 12-18 months have witnessed a fairly impressive string of M&A from Canada's energy and infrastructure companies that included:
Canadian Equity Strategy 52
22 December 2016
Figure 92: Selected Canadian infrastructure transactions Announced Announce Total Value Date Target Name Acquirer Name Seller Name (mil.) (USD) Deal Status 9/6/2016 Spectra Energy Corp Enbridge Inc 42,818 Pending 3/17/2016 Columbia Pipeline Group Inc TransCanada Corp 12,026 Completed 2/9/2016 ITC Holdings Corp Fortis Inc/Canada 11,057 Completed 9/4/2015 TECO Energy Inc Emera Inc 10,361 Completed 11/25/2015 Transgrid Consortium 7,437 Completed 2/12/2016 Transportadora Associada de Gas SA Potential Buyer Petroleo Brasileiro SA 6,000 Proposed 9/8/2016 Nova Transportadora Do Sudeste SA Consortium Petroleo Brasileiro SA 5,200 Pending 6/19/2015 Enbridge's Canada Liquids Pipelines business Enbridge Income Fund Holdings Inc Enbridge Inc 5,117 Completed 1/13/2016 Isagen SA ESP Investor Group,Brookfield Renewable Partners LP Republic of Colombia 3,040 Completed 2/9/2016 Empire District Electric Co/The Algonquin Power & Utilities Corp 2,362 Pending 9/26/2016 Columbia Pipeline Partners LP TransCanada Corp 2,149 Pending 1/13/2016 Isagen SA ESP Investor Group,Brookfield Renewable Partners LP 1,467 Pending 2/25/2016 New England portfolio of hydroelectric assets Public Sector Pension Investment Board/The Engie SA 1,200 Pending 7/14/2016 Access Pipeline Inc Wolf Midstream Inc Devon Energy Corp 1,087 Completed 8/8/2016 Williams Canada Assets Inter Pipeline Ltd Williams Cos Inc/ WPZ 1,026 Completed 10/8/2015 Encana Denver Julesburg Basin assets Canada Pension Plan Investment Board,Broe Group/The Encana Corp 900 Completed 10/8/2015 Holtwood & Lake Wallenpaupack Hydroelectric ProjectBrookfield Renewable Partners LP Talen Energy Corp 860 Completed 9/29/2016 South Prairie Region pipeline assets Tundra Energy Marketing Ltd Enbridge Inc, ENF 819 Completed 8/4/2016 Veresen power generation business Potential Buyer Veresen Inc 769 Proposed 10/27/2016 Odebrecht Ambiental Brookfield Business Partners LP Odebrecht SA 768 Pending 10/26/2015 APR Energy Ltd Consortium 702 Completed 10/8/2015 Ravenswood/Ironwood/Ocean State Power and KibbyTransCanada Wi Corp Talen Energy Corp 657 Completed 9/21/2015 GWF Energy Holdings LLC AltaGas Ltd Highstar Capital LP 642 Completed 1/29/2016 Great Lakes Power Transmission LP Hydro One Ltd Brookfield Infrastructure Partners LP 373 Completed 3/28/2016 Bangalore International Airport Ltd Fairfax India Holdings Corp GVK Power & Infrastructure Ltd 323 Pending 12/3/2015 Aitken Creek Gas Storage ULC Fortis Inc/Canada Chevron Canada Properties Ltd 266 Completed 5/10/2016 Eolien Maritime France SAS Enbridge Inc DONG Energy A/S 218 Pending 10/2/2015 3 operating solar projects Canadian Solar Inc KKR & Co LP 205 Completed 12/3/2015 Bruce Power LP TransCanada Corp OMERS 176 Completed 6/17/2015 U.K. project pipeline portfolio Brookfield Renewable Partners LP PNE Wind AG 159 Completed 11/23/2015 TransAlta Renewables Inc Alberta Investment Management Corp 150 Pending
Total Pending 56,654 Total Completed 56,911 Total Proposed 6,769 Source: the BLOOMBERG PROFESSIONAL™ service
Clearly, a considerable amount of the Canadian led M&A focused on the US market. That direction is a function of many factors, including: more limited opportunities in Canada; in some cases, a true need to diversify underlying business exposure; and, certain financing advantages of working across an international boundary. We believe the southward M&A is likely to slow in the year ahead given multiple issues that include: integration of already acquired assets; the USD/CAD currency moves; financial market access; effectiveness of tax structures with plans to substantially change US corporate taxation rates; and, major questions of appetite in the near term. To further explore some of these issues, we outline five key headings:
Less frenetic pace of ■ Acquisition Appetite; M&A expected ■ Integration Issues;
■ Interest rates;
■ Foreign Exchange; and,
■ Fundamental business reasons. These areas are addressed in part below. Acquisition Appetite In our coverage universe, the most active and consistent buyers of assets and companies are The Brookfield Group (in a broad sense) and Fortis. For some very company specific perspective, Figure 93 , Figure 95 and Figure 96 outline a selection of Brookfield-specific
Canadian Equity Strategy 53
22 December 2016
transactions for Brookfield Infrastructure Partners, LP (BIP), Brookfield Renewable Partners, LP (BEP) and Brookfield Property Partners, LP (BPY), respectively.
Figure 93: Selected Brookfield Infrastructure Partners acquisitions (USD) Announced Announce Total Value Date Target Name Acquirer Name Seller Name (mil.) Deal Status 12/4/2016 Greenergy Fuels Holdings Ltd Brookfield Infrastructure Partners LP N/A Proposed 10/14/2016 Nationwide tower assets & related infrastructure Brookfield Infrastructure Partners LP Reliance Communications Ltd 1,649 Pending 9/8/2016 Nova Transportadora Do Sudeste SA Consortium Petroleo Brasileiro SA 5,200 Pending 3/15/2016 Patricks terminals business Consortium Asciano Ltd 2,175 Completed 3/15/2016 Bulk & Automotive Port Services business Consortium Asciano Ltd 690 Completed 11/30/2015 Natural Gas Pipeline Co of America LLC BIP,Kinder Morgan Inc/DE Myria Holdings Inc 242 Completed 11/5/2015 Asciano Ltd Brookfield Infrastructure Partners LP 1,200 Completed 7/1/2015 Asciano Ltd Consortium 7,334 Terminated 6/15/2015 Niska Gas Storage Partners LLC Brookfield Infrastructure Partners LP Carlyle/Riverstone 979 Completed 11/6/2014 TDF SAS Brookfield Infrastructure Partners LP 2,207 Completed 8/21/2014 Thermal Chicago Corp Brookfield Infrastructure Partners LP Macquarie Infrastructure Corp 270 Completed 7/29/2014 Lodi Gas Storage LLC Brookfield Infrastructure Partners LP Buckeye Partners LP 105 Completed 5/5/2014 District Energy Midwest Sub LLC,Seattle Steam LP Brookfield Infrastructure Partners LP N/A Completed 12/23/2013 VLI SA Consortium Vale SA 845 Completed 9/25/2012 Abertis Infraestructuras SA Brookfield Infrastructure Partners LP Banco Bilbao Vizcaya Argentaria SA 96 Completed 8/6/2012 Participes en Brasil SL Abertis Infraestructuras SA, BIP OHL Concesiones SA 1,660 Completed 7/30/2012 Autopista Vespucio Norte Toll Road Brookfield Infrastructure Partners LP 290 Completed 6/25/2012 Inexus Group Ltd Brookfield Infrastructure Partners LP Challenger Infrastructure Fund 16 Completed 8/23/2010 Prime Infrastructure Group Brookfield Infrastructure Partners LP 1,602 Completed 10/8/2009 Prime Infrastructure Group BAM / BIP 647 Completed 10/8/2009 Dalrymple Bay Coal Terminal Pty Ltd BAM / BIP Prime Infrastructure Group 268 Completed 3/12/2008 Ontario transmission systems Brookfield Infrastructure Partners LP Brookfield Asset Management Inc 92 Completed
Total Completed 13,383 Total Pending 6,849 Total Terminated 7,334 Source: Bloomberg
Specifically, in relation to energy infrastructure, BIP is in the process of purchasing Nova Transportadora Do Sudeste SA (NTS) in Brazil from Petrobras and within the last 24 months the infrastructure player increased positions in North American natural gas pipeline and storage assets. Very notably, BIP's deal size has grown along with the underlying Brookfield Asset Management private fund size as partially shown in Figure 94 .
Figure 94: Brookfield private fund growth
Source: Company data
Funding Flexibility In our view, the greatest growth opportunities for the broader Brookfield Group continue to be at BIP and, to a lesser degree, BEP. There is considerable flexibility around deal size in
Canadian Equity Strategy 54
22 December 2016
light of the private funding model that also utilizes a co-invest strategy. Accordingly, BIP's US$20bn of deals over the past nine years and BEP's US$10.6bn of deals benefit from a flexible funding model that also uses capital recycling strategies to reinforce liquidity and a view to constantly high grade returns. Specific statements regarding capital recycling from BIP focus on US$1bn a year over the next two to three years. BEP will also look to capital recycle and "up finance" on certain assets to enhance liquidity.
Figure 95: Selected Brookfield Renewable Partners acquisitions (USD) Announced Announce Total Value Date Target Name Acquirer Name Seller Name (mil.) Deal Status 1/13/2016 Isagen SA ESP Consortium Republic of Colombia 3,040 Completed 1/13/2016 Isagen SA ESP Consortium 1,467 Pending 10/16/2015 Southeast Distribution Rigths Brookfield Renewable Partners LP Twin Disc Inc 4 Completed 10/8/2015 Holtwood & Lake Wallenpaupack Hydroelectric Project Brookfield Renewable Partners LP Talen Energy Corp 860 Completed 6/17/2015 U.K. project pipeline portfolio Brookfield Renewable Partners LP PNE Wind AG 159 Completed 5/20/2015 Tangara Energia SA Brookfield Renewable Partners LP Rede Energia SA 142 Completed 5/6/2015 123 MW operating wind portfolio Brookfield Renewable Partners LP Infraventus SA N/A Completed 11/20/2014 488 MW Diversified Renewable Portfolio Brookfield Renewable Partners LP Energisa SA 825 Completed 5/16/2014 417 MW Safe Harbor HPP Brookfield Renewable Partners LP Exelon Corp 613 Completed 3/25/2014 Bord Gais Energy Ltd Consortium ERVIA 1,521 Completed 2/6/2014 417 MW Safe Harbor HPP Brookfield Renewable Partners LP LS Power Development LLC 289 Completed 11/5/2013 30 megawatt Malacho Hydro peaking facility Brookfield Renewable Partners LP N/A Completed 11/1/2013 70 megawatt hydroelectric portfolio/ME Brookfield Renewable Partners LP ArcLight Capital Partners LLC N/A Completed 2/14/2013 Powell River Energy Inc Brookfield Renewable Partners LP Catalyst Paper Corp 33 Completed 12/24/2012 19 Hydroelectric generation stations Brookfield Renewable Partners LP NextEra Energy Inc 760 Completed 11/23/2012 Western Wind Energy Corp Brookfield Renewable Partners LP 308 Completed 8/29/2012 Western Wind Energy Corp Brookfield Renewable Partners LP 23 Completed 6/29/2012 Four Hydroelectric Generating Stations Brookfield Renewable Partners LP Alcoa Corp 600 Completed 1/12/2012 Two California Wind Farms Brookfield Renewable Partners LP N/A Completed 9/13/2011 Brookfield Renewable Power Division Brookfield Renewable Partners LP Brookfield Asset Management Inc 4,738 Completed 7/6/2009 Portfolio of small hydro plants Brookfield Renewable Partners LP Brookfield Asset Management Inc 945 Completed 12/15/2008 189 MW Prince Wind Farm,45 MW Pingston Hydro Station Brookfield Renewable Partners LP Brookfield Asset Management Inc 105 Completed 6/7/2006 Carmichael Falls Generating Station Brookfield Renewable Partners LP Brookfield Asset Management Inc 47 Completed 11/20/2003 3 Hydroelectric Facilities Brookfield Renewable Partners LP Hafslund ASA 23 Completed 5/31/2002 6 US power stations Brookfield Renewable Partners LP 21 Completed 11/6/2000 2 Hydroelectric power stations Brookfield Renewable Partners LP Pacifica Papers Inc 74 Completed
Total Completed 15,129 Total Pending 1,467 Source: Bloomberg
Away from energy related assets, Brookfield's property division faces similar trends as BIP and BEP and did US$16.7bn of deals along with US$5 of capital recycling/up financings.
Figure 96: Selected Brookfield Property Partners acquisitions (USD) Announced Announce Total Value Date Target Name Acquirer Name Seller Name (mil.) Deal Status 11/17/2016 International Financial Center Brookfield Property Partners LP American International Group Inc N/A Completed 4/27/2016 2 suburban Maryland office assets Brookfield Property Partners LP Washington Real Estate Investment Trust 129 Completed 4/27/2016 4 suburban Maryland office assets Brookfield Property Partners LP Washington Real Estate Investment Trust 112 Completed 10/13/2015 Potsdamer Platz buildings Unnamed Buyer,Brookfield Property Partners LP Savills Fund Management Holding AG N/A Completed 6/2/2015 Center Parcs UK Group Ltd,Center Parcs Operating Co LtdBrookfield Property Partners LP Blackstone Group N/A Completed 5/13/2015 75 State St/Boston AustralianSuper Pty Ltd,Brookfield Property Partners LP N/A Pending 2/13/2015 Canary Wharf Group PLC Qatar Investment Authority,Brookfield Property Partners LP 540 Completed 11/21/2014 GBP 106 Million junior loan on tower Brookfield Property Partners LP Mount Kellett Capital Management LP N/A Withdrawn 11/7/2014 Canary Wharf Group Investment Holdings PLC Qatar Investment Authority,Brookfield Property Partners LP 8,071 Completed 10/31/2014 Capital Automotive LP Brookfield Property Partners LP DRA Advisors LLC N/A Completed 6/11/2014 Candor Investments Ltd Brookfield Property Partners LP UCP PLC 346 Completed 11/1/2013 General Growth Properties Inc Brookfield Property Partners LP 1,400 Completed 9/30/2013 Brookfield Office Properties Inc Brookfield Property Partners LP 5,037 Completed 8/7/2013 Industrial Developments International Inc Brookfield Property Partners LP Kajima Corp 1,100 Completed 6/11/2013 Gazeley Ltd Brookfield Property Partners LP Dubai World Corp N/A Completed
Total Completed 16,733 Source: Bloomberg
Rounding out the Brookfield Group and some energy related areas is Brookfield Business Partners (BBU) that is currently involved in the pending Odebrecht Ambiental deal for and Vistra Energy (VSTE.PK) among other assets.
Canadian Equity Strategy 55
22 December 2016
Another major player in M&A is Fortis as partly evidenced in Figure 97 with a series of large scale utility deals, on an EV basis, in recent years ranging from CH Energy (US$1.5bn) to UNS Energy (US$4.3bn) and, most recently, ITC Holdings (US$11.3bn).
Figure 97: Selected Fortis Inc. acquisition history Announced Date Asset/Company Deal value ($m) Comment 2/6/2016 ITC Holdings Corp. USD 11,300.00 Acquisition of electric transmission company 12/12/2013 UNS Energy Corp. USD 4,300.00 Acquire AZ State electric and gas utility 10/1/2012 StationPark All Suite Hotel CAD 13.00 Acquire 126-room hotel in London, Ontario 9/13/2012 Electric utility assets from City of Kelowna CAD 55.00 Purchased electric utility assets that serve 15,000 customers expect close Q1'13 8/31/2012 Turks and Caicos Utilities Limited CAD 13.00 Purchased regulated electric utility with a 50-year licence expiring in 2036 4/1/2012 Distribution asset of the City of Port Colborne CAD 7.00 Purchased electricity distribution assets in Port Colborne 2/21/2012 CH Energy Group USD 1,500.00 Acquired NY State electric and gas utility 7/22/2009 Caribbean Utilities Co. CAD 6.74 Acquired an additional 2.7% of Caribbean Utilities Co. 6/23/2009 Great Lakes Power Distribution CAD 68.00 Acquired from Brookfield the utility that serves the District of Algoma in northern Ontario. 10/1/2008 Grimsby Power Inc. CAD 1.10 Acquired a 10% minority interest. 10/1/2008 Caribbean Utilities Co. CAD 3.00 Acquired an additional 1% of Caribbean Utilities Co. 8/15/2008 Caribbean Utilities Co. CAD 25.00 Acquired an additional 2% of Caribbean Utilities Co. 7/23/2007 Delta Regina CAD 49.95 Delta hotel located in Regina, Saskatchewan. 2/26/2007 Terasen Inc. CAD 3,700.00 Gas distribution in British Columbia. 11/7/2006 Caribbean Utilities Co. CAD 55.70 Acquired an additional 16% of Caribbean Utilities Co. 10/19/2006 4 hotels in western Canada CAD 51.60 4 hotels (Holiday Inn, Best Western and Ramada) located in BC and Alberta. 8/28/2006 PPC Ltd & Atlantic Equipment & Power (Turks & Caicos) Ltd. CAD 97.70 Electric utility that services ~80% of the Turks and Caicos Islands. 1/25/2005 3 hotels in western Canada CAD 62.60 3 hotels in Western Canada from Greenwood Inns (Calgary, Edmonton and Winnipeg). 12/15/2004 Princeton Light & Power CAD 3.70 PLP is an electric utility that services Princeton, BC. 5/21/2004 Belize Electric Company Ltd. USD 3.50 Acquired the remaining 5% interest of the company. 9/17/2003 4 hotels in Ontario CAD 43.20 4 hotels located in Ontario (Cambridge, Kitchener, Sarnia and Peterborough). 9/15/2003 Alberta Utility & British Columbia Utility (from Aquila) CAD 1,500.00 BC and Alberta units of Aquila Inc. 2/26/2003 Granite Power Corp CAD 8.80 Company consist of Granite Power Distribution & Granite Power Generation. Source: Company data, the BLOOMBERG PROFESSIONAL™ service
Given the nature of the business model that retains largely autonomous underlying units, the FTS time to integrate is not overwhelming versus some other consolidation strategies. Yet, there are clear capital market limitations and other business limitations on going back to the M&A bandwagon too quickly, at least, in our view. For a variety of reasons, others have engaged in M&A more recently and may look for this trend (to a certain extent) to continue. Those include Emera with the TECO Energy deal and, among others, TransCanada with the Columbia transaction. Simply, our expectation is for a less frenetic M&A year ahead, however, one major area to watch will be capital market access. The broadly defined Canadian infrastructure sector had an extremely robust year with a total of C$20bn of equity capital raised (common and preferred) that accounted for 43% of the total amount. Such a figure is well in excess of the overall index representation. For additional perspective, we consider the C$46bn of total financings in the Canadian market from TSX data that consisted of the following:
Healthy equity appetite ■ IPO financings: C$1.4bn;
■ Secondary financings: C$25.3bn; and,
■ Supplemental financings: C$19.2bn. The broadly defined Canadian infrastructure universe raised nearly C$20bn of equity in the year to date. That dollar value easily surpasses the market weight of the sector. Some of the larger situations appear below:
■ Brookfield Infrastructure Partners: US$750m equity (November 28, 2016)
■ Emera Inc.: C$300m common equity (November 28, 2016)
■ Enbridge Inc.: C$750m preferred shares (November 15, 2016)
■ TransCanada: C$1.0bn preferred shares (November 14, 2016)
■ TransCanada: C$3.5bn common equity (November 1, 2016)
Canadian Equity Strategy 56
22 December 2016
■ Inter Pipeline: C$600m subscription receipts (August 8, 2016) Extremely supportive capital markets for ■ Brookfield Renewable Partners: C$800m equity (June 6, 2016) infrastructure issuance ■ AltaGas: C$440m common equity (May 26, 2016)
■ Gibsons: C$230m common equity and C$100m convertible (May 24, 2016)
■ Brookfield Renewable Partners: C$150m preferred shares (May 16, 2016)
■ Keyera: C$345m common equity (May 16, 2016)
■ Pembina: C$250m preferred shares (April 18, 2016)
■ TransCanada: C$500m preferred shares (April 13, 2016);
■ Enbridge Income Fund Holdings: C$500m common equity (April 11, 2016)
■ Pembina: C$345m common equity (March 17, 2016)
■ TransCanada: C$4.4bn subscription receipts (March 17, 2016) Notably, these figures do not include the effective amount of equity issued in several large scale acquisitions by Canadians into the US market involving share ratios. For instance, the FTS acquisition of ITC increased the Canadian company's share count by 28% for a total of C$4.6bn of incremental market cap at today's prices. One of the clear standouts in the above figures was TransCanada with nearly C$10bn of equity related financing. Large scale issues on The combination of modestly rising interest rates and the prospect for some sector rotation major transactions arising from somewhat improved commodity outlooks may dampen capital market flows to the infrastructure sector after an impressive year of performance. Another practical reality for capital market participants is the degree of investor fatigue that can sometimes creep in the investment process when considering the frequency and size of issues around repeat issuers. With last year's robust infrastructure capital market calendar, the businesses will likely need to convince the market of the underlying fundamentals for recently purchased assets along with resulting stock market performance.
Integration Issues Given the M&A theme, the issue of integration is an important one at a number of levels. In our view, integration is often less of an issue in the infrastructure universe versus many other parts of the market given the often standalone nature of individual assets. Naturally, some assets cannot be technically integrated in light of independent regulatory obligations. Yet, even with such assets there is still a need for an interface between the target and the acquirer in relation to accounting and, among other things, finance systems. There can be a whole host of challenges associated with this granular level of activities that are often forgotten by the Street, yet they still exist. Beyond these issues, there is a simple reality of balancing capital market access needs, size and timing of past deals with anything new in the future. Integration issues vary Ultimately, with two major M&A deals last year (i.e., TRP-CPGX and FTS-ITC), we expect a period of relatively "clean" results to be required before any additional transactions could realistically be contemplated. Despite some impressive M&A track records, there is a need to increase market confidence about the results from a past deal in a visible fashion before moving onto the next target. With a considerable portion of the larger Canadian players having undertaken recent transactions, we believe there will be a bit of a hiatus. Yet, we note that both Brookfield (broadly) and FTS has illustrated an ability to engage in M&A in a typical integration period.
Canadian Equity Strategy 57
22 December 2016
We will discuss some potential M&A themes under the "fundamental business reasons" heading below for a few of the other names in our coverage universe. Interest Rates As illustrated in the charts in Figure 98 and Figure 99, interest rates have clearly risen at a fairly frenetic pace over the last 5 weeks.
Figure 98: Canadian 10-year (last 3 months) Figure 99: US 10-year (last 3 months)
1.90 2.80 1.80 2.60 1.70 2.40 1.60 2.20
1.50 2.00 % % 1.40 1.80 1.30 1.60 1.20 1.40 1.10 1.20
1.00 1.00
11/7/2016 12/5/2016
11/7/2016 12/5/2016
11/21/2016 10/17/2016 10/24/2016 10/31/2016 11/14/2016 11/28/2016 12/12/2016
11/21/2016 10/24/2016 10/31/2016 11/14/2016 11/28/2016 12/12/2016 10/17/2016 Source: Bloomberg Source: Bloomberg
In many cases, infrastructure companies have long-dated protection from rising rates that is underpinned by regulatory frameworks, contracts, inflation protected tariffs or the reality of longer-term debt dominating the capital structure. Despite these realities, increasing rates tends to result in market rotation and can cause valuation weakness at certain inflection points which is a topic we have often addressed (link). From our perspective, rising rates can be a risk for absolute and, even more so, relative market performance, but also support our views of sub-sector preference. Very simply, at a time of rising rates that are underpinned by growing confidence in economic growth and resulting inflation, we prefer companies with better economic exposure from assets like toll roads, ports and airports. In our universe, Brookfield Infrastructure Partners is the best positioned with economic sensitivity, then we look to (broadly) the pipelines and energy infrastructure universe with a preference for TransCanada. To help put more perspective around the magnitude of interest rate movements, Figure 100 and Figure 101 illustrate various Canada yields along with a selection of interest rate expectations over the next 12 months.
Canadian Equity Strategy 58
22 December 2016
Figure 100: Yields Canada – short and long rates Figure 101: Cumulative interest rate expectations since 2000 over next 12 months % basis points* 30 7.0
6.0 25
5.0 20
4.0 15
3.0 10
2.0 5
1.0 0
0 -5 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Fed ECB BoE SNB BoJ BoC RBA RBNZ 3-month LIBOR CAD 10-year CAD Government Bond 30-year CAD Government Bond Expected change in short-term interest rates over 12 months, current 7 days ago 1 month ago
Source: Credit Suisse / IDC, Bloomberg Source: Credit Suisse / IDC, Bloomberg
As further evidenced in Figure 102 and Figure 103, the Bank of Canada's overnight rate remains extremely benign as does inflation, both of which support a "lower for longer" thesis.
Figure 103: Canada – CPI core and headline Figure 102: Bank of Canada overnight lending rate inflation
in % in %
6.0 5.0
5.0 4.0
4.0 3.0
3.0 2.0
2.0 1.0
1.0 0
0 -1.0 Feb 00 Feb 02 Feb 04 Feb 06 Feb 08 Feb 10 Feb 12 Feb 14 Feb 16 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Bank of Canada overnight lending rate Headline inflation CPI core Source: Bloomberg, Credit Suisse / IDC Source: Credit Suisse / IDC, Bloomberg, Datastream
For a truly longer-term historical perspective, Figure 104 illustrates the US 10-year over the last 125 years.
Canadian Equity Strategy 59
22 December 2016
Figure 104: US long term interest rate (long series)
%
16
14
12
10
8
6
4
2
0 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
US long term treasury interest rate (>10y)
Source: S. Homer, R.J. Shiller, Datastream, Credit Suisse / IDC
With this backdrop, we favour companies with greater economic exposure like BIP and the higher rates of dividend growth. Figure 105 shows a sample of Canadian companies with their respective consensus dividend growth for 2016 versus 2015 and 2017 versus 2016 with the infrastructure names highlighted.
Canadian Equity Strategy 60
22 December 2016
Figure 105: Consensus dividend growth Company 2016 2017 2018 Company 2016 2017 2018 First Quantum Minerals Ltd. -65.0% 57.1% 48.5% National Bank of Canada 6.7% 4.6% 5.8% Silver Wheaton Corp. 9.5% 37.9% 11.3% North Power 0.0% 4.5% 8.9% Norbord Inc 20.4% 26.7% -42.9% Stantec 5.7% 4.5% 3.4% Husky Energy Inc. -87.4% 17.7% 91.7% Royal Bank of Canada 5.2% 4.5% 5.0% Waste Connect -46.4% 17.6% 7.9% Milestone 4.7% 4.4% 3.5% Couche Tard 61.4% 17.4% 18.8% BCE 4.8% 4.4% 4.5% CP 28.9% 15.2% 7.6% Inter US 5.3% 4.4% 4.9% Canadian Natural Resources Limited -6.0% 13.3% 3.8% Cineplex 3.6% 4.1% 4.2% Atco Ltd 15.2% 13.2% 10.7% Empire 11.1% 4.0% 5.3% Quebecor 36.2% 13.0% 17.5% Cott -8.0% 3.8% 1.3% Cdn Tire 7.7% 12.4% 2.5% Suncor Energy 2.0% 3.5% 2.5% Gildan Activewear Incorporated 22.3% 12.3% 7.0% TransAlta 7.3% 3.5% 3.0% Dollarama Inc. 12.5% 11.7% 13.2% George Weston 2.7% 3.2% 5.0% Magna Intl 19.6% 10.8% 0.6% Innergex 3.2% 3.1% 1.2% Colliers Int Gr -26.0% 10.5% -9.5% H&R REIT 0.3% 2.8% 0.6% Labrador Iron Ore Royalty Corporation 5.8% 9.9% -9.7% Franco Nevada 8.3% 2.8% 3.2% Capital Power Corporation 3.2% 9.9% 5.6% Smart REIT 3.1% 2.7% 2.1% Enbridge Income Fund Holdings 15.0% 9.7% 8.9% ThomsonReuters 5.3% 2.4% 2.4% Agnico Eagle 16.9% 9.6% 1.0% Brookfld Prpty 9.5% 2.3% -0.8% WestJet Airlines 1.4% 9.5% 8.0% RCI -0.1% 1.9% 4.7% Cenovus Energy Inc. -76.5% 9.5% 20.5% CAPREIT 2.4% 1.8% 1.4% Manulife Financial Corporation 6.4% 9.3% 11.2% CREIT 2.2% 1.8% 1.8% TransCanada Corp. 7.9% 9.2% 10.6% Barrick Gold -41.5% 1.7% -9.2% MTRO 24.4% 9.1% 9.5% Allied Propertie 2.9% 1.7% 1.4% Emera Inc. 18.9% 8.5% 8.0% Boardwalk REIT 9.4% 1.2% -0.3% Canad Natio Rail 25.1% 8.5% 2.3% Hydro One Limited -52.2% 1.0% 6.3% Home Capital 8.9% 8.5% 8.5% Pure Ind RE Tru 0.3% 1.0% 0.3% Intact Financial 9.8% 8.5% 6.6% Gibson Energy Inc. 3.0% 0.8% 4.0% Canadian Utilities Limited 10.1% 8.3% 7.3% SNC-Lavalin 3.0% 0.8% -0.8% Industrial-Alliance Insurance Company 8.6% 8.2% 6.4% Encana -77.8% 0.5% -0.5% Ritchie Bros 10.9% 8.0% 11.5% FirstService 3.7% 0.5% -0.5% Algonqn Pwr & Ut 7.6% 8.0% 6.5% Agrium 6.3% 0.2% 0.3% Saputo 3.8% 8.0% 13.2% First Cptl Rlty 0.1% 0.1% 0.6% Sun Life Financial 7.7% 7.8% 7.9% Teck Resources Ltd -51.0% 0.0% 5.1% Pembina Pipeline Corporation 5.6% 7.6% 8.9% Finning Intl 0.7% 0.0% 0.0% Telus 9.7% 7.4% 6.7% MacDonald, Dettwiler and Associates Ltd. 0.0% 0.0% 4.7% West Fraser Timb -0.7% 7.2% -9.4% Maple Leaf Foods 11.3% 0.0% -1.1% CAE 9.3% 7.1% 6.3% RioCan REIT 0.0% 0.0% 0.0% Toronto Dominion Bank 8.0% 7.0% 6.3% Cominar REIT 0.0% 0.0% 0.2% Brookfield Asset Management 11.3% 6.7% 7.0% Artis Real 0.0% 0.0% 0.0% Keyera Corp. 7.8% 6.7% 10.1% Crombie REIT 0.0% 0.0% 0.0% Granite REIT 5.0% 6.3% 4.8% Dream Global 0.0% 0.0% 0.0% Fortis Inc. 11.9% 6.1% 7.8% TransAlta Corporation -77.8% 0.0% 0.0% Loblaw 2.3% 6.1% 2.8% Superior Plus 0.0% 0.0% 0.7% CI Financial 5.3% 6.1% 7.6% Veresen 0.7% -0.3% -0.4% AltaGas 7.7% 5.8% 7.4% Dream Offc REIT -31.3% -2.6% 0.0% Great-West Lifeco Inc. 6.5% 5.7% 4.2% Shaw Comms 3.9% -5.1% -0.1% Imperial Oil Ltd 10.2% 5.7% 6.3% ARC Resources Ltd. -47.7% -7.8% 6.6% Brookfield Prtn 7.2% 5.5% 6.8% PrairieSky -28.8% -8.0% -6.7% Rstrnt Brnd 37.3% 5.5% 9.7% Whitecap Resources -53.5% -19.8% 0.0% Bank of Nova Scotia 5.9% 5.2% 5.0% Goldcorp -72.4% -23.0% 3.8% Laurentian Bank of Canada 7.2% 5.0% 5.5% Crescent Point Energy Corp -76.5% -27.2% 0.3% Cameco Corporation -14.0% 4.9% -2.2% Enerplus Corporation -73.1% -30.2% 0.0% Canada Imperial Bank of Commerce 10.5% 4.8% 2.9% PotashCorp -45.0% -44.9% 3.1% Bank of Montreal 5.0% 4.8% 4.2% Source: Credit Suisse RAVE, IBES
Despite the concerns about rising interest rates, we remain confident in the underlying fundamentals of the broader infrastructure sector along with our preferred companies. Foreign Exchange In relation to fund flows and some of the underlying business operations, one currency pair has always been predominate for Canadian investors: USD/CAD. Figure 106 illustrates a
Canadian Equity Strategy 61
22 December 2016
weaker CAD after a prolonged period of strength that roughly coincided with a bullish oil market.
Figure 106: Historical USD/CAD exchange rate
1.60
1.50
1.40
1.30
1.20
1.10
1.00
0.90
0.80
Jan-01 Jan-99 Jan-00 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Source: Bloomberg and Credit Suisse
USD/CAD swings Part of that "petrodollar" dynamic and commodity relationship is captured by Figure 107 and Figure 108.
Figure 108: CAD / USD, AUD / USD and CRB Figure 107: CAD/USD vs. WTI Commodity Index
1.10 120 Fx-Rate Index 1.05 1.20 500 1.00 100 0.95 80 0.90 1.10 450 0.85 60 0.80 1.00 400 0.75 40 0.70 0.65 20 0.90 350 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 CAD/USD spot rate WTI (USD/bbl, r.h.s.) 0.80 300 1.0 0.70 250 0.5 0.60 200 0
-0.5 0.50 150
-1.0 0.40 100 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 94 Jan 98 Jan 02 Jan 06 Jan 10 Jan 14 26-week rolling correlation between CAD/USD and WTI CAD / USD AUD / USD CRB Commodity Index (rhs)
Source: Bloomberg, Credit Suisse / IDC Source: Bloomberg, Credit Suisse / IDC, Datastream
On a more near-term basis, Figure 109 highlights the performance over a variety of timelines. The Canadian dollar was stronger since the beginning of the year, depreciated versus the USD in Q3. Of note, the USD/CAD was recently trading at roughly 1.3271.
Figure 109: USD/CAD recent performance Data USD/CAD Performance USD/CAD Begin of 2016 1.3828 QTD 5.1% End of Q1 1.3004 Jan to Mar 6.0% End of Q2 1.2979 Apr to Jun 0.2% End of Q3 1.3117 Jul to Sept -1.1% Source: Bloomberg and Credit Suisse
Canadian Equity Strategy 62
22 December 2016
In terms of currency, there are not a lot of FX issues in the infrastructure sector for several reasons, including:
A largely hedged ■ Asset and cash flow hedges tend to exist – not earnings streams; industry, but longer- term FX issues ■ Cash flow hedges are designed to help ensure the sustainability of various distribution streams (intercompany dividends and ultimately to equity holders); and,
■ For many, the asset skew is really in Canada with substantial US positions. Some selected points of note in our coverage universe related to currency include:
Capex and M&A ■ A rather range bound CAD does not look like a significant motivator on funding deals consequences from outside of the country (in particular) in the USD at this time; currency ■ An expectation of a weaker future CAD versus the USD also translates into more expensive organic development opportunities with cash flow generated outside the US (in particular if the US business does not have sufficient cash flows on a standalone basis);
■ With this backdrop, we note EMA, FTS and TRP each increased their respective USD exposures by way of acquisitions and, as a result, generally, CAD devaluation acts as a positive with a slew of USD cash flows and earnings influencing the consolidated figures; and,
Brookfield as the most ■ In our view, the Brookfield Group has the most international of operations and the most sophisticated FX sophisticated approach to FX. The organization will look and take structural positions in program assets partly on the basis of currency expectations if all the other criteria are sufficient for their purposes. Keep in mind, Brookfield has multiple currency pair exposures, less CAD assets and future growth than others in our coverage universe. Thus, the USD/CAD relationship is not overly important to Brookfield and arguably some other currency pairs are more important. Also note most Brookfield entities (not all) are USD reporters and USD dividend or distribution payers (there are some exceptions).
■ For more internationally exposed assets, we highlight a few interesting currency pairs that include:
■ EUR/USD;
■ GBP/USD;
■ AUD/USD; and
■ USD/BRL. Figure 110 through Figure 113 provide visuals of these pairs.
Canadian Equity Strategy 63
22 December 2016
Figure 110: EUR/USD Figure 111: GBP/USD
1.40 EUR/USD 1.80 GBP/USD 1.35 1.70 1.30 1.60 1.25 1.20 1.50 1.15 1.40 1.10 1.30 1.05
1.00 1.20
1/1/2014 4/1/2014 7/1/2014 1/1/2013 4/1/2013 7/1/2013 1/1/2015 4/1/2015 7/1/2015 1/1/2016 4/1/2016 7/1/2016
1/1/2014 4/1/2014 7/1/2014 1/1/2013 4/1/2013 7/1/2013 1/1/2015 4/1/2015 7/1/2015 1/1/2016 4/1/2016 7/1/2016
10/1/2013 10/1/2014 10/1/2015 10/1/2016
10/1/2014 10/1/2015 10/1/2016 10/1/2013 Source: Bloomberg Source: Bloomberg
Figure 112: AUD/USD Figure 113: USD/BRL
1.10 AUD/USD 4.30 USD/BRL 1.05 1.00 3.80 0.95 3.30 0.90 0.85 2.80 0.80 0.75 2.30 0.70
0.65 1.80
1/1/2015 4/1/2015 7/1/2015 1/1/2013 4/1/2013 7/1/2013 1/1/2014 4/1/2014 7/1/2014 1/1/2016 4/1/2016 7/1/2016
1/1/2013 4/1/2013 7/1/2013 1/1/2014 4/1/2014 7/1/2014 1/1/2015 4/1/2015 7/1/2015 1/1/2016 4/1/2016 7/1/2016
10/1/2013 10/1/2014 10/1/2015 10/1/2016
10/1/2014 10/1/2015 10/1/2016 10/1/2013 Source: Bloomberg Source: Bloomberg
Focus on longer-term We do not view a lot of near-term impacts within our infrastructure coverage universe. Yet, currency moves and the longer-term reality of FX risk for most in the sector is the consequence of major moves distribution cover eroding residual asset values and in place cash flows. The major concern is cash flows deteriorating in a foreign currency and ultimately hindering the ability of the corporate entity to pay dividends. This situation rarely happens, but it does occur in some situations. In the current situation, a future potential decline of the CAD against the USD does not overly negatively affect many of the Canadian names we follow. In fact, in some situations, the stronger US will provide more cash flows into the Canadian holdco as hedges roll off over time. Credit Suisse FX forecast for the 3 months and 12 months include:
■ USD/CAD: 1.380 / 1.400
■ AUD/USD: 0.720 / 0.700
■ EUR/USD: 1.030 / 1.000
■ GBP/USD: 1.200 / 1.205
■ USD/BRL: 3.500 / 3.800
Canadian Equity Strategy 64
22 December 2016
With this currency outlook, we view some of the major USD earners as being positioned to benefit from further CAD devaluation compared to the USD. A few of the major names are EMA, FTS and TRP for this theme. Fundamental business reasons In a series of research reports over the course of the past 12 months, we discussed a need for certain businesses to "reinvent" themselves by way of acquisition. Some reinventions are underway or still in progress with a tendency for the larger companies to lead the way. From our vantage point, there are some clear fundamentals in Western Canada's energy market that may look to motivate another round of "reinvention" themes. As discussed in some of our past work, there are a number of emerging issues in the Western Canadian natural gas basins. Clearly, the economics are extremely favourable, but there are several issues related to proximity to markets along with physical connectivity (see past research at "Western Canadian Natural Gas: Diving into Western Canada Gas Production Trends and Other Topics"). Reinvention trade With that backdrop and the major pipelines having engaged in significant transactions, we underpinnings still believe a future theme will revolve around the remaining small and mid-cap infrastructure exist for some companies involved Western Canadian energy infrastructure. With names like Pembina Pipeline and Inter Pipeline having market capitalizations of roughly C$16bn and C$10bn, respectively, these stocks are a decent size versus many others in the North American market. Clearly, their existing footprints have provided a considerable amount of growth in recent years with the ongoing evolution and development of the Montney and, among others, the Duvernay resource plays. That trend may continue, albeit at a slower pace, however, some risks abound in relation to market connectivity and competitiveness. In addition, some interest in petrochemical activities may also indicate a perceived slowing of growth. In our view, these factors may motivate some transactional activity with a southward view. At this time, we do not believe it is necessary to really consider the appropriateness of the specific names involved, but rather the logic of diversifying out of the Western Canadian basin. The other issues can be explored in future work. One notable aspect regarding the potential for M&A activity by the next tranche of companies is that of relative valuation. Figure 114 and Figure 115 highlight several valuation parameters for a number of Canadian midstream companies and US MLPs, respectively.
Figure 114: Selected Canadian midstream companies Price on P/E Div Yield EV/EBITDA Company Ticker Target Price Rating 20-Dec-16 2016 2017 2018 2016 2017 2018 2016 2017 2018 AltaGas ALA.TO C $ 33.80 NR NR 33.5x 31.3x 28.4x 6.0% 6.4% 6.8% 13.3x 12.5x 11.9x Enbridge Income Fund Holdings ENF.TO C $ 34.85 C $ 34.00 NEUTRAL 16.1x 15.1x 14.0x 5.3% 5.8% 6.3% NA NA NA Gibson Energy Inc. GEI.TO C $ 18.79 C $ 16.00 NEUTRAL NA NA NA 7.0% 7.1% 7.4% 14.8x 10.7x 9.5x Inter US IPL.TO C $ 29.61 NR NR 22.0x 20.0x 20.1x 5.3% 5.5% 5.8% 15.6x 14.1x 13.9x Keyera Corp. KEY.TO C $ 40.59 C $ 42.00 NEUTRAL 29.2x 23.7x 20.9x 3.8% 4.0% 4.5% 15.1x 12.8x 11.5x Pembina Pipeline Corporation PPL.TO C $ 42.16 C $ 44.00 NEUTRAL 37.9x 25.7x 21.0x 4.5% 4.8% 5.3% 17.3x 13.4x 11.2x TransCanada Corp. TRP.TO C $ 61.35 C $ 70.00 OUTPERFORM 22.4x 21.6x 20.5x 3.7% 4.0% 4.4% 13.8x 11.9x 10.8x Veresen VSN.TO C $ 12.37 NR NR 54.7x 23.5x 20.8x 8.1% 8.1% 8.1% 9.0x 8.8x 7.6x Average 30.8x 23.0x 20.8x 5.5% 5.7% 6.1% 14.1x 12.0x 10.9x
Source: Credit Suisse RAVE, IBES
Canadian Equity Strategy 65
22 December 2016
Figure 115: Selected US MLPs Price on P/E Div Yield EV/EBITDA Company Ticker Target Price Rating 20-Dec-16 2016 2017 2018 2016 2017 2018 2016 2017 2018 Buckeye Partners, LP BPL US $ 65.04 US $ 79.00 NEUTRAL 15.2x 14.8x 14.2x NA 7.8% 8.1% 12.6x 11.6x 11.3x Energy Transfer Equity, LP ETE US $ 18.74 US $ 20.00 OUTPERFORM 19.6x 16.1x 12.4x 6.1% 6.2% 6.9% 9.7x 8.1x 7.2x Energy Transfer Partners, LP ETP US $ 34.95 US $ 50.00 OUTPERFORM NA 18.4x 13.5x 12.5% 12.5% 12.8% 8.4x 7.1x 6.2x Enterprise Products Partners, LP EPD US $ 26.26 US $ 34.00 OUTPERFORM 21.0x 18.5x 16.9x 6.2% 6.5% 6.8% 14.9x 13.6x 12.5x EQT GP Holdings, LP EQGP US $ 25.08 US $ 32.00 OUTPERFORM 31.9x 28.9x 24.9x 2.5% 3.5% 4.5% NA NA NA EQT Midstream Partners, LP EQM US $ 74.07 US $ 102.00 OUTPERFORM 14.1x 13.7x 14.3x 4.3% 5.1% 6.0% 11.2x 9.2x 7.9x AmeriGas Partners, L.P. APU US $ 45.71 US $ 40.00 UNDERPERFORM 25.8x 17.2x 16.7x 8.2% 8.3% 8.5% 11.0x 10.2x 9.9x Suburban Propane Partners, LP SPH US $ 29.59 US $ 30.00 UNDERPERFORM NA 16.7x 14.8x 12.0% 12.0% 12.0% 13.5x 9.7x 9.3x Ferrellgas Part FGP US $ 6.76 NR NR NA 30.3x 13.9x 30.3% 8.4% 7.4% 11.3x 9.2x 8.6x Columbia Pipeline Partners, LP CPPL US $ 17.10 US $ 18.00 OUTPERFORM 21.3x 17.0x 12.4x 4.6% 5.2% 6.0% 3.2x 2.9x 2.3x Kinder Morgan, Inc. KMI US $ 20.77 US $ 27.00 OUTPERFORM 33.9x 29.2x 25.8x 2.4% 2.4% 3.6% 12.4x 12.3x 11.6x Magellan Midstream Partners , LP MMP US $ 74.29 US $ 74.00 UNDERPERFORM 21.1x 19.6x 18.7x 4.5% 4.8% 5.2% 17.2x 15.8x 14.8x MPLX LP MPLX US $ 32.85 US $ 42.00 OUTPERFORM NA 29.4x 20.8x 6.3% 7.1% 8.0% 12.3x 9.1x 6.6x ONEOK, Inc. OKE US $ 58.67 US $ 54.00 NEUTRAL 34.2x 32.4x 29.1x 4.2% 4.3% 4.7% 11.8x 11.0x 10.2x ONEOK Partners, LP OKS US $ 44.90 US $ 45.00 NEUTRAL 19.0x 17.1x 16.4x 7.0% 7.1% 7.4% 10.9x 10.2x 9.5x Phillips 66 Partners, LP PSXP US $ 47.38 US $ 68.00 OUTPERFORM 20.6x 14.8x 14.1x 4.4% 5.4% 6.5% 13.9x 7.7x 5.5x Plains All American Pipeline, LP PAA US $ 32.24 US $ 35.00 NEUTRAL 29.8x 18.7x 16.0x 8.0% 7.1% 7.3% 15.2x 14.0x 12.5x Plains GP Holdings, LP PAGP US $ 34.28 US $ 37.00 NEUTRAL 15.2x 13.3x 11.8x 7.0% 8.0% 7.7% 12.0x 9.7x 8.1x Tallgrass Energy GP, LP TEGP US $ 25.51 US $ 30.00 OUTPERFORM 44.8x 27.3x 20.7x 3.9% 5.3% 6.8% 15.3x 10.6x 9.4x Targa Resources Corp. TRGP US $ 56.21 US $ 57.00 NEUTRAL NA NA NA 6.5% 6.5% 6.7% 14.9x 13.2x 12.2x TC PipeLines TCP US $ 55.12 NR NR 16.7x 17.3x 17.2x 6.7% 7.1% 7.5% 13.9x 12.8x 11.3x Valero Energy Partners, LP VLP US $ 43.65 US $ 55.00 OUTPERFORM 17.4x 14.5x 13.4x 3.4% 4.3% 5.2% 13.2x 9.6x 7.1x VTTI Energy Partners, LP VTTI US $ 16.25 US $ 22.00 NEUTRAL 14.6x 17.8x 18.1x 8.0% 8.8% 9.7% 7.1x 7.0x 6.9x Williams Companies, Inc WMB US $ 30.35 NR NR NA 28.7x 27.7x 6.1% 4.0% 5.6% 10.9x 10.4x 9.5x Williams Partners, LP WPZ US $ 35.87 US $ 38.00 NEUTRAL NA 27.2x 24.5x 9.5% 9.5% 9.5% 9.4x 9.0x 8.2x World Point Ter WPT US $ 16.38 NR NR 15.2x 14.7x NA 7.3% 7.3% NA NA NA NA Average 22.7x 20.5x 17.8x 7.3% 6.7% 7.2% 11.9x 10.2x 9.1x
Source: Credit Suisse RAVE, IBES
Perhaps the most notable takeaway from these tables is the simple fact that a number of the Canadian energy infrastructure players trade at roughly a 20% premium to their US counterparts. With fairly healthy capital market access and share price performance (Figure 116 and Figure 117), a selection of Canadian energy infrastructure companies may look southward to further business growth on a longer-term basis.
Figure 116: Canadian midstream companies Name Ticker 1 Week 1 Month 3 Months 6 Months 9 Months 12 Months AltaGas ALA.TO 2.5% 4.5% 3.0% 11.3% 2.8% 9.9% Enbridge Income Fund Holdings ENF.TO 2.2% 3.4% 6.1% 10.9% 17.2% 29.7% Gibson Energy Inc. GEI.TO 1.2% 13.5% 12.8% 23.3% 2.3% 34.3% Inter US IPL.TO 3.4% 8.6% 8.4% 11.0% 16.3% 33.0% Keyera Corp. KEY.TO 4.4% 5.7% 1.0% 9.3% 3.2% -0.1% Pembina Pipeline Corporation PPL.TO 3.5% 9.5% 7.5% 6.8% 22.9% 40.9% TransCanada Corp. TRP.TO 4.6% 2.2% -0.6% 11.0% 25.7% 34.9% Veresen VSN.TO 2.0% -1.0% -3.7% 15.0% 39.8% 44.2% Performance 3.0% 5.8% 4.3% 12.3% 16.3% 28.3%
Source: Credit Suisse RAVE
Canadian Equity Strategy 66
22 December 2016
Figure 117: US MLP share performance Name Ticker 1 Week 1 Month 3 Months 6 Months 9 Months 12 Months Buckeye Partners, LP BPL.N 1.2% 0.7% -6.3% -6.0% -3.6% 16.3% Energy Transfer Equity, LP ETE.N 5.0% 3.9% 9.4% 38.3% 124.2% 61.9% Energy Transfer Partners, LP ETP.N 1.1% -11.7% -6.8% -9.9% 16.7% 23.3% Enterprise Products Partners, LP EPD.N 1.8% 3.4% -2.4% -5.8% 2.4% 11.4% EQT GP Holdings, LP EQGP.N 0.0% 4.6% -3.2% -0.1% -0.9% 29.5% EQT Midstream Partners, LP EQM.N 2.5% 0.7% -3.2% 0.3% -0.5% 6.4% AmeriGas Partners, L.P. APU.N 3.9% 2.7% 3.5% 5.7% 7.6% 36.7% Suburban Propane Partners, LP SPH.N -2.0% -0.4% -9.5% -6.3% -1.4% 25.5% Ferrellgas Part FGP.N 8.7% -8.0% -60.0% -60.7% -60.7% -58.0% Kinder Morgan, Inc. KMI.N -1.3% -3.0% -4.1% 16.5% 12.2% 38.8% Magellan Midstream Partners , LP MMP.N 2.7% 9.5% 7.8% -0.8% 6.4% 18.1% ONEOK, Inc. OKE.N 1.6% 15.2% 22.6% 27.5% 88.5% 206.9% ONEOK Partners, LP OKS.N 5.4% 7.9% 19.5% 17.2% 38.0% 94.7% Phillips 66 Partners, LP PSXP.N 2.8% 8.4% 0.7% -12.3% -24.6% -17.3% Plains All American Pipeline, LP PAA.N -1.3% 2.5% 14.9% 19.6% 32.7% 61.0% Plains GP Holdings, LP PAGP.N -3.0% -0.1% 11.1% 23.1% 44.2% 68.1% Tallgrass Energy GP, LP TEGP.N -1.5% 3.6% 5.7% 11.5% 39.5% 83.7% Targa Resources Corp. TRGP.N 2.8% 8.9% 14.2% 32.5% 84.7% 113.5% TC PipeLines TCP.N 4.6% 1.3% 3.2% 0.8% 5.0% 28.7% Valero Energy Partners, LP VLP.N 6.2% 7.6% 1.4% -4.9% -16.5% -13.7% VTTI Energy Partners, LP VTTI.N 0.5% -2.9% -9.6% -16.5% -13.4% -7.3% Williams Companies, Inc WMB.N 2.8% 2.0% 2.5% 36.5% 69.5% 42.8% Williams Partners, LP WPZ.N 2.9% -2.6% -3.8% 8.7% 72.9% 55.0% World Point Ter WPT.N 0.5% 6.4% 9.2% 8.7% 16.5% 37.3% Performance 2.0% 2.5% 0.7% 5.1% 22.5% 40.1%
Source: Credit Suisse RAVE
Before venturing too far afield, there is may be a clear motivation for some Canadian Many consolidation names to consolidate amongst each other first which, in some cases, could strengthen plays exist already impressive footprints. Yet, from our perspective, there are some notable realities associated with the Western Canadian basin that carry some risks not currently reflected in the stocks and clearly underpin a need to reinvent. Positively, some of the successful reinvention themes from the last two-years have delivered impressive market performance and thus provide a nature market template to somewhat follow. Increased Infrastructure In recent years, the "infrastructure theme" has experienced increased momentum. Infrastructure is not a new investment theme, however, a number of factors are making the issue much more topical. Clearly, there have been many efforts from politicians to highlight the infrastructure theme. In Canada, we note the government's plan on possibly applying Keynesian economics to aid the economy with increased spending targeting infrastructure. Beyond those plans, the Canadian government outlined the future creation of a "Canada Infrastructure Bank" that will target hundreds of billions of dollars of projects. For more details please see "Keen on Keynes; Liberals Outline Plans for a Decade of Infrastructure Investing" and "Increased Infrastructure Investment". Keen on Keynes In addition to our specific views in a Canadian context, our Global Thematic team's recent research report (thematic report) addressed a number of issues, including: (1) the current favourable interest rate environment enhances longer-term financing; (2) the potential for increased institutional investment in infrastructure assets; (3) the size of the opportunity; and, (4) the longer-term benefits from infrastructure investment. The US President-Elect Trump has clearly supported increased infrastructure investment and, importantly, for our universe, supports TransCanada's Keystone XL. As discussed in some past work, we believe another path for TRP's re-rating revolves around the future KXL approval and having greater timeline clarity. Beyond KXL specifically, a number of Trump's policies look to favour infrastructure and the energy sector with the potential for increased hydrocarbons flowing through a growing network of pipelines. Generally, such developments are positive for our companies, especially if more favourable approval processes are put into place.
Canadian Equity Strategy 67
22 December 2016
A Tough Transition A difficult transition for Another area of note to address is Alberta's power markets that continue to face a number Alberta's IPPs of uncertainties. Positively, Alberta's power market uncertainties are being addressed in a gradual and systematic fashion. The positive developments, in our view, favour the incumbents with a focus on TransAlta (TA), Capital Power (CPX) and Canadian Utilities (CU). We view Alberta's power market transition to a capacity market and the plans to compensate the legacy coal generators for an accelerated shutdown as being steps towards restoring market confidence. Yet, there are many questions and "known unknowns" in relation to future developments. So while the developments are positive, we view Alberta's power market as the weakest relative sub-sector for certainty in our coverage universe. As a result, we reiterate Underperform ratings on CPX and TA, however, we note more aggressive traders may look to position around notable stock moves and longer-term investors (three to five-plus years) may note interesting underlying value. For a more comprehensive discussion, please refer to our recent note at "Alberta Power Market: Positive Progress Advantages Incumbents, but Transition has "Known Unknowns"".
Brookfield Specifics Given the focus of the Energy in 2017 report, this section briefly addresses some of the major themes around four of the major Brookfield public entities:
■ Brookfield Asset Management;
■ Brookfield Business Partners
■ Brookfield Infrastructure Partners
■ Brookfield Renewable Partners Each of these areas is addressed briefly below. Brookfield Asset Management Aside from exposure to a power market business and the underlying ownership positions Fund raising helps in each of the major public LPs, BAM's direct energy asset exposure is rather limited. Yet, transaction firepower we believe BAM's positive funding momentum for the private fund business along with the associated deployment is a key issue to watch. Figure 118 illustrates the positive fund raising momentum across BAM's flagship funds which are a critical factor in any asset management business.
Canadian Equity Strategy 68
22 December 2016
Figure 118: Flagship funds
Source: Company data
BAM's platform provides opportunities to allocate capital into many situations around the world and might be best summarized in Figure 119.
Figure 119: Scale to complete for assets globally
Source: Company data
This type of business model has already witnessed considerable capital go toward many energy assets around the world. Brookfield Business Partners Our team view BBU as offering investors an attractive combination of downside protection from the ownership of several established, high-quality franchises and potential upside from a series of "turnaround businesses." On the turnaround front, BBU owns a number of oil and gas production companies and assets producing about 108,000 boe/d coming from Australian and Canadian wells. Additionally, BBU was involved in restructuring the Texas Competitive Electric Holdings (TCEH and now known as Vistra Energy). Given Brookfield's capital market access and approach to investing, one should watch BBU's investments in potentially distressed situation along with the ultimate monetization plans. Brookfield Infrastructure Partners A number of energy For many reasons, we believe energy dedicated investors need to be more knowledgeable angles for BIP and BBU about BIP's market presence and capital allocation potential. On a simple basis, Figure 120 and Figure 121 highlight growth opportunities within the energy and the district energy segments that balance both the energy platform growth from existing assets and a bit of consolidation potential in district energy.
Canadian Equity Strategy 69
22 December 2016
Figure 120: Energy opportunities Figure 121: District energy opportunities
Source: Company data Source: Company data
From our perspective, the most notable recent transaction (and possibly since Babcock & Brown Infrastructure) is NTS from Petrobras. Figure 122 comes from BIP's investor day disclosures and highlights NTS.
Figure 122: Brazilian natural gas transmission utility (NTS)
Naturally NTS
Source: Company data
Our reinstatement note provided broader context on this asset, but some of the specifics now disclosed by BIP include:
■ Going-in FFO and AFFO yields greater than 13%;
■ Maintenance capital of roughly 3% of EBITDA;
■ No regulatory resets on this asset with inflation indexed topline; and,
■ Incremental opportunities for capital allocation. Given the excess liquidity and platform dynamics, we believe BIP will remain a significant player in growing an energy infrastructure footprint. BIP remains our top pick in our coverage universe.
Canadian Equity Strategy 70
22 December 2016
Brookfield Renewable Partners BEP's global platform and renewable power focus is unique versus many others. This platform and approach on capital allocation translates into many opportunities. BEP's capital allocation strategies across markets appears in Figure 123 and Figure 124.
Figure 123: Where BEP is investing Figure 124: Other core markets
Source: Company data Source: Company data
BEP's growth strategy is outline in Figure 125 and is partially predicated on balancing a bit of M&A and underlying pipeline development.
Figure 125: Growth strategy
Source: Company data
Figure 126 outlines BEP's investment and operational capabilities.
Canadian Equity Strategy 71
22 December 2016
Figure 126: Investment and operational capabilities
Source: Company data
Frankly, we have been surprised with BEP's ongoing success with the North American M&A pipeline. Notably, as in Figure 127, BEP continues to see a large opportunity set for hydro generation in both the US and globally. In terms of the development pipeline, there is a clear skew to wind power (Figure 128).
Figure 127: Hydro opportunities Figure 128: Development pipeline
Source: Company data Source: Company data
As with most of the Brookfield entities, we continue to believe BEP faces an enviable set of opportunities. Yet, the timing and financial impact of those potential deals is uncertain and, therefore, creates some challenges around valuation.
Metals and Mining Our Metals and Mining coverage is divided into two areas addressed individually below:
■ Gold sector; and,
■ Industrial metals.
Canadian Equity Strategy 72
22 December 2016
Gold sector Anita Soni We are bullish on gold prices into 2017 from the current ~$1,130/oz. Our forecast is for 416-352-4587 $1,275/oz by Q1/17 and a $1,338/oz average for the full year (see our Commodity forecast anita.soni@credit- report). Reasons we are gold bulls: suisse.com ■ Real interest rates to remain low: Real interest rates have a greater correlation to Robert Reynolds gold price performance than the USD alone with low and negative real rates a positive 416-352-4516 for gold. We believe the market is currently pricing in a more optimistic scenario for the robert.reynolds@credit real rates in the US and globally and the bias is toward a reversal. We see higher -suisse.com inflation under Trump (and with higher oil & commodity prices on YoY comps in Q1) and bond yields still weighed down by the global outlook, supporting low real rates.
A rates reversal bias ■ Market underestimating possibility of increased trade protectionism under Trump, which would be inflationary and also a drag on growth, driving lower real rates.
■ Improved supply/demand fundamentals vs. 2016: We see a shift from ETF buying, which supported the market in 2016, to higher demand for gold bars/coins due to geopolitical risk (Europe) and potential currency volatility (Europe & China). Supply constraint remains an issue particularly at $1,150/oz gold. 2016 year in review
■ Gold equities increased 50% in 2016YTD (HUI Index), coming off of a 13 year low and a seven fold return over the 7% increase in the gold price. Recapitalization and leverage trades outperformed in 2016, notably ABX (+94%), KGC (+66%), IAG (+139%) and GSS (+317%). For the sector as a whole, we attribute equity outperformance primarily to margin expansion, with a Cash Flow Implied Cost margin (CFIC, see report) of ~$246/oz in 2016 ($1,250/oz price and $1,004/oz CFIC) up from $54/oz based on the 2015YE spot price ($1,070/oz price and $1,016/oz CFIC). Key themes for 2017 The gold price outlook continues to dominate, outside of gold prices we see the following key themes in the sector.
■ Capital allocation: The industry faces a medium and long term mine supply challenge as reserve life has declined to 10 years at 2015YE from 14 years in 2012. Depletion is not being replaced as only 40% of the ounces mined since 2009 have been replaced organically by the largest producers in our coverage. Investment is necessary for long term viability, and investors will reward companies that follow a disciplined capital allocation process and focus on returns rather than ounces. A disciplined process should lead to sustainable cash flow generation, see below for our 2017 cash flow yield estimates at $1,100/oz and $1,300/oz. If the gold price underperforms our outlook and remains sub-$1,200, we would expect a greater focus on M&A in the space.
Capital allocation and ■ Margin trajectory: 2016 saw significant margin expansion, 2017 could bring pressure margins in focus from a combination of higher costs and lower output. Cost tailwinds from currency devaluation and oil price look to have passed, thus cost reductions will increasingly need to come from operating efficiency. On our current forecasts, CFIC rises in 2017 to $1,037/oz from $1,004/oz in 2016 (see Figure below). Companies for whom we forecast notable reductions are GG and EGO.
■ Technical delivery: Includes delivery on production and cost targets, project development in line with expectations and the ability to add value through the drill bit. Investors will continue to gravitate towards organizations that can deliver in all areas.
Canadian Equity Strategy 73
22 December 2016
Figure 129: 2017 OpCFa yield (FCF before growth Figure 130: 2017 FCF yield (before dividends and capex) at $1,100/oz and $1,300/oz gold debt repayments) at $1,100/oz and $1,300/oz
20% 10% 15% 5% 10% 0% 5% 0% -5% -5%
2017 FCF yield FCF 2017 -10% 2017 OpCFa yield OpCFa2017 -10% -15% -15% -20% -20%
$1,100/oz OpCFa yield $1,300/oz OpCFa yield $1,100/oz FCF yield $1,300/oz FCF yield Averages Averages
Source: RAVE, Credit Suisse estimates, market cap weighted averages shown Source: RAVE, Credit Suisse estimates, market cap weighted averages shown
Costs in 2017 vs. 2016 and three year average track record of delivery against beginning of year guidance for production and costs is summarized in the charts below.
Figure 131: Cash Flow Implied Costs and Total Cash Figure 132: Actual production and cash costs vs. Costs in 2017 vs. 2016 beginning of year guidance, 2013-15
$1,400 $1,400 12.5% $125 Total cash costs shown as black outline Production above guidance mid-point $1,300 10.0% $100 $1,200 $1,200 $1,100 7.5% $75 $1,000 $1,000 5.0% $50 $900
$800 $800 2.5% $25
2015
2015 - $700 0.0% $0 -
$600 $600 2013 -2.5% ($25) 2013 $500
Cost per ounce (US$) ounceper Cost $400 $400 -5.0% ($50) $300 -7.5% ($75)
$200 $200 Cash costs below guidance mid-point -10.0% ($100) $100 (better)
$0 Average production vs. beginning of year guidance, year of vs. beginning production Average $0 -12.5% ($125) guidance,year of beginningvs. costs cash Average
2016 CFIC 2017 CFIC Average Gold production Total cash costs
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates, companies ranked based on combined production & cost ranking
Balance sheets – in better shape than a year ago Sector net debt has decreased from $18.3B at 2015YE to $14.2B at 2016YE. NEM, ABX, FNV, EGO and AEM drove the largest decrease in net debt. Debt covenants are most frequently applicable to credit facilities (less frequently on unsecured debt) and are typically based on 3.5:1.0 net debt/EBITDA. In a $1,100/oz environment covenants come into play for AUY on our estimates (although the company remains below on our estimates). Golden Star does not have any covenants on its current debt balances.
Canadian Equity Strategy 74
22 December 2016
Figure 133: Net debt at 2016YE down 22% vs. Figure 134: 2017 net debt/EBITDA at $1,100 and 2015YE $1,300/oz
$8,000 5.0x
$7,000 4.0x $5,660 $6,000 3.0x $5,000 2.0x $4,000 1.0x
$3,000 $2,424 $2,335
0.0x
2017 net debt/EBITDAnet 2017 Net debt (US$M)debtNet
$2,000 $1,384 $982 $982
$700 $700 -1.0x $555 $555
$1,000 $384
$309 $309
$116 $116
$110 $110 $42 $42 $0 -2.0x
($1,000)
($231)
($249) ($312)
Net debt/EBITDA, $1,100 Net debt/EBITDA, $1,300
2015YE 2016YE Averages
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Top picks
■ Agnico Eagle: AEM is a top pick for its strong exploration and project pipeline which leads to a growth pipeline without the need for M&A and strong balance sheet and operating track record, which makes it less leveraged to gold price moves than peers. It is also one of the few companies we cover that has added to our NAV/sh estimate over the past two years.
■ Newmont: NEM is outperform rated due to operational consistency and strong track record of adding to reserves and NAV vs. peers, with NEM targeting ~50-66% organic reserve replacement at 2016YE. NEM's consistency in achieving production and cost targets over the last three years adds a greater degree of confidence to our outlook. NEM has a stronger five-year production profile on our estimates than its peers GG and ABX. Additionally, NEM has the strongest track record of adding reserves through exploration since 2009.
Canadian Equity Strategy 75
22 December 2016
Figure 135: Gold comparable valuation table Rating and price target NAV P/NAV EV/EBITDA P/OpCF OpCFa yield FCF yield Tuesday, December 20, 2016 Rating Price Target Return 2015A 2016E 2017E 2015A 2016E 2017E 2015A 2016E 2017E 2015A 2016E 2017E
Large cap gold producers Barrick OP $14.34 $23.00 60% $8.68 1.41x 8.2x 6.5x 5.5x 7.6x 6.5x 5.8x 6% 10% 11% 3% 9% 8% Newmont OP $31.66 $51.00 61% $25.54 1.21x 9.3x 5.2x 5.7x 9.5x 6.3x 6.8x 7% 10% 9% 3% 7% 8% Goldcorp N $12.32 $19.00 54% $10.91 1.10x 7.4x 7.2x 6.2x 6.5x 9.9x 6.1x 7% 7% 11% 3% 5% 6% Large cap average 59% 1.24x 8.3x 6.3x 5.8x 7.9x 7.5x 6.3x 7% 9% 10% 3% 7% 7%
Mid cap gold producers Kinross N $3.03 $4.75 57% $3.44 0.90x 5.4x 4.0x 3.2x 4.4x 3.9x 3.7x 10% 15% 17% 3% 8% 6% Yamana OP $2.58 $4.50 74% $3.00 0.90x 6.6x 5.9x 5.0x 9.0x 5.3x 4.6x 2% 4% 11% -5% 0% 0% Agnico Eagle OP $37.76 $65.00 72% $34.27 1.10x 11.4x 10.1x 8.3x 13.3x 10.1x 9.8x 4% 6% 7% 2% 4% 2% Eldorado OP $2.96 $4.75 60% $4.71 0.59x 5.6x 8.3x 6.2x 9.6x 17.8x 9.0x 4% 2% 6% -8% -10% -15% Mid cap average 66% 0.87x 7.3x 7.1x 5.7x 9.1x 9.2x 6.8x 5% 7% 10.5% 2% 4% 3% Large+mid cap average 63% 1.03x 7.7x 6.7x 5.7x 8.6x 8.5x 6.6x 6% 8% 10.4% 3% 5% 5%
Smaller cap gold producers New Gold N $3.07 $5.00 63% $3.01 1.01x 8.9x 7.5x 6.6x 7.4x 5.7x 4.9x 5% 10% 12% -11% -22% -3% IAMGold N $3.40 $4.25 25% $4.96 0.66x 11.4x 4.7x 3.2x -186.7x 5.3x 4.2x -10% 4% 7% -14% -2% -2% Detour N C$15.89 C$26.00 64% $27.08 0.61x 16.2x 9.9x 7.8x 16.0x 12.7x 7.4x 1% 3% 7% 1% 3% 7% SEMAFO (analyst: R. Reynolds) N C$3.86 C$6.00 55% C$4.77 0.76x 4.6x 4.7x 4.3x 5.5x 5.7x 6.1x 10% 11% 10% 8% 7% 0% Centerra (analyst: R Reynolds) OP C$5.8 C$10.25 77% C$8.91 0.66x 4.9x 3.3x 3.0x 3.1x 2.9x 2.8x 10% 15% 15% 7% 12% -1% Alamos OP $6.14 $10.00 63% $7.44 0.83x 54.8x 10.0x 6.4x 385.0x 13.2x 8.3x -3% 5% 9% -7% -1% 5% Golden Star UP $0.69 $0.75 8% $0.88 0.84x -51.9x 10.9x 2.4x -12.1x -30.6x 4.4x -13% -7% 4% -32% -42% -6% Smaller cap average 51% 0.77x 9.2x 7.3x 4.8x 8.0x 7.6x 5.5x 2% 8% 10% -3% 0% 1% Small+mid cap average 57% 0.81x 8.4x 7.2x 5.2x 8.4x 8.2x 6.0x 3% 8% 10% 0% 2% 2% All average 57% 0.91x 8.4x 7.0x 5.3x 8.3x 8.1x 6.0x 4% 8% 10% 1% 3% 3%
Royalty Companies Franco-Nevada N $56.81 $79.00 39% $31.92 1.73x 31.5x 21.8x 19.1x 35.2x 21.2x 20.1x 3% 5% 5% 2% 3% 3%
Gold price assumption $1,161 $1,252 $1,338 $1,161 $1,252 $1,338 $1,161 $1,252 $1,338 $1,161 $1,252 $1,338
CS Equities commodity prices 2015 2016 2017 2018 LT Gold (US$/oz) $1,161 $1,252 $1,338 $1,375 $1,300 Silver (US$/oz) $15.69 $17.11 $17.80 $18.60 $20.00 Copper (US$/lb) $2.50 $2.21 $2.45 $2.05 $2.50 Source: Company data, Credit Suisse estimates
Industrial Metals Ralph Profiti 2016 was a tale of two halves. Bearish sentiment, investor positioning, and weak metal 416-352-4563 prices at the onset of 2016 prompted an even more aggressive approach to cost and ralph.profiti@credit- capital budgeting rationalization versus 2015, namely through: (i) mine plan optimizations suisse.com (Lundin, HudBay, Turquoise Hill, Tahoe, Silver Standard), (ii) debt refinancing and covenant relief (Teck, HudBay, First Quantum), and (iii) hedging (First Quantum, Capstone). Iron ore and oil, which provided a lift in 1H16, was met with 2H16 rallies in coal, nickel, copper and zinc, and encouraged another bout of outperformance.
Figure 136: Best performing mining equities (2016) – Selected North American mining peers
500% 100% 90% 400% 80% 70% 300% 60% 200% 50% 40% 100% 30% 20% 0% 10% -100% 0% TCK CDE HL FM CS TCM PAA TKO FR FCX CUM S LUN SSO HBM SLW TRQ NSU DML THO III CCO NUS PDN
FY16 Performance % in 52-Week Hi/Lo Range - RHS
Source: Company data, Credit Suisse estimates
Canadian Equity Strategy 76
22 December 2016
Improving fundamentals to stay in 2017. As we enter 2017, our Economics and Commodities Teams expects improving fundamentals to stay with most Chinese basic materials driven by higher visibility on supply discipline, while demand remains supported through modest growth in infrastructure, stable property construction (with potential upside in 1H17) and soft, yet seemingly bottomed, manufacturing demand. The current rebound in US growth should continue into 2017 driving growth back to the low-2% range. We expect the US Fed to hike twice in 2017, at the June and December meetings.
Figure 137: Performance of major global asset classes Figure 138: Performance of S&P/TSX subgroups
Major Global Asset Classes (FY16) S&P/TSX Indices (2016) 50% 60% 40% 50% 40% 30% 30% 20% 20% 10% 10% 0% -10% 0% -20% -10% -30% -40% -50%
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Investor positioning and the investment cycle for mining stocks. Positioning indicators for large-cap materials equities are pointing to re-engagement from investors. Hedge fund net exposure has surged back to the high end of the range, though still well off from past peaks. Mutual fund Overweights are closer to their historical averages, but have climbed a bit as of late.
Figure 139: Mutual fund overweight % Figure 140: Hedge fund net exposures
Source: CS US Equity Strategy, Morningstar, CS Prime Services, Russell, S&P Capital Source: CS US Equity Strategy, Morningstar, CS Prime Services, Russell, S&P Capital IQ/Clarifi; as of 12/1/2016 (hedge fund), 3Q16 (mutual fund), Credit Suisse Analyst Lori IQ/Clarifi; as of 12/1/2016 (hedge fund), 3Q16 (mutual fund), Credit Suisse Analyst Lori Calvasina Calvasina
We believe the main theme for industrial metals equities into 2017 is the potential for valuation stabilization based long-term metal market fundamentals. A more positive macro backdrop and greater investor confidence has helped lift metals prices well Canadian Equity Strategy 77
22 December 2016
above levels seen in recent years; however, underlying supply/demand fundamentals are still challenging, and in the case of iron ore and copper, a healthy dose of speculative activity leaves metals equities vulnerable to a correction. Our Top Picks Lundin Mining (LUN.TO, Outperform, TP C$9): Lundin remains among our top base metals picks for its diversified metals exposure (copper, zinc and nickel), operational excellence, strong balance sheet, and free cash generation. The recently announced sale of its 24% interest in Tenke enables Lundin to advance organic growth initiatives, including debottlenecking at Candelaria, resource expansion at Eagle East, zinc expansion at Neves Corvo, as well as potential M&A. Teck Resources (TECKb.TO, Outperform, TP C$43): We see compelling valuation support for Teck in a tight coking coal market in 2017, a constrained supply-side response, reflation of the steelmaking cost curve, and equity scarcity among global coking coal plays. Teck's equity-implied coal price has benefited from debt reduction and cost savings. We estimate Teck is trading at an equity-implied coking coal benchmark price of $130/tonne (at $2.50/lb copper, $1.10/lb zinc and $0.75 CAD). Keeping an Eye on the Laggards Industrial metals producers exposed to a more positive fundamental outlook into 2017 relative to 2016 (zinc, coking coal and copper) and those exhibiting EBITDA growth and positive free cash flow are always best positioned to outperform peers; however, laggards in 2016 (Cameco, Tahoe, HudBay, Silver Wheaton, Silver Standard) could be poised to Outperform based on company-specific catalysts related to EBITDA growth (Tahoe, HudBay), mine revaluation (HudBay), and tax litigation (Cameco, Silver Wheaton).
Figure 141: Canada materials equities relative Figure 142: Canada materials equities relative performance and China OECD Leading Indicator performance and Total OECD Leading Indicator
100% 10% 100% 6%
80% 8% 80% 4% 60% 6% 60% 4% 40% 40% 2% 2% 20% 20% 0% 0% 0% 0% -2% -20% -20% -2% -4%
-40% -6% -40% -4% -60% -8% -60%
-80% -10% -80% -6% Feb-88 Oct-91 Jun-95 Feb-99 Oct-02 Jun-06 Feb-10 Oct-13 Feb-88 Oct-91 Jun-95 Feb-99 Oct-02 Jun-06 Feb-10 Oct-13
Rel. Perf. - Canada Materials Share Index vs. Global Equity Index (YoY%) Rel. Perf. - Canada Materials Share Index vs. Global Equity Index (YoY%) Rel. Perf. - Canada Materials Share Index vs. Base Metals Price Index (YoY%) Rel. Perf. - Canada Materials Share Index vs. Base Metals Price Index (YoY%) OECD CLI - China (YoY%) OECD CLI - China (YoY%)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Canadian Equity Strategy 78
22 December 2016
Figure 143: P/NAV on Credit Suisse price forecast Figure 144: 2017 net debt-to-equity and FCF yield
P/NAV 80% 80%
1.00 60% 60% 0.90
0.80 40% 40% 0.70
0.60 20% 20% 0.50
0.40 0% 0%
0.30 -20% -20% 0.20
0.10 -40% -40% 0.00 LIF CS SSO HBM TRQ THO LUN TECK FM SLW PAA CCO
P/NAV 2016 nD/E 2017 nD/E 2017 FCF yield - RHS
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 145: 2017 Credit Suisse Supply/Demand balance for major commodities Iron ore Coking coal Copper Nickel Zinc Uranium Gold Silver (Mt) * (Mt) * (Kt) (Kt) (Kt) (Mln lbs) (Koz) (Moz) Global supply growth (YoY) 6.6% 4.7% 0.2% 1.8% 3.1% 1.0% -5.9% 6.2% China supply as % of global 7.6% 26.0% 44.0% 1.5% 15.0% 11.2%
Global demand growth (YoY) 2.6% 4.0% 2.2% 3.9% 2.2% 6.4% 6.1% -4.5% China demand growth (YoY) 1.1% -4.0% 2.6% 4.0% 2.3% 48.3% 6.1% 1.2% China demand as as % of global 66.6% 17.3% 47.2% 54.4% 48.1% 15.2% 21.0% 25.8%
Market surplus (deficit) 55 (2) (128) (148) (423) (3) (1) (62) Market surplus (deficit) as % of demand 3.9% -0.6% -0.6% -7.2% -2.9% -1.6% -0.9% -5.5% *Seaborne market only
Source: Company data, Credit Suisse estimates
Copper We expect the copper price to remain supported at ~$2.50/lb for most of 2017, driven primarily by a forecast deficit of 128Kt based on a China copper consumption growth rate of +2.6%. We, however, assume prices to begin trending downwards in late-2017 and into 2018 based on supply additions and a sub-2% China consumption growth rate, yielding surpluses from 2018 onwards. Between exchange inventories (LME + SHFE + COMEX) and China bonded warehouse stocks (480Kt), total visible inventories currently stand at 1.0Mt or at 15.9 days of consumption compared to the historical average of 17.2 days. A pause in the stock build is forecast for 2017 on slower ramp-up of Peruvian mines and delayed restart of Glencore’s African mines (our estimate of 2019). In 2018, we expect inventory to build as a result of a supply-demand surplus of 468Kt and to begin and pressure prices.
Canadian Equity Strategy 79
22 December 2016
Figure 146: Copper Commitment of Traders Net Figure 147: China apparent demand (YTD change Speculative Positions and copper price YoY%) vs. FAI
80 5.00 1200 50%
4.50 60 40% 1000 4.00 30% 40 3.50 LME copper price (US$/lb) 800 20%
20 3.00
(# contracts, Thousands)contracts, (# 600 10% -
2.50 - 0% Growth YoY YTD 400 2.00 tonnes000's -10% (20) 1.50 200
-20% Net speculative positions positions speculative Net (40) 1.00 0 -30% Jan-10 Dec-10 Nov-11 Oct-12 Sep-13 Aug-14 Jul-15 Jun-16 (60) 0.50 Jan- Sep- May- Feb- Oct- Jun- Feb- Nov- Jul- Mar- Dec- Aug- Apparent demand (tonnes) Apparent demand (YTD YoY%) 09 09 10 11 11 12 13 13 14 15 15 16 FAI Ex-Rural housing (YTD YoY%)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Zinc We assume a bullish market in 1H17 with prices to hold the $1.15-1.25/lb levels. Subsequently, we expect a gradual resumption of Glencore production in late 2017 (~100Kt), and an increase in China mine output in 2H17 to cause prices to retreat. Zinc exchange stocks remain elevated by historical standards at 587Kt, which have remained broadly level over the past seven months despite estimated metal deficits, largely a result of repeated refills from hidden stockpiles, with backwardation in futures prices attracting metal onto the exchange. That said, inventories below 500Kt in 2006 were a catalyst for stronger zinc prices. There are large inventory positions still to work down but LME stocks are at ~430Kt, nearing levels last seen in 2010. Large, sudden increases indicate there are also significant off-market inventories flowing through the LME to consumers.
Coking coal We expect coking coal prices to remain supported in early-2017 as Chinese steel mills continue to show a profit despite absorbing higher raw material prices, and forward order books remain firm. Moving into the latter half of the year, we expect prices to return to more normalized levels as supply-side responses begin to materialize – specifically, we expect U.S. swing material to emerge and begin to balance the market. Overall, we expect a nominal deficit of 2Mt for 2017 and expect the market to remain largely balanced (4-5Mt surplus) through to 2019.
Iron Ore Strong steel prices in response to real estate investment, low steel inventories and steel mills reporting solid order books for 1Q17 should contribute to iron ore prices remaining resilient into the Chinese New Year; however, we estimate notional iron ore surpluses of 55Mt in 2017, growing to 119Mt in 2018 to pressure prices into the latter half of the year. Roy Hill and Minas Rio have achieved annualized weekly shipments rates at full capacity
Canadian Equity Strategy 80
22 December 2016
and the base case of consensus already includes the latest guidance of major miners, which is lower.
Figure 148: China steel profitability index
6,000 China Steel Profitability Breakdown 1,500 1,300 5,000 1,100 900 4,000 700 CNY/tonne 3,000 500
CNY/tonne 300 2,000 100 -100 1,000 -300 0 -500 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 China Domestic Hot Rolled Steel China Iron Ore Spot Hebei/Tangshan China Foundry Coke Domestic Spot Iron & Steel Scrap China Domestic Heavy Scrap BOF Integrated Steel Profit (RHS)
Source: Company data, Credit Suisse estimates
Silver We forecast the 2017 silver market will be largely balanced from a physical perspective (deficit of 2Moz), but post a net deficit of 62Moz when factoring in ETF and Exchange inventory build. We, however, do not expect these deficits to translate into higher prices in the near term, but rather for prolonged periods of deficits to exert upward pressure on prices over the medium to long term. We expect the near-term silver price to be affected by more recent outflows from precious metals ETFs, weaker sentiment in precious metals, the underperformance of gold, prospects for a stronger US dollar, and impending Fed rate hikes.
Uranium We expect the near-term outlook to remain challenging on the overhang of: (i) current oversupplied markets; (ii); "Tier Zero" mines providing "sticky" primary supply, secondary supply contribution from U.S. DOE and enricher underfeeding; (iii) utilities are well covered in the short-to-medium term; (iv) slow pace of reactor restarts in Japan; and (v) distressed and discretionary (carry trade) selling by intermediaries. However, as uncovered utility requirements approach significant levels beginning in 2019-2021 following years of under- contracting, a greater emphasis on security of supply beginning around 2018 should emerge.
Canadian Equity Strategy 81
22 December 2016
Figure 149: Global industrial metals comparables Tuesday, December 20, 2016 6:42 PM CS Mkt. Cap. E.V. P/E EV/EBITDA P/CF 12/20/2016 Ticker (US$Bln) (US$) P/NAV 2016 2017 2018 2016 2017 2018 2016 2017 2018
Global Major Diversified Producers Anglo American Plc AAL.L 18.1 27.4 29.5 5.6 7.9 4.4 3.0 3.5 2.7 2.2 2.7 BHP Billiton BHP.AX 95.7 121.9 0.93 76.0 12.0 13.2 9.9 5.1 5.5 12.5 8.2 8.7 Vale VALE 40.7 66.1 9.0 22.9 10.3 5.9 5.7 5.1 4.0 2.8 3.3 Rio Tinto RIO.AX 77.3 88.4 0.82 14.7 10.0 14.0 6.6 5.2 6.7 10.3 8.1 10.0 South32 S32.AX 10.1 9.8 0.98 55.0 8.5 9.3 8.7 3.4 3.3 13.6 7.4 7.8 Group Average (Global) 289.9 380.0 0.91 36.8 11.8 10.9 7.1 4.5 4.8 8.6 5.8 6.5
Global Intermediate Base Metals Producers Antofagasta ANTO.L 8.1 9.1 22.3 23.7 49.7 5.6 5.2 7.1 5.5 5.0 6.7 Boliden BOL.ST 7.1 8.2 19.2 11.7 15.1 8.6 6.0 6.5 10.4 6.9 7.0 Capstone Mining Corp. CS.TO 0.4 0.5 0.68 10.0 12.1 n/a 3.0 2.8 n/a 3.2 3.6 n/a First Quantum Minerals Ltd. FM.TO 7.5 11.6 0.85 44.2 29.6 74.3 12.0 9.2 11.7 10.2 10.7 12.6 HudBay Minerals Inc. HBM.TO 1.4 2.5 0.73 31.5 12.4 28.3 5.0 4.1 4.1 4.3 3.5 4.1 Jiangxi Copper Company Ltd 0358.HK 5.6 6.6 35.7 24.3 78.2 10.4 8.6 12.0 28.3 14.6 12.6 KAZ Minerals Plc KAZ.L 2.5 4.9 16.7 10.4 20.0 20.1 9.4 9.1 n/a 6.5 5.4 Labrador Iron Ore Royalty Corporation LIF.TO 0.9 0.9 0.64 13.2 18.1 36.4 11.9 12.6 14.5 19.4 18.1 20.8 Lundin Mining Corp. LUN.TO 3.6 3.8 0.77 >100 15.9 31.7 5.5 2.7 3.7 7.4 5.2 7.6 MMC Norilsk Nickel NKELyq.L 29.7 35.1 12.0 12.5 12.3 10.1 9.7 9.5 10.1 9.6 9.2 OZ Minerals OZL.AX 1.7 1.2 1.07 19.4 13.1 83.8 4.5 3.6 7.9 6.5 5.2 9.0 Southern Copper Corporation SCCO 25.1 30.6 29.6 22.9 26.3 13.9 11.1 12.2 15.5 13.5 15.7 Teck Resources Ltd TECKb.TO 12.4 17.4 0.83 15.0 5.4 14.6 6.4 2.9 5.0 5.3 2.8 4.9 Turquoise Hill Resources Ltd TRQ.TO 6.5 9.5 0.70 n/a n/a n/a 24.5 n/a n/a 24.7 n/a n/a Vedanta Resources PLC VED.L 3.1 10.4 n/a n/a n/a 4.5 3.6 2.9 0.8 1.4 0.9 Group Average (Global) 115.5 152.4 0.78 22.4 16.3 39.2 9.7 6.5 8.2 10.8 7.6 9.0 Group Average (North America) 30.5 42.9 0.74 22.8 15.6 37.1 9.8 5.7 7.8 10.6 7.3 10.0
Global Uranium Producers Cameco Corporation CCO.TO 4.3 5.1 0.90 21.7 23.2 12.8 9.7 10.0 6.7 16.1 9.7 7.1 Denison Mines Corp. DML.TO 0.3 0.3 0.85 n/a n/a n/a n/a n/a n/a n/a n/a n/a Paladin Energy PDN.TO 0.1 0.5 0.18 4.4 n/a 5.4 12.6 8.7 6.6 33.9 n/a 3.7 Group Average (Global) 4.6 5.8 0.64 13.0 23.2 9.1 11.1 9.3 6.6 25.0 9.7 5.4
Global Silver Producers Fresnillo plc FRES.L 9.9 10.7 29.4 21.1 16.4 11.6 7.9 7.9 17.1 7.4 9.7 Pan American Silver Corp. PAA.TO 2.2 2.0 0.86 26.2 36.4 26.2 7.1 7.9 6.0 13.2 14.7 12.7 Silver Wheaton Corp. SLW.TO 7.7 8.8 0.86 29.6 23.6 21.6 15.4 12.9 12.0 18.2 16.9 16.2 Silver Standard Resources Inc. SSO.TO 1.0 0.9 0.68 10.1 26.3 >100 4.6 5.9 8.8 8.2 10.2 14.1 Tahoe Resources Inc. THO.TO 2.7 2.6 0.71 13.0 11.6 8.9 6.9 5.8 4.2 16.2 10.4 8.3 Group Average (North America) 48.6 25.1 0.78 21.6 23.8 18.3 9.1 8.1 7.8 14.6 11.9 12.2 Source: Company data, Credit Suisse estimates
Canadian Equity Strategy 82
22 December 2016
Credit Suisse: Canadian Coverage
Figure 150: Canadian Coverage Universe
CONSUMER STAPELS / CONSUMER DISCRETIONARY INDUSTRIALS Analyst Covering Company Name Ticker Currency TP Rating Analyst Covering Company Name Ticker Currency TP Rating Laurent Grandet Cott Corporation COT USD $ 14.00 OUTPERFORM Allison Landry Canadian National CNI USD $ 66.00 NEUTRAL Edward Kelly Dollarama Inc. DOL.TO CAD $ 104.00 NEUTRAL Allison Landry Canadian Pacific Railways CP USD $ 173.00 OUTPERFORM Christian Buss Gildan Activewear Incorporated GIL.TO CAD $ 43.00 OUTPERFORM Andrew Buscaglia Waste Connections BIN.N USD $ 87.00 OUTPERFORM Christian Buss Hudson's Bay Company HBC.TO CAD $ 23.00 OUTPERFORM Robert Spingarn MacDonald, Dettwiler and Associates Ltd.MDA.TO CAD $ 93.00 OUTPERFORM Jason West Restaurant Brands International QSR USD $ 45.00 NEUTRAL Robert Spingarn Bombardier Inc (SVS) BBDb.TO CAD $ 2.84 OUTPERFORM Omar Sheikh IMAX Corp IMAX.N USD $ 42.00 OUTPERFORM Nick Stogdill Brookfield Business Partners BBU.N USD $ 29.00 OUTPERFORM ENERGY INFORMATION TECHNOLOGY Analyst Covering Company Name Ticker Currency TP Rating Analyst Covering Company Name Ticker Currency TP Rating Andrew M. Kuske Enbridge Inc. ENB.TO CAD RESTRICTED Anjaneya Singh CGI Group GIBa.TO CAD $ 72.00 OUTPERFORM Andrew M. Kuske Gibson Energy Inc. GEI.TO CAD $ 16.00 NEUTRAL Michael Nemeroff Shopify Inc. SHOP.N USD $ 50.00 OUTPERFORM Andrew M. Kuske Keyera Corp. KEY.TO CAD $ 42.00 NEUTRAL Michael Nemeroff Open Text Corporation OTEX.OQ USD $ 55.00 NEUTRAL Andrew M. Kuske Pembina Pipeline Corporation PPL.TO CAD $ 44.00 NEUTRAL Kulbinder Garcha BlackBerry RIMM USD $ 6.00 UNDERPERFORM Andrew M. Kuske TransCanada Corp. TRP.TO CAD $ 70.00 OUTPERFORM MATERIALS Jason Frew ARC Resources Ltd. ARX.TO CAD $ 28.00 OUTPERFORM Analyst Covering Company Name Ticker Currency TP Rating Jason Frew Baytex Energy Corp. BTE.TO CAD $ 5.50 NEUTRAL Andrew M. Kuske Acadian Timber Corp. ADN.TO CAD $ 20.00 NEUTRAL Jason Frew Canadian Natural Resources Limited CNQ.TO CAD $ 48.00 OUTPERFORM Andrew M. Kuske Mercer International Inc. MERC USD $ 15.00 OUTPERFORM Jason Frew Cenovus Energy Inc. CVE.TO CAD $ 24.00 OUTPERFORM Andrew M. Kuske Norbord Inc NBD.TO CAD $ 34.00 NEUTRAL Jason Frew Crescent Point Energy Corp CPG.TO CAD $ 20.00 NEUTRAL Anita Soni Agnico Eagle Mines Limited AEM.N USD $ 65.00 OUTPERFORM Jason Frew Encana Corp. ECA USD $ 14.00 OUTPERFORM Anita Soni Alamos Gold Inc. AGI.N USD $ 10.00 OUTPERFORM Jason Frew Enerplus Corporation ERF.TO CAD $ 15.00 OUTPERFORM Anita Soni Barrick Gold Corp ABX USD $ 23.00 OUTPERFORM Jason Frew Husky Energy Inc. HSE.TO CAD $ 17.00 NEUTRAL Anita Soni Detour Gold Corporation DGC.TO CAD $ 26.00 NEUTRAL Jason Frew Imperial Oil Ltd IMO.TO CAD $ 50.00 OUTPERFORM Anita Soni Eldorado Gold EGO.N USD $ 4.75 OUTPERFORM Jason Frew MEG Energy CORP MEG.TO CAD RESTRICTED Anita Soni Franco Nevada Corporation FNV.N USD $ 79.00 NEUTRAL Jason Frew Pengrowth Energy Corp. PGF.TO CAD $ 2.00 UNDERPERFORM Anita Soni Goldcorp Inc. GG.N USD $ 19.00 NEUTRAL Jason Frew Penn West Petroleum Ltd. PWT.TO CAD $ 1.75 UNDERPERFORM Anita Soni Golden Star GSS USD $ 0.75 UNDERPERFORM Jason Frew Suncor Energy SU.TO CAD $ 48.00 OUTPERFORM Anita Soni IAMGold IAG.N USD $ 4.25 NEUTRAL Jason Frew Vermilion Energy Inc. VET.TO CAD $ 52.00 NEUTRAL Anita Soni Kinross Gold Corp. KGC USD $ 4.75 NEUTRAL David Phung Advantage Oil & Gas AAV.TO CAD $ 11.00 OUTPERFORM Anita Soni New Gold NGD.A USD $ 5.00 NEUTRAL David Phung Bellatrix Exploration Ltd BXE.TO CAD $ 1.25 NEUTRAL Anita Soni Newmont Mining NEM USD $ 51.00 OUTPERFORM David Phung Birchcliff Energy BIR.TO CAD $ 9.75 NEUTRAL Anita Soni Yamana Gold AUY USD $ 4.50 OUTPERFORM David Phung Bonavista Energy Corporation BNP.TO CAD $ 4.25 NEUTRAL Christopher Parkinson Agrium Inc. AGU USD $ 88.00 NEUTRAL David Phung Crew Energy Inc CR.TO CAD $ 7.50 NEUTRAL Christopher Parkinson Potash Corp - Saskatchewan POT USD $ 11.00 UNDERPERFORM David Phung Gran Tierra GTE USD $ 3.50 NEUTRAL Michael Slifirski Alacer Gold Corp. AQG.AX AUD $ 5.30 OUTPERFORM David Phung Kelt Exploration Ltd KEL.TO CAD $ 6.50 NEUTRAL Ralph Profiti Capstone Mining Corp. CS.TO CAD $ 1.20 NEUTRAL David Phung NuVista Energy NVA.TO CAD $ 9.50 OUTPERFORM Ralph Profiti First Quantum Minerals Ltd. FM.TO CAD $ 18.00 OUTPERFORM David Phung Painted Pony Petroleum Ltd PPY.TO CAD $ 10.50 NEUTRAL Ralph Profiti HudBay Minerals Inc. HBM.TO CAD $ 10.00 NEUTRAL David Phung Paramount Resources Ltd POU.TO CAD $ 17.00 NEUTRAL Ralph Profiti Labrador Iron Ore Royalty Corporation LIF.TO CAD $ 19.00 NEUTRAL David Phung Parex Resources Inc. PXT.TO CAD $ 18.25 OUTPERFORM Ralph Profiti Lundin Mining Corp. LUN.TO CAD $ 9.00 OUTPERFORM David Phung Peyto Exploration & Development Corp. PEY.TO CAD $ 37.00 NEUTRAL Ralph Profiti Nautilus Minerals Inc NUS.TO CAD $ 0.20 NEUTRAL David Phung Seven Generations Energy Ltd. VII.TO CAD $ 35.00 OUTPERFORM Ralph Profiti Pan American Silver Corp. PAA.TO CAD $ 25.00 NEUTRAL David Phung Tourmaline Oil Corp TOU.TO CAD $ 47.00 OUTPERFORM Ralph Profiti Silver Standard Resources Inc. SSO.TO CAD $ 16.00 NEUTRAL David Phung TransGlobe Energy Corp. TGL.TO CAD $ 2.75 NEUTRAL Ralph Profiti Silver Wheaton Corp. SLW.TO CAD $ 35.00 OUTPERFORM David Phung Trilogy Energy Corp TET.TO CAD $ 5.50 UNDERPERFORM Ralph Profiti Tahoe Resources Inc. THO.TO CAD $ 20.00 OUTPERFORM James Wicklund Precision Drilling Corporation PDS.N USD $ 4.25 UNDERPERFORM Ralph Profiti Teck Resources Ltd TECKb.TO CAD $ 43.00 OUTPERFORM Paul Tan Enbridge Income Fund Holdings ENF.TO CAD $ 34.00 NEUTRAL Ralph Profiti Turquoise Hill Resources Ltd TRQ.TO CAD $ 6.00 NEUTRAL Ralph Profiti Cameco Corporation CCO.TO CAD $ 13.50 NEUTRAL Robert Reynolds Centerra Gold CG. TO CAD $ 10.25 OUTPERFORM Ralph Profiti Denison Mines Corp. DML.TO CAD $ 0.80 NEUTRAL Robert Reynolds SEMAFO Inc. SMF.TO CAD $ 6.00 NEUTRAL Ralph Profiti Paladin Energy PDN.TO CAD $ 0.15 UNDERPERFORM SPECIALTY STORES Thomas Adolff Africa Oil Corp AOI.V CAD $ 2.55 OUTPERFORM Analyst Covering Company Name Ticker Currency TP Rating FINANCIALS Christian Buss lululemon athletica Inc. LULU USD $ 64.00 NEUTRAL Analyst Covering Company Name Ticker Currency TP Rating UTILITIES Andrew M. Kuske Brookfield Asset Management BAM USD $ 36.00 NEUTRAL Analyst Covering Company Name Ticker Currency TP Rating Nick Stogdill Bank of Montreal BMO.TO CAD $ 93.00 NEUTRAL Andrew M. Kuske Brookfield Renewable Partners BEP_u.TO CAD $ 44.00 NEUTRAL Nick Stogdill Bank of Nova Scotia BNS.TO CAD $ 78.00 NEUTRAL Andrew M. Kuske Brookfield Infrastructure Partners LP BIP USD $ 40.00 OUTPERFORM Nick Stogdill Canada Imperial Bank of Commerce CM.TO CAD $ 112.00 UNDERPERFORM Andrew M. Kuske Capital Power Corporation CPX.TO CAD $ 22.00 UNDERPERFORM Nick Stogdill Canadian Western Bank CWB.TO CAD $ 27.00 UNDERPERFORM Andrew M. Kuske Emera Inc. EMA.TO CAD $ 58.00 OUTPERFORM Nick Stogdill Great-West Lifeco Inc. GWO.TO CAD $ 35.00 NEUTRAL Andrew M. Kuske Fortis Inc. FTS.TO CAD $ 46.00 NEUTRAL Nick Stogdill Industrial-Alliance Insurance Company IAG.TO CAD $ 53.00 UNDERPERFORM Andrew M. Kuske Hydro One Limited H.TO CAD $ 26.00 NEUTRAL Nick Stogdill Laurentian Bank of Canada LB.TO CAD $ 52.00 UNDERPERFORM Andrew M. Kuske TransAlta Corporation TA.TO CAD $ 7.00 UNDERPERFORM Nick Stogdill Manulife Financial Corporation MFC.TO CAD $ 21.00 OUTPERFORM Paul Tan Canadian Utilities Limited CU.TO CAD $ 42.00 NEUTRAL Nick Stogdill National Bank of Canada NA.TO CAD $ 51.00 NEUTRAL As at December 20, 2016 Nick Stogdill Royal Bank of Canada RY.TO CAD $ 100.00 OUTPERFORM Nick Stogdill Sun Life Financial SLF.TO CAD $ 50.00 OUTPERFORM Nick Stogdill Toronto Dominion Bank TD.TO CAD $ 69.00 OUTPERFORM Nick Stogdill Element Financial Corporation EFN.TO CAD $ 16.00 OUTPERFORM Nick Stogdill ECN Capital Corp. ECN.TO CAD $ 4.00 NEUTRAL Paul Condra DH Corporation DH.TO CAD RESTRICTED Source: Credit Suisse estimates
Canadian Equity Strategy 83
22 December 2016
Companies Mentioned (Price as of 20-Dec-2016) ARC Resources Ltd. (ARX.TO, C$23.06) Acadian Timber Corp. (ADN.TO, C$18.44) Advantage Oil & Gas (AAV.TO, C$8.95) Africa Oil Corp (AOIC.ST, Skr16.61) Agnico Eagle Mines Limited (AEM.N, $37.76) Agrium Inc. (AGU.N, $100.93) Alacer Gold Corp. (AQG.AX, A$1.94) Alamos Gold Inc. (AGI.N, $6.14) Algonqn Pwr & Ut (AQN.TO, C$11.48) Alimentation Couche-Tard Inc. (ATDb.TO, C$61.76) Allied Propertie (AP_u.TO, C$34.97) AltaGas (ALA.TO, C$33.8) Altus Group (AIF.TO, C$30.25) AmeriGas Partners, L.P. (APU.N, $45.71) Anglo American Plc (AAL.L, 1135.0p) Antofagasta (ANTO.L, 667.0p) Artis Real (AX_u.TO, C$12.32) Atco Ltd (ACOx.TO, C$44.03) BCE Inc. (BCE.TO, C$57.38) BHP Billiton (BHP.AX, A$24.91) Bank of Montreal (BMO.TO, C$96.92) Bank of Nova Scotia (BNS.TO, C$75.89) Barrick Gold Corp (ABX.N, $14.34) Baytex Energy Corp. (BTE.TO, C$6.68) Bellatrix Exploration Ltd (BXE.TO, C$1.22) Birchcliff Energy (BIR.TO, C$9.51) Boardwalk REIT (BEI_u.TO, C$47.2) Boliden (BOL.ST, Skr242.0) Bombardier Inc (SVS) (BBDb.TO, C$2.05) Bonavista Energy Corporation (BNP.TO, C$4.71) Brookfield Asset Management (BAM.N, $33.7) Brookfield Business Partners LP (BBU.N, $24.0) Brookfield Infrastructure Partners LP (BIP.N, $33.22) Brookfield Property Partners LP (BPY.N, $22.09) Brookfield Renewable Partners (BEP_u.TO, C$38.47) Buckeye Partners, LP (BPL.N, $65.04) CAE Inc. (CAE.TO, C$18.71) CAPREIT (CAR_u.TO, C$30.48) CGI Group (GIBa.TO, C$64.26) CI Financial (CIX.TO, C$28.75) CMG (CMG.TO, C$9.12) CREIT (REF_u.TO, C$45.23) Cameco Corporation (CCO.TO, C$14.34) Canada Imperial Bank of Commerce (CM.TO, C$111.58) Canadian National (CNI.N, $67.9) Canadian Natural Resources Limited (CNQ.TO, C$44.13) Canadian Pacific Railways (CP.N, $144.87) Canadian Tire Corporation Limited (CTCa.TO, C$139.85) Canadian Utilities Limited (CU.TO, C$36.02) Canadian Western Bank (CWB.TO, C$30.78) Capital Power Corporation (CPX.TO, C$23.7) Capstone Mining Corp. (CS.TO, C$1.23) Celestica (CLS.TO, C$16.22) Cenovus Energy Inc. (CVE.TO, C$20.89) Centerra Gold Inc. (CG.TO, C$5.8) Chrtwl Retir Res (CSH_u.TO, C$14.47) Cineplex Inc. (CGX.TO, C$51.04) Cogeco Com (CCA.TO, C$65.93) Colliers Int Gr (CIGI.TO, C$50.35) Cominar REIT (CUF_u.TO, C$14.42) Constel Software (CSU.TO, C$614.21) Cott Corporation (COT.N, $11.3) Crescent Point Energy Corp (CPG.TO, C$18.74) Crew Energy Inc (CR.TO, C$7.28) Crombie REIT (CRR_u.TO, C$13.57) DH Corporation (DH.TO, C$21.75) Denison Mines Corp. (DML.TO, C$0.7) Descartes (DSG.TO, C$28.43) Detour Gold Corporation (DGC.TO, C$15.89) Dollarama Inc. (DOL.TO, C$97.48) Dream Global (DRG_u.TO, C$9.34) Dream Offc REIT (D_u.TO, C$19.16) ECN Capital Corp. (ECN.TO, C$3.17) EQT GP Holdings, LP (EQGP.N, $25.08) EQT Midstream Partners, LP (EQM.N, $74.07) Eldorado Gold (EGO.N, $2.96) Element Financial Corporation (EFN.TO, C$12.56) Emera Inc. (EMA.TO, C$44.79) Empire Company Limited (EMPa.TO, C$15.28) Enbridge Inc. (ENB.TO, C$56.45) Enbridge Income Fund Holdings (ENF.TO, C$34.85) Encana Corp. (ECA.N, $12.51) EnerCare (ECI.TO, C$17.84) Energy Transfer Equity, LP (ETE.N, $18.74) Energy Transfer Partners, LP (ETP.N, $34.95) Enerplus Corporation (ERF.TO, C$12.53) Enghouse Systems (ENGH.TO, C$53.94) Canadian Equity Strategy 84 22 December 2016
Enterprise Products Partners, LP (EPD.N, $26.26) Extendicare (EXE.TO, C$9.91) Ferrellgas Part (FGP.N, $6.76) Finning International Inc. (FTT.TO, C$26.57) First Cptl Rlty (FCR.TO, C$20.52) First Quantum Minerals Ltd. (FM.TO, C$14.44) FirstService (FSV.TO, C$62.38) Fortis Inc. (FTS.TO, C$40.6) Franco Nevada Corporation (FNV.N, $56.81) Fresnillo plc (FRES.L, 1091.0p) George Weston Limited (WN.TO, C$112.81) Gibson Energy Inc. (GEI.TO, C$18.79) Gildan Activewear Incorporated (GIL.TO, C$35.12) Goldcorp Inc. (GG.N, $12.32) Golden Star (GSS.A, $0.69) Granite REIT (GRT_u.TO, C$44.27) Great-West Lifeco Inc. (GWO.TO, C$35.62) H&R REIT (HR_u.TO, C$21.98) Home Capital (HCG.TO, C$29.36) HudBay Minerals Inc. (HBM.TO, C$8.12) Hudson's Bay Company (HBC.TO, C$13.41) Husky Energy Inc. (HSE.TO, C$16.45) Hydro One Limited (H.TO, C$23.42) IAMGold (IAG.N, $3.4) IMAX Corp (IMAX.N, $31.1) Imperial Oil Ltd (IMO.TO, C$47.84) Industrial-Alliance Insurance Company (IAG.TO, C$54.52) Innergex (INE.TO, C$14.0) Intact Financial (IFC.TO, C$95.14) Inter US (IPL.TO, C$29.61) Jean Coutu Group Inc (PJCa.TO, C$21.36) Jiangxi Copper Company Ltd (0358.HK, HK$11.18) Just Energy (JE.TO, C$7.05) KAZ Minerals Plc (KAZ.L, 359.5p) Kelt Exploration Ltd (KEL.TO, C$6.61) Keyera Corp. (KEY.TO, C$40.59) Kinaxis (KXS.TO, C$62.01) Kinder Morgan, Inc. (KMI.N, $20.77) Kinross Gold Corp. (KGC.N, $3.03) Labrador Iron Ore Royalty Corporation (LIF.TO, C$18.58) Laurentian Bank of Canada (LB.TO, C$58.25) Loblaw Companies Limited (L.TO, C$70.57) Lundin Mining Corp. (LUN.TO, C$6.71) MEG Energy CORP (MEG.TO, C$9.32) MMC Norilsk Nickel (NKELyq.L, $16.8) MacDonald, Dettwiler and Associates Ltd. (MDA.TO, C$65.3) Magellan Midstream Partners , LP (MMP.N, $74.29) Magna Intl (MG.TO, C$59.82) Manulife Financial Corporation (MFC.TO, C$24.69) Maple Leaf Foods (MFI.TO, C$27.97) Mercer International Inc. (MERC.OQ, $10.55) Metro Inc. (MRU.TO, C$39.94) Milestone (MST_u.TO, C$18.79) Mitel Networks (MNW.TO, C$8.95) National Bank of Canada (NA.TO, C$55.64) Nautilus Minerals Inc (NUS.TO, C$0.14) New Gold (NGD.A, $3.07) Newmont Mining (NEM.N, $31.66) Norbord Inc (OSB.TO, C$35.06) North Power (NPI.TO, C$23.01) Northview Apartm (NVU_u.TO, C$19.43) NuVista Energy (NVA.TO, C$6.52) ONEOK Partners, LP (OKS.N, $44.9) ONEOK, Inc. (OKE.N, $58.67) OZ Minerals (OZL.AX, A$7.66) Open Text (OTC.TO, C$82.67) Painted Pony Petroleum Ltd (PPY.TO, C$9.18) Paladin Energy (PDN.TO, C$0.08) Pan American Silver Corp. (PAA.TO, C$19.26) Paramount Resources Ltd (POU.TO, C$18.76) Parex Resources Inc. (PXT.TO, C$17.2) Pembina Pipeline Corporation (PPL.TO, C$42.16) Pengrowth Energy Corp. (PGF.TO, C$2.17) Penn West Petroleum Ltd. (PWT.TO, C$2.36) Peyto Exploration & Development Corp. (PEY.TO, C$33.42) Phillips 66 Partners, LP (PSXP.N, $47.38) Plains All American Pipeline, LP (PAA.N, $32.24) Plains GP Holdings, LP (PAGP.N, $34.28) Potash Corp - Saskatchewan (POT.N, $18.26) PrairieSky (PSK.TO, C$32.38) Precision Drilling Corporation (PDS.N, $5.57) ProMetic Life (PLI.TO, C$1.66) Pure Ind RE Tru (AAR_u.TO, C$5.43) Quebecor, Inc. (QBRb.TO, C$37.12) Restaurant Brands International (QSR.N, $48.1) Rio Tinto (RIO.AX, A$59.26) RioCan REIT (REI_u.TO, C$26.16) Ritchie Bros Auc (RBA.TO, C$50.19)
Canadian Equity Strategy 85 22 December 2016
Rogers Communications (NVS) (RCIb.TO, C$51.2) Royal Bank of Canada (RY.TO, C$91.95) SEMAFO Inc. (SMF.TO, C$3.86) SNC Lavalin Group (SNC.TO, C$57.12) Saputo Incorporated (SAP.TO, C$47.22) Seven Generations Energy Ltd. (VII.TO, C$29.9) Shaw Communications (NVS) (SJRb.TO, C$27.2) Shopify Inc. (SHOP.N, $41.42) Sierra Wireless (SW.TO, C$21.67) Silver Standard Resources Inc. (SSO.TO, C$10.8) Silver Wheaton Corp. (SLW.TO, C$23.37) Smart REIT (SRU_u.TO, C$31.66) South 32 (S32.AX, A$2.62) Stantec (STN.TO, C$34.71) Suburban Propane Partners, LP (SPH.N, $29.59) Sun Life Financial (SLF.TO, C$52.47) Suncor Energy (SU.TO, C$43.95) Superior Plus (SPB.TO, C$12.78) TC PipeLines (TCP.N, $55.12) TELUS Corporation (T.TO, C$42.38) Tahoe Resources Inc. (THO.TO, C$11.5) Tallgrass Energy GP, LP (TEGP.N, $25.51) Targa Resources Corp. (TRGP.N, $56.21) Teck Resources Ltd (TECKb.TO, C$28.79) Thomson Reuters Corporation (TRI.N, $44.35) Toromont Industries Ltd. (TIH.TO, C$42.48) Toronto Dominion Bank (TD.TO, C$66.97) Tourmaline Oil Corp (TOU.TO, C$35.52) TransAlta Corporation (TA.TO, C$7.26) TransAlta Renew (RNW.TO, C$14.17) TransCanada Corp. (TRP.TO, C$61.35) TransGlobe Energy Corp. (TGL.TO, C$2.28) Tricon Cap Grp (TCN.TO, C$9.68) Trilogy Energy Corp (TET.TO, C$7.34) Turquoise Hill Resources Ltd (TRQ.TO, C$4.33) VTTI Energy Partners, LP (VTTI.N, $16.25) Vale (VALE.N, $7.9) Valeant Pharm In (VRX.TO, C$19.63) Valero Energy Partners, LP (VLP.N, $43.65) Vedanta Resources PLC (VED.L, 911.0p) Veresen (VSN.TO, C$12.37) Vermilion Energy Inc. (VET.TO, C$58.02) WPX Energy Inc. (WPX.N, $14.93) Waste Connections (WCN.N, $77.76) West Fraser Timb (WFT.TO, C$49.61) WestJet Airlines (WJA.TO, C$23.37) Westshore Term (WTE.TO, C$26.1) Whitecap Resources (WCP.TO, C$12.01) Williams Companies, Inc (WMB.N, $30.35) World Point Terminals, LP (WPT.N, $16.38) Yamana Gold (AUY.N, $2.58) lululemon athletica Inc. (LULU.OQ, $67.59)
Disclosure Appendix Analyst Certification Andrew M. Kuske, Andrew E. Buscaglia, Jason Frew, Laurent Grandet, Allison M. Landry, David Phung, Ralph M. Profiti, CFA, Robert Reynolds, CPA, CA, CFA, Anita Soni, P. Eng., CFA, Robert Spingarn, Nick Stogdill, CA, CFA and Paul Tan each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011.
Canadian Equity Strategy 86 22 December 2016
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (64% banking clients) Neutral/Hold* 38% (59% banking clients) Underperform/Sell* 15% (53% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html . Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: See the Companies Mentioned section for full company names The subject company (SU.TO, PPL.TO, HSE.TO, AUY.N, SLF.TO, ENF.TO, H.TO, GWO.TO, BEP_u.TO, GG.N, MFC.TO, DGC.TO, COT.N, IAG.N, FM.TO, IMO.TO, NEM.N, ECA.N, QSR.N, ERF.TO, FNV.N, BNS.TO, RY.TO, BAM.N, BMO.TO, NGD.A, CU.TO, CVE.TO, CM.TO, BPY.N, AGU.N, DOL.TO, FTS.TO, ABX.N, NA.TO, EGO.N, TECKb.TO, CCO.TO, AEM.N, MDA.TO, GEI.TO, CG.TO, LB.TO, KGC.N, CPG.TO, CP.N, KEY.TO, TD.TO, EMA.TO, TRP.TO, AGI.N, CPX.TO, POT.N, TA.TO, WCN.N, HBC.TO, BBDb.TO, BBU.N, PDS.N, AAV.TO, POU.TO, KEL.TO, NVA.TO, VII.TO, BNP.TO, PWT.TO, TOU.TO, CR.TO, BXE.TO, BIP.N, EFN.TO, MERC.OQ, SHOP.N, TRQ.TO, SSO.TO, PAA.TO, LUN.TO, HBM.TO, THO.TO, AAL.L, RIO.AX, KAZ.L, VED.L, ANTO.L, BOL.ST, OZL.AX, BHP.AX, S32.AX, VALE.N, WPX.N, OKS.N, EQM.N, OKE.N, MMP.N, VTTI.N, PAA.N, WMB.N, VLP.N, TRGP.N, PSXP.N, ETP.N, ETE.N, APU.N, SPH.N, KMI.N, BPL.N, MEG.TO, ENB.TO, DH.TO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (PPL.TO, ENF.TO, H.TO, GWO.TO, BEP_u.TO, GG.N, MFC.TO, COT.N, IAG.N, IMO.TO, NEM.N, ECA.N, FNV.N, BNS.TO, RY.TO, BAM.N, BMO.TO, CVE.TO, CM.TO, BPY.N, DOL.TO, FTS.TO, NA.TO, CCO.TO, CG.TO, LB.TO, KGC.N, CP.N, KEY.TO, TD.TO, EMA.TO, TRP.TO, WCN.N, BBDb.TO, BBU.N, PDS.N, AAV.TO, KEL.TO, NVA.TO, VII.TO, TOU.TO, BIP.N, EFN.TO, MERC.OQ, SHOP.N, TRQ.TO, AAL.L, RIO.AX, VED.L, BHP.AX, VALE.N, WPX.N, OKS.N, EQM.N, WMB.N, VLP.N, TRGP.N, PSXP.N, ETP.N, ETE.N, APU.N, KMI.N, ENB.TO, DH.TO) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (SLF.TO, BNS.TO, RY.TO, FTS.TO, NA.TO, CG.TO, TD.TO) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (PPL.TO, H.TO, BEP_u.TO, MFC.TO, IAG.N, IMO.TO, ECA.N, FNV.N, BNS.TO, RY.TO, BAM.N, BMO.TO, CVE.TO, CM.TO, BPY.N, DOL.TO, CCO.TO, CG.TO, KGC.N, CP.N, KEY.TO, TD.TO, TRP.TO, PDS.N, AAV.TO, NVA.TO, VII.TO, EFN.TO, SHOP.N, VLP.N, TRGP.N, PSXP.N, APU.N, ENB.TO) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (PPL.TO, ENF.TO, H.TO, GWO.TO, BEP_u.TO, GG.N, MFC.TO, COT.N, IAG.N, IMO.TO, NEM.N, ECA.N, FNV.N, BNS.TO, RY.TO, BAM.N, BMO.TO, CVE.TO, CM.TO, BPY.N, DOL.TO, FTS.TO, NA.TO, CCO.TO, CG.TO, LB.TO, KGC.N, CP.N, KEY.TO, TD.TO, EMA.TO, TRP.TO, WCN.N, BBDb.TO, BBU.N, PDS.N, AAV.TO, KEL.TO, NVA.TO, VII.TO, TOU.TO, BIP.N, EFN.TO, MERC.OQ, SHOP.N, TRQ.TO, AAL.L, RIO.AX, VED.L, BHP.AX, VALE.N, WPX.N, OKS.N, EQM.N, WMB.N, VLP.N, TRGP.N, PSXP.N, ETP.N, ETE.N, APU.N, KMI.N, ENB.TO, DH.TO) within the past 12 months
Canadian Equity Strategy 87 22 December 2016
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (GIBa.TO, SU.TO, PPL.TO, HSE.TO, SMF.TO, AUY.N, SLF.TO, ENF.TO, H.TO, GWO.TO, BEP_u.TO, GG.N, MFC.TO, DGC.TO, COT.N, IAG.N, FM.TO, IMO.TO, NEM.N, ECA.N, QSR.N, ERF.TO, FNV.N, BNS.TO, RY.TO, BAM.N, WCP.TO, BMO.TO, NGD.A, CU.TO, CVE.TO, CM.TO, BPY.N, AGU.N, DOL.TO, FTS.TO, ABX.N, NA.TO, EGO.N, TECKb.TO, CCO.TO, GIL.TO, AEM.N, MDA.TO, GEI.TO, CG.TO, LB.TO, KGC.N, CPG.TO, CP.N, KEY.TO, OSB.TO, TD.TO, EMA.TO, CNQ.TO, TRP.TO, AGI.N, CPX.TO, POT.N, TA.TO, WCN.N, IMAX.N, HBC.TO, BBDb.TO, BBU.N, PDS.N, AAV.TO, PEY.TO, PPY.TO, TET.TO, POU.TO, KEL.TO, NVA.TO, PXT.TO, VII.TO, PGF.TO, BNP.TO, PWT.TO, TOU.TO, BIR.TO, CR.TO, PDN.TO, BXE.TO, TGL.TO, BIP.N, ECN.TO, EFN.TO, LULU.OQ, ADN.TO, MERC.OQ, SHOP.N, TRQ.TO, SSO.TO, CS.TO, PAA.TO, LUN.TO, HBM.TO, THO.TO, AAL.L, RIO.AX, KAZ.L, VED.L, 0358.HK, ANTO.L, BOL.ST, OZL.AX, FRES.L, BHP.AX, S32.AX, VALE.N, WPX.N, OKS.N, EQM.N, OKE.N, EQGP.N, MMP.N, VTTI.N, PAA.N, TEGP.N, WMB.N, VLP.N, TRGP.N, PSXP.N, ETP.N, ETE.N, APU.N, SPH.N, KMI.N, BPL.N, MEG.TO, ENB.TO, DH.TO) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (SLF.TO, BNS.TO, RY.TO, FTS.TO, NA.TO, CG.TO, TD.TO) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (AUY.N, GG.N, NEM.N, NGD.A, KGC.N, WPX.N, KMI.N). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (IAG.N, TA.TO, TET.TO, KAZ.L, OZL.AX, S32.AX, EQM.N, ETE.N). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (NEM.N, TET.TO, KAZ.L, EQM.N, ETP.N, ETE.N, DH.TO). Credit Suisse has a material conflict of interest with the subject company (NEM.N) . ‘Noreen Doyle, an employee of Credit Suisse, is a Non- Executive Director of Newmont Mining Corporation.’ Credit Suisse has a material conflict of interest with the subject company (BMO.TO) . Credit Suisse is acting as as financial advisor General Electric Co. (GE) in relation to their potential sale of GE Capital, Transportation Finance business in the U.S. and Canada to BMO Financial Group (BMO). Credit Suisse has a material conflict of interest with the subject company (CG.TO) . Credit Suisse acted as financial advisor to Centerra Gold (CG.TO) on the acquisition of Thomson Creek Metals Company (TCM.TO). Credit Suisse has a material conflict of interest with the subject company (POU.TO) . Credit Suisse is acting as a strategic advisor on Seven Generations' acquisition of Paramount Resources Ltd's Montney Nest assets. Credit Suisse has a material conflict of interest with the subject company (VII.TO) . Credit Suisse is acting as a strategic advisor on Seven Generations' acquisition of Paramount Resources Ltd's Montney Nest assets. Credit Suisse has a material conflict of interest with the subject company (BIP.N) . Credit Suisse is advisor to Global Infrastructure Partners and Canada Pension Plan Investment Board in relation to the acquisition of an interest in the shares of Asciano Limited. Credit Suisse has a material conflict of interest with the subject company (AAL.L) . Credit Suisse is acting as financial adviser to Anglo American Platinum Limited in relation to the proposed disposal of its Rustenburg operations. Credit Suisse has a material conflict of interest with the subject company (VALE.N) . The analyst Ivano Westin has a relationship with a natural person who may provide remunerated services to one or more of the companies covered in this report. Credit Suisse has a material conflict of interest with the subject company (WMB.N) . Credit Suisse is acting as financial advisor to Energy Transfer Equity (ETE) on its announced acquisition of The Williams Companies (WMB). Credit Suisse has a material conflict of interest with the subject company (ETE.N) . Credit Suisse is acting as financial advisor to Energy Transfer Equity (ETE) on its announced acquisition of The Williams Companies (WMB). Credit Suisse has a material conflict of interest with the subject company (ENB.TO) . Credit Suisse is acting as lead financial advisor to Enbridge Inc. (ENB) as it relates to its potential merger with Spectra Energy Corp. (SE). For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=276058&v=- 4jfmwcd0vk5881utadnmqspet . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (CCO.TO, AAL.L, KAZ.L, VED.L, ANTO.L, NKELyq.L). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (PPL.TO, AUY.N, ENF.TO, H.TO, BEP_u.TO, GG.N, MFC.TO, DGC.TO, IAG.N, FM.TO, IMO.TO, ECA.N, QSR.N, FNV.N, BNS.TO, RY.TO, BAM.N, BMO.TO, CVE.TO, CM.TO, BPY.N, DOL.TO, FTS.TO, NA.TO, CCO.TO, GEI.TO, CG.TO, KGC.N, CP.N, KEY.TO, TD.TO, EMA.TO, TRP.TO, AGI.N, BBDb.TO, PDS.N, AAV.TO, KEL.TO, NVA.TO, VII.TO, BTE.TO, BIP.N, EFN.TO, MERC.OQ, SHOP.N, THO.TO, AAL.L, OKS.N, EQM.N, EQGP.N, VTTI.N, TEGP.N, WMB.N, VLP.N, TRGP.N, PSXP.N, ETP.N, ETE.N, APU.N, KMI.N, ENB.TO) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by:
Canadian Equity Strategy 88 22 December 2016
Credit Suisse Securities (USA) LLC ...... Andrew E. Buscaglia ; Laurent Grandet ; Allison M. Landry ; Alvise Marino ; Robert Spingarn Credit Suisse Securities (Canada), Inc.Andrew M. Kuske ; Jason Frew ; David Phung ; Ralph M. Profiti, CFA ; Robert Reynolds, CPA, CA, CFA ; Anita Soni, P. Eng., CFA ; Nick Stogdill, CA, CFA ; Paul Tan ; Brian Ho ; Yan Truong, CFA ; Robert Loebach To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Canada), Inc.Andrew M. Kuske ; Jason Frew ; David Phung ; Ralph M. Profiti, CFA ; Robert Reynolds, CPA, CA, CFA ; Anita Soni, P. Eng., CFA ; Nick Stogdill, CA, CFA ; Paul Tan ; Brian Ho ; Yan Truong, CFA ; Robert Loebach Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.
Canadian Equity Strategy 89 22 December 2016
This report is produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who-we-are This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates.The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in European Union (except Switzerland): by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Germany: Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). United States and Canada: Credit Suisse Securities (USA) LLC; Switzerland: Credit Suisse AG; Brazil: Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; Mexico: Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); Japan: by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau ( Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; Hong Kong: Credit Suisse (Hong Kong) Limited; Australia: Credit Suisse Equities (Australia) Limited; Thailand: Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok10500, Thailand, Tel. +66 2614 6000; Malaysia: Credit Suisse Securities (Malaysia) Sdn Bhd; Singapore: Credit Suisse AG, Singapore Branch; India: Credit Suisse Securities (India) Private Limited (CIN no.U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH 000001030) and as Stock Broker (registration no. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777; South Korea: Credit Suisse Securities (Europe) Limited, Seoul Branch; Taiwan: Credit Suisse AG Taipei Securities Branch; Indonesia: PT Credit Suisse Securities Indonesia; Philippines:Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Additional Regional Disclaimers Hong Kong: Credit Suisse (Hong Kong) Limited ("CSHK") is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an Australian financial services licence (AFSL) and is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (the Act) under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Act). Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Australia (to the extent services are offered in Australia): Credit Suisse Securities (Europe) Limited (“CSSEL”) and Credit Suisse International (“CSI”) are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority under UK laws, which differ from Australian Laws. CSSEL and CSI do not hold an Australian Financial Services Licence (“AFSL”) and are exempt from the requirement to hold an AFSL under the Corporations Act (Cth) 2001 (“Corporations Act”) under Class Order 03/1099 published by the Australian Securities and Investments Commission (“ASIC”), in respect of the financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's professional clients and eligible counterparties as defined by the FCA, and wholesale clients as defined under section 761G of the Corporations Act. Credit Suisse (Hong Kong) Limited (“CSHK”) is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Credit Suisse Securities (USA) LLC (CSSU) and Credit Suisse Asset Management LLC (CSAM LLC) are licensed and regulated by the Securities Exchange Commission of the United States under the laws of the United States, which differ from Australian laws. CSSU and CSAM LLC do not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1100 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Malaysia: Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. Singapore: This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore Branch to overseas investors (as defined under the Financial Advisers Regulations). Credit Suisse AG, Singapore Branch may distribute reports produced by its foreign entities or affiliates pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact Credit Suisse AG, Singapore Branch at +65-6212-2000 for matters arising from, or in connection with, this report. By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore Branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the “FAA”), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore Branch may provide to you. UAE: This information is being distributed by Credit Suisse AG (DIFC Branch), duly licensed and regulated by the Dubai Financial Services Authority (“DFSA”). Related financial services or products are only made available to Professional Clients or Market Counterparties, as defined by the DFSA, and are not intended for any other persons. Credit Suisse AG (DIFC Branch) is located on Level 9 East, The Gate Building, DIFC, Dubai, United Arab Emirates. EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-US customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. US customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the US. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials,management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2016 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
Canadian Equity Strategy 90