Terri Ellis, mba, cfa
Senior Vice-President,
Investment Research
(North America)
Brian Madden, cfa, cfp
Vice-President &
Portfolio Manager
Sector coverage:
Consumer Staples
Carmen Tang,
m.sc., mba, cfa
Equity Analyst
Sector coverage:
Health Care & Utilities
Richard Fisher,
ma (econ.)
Curtis Gillis,
mba, cpa, cma, cfa
Equity Analyst
Sector coverage:
Financials
Associate Portfolio Manager
Sector coverage:
Co-covers Energy
Sam Mitter, mba
Dillon Culhane,
cpa, ca, cfa
Equity Analyst
Sector coverage:
Information Technology
Equity Analyst
Sector coverage:
Co-covers Energy
Wai Tong,
mba, p.eng, cfa
Equity Analyst
Sector coverage:
Materials &
Telecommunication Services
John Vermeer, mba, cfa
Equity Analyst
Sector coverage:
Consumer Discretionary
& Industrials
Geoffrey Scott, mba, cfa
Junior Equity Analyst
AGF INVESTMENTS
AGF North American Equity Research Team
Uncovering ideas, delivering results
AGF north american equity research team
The AGF North American equity research team is a group of experienced sector
specialists that support AGF’s North American equity portfolio managers.
The role of the analyst is to provide research and analysis within their specific
sector and recommend timely, high-conviction investment ideas that portfolio
managers can act on.
The analyst team covers all 10 GIC sectors and functions under a centralized
research platform where each sector specialist provides analysis and ideas
to our Fund managers, all of whom operate with diverse investment styles.
Teamwork
Through AGF’s guiding principle of enlightened communication, the team actively pursues the sharing of
ideas and building of relationships to achieve their goals. Collaboration and dialogue are encouraged through
structured ongoing meetings and regular updates. The analysts also communicate regularly with their
counterparts on the AGF global equity team and research teams in Dublin and Singapore.
A centralized research database allows the teams to share timely research notes and historical research data
across the globe.
Tony Genua
Peter Imhof, cim
AGF American Growth Class
AGF Global Select Fund
AGF U.S. Small-Mid Cap Fund
Mike White, cfa
Brian Madden, cfa, cfp
AGF Canadian Asset Allocation Fund1
Ani Markova, mba, lifa, cim, cfa
AGF Precious Metals Fund
Stephen Bonnyman, mba, cfa
AGF Global Resources Class
AGF Canadian Resources Class
AGF Canadian Growth Equity Class2
Caterina Prato, mba, cfa
AGF North
American
Analyst Team
AGF Canada Class
Peter Frost, mba, cfa
AGF Canadian Stock Fund3
AGF Traditional Income Fund4
AGF Monthly High Income Fund5
Marc-André Robitaille, m.sc., cfa
AGF Dividend Income Fund
Note: AGF Investment Analysts work closely with the Portfolio Managers but do not have the authority to make discretionary investment decisions on a portfolio.
1
AGF Conservative Asset Allocation Fund merged into AGF Canadian Asset Allocation Fund on May 23, 2014.
2
On April 10, 2012, shareholders approved a change in the investment objective providing the Fund with greater flexibility to invest in stocks of all market capitalizations.
3
AGF All Cap 30 Canadian Equity Fund merged into AGF Canadian Stock Fund on May 23, 2014.
4
AGF Social Values Balanced Fund merged into AGF Traditional Income Fund on May 23, 2014.
5
AGF High Income Fund merged into AGF Monthly High Income Fund on May 23, 2014.
AGF north american equity research team
AGF’s research process – we form an independent view
The research that is generated by the team is an integral part of the investment process at AGF. Each analyst has
a clear set of guidelines they use to generate the investment ideas that will be implemented within a portfolio. The
culmination of our research is an initiation report. As opposed to synthesizing available sell-side research, the
initiation report is an in-depth, propriety research tool that forms an independent view on a company. All analysts
follow the same structured report template to ensure consistency, transparency and repeatability in the process. Key
sections within the report include:
▪Industry dynamics and projections
▪Buy and sell targets (valuation)
▪Company drivers and risks ▪Buy, sell or hold recommendations
▪Financial analysis ▪Conclusion
▪Comps and models
Company (CAM-N)
February 5, 2014
Company (CAM-N)
February 5, 2014
Company (CAM-N)
February 5, 2014
recovery rates ranges from +10-15%, which on a large field is very meaningful. It also allows the
production of offshore fields that are challenging due hydrate formation and waxxing that may
form in the risers. It would also allow the production of more viscous fluids (ie heavier crudes)
thereby opening up additional fields.
The risks of the subsea separation (ie new technology in an expensive field) may result in a slow
adoption rate. CAM, as the leading provider of topside separation vessels, however, is well
positioned to weather any delay in subsea separation adoption.
Company (CAM-N)
February 5, 2014
Company (CAM-N)
Company (RKT-N)
•
February 5, 2014
The $72 target price for CAM is generated by applying a 15.5x multiple to its 2014e EPS. The
multiples is a 10% discount to the 2013e multiple, a 20% premium to the Fabrication group
average, and a 15% discount its 5 Yr Avg multiple. It also represents a slight (5%) to the direct
peer group (but is ~ 3x multiples below FMC’s 18.4x 2014e multiple. Given the visibility of growth
and its history of solid ROIC, CAM arguably deserves a premium to the group.
(see Appendix for charts/tables)
Company (CAM-N)
February 5, 2014
Company (RKT-N)
Capacity Utilization – containerboard shipments has yet to recover to pre-GFC levels and
capacity utilization is now at 96.1% and inventory are near multi-year lows. Containerboard
producers like Rock-Tenn keep close gauge on customer demand to prevent inventory
accumulation. As a result, industry inventories have been falling steadily since early 2000’s .
February 5, 2014
•
Company (RKT-N)
•
CAM
•
•
CAM’s Theme Exposure:
Threats
•
Aggressive competition – The barriers to entry into the subsea equipment market are:
technological capabilities, service/quality reputation, and capital. While these are normally
formidable barriers, to a company like GE, they are less of a deterrent. GE has stated its goal of
becoming a meaningful player in the energy fabrication space, from well head to burner tip.
Furthermore, it has the engineering capability to deploy in a competitive fashion. Should GE (or
other players) become aggressive in its bid to win market share (especially important in front end
attempt to break into market), this could disrupt an otherwise rational and healthy pricing regime.
Management and Compensation
• Management Compensation – As can be seen from the chart below, a significant portion (67%71% depending on whether NEO or CEO) of compensation is performance based. Compensation
does not appear out of line with industry practices.
•
CAM relative to US Energy Index
February 5, 2014
Company (RKT-N)
February 5, 2014
receive insight to and from customer, very strategic business
• SBS (sulphate paperboard) industry running at 93.1% (while RKT is running at 100%)
• CRB/URB (coated/uncoated recycled boxcard) industry running at 92.5% (vs. RKT at
94.8%)
• Consumer packaging is a defensive business with low risk of new entrants, is more
dependent on consumer spending
• Merchandising Display – grew from $35mm in 1995 to $650mm by 2012, RKT is the largest
merchandising display supplier in NA now, mgmt believes RKT can grow sales to $1b in this
$12b per year market
Management – the current management team seem very strong and experienced, mgmt owns
February 5, 2014
Company (RKT-N)
February
5, 2014
(RKT-N)
February 5, 2014
• Cost
rationalization – RKT has increased scale of individual facilitiesCompany
while reducing
the
1.71% of company shares valued at $128mm, senior management are in their late 50’s to midnumber of facilities, has outperformed market over last 5 years, very capital intensive
60’s and has been with the company since 2000, executive compensation is base salary + annual
business, strategy to continue to focus on costs and optimization (annual reduction of waste
bonus is based on hitting operating income and cost saving targets + long term incentive
by 8%, production improvement by 5.5%, and 8% quality improve by modernizing asset base
compensation tied to trailing 3 year FCF return vs. cost of equity with growth rate targets
and invest capex to reduce costs, in last 5 years, avg sales per plant increased
from
$51mm
Investment
Highlights
Investors – the top shareholders of Rock-Tenn include Fidelity (10.1%), Blackrock (5.4%),
to $68mm while income growth was 19%
Vanguard (4.9%), JPM (3.8%), and Wellington Mgmt (3.4%). The composition of institutional
• Rock-Tenn Inc. (RKT) – the company was originally created as a merger between Tennessee
• Top 10 customers - represent 27% of segment sales, include such customers
P&G,
shareholders base in RKT are: growth funds (48.4%), value funds (20%), GARP (10.2%), Index
Paper as
Mills
Inc. and Rock City Packaging. The company manufactures containerboard, recycled
Nestle, J&J, Walmark, etc., 50% of sales are to internal customers
(16.5%)
paperboard, bleached paperboard, packaging products and merchandising displays.
• Key competitors: GPK (Graphic Packaging Holdings), MWV (MeadWestvaco),
IP aims to provide low-cost, high-value paperboard packaging products primarily to
M&A – The current mgmt team has shown their ability to transform the company through
Management
serve
beverage
(International Paper) à only GPK and RKT are national players, don’tfood,
acquisitions while still generating solid FCF and good shareholder returns. Over the last decade,
beverage,
and consumer nondurable end-markets. In addition to the United States, where
market
b/c
GPK
and
MWV
make
the
substrate
for
drinking
boxes
RKT has made three transformational acquisitions. FCF yield dropped during each of the
the company derives 87% of its revenue, the company also has locations in Canada, Mexico,
acquisition years but then recovered nicely in subsequent years. This same trend seems to be
Chile, Argentina, Puerto Rico and China. The company operates as three segments –
playing out with their latest acquisition of Smurfit-Stone, where they have achieved $325mm of
Corrugated Packaging, Consumer Packaging, Recycled and Waste Solutions.
• their
Pension
– The
the forecasted $550mm in synergies within two years after the acquisition. In
previous
twocompany does have over $1b in unfunded pension liabilities, mostly attributed to
• Smurfit-Stone – In May 2011, Rock-Tenn acquired Smurfit-Stone, the #2 largest containerboard
its Smurfit
acquisition. Mgmt has laid out a schedule of how to pay down this liability. It is worth
transformational acquisitions, the mgmt team exceeded guidance both in the amount
of savings
and corrugated container manufacturer in North America for $5.6b in cash and stock and
that each 10 bps change in the yield curve equates to $42mm impact. The recent 100bps
and the time needed to achieve the debt reduction targets. Mgmt has indicated noting
they are
assumed debt. At the time, the Smurfit acquisition was 2x the market capitalization of Rockincrease in the yield curve should have reduced the funding short fall by over $400mm.
interested in further consolidations of the 1-2% players in the US in corrugated market.
Tenn. The acquisition improved RKT’s balance between virgin and recycled fiber from 80%
Expansion outside US will be focused on South America and Mexico, there RKT’s cost cutting
model works. This model does not work in Europe and the company does not want to enter Asia,
where costs are high and fiber is scarce.
Labour – 100% of labour is unionized and on 2-4 year labour contracts, there has been no work
stoppage in recent history (except for a recent strike in BC), mgmt subsequently closed the BC
plant and sold the property for its land value.
•
•
CAM’s Operations:
The three cartoons above highlight CAM products, the segments of the oil and gas value chain that
they are part of, and the themes to which they are exposed.
recycled/20% virgin to a more balanced 45% recycled/55% virgin. Since the acquisition, mgmt
has realized $325mm of the $550mm of forecasted run-rate savings as of Q1/13. The full
savings is expected to be achieved by YE14.
It also transformed Rock-Tenn into the #2 largest producer of containerboard and coated
recycled board and #1 largest recycler in NA. Management noted that the rationale for
making the Smurfit-Stone acquisition was not to consolidate the market but rather to enter
a low-cost globally competitive business with long-term advantages
Industry Consolidation – The industry has reached a tipping point with the latest round of
consolidation where Rock-Tenn acquired of Smurfit-Stone and International Paper acquired of
Temple Inland in 2011/2012. The new industry structure and discipline in controlling capacity has
resulted in the successful implementation of two $50/t price increases over the last 9 months
In terms of revenue and operating profit, the DPS business unit is the largest. It is also the division
with the greatest growth potential.
Investment Highlights
2
•
9
Shale Plays Shift to Development – In an effort to capitalize on the new onshore environment
CAM has bundled its surface equipment and services (ie. Completions, frac support services,
fluid management, and compression) into a single product offering. This becomes more attractive
as the industry shifts7 to development mode with an increasing number of wells being drilled off
pads. A recent contract win from BHP Billiton ($550m) and the increase in market share (flattish
rig count but orders up 40% 1H y/y) in the space, are evidence of the commerciality of the
business offering.
Subsea Separation – The next technology frontier is that of subsea separation and boosting
(pumping). Separating the liquids on the sea floor (as opposed to the topside of a production
platform/FPSO) not only frees up surface space and liquids capacity topside, it reduces the
backpressure by removing the water from the production stream thereby reducing the impact of
the weight of the water (the static head) and slugging (water, oil, gas flow different rates due to
different densities). The net impact of this is to reduce the necessary minimum well pressure
resulting in increased production and recovery (see charts below). An estimated increase in
6
•
•
CAM Operations
•
Defensive – 85% of box shipments are for the food & beverage industry and non-durable
consumer goods, which are defensive and should lead to stable earnings and sales growth.
Distribution – containerboard doesn’t ship well because the product contains a lot of air so the
end customer should be within 200-300 mile radius from the box plants. Flatboard used in
consumer packaging ships better as does the paper from the fiber mills before they are converted
to container boards at the box plants.
4
Catalyst
• Since Sept 2012, the industry has implemented two $50/t containerboard price
• increases
Dividendsdespite
– Mgmt has targeted reducing leverage to 2x net debt to EBITDA following the
a flat market demand. With the industry operating at almost full capacity (97% inacquisition
Q2/13), the
of Smurfit-Stone. They should be able to meet this goal by 2014, at which time,
despite flat market demand.
management has indicated they would likely return cash to shareholders in the form or dividends
8
and/or share buybacks. Management has grown dividends by 19% CAGR over the last 5 years.
The level of FCF the company generates each year will allow RKT to buy back a meaningful
percentage of its outstanding shares while still growing dividends. The company’s dividend
payout ratio is only about 20% currently. Management has indicated its desire to bring RKT’s
dividend yield in line with its peers. Currently RKT’s dividend yield is only 1% whereas PKG’s
dividend yield of 3.1% and IP’s dividend yield of 2.5%.
16
•
•
•
3
14
Barriers to Entry – 5the introduction of new virgin containerboard capacity in the US is unlikely in
the near future given the $2b initial capex cost for a 900ktpa mill and the 5 year lead time given
the challenges of environmental permitting. Any new capacity will likely be in the form of new
recycling mills which have higher cost and limited capacity.
While Rock-Tenn manufactures many other products such as folding cartons, CRB and SBS,
most investors rightly focus on the Corrugated Packaging business which generates 66% of
revenues and over 50% of profits with the potential to increase margins meaningfully in the nearterm through its Lean Six Sigma cost reduction system and periodic price increases.
Corrugated Packaging
• $6b in 2012 sales (66% of total) with 6% operating margins
7
3
No stone unturned – influencing factors in investment decisions
There are many factors that our analysts consider when providing recommendations to the portfolio
management team. Thorough due diligence is performed at all levels of the research process and the team
employs a multi-faceted approach to idea generation.
SECTOR
AGF
▪ Industry conferences
▪ Meetings with industry analysts
▪ Sell-side research
▪ Ongoing review of existing large
▪ Weekly meetings with analysts
holdings
▪ Outlook for the sector
▪ Bellwethers
Company
▪ In-depth company analysis
▪ Meetings with management
▪ Company on-site visits
▪ Fostering quality company
interactions and relationships
▪ Quant/tech analysis
Investment
recommendation:
across the globe for idea generation
and knowledge sharing (Dublin,
Singapore, global equity team)
▪ Sharing data with investment
subsidiaries
▪ Leveraging technology to share
investment ideas across the
investment team (Sharepoint)
Buy/sell/hold
MACRO
▪ Economists/strategists
▪ Geo-political/world issues
▪ Economic outlooks
AGF north american equity research team
Ideas in action: Model portfolios
Each analyst establishes and runs their own ‘model portfolio’ of relevant securities that is benchmarked against
an appropriate index or indexes. This portfolio is presented to the North American investment team and any
updates or changes, including rationale, must also be communicated before a stock can be added or removed.
This exercise ensures personal accountability and conviction of their ideas.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the
prospectus before investing. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated.
For advisor use only. This document is intended for advisors to support the assessment of investment suitability for investors. Investors are
expected to consult their advisor to determine suitability for their investment objectives and portfolio.
The All World Tax Advantage Group is a mutual fund corporation that currently offers over 20 different classes of securities. Investing in any
of the classes within the group offers the following potential benefits and features: deferral of capital gains tax on transfers between classes,
potential capital tax savings for corporate investors and fund diversification by investment style, geography and market capitalization.
While the articles of AGF All World Tax Advantage Group Limited provide authority to make distributions out of capital and AGF All World
Tax Advantage Group Limited intend both to calculate capital in the manner contemplated by the corporate statute for corporations that
are not mutual fund corporations and only to declare distributions out of capital if there is sufficient capital attributable to a series, no
definitive case law exists to confirm that a mutual fund corporation may make distributions of capital and how it is to be calculated. Further,
no advance income tax ruling has been requested or obtained from Canada Revenue Agency, nor is AGF aware of any published advance
income tax ruling or the possibility of obtaining such a ruling, regarding the characterization of such distributions or the calculation of
capital for such purposes.
Publication date: January 30, 2015.
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
FUND869 01-15-E
AGF is committed to ensuring the ongoing success of our clients’ North American equity portfolios. We
believe that research analysis, idea sharing and accountability lead to deeper insights and ultimately better
investment decisions.