MARQUEST WEEKLY COMMENTARY – JUNE 15, 2015.
Liis Palmer, Cassels Investment Management Inc.
Monthly Pay Fund
Last week the TSX was down 1.4 percent. The Marquest Monthly Pay Fund A units closed at $4.09 compared to $4.15 the previous week.
Significant contributors in the Fund last week were Algonquin Power (up 3.0 percent), Brookfield Infrastructure (up 1.8 percent) and Vermillion Energy (up 3.1 percent). Algonquin Power has a good growth profile and its regulated utility assets can partly pass through the impact of rising rates. There has been steady insider buying; last week the CEO bought stock. Vermillion has a globally diversified portfolio of oil-weighted assets. The Corrib project in Ireland (18.5 percent interest) is slated to start up shortly and on this basis, National Bank added Vermillion to its “Action List” because of Vermillion’s increasing exposure to premium European gas and the free cash flow that would follow.
Laggards were Transcontinental (down 12.4 percent), Cineplex (down 5.3 percent) and Canadian Natural Resources (down 5.3 percent). Transcontinental prints and distributes flyers and inserts as well as magazines, local newspapers, catalogues and books. It reported lower than expected Q2 results due to ad declines across the weekly newspapers, lower sales from distribution activities after Target’s Canadian exit, weaker digital ad sales and timing issues in book publishing. There are ongoing print and advertising revenue pressures in the near term. However, the firm’s cost cutting and diversification into flexible packaging offer upside. The management has shown superior operating performance versus competitors and owns 17 percent of the outstanding shares. TCL trades at a discount to peers at 7 times earnings and 4.3 times EBITDA and yields strong free cash flow (with low leverage). The dividend is over 4 percent.
Cineplex was downgraded by BMO last week as weekly box office sales continue to underperform expectations (down 3 percent for the quarter as at June 4th). The 2015 film slate carries high expectations and management has done a good job lowering costs. However, Canadian box office sales have been declining for 8 quarters in a row.
Global Balanced Fund
Last week, the MSCI World Index was up 0.6 percent. The C$ was up 1.0 percent against the US$. The Marquest Global Balanced Fund A units closed at $18.14 compared with $18.32 the previous week. The negative move was primarily due to the strength of the C$. Global markets are focused on the possibility of a Greek debt default. In the US there was fresh evidence of an improving economy with good retail sales numbers showing consumer confidence last month.
Significant contributors to performance were Keyera (up 1.7 percent), CVS (up 0.9 percent) and Alaris Royalties (up 1.5 percent).
Laggards were Tata Motors (down 3.1 percent), Whirlpool (down 2.4 percent) and Comcast (down 2.0 percent). Tata Motors continues to be weak, dragged down by the Indian stock market and the disappointing quarter. The stock trades at 8 times 2016 earnings and 6.4 times 2017 earnings.