Michael Decter is president and CEO of LDIC Inc. His focus is on Canadian large caps.
Granite Real Estate Inc.
A conversion to a REIT is expected in the first quarter, and the company has been clear that it will take advantage of its under-levered balance sheet by actively looking for acquisitions that will increase cash flow and diversify its Magna International Inc. concentration. Granite believes it can add roughly $1-billion in assets over three years without issuing any new equity, which could add up to a 30-per-cent increase in operating income/cash flow. ($37.49; $1.75-billion market cap; 5.34-per-cent yield)
Chorus Aviation Inc.
Arbitrators have ruled on a fixed-margin dispute between Chorus and Air Canada as the two sides have largely resolved the lingering issue and, based on the reported facts, there will be little change to the current mark-up. Therefore Chorus’s forecasted cash flow should be minimally affected and the company should be able to maintain something close to its current 60-cent dividend. Given the long-term CPA (capacity purchase agreement) with Air Canada, and Chorus’s ability to service regional routes more efficiently than Air Canada can, we will enjoy collecting the dividends until the market reflects fair value. ($3.88; $482-million market cap; 15.46-per-cent yield)
A chemical company for pulp and water treatment with six low-cost plants, Canexus is now getting into the oil and oil sands terminalling and transportation business. Expect strong growth to come as $85-million in capex spending adds $40-million to $60-million in cash flow to a $147-million base. The terminalling business should become very meaningful, adding $3 to NAV according to some sell-side analysts, and grow to 100,000-150,000 bpd by the end of 2013 with pipeline connectivity. ($8.35; $938-million market cap; 7.1-per-cent yield; 60-per-cent payout; growth coming from key terminalling oil business)
Canacol Energy Ltd.
(stock split 12/20/2012, 1-for-10)
Total return: –58.97 per cent
Finning International Inc.
Total return: +14.23 per cent
(acquired by Pembina Pipeline Corp. 04/05/12)
Total return: +24.24 per cent
Total return average: –6.83 per cent
We are approaching 2013 with optimism, albeit cautiously, after several quarters of waiting for three dark clouds to clear: the U.S. economic recovery, European debt crisis, and China’s slowing economy. We forecast two of the clouds lifting (the U.S. and China) and are preparing to invest in the companies that stand to benefit most (cyclicals), especially toward the second half of the year. In the very near term we remain conservatively positioned in our funds as we let markets digest the impeding U.S. fiscal changes.
In the U.S., we envision a scenario where capital spending accelerates in the second half of the year, catching the pessimists somewhat by surprise. Assuming Washington manages to avoid a full-blown drop off the “fiscal cliff,” business confidence should keep improving, which will lead to corporations spending the hoards of cash on their balance sheets and taking advantage of the low interest rate environment.
In China the signs are become clear that a hard landing was in fact avoided and that we have likely seen the bottom as indicators begin to turn largely positive.
While the European Union works through its economic challenges the forecast remains cloudy, however, it is no longer the serious threat to other regions as it was in 2012.