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Viterra (TROY FLEECE/Troy Fleece)
Viterra (TROY FLEECE/Troy Fleece)

Eye on Equities

Big upside seen for Viterra if wheat board monopoly broken Add to ...

With the Conservatives winning their long-sought majority in the House of Commons, the days of the Canadian Wheat Board’s monopoly on marketing wheat and barley appear numbered. Agriculture Minister Gerry Ritz said Wednesday that the government is aiming to introduce legislation this fall that would bring changes in a little over a year to the way grain is sold in this country.

If this comes to fruition, it could be good news for large grain handlers such as Viterra Inc.

As Wellington West Capital Markets Inc. analyst Robert Winslow points out, under a free marketing system farmers would look to pure economic considerations when allocating their grain, and it’s usually the larger processors that offer the better pricing terms and services.

“This would suggest that smaller, less efficient gain handlers would be marginalized and the larger, more efficient handlers like Viterra would reap the rewards of higher volume throughput,” Mr. Winslow wrote in a report today. “We also suggest that grain turnover for the industry as a whole, as well as for the most efficient handlers, could rise upon elimination of CWB inefficiencies.”

He estimates that breaking the CWB’s monopoly could be worth 50 to 75 cents per share of value to Viterra.

But other developments may also be in the works that could affect the outlook for Viterra. Australian media reports have emerged this week that the company may be interested in acquiring GrainCorp. of Sydney. Viterra, which declined comment, acquired Australia’s ABB Grain in 2009 with the explicit intention of using it as a platform to participate in further consolidation.

TD Newcrest analyst Cherilyn Radbourne suggests an acquisition of GrainCorp. would offer greater synergies than the ABB deal and position Viterra as the originator of roughly 35 per cent of Australian grain production.

But she recommends investors “be cognizant of the potential for any foreign purchase by Viterra to dilute the earnings upside” that would come from the deregulation of the grain trade in Canada.

Upside: Mr. Winslow affirmed his “strong buy” rating and $15 12-month price target. Ms. Radbourne has a “buy” recommendation and $14 target price.

The recent plunge in commodity prices has translated into flat core retail fund sales at Sprott Inc. so far in the second quarter and a softening in its assets under management, according to Canaccord Genuity analyst Scott Chan. By the end of the quarter, he expects assets under management to be off 3 per cent from the previous three months.

Downside: Mr. Chan cut his price target by 50 cents to $9 and maintained a “hold” rating.

North American Energy Partners is taking a writedown of $40-million to $45-million related to its contract at the Horizon oil sands mine. “We believe the writedown is largely a function of a poorly structured contract where the cost inflation indices have not been appropriate and fully reflective of the increases realized,” commented CIBC World Markets Inc. analyst Jeff Fetterly.

Downside: Mr. Fetterly cut his price target by $4 to $9.50 “to reflect the writedown, lower revenue recognition and uncertainty regarding a resolution and go-forward structure of the contract.”

Dollarama Inc. , already the leading dollar store chain in Canada at five times larger than its next competitor, “has the opportunity to double in size in a market that is underdeveloped, fragmented, and with poor competition,” said TD Newcrest analyst Jessy Hayem. He expects more store openings and operating efficiency gains, leading to consistent earnings growth and possibly the introduction of a dividend in the near term.

Upside: Mr. Hayem initiated coverage with a $37 target price and “buy” rating.

Paramount Resources Ltd. reported first-quarter production volumes that were lower than expected due to delays tying in new wells and outages at third-party facilities it relies on. Cash flow per share for the quarter was 3 cents below consensus but the company maintained guidance for the year of 20,000 barrels per day of oil equivalent production.

Downside: RBC Dominion Securities Inc. cut its price target by $4 to $36 but maintained an “outperform-above average risk” rating.

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