Top TSX Weekly Gainers
Polaris Materials Corp (TSX:PLS, Chg:183.3%)
Industry: Basic Materials
Vulcan Materials, a $16bn construction aggregates and concrete producer agreed to acquire PLS for $2.79/share in cash, valuing PLS equity at about $252mm. PLS closed last Friday at $0.96.
Prometic Life Sciences Inc (TSX:PLI, Chg:25.8%)
On August 29, 2017 PLI announced that the U.S Food and Drug Administration (FDA) has granted a “Rare Pediatric Disease Designation” to its Ryplazim, a plasminogen replacement therapy for the treatment of patients with congenital plasminogen deficiency.
Aimia Inc (TSX:AIM, Chg:21.2%)
AIM has completed the first of its non-core asset divestitures since Air Canada non-renewal news (Air Canada will stop using AIMIA’s Aeroplan as its loyalty rewards administrator) with the sale of the Air Miles trademarks for Canada to Diversified Royalty Corp (DIV).
AIM transferred the trademark, license and royalty agreements for Canada for cash consideration of $53.7mm, with up to $13.75mm in additional performance-related payments over the next three years. AIM is expected to pay cash tax on the sale between $13-16mm. In exchange, AIM is giving up $8.5mm in annual license fee revenue from LoyaltyOne (the owner and operator of Air Miles in Canada), a subsidiary of Alliance Data System.
AIM’s effort to simplify its business while raising cash (via divestiture) to defend a potential rewards redemption run is being rewarded by the market.
Background: AIM acquired the Air Miles trademark when it acquired the creator of Air Miles, Loyalty Management Group in U.K. AIM retains the intellectual property associated with the Air Miles name and logo internationally and is the majority partner in the Air Miles program in the Middle East. In all other countries where Air Miles program operates, AIM is the licensor and is not involved in program operation.
Toromont Industries Ltd (TSX:TIH, Chg:18.2%)
TIH had a very clean balance sheet at 0.1x Net Debt/LTM EBITDA, and with plenty of private CAT dealers in Canada, the market expected TIH to put its balance sheet strength to good use. On August 28, 2017, TIH announced that it was acquiring Hewitt, a Quebec-based Caterpillar dealer, for $917.7mm in cash and 2.25mm TIH shares (total consideration sums to $1.02bn but higher now with the stock rising).
The acquisition is a classic example of “bigger publicly-traded acquirer buying smaller-private-less operationally-efficient target”. Hewitt generated $1.0bn in revenue and $66.4mm in operating profit. TIH’s EBIT margin averages about 12% for the past three years.
With acquisition like this, the market generally believes that the target’s margin will improve. Hewitt also gives TIH access to Quebec, Western Labrador and the Maritimes. So overall, the market feels that this is a very positive development for TIH.
Westport Fuel Systems Inc (TSX:WPRT, Chg:16.8%)
As previously discussed in this weekly feature, with the combination of a $28.7mm equity raise and non-core asset divestitures of $70mm, WPRT has liquidity to pay down its 9% junior debenture due on September 15. On August 29, WPRT announced that it expects to repay the remainder of the debentures on their original maturity date, removing all short-term liquidity concerns. The market is waking up to the fact.
Top TSX Weekly Losers
Painted Pony Energy Ltd (TSX:PONY, Chg:-13.9%)
PONY reduced capex and revised its production guidance downward for FY2017 and FY2018. FY2017 capex is reduced to $314mm from $347 and FY2018 capex is reduced to $262mm from $301mm. Production revised to 44,750 boe/d from 48,400 boe/d for FY2017, and to 70,250 boe/d from 84,800 boe/d for FY2018.
At first, the stock reaction looks counterintuitive – in a DCF framework, reducing capex means higher FCFF and should increase the EV. However, for resource extraction business like E&P and mining, top-line growth is directly tied to its capex program.
In fact, E&P companies need to constantly spend capex just to keep its production level stable due to the natural production decline. Therefore, reducing capex generally reduces the NAV of a resource extraction company and the stock reaction is rational.
Grocery Stores (Loblaw, Metro, Empire, North West)
Industry: Consumer & Retail
With the Whole Foods acquisition, Amazon is aiming to disrupt the grocery shopping business. On the first day as the owner of Whole Foods, Amazon cut prices on a number of organic goods at locations across Canada and the U.S. On Friday, WSJ reported that Amazon will pilot a grocery-delivery system in Toronto and Vancouver later this year and expand to other Canadian cities throughout 2018.
This development is negative to the Canadian grocery stocks as they risk losing market share to Amazon if they do nothing, or they will have to spend a lot of money to develop and establish their online presence, which is close to non-existence at the moment.