CANEXUS CORP 6.5 PCT DEBS T.CUS.DB.D

TD SI Morning Action Notes 11 April 2014

[BlueCollar51]

Canexus Corporation (CUS-T) C$4.87
 
Recommendation: BUYUnchanged
Risk: HIGH
12-Month Target Price: C$6.50Unchanged
12-Month Dividend (Est.): C$0.55
12-Month Total Return: 44.8%
 
Investor Meeting Takeaways
 
Event
 
We recently hosted Canexus’ interim CEO, Richard Ott, and SVP Finance
and CFO, Richard McLellan, for investor meetings.
 
Impact
 
SLIGHTLY POSITIVE.
 We came away from the investor meetings increasingly confident that
Canexus will place its unit train, crude-by-rail facility into service on the
company’s revised budget and schedule.
 We remain concerned about the possibility of a cut in dividend, although
we note that it would not change our view of the value of Canexus’
assets. In addition, we would argue that the market appears to be largely
pricing in a cut in dividend.
 
TD Investment Conclusion
We view Canexus as one of the companies in Canada with the highest
exposure to crude-by-rail. Although we would describe the execution of the
NATO expansion as disappointing so far, we ultimately expect Canexus to be
successful in securing additional unit train contracts and that the facility will
be well utilized. In addition, we expect the company’s chlor-alkali outlook to
improve over the course of the year, in part because of a weaker Canadian
dollar. At recent levels, we do not believe that the shares are fully reflecting
the value of the NATO terminal. We recommend investors BUY Canexus.
 
Details
 
Key North American Terminal Operations (NATO) Takeaways:
 
 NATO Remains on Revised Timeline and Budget: The update
management provided regarding its plan to complete the NATO unit
train facility left us increasingly confident that the facility will be placed
in service on the company’s revised budget and timeline. The company
noted that the $70 million–$80 million of work remaining at the site, as
at year end, had a weighted average contingency factor of approximately
25%. In addition, there have been no surprises regarding work recently
put out to bid. Management also noted that the remaining work could be
portioned into relatively small and easily defined parcels, which should
lower the risk of cost overruns, in our view. In addition, the company
expects smaller contractors, which were previously used, to do the
remaining work. Canexus’ experience with these smaller contractors has
generally been positive.