Tips on Trusts
Dividend Watch List
Five Canadian trusts slashed distributions last month. For all of them—including High Yield of the Month TransForce Income Fund (TSX: TIF-U, OTC: TIFUF)—the slumping US economy and dollar were at least partly to blame.
With 80 percent of its sales in the US, it’s no surprise Sun Gro Horticulture (TSX: GRO-U, OTC: SGHRF) has been hit hard by troubles here. Sales to plant nurseries in the US fell sharply because of slumping new home sales, while a 9 percent US price increase failed to match the 17 percent year-over-year decline in the dollar.
The US dollar drop alone shaved 24 cents Canadian a share off revenue. The result: Fourth quarter cash flows from operating activities swung negative, while distributable cash per share fell more than 80 percent.
At this point, management is characterizing as “temporary” the 50 percent cut in the distribution to a monthly rate of 3.8 cents Canadian. And it believes recovering 2008 cash flows will bring the payout ratio down to the 85 to 90 percent range for the year.
The US assets the company has acquired appear to be solid, and the trust is achieving its goal of scaling up in what it considers to be key markets, while diversifying its product mix. The purchases were made at good prices—taking full advantage of the Canadian dollar’s strength—and were financed with modest debt and negligible share dilution. The reliance on US assets also limits the trust’s prospective 2011 tax burden.
At current prices, the trust still yields more than 10 percent and trades for just 71 percent of book value and 45 percent of annual sales. That’s enough to earn Sun Gro Horticulture’s shares an upgrade to hold.
But until the US economy bounces back, Sun Gro’s operations here will remain under pressure, as will distributions. Accordingly, I’m keeping it on the Watch List.
By some measures, Chartwell Seniors Housing REIT (TSX: CSH-U, OTC: CWSRF) hasn’t covered its distribution with cash flow since its initial public offering (IPO) back in late 2003. Rather management’s avowed strategy had been to “grow into” the level promised at the trust’s IPO, an approach that appeared to be succeeding as the senior housing REIT continued to add cash-generating assets.
All that, however, went out the window last month, as management cut distributions 30.5 percent. The new annual rate of 74 cents Canadian a share (6.17 cents Canadian monthly) is well covered by current cash flow levels; the reduction brings the payout ratio down to about 86 percent based on fourth quarter numbers. Management has also pledged to limit acquisitions only to those that are “immediately accretive,” which it will largely finance with the CAD30 million saved from the distribution cut.
I’ve rated Chartwell a sell on the Dividend Watch List for some time. Now with the distribution at a more sustainable level—and the shares trading for 1.14 times book value and 1.26 times sales—I’m removing Chartwell Seniors Housing REIT from the Watch List and upgrading to hold.
Like crude oil, coal is priced in US dollars on world markets. As a result, the dollar’s slide over the past year has hurt cash flow for Fording Canadian Coal (NYSE: FDG, TSX: FDG-U), whose primary asset is a royalty stream from a metallurgical or “coking” coal mine operated by mining giant Teck Cominco.
Fording’s results have also been nicked over the past couple years by the weakening US economy—which has depressed demand for met coal—and substitution of lower grade coal by the Asian industry. The result has been an almost uninterrupted series of cuts in the trust’s quarterly dividend, the latest a 5.7 percent reduction to the April payment of 50 cents Canadian.
Ironically, even as Fording’s distribution has been steadily slashed, its share price has more than doubled over the past year. In fact, it’s mere percentage points away from the all-time highs reached in 2005, when the distribution was several times greater.
Fording’s surge is due entirely to one factor: speculation about ongoing contract negotiations between major producers of coking coal and the fuel’s major consumers, Asian steelmakers. The price reached in negotiations will in large part determine what Fording’s royalty stream will be for the next few years and, hence, what distribution it will pay.
Fording has exploded to the upside mainly because expectations are extremely high for a big price increase. The risk now is if results don’t measure up, there will be little to hold up the shares at their current price of more than 25 times book value and yield of less than 4 percent.
There’s always the chance that expectations could be exceeded. And certainly, coal markets have tightened this year on weather-related mine closings and the resilience of Asian economies.
At this price, however, Fording is basically a momentum stock with no real appeal for income investors. Even speculators should consider taking some money off the table to lock in gains. Fording Canadian Coal remains a sell.
Westshore Terminals’ (TSX: WTE-U, OTC: WTSHF) cash flow depends primarily on two things: the volume and price of the met coal shipped from the Fording/Teck mine. In contrast, the owner of storage and terminal infrastructure sells for only a little more than twice book value and yields nearly 7 percent. It also has contracts with Fording/Teck that lock in revenue, making cash flow more secure than Fording’s.
Westshore’s quarterly distribution has also been historically volatile. The April payment, for example, was 22 percent below January’s. But it was also 24.4 percent above year-ago levels, indicating a general uptrend. A higher met coal price from the producer/steelmaker negotiations would push distributions up further. A much lower risk alternative to Fording, Westshore Terminals is a buy up to USD18.
As the Feature Article points out, rising natural gas prices and still-high oil prices are spurring a revival in energy-producing trusts. Distributions at two trusts, however, bear careful watching.
Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF) has lowered its first quarter output estimates for Syncrude Canada—essentially the source of all of its cash flow—to 24 million barrels from 29 million. Full-year projections, meanwhile, were trimmed to 108 million barrels from a prior 115 million.
Extremely cold weather in January and February were to blame for disrupting output at Syncrude, which like all oil sands is basically a mining operation. The impact is temporary, and there’s been no permanent effect on the capacity of facilities either in operation or on the drawing board.
The shortfall, however, will drive up operating costs and crimp cash flow in the first quarter. Coupled with recent increases in the distribution, that’s likely to drive Canadian Oil Sands’ payout ratio well north of 100 percent in the first quarter.
There’s every indication management will cover the difference, at least some of which should be covered by higher realized oil prices. But until the payout ratio comes down, there will be some risk to the current distribution.
More worrisome is the situation at Harvest Energy Trust (NYSE: HTE, TSX: HTE-U), which saw its payout ratio balloon upward to 150 percent in the fourth quarter. As expected, the primary problem was the refining operation, which was hurt by weak industrywide conditions. That was the reason Harvest trimmed its distribution last year, which in turn triggered the slide in the share price to the low 20s.
Unfortunately, last month, major US refiner Valero Energy warned that refining sector conditions didn’t improve in the first quarter of 2008. Margins continue to be squeezed by a combination of high raw commodity prices—i.e., crude oil—and a weak North American economy, which won’t absorb commensurate price increases in refined products like gasoline. Worse, Valero management intimated it didn’t expect conditions to improve much in the second quarter either.
Outside refining, Harvest’s oil and gas production operations are thriving. And with realized output prices for oil and gas in the fourth quarter just USD57.32 per barrel of oil equivalent, there’s plenty of upside this year.
Unless the refining business turns quickly, however, it’s looking more like Harvest may have to cut its distribution again this year. That outlook is in stark contrast with oil and gas trusts that don’t have refining risk.
Ultimately, the refinery should prove to be a very valuable asset. But with Harvest’s payout ratio this high, there’s no sense in sticking around to take the risk. Sell Harvest Energy Trust.
Essential Energy Services Trust (TSX: ESN-U, OTC: EEYUF) also looks like it may have to make another distribution cut. Fourth quarter funds from operations slid 60 percent as sales dropped 18 percent and cash flow margins contracted from 32 percent to just 18 percent of sales. The result was a clearly unsustainable payout ratio of 170 percent.
As expected, the culprit was the dramatic slowdown in energy patch activity in Alberta, which was made worse by the imposition of higher royalty tax rates, particularly on newer fields. Encouragingly, management pointed to improving conditions in the first quarter and cited the pending merger with Builders Energy Services Trust as a source of CAD6 million in future annual cost reductions.
Unfortunately, we’re still likely to see another bad payout number in the first quarter, which will keep up the pressure on the distribution and share price. I don’t see any threat to long-term viability or solvency here. But until the payout ratio comes down, energy services sector investors are much better off in lower-yielding but far healthier, faster-growing Trinidad Drilling (TSX: TDG, OTC: TDGCF).
On the plus side, Primary Energy Recycling (TSX: PRI-U, OTC: PYGYF) moved closer to exiting the Watch List last month, at last reaching a deal with its partner in the Harbor Coal facility. The new agreement eliminates the “shared savings” approach to revenue determination, as well as the trust’s exposure to the customer’s inventory adjustments.
That should cut down on cash flow volatility, protecting future distributions. It also brings the company back into compliance with credit agreements and eliminates exposure to increased interest rate spreads and cash sweeps, quelling remaining threats to solvency.
I want to see the currently high payout ratio (129.3 percent) come down before taking Primary off the Dividend Watch List. But with this challenge at last behind it, its yield at more than 12 percent and its shares trading at just 1.2 times book value, I’m upgrading Primary Energy Recycling to a hold.
Here’s the complete Dividend Watch List. Note that all trusts have now reported fourth quarter payout ratios, which are reviewed in How They Rate.
Acadian Timber (TSX: AND-U, ORC: ATBUF)
Advantage Energy Trust (NYSE: AAV, TSX: AVN-U)
Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF)
Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF)
Canfor Pulp (TSX: CFX-U)
Connors Brothers Income Fund (TSX: CBF-U, OTC: CBICF)
Daylight Resources Trust (TSX: DAY-U, OTC: DAYFF)
Essential Energy Services (TSX: ESN-U, OTC: EEYUF)
Fording Canadian Coal (NYSE: FDG, TSX: FDG-U)
Harvest Energy Trust (NYSE: HTE, HTE.UN)
Mullen Group Income Fund (TSX: MTL-U, OTC: MNTZF)
Newalta Income Fund (TSX: NAL-U, OTC: NALUF)
Newport Partners Income Fund (TSX: NPF-U, OTC: NWPIF)
Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)
Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)
Precision Drilling (NYSE: PDS, TSX: PD-U)
Primary Energy Recycling (TSX: PRI-U, OTC: PYGYF)
Sun Gro Horticulture (TSX: GRO-U, OTC: SGHRF)
Swiss Water Decaf Coffee Fund (TSX: SWS-U, OTC: SWSSF)
TimberWest Forest Corp (TSX: TWF-U, OTC: TWTUF)
Tree Island Wire Income Fund (TSX: TIL-U, OTC: TWIRF)
True Energy Trust (TSX: TUI-U, OTC: TUIJF)
Westshore Terminals (TSX: WTE-U, OTC: WTSHF)
Resources Equal Resilience
Statistics Canada reported March 31 that Canada’s economy expanded by a greater-than-expected 0.6 percent during January, a happy result in the wake of December’s 0.7 percent contraction.
The solid GDP number reflects a forecast made here that Canada wouldn’t suffer as much as it has during past US downturns because of the increasing global importance of its ample resources. It’s the biggest one-month increase for the Canadian economy since April 2005 and basically reversed December’s contraction.
It’s an important indicator amid what seems a sea of negativity, but analysts still expect first quarter numbers to show an overall shrinkage. The wheels won’t come off because fundamentals, employment chief among them, should provide enough support to avert a recession.
Given the modest expectation for the economy over the first half of 2008, economists expect the Bank of Canada to cut its key short-term lending rate by 50 basis points on April 22.
Manufacturing, which has languished while resource-based sectors have flourished during this commodity bull, grew by 1.7 percent. Also advancing in January were the financial sector, retail trade, oil and gas, accommodation, food services and agriculture, while construction crept up 0.1 percent. Durable goods manufacturing rose 2.6 percent. However, utilities, mining and forestry declined.
Sixteen of the 21 sectors Statistics Canada follows showed gains for the month.
Bay Street Beat
CML Healthcare (TSX: CLC-U, OTC: CMHIF) earned the biggest ratings increase in the latest Bloomberg survey of Bay Street, adding 0.343 points to 4.143. Four analysts have it as a buy, three a hold.
CML took in more revenue based on increased lab service and other funding from the Ontario Ministry of Health and Long-Term Care, organic growth in nonpublicly supported service and the integration of acquisitions. No doubt CML enjoys the benefits—stability and predictability, mainly—flowing from Canada’s national healthcare system. Demand is relatively inelastic for licensed medical imaging and diagnostic testing facilities.
Long-term debt was up at year’s end compared to Dec. 31, 2006, and working capital contracted a bit. But CML just completed a financing arrangement that includes a CAD100 million acquisition line, and it plans to use it to aggressively consolidate the Canadian medical imaging market.
For 2007, revenue increased 8.3 percent in 2007 to CAD312.8 million. Net earnings increased 8.4 percent to $100.2 million. Cash from operating activities increased 7 percent to CAD105.8 million. The fund generated distributable cash of CAD102.3 million and declared distributions totaling CAD88.5 million for a payout ratio of 86.5 percent. It boosted the distribution paid to unitholders by 3.5 percent in May 2007.
Bonavista Energy Trust’s (TSX: BNP-U, OTC: BNPUF) average rating was up 0.227 to a 4.500, with nine buy calls and three holds from analysts.
Crescent Point Energy Trust (TSX: CPG-U, OTC: CPGCF), Penn West Energy Trust (NYSE: PWE, TSX: PWT-U) and Vermilion Energy Trust (TSX: VET-U, OTC: VETMF) also surged.
Nontrust recommendation First Quantum (UK: FQM, TSX: FM) is a new favorite, earning a 0.222 point boost to 4.222; 11 Bay Streeters say buy, seven say hold.
Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) lost 0.200 points but still chalked up a 4.200 average. Seven analysts list it as a buy, two a hold and one says sell.
Progress Energy Trust (TSX: PGX-U, OTC: PGXFF) also lost some luster, dropping 0.154 to 3.923.
T-Minus 11 Days
April 15 is right around the corner. Here are a few key trust-specific points to guide you through the tax season.
Five Canadian trusts slashed distributions last month. For all of them—including High Yield of the Month TransForce Income Fund (TSX: TIF-U, OTC: TIFUF)—the slumping US economy and dollar were at least partly to blame.
With 80 percent of its sales in the US, it’s no surprise Sun Gro Horticulture (TSX: GRO-U, OTC: SGHRF) has been hit hard by troubles here. Sales to plant nurseries in the US fell sharply because of slumping new home sales, while a 9 percent US price increase failed to match the 17 percent year-over-year decline in the dollar.
The US dollar drop alone shaved 24 cents Canadian a share off revenue. The result: Fourth quarter cash flows from operating activities swung negative, while distributable cash per share fell more than 80 percent.
At this point, management is characterizing as “temporary” the 50 percent cut in the distribution to a monthly rate of 3.8 cents Canadian. And it believes recovering 2008 cash flows will bring the payout ratio down to the 85 to 90 percent range for the year.
The US assets the company has acquired appear to be solid, and the trust is achieving its goal of scaling up in what it considers to be key markets, while diversifying its product mix. The purchases were made at good prices—taking full advantage of the Canadian dollar’s strength—and were financed with modest debt and negligible share dilution. The reliance on US assets also limits the trust’s prospective 2011 tax burden.
At current prices, the trust still yields more than 10 percent and trades for just 71 percent of book value and 45 percent of annual sales. That’s enough to earn Sun Gro Horticulture’s shares an upgrade to hold.
But until the US economy bounces back, Sun Gro’s operations here will remain under pressure, as will distributions. Accordingly, I’m keeping it on the Watch List.
By some measures, Chartwell Seniors Housing REIT (TSX: CSH-U, OTC: CWSRF) hasn’t covered its distribution with cash flow since its initial public offering (IPO) back in late 2003. Rather management’s avowed strategy had been to “grow into” the level promised at the trust’s IPO, an approach that appeared to be succeeding as the senior housing REIT continued to add cash-generating assets.
All that, however, went out the window last month, as management cut distributions 30.5 percent. The new annual rate of 74 cents Canadian a share (6.17 cents Canadian monthly) is well covered by current cash flow levels; the reduction brings the payout ratio down to about 86 percent based on fourth quarter numbers. Management has also pledged to limit acquisitions only to those that are “immediately accretive,” which it will largely finance with the CAD30 million saved from the distribution cut.
I’ve rated Chartwell a sell on the Dividend Watch List for some time. Now with the distribution at a more sustainable level—and the shares trading for 1.14 times book value and 1.26 times sales—I’m removing Chartwell Seniors Housing REIT from the Watch List and upgrading to hold.
Like crude oil, coal is priced in US dollars on world markets. As a result, the dollar’s slide over the past year has hurt cash flow for Fording Canadian Coal (NYSE: FDG, TSX: FDG-U), whose primary asset is a royalty stream from a metallurgical or “coking” coal mine operated by mining giant Teck Cominco.
Fording’s results have also been nicked over the past couple years by the weakening US economy—which has depressed demand for met coal—and substitution of lower grade coal by the Asian industry. The result has been an almost uninterrupted series of cuts in the trust’s quarterly dividend, the latest a 5.7 percent reduction to the April payment of 50 cents Canadian.
Ironically, even as Fording’s distribution has been steadily slashed, its share price has more than doubled over the past year. In fact, it’s mere percentage points away from the all-time highs reached in 2005, when the distribution was several times greater.
Fording’s surge is due entirely to one factor: speculation about ongoing contract negotiations between major producers of coking coal and the fuel’s major consumers, Asian steelmakers. The price reached in negotiations will in large part determine what Fording’s royalty stream will be for the next few years and, hence, what distribution it will pay.
Fording has exploded to the upside mainly because expectations are extremely high for a big price increase. The risk now is if results don’t measure up, there will be little to hold up the shares at their current price of more than 25 times book value and yield of less than 4 percent.
There’s always the chance that expectations could be exceeded. And certainly, coal markets have tightened this year on weather-related mine closings and the resilience of Asian economies.
At this price, however, Fording is basically a momentum stock with no real appeal for income investors. Even speculators should consider taking some money off the table to lock in gains. Fording Canadian Coal remains a sell.
Westshore Terminals’ (TSX: WTE-U, OTC: WTSHF) cash flow depends primarily on two things: the volume and price of the met coal shipped from the Fording/Teck mine. In contrast, the owner of storage and terminal infrastructure sells for only a little more than twice book value and yields nearly 7 percent. It also has contracts with Fording/Teck that lock in revenue, making cash flow more secure than Fording’s.
Westshore’s quarterly distribution has also been historically volatile. The April payment, for example, was 22 percent below January’s. But it was also 24.4 percent above year-ago levels, indicating a general uptrend. A higher met coal price from the producer/steelmaker negotiations would push distributions up further. A much lower risk alternative to Fording, Westshore Terminals is a buy up to USD18.
As the Feature Article points out, rising natural gas prices and still-high oil prices are spurring a revival in energy-producing trusts. Distributions at two trusts, however, bear careful watching.
Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF) has lowered its first quarter output estimates for Syncrude Canada—essentially the source of all of its cash flow—to 24 million barrels from 29 million. Full-year projections, meanwhile, were trimmed to 108 million barrels from a prior 115 million.
Extremely cold weather in January and February were to blame for disrupting output at Syncrude, which like all oil sands is basically a mining operation. The impact is temporary, and there’s been no permanent effect on the capacity of facilities either in operation or on the drawing board.
The shortfall, however, will drive up operating costs and crimp cash flow in the first quarter. Coupled with recent increases in the distribution, that’s likely to drive Canadian Oil Sands’ payout ratio well north of 100 percent in the first quarter.
There’s every indication management will cover the difference, at least some of which should be covered by higher realized oil prices. But until the payout ratio comes down, there will be some risk to the current distribution.
More worrisome is the situation at Harvest Energy Trust (NYSE: HTE, TSX: HTE-U), which saw its payout ratio balloon upward to 150 percent in the fourth quarter. As expected, the primary problem was the refining operation, which was hurt by weak industrywide conditions. That was the reason Harvest trimmed its distribution last year, which in turn triggered the slide in the share price to the low 20s.
Unfortunately, last month, major US refiner Valero Energy warned that refining sector conditions didn’t improve in the first quarter of 2008. Margins continue to be squeezed by a combination of high raw commodity prices—i.e., crude oil—and a weak North American economy, which won’t absorb commensurate price increases in refined products like gasoline. Worse, Valero management intimated it didn’t expect conditions to improve much in the second quarter either.
Outside refining, Harvest’s oil and gas production operations are thriving. And with realized output prices for oil and gas in the fourth quarter just USD57.32 per barrel of oil equivalent, there’s plenty of upside this year.
Unless the refining business turns quickly, however, it’s looking more like Harvest may have to cut its distribution again this year. That outlook is in stark contrast with oil and gas trusts that don’t have refining risk.
Ultimately, the refinery should prove to be a very valuable asset. But with Harvest’s payout ratio this high, there’s no sense in sticking around to take the risk. Sell Harvest Energy Trust.
Essential Energy Services Trust (TSX: ESN-U, OTC: EEYUF) also looks like it may have to make another distribution cut. Fourth quarter funds from operations slid 60 percent as sales dropped 18 percent and cash flow margins contracted from 32 percent to just 18 percent of sales. The result was a clearly unsustainable payout ratio of 170 percent.
As expected, the culprit was the dramatic slowdown in energy patch activity in Alberta, which was made worse by the imposition of higher royalty tax rates, particularly on newer fields. Encouragingly, management pointed to improving conditions in the first quarter and cited the pending merger with Builders Energy Services Trust as a source of CAD6 million in future annual cost reductions.
Unfortunately, we’re still likely to see another bad payout number in the first quarter, which will keep up the pressure on the distribution and share price. I don’t see any threat to long-term viability or solvency here. But until the payout ratio comes down, energy services sector investors are much better off in lower-yielding but far healthier, faster-growing Trinidad Drilling (TSX: TDG, OTC: TDGCF).
On the plus side, Primary Energy Recycling (TSX: PRI-U, OTC: PYGYF) moved closer to exiting the Watch List last month, at last reaching a deal with its partner in the Harbor Coal facility. The new agreement eliminates the “shared savings” approach to revenue determination, as well as the trust’s exposure to the customer’s inventory adjustments.
That should cut down on cash flow volatility, protecting future distributions. It also brings the company back into compliance with credit agreements and eliminates exposure to increased interest rate spreads and cash sweeps, quelling remaining threats to solvency.
I want to see the currently high payout ratio (129.3 percent) come down before taking Primary off the Dividend Watch List. But with this challenge at last behind it, its yield at more than 12 percent and its shares trading at just 1.2 times book value, I’m upgrading Primary Energy Recycling to a hold.
Here’s the complete Dividend Watch List. Note that all trusts have now reported fourth quarter payout ratios, which are reviewed in How They Rate.
Acadian Timber (TSX: AND-U, ORC: ATBUF)
Advantage Energy Trust (NYSE: AAV, TSX: AVN-U)
Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF)
Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF)
Canfor Pulp (TSX: CFX-U)
Connors Brothers Income Fund (TSX: CBF-U, OTC: CBICF)
Daylight Resources Trust (TSX: DAY-U, OTC: DAYFF)
Essential Energy Services (TSX: ESN-U, OTC: EEYUF)
Fording Canadian Coal (NYSE: FDG, TSX: FDG-U)
Harvest Energy Trust (NYSE: HTE, HTE.UN)
Mullen Group Income Fund (TSX: MTL-U, OTC: MNTZF)
Newalta Income Fund (TSX: NAL-U, OTC: NALUF)
Newport Partners Income Fund (TSX: NPF-U, OTC: NWPIF)
Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)
Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)
Precision Drilling (NYSE: PDS, TSX: PD-U)
Primary Energy Recycling (TSX: PRI-U, OTC: PYGYF)
Sun Gro Horticulture (TSX: GRO-U, OTC: SGHRF)
Swiss Water Decaf Coffee Fund (TSX: SWS-U, OTC: SWSSF)
TimberWest Forest Corp (TSX: TWF-U, OTC: TWTUF)
Tree Island Wire Income Fund (TSX: TIL-U, OTC: TWIRF)
True Energy Trust (TSX: TUI-U, OTC: TUIJF)
Westshore Terminals (TSX: WTE-U, OTC: WTSHF)
Resources Equal Resilience
Statistics Canada reported March 31 that Canada’s economy expanded by a greater-than-expected 0.6 percent during January, a happy result in the wake of December’s 0.7 percent contraction.
The solid GDP number reflects a forecast made here that Canada wouldn’t suffer as much as it has during past US downturns because of the increasing global importance of its ample resources. It’s the biggest one-month increase for the Canadian economy since April 2005 and basically reversed December’s contraction.
It’s an important indicator amid what seems a sea of negativity, but analysts still expect first quarter numbers to show an overall shrinkage. The wheels won’t come off because fundamentals, employment chief among them, should provide enough support to avert a recession.
Given the modest expectation for the economy over the first half of 2008, economists expect the Bank of Canada to cut its key short-term lending rate by 50 basis points on April 22.
Manufacturing, which has languished while resource-based sectors have flourished during this commodity bull, grew by 1.7 percent. Also advancing in January were the financial sector, retail trade, oil and gas, accommodation, food services and agriculture, while construction crept up 0.1 percent. Durable goods manufacturing rose 2.6 percent. However, utilities, mining and forestry declined.
Sixteen of the 21 sectors Statistics Canada follows showed gains for the month.
Bay Street Beat
CML Healthcare (TSX: CLC-U, OTC: CMHIF) earned the biggest ratings increase in the latest Bloomberg survey of Bay Street, adding 0.343 points to 4.143. Four analysts have it as a buy, three a hold.
CML took in more revenue based on increased lab service and other funding from the Ontario Ministry of Health and Long-Term Care, organic growth in nonpublicly supported service and the integration of acquisitions. No doubt CML enjoys the benefits—stability and predictability, mainly—flowing from Canada’s national healthcare system. Demand is relatively inelastic for licensed medical imaging and diagnostic testing facilities.
Long-term debt was up at year’s end compared to Dec. 31, 2006, and working capital contracted a bit. But CML just completed a financing arrangement that includes a CAD100 million acquisition line, and it plans to use it to aggressively consolidate the Canadian medical imaging market.
For 2007, revenue increased 8.3 percent in 2007 to CAD312.8 million. Net earnings increased 8.4 percent to $100.2 million. Cash from operating activities increased 7 percent to CAD105.8 million. The fund generated distributable cash of CAD102.3 million and declared distributions totaling CAD88.5 million for a payout ratio of 86.5 percent. It boosted the distribution paid to unitholders by 3.5 percent in May 2007.
Bonavista Energy Trust’s (TSX: BNP-U, OTC: BNPUF) average rating was up 0.227 to a 4.500, with nine buy calls and three holds from analysts.
Crescent Point Energy Trust (TSX: CPG-U, OTC: CPGCF), Penn West Energy Trust (NYSE: PWE, TSX: PWT-U) and Vermilion Energy Trust (TSX: VET-U, OTC: VETMF) also surged.
Nontrust recommendation First Quantum (UK: FQM, TSX: FM) is a new favorite, earning a 0.222 point boost to 4.222; 11 Bay Streeters say buy, seven say hold.
Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) lost 0.200 points but still chalked up a 4.200 average. Seven analysts list it as a buy, two a hold and one says sell.
Progress Energy Trust (TSX: PGX-U, OTC: PGXFF) also lost some luster, dropping 0.154 to 3.923.
T-Minus 11 Days
April 15 is right around the corner. Here are a few key trust-specific points to guide you through the tax season.
- The Canadian government assesses a flat 15 percent tax on trust distributions to US investors who hold trusts. The tax is withheld at the clearing corporation level, not at the brokerage or trust level. This payment can be recovered when you file your US taxes with Form 1116 of your 1040, essentially filing a foreign tax credit.
- Most Canadian royalty and income trusts’ distributions should be treated as qualified dividends. See the table below for links to statements issued by trusts on their respective US tax status. Note that not all trusts issue such statements.
- As the IRS has stated, you shouldn’t blindly accept the results on your 1099. Some brokerages will blow off the tax accounting for trusts. We advise using the statements by the trusts themselves as backup for filing them as qualified and taxable to the maximum 15 percent rate.
| Oil and Gas | Tax Status Statements | |
| Advantage Energy | 2006 | 2007 |
| ARC Energy Trust | 2006 | 2007 |
| Avenir Diversified | 2006 | 2007 |
| Baytex Energy Trust | 2006 | 2007 |
| Bonavista Energy Trust | 2006 | 2007 |
| Bonterra Energy | 2006 | 2007 |
| Canadian Oil Sands | 2006 | 2007 |
| Canetic Resources | 2005 | 2006 |
| Crescent Point Energy | 2006 | 2007 |
| Daylight Resources | 2005 | 2007 |
| Enerplus Resources | 2006 | 2007 |
| Enterra Energy Trust | 2006 | 2007 |
| Fairborne Energy Trust | 2005 | 2006 |
| Focus Energy Trust | 2005 | 2006 |
| Freehold Royalty Trust | PFIC | PFIC |
| Harvest Energy Trust | 2006 | 2007 |
| NAL Oil & Gas Trust | 2006 | 2007 |
| Paramount Energy Trust | 2006 | 2007 |
| Pengrowth Energy Trust | 2006 | 2007 |
| Penn West Energy Trust | 2006 | 2007 |
| Peyto Energy Trust | 2006 | 2007 |
| PrimeWest Energy Trust | 2006 | 2007 |
| Progress Energy Trust | 2006 | 2007 |
| Provident Energy Trust | 2006 | 2007 |
| Trilogy Energy Trust | 2006 | 2007 |
| True Energy Trust | 2006 | 2007 |
| Vault Energy | 2006 | 2007 |
| Vermilion Energy Trust | 2006 | 2007 |
| Zargon Energy Trust | 2006 | 2007 |
| Electric Power | Tax Status Statements | |
| Algonquin Power Income Fund | N/A | N/A |
| Atlantic Power Corp | 2006 | 2007 |
| Boralex Power | 2006 | 2007 |
| Great Lakes Hydro Income Fund | 2006 | N/A |
| Innergex Power Income Fund | N/A | N/A |
| Macquarie Power & Infrastructure | N/A | N/A |
| Northland Power Income Fund | N/A | N/A |
| Primary Energy Recycling | 2006 | 2007 |
| Gas/Propane | Tax Status Statements | |
| AltaGas Income Trust | 2006 | 2007 |
| Energy Savings Income Fund | 2006 | 2007 |
| Essential Energy Services | 2006 | 2007 |
| Eveready Income Fund | 2006 | 2007 |
| Keyera Facilities | 2006 | 2007 |
| Peak Energy Services | 2006 | 2007 |
| Precision Drilling | 2006 | 2007 |
| Spectra Energy Income Fund | 2006 | 2007 |
| Superior Plus | 2006 | 2007 |
| Trinidad Drilling Energy Services | 2006 | 2007 |
| Wellco Energy Services Trust | 2006 | N/A |
| Business Trusts | Tax Status Statements | |
| A&W Revenue Royalties | N/A | N/A |
| Aeroplan Income Fund | N/A | N/A |
| Ag Growth Income Fund | N/A | N/A |
| Arctic Glacier Income Fund | 2006 | 2007 |
| Bell Aliant | 2006 | 2007 |
| BFI Canada Income Fund | N/A | 2007 |
| Big Rock Brewery | N/A | N/A |
| Boston Pizza Royalties | N/A | N/A |
| Brookfield Real Estate Services | N/A | N/A |
| Chemtrade Logistics | N/A | N/A |
| CI Financial | N/A | N/A |
| Cineplex Galaxy Income Fund | N/A | N/A |
| Cinram International | 2006 | 2007 |
| Clearwater Seafoods Income Fund | N/A | N/A |
| CML Healthcare | N/A | N/A |
| Colabor Income Fund | N/A | N/A |
| Connors Bros Income Fund | N/A | N/A |
| Consumers’ Waterheater | N/A | N/A |
| Contrans Income Fund | 2006 | 2007 |
| Davis + Henderson Income Fund | N/A | N/A |
| FP Newspapers Income Fund | N/A | N/A |
| Futuremed Healthcare Income Fund | N/A | N/A |
| GMP Capital Trust | N/A | N/A |
| Home Equity Income Trust | N/A | N/A |
| IBI Income Fund | N/A | N/A |
| Jazz Air Income Fund | 2006 | 2007 |
| Keystone North America | N/A | N/A |
| Medical Facilities Corp | ||
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