Desjardins Securities MAY 2012 NEWSLETTER

1. F CUS Volume 23, N°5, may 2012
EDITORIAL Ed Sollbach, CFA
Portfolio Strategy and
Quantitative Research Analyst
retail strategy
Message from the
General Manager “ Our models suggest that relative valuations continue to favour stocks vs the
competing asset classes of government or corporate bonds.“
Bruno Desmarais
Vice-President and General Manager
Full Service Brokerage
The global financial markets are characterized us to believe it will likely raise rates modestly
As investors, we are continually bombarded by sharp regional differences—the US is in mid-2013, about a year ahead of the
with all sorts of information: debt crisis in recovering steadily but slowly from the worst Fed. We believe the Canadian dollar can
the euro zone, Barack Obama’s difficulties
recession in 70 years, Europe continues to continue to appreciate toward US$1.05 as
with the U.S. Congress or, closer to home,
fluctuations in the price of gold and oil. struggle with sovereign debt problems in Canadian short rates are now 100bps higher
All this data can influence our investment the PIIGS and China is slowing after two (1% vs 0% in the US), with this spread likely
decisions, hence the importance of years of tightening. increasing in 2013 as Canada raises rates
knowing your goals and having a plan. ahead of the Fed.
In addition to clearly defining your United States
situation, a well-structured financial plan In late April, the US Federal Reserve (Fed) Globally
gives a direction to your decisions. Your
revised upward its forecasts for 2012, Global GDP growth is expected to slow
Investment Advisor can help you in this
regard, because he or she can understand increasing its GDP growth forecast to to a near-average 3.5% in 2012, from
your situation and support you in achieving 2.4 – 2.9% (from 2.2 – 2.7%) and signifi- 4% in 2011, as Europe is dragged into
your financial goals. Your Advisor’s cantly lowering its unemployment forecast a recession because of sovereign debt
experience, knowledge and judgment to 7.9 – 8% (from 8.2 – 8.5%); it also problems in peripheral countries. Recent
are just some of the elements that make
increased its inflation forecast to 1.9 – 2% worries centre on Spain and its banking
him or her a financial partner of choice,
provided, however, that you enable your (from 1.4 – 1.8%). However, the Fed is system—the downward spiral due to severe
Advisor to correctly assess your situation. stubbornly sticking to its belief that rates austerity, job losses and a contracting
It is therefore essential that there be open will remain at zero until late 2014. economy has resulted in a depression-like
lines of communication between you and
record unemployment of 24.4%. In China,
your Advisor.
Canada which has been tightening its monetary
I encourage you to contact your Following a few weak months, Canada had a policy to combat inflation, growth slowed
Investment Advisor for any change that
blockbuster jobs report in March with 82,000 to 8.1% in 1Q12 (from a high of 11.9%
may have an impact on your situation.
The more transparent you are in your jobs created—proportionately seven times in 2010); however, we note that spending
discussions with your Advisor, the better more than in the US—while unemployment and lending data in China has been more
your relationship will be with him or her, dropped to 7.2% (from 7.4%). The Bank positive recently. Lastly, for the first time in
which could be very beneficial for you.
of Canada raised its forecast for Canadian over a year, the International Monetary Fund
“The only route that offers any hope GDP growth to 2.4% in 2012, and expects raised its global growth forecast in view of
of a better future for all humanity is the Canadian economy to return to full stronger US growth, and now expects global
that of cooperation and partnership.”
capacity by mid-2013. However, the Bank growth of 4.1% in 2013.
— Kofi Annan of Canada warned of a “withdrawal” of
monetary stimulus—a statement that leads
continued on page 2
Please see the last page of this document for company specific disclosures.

2. EDITORIAL (continued) Recommendations
Algonquin Power & Utilities Corp
7
Risks Currently, both the S&P 500 and the TSX
The main risks to our positive outlook for yield more than government bonds (currently 6
PRICE ($)
North America are the elections on May 6 in around 2%), a situation not seen in 54 years.
5
Greece and France, which could jeopardize The TSX yields almost 3%, and its 100bps
4
the recent political consensus of more premium over Canadian government bonds
Volume (M)
15
austerity in Europe. Longer term, with rising is the highest since World War II. Moreover, 10
dividends are increasing rapidly while the 5
unemployment in the European peripheral
0
countries and uneven distribution of the return on government bonds is, of course, Apr-11 Jul-11 Oct-11 Jan-12 Apr-12
benefits of a common currency, we are fixed. TSX dividends are up 8.9% over the
RATING TOP PICK–AVERAGE RISK
concerned that politics will tear apart the last year and have tripled over the last Target $7.75
fragile European consensus. 10 years. Symbol AQN
Sector Utility & Power
Recent price $6.34
Oil prices have climbed to US$110/bbl this We continue to believe that investors are Total potential return 26.7%
52-week range $4.90–6.59
year. Political unrest in Syria or growing best served by holding equities. Normally at
Market cap $930m
tensions concerning Iran’s nuclear program this time of the year, a good switch is to sell Year-end Dec-31
could push oil prices higher, hurting the US low-yielding stocks and buy high-yielding EBITDA 2012E $140.8m
2013E $201.1m
consumer. bonds. However, this May, for the first CFPS 2012E $0.77
time since 1958, stocks are yielding more 2013E $0.90
Adjusted debt/total capital 31.6%
Stocks than bonds (+22bps); stocks yielded at least
Dividend yield* 4.4%
The S&P 500 hit our original 2012 price 140bps less than bonds the previous two * Most recently announced dividend (annualized)
Sources: Desjardins Securities, company reports, Bloomberg
target of 1420 in early April and then had times when stocks corrected in May.
a much needed correction after rallying
for 105 days—the longest run since 2007. Our portfolio strategy has not changed
Similar to the seven previous corrections, this year, as we continue to recommend a Canadian National
the US dollar and bonds rose, while investors core portfolio consisting of high-yielding Railway Company
90
sold stocks and commodities. A fall in bond REITs, utilities, telecoms and pipelines, with
a riskier component comprised of growing
PRICE ($)
yields and commodity prices is an important 80
reset for longer term economic recovery as companies (preferably with yield protection) 70
falling bond yields mean lower mortgage in the financial, technology, industrial, 60
rates for US homebuyers. consumer discretionary, transportation, 6
Volume (M)
4
gold, oil and oil services sectors. n 2
Our models suggest that relative valuations 0
Apr-11 Jul-11 Oct-11 Jan-12 Apr-12
continue to favour stocks over the
competing asset classes of government or RATING BUY–AVERAGE RISK
Target $88.00
corporate bonds. As yields are at historically
Symbol CNR
low levels and below inflation, the price of Recent price $84.39
bonds in Canada and the US continues to be Total potential return 6%
52-week range 63.72–81.79
high. With 2.7% inflation, bond investors Market cap 37,216m
are losing 80bps per annum to inflation. Year-end Dec-31
Revenue 2011A $9,028m
2012E $9,796m
2013E $10,477m
Adjusted EPS 2011A $4.59
2012E $5.49
2013E $6.19
Last quarter ROE 28.2%
Dividend yield 1.8%
Sources: Desjardins Securities, company reports, Bloomberg

3. Jeremy Rosenfield, CFA, Analyst
n Stable earnings and cash flow from a diversified portfolio We expect strong near-term growth for AQN over the next five
of ~424MW of renewable and thermal power capacity in years based on utility acquisitions in progress, including expansions
Canada and the US, as well as regulated water, gas and into the electricity and gas distribution sectors, as well as upcoming
electricity distribution utilities in the US investments totalling ~$1b in contracted power projects in Ontario,
Québec and the US.
n Exceptional near-term growth from investments in
~$1b of power projects under construction and ~$550m Our Top Pick recommendation for AQN is primarily based on its:
of utility acquisitions in progress
• Very strong near-term growth outlook, which is expected to
generate five-year EBITDA and cash flow growth in excess of
n Attractive relative valuation and ~5% dividend yield
~20% per year;
Algonquin Power & Utilities Corp. (AQN) is a diversified power and • Inexpensive relative valuation of only ~5x estimated 2012
utility infrastructure company, with ownership interests in a portfolio EV/EBITDA and P/CF (vs ~9x average for its peers);
of ~424MW of net installed hydro, wind and thermal capacity, as
• Healthy ~5% dividend yield, ~40% forward cash payout ratio
well as regulated water, gas and electricity distribution utilities.
and low ~33% debt-to-total capitalization ratio.
The company’s power portfolio is supported by long-term power The risks to our recommendation include fluctuations in the
contracts for ~70% of installed capacity, while its utility operations foreign exchange rate and commodity price risk associated with
are underpinned by healthy regulated equity returns in the the company’s current operations, as well as political, regulatory,
8–10% range. financing and execution risks associated with its growth projects.
Benoit Poirier, CFA, Analyst
n CN reported solid 1Q results, driven by a record • Growth in frac sand shipments;
operating ratio • Opportunities in Mexico with Kansas City Southern;
• Plan Nord;
n Several growth opportunities on the horizon should • The Contrecoeur, Québec, intermodal expansion.
boost future earnings
Trading at 15.4x our estimated 2012 EPS, in line with its historical
n CN’s premium valuation is justified average of 15.6x (last-12-month basis), CN shares are still worth a
look despite their premium valuation vs US peers, which are trading
CN recently reported solid 1Q12 results that handily beat our at an average (ex KCS) of 12.9x consensus 2012 EPS. In our view,
expectations on the back of a record operating ratio (operating this premium valuation is justified given CN’s limited exposure
expenses/revenues), of 66.2%, the lowest among North American (~2% of revenue) to further expected declines in thermal coal
railroads. Following these results, the company raised its 2012 shipments, which are severely impacting US railroads.
outlook, calling for EPS growth of “a full 10%” (previously “up to
10%”), which we view as conservative. Moreover, we prefer CN over CP in Canada (CP is trading at 17.1x
our estimated 2012 EPS) as we believe significant profitability
We expect CN to continue to increase its profitability as it generates improvement has been largely factored into CP’s current price.
additional volumes at low incremental cost and sustains above-
inflation pricing gains. CN has several growth avenues: Our $88 target for CN is based on the average of three valuation
• Markedly higher potash shipments through Canpotex; methods.
• Stronger export coal and intermodal shipments out
of Prince Rupert, BC;
Sources: Desjardins Securities, company reports, Bloomberg
Volume 23, N°5, may 2012 2-3 3

4. Desjardins Securities Top 25
COMPANY TICKER RATING & RISK TARGET PRICE ($) MARKET CAP (M$)
Toronto-Dominion Bank (The) TD Top Pick–Average 95.00 75,150
Bank of Nova Scotia (The) BNS Top Pick–Average 65.00 61,953
Brookfield Asset Management Inc. BAM Top Pick–Average US$40.00 US$20,515
TransForce Inc. TFI Top Pick–Average 22.00 1,721
Algonquin Power & Utilities Corp. AQN Top Pick–Average 7.75 930
Whitecap Resources Inc. WCP Top Pick–Average 15.00 797
Royal Bank of Canada RY Buy–Average 66.50 82,241
Canadian National Railway Company CNR Buy–Average 88.00 37,216
Potash Corporation of Saskatchewan Inc. POT Buy–Average 58.00 35,946
Enbridge Inc. ENB Buy–Average 42.00 31,685
BCE Inc. BCE Buy–Average 43.20 30,969
Manulife Financial Corporation MFC Buy–Average 18.00 24,567
Teck Resources Limited TCK.B Buy–Average 64.40 21,615
Agrium Inc. AGU Buy–Average 106.30 13,756
Yamana Gold Inc. AUY Buy–Above-average US$22.25 US$11,033
Tim Hortons Inc. THI Buy–Average 58.00 8,932
Penn West Petroleum Ltd. PWT Buy–Average 30.50 8,068
Bombardier Inc. BBD.B Buy–Above-average 7.00 7,175
Baytex Energy Corp. BTE Buy–Average 68.00 6,191
Metro Inc. MRU Buy–Average 59.00 5,341
Finning International Inc. FTT Buy–Average 34.00 4,805
Vermilion Energy Inc. VET Buy–Average 59.00 4,598
Dollarama Inc. DOL Buy–Average 58.00 4,040
Inmet Mining Corporation IMN Buy–Average 80.10 3,815
Cogeco Cable Inc. CCA Buy–Above-average 55.00 2,361
Source: Desjardins Securities Portfolio Advisory Group in collaboration with Research analysts.
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Volume 23, N°5, may 2012 4