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Daily Letter
Analysts' Breaking News Wednesday, October 13, 1999
RECOMMENDATIONS
1. ACCUMULATE Finning International (FTT : TSE : $14.20 : Issued 79.6M)
Yue
* Reported third quarter fiscal 1999 EPS of $0.20 versus $0.05 a year
ago, in-line with expectations
* Cost reductions accounted for the improvement in earnings to date.
Higher commodity prices should further improve earnings going forward
2. BUY Patheon Inc. (PTI : TSE : $9.90 : Issued 43.2M) Yue
* Finalized negotiations with the Hoechst Marion Roussel Group for the
purchase of two European manufacturing facilities in Swindon, England
and Bourgoin, France. Closing is scheduled in November 1999 and these
facilities should add $100 million in annual sales.
* Applied to the Ontario Superior Court of Justice seeking a
dissolution of 48% owned Global Pharm and a court ordered sale of the
shares or assets of Global Pharm. Patheon intends to be a bidder for
all of the Global Pharm shares that it does not already own
3. BUY SCS Solars Computing Systems Inc. (SCS : VSE : $0.78 : Issued
35.8M) Wong
* Internet chatroom rumours wreak havoc on SCS Solars
Finning International (FTT : TSE : $14.20) Tony Yue, Ph.D. (604)
643-0195
Recommendation ACCUMULATE
Web site adress: www.finning.ca
12-month target: $17.00
52-week price range: $15.40-9.00
Shares O/S: basic 79.6M
Float: 100%
Weekly trading volume: 200,000
Market capitalization: $1,130M
Higher Earnings from Cost Reductions
Finning reported a four-fold increase in EPS for the third quarter of
fiscal 1999 to $0.20 from $0.05 a year ago, despite a 14% decline in
revenue to $503.6 million from $582.3 million. Much lower levels of
new and used equipment sales accounted for the drop in the
consolidated revenue. EPS for the first nine months were $0.48 versus
0.20 and revenue was $1,627.3 million versus $2,020.1 million. The
improvement in net earnings was largely due to a 16% reduction in SG&A
expenses and an 8% decrease in interest expense in the third quarter
as well as in the nine month period of fiscal 1999. The firming of
commodity prices has not yet impacted Finning's operating results.
The reported results are in-line with our expectations.
All Geographic market Operations returned to Profitability in the
third Quarter
Despite lower revenue, all geographic operations achieved positive net
earnings for the third quarter of fiscal 1999. Canada had net
earnings of $9.3 million or $0.12/share on revenue of $221.3 million,
compared with net earnings of $7.8 million or $0.10/share on revenue
of $259.9 million a year ago. Sales of new equipment in Canada
dropped 30% during the third quarter. The UK returned to positive net
earnings of $2.4 million or $0.03/share on revenue of $178.4 million,
from a loss of $5.4 million or $0.07/share on revenue of $186.6
million. Used equipment sales in the UK declined 37% in the third
quarter. Chile recorded higher net earnings of $3.1 million or
0.04/share on revenue of $80.7 million, compared with net earnings of
2.4 million or $0.03/share on revenue of $109.3 million. New
equipment sales to the mining industry in Chile plunged 68% in the
third quarter from a year ago. International operations generated a
profit of $1.4 million or $0.02/share on revenue of $23.3 million,
compared with a loss of $1.2 million or $0.01/share on revenue of
26.4 million. Foreign exchange gains were a positive factor of
Finning's international operations improved results.
ACCUMULATE Finning shares; better days are Ahead
Management expects that Finning will continue to achieve further
reductions in SG&A as well as interest expenses. The company's order
book also improved from the second quarter of fiscal 1999 level and it
has received orders for 18 360-ton Caterpillars, 797 trucks for use in
the oil sands in northern Alberta, and a $24 million mining equipment
order in Chile for delivery in the fourth quarter of fiscal 1999. A
higher level of drilling and pipeline construction activities in
Alberta and the positive impact of a higher copper price on the
Chilean economy should enhance Finning's earnings outlook going
forward. The Channel Rail Link project in the UK should also help.
Although Finning shares are not exactly cheap, they offer a
comparatively "liquid" play in commodity prices. With a lower cost
structure and steadily improving balance sheet, investors can
ACCUMULATE Finning shares. We would be a more aggressive buyer if
Finning shares drop below $14.00. We have a 12-month target price of
17.00. Our EPS estimates are $0.65 for fiscal 1999 and $0.85 for
fiscal 2000 at this time.
We should learn more about Finning's strategic and operating
initiatives on October 22 when Mr. Jim Shepard, Chairman and CEO, and
Mr. Doug Whitehead, President and COO, make their presentation to
research analysts in Toronto, ON.
Patheon Inc. (PTI : TSE : $9.90) Tony Yue, Ph.D. (604) 643-0195
Recommendation: BUY
Web site address: www.patheon.com
12-month target price: $15.00-12.00
52-week price range: $11.95-1.95
Shares O/S: basic 43.2M
Float: 80%
Weekly trading volume: 250,000
Market capitalization: $427.7M
Finalizing Acquisitions
Patheon recently announced that it finalized negotiations with the
Hoechst Marion Roussel Group to acquire two European manufacturing
facilities located in Swindon, England and Bourgion, France. Closing
is scheduled in November 1999. Terms of the transaction include a
long-term manufacturing contract for virtually all of the current
production at each site and the two facilities should add about $100
million in annual sales.
The Swindon facility is a sterile site approved by regulatory
authorities in both the UK and the US. It currently manufactures 55
products for sale in over 80 countries in Europe, North America, and
around the world. The 262,000 square foot plant employs about 400
people and operates at roughly 45% capacity.
The 271,000 square foot Bourgion facility is a solid dosage
manufacturing plant currently producing 37 products for sale in over
70 markets. It has about 220 employees and operates at a 65% capacity
range.
Seeking A Dissolution of Global Pharm
Patheon recently applied to the Ontario Superior Court of Justice
seeking a dissolution of the 48% owned Global Pharm Inc. and a court
ordered sale of the shares or assets of Global Pharm. The action was
due to unresolved, fundamental issues relating to the strategic
direction of Global Pharm and a slow down in its growth. Patheon
intends to be a bidder for all of the shares that it does not own.
Management believes that the sale of Global Pharm through a public
auction process will be fair and equitable to all potential buyers.
The table below indicates that Global Pharm has experienced a
considerable slow down in fiscal 1999. Note that Patheon consolidate
the results of Global Pharm on a proportionate basis. The fiscal 1995
results are for five months effective June 1, 1995.
Still a BUY
While it may take some time to resolve the Global Pharm dispute, we
continue to like the Patheon story and its promising prospects of
strong growth. We think Global Pharm has the potential to provide
Patheon with more meaningful growth than the results shown in the
table below. Growth-oriented investors can still BUY Patheon shares
at the current level.
Contributions from Global Pharm (table not available in email version)
SCS Solars Computing Systems Inc. (SCS : VSE : $0.78) David Wong (604)
643-7739
Recommendation: BUY
12-month target: $2.25
52-week price range: $1.80-0.75
Shares O/S: basic 35.8M
fully diluted 44.3M
Working capital: $2.8M
Long-term debt: Nil
Weekly trading volume: 135,722
Market capitalization: $34.6M (f.d.)
There have been some negative rumors amongst Internet chatroom users,
that insiders are selling their large holdings in SCS Solars or that
certain members of the board of directors have received free stock to
come on board. Management assured us that these accusations are false.
Except for the private placement of $2.3 million back on June 8, any
insider movement of SCS stock has been the transfer of shares into
family trust accounts.
These rumors have caused the stock to drop down to the $0.75 range,
making it an attractive opportunity to buy. We are maintaining our
12-month target price of $2.25. SCS Solars is a BUY for the
aggressive investor. |
