Student Investment Advisory Services | Simon Fraser University · 2017-08-16 · 7 Student...
Transcript of Student Investment Advisory Services | Simon Fraser University · 2017-08-16 · 7 Student...
1 Student Investment Advisory Services | Simon Fraser University
2 Student Investment Advisory Services | Simon Fraser University
3 Student Investment Advisory Services | Simon Fraser University
4 Student Investment Advisory Services | Simon Fraser University
Current Month Asset Mix
Name % Δ $ Δ Name % Δ $ Δ 30-Jun-10 IPS Range
BARRICK GOLD CORP 23.99 33,660.00 INMET MINING CORP -28.57 -29,505.00 35.64% 30 - 40%
BIOVAIL CORP 20.72 24,640.00 TECK RESOURCES LTD -28.86 -57,465.00 35.90% 30 - 40%
TELUS CORP 6.27 4,384.50 RESEARCH IN MOTION LTD -30.46 -38,964.00 26.18% 20 - 40%
MOLSON COORS CDA INC 6.08 4,090.60 FIRST QUANTUM MINERALS LTD -35.92 -45,030.00 2.29% 0 - 10%
REITMANS (CANADA) LTD 4.69 3,528.00 CANADIAN NATURAL RESOURCES LTD-53.00 -9,696.50
Asset Selection Interaction Value
Weight Return W*R Weight Return W*R Δ Weight Δ Return Allocation Decision Added
Canadian 35.00% -5.51% -1.93% 37.69% -8.22% -3.10% 2.69% -2.71% 0.07% -1.27% 0.08% -1.11%
Global 35.00% -8.45% -2.96% 34.89% -3.03% -1.06% -0.11% 5.42% 0.29% 1.72% -0.16% 1.85%
Fixed Income 28.00% 1.07% 0.30% 24.69% 1.06% 0.26% -3.31% -0.01% -0.04% 0.00% 0.00% -0.04%
Cash & Equivalents 2.00% 0.12% 0.00% 2.73% -1.05% -0.03% 0.73% -1.17% 0.00% -0.02% -0.01% -0.03%
Total 100.00% -0.05% -4.58% 100.00% -0.04% -3.92% 0.00% 0.01% 0.32% 0.43% -0.09% 0.66%
Attribution by Asset Class Attribution Analysis by Effects
(Rp-Rbm)x(Wp-Wbm)
Asset Class Allocation
Investment Objective
Compliance Officer
Selection Decision Interaction
Quarterly Report for the period ended June 30, 2010
Relative Attribution of Portfolio
Benchmark Portfolio Attribution
Due to Due to
Top gainers and losers
Gainers Losers
(Rp-Rbm)xWbm
0.43% -0.09%
Due to
Benchmark
(Wp-Wbm)xRbm
Attribution Review
The primary objective of this fund is to provide long-term capital growth. To achieve this
objective, the fund may focus its assets in specific industry sectors and asset classes based on
the analysis of business cycles, industry sectors and market outlook.
The SIAS Fund had a net value added 0.66% compared to the benchmark in 2010Q2. All asset
classes are in compliance with the IPS. The return data stated in this report include dividend
and interest.
Genica Gao
Genica Gao
-4.58% 0.32%
Portfolio Attribution
36%
36%
26%
2%
Canadian Global Fixed Income Cash & Equivalents
Asset Allocation 0.07% 0.29% -0.04% 0.00%
Selection Decision -1.27% 1.72% 0.00% -0.02%
Interaction 0.08% -0.16% 0.00% -0.01%
Value Added -1.11% 1.85% -0.04% -0.03%
-1.50%-1.00%-0.50%0.00%0.50%1.00%1.50%2.00%2.50%
%
Segal Graduate School of Business at Simon Fraser University
500 Granville Street. Vancouver, British Columbia. V6C 1W6
www.sfu.ca/segalschool
5 Student Investment Advisory Services | Simon Fraser University
Asset Selection Interaction Value
Weight Return W*R Weight Return W*R Δ Weight Δ Return Allocation Decision Added
Financials 10.90% -9.81% -1.07% 10.59% -11.88% -1.26% -0.31% -2.07% 0.03% -0.23% 0.01% -0.19%
Health Care 0.17% 11.27% 0.02% 1.22% 21.30% 0.26% 1.05% 10.03% 0.12% 0.02% 0.10% 0.24%
Utilities 0.58% -5.31% -0.03% 0.91% 1.55% 0.01% 0.33% 6.85% -0.02% 0.04% 0.02% 0.04%
Consumer Discr 1.58% 1.57% 0.02% 1.79% 4.44% 0.08% 0.21% 2.87% 0.00% 0.05% 0.01% 0.05%
Consumer Staples 0.90% -9.08% -0.08% 2.32% 2.66% 0.06% 1.42% 11.74% -0.13% 0.11% 0.17% 0.14%
Energy 9.22% -4.86% -0.45% 10.31% -3.74% -0.39% 1.09% 1.12% -0.05% 0.10% 0.01% 0.06%
Information Tech 1.17% -24.96% -0.29% 1.25% -30.46% -0.38% 0.07% -5.50% -0.02% -0.06% 0.00% -0.09%
Materials 6.97% 0.79% 0.06% 7.53% -19.68% -1.48% 0.56% -20.47% 0.00% -1.43% -0.11% -1.54%
Telecomm Svcs 1.52% 3.84% 0.06% 1.77% 5.03% 0.09% 0.25% 1.19% 0.01% 0.02% 0.00% 0.03%
Industrials 1.99% -6.20% -0.12% 0.00% 0.00% 0.00% -1.98% 6.20% 0.12% 0.12% -0.12% 0.12%
Total 35.00% -5.51% -1.89% 37.69% -8.22% -3.00% 2.69% -2.71% 0.07% -1.27% 0.08% -1.11%
`
Attribution by Asset Class Attribution Analysis by Effects
(Rp-Rbm)x(Wp-Wbm)
Asset Class Allocation
(Wp-Wbm)xRbm
0.07%-1.89%
PortfolioBenchmark
Due to
Quaterly Report for the period ended June 30, 2010
Relative Attribution of Canadian Equity
-1.27%
Benchmark
0.08%
Due to
Selection Decision
(Rp-Rbm)xWbm
Attribution
Due to
Interaction
Portfolio Attribution
-0.19%
0.24%0.04% 0.05% 0.14% 0.06%
-0.09%
-1.54%
0.03% 0.12%
Canadian Equity Value Added
Value Added
Market Selection Interaction Value
Weight Return W*R Weight Return W*R Δ Weight Δ Return Allocation Decision Added
Asia Pacific 6.54% -12.18% -0.80% 4.17% -10.47% -0.44% -2.37% 1.71% 0.29% 0.11% -0.04% 0.36%
Emerging 3.29% -7.29% -0.24% 3.67% -12.25% -0.45% 0.38% -4.96% -0.03% -0.16% -0.02% -0.21%
North America 15.43% -11.87% -1.83% 22.47% -6.47% -1.45% 7.04% 5.41% -0.83% 0.83% 0.38% 0.38%
Europe 9.74% -17.18% -1.67% 4.76% -7.48% -0.36% -4.99% 9.70% 0.86% 0.94% -0.48% 1.32%
Total 35.00% -4.53% -4.54% 35.06% -2.69% -2.69% 0.06% 1.84% * 0.29% 1.73% -0.17% 1.85%
The difference between the total Δ Return and the total Value Added
is because our attribution analysis is based on the static portfolio weight
Attribution by Regions Attribution Analysis by Effects
(Rp-Rbm)x(Wp-Wbm)
Segal Graduate School of Business at Simon Fraser University
500 Granville Street. Vancouver, British Columbia. V6C 1W6
www.sfu.ca/segalschool
Due to
Benchmark
(Wp-Wbm)xRb
-4.53% 0.29%
Market Allocation
1.73% -0.17%
Relative Attribution of Global Equity
Benchmark Portfolio Attribution
Due to Due to
Selection Decision Interaction
(Rp-Rbm)xWbm
0.36%
-0.21%
0.38%
1.32%
Asia Pacific Emerging North America Europe
Global Equity Value Added
Value Added
6 Student Investment Advisory Services | Simon Fraser University
Segal Graduate School of Business at Simon Fraser University
500 Granville Street. Vancouver, British Columbia. V6C 1W6
www.sfu.ca/segalschool
7 Student Investment Advisory Services | Simon Fraser University
Risk Metrics
Risk Summary 2010:Q2 Canadian & US Equity Transaction
Company Name Ticker Sector Trans Shares Price Values MVaR Beta
Husky Energy Inc HSE CN Equity Energy PURCHASES 1200 26.94 -32543.00 0.0230 1.027
Potash Corp of Saskatchewan IncPOT CN Equity Materials PURCHASES 576 101.54 -58700.08 0.0306 1.366
Molson Coors Canada Inc TPX/B CN Equity Consumer Staples SALES -1656 45.35 74884.60 0.0159 0.666
Nexen Inc NXY CN Equity Energy SALES -2100 22.48 46993.00 0.0282 1.179
Suncor Energy Inc SU CN Equity Energy SALES -1400 34.03 47427.00 0.0115 0.480
Total 78061.52
Canadian Equity Transaction on June 23, 2010
-0.5241%
0.6046%
-7.4351%
0.7693%
Annualized Port. Volatility:
Diversification Effect:
18.0844%
0.92948
After
0.93510
72051.23
43.7808%
Portfolio Beta:
Effect
Risk Statistics
Before
44.1176%
77838.60Daily 99 % VaR:
17.9896%
Asset Allocation (After)Asset Allocation (Before)
Cons. Discret., 4.36%
Cons. Staples, 6.94%
Energy, 24.46%
Financials, 28.57%
Health Care, 4.04%
Industrials, 0.00%
Info. Tech, 3.16%
Materials, 19.76%
Telecom Services, 5.33%
Utilities, 2.68%Cons. Discret.,
4.36%
Cons. Staples, 4.83%
Energy, 23.10%
Financials, 29.35%
Health Care, 4.32%
Industrials, 0.00%
Info. Tech, 3.05%
Materials, 21.86%
Telecom Services, 5.52%
Utilities, 2.77%
8 Student Investment Advisory Services | Simon Fraser University
Risk Decomposition (After)Risk Decomposition (Before)
Cons. Discret., 4.36%
Cons. Staples, 2.46%
Energy, 29.01%
Financials, 24.25%
Health Care, 4.10%
Industrials, 0.00%
Info. Tech, 2.53%
Materials, 32.98%
Telecom Services, 2.15%
Utilities, 0.96% Cons. Discret., 4.36%
Cons. Staples, 2.59%
Energy, 26.79%
Financials, 25.99%
Health Care, 2.16%
Industrials, 0.00%
Info. Tech, 2.93%
Materials, 34.27%
Telecom Services, 2.33%
Utilities, 1.14%
Company Name Ticker Sector Trans Shares Price Values MVaR Beta
SPDR S&P 500 ETF Trust SPY US Equity ETF Buy 1660 107.86 179262.43 0.0096 0.3980
Health Care SPDR Fund XLV US Equity Health Care Buy 6500 29.04 188974.35 0.0153 0.6333
Technology SPDR Fund XLK US Equity Info. Tech. Buy 9000 21.53 193985.00 0.0237 0.9811
562221.78
Company Name Ticker Sector Trans Shares Price Values MVaR Beta
Chevron Corp CVX Us Equity Energy Sell 2700 70.47 185370.00 0.0097 0.3811
Freeport-McMoRan Copper FCX US Equity Materials Sell 800 64.93 54093.92 0.0218 0.8520
Goldman Sachs Group GS US Equity Financials Sell 400 137.56 53685.96 0.0403 1.5757
Visa Inc V US Equity Info. Tech. Sell 1800 76.77 140351.82 0.0311 1.2155
433501.70
US Equity Transaction on June 25, 2010
-0.802%
0.301%
-3.000%
-22.451%
Before
50229.23 48722.36
Diversification Effect:
Risk Statistics
Effect
Portfolio Beta:
19.9695%
25.7857%
19.8093%
19.9966%
After
Annualized Port. Volatility:
0.75107 0.75333
Daily 99 % VaR:
9 Student Investment Advisory Services | Simon Fraser University
Asset Allocation (Before) Asset Allocation (After)
Risk Decomposition (Before) Risk Decomposition (After)
Cons. Discret., 4.36%
Cons. Staples, 18.76%
Health Care, 4.50%
Industrials, 9.54%
Information Tech., 21.14%Materials,
5.44%
US ETF, 22.57%
Energy, 9.67%
Financials, 2.86%
Cons. Discret., 4.36%
Cons. Staples, 17.64%
Health Care, 13.29%
Industrials, 8.97%
Info. Tech, 22.53%
Materials, 2.56%
US ETF, 29.83%
Cons. Discret., 4.36% Cons. Staples,
9.86%
Health Care, 7.77%
Industrials, 9.74%
Info. Tech, 28.60%
Materials, 5.29%
US ETF, 36.14%
Cons. Discret., 4.36% Cons. Staples,
9.57%
Health Care, 1.60%
Industrials, 9.46%
Info.Tech., 26.30%
Materials, 10.30%
US ETF, 24.75%
Energy, 12.52%
Financials, 2.95%
10 Student Investment Advisory Services | Simon Fraser University
Canadian Equity
Global Equity
Fixed Income
Economics and Portfolio Strategy
Canadian Equity Risk Metrics Monthly Report for the period ended April 30, 2010
16.633% -1667.242%
19.702% 0.177%
48.965% -762.270%
1M Performance: 1M Performance:
Q2 Performance Q2 Performance
Total Performance: Total Performance:
93037.47 0
294210.30 0
0
10 Days 99% VaR:
99% Value at Risk V.S Actual Returns
Annualized TSX Volatility:
Tracking Error I:
Tracking Error II:
Chances of Outperform
45.933%
38.095%
-0.0052
Chances of Outperform
-1.2873
38.095%
38.095%
38.095%
48.804%
Risk Adjusted Alpha Risk Adjusted Alpha
Information Ratio:Diversification Effect:
Num of Exception from July 2009:
Num of Exception in Q2:
Annualized Port. Volatility:
Sharpe Ratio Analysis Treynor Ratio Analysis
Num of Exception in April:
Daily 99 % VaR:
Quick Statistics
Port. Returns
99% VaR
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
20
09
-07
-02
20
09
-08
-02
20
09
-09
-02
20
09
-10
-02
20
09
-11
-02
20
09
-12
-02
20
10
-01
-02
20
10
-02
-02
20
10
-03
-02
20
10
-04
-02
2.0000
1.5000
1.0000
0.5000
0.0000
0.5000
1.0000
1.5000
2.0000
2.5000
3.0000
02
/07
/09
02
/08
/09
02/0
9/0
9
02
/10
/09
02/1
1/0
9
02
/12
/09
02/0
1/1
0
02
/02
/10
02/0
3/1
0
02/0
4/1
0
Risk Adjusted Alpha
0.0100
0.0050
0.0000
0.0050
0.0100
0.0150
0.0200
02/0
7/0
9
02/0
8/0
9
02/0
9/0
9
02
/10
/09
02
/11
/09
02/1
2/0
9
02/0
1/1
0
02/0
2/1
0
02
/03
/10
02
/04
/10
Risk Adjusted Alpha
11 Student Investment Advisory Services | Simon Fraser University
Sector Risk(%) Asset(%) Strategy
Cons. Discretionary 0.815% 4.477% Market
Cons. Staples 1.422% 6.319% Market
Energy 36.465% 27.541% Over
Financials 16.512% 28.426% Market
Health Care 1.634% 3.250% Over
Industrials 0.000% 0.000% Under
Info. Tech 9.237% 3.343% Market
Materials 31.137% 19.663% Over
Telecom Services 2.172% 4.629% Market
Utilities 0.606% 2.322% Market
Total 1.0000 0.9997
Sector Per Dollar Sector Per Dollar
Info. Tech 0.07358 Energy 0.00017
Materials 0.06232 Discretionary 0.00152
Materials 0.06161 Staples 0.00365
Energy 0.05387 Staples 0.00590
Materials 0.04585 Discretionary 0.00623
604-518-1622
Objective of RiskMetrics Team
The objective of the Risk Team couple with Compliance is to add value to the SIAS fund operation, in terms of regularly
monitoring risk factors and providing risk statistics to support asset allocation and selection process. The reestablishment of the
risk team will be permanent and all the procedures are organized into user manual to facilitate the transition of management.
RiskMetrics Officer
TECK RESOURCES LTD
Activity Highlights
Value at Risk Decomposition By Sector
REITMANS CANADA LTD
Top 5 Stabilizer by MVaR
CENOVUS ENERGY INCRESEARCH IN MOTION
Top 5 Fluctuaters by MVaR
www.sfu.ca/segalschool
FIRST QUANTUM MINER
INMET MINING METRO INC
MOLSON COORS CDA INC CL B
Segal Graduate School of Business at Simon Fraser University
500 Granville Street. Vancouver, British Columbia. V6C 1W6
Ted Hsieh
Ted Hsieh
We have made some improvements for the estimation as the following:
1. All the returns are adjusted and taken the dividends into account
2. The month risk adjusted alphas (sharpe & treynor) are added into the report
TIM HORTONS INC
CANADIAN OIL SANDS TR
Discretionary1%
Consumer Staples
1%
Energy36%
Financials17%
Health Care2%
Industrials0%
Information Technology
9%
Materials31%
Telecom Services
6%
Utilities1%
12 Student Investment Advisory Services | Simon Fraser University
Canadian Equity Risk Metrics Monthly Report for the period ended May 31, 2010
18.228% 26.233%
18.783% 0.327%
41.407% -405.653%
1M Performance: 1M Performance:
Q2 Performance Q2 Performance
Total Performance: Total Performance:
-90871.19 30
-287359.93 1
1
Sharpe Ratio Analysis Treynor Ratio Analysis
Num of Exception in May:
Daily 99 % VaR:
Quick Statistics
Annualized Port. Volatility:
Risk Adjusted Alpha Risk Adjusted Alpha
Information Ratio:Diversification Effect:
Num of Exception in from April 2003:
Num of Exception in Q2:
50.000%
51.220%
55.000%
50.673%
Annualized TSX Volatility:
Tracking Error I:
Tracking Error II:
Chances of Outperform
49.776%
48.780%
-0.0002
Chances of Outperform
0.0099
10 Days 99% VaR:
99% Value at Risk V.S Actual Returns
2.0000
1.5000
1.0000
0.5000
0.0000
0.5000
1.0000
1.5000
30
/04
/03
30
/04
/04
30
/04
/05
30
/04
/06
30
/04
/07
30
/04
/08
30
/04
/09
30
/04
/10
Risk Adjusted Alpha
0.0400
0.0300
0.0200
0.0100
0.0000
0.0100
0.0200
0.0300
0.0400
30/0
4/0
3
30
/04
/04
30
/04
/05
30/0
4/0
6
30/0
4/0
7
30
/04
/08
30
/04
/09
30/0
4/1
0
Risk Adjusted Alpha
Port. Returns
99% VaR
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20
03
-04
-30
20
04
-04
-30
20
05
-04
-30
20
06
-04
-30
20
07
-04
-30
20
08
-04
-30
20
09
-04
-30
20
10
-04
-30
13 Student Investment Advisory Services | Simon Fraser University
Sector Risk(%) Asset(%) Strategy
Cons. Discretionary 1.438% 5.126% Market
Cons. Staples 2.110% 6.934% Market
Energy 29.655% 24.178% Over
Financials 27.942% 29.192% Market
Health Care 1.235% 3.312% Over
Industrials 0.000% 0.000% Under
Info. Tech 2.392% 3.271% Market
Materials 32.512% 20.114% Over
Telecom Services 1.812% 5.223% Market
Utilities 0.904% 2.650% Market
Total 1.0000 1.0000
Sector Per Dollar Sector Per Dollar
Materials 0.07361 Materials 0.00010
Materials 0.07110 Cons. Staples 0.00059
Materials 0.06169 Cons. Discretionary0.00611
Energy 0.05270 Cons. Discretionary0.00863
Energy 0.05227 Tele Services 0.00867
604-518-1622
Objective of RiskMetrics Team
The objective of the Risk Team couple with Compliance is to add value to the SIAS fund operation, in terms of regularly monitoring
risk factors and providing risk statistics to support asset allocation and selection process. The reestablishment of the risk team will
be permanent and all the procedures are organized into user manual to facilitate the transition of management.
RiskMetrics Officer
SUNCOR ENERGY INC NEW
Activity Highlights
Value at Risk Decomposition By Sector
MOLSON COORS CDA INC CL B
Top 5 Stabilizer by MVaR
AGRIUM INCFIRST QUANTUM MINERALS
Top 5 Fluctuaters by MVaR
www.sfu.ca/segalschool
TECK RESOURCES LTD CL B
INMET MINING CORP REITMANS CANADA LTD
TIM HORTONS INC
Segal Graduate School of Business at Simon Fraser University
500 Granville Street. Vancouver, British Columbia. V6C 1W6
Ted Hsieh
Ted Hsieh
We have made some improvements for the estimation as the following:
1. Back tracking the hisorical data to April 30, 2003, and the back testing results for the risk model is favuorable.
2. Sharpe, Treynor, and VaR analysis are undated corresponding to the back tracking historical data.
BCE INC
CANADIAN NAT RESOUR
Consumer Discretionary
1%Consumer
Staples
2%
Energy30%
Financials28%Health Care
1%
Information Technology
2%
Materials33%
Telecommunication Services
2%
Utilities1%
14 Student Investment Advisory Services | Simon Fraser University
Canadian Equity Risk Metrics Monthly Report for the period ended June 30, 2010
17.593% -23.362%
17.890% 0.350%
43.977% 220.257%
1M Performance: 1M Performance:
Q2 Performance Q2 Performance
Total Performance: Total Performance:
-85727.42 31
-271093.90 2
1
Sharpe Ratio Analysis Treynor Ratio Analysis
Num of Exception in June:
Daily 99 % VaR:
Quick Statistics
Annualized Port. Volatility:
0.0028Risk Adjusted Alpha
Information Ratio:Diversification Effect:
Num of Exception from April 2003:
Num of Exception in Q2:10 Days 99% VaR:
Risk Adjusted Alpha
49.206%
45.455%
49.206%
-0.0002
Chances of Outperform
50.000%
49.113%
99% Value at Risk V.S Actual Returns
Annualized TSX Volatility:
Tracking Error I:
Tracking Error II:
Chances of Outperform
49.169%
2.0000
1.5000
1.0000
0.5000
0.0000
0.5000
1.0000
1.5000
30
/04
/03
30/0
4/0
4
30/0
4/0
5
30
/04
/06
30
/04
/07
30/0
4/0
8
30/0
4/0
9
30
/04
/10
Risk Adjusted Alpha
0.0400
0.0300
0.0200
0.0100
0.0000
0.0100
0.0200
0.0300
0.0400
30
/04
/03
30
/04
/04
30/0
4/0
5
30/0
4/0
6
30
/04
/07
30
/04
/08
30
/04
/09
30/0
4/1
0
Risk Adjusted Alpha
Port. Returns
99% VaR
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20
03
-04
-30
20
04
-04
-30
20
05
-04
-30
20
06
-04
-30
20
07
-04
-30
20
08
-04
-30
20
09
-04
-30
20
10
-04
-30
15 Student Investment Advisory Services | Simon Fraser University
Sector Risk(%) Asset(%) Strategy
Cons. Discretionary 1.743% 5.332% Market
Cons. Staples 2.383% 4.988% Market
Energy 26.287% 23.000% Over
Financials 24.459% 29.305% Market
Health Care 4.211% 4.624% Over
Industrials 0.000% 0.000% Under
Info. Tech 2.679% 2.865% Market
Materials 34.872% 21.457% Over
Telecom Services 2.414% 5.574% Market
Utilities 0.951% 2.855% Market
Total 1.0000 1.0000
Sector Per Dollar Sector Per Dollar
TECK RESOURCES LTD Materials 0.05798 Materials 0.00487
FIRST QUANTUM MINERALS Materials 0.05088 Cons. Discre. 0.00562
INMET MINING CORP Materials 0.04990 Cons. Discre. 0.00750
SUNCOR ENERGY INC NEW Energy 0.03875 Utilities 0.00803
POTASH CORP OF SASKA Materials 0.03652 Energy 0.00866
www.sfu.ca/segalschool
REITMANS CANADA LTD
EMERA INC
Segal Graduate School of Business at Simon Fraser University
500 Granville Street. Vancouver, British Columbia. V6C 1W6
Ted Hsieh
Ted Hsieh
604-518-1622
Top 5 Fluctuaters by MVaR Top 5 Stabilizer by MVaR
AGRIUM INC
The objective of the Risk Team couple with Compliance is to add value to the SIAS fund operation, in terms of regularly monitoring
risk factors and providing risk statistics to support asset allocation and selection process. The reestablishment of the risk team will
be permanent and all the procedures are organized into user manual to facilitate the transition of management.
TIM HORTONS INC
TRANSCANADA CORP
Value at Risk Decomposition By Sector
Objective of RiskMetrics Team
RiskMetrics Officer
Consumer Discretionary
2%
Consumer Staples
2%
Energy26%
Financials25%
Health Care4%
Information Technology
3%
Materials35%
Telecommunication Services
2%
Utilities1%
16 Student Investment Advisory Services | Simon Fraser University
Global Equity
Canadian Equity
Fixed Income
Economics and Portfolio Strategy
U.S. Equity Risk Metrics Monthly Report for the period ended April 30, 2010
24.251% -271.84%
24.182% 0.20%
33.414% -529.51%
1M Performance: 1M Performance:
Q2 Performance Q2 Performance
Total Performance: Total Performance:
-82437.54 0
-260690.40 0
0
10 Days 99% VaR:
Quick Statistics
Annualized Port. Volatility:
Sharpe Ratio Analysis Treynor Ratio Analysis
Num of Exception from in April:
99% Value at Risk V.S Actual Returns
-0.0075-0.1456
Numnber of Exception in Q2:
Chances of Outperform
Risk Adjusted Alpha Risk Adjusted Alpha
Annualized S&P500 Volatility:
Tracking Error I:
Tracking Error II:
42.857%
46.190%
Num of Exception from July 2009:Daily 99 % VaR:
Information Ratio:Diversification Effect:
Chances of Outperform
47.619%
47.619%
45.238%
42.857%
3.0000
2.0000
1.0000
0.0000
1.0000
2.0000
3.0000
4.0000
01
/07
/09
01
/08
/09
01
/09
/09
01
/10
/09
01
/11
/09
01
/12
/09
01
/01
/10
01
/02
/10
01
/03
/10
01
/04
/10
Risk Adjusted Alpha
0.0100
0.0050
0.0000
0.0050
0.0100
0.0150
01
/07
/09
01
/08
/09
01
/09
/09
01
/10
/09
01
/11
/09
01
/12
/09
01
/01
/10
01
/02
/10
01
/03
/10
01
/04
/10
Risk Adjusted Alpha
Port. Returns
99%VaR-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
20
09
-07
-01
20
09
-08
-01
20
09
-09
-01
20
09
-10
-01
20
09
-11
-01
20
09
-12
-01
20
10
-01
-01
20
10
-02
-01
20
10
-03
-01
20
10
-04
-01
17 Student Investment Advisory Services | Simon Fraser University
Sector Risk(%) Asset(%) Strategy
Cons. Discretionary 2.485% 5.300% -
Cons. Staples 12.939% 18.061% -
Energy 11.638% 10.275% -
Financials 4.262% 2.964% -
Health Care 2.172% 4.510% -
Industrials 7.923% 9.572% -
Info. Tech 29.872% 22.426% -
Materials 7.539% 5.966% -
US ETF 21.170% 22.883% -
Total 1.0000 1.0196
Sector Per Dollar Sector Per Doolar
Discretionary 0.08072 Discretionary 0.02031
Info.Tech. 0.08060 Staples 0.02033
Materials 0.07461 Health Care 0.02095
Financials 0.06255 Staples 0.02751
Info. Tech. 0.05514 Staples 0.02985
Ted Hsieh
KRISPY KREME DOUGHNUTS INC WT
Top 5 Fluctuaters by MVaR
As the strategic decision, the US ETF is hold as self-diversified
purpose for the US equity portfolio, and additional investment
is made into the individual stock that is expected to be well
performing
Value at Risk Decomposition By Sector
Segal Graduate School of Business at Simon Fraser University
Ted HsiehRiskMetrics Officer
500 Granville Street. Vancouver, British Columbia. V6C 1W6
604-518-1622
www.sfu.ca/segalschool
VISA INC COM CL A
FREEPORT MCMORAN COPPER & GOLD JOHNSON & JOHNSON COM
COCA COLA CO COM
ALTRIA GROUP INCINTEL CORP
Objective of RiskMetrics Team
The objective of the Risk Team couple with Compliance is to add value to the SIAS fund operation, in terms of regularly monitoring
risk factors and providing risk statistics to support asset allocation and selection process. The reestablishment of the risk team will be
permanent and all the procedures are organized into user manual to facilitate the transition of management.
WAL MART STORES INC COM
Activity Highlights
We have made some improvements for the estimation as the following:
1. All the returns are adjusted and taken the dividends into account
2. The month risk adjusted alphas (sharpe & treynor) are added into the report
GOLDMAN SACHS GROUP INC COM
Top 5 Stabilizer by MVaR
MCDONALDS CORP COM
Consumer Discretionary
2%
Consumer Staples
13%
Energy12%
Financials4%
Health Care2%Industrials
8%Information Technology
30%
Materials8%
US ETF21%
18 Student Investment Advisory Services | Simon Fraser University
U.S. Equity Risk Metrics Monthly Report for the period ended May 28, 2010
19.257% -4.63%
27.002% 0.29%
26.493% 128.70%
Risk Adjusted Alpha 1M
1M Performance: 1M Performance:
Q2 Performance Q2 Performance
Total Performance: Total Performance:
59571.63 30
188382.03 3
2
Chances of Outperform
30.000%
41.463%
48.965%
30.000%
Annualized S&P500 Volatility:
Tracking Error I:
Tracking Error II:
41.463%
50.065%
Num of Exception from April 2004:Daily 99 % VaR:
Information Ratio:Diversification Effect:
Chances of Outperform
Risk Adjusted Alpha 1M
Sharpe Ratio Analysis Treynor Ratio Analysis
Num of Exception in May:
99% Value at Risk V.S Actual Returns
-0.0008-0.0517
Numnber of Exception in Q2:10 Days 99% VaR:
Quick Statistics
Annualized Port. Volatility:
1.0000
0.5000
0.0000
0.5000
1.0000
1.5000
2.0000
08
/04
/04
08
/04
/05
08
/04
/06
08
/04
/07
08
/04
/08
08
/04
/09
08
/04
/10
Risk Adjusted Alpha
0.0200
0.0100
0.0000
0.0100
0.0200
0.0300
0.0400
08
/04
/04
08
/04
/05
08
/04
/06
08
/04
/07
08
/04
/08
08
/04
/09
08
/04
/10
Risk Adjusted Alpha
Port. Returns
99%VaR (%)
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20
04
-04
-08
20
05
-04
-08
20
06
-04
-08
20
07
-04
-08
20
08
-04
-08
20
09
-04
-08
20
10
-04
-08
19 Student Investment Advisory Services | Simon Fraser University
Sector Risk(%) Asset(%) Strategy
Cons. Discretionary 2.075% 5.390% -
Cons. Staples 10.046% 18.860% -
Energy 8.949% 10.034% -
Financials 3.477% 2.903% -
Health Care 2.082% 4.399% -
Industrials 7.967% 9.413% -
Info. Tech 21.524% 20.812% -
Materials 10.925% 5.662% -
US ETF 32.955% 22.526% -
Total 1.0000 1.0000
Sector Per Dollar Sector Per Doolar
Materials 0.03610 Cons. Staples 0.00555
Materials 0.03424 Cons. Staples 0.00713
Con. Disc. 0.03147 Cons. Staples 0.00852
US ETF 0.02600 Cons. Disc. 0.00878
Financials 0.02515 Cons. Staples 0.01046
Ted Hsieh
FREEPORT MCMORAN COPPER
Top 5 Fluctuaters by MVaR
As the strategic decision, the US ETF is hold as self-diversified
purpose for the US equity portfolio, and additional investment
is made into the individual stock that is expected to be well
performing
WAL MART STORES INC COM
DOW CHEM CO COM
Segal Graduate School of Business at Simon Fraser University
Ted HsiehRiskMetrics Officer
Value at Risk Decomposition By Sector
500 Granville Street. Vancouver, British Columbia. V6C 1W6
www.sfu.ca/segalschool
KRISPY KREME DOUGHNUTS COCA COLA CO COM
MCDONALDS CORP COM
PROCTER & GAMBLE CO COMGOLDMAN SACHS GROUP
Objective of RiskMetrics Team
The objective of the Risk Team couple with Compliance is to add value to the SIAS fund operation, in terms of regularly monitoring
risk factors and providing risk statistics to support asset allocation and selection process. The reestablishment of the risk team will be
permanent and all the procedures are organized into user manual to facilitate the transition of management.
Top 5 Stabilizer by MVaR
COLGATE PALMOLIVE CO
604-518-1622
Activity Highlights
We have made some improvements for the estimation as the following:
1. Back tracking the hisorical data to April 8, 2004, and the back testing results for the risk model is favuorable.
2. Sharpe, Treynor, and VaR analysis are undated corresponding to the back tracking historical data.
SPDR TR UNIT SER 1 S&P
Consumer Discr 2%
Consumer Staples
10%
Energy9%
Financials3%
Health Care
2%Industrials
8%
Information Technology
22%
Materials11%
US ETF33%
20 Student Investment Advisory Services | Simon Fraser University
U.S. Equity Risk Metrics Monthly Report for the period ended June 30, 2010
19.474% -28.15%
25.083% 0.37%
21.427% 325.43%
Risk Adjusted Alpha 1M
1M Performance: 1M Performance:
Q2 Performance Q2 Performance
Total Performance: Total Performance:
58336.46 32
184476.09 5
2
99% Value at Risk V.S Actual Returns
Annualized S&P500 Volatility:
Annualized Port. Volatility:
Quick Statistics
Information Ratio:
Tracking Error I:
Num of Exception in June:
10 Days 99% VaR: Numnber of Exception in Q2:
Sharpe Ratio Analysis Treynor Ratio Analysis
Diversification Effect:
Tracking Error II:
41.270%
48.852%
-0.0204
Chances of Outperform
41.270%
Daily 99 % VaR:
-0.0003Risk Adjusted Alpha 1M
49.936%
40.909%
Num of Exception from April 2004:
Chances of Outperform
40.909%
1.0000
0.5000
0.0000
0.5000
1.0000
1.5000
2.0000
08
/04
/04
08
/04
/05
08
/04
/06
08
/04
/07
08
/04
/08
08
/04
/09
08
/04
/10
Risk Adjusted Alpha
0.0200
0.0100
0.0000
0.0100
0.0200
0.0300
0.0400
08
/04
/04
08
/04
/05
08
/04
/06
08
/04
/07
08
/04
/08
08
/04
/09
08
/04
/10
Risk Adjusted Alpha
Port. Returns
99%VaR (%)
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20
04
-04
-08
20
05
-04
-08
20
06
-04
-08
20
07
-04
-08
20
08
-04
-08
20
09
-04
-08
20
10
-04
-08
21 Student Investment Advisory Services | Simon Fraser University
Sector Risk(%) Asset(%) Strategy
Cons. Discretionary 2.254% 5.198% -
Cons. Staples 8.854% 18.021% -
Health Care 7.194% 13.636% -
Industrials 8.888% 8.998% -
Information Tech. 30.280% 22.438% -
Materials 4.817% 2.454% -
US ETF 37.714% 29.255% -
-
-
Total 1.0000 1.0000
Sector Per Dollar Sector Per Doolar
Materials 0.04008 Cons. Staples 0.00925
Cons. Discre. 0.03426 Cons. Staples 0.01003
Info. Tech. 0.02808 Cons. Staples 0.01029
Industrials 0.02699 Cons. Discre. 0.01030
Info. Tech. 0.02573 Health Care 0.01221
KRISPY KREME DOUGHNUTS
COLGATE PALMOLIVE CO
500 Granville Street. Vancouver, British Columbia. V6C 1W6
The objective of the Risk Team couple with Compliance is to add value to the SIAS fund operation, in terms of regularly monitoring
risk factors and providing risk statistics to support asset allocation and selection process. The reestablishment of the risk team will be
permanent and all the procedures are organized into user manual to facilitate the transition of management.
Ted Hsieh
Segal Graduate School of Business at Simon Fraser University
604-518-1622
Objective of RiskMetrics Team
We have made some improvements for the estimation as the following:
1. Back tracking the hisorical data to April 8, 2004, and the back testing results for the risk model is favuorable.
2. Sharpe, Treynor, and VaR analysis are undated corresponding to the back tracking historical data.
www.sfu.ca/segalschool
Ted Hsieh
CORNING INC COM COCA COLA CO COM
MCDONALDS CORP COM
JOHNSON & JOHNSON COMINTEL CORP
RiskMetrics Officer
UNION PAC CORP COM
Activity Highlights
WAL MART STORES INC COM
Value at Risk Decomposition By Sector
Top 5 Stabilizer by MVaR
DOW CHEM CO COM
As the strategic decision, the US ETF is hold as self-diversified
purpose for the US equity portfolio, and additional investment
is made into the individual stock that is expected to be well
performing, and also to have some exposure of certain sectors
due to lack of value stock in Canadian Market.
Top 5 Fluctuaters by MVaR
Cons Discretionary
2%
Consumer Staples
9%
Health Care7%
Industrials9%
Information Technology
29%
Materials5%
US ETF39%
Canadian Equity Research June 15, 2010
Energy Sector Jerry Su
22 Student Investment Advisory Services | Simon Fraser University
Sector Outlook
Global Equity
Fixed Income
Economics and Portfolio Strategy
Natural Gas Outlook
Volatility is on the run in the short term.
Price will be depressed in the longer term.
In the short run, fluctuations in Natural Gas (NGAS)
prices are largely derived from weather, current economic
conditions, and storage. Volatility is higher as all these
factors are harder to predict whereas the long term price
is mainly derived from supply and demand. This is
substantiated by Figure 1, which shows that the spot rate
is more volatile than the futures contract. As per the same
figure, we can see that prices tend to increase when the
storage cycle is at its low. Therefore, prices are expected
to increase in the short term. But we don’t expect it to
achieve new highs above $7.50 as it did in Jan 2010. The
reason is because the current market is oversupplied with
the discovery and popularity of Shale gas production.
In the long run, based on the overall consumption of
natural gas in USA (Figure 2), we can see that the current
consumption has reached a low for United States since
early 2007. Economic recovery in the long run leading to
increased demand for energy is the consensus among
economists, however, the total consumption is only
expected to increase by 0.5 trillion cubic feet (TCF) by
2011 according to the Department of Energy.
The only way that NGAS usage will surpass other non-
renewable resources such as Oil and Coal is if governments
implement pro-natural gas policies and assuming no
advancement in renewable energy technology for decades
to come. This prediction can be confirmed with DOE’s
future projection of world consumption of non-renewable
energy (Figure 3). The gap between Oil and NGAS
consumption will actually increase by 2035. The gap is
forecasted to be filled by the increasing consumption of
coal. The reasoning behind this is that coal currently costs
$2.27 per Million BTU while NGAS costs $6.05 for the
exact amount of energy. Crude oil is still the most
expensive, costing around $9.30 per Million BTU1
.
1 http://www.eia.doe.gov/emeu/mer/pdf/pages/sec9_15.pdf
Figure 1
Figure 2
Figure 3
Canadian Equity Research June 15, 2010
Energy Sector Jerry Su
23 Student Investment Advisory Services | Simon Fraser University
Long term supply exceeds demand
Growth in consumption of NGAS has stabilized in
the past six years in North America. The level of
consumption has not deviated by more than 1%
except in 2007. The 2007 growth is mainly due to
increase in NGAS usage for power generation,
lease and plant fuel (Table 1). Looking on to the
projected net change of world natural gas reserves
by 2035 (Figure 4), we can expect a total of 48.8
TCF of natural gas increase in global reserves and
an increase of 4.1 TCF from the United States. The
current known world reserve for NGAS is 6,254
TCF2. This will allow approximately 50 years of
usage.
View on energy companies.
Energy companies are 26% of the TSX so it is difficult to avoid companies with natural gas plays. Do note
that despite our bearish view on the price of natural gas, it will not deter us away from well managed
companies such as EnCana. Also, North America’s shale gas region hasn’t fully discovered yet. Companies
could be sitting on reserves that will increase their value significantly despite the downward pricing. Also, a
downward pricing of natural gas could make it into a favourable alternative energy compared to Coal. If this
was to happen in the future, it will increase the demand of natural gas significantly.
2 http://www.eia.doe.gov/emeu/international/reserves.html
Figure 4
Consumption (TCF) 2004 2005 2006 2007 2008 2009
Residential 4.8545 4.8253 4.36905 4.7231 4.85815 4.7596
-1% -9% 8% 3% -2%
Commercial 3.12075 3.0003 2.8324 3.01125 3.12805 3.11345
-4% -6% 6% 4% 0%
Industrial 7.22335 6.59555 6.5116 6.64665 6.63205 6.14295
-9% -1% 2% 0% -7%
Electric Power 5.44945 5.8692 6.22325 6.8401 6.6503 6.88755
8% 6% 10% -3% 4%
Lease and Plant Fuel 1.095 1.11325 1.14245 1.2264 1.2191 1.2629
2% 3% 7% -1% 4%
Pipeline and Distribution Use 0.56575 0.584 0.584 0.6205 0.64605 0.63875
3% 0% 6% 4% -1%
Vehicle Use 0.0219 0.0219 0.02555 0.02555 0.0292 0.03285
0% 17% 0% 14% 13%
Total Consumption 22.3307 22.0095 21.6883 23.09355 23.1629 22.83805
-1% -1% 6% 0% -1%
Table 1
Canadian Equity Research June 10, 2010
Energy Sector Richard Cotter
24 Student Investment Advisory Services | Simon Fraser University
0
20
40
60
80
100
10/2008 03/2009 08/2009 01/2010 06/2010 11/2010
Crude Oil Spot and Futures Prices ($USD/barrell)
SpotPrice
Jun-11
Crude Oil Outlook
Volatile Markets Crude oil markets have been extremely volatile
since prices peaked in 2007. With a decrease in the
amount of storage tankers holding crude oil for
speculative profits, it appeared that crude markets
were showing signs of reverting towards true
fundamentals where general supply and demand
drive prices. However, large speculation and
continuous worry over European sovereign debt
and Chinese demand has sent crude prices back to
10 month lows ($70 USD/barrel).
Oil Arbitrage The growing trend over the last 6 months has been
for speculators to enter into crude arbitrage
agreements by holding oil in tankers coupled with
taking advantage of contango futures’ markets.
While the trend was starting to diminish, it
reverted by the end of Q1 2010. We believe that
this trend will continue for the short-term as prices
are at 10 month lows. This speculative strategy is
difficult for value investors who trade on
fundamentals and look for long-term gains.
However, we believe that enviably supply and
demand for a non-renewable resource will revert
back to rationale economics. Correspondingly, the
most prudent way to take advantage of this is to be
bullish on long-term crude prices.
Supply and Demand Due to the number of storage tankers decreasing
during Q1 2010, there was a flood of crude
entering the markets. While short-term demand is
in question, long-term demand is not. Until
efficient renewable sources are the focal, long-
term demand for crude oil is safe.
On the Move
As supply increased, shipping and pipeline indexes
have increased as well. The Baltic Dry Ice Index,
as a proxy to determine the movement of all the
overall economy, demonstrates that the business
continues to be strong.
The BUSPIPE index reveals that the top North
American pipelines are increasing in value. While
we forecast that crude storage will increase, we
believe in summer months businesses will
continue to need oil and in turn pipeline activity
will remain strong. Crude oil speculative investing
that is associated with the tankers is only one half
of the equation. The second half being that crude
serves a function. Even though, equity markets
have been volatile, company earnings continue to
demonstrate strong growth and this will
fundamentally help drive crude price in the future.
Estimated
-4
-2
0
2
Net Demand Minus Supply Crude Oil (millions barrels/day)
0
20
40
60
80
0
1000
2000
3000
4000
5000
10/2008 02/2009 06/2009 10/2009 02/2010
Pipeline and Shipping Indexes
BDIY
BUSPIPE
BDIY BUSPIPE
0
10
20
30
11/2009 12/2009 01/2010 02/2010 03/2010
Storage Tanker Index (Flot)
Canadian Equity Research June 25, 2010
Financial Sector Ye (Juliet) Zhu
25 Student Investment Advisory Services | Simon Fraser University
Financial Institutions Outlook
In order to investigate future opportunities in the
financial sector, we take a look at the products and
services offered by financial institutions. Besides
the general saving deposits, we placed the
emphasis on the other major financial products
including fixed income, insurance and mutual
funds. The specific potential risks in financial
market are also analyzed.
Fixed income is an
excellent choice of
investment vehicle for
investors who are
looking for a secure
and stable source of
interest income. In the
context of portfolio management, fixed income is
often used to reduce the overall risk. There is a
variety of fixed income investments, including
Government of Canada and Provincial Bonds,
Federal Crown Corporation Bonds, corporate
bonds, stripped bonds ("strips") and mortgage-
backed securities. Except for Federal Crown
corporation bonds, all others are eligible for RSP
(Retirement Saving Plan) / RRIF (Registered
Retirement Income Fund).
In the life and
health insurance
sector, a wide
range of financial security products are provided to
about 26 million Canadians and their dependants.
These products include individual and group life
insurance, individual and group annuities
(including RRSPs, RRIFs and pensions) and
supplementary health insurance. These products
are designed to protect policyholders from the
financial risks of premature death, illness and
retirement. Incorporated insurers as well as
foreign insurers are well regulated by the federal
government through the Office of the
Superintendent of Financial Institution (OSFI) and
the provincial level. To ensure the safety and
soundness of the overall insurance industry, OSFI
requires each insurer to hold a 150% Minimum
Continuing Capital and Surplus Requirement
(MCCSR), which is the minimum level of risk-
adjusted capital, over and above its actuarial
liabilities. This helps ensure that insurers can
meets its obligations on an ongoing basis. Under
the Insurance Companies Act, insurers are also
required to invest in a reasonable and prudent
manner to avoid undue risk of loss. On the other
hand, policyholders are protected by Assuris, a
not-for-profit organization, from the event that
their life insurance companies may fall.
A mutual fund can be considered as a large
investment pool that gathers investment from a
large number of investors. Each fund has its own
set of investment objective. Investment decisions
are entrusted to a group of professional money
managers who will act in the best interest on their
clients by acting upon the given investment
objectives.
The chart above clearly shows the upward trend of
mutual fund assets under management.
Currently, the mutual funds and mutual fund
wraps (also known as the mutual fund advisory
program, which benefits investors by ease the
burden creased by building and monitoring a
diversified portfolio in order to lower the risk)
account for roughly 30% of Canadians’ total
financial wealth. This comes to an enormous
amount of over $700 billion being managed.
Despite the fact that mutual fund is managed by
Fixed Income Government of Canada Bonds Federal Crown Corp. Bonds Provincial Bonds Stripped Bonds Mortgage-Backed Securities
Life and Health Insurance
Canadian Equity Research June 25, 2010
Financial Sector Ye (Juliet) Zhu
26 Student Investment Advisory Services | Simon Fraser University
professional money managers and that it offers
diversification benefit, there is no guarantee on the
rise of value, nor is there any sort of protection
against the downfall in value. The mutual fund
industry is regulated by a number of authorities
including the Securities Commission, Self-
Regulatory Organizations, and Registration and
Education Requirements for people who would
like to provide investment advice on mutual fund
products.
Investment Thesis – for Insurance
and Asset Management Company Among the three biggest sectors in S&P/TSX, the
financial sector has a relatively better performance
in the past 12 months. In the more detail level (the
subcategories are banks, diversified financials,
insurance and real estate), the bank sector has the
highest return whereas the insurance sector has the
lowest return on the other end. However, using
the aggregate data obtained from Statistics
Canada, it is difficult to tell which sector is more
profitable based on the financial ratios presented in
table 1 (see appendix). The only stable trend
shown from the aggregate data is that the leverage
ratio of all categories decreased.
This reflects the intentions of the financial
institutions to lower the exposure to risk.
Furthermore, we think that banks are more
attractive to individual investors due to their sound
environment and diversified products and services
including deposits and loans.
As of the report date, the SIAS portfolio contains five financial holdings, including Great-West Lifeco Inc.
(GWO), Onex Corporation (OCX), Brookfield Asset Management Inc. (BAM/A), IGM Financial Inc. (IGM),
and Manulife Financial Corp. (MFC). OCS and BAM have been analyzed in 2010 Q1. Within three month
(from Mar. 25 to Jun. 24) BAM and OCX declined by 4.87% and 7.54%, respectively. In our opinion, such
drop is normal and expected as it is more or less caused by the European market crisis.
Stock Current
Price
Target
Price
52 Week Range Market
Cap
EPS
TTM
P/E TTM Dividend Recommend
MFC C$ 16.26 $20 $16.2-$26.5 28.6B $2.12 7.7x $0.52 BUY/HOLD
GWO C$ 24.55 $28.27 $20.02-$29.24 23.3B $1.85 13.3x $1.23 BUY/HOLD
IGM C$ 38.24 $41.85 $37.51-$45.60 10.0B $2.28 16.8x $2.05 BUY/HOLD
* June 25 2010
Great-West Lifeco Inc. (GWO)
Similar to other companies in financial sector, Great-West Lifeco Inc. is still on its way to fully recover. Its
revenues decreased from C$35.9B to C$24.0B year over year, however, a positive signal is that it was able to
grow net income from C$1.5B to C$1.7B. Compared to the same quarter last year, its revenues remained
relatively flat (C$6.1B to C$6.0B) and net income grew from C$343.0M to C$461.0M.
Canadian Equity Research June 25, 2010
Financial Sector Ye (Juliet) Zhu
27 Student Investment Advisory Services | Simon Fraser University
Due to the reason that GWO began to sell guaranteed minimum withdrawal benefit (GWMB) products only
recently, it is less sensitive to equity market movements. According to the statistics from CIBC, a 10%
increase in equity markets would add $26 million to GWO’s earnings while a 10% decrease would reduce
GWO’s earnings by $73 million. GWO’s exposure to financial institutions is a problem that will mainly
affect its performance. In terms of the geographic exposure, $2.8 billion out of $11.7 billion (total exposure
to financial institutions) is in U.K.. $0.9 billion of the upper Tier 2 and Capital Securities) is invested in the
U.K. bank securities. The recent down-trend in European equity market caused by downgrade increased
GWO’s charge.
GWO’s EPS for 2009 is $1.71 and for 2010 Q1 is $0.47. Our estimated 2010 EPS is $2.08 (adjusted by its
exposure to European market). The P/E multiple was 12.1x in 2008 and 16.2x in 2009. Because the 6-month
stock market of insurance sector is in a downturn , our estimated 2010 P/E Multiples is 13.8x. Out target
price for GWO is C$28.7. This target price is effective over the next 6-12 months.
Manulife Financial Corp. (MFC)
Manulife Financial Corp. (MFC) has seen revenues remain relatively flat from
2008 to 2009 (C$30.4B to $30.0B), but its net income grew from C$497.0M to
C$1.4B. Compared to the same quarter last year, Manulife Financial Corp. has
been able to turn their revenue from a loss of C$1.1B to a gain of C$1.1B.
For the 2010 Q1, it has a C$0.64 EPS and 16.8% ROE. The positive impact of
stronger equity markets brings MFC $351 million / $0.2 per share in 2010 Q1.
Besides, MFC also obtained $195 million after tax income from the fixed income investing activities. While,
compare to its peers, MFC has the highest MCCSR ratio. It is much higher than 150%, the ratio required by
OSFI. It indicated that MFC is with a high degree of sensitivity to volatile inputs. The capital ratios
sensitivity is primarily driven by equity market and the hedges for annuity guarantees.
The EPS (ttm) is $2.12. The estimated 2010 EPS is $2.0. The estimated 2010 P/E ratio is $10 due to the
uncertainty of insurance sector. The target price of MFC is $20, which is also effective over the next 6-12
months.
IGM Financial Inc. (IGM)
IGM Financial Inc. is the fourth largest publicly traded asset manager globally, based on market
capitalization. It is the largest long-term mutual fund manager in Canada. IGM Financial operates through
three subsidiaries, including Investors Group, Mackenize Investments and Investment Planning Counsel.
Based on the Investment Funds Institute of Canada mutual fund investor survey, about 85% of Canadians
using mutual funds rely on an advisor. The increasing number of baby-boomers in prime savings years of 40-
65 years old indicates this is a high growth industry.
In 2009, the revenues of IGM fell from C$2.5B to C$2.3B and the net income fell from $730m to $559m.
IGM had a good Q1 besides its revenues keep an up-trend in the recent four quarters. In the last month,
IGM’s stock price is off 9%. In the past 10 year,
the EV/EBITDA ratio is around 7.0x to 11.0x
with the 9.0x average. Out target price $41.85
for IGM is calculated by applying a 9.0x
multiple to the estimated EBITDA/Share.
Q4/09 Q1/10
MFC 240% 250%
GWO 204% 202%
SLF 221% 210%
IAG 208% 223%
2008 2009 Q1 2010 2010 E
EBITDA ($m) 1,157.5 1,050.0 $284.4 1,226.0
EBITDA/Share 4.36 3.97 $1.08 4.65
Canadian Equity Research June 25, 2010
Financial Sector Ye (Juliet) Zhu
28 Student Investment Advisory Services | Simon Fraser University
Appendix
Table 1 Key Ratios Calculated by Aggregate Data
Risks Associated with Target Price
The risks include meaningful declines in equity markets, interest rates, exchange rates and a drop in the
number/quality of clients.
2009 Banking Insurance
Investment
Services
Other Financial
Services
Other Consumer and
Business Credit
Gross Margin 19.28% 6.95% 34.95% 14.82% 34.22%
Net Profit Margin 9.45% 10.50% 26.01% 11.09% 10.04%
Return on Assets 0.44% 2.52% 4.34% 1.23% 1.11%
Return on Equity 5.87% 8.93% 8.86% 9.85% 6.02%
Debt/Equity 11.79 2.41 1.02 6.42 4.08
Assets/Equity 12.79 3.41 2.02 7.42 5.08
Asset Turnover 4.74% 23.12% 16.43% 11.32% 11.28%
Global Equity Research June 17, 2010
Technology Sector Jerry Chen
29 Student Investment Advisory Services | Simon Fraser University
US Equity/Technology Sector
Same as the select sector SPDRs, we are
combining both ―Information Technology‖ and
―Telecom Service‖ of the original SP500 Index
into one single and bigger ―Technology‖ sector,
representing 21.94% of the market. In a deeper
look, its component industries include
Semiconductors & Semi Equipment; Software &
Services; Tech Hardware & Services; and
Telecommunication Services. The technology
sector is a major economic engine for America’s
future, and it has been and will continue to be the
one important factor that sets US economy apart
from the rest of the world. We think US equities
still remain attractive after the broad brush market
dislocation in late 2008 and the most recent
turbulence due to the Euro-zone liquidity concerns
and slow-than-expected global recovery in general.
More particularly, our research and analysis shows
that the technology sector may be poised to
outperform every other industry sector over the
next few years.
Investment Outlook/Highlights Among four industry sectors that we would like to
strategically overweight in US equity, the
technology sector outlook makes the most sense
for us (High ROE, High Net Margin, and low
Debt-to-equity ratio). We feel the following points
about the sector can truly reflect our principles of
investment as a value fund:
o Increased global exposure (See Exhibit 1) with
continued strength in emerging markets
o More value-add products pipelined for the
mainstream
o Higher corporate expenditures on IT
o Longer-term themes across a broad range of
sub-sectors
o Unremitting R&D outlays from technology
companies
o Strong balance sheet, high cash reserves and
operating margin up
o Valuations remain attractive, and revenue
continuingly rebound
With the five-year median of 19.5X and the 1993-
2000 median of 20.5X, we believe the near-term
forward-looking P/E (13.7X, based on 4Q’09
earnings) remains attractive. What makes that
scenario more desirable is the broad-based global
diversity in technology companies’ revenue stream.
In fact, technology is the most ―globally leveraged‖
of all GICS sectors, with more than half of
revenues coming from outside of the U.S. The
materials and industrials follow with 43%, 35% of
non-U.S. revenue sources, respectively. Another
promising fact about the sector is the forward
planning decisions made by the industry as a
whole, especially these boosting R&D expenses
(more than 10% increased) committed by market
leaders, despite the market turmoil.
Those fat R&D budgets are fuelled by technology
firms with a build-up in cash on strong and healthy
balance sheets. Illustrated by the industry analysis,
technology companies hit an all-time high of $301
billion as of September of 2009, while much of
this falls in the hands of the biggest tech brands.
As a truth, the top 10 account for two thirds of the
industry total, and this is also in line with that the
top 10 holdings of the sector ETF count for 62.8%
of the portfolio. Furthermore, technology
companies have improved some key business
fundamental factors:
- operating profit margin lift up through
continued efficiency gains
Exhibit 1, Souce: ISI
Sector Breakdown (as of 17-Jun-2010)
Global Equity Research June 17, 2010
Technology Sector Jerry Chen
30 Student Investment Advisory Services | Simon Fraser University
- Revenue rebound base on high demand-
fueled growth
- Inventories declined close to 30 days worth
of supply, well below historical avg. (see
appendix)
Most Preferred Companies
When it comes to stock picking, we don’t hide our
preference on sub-sector leaders. The following
companies not only do have their spectacular track
record of successes, but also they are well
positioned in their own industry and they share
some of key indicators that we rely on:
- Piles, piles, piles of cashes
- Innovator (also the largest winner) of ― the
next big thing‖
- Big and getting bigger, but a swift player
- Creator of the industry standards and eco-
systems
- Serve both consumer and business well and
diligently
For example, Apple iPhone now takes 28% of the
smart phone market is U.S. (RIM: 35%) according
to Nielsen research, but over 50% of mobile
browsing is generated by iPhone. Also, Apple
grabs 48% of the U.S. mobile advertising market
in only 8 weeks after it released iAd platform (a
new eco-system that sells Ad’s through Apple
apps to support free app developers), based on the
company released data and a recent report on
mobile advertisement from J.P. Morgan.
Furthermore, Apple, Microsoft and IBM happen to
be among top 10 constituents by market cap of the
SP500 index; while SPDR Technology Select
Sector Fund holds Microsoft, IBM, Intel, Cisco,
and etc. in its top holdings. For our BUY list, we
have MSFT, IBM, HPQ as the candidate firms.
Risks Associated with
Recommendation If not impossible, then it is extremely difficult to
predict the macro economic conditions and the
course of the global recovery with any certainty,
our analysis indicates an upside potential in the
technology sector. However, any or more of the
factors such as the unstable post-recession
environment, a negative supply shock, political
risks associated with countries where technology
companies operate, currency swings, and mergers
and actuations could significantly alter our outlook.
At a company stock level, further due diligence is
necessary to conclude our decisions.
S&P 500 INFO TECH SECTOR AGGREGATE B/S CASH
HOLDIGNS
Exhibit 2, Source: FactSet
Research, ISI
Global Equity Research June 17, 2010
Technology Sector Jerry Chen
31 Student Investment Advisory Services | Simon Fraser University
Appendices
Appendix I Sector ETF/Technology SPDR (NYSE:XLK)
Appendix II Technology Sector SPDR XLK
Price $22.41
52-week Range $17.15 - $24.16
Avg. volume 15.7M
Mkt cap $4.2B Current Div. $0.31
Div/yield 1.38%
Outstanding Shares 189M 189 M
Beta vs. S&P500 1.03 1.03 Standard deviation 23.2%
Global Equity Research June 17, 2010
Technology Sector Jerry Chen
32 Student Investment Advisory Services | Simon Fraser University
Appendix III
Appendix IV
Fundamentals for Preferred US Technology Companies – 2008Q1 v.s. 2010Q1
Source: FactSet Research
TECH FORWARD DAYS INVENTORY DROPPING
Canadian Equity Research June 25, 2010
Material Sector Ye (Juliet) Zhu
33 Student Investment Advisory Services | Simon Fraser University
Fertilizer Industry Outlook
Fertilizer industry is a necessary market component that tightly relates to the agriculture production. On the
other hand, the trend of agricultural also affects the demand of fertilizer. Thus, the macro factors that are
affecting the global agriculture and fertilizer consumption should be highlighted.
Economy The global economy recovered a lot in 2009.
Take U.S. for example, the percent change from the
preceding quarter has raised above 4%. The rebound is
partly attributable to the growth in the emerging countries,
which lead to a strong food demand.
Population Currently, the global population is estimated
to be over 6.8 billion, and is expected to hit 6.9 billion by
March 20111. Continued growth in population will drive
the sustainable demand for food and fertilizer.
Oil Price Oil prices should be considered since high oil
price will increase the input cost not only for most
agricultural crop but also for fertilizer.
Freight Costs Neighbouring countries may be relied
upon heavily from imported goods, to save on freight costs.
Exchange Rate Currently, Asia has the largest
fertilizer consumptions. The appreciation of Canadian
Dollar increased the cost of import for Asian countries. In
other words, the future trend of Canadian dollars will
continue to exert its influence on the Canadian export.
Dietary History Wheat, rice, corn, fruit & vegetables
and other crops, as a whole, consumes around 76% of the
worlds fertilizer. A large part of the population growth
originated from developing countries such as China, India
and Brazil. Therefore, the consumption trends in these
countries can be seen as a reflection of the fertilizer market
trend.
Future trend of fertilizer demand can be also analyzed from
the dietary history. For instance, China has a significant
increase in the daily consumption of some major food types
such as fruits and vegetables, meat, eggs and fish (see
graph on the right). Furthermore, we believe that the
demand for corn and fertilizer will continue to increase as
life quality continues to improve.
Canadian Equity Research June 25, 2010
Material Sector Ye (Juliet) Zhu
34 Student Investment Advisory Services | Simon Fraser University
The three primary crop nutrients are potash, phosphate and nitrogen. For fertilizer, three countries including
Canada, Russia, and Belarus together possess more than 80% of the global reserves and produce 2/3 of the
annual world production2. Compared with phosphate and nitrogen, potash is rare. While a significant portion
of potash production occurs in only 12 countries, potash is consumed in about 160
countries3. Currently, about 80% of the world potash is traded across borders.
Besides, only about 19% of the global potash industry are controlled by
governments4. Therefore, potash is primarily driven by economic factors.
According to the historical trends of fertilizer use and crop production in China,
India, Malaysia, and Brazil (see appendix), the fertilizer market has an up-trend.
Appendix
China Fertilizer Use and Crop Production
India Fertilizer Use and Crop Production
Malaysia Fertilizer Use and Crop Production
Brazil Fertilizer Use and Crop Production
Fertilizer Potash
Phosphate
Nitrogen
Canadian Equity Research June 17, 2010
Consumer Staples Sector Tanya Lu
35 Student Investment Advisory Services | Simon Fraser University
Consumer Staples Outlook
As a defensive sector, Consumer Staples tracks the
overall economic condition and poses less volatility.
As the U.S. economy didn’t recover at the expected
pace, accompanied by the euro zone debt crisis,
Consumer Staples has been underperforming.
However, the euro zone crisis has now come to a full
disclosure, which has helped ease the panic in
investors. On top of that, sales in April has increased
by 0.6% accompanied with a 1.2% increase in new
orders for manufactured goods. The U.S. census
Bureau also revealed that new home sales has grown
by 14.8%. The consumer staples industry is expected
to resume. The following company stocks owned by
SIAS fund are futher examined .
Altria Group INC. (NYSE: MO)
Price $19.83
52-week Range $16.1 - $21.91
Dividend Yield 6.96%
Date of Price 17-June-10 EPS (T12M) 1.79
Company Description:
Altria Group Inc. is the owner of the bestselling brand,
Marlboro, in the U.S. Altria has outperformed its peers
throughout the years, enjoying high returns and
dividends. Also, the tobacco Industry has always been
profitable with their high profit margin. Although
facing more legal challenges, the tobacco company
have had time to enact to regulations. Altria has
responded to the Family Smoking Prevention and
Tobacco Control Act (signed June, 2009) by adding
smokeless cigarette to their product line.
High sustainable profitability combined with adequate
leverage and high dividend yield make Altria an
appealing investment.
Yet, its current high price can only support a hold recommendation.
P/E ROE PM Debt/Equity Interest Coverage Inv Turnover Gross Div
ALTRIA GROUP INC 11.05 97.43 20.58 2.83 4.98 4.21 7.04
Industry Average 9.78 63.46 13.90 1.64 7.77 2.94 4.72
0
1
2
3
4
J-0
1
J-0
2
J-0
3
J-0
4
J-0
5
J-0
6
J-0
7
J-0
8
J-0
9
J-1
0
Bas
e M
on
th J
an,0
1
Relative Price of Altria v.s. Consumer Staples SPDR
XLP
MO
Canadian Equity Research June 17, 2010
Consumer Staples Sector Tanya Lu
36 Student Investment Advisory Services | Simon Fraser University
Coca-Cola Company (NYSE: KO)
Price $52.40
52-week Range $47.18 - $59.45
Dividend Yield 3.24%
Date of Price 17-June-10
EPS (T12M) 3.19
Company Description:
Coca-Cola Company generates more than 50%
of their profit from outside of North America
(73.6% for FY 2009) with 120.89 B in market
cap. Overall, Coca-Cola Company is in good
shape, having higher profitability and lower
than industry average debt ratio. Although the
beverage industry is generally highly leveraged,
Coca-Cola is well covered with high interest
coverage. It also provides sufficient dividend
that is expected to continue.
Coca-Cola now faces possible threats from
declining euro and weakening euro zone
economy (35.8% sales are from European
Countries) accompanied by the proposed ―fat-
tax‖ in United State. During the past, Coca-
cola has been successful in lobbying. Also,
sales in developing countries have continued to
grow with a 35% presence as of first quarter in
2010. Therefore, in spite of the risks, continuing
to hold the stock is recommended.
Colgate-Palmolive Co. (NYSE: CL)
Price $80.63
52-week Range $68.32 - $87.39
Dividend Yield 2.29%
Date of Price 17-June-10
EPS (T12M) 4.56
Name P/E ROE PM Debt/Equity Interest Coverage Inv Turnover Gross Div
COCA-COLA 16.34 31.11 21.45 46.25 22.67 4.77 3.37
Industry Average 17.40 30.50 14.38 57.52 21.39 6.10 2.25
Name P/E ROE PM Debt/Equity Interest Coverage Inv Turnover Gross Div
COLGATE-PALMOLIVE CO 17.64 104.62 9.32 1.13 6.19 6.46 2.63
Industry Average 15.53 55.67 10.25 0.79 17.62 5.47 3.32
0
0.5
1
1.5
J-0
1
J-0
2
J-0
3
J-0
4
J-0
5
J-0
6
J-0
7
J-0
8
J-0
9
J-1
0
Bas
e Y
ear
Jan
,01
Relative Price of Coca-cola v.s. Consumer Staples SPDR
Coke
XLP
Eurasia &Africa
8% Europe 16%
Latin America
12%
North America
24%
Pacific 15%
Bottling 25%
Revenue by division
US Equity Research 11 August 2010
[Consumer Staples] [Tanya Lu]
37 Student Investment Advisory Services | Simon Fraser University
Company Description:
Colgate Company has only 20% sales coming from North America with 39.55B market cap. Excluding an
unusual and infrequent charge in the first quarter of 2010, Colgate has continued to grow at a rate exceeding
market estimate. As a market leader, Colgate has continued to enjoy its growth in developing countries. The
slightly lower profit margin caused by continuous promotion is offset by increasing sales. Combined with its
sufficient leverage, holding Colgate is recommended.
PROCTER & GAMBLE CO. (NYSE: PG)
Price $61.19
52-week Range $39.39 - $64.58
Dividend Yield 2.95%
Date of Price 17-June-10
EPS (T12M) 3.79
Company Description:
Procter & Gamble Company has 43 brands with strong
presence around the globe. It has successfully grown its brands,
offering various products at different prices, thus benefiting
from economies of scale and scope efficiency.
Despite the increasing competition in the premium brand
segment, the company has reported 3% sales growth for Q1
FY10. Having more than 40% growth coming from developing
country, the company is expected to prosper and maintaining
the position is recommended.
Name P/E ROE PM Debt/Equity Interest Coverage Inv Turnover Gross Div
PROCTER & GAMBLE CO/THE 16.26 20.90 13.48 0.45 11.87 5.24 3.13
Industry Average 15.53 55.67 10.25 0.79 17.62 5.47 3.32
0
1
2
J-01 J-03 J-05 J-07 J-09Bas
e Y
ear
Jan
,01
Relative Price of Colgate v.s. Consumer Staples SPDR
CL
XLP
0
1
2
3
J-01 J-03 J-05 J-07 J-09
Bas
e Y
ear
: Ja
n,0
1
Relative Price of P&G v.s. Consumer Staples SPDR
P&G
XLP
North America
20%
Latin America
26%
Europe& South Pacific 22%
Greater Asia& Africa 19%
Pet nutrition
13%
Revenue by division
Canadian Equity Research June 16, 2010
Energy Sector Parry Pasricha
38 Student Investment Advisory Services | Simon Fraser University
Canadian Equity
Global Equity
Fixed Income
Economics and Portfolio Strategy
Cenovus (TSE: CVE)Price 29.99
Date of Price 16/06/10
52-week Range 24.26 - 32.00
Shares Outstanding 751.70 Mil
Market Cap 22.54 billion
Current Dividend 0.80
Dividend Yield 2.667%
P/E (TTM) 27.26X
EPS (TTM) 1.10
P/B (Q1) 2.174X
Target Price 33.00
Target Price Date 31-DEC-2010
Rating Sector Outperform
Company Description
Cenovus Energy Inc., an integrated oil company,
engages in the development, production, and
marketing of bitumen, crude oil, natural gas, and
natural gas liquids in Canada with refining
operations in US. CVE was formed on November
30, 2009 from the split of Encana (ECA)
Corporation into two highly focused and
independent publicly traded energy companies:
one an integrated oil company (CVE), the other a
pure play natural gas company (ECA).
Production and Reserves
As of March 31, 2010 CVE has 1,143 million
barrels of proven Oil reserves and 1.5 Tcf of
Natural gas reserves. CVE has four major Crude
Oil assets in the Canadian Plains, all of which are
still being developed and expanded to increase
production. CVE also operated two refineries out
of the U.S with production capacities of
450,000BPD, however it has been focusing its
expansion on upstream, oil recover, rather than
downstream, refinement, operations.
Current Projects
CVE’s strategy is focused on growing its oil
business, which accounts for approximately 85%
of its proved plus probable reserves and 98% of its
economic contingent resources. In 2009, CVE
expanded the Foster Creek output capacity from
60,000 BPD to 120,000 and is still working
towards an increase of 30,000. In February, the
acceleration of construction of phase D at
Christina Lake was approved. The completion has
been advanced by about six months with
production expected to begin in 2013, adding
40,000 BPD to their production capacity.
Operations
CVE reported net revenue of $3.49 billion during
the first quarter of 2010, compared to $2.23 billion
for the same period of the previous financial year.
During the first
quarter, CVE’s mature conventional oil and gas
properties generated about half a billion dollars in
0
0.5
1
1.5
2
0
10
20
30
40
Nov-09 Feb-10 May-10
Price & EPS
Price
TTM EPS
50
100
150
Q1 08 Q3 08 Q1 09 Q3 09 Q1 10
Tho
usa
nd
s B
PD
Crude Oil Production
Pelican LakeWeyburnChristina LakeFoster Creek
0
50
100
150
0
2000
4000
6000
8000
Q1 08 Q3 08 Q1 09 Q3 09 Q1 10
Oil
Pri
ce -
USD
Mill
ion
s C
dn
Do
llars
Revenues & Oil Price Net RevenueCrude Oil Prices
Canadian Equity Research June 16, 2010
Energy Sector Parry Pasricha
39 Student Investment Advisory Services | Simon Fraser University
operating cash flow in excess of capital
expenditures. CVE’s operating costs per barrel at
Foster Creek and Christina Lake averaged $11.82
in the first quarter of 2010, down from $16.33 in
the first quarter of 2009 driven by higher
production volumes and a lower level of repair and
maintenance activities. While the non-fuel
operating costs for Foster Creek and Christina
Lake were $8.57/bbl in the first quarter of 2010
compared to $13.02/bbl in the first quarter of
2009.
Valuation
A target price of $33 is achieved by using the
multiples approach with an earnings estimate of
$1.73 from Bloomberg for 2010 and current
industry PE of 19X.
Recommendation
CVE’s mature oil and gas properties allow for
continous predictable cash flow in the near future.
Since focusing on expanding oil capacity in
Alberta, they have been able to significantly
reduce costs, while increasing excess capacity.
CVE has strong revenue growth potential at
current production levels and has demonstrated
significant cost reduction over the last year, which
making it suitable for SIAS even at its currently
high PE relative to industry. Date Apr-02 Aug-04 Nov-06 Mar-09
EBITDA Margin EBITDA Margin
Canadian Equity Research June 10, 2010
Energy Sector Richard Cotter
40 Student Investment Advisory Services | Simon Fraser University
Husky Energy Inc. (TSE: HSE)
Price 26.42
Date of Price 01/06/10
52-week Range 25.37 - 36.09
Shares Outstanding 850 million
Market Cap 22.5 billion
Current Dividend 1.20
Dividend Yield 4.12%
P/E (T12M) 14.5X
EPS (T12M) 1.67
P/B 2.2X
Target Price $30
Target Price Date 01/06/2011
Rating Sector Outperform
Recommendation
Husky Energy Inc. (Husky or the Company) has
short-term CFO concerns that should be off-set
with expected production increases. Stable lift
costs and investment in mega projects balances
short-term and long-term incentives. The highest
dividend yield amongst its peers and targeted
increases in earnings makes Husky an attractive
opportunity.
Company Description
Husky Energy Inc. (Husky or the Company) is
integrated crude oil and natural gas company.
Husky is segmented into three divisions: upstream,
midstream, and downstream. With assets-in-place
in Canada (59% of revenue), United States (40%),
and outside of North America (1%), the company
has low exposure to foreign country risk. It was
announced that the Husky will be under new
leadership, with Asim Ghosh taking over as
President and CEO.
Production and Reserves
Production per day in Q1 2010 averaged 296 000
boe/d which was a YoY decrease of 14% from Q1
2009. Decreases in production were attributed to
scheduled maintenance shut-downs and a
softening in natural gas prices. Natural gas
production in the quarter was 524 million cubic
ft/day, down 5% YoY. The new SEC procedure on
calculating reserves is forecasted to have minimal
impact of current reserve levels, and adjusted
reserve levels are expected to be announced in late
Q2 or early Q3 2010. Husky has an estimated
proved reserve life of 8 years.
Commitment to Mega Projects
Phase 1 of the Sunrise project in northern Alberta
is complete, and costs were $1 billion lower than
estimated. Forecasts show by 2014, production of
oil should commence. In Eastern Canada, Husky’s
share of the North Amethyst project is estimated to
produce 25 000 boe/d by year end. White Rose is
forecasted to have stable production of 6000
boe/d. Continued progress is being made for
exploration and development in China. Potential
new regulation is a concern for offshore drilling in
Eastern Canada, and US. Husky acquired 98 retail
outlets in Q4 2009, therefore strengthening their
presence in southern Ontario.
0
0.5
1
1.5
2
0
20
40
60
01/2007 09/2007 05/2008 01/2009 09/2009
Share Price and Diluted EPS
PriceEPS
0
200
400
600
800
1000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Production and Reserves
Production/Day
Total Reserves
Res. Replacement
0.00
0.20
0.40
0.60
2000 2002 2003 2004 2005 2006 2007 2008 2009
Production (MBOE/D) per Share
Canadian Equity Research June 10, 2010
Energy Sector Richard Cotter
41 Student Investment Advisory Services | Simon Fraser University
Operations and EPS
Cash flow from operations (CFO) is a concern
with falling production levels. While, levels of
production are expected to increase, Q1 2010 CFO
is only 25% of Q2 2008. Volatile commodity
prices have been balanced with stable lifting costs
(5 year average $12/boe). Falling EBITDA
margins, demonstrates management’s commitment
to operational efficiency. Husky pays out the
highest dividend yield amongst its peers (4.12%
versus peer’s average 1.83%) Consensus
estimates for EPS are: $2.06 (2010), $2.64 (2011),
and $2.53 (2012).
Valuation
The target price for Husky is achieved by using the
current PE 14.5X and the consensus 2010 earnings
per share.
0%
20%
40%
60%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
EBITDA Margin
Canadian Equity Research June 10, 2010
Energy Sector Richard Cotter
42 Student Investment Advisory Services | Simon Fraser University
-1
0
1
2
3
0
20
40
60
01/2007 09/2007 05/2008 01/2009 09/2009
Share Price and Diluted EPS
PriceEPS
Canadian Natural Resources Limited (TSE: CNQ)
Price 36.61
Date of Price 29/05/10
52-week Range 26.35 – 50.42
Shares Outstanding 1.09 billion
Market Cap 39.9 billion
Current Dividend 0.30
Dividend Yield 0.62%
P/E (T12M) 12.1X
EPS (T12M) 1.46
P/B 2.0X
Target Price 39.00
Target Price Date 01/06/2011
Rating Sector outperform
Recommendation
Canadian Natural Resources Limited (Canadian
Natural or the Company) large cap presence and
ability to have continuous cash flow contends with
a great opportunity for SIAS. Further, the
emphasis towards crude oil and the Horizon
project puts shareholder value in the forefront.
Higher expected returns and a forecast of cash
costs on the lower end of industry standards is
appealing. It is suggested to hold the current shares
of Canadian Natural.
Company Description
Canadian Natural participates in exploration,
development and production of crude oil and
natural gas. Revenue by geographic segment is as
follows: North America 80%, North Sea 11%, and
Offshore West Africa 9%. In Q1 2010,
shareholder’s and the board approved a 2:1 split of
common shares.
Production and Reserves
Production per day in Q1 2010 increased 9% YoY
from Q1 2009 versus management’s target of
10%. Production is estimated to climb above 600
000 boe/d by 2011. Forecasted capital
expenditures in 2010 are $4 billion. Nearly 80%
are aligned with crude oil projects. A strong
reserve replacement ratio demonstrates an active
increase in total proved reserves.
Horizon Project
The Horizon project once complete (further
construction is pending future economic
conditions) will provide 500 000 boe/d. Recent
production has reached 110 000 boe/d and are
estimated to grow 10% in 2010. Currently, average
cash cost for production is $34/barrel; higher than
the targeted $30/barrel. Missed target did hurt
earnings; however costs are expexted to decrease
with increase in production.
Operations
Forecasted increase in production should translate
into consistent CFO. However, missed target costs
and volatile commodity prices hurt EBITDA
margins. Canadian Natural has actively engaged in
hedging strategies. The Company has in place
50% of Q2 and 25% of Q3-Q4 crude oil hedged in
collars ($60USD - $90USD). Natural gas collars
($4.50 - $8.00) make up 17% of estimated
production volumes.
0
1000
2000
3000
4000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Production and Reserves Production/Day
Total Reserves
Res. Replacement
0.00
0.20
0.40
0.60
2000 2001 2002 2003 2004 2005 2005 2006 2007 2008 2009
Production (MBOE/D) per Share
Canadian Equity Research June 10, 2010
Energy Sector Richard Cotter
43 Student Investment Advisory Services | Simon Fraser University
Acquisitions and EPS
Acquisition of core assets amounted to $1 billion
in Q1. The acquired assets are forecasted to
increase production levels by 28 000 bpd. Crude
oil segment portion is 25%, while conventional
natural gas constitutes a significant source of the
remaining barrels. The assets purchases are in
Western Canada; therefore strengthen Canadian
Natural’s position in the area. Consensus estimates
for EPS are: $3.19 (2010), $3.86 (2011), and $3.87
(2012).
Valuation
The target price for the Company is achieved by
using the current PE 12.1X and 2010 consensus
earnings per share.
30%
50%
70%
90%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
EBITDA Margin
Canadian Equity Research June 10, 2010
Energy Sector Richard Cotter
44 Student Investment Advisory Services | Simon Fraser University
Imperial Oil Limited (TSE: IMO)
Price 39.46
Date of Price 01/06/10
52-week Range 37.75 – 46.79
Shares Outstanding 848 million
Market Cap 33.9 billion
Current Dividend 0.44
Dividend Yield 1.02%
P/E (T12M) 19.3X
EPS (T12M) 1.84
P/B 3.3X
Target Price 36.50
Target Price Date 01/06/2011
Rating Sector Perform
Recommendation
The target price is not intriguing to a value
investor, however low debt and strong cash flow
combined with a commitment to spending at an
opportune time does appeal. Conversely, below
average dividend yield, and above average lift
costs, does put Imperial at a disadvantage. It is
suggested not to purchase Imperial.
Company Description
Imperial Oil Limited (Imperial or the Company) is
an integrated crude oil and natural company. With
three segments, Imperial focuses on upstream,
downstream and chemical divisions. Imperial has
all assets-in-place in Canada, therefore low
country risk. The Company largest shareholder is
Exxon Mobile Corporation (about 70%).
Production and Reserves
Gross production from Q1 2010 averaged 291 000
bpd (barrels per day) versus 302 000 bpd Q1 2009.
The decrease in production was due to a scheduled
maintenance. The Cold Lake project (bitumen) and
Syncrude project (crude oil) were at par with
production levels compared with Q1 2009 – 148
000 bpd, and 67 000 bpd respectively. Finally,
natural gas production was down 11% to 273
million cubic ft/day compared with Q1 2009. This
drop off was largely related to scheduled
maintenance and has not returned to full
production. It is estimated that Imperial has 9
years of proved reserve life.
Spending Through the Downturn
Capital expenditures have increased 82% from Q1
2009 to 900 million, largely financed from CFO.
The Kearl project, located in northern Alberta,
continues to be in the construction stage. First
production is scheduled for 2012. An estimated
100 000 bpd of bitumen is estimated during the
first phase of production; while maximum bpd are
forecasted at 300 000. The development of the
Dartmouth project is on time and budget. The first
stage of two is complete, with the latter expected
to be finished by the end of 2010. Dartmouth will
decrease emissions by 25% and increase sulphur
recovery to 98%.
Operations and EPS
The upstream division has been positively affected
from the rise in commodity prices. Earnings from
upstream are up 46% from Q1 2009 ($491 millio).
Downstream earnings have suffered 80% losses
($52 million) with demand levels fluctuating
0
0.5
1
1.5
2
0
20
40
60
80
01/2007 09/2007 05/2008 01/2009 09/2009
Share Price and Diluted EPS
Price
EPS
-500
0
500
1000
1500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Production and Reserves Production/Day
Total Reserves
Res. Replacement
0
0.1
0.2
0.3
0.4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Production (MBOE/D) per Share
Canadian Equity Research June 10, 2010
Energy Sector Richard Cotter
45 Student Investment Advisory Services | Simon Fraser University
through-out the quarter. Strong CFO has enabled
Imperial to increase capital expenditures without
bombarding the balance sheet with debt. The
company’s average lift cost of $36/ barrel, does
place it on the upper end compared with peers.
Consensus estimates for EPS are: $2.65 (2010),
$3.03 (2011), and $3.26 (2012).
Valuation The target price for the Company is achieved by
using the current EV/EBITDA 10.6X, and
adjusting for net debt -$373 million. As well,
using current PE and PB, corresponds with price
of $36 and $37 respectively.
0%
10%
20%
30%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
EBITDA Margins
Global Equity Research July 2010
Technology Victor He
46 Student Investment Advisory Services | Simon Fraser University
Global Equity
Canadian Equity
Fixed Income
Economics and Portfolio Strategy
Texas Instrument Incorporated (NYSE: TXN) Price 23.11
Date of Price 05/07/10
52-week Range 20.11 - 27.44
Shares Outstanding 1.22B
Market Cap 28.37B
Current Dividend 0.12
Dividend Yield 2.08%
P/E (T12M) 13.98X
EPS (T12M) 1.67
Target Price $26-30
Target Price Date 06/07/10
Rating Buy
Recommendation
I would recommend a ―buy‖ for this stock with a
long-term investment horizon. The fundamentals
and outlook of the company are strong, and it has
the lowest multiple compared to its closes
competitors. It has superior financial strength and
strong profitability. Please see detailed analysis in
the following:
Company Description
TXN is organized in the following 4 segments.
TXN’s product portfolio is well-diversified and
well-positioned:
Analog (40% of revenue) is the focus and the
engine of growth for TXN going forwards. Analog
products have a wide scope of use in real life—
amplifying/converting signal, etc. Basically it is
the essential building block for communication
infrastructure. In the world ever increasingly
connected, it is expected that the demand for
analog would remain strong for the foreseeable
future. TXN has a leading position in the analog
market with about 13% of the market share.
Embedded Processing Products (15%) are chips
that perform mathematical computation. TXN is
also the leader in this segment and has about 11%
of the total market share. An important
characteristic about this product is that there is
switching cost, and customer relationships tend to
be stable and long for this segment. Therefore
TXN is also in a good position to grow this
segment going forward.
Wireless and Others (45%): they are technically
two separate segments, but they are not TXN’s
focus area. There are a wide variety of products
but suffice to say that the wireless segments are
largely driven by the use of wireless products –
cell phones, WiFi network, etc – which should
remain stable. As for the ―others‖ segment, the
income is mainly through licensing production of
many smaller product lines – such as graphing
calculator.
Financial Strength/Profitablity
Analysis
The company is financially sound: it has no long-
term debt and its current ratio is at 3.68,
substantially higher than the industry average of
0.58.
Earnings have also performed well: it has a profit
margin of 17.03% (average of 5 years) and
18.28% (TTM). And both the top-line and the
bottom-line growth have been consistently
increasing for all 5 quarters since Q1 of 2009.
Macro fundamental Analysis
The cyclicality of the technology industry has a
strong correlation with economic cycle – firms
spend on technology to improve efficiency in the
hope that the cost would be recovered quickly,
especially when they are optimistic about the
future. However, while we agree the economy
would do well in the long term, there is also a
growing consensus that the market is poised to
experience a major correction (the DJIA has been
seeing 7 consecutive days of decline, from June
25th
– July 2nd
, 2010).
The turning point of the U.S. bull market we’ve
seen since March 2009 started with the Euro
gaining unprecedented attention in late April. And
Global Equity Research July 2010
Technology Victor He
47 Student Investment Advisory Services | Simon Fraser University
after what happened to BP, which drags down other oil giants and adds fuels to the decline of the
overall market, the major headline risks are now concentrated in the U.S. itself—the uncertain effects of the
financial regulation; the weakness of positive economic indicators, etc.
While I believe the most fear-driven moment that caused dramatic fall in the market has passed, what follows
now would be the chronic decline due to the aftermath of all the negative headlines. Therefore, it is
recommended to simply watch where the market is heading and buy the stock when we see more clarity in
the direction of the stock market.
Valuation
TXN is a big-cap stock and has a beta of 1.08 – very in sync with the movement of the overall market. There
would not be dramatic upside for this mature company in the short term. But according to this 5-year graph,
it seems the resistance is around the $30-35 range, using technical analysis.
TXN’s main business is in the analog segment, and its competitors who operates in the heavily in the same
segment. These companies are selected according to Reuters’ classification, and it has an average P/E of 23
compared to TXN’s current P/E of 14. To take a conservative estimate by taking the P/E of 16-18 would
arrive at the target price of $26-30.
Global Equity Research June 26, 2010
Consumer Foodservice Jin Yan
48 Student Investment Advisory Services | Simon Fraser University
McDonald’s Corporation (NYSE: MCD) Price $69.90
Date of Price 11-Aug-10
52-week Range $53.88 - $71.84
Shares Outstanding 1.076 billion
Market Cap $75.2 billion
Current Dividend $0.55
Dividend Yield 3.15%
P/E (T12M) 15.92x
EPS (T12M) $4.36
P/B (MRQ) 5.33x
Target Price $78.67
Target Price Date 23-July-10
Rating Sector Outperform
Recommendation Bu
Recommendation
McDonald’s Corporation as a value stock fits in
well with the SIAS portfolio. The company has
provided consistent returns historically and a
higher dividend yield than its main competitors. In
addition, its management has demonstrated an
ability to explore areas with growth potentials
ahead of the industry. Since its shares are currently
trading at a lower price than its intrinsic value, I
would issue a buy recommendation on MCD.
Company Description:
McDonald’s is a global leading brand in consumer
foodservice. The Company operates exclusively
under the McDonald’s brand with its burger fast
food chain and McCafé, the expanding coffee
specialist shop. 80.8% of McDonald’s 32,000+
restaurants are operated by franchisees. Franchise
arrangements require payment of initial fees from
the franchisee, as well as continuing rent and
royalties. In effect, McDonald’s business is driven
by rental income as well as store sales. Such
agreements grant franchisees the use of the
Company’s property for a period of 20 years. The
guaranteed revenue flow shelters McDonald’s
from the cyclical nature of the economy and this is
reflected in the share price performance graph.
Industry Outlook
Overall, the fast food industry has weathered the
global financial crisis well and while not immune
to the recession, has shown more resistance than
other sectors in consumer foodservice. Despite the
large drop in consumer spending, the larger and
more established fast food operators such as
McDonald’s and YUM! Brands still managed to
post positive growth, with strong sales in Western
Europe and China offsetting the hard-hit U.S.
market. Since consumers will still be in a price-
conscious mindset while the economy remains
soft, fast food is expected to benefit the most from
a small increase in consumer spending. Other
dining categories, including full service restaurants
and cafes/bars will remain laggards in the sector.
While global consumption of fast food remains
concentrated in developed markets, growth in
spending is much stronger in Asia Pacific and the
Middle East/Africa regions. Large international
chains are at an advantage in these markets due to
their financial strength and their ability to support
aggressive marketing campaigns.
Growth Forecast and Earnings
Outlook
McDonald’s earnings increased 16.5% from Q2
2009 to same quarter this year. Same store sales
increased 1.5% in the U.S., 5.2% in Europe, and
5.7% in the APMEA regions. Bloomberg analyst
consensus EPS estimates average at $4.53 for
2010. Outlook is strong as year-on-year growth in
the fast food industry is expected to average at
5.5% over 2009-2013 (Euromonitor).
The Company has also been injecting excess funds
into reimaging existing restaurants to further push
sales. This strategy has proven to be successful as
same-store sales have grown at a faster pace than
McDonald’s competitors. Further, management
continues to refine its marketing concepts and the
Company is able to leverage its scale in
implementing new programs.
As 70% of McDonald’s operating income is
generated outside of the U.S. and 45% of debt is
Global Equity Research July 2010
Consumer Foodservice Jin Yan
49 Student Investment Advisory Services | Simon Fraser University
held in foreign currencies, the company benefits
from currency conversions on a weak dollar.
Valuation (DCF)
Since McDonald’s Corporation is a well-
established company operating in a stable
environment, its revenues and earnings tend to
align closely with forecasts. Assuming 2010 is a
recovery year for McDonald’s and its compounded
revenue growth rate rebounds to the same level as
2007, a year-end target price of $78.67/share is
obtained through the FCFE model. Compared to
the current trading price of $69.90 the shares
appear to be trading at a discount.
Valuation (Multiples)
McDonald’s has historically outperformed its main
competitors in terms of profit margins. Its shares
are currently trading at below its 10-year average
P/E as well as the peer group P/E ratio of 17.8. At
a forecasted EPS of $4.53 and forward P/E of 16x,
a year-end target price of $72.48 is reached.
Risks Associated with Target Price Consumer confidence in the U.S. and
Eurozone remain soft, and may lead to
volatility in sales
Currency markets also impact earnings;
however, currency conversion risks are
reduced by the Company’s strategy to
partially hedge
Commodity prices (i.e. beef, chicken) and
labour costs
Appendices
-60
-40
-20
0
20
40
CQ
1 2
00
3
CQ
4 2
00
3
CQ
3 2
00
4
CQ
2 2
00
5
CQ
1 2
00
6
CQ
4 2
00
6
CQ
3 2
00
7
CQ
2 2
00
8
CQ
1 2
00
9
CQ
4 2
00
9
Profit Margin Analysis
MCD
YUM
WEN
JACK
SBUX
0
5
10
15
20
25
CQ
3 2
00
1
CQ
2 2
00
2
CQ
1 2
00
3
CQ
4 2
00
3
CQ
3 2
00
4
CQ
2 2
00
5
CQ
1 2
00
6
CQ
4 2
00
6
CQ
3 2
00
7
CQ
2 2
00
8
CQ
1 2
00
9
CQ
4 2
00
9
Historical P/E Ratio Analysis
0
0.5
1
1.5
CQ1 CQ2 CQ3 CQ4
Diluted EPS
2007
2008
2009
2010
-1
-0.5
0
0.5
1
1.5
Relative Share Price Performance
MCD
YUM
WEN
SBUX
SPX
Global Equity Research July 2010
Consumer Foodservice Jin Yan
50 Student Investment Advisory Services | Simon Fraser University
Relative Valuation
Name
Dvd
Yld
Diluted
EPS
T12M
EPS: 1-
Yr
Growth
BEst
EPS:Y ROA ROE P/E P/B Debt/Cap
Curr
Ratio
Quick
Ratio
Operating
Margin
Profit
Margin
Average 1.2 2.1 13.7 2.3 10.1 28.9 18.5 4.7 32.4 1.4 1.0 13.1 8.0
MCDONALD'S CORP 3.3 4.4 13.0 4.5 16.2 34.8 16.0 5.3 42.7 1.4 1.1 31.2 20.6
YUM! BRANDS INC 2.0 2.2 -6.2 2.5 15.3 132.6 17.6 16.9 72.5 0.7 0.4 16.0 11.1
STARBUCKS CORP 0.5 1.1 35.0 1.2 13.3 24.6 21.9 5.4 13.4 1.5 1.0 11.9 8.0
TIM HORTONS INC 1.3 1.6 21.6 2.0 15.7 26.5 19.1 5.4 25.0 0.8 0.5 21.3 13.5
DARDEN RESTAURANTS INC 2.3 2.8 -6.7 3.3 7.9 23.1 14.5 3.2 47.2 0.5 0.2 9.9 6.2
CHIPOTLE MEXICAN GRILL INC 0 4.7 33.3 5.1 16.0 21.5 30.2 6.1 0 3.4 3.1 16.4 10.0
PANERA BREAD COMPANY-
CLASS A 0 3.0 45.6 3.5 11.9 16.3 24.1 3.8 0 2.5 2.1 11.6 7.1
BURGER KING HOLDINGS INC 1.1 1.4 -14.3 1.4 7.4 19.3 11.9 2.1 43.0 0.8 0.6 13.2 6.9
WENDY'S/ARBY'S GROUP INC-
A 1.2 0 50.0 0.2 0.3 0.5 20.4 0.8 40.2 1.9 1.4 4.5 -0.4
BRINKER INTERNATIONAL INC 2.2 1.1 16.7 1.2 6.0 18.0 13.5 2.4 46.4 0.7 0.3 7.0 5.6
CHEESECAKE FACTORY
INC/THE 0 0.9 14.3 1.4 4.7 10.3 18.7 2.7 15.8 1.0 0.6 8.9 4.6
JACK IN THE BOX INC 0 1.8 -38.5 1.9 7.1 19.4 13.5 2.0 42.9 1.0 0.2 5.3 3.3
All measures based on last filing unless otherwise indicated.
Global Equity Research 11 August 2010
Consumer Staples Belinda, Tanya, Wei, & Jerry
51 Student Investment Advisory Services | Simon Fraser University
Yum! Brands, Inc. (NYSE: YUM)
Price $41.46
Date of Price 13-March-2010
52-week Range $32.24 - $44.00
Shares Outstanding 0.469 million
Market Cap $1921 million
Current Dividend $0.84
Dividend Yield 2.10%
P/E (T12M) 17.30
EPS (T12M) $2.26
P/B (MRQ) 18.30
Target Price $40.28
Target Price Date 1-December-2010
Rating Sector Outperform
Recommendation Based on our analysis, Yum! is a company with a
bright future. We believe in their strategy and
management’s ability. With the ability to localize
food menu items in different countries, they will
remain competitive in the medium to long run.
With our valuation capturing the potential growth
of the company, we believe this stock’s
conservative fair price is at $40.28 with a high of
$50.30 and low of $33.38. A hold
recommendation can be concluded if the price
drops below $40.28 as we do not believe in
purchasing something that is overpriced.
Exhibit 1: Source Yahoo Finance
Company Description Yum! Brands, Inc. is the world’s largest restaurant
company which owns the famous fast food stores,
and operates 37,000 restaurants in over 110
countries and territories with over 1 million team
members. The company’s well-known fast food
restaurants are KFC, Pizza Hut, Taco Bell, A&W,
and Long John Silver’s, which are the global
leaders for chicken, pizza, Mexican food, Burgers
and quick-service seafood. Over the past few
years Yum’s stock performance has been
outperforming the consumer discretionary index
and economy trends (See Exhibit 1). As well as
the revenue and operating profit that has been
increasing aggregately for the past six years (See
Exhibit 2).
Exhibit 2: Yum Annual Report
Industry Outlook
Yum! Brands Inc. (Yum!) is in the Quick Service
Restaurant (QSR) industry, primarily competing
with McDonald’s, Domino’s Pizza, and Burger
King. The nature of the industry deals with
commodity prices and dairy farm products. The
main inputs for QSR are chicken, beef, cheese, and
beverages. The industry structure is oligopoly,
which is characterized by few major sellers in the
market. Therefore, when the commodity prices
rise, the intense competition makes companies
more difficult to earn margin or to set higher
prices. It is important for firms to be aware of
competitors’ actions (marketing, promotion) in
order to survive in the industry.
Growth Forecast and Earnings
Outlook The growth opportunity for Yum! is to focus on
their China division since China is predicted to be
Global Equity Research 11 August 2010
Consumer Staples Belinda, Tanya, Wei, & Jerry
52 Student Investment Advisory Services | Simon Fraser University
the fastest growing country in the
world. According to China’s GDP statistics, it
increased from 1.93 trillion in 2004 to 4.33 trillion
in 2008 (Google, 2010). The growing GDP
indicates that the Chinese purchasing power will
increase rapidly based on their expanding
economy. 35% of operating profit was generated
from China division in 2009 that was very close to
U.S. segment profit of 37% (See Exhibit 3).
Exhibit 3: Source Yum Investor Conference
Information
Valuation I (FCFE)
As a MNC, Yum! has different strategies for
regions with distinctive characteristics. Therefore,
our valuation model needs to consider each
geographic division’s prospects and unique value
drivers when forecasting the company’s financial
performance (See Exhibit 4).
Exhibit 4
China Division
In order to incorporate the China market’s
enormous growth potential into our forecast, we
use a 3-stage growth model with 3-year high
growth and 5-year declining growth. Exhibit 5
summarizes the assumptions of our model. In the
3-year high growth stage, we expect the new unit
development rate to be 13.23%, with sales per unit
of 1.06 million for company-owned restaurants
and 0.23 million for franchise units. The
percentage of company-owned units is higher than
the historical average as we observe an increasing
trend in this number. Same store growth rate is 5%
and operating profit margin is 16.9%. In the
following 5-year declining growth stage, the new
unit development rate will decrease by 2.21%
annually. Same store sales growth rate is 2%,
which will continue in the terminal stage.
Exhibit 5
YRI Division
The YRI Division is undergoing refranchising.
The effect will lower company sales with a higher
franchise income. We set the annual refranchising
rate to be 0.5% and the net impact on revenue to
be 0.93 million per unit (Exhibit 6). Beside the
refranchising program, we expect this division to
enjoy 3-year above average growth with total unit
growth rate of 3.9% and same store sales growth
rate of 4.8%. In the terminal stage, the growth rate
is 2% (Exhibit 7).
Historical
Average2009
3-Year High
Growth
Stage
5-Year
Declining
Growth Stage
Terminal
Stage
Total Unit
Compounded
Growth Rate
13.23% 13.20% 13.23%
2.21%
decrease
annually from
13.23%
0%
Sales per Company
Owned Unit1.06 M 1.21 M 1.06 M 1.06 M 1.06 M
Sales per Franchise
Unit0.23 M 0.22 M 0.23 M 0.23 M 0.23 M
% of Company
Owned Unit80% 82% 85% 85% 85%
% of Franchise Unit 20% 18% 15% 15% 15%
Same Store Growth
Rate10% -2% 5% 3% 2%
Global Equity Research 11 August 2010
Consumer Staples Belinda, Tanya, Wei, & Jerry
53 Student Investment Advisory Services | Simon Fraser University
Exhibit 6
Exhibit 7
U.S. Division For the U.S. unit, the company’s refranchising
program aims to decrease its company-owned unit
percentage to below 10% (Exhibit 8). Based on
historical trend, we expect this number to decline
by 1.5% per year until it reaches the target level.
The net impact on revenue is estimated to be 0.86
million per unit. For other factors, the same store
sales growth rate is 2%, and the operating profit
margin is set to be 14%.
Exhibit 8
Yum! Firm-wide Cash flow After the three division’s future sales are
determined, combining them can reach Yum!’s
equity value. Exhibit 9 presents the summary of
our FCFE model metrics. In the aggregated 8-year
growth stage, we expect the company to maintain
a high level of capital expenditure and leverage as
what has been shown in the historical trend. In the
terminal stage, a 2% terminal growth rate is
expected while a 50% capex/OCF is predicted to
support the matured company. Yum! can also
decrease its dependency on leverage after passing
the peak of growth.
Exhibit 9
Yum! Equity Value
Exhibit 10 shows the intrinsic value per share of
Yum! based on our valuation model and the results
of our sensitivity analysis. The fair value of Yum!
Is $40.28, which is very close to the closing price
of $41.46 on May 13, 2010. For the sensitivity
analysis, we choose to vary the growth estimates
of the China Division, since the China market
possesses the highest potential yet the highest
uncertainty. We also examine the effect of change
in Yum!’s risk factor. This analysis shows a price
range of $33.38 to $50.30 per share. We can see
that Yum!’s equity value is highly sensitive to the
expansion in China, and that cautions investors
about China’s economic growth and the
company’s development in this region.
ResultRevenue Impact per Refranchised Unit: 0.93M (Historical Average)
Effect
Lower Company Sales Higher Franchise Income
Target Company-owned Unit
9.5%
Annual Refranchise Rate
0.5% (Historical Average)
Refranchising Program
2009 Company-owned Unit: 12%
Historical
Average2009
3-Year High
Growth
Stage
Terminal
Stage
Total Unit
Compounded
Growth Rate
3.93% 3.61% 3.93% 0%
Net Revenue Impact
per Refranchising
Unit
0.93M 1.21 M 0.93M n/a
Same Store Growth
Rate4.80% 1.00% 4.80% 2%
Cost of Equity
• Risk Free Rate: 3.43%
• Market Premium: 6.47%
• Beta: 0.87
• Cost of Equity: 9.05%
Growth Stage (8 years)
• OCF/Revenue: 13.5%
• Capex/OCF: 65%
• Debt/Capital: 85%
Terminal Stage (9 year +)
• Terminal Growth Rate: 2%
• Capex/OCF: 50%
• Debt/Capital: 50%
Global Equity Research 11 August 2010
Consumer Staples Belinda, Tanya, Wei, & Jerry
54 Student Investment Advisory Services | Simon Fraser University
Exhibit 10
Valuation II (Relative)
Whether Yum! Company is worth investing
depends on its profitability, liquidity and
operational efficiency. Yum! has a continuous
growth in ROA in the last 10 years, and its ROA is
the highest among its international QSR peers and
consumer discretionary industry for fiscal year
2009 (Exhibit 11 & 12)
.
Exhibit 11
We use ROA instead of conventional ROE as the
profitability measurement due to the fact that
Yum! has very low equity value and negative
equity in fiscal year 2000 and 2008.
Exhibit 12
However, their energetic growth is the reason that
they maintained a high level of the debt. In fact,
the international QSR industry prefers to leverage
a substantial amount of debt to increase their
overall profit. As of 2009, Yum! has a 0.78 debt to
capital ratio, while the peer average is close to 1.5
(Exhibit 13 & 14).
Exhibit 13
Exhibit 14
Risks Associated with Target Price
Yum! faces some of the very common yet
significant risks shared by many multinational
corporations (MNC) as well as other quick service
restaurants (QSR). The risks are associated with
food safety, Food borne-illness, foreign
operations, input prices and YUM’s franchisees.
US Equity Research 11 August 2010
Technology Roxana Zaman
55 Student Investment Advisory Services | Simon Fraser University
Microsoft Corp. (NASDAQ:MSFT)
Price $25.80
Date of Price 11-Aug-10
52-week Range $22.73.00 - $31.58
Shares Outstanding 8763.8M
Market Cap $226194.7M
Current Dividend $0.52
Dividend Yield 2.01%
P/E (T12M) 12.29x
EPS (T12M) $2.10
P/B (MRQ) 4.84x
Target Price $29.50
Rating: Sector Outperform
Recommendation Microsoft Corp. is currently trading at a discount
relative to its target price, and is relatively
undervalued compared to its historical average and
its peer group, signalling a good buying
opportunity. Even though the Company has not
been able to successfully capitalize on significant
trends in comparison to its competitors, it
continues to have relatively strong operating cash
flows. In addition, an increase in worldwide PC
sales as well as the Company’s new products and
services are expected to contribute to strong future
performance.
Exhibit 1:Source Bloomberg
Company Description
Microsoft Corp. is a multinational computer
technology corporation engaged in developing,
manufacturing, licensing and supporting a wide
variety of software products and services for many
different types of computing devices; it also
designs and sells hardware. Its products are
distributed primarily through original equipment
manufacturers (OEMs), distributors and resellers,
as well as online directly from the Company.
Exhibit 2: Source Bloomberg
Industry Outlook
The technology sector is cyclical as consumer
spending on technological products and services
fluctuates with the business cycle; economic
growth is thus a significant drive of the technology
sector. In June, consumer sentiment rose to its
highest level since February of 2008, while
incomes climbed the most in a year to 1.4%.
According to a Bloomberg survey of economists,
U.S. GDP may grow by 2.7% in 2010. Assuming
that the overall economy continues to improve,
technology stocks are expected to outperform
during such periods of economic growth.
Exhibit3: Source Bloomberg
In addition, many technology companies such as
Apple Inc., IBM Corp. and Microsoft Corp. have
been stockpiling cash and extending debt
securities. These cash stockpiles limit how much
investors can lose if the economy rebound tails off.
A significant industry trend is cloud computing –
Internet-based computing – which is decreasing
the need for local operating systems and
application suites. Similarly, there is increased
usage of mobile devices. For example, it is
estimated that mobile PCs will drive 90% of PC
growth over the next three years (Gartner).
15
20
25
30
35
40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Share Price Performance
MSFT
0%
10%
20%
30%
40%
50%
60%
70%
80%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Qu
art
erl
y %
Ch
an
ge
sin
ce 2
00
0
Relative Performance
US Nominal GDP
MSFT Equity
-20%
-10%
0%
10%
20%
30%
40%
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10
Re
tu
rn
Relative PerformanceMSFT
XLK
NASDAQ Composite
August 9, 2010
56 Student Investment Advisory Services | Simon Fraser University
Growth Forecast and Earnings
Outlook
Over the last twelve months, Microsoft Corp. has
been able to enjoy higher returns relative to the
market and its peer group. The Company generates
most of its revenue from the Client segment
(Windows product family) and the Microsoft
Business Division (Microsoft Office system).
However, Microsoft Corp. has not been able to
successfully capitalize on significant trends,
allowing its competitors to gain large market
share. Regarding mobile operating systems,
Symbian OS along with Android and Apple’s iOS
dominate the market. In the cloud-computing
world, Google has become a significant threat; its
cloud-based services (ie. Google Docs) are causing
a downward pressure on the selling price of the
Microsoft Office system. In addition, the increase
in popularity of Netbooks is adversely affecting
growth rates in the Client segment, since many are
sold with a lower cost version of Windows.
Going forward, worldwide PC shipments are
projected to increase by 19.7% in 2010, up from
12.2% in 2009 (Gartner). Windows is the
dominant operating system for desktop and laptop
PC’s, with Windows 7 being the fastest growing
operating system in history. In addition, there is a
vast marketplace for cloud computing and the
Windows Azure Platform is well-positioned to
take advantage of this emerging opportunity. Other
new products and services such as Bing and
Microsoft Office 2010 are well-positioned in the
product cycle and are thus expected to contribute
to strong future performance; earnings per share
are expected to increase to $2.40.
Valuation
Microsoft Corp. has outperformed its main
competitors in terms of profit margin over the past
decade, indicating relatively stronger financial
health. In addition, Microsoft Corp. has a much
lower debt-to-total equity ratio (13.12%) than the
industry average (18.65%), signalling its cash
flows are less risky than those of its peers.
Exhibit 4: Source Bloomberg
Additionally, the Company has a long history of
relatively stable and predictable cash flows and
earnings - Exhibit 4 shows an increasing trend in
both of these variables. Both its return on equity
and dividend yield are higher than the industry
average; these features are consistent with a value
investment philosophy. Microsoft Corp. is
currently trading at a discount relative to its
historical level and to its peer group, indicating
that the stock is undervalued.
Exhibit 5: Source Bloomberg
Given that earnings per share are forecasted to
increase to $2.40, the leading price-to-earnings
ratio is 10.75x. The expected value of the stock
based on forecasted earnings is $29.50.
Risks Associated with Target Price
Given that the Company’s main focus is
innovating and developing new products in order
to drive growth, these objectives are highly
dependent on consumer acceptance. It is not
guaranteed that high R&D spending will lead to
the manufacturing of commercially successful
products. The Company may not be able to
achieve significant revenue from its new products
and services for a number of years, if at all. Other
general risks to consider are worldwide economic
conditions, consumer preferences and existing
claims and lawsuits that may result in adverse
outcome.
-80
-60
-40
-20
0
20
40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Perc
enta
ge
Profit Margin
MSFT
AAPL
GOOG
IBM
0
0.5
1
1.5
2
2.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
MSFT Cash Flow/Share vs. Diluted EPS
Cash Flow Per Share
Diluted EPS