Eric Nuttall, portfolio manager, Sprott Asset Management
FOCUS: Oil & Gas Stocks, and Small-Mid Cap Canadian Equities
The oil market is rebalancing due to strong demand growth coupled with plummeting non-OPEC supply and flat lining OPEC supply. The market will imminently be undersupplied (persistent draws from US inventory to begin within the next month) and unless oil rallies high enough to allow for the return of drilling activity in the Big 3 US tight oil/shale plays, the oil market will be undersupplied within one year. This price is around $60-to-$65/bbl and we should see that by early 2017. In that price environment we still see 30-to-40 percent upside in many energy stocks despite the strong rally enjoyed year-to-date.
Cardinal Energy (CJ.TO)
Cardinal Energy has lagged the rise in oil this year and is due for a rerate. It trades at a 2.0X discount to its peers (TOG, WCP, CPG) yet has the highest leverage to a rise in the price of oil, a pristine balance sheet, a low corporate decline rate, and will be one of the first oil divco’s to be able to raise their dividend. We estimate it trades at 6.2X 2016 EV/CF and 5.2X 2018 EV/CF and could raise its dividend by 33 percent next year assuming $60/bbl oil. As it reclaims its historical multiple of 8.0X we see over 50 percent upside in the stock over the next 1-to-2 years.
NYX Gaming (NYX.V)
NYX closed a massive acquisition of the largest sports betting software company in the world for $505MM. To do so they issued $150 million in stock to two existing customers and another $150 million to the public. The fact that the largest European sportsbook company became a 19 percent shareholder and backstopped the financing speaks to their strong opinion of NYX and its management. Pro-forma the deal NYX trades at 7.4X 2017 EBITDA versus its comps at over 12X. Once the market becomes more comfortable with the integration of Open Bet we see a multiple rerate on what is a highly profitable and strong free cash flow business in an industry that grows by roughly 10 percent per year. A 8X multiple on 2018 EBITDA would = $4.40 share price or 70 percent upside.
DHX Media (DHX’b.TO)
DHX is a children’s media content company that owns the rights to many successful titles including Bob the Builder, Teletubbies, and the Twirlywoos. Benefiting from increasing demand for online children’s content they are generating organic growth rates in excess of 30 percent which for a small cap Canadian company is very special. DHX is also benefitting from an increase in partnerships with Mattel for toy merchandising for several of their titles and success on their modernization of the Teletubbies franchise could prove hidden upside for which the market is ascribing very little value. Trading at less than 10X forward EBITDA (a public comp Dreamworks was just acquired for 30X EBITDA) given the strong organic growth and high margins of long legacy content we see fair value closer to $10/share offering over 50 percent upside.
Past Picks: June 8, 2015
Tamarack Valley Energy (TVE.V)
- Then: $3.80
- Now: $3.97
- Return: +4.47%
- TR: +4.47%
Trinidad Drilling (TDG.TO)
- Then: $4.51
- Now: $2.32
- Return: -48.56%
- TR: -48.56%
Grenville Strategic Royalty (GRC.V)
- Then: $0.89
- Now: $0.37
- Return: -58.43%
- TR: -58.43%
Total Return Average: -32.17%
Sprott Energy Fund
Performance as of: April 29, 2016
Year to date: Fund 39.4%, Index* 17.4%
1 year: Fund -17.1%, Index*-18.3%
3 year: Fund 4.5%, Index* -5.7%
* Index: S&P/TSX Capped Energy Total Return Index
* Returns are all after-fees