Stephen Takacsy on BNN-Bloomberg’s Market Call, April 28, 2021

Stephen Takacsy on BNN-Bloomberg’s Market Call, April 28, 2021

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MARKET OUTLOOK:

Amidst the on-going pandemic, financial markets continue to defy gravity and logic. Many bubbles have formed (housing, cryptocurrencies, SPACs), yet many attractive investment opportunities have also been created. While most sectors have rallied sharply from the lows of March 2020, there are still areas where valuations are attractive such as energy infrastructure, renewable energy producers, asset managers, and telecom. While vaccinations are increasing, so are the rates of infection, and consequently, lockdowns in many parts of the country remain strict. We therefore continue to be cautious in our approach: not wanting to be a hero by playing the “re-opening trade”, but rather holding more stable companies and a larger cash balance, even at the risk of lagging the broader market on the upside.

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TOP PICKS

Savaria (SIS TSX)

Savaria is a global leader in accessibility equipment for the physically challenged. It manufactures and sells stairlifts, wheelchair lifts, and home elevators. It also manufactures and sells patient handling products such as specialized mattresses and beds for long-term care facilities, and medical equipment like ceiling lifts and slings. It just completed a transformative acquisition of Handicare of Sweden for $521M making it the largest player in the world. It expects to realize huge synergies in both revenues and costs and generate nearly $700M in sales and $100M of EBITDA. Aging demographics and the desire to live at home longer will provide strong tailwinds for many years to come.

Goodfood Market (FOOD TSX)

Goodfood is one of the fastest growing companies in Canada and one of 30 top performing stocks in 2020. It is Canada’s leading meal-kit company with a national platform serving 319,000 subscribers and is now building an on-line grocery business under the Goodfood brand. Sales are up tenfold in the past three years with a gross revenue run rate of roughly $400M today. Growth has accelerated during the pandemic as more people order food online, and this trend will continue post-pandemic. FOOD is trading at an EV of just over 1X sales versus nearly 2X for its main competitor Hello Fresh. Great entry point for one of the fastest growing companies on the TSX.

Andrew Peller (ADW/A TSX)

Canada’s second largest wine producer and distributor, and only one of two publicly traded companies. Stock is down 45 per cent from its highs three years ago, yet it has continued to grow its sales and earnings, both by acquisition and organically through new product launches. Well managed company with strong brands like Peller Estates, and 40 per cent plus gross margins. Peller is trading at a P/E of only 12X and only 8.5X EBITDA which is a huge discount to recent winery IPOs in the U.S.. We expect Peller to report record sales and profits which should get its share price back into the mid-teens. The company also recently filed notice to buy-back shares. One of the few high-quality companies whose shares are still dirt-cheap.

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PAST PICKS: June 16, 2020

CareRX (CRRX TSX) – formely CENTRIC HEALTH (CHH TSX) - **1 FOR 20 STOCK SPLIT, 06/23/2020**

CareRX is Canada’s largest institutional pharmacy supplying medication to senior care facilities. The stock is up for three reasons: their business is unaffected by the lockdowns because seniors need their medication; they made several large accretive acquisitions making them the number one player in Canada; and they are winning new business from competitors. CareRX is also launching telemedicine services and announced a partnership with Think Research to supply virtual services to senior facilities. The stock has the potential to double over the next few years.

Then: $0.23

Now: $6.32

Return: 34%

Total Return: 34%

MDF Commerce (MDF TSX) - formerly Mediagrif

MDF Commerce is an e-commerce solutions provider for large companies like Sobeys/IGA, Dollarama, and Carrefour. The company recently announced a huge contract with Aldi, the largest food retailer in the world, for a click & collect platform for its U.K. stores. MDF also enables suppliers to bid on government contracts, and recently won a large contract with NHS in the U.K., one of the largest healthcare systems in the world. MDF’s growth accelerated during the pandemic with the rush for businesses to digitize. Nearly 80 per cent of MDF’s sales are recurring SaaS revenue. Whereas Shopify trades at over 35X sales, MDF trades at under 2.5X revenues.

Then: $6.15

Now: $12.43

Return: 102%

Total Return: 102%

Sienna Senior Living (SIA TSX)

Owns and operates over 80 long term care facilities and retirement homes in Ontario and B.C.. It suffered from negative headlines during the pandemic and higher vacancy rates. However, this is transitory – there will be massive demand as the number of seniors in Canada increases. Sienna has a solid balance sheet and is entirely covered by government-guaranteed cash flows from its LTC facilities. While operating costs have risen, governments are subsidizing a large part of these costs. We expect to see growth resume in 2021 with the expansion and renovation of some facilities.

Then: $10.00

Now: $14.69

Return: 47%

Total Return: 57%

Total Return Average: 65%

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Stephen Takacsy, president, CEO and chief investment officer, Lester Asset Management, discusses his top picks: Andrew Peller, Savaria Corp and Goodfood Market

WEBSITE: www.lesterasset.com

Five winning traits investors should look for while navigating the small and mid-cap minefield

Five winning traits investors should look for while navigating the small and mid-cap minefield

Peter Hodson: Sure smaller companies are riskier, but they also tend to grow faster and can provide bigger returns

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On a professional basis, I have now been analyzing small and mid-capitalization companies for more than 30 years. Smaller companies, in my view, are just more fun. Sure, they are riskier than larger, more-established companies. But they are also typically growing faster, and can provide greater investment returns. You just have to be careful, and know what to watch out for. There are dozens of warning signs one can pick up on for small companies, and we will cover these in a later column. But for now, let’s focus on some things to look for, when trying to find a good small or mid-cap investment idea. We will try to list some company examples, as well.

Management

There is a reason why analysts and portfolio managers always say that management of a company is the most important factor to look at — because it is. This is even more true with a smaller company, because senior management has the vision, the expertise and the motivation (through stock ownership) to drive the company forward. Sure, large companies have lots of experienced managers as well. But smaller companies tend to have managers that live, breathe and sleep their company 24 hours a day. Many managers have their entire net worth at risk in their own company. We like this. Frankly, we want the managers of the companies we buy to be lying awake at night worrying about their business. If they are lying awake, we can sleep better. One example is Well Health Technologies (WELL on TSX). The executive team, led by Hamed Shahbazi, has grown (and sold) companies before. Our clients did well on TIO Networks, Shahbazi’s prior company, which was sold to Paypal in 2017 for $300 million. The team knows how to grow a company. Well’s shares are up 363 per cent in the past year, so are certainly off to a good start. Insiders own about 16 per cent.

Sponsorship

We like it when a smaller company has a “big brother” — that is, a larger company with a vested interest in it. In the large cap universe, this is exemplified by the Brookfield Group of companies, where Brookfield Asset Management (BAM.A on TSX) owns between 10 per cent and 50 per cent of many other companies, providing guidance, support, financing and, occasionally, a buy-out. In the mid-cap arena, we have really warmed up to Topicus Inc. (TOI on Venture), a new listing this year, spun out of Constellation Software (CSU on TSX). Constellation owns 30 per cent of Topicus, and fully controls the votes. We can’t see how it is a bad thing for Topicus to be controlled by the company that has had one of the best stock performances in Canada over the past decade. Many see Topicus as a ‘mini’ Constellation, and we would agree with this assessment. How is this relationship going so far? Well, Topicus shares are up 40 per cent since their listing less than three months ago.

New and big market opportunity

We like it when small companies go after new markets. Most investors know that gaming, e-sports and gambling are rapidly-emerging markets. Small companies moving fast in such markets are often at an advantage over larger, slower-moving large-cap companies. Case in point: Enthusiast Gaming Holdings (EGLX on TSX). Enthusiast has a dedicated network of more than 300 million gamers, and has started to monetize its customers. It has raised money and had more than $127 million in revenue last year. The gaming market has many years of assured growth ahead of it, and, while nothing is guaranteed, Enthusiast is off to a good start. If it can maintain its growth it should be able to capture a growing share of a large market. The stock is up more than 100 per cent already this year. Growth has been likely “pulled forward” by the pandemic, but that’s not necessarily a bad thing. Insiders still own 20 per cent of the company.

Balance sheet and sector

If you have been reading anything recently, you should know that there is a global shortage of semi-conductors. Car factories have stopped production, and other industries are feeling the pinch. Semi-conductor companies thusly are practically guaranteed to start looking to add more production capacity. Intel (INTC on Nasdaq) has already announced US$20 billion in new facilities. Its stock is up 30 per cent this year. But there is far more torque in smaller companies that provide capital equipment to the larger companies. Ichor Holdings (ICHR on Nasdaq), for example, makes critical fluid handling equipment for the sector. Shares are up 95 per cent this year and likely have room to grow. In Canada, we like Photon Control (PHO on TSX), up 36 per cent this year. It also provides semi-conductor manufacturing equipment. Both companies are also right now net debt-free, which reduces some risk in a typically-volatile sector.

Limited promotion plus dividends

When we pen our column on what to watch out for with small caps, we will have plenty to discuss on how stock promotion can be a negative sign. Promotion sets up high expectations. And, as any investor knows, high expectations are often met with disappointment in reality. So, ironically, we prefer little promotion. This way, companies can attract attention with fundamental performance, and not press releases. Put another way, if we are hearing about a stock, then no doubt thousands of others are as well. One small company that does not do much promotion is Sylogist Ltd. (SYZ on TSX). A small software provider, its shares are up 92 per cent in the past year, despite not many press releases. What’s more, and another thing we like with small companies, is its dividend. Current yield is 3.2 per cent, and it has raised its dividend four times in the past three years. For those paying attention to the prior point above, it also had $40 million net cash at the end of 2020.

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Peter Hodson, April 15, 2021

Peter Hodson, CFA, is Founder and Head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. Peter is also Associate Portfolio Manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned).

Source

https://financialpost.com/investing/five-winning-traits-investors-should-look-for-while-navigating-the-small-and-mid-cap-minefield

Reserve Requirement and How It Affects Interest Rates

Reserve Requirement and How It Affects Interest Rates

Why the Fed Removed the Reserve Requirement

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The reserve requirement is the total amount of funds a bank must have on hand each night.1 It is a percentage of the bank's deposits. The nation's central bank sets the percentage rate.

In the United States, the Federal Reserve Board of Governors controls the reserve requirement for member banks. The bank can hold the reserve either as cash in its vault or as a deposit at its local Federal Reserve bank.

The reserve requirement applies to commercial banks, savings banks, savings and loan associations, and credit unions. It also pertains to U.S. branches and agencies of foreign banks, Edge Act corporations, and agreement corporations.

How the Reserve Requirement Works

Say a bank has $1,000,000 in deposits. Each night, it must hold $100,000 in reserve. That allows it to lend out $900,000. That increases the amount of money in the economy. The loans help businesses expand, families buy homes, and students attend school. Having $100,000 on hand makes sure it has enough to meet withdrawals. Without the reserve requirement, the bank might be tempted to lend all the money out.

The reserve requirement is the basis for all the Fed's other tools.

If the bank doesn't have enough on hand to meet its reserve, it borrows from other banks. It may also borrow from the Federal Reserve discount window. The money banks borrow or lend to each other to fulfill the reserve requirement is called federal funds. The interest they charge each other to borrow fed funds is the fed funds rate. All other interest rates are based on that rate.

The Fed uses these tools to control liquidity in the financial system. When the Fed reduces the reserve requirement, it's exercising expansionary monetary policy. That creates more money in the banking system. When the Fed raises the reserve requirement, it's executing contractionary policy. That reduces liquidity and slows economic activity.

The higher the reserve requirement, the less profit a bank makes with its money.

Changing the reserve requirement is expensive for banks. It forces them to modify their procedures. As a result, the Fed Board rarely changes the reserve requirement. Instead, it adjusts the amount of deposits subject to different reserve requirement ratios. 

Reserve Requirement Ratio

On March 15, 2020, the Fed announced it had reduced the reserve requirement ratio to zero effective March 26, 2020. It did so to encourage banks to lend out all of their funds during the COVID-19 coronavirus pandemic.

Prior to the March 15 announcement, the Fed had just updated its reserve requirement table on January 16, 2020. It required that all banks with more than $127.5 million on deposit maintain a reserve of 10% of deposits.

Banks with more than $16.9 million up to $127.5 million had to reserve 3% of all deposits. Banks with deposits of $16.9 million or less didn’t have a reserve requirement. A high requirement is especially hard on small banks. They don't have much to lend out in the first place.

An Incentive to Grow

The Fed raises the deposit level that is subject to the different ratios each year. That gives banks an incentive to grow. The Fed can raise the low reserve tranche and the exemption amount by 80% depending on the increase in deposits in the prior year.2 The Fed's fiscal year runs from July 1 to June 30. 

Deposits include demand deposits, automatic transfer service accounts, and NOW accounts. Deposits also include share draft accounts, telephone or preauthorized transfer accounts, ineligible banker’s acceptances, and obligations issued by affiliates maturing in seven days or less.

Banks use the net amount. That means they don't count the amounts due from other banks and any cash that's still outstanding. Since December 27, 1990, nonpersonal time deposits and eurocurrency liabilities have not required a reserve. 

How the Reserve Requirement Affects Interest Rates

Raising the reserve requirement reduces the amount of money that banks have available to lend. Since the supply of money is lower, banks can charge more to lend it. That sends interest rates up.

But changing the requirement is expensive for banks. For that reason, central banks don't want to adjust the requirement every time they shift monetary policy. Instead, they have many other tools that have the same effect as changing the reserve requirement.

The Federal Open Market Committee sets a target for the fed funds rate at its regular meetings.

If the fed funds rate is high, it costs more for banks to lend to each other overnight. That has the same effect as raising the reserve requirement.

Conversely, when the Fed wants to loosen monetary policy and increase liquidity, it lowers the fed funds rate target. That makes lending fed funds cheaper. It has the same effect as lowering the reserve requirement. Here's the current fed funds rate.

Open Market Operations

The Federal Reserve can't mandate that banks follow its targeted rate. Instead, it influences the banks’ rates through its open market operations. The Fed buys securities, usually Treasury notes, from member banks when it wants the fed funds rate to fall. The Fed adds credit to the bank's reserve in exchange for the security. Since the bank wishes to put this extra reserve to work, it will try to lend it to other banks. Banks cut their interest rates to do so.

The Fed will sell securities to banks when it wants to increase the fed funds rate. Banks with fewer fed funds to lend can raise the fed funds rate. That how open market operations work.

Borrowing From the Discount Window

If a bank can't borrow from other banks, it can borrow from the Fed itself.

That’s called borrowing from the discount window. Most banks try to avoid this. That's because the Fed charges a discount rate that's slightly higher than the fed funds rate. It also stigmatizes the bank. Other banks assume no other bank is willing to lend to it. They assume the bank has bad loans on its books or some other risk.

Interest Rates Rise

As the fed funds rate rises, these four interest rates also rise:

LIBOR is the interest rate banks charge each other for one-month, three-month, six-month and one-year loans. Banks base their rates for credit cards and adjustable-rate mortgages on LIBOR.

The prime rate is the rate banks charge their best customers. Other bank loan rates are a little higher for other customers.

Interest rates paid on savings accounts and money market deposits also increase.

Fixed-rate mortgages and loans are indirectly influenced. Investors compare these loans to the yields on longer-term Treasury notes. A higher fed funds rate can drive Treasury yields a bit higher.

During the financial crisis, the Fed lowered the fed funds rate to zero. Interest rates were as low as they could be. Still, banks were reluctant to lend. They had so many bad loans on their books that they wanted to conserve cash to write off the bad debt. They were also hesitant to take on more potentially risky debt.

This forced the Fed to massively expanded its open market operations with the quantitative easing program. The Fed also removed some unprofitable mortgage-backed securities from its member banks.

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Key Takeaways

The federal reserve requirement is the amount of money the Federal Reserve requires its member banks to store in its vaults overnight.

Requiring banks to have a reserve requirement serves to protect them and their customers from a bank run. 

When the Fed adjusts the reserve requirement, it allows banks to charge lower interest rates. 

Banks often take on a financial burden when limits change, so the Fed often 

uses open market operations instead to influence banks. 

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By Kimberly Amadeo 

Reviewed by Eric Estevez

Updated October 27, 2020

Source

https://www.thebalance.com/reserve-requirement-3305883

Another interesting site

https://www.federalreserve.gov/monetarypolicy/reservereq.htm

Brookfield Infrastructure Partners, Q4 2020 Letter to Unitholders

Brookfield Infrastructure Partners, Q4 2020 Letter to Unitholders

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Overview

Although the past year was like none we have seen before, it provided a unique environment to showcase the resilience and strength of our business. Our operations continue to deliver uninterrupted service despite many of the broad-based restrictions that have been imposed globally. During the year, we also opportunistically added a number of high-quality assets in key strategic sectors and geographies that will contribute to future cash flow growth.

Funds from Operations (FFO) for the year totaled $1.45 billion or $3.13 per unit, an increase of 2%. Our fourth quarter FFO per unit exceeded the prior year by 12%. These results reflect strong operating performance across most of our operating regions and businesses and the value of our active asset management approach.

Our key accomplishments for the year are summarized below:

Achieved solid performance across operating segments – delivered organic growth of 9% at our regulated and contracted operations, which comprise approximately 75% of our business.

Deployed $2.5 billion into new investments and organic capital projects – expanded our presence in India’s rapidly growing data infrastructure sector with the acquisition of a large-scale portfolio of telecom towers, and made an investment in a world class LNG export terminal that is contributing to global decarbonization efforts.

Generated over $700 million through capital recycling – completed four sale processes and several asset-level financings that produced over $700 million of proceeds, resulting in an average after-tax IRR of approximately 20% and approximately three times multiple of capital.

Listed Brookfield Infrastructure Corporation (BIPC) – expanded our market access with the launch of BIPC on March 31; the listing was met with strong investor reception and robust trading volumes.

These achievements are in addition to the agreement we recently reached to sell our North American district energy business in two separate transactions for total consideration of $4.1 billion on an enterprise value basis. Net proceeds to BIP are expected to be approximately $950 million. We will earn an IRR on this investment of over 30%, with a multiple of capital of over six times. This is a tremendous result for the business and is a significant part of our capital recycling plans for the year.

As a result of our strong financial and operating performance and robust liquidity position, our Board of Directors approved a quarterly distribution increase of 5% to $0.51 per unit in 2021. This represents the 12th consecutive year of distribution increases and is a testament to the resiliency of our operations and positive outlook for growth.

BIP Stock Market Performance

Brookfield Infrastructure’s units performed well for investors during a volatile year. Our latest tabulation of compound investment returns since our inception is provided below. This year, our units returned 15% and 12% on the NYSE and TSX, respectively, while our paired corporate security (BIPC) has more than doubled since its launch at the end of March. More relevant for long-term investors, our 5-year and since-inception annualized compound returns of 22% and 18%, respectively, have considerably exceeded performance of the broader market and our peer group.

Results of Operations

FFO for 2020 totaled $1.45 billion, compared to $1.38 billion in the prior year. The 5% increase reflects the highly regulated and contracted nature of our cash flows, as well as the embedded organic growth within the company. Results benefited from capital deployed across our segments and organic growth within our utilities, midstream and data segments. The single largest adverse impact on results was the depreciation of the Brazilian real, which reduced FFO by approximately $100 million, relative to 2019.

Utilities

Our utilities segment generated FFO of $659 million in 2020, an annual increase of 6% after adjusting for the impact of a weaker Brazilian real. Our utility businesses performed well overall, reflecting the regulated and contractual frameworks under which we operate. Results benefited from inflation-indexation and $340 million of capital commissioned into rate base during the last 12 months. These contributions were partially offset by delays in the recognition of certain connections revenue at our U.K. regulated distribution business.

At our U.K. regulated distribution business, new connection activity for the quarter averaged approximately 90% of prior year levels as construction activity steadily increased over the past six months. Connection sales exceeded plan for the first time since the initial government-imposed shutdowns took effect, reflecting the strength of both our multi-utility offering and the housing market. While the U.K. government recently implemented further restrictions, we do not expect a significant impact to our operations. The restrictions do not apply to the construction sector, and the broad stimulus programs have contributed to robust housing demand.

In December, our Brazilian regulated gas transmission operation received its annual inflationary tariff adjustment that will result in an almost 25% increase in revenue (on a local currency basis) this year. Revenues for this business are contractually linked to an inflation index which increased substantially in 2020 because of the devaluation of the Brazilian real. This contractual protection serves as a natural foreign currency hedge and will allow us to meaningfully grow FFO in 2021.

At the U.S. operations of our North American residential infrastructure business, we completed a securitization financing with an initial draw of $220 million (BIP’s share – $70 million) at an interest rate of approximately 2.5%. This securitization entity facilitates efficient and low-cost financing for our growing rental offering. We have largely completed our balance sheet optimization initiatives which we set out when we acquired the business. This includes securitization programs in both the Canadian and U.S. operations, in addition to a standalone green bond issuance at our metered services operation.

In January, we agreed to acquire a controlling stake in the largest independent residential infrastructure company in Germany. The company provides low-carbon heating solutions to over 20,000 customers and we plan to leverage the existing platform to expand in this highly fragmented industry in Germany. The total investment amount was initially approximately $75 million (BIP’s share – approximately $20 million) but we believe we can deploy significant follow-on capital as we use this initial investment as a platform to grow residential heating and cooling solutions throughout Germany and the rest of continental Europe.

Transport

FFO from our transport segment was $590 million, which was relatively consistent with the prior year despite a challenging environment and disruptions in global trade. The segment benefited from the initial contribution of our North American rail operation and LNG export terminal, solid volumes across our rail networks and favorable rent settlements at our U.K. port operation. These contributions were offset by lower volumes at our toll roads and container ports.

Traffic and volume levels across our GDP-sensitive transport businesses continued to improve throughout the fourth quarter. On average, carloads across our rail networks were broadly in-line with the same quarter last year as global trade recovers. Notably, traffic levels at all our toll roads have improved to levels above 2019, highlighted by a 7% increase in Brazil (on a same-store basis). Finally, our diversified terminal operations recovered after experiencing volume declines earlier in the year. Fourth quarter port volumes were up approximately 10% year-over-year. We are encouraged by the trajectory at our transport businesses and expect performance to benefit as mobility restrictions ease.

Our U.K. port operation received further favorable outcomes in realizing on rent increases with long-term tenants. The increases will result in annual rent doubling on those currently charged and includes a retroactive payment as far back as 2014. This outcome follows a similar increase received last quarter, which resulted in an almost four-fold increase in annual charges for a large property tenant.

The U.S. LNG export terminal we acquired in the third quarter is performing in-line with our expectations. The lump sum construction of a sixth LNG export train is well-progressed at over 70% complete and expected to reach substantial completion during the second half of 2022 – well ahead of the guaranteed timelines and within budget. Once all six trains are operational, run-rate production capacity is estimated to increase by approximately 20%.

Midstream

FFO from our midstream segment totaled $289 million, an increase of 18% compared to the prior year. Performance this year was excellent, with organic growth contributing 13% despite challenges in global energy markets. Our highly contracted cash flows were uninterrupted by the economic shutdowns and we benefited from robust transportation volumes and the commissioning of several new capital expenditure projects.

Our U.S. gas pipeline reported very strong results during the fourth quarter with FFO increasing 25% above prior year levels. Results were driven by favorable market conditions, particularly at our gas storage operations, as well as due to the commissioning of two growth projects. These projects involve system enhancements to increase deliverability to Gulf Coast LNG facilities and a pipeline extension. Additionally, the business has substantially completed the second phase of its Gulf Coast expansion, which will further increase transport capabilities in the region. This project involves approximately $200 million of capital spend (BIP’s share – $100 million) and is on track to be completed below budget. Once commissioned during the first quarter of 2021, the expansion will generate annual EBITDA of approximately $45 million under long-term take-or-pay contracts.

Data 

Our data segment delivered FFO of $196 million, an increase of almost 50% compared to the prior year. This step-change increase is the result of organic growth and approximately $1 billion of capital deployed into various strategic growth initiatives over the last 24 months. With respect to our ongoing growth capital projects, we have commissioned 22 MW of capacity at our South American data center operation and constructed approximately 150,000 fiber plugs at our French telecom operation in the last year. Combined, these two projects will contribute additional annual EBITDA of $50 million (BIP’s share – approximately $10 million).

The integration of our recently acquired Indian tower operation is progressing with key commercial activities well underway. In January, we signed a binding term sheet with one of the leading MNOs in the country to install their telecommunication equipment on our towers. We are now focused on the onboarding process and finalizing the long-term master service agreement. This is a notable milestone for the co-location strategy that formed a core part of our investment thesis and should lead to deals with other MNOs to implement similar arrangements.

Balance Sheet & Strategic Initiatives

A disciplined approach to financing at the corporate and asset level allowed us to remain focused on opportunistic transactions throughout the year. With our attention on de-risking our balance sheet and maintaining a healthy liquidity position to support growth opportunities, we completed several important activities as historically low interest rates and supportive credit markets characterized much of the year.

Enhanced our corporate issuance profile – We extended our debt maturity profile and commenced a green preferred unit program. With these initiatives, our nearest corporate maturity is not until 2024. Including our first quarter issuance, we have now raised a total of $400 million of perpetual green preferred units in the U.S. with an average coupon of just over 5%.

Maintained robust credit metrics and a strong investment grade credit rating – We have a conservative balance sheet with approximately 85% of our term debt at the asset level on a non-recourse basis, and a 21x interest coverage ratio at the corporate level; these factors support our strong investment grade rating, which was reaffirmed in June 2020.

Meaningfully advanced our capital recycling program – We generated over $700 million of proceeds and launched other sale processes that are progressing well.

Our liquidity position is robust following an active year of capital deployment. We deployed $2.5 billion in new investments and organic capital projects. During the year, we deployed approximately $1 billion into two highly cash generative data and transport assets and invested over $900 million (approximately $400 million net of project-level financing) to advance key capital projects within our existing businesses that will significantly contribute to our organic growth in the coming years.

We also purchased over $600 million of shares in a handful of publicly traded infrastructure companies that traded at substantial discounts to their intrinsic value. Many of those companies recovered quickly, which resulted in approximately $60 million of realized gains in the year. We continue to hold the remaining companies and hope that at least one of these positions will lead to a larger transaction.

Today we have approximately $3.7 billion of available liquidity, of which $2.4 billion is at the corporate level. In the near term, we expect to further strengthen our liquidity position by an incremental $2 billion as several sale processes near completion. During the fourth quarter, we listed our Australian Export Terminal on the Australian Stock Exchange. Through the initial public offering, we sold an approximate 20% ownership interest (BIP proceeds of approximately $100 million) and retained a 49% stake. The successful listing demonstrates the value and demand for stable, cash flow producing infrastructure businesses.

Looking ahead, we are well-positioned to capitalize on new infrastructure investment opportunities and foresee our capital recycling program to be a principal source of funding. As previously communicated, we expect 60-75% of growth opportunities to be funded through the monetization of mature and de-risked assets. We anticipate approximately $4 billion of proceeds from capital recycling over the next two years.

Enwave: A Value Creation Success Story

We often refer to our active approach to asset management and the value created through the collaborative partnership we have with our businesses. Enwave, our North American district energy platform, is a good example of this full-cycle strategy. Over the last eight years, the business and organizational culture has been transformed through disciplined commercial efforts, remarkable organic growth, strategic tuck-in acquisitions and active balance sheet management. Under our ownership, Enwave has grown to be the largest district energy system in North America and delivers heating or cooling to over 800 buildings.

To put it simply, district energy utilizes a centralized source to distribute low-carbon thermal energy to a network of buildings. District energy systems facilitate sustainable growth, offer exceptional reliability and provide customers with capital and space savings compared to owning and maintaining their own dedicated heating and cooling equipment.

In 2012, we had our first opportunity to complement our utilities segment with an unregulated but highly contracted district energy system. In addition to the strength of the in-place cash flows and organic growth potential, we recognized the value we could uncover by doing two things: 1) we could leverage Brookfield’s commercial real estate operations to expand and efficiently consolidate fragmented systems across North America, and 2) we believed we could transform what was previously a reactionary utility, into a sales-focused, commercial minded heating and cooling solutions provider.

Since the initial acquisition of systems in Toronto and Windsor, we have grown Enwave’s network by acquiring other high-quality district energy systems in major North American markets and driving a structural organic growth strategy. Today, Enwave operates in nine major cities in the U.S. and four in Canada. Following each acquisition, the standalone assets were integrated into one cohesive and operationally efficient business led by a high performing management team. This team was largely hand-picked from our existing businesses and we supplemented their breadth with internal Brookfield expertise in the areas of operations and finance. Over the years, we realized substantial benefits through the implementation of a focused commercialization strategy, operational best practices, balance sheet discipline and centralized procurement.

To manage Enwave’s large pipeline of organic growth opportunities, the business required the right capital discipline to both plan and execute projects. By leveraging the Brookfield network, we were able to incorporate best practices of other portfolio companies to de-risk our growth strategy. One of the most notable shifts in the business was converting a legacy utility business into an acquisitive, sales-oriented growth platform. This transformation occurred gradually over several years and was driven by the very capable leadership team we inserted into the business. We also created a single and cohesive finance function, eliminating the redundancy and inefficiencies of system-specific teams. Lastly, we consolidated the procurement function to leverage the platform scale and achieved meaningful operating savings.

Throughout our ownership, Enwave secured over 135 new building connections and realized a compounded annual EBITDA growth rate of over 20% (of which 13% was driven organically). This business has a highly attractive investment profile; it is a global leader in sustainability, it benefits from an incumbent advantage in its service territory and it generates stable and predictable cash flows under long-term contracts with a diversified base of creditworthy counterparties.

We commenced a sales process for the business in the fall of 2020. As a result of our asset management initiatives, the business has been well contracted and a substantial, de-risked growth pipeline has been put in place, making this business an attractive investment for institutional investors. We recently reached an agreement to sell the business in two separate transactions for total consideration of $4.1 billion on an enterprise value basis. Net proceeds to BIP are expected to be approximately $950 million. We will earn an IRR of over 30% on our investment and a multiple of invested capital of over six times. This result provides another indication of the value of high quality, de-risked infrastructure assets to institutional investors.

Our Approach to ESG

We have a long history of owning and operating long-life infrastructure businesses that provide essential services both globally, and in the local communities in which they operate. Environmental, Social and Governance (“ESG”) considerations have always been embedded in how we operate and underwrite, and we make it a priority to actively engage with all relevant stakeholders on a regular basis. With the investment community’s increased focus on ESG, we wanted to provide a reminder of our approach and highlight some recent initiatives in this regard.

ESG considerations and monitoring practices are ingrained in our underwriting and operating standards. We utilize our operating expertise to identify material ESG risks and opportunities when underwriting a prospective investment. We then develop and oversee the implementation of near-term and long-term plans to drive performance. Given the essential nature of our businesses, our initiatives typically focus on risks associated with employee health & safety, the environment, bribery & corruption and legal & regulatory compliance. We drive strong cultures within our operating businesses by holding senior executives accountable for specific performance targets on these topics, tying this performance to compensation and leveraging experience both within our Brookfield team and across our operating groups where we see opportunities to bring new ideas and approaches.

We invest in resilient businesses and account for stranded asset risk. Avoiding stranded assets has always been top of mind for us. This risk could be influenced over time by technology, human behavior, and increasingly, because of environmental considerations. Looking specifically at our midstream assets, we are focused on businesses that are both resilient and active contributors to global decarbonization efforts. Within this segment, revenues are mostly contracted on a long-term basis and we take no material commodity price or volume exposure. We have a diversified base of creditworthy counterparties and cash flows are front ended with attractive cash yields. And finally, there is significant upside potential should these assets be repurposed in the future as part of a global energy transition. 

Carbon footprint. The measurement and reduction of greenhouse gas (“GHG”) emissions over time has become a key area of focus for investors. Each of Brookfield’s public entities and institutional funds, including our partnership, are striving towards net zero emissions on an avoided carbon, Scope 1 and Scope 2 basis. On that basis, Brookfield Asset Management (“BAM”) is currently net negative across its entire $600 billion asset portfolio, largely due to its ownership of one of the world’s largest pure-play renewable power businesses. Through our affiliation with BAM, not only will we benefit from broad expertise regarding the implementation and maintenance of industry-leading ESG policies and protocols, but also the ability to offset and avoid our current emissions using favorable group-level attributes.

In line with our overall approach on ESG of solid leadership complemented by effective measurement systems, we have implemented carbon measurement and reduction programs across our businesses. We will track and report GHG emissions consistent with the Partnership for Carbon Accounting Financials (“PCAF”) standards, and we will develop and regularly publish decarbonization plans consistent with the Paris agreement.

Within the envelope of net zero, we will continue to own and operate certain essential infrastructure assets globally that transport fuel. While natural gas related assets make up only a portion of our diversified portfolio, we believe that they play an important role in the global energy transition that is well underway, particularly in Asia, and as a bridge to renewables and potentially hydrogen. Rest assured, when we acquire these assets, we will be laser focused on the duration of cash flows, we will operate them with their contributions to the transition to net zero in mind and with plans to continuously improve them over time.

Outlook

We enter 2021 with a great deal of optimism guided by a fairly positive backdrop anchored around a historically low interest rate environment and a global rollout of several COVID-19 vaccines that are currently underway. This should result in a gradual reopening for economies around the world to begin in the first half of the year.

This backdrop bodes well for the global economy, and more specifically, for our GDP sensitive assets. Our ports, toll roads and rail businesses have proven their resilience, and we anticipate they will outperform during a return to normalcy and an anticipated period of economic expansion. Additionally, our midstream businesses performed well in 2020 due to their contracted nature, however increased economic activity should lead to even higher market sensitive revenues which had historically comprised approximately 15-20% of our revenues.

The key priority heading into 2021 is to convert on our substantial pipeline of attractive opportunities into investments. As we discussed at our investor day, we believe we are entering an infrastructure super cycle where the investable universe of opportunities will grow materially and our access to low-cost capital will remain strong. We are continuing to target to deploy over $2 billion in 2021. Furthermore, the contribution from new investments is expected to be enhanced by our capital recycling program which is on track to deliver over $2 billion of proceeds, a record for us in a given year.

On behalf of the Board and management team of Brookfield Infrastructure, I would like to take this opportunity to thank our unitholders for their ongoing support. I look forward to updating you on our progress during the upcoming year.

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Sincerely, Sam Pollock

Chief Executive Officer

February 3, 2021

Brookfield Business Partners, Q4 2020 Letter to Unitholders

Brookfield Business Partners, Q4 2020 Letter to Unitholders

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Our business performed well in 2020 in the face of a uniquely challenging environment. Company EBITDA increased to $1.4 billion reflecting the contribution of recently acquired businesses and we generated Company FFO of approximately $870 million. Despite unprecedented volatility during the year, we made good progress on initiatives to build value, committing approximately $3.5 billion (BBU’s share was $1.3 billion) in new investments and generating over $1.1 billion (BBU’s share was $550 million) from monetizations and distributions. We ended the year with $2.5 billion of liquidity, positioning us well to continue pursuing large scale growth opportunities in 2021.

The strength of our financial performance in 2020 was supported by the exceptional quality of businesses we own and our disciplined approach to risk management. At our largest businesses, revenues were either virtually unaffected by the global economic shutdown or recovered strongly as the year progressed. Given the favorable financing structures we employ, our businesses got through the year with no meaningful capital requirements.

Intrinsic Value

Over the last several years we have built BBU into a global business that is well positioned to manage through difficult economic cycles. We have been deliberate, investing in large scale operations that are market leading providers of essential products and services.

As our business has evolved, we have sold down or fully exited ten businesses over the last five years. These monetization's in total have generated more than $7 billion of proceeds (approximately $2.5 billion to BBU) that we have reinvested to fund our growth. As a result, while we own about the same number of companies as we did five years ago, the profile of BBU’s businesses is very different. Currently, four companies, Sagen, Westinghouse, Clarios and BRK Ambiental generate over ten times the EBITDA of our largest four companies in 2016 when we created BBU. The substantial majority of BBU now comprises businesses with scale, stable operations and resilient cashflows. The remainder of BBU’s value comprises smaller businesses we recently acquired with exciting growth potential, like IndoStar and Ouro Verde, and others we have owned for many years that have become a progressively smaller part of BBU but continue to create value for us.

A consequence of the improved quality of our overall operations has been the enhanced resilience of BBU’s intrinsic value. We define the intrinsic value of BBU as the present value of all cash flows our operations will generate in the future. Like most companies around the world, our near-term cash flows were impacted by the economic disruption during 2020 but because of the resilience of our larger businesses, the long-term viability of our cash flows and terminal values has been largely unaffected. As a result, we believe the overall impact of the pandemic-driven economic shutdown to BBU’s intrinsic value has been limited.

While the trading price of BBU’s units has almost doubled from lows in 2020, the unit price remains below our view of fair value, and we acquired approximately two million units during the year. We plan to continue acquiring units at prices which represent an attractive use of our capital.

More Cash

The stability of our larger businesses should support recurring and increasing distributions of cash to BBU, which we will use to fund growth. Westinghouse, our provider of essential products and services to the nuclear power industry, is one of our largest and most stable businesses. Demand at Westinghouse has been largely unaffected over the last twelve months and we continue advancing initiatives to build value within the business. Since acquiring Westinghouse in 2018, EBITDA has increased from $440 million to $650 million in 2020. We hope to improve annual EBITDA by an additional $150 million over the medium term. The business also continues to generate substantial free cash flow and paid a dividend at year end of $265 million, of which BBU’s share was $115 million. To date, BBU has received more than $370 million in distributions from Westinghouse, representing almost all our initial equity investment, which was achieved with no increase to Westinghouse’s debt levels. As a consistent and growing cash generator, Westinghouse is increasing the intrinsic value of BBU.

Sagen is also a highly cash generative business. It is the largest private sector residential mortgage insurer in Canada and we acquired a controlling interest in this business at the end of 2019. Sagen has a long track record of generating stable earnings through housing and market cycles as well as strong and steady distributions for shareholders. As we look forward, the strong cash flow profile of the company and opportunities to further optimize its capital structure should support continued distributions to BBU.

Update on Strategic Initiatives

Sagen

In October we entered into an agreement to acquire the 43% publicly held shares of Sagen that we did not already own for approximately book value, or eight-times fully taxed earnings. The transaction is a natural extension of the initial investment we made in 2019 for our 57% controlling interest in the company. We would have liked to acquire full ownership of the business at that time, but the speed and certainty required by the selling shareholder did not allow for us to do so. Privatizing the company will provide us additional opportunities to optimize the capital structure and enhance the long-term cash generation potential of the business. Our offer was accepted by shareholders in December and the transaction remains on track to close in the first half of the year.

Upon closing, BBU’s interest in Sagen will increase to approximately 40% and represent one of our largest investments to date. Given exceptionally low interest rates, and strong market appetite for debt of high-quality businesses, it is likely BBU will not need to fund all $460 million which represents our share of the privatization investment. This will depend on capital market receptivity and our ability to maintain strong credit ratings for the business, which is important to Sagen’s customer base.

Everise

In January we closed the acquisition of Everise. Everise is a business process outsourcing company which specializes in managing customer interactions for large global healthcare and technology clients primarily based in the U.S. The types of customer interactions Everise manages are complex and often involve the use of technology specifically designed for a particular client’s needs. Everise is an essential service provider to its customer base and has a strong track record of delivering best-in-class service and meaningfully reducing customer costs which results in stable profitability.

Everise has an established management team and we have identified opportunities to continue to grow the business, particularly in the high growth healthcare and technology sectors. BBU funded approximately $85 million of the $240 million equity investment for a 35% ownership interest.

Capital Recycling

GrafTech’s share price has responded to improving global steel production and strong demand for GrafTech’s shares provided us opportunities to advance our ongoing monetization efforts. During and subsequent to the fourth quarter, we sold approximately 45 million GrafTech shares of which approximately 17 million were directly held by BBU. The sales generated approximately $220 million of proceeds to BBU.

BBU continues to hold a 17% ownership interest in GrafTech and with the increased liquidity of GrafTech shares we will continue exploring opportunities to further reduce our ownership in the business.

The significant decline in the price of public securities early last year created an opportunity to invest approximately $600 million in the equity of high-quality businesses we know well at meaningful discounts to our view of their intrinsic value. With the recovery in public markets during the second half of the year, the market value of these securities has increased by 150%, representing a total gain and increase to BBU’s liquidity of approximately $300 million.

Overview of Operational Performance

Our Infrastructure Services segment generated Company EBITDA of $602 million for 2020. Westinghouse contributed strong performance throughout the year. Execution on new plant projects and strong cost management more than offset the limited impact of maintenance deferrals at customer sites.

Westinghouse’s EBITDA improved over 2019 and the business remains on track to achieve its long-term annual EBITDA target.

Altera Infrastructure’s contracted revenues remain stable while the business continues to operate in a challenging environment with its oil producing customers deferring many large capital projects. The business contributed higher Company EBITDA in 2020 primarily as a result of BBU’s increased ownership.

At BrandSafway, the recovery in activity levels remains uneven due to restrictions at customer sites and delayed project starts. Despite the challenging operating environment, the business is well positioned to capitalize on market consolidation opportunities. In December BrandSafway acquired Big City Access, becoming Texas’ largest premier commercial work access provider.

Our Industrials segment generated Company EBITDA of $604 million for 2020. At Clarios, overall battery volumes for 2020 declined only 4% compared to 2019 as both aftermarket and original equipment volumes recovered strongly in the second half of the year. Facilities across all regions are operational and the company is focused on managing capacity in line with increased demand and order backlogs in the U.S. and Europe. The business continues to advance initiatives to enhance its operations and in October Clarios made an early payment of approximately $150 million on its term loan to reduce leverage.

GrafTech’s full-year performance was impacted by weak global steel markets and continued graphite electrode inventory destocking, resulting in reduced sales volumes and pricing. Despite these challenges, GrafTech generated meaningful cash flow and paid down approximately $400 million of debt during the year. In December GrafTech issued a $500 million secured note at favorable terms with proceeds used to repay a portion of its existing term loan.

BRK Ambiental’s performance remained resilient throughout 2020 given the essential nature of the water and wastewater services it provides to millions of Brazilians. Continued cost discipline contributed to strong performance and the company’s focus on high priority capital projects resulted in 56,000 new customer connections. Following its acquisition of the Maceió concession in September, the company is reviewing additional concession opportunities expected to come to market over the next several years.

Our Business Services segment generated Company EBITDA of $271 million for 2020. Sagen reported strong full year results that benefited from a resilient Canadian housing market and strong new underwriting activity. The continued strength in housing prices has contributed to low levels of mortgage defaults and loss ratios. The business is well capitalized and should mortgage defaults increase in the near-term, has sufficient headroom to absorb potential higher losses.

Healthscope’s performance in 2020 reflects its critical role as part of Australia’s healthcare infrastructure. While results during the year benefited from payments received under state agreements, activity levels have returned to normal following the easing of restrictions on elective surgeries in Australia. Healthscope was contracted by the government to build and operate Northern Beaches Hospital in Sydney, which opened its doors in October 2018. Northern Beaches is licensed as a private hospital with the ability to treat public and private patients and was significantly underperforming when we acquired Healthscope. We have been working to improve capacity utilization of the private portion of the hospital and overall operational discipline which is positively impacting results. During the fourth quarter, Northern Beaches reported record admissions. More broadly, management is refocusing on business improvement initiatives including procurement savings and growth of its mental health and rehabilitation services. In November, Healthscope closed the sale of its pathology business in New Zealand for $390 million and the proceeds were used to pay down debt.

Liquidity and Capital Position

We ended the year in a strong capital position with $2.5 billion of corporate liquidity comprising cash, marketable securities, and availability on our credit facilities. We remain confident in our ability to continue generating liquidity within our operations and from the monetization of business interests to support our growth.

Our approach to financial risk management is designed to protect our business in all market environments. We have been mindful to finance each of our businesses with an appropriate level of debt, without recourse to BBU, that can be readily serviced and sustained. We seek to borrow longer dated debt with maturities at least five years out and ideally no financial maintenance covenants.

Outlook

With 2020 finally in the rear-view mirror, we look forward to better days ahead. Global economies are recovering, and while we expect bumps along the way our business has never been better positioned.

Activity levels have picked up globally in private market transactions and we are actively pursuing new investments in high-quality businesses as well as add-on opportunities to grow our existing operations. With our ample liquidity and access to capital in this low interest rate environment we are well positioned to execute on growth opportunities for our business.

On behalf of the BBU management team, we would like to acknowledge the hard work and dedication over the past year of all our employees, including those in our operating companies around the world. It is because of their commitment that we are so well positioned today. We would also like to thank all our unitholders for their ongoing interest and support, especially those who took the time to provide us with suggestions, all of which are welcome.

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Sincerely, Cyrus Madon

Chief Executive Officer

February 5, 2021

TELUS International (Cda) Inc.

TELUS International (Cda) Inc.

(TIXT-N, TIXT-T) US$29.11 | C$36.73

Delivering Digital Customer Experience on a Different Level

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Company Profile

About TELUS International TELUS International (NYSE and TSX: TIXT) designs, builds and delivers next-generation digital solutions to enhance the customer experience (CX) for global and disruptive brands. The company’s services support the full lifecycle of its clients’ digital transformation journeys and enable them to more quickly embrace next-generation digital technologies to deliver better business outcomes. TELUS International’s integrated solutions and capabilities span digital strategy, innovation, consulting and design, digital transformation and IT lifecycle solutions, data annotation and intelligent automation, and omnichannel CX solutions that include content moderation, trust and safety solutions and other managed solutions. Fueling all stages of company growth, TELUS International partners with brands across high growth industry verticals, including tech and games, communications and media, eCommerce and fintech, healthcare, and travel and hospitality. Learn more at: telusinternational.com.

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A leading digital customer experience provider. TI is a provider of digital customer experience (CX), digital transformation, content moderation, and data annotation solutions. It has ~50,000 employees in 50 delivery locations servicing over 600 clients. The company has a three-year revenue CAGR of ~40%.

Expecting above-market growth. We expect TI to report mid-teens organic revenue growth in each of the next two years, partially supported by TI's higher revenue mix of digital services. TI is estimated to generate 54% of its revenue from digital services, a market sub-segment that is expected to grow at an over 20% CAGR in the next three years. We also estimate that ~40% of TI's 2021 revenue could come from the recent CCC and Lionbridge AI acquisitions; these acquisitions were each growing at ~30% before the pandemic.

Strong customer base and end-market exposure. Some of the fastest-growing companies, including Google, Facebook, and Amazon are TI customers. TI's top-25 customers are expected to grow by 13% in the NTM, supporting our mid-teens organic forecast. Its three largest verticals are Tech & Games, Communication & Media, and Ecommerce & FinTech. We believe that these are some of the fastest growing end-markets and set up TI for continued market outperformance.

Market-leading metrics. We believe that TI has one of the highest EBITDA per employee metrics among the customer experience and business process outsourcing (BPO) peers. We estimate TI's EBITDA per employee to be more than twice as much as Teleperformance, one of the largest customer experience vendors. We believe that TI is able to achieve this performance due to strong execution and a favourable business mix.

Strong acquirers. TI's strong track record is evidenced by record revenue and EBITDA margin in 2020, 2019 ROIC of 17.2%, and the acquired companies generating an EBITDA CAGR of 23-73% following their acquisition.

TD Investment Conclusion

Our $37.00 target price is based on 17x our C2022 EBITDA. Our multiple is above its CX and BPO peer group, but we believe that TI's market-leading metrics, margins, and above-market expected growth rates deserve a multiple premium.

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Source

TD Securities Inc, Equity Research, March 2, 2021