Friday, August 15, 2008

Mail and Globe loses its credibility with professionals on Bay Street .


From: John Priestman, Michelle Robitaille, Kevin Hall –(Guardian Capital)

Comments on Recent Negative Trust Articles – August 14th, 2008


On August 13th there were two articles written on income trusts that carried very negative tones.

Investors do not appear to have reacted to the articles as the trust sector was up on the day they were printed

“Income Trust Balloon Quickly Deflating” – by Angela Barns, [Globe and Mail]

Diane Urqhuart has been negative on trusts for a long time.

The article is very one-sided in that there is no mention of the numerous trusts that have maintained or increased their distributions over time, some very recently like Yellow Pages and Keyera Facilities (60% of trust universe have maintained or increased distributions according to the data used).

We have always maintained that there are good trusts as well as bad trusts, like every asset class.

Of course energy trusts and energy service trusts are cyclical businesses dependant on energy prices with volatile cash flows and distributions. This is not new information.

“Here’s Scary Reading for Energy Trust Investors” – by Andrew Willis, [Globe and Mail]

He quotes data from a recent CIBC research report on the tax pools of the energy trusts and their taxability in the future.

He also quotes data from the previous article on distribution cuts by energy trusts.

The main point of the article is that distribution cuts are on the way starting in 2011. Again this has been known for a year and a half.

Part of the distribution cuts are due to CIBC’s assumption that the energy trusts will make a decision to re-invest more of their cash flow for tax reasons. He does not mention that this may actually be good for the trusts if they can re-invest it and make good economic returns.

What Andrew Willis fails to mention is that in the same research report, CIBC includes their price targets and total return estimates that average 50% in the next 12 months.

No mention that some energy trusts have been raising distributions this year.

No mention that while distributions in 2011 will likely be lower, they will be treated as dividend income for taxable Canadian investors, which will receive a much lower tax rate than current tax rates on distributions (unless they are deemed to be a return of capital, which will continue to be non taxable in the year received but will lower the investors cost base).

No mention of the fact that CIBC believes:

There will be continued demand for high-yielding-dividend paying equities or entities that have high quality asset bases and can re-invest at economic rates of return.
On a total return basis, trusts appear to be competitive with the junior E&P stocks on a risk-adjusted basis


We [Guardian] continue to believe that the market is already largely discounting future taxation. Having said that, there may still be volatility surrounding a trusts decision to convert back to a corporation and/or cut distributions.

1 comment:

Robert Gibbs said...

John Priestman, Michelle Robitaille, Kevin Hall –(Guardian Capital):

Fine, well informed, cogent, very astute analysts.

Among the best guests on BNN.

Not sure about most of BNN's hosts though.