Hometown heroes

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This article was published 16/01/2010 (5806 days ago), so information in it may no longer be current.

Manitoba may lay claim to being the geographical heart of Canada, but most Manitobans hold no illusion we’re the centre of the nation’s financial and business universe.

We may be loath to admit it, but Toronto is Canada’s financial centre. And Alberta is often referred to as the country’s economic engine with its vast deposits of oil-laden sand.

Yet Manitoba is no economic slouch, either. After the financial meltdown of 2008, it has experienced fewer negative effects than Ontario and Alberta. The economy is even expected to break new ground in 2010, while many other provinces are expected only to grow enough to dig themselves out of the hole they fell into during the downturn, according to a TD Economics forecast.

Manitoba may not have the booming growth of Alberta nor economic mass of Ontario, but that doesn’t mean investors should overlook investing in the keystone province.

Here is a look at a few of the brighter stars of the Manitoba investment universe at the moment.

San Gold Corp. (CVE:SGR)

This small-cap mining firm is producing gold, recently recording a net profit for the first time, and it expects to increase production in 2010. But it’s the fact San Gold is increasing reserves by finding new gold sources that is turning investors’ heads, says Tony Warzel, a chartered financial analyst (CFA) with Rival Capital Management, which manages a North American equity hedge fund.

“San Gold is particularly interesting in that it is getting very good exploration results in and around their mine in Bissett,” he says about the mine in eastern Manitoba.

“We are very bullish on the gold price and think it will hit $1,500 U.S. per ounce in the next two years,” says Warzel, whose fund does not hold Manitoba investments.

Winnipeg investment adviser with Union Securities David Derwin says he began recommending San Gold when its share price was hovering at 30 cents five about years ago. Today, San Gold’s stock trades at about $3.75 a share on the TSX’s Canadian Venture Exchange.

“One of the big reasons we like mining companies in Manitoba is you don’t have the political risk that you do in other parts of the world,” Derwin says. “You have companies that are punching holes down in South America or Russia where there can be a lot of political risk.”

AG Growth International (TSE:AFN)

AG Growth International is another Manitoba-based firm with an upside for the foreseeable future. The manufacturer of agricultural machinery is a well-managed, “nut and bolts” company, says Derwin, who has visited AG Growth’s Rosenort manufacturing facilities.

“You want to protect clients’ assets and put them where they will be safe over time,” he says. “And I like agriculture — you have to eat at the end of the day.”

Warzel also says the agricultural firm shows promise.

“The demand for food is increasing along with global growth in population as well as the increasing wealth in countries such as China,” he says. “This macro trend bodes very well for AG Growth as they supply many key components for the agricultural business, such as grain storage and handling equipment.”

Up until last year, AG Growth was an income fund, faced with the 2011 deadline set out by the federal government regarding income trust taxation, but the company completed its conversion to a corporation last June and pays investors dividends instead of trust distributions.

Boyd Group Income Fund (TSE:BYD.UN)

Boyd Group Income Fund’s management has yet to determine its future structure, according to its 2009 third-quarter report.

“In general, the switch to a corporation may impact the price of the security as shareholders that wanted an enhanced income stream will sell the security, thus putting pressure on the stock,” Warzel says. “But the value of the company should not change because all you are changing is where the tax on the corporation’s income is paid — from the shareholder to the corporate level.”

The important consideration for investors is the underlying business of the investment, and Boyd’s holdings look good.

“The company has done a great job of focusing on their core competencies as well as controlling costs,” Warzel says. “The growth in their sales has been impressive, but the growth in earnings has been more so.”

Boyd Group Inc., the fund’s major holding, is Canada’s largest operator of collision repair facilities in Canada and among the largest in North America.

HudBay Minerals (TSE:HBM)

Although it relocated to Toronto from Winnipeg in mid-2008, HudBay still has major operations and properties in Manitoba and also across North America. The company is well-positioned, like many other established Canadian resource firms, to profit from economic growth in the developing world.

“We are very bullish on base metal prices as we continue to see rising demand for these commodities from countries such as China and India,” Warzel says.

HudBay has established mines producing both zinc and copper, two base metals in high demand throughout the world.

“HudBay has also been getting tremendous exploration results in northern Manitoba, which makes this stock attractive from a longer-term perspective in terms of increasing mine life or perhaps new mine operations,” he says.

In real estate, we trust

Manitoba’s commercial real estate market wasn’t hit by the economic downturn as hard as markets in other Canadian cities.

“It’s pretty positive for Manitoba,” says Dan Burton, president of DR Burton and Associates in Winnipeg. “The biggest hits have been in Calgary and Toronto office properties.”

Investors looking for exposure to commercial real estate — industrial, retail and office properties — should consider real estate investment trusts (REITs), which provide income to unit holders through distributions funded by cash flows generated from the properties held in trust.

A number of REITs are headquartered in Winnipeg, including Artis, as well as Lanesborough, Temple and Huntingdon, which are managed by Shelter Canadian Properties Ltd.

But many of these trusts’ holdings are spread across several regions in Canada. As a result, they’ve experienced setbacks arising from the downturn as much as their peers headquartered in other parts of the country.

“If you chose to invest in a REIT, you wouldn’t invest in it because it’s headquartered in Winnipeg,” Burton says.

The main reason to invest in a REIT is it can provide steady income and more liquidity than direct ownership of real estate.

“Any other forms of real estate investment tend to be much more illiquid,” he says.

“The REIT provides the most liquid way of owning real estate through the public trading of units.”

Fixed income opportunities

In this low-interest rate environment, it doesn’t matter where you look. The yields on many fixed income investments are either very low, or investors have to take on a lot of risk for a higher return. But for investors looking for security in lieu of return, Derwin says Manitoba government bonds are highly rated.

“You look at the fact that we don’t have the same cyclical booms and busts that Alberta does,” he says. “You don’t have the same sensitivity to manufacturing and financial services that Ontario does.”

Like most government securities, Manitoba bonds are liquid and because the province’s economy remains relatively steady, bond prices won’t fluctuate as much — a concern should you need to sell them before maturity.

More than anything, however, an investor is purchasing security — not to be overlooked even in a low-interest-rate environment.

“It’s more from a credit rating point of view,” Derwin says about purchasing Manitoba bonds. “Look at the State of California; it’s having financial issues. It’s not that you will have to sell the bonds, but over the long term things can happen. We have a stable situation in Manitoba so that 10 years out, we won’t have as many worries as other governments might.”

The big players

Most Manitobans recognize MTS and Great-West Life as the big names when it comes to home-based corporations, but they may not be up to speed on their investment outlook. Portfolio manager with BCV Asset Management Todd Johnson offers his take.

Great-West Lifeco (TSE:GWO)

“We like Great-West Lifeco and own it broadly for client accounts,” says Johnson, also a CFA. “It is a global company with operations in the U.K., U.S. and Canada.” The company has a long track record of increasing dividends to shareholders, today providing $1.23 a share dividend yields.

Furthermore, the company is well-capitalized, able to weather the difficult climate insurance companies have experienced over the last year and a half.

“GWO earns about $500 million a quarter and is not expensively valued,” he says. “The insurance sector should again become a very profitable place for investors over the next couple of years.”

Manitoba Telecom Services (TSE:MBT)

MTS is the dominant telecom provider in the province. Its cellphone, Internet and television businesses continue to grow, which offset the declining revenue from the residential phone business.

“Their national business division — Allstream — seems to always struggle since MTS bought it,” Johnson says.

Still, investors looking for dividend income might find the telecom an attractive investment because it pays out most of its earnings in dividends. (It has a high dividend yield of 7.5 per cent.) “However, we don’t own MTS for clients,” Johnson says. “The dividend has not been growing, and the telecom industry is going through constant change that is capital-intensive.”

Analyst’s caveat on backyard investment

The aforementioned corporations and investments represent only a small fraction of the investment opportunities in Manitoba and the fact others have been omitted from the list is not necessarily a reflection on their performance.

Manitoba offers a wide variety of both large and small companies in a number of sectors, from telecom to finance to mining, and even oil and gas.

“You could put together a fully diversified portfolio that just so happens to be made up of companies that are headquartered in Manitoba,” says chartered financial analyst Val Wowryk, vice-president and portfolio manager with Goodman Private Wealth Management in Winnipeg.

Yet Wowryk says she is reluctant to offer commentary on specific companies based on the premise they’re headquartered in Manitoba.

“The problem is it’s irrelevant that they are in Manitoba,” she says. “I fear that this would become the driving force behind someone’s desire to invest.”

Investors must approach buying shares in a company as though they were buying the business itself, she says.

“If you put yourself in that mindset, you start to look very closely at the acquisition cost of your investment,” she says, referring to tried-and-true investment philosophy of buy low and sell high.

“It may be a great company, in a great industry, in a great geopolitical climate. The problem is, it may not be a good time to invest from an acquisition cost.”

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