AGRICULTURAL AND INDUSTRIAL EQUIPMENT · October 28, 2013 Sector Report Peter Prattas, CA CFA [email protected] (416) 350-8152 Sales/Trading — Toronto: (416) 363-5757, (800) 442-4485;

October 28, 2013 Sector Report

Peter Prattas, CA CFA [email protected] (416) 350-8152

Sales/Trading — Toronto: (416) 363-5757, (800) 442-4485; Montreal: (514) 845-8111, (800) 465-5616

See disclosure and a description of our recommendation structure at the end of this report.

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AGRICULTURAL AND INDUSTRIAL EQUIPMENT Small-to-Mid-Cap Sub-Sector Equipped to Outperform OEM Counterparts

We are initiating coverage* on a universe of agricultural and industrial equipment companies as follows:

* Initiating coverage of all of the above companies with the exception of Cervus Equipment which we initiated coverage on April 4, 2013.

BOTTOM LINE

We believe this sub-sector is currently underfollowed and offers excellent upside potential. Generally, the universe can be characterized as having greater long-term growth potential and lower near-term sales volatility versus large-cap OEM’s while company valuations are more compelling. Our top picks are Cervus Equipment among the agricultural concentrated players and Finning International among the industrial focused names.

Company Ticker Price Recommendation Target Market-Cap

Ag Growth International AFN-T C$39.41 BUY C$42.00 C$495M

Cervus Equipment CVL-T C$20.50 BUY Top Pick C$24.00 C$321M

Finning International FTT-T C$23.88 BUY Top Pick C$29.00 C$4.107B

Ritchie Bros. Auctioneers RBA-N, RBA-T U$19.65 HOLD U$20.00 U$2.076B

Rocky Mountain Dealerships RME-T C$12.08 HOLD C$12.50 C$245M

Strongco Corporation SQP-T C$4.15 BUY C$5.00 C$55M

Toromont Industries TIH-T C$22.69 HOLD C$24.00 C$1.738B

Titan Machinery Inc. TITN-NASDAQ C$17.56 HOLD U$18.75 U$371M

WesternOne Inc. WEQ-T C$8.25 BUY C$9.00 C$199M

Wajax Corporation WJX-T C$36.60 HOLD C$35.00 C$613M

Agricultural and Industrial Equipment October 28, 2013

Peter Prattas, CA CFA, (416) 350-8152 2 of 135

TABLE OF CONTENTS

Introduction .................................................................................................................... 3

Ag Growth .................................................................................................................... 11

Cervus Equipment Corporation ................................................................................ 24

Finning International Inc. ........................................................................................... 38

Ritchie Bros. Auctioneers ........................................................................................... 50

Rocky Mountain Dealerships Inc. ............................................................................. 63

Strongco Corporation ................................................................................................. 75

Toromont Industries ................................................................................................... 87

Titan Machinery ........................................................................................................... 98

WesternOne Inc ......................................................................................................... 110

Wajax Corporation .................................................................................................... 123

Disclosures as of October 28, 2013 ......................................................................... 135



INVESTMENT THESIS

We are initiating coverage on a universe of agricultural and industrial equipment companies. This universe consists primarily of heavy equipment dealers representing some of the world’s leading brands. For example, Cervus (TSX:CVL), is Canada’s largest dealer for Deere (NYSE:DE), the foremost brand in agricultural equipment. Two companies, Titan Machinery (Nasdaq:TITN) and Rocky Mountain Dealerships (TSX:RME), represent Case New Holland (NYSE:CNHI). Case New Holland (CNH) is the world’s second most prominent agricultural brand. Another two, Finning International (TSX:FTT) and Toromont Industries (TSX:TIH), are top dealers for Caterpillar. (NYSE:CAT). Catepillar (CAT) ranks first globally for construction equipment market share. Rounding out our list of dealers is Strongco (TSX:SQP), which has exclusive territory rights for Volvo equipment, and Wajax (TSX:WJX), which similarly has rights for Hitachi. Complementing our dealer coverage is Ag Growth International (TSX:AFN), Ritchie Bros. Auctioneers (NYSE:RBA, TSX:RBA) and WesternOne (TSX:WEQ). Ag Growth is a dominant global manufacturer of grain handling equipment, while Ritchie Bros. dominates in the world of heavy equipment auctioneering. WesternOne is a fast growing small-cap with an attractive equipment rental business, as well as a modular building construction division.

This subset of small and mid-cap companies offers several desirable attributes when compared to large-cap manufacturers. First, we assess it to have a superior growth profile. While typically benefitting from original equipment manufacturer (OEM) sales growth (whether internal or external), our group of covered dealers also deploys a growth via acquisition strategy. The subset has a long track record of success in this regard and the opportunities remain abundant, particularly for the agricultural equipment dealers. For instance, Titan Machinery quadrupled its number of dealer locations and revenue base in just six years since its IPO. CNH appears highly supportive of Titan further consolidating its dealer network as the industry remains highly fragmented. Second, our group of dealers has a high proportion of high margin recurring revenue which reduces the volatility in its earnings. Roughly half of sales and about two-thirds of profit are attributed to parts, service and rentals as opposed to more volatile equipment sales. As well, used equipment sales offer some counter cyclicality versus new equipment. Clearly, manufacturers are most heavily weighted toward new equipment sales. Finally, the sub-sector appears to be attractively valued trading at a big discount to larger-cap manufacturers. While the market often ascribes a lower valuation multiple to smaller companies, we believe it should be modest across this agricultural and industrial equipment coverage group given the aforementioned

In our opinion, our selected universe of agricultural and industrial equipment companies offers an excellent risk-return profile worthy of investment. While we have our favourites within this group, we recommend that investors looking for diversification invest across the entire basket of 10 companies as each has a history of growth and is positioned to trade higher over the long-term as this continues. For those looking for a more concentrated approach, we suggest investing in those five companies we rate with a BUY recommendation (Ag Growth, Cervus, Finning, Strongco and WesternOne) as we see them as having the most upside from current share prices. For those wanting maximum torque at the risk of not diversifying, we recommend our top picks, Cervus and Finning where we have the highest conviction.



STOCK PERFORMANCE

Below, we table the trailing twelve month performance of the U.S. and Canadian agricultural and industrial equipment peer groups against the broader DJIA and S&P/TSX indices. Our groupings are consistent with the “Comp Table” we provide in Exhibit 8. The results show that the agricultural and industrial equipment group has trailed the performance of the broad market. Notably, our U.S. group is primarily comprised of OEMs and accordingly does not isolate the even greater underperformance of companies like Ritchie Bros. and Titan Machinery, which are down 4% and 29%, respectively. Also worth mentioning, the Canadian group has been essentially flat and has substantially underperformed the group of US-listed OEM’s by 21%. Accordingly, we believe that our group of covered companies has the opportunity to play catch up and outperform over the coming twelve months as investors seek out bargains with maximum upside potential.

Exhibit 1. Trailing Twelve Month Stock Performance

Source: Capital IQ, Cantor Fitzgerald Canada

MACRO OUTLOOK

Each company within our report has significant potential to outgrow the broader economy by grabbing market share and through acquisitions. Nonetheless, macro-economic activity levels will largely dictate a company’s sales and performance as customers are clearly keener to make a substantial capital investment into heavy equipment when they have confidence in the business outlook and expect to achieve a favourable return on investment. The cycle relevant to each company depends on the markets it serves (sector and geography). For example, the construction/industrial cycle typically traces the broad economy and will be of greatest relevance to FTT, RBA, SQP, TIH, WEQ and WJX. The agricultural cycle is different (yet normally not a counter-cyclical one) and is most relevant to AFN, CVL, RME and TITN.

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US Average Cdn Average DJIA S&P/TSX Composite



Most economists predict a sustained global economic recovery which bodes well for continued capital investment in equipment. The IMF’s outlook points to higher growth in 2014 across all major regions with the biggest lift expected by the European Union. The next most significant uptick is expected in the U.S. where the majority of our covered companies have at least some exposure (Titan Machinery, Ag Growth and Ritchie Bros. most notably).

Exhibit 2. World GDP Outlook

Source: IMF World Economic Outlook released on July 9, 2013

The U.S. unemployment rate has dropped from a recession peak of 10% down to 7.2% in September 2013 while durable goods sales continue to trend higher this year. Most relevant to our universe, construction expenditures have stopped declining. Housing starts have started to move higher after several years of extremely low activity. Over the next two years, growth in housing starts is expected to exceed 21% per year. Non-residential construction expenditures will likely show a more gradual upward trend. Of note, the construction cycle typically commences with higher sales of earth moving equipment for site preparation and then transition toward greater sales of cranes later in the cycle as buildings get erected.



Exhibit 3. US Economic Indicators

Source: US Department of Labour, US Census Bureau

Exhibit 4. Construction Expenditures

Source: PotashCorp Q3 Market Analysis Report – September 18, 2013

Certainly, a U.S. recovery is also good news for Canadians as the U.S. is Canada’s greatest trading partner. The Conference Board of Canada expects Canadian GDP to advance at an accelerated rate of 2.3% in 2014, which bodes well for all of our covered companies within this report except Titan Machinery which has no Canadian operations.



Exhibit 5. Canadian Real GDP Growth by Province

Source: The Conference Board of Canada, Statistics Canada

The Canadian economy is growing disproportionately by province with Western Canada outpacing the East. Most of our covered companies have substantial coverage of Western Canada, where names like Cervus, Finning, Rocky Mountain and WesternOne derive the majority of revenue.

GDP forecasts for 2013 by city centre show Vancouver’s economy growing by 2.2%, as modest services growth offsets slower goods-sector growth. Calgary’s GDP is forecast to increase 3.3% as goods sector strength outweighs slower business services growth due to the devastating floods, while the oil sands are expected to drive Edmonton’s primary and manufacturing sectors leading to a 4.2% expansion. Saskatoon will expand by a sizzling 5.2%, thanks to strength in the goods sector, as Regina’s economy soars 5%, pulled up by robust growth in manufacturing and construction. Weak growth in manufacturing and the services sector will result in 1.4 % GDP growth in Winnipeg. Slower services growth and a dip in manufacturing will limit growth to 1.6% in Toronto as federal fiscal austerity will limit Ottawa’s growth to 0.8% and Hamilton will grow by 1.3% on construction strength offset by a manufacturing decline. Montreal’s GDP will grow 1.3% as manufacturing output contracts and services sector growth slows. Weakness in the public sector is limiting Quebec City’s growth to 1.3%.

Four of our ten covered companies are primarily weighted toward the agriculture sector with the key economic drivers being crop prices, yields and farm income. Corn and wheat prices have moved down from the record levels set in 2012 due to the prospect for improved global and US crops this year. Recent hot and dry conditions in the US have provided some support for the market but pricing has been volatile as the size of the US corn crop has yet to be finalized. Soybeans have been more stable due to strong demand and reduced US production prospects. Stock recovery will be a multiyear process, and as a result, crop prices remain above the 10 year average to incent farmers to continue investing in higher crop production.



Exhibit 6. Crop Prices

Source: PotashCorp Q3 Market Analysis Report – September 18, 2013

U.S. net farm income is forecast at a record $120.6 billion in 2013, about $7 billion (6%) above 2012 and $3 billion above 2011’s previous record. When adjusted for inflation, 2013’s net farm income forecast is expected to be slightly behind 2011 and the second-highest since 1974, but well below 1973’s peak. Measured in cash terms, net cash income in 2013 is projected lower at $120.8 billion, down 10% from 2012’s record level but the third-highest on record.

Exhibit 7. Net farm income forecast to increase 6% in 2013

Source: United States Department of Agriculture

OEM PERFORMANCE AND OUTLOOK

Over the coming months, major equipment manufacturers will communicate their outlook for 2014 after a rather mixed 2013. In general, this year has been a growth year for agricultural equipment and a down year for construction equipment. For example, Deere & Company is guiding for a 5% increase in company equipment sales (albeit down 5% in the fourth quarter). It predicts agriculture & turf sales to be up 7% in 2013 with the U.S. and Canada up about 5%. Conversely, construction and forestry sales are forecast to decrease 8% largely as a result of a cautious outlook for U.S. economic growth. Caterpillar has guided even more cautiously with its outlook, forecasting its 2013 worldwide revenue to be down about 16.5% from a record level in 2012. However, North American statistics show that machine retail sales have turned



positive in the third quarter after being down through the first six months of the year. Weighing on Caterpillar sales this year has been a drop in sales in mining equipment, as well as a move by dealers to reduce machine inventory. Last week, Caterpillar guided that 2014 sales will be flat versus 2013, plus or minus 5%, with growth in construction industries, relatively flat sales in power systems and a decline in resources industries’ sales. Notably, the consensus view calls for sales growth at Caterpillar and a revenue decline at Deere in 2014. Working against Deere next year may be a dealer initiative to reduce inventory (similar to Caterpillar dealers in 2013) as levels have recently peaked. In our view, it will be a significant positive for ag equipment dealers if OEM’s like Deere and Case New Holland pull back on production to allow inventories to come down. In 2014, we foresee modest sales growth for both agricultural and industrial equipment dealers with the biggest driver being an increase in parts, service and rental business as equipment sales are flat or down.

VALUATION METRICS

On the next page, we summarize valuation metrics across the agricultural and industrial equipment sector divided by U.S. and Canadian listing. Notably, the U.S. group is primarily comprised of larger manufacturers, as well as the two U.S. listed names we cover (Ritchie Bros. and Titan Machinery). The Canadian group is comprised of the remaining eight names that make up our ten stock universe.

We believe that these companies are most appropriately valued employing a peer multiples methodology, paying particularly close attention to a company’s enterprise value to EBITDA. Worth pointing out, the Canadian group trades at a significant discount to the U.S. group. Even more pronounced, names like Finning and Cervus trade at an even deeper discount when compared to their OEM counterparts, Caterpillar and Deere.



Exhibit 8. Comp Table

Source: Capital IQ, Company documents, Cantor Fitzgerald Canada

Share Shares Mrkt-Cap Dividend

Company Name Exchg. Ticker Price O/S (M) ($M) 2012A 2013E 2014E 2012A 2013E 2014E 2012A 2013E 2014E per share

US Listed

AGCO Corporation NYSE AGCO $63.33 97 6,165 9,861 10,883 10,934 935 1,167 1,172 5.22 6.09 6.10 $0.04

Caterpillar Inc. NYSE CAT $84.77 648 54,898 65,768 54,543 54,866 11,023 7,823 8,217 9.07 5.47 6.08 $2.40

CNH Industrial N.V. NYSE CNHI $12.33 1,349 16,632 - 26,387 27,112 - 2,902 3,155 - 0.79 0.92 $0.00

Deere & Company NYSE DE $83.55 383 31,987 34,175 35,189 35,606 5,721 6,160 5,073 7.99 8.60 7.93 $2.04

Joy Global, Inc. NYSE JOY $58.09 106 6,071 5,675 4,701 3,785 1,324 1,013 730 7.30 5.40 3.85 $0.70

The Manitowoc Company, Inc. NYSE MTW $20.48 134 2,735 3,911 4,128 4,378 405 475 561 0.73 1.20 1.59 $0.08

PACCAR Inc. NASDAQ PCAR $58.55 354 20,725 16,093 16,234 17,606 1,899 1,640 1,949 3.11 3.24 3.65 $1.60

Ritchie Bros. Auctioneers NYSE RBA $19.64 107 2,098 435 444 471 168 161 181 0.79 0.75 0.87 $0.52

Rush Enterprises, Inc. NASDAQ RUSH.B $24.89 39 1,097 3,071 3,357 3,857 152 146 181 1.55 - - $0.00

Terex Corp. NYSE TEX $35.57 111 3,959 7,435 7,269 7,789 646 638 814 2.02 2.09 2.92 $0.00

Titan International Inc. NYSE TWI $14.80 54 792 1,911 2,255 2,363 263 241 243 2.27 1.17 1.44 $0.00

Titan Machinery NASDAQ TITN $17.56 21,103 371 2,198 2,337 2,454 116 101 115 2.00 1.33 1.64 $0.02

Growth (average) 11.4% 2.1% -0.8% -0.3% -14.1% 2.4%

CAD Listed

Ag Growth International TSX AFN $39.41 13 495 314 328 378 49 55 71 1.37 1.77 2.63 $2.40

Cervus Equipment TSX CVL $20.50 15 307 734 889 955 48 56 59 1.58 1.71 1.91 $0.78

Finning International TSX FTT $23.88 172 4,107 6,622 6,665 6,865 712 743 766 1.96 1.98 2.05 $0.61

Rocky Mountain Dealerships TSX RME $12.08 19 232 966 1,017 1,093 55 58 68 1.28 1.39 1.73 $0.40

Strongco TSX SQP $4.15 13 54 464 489 514 49 48 54 0.58 0.34 0.55 $0.00

Toromont Industries TSX TIH $22.69 77 1,738 1,507 1,564 1,626 223 227 245 1.56 1.53 1.69 $0.52

WesternOne TSX WEQ $8.25 22 178 218 368 386 45 56 61 0.51- 0.36 0.52 $0.60

Wajax TSX WJX $36.60 17 613 1,466 1,403 1,445 112 93 100 3.89 2.83 3.09 $2.40

Growth (average) 3.5% 4.2% 3.2% 6.6% 1.8% 18.9%

Net Debt Debt / TEV Dividend

Company Name Exchg. Ticker ($M) EBITDA ($M) 2012A 2013E 2014E 2012A 2013E 2014E 2012A 2013E 2014E Yield

US Listed

AGCO Corporation NYSE AGCO 682 0.7 6,881 0.7x 0.6x 0.6x 7.4x 5.9x 5.9x 12.1x 10.4x 10.4x 0.1%

Caterpillar Inc. NYSE CAT 35,429 3.2 90,394 1.4x 1.7x 1.6x 8.2x 11.6x 11.0x 9.3x 15.5x 13.9x 2.8%

Deere & Company NYSE DE 29,890 5.2 61,879 1.8x 1.8x 1.7x 10.8x 10.0x 12.2x 10.5x 9.7x 10.5x 2.4%

Joy Global, Inc. NYSE JOY 843 0.6 6,914 1.2x 1.5x 1.8x 5.2x 6.8x 9.5x 8.0x 10.8x 15.1x 1.2%

The Manitowoc Company, Inc. NYSE MTW 1,716 4.2 4,451 1.1x 1.1x 1.0x 11.0x 9.4x 7.9x 28.0x 17.0x 12.8x 0.4%

PACCAR Inc. NASDAQ PCAR 5,445 2.9 26,170 1.6x 1.6x 1.5x 13.8x 16.0x 13.4x 18.8x 18.1x 16.0x 2.7%

Ritchie Bros. Auctioneers NYSE RBA 4 0.0 2,102 4.8x 4.7x 4.5x 12.5x 13.0x 11.6x 24.7x 26.1x 22.7x 2.6%

Rush Enterprises, Inc. NASDAQ RUSH.B 915 6.0 2,012 0.7x 0.6x 0.5x 13.2x 13.8x 11.1x 16.1x N/A N/A 0.0%

Terex Corp. NYSE TEX 1,535 2.4 5,578 0.8x 0.8x 0.7x 8.6x 8.7x 6.9x 17.6x 17.0x 12.2x 0.0%

Titan International Inc. NYSE TWI 320 1.2 1,135 0.6x 0.5x 0.5x 4.3x 4.7x 4.7x 6.5x 12.7x 10.3x 0.0%

Titan Machinery NASDAQ TITN 975 8.4 1,346 0.5x 0.6x 0.5x 9.7x 13.3x 10.7x 8.8x 13.2x 10.7x 0.1%

Average 1.4x 1.4x 1.4x 9.5x 10.3x 9.5x 14.6x 15.0x 13.5x 1.1%

CAD Listed

Ag Growth International TSX AFN 123 2.5 618 2.0x 1.9x 1.6x 12.8x 11.3x 8.7x 28.8x 22.3x 15.0x 6.1%

Cervus Equipment TSX CVL 107.1 2.2 414 0.6x 0.5x 0.4x 9.6x 7.6x 7.0x 12.9x 12.0x 10.8x 3.8%

Finning International TSX FTT 1,389 2.0 5,497 0.9x 0.8x 0.8x 8.0x 7.4x 6.8x 12.2x 12.0x 11.6x 2.6%

Rocky Mountain Dealerships TSXV RME 356 6.4 589 0.6x 0.6x 0.5x 11.0x 10.3x 7.8x 9.5x 8.7x 7.0x 3.3%

Strongco TSX SQP 253 5.1 307 0.7x 0.6x 0.6x 6.3x 6.3x 5.8x 7.2x 12.1x 7.6x 0.0%

Toromont Industries TSX TIH 156 0.7 1,895 1.3x 1.2x 1.1x 8.5x 8.4x 7.5x 14.5x 14.9x 13.4x 2.3%

WesternOne TSX WEQ 199 4.4 378 1.6x 1.1x 1.0x 7.9x 7.2x 6.6x -16.2x 22.8x 15.8x 7.3%

Wajax TSX WJX 231 2.1 844 0.5x 0.6x 0.6x 7.0x 9.1x 8.3x 9.4x 12.9x 11.8x 6.6%

Average 1.0x 0.9x 0.8x 8.9x 8.4x 7.3x 9.8x 14.7x 11.6x 4.0%

Combined US and CAD Average 1.2x 1.2x 1.1x 9.2x 9.5x 8.6x 12.6x 14.9x 12.7x 2.3%

EV/ Revenue

Revenue ($M)

EV/ EBITDA

EBITDA ($M) Earnings ($)

Price/ Earnings

Ag Growth Inc. October 28, 2013


AG GROWTH INTERNATIONAL INC. Crops in a row for a great year ahead augmented by international success

INVESTMENT THESIS

Ag Growth Inc. (AGI) is a global market leader in grain handling, storage and conditioning solutions. AGI shares offer a highly attractive yield for a company that has a strong track record of growth and profitability with a large opportunity to expand internationally culminating in a record profit before taxes expected next year.

VALUATION

We initiate coverage of Ag Growth International with a BUY recommendation and a one-year price target of $42.00 per share. Our target is based on a 9× EV/EBITDA multiple against our 2014 estimates which is conservatively toward the lower end of its historical trading range.

FOCUS POINTS

▪ Ag Growth has grown into a dominant player in grain handling equipment. Since its IPO in 2004, the company has grown sales at a 21% CAGR primarily in North America with an estimated 40% market share in grain handling.

▪ International markets offer an abundant opportunity to grow further. Emerging markets provide the greatest opportunity due to increasing grain production, a need to reduce post-harvest losses and a gap in storage and infrastructure.

▪ A resumption of growth is imminent after a recent pause following last year’s drought. A record harvest and farm income is expected which should drive strong sales for AGI into 2014 leading to record pre-tax earnings.

▪ The stock is attractive across several valuation metrics. Shares offer a 6.1% dividend yield and trade at a 15× P/E which is toward the lower end of its historical trading range.

Recommendation: BUY

Symbol/Exchange: AFN/TSX

Sector: Agricultural Equipment

All dollar values in C$ unless otherwise noted.

Current price: $39.41

One-year target: $42.00

Target return (including dividend): 13%

Dividend/Yield $2.40/6.1%

Financial summary

Source: Company documents, Cantor Fitzgerald Canada

Company profile: Ag Growth International Inc. is a leading manufacturer of portable and stationary grain handling,

storage and conditioning equipment with eleven manufacturing facilities across Canada, the U.S., the U.K. and Finland.

Shares O/S (M) 12.6 52-Week Range (US$) 27.80 - 40.99

Market Cap ($M) 494.7 Avg. Daily Volume 33,231

Enterprise Value ($M) 618.0 Net Debt ($M) 123.3

Year-end Dec-31 F2011A F2012A F2013E F2014E

Revenue ($M) 306$ 314$ 328$ 378$

EBITDA ($M) 53$ 49$ 55$ 71$

EPS ($) 1.95$ 1.37$ 1.77$ 2.63$

FFOPS ($) 3.21$ 2.57$ 3.57$ 4.04$

EV/EBITDA 11.7 12.8 11.3 8.7

P/E 20.2 28.8 22.3 15.0

FFO Yield 8.1% 6.5% 9.0% 10.2%

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INTRODUCTION

We are initiating coverage of Ag Growth International (AGI), a leading manufacturer of grain handling, storage and conditioning equipment. The company has a long history of growth and profitability having grown at a compounded annual rate of 15% over the last twenty years or an even more impressive 21% since its initial public offering in 2004. It has become the dominant player in grain handling, with an estimated 40% market share, as well as a market leader in grain conditioning. We expect Ag Growth to maintain its competitive position as it builds scale further primarily through international expansion which we envision doubling the company’s size as farming practices evolve. This pursuit is in the early stages and Ag Growth is quickly gaining traction with recent success in the Former Soviet Union (FSU). Growth may be accelerated via acquisitions where the company has proven its ability to execute deals accretively, historically paying around 4× to 6× EBITDA. Most imminently, we expect a dramatic improvement in sales which have contracted in recent quarters largely due to last year’s U.S. drought yet are now reversing on the expectations of a bumper crop, a late wet harvest and low agricultural commodity prices driving demand for handling and storage equipment. Accordingly, we expect 2014 to produce a record amount of earnings before tax leading to further strength in the shares while investors continue to receive an attractive dividend yielding 6.1% that we assess to be very sustainable.

We are initiating coverage of Ag Growth International with a BUY recommendation and a one-year price target of $42.00 per share. Our target is based on an 9× EV/EBITDA multiple against our 2014 estimates which conservatively values it toward the lower end of its historical range yet at a minor premium to our agricultural and industrial equipment peer group due to its high dividend and strong market position. Notably, we do not factor in potential upside from the consummation of any acquisitions.

Exhibit A1. Ag Growth Current and Target Valuation Metrics


Valuation metrics (based on F2012 actual)

C$ P/Rev EV/EBITDA P/E FFO Yield

Target $42.00 2.1x 13.4x 30.7x 6.1%

Current $39.41 2.0x 12.8x 28.8x 6.5%

Valuation metrics (based on F2013 estimates)


Target $42.00 2.0x 11.9x 23.7x 8.5%

Current $39.41 1.9x 11.3x 22.3x 9.0%



Target $42.00 1.7x 9.1x 16.0x 9.6%

Current $39.41 1.6x 8.7x 15.0x 10.2%



COMPANY DESCRIPTION

Ag Growth was established in 1996 and launched an initial public offering in 2004 (under the name Ag Growth Income Fund structured as an income trust) raising $69 million in gross proceeds at $10 per unit. In 2009 it completed a conversion to a corporation (as mandated by the government) adopting its current name. Since its IPO, it has come to the market three times for additional capital including a $21.5 million offering in 2005 priced at $13.50, a $45.0 million offering in 2007 priced at $26.00 and a $115.0 million convertible debenture offering in 2009 (with a conversion price of $44.98). The company’s head office is located in Winnipeg, Manitoba, Canada. As of December 31, 2012, it had 1,232 employees.

The company is a manufacturer of agricultural equipment that it sells to small farms, large and corporate farms, commercial grain handling operations and commercial processors of agricultural commodities. It has a broad product offering with a focus on portable and stationary grain handling, storage and conditioning equipment.

Exhibit A2. Ag Growth Brands and Business Segments

Portable Grain Handling Commercial Grain Handling Grain Storage and Conditioning

Source: Company documents

The portable grain handling segment offers the industry’s most extensive product offering. This segment is characterized by a low price point (ranging from $10,000 to $20,000) and a life cycle of about three to five years. Its leading brand is Westfield (founded in 1950 and acquired in 2000) which dominates the market for augers (used to move grain from trucks and grain carts into storage bins) dwarfing its competitors like Hutchinson Mayrath, Farm King and Brandt.

Its commercial grain handling segment offers an industry leading catalogue with only a handful of competitors able to offer a similarly complete solution. Products are priced as low as $80,000 to $100,000 for single units or as high as $10 million for new facilities and have a life cycle of 15 to 20 years.

The storage and conditioning segment sells storage bins and dryers, as well as an extensive aeration line. These products are sold to small farms, commercial farms and commercial grain traders. Pricing ranges from $5,000 to $300,000 for storage bins, $30,000 to $500,000 for dryers and $1,000 to $100,000 for aeration. A storage bin has a life cycle of over 30 years, while aeration products last over 20 years and dryers more than 15 years.



Around half of the company’s revenue is derived in the United States while Canada and the rest of the world each account for about a quarter. By product, roughly 40% of revenue comes from portable grain handling, another 40% from commercial grain handling and the remaining 20% from storage and conditioning. Gross margins by product segment are roughly 40%+ within portable grain handling, 30% for commercial grain handling and 20% for storage and conditioning.

Exhibit A3. Ag Growth Revenue Mix by Geography and Product Category (2012)


Ag Growth operates owned and leased facilities for manufacturing, warehousing and distribution across North America, Europe and South America. Operations are primarily concentrated in Canada and the United States. The European presence includes production facilities in England (Tramco) and Finland (Mepu), as well as a warehouse in England and an office in Latvia. The company maintains an office in Columbia and Argentina.

Exhibit A4. Ag Growth Geographic Footprint


Geographic Mix Product Mix

Canada24%

United States

53%

International23%

Portable grain

handling40%

Commercial grain

handling40%

Storage and conditioning

20%



INVESTMENT POSITIVES

Ag Growth has achieved market leadership in several markets

The company has a towering position in grain handling and is a market leader across other categories. Within portable handling there are approximately 20 competitors. Most are small regional players and five have North American distribution. AGI brands are dominant with approximately 40% market share which is larger than the next three competitors combined. The competitors in commercial handling are major U.S. bin companies along with global and regional independents. AGI dominates in the highest capacity categories with its brands Hi Roller and Tramco. The competitive landscape in storage and conditioning on the distribution side includes large U.S. storage players having broad catalogues and dominant distribution. Also, Westeel, a division of Vicwest Inc. (VIC/TSX), has a narrow catalogue and is a force in Western Canadian distribution. There are over 30 global manufacturers that are mostly regional having narrow production offerings. AGI is dominant in aeration across Western Canada and has a growing presence in storage internationally.

The company has many competitive strengths

AGI can attribute many key critical success factors to its strong position in each category. In portable handling it runs dedication production facilities, achieves low cost production through vertical integration, has a leading dealer network, operates an extensive warehousing system and is committed to new product development catered to customer needs. For commercial handling, it similarly has dedicated production facilities. As well, it achieves the highest capacities in the industries (scale), has a strategic relationship with heavyweights like ADM, and is committed to its customer. Across storage and handling, once again it operates dedicated production facilities for bins, dryers and aeration lines. Further, it invests in new product development, is known to be the market experts in aeration and promotes bundling with AGI handling equipment.

AGI has a strong track record of growth

The company has a long history of growth having grown at a compounded annual rate of 15% over the last twenty years or an even more impressive 21% since its initial public offering in 2004. This growth has been primarily fuelled by acquisitions further augmented by incremental internally generated sales. AGI has grown profitably achieving positive earnings throughout its existence as a public company. Earnings peaked around the 2009/2010 timeframe and are poised to peak again shortly.

Exhibit A5. Ag Growth Revenue by Year (in millions)


$0

$50

$100

$150

$200

$250

$300

$350

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012



An earnings turnaround appears imminent aided by several factors

Over the trailing twelve months, Ag Growth’s results have suffered largely as a result of last year’s drought across much of the United States impacting the demand for grain handling, storage and conditioning equipment. This year the reverse appears to be materializing. Growing conditions have been very favourable and are expected to lead to record crop production and net farm income. The greater yield necessitates more equipment while the greater income ensures farmers can afford it. Further, grain prices have fallen further increasing the incentive for farmers to store grain in anticipation of better prices later on.

International opportunity is huge and progressing well

Further driving earnings growth is the company’s international expansion. Aside from the western world, most nations have been slow to adopt the use of farm machinery and equipment. The developing world is now adopting western techniques and evolving its farming practices to increase grain production (there is 52% increased yield potential in Former Soviet Union (FSU) with 27.4 million hectares abandoned post the break-up), reduce post-harvest losses (estimated to be more than 15% in FSU) and narrow the gap in storage and infrastructure. This pace is accelerating as farms become larger (corporate farms) and more sophisticated. The world’s agricultural equipment OEMs (like Deere and CNH) are aggressively pursuing emerging markets like theFSU. Ag Growth is penetrating these markets with its product lines. The FSU now accounts for about half of the company’s international business (or about a tenth of consolidated) and is growing rapidly. Earlier this year, the company entered into its largest ever contract, a $42 million agreement to a single customer in Ukraine. An additional $11 million contract with this customer was more recently added.

Ag Growth has a long history of acquiring and prospects remain

Since 1996, the company has made 12 acquisitions including nine after going public for a combined purchase price of $124 million. Typically it pays in the neighbourhood of 5× trailing EBITDA and further realizes synergies thereafter. Hence acquisitions have proven very accretive and bring strategic value as well, either rounding out AGI’s product portfolio or adding geographic scope. As discussed earlier, the industry has a broad number of players thus creating a pool of targets to go after.

Pending debt refinancing likely to be on much better terms

Ag Growth’s last major financing was a $115 million convertible debenture offering in October 2009 during a challenging market environment. This offering doesn’t mature until December 31, 2014. However, as of December 31st of this year, AGI has the option to redeem these debentures at a price equal to their principal amount plus accrued and unpaid interest. We expect the company to refinance this debt in early 2014 on more favourable terms thus bringing down its borrowing costs by around $1 million to $2 million per year.



The stock offers a compelling yield and is sustainable

Shares offer an attractive dividend at $2.40 implying a very competitive yield of 6% in a market that continues to reward income stocks. We believe this dividend is very sustainable going forward as it is below our forecasted EPS for next year, and more importantly, represents a 59% payout ratio over our estimate for funds from operation. With continuing growth, this dividend has room to expand further over time.

INVESTMENT RISK

Industry cyclicality and macro-economic conditions

The company serves the agricultural industry sectors and therefore is dependent on its health. Consequently, grain and livestock prices, weather conditions that effect crop production, borrowing rates, grain disease, and customer confidence have an impact on demand for agricultural equipment. More generally, developments in North American and global economies, such as negative economic conditions, declines in stock markets and contraction of credit availability, may negatively impact the demand for its products.

Expansion risk

Ag Growth has grown largely through acquisition and via geographic expansion including into lesser developed nations. Acquisitions carry inherent risk as there can be no assurance that the company will be able to properly integrate and profitably manage an acquisition and therefore could adversely impact the company’s operations and financial condition. As well, the company is expanding into lesser developed nations that carry a higher degree of risk.

Foreign currency risk

Although it reports in Canadian dollars, Ag Growth is exposed to foreign currency risk through its operations around the world, primarily in the United States and Europe. Fluctuations in the exchange rate will impact pricing and costing. For example, AGI generates the majority of its sales in U.S. dollars and Euros, but a smaller proportion of its expenses are denominated in such currencies. The company enters into hedging arrangement to partially mitigate foreign exchange risk.

Tax reassessment

The Canada Revenue Agency (CRA) has requested information relating to the company’s conversion to a corporation completed in 2009. There is a risk that the CRA could reassess tax filings for 2009 through 2012 resulting in the payment of back taxes near $25 million (requiring a 50% deposit if appealed), as well as the elimination of tax shields currently valued near $45 million on the balance sheet. Importantly, the CRA has only requested information from AGI and has not issued a reassessment nor proposed one. The corporate conversion was heavily vetted by accounting, tax and legal consultants and we expect the company would determinedly appeal any reassessment if one were presented.



FINANCIAL PERFORMANCE AND FORECASTS

For reporting purposes, Ag Growth segments its revenue across three geographies; U.S., Canada and International. On a consolidated basis, 2012 was a tough year as EPS fell to $1.37 (from $1.95 in 2011) primarily due to the widespread U.S. drought. Revenue from the U.S. fell 9% year-over-year while Canada grew 20% and International grew 32%. This headwind peaked in the first quarter of this year before abating in the second quarter yet still showing a decline. We expect that the company returned to growth in the third quarter as U.S. agricultural fundamentals are now favourable and a late wet harvest further amplifies demand for Ag Growth products. Momentum should further accelerate with recent success in Ukraine. Accordingly, we estimate EPS improving to $1.77 in 2013 and $2.63 in 2014 which implies a record year of performance on a before-tax basis.

VALUATION

Ag Growth shares currently trade roughly in-line with its Canadian peer group (we define as publicly traded agricultural and industrial equipment companies) and at a discount the U.S. average. The current EV/EBITDA multiple is 8.7× EV/EBITDA against our 2014 estimates while the combined Canadian and U.S. groups trade similarly at an average EV/EBITDA of 8.6×. Notably, this is at the lower end of its historical trading range. We believe the stock should command a premium valuation for its dominance across several product categories, its growth profile and its attractive dividend yield.

RECOMMENDATION

We are initiating coverage of Ag Growth International with a BUY recommendation and a one-year price target of $42.00 per share. Our target is based on a 9× EV/EBITDA multiple against our 2014 estimates which conservatively values it toward the lower end of its historical range yet slightly higher than the overall agricultural and industrial equipment peer group. Notably, we do not factor in potential upside from the consummation of any acquisitions.



Exhibit A6. Ag Growth Board of Directors

Name Office Director since Principal occupation

Gary Anderson Manitoba, Canada

Director & CEO

2006 Please see the following Exhibit

Janet Giesselman Indiana, U.S.A.

Director 2013 Ms. Giesselman is the retired President and General Manager of Dow Oil & Gas, a business unit of The Dow Chemical Company, and has over 30 years of U.S. and international agriculture, energy and specialty andcommodity chemicals industry experience, having led businesses in the United States, Europe, the Middle East and Asia. From 2001 to 2010, she held numerous senior leadership positions with The Dow Chemical Company including Vice President, Dow AgroSciences, and Vice President, Dow Latex (Switzerland). Before joining Dow, Ms. Giesselman held various leadership positions in marketing and strategic planning with the Rohm & Haas Company, a specialty and performance materials company. Ms. Giesselman holds a B.Sc., Biology from Pennsylvania State University and a Masters in Plant Pathology from the University of Florida.

Bill Lambert (1) Ontario, Canada

Director 2006 Mr. Lambert retired as a Special Partner to Birch Hill Equity, a Canadian private equity investment firm, in December 2009 and serves on the board and/or the audit committee of several other public and private entities. Mr. Lambert has an extensive financial background including a number of years in the banking sector prior to his involvement in private equity.

Bill Maslechko (1) Alberta, Canada

Director 2006 Ms. Maslechko is a Partner at the law firm Burnet, Duckworth & Palmer LLP.

Malcom (Mac) Moore Florida, U.S.A.

Director 2013 Mr. Moore is the retired President and Chief Executive Officer of Gehl Company, a manufacturer and distributor of construction and agricultural equipment, and is an experienced executive with over 35 years of diverse industry experience. Mr. Moore is currently Chairman of the Board of Digi-Star Investments LLC, a provider of specialized

monitoring and electronic control systems for precision agriculture. In his 11 years with Gehl Company, Mr. Moore held a series of senior positions including President since 2003 and culminating with his appointment as Chief Executive Officer in 2009. Mr. Moore also serves on the board of directors of Twin Disc, Inc. (a Wisconsin based public company involved with power transmission equipment), where he chairs the Compensation Committee and additionally serves on the Pension and Nominating and Governance Committees. Mr. Moore holds a B.S., International Business, from American University and an M.B.A. from the J. L. Kellogg Graduate School of Management-Northwestern University.

David White (1) Pennsylvania, U.S.A.

Director 2006 Mr. White has been a chartered accountant since 1978. He has held a number of senior financial and operating positions in the packaging, transportation and healthcare industries, including most recently Chief Executive Officer of Transcare Inc., a medical transportation company, and President and Chief Operating Officer and a Director of Student Transportation of America, a TSX listed company. Mr. White continues to act as CEO of First Call Services LLC, a private holding company and advisory firm, and has received the ICD.D designation from the Institute of Corporate Directors.

(1) Member of the Audit Committee.




Exhibit A7. Ag Growth Senior Management

Name Office Previous positions

Gary Anderson Chief Executive Officer & Director Mr. Gary Anderson is a co-founder of Ag Growth International Inc. and has been its Chief Executive Officer since December 13, 2010. Mr. Anderson previously served as Ag Growth’s Chief Operating Officer from its inception until he was promoted to CEO. Prior to joining Ag Growth he served as General Manager at REM Manufacturing until 1996 when he joined Batco as a General Manager through 2000. Mr. Anderson holds a Bachelor of Commerce Degree from the University of Saskatchewan.

Steve Sommerfeld Chief Financial Officer Mr. Steve Sommerfeld, CA has been the Chief Financial Officer of Ag Growth International Inc. since 1997 and also serves as Corporate Secretary and Executive Vice-President. Prior to AG Growth, Mr. Sommerfeld worked for both Deloitte & Touche and KPMG, and J&H Marsh McLennan in the offshore insurance industry. Mr. Sommerfeld holds a Bachelor of Commerce Degree from the University of Saskatchewan and obtained his CA designation in 1992.

Dan Donner SVP, Sales & Marketing Mr. Dan Donner serves as Senior Vice President of Sales & Marketing at Ag Growth International Inc. and has been with the company since 2002. Prior to joining Ag Growth, Mr. Donner was Manager Customer Acquisition at John Deere Credit leading sales and marketing efforts for its agriculture portfolio. He studied agriculture at the University of Manitoba.

Paul Franzmann SVP, Operations Mr. Paul Franzmann, serves as Senior Vice President - Operations of Ag Growth International Inc. Prior to joining the company in 2005, he was a business brokerage and management consultant from 2001 to 2004. He is a Chartered Accountant having spent 7 years with Deloitte during which he became a Silver Medalist in the Province of Manitoba for the Uniform Final Exam.




Exhibit A8. Ag Growth Income Statement ($000’s)


FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E

Sales 269,267 305,932 314,342 327,739 377,967 415,764

Cost of goods sold 163,958 204,203 219,199 223,555 255,128 280,641

Gross profit 105,309 101,729 95,143 104,184 122,839 135,123

Gross margin as a percentage of sales 39% 33% 30% 32% 33% 33%

Expenses

Selling, general and administrative 51,058 54,826 56,077 60,880 62,707 64,588

Impairment of goodwill - - 1,890 - - -

Other operating income (605) (100) (122) (4,713) - -

Finance costs 12,484 12,668 13,058 12,938 11,799 11,418

Finance expenses (income) (2,065) 159 (773) 1,999 - -

60,872 67,553 70,130 71,104 74,506 76,006

Profit before income taxes 44,437 34,176 25,013 33,080 48,334 59,117

Income Taxes

Current 5,627 3,910 3,771 5,315 7,250 8,868

Deferred 8,049 5,743 4,054 5,012 7,250 8,868

13,676 9,653 7,825 10,327 14,500 17,735

Profit for the period 30,761 24,523 17,188 22,753 33,834 41,382

Profit as a percentage of sales 11% 8% 5% 7% 9% 10%

Profit per share

Basic 2.43$ 1.97$ 1.38$ 1.81$ 2.70$ 3.30$

Diluted 2.40$ 1.95$ 1.37$ 1.77$ 2.63$ 3.22$

Weighted average shares outstanding

Basic 12,675 12,423 12,472 12,545 12,552 12,552

Diluted 12,828 12,562 12,575 12,855 12,861 12,861

Profit before income taxes 44,437 34,176 25,013 33,080 48,334 59,117

Impairment of goodwill and other 2,549 - 1,890 - - -

Finance costs 12,484 12,668 13,058 12,938 11,799 11,418

Depreciation and amortization in cost of sales 3,312 5,436 5,839 5,774 5,941 5,844

Depreciation and amortization in G&A expenses 3,418 3,758 4,171 4,342 4,468 4,395

EBITDA 66,200 56,038 49,971 56,134 70,541 80,774

T ransaction costs 1,696 1,676 - - - -

Loss (gain) on foreign exchange in sales (7,007) (4,918) 274 928 - -

Loss (gain) on foreign exchange in finance income (1,300) 276 (785) 2,000 - -

Loss on ineffective hedge and other (121) 126 - 150 - -

Loss (gain) on sale of property, plant & equipment 262 76 32 (4,667) - -

Adjusted EBITDA 59,730 53,274 49,492 54,545 70,541 80,774

EBITDA margin 22% 17% 16% 17% 19% 19%



Exhibit A9. Ag Growth Balance Sheet ($000’s)



Assets

Current assets

Cash and cash equivalents 35,803 6,839 2,171 28,862 35,949 51,684

Accounts receivables 38,535 49,691 51,856 48,780 47,246 51,971

Inventory 52,574 64,558 58,513 55,284 70,869 77,956

Prepaid expenses and other current assets 7,628 2,720 1,645 2,341 2,341 2,341

Income taxes recoverable - 1,506 900 - - -

Derivative instruments 4,200 - 1,377 - - -

140,600 127,753 116,496 135,328 156,466 184,014

Non-current assets

Property, plant and equipment 79,022 83,434 80,854 88,089 88,530 88,974

Goodwill 62,355 65,876 63,399 64,054 62,054 60,054

Intangible assets, net 72,345 75,510 72,777 70,713 66,928 63,345

Available-for-sale investment 2,000 2,800 2,000 2,000 2,000 2,000

Derivative instruments - - 234 - - -

Deferred tax asset 42,063 38,092 33,621 33,053 33,053 33,053

257,785 265,712 252,885 257,909 252,565 247,426

Assets held for sale - 1,101 1,101 1,101 1,101 1,101

Total assets 398,385 394,566 370,482 394,338 410,133 432,541

Liabilities

Current liabilities

Accounts payale and accrued liabilities 22,623 22,264 17,351 21,651 26,486 28,769

Customer deposits 6,573 8,018 4,983 15,498 15,498 15,498

Dividends payable 2,509 2,509 2,510 2,514 2,514 2,514

Acquisition price, transaction and financing costs payable 11,994 1,938 - - - -

Current portion of long-term debt 128 16 7 5 5 5

Current portion of obligations under finance leases 432 131 - - - -

Current portion of derivative instruments 2,003 1,828 - 1,695 1,695 1,695

Current portion of share award incentive plan - 1,495 - - - -

Provisions 1,998 2,222 2,420 2,579 2,579 2,579

48,260 40,421 27,271 43,942 48,777 51,060

Non-current liabilities

Long-term debt 24,518 35,824 34,916 37,021 37,021 37,021

Convertible unsecured subordinated debentures 105,140 107,202 109,558 110,808 110,808 110,808

Derivative instruments and other 1,709 - - 2,716 2,716 2,716

Deferred tax liability 8,464 8,960 9,041 12,392 19,642 28,510

139,831 151,986 153,515 162,937 170,187 179,055

Shareholders' Equity

Common shares 151,376 151,039 153,447 156,363 156,363 156,363

Accumulated other comprehensive loss (443) (1,875) (2,590) 462 462 462

Equity component of convertible debentures 5,105 5,105 5,105 5,105 5,105 5,105

Contributed surplus 6,121 5,341 4,108 3,322 3,322 3,322

Retained earnings 48,135 42,549 29,626 22,207 25,916 37,174

Total Shareholders' Equity 210,294 202,159 189,696 187,459 191,168 202,426

Total Liabilities and Shareholders' Equity 398,385 394,566 370,482 394,338 410,133 432,541



Exhibit A10. Ag Growth Statement of Cash Flows ($000’s)



Operating Activities

Profit before income taxes for the period 44,437 34,176 25,013 33,080 48,334 59,117

Add (deduct) items not affecting cash

Depreciation of property, plant and equipment 3,313 5,418 6,161 6,114 6,623 6,656

Amortization of intangible assets 3,418 3,776 3,849 4,002 3,785 3,583

Impairment of goodwill and other 1,703 - 1,890 - - -

T ranslation loss (gain) on foreign exchange (1,022) 1,641 (1,766) 5,748 - -

Non-cash component of interest expense 2,274 2,422 2,543 1,357 - -

Share-based compensation expense 6,511 2,038 1,174 2,225 2,000 2,000

(Gain) loss on sale of property, plant and equipment (263) 76 32 (4,667) - -

60,371 49,547 38,896 47,859 60,742 71,356

Net change in non-cash working capital:

Accounts receivable (9,664) (9,607) (2,165) 3,076 1,534 (4,725)

Inventory (1,321) (9,850) 6,045 3,229 (15,585) (7,087)

Prepaid expenses and other assets (5,248) 5,034 1,075 (696) - -

Accounts payable and accrued liabilities 2,046 (1,755) (4,913) 4,456 4,835 2,283

Customer deposits (2,868) 1,445 (3,035) 10,515 - -

Provisions 748 280 198 109 - -

Net change in non-cash working capital (16,307) (14,453) (2,795) 20,690 (9,216) (9,529)

Settlement of SAIP obligation - (1,998) (1,495) - - -

Income tax paid (5,063) (5,217) (3,012) (4,444) (7,250) (8,868)

Cash provided by operating activities 39,001 27,879 31,594 64,104 44,276 52,960

Investing Activities

Acquisition of property, plant and equipment (25,021) (9,254) (4,710) (13,206) (7,065) (7,100)

Acquisitions (31,328) (21,900) - - - -

T ransfer from (to) cash held in trust and restricted cash (2,682) (243) 2,405 (28) - -

Proceeds from sale ofproperty, plant and equipment, net 648 500 158 5,943 - -

Development of intangible assets - (1,471) (1,615) (781) - -

T ransaction and financing costs paid 1,484 (433) (1,938) - - -

Cash used in investing activities (56,899) (32,801) (5,700) (8,072) (7,065) (7,100)

Financing Activities

Increase of bank indebtedness - - - - - -

Issuance (repayment) of long-term debt (89) 10,674 (7) (2) - -

Repayment of obligations under finance leases (135) (439) (131) - - -

Finance costs incurred - - (313) - - -

Dividends paid (26,568) (30,109) (30,111) (29,308) (30,124) (30,124)

Dividend reinvestment plan costs incurred and NCIB (29,423) (3,346) - (32) - -

Cash (used in) provided by financing activities (56,215) (23,220) (30,562) (29,342) (30,124) (30,124)

Decrease in Cash Position (74,113) (28,142) (4,668) 26,691 7,087 15,736

Cash Position, Beginning of Period 109,094 34,981 6,839 2,171 28,862 35,949

Cash Position, End of Period 34,981 6,839 2,171 28,862 35,949 51,684

Cervus Equipment Corp. October 28, 2013


CERVUS EQUIPMENT CORP. Harvesting earnings growth via multiple verticals and expanding geographies

INVESTMENT THESIS

Cervus is an aggregator and operator of authorized agricultural, industrial and commercial equipment dealerships. The company has an exceptional track record of earnings growth with a long runway of future expansion opportunities across multiple verticals and geographies that we believe will translate into ongoing increases in the share price and dividend.

VALUATION

We maintain a BUY recommendation on Cervus Equipment Corporation with a one-year price target of $24.00 per share. Our target is based on an 8× EV/EBITDA multiple against our 2014 estimates which is at a discount to the U.S. peer average at 9.5× and a small premium to the Canadian group at 7.3×. Notably, Deere & Company trades at 12.2× while the closest Canadian comparable (RME) trades at 7.8×.

FOCUS POINTS

▪ Cervus has a history of growing profitably. Since 2003, the company has a 33% revenue CAGR including another record year in 2012 with revenue and EPS advancing ~30% YoY.

▪ It deploys a winning acquisition formula. The company typically acquires at 3 to 4 times pre-tax earnings which is immediately accretive with further upside through realizing synergies.

▪ Multiple avenues of growth are available. Having established the largest group of John Deere dealerships in Canada, Cervus is replicating this model across other geographies (New Zealand and Australia) and verticals (commercial and industrial equipment).

▪ The long-term potential seems nearly endless. John Deere is supportive of the company’s international expansion while nascent forays into other verticals are proving successful.

Recommendation: BUY

Symbol/Exchange: CVL/TSX

Sector: Agricultural and Industrial Equipment






Financial summary


Company profile: Cervus operates authorized agricultural, industrial and commercial equipment dealerships selling recognized brands including John Deere, JCB Construction, Bobcat, Clark, Sellick, Nissan, Doosan and Peterbilt Motors.

Shares O/S - F.D. (M) 15.7 52-Week Range ($) $17.25 - $21.39

Market Cap ($M) 321.4 Avg. Weekly Volume 56,713


$M (Dec-31) F2011A F2012A F2013E F2014E

Revenue ($M) 560$ 734$ 889$ 955$

EBITDA ($M) 35$ 48$ 56$ 59$

EPS ($) 1.22$ 1.58$ 1.71$ 1.91$

CFPS ($) 2.32$ 2.95$ 3.29$ 3.40$

EV/EBITDA 9.9 9.6 7.6 7.0

P/E 16.7 12.9 12.0 10.8

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INTRODUCTION

We are initiating coverage of Cervus Equipment Corporation, an operator of authorized equipment dealerships under leading brands including John Deere, JCB, Bobcat, Peterbilt and others. The company has a long history of growth and profitability becoming Canada’s largest group of John Deere agricultural equipment dealers and diversified into other verticals and geographies. Chairman and founder Peter Lacey purchased his first dealership in 1982 and has overseen Cervus’ transformation into 55 agricultural, commercial and industrial dealerships across Canada, New Zealand and Australia. The company has grown largely through acquisition facilitating dealership succession with the full endorsement of its product manufacturers. It deploys a winning strategy acquiring companies at highly accretive valuation metrics and further enhancing returns by transitioning these locations to be more profitable. We believe Cervus remains in the early innings of its growth trajectory, having succeeded with recent forays into complementary verticals and geographies, which will allow for a multiplying of existing sales, the share price and the dividend over time.

We maintain our BUY recommendation on Cervus with and a one-year price target of $24.00 per share. Our target is based on an 8× EV/EBITDA multiple against our 2014 estimates (assuming only internally generated growth) which values Cervus at a discount to the U.S. peer average at 9.5× and a small premium to the Canadian group at 7.3×. Notably, Deere & Company trades at 12.2× while the closest Canadian comparable (Rocky Mountain Dealerships) trades at 7.8×. Adding the prospect for near-term acquisitions would increase our target to $30.00 per share assuming $50 million were spent on additional targets.

Exhibit B1. Cervus Current and Target Valuation Metrics


Valuation metrics (based on F2013E estimates)

C$ P/Rev EV/EBITDA P/E FCF Yield

Target $24.00 0.5x 8.6x 14.1x 7.2%

Current $20.50 0.5x 7.6x 12.0x 8.5%



Target $24.00 0.5x 8.0x 12.6x 9.1%

Current $20.50 0.4x 7.0x 10.8x 10.6%



Target $24.00 0.4x 6.9x 10.9x 10.5%

Current $20.50 0.4x 6.0x 9.3x 12.3%



COMPANY DESCRIPTION

Cervus Equipment Corporation acquires and manages authorized agricultural, commercial, industrial and transportation equipment dealerships with interests in 55 dealerships located in Western Canada, New Zealand and Australia. The primary equipment brands represented by Cervus include John Deere agricultural equipment; JCB and Bobcat construction equipment; Clark, Sellick, Nissan and Doosan material handling equipment; and Peterbilt transportation equipment. A total of 43 dealerships are wholly-owned and managed locations while 12 are investment partnerships including a 20% interest in Maple Farm Supply Partnership (7 locations in Saskatchewan and Manitoba acquired in January 2010) and a 53% interest in Windmill Ag Pty Ltd (5 locations in Australia acquired in July 2012). The company’s first venture outside of agriculture was in 2005 via the acquisition of 5 Bobcat/JCB construction equipment dealerships in Alberta. It subsequently bought A.R. Williams in January 2010 adding 10 material handling dealerships. In March 2012, Cervus entered the transportation vertical by buying Frontier Peterbilt adding 5 locations in Saskatchewan.

Exhibit B2. Cervus Footprint




Cervus operated as a limited partnership under the name Cervus LP from 2003 with shares initially trading on the TSX Venture exchange. In 2006, the Canadian federal government mandated that specified investment flow-through entities (including limited partnerships) be converted to a corporation before 2011. Accordingly, the company completed a corporate conversion in October 2009 changing its name to Cervus Equipment Corporation. On January 31, 2011 Cervus graduated to the Toronto Stock Exchange.

The company’s head office is located in Calgary, Alberta, Canada. As of December 31, 2012, it had 1,115 employees with 575 working in the agricultural segment, 478 in the commercial and industrial segment and another 62 in executive, management and administrative roles. Revenue is most heavily weighted toward the agricultural segment (65%). The company obtains revenue primarily from the sale of new and used equipment with auxiliary revenue coming from parts, service and rentals.

Exhibit B3. Cervus Revenue Breakdown (2012)


Agricultural65%

Commercial and

Industrial35%

Equipment Sales75%

Parts14%

Service9%

Rentals2%




Cervus deals in trusted and recognized brands

The company has partnered with many of the world’s most dominant agricultural, commercial and industrial brands including John Deere, Bobcat, JCB and Peterbilt. Deere & Company has been manufacturing agricultural equipment for 175 years and is one of North America’s oldest and most respected brands with a very loyal customer base. Bobcat has established itself as the leader in North America for the manufacture of light construction equipment. In Alberta’s active economy, JCB’s world-renowned line of machinery presents ground-breaking opportunities. Peterbilt has reigned as North America’s premium-quality, heavy duty truck manufacturer. While other manufacturers like Freightliner and Volvo sell more trucks annually, Peterbilt is known as the “Harley Davidson” of trucks.

Exhibit B4. Cervus Respective Brands


The company serves a variety of industries in growth markets

Its primary agricultural segment alone offers an exciting opportunity for growth. While the agriculture industry is expected to grow at a 3.4% CAGR over the current decade, John Deere has an even more aggressive growth target. Deere has a strategic plan to double that pace increasing sales by 50% (from $33 billion to $50 billion) in 2018. It seeks to exploit faster growing markets outside North America (particularly the BRICs) and Cervus can be a valuable partner in this pursuit given its proven success in consolidating dealerships in Canada and more recently in New Zealand and Australia. While the industries serving Cervus’ commercial and industrial segment (i.e. construction and transportation) are similarly expected to grow at a 3% to 4% CAGR, the



company can far outpace this growth through both domestic and international acquisitions.

It has an excellent track record of growth and profitability

Cervus has grown its topline 13-fold since 2003 (growing at a 33% CAGR). Gross margin and EBITDA have kept pace (growing at a 35% and 38% CAGR, respectively). This growth has been primarily fuelled by acquisitions and enhanced by organic means with same-store sales growth estimated to be near a 10% CAGR. Notably, the company has financed much of this expansion through internally generated cash flow while also tapping the equity markets on occasion and issuing stock to acquirees. In 2012, the company completed a $34.5 million convertible debenture which we believe is more than sufficient to fund its next wave of acquisitions.

Exhibit B5. Historical Financial Performance


Organic growth alone can improve upon 2012 record performance

As the industries underlying Cervus’ customer base grow between 3% and 4% annually, the company can continue outpacing this trajectory by gaining market share versus competing brands (i.e. Case Agriculture) and competing dealerships (i.e. neighbouring John Deere dealerships). Over time, Cervus has gained scale and efficiencies that smaller dealerships cannot match thus allowing the company to capture market share from its competitors gradually or else acquire them outright more suddenly.

Cervus facilitates dealer succession

For decades, the majority of North American farm equipment dealerships were family owned and operated. Similarly, dealerships have a history of being passed down from generation to generation. However, increasingly children of family owned dealerships are opting alternative careers. So when retirement approaches, many owners are looking to sell instead of passing down their

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legacy to their offspring. As well, as farms are getting larger, farmers are demanding more from their equipment dealers in terms of service and technology. Cervus’ scale, experience and access to capital make it a natural consolidator in the agricultural equipment dealership industry which is also translating into opportunities across other verticals.

OEMs benefit from having a strong dealership consolidator

An OEM will always prefer a dealership operator with greater experience and more capital. This is to ensure that sales of its products and customer satisfaction are maximized. A more experienced dealer will operate predictably (i.e. less experienced dealers are prone to mistakes such as mispricing trade-ins) while a greater capitalized one has the scale to meet broader customer needs (i.e. greater inventory and service offerings).

Accordingly, acquisitions have proven to be highly accretive

For the reasons just mentioned, an OEM generally must approve any transaction surrounding the sale of a dealership. While there are other multi-dealership operators, very few approach the scale and efficiency of Cervus. Accordingly, the company is typically the most preferred successor by the OEM. With very limited opportunity to shop for the highest bid, Cervus normally acquires dealerships at highly attractive valuation metrics in the range of 3 to 4 times pre-tax earnings (it currently trades around double that).

No shortage of acquisition targets across verticals and geographies

We estimate that Cervus operates around a third of John dealerships across Alberta and Saskatchewan. John Deere may wish to limit Cervus from controlling too many locations within a certain region. However, we expect that Deere would be supportive of some further consolidation in the area. More encouragingly, Deere & Co has allowed Cervus to expand internationally to New Zealand and Australia. The “experiment” has proven successful and we expect Cervus will keep growing geographically. The opportunity in Australia alone is comparable to Western Canada whereas the greater global opportunity represents a multiple of that. Even greater is the prospect of growing out the more nascent commercial and industrial segment both domestically and abroad.

The company could access debt rather than raising dilutive equity

The balance sheet is very strong with modest debt. Cervus has only $8 million in bank indebtedness, $48 million in term debt (mostly mortgage financing), $3 million in notes payable and $35 million in convertible debentures (maturing July 31, 2017). With the company approaching $56 million in EBITDA, we believe it has the capacity to take on more debt. We assess that it could comfortably take on $50 million in further debt. Applying historical acquisition metrics suggests that Cervus could fund acquisitions that would add roughly $200 million in revenue, $15 million in EBITDA and $0.50 in EPS to our 2014 estimates thus translating to a 25% bump up in our targeted valuation.

Insiders interests are well aligned with the company’s success

We are encouraged to see insider interests well aligned with the company’s success. Insiders combined own 29% of the company’s shares with Chairman Peter Lacey controlling 22% and CEO Graham Drake owning 4%. Insider trading reports show no significant movements in insider positions other than acquisitions of stock under a share purchase plan. Thus, it is clear that the



interest of insiders and shareholders are well aligned with a common goal of maximizing shareholder value.

INVESTMENT RISK

Reliance on key manufacturers and dealership arrangements

Cervus Equipment’s primary source of income is from the sale of agricultural, commercial and industrial equipment pursuant to agreements to act as an authorized dealer. Hence the company relies on the success of its suppliers and the renewal of these agreements. Suppliers must continue to provide competitive prices and quality products while Cervus must continue to maintain certain performance metrics to ensure dealership agreements are renewed upon any expiry.

Dependence on industry sectors and competition

The company serves a select few industry sectors and is dependent on the health of these industries. For example, the majority of John Deere dealership sales are derived from the agricultural sector. Consequently, grain and livestock prices, weather conditions that effect crop production, borrowing rates, grain disease, and customer confidence have an impact on demand for equipment, parts and service. As well, the retail farm equipment industry is very competitive with Cervus competing against other John Deere dealerships, as well as CASE, AGCO, New Holland and Kubota.

Foreign currency

Although it reports in Canadian dollars, Cervus is exposed to some foreign currency risk. The company takes pricing on new equipment from its U.S. suppliers and sells these goods to its Canadian customers in Canadian dollars. Fluctuations in the exchange rate may impact pricing to Canadian customers thereby influencing the volume of sales. Furthermore, some customers may seek to find greater bargains south of the border. A sudden move in the exchange rate could also impact inventory valuation where used equipment becomes relatively less desirable following a downward price move in new equipment. Finally, operations in New Zealand and Australia also expose Cervus to movements in those respective currencies.

Tax reassessment

In 2012, the Canada Revenue Agency (CRA) requested information relating to the plan of arrangement involving Cervus LP and Vasogen completed in October 2009 which resulted in the company’s current corporate structure. There is a risk that the CRA could reassess tax filings for 2009 through 2012 resulting in the payment of back taxes of around $25 million, as well as the elimination of tax shields currently valued at $35 million on the balance sheet. Importantly, the CRA has only requested information from Cervus and has not issued a reassessment nor proposed one. The plan of arrangement was heavily vetted by accounting, tax and legal consultants and we expect Cervus would determinedly appeal any reassessment if one were presented.




For reporting purposes, Cervus presents its results in two broad segments; Agricultural Equipment and Commercial and Industrial Equipment. While the Commercial and Industrial segment was the primary driver of record revenue performance in 2012 (primarily as a result of the Frontier Peterbilt acquisition), the Agricultural segment was the bigger contributor to earnings growth due to being a greater proportion of the overall mix and because of the relative strength of the broader agriculture sector. We expect the company can build on record 2012 performance in 2013 and 2014 via a combination of same store sales growth, a shift in mix toward higher margin offerings (parts and service) and through the realization of operating synergies. We estimate EPS building from $1.58 in 2012 to $1.71 in 2013 and $1.91 in 2014. Acquisitions would be further accretive to our estimates.

Agriculture

The agricultural segment grew revenue 17.3% year-over-year or 15.3% on a same-store basis which excludes the purchase of 5 additional stores in New Zealand in 2012. The strength in equipment sales during 2012 should translate to stronger parts and service sales going forward. Earnings growth from this segment outpaced revenue growth as the company realized operating leverage.

Commercial and Industrial

The commercial and industrial segment grew 69.4% year-over-year in 2012 or 5.8% on a same-store basis which excludes the purchase of the transportation group in March 2012. Far outpacing top-line performance, EPS from this segment grew at 54% year-over-year implying that the Frontier Peterbilt acquisition has proven highly accretive already.

VALUATION

CVL shares currently trade at a discount to its respective peer group. The current EV/EBITDA multiple is 7.0x against our 2014 estimates. Its OEM counterpart, Deere & Company, trades at a substantial premium (12.2× EV/EBITDA) largely due to scale and brand yet offers an inferior growth profile in our view. CNH dealership peers, Titan Machinery (TITN-NASDAQ) and Rocky Mountain (RME-TSX), trade at a premium EV/EBITDA valuation of 7.8× and 10.7×, respectively. We concede that a small price premium for Titan is warranted based on that company’s greater revenue scale.

RECOMMENDATION

We maintain a BUY recommendation on Cervus Equipment with a one-year price target of $24.00 per share. Our target is based on an 8× EV/EBITDA multiple against our 2014 estimates which values Cervus at a discount to the U.S. peer average at 9.5× and a small premium to the Canadian group at 7.3×. Notably, our target excludes upside from potential acquisitions. Given the strength of the company’s balance sheet we believe it could take on an additional $50 million in debt to pursue acquisitions which after applying historical acquisition metrics would increase our target to around $30.00 per share.



Exhibit B6. Cervus Board of Directors


Peter Lacey (3) Alberta, Canada

Executive Chairman

1998 Mr. Lacey serves as the Executive Chairman for the Cervus Board of Directors. Prior to assuming this role, Mr. Lacey was the President, Chief Executive Officer and a Director of Cervus Equipment Corporation, and one of the founders of Cervus Equipment since 1999. Mr. Lacey is also the President, Chief Executive Officer and a trustee of Proventure Income Fund, a public real estate investment trust listed on the TSX Venture Exchange. Additionally, Mr. Lacey currently holds the following positions:

President & CEO, ProDev Trust

Director, Bioexx Specialty Proteins (BXI – TSX)

Director, Entrec Transportation Services (ENT – TSXV)

Past President, Canada West Equipment Dealers Association

Director, Canada West Equipment Dealers Association

His other previous positions include:

Chairman, Eveready Income Fund (EIS.UN – TSX [acquired by Clean Harbors COH – NYSE])

Chairman, Red Deer College Board of Governors

Trustee, Alberta Ingenuity Fund

Director, Collicutt Energy Services Ltd (COH TSX)

Don Bell (1) (3) Alberta, Canada

Director 2008 Mr. Bell currently serves as a Cervus Corporation Director and was a Director of its predecessor, the general partner of Cervus LP. As one of the founders of WestJet Airlines Ltd, Mr. Bell held several positions within that organization until his retirement in July 2007, including, Executive Vice-President, Culture as well as Executive Vice-President, Customer Service. Prior to his retirement, he also served as Chairman of the Air Transport Association of Canada. In addition, Mr. Bell serves on the boards for a number of private companies and charities.

Larry Benke (2) (3) Alberta, Canada

Director 2012 Mr. Benke currently serves as a Cervus Corporation Director. Mr. Benke was President and Chief Executive Officer of Colt Companies, which he led until WorleyParsons acquired it in 2007. After the acquisition, Mr. Benke was the Managing Director for WorleyParsons Canada until his retirement in 2010. Mr. Benke is currently a director of WorleyParsons Limited, a global engineering and project delivery company listed on the Australian Securities Exchange, and is a director of the Board of The Calgary Airport Authority, a not-for profit responsible for the operation and development of the Calgary International and Springbank airports. Mr. Benke is also a director of CEDA International, an OMERS owned corporation, providing specialty maintenance and turnaround services to their industry partners. Mr. Benke graduated from the University of Alberta in 1973 with a Bachelor of Science in Electrical Engineering (Honors Standing).

Steven M. Collicutt (1) (2) Alberta, Canada

Director 2003 A current Cervus Corporation Director, Mr. Collicutt was also a Director of the general partner of Cervus LP and is a trustee for both ProDev and Proventure Income Fund. Mr. Collicutt is the President of Collicutt Compression Solutions Ltd., a private company involved in the sales, parts and service business for gas compression and power generation units in Western Canada and the Western U.S. Region. He also served as President and CEO of Collicutt Energy Services Ltd. (Purchased by Finning International Inc.), a public company listed on the Toronto Stock Exchange.

Graham Drake Alberta, Canada

Director & CEO

2003 Please see the following Exhibit.

Gary Wayne Harris (1) (2) Alberta, Canada

Director 2003 Mr. Harris is currently a Director of Cervus Corp. and also served as a Director of the general partner of Cervus LP, the predecessor of Cervus Equipment Corporation. Mr. Harris is also a trustee for ProDev and Proventure Income Fund, respectively. Mr. Harris is the President and CEO of both Westward Parts Services Ltd., a private wholesale distributor of all makes of agricultural parts and small sprayer, grounds maintenance and recreational equipment, and Westward Products Ltd., a private manufacturer of agricultural equipment. He is also a member of the Law Society of Alberta.


(2) Member of the Compensation Committee.

(3) Member of Nominating and Governance Committee. Source: Company documents



Exhibit B7. Cervus Senior Management


Graham Drake Chief Executive Officer & Director Mr. Drake is the President, CEO and a Director of Cervus Equipment Corporation, and previously served as the Vice President of Operations, Agriculture Division for Cervus Corp. and its predecessor, Cervus LP. He is also the Secretary of ProDev Trust and a trustee of the Proventure Income Fund. Prior to joining Cervus, Mr. Drake owned a John Deere dealership in Stettler, Alberta, which he sold to Cervus LP in 2000. He also managed a John Deere dealership in Lloydminster, Alberta and worked for John Deere Ltd. Mr. Drake was awarded a B.Sc. in Agricultural Engineering from Macdonald College of McGill University.

Randy Muth Chief Operating Officer

Mr. Muth is the Chief Financial Officer of Cervus Equipment Corporation and was also the CFO of its predecessor, the general partner of Cervus LP. Prior to joining Cervus, Mr. Muth was the CFO of AmeriVision Communications Ltd and the Vice President of Operations, Network Cabling for Orius Corp. He worked for the Videotron Group of Companies where he served as the Vice President, General Manager and Director of Finance in Edmonton, Alberta as well as the South Texas General Manager, in Houston, Texas. Mr. Muth has earned his Chartered Accountant (Alberta) and Certified Public Accountant (Illinois) designations, and received a Bachelor of Commerce degree from the University of Alberta.

John C. Higgins Vice President of Operations, Commercial and Industrial Division

Mr. Higgins has been Vice President of Operations - Industrial/Construction Equipment Division of the Corporation, and its predecessor entities, since 2007. Before joining Cervus, Mr. Higgins was General Manager of Signature Tractor Inc., an agricultural equipment dealer. Prior thereto, Mr. Higgins also held senior operations responsibilities in the logistics, transportation and heavy truck dealership industries with the Irving Group of companies for the previous twenty-five years. Mr. Higgins is a member of the Executive Council, the Canadian Investor Relations Institute and has attended the Chartered Directors College.

Cal Johnson Vice President of Operations, Agricultural Division

Mr. Johnson is the Vice President of Operations, Agricultural Division. Previously he served as the General Manager for John Deere Agro Alberta. Prior to joining Cervus in 2000, he held several positions with John Deere Ltd. over a period of eleven years. Mr. Johnson is professional engineer and a University of Saskatchewan graduate.




Exhibit B8. Cervus Income Statement ($000’s)


Fiscal year-end December 31 FY2011 FY2013 FY2013 FY2014E FY2015E

Revenue

Equipment sales 429,442 554,349 666,202 721,185 775,274

Parts 73,172 104,225 128,918 135,640 145,813

Service 45,852 62,824 76,933 81,193 87,282

Rentals 11,132 12,847 16,516 17,194 18,483

Total Revenue 559,598 734,245 888,569 955,211 1,026,852

Cost of sales 453,263 594,067 726,596 776,109 834,318

Gross profit 106,335 140,178 161,973 179,102 192,535

Other income (1,839) (2,984) (1,762) (3,000) (3,000)

Selling, general and administrative expenses 82,601 108,667 122,940 138,506 146,326

Results from operating activities 25,573 34,495 40,795 43,596 49,208

Finance income 372 1,271 823 2,341 3,134

Finance costs (1,265) (4,536) (6,963) (6,430) (6,693)

Net finance costs (893) (3,265) (6,140) (4,089) (3,558)

Share of profit of equity accounted investees, net of income tax 1,346 2,457 2,060 1,250 1,438

Profit before income tax expense 26,026 33,687 36,715 40,757 47,088

Income tax expense 7,900 9,105 10,096 11,004 12,714

Profit for the period 18,126 24,582 26,619 29,753 34,374

Foreign Exchange loss 213 71 (745) - -

Net earnings (loss) and comprehensive income 18,339 24,653 25,874 29,753 34,374

Earnings (loss) per common share

EPS - basic 1.27$ 1.65$ 1.78$ 1.98$ 2.29$

EPS - diluted 1.22$ 1.58$ 1.71$ 1.91$ 2.20$

Weighted average number of shares - basic 14,546 14,791 14,969 14,993 14,993

Weighted average number of shares - fully diluted 15,061 15,406 15,584 15,608 15,608

EBITDA 35,243 48,153 56,023 59,280 66,438

EBITDA margin % 6.3% 6.6% 6.3% 6.2% 6.5%



Exhibit B9. Cervus Balance Sheet ($000’s)



Assets

Cash and cash equivalents 6,536 8,156 44,916 62,216 84,581

Deposit for business acquisition 2,000 - - - -

Asset held for sale 1,447 - 4,959 4,959 4,959

T rade and other accounts receivable 50,189 38,810 51,298 58,374 62,752

Inventories 106,776 172,857 141,653 150,910 162,228

Total current assets 166,948 219,823 242,827 276,459 314,521

Long-term receivables and other long-term assets 112 1,665 1,798 1,798 1,798

Investments in associates, at equity 5,146 9,797 7,497 7,497 7,497

Deposits with manufacturers 1,459 1,855 1,874 1,874 1,874

Property and equipment 29,185 92,091 103,539 113,422 123,874

Deferred tax asset 53,546 44,197 34,099 23,095 10,381

Intangible assets 19,905 26,717 27,544 24,672 22,099

Goodwill 5,154 5,812 6,475 6,475 6,475

Total Assets 281,455 401,957 425,652 455,291 488,519

Liabilities

Trade and other accrued liabilities 22,514 37,655 33,247 38,109 40,860

Customer deposits 5,269 8,188 8,886 9,552 10,269

Floor plan payables 51,944 73,626 67,993 73,946 81,114

Dividends payable 2,647 2,831 2,919 2,919 2,919

Current portion of term debt 2,957 4,658 4,976 4,976 4,976

Current portion of notes payable 2,477 2,652 2,743 2,743 2,743

Total current liabilities 87,808 129,610 128,509 139,990 150,626

Term debt 7,276 39,028 43,430 43,430 43,430

Notes payable 2,652 - - - -

Debenture payable / Deferred credit - 30,534 30,891 30,891 30,891

97,736 199,172 203,620 215,101 225,737


Shareholders' capital 72,925 76,503 77,322 77,322 77,322

Deferred share plan 3,785 5,133 6,411 7,911 9,411

Other reserves 3,036 5,136 4,687 3,437 2,000

Accumulated other comprehensive income 150 221 (524) (524) (524)

Retained earnings 102,084 115,792 130,713 148,621 171,151

Total equity attributable to equity holders of the company 181,980 202,785 218,609 236,767 259,359

Non-controlling interest 1,739 - 3,423 3,423 3,423

Total equity 183,719 202,785 222,032 240,190 262,782

Total liabilities and equity 281,455 401,957 425,652 455,291 488,519



Exhibit B10. Cervus Statement of Cash Flows ($000’s)




Profit for the period 18,126 24,582 26,619 29,753 34,374

Depreciation 5,505 7,253 8,865 9,221 10,085

Amortization of intangibles 2,447 2,677 3,480 2,872 2,572

Forgiveness of employee purchase loans and other 70 - 598 - -

Equity-settled share-based payment transactions 1,150 1,506 1,222 1,500 1,500

Net finance costs 1,292 3,524 3,205 - -

Gain on sale of property and equipment (193) (775) (782) - -

Share of profit of equity accounted investees, net of tax (1,346) (2,457) (2,060) (1,250) (1,438)

Income tax expense 7,900 9,105 10,096 11,004 12,714

34,951 45,415 51,243 53,100 59,808

Change in non-cash working capital (7,437) (21,720) 10,545 (4,852) (5,060)

Interest paid (1,665) (4,744) (3,086) - -

Net cash from operating activities 25,849 18,951 58,702 48,248 54,747


Interest received 372 1,271 379 - -

Business acquisition (2,000) (22,260) (1,352) - -

Advances to related party (14,684) 15,354 - - -

Purchase of property and equipment (11,455) (42,832) (24,240) (19,104) (20,537)

Proceeds from disposal of property and equipment 1,965 4,888 2,289 - -

Proceeds from investments, at equity, net of purchases 905 (2,193) 559 - -

Proceeds from asset held for sale - 1,501 - - -

Increase in other investments, at cost (1,545) 112 - - -

Net cash used in investing activities (26,442) (44,159) (22,365) (19,104) (20,537)


Proceeds from (repayment of) term debt (121) 6,680 3,451 - -

Proceeds from exercise of share options - 17 172 - -

Advance from debenture offering, net of costs - 33,159 - - -

Dividends paid (9,797) (9,902) (11,167) (11,844) (11,844)

Decrease in deposits with John Deere 250 (289) 244 - -

Repayment on notes payable (2,808) (2,837) - - -

Cash flow from financing activities (12,476) 26,828 445 (11,844) (11,844)

Net increase in cash and cash equivalents (13,069) 1,620 36,782 17,299 22,366

Cash and cash equivalents, beginning of period 19,605 6,536 8,156 44,916 62,216

Cash and cash equivalents, end of period 6,536 8,156 44,916 62,216 84,581

Finning International Inc. October 28, 2013


FINNING INTERNATIONAL INC. An attractively valued, less volatile play on Caterpillar with better growth potential

INVESTMENT THESIS

Finning International Inc. is the world’s largest dealer of Caterpillar (CAT) products. FTT shares offer an attractively valued means of playing the Caterpillar brand with lower risk due to a high proportion of recurring revenue and better long-term growth potential on further territory consolidation.

VALUATION

We initiate coverage of Finning International with a BUY recommendation and a one-year price target of $29.00 per share. Our target is based on an 8× EV/EBITDA multiple against our 2014 estimates, below its OEM counterpart at 11×.

FOCUS POINTS

▪ Finning is the globe’s leading CAT dealer. Representing the industry’s top brand, it is well diversified across three regions (Western Canada, South America and UK & Ireland) and industries (i.e. construction, mining, power systems, etc.).

▪ Earnings volatility is muted by product support revenue. Encompassing about half of the sales mix, this segment is high margin and largely recurring in nature ensuring that the company can remain highly profitable in down markets.

▪ The company has grown its footprint over time and prospects remain. Caterpillar has been very supportive of Finning’s expansion historically and we expect them to be further accommodating in the future as opportunities become available.

▪ The stock offers a rare opportunity to pick up a quality mid-cap with many desirable attributes. Shares trade below the broad peer group and Caterpillar (CAT/NYSE) despite having many relative advantages.

Recommendation: BUY

Symbol/Exchange: FTT/TSX

Sector: Industrial Equipment






Financial summary


Company profile: Finning is a dealer of Caterpillar equipment with operations in Western Canada, South America, the United Kingdom and Ireland. The company sells, rents and provides parts and service for equipment and engines to customers in mining, construction, power systems, forestry and other industrial markets.

Shares O/S (M) 172.0 52-Week Range ($) 20.37 - 27.30

Market Cap ($M) 4,107.3 Avg. Daily Volume 514,359

Enterprise Value ($M) 5,496.8 Net Debt ($M) 1,389.5


Revenue ($M) 5,895$ 6,622$ 6,665$ 6,865$

EBITDA ($M) 556$ 712$ 743$ 766$

EPS ($) 1.51$ 1.96$ 1.98$ 2.05$

EV/EBITDA 9.1 8.0 7.4 6.8

P/E 15.9 12.2 12.0 11.6

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INTRODUCTION

We are initiating coverage of Finning International, the world’s leading dealer of Caterpillar products. We believe the business is well positioned to prosper as the economy expands yet remain highly profitable during a downturn. The company is partnered with the globe’s top equipment manufacturer and is well diversified across various industries and geographies. It is most heavily weighted toward Western Canada gaining attractive exposure to the success of the oil sands. Finning has a track record of growth having expanded at a compounded annual rate of 8% at the top and 9% on the bottom line over the last ten years. More notably, the company has grown its product support business even faster, at a compounded rate of 11%, now representing almost half of its overall sales mix. This revenue is highly recurring and high margin thus reducing volatility in the company’s earnings relative to Caterpillar and most of its peers. While the industry has slowed in 2013, Finning is working to enhance profitability through improving its supply chain, service efficiency and asset utilization, as well as through capturing market share. We expect this to lead to earnings improvement in 2014 and beyond. Longer term, we envision Finning continuing to grow via acquisition as the opportunities come up. Caterpillar has been very supportive of the company’s expanding footprint and we see further potential within Canada (i.e. Saskatchewan) and outside of it (possibly even the United States). In our opinion, the stock appears to discount the company’s strengths and presents a rare opportunity to purchase shares of a high quality mid-cap at a discount relative to its peer group and OEM partner.

We are initiating coverage of Finning International with a BUY recommendation and a one-year price target of $29.00 per share. Our target is based on an 8× EV/EBITDA multiple against our 2014 estimates which values FTT shares in-line with how we value relevant comparables (TIH and WJX), yet still at a discount to Caterpillar which currently trades much higher at 11×.

Exhibit C1. Finning Current and Target Valuation Metrics



C$ P/Rev EV/EBITDA P/E

Target $29.00 1.0x 9.2x 14.8x

Current $23.88 0.9x 8.0x 12.2x



Target $29.00 1.0x 8.6x 14.6x

Current $23.88 0.8x 7.4x 12.0x



Target $29.00 0.9x 8.0x 14.1x

Current $23.88 0.8x 6.8x 11.6x



COMPANY DESCRIPTION

Finning International provides sales, rental, parts and support services for Caterpillar Inc. equipment and engines, as well as complementary equipment. It has operations across three continents, being the authorized dealer for CAT across several provinces in Western Canada, several nations in South America and a couple more in Europe. It beginnings are in the province of British Columbia where it has operated for 80 years. In 1977, it expanded into the Yukon Territory, later adding Alberta in 1989 and the Northwest Territories in 1995. In 1993, the company acquired its first South American Caterpillar dealership, in Chile, before later expanding into Argentina, Uruguay and Bolivia in 2003. Its foray into Europe began in Great Britain in 1983, consolidating the rest of the United Kingdom in 1997 before adding Ireland in 2010.

Exhibit C2. Finning Footprint


By geography, Finning derives about half of its revenue in Canada (49%), followed by South America (37%) and Europe (14%). In Canada, new equipment sales by industry are weighted toward mining including oil sands, copper and coal (32%), construction (35%), power systems (12%), petroleum (11%) and forestry (4%). South American sales are similarly dominated by mining and construction while the UK and Ireland are more diversified with the predominant commodity exposure being toward coal.

Exhibit C3. Finning Revenue Breakdown (2012)


Geographic Mix Product Mix

Canada49%

South America

37%UK & Ireland

14%

New equipment

46%

Used equipment

Equipment rental

Product support

43%Other



Notably, in 2012, Finning completed its acquisition from Caterpillar of the former Bucyrus International Inc. distribution and support business in its dealership territories across Western Canada, South America, the UK and Ireland for a total value of US$466 million. This acquisition allows Finning to sell and support a very comprehensive product line in the mining industry and contributed approximately $233 million in revenue and $0.09 per share in earnings during 2012.

The company became public in 1969 trading on the Vancouver and Toronto stock exchanges. It maintains its head office in Vancouver, British Columbia and it had 15,382 employees as of December 31, 2012.


Finning deals in the world’s top heavy equipment brand

The company is partnered with Caterpillar, a U.S. based company founded in 1925 with US$66 billion in sales during 2012. They are the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. CAT has a dominant market share lead in North America where it accounts for about one third of construction equipment sales, nearly double its next closest competitor, John Deere. It also leads in Europe where it has a more modest 18% market share and competes neck and neck with Volvo.

The company has an attractive footprint serving growth markets

Finning’s revenue is heavily weighted toward Western Canada where it derives about half of its revenue. While 2013 has seen a lull, the Conference Board of Canada continues to expect growth in Alberta and B.C. forecasting that these provinces will outpace the national average in 2014 by expanding close to 3%. Finning largely benefits from the Alberta oil and gas sector including the emergence of the oil sands which aids the sale of mining equipment like the Caterpillar 797 (a series of off-highway hauling trucks designed specifically for high-production mining and heavy-duty construction). Notably, Finning has seen its oil sands related revenue grow by a 17% compounded annual rate since 2005 or an even more impressive 21% in product support.

It has a track record of growth, particularly in product support

The company has expanded at a compounded annual rate of 8% at the top and 9% on the bottom line over the last ten years. This growth has been led by product support sales which have expanded at a compounded rate of 11%. The product support segment now represents almost half of Finning’s overall sales mix and is highly recurring in nature. This business is also high margin. Thus, Finning’s operating results are less dependent on equipment sales which can vary significantly from period to period depending on the strength of the economy. Accordingly, Finning’s results are less volatile than its OEM partner, as well as most equipment dealer peers, suggesting it is a lower risk play.

http://en.wikipedia.org/wiki/Mining

http://en.wikipedia.org/wiki/Construction



Exhibit C4. Product Support Revenue 2002-2012


There are opportunities to enhance profitability

While the industry has slowed in 2013, Finning is working to enhance profitability through various means such as improving its supply chain, service efficiency and asset utilization, as well as through capturing market share. Within Canada, the company is focused on bettering customer satisfaction levels through the availability of parts and services. It is collaboratively addressing this supply chain issue with Caterpillar and dedicating more resources toward process improvements. A second focus area is service profitability where it is looking to add discipline against a backdrop of low labour utilization and elevated levels of SG&A. Thirdly, it expects to gain market share in the non-mining segments, such as medium and large excavators, where it has conceded share while focusing elsewhere. Lastly, it wishes to improve asset utilization in areas like the oil sands where it currently has excess capacity. In South America, Finning believes it can grow profit by increasing its market share in the mining and general construction sectors, while in the UK and Ireland it sees an opportunity to grow its construction segment and power systems segment. With these efforts in mind, we expect to see modest earnings improvement in 2014 with a longer term prospect of expanding EPS by $0.25 to $0.50 excluding growth.

Longer term, Finning is likely to keep growing via acquisition

Historically, the company has grown largely via acquisition and investment in expanding its footprint. Caterpillar appears to be very supportive of these efforts. An OEM will almost always prefer that a retiring dealer be acquired by an operator with greater experience and more capital. This is to ensure that sales of its products and customer satisfaction are maximized. A more experienced dealer will operate predictably (i.e. less experienced dealers are prone to mistakes) while a greater capitalized one can has the scale to meet broader customer needs (i.e. greater inventory and service offerings). While impossible to predict when a territory will become available, Finning is well positioned to be the successor when they do come up. For example, within Canada there is an adjacent territory in the Province of Saskatchewan which is privately held. A bigger opportunity is in the United States, where there are many smaller privately owned dealers. Worth mentioning, we believe Fining’s balance sheet is under leveraged and could fund an acquisition entirely with debt.

1.0 1.1 1.2 1.3

1.6 1.71.9 1.9

2.1

2.4

2.8

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(in billions)



INVESTMENT RISK


The company’s product and services predominantly serve a select few industry sectors. Finning is therefore dependent on the health of these industries. For example, a significant portion of sales are derived from the oil and gas sector (including the oil sands). Consequently, oil and gas prices, borrowing rates, and customer confidence have an impact on demand for equipment, parts and service. As well, the heavy equipment industry is very competitive with Caterpillar competing against others like John Deere, Komatsu, Terex, CNH, Volvo, JCB, Hitachi and others.

Reliance on Caterpillar and dealership arrangements

Finning’s primary source of income is from the sale of Caterpillar products pursuant to agreements to act as an authorized dealer. Hence the company relies on the success of its supplier and the renewal of these agreements. The supplier must continue to provide competitive prices and quality products while Finning must continue to maintain certain performance metrics to ensure dealership agreements are renewed upon any expiry.

Foreign currency and operations

Although it reports in Canadian dollars, Finning transacts business in multiple currencies including the U.S. dollar, the Canadian dollar, the U.K. pound sterling and the Chilean peso. Hence, the company is exposed to transactional foreign currency risk. As well, the company operates several subsidiaries outside of Canada. Fluctuations in the exchange rate will impact how foreign operations are reported in the company’s financial statements. Lastly, operating in lesser developed nations, like those in South America, inherently carries a higher degree of operating risk.


For reporting purposes, Finning presents its results by geographic segments; Canada, South America and U.K. & Ireland. While the Canada segment was the primary driver of record revenue performance in 2012, new equipment sales are down 33% year-to-date on soft market conditions for mining equipment (including oil sands). Nonetheless, product support growth across both Canada and South America should ensure the company achieves flat to slightly positive revenue and earnings versus last year. We expect that continued growth in product support revenue combined with efficiencies gained through recent initiatives will contribute to modest revenue and earnings growth in 2014. We estimate EPS building from $1.96 in 2012 to $1.98 in 2013 and $2.05 in 2014.

VALUATION

FTT shares currently trade at a discount to its respective peer group. The current EV/EBITDA multiple is 6.8× against our 2014 estimates. The US heavy equipment peer group trades at a premium with an average EV/EBITDA of 9.5× (with Caterpillar trading at 11×) while Canadian peers trade at a more modest premium of 7.3× with the most comparable peer (Toromont) trading at 7.5×.



RECOMMENDATION

We are initiating coverage of Finning International with a BUY recommendation and a one-year price target of $29.00 per share. Our target is based on an 8× EV/EBITDA multiple against our 2014 estimates which values Finning in-line with how we value its closest comparables (TIH and WJX) yet at a discount to Caterpillar which trades at 11× EV/EBITDA.

Exhibit C5. Finning Board of Directors


L. Scott Thomson (2) B.C., Canada

Director & CEO


Douglas Whitehead B.C., Canada

Chairman 1999 Mr. Whitehead is a Corporate Director. From 2000 to May 2008 he was the President and Chief Executive Officer of Finning. Prior to joining Finning, Mr. Whitehead held a number of senior executive positions with Fletcher Challenge Canada including President and Chief Executive Officer, Senior Vice President and Chief Operating Officer and Vice President of the Crown Packaging Division. Mr. Whitehead is a director of Inmet Mining Corporation, International Forest Products Ltd., KAL Tire and Belkorp Industries. He is also a member of the Board of Directors of the Vancouver General Hospital and University of British Columbia Hospital Foundation. Mr. Whitehead holds a Bachelor of Applied Sciences (Civil Engineering) from the University of British Columbia and an MBA from the University of Western Ontario.

Ricardo Bacarreza (1,2,3) Santiago, Chile

Director 1999 Mr. Bacarreza is currently the President of Proinvest S.A., a financial services company based in Santiago, Chile. In his career, Mr. Bacarreza has been an Economist at the World Bank (Washington, D.C.), Vice President of Banco Unido De Fomento (Chile) and Chief Executive Officer of Banco Del Trabajo (Chile), La Chilena Consolidada Insurance Company (Chile), Banco Sudamericano (Chile) and Banco BHIF (Chile). Mr. Bacarreza has been on the Board of Directors of a number of companies and has served as director and Chairman of the Chilean Management Institute. Mr. Bacarreza currently serves on the Board of Directors for Sociedad de Rentas Palo Alto SA. He holds a Civil Engineering degree from Catholic University of Chile and M.A., M.Sc. and Ph.D. from Stanford University and is fluent in Spanish.

James Carter (3,4,5) Alberta, Canada

Director 2007 Mr. Carter is a Corporate Director. Mr. Carter retired from Syncrude Canada Ltd. in 2007 after twenty-eight years, including 10 years as President and 18 years as Operations Chief. He currently serves on the Boards of Directors of EPCOR Utilities Inc., Clark Builders, the Climate Change Emissions Management Corporation, Alberta Treasury Branch Financial, CAREERS: The Next Generation and the Edmonton Symphony Orchestra. He is a former director and Chair of the Mining Association of Canada where he championed development of the Toward Sustainable Mining initiative, which is designed to help improve the mining industry’s environmental and social performance. Mr. Carter was also a member, director and executive member of the Alberta Chamber of Resources. Mr. Carter is a registered professional engineer in the Province of Alberta and a Fellow of the Canadian Academy of Engineering. He holds a bachelor of Engineering Degree in Mining engineering, Technical University of Nova Scotia (now Dalhousie Engineering), and is a graduate of the Advanced Management Program at Harvard Graduate School of Business Administration. Mr. Carter has also been awarded honorary doctorates by three Canadian universities.

David Emerson (1,4,5) B.C., Canada

Director 2008 Mr. Emerson PC, OBC is a Corporate Director, Public Policy Advisor and senior advisor to CAI Managers, a private equity fund. Nationally, he has held senior positions with the Government of Canada, including: Minister of Foreign Affairs, Minister of International Trade with responsibility for the Asia Pacific Gateway initiative and the 2010 Vancouver Olympics and Minister of Industry. In British Columbia, Mr. Emerson was the Province’s Deputy Minister of Finance, Secretary to Treasury Board, Deputy Minister to the Premier and Secretary to Cabinet. His leadership roles in the private sector included: President and CEO of Canfor Corporation, President and CEO of the Vancouver International Airport Authority and Chairman and CEO of Canadian Western Bank. Mr. Emerson is currently Board Chair of Maple Leaf Foods Inc. and TimberWest Forest Corporation and serves on the Boards of Directors of New Gold Inc. and Stantec Inc. In addition, Mr. Emerson is Co-Chair, Prime Minister’s Advisory Committee on the Public Service. Mr. Emerson is a recipient of the Order



of British Columbia and the Peter Lougheed Award of Excellence in Public Policy. Mr. Emerson holds a Bachelor and Master Degree in Economics from the University of Alberta and Doctorate in Economics from Queen’s University.

Kathleen O’Neill (3,4,5) Ontario, Canada

Director 2007 Ms. O’Neill is a Corporate Director. Prior to 2005, Ms. O’Neill was an Executive Vice-President at BMO Financial Group where her most recent position was Executive Vice-President, Personal & Commercial Development and Head of Small Business Banking. Prior to joining BMO Financial Group in 1994, Ms. O’Neill was with PriceWaterhouseCoopers LLP for 19 years including eight years as a tax partner. Ms. O’Neill currently serves on the Board of Directors of ARC Resources Limited, Invesco Canada Funds (Invesco Canada Fund Inc. and Invesco Corporate Class Inc. boards, and Invesco Canada Funds Advisory Board, Independent Review Committee) and Cadillac Fairview Corporation Ltd. Ms. O’Neill is past Chair of St. Joseph's Health Care Centre and St. Joseph’s Health Centre Foundation and is a director of the University of St. Michael's College in Toronto. Ms. O’Neill is accredited through the Institute of Corporate Directors / Rotman School of Management Director’s Education Program, holds a Bachelor of Commerce Degree (with Honours) from the University of Toronto and is a Fellow of the Ontario Institute of Chartered Accountants.

Christopher Patterson (1,2) North Carolina, U.S.A.

Director 2010 Mr. Patterson is a Corporate Director. From April 2005 until his retirement in June 2009, he was President and Chief Executive Officer of Daimler Trucks North America LLC. Prior to 2005, he held progressively senior executive positions with Freightliner LLC, predecessor to Daimler Trucks North America, including Senior Vice President, Service and Parts and was Executive Vice President, Sales and Marketing of Volvo Trucks North America. Mr. Patterson is a director of Gates Corporation and Modine Manufacturing Company. He holds a BA degree in economics and a MBA from the University of Western Ontario.

John Reid (1,3,5) B.C., Canada

Director 2006 Mr. Reid is a Corporate Director. From November 1997 to November 2005 he was President and Chief Executive Officer of Terasen Inc. (formerly BC Gas Inc.). Mr. Reid joined Terasen Inc. in May 1995 as Executive Vice President, Finance and Chief Financial Officer. Formerly, Mr. Reid worked with Scott Paper Limited for 15 years in a number of senior financial positions and as President and Chief Executive Officer. Mr. Reid currently serves on the boards of Methanex Corporation and Corix. Over the years, he has served on many boards including MacDonald Dettwiler & Associates Ltd., the University of British Columbia, Lester B. Pearson College, St. Paul’s Hospital Foundation, Vancouver Board of Trade, Junior Achievement of British Columbia and the Financial Executives Institute. Mr. Reid holds a Bachelor of Economics degree from the University of Newcastle in the United Kingdom and is a Fellow of the British Columbia and England and Wales Institutes of Chartered Accountants.

Andrew Simon (1,2,4) Bougy-Villars, Switzerland

Director 1999 Mr. Simon is a Corporate Director who serves on the Boards of Directors of a number of companies including Exova Group plc, SGL Carbon SE Supervisory Board, Travis Perkins plc, Management Consulting Group plc, Icon Infrastructure Management Ltd., Icon 1A GP Limited and BCA Osprey 1 Ltd. For most of his career, Mr. Simon worked for the Evode Group, an international specialty chemicals and materials company. At Evode, he held various positions including Managing Director and Chairman and Chief Executive Officer. Mr. Simon holds a Bachelor of Science degree from Southampton University and an MBA from the Wharton School of Finance.

Michael Wilson Alberta, Canada

Director 2013 Mr. Wilson is President and Chief Executive Officer of Agrium Inc. He joined Agrium as Executive Vice President and Chief Operating Officer in August 2000. Prior to joining Agrium, Mr. Wilson was a senior executive at Methanex Corporation, a leading global producer of methanol headquartered in Vancouver, B.C. where he was Executive Vice President and President, Methanol. In addition, he held various senior positions in North America and Asia during his 18 years with Dow Chemical. Mr. Wilson brings over 30 years of international and executive management experience in the chemical industry. Mr. Wilson currently serves as a director of Agrium Inc. and is Chair of Canpotex Limited and a director of the International Plant Nutrition Institute, The Fertilizer Institute, Alberta Economic Development Authority, Celestica Inc. and Chair of the Calgary Prostate Cancer Foundation. Mr. Wilson is a graduate of the University of Waterloo, Ontario where he earned his degree in Chemical Engineering.


(2) Member of the Environmental, Health & Safety Committee.

(3) Member of the Human Resources Committee.

(4) Member of the Pension Committee.

(5) Member of the Corporate Governance Committee.




Exhibit C6. Finning Senior Management


L. Scott Thomson Chief Executive Officer & Director Scott Thomson joined Finning International Inc. as President and Chief Executive Officer in June of 2013. Prior to joining Finning, Mr. Thomson was Chief Financial Officer of Talisman Energy Inc. with responsibility for finance, tax, treasury, investor relations, marketing, business development, and strategy, planning and performance management. Prior to Talisman, Mr. Thomson held several executive positions with Bell Canada Enterprises, including Executive Vice President, Corporate Development; Vice President, Head of Mergers and Acquisitions; and Vice President, Corporate Strategy. Prior to Bell, Mr. Thomson was a Vice President at Goldman, Sachs and Co. Mr. Thomson holds a Bachelor of Arts in Economics and Political Science from Queen’s University, Kingston and a MBA from the University of Chicago, Graduate School of Business.

Dave S. Smith Chief Financial Officer Dave Smith was appointed Executive Vice President and Chief Financial Officer for Finning International Inc. in February 2009. Prior to joining Finning, Mr. Smith was Chief Financial Officer of Ballard Power Systems (2002-2008). Prior to Ballard, Mr. Smith worked 16 years with Placer Dome Inc. (formerly a publicly listed senior international mining company, now a subsidiary of Barrick Gold Corporation) in various senior financial positions, including, regional Vice President and Chief Financial Officer in the United States, Chile and Canada. Mr. Smith is an alumni of Price Waterhouse. Mr. Smith is a Certified Public Accountant, holds a Bachelor of Science, Business Administration, from California State University, Sacramento and is accredited through the Institute of Corporate Directors/Rotman School of Management Directors’ Education Program (ICD.D).

Juan Carlos Villegas Chief Operating Officer Juan Carlos Villegas was appointed Executive Vice President and Chief Operating Officer of Finning International Inc. effective June 2012. As the Chief Operating Officer, Mr. Villegas has responsibility for increasing efficiencies and profitability while maintaining Finning's safety leadership across Finning's operations worldwide. His previous role was President of Finning South America, with overall responsibility for Finning’s operations in Chile, Argentina, Bolivia and Uruguay effective August 2006. Mr. Villegas joined Finning in 1998 as Vice President, Operations for Chile. He was subsequently promoted to the role of Vice President, Mining for South America, and in June 2005 he was promoted to the role of Vice President, Power Systems for Canada. Prior to joining Finning, Mr. Villegas had over 18 years of experience with the Cummins and Komatsu dealer in Chile, Argentina, Peru and Bolivia, and held various executive management positions with Cummins and Komatsu, including Vice President Operations for the southern cone of South America. Mr. Villegas was educated in Chile and also attended the University of California at Irvine. Mr. Villegas has completed a number of executive development courses in the United States and Canada.

Andrew S. Fraser Finning (Canada), President Andrew S. Fraser was appointed President, Finning (Canada) in October 2011. His previous role was Executive Vice President, Power Systems and Global Business Development for Finning from August 1, 2010, where he was responsible for Finning’s global power systems strategy and evaluating global growth opportunities. Prior to that, he was Managing Director, Finning Group (UK) from 2006, where he had overall responsibility for Finning’s operations in the U.K. Mr. Fraser joined Finning in 1979 and held numerous positions during his tenure in Canada. He was appointed Branch Manager, Sparwood in 1994, General Manager, Used Equipment in 1998, and Vice President, Redistribution for Finning (Canada) in 2000. In 2001 Mr. Fraser was promoted to Vice President, Operations and Customer Relations and in 2003 he was appointed Vice President, Sales and Marketing for Finning (Canada). In 2005, Mr. Fraser was appointed to the position of Group Vice President, Finning (Canada). Mr. Fraser holds a B.A. in economics and an MBA from Royal Roads University.




Exhibit C7. Finning Income Statement ($000’s)



Revenue

New equipment 1,928,642 2,889,020 3,077,141 2,862,786 2,948,622 3,037,081

Used equipment 253,553 253,407 295,449 280,283 288,750 297,413

Equipment rental 274,688 345,486 379,837 392,167 403,899 416,016

Product support 2,117,663 2,395,653 2,815,380 3,049,060 3,140,516 3,234,732

Other 10,059 11,344 54,322 81,093 83,543 86,050

Total revenue 4,584,605 5,894,910 6,622,129 6,665,389 6,865,331 7,071,291

Cost of sales 3,206,796 4,215,195 4,657,358 4,603,381 4,737,078 4,879,191

Gross profit 1,377,809 1,679,715 1,964,771 2,062,008 2,128,253 2,192,100

Gross margin as a percentage of sales 30.1% 28.5% 29.7% 30.9% 31.0% 31.0%

Selling, general and administrative expenses (1,057,497) (1,279,240) (1,483,158) (1,541,837) (1,588,092) (1,635,735)

Equity earnings of joint venture and associate 5,590 6,674 10,124 11,321 12,000 12,500

Other expenses (40,648) (27,412) 4,741 (3,855) - -

EBIT 285,254 379,737 496,478 527,638 552,161 568,866

Finance costs (57,616) (53,242) (80,087) (92,310) (92,855) (92,855)

Income before provision for income taxes 227,638 326,495 416,391 435,328 459,305 476,010

Provision for income taxes (46,555) (67,130) (78,772) (93,209) (105,640) (109,482)

Net earnings 181,083 259,365 337,619 342,119 353,665 366,528

Net earnings per share

Basic 1.06$ 1.51$ 1.96$ 1.99$ 2.06$ 2.13$

Diluted 1.05$ 1.51$ 1.96$ 1.98$ 2.05$ 2.13$

Weighted average number of shares outstanding

Basic 171,030 171,546 171,837 171,982 171,999 171,999

Diluted 171,718 172,287 172,391 172,357 172,375 172,375

EBITDA 445,830 556,087 711,866 742,982 766,105 775,169

EBITDA margin 10% 9% 11% 11% 11% 11%



Exhibit C8. Finning Balance Sheet ($000’s)



Assets

Current assets

Cash and cash equivalents 346,387 122,745 114,924 467,650 753,985 1,052,044

Accounts receivable 663,920 862,698 876,908 1,000,986 953,518 982,124

Service work in progress 73,602 171,214 119,824 140,138 131,586 135,533

Inventories 1,075,824 1,442,829 1,930,114 1,961,933 1,842,197 1,897,463

Income tax recoverable 24,444 20,880 22,014 20,075 20,075 20,075

Derivative assets 7,420 2,287 7,390 4,805 4,805 4,805

Other 114,096 154,803 246,058 270,627 270,627 270,627

2,305,693 2,777,456 3,317,232 3,866,214 3,976,793 4,362,671

Non-current assets


Rental equipment 343,766 402,114 408,995 425,662 425,662 425,662

Intangible assets 45,285 51,386 94,795 86,257 86,257 86,257

Distribution network - 646 305,602 317,442 317,442 317,442

Goodwill 91,114 92,501 109,481 110,833 110,833 110,833

Investment in and advances to joint venture and associate 53,008 61,600 66,633 74,701 74,701 74,701

Finance assets 30,158 33,820 42,033 38,943 38,943 38,943

Deferred tax assets 59,542 81,029 59,713 62,684 62,684 62,684

Other 37,907 34,284 55,467 51,403 51,403 51,403

1,124,005 1,307,904 1,800,791 1,833,962 1,798,517 1,768,996

Total assets 3,429,698 4,085,360 5,118,023 5,700,176 5,775,310 6,131,667

Liabilities

Current liabilities

Short-term debt 89,965 334,525 303,346 454,197 454,197 454,197

Accounts payable and accruals 611,051 965,981 996,260 1,064,995 874,718 900,960

Income tax payable 8,225 12,511 16,855 8,473 8,473 8,473

Provisions 57,365 88,146 101,171 96,818 87,472 90,096

Deferred revenue 318,657 317,299 454,778 500,493 476,759 491,062

Derivative liabilities 4,421 23,515 14,230 20,324 20,324 20,324

Current portion of long-term debt 203,087 508 363,590 250,529 250,529 250,529

1,292,771 1,742,485 2,250,230 2,395,829 2,172,472 2,215,641


Long-term debt 711,067 762,571 1,012,214 1,152,382 1,152,382 1,152,382

Long-term obligations 180,725 192,410 236,581 245,810 245,810 245,810

Provisions and derivative liabilities 1,078 2,897 4,164 5,524 5,524 5,524


Deferred tax liabilities and other 22,196 17,723 21,323 47,102 83,847 121,928

933,942 997,921 1,301,239 1,463,496 1,500,241 1,538,322

Total Liabilities 2,226,713 2,740,406 3,551,469 3,859,325 3,672,713 3,753,962


Share capital 564,973 566,452 571,100 572,988 572,988 572,988


Accumulated other comprehensive loss (53,385) (38,193) (50,474) (13,228) (13,228) (13,228)

Retained earnings 658,269 780,883 1,009,882 1,237,845 1,486,590 1,748,198

Total Shareholders' Equity 1,202,985 1,344,954 1,566,554 1,840,851 2,102,596 2,377,704

Total Liabilities and Shareholders' Equity 3,429,698 4,085,360 5,118,023 5,700,176 5,775,310 6,131,667



Exhibit C9. Finning Statement of Cash Flows ($000’s)




Net income 56,060 259,365 337,619 342,119 353,665 366,528

Add items not affecting cash:

Depreciation and amortization 160,576 176,350 215,388 215,345 213,944 206,304

Gain on sale of PP&E and rental equipment (27,291) (18,827) (46,395) (12,800) - -

Deferred taxes (2,744) 4,792 20,353 28,680 36,744 38,081

Share-based payments 3,273 13,743 15,344 16,768 13,000 13,500

Other 134,922 (3,509) (14,134) (8,100) - -

Net income adjusted for items not affecting cash 324,796 431,914 528,175 582,012 617,353 624,412

Changes in operating assets and liabilities 143,306 (280,856) (194,823) (1,188) (47,601) (44,651)

Interest paid (49,052) (45,736) (66,050) (43,031) - -

Income taxes paid (19,174) (38,679) (41,479) (23,787) - -

Cash used by operations after changes in operating assets and liabilities and interest and income tax paid399,876 66,643 225,823 514,006 569,753 579,762

Additions to rental equipment (195,460) (311,871) (330,204) (133,565) - -

Proceeds on disposal of rental equipment 120,477 161,914 237,353 82,149 - -

Equipment leased to customers and other (5,175) 2,397 53 - - -

Cash flow (used in) provided by operating activities 319,718 (80,917) 133,025 462,590 569,753 579,762


Additions to PP&E and intangible assets (70,788) (149,160) (194,071) (146,994) (178,499) (176,782)


Investment in equity investment - (1,375) (2,784) (4,542) - -

Net payments for acquisitions and other 109,726 1,882 (452,406) - - -

Cash (used in) provided by investing activities 48,757 (139,372) (625,647) (148,926) (178,499) (176,782)


Increase in short-term debt (70,011) 245,728 (30,200) 135,003 - -

U.S. senior notes issue and other (73,156) (150,000) 645,798 108,389 - -

Decrease in long-term debt 19,003 (11,745) (32,497) (109,188) - -

Issue of common shares on exercise of stock options 4,837 700 255 63 - -

Dividends paid (80,396) (87,492) (94,527) (102,762) (104,920) (104,920)

Cash (used in) provided by financing activities (199,723) (2,809) 488,829 31,505 (104,920) (104,920)

Effects of changes in foreign currency rates on cash and cash equivalents (17,275) (544) (4,028) 7,557 - -

Increase in cash and cash equivalents 151,477 (223,642) (7,821) 352,726 286,335 298,060

Cash and cash equivalents, beginning of period 194,910 346,387 122,745 114,924 467,650 753,985

Cash and cash equivalents, end of period 346,387 122,745 114,924 467,650 753,985 1,052,044

Ritchie Bros. Auctioneers (RBA) October 28, 2013


RITCHIE BROS. AUCTIONEERS A justified premium valuation for its industry dominance and high barrier to entry

INVESTMENT THESIS

Ritchie Bros. Auctioneers (RBA) has established a dominant position within the heavy equipment auctioneering market with a high barrier to entry and ample room for further growth. This has led to a premium valuation in its stock which we believe is justified. However, we await a more attractive entry point before recommending accumulation.

VALUATION

We initiate coverage of Ritchie Bros. Auctioneers with a HOLD recommendation and a one-year price target of US$20.00 per share. Our target is based on a 12× EV/EBITDA multiple or 24× P/E ratio against our 2014 estimates which is above the peer group.

FOCUS POINTS

▪ Ritchie Bros. dominates the market for used heavy equipment. In 2012 it nearly achieved $4 billion of annual gross auction proceeds, estimated at about eight times its next closest competitor.

▪ Barriers to entry are high ensuring that the company can maintain its stronghold. Over its 55 year history, Ritchie has built a brand, scale and systems that competitors cannot simply replicate.

▪ The opportunity for growth remains massive. The global market for used equipment is highly fragmented and estimated to be around $200 billion annually with RBA only having penetrated 2%.

▪ Shares have a modest dividend yield with room to grow and the possibility of share buybacks. Ritchie has a goal of growing EPS by at least 15% a year and has a net cash position on its balance sheet.

Recommendation: HOLD

Symbol/Exchange: RBA:NYSE, RBA:TSX


All dollar values in US$ unless otherwise noted.

Current price: US$19.65

One-year target: US$20.00


Dividend/Yield US$0.52/2.6%

Financial summary


Company profile: Ritchie Bros. is the world’s largest auctioneer of heavy equipment and trucks. It conducts live, unreserved public auctions with both on-site and online bidding, selling a wide range of used and unused equipment for construction, mining, transportation, agriculture, oil & gas, lifting & material handling, forestry and other industries.


Market Cap (US$M) 2,076.0 Avg. Daily Volume 559,929

Enterprise Value (US$M) 2,079.6 Net Debt (US$M) 3.7


Revenue (US$M) 396$ 438$ 442$ 483$

EBITDA (US$M) 146$ 161$ 153$ 175$

EPS (US$) 0.72$ 0.74$ 0.71$ 0.85$

EV/EBITDA 14.5 13.4 13.6 11.6

P/E 27.4 26.4 27.7 23.2

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INTRODUCTION

We are initiating coverage of Ritchie Bros. Auctioneers, the world’s largest auctioneer of heavy equipment. The company has become the dominant player in the industry by establishing a brand known for achieving superior sales results for its consignors through attracting a large and diverse audience of bidders. Its formula for success has been built over 55 years to a large scale which towers over its competitors ensuring that Ritchie Bros. will continue to capture share as it further penetrates the global market for used equipment. The runway for growth remains massive with the company having only penetrated a very small percentage. The company is expanding its network by growing its sales force and adding facilities across its new and existing markets. It is also investing in complementary solutions and adding information technology to its platform. Accordingly, RBA is doing more business with traditional and new customer groups and we expect this trend to continue long into the foreseeable future. This momentum should allow the company to trend close to its long-term objective of achieving 15% annual earnings growth. We believe RBA shares fairly reflect a premium valuation relative to its peer group given its competitive attributes. Nonetheless, we await a more compelling share price before recommending that investors should accumulate.

We are initiating coverage of Ritchie Bros. Auctioneers with a HOLD recommendation and a one-year price target of US$20.00 per share. Our target is based on a 12× EV/EBITDA multiple against our 2014 estimates which values Ritchie Bros. at the high end of the heavy equipment peer group owning to its unique position as an auctioneer where it clearly and sustainably dominates its competitors.

Exhibit D1. Ritchie Bros. Current and Target Valuation Metrics



US$ P/Rev EV/EBITDA P/E

Target $20.00 5.0x 13.6x 26.9x

Current $19.65 4.9x 13.4x 26.4x



Target $20.00 4.8x 13.8x 28.2x

Current $19.65 4.7x 13.6x 27.7x



Target $20.00 4.3x 11.9x 23.6x

Current $19.65 4.2x 11.6x 23.2x



COMPANY DESCRIPTION

Established in 1958, Ritchie Bros. Auctioneers is the world’s largest auctioneer of industrial equipment. It conducts hundreds of unreserved live public auctions each year with bidding on-site and online. RBA sells a broad range of used and new equipment, trucks, and other assets used in the construction, transportation, agricultural, material handling, energy, mining, forestry, marine and other industries. The company has over 110 locations in more than 25 countries, including 44 auction sites worldwide.

Exhibit D2. Ritchie Bros. Footprint


In 2012, the company’s industrial auctions averaged US$16.5 million in gross auction proceeds, 190 consignors, 1,300 lots and 1,760 bidder registrations of which half were online. Ritchie Bros. derives most (80%) of its revenue from auction commissions which are earned by acting as an agent for consignors, but also include net profits on the sale of inventory. The remainder (20%) of its revenue is from auction fees which are comprised of administrative and documentation fees on the sale of certain lots and auction advertising fees. By geographic region, about half of its revenue is from the United States, a quarter in Canada and the remaining quarter in Europe and elsewhere.

Exhibit D3. Ritchie Bros. Revenue Breakdown


Revenue Mix by Region Revenue Mix by Source

United States

48%

Canada28%

Europe14%

Other10%

Auction commissions

80%

Auction fees20%



Ritchie Bros. became publicly listed on the NYSE in 1998 via an initial public offering which raised $49.3 million of gross proceeds priced at $17.00 per share. The stock has since had two splits including a 2-for-1 split in 2004 and a 3-for-1 split in 2008. The company’s head office is located in Burnaby, British Columbia, Canada. As of December 31, 2012, it had 1,414 full-time employees including 305 sales representatives and 21 trainee territory managers. This figure has since increased to 327 sales representatives as of June 30, 2013.


RBA has grown to become the world’s top equipment auctioneer

The company has maintained a strong growth trajectory throughout its entire history. Gross auction proceeds (GAP) continue to expand at a compounded annual growth rate above 10% despite a recent lull relating to the global economic downturn. This growth has been aided by the addition of new auction sites and sales representatives which has brought more consignors and buyers. Notably, per buyer and per consignor are also growing demonstrating their satisfaction and confirming that Ritchie Bros. offers a strong value proposition.

Exhibit D4. Growth of GAP, Buyers and Sellers


The company dwarfs its competitors

The global market for used industrial equipment is highly fragmented including the portion which is served by auction. Ritchie Bros. is clearly the leader within the auction segment. With around $4 billion in gross auction proceeds, its next largest competitor is estimated to be only about an eight of the size in terms of gross auction proceeds. Its most notable competitors are Iron Planet and CAT Auction Services. Both companies are privately held. Iron Planet operates strictly online with a key disadvantage being that buyers lack the confidence of seeing the equipment on the day of the auction. CAT Auction Services is owned by 25 Caterpillar dealer partners along with the OEM itself and clearly specializes in sales of that brand name alone. Ritchie’s other competitors include



equipment dealers and rental companies, as well as owners who have traditionally disposed of equipment through private sale.

Ritchie Bros. auctions have a distinct competitive advantage

The company attracts large and diverse bidding audiences (comprised primarily of end users) from around the world to help consignors achieve the highest possible sale price on their equipment. Paramount to attracting bidders is the company’s reputation for providing a transparent and fair bidding environment. All of its auctions are “unreserved”, meaning that there are no minimum bids or reserve prices and consignors are prohibited from bidding on their own items. Ritchie also provides an array of value added services such as making equipment available for inspection and testing by prospective buyers, on-site cleaning and refurbishment of equipment and financing. The company uses a variety of on-site and online participation options and the equipment is marketed extensively to its customer base worldwide in 21 languages including high-resolution photos and specifications. By working with RBA, an equipment owner is able to access the international market of retail equipment buyers and sell equipment at world fair market prices. Notably, 75% of sales go to end users of the equipment (i.e. not sold to someone who will further mark it up at higher price). As well, nearly 60% of sales go to buyers from outside the region of sale (thus not capped at a local market value). Lastly, online bidders are buyer or runner-up on over 40% of lots offered online (meaning that they help drive the price up).

The barriers to entry are high

Ritchie Bros. has built its expertise and reputation over an extensive 55 year period. Also, the company has invested heavily in building out auction sites and its sales force around the world. Further, the company maintains proprietary databases and has built an extensive internet presence. Replicating this while competing against Ritchie Bros. would take a very long time and would require enormous financial resources.

The market is large and remains very underpenetrated

The global market for used equipment is estimated to be over $200 billion. Only a small fraction of this is currently traded through auctions with Ritchie only having achieved around 2% penetration. While probably about half of this market will always remain private (i.e. sellers that don’t want an intermediary), the other half is considered to be addressable. Accordingly, there remains an opportunity for RBA to multiply its gross auction proceeds yet.

The proportion of used equipment sold via auction should grow

Selling of equipment through auction is becoming increasingly popular among sellers as they recognize the numerous advantages. Auctioneers have the ability to sell a wide range of equipment thereby offering a comprehensive and convenient service to both buyers and sellers. There is increasing transparency of the international used equipment market due to the depth of information now available and ease of conducting commerce online. There is an increasing preference of sellers to access the auction marketplace to achieve a sale quickly and efficiently. Finally, auctioneers are proving the ability to deliver high net proceeds on the sale of equipment.



The company has invested in information technology

Ritchie Bros. maintains databases containing valuable information regarding millions of equipment transactions around the world, used and new, sold via auction and otherwise. This helps to identify market trends and estimate equipment values. As well, the company has detailed information on more than 560,000 unique customers from around 190 countries allowing it to identify customers who might be interested in equipment being sold. Furthermore, RBA has built an extensive internet presence offering valuable tools for buyers and sellers, enhancing its ability to transcend local market conditions and increasing the number of bidding participants. Finally, the company acquired AssetNation in 2012 in a cash deal valued at $64 million. This acquisition has led to the launch of EquipmentOne which doubles RBA’s addressable market by providing a marketplace for the private sale of equipment and materials.

There is a big opportunity to expand further internationally

Although Ritchie Bros. has room to grow within North America, the opportunity to grow outside of the continent is far larger. Europe represents only 14% of revenue and has the potential to become as significant as North America. Asia is also big and an entirely greenfield prospect as the company held its first ever auction in China just a few months ago. As discussed, the majority of equipment sold via RBA auctions has left the region of sale with a large portion of this heading overseas which shows that there is a large demand for auction services abroad.

The company has three stated objectives which seem achievable

Ritchie Bros. seeks to 1) grow EPS at least 15% per year on average over the long term; 2) achieve a return on invested capital of at least 15% over the long term; and 3) maintain an EBITDA margin of at least 40%. While these targets are aggressive (a good thing), we believe they can be achieved. We believe the first target will be met over the next couple of years whereas the second and third objectives are more likely to take longer to achieve.

The dividend should grow and share repurchases are likely

The stock offers a $0.52 dividend equating to a modest 2.6% yield. We expect the dividend to grow commensurately with EPS growth. The dividend is further supported by a strong balance sheet with Ritchie Bros. having crossed into a net cash position earlier this year. This strength also affords the prospect of share buy-backs that can reduce the share count and create earnings accretion thereby supporting a higher share price. We suspect the company is assessing this opportunity and may act on it rather soon.

INVESTMENT RISK

Competition

Although we are confident in Ritchie Bros. ability to remain dominant in the market for used equipment, there is a risk that the company could lose market share. The market is highly fragmented with many direct and indirect competitors. As well, new competitors with greater financing and other resources could enter the market. Competitors could succeed in entering new geographic markets ahead of RBA. Existing or future competitors could become aggressive in setting lower commission rates that could require the company to reduce its rates which would reduce revenue and earnings.



Fluctuations in the supply and demand of industrial assets

The company’s auction proceeds could decrease if there was a drop in supply and demand of industrial assets or the market value of such equipment eroded. As seen during the recent global economic recession, the company’s performance is largely pro-cyclical and would likely be materially adversely impacted in the event of another downturn. However, we note that the company did maintain a high level of profitability throughout the Great Recession with EPS decreasing to a low of $0.62 which would seemingly support sustaining payment of the company’s current dividend.

Possible losses on guarantees offered to consignors

While the large majority (typically 60% to 80%) of the company’s auction contracts are conducted on a straight commission basis, a portion is done through a guarantee from Ritchie Bros. that a minimum level of sale proceeds will be achieved. As well, sometimes the company will purchase the equipment outright from the consignor for sale in a particular auction. RBA’s financial performance is adversely impacted if auction proceeds are lower than the guaranteed amount or the purchase price paid to the consignor.


Generally, the company’s top and bottom line performance are dictated by its gross auction proceeds. Historically, the auction revenue rate (auction revenue divided by GAP) has remained within a tight range bordering 11%. Similarly, direct expenses hover in and around 1.3% of GAP. Slightly more variable is SG&A which in recent years has been almost as low as 5% as a percentage of GAP and more recently has trended higher to about 7% as the company takes on added expenses of expansion and investment in technology. Ritchie Bros. saw earnings peak in 2008 at $0.98 per share before decreasing during the recession. Earnings returned to growth in 2011 but were relatively flat in 2012 and into 2013. We expect a return to meaningful earnings growth over the next couple of years (roughly in-line with the RBA’s stated 15% EPS growth objective) as GAP grows at a rate of around 10% as an influx of high value three-to-five year equipment enters the system. We estimate EPS building from $0.71 in 2013 to $0.85 in 2014 and back near a record level in 2015 ($0.97).

VALUATION

RBA shares currently trade at a premium to its respective peer group. Notably, this peer group includes various industrial and agricultural equipment OEM’s and dealers as there are no heavy equipment auctioneering companies we can compare. Ritchie’s current EV/EBITDA multiple is 11.6× against our 2014 estimate. The US peer group has an average EV/EBITDA of 9.5× while Canadian peers trade lower at 7.3×.

RECOMMENDATION

We are initiating coverage of Ritchie Bros. Auctioneers with a HOLD recommendation and a one-year price target of US$20.00 per share. Our target is based on an 12× EV/EBITDA multiple against our 2014 estimates which values Ritchie Bros. at the high end of the heavy equipment peer group owning to its unique position as an auctioneer where it clearly and sustainably dominates its direct competitors.



Exhibit D5. Ritchie Bros. Board of Directors


Peter Blake B.C, Canada

Director & CEO


Robert Murdoch (3) B.C, Canada

Chairman 2006 Bob Murdoch was elected to the Ritchie Bros. Board in 2006, becoming Chairman in 2008. After earning a Bachelor of Arts degree from the University of British Columbia and a law degree from the University of Toronto, Bob spent the majority of his career with Lafarge Corporation and affiliates, suppliers of construction materials, retiring from the position of President and Chief Executive Officer of Lafarge North America Inc. (NYSE & TSX: LAF) in 1992. Bob was a member of the board of Lafarge, S.A. (NYSE: LR; Paris Stock Exchange (Eurolist): LG), the Paris-based parent company of Lafarge Corporation, until 2005. Bob is a director of Lallemand Inc. and Weatherhaven Inc.

Beverley Briscoe (1,3) B.C, Canada

Director 2004 Bev Briscoe was appointed to the Ritchie Bros. Board in 2004. Ms. Briscoe has an extensive background working in industries complementary to the auction business and currently is owner and President of Briscoe Management Ltd, a consulting company she has owned since 2004. Ms. Briscoe previously owned and was president of Hiway Refrigeration Limited. Before that she held executive positions with Wajax Industries Ltd., the Rivtow Group, and the Jim Pattison Group, and was a manager at a predecessor firm of PricewaterhouseCoopers. Ms. Briscoe is a member of the board of Goldcorp Inc. (TSX: "G"; NYSE: "GG"), as well as a director of several non-profit organizations, including Forum of Women Entrepreneurs and Minerva Foundation. Ms. Briscoe holds a Bachelor of Commerce degree and is a Chartered Accountant (Fellow). Ms. Briscoe is a member of the Audit Committee and the Nominating & Corporate Governance Committee.

Eric Patel (1,3) B.C, Canada

Director 2004 Eric Patel was first elected to the Ritchie Bros. Board in 2004. Mr. Patel has extensive business and financial experience, most recently as CFO of Pembrook Mining Corp. (formerly Paget Resources Corporation), a private mining company that he left in 2010. Prior to that Mr. Patel acted as the CFO of Crystal Decisions, Inc., a privately held software company. Mr. Patel joined Crystal Decisions in 1999 after holding executive level positions, including that of CFO, with University Games, Inc., a privately held manufacturer of educational toys and games. Before 1997, Mr. Patel worked for Dreyer's Grand Ice Cream as Director of Strategy, for Marakon Associates strategy consultants and for Chemical Bank. Mr. Patel sits on the Advisory Board of ACL Services Ltd. and on the board of Daiya Foods Inc. Mr. Patel holds an MBA degree. Mr. Patel is currently a member of the Audit Committee and is Chair of the Nominating & Corporate Governance Committee.

Edward Pitoniak (1,2)

Rhode Island, U.S.A.

Director 2006 Ed Pitoniak was appointed to the Company's Board in 2006 and is currently Chair of the Company's Compensation Committee. Mr. Pitoniak is a businessman and until 2008 was President and CEO of bcIMC Hospitality, a private hotel company. Prior to joining the predecessor firm of bcIMC Hospitality Group in 2004 (Canadian Hotel Income Properties Real Estate Investment Trust – TSX: "HOT.un"), Mr. Pitoniak was a Senior Vice-President at Intrawest Corporation for eight years. Before Intrawest, Mr. Pitoniak spent nine years with Times Mirror Magazines, where he held both top editorial and advertising positions with Ski Magazine — specifically, editor-in-chief and advertising director. Mr. Pitoniak has a Bachelor of Arts degree. He is a director of Regal Lifestryle Communities Inc. (TSX:RLG).

Christopher Zimmerman (2) California, U.S.A.

Director 2004 Chris Zimmerman was elected to the Company's Board in 2008. Mr. Zimmerman recently served as President of Easton Sports, Inc., a designer, developer and marketer of sports equipment and accessories. He resigned in 2009 from the position of President and Chief Executive Officer of Canucks Sports and Entertainment, a sports entertainment company in Vancouver, B.C. Before joining the Canucks organization, Mr. Zimmerman was the President and Chief Executive Officer of Nike Bauer Inc., a hockey equipment company. Prior to this appointment in March 2003, Mr. Zimmerman was General Manager of Nike Golf USA, in Beaverton, Oregon. He joined Nike Golf in 1998 after spending 16 years in a variety of senior advertising positions, including USA Advertising Director for the Nike Brand and Senior Vice President at Saatchi and Saatchi Advertising in New York. Mr. Zimmerman has an MBA degree from Babson College. Mr. Zimmerman is a member of the Compensation Committee.

Robert Elton (1,2)

B.C, Canada

Director 2006 Bob Elton was elected to the Ritchie Bros. Board in 2012 and is currently Chair of the Company's Audit Committee. Bob is currently acting as Interim Chief Financial Officer of Vancouver City Savings Credit Union and is also a corporate director and an adjunct professor at the University of British Columbia's Sauder School of Business. Mr. Elton held a



number of positions at BC Hydro, a government-owned electric utility, between 2001 and 2009, including President and Chief Executive Officer and EVP Finance and Chief Financial Officer. He was also CFO at Eldorado Gold Corporation from 1996 until 2001 (TSX: "ELD"; NYSE "EGO"; ASX: "EAU"). Bob spent over 20 years with PriceWaterhouseCoopers and predecessor firms, becoming Partner in 1987 before leaving the firm in 1996. He is a Fellow of the Institute of Chartered Accountants in British Columbia and has a Master of Arts degree from Cambridge University, U.K. Bob is a director and chair of a number of not for profit Boards as well as Chair of the Board of Governors of Simon Fraser University. He sits on the advisory board for Nurse Next Door and is a director of Aquatics Informatics Inc.

Erik Olsson Arizona, U.S.A.

Director 2013 Erik Olsson was appointed to the Company's Board in 2013. Mr. Olsson is currently President, Chief Executive Officer and a Director of Mobile Mini, Inc. (NASDAQ-GS: MINI), the world's leading provider of portable storage solutions. Mr. Olsson had previously been President, Chief Executive Officer, and a Director of RSC Holdings, Inc., a premier provider of rental equipment in North America, prior to their acquisition by United Rentals, Inc. in April 2012. Prior to that he served as Chief Financial Officer and Chief Operating Officer of RSC Holdings, Inc. In addition, he held various senior positions in the United States, Brazil, and Sweden in his 13 years with mining equipment maker Atlas Copco AB, an industrial group with world-leading positions in compressors, construction and mining equipment. Erik holds a degree in Business Administration and Economics from the University of Gothenburg.






Exhibit D6. Ritchie Bros. Senior Management


Peter Blake Chief Executive Officer & Director Peter Blake joined Ritchie Bros. as a controller in 1991, having worked previously with predecessor firms of KPMG and PriceWaterhouseCoopers. In 1994 he was appointed Vice President, Finance, and in 1997 was appointed Chief Financial Officer and elected to the Board of Directors. In 2002 he was promoted to Senior Vice President and in 2004 Peter became the Chief Executive Officer of Ritchie Bros. Auctioneers. Peter is a Chartered Accountant with a Diploma of Technology from BCIT (British Columbia Institute of Technology) and a Bachelor of Commerce degree from the University of Alberta.

Bob Armstrong Chief Strategic Development Officer Bob Armstrong joined Ritchie Bros. Auctioneers in 1997. Bob has worked in several roles within the organization, starting as the Company's Manager of Corporate Relations. In 2000 he was promoted to Vice President, Investor Relations and Corporate Secretary. Subsequent roles included Vice President, Internet Services and Vice President, Finance. In November 2004, Bob was appointed Chief Financial Officer and Corporate Secretary. In 2008 he became the Company's Chief Operating Officer and in 2012 was appointed to the new position of Chief Strategic Development Officer. Bob is a CA with a Bachelor of Commerce degree from Queen's University. Prior to joining Ritchie Bros. he worked for several years with KPMG and held financial management positions in the shipping and television production industries.

Rob McLeod Chief Financial Officer Rob McLeod began his career with Ritchie Bros. in 1993 as U.S. Controller and held various other positions in the Vancouver head office, including corporate controller. In 1999, Rob relocated to Lincoln, Nebraska to establish the Ritchie Bros. U.S. head office and in 2002, Rob relocated again, to Ritchie Bros.' office in the Netherlands, where he was Sr. Manager of Operations for Europe. Returning to the head office in Vancouver in 2005, Rob undertook various strategic projects before being appointed CFO in 2008. Rob has a Bachelor of Commerce degree from the University of British Columbia and received his CA designation while working for KPMG.

Steve Simpson Chief Sales Officer Steve Simpson began his career selling equipment with his family's company in British Columbia, Canada, followed by several years selling heavy trucks at a dealership. He joined Ritchie Bros. in 1990 as a Territory Manager at the Surrey, B.C. auction site. In 1995 Steve relocated to Brisbane, Australia and helped establish Ritchie Bros.' presence in the South Pacific region. He served as Regional Manager for seven years before returning to North America and taking on responsibility for the southwestern United States, first as Divisional Manager (2002) and then Vice President (2004), at which time he joined the Management Advisory Committee. In 2008 Steve was promoted to Senior Vice President, overseeing the U.S. West, and in 2012 assumed responsibility for global sales as Chief Sales Officer.

Andrew Muller Chief People Officer Andrew Muller joined Ritchie Bros. in 2011 as head of Human Resources, bringing with him extensive practical knowledge of HR management and strategy, including recruiting, talent management and succession planning. Andrew came to Ritchie Bros. from BP Canada, where he served as VP of HR, and prior to that Suncor, where he oversaw the hiring of 1,000+ employees as VP of Talent Acquisition and then, as VP of HR, helped manage the integration of thousands of Suncor and Petro-Canada employees during one of the largest mergers in Canadian history. Andrew has broad HR experience in a range of industries and companies, including Lafarge (Aggregate Concrete & Asphalt group) and Labatt Breweries. He holds a Bachelor of Arts from the University of Waterloo (Ontario) and a Master's degree in Industrial Relations from Queen's University (Ontario).

Kenton Low Chief Marketing Officer Kenton Low joined Ritchie Bros. in 2010 with extensive marketing leadership experience in both entrepreneurial and Fortune 500 companies. He most recently served as President of New Media BC, President & CEO of Robeez Footwear and as a senior advisor to the CEO of BC Lotteries Corporation. Prior to that, Kenton was President of Universal Studios Online, Corporate Chief Marketing Officer for Universal Studios and Vice President at Disney's Internet Group, Disney Interactive and Walt Disney Imagineering. Kenton's career also includes senior corporate planning and marketing roles at Nestlé and Clorox. Kenton earned his undergraduate degree from the University of British Columbia and an MBA from the Anderson School at UCLA. He is also a sessional instructor at UBC's Sauder School of Business.




Exhibit D7. Ritchie Bros. Income Statement (US$000’s)



Auction revenues 357,369 396,099 437,955 441,704 483,230 520,243

Direct expenses 47,021 48,044 49,687 47,547 53,464 58,810

Gross profit 310,348 348,055 388,268 394,157 429,766 461,433


Selling, general and administrative 218,833 244,343 268,229 283,648 297,831 312,722

Earnings from operations 91,515 103,712 120,039 110,508 131,935 148,711

Other income (expenses):

Foreign exchange gain (loss) (49) (585) (619) 47 - -

Gain (loss) on disposition of property, plant and equipment 250 3,861 (2,074) 119 - -

Other 1,823 4,242 (891) 829 - -

2,024 7,518 (3,584) 995 - -

Finance income (costs):

Finance income 2,035 2,326 2,420 2,502 2,029 1,977

Finance costs (5,216) (5,541) (6,860) (7,249) (5,651) (4,151)

(3,181) (3,215) (4,440) (4,748) (3,623) (2,175)

Earnings before income taxes 90,358 108,015 112,015 106,756 128,312 146,536

Income Taxes

Current 21,992 26,096 30,371 26,650 34,644 39,565

Deferred 2,691 5,286 2,098 4,499 3,849 4,396

24,683 31,382 32,469 31,149 38,494 43,961

Net earnings 65,675 76,633 79,546 75,607 89,819 102,575

Net earnings as a percentage of sales 18.4% 19.3% 18.2% 17.1% 18.6% 19.7%


Basic 0.62$ 0.72$ 0.75$ 0.71$ 0.85$ 0.97$

Diluted 0.62$ 0.72$ 0.74$ 0.71$ 0.85$ 0.97$

Adjusted net earnings per share

Basic 0.62$ 0.69$ 0.78$ 0.71$ 0.85$ 0.97$

Diluted 0.61$ 0.69$ 0.77$ 0.71$ 0.85$ 0.97$


Basic 105,522 106,164 106,470 106,253 105,648 105,648

Diluted 106,169 106,984 106,924 106,560 105,955 105,955

EBITDA 129,328 146,120 161,177 152,853 175,461 192,352

EBITDA margin 36% 37% 37% 35% 36% 37%



Exhibit D8. Ritchie Bros. Balance Sheet (US$000’s)



Assets

Current assets


T rade and other receivables 59,818 60,980 76,066 131,665 134,230 144,512

Inventory 26,533 49,212 60,947 48,087 51,979 57,176

Advances against auction contracts 2,379 11,784 6,816 10,557 10,557 10,557

Prepaid expenses and deposits 10,565 9,923 14,881 9,389 9,389 9,389

Assets held for sale and other 458 81 958 - - -

Current portion of loan receivable 105 111 118 4,869 4,869 4,869

Income taxes receivable 14,635 12,426 7,764 8,673 8,673 8,673

182,678 253,840 345,601 418,103 410,810 429,689

Non-current assets


Investment property 8,246 7,890 6,902 6,608 6,608 6,608

Loan receivable 5,026 4,915 4,797 - - -

Other non-current assets 6,227 8,857 8,410 8,441 8,441 8,441

Intangible assets - - 25,570 30,170 26,328 22,975

Goodwill 46,254 45,957 84,247 83,518 83,518 83,518


689,880 713,401 786,897 785,851 793,064 798,846

Total assets 872,558 967,241 1,132,498 1,203,954 1,203,875 1,228,535

Liabilities

Current liabilities

Auction proceeds payable 46,463 69,004 87,139 177,748 181,211 195,091

T rade and other payables 87,685 100,868 117,766 113,370 117,098 123,844

Income tax payable 1,900 8,077 5,163 643 643 643

Current borrowings 1,087 12,595 39,480 90,028 90,028 90,028

137,135 190,544 249,548 381,790 388,980 409,606


Non-current borrowings 135,886 133,881 200,746 123,355 73,355 23,355

Other non-current liabilities 1,659 4,309 5,193 6,109 6,109 6,109

Deferred tax liabilities 18,011 20,601 20,480 25,073 28,923 33,319

155,556 158,791 226,419 154,537 108,387 62,783

Total Liabilities 292,691 349,335 475,967 536,327 497,367 472,389


Share capital 103,978 115,961 118,694 122,165 122,165 122,165

Additional paid-in capital 21,101 22,777 27,080 30,572 34,572 36,572


Foreign currency translation reserve 4,520 (1,550) 535 (17,338) (17,338) (17,338)


Total Liabilities and Shareholders' Equity 872,558 967,241 1,132,498 1,203,954 1,203,875 1,228,535



Exhibit D9. Ritchie Bros. Statement of Cash Flows (US$000’s)




Net earnings 65,675 76,633 79,546 75,607 89,819 102,575

Items before changes in non-cash working capital:

Depreciation 37,813 42,408 39,177 38,569 39,684 40,289

Amortization - - 1,961 3,775 3,842 3,353

Share-based compensation expense 3,392 3,875 4,303 4,372 4,000 2,000

Deferred income tax expense 2,691 5,286 2,098 4,499 3,849 4,396

Foreign exchange loss 49 585 619 (47) - -

Loss (gain) on disposition of PP&E and impairments (250) (3,861) 4,246 (119) - -

109,370 124,926 131,950 126,657 141,193 152,613

Changes in non-cash working capital:

T rade and other receivables (7,818) (3,653) (14,027) (61,214) (2,565) (10,281)

Inventory (19,509) (23,011) (11,325) 11,929 (3,892) (5,198)

Advances against auction contracts 2,273 (9,520) 4,962 (3,765) - -

Prepaid expenses and deposits (2,213) 625 (4,095) 5,312 - -

Income taxes receivable (10,744) 2,209 4,662 (909) - -

Income taxes payable 29,052 21,096 24,172 14,841 - -

Auction proceeds payable (32,625) 27,804 9,286 97,596 3,463 13,880


Other 259 1,606 2,346 3,188 - -

Net change in non-cash working capital (36,801) 37,380 38,384 68,896 733 5,147

Interest paid (5,506) (6,115) (9,005) (3,974) - -

Income taxes paid (26,898) (15,045) (27,269) (19,403) - -

Cash provided by operating activities 40,165 141,146 134,060 172,175 141,927 157,760


Property, plant and equipment additions (62,284) (77,053) (58,707) (59,118) (50,739) (49,423)

Development of intangible assets - - (3,633) (8,375) - -

Proceeds on disposition of property, plant and equipment 8,479 10,072 6,349 2,065 - -

Other (788) (3,120) (54,879) (115) - -

Cash used in investing activities (54,593) (70,101) (110,870) (65,543) (50,739) (49,423)


Issuance of share capital 3,279 9,723 2,220 2,797 - -

Dividends on comon shares (43,266) (46,183) (50,042) (53,601) (54,937) (54,937)

Proceeds from borrowings 46,636 56,170 144,766 15,202 - -

Repayment of borrowings (50,351) (44,765) (53,951) (34,000) (50,000) (50,000)

Other 360 381 421 (205) - -

Cash (used in) provided by financing activities (43,342) (24,674) 43,414 (69,807) (104,937) (104,937)

Effects of changes in foreign currency rates on cash and cash equivalents 3,359 (5,233) 2,124 (10,013) - -

Increase in cash and cash equivalents (54,411) 41,138 68,728 26,812 (13,749) 3,400


Cash and cash equivalents, end of period 68,185 109,323 178,051 204,863 191,113 194,513

Rocky Mountain Dealerships Inc. October 28, 2013


ROCKY MOUNTAIN DEALERSHIPS INC. Canada’s largest CNH dealership consolidator with room for margin improvement

INVESTMENT THESIS

Rocky Mountain Dealerships is a consolidator of agriculture and construction dealerships for CNH. RME shares offers investors exposure to the consolidation of CNH dealerships within Canada and possibly elsewhere. However, we await a more attractive entry point before recommending an accumulation of the company’s shares.

VALUATION

We initiate coverage of Rocky Mountain Dealerships with a HOLD recommendation and a one-year price target of $12.50 per share. Our target is based on an 8× EV/EBITDA multiple against our 2014 estimates which would value it roughly in-line with its peer group.

FOCUS POINTS

▪ Rocky Mountain has grown to be Canada’s largest Case IH dealer and second worldwide. Since its IPO in late 2007, the company has more than tripled its locations and revenue base and is set to top $1 billion in sales this year.

▪ CNH appears very supportive of its acquisition strategy in Canada and possibly elsewhere. The CNH dealership network across Western Canada remains very fragmented. Rocky can also acquire in nearby states and expand internationally.

▪ However a greater emphasis on integration over growth could allow profit to ratchet upwards. Rapid growth has come at the expense of flattish profit. Achieving the company’s gross margin target may nearly double earnings over the next few years.

▪ Shares could prove to be cheap but we await further evidence of operating improvement. The stock appears expensive against 2013 performance and appears to already be pricing in significant improvement in 2014.


Symbol/Exchange: RME/TSX







Financial summary


Company profile: Rocky Mountain Dealerships is a consolidator of agriculture and construction equipment dealerships, primarily focused around the Case IH, Case Construction and New Holland brands.

Shares O/S - F.D. (M) 20.3 52-Week Range ($) $10.43 - $14.88

Market Cap ($M) 245.2 Avg. Weekly Volume 188,974


$M (Dec-31) F2011A F2012A F2013E F2014E

Revenue ($M) 803$ 966$ 1,017$ 1,093$

EBITDA ($M) 50$ 55$ 58$ 68$

EPS ($) 1.12$ 1.28$ 1.39$ 1.73$

EV/EBITDA 9.6 11.0 10.3 7.8

P/E 10.8 9.5 8.7 7.0

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INTRODUCTION

We are initiating coverage of Rocky Mountain Dealerships, an operator and consolidator of agriculture and construction equipment dealerships mainly for CNH Industrial N.V. (CNHI/NYSE). The company has grown to become CNH’s largest dealership network in Canada and second worldwide, having more than tripled its store count since its IPO in late 2007 (over a recessionary period). We expect the company to continue on its path of adding stores with a long runway of opportunities remaining (both within Canada and possibly outside of it). The industry consolidation continues as dealer-principals age and as farm operations become bigger and more complex. Rocky is an exceptionally well positioned successor due to its scale, access to capital, operational expertise and CNH’s apparent support. The company also has an opportunity to improve operating performance at its existing locations with a gross margin target that could nearly double earnings over the next couple of years if achieved. However, the market appears to be already pricing in significant margin improvement into the current stock price while we await further evidence of progress before recommending accumulation of the shares.

We are initiating coverage of Rocky Mountain Equipment Dealerships with a HOLD recommendation and a one-year price target of $12.50 per share. Our target is based on an 8× EV/EBITDA multiple against our 2014 estimates which values Rocky roughly in-line with its respective peer group and at a discount to its bigger U.S. counterpart (TITN/Nasqaq).

Exhibit E1. Rocky Mountain Current and Target Valuation Metrics




Target $12.50 0.6x 10.4x 9.0x 7.7%

Current $12.08 0.6x 10.3x 8.7x 8.0%



Target $12.50 0.5x 8.0x 7.2x 12.8%

Current $12.08 0.5x 7.8x 7.0x 13.2%



Target $12.50 0.5x 7.1x 6.2x 15.0%

Current $12.08 0.5x 7.0x 6.0x 15.6%



COMPANY DESCRIPTION

Rocky Mountain Dealerships is the parent entity that was formed from the merger of Hi-Way Service Ltd. and Hammer Equipment in 2006. The company commenced trading on the Toronto Stock Exchange in late 2007 after raising $75 million of gross proceeds (including over-allotment) on an initial public offering of its common shares priced at $10.00. Rocky is in the business of acquiring and managing authorized CNH agriculture and construction equipment dealerships under various CNH core brands as well as complementary ones as depicted below.

Exhibit E2. Rocky Mountain Equipment Brands


The company operates 40 stores across highly productive farming and extensive energy producing regions in Western Canada. Rocky’s head office is located in Calgary, Alberta, Canada. The Province of Alberta encompasses the majority of Rocky’s locations with strength also in the Province of Manitoba.

Exhibit E3. Rocky Mountain Footprint




As of December 31, 2012, it had approximately 900 non-unionized employees and management staff. The company’s revenue is heavily weighted toward the agricultural segment (88%) with the remainder tied to construction. The company obtains revenue primarily from the sale of new and used equipment with auxiliary revenue coming from parts, service and other.

Exhibit E4. Rocky Mountain Revenue Breakdown (FY2012)



Rocky Mountain Dealerships is partnered with a top tier OEM

The company deals with CNH Industrial, a company with $20 billion in revenue and a market-cap near $17 billion. CNH is a major player in the agricultural equipment sector accounting for the second largest market share in North America, next only to John Deere. It is also a major player in construction equipment ranking fifth for market share in North America. Its brand is well recognized and highly reputable while its customer base is quite loyal (albeit to a lesser extent than John Deere). CNH is well positioned to maintain its market share and its footprint is expansive enough to ensure a long run-way of acquisition opportunities for Rocky Mountain.

The company has an excellent track record of growth since its IPO

Rocky has more than tripled its store count to 40 locations in just over five years. This growth has been fuelled by acquisitions and is net of a total of eight stores that were consolidated into four over the 2012 and 2013 timeframe. Notably, the company typically acquires using cash. It has financed its expansion through the proceeds from the aforementioned initial public offering in 2007, a bought deal financing in 2009 ($24 million of gross proceeds priced at $6.20 per share), a convertible debenture offering in 2010 ($31.5 million) and internally generated cash flow from operations.

New Equipment

56%

Used Equipment

31%

Parts9%

Service3%Other

1%



Exhibit E5. Rocky Mountain Store Growth since 2007


Rocky facilitates dealer succession

For decades, the majority of North American farm equipment dealerships were family owned and operated. Similarly, dealerships have a history of being passed down from generation to generation. However, increasingly children of family owned dealerships are opting alternative careers. So when retirement approaches, many owners are looking to sell instead of passing down their legacy to their offspring. As well, as farms are getting larger, farmers are demanding more from their equipment dealers in terms of service and technology. Rocky’s scale, experience and access to capital make it a natural consolidator in the industry.



Accordingly, acquisitions have proven to be accretive

For the reasons just mentioned, an OEM generally must approve any transaction surrounding the sale of a dealership. While there are other multi-dealership operators, none approach the scale of Rocky in Canada. Accordingly, the company is typically the most preferred successor of Canadian locations by the OEM. With very limited opportunity to shop for the highest bid, Rocky normally acquires dealerships at attractive valuation metrics. As well, an acquired store typically grows revenue during the first full fiscal year of operations after being acquired and improves pre-tax profit

No shortage of acquisition targets in or outside of Canada

Rocky operates only a fraction of CNH’s Canadian stores and of course an insignificant portion of CNH’s overall global footprint. As well, nearly three-quarters of North American agricultural equipment dealers are open to selling their businesses in the coming years. Thus far it appears that CNH has placed



no limits on how much it will allow Rocky to grow domestically and possibly even beyond. Clearly CNH must be satisfied with the company’s performance within Canada and seems to be encouraging it.

Improving margin performance can greatly improve earnings

The company’s exceptional top line growth has come at the expense of performance at the bottom line. Results have been further hampered of late due to a number of other factors within its agricultural segment (including a short seeding window due to the late spring thaw and flooding across much of Southern Alberta) and construction segment (increasingly competitive with high inventories). As these issues dissipate and as Rocky focuses on integrating past acquisitions, there is an excellent opportunity to greatly improve profitability toward a long-term gross margin target of 17% that could almost double the company’s earnings within the next couple few years factoring in only modest growth.


We are encouraged to see insider interests well aligned with the company’s success. Insiders combined own about 23% of the company’s shares with the Chairman and CEO Matt Campbell controlling 12%. Thus, it is clear that the interest of insiders and shareholders are well aligned with a common goal of maximizing shareholder value.

INVESTMENT RISK


Rocky’s primary source of income is from the sale of agriculture and construction equipment pursuant to agreements to act as an authorized dealer for CNH. Hence the company relies on the success of its supplier and the renewal of these agreements. CNH must continue to provide competitive prices and quality products while Rocky must continue to maintain certain performance metrics to ensure dealership agreements are renewed upon any expiry.


The company serves a select few industry sectors and is dependent on the health of these industries. For example, the majority of CNH dealership sales are derived from the agricultural sector. Consequently, grain and livestock prices, weather conditions that effect crop production, borrowing rates, grain disease, and customer confidence have an impact on demand for equipment, parts and service. As well, the retail farm equipment industry is very competitive with Rocky competing against neighbouring CNH dealerships, as well as dealers of John Deere (i.e. Cervus Equipment), AGCO, and Kubota.

Relatively high amount of borrowings to fund inventory

Rocky has a relatively high amount of borrowings which is mostly comprised of floor plan payables ($379 million) that finances the company’s inventory. Net borrowing to trailing-twelve-month EBITDA has increased to a multiple of 7x while inventory turns have recently dropped below 2x. While we believe Rocky can comfortably service this debt and we expect inventory turns to improve, there is a risk that with a significant economic downturn the company could become distressed.




For reporting purposes, Rocky presents its results in two broad segments; Agriculture and Construction. The overwhelming driver of sales growth in 2012 was same-store new equipment sales in the agriculture segment. This was augmented by some acquired growth in the same segment along with a minor contribution from same-store growth in the construction segment. Same-store sales are down year-to-date in 2013 due to the aforementioned issues. However acquisitions have led to consolidated sales growth year-to-date and a corresponding improvement in profit. We expect a modest improvement in earnings this year over the prior year with a more meaningful lift in 2014. We estimate EPS building from $1.28 in 2012 to $1.39 in 2013 and $1.73 in 2014. Any new acquisitions would likely be accretive to our estimates.

VALUATION

RME shares currently trade at a premium to their respective peer group on 2013 metrics or roughly in-line based on 2014. The current EV/EBITDA multiple is 10.3×/7.8× against 2013/2014 our estimates. The US peer group has an average EV/EBITDA of 10.3×/9.5× while Canadian peers trade at a more modest 8.4×/7.3× with the most comparable peer (Cervus Equipment) trading at 7.6×/7.0×. Notably, Rocky trades at a discount to its larger CNH comparable (Titan Machinery) and the OEM itself.

RECOMMENDATION

We are initiating coverage of Rocky Mountain Dealerships with a HOLD recommendation and a one-year price target of $12.50 per share. Our target is based on an 8× EV/EBITDA multiple against our 2014 estimates which values Rocky in-line with its overall Canadian peer group yet maintains what we assess to be an appropriate discount versus the larger Titan Machinery.



Exhibit E6. Rocky Mountain Board of Directors


Matt Campbell Alberta, Canada

Chairman & CEO


Derek Stimson Alberta, Canada

Director & President


Paul Walters (1,2,3) Ontario, Canada

Director 2007 Paul S. Walters is an independent consultant. Mr. Walters has served as past Chairman, President and CEO of Sears Canada Inc. In addition, Mr. Walters held a number of executive management positions with Hudson's Bay Company. He is also a past director of the Richard Ivey School of Business at the University of Western Ontario, as well as being a past director of the University of British Columbia, the Retail Council of Canada, The International Mass Retail Association and The Conference Board of Canada. Mr. Walters is also a director of The Forzani Group Ltd.

Dennis Hoffman (1,2,3) Alberta, Canada

Director 2007 Dennis J. Hoffman, C.A. is an independent businessman and was, until 2005, a partner at PricewaterhouseCoopers LLP, Chartered Accountants in Calgary, Alberta. After receiving a Bachelor of Commerce degree and a Bachelor of Science degree in 1970 from the University of Saskatchewan, he joined PricewaterhouseCoopers LLP in 1970, was admitted to the partnership in 1982, became office managing partner and a member of the Canadian Leadership team in 2001 until his retirement in 2005. Mr. Hoffman is a member of the Institute of Corporate Directors (ICD) and completed the ICD's Director Education Program in 2005. Currently, Mr. Hoffman is a director of Mullen Group Inc., the administrator of Mullen Group Income Fund, a trustee of North Property Real Estate Investment Trust, and a director of the United Way of Calgary and area.

Patrick Priestner (1,2,3) Alberta, Canada

Director 2007 Patrick J. Priestner is the Chief Executive Officer and a director of AutoCanada GP Inc., administrator of AutoCanada Income Fund. Mr. Priestner has over 30 years of experience in the retail automotive industry, including over 25 years as a franchised automobile dealership owner. Mr. Priestner commenced his retail automotive career at the age of 17 at Chinook Chrysler in Calgary, Alberta after completing high school and one year at the University of Calgary. Mr. Priestner was the number one salesman in Alberta and in the top 10 sales for Chrysler Canada in 1975. At the age of 19, Mr. Priestner was promoted to Sales Manager and General Sales Manager at Chinook Chrysler, a position held from 1977 to 1981. In 1981, Mr. Priestner became General Manager and a Partner in Oxford Dodge in London, Ontario. Mr. Priestner became the President and Dealer Principal at Canada One Auto Group Ltd. (now an operating entity of AutoCanada Income Fund) in 1993. Since 1998, Mr. Priestner has been the Vice President of the Alberta Dealers Association Advertising Council and has served as the Chairman for the Dealer Council DaimlerChrysler - Western Region.

Robert Mackay (2,3) British Columbia, Canada

Director 2013 Robert Mackay currently serves as the President of Ritchie Bros. Auctioneers Incorporated. Mr. Mackay joined Ritchie Bros. in 1985 after many years with his family’s highway construction business in Saskatchewan. Over the next 10 years he held numerous head-office administrative positions and was closely involved with Ritchie Bros.’ expansion into overseas markets, initially in Europe and the Middle East, and then in Southeast Asia and Australia. Rob was promoted to Vice President of the Asia Pacific Division in 1995 and took on additional responsibility for South America in 2000. In 2001 he became a Senior Vice President, with additional responsibilities for western North America. In 2002 Rob was appointed Executive Vice President, assuming responsibility for all of the Company's sales and operations in the United States, Asia, Australia and South America. Rob was promoted to the role of President in 2005. Rob earned a Bachelor of Commerce degree from the University of Saskatchewan.






Exhibit E7. Rocky Mountain Senior Management


Matt Campbell Chief Executive Officer & Chairman M.C. (Matt) Campbell is the Chief Executive Officer of the Corporation. Prior to this, he was the Chief Executive Officer and principal shareholder of Hammer Equipment. Mr. Campbell has been a successful entrepreneur for over 35 years, owning and operating businesses in a variety of undertakings, including automobile dealerships, scrap metal sales, and heavy equipment services such as trucking, contracting and rentals, sand & gravel hauling, asphalt paving and road salt operations. Mr. Campbell established Hammer Equipment in 1993 when he bought Case Construction equipment dealerships in Edmonton and Calgary, Alberta. He has successfully expanded the Hammer Equipment dealership opertion to include six branches located across Alberta and over 230 employees. In addition to his involvement with numerous industry committees and associations, Mr. Campbell was elected President of the Saskatchewan Roadbuilders, 1987-88, Chairman of the Saskatchewan Construction Association 1990, and President of the Western Canada Roadbuilders 1990.

Derek Stimson President and Director Derek I. Stimson is the President and a director of the Company. Mr. Stimson had been the President and Chief Executive Officer of Hi-Way Service for 28 years. Mr. Stimson expanded Hi-Way Service's operations from the initial offices in Taber and Lethbridge, to include offices in Balzac, Bow Island, High River, Medicine Hat, Picture Butte, Alberta, Drumheller, Oyen, Vermilion, Fort McMurrary, Edmonton, Red Deer, Calgary, two in Grande Prairie and Milk River, Alberta. In 1979, he purchased the Hi-Way Service business from his father and was awarded CNH's Top North American Dealer Award in that same year. Mr. Stimson has considerable experience in the independent equipment dealership industry having been involved in the agricultural equipment industry for over 45 years and being a dealer principal for over 28 years.

Garrett Ganden Chief Operating Officer Garrett is a chartered accountant with over 10 years of financial and accounting experience.

David Ascott Chief Financial Officer David has been a chartered accountant for over 15 years and has many years of experience in senior financial management roles both domestically and internationally.




Exhibit E8. Rocky Mountain Income Statement ($000’s)


Fiscal year-end December 31 2011A 2012A 2013E 2014E 2015E

Sales

New equipment 423,933 549,036 555,318 596,967 641,739

Used equipment 269,809 297,476 335,498 360,660 387,710

Parts 75,531 84,653 91,668 98,543 105,934

Service 28,028 30,459 30,342 32,618 35,064

Other 5,462 4,482 3,765 4,047 4,351

802,763 966,106 1,016,591 1,092,836 1,174,798

Cost of sales 677,571 818,595 861,032 920,714 986,831

Gross profit 125,192 147,511 155,559 172,122 187,968

Gross margin % 15.6% 15.3% 15.3% 15.8% 16.0%

Selling, general and administrative expenses 82,001 97,711 103,374 110,923 119,242

Impairments and other - 4,232 - - -

Interest on short-term debt 8,306 9,071 11,783 11,351 11,231

Interest on long-term debt 3,587 2,843 2,418 2,329 2,305

Earnings before income taxes 31,298 33,654 37,984 47,518 55,190

Income taxes

Current 6,434 10,759 17,805 14,255 16,557

Deferred 1,655 (1,080) (6,600) - -

8,089 9,679 11,205 14,255 16,557

Net earnings 23,209 23,975 26,779 33,263 38,633

Unrealized loss on derivative financial instruments, net of tax (502) (95) 281 - -

Comprehensive income 22,707 23,880 27,060 33,263 38,633

Earnings per share

Basic 1.24$ 1.28$ 1.39$ 1.73$ 2.01$

Diluted 1.12$ 1.28$ 1.39$ 1.73$ 2.01$

Weighted average number of shares - basic 18,649 18,748 19,156 19,237 19,237

Weighted average number of shares - diluted 22,565 18,778 19,186 19,267 19,267

EBITDA (RME definition) 41,225 42,008 46,701 56,796 65,337

Normalized EBITDA (RME definition) 44,437 46,510 46,355 56,796 65,337

EBITDA (Cantor definition) 49,531 55,311 58,485 68,147 76,568

EBITDA margin % 6.2% 5.7% 5.8% 6.2% 6.5%



Exhibit E9. Rocky Mountain Balance Sheet ($000’s)



Assets

Current

Cash 31,032 34,177 38,097 74,804 93,930

T rade receivables and other 45,453 52,924 57,740 51,606 55,477

Inventory 354,631 495,151 505,229 460,357 493,415

Prepaid expenses 3,363 4,470 3,189 3,189 3,189

434,479 586,722 604,255 589,956 646,011

Non-current - - - - -

Property and equipment 21,369 21,558 24,231 28,210 32,116

Goodwill 9,961 13,884 14,692 14,692 14,692

31,330 35,442 38,923 42,902 46,808

465,809 622,164 643,177 632,859 692,819

Liabilities

Current

Trade payables, accruals and other 48,670 53,576 63,518 57,313 61,448

Floor plan payable 226,863 351,812 353,660 322,250 345,391

Deferred revenue and advances 3,808 5,236 3,050 3,279 3,524

Current portion of long-term debt and other borrowings 5,927 10,159 9,519 9,519 9,519

Current portion of obligations under finance leases 907 984 966 966 966

286,175 421,767 430,713 393,327 420,849

Non-current

Long-term debt 11,701 45,977 41,462 41,462 41,462

Obligations under finance leases 1,589 1,379 977 977 977

Convertible debentures 28,761 - - - -

Deferred tax liability 8,283 7,042 630 630 630

Derivative financial instruments 1,139 1,438 344 344 344

51,473 55,836 43,413 43,413 43,413

337,648 477,603 474,126 436,740 464,262


Common shares 79,668 81,947 85,646 85,646 85,646

Convertible debentures 990 - - - -

Contributed surplus 4,304 4,435 4,973 6,473 7,973

Accumulated other comprehensive loss (502) (597) (65) (65) (65)

Retained earnings 43,701 58,776 78,497 104,065 135,003

128,161 144,561 169,051 196,119 228,557

465,809 622,164 643,177 632,859 692,819



Exhibit E10. Rocky Mountain Statement of Cash Flows ($000’s)




Net earnings 23,209 23,975 26,779 33,263 38,633

Adjustments for:

Depreciation expense 6,340 5,511 6,299 6,948 7,842

Accretion expense 350 123 - - -

Deferred tax expense (recovery) 1,655 (1,080) (6,600) - -

Share-based payment expense 1,087 1,613 1,508 1,500 1,500

Non-cash impact of credit promissory note (18) 18 1 - -

Loss (gain) on disposal of property and equipment (1) 554 30 - -

Loss on derivative financial instruments 465 174 (382) - -

Loss on repurchase of convertible debentures and other - 4,232 - - -

33,087 35,120 27,635 41,711 47,975

Changes in non-cash working capital (298) (13,117) 216 13,620 (9,407)

Net cash flow from operating activities 32,789 22,003 27,851 55,331 38,568


Repayment of long-term debt (5,918) (7,302) (5,156) - -

Proceeds from (repurchase of) convertible debentures - (37,800) (219) - -

T ransaction costs incurred on debt and debentures - (840) (1,287) - -

Proceeds from long-term debt 3,932 45,478 2,492 - -

Net change in obligations under finance leases 284 (133) (225) - -

Dividends paid (3,363) (4,650) (5,770) (7,695) (7,695)

Proceeds from issuance of common shares 594 797 237 - -

Purchase of common shares for cancellation and other (93) - - - -

Net cash flow from financing activities (4,564) (4,450) (9,928) (7,695) (7,695)


Purchase of property and equipment (5,718) (9,263) (9,125) (10,928) (11,748)

Disposal of property and equipment 677 4,709 324 - -

Purchase of equipment dealerships, net of cash acquired (9,291) (9,854) (5,202) - -

Other - - - - -

Net cash used in investing activities (14,332) (14,408) (14,003) (10,928) (11,748)

Net increase in cash and cash equivalents 13,893 3,145 3,920 36,707 19,126

Cash and cash equivalents, beginning of period 17,139 31,032 34,177 38,097 74,804

Cash and cash equivalents, end of period 31,032 34,177 38,097 74,804 93,930

Strongco Corporation October 28, 2013


STRONGCO CORPORATION A highly levered play on heavy equipment with a compelling risk-reward profile

INVESTMENT THESIS

Strongco Corporation is North America’s largest Volvo equipment dealer. The company has vastly turned around after experiencing recessionary hardship. Although debt appears high, it primarily relates to inventory financing and the carrying cost is very manageable. Thus, SQP shares offer a highly levered play on a Canadian economic recovery with a compelling risk-reward trade-off in our view.

VALUATION

We initiate coverage of Strongco with a BUY recommendation and a one-year price target of $5.00 per share. Our target is based on a 6× EV/EBITDA multiple or a 9× P/E ratio against our 2014 estimates which is at a discount to the peer group of relatively larger scale.

FOCUS POINTS

▪ The company has an attractive footprint across Canada and Northeastern U.S. Strongco has favourable exposure to increasing oil and gas activity in Alberta, as well as infrastructure spending in Ontario and Quebec.

▪ Growth opportunities remain with the opening of new branches and acquisitions prospects. The company is pursuing organic growth with the opening of new branches in Alberta and Quebec. The acquisition focus is on brands already represented and neighbouring regions.

▪ Downside risk is modest given Strongco’s high proportion of recurring revenue. Around 60% of gross profit stems from product support or 65% including rentals. As well, EBITDA has been continuously improving since the 2009 recession.

▪ The stock has huge torque with improved profitability. SQP shares peaked over $20 in 2006 on record earnings. We believe a return to this high is achievable with continued growth and execution.

Recommendation: BUY

Symbol/Exchange: SQP/TSX






Dividend/Yield N/A

Financial summary


Company profile: Strongco Corporation is one of Canada's largest multiline mobile equipment dealers. It sells, rents and services equipment under recognized brands including Volvo, Manitowoc, Case, Terex and others used in sectors such as construction, infrastructure, mining, oil & gas, utilities, municipalities, waste management and forestry.

Shares O/S (M) 13.1 52-Week Range ($) $3.21 - $5.88




Revenue ($M) 423$ 464$ 489$ 514$

EBITDA ($M) 43$ 49$ 48$ 54$

EPS ($) 0.76$ 0.58$ 0.34$ 0.55$

EV/EBITDA 5.8 6.3 6.3 5.8

P/E 5.5 7.2 12.1 7.6

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INTRODUCTION

We are initiating coverage of Strongco Corporation, one of Canada's largest multiline mobile equipment dealers offering leading brands including Volvo, Manitowoc, Case and others. The company is well positioned with strong brands in diversified and growing markets across Canada and the Northeastern United States. The management team has done an enviable job of turning around the operations from a period of losses through the recession to becoming highly profitable in recent years with room for further improvement internally. We expect organic growth in 2014 as the order book has been increasing and with new branches soon to open in Alberta and Quebec. Acquisition opportunities remain robust with the company looking at opportunities in neighbouring geographies and complementary product lines. The OEM’s are keen approve dealership sales to a bigger, better managed and well capitalized company like Strongco and the deal metrics are typically very accretive. The primary concern with the stock is an inflated inventory balance. Working this down is a top priority for management and appears very manageable. This will have a positive impact on the stock as borrowing costs come down with lower debt levels while also reducing the enterprise value making shares appear even cheaper.

We are initiating coverage of Strongco Corporation with a BUY recommendation and a one-year price target of $5.00 per share. Our target is based on a 6× EV/EBITDA multiple against our 2014 estimates (assuming only internally generated growth) which still values Strongco at a discount to its respective peer group given its smaller scale. We note that the stock did reach an all-time high of $23.25 in 2006 and believe it has the potential to return to that level with continued execution and with the aid of acquisitions.

Exhibit F1. Strongco Current and Target Valuation Metrics




Target $5.00 0.7x 6.5x 8.7x

Current $4.15 0.7x 6.3x 7.2x



Target $5.00 0.7x 6.6x 14.5x

Current $4.15 0.6x 6.3x 12.1x



Target $5.00 0.6x 6.0x 9.1x

Current $4.15 0.6x 5.8x 7.6x



COMPANY DESCRIPTION

Strongco Corporation is a major multiline mobile equipment dealer with operations across Canada and in the United States. It sells, rents and services equipment used in sectors such as construction, infrastructure, mining, oil and gas, utilities, municipalities, waste management and forestry. The Company is headquartered in Mississauga, Ontario and has approximately 740 employees serving customers from 27 branches in Canada and five in the United States, operating under Chadwick-BaRoss which it acquired in early 2011 for US$11.5 million.

Exhibit F2. Strongco Footprint


Strongco represents leading equipment manufacturers with globally recognized brands, including Volvo Construction Equipment, Case Construction, The Manitowoc Company, National, Grove, Terex Cedarapids, Terex Finlay, Ponsse, Fassi, Allied Construction, Taylor, ESCO, Dressta, Sennebogen, Jekko, Takeuchi, Link-Belt and Kawasaki. Most notably, the company has exclusive rights to sell Volvo equipment in Alberta, Ontario, Quebec, the Atlantic provinces, Maine and New Hampshire.

Exhibit F3. Strongco Brands




Revenue is most heavily weighted toward the agricultural segment (65%). The company obtains revenue primarily from the sale of new and used equipment with auxiliary revenue coming from parts, service and rentals.

Exhibit F4. Strongco Revenue Breakdown (FY2012)


The company was taken public via an initial public offering on the TSX in November 1995. In May 2005, Strongco reformed as an income trust (a tax preferred vehicle) before the government mandated that these vehicles be converted back to a corporation which it completed on July 1, 2010.


Strongco represents world leading manufacturers including Volvo

The company has partnered with many of the world’s leading industrial brands including Volvo whose market share ranks sixth in North America for construction equipment (ranked second in Europe). Volvo accounts for about half of the company’s sales and even more in terms of the overall profit mix thus is the primary driver of performance. Worthy of mention, Strongco is Volvo’s largest North American dealer, ahead of ASC Construction Equipment (a privately owned company with strength in the lower United States) although ASC is bigger on a worldwide basis. The company is also a Tier 1 Case dealer meaning it has a very strong OEM relationship giving it access to bigger discounts and broader coverage. Similarly, it has “Elite” status as a Manitowoc Crane dealer.

The company is well positioned in diversified and growing markets

Strongco’s product line covers a diverse spectrum of equipment serving an array of end markets across a broad footprint in North America. In round figures, Western, Central and Eastern Canada each account for around 30% of the company’s revenue while the Northeastern U.S. accounts for about 10%. Accordingly, it has exposure to increased oil and gas activity in Alberta, as well as accelerating commercial construction and government infrastructure spending in Ontario. Quebec has seen a decline of late (owning to corruption in



the construction industry and other factors) yet prospects remain strong for construction activity and infrastructure spending including hydro-electric projects. The construction market in the company’s U.S. markets has been flat but Strongco is well positioned for an eventual recovery.

Financial performance has improved dramatically post-recession

After earnings peaked in 2006, the company’s earnings declined into a loss position by 2008 when a new CEO and CFO were brought on board. The headwinds of the recession continued to weigh on performance until a recovery took shape and capital investment returned in 2011 leading to a 44% lift in sales and an 80% improvement in EBITDA. Progress slowed in 2012 and into 2013 as the global economy dealt with issues like the European financial crisis and sentiment toward capital investment had waned. Nonetheless, the company has managed to grow the top line while making investments in the business for a more profitable future.

Recent investments position Strongco for organic growth in 2014

While year-to-date revenue is up 3.8%, the company’s order book is up nearly twice that much as of mid-year suggesting its gaining momentum. Strongco has also ratcheted up capital investment this year with the planned opening of new branches in Fort McMurray, Alberta and St. Augustin-de-Desmaures, Quebec later this year which should drive incremental sales in 2014. We model a conservative 5% sales growth in 2014 with operating leverage leading to a more pronounced improvement in EBITDA and earnings.

Profit is heavily weighted toward recurring product support work

While the top line can vary widely from period to period due to the volatility in equipment sales and high proportion of the overall mix (66%), the movement in the gross profit line is tempered by product support (27% of the sales mix) as it largely recurring and much greater margin (41% gross margin versus only 10% for equipment sales). Accordingly, the company should normally remain quite profitable during an economic downturn although it will depend on the severity of course.

The OEMs prefer to have a strong operator like Strongco

An OEM will always prefer a dealership operator with greater experience and more capital. This is to ensure that sales of its products and customer satisfaction are maximized. A more experienced dealer will operate predictably (i.e. less experienced dealers are prone to mistakes such as mispricing trade-ins) while a greater capitalized one can has the scale to meet broader customer needs (i.e. greater inventory and service offerings).

Volvo and others likely to support Strongco’s consolidation strategy

For the reasons just mentioned, an OEM generally must approve any transaction surrounding the sale of a dealership. While there are other multi-dealership operators, very few approach the scale and efficiency of Strongco. Accordingly, the company will typically be the preferred successor where it has an existing OEM relationship. With very limited opportunity to shop for the highest bid, Strongco can acquire dealerships at highly attractive valuation metrics. For example, the company’s Chadwick-BaRoss acquisition was done at a valuation metric of only 3.2x TTM EBITDA.



No shortage of acquisition targets across verticals and geographies

In the case of Volvo, three large potential acquisition opportunities remain in Canada – British Columbia, Saskatchewan and Manitoba. In the United States there are many more. Strongco’s acquisition of Chadwick-BaRoss now gives it a platform from which to further acquire into the U.S. The overall industry is known for being highly fragmented dominated by mom and pops and far fewer multi-store groups. Strongco can be a prime consolidator of these stores where brands and products are complementary to its Volvo offerings.

Reducing inventory will help greatly reduce borrowings

Responding to a situation where customer demand was high while OEM production was constrained, Strongco made an aggressive move to take on a lot more inventory in 2012 to ensure it could fulfill. Unfortunately, the market slowed and inventory levels now appear excessive. A top priority for management is to bring inventory down in the near term to a more appropriate level. They appear confident in their ability to do so as it is primarily new equipment (not used) that remains very much in demand. As inventory is brought down, borrowing costs should also come down (with lower debt levels) while also reducing the enterprise value making shares appear even cheaper.

The stock has huge torque to the upside

Strongco is significantly undervalued relative to its peer group. Part of this may be attributed to its balance sheet where its borrowing, including inventory financing, appears high. As discussed, bringing inventory down will alleviate this situation. With the market-cap being only about a sixth of net borrowings, the pricing of the stock should be highly sensitive to improving company fundamentals.

INVESTMENT RISK


Strongco’s primary source of income is from the sale of industrial equipment pursuant to agreements to act as an authorized dealer for Volvo and others. Hence the company relies on the success of its suppliers and the renewal of these agreements. Suppliers must continue to provide competitive prices and quality products while Strongco must continue to maintain certain performance metrics to ensure dealership agreements are renewed upon any expiry.


The company serves a select few industry sectors and is dependent on the health of these industries. For example, Volvo sales are typically derived from the construction sector. Consequently, the health of the economy, borrowing rates, and customer confidence has an impact on demand for equipment, parts and service. As well, the construction equipment industry is very competitive with Volvo competing against other brands including Caterpillar, John Deere, Komatsu, and others.

Liquidity

The stock is very thinly traded largely as a result of having a few large institutional shareholders. Three institutions plus insiders total 44% stock ownership leaving a remaining float of 56% or 7.4 million shares. Hence, establishing a large position in the stock is challenging and conversely exiting



the stock will be as well. We believe that with continued execution, the stock price will become more appropriately valued higher providing an opportunity for the company to further issue shares in order to pursue acquisitions thereby improving its liquidity.


For reporting purposes, Strongco breaks down its performance by four geographic segments. On a consolidated basis, FY2012 was a respectable year with an 11% increase in sales outpaced by a 14% increase in EBITDA. Western Canada was the biggest driver of growth with more modest contribution from Central Canada and Northeastern U.S. while Eastern Canada was flat. However, net income was down significantly year-over-year on higher borrowing costs (largely attributed to greater inventory) and higher taxes as FY2011 benefited from the recognition of previously unrecognized tax attributes. Sales growth has continued into FY2013 up 4% in the first half over the first half of last year. Western Canada continues to be the prime driver with Central Canada also performing well while Eastern Canada and Northeastern U.S. declined. The back half of this year should continue to show an increase as the order book at mid-year was up to $77 million from $72 million at December 31, 2012. We foresee the company maintaining a 5% growth trajectory this year and next as the overall economy in Canada and the U.S. grows modestly while the company gains market share across all regions aided by recent investment in new facilities Alberta and Quebec. EBITDA and earnings should far outpace sales growth as operating leverage is realized and as borrowing costs come down.

VALUATION

SQP shares currently trade at a discount to its respective peer group. The current EV/EBITDA multiple is 6.3×/5.8× against our 2013/2014 estimates while the Canadian peer group trades at 8.4×/7.3× and the U.S. comparables are at 10.3×/9.5×. The most relevant peers are Finning (FTT), Toromont (TIH) and Wajax (WJX) which trade at 7.4×/6.8×, 8.4×/7.5× and 9.1×/8.3×, respectively. A discount is warranted given Strongco’s relatively smaller size and debt. However, we expect the discount will narrow as the balance sheet improves.

RECOMMENDATION

We are initiating coverage of Strongco Corporation with a BUY recommendation and a one-year price target of $5.00 per share. Our target is based on a 6× EV/EBITDA multiple or a 9× P/E ratio against our 2014 estimates which is at a discount to the peer group of relatively larger scale. We foresee the prospect for substantial upside beyond our target with continued execution and with the aid of acquisitions.



Exhibit F5. Strongco Board of Directors


Robert Dryburgh Ontario, Canada

Director & CEO


John Bell (1) Ontario, Canada.

Director 2010 Mr. Bell is Chairman of BSM Wireless, Incorporated, a TSX-listed venture company providing GPS/cellular management capabilities for trucking fleets in North America. Mr. Bell is a board member and Chair of the Audit Committee of Newport Partners Income Fund, a TSX-listed company involved in manufacturing, remediation and financial services. Mr. Bell also serves on the board of ATS Automation Tooling Systems, Inc., a global designer and manufacturer of automation for healthcare, solar and automotive industries. He also serves on the board of the Royal Canadian Mint. Mr. Bell holds a BBA from the University of Western Ontario Ivey School of Business and is a chartered accountant. He is also a Fellow of the Institute of Chartered Accountants of Ontario.

Robert Beutel (1,2) Ontario, Canada

Director 2010 Mr. Beutel has been an executive officer of Oakwest Corporation Limited (an investment and management holding company) since 1987. Mr. Beutel is also a director of Accord Financial Corp. (a publicly listed financial services company), a director and Chairman of Hanfeng Evergreen Inc. (a publicly listed fertilizer production company) and a director of Penn Treaty America Corporation (a publicly listed insurance company).

Anne Brace (1) Ontario, Canada

Director 2013 Mrs. Brace was Chief Financial Offer of Softchoice Corporation, a TSX-listed reseller of technology products and services, from 1998 to 2009. Prior to 1998, she was the Chief Financial Officer of Applanix Corporation from 1994 to 1997. She is Chair of the Huntington Society of Canada, Treasurer of Evergreen Centre for Green Cities and a director of Ontario Telemedicine Network. Mrs. Brace is a Chartered Accountant who holds a Master of Business Administration from York University in Toronto.

Ian Currie (2) Ontario, Canada

Director 2010 Mr. Currie is a corporate director. He serves on the board of directors of Jannock Properties Limited, a liquidation trust, of which he is Chairman and President. Prior to the spring of 2000, Mr. Currie was Chairman of Jannock, a manufacturer and distributor of building products. Mr. Currie was also Managing Partner and Chief Executive Officer of Fraser Milner Casgrain LLP, a leading business law firm.

Colin Osborne (2) Ontario, Canada

Director 2011 Mr. Osborne is President and Chief Executive Officer of Vicwest Inc., a TSX-listed company with $350 million in annual revenues. Vicwest is a leading manufacturer and distributor of building construction and steel containment products for grain, fertilizer and liquid storage. Prior to joining Vicwest in October 2007, Mr. Osborne provided consulting services to a variety of private equity, investment banking, manufacturing and engineering businesses, with an emphasis on mergers and acquisitions. He has extensive capital market experience and has assisted in the raising of over $200 million of equity in North America and Europe. Mr. Osborne has 20 years of experience in the manufacturing industry, most of it in senior operating and general management positions at the former Stelco Inc., including acting as Chief Operating Officer during one of Canada's largest corporate restructurings. In addition to his current board membership at Vicwest, Mr. Osborne is a director of Tube City IMS (a portfolio company of Onex Corporation) and a director of McMaster Innovation Park. Mr. Osborne is a professional engineer with a Bachelor of Engineering degree from McGill University and has completed the Executive Program at the Queen's University School of Business.


(2) Member of the Corporate Governance, Nominating, Compensation and Pension Committee.




Exhibit F6. Strongco Senior Management


Robert Dryburgh Chief Executive Officer & Director Mr. Dryburgh was appointed President and CEO of Strongco in August 2008. Previously, he held senior management and executive positions in a number of public and private corporations in Canada and the U.S. They included: Executive Vice-President of Heico Acquisitions Inc., an investment holding company, and Executive Vice-President of a Heico portfolio company; Robertson-Ceco Corporation, a leading manufacturer of custom engineered metal buildings from 2004 to 2006; President of Straightline Division, United States Steel Corporation, a technology based steel distribution/supply chain management company from July 2001 to September 2004; and President of Jenisys Engineered Products Division of Jannock Limited, a manufacturer and distributor of construction products, from 1992 to 2000. Mr. Dryburgh is a Chartered Accountant and a Chartered Director. Mr. Dryburgh was a member of the audit committee of Strongco prior to his appointment as President and CEO. He is a trustee of the Frank Lloyd Wright Foundation, a non-profit organization dedicated to conserving the acclaimed architect’s works and educating architects.

David Wood Chief Financial Officer Mr. Wood was appointed Vice-President, Finance and CFO of Strongco in December 2008. Prior to joining Strongco, Mr. Wood was Executive Vice President and Chief Financial Officer at CPI Plastics Group Limited, a publicly traded company involved in the manufacturing of thermo-plastic extrusion products. He has held senior financial management positions at various other public and private companies in Canada, including: Chief Financial Officer of CFM Corporation, a leading manufacturer of gas and wood-burning fireplaces and gas barbeque grills; Senior Vice President Finance of Magna International Inc., a manufacturer of auto parts and assemblies; and Director of Finance for Dell Computer Corporation, a leading manufacturer and distributor of computer hardware and peripherals. Mr. Wood is a Chartered Accountant and holds an Honours Bachelor degree from the University of Toronto.

Christopher Forbes VP, Human Resources Mr. Forbes joined Strongco May 2007. Prior to joining Strongco, Mr. Forbes spent two years as the Director of Human Resources for L3 Aerospace, a large multi-national Defence and Space contractor. Prior to that, Mr. Forbes spent 7 years at Honeywell Aerospace Canada in a variety of positions of increasing responsibility, finally as Director Human Resources.

William Ostrander VP, Crane Mr. Ostrander joined Strongco in 1998 as a result of Strongco's acquisition of Contractors Machinery & Equipment Ltd., an equipment distribution company, of which he was General Manager. On November 21, 2008, Mr. Ostrander became Vice President, Crane Division.

Thomas Perks VP, Corporate Development Mr. Perks has been employed at Strongco and one of its predecessor companies since October 1969. During this time he progressed from a technician to National General Manager, Product Support. In December 2004 he became Vice President, Product Support of Strongco. In November 2007 Mr. Perks assumed his current role of Vice President, Corporate Development.

Leonard Phillips VP, Admin. & Corporate Secretary Mr. Phillips joined Strongco in 1998 as a result of Strongco's acquisition of Contractors Machinery & Equipment Limited, an equipment distribution company. In October 2003 he was promoted to his current position of Vice President, Administration and Corporate Secretary at Strongco. Prior to joining Strongco, Mr. Phillips served as CME's Vice President, Finance and Administration.

Stephen Slama VP, Multiline Mr. Slama joined Strongco as Vice President, Multiline in Canada in February 2013. Prior to Strongco, he was Vice President, Mining Canada at Sandvik Mining and Construction. During his time there, he progressed through multiple roles including Vice President for Underground Mining for US and Canada, Product Group Manager and Director of North American Sales in their Underground Hardrock Mining business. He has also worked in the natural resources sector as the Business Development Manager for AMEC Americas Limited. Mr. Slama holds a Bachelor of Science Degree in Mining Engineering from Queen’s University and an MBA from McMaster University.




Exhibit F7. Strongco Income Statement ($000’s)



Revenues 294,657 423,153 464,181 489,238 513,736 539,423

Cost of sales 237,971 342,601 377,727 400,203 418,695 439,630

Gross profit 56,686 80,552 86,454 89,034 95,041 99,793


Administration 26,760 31,383 32,270 32,502 33,477 34,481

Distribution 16,879 20,057 23,003 25,405 26,167 26,952

Selling 9,896 13,302 14,499 15,394 15,856 16,331

Other expenses (income) (740) (1,163) (1,828) (737) (800) (800)

Earnings before finance costs and income taxes 3,891 16,973 18,510 16,471 20,342 22,829

Interest expense 4,816 5,841 8,012 10,264 11,154 11,897

Earnings before income taxes (925) 11,132 10,498 6,207 9,188 10,932

Provision for income taxes - 1,203 2,900 1,687 2,527 3,006

Net income attributable to shareholders (925) 9,929 7,598 4,519 6,661 7,925

Net income as a percentage of sales 0% 2% 2% 1% 1% 1%

Earnings per share

Basic earnings per share (0.08)$ 0.76$ 0.58$ 0.34$ 0.51$ 0.60$

Diluted earnings per share (0.08)$ 0.76$ 0.58$ 0.34$ 0.51$ 0.60$


Basic 11,054 13,049 13,129 13,129 13,129 13,129

Diluted 11,054 13,089 13,184 13,147 13,159 13,159

EBITDA 24,187 43,063 49,092 45,973 51,680 55,734

EBITDA margin 8% 10% 11% 9% 10% 10%



Exhibit F8. Strongco Balance Sheet ($000’s)



Assets

Current assets

Cash - - 1,395 19,710 21,226 17,802


Inventories 159,988 210,128 274,620 282,695 290,760 305,298

Prepaid expenses 1,452 1,420 1,959 2,923 2,923 2,923

Other - - - - - -

197,324 254,307 322,350 353,593 364,856 378,467

Non-current assets

Property and equipment 15,849 31,278 38,894 56,279 61,416 66,811

Rental fleet - 15,564 18,588 18,744 10,524 1,893

Deferred income tax asset - 1,541 880 872 872 872

Intangible asset 1,800 1,800 1,800 1,800 1,800 1,800

Other assets 188 146 291 263 263 263

17,837 50,329 60,453 77,958 74,875 71,639

Total assets 215,161 304,636 382,803 431,551 439,732 450,106

Liabilities

Current liabilities

Bank indebtedness 12,370 10,951 15,307 21,099 21,099 21,099


Provisions for other liabilities 1,436 1,198 1,129 1,333 1,373 1,437

Deferred revenue and customer deposits 1,321 971 1,261 1,224 1,224 1,224

Equipment notes payable - non-interest-bearing 40,097 72,262 37,566 63,807 63,807 63,807

Equipment notes payable - interest-bearing 78,063 88,151 171,491 169,258 169,258 169,258

Current portion of finance lease obligations 959 2,110 3,495 3,857 3,857 3,857

Current portion of notes payable 1,233 6,242 3,077 4,590 4,590 4,590

164,308 216,871 280,590 314,481 316,000 318,449


Deferred income tax liability - 2,565 2,925 2,991 2,991 2,991

Finance lease obligations 1,502 3,291 5,581 5,322 5,322 5,322

Notes payable - 13,558 19,205 29,502 29,502 29,502

Employee future benefit obligations and other 4,374 11,760 9,801 6,860 4,860 2,860

5,876 31,174 37,512 44,675 42,675 40,675



Shareholders' capital 57,089 64,898 64,898 64,898 64,898 64,898

Accumulated other comprehensive income - 205 29 778 778 778

Contributed surplus 315 498 707 1,665 3,665 5,665

Deficit (12,427) (9,010) (933) 5,054 11,716 19,641





Exhibit F9. Strongco Statement of Cash Flows ($000’s)




Net income (925) 9,929 7,598 4,519 6,661 7,925

Adjustment for

Depreciation - property and equipment 2,085 2,975 4,233 5,049 5,137 5,394

Depreciation - equipment inventory on rent 18,211 20,668 23,159 21,630 23,118 24,274

Depreciation - rental fleet and intangibles - 2,447 3,190 2,823 3,082 3,237

Gain on disposal of property and equipment (3) (40) (101) - - -

Gain on sale of rental fleet - (997) (770) (525) - -

Contributed surplus and other 315 183 209 158 - -


Income tax expense - 1,203 2,900 1,687 2,527 3,006

Employee future benefit expense 1,437 3,883 1,235 1,292 2,000 2,000

Foreign exchange gain - (10) (4) (10) - -

Changes in working capital (19,349) (27,865) (31,009) 5,999 (8,228) (14,586)

Funding of employee future benefit obligations (1,466) (2,958) (2,544) (1,965) (2,000) (2,000)

Interest paid (4,770) (5,824) (7,771) (10,537) (11,154) (11,897)

Income taxes paid - (190) (67) (3,129) (2,527) (3,006)

Net cash provided by operating activities 351 9,245 8,270 37,255 29,772 26,244


Business acquisition net of cash acquired and other - (9,248) - - - -

Purchases of rental fleet - (13,382) (14,989) (18,042) (17,981) (18,880)

Proceeds from sale of rental fleet - 8,349 9,260 5,196 - -

Purchase of property and equipment (336) (9,038) (5,865) (20,471) (10,275) (10,788)

Proceeds from sale of property and equipment 74 40 133 67 - -

Net cash used in investing activities (262) (23,279) (11,461) (33,250) (28,255) (29,668)


Increase (decrease) in bank indebtedness 2,356 (1,442) 4,371 5,741 - -

Increase in long-term debt 171 12,063 5,342 11,846 - -

Repayment of long-term debt (1,250) (2,059) (1,867) (1,050) - -

Repayment of finance lease obligations (1,366) (1,738) (2,477) (1,754) - -

Issuance of share capital - 7,809 - - - -

Repayment of business acquisition purchase financing and other - (594) (776) (514) - -

Net cash provided by financing activities (89) 14,039 4,593 14,269 - -

Foreign exchange on cash balances - (5) (7) 41 - -

Change in cash and cash equivalents - - 1,395 18,315 1,516 (3,425)

Cash and cash equivalents, beginning of period - - - 1,395 19,710 21,226

Cash and cash equivalents, end of period - - 1,395 19,710 21,226 17,802

Toromont Industries Ltd. October 28, 2013


TOROMONT INDUSTRIES LTD. A top CAT dealer with a steady and growing dividend and a strong balance sheet

INVESTMENT THESIS

Toromont Industries is one of the world’s top Caterpillar (CAT) dealers, as well as a market leading supplier of refrigeration systems. TIH shares offer a steadily increasing dividend while the company’s balance sheet provides a means to grow organically and possibly via acquisition. However, the stock currently trades much in-line with its peer group and we await a more attractive entry point.

VALUATION

We initiate coverage of Toromont Industries with a HOLD recommendation and a one-year price target of $24.00 per share. Our target is based on an 8× EV/EBITDA multiple against our 2014 estimates, in-line with our valuation for FTT.

FOCUS POINTS

▪ Toromont is one of the globe’s leading CAT dealers. Representing the industry’s top brand, the company is diversified across four provinces and territories (ON/MB/NFLD/NU) and three key industries (construction/mining/power).

▪ Its CIMCO division has a 100 year history in North America’s refrigeration market. It has the distinction of being the continent leader in industrial refrigeration and leads globally in recreational ice applications.

▪ A stable business with high recurring revenue, a strong balance sheet and growth potential. Nearly half of revenue is high margin and recurring product support and rentals. With net debt to equity down to 0.25:1, it can invest in growth initiatives.

▪ The dividend should continue to grow steadily. Toromont has a disciplined focus on return on capital demonstrated by 24 consecutive years of dividend growth and an announced share buyback.


Symbol/Exchange: TIH/TSX







Financial summary


Company profile: Toromont operates through two business segments (The Equipment Group and CIMCO). The Equipment Group includes one of the world’s largest Caterpillar dealerships, as well as rental operations. CIMCO is a market leader in the design, engineering, fabrication and installation of industrial and recreational refrigeration systems. Both segments offer comprehensive product support capabilities.


Market Cap ($M) 1,738.3 Avg. Daily Volume 132,861

Enterprise Value ($M) 1,894.6 Net Debt ($M) 156.3


Revenue ($M) 1,382$ 1,507$ 1,564$ 1,626$

EBITDA ($M) 194$ 223$ 227$ 245$

EPS ($) 1.33$ 1.56$ 1.53$ 1.69$

EV/EBITDA 9.3 8.5 8.4 7.5

P/E 17.1 14.5 14.9 13.4

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INTRODUCTION

We are initiating coverage of Toromont Industries, one of the world’s top dealers for Caterpillar (CAT/NYSE) and a market leader in industrial and recreational refrigeration through its CIMCO division. This is a milestone year for the company as it celebrates 20 years with the foremost brand in heavy equipment, as well as the 100th anniversary of CIMCO. The equipment business is diversified across various industries and geographies within Canada while the refrigeration group has a more expansive footprint across North America serving a diverse set of customers. Both segments enjoy stability from a high degree of product support business which is both recurring and high margin. This category has a long history of growing steadily thereby absorbing a greater portion of related costs resulting in improved profitability with less volatility. While the industry is decelerating in 2013, Toromont is investing in growth. Last year it acquired the coterminous Bucyrus distribution network from Caterpillar and added a new store in its rental business. It intends to open a new rental location each year going forward and is investing in growing its technical workforce. Accordingly, we expect earnings to keep trending higher enabling the company to continue its storied tradition of increasing the dividend each year. Toromont has an enviable balance sheet and can comfortably take on debt as accretive growth opportunities arise. In our opinion, the stock is pricing in much of these positives and the medium-term return potential is largely consistent with the overall peer group.

We are initiating coverage of Toromont Industries with a HOLD recommendation and a one-year price target of $24.00 per share. Our target is based on an 8× EV/EBITDA multiple against our 2014 estimates which values TIH shares roughly in-line with our target valuation for Finning International and Wajax Corporation.

Exhibit G1. Toromont Current and Target Valuation Metrics




Target $24.00 1.3x 8.9x 15.3x

Current $22.69 1.3x 8.5x 14.5x



Target $24.00 1.3x 8.8x 15.7x

Current $22.69 1.2x 8.4x 14.9x



Target $24.00 1.2x 7.9x 14.2x

Current $22.69 1.1x 7.5x 13.4x



COMPANY DESCRIPTION

Toromont Industries operates through two business segments. The Equipment Group includes one of Caterpillar’s larger dealerships (named Toromont CAT) by revenue and geographic territory in addition to industry leading rental operations (named Battlefield). CIMCO is a market leader in the design, engineering, fabrication and installation of industrial and recreational refrigeration systems. Both segments offer comprehensive product support capabilities. We depict the Toromont brands below noting that Sitech represents Trimble machine control systems.

Exhibit G2. Toromont Brands


The Equipment Group has 36 Toromont CAT branches and 37 Battflefield stores spread across Ontario, Manitoba, Newfoundland & Labrador, and Nunavut. CIMCO has 19 offices across Canada and down the eastern United States where it also has eight service account managers. The company employs over 3,200 people and maintains its head office is in Concord, Ontario.

Exhibit G3. Toromont Footprint




By category, Toromont derives almost half of its revenue from equipment sales (CAT) or around 55% including CIMCO package sales. Around a third comes from product support, 12% from rental equipment sales and 1% from power generation. By division, the Equipment Group accounts for 87% of revenue while CIMCO represents 13%. Profitability is higher in the Equipment Group at 11.9% EBIT margin versus 7.2% at CIMCO in 2012.

Exhibit G4. Toromont Revenue Breakdown (2012)


Toromont was incorporated in 1961 and became publicly listed on the Toronto Stock Exchange in 1968. Through 1985, it held investments in businesses operating in a number of industries. The company’s focus was narrowed in 1986 to compressions businesses including gas compression and refrigeration systems. In 1993, it expanded into equipment with the acquisition of a Caterpillar dealer in Ontario and was awarded other franchises in 1996 (Newfoundland and Labrador), 2001 (Manitoba) and 2006 (MaK marine for the entire Great Lakes region). In 2011, it spun off its gas compression business, Enerflex, as a separate public company.


Toromont deals in the world’s top heavy equipment brand

The company is partnered with Caterpillar, a U.S. based company founded in 1925 with US$66 billion in sales during 2012. They are the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. CAT has a dominant market share lead in North America where it accounts for about one third of construction equipment sales, nearly double its next closest competitor, John Deere. It also leads in Europe where it has a more modest 18% market share and competes neck and neck with Volvo.

Its CAT footprint is diversified across geographies and industries

Toromont’s primary Equipment division is spread across four distinct provinces/territories and serves an array of industries. Approximately 39% of equipment sales are to local/large contractors that are serving the construction/infrastructure industry. A significant driver of sales is a population influx in southern Ontario. As well, Canada has a massive $130 billion infrastructure deficit that is growing at $2 billion per year. Toromont is well exposed to the mining sector (23% of equipment sales) which is primarily

Revenue Mix by Category Revenue Mix by Division

Equipment / package

sales55%

Rental equipment

sales12%

Power generation

1%Product support

32%

Equipment Group

87%

CIMCO13%



weighted toward gold, as well as nickel, copper and diamonds. About 19% of equipment sales are in power systems, mostly electric power and industrial.

Product support and rentals have grown steadily and are recurring

Nearly half of the Equipment Group’s revenue relates to product support and rentals, which is highly recurring business and high margin therefore dominating bottom line performance. These segments have grown steadily over time. Product support has expanded at a compounded annual rate of 7% over the last ten years while the rental business has expanded nearly as fast. The company’s strategy is to open a new rental location each year. As revenue grows, Toromont absorbs a greater proportion of its fixed costs thus realizing operating leverage.

CIMCO has a long history in North America

This division has been serving refrigeration markets in North America for 100 years and has gained notable distinction. It is the continent’s leader in industrial refrigeration and a global market leader in recreational ice applications. Industrial sales account for 42% of the division’s revenue with recreational sales representing 16%. The remaining 42% is in product support which by nature is highly recurring and high margin. The market opportunity for CIMCO is widespread and there has been a significant increase in recent booking generated by food processing and the distribution network. Industrial customers are diverse and include top names like Maple Leaf, Nestle, Loblaws, McCain, Coca-Cola, Pepsico and Kraft. CIMCO has installed 4,500 recreational facilities worldwide and has been the official NHL rink provider for 12 years.

Balance sheet strong and Toromont committed to returning capital

The company maintains a conservative balance sheet relative to its peers like Finning. As of mid-2013, its net debt to capital ratio stood at only 0.25:1 and net debt to TTM EBITDA was only 0.73:1. Accordingly, Toromont could comfortably take on debt to pursue growth, such as territory expansion, if and when the opportunity arises. For example, there is an adjacent Caterpillar territory in the Province of Saskatchewan which is privately held and could become available in the future. In the meantime, the company appears committed to return capital to its shareholders. In 2012, it had a 30% return on equity continued its long tradition of increasing its dividend which has grown at a 16.9% 10-year CAGR. More recently, it announced an normal course issuer bid allowing it to repurchase up to 6.5 million TIH shares through August 2014.

INVESTMENT RISK


The company’s product and services predominantly serve a select few industry sectors. Toromont is therefore dependent on the health of these industries. For example, a significant portion of sales are derived from the mining sector, especially gold. Consequently, commodity prices, borrowing rates, and customer confidence have an impact on demand for equipment, parts and service. As well, the heavy equipment industry is very competitive with Caterpillar competing against others like John Deere, Komatsu, Terex, CNH, Volvo, JCB, Hitachi and others.



Reliance on Caterpillar and dealership arrangements

Toromont’s primary source of income is from the sale of Caterpillar products pursuant to agreements to act as an authorized dealer. Hence the company relies on the success of its supplier and the renewal of these agreements. The supplier must continue to provide competitive prices and quality products while Toromont must continue to maintain certain performance metrics to ensure dealership agreements are renewed upon any expiry.

Foreign currency

Although it reports in Canadian dollars, nearly all of the equipment and parts sold in the Equipment Group are sourced in US dollars with Canadian dollar sales prices generally reflecting changes in exchange rate. CIMCO is similarly affected. Accordingly, currency fluctuations can have a material impact on operations. To mitigate the risk, Toromont enters into foreign exchange contracts to reduce volatility by fixing landed costs related to specific customer orders and establishing a level of price stability for high volume inventory (i.e. parts).


For reporting purposes, Toromont presents its results by division and further breaks down revenue by product/service category. Pro-forma net earnings from continuing operations have shown an impressive rise over the last 10 years, reflecting a 16.3% CAGR and peaking at $120.6 million in 2012. Driving last year’s record performance was an 11.9% and 16.2% increase in Equipment Group revenue and EBIT, respectively. However, growth has moderated in 2013 as equipment sales have declined year-to-date. Nonetheless, product support and rental continue to track higher and CIMCO is performing well on deliveries against a significant Maple Leaf Foods order. We estimate EPS will decline only slightly from $1.56 in 2012 to $1.53 in 2013 due to weaker equipment sales. We expect earnings growth to resume in 2014 to $1.69 per share as equipment sales once again grow.

VALUATION

Toromont trades roughly in-line with its Canadian peer group and at a modest discount to the US group including Caterpillar. The current EV/EBITDA multiple is 7.5× against our 2014 estimates while the Canadian group averages 7.3× and the US heavy equipment group trades at 9.5× (with Caterpillar trading at 11×). Toromont’s most comparable peer (Finning) currently trades lower at 6.8× EV/EBITDA against our 2014 estimates.

RECOMMENDATION

We are initiating coverage of Toromont Industries with a HOLD recommendation and a one-year price target of $24.00 per share. Our target is based on an 8× EV/EBITDA multiple against our 2014 estimates which values Toromont in-line with our target valuation for Finning International, yet at a discount to the current trading valuation for Caterpillar and the US peer group.



Exhibit G5. Toromont Board of Directors


Robert Ogilvie Ontario, Canada

Chairman 1986 Mr. Ogilvie joined Toromont as President in 1985 and was Chairman, President and Chief Executive Officer of Toromont from 1987 to 1997. Mr. Ogilvie was Chairman and Chief Executive Officer of Toromont from 1997 to January 2002, at which time he became Executive Chairman of the Board. Mr. Ogilvie ceased to be Executive Chairman of the Board in May, 2005 upon his appointment as Chairman. Mr. Ogilvie was re-appointed Chief Executive Officer on August 28, 2006 to February, 2012. He was appointed Executive Chairman of the Board in March, 2012. Effective April 1, 2013 he became Chairman of the board. Mr. Ogilvie holds a B.Comm. degree from Mount Allison University.

Scott Medhurst Ontario, Canada

Director & CEO


Wayne Hill (1,2) Ontario, Canada

Director 1988 Mr. Hill joined the Corporation in 1985 as Vice President, Finance and Chief Financial Officer and became Executive Vice President & CFO in February 2002. Mr. Hill ceased to be Chief Financial Officer in October, 2005 upon his appointment as Executive Vice President. He retired on May 31, 2006, but was re-appointed as Executive Vice President on August 28, 2006. He subsequently retired in May, 2008. Mr. Hill holds a B.Comm. (Hons) from Queen's University and is a Chartered Accountant.

John McCallum (1,3) Manitoba, Canada

Director 1985 Mr. McCallum is a Professor of Finance in the I. H. Asper School of Business at the University of Manitoba and was previously Chair, Manitoba Hydro from 1991 to 2000 and policy advisor to the Federal Minister of Finance from 1984 to 1991. He is also a director of IGM Financial Inc., Wawanesa Mutual Insurance Company, Wawanesa General Insurance Company, Wawanesa Life Insurance Company and Fortis Inc. (including subsidiaries in British Columbia and Alberta). Mr. McCallum holds a B.Sc. and a B.A. from the University of Montreal, a M.B.A. from Queen's University and a Ph.D. from the University of Toronto.

Robert Franklin (1,2) Ontario, Canada

Director 1994 Mr. Franklin is President of Signalta Capital Corporation, a private investment company. Previously he was Chairman of Placer Dome Inc. from 1993 until it was taken over by Barrick Gold Corporation in 2006. He is now a Director of Barrick, as well as Canadian Tire Corporation. Mr. Franklin holds a B.A. in Business Admin. from Hillsdale College, Michigan.

David Galloway (2,3) Ontario, Canada

Director 2002 Mr. Galloway is Chairman of the Board of Directors of Bank of Montreal, having been appointed to this position effective May 1, 2004. He was President and CEO of Torstar Corporation from 1988 to 2002. He also serves on the Board of Directors of the E.W. Scripps Company in the USA. Mr. Galloway holds a B.A. (Hons) in political science and economics from the University of Toronto and an M.B.A. from Harvard Business School.

Jeffrey Chisholm (1,3) Ontario, Canada

Director 2011 Mr. Chisholm is a business and finance consultant in the financial services industry. He is also a director of Amex Bank of Canada and PMI, Canada. Mr. Chisholm retired from Bank of Montreal in 2001 after a 30 year career of progressively senior positions including as Vice Chair of Electronic Financial Services as well as the Personal Commercial Client Group.

Mr. Chisholm holds a BSBA from Georgetown University.

Cathryn Cranston Ontario, Canada

Director 2013 Ms. Cranston is currently the Senior Vice President, Finance and Treasurer, BMO Financial Group. Ms. Cranston has had a progressive 27-year career with the Bank of Montreal, moving successfully through a series of line and functional roles including corporate banking, capital markets, risk management, asset management, and as a Divisional CFO in the private client group and Corporate Treasurer. She has also held a leadership role in investor relations. Ms. Cranston has a bachelor of commerce (Honours) and an M.B.A. from the University of Manitoba. She has served on non-profit and internal boards of directors.

Katherine Rethy Ontario, Canada

Director 2013 Ms. Rethy is currently President of KAR Development Corporation, her own leadership development and consulting company. Prior to this, Ms. Rethy held a series of progressively more senior roles at Noranda/Falconbridge, most recently as Senior Vice President, Global Services (including procurement, supply chain, risk management, insurance, information systems and facilities). Prior to joining Noranda, Ms Rethy was an executive with Dupont Canada Inc. where she held a number of roles, including legal counsel, sales and business management. Ms. Rethy has a J.D. from the University of Windsor, a B.Sc. from the University of Toronto, an M.B.A. from York University, and an M.A. from Lancaster University in the U.K. She currently is a member of the board of directors of Equitable Bank and SBM Offshore N.V. (Netherlands), and is Chair of Katimavik-Opcan.

(1) Member of Audit Committee. (2) Member of HR and Compensation Committee. (3) Member of Corporate Governance Committee.




Exhibit G6. Toromont Senior Management


Scott Medhurst Chief Executive Officer & Director Mr. Medhurst is President and Chief Executive Officer of Toromont. He joined Toromont in 1988 as a Management Trainee and held various positions at Toromont. He was promoted to President of Toromont CAT in September of 2004. He was appointed to President and Chief Executive Officer of Toromont in March, 2012.

Paul Jewer Chief Financial Officer Mr. Jewer joined Toromont in 2005 as Vice President Finance & Chief Financial Officer. Prior to joining Toromont, he served five years as Chief Financial Officer for another Canadian publicly listed company. He is a Chartered Accountant (1989) and a member of the Institutes of Chartered Accountants of Newfoundland and Ontario.

David Wetherald VP, Human Resources & Legal Mr. Wetherald is Vice President Human Resources and Legal. He joined the Corporation in 2004 as General Counsel & Corporate Secretary and became Vice President Human Resources and Legal in 2008. He was previously employed with Torstar Corporation for eleven years as General Counsel & Secretary with corporate development responsibilities, and prior to that for five years with Davies Ward Phillips & Vineberg.

Michael Cuddy VP and Chief Information Officer Mr. Cuddy is Vice President and Chief Information Officer of the Corporation. He joined Toromont as General Manager, Information Technology and Chief Information Officer in 1995 and became Vice President and Chief Information Officer in 2004. He was previously employed with the systems group of Bell Mobility for three years.

Randy Casson President, Construction Industries of Battlefield, Toromont Cat and Sitech

Mr. Casson is President Construction Industries of Battlefield, Toromont Cat and Sitech. He joined Toromont in 1993 as General Manager Northern Region, Toromont CAT. He was appointed Vice President and General Manager Northern Region in 1997 and became President of Battlefield in 2001. Mr. Casson has been in the heavy equipment industry for more than 30 years, including Toromont and predecessor companies where he held various management positions. He is a graduate of Toromont's management training program.

Steve McLeod President, CIMCO Refrigeration Mr. McLeod is President of CIMCO Refrigeration. A graduate of the University of Toronto, Steve joined the Company in 1971 and has held a variety of increasingly senior management positions culminating with his appointment as CIMCO President in 1985.




Exhibit G7. Toromont Income Statement ($000’s)



Revenues 1,207,028 1,381,974 1,507,173 1,563,983 1,625,924 1,747,868

Cost of goods sold 913,336 1,032,599 1,122,765 1,181,841 1,219,443 1,310,901

Gross profit 293,692 349,375 384,408 382,142 406,481 436,967


Selling and administrative expenses 174,492 201,190 214,130 214,344 220,774 227,397

Operating income 119,200 148,185 170,278 167,798 185,707 209,570


Interest and investment income (2,803) (3,214) (3,974) (2,331) (1,836) (2,749)

Income before income taxes 110,374 142,387 164,538 161,582 179,003 203,779

Income taxes 33,715 39,709 43,985 43,785 48,331 55,020

Net earnings from continuing operations 76,659 102,678 120,553 117,797 130,672 148,759

Net gain on spinoff of Enerflex - 133,164 - - - -

Earnings from discontinued operations 27,253 10,617 - - - -

Net earnings 103,912 246,459 120,553 117,797 130,672 148,759

Net earnings from continuing operations as a percentage of sales 6% 7% 8% 8% 8% 9%

Basic earnings per share

Continuing operations 1.01$ 1.33$ 1.57$ 1.54$ 1.71$ 1.94$

Discontinued operations 0.36$ 1.87$ -$ -$ -$ -$

Diluted earnings per share

Continuing operations 1.00$ 1.33$ 1.56$ 1.53$ 1.69$ 1.93$

Discontinued operations 0.36$ 1.86$ -$ -$ -$ -$


Basic 76,171 77,014 76,550 76,589 76,611 76,611

Diluted 76,362 77,393 77,087 77,162 77,182 77,182

EBITDA 165,583 194,048 223,096 226,594 245,053 270,745

EBITDA margin 13.7% 14.0% 14.8% 14.5% 15.1% 15.5%



Exhibit G8. Toromont Balance Sheet ($000’s)



Assets

Current assets

Cash 174,089 75,319 2,383 14,491 77,290 105,957

Accounts receivable 209,332 209,243 231,518 252,157 234,856 252,470

Inventories 224,416 301,937 327,785 416,060 379,382 407,836

Derivative financial instruments 824 12 43 3,248 3,248 3,248

Other 493,841 4,718 4,086 2,744 2,744 2,744

1,102,502 591,229 565,815 688,700 697,520 772,255

Non-current assets



Derivative financial instruments - 418 - - - -

Other assets 882,924 8,195 12,614 7,728 7,728 7,728


Goodwill and intangible assets 13,450 13,450 27,119 27,604 27,604 27,604

1,169,261 322,102 370,355 417,378 468,301 525,665

Total assets 2,271,763 913,331 936,170 1,106,077 1,165,820 1,297,919

Liabilities

Current liabilities

Accounts payable, accrued liabilities and provisions 245,245 280,735 203,468 264,927 240,036 256,383


Current portion of long-term debt 6,889 1,280 1,372 1,420 1,420 1,420

Derivative financial instruments 4,048 640 262 - - -

Income taxes payable and other 322,962 8,352 3,130 - - -

624,213 340,107 262,896 341,994 309,203 330,631



Long-term debt 413,040 132,815 158,395 169,371 169,371 169,371

Accrued pension liability 19,851 26,161 26,840 19,460 19,460 19,460

Derivative financial instruments and other 3,684 - 127 - - -

450,712 169,363 196,699 198,812 198,812 198,812

Total Liabilities 1,074,925 509,470 459,595 540,806 508,015 529,443


Share capital 469,080 265,436 270,900 274,524 274,524 274,524



Accumulated other comprehensive income (12,818) 892 232 2,098 2,098 2,098

Total Shareholders' Equity 1,196,838 403,861 476,575 565,271 657,805 768,476

Total Liabilities and Shareholders' Equity 2,271,763 913,331 936,170 1,106,077 1,165,820 1,297,919



Exhibit G9. Toromont Statement of Cash Flows ($000’s)




Net earnings from continuing operations 76,659 102,678 120,553 117,797 130,672 148,759

Items not requiring cash and cash equivalents


Stock-based compensation 3,005 1,001 1,659 1,779 1,700 1,750

Accrued pension liability (7,188) (3,335) (5,002) (1,702) - -

Deferred income taxes 3,293 (1,450) 769 (612) - -

Gain on sale of PP&E and rental equipment (6,627) (8,211) (8,967) (6,027) - -

Cash flow from discontinued operations and other 30,490 26,028 - - - -

146,015 162,574 161,830 170,031 191,719 211,684

Net change in non-cash working capital and other from continuing operations 48,437 (39,731) (124,475) (26,746) 21,188 (24,640)

Net change in non-cash working capital and other from discontinued operations 61,334 31,405 - - - -

Cash (used in) provided by operating activities 255,786 154,248 37,355 143,286 212,906 187,044


Additions to rental equipment (38,579) (57,860) (77,611) (92,651) (84,254) (90,573)

Additions to property, plant and equipment (32,564) (25,017) (23,700) (24,859) (26,015) (27,966)


Proceeds on disposal of property, plant and equipment 899 4,080 1,504 1,255 - -

Increase in other assets 1,230 (184) (291) (139) - -

Increase in intangible assets - - (13,669) (500) - -

Discontinued operations (292,887) 140,115 - - - -

Cash (used in) provided by investing activities (341,042) 84,174 (91,205) (105,928) (110,269) (118,539)


Increase in term credit facility 280,000 - 26,547 11,413 - -

Repayment of long-term debt (178,854) (286,888) (1,280) (674) - -

Financing costs (8,330) (575) (369) - - -

Dividends (45,099) (40,877) (35,996) (39,035) (39,838) (39,838)

Shares purchased for cancellation - (12,213) (14,137) - - -

Cash received on exercise of stock options 6,736 3,242 6,202 2,911 - -

Cash (used in) provided by financing activities 54,453 (337,311) (19,033) (25,385) (39,838) (39,838)

Effects of exchange rate changes on cash denominated in foreign currency (2,065) 119 (53) 135 - -

Increase in cash and cash equivalents (32,868) (98,770) (72,936) 12,108 62,799 28,667



Titan Machinery Inc. October 28, 2013


TITAN MACHINERY INC. CNH’s prime dealer consolidator with room to improve earnings post a FY2014 lull

INVESTMENT THESIS

Titan Machinery is CNH’s largest retail dealer of agricultural and construction equipment. TITN shares offer an opportunity for investors to play the consolidation of CNH dealerships worldwide. However, we believe much of the medium-term potential has already been priced into the stock and we await a more attractive entry point.

VALUATION

We initiate coverage of Titan Machinery Inc. with a HOLD recommendation and a one-year price target of US$18.75 per share. Our target is based on an 11× EV/EBITDA multiple against our FY2015 estimates ascribing a premium versus peers for the company’s larger scale.

FOCUS POINTS

▪ Titan has grown excessively through dealership consolidation. The company has quadrupled its number of locations to 119 over the last seven years including the more recent expansion into Eastern Europe with 14 stores.

▪ Acquisition opportunities remain abundant both domestically and internationally. The majority of North American dealers are open to selling out in the next 3 to 5 years while the international consolidation play is still in its infancy.

▪ Titan has become the partner of choice. There are a limited number of potential consolidators able to acquire and run a large, multi-store operation. Titan offers management depth, a successful track record and access to capital.

▪ Long-term industry fundamentals should drive improved performance following a recent lull. Earnings have been hurt by bad weather, softening commodity prices and an excess of used inventory. We expect EPS to improve as these forces dissipate and as focus shifts to integrating past acquisitions.


Symbol/Exchange: TITN/NASDAQ


All dollar values in US$ unless otherwise noted.

Current price: US$17.56

One-year target: US$18.75

Target return: 7%

Dividend/Yield N/A

Financial summary


Company profile: Titan Machinery is a dealer for Case IH, Case Construction, New Holland, and New Holland Construction. It represents a diversified mix of agricultural, construction, and consumer product dealerships across much of the upper Midwest and Europe.


Market Cap (US$M) 370.6 Avg. Daily Volume 428,139

Enterprise Value (US$M) 1,345.6 Net Debt (US$M) 975.0

Year-end Jan-31 F2012A F2013A F2014E F2015E

Revenue (US$M) 1,659$ 2,198$ 2,337$ 2,454$

EBITDA (US$M) 98$ 116$ 101$ 115$

EPS (US$) 2.18$ 2.00$ 1.33$ 1.64$

EV/EBITDA 9.1 9.7 13.3 10.7

P/E 8.1 8.8 13.2 10.7

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INTRODUCTION

We are initiating coverage of Titan Machinery Inc., an authorized operator of equipment dealerships for CNH Industrial N.V. (CNHI-NYSE). The company has grown to become the largest CNH dealer operator in the world, having quadrupled its store count since its IPO in late 2007 (over a recessionary period) and expanded its footprint internationally (into Eastern Europe). We expect the company to continue on its path of adding stores with a long runway of opportunities remaining (both domestically and abroad). The industry consolidation continues as dealer-principals age and as farm operations become bigger and more sophisticated. Titan Machinery is an exceptionally well positioned successor due to its scale, access to capital, operational expertise and CNH’s apparent backing. The company also has an opportunity to improve operating performance at its existing locations after a confluence of factors has hindered earnings of late. Achieving a long-term pre-tax margin objective of 6% would nearly triple its earnings without even factoring in growth. Our primary caution with the stock rests with its current valuation at 10.7× EV/EBITDA (forward) which is significantly above the peer group suggesting much of the aforementioned upside potential has been priced in.

We are initiating coverage of Titan Machinery Inc. with a HOLD recommendation and a one-year price target of $18.75 per share. Our target is based on an 11× EV/EBITDA multiple against our FY2015 estimates which values Titan roughly in-line with its OEM counterpart (CNHI-NYSE) yet at a premium to its closest dealership peers (RME-TSX and CVL-TSX) due to its greater revenue scale.

Exhibit H1. Titan Machinery Current and Target Valuation Metrics




Target $18.75 0.5x 9.9x 9.4x

Current $17.56 0.5x 9.7x 8.8x



Target $18.75 0.6x 13.5x 14.1x

Current $17.56 0.6x 13.3x 13.2x



Target $18.75 0.5x 10.9x 11.5x

Current $17.56 0.5x 10.7x 10.7x



COMPANY DESCRIPTION

Titan Machinery Inc. commenced trading on the NASDAQ on December 11, 2007 after raising $42 million in net proceeds on an initial public offering of its common stock priced at $8.50 per share. It had two subsequent common share offerings priced at $20.00 in 2008 and $28.75 in 2011. Titan is in the business of acquiring and managing authorized CNH agriculture and construction equipment dealerships. Below, we depict the various CNH brands available for sale at Titan locations.

Exhibit H2. Titan Machinery Brands


The company operates 105 North American stores across highly productive farming and extensive energy production regions. In 2011, the company commenced an international expansion initiative with the purchase of two stores in Romania soon followed by the acquisition of seven stores in Bulgaria. It has since opened five more stores in Europe (three in Romania, one in Serbia and another in Ukraine).

Exhibit H3. Titan Machinery Footprint




Titan’s head office is located in Fargo, North Dakota, U.S.A. The company’s revenue is most heavily weighted toward the agricultural segment (83%) complemented by construction (17%). It obtains revenue primarily from the sale of new and used equipment with auxiliary revenue coming from parts, service and rentals.

Exhibit H4. Titan Machinery Revenue Breakdown



Titan is partnered with a top tier OEM

The company deals with CNH Industrial, a company with $20 billion in revenue and a market-cap near $17 billion. CNH is a major player in the agricultural equipment sector accounting for the second largest market share in North America, next only to John Deere. It is also a major player in construction equipment ranking fifth for market share in North America. Its brand is well recognized and highly reputable while its customer base is quite loyal (albeit to a lesser extent than John Deere). CNH is well positioned to maintain its market share and its footprint is expansive enough to ensure a long run-way of acquisition opportunities for Titan.

The company has an excellent track record of growth since its IPO

Titan has quadrupled its store count to 119 locations in just over five years. This growth has been primarily fuelled by acquisitions with new store openings accounting for only about 10% of net additions. Notably, the company typically acquires using cash. It has financed its expansion through internally generated cash flow from operations along with three common share offerings (the December 2007 IPO and two subsequent raises) along with a $145 million convertible notes offering in the prior fiscal year which has an initial conversion price of $43.17.



Exhibit H5. Titan Machinery Store Growth since its 2007 IPO


Titan facilitates dealer succession

For decades, the majority of North American farm equipment dealerships were family owned and operated. Similarly, dealerships have a history of being passed down from generation to generation. However, increasingly children of family owned dealerships are opting alternative careers. So when retirement approaches, many owners are looking to sell instead of passing down their legacy to their offspring. As well, as farms are getting larger, farmers are demanding more from their equipment dealers in terms of service and technology. Titan’s scale, experience and access to capital make it a natural consolidator in the industry.



Accordingly, acquisitions have proven to be highly accretive

For the reasons just mentioned, an OEM generally must approve any transaction surrounding the sale of a dealership. While there are other multi-dealership operators, none approach the scale of Titan. Accordingly, the company is typically the most preferred successor by the OEM. With very limited opportunity to shop for the highest bid, Titan normally acquires dealerships at highly attractive valuation metrics typically paying fair value for existing assets (fixed assets and inventory) plus only a modest premium for goodwill. As well, an acquired store has grown revenue by around 30% on average during the first full fiscal year of operations after being acquired and improved pre-tax profit by 38%.

No shortage of acquisition targets in or outside of the U.S.

Titan operates only about 5% of CNH’s North American stores and an insignificant portion internationally. As well, nearly three-quarters of North American agricultural equipment dealers are open to selling their businesses in the coming years. Thus far it appears that CNH has placed no limits on how much it will allow Titan to grow domestically and beyond. Clearly CNH must



be satisfied with the company’s performance within North America and seems to be encouraging its international pursuit.

Eastern Europe is a fertile opportunity

After acquiring two stores in Romania at the tail end of CY2011, Titan has expanded its Eastern European presence to 14 locations. Five of these locations have been new store openings with the most recent addition being in the Ukraine where Titan has rights in four regions (all of which it intends to open stores). Eastern Europe is a growth market for agricultural equipment as historically the region has underutilized mechanization for crop production enhancement. CNH has directed much of its attention toward growing in this region and will likely be a source for directing further potential acquisition targets toward Titan.


We are encouraged to see insider interests well aligned with the company’s success. Insiders combined own about 20% of the company’s shares with the Chairman and CEO David Mayer controlling 13%. Thus, it is clear that the interest of insiders and shareholders are well aligned with a common goal of maximizing shareholder value.

INVESTMENT RISK


Titan’s primary source of income is from the sale of agriculture and construction equipment pursuant to agreements to act as an authorized dealer for CNH. Hence the company relies on the success of its supplier and the renewal of these agreements. CNH must continue to provide competitive prices and quality products while Titan must continue to maintain certain performance metrics to ensure dealership agreements are renewed upon any expiry.


The company serves a select few industry sectors and is dependent on the health of these industries. For example, the majority of CNH dealership sales are derived from the agricultural sector. Consequently, grain and livestock prices, weather conditions that effect crop production, borrowing rates, grain disease, and customer confidence have an impact on demand for equipment, parts and service. As well, the retail farm equipment industry is very competitive with Titan competing against neighbouring CNH dealerships, as well as dealers of John Deere, AGCO, and Kubota.

Foreign currency and operations

Although it reports in U.S. dollars, Titan is exposed to some foreign currency risk through its operations in Eastern Europe. Fluctuations in the exchange rate will impact how foreign operations are reported in the company’s financial statements. As well, an appreciating U.S. dollar typically increases pricing to European customers thereby having an adverse impact on the volume of sales. Finally, operating in lesser developed nations inherently carries a higher degree of operating risk.




Titan has seen a retrenchment in its EPS after a peak of $2.18 in FY2012 (January 31 year-end). Last year, performance tapered off slightly to $2.00 in EPS with the onset of drought across the U.S. dimming farmer sentiment, the start-up cost of international expansion and a sluggish recovery in the economy negatively impacting the construction segment. This year financial performance has been even worse. While the majority of the United States have enjoyed favourable growing conditions (with the Eastern Corn Belt driving overall high production yields), the weather across Titan’s footprint has been unfavourable (recent hot and dry conditions are stressing crop production). At the same time, crop prices have declined dramatically versus a year ago thus hurting farmer income. As well, used inventory levels in the industry have been high which has compressed margins on used sales. However, as these forces dissipate and as the company continues to grow (both organically and via acquisition) we expect earnings growth to resume. We forecast EPS improving from an estimated $1.33 in FY2014 (guidance of $1.20 to $1.50) to $1.64 in FY2015 excluding acquisitions. Notably, the company has a long-term pre-tax margin objective of 6% which would nearly triple earnings on the current revenue base if achieved.

Exhibit H6. Titan Machinery Long-term Financial Objectives


VALUATION

Titan shares currently trade roughly in-line with CNH and at a premium to the overall peer group. The company’s current EV/EBITDA multiple is 10.7× against our estimates for FY2015 (essentially CY2014). CNH trades similarly while the closest comparable, Rocky Mountain, trades at 7.8×. The overall heavy equipment peer group in the U.S. trades at an average EV/EBITDA of 9.5× while the Canadian peer group trades at a more modest 7.3×.

RECOMMENDATION

We are initiating coverage of Titan Machinery Inc. with a HOLD recommendation and a one-year price target of $18.75 per share. Our target is based on an 11× EV/EBITDA multiple against our FY2015 estimates which values Titan roughly in-line with its OEM counterpart (CNHI-NYSE) yet at a premium to its closest dealership peers (RME-TSX and CVL-TSX) due to its greater revenue scale.



Exhibit H7. Titan Machinery Board of Directors


David Meyer

Chairman & CEO


John Bode (1)

Director 2005 John Bode is a retired partner of KPMG, LLP with over 34 years of experience in public accounting. He was elected to the partnership in 1981 and retired in 2005. Mr. Bode was the lead audit partner for numerous clients in the consumer products, food, agribusiness and manufacturing industries. He also currently serves on the board of The Valspar Corporation.

Tony Christianson

Director 2003 Tony Christianson is a founder of Titan Machinery LLC. Since 1981, Mr. Christianson has been the Chairman of Cherry Tree Companies, an affiliated group of investment banking, venture capital and asset management firms in Minneapolis. Mr. Christianson has been a director of numerous public and private companies over his career and is currently a director of Dolan Media Company, Fair Isaac Corporation, Peoples Educational Holdings, Inc. and Ameripride Services.

Stan Dardis (2,3)

Director 2010 From 1998 to 2010, Mr. Dardis served as Chief Executive Officer and Director of Bremer Financial Corporation, a bank holding company composed of nine bank subsidiaries, a trust company, and an insurance company, headquartered in St. Paul, Minnesota. During his tenure as CEO, Bremer Financial Corporation delivered strong asset growth, net income growth, and return on equity that resulted in significant improvements in peer group ranking. From 1995 to 1998, he served as Bremer Financial Corporation's President and Chief Operating Officer, and prior to that, he was the Company's Executive Vice President—Retail Banking. From 1986 to 1993, Mr. Dardis held positions of increasing responsibility at Metropolitan Federal Bank, including serving as President, Chief Executive Officer, and Director from 1990 to 1993. Mr. Dardis also served as a member of the Office of the Chairman of Metropolitan Financial Corporation from 1990 to 1993. Metropolitan Financial Corporation was sold and merged into U.S. Bank. From 1982 to 1986, he served as Executive Vice President of Norwest Bank. Mr. Dardis served in the United States Air Force as a pilot and instructor pilot from 1971 to 1975. He received a B.S. from North Dakota State University and is a graduate of the University of Wisconsin Graduate School of Banking.

James Irwin (2.3)

Director 2005 Mr. Irwin is a former vice president of Case IH’s North American Agricultural Business, with over 40 years of experience in various executive positions in CNH prior to his retirement in January 2005. Mr. Irwin helped manage the mergers and buyouts of International Harvester and New Holland. Mr. Irwin was recently named the 2005 Agribusiness Leader of the Year by the National Agri-Marketing Association.

James Williams (1.3)

Director 2003 Mr. Williams is currently Chairman of First State Bank of North Dakota and Goose River Bank. Since 1972, he has been an owner of Arthur Mercantile Company, a farm equipment dealership which was acquired by the Company in fiscal year 2010. Since 1998, Mr. Williams has also served as the president of Valley Equipment, Inc., a farm equipment dealership which was also acquired by Titan in 2010. Mr. Williams is managing partner of Williams Farms in Arthur, North Dakota. He previously worked at Bank of New York.

Theodore Wright (1,2)

Director 2009 Since February 2011, Mr. Wright has served as Chief Executive Officer of Conn's, Inc., a specialty retailer of home appliances, consumer electronics, computers, furniture and mattresses, and lawn and garden products. Mr. Wright has served as the Chairman of the Board of Conn's, Inc. since December 2010, and has served as a director of Conn's, Inc. since 2003. Mr. Wright served as President of Sonic Automotive, Inc., a New York Stock Exchange listed and Fortune 300 automotive retailer, from 2002 to 2004, and he served as Chief Financial Officer at Sonic Automotive from its formation in 1997 to 2002. From 1997 to 2004, Sonic Automotive acquired and integrated into its operations over 150 automotive dealerships. During his tenure at Sonic Automotive, Mr. Wright was a member of the company's Board of Directors. From 1995 to 1997, Mr. Wright was a Senior Manager in Deloitte & Touche LLP's Columbia, South Carolina office. From 1994 to 1995, Mr. Wright was a Senior Manager in Deloitte & Touche LLP's National Office Accounting Research and SEC Services Department. Mr. Wright is the principal owner of a construction and agriculture equipment rental business, and he owns and operates a farm and ranch on 11,500 acres in Central Montana.



(3) Member of the Governance Committee. Source: Company documents



Exhibit H8. Titan Machinery Senior Management


David Meyer Chief Executive Officer & Chairman Mr. Meyer was a founder of the Company in 1980 and has been a director of the Company since its creation. From 1976 to 1980, Mr. Meyer was a partner in a Case and New Holland dealership with locations in Lisbon (started in 1977) and Wahpeton, North Dakota.

Peter Christianson Chief Operating Officer Peter Christianson has been the company’s President and a director since January 2003 and its Chief Operating Officer since April 2011, and was its Chief Financial Officer from August 2007 to April 2011. Prior to joining Titan and since 1988, he was a partner and owner of Fargo Farm Power, Inc., the operator of two of the dealership locations acquired by Titan Machinery LLC in 2002. Peter Christianson and Tony Christianson, one of Titan’s directors, are brothers.

Mark Kalvoda Chief Financial Officer Mark Kalvoda has been Titan’s Chief Financial Officer since April, 2011. He joined Titan Machinery in September 2007 as Chief Accounting Officer. Prior to joining the Company, he held various positions between 2004 and 2007 at American Crystal Sugar Co., including Corporate Controller, Assistant Secretary and Assistant Treasurer. Prior to working for American Crystal Sugar Co., he served in various financial positions within Hormel Foods Corporation.

Ted Christianson VP, Finance & Treasurer Ted Christianson has been Titan’s Vice President, Finance and Treasurer since August 2007 and was previously the Company’s Chief Financial Officer from 2003 until August 2007. Mr. Christianson has spent over 15 years with startups and high growth companies in a variety of financial management roles, including as chief financial officer. Mr. Christianson was the full-time Managing Partner for Adam Smith Properties, a private real estate development company from 1997 to 2003. Mr. Christianson was formerly with US Bank (First Bank System).




Exhibit H9. Titan Machinery Income Statement (US$000’s)



Revenue

Equipment 855,443 1,303,900 1,763,877 1,861,306 1,954,371 2,052,089

Parts 140,982 201,404 242,368 263,507 276,682 290,516

Service 74,506 103,474 127,779 141,612 148,693 156,127

Rental and other 23,558 50,214 64,396 70,929 74,475 78,199

Total revenue 1,094,489 1,658,992 2,198,420 2,337,353 2,454,221 2,576,932

Cost of revenue

Equipment 773,060 1,171,618 1,600,233 1,695,943 1,768,706 1,857,141

Parts 100,281 140,096 169,164 183,759 193,678 203,362

Service 27,767 37,236 45,748 50,156 52,042 54,645

Rental and other 18,813 34,581 43,914 47,587 49,898 50,829

Total cost of sales 919,921 1,383,531 1,859,059 1,977,445 2,064,324 2,165,976

Gross profit 174,568 275,461 339,361 359,908 389,897 410,956


Operating expenses 130,541 193,860 247,557 285,279 292,411 299,721

Income from operations 44,027 81,601 91,804 74,629 97,486 111,234

Interest and other income 1,794 1,643 1,654 1,846 2,445 4,003

Interest expense (8,584) (9,670) (22,762) (29,222) (30,074) (29,510)

Income before income taxes 37,237 73,574 70,696 47,253 69,857 85,727

Provision for income taxes (14,895) (29,429) (28,137) (18,872) (27,943) (34,291)

Net income including noncontrolling interest 22,342 44,145 42,559 28,380 41,914 51,436

Less: net income (loss) attributable to NCI - (15) 86 (55) - -

Net income attributable to T itan Machinery Inc. 22,342 44,160 42,473 28,435 41,914 51,436

Net income available to common shareholders 22,110 43,751 42,030 28,140 41,495 50,922


Basic 1.25$ 2.21$ 2.02$ 1.34$ 1.97$ 2.41$

Diluted 1.23$ 2.18$ 2.00$ 1.33$ 1.95$ 2.40$


Basic 17,658 19,809 20,787 21,077 21,103 21,103

Diluted 17,961 20,110 20,987 21,226 21,252 21,252

EBITDA 54,431 98,091 116,218 101,210 126,184 139,955

EBITDA margin 5.0% 5.9% 5.3% 4.3% 5.1% 5.4%



Exhibit H10. Titan Machinery Balance Sheet (US$000’s)



ASSETS

CURRENT ASSETS

Cash 76,112 79,842 124,360 73,334 171,132 229,145

Receivables, net 44,945 82,518 121,786 176,951 136,346 143,163

Inventories 429,844 748,047 929,216 1,073,303 1,032,162 1,022,822

Prepaid expenses and other 1,003 2,108 8,178 7,666 5,734 6,017

Income tax receivable - 3,140 503 5,767 5,767 5,767

Deferred income taxes 3,247 5,370 8,357 8,411 8,411 8,411

Total current assets 555,151 921,025 1,192,400 1,345,432 1,359,552 1,415,325

INTANGIBLES AND OTHER ASSETS

Noncurrent parts inventories 2,405 2,792 3,507 4,865 4,865 4,865

Goodwill 18,391 24,404 30,633 30,959 30,959 30,959

Intangible assets, net of accumulated amortization 4,734 10,793 14,359 14,019 14,019 14,019

Other 2,793 2,776 8,534 7,894 7,894 7,894

Total intangibles and other assets 28,323 40,765 57,033 57,737 57,737 57,737

PROPERTY AND EQUIPMENT 65,372 126,282 194,641 238,776 239,529 239,154

TOTAL ASSETS 648,846 1,088,072 1,444,074 1,641,946 1,656,818 1,712,216

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILIT IES

Accounts payable 15,957 28,424 28,282 34,037 32,732 34,246

Floorplan notes payable 320,801 552,428 689,410 826,443 794,765 787,573

Current maturities of long-term debt 4,207 4,755 10,568 16,518 16,518 16,518

Customer deposits 28,180 49,540 46,775 35,060 36,813 38,654

Accrued expenses 16,816 26,735 29,590 34,037 32,732 34,246

Income tax payable 2,093 - 310 32 32 32

Total current liabilities 388,054 661,882 804,935 946,128 913,593 911,269

LONG-TERM LIABILIT IES

Senior convertible notes - - 125,666 127,252 127,252 127,252

Long-term debt, less current maturities 33,409 57,405 56,592 82,657 82,657 82,657


Other long-term liabilities 3,814 2,854 9,551 6,608 6,608 6,608

Total long-term liabilities 46,235 88,851 239,220 266,205 269,698 273,984

STOCKHOLDERS' EQUITY

Common stock - - - - - -

Additional paid-in-capital 140,466 218,156 236,521 238,712 240,712 242,712


Accumulated other comprehensive loss - (70) (735) (1,075) (1,075) (1,075)

Total T itan Machinery Inc. stockholders' equity 214,557 336,337 396,510 426,796 470,710 524,146

Noncontrolling interest - 1,002 3,409 2,817 2,817 2,817

Total stockholders' equity 214,557 337,339 399,919 429,613 473,527 526,963

TOTAL LIABILIT IES AND STOCKHOLDERS' EQUITY 648,846 1,088,072 1,444,074 1,641,946 1,656,818 1,712,216



Exhibit H11. Titan Machinery Statement of Cash Flows (US$000’s)




Net income including noncontrolling interest 22,342 44,145 42,559 28,380 41,914 51,436

Adjustments to reconcile net income to net cash used for operating activities



Stock-based compensation 1,157 1,368 1,630 1,932 2,000 2,000

Noncash interest expense 126 535 3,440 2,245 - -

Other (237) (233) (1,171) 404 - -

Net income adjusted for items not affecting cash 34,032 77,107 76,030 61,563 76,105 86,443

Changes in assets and liabilities

Receivables, prepaid expenses and other assets (19,873) (32,695) (41,598) (37,768) 42,538 (7,100)

Inventories (63,108) (261,597) (144,021) (186,064) 41,141 9,340

Floorplan notes payable (12,992) 4,195 (5,709) 116,116 (31,678) (7,192)

Accounts payable, customer deposits, accrued expenses and other long-term liabilities23,245 36,428 (2,739) (8,971) (856) 4,867

Income taxes 3,688 (5,623) 2,712 (5,540) - -

(69,040) (259,292) (191,355) (122,227) 51,144 (84)

Cash (used in) provided by operating activities (35,008) (182,185) (115,325) (60,664) 127,249 86,359


Rental fleet purchases (3,429) (2,642) (13,358) (432) - -

Property and equipment purchases (excluding rental fleet) (13,303) (18,780) (26,474) (29,413) (29,451) (28,346)

Net proceeds from sale of property and equipment 892 3,342 8,422 415 - -

Purchase of equipment dealerships, net of cash purchased (32,312) (48,448) (31,877) (4,848) - -

Other, net (296) (99) (825) 695 - -

Cash (used in) provided by investing activities (48,448) (66,627) (64,112) (33,583) (29,451) (28,346)


Proceeds from senior convertible notes offering, net of direct issuance costs - - 145,247 - - -

Proceeds from follow-on offering of comon stock - 74,898 - - - -

Net change in non-manufacturer floorplan notes payable 82,371 168,118 108,417 21,517 - -

Proceeds from long-term debt borrowings 23,259 37,832 113,967 31,113 - -

Principal payments on long-term debt (20,385) (30,067) (145,509) (9,105) - -

Proceeds from sale of subsidiary shares to noncontrolling interest holders - 802 2,464 - - -

Other, net (1,862) 990 (359) (196) - -

Cash (used in) provided by financing activities 83,383 252,573 224,227 43,329 - -

Effect of exchange rate changes on cash equivalents - (31) (272) (108) - -

Net change in cash and cash equivalents (73) 3,730 44,518 (51,026) 97,798 58,013



WesternOne Inc. October 28, 2013


WESTERNONE INC. Constructive growth ahead for this high yielding rental and construction play

INVESTMENT THESIS

WesternOne has achieved scale through acquisition and now operates two highly attractive business groups primarily serving the construction and infrastructure services sectors. As the company now turns its focus toward exploiting internal growth opportunities, we foresee revenue and earnings expansion sustaining the current dividend and prompting a higher share price.

VALUATION

We initiate coverage of WesternOne Inc. with a BUY recommendation and a one-year price target of $9.00 per share. Our target is based on a 7× EV/EBITDA multiple against our 2014 estimates which is toward the low end of its peer group given its relatively smaller size.

FOCUS POINTS

▪ WesternOne Rentals & Sales operates two business lines generating high ROI. The construction heat line offers an end-to-end package of services that generates high margins and promotes customer loyalty. The aerial equipment line generates steady construction related sales and dominates the high margin movie and TV market.

▪ The Britco modular construction group is winning big projects and is poised for more. It is now one of the largest modular construction companies in the industry and is diversified across three regions (Western Canada, Australia and Texas). Recent awards include a $100 million project for Devon Energy and $207 million build for Manitoba Hydro.

▪ Earnings are expanding and should fuel further share appreciation. Internally generated sales growth alongside operating leverage should improve the bottom line while generating sufficient cash flow to support the current high yielding dividend and pay down debt.

Recommendation: BUY

Symbol/Exchange: WEQ/TSX







Financial summary


Company profile: WesternOne Inc. is focused on acquiring and growing businesses in the construction and infrastructure services sectors. It currently has two principal business platforms: 1) Construction heat services and aerial equipment; and 2) Modular building construction and leasing.





Revenue ($M) 109$ 218$ 368$ 386$

EBITDA ($M) 23$ 45$ 56$ 61$

EPS ($) 1.21-$ 0.51-$ 0.36$ 0.52$

EV/EBITDA 13.5 7.9 7.2 6.6

P/E (6.8) (16.2) 22.8 15.8

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INTRODUCTION

We are initiating coverage of WesternOne Inc., an acquirer and operator of businesses primarily serving the construction and infrastructure services sectors. Initially focused on rounding out its rental and sales portfolio, the company has established an attractive footprint in Western Canada specializing in construction heat and aerial equipment. This group generates a high return on investment and is expected to grow as new locations are added and offerings are expanded. The newer and bigger Britco modular construction division has become one of the industry’s largest and is gaining momentum having been awarded two substantial workforce housing projects. The company is well positioned in Canada’s fast growing western provinces gaining access to hydroelectric dam, mining, pipelines, oil sands and natural gas work. Its newly acquired Australian presence enables it to further pursue mining related projects while its US footprint allows it to pursue shale oil and gas related ones. Accordingly, the runway for growth remains long and we envision earnings growth and cash flow continuing to sustain the company’s attractively high dividend while paying down debt. In our view the market is unduly discounting these favourable attributes as the stock currently trades at a significant discount versus its most relevant peer group.

We are initiating coverage of WesternOne with a BUY recommendation and a one-year price target of $9.00 per share. Our target is based on a 7× EV/EBITDA multiple against our 2014 estimates which values the company toward the lower end of the respective peer group given its smaller size. Valuing it in-line with the peer group would imply a target of around $12.00 per share which we believe is attainable with continued growth and execution.

Exhibit I1. WesternOne Current and Target Valuation Metrics




Target $9.00 1.7x 8.3x NMF

Current $8.25 1.6x 7.9x NMF



Target $9.00 1.1x 7.5x 24.9x

Current $8.25 1.1x 7.2x 22.8x



Target $9.00 1.1x 6.9x 17.3x

Current $8.25 1.0x 6.6x 15.8x



COMPANY DESCRIPTION

WesternOne was established in 2006 to seek out and acquire predominantly privately owned businesses located primarily in the Western Canadian provinces (B.C., Alberta and Saskatchewan). In the form of an income trust, it completed an IPO on the TSX Venture Exchange in August 2006 raising $26 million in gross proceeds at a price of $3.50 per unit. These proceeds were fully utilized to acquire a production equipment rentals company in Port Coquitlam, British Columbia, that specialized in renting, selling and servicing quality high reach and material handling equipment. Over the next couple of years, the company acquired three more rental businesses using cash, debt and shares before graduating to the TSX main board in September 2008. Later that year it acquired a propane and heater service business and then rounded out its rental portfolio with two more acquisitions through 2010. It then entered the modular construction business via a $100 million acquisition of Britco Group in June 2011. It added a minority interest (44.55%) in another modular manufacturing business in Texas later that year. Further expanding its Britco footprint, WesternOne acquired 80% of the modular building construction business of APB Holding Australia in a transaction valued at A$27.6 million net of a related divestiture. It was converted back to a corporation in January of this year.

The company’s footprint now spans three areas of the world. WesternOne Rentals & Sales operates in Western Canada. Britco similarly operates in the western provinces, as well as Australia and Texas. The company employs over 1,000 workers and maintains a head office in Vancouver, BC. Around 69% of revenue is derived in Canada, 24% in Australia and 7% in the United States.

Exhibit I2. WesternOne Footprint


WesternOne Rentals & Sales (WRS) employs 275 workers and has 16 locations serving BC and Alberta across all major markets. The business specializes in providing (i) construction heat and related services; and (ii) aerial equipment for construction, television and movie production. Trailing twelve month revenue for this group is $68 million producing EBITDA of $24 million. Around 45% of revenue is derived from aerial equipment, 44% from construction heating and climate control, and the remaining 11% from general construction.



Exhibit I3. WesternOne Rental & Sales – Products and Services


Britco operates 10 manufacturing facilities with three in Western Canada, one in Texas and six in Australia. It specializes in modular building construction and leasing and has one of the largest fleets with over 1,300 office complexes, construction site offices and storage containers in Western Canada. Britco provides modular workforce housing units to customers in the infrastructure and resource sectors. As well, it offers temporary modular building solutions for classrooms, health care facilities, switch rooms, offices, hotels, resorts and special purpose housing. Trailing twelve month revenue for this group is $221 million producing EBITDA of $31 million. Around 76% of revenue is derived from modular manufacturing, 20% from site servicing and the remaining 4% from space leasing.

Exhibit I4. Britco – Products and Services





WesternOne is diversified in desirable regions and end markets

The company derives over two-thirds of its revenue from Canada’s western provinces, which lead the nation in growth. It has exposure to attractive end markets including construction and infrastructure which accounts for over half of sales. Notably, Canada has a need to address a massive $130 billion infrastructure deficit that is growing at a rate of $2 billion per year, which plays well into WesternOne’s hand. As well, the oil & gas market accounts for a quarter of the company’s revenue and has been a key sector driving both the Canadian economy and the state of Texas. It also has exposure to mining in both Canada and Australia. While capital investment in the mining sector has seen a lull recently, it is expected to play an important role as the global economy continues to expand. Longer term, WesternOne is well positioned to benefit from the advancement of liquefied natural gas (LNG) mega-projects proposed in Canada and ongoing in Australia. Three major projects in Canada alone envision a capital investment upwards of $75 billion.

Exhibit I5. WesternOne End Markets


The WRS business offers strong ROI and has room to grow

WesternOne Rental & Sales is a strong performing group. The company is well positioned in two business lines. The construction heat business offers customers a complete end-to-end package from equipment down to the key input (fuel). This provides customer cost efficiencies, reliability, ease and safety. In return, WesterOne achieves high margin on fuel sales, customer loyalty and better pricing. Its aerial equipment business is particularly dominant in the movie and television market. WesternOne is able to address this market’s demanding need for service and reliability, thus earning it a greater return. WRS as a whole has been growing organically and is now achieving 40% gross margins. The company is investing in adding new locations and growing its equipment inventory to further drive sales internally.

Britco has established itself as one of the largest in its sector

Before acquired by WesternOne in 2011, Britco was involved in major projects including the build-out of the athletes’ village for the 2010 Olympic Games. It was selected as best modular building in North America in 2011 and 2012. It has been growing rapidly since being acquired in mid-2011. This growth has come organically in Canada and via acquisitions in Texas and Australia. As a result, Britco is now one of the largest modular construction companies in the

Consolidated End Market WRS End Market Britco End market

Oil & Gas

25%

Construction

&

Infastructure52%

Mining

20%

Other

3%

Commercial Construction

& Infrastructure

52%

Residential Construction

24%

Government, Ag &

Industrial16%

Film Production

8%

Oil & Gas31%

Construction

&

Infastructure44%

Mining25%



industry. It has transitioned from being a small regional player into a sizeable global one. Britco is known for providing high-end customizable workforce housing solutions for its customers and for its deliverability. The group is benefitting from an employer trend toward higher end housing in order to attract employees where there are tight labour markets (i.e. Alberta).

Two major contract wins of late may be just the start of a trend

On December 20, 2012, WesternOne announced that its Britco division had executed a contract to design and build the first phase of 2,000 room workforce accommodation complex for Manitoba Hydro’s $6.2 billion Keeyask Generating Station Project. Phase 1 involves 500 dorm rooms and will be complete by mid-2104 at which time regulatory approval is expected for the second phase. The two phases are valued at over $200 million and very plausibly could be expanded to $300 million. More recently, Britco was awarded a $100 million workforce housing project for Devon Energy in Northern Alberta. This work is now commencing and is scheduled for completion by year-end 2015.

WEQ has been built on acquisitions and in time will acquire more

Since inception, WesternOne has delivered on its intent to acquire businesses that can capitalize on strong economic trends in Western Canada, driven by oil and gas development, and the mining, shipyard and film industries. These trends are creating strong demand for its products and services in equipment rentals, construction, and workforce housing. Accordingly, the company continues to review acquisition prospects that directly benefit from these trends and which are complementary to existing business or which offer entry into new profitable niches.

Organic growth is today’s focus and will bring higher earnings

Notwithstanding, WesternOne’s success in acquiring, critical mass has now been achieved and the company is mostly committed to growing organically. As discussed, WRS is intent on adding locations and rental inventory while Britco pursues the award of more large projects. Operating leverage should allow the bottom line to outpace the top line. Notably, while the gross margin at Britco has been 20% recently, the contribution margin is expected to be in the range of 30% to 35%.

Cash flow supports the dividend and debt repayment in our view

The company’s earnings picture is largely distorted by its investment in growth. For example, WesternOne must amortize intangible such as those related to acquisitions. As well, equipment added to its rental fleet is often depreciated quicker than it intrinsically depletes its value. In our view, the more meaningful measure to track is distributable cash generated. This shows that WesternOne’s dividend payout ratio is low at around 43% of distributable cash. Hence the dividend appears very sustainable and excess cash can go toward reducing the company’s debt.



INVESTMENT RISK

Business cyclicality and competition

The company primarily serves a select few industry sectors and is dependent on the health of these industries. For example, the Western Canadian economy is largely dependent on the oil and gas sector. Consequently, related commodity prices, surrounding weather conditions, the status of proposed mega-projects (like LNG), borrowing rates, and customer confidence have an impact on demand for its products and services. As well, the industries in which WesternOne operates are very competitive. For example, WRS competes against companies like United Rentals and Hertz while Britco competes against the likes of ATCO, Horizon North, PTI Group, Black Diamond and Shelter Industries.

Foreign currency

Although it reports in Canadian dollars, WesternOne is exposed to some foreign currency risk. WRS has a minor risk related to the U.S. dollar as the majority of equipment purchases are denominated in that currency. Furthermore, a portion of its business relates to equipment rental in the television and film production industry in B.C. which is sensitive to the U.S. dollar currency fluctuations. Britco is exposed to foreign currency risk based on its foreign operations, mainly Australia. The results of this foreign entity are consolidated in the company’s financial statements and reported in Canadian dollars.

Relatively high amount of debt which has funded acquisitions

WesternOne has a relatively high amount of debt which has been amassed in order to execute past acquisitions. Net debt to capital is at 0.78:1 while net debt to trailing-twelve-month EBITDA is at 3.5:1. While we believe WesternOne can comfortably service this debt, there is a risk that some or all of the debt may not rollover on favourable terms or that a significant economic downturn could cause the company to become distressed.


For reporting purposes, WesternOne provides segmented results for each division; WRS and Britco. In 2012, consolidated revenue grew 99% primarily due to the acquisition of Britco and the related U.S. manufacturing facility. However, both WRS and Britco contributed significant organic growth. EBITDA similarly almost doubled and grew 56% on a per share basis. Year-to-date, revenue has grown 65% mostly as a result of the Britco acquisition in Australia, as well as organic growth in both divisions. We expect the back half of the year to be similarly strong resulting demonstrable improvement in EPS from a loss of $0.51 in 2012 to a positive $0.36 in 2013. We model a conservative 5% lift to sales in 2014 (leaving room for upside from the award of any new large projects) with a further improvement in EPS to $0.52.



VALUATION

WEQ shares currently trade at a discount to its respective peer group. The current EV/EBITDA multiple is 7.2×/6.6× against our 2013/2014 estimates while the Canadian peer group trades at 8.4×/7.3× and the U.S. comparables are at 10.3×/9.5×. While a discount may be warranted given WesternOne’s relatively smaller size and higher debt, we expect the discount to narrow as the company grows and the balance sheet improves.

RECOMMENDATION

We are initiating coverage of WesternOne Inc. with a BUY recommendation and a one-year price target of $9.00 per share. Our target is based on a 7× EV/EBITDA multiple against our 2014 estimates which values the company toward the lower end of the respective peer group given its smaller size. Valuing it in-line with the peer group would imply a target of around $12.00 per share which we believe is attainable with continued growth and execution.



Exhibit I6. WesternOne Board of Directors


Robert King (1,2,3) B.C., Canada

Chairman & Interim CEO


Douglas Scott (1,2,3) B.C., Canada

Director 2006 Mr. Scott is currently a financial consultant who has been advising companies in Canada for over 30 years. Previously, Mr. Scott served as the Chief Financial Officer of First Majestic Resources Corp. and First Silver Reserve Inc. Mr. Scott was Vice President and Chief Financial Officer of Coast Wholesale Appliances Income Fund and its predecessor from 2003-2005, and was instrumental in its initial public offering of 2005. In addition, Mr. Scott was a Partner with FinancExec Associates, working primarily in the roles of director and chief financial officer for a number of large to medium-sized public and private companies. Mr. Scott has a Bachelor of Commerce Degree with Distinction from the University of Alberta and is a Chartered Accountant.

Stephen Evans (1) B.C., Canada

Director 2006 Mr. Evans is Managing Director and co-founder of Sunstone Realty Advisors Inc. and its related companies. Mr. Evans is a Co-founder and Co-CEO of Pure Industrial Real Estate Trust (TSX: AAR.UN) and CEO of Pure Multi-Family REIT LP (TSX-V: RUF.U). Mr Evans is also an independent trustee of Huntingdon REIT whose shares are listed for trading on the TSX Exchange.

Rick Turner (1,2,3) B.C., Canada

Director 2006 Since 1995, Richard Turner has served as the President and Chief Executive Officer of TitanStar Investment Group Inc., a private company engaged in the provision of private equity capital to midmarket businesses and capital for real estate developments and acquisitions. His current board positions include Board Chair and Trustee of Pure Industrial Real Estate Investment Trust; Director of WesternOne; Board Chair, President and Chief Executive Officer of DVPC Inc., a Capital Pool Corporation; Director of Vancouver Fraser Port Authority; and Director of Sora Group Wealth Advisors Inc. Mr. Turner is also a Director of the Organizing Committee of the Vancouver 2010 Olympic and Paralympic Winter Games (VANOC) and serves as Chair of the Audit Committee; Governor of the B.C. Business Council; a past Board Chair and Director of the Insurance Corporation of BC; and past Chair and Governor of the Vancouver Board of Trade. From 1988 to 2005, Mr. Turner served as Director, President and Chief Executive Officer of the operating subsidiary of IAT Air Cargo Facilities Income Fund, a business which is involved in the development and management of real estate at airports. Mr. Turner also served as Board Chair and Director of the British Columbia Lottery Corporation from 2001 to 2005. Mr. Turner served as Trustee of Sun Gro Horticultural Income Fund from 2002 to 2009 and as Trustee of Sunrise Senior Living REIT from 2004 – 2007. Mr. Turner holds a Bachelor of Commerce in Finance from the University of British Columbia and is a Member of the Institute of Corporate Directors.

Stockwell Day B.C., Canada

Director 2013 From 1986 to 2000, Stockwell Day represented Red Deer North in the Alberta Legislature, where he served in the Progressive Conservative Government in a variety of senior roles, including Chief Whip, Government House Leader, Minister of Labour and Minister of Social Services. From 1997 to 2000 he was Provincial Treasurer (Minister of Finance) and Acting Premier. In 2000 Stockwell Day won the leadership of the Canadian Alliance and became Leader of Canada’s Official Opposition. In 2002, Stockwell Day was appointed Foreign Affairs critic, Vice-Chair of the Standing Committee on Foreign Affairs and International Trade, as well as Chair of the Subcommittee on Human Rights. In 2006 Stockwell Day was appointed Minister of Public Safety and member of the Cabinet Committee on Priorities and Planning. Upon his re-election in 2008, Stockwell Day was appointed Minister of International Trade and Minister for the Asia-Pacific Gateway and Regional Minister for British Columbia, advancing the economic and trade interests of BC. He was also appointed Chair of the Cabinet Committee on Afghanistan. In 2010 Stockwell Day was appointed President of the Treasury Board. He did not seek re-election in the 2011 general election. Stockwell Day is a Senior Strategic Advisor for McMillan LLP and serves on the boards of Telus, the Johns Hopkins University Atlantic Basin Policy Institute, the Eminata Group, RCI Capital, the International Federation of Christians and Jews, the Canada-India Business Council, the Canada-China Business Council (Vice-Chair), and the Council on Jewish and Israel affairs. Stockwell Day has received an Honorary Doctorate of Laws from Trinity Western University, in Langley, British Columbia, and an Honorary Doctorate from St. Petersburg University, Russia.

(1) Member of the Audit Committee. (2) Member of the Compensation Committee. (3) Member of Nominating and Governance Committee.




Exhibit I7. WesternOne Senior Management


Robert King Interim CEO & Chairman Mr. King is President of King Pacific Capital Corporation, a financial services company involved in mortgage finance and real estate investment. Mr. King is also a principal of Westbridge Capital Group, a full-service commercial mortgage brokerage company. Since March 2006, Mr. King has served on the Board of Directors of Wall Financial Corporation, a real estate investment and development company whose shares are listed for trading on the Toronto Stock Exchange. Mr. King is a Trustee of Pure Industrial Real Estate Trust (TSX: AAR.UN), and a Director of Pure Multi-Family REIT LP (TSX-V: RUF.U). Mr. King earned his MBA from Dalhousie University in 1992 and a Bachelor of Arts from the University of British Columbia in 1989.

Carlos Yam Chief Financial Officer Mr. Yam is a Chartered Accountant (British Columbia) and a Certified Public Accountant (Illinois). In 2003, Mr. Yam joined Intrawest ULC (formerly Intrawest Corp.) and from 2004 to 2007 was Director of Financial Planning with Intrawest Placemaking, the resort real estate development division. Prior to this, Mr. Yam worked in the Financial Advisory Services Department of PricewaterhouseCoopers in Vancouver. His experience included working with public companies and private businesses to perform acquisition, divestiture, refinancing, forensic and litigation support related services.

Geoff Shorten Chief Operating Officer Mr. Shorten joined WesternOne on February 19, 2008 in conjunction with WesternOne’s acquisition of Deerfoot Equipment Rentals located in Calgary, Alberta. In June 2008, Mr. Shorten expanded Deerfoot Equipment Rentals into Lethbridge, Alberta, and was instrumental in completing WesternOne Equity’s recent acquisitions, including SureFire Propane Ltd. and Davis Heater Service Ltd.

Mike Ridley President of Britco Mr. Ridley joined Britco in 1997 and has held several key positions with the company including General Manager of its Leasing Division and Vice President of Sales before becoming President in 2011. He has been instrumental in driving Britco’s growth and expansion through strategic acquisitions in Western Canada, the United States and Australia. Prior to joining Britco, he was an account executive in the lease financing divisions of AT&T Capital and GE Capital. Mr. Ridley graduated from the University of Toronto with a Bachelor of Arts in Business in 1986. Mr. Ridley is a Past President of the Modular Building Institute and sits on the Board of Directors of the Independent Construction and Businesses Association and is a member of its Executive Committee.




Exhibit I8. WesternOne Income Statement ($000’s)



Revenue 48,173 109,432 217,793 367,752 386,084 405,388

Cost of sales 33,186 76,627 154,118 280,192 293,424 308,095

Gain on sale of property and equipment 280 1,300 3,359 3,447 3,500 3,500

Gross profit 15,267 34,105 67,034 91,006 96,160 100,793


Operating expenses:

General and administration 14,678 26,731 40,106 60,475 62,289 64,158

Business acquisition costs 431 1,010 4,079 798 - -

15,109 27,741 44,185 61,273 62,289 64,158

Other expenses:

Finance costs 4,680 17,525 27,466 15,620 15,922 15,922

Other 11,858 9,996 - 2,369 - -

16,538 27,521 27,466 17,989 15,922 15,922

Income (loss) before income taxes (16,380) (21,157) (4,617) 11,744 17,949 20,713

Income tax expense 1,313 1,242 (4,477) (2,704) (5,385) (6,214)

Net income (loss) (15,067) (19,915) (9,094) 9,040 12,564 14,499

Net income as a percentage of sales -31.3% -18.2% -4.2% 2.5% 3.3% 3.6%

Net income (loss) attributable to:

Shareholders (15,067) (19,523) (10,273) 8,866 12,564 14,499

Non-controlling interest - (349) 1,108 174 - -

Total (15,067) (19,872) (9,165) 9,040 12,564 14,499

Earnings per share

Basic earnings per share (1.08)$ (1.21)$ (0.51)$ 0.37$ 0.52$ 0.60$

Diluted earnings per share (1.08)$ (1.21)$ (0.51)$ 0.36$ 0.52$ 0.60$


Basic 13,996 16,133 20,210 24,398 24,102 24,102

Diluted 13,996 16,133 20,210 25,002 24,102 24,102

EBITDA (net of share based compensation) 15,220 23,214 45,195 55,554 60,897 65,012

EBITDA margin 31.6% 21.2% 20.8% 15.1% 15.8% 16.0%



Exhibit I9. WesternOne Balance Sheet ($000’s)



Assets

Current assets


Accounts receivable 9,476 18,219 28,685 46,024 48,260 50,673

Inventories 2,059 14,960 8,505 11,659 12,226 12,837

Construction contract assets - - 15,649 23,319 24,452 25,675

Deposits and prepaid expenses 576 1,630 1,577 3,591 3,591 3,591

16,103 47,850 60,076 119,394 120,231 123,336

Non-current assets

Property and equipment 35,672 59,439 78,044 82,782 82,782 82,782

Intangible assets 22,332 49,540 44,753 70,350 70,350 70,350

Goodwill 9,493 46,466 48,185 56,259 56,259 56,259

Deferred income taxes - 9,111 4,742 3,815 3,815 3,815

Other assets 7,868 - 450 655 655 655

75,365 164,556 176,174 213,861 213,861 213,861

Total assets 91,468 212,406 236,250 333,255 334,092 337,197

Liabilities

Current liabilities

Operating loans 2,608 2,456 5,966 9,991 9,991 9,991

Accounts payable and accrued liabilities 4,008 16,032 22,306 42,730 44,464 46,532

Dividends and distributions payable 694 912 1,075 1,205 1,205 1,205

Capital and acquisition loans 30,445 60,098 75,187 89,786 89,786 89,786

Income tax payable - - 1,746 2,984 2,984 2,984

Other current liabilities 10,745 1,350 1,268 2,577 2,577 2,577

48,500 80,848 107,548 149,273 151,007 153,075


2010 Debentures 27,876 27,143 11,171 4,831 4,831 4,831

2011 Debentures - 84,956 74,483 65,791 65,791 65,791

2013 Debentures - - - 46,377 46,377 46,377

Exchangeable Units and Fund Units 45,987 748 - - - -

Finance lease obligation 570 825 1,924 - - -

Unit based compensation 207 1,426 - - - -

Other long-term liabilities 306 1,089 753 7,352 7,352 7,352

74,946 116,187 88,331 124,351 124,351 124,351



Common shares or units - 71,476 97,803 117,813 117,813 117,813

Contributed surplus - - 600 1,175 2,175 3,175

Non-controlling interest - 646 1,902 3,522 3,522 3,522

Foreign currency translation reserve - 43 (28) 2,378 2,378 2,378

Equity component of debentures - - 17,313 17,371 17,371 17,371

Accumulated deficit (31,978) (56,794) (77,219) (82,629) (84,526) (84,487)

Total Shareholders' Equity (31,978) 15,371 40,371 59,630 58,733 59,772




Exhibit I10. WesternOne Statement of Cash Flows ($000’s)




Net earnings (loss) (15,067) (19,915) (9,094) 9,040 12,564 14,499

Items not affecting cash:

Amortization of tangible and intangible assets 12,899 15,601 18,981 25,867 27,026 28,377

Interest expense relating to amortization (104) 360 277 533 - -

Deferred income tax expense (recoveries) (1,313) (1,242) 2,731 (1,502) - -

Share-based compensation 111 1,276 1,957 611 1,000 1,000

Increase in fair value of Debentures and exchangeable units 497 8,588 16,381 606 - -

Gain on sale of property and equipment (280) (1,300) (3,216) (3,447) (3,500) (3,500)

Debenture issuance costs 1,733 4,885 - 2,369 - -

Finance costs 4,241 8,467 10,622 14,288 15,922 15,922

Impairment of assets and other 2,157 561 - - - -

Distributions 8,399 4,550 - - - -

13,273 21,831 38,639 48,366 53,012 56,298

Changes in non-cash working capital balances:

Accounts receivable (2,540) 2,338 (10,914) (7,740) (2,236) (2,413)

Inventories (297) (7,537) (8,175) (591) (1,699) (1,834)

Deposits and prepaids (3) (491) 151 92 - -

Accounts payable and accrued liabilities 528 7,497 5,057 1,173 1,734 2,067

Other (9) 362 1,572 4,056 - -

(2,321) 2,169 (12,309) (3,010) (2,202) (2,179)

Net cash from operating activities 10,952 24,000 26,330 45,355 50,810 54,119


Purchase of property and equipment (8,185) (19,014) (35,651) (25,495) (27,026) (28,377)

Proceeds from the sale of property and equipment 2,080 4,199 8,286 5,954 3,500 3,500

Business acquisition and other (14,575) (99,937) (2,337) (36,841) - -

Net cash used in investing activities (20,680) (114,752) (29,702) (56,382) (23,526) (24,877)


Shares and units issued for cash, net of expenses - 4,971 - - - -

Debentures issued for cash, net of expenses 25,867 81,365 - 49,108 - -

Dividends and distributions paid (8,396) (9,583) (12,046) (14,128) (14,461) (14,461)

Interest received 47 110 186 193 - -

Interest paid (4,291) (8,577) (10,808) (14,758) (15,922) (15,922)

Proceeds from option exercise - 148 591 478 - -

Investment from non-controlling interest - 995 148 1,446 - -

Repayment of Series A Debentures - (306) - - - -

(Repayment of) proceeds on term mortgage - (18) (310) - - -

(Repayment) advance from loans (1,577) 30,696 18,230 17,828 - -

Net cash (used in) from financing activities 11,650 99,801 (4,009) 40,167 (30,383) (30,383)

Increase in cash and cash equivalents 1,922 9,049 (7,381) 29,140 (3,099) (1,141)



Wajax Corporation October 28, 2013


WAJAX CORPORATION A well-diversified industrial equipment company with a high yielding dividend

INVESTMENT THESIS

Wajax Corporation is one of Canada’s largest multi-line industrial equipment dealers. In our opinion, it is as a well-diversified heavy equipment play offering a high yielding and sustainable dividend. However, the stock appears appropriately valued versus its peers and we await a more compelling entry point.

VALUATION

We initiate coverage of Wajax Corporation with a HOLD recommendation and a one-year price target of $35.00 per share. Our target is based on an 8× EV/EBITDA multiple against our 2014 estimates which values it in-line with our target valuation for its closest peers, Finning (FTT/TSX) and Toromont Industries (TIH/TSX).

FOCUS POINTS

▪ Wajax has a well-rounded equipment catalog comprised of strong brands. Predominantly a Hitachi dealer, JCB rounds out its construction offering while Hyster-Yale and Terex brands gain access to material handling and crane markets.

▪ The business is well diversified geographically and across several industries. The company has three distinct divisions serving a multitude of sectors and a footprint spanning most of Canada.

▪ Its recurring revenue component appears to be the highest among its peer group. Roughly 60% of sales are in the form of parts, service and rentals and only 40% from the sale of equipment. Each peer is more than 50% weighted in equipment sales.

▪ The dividend is attractive and should grow along with earnings. Shares offer a 6.6% dividend yield. This implies a 78% payout ratio against our forward earnings estimate while the company aims to maintain a 75% payout ratio.


Symbol/Exchange: WJX/TSX







Financial summary


Company profile: Wajax is a leading Canadian multi-line distributor engaged in the sale and after-sale parts and service support of equipment, power systems and industrial components, through a network of over 100 branches across Canada.





Revenue ($M) 1,377$ 1,466$ 1,403$ 1,445$

EBITDA ($M) 106$ 112$ 93$ 100$

EPS ($) 3.77$ 3.89$ 2.83$ 3.09$

EV/EBITDA 6.4 7.0 9.1 8.3

P/E 9.7 9.4 12.9 11.8

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INTRODUCTION

We are initiating coverage of Wajax Corporation, one of Canada’s top multi-line distributors of equipment, power systems and industrial components. Its primary Equipment group accounts for just over half of the company’s revenue and offers recognized brands including Hitachi, JCB, Hyster-Yale, Terex, Tigercat and others. The Power Systems and Industrial Components groups each account for nearly one quarter of revenue and round out the company’s portfolio. Accordingly, the consolidated entity is well diversified across product offerings. The company’s expansive footprint across Canada further enables it to serve a variety of industries. Hence, the company is not reliant on the success of any one particular region or customer base. Further mitigating risk, Wajax derives the majority of its revenue from recurring sources such as part, service and rentals. As such, it has a relatively stable earnings base that allows it to sustain a dividend with a high payout ratio. The dividend has room to grow alongside earnings as the company focuses on organic growth and pursues tuck-in acquisitions. While the dividend yield is higher than its direct peers, the stock trades at a small premium using a trading multiples methodology. Accordingly, we await a more compelling entry point before recommending accumulation of WJX shares.

We are initiating coverage of Wajax Corporation with a HOLD recommendation and a one-year price target of $35.00 per share. Our target is based on an 8× EV/EBITDA multiple against our 2014 estimates which values WJX shares roughly in-line with our target valuation for both Finning International (FTT/TSX) and Toromont Industries (TIH/TSX).

Exhibit 1. Wajax Current and Target Valuation Metrics




Target $35.00 0.5x 6.8x 9.0x

Current $36.60 0.5x 7.0x 9.4x



Target $35.00 0.6x 8.8x 12.3x

Current $36.60 0.6x 9.1x 12.9x



Target $35.00 0.6x 8.0x 11.3x

Current $36.60 0.6x 8.3x 11.8x



COMPANY DESCRIPTION

Wajax is a leading Canadian distributor engaged in the sale and after-sale parts and service support of equipment, power systems and industrial components, through a network of over 100 branches across Canada. The Corporation is a multi-line distributor and represents a number of leading worldwide manufacturers across its core businesses. Its customer base is diversified, spanning natural resources, construction, transportation, manufacturing, industrial processing and utilities.

Exhibit J2. Wajax Footprint


The company’s head office is located in Mississauga, Ontario, Canada. As of December 31, 2012, it had approximately 2,833 employees. Revenue is most heavily weighted toward the Equipment segment (roughly half) where the company obtains revenue from the sale of new and used equipment with auxiliary revenue coming from parts, service and rentals. The Power Systems and Industrial Components groups each account for about a quarter of the company’s revenue. Notably, the profit mix among the three groups is largely consistent with the revenue mix.

Exhibit J3. Wajax Revenue and EBIT Mix (2012)


Revenue Mix EBIT Mix

Equipment53%

Power Systems

23%

Industrial Components

24%

Equipment54%

Power Systems

25%Industrial

Components

21%



While the company can trace its roots back to 1858, the modern day Wajax began to take shape beginning in the 1950’s when it listed on the Montreal Stock Exchange, acquired its first mobile equipment subsidiary and changed its name to Wajax. It listed on the Toronto Stock Exchange in 1966 and diversified into Power Systems and Industrial Components through acquisitions made in the late 1960’s and 1970’s. Another notable development was in 1994 when it acquired the distribution rights for the Hitachi product line in Alberta and Saskatchewan. In 2005, Wajax Limited converted to an income trust (a preferred vehicle for tax purposes) and changed its name to Wajax Income Fund. However, the government subsequently mandated that these vehicles be converted back to a corporation and Wajax complied as of January 1, 2011.


Wajax represents strong brands including Hitachi

The company has partnered with many of the world’s leading industrial brands including Hitachi whose market share ranks eight in North America for construction equipment. Also notable, Wajax distributes Hyster-Yale materials handling equipment, Tigercat forestry equipment and Terex utility equipment, all highly recognizable and respected brands. More recently (November 2012), the company became the exclusive Canadian distributor of Bell articulated dump trucks, one of the world’s leading truck lines for construction, quarry and medium duty resource applications.

Exhibit J4. Wajax Brands


The company is well diversified geographically and by industry

Wajax’ product line covers a diverse spectrum of equipment serving an array of end markets across a broad footprint in Canada. In rough proportions, Western Canada and Eastern Canada each account for about half of the company’s revenue. On a consolidated basis, the largest industry served is construction. However, the company has exposure to many of Canada’s top sectors including natural resources (mining, oil sands, forestry, oil and gas). Wajax also has exposure to infrastructure spending such as transportation and utilities. Worth mentioning, Canada has a massive $130 billion infrastructure deficit that is growing at $2 billion per year.



Exhibit J5. Wajax Revenue by Market and Equipment Revenue Mix (2012)


Profit is heavily weighted toward recurring sources of revenue

Wajax derives almost 60% of its revenue from parts, service and rentals which are all largely recurring in nature. Only about 40% of its revenue comes from equipment sales, which compares favourably versus each of its peers including Finning (51%), Toromont (55%) and Strongco (65%). This slant has an even more calming effect on earnings as these categories typically earn higher margin. Accordingly, the company can remain quite profitable during an economic downturn, as well as better anticipate its earnings and manage its dividend.

Exhibit J6. Wajax Revenue Mix by Category (2012)


Organic initiatives and tuck-in acquisitions can help fuel growth

Within the Equipment group, growth priorities include growing its market share (focusing on construction and material handling), as well as expanding its mining business (through expanding infrastructure in Ontario and Eastern Canada). Within the Power Systems group, the company aims to expand its success in off-highway mechanical drive systems and establish Wajax as one of Canada’s leaders in commercial electric power generation. Its Industrial Components Group can expand its branch network (organically or through acquisition) and expand into engineering and repair service.

Equipment41%

Parts44%

Service13%

Rentals2%



The dividend is sustainable and should grow with earnings

The company is committed to maintaining a high return of capital to shareholders in the form of a dividend. While a soft year has caused the dividend to come down, we believe that the 2014 outlook suggests that it can be maintained at the current level of $2.40. As the company delivers upon its aforementioned growth initiatives, we expect the dividend will keep pace as the company maintains its targeted payout ratio on earnings at 75%.

INVESTMENT RISK


Wajax’s primary source of income is from the sale and servicing of equipment pursuant to agreements to act as an authorized dealer for Hitachi and others. Hence the company relies on the success of its suppliers and the renewal of these agreements. Suppliers must continue to provide competitive prices and quality products while Wajax must continue to maintain certain performance metrics to ensure dealership agreements are renewed upon any expiry.


The company serves a select few industry sectors and is dependent on the health of these industries. For example, Hitachi sales are typically derived from the construction and mining sectors. Consequently, the health of the economy, borrowing rates, commodity prices and customer confidence has an impact on demand for equipment, parts and service. As well, the construction equipment industry is very competitive with Hitachi competing against other brands including Caterpillar, John Deere, Komatsu, Case, Volvo and others. Wajax Power Systems competes with other major diesel engine distributors representing brands like Cummins and Caterpillar.


For reporting purposes, Wajax presents its results by division (Equipment, Power Systems and Industrial Components) and further breaks down revenue by product/service category (equipment, parts, service, rentals and other). Earnings have seen a continuous rise since the 2009 recession year, almost tripling on a pre-tax basis to a new high in 2012. However, 2013 is proving to be challenging as a result of a mining and oil & gas slowdown and the loss of LeTourneau distribution rights (after it was acquired by Joy Global). Accordingly, we expect EPS to dip from $3.89 in 2012 down to $2.83 in 2013 on lower revenue. Notably, the company is similarly guiding that earnings will decline versus 2012. We anticipate a resumption of sales growth in 2014 which should lead to improved earnings estimated at $3.09 per share.



VALUATION

WJX shares currently trade loosely in-line with the respective peer group. The current EV/EBITDA multiple is 9.1×/8.6× against our 2013/2014 estimates while the Canadian peer group trades at 8.4×/7.3× and the U.S. comparables are at 10.3×/9.5×. The most relevant peers are Finning (FTT), Toromont (TIH) and Strongco (SQP) which trade at 7.4×/6.8×, 8.4×/7.5× and 6.3×/5.8×, respectively. A premium versus Strongco is warranted given Wajax’s relatively bigger size and lower debt.

RECOMMENDATION

We are initiating coverage of Wajax Corporation with a HOLD recommendation and a one-year price target of $35.00 per share. Our target is based on an 8× EV/EBITDA multiple against our 2014 estimates which is in-line with how we value its closest peers, Finning and Toromont. Our target price implies a 6.9% dividend yield or a net return potential of 2% including downside to our target.



Exhibit J7. Wajax Board of Directors


Mark Foote Ontario, Canada

Director & CEO


Edward Barrett (1,2) New Brunswick, Canada

Director 2006 Mr. Barrett is Chairman and Co-Chief Executive Officer of Barrett Corporation, a private holding and management company with interests in wholesale distribution, automotive services and satellite/wireless communications. He is also Chairman of NB Power, an electric utility crown corporation and Atlantic Industries Limited, a private company that designs and fabricates corrugated steel products primarily for infrastructure applications. He is a director of NAV Canada, Canada’s civil air navigation services provider. Mr. Barrett holds a Bachelor of Arts degree from Acadia University and a Masters of Public Administration from Dalhousie University. He was inducted into the New Brunswick Business

Hall of Fame in 2010.

Ian Bourne (1,3) Alberta, Canada

Director 2006 Mr. Bourne is a corporate director. He is the Chairman of Ballard Power Systems Inc., a company involved in the development, manufacture and sale of hydrogen fuel cells, and also a director of the Canada Pension Plan Investment Board, SNC-Lavalin Group Inc., The Canadian Public Accountability Board and Canadian Oil Sands Limited. Mr. Bourne holds the ICD.D designation from the Institute of Corporate Directors (ICD) and has also been recognized as a Fellow of the ICD. Mr. Bourne has over 35 years of experience in senior finance roles, and was previously Executive Vice President and Chief Financial Officer of TransAlta Corporation, and President and a director of TransAlta Power LP. He obtained his Bachelor of Commerce degree from Mount Allison University.

Douglas Carty (1,2) Illinois, U.S.A.

Director 2009 Mr. Carty is a corporate director. He serves on the board of Points International Ltd., a company offering products and services to the loyalty program industry, and YRC Worldwide Inc., a leading transportation service provider. He is also the Chairman and Co-Founder of Switzer-Carty Transportation Inc., a Burlington, Ontario based provider of school bus services. Previously, Mr. Carty served as Chief Financial Officer of Laidlaw International Inc., and subsequently as the President and Chief Executive Officer of its school bus subsidiary. He has also served as Chief Financial Officer of Atlas Air Worldwide Holdings and Canadian Airlines Corporation. Mr. Carty holds a Bachelor of Arts (Honours) degree from Queens University and a Masters of Business Administration from the University of Western Ontario.

Robert Dexter (2,3) Nova Scotia, Canada

Director 1988 Mr. Dexter is Chairman and Chief Executive Officer of Maritime Travel Inc., an independent travel agency with 98 locations across Canada. He is also the Chairman of Empire Company

Limited, a food retailing and real estate company, and a director of Bell Aliant Inc., High Liner Foods Incorporated and Sobeys Inc. He is counsel to the law firm of Stewart McKelvey. Mr. Dexter holds both a Bachelor’s Degree in Commerce and a Bachelor of Laws from Dalhousie University, and was appointed Queen’s Counsel in 1995. He was inducted into the Nova Scotia Business Hall of Fame in 2006.

John Eby (1,3) Ontario, Canada

Director 2006 Mr. Eby is a corporate director. He is a Founder and the President of Developing Scholars, a

charity supporting education projects in Guatemala, and serves on the board of Inmet Mining

Corporation, a copper and zinc mining company, and is a trustee of Crombie Real Estate Investment Trust. Previously, Mr. Eby was the Vice-Chairman of Scotia Capital Inc., where he was responsible for overseeing the mining practice, and prior to that, was Senior Vice President, Corporate and Energy Banking at Scotiabank. He holds a Bachelor of Arts degree and Masters of Business Administration from Queen’s University.

Paul Gagne (1,2,3) Quebec, Canada

Chairman 1996 Mr. Gagne is a corporate director and the Chairman of the board of directors of the Corporation. He is also a director of Textron Inc., an aerospace and defence industry company, CAE Inc., a provider of simulation technologies and training services to the aviation, medical and mining industries, Inmet Mining Corporation, a copper and zinc mining company, and Ainsworth Lumber Co. Ltd., an engineered wood products company. Mr. Gagn ´ e was previously the President and Chief Executive Officer of Avenor Inc., a publicly traded Canadian forest products company, and a strategy consultant to Kruger Inc., a privately held paper and tissue producer. He holds a Bachelor of Commerce degree from the University of Ottawa and Masters of Business Administration from Queen’s University. Mr. Gagn´ e is a member of the Canadian Institute of Chartered Accountants.

James Hole (2,3)

Alberta, Canada

Director 2006 Mr. Hole is a corporate director and the President of J.D. Hole Investments Inc. He serves on the boards of Aecon Group Inc., a construction and infrastructure development company and the Alberta Electric System Operator. Mr. Hole was previously the President and Chief



Executive Officer of Lockerbie & Hole Inc., a construction services provider to the commercial, municipal and institutional market sectors, where he played an integral part in the company’s growth for over 36 years. He holds a Bachelor of Engineering Science degree from the University of Western Ontario, and is a Member of the Association of Professional Engineers and Geoscientists of Alberta.

Alexander Taylor (2,3) Montreal, Quebec

Director 2009 Mr. Taylor is Senior Group Vice President, Oil, Gas & Petrochemical Business Unit of ABB Inc., a leader in power and automation technologies for the industrial and utility sectors. Mr. Taylor has more than 33 years of experience working with utility and industry customers in Canada. He began his career with Atomic Energy of Canada as a commissioning engineer, before joining Elsag Bailey Process Automation N.V., one of the world’s leading process automation groups, in 1985. He held successively senior management positions in Canada and overseas, and when ABB acquired Elsag Bailey in 1999, was appointed Head of Oil and Gas Industries within the Automation Technologies division. Mr. Taylor holds a Bachelor of Mechanical Engineering from Queen’s University and a Masters of Business Administration from the University of Western Ontario.


(2) Member of the Human Resources and Compensation Committee.

(3) Member of the Governance Committee. Source: Company documents

Exhibit J8. Wajax Senior Management


Mark Foote Chief Executive Officer & Director Prior to joining the Corporation, Mr. Foote was the President and Chief Executive Officer (Canada) of Zellers Inc. Prior to that, he was the President and Chief Merchandising Officer (Canada) of Loblaw Companies Limited, where he oversaw procurement and merchandising functions for all lines of business, marketing, supply chain and information technology. Mr. Foote also had an extensive career with Canadian Tire Corporation, where he worked for 28 years, including six years as President, Canadian Tire Retail. He holds a Masters of Business Administration from the University of Toronto.

John Hamilton Chief Financial Officer Mr. John J. Hamilton serves as the Chief Financial Officer and also Senior Vice President of Wajax Corporation.

Brian Dyck SVP, Equipment Brian M. Dyck had been with Wajax for 17 years and over that time had assumed increased responsibilities and was General Manager, Mobile Equipment, Western Region prior to his appointment in 2010.

Adam Trotman SVP, Industrial Components Adrian A. Trotman prior to his appointment in 2010 had 20 years of experience in industrial distribution in Canada with a major U.S. multinational. He is a professional engineer and has an MBA degree.

Richard Plain SVP, Power Systems Richard M. G. Plain prior to his appointment in 2011 held the position of Vice President Sales and Marketing since joining Wajax Power Systems in 2009 and brings 18 years of experience in the power systems and equipment distribution businesses in western Canada.




Exhibit J9. Wajax Income Statement ($000’s)



Revenues 1,110,888 1,377,100 1,466,014 1,402,684 1,444,765 1,502,590

Cost of sales 873,032 1,084,667 1,164,199 1,119,201 1,148,588 1,190,802

Gross profit 237,856 292,433 301,815 283,483 296,177 311,787


Selling and administrative expenses 179,643 200,321 207,672 210,269 216,577 223,075

Earnings before finance costs and income taxes 58,213 92,112 94,143 73,214 79,599 88,713

Finance costs 4,277 4,630 4,442 7,812 8,116 8,116

Earnings before income taxes 53,936 87,482 89,701 65,402 71,483 80,596

Income tax expense (2,454) 23,679 23,762 17,247 18,943 21,358

Net earnings 56,390 63,803 65,939 48,154 52,540 59,238

Net earnings as a percentage of sales 5.1% 4.6% 4.5% 3.4% 3.6% 3.9%

Earnings per share

Basic earnings per share 3.39$ 3.84$ 3.95$ 2.88$ 3.14$ 3.54$

Diluted earnings per share 3.34$ 3.77$ 3.89$ 2.83$ 3.09$ 3.49$


Basic 16,614 16,629 16,700 16,736 16,736 16,736

Diluted 16,875 16,924 16,954 16,987 16,988 16,988

EBITDA 69,457 105,607 111,959 93,182 100,181 110,046

EBITDA margin 6.3% 7.7% 7.6% 6.6% 6.9% 7.3%



Exhibit J10. Wajax Balance Sheet ($000’s)



Assets

Current assets

Cash 42,954 5,659 - (11,890) (586) 1,949


Inventories 196,460 241,524 285,185 291,270 287,147 297,701

Prepaid expenses 7,244 8,033 7,089 6,950 6,950 6,950

Other - - - 1,199 1,199 1,199

382,175 429,449 486,841 489,801 495,372 516,492

Non-current assets



Intangible assets and goodwill 75,794 84,493 87,668 85,869 84,069 82,269

Deferred taxes 5,277 - 2,922 3,076 3,076 3,076

Other assets 240 - - - - -

140,373 160,477 185,021 189,944 195,768 201,505

Total assets 522,548 589,926 671,862 679,744 691,140 717,997

Liabilities

Current liabilities

Bank indebtedness - - 10,195 - - -


Accrued liabilities 63,762 84,050 - - - -

Provisions 5,353 5,704 7,033 7,651 7,584 7,855

Dividends and distributions payable 12,472 3,326 4,519 3,347 3,347 3,347

Income taxes payable 2,072 2,398 44,349 - - -

Obligations under finance leases 3,677 3,646 3,611 3,449 3,449 3,449

Derivative instruments 2,452 208 149 - - -

224,620 262,440 256,753 205,714 203,987 211,023


Provisions 4,338 4,010 4,088 3,547 3,547 3,547

Deferred taxes - 17,694 - - - -

Employee benefits 4,132 6,843 7,160 7,465 7,465 7,465

Other liabilities 5,221 5,644 2,083 888 888 888

Obligations under finance leases 5,227 6,688 8,192 8,026 8,026 8,026

Bank debt 79,680 59,021 151,701 207,888 207,888 207,888

98,598 99,900 173,224 227,814 227,814 227,814


Share capital 105,371 105,371 106,651 106,651 106,651 106,651



Accumulated other comprehensive income (loss) (1,777) (150) (56) 221 221 221





Exhibit J11. Wajax Statement of Cash Flows ($000’s)




Net earnings 56,390 63,803 65,939 48,154 52,540 59,238

Items not affecting cash flow:

Depreciation and amortization



Assets under finance lease 2,645 - - 0 0 0

Intangible assets 966 1,216 1,466 1,829 1,800 1,800

Loss (gain) on disposal of property, plant and equipment - 61 139 (7) - -

Share-based compensation expense 635 957 738 755 750 750

Non-cash rental income 103 (303) (1,687) (180) - -

Employee benefits expense (income), net of payments (1,139) (478) (618) 305 - -

Non-cash (gain) loss on derivative instruments and other 4,380 - 72 (645) - -

Finance costs 4,277 4,630 4,442 7,812 8,116 8,116

Income tax expense (2,454) 23,679 23,762 17,247 18,943 21,358

Cash flows from operating activities before changes in working capital 73,436 105,844 110,603 93,410 100,931 110,796

Changes in working capital 22,409 (20,253) (114,347) (7,346) 4,006 (11,549)

95,845 85,591 (3,744) 86,064 104,937 99,248

Rental equipment additions (5,775) (20,177) (25,076) (19,726) (20,628) (21,060)

Provisions, non-current 820 - - - - -

Other liabilities - 95 (3,784) (1,736) - -

Finance costs paid (3,999) (4,132) (4,118) (7,791) (8,116) (8,116)

Income taxes paid 1,778 (116) (2,387) (62,169) (18,943) (21,358)

Cash generated from (used in) operating activities 88,669 61,261 (39,109) (5,358) 57,250 48,713


Property, plant and equipment additions (4,132) (5,499) (6,234) (5,109) (5,779) (6,010)

Proceeds on disposal of property, plant and equipment 2,393 132 523 156 - -

Intangible asset additions (3,220) (664) (237) (30) - -

Acquisition of business - (23,247) (10,078) - - -

Cash (used in) provided by investing activities (4,959) (29,278) (16,026) (4,983) (5,779) (6,010)


Increase in bank debt - (20,000) 92,998 56,000 - -

Debt facility amendment costs and other (93) (1,061) (568) - - -

Finance lease payments (3,351) (3,484) (2,553) (1,328) - -

Dividends and distributions paid (46,519) (44,733) (50,596) (46,026) (40,167) (40,167)

Cash (used in) provided by financing activities (49,963) (69,278) 39,281 8,646 (40,167) (40,167)

Increase in cash and cash equivalents 33,747 (37,295) (15,854) (1,695) 11,304 2,535

Cash and cash equivalents, beginning of period 9,207 42,954 5,659 (10,195) (11,890) (586)

Cash and cash equivalents, end of period 42,954 5,659 (10,195) (11,890) (586) 1,949

Disclaimers and Disclosures October 28, 2013


DISCLAIMERS AND DISCLOSURES Disclaimers

The opinions, estimates and projections contained in this report are those of Cantor Fitzgerald Inc. (“Cantor”) as of the date hereof and are subject to change without notice. Cantor makes every effort to ensure that the contents have been compiled or derived from sources believed to be reliable and that contain information and opinions that are accurate and complete; however, Cantor makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be available to Cantor that is not herein.

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Potential conflicts of interest

The author of this report is compensated based in part on the overall revenues of Cantor, a portion of which are generated by investment banking activities. Cantor may have had, or seek to have, an investment banking relationship with companies mentioned in this report. Cantor and/or its officers, directors and employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. Although Cantor makes every effort possible to avoid conflicts of interest, readers should assume that a conflict might exist, and therefore not rely solely on this report when evaluating whether or not to buy or sell the securities of subject companies.

Disclosures as of October 28, 2013

Cantor has not provided investment banking services or received investment banking related compensation from any of the covered companies within this report within the past 12 months.

The analyst responsible for this research report does not have, either directly or indirectly, a long or short position in the shares or options of any of the covered companies within this

report.

The analyst responsible for this report has visited the material operations of each of the covered companies within this report

except for Toromont Industries Ltd. and Wajax Corporation. No payment or reimbursement was received for the related travel costs.

Analyst certification

The research analyst whose name appears on this report hereby certifies that the opinions and recommendations expressed herein accurately reflect his personal views about the securities, issuers or industries discussed herein.

Definitions of recommendations

BUY: The stock is attractively priced relative to the company’s fundamentals and we expect it to appreciate significantly from the current price over the next 6 to 12 months.

BUY (Speculative): The stock is attractively priced relative to the company’s fundamentals, however investment in the security carries a higher degree of risk.

HOLD: The stock is fairly valued, lacks a near term catalyst, or its execution risk is such that we expect it to trade within a narrow range of the current price in the next 6 to 12 months. The longer term fundamental value of the company may be materially higher, but certain milestones/catalysts have yet to be fully realized.

SELL: The stock is overpriced relative to the company’s fundamentals, and we expect it to decline from the current price over the next 6 to 12 months.

TENDER: We believe the offer price by the acquirer is fair and thus recommend investors tender their shares to the offer.

UNDER REVIEW: We are temporarily placing our recommendation under review until further information is disclosed.

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AGRICULTURAL AND INDUSTRIAL EQUIPMENT · October 28, 2013 Sector Report Peter Prattas, CA CFA [email protected] (416) 350-8152 Sales/Trading — Toronto: (416) 363-5757, (800) 442-4485;

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