Daily bulletin - september 10, 2002

DAILY BULLETIN
Table of Contents  September 10, 2002 PM
# National Bank Financial has assumed an underwriting liability for, and/or provided financial advice for consideration to, this company during the past 12 months.
** Two or more classes of common shares exist with differential voting rights.
National Bank Financial (the Firm) is an indirect wholly owned subsidiary of National Bank of Canada.
The particulars contained herein were obtained from sources which we believe reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis andinterpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The Firm may act as financial advisor, fiscal agent or underwriter forcertain of the companies mentioned herein and may receive a remuneration for its services. The Firm and/or its officers, directors, representatives, associates, may have a position in the securitiesmentioned herein and may make purchases and/or sales of these securities from time to time in the open market or otherwise.
To U.S. residents: NBC International (USA), an affiliate of the Firm, accepts responsibility for the contents of this report, subject to any terms set out above. Any U.S. person wishing to effect transactions inany security discussed herein should do so only through NBC International (USA).
Daily Bulletin
September 10, 2002 PM
BIOVAIL CORP. – BVF (TSX) CDN$43.24; BVF (NYSE) US$27.26
GSK Gets FDA Approval for Valtrex Once-A-Day – Neutral to Biovail
Dimi Ntantoulis – (416) 869-6586 – dimi.ntantoulis@nbfinancial.com
Associate: Tania Maciver – (416) 869-7854 – tania.maciver@nbfinancial.com
RECOMMENDATION: FOCUS BUY (Unchanged) u TARGET: US$68.00 (Unchanged)
Estimates (Dec. 31 Year-End)
Valuation
Basic Information
52-Week Range
Market Cap (Mln)
Shares O/S (Mln)
Note: All figures in US$
Company Profile
• Biovail develops oral, controlled-release generic drugs using various drug-delivery technologies. Biovail can produce once-daily generics that are identical to the branded versions (pure generics that can be directlysubstituted) or improved versions (super generics that must be marketed as a new drug).
• Tiazac is marketed by Forest Laboratories in the U.S. and by a number of different generics companies in Europe. U.S. marketing of subsequent generics is being conducted by Teva Pharmaceuticals.
• The company is also developing a pipeline of branded products for the treatment of cardiovascular, pain and CNS afflictions. The first of these products is Cardizem XL for hypertension, expected to be launched laterthis year. In conjunction with Glaxo Smith Kline, Biovail is also developing a once daily version of WellbutrinXL for depression, expected on the market during 2003 HIGHLIGHTS
• GlaxoSmithKline (US;GSK) has announced that the FDA has approved its once-a-day formulation of Valtrex®
for the treatment of cold sores (herpes labialis) − Valtrex has been available for several years as a three times
per day formulation
• We believe that the impact of this approval and subsequent launch of a competitive product will be neutral to
the sales of Zovirax ointment and Zovirax cream formulations, which have been licensed to Biovail from GSK
• Since Biovail’s re-launch of Zovirax ointment into the U.S. marketplace in January 2002, IMS prescription data
has indicated that good progress is being made by the company on sales of Zovirax ointment. Further, within
the last quarter alone, Biovail increased market share to 58% from 53%.
• We have estimated that revenues to Biovail from the sales of Zovirax ointment alone will be approximately
US$90 million in 2002; Given that Biovail paid roughly US$83 million on a net basis for the marketing and
distribution rights to both Zovirax ointment and Zovirax cream in the United States and in Puerto Rico, we
believe that Biovail will make an above average return on invested capital
• We reiterate our FOCUS BUY recommendation and US$68.00 target price on Biovail
OVERVIEW
GlaxoSmithKline (Glaxo − US;GSK) announced that FDA had approved a once-a-day formulation of Valtrex, an oral,antiviral medication for the treatment of cold sores (herpes labialis). During October 2001, Biovail acquired (from GSK)promotion and distribution rights for the United States and Puerto Rico for Zovirax Ointment and Zovirax Cream, anotherantiviral medication used in the treatment of cold sores. The Glaxo products will compete for market share in the UnitedStates. However, we believe that the impact of this new product on Zovirax sales and on Biovail’s revenues will beminimal. Here are the reasons why: • Valtrex once-a-day is a new formulation of a three times a day version that Glaxo has been selling for some
time. The three times a day version has been indicated for herpes zoster (shingles) and genital herpes, however is
regularly prescribed off-label for herpes labialis. We expect that the Valtrex once-a-day will gain significant market
share from the transfer of prescriptions from the three times a day version rather than from topical Zovirax. For the
first half of 2002, sales of Valtrex by GSK in the USA were £131 million (approx. US$325 million). Strategically, GSK
needed to be the first to develop a once-a-day formulation of Valtrex in order to sustain its revenue base in this
market.
• Valtrex three times a day formulation is 25% more expensive than Zovirax. Given this, we expect the new once-
a-day formulation to be priced within the same range as the three times a day version. Zovirax is much less expensivethan the competing Valtrex three times a day and has also been generic in the United States for some time.
• Both products, Valtrex and Zovirax, are derivations of the same compound, acyclovir, which has been found
to have an inhibitory effect on variations of the herpes virus. In the head-to-head trials for the treatments of
herpes zoster (shingles) and genital herpes, the results showed that Valtrex and Zovirax were essentially equivalent in
terms of efficacy. It would seem then that the preference of one product over another would come down to ease of
use, once-a-day versus multiple times daily, and the total cost to the patient.
• Biovail paid approximately US$83 million (US$133 million less US$50 million for the co-promotion agreement
for Wellbutrin SR with GSK) for the rights to Zovirax Ointment and Zovirax Cream from Glaxo. Our estimates
are for revenues to Biovail from sales of Zovirax ointment for 2002 to reach approximately US$90 million. In the most
recent quarter, Biovail announced an increase in market share for Zovirax ointment to 58% from 53% and IMS
prescription data to date shows reasonably good progress by Biovail’s sales force on the re-launch of the product. In
addition, the approval process for Zovirax cream is underway and final approval is expected to come in 2003. As a
result, we believe that Biovail will make an above average return on invested capital even with the launch of Valtrex
once-a-day.
After this assessment, we remain comfortable with our Zovirax estimates in our Biovail valuation, which do not
currently include any sales from the recently filed cream formulation. We view this approval of Valtrex once-a-day
as neutral to Biovail’s earnings. We reiterate our FOCUS BUY recommendation and US$68.00 target. At current levels,
Biovail’s valuation remains very attractive, trading at 16x forward earnings, with the specialty pharma peer group at 22x.
Anticipated Upcoming Events
Launch of generic Tiazac by Biovail and Forest.
FDA filing for approval of once daily tramadol FDA approval for once-daily tramadol.
# National Bank Financial has assumed an underwriting liability for, and/or provided financial advice for consideration to, this company during the past 12 months.
** Two or more classes of common shares exist with differential voting rights.
National Bank Financial (the Firm) is an indirect wholly owned subsidiary of National Bank of Canada.
The particulars contained herein were obtained from sources which we believe reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis andinterpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The Firm may act as financial advisor, fiscal agent or underwriter forcertain of the companies mentioned herein and may receive a remuneration for its services. The Firm and/or its officers, directors, representatives, associates, may have a position in the securitiesmentioned herein and may make purchases and/or sales of these securities from time to time in the open market or otherwise.
To U.S. residents: NBC International (USA), an affiliate of the Firm, accepts responsibility for the contents of this report, subject to any terms set out above. Any U.S. person wishing to effect transactionsin any security discussed herein should do so only through NBC International (USA).
Daily Bulletin
September 10, 2002 PM
ALLIANCE ATLANTIS – AAC.B (TSX) $17.20
CFO to Leave
David McFadgen – (416) 869-7116 – david.mcfadgen@nbfinancial.com
Sr. Associate: Bruce Chin – (416) 869-7935 – bruce.chin@nbfinancial.com
RECOMMENDATION: HOLD (Unchanged) u TARGET: $20.00 (Unchanged)
Estimates (Year-End March 31)
Valuation
Basic Information
52-Week Range
12-Month Target
13.38-21.15
Shs O/S (FD mln)
Mkt. Val. ($mln)
Note: All numbers in Cdn$. * After diginet losses of $17.0 mln and $15.0 mln in 2002 and 2003, respectively. ** From
operations excluding one-time items.
Planned Departure
Alliance Atlantis announced yesterday that Judd Martin, CFO, will be leaving to become President and CEO of a realestate investment trust effective Nov. 1, 2002. Mr. Martin joined Alliance Atlantis in May 1999, therefore he will have beenwith the company for 41 months. He will be replaced in the interim by Rita Middleton, Senior Vice President, CorporateFinance. Alliance Atlantis is currently in the process of finding a replacement for Mr. Martin. We spoke with managementyesterday and it reiterated that it was striving to make this change a seamless transition.
We see no reason to change our recommendation or estimates as a result of the news.
We rate Alliance Atlantis a HOLD with a $20 target. It is derived by applying a 9.1x target EV/EBITDA multiple to ourf2004 estimates. Although our target versus the current share price offers a potential return of 18%, we will notrecommend the stock, given our belief that f2003 guidance will not be achieved. In the current market environment,companies that lower or miss earnings targets are often punished severely.
# National Bank Financial has assumed an underwriting liability for, and/or provided financial advice for consideration to, this company during the past 12 months.
** Two or more classes of common shares exist with differential voting rights.
National Bank Financial (the Firm) is an indirect wholly owned subsidiary of National Bank of Canada.
The particulars contained herein were obtained from sources which we believe reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis andinterpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The Firm may act as financial advisor, fiscal agent or underwriter forcertain of the companies mentioned herein and may receive a remuneration for its services. The Firm and/or its officers, directors, representatives, associates, may have a position in the securitiesmentioned herein and may make purchases and/or sales of these securities from time to time in the open market or otherwise.
To U.S. residents: NBC International (USA), an affiliate of the Firm, accepts responsibility for the contents of this report, subject to any terms set out above. Any U.S. person wishing to effect transactionsin any security discussed herein should do so only through NBC International (USA).
Daily Bulletin
September 10, 2002 PM
CANADIAN OIL & GAS
Kyoto… The Week in Review: Ratification Cogitation
Robert M. Feick – (403) 290-5448 – bob.feick@nbfinancial.com
Associate: Menal Patel, CA, CBV - (403) 290-5622 – menal.patel@nbfinancial.com
Unknowns Impair Investment Decisions
• Canada to Ratify Kyoto – Uncertainty for Oil Patch – Last week, the press was abuzz with news that at the Earth
Summit in South Africa, Prime Minister Chretien said that Canada would ratify the Kyoto Protocol on Climate Change.
‘Kyoto’ would bind the nation to a commitment to reduce greenhouse gas emissions − mostly carbon dioxide (CO2) −by 6% from 1990 levels of 606 megatonnes (mt). Ratification would, in the Prime Minister’s view, proceed by the endof 2002, after domestic consultations were completed. Since Canada became a Kyoto signatory five years ago, thepossibility of ratification has loomed, but last week’s announcement has brought the prospect into plain view. Oneresult is the introduction of a new layer of uncertainty onto the Oil & Gas equity market given that the combustion of oiland gas is a significant source of CO2 emissions. Nevertheless, while we appreciate that investors may be keen toidentify winners and losers, we believe it is premature to be making major investment decisions based on Kyoto.
Given investor interest in this issue, we are setting out some of our initial views in this note.
• The Kyoto Protocol In Brief – The Kyoto Protocol was agreed to in December 1997, and was the culmination of 10
years of global debate, which incidentally started in Toronto in 1988, on concerns about the rise in globaltemperatures and what to do about it. While some may still want to argue about the scientific underpinnings of globalwarming, and the extent to which mankind is causing the planet to heat up by burning carbon fuels, internationalpolicy makers have moved beyond the science and are addressing the issue – like it or not.
Highlights include: 1. “Kyoto” was signed by 84 countries with each signatory taking on the commitment to limit CO2 emissions to varying percentages of 1990 levels. For example, Canada has committed to a 6% reduction, most of the European nationswill cut by 8%, Australia will limit emissions to 108% of 1990 levels. Developing countries such as China and Indiaare signatories but are not required to reduce emissions; 2. Mechanisms to achieve the reductions are left up to each country but Kyoto also provides for credits to be earned for surpassing commitments. These credits can be sold to others, presumably at market prices. Furthermore, credits canbe earned by investing in emissions reductions in foreign countries; 3. Much remains undefined under the Protocol, particularly the range of sanctions or consequences that might be 4. The Protocol comes into effect when 55 countries, including countries representing 55% of the total emissions, ratify.
Amendments to the Protocol can be implemented with a three-fourths majority. With Canada signing on, the Protocolwould require Russia’s endorsement to come into force, given the U.S. has decided not to ratify the deal.
• Kyoto is More Than an Environmental Issue – We are not quite sure which of the signatories to Kyoto actually view
it as a pact to improve the environment. In fact, the economic motivations behind most signatories are easilyunderstandable. For example: 1. The European block, which is heavily dependent on nuclear or hydro power, is looking to gain an edge on carbon- 2. Former East block countries and Russia, currently benefiting from the closure of old inefficient plant and equipment, see the sale of emissions credits as a means to improve terms of trade; 3. Developing countries want to slow down the developed countries to get a share of the global economic prosperity 4. Impoverished countries are looking for aid, which they can get under the terms of some of the credit provisions in 5. We note that the only OPEC country to sign is Indonesia and it has not yet ratified; and, 6. The United States, after signing the Protocol, has since announced that it will not ratify it and will set its own course on addressing climate change. Significant economic dislocation was cited as a chief U.S. concern.
Perhaps only the Canadians felt they were negotiating for a cooler planet. We can’t help but compare Canada toAustralia, another country with a high reliance on energy-intensive industry and characterized by vast distances. Canadanegotiated for a 6% reduction in CO2, Australia for an 8% increase. Australia has yet to signal any intention to ratify.
• Concerns – With Canada preparing to adopt the Protocol, the most severe criticisms are as follows:
1. Canada’s largest trading partner, the United States, is not coming along, so any costs of compliance borne in Canada
2. Canada has a fragmented, geographically-based and politicized economy, so the scope for adopting measures which prejudice certain regions or sectors is substantial; and, 3. With the United States, China and India not committing to reductions, the overall impact of the Protocol on emissions • Canadian Implementation − Kyoto By the Numbers – The Kyoto
Meeting Kyoto
Protocol calls for Canada to emit no more than an average of 570 megatonnes
megatonnes (mt) of CO2 between 2008 and 2012. With growth in theeconomy, it is expected that emissions will be about 810 mt under a business as usual case. Basically, very little is known about how Canada will achieve its commitment. The government has sketched insome mechanisms to help bridge the 240-mt shortfall. These include: 1) domestic emissions trading, whereby industry in Canada could trade credits for surpassing objectives with others who are coming up short;2) specific targeted measures based on regulatory or fiscal mechanisms; 3) buying foreign credits; or, 4) variations on, or combinations of, the above. Existing programs and CO2 “sinks,” such asforests, should contribute 74 mt to covering the gap. The government New actions 166
has also argued that Canada should get about a 70 mt credit for “cleanenergy exports (natural gas and electricity)” to the United States, which helps that country reduce its reliance on coal. It is not clear if the othersignatories are agreeable. Clearly, there are major unanswered Remaining 96
questions with respect to how the gap would be allocated acrossindustries and how it would be funded.
• Energy Industry Exposure –The oil, gas and coal
Canadian CO2 Emissions -
production industries are expected to account for about 18%of Canadian CO estimated 2010
2 emissions in 2010. However, consumption of these fuels accounts for virtually all of the remaining Fossil Fuel
Residential
Production
emissions. There are industry concerns that Ottawa may target the fossil fuel industry to bear the brunt of the Kyoto Commercial
impacts. Many have raised the spectre of the punitive National Energy Program as an analogy – even withoutknowing exactly what the details of Canadianimplementation are going to be. Among fuels, natural gas Industrial
2 emission per unit of energy – about 71% Electric Power
that of oil and 55% of coal, on an energy equivalent basis.
Transportation
Source: NEB
hand, the relative scarcityof gas makes further gains in market share unlikely at reasonable prices. Perhaps the largest source of incrementalCO2 emissions from the fossil fuel industry will be from development of the oil sands. Oil sands production is energyintensive and the National Energy Board estimates synthetic oil from oil sands is the most carbon intensive form of oiland gas development –associated with 0.12 t of CO2 for each barrel produced. By comparison, in situ bitumen couldbe produced by releasing 0.07t/bbl and conventional light crude releases 0.02t/bbl. In reality though, virtually all of the growth in Western production will be based on the oil sands − synthetic or bitumen − raising concerns aboutdiscriminatory treatment for Alberta.
• Too Early To Make Investment Decisions Based on Kyoto − In considering all of the foregoing, we simply
conclude that it is too early to be making major investment decisions based on Kyoto for the following reasons: 1. Implementation mechanisms are purely speculative – As noted above, the government is considering
different policy approaches to achieve the Kyoto commitment – domestic emissions trading, targetedmeasures and the purchase of foreign credits. Each of these comes with different implications for the oil andgas industry – examples being how the emissions permits are allocated, or which measures target the oilindustry or how much revenue, to purchase global credits, is sourced from the oil and gas industry. As notedearlier, the biggest contribution to combustion emissions is the transportation sector. At the same time, it isalso economically and politically the hardest sector to implement an emission trading/taxation scheme tochange behaviour or introduce new technology. Conversely, the fossil fuel industry makes a tidy target butarguably one that could be unfairly burdened. The bottom line is that without details on the implementationprogram, it is virtually impossible to assess the impacts; 2. Range of economic outcomes is too wide − From a financial standpoint, there is much to speculate about,
but frustratingly little to analyze. Looked at in the simplest form, the purchase of 166 mt of credits – theCanadian Gap - should provide a benchmark maximum cost for Canada. Unfortunately, this cost depends onthe unit costs of the credits. We have seen estimates for credit costs range between $2-50/tonne. The fact isnobody knows for sure. Using those extremes suggests Kyoto could cost between $330 million and $8.3billion per year, a range, which is so wide as to be meaningless. However, the scope for a significant impact isobvious. For reference, oil and gas industry cash flows in a normalized year are about $15-$20 billion; 3. Oil sands discrimination is a non-starter – The Alberta oil sands currently produce about 820 mbbls/d of
synthetic crude and bitumen. Reasonable projections could see that double in four to five years. With thebillions of dollars of investment that have been committed to the oil sands, it has become one of the mostimportant games in town. It is a resource that will fuel economic engines throughout Canada and productionfrom the oil sands has been held up as a source of secure incremental supply to a jittery U.S. market. With somuch riding on the future of the oil sands, it seems unlikely a major discriminatory policy could be tolerated,either by Alberta or by the United States, both of which have considerable economic leverage with theFederal government; 4. Political reactions could prevent adoption of impactful measures – There is a good chance that
implementation of Kyoto could distil down to a revenue raising exercise. The obvious mechanisms like anincrease to the GST, or gasoline taxes are political losers. Trying to exact a higher than proportionate costfrom the oil industry could be equally challenging given Alberta’s stated willingness to fight discriminatorytreatment; 5. Lower Canadian dollar could help offset impact – Looked at realistically, to the extent Canada impairs its
competitiveness by imposing additional costs on its economy – when its largest trading partner is not − thevalue of our dollar should decline. Recall that a $0.01 drop in the value of the dollar raises Oil & Gas industryrevenues by about $750 million/year; and, 6. Change in leadership is coming – The resolve of the federal Liberal party to jam through a major policy
initiative in the dying months of Mr. Chretien’s term may flag, if the going gets rough. If the package ofproposals is truly objectionable and the public begins to understand that Kyoto may be a needless and costlyaffront to Canada’s economic well-being, would-be successors to Mr. Chretien may find ways to dampen thewhole exercise. • Investment Stance is to Stand Pat. but here are some possible strategies for later. Basically, we have
concluded that the implementation of Kyoto is too ill-defined to allow for reasoned investment decision-making.
Nevertheless, if impactful policy measures are adopted, investors may want to move along the following lines: (1) Buy U.S. E&P – With Canada going it alone on Kyoto in North America, the place to be for a competitive advantage is the U.S. Given that Canadian producers are price takers there will be limited scope to pass alongKyoto-related costs. Not so for Burlington, Anadarko, Apache, Devon (all not rated).
(2) Favour natural gas –Natural gas has an advantage over the solid and liquid fossil fuels in terms of CO2/ unit of energy and may do comparatively better under a Kyoto regime. Having said that, a carbon-related cost of$10/tonnes or $0.50/mcf would render much of Canadian gas including the Mackenzie delta uneconomic relative to imported LNG into the U.S. market at US$3.25-$3.50/mcf. Furthermore it is difficult to find good natural gasleverage in Canada, the best remaining large-cap plays are ECA and CNQ.
(3) Favour existing oil sands projects – In the Oil Sands, we would tend to favour existing projects versus new ones, as any policy should have an aspect of grandfathering associated with it. SU, SHC and the Syncrude partners(PCA, ECA, and IMO) should fare better than newcomers, UTS and CNQ. We note, however, that the marketshould not be too hasty in adjusting the value for these projects. We believe that the market has, in many cases,not priced in the full value of many of these projects owing to their longer-term horizon, and so material declines instock values are not justified. At the same time, we recognize that depending on the implementation plan forKyoto, we may not be projecting the same level of price appreciation stemming from such oil sands projects.
(4) Canadian dollar offset – As noted earlier, given the deterioration in Canada’s terms-of-trade with a policy that raises our domestic cost structure, it seems likely that the entrenched decline in the Canadian dollar may continueundisturbed.
# National Bank Financial has assumed an underwriting liability for, and/or provided financial advice for consideration to, this company during the past 12 months.
** Two or more classes of common shares exist with differential voting rights.
National Bank Financial (the Firm) is an indirect wholly owned subsidiary of National Bank of Canada.
The particulars contained herein were obtained from sources which we believe reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis andinterpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The Firm may act as financial advisor, fiscal agent or underwriter forcertain of the companies mentioned herein and may receive a remuneration for its services. The Firm and/or its officers, directors, representatives, associates, may have a position in the securitiesmentioned herein and may make purchases and/or sales of these securities from time to time in the open market or otherwise.
To U.S. residents: NBC International (USA), an affiliate of the Firm, accepts responsibility for the contents of this report, subject to any terms set out above. Any U.S. person wishing to effect transactionsin any security discussed herein should do so only through NBC International (USA).
Daily Bulletin
September 10, 2002 PM
EMS COMPANIES
Bankruptcy Predictor Z-Score vs. the EMS Companies
Benoît Chotard – (514) 879-2596 – benoit.chotard@nbfinancial.com
Associate: Neil Linsdell – (514) 879-5357 – neil.linsdell@nbfinancial.com
HIGHLIGHTS:
• Celestica and Jabil score tops with Altman's Z-Score model. As financial statement scrutiny is foremost on most
investors’ minds, we have seen the resurgence of a bankruptcy predictor test first published by Dr. Edward I. Altmanin 1968. Using various balance sheet and income statement items, Altman's Z-Score claims to help predictbankruptcy up to two years ahead of time. This original model was reported to be accurate 50% of the time(considering Type 1 errors when a non-bankruptcy prediction results in a bankruptcy). We would prefer to use it inaddition to other metrics to help spot trends. (Note: in 1977 Altman refined the model into the ZETA™ Model, whichimproved accuracy up to 70%, but the parameters and design remain proprietary.) Although we do not want to readtoo much into the specific scores, guidelines suggest that a Z-Score above 2.99 clearly indicates that a company fallsinto the 'non-bankrupt' zone. Z-Scores below 1.81 suggest that the company will become bankrupt.
Altman Z-Scores
Altman Z-Score
Jabil and Celestica seem well situated in the 'non- bankrupt' range but Flextronics has slipped recently.
Sanmina-SCI has been adversely affected because of its acquisition of SCI and Solectron remains a turnaroundstory with a yet unclear path to a profitable and successful future. Since the Z-Score for Solectron has only just dropped down below the 1.81 mark as of the last quarter, it will be important to monitor this metricfollowing the fQ4 results to be reported on Sept. 26.
Altman's Z-Score supports our top picks among the EMS companies. Adding the Z-Score to our other performance
metrics supports our overall rankings favouring Celestica and Jabil. Our slight preference for Celestica stems from its
slightly lower valuation multiples.
Inventory
Net Debt/
Cash Cycle
NBF Overall
Celestica
#2 (7.8%)
#4 (7.1x)
#2 (-13%)
#2 (7.2%)
#3 (44.1)
#2 (3.43)
Flextronics
#3 (5.2%)
#1 (9.2x)
#4 (5.3%)
#1 (30.6)
#3 (2.32)
Jabil Circuit
#1 (9.6%)
#2 (9.1x)
#1 (-26%)
#1 (9.9%)
#2 (36.2)
#1 (5.35)
Sanmina-SCI
#4 (1.7%)
#3 (7.9x)
#5 (4.2%)
#4 (53.0)
#4 (1.86)
not rated
Solectron
#5 (-1.2%)
#5 (5.1x)
#3 (7.0%)
#5 (84.6)
#5 (1.62)
EMS companies have come down from their historic highs, because of the collapse in business from the electronicsOEMs and specifically telecom related players. As the companies have made tremendous efforts to scale down theirbusinesses and reduce costs while looking for revenues from other industries, we believe that they have set the stage forbetter earnings power than ever before.
Given the differences in the business models and industry concentrations, the choice of which EMS provider(s) to investin can depend on your outlook for the various end-markets, as well as for the economy in general. Overall, if you believethat the economy will continue along at an anemic or slow growth pace, then Celestica and Jabil are probably where youshould invest. Both these companies have horizontal business models, with low fixed costs and can provide strong andmore stable operating earnings in this environment because up to 80% of their costs are material costs that are quicklyreduced when revenues are weak or falling. If the economy picks up steam rapidly, then Flextronics and Sanmina-SCIshould be better investments. Both these companies have vertical integration models and relatively heavy reliance onprinted circuit boards. With higher fixed costs, these companies also provide more dramatic profitability swings asrevenues increase or decrease. In boom times, these companies can generate significant earnings, and conversely willsuffer more in declining markets. Lastly, Solectron is a turnaround story, which is taking much more time than previouslyanticipated to provide results. With a better balance sheet and reduced cost structure, we would include Solectron in thesame category as Flextronics and Sanmina-SCI. As it is now, Solectron is an investment best suited for investors that puttheir faith in a successful restructuring effort (both operationally and financial) as well as a rebound in the generaleconomy and electronics markets specifically.
NBF EMS Company Recommendation Summary
Ticker Closing Price NBF Target % Return Recommendation
Celestica CLS $36.62 $43.00 17% BUY
Flextronics FLEX $9.56u $11.00 15% BUY
Jabil Circuit JBL $19.20u $22.00 15% BUY
Sanmina-SCI SANM $3.99u n/a n/a Not Rated
Solectron SLR $3.87u $6.00 55% BUY
u - denotes figure in U.S. dollars
EMS Comparables
10-Sep-02
S/O Mkt Cap Rev LTM EV/Sales EV/EBITDA EPS
Company Ticker
end Price
Celestica CLS Dec-01 23.26 236.0 5 489.4 9 051.9 0.5 18.7 $1.38 $1.13 $1.40 16.9x 20.6x 16.6x
Flextronics FLEX Mar-02 9.56 524.9 5 018.0
13 094.2 0.4 14.3 $0.61 $0.36 $0.55 15.7x 26.6x 17.4x
Jabil Circuit JBL Aug-01 19.20 201.0 3 859.2 3 501.4 1.0 29.0 $0.73 $0.45 $0.78 26.3x 42.7x 24.6x
Sanmina-SCI SANM Sep-01 3.99 525.6 2 097.1 8 035.7 0.5 28.8 $0.85 $0.08 $0.26 4.7x 49.9x 15.3x
Solectron SLR Aug-01 3.87 823.2 3 185.8
12 754.5 0.3 (21.4) $0.57
$0.06 6.8x n/a 64.5x
Benchmark BHE Dec-01 27.36 24.7 675.5 1 261.2 0.5 17.8 $0.81 $1.33 $1.54 33.8x 20.6x 17.8xPlexus PLXS Sep-01 15.21 43.1 656.1 922.9 0.6 21.9 $0.18 $0.19 $0.45 84.5x 80.1x 33.8xEMS Company Average 2 997.3 6 946.0 0.5 15.6 $0.73 $0.49 $0.72 26.9x 40.1x 27.1xNotes:- Estimates for CLS, FLEX, JBL, SLR are NBF, all others are First Call estimates- All figures in US$ # National Bank Financial has assumed an underwriting liability for, and/or provided financial advice for consideration to, this company during the past 12 months.
** Two or more classes of common shares exist with differential voting rights.
National Bank Financial (the Firm) is an indirect wholly owned subsidiary of National Bank of Canada.
The particulars contained herein were obtained from sources which we believe reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis andinterpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The Firm may act as financial advisor, fiscal agent or underwriter forcertain of the companies mentioned herein and may receive a remuneration for its services. The Firm and/or its officers, directors, representatives, associates, may have a position in the securitiesmentioned herein and may make purchases and/or sales of these securities from time to time in the open market or otherwise.
To U.S. residents: NBC International (USA), an affiliate of the Firm, accepts responsibility for the contents of this report, subject to any terms set out above. Any U.S. person wishing to effect transactionsin any security discussed herein should do so only through NBC International (USA).
NBF HOT CHARTS September 10, 2002 (Vol III, No. 167)
U.S. Watch
The U.S. Policy Mix
In retrospect, it appears that the September Fed funds target rate and 12-month change in outstanding U.S. debt 2001 events only had a temporary negativeimpact on U.S. economic activity. Consumer confidence did drop brutally after the terrorist WTC attack
attacks. However, U.S. fiscal and monetary authorities were quick to react, taking the necessary measures to avoid a full-blownconfidence crisis. The U.S. Federal Reserve interest rates another 175 basis points.
fiscal policy tap wide open. Over the last year, U.S. Treasury debt has soared $440 billion (see Fed funds rate
Vincent Lépine
NBF Economic and Strategy Team (514) 879-2529
Clément Gignac, Chief Economist and Strategist
Vincent Lépine, Assistant Chief Economist • Pierre Lapointe, Assistant Market Strategist
Stéfane Marion, Senior Economist • Marc Pinsonneault, Senior Economist
National Bank Financial (the Firm) is an indirect wholly owned subsidiary of National Bank of Canada.
The particulars contained herein were obtained from sources which we believe reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to beconstrued as a solicitation or offer to buy or sell the securities mentioned herein. The Firm may act as financial advisor, fiscal agent or underwriter for certain of the companies mentioned herein and may receive a remuneration for its services. The Firmand/or its officers, directors, representatives, associates, may have a position in the securities mentioned herein and may make purchases and/or sales of these securities from time to time in the open market or otherwise.
To U.S. residents: NBC International (USA), an affiliate of the Firm, accepts responsibility for the contents of this report, subject to any terms set out above. Any U.S. person wishing to effect transactions in any security discussed herein should do so onlythrough NBC International (USA).
This report may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express consentof National Bank Financial.

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