TSX Diversified Income Equities: Ranking Dividend Attractiveness

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1 Title: Diversified Equities Headline: Identifying High Yield Opportunities 2011 Outlook July 14, 2016 The NBF Daily Bulletin Industry Comment Special Situations TSX Diversified Income Equities: Ranking Dividend Attractiveness Trevor Johnson, CFA, MBA - (416) trevor.johnson@nbc.ca Associate: Endri Leno (416) endri.leno@nbc.ca Associate: Kyle Stanley (416) kyle.stanley@nbc.ca Associate: Alex Bauer (416) alex.bauer@nbc.ca Although the Bank of Canada left the overnight rate unchanged at 0.50%, yesterday s fiscal update continues to reinforce our view that domestic interest rates will remain low for the foreseeable future (Canada s 2016 GDP growth forecasts to 1.3% from 1.7%; Global GDP growth estimates down 0.1% through 2018; U.S. kept flat at 2-2.1% through 2018). With this backdrop in mind we summarized our TSX diversified yield coverage list according to who presents the best income opportunities in terms of: 1) size; 2) capacity to grow payout; 3) management s willingness to grow payout; and 4) free cash flow yield. Based on these criteria our top ideas for income-oriented investors include: Exchange Income, Alaris, EnerCare, Parkland Fuels, New Flyer, Tricon Capital and Boyd Group, each of which are rated Outperform. The scatterplot below outlines the current cash yield and forward NBF forecasted distributable cash per share (DCPS) payout ratios for the 18 diversified equities we currently cover: CASH YIELD VS. FY+1 PAYOUT 120% 110% 100% Less Attractive Cash Yield Avg: 5.2% GRC Payout 90% 80% 70% 60% 50% 40% 30% 20% 10% BYD.UN Source: Company Reports, NBF DR RSI AD CRN MSI PKI ECI M JE EIF CHE.UN TCN DH KBL LIQ NFI 0% 0% 2% 4% 6% 8% 10% 12% 14% Cash Yield Payout Avg: 56% More Attractive This screen does a nice job of identifying potentially mispriced yields (group average 5.2%) and identifying expected sustainability (group average forward payout ratio 56%). That said, in order to better assess income opportunities we introduce a scorecard that looks at not only each company s ability to increase dividends, but also balance sheet support, management s prior willingness and the calculated FCF yield. From this we rank our diversified coverage universe from 1-18: INCOME ATTRACTIVENESS SCORECARD Capacity to Supporting Track Record FY+1 FCF Company Ticker Increase + Balance Sheet + Divvy Growth + Yield = RANKING Exchange Income EIF X X X 12.2% 1 Alaris AD X X X 7.9% 2 Enercare ECI X X X 8.1% 3 Parkland Fuels PKI X X X 7.4% 4 Boyd Group BYD.UN X X X 6.7% 5 New Flyer NFI X X X 9.3% 6 Tricon Capital TCN X X X 6.8% 7 Crown Capital CRN X X 6.9% 8 Morneau Shepell MSI X X 6.4% 9 Chemtrade CHE.UN X 13.6% 10 Just Energy JE X 12.1% 11 K-Bro Linen KBL X 7.4% 12 Medical Facilities DR X 6.7% 13 DH Corporation DH X X 9.6% 16 Liquor Stores LIQ X 11.5% 14 Mosaic Capital M 12.8% 15 Rogers Sugar RSI X 7.6% 17 Grenville GRC 11.8% 18 Source: NBF

2 Page 2 Individual Company Ranking Rationale: 1. Exchange Income (EIF, Outperform, $36.00) 6.5% cash yield / 53% 2017e payout Best track record of dividend growth in our universe (+6% CAGR since 2004 IPO). Prospects for continued positive earnings momentum + likelihood of more accretive acquisitions + management s primary objective with EIF is to grow cash flow/dividend per share = much of the same trajectory going forward. 2. Alaris (AD, Outperform, $33.00) 5.6% cash yield / 72% 2017e payout Model is to acquire revenue royalty streams at ~14% IRRs and use the resulting accretion to grow the dividend. Lather, rinse, repeat since 2008 IPO, and with the pipeline robust, a relatively new large credit facility in place and management suggesting 2016 will be a record year of capital deployment, we like the odds of this continuing. 3. EnerCare (ECI, Outperform, $18.50) 5.4% cash yield / 66% 2017e payout Has shown a commitment to returning increased levels of income to shareholders, and the expected accretion from Service Experts (both in terms of integration synergies and resulting consolidation opportunities) should continue to feed additional dividend growth. ECI has an above-average FCF yield that we anticipate will reprice as the merits of Service Experts are played out in coming quarters. 4. Parkland Fuels (PKI, Outperform, $28.00) 4.9% cash yield / 67% 2017e payout Our positive bias towards PKI is predicated on the company s significant North American retail gas station consolidation opportunity (and to a lesser extent other fuel distribution channels), which we have already seen drive meaningful cash flow accretion that management is willing to return to shareholders. With material dry powder, a deep pipeline of M&A opportunities and management well-versed at integration, we anticipate continued attractive dividend growth. 5. New Flyer (NFI, Outperform, $46.00) 2.4% cash yield / 26% 2017e payout Recently increased the dividend +35% to reflect the initial accretion from the MCI acquisition, and as synergies and other tuck-in opportunities play out we anticipate steady increases to persist. The company s extremely high free cash flow profile and relatively minor capital intensity further supports this outlook. 6. Tricon Capital (TCN, Outperform, $13.00) 2.9% cash yield / 43% 2017e payout One of the higher growth profiles amongst our coverage list, but management is attempting to balance this attribute alongside an increased focus on returning income to shareholders in order to round out its investor base. The +8% increase earlier this year is a sign of more to come, and our analysis suggests TCN is well-positioned to continue financing its various verticals with harvested cash from maturing investments (i.e., THP1) and existing liquidity channels (i.e., TAH securitization, credit facilities, third-party investors). 7. Boyd Group (BYD.un, Outperform, $85.00) 0.6% cash yield / 10% 2017e payout Has been a steady dividend grower for years, and while the cash yield is relatively skinny, the company s free cash flow yield is attractive. Company guidance is to double the business over the next five years and a corresponding increase in dividends is doable. Also, as BYD s growth opportunities eventually slow the logical shift is into a higher payout model, which management has spoken about in the past as a possible evolution over time. 8. Chemtrade Logistics (CHE.un, Sector Perform, $18.00) 6.7% cash yield / 50% 2017e payout CHE is relatively highly leveraged and management has expressed a desire to grow through M&A, so dividend growth is a low likelihood near term. That being said its FCF yield and cash yield to payout combination scores the best amongst our coverage list, providing a positive relative backdrop for income investors. 9. Crown Capital (CRN, Outperform, $10.50) 4.8% cash yield / 68% 2017e payout CRN has ~$40 mln cash + deep third-party financing to continue funding deal flow and growing DCPS. The dividend was only introduced in January, but as payout grinds lower from new investments we anticipate opportunities for increases will emerge.

3 Page Morneau Shepell (MSI, Outperform, $19.50) 4.3% cash yield / 67% 2017e payout MSI has more than adequate cushion to increase payout given the sticky nature of its offering (~98% recurring revenue); however, management has elected to instead conserve cash to maintain the balance sheet and finance tuck-in M&A in recent years rather than grow the dividend. Nevertheless the company s FCF yield and predictability make it an attractive option for income investors. 11. Just Energy (JE, Sector Perform, $9.00) 6.4% cash yield / 52% f2018e payout JE right-sized its dividend a few years ago, and while payout and balance sheet have improved subsequently, we believe the company is better served investing internally (UK, solar, selling initiatives) rather than increasing payout. Despite this low dividend growth outlook JE has one of the higher FCF yields in our universe, which should continue to reprice as its portfolio high-grade strategy plays out. 12. Mosaic Capital (M, Sector Perform, $5.50) 6.8% cash yield / 53% 2017e payout M has almost as much cash on its balance sheet (~$35 mln) as its market capitalization (~$50 mln), and as a result the company s near-term objective is to deploy capital and reduce payout, rather than increasing it. Despite this the company s FCF yield is relatively attractive, and as M&A accretion is realized we could eventually see dividend growth, particularly as we calculate M spending its existing cash could be upwards of ~100% accretive to run-rate DCPS. 13. Medical Facilities (DR, Sector Perform, $18.50) 5.8% cash yield / 88% 2017e payout Of all our diversified companies DR is best positioned for a special dividend (over US$60 mln in cash), but we believe new CEO Britt Reynolds will use some or all of this amount for M&A following a quiet few years under previous management. We argue the dividend is easily sustainable (particularly after adjusting for acquisition upside), but DR s FCF yield is already relatively low and a proportionately high payout limits future dividend increases based on our analysis. 14. DH Corporation (DH, Outperform, $44.00) 4.0% cash yield / 41% 2017e payout DH has more than enough room to meaningfully grow the dividend, but we believe this is a low priority due to: 1) an already leveraged balance sheet that management is focused on improving; 2) the aggressive IRRs realized by DH investing excess cash internally across its platform; 3) the belief that DH is more likely to receive a better valuation the more it looks like public U.S. fintech peers (which inherently have little to no payout); and 4) the structural declines facing DH s cheque portfolio. 15. Liquor Stores (LIQ, Sector Perform, $9.00) 3.9% cash yield / 34% 2017e payout Management recently cut the dividend by two thirds to free up capital for proportionately high IRRs on: 1) store refurbishments/renovations; 2) new location openings; 3) tuck-in M&A; and 4) internal capex (i.e., planned ERP, private label, training). Dividend growth is consequently a low priority; however, the company s FCF yield is relatively attractive, and could subsequently support eventual increases as the Seven Points Plan proves out. 16. Rogers Sugar (RSI, Sector Perform, $5.50) 6.1% cash yield / 80% f2018e payout Management paid a sizable special dividend a few years ago, but the more recent priority has been managing the balance sheet and funding internal capex/opportunities. Moreover, new CEO John Holliday appears more focused on growing RSI s footprint through M&A than his predecessors following a quiet number of years, and the company s FCF yield appears already reasonably priced. 17. K-Bro Linen (KBL, Sector Perform, $45.00) 2.8% cash yield / 39% 2017e payout Management demonstrated a modest commitment to dividend increases ($1.10 per year at 2004 IPO to $1.20 today), but with Toronto and Vancouver facility relocations over the next ~18 months (~$85 mln) we anticipate KBL will focus on conserving cash. KBL s FCF yield is nevertheless relatively attractive, particularly in the context of its recurring revenue model characterized by long-term predictable contracts with blue chip counterparties. 18. Grenville (GRC, Sector Perform, $0.55) 13.9% cash yield / 114% 2017e payout Following the surprise company update and dividend cut in May GRC s focus is on conserving cash, realizing value from the existing portfolio and growing into its current payout. GRC is the only company we cover currently not earning its dividend based on our forward DCPS calculation, and as a result rates lowest amongst our diversified coverage list in terms of income attractiveness.

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5 Page 5 ADDITIONAL COMPANY RELATED DISCLOSURES AD 2,3,4,5,7 BYD.UN 2,3,4,5,7 CHE.UN 6,7 CHP.UN 2,3,4,5,7 CRN 2,3,4,5,7 CRT.UN 2,3,4,5,6,7 DH 2,3,4,5,7,10 DR 6,7 ECI 2,3,4,5,6,7 EIF 2,3,4,5,6,7 GRC 2,3,4,5,7 HOT.UN 2,3,4,5,7 JE 6,7 KBL LIQ 6,7 M MR.UN MSI 2,3,4,5,6,7 * NFI 6,7 PKI RSI RUF.U 2,3,4,5,7 SRU.UN 2,3,4,5,6,7,10 TCN 6,7 TPH 6,7,10 WIR.U 2,3,4,5,7 LEGEND FOR COMPANY RELATED DISCLOSURES: 2 National Bank Financial Inc. has acted as an underwriter with respect to this issuer within the past 12 months. 3 National Bank Financial Inc. has provided investment banking services for this issuer within the past 12 months. 4 National Bank Financial Inc. or an affiliate has managed or co-managed a public offering of securities with respect to this issuer within the past 12 months. 5 National Bank Financial Inc. or an affiliate has received compensation for investment banking services from this issuer within the past 12 months. 6 National Bank Financial Inc. or an affiliate has a non-investment banking services related relationship during the past 12 months. 7 The issuer is a client, or was a client, of National Bank Financial Inc. or an affiliate within the past 12 months. 8 National Bank Financial Inc. or its affiliates expects to receive or intends to seek compensation for investment banking services from this issuer in the next 3 months. 9 As of the end of the month immediately preceding the date of publication of this research report (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), National Bank Financial Inc. or an affiliate beneficially own 1% or more of any class of common equity securities of this issuer. 10 National Bank Financial Inc. makes a market in the securities of this issuer, at the time of this report publication. 11 A partner, director, officer or research analyst involved in the preparation of this report has, during the preceding 12 months provided services to this issuer for remuneration other than normal course investment advisory or trade execution services. 12 A research analyst, associate or any other person (or a member of their household) directly involved in preparing this report has a financial interest in the securities of this issuer. 13 A partner, director, officer, employee or agent of National Bank Financial Inc., is an officer, director, employee of, or serves in any advisory capacity to the issuer. 14 A member of the Board of Directors of National Bank Financial Inc. is also a member of the Board of Directors or is an officer of this issuer. * Gillian H. Denham is a member of the Board of Directors or is an officer of this issuer.