Thursday, January 26, 2006

Scotia Capital Research on TD Bank

  
TD Bank • Rating: 1-Sector Outperform • Risk Ranking: Low
Target 1-Yr: $75.00 ROR 1-Yr: 25.7% • 2-Yr: $85.00 2-Yr: 44.9%
Valuation: 16.3x 2006 cash earnings estimate
Est. NTM Div. $1.74 • Div. (Current) $1.68

Event

• Toronto-Dominion Bank (TD) announced the completion of its sale of TD Waterhouse USA to Ameritrade (AMTD) and the acquisition of 100% of AMTD's Canadian brokerage operations.
• TD will realize a gain on sale of approximately C$1.5 billion or C$2.11 per share in Q1 2006.
• TD Ameritrade has increased the expected gross synergies by US$100 million to US$678 million due to higher expected revenue synergies.

What It Means

• We continue to view the transaction as extremely positive as TD Ameritrade enhances its strategic positioning in the discount brokerage industry in the U.S., creates substantial synergies, is accretive to earnings and provides a strong platform for growth.
• TD Ameritrade is expected to be accretive to TD earnings by C$0.04 per share to C$0.07 per share in 2006 and by C$0.19 per share to C$0.25 per share in 2007.
• Maintain 1-Sector Outperform on TD based on strong Canadian retail and wealth management platform, Ameritrade value-add, high ROE and capital, and discount to bank P/E multiple.

TD Ameritrade Merger Complete

TD Bank to Realize Gain on Transaction of C$1.5 Billion in Q1/06

• TD Bank (TD) announced the completion of its sale of TD Waterhouse USA (TDW) to Ameritrade (AMTD) and the acquisition of 100% of AMTD's Canadian brokerage operations.
• TD currently owns 32.5% of the new company, TD Ameritrade, and will realize a gain of C$1.5 billion or C$2.11 per share in Q1 2006.
• Ameritrade paid a US$6 per share special cash dividend to its shareholders prior to close of the TD Ameritrade transaction.

Estimated Gross Synergies at US$678 Million

• TD Ameritrade has increased the expected gross synergies by US$100 million to US$678 million due to higher expected revenue synergies.
• The US$678 million in synergies is comprised of US$300 million in revenue enhancements, and US$378 million from reduced fixed costs and advertising expenses (eliminating 59% of TD Waterhouse expenses). TD Ameritrade expects to reduce its fixed costs to US$333 million from the current level of US$661 million by the quarter end September 2007.
• TD Ameritrade expects the acquisition to be accretive within twelve months and to realize the synergies within eighteen months. Assuming TD Ameritrade will achieve full benefit of the expected synergies, the new company would have annual revenues in excess of US$2 billion and pre-tax margins of approximately 56% by fiscal year 2007.

TD Current Ownership at 32.5% - 5 Board Seats

• TD currently owns 32.5% of TD Ameritrade and has five seats on the Board of Directors of the new company, with Ed Clark as Vice Chairman of the Board. Unless TD increases its ownership to 37.5% within one year, they would lose one board seat. TD has the option of increasing its ownership of TD Ameritrade to 39.9%. TD's ownership will be capped at 39.9% for three years and at 45% from years four to ten.

TD Ameritrade Earnings Guidance for 2006 and 2007

• TD Ameritrade provided new EPS guidance for the next two fiscal years. For 2006, EPS estimates range from US$0.82 per share to US$1.00 per share. EPS estimates for 2007 range from US$1.03 per share to US$1.27 per share, respectively. IBES mean estimates currently are US$0.92 per share for 2006 and US$1.26 per share for 2007 (up from previous 2007 mean estimate of US$1.17 per share).

Earnings Accretion to TD Bank

• Earnings accretion for TD is estimated at C$0.04 per share in 2006 and C$0.19 per share in 2007, based on TD's 32.5% ownership of TD Ameritrade. If TD increases its ownership to 39.9%, expected earnings accretion would increase to C$0.07 per share in 2006 and C$0.25 per share in 2007.
• Our 2006 and 2007 estimates for TD Bank are unchanged at C$4.60 per share and C$5.10 per share, respectively.
• We are maintaining a conservative earnings accretion estimate for TD at C$0.04 per share in 2006 and C$0.17 per share in 2007 based on a 32.5% ownership and a Canadian dollar at US$0.90 in 2007. We have built in an $0.08 per share cushion that could be realized with TD's increased ownership to 39.9%.

Maintain 1-Sector Outperform on TD Bank

• The TD Ameritrade merger brings together two highly complementary businesses. Ameritrade's strength lies in its on-line brokerage business catering mainly to the active trader while TD Waterhouse U.S.A. is more focused on providing investment advice and solutions to longer term investors through its branches and network of independent investment advisors.
• We continue to view the transaction as extremely positive as TD Ameritrade enhances its strategic positioning in the discount brokerage industry in the U.S., creates substantial synergies, is accretive to earnings and provides a strong platform for growth.
• We believe that TD Ameritrade, in addition to TD Banknorth's personal and commercial banking operations, will strengthen TD's brand name in the United States. Furthermore, the TD Ameritrade and Hudson United transactions will increase TD's proforma net tangible common equity ratio to 8.5% (Q4/05 ratio was 7.4%).
• Maintain 1-Sector Outperform on TD bank based on strong Canadian retail and wealth management platform, Ameritrade value-add, high ROE and capital, and discount to bank P/E multiple.

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