Gajan Kulasingam is portfolio manager at Sentry Investments. His focus is on industrials, utilities and energy infrastructure.
Top Picks:
AltaGas (ALA-T)
I think AltaGas should deliver the highest dividend growth among its midstream peers supported by the commissioning of the Forrest Kerr project. It has a very low payout ratio to begin with.
AltaGas also has excellent exposure to the west coast LNG export market. Both Douglas Channel and Tirton LNG projects can go through despite Petronas' decision to delay FID. Expect the company to announce an expansion of its U.S. Blythe facility which would be meaningful capital deployment.
AltaGas has nearly $5-billion of total growth opportunity – $2.5-billion secured and another $2.5-billion related to energy export.
Macquarie Infrastructure Co. (MIC-N)
Macquarie Infrastructure Co. is a holding company that operates in 4 different businesses: bulk liquid storage terminals, gas distribution in Hawaii, heating/cooling business in U.S. and operators of private airports utilized by narrow body airplanes.
It has a great management team, with a good diverse set of portfolios giving you a nice mix of cyclical and defensive exposure. It recently bought out the remaining 50 per cent of IMTT – which was a great move. We've been waiting for this transaction for a while. Under full control of IMTT, Macquarie Infrastructure Co. can better operate the asset. The next strategic decision will be on what kind of entity structure to operate under – REIT, MLP and C-corp – this decision will drive further value.
The aviation business provides a natural commodity hedge to the terminal business. The company currently has a 6-per-cent dividend yield and expect dividend growth in 8 to 10-per-cent range over the next couple of years – so a 15-per-cent total return for a stable/high quality business.
Pattern Energy Group (PEGI-Q)
Pattern Energy is a renewable operator with assets fully contracted going out nearly 20 years. Pattern Energy currently has a 1,472 MW portfolio of renewable power projects diversified across Canada, the U.S. and South America. PEGI core assets are wind projects that have long-term PPA agreements with high quality counterparties. The average remaining term for its portfolio is 17 years, with only 10-per-cent merchant exposure.
Pattern Energy has 8 projects in its ROFO portfolio, which represents an additional 874 MW of low-risk growth (+60 percent) over the next 3 years. Since the IPO in mid-2013, PEGI has increased its dividend 3 times (+7.2 per cent), made several acquisitions and grown its ROFO portfolio; all ahead of expectations. In addition to its 2015 implied yield of 6.3 per cent, we believe Patter Energy can growth its dividend by 12-15 per cent over the next 3 years, with scope for additional growth beyond that time frame once additional projects are developed at the parent level, and also through third-party acquisitions in a largely fragmented market.
Disclosure: | Personal | Family | Portfolio/Fund |
ALA | Y | Y | Y |
MIC | Y | Y | Y |
PEG | Y | Y | Y |
Past Picks: July 15, 2014
Danaher Corp. (DHR-N)
Then: $78.24; Now: $83.39, +6.58%; Total return: +6.72%
Comcast (CMCSA-Q)
Then: $54.89; Now: $54.94, +0.09%; Total return +0.51%
Quanta Services (PWR-N)
Then: $34.88; Now: $25.85, -25.89%; Total return -25.89%
Total return average: -6.22%
Disclosure: | Personal | Family | Portfolio/Fund |
DHR | N | N | Y |
CMCSA | N | N | Y |
PWR | Y | Y | Y |
Market outlook:
The key point for oil will change from how low can oil go, to how long it will remain at these levels.
Global divergence continues – the U.S. is recovering, while the rest of the world attempts to fight off recession and deflation threats. Can the U.S. carry the rest of the world out of a recession or will the rest of the world drag the U.S. into an economic slowdown?
The market will shift its focus to risk once again, as 2015 brings the first rate rise in the U.S, continued geopolitical tensions, rising U.S. dollar threats on emerging markets and overall rise in investor anxiety, which is represented by a rise in volatility.
Market multiples are fair. Capital appreciation will have to be driven by earnings growth and/or continued reduction in supply of stock (i.e. buybacks).