In the wake of a dip in share price of almost 14 per cent over the last month, Bank of Montreal sees a "once in a multi-year buying opportunity" for Enbridge Inc. (ENB-T).
Investors have expressed doubt in recent weeks about the near-term fortunes of the Calgary-based energy giant, citing funding concerns and the potential of a reduction in its 10-12-per-cent dividend growth guidance.
However, analyst Ben Pham said the dip in market capitalization of almost $9-billion is a "material overreaction."
"With the recent material stock correction, we believe that not only is the market not appreciating the $31-billion secured project backlog, it is also discounting the existing asset base, which we view as high quality (less than 5-per-cent commodity exposure)," said Mr. Pham in a research note released Friday. . "We support this view by stress-testing our financial model, resulting in a hypothetical 'low-growth' ENB that we believe is worth $48-53 per share, suggesting that the future growth projects are a free option. We also re-ran the sensitivity assuming what we view as more realistic assumptions including the removal of L3R [Line 3 Replacement Program] -- we came out to $58-62 per share."
Mr. Pham sees a "strong rationale" for Enbridge to reaffirm its dividend growth guidance of 10-12 per cent, though he did admit it was "surprising" that management failed to reiterate that projection during its conference call to discuss third-quarter financial earnings on Nov. 2.
"We see strong rationale for ENB to reaffirm the 10-12-per-cent dividend growth guidance. While we found it surprising that management did not reiterate its 10-12-per-cent dividend growth guidance on the Q3/17 call, deferring the details to the December investor day, we believe it is a prudent exercise for ENB to continue to revisit its payout policy in the context of the record-high 5.5-per-cent dividend yield and credit rating overhang. In the end, we believe ENB will reaffirm the current dividend guidance: we believe issuing equity is less value destructive than tempering dividend growth given the material market valuation compression."
Shares of Enbridge were up 1.4 per cent to $44.61, erasing a portion of its loss for the week. It's five-day drop sat near 3.5 per cent
Mr. Pham has given Enbridge shares an "outperform" rating and a Street-high 12-month target price of $70. The average target price is currently $58.59, according to Bloomberg data.
"The current share price is also nearing the lows reached during the depths of the oil downturn in late 2015/early 2016 when WTI was $30 (U.S.) per barrel and ENB credit spreads were 350 basis points," said Mr. Pham. "Interestingly, today WTI is $55 per barrel and ENB credit spreads have remained in the 170 basis points context all year."
"Given our expectation for management to reiterate the 10-12-per-cent dividend growth CAGR [compound annual growth rate at the upcoming Investor Day (Dec. 12 in New York; Dec. 13 in Toronto), the manageable funding program, and our view that the market is reflecting virtually no growth in the current share price, we believe the risk/reward on the ENB shares is very attractive at current valuations (2018 estimated FCF of 10 per cent versus. peer average of 9 per cent and 2019 at 11.5 per cent versus 9.5 per cent). Accordingly, we reiterate our Outperform rating and $70 target price and note the attractive 5.5-per-cent dividend yield (highest we have seen historically in the name). Use the opportunity."
David Leeder