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Construction of Inter Pipelines Polaris Pipeline

Inside the Market's roundup of some of today's key analyst actions

BMO Nesbitt Burns analyst Ben Pham said Inter Pipeline Ltd.'s (IPL-T) $1.35-billion acquisition of Williams Cos. Inc. and Williams Partners L.P.'s Canadian NGL midstream segment "might seem on the surface an odd diversion."

However, Mr. Pham said it will likely add long-term value.

On Wednesday, Inter announced the closing of a $600-million bought deal with the proceeds used to help fund the acquisition.

"For most companies, acquiring asset packages where EBITDA has declined by 70 per cent in a short time span is often a huge red flag," said Mr. Pham. "But for IPL and its conservative management team and strong acquisition track record, the $1.35-billion Williams Canada acquisition might just mean better returns and further diversification, with minimal incremental risk. The reality for IPL and peers is secured growth opportunities have waned and new project returns have compressed. This is more pronounced with IPL in particular, as it does not have a large NGL business to benefit from the liquids-rich thematic and low-cost expansions on Polaris and Cold Lake are likely now on a longer time frame given oversupply of regional pipeline capacity and increased competition. As such, despite a subtle departure from its current business mix, we believe IPL likely will succeed in the Williams Canada acquisition and ultimately achieve its target returns. This conclusion is based on our review of past commodity price trends and margins, and our expectation for a recovery in oil prices through late decade."

Mr. Pham said the acquisition adds scale to its NGL platform, while, at the same time, keeping its commodity exposure at a manageable level.

"We estimate the NGL business mix will increase to 17 per cent from 12 per cent in 2017 and gradually increase to 21 per cent in 2018 as commodity prices increase, diversifying IPL's growth opportunities beyond oil sands transportation," he said. "Contrary to some initial concerns from investors, we note that IPL's commodity exposure doesn't materially change near term, as we believe the $40-million of Williams Canada EBITDA generated in 2015 is largely from fee-based assets; we estimate a slight increase to 10 per cent over the next few years from 9 per cent currently and well below the 30 per cent in 2010. The transaction is expected to close in Q3/16 and is subject to approval under the Competition Act and other customary closing conditions."

Mr. Pham raised his EBITDA estimates for 2016 and 2017  to $1.031-billion and $1.1-billion, respectively, from $1.015-billion and $1.027-billion. His funds from operation per share projections moved to $2.40 and $2.54 from $2.39 and $2.42.

Keeping his "market perform" rating, he raised his target price to $28 from $27. The analyst average is $28.59, according to Bloomberg.

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"Further upside is likely as IPL proves out its strategy on the acquisition with respect to improved results/return and potential new growth opportunities from the larger, better-positioned NGL Alberta business," he said.

Elsewhere, the stock was upgraded to "buy" from "hold" by TD Securities analyst Linda Ezergailis with a 12-month target price of $30 (Canadian) per share, up from $27.

"The pending acquisition of the Williams Canada assets ...  should provide immediate accretion, diversification, visibility of growth potential, and positive leverage to recovering NGL prices," she said.

"Over the long-term, Inter Pipeline continues to be well-positioned to service additional oil sands volumes through cost-efficient bolt-on connections."


The next two quarters are likely to be "lumpy" for NorthWest Healthcare Properties REIT (NWH.UN-T), said CIBC World Markets analyst Yashwant Sankpal in reaction to its second-quarter results.

The REIT reported quarterly funds from operations of 22 cents per unit, in line with the consensus projection and a cent ahead of Mr. Sankpal's estimate. It was an improvement of 6 cents year over year.

Following the quarter, NorthWest announced a $146-million acquisition of a pair of Brazilian hospitals at a cap rate of 9.7 per cent.

"YTD NWH has been active on both investment and capital activity fronts with multiple transactions closing between April and November," said Mr. Sankpal. "As a result, we expect many one-time items to obscure Q3 and Q4/16 results."

In reaction to its recent investments, Mr. Sankpal raised his funds from operations estimates for 2016 and 2017 to 86 cents and 90 cents per unit, respectively, from 84 cents and 87 cents.

Maintaining his "sector performer" rating, he raised his target price to $10.25 from $9.50. The analyst consensus price target is $10.41, according to Thomson Reuters.

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CIBC World Markets analyst Alex Avery raised his target price for First Capital Realty Inc. (FCR-T) in reaction to its second-quarter results.

The Toronto-based company reported funds from operations of 28 cents per share, a 1-cent improvement from the previous year and 2 cents ahead of Mr. Avery's estimate. Total occupancy was 95.2 per cent (down 0.5 per cent from 2015), while same-property occupancy was 96.3 per cent (up 0.3 per cent).

"On a same-property basis, Q2/16 was expectedly weak due to transitional vacancy and a strong Q2/15 contribution of lease termination income. We continue to view the longer-term trend as positive, with an increasing proportion of cash rent coming online in the near term - this year and by H1/17. In Q2, FCR leased 0.4 mln sq.ft. in Q2/16 at +5.9% higher rents. Average rent per occupied sq. ft. rose to $19.04, from $18.70 at Q2/15, driven mainly by contractual rent escalations. Current in-place rent of $19.04 per sq. ft., vs. estimated market rents in the range of $23.00 to $25.00 per sq. ft., provide opportunity for expanding leasing spreads, and supporting SP-NOI growth."

He added: "CR's investments in Q2 and since the quarter are consistent with the company's long-standing strategy of focusing on well-located, urban, and staples-oriented retail properties, with strong value-creation opportunities. The 85,000 sq. ft. purchased on the south-east corner of Yonge and Bloor is a flagship retail property, extremely well-located with a direct connection to transit, housed in the base of a 760-unit condominium tower. The Pusateri's-anchored assembly at Avenue and Lawrence, and former Mr. Christie's factory at Lakeshore and Park Lawn, also represent opportunistic acquisitions of scarce, well-located sites with substantial mixed-use development potential. While we don't expect a positive contribution to FFO from these value-add development and redevelopment investments in the near term, FFO growth should continue to be positive, with an accelerating pace of growth over time, with near-term growth driven by a recovery to higher SP-NOI growth in coming quarters, as well as refinancing debt at lower interest rates. Recent transactions in an increasingly competitive environment for comparable high-quality retail assets in prime urban locations have become scarce (making it more difficult to value FCR's portfolio), but do suggest strong appreciation in value, not reflected in the company's conservative 5.5% IFRS cap rate. At a 5.00-per-cent cap rate, our NAV would increase to $23.25 per share, and to $25.25 at a 4.75-per-cent cap rate."

Mr. Avery's target sits at $23, up from $22.50. Consensus is $24.04.

He did not change his "sector performer" rating.


The valuation for Teekay Offshore Partners LP (TOO-N) is still "in the penalty box" based on its distribution cut in December of 2015, said RBC Dominion Securities analyst TJ Schultz.

However, he said the company is now on "much firmer footing following comprehensive self-funding measures that remove biggest headwind into 2018."

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Accordingly, he upgraded his rating for the stock to "outperform" from "sector perform."

"We think TOO has significantly de-risked following completion of several self-funding measures," said Mr. Schultz. "At current levels, TOO is clearly still in penalty box from December 2015 85% distribution cut. However, with the cut in rear-view mirror, our view is that balance sheet improvements, better commodity prices, and project execution should allow valuation discount to narrow."

In December, Teekay slashed its distribution by 85 per cent to 44 cents (U.S.) per unit. Mr. Schultz said the company now carries greater-than 4 times coverage into 2018 and expects distribution growth into 2019.

"With the lower payout, TOO is now in a position to significantly de-lever," he said. "We estimate that TOO de-levers from near 5x in 2016 to 3.5x or lower by 2018."

He added: "TOO has [about] $1-billion of new projects coming online over the next several years, and the biggest headwind had been funding capex. During 2Q, TOO completed $200-million in preferred/common that we think completes self-funding measures for next 2 years (coupled with the distribution cut and new debt commitments)."

Mr. Schultz raised his target price for the stock to $8 from $5. The analyst consensus price target is $5.58.

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"Teekay Offshore Partners (TOO) is a leading provider of shuttle tanker solutions and has several high-impact FPSOs in its fleet," he said. "While TOO did recently cut its dividend by 80 per cent, we believe it was the right decision for the long-run as it enables TOO to continue growing cash flow while strengthening its balance sheet. We expect debt leverage to lower from 5x to 3.5x over the next 2 years and think valuation can normalize better as the financial picture clears up."


Canaccord Genuity analyst Ken Herbert expects a strong quarter for Heico Corp. (HEI-N).

The U.S. aerospace and electronics company is scheduled to report third-quarter results on Aug. 24.

Mr. Herbert is projecting earnings per share of 61 cents, ahead of consensus projections.

"We model in just under 7-per-cent organic growth, similar to Q2/16, but we believe growth will be stronger in the FSG [Flight Support Group] segment, driving some mix shift," he said. "We believe industry fundamentals are improving, and potential acquisitions and upside to 2017 estimates can also be positive catalysts."

He added: "HEI's organic growth in its FSG segment (where it reports virtually all of its commercial aftermarket exposure) has followed a three year peak-to-peak cycle. With organic growth rates peaking at well over 20 per cent in 2010-2011, and then again in the high-teens in 2013-2014, expectations are building that organic growth rates will peak again in the late-2016-2017 period. We agree that the market fundamentals support accelerating organic growth in the FSG segment, but we believe the peak growth rate again will be a slight step down from prior peaks, representing both the increased size of the FSG segment, but also the increased competition in the legacy parts market, especially on the engine side."

In a research note previewing the quarterly results, Mr. Herbert did question whether the stock's valuation has "gotten ahead of itself?"

"The most common pushback we get on HEI is the valuation, which we agree is high after the 35-per-cent move so far this year," he said. "We continue to rate HEI a buy, and we have slightly increased our price target to $82 (based on the blend of a 16.5x EBITDA and 33x EPS multiple, applied to our 2017 estimates), but we are not expecting a significant move in the stock around the Q3/16 results. However, we expect the stock to continue to grind higher as the market fundamentals continue to improve, 2017 estimates increase, and potential acquisitions help the company to continue to grow into the higher valuation. Management enjoys a well-deserved strong reputation, and FCF [free cash flow] should remain strong."

Mr. Herbert's target price rose to $82 from $75. The consensus is $71.14.

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In other analyst actions:

Twitter Inc. (TWTR-N) has "more risk than reward" as broadcast capabilities drift into social platforms, according to Evercore ISI analyst Ken Sena, who downgraded the stock to "sell" from "hold." He lowered his target to $17 (U.S.) from $18. The average is $16.46, according to Bloomberg.

Evercore ISI analyst Ken Sena upgraded Priceline Group Inc. (PCLN-Q) to "buy" from "hold." He raised his target to $1,650 (U.S.) from $1,350. The analyst average is $1,577.61.

Sierra Metals Inc. (SMT-T) was rated new "buy" at Rodman & Renshaw by analyst Heiko Ihle with a 12-month target price of $3 (Canadian) per share. The average is $2.75.

Kinder Morgan Inc. (KMI-N) was raised to "overweight" from "equalweight" by Morgan Stanley analyst Tom Abrams. He raised his target to $24 (U.S.) from $23, versus the average of $22.06.

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