Inside the Market’s roundup of some of today’s key analyst actions
Following an “overall strong” second quarter for TSX-listed Energy Services and Infrastructure companies, Industrial Alliance Securities analyst Elias Foscolos said he’s favouring pipeline and fuel distribution stocks heading into the second half of 2020.
“The best way to summarize Q2 was that it was better-than expected for Midstream and Fuels Distribution companies, in line for Pipelines, and mixed for Utilities,” he said. " Midstream and Pipelines companies’ operating performance held up through take-or-pay contracts. Fuels Distribution companies, which do not have the luxury of take-or-pay contracts, demonstrated an impressive ability to reduce costs to keep their bottom line intact. Utility companies’ results were generally less impacted by COVID-19 and more weather-dependent.
“As we set our sights towards year-end, we are favouring the larger cap Pipelines stocks and Fuels Distribution companies with select Utility and Midstream stocks remaining attractive. In a retrospective look back, if we compare consensus EBITDA estimates for 2021 from December 2019 to today, estimates (excluding Utilities) are down 3 per cent, yet total returns are averaging negative 9 per cent on a cap-weighted basis.”
In a research report released Friday, Mr. Foscolos made a series of changes to ratings and target prices for stocks in his coverage universe after updating his financial projections based on second-quarter results, emphasizing share prices have “deteriorated” more than the outlook for most companies.
“Q2/20 results in our Energy Infrastructure coverage universe were generally at or above expectations,” the analyst said. “Midstream stocks performed well despite headwinds in commodity markets, surprising markets and outperforming the TSX post reporting. KEY has led the pack subsequent to reporting, with ALA trailing sub-sector peers, thus being the only Midstream company that did not beat expectations. Pipelines also posted solid results. We would highlight that ENB has underperformed peers despite exceeding expectations, while TRP has outperformed on results that were slightly below consensus estimates. Utilities generally performed well but have underperformed the TSX post reporting, likely due to a flow of funds into higher beta stocks (i.e., Midstream). H has performed in line with the TSX after posting a solid quarterly beat. PKI has outperformed in Fuels Distribution, as we believe the Company’s results had a surprise factor, with better-than-expected performance despite margin headwinds as a result of aggressive cost control and surging same-store sales growth.”
Mr. Foscolos upgraded the following stocks:
* TC Energy Corp. (TRP-T) to “buy” from “hold” with a $73 target, up from $68. The average on the Street is $72.39.
“TRP maintained its guidance for comparable earnings in 2020 to be similar to 2019, and that the dividend can be expected to grow by 8-10 per cent this year with annual growth of 5-7 per cent thereafter,” he said. “Our upgraded target is driven by a number of factors, including a reduced risk profile and the potential addition of the Section 4 rate case with FERC for TRP’s Columbia Gas Transmission System, which looks to increase the returns on the base system and proceed with a third phase of modernization (US$3-billion over seven years).”
* Superior Plus Corp. (SPB-T) to “strong buy” from “buy” with a $15 target, rising from $14.50. Average: $13.40.
“Due to the seasonal nature of propane demand, SPB’s annual EBITDA is weighted more toward Q1 and Q4, therefore we should not put very much emphasis on the Q2 or Q3 results,” he said. “Looking into 2021, we see SPB benefiting from a colder winter (Q1/20 was exceptionally warm in the NE U.S.), a more normalized performance from the Specialty Chemicals business, and lower operating costs. In addition, the $350-million preferred share financing with Brookfield Asset Management (BAM.A-T, Not Rated) deleverages the Company, allowing it to pursue more tuck-ins while it transitions toward becoming a pure-play propane distributor. SPB has wasted no time in putting the capital to use, closing the acquisition of Champagne’s Energy in August. Our increased target results from rolling our valuation forward.”
Conversely, Mr. Foscolos lowered his rating for Keyera Corp. (KEY-T) to “buy” from “strong buy” with a $30 target, up from $29 and above the $27.63 average.
“As expected, KEY did not increase its dividend as it historically has in Q2, however, given the strong Q2/20 results, increased Marketing guidance, projected EBITDA ramp-up from capital projects expected to come online through H2/20 along with cost-saving initiatives, and increasing stability in the energy sector, we believe a dividend increase before the end of the year is certainly a possibility,” he said. “Our increased target price is primarily driven by rolling our estimates forward which should capture a full year of contribution from the Company’s Oklahoma crude oil terminal and additional gas plant expansions. However, the strong price performance since the quarterly results compel us to lower our rating.”
He also made the following target price changes:
- Enbridge Inc. (ENB-T, “strong buy”) to $55 from $53. Average: $51.98.
- AltaGas Ltd. (ALA-T, “strong buy”) to $21.50 from $20.50. Average: $19.71.
- Gibson Energy Inc. (GEI-T, “hold”) to $25 from $24. Average: $25.41.
- Parkland Corp. (PKI-T, “buy”) to $48 from $46. Average: $44.92.
Canaccord Genuity analyst John Bereznicki also reviewed the performance of Canadian midstream energy companies, seeing “some positive in a tough quarter” but warning “challenges remain.”
“In retrospect, we believe Q2/20 domestic midstream results were generally resilient following the collapse of oil prices and broad production shut in,” he said. “All companies in our coverage universe generated Q2/20 EBITDA that was either in line with or ahead of consensus expectations. These companies either maintained (PPL, IPL, ALA, TWM) or increased (GEI, KEY) their 2020 corporate / segment cash flow guidance concurrent with their Q2/20 releases.”
Concurrent with his note, Mr. Bereznicki resumed coverage of a pair of stocks:
* Pembina Pipeline Corp. (PPL-T) with a “buy” rating and $42 target. The average is $39.71.
“We view Pembina as a relatively defensive play in the domestic midstream sector given its diverse and integrated asset portfolio, strong contracted cash flow exposure, and solid counterparty profile,” he said. “We also believe the company is well capitalized, with a sustainable dividend, and attractive longer-term growth prospects.”
* Inter Pipeline Ltd. (IPL-T) with a “hold” rating and $16 target. The average is $14.42.
“We believe Q2/20 likely represented a cyclical low point for IPL, but we nonetheless expect the company to face lingering frac spread and conventional pipeline volume weakness through 2H20,” he said. “We also view IPL as relatively levered and believe its Heartland Petrochemical Complex (HPC) could create an investment overhang until the company can further de-risk this investment. From our perspective, the likelihood of this occurring before 2021 is low, and we view shares of IPL as reasonably valued.”
Mr. Bereznicki also raised his target prices for the following stocks:
- AltaGas Ltd. (ALA-T, “buy”) with a $21 target from $20. The average is $19.71.
- Gibson Energy Inc. (GEI-T, “buy”) with a $29 target from $27. Average: $25.41.
- Keyera Corp. (KEY-T, “buy”) with a $29 target from $25. Average: $27.63.
- Tidewater Midstream and Infrastructure Inc. (TWM-T, “buy”) with a $1.30 target from $1.25. Average: $1.24.
Credit Suisse analyst Mike Rizvanovic updated his target prices for Canadian banks on Friday.
He increased his target for the following stocks:
- Royal Bank of Canada (RY-T, “outperform”) to $103 from $101. The average on the Street is $104.50.
- Canadian Imperial Bank of Commerce (CM-T, “neutral”) $95 from $91. Average: $98.21.
- National Bank of Canada (NA-T, “underperform”) to $60 from $58. Average: $66.36.
He lowered these:
- Laurentian Bank of Canada (LB-T, “underperform”) to $25 from $27. Average: $27.77.
- Bank of Nova Scotia (BNS-T, “neutral”) to $56 from $59. Average: $62.12.
- Bank of Montreal (BMO-T, “neutral”) to $75 from $76. Average: $79.19.
Melcor Real Estate Investment Trust’s (MR.UN-T) “challenges” are likely to persist into the second half of the year, said Desjardins Securities analyst Kyle Stanley in the wake of in-line second-quarter results.
On Aug. 6, the Edmonton-based REIT reported funds from operations of 21 cents, matching expectations. Occupancy slid 1.2 per cent year-over-year, while same-property net operating income was down 6.3 per cent due, in part, to a $0.7-million provision for bad debt booked.
Mr. Stanley said more provisions are to come in the third quarter.
“MR has received requests from tenants representing 8 per cent of GLA to apply for CECRA; the REIT’s 2Q20 NOI was not impacted by the 25-per-cent landlord abatement under the CECRA program as it had not yet finalized all agreements,” he said. “The REIT’s expected 2Q20 CECRA rent abatement is $0.5-million ($2-million or 11 per cent of revenue qualifies for the program). As a result, we believe MR will recognize incremental provisions related to CECRA and other lease amendments in 3Q.”
He added: “MR realized a $57.3-million fair-value loss to investment properties (7 per cent of portfolio value) during the quarter, representing a declining NOI run rate as well as a 25–50 basis points increase in cap rates and discount rates. The negative valuation revisions include: (1) $35.2-million (7 per cent) in the retail portfolio, (2) $18.5-million (11 per cent) in the office portfolio, and (3) $3.6-million (6 per cent) in the industrial portfolio.”
Pointing to a “more subdued” NOI outlook and “modest” cap rate expansion, Mr. Stanley reduced his target for Melcor units to $4.50 from $5, keeping a “hold” rating. The average on the Street is $4.75.
“Rent collections are trending in the right direction; however, we expect NOI to deteriorate further in 3Q as the REIT recognizes additional provisions related to rent deferrals and abatements under the CECRA program,” he said.
In other analyst actions:
RBC Dominion Securities initiated coverage of Pason Systems Inc. (PSI-T) with a “sector perform” rating and $8 target. The average on the Street is $8.29.
MORE TO COME