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

ATB Capital Markets analyst Nate Heywood thinks TransAlta Renewables Inc.’s (RNW-T) $439-million acquisition of a portfolio of assets from TransAlta Corp. (TA-T) is “well aligned” with his investment thesis of “improving cash flow quality through contracted asset growth with a preference towards renewable generation technologies and geographic diversification.”

“TransAlta management had previously highlighted its intention to drop these assets down to RNW; which, aligns well with the typical growth structure for TA to develop highly contracted assets to then divest to RNW, reducing development risk for the subsidiary,” said Mr. Heywood. “The deal improves RNW proportional generation from renewable technologies and increases geographic diversification in Alberta and the U.S. The deal will also increase RNW’s average contract life from its total fleet of assets from 10 years to 12 years. The asset growth will also support RNW’s proclivity for stable dividend distributions, targeting a payout ratio 80-85 per cent.”

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The analyst views the deal, announced Wednesday after the bell, as accretive for TransAlta Renewables, but said it was “not a surprise given management’s previous messaging around its intentions for the suite of assets.”

“Given RNW’s 2021 estimated EV/EBITDA of 12 times, the acquisition at a 10 times multiple is accretive to the Company’s cash flow profile,” he said.

Keeping a “sector perform” recommendation for RNW, Mr. Heywood raised his target for its shares to $19 from $17.50. The current average on the Street is $17.50, according to Refinitiv data.

“The diverse generating assets and regions offer varying levels of cash flows to TransAlta Renewables; however, all are supported by stable long-term contracts with a weighted average remaining life of 12 year,” he said. “With the growing cash available for distribution, the Company has also shown its willingness to increase its dividends and distributing returns to shareholders with a long-term target payout ratio of 80-85 per cent. Notably, the current dividend yields 4.8 per cent. Our 2020 estimates imply an EV/EBITDA multiple of 13.1 times in 2020, in line relative to its peer group average of 13.5 times.”

In a separate note, Mr. Heywood maintained an “outperform” rating and $11 target for TransAlta shares after the announcement of the deal and a 6-per-cent increase to its quarterly dividend. The average on the Street is $10.72.

“Overall, we view the announcement as positive for TransAlta given the successful dropdowns at a reasonable valuation, while retaining cash flows through its ownership in RNW,” he said. “The drop downs were largely expected by the market given previous messaging and we expect the proceeds will help fund the current capital program, focused on the Company’s off coal strategy. The new annualized dividend offers a dividend yield of 2.0 per cent.”

Elsewhere, Credit Suisse analyst Andrew Kuske hiked his TransAlta target to $16 from $12 with an “outperform” rating.

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“TransAlta is substantially de-risked and now moves into the execution phase of the investment plan in a market with less regulatory uncertainty,” he said “In our view, TA is well positioned to benefit from margin expansion from the coal-to-gas conversions and the structural reality of the TransAlta Renewables business provides explicit downside support.”

Mr. Kuske’s target for TransAlta Renewables rose to $19.50 from $17 with a “neutral” rating.

“In our view, the transaction helps shift the ‘power or purity’ in RNW’s portfolio,” he said.

“We view three distinguishing features for TransAlta Renewables as: (a) public sponsor relationship; (b) dropdown visibility; and, (c) the generation mix has a higher than typical fossil percentage.”

Scotia Capital’s Robert Hope raised his target for TransAlta Renewables to $19 from $17.50, keeping a “sector perform” recommendation.


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Though he cautioned investors about the potential for further risk moving forward, Industrial Alliance Securities analyst Elias Foscolos raised his target for shares of Shawcor Ltd. (SCL-T) following the $120-million sales of its Pipeline Performance Products (Products) business to privately held Seal for Life Industries.

He sees the transaction, announced late Wednesday, as a move toward re-risking its balance sheet.

“Due to a lack of capital investment in the oil & gas sector, the PL&PS segment has struggled to generate EBITDA in recent years,” said Mr. Foscolos. “Considering the current environment, we believe the 13 times sales multiple is attractive. SCL has also stated that the assets do not align with its strategy moving forward. Proceeds will be used to deleverage its balance sheet, help achieve its goal of $60-million in annual SG&A cost savings and for working capital. However, with the sale of the Products business, there will be increased reliance on management to execute SCL’s strategy, specifically profitability within the PL&PS business. Investors will likely be paying closer attention to results from this segment.”

Seeing it accretive to leverage metrics and share value, Mr. Foscolos increeased his target to $5 from $4, keeping a “speculative buy” recommendation. The average on the Street is $4.43.

“With the Company’s focus on deleveraging, these assets were not deemed a core part of their business moving forward,” he said. “This sale adds some additional risk as investors will focus on whether SCL can make its PL&PS segment profitable in 2021 without these assets. Post updating our model accounting for the sales proceeds less the EBITDA lost, we have elected to increase our target.”

Elsewhere, National Bank Financial analyst Michael Robertson upgraded Shawcor to “outperform” from “sector perform” with a $5.75 target, up from $4, while TD Securities’ Aaron MacNeil increased his target to $4.25 from $4 with a “hold” rating. The average target on the Street is $4.43.

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In other analyst actions:

* In response to its joint venture with LG Electronics Inc., JP Morgan analyst Ryan Brinkman raised his target for Magna International Inc. (MGA-N, MG-T) to US$86 from US$73 with an “overweight” rating. The average is US$69.82.

The venture serves to highlight Magna as an inexpensive play on industry secular growth themes,” he said.

* TD Securities’ Daryl Young increased his target for NFI Group Inc. (NFI-T) to $26 from $16 with a “hold” rating. The average is $24.14.

* Scotia Capital analyst Paul Steep raised his target for Dye & Durham Ltd. (DND-T) to $52 from $47 with a “sector outperform” rating. The average is $44.75.

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* Piper Sandler analyst Nicole Miller Regan increased her target for Restaurant Brands International Inc. (QSR-N, QSR-T) to US$65 from US$62. The average is US$64.69.

* Canaccord Genuity analyst Aravinda Galappatthige raised his target for Cineplex Inc. (CGX-T) to $8.50, matching the consensus on the Street from $7. He reitreated a “hold” recommendation.

* RBC Dominion Securities analyst Douglas Miehm cut his target for CRH Medical Corp. (CRH-T) to $4 from $4.50 with an “outperform” rating. The average is $4.34.

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