On today’s TSX Breakouts report, there are just two stocks on the positive breakouts list (stocks with positive price momentum), and 138 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that surfaced on the negative breakouts list – Keyera Corp. (KEY-T). Keyera has an attractive dividend yield of 7 per cent. Given the conservative payout ratio, the monthly dividend appears sustainable with room for a potential dividend increase in 2023. The share price is under pressure along with the weakness in the overall markets. As a result, this is a stock that income investors may want to monitor.
The stock has 10 buy-equivalent recommendations and four neutral recommendations with a forecast return averaging 30 per cent.
A brief outline on Keyera is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Calgary-based Keyera is a midstream energy company, providing natural gas gathering and processing, transportation, storage and marketing services to natural gas and oil sand producers. The company’s three reporting segments are: gathering and processing, liquids infrastructure and marketing.
Investment thesis
- Positive natural gas pricing environment.
- Modest growth. Between 2022 and 2025, management targets adjusted EBITDA will increase at a compound annual growth rate of between 6 per cent and 7 per cent.
- Stable monthly dividend, currently yielding 7 per cent. The dividend is supported by strong cash flow generation.
- Solid balance sheet.
- The Key Access Pipeline System (KAPS) pipeline project is over 70 per cent complete and anticipated to be operational at the end of the first quarter of 2023. KAPS will provide cash flow stability with 75 per cent take-or-pay commitments, in which a customer has a minimum revenue or volume commitment.
- Reasonable valuation.
Dividend policy
The company pays its shareholders a monthly dividend of 16 cents per share or $1.92 per share on a yearly basis. This equates to an attractive current annualized dividend yield of 7 per cent. The dividend has been maintained at this level since 2019.
The dividend appears sustainable with room to grow given the conservative payout ratio of 55 per cent of distributable cash flow for the first half of 2022. The payout ratio was 51 per cent in the second quarter. Management targets a payout ratio of between 50 per cent and 70 per cent so the current payout ratio is at the low end of this target range.
Quarterly earnings and outlook
Before the market opened on Aug. 4, the company reported better-than-expected second-quarter financial results driven by strength from its marketing business segment.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $316-million, surpassing the Street’s forecast of $273-million and up from $224-million reported during the same period last year. Distributable cash flow was $209-million, or 94 cents per share, up from $148-million and 67 cents per share reported last year. Earnings per share came in at 78 cents per share, up from 36 cents per share reported last year.
At quarter-end, net debt-to-adjusted EBITDA stood at 2.3 times, below management’s target range of between 2.5 times and 3 times. Management raised its guidance for its marketing segment with record realized margin of between $380-million and $410-million expected, up from its previous guidance of between $300-million and $340-million.
On the earnings call, president and chief executive officer Dean Setoguchi remarked on the growth opportunity arising from the nearly completed KAPS liquids pipeline system, “KAPS is a game changer for Keyera as it is a missing link in our value chain. It will connect NGLs from our Montney G&P business and other third-party facilities to our core Liquids Infrastructure business in Edmonton and Fort Saskatchewan. It also provides meaningful future growth opportunities like our Zone 4 expansion, which would extend the pipeline to the BC border.” However, management indicated that costs have increased due to “weather related productivity losses, as well as inflationary pressure for items such as matting required to access excessively wet construction sites.” The cost is now expected to be approximately $900-million (net to the company), up from management’s previous guidance of between $800-million and $880-million.
Analyst recommendations
With a market capitalization of $5.9-billion, this mid-cap stock is well covered by the Street. According to Bloomberg, after the company released its second-quarter earnings results 10 analysts issued buy recommendation and four analysts issued neutral recommendations.
The firms providing recent research coverage on the company are: ATB Capital Markets, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Credit Suisse, Morningstar, National Bank Financial, Peters & Co., Raymond James, RBC Dominion Securities, Scotiabank, TD Securities, Tudor Pickering Holt & Co. and Wells Fargo.
Revised recommendations
Since the beginning of September, only one analyst has tweaked his expectations. CIBC’s Robert Catellier trimmed his target price to $34 from $36.
Financial forecasts
The consensus EBITDA estimates are $1.045-billion in 2022 and $1.047-billion in 2023. The consensus earnings per share estimates are $2.29 in 2022 and $2.17 for the following year.
Earnings estimates for this year have been rising. Three months ago, the consensus EBITDA estimates were $980-million for 2022 and $1.035-billion for 2023. The consensus earnings per share estimates were $2.04 for 2022 and $2.14 for 2023.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 9.2 times the 2023 consensus estimate, which is below its five-year historical average multiple of 10 times and its 10-year historical average multiple of 11.1 times.
The average one-year target price is $36.04, suggesting the share price has 30-per-cent upside potential over the next 12 months. Analysts’ target prices range from a low of $30 (from Morningstar’s Stephen Ellis) to a high of $40 (from Peters’ Ken Chmela). Individual target prices are as follows in numerical order: $30, $33, three at $34, $35.50, two at $37, five at $38 and $40.
Insider transaction activity
Over the past six months, there has not been any trading activity in the public market reported by insiders.
Chart watch
Year-to-date, the share price is down 3 per cent.
In terms of key support and resistance levels, there is strong technical support around $25. Failing that, there is support around $20. On a recovery, the share price faces a ceiling of resistance around $30, near its 50-day moving average (at $30.95) as well as its 200-day moving average (at $30.93). After that, there is major resistance around $35.
The relative strength index (RSI) is at 29, suggesting the stock is in oversold territory. Generally, an RSI reading at or below 30 reflects an oversold condition.
ESG Risk Rating
According to risk provider Sustainalytics, Keyera has an ESG (environmental, social and governance) risk score of 22.7 as of June 23, 2022. A risk score between 20 and 30 reflects a “medium risk” rating.
Please note that this report is not an investment recommendation
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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