Inside the Market’s roundup of some of today’s key analyst actions
Touting the “resilient, utility-like cash flow predictability” across its integrated infrastructure asset portfolio in North America, ATB Capital Markets analyst Nate Heywood initiated coverage of Enbridge Inc. (ENB-T) with an “outperform” recommendation.
“Given its expansive network of assets, the Company is structurally supportive of energy transition initiatives through its growing focus on natural gas (including RNG) and renewables,” he said in a research report released Friday titled Forget Art Vandelay... ENB is the Exporter of Choice.
“ENB maintains a significant secured growth program and continues to employ a self-funded equity model to help maintain its attractive leverage position. With the expected execution of recent material acquisitions, ENB is expected to continue to maintain financial discipline and aims for leverage to remain within its 4.5-5.0 times range.”
Mr. Heywood sees the Calgary-based company “well situated” to take advantage of an “evolving domestic energy macro” through its “well-diversified” fleet of liquids pipelines, natural gas transmission, midstream, natural gas distribution and storage, and renewable power generation. He also sees it exposed to key global fundamentals and growing energy demands.
“The cash flow profile is heavily resilient, with 80 per cent of EBITDA underpinned with inflation protection and 98 per cent of EBITDA from utility-like and contracted cash flows,” he said. “The strong contracted cash flows and associated resilience are seen across the business from its utility assets, to its liquids and natural gas pipelines, and PPA demand for renewable power developments. Overall, the high proportion of contracted cash flow provides confidence in the Company’s ability to meet its growth capital demands and the current secured capital program of $25-billion. With execution of the growth program, management has pointed toward a medium-term (beyond 2025) CAGR [compound annual growth rate] of 5 per cent for EBITDA.”
“ENB has been transitioning its asset portfolio over recent years, increasing its proportion of cash flows toward natural gas assets through growth capital allocations and M&A. The current secured capital program is heavily weighted to the natural gas business lines (more than 80 per cent), with significant amounts being dedicated to growth in the gas transmission and midstream and gas distribution and storage segments. In addition, with the recently announced US utility acquisitions, we estimate pro-forma EBITDA to be 46 per cent from its natural gas business lines compared to 40 per cent in 2022. The investments highlight ENB’s commitment to contracted assets and energy transition initiatives.”
Also emphasizing its “robust” capital program and “sustainable” balance sheet, which he called “strong,” Mr. Heywood thinks investors should be attracted by Enbridge’s history of dividend growth, pointing to its 29 consecutive raises and expectation “to continue increasing its dividend annually with DCF growth.”
“The dividend has boasted a 5-per-cent CAGR since 2019 and the current $3.66 dividend yields 7.5 per cent, which is supported by a sustainable payout ratio within its 60%-70% target range (2024e: 67 per cent),” he said.
Seeing Enbridge “commanding a top tier valuation,” Mr. Heywood set a one-year target of $56 per share. The average target on the Street is $53.34, according to Refinitiv data.
“Overall, we view ENB as a name that attracts a premium valuation in the energy infrastructure space given its significant scale, unique export exposure and growing predictable cash flow base. ENB currently trades at a 2024 estimated EV/EBITDA multiple of 11.4 times, which we expect to compress to 10.5 times in 2025, compared to peers trading between 9-11 times,” he said. “With noted insulation from commodity volatility, ENB provides upside in a dovish interest rate environment and the near-term portfolio growth should attract interest given its self-funding philosophy.”
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In a separate report, Mr. Heywood initiated coverage of TC Energy Corp. (TRP-T) with a “sector perform” recommendation, believing it benefits from “underpinning rate-regulated and contracted cash flows, which offer long-term predictability and account for 97 per cent of EBITDA.”
“The legacy asset base consists largely of natural gas pipeline assets in Canada, the US, and Mexico, and are further complemented by the Liquids Pipelines and Power divisions; however, TRP is currently pursuing a spinoff of Liquids to create a pure-play, independent, publicly-traded entity called South Bow, and unlock shareholder value in its remaining legacy business,” he said in a report titled A Tale of Two Value Streams – Get to Know Bow.
“Following a period of significant development and major projects, TRP is entering an execution phase and is expected to remain disciplined through achievement and maintenance of a more conservative leverage profile target of 4.75 times debt/EBITDA (by year-end 2024). The recent growth initiatives are expected to grow EBITDA at an 7-per-cent CAGR [compound annual growth rate] through 2026 for TC Energy, post spinoff (2-3 per cent for South Bow).”
Mr. Heywood said the rationale for the spinoff centres on the simplification of corporate structures and “ability to maximize shareholder values for each entity.”
“Keystone is the key asset for the new South Bow entity,” he noted. “EBITDA is expected to grow at a more modest 2-3 per cent annually and management outlined an investment multiple target for growth of 6-8 times. South Bow is expected to have an initial leverage target below 5.0 times debt-to-EBITDA, which should sequentially decrease by 0.25-0.5 times within 3 years of the transaction. There is an assumed initial debt balance of $7.9-billion, which incorporates $6-billion of senior debt and $2-billion of junior subordinated notes (50-per-cent equity credit).”
Like its peer Enbridge, the analyst pointed to TC Energy’s “attractive” distribution history with annual increases over the last 23 years and the expectation to continue with both the pro-forma TRP and South Bow.
“The pro-forma TRP is targeting annual dividend growth in the 3-5-per-cent range with the payout ratio expected to remain near 50 per cent,” he said. “South Bow will see modestly lower dividend growth in the 2-3-per-cent range (in-line with EBITDA expectations). With the spinoff, management noted that the sum of dividends between the two entities will be equivalent to the current TRP dividend at the time. The current $3.72 per share dividend offers a yield of 7.0 per cent.”
Believing it possesses a valuation that “commands a premium,” Mr. Heywood set a target of $54 per share. The average is $53.18.
“Given the heavy proportion of quality and diversified cash flows that provide reliable and predictable results, in combination with deleveraging initiatives, we view TRP as a name that commands a premium to midstream names and should trade more in line with Utilities,” he said. “TRP currently trades at a 2024 times EV/EBITDA multiple of 10.4 times, which compares to peers trading near 9-11 times.”
He added: “The name typically trades inversely to interest rates and we suspect capital rotation into TRP will come through strategy execution and a rejuvenated balance sheet.”
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RBC Dominion Securities analyst Robert Kwan continues to see Intact Financial Corp. (IFC-T) as “a core holding given its strong long-term track record of growth and profitability with the company and industry having positive fundamentals” and touted the presence of potential catalysts and “strong defensive attributes.”
However, despite expressing a more bullish view on Canadian diversified financial companies heading into 2024, he lowered his recommendation to “sector perform” from “outperform” on Friday, seeing its shares as appropriately valued currently.
“Our prior upgrade reflected IFC’s shares trading at a very attractive valuation (2.0 times P/BV) coupled with our view that was IFC continuing to deliver strong financial results and that the industry backdrop was also favorable,” said Mr. Kwan.
“With IFC’s shares trading at 2.5 times P/BV [price to book value] and our more constructive view on our coverage universe in 2024, with us favoring stocks with a bit more offensive tilt, we see IFC’s shares as fairly valued. We still think IFC is successfully delivering strong financial results and 2024 EPS/BVPS [earnings per share to book value per share]should benefit from strong premium growth due to hard market conditions and higher investment income due to higher book yields with potential further upside if catastrophe losses in 2024 are significantly less than 2023. We recognize that to the extent IFC engages in further M&A, particularly something sizable in Canada, this could be a positive catalyst for the shares.”
Mr. Kwan reiterated a $228 target for Intact shares. The current average is $224.61.
On the industry, Mr. Kwan said he’s “tilting a bit more offensive” in 2024, but he cautioned that he’s still “valuing defence.”
“Given the lack of clarity on macro and economic conditions, we prefer stocks that have a balanced mix of offensive and defensive attributes,” he added. “Our 2024 best ideas (EFN, BN, then BAM) tilt moderately more offensive vs. our 2023 best ideas (EFN, X, then BAM). Although we still remain slightly cautious on the short-term outlook, we remain cognizant that the macro and economic outlook could improve and that a stronger market recovery may occur in 2024. As a result, we believe it remains prudent to be positioned in names with a solid blend of growth and defensiveness pending early signs of improving market conditions and then slowly pivot to more offensive-oriented names as more evidence emerges of a sustainable market rally. Our 2024 best ideas reflect a solid mix of positive fundamentals; potential catalyst(s); defensive attributes; and in most cases, attractive valuations: Element Fleet; then Brookfield Corp.; and then Brookfield Asset Management.”
His ratings and targets for his best ideas are:
* Element Fleet Management Corp. (EFN-T) with an “outperform” rating and $31 target, up from $30. The average is $25.58.
“A rare stock for all seasons. Simply put, we think EFN is a stock that can perform well in pretty much any scenario in 2024 (e.g., offensive or defensive markets, recession, high inflation, high interest rates, etc.), but bigger picture, we think EFN is a core holding that should be in any portfolio,” he sai.
“Why we still have high conviction in our bullish call one year later: (1) there is strong evidence that OEM production is back to pre-pandemic levels, unlike at the start of 2023, when it was unclear when OEM production would normalize; (2) the return of capital catalyst is finally imminent vs. being something that was ‘x’ years away; and (3) EFN continues to execute winning new customers and cross-selling existing clients additional fleet services.”
* Brookfield Corp. (BN-N/BN-T) with an “outperform” rating and US$52 target, up from US$44. The average is US$46.20.
“Positive fundamentals excluding Real Estate, although Real Estate trends appear to be stabilizing,” he said. “While BN’s Real Estate segment was likely the primary focus for investors in 2023, we think that BN’s other verticals were performing well. Excluding Real Estate, BN’s LTM [last 12-month] OFFO/share grew by 9 per cent year-over-year. In Real Estate, we think there were encouraging signs in 2023 as Real Estate FFO is showing signs of stabilizing in the past couple of quarters.”
“Potential catalyst(s): (1) should interest rates decline, we think this would be most positive for BN’s Real Estate vertical, via higher OFFO from lower interest expense/improved leverage metrics and higher asset values from lower discount rates; (2) even without lower interest rates, Real Estate OFFO could increase from higher lease rates, increased lease up activity; and (3) favorable monetization markets facilitating opportunities to surface value.”
* Brookfield Asset Management Ltd. (BAM-N/BAM-T) with an “outperform” rating and US$49 target, up from US$41. The average is US$38.49.
“While we think EFN, IFC, and DFY are the most defensive within our coverage, we think BAM has certain defensive attributes,” he said. “For example, we think BAM’s FRE is not as sensitive to a significant decline in public market valuation as investors might think as we estimate only about 25 per cent of BAM’s revenues are driven by public market valuations, with the remainder of its revenues largely driven off of a percentage of 3rd party capital committed or outstanding and those values are not impacted by changes in public market valuations. Furthermore, certain BAM funds (e.g., credit funds, non-flagship fund strategies) have management fees that are received only when capital is deployed (not when capital is committed), so if BAM were to make (opportunistic) investments during a capital markets decline, this would help to incrementally increase revenues.”
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Citi analyst Jon Tower warned Starbucks Corp.’s (SBUX-Q) expansion of its “bring your own cup” initiative adds “an additional risk amid shaky data.”
On Wednesday, the U.S. coffee giant announced customers can now use personal cups for drive-thru and mobile orders, calling the change a “milestone” in its commitment to reduce waste by 50 per cent by 2030. Participants will receive a 10-ent discount and receive 25 bonus stars for its reward program.
“We estimate this equates to an 28 per cent/mid-teens discount on a drip coffee/specialty beverage purchase cycle,” said Mr. Tower. “SBUX notes that this rollout is a direct result of its ‘test and learn’ process, but we see it raising obvious operational/throughput questions, and at least a period of customer/employee education to internalize the new processes.”
“SBUX plans to take and hand back customer cups using a ‘contactless vehicle’, and they will essentially create the beverage in another cup, move to the customer cup and add toppings. We find it hard to see how adoption of this additional exchange doesn’t slow down drive-thru and disrupt MOAP [mobile order and pay] flow, and/or require another chunk of investment in labor, and we expect some ongoing confusion regarding cup sizes, what constitutes a clean cup, etc.”
Calling the value of the program “compelling,” Mr. Tower added: “Coffee is a habit, many of SBUX customers might be unmoved by any discount, and the consumer is trading time for cost savings; however, SBUX’s footprint has also extended firmly to ‘middle America’, and the value looks compelling. We estimate BYOC equates to a 28 per cent/mid-teens discount on an ongoing drip coffee/specialty beverage purchase cycle, compared to a 3-4 per cent/7-8 per cent effective discount from rewards using pay-as-you-go/stored value.”
Also warning of “mixed” high-frequency data at the end of 2023, Mr. Tower opened a “downside 30-day catalyst watch” for Starbucks shares, cutting his target to US$103 from US$110 with a “neutral” recommendation (unchanged). The average on the Street is US$113.68.
“We see: (1) risk to Street F1Q24 (ended 12/31) top-line numbers given weaker U.S. footfall throughout the quarter, and (2) risks that challenging weather compares and throughput disruptions regarding the new BYOC platform lead to weakening early F2Q24 high-frequency data and further re-sets in Street expectations into and out of F1Q earnings,” he said.
“In addition to broader inflation pressures/risks, management changes/unionization pushes could be tied to additional partner investments, and new ESG initiatives on the horizon present additional unknowns for forward looking estimates. China COVID-related lockdowns are likely to limit NT positive surprises, and it feels appropriate for shares to be trading near multi-year lows relative to the S&P 500. Shares at these levels also suggest there would be room for meaningful upside without bottom-ticking the trade if the next 1-2 quarters offer better clarity into the U.S, transformation, a bottoming in China and reassurance of FY24 targets/longer-term growth algorithm.”
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In other analyst actions:
* National Bank’s Cameron Doerksen raised his Cargojet Inc. (CJT-T) target to $129 from $109 with a “sector perform” rating. The average on the Street is $137.17.
* In response to Thursday’s announcement of the dismissal of CEO Sébastien de Montessus, BMO’s Raj Ray cut his Endeavour Mining Corp. (EDV-T) target to $34 from $38, keeping an “outperform” rating. The average is $40.97.
“We do not anticipate any operational or financial impact at this point,” he said. “From an ESG perspective, while we acknowledge the prompt action taken by the Board, we believe [Thursday’s] announcement could impact the company’s ESG credentials.”
* Following a Thursday corporate update and raise to its fourth-quarter 2023 revenue guidance, Echelon Partners analyst Andrew Semple bumped his target for Indiva Ltd. (NDVA-X), a London, Ont.-based producer of cannabis edibles, to 15 cents from 13 cents, keeping a “speculative buy” rating.
“We are very pleased to see the strong traction of Indiva’s products, highlighting the Company’s repeated success at innovating and manufacturing market leading edible products,” he said.
“With higher revenues, we believe Indiva will see a sequential step up in adjusted EBITDA. Our new Q423 EBITDA forecast is $1.18-million (prev. $0.87-million), reaching levels where the Company should achieve breakeven positive cashflow from operations in Q423 (prior to net working capital changes), and approaching (though not yet achieving) positive net income. With Indiva on the cusp of cashflow generation, further revenue growth should result in material operating leverage to cashflows, resulting in rapid growth in cashflow in 2024 as new product sales grow.”
* Baird’s Mark Altschwager increased his target for Lululemon Athletica Inc. (LULU-Q) to US$555 from US$520, exceeding the US$497.15 average, with an “outperform” rating.
* In a note previewing its fourth-quarter results, Citi’s Spiro Dounis increased his Pembina Pipeline Corp. (PPL-T) target by $1 to $47 with a “neutral” rating. The average is $51.70.
“We adjust our model ahead of earnings and lift our TP to $47 from $46 to reflect the accretive Aux Sable and Alliance acquisition,” he said. “Our ‘24 EBITDA estimate of $4.2-billion exceeds the high-end of the guidance range of $4.0-billion to reflect a three-quarter benefit ($0.25-billion) from the impending acquisition. We expect PPL to exit ‘23 above a $4-billion EBITDA run-rate and see organic basin growth driving incremental volumes through the system. Lower ‘24 Marketing EBITDA and Cochin rates are ‘24 EBITDA headwinds. Notably, we estimate an more than $50-million headwind from lower NGL prices in ‘24 vs. ‘23 levels. Delays or a slow ramp in Coastal Gas Link and/or the TMX pipeline remain the primary risk to our estimates due to the impact on overall Canadian basin growth.”
* Jefferies’ Samad Samana raised his Shopify Inc. (SHOP-N, SHOP-T) target to US$80 from US$65 with a “hold” rating. The average is US$73.16.