Scotiabank analyst sees attractive entry point for high-yield energy infrastructure stock

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Infrastructure review

Scotiabank analyst Robert Hope reviews a busy day for energy infrastructure profit reports,

“We outline key takeaways from Friday’s quarterly earnings and conference calls (ACO, ALA, AQN, BIP, BLX, EMA, ENB). Results were ahead of expectations for ACO, AQN, CU, EMA, and PPL, while BIP and EMA were in line with expectations and BLX was below expectations. Our ACO target price increases $1 to reflect stronger Structures earnings while our ENB target price increases $1 to reflect project announcements. Quick thoughts on the quarter: Algonquin: The company continues to make progress on key rate filings as well as improving the cost structure of its utilities … ATCO & Canadian Utilities: Another solid quarter for these two companies. We move up our CU estimates to reflect continued strength in Australia. Our ATCO estimates move up (again) to reflect a stronger than expected Structures outlook. We prefer ACO over CU. Boralex: A soft quarter given weak generation - a theme we have seen across our renewable coverage … Brookfield Infrastructure: Overall an in-line quarter … Emera: As expect the company rolled forward its 7%-8% rate base growth outlook by a year to 2030 … Enbridge: The company added another $3b of projects to its backlog and appears highly confident that the Mainline Optimization project 1 (MLO1) will be sanctioned in the coming weeks … Pembina: The company continues to make progress adding contracts and re-contracting the peace pipeline with 50 mmbb/d secured recently. The next wave of growth is also becoming more clear as well. The shares were down following the in-line quarter which we believe presents an attractive entry point”

Mr. Hope has “sector outperform” ratings Pembina Pipeline Corp., Emera Inc, Brookfield Infrastructure, Rockpoint Gas Storage, AltaGas Ltd, TC Energy Corp, TransAlta Corp, Brookfield Renewable, Capital Power Corp, Cia Paranaense de Energia, Cia de Saneamento Basico do Estado de Sao Paulo., Northland Power Inc and Keyera Corp.

Credit

Prominent U.S. bankruptcies have led to credit concerns that Goldman Sachs credit strategist Spencer Rogers believes are misplaced as described in Goldman’s weekly newsletter,

“Rogers says the defaults probably aren’t a canary in the corporate-credit coal mine: Every major credit default cycle in the last 30 years has coincided with a recession or a major industry shock. Our US economists forecast GDP growth of more than 2 per cent in 2026. ‘Until we get a material weakening in economic growth it would be hard to get a full-blown credit default cycle,’ Rogers says. Other indicators that would normally signal the onset of a broader default cycle are also missing: Trailing one- and three-month default rates are falling; there hasn’t been a big increase in the amount of money banks are setting aside for loan losses; and there hasn’t been a significant pickup in consumer and small business bankruptcies. Public credit markets have been relatively unaffected. High-yield corporate bond spreads (the extra yield investors demand to own riskier bonds instead of Treasuries) have increased by 20 basis points over the last month. “That’s not a big move for that market by historical standards—we’ve basically gone from close to all-time tight high-yield credit spreads to slightly wider,” Rogers says. Provided economic growth stays durable and interest rates continue to come down, “we’re still in a very constructive environment for credit writ large,” he adds”.

Markets

JP Morgan strategist Mislav Matejka thinks equity markets will stabilize,

“Credit outlook is another concern, given tight spreads and some adverse recent news; however, we do not see a systemic issue and balance sheets of both corporates and banks are in strong shape. The state of the US labour market is unclear, with Challenger cuts up again and sentiment surveys soft, but this is offset by well behaved claims, better than feared ADP print and ISM services employment component that moved up most recently. At the same time, inflation is staying subdued and Brent rangebound, which suggests any move up in bond yields should not be for the wrong reasons, and we believe central banks will remain dovish. While recognizing the concerns, we would not expect derisking to have legs, as we believe activity-rates tradeoff will remain supportive in the background. We note Eurozone IFO and PMIs moved to year highs, as did US services ISM new orders, and the recent upgrades to China growth outlook.”

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