RBC's Opinion Sorry if it has been posted already. New target, $20. Sorry also if hard to read. Am copy pasting from their PDF.
October 31, 2018
AltaGas Ltd.
Putting up the goal posts, but the path forward is
hardly a tap in
Our view:
We believe the stock will be rangebound, if not continue to
drift, until there is greater clarity on the path forward for funding and
the dividend. Quite possibly, even with a comprehensive plan, which is
expected to be unveiled later this quarter, the stock may also stay in the
penalty box into 2019 until execution of the plan becomes clearer.
Key points:
A str ategic dividend cut appears to be in the cards; we think a roughly
40% cut is most likely.
We left the conference call with the impression
that a strategic cut in the dividend was being telegraphed. While we have
previously noted that the payout ratio is high, we felt that the company
had the cash flow to sustain, and even grow, the dividend. That being said,
we think that a strategic dividend cut that "leaves no doubt" may be the
best path forward. Our revised dividend forecast incorporates a 40% cut
to a new annualized rate of $1.32/share.
Stepped-up asset sales include a target for an additional $1.5–2.0 billion
by early 2019.
AltaGas is looking at focusing its assets on Gas and U.S.
Utilities while seeking to sell another $1.5–2.0 billion, with that range
including the estimated sale of an additional stake in the Northwest Hydro
business that attracted a 27x 2017 EBITDA valuation this past summer.
Management noted that it would be "significantly disappointed" if there
is not clarity on the sales by the end of Q1/19.
Looking to maintain an investment grade credit rating.
The company
expressed its target of maintaining an investment grade credit rating. With
S&P currently at BBB (negative outlook), we think that AltaGas would like
to maintain a BBB rating, but we also see potential to drop to a BBB- rating,
which would still be investment grade and allow for additional headroom
within the credit metrics.
"Equity is precious."
This came up multiple times on the conference call
and we see it as highlighting an aversion to increasing the share count. As
such, AltaGas announced that it will turn off the premium component of
its DRIP and we also believe that the funding plan going forward will be
geared toward minimizing the issuance of common equity.
Reducing our price target to $20.00 (from $28.00); introducing our new
AFFO metric.
Our new price target is based on a revised sum-of-the-
parts projection one-year out of $18.00–23.00/share. Our revised analysis
takes into account recent M&A valuations (e.g., San Joaquin), pressure
on midstream sector valuations, and changes in our financial forecast. As
further detailed in this report, we are introducing a new adjusted funds
from operations (AFFO) metric to better capture cash flow from utility
assets. With that, our 2018, 2019, and 2020 AFFO/share estimates are
$1.79, $2.23, and $2.55, respectively).