Capstone Infrastructure Corp T.CSE.PR.A

From Royal Bank Capital Markets, 2013.11.29

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Capstone Infrastructure Corp. (CSE) - $3.58 – Good Value Despite Potential Dividend Cut

RBC CM: Outperform, Price Target: $4.50

RBC CM published a detailed note which provides a detailed assessment of the dividend sustainability and a sum- of-the-parts analysis. In RBC CM’s view, the dividend sustainability is mainly dependant on the economics of the recontracted Cardinal Facility. Based on RBC CM’s estimates, and taking management’s 70-80% long-term payout ratio target into consideration, RBC CM believes a 20% dividend cut is possible.

Valuation: Our price target of $4.50 is based on a sum-of-the-parts analysis. Our price target implies an 2014E EV/ EBITDA multiple of approximately 8.0x, adjusted for our lower EBITDA expectations for the Cardinal facility post PPA expiration.

Price Target Impediments: Impediments to our price target include the company’s ability to renegotiate its power and gas contracts as they expire or realize market prices similar to our assumptions, its ability to extend its site lease until the end of the useful life of the Cardinal plant, material changes in gas transportation costs, and the level of accretion and investors’ acceptance of future acquisitions and project developments.