RBC view of FRU with $9 TargetThought this RBC published review might be of interest.
Freehold Royalties (FRU)
Luke Davis, Analyst
(403) 299-5042
luke.davis@rbccm.com
Defensive royalty model well positioned in times of uncertainty. In our minds,
Freehold’s royalty model is well positioned in times of uncertainty given a clean
cost structure with no exposure to operating costs, capital expenditures, or asset
retirement obligations. While we do expect Canadian volumes to trend in-line with
the broader basin, the company is well diversified from both a geographic and
counterparty perspective with the company’s recent US acquisition providing
additional diversification as well as a strong reinvestment platform for potential
growth.
Unhedged model provides direct commodity exposure. Freehold does not hedge
its royalty volumes and therefore retains full upside exposure to improved
commodity prices. The company also benefits from increased E&P activity with no
incremental capital outlay.
Dividends supported by favourable cost structure. Freehold’s low cost model
supports continued dividend payment. The company raised its dividend alongside
Q3/20 earnings to $0.24 annually, placing the new yield in the range of 3.5%. We
forecast the dividend to increase by 50% to $0.36/share annually in Q2/21 and
33% to $0.48/share in Q1/22 mapping to payout ratios of 30%/39% in 2021/22
respectively, well below the company’s target range of 60-80%.
Strong balance sheet, capable of generating FCF at low prices. Based on our
current estimates, we forecast the company shifting to a net cash balance in
Q4/21 (though we do not currently model potential acquisitions). In addition, we
see the company generating roughly $100/$98 million in post-dividend free cash
flow in 2021/22 at our US$62/US$63 pricing outlook.
Discounted valuation. Freehold shares trade at a significant discount to the
diversified royalty peer group.