From today's Globe and Mail A trio of equity analysts on the Street raised their rating for
Inter Pipeline Ltd. (
IPL-T) on Tuesday in response to its dividend reduction, exploration of partnership options for its Heartland Petrochemical Complex and the suspension of the sale of its European Bulk Liquids Storage business.
Industrial Alliance Securities analyst Elias Foscolos thinks the “right steps are being taken” by the Calgary-based multinational petroleum transportation and infrastructure limited partnership to adjust to the current market environment.
Accordingly, he raised his rating to “speculative buy” from “hold” on Tuesday based on its return relative to his coverage universe.
On Monday before the bell, Inter announced a cut to its monthly dividend by 72 per cent to 4 cents per share from 14.25 cents and a a suspension to its premium dividend and dividend reinvestment plan (DRIP), a move Mr. Foscolos thinks was not surprising and provides it greater flexibility for its capital program.
"Following [Monday's] announcement of IPL’s dividend cut, the company’s share price slightly fell just marginally more than the sector," said Mr. Foscolos. "Given IPL’s large capital program and previously non-sustainable payout ratio, a dividend reduction and elimination of the DRIP will help. We have maintained our long-term outlook as the actions being taken by the company to preserve its financial flexibility are its best options given the current economic environment. While a JV in the PDH/PP plant is an ideal measure, we do believe that the sale of other core assets, particularly the BLS business, should not be ruled out just yet."
Mr. Foscolos maintained an $11 target price for Inter shares. The average target on the Street is currently $15.22.
Elsewhere,
Raymond James analyst Chris Cox called the moves “a painful step, but a step in the right direction.”
“On the whole, we are encouraged that the company is finally taking steps in the right direction toward a manageable and prudent funding outlook, especially given the acute pressures on the sector and the added capital constraints likely to face the industry,” he said. “While the dividend cut may still weigh on the shares over the near-term - especially given the company’s retail-heavy ownership - we believe the move was a necessary step in the right direction, particularly given the significant dilution the company was incurring with the DRIP.
Strategically, we agree with the initiative to bring in a partner for Heartland, as we continue to view the decision to go at this project alone as outside of what we would view ‘reasonable’ risk parameters. However, we are skeptical that a potential buyer at this juncture will be willing to pay an attractive enough price to justify the sizable premium we see in IPL shares - trading at 12.0 times 2020 estimated EBITDA vs. peers in the 7.5-10.0-times range. All told, we believe the company has taken enough steps to reduce the risk profile, such that an Underperform rating is no longer warranted, but we see a relative valuation that leaves us on the sidelines at Market Perform.”
Mr. Cox raised his target by a loonie to $10 per share.