From RBC
July 30, 2023
TC Energy Corporation
How low can it go?
Our view: Despite solid Q2/23 results, an update on Coastal GasLink (CGL)
that confirmed budget and timing, and the reiteration of EBITDA guidance
(i.e., operating segment performance is in line with management's
expectations), the shares still underperformed. We attribute the stock price
weakness to the market's reaction to the proposed spin-off of the liquids
pipelines business. Looking past the near-term volatility, we view the stock
as inexpensive as it is trading at its lowest level in almost 20 years.
Key points:
Hard to ignore the value; we believe some investors will gravitate to
what is close to becoming a single digit P/E. While we recognize the
shift in investor sentiment given the lacklustre valuation received for the
company's 40% stake in Columbia, an asset that many viewed as a premium
business, as well as uncertainty with respect to the proposed spin-off of the
liquids pipelines assets, we point to the shares trading at roughly 10.5x our
2024E EPS. This level represents a new low since 2005 (please see Exhibit
1 on page 3).
Solid results and reiteration of EBITDA guidance. In Q2/23, comparable
EBITDA was $2.474 billion versus our estimate of $2.469 billion with EPS
coming in at $0.96 versus our estimate of $0.93. TC Energy reiterated its
2023 financial outlook, which includes EBITDA being 5-7% higher than 2022
(i.e., roughly $10.4-10.6 billion). For 2023 EPS, the company now expects
comparable EPS to be "consistent" with 2022 (previously "modestly higher"
than the $4.30/share booked in 2022) due to higher non-controlling
interest associated with the monetization of the 40% stake in Columbia,
which it expects to close during Q4/23.
Coastal GasLink continues to track to management's plan. Coastal GasLink
is now 91% complete and the company continues to expect mechanical
completion by the end of the year at a total capital cost of $14.5 billion. We
believe an update in the fall of 2023 will be important given the timing of
various critical path portions of the project's construction.
Modestly reducing our estimates to primarily reflect the Columbia sale.
Our new 2023 and 2024 EPS estimates are $4.30 and $4.28, respectively
(down from $4.34 and $4.35, respectively), with the change primarily
reflecting the sale of a 40% stake in Columbia at a valuation slightly below
our prior assumption.
Lowering our price target to $54.00 (down from $65.00). We believe the
stock setting new P/E valuation lows is unwarranted, and that it is not
unreasonable for the stock to recover to the P/E valuation low of 12.5x that
was reached several times over the past five years. Our new price target is
primarily driven by a reduction in our target P/E to 12.5x (down from 15x)
applied to our revised 2024 EPS estimate.