Post by
Dibah420 on Jul 25, 2023 10:44am
BMO:Ben Pham T/P $60
July 24, 2023 | 20:07 ET~ TC Energy TRP-TSX TRP-NYSE Rating Outperform Price: Jul-24 $50.89 Target ↓ $60.00 Total Rtn 25%
Updating Model for Minority Sale of Columbia; Target to $60 vs. $64
Bottom Line: We maintain our Outperform rating on TRP shares following the US$3.9B ($5.2B CAD) minority sale of its Columbia Gas and Gulf assets.
While the implied valuation was disappointing (10.5x vs. our 12x expectation) and could cause investors to re-evaluate sector valuations for our Canadian pipes coverage, the implied total return to our new target of $60 (vs. $64) is still attractive (esp. with the 7% plus yield) and the $5B plus asset divestiture target for 2023 has effectively been largely de-risked (providing flexibility on the next round of asset sales).
Key Points Key questions asked (for more details see our note):
1) How do you get to 10.5x EV/EBITDA valuation? The US$3.9B equity consideration implies US$9.75B on 100% basis. We add that to the assumed Columbia debt of US $8.2B to derive an EV of ~US$17.9B. Applying that to our 2023E adj. EBITDA of ~US1.7B for Columbia Gas and Gulf gets us close to 10.5x.
2) What drove the underwhelming multiple? We believe the sustained high interest rate environment, no control premium, and the relatively large size of the deal weighed on what potential buyers were willing to pay. We were expecting 12x EV/ EBITDA, especially for a high-quality regulated/contracted asset such as Columbia.
3) Are you expecting further asset sales? We believe further asset sales are required to achieve de-leveraging target of 4.75x run-rate. However, we believe TRP has flexibility on timing. We model additional asset sales of ~$3.1B/~$1.2B in 2024/25 at 11x implied valuation (down from 12x).
4) Any read-throughs on the broader sector? No doubt the headline 10.5x valuation for Columbia (and other recent midstream precedents) is a negative read-through for our Cdn. pipelines coverage and more specifically our TRP SOTP analysis. As such, we are shifting our consolidated target valuation down to 12.5x (vs. 13x), driving our target price to $60 vs. $64. TRP's NGTL and Bruce Power assets (25% of adj. EBITDA) notably supports our SOTP valuation, while Mexico gas pipes and Alberta power partially offsets.
5) What are we doing with our estimates? Our 2023-2025E adj. EBITDA estimates are unchanged (Columbia still consolidated), but our EPS (f.d.) moves lower to $4.29 (vs. $4.30) in 2023E, $4.18 (vs. $4.27) in 2024E, and $4.45 (vs. $4.49) in 2025E.
Key Changes Target $60.00↓ $64.00 Estimates 2023E 2024E EPS $4.29 $4.18 Previous $4.30 $4.27 DCF/Sh $6.68 $6.17 Previous $6.69 $6.37 Energy Infrastructure Ben Pham, CFA Analyst