TC Energy Corp T.TRP

Scotia comments on valuation

[incomedreamer11]

Attractively Valued – Buy the Dip

OUR TAKE: Mixed. We believe the market is overreacting to the news of the spin-out of the Liquids pipeline business, and at current levels, we see the shares as an attractive opportunity. The spin-out does not change our outlook for the company, but longer-term, it makes sense to us. In the near term, the spin-out does not alter our funding / leverage outlook for the company, which are the key drivers of the shares. Management is confident that it can achieve the spin-out, realignment of its business units, and construction of two large projects concurrently. We believe investors should look past the spin-out and focus on the base business, which continues to perform well. The Coastal GasLink (CGL) project progress and recent asset sales add additional clarity to the funding outlook, which is a positive as well. We view the existing dividend as sustainable and it should provide some downside support to the shares. We see the valuation at multi-year lows at 10.4x 2024E P/E, 12.3% 2024E free cash flow yield, and a 10.7x EV / EBITDA, presenting an attractive entry point.

KEY POINTS

Valuation, valuation, valuation. Our outperform thesis rests on: 1) an overly discounted valuation, 2) Coastal GasLink (CGL) entering service on time and on budget, and 3) additional asset sales improving the funding outlook. We believe the recent selloff in the share price is overdone, though note that sentiment on the name is quite negative as well as feedback on the proposed liquids spin-out. That said, we believe that progress on CGL and funding would be supportive of valuation expansion. Looking at recent valuation, on a 2024 EV / EBITDA basis, we see TC Energy trading at 10.7x, a 0.7x discount to Enbridge. We would argue TC Energy’s more gas and nuclear-centric business mix deserves a multiple at least in-line, if not better, than Enbridge longer-term. The recent discount seems too punitive to us. Looking at our target valuation, we have adjusted our multiples to what we view as quite conservative levels, which yields our target price of $55 (down from $64). A key variable is our natural gas pipeline multiple of 11x on our 2025 EBITDA estimate. This would be above the recent Columbia sale at 10.5x, but in-line with what our colleague Tristan Richardson uses for U.S. natural gas pipelines. We also note that 2025 only has a partial year contribution of the Southeast Gateway Pipeline (SGP) project, and if we look out to 2026, this multiple comes down to 10.25x. The liquids business at 10x seems fair to us given the contracted nature of the assets and high likelihood of asset re-contracting longer-term based on our view of supply and demand dynamics. There are few valuation markers for contracted long-haul oil pipelines recently. Our valuation for Keystone would be well below the 11x-12x multiple Enbridge monetized a portion of its regional pipeline system last year. A point we believe is important to highlight is that $0.6b of our EBITDA estimate in 2025 (5%) is the equity income from Bruce Power which warrants a much higher multiple (16x) due to the fact that it is income as well as the strong growth from the asset. We outline our sum of the parts in Exhibit 1 with sensitivities on each valuation metric.Good updates lost in the Liquids spin noise. Looking through the spin out, we believe the market is missing two key points: 1) the cost and schedule risk for CGL has been materially reduced given progress this summer, and 2) the reiteration of the sustainability of the dividend (~8.4% yield) as well as dividend growth moving forward. We have updated our model to include $3b of partial asset sales in 2023/2024 which brings our leverage to ~5x. Once SGP enters service, we see this dropping to ~4.7x (consolidated). Our per share estimates come down slightly to reflect $3b of asset sales versus our prior assumption of $2.5b.

[Karl63]

Finally some common sense from both BNS and Royal.  

[incomedreamer11]

More from analysts: DJ TC Energy Split May Offer Potential for Both Companies -- Market Talk Friday, July 28, 2023, 1:59 PM ET   1358 ET - TC Energy managed a "fine enough" second quarter, but the planned spin-off of its liquids business became the focus, says Raymond James, which leans positive on the potential it could bring to both companies. It says a split