BMO analyst update2021 Investor Day Dispels the Concerns About Slowing Growth
Bottom Line:
TRP shares have remained weak lately, we believe, largely on the decline in commodity prices (esp. natural gas) and concerns around future growth following the recent rebase in dividend growth to 3-5% (vs. 5-7%). The 2021 investor day confirmed that underlying growth indeed has not slowed and that there could be further upside in the years ahead. We recommend accumulating shares ahead of growth catalysts and greater appreciation of the low-risk business mix (95% plus regulated/contract) and premium long-life energy infrastructure assets. Maintain Outperform rating and $70 target price.
Key Points
Line of sight to "at least" 5% growth. TRP's initiation of a 5% EBITDA CAGR through 2026 was better than our prior 3% modelled and reflects a higher secured growth roster of $29B vs. the prior $22B. Investment in natural gas pipeline infrastructure and Bruce Power refurbishments are the key growth drivers. On top of that, TRP was emphatic that 5% is the minimum growth expected and that it is well positioned for further upside. As in the past, M&A is not included, but TRP remains opportunistic especially in the fragmented renewable power sector.
2026E NAV if growth guidance is achieved. With a longer-term guidance outlook (to five years vs. the typical three) and given the long-life nature of TRP's energy infrastructure assets, we believe it is warranted to do a deeper dive into the share price upside if the base 2026 targets are achieved. Assuming a 12-13x EBITDA valuation, we estimate a five-year net asset value of $80-90, an attractive investment proposition for longer-term total return oriented investors on a name with arguably the lowest risk in the Cdn. pipeline and midstream coverage.
Funding plan requires no equity. TRP’s funding plan contemplates a total $21B capital investment program ($6.4B in 2022, $4.5B in 2023, $3.6B in 2024, $4.1B in 2025, and $2.7B in 2026), of which about $8.7B is maintenance capex. Good news is the funding plan requires no new equity, while leverage and payout ratios gradually improve in the outer years of the five-year plan.
Revised estimates. We have updated our model to reflect the new longer-term EBITDA guidance, funding, and NGTL growth timing: 2021E EBITDA/EPS $9,340mm/$4.33 unchanged; 2022E EBITDA to $9,648mm from $9,627mm and EPS to $4.33 from $4.35; and 2023E EBITDA to $10,241mm from $9,924mm and EPS to $4.55 from $4.34.