Desjardins likes sale price. Target price raised to 14.00Only concern Desjardins has is the recontracting of Ruby pipeline. Anyone know when the recontracting has to be done?
Veresen Inc.’s (VSN-T) $1.18-billion sale of its power generation business exceeded the expectations of Desjardins Securities analyst Justin Bouchard.
Announced Tuesday, the sale, involving three separate transactions, equates to a valuation of 12.8 times Mr. Bouchard’s 2016 earnings before interest, taxes, depreciation and amortization (EBITDA) estimate.
“Based on the suite of assets sold, we believe VSN realized full value for its power assets—in our view, this is primarily a reflection of the ongoing appetite for investments offering stable cash flows in a ‘low for longer’ interest rate environment,” the analyst said. “Of note, the sale does not include the waste-heat assets located on the Alliance Pipeline. Additionally, we believe all three counterparties are of high quality (including Capital Power and BluEarth Renewables), which substantially limits the closing risk related to the transaction.
“With VSN sporting an estimated 94-per-cent payout ratio (2017), the $1.18-billion divestiture effectively allows the company to fund its existing capex program through year-end 2018 (in addition to incremental growth capex projects that may be announced) without the need to cut the dividend, issue incremental corporate-level debt or issue additional equity. With the large majority of its growth capex slated to be invested in natural gas–focused midstream assets within Veresen Midstream, the transaction effectively allows VSN to recycle the proceeds from the non-core Power assets (which generated an implied annualized EBITDA return of 8 per cent at the transaction price) into core midstream investments that are expected to generate an annualized EBITDA return of 10–13 per cent, provide fee-for-service revenue through 2044 based on a target rate of return within the agreement and provide a platform for further growth as the Montney is developed.”
Mr. Bouchard maintained a “hold” rating for Veresen stock and raised his target price by a loonie to $14. Consensus is $14.53.
“The proceeds should allow VSN to strengthen its balance sheet, focus on its core business and fund its existing growth program without further equity issuance,” he said. “In our view, the transaction improves the near-term visibility toward a sustainable payout ratio; however, longerterm, we remain concerned with recontracting risk associated with the Ruby Pipeline.”