Mixed bag, but generally positive BMO Nesbitt Burns analyst Ben Pham sees Enbridge Inc.'s (ENB-T, ENB-N) new strategic plan as a positive compared to his "tempered expectations," however he feels investor confidence could take a few quarters to materialize and drive valuation expansion.
On Wednesday, the company unveiled a strategic plan following its merger with Spectra Energy, whoch closed in late February. It's set to issue $1.5-billion of shares and plans to sell at least $3-billion in assets to seek funding for new projects and streamline operations. It also plans to raise its dividend to 67.1 cents per quarter.
"While the $1.5-billion equity offering was unexpected and resulted in dilution to our estimates, we think it removes an overhang regarding near-term funding needs," said Mr. Pham. "Moreover, the company plans to focus on growth in three core businesses: liquids pipelines and terminals, gas transmission and storage, and utilities, with unregulated gas midstream and onshore renewables viewed as 'non-core.; With that, ENB plans to monetize at least $3-billion of non-core assets in 2018 out of an identified $10-billion. These actions accelerate de-leveraging and improve financial flexibility to fund growth (debt/EBITDA to 5 times by end of 2018 and 4.5 times by 2020)."
He added: "Good news in that ENB raised its quarterly dividend by 10 per cent to $0.671, consistent with our outlook and equating to a 5.9-per-cent yield (vs. our coverage at 4.9 per cent). More important, the company expects similar 10-per-cent growth through 2020, underpinned by a $22-billion capital program. That compares to previous guidance of 10-12 per cent through 2024 which was predicated on securing additional growth projects of $5-6-billion per annum beyond 2020. In that sense, the new guidance is a "reset", but more realistic and achievable and based solely on secured projects. The payout is expected to be below 65 per cent through 2020, still conservative relative to peers, but above 50-60-per-cent long-term target."
Mr. Pham kept an "outperform" rating for Enbridge shares but dropped his target to $66 from $70. The average is $57.94.
Elsewhere, though he sees its strategic plan and outlook as a negative in the near term, GMP analyst Ian Gillies upgraded Enbridge to "buy" from "hold," believing it's currently priced into the stock. Suggesting any share price weakness over the coming days should be seen as a buying opportunity, he raised his target price for its shares to $58 from $54.
"We view this as a prudent, yet difficult decision," said Mr. Gillies. "Investor focus can now return to Enbridge's significant capital program and execution of its business plan."