cibc downgrade target $30 down from $31 still rated neutralInter Pipeline Ltd. Building Bulk
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November 7, 2018 Energy Stock Rating: NEUTRAL Key Ratios and Statistics 12-18 mo. Price Target $30.00 IPL-TSX (11/7/18) $25.21 Key Indices: Toronto, S&P/TSX Income Trust Composite 3-5-Yr. EPS Gr. Rate (E) NM 52-week Range $20.68-$27.92 Shares Outstanding 386.7M Float 396.3M Shrs Avg. Daily Trading Vol. 1,104,817 Market Capitalization $9,749.0M Dividend/Div Yield $1.68 / 6.7% Fiscal Year Ends December Book Value $9.29 per Shr 2018 ROE (E) 16.1% LT Debt $5.3B Net Asset Value Common Equity $3.5B FFO per Share 2016 2017 2018 2019 Current $2.47A $2.65A $2.83E $2.85E Prior $2.84E $2.84E Estimates (Dec. 31) 2016 2017 2018 2019 EBITDA ($mln)-Curr $1039.8A $1147.6A $1247.0E $1342.0E EBITDA ($mln)-Prior $1247.0E $1300.7E Div Per Share-Curr $1.57A $1.63A $1.69E $1.74E Div Per Share-Prior $1.69E $1.74E Valuation (Dec. 31) P/FFO-Curr 10.2X 9.5X 7.8X 8.8X P/FFO-Prior 7.8X 8.9X EV/EBITDA-Curr 14.5X 13.1X 12.6X 12.4X EV/EBITDA-Prior 12.6X 12.8X Dividend Yield-Curr 6.2% 6.5% 6.7% 6.9% Dividend Yield-Prior 6.7% 6.9%
Company Description Inter Pipeline owns interests in conventional and oil sands pipelines, NGL extraction, and bulk liquid storage businesses. www.interpipeline.com/
Our Conclusion
The acquisition of NuStar Energy's European bulk liquid storage is neutral to our outlook for IPL. We view the acquisition as on strategy to build the company to a relevant size, but are puzzled by the willingness to issue equity at $20.80/share. We reiterate our Neutral rating and $30/share price target.
Implications
The company has long held the view that it would either increase the relevance of the bulk liquids segment or sell it. Acquiring NuStar's European operations is in keeping with this strategy, adding $40MM (52%) in annual EBITDA to the bulk business, or 3.1% to total EBITDA.
It also adds to the company's European operations, increasing capacity in that market by 33%. It also provides meaningful entry to the Amsterdam-Rotterdam-Antwerp area. The business is also substantially less contango driven than the existing assets, implying more stability of cash flows through periods when oil prices are in backwardation. Revenues are cost-of-service and fee-based.
We are puzzled by the company's willingness to issue equity at $20.80/share, but the amount of $200MM is relatively small. The purchase multiple equates to about 8.9x EBITDA, a reasonable price in light of the asset features. The transaction is expected to close in Q4/18 subject to customary closing conditions