BMOMarch 1, 2022 | 19:26 ET~ Pembina Pipeline PPL-TSX Rating ↑ Outperform
Price: Mar-1 $44.08 Target ↑ $50.00 Total Rtn 19% Upgrading to Outperform and Now Top 3 Best Idea; Target Price to $50 vs. $43
Bottom Line: We are upgrading PPL shares to Outperform from Market Perform (target price to $50 vs. $43 prior) and with a Top 3 Best Idea designation (replacing ENB, also still rated OP) following the $11.4B Newco JV with KKR. We view the JV creation positively given the positive valuation marker for its gas processing assets (implied ~12x EBITDA), mid-tohigh single-digit accretion to cash flow, and accelerated capital return initiatives without change in financial guardrails,
ESG targets (30% reduction in GHGs by 2030), and/or business risk profile.
Key Points Newco JV a net positive event. Please see our March 1 note for our initial thoughts on the Newco JV, which is expected to be accretive to adj. CFPS over the next five years and accelerate capital return initiatives (~3.6% dividend increase and incremental share buybacks this year). Incrementals from conference call: (1) synergies -
Newco non-cash tax payable for next 3-4 years; operating synergies could include connecting Duvernay assets to maximize utilization; (2) the Newco will be focused on field-based gas processing in an area of mutual interest (essentially Western Canada), but open to other midstream asset opportunities that could arise in the future including M&A; (3)
PPL expects a normal course Competition Bureau process. We note that the gas processing market is highly fragmented;
(4) credit profile - positive as credit rating agencies don't typically include JV debt in credit metric calculations; on a proportionate basis, adj. debt-to-EBITDA only goes up ~0.1x; and (5) the deal is not expected to have a significant influence on the potential sanctioning of Peace Phase VIII and Prince Rupert expansion, which could be added to secured bucket before H1/22.
Raising estimates. We have updated our financial model to reflect the Newco JV and anticipated capital return initiatives. Our adj. EBITDA is now $3,467M (vs. $3,445M) in 2022E and $3,560M (vs. $3,499M) in 2023E; we estimate ~6% accretion to adj. CFPS in first full-year (to $4.22 vs. $3.97 previously) consistent with guidance for mid-to-high single-digit accretion.
Combined with a higher target valuation of 11.5x EBITDA (vs. 11x) and estimates, our target price increases to $50 vs. $43 prior