iA Capital Accelerating interest rates warrant caution for investors in Canadian independent power and infrastructure companies, according to iA Capital Markets analyst Naji Baydoun.
However, he sees near-term buying opportunities with yields “racing higher” and stock prices holding up.
“The monetary policy outlook has dramatically shifted over the past six months, with (1) market expectations now pointing to more aggressive tightening over the next 12-18 months, and (2) North American benchmark bond yields rapidly increasing year-to-date,” said Mr. Baydoun.
“Overall equity performance in the Power & Infrastructure sectors has been relatively decent so far this year, with (1) Power companies under coverage delivering an average 8-per-cent TSR (ranging from down 9 per cent to up 27 per cent), and (2) Infrastructure companies under coverage generating approximately negative 15-per-cent TSR (ranging from negative 31 per cent to negative 2 per cent, dragged down by smaller capitalization/cyclical companies), compared to negative 9 per cent for the S&P/TSX Composite Index. The resiliency of companies’ business models and defensive portfolio characteristics (e.g., contracted cash flows) have helped partially offset the sharp move higher in interest rates; higher underlying interest rates (1) have impacted year-to-date performance and kept a lid on stock prices (among other macro and company-specific factors), and (2) could place further pressure on H2/22 returns. We note exceptionally strong YTD performance from (1) BLX (on the back of strong execution on various shareholder value-creative initiatives), (2) PIF (following highly anticipated capital deployment into several M&A opportunities), and (3) CPX (with strong Q1/22 results that benefited from above-average Alberta power prices, and revised forward expectations for 2022-23.”
His other target changes are:
- Brookfield Renewable Partners LP ( “hold”) to US$40 from US$42. Average: US$40.46.