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Reiterating his positive view of the Canadian Energy Infrastructure sector, Stifel analyst Cole Pereira initiated coverage of Keyera Corp. (
) with a “buy” recommendation, seeing it poised to benefit from a key near-term catalyst.
“In 2Q23, KEY will reach an important milestone as it finally brings its 50-per-cent owned Key Access Pipeline System (KAPS) into service,” he said.
“KAPS ... should result in a meaningful improvement in both its earnings power and leverage metrics. Additionally, the company plans to pursue a modest growth capital program in 2023 to drive its leverage back down to the midpoint of its target range. We forecast this to occur by the end of 2023 and, as such, expect KEY will be positioned to revisit dividend increases in 2H23. While there is additional contracting work required for KAPS to reach the company’s return hurdle, we ultimately believe it will be successful — though it may take some time. We believe these factors should drive valuation upside.”
Mr. Pereira emphasized Keyera shares have “underperformed” peers over the past few years during the construction of KAPS in a “challenging environment.”
“From 2020-2022, Keyera’s share price declined 13 per cent, while ENB, GEI and PPL were down 4 per cent on average and the S&P was up 19 per cent — though it still outperformed TRP, which was down 22 per cent,” he said. “KAPS was originally planned to cost $1.3-billion ($650-million net to KEY), but the challenges of construction over the past few years have seen the cost increase to $2.0-billion ($1.0-billion net to KEY).”
“Its valuation remains attractive relative to long-term average and its peers. Keyera currently trades at 10.5 times 2024 estimated EV/EBITDA and 9.2 times 2024 estimated P/DCFPS vs. its respective 10-year averages of 11.3 times and 11.8 times. Additionally, KEY’s valuation at 9.2 times 2024 P/DCFPS remains discounted to GEI at 9.7 times (Stifel), ENB at 9.7 times (consensus) and PPL at 9.8 times (consensus). Given the points above, we believe KEY’s shares are poised to re-rate closer to its long-term average and its peers. However, one near-term valuation hurdle may be that TRP now trades at 8.7 times 2024 consensus P/DCFPS, however this largely reflects the construction risks of Coastal GasLink as well as increasing interest rates.”
Also touting its “attractive integrated infrastructure network with Montney exposure,” the analyst set a target of $36. The average on the Street is $34.47.
Separately, Mr. Pereira initiated coverage of peer Gibson Energy Inc. (
) with a “hold” rating and $25.50 target, below the average by 7 cents.
“We highlight four key points for investors: 1) the company boasts a strong management team behind one of the best turnarounds in the space; 2) it has a well-demonstrated commitment to shareholder returns; 3) however, more clarity on forward growth is needed; and 4) its valuation is currently trading in line with its larger peers,” he said.
KEYERA CORP
30.36-0.11 (-0.36%)