retiredcf wrote: National Bank Financial analyst Patrick Kenny expects utility companies to benefit from the rise in demand for “affordable and reliable” energy sources in the year ahead, however lingering macroeconomic pressures will continue to provide significant obstacles.
“With affordability pressures and grid instability concerns top of mind, we believe the path of least resistance for the Big Data Buildout will be through ‘off-grid, behind-the-meter’ developers focused on natural gas-fired generation,” he said. “Coupled with rising demand for natural gas pipeline connections and storage capacity, we see attractive growth prospects and further valuation upside potential for energy infrastructure companies with material exposure to the data center growth theme in 2025, including TA, CPX, TRP, H, ENB and FTS.”
In a research report released Tuesday previewing 2025 for pipeline, utility and energy infrastructure companies, Mr. Kenny warned both interest rate uncertainty and the impact of inflation will remain troublesome, while the fallout from a weaker Canadian dollar will also be felt.
“With the overnight rate now down to the upper end of the Bank of Canada’s neutral range (2.25-3.25 per cent), further cuts are sensitive to prevailing geopolitical conditions such as potential tariffs, immigration policies and FX rates,” he said.”That said, our NBF Economics & Strategy group believes Canada’s sluggish economy warrants further rate relief through early 2025 with the 10-year GCAN rate settling in around 3.0 per cent by late 2026, in line with our unchanged long-term assumption. Our debt maturity analysis confirms strong liquidity positions relative to 2025 refinancing needs, which should support healthy credit spreads and strong access to debt markets ahead of any geopolitical turbulence.
“We have updated our long-term CAD/USD FX rate assumption to $1.40 (was $1.35), and highlight those companies with the most exposure to USD cash flow tailwinds, including EMA, ENB, FTS, TRP and ALA. Overall, every nickel increase to our long-term FX rate assumption represents on average 7-per-cent valuation upside for the Power & Utilities names and 5-per-cent upside for the Pipelines & Midstream names in our coverage universe with material exposure.”
From an investing perspective, Mr. Kenny recommends “high-quality, attractive FCF yields poised for continued valuation upside related to the confirmation of asset contracting opportunities and/or sanctioning brownfield expansions following the rise in demand for affordable and reliable energy sources through 2024 (i.e., walking the walk in 2025).”
“Our top picks continue to be screened using a multi-pronged approach: 1) Double-digit free cash flow (AFFO) yield; 2) improving balance sheet metrics; 3) attractive per share growth; and 4) strong catalyst potential .... Our catalyst potential for 2025 largely relates to the confirmation of asset contracting opportunities and/or sanctioning brownfield expansions following the rise in demand for affordable and reliable energy sources through 2024 (i.e., walking the walk in 2025),” he added.
He named six top picks for the year ahead. They are:
- AltaGas Ltd. with an “outperform” rating and $41 target, up from $39. The average target on the Street is $38.
- Capital Power Corp. with an “outperform” rating and $65 target. Average: $62.91.
- Gibson Energy Inc. with an “outperform” rating and $29 target, rising from $27. Average: $27.
- Secure Waste Infrastructure Corp. with an “outperform” rating and $18 target. Average: $18.25.
- TransAlta Corp. with an “outperform” rating and $20 target, up from $16. Average: $17.48.
- TC Energy Corp. with an “outperform” rating and $74 target, up from $71. Average: $69.93.
He also made these other target adjustments:
Pembina Pipeline Corp. (“sector perform”) to $58 from $57. Average: $61.31.