AltaGas Ltd T.ALA

RBC

[retiredcf]

Their upside scenario target is $49.00! GLTA

August 2, 2024

AltaGas Ltd.
Continued execution with more to come

Outperform

TSX: ALA; CAD 33.66

Price Target CAD 37.00 ↑ 34.00

Our view: We expect investors to continue to give AltaGas credit for execution of its strategic plan to: (1) de-risk its Midstream business; (2) lever off of its footprint to grow EBITDA and EPS via investments with attractive risk-adjusted returns; (3) improve the achieved ROEs in its Utilities segment; and (4) delever the balance sheet. Each quarter, AltaGas has made tangible progress on some, or all, of these items and we expect that to continue in future quarters, which should provide catalysts for further share price appreciation.

Key points:

Positive business updates. On top of the Q2/24 results that exceeded our expectations and consensus, AltaGas has performed well with its strategy to manage costs in its Utilities segment, and on the Midstream side, the company announced: (1) additional long-term contracts for the REEF project; (2) fixed-price EPC contracts to lock down capital costs for REEF with more contracts on the way; (3) good progress on the construction of the Pipestone II expansion; and (4) a new time charter that will provide certainty for marine logistics costs.

Completion of MVP puts the wheels in motion for an asset sale to help the deleveraging plan. The Mountain Valley Pipeline (MVP) was placed into service in June 2024. As expected, AltaGas is evaluating a sale of its 10% non-operated stake in MVP as part of its deleveraging strategy. We believe the company's stake in MVP could be worth something in the range of $700-750 million.

Guidance was reiterated, but we think it is still positioned conservatively.

While the company reiterated its 2024 guidance, we still think the base business is trending towards the higher-end of its guidance range, particularly for EBITDA. However, we believe that the company deciding to maintain guidance with a balanced commentary was partly driven by conservatism related to a potential upcoming rail strike.

Slight revisions to our EBITDA estimates; EPS estimates unchanged. Our 2024 and 2025 EBITDA estimates are now $1.755 billion and $1.870 billion, respectively (up from $1.751 billion and $1.864 billion, respectively), driven by modestly stronger results from the Utilities segment due to favourable cost performance.

Valuation: Increasing our price target to $37.00 (up from $34.00). Our new sum-of-the-parts valuation range as shown in Exhibit 5 of this note is $33.00-40.00 per share (up from $32.00-37.00 per share) with the higher range reflecting a 1x increase in our utility P/E valuation due to multiple expansion that we have observed for utilities year-to-date, as well as the high-end of our valuation range incorporating the potential value from the recently-sanctioned REEF project. We continue to use the rough mid-point of the sum-of-the-parts range to set our price target.