National Bank Financial’s Patrick Kenny sees several tailwinds likely to propel Canadian utility, pipeline and energy infrastructure stocks in 2024, predicting “robust cash flow per share growth as the M&A landscape continues to unravel.”
In a research report released Tuesday titled Show me the money!, the analyst raised his target prices for equities in his coverage universe by an average of 3 per cent after introducing his financial estimates for fiscal 2025 that include adjusted funds from operations per share growth of 6 per cent with dividends up 4 per cent on average.
“Our top picks continue to be screened using a multi-pronged approach: 1) Double-digit free cash flow (AFFO) yield; 2) healthy balance sheet metrics; 3) attractive per share growth; and 4) strong catalyst potential,” he said.
“Our catalyst potential for 2024 largely relates to executing on asset sales/partnerships to improve balance sheets and share buyback capabilities, combined with asset contracting opportunities to improve cash flow quality profiles, supporting valuation rerate momentum. Overall, we recommend overweighting high-quality, double-digit FCF yields poised for valuation upside. Our top picks for 2024 include ALA, CPX, GEI, SES and TRP.”
While Mr. Kenny thinks commodity prices and market access will a “mixed impact” on the sector, he pointed to three factors likely to lead performance for the year ahead:
* M&A activity
“Our coverage universe announced or closed nearly $40-billion worth of transactions through 2023, expanding value chains and organic growth backlogs on the buy side, while enhancing liquidity positions and improving credit ratios on the sell side,” he said. “We highlight that the market penalized the ‘net buyers’ and rewarded the ‘net sellers’, a trend we expect to continue as investors gravitate towards those companies building dry powder for share buybacks / organic growth. For 2024, we expect several companies to announce additional divestitures including ALA ($0.7-billion), EMA ($1.3-billion), ENB ($2.0-billion) and TRP ($3.0-billion-plus).”
* “Energy Trilemma”
“Despite President Biden’s pause on approving new LNG export licenses ahead of the November U.S. election, we highlight 26 bcf/d [billion cubic feet per day] of projects already pre-approved/under construction, set to triple current U.S. capacity by 2030. Meanwhile, anticipation of TMX and Westcoast Canadian LNG underpins our 5-per-cent annual production growth forecast, while supporting contracting opportunities across various infrastructure assets (ALA, GEI, KEY, PPL, BIP) and also driving further expansions along existing pipeline routes (ENB, TRP).”
* Interest rates and yield spread
”On top of potential interest rate cut tailwinds through 2024, we highlight certain dividend yield spreads sitting above historical average spreads, suggesting further upside (all else equal) from mean reversion (TRP, ENB, SPB),” he said. “Meanwhile, certain Utilities continue to screen as most exposed to valuation downside risk with current dividend yield spreads sitting 70 bps tighter than the five-year average (BIP, FTS, H).”
The analyst made one rating change on Tuesday, downgrading Brookfield Infrastructure Partners L.P. to “sector perform” from “outperform” based on its relative outperformance.
“With over US$3.50-billion of liquidity through the end of 2023 and a record US$6.7-billion capital backlog, primarily underpinned by the Data segment’s US$4.4-billion of growth projects including BIP’s partnership with Intel for the Arizona-based semiconductor manufacturing facility (net US$3.6-billion BIP investments), we have conservatively assumed US$1.6-billion of growth capital deployed through 2024,” said Mr. Kenny. “Overall, we forecast 2027 estimated AFFO/sh of US$2.55, representing a five-year CAGR [compound annual growth rate] of 6 per cent before considering any upside from M&A activity.”
“With geopolitical/macroeconomic headwinds expected to persist through 2024, we expect BIP to continue building out its global footprint through deploying capital in higher growth platforms while divesting mature assets on favourable terms. Elsewhere, we await a potential FID on NorthRiver Midstream’s proposed NEBC Connector project recently approved by the Federal government and IPL’s HPC complex ramping up to full commercial operations.””
His target for Brookfield Infrastructure’s U.S.-listed shares remains US$32. The average on the Street is US$37.59, according to Refinitiv.
“Rolling our valuation forward to 2025, our US$32 target (unchanged) is based on a risk-adjusted dividend yield of 5.0 per cent (unchanged) applied to our 2025 estimated dividend of US$1.72, a 15.0 times multiple of our 2025e Free-EBITDA (was 14.5 times on 2024 estimated Free-EBITDA) and our DCF/sh valuation of US$31 (was US$32.50),” he concluded. “Combined with the stock rebounding 20 per cent since upgrading the name in October, and a SOTP valuation of US$30, we are moving our rating back to Sector Perform based on relative price performance in conjunction with our 2024 Outlook report.”
Mr. Kenny raised his targets for these equities:
- AltaGas Ltd. ( “outperform”) to $33 from $31. Average: $32.67.
- Enbridge Inc. ( “sector perform”) to $52 from $49. Average: $53.31.
- Fortis Inc. (“sector perform”) to $55 from $52. Average: $57.88.
- Gibson Energy Inc. ( “outperform”) to $25 from $24. Average: $24.75.
- Hydro One Ltd. ( “sector perform”) to $38 from $35. Average: $39.21.
- Keyera Corp. ( “sector perform”) to $34 from $33. Average: $35.69.
- Pembina Pipeline Corp. (“sector perform”) to $50 from $46. Average: $52.
- Secure Energy Services Inc. (“outperform”) to $12 from $10. Average: $11
- TC Energy Corp. ( “outperform”) to $58 from $54. Average: $53.94.
Mr. Kenny reduced his targets for these stocks:
- Emera Inc. (“sector perform”) to $50 from $51. Average: $54.75.
- TransAlta Corp. ( “outperform”) to $13 from $14. Average: $15.28.
- Tidewater Midstream and Infrastructure Ltd. ( “sector perform”) to $1.10 from $1.25.