In a separate report, Mr. Dounis initiated coverage of Pembina Pipeline Corp. (
) with a “neutral” recommendation, seeing it trading at a premium that reflects its more than $5-billion backlog of “high quality and low-carbon projects.”
“PPL offers investors a unique dual track: a low-risk growing base business and one of the most holistic approaches to low-carbon growth in our coverage,” he said in a note titled Dual Track but Long Track. “PPL’s base business take-or-pay earnings profile at approximately 70 per cent bests its peers. Its growth backlog of up to $4-billion in low-carbon projects also stands out. That said, PPL already trades at a 0.5 times premium, reflecting its lower risk profile. Its energy transition projects offer new revenue streams but are in early stages and present execution risk. PPL trades at a high-single-digit FCF yield, which is in-line with peers and offers comparable forecasted growth.”
Mr. Dounis estimates Pembina’s low-carbon projects offer as much as $4 per share in value, however he thinks “some of that value may be priced-in, while the rest remains in very early stages of execution.”
“We expect PPL to generate nearly 20 per cent of its CFO annually in excess cash flow (after capex and dividend), which can be used to accelerate growth, de-lever, or return capital to shareholders,” he said. “Historically, leverage funded growth, but the paradigm has changed (for the sector as a whole). That said, PPL’s excess cash flow generation tracks peers and has a high likelihood of being reinvested vs returned to shareholders, in our view.”
Mr. Dounis set a target of $42 per share. The average on the Street is $51.18.