Company Profile

Enbridge Inc (TSX: ENB) is a Calgary, Canada-based energy infrastructure company. Its business segments include energy services, liquid pipelines, gas transmission, gas distribution and renewable power generation and transmission. Its geographical segments includes the United States and Canada. In the Liquid Pipeline space, the group has North America's premium liquid pipeline system. The outstanding market capitalization of CAD 84.20 billion ranks ENB among the large cap listed and traded on the Toronto Stock Exchange.

Investment rationale

• An Income Stock with Consistent Dividend Payment Track Record: The group has a consistent track record of dividend payment over the last 65-years to its shareholders. Despite challenging economic condition led by COVID-19 pandemic, the group declared a quarterly dividend of CAD 0.81/share on May 05, 2020, which was approximately 9.8% higher on a sequential basis, which reflects the financial strength of the company. Further over the past 25-years, ENB dividend payment has increased with a CAGR of 11% between 1995-2020. At the last traded price of CAD 41.58 (July 02, 2020 market close), ENB shares were offering a lucrative dividend yield of 7.85% (approx. 15.4x of Canadian 10yr bond yield of 0.15%), which is significantly higher in the current interest rate environment. And given the dividend payment track record of the company, it is one of the important fundamental measures of the company's health from an income investor's standpoint. 

Source: Company Report.

• Resilient Business Model and Investment Grade Customers are Providing Safety Cushion: COVID-19 has threatened millions of people and economic activities across the globe. However, resilient business model and the actions which the group took over the last 3 years put it in a strong position to weather this challenging time as the majority of the group's EBITDA is unaffected and enabling the group to reaffirm its guidance and outlook. The group has over 40 different sources of EBITDA generation diversified by business line, commodity, size and geography. Also, 95% of the Enbridge's customers are investment-grade with a strong balance sheet. Further, 98% of the group's EBITDA is supported by cost of service, long-term take-or-pays or similar structures, which helps the group to generate predictable cash flows.

Source: Company Presentation

• Strong Liquidity Position with Manageable Debt: To prepare for any economic scenario and make sure the group stay ahead, it has bolstered the liquidity position by CAD 5 billion to CAD 14 billion to provide more buffer in case debt capital markets shut down for an extended period. Further, the company has reduced FY20 costs by CAD 300 million comprising salary rollback across the organization, including senior management and the Board and refined their FY20 capital execution schedules in light of COVID-19 pandemic. The group expects about CAD 1 billion of capital expenditure will be deferred to next year without changing schedules in terms of EBITDA uptick. In terms of balance sheet metrics, for the full year, the group continue to expect debt-to-EBITDA to be well within their 4.5 to 5x target range. The group’s long-term debt to capital ratio stood at 45.1% while the company has an interest coverage ratio of 3.02x.
• CAD 10 Billion Growth Capital Program Execution in the Next Three Years (2020-22): The group maintains its focus on the execution of its CAD 10 billion secured capital programme between 2020-22. The company has invested almost half of the planned expenditure, and ~CAD 5.5bn is yet to be utilised. These investments are expected to drive the business growth over the near to medium term.
• Risk Associated to the Investment: The group’s earnings and cash flows are exposed to movements in foreign exchange rates as it generates certain revenues, incur expenses, and hold a number of investments and subsidiaries that are denominated in currencies other than Canadian dollars. Any fluctuation in exchange rate is likely to affect the group’s financials. Further, COVID-19 pandemic had reduced the crude oil demand. Consequently, the group might face lower oil volume flow in the near term. 

Financial Highlights: Q1FY20 (March 31^st, 2020)

Source: Company Presentation

During the period under consideration, the group's operating revenue stood at CAD 12,013 million, which was approximately 6.6% lower against CAD 12,856 million reported in the corresponding quarter of the previous financial year. The decline was driven by 26% revenue slump in Transportation and other services to CAD 3,208 million from CAD 4,348 million reported in a year-over period and 25% decline in the gas distribution to CAD 1,416 million from CAD 1,876 million reported in a year-over period. However, commodity sales increased 11% to CAD 7,389 million on YoY basis. Operating Income narrowed to CAD 1,513 million from CAD 2,619 million reported in a year-over period, driven by lower operating revenue and a 9% surge in the commodity costs. The group reported a net loss of CAD 1,364 million during the quarter under consideration, driven by lower operating revenue, lower Income on equity investment, impairment from equity investments, forex loss and relatively higher interest expenses. Diluted loss per share stood at CAD 0.71 against earnings per share of CAD 0.94 in the Q1FY19. 

However, due to foreign currency translation adjustments of CAD 5,637 million, the group reported a comprehensive income of CAD 3,073 against CAD 695 million reported in a year-over period. Comprehensive Income attributable to common shareholders stood at CAD 2,832 million against CAD 613 million reported a year ago. 

Further, net cash provided by operating activities during the period under consideration increased by 29% to CAD 2,809 million against CAD 2,176 million reported in the Q1FY19. Capital expenditure during the period reported at CAD 1,147 million, 29% lower against the same quarter of the corresponding period. Cash and Cash Equivalent and restricted cash at the end of Q1FY20 stood at 840 million, 11% higher on a YoY basis.

The group's long-term debt at the end of Q1FY20 increased by 7% to CAD 63,571 million from CAD 59,661 reported at the end of Q1FY19.

Stock Performance

At the last closing price (July 02, 2020) shares of ENB traded approximately 0.73% higher at CAD 41.58. ENB shares are up by 1.44% in the past five trading sessions and relatively outperformed the sector by 0.40% at the same time. In a year over period, its shares have tested a 52W high of CAD 57.32 on February 11, 2020, and a 52W low of CAD 33.06 on March 18, 2020. At the last closing price, its shares traded approximately 27.46% below its 52W high price level and 25.77% above its 52W low price level.

1-year price performance (as on July 02, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

ENB shares are featuring a positive return over the past 3-months and up by 6.42%; however, on relative performance basis its shares have underperformed the broader indices. On a YTD basis, its shares are delivering a negative price return of 19.47%.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together form around 24.63% of the total shareholding. Capital International Investors and The Vanguard Group, Inc. holds the maximum interests in the company at 7.69% and 3.31%, respectively. Further, six out of top ten shareholders have increased their stake in ENB in the March ended quarter of FY20, with Capital International Investors and Manulife Asset Management Limited increased their stakes by 28.06 million and 10.69 million, respectively. The institutional ownership in the ENB stood at 60.29%, and ownership of the strategic entities stood at 0.21%.

Source: Refinitiv (Thomson Reuters).

Valuation Methodology (Illustrative): EV to Sales Based Valuation Metrics

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters).

Stock Recommendation: The resilient business model positions the group strongly to weather the current challenging time as 98% of the group's EBITDA is supported by cost of service, long-term take-or-pays or similar structures. Also, resilient and diversified business model helps the group to generate predictable cash flows.  Distributable cash flow remained strong during the quarter under review and exceeded the group’s Q1 expectation as well. Further, majority of the cash flows comes from reservation-based revenue contracts, and over 90% of the customers are investment grade. Further, the company's liquids contracts are of long-term, typically of 10 to 20 years, which ensure stability. The company has successfully managed to drive EBITDA despite commodity price collapse in the past as well.

Enbridge is an excellent investment option for investors seeking steady income flow. Enbridge is a Dividend Aristocrat and has consistently raised its dividend in the last 25 years. Enbridge’s stock currently offers a dividend yield of 7.85%, which is lucrative, considering the current interest rate environment.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a "Buy" recommendation at the closing price of CAD 41.58 (as on July 02, 2020, after the market close), with double-digit upside potential, based on the NTM Peer's Average EV/Sales multiple of 3.7x on the FY20E Sales. We have considered TC Energy Corp, Kinder Morgan Inc and Enterprise Products Partners LP etc., as a peer group for comparison purpose.

*Recommendation is valid at July 3, 2020 price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.