KEY Details (Yield subject to latest price correction)

Company Profile

Keyera Corp is a Canada-based integrated energy infrastructure business with extensive interconnected assets and depth of expertise in delivering energy infrastructure solutions. Its predominantly fee-for-service based business consists of natural gas gathering and processing; natural gas liquids processing, transportation, storage and marketing; iso-octane production and sales; and an industry-leading condensate system in the Edmonton/Fort Saskatchewan area of Alberta. Keyera strives to provide high quality, value-added services to its customers across North America. 

Investment Rationale

• Expectation of recovery in oil demand as countries ease COVID-19 restriction, though risks still prevail: The easing of lockdown restrictions is likely to drive a recovery in oil demand especially in gasoline (petrol) as traffic congestion in some parts of the world is returning to the previous level. Further, the United States has eased travel restrictions in some states, which is supporting demand for gasoline. Also, the latest report from EIA shows that U.S. oil inventories declined last week against the erstwhile expectations of a rise, which suggest that the overall oil supply glut in the market is easing. Increase in oil demand will benefit Keyera to clear its inventory and increase in marketing and storage activities. 

• Operating margin in liquids infrastructure segment to stay resilient: In the first quarter of FY20, the company's Liquids Infrastructure and Marketing segments contributed significantly to the group's profitability. The Liquids Infrastructure segment achieved record results generating CAD 102 million in operating margin vs CAD 94 million in the same period of the previous financial year, driven by strong demand for the company's condensate transportation and storage services. Further, the company’s operating margin of this segment is expected to remain relatively resilient in the current environment as its condensate business is supported by long-term, take-or-pay contracts with creditworthy counterparties. Further, the need for storage is likely to increase as the market tries to balance the supply and demand of condensate and other natural gas liquids. 

• Higher realised operating margin expected from marketing segment in the rest of FY20: In the Q1FY20 Marketing segment delivered a robust operating margin of CAD 246 million against a loss of CAD 18 million reported in the corresponding previous period, on account of higher contributions from iso-octane sales and an effective risk management strategy. Further, the company is bullish on the Marketing segment for FY20 and expecting a realised margin between CAD 270 million to CAD 310 million. 

• An Income Play amid lower interest rate environment: Keyera Corp has been offering a lucrative dividend yield; however the yield of 8.6% may look to be inflated given latest price corrections. Also, the company has a proven track record of consistent monthly dividend payment, and since 2003, the company has recorded a steady dividend CAGR of 8%, which is exceptionally higher. Further, the Keyera's dividend yield of 8.6% is approximately 14 times of the 10 Year Canadian Benchmark Bond Yield of 0.60% and 2 times of the average S&P/TSX 60 dividend yield of 4.04%, respectively. Therefore, the company is offering a lucrative income opportunity from an income investor standpoint as well. 

• Generating a Higher Return to Shareholders: Keyera is generating a superior return for its shareholder as compared to its peer group companies, with the Return on Common Equity (ROE %) of the company stood at 16.9%, whereas the industry median ROE stood at 6.2%, respectively. It reflects the efficiency of the company's management and how effectively they are using shareholder's money to produce income. 

• Investment Grade Credit Profile: The company has maintained its BBB credit rating at the end of Q1FY20, which reflects the group’s balance sheet quality, appropriate capital structure and ability of honour its debt obligations. The company has a strong financial position, with a net debt to adjusted EBITDA ratio stood at 2.2x as on March 31^st, 2020. Further, approximately 15% of the group’s long-term debt is maturing in the next five years, which indicates that the company has no material long-term debt maturities. 

Key Fundamentals

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

Financial Highlights: Q1FY20

• The company reported strong financial performance amid challenging market conditions in the first quarter of FY20. The company's adjusted EBITDA increased approximately two-fold to CAD 327 million against CAD 164 million reported in the year over the period, driven by a 27% surge in the group's revenue to CAD 1.06 billion and strong performance of the group’s Liquids Infrastructure and Marketing segments. The strong performance of the company in the Q1FY20 reflects the strength of its business model. 

• The Liquids Infrastructure segment continued to generate strong results, reporting a record operating margin of $102 million in the first quarter of 2020, which represents an 8% increase over the same period last year. These results were driven by strong demand for the company’s condensate storage and transportation services. The volume of condensate delivered to the oil sands increased by 28% over the same period last year and 9% over the fourth quarter of 2019.

• The Marketing segment achieved record financial results in the first quarter of 2020, generating an operating margin of $246 million and realised margin of $165 million. The strong performance was largely driven by the company’s iso-octane business, along with the company’s effective risk management strategy.

• The group’s Gathering and Processing segment was affected by lower gas processing volumes due to reduced producer activity year over year and unscheduled repair work at the Wapiti gas plant. The segment’s operating margin stood at CAD 64 million as compared to CAD 68 million in the same quarter of the corresponding financial year.

• The company reported that its capital projects are in line with the budget and all major work-in-progress projects are expected to commence operation by the second half of the current financial year. The key projects include, the second phase of Wapiti gas plant, the Pipestone gas plant, and the Wildhorse crude oil storage and blending terminal in Cushing, Oklahoma. 

Stock Performance

At the time of writing (as on May 22, 2020), shares of KEY were trading at CAD 21.74. In a year-over period, its shares have registered a 52W high of CAD 36.56 as on February, 11^th, 2020 and a 52W low of CAD 10.04 as on March 19^th, 2020 and at the last closing, its shares traded approximately 121% above its 52W low price level and around 37% below its year’s peak price level, which reflects that the stock is more tilted towards its 52W high price level, despite a tumultuous market condition both in oil and equity market led by COVID-19 pandemic.

Also, upside momentum has built in the stock, as in a month over a period, its shares have bagged ~ 33% return and outperformed the benchmark index by approximately 25% in the same period and outperformed its peers by ~ 17% as well. The momentum also continued over the past 5 trading sessions, as KEY shares surged around 11% and relatively outperformed the index by ~ 8% at the same time.

1-Year Price Chart (as on May 21^st, 2020, after the market close). Source: Refinitiv (Thomson Reuters).

However, on a YoY basis, its shares are featuring a negative price return of ~34% and plummeted ~35% on a YTD basis. Also, at the last traded price of CAD 21.74, its shares traded approximately 25% below its long-term crucial support level of 200-day SMA.

Top 10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 33.57% of the total shareholding. CI Investments Inc and RBC Global Asset Management Inc. hold the maximum interests in the company at 8.0% and 6.81%, respectively.

Source: Refinitiv (Thomson Reuters) 

Valuation Methodology (Illustrative): EV/EBITDA Methodology

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

Stock Recommendation

We believe that the resilient business model of the company and potential decent performance of the group's Liquids Infrastructure segment and Marketing segment is likely to benefit the group in the remaining period of the FY20. The lifting of COVID-19 curbs and balancing act by market players for the supply and demand of condensate, and other natural gas liquids is likely to increase demand for the storage and transportation services significantly, that will have a positive impact on the group’s business.

Further, the company is offering a lucrative dividend yield of 8.6% which is significantly higher given the lower interest rate environment and which makes it a profitable bet from an income investors point of view, as finding this kind of yield with an investment-grade credit rating will be crucial.

Moreover, the group’s shares are trading at a discounted valuation in terms of the Price/Book Value ratio, the company's Price/BVP ratio stood at 1.56x, and the industry average Price/BVP ratio stood at 1.72x, which reflects a discounted valuation of 11% against the industry average. Though, the company is providing relatively higher Return on Equity of 16.9% whereas the industry average ROE stood at 6.2%.

Also, upside momentum has built-in, as over the past one-month as its shares added approximately 33% and added about 11% in the last 5 trading session and outperformed the benchmark index by 25% and 8% respectively during the period under consideration. The group’s shares are trading above its short-term crucial support levels of 20-day, 30-day, and 50-day SMAs, another favourable technical trend.

Therefore, based on the above rationale and valuation done using EV/EBITDA methodology, we have given a “Buy” recommendation at the closing price of CAD 21.74 (as on May 22, 2020), with lower double-digit upside potential, based on the NTM EV/EBITDA multiple of 9.89x on the FY20E EBITDA. We have considered Inter Pipeline Ltd (TSX: IPL), Pembina Pipeline Corp (TSX: PPL), and Gibson Energy Inc (TSX: GEI) etc. as a peer group.

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.