Keyera Corp (TSX: KEY) is a Canada-based integrated energy infrastructure company 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.

Investment Rationale

• Decent performance in the Q2FY20 supported by strong customer relationships: The group delivered decent result in the second quarter despite the ongoing COVID-19 pandemic and low commodity prices that continue to affect the global economy and energy industry. The Gathering and Processing segment reported operating margin of CAD 69 million, relatively similar with the year-ago operating margin of CAD 70 million, which shows the group's s strong customer relationships that helped ensure only modest volumes were shut in during the quarter. The Liquids Infrastructure segment generated CAD 100 million in operating margin as compared to the CAD 93 million reported a year-before. During the second quarter, Keyera made significant progress in enhancing its long-term competitive positioning by reducing its overall cost structure and expects these efforts to contribute a total annual improvement in earnings before tax of between CAD 45 million and CAD 65 million, with the majority to begin in 2021. Further, in the period under consideration, Gathering and Processing segment and Liquids Infrastructure business segments performed well.

• Strong balance sheet: The company has a strong balance sheet with Net Debt to Adjusted EBITDA of 2.5x as of June 30, 2020. The company has no material long-term debt maturities in the next five years. Further, the company has a conservative payout ratio of 51% for Year-to-date, well within the long-term target range of between 50% and 70%. The company's total debt to equity ratio stood at 0.98, which is relatively higher than the industry median of 0.86; however, the interest coverage ratio of the company stood at 5.92x, implies that the company's earnings before interest and taxes are adequate enough to cover its debt obligations.

• An Income Play with a track record of consistent dividend payment and steady growth: The company has a long track record of paying dividends. The group announced a dividend of CAD 0.16 per share at a time when the sector is going through a steep pain. This shows the resilience of the company's business model. At the last closing price of CAD 23.46 (on August 06th, 2020), KEY shares are offering an advantageous dividend yield of 8.18%, which is significantly higher, given the lower interest rate. It provides income investors with an opportunity to harvest a higher yield income. Moreover, the company's dividend yield of 8.18% is approximately 19.2 times of the Canada 10 Years Bond yield of 0.46% and approximately 2.4% of the TSX Composite average bond yield of 3.6%, respectively.

Source: Company Presentation

 

• Bullish Price Trend: At the last traded level of CAD 23.46 (on August 06^th, 2020, after the market close), shares of KEY traded well above the short-term crucial support levels of 5-day, 10-day, 20-day, 30-day, 50-day and 100-day simple moving averages, which reflects a strong upside momentum in the stock. Also, the moving averages are rising, which is another positive measure. Further, the moving average convergence divergence (MACD) is rising with the difference between 12-day, and 26-day Exponential Moving Average (EMA) is positive another positive trend.

Technical Chart (as on August 06^th, 2020). Source: Refinitiv (Thomson Reuters)

• Risks Associated to Investment: Further breakout of the novel virus would dent the business operations and financial condition of the group. The risk of COVID-19 to Keyera includes the health and safety of its employees and contractors, the temporary suspension of operations in geographic locations in which the company deals, operational restrictions, delays in the completion, or deferral of growth and expansion projects; counterparty credit risk; volatility in financial and commodity markets; and supply chain disruptions, all or any of which could materially adversely affect Keyera’s business operations and financial results.

2QFY20 Highlights

Source: Company filings

The COVID-19 pandemic has adversely affected the global economy; however, regardless of current economic conditions, the company has reported strong performance in the second quarter of the FY20. This was primarily because of the resilience of the Liquids Infrastructure business and its disciplined and effective risk management program that protected margins in the Marketing segment. In addition, Keyera's strong customer relationships ensured there were only modest volume shut-ins in the Gathering & Processing business.

The group's consolidated revenue for the quarter under consideration stood at CAD 529.9 million as compared to CAD 960.5 million reported in the corresponding previous financial period. This was mainly driven by a steep plunge in the marketing business segment revenue, which came in at CAD 343.87 million compared to CAD 785.74 million reported in the same quarter of the previous financial year. However, the Gathering and Processing segment reported revenue stood at CAD 124.8 million, higher than CAD 120.012 million recorded in the same quarter of the previous financial year, which reflects Keyera's strong customer relationships. The Liquids Infrastructure segment generated CAD 135.9 million in revenue during the quarter under review as compared to CAD 130.96 million reported in the year over the period.

Further, the Gathering and Processing segment reported operating margin of CAD 69 million, relatively similar to the operating margin of CAD 70 million reported a year before, and the Liquids Infrastructure segment generated CAD 100 million in operating margin 8% higher against CAD 93 million reported a year-ago period. The Marketing segment earned realized margin of CAD 54 million as compared to CAD 115 million reported a year ago.

The group's adjusted EBIDTA during the quarter under review stood at CAD 182 million as compared to CAD 249 million recorded in the same quarter of the previous financial year. Distributable cash flow increased to CAD 158 million compared to CAD 144 million reported a year before. 

The company's capital projects are progressing well, and the company expects growth capital expenditure in the range of CAD 500 million and CAD 550 million. In addition, it expects to invest approximately CAD 70 million related to the butane distribution infrastructure at Kinder Morgan's Galena Park facility. Keyera plans to fund its 2020 capital program without issuing common equity and expects to adhere to this funding model for growth capital projects in short to medium term.

The group's balance sheet stood firm at the end of the quarter, with a minimal long-term debt maturity over the next five years and net debt to adjusted EBITDA ratio of 2.5x as of June 30, 2020.

Stock Performance

At the closing (on August 06, 2020), shares of KEY traded 7.9% higher at CAD 23.46. In a year-over period, shares of KEY tested a 52W High of CAD 36.56 on February 11, 2020 and a 52W Low of CAD 10.04 on March 19, 2020.  At the last traded price of CAD 23.46, shares of KEY traded approximately 36% lower against its 52W High price level and approximately 134% above its 52W Low price level, which implies that the stock is more tilted towards its 52w high price level, a positive price trend.

1-Year Price Performance (as on August 06^th, 2020, after the market close). Source: Refinitiv, Thomson Reuters

Shares of KEY are featuring a positive price return over the past 5-day trading sessions, 1-Month, 3-Month and up by 10.4%, 14.33% and 17% in the period under consideration; however, posing a negative price return of 31.04% and 29% over the YTD and YoY basis, respectively.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together form around 35.96% of the total shareholding. CI Investments Inc. and RBC Global Asset Management Inc. hold maximum interests in the company at 8.99% and 6.72%, respectively. Further, six out of top-10 shareholders have increased their stake in the company over the last three months, with CI Investments Inc. and RBC Global Asset Management Inc.  are among the top investors in the company that have increased their stakes by 6.81 million and 0.87 million, respectively. The institutional ownership in the KEY stood at 19.82%, and ownership of the strategic entities stood at 0.43%, respectively.

Source: Refinitiv (Thomson Reuters) 

Valuation Methodology (Illustrative): EV/EBITDA Based valuation Metrics

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

Stock Recommendation

The group’s performance was decent in the second quarter of FY20. The Gathering and Processing segment reported stable operating profit, while the Liquids Infrastructure segment’s operating profit improved 8% on an annual basis. However, the performance of the marketing segment remained a drag. Going forward, the company expects marketing segment to perform better. With an improving commodity price outlook for the remainder of the year, Keyera expects Marketing to generate realized margin between CAD 300 million and CAD 340 million in 2020 compared to previous guidance of CAD 270 million to CAD 310 million. The company maintained a strong balance sheet with Net Debt to Adjusted EBITDA of 2.5x as of June 30, 2020. The company have ample liquidity with no material debt maturing in the next five years.

Further, the company is a cash cow and has consistently boosted its shareholders’ returns through higher dividends, which is encouraging from an income investor point of view. At the last traded price, the stock was offering a dividend yield of 8.18%, which is lucrative considering the prevailing interest rate environment in the economy.

Also, the technical indicator also, positives in the stock and at the last traded price, the traded well above the short-term crucial support levels, which reflects a strong upside momentum in the stock.

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 23.46 (on August 06th, 2020), with lower double-digit upside potential based on the NTM EV/EBITDA multiple of 10.45x, 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 for the comparison purpose.

*Recommendation is valid at August 7, 2020 price as well.

*Please be aware that dividend is variable and not guaranteed.

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Disclaimer

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