Keyera Corp. (TSX: KEY) is a midstream energy business that operates primarily out of Alberta, Canada. Its primary lines of business consist of the gathering and processing of natural gas in western Canada, the storage, transportation, and liquids blending for NGLS and crude oil, and the marketing of NGLs, iso-octane, and crude oil.

Key Investment Rationale:

• Improved traction from Liquids Infrastructure segment: During both Q4FY21 and FY21, the Liquids Infrastructure segment achieved record margin contributions, driven by record condensate volumes flowing through the industry-leading condensate system. The company also registered best-ever contributions from the underground storage business, and also received strong traction from the fractionation business, which operated close to the full capacity during FY21. Notably, this has contributed healthily to the KEY’s profitability margins which is a key positive. Notably, operating margin and net margin stood healthily at 8.6% and 6.5%, respectively, in FY21, surged from 2.4% and 2.1%, respectively, in FY20.

Liquids Infrastructure performance highlight (Source: Company Report)

• Stable dividend payment: The company has a strong history of consistent dividend payment amidst the economic cycles, backed by stable cash flow generation. Notably, the stock of KEY carries an impressive dividend yield of ~6.379% on an annualized basis, which looks impressive considering the futuristic interest rate scenario. In FY21, total dividend distribution stood at CAD 424.3 million, slightly higher than CAD 423.4 million in FY20, along with a payout ratio of ~63%. Meanwhile, the board of directors announced a monthly cash dividend of 16.00 cents per share, payable on April 18, 2022.

Five-years dividend distribution (Source: Refinitiv)

• Strong performance from the Gathering & Processing segment: In FY21, the company’s Gathering & Processing segment reported a robust performance, which has uplifted the company’s overall performance. Operating profit and net earnings stood at CAD 323.1 million and CAD 225.0 million, respectively, In FY21, as compared to CAD 260.2 million and a net loss of CAD 57.2 million, respectively, in FY20.

• Strategic collaboration with Shell Canada Limited: Recently, the company collaborated with Shell Canada Limited, wherein the two would establish potential low-carbon projects across the Alberta's Industrial Heartland. As per the management, this would leverage existing assets, adjacent areas and would focus on a lower-carbon future and attract new investment opportunities to the region. Notably, the company is also prioritizing on leveraging its existing pipeline capable of transporting hydrogen to complement a hydrogen manufacturing and distribution network within the region. Considering the recent preference for clean sources of energy, this is expected to boost the company’s order book in the coming years.

• Bullish outlook from the KAPS pipeline project: The company is conducting construction activity in the KAPS pipeline project and has completed more than 40% in January 2022. The company is prioritizing to connect its KAPS Natural Gas Liquids and Condensate Pipeline system and would start working in the first quarter of FY23. This would result in strengthening the company’s value chain and would lead to improved prospects in the coming years. Notably, the KAPS pipeline project is anticipated to earn an annual return on capital of 10% to 15% starting in 2025 based on existing contracts combined with the ability to attract incremental volumes.

• Growth in cash balance: In FY21, the company reported robust growth in the cash balance of CAD 15.9 million, significantly higher than CAD 2.9 million in FY20. A higher cash balance suggests higher liquidity of the company, which is a key positive.

Risk associated with the investment:

Due to the inflationary pressure, the company witnessed a higher capital investment for the KAPS pipeline project, and the continuation of the trend might dampen the company’s return ratios. Moreover, the company reported a higher D/E ratio of 1.39x in FY21, compared to 1.24x in FY20, which resulted in a higher finance cost.

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• In FY21, the company reported its revenue of CAD 4.9 billion, significantly higher than CAD 3.0 billion in FY20. The growth was supported by higher income from all three segments, partially offset by an increase in intersegment eliminations.
• Operating profit stood at CAD 1.0 billion, surged from CAD 0.9 billion in FY20, supported by higher revenues, partially offset by higher expenses.
• The period was marked by lower general and administrative expenses, lower depreciation and amortization, a steep decline in impairment expense, partially offset by an increase in finance costs. Hence, earnings before income tax stood higher at CAD 426.2 million, significantly higher than CAD 73.1 million in FY20. This was due to higher operating income coupled with lower input costs, as mentioned above.
• Net earnings stood at CAD 324.2 million, grew from CAD 62.0 million in pcp, supported by higher earnings before income tax, while an increase in income tax stood as a drag.

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 32.20% stake, RBC Global Asset Management Inc., and M & G Investment Management Ltd. are the major shareholders in the company with an outstanding position of 9.75% and 6.14%, respectively.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales based methodology

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

In FY21, the company reported a significantly lower cash conversion period of 64.6 days versus 79.5 days in FY20. A lower cash conversion period illustrates that the company is taking a lower time to convert its investments to cash flows, and the continuation of the above trend is likely to result in higher operational efficiencies. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Magellan Midstream Partners LP, Pembina Pipeline Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of KEY at the closing price of CAD 30.10 on March 17, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 17, 2022). Analysis by Kalkine Group

*Recommendation is valid on March 18, 2022, price as well.

Technical Analysis Summary

Disclaimer

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