TC Energy Corp (TSX: TRP) is engaged in providing energy infrastructure which consists of pipeline and power generation assets in Canada, the United States, and Mexico. Its pipeline network consists of over 92,600 kilometers (57,500 miles) of the natural gas pipeline, along with 4,900 kilometers (3,000) miles) from the Keystone Pipeline system. The company also owns or has interests in 11 power-generation facilities with a capacity of 6,600 megawatts.

Investment Rationale

• A Solid Income Play with Track Record of Consistent Dividend Payment: In equity investing, many investors look for the consistent dividend-paying stocks like TC Energy Corp, as they provide stable income. With TC Energy yielding ~5.5% and having paid a dividend for over 20 years, we believe that many investors find the company quite interesting from consistent income standpoint as a series of rate cuts announced by the Central Bank resulted in falling interest rate yield across the fixed income securities. The Canadian 10-Year Government Bond Yield has plummeted from 1.70% at the beginning of 2020 to 0.54% on September 24, 2020. We expect the low-interest-rate environment to persist in the near to medium term, which would bring high yielding stocks like TC Energy into the limelight.

Source: Company Website

• Strong Competitive Advantage: The company has consistently delivered an EBITDA margin above 60% over the last eight quarters and outperformed the industry average at the same time. The group reported a Net Margin above 25% in the same period and outperformed its peers. Moreover, despite a challenging last two quarters, the company has outperformed the industry peers both on the EBIDTA margin and Net Margin front. June quarter EBITDA margin stood at 74% whereas the industry median stood at 21.9%, which implies and outperformance of 52.1%. Net margin in the same quarter stood at 44.8% whereas the industry median turned negative. This reflects the competitive advantage of the TC Energy has built over the years against the market competition. Also, 95% of the group’s EBITDA comes from regulated assets and/or long-term contracts, which reflects a low-risk business model.

• Superior Return on Equity (LTM): Return on Equity (RoE) is a financial ratio that calculates the amount of net profit earned as a percentage of shareholders’ equity. It reveals how efficiently a company has used its shareholders’ money. TC Energy’s LTM ROE stood at 15.3% whereas peer’s average ROE in the period stood at 10.7%, which implies relative outperformance of 4.6 percentage points over the last twelve months. This reflects that despite a relatively higher debt contribution company is prudently investing the shareholder’s money and generating industry above returns. Moreover, in the June 2020 quarter, which was full of large swings in the oil demand, the group reported an RoE of 4.1%, whereas the industry average RoE was negative.

• Ample Liquidity amidst Disrupted Market Conditions: In the second quarter of FY20, the group has enhanced its liquidity in excess of CAD 11 billion by concluding the partial sale and project financing of Coastal GasLink along with the disposition of its Ontario natural gas-fired power plants for combined proceeds of approximately CAD 4.9 billion, completing senior debt issuances of CAD 2.0 billion and US$1.25 billion on compelling terms, as well as arranging US$2.0 billion of incremental committed credit facilities with its core banking group.

• Proven resilience across business cycles: Over the past 20-years, the company has a proven track record of delivering 13% average annual total shareholder return, with visible solid growth prospects.

Source: Company Presentation

• Risk Associated to Investment: The combination of the COVID-19 pandemic and unparalleled energy demand and supply disruption had a significant impact on certain of the group’s customers, which has increased counterparty risks for the company. Further, an extended slowdown in the global economic growth and lower demand for energy may weigh on the group’s performance.

2QFY20: Financial Highlights

Source: Company Presentation

• Despite the challenges brought about by COVID-19, the company’s assets have been largely unimpacted, With few exceptions, flows and utilization levels remain in line with historical and seasonal norms, which reflects the importance of the company’s critical energy infrastructure to North American consumers, institutions and commerce.
• Second quarter 2020 Comparable EBITDA decreased by CAD125 million compared to the same period in 2019. Principal variances included:
  • Canadian Natural Gas Pipelines – Higher primarily due to increased rate base earnings and flow-through depreciation and financial charges on the NGTL System from additional facilities placed in service
  • US Natural Gas Pipelines – Lower primarily due to the sale of certain Columbia midstream assets in August 2019
  • Mexico Natural Gas Pipelines – Higher mainly due to increased earnings from investment in the Sur de Texas pipeline which was placed into service in September 2019
  • Liquids Pipelines – Lower due to reduced uncontracted volumes on the Keystone Pipeline System, lower contributions from liquids marketing activities and decreased earnings following the July 2019 sale of an 85 per cent equity interest in Northern Courier
  • Power and Storage – Lower mainly due to the planned removal from service of Unit 6 on January 17, 2020 under the Bruce Power Major Component Replacement program as well as lower Canadian Power earnings largely as a result of the sales of the Ontario natural gas-fired power plants on April 29, 2020 and the Coolidge generating station in May 2019, along with an outage at the Mackay River cogeneration facility in 2020
• Net income attributable to common shares increased by CAD 156 million or CAD 0.15 per common share for the three months ended June 30, 2020 compared to the same periods in 2019.
• Liquidity improved by more than CAD 11 billion through the issuance of long-term debt, incremental committed credit facilities and various portfolio management activities.
• Approximately 95% of comparable EBITDA is generated from regulated assets and/or long-term contracts and the outlook for full year 2020 is essentially unchanged as a result of low-risk business model.
• Comparable funds generated from operations stood at CAD 1.5 billion in the second quarter.

Recent Development in the Canada Natural Gas Pipelines

Source: Company Presentation

Stock Performance

1-Year Price Chart (as on September 24, after the market close). Source: Refinitiv (Thomson Reuters)

At the last close on September 24, 2020, TRP shares traded slightly higher at CAD 58.65. Over the past 52 weeks TRP shares have registered a 52W High of CAD 76.58 (on February 21, 2020) and a 52W Low of CAD 47.05 (on March 18, 2020) and at the last traded price its shares traded approximately 23% below its 52W high price and 24% above its 52W Low price.

Top-10 Shareholders     

The top 10 shareholders have been highlighted in the table, which together forms around 29.87% of the total shareholding. RBC Wealth Management, International and T. Rowe Price Associates, Inc. hold the maximum interests in the company at 3.69% and 3.66%, respectively. The institutional ownership in the TRP stood at 73.59% and strategic ownership stood at 4%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to EBITDA based Relative Valuation Metrics

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

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: The group has recorded strong financial performance in the second quarter of 2020, despite challenging business condition led by COVID-19 pandemic, as the group's diversified portfolio of essential energy infrastructure continued to perform well. Further, Despite the difficulties brought about by COVID-19, the group's assets have been largely unimpacted. With few exceptions, flows and utilization levels remain in line with historical and seasonal norms, underscoring their criticality to North American consumers, institutions and commerce. With approximately 95 per cent of comparable EBITDA generated from regulated assets and/or long-term contracts, the group said that they would continue to be largely insulated from short-term volatility associated with volume throughput and commodity prices. The company's outlook for the full year 2020 is essentially unchanged. The group has a solid fundamental and continuously outperformed the industry in terms of EBITDA margin and net margin.

Further, the group declared a quarterly dividend of CAD 0.81 per common share for the quarter, and at the last traded price, its shares offering a lucrative yield of 5.5%, which is substantially higher amid the current interest rate environment.

Therefore, based on strong fundamentals, the competitive advantage of the company, higher dividend yield with a track record of consistent dividend payment and valuation, we have given a "Buy" recommendation on the stock at the closing price of CAD 58.65 on September 24, 2020.

*Recommendation is valid at September 25, 2020.

*Please be aware dividend is variable and not guaranteed.

Disclaimer

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