TC Energy Corp (TSX: TRP) operates as an energy infrastructure company, consisting 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 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

• Stock Entered in a Bullish Price Zone: Shares of TRP entered a bullish price zone on February 12^th, 2021, with price crossed over the short-term crucial support levels of 50-day and 30-day SMAs. Now the price is heading towards the long-term support level of 200-day SMA. Further, the Moving Average Convergence Divergence (MACD) is rising and hovering above the 9-day SMA signal line, with the difference between 12-day and 26-day EMAs is positive. This implies a bullish trend in the stock. Further, the 14-day RSI is hovering in the neutral zone and mostly tilted towards the overbought zone.

Technical Price Chart (as on February 18^th, 2021). Source: Refinitiv (Thomson Reuters).

• An Income Play: TRP shares are yielding higher on the stock exchange, with a dividend yield of 6.1% on the stock exchange, as compared to the median TSX Composite dividend yield of 3.3% and Canada 10-Year Government Bond Yield of 1.18%. Moreover, the company has a consistent track record of dividend payment regardless of the business cycle over the past 20-years. A high yielding stock with a consistent track record of dividend payment tends to be in the investor’s limelight. The stock presents a lucrative opportunity for income-seeking investors to get a higher income amid a low-interest rate environment.

Dividend History: Source: Refinitiv (Thomson Reuters)

• Generating a Higher Return for Shareholders: The company is offering a higher return to its shareholders with a TTM Return on Equity of 14.9%, which is significantly higher than the industry average of 4.7%. This implies that the company is using its fund efficiently and generating a higher return for its shareholders. A higher ROE suggests that a company’s management team is more efficient when it comes to utilizing funds to grow their business. ROE is more than a measure of profit; it is also a measure of efficiency. A rising ROE suggests that a company is increasing its profit generation without needing as much capital.

• Industry Leading Margin Profile: The company maintains an industry-leading margin profile, with a gross margin of 70.2% in FY20, as compared to the industry median of 54%. The company’s EBITDA margin stood at 63.5% as compared to the industry median of 40.4%, Operating margin of 44.6% vs 14.4% of industry median and Net Margin of 37.8% as compared to 3.10% industry median. This reflects the company has created a strong competitive moat against the peers and also reflects the operational excellency of the business.

Source: Refinitiv (Thomson Reuters) 

• Risk Associated with Investment: Change in demand dynamics of oil may affect the overall performance. The next wave of COVID-19 could weigh on the group's performance. Further, the company is also exposed to forex risk. 

Financial Highlights: Q4FY20

Source: Company Filing

• Net income attributable to common shares increased by CAD 16 million or CAD 0.02 per common share to CAD 1.1 billion or CAD 1.20 per share for the three months ended December 31, 2020 compared to the same period last year. For the year ended December 31, 2020, net income attributable to common shares was CAD 4.5 billion or CAD 4.74 per share compared to CAD 4.0 billion or CAD 4.28 per share in 2019, an increase of CAD 0.5 billion or CAD 0.46 per common share.
• Comparable EBITDA of CAD 2.3 billion increased by CAD 8 million for the three months ended December 31, 2020 compared to the same period in 2019 primarily due to the net effect of a) increased earnings from U.S. Natural Gas Pipelines mainly attributable to lower operating costs, b) higher comparable EBITDA from Canadian Natural Gas Pipelines due to the impact of increased rate-base earnings, flow-through depreciation from additional facilities placed in service as well as higher financial charges on the NGTL System along with Coastal GasLink development fee revenue recognized in 2020, c) contribution from Liquids Pipelines primarily attributable to reduced margins from our liquids marketing activities, d) foreign exchange impact of a weaker U.S. dollar on the Canadian dollar equivalent earnings from our U.S. dollar-denominated operations.
• The group’s capital program consists of CAD 20 billion of secured projects which include commercially supported, committed projects that are either under construction or are in preparing to commence the permitting stage. An additional CAD 8 billion of projects under development are commercially supported but have greater uncertainty with respect to timing and estimated project costs and are subject to certain key approvals.
• During the quarter under consideration, Energy's Board of Directors approved a 7.4 per cent increase in the quarterly common share dividend to CAD 0.87 per common share for the quarter ending March 31, 2021.
• Further, the company approved the USD 0.2 billion Wisconsin Access Project on October 28, 2020 to replace, upgrade and modernize certain ANR facilities.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 24.93% of the total shareholding. RBC Wealth Management, International and Capital Research Global Investors holds the maximum interests in the company at 3.72%, and 3.72% respectively. The institutional ownership in the TRP stood at 73.66% and ownership of the strategic entities stood 0.60% respectively.

Source: Refinitiv (Thomson Reuters)

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

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Peer Comparison

Source: Refinitiv

Stock Recommendation: The company is built upon strong fundamentals, with a strong competitive moat created over time. The company is also delivering an industry-leading return for its shareholders with an RoE of ~14.9%, whereas the industry median of 4.7%. This strong RoE generation ability reflects that the company is utilizing shareholders fund efficiently to increase shareholders value. Further, together with higher RoE, the company is also offering a significantly higher dividend yield of 6.1% amid a lower interest rate environment. The higher RoE and Higher dividend yield are two strong fundamental metrics from an investor’s point of view.

Moreover, its shares have also registered a crossover on the daily price chart, with stock price crossed over the crucial short-term support levels of 50-day and 30-day SMAs and now heading towards the crucial long-term resistance of 200-day SMA. This implies a bullish price trend in the stock.

Therefore, based on the above rationale, we recommend a “Buy” rating at the closing price pf CAD 57.10 on February 18, 2021.

1-Year Price Chart (as on February 18^th, 2021). Source: Refinitiv (Thomson Reuters).

*Recommendation is valid at February 19, 2021 price as well.

Disclaimer

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