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.

Revenue Mix

Source: Company

• Resilient Business Model: The group reported decent performance from the diversified portfolio of regulated and long-term contracted assets, which generated record financial results again in 2020. The company’s services were deemed essential given the critical role its infrastructure plays in providing energy to North Americans. The group’s results demonstrate the resiliency of the assets and utility-like business model in these unprecedented times. Comparable earnings per share improved by 1.5% compared to what was recorded in 2019, while comparable funds generated from operations of CAD 7.4 billion were 4% higher. The increases reflect the strong performance of the legacy assets and contributions from approximately CAD 5.9 billion of growth projects that entered service in 2020. Further, the group would capitalize on the gradual recovery in crude oil and its derivatives demand.

Source: Company Presentation

• A Solid Income Play: Despite the challenges brought by COVID-19, TC Energy's operating assets have been largely unimpacted. Across the company's extensive North American operations, flows and utilization levels generally remained in line with historical and seasonal norms. Based on this decent performance, together with the confidence, the group has in its outlook, the board has announced a 7.4% increase in the common share dividend for 2021. Moreover, its shares are yielding significantly higher with a dividend yield of ~5.7%, which is approximately 3.65 times the risk-free Canada 10-Year Government Bond Yield of 1.565%. This offers a very decent margin of safety for the investors to hold shares as they are going to earn a decent income. The group's dividend per share recorded a CAGR of 7% since 2000, which is noteworthy.

Source: Company Presentation

• Double-Digit EPS Growth over the Past 3-Years: Arguably, nothing is more important than earnings growth, as surging profit levels is what most investors are after. And for growth investors, double-digit earnings growth is definitely preferable and often an indication of strong prospects and stock price gains for the company under consideration. If you believe that markets are even vaguely efficient, then over the long term, you should expect a company's share price to follow its earnings per share (EPS). That makes EPS growth an attractive quality for any company. TC Energy managed to grow its EPS with a CAGR of 11.3% over the past three years.  

Source: Refinitiv (Thomson Reuters)

• Solid Business Segment EBITDA in Q4FY20: In the fourth quarter of FY20, the company’s consolidated EBITDA increased by CAD 8 million to CAD 2,334 million as compared to CAD 2,315 million reported in a year over period, driven by solid growth on the Canadian natural gas pipeline and US Natural gas pipeline on a YoY basis. Canadian Natural Gas Pipelines reported EBITDA expansion on account of increased rate base earnings, flow-through depreciation from additional facilities placed in service, as well as higher financial charges on the NGTL System plus Coastal GasLink development fee revenue, partially offset by a decrease in flow-through income taxes on the NGTL System and Canadian Mainline. And US Natural gas EBITDA expanded on account of lower operating costs.

Source: Company Presentation

• Industry Leading Margin Profile: The company delivered a decent FY20 performance and outperformed the industry on various financial parameters, which is evident from the below chart.

Source: Refinitiv (Thomson Reuters)

• Positive 2021 Comparable Earnings Per Share and Capital Spending Outlook:

Source: Company Presentation

• Delivering Long-term Shareholder Value: The company has delivered ~12% average annual return to its shareholders since 2000, which is noteworthy. Moreover, the group has solid visibility as it has a strong secured capital spending program amounting to CAD 20 billion through 2024.

Source: Company Presentation

• Solid Funding Program Outlook- 2021-2023: The company has a capital outlook that includes TCP acquisition, capital program and dividend distribution. The company would fund all of these without any hiccups as it has strong, predictable cash flow from operations and has access to capital markets on the compelling term.

Source: Company Presentation

• Risk Associated with Investment: The company is exposed to a variety of risks including a) performance and credit risk of the counterparties, b) competition in the businesses in which it operate c) economic conditions in North America as well as globally, d) anticipated construction costs, schedules and completion dates, e) the availability and market prices of commodities and f) currency transition risk.

Financial Highlights: Q4FY20

Source: Company Filing

• Revenue for the three months ended December 31, 2021 improved by 1% to CAD 3,297 million as compared to CAD 3,263 million reported at the end of the previous financial year.
• 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.
• 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 the following: increased earnings from U.S. Natural Gas Pipelines mainly attributable to lower operating costs, 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, and lower contribution from Liquids Pipelines primarily attributable to reduced margins from our liquids marketing activities.
• Comparable earnings of CAD 1.1 billion or CAD 1.15 per common share increased by CAD 110 million or CAD 0.12 per common share for the three months ended December 31, 2020 compared to the same period in 2019.
• Cash Flow from operation jumped by 6.18% to CAD 1,939 million as compared to CAD 1,826 million in the comparable previous quarter of the FY19.
• Quarterly dividend improved by 8% to CAD 0.81 cents as compared to CAD 0.75 in the same quarter of the previous financial year.

Top-10 Shareholders

Top-10 shareholders together holds approximately 25.61% stake in the company, with Capital Research Global Investors and Capital International Investors are the biggest shareholders in the company with an outstanding position of 3.58% and 3.25%, respectively. Institutional ownership in the company stood at 68.10% and strategic ownership stood at 0.55%.

Source: Refinitiv (Thomson Reuters)

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

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: Despite the challenges brought in by COVID-19, TC Energy's operating assets have been largely unimpacted. Across its extensive North American operations, flows and utilization levels generally remained in line with historical and seasonal norms, underscoring the importance of its assets to the North American economy. Given the regulated and or long-term contracted nature of their portfolio, the group continue to be largely insulated from the volatility associated with volume throughput and commodity price.

The company is advancing well on its CAD 20 billion secured capital program. ~CAD 4.2 billion of projects are expected to be completed in 2021.

The stock is offering a lucrative dividend yield amid a low interest rate environment with 21-years of consistent dividend growth. Moreover, the company is targeting a 5% to 6% growth in DPS in the foreseeable future. This is a single strong financial metric from an income investor's standpoint, as it is providing holding power safety.

Moreover, the company has registered a double-digit EPS growth over the past three years, which is definitely preferable, and often an indication of strong prospects and stock price gains for the company under consideration.

From the technical analysis standpoint, its shares are hovering in a steep bullish trend. At the last closing, its shares traded well above the crucial long-term as well as short-term support levels, which implies a strong bullish trend in the stock. Moreover, moving averages are moving higher, which is another bullish indicator, making the prevailing trend stronger. Further, the leading momentum indicator, the MACD is rising with the difference between 12-day, and 26-day EMA is positive, and the MACD oscillator hovering above 9-day SMA signal line. This is a bullish indicator and implies a potential upside from the current trading levels.

Therefore, based on the above rationale and valuation, we suggest a "Buy" recommendation at the closing price of CAD 60.92 on April 29, 2021.  

Technical Price Chart (as on April 29, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at April 30, 2021 price as well.

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