TC Energy Corporation

TC Energy Corporation (TSX: TRP) operates as an energy infrastructure company consisting of pipeline and power generation assets in Canada, the United States, and Mexico. 

Key Highlights:

• An Income Play: The company reported constant dividend payment amidst ongoing economic sluggishness, supported by superior cash flow generation. Notably, the company paid a higher dividend of CAD 1,613 million in the latest quarter as compared to CAD 1,465 million in pcp. Moreover, the stock carries a dividend yield of ~5.8%, which looks impressive considering the current interest rate scenario. The management expects a 5-7% of growth in dividend distribution in the coming days.

Ten years dividend distribution, Source: REFINITIV

• Upcoming Projects: The company is working upon its Phase I of Grand Chenier Xpress expansion, which is an extension of ANR pipeline system connecting supply directly to U.S. Gulf Coast LNG export facilities. The above is expected to be operational from early 2022. Moreover, the company is working in capacity expansion for its NGTL System and reported almost CAD 0.1 billion of capacity projects in service during Q2FY21. Notably, the above expansion has contributed CAD 16 million of net income during Q2FY21.
• Robust Margin profile: The company commands robust margin than its peers, which indicates improved operational efficiencies and prudent cost management. Notably, EBITDA margin and operating margin stood at 63.8% and 43.5%, respectively, in Q2FY21, which was considerably higher than the industry median of 42.4% and 19.4%, respectively. The company reported a solid net margin of 32.1% in Q2FY21, as compared to the industry median of 4.1%. The management is focusing on prudent financial management in order to attain operational excellence, which would subsequently support the company’s upcoming margins.

Q2FY21 Income Statement Highlights:

• TRP announces its second quarter result, wherein the company posted revenues of CAD 3,182 million, improved from CAD 3,089 million in the previous corresponding period (pcp). The increase was primarily driven by higher income from Canadian Natural Gas Pipelines and Power & Storage, partially offset by a slide in the revenue from the Liquids Pipelines segment.
• Total operating expenses stood higher at CAD 1,797 million compared to CAD 1,767 million in pcp. The quarter witnessed higher plant operating costs coupled with an increase in other expenses.
• The group reported a net income of CAD 1,020 million, as compared to an income of CAD 1,384 million in the previous corresponding period (pcp).

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: Due to the stricter restrictions on account of COVID 19, the group might face a delay in the execution of its projects, which might lead to a pause in additional earnings.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company is betting on critical energy infrastructure, which would provide utility services to North American consumers in the coming years. Moreover, the company’s operations are regulated by long-term contracts, which ensures revenue stability. Moreover, the group is also focusing on renewables segments, and is expanding proven wind, solar and hydro capabilities, which are expected to grow in the coming days, as most of the developed nations are focusing on lower carbon emissions. We have valued the stock using the P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms) upside. For the said purposes, we have considered peers like Pembina Pipeline Corp, Enbridge Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 60.45 on September 02, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on September 02, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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