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 group has an excellent track record of dividend payment, backed by stable cash flows, which is impressive. Moreover, in Q1FY21, the group reported a higher dividend payment of CAD 761 million, as compared to CAD 704 million in Q1FY20. Notably, at the last closing price, the stock was offering a dividend yield of ~5.5%, which is lucrative considering the current interest rate scenario. Moreover, the management has guided that it would increase the dividend distribution by 5% to 7% in the near future.         

10-years dividend history

• Management Update: On June 14, 2021, the company reported the appointment of a new independent director, William D. (Bill) Johnson.

• Encouraging long-term outlook: The group has planned to deploy ~CAD 20 billion for expansion. The majority of the expansion would come from Natural Gas Pipeline. The group majorly operates through regulated natural gas pipelines across North America and is underpinned by long-term contracts, which are expected to generate stable cash flows for the company. The group would be able to complete ~CAD 4.1 billion worth of project work in FY21.

Source: Company Presentation

• Reduction in total debt: TRP reported total debt of CAD 51,760 million in Q1FY21, lower than CAD 55,137 million in Q1FY20. The operations of the company are capital intensive in nature, and a slide in the total borrowings indicates higher financial flexibility and prudent capital management. Moreover, a lower debt level would lead to a decline in the finance costs, which subsequently would support the company’s bottom line.

Q1FY21 Income Statement Highlights:

• TRP announces its quarterly result, wherein the company posted revenues of CAD 3,381 million, declined from CAD 3,418 million in the previous corresponding period (pcp). The marginal slide was primarily due to a lower income from Mexico Natural Gas Pipelines and Liquids Pipeline segments.
• Total operating expenses stood higher at CAD 4,572 million, as compared to CAD 1,726 million in Q1FY20, due to inclusion of asset impairment charge of CAD 2,845 million and higher depreciation and amortization expense of CAD 645 million v/s CAD 630 million in pcp, partially offset by lower plant operating costs and other costs CAD 886 million v/s CAD 920 million in pcp.
• The group reported a net loss of CAD 950 million, as compared to a net profit of CAD 1,285 million in the previous corresponding period (pcp).

Q1FY21 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 Earnings

Stock Recommendation:

The group is a prominent player within energy infrastructure segment and derives robust cash flows from its operations, which is a key positive. During the last two decades, the company has consistently increased its dividend payment at a CAGR of 7%. We have valued the stock using the P/E 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 Enbridge Inc, Inter Pipeline Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 62.89 on June 23, 2021.

One-Year Technical Price Chart (as on June 23, 2021). Analysis by Kalkine Group

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

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