TC Energy Corp (TSX: TRP) is an energy infrastructure company, which operates through a pipeline and power generation assets in Canada, the United States, and Mexico. The company’s pipeline network includes more than 92,600 kilometers of natural gas pipeline, along with 4,900 kilometers from the Keystone Pipeline system. 

Key Highlights:

• Weak Margin profile on Q-O-Q basis: The company reported operating margin and pretax margins of of 27.5% and 20.7%, respectively, in Q1FY22, lower than, 46.3% and 40.1%, respectively, in Q4Fy21. This indicates weak operational efficiencies and poor cost management. Moreover, the company posted a lower net margin of 11.4% in Q1FY22, as compared to the 32.2% in Q4FY21.

• Poor Liquidity profile: In Q1FY22, the company’s quick ratio and current ratio stood at 0.54x and 0.61x, respectively, lower than the industry median of 0.92x and 1.01x, respectively. This indicates that the company has higher current liabilities as compared to its current assets, reflecting a weak working capital management.

• Highly leveraged financials: At the end of Q1FY22, the company reported a higher D/E ratio of 1.83x, as compared to the industry median of 0.57x. This remains a key concern for the group as it leads to higher finance costs along with a lower profitability for the firm. Moreover, a higher D/E would lead to lower financial flexibility for the firm.
  

• Increase in balance-sheet risk: The investors of TRP are prone to higher balance sheet risks, as the company’s long-term debt to total capital stood considerably higher at 54.1% in Q1FY22, as compared to the industry median of 24.9%. Hence, the capital management of the firm is significantly weak compared to the industry peers.

Valuation Methodology (Illustrative): Price to Cash flow based

Analysis By Kaline Group

Stock Recommendation:

The company’s comparable EBITDA stood at CAD 2,388 million in Q1FY22, which is lower than CAD 2,489 million in pcp on account of a decline in the comparable EBITDA from Liquids Pipelines, Power and Storage and Canadian Natural Gas Pipelines segments. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like Antero Midstream Corp, Equitrans Midstream Corp etc. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock of TRP at the last closing price of CAD 73.87 on June 03, 2022.

One-Year Technical Price Chart (as of June 03, 2022). Analysis by Kalkine Group

The reference data has been partly sourced from REFINITV

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