Keyera Corp. (TSX: KEY) is a midstream energy business that operates primarily out of Alberta, Canada. Its primary lines of business consist of the gathering and processing of natural gas in western Canada, the storage, transportation, and liquids blending for NGLS and crude oil, and the marketing of NGLs, iso-octane, and crude oil.

Key Updates:

• Lower Margins: In Q1FY22, the company reported its EBITDA margin and operating margin of 14.4% and 8.8%, respectively, as compared to the industry median of 47.6% and 33.8%, respectively. This indicates weak operational efficiencies and poor cost management. The company posted a lower net margin of 6.7% in Q1FY22, as compared to the industry median of 8%.

• Lengthy Cash Conversion period: In Q1FY22, the company reported its cash conversion period of 55.2 days, significantly higher than the industry median of 2.4 days. A higher cash conversion period suggests that the company is taking higher time to convert its investment to cash flows, which indicates lower operational efficiency.

• Highly leveraged Balance Sheet: The company reported a higher D/E ratio of 1.45x in Q1FY22, as compared to the industry median of 0.58x. This indicates a lower financial flexibility and remains a key concern for the group. Moreover, the company reported a higher long-term debt to total capital of 57.8% in Q1FY22, considerably higher than the industry median of 24.9%. This indicates higher balance sheet risk for the company.
  

Valuation Methodology (Illustrative): EV to Sales based methodology

Analysis by Kalkine Group

Stock Recommendation:

The company reported its operating margin of CAD 272.9 million in Q1FY22, which is lower than CAD 344.0 million in Q4FY21. This indicates a rise in the input costs and weak profitability. We have valued the stock using the EV to Sales value-based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like Pembina Pipeline Corp, Ensign Energy Services Inc etc. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock of KEY at the last closing price of CAD 33.72 on May 30, 2022.

One-Year Technical Price Chart (as on May 30, 2022). Source: REFINITIV, Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

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