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:

• Growth in Cash flows: The company reported an impressive growth in its cash flows of CAD 457.0 million in Q1FY22, as compared to CAD 268.4 million in Q1FY21, supported by a solid net profit growth. This is impressive and would support the company’s overall liquidity position.

• Impressive Dividend Yield: The company has a strong history of consistent dividend payment amidst the economic cycles, backed by stable cash flow generation. Notably, the stock of KEY carries an impressive dividend yield of ~5.959% on an annualized basis, which looks impressive considering the futuristic interest rate scenario. Dividend distribution stood at CAD 106.0 million, which is at par with previous year’s distribution. The company declared a monthly cash dividend of 16.00 cents per share with a payment date of May 24, 2022.

• KAPS pipeline project to add meaningful prospect: The company is conducting construction activity in the KAPS pipeline project and has completed more than 70% till March 2022. The company is prioritizing to connect its KAPS Natural Gas Liquids and Condensate Pipeline system and would start working in the first quarter of FY23. This would result in strengthening the company’s value chain and would lead to improved prospects in the coming years.

Risks associated with the business:

A slowdown in the industrial activities would lead to a lower demand scenario for the company. Moreover, volatility in the commodity prices might lead to lower margins.

Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• In Q1FY22, the company reported its revenue of CAD 1,690.2 million, significantly higher than CAD 1,017.9 million in pcp. The growth was supported by higher income from all three segments, partially offset by an increase in intersegment eliminations.
• Operating profit stood at CAD 272.9 million, surged from CAD 235.9 million in pcp, supported by higher revenues, partially offset by higher expenses.
• The company reported impressive cost control and posted slightly higher general & administrative costs, and a lower depreciation and amortization expense. However, a higher finance costs remained as a drag. Hence, earnings before income tax stood higher at CAD 149.4 million, significantly higher than CAD 111.6 million in pcp.
• Net earnings stood at CAD 113.7 million, grew from CAD 85.8 million in pcp, supported by higher earnings before income tax, while an increase in income tax stood as a drag.

        Valuation Methodology (Illustrative): Price to CF based

       Analysis by Kalkine Group

Stock Recommendation:

The company reported an improved working management and posted its quick ratio and current ratio of 1.01x and 1.19x, respectively, as compared to the industry median of 0.89x and 1.01x, respectively. The group reported an improved cash conversion period of 55.2 days in Q1FY22, as compared to 59.8 days in Q4FY21, which indicates that the company is taking lower time to convert its investments to cash flows.

We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Pembina Pipeline Corp, Gibson Energy Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of KEY at the last closing price of CAD 32.22 on May 12, 2022.

One-Year Technical Price Chart (as on May 12, 2022). Source: REFINITIV, Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

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