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:

• Improved traction from Liquids Infrastructure segment: During both Q4FY21 and FY21, the Liquids Infrastructure segment achieved record margin contributions, driven by record condensate volumes flowing through the industry-leading condensate system. The company also registered best-ever contributions from the underground storage business, and also received strong traction from the fractionation business, which operated close to the full capacity during FY21. Notably, this has contributed healthily to the KEY’s profitability margins which is a key positive.

• 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 ~5.773% on an annualized basis, which looks impressive considering the futuristic interest rate scenario. In FY21, total dividend distribution stood at CAD 424.3 million, slightly higher than CAD 422.9 million in FY20, along with a payout ratio of ~63%.

• KAPS pipeline project to add meaningful prospect: The company is conducting construction activity in the KAPS pipeline project and has completed more than 40% in January 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. Notably, the KAPS pipeline project is anticipated to earn an annual return on capital of 10% to 15% starting in 2025 based on existing contracts combined with the ability to attract incremental volumes.

• Issued CAD 400 million medium-term notes: Recently, the company offered senior unsecured medium-term notes amounting CAD 400 million, with a fixed coupon of 5.022% per annum, along with maturing on March 28, 2032. The funds are expected to be used for the repayment of its total borrowings and for other general corporate purposes.

 FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• In FY21, the company reported its revenue of CAD 4.9 billion, significantly higher than CAD 3.0 billion in FY20. The growth was supported by higher income from all three segments, partially offset by an increase in intersegment eliminations.
• Operating profit stood at CAD 1.0 billion, surged from CAD 0.9 billion in FY20, supported by higher revenues, partially offset by higher expenses.
• The period was marked by lower general and administrative expenses, lower depreciation and amortization, a steep decline in impairment expense, partially offset by an increase in finance costs. Hence, earnings before income tax stood higher at CAD 426.2 million, significantly higher than CAD 73.1 million in FY20. This was due to higher operating income coupled with lower input expenses, as mentioned above.
• Net earnings stood at CAD 324.2 million, grew from CAD 62.0 million in pcp, supported by higher earnings before income tax, while an increase in income tax stood as a drag.

 Valuation Methodology (Illustrative): EV to Sales based methodology

Analysis by Kalkine Group

Stock Recommendation:

The management expects that its adjusted EBITDA to grow by 6% to 7% on CAGR basis during 2022 to 2025 timeframe, with most of this growth coming from projects with a high proportion of contracted, long-term take-or-pay revenue. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Secure Energy Services Inc, Murphy Oil Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of KEY at the last closing price of CAD 32.54 on April 22, 2022.

One-Year Technical Price Chart (as on April 22, 2022). Source: REFINITIV, Analysis by Kalkine Group

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