TC Energy Corp.

TC Energy Corp. (TSX: TRP), formerly TransCanada Corp, is an energy infrastructure company engaged in the development and operation of North American energy infrastructure, including natural gas and liquids pipelines, power generation and natural gas storage facilities. 

Key highlights

• Entered a joint venture: The company has formed a joint venture with Motiva Enterprises to build the USD 152 million Port Neches Link pipeline system, which would connect the Keystone Pipeline System to Motiva's Port Neches Terminal. This standard carrier pipeline system, which is planned to be operational in the second half of 2022, would contain capabilities to connect additional liquids terminals to the Keystone Pipeline System as well as other downstream infrastructure. 

• An Income play:The Company has an excellent track record of dividend distribution and has increased its distribution over the years, reflecting resilience and healthy cash flow generation. Recently it declared a quarterly dividend of CAD 0.87 per share payable on July 30, 2021. Moreover, at the last traded price, the stock was offering a dividend yield of 5.735%, which is lucrative, considering the current interest rate environment.

Source: Company

• Robust margin matrix:Despite the turmoiled period in 2020, the Company maintained its pace and witnessed the spirited performance across the gross margin, EBITDA margin, operating margin and net margin. The resilient business of the company assisted in outperforming the industry margins also, which is notable. The graph below gives a glimpse of this.

Source: Refinitiv (Thomson Reuters)

• Advancing secured capital program: The company is working on a CAD 20 billion secured capital programme and has a substantial portfolio of other high-quality projects in the works. All of the company's capital projects are backed by long-term contracts and/or regulated business models, emphasizing the urgent necessity for this new infrastructure. At the same time, it provides visibility into the company's earnings and cash flow as it enters services in the following years.

Source: Company

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company reported a slight decline in its revenue to CAD 3,381 million, against CAD 3,418 million in the previous corresponding period. The fall was mainly due to lower performance from Mexico Natural Gas Pipelines and Liquids Pipelines.
• Loss before income tax stood at CAD 1,390 million in the reported period, against a profit of CAD 1,121 million, primarily due to an asset impairment charge of CAD 2,845 million.
• The company posted a net loss attributable to common shares of CAD 1,057 million in Q1 2021, against a profit of CAD 1,148 million in the previous corresponding period. The loss was mainly due to higher income tax along with asset impairment.

Risks associated with investment

Most of the projects of the company are capital intensive in nature and requires extensive funding. Any delays or shortage in capital funding might dampen the overall performance and the return ratios. Lower demand due to seasonal fluctuations in short-term throughput volumes might impact the company’s performance. 

Valuation Methodology (Illustrative): Price to Earnings

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Despite energy market volatility, weather events, and the continued effects of COVID-19, flows and utilisation levels throughout the group's broad activities have remained consistent with historical and seasonal averages. In Q1 2021, its diverse portfolio of critical energy infrastructure performed admirably; however, the performance of Mexico Natural Gas Pipelines and Liquids Pipelines was disappointing. From FY17 to FY20, the Company continued its rising trend in margins and surpassed the industry margin profile. Furthermore, the Company offers a dividend yield of 5.735%, which is lucrative in a low-interest-rate environment. In addition, the firm is developing a CAD 20 billion secured capital programme supported by long-term contracts and/or regulated business models, which will offer insight into the firm's earnings and cash flow as it enters service in the coming years. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 60.68 as on May 20, 2021. We have considered Enbridge Inc, Inter Pipeline Ltd, Pembina Pipeline Corp etc., as the peer group for comparison.

1-Year Price Chart (as on May 20, 2021). Source: Refinitiv (Thomson Reuters)

Rogers Communications Inc.

Rogers Communications Inc. (TSX: RCI.B) is a leading telecom and media company based out of Canada and has a subscriber base of more than ten million. Rogers Communication is the first company to roll out a 5G network in Canada and has one of the most extensive networks. The company operates through three business segments, namely wireless, media and cable services.

Key Updates:

• Significant Reduction in Total Debt: The group has prudent capital management and has reduced its total debt to CAD 19,737 million in Q1FY21, reflecting a decline of 12.67% and 7.15%, respectively, from Q1FY20, and Q4FY20, respectively. A decrease in the debt component indicates higher financial flexibility and lower finance costs.
• Better than Industry Margin: The company enjoys improved margins over most of its peers, aided by implementations of various cost efficiencies coupled with improved margins from the Wireless equipment segment, which supported the company’s overall margins. EBITDA and operating margins stood at 40.50% and 20.30%, respectively, higher than the industry median of 33.50% and 10.60%, respectively. Net margin stood at 10.30% as compared to the industry median of 4.90%.

Source: Refinitiv (Thomson Reuters)

• Attractive Macros: Wireless penetration in Canada is the lowest among the developing nations, and hence, the sector offers substantial growth potential, which is a key positive. In the recent past, the industry witnessed significant growth in data consumption, driven by increasing video consumption, supported by the change in consumer’s preferences. The current scenario offers lucrative opportunities for the telecom players and RCI.B is highly poised to take advantage of the elevated demand from the industry. Notably, the company offers first 5G network in the country and has launched favorable data plans in order to cater the growing needs of the customers.

Source: Company Presentation        

• Expansion of Network: Recently, the group reported that it had expanded its 5G wireless network across British Columbia (B.C.), through a strategic partnership with the B.C. Government. The company would provide reliable connectivity along Highways 95 and 97 for the British Columbians.

Q1FY21 Income Statement Highlights:

• B announced its quarterly result, wherein the company posted revenue of CAD 3,488 million, up 2% over Q1FY20. The slight increase was supported by improved revenue from the cable and media segment, partially offset by a sluggish performance from the wireless segment.
• Adjusted EBITDA stood at CAD 1,391 million, reflecting a 4% y-o-y growth, while adjusted EBITDA margin improved 80 bps from Q1FY20 to 39.9%. The improvement was contributed by 8% y-o-y growth from the cable segment at CAD 487 million v/s CAD 453 million in pcp.
• Net income stood higher at CAD 361 million, as compared to CAD 352 million in the previous corresponding period (pcp).
• The group reported cash and cash equivalent of CAD 801 million, while the total asset was recorded at CAD 37,452 million.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The operations are capital intensive in nature, and any delay in capital execution plan would affect the group’s performance.

Valuation Methodology (Illustrative): EV to EBITDA based

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

The stock of RCI.B carries an impressive dividend yield of ~3.24%, which looks decent considering the current interest rate scenario. During the quarter, cable revenue increased by 5% on y-o-y basis to CAD 1,020 million, supported by disciplined promotional activity, service pricing changes, and increases on the Internet and Ignite TV subscriber bases, which are key positives. Moreover, the group is going to acquire Shaw communication, which is likely to improve the business prospect further. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like T-Mobile US Inc, Telus Corp Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 61.74 on May 20, 2021.

One-Year Price Chart (as on May 20, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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