TC Energy Corporation

TC Energy Corporation (TSX: TRP) operates as an energy infrastructure company consisting of pipeline and power generation assets in Canada, the United States, and Mexico. 

Key Highlights:

• An income Play: The company has a strong history of consistent dividend distribution, backed by stable cash flows, which is a key positive. Notably, in H1FY21, the company’s dividend distribution stood at CAD 1,613 million, higher than CAD 1,465 million a year ago. Moreover, the stock carries a dividend yield of ~5.7%, which is lucrative considering the current interest rate environment.                  

Ten years dividend distribution, Source: REFINITIV

• New Order wins: Recently, the company received an order from National Defence, wherein the former would develop a transformative 1,000-megawatt clean energy storage project in Ontario. The proposed project is expected to be the largest energy storage project in Ontario which would optimize the province’s electricity system and is likely to result in CAD 250 million of annual savings to electricity consumers.

• Positive scenario from Power & Storage segment: The company is identifying potential investment opportunities in the power segment, which includes 620 MW of wind energy projects, 300 MW of solar projects and 100 MW of energy storage projects in order to meet the electricity needs of a portion of its U.S. pipeline assets. We expect the above segment to contribute to the future growth of the company driven by higher demand from the renewable segment. Notably, comparable EBITDA from the Power and Storage segment stood at CAD 157 million in Q2FY21, higher than CAD 135 million in Q2FY20.
  

Q2FY21 Income Statement Highlights:

• TRP announces its second quarter result, wherein the company posted revenues of CAD 3,182 million, improved from CAD 3,089 million in the previous corresponding period (pcp). The increase was primarily driven by higher income from Canadian Natural Gas Pipelines and Power & Storage, partially offset by a slide in the revenue from Liquids Pipelines segment.
• Total operating expenses stood higher at CAD 1,797 million, as compared to CAD 1,767 million in Q2FY20. The quarter was marked by higher plant operating costs and other expenses.
• The group reported a net income of CAD 1,020 million, as compared to an income of CAD 1,384 million in the previous corresponding period (pcp).

Source: Company Report

Risks: Due to the stricter restrictions on account of COVID 19, the group might face a delay in the execution of its projects, which might lead to a pause in additional earnings.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company operates in developing critical energy infrastructure assets, and caters to diversified industries like Electrification of fleet, LNG feedstock, Firming resources including pumped storage etc. The prospects remain enormous, driven by increasing demand from the infrastructure developments. Further, the company’s comparable EBITDA stood at CAD 2.2 billion in Q2FY21, increased by CAD 47 million from the previous corresponding period, supported by higher EBITDA from Canadian Natural Gas Pipelines and U.S. Natural Gas Pipelines segments. We have valued the stock using the P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms) upside. For the said purposes, we have considered peers like Pembina Pipeline Corp, Enbridge Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 60.95 on August 04, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 04, 2021). Analysis by Kalkine Group 

Linamar Corporation

Linamar Corporation (TSX: LNR) is engaged in the manufacturing of powertrains and drivelines for vehicle and power generation markets and operates under two business segments, namely, Transportation and Industrial. Within the Transportation segment, the company develops and manufactures precision metallic components, modules and systems used in vehicles and power generation machines.

Key Highlights:

• Encouraging outlook: For FY21, the company expects to deliver double-digit growth in its topline, while EPS is expected to grow in higher double-digit, which reflects strong demand and prudent cost management. The management expects strong momentum to persist within the industrial segment, supported by strong growth from Skyjack and MacDon segments. Normalized Net Margin is expected within 7% to 9%, higher than 5.4% in pcp. The group also expects robust free cash flow and an improved leverage ratio.
  

• Decline in total debt: During Q1 FY21, the company registered total debt amount of CAD 980.829 million, declined 25% from the previous quarter where total debt stood CAD 1,303.214 million. Additionally, the Debt/Equity ratio improved to 0.22x in Q1 FY21 v/s 0.30x in Q4 FY20. The company also witnessed efficient operations, where Net Debt/EBITDA improved to 0.31x in Q1 FY21 v/s 1.57x during Q1 FY20.
  

• Growing traction from light vehicle demand: In the recent past, demand for light vehicles across the globe has revived, supported by improved demand from Europe, US, and China, benefitted from easing lockdown restrictions. Notably, global productions have recovered in the recent past and are expected to grow by 12% y-o-y in FY21, which looks promising.

Q1FY21 Financial Highlights:

• LNR posted its quarterly result, wherein the company reported sales of CAD 1,781.857 million, jumped from CAD 1,549.765 million in the previous corresponding period (pcp). The increase was driven by the strong performance from the automobile sector across Asia and North America.
• Operating earnings were recorded at CAD 221.236 million, climbed from CAD 117.940 million in the previous corresponding period (pcp). The growth was supported by higher sales coupled with a decline in the selling, general and administrative expenses.
• Net earnings stood higher at CAD 153.532 million, soared from CAD 78.486 million in the previous corresponding period (pcp).

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Extension of lockdown restrictions would lead to a decline in the global demand dynamics, which might take a toll on the company’s overall performance.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

Amidst the sluggish global scenario, the company reported solid operational performance, supported by strong mobility market share gains coupled double digit growth in Content per Vehicle growth within North America and the Asia Pacific. This indicates a sign of revival within the auto industry across the globe, which is a key positive. Moreover, the management reported that the company received orders from new clients during the quarter, which is encouraging considering the current economic scenario. At the end of Q1FY21, the company reported liquidity of CAD 671.9 million in form of cash and short-term investments and CAD 957.5 million of available credit facility, which seems to be sufficient to fulfil the working capital and capital investment needs. We have valued the stock using the P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms) potential. For the said purposes, we have considered the peers like Dana Inc, Magna International Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 73.22 on August 04, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 04, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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