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Utilities. Have had a pretty good start into the 1st half which has really been a function of declining bond yields. Feels this caught investors by surprise. Rates will likely back up into the 2nd half, but at a slow and moderate pace. From that perspective, he feels there is going to be a bit of headwind for utilities, so he is fairly cautious in this area.
Industrials. These tend to correlate very well with economic and GDP growth. There are early-cycle, mid-cycle and late-cycle industrials, and he feels the early cycle trades have been and gone. Focusing on mid and late cycle non-residential and CapX cycles where there is still tailwind and a positive growth outlook.
Energy Infrastructure. Stretched valuations, but in the midst of a multiyear expansion. Fairly valued, but you know that there is more CapX coming down the line. There’s so much opportunity to deploy capital in this space, that ultimately these businesses are going to be worth more 2 to 5 years out.
An Alberta energy infrastructure operator and a great business. Really a play in the northern Athabascan and Cold Lake regions. Have 3 pipelines. Funded 2 of the pipelines with 2 anchor tenants. The thesis is that they are going to add on incremental shippers with very high, accretive returns. Dividend is sustainable, and will probably grow north of 5%-7% over the next 2-3 years. There continues to be significant CapX put into the space. The only risk would be that they are predominantly in the Alberta pipeline system, and will need to have market access. They can get their pipelines to key Edmonton terminals, and will need to have long haul pipelines out of Edmonton. With a two-year time horizon, you can chip away here. South of $29 would be a good access price, and would give you a 10%-15% margin of error of safety.
Rising interest rates would be a negative headwind, but it will be for any utility and any equity stock from a valuation perspective. In a rising interest rate environment you want to look for businesses where they can grow their free cash flow and dividend in a measured pace that offsets the rising interest rate impact on valuation. He thinks this is one of those names. Have a unique 2 prong strategy where half the business is a fully regulated utility, and the other half is a contracted independent power generation business. Management has done a good job. They have indicated there is potential of up to $2 billion of incremental projects they can take on. If so, you are looking at a stock that is probably worth $12-$13 out in 2017. If you can get this between $8-$9, you will get a 12%-15% total return over 2 years. Yield of 4.2%, which he expects will be increased every year.
Dividend is stable with a payout ratio of 100%. They are going through a CapX program right now with the Gemini project, an offshore European wind project. Comes online in 2017-2018, and when that happens the dividend payout ratio will immediately drop to 80%-85%. Management has a tendency to go through CapX cycles pretty extensively, so there is a potential that Gemini could come online, the payout ratio dips into the 80%s, and then they undertake another CapX program, which would keep the payout ratio high. They are always investing in high return/high growth businesses. 5.5% yield.
The ultimate diversified conglomerate. A nice stable business that is going to give you low, single-digit total returns from an earnings growth perspective. The multiple of 15X is not rich. Always trades at a discount just because it is a large conglomerate. Recently got permission from the French government to bid for their power and grid business. This will be done in 3 joint ventures, so it will be less of a capital outlay and de-risks the initial investment. Dividend is going to continue to grow at mid-single digit levels.
Stock had a nice run, and was really a function of them de-risking their Jordan Coal project, a West Coast-based LNG export project. They need to secure the financing and an off taker for their LNG facility. Thinks this is worth $21. Still have the risk of the alliance pipeline that needs to be re-contracted. He doesn’t want to take on their risks. Dividend is safe for now, but it depends on how they re-contract.
Great company. 3 different segments of power, gas and utilities. The utility segment is pretty stable, and generates a nice cash flow. The power segment is where he thinks they’ll have a good project in their Forrest Kerr Hydro that just came online, which would generate a lot of free cash flow. This is also the best way to play the LNG export market.
Unique in the sense that they are a true global renewal business within Canada. One of the best run management teams with some of the best assets in the renewal space, mostly hydro. A slower yield growth name, but is stable. If you think rates are going to rise, which he thinks they will, there could be a moderate pullback.
Has done phenomenally well since the IPO in 2011. A little more diversified than some of their peers in that they have terminal businesses, trucking, storage and the Omni Services in the US. Have probably 2 of the most strategic hubs in Edmonton, and a lot of the volumes of crude oil, commodities and NGL’s will go through these 2 hubs. Trades at a pretty good discount to its peers.
He would buy this under $48 and sell at about $57. Has been the unfortunate victim of a political hot potato, but you have to look out to 2017-2018, if 1) the Eastern asset comes on-line and 2) they can build out their West Coast LNG. Has exposure in Mexico to the infrastructure space. Have very large projects that are long dated.
This is been a great name. It always looks expensive until they come out and announce the next CapX project, and then it looks cheap. He would buy this at under $75, and if you own continue to Hold. They are going through $1.5 billion CapX, but they could do $2.5 billion. If so, they are worth around $80-$85.
A Western based regulated utility, and the largest in Canada. Thinks the valuation of 16X is a little high. If we are going into a rising interest rate environment, a fully regulated utility will likely have more capital pressure on its stock price than more of a merchant power business.
Investing. He tends to do his investing bottom-up. Rates continue to drive a lot of the valuations in utilities and energy infrastructure, so he continues to pay attention to the high-level macro. ECB continues to be monetary easing, and the Fed policy continues to be accommodating. This is all positive from an equity valuation perspective.