EUR 850.00 For Business Accounts Only

Morningstar | No Surprises at TransCanada’s Investor Day; Stock Remains Deeply Undervalued

There weren’t any surprises at TransCanada’s 2018 investor day. The company guided to EBITDA growth that is expected to approximate CAD 10 billion by 2021, which is in line with our forecasts. This forecast doesn’t include contributions from the Keystone XL. If placed into service, we think that cash flows from the project will begin to be accretive to the company in 2022.

Regarding the Keystone XL, management is reviewing the options provided by the federal judge, who temporarily blocked construction of the project last week. Management believes that it's too soon to determine the impact of the ruling on the schedule of the project. Additionally, TransCanada is awaiting the Nebraska Supreme Court’s decision on the approved route challenge. All signs point to a positive outcome for TransCanada. Management also announced that the Keystone XL is now fully contracted at 90% of the line’s capacity--the maximum allowable capacity.

TransCanada also reaffirmed its planned dividend growth of 8%-10% throughout 2021. We expect the first dividend increase to be announced in February 2019 and payable in April.

We are maintaining our $55 (CAD 72) fair value estimate and narrow moat rating. The stock is down modestly after the investor day release, and we still see plenty of upside for investors. With its 4-star rating and narrow moat, TransCanada's stock offers 45% upside and an attractive dividend yield. The market continues to overlook the positive impact the growth portfolio will have on cash flows and the balance sheet, and it places too much emphasis on less important outside factors such as the widening of the heavy oil discount, the Federal Energy Regulatory Commission's proposed tax regulations, and rising interest rates. The time is right for long-term investors to capitalize on the stock's considerable upside while collecting a steady stream of growing income.

For a deeper Dive into TransCanada and what the market is missing about the stock, please refer to our April Select report, "What the Market Is Missing on Keystone's Impact on TransCanada."

For a detailed look into the Canadian crude and pipeline trends, please refer to our September Energy Observer, "Don't Overlook Oil Sands: Falling Costs and More Infrastructure Will Make Canadian Production Globally Competitive."