TC Energy Corporation (NYSE:TRP:CN) (NYSE: TRP) received an upgraded stock rating from UBS, moving from Neutral to Buy. The financial institution also raised the price target for TC Energy to C$71.00, up from the previous C$61.00. The adjustment follows expectations that TC Energy will benefit from a strategic spin-off, resulting in a more favorable valuation.
UBS anticipates that the post-spin TC Energy, referred to as "remain-co," will trade at higher multiples due to the significant growth potential of its gas assets compared to the entity being spun out, South Bow. The South Bow spin-off is seen as having limited growth and deleveraging prospects. The upgrade is based on the belief that the market has not fully appreciated the positive implications of the spin-off, which is expected to reduce TRP's total debt by approximately $8 billion.
The firm further supports its positive outlook by highlighting TC Energy's ability to replenish the C$1.45 billion of EBITDA that will be transferred with the South Bow spin-off (SOBO) through its robust portfolio of growth projects. Additionally, UBS points to the rising demand for data center power, which is forecasted to grow by over 500 terawatt-hours by the year 2031. This increase in demand is anticipated to benefit TC Energy, as nearly two-thirds of the over 300 data centers currently under construction are located within 50 miles of the company's pipelines.
Bruce Power, a joint venture between TC Energy and OMERS, is mentioned as a key asset in meeting the growing energy demands. Bruce Power operates the largest nuclear power plant in North America, which positions TC Energy favorably to capitalize on the increased need for both natural gas and nuclear power.
TC Energy and its partner, Northern New England Investment Company, have completed the sale of Portland Natural Gas Transmission System (PNGTS) for a gross purchase price of $1.14 billion. This sale is aligned with TC Energy's strategic plan to reach a $3 billion asset divestiture target by 2024. The company has reported a 9% year-over-year increase in comparable EBITDA for the second quarter of 2024 and is on track to introduce approximately $7 billion in assets in 2024 and $9 billion in 2025.
Other recent developments include the shareholder approval of the South Bow spinoff, a landmark Indigenous Equity Ownership agreement in Canada, and the exploration of opportunities in the data center industry. TC Energy has declared a third-quarter dividend of $0.96 per common share, but earnings per common share are projected to be lower due to ongoing asset divestiture.
InvestingPro Insights
TC Energy's recent upgrade by UBS aligns with several key metrics and insights from InvestingPro. The company's market cap of $49.06 billion USD reflects its significant presence in the energy sector. TC Energy's strong dividend history is particularly noteworthy, with InvestingPro Tips highlighting that the company has raised its dividend for 23 consecutive years and maintained payments for 52 consecutive years. This consistent dividend growth supports UBS's positive outlook on the company's financial stability and shareholder value creation.
The company's revenue growth of 8.89% over the last twelve months and a robust EBITDA growth of 9.49% in the same period underscore TC Energy's ability to expand its operations, which is crucial for replenishing the EBITDA that will be transferred with the South Bow spin-off. Additionally, the company's high gross profit margin of 65.31% and operating income margin of 41.69% indicate efficient operations and strong profitability, factors that could contribute to the higher multiples UBS anticipates for the post-spin TC Energy.
InvestingPro Tips also indicate that TC Energy is trading near its 52-week high, with a strong return over the last three months. This aligns with UBS's view that the market may not have fully priced in the benefits of the upcoming spin-off. For investors seeking more comprehensive analysis, InvestingPro offers 9 additional tips for TC Energy, providing a deeper understanding of the company's financial health and market position.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.