BMO Offers A Few Reasons To Like AltaGas

Shares of Altagas Ltd ALA remain below its 2018 highs but is now trading at a valuation which more than accounts for any ongoing concerns, according to BMO.

The Analyst

BMO analyst Ben Pham upgraded AltaGas' stock rating from Market Perform to Outperform with a price target lifted from $21 to $22.

The Thesis

AltaGas previously guided to $1.5 billion to $2 billion of asset sales in 2019 and it has already achieved or announced $1.3 billion worth of sales, Pham wrote in the upgrade note. It is now more likely total asset sales for 2019 will come in near or above the $2 billion mark. This should eliminate any need for the company to assume a preferred share issuance.

The case for turning bullish on the Calgary-based energy infrastructure company is based on expectations for leverage to notably decline, the analyst wrote. Specifically, management is targeting a net debt to EBITDA ratio of around 5.5 times with a long-term goal of 5.0 to 5.5 times FFO/debt target of 13-15%. As the company progresses towards its goal it can turn off the DRIP program, self-fund future growth, and potentially resume dividend increases.

In addition, earnings should expand from lower interest expenses and secured growth backlog which focuses on the U.S. utility space and midstream investments, the analyst wrote. In addition, the company could see earnings benefits from requested utility rate cases.

Finally, AltaGas' stock is trading with a P/E multiple of around 14 to 15 times which is a discount to utilities at 18 times and pipelines at 16 times.

"While we acknowledge further evidence of improvement needs to be seen for valuation expansion, we believe the current trading level more than accounts for this caution," the analyst wrote.

Price Action

Shares of AltaGas were trading higher by 2.2% Monday afternoon at C$18.73.

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