Thread by @CadPrefs

When we do our preferred share research, we also provide a common share recommendation. One company we cover where the common shares look interesting is AltaGas. $ALA.TO #dividend #CPSR

Many investors were burned by AltaGas in 2018 when it was forced to cut its dividend in half, which has led to the common shares being overlooked.

The stock was highly owned by retail investors, and the emotional scars from the dividend cut have caused the common shares to be ignored.

AltaGas has transformed itself under new management by shedding non-core assets, focusing on improving credit metrics, and appears to be turning the corner. We believe AltaGas is undervalued on a sum of the parts basis, valuing its midstream and utility segments.

We understand investors' concerns with SOTP investing, but AltaGas unlike many other SOTP investments has a catalyst in 3-4 years for the value to be realized through a future spin-off.

AltaGas recently increased its ownership in its PetroGas investment, which we see as the first chess move on a 3-year plan. PetroGas is the move that allows AltaGas to start considering a spin-off.

PetroGas brings in a much-needed source of cash flow, which will be financed by non-core asset sales.

With the integration of PetroGas and selling off non-core assets, we see AltaGas’ credit metric of FFO/Debt increasing to 13%. S&P said that they would only downgrade AltaGas if its FFO/Debt dropped below 10%, now AltaGas has a significant buffer.

With the credit buffer, AltaGas should see an upgrade from BBB- to BBB, which should allow management to finally start growing the dividend to get momentum in the common shares. We could see the dividend grown by 25% without the payout ratio increasing just from the integration.

The sell-side in the past asked why management was not looking at splitting up the company. What they did not understand is that the management because of the credit situation had to be working for the bondholders until a credit upgrade came.

Splitting up the company before PetroGas was not possible because the regulators of WGL had forced AltaGas to ring-fence the assets. Which meant AltaGas corporate debt could not be pledged against WGL’s assets.

This meant all the corporate debt would need to be placed on the midstream segment. Before PetroGas we estimate that if a split took place that the Debt/EBITDA at the midstream business would have been over 7 times. No one wants to own a midstream business with 7 times leverage.

The PetroGas acquisition, expansion approval at RIPET, and management executing on ROE expansion at its utility segment will all lead to leverage coming down for the spin-off. We estimate in 2023 the midstream segment leverage will be around 4.3 times.

With a much more manageable debt load, we expect if the market does not start giving full value to AltaGas’ assets a spin-off will come. How do we know? Because the CEO said on the Q3 call they would do anything to realize value.

They are not just words, but if we look up the CEO’s track record at EQT Corp he led the spin-off of midstream assets. And we see the CEO being highly motivated with a chip on his shoulder.

AltaGas’ CEO Randy Crawford came to AltaGas with a chip on his shoulder after being passed over for the CEO role at EQT Corp and we think he wants to prove that EQT made the wrong decision.

Mr. Crawford lost out on the CEO role to another long time executive, which we believe lead to Mr. Crawford quitting. Looking at Mr. Crawford’s pay helps our thinking that there is personal motivation at work.

Mr. Crawford is earning 30% less than the CEO that was hired instead of him at EQT. But if we look at the after-tax amount paying both Canadian and US taxes, he is an American working in Canada, we estimate he is taking home less than what he was earning at his old role at EQT.

With such a highly motivated CEO we see a spin-off as likely. We believe by 2023-2024 AltaGas’ SOTP value will be $35/share.

If we are wrong about the spin-off it is because AltaGas has grown its dividend significantly and the market is finally rewarding the company with a higher valuation.

We estimate from our credit model after receiving a credit upgrade AltaGas could grow its dividend by 60% by 2023 while still maintaining its investment-grade credit rating.

All these factors create an attractive opportunity in AltaGas with tailwinds at its back. #CPSR