MARKET OUTLOOK:

The recent invasion of Ukraine by Russia has further elevated uncertainty in the market. While it is difficult to predict geopolitics and how events will unfold over the coming months, it is clear volatility will remain elevated. 

Financial conditions will continue to tighten globally, however the pace and magnitude of rate hikes is likely to slow down, as central banks evaluate the economic impact of the Ukraine crisis. Surging commodity prices, coupled with supply chain disruptions and economic sanctions on Russia, will result in slower growth globally, while inflation will remain elevated. 

In this environment, investors should focus on allocating capital to companies with resilient demand profiles and inflation protection; this is precisely where infrastructure equities shine. 

In the current macro environment, we do not anticipate a material demand impact on infrastructure equities, particularly those providing mission-critical services (ie waste collection, electricity, water, internet). 

In addition, many infrastructure businesses structure their contracts to include inflation pass-through or CPI-linked escalators, which limit the impact of higher inflation on cash flow and earnings growth. 

The Ukraine invasion has resulted in a renewed focus on reducing the reliance on Russian oil & gas while promoting energy independence. This will result in even more support and investment into renewable energy, which will be the dominant form of incremental power generation over the next century.

With long bond yields consistently below 3 per cent and forecast to remain so, infrastructure assets have extended maturities and locked in low-cost structures for years to come. The expectations for 6-7 rate hikes from the U.S. Federal Reserve and Bank of Canada in 2022 was unlikely before the invasion of Ukraine, and now the odds are even lower. 

We anticipate infrastructure equities to outperform in this macroeconomic environment while providing superior downside protection and tax-efficient distributions.

TOP PICKS:

EverGen Infrastructure (EVGN CVE)
A pure-play renewable energy company focused on renewable natural gas (RNG) infrastructure. The company acquires, develops, builds, owns and operates a portfolio of renewable natural gas projects, primarily in British Colombia. 

The RNG space is attractive given the positive impact it has on emissions (converting waste from landfills into natural gas is a carbon neutral event vs. mining for natural gas which increases emissions) and the fact that RNG producers are paid by both their suppliers (landfill owners, municipalities) and customers (utilities). 

Landfills account for 15 per cent of global methane emissions, which traps over 80 times more heat in the Earth’s atmosphere than carbon dioxide, making companies like Evergen a key player in reducing global warming. 

Utilities are also focused on increasing the amount of RNG in their existing pipelines; Fortis BC is targeting 15 per cent of its natural gas supply to be renewable by 2030 and is a key long-term customer of Evergen. 

With existing liquidity and project-level debt, EVGN’s 2023 EBITDA will exceed $10M (up from $3M in 2021), representing a two-year CAGR of 83 per cent. The company currently trades at 4x 2023 EBITDA, a compelling valuation on an absolute basis, and well-below peers. 

While the shares will continue to have higher beta and volatility over the short term, we believe the risk/reward is heavily skewed to the upside, and the shares will re-rate as the company hits project milestones and attracts new investors to the shareholder base. Evergen remains one of the best ways for investors to gain exposure to the emerging renewable opportunity in RNG.

Switch (SWCH NYSE)
A pure-play data center company in the U.S. and offers collocation, connectivity, cloud computing and other related solutions to customers all over North America. 

SWCH has generated significant growth throughout the pandemic, and boasts one of the best Revenue/EBITDA/AFFO growth profiles over the next five years. 

Switch recently completed the acquisition of Data Foundry, which provides significant cross-sell opportunities and exposure to the growing market of Texas. The company also announced its intention to convert to a REIT, which we anticipate will be completed by early 2023 and will broaden the investor base while improving tax efficiency. 

Despite these positive developments, SWCH trades at a discount to its peers and below recent data center transactions (CONE, COR, QTS). While the stock has performed well over the past year, we believe there is further upside as it should trade at a premium to the group given its superior growth profile and several catalysts on the horizon.

Tidewater Midstream and Infrastructure (TWM TSX)
A Western Canada midstream company, focused on natural gas processing, liquids upgrading, storage and transportation, and marketing. Tidewater is well positioned in some of the most active formations in North America, including the Montney and Duvernay. 

Since going public in 2015, Tidewater has completed a number of acquisitions while driving organic growth and optimizing operations at existing facilities. 
In 2021, Tidewater completed the spin-off of its renewable business, LCFS, and used the proceeds to reduce leverage, while retaining a ~65 per cent stake in LCFS.

LCFS’s flagship project, the renewable diesel facility at its Prince George Refinery, will be the first of its kind at this scale in Canada, and has already secured $100M in carbon credits from the B.C. government. 

The stock price also does not reflect additional projects in the pipeline or the potential upside from the Federally-mandated Canadian Clean Fuel Standard, which we anticipate could be worth more than $100/tonne by 2028. 

Tidewater's valuation is one of the most compelling in the Canadian midstream space, with shares trading at less than 5x 2023 EV/EBITDA, well below peers and recent transactions, despite its robust growth outlook and high quality asset base. 

 

PAST PICKS: February 4, 2021

Polaris Infrastructure (PIF TSX)

• Then: $22.22
• Now: $15.64
• Return: -30%
• Total Return: -26%

Cellnex Telecom ADR (CLNX SM)

• Then: € 44.50
• Now:  € 40.67
• Return: -9%
• Total Return: -9%

Waste Connections (WCN TSX)

• Then: $126.76
• Now: $159.75
• Return: 26%
• Total Return: 27%

Total Return Average: -3%