Kinder Morgan's (KMI) Price Target Trimmed at Deutsche Bank, Buy Rating Maintained
Deutsche Bank maintained a Buy rating on Kinder Morgan (NYSE: KMI) and lowered its price target to $19.00 (from $28.00). The change follows news Kinder Morgan plans to cut its dividend by 75%.
Commenting on developments, analyst Kristina Kazarian said, "This cut gives KMI coverage of 4.6x, allowing it to divert $3.9b/yr of cash flow from dividend payments to funding capex and stay out of the equity markets in 2016-17. We think the focus of this release was to calm the credit markets and get a Moody’s upgrade vs. focused on the equity valuation. While we anticipate considerable volatility NT as the market reacts to KMI’s new profile, we are moving to a 2017 EV/EBITDA valuation and revise our 12-month PT to $19."
The analyst added, "What we think the market will struggle with tomorrow is how to value a no DPS growth midstream name. The most frequent downside comp set investors have mentioned is the utility space. If the market overreacts towards this set, we think a floor might be the 4% UTY yield on the new $0.50 DPS, implying $12.50. Directionally from there, the next step could be an average UTY EV/EBITDA multiple – 9.5x on 2016 gives us $15.20. But we think this set completely ignores the LT KMI DCF growth story ($21.3b backlog). Therefore we are moving to a 10x 2017 EV/EBITDA methodology on KMI, implying a $19 PT – reiterate Buy."
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Shares of Kinder Morgan closed at $15.72 yesterday.