Hold Kinder Morgan Pre-Earnings
We are maintaining our Hold recommendation on Kinder Morgan Energy Partners, L.P. (KMP) units ahead of the partnership's quarterly results. Strength across all of its business lines drove the first quarter. Importantly, it also announced a 16% year-over-year increase in quarterly distribution to the annualized run rate of $3.84 per unit.
Looking forward, with over $3 billion of organic projects beginning to come online over the next few years, we see favorable long-term growth profile for KMP. However, we believe these positives are already reflected in its premium valuation relative to the peer group and do not foresee much upside from current levels.
We believe that midstream players, such as KMP, are in a good position to achieve sustainable distribution growth. The partnership's product pipelines, which currently operate at about 70% - 80% of capacity, leave considerable room for incremental volume growth. Moreover, KMP has planned several significant pipeline projects.
KMP's major organic growth driver, the carbon dioxide (CO2) business, has substantial upside potential, especially if production increases are sustained and the trend in oil prices remains favorable. Production is largely hedged, and is expected to become more profitable as the older hedges wind down and are replaced with new hedges at higher price points. However, KMP's large size makes it increasingly difficult to sustain its historically impressive growth performance.
On a distribution yield basis, KMP common units are currently trading at a premium to the peer pipeline MLP group average. This represents a 304 basis points (bps) spread over the 10-year Treasury bond, compared to the peer group s average spread of 405 bps. Our new $53 price objective (down from $56) reflects an annualized distribution run rate of $4.11 per unit and a target yield of 7.80%.
Chinese Semi SMI Fairly Priced
Semiconductor Manufacturing International Corp. (SMI) is a Chinese semiconductor foundry company with multiple integrated chip wafer fabrication plants. March quarter top and bottom-line missed the consensus estimates.
The company is receiving very favorable tax treatment from the Chinese government, along with other incentives to boost investment. Looking at other fab's product mix, it would appear SMI is well-positioned for further growth.
SMI grew strongly in preceding quarters, its extensive foundry services and aggressive pricing permitting the company to gain share in the foundry space. In particular, the company witnessed strength in the memory area and in the computing end market.
