South Bow (SOBO): A Contrarian Gem in Canada's Economic Crossroads

Is South Bow (SOBO) undervalued relative to Canadian macro risks? With RBC raising its price target to $38 despite weakening housing and labor markets, the question of whether South Bow represents a rare contrarian buy opportunity has never been more urgent. Let’s dissect the disconnect between analyst optimism and macro headwinds—and why now could be the moment to act.

RBC’s Bullish Case: Dividends and Debt Discipline in a Bear Market

RBC Dominion Securities’ decision to raise South Bow’s price target to $38 (from $34) in March 2025 is built on two pillars: dividend sustainability and sector-specific resilience. While Canada grapples with a housing slump (down 7% year-over-year) and an unemployment rate hovering near 6%, South Bow’s cash flows remain anchored to its 95%-contracted Keystone Pipeline system. Analyst Maurice Choy argues that the company’s distributable cash flow (DCF)—a metric adjusting for non-cash expenses—supports its $2 annual dividend, even if earnings-based payout ratios hit 124% in 2025.

The key here is that DCF coverage (1.3x in 2025, rising to 1.5x by 2026) ensures dividends aren’t just sustainable but defensible. Meanwhile, South Bow’s debt-reduction strategy—targeting a net debt-to-EBITDA ratio of 4.0x by 2028—adds credibility. Even after a costly April 2025 oil spill near Fort Ransom, RBC remains confident in the pipeline’s long-term contracted cash flows, which form the bedrock of its “Outperform” rating.

Contrasting Views: National Bank’s Caution vs. RBC’s Conviction

While RBC sees opportunity, National Bank’s maintained “Sector Perform” rating (target $25) and the $36.26 peer-average target reflect broader skepticism. Why the divergence?

• National Bank’s Concerns: Focus on near-term risks like the spill’s operational impact and elevated leverage (4.8x in 2025). Their stance aligns with a market hesitant to reward infrastructure plays amid weak GDP growth (0.8% in Q1 2025).
• RBC’s Edge: Relies on strategic catalysts—such as potential U.S.-Canada trade stabilization post-NAFTA renegotiations and Governor Carney’s hinted pivot to inflation moderation. These could unlock incremental demand for energy infrastructure.

Valuation Deep Dive: Is SOBO Undervalued?

To justify immediate action, let’s compare South Bow’s valuation to peers and sector benchmarks:

1. EV/EBITDA Multiple:
2. South Bow: Estimated at 10.2x (based on 2025 EBITDA guidance of $1.01B and a $34.52 share price).
3. Peer Average (Canadian Energy Infrastructure): 11.5x (e.g., Enbridge trades at 10.8x, below its five-year average but still above SOBO).
4. Implication: SOBO is 11% undervalued relative to sector averages, offering a margin of safety.

1. P/E Ratio:
2. South Bow: ~8.5x (based on $4.06 EPS estimates for 2025).
3. Sector Average: ~12x for stable cash flow-driven peers.

4. Why It Matters: A lower P/E reflects market underappreciation of its dividend stability and balance sheet cleanup.

5. Dividend Yield:

6. South Bow: 5.8%, among the highest in Canadian energy infrastructure.
7. Peer Average: ~4.5% (Enbridge yields ~6.2%, highlighting SOBO’s competitiveness).

The Contrarian Play: Why Buy Now?

Three factors make South Bow a compelling contrarian bet:

1. Macro Tailwinds in Disguise:
2. A potential Carney-led rate cut (if inflation dips to 2% by year-end) could reduce borrowing costs for South Bow’s debt reduction.

3. U.S. demand for Canadian crude (Keystone’s core market) is rising due to Gulf Coast refinery expansions, despite overall economic softness.

4. Catalysts on the Horizon:

5. The spill’s cleanup costs are likely fully reserved, reducing downside risk.

6. A planned 2026 EBITDA upgrade to $1.15B (from $1.01B) could trigger multiple re-rating.

7. Valuation Inefficiency:

8. With SOBO trading at a 20% discount to its 2025 DCF-derived intrinsic value ($43/share), the gap is too large to ignore.

Final Call: Go Long Before the Tide Turns

The disconnect between RBC’s optimism and National Bank’s caution presents a high-reward/low-risk asymmetry. South Bow’s fortress-like cash flows, dividend resilience, and undervalued multiples make it a rare “buy” in a market dominated by defensive posturing.

Act now—before the broader market recognizes what RBC already knows: SOBO is a hidden gem in Canada’s economic storm.