Company Profile

Algonquin Power & Utilities Corp (TSX: AQN) is a Canada-based multi-utility company. The group is a diversified generation, transmission, and distribution utility business with approximately U.S. $11 billion of total assets. Through its two business groups, the company is committed to providing safe, reliable, and cost-effective rate-regulated natural gas, water, and electricity generation, transmission and distribution utility services to approximately 805,000 connections in the United States and Canada. The group is a global leader in renewable energy through its portfolio of long-term contracted wind, solar and hydroelectric generating facilities representing over 2 G.W. of installed capacity and more than 1.4 GW of incremental renewable energy capacity under construction.

Investment Rationale

• A defensive play amid challenging times: The business offerings of the AQN are essential in nature and demand for its offerings remain stable during the various phase of the economic cycle. Further, the company's performance amid current bearish market sentiment is relatively better than the broader market and outperformed its benchmark index by ~ 17% on a YTD basis and ~ 31% on an annual basis, which shows a resilient business model of the company. 

• An income play amid falling interest rate environment and an increase in Q1FY20 common share dividend: The company has a proven track record of consistent dividend payment. At the current trading level, the group is offering a decent dividend yield of 4.63%, which is approximately 8.3 times of the Canada 10 Year Benchmark Bond Yield is at 0.56% and 1.14 times of the S&P/TSX 60 average dividend yield of 4.04%. Further, during the first quarter of the FY20, the company has raised its quarterly dividend by 10% to US$ 0.1551 per share, broadly in line with the company’s strategy of delivering a decent dividend to its shareholders. The company’s LTM dividend payout ratio stood at 76.22%. 

• No Material Impact of COVID-19 on the company’s business: As the company deals in a portfolio of utility business including electric, water, and gas utility and provides bare essential services to communities throughout North America, the group has not witnessed any impact on its operation. Further, the company has ensured that these essential services have continued safely and uninterrupted since the onset of the public health measures taken to address the COVID-19 pandemic. Moreover, the company has extended support to the communities by temporarily waiving late payment charges, and suspended collection of overdue accounts, across all of its utility service territories. Also, the board of directors stated that the company is well-positioned to bear the impact of the COVID-19 (if any) on the group's business in FY20. 

• Higher margin of safety with Earnings Yield of 5.5%: AQN shares are featuring earnings yield of 5.5% which is significantly higher than the Canada 10 Year Benchmark Bond Yield is at 0.56%, which provide a greater margin of safety to the existing and potential shareholders, as a higher earnings yield provide a cushion to investors for future adverse development affecting the investment decision.

Financial Highlights: Q1FY20

• The strong and resilient business model of the company allowed it to continue growing in the first quarter of 2020, with adjusted EBIDTA grew by 5% to US$ 242.2 million, and adjusted earnings recorded an increase of 10%, despite a revenue reduction of 3% to US$ 464.9 million. 

• The board of the company has increased its common share dividend by 10% to a total annual dividend of US$ 0.6204 per share to be paid quarterly at a rate of US$ 0.1551 per common share, up from US$ 0.1410 per common share. 

• The company has reaffirmed its long-term capital investment program despite challenges emerged in the face of COVID-19 pandemic. Also, the company stated that the long-term growth prospects remain intact and the group is well placed to enhance shareholder value through the execution of its capital plan as well as the balance and strength of a diversified portfolio. AQN reaffirmed its previously mentioned guidance regarding its approximately US$ 9.2 billion development pipeline consisting of approximately US$ 6.7 billion of investments in its Regulated Services Group and approximately US$ 2.5 billion of investments in its Renewable Energy Group through to the end of 2024. 

• During the period under consideration, the company bagged additional liquidity of US$ 1.6 billion to ensure an additional margin of safety to ensure the group can move forward with its capital expenditure plans. 

• Further, in the same period, the company issued senior unsecured debentures amounting to US$ 200 million. The debentures are bearing an interest rate of 3.315% and a maturity date of February 14, 2050. These debentures received a credit rating of BBB from DBRS. 

• Also, the company stated that it has an uninterrupted business operation since the onset of the public health measures taken to address the COVID-19 pandemic. The defensive business nature of the company ensured the group's decent performance during the Q1FY20.  

Full-year Financial Highlights: FY19

Source: Company Annual Report

For the financial year ended on 31^st December 2019, the group's adjusted net earnings totalled at US$ 321.3 million as compared to adjusted Net Earnings of US$ 312.2 million for the same period of the previous financial year, an increase of 3% on a YoY basis.  Adjusted Fund from Operations increased to US$ 566.2 million from US$ 554.1 million reported in the same period of the corresponding financial period. Further, despite a marginal reduction the group’s revenue, the group’s adjusted EBITDA surged by 4% to US$ 838.6 million from US$ 804.4 million reported in the year-over period. Full-year EBITDA Margin stood at 41.8%, which was 320 bps higher against the industry median of 38.6%. For FY19, the board of the company declared an annual dividend of US$ 0.55 per shares, an increase of 10% on a YoY basis. Long-term Debt to Total Capital ratio at the end of FY19 stood at 46.3%, relatively higher against the industry median of 34.6%.

Stock Performance

On May 22^nd, 2020, after the market close, shares of AQN traded 1.41% higher at CAD 18.75. In a year-over period, its shares have registered a 52W high of CAD 2.39 as on March 05^th, 2020 and a 52W low of CAD 13.84 as on March 23^rd, 2020 and at the last closing, its shares traded approximately 36% above its 52W low price level and around 16.1% below its year’s peak price level, which reflects that the stock is primarily tilted towards its 52W high price level, despite a tumultuous market condition led by COVID-19 pandemic.

Further, on a YoY basis, shares of AQN are featuring a positive price return of ~20% and significantly outperforming the benchmark index by 32% and its sector peers by 15% in the same time. And, on a YTD basis also its shares are hovering in a positive price territory and up by 2.07% and outperforming its benchmark by 17% in the same period.

1-year price performance (as on May 22^nd, 2020, after the market close). Source: Refinitiv (Thomson Reuters) (Refinitiv).

Moreover, at the last price of CAD 18.75, AQN shares traded above its crucial long-term support level of CAD 18.69, which indicates a long-term positive trend in the stock.

Top 10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 22.22% of the total shareholding. BMO Asset Management Inc. and BMO Nesbitt Burns Inc. holds the maximum interests in the company at 3.5% and 2.9%, respectively.

Source: Refinitiv (Thomson Reuters) 

Valuation Methodology (Illustrative): Price to Earnings (PE)

*Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters). 

Stock Recommendation

Given the resilient business model of the company and the liquidity position, we believe the group is well-positioned to grow in the near to medium term. The group's interest coverage ratio of 2.03x reflects that it can easily service its debt obligation despite a relatively long-term debt contribution of 46% in the group's total capital, whereas industry median is 38.6%. Further, the relative outperformance of its shares on a YoY and YTD basis against the benchmark index reflects a defensive business model of the company, and we believe that the company will continue to perform better given the essential nature of its offering. Also, a lucrative dividend yield of 4.6% amid the lower interest rate environment, together with a proven track record of consistent dividend payment is a good fundamental metric from an income investor's standpoint. And earnings yield of 5.6% provides a greater margin of safety to its existing and potential investors. Moreover, shares of ANQ traded above its crucial long-term support level of 200-day SMA, where the broader market is hovering significantly below its 200-day SMAs, which reflects a long-term positive trend in the stock.

Therefore, based on the above rationale and valuation done, using the above methodology, we have given a "Buy" recommendation at the closing price of CAD 18.75 (as on May 22nd, 2020), with lower double-digit upside potential, based on a 22x NTM P/E multiple (Industry Average – Utilities) on FY20E earnings.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.