Algonquin Power & Utilities Corp (TSX: AQN) is a North American generation, transmission, and distribution utility. Within its distribution group, Algonquin owns and operates regulated water, natural gas, and electricity distribution utilities in the United States. Most of the company's revenue is derived from this division and, in turn, most of this division's revenue comes from its distribution of natural gas. In its generation group, Algonquin sells electricity produced by its energy facilities, including hydroelectric, wind, solar, and thermal power plants. Algonquin's wind farms account for most of its generation revenue. The company's transmission group focuses on building and investing in natural gas pipelines and electric transmission systems.

Organizational Structure

Source: Company Filing

Investment Rationale

• An income play with more than 20 years track record of dividend payment: At the last closing price (on July 16, 2021), AQN shares were offering a dividend yield of ~4.3%, which is significantly above the S&P/TSX Composite dividend yield of 2.99%. Amid a lower interest rate environment, where finding a decent risk-adjusted nominal rate of return is quite tough, AQN shares are offering a lucrative entry to the investors. Moreover, the group is continuously delivering dividends to its shareholders over the past two decades, which reflects the group's capability to generate a consistent cash flow. On May 6, 2021, AQN's Board of Directors approved a 10% dividend increase from a total annual dividend of USD 0.6204 per common share to a total annual dividend of USD 0.6824 per common share.

20-Years Dividend Payment History: Source: REFINITIV 

• Solid Q1FY21 Performance: During the three months under consideration, the company reported solid financial performance with revenue jumped by 36% on a YoY basis, adjusted EBIDTA nudged by 17%, adjusted Net Earnings soared up by 21%, and adjusted net earnings per share increased by 5% against the corresponding previous financial year.

• Progress on Renewable Construction Projects: The Company continues to execute on the largest construction program in its history. Out of the approximately 1,600 MWs of new renewable energy projects that the company had under construction in 2020 and to date in 2021, approximately 1,400 MWs have been placed in service, and the remainder is on schedule for completion by the end of 2021. These new projects are expected to approximately double the size of the company's portfolio of renewable energy facilities that it owns and operates.

• Completed Maverick Creek Wind Project: On April 21, 2021, the Renewable Energy Group achieved full commercial operations at its 492 MW Maverick Creek Wind Facility, located in Concho County, Texas. The Maverick Creek Wind Facility is the Renewable Energy Group's 14th wind-powered electric generating facility and is expected to generate approximately 1,920 GW-hrs of energy per year, with the majority of output being sold through two long-term power purchase agreements with investment-grade rated entities.

• Registered a Short-term Breakout on Daily Price Chart: After registering a bullish Doji candle patter on July 14, AQN shares are moving higher. Moreover, its shares crossed over two near-term resistances of 21-day and 50-day SMAs and registered two consecutive days of a close above the resistance levels, which implies that AQN shares have entered a short-term bullish zone. Further, 21-day and 50-day SMAs would now act as immediate support levels for the stock.

Daily Price Chart (as on July 16, 2021). Source: REFINITIV, Analysis by Kaline Group

• Price Momentum Indicators Indicating a Bullish Trend: The leading momentum indicator, the moving average convergence divergence (MACD), is rising, with the difference between short-length 12-day EMA and long-length 26-day EMA is positive. Moreover, the MACD oscillator is hovering above the 9-day Signal line, which is a bullish trend. Further, 14-day Relative Strength Index (RSI) is hovering in a neutral zone, with a bullish bias at 58.86.
  

Source: REFINITIV, Analysis by Kalkine Group

• Risk Associate to Investment: The company is exposed to a number of risks and uncertainties. A resurgence in COVID-19 cases could impact the group’s operating, supply chain and project development and construction delays, disruptions and cost overruns, and also delayed collection of accounts receivable and increased levels of bad debt expense. The company has a significant amount of debt in its balance sheet, which may put the balance sheet at risk in the adverse operating environment. Also, the group is exposed to currency fluctuation.

Financial Highlights: Q1FY21

• For the three months ended March 31, 2021, AQN reported total revenue of USD 634.5 million as compared to USD 464.9 million during the same period in 2020, an increase of USD 169.6 million or 36.5%.
• During the three months ended March 31, 2021, Adjusted EBITDA totaled USD 282.9 million as compared to USD 242.2 million during the same period in 2020, an increase of USD 40.7 million or 16.8%.
• During the three months ended March 31, 2021, Adjusted Funds from Operations totaled USD 205.3 million as compared to Adjusted Funds from Operations of USD 179.3 million during the same period in 2020, an increase of USD 26.0 million.
• During the three months ended March 31, 2021, cash provided by (used in) operating activities totaled USD (243.5) million as compared to USD 66.9 million during the same period in 2020, a decrease of USD 310.4 million.
• For the three months ended March 31, 2021, net earnings attributable to shareholders totaled USD 13.9 million as compared to a net loss of USD 63.8 million during the same period in 2020, an increase of USD 77.7 million or 121.8%.
• Dividend declared to common shareholders increased by 27% to USD 94.6 million as compared to USD 74.6 million in the same quarter of the previous financial year.
• During the three months ended March 31, 2021, the Regulated Services Group invested USD 486.4 million (USD 238.3 million excluding acquisitions) in capital expenditures as compared to USD 109.9 million during the same period in 2020. The Regulated Services Group's investment was primarily related to the construction of transmission and distribution main replacements, work on new and existing substation assets, and initiatives relating to the safety and reliability of the electric and gas systems. Property, plant and equipment acquired of USD 248.1 million was related to the acquisition of the North Fork Ridge Wind Project.
• During the three months ended March 31, 2021, the Renewable Energy Group's incurred capital expenditures of USD 1,443.4 million related to the acquisitions of the Maverick Creek and Sugar Creek Wind Projects from its joint venture partners, the acquisition of a 51% interest in the Texas Coastal Wind Facilities, to advance the development and/or construction of the Altavista, Dimension and Carvers Creek Solar Projects, as well as ongoing maintenance capital at existing operating sites.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 24.06% of the total shareholding. BMO Asset Management Inc. is the entity holding maximum shares in the company at 3.9%. RBC Dominion Securities, Inc. is the second-largest shareholder, with an outstanding position of 3.21%. Institutional Ownership in the company stood at 54.63% and strategic ownership stood at 0.28%.

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Stock Recommendation: AQN is a strong utility player based out in Canada, with USD 15 billion in assets. It operates two business segments, the Regulated Services Group and the Renewable Energy Group. In the regulated service segment, the number of customer connections increased by around 3,000 as per the last published results for 2021, and in the renewable energy segment, over 80% of the output is locked in by contractual agreements, with the weighted average term of around 13 years remaining as at the end of Q1 2021. AQN also has investments in other renewable plays, which overall add another 1.1 GW of generating capacity to its roster.

AQN has a very aggressive plan for capital expenditures, and the capex plans are very front-loaded, with 2021 representing the peak. Management has planned for this cash outflow with the issuance of the mandatory convertible units.

Further, the company has demonstrated ongoing resiliency throughout the COVID-19 pandemic as the delivery of essential services has remained uninterrupted.

AQN is also yielding higher on TSX and offering a decent dividend yield, especially for income-seeking investors. Together with a yield of 4.4%, the company has a track record of consistent dividend payment over the past 20-years and also increased its dividend over the same period.

Therefore, based on the above rationale and valuation, we have recommend a “Buy” rating on the stock at the closing price of CAD 19.19 on July 16, 2021.  

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

1-Year Price Chart (as on July 16, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid at July 19, 2021 price as well.

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Disclaimer

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