Algonquin Power & Utilities Corp.

Algonquin Power & Utilities Corp. (TSX: AQN) operates in the generation, transmission, and distribution utility across the North America region. Within its distribution group, the owns and operates regulated water, natural gas, and electricity distribution utilities in the United States.

Investment Rationale:

• Impressive dividend yield: Over the years, the group reported a consistent dividend payment backed by stable cash flows, which is impressive. Notably, in H1FY21, the company distributed total dividend of USD 140.777 million, higher than USD 122.568 million in pcp. The stock of AQN is carrying a dividend yield of ~4.808% on an annualized basis, which looks attractive considering the ongoing interest rate scenario.

Five years dividend distribution

• Acquisition of Kentucky TransCo to support future growth: Recently, the company reported the acquisition of Kentucky Power Company at a price consideration of CAD 2.846 billion. Kentucky Power has a customer base of ~228,000 and operates in the electricity transmission business and is expected to add more than USD 2 billion of regulated rate base assets to AQN. As per the management, after the acquisition, the company’s regulated rate base would increase by ~32% to USD 9 billion. We expect the above would likely to boost the overall performance of the company in the coming days.

• Stock price closed near oversold zone: On a daily price chart, the 14-days RSI is trading at 28.99, which is currently at an oversold zone and indicates a possible price appreciation in the coming days. Additionally, the stock of AQN closed closer to the lower band of 20-days Bollinger band, which suggest a possible up move in the coming trading sessions.

Technical Price Chart (as on November 05, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Growth in Adjusted Fund from operations: The company reported a surge in its adjusted fund from operations of USD 6 million in H1FY21, higher than USD 272.9 million in pcp, supported by improved working capital management. The above is expected to support the company’s overall liquidity.
  

• Strong customer addition within the regulated segment: At the end of Q2FY21, the company reported its total Customer Connections of 1,093,000, which is significantly higher than 807,000 in pcp. The above was primarily driven by strong growth from the Electricity and Water & Wastewater segments. The above has led improved performance metrics, wherein Net Utility Sales stood at USD 649.5 million in H1FY21, higher than USD 487.1 million in pcp.

Source: Company Report

• Long-term prospect from the renewable segment remains positive: The company derives majority of its income from the renewable sector and due to the recent lower carbon emission norm, the developed nations are leaning towards renewable energy sources. The long-term demand of the renewable utility segment remains bright, and the group is highly poised to take advantage from the growing demand. Moreover, the company has diversified revenue stream and operates through segment like hydroelectric, wind, solar, and thermal facilities, which indicates lower dependence on a particular segment.

• Healthy product pipeline: The group has a strong product pipeline of renewable energy generation, which includes construction projects of 1,600 Megawatt (MW). Notably, the group completed construction activities of 1,400 MW till date, and the rest is expected to be completed in FY21. The above would double the size of the Company's current portfolio of renewable energy generation facilities.

• Acquisition of energy projects: The company recently completed the acquisition of 600 MWs of wind energy generation project, which is expected to add strong prospects within the Regulated electric segment. Recently, the group also completed full commercial operations of its 80 MW Altavista Solar Facility, located in Campbell County, Virginia. The above is expected to generate 174 GW-hrs of energy per year, and the major output would be sold to Facebook, Inc.
  

Q2FY21 Financial Highlights:

• Elevated revenue: AQN announces its quarterly result, wherein the company posted its top line of USD 523 million, stood higher than USD 343.638 million in pcp, supported by strong momentum from both Regulated and non-regulated segments.

• Higher input costs: Total expenses increased at USD 442.112 million, as compared to USD 284.565 million in pcp. The surge was primarily due to higher operating expenses, increase in regulated electric purchased and an increase in non-regulated energy purchased.

• Growth in EBITDA and Adjusted Funds from Operations: The company reported a higher Adjusted EBITDA of USD 244.9 million, reflecting a 39% surge from pcp. Notably, the company reported its Adjusted fund from operations of USD 366.6 million, jumped from USD 272.9 million in pcp. The above metrices indicates strong operational efficiencies, which is a key positive.

• Growth in operating income: Operating income stood higher at USD 85.411 million, as compared to USD 59.073 million in pcp, thanks to the higher revenues, partially offset by increase in input costs.

• Decline in bottom-line: The group reported slide in its net profit at USD 84.902 million, as compared to USD 272.978 million in pcp. This decline is due to lower income from long-term investments as compared to previous year (USD 60.506 million v/s USD 334.809 million in pcp).

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s operation is capital-intensive in nature, while the group witnessed a constant surge in its total debt in the recent quarters. Total debt stood at USD 6,622 million in Q2FY21, which is highest in the last five quarters. Notably, Debt to Equity ratio were recorded at 1.33x, which is higher than the industry median of 1.30x. A higher borrowing is likely to hinder the company’s overall financial flexibility.

Top-10 Shareholders

Top ten shareholders of the company together hold approximately 24.92% stake, BMO Asset Management Inc., and RBC Dominion Securities, Inc. are the major shareholders in the company with an outstanding position of 3.75% and 3.34%, respectively.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendation:

The Renewable Energy segment directly owns and operates hydroelectric, wind, solar, and thermal facilities with a combined gross generating capacity of more than 2.3 GW. More importantly, ~81% of the electrical output is sold through the long-term contractual arrangements with an average remaining contract life of ~13 years. The above is impressive as it indicates revenue stability and would subsequently support the company’s cash flows. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Capital Power Corp, Emera Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of AQN at the last traded price of CAD 17.77 on November 05, 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:

One-Year Technical Price Chart (as on November 05, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on November 08, 2021 price as well.

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Disclaimer

 

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