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, it owns and operates regulated water, natural gas, and electricity distribution utilities in the United States.

Investment Rationale:

• Stable dividend distribution: Historically, the corporation reported a consistent dividend payment backed by stable cash flows, which is impressive. Notably, in 9MFY21, the company distributed a total dividend of USD 928 million, higher than USD 186.415 million in pcp. The stock of AQN is carrying a dividend yield of ~ 4.946% on an annualized basis, which looks attractive considering the ongoing interest rate scenario.

Five years dividend distribution (Source: Refinitiv)

• Recent acquisition to spur added prospects: During Q3FY21, the corporation acquired Kentucky Power, which provides utility distribution and transmission to more than twenty eastern Kentucky counties. The above has an active customer connection of ~228,000, which is expected to add more than USD 2 billion of regulated rate base assets to the company. As per the management, after the acquisition, the company’s regulated rate base would increase by ~32% to USD 9 billion. 
  

• Stock price closed near the oversold zone: On a daily price chart, the 14-days RSI is trading at 34.0879, which is currently at an oversold zone and indicates a possible price appreciation in the coming days. Moreover, the AQN stock closed near to the lower band of the 20-days Bollinger band, which implies a possible up move in the coming trading sessions.

Technical Price Chart (as on December 03, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Robust production growth from wind, solar and thermal segment: On a year-to-date basis, the company reported strong growth from its renewable segments like wind solar and thermal, supported by the recent acquisitions done by the company. The above is impressive as it indicates higher demand for its services.

*Gigawatt hours= GW-hrs

Source: Company Report

• Strong traction from the Water and Wastewater Distribution Systems: The group witnessed impressive growth from its water distribution segment, supported by the acquisition of ESSAL during the fourth quarter of FY20. The ESSAL group provides water utility services in Chile and Ascendant in Bermuda. Notably, the above contributed 8,299 million gallons of water provided during the period. In 9MFY21, the company provided 22,941 gallons of water to its customers, higher than 14,149 gallons in pcp. Moreover, total Average Active Customer Connections rose to 405,700 in 9MFY21, higher than 161,700 in pcp. Continuation of the above trend is likely to support the overall performance of the group.

   Source: Company Report

• Bullish sectoral outlook: The company derives the 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 of the growing demand. Moreover, the company has a diversified revenue stream and operates through segments like hydroelectric, wind, solar, and thermal facilities, which indicates lower dependence on a particular segment.

• Long-term contract to support income stability: Within the Renewable Energy segment, AQN 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 almost thirteen years. The above is impressive as it indicates revenue stability and would subsequently support the company’s cash flows.

 

Q3FY21 Financial Highlights:

• Elevated revenue: AQN announces its quarterly result, wherein the company posted its top line of USD 575 million, jumped from USD 376.481 million in pcp, supported by strong momentum from both Regulated and non-regulated segments.

• Higher input costs: Total expenses increased at USD 907 million, as compared to USD 281.239 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 operating income: Operating income stood higher at USD 113.668 million, as compared to USD 95.242 million in pcp, thanks to the higher revenues, partially offset by an increase in input costs.

• Decline in bottom-line: The group reported a net loss of USD 421 million, as compared to a net profit of USD 47.322 million in pcp. This decline is due to an extended loss from long-term investments as compared to the previous year (USD 114.242 million v/s USD 3.067 million in pcp).

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: Due to the capital-intensive in nature of the business, AQN witnessed a constant surge in its total debt in the recent quarters. Continuation of the above trend might drag the company’s financial flexibility. Moreover, the company’s available liquidity at the end of Q3FY21 stood at USD 1,888.5 million, decreased from USD 2,783.9 million in FY20. 

Top-10 Shareholders

Top ten shareholders of the company together hold approximately 22.34% stake, BMO Asset Management Inc., and RBC Dominion Securities, Inc. are the major shareholders in the company with an outstanding position of 3.56% and 3.34%, respectively.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendation:

The recent acquisition of Kentucky Power and Kentucky TransCo would enhance the company’s presence within the regulated electric transmission segments in the United States. The above is expected to increase service territory footprint and provide larger regulatory jurisdiction diversification to the group. Notably, the above acquisition is in-line with the company’s target of achieving net-zero greenhouse gas emissions by 2050. 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 17.37 on December 03, 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 December 03, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on December 06, 2021 price as well.

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Disclaimer

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