Company Overview: As the world steadily moves toward cleaner and renewable energy sources, owning a piece of Brookfield Renewable Partners (BEP.UN) seems to be a fair idea. Brookfield Renewable Partners is a renewable power company with an installed capacity of 19,000 MW. The company’s portfolio of hydro, solar, wind, distributed generation and storage capacity makes it a pure-play renewable power company. The company has 5,274 power generating facilities spread across North and South America, Europe, China, and India.

Stock’s Details

 

Source: Company Reports 

 

Investment case 

• Gaining while Going Green: Brookfield Renewable’s growth as well as defensive attributes of the business make it immune to the economic cycles, which is reflected in its stock performance. While the broader markets are bleeding amid the spread of coronavirus, Brookfield Renewable stock is up about 21% on a year-to-date basis. Moreover, the stock has returned a whopping ~82% in one-year period.

 

Given the stock’s stellar run, it may not look prudent to jump in the deep side of the pool. However, the up move in Brookfield Renewable stock in the recent past could only be the beginning. We expect Brookfield Renewable Partners to continue to benefit from the shift in the power sector towards renewables. The company’s diversified asset base and technology positions it well to benefit from strong growth in solar and wind power. Further, an additional development pipeline of about 13,000 MW is likely to boost growth in the coming years.

We acknowledge that the power market is to be dominated by the conventional sources of energy, at least in the foreseeable future. However, the gradual decline in the usage of fossil fuels could act as a tailwind for the company in the long run. Moreover, cost competitive power generation could further support the growth. Also, as renewables only form a small part of the power sector, the scope for growth is enormous.  

 

• Stable and high-quality cash flows: Brookfield Renewable is known for its stable and diversified cash flow generating capabilities. Notably, most of its power generation output is contracted under the long-term power purchase agreement, which works in its favor even when the economy is in the doldrums. Further, the company is able to realize the higher prices through inflation indexation of these contracts. On a proportionate basis, Brookfield Renewable’s power purchase agreements have a weighted-average remaining duration of about 13 years, which is encouraging. Moreover, for 2020, nearly 95% of proportionate generation output is already contracted to the creditworthy counterparties.

Contracts for the Next Five Years (Source: Company Reports)

By regions, the weighted-average remaining contract duration for North America is about 16 years. Moreover, in Europe, it is 19 years. As for Brazil and Colombia, the weighted-average remaining contract durations are ten years and three years, respectively.

The company expects that the ever-increasing demand for power will continue to drive prices higher in both Brazil and Colombia. Further, contracting is the only medium to buy and sell electricity in these regions. The legislative requirements and increase in pricing are likely to work in favor of the company as it will be able to capture higher prices while re-contracting power output in the medium term. 

• Strong distribution profile: The company’s stable, high-quality, and diversified cash flows enable it to boost shareholders’ return through attractive distributions. Moreover, Brookfield Renewable follows a strategy of capital recycling. Under this, the company sells non-core, de-risked and mature assets to lower the cost of capital and deploy funds in high growth opportunities that support cash flow generation capabilities. Further, cost-saving initiatives also support growth.

Brookfield Renewable’s Annual Distribution (Source: Company Reports)

The company’s distributions have grown at a CAGR of 6% as can be seen in the graph below. Going forward, the company is targeting an annual distribution growth of 5% to 9%. For 2020, the company increased its distribution by 5%. 

A Quick Look at 2019 Performance

Brookfield Renewable generated Funds from Operation of US$ 761 million in 2019, up 13% on a year-over-year basis. The double-digit growth reflects the benefits of the acquisition, higher price realization, and cost-saving initiatives.

Total revenues fell by US$ 2 million to US$ 2.98 billion, reflecting currency headwinds. However, revenues rose by about US$ 130 million year-over-year on a same-store currency-neutral basis. The growth came on the back of higher prices realization and an increase in power generation. Besides, higher market prices on its uncontracted volumes in Colombia contributed significantly to the top-line growth.

The company’s cost-saving initiatives led to a US$ 24 million decline in the direct operating costs. Adjusted EBITDA rose about 5% to US$ 2.33 billion, while proportionate adjusted EBITDA increase by 9% year-over-year to US$ 1.44 billion. Interest expenses fell about US$ 23 million in 2019. The company’s capital recycling strategy leads to a lower average cost of borrowings. Higher non-cash depreciation took a toll on the company’s bottom line. The company posted a net loss of US$ 59 million in 2019 compared to net earnings of US$ 42 million in 2018.

Balance Sheet and Cash Flows: The company generated cash and cash equivalents of US$ 115 million in 2019. The company’s debt to capitalization ratio was 32%, flat when compared to the prior year. Brookfield Renewable generated cash flows from operations of US$ 1.21 billion, as compared to US$ 1.10 billion in 2018. 

The company increased distribution by US$ 0.10 per share to US$ 2.06 in 2019.

Historical Financial Performance (Source: Company Reports)

Q4FY19 performance: Brookfield Renewable posted weak numbers for the fourth quarter. The company’s revenues came in at US$ 726 million in the fourth quarter, which implies a year-over-year decline of about 7%. Funds from Operation fell nearly 17% year-over-year to US$ 171 million. Adjusted EBITDA fell about 6% to US$ 348 million. Meanwhile, the company posted a net loss of US$ 66, million as compared to net earnings of US$ 91 million in the prior-year period.

The company’s fourth-quarter results failed to impress, but growth initiatives taken during the quarter is likely to bolster growth in 2020. In 4Q19, Brookfield Renewable closed the acquisition of a 50% stake in X-Elio. The addition could boost the company’s solar power segment by adding 972 megawatts capacity. Also, the stake in X-Elio added 6,000 megawatts to its global development pipeline.

Besides gaining a stake in X-Elio, Brookfield agreed to acquire 14 solar development projects in Brazil. The acquisition, slated to close in the first quarter of 2020, will add 428 megawatts to its capacity. The company also acquired a 44 MW of PV (Photovoltaic) solar assets in Spain through its interest in TerraForm Power. Also, it has agreed to acquire 100 megawatts of solar CSP assets in Spain. The increase in capacity is likely to boost Brookfield Renewable’s growth in 2020.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 45.61% of the total shareholding. Brookfield Asset Management, Inc. is the entity holding maximum shares in the company at 31.3%. Fidelity Investments Canada ULC is the second-largest shareholder, with a holding of 4.41%.

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics (Source: Thomson Reuters)

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: 

Method: EV/EBITDA Multiple Approach

EV/EBITDA Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: As on 5 March 2020, the stock had a market cap of ~CAD 13.1 billion. We have valued the stock using relative valuation methods, i.e., EV/EBITDA multiple, and for the said purpose, we have considered peers like Emera Inc (TO: EMA), TransAlta Renewables Inc. (RNW.TO), Algonquin Power & Utilities Corp. (TO: AQN), and Northland Power Inc (TO: NPI), just to name a few. Despite the recent run in Brookfield Renewable stock, it is trading a lower valuation multiple when compared to its peers. We believe, favorable industry trend, increase in power generation capacity in 2020, higher price realization, and stable cash flows through inflation indexed contracts will continue to drive the upside in Brookfield Renewable stock. The company’s current dividend yield also looks attractive at ~3.97%. We have arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the above factors, we give a “Buy” recommendation on the stock at the market price of CAD 73.25 per share, no change on 5 March 2020.

1-Year daily price chart (as on 4 March 2020). Source: Thomson Reuters

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