Canadian Utilities Ltd (TSX: CU) is a Calgary-based multiline utility company. The company is a diversified global enterprise with assets of CAD 20 billion and approximately 5,000 employees engaged in Electricity, Pipelines & Liquids, and Retail Energy. The Electricity Global Business Unit's activities are conducted through two regulated businesses, electricity distribution and electricity transmission, and non-regulated electricity generation and transmission. The Pipelines & Liquids Global Business Unit's operations are conducted through three regulated businesses: natural gas distribution, natural gas transmission, and international natural gas distribution, and one non-regulated business: storage & industrial water. The group's majority of revenue comes from the Canadian market (95.6%), and the rest comes from Australia.

Segment Information

  Source: Company Filing

Investment Rationale

• Bullish Price Indicator: CU shares are hovering in a steep bullish zone, with its shares traded well above the crucial short-term as well as long-term support levels of 200-day and 50-day SMAs. Further, the Price/200-day SMA ratio stood at 1.05x implies that CU shares are trading approximately 5% above the 200-day SMA. Moreover, moving averages are moving higher, which is another bullish indicator.

Technical Price Chart (as on March 26, 2021). Source: Refinitiv (Thomson Reuters). 

• Momentum Indicators are reflecting a Bullish Stance: The leading momentum indicator, the Moving Average Convergence Divergence (MACD), is moving higher, with the difference between 12-day EMA and 26-day EMAs is positive, reflecting a bullish bias in the stock. Further, the MACD oscillator is hovering above the 9-day SMA signal line, which is another bullish indicator. Further, 14-day RSI hovering in the overbought zone, but given the other bullish indicator, we believe the prevailing trend is expected to continue.

Momentum Indicators. Source: Refinitiv (Thomson Reuters)

• A High Yielding Stock: Canadian Utilities has a consistent track record of dividend payment with decent growth over the last 49-years. The group declared a dividend of CAD 0.4354 per share, which was in-line with the previous quarter but 3% higher on an annual basis. Further, at the last traded price, shares of CU were offering a dividend yield of 5.17%, which is significantly higher, given the lower interest rate environment and drying yield income on fixed income securities. Further, CU's dividend yield is approximately 3.4 times the Canada 10 Year Benchmark Bond Yield of 1.504% and approximately 1.6 times of the TSX 300 Composite Index's dividend yield of 3.16%, respectively.

Source: Company Filings

• Disciplined Capital Investment Approach: Over the years, Canadian Utilities has invested billions of dollars in the regulated utility assets, which is driving its high-quality earnings base and is likely to bolster its balance sheet. Moreover, it also lays a solid foundation to increase the annual dividend consistently.

Source: Company Presentation

• Planned Capex is Expected to Bolster the Group’s Financials: In the 2021 to 2023 period, Canadian Utilities expects to invest a significant amount in regulated utility and commercially secured energy infrastructure capital growth projects. This capital investment is expected to contribute significant earnings and cash flows and create long-term value for its shareowner. The three-year plan includes CAD 3.2 billion of planned capital investment in the Regulated Utilities of which CAD 0.8 billion relates to Electricity Distribution, CAD 0.8 billion to Electricity Transmission, CAD 0.8 billion to Natural Gas Distribution, CAD 0.6 billion to Natural Gas Transmission and CAD 0.2 billion to International Natural Gas Distribution. This capital investment is expected to generate utility mid-year rate base growth of approximately two per cent per year.

Source: Company Filing

• Investment Grade Credit Rating: Credit ratings are extremely important because they convey the risk associated with buying a certain stock. An investment-grade credit rating indicates a low risk of a credit default, making it an attractive investment vehicle primarily to conservative investors. In the case of Canadian Utilities, the company has assigned with an “A-” rating by Standard & Poor’s; and an “A” rating by DBRS Limited. Companies with these ratings are considered to be stable entities with robust capacities for repaying their financial commitments. 

Source: Company Presentation

• Strategic Priorities for 2021

Source: Company Filing 

• Risks Associated to Investment: Canadian Utilities has operations in several jurisdictions subject to emission regulations, including carbon pricing, output-based performance standards, and other emission management policies. The company's business is exposed to a variety of business and financial risks. The outbreak of COVID-19 is also posing a risk to the company's operations, and these risks include a decline in consumer demand, increase in operating costs, interruption of the project work. The credit risks associated with the business are customer non-payment and change in the timing of cash flows.

Financial Highlights: FY20

Source: Company Filing

• Revenues in 2020 were CAD 3,233 million, CAD 672 million lower than the same period in 2019. Lower revenues were mainly due to forgone revenue following the sale of the Canadian fossil fuel-based electricity generation business and Alberta PowerLine (APL) in 2019.
• The group's adjusted earnings in 2020 were CAD 535 million or CAD 1.96 per share compared to CAD 608 million or CAD 2.23 per share for the same period in 2019. Lower adjusted earnings in 2020 were mainly due to the sale of the Canadian fossil fuel-based electricity generation business and 80% ownership interest in APL in 2019, which together contributed CAD 87 million in adjusted earnings in 2019.
• Excluding the foregone earnings impact from the sale of these businesses in 2019, adjusted earnings in 2020 were CAD 14 million higher compared to 2019. Higher earnings were mainly due to cost efficiencies across the organization, continued rate base growth in the Alberta Utilities, and earnings from ongoing transition work related to the long-term contract to operate Puerto Rico's electricity transmission and distribution system.

Source: Refinitiv (Thomson Reuters)

• Earnings attributable to equity owners of the Company were CAD 427 million in 2020, CAD 524 million lower compared to 2019.
• Dividends paid to Class A and Class B shareowners totalled CAD 477 million in 2020. On January 14, 2021, the Board of Directors declared a first-quarter dividend of 43.98 cents per share.
• Funds generated by operations were CAD 1,628 million in 2020, CAD 169 million lower than the same period in 2019. The decrease was mainly due to lower funds generated in the Canadian Utilities' Energy Infrastructure business as a result of the sale of APL and the Canadian fossil fuel-based electricity generation business in 2019, and in the Alberta Utilities as a result of the timing of certain revenues and expenses from regulatory decisions.
• Total capital investment of CAD 912 million in the full year of 2020 was CAD 314 million lower than the previous year mainly due to lower capital investment in the Regulated Utilities in 2020, the completion of construction on Alberta PowerLine in 2019, and lower capital investment in Electricity Generation due to the sale of the Canadian fossil fuel-based electricity generation business in 2019.
• Capital spending in the Regulated Utilities accounted for 96% of total capital invested in 2020. The remaining 4% or CAD 36 million invested in 2020 included capital in Storage & Industrial Water for a long-term contracted hydrocarbon storage cavern and an industrial water pipeline in Fort Saskatchewan, Alberta, and in Electricity Generation for a solar electricity generation facility in Chile.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 11.56% of the total shareholding. TD Asset Management Inc. and BMO Asset Management Inc. hold the maximum interests in the company at 2.55% and 2.46%, respectively. The institutional ownership in the CU stood at 16.64%, and ownership of the strategic entities stood at 0.34%.

Source: Thomson Reuters, Refinitiv

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

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: Canadian Utilities has the longest history of uninterruptedly increasing its dividends for 48 years in a row, the highest by any publicly listed Canadian company.  The primary reason behind its robust dividend payments is its high-quality earnings base supported by rate-regulated utility assets. Canadian Utilities’ 95% of the earnings come from the regulated utility business. Meanwhile, the rest is derived from assets with long-term contracts.

Source: Company Presentation

Over the years, Canadian Utilities has invested billions of dollars in the regulated utility assets, which is driving its high-quality earnings base and is likely to support future dividend payments. Moreover, it also lays a solid foundation for the company to increase its annual dividend consistently.

The group's reported decent performance in Q4FY20 as well, with adjusted earnings of CAD 186 million, or CAD 0.68 per share, CAD 10 million or CAD 0.03 per share higher compared to CAD 176 million, or CAD 0.65 per share, in the fourth quarter of 2019. Higher earnings were mainly due to stronger results in the Utilities segment from continued cost efficiencies, continued growth in the asset base, and earnings from ongoing transition work related to the long-term contract to operate Puerto Rico's electricity transmission and distribution system.

Moreover, the company's shares are yielding higher on TSX with a 5.17% dividend yield, which is lucrative amid a low interest rate environment.

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 34.02 on March 26, 2021.  

1-Year Price Chart (as on March 26, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at March 29, 2021 price as well.

Disclaimer

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