Canadian Utilities Ltd (TSX: CU) is a Canada-based company which offers services in the areas of electricity, pipelines & liquids, and retail energy. The Company’s segments include Electricity, Pipelines & Liquids and Corporate & Other.

Key Highlights

• Strong Financial performance on sequential basis: The company reported decent performance in Q1 2022, where revenue surged by 8% to CAD 1,110 million, against CAD 1,028 million in the previous sequential period, while earnings attributable to equity owners of the Company improved by 29% to CAD 227 million against CAD 176 million in the previous sequential period. Gaining strength on sequential basis, reflects the resilience of the company.

• Improving operating matrix: Despite the turmoil period, the Company maintained its pace and witnessed spirited performance across its operating margin and net margin. The Company is continuously working closely with customers; thus, its presence is increasing along volume, which is appreciable. We believe the momentum to continue in the foreseeable future, as the Company had big capital investment plans to support future growth.

• Rise in cash flows from operating activities: In the first quarter of 2022, cash flows from operational activities were CAD 639 million, CAD 128 million more than the same period in 2021. The increase was primarily due to stronger cash flows from the company's Electricity Distribution and Gas Distribution businesses as a result of revenue linked to the recovery of the 2021 rate increase deferral and the timing of certain revenue and expenses in Utilities.

• An Income play: The Company has an excellent track record of dividend distribution and has increased its distribution over the years, reflecting resilience and healthy cash flow generation. Recently the company declared a second quarter dividend of CAD 0.4442 per share or CAD 1.78 on an annualized basis and at the last closing price of CAD 39.65, the stock is offering a dividend yield of 4.48%, which translates into an essential factor for regular income-seeking investors with a long-term horizon.      

• Industry Beating Margins: The Company's resilient business helped them leaping the industry median margins on many fronts in Q1 2022, which is a key positive. The chart below gives a glimpse of this.

• Improving liquidity: The Company maintained its pace and had strong success across all liquidity ratios. Cash flow from operations is the company's primary source of liquidity. The group is consistently improving its liquidity profile, and in Q1 2022, it outperformed the industry in terms of liquidity. Furthermore, the Company's cash position on March 31, 2022 was CAD 837 million, an increase of CAD 87 million from December 31, 2021, owing primarily to increased cash flows from operational activities.
  

Risks associated with investment

The company is exposed to many risk factors that, alone or cumulatively can affect its operations and financial health. Some of the risks are the supply of and demand for energy, Realization prices, exchange rates, inflation, and interest rates. A prolonged economic downturn could adversely impact customers, contractors, and suppliers' ability to fulfil their obligations and could disrupt operations and financial health.

Financial overview of Q1 2022 (In millions of CAD)

Source: Company Filing

• Boosted revenue: In Q1 2022, the company posted revenue of CAD 1,110 million, against CAD 907 million in the previous corresponding period. The rise in revenue was primarily due to improved performance from higher Electricity Distribution and Natural Gas Distribution and higher natural gas prices in the Energy Infrastructure segment.

• Strong operating profit: The company posted strong operating profit, which stood at CAD 403 million in the reported quarter against CAD 285 million in pcp, primarily due to higher revenue. Moreover, the expenses as a % to revenue in Q1 2022 dropped to 65.3% against 70% in pcp.

• Elevated earning for the period: On the back of strong revenue and exceptional performance of the Alberta-based distribution utilities, the company reported robust earnings at CAD 229 million against CAD 143 million in Q1 2021.
  

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 11.57% of the total shareholding. BMO Asset Management Inc. and BlackRock Institutional Trust Company, N.A hold the company's maximum interests at 2.74% and 2.54%, respectively. The company's institutional ownership stood at 16.81%.

Valuation Methodology Illustrative: EV to EBITDA Based

Analysis by Kalkine Group 

Stock recommendation 

In the first quarter of 2022, the company's sales increased to CAD 1,110 million, while earnings attributable to equity owners increased to CAD 227 million. The firm did extremely well in the first quarter of this year, with year-over-year earnings increasing principally due to the extraordinary performance of the Alberta-based distribution utilities, particularly the gas distribution utility, which was bought in December of 2021.

The utilities segment is expected to stay constant in the next quarters because it is classified as "essentials" and the company expects to profit from rising realization prices. The firm has tangible financial strength, with roughly CAD 837 million in cash as of March 31, 2022, and a CAD 2,157 million unused credit facility to support its growth-oriented projects. Furthermore, the company's industry-leading profits indicate the company's resiliency. A reliable dividend-paying corporation with a dividend yield of 4.48 percent is also an important aspect for long-term income-seeking investors.

Therefore, based on the above rationales and valuation done using the above methodology, we recommend a "Buy" rating on the CU stock at the last closing price of CAD 39.65 as on June 10, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on June 10, 2022). Source: REFINITIV, Analysis by Kalkine Group

*Recommendation is valid on June 13, 2022, price as well. 

Technical Analysis Summary

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Disclaimer

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