Innergex Renewable Energy Inc (TSX: INE) is a Canada-based independent renewable power producer. The company develops, acquires, owns and operates hydroelectric facilities, wind farms, and solar farms. The company manages a portfolio of assets consisting of interests in approximately 77 operating facilities with a net installed capacity of over 3,071 MW (gross 3,741 MW), including approximately 38 hydroelectric facilities, 32 wind farms, and seven solar farms.  The company's geographic segments include Canada, France, United States and Chile.

Investment Rationale

• Robust financial performance: The company reported decent performance in Q2 2021, with revenue surged by 13% to CAD 170.6 million, against CAD 150.5 million on a YoY basis, while the adjusted EBITDA grew by 16% to CAD 122.6 million against CAD 105.3 million and adjusted net income also rose to CAD 50.1 million compared to a loss of CAD 1.5 million in the previous corresponding period. The Mountain Air and Salvador acquisitions, as well as greater output at British Columbia's hydro plants and the ramp-up of production at the Hillcrest solar project, all contributed to the rise.

• Proven track record: The firm has interests in 38 hydroelectric facilities, 32 wind farms, and seven solar farms that use 32 watersheds. Its knowledge and innovation in diverse energies and locations may be used and shared within the Corporation in order to optimize earnings on high-quality assets. Despite the turbulent period, the company's output, income, and Adjusted EBITDA all showed signs of enthusiasm. It stated that its output was proportional to 94% of the long-term average (LTA) and that it expanded by 98% on average from 2003 to 2021, which is significant. A similar upward trend was found in adjusted EBITDA.

Source: Company

• The strong development pipeline for long-term growth: The company has a vigorous development pipeline permitting a few chances in the years to come, with 10 projects for a total of 669 MW installed capacity, currently at an advanced stage. By 2023 the organization would be expanding its capacity by 3,947 MW. Furthermore, it has plans of expanding capacity by 6,931 MW; hence, the company’s net installed capacity would increase to 10,878 MW in the mid-term.

Source: Company

• Healthy guidance:On the back of increased net installed capacity and on a higher number of operating facilities, the company expects robust growth in its production, revenues and Adjusted EBITDA. Furthermore, by 2025 the company would be clocking free cash flow per share of CAD 0.97, which would be a key positive.

Source: Company

• Consistent free cash-flow & healthy payout ratio: The company's ability to generate steady free cash flow over a long period of time is commendable. In Q2 2021, the company reported free cash flow of CAD 92.49 million on a TTM basis, up 3.2% from CAD 89.5 million in Q1 2021, thanks to strong operational performance, a healthy contribution from recently acquired and commissioned projects, increased revenues from the BC facilities, and increased distribution from JV and associates. In the time period under consideration, the payout ratio was a respectable 136%.

Source: Company

• Industry beating margins: Despite the second wave of the Covid-19 Pandemic, the Company kept up its momentum and had strong results across the board. Furthermore, the company's strong determination enabled it to outperform the industry median margins on several fronts in Q2 2021, which demonstrates its competitive edge within the industry.

• Acquired 18MW hydro facility in Chile: The company recently purchased 100 percent of Empresa Eléctrica Licán S.A. "Licán," which owns and manages an 18 MW run-of-river hydro plant with a reservoir for up to 3.5 hours of daily regulation. The firm was purchased for a total enterprise value of CAD 50.5 million, with Innergex investing CAD 20.6 million in equity, which was split between payment to shareholders and partial repayment of existing debt and other expenditures. Furthermore, the purchase is anticipated to provide a gross long-term average of 77.8 GWh per year and Adjusted EBITDA of CAD 2.6 million for the first five full years.
  

• Making Strategic alliance: The firm and HQI US Holding LLC, a subsidiary of Hydro-Québec, recently signed a purchase agreement with Atlantic Power to buy Curtis Palmer, a 60 MW run-of-river hydroelectric property near Corinth, New York, for CAD 387.5 million in cash. This is the first joint acquisition under Innergex and Hydro-Strategic Québec's Alliance, which was created in 2020. After the transaction is completed, each entity will control 50% of the company. The purchased facilities have a favorable cash flow profile, with average annual Adjusted EBITDA of CAD 53.1 million and average annual Free Cash Flow of CAD 49.4 million projected through the PPA's conclusion.
  

• Steady dividend distribution: Over the years, the company has maintained a consistent dividend payout, helped by solid cash flows from strong activities. Recently, it has declared a quarterly dividend of CAD 0.18 per share, payable on October 15, 2021. Moreover, the stock carries a healthy dividend yield of 3.34%, which looks decent considering the current macros and interest rates.

Source: Company

• Risks associated with investment: The company’s business activities are exposed to various risks and uncertainties such as regulatory changes, rapidly changing market dynamics and volatility in commodity prices. Furthermore, interruptions in production, delays in growth projects, increased credit risk with counterparties, adverse weather conditions and foreign exchange volatility plays a direct role in the financials of the company. Also, the company has a bit higher debt in its balance sheet, which may be an area of concern in adverse time.
  

Financial overview of Q2 2021 (Expressed in thousands of CAD dollars)

Source: Company

• Production for the three-month period ended June 30, 2021 was 94% of LTA, and it improved its total production by 10% to 2,396 GWh in Q2 2021, compared to 2,185.8 GWh in the previous corresponding period.
• In Q2 2021, the company’s revenue surged by 13% to CAD 170.6 million, against CAD 150.5 million in the previous corresponding period, an improvement in the revenue was primarily due to acquisitions, higher production at the hydro facilities in British Columbia and the ramp-up of production at the Hillcrest solar project.
• Total expenses in the reported period increased by 6.2% to CAD 47.8 million compared to CAD 45.0 million in the previous corresponding period. Increase in the total operating expense was mainly due to higher G&A expenses and higher prospective projects cost.
• The Adjusted EBITDA was up 16% to CAD 122.6 million compared to CAD 105.3 million in the previous corresponding period. The rise was due to a combination of a larger contribution from British Columbian facilities, a higher contribution from French wind facilities, and the ramp-up of output at the Hillcrest solar project.
• Finance cost elevated to CAD 58.7 million in Q2 2021, compared to CAD 55.2 million in pcp.
• Earnings before income tax stood at CAD 6.3 million against a loss of CAD 0.7 million in pcp.
• On the back of higher EBITDA and income tax recovery of CAD 43.8 million in the reported period, the company clocked healthy net profit of CAD 50.1 million against a loss of CAD 1.5 million in the previous corresponding period.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 46.39% of the total shareholding. Hydro-Québec and 1832 Asset Management L.P. hold the company's maximum interests at 17.97% and 9.00%, respectively. The company's institutional ownership stood at 37.93%, and ownership of the strategic entities stood at 23.04%. 

Valuation Methodology (Illustrative): EV to EBITDA 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

The company is in the energy generation business, which is resistant to business cycles because it is classified as a need. And it recently released its Q2 2021 financial results, which showed that revenue increased by 13% to CAD 170.6 million, up from CAD 150.5 million on a year-over-year basis, while adjusted EBITDA increased by 16% to CAD 122.6 million, up from CAD 105.3 million, and adjusted net income increased to CAD 50.1 million, up from a loss of CAD 1.5 million the year before. The firm has a healthy development pipeline. By 2023, the company plans to increase its capacity by 3,947 MW. Furthermore, after taking into account the upcoming tasks of MW 6,931, the company's net installed capacity would be increased to 10,878 MW, resulting in a free cash flow per share of CAD 0.97 by 2025.

Recently, the company acquired 100% shares of Empresa Eléctrica Licán S.A. "Licán" and this acquisition is expected to deliver an Adjusted EBITDA of CAD 2.6 million on average for the first five full years. Furthermore, in form of strategic alliance it also entered into a purchase agreement with Atlantic Power to acquire Curtis Palmer. The acquired facilities have an attractive cash flow profile and are expected to generate average annual Adjusted EBITDA of CAD 53.1 million and average annual Free Cash Flow of CAD 49.4 million through the end of the PPA. In addition, the management's solid determination helped them leap the industry median margins on many fronts in Q2 2021, which exhibits the competitive advantage of the company within the industry.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock at the closing price of CAD 21.56 on September 17, 2021. We have considered Brookfield Renewable Partners LP, Boralex Inc, Algonquin Power & Utilities Corp, etc, as the peer group for the comparison.

*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 Price Chart (as on September 17, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on September 20, 2021 price as well.

Disclaimer

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