Innergex Renewable Energy Inc. (TSX: INE) is an independent Canadian renewable power producer that develops, acquires, owns, and operates hydroelectric, wind, and solar facilities in Canada, the United States, France, and Chile.

Key Updates:

• An income play: The company has a strong history of consistent dividend payment, backed by stable cash flows. During 9MFY21, the company paid a total dividend to its common and preferred shares holders of CAD 95.529 million, higher than CAD 85.673 million in pcp. The above is impressive as most of the companies are lowering its dividend distribution in order to retain their liquidity. Notably, the INE stock carries an impressive dividend yield of ~3.965% on an annualized basis, which looks attractive considering the ongoing interest rate scenario.

Five year dividend distribution (Source: REFINITIV)

• Long-term PPA agreements: INE has one of the largest average contract durations within the renewable sector, with an average of 14.2 years of remaining power purchase agreement (PPA) terms. The above indicates strong revenue visibility and would subsequently provide income stability.

Source: Company Presentation

• Acquisition of Curtis Palmer hydro assets to support upcoming performance: Recently, the entered into a Membership Interest Purchase Agreement with Hydro-Québec to purchase the 60 MW Curtis Palmer run-of-river hydro portfolio in New York State, which includes Curtis Mills (12 MW) and Palmer Falls (48 MW). The above is expected to contribute an average annual Adjusted EBITDA of CAD 54.1 million and an average annual Free Cash Flow of ~CAD 50.3 million through the end of the PPA.

• Reaping yield from the successful installation of Griffin Trail wind facility: Recently, the company successfully installed a 225.6 MW Griffin Trail wind facility, which is expected to generate an estimated Adjusted EBITDA of CAD 10.1 million in the coming days.

• 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 is estimated to remain bright, and the group is highly poised to take advantage of the growing demand. Moreover, the company’s operation is not dependent on any particular stream and operates through segments like hydroelectric, wind and solar.

• Consistent growth in Gross Installed Capacity: The company has an impressive track record of increasing production capacity, driven by improved demand dynamics. The company’s operations are deemed essential services in every region in which it operates, which indicates sustainable cash flows in the coming years.

Source: Company Report

• Closure of equity financing: Recently, the company raised funds through a collective equity issuance amounting to CAD 201.258 million from CIBC Capital Markets, National Bank Financial Inc., BMO Capital Markets and TD Securities Inc. Apart from the above, INE also completed a Private Placement with Hydro-Québec and received gross proceeds of CAD 50.071 million. The above funds are likely to be utilized for the above Curtis Palmer acquisition and for general corporate purposes, including future growth initiatives.

• Technical showing a sign of revival: On a daily price chart, the INE stock closed near the lower range of its 20-days Bollinger band, indicating a possible price recovery in the coming trading sessions. Moreover, the RSI of the stock is at 26.7795, respecting an oversold zone and a price up move from the current levels.

Technical Price Chart (as on December 10, 2021). Source: REFINITIV, Analysis by Kalkine Group

Q3FY21 Financial Highlights:

• Elevated revenue: INE announced its quarterly result, wherein the company posted revenue of CAD 184.564 million, stood higher than CAD 162.651 million in pcp. The growth was supported by an increase in revenues mainly attributable to the acquisition of the remaining 50% interest in Energía Llaima, which was included in the Innergex's consolidated revenues.

• Growth in production: Notably, the company reported a higher production 2,290,086 MWh in Q3FY21, as compared to 2,021,559 MWh in pcp. the above was supported by above-average wind regimes at the Griffin Trail facility in the United States.

• Higher Adjusted EBITDA: The quarter witnessed an increase in operating costs and higher costs related to prospective projects, partially offset by lower general & administrative expenses. Adjusted EBITDA stood at CAD 122.522 million, grew from CAD 108.524 million in pcp.

• Reported net loss: At the end of Q3FY21, the company reported a net loss of CAD 23.464 million, as compared to a net profit of CAD 7.492 million in Q3FY20. The above was primarily due to an inclusion of asset impairment amounting CAD 30.660 million coupled with higher finance costs.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: The majority of the income is being derived from the wind farms, and an adverse weather condition might hinder the company’s production status due to unpredictable wind movement. Moreover, Improper assessment of water, wind and solar resources and associated electricity may impact the operations as well.

Top-10 Shareholders

Top ten shareholders of the company together hold approximately 47.52% stake, Hydro-Québec, and 1832 Asset Management L.P., Inc. are the major shareholders in the company with an outstanding position of 17.96% and 9%, respectively.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales based

Stock Recommendation:

The acquisition of Energía Llaima is likely to solidify the group’s alliance within the New York renewables market, while we believe the company is highly poised to grab the opportunity coming from the region. Additionally, the group is planning to develop greenfield projects in order to cater to the additional demand coming from the sector. In 9MFY21, the company reported total production of 6,472,058 MWh, which is 10% higher on a y-o-y basis, driven by above-average wind regimes at the Mountain Air and Griffin Trail facilities in the United States.  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 Brookfield Renewable Partners LP, Northland Power Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of INE at the last closing price of CAD 18.16 on December 10, 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 10, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on December 13, 2021 price as well.

Disclaimer

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