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 75 operating facilities with a net installed capacity of over 2,656 MW (gross 3,488 MW), including approximately 37 hydroelectric facilities, 32 wind farms, and 6 solar farms.               

Revenue Mix

Product Mix                                                Geography Mix

Source: Annual Report

Investment Rationale

• Diversified Revenue Base: The company has stable and predictable nature of contracted cash flows generated by its portfolio of wind, hydroelectric and solar assets that are well diversified with respect to geographical exposure and asset class. Nearly three-fourths of Innergex's revenues are derived from long-term contracts with strong, creditworthy counterparties that include large municipal- and investor-owned utilities, which helps to minimize commodity risk.

• Robust Renewable Pipeline Drives Growth: The company has a strong pipeline of key renewable projects that would support its growth targets in the near term. In addition to the new solar farm in Chile and anticipated acquisition of wind assets in Idaho in late 2020/early 2021, these projects include Hillcrest, a 200MW solar farm in Ohio with an expected in-service date in late 2020/early 2021; and Griffin Trail, a 226MW merchant wind farm in Texas with an expected in-service date in 2021. Future growth is focused on the U.S., specifically in the coal-heavy Midwest and Southern regions. In the U.S., ERCOT remains a key market, and in late 2019 Innergex commissioned two of its largest projects to date in Texas, including Phoebe, a 250MW solar farm, and Foard City, a 350MW wind farm.

• Robust Capacity Expansion Plan: The company has nine development projects, which are likely to come into the service by 2023 and increase the company's capacity by 623 MW. Moreover, the company has a solid pipeline of advanced-stage, mid-stage and early-stage perspectives.

Source: Company 

• One of the Longest Average Contract duration in the Renewable Sector: The company's average long term contract duration is of 14.3 years, which is one of the longest in the industry. More than 60% of the capacity is contracted for more than ten years. The company has young assets with an average age of approximately 8.2 years.
  

• Encouraging 2021 Projections: For 2021, the management expects production to increase by ~15%, while revenue is expected to increase by ~12%. The management expects adjusted EBITDA and adjusted EBITDA proportionate to increase by ~12% each.
  

• Solid Financial Outlook: Strategic plans scheduled between 2020 to 2025 are expected to bolster the group's financial health in future. The group is expecting its adjusted EBITDA proportionate to bolster at a CAGR of 10% between 2020-2025 and Free Cash Flow per share to increase by 12% CAGR in the same period.

• Insider's Buying: Innergex Renewable Energy insiders were the net buyers in the last one year. It is great to see insiders putting their own cash into the company's stock. It is often noticed that insiders are more likely to engage in open market purchases of their own company's stock when they are bullish on the company's prospect.

Source: REFINITIV, Analysis by Kalkine Group

• Yielding Higher Amid Lower Interest Rate Environment: At the closing price (on July 23, 2021), INE shares were yielding higher with a dividend yield of 3.4% compared to the Canada 10-year Government Bond Yield of 1.21%. Also, the stock is yielding higher than the median TSX Composite Index dividend yield of 2.95%. Further, the company has a consistent track record of dividend payment over the past 10-Years. Therefore, a higher-yielding stock, together with a consistent track record of regular dividend payment is tend to remain in the investors' limelight.  

Source: REFINITIV, Analysis by Kalkine Group

• Relative Strength Index (RSI) indicating a Potential Trend Reversal: On the daily price, the leading momentum indicator, 14-day RSI, is not falling below 40 and taking strong support near 40. Also, we noticed a spinning top kind of chart pattern on the last closing price, which indicates that bears are now indecisive. Moreover, on the weekly price chart as well, 14-day RSI is taking support near 40. Also, a Doji candle appeared after two straight bearish candles that implies that the bears are indecisive, and a potential trend reversal could take place in the near term.

Daily Price Chart (as on July 23, 2021). Source: REFINITIV, Analysis by Kalkine Group

Weekly Price Chart (as on July 23, 2021). Source: REFINITIV, Analysis by Kalkine Group 

• Prices are Trading in a Rising Channel Pattern: On the daily price chart, the prices are trading in a rising channel pattern and taking the support of the lower band of the pattern, which suggests that bulls are still in action. Also, prices have taken the support of horizontal trend line and bounced from there. This reflects a potential upside in the stock.

Technical price chart, Source: REFINITIV, Analysis by Kalkine Group

• Risk Associated to Investment: The Corporation’s revenues may be significantly affected by events that impact the hydrological conditions of the Corporation’s hydroelectric facilities, such as low and high-water flows within the watercourses on which the hydroelectric facilities are located. Further, Delays and cost overruns may occur in completing the construction of the Development Projects and the development and construction of Prospective Projects and future projects that the Corporation will undertake. Also, the group has a significant amount of debt in its books, which can be a cause of concern if adverse operating conditions arise.

Financial Highlights: Q1FY21

Source: Company Report

• For the quarter ended March 31, 2021, revenues came in at CAD 189.7 million. Excluding the February 2021 Texas Events, on a normalized basis, Revenues were up 2% to CAD 134.7 million.
• The hydroelectric power generation segment recorded a decrease in revenues mainly due to a combined effect of lower production in British Columbia and lower average selling price at some facilities in the same region, partly offset by higher revenues at the Quebec facilities due to higher production.
• The increase in revenues, on a normalized basis, in the wind power generation segment was mostly attributable to the Mountain Air Acquisition completed on July 15, 2020, and to the contribution of the Foard City facility due to higher production, partly offset by lower revenues at the France wind facilities due to lower production.
• The increase in revenues, on a normalized basis, from the solar power generation segment was due to the Salvador Acquisition completed on May 14, 2020, partly offset by lower revenue due to lower average selling price at the Phoebe solar facility.
• Revenues Proportionate were CAD 261.7 million. Excluding the February 2021 Texas Events, on a normalized basis, Revenues Proportionate were up 1% to CAD 166.5 million.
• The Adjusted EBITDA stood at CAD 143.1 million. Excluding the February 2021 Texas Events, on a normalized basis, the Adjusted EBITDA was down to CAD 88.2 million, a 3% decrease compared with the same period last year. The decrease, on a normalized basis, was mainly attributable to a lower contribution from wind facilities in France and hydroelectric facilities in British Columbia both due to lower revenues and by higher prospective expenses over lower general and administrative expenses.
• The Adjusted EBITDA Proportionate reached CAD 208.9 million. Excluding the February 2021 Texas Events, on a normalized basis, the Adjusted EBITDA Proportionate reached to CAD 113.6 million, a 2% decrease compared with the same period last year.
• Adjusted normalized EBITDA margin stood at 65.5% as compared to 68.4% in the corresponding quarter of the previous financial year.
• Innergex recorded a net loss of CAD 217.9 million (CAD 1.24 loss per share - basic and diluted) for the quarter ended March 31, 2021, compared with a net loss of CAD 46.9 million (CAD 0.35 loss per share - basic and diluted) for the same period in 2020. This was mainly due to the net unfavorable impacts of CAD 81.3 million from the February 2021 Texas events, and the recognition of an aggregate CAD 112.6 million share of impairment charges in the Flat Top and Shannon joint ventures.
• Dividends Declared on Common Shares for the quarter under consideration stood at CAD 31.45 million as compared to CAD 31.34 million in the same period of the previous financial year.

* Results were affected by unprecedented extreme winter weather conditions and related electricity market failure in the State of Texas, United States (unofficially referred to as Winter Storm Uri). These unprecedented extreme winter weather events pushed the Texas Government to declare a disaster and the US Government to declare a state of emergency.

Top-10 Shareholders

Top-10 shareholders in INE together holds around 49.24% stake. Hydro-Québec and 1832 Asset Management L.P. are major shareholder with an outstanding position of 19.26% and 9.65% respectively. Institutional ownership in the company stood at 39.4% and Strategic ownership stood at 24.71%.

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 group is a pure-play renewable player, with 76 operating facilities and nine projects under development with a gross installed capacity of 3,701 MW, which is sufficient to supply 1,007,462 households with clean energy in 2020. Further, Innergex's strategic alliance with Hydro Quéebec, the largest public utility in Canada, is likely to benefit the company from the financial strength that Hydro-Quebec provides, as both companies seek to accelerate investments in renewable energy.

Recently, the group has become the sole owner of the Chilean renewable energy company Energía Llaima SpA by acquiring the remaining 50% interest for an aggregate consideration of US$ 71.35 million. Following the transaction, Innergex has now three hydro facilities in Chile with a gross installed capacity of 152 MW, a solar thermal facility with a gross installed capacity of 34 MW, as well as several projects in the development or prospective stages. This transaction would increase Innergex's net installed capacity by 83.4 MW and reinforced Innergex's commitment to increasing its foothold in the Latin American renewable energy sector.

Moreover, insiders are net buyers in the company, which implies insiders are bullish on the business prospect.

Moreover, technical indicators are indicating a potential upside in the stock.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 21.13 on July 23, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

One-Year Technical Price Chart (as on July 23, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid at July 26, 2021 price as well.

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