Company Overview: Northwest Natural Holding Company (NYSE: NWN) is a holding company and operates through its subsidiaries in gas utilities industry. NWN is broadly segmented into the Natural Gas Distribution business, a regulated utility involved in purchase, sale and delivery of natural gas, and NW Natural, involved in interstate storage services and asset management services (a third-party) for NWN’s contracted interstate pipeline customers in southwest Washington and Oregon.

­­­­­­NWN Details

Material Business Updates

NWN Elects New Board Chair: On 11 August 2021, NWN announced that the board of directors have elected a new board chair, Malia H. Wasson, effective as of 9 August 2021. Wasson is also a CEO of Sand Creek Advisors LLC, and her prior engagement was with U.S. Bank, N.A., as an Executive Vice President of Commercial Banking.

NWN and Element Markets Collaborate to Deliver Merits of Renewable Natural Gas to Customers: As announced on 4 August 2021, NW Natural, a subsidiary of NWN, entered into an agreement with Element Markets, as a part of the RNG program, to purchase renewable natural gas for Oregon customers. This marks the second RNG agreement under the Oregon Senate Bill 98, which delivers support to procurements and investments in renewable energy by way of natural gas utilities.

Historical Financial Trend:

NWN illustrated sustainable historical growth while keeping the value proposition intact. The Operating revenues have been growing since FY16 with consistent growth in net income. Operating revenues grew at a 3.7% CAGR (FY16 – FY20).

Figure 1: Historical Financial Overview

Source: Company Reports, Analysis by Kalkine Group

First Quarter FY21 Performance:

Figure 2: Summary of Quarterly Performance:

Source: Company Reports, Analysis by Kalkine Group

Full-Year FY20 Performance:

Figure 3: Annual Performance Highlights:

Source: Company Reports, Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~43.88% of the total shareholding. BlackRock Institutional Trust Company, N.A. and The Vanguard Group, Inc. holds a maximum stake in the company at ~­­­15.28% and ~11.50%, respectively.

Figure 4: Top 10 Shareholders

Souce: Analysis by Kalkine Group

Key Metrics:

NWN’s liquidity profile remains strong amidst increasing capacity expansion programs. In addition, debt levels have declined marginally, exhibiting stable financial risk. NWN’s prudent working capital management with definitive sales contracts may provide substantial support to operating cash flows.

Figure 5: Key Financial Metrics

Source: Analysis by Kalkine Group

Outlook:

Flexible Renewable Storage: The US Gas system boasts large-scale operations with 2.5x over the energy of hydro facilities and almost 1,500x over the energy delivered from large-scale utility batteries. NWN’s Mist storage can hold up to 6 million MWh of energy with discretionary delivery.

Tyson RNG Partnership: The RNG investment partnership was signed in December 2020, which encompasses $38 million investment for four initial projects. Tyson first project construction is estimated to deliver planned completion by early 2022.

Operational Targets: NWN targets a 3% - 5% growth in EPS with strong and growing dividends. Customer growth in gas utility is estimated at 1.4% annually with rate base growth of 4% - 6%. Capital plans for Gas utility range between $1.0 - $1.2 billion.

Key Risks:

Regulatory Risk: NWN undergoes a strict regulatory environment, and failure of regulatory authorities to approve rates may cost timely margin recovery and inadequate return for investors. The OPUC and WUTC hold general regulatory authority over NWN’s business in Oregon and Washington.

Operational Risk: Transportation, storage and distribution of natural gas and water holds high accidental risks, which can halt operations and adversely impact the financial health of NWN.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Stock Recommendation:

NWN has delivered 3-month and 6-month returns of ~-9.647% and ~-12.323%, respectively. The stock is trading below the average of the 52-week high price of US$56.75 and the 52-week low price of US$41.71, indicating an accumulation opportunity. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in % terms). The company might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), considering NWN’s most modern distribution systems in the US and policy support from Oregon law in purchasing renewable natural gas. For the purpose of valuation, few peers like National Fuel Gas Co (NYSE: NFG), New Jersey Resources Corp (NYSE: NJR), South Jersey Industries Inc (NYSE: SJI) have been considered. Considering the potential of the US gas system over other energy streams, worthy investment in renewable natural gas, steady growth prospects, and potential upside as indicated by the valuation, we give a “Buy” recommendation on the stock at the current market price of $47.10, as of 5^th October 2021, down by ~0.23%.

NWN Daily Technical Chart (Source: REFINITIV)

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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