TransAlta Renewables Inc. (TSX: RNW) is a Canada-based company that owns a portfolio of renewable and natural gas power generation facilities and other infrastructure assets. The Company owns and operates approximately 13 hydro facilities, 20 wind farms and seven gas facilities. 

Investment Rationale

• Consistent dividend distribution: Over the years, the company has maintained a consistent dividend payout, helped by solid cash flows from strong activities. Because the firm offers vital services like electricity, its operations are immune to the economic cycle; thus we expect healthy cash flow generation and dividend payments would be stable in the near future.

Source: REFINITIV, Analysis by Kalkine Group

• Healthy dividend yield: The dividend pay-out practice translates into an essential factor for regular income-seeking investors with a long-term horizon. Recently, the company declared a monthly cash distribution of CAD 0.078 per common share. Moreover, at the last closing price, the stock was offering a dividend yield of 4.662%, which looks decent considering the current macros and interest rate environment.
  

• Significant Increase in cash available for distribution: The firm recorded a considerable rise in its cash available for distribution over the last several years, growing at a CAGR of 24.4% (during 2014-2020), which is a big positive. The business intends to have CAD 285-315 million in cash available for distribution in FY 2021.
  

• The strong development pipeline for long-term growth: The firm has a robust development pipeline that would allow it to take a few chances in the next years, with multiple projects totaling 2900 MW installed capacity now in the advanced and early stages of development. Over the previous five years, the firm has added five wind farms and a solar farm in the United States, with an emphasis on developing and broadening the corporate PPA market. The firm is also constantly assessing potential acquisitions.
  

• Acquired Windrose Wind Project and made an investment in the Skookumchuck wind and Ada cogen facilities: The business has purchased a 100% direct interest in the 207 MW Windrose wind project and made investments in the Skookumchuck wind and Ada cogeneration plants. The Windrose Wind Project is anticipated to begin commercial operations in the second part of 2021. When fully operational, these three assets would provide approximately CAD 39 million in extra EBITDA to the company's weighted average contract life, which is considerable.
  

• Diversified assets base: The company remains highly diversified with 47 facilities that are fully contracted and located in various geographies. The group made their presence into almost all renewable segments, though wind and natural gas segments generate the most significant chunk of cash flows.
  

• The most significant player in the segment: Being a leading player in the generation of wind power, the company holds one of the largest wind portfolios in North America. Presently, the group has 100% of generation contracted with an average capacity weighted contract life of 12 years, and the majority of its output is sold under long-term contracts. Additionally, the company is exceptionally well-positioned to grow its portfolio in order to meet the expanding demand for clean, sustainable electricity for customers focused on decarbonization.
  

• Solid balance sheet and ample liquidity: The Company has a strong financial position, with substantial cash on hand and a large, syndicated credit facility. As of June 30, 2021, the Corporation had cash of CAD 240 million and a credit facility of CAD 700 million, of which CAD 595 million was available. Furthermore, the credit facility was amended to extend to June 30, 2025.
  

• 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, and foreign exchange volatility plays a direct role in the financials of the company.
  

Financial overview of Q2 2021 (In millions of CAD)

Source: Company

• Renewable energy production for the three and six months ended June 30, 2021, decreased by 47 GWh and 111 GWh, respectively, compared to the same periods in 2020. This decrease was mainly due to lower wind resources in Canadian Wind and US Wind and wind turbine blade icing events in Eastern Canada.
• In Q2 2021, the company posted lower revenue at CAD 92 million compared to CAD 101 million in the previous corresponding period. The results were lower than expected as a result of unplanned steam outages at Sarnia and lower wind resource experienced through the natural variations in weather.
• Gross income in the reported period stood at CAD 67 million against CAD 86 million in pcp, mainly due to lower wind resources and unplanned outages in the Canadian Gas segment, partially offset by production from the acquisition of the economic interests of Skookumchuck and Ada.
• On the back of stagnant operating expenses and lower revenues the operating income in Q2 2021 registered by the company stood lower at CAD 8 million against CAD 29 million in pcp.
• Finance income related to subsidiaries increased to CAD 20 million compared to CAD 10 million in pcp.
• The company’s earnings before income tax in Q2 2021 was at CAD 28 million compared to CAD 36 million in pcp.
• Net earning in the reported period fell to CAD 26 million compared to CAD 31 million, while net earnings in H1 2021 stood at CAD 79 million compared to CAD 35 million in pcp.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 67.50% of the total shareholding. TransAlta Corporation and TransAlta, G.P. hold the company's maximum interests at 37.38% and 22.73%, respectively. The company's institutional ownership stood at 13.50%, and ownership of the strategic entities stood at 60.12%.

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's objective has been to diversify and improve its fleet's contractual cash flow profile, and it achieved considerable headway this quarter with the inclusion of the recent Skookumchuck and Ada purchases, which are now contributing to its earnings. Northern Goldfields Solar Project, which would begin construction in the fourth quarter of this year, was recently announced by the firm. Upon completion, this project is expected to be one of the world's largest remote solar and storage projects supporting mining operations.  Furthermore, the company's Windrise purchase is nearing completion and is expected to begin commercial operations later this year. These two new projects would contribute about CAD 30 million in comparable EBITDA each year and would significantly prolong and diversify the company's contracted cash flow profile, which is a significant benefit.

On the operational front, this quarter's EBITDA and CAFD figures were lower. This was due to poorer results in its Canadian Gas business, as well as reduced wind resource due to natural weather changes. However, the company has a robust development pipeline with multiple projects totaling 2900 MW installed capacity, which are currently in the advanced or early stages of development in order to meet the growing demand for clean, sustainable electricity from customers who are committed to decarbonization. We believe that once these initiatives are operational, they will help to boost the company's cash flow.

Furthermore, the group has reported a stable dividend payment over the years, aided by stable cash flows from resilient operations. Since the company provides essential services like energy, the operations of the group are immune to the economic cycle, and hence, we expect the stability in cash flow generation and dividend payment in the foreseeable future.

The demand for renewables is expected to continue to increase in the coming years, and we expect many of these projects to contribute to growth at TransAlta Renewables. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 20.16 on August 23, 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 August 23, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on August 24, 2021 price as well.

Disclaimer

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