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 has interests in approximately 23 wind facilities, 13 hydroelectric facilities, seven natural gas generation facilities, one solar facility, one natural gas pipeline, and one battery storage project, representing an ownership interest of over 2,537 megawatts of owned generating capacity.

Investment Rationale

• An Income Play: On the last closing price, RNW shares are offering a lucrative income opportunity for the investors, with Dividend yield of 5.05%, amid times when investors are struggling to get 2% annually on investment grade bonds or fixed income securities. Together with higher yield, the company has track record of consistent dividend payment since IPO in 2013. Therefore, a high yielding stock, history of dividend payout and investment grade balance sheet, will keep RNW shares in the investor’s limelight especially for income seeking investors.

Dividend History. Source: REFINITIV, Analysis by Kalkine Group

• Highly Diversified: The group manages 47 facilities across multiple regions and spanning various technologies with recent asset additions. RNW is the largest generators of wind power in Canada and is among the largest publicly traded renewable power generation companies in Canada.
• Long-term stable cash flows: The company’s 100% of natural gas generation and wind and solar generation revenue contracted with an average capacity-weighted contract life of 12 years. Major clients include Suncor, BHP Billiton and Newmont.

Clientele. Source: Company Presentation

• Track Record of Growth and Value Creation: The company has proven track record of growth and value creation, with CAD 3.4 billion of acquisitions since IPO in 2013. Also, it announced a CAD 439 million acquisition of wind & cogen Dec 2020.
• Lower Balance Sheet risk: The group is relatively less leveraged compared to its peers, with Debt-to-Equity ratio of 0.40% as of June 30, 2021, whereas industry median stood at 2.68x, implies that the company is using debt intelligently to avoid any balance sheet risk. Further, the company’s Net debt is ~13.32x of its EBITDA as of June 30, 2021, whereas industry median Net Debt to EBITDA ratio stood at 23.37x, implies relatively strong debt protection metric.
• Hovering Near Demand Zone: From the technical analysis standpoint, RNW shares are hovering near strong demand zone, as since late 2020 to date, its shares have not tested a level below 18, which is acting as strong demand zone in the stock.

Technical Price Chart (as on November 09, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Risk Associated to Investment

The company’s business activities expose them to a variety of risks and uncertainties including, increased regulatory changes, rapidly changing market dynamics, volatility in commodity markets, interest rate risk and forex risk as well.

Financial Highlights: Q3FY21

Source: Company Filing

• Revenue up 20% on a YoY basis: During the third quarter under consideration, the company reported revenue of CAD 114 million was approximately 20% higher compared to CAD 95 million reported in the same quarter of previous financial year.
• EBITDA expansion: Comparable EBITDA for the quarter under consideration increased by CAD 6 million or by 6.3% to CAD 102 million compared to CAD 96 million in the same period in 2020, primarily driven by impact of the acquisitions of Ada and Skookumchuck facilities, favourable market conditions in Canadian Gas, and higher contract revenues at Australia Gas.
• Bolstered bottom-line: Net earnings attributable to common shareholders during the quarter under review increased by CAD 14 million to CAD 20 million , compared to CAD 6 million in the same period in 2020, primarily due to higher finance income from investments in subsidiaries of TransAlta and no fair value losses recognized in the current period partially.
• Cash available for distribution: As of September 31, 2021, Cash available for distribution (CAFD) stood at CAD 54 million or CAD 0.20 per share, a CAD 19 million or CAD 0.07 per share decrease on a YoY basis.
• Stable Dividend: During the Q3FY21, the board has declared a dividend per share of CAD 0.23, inline with dividend declared in Q3FY20.

Top-10 Shareholders

Top-10 shareholders together holds approximately 66.71% stake in the company, with TransAlta Corporation and TransAlta, G.P. are the majors’ shareholders with an outstanding position of 37.38% and 22.73% respectively. Institutional holding in the company stood at 12%.

Source: REFINITV, Analysis by Kalkine Group

 Valuation Methodology (Illustrative): EV/Sales-Based Valuation

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 reported  decent performance in Q3FY21, with revenue up 20% on a YoY basis, improved bottom line and higher cash flows from operations. Moreover, made progress on strategy of fleet diversification and growth in their contracted cash flow profile with the closing of the North Carolina Solar acquisition. This project has expanded their solar footprint in the United States and adds a new high-quality customer in a region where the company see significant growth opportunities.  Moreover, the project is expected to add USD 9 million in comparable EBITDA annually.

Further, RNW has strong balance sheet and access to competitive capitals. Its shares are yielding higher together with history of consistent dividend payment. 

Therefore, based on the above rationale and valuation done, we recommend a “Buy” rating on the “RNW” stock on the closing price of CAD 18.49 (November 08, 2021)

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

1-Year Price Chart (as on November 08, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on November 09, 2021, price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.