TransAlta Renewables Inc.

TransAlta Renewables Inc. (TSX: RNW) is a Canada-based company who 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 highlights

• 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 will 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 paid a monthly cash distribution of CAD 0.078 per common share. Moreover, at the last closing price of CAD 16.97 as on January 24, 2022, the stock offered a healthy dividend yield of 5.54%, which looks decent considering the current macros and interest rates.

• Significant Increase in cash available for distribution: The firm has had a considerable rise in its cash available for distribution over the last several years, rising at a CAGR of 19.77%, which is a big positive. The business intends to have CAD 250-270 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 will 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.

• Started commercial operation: Recently, the company announced that its 206.4 MW Windrise wind plant entered into commercial operation. This is its tenth wind facility in Alberta and is the first project to reach commercial operation out of the eight projects awarded through the second and third rounds of the Alberta Electric System Operator’s Renewable Electricity Program. Moreover, the company expects an average annual EBITDA of CAD20-CAD22 million.

• Acquired North Carolina Solar: The Corporation has purchased a 100% economic interest in a 122 MW portfolio of 20 operating solar PV facilities in North Carolina. The company's US Wind and Solar installed capacity has expanded from 397 MW to 519 MW as a result of this transaction. Furthermore, the project is estimated to generate annual EBITDA of USD 9.0 million, which is a considerable benefit.

• Lower Balance Sheet risk: The group is relatively less leveraged compared to its peers, with Debt-to-Equity ratio of 0.41% as on September 30, 2021, whereas industry median stood at 2.67x implies that the company is using debt intelligently to avoid any balance sheet risk. Further, the company’s Net debt is ~11.77x of its EBITDA in the same period, whereas industry median Net Debt to EBITDA ratio stood at 23.94x, implies relatively strong debt protection metric.
  

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 Q3 2021 (in millions of CAD)

Source: Company Filing

• Higher Revenues: In Q3 2021, 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.
  

• Constant gross profit: The gross profit in the reported period made no change from previous corresponding period and stood at CAD 76 million, as the company witnessed higher fuel and royalty’s charges.
  

• On the back of higher asset impairment cost the company’s operating income shed to CAD 8 million against CAD 15 million in pcp.
  

• Rising net income: The net income in the reported period stood at CAD 21 million compared to CAD 7 million in pcp. The rise in net income was mainly due to higher finance income from subsidiaries.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 66.65% 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 11.33%, and ownership of the strategic entities stood at 60.10%.

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer 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, it made progress on strategy of fleet diversification and growth in the 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. Additionally, the project is expected to add USD 9 million in comparable EBITDA annually, which is a key positive. Furthermore, the company has a strong balance sheet and on top of all its share is delivering a healthy yield, which is encouraging looking at the current market dynamics.

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 16.61 at 10:08 am Toronto time on January 25, 2022.

One-Year Technical Price Chart (as on January 25, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

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 

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

Note 2: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

Disclaimer

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