TransAlta Renewables (TSX: RNW) owns, operates and develops a diverse fleet of electrical power generation assets in Canada, the United States and Australia. As one of Canada’s largest producers of wind, and Alberta’s largest producer of hydroelectric power, the company provide clean, affordable and reliable power to our customers.

Investment Rationale

• An Income Play: The company is offering a lucrative dividend yield of 4.75%, which is significantly higher against the Canada 10-Year Dividend Yield of 1.48% and U.S 10-Year Treasury Bond Yield of 1.58%. Further, the company has a consistent track record of dividend payment over the last 20-years. Therefore, a high yielding stock together with a consistent track record of dividend payment would keep the RNW shares in the investor’s limelight, especially for income-seeking investors. TransAlta Renewables, which owns and operates a diversified portfolio of power-generating assets, has raised its dividends at a CAGR of 3% since going public in 2013. Its long-term agreements and acquisitions have delivered strong financials, allowing the company to increase its dividends.

• Highly Diversified Business with Focus on Wind Energy: The group has 47 facilities across multiple regions and spanning various technologies. The group has ~23 assets in the Wind segment, which are contributing more than 50% of the company’s cash flow. Since the focus on renewable energy is increasing, the company is highly poised to take advantage of this.
  

• Decent Pipeline: The company added five wind farms and a solar farm in the last five years in the US. The company has 1+ GW of US wind projects in the development pipeline, and the company is focusing on growing and broadening the corporate PPA market. The company is continuously evaluating opportunistic acquisitions, and the current pipeline under evaluation stood at 2,000 MW.
  

• Highly Contracted Business Model: The facilities in the company’s portfolio consist of operational and highly contracted renewable power generation facilities, including wind, hydro and gas. The company’s objective is to create stable cash flows and consistent returns for investors with an investment vehicle comprised of power generation assets that are fully contracted for the long term with creditworthy counterparties.

• Growth Projects are in Advance or Early Stage: The group has a significant number of growth projects in advanced or early-stage development, which would bolster its financial health in the mid to long term. Below is the list of projects in advance and early stage.  

Source: Company Profile

• Strong Competitive Advantage against the Peers: RNW reported an industry-leading margin profile, which reflects the strength of the business model and prudence of the management running the company.

• Strong Liquidity and Financial Risk Profile: The company has sufficient liquidity to fund its operations with the current ratio of 1.45x, which is better than the industry median of 1.18x. Also, the debt/equity ratio of 0.41x is significantly lower than the industry median of 3.25x. The company has strong debt protection metrics with Net Debt/EBITDA at 5.15x against the industry median of 20.15x. This reflects the company’s robust balance sheet against the industry peers.

• Technical Indicators are Showing Strong Trend: On the daily price chart, The stock has registered a double bottom pattern and moving higher since then. Double bottom is typically considered a bullish indicator. After hitting the double bottom, the stock is continuously trading above the upward sloping trend line.

Technical Chart (as on June 07, 2021). Analysis by Kalkine Group

• Registered a Breakout on Daily Price Chart: The stock registered a breakout on the daily price chart on June 07, 2021, where prices crossover the crucial short-term resistance of 50-day SMA and managed to settle above it. Also, the leading momentum indicator, the Moving Average Convergence Divergence, is rising with the difference between 12-day and 26-day EMAs is positive, which is another bullish indicator.  

Technical Chart (as on June 07, 2021). Analysis by Kalkine Group 

• Risk Associated with Investment: RNW business activities expose it to a variety of risks and uncertainties, including, but not limited to, increased regulatory changes, rapidly changing market dynamics and volatility in commodity markets. Moreover, Unforeseen weather conditions are likely to hamper the company’s operation. The company derive its revenue from different geography; hence it is exposed to FX risk.

Financial Highlights: Q1FY21

Source: Company

• Revenue increased by 15% on a YoY basis to CAD 126 million against CAD 100 million reported in a year-over period. However, the company’s business results fluctuate with seasonal variations, with the first and fourth quarters seeing the largest wind volumes and the second and third quarters recording higher hydro volumes. As wind forms a larger part of their renewable fleet, higher revenues and earnings are expected in the first and fourth quarter.
• Renewable energy production for the three months ended March 31, 2021, decreased by 64 GWh compared to the same period 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.
• Gross profit nudged by 5% to CAD 98 million against CAD 93 million reported a year-over period.
• Comparable EBITDA improved by 4% to CAD 123 million against CAD 118 million reported a year ago period.
• Cash Flow from Operating activities nudged by 26% to CAD 103 million against CAD 83 million reported in a year over period.
• Net earnings attributable to common shareholders for the three months ended March 31, 2021, increased by CAD 49 million compared to the same period in 2020, primarily due to higher finance income from investments in subsidiaries of TransAlta, foreign exchange gains resulting from the strengthening Australian dollar relative to the Canadian dollar and unrealized foreign exchange losses recognized in the prior period on the Preferred Shares Tracking the Amortizing Term Loan.
• Net Earnings Distributable to shareholders nudged significantly from CAD 0.01 in Q1FY20 to CAD 0.19 in Q1FY21.
• Further, the Corporation acquired a 100% direct interest in the 207 MW Windrise wind project located in Alberta for CAD 213 million. The acquisition of the Windrise wind project closed on Feb 26, 2021, and is accounted for as a business combination under common control.

Update on Windrise Wind Project: The total expected construction cost of the Windrise wind project is approximately CAD 270 million to CAD 285 million. As of March 31, 2021, the remaining estimated cost of the project is CAD 50 million. The project has advanced significantly, with all appropriate procedures in place to protect the construction team during the COVID-19 pandemic. As of March 31, 2021, the project is approximately 84% complete and is on track to be delivered on schedule during the second half of 2021. The bulk of the major equipment has been delivered to the site, and turbine erection activities have commenced. In addition, the main transmission line is progressing well and remains on track for energization during the second quarter.

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.

Top-10 Shareholders

The top-10 shareholders together hold 67.26% stake in the company, with TransAlta Corporation and TransAlta, G.P are the biggest shareholders in the company with an outstanding position of 37.38% and 22.73%.

Stock Recommendation: The company reported decent performance in the first quarter of FY21. Further, the company has slowly worked to increase the percentage that comes from renewables, but it has emphasized the quality of growth at all costs, and hence the numbers have moved marginally over the last two years. We must note here that natural gas, while not a carbon-free source, is still significantly less polluting than coal. Considering this, the energy generation profile of RNW's is definitely one of the cleanest and least polluting out there.

Also, the group has a strong competitive advantage against the peers with industry-leading profitability metrics majorly protected by "Highly Contracted Portfolio" with ~12-year weighted average contract life. Given the strong balance sheet, industry-leading margin profile, consistency in maintaining margin, and a lower debt in the balance sheet, along with robust risk protection metrics, the stock is a decent option for the investors who want to bet on the ESG theme.  Moreover, the group has a proven track record of dividend distribution, and the stock is offering a decent dividend yield amid a low-interest-rate environment.

Therefore, based on the above rationale and valuation, we suggest a "Buy" recommendation on the stock at the closing price of CAD 19.79 on June 07, 2021.

1-Year Technical Price Chart (as on June 07, 2021). Analysis by Kalkine Group

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

 

*Recommendation is valid at June 8, 2021 price as well.

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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.