AltaGas Ltd

AltaGas Ltd (TSX: ALA) is a Canadian based leading energy infrastructure company that connects natural gas liquids (NGLs) and natural gas to domestic and global markets.  The group operates through two operating segments, namely Utilities and Midstream. The utilities segment accounts for the majority of the revenue for the Company and serves about 1.7 million customers.

Operating highlights:

• Recently, the Company issued senior unsecured medium-term notes amounting CAD 500 million, bearing a coupon rate of 2.157%. These notes will be maturing on June 10, 2025. The funds would be used to repay a part of the Company’s existing debt and for general corporate purposes. 

• The Group paid a monthly dividend of CAD 0.08 per common share for the month of June 2020. The Company has a solid history of paying monthly dividends backed up by its resilient cash flows generation.

Q1FY20 Financial Highlights: ALA declared its quarterly results, wherein the Company reported revenue of CAD 1,869 million, marginally lower than CAD 1,898 million in the previous corresponding quarter. Revenue from the Utilities segments stood lower as compared to the previous corresponding quarter, while midstream revenue increased. The quarter was marked by a decline in cost of sales to CAD 964 million, as compared to CAD 1,139 million in pcp, while operating and administrative costs and depreciation and amortization stood lower than a year ago. Income before income taxes stood lower at CAD 618 million, against CAD 948 million in Q1FY20, as other income declined compared to the previous corresponding quarter (CAD 218 million versus CAD 697 million). Net income after taxes shrank to CAD 486 million, as compared to CAD 822 million in the previous corresponding quarter.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: Temporary closure of businesses could hamper the gas demand in the utility segment while lower NGL pricing, lower demand lower production in the Western Canada Sedimentary Basin (WCSB) could have an adverse impact on midstream business operations.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock made a recent up move and appreciated ~21% in the last three months, outperforming the index by ~3%. Despite the current challenging environment, the Company is expected to generate stable cash flow from its Utilities segment, which is a key positive. The Company mentioned that it had decent liquidity and solid balance sheet. The Company is expected to have a net capital expenditure of ~CAD 900 million in FY20, which is likely to be funded by internal cash flow.  Majority of the expenditure would be allocated for Utilities segment, and the group expect to earn an immediate return on ~80% of investments. Furthermore, the Company expects to derive ~60% of the normalized EBITDA from the utilities segment. At the last traded price, the stock is offering a healthy dividend yield of ~6.2%, which is a solid indicator for an income investor. The dividend yield is quite lucrative, considering the current interest rate environment. We have valued the stock using the price to CF based relative valuation methodology and considered peers like Canadian Utilities Ltd (TSX: CU), Secure Energy Services Inc (TSX: SES) and TransAlta Corp (TSX: TA) etc. We have arrived at a target price with an upside potential of double-digit (in percentage terms). Hence, we have given a “Buy” recommendation on ALA stock at the closing price of CAD 15.57 per share on June 25, 2020.

ALA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Emera Incorporated

Emera Incorporated (TSX: EMA) owns and provides rate-regulated electric and gas utility services across the regions like Canada, the United States and the Caribbean. 

Dividend Update: The Group approved a quarterly dividend of CAD 0.6125, per common share, payable after August 14, 2020. Emera reported a 6% dividend growth since 2000, backed up by sustainable cash flows. Going forward, the group is targeting a growth of 4% to 5% through 2022.

Q1FY20 Financial Highlights: EMA announced its quarterly results, wherein revenue stood lower at CAD 1,637 million compared to CAD 1,818 million in pcp, primarily attributed by a fall in the regulated gas and non-regulated segment while regulated electric segment recorded an improvement. Income from operations reduced to CAD 421 million, as compared to CAD 542 million in pcp, primarily attributable to a lower income coupled with an increase in operating, maintenance and general costs, partially offset by the lower regulated cost of natural gas and non-regulated fuel for generation and purchased power expenses. The Company reported a higher net income of CAD 535 million compared to CAD 324 million, majorly supported by a significantly higher other income. The Company exited the quarter with cash and cash equivalents of CAD 1,553 million, while total assets stood at CAD 33,856 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company might face a delay in collection or default as most of the businesses were temporarily shut down, and there is an expectation of an increase in the unemployment rate. 

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The group derives the majority of the revenue from the ‘Utility’ sector and is immune to the economic cycle. The stock corrected only ~4% so far this year, amidst a stiff correction across the global equity market due to the defensive nature of the business. The Company derives ~95% of its income from regulated investments, which provide cash flow stability, which is impressive. The group intends to invest ~CAD 7.5 Billion and plans to drive rate base growth through FY22. The group has a decent cash flow generation and planning to meet ~50% -55% of its near-term funding requirement from internal cash flow generation and ~25% to 30% via various equity instruments. At the last closing price, the EMA stock carries an attractive dividend yield of ~4.60%, which would appeal several income investors. Further, the group is targeting a 4% to 5% growth in its dividend distribution, which is positive for income investors. We have valued the stock using Price to Cash Flow-based relative valuation method and have arrived at a target upside offering single digit (in percentage terms). For the said purposes, we have considered industry (Utilities) average on NTM basis. Hence, we recommend a ‘Hold’ rating on the stock at the current market price of CAD 53.31 on June 25, 2020.

EMA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Superior Plus Corp.

Superior Plus Corp. (TSX: SPB) is a Canada based Company which operates with two products line, namely Propane Distribution and Specialty Chemicals across U.S. and Canada region.

The company announced a monthly dividend of CAD 0.06 per common share, payable on June 29, 2020 while, the company’s annual dividend rate is at CAD 0.72 per share. The company has a track record of consistent dividend payment. Current dividend payout ratio stood at ~46%. Notably, the Business has delivered consistent positive cash from operations over the years, and we expect the pattern to continue, which augers well for the future dividend payouts.

Q1FY20 Financial Highlights: SPB declared its first-quarter results, wherein the company reported a lower revenue of CAD 840.2 million, as compared to CAD 1036 million in pcp, due to a lower propane distribution revenue. Gross profit stood at CAD 399.2 million against CAD 428.3 million in Q1FY19, primarily attributable to the lower income. Net earnings for the period was CAD 11.4 million, significantly lower than CAD 156.6 million in pcp. The decline was primarily attributable to a loss on derivatives and foreign currency translation of borrowings of CAD 116 million, partially offset by lower selling, distribution and administrative costs. The company exited the cash and cash equivalent stood at CAD 34.3 million, while total assets were reported at CAD 3,774.9 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The second wave of novel virus outbreak may result in supply chain delays and disruptions, labor shortages, expansion project delays and facility shutdowns which could have a negative impact on the financials. Further warm weather may reduce the demand for the group’s offerings.

Stock Recommendation: The stock surged ~57% in the last three months. The group’s offerings were declared critical and essential, and all the facilities remained operational. The group has not witnessed any disruption to its facilities to date owing to COVID-19. The Company has ample liquidity and no major debt maturities until 2024. The Company derives ~74% of energy distribution profit from residential customers which is immune to the economic cycle. The group is focusing on reducing operating ratio, higher customer retention and organic growth which is likely to help in improving financial performance. Further, the stock carries a healthy dividend yield of ~6.40%, which is lucrative, considering the low-interest-rate environment in the country. Investors should note that the stock has closed above its 200 days simple moving average (SMA) of CAD 10.98, indicating a long-term bullish pattern. On the valuation front, the stock is trading at a forward EV/Sales multiple of 1.5x, which is slightly lower than industry (energy) average of 1.9x. Hence, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 11.25 on June 25, 2020.

SPB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Shaw Communications Inc.

Expanded Customer Base and Increased Revenue: Shaw Communications Inc. (TSX: SJR.B) is a cable company in western Canada, serving as one of the biggest providers of Internet, television, and landline telephone services.

Dividend History: The company has a history of paying consistent dividends to its shareholders. As on date, the dividend yield of the company stood at 5.281%. Despite the softer market conditions due to the global pandemic, the Board has declared dividends for the three months period ended June 30, 2020 of CAD0.17444 per Cumulative Redeemable Rate Reset Class 2 Preferred Share, Series A and CAD0.22738 per Cumulative Redeemable Floating Rate Class 2 Preferred Share of Series B. These dividends will be paid on 30 June 2020.

Quarterly Performance (For the Period Ended 29 February 2020): During the quarter ended 29 February 2020, the company reported an increase of 3.7% in revenue to CAD1.36 billion and adjusted EBITDA increased by 9.5% year-over-year to CAD600 million. During the second quarter, the company added ~54,000 net postpaid customers, building its wireless subscriber base to nearly 1.8 million customers. The operational and financial performance of the company reflects continued focus of the company on execution, delivering stable wireline results and sustained wireless growth, supported by underlying networks that continue to prove their worth.

Quarterly Financial Highlights (Source: Company Reports)

Key Risks: The company is exposed to the general economic conditions which include the impact on the economy and financial markets. It also bears the risks from the fluctuations in the price of oil, the COVID-19 pandemic, and other geopolitical risks. These risks could have a material effect on the company’s operations, capital resources and financial results.

What to Expect: In the times when the world is grappled with the COVID-19 crisis, the network performance of the company has been exceptional. SJR.B has seen an increase in network traffic. It continued to provide critical Wireline and Wireless essential services into homes, businesses, and communities across the country and quickly adapted to the changing needs.

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

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Shaw Communications Inc is in a strong position to withstand the challenges ahead because of the strategic and operational changes. Operational performance of the company has been solid and has financial flexibility and liquidity providing strength to its balance sheet. The stock of SJR.B gave a return of 7.01% in the past three months. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). Considering the decent returns in the past three months, consistent history of dividend payments, decent network performance and financial resilience despite the global pandemic, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 22.44, up by 0.5827% on 25 June 2020.

SJR.B Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

TELUS Corporation

TELUS Launches First Wave of Its 5G Network: TELUS Corporation (TSX: T) is one of the big three wireless service providers in Canada, with its 9 million mobile phone subscribers nationwide constituting almost 30% of the total market. The company has recently rolled its first wave 5G network and will continue to expand in additional 26 markets across Canada.

Dividend History: Despite the significant volatility in markets due to the global pandemic, the company retains a dividend yield of 5.054%. It has a history of paying regular dividends for the past three years. During the quarter ended 30 March 2020, the company declared an unchanged dividend of CAD0.29125 per share, supported by strong growth in free cash flow.

Quarterly Performance (For the Period Ended 31 March 2020): During the quarter, consolidated operating revenue of the company stood at CAD3.7 billion, reflecting an increase of 5.4% over the prior corresponding period. In the same time span, EBITDA of the company witnessed an increase of 2.2% to CAD1.4 billion. This growth was mainly due to the growth in wireline data service margins, an increased EBITDA contribution from TELUS International customer care and business services, and higher wireless network revenue driven by a growing subscriber base.

Key Risks: The COVID-19 crisis has had a profound impact on global financial markets. As a by-product of the COVID-19 pandemic and measures put into place to contain the risk of transmission, the company experienced lower subscriber growth. The results of the company may be further impacted by  the changed consumer behavior, competitive environment, challenges of TELUS’s ability to deploy technology, etc.

Outlook: The company’s robust and consistent performance over the longer-term, well-positions the company to navigate the uncertainty caused by the global COVID-19 pandemic. The company is leveraging its digital capabilities to offset the impact of store closures. TELUS retains a strong balance sheet with liquidity of over CAD3 billion and no debt until 2021.

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Despite the challenging circumstances, TELUS achieved decent financial and operational results in the first quarter, characterized by its hallmark of customer growth, coupled with enhanced profitability. The stock of T gave a return of 7.26% in past three months and a return of 1.32% in the past one month. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purpose, we have considered Rogers Communications Inc, Cogeco Communications Inc, etc. as peers. Considering the decent returns in the past three months, consistent history of dividend payments, and financial resilience despite the global pandemic, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 23.05, up by 0.9636% on 25 June 2020.

T Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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.