TransAlta Corporation

TransAlta Corporation (TSX: TA) operates a portfolio of power generation assets across Canada, the United States and Australia. The Group operates via two segments, namely Generation and Energy Marketing. The Group provides clean, affordable, and reliable power to municipalities, medium and large industries, businesses and utility customers.

Q1FY20 Financial Highlights: TransAlta Corporation impresses with its operating performance in the first quarter of FY20 and reported an improved bottom line. Revenue declined from CAD 648 million in Q1FY19 to CAD 606 million in Q1FY20. The slide in the revenue was primarily attributable to lower production, resulting in lower revenue, within the Canadian Coal and Canadian Gas segments coupled a with a weak performance from Energy Marketing segment, partially offset by improved revenues from the Wind and Solar segment. Fuel, carbon compliance and purchased power remained relatively lower than the previous corresponding quarter on account of lower coal costs across Canada and the US, resulting in a higher gross margin. Gross margin, during the period improved significantly to CAD 368 million, from CAD 282 million in Q1FY19. Operating income stood considerably higher at CAD 126 million versus CAD 36 million in pcp, driven by favorable gross margin and an asset impairment reversal; while a rise in operations, maintenance & administration, expense remained a drag. The Company reported its net earnings at CAD 44 million, as compared to a net loss of CAD 30 million in Q1FY19. Free cash flow improved to CAD 109 million from CAD 95 million in Q1FY19. The Company exited the quarter with cash and cash equivalent of CAD 338 million, while total assets stood at CAD 9,442 million.

Q1FY20 Income Statement Highlights (Source: Company reports)

Outlook: For FY20, the company expects Comparable EBITDA at CAD 925 million to CAD 1,000 million, while cash flow is expected in between CAD 325 million to CAD 375 million. The group is targeting an annual dividend of CAD 0.17 per share. Power Prices of Alberta Spot is expected within the range of CAD 45 to CAD 53 per MWh while Mid-C spot is expected within the range of CAD 25 to CAD 35 per MWh.

Risk: Due to ongoing COVID -19 pandemic, the company may face a supply chain disruption which could increase the input cost. Also, as the businesses are temporarily closed, the group might face counterparty risk where the payment collection can be delayed. Further, delays in the completion of construction projects on account of labor shortage might hinder expected cash flows.

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 corrected ~12% so far this year amid a massive correction in the broader market. The Business comes under the ‘essential services’ and more or less immune to the economic cycles. The Company has generated higher free cash flows due to strong operational results, which is a key positive. Notably, the Company has decent liquidity of CAD 1.7 billion, which seems sufficient to cater to the current debt maturity due in November 2020 and the near-term requirement. The group is investing in expanding its renewables platform and advancing on WindCharger Battery Project and the Windrise Wind Project. WindCharger project is likely to commence commercial operation in July 2020, while Windrise project is expected to commence operations in the second half of 2020. We have valued the stock using Price/CF based relative valuation approach and arrived at a target price offering a double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the current price of CAD 7.87 as on June 24, 2020. We have considered Atco Ltd (TSX: ACOx), Capial Power Corp (TSX: CPX) and Canadian Utilities (TSX: CU) as a peer group for comparison purpose.

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

Polaris Infrastructure Inc.

Polaris Infrastructure Inc. (TSX: PIF) is a Toronto-based company engaged in the acquisition, development and operation of renewable energy projects in Latin America.

The Company recently signed a Memorandum of Understanding to acquire Panama-based 10 MW run-of-river hydro project called Chuspa from Navitas Holdings Inc.

Q1FY20 Financial Highlights: For the period ended March 31, 2020, PIF reported revenue of USD 20.27 million, improved from USD 18.60 million in Q1FY19. The quarter was marked by a significantly higher power production of 182,408 MWh against 147,602 MWh (net) in Q1FY19, supported by added production from the Generación Andina facilities combined with an increase performance form Canchayllo’s, while lower production at the San Jacinto facility remained as a drag. Operating income stood at USD 10.69 million, as compared to USD 9.74 million in the previous corresponding quarter. The increased was underpinned by higher revenue and lower general and administrative expenses, partially offset by higher direct costs and depreciation & amortization costs. The Company reported a surge in the direct costs required for energy production, which stood at CAD 1.9 million against CAD 1.7 million in the previous corresponding quarter, due to additional production costs from the Generación Andina facilities. Total earnings and comprehensive earnings stood at USD 4.39 million, as compared to USD 3.38 million in pcp. The Company exited the quarter with a cash balance of USD 32.81 million and total assets of USD 457.83 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: Any changes in the regulations on electricity rate by the Government may act as a barrier for the company and might impact the cash flows of the company. Owing to the current disruption, the group might face default or delay in payments from its customers.

Stock Recommendation: The stock stood resilient and appreciated ~63% and 24% in the last three months and six months, respectively. The business of PIF is defensive in nature and is immune to economic cycles. The group did not face any material impact on its operation due to COVID-19, and all facilities are operational to date. The Company provides renewable power services across Latin American nations like Peru and Nicaragua, and geography is characterized by higher power requirements. Thus, to support the existing power requirements, the Government provides several supports to domestic renewable energy producers. Investors should note that the stock of PIF is trading above its 200-days simple moving average (SMA) of CAD 13.00, indicating a long-term bullish pattern. The Company maintain strong cash flows from operation in the recent past, and we expect, the growth in the cash flows to sustain in coming years owing to the strategical investment decisions. Further, the stock is offering a decent dividend yield of 5.6%, which is lucrative, considering the current interest rate environment. On the valuation front, the stock is trading at a forward EV to sales multiple of 3.9x, which is in line with the industry (Electric Utilities and IPP) median of 4.3x. Hence, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 15.03 on June 24, 2020.

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

Disclaimer

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