Atco Ltd.

Atco Ltd. (TSX: ACO.X) is a Canadian holding company that offers gas, electric, and infrastructure solutions, while the company’s primary segments include electricity generation, transmission, and distribution.

Key Highlights

• Signs 15-Year Contract with Pacific Northern Gas Ltd.: Recently, the company signed a contract with Pacific Northern Gas Ltd., wherein the latter would purchase Renewable Natural Gas (RNG) produced from the company’s upcoming biomethane facility located in Two Hills County, Alberta. RNG is a low carbon, pipeline-quality substitute for conventional natural gas, which is generated by decomposing organic waste by-products from farming and forestry, landfills, and wastewater treatment plants. ACO.X is expected to deliver RNG from late 2022 after the commission of the above facility. The above agreement would cater to more than 2,300 homes across northern British Columbia.

• Stable Dividend Payment: The company has a strong history of regular dividend payments, backed by stable cash flow generation. Notably, the stock of ACO.X carries a dividend yield of ~4.24% on an annualized basis, which looks impressive considering the persisting interest rate scenario.

Dividend History (Source: Company Report)

• Positive Outlook from Integrated Water Services and Gas Storage Segments: The company also provides integrated water services, including pipeline transportation, storage, water treatment, recycling, and disposal to its industrial customers. The above facilities are located near Alberta and the Northwest Territories and offer significant room for growth, and we believe ACO.X is highly poised to utilize the above opportunity.

Q3FY21 Financial Highlights

• X announced its quarterly result, wherein the company posted revenues of CAD 977 million, higher than CAD 897 million reported in Q3FY20.
• The company reported an increase in salaries, wages & benefits, energy transmission and transportation costs, depreciation, amortization and impairment costs, and expenses relating to materials & consumables. Hence, total costs and expenses stood at CAD 780 million, higher than CAD 671 million in pcp.
• Operating profit stood at CAD 220 million, a slide from CAD 240 million in Q3FY20, due to increased total costs.
• Earnings for the period stood at CAD 93 million, a decline from CAD 108 million in Q3FY20.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks

The company’s operations might be hindered due to a rise in maintenance costs coupled with a surge in energy transmission and transportation expenses. In addition, the company reported lower earnings from the structures and logistics segment due to insufficient workforce housing trade sale activity in Canada, Australia, and the US. Hence, a continuation of the above trend would dampen the overall performance of the group.

Valuation Methodology (Illustrative): EV to Sales based

Stock Recommendation:

At the end of Q3FY21, the company reported a cash balance of CAD 837 million, plus CAD 2,570 million available under its lines of credit, which is sufficient to meet the company’s working capital and CAPEX needs. Additionally, funds generated from operations stood at CAD 1,306 million in 9MFY21, higher than CAD 1,288 million in pcp. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Canadian Utilities Ltd, Algonquin Power & Utilities Corp, etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 42.28 on November 22, 2021.

One-Year Technical Price Chart (as on November 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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