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:

• An Income Play: Historically, the company has consistently paid a dividend to its shareholders, backed by stable cash flows. In H1FY21, the company paid a dividend of CAD 103 million, as compared to CAD 100 million in pcp. Moreover, the stock carries a dividend yield of ~4.17%, which looks attractive considering the current interest rate scenario.

10 years Dividend distribution, Source: REFINITIV

• Win of new contract: The company reported addition of a new order from the Petroleum Products Division of the Government of Nunavut, which includes a 10-year CAD 600 million contract, wherein the group would manage and operate Iqaluit's 79-million-litre bulk fuel storage facility, pipeline distribution system and municipal fuel delivery system. The order was received by the company’s joint venture arm Uqsuq Corporation.

• Highly Contracted Portfolio drives income stability: Within the unregulated segment, the group derives majority of income from long-term contracts, representing ~89% of the portfolio.The company has a diversified portfolio and operates across North America, South America and Australia. Due to the long-term nature of contracts, the company is expected to generate stable income and cash flows in the coming quarters.

Q2FY21 Financial Highlights:

• The group announced its full-year result, wherein the company posted revenues of CAD 970 million, improved from CAD 938 million in Q2FY20.
• Salaries, wages and benefits and Plant and equipment maintenance stood lower than the previous year, while Energy transmission and transportation, depreciation, amortization and impairment and other costs were higher than the previous corresponding period (pcp). Total cost and expenses stood at CAD 842 million, stood higher from CAD 717 million in pcp.
• Operating profit stood at CAD 137 million, down from CAD 226 million in Q2FY20, due to an increase in total costs.
• Earnings for the period stood at CAD 26 million, significantly lower than CAD 89 million in Q2FY20.

Source: Company Report

Risks:  Unforeseen circumstances like adverse weather conditions and currency fluctuations might hinder the company’s overall performance. Moreover, a decline in the regulated rate base would dampen the overall income and cash flow of the company.

Valuation Methodology (Illustrative): EV to EBITDA

Stock Recommendation:

Apart from the power generation, the company also built own and operates energy infrastructure assets across Alberta and the Northwest Territories. The group offers a wide range of services like integrated water services, hydrocarbon storage facility, non-regulated gas transmission etc. During the second quarter of FY21, the company recorded improved performance from the electricity and natural gas commodity prices associated with floating rate energy contracts. Hence, the company reported its funds generated by operations at CAD 414 million in Q2FY21, increase by CAD 36 million from the previous corresponding period. We have valued the stock using the EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered Emera Inc, Fortis inc and Capital Power Cor etc., as a peer group. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 43.02 on August 17, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 17, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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