Canadian Utilities Ltd

Canadian Utilities Ltd (TSX: CU) is a Calgary-based multiline utility company, which operates in a diversified global enterprise. The corporation offers services to Electricity, Pipelines & Liquids, and Retail Energy businesses.

Key Highlights:

• An income play: The company has an impressive track record of consistent dividend distribution over a period of time, backed by stable cash flows. Notably, dividends paid to Class A and Class B share owners in H1FY21 stood at CAD 240 million, at par with CAD 239 million in the previous corresponding period. Moreover, the stock carries a dividend yield of ~5.0%, which looks attractive considering the current interest rate scenario.

Source: Company Report

• Ample liquidity to support future operations: At the end of Q2FY21, the company reported its available line of credit amounting to CAD 2,253 million, which seems to be sufficient to support the company’s upcoming capital investments and working capital requirements. Moreover, the company has a cash balance of CAD 365 million.

Entering new avenues: Apart from electricity and natural gas distributions, the company is offering integrated water services, including pipeline transportation, storage, water treatment, recycling and disposal to a number of industrial customers. The prospect from the above segment remains very lucrative, and we believe the company is highly poised to utilize the upcoming opportunities coming from the segment.

• Management Update: On September 01, 2021, CU announced the appointment of Robert Hanf, Q.C. to the Company's Board of Directors.
  

Q2FY21 Financial Highlights:

• Canadian Utilities declared its quarterly result and reported revenue CAD 790 million, improved from CAD 740 million in the previous corresponding period (pcp).
• Operating profit stood at CAD 107 million, declined from CAD 201 million in pcp. The quarter was marked by higher Depreciation and amortization (CAD 208 million v/s CAD 162 million in pcp) and a jump in other expenses (CAD 114 million v/s CAD 36 million in pcp). Moreover, a higher purchased power expense (CAD 69 million v/s CAD 46 million in pcp) also contributed to the decline.
• Earnings for the period came at CAD 6 million, as compared to CAD 73 million in pcp. The slide was due to a lower operating profit, partially offset by a lower income tax expense (CAD 5 million v/s CAD 31 million in pcp).

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): Price to Cash Flow

Stock Recommendation:

The company is a leader in hydrogen production in Canada, and has a strong clientele, primarily from the industrial segment. Recently, the company collaborated with Suncor Energy, wherein it would provide early-stage design and engineering of a potential clean hydrogen project in Fort Saskatchewan, with a production capacity of 300,000 tons per year. We have valued the stock using the P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms) upside. For the said purposes, we have considered industry (Multiline Utilities) on an NTM basis etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 34.99 on September 10, 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 September 10, 2021). Analysis by Kalkine Group

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

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