AltaGas Ltd.

AltaGas Ltd (TSX: ALA) owns and operates a diversified basket of energy infrastructure businesses. The group operates through four segments: Midstream, power, utilities and corporate. Utility business owns and operates rate-regulated natural gas distribution assets across North America. 

Key Highlights:

• Issuance of CAD 700 million of medium-term notes: The company issued two medium-term notes amounting to CAD 500 million and CAD 200 million, maturing in 2028 and 2030, respectively. The company would allocate the proceeds to repay its indebtedness under the credit facilities.

• Income Play: The company has a strong history of dividend payments across economic cycles, which suggests stable cashflows from the operations. At the last traded price, the stock was offering a dividend yield of ~5.1%, which is lucrative considering the low interest rate environment in the economy.

10-years Dividend History; Source: Refinitiv (Thomson Reuters)

• Prudent Capital Allocation: During FY20, the company invests ~CAD 900 million in top-quality projects which are expected to generate strong organic growth through robust risk-adjusted returns. Almost 78% of the investments are made across the utility segment. We expect the utility segment would report stable business growth driven by a gradual increase in customer-base.                        

Source: Company Presentation

Q3FY20 Financial Highlights:

• ALA announced its quarterly results, wherein the company posted revenue of CAD 969 million, higher than CAD 888 million in the previous corresponding period (pcp). The increase was driven by higher income from both midstream and utilitiy segments.

Q3FY20 Revenue Bifurcation (Source: Company Reports)

• The company posted a loss before income taxes at CAD 40 million, as compared to a profit of CAD 9 million in Q3FY19. The decline was due to a higher cost of sales (CAD 611 million versus CAD 481 million in Q3FY19), and a decline in other income, which was partially supported by a lower interest expense (CAD 65 million versus CAD 92 million in pcp).
• ALA reported a net loss of CAD 27 million, as compared to a net income of CAD 43 million in Q3FY19.
• Cash and cash equivalent stood at CAD 29 million, while total assets stood at CAD 19,799 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Lower consumer demand, unfavorable weather conditions etc., might hinder the overall demand dynamics of the utility business, which subsequently may take a toll on the overall margins and cash flows of the company.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation:

The company is a leading North American energy infrastructure company, which supplies NGLs and natural gas to domestic and global markets and also distributes natural gas and power directly to residential, commercial, and industrial customers. The nature of the operation is more or less immune to the economic cycles. The company offers ~USD 4.3 billion of rate base regulated gas distribution network and is expecting a growth rate of higher single-digit for FY20 to FY25. We have valued the stock using Price to CF based relative valuation method and have arrived at a target upside of double-digit upside (in percentage terms). For the said purposes, we have considered peers like Secure Energy Services Inc, TransAlta Corp etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 18.83 on December 3, 2020.

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

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