TransAlta Renewables Inc

TransAlta Renewables Inc. (TSX: RNW) is a Canada-based company that owns a portfolio of renewable and natural gas power generation facilities and other infrastructure assets. The Company owns and operates approximately 13 hydro facilities, 20 wind farms and seven gas facilities.

Investment Rationale

• Strongest Player in Wind Power Arena:The company is Canada’s largest generator of wind power and holds one of the largest wind portfolios in North America. Currently, the group has 100% of generation contracted with an average capacity weighted contract life of 11 years.

• Diversified Asset base: The company has diversified its presence into hydro and solar segment also, although the biggest chunk of cash flows is generated from wind and natural gas segment.

Source: Company Reports

• An Income Play:The company has a healthy practice of dividend pay-out; this translates in an essential factor for regular income-seeking investors with a long-term horizon. During the current quarter, management announced a dividend of CAD 0.23 per common share. At the last traded price, the stock was offering a dividend yield 5.33%, which is lucrative looking at the current market dynamics.

Source: Company

Financial Overview (Amount in CAD millions, except per share data)

Source Company

• The company posted EBITDA of CAD 115 million, a CAD 4 million or 4% improvement over the same period in 2019.
• Adjusted funds from operations ("AFFO") stood at CAD 90 million, reflecting a CAD 10 million or 13% improvement to the same period last year.
• Cash available for distribution ("CAFD") was CAD 67 million or CAD 0.25 per share in the second quarter, an increase of 14% on a per share basis as compared to the same period in 2019

Upcoming Event

The company will release their third quarte5r 2020 results before markets on Friday, October 30, 2020.

Risk associated to investment

The Company has exposure in the natural gas segments, which expose the company to commodity price risk. The company is also exposed to foreign exchange risk at it has operations in the US and Australia.

Valuation Methodology (Illustrative): Price to Book Value

 Source: Refinitiv (Thomson Reuters)

Stock Recommendation

The Company is highly diversified with facilities that are highly contracted and located in various geographies. Its cash flows have been relatively unaffected in the quarter due to the high contracts of various asset portfolio and financial strength of customers. At present the company continue to have a strong balance sheet with ample liquidity to provide added flexibility during the current challenging time. All the facilities continue to remain fully operational and capable of meeting their customers' needs, since the electricity and steam supply continue to remain a critical service requirement to all and have been deemed an essential service. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 17.63 on October 21, 2020. We have considered Capital Power Corp, Emera Inc, Algonquin Power & Utilities Corp, Northland Power Inc etc. as the peer group for the comparison.    

1-Year Price Chart (as on October 21, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Disclaimer

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