AltaGas Ltd (TSX: ALA) is a Canada-based diversified energy infrastructure company. It owns and operates a diversified basket of energy infrastructure businesses. Business is conducted through four segments: Midstream, power, utilities and corporate.  Revenue is derived from customers in both Canada and the United States, with United States customers contributing the most.

Key Highlights

• Got an additional license to export:Recently, the Canada Energy Regulator (CER) granted the company an additional 25-year permit to export up to 46,000 Bbls/d of propane to North American and global markets, bringing the aggregate propane export capacity under 25-year export licenses to 92,000 Bbls/d.

• Increasing ownership in Petrogas Energy Corp:Recently, the company announced that they are advancing their global export strategy through an agreement to increase ownership in Petrogas Energy Corp. (Petrogas) to approximately 74 %. We expect that with this, the company would tap the growing global propane demand.

Source: Company

• Investing in the utility segment:The company is investing in its aging infrastructure and attracting new customers. The company expect to drive strong rate base growth of 8 - 10% annually through 2024. The utility segment is the biggest revenue contributor for the company and under this the revenues are generally highest in the first and fourth quarters as the majority of natural gas demand occurs during the winter heating season.

Source: Company

• Dividend Play:Despite the challenging environment, the company maintained its dividend payment at a time when most of the businesses are cutting down or suspending their dividend distribution. This shows the group's financial strength and suggests that the group is a friend of income investors. At the last traded price, the stock was offering a dividend yield of 5.68%, which is lucrative considering the current interest rate environment.

Source: Company

Financial Overview of Q3 2020

Source: Company

• The company reported Normalized EBITDA to CAD 213 million in Q3 2020, increased 23% against CAD 173 million in the last-year comparable quarter, reflecting strong execution and performance from the Utility segment.

• Normalized net income reported in Q3 2020 was CAD 12 million (CAD 0.04 per share) compared to a normalized net loss of CAD 62 million (CAD 0.22 per share) on a Y-o-Y basis. This improvement was mainly due to lower interest expense, partially offset by higher depreciation and amortization expense.

• Net loss applicable to common shares in this quarter was CAD 47 million (CAD 0.17 per share), compared to net income of CAD 22 million (CAD 0.08 per share) on a Y-o-Y basis. The decrease was mainly due to higher unrealized losses on risk management contracts, higher depreciation and amortization expense.

Risks associated with Investment

The company is exposed to various market risks in the ordinary course of operations that could impact its earnings and cash flows. Some important risk factors are like lower demand, lower production, adverse weather conditions etc.

Valuation Methodology (Illustrative): Price to Cash Flow based Valuation

(Note: All forecasted figures and peers have been taken from Thomson Reuters)

Stock recommendation

The company’s outlook for FY20 remains unchanged as it expects Normalized EBITDA in the range of CAD 1.275 billion – CAD 1.325 billion and normalized net income of CAD 1.20 – CAD 1.30 per share. The company is investing in its aging infrastructure and attracting new customers as they expect to drive strong rate base growth of 8 - 10% annually through 2024. Furthermore, the dividend yield of 5.68% is the icing on the cake for the long-term investors. Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 16.89 on 30 October 2020. We have considered Black Hills Corp, Sempra Energy, Canadian Utilities Ltd etc. as the peer group for the comparison.

ALA daily technical chart. Source: Refinitiv (Thomson Reuters)

Disclaimer

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