Algonquin Power & Utilities Corp. (TSX: AQN) is a Canada-based diversified international generation, transmission, and distribution utility company. The Company through its two business groups, the Regulated Services Group, and the Renewable Energy Group provide sustainable energy and water solutions through its portfolio of electric generation, transmission, and distribution utility investments to approximately one million customer connections in the United States and Canada.

Key Highlights:

• Increased revenue: During Q1FY22 the company reported an increase in the total revenue to USD 735.69 million as compared to the total revenue of USD 634.54 million in Q1FY21. The regulated gas distribution segment reported the sales of USD 263.43 million in the reported period (Q1FY22) when measured against the sales of USD 198.61 million in pcp. The total number of natural gas customers across the USA and Canada was 374,000 as of March 31, 2022. Further, the company’s nonregulated sales also increased to USD 88.22 million in Q1FY22 against sales of USD 30.78 million in Q1FY21. Below is the pictorial presentation of regulated revenue contributed by the various geographies.

Source: Company presentation

• Acquisition updates: Recently the Kentucky Public Service Commission ("KPSC") approved the pending acquisition of Kentucky Power Company & Kentucky Transmission Company, Inc by Liberty Utilities Co., which is an indirect wholly-owned subsidiary of AQN. The Kentucky Power transaction is estimated to add close to USD 2 billion of regulated rate-based assets in a favorable regulatory jurisdiction.

• Strong liquidity profile: The group's quick ratio at the end of Q1FY22 was reported at a higher level of 0.85x, as compared to the quick ratio of 0.50x in Q1FY21. To add more, the company’s current ratio at the end of Q1FY22 stood at 0.96x, which is higher than the current ratio of 0.57x during Q1FY21. The higher quick ratio and current ratio state the company’s ability to meet its short-term obligations falling within one year time, without any hindrance, ensuring the smooth running of the business operations.

Source: Refinitiv, Analysis by Kalkine Group

• Improved profitability margins: In Q1FY22, the company witnessed an increase in the revenues, supported by increased demand and higher prices, which were partially offset by the increase in the overall expenses, still, the group managed to attain higher profit margins as compared to the previous comparable period (Q1FY21).

Source: Refinitiv, Analysis by Kalkine Group    

Risks associated with investment

The group is majorly exposed to the change in the demand on account of any economic slowdown, and rise in interest costs which will impact the balance sheet on account of the presence of debt. Also, the other risks involved are credit risk, currency risk, rise in costs because of inflationary pressure, supply chain disruptions, etc to name a few.   

Financial overview of Q1FY22 (Expressed in thousands of USD)

Source: Company Filing 

• The group reported total revenue across the regulated and non-regulated energy segments close to USD 735.69 million during Q1FY22, which is higher than the sales of USD 634.54 million in Q1FY21. The major increases in sales were from the regulated gas distribution and nonregulated energy sales segment, which pushed the sales to an elevated level.

• During Q1FY22, the operating income climbed to USD 137.73 million against the operating income of USD 86.09 million. Higher revenues were partially offset by the increase in overall expenses to USD 599.15 million in Q1FY22 against the expenses of USD 548.45 million in pcp.

• The group transitioned into net earnings of USD 52.59 million against a net loss of USD 3.33 million in Q1FY21.

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The group reported higher adjusted EBITDA of USD 330.6 million in Q1FY22 against the adjusted EBITDA of USD 282.9 million in pcp. Also, the company transitioned into net earnings of USD 52.59 million in the same period (Q1FY22) from the net losses of USD 3.33 million in Q1FY21, which were supported by the higher revenue on account of increased demand, higher prices, and limited increase in the overall expenses.  Recently the company declared a quarterly dividend of CAD 0.2345 per common share which is to be paid on July 15, 2022, bringing the dividend yield of the stock close to 5.47%, which is on the radar of the regular income-seeking investors. Further, the approval of the pending acquisition of Kentucky Power Company & Kentucky Transmission Company will enable AQN to access a diverse customer base resulting in an increase in total revenue, which is a key positive. On the valuation front, the stock is measured on the EV/ Sales based relative valuation multiple, and we have considered Emera Inc., Northland Power Inc., etc. as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock of AQN at the last closing price of CAD 17.22 on June 15, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as of June 15, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV 

Technical Analysis Summary

Disclaimer

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