One Large-Cap Utility Stock to Hold – AQN

Algonquin Power & Utilities Corp. (TSX: AQN) is a Canada-based diversified North American generation, transmission, and distribution utility company.  Within its distribution group, Algonquin owns and operates regulated water, natural gas, and electricity distribution utilities in the United States.

Key highlights

• Higher revenues: During FY21, the company reported an increase in total revenue to USD 2,285.47 million as compared to USD 1,676.9 million in FY20. The major increase was from its Regulated Electricity distribution segment, which increased by 52% in revenue to USD 1,183.39 million for the reported period as compared to USD 776.3 million. The other segmental push was from its Regulated gas distribution of USD 525.89 million in FY21 vs USD 454.74 million in the pcp.

• Improved Electricity Generation performance: For FY21, the company’s Renewable Energy performance increased by 35% to 6,577.1 Gigawatt hours sold (GW-hrs sold) as compared to 4,863.8 GW-hrs sold in the FY20. The major contributor to the above performance was from the US. Wind facilities that produced 4,738.4 GH-hrs sold for the reported period as compared to 3,120.6 GW-hrs sold in the pcp. The improved Renewable energy business segment is the key highlight, considering the rising demand for renewable and clean energy across the US and other geographies.

• Dividend distribution: On March 3, 2022, the group declared a dividend of USD 0.1706 per common share for the period from January 1, 2022, to March 31, 2022, payable on April 14, 2022. For FY21 the total dividend declared by the group was USD 423.0 million as compared to USD 344.4 million for the FY20.

• Improved Outlook: For FY22, the group has estimated a higher Adjusted Net Earnings per share in the range of USD 0.72 to USD 0.77 per share as compared to USD 0.71 for FY21. To meet the rising demand for renewable energy, the company has budgeted nearly USD 12.4 billion for capital expansion to be deployed between 2022 till 2026, which will be a game-changer in meeting the demand across the US and other regions.
  

Risks associated with investment

The group is exposed to rising interest rates because of the increased debt in its books, changing laws and regulations, foreign exchange volatility, labor shortage, unfavorable weather conditions are a few of the other risks, the company is facing. 

Financial overview of FY21 (Expressed in thousands of USD)

 Source: Company Filing 

• The company reported an increase in its total revenues to USD 2,285.4 million for FY21 as compared to USD 1,676.9 million in FY20. The major increase was reported from the Regulated Electricity Distribution which contributes almost 51% to the total revenue.

• The total expenses for FY21 increased to USD 1,895.2 million vs USD 1,292.9 million in FY20, on account of increasing operating expenses and a surge in regulated electricity purchased during the reported period.

• The Operating income for the FY21 increased to USD 419.25 million vs USD 384.02 million in the pcp.

• For FY21, the company reported net earnings attributable to its common shareholder of USD 255.85 million vs USD 774.06 million in the FY20. This was on account of a loss from a long-term investment of USD 26.45 million for the FY21 as compared to the gain on the long-term investment of USD 664.73 million in the FY20.
  

Valuation Methodology (Illustrative): EV to Sales based

 Analysis by Kalkine Group

 Stock recommendation

The company reported higher revenues of USD 2,285.47 million during the FY21, vs USD 1,676.9 million in the FY20. The improvement in the Renewable Energy performance in FY21 to 6,577.1 GW-hrs sold, elevated the total energy performance to the 6,851.3 GW-hrs sold for the FY21 vs 5,045.5 GW-hrs sold in FY20, which is the major revenue driver for the company. In addition, the optimistic outlook of the company with capital expenditure plans of close to USD 12.4 billion over the next five years, is again a key positive considering the rising demand for Renewable Energy across US and major regions.  

On the valuation front, the stock is measured on the EV to Sales based multiple and we have considered National Grid PLC, Atlantica Sustainable Infrastructure PLC, etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing market price of CAD 19.19 on March 21, 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 on March 21, 2022). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.