Hydro One Limited

Hydro One Limited (TSX: H) operates in regulated transmission and distribution assets in Ontario. The group is the largest electricity provider, that serves nearly 1.4 million customers. The company derives roughly 60% revenue from the transmission segment, while the rest is being derived from distribution.

Event Update:

The group would disclose its fourth-quarter results on February 24, 2021.

Key Updates:

• An Income Play: The company has a solid track record of consistent dividend payment, backed by stable cash flows. During 9MFY20, the group reported total dividend distribution of CAD 460 million, higher than CAD 439 million, a year ago. Moreover, at the last closing price, the stock was offering a dividend yield of ~3.395%, which is decent considering the current interest rate environment.

Five-years dividend distribution (Source: Refinitiv, Thomson Reuters)

• Bullish Technical Indicators: The stock of Hydro One Limited closed above the long -term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend.

Source: Refinitiv (Thomson Reuters)

• Impressive Guidance: The long-term outlook remains positive, driven by the nature of the business model. The group would include 170 commercial and industrial customers in the coming days, representing an additional demand of more than 2,200 megawatts, which augurs well for business prospects. Moreover, the recent acquisitions of Peterborough and Orillia would also enhance the company’s customer base across new geographies.

Q3FY20 Financial Highlights:

• Hydro One announced its quarterly results, wherein the group posted revenues of CAD 1,903 million, higher than CAD 1,593 million in the previous corresponding period (pcp). The increase was driven by improved revenues from both distribution and transmission segments.                             

Source: Company Reports

• The quarter was marked by a 34% y-o-y increase in the purchased power cost to CAD 993 million, while operation, maintenance and administration and depreciation, amortization and asset removal costs stood at par with Q3FY19.
• The group reported net income of CAD 292 million, higher than CAD 246 million in the previous corresponding period, partially supported by a lower financing costs (CAD 114 million versus CAD 118 million in pcp).
• Cash and cash equivalents were reported at CAD 42 million, while the group reported total assets, at the end of Q3FY20 at CAD 28.615 billion.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s performance might be hindered by falling electricity rates coupled with adverse weather conditions, which would eventually lead to lower realization and suppressed margins.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

The group is a prominent name within the North American region. The group reported a 17.9% increase in the capital investment to CAD 500 million in Q3FY20, which includes investments in multiyear development projects for the transmission business, construction of a new Ontario Group control center in Orillia and Woodstock Operations Center. The corporation also made investments in distribution system connections and modernization of its assets, which would subsequently improve the company’s operations in the coming quarters. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms) potential. For the said purposes, we have considered peers like Fortis Inc, Enbridge Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 29.88 on February 4, 2021.

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

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