Algonquin Power & Utilities Corp.

Algonquin Power & Utilities Corp. (TSX: AQN) operates in the generation, transmission, and distribution utility across the North America region. Within its distribution group, it owns and operates regulated water, natural gas, and electricity distribution utilities in the United States.

Key Updates:

• Stable dividend distribution: Historically, the corporation reported a consistent dividend payment backed by stable cash flows, which is impressive. Notably, in 9MFY21, the group distributed a total dividend of USD 928 million, higher than USD 186.415 million in pcp. The stock of AQN carries a dividend yield of ~ 4.710% on an annualized basis, which looks attractive considering the ongoing interest rate scenario.

Five years dividend distribution (Source: Refinitiv)

• Acquisition of Kentucky Power Company: During Q3FY21, the group successfully acquired Kentucky Power, which provides utility distribution and transmission to more than twenty eastern Kentucky counties. The above has an active customer connection of ~228,000, which is expected to add more than USD 2.0 billion of regulated rate base assets to the company.
  

• Positive macro scenario: The company derives the majority of its income from the renewable sector, and due to the recent lower carbon emission norm, the developed nations are leaning towards renewable energy sources. The long-term demand of the renewable utility segment remains bright, and the group is highly poised to take advantage of the growing demand. Moreover, AQN has a diversified revenue stream and operates through segments like hydroelectric, wind, solar, and thermal facilities, which indicates lower dependence on one segment and ensures a balanced revenue profile

Q3FY21 Financial Highlights:

• AQN announces its quarterly result, wherein the company posted its top line of USD 575 million, jumped from USD 376.481 million in pcp, supported by strong momentum from both Regulated and non-regulated segments.

• Total expenses increased at USD 414.907 million, as compared to USD 281.239 million in pcp. The surge was primarily due to higher operating expenses, an increase in regulated electric purchased and an increase in non-regulated energy purchased.

• Operating income stood higher at USD 113.668 million, as compared to USD 95.242 million in pcp, thanks to the higher revenues, partially offset by an increase in input costs.

• The group reported a net loss of USD 421 million, as compared to a net profit of USD 47.322 million in pcp. This decline is due to an extended loss from long-term investments as compared to the previous year (USD 114.242 million v/s USD 3.067 million in pcp).

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: Due to the capital-intensive in nature of the business, AQN witnessed a constant surge in its total debt in the recent quarters. Continuation of the above trend might drag the company’s financial flexibility. 

Valuation Methodology (Illustrative): EV to Sales based

Stock Recommendation:

 More than 81% of the electrical output is sold through the long-term contractual arrangements, with an average remaining contract life of almost thirteen years. The above is impressive as it indicates revenue stability and would subsequently support the company’s cash flows.

We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Fortis Inc, Ameren Corp and Emera Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of AQN at the last traded price of CAD 18.24 on December 21, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary:

One-Year Technical Price Chart (as on December 21, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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