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:

• Consistent dividend distribution: The company has a solid history of stable dividend payments backed by stable cash flows, which is impressive. Notably, in 9MFY21, the group distributed a total dividend of USD 9 million, higher than USD 186.4 million in pcp. The stock of AQN carries a dividend yield of ~ 4.746% on an annualized basis, which looks attractive considering the ongoing interest rate scenario.

Five year dividend distribution  (Source: REFINITIV)

• Acquisition of American Water Company, Inc.: Recently, the company confirmed the acquisition of New York American Water Company, Inc. from American Water Works Company, Inc. at a purchase consideration of ~USD 608 million. New York American Water is a regulated water and wastewater utility which has more than 125,000 customers across seven counties in southeastern New York. The company’s operations include ~1,270 miles of water mains and distribution lines, with 98% of customers in Nassau County on Long Island. This is expected to add value to the company’s operations on the long run.

• Impressive pipeline: The company derives a part 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. Moreover, to cater to the growing demand of the renewable segment, the company is working on constructing ~3,800 MW Wind and Solar projects along with ~1,700 MWh storage pipeline. The expected capital allocation is at ~USD 3.6 billion for the renewable segment and ~8.8 billion for the regulated segment, distributed for the next five years.

Source: Company Presentation

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

  Q3FY21 Financial Highlights:

Q3FY21 Income Statement Highlights (Source: Company Report)

• In Q3FY21, the company posted total revenues of USD 5 million, soared from USD 376.4 million in pcp. The growth was aided by strong momentum from both Regulated and non-regulated segments.

• Total expenses stood higher at USD 414.9 million, as compared to USD 281.2 million in pcp. The surge was primarily due to higher operating expenses, an increase in both regulated electric purchased and non-regulated energy purchased costs.

• Operating income stood higher at USD 113.6 million, as compared to USD 95.2 million in pcp, thanks to the higher revenues, partially offset by an increase in input costs.

• The group reported a net loss of USD 4 million, as compared to a net profit of USD 47.3 million in pcp. This decline is due to a higher loss from long-term investments of USD 114.2 million, as compared to USD 3.0 million in pcp.
  

 Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group 

Stock Recommendation:

At the end of Q3FY21, the company reported a higher cash balance of USD 190.8 million, as compared to USD 101.6 million in Q4FY20. The higher cash balance indicates a better liquidity profile and is a key positive. 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 etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of AQN at the closing price of CAD 18.10 on February 02, 2022.

One-Year Technical Price Chart (as on February 2, 2022). Source: REFINITIV, Analysis by Kalkine Group

  Technical Analysis Summary:

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

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