TransAlta Renewables Inc. (TSX: RNW) is an electric utility company that owns and operates energy generation and transmission facilities. The operating business segments are Canadian Wind, Canadian Hydroelectric, and Canadian Gas. 

Key Highlights:

• Increased production capacity: During Q1FY22, the company reported an increase in the total production (renewable energy) to 1,310 GWh (Gigawatt hours) as compared to the total production (renewable energy) of 1,109 GWh in Q1FY21. The Canadian Wind saw an uptick in the production to 909 GWh during Q1FY22 vs 818 GWh in Q1FY21, and the increase was majorly attributable to the additional production from the Windrise wind facility, which was recently commissioned, and higher wind resources across the Canadian region which was partially offset by the outage at Kent Hill 1 & 2 wind facilities. The US Wind and Solar witnessed the production of 360 GWh against the production of 251 GWh in the pcp.

• Strong liquidity: The group reported an increase in its cash and cash equivalents to CAD 278 million during Q1FY22 against CAD 244 million in Q1FY21. Further, the free cash flow also increased by 9% to CAD 108 million in the same period (Q1FY22) when compared with the free cash flow of CAD 99 million in Q1FY21. The strong liquidity helps the company to meet its day-to-day operational expenses along with carrying out the expansionary plans as well.

• Brighter outlook: The management is optimistic considering the increasing demand for renewable energy and stated the total renewable energy production across the wind, solar and hydro assets clubbing those owned via economic interest to be in between 4,600 GWH and 5,200 GWh. The free cash flow is estimated to be in the range of CAD 345 million to CAD 385 million, adjusted EBITDA to be between CAD 485 million to CAD 525 million and the cash available for distribution is expected between CAD 245 million to CAD 285 million in FY22.

• Efficient debt management: In Q1FY22, the group is efficient in managing its debt by making principal and interest repayments and able to attaint lower debt ratios as compared to the industry median which is represented below.

Source: Refinitiv, Analysis by Kalkine Group

Risks associated with investment

The company is primarily exposed to the risk related to unfavorable climatic conditions, volatile commodity prices, regulatory changes, and other Environmental, Social, and Governance compliance. Further, the credit risks related to counterparties, liquidity risk, and shortage of labor, are other risks looming on the business. 

Financial overview of Q1FY22 (Expressed in millions of CAD)

Source: Company Filing 

• During Q1FY22, the company reported an increase in revenues to CAD 143 million against the revenue of CAD 126 million in Q1FY21. Canadian gas witnessed an increase in sales to CAD 69 million in the same period (Q1FY22) against CAD 54 million in Q1FY21. Further, the US wind and solar segment also reported higher revenue to CAD 31 million in Q1FY22 as compared to CAD 22 million in Q1FY21, pushing the overall sales higher.

• The gross margin stood at CAD 98 million during Q1FY22, which was in line with Q1FY21, on account of higher fuel, royalties, and other costs in Q1FY22, the impact of increased revenue was muted, preventing any uptick in the gross margins.

• The group reported a decrease in net income for Q1FY22 at CAD 41 million against CAD 53 million in Q1FY21.

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The group reported an increase in the revenue to CAD 143 million in Q1FY22 against the revenue of CAD 126 million in Q1FY21, and the adjusted EBITDA increased to CAD 139 million in the same period (Q1FY22) vs the adjusted EBITDA of CAD 123 million in Q1FY21. Recently the company declared a dividend of CAD 0.23 per share, bringing the dividend yield of the stock close to 5.4%, which is very much on the radar of the regular income-seeking investors. Further, the company gave a strong outlook in terms of the total production for FY22 to be between 4,600 GWh and 5,200 GWh and expects the free cash flow in the range of CAD 345 million to CAD 385 million in the FY22.  On the valuation front, the stock is measured on the EV/ Sales based multiple and we have considered Northland Power Inc., 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 on the stock of RNW at the last closing price of CAD 17.48 on June 3, 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 3, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

Disclaimer

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