TransAlta Renewables Inc. (TSX: RNW) is a Canadian-based company, which is actively engaged in operating renewable power generation facilities. Its key operating business segments are Canadian Wind, Canadian Hydroelectric, and Canadian Gas.

Key highlights

• Increased production capacity: The company reported an increase in its Gross installed capacity in FY21 at 2,996 MW (Megawatts) which is much higher than the gross installed capacity in FY20 at 2,565. The majority of the increase is from the acquisitions, which scaled the Wind & Solar gross installed capacity to 1,387 MW in FY21 vs the gross installed capacity of 1,174 MW FY20.

• Improved profitability margin sequentially: During Q4FY21 the EBITDA margins stood at 51.4% vs the EBITDA margin of 45.6% in the previous quarter. The group scaled its operating margins to 10.9% for Q4FY21 as compared to 7.0% in Q3FY21. The net margin also inched higher to 28.3% during the reported period vs 18.4% in Q3FY21.

Source: Refinitiv, Analysis by Kalkine Group

• Consistent dividend declaration: The group declared the total dividend of CAD 0.94 per common share during FY21, with a payout ratio of 91% (higher than the 83% payout ratio in FY20).
  

• Strong outlook: The group reported a strong outlook for the FY22, wherein the Adjusted EBITDA is estimated to increase in the range of CAD 485 million to CAD 525 million, reflecting an increase of 9% from the midpoint of 2021 on account of the commercial operations of Windrise wind farm, which commenced in November 2021 and the acquisition of the North Carolina Solar farm. Further, the Cash available for distribution is estimated to be in the range of CAD 245 million to CAD 285 million.
  

Risks associated with investment

The group is majorly 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 FY21 (Expressed in millions of CAD)

 Source: Company Filing 

• The company reported an increase in its total revenues to CAD 470 million for the FY21 as compared to CAD 436 million in the previous comparable period.

• The gross margin declined to CAD 338 million for the reported period on account of higher input costs such as fuel and increased royalty and other charges, as compared to the gross margin of CAD 359 million in the pcp.

• The operating income declined to CAD 69 million in the FY21 vs CAD 125 million in the FY20. The decline was majorly attributed to the higher Operational costs which increased to CAD 94 million in FY21 vs CAD 89 million and higher depreciation and amortization costs which rose to CAD 150 million in the reported period vs CAD 135 million in the FY20.

• For FY21 the company reported higher net earnings at CAD 139 million vs CAD 97 million in the pcp. During FY21 the group reported higher finance income related to its subsidiaries of CAD 108 million, which pushed the net income to a higher side.
  

 Valuation Methodology (Illustrative): EV to EBITDA value-based Multiple

Analysis by Kalkine Group 

Stock recommendation

The company reported an increase in its renewable gross installed capacity to 2,018 MW in FY21 which is much higher than the 1,616 MW in FY20, and the gas installed capacity increased to 978 MW for the FY21, higher than 949 MW in FY20. The group also witnessed an increase in its EBIT to CAD 150 million in FY21, which is higher than 23% of the EBIT during FY20. The stronger outlook and the consistent dividend declaration with 91% payout ratio are also key positives for the company. On the valuation front, the stock is measured on the EV to EBITDA values-based multiple and we have considered Northland Power Inc, Boralex Inc, 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 19.09 on April 7, 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 April 7, 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.