Innergex Renewable Energy Inc. (TSX: INE) is an independent Canadian renewable power producer that develops, acquires, owns, and operates hydroelectric, wind, and solar facilities in Canada, the United States, France, and Chile.

Key Highlights

• Long-term PPA agreements: INE has one of the largest average contract durations within the renewable sector, with an average of 14.2 years of remaining power purchase agreement (PPA) terms. The above indicates strong revenue visibility and would subsequently provide income stability.

Source: Company Presentation

• Acquisition of Curtis Palmer hydro assets to support upcoming performance: The company recently signed a Purchase Agreement with Hydro-Québec to buy the 60 MW Curtis Palmer run-of-river hydro portfolio in New York State, which includes Curtis Mills (12 MW) and Palmer Falls (48 MW). Through the end of the PPA, the aforementioned is estimated to provide an average annual Adjusted EBITDA of CAD 54.1 million and an average annual Free Cash Flow of CAD 50.3 million.

• The strong development pipeline for long-term growth: The company has a vigorous development pipeline permitting a few chances in the years to come, with 9 projects for a total of 696 MW installed capacity, currently at an advanced stage. By 2023 the organization would be expanding its ability by 4010 MW. In the wake of considering the forthcoming tasks of MW 7,281, it would be 11,281 MW.

Source: Company Presentation

• An income play: The company has a strong history of consistent dividend payment, backed by stable cash flows. During 9MFY21, the company paid a total dividend to its common and preferred shares holders of CAD 95.5 million, higher than CAD 85.6 million in pcp. The above is impressive as most of the companies are lowering its dividend distribution in order to retain their liquidity. Notably, the INE stock carries an impressive dividend yield of ~3.87% on an annualized basis, which looks attractive considering the ongoing interest rate scenario.

Risks associated with investment 

The company is exposed to various market risks in the ordinary course of operations that could impact its earnings and cash flows. Some important risk factors are lower demand, lower production, adverse weather conditions etc. There is also a risk that its contract counterparties could fail to meet their obligations.

Financial overview of Q3 2021 (In 000 of CAD)

Source: Company Filing

• In Q3 2021, the company posted revenue of CAD 184.5 million higher against CAD 162.6 million in pcp. The growth was supported by an increase in revenues mainly attributable to the acquisition of the remaining 50% interest in Energía Llaima, which was included in the Innergex's consolidated revenues.
• Notably, the company reported a higher production of 2,290,086 MWh in Q3FY21, as compared to 2,021,559 MWh in pcp. the above was supported by above-average wind regimes at the Griffin Trail facility in the United States.
• The quarter witnessed an increase in operating costs and higher costs related to prospective projects, partially offset by lower general & administrative expenses. Adjusted EBITDA stood at CAD 122.5 million, grew from CAD 108.5 million in pcp.
• At the end of Q3FY21, the company reported a net loss of CAD 23.4 million against a net profit of CAD 7.4 million in Q3FY20, primarily due to an inclusion of asset impairment amounting CAD 30.6 million coupled with higher finance costs.
  

Valuation Methodology (Illustrative) EV to Sales

Analysis by Kalkine Group 

Stock recommendation 

The company is in the power generation business, which is immune to business cycles because it is classified as a need. It also holds a strong financial position. In addition, by acquiring the remaining stakes in Energa Llaima as well as three hydro plants, Innergex is securing high-quality, long-life assets that will create immediate cash flows. Furthermore, the company has a strong development pipeline that will grow its net installed capacity, which is a significant plus as it will help to generate more free cash flows over time. Therefore, based on the above rationales and valuation, we recommend a “Buy” rating at the current market price of CAD 18.19 at 10.00 am Toronto time as on January 04, 2022.

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

Technical Summary Analysis

1-Year Price Chart (as on January 04, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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