One Mid-Cap Utility Stock to Hold – NPI

Northland Power Inc. (TSX: NPI) is a Canada-based power producer focused on developing, building, owning, and operating clean and green power infrastructure assets in Canada, Europe, and other selected global jurisdictions.

 Key Highlights

• Prioritizing on clean energy: Due to the recent government policy of de-carbonization, the demand for renewable energy is likely to grow in the coming years. Most of the developed nations are leaning towards clean sources of energy, which provides ample room for expansion, and the company is highly poised to take advantage of it.
  

• Increase in cash flows: The company reported a higher cash from operations of CAD 1,609.2 million in FY21, compared to CAD 1,321.6 million in FY20. A higher cash flows indicates improved liquidity position.
  

• Strong profitability margins: The group exhibits higher profit margins than the industry median, which indicates higher operational efficiencies. Notably, in FY21, NPI reported its gross margin of 89.8%, versus an industry median of 74.1%. Moreover, the company posted an operating margin of 36.1% against 22.7%, it also recorded healthy net margin of 12.9%.

      Source: REFINITIV, Analysis by Kalkine Group

• Update on ‘At-the-market equity program’: On March 01, 2022, the company established an at-the-market equity program that allows the Company to issue up to CAD 500,000,000 of common shares from treasury to the investors. The transaction would be done through the Toronto Stock Exchange. This “ATM” Program provides Northland with additional financing flexibility to fund its growth initiatives.
  

Risks Associated with investment 

The company’s business activities are exposed to various risks and uncertainties such as regulatory changes, rapidly changing market dynamics and volatility in commodity prices, interruptions of production, delays in growth projects, increased credit risk with counterparties, and adverse weather conditions, to name a few.

Financial overview of FY 2021

Source: Company Filing

• NPI announces its FY21 results, wherein the company reported total sales of CAD 2,093.2 million, slightly higher than CAD 2,060.6 million in FY20.
• Gross profit stood higher at CAD 1,879.7 million, compared to CAD 1,858.2 million, supported by higher income, partially offset by higher cost of sales.
• Total expenses increased to CAD 1,085.9 million from CAD 973.3 million in FY20. Operating income slide to CAD 808.6 million from CAD 900.2 million in FY20, due to higher expenses, partially offset by lower finance income.
• The company reported its net income of CAD 269.8 million, as compared to CAD 485.0 million in FY20. The decline was primarily due to the above-mentioned reasons, coupled with a fair value loss amounting to CAD 116.6 million and an inclusion of impairment charges amounting CAD 29.9 million.

Valuation Methodology (Illustrative): Price to Cash Flow based

Analysis by Kalkine Group

Stock Recommendation

Last year the company made significant progress on three key strategic priorities: securing near-term growth, advancing its large offshore wind pipeline and pursuing a diverse range of sources to fund this growth. The immediate benefit of this is seen in its FY2021 financial results as strong contributions from the Spanish portfolio and EBSA helped offset an anomalously low wind resource at our North Sea offshore wind facilities. Furthermore, for FY2022, the company expects its Adjusted EBITDA in between CAD 1.15 billion to CAD 1.25 billion, while its Free Cash Flow is expected within the range of CAD 1.20 to CAD 1.40 per share. The stock is also carrying a dividend yield of 2.886% on an annualized basis, which looks decent considering the ongoing interest rate scenario.

Therefore, based on the above rationales and valuation, we recommend a “Hold” rating at the last closing price of CAD 41.58 as on March 22, 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 March 22, 2022). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

Kalkine New Zealand Limited is authorised to provide general advice only. The information on this website does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.