TransAlta Renewables Inc. (TSX: RNW) is a Canada-based company who owns a diversified portfolio of renewable and natural gas power generation facilities and other infrastructure assets, located at different pasts of North America.

Key highlights 

• Started commercial operation: Recently, the company announced that its 206.4 MW Windrise wind plant entered into commercial operation. This is its tenth wind facility in Alberta and is the first project to reach commercial operation out of the eight projects awarded through the second and third rounds of the Alberta Electric System Operator’s Renewable Electricity Program. Moreover, the company expects an average annual EBITDA of CAD20-CAD22 million.

• An Income Play: On the last closing price, RNW shares are offering a lucrative income opportunity for the investors, with Dividend yield of 5.013%, amid times when investors are struggling to get 2% annually on investment grade bonds or fixed income securities. Together with higher yield, the company has track record of consistent dividend payment since IPO in 2013. Therefore, a high yielding stock, history of dividend payout and investment grade balance sheet, will keep RNW shares in the investor’s limelight especially for income seeking investors.

Source: REFINITIV, Analysis by Kalkine Group

• Acquired North Carolina Solar: The Corporation has purchased a 100% economic interest in a 122 MW portfolio of 20 operating solar PV facilities in North Carolina. The company's US Wind and Solar installed capacity has expanded from 397 MW to 519 MW as a result of this transaction. Furthermore, the project is estimated to generate annual EBITDA of CAD 9.0 million, which is a considerable benefit.

• Lower Balance Sheet risk: The group is relatively less leveraged compared to its peers, with Debt-to-Equity ratio of 0.41% as on September 30, 2021, whereas industry median stood at 2.67x implies that the company is using debt intelligently to avoid any balance sheet risk. Further, the company’s Net debt is ~11.77x of its EBITDA in the same period, whereas industry median Net Debt to EBITDA ratio stood at 23.94x, implies relatively strong debt protection metric.

Risks associated with investment

The company’s business activities expose them to a variety of risks and uncertainties including, increased regulatory changes, rapidly changing market dynamics, volatility in commodity markets, interest rate risk and forex risk as well. 

Financial overview of Q3 2021 (in millions of CAD)

Source: Company Filing 

• In Q3 2021, the company reported revenue of CAD 114 million was approximately 20% higher compared to CAD 95 million reported in the same quarter of previous financial year.
  

• The gross profit in the reported period made no change from previous corresponding period and stood at CAD 76 million, as the company witnessed higher fuel and royalty’s charges.
  

• On the back of higher asset impairment cost the company’s operating income shed to CAD 8 million against CAD 15 million in pcp.
  

• Net income stood at CAD 21 million compared to CAD 7 million in pcp. The rise in net income was mainly due to higher finance income from subsidiaries.
  

Valuation Methodology (Illustrative) EV to EBITDA Based

Analysis by Kalkine Group 

Stock recommendation

The company reported decent performance in Q3FY21, with revenue up 20% on a YoY basis, improved bottom line and higher cash flows from operations. Moreover, it made progress on strategy of fleet diversification and growth in the contracted cash flow profile with the closing of the North Carolina Solar acquisition. This project has expanded their solar footprint in the United States and adds a new high-quality customer in a region where the company see significant growth opportunities. Additionally, the project is expected to add USD 9 million in comparable EBITDA annually, which is a key positive. Furthermore, the company has a strong balance sheet and on top of all its share is delivering a healthy yield, which is encouraging looking at the current market dynamics. Therefore, based on the above rationales and valuation, we recommend a "Buy" rating at the closing price of CAD 18.75 as on December 31, 2021. 

*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 December 31, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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