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 Updates:

• Attractive dividend yield: The stock of RNW carries an annualized dividend yield of ~5.529%, which looks attractive considering the persisting interest rate scenario. Moreover, the company paid a total dividend of CAD 187 million in 9MFY21, higher than CAD 162 million in pcp. Notably, since 2013 to 2020, the company reported a ~3% annualize growth in its dividend distribution, which looks impressive.

Source: Company Report

• Surge in cash flows: The company reported a stable growth in its cash flows of CAD 265 million, in 9MFY21, higher than CAD 218 million in pcp, supported by higher net earnings. This is impressive and is expected to boost the company’s liquidity.
  

• Focusing on the renewable segment: Due to the recent shift in consumer’s preference towards the renewable sources, the company is expanding its operations under the renewable segment. Notably, during the last five years, the company added five wind farms and a solar farm in the U.S. and is looking to enhance its corporate power purchase agreements (PPA) market. Notably, the company has a strong project pipeline of ~2,000 MW in the renewable segment, which is likely to support the upcoming performance.
  

Risks:  

Unforeseen weather conditions are likely to hamper the company’s operation while the company generates its income other than USA, and the performance of the company might be impacted due to currency volatility.

Q3FY21 Financial Highlights:

Q3FY21 Income Statement Highlights (Source: Company Report) 

• In Q3FY21, RNW posted its total revenue at CAD 114 million, as compared to CAD 95 million in Q3FY20. The quarter was marked by total renewable energy production 1,051 GWh, as compared to 1,098 GWh in pcp.
• The quarter was marked by higher Fuel, royalties and other costs (CAD 38 million v/s CAD 19 million in pcp), increase in asset impairment expense (CAD 10 million v/s CAD 2 million in pcp), partially offset by slight lower operations, maintenance and administration costs (CAD 22 million v/s CAD 23 million in pcp).
• The group reported its operating income at CAD 8 million, which declined from CAD 15 million in Q3FY20.
• Net earnings were reported at CAD 21 million, as compared to CAD 7 million in pcp. This growth was primarily due to a change in fair value of financial assets of CAD 13 million reported in the previous corresponding period coupled with marginally lower interest expense.

Valuation Methodology (Illustrative): Price to CF based

Analysis by Kalkine Group

Stock Recommendation:

The company reported lower net debt to EBITDA of 11.77x, as compared to the industry median of 23.94x, which indicates better debt protection metrics, and is a key positive. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Brookfield Renewable Partners LP, Innergex Renewable Energy Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last traded price of CAD 17.00 on February 04, 2022.

One-Year Technical Price Chart (as on February 04, 2022). Source: REFINITIV, Analysis by Kalkine Group 

 Technical Analysis Summary:

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

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