Stock’s detail

Efficient Organic Growth with Improved Balance Sheet: AltaGas Ltd (TO: ALA) owns and operates a diversified basket of energy infrastructure businesses, with four main segments including Midstream, power, utilities and corporate. The stock of AltaGas Ltd has fallen by 11.83% in the last one year.

Increased utilization and higher rate to drive growth: The management is expecting rate base to growth in the range of 8% to 10% annually over next for years. The higher rate base along with increased utilization of replacement programs and higher returns from rate case settlement to drive the Utilities segment in the near to medium term. In addition to this, the full year contribution of RIPET and volume growth at other facilities is expected to support the growth in midstream segment. A higher margin from the US storage and transportation would further add strength to the segment. The group expect a higher contribution from its core business in the coming years and due to lower leverage, interest expenses are expected to on the lower side. Hence, the management expect its normalized EPS to fall in the range of CAD 1.20 to CA 1.30 per share. The company expects to fund its capital investments through significant embedded growth and current financial capacity; however, the company doesn’t expect to raise common equity in the near term.

Strong Fourth Quarter with Decent Increase in Normalized EBITDA: The fourth quarter is seasonally a strong quarter. During the period, the company has reported an increase of 26% in Normalized EBITDA to $425 million. Factors positively impacting the results include contributions from RIPET, Petrogas, Washington gas and higher margins from the retail gas and power marketing businesses. The normalized funds from operations stood at $332 million for the fourth quarter. In the same time span, normalized net income of the company went up by 55% on YoY basis to $186 million. The company is prioritizing to enhance the business through asset optimization and operational efficiencies.

Quarterly Financial Highlights (Source: Company Reports)

Valuation Methodology: EV/EBITDA Multiple Approach

EV/EBITDA Multiple Based Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per TSX, the stock of ALA is trading at CAD15.65, down by 6.39% on March 11, 2020, close to its 52-weeks’ low level of CAD15.44, proffering a decent opportunity for accumulation. We have valued the stock using EV/EBITDA relative valuation approach and have arrived at a target price offering an upside of lower double-digit (in percentage terms). For the said purposes, we have considered TransAlta Corp, Innergex Renewable Energy Inc, etc. as peers. The company is well-positioned for growth and has a disciplined capital allocation. During the past year, the company reduced its costs and has delivered improved customer experience. Hence, we recommend a “Buy” rating on the stock at the closing market price of CAD15.65, down by 6.39% on March 11, 2020.

1-Year daily price chart (as on March 11, 2020). Source: Thomson Reuters

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