Atco Ltd

Atco Ltd (TSX: ACO.X) is a Canada-based holding company offering infrastructure solutions to customers worldwide. Atco's primary segments include Structures and Logistics; Utilities (Electricity and Natural Gas); Energy Infrastructure; Neltume Ports and Corporate and Other. It generates maximum revenue from the Utilities segment.

Key highlights

• An Income play:The Company has an excellent track record of dividend distribution and has increased its distribution over the years, reflecting business resilience and healthy cash flow generation. Recently, it declared a quarterly dividend of CAD 0.4483 per share payable on June 30, 2021.  Moreover, at the last closing price, the stock was offering a dividend yield of ~4.1%, which is decent considering the current interest rate environment.

Source: Company

• Building Australia's first commercial hydrogen plant: The Australian Renewable Energy Agency (ARENA) has announced that Atco’s company's proposed Clean Energy Innovation Park (CEIP) would receive AUS$28.7 million in financing to assist the production of hydrogen on a massive scale, providing clean fuel for the country's natural gas networks. A 10MW electrolyser and facility capable of producing up to four tons of hydrogen per day and storage and distribution to gas network injection sites will be included in the CEIP.

• Started operating Puerto Rico's electricity system: According to the company, LUMA Energy LLC (LUMA) has begun a 15-year contract to update and run Puerto Rico's power transmission and distribution infrastructure. The LUMA potential aligns with ATCO's long-term global vital services strategy of expanding its business in the United States and Latin America. LUMA is 50% owned by Canadian Utilities, an ATCO Company, and 50% owned by Quanta Services.

• Strong financial performance: The company reported decent performance in the Q1 2021, where revenue increased by 1.5% to CAD 1,072 million, against CAD 1,056 million in the previous corresponding period, while adjusted earnings improved by 12.3% to CAD 119 million against CAD 106 million in pcp.

Financial overview of Q1 2021

Source: Company 

• The Company posted revenues of CAD 1,072 million in Q1 2021, against CAD 1,056 million in the previous corresponding period. Higher revenues were mainly due to improved performance at ATCO energy resulting from higher electricity and natural gas commodity prices and customer growth.
• On the back of slightly increased cost and expenses, the company posted lower operating profit of CAD 308 million, compared to 336 million in the previous corresponding period, partially offset by higher earnings from investment in joint ventures.
• Net earnings for the reported period stood at CAD 161 million, against 174 million in Q1 2021, due to above stated reasons, partially supported by lower tax expense.

Risks associated with investment

The Company is under various market risks in the ordinary course of operations that could impact its earnings and cash flows. Some important risk factors include lower demand, lower production, adverse weather conditions etc. Foreign currency volatility risk is also associated with the Company as Company is present in many geographies. 

Valuation Methodology (Illustrative): Price to Earnings

Stock recommendation

The Company reported strong Q1 2021 results, which despite the challenges presented by the COVID-19 pandemic, reflect year-over-year growth in its key financial metrics. The utility segment is likely to remain stable in the coming quarters, as the sector is categorized under "essentials" and the business expects to benefit from the improving realization prices. The company has a concrete financial strength, with a cash of approximately CAD 1,147 million as on March 31,2021, along with an unused credit facility of CAD 2,565 million. Furthermore, the industry-beating margins profile of the company reflect the resilience of the business. Also, the company is offering a decent dividend yield amid a low interest rate environment. This is an essential factor for regular income-seeking investors with a long-term horizon. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 43.72 as on June 03, 2021. We have considered Emera Inc, TC Energy Corp, Fortis Inc, etc. as a peer group for the comparison.

One-Year Technical Price Chart (as on June 03, 2021). Analysis by Kalkine Group

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

Disclaimer

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