Emera Incorporated

Emera Incorporated (TSX: EMA) is a geographically diverse energy and services company investing in electricity generation, transmission, and distribution as well as gas transmission and utility energy services. 

Key Updates:

• An income Play: The company has a solid history of consistent dividend payment, backed by stable cash flows. Since 2020, the company recorded a CAGR of 6% in its DPS. Also, the company is likely to increase its dividend by 4%-5% in FY21 and FY 22. Moreover, the stock is offering a dividend yield of ~4.6%, which is decent considering the current interest rate dynamics.

Source: Company Presentation

• New Investment in renewable energy: The company has invested USD 850 million towards the installation of 600 MW of solar project, which is expected to complete by 2021. Moreover, the company would invest USD 850 million for the modernization of Tampa Electric, with the implementation of natural gas combined-cycle technology, which would eliminate coal the unit’s fuel. This would safeguard the interest in terms of economic, environmental risk and operational perspectives, which is a key positive. As the overall economy is moving towards clean sources of energy, the recent investments made by the group would generate fruitful returns in the near future.

FY20 Financial Highlights:

• EMA announced the full-year result, wherein the company posted total operating revenue of CAD 5,506 million v/s CAD 6,111 million. The decrease was primarily due to lower income from the regulated electric segment (CAD 4,442 million v/s CAD 4,769 million in FY19).
• Income from operations stood at CAD 1,147 million, lower than CAD 1,343 million in FY19. The decline was primarily due to a lower top line, partly offset by an increase in total operating expense (CAD 4,359 million v/s CAD 4,768 million in FY19). The period witnessed a decline in regulated fuel for generation and purchased power expense, lower operating, maintenance and general costs, and a slide in depreciation and amortization expense.
• Net income stood higher at CAD 984 million as compared to CAD 710 million in the previous year, primarily driven by an increase in other income.
• Cash and cash equivalents were recorded at CAD 220 million, while total assets were recorded at CAD 31,234 million.

FY20 Income Statement Highlights (Source: Company Report)

Risks: The company might be impacted by regulatory and political risk, which includes a change in regulatory frameworks, shifts in government policy, and regulatory decisions.

Valuation Methodology (Illustrative): P/CF based valuation

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

Stock Recommendation:

The business model is immune to the economic cycle and ~95% of the revenue is derived from the regulated segment, which assures stable cashflows. Moreover, the company expects its rate base to grow in the coming years, driven by the company’s prudent capital investments towards cleaner sources of energy.

Source: Company Presentation

We have valued the stock using the Price to CF based relative valuation method and have arrived at a higher-single-digit upside (in percentage terms). For the said purposes, we have considered peers like Hydro One Ltd, AltaGas Ltd and Canadian Utilities Ltd etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 55.87 on March 30, 2021.

One-Year Price Chart (as on March 30, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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