Hydro One Limited

Hydro One Limited (TSX: H) is Ontario's largest electricity transmission and distribution provider which caters more than 1.4 million valued customers. Transmission accounts for roughly 60% of the company's rate base, with distribution accounting for the remainder.

The company would disclose its third-quarter FY20 results on November 06, 2020.

Q2FY20 Financial Highlights: Hydro One disclosed its second-quarter results, wherein the company posted revenue of CAD 1,670 million, increased significantly from CAD 1,413 million in the previous corresponding period (pcp). The increase was driven by decent growth from both transmission and distribution segments. Total operating maintained costs and administrative costs stood at CAD 270 million, slightly higher than CAD 267 million in pcp. The company’s total income before financing charges and taxes stood at CAD 379 million, as compared to CAD 272 million in Q2FY19, supported by improved profitability from the distribution segment. The company’s basic EPS grew considerably to CAD 1.84 per common share, as compared to CAD 0.26 per share in Q2FY19. Net cash from operating activities soared to CAD 375 million, from CAD 297 million in pcp. The company reported total capital investments of CAD 429 million, higher than CAD 370 million in Q2FY19.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Demand for electricity consumption can be impacted by numerous variables, including weather, changing economic conditions and conservation efforts etc. The above factors might take a toll on the company’s overall performance.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation: The stock of H has remained resilient in the recent past and appreciated ~13% and ~18% in the last six-months and one-year, respectively. Notably, the stock has closed above its 200-days simple moving average of CAD 26.53, indicating a bullish trend. During the quarter, distribution customer satisfaction score with residential and small business stood at 86%, reflecting a 2% increase over a year ago. The increase has been driven by improvements in time to restore power during outages and focusing on building and communicating programs to address customers' need, which is a key positive. The distribution and transmission segments performed exceedingly well in the recent past and were primarily responsible for the stellar quarterly growth. We expect the momentum to continue in the coming quarters, which is likely to drive the company’s overall business prospect. Further, the business comes under the ‘essential services’ and is immune to the economic cycles. Further, at the last traded price, the stock was offering a decent dividend yield of 3.4%. We have valued the stock using Price/CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered industry (Electric Utilities & IPPs) average on next twelve months (NTM) basis. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 29.55 on October 7, 2020.

H Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.