Hydro One Ltd

Hydro One Ltd (TSX: H) is a Canada-based electricity transmission and distribution service provider. They distribute electricity across Ontario to nearly 1.4 million predominantly rural customers, or approximately 26% of the total number of customers in Ontario. The Company’s segments include Transmission, Distribution and Other.

Key highlights

• An Income play:The Company has a solid track record of consistent dividend payment, backed by stable cash flows. Recently, the company declared a quarterly cash dividend of CAD 0.2663 per share to be paid on June 30, 2021. Moreover, at the last closing price (on May 28, 2021), the stock was offering a dividend yield of 3.4%, which looks impressive considering the current economic scenario and interest rates.
• Request made by an Independent Electricity System Operator (IESO): Recently, the Company was requested by the “IESO” to build a 230-kilovolt double circuit transmission line between Chatham and Lambton to provide electricity in support of agricultural growth in the Windsor-Essex and Chatham areas. The IESO is expecting the agricultural electricity demand in the region to grow from 500 MW today to about 2,000 MW by 2035. If approved by the OEB, the line would be in service by 2028.
• Steady cash from operating activities: The company posted stable cash from operating activities in Q1 2021, which stood at CAD 517 million, against CAD 548 million in the previous corresponding period.
• Healthy liquidity: The company is maintaining healthy liquidity. On March 31, 2021, Hydro One Inc. had CAD 815 million in commercial paper borrowings, in addition, the Company has revolving bank credit facilities with a total availability balance of CAD 2,550 million. The Company's available liquidity is also expected to be sufficient to address any reasonably foreseeable impacts.

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company posted revenues of CAD 1,811 million, against CAD 1,850 million in the previous corresponding period. The drop in revenue was mainly due to lower performance from distribution segment which registered a degrowth of 5.9%.
• The group posted higher Income before financing charges and income tax expense at CAD 412 million in the reported period, against CAD 366 million in pcp. The increase was primarily due to lower expenditures.
• Net Income in Q1 2021, stood at CAD 270 million, increased by CAD 38 million, against CAD 232 million in pcp. The increase in Net Income was primarily due to lower expenses. 

Risks associated with investment

The company is exposed to many risk factors which alone or in a cumulative manner can affect the company’s operations and financial health. Some of the risks are like the supply of and demand for energy, adverse weather conditions, falling approved rates might lead to lower-income, inflation, interest rates, etc. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation: We believe the company would post much better numbers in the upcoming period supported by the revival in the economy, which has started generating the demand in the energy sector. Furthermore, recently the Company was requested by the “IESO” to build a 230-kilovolt double circuit transmission line, is key positive. The company continued to distribute dividend amid a challenging operating environment, on top of this the stock is delivering healthy yield of more than 3%, which looks decent from an investor’s point of view. Therefore, based on the above rationales and valuation, we recommend a “Hold” rating at the closing price of CAD 30.74 as on May 28, 2021. We have considered Emera Inc, Canadian Utilities Ltd, Fortis Inc etc. as the peer group for the comparison.

One-Year Technical Price Chart (as on May 28, 2021). Analysis by Kalkine Group

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

Disclaimer

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