Northland Power Inc

Northland Power Inc (TSX: NPI) provides power-producing facilities which generate electricity from natural gas or use renewable sources, such as wind and solar power.

Key Highlights:

• Strong Financial metrics: The company has delivered a strong EBITDA and cash flow growth during the last five years, which is a key positive and indicates customer addition supported by expanded footprint across new projects.                  

Financial Metrics (Source: Company Presentations)

• Constant Dividend Payment: The company has paid a constant dividend to its shareholders since 1997, which is a key positive and indicates operational resiliency and stable cash flows. The company has a diversified portfolio and generates income from gas & biomass, offshore wind, onshore winds and solar, which is impressive.

Dividend History (Source: Company Presentation)

Q3FY20 Financial Highlights:

• NPI announced its quarterly results, wherein the company posted sales of CAD 470.867 million, as compared to CAD 378.437 million in the previous corresponding period (pcp). The increase was driven by higher income from electricity and related products (CAD 413.383 million versus CAD 369.537 million in pcp), along with an inclusion of additional income from regulated electricity segments.
• The company’s gross profit soared to CAD 418.403 million, higher from CAD 355.945 million in pcp, primarily attributed to a higher income, partially offset by a higher cost of sales.
• Total expenses stood higher at CAD 242.668 million, as compared to CAD 182.853 million in Q3FY19, due to a higher operating cost, increase in depreciation of property, plant and equipment.
• Operating income stood higher at CAD 179.477 million, as compared to CAD 176.900 million in pcp.
• Net income stood marginally lower at CAD 108.964 million, as compared to CAD 110.621 million, a year ago.
• The company reported cash and cash equivalent of CAD 487.040 million, while total assets stood at CAD 11,559.813 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company’s operations may impact due to adverse weather conditions, fall in electricity prices etc. Moreover, a continuation of the elevated debt-component might lead to higher finance costs, which would affect profitability.

Valuation Methodology (Illustrative): P/CF based valuation

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

Stock Recommendation:  The company expects its FY20 Adjusted EBITDA within the range of CAD 1.1 billion to CAD 1.2 billion, while free cash flow per share is expected within CAD 1.60 to CAD 1.70, looks impressive. The company has impressive liquidity of CAD 1 billion, which seems sufficient to withstand the current challenging operating environment. The company is focusing on optimizing its existing assets and secure new revenue streams in order to improve its profitability. The company would enhance its presence within integrate energy marketing, which would provide greater margins by bringing in-house gas and electricity services. We have valued the stock using P/CF based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered industry (utilities) median on NTM basis. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 44.33 on December 7, 2020.

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

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