TransAlta Renewables Inc.

TransAlta Renewables Inc. (TSX: RNW) is a Canada-based company that owns a portfolio of renewable and natural gas power generation facilities and other infrastructure assets. The Company owns and operates approximately 13 hydro facilities, 20 wind farms and seven gas facilities.

Key highlights 

• Acquisition of 303 MW portfolio:Recently, the group announced that it had entered into definitive agreements to acquire three assets from TransAlta Corporation. This acquisition would be of 303 MW portfolio, including 274 MW of wind at a total price of CAD 439 million. This would enhance the group’s position in the renewables sector in both Canada and the US. The management believes that it would increases the average contracted life of the fleet from 10 years to 12 years, while annual EBITDA contribution of the assets to the Company is estimated at approximately CAD 45 million.

• The most significant player in the segment:Being a leading player in the generation of wind power, the company holds one of the largest wind portfolios in North America. Presently, the group has 100% power generation contracted with an average capacity weighted contract life of 11 years. The current pipeline under evaluation is of 2,000 MW.

Source: Company 

• Diversified assets base: The Company remains highly diversified with facilities that are fully contracted and located in various geographies. The group made its presence into almost all renewable segment, though wind and natural gas segments generate the most significant chunk of cash flows.

Source: Company

• Healthy dividend pay-out:The company has a healthy practice of dividend pay-out; this translates in an essential factor for regular income-seeking investors with a long-term horizon. During the current quarter, management announced a dividend of CAD 0.23 per common share. The dividend yield of 4.27% is decent looking at the current interest rate dynamics.

Source: Company 

Financial overview of Q3 2020 (In millions of CAD, except per share data)

Source: Company 

• The company’s renewable energy production increased by 158 GWh to 864 GWh in Q3 2020, compared to 706 GWh in the previous corresponding period. This change was mainly due to higher contribution from wind and hydro resource in Canada and higher production at US Wind and Solar plants.

• Comparable EBITDA reported by the company in Q3 2020, was of CAD 96 million, increased by CAD 10 million or 12% compared to CAD 89 million in Q3 2019.

• Adjusted funds from operations reported by the company in Q3 2020, was CAD 76 million, increased by CAD7 million or 10% compared to CAD 69 million in Q3 2019.

• The company reported Net earnings of CAD 6 million, decreased by CAD 18 million in Q3 2020, compared to CAD 24 million in the previous corresponding period, due to an increase in unrealized losses regarding the change in the fair value of financial assets. 

Risk associated with investment 

The company’s business activities are exposed to various risks and uncertainties such as regulatory changes, rapidly changing market dynamics and volatility in commodity prices, interruptions of production, supply chain disruptions, delays in growth projects, increased credit risk with counterparties, and foreign exchange volatility, etc. 

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The company's cash flows have been relatively unaffected in the quarter due to the high contractedness of various asset portfolios and customers' financial strength. At present, the company continue to have a strong balance sheet with ample liquidity of CAD 507 million to provide added flexibility during this time. We expect that the group would achieve the target of Comparable EBITDA in a range of CAD 445 million to CAD 475 million, and Adjusted funds from operations in a range of CAD 350 million to CAD 380 million for FY2020. Therefore, based on the above rationale and valuation, we have given a "HOLD" rating at the closing price of CAD 22.02 on January 28, 2021. We have considered Northland Power Inc, Innergex Renewable Energy Inc, Boralex Inc etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

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