TransAlta Renewables Inc.

TransAlta Renewables Inc. (TSX: RNW) is an electric utility company that owns and operates energy generation and transmission facilities. The operating business segments are Canadian Wind, Canadian Hydroelectric, and Canadian Gas.

Key Updates:

• An income Play: The company has a decent track record of dividend distribution, which indicates a stable income and cash flow from the company’s business, along with operational resiliency. Since FY13 to FY19, the group has reported a 4% CAGR in its annual dividend. At the last closing price, the stock of RNW was offering a dividend yield of ~5.17%, which is lucrative considering the current interest rate environment.               

Dividend History (Source: Company Presentation)

• 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% of generation contracted with an average capacity weighted contract life of 11 years. The group has added five wind farms and a solar farm in the US over the last five years, 1+ GW of US wind projects in the development pipeline. The current pipeline under evaluation is of 2,000 MW.

Source: Company Presentation

Q3FY20 Financial Highlights:

• RNW announced its quarterly results, wherein the company posted CAD 95 million, improved from CAD 89 million in the previous corresponding period (pcp). The increase in the revenue was supported by higher renewable energy production at 864 GWh, higher than 706 GWh in pcp.
• Gross margin stood higher at CAD 76 million, higher than CAD 72 million in Q3FY19, thanks to the improved revenue, partially offset by higher fuel, royalties and other costs (CAD 19 million versus CAD 17 million in pcp.).
• Operating income soared to CAD 15 million, from CAD 9 million, a year ago, supported by lower depreciation and amortization (CAD 34 million versus CAD 38 million in Q3FY19), partially offset by higher operations, maintenance and administration costs (CAD 23 million versus CAD 20 million in pcp).
• The group reported net earnings of CAD 7 million, plunged from CAD 25 million in Q3FY19. The decline was primarily due to loss from change in fair value of financial assets amounting CAD 13 million, as compared to a gain of CAD 27 million a year ago.
• Adjusted funds from operations reported by the company in Q3 2020, was CAD76 million, increased by CAD7 million or 10% compared to CAD69 million in Q3 2019.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company’s operations can be hindered by regulatory changes, volatility in commodity prices and currency fluctuations etc.

Valuation Methodology (Illustrative): Price to Earnings

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock Recommendation: The stock of RNW appreciated ~26% and ~44% in the last six months and nine months, respectively. The company expects its comparable FY20 EBITDA within the range of CAD 445 million to CAD 475 million, while adjusted funds from operations are  expected in between CAD 350 million to CAD 380 million. RNW expects its cash available for distribution of around CAD 300 million to CAD 330 million, higher than CAD 293 million in FY19. The future growth of the company is based on renewables segments, which has a product pipeline of 2000 mw, and we expect higher demand from the US corporate and institutional market. We have valued the stock using Price to Earnings based relative valuation approach and arrived at a target price offering single-digit upside side potential (in % terms). We have considered peers like Capital Power Corp, Algonquin Power & Utilities Corp etc. Considering the above-mentioned facts, current stock price movement, we have given a ‘Hold’ rating on the stock at the current closing price of CAD 18.18 on December 14, 2020.

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

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