FTS Details

Medium-term Capital Plan to Aid Improved Business Prospects: Fortis Inc. (TO: FTS) is a leading company in North America which operates in the electric and gas utility industry. The group is focusing on a CAD18.8 billion five-year capital plan which is likely to result in an increased base from CAD28.0 billion in FY19 to ~CAD34.5 billion by FY22 and ~CAD38.4 billion by FY24. Recently, the company informed its completion of CAD 1.2 billion common equity offerings during the fourth quarter of FY19. The stock has generated a positive return of 7.08% in the last one year, amidst jitter situation across the global stock market.

Medium-term Business Snapshot: The company’s total asset base increased to CAD 53.4 billion in FY19 from CAD 47.9 billion in FY16. Net earnings attributable to common equity shareholders stood higher from CAD 963 million in FY17 to CAD1,655 million in FY19. The above growth indicates the company’s profitable organic growth strategy for its principal regulated utilities. Regulated utilities account for 99% of the company’s Assets.

FY19 Operational Highlights: For the period ended 31 December 2019, the company reported net earnings of CAD 1,655 million, increased from CAD 1,100 million in FY18, aided by a one-time gain on sale of the Waneta Expansion of CAD 484 million and a favorable tax-adjustment of CAD 83 million associated with prior period impacts. During the period, the company reported a capital expenditure of CAD 3.8 billion within the utility segment.

FY19 Financial Highlights (Source: Company Reports)

Outlook: For FY20, the company expects its long-term growth in rate base will result in  improved  growth in earnings and dividends. The company is focusing to deliver a dividend growth of 6% through FY24. Going forward, in addition to the company’s capital plan, the business emphasizes on cleaner energy along with innovative, sustainable and affordable investment in the electric and gas networks. Apart from these, the group is focusing on the expansion of LNG infrastructure in British Columbia; the fully permitted, cross border, Lake Erie connector electric transmission project in Ontario; and the acceleration of cleaner energy goals in Arizona.

Valuation Methodology: EV/EBITDA Based Relative Valuation

EV/EBITDA Based Relative Valuation (Source: Thomson Reuters)

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

Stock Recommendation: The stock of FTS closed at CAD 52.29 with a market capitalization of CAD 12.7 billion. The stock made a 52-week low and high of CAD 45.75 and CAD 59.28 and is currently trading close to the upper band of its 52-week’s trading range. With the broader market indices and a vast majority of sectors are in deep pain on account of concerns over coronavirus spreading; the utility sector stocks still managed to restrict downside to some extent and Fortis Inc stocks are no exception. Share of Fortis have relatively outperformed the broader indices of TSX by +16% in a month-over period, by +21% in the last 3-months and also it has relatively outperformed its industry peers over the same time period, which reflects a strong defensive characteristics of the company. Also, amid lowering interest yields on fixed income securities, shares of Fortis Inc offering a decent dividend yield of 3.65%, which is approximately 300 bps higher against the Canada 10-Year Bond Yield. The recent fall in the oil prices also going to positively impacts the group’s performance in near-term as the group is oil-intensive company and a lower oil regime will lower its costs as well and implies to higher profitability. The business is focusing on the base capital plan to seek additional energy infrastructure opportunities. We believe, on a mid to long term basis, the company  is well equipped to enhance its shareholder value through the proper execution of its capital plan. We have valued the stock using Price to Earnings based relative valuation method. For this, we have considered peers like Hydro One Ltd (TO: H), TC Energy Corp (TO: TRP), Algonquin Power & Utilities Corp (TO: AQN), etc., and arrived at a target price which is offering a double-digit upside (in % terms).  Hence, we give a ‘Buy’ recommendation on the stock at the closing price of CAD 52.29, down 10.59% as on 13^th March 2020.

BNS Daily Technical Chart (Source: Thomson Reuters)

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