Atco Ltd

Atco Ltd. (TSX: ACO.X) is a Canadian holding company that offers gas, electric, and infrastructure solutions, while the company’s primary segments include electricity generation, transmission, and distribution.

Key Highlights:

• Stable dividend payment: The company has a solid history of regular dividend payment, backed by stable cash flow generation, which is a key positive. Notably, the stock carries a dividend yield of ~4.4%, which is decent considering the current interest rate scenario.                             

Source: Company Presentation

• Completion of Landmark Solar Project: Recently, the company completed one of the Canada's promising off-grid solar project which is expected to reduce diesel fuel consumption by ~189,000 litres per year, which would support the company’s cost center. The above project was done with the collaboration with Vuntut Gwitchin First Nation, wherein the later would serve as the Independent Power Producer, owner and operator of the solar facility, while Atco Ltd. Would purchase the solar electricity generated for the next 25 years.
• Bullish outlook from integrated water services and gas storage segments: The company also provide integrated water services, including pipeline transportation, storage, water treatment, recycling and disposal to its industrial customers. The above facilities are strategically located near Alberta and the Northwest Territories, which is expected to offer ample opportunity for the company, and we believe ACO.X is highly poised to utilize the above opportunity.
• Change in Management: Recently, the company announced the appointment of Norman M. Steinberg to the Board of Directors, effective from September 1, 2021.

Q2FY21 Financial Highlights:

• The company announced its full-year result, wherein the company posted revenues of CAD 970 million, improved from CAD 938 million in Q2FY20.
• The company reported an increase in salaries, wages & benefits and higher Energy transmission and transportation, depreciation, amortization and impairment costs, partially supported by slightly lower materials & consumable expense and marginally lower plant & equipment maintenance expenses. Total cost and expenses stood at CAD 842 million compared to CAD 717 million in pcp.
• Operating profit stood at CAD 137 million, down from CAD 226 million in Q2FY20, due to an increase in total costs.
• Earnings for the period stood at CAD 26 million, significantly lower than CAD 89 million in Q2FY20.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks:  The company’s operations might be hindered due to a rise in maintenance costs coupled with a surge in energy transmission and transportation expenses. The company reported lower earnings from structures and logistics segment driven by lower workforce housing trade sale activity in Canada, Australia and the United States (US). Continuation of the above trend would dampen the overall performance of the group.

Valuation Methodology (Illustrative): EV to EBITDA  

Stock Recommendation:

At the end of Q2FY21, the company reported available liquidity of CAD 2,597 million, which seems to be sufficient to fund its working capital and capital investment requirements. Moreover, Funds generated by operations came at CAD 414 million in Q2FY21, which is CAD 36 million higher than the previous year. The increase was mainly due to higher customer contributions for Canadian Utilities' Electricity Transmission and International Natural Gas Distribution capital investments. We have valued the stock using the EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Fortis Inc, Capital Power Corp and TransAlta Corp. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 40.76 on September 20, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on September 20, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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