Canadian Utilities Ltd

Canadian Utilities Ltd (TSX: CU) is a Calgary-based multiline utility company, which operates in a diversified global market. The corporation business division includes Electricity, Pipelines & Liquids, and Retail Energy.

Key Highlights:

• An Income Play: The company has an impressive track record of consistent dividend payment, backed by a resilient business model. Notably, the group paid CAD 120 million of dividend to its equity shareholders in Q1FY21, at par with CAD 119 million in pcp. Moreover, at the last closing price, the stock was carrying a dividend yield of ~5.022%, which is lucrative considering the current interest rate scenario.                                     

Source: Company Presentation

• Ample Liquidity to support future operations: The company has a strong liquidity level of CAD 3,057 million. Moreover, the group has healthy cash flows and reported cash from operations of CAD 511 million in Q1FY21, up from CAD 489 million in Q1FY20. The current liquidity level seems to be sufficient to cater to the working capital and capital investments needs.

• Commencement of 15-year contract: The group reported the commencement of a 15-year contract, which includes modernizing and operating Puerto Rico's electricity transmission and distribution system. The above constitutes a 30,000-km electricity system, which was damaged by natural calamity during 2017. As per the plan of action, the group is likely to strengthen customer service and reliability and would help Rico to transform the island's electric power system. The above is in line with the long term opportunity of enhancing its presence across the United States and Latin America. The group will be conducting the above operations through its subsidiary LUMA in which the company has 50% of controlling stake.

Q1FY21 Financial Highlights:

• CU announces its quarterly result, wherein the company posted revenue CAD 907 million, higher than CAD 885 million in the previous corresponding period (pcp). The increase was supported by improved performance at the ATCO energy segment on account of higher electricity and natural gas commodity prices coupled with customer growth.
• Operating profit stood at CAD 285 million, lower than CAD 319 million in pcp, despite a higher revenue due to higher Depreciation and amortization and an increase in other expenses.
• Earnings for the period stood at CAD 143 million, down from CAD 162 million in pcp. The decline was due to a lower operating profit, slightly offset by a lower income tax expense (CAD 45 million v/s CAD 63 million in pcp).
• Funds generated by operations stood at CAD 443 million, lower than CAD 466 million in pcp. The reduction was primarily due to the unfavorable timing of certain revenues and expenses, partially offset by higher customer contributions for Electricity Transmission capital investments.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Unforeseen circumstances like adverse weather conditions and currency fluctuations might hinder the company’s overall performance. Moreover, a decline in the regulated rate base would dampen the overall income and cash flow of the company.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The group caters to the utility segment, and the operation is immune to the economic cycles, which is a key positive. Moreover, the group’s majority income comes from the Regulated Utilities, which has long-term contracts, indicates stable performance. We have valued the stock using the P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms) upside. For the said purposes, we have considered industry (Utilities) mean on an NTM basis. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 35.03 on June 28, 2021.

One-Year Technical Price Chart (as on June 28, 2021). Analysis by Kalkine Group

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.