Canadian Utilities Ltd

Canadian Utilities Ltd (TSX: CU) is a Calgary-based multiline utility company and which operates in a diversified global enterprise. The corporation offers services to Electricity, Pipelines & Liquids, and Retail Energy businesses.

Key Highlights:

• Industry Beating Margin Profile: The company reported higher efficiency as compared to its peers, which is encouraging. In Q1FY21, EBITDA margin and Operating margin stood at 54.5% and 31.4%, which is higher than the industry median of 37.5% and 23.4%, respectively. The net margin stood at 15.8% as compared to the industry median of 15.2%.         

• An Income Play: The company’s operation comes under the essential services and is immune to the economic cycles, which further resulted in a stable cash flow generation. Historically, the group reported a continuous dividend distribution, which is a key positive. Moreover, the stock carries a dividend yield of ~5.0%, which is attractive considering the current interest rate scenario.

• Capital Investment Plan: The company has a capital investment plan in place, where it is planning to invest CAD 3.2 billion over the next three years. As a result, the group is expecting 2% rate base growth per year.
  

Q1FY21 Financial Highlights:

• Canadian Utilities declared its first-quarter result and reported revenue of CAD 907 million, improved from CAD 885 million in the previous corresponding period (pcp).
• Operating profit stood at CAD 285 million, lower than CAD 319 million in pcp, despite a higher revenue due to higher depreciation and amortization (CAD 154 million v/s CAD 143 million in pcp) and an increase in other expenses (CAD 90 million v/s CAD 62 million in pcp). Moreover, a higher purchased power expense (CAD 77 million v/s CAD 65 million in pcp) also contributed to the decline.
• Earnings for the period came at CAD 143 million, versus CAD 162 million in pcp. The slide was due to a lower operating profit, partially offset by a lower income tax expense (CAD 45 million v/s CAD 63 million in pcp).

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:

At the end of Q1FY21, the group reported the available liquidity level of CAD 2,235 million, which seems to be sufficient to cater to short-term and long-term capital needs. Moreover, the group has healthy cash from operations of CAD 511 million in Q1FY21, which increased from CAD 489 million in Q1FY20. 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 peers like Fortis Inc, Hydro One Ltd etc. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 35.03 on July 21, 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 July 21, 2021). Source: REFINTIV, Analysis by Kalkine Group

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

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