Canadian Utilities Ltd

Canadian Utilities Ltd (TSX: CU) is a Calgary-based multiline utility company and has a diversified global enterprise with assets of CAD 20 billion. The company offers services to Electricity, Pipelines & Liquids, and Retail Energy businesses. The Electricity Global Business Unit's activities are conducted through two regulated businesses, electricity distribution and electricity transmission, and non-regulated electricity generation and transmission. 

Q2FY20 Financial Highlights: CU announced its quarterly results, wherein the company posted revenue of 740 million, as compared to CAD 902 million in the previous corresponding (pcp). The decline was majorly attributable primarily led by forgone revenue following the sale of the Canadian fossil fuel-based electricity generation business in the third quarter of 2019 and subsequent sale of Alberta PowerLine (APL) in the fourth quarter of 2019, which was partially offset by improved rate base across the Alberta Utilities.  Operating profit stood lower at CAD 201 million, against CAD 240 million in pcp. During the quarter, the group recorded lower interest expense at CAD 100 million as compared to CAD 122 million in pcp. Earnings for the period stood at CAD 73 million, as compared to CAD 300 million in pcp, due to an income tax recovery of CAD 177 million in the previous corresponding period. The company ended the quarter with cash and cash equivalent of CAD 940 million, while total assets were recorded at CAD 20,046 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company's business is exposed to a variety of business and financial risks. The outbreak of COVID-19 is also posing a risk to the company's operations, and these risks include a decline in the consumer demand, increase in operating costs, interruption of the project work. The credit risks associated with the business are customer non-payment and change in the timing of cash flows.

Valuation Methodology: EV/EBITDA Based (Illustrative)

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

Stock Recommendation: The stock of CU corrected ~16% so far this year. The group's operation comes under essential services, hence are immune to the economic cycle. The group's performance in the second quarter of the financial year 2020 and in the first half of the financial year 2020 remain immune against the COVID-19 pandemic. The group has strong liquidity to fund approximately one full year of cash requirements, which shows strong financial flexibility. The group derives around 95% of its adjusted earnings through regulated utilities, which suggests stability in earnings. Further, usually Utilities business are safe investment options as these are mostly regulated and remain steady regardless of the economic condition. Also, business models of the utility companies have assured revenues and offer strong dividend yields too. The company is friend of income investors and has a solid history of dividend payment. At the last traded price, the stock was offering a dividend yield of 5.31%, which is lucrative considering the current interest rate environment. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). We have considered Emera Inc (TSX: EMA), Hydro One Ltd (TSX:H), and Fortis Inc (TSX: FTS) etc., as a peer group for comparison purpose. Hence, considering the above-mentioned facts, current price levels, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 32.80 on September 8, 2020.

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

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