TransAlta Renewables Inc.

TransAlta Renewables Inc. (TSX: RNW) is an electric utility company that owns and operates energy generation and transmission facilities. The operating business segments are Canadian Wind, Canadian Hydroelectric, and Canadian Gas.

Key Updates:

• Impressive dividend yield: The stock of RNW carries an annualized dividend yield of ~4.914%, which looks attractive. Moreover, the company paid a total dividend of CAD 125 million in H1FY21, higher than CAD 114 million in pcp. The above is impressive as most of the companies are lowering their dividend distribution in order to retain liquidity.
• New Acquisition to spur improved prospects: The company recently acquired a 122 MW portfolio of operating solar facilities located in North Carolina at a price consideration of  USD 96.65 million. The above would mark the company’s expansion in the United States, wherein the company sees enough potential due to the presence of high-quality customers within the region.
• Increase in cash flows: The company reported a stable growth in its cash flows of CAD 182 million, in H1FY21 higher than CAD 153 million in pcp. The above is impressive and would lead to higher liquidity in the coming years. We expect the above momentum to continue in the coming days, supported by an upcoming product pipeline of 2000 MW within the renewable segment.

Q2FY21 Financial Highlights:

• In Q2FY21, RNW posted its revenue at CAD 92 million, as compared to CAD 103 million in Q2FY20. The quarter was marked by higher total renewable energy production 1,051 GWh, as compared to 1,098 GWh in pcp.
• Gross margin stood at CAD 67 million, slide from CAD 86 million in pcp. The decline was primarily due to a decline in revenue.
• Fuel, royalties and other costs stood at CAD 25 million, increased from CAD 17 million in the previous year. Operations, maintenance and administration cost remained stable throughout the period at CAD 23 million, as compared to CAD 22 million in pcp.
• The group reported its operating income at CAD 8 million, which declined from CAD 29 million in the previous year.
• Net earnings came at CAD 26 million, as compared to CAD 31 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Reports)

Risks:  Unforeseen weather conditions are likely to hamper the company’s operation while the company generates its income other than USA, and the performance of the company might be impacted due to currency volatility.

Valuation Methodology (Illustrative): Price to CF based

Stock Recommendation:

The group enjoys improved margins as compared to its peers and reported pretax margin and net margin of 30.4% and 28.3%, respectively, in Q2FY21, higher than the industry median of 9.2% and 3.4%, respectively. Moreover, the company has a healthy balance sheet and reported a debt to equity ratio of 0.40x in Q2FY21, as compared to the industry median of 2.43x. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Boralex Inc, Innergex Renewable Energy Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last traded price of CAD 19.13 on October 22, 2021.

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

Technical Summary Analysis:

One-Year Technical Price Chart (as on October 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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