Canadian Utilities Ltd (TSX: CU) is a subsidiary of holding company Atco, offers gas and electricity services. The company's main divisions include electricity (generation, transmission, and distribution), pipelines & liquid (natural gas and water), and Retail Energy.

Why Should Investors Book Profit?

• Increasing uncertainties: The resurgence of Delta variant cases has raised a lot of questions, and it might have an influence on the company's operations and cash flows as the government may tighten some mandatory lockdowns to combat the spread.

• Higher Cash Cycle days: The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is enormously high at 1805.1 days compared to an industry median of 25.8 days.
  

• Heavily leveraged: The company’s debt to equity ratio at the end of September 30, 2021, stood at 1.89x, which was higher than the industry median of 1.28x. Furthermore, on the sequential basis its debt-to-equity ratio is increasing, which is not a healthy sign. Additionally, its % LT Debt to Total Capital stood at 57.2% against the industry median of 37.1%. These factors imply higher balance sheet risks.
  

• Exhausted technical indicators: Recently, the stock witnessed a healthy rally on the daily price chart and has moved close to the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Also, the stock has re-touched its previous resistance level, which it had attempted to breach but failed to do so. As a result, there is a strong likelihood of price consolidation or decline.

Source: REFINITIV, Analysis by Kalkine 

Valuation Methodology (Illustrative): Price to Cash Flow

Stock recommendation

In the recent reported financial numbers, the company witnessed healthy growth in its topline, but failed to carry the same strength in its bottom line where the net income decreased by 22% to CAD 73 million. Furthermore, the resurgence of the delta variety is causing more havoc, and its liquidity ratios are on lower side, and its cash cycle days are on the higher side compared to an industry median, indicating a weak liquidity profile. Even the higher debt profile, which is increasing on the sequential basis, indicates the pressure on balance sheet. Additionally, the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 36.42 on December 21, 2021.

One-Year Technical Price Chart (as on December 21, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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