Atco Ltd. (TSX: ACO.X) is a Canadian holding company that offers gas, electric, and infrastructure solutions, while the company’s primary segments include electricity generation, transmission, and distribution.

Why Should Investors Book Profit?

• Highly leveraged balance sheet: At the end of Q3FY21, the company reported higher debt levels which resulted to a D/E ratio of 2.48x, as compared to the industry median of 1.28x. Moreover, the company reported its long-term debt to total capital at 54.9% during the quarter, versus the industry median of 37.1%, which indicates a higher risk element and lower financial flexibility.

• Decline in profitability: At the end of 9MFY21, the company posted its net income of CAD 280 million, which is significantly lower than CAD 371 million in pcp. This was primarily due to a rise in input costs, such as employee costs, increase in Energy transmission and transportation expense, coupled with higher purchased power costs. Continuation of the above trend would dampen the company’s profitability and cash flows.

• Over dependence on regulated segment: The majority of the income is derived from the regulated category and hence, the company has no authority to increase its tariffs despite increase in input costs. Notably, adjusted earnings from the Electricity Transmission dipped to CAD 62 million in 9MFY21, which was CAD 7 million lower than the same period in FY20. Lower earnings were mainly due to the impact of the Electricity Transmission 2018-2019 GTA Compliance Filing decision received in the second quarter of FY21.

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:

The stock of ACO.X closed below its 50-days and 100-days simple moving averages (SMAs), indicating a bearish pattern. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like TransAlta Corp, Unitil Corp etc. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock at the current market price of CAD 42.45 at 9:40 am Toronto time on January 27, 2022.

One-Year Technical Price Chart (as on January 27, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

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