Fortis Inc

Fortis Inc. (TSX: FTS) owns and operates utility transmission and distribution assets across North America and caters to more than 2.5 million electricity and gas customers across North America. Meanwhile, the company has smaller stakes in electricity generation and several Caribbean utilities. 

Why Should Investor’s Book profit?

• Highly leveraged balance-sheet: The company’s balance sheet is significantly leveraged, with a Debt/Equity ratio of 1.46x, significantly higher compared to the industry median of 1.14x, implies a greater balance sheet risk. Moreover, long-term debt to total capital stood higher at 53.3% as compared to the industry median of 33.8%. Total debt rose by 3.08% from Q4FY20 to CAD 25,594 million in Q3FY21. Continuation of the above trend might lead to higher finance costs.
  

• Long cash conversion days: In Q3FY21, the company reported stretched cash cycle conversion of 127 days, significantly higher than the industry median of 10.6 days. A higher cash conversion period illustrates weak operational efficiency.
  

• Weak debt-protection metrics: The company reported its net debt to EBITDA of 25.58x, as compared to the industry median of 15.61x. A higher ratio from the industry suggests a poor debt protection ability of the firm.
  

Valuation Methodology (Illustrative): Price to Cash Flow based 

Stock Recommendation:

On a daily chart, the RSI of FTS stock is hovering at an overbought zone of 78.13, which indicates a possible correction in the coming trading sessions. We have valued the stock using the Price to Cash Flow based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like TC Energy Corp, Canadian Utilities Ltd etc. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock of FTS at the closing price of CAD 60.01 on December 15, 2021.

One-Year Technical Price Chart (as on December 15, 2021). Analysis by Kalkine Group

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

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