Innergex Renewable Energy Inc. (TSX: INE) is an independent Canadian renewable power producer that develops, acquires, owns, and operates hydroelectric, wind, and solar facilities in Canada, the United States, France, and Chile.

Why should investor’s book profit?

• Highly leveraged balance-sheet: The company’s D/E ratio stood excessively higher at 4.85x in Q3FY21, as compared to the industry median of 2.67x. A higher D/E ratio indicates lower financial flexibility and poor capital management. Moreover, long-term debt to total capital stood immensely higher at 70.1% in Q3FY21, as compared to the industry median of 38.4%. This indicates higher balance sheet risk.

• Higher net losses: Despite higher revenue, the company was unable to retain the momentum and posted a higher net loss of CAD 191.1 million in 9MFY21 from a net loss of CAD 41.0 million in pcp. The company witnessed higher input costs coupled with an increase in the finance costs due to an increase in total debt, which has resulted in a poor bottom line. Continuation of the above trend is likely to dampen the company’s upcoming performance.

• Poor debt protection metrics: At the end of Q3FY21, the group’s net debt to EBITDA stood at 38.39%, which is considerably higher than the industry median of 23.94%. This indicates weak debt protection metrics of the firm and remains a key concern.

Stock recommendation

At the end of Q3FY21, the company reported its operating margin of 17.4%, lower than the industry median of 22.2%. Moreover, the company reported a negative net margin of 12.7% in Q3FY21, as compared to the industry median of 3.1%. This indicates poor operational efficiencies and weak cost management. 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 Brookfield Renewable Partners LP, Northland Power Inc etc. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock of INE at the closing price of CAD 18.41 on February 03, 2022.

One-Year Technical Price Chart (as on February 03, 2022). Source: REFINITIV, Analysis by Kalkine Group

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