Capital Power Corp

Capital Power Corporation (TSX: CPX), is a North American power producing company which develops, acquires, operates, and optimizes power generation from a range of energy sources. It owns over 3,200 megawatts (MW) of power generation capacity at approximately 20 facilities across North America.

Why Should Investors Book Profit? 

• Stretched valuation: CPX shares are available at an NTM EV/EBITDA multiple of 7.5x compared to the industry (Electric Utilities & IPPs) average of 0.3x. This implies that the shares are overvalued against the industry. The stock is overvalued on multiple valuation parameters. The table below reflects the picture.

• Lower margin profile v/s Industry: In Q2 2021, the Company failed on maintaining its pace and witnessed lower performance across operating matrix against an industry, which exhibits the pressure on company.
• Weak liquidity profile: In Q2 2021, the company's current ratio was 0.89x compared to the industry median of 1.02x. While its Quick ratio was also on the lower side at 0.66x V/s 1.07x. Both these lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.
• Trading near the upper band of the Bollinger Bands®: Recently, the stock witnessed a healthy rally on the daily price chart and has moved near the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the stock may also face the resistance at the rising trend line, where it is currently trading.

Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

The company’s Q2 2021 financial results exceeded management’s expectations, which benefitted from higher Alberta power prices where its trading desk captured an average realized power price of CAD 75 per megawatt hour. Although, on the sequential basis the results were on the lower side, where its revenues and other income fell to CAD 387 million compared to CAD 554 million in pcp and net income fell to CAD 17 million V/s CAD 101 million. Also, the stock is trading on highly stretched valuation along with lower margin profile, which exhibits the pressure on company. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 44.01 on September 9, 2021.

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

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