TransAlta Renewables Inc. (TSX: RNW) is a Canada-based company who owns a diversified portfolio of renewable and natural gas power generation facilities and other infrastructure assets, located at different pasts of North America.

Key highlights

• Healthy Guidance: The company provided solid outlook for FY 2022, with Adjusted EBITDA expected to range between CAD 485 million to CAD 525 million. The midpoint of the range reflects a 9% increase to 2021, owing to the full-year operations of the Windrise wind farm, which began commercial operations in November 2021, and the acquisition of the North Carolina Solar farm. Furthermore, the Free cash flow is estimated to be CAD 385 million on the high end of its forecast.

Source: Company Filing

• Diversified assets base: The Company remains highly diversified with facilities that are fully contracted and located in various geographies. The group made their presence into almost all renewable segments; however, the wind and natural gas segments generate the most significant chunk of cash flows.

Source: Company Filing

• The strong development pipeline for long-term growth: The firm has a robust development pipeline that will allow it to take a few chances in the next years, with multiple projects totaling 2900 MW installed capacity now in the advanced and early stages of development. Over the previous five years, the firm has added five wind farms and a solar farm in the United States, with an emphasis on developing and broadening the corporate PPA market. The firm is also constantly assessing potential acquisitions.

• An Income Play: Over the years, the company has maintained a consistent dividend payout, helped by solid cash flows from strong activities. The dividend pay-out practice translates into an essential factor for regular income-seeking investors with a long-term horizon. Recently, the Company declared a monthly cash distribution of CAD 0.078 per common share, to be paid on April 29, 2022. Moreover, at the last closing price of CAD 18.63 as on March 08, 2022, the stock offered a healthy dividend yield of 5.045%, which looks decent considering the current macros and interest rates.

Source: REFINITIV, Analysis by Kalkine Group

Risks associated with investment 

The company’s business activities are exposed to a variety of risks and uncertainties such as regulatory changes, rapidly changing market dynamics and volatility in commodity prices, interruptions of production, supply chain disruptions, delays in growth projects, increased credit risk with counterparties, and foreign exchange volatility, etc. 

Financial overview of FY 2021 (in millions of CAD)

 Source: Company Filing 

• In FY 2021, the company reported revenue of CAD 470 million which was approximately 8% higher compared to CAD 436 million in the previous corresponding period.
  

• The gross profit in the reported period declined to CAD 338 million against CAD 359 million in pcp, as the company witnessed higher fuel and royalty’s charges.
  

• On the back of higher operating expenses at CAD 94 million against CAD 89 million and higher depreciation cost at CAD 150 million v/s CAD 122 million in FY 2020, the company’s operating income declined at CAD 69 million compared to CAD 125 million in pcp.

• The company witnessed higher finance income related to its subsidiaries at CAD 108 million in the reported period of FY 2021, which helped it to post higher net income of CAD 139 million compared to CAD 97 million in pcp.
  

Valuation Methodology (Illustrative): EV to EBITDA based

Analysis by Kalkine Group 

Stock recommendation 

Despite the prolonged suspension at Kent Hills, the company's results for 2021 showed the strength of its diverse portfolio, with free cash flows of CAD 357 million. Furthermore, the company added 476 MW of contracted power to its fleet in 2021, including the Northern Goldfields Solar Project in Western Australia, which is now under development. These projects will further diversify the portfolio by increasing capacity in each of the company's core operating regions.

The company has a strong development pipeline, and we expect many of these projects to contribute to TransAlta Renewables' growth in the future years as demand for renewable energy continues to rise. In addition, the firm has a good balance sheet and, on top of that, its stock offers a substantial dividend, which is positive given present market conditions. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating on the stock at the closing price of CAD 18.63 as on March 08, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 8, 2022). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

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