Canadian Utilities Ltd

Canadian Utilities Ltd (TSX: CU) is a Calgary-based multiline utility company and has a diversified global enterprise with assets of CAD 20 billion. The company offers services to Electricity, Pipelines & Liquids, and Retail Energy businesses. The Electricity Global Business Unit's activities are conducted through two regulated businesses, electricity distribution and electricity transmission, and non-regulated electricity generation and transmission. 

Recently, the company reported the acquisition of 131-km natural gas pipeline from Tidewater Midstream & Infrastructure Ltd at a price consideration of CAD 255 million, which is expected to be closed during Q2FY21.

Q2FY20 Financial Highlights: Canadian Utilities declared its quarterly results, wherein the company posted revenue of 740 million, lower than CAD 902 million in the previous corresponding (pcp), due to the sale of the Canadian fossil fuel-based electricity generation segment during Q3FY19 and subsequent sale of Alberta Power Line (APL) in the Q4FY19, partially offset by improved rate base across the Alberta Utilities. The group reported its operating profit at CAD 201 million during the quarter versus CAD 240 million in pcp. The quarter was marked by a lower interest expense of CAD 100 million against CAD 122 million in pcp. Earnings for the period stood at CAD 73 million, significantly lower than CAD 300 million in Q2FY19. The company ended the quarter with cash and cash equivalent of CAD 940 million, while total assets were recorded at CAD 20,046 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Further outbreak of COVID-19 would throw severe challenges like supply-chain disruptions, delay in project deployments, and extended lockdowns etc. which may dampen the overall business prospects of the company. 

Valuation Methodology: EV to EBITDA Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of CU declined ~15% so far this year, due to a sluggish economic growth due to COVID 19 pandemic. On a year to date basis, the company reported a lower capital investment of CAD 449 million, down by CAD 107 million on y-o-y basis, to ensure higher liquidity. Further, the Natural Gas Distributions and Energy Infrastructure segments do not bear any material impact from declining oil prices, which is a key positive. The utility segment is resilient in nature, as it comes under the ‘essential services’ and the company maintained a stable top-line from the segment. The group derives around 95% of its adjusted earnings through regulated utilities, which suggests stability in earnings. Further, usually Utilities business are safe investment options as these are mostly regulated and remain steady regardless of the economic condition. Further, the group has strong liquidity to fund approximately one full year of cash requirements, which shows strong financial flexibility. At the last traded price, the stock was offering a dividend yield 0f 5.2%, which is lucrative considering the current interest rate environment. We have valued the stock using the EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Emera Inc, Hydro One Ltd and Fortis Inc etc. Hence, considering the above-mentioned facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 33.46 on October 7, 2020

CU Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

AltaGas Ltd

AltaGas Ltd (TSX: ALA) is a Canadian based leading energy infrastructure company that connects natural gas liquids (NGLs) and natural gas to domestic and global markets. The Group operates through two operating segments, namely Utilities and Midstream. The utility segment accounts for the majority of the revenue for the Company and serves about 1.7 million customers.

Q2FY20 Financial Highlights: ALA delivered a stable set of quarterly numbers, wherein the Company posted revenue of CAD 1,059 million, lower than CAD 1,174 million in the previous corresponding period (pcp). The quarter witnessed a sluggish demand due to the spring and summer months, while within the Fractionation segment, volumes remained subdued from Harmattan and Younger projects, which was partially offset by added volume from the expansion of North Pine and additional volumes at Townsend 2B project. Total expenses stood comparatively lower at CAD 984 million, against CAD 1,135 million a year ago, underpinned by a lower cost of sales and marginally lower depreciation and amortization costs while operating and administrative expense came at par with the previous corresponding period. The company reported its Income before taxes at CAD 46 million, higher than CAD 27 million in pcp, due to lower interest expense, partially offset by a decline in the other income. Net income after tax stood lower at CAD 43 million as compared to CAD 60 million, as a result of a CAD 40 million deferred income in the pcp versus a deferred tax of CAD 8 million in the current quarter.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Temporary closure of businesses could hamper the gas demand in the utility segment while lower NGL pricing, lower demand lower production in the Western Canada Sedimentary Basin (WCSB) could have an adverse impact on midstream business operations.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company has a resilient Utility business, wherein more than 70% of the customers are residential, and hence majority earnings are protected through decoupling and fixed-billing charges, which is a key positive. The quarter witnessed a strong Midstream segment performance, driven by record volumes from the Ridley Island Propane Export Terminal and reported strong operating performance with exports of 41,460 Bbls/day of Canadian propane to Asia during the quarter. The company's midstream segment is underpinned by the group's unique energy export strategy and the distinct ability to handle the molecule through the entire value chain and provide access to premium-priced global markets for western Canadian producers, which is a key positive. Further to enhance the liquidity, the company refinanced all its remaining 2020 debt maturities across the platform through two debt financings. Furthermore, the company's FY20 outlook remained unchanged at normalized EBITDA in the range of CAD 1.275 to CAD 1.325 billion. The group continued to distribute the dividend, which is encouraging from an income investor's point of view. At the last traded price, the stock was offering a dividend yield of 5.9%. We have valued the stock using Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (multi-line utilities) median on the next twelve months (NTM) basis. Considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 16.23 on October 7, 2020.

ALA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Timbercreek Financial Corp

Timbercreek Financial Corp (TSX: TF) is a Canada-based non-banking commercial real estate lender. The company provides shorter-duration, customized financing solutions to professional real estate investors. The company directly invests in a diversified portfolio of structured mortgage loans which are secured by stabilized, income-producing commercial real estates, such as multi-residential, office and retail buildings located in urban markets across Canada.

The Management has declared a monthly cash dividend of CAD 0.0575 per common share, payable on October 15, 2020.

Q2FY20 Financial Highlights: Timbercreek declared its second-quarter results, wherein the company reported Net Mortgage Investments of CAD 1,210.3 million, against CAD 1,214.5 million in the previous corresponding period (pcp). The quarter was marked by improved investment volumes, which was offset by lower repayments and higher renewals, which lead to a mortgage portfolio of CAD 1,210.3 million as compared to CAD 1,191.1 million in Q1FY20. Due to the ongoing slowdown in transaction activity across the industry, the company reported lower turnover and more renewals in its portfolio during the quarter. The company reported Net Investment Income at CAD 22 million, against CAD 25 million in the previous corresponding period (pcp). Net income and comprehensive income stood at CAD 11.7 million, lower than CAD 13.6 million in pcp. The Group reported Cash-Flowing Properties of 85.8%, as compared to 86.1% in Q2FY19.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The spread of the COVID-19 pandemic might hinder the disposable income of the consumers, which is likely to impact the performance of the company in a negative manner.

Valuation Methodology: Price to Book Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of TF corrected ~18% so far this year due to a tepid economic growth on account of COVID 19 pandemic. The management hinted that it would take strategic advantage of the recent growth in the transaction volumes to improve its overall business prospects. Furthermore, the company informed that there had been no material impact on interest and principal payments till date, while the business is monitoring its loan portfolio very closely, which is likely to reduce the risk of defaults and is a key positive for the company. Despite a tepid macro Scenario, the company has reported a stable quarter, aided by the company’s conservative approach of focusing on income-producing assets in urban markets. Despite the challenging operating environment, the company has paid a regular dividend, which indicates the financial flexibility, as most of the businesses are preserving its liquidity by cutting down its dividend payment. At the last closing price, the stock carries a lucrative dividend yield of ~8.44% on an annualized basis, would appeal several income investors. We have valued the stock using Price/Book based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Atrium Mortgage Investment Corp, Home Capital Group Inc etc. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 8.18 on October 7, 2020.

TF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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