Algonquin Power & Utilities Corp.

Algonquin Power & Utilities Corp. (TSX: AQN) is a North American generation, transmission, and distribution utility company. Within its distribution segment, AQN owns and operates regulated water, natural gas, and electricity distribution utilities in the United States.

Key Highlights:

• Impressive Dividend Yield: The group has reported a stable dividend payment over the years, aided by consistent cash flows. As the company provides essential services like energy and water services, the operations of the group are immune to the economic cycle, and hence we expect the stability in cash flow generation and dividend payment in the foreseeable future. Notably, the company distributed a higher dividend distribution of USD 253.762 million in FY20, higher than USD 196.391 million in FY19. At the last closing price, the stock was offering a dividend yield of ~3.8%, which is decent considering the current interest rate scenario.

Source: Refinitiv (Thomson Reuters)

• Robust margins v/s industry: The company reported healthy EBITDA margin and net margin of 41.5% and 43.4%, respectively in FY20, v/s the industry median of 37% and 10.8%, respectively in FY19.

• Issuance of Bond: On April 06, 2021, the company offered the sale of CAD 400 million 2.85% senior unsecured debentures with a maturity date of July 15, 2031. The proceeds would be used for investments within renewable power generation and clean energy technologies. 

• Appointment of Director: On March 30, the company appointed Carol Leaman to its Board of Directors.

FY20 Financial Highlights:

• AQN declared its full-year results, wherein the group posted revenue of USD 1,677.058 million, marginally higher than USD 1,626.392 million in FY19. The increase was driven by higher income from regulated gas distribution and regulated water reclamation and distribution. Moreover, an increase in non-regulated energy sales also contributed to the increase. However, a lower non-regulated energy sale acted as a drag.
• Operating income stood at USD 384.093 million, higher than USD 366.847 million in the previous corresponding period (pcp). Adjusted EBITDA increased by 4% y-o-y to USD 869.5 million.
• The company reported net earnings of USD 727.828 million, significantly higher than USD 484.950 million in pcp, supported by a higher income from long-term investments.
• Cash and cash equivalent stood at USD 101.614 million, while total assets were recorded at USD 13,223.906 million.

FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group reported a constant increase in total debt in the recent years, which is not a positive sign. At the end of FY20, the company reported total debt of USD 4,538 million, 15.41% and 36% higher than FY19 and FY18, respectively. Higher debt would result in higher finance cost and lesser financial flexibility.

Valuation Methodology (Illustrative): Price to Earnings-based

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

Stock Recommendation:

For FY21, the company expects its Adjusted Net Earnings per share would be within the range of USD 0.71 to USD 0.76 while, capital investment is expected in between USD 4.0 billion and USD 4.5 billion in 2021. Moreover, the stock is offering a decent dividend yield amid a low interest rate environment. We have valued the stock using the Price to Earnings based relative valuation approach and arrived at a target price offering lower double-digit upside potential (in % terms). We have considered peers like Avangrid Inc, Avista Corp and Northland Power Inc. Considering the above-mentioned facts, we suggest a ‘Buy’ recommendation on the stock at the closing price of CAD 20.55 on April 07, 2021.

One-Year Price Chart (as on April 07, 2021). Source: Refinitiv (Thomson Reuters)

Maxar Technologies Inc

Maxar Technologies Inc (TSX: MAXR) is an integrated space and geospatial intelligence company with a full range of space technology solutions for commercial and government customers including satellites, Earth imagery, geospatial data and analytics.

Key Highlights

• Awarded contract from U.S. Army: Recently, the company has been awarded a contract to support GEOINT Exploitation for U.S. Army and Combatant Commands. The contract worth of USD 48.3 million for support services in geospatial intelligence.

• Helping NASA on its psyche mission: Recently, the company delivered a Solar Electric Propulsion (SEP) Chassis to NASA’s Jet Propulsion Laboratory (JPL) for the NASA Discovery Mission, Psyche. This mission is expected to launch in August 2022 to explore an asteroid orbiting between Mars and Jupiter.

• Presence across multiple domains: The company caters to several domain like Space, Air, Land, Maritime, sub-surface and cyber, and helps them in monitoring, understanding, and delivering global broadband communications, and explore and advance the use of space. The company is present in all possible domains from space to sub-surface, providing extreme diversity. 

Source: Company

• Higher guidance for FY2021: The management highlighted strong revenue growth and expected it to be in a range of USD 1,805-1,885 million, up by 9.4% from 2020. The company’s guidance looks promising. Furthermore, it expects the adjusted EBITDA between USD 420-470 million, along with operating cash flow in a range of USD 240-290 million.

Source: Company

• Robust backlog: The company is having a healthy backlog, which increased to USD 1.9 billion from USD 1.6 billion, or by approximately USD 300 million, for the year ended December 31, 2020 compared to the previous corresponding period. Approximately 58% of the total backlog is expected to be converted into revenue in 2021, which is a key positive. The increase in backlog was primarily driven by an increase in the Space Infrastructure segment due to new contracts with the U.S. government.

Financial overview of FY2020 (In millions of USD)

Source: Company

• In FY2020, the company reported revenues of USD 1,723 million, increased by USD 57 million, against USD 1,666 million in 2019. The increase was primarily driven by the rise in the Space Infrastructure segment, partially offset by a decrease in the Earth Intelligence segment. 

• Adjusted EBITDA stood at USD 422 million, or 24.5% as percentage of revenues as compared to adjusted EBITDA of USD 416 million, or 25.0% adjusted EBITDA margin in 2019. The increase was driven by higher Adjusted EBITDA from the Space Infrastructure segment.

• The company posted a net income of USD 303 million in the reported period against USD 109 million in 2019. The prime source of net income was gain from the discontinued operation. 

Risks associated with investment

The company’s business with various government entities is exposed to the risk associated with policies, priorities, regulations, mandate and funding levels. Furthermore, it requires innovative technologies to meet the needs of existing or potential new customers. It also faces competition that may cause either to reduce prices for imagery, related products and services or to lose market share.

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The company made solid progress during 2020 toward achieving its longer-term targets, including efforts to drive sustainable growth in both Earth Intelligence and Space Infrastructure segments and reduced its debt and leverage. For 2021, the company expects to see revenue and adjusted EBITDA growth and improvement in free cash flow. Moreover, it has also increased its 2023 targets to reflect the earnings and cash generation power better. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of USD 47.78 as on April 7, 2021. We have considered Corelogic Inc, General Dynamics Corp, Open Text Corp. as the peer group for the comparison.

1-Year Price Chart (as on April 7, 2021). Source: Refinitiv (Thomson Reuters)

Winpak Ltd

Winpak Ltd (TSX: WPK) manufactures and sells a variety of packaging materials and related packaging machines. The packaging materials are used primarily for perishable foods, beverages, and healthcare applications. 

Key highlights

• Debt-free balance sheet with strong financial flexibility: The company has a strong balance sheet, which is virtually debt-free. Moreover, despite a sluggish economic scenario, the group reported consistent net cash flow from operations at USD 191.7 million in FY2020, against USD 199.4 million in previous corresponding period. The company is likely to report lower finance costs in the coming quarters, which would further support the group’s profitability.

• Increase in cash and cash equivalents: For the year, the cash and cash equivalents balance climbed by USD 98.2 million to USD 495.3 million, against the previous corresponding period. An increase was fuelled by the exceptional cash flow generated from operating activities.

• Increasing presence in healthcare packaging: The management is taking some prudent and strategic initiatives to increase their presence within healthcare packaging, including the introduction of a global healthcare model in the medical and pharmaceutical markets, which are well underway with established plans in place.

• Industry beating margins: The company reported higher gross margin, EBITDA margin, operating margin of 30.9%, 22.8%, 17.2%, respectively in FY2020, higher than the industry median of 25.5%, 16.2%, 10.7%, respectively. Moreover, the group also reported a higher net margin of 12.8%, as compared to 4.8% of the industry median. 

Financial overview of FY2020 (In thousands of US dollars)

Source: Company

• For 2020, revenue declined to USD 852.5 million, decreased by 2.4% compared to 2019 revenue of USD 873.8 million. The slight decline was primarily attributable to the tepid performance from the restaurants and food-service segments due to the restrictions imposed across North America.

• The group posted a gross profit of USD 263.6 million, compared to USD 273.5 million in the previous corresponding period (pcp). The marginal decrease was due to a fall in revenue. The gross profit margins also decreased to 30.9% versus the 2019 level of 31.3%.
• Income from operations stood at USD 146.76 million, against USD 154.97 million in the pcp. However, the decline was partially offset by a lower G&A expense and lower pre-production expenses.
• The company reported a net income of USD 108.9 million in FY2020, lower than USD 118.0 million in pcp. 

Risks associated with investment

The company derives a significant part of the revenue from the food-service segment, and any further restriction would result in a slide in the overall volumes. 

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company is an essential supplier of packaging materials and machinery within the food, beverage and healthcare segments. Notably, the flexible packaging segment witnessed improved traction primarily from retailers due to pantry stocking, which is encouraging. The packaging machinery segment set a record in 2020 with the number of machines sold, and this momentum has continued into 2021 with a vibrant order backlog. Furthermore, for 2021 the company is committed to securing organic growth opportunities with new technologies, processes and material sciences, which is a key positive. Therefore, based on the above rationale and valuation, we suggest a “Buy” recommendation at the closing price of CAD 44.44 on April 7, 2021. We have considered CCL Industries Inc, Aptargroup Inc, Sealed Air Corp etc. as the peer group for the comparison.

1 Year Daily Price Chart (As on April 7, 2021) Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.