Boralex Inc

Boralex Inc (TSX: BLX) is an electric utility company which develops, constructs, and operates renewable energy power facilities across, Canada, the United States, France, and the United Kingdom. Most of Boralex's plants rely on wind power, while a significant number also employ hydroelectric power.

Key highlights 

• Strategic plan and financial objectives: The group is implementing strategic procedures based on the growth potential in the markets in which it operates. Along with strict financial discipline, targeting projects and acquisitions that meet specific growth is helping the group to gain synergy criteria to create value and generate returns. On the back of this, the company’s objective is to earn discretionary Cash Flows in a range of CAD 140-150 million and a total installed capacity of 2,800 MW by FY2023.

Source: Company 

• Acquiring interests in seven solar plants in the United States: Recently the group announced that it has entered into binding agreements with Centaurus Renewable Energy and certain other investors to acquire their controlling interests in seven solar plants with 209 MW of gross installed capacity, at a price of CAD 283 million. The transaction is anticipated to close before December 31. The acquisition of these high-quality assets secured by long term contracts is perfectly aligned with the growth and diversification orientations of the group’s 2023 strategic plan. 

• Diversified assets at different locations: The Company remains highly diversified with facilities that are fully contracted (98%) and located in various geographies. A significant portion of the company’s net installed capacity originates from the wind power segment, making the company largest independent producer of onshore wind power in France.

Source: Company 

Financial overview Of Q3 2020

Source: Company 

• In Q3 2020, revenues from energy sales posted by the company were CAD 105 million, up 14% against CAD 92 million in Q3 2019. This increase was mainly attributable to a favourable volume from Canadian wind power segment.
• The company posted an Adjusted EBITDA of CAD 62 million, increased 38% in Q3 2020, as against CAD 45 million in Q3 2019, mainly driven by increased production at Canadian wind and hydroelectric facilities.

• The company posted a net loss of CAD 8 million in Q3 2020, as against a loss of CAD 29 million in the previous corresponding period. 

Risks associated with investment

The Company is under various market risks in the ordinary course of operations that could impact its earnings and cash flows. Some important risk factors include lower demand, lower production, adverse weather conditions etc. There is also a risk that its contract counterparties could fail to meet their obligations. Foreign currency volatility risk is also associated with the Company as the Company operates in many geographies.  

Valuation Methodology (Illustrative): Price to Cash Flow 

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

Stock recommendation 

The renewable energy is likely to show a substantial and sustained increase in the market share over the next decade as most of the developed nations are adopting the renewable services, which is promising and augers well for the company’s long-term growth. Therefore, based on the above rationale and valuation, we have given a “HOLD” rating at the closing price of CAD 39.93 on December 21, 2020. We have considered Innergex Renewable Energy Inc, Brookfield Renewable Partners, Northland Power Inc etc. as the peer group for the comparison. 

Source: Refinitiv (Thomson Reuters) 

Hydro One Ltd

Hydro One Ltd (TSX: H) is a Canada-based electricity transmission and distribution service provider. They distribute electricity across Ontario to nearly 1.4 million predominantly rural customers, or approximately 26% of the total number of customers in Ontario. The Company’s segments include Transmission, Distribution and Other.

Key highlights 

• Rise in Cash from operating activities: In Q3 2020, the Company managed to increase its Cash from Operating activities by CAD 32 million to CAD 680 million, compared to CAD 648 million in Q3 2029. The increase was primarily due to higher earnings in the reported quarter and increases in net working capital as a result of higher rate protection plan settlements.

Source: Company 

• Consistent Dividend Distribution:The company has a track record of dividend distribution. The Company declared a quarterly cash dividend of CAD 0.2536 per share to be paid on 31 December 2020, to shareholders with a record date of 9 December 2020. At the last closing price, the stock is offering a lucrative dividend yield of ~3.55%, which looks impressive considering the current economic scenario and interest rates. 

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the company posted revenues, net of purchased power of CAD 910 million, increased by 54 million, as against CAD 856 million in the previous corresponding period, mainly due to higher average monthly Ontario 60-minute peak demand and higher energy consumption driven by favourable weather.
• The group posted muted growth in OM&A cost as well as in Depreciation in Q3 2020 compared to Q3 2019. OM&A cost stood at CAD 262 million Vs CAD 259 million, and depreciation cost was CAD 220 million Vs CAD 219 million.
• In Q3 2020, Net Income stood at CAD 281 million, increased by CAD 40 million as against CAD 241 million in Q3 2019. The increase in Net Income was primarily due to a rise in revenues and stagnant operating expenditure, partially offset by an increase in interest cost.

Source: Company 

Risks associated with investment

The company is exposed to many risk factors which alone or in a cumulative manner can affect the company’s operations and financial health. Some of the risks include the supply of and demand for energy, adverse weather conditions, falling approved rates might lead to lower-income, inflation, interest rates, etc. 

Valuation Methodology (Illustrative): Price to Cash Flow 

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months 

Stock recommendation

We believe the company is likely to post much better numbers in the upcoming period supported by the revival in the economy, which has started generating the demand in the energy sector. Further, the company continued to distribute dividend amid a challenging operating environment, on top of this the stock is delivering a healthy yield of more than 3.5% at the last closing price, which looks impressive and encouraging from an investor’s point of view. Therefore, based on the above rationales and valuation, we have given a “Hold” rating at the closing price of CAD 28.59 on December 21, 2020. We have considered Emera Inc, Canadian Utilities Ltd, Fortis Inc etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Element Fleet Management Corp.

Element Fleet Management Corp. (TSX: EFN) is a global fleet management company, which provides management services and assistance for financing commercial vehicle and equipment fleets.

Key Highlights:

• Stable Free Cash flows: In the recent past, the company reported a stable cash flows, driven by the company’s new strategy client-centric transformation plan. The company’s stable cash flow indicates operational resiliency. We expect the above trend to continue in the coming days, which would further support the company’s overall performance.

 Source: Company Presentations

• Ample Liquidity: The company has ample liquidity of CAD 5.8 billion in the form of revolving unsecured and vehicle management asset-backed facilities, which seems sufficient enough to combat the current downturn and support the company’s working capital requirements.
• Reduction in debt: The company has reduced its total debt component, despite the current economic jolt, which is a key positive. A reduction in debt is likely to support the company’s profitability through lower finance costs.

Source: Company Presentations

• EFN announced its quarterly results, wherein the company posted net revenue of CAD 243.252 million, as compared to CAD 245.796 million in the previous corresponding period (pcp). The decline was primarily driven by lower income from syndication revenue (CAD 15.246 million versus CAD 23.084 million in pcp), partially offset by improved performance from net financing and servicing income.
• Adjusted operating income stood at CAD 128.985 million, as compared to CAD 127.650 million in Q3FY19.
• The company reported net income of CAD 70.778 million, improved from CAD 70.145 million, a year ago.

Q3FY20 Financial Snapshots (Source: Company Reports)

Risk: The continuation of the COVID-19 outbreak might dampen the company’s overall volumes and a decrease in the estimated value of the collateral loans and leases, which might impact the overall performance of the company.

Valuation Methodology (Illustrative): Price to Book Based

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

Stock Recommendation:

The company has a capital-light business model that enhances return on equity and would materially grow annual FCF and predictably return excess capital to the shareholders. The company focuses on organic profitable revenue growth which includes converting self-managed fleets across its footprint. Transformation program surpassed end-goal of CAD 180 million in annual run-rate pre-tax profit improvement initiatives, reaching cumulative CAD 189 million actioned and delivering CAD 94 million of operating income enhancement year-to-date. Further, the stock closed above its long-term support levels of 100-days, 150-days and 200-days simple moving average, indicating a bullish trend. We have valued the stock using P/BV-based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Intact Financial Corp, Canadian Western Bank etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 12.94 on December 21, 2020.

EFN Daily Technical Chart (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.