Canadian National Railway Company

Canadian National Railway Company (TSX: CNR) is engaged in the transportation business and thus transports natural resources, manufactured products, and finished goods throughout North America.

Key Highlights:

• Proposed combination with Kansas City Southern: The company recently announced that its proposal to combine with Kansas City Southern in a cash-and-stock transaction valued at USD 33.7 billion continues to receive overwhelming support from customers, suppliers, elected officials and other stakeholders because of its extensive pro-competitive benefits. The combination would enhance routing choices and price competition for customers by introducing new access and interchange options.
• Demand Revival from the Major sectors: The company witnessed a strong demand from the Western Canadian region and continue to witness higher export demand supported by low carry-out supply levels. Moreover, the company is having positive outlook for domestic use and export of potash and expects higher export volumes of U.S. grain via U.S. Gulf Coast. The group also reported strong demand in the renovation sector and housing market due to higher lumber and panel sales.                                

Source: Company Presentation

• Impressive Guidance: The management is targeting double-digit growth for the adjusted diluted EPS in FY 2021 as compared to the EPS of CAD 5.31 during FY 2020. Additionally, the company is expecting higher single-digit volume growth in terms of RTMs and anticipating its FY21 free cash flow within the range of CAD 3.0 billion to CAD 3.3 billion. Moreover, capital expenditure is expected at ~CAD 3 billion for FY 2021.
• Improved Operation metrics amidst turbulent times: During the first quarter of FY21, the company witnessed improvement within the workload, train length, car velocity and train weight, which remains encouraging considering the current economic scenario.

Source: Company Presentation

Q1FY21 Financial Highlights:

• CNR announced its quarterly result, wherein the company posted revenues of CAD 3,535 million, as compared to CAD 3,545 million in the previous corresponding period (pcp).
• Total operating expenses stood lower at CAD 2,208 million, as compared to CAD 2,330 million in pcp. The improvement was primarily driven by lower Purchased services and material costs and a recovery of loss on assets held for sale amounting to CAD 137 million. Operating income was higher at CAD 1,327 million v/s CAD 1,215 million in pcp.
• The company reported a net income of CAD 974 million, lower than CAD 1,011 million, primarily due to a higher income tax expense (CAD 317 million v/s CAD 154 million in pcp).
• Cash and cash equivalents were recorded at CAD 518 million, while total assets were recorded at CAD 44,964 million.

Source: Company Report

Risks: Due to the ongoing COVID pandemic, the company has witnessed a lower demand from several oil-based commodities like petroleum crude, refined petroleum products and frac sand etc. Moreover, lower demand was also witnessed from finished vehicles and parts, chemicals and plastics and pulp and paper segments due to a drop in consumption. Continuation of the above trend may dampen the company’s performance.

Valuation Methodology (illustrative): Price to CF

All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

In the recent past, company has witnessed higher investments within the grain unloading capacity.  In Vancouver, more than 50% increase was all exclusively served by the company, which is a key positive. Moreover, the company is investing in sidings, double track, and tunnel ventilation in order to enhance its capacity and resiliency within the Vancouver corridor. The company caters to essential services, and the outlook of it remains bright due to the nature of the segment. We expect the growth momentum to continue despite the ongoing economic cycle. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like TFI International Inc, CH Robinson Worldwide Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of CNR at the last closing price of CAD 134.19 on April 28, 2021.

One-Year Price Chart (as on April 28, 2021). Source: Refinitiv (Thomson Reuters)

Hydro One Limited

Hydro One Limited (TSX: H) operates in regulated transmission and distribution assets in Ontario. The group is the largest electricity provider that serves nearly 1.4 million customers. The company derives around 60% of its revenue from the transmission segment, while the rest is being derived from distribution.

Key Highlights:

• Stable Dividend payout: The company delivered a consistent dividend payout, supported by stable cash flows. During FY20, the group reported total dividend distribution of CAD 617 million, higher than CAD 588 million in FY19. At the last closing price, the stock was offering a dividend yield of ~3.43%, which is decent amid low interest rate environment.

Five-year Dividend History (Source: Thomson Reuters)

• Ample Liquidity: At the end of FY20, the company reported CAD 800 million of commercial paper borrowings outstanding and reported revolving bank credit facilities (Operating Credit Facilities) with a total available balance of CAD 2,550 million. The company is yet to utilize any amount from the available credit facility, which is a key positive and indicates sufficient cash flow generation. Notably, net cash from operating activities was recorded at CAD 2,030 million, higher than CAD 1,614 million in FY19.

• Event Update: The company would disclose its first quarter FY21 result on May 07, 2021.

FY20 Financial Highlights:

• The group announced its full-year result, wherein the company posted revenues of CAD 7,290 million, higher than CAD 6,480 million in FY19. The increase was driven by higher Distribution and Transmission income as compared to the previous year.
• Total costs stood higher at CAD 5,808 million v/s CAD 5,170 million in FY19, due to a rise in purchased power costs (CAD 3,854 million v/s CAD 3,111 million in the previous year).
• Income before financing charges and income tax expense was recorded at CAD 1,482 million, as compared to CAD 1,310 million in FY19.
• Net income was higher at CAD 1,796 million, significantly higher than CAD 802 million in FY19. The increase was driven by an income tax recovery of CAD 785 million, as compared to CAD 6 million in the previous year.

Income Statement Highlights (Source: Company Report)

Risks:  The company’s operations are regulated in nature, and hence the realization per unit depends upon the sweet will of the Electricity regulatory bodies. Moreover, unfavorable weather conditions might hinder the demand dynamics.

Valuation Methodology (illustrative): Price to CF

All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

During the fourth quarter of FY20, the Company made capital investments of CAD 577 million and placed CAD 878 million of new assets in-service. We believe the above would lead to improved business prospects in the coming quarters. Moreover, the company is targeted its dividend payout ratio in the range of 70% to 80% in the coming years, which is encouraging for income seeking investors. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered the industry (Utilities) median on NTM basis. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of H at the last closing price of CAD 29.61 on April 28, 2021.

One-Year Price Chart (as on April 28, 2021). Source: Refinitiv (Thomson Reuters)

TransAlta Renewables Inc.

TransAlta Renewables Inc. (TSX: RNW) is an electric utility company that owns and operates energy generation and transmission facilities. The operating business segments are Canadian Wind, Canadian Hydroelectric, and Canadian Gas.

Key Highlights:

• An Income Play: Historically, the company paid a consistent dividend to its shareholders, backed by stable cash flows due to the resilient business model. From FY13 to FY20, the company reported a 3% CAGR growth in its dividend payment. At the last closing price, the stock was offering a dividend yield of ~4.75%, which is impressive considering the persisting interest rate scenario.      

Source: Company Presentation

• Focusing on the renewable segment: Due to the recent shift in consumer’s preference across the renewable source, the company prioritize to expand its renewable segment operations. In the recent past, the company added five wind farms and a solar farm in the U.S. and is looking to enhance its corporate PPA market. The company is also looking for acquisitions, which would complement its line of growth. Presently, the company has a pipeline of 2,000 MW of renewable project, including more than one GW of U.S. wind project. 

• Event Update: The Company would disclose its first quarter FY21 result on May 13, 2021. 

FY20 Financial Highlights:

• In FY20, the RNW posted its revenue at CAD 436 million, as compared to CAD 446 million in FY19.
• Gross margin stood at CAD 359 million, slightly lower than CAD 363 million in FY19. The decline was primarily due to marginally lower revenue.
• Fuel, royalties and other costs stood at CAD 77 million, fell from CAD 83 million in the previous year. Operations, maintenance, and administration cost remained stable throughout the year at CAD 89 million, as compared to CAD 87 million in FY19.
• The group reported its operating income at CAD 125 million, which declined from CAD 134 million in the previous year.
• Net earnings came at CAD 97 million, significantly lower than CAD 183 million in FY19. The decline was primarily attributed to loss from change in fair value of financial assets amounting to CAD 59 million, v/s a profit of CAD 49 million in the previous year.
• Cash and cash equivalents were recorded at CAD 582 million, while total assets were reported at CAD 3,656 million.

FY20 Income Statement Highlights (Source: Company Report)

Risks:  Unforeseen weather conditions are likely to hamper the company’s operation. The company generates its income outside the USA, and the performance of the company might be impacted due to currency volatility.

Valuation Methodology (Illustrative): Price to Earnings based

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

Stock Recommendation:

Apart from its impressive pipeline of renewable projects, the company is expanding the operations across Canada, the U.S. and Australia. The company has On-Site and Cogeneration of more than 900 MW under its pipeline. The company expects its Comparable FY21EBITDA within the range of CAD 480 million to CAD 520 million, while Adjusted funds from operations for FY21 is expected within the range of CAD 335 million to CAD 365 million.

Source: Company Report

We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Capital Power Corp, TransAlta Renewables Inc. etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 19.78 on April 28, 2021.

One-Year Price Chart (as on April 28, 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.