Fortis Inc.

Fortis Inc. (TSX: FTS), owns and operates utility transmission and distribution assets in Canada and the United States. The group is serving more than 2.5 million electricity and gas customers. The company has smaller stakes in electricity generation and several Caribbean utilities.

Key highlights

• Massive capital investment plans: The company is planning to invest CAD 19.6 billion from 2021 to 2025. This five-year capital plan is expected to increase rate base from CAD 30.2 billion in 2020 to CAD 36.4 billion by 2023 and CAD 40.3 billion by 2025, translating into a CAGR of 6.5% and 6.0%, respectively. Around 61% of this capex is likely to be funded from cash from operations, which is impressive.

Source: Company

• A long history of Dividend Distribution: The company has a decent dividend payment record and has guided for a 6% average annual dividend growth till FY25. A consistent dividend payout reflects a stable cash flow generation capability of the company.The group announced the fourth-quarter dividend of CAD 0.505 per common share. At the last traded price, the stock was offering a dividend yield of 3.93%, which is lucrative considering the current interest rate environment. 

Source: Company

• Liquidity: The company has a cumulative credit facility of CAD 5.8 billion, with approximately CAD 4.8 billion undrawn. The company also holds a cash balance of CAD 494 million as on September 30. The current liquidity level seems sufficient enough to meet the group’s near-term requirement.

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the group posted revenue of CAD 2.12 billion, increased by CAD 70 million as against CAD 2.05 billion in the previous corresponding period. The increase in revenue was primarily due to overall higher flowthrough costs in customer rates, favourable weather in Arizona, and favourable foreign exchange of CAD 10 million.
• The operating income registered by the group in Q3 2020 stood at CAD 602 million, as against CAD 585 million in Q3 2019.
• The group posted net earnings of CAD 336 million in the reported quarter, as against CAD 324 million in the previous corresponding period. The increase in net earnings was partially offset by an increase in energy supply cost, which increased by CAD 50 million. 

Risk 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, Realization prices, exchange rates, inflation, interest rates. A prolonged economic downturn could adversely impact the ability of customers, contractors, and suppliers to fulfil their obligations and could disrupt operations and financial health.

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company’s business model is resilient as it operates in the utility industry, which is immune to the economic cycles. The company is likely to benefit from its capital investment plan. Further, the company continued to distribute dividend amid a challenging operating environment, on top of this, the company increased its annual dividend rate, which is encouraging from an investor’s point of view. Therefore, based on the above rationales and valuation, we have given a ‘Buy’ rating at the closing price of CAD 51.42 on December 2, 2020. We have considered Canadian Utilities Ltd, Emera Inc, and Algonquin Power & Utilities Corp etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Shaw Communications Inc.

Shaw Communications Inc. (TSX: SJR.B) is a Canadian cable company which is one of the biggest providers of Internet, television, and landline telephone services in British Columbia, Alberta, Saskatchewan, Manitoba, and northern Ontario. The group operates through two segments: Wireless and Wireline.

Key highlights 

• An upsurge in wireless subscribers:In Q4 2020, the net addition of approximately 60,000 Wireless subscribers reflected increased retail traffic and strong demand from western Canadians for the company’s offering, despite the intense competition and less active back-to-school season due to the COVID-19 environment.

• Increase in Free cash flow:The group generated a free cash flow of CAD 152 million in Q4 2020, compared to CAD 42 million in the previous corresponding period. The increase was mostly due to higher adjusted EBITDA and lower capital expenditures. 

• The bullish stance of management: The management is optimistic on their operations and they have provided fiscal 2021 guidance, where they expect healthy growth in Adjusted EBITDA over fiscal 2020, capital investments would be of approximately CAD 1.0 billion and free cash flow of approximately CAD 800 million.

• An Income play: The company has a strong history of dividend payment, which establishes the fact that the company’s business is resilient and has reported stable cash flows over the years. The group declared a monthly dividend of CAD 0.099 per outstanding common share, to be paid on 30th December 2020. At the last traded price, the stock was offering a dividend yield of 5.16% amid a low interest rate environment. 

Financial overview of Q4 2020.

Source: Company 

• In Q4 2020, the company reported revenue of CAD 1.3 billion, more or less same with the previous corresponding period.

• Wireline revenue decreased 1.3% to CAD 1.06 billion from CAD 1.07 billion in Q4 2019.
• Wireless service revenue increased 14.7% to CAD 211 million in Q4 2020 compared to CAD 184 million recorded in the previous corresponding period. The increase was primarily due to increased subscriber base and growing penetration of Big Gig and Absolute Zero pricing plans. In contrast, the wireless equipment revenue decreased by 13.5% to CAD 83 million due to lower subscriber activity and the temporary retail closures because of COVID-19.

• Adjusted EBITDA posted by the company in Q4 2020, increased by 11.2% and stood at CAD 594 million, as compared to CAD 534 million in the comparable prior-year quarter. 

• The group posted net income of CAD 175 million in Q4 2020, as against CAD 166 million in the previous corresponding period. The increase was primarily due to a rise in Adjusted EBITDA. 

Risk associated with investment

Like most of the peers, the company continues to lose subscribers in the Wireline segment, and this could impact revenues. Moreover, the intense competition is leading to a higher churn rate in the wireless business, mainly in the prepaid segment. Further, moderation in the ARPU and ABPU could hurt the revenue growth for the company. 

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation

The group closes the fourth quarter and financial year 2020 on a positive note. Fiscal 2020 included another exciting milestone for the company, Wireless business with the launch of Shaw Mobile in Alberta and British Columbia, complementing the company’s existing Freedom Mobile brand. The management is also bullish on the group’s performance and has shared guidance for FY21, where they expect healthy growth in Adjusted EBITDA over FY20, along with a generation of Free Cash Flow of CAD 800 million after capex of CAD 1 billion. Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 22.97 on December 2, 2020. We have considered Rogers Communications Inc, BCE Inc, Telus Corp, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

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