Canadian Utilities Ltd

Canadian Utilities Ltd (TSX: CU) is a Calgary-based multiline utility company and which operates in a diversified global enterprise. The corporation 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. 

Key Highlight

• An income Play: The company has an excellent track record of dividend payment and has increased its dividend payment over the years, which is commendable. Growth in the dividend payment indicates a healthy cash flow generating capacity and business resiliency. At the last traded price, the CU stock offers a healthy dividend yield of ~5.559%, which would attract several income investors.

Dividend Payment History (Source: Company Presentation)

• Ample Liquidity: Apart form a healthy cash position of CAD 980 million, the company has strong liquidity levels through its lines of credit amounting CAD 3,048 million with an available balance of CAD 2,260 million. We believe the current liquidity seems sufficient enough to withstand the current downturn.                                                               

Line of Credit as on September 30, 2020 (Source: Company Reports)

Q3FY20 and 9MFY20 Financial Highlights:

• Revenue for Q3FY20 stood at CAD 727 million, as compared to CAD 885 million in the previous corresponding period. The decline was primarily attributed due to lost revenue on account of the sale of the Canadian electricity generation business coupled with the timing of settlements related to regulatory decisions, the completion of the PBR efficiency carry-over mechanism funding, and the transition to APL operating activities by Electricity Transmission. However, a rise in the regulated rate base partially supported the group’s income.
• Operating profit stood significantly lower at CAD 216 million, against CAD 464 million in the previous corresponding period (pcp), due to a lower income, partially offset by a slide in total expenses.
• Capital investment for the nine months ended FY20 stood at CAD 659 million, stood CAD 193 million lower than the previous corresponding period (pcp), due to completion of construction on Alberta PowerLine in 2019, coupled with a delayed capital investment in the Regulated Utilities in 2020 and lower capital investment in Electricity Generation.                                                  

9MFY20 Capital Investments (Source: Company Reports)

• Earnings for the period stood at CAD 93 million, as compared to CAD 286 million in Q3FY19.                          

Q3FY20 Financial Highlights (Source: Company Reports)

Risks: The outbreak of the second wave of COVID 19 would disrupt the supply-chain and would delay in project deployment.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation:

The group derives the majority of the revenues from the utility segment, which is resilient in nature and is categorized under ‘essential services’, which is a key positive. Moreover, the company is exploring new avenues across the U.S. and in Latin America for its utility segment, which augurs well for the business prospect. The group derives around 95% of its adjusted earnings through regulated utilities, which suggests stability in earnings. Further, usually, Utility businesses 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. We have valued the stock using Price to Earnings-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered industry (Multiline Utilities) mean on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 30.78 on November 4, 2020.

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

Fairfax Financial Holdings Limited

Fairfax Financial Holdings Limited (TSX: FFH) is a holding company which is engaged in property and casualty insurance and reinsurance and the associated investment management.

Q3FY20 Financial Highlights:

• FFH announced its quarterly results, wherein the company posted higher net premium written at USD 3,735.2 million in the third quarter of 2020, as compared to USD 3,318.3 million in the previous corresponding period (pcp). The company reported stable top-line of USD 4,992.6 million, against USD 4,925.9 million in pcp, supported by higher net premium earned, partially offset by lower interest and dividends and other revenue.
• Total expense stood at USD 4,913.1 million, slightly higher than USD 4,856.0 million in Q3FY19, primarily attributable to a higher loss on claims.
• Earnings (loss) before income taxes stood at USD 79.5 million, against USD 69.9 million, a year ago. The company reported a lower bottom-line of USD 41.8 million, as compared to USD 74.4 million in Q3FY19. The decline was primarily due to an increase in the provision of income taxes of USD 37.7 million versus recovery of income taxes of USD 4.5 million in the previous corresponding period.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Recent Highlights:

• Recently, the company extended its offer to exchange up to USD 650,000,000 in aggregate principal amount of its 4.625% Senior Notes due 2030, for an equivalent amount of its 4.625% Senior Notes due 2030 registered under the United States Securities Act of 1933.
• Earlier, on October 05, 2020, FFX announced the appointment of Honorable David Johnston for the post of director.

Risk: Volatility in the financial markets, change in interest rates, lower dividend income are likely to affect the overall performance of the company.

Valuation Methodology: Price to Book Value (Illustrative)

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

Stock Recommendations: Due to a volatile equity market coupled with low-interest rate environment, the stock of FFH corrected ~36% so far this year. The company has ample liquidity to meet its short-term and as well as long-term obligations, which is a key positive. Furthermore, amidst the current tepid demand, the group has been consistent in making payments relating to interest expense, corporate overhead, preferred share dividends, income taxes and other investment-related activities, which shows operational resilience. Moreover, the company has repaid its USD 228.0 million as net borrowings on revolving credit facilities and USD 132.1 million as net borrowings on revolving credit facilities and short-term loans, during the quarter, which is impressive. Core underwriting performance continues to be very strong with a combined ratio excluding COVID-19 losses of 94.5%, continued favourable reserve development and growth in gross premiums written of 13.9%, and operating income was $254.7 million despite the catastrophe and COVID-19 losses. Further, the company is yielding higher on the exchange with a dividend yield of 3.39%, which is decent, given the lower interest rate environment.  We have valued the stock using Price to Book value based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered a peer group like Hartford Financial Services Group Inc, Aviva PLC etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 384.67 on November 04, 2020.

1-Year Price Chart (as on November 04, 2020, after the market close). 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.