Fortis Inc.

Fortis Inc. (TSX: FTS) is a Canada-based operates utility transmission and distribution company which has operations across Canada and the United States. The company serves more than 2.5 million electricity and gas customers.

Key Highlights:

Impressive Dividend History: 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 business. At the last traded price, the stock was offering a dividend yield of ~3.838%, which is lucrative considering the current interest rate environment.                        

Dividend History (Source: Company Reports)

Strong Liquidity and Capital investments program:  The company proposed a solid funding plan of ~CAD 19.6 billion for the next five-year, and ~61% of this program is likely to be funded from cash from operations, which is impressive. The corporation has strong access to its debt-market, and an unutilized credit facility of ~CAD 4.8 billion ensures abrupt liquidity-levels. Current liquidity level seems sufficient to pass through the current challenging time.

Liquidity and Future Funding Plans (Source: Company Reports)

Q3FY20 Financial Highlights:

• During Q3FY20, revenue stood at CAD 2,121 million, higher than CAD 2,051 million in Q3FY19. The increase was driven by higher flowthrough costs in customer rates coupled with Rate Base growth at the regulated utilities. However, the performance has been impacted by the temporary closure, and subsequent reopening, of non-essential businesses related to the COVID-19 Pandemic.
• Operating income stood higher at CAD 602 million, as compared to CAD 585 million in the previous corresponding quarter.
• The group reported net earnings of CAD 336 million, as compared to CAD 324 million in Q3FY19. Basic EPS stood at CAD 0.63, marginally lower than CAD 0.64 in Q3FY19.                 

Q3FY20 EPS (Source: Company Reports)             

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group might witness a delay in payment collection owing to COVID-19 pandemic. The group is also exposed to currency fluctuations risk.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Reccommednation

The company operates in the utility segment, which is immune to the economic cycles. The corporation’s 5-year capital investments plan is expected to increase rate base from CAD 30.2 billion in FY20 to CAD 36.4 billion by FY23 and CAD 40.3 billion by FY25, translating into three- and five-year compound annual growth rates of 6.5% and 6.0%, respectively. Further, the company has a decent track record of dividend payment and continue to distribute dividend amid a challenging operating environment, which is encouraging from an income investor’s point of view. We have valued the stock using Price to Earnings 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 industry (Utilities) mean on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 52.69 on November 2, 2020.

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

Aecon Group Inc

Aecon Group Inc (TSX: ARE) is a diversified Canada-based construction company that operates in two major segments, namely, Construction and Concessions.

Key Highlights:

• An Income Play: The company has an impressive track record of continuous dividend payment, which is an indication of stable cash-flow generation and is a key positive from an income investor’s point of view. Furthermore, the company has increased the dividend payment during FY20 at a time when most of the companies are lowering dividend payments. At the last traded price, ARE stock was offering a lucrative dividend yield of ~4.47% amid low interest rate environment.             

10-years Dividend Payment History (Source: Company Reports)

• Stable Order-Book: The company reported a higher backlog of CAD 6,664 million as on September 30, 2020, higher than CAD 6,557 million in the previous corresponding period (pcp). A higher backlog denotes higher future revenue. The company has reported new contract awards of CAD 2,440 million on a year-to-date basis, as compared to CAD 2,279 million, a year ago.

Backlog Details (Source: Company Reports)

Q3FY20 Financial Highlights:

• ARE reported an excellent quarterly performance, wherein the company reported revenue of CAD 1,039.456 million, marginally higher than CAD 1,025.435 million in the previous corresponding period (pcp).
• The increase was driven by higher revenues from the construction segment due to increased activity on mainline pipeline projects in western Canada, higher civil operations and urban transportation systems. Furthermore, higher revenue from the utility segment, due to the recent acquisition also supported the top-line.
• Operating profit stood significantly higher at CAD 106.779 million, as compared to CAD 58.769 million in Q3FY19, driven by a higher gross profit, coupled with a lower Marketing, general and administrative expense and depreciation and amortization costs.
• Profit for the period came in at CAD 73.624 million, as compared to CAD 42.116 million in Q3FY19.
• Cash and cash equivalents were reported at CAD 577.141 million, while total assets were reported at CAD 3,390.133 million.             

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Aecon's operations in 2020 have been impacted at varying times by way of suspensions of certain of the Company's projects, either by its clients or due to a broader government directive, by disruption to the progress of projects due to the need to modify work practices to meet appropriate health and safety standards. Continuation of such a trend would hamper the financial performance.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation:

The company has an impressive order pipeline which is visible from its current backlog. Furthermore, the company has a robust recurring-revenue base, which augurs well for stable top-line. The group mentioned that its financial position, liquidity and capital resources remain strong, and are expected to be sufficient to finance its operations and working capital requirements for the foreseeable future. The Company expects that demand for its services will remain strong following the COVID-19 pandemic as the federal government and provincial governments across Canada have identified investment in infrastructure as a key source of economic stimulus as part of the recovery plan. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered WSP Global, Bird Construction Inc and SNC-Lavalin Group Inc., etc. as a peer group. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 14.33 on November 2, 2020.

ARE 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.