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 roughly 60% of its revenue from the transmission segment, while the rest is derived from distribution. 

Key Updates:

• An Income Play: The company has a strong history of regular dividend distribution, supported by stable cash flows, which is a key positive. Notably, the stock of H carries an annualized dividend yield of ~3.449%, which looks impressive considering the current interest rate scenario.

Five-Year Dividend Distribution (Source: Refinitiv)

• Growth in Funds from Operations: The company reported higher funds from operations of CAD 1,553 million in 9MFY21, higher than CAD 1,409 million in pcp, supported by improved working capital management, which is a key positive. The above is impressive as it would help the company’s overall liquidity.

• Commencement of a Pilot Project: Recently, H announced the launch of a new pilot program in collaboration with Peak Power, wherein the group would study the benefits of using an electric vehicle (EV) charging technology to improve power resiliency and reliability for customers. As per the management, the above would help the consumers understand the ability of EVs to act as batteries and provide backup electricity during simulated power outages. Implementation of the above project is expected to provide cost efficiencies to consumers and will likely increase service demand in the coming days.

Q3FY21 Financial Highlights:  

• H announced its quarterly result, wherein the company posted slightly higher revenues of CAD 1,913 million than CAD 1,903 million in Q3FY20. The increase was driven by higher income from the Transmission segment (CAD 507 million vs CAD 483 million in pcp). 
• Total costs stood at CAD 1,422 million, lower than CAD 1,475 million in pcp. The decline was primarily due to lower purchased power costs (CAD 933million v/s CAD 993 million in the previous year).
• Income before financing charges and income tax expense was recorded at CAD 491million, compared to CAD 428 million in Q3FY20. 
• Net income amounted to CAD 302million, an improvement from CAD 292 million in Q3FY20. The increase was due to higher income before finance charges and income tax expense, partially offset by higher income tax (CAD 71 million v/s CAD 22 million in pcp).

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks:  

The company’s operations are highly regulated in nature, and hence the realization per unit depends on persisting rates as capped by the regulatory bodies. Moreover, unfavorable weather conditions might hinder the demand dynamics. 

Valuation Methodology (Illustrative): Price to CF-based

Stock Recommendation: 

The company reported a higher income from its distribution segment of CAD 1,347 million in 9MFY21, reflecting an 8% growth on a yoy basis, supported by improved OEB-approved rates, which is a key positive. 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 Emera Inc, Fortis Inc, etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of H at the last closing price of CAD 30.95 on November 25, 2021. 

One-Year Technical Price Chart (as on November 25, 2021). Source: REFINITIV, Analysis by Kalkine Group  

*The reference data in this report has been partly sourced from REFINITIV. 

Open Text Corporation

Open Text Corporation (TSX: OTEX) enables organizations to gain insight through market-leading information management solutions powered by OpenText Cloud Editions.

Key Updates:

• Strong Profitability Margins: The company commands higher margins than the industry median, indicating improved operational efficiencies. Notably, during Q1FY22 (ended September 30, 2021), the group reported an EBITDA margin of 37.2%, compared to the industry median of 8.2%. Additionally, its operating and net margins were 21.9% and 15.9%, respectively, compared to the negative industry median of 0.1% and 4.0%.

• New Acquisition Update: On November 24, 2021, the company announced the acquisition of Bricata, which provides Network Detection & Response (NDR) security technologies that analyze network traffic for vulnerabilities and threats and help reduce the number of false-positive security alerts. With the growing traction for cloud services, we believe the need for this service is likely to grow in the coming times, which will boost the company’s operations.

• Ample Liquidity: The company reported its available liquidity of USD 2.5 billion, including cash and cash equivalents of USD 1.735 billion. The above is sufficient to meet its working capital and capex requirements. Moreover, the OTEX does not have significant debt maturities before 2025, which is a key positive.

• Focused on Improving Annual Recurring Revenue (ARR): For FY22, the company’s emphasis is on improving its ARR from 81% of total revenue in FY21 to 83%, which is impressive as it provides higher revenue stability due to its repetitive nature. Moreover, on a long-term basis (FY24), the company is targeting to increase its recurring revenue share to 85%. The company also expects its adjusted EBITDA margin to range from 38% to 40% in FY24.
  

Q1FY22 Financial Highlights:

• OTEX announced its quarterly result, wherein the company posted total revenues of USD 832.308 million, higher than USD 804.013 million in Q1FY21. The increase was driven by higher income from cloud services & subscriptions and customer support segments.

• Gross profit increased to USD 574.185 million from USD 555.088 million in pcp, thanks to the higher income, partially offset by an increase in the cost of revenues (USD 258.123 million vs USD 248.925 million in pcp).

• The quarter was marked by higher research and development costs (USD 100.165 million vs USD 93.903 million in pcp) and an increase in sales and marketing expense (USD 146.240 million v/s USD 132.400 million in pcp). Income from operations was marginally up at USD 182.689 million, from USD 182.356 million in pcp.
• The corporation reported a net income of USD 131.966 million, an improvement from USD 103.406 million reported in Q1FY21.

Q1FY22 Income Statement Highlights (Source: Company Reports)

Risks:

The company’s products require constant upgradation to stay relevant within the industry. Moreover, the arrival of new players would likely lead to price competition and loss of clients.

Valuation Methodology (Illustrative): Price to CF-based

Stock Recommendation:

Over the years, the company has reduced its net leverage ratio, which indicates prudent capital management. Notably, in Q1FY22, the net leverage ratio stood at 1.36x, the lowest in the last eight quarters. 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 Oracle Corp, Box Inc, etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of OTEX at the last traded price of CAD 63.32 on November 25, 2021.

One-Year Technical Price Chart (as on November 25, 2021). Source: REFINITIV, Analysis by Kalkine Group 

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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