TransAlta Corporation

TransAlta Corporation operates a portfolio of power generation assets across Canada, the United States and Australia. The group operates via two segments, namely Generation and Energy Marketing. The Group provides clean, affordable, and reliable power to municipalities, medium and large industries, businesses and utility customers.

During the first quarter of FY20, Brookfield acquired 30,388,645 common shares of TransAlta Corporation, representing ~11% of the total issued and outstanding common shares. The Group declared a quarterly dividend of CAD 0.0425 per common share, payable on July 1, 2020.

Q1FY20 Financial Highlights: TA declared its quarterly results for the period ended March 31, 2020, wherein the Company posted a decline in revenue of CAD 606 million, as compared to CAD 648 million in the previous corresponding period. The decline was primarily attributable to lower production, resulting in lower revenue, within the Canadian Coal and Canadian Gas segments and a slide in income from Energy Marketing segment, which was partially offset by higher revenues from the Wind and Solar segment. Fuel, carbon compliance and purchasing power remained relatively lower than the previous corresponding quarter due to a lower coal costs across Canada and the US, resulting in a higher gross margin. Operating income stood significantly higher at CAD 126 million versus CAD 36 million in pcp, supported by favorable gross margin and an asset impairment reversal; while a rise in operations, maintenance & administration, expense remained a drag. The Company reported its net earnings of CAD 44 million, as compared to a net loss of CAD 30 million in Q1FY19. Free cash flow improved to CAD 109 million from CAD 95 million in Q1FY19.

Q1FY20 Income Statement Highlights (Source: Company Reports) 

Guidance: For FY20, the Company anticipates its Comparable EBITDA within the range of CAD 925 million to CAD 1,000 million, while Free cash flow is expected to be the range of CAD 325 million to CAD 375 million. The Group targets its annual dividend at CAD 0.17 per share. Sustaining capital is expected within the range of CAD 170 million to CAD 200 million for FY20.

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All forecasted figures and peers have been taken from Refinitiv (Thomson Reuters), NTM-Next Twelve Months

Stock Recommendation: The stock slide ~14% in the last one year due to the ongoing selling pressure across the broader market. The offerings the Company come under ‘essential services’ ensuring business continuity despite an overall disruption scenario and the Business has delivered a decent quarterly performance. The Company generates its cash flow from diversified sources, which helps to mitigate the risk factor. The stock offers a dividend yield of 2.18%, which looks decent amidst the low interest rate scenario. The stock recovered from the recent low as investors have shown interest in the stock after a stake acquired by Brookfield during the first quarter. We have valued the stock using Price/CF based relative valuation approach and taken peers like AES Corp (NYSE: AES), Capital Power Corp (TSX: CPX)  and Canadian Utilities (TSX: CU) Ltd and arrived at a target price offering a lower double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the current price of CAD 7.42 as on May 14, 2020.

TA One Year Daily Chart (Source: Refinitiv, Thomson Reuters)

Westshore Terminals Investment Corp

Westshore Terminals Investment Corp (TSX: WTE) is an industrial transportation company based out of Canada; operating loading terminal and coal storage in British Columbia based Roberts Bank. The group handles coal from mines in Alberta, British Columbia, and north-west part of the US.

Financial Highlights: Q1 FY2020 (31^st March 2020)

(Source: Quarterly Report, Company Website) 

In the first quarter of the financial year 2020, driven by an increase in the revenue from coal loading for the period, the revenue surged to CAD 92,372 thousand as against CAD 88,799 thousand in the Q1 of FY2019. The PBT (profit before tax) stood at CAD 39,842 thousand in the first quarter of the financial year 2020 versus a PBT (profit before tax) of CAD 37,307 thousand in Q1 FY2019, reflecting increased revenue and lower operating expenses. The group’s Profit for the period stood at CAD 29,074 thousand in the first quarter of the financial year 2020 versus CAD 27,237 thousand in the first quarter of the financial year 2019. The basic and diluted earnings per share stood at 0.44 cents in the first quarter of the financial year 2020 as against the basic and diluted earnings per share of 0.41 cents in Q1 FY2019. The cash & cash equivalents balance stood at CAD 126,853 thousand as on 31^st March 2020 versus cash balance of CAD 131,858 thousand as on 31^st December 2019. The total assets stood at CAD 1,193,635 thousand as on 31^st March 2020 versus total assets of CAD 1,207,307 thousand as on 31^st December 2019.

Share Price Performance

WTE One Year Daily Chart (Source: Refinitiv, Thomson Reuters)

Westshore Terminals Investment Corp shares currently trading at CAD 14.03 at the time of writing on 14 May 2020. Stock's 52 weeks High is CAD 24.26 and Low is CAD 11.88.

Valuation Methodology (Illustrative): Price to Earnings

*Peers: Intertape Polymer Group Inc, Bombardier Inc, Canadian Pacific Railway Ltd and Chorus Aviation Inc. 

Conclusion

The Company has shown an increase in financial performance in the first quarter of the financial year 2020. Both the top-line and the bottom-line performance have improved with improved profitability for the period. The Group managed to control its operating expenses more effectively, which will result in improvement in financial performance in the near term. WTE’s tonnage shipped increased to 7.7 million for the period versus 6.9 in the same period of last year. The operating cash flow increased by 16 per cent for the period versus Q1 FY2019 data. The group’s operations are not materially impacted by the impact of Covid-19 and are running at a normal pace at the Terminal and are expected to remain unchanged. The group has a well-positioned balance sheet with a decent operating facility to carry daily operations. WTE has managed to mitigate the negative impact on operational and financial performance through improved cost structures and operational efficiency.

Over the course of 3 years (FY16 - FY19), the company’s operating income surged from CAD 165.4 million in FY16 to CAD 201.7 million in FY19. Compounded annual growth rate (CAGR) stood at 6.84 per cent.

Based on the decent growth prospects, we have given a “Buy” recommendation at the closing price of CAD 14.03 (as on 14th May 2020) with lower double-digit upside potential based on 9.05x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

Disclaimer

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