TransAlta Renewables Inc

TransAlta Renewables Inc. (TSX: RNW) is a Canada-based company who owns a diversified portfolio of renewable and natural gas power generation facilities and other infrastructure assets, located at different pasts of North America.

Key highlights 

• An Income Play: On the last closing price, RNW shares are offering a lucrative income opportunity for the investors, with Dividend yield of 5.011%, amid times when investors are struggling to get 2% annually on investment grade bonds or fixed income securities. Together with higher yield, the company has track record of consistent dividend payment since IPO in 2013. Therefore, a high yielding stock, history of dividend payout and investment grade balance sheet, will keep RNW shares in the investor’s limelight especially for income seeking investors.

• Acquired North Carolina Solar: The Corporation has purchased a 100% economic interest in a 122 MW portfolio of 20 operating solar PV facilities in North Carolina. The company's US Wind and Solar installed capacity has expanded from 397 MW to 519 MW as a result of this transaction. Furthermore, the project is estimated to generate annual EBITDA of USD 9.0 million, which is a considerable benefit.

• Started commercial operation: On November 10, 2021, the company announced that its 206.4 MW Windrise wind plant entered into commercial operation. This is its tenth wind facility in Alberta and is the first project to reach commercial operation out of the eight projects awarded through the second and third rounds of the Alberta Electric System Operator’s Renewable Electricity Program. Moreover, the company expects an average annual EBITDA of CAD20-CAD22 million.

• Lower Balance Sheet risk: The group is relatively less leveraged compared to its peers, with Debt-to-Equity ratio of 0.41% as on September 30, 2021, whereas industry median stood at 2.67x implies that the company is using debt intelligently to avoid any balance sheet risk. Further, the company’s Net debt is ~11.77x of its EBITDA in the same period, whereas industry median Net Debt to EBITDA ratio stood at 23.94x, implies relatively strong debt protection metric.
  

Financial overview of Q3 2021 (in millions of CAD)

Source: Company Reports 

• In Q3 2021, the company reported revenue of CAD 114 million was approximately 20% higher compared to CAD 95 million reported in the same quarter of previous financial year.
• The gross profit in the reported period made no change from previous corresponding period and stood at CAD 76 million, as the company witnessed higher fuel and royalty’s charges.
• On the back of higher asset impairment cost the company’s operating income shed to CAD 8 million against CAD 15 million in pcp.
• Net income stood at CAD 21 million compared to CAD 7 million in pcp. The rise in net income was mainly due to higher finance income from subsidiaries.
  

Risks associated with investment

The company’s business activities expose them to a variety of risks and uncertainties including, increased regulatory changes, rapidly changing market dynamics, volatility in commodity markets, interest rate risk and forex risk as well. 

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

The company reported decent performance in Q3FY21, with revenue up 20% on a YoY basis, improved bottom line and higher cash flows from operations. Moreover, made progress on strategy of fleet diversification and growth in their contracted cash flow profile with the closing of the North Carolina Solar acquisition. This project has expanded their solar footprint in the United States and adds a new high-quality customer in a region where the company see significant growth opportunities. Moreover, the project is expected to add USD 9 million in comparable EBITDA annually, which is a key positive. Furthermore, the company has a strong balance sheet and on top of all its share is delivering a healthy yield, which is encouraging looking at the current market dynamics. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 18.78 as on December 7, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Summary Analysis

1-Year Price Chart (as on December 07, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Westport Fuel Systems Inc.

Westport Fuel Systems Inc. (TSX: WPRT) provides high-performance, low-emission engine and fuel system technologies utilizing gaseous fuels. The company operates through four segments, namely, Original Equipment Manufacturer(OEM), Independent Aftermarket (IAM), the Cummins Westport Inc (CWI) Joint Venture, and Corporate.

Key Updates:

• Better liquidity: The company reported its quick ratio and current ratio of 1.84x and 2.31x, respectively in Q3FY21, higher than the industry median of 1.34x and 2.13x, respectively. The above indicates better working capital management and illustrates that the company can fund its short-term liability through its current assets.

• Higher cash balance: At the end of Q3FY21, the company reported its cash balance of USD 142 million, which is the higher than USD 46 million in pcp. A higher cash balance indicates better liquidity position. Moreover, total available liquidity of the company stood at USD 157 million in Q3FY21, which is higher than USD 49 million reported in Q3FY20. We believe the corporation would be able to meet its short-term obligations and capital expenditures through the above liquidity.

Source: Company Presentation

• Positive outlook: In the recent past, the company reported higher revenue from its OEM segment due to increase in light-duty OEM sales volumes, particularly sales to Indian and Russian OEMs. Within the OEM segment, the company expects growth in High Pressure Direct Injection (HPDI) through the remainder of this year supported by recovery in the automobile production from its clients. On the other hand, the IEM segment witnessed demand revival across all markets coupled with significant growth from its emerging markets. The momentum is likely to continue in the fourth quarter of FY21, which is a key positive.

Q3FY21 Financial Highlights:

• WPRT announces its quarterly result, wherein the company posted its revenue of USD 74.343 million, higher than USD 65.407 million in pcp. The growth was primarily due to the continued recovery of sales volumes in the light-duty OEM businesses coupled with USD 7.1 million revenue from the recently acquired fuel storage business, partially offset by the decrease in the independent aftermarket operations.
• The quarter was marked by higher cost of revenue, increase in research & development expense, increase in general & administrative expenses. Total expenses stood higher at USD 82.986 million, as compared to USD 68.523 million in pcp.
• Loss from operations widens to USD 8.643 million, from a loss of USD 3.116 million in pcp due to higher input costs.
• The company reported net loss of USD 5.768 million, as compared to a net profit of USD 0.822 million in pcp.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: The company reported higher input costs during Q3FY21, which has dampened the company profitability and cash flows. Continuation of the above trend is likely to hamper the overall performance of the company. 

Valuation Methodology (Illustrative): EV to Sales based

Stock Recommendation:

The group reported a lower D/E ratio of 0.33x in Q3FY21, as compared to the industry median of 0.45x, which indicates improved financial flexibility as compared to its peers. Moreover, long-term debt to total capital stood at 13.7% in Q3FY21, as compared to the industry median of 22.6%. We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered industry (Consumer Cyclical) median on an NTM basis. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 3.06 on December 07, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Summary Analysis

One-Year Technical Price Chart (as on December 07, 2021). Analysis by Kalkine Group

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

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.