Fortis Inc.

Fortis Inc. (TSX: FTS) owns and operates utility transmission and distribution assets across Canada and the United States and caters to more than 2.5 million electricity and gas customers.

Q4FY20 Financial Highlights:

• Consistent Dividend Distribution: The group has a strong history of stable dividend payout, backed by consistent cash flow generation. At the last price traded, the stock of FTS was offering an impressive dividend yield of ~3.922% on an annualized basis, higher than the TSX composite of ~3.31% on an annualized basis.

Source: Company Reports

• Sequential Growth driven by Resilient business model: The group has a resilient operating model and reported a sequential increase in total revenue and operating income at CAD 2,346 million and CAD 650 million, respectively, as compared to CAD 2,121 million and CAD 602 million, respectively a quarter ago. Moreover, the group reported its net income at CAD 348 million, higher than CAD 307 million in Q3FY20. 

• Better than Industry-margins: The group reported robust margins during Q4FY20, stood higher than the industry median, driven by higher operational efficiency. EBITDA margin and operating margin stood strong at 42.5% and 27.7%, respectively, higher than the industry median of 34.3% and 22.5%, respectively. Moreover, the group reported net margin of 16%, slightly higher than the industry median of 15.1%. 

Q4FY20 Financial Highlights:

• FTS announced its quarterly results, wherein the group posted revenue of CAD 8,935 million, higher than CAD 8,783 million in the previous corresponding period (pcp). The increase was driven by higher income from the contractual segment.
• Total expenses stood at CAD 6,427 million, as compared to CAD 6,322 million in Q4FY19. Depreciation and amortization stood higher at CAD 1,428 million, as compared to CAD 1,350 million in pcp.
• Operating income stood at CAD 2,508 million, as compared to CAD 3,038 million in Q4FY19, supported by a gain on disposition amounting to CAD 577 million in pcp.
• Net earnings stood lower at CAD 1,389 million, as compared to CAD 1,852 million in pcp, due to a lower operating income.
• The group reported cash and cash equivalents of CAD 249 million, while total assets were recorded at CAD 55,481 million.

Risks: The group reported a slide in its energy sales across all the company's utility segments, due to the closure and reopening of non-essential businesses coupled with stay-at-home orders and other economic impacts related to the COVID-19 Pandemic. Continuation of the above trend would likely to dampen the group’s income.

Valuation Methodology (Illustrative): EV to EBITDA

*(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

From a long-term perspective, the group’s outlook remains positive due to the nature of its operations. Moreover, FTS is well funded and has impressive liquidity of CAD 4.3 billion, out of CAD 5.6 billion, sufficient to fund its capital investments and working capital requirements. The group would diversify its operating portfolio and would seek opportunities across several growth prospects within its service territories. Moreover, the company’s adjusted earnings for FY20 grew by 7% y-o-y to CAD 1,195 million, supported by a decent growth (~8% y-o-y) in rate base. We have valued the stock using the EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers Emera Inc, Hydro One Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 51.54 on February 16^th, 2021.

FTS Daily Technical Chart (as on February 16^th, 2021). Source: Refinitiv (Thomson Reuters).

iA Financial Corp

iA Financial Corp. (TSX: IAG), is a life and health insurance company. It offers life and health insurance products, savings and retirement plans, mutual funds, securities, auto and home insurance, mortgages, etc. The company operates and manages its activities according to five main reportable operating segments Individual Insurance, Individual Wealth Management, Group Insurance, Group Savings and Retirement, and US Operations. 

Key highlights 

• Decent Guidance for 2021: With its proven business model, the group is well-positioned to grow its earnings and create value for its shareholders in 2021. The management shared its guidance for 2021, where they expect its core earnings per common share to report a healthy jump, in a range of CAD 7.60 to CAD 8.20 based on steady organic capital generation.

Source: Company

• A robust rise in premiums and deposits: In 2020, the company reported premiums and deposits of nearly CAD 14.1 billion, increased by 24.78% compared to CAD 11.3 billion in 2019. Despite the pandemic, the group's sales growth was excellent, particularly in Individual Insurance, Individual Wealth Management, Group Insurance Employee Plans, Group Savings and Retirement, US Operations and at iA Auto and Home, helping them in generating healthy premiums. 

Source: Company 

• Healthy Assets Under Management & Administration: On December 31, 2020, the company had CAD 197.5 billion in assets under management and administration, increased by nearly CAD 8.0 billion, or 4.2%, against CAD 189.5 billion in 2019. Growth in assets under management and consistent growth in gross sales along with stable return on assets are key to long-term profitability. 

Source: Company 

Steady dividend distribution: The company has a strong history of consistent dividend distribution, backed by healthy operating performance. Recently the company announced a fourth quarter dividend of CAD 0.4850 per share, CAD 1.94 on annualized basis, payable on March 15, 2021 with a record date of February 26, 2021.

Source: company 

Financial overview

Source: Company 

• In 2020, the company posted healthy growth in revenues to CAD 17.63 billion, against CAD 15.26 billion in the previous corresponding period. Despite the pandemic, sales growth registered by the group was excellent in most of the segments.
• Total operating expenses for 2020, stood at CAD 16.87 billion, against CAD 14.37 billion in the previous corresponding period. The rise in operating expenses was mainly due to high net transfers of segregated funds and higher insurance contract liabilities.
• The company's net income declined in 2020, to CAD 632.3 million, compared to CAD 699.4 million in 2019, primarily due to above-stated reasons coupled with higher commissions paid and higher general expenses. 

Risks associated with investment

The group’s operations are linked to capital market and interest rate movements. Any volatility in the capital market and interest rate would affect the group’s performance. 

Valuation Methodology (Illustrative): Price to Book Value

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

With the increased financial strength and strong sales momentum, the Company put in place to deal with the pandemic's potential impacts and the group is well-positioned to continue its growth in 2021. The Company finished 2020 with net income attributed to common shareholders of CAD 611.2 million and maintained a strong solvency ratio above the target despite the significant capital deployment for the IAS acquisition. An organic capital generation was good enough along with the highest quality investment portfolio, which increased the book value per share by 7%. Furthermore, the Company reported continued growth over the years in premiums and deposits and AUM, indicating business resiliency. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 64.99 on February 16, 2021. We have considered Sun Life Financial Inc, Great-West Lifeco Inc, Canadian Imperial Bank of Commerce, etc. as the peer group for the comparison. 

Source: Refinitiv (Thomson Reuters)

Disclaimer

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