Emera Inc.

Emera Inc. (TSX: EMA) is a Canada-based energy and services company which invests in electricity generation, transmission and distribution and gas transmission and distribution.  

Key highlights

• Big capital investment plans: The company plans to invest CAD 7.4 billion over the next two years (2021-2023) and another CAD 1.2 billion for opportunities under development over the same period, resulting in a forecasted rate base growth of 7.5% to 8.5% through to 2023. The investments will be across the portfolio in a renewable and cleaner generation, infrastructure modernization and customer-focused technologies.

Source: Company

• Liquidity: The company has a cumulative credit facility of CAD 3.3 billion, with approximately CAD 1.6 billion undrawn and the company also holding a cash balance of CAD 335 million as on September 30. The current liquidity level seems sufficient to mee the near-term requirement.
• Increased common dividend: On 16^th November 2020, the group paid a dividend of CAD 0.637. The group increased its annual common share dividend to CAD 2.55 from CAD 2.45. The company has provided annual dividend growth guidance of four to five per cent through to 2022.

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the company posted operating revenues decreased by CAD 136 million to CAD 1,163 million as compared to CAD 1,299 million in Q3 2019. The group witnessed lower revenues under Florida electric utility segment due to lower clause revenues as a result of a decrease in fuel costs also the company had short revenues from their other electric utility segment where they sold Emera Maine in Q1 2020.
• In Q3 2020, operating expenses posted by the company decreased by CAD 127 million to CAD 990 million as compared to CAD 1,117 million in Q3 2019 due to lower regulated fuel for generation and purchased power as a result of lower natural gas prices at the Florida electric utility segment.
• The net income attributable to common shareholders in Q3 2020 came at CAD 84 million as compared to CAD 55 million over the previous corresponding period, based on lower operating expenses as well as lower interest expense.

Risk associated with investment

The company is exposed to many risk factors which alone or in a cumulative manner can affect the company’s operations and financial health. Some of the risks include the supply of and demand for crude oil, natural gas, natural gas liquids and renewable energy, prices of these commodities, exchange rates, inflation, interest rates, the COVID-19 pandemic impacted the economies and business environments in which the company operates. 

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

We believe the company will post much better numbers in the upcoming period supported by the revival in the economy, which has started generating the demand in the energy sector. Also, the temporary suspension of disconnections over non-payment trend has begun to reverse as normal disconnection processes resume, and the company do not see any significant customer defaults. Further, the company continued to distribute dividend amid a challenging operating environment, on top of this the company increased the annual common share dividend rate, which is encouraging from an investor’s point of view. Therefore, based on the above rationales and valuation, we have given a ‘Hold’ rating at the closing price of CAD 55.25. We have considered TC Energy Corp, AltaGas Ltd, Enbridge Inc etc. as the peer group for the comparison.

Daily technical chart. Source: Refinitiv (Thomson Reuters)

Primo Water Corporation

Primo Water Corporation (TSX: PRMW), operates as a pure-play water provider through its recent acquisition of the legacy Primo business by Cott. The firm's water solutions ecosystem is anchored by an assortment of water dispensers and its water direct business.

Recent Highlights:

• Recently, the company announced the acquisition of Mountain Valley Water Company (MVLA), located in Los Angeles. The acquisition would add more than 8,000 customers to Primo NA and would enhance the company’s footprint in southern California.
• The Board of Directors announced a quarterly dividend of USD 0.06 per share, payable on December 04, 2020.

Key Highlights:

Resilient Business-model:  The company’s operations are resilient in nature and caters to more than 2.5 million customers globally and has a business presence across 21 countries. The group has a remarkable presence across the U.S. region, with more than 90% of the population takes services from PRMW.                                             

Source: Company Reports

Impressive Guidance: Despite the current economic down turn, the company reaffirms stable Q4FY20 guidance, which is encouraging. Revenue for the fourth-quarter of FY20 is expected within the range of USD 470 million to USD 500 million, while adjusted EBITDA is estimated to be around USD 85 million to USD 95 million. Adjusted EBITDA margin is expected to be around ~18%, from earlier guidance of ~16%.

Source: Company Reports

Q3FY20 Financial Highlights:

• PRMW announced its quarterly results, wherein the company posted revenue of USD 517.5 million, as compared to USD 472.1 million in the previous corresponding period (pcp). The increase was driven by the positive impact from the legacy Primo acquisition, partially offset by lower revenue from our Water Direct commercial customer base.
• Gross profit grew to USD 304.1 million, as compared to USD 286.3 million in Q3FY19, supported by higher income while an increase in the cost of sales stood as a drag.
• Operating income stood at USD 41.3 million, grew from USD 38.4 million in the previous corresponding period.
• The company reported net income at USD 22 million, significantly higher than USD 10.1 million, thanks to a higher operating income and the other income.
• The company reported cash and cash equivalent of USD 161.9 million, while total assets stood at USD 3,660.9 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to the prolonged lock-down phase, the company might witness a dip in its Water Direct commercial customer base.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock Recommendation:  The stock of PRMW appreciated ~11% so far this year, as investors are leaning towards safe and resilient business model. During the third quarter of FY20, the company reported higher adjusted EBITDA margin of 21.4%, as compared to 18.3% in pcp, which indicates operational efficiency. We have valued the stock using P/E based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered industry (Consumer – Non cyclicals) average on NTM basis. Hence, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 19.45 on November 18, 2020.

PRMW 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.