Hydro One Ltd

Hydro One Ltd (TSX: H) is a Canada-based electricity transmission and distribution service provider. They distribute electricity across Ontario to nearly 1.4 million predominantly rural customers, or approximately 26% of the total number of customers in Ontario. The Company’s segments include Transmission, Distribution and Other.

Key Highlights

• An Income play:The Company has a solid track record of consistent dividend payment, backed by stable cash flows. Recently the company declared a quarterly cash dividend of CAD 0.2415 per share to be paid on March 31,2021. Moreover, at the last closing price, the stock was offering a dividend yield of 3.5%, which looks decent considering the current economic scenario and interest rates.

• Increase in cash provided by operating activities: In FY 2020, the company’s cash from operating activities increased by CAD 416 million to CAD 2,030 million, against CAD 1,614 million in the previous corresponding period. The increase was mainly due to higher earnings in FY 2020, changes in certain regulatory accounts and increases in net working capital attributable to higher payments received from the IESO during 2020. Furthermore, the company increased its cash and cash equivalents to CAD 727 million.

Source: Company

• Healthy liquidity: Investment grade balance sheet with one of lowest debt costs in utility sector. In addition, the Company has revolving bank credit facilities with a total availability balance of CAD 2,550 million. The Company's currently available liquidity is also expected to be sufficient to address any reasonably foreseeable impacts.

Source: Company

Financial overview of FY 2020

Source: Company

• In FY 2020, the company posted revenues of CAD 7,290 million, against CAD 6480 million in the previous corresponding period. The company witnessed growth from all the segments, however distribution segment registered a growth of 15%.
• The group posted higher EBIT to CAD 1,482 million in FY2020, against CAD 1,310 in pcp. The rise in EBIT was primarily due to higher revenues, partially offset by higher purchased power cost which grew to CAD 3,854 million, against CAD 3,111 million in FY 2019.
• In FY 2020, Net Income stood at CAD 1,796 million, increased by CAD 994 million as against CAD 802 million in FY 2019. The increase in Net Income was primarily due to a rise in revenues and income tax recovery of CAD 785 million. 

Risks 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 are like the supply of and demand for energy, adverse weather conditions, falling approved rates might lead to lower-income, inflation, interest rates, etc. 

Valuation Methodology (Illustrative): EV to Sales

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

Stock recommendation

We believe the company would 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. Furthermore, the company affirmed its guidance of 4% to 7% earnings per share growth through 2022, which is key a positive. The company continued to distribute dividend amid a challenging operating environment, on top of this the stock is delivering healthy yield which looks decent. Therefore, based on the above rationales and valuation, we recommend a “Hold” rating at the closing price of CAD 28.87 on March 12, 2021. We have considered Emera Inc, Canadian Utilities Ltd, Fortis Inc etc. as the peer group for the comparison.

1-Year Price Chart (as on March 12, 2021). Source: Refinitiv (Thomson Reuters)

Secure Energy Services Inc

Secure Energy Services Inc (TSX: SES) is a Canada-based energy services company, which provides treatments and disposal services to the oil and gas industry. It constitutes midstream services, environmental services, systems and products for drilling, production and completion fluids, and other specialized services and products.

Key Highlights

• Amalgamating “Tervita Corporation”: Recently, the company announced an amalgamation of Tervita Corp. SES would acquire all issued and outstanding common shares of Tervita on the basis of 1.2757 common shares of SES for each outstanding Tervita Share. Upon completion of the transaction, SECURE and Tervita shareholders would own approximately 52% and 48%, respectively, of the combined company.

• Unlocking significant values: This strategic combination of highly complementary businesses is expected to unlock significant value. We believe this transaction to create a stronger midstream infrastructure and environmental solutions business, which would enhance the free cash flow generation and significant annual integration cost savings of CAD 75 million is expected to be realizable within 12 to 18 months after closing the transaction.

• Prioritizing debt repayment in 2021: On the pro forma basis, the combined company would be well capitalized with a net debt to 2020 Adjusted EBITDA ratio of 3.1x, inclusive of CAD 75 million of annual integration cost savings. Furthermore, it expects to achieve target of less than 2.5x debt to EBITDA ratio within two years, supported by integration cost savings and a strong discretionary free cash flow profile.

Financial overview of FY 2020

Source: Company

• The Company posted decline in revenue to CAD 1.82 billion in FY 2020, against CAD 2.93 billion in the previous corresponding period. Both segments reported degrowth, where midstream Infrastructure segment revenue decreased by 35% over 2019 to CAD200.7 million, while oil purchase and resale revenue decreased 44% over 2019 to CAD 1.4 billion, primarily due to decrease in Canadian light oil benchmark pricing by 34%.
• Adjusted EBITDA decreased by 24% to CAD 136.2 million, compared to previous corresponding period. The reason behind this drop was the decreased level of production and contracted volumes during a period of reduced drilling and completion activity levels. 
• The Company reported a net loss of CAD 87.19 million, against a profit of CAD 0.19 million in FY 2019. The increase in net loss is primarily due to lower revenues and lower adjusted EBITDA. 

Risks associated with investment

The company’s performance is related to the demand and price of the crude oil. Any volatility in the crude oil prices or setback to demand would hamper the company’s performance. 

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

FY2020 was a year marked by unprecedented challenges for the oil and gas industry. The impact of the COVID‐19 pandemic on the demand for oil was exacerbated by over supply concerns. However, crude oil prices have started the year on a higher note, reaching a trailing 12‐month high in February 2021 following the announcement of short‐term production cuts by Saudi Arabia, and renewed optimism for rising energy demand with the deployment of COVID‐19 vaccines underway. For 2021, the Company would continue to focus on maintaining financial resiliency by maximizing cash flows and paying down debt with discretionary free cash flow.  Moreover recently, the company company announced an amalgamation of Tervita Corp. We believe this strategic combination of highly complementary businesses is expected to unlock significant values, which would enhance the free cash flow generation and significant annual integration cost savings of CAD 75 million. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating at the closing price of CAD 4.40 on March 12, 2021. We have considered Superior Plus Corp, CES Energy Solutions Corp, Ensign Energy Services Inc, etc. as the peer group for the comparison.

1-Year Price Chart (as on March 12, 2021). 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.