TransAlta Corporation

TransAlta Corporation (TSX: TA) operates in a portfolio of power generation assets within 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.

Key Highlights:

• Ample Liquidity and favorable trends: The company reported strong liquidity of CAD 2.1 billion, which includes cash and cash equivalents of CAD 648 million. Apart from this, the company operates through long-term contracts with hedged positions, which would lower the company’s risk profile through minimizing unfavorable market pricing during lower-priced hours.

• Update on Windrise Wind project: The group is constructing a wind energy project named Windrise Wind. The project is expected to improve the business prospects, aided by growing traction for renewable energy. The project began receiving wind turbine generators on site in mid-October 2020. The construction activities on the Windrise wind project continues to advance with 84% of project completed as on March 31,2021. In addition, the main transmission line is progressing well and remains on track for energization during the second quarter. The project is expected to complete during the second half of 2021.

Q1FY21 Financial Highlights:

• TA announced its quarterly result, wherein the company posted revenue of CAD 642 million, higher than CAD 606 million in the previous corresponding period (pcp).
• Comparable EBITDA stood at CAD 310 million, as compared to CAD 220 million in pcp. The growth was supported by strong EBITDA growth from the hydro segment (CAD 77 million v/s CAD 26 million in pcp) coupled with higher comparable EBITDA from the Northern American Gas segment (CAD 35 million v/s CAD 29 million in pcp.).
• The quarter was marked by higher fuel and purchased power expense (CAD 243 million v/s CAD 193 million in pcp), partially offset by lower operation, maintenance and administration costs (CAD 105 million v/s CAD 128 million in pcp).
• The group reported a net loss of CAD 30 million, as compared to a net profit of CAD 27 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The company might witness a delay in its construction activities which may subsequently impact the overall performance of the company.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The operation of the company is immune to the economic cycle, as it caters to the utility segment, and thus we expect an income stability. Notably, the group reported a higher free cash flow of CAD 129 million v/s CAD 109 million in pcp amidst the current economic turmoil, which is encouraging. Within the Hydro segment, the company derived optimize revenues on the merchant facilities through higher water flow and realized higher prices in the Alberta market while also benefited from the elimination of payment obligations to the Alberta Balancing Pool. We have valued the stock using Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered industry (Electric Utilities & IPPs) mean on an NTM basis. Hence, we recommend a 'Hold' rating on the stock at the closing price of CAD 11.84 on June 11, 2021.

One-Year Technical Price Chart (as on June 11, 2021). Analysis by Kalkine Group

Stella-Jones Inc.

Stella-Jones Inc. (TSX: SJ) is a leading producer and marketer of pressure-treated wood products. The Company supplies North America’s electrical utilities and telecommunication companies with utility poles and the continent’s railroad operators with railway ties and timbers. It also manufactures and distributes residential lumber and accessories to retailers for outdoor applications and industrial products for construction and marine applications.

Key Highlights 

• Consistently growing financials: The company's income and profitability have continued an upward trajectory throughout the years, owing to a good business plan. In FY20, sales and net income increased to CAD 2,551 million and CAD 210 million, respectively, from CAD 640 million and CAD 56 million in FY11. In addition, the company's Net debt to EBITDA ratio was 1.9x at the end of FY20, down from the heights of 2.8x in FY15.

Source: Company 

• Robust guidance for 2021: In 2021, the business expects EBITDA to be in the range of CAD 450-480 million, up from the previously stated projection of CAD 385-410 million. Furthermore, it anticipates a sales increase of 15% to a low 20% in 2020, which is a significant plus. Due to continued solid replacement demand, utility pole sales are predicted to rise mid-to-high-single digits. Moreover, the sales of residential lumber are expected to climb by 45% to 65% compared to 2020.

• Generating higher EBITDA and EBITDA margin: Driven by the strong sales growth, EBITDA increased by 57% to reach CAD 99 million and clocked a margin of 15.9%, up from CAD 63 million along with a margin of 12.4% in the previous corresponding period. Operating income rose by 82% to CAD 82 million.
  

Financial overview OF Q1 2021 (expressed in millions of Canadian dollars)

Source: Company 

• Sales for the first quarter reached CAD 623 million, up CAD 115 million, against CAD 508 million in the previous corresponding period. The increase was driven by improved sales from pressure-treated wood products, aided by the combination of elevated lumber prices coupled with strong demand for residential lumber products.
• Operating income surged to CAD 82 million from CAD 45 million in pcp, supported by an improved revenue, while the higher cost of sales remained a drag.
• Net income for the period recorded by the company stood at CAD 56 million, significantly higher than CAD 28 million in the previous year.
  

Risks associated with investment

The company’s operations might be impacted due to volatility in commodity prices, currency volatility, high raw material costs, etc. Additionally, the international lumber prices are trading at a historical peak, any correction in the prices could drag the company’s EBITDA margin. 

Stock recommendation

The company had a solid start to the year and continuing its upward trend. The first quarter of 2021 saw record pricing and volume growth in the residential lumber product category, robust utility pole performances, and high demand for railway ties. Furthermore, the EBITDA grew by 57% to an all-time first quarter high of CAD 99 million, and net income doubled to CAD 56 million compared to the previous corresponding period. The company is well-positioned to take advantage of the momentum in demand, create opportunities to grow its core businesses, and produce EBITDA in the mid-to-high CAD 400 million range in 2021, thanks to its resilient business model and strong competitive position. On the valuation front, the stock is available at a forward EV/Sales multiple of 1.3x against the industry (Paper & Forest Products) mean of 1.8x. Hence, considering the aforesaid rationales, we recommend a “Hold” rating on the stock at the closing price of CAD 46.15 on June 11, 2021.

One-Year Price Chart (as on June 11, 2021). Source: Analysis by Kalkine Group

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

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