Fortis Inc.

Fortis Inc. (TSX: FTS), owns and operates utility transmission and distribution assets in Canada and the United States. The group is serving more than 2.5 million electricity and gas customers. The company also holds smaller stakes in electricity generation and several Caribbean utilities.

Key highlights

• Leadership Succession:The Group has announced the retirement of Barry Perry, President and CEO, effective December 31, 2020. David Hutchens has succeeded Mr Perry effective from January 1, 2021. Earlier, David Hutchens was Chief Operating Officer of Fortis and CEO of UNS Energy.

• Focused on Carbon-Free generation:Delivering a cleaner energy future is a key priority for Fortis. During the third quarter, the corporation announced its target to reduce carbon emissions by 75% by 2035. The group would replace coal fired generation with approximately 2,400 MW of wind and solar power and 1,400 MW of energy storage.

Source: Company

• Enormous capital investment plans: The Company plans to invest CAD 19.6 billion from 2021 to 2025. This five-year capital plan is expected to increase rate base from CAD 30.2 billion in 2020 to CAD 36.4 billion by 2023 and CAD 40.3 billion by 2025, translating into a CAGR of 6.5% and 6.0% respectively. 61% of this capex is likely to be funded from cash from operations, which is impressive.

Source: Company 

• A long history of Dividend Distribution: The Company has a strong dividend payment track record and has guided for a 6% average annual dividend growth till FY25. A consistent dividend pay-out reflects a stable cash flow generation capability of the company. At the last closing price, the stock was offering a dividend yield of 3.92%, which is higher compared to TSX Composite dividend yield of 3.4%.

Source: Company

Financial Overview of Q3 2020 (in millions of Canadian dollars)

Source: Company

• In Q3 2020 the group posted revenue of CAD 2.12 billion, increased by CAD 70 million as against CAD 2.05 billion in the previous corresponding period. The increase in revenue was primarily due to overall higher flow through customer rates, favourable weather in Arizona, and favourable foreign exchange of CAD 10 million.
• Operating income stood at CAD 602 million, as against CAD 585 million in Q3 2019.
• The group posted net earnings of CAD 336 million in the reported quarter against CAD 324 million in the previous corresponding period. The increase in net earnings was partially offset by an increase in energy supply cost, increased by CAD 50 million. 

Risks associated with investment

The company is exposed to many risk factors that alone or cumulatively can affect its operations and financial health. Some of the risks are the supply of and demand for energy, Realization prices, exchange rates, inflation, and interest rates. A prolonged economic downturn could adversely impact customers, contractors, and suppliers' ability to fulfil their obligations and could disrupt operations and financial health. 

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

We believe the company would report better numbers in the upcoming quarters led by the revival in the broader economies, and gradually improving energy demand. Furthermore, the company continued to distribute dividend amid a challenging operating environment. On top of this, the company increased its annual dividend rate, which is encouraging from an income investor's perspective. Therefore, based on the above rationale and valuation, we have given a "Buy" rating at the closing price of CAD 51.49 on January 6, 2021. We have considered Emera Inc, TC Energy Corp, and Hydro One Ltd, etc. as the peer group.

Source: Refinitiv (Thomson Reuters)

Atco Ltd

Atco Ltd (TSX: ACO.X) is a Canada-based holding company offering infrastructure solutions to customers worldwide. The Company is engaged in the business activities: Structures & Logistics, Canadian Utilities and Neltume Ports.

Key highlights

• Focusing on renewable portfolio:The company is focused on expanding its renewable electricity generation capabilities. Atco, through its subsidiary Canadian Utilities, sold the entire Canadian fossil fuel-based electricity generation business for aggregate proceeds of CAD 821 million, consisting of 12 coal-fired and natural gas-fired electricity generation assets generating approximately 2,300 MW.
• An Income play:When most businesses are suspending or curtailing the dividends, the group is increasing the dividend distribution, which is impressive. Recently, the company paid a fourth-quarter dividend of CAD 0.435 per share or CAD 1.74 per share on an annualized basis. The group has a healthy dividend pay-out practice; this translates in an essential factor for regular income-seeking investors with a long-term horizon. At the last closing price, the stock was offering a dividend yield of 4.76%, which is lucrative amid a low interest rate environment.

Source: Company

• Above Industry Margin Profile: The Company's resilient business helped them leaping the industry median margins on many fronts, the matrix below gives a glimpse of this. To come out with more conclusive numbers, we took the company's average margins of the past ten quarters.

Source: Refinitiv (Thomson Reuters) 

Financial overview of Q3 2020

Source: Company

• In Q3 2020 the company posted revenues of CAD 897 million, CAD 200 million lower than Q3 2019. This decline in revenue was primarily due to sale of the Canadian fossil fuel-based electricity generation business in the third quarter of 2019 and subsequent sale of Alberta PowerLine (APL) in the fourth quarter of 2019.
• On the back of lower revenues and higher depreciation in Q3 2020, the company posted its operating profit of CAD 240 million, compared to 494 million in the previous corresponding period.
• Net earnings stood at CAD 108 million in Q3 2020, against 305 million in Q3 2019, due to above stated reasons.

Risks associated with investment

A further outbreak of COVID-19 could adversely impact the company by causing its operations, supply chain and project development delays and disruptions, labour shortages and shutdowns because of government regulation and prevention measures. All of these could harm the company’s operations and its ability to earn the profit. 

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

The utility segment is likely to remain stable in the coming quarters, as the sector is categorized under "essentials" and the business expects to benefit from the improved realization prices. The company has a concrete financial strength, with a cash position of approximately CAD 1.24 billion as on 30th September 2020 and unused credit facility of CAD 2.54 billion. Furthermore, the industry-beating margins of the company reflect the resilience of the business. Also, a consistent dividend-paying company, with a dividend yield of 4.76% is likely to remain under the radar for the investors seeking quality for the long-term horizon. Therefore, based on the above rationale and valuation, we have given a "Buy" rating at the closing price of CAD 36.56 on January 6, 2021. We have considered TC Energy Corp, Capital Power Corp, Emera Inc, etc. as the comparison's peer group.

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.