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

• 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 30.5 billion in 2020 to CAD 40.3 billion by 2025, translating into a CAGR 6.0%. On top of it, approximately 61% of this capex is likely to be funded from cash from operations, which is impressive and demonstrates the company's resiliency.

Source: Company

• Rise in Operating Cash Flow: The company witnessed an increase of CAD 149 million in Operating Cash Flow to CAD 739 million compared to CAD 590 million in the previous corresponding period. Primarily the rise was due to higher cash earnings reflecting Rate Base growth and new customer rates at TEP effective January 1, 2021, partially offset by higher generation maintenance costs in the first quarter of 2021 at UNS Energy. 

• Registering sequential improvement: Despite the turbulent year of 2020, the Company maintained its momentum and delivered strong results in sales, common equity profits, and EPS.

Source: Company

• A long history of Dividend Distribution: The Company has a decent dividend payment 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, which translates in an essential factor for regular income-seeking investors with a long-term horizon. Moreover, at the last closing price, the stock was offering a dividend yield of ~3.7%, which is decent considering the current interest rate environment.

Source: Company

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the group posted revenue of CAD 2,539 million, up 6.2% against CAD 2,391 million in the previous corresponding period. The increase in revenue was primarily due to growth in Rate Base, new customers, and higher flowthrough costs in customer rates.
• The operating income registered by the group in the reported period, stood at CAD 668 million against CAD 658 million in Q1 2020.
• The group posted net earnings of CAD 396 million in the reported quarter against CAD 353 million in the previous corresponding period. The increase in net earnings was partially offset by an increase in energy supply cost, which increased by CAD 99 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 include 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 Sales

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

Stock recommendation

The company continued to push its low-risk organic growth strategy in Q1 2021, delivering good operational and financial performance. The Oso Grande Wind Project was just finished, while the Wataynikaneyap Transmission Power Project is still in the works. Furthermore, the group is putting in a strong showing on a sequential basis, indicating that the situation is improving. We expect the firm would record considerably stronger figures in the next quarters, owing to the economy's recovery, which would generate demand in the energy sector. Therefore, based on the above rationales and valuation, we recommend a "Buy" rating at the closing price of CAD 54.90 on May 19, 2021. We have considered Emera Inc, TC Energy Corp, Hydro One Ltd, etc. as the peer group for comparison.

One-Year Price Chart (as on May 19, 2021). Source: Refinitiv (Thomson Reuters)

Canadian Utilities Ltd

Canadian Utilities Ltd (TSX: CU) is a Canada-based company which offers services in the areas of electricity, pipelines & liquids and retail energy. The Company’s segments include Electricity, Pipelines & Liquids and Corporate & Other.

Key Highlights

• An Income play: The Company has an excellent track record of dividend distribution and has increased its distribution over the years, reflecting resilience and healthy cash flow generation. Recently, the Company declared a dividend of CAD 0.4398 per share. Moreover, at the last closing price, the stock was offering a dividend yield of ~5.0%, which translates into an essential factor for regular income-seeking investors with a long-term horizon.

Source: Company

• Strong Financial performance: The company reported decent performance in the Q1 2021, with revenue surged by 2.5% to CAD 907 million, against CAD 885 million in the previous corresponding period, while adjusted earnings improved by 6.7% to CAD 191 million against CAD 179 million in pcp.

Source: Company

• Industry Beating Margins: The Company's resilient business helped in leaping the industry median margins on many fronts in Q1 2021, which is a key positive. The chart below gives a glimpse of this.

Source: Refinitiv (Thomson Reuters)

• Robust liquidity: The on-going steady performance of the company’s operations and constant upgrading in the strength of the balance sheet resulted, with total liquidity of CAD 3,065 million, including a cash balance of CAD 830 million, while as on March 31, 2021, the group had available credit limit of CAD 2,235 million.

Source: Company

• The group’s President & CEO getting retired: Recently, the President and CEO Siegfried Kiefer has announced his retirement, effective July 1, 2021. Nancy Southern, Chair and CEO of ATCO and Executive Chair of Canadian Utilities, would re-assume the CEO job at Canadian Utilities on July 1 and continue to serve as Chair of the Board.

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company posted revenue of CAD 907 million, against CAD 885 million in the previous corresponding period. The rise in revenue was primarily due to improved performance at ATCO energy resulting from higher electricity and natural gas commodity prices and customer growth.
• Operating profit stood at lower at CAD 285 million in the reported quarter against CAD 319 million in pcp, primarily due to higher salaries, coupled with higher depreciation and other expenses.
• Earning for the period stood at CAD 143 million against CAD 162 million in Q1 2020, the decline in net income was primarily due to above stated reasons.

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): Price to Cash Flow

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

Stock recommendation

The Company reported strong Q1 2021 results, which despite the challenges presented by the COVID-19 pandemic, reflect year-over-year growth in its key financial metrics. The utility segment is likely to remain stable as the sector is categorized under "essentials" and the business expects to benefit from the improving realization prices. The company has a concrete financial strength, with a cash of approximately CAD 830 million as on March 31,2021, along an unused credit facility of CAD 2,235 million. Furthermore, the industry-beating margins of the company reflect the resilience of the business. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 35.27 on May 19, 2021. We have considered Emera Inc, TC Energy Corp, Hydro One Ltd, etc. as a peer group for the comparison.

One-Year Price Chart (as on May 19, 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.