Algonquin Power & Utilities Corp.

Algonquin Power & Utilities Corp. (TSX: AQN) is a North American generation, transmission, and distribution utility company. Within its distribution segment, AQN owns and operates regulated water, natural gas, and electricity distribution utilities in the United States.

Key Highlights:

• An income play: The group has reported a stable dividend payment over the years, aided by stable cash flows from resilient operations. As the company provides essential services like energy and water services, the operations of the group are immune to the economic cycle, and hence, we expect the stability in cash flow generation and dividend payment in the foreseeable future. At the last closing price, the stock of AQN was offering a dividend yield of ~3.8%, which is higher than the TSX Composite yield of ~3.35%.

10-years Dividend Yield, Source: Refinitiv (Thomson Reuters)

• Impressive Guidance: For FY21, the group expects its adjusted net earnings per share within the range of USD 0.71 to USD 0.76, representing an annual growth of 8% to 10%. Moreover, the management expects a 10% growth in its annualized dividend, reflecting an annualized payout ratio of 80% to 90%.
• Recent Acquisitions to support growth: Recently, the group acquired 53.5% stake (resulting to a total stake of ~94%) in Chilean water utility company Empresa de Servicios Sanitarios de Los Lagos S.A., which is a vertically integrated, water and wastewater service provider with ~230,000 connections across Southern Chile. Moreover, in November 2020, the group also acquired Ascendant Group Limited, the only electric utility in Bermuda, which offers services like regulated electrical generation, transmission and distribution services to ~36,000 connections. We believe, the above acquisitions would lead to improved business prospects in the coming quarters.

Q3FY20 Financial Highlights:

• AQN announced its quarterly results, wherein the group posted revenue of USD 376.115 million, slightly higher than USD 365.566 million in Q3FY19. Despite a change in consumption patterns of residential, commercial and industrial customers across all the business segments, the group managed to retain its top line.
• Operating income stood at USD 94.876 million, higher than USD 84.265 million in the previous corresponding period (pcp). The increase was driven by higher income and lower regulated electricity purchased (USD 58.106 million versus USD 68.281 million in pcp) and a decline in administrative expense (USD 13.812 million versus USD 14.929 million in pcp), while an increase in regulated gas purchased (USD 13.254 million versus USD 10.670 million in pcp) and higher depreciation and amortization (USD 71.528 million versus USD 65.782 million in pcp) remained as a drag.
• Adjusted EBITDA increased by 6% y-o-y to USD 197.9 million, supported by an income tax recovery amounting USD 19.7 million, as compared to an income tax expense of USD 22 million in Q3FY19.
• The company reported net earnings of USD 47.322 million, significantly lower than USD 111.386 million in pcp, due to an income from long-term investments amounting USD 90.055 million in pcp, as compared to a loss of USD 2.701 million in Q3FY20.
• Cash and cash equivalent stood at USD 318.164 million, while total assets were recorded at USD 11,739.94 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Change in the consumption pattern of the residential and industrial customers due to the ongoing slowdown and closure of several industrial segments might lead to lower operating performance.

Valuation Methodology (Illustrative): EV to Sales 

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

Stock Recommendation:

The group reported higher operating margin and net margin of 24.5% and 12.6%, respectively during Q3FY20, as compared to the industry median of 22.4% and 12.6%, respectively, which looks impressive considering the current economic cycle. Further, the group has a decent track record of dividend payment, which shows the stable cash flow generating capabilities of the group. We have valued the stock using EV to Sales based relative valuation approach and arrived at a target price offering lower-double-digit upside side potential (in % terms). We have considered industry (Utilities) mean on NTM basis. Considering the above-mentioned facts, current price movements, we give a ‘Buy’ rating on the stock at the current closing price of CAD 21.31 on January 29, 2021.

Source: Refinitiv (Thomson Reuters)

Boralex Inc.

Boralex Inc. (TSX: BLX) is an electric utility company which operates in the development, construction, and operation of renewable energy power facilities. The group operates a portfolio of electricity producing plants that utilize wind, hydroelectric, thermal, and solar fuel sources. 

Event Update: The company would disclose its fourth-quarter results on February 25, 2021.

Key Updates:

• Stable Income Generation: The company has resilient business model as it operates within the renewable segment, with ~97% of the company’s revenue comes from long-term contracts. Moreover, the group expects its capacity to reach 2,800 MW in FY23, from 2,040 MW in FY19. Also, the company has a strong clientele which includes Hydro Quebec, EDF, Ontario ISO, BC Hydro, NYISO etc. that augurs well for stable revenue generations.

Source: Company Presentations

• Bullish Indicators: The stock closed above the 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend. Moreover, the stock appreciated ~43% and ~86% in the last six months and nine months, respectively.

(Source: Refinitiv, Thomson Reuters)

• Acquisition of Sky High Solar Farm: Recently, the company acquired New York-based Sky High Solar Farm, which is 20MW project located in the Town of Tully, in the County of Onondaga. The project is equipped and being developed within three separate parcels of land across 145 acres. The Management highlighted that an electric generation of 35 gigawatt-hours annually, which would cater to 4,600 homes annually. The above Solar Farm is expected to be completed by Q3FY22.

Q3FY20 Financial Highlights:

• BLX announced its quarterly results, wherein the group posted total revenue of CAD 108 million, higher than CAD 95 million in the previous corresponding period (pcp). During the quarter, the group generated 789 GWh of power, higher than 712 GWh of power in the previous corresponding period (pcp).
• Total costs stood at CAD 105 million, at par with the Q3FY19. However, the group posted an operating income of CAD 3 million, as compared to a loss of CAD 10 million in the previous corresponding period (pcp).
• Net loss lowered to CAD 8 million, as compared to a loss of CAD 36 million in the previous corresponding period (pcp).
• The company reported cash and cash equivalent of CAD 220 million, while total assets were reported at CAD 4,575 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company’s operations might be hindered due to lower demand scenario, fall in per-unit prices and adverse weather conditions.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation:

The group reported a higher cash flows of CAD 303 million for 9MFY20, as compared to CAD 236 million, a year ago, which is a key positive. The future operations of the company will be supported by its focus on developing solar power stations within the State of New York, combined with deploying energy storage facilities. Moreover, the company’s long-term business outlook remains positive, as the State of New York has targeted to increase its forecast volume of renewable energy by ~40% for 2030. We have valued the stock using the 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 peers like Northland Power Inc, Brookfield Renewable Partners LP etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 50.17 on January 29, 2021.

BLX 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.