Brookfield Renewable Partners L.P.

Brookfield Renewable Partners L.P. (TSX: BEP.UN) is a renewable power generating company which owns a portfolio of renewable power generating facilities. These facilities spread across North America, Latin America, and Europe.

Key Highlights:

• Strong Traction from Renewable operations: As per the recent trend, the utility sector is witnessing higher demand within the renewable segment, while fossil fuel generation and electricity generation declined in the recent past. As most of the nations are leaning towards renewable energy due to lower carbon emission target, we believe the medium to long-term outlook of the renewable energy sector remains positive and the group being a prominent name could utilize the upcoming opportunity coming from the sector.

Current Carbon reduction level (Source: Company Presentation)

• Strong Liquidity: The company has strong liquidity of USD 3.3 billion and has no maturity in the next five years. We believe, with the above, the company would be able to finance its working capital requirements and capital expenditure. 

• Elevated Distributions: Despite a tepid bottom line, the group has retained a stable distribution growth over the years. From 2000 to 2020, the group has delivered a CAGR of ~6% in its distributions, supported by stable cash flow generation.

Distribution Trend (Source: Company Presentation)

Q4FY20 Financial Highlights:

• The group announced its quarterly results, wherein the group posted revenue of USD 952 million, against USD 965 million in the previous corresponding period (pcp). During the quarter, total generation stood at 14,333 GWh, as compared to 13,850 GWh in Q4FY19.
• The quarter was marked by an increase in direct operating costs (USD 357 million against USD 326 million in Q4FY19) coupled with an increase in management service costs (USD 84 million, against USD 44 million in Q4FY19). Other costs soared to USD 307 million, from USD 169 million in Q4FY19.
• Net loss stood lower at USD 5 million, from a net loss of USD 90 million in Q4FY19.
• The group posted cash and cash equivalents of USD 431 million, while total assets stood at USD 49,722 million.

Q4FY20 Income Statement highlights (Source: Company Reports)

Risks: The group is unable to report profitability despite a higher electricity generation, which remains as a reason for concern. Moreover, the increase in the input costs would likely to dampen the company’s profitability and cash flows in the coming days

Stock Recommendation:

In December 2020, the group acquired Exelon Generation Company’s U.S. distributed generation business, which has 360 megawatts of operating generation across ~600 sites with an additional over 700 megawatts under development. Along with the acquisition, the company has enhanced its presence through the expansion of its on-site generation and has reported cost declines in solar technology, which is a key positive and is expected to support the company’s bottom line in the coming quarters. The stock of BEP.UN has generated decent returns of ~31% and ~44% in the last six months and one year, respectively. Moreover, the renewable energy sector is likely to receive significant traction and the group is well placed to capitalize on the opportunities. Considering the aforesaid facts and industry prospects, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 50.26 on March 10, 2021.

One-Year Price Chart (as on March 10, 2021). Source: Refinitiv (Thomson Reuters)

Polaris Infrastructure Inc.

Polaris Infrastructure Inc. (TSX: PIF) is engaged in the acquisition, exploration, development and operation of geothermal and hydroelectric energy projects. 

Key Highlights:

• Stable Cash flows: The company has a resilient business model and reported stable cash flows in the recent past, which is a key positive. The improvement was driven by improved working capital management, as the company’s operations and related supply chain activities were not materially impacted due to the pandemic.

FY20 Cash Flow Highlights (Source: Company Report)

• Impressive Production: During the Q4FY20, the group reported a surge in its production activities and reported a 19% y-o-y jump in production at 171,933 MWh, supported by higher production from the Canchayllo facility. Moreover, the company reported additional production from the two GASAC facilities. During the full-year, the group reported additional production from Peru, including the first annual production of 8 de Agosto and El Carmen facilities, which resulted in a 16% y-o-y increase of production at 662,893 MWh in FY20.

Production Highlights (Source: Company Report)

FY20 Financial Highlights:

• PIF announced its full-year result, wherein the company posted revenue of USD 74.720 million, improved from USD 71.251 million in the previous corresponding period (pcp).
• Operating income stood at USD 56.892 million, significantly higher than USD 23.152 million in pcp, thanks to the higher income coupled with an impairment recovery, while an increase in direct costs remained a drag.
• Total earnings and comprehensive earnings stood at USD 38.984 million, increased from USD 10.042 million in pcp.
• The group reported a cash balance of USD 60.058 million, while total assets were recorded at USD 491.118 million.

FY20 Income Statement Highlights (Source: Company Report)

Risks: Due to the inherent nature of the operations, the group might witness setbacks from the global economic trends, risks related to local social, political, environmental, and economic conditions, as well as currency and inflation-related risks within the markets within which it operates.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

The business model of the group is immune to the economic cycles and the group would continue to grow and diversify its operations within the Latin American region through renewable energy projects with attractive return profiles. Moreover, Latin America accommodates a unique renewable energy markets, which is expected to support the company’s operations as well. Moreover, the stock of PIF is offering a dividend yield of ~3.9%, higher than the TSX composite of ~3.32%. 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 Capital Power Corp, Northland Power Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 19.60 on March 10, 2021.

One-Year Price Chart (as on March 10, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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