Northland Power Inc.

Northland Power Inc. (TSX: NPI) is a Canada-based power producer. The company focuses on developing, building, owning and operating clean and green power infrastructure assets in Canada, Europe and other selected global jurisdictions. Its segments include Offshore Wind, Thermal, On-shore Renewable and Other.

Key highlights 

• Bullish outlook: The management expects adjusted EBITDA to be in the range of CAD 1.1 billion to CAD 1.2 billion for FY 2020, which suggests strong operational results. The company delivered strong results, amounting to CAD 289 million or CAD 1.46 per share of free cash flow per share for the first nine months of the year, in spite lower revenues experienced within the offshore wind facilities. The management expects FY 2020 free cash flow per share to be in the range of CAD 1.60 to CAD 1.70.

Source: Company 

• Stable dividend payment: The company has paid a constant dividend to its shareholders since 1997, which is a key positive and indicates operational resiliency and stable cash flows. Recently the group declared a monthly dividend CAD 0.10 per share with a record date of 31^st December 2020.

Source: Company 

• A pipeline of growth opportunities: The Company’s long-term growth strategy is centred on the development of its extensive pipeline of offshore wind projects in Europe and Asia, which can increase long-term cash flow growth potential of the Company. The group is also executing a business plan to provide a platform for significant Adjusted EBITDA growth.

Source: Company 

Financial overview of Q3 2020

Source: Company 

• The company posted total revenue of CAD 470.9 million in Q3 2020, against CAD 378.4 million in the previous corresponding period. The rise in revenue was primarily due to higher income from electricity and related products, along with additional income from regulated electricity segment.
• A muted growth was witnessed in the operating income, as it stood at CAD 179.48 million in Q3 2020, compared to CAD 176.9 million in Q3 2019.
• In Q3 2020, the company's net income decreased slightly to CAD 108.96 million compared to CAD 110.62 million in Q3 2019. 

Risks associated with investment

The company’s business activities are exposed to a variety of risks and uncertainties such as regulatory changes, rapidly changing market dynamics and volatility in commodity prices, interruptions of production, supply chain disruptions, delays in growth projects, increased credit risk with counterparties, and foreign exchange volatility, etc. 

Valuation Methodology (Illustrative): EV to Sales

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Northland has successfully established a global platform with geographic diversification across four continents. The Company actively pursues new sustainable infrastructure opportunities that encompass a range of clean technologies, including onshore and offshore renewables and electricity grid networks. The Company’s long-term growth strategy is centred on the development of its extensive pipeline of offshore wind projects in Europe and Asia, which can increase long-term cash flow growth potential. Furthermore, the management expects adjusted EBITDA to be in the range of CAD 1.1 billion to CAD 1.2 billion for FY 2020, which reflects strong operational results. Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 46.99 on January 14, 2021. We have considered Capital Power Corp, Algonquin Power & Utilities Corp, TransAlta Corp, etc. as the peer group for comparison.

Source: Refinitiv (Thomson Reuters)

Innergex Renewable Energy Inc

Innergex Renewable Energy Inc (TSX: INE) is an independent Canadian renewable power producer, which develops, acquires, owns and operates hydroelectric, wind, and solar facilities in Canada, the United States, France, and Chile.

Key Highlights:

• Funding of Griffin Trail project: Recently, the company confirmed its source of funding and tax equity commitment for its Griffin Trail project. The USD 276.2 million financing has been arranged with Sumitomo Mitsui Banking Corporation acting as Lead Arranger, and CIBC acting as Joint Lead Arranger, and a tax equity commitment amounting USD 171.4 million from Wells Fargo. Griffin Trail is a 225 MW wind facility project, located in north-west Texas and is expected to generate 819.0 GWh per year, which is expected to cater 57,000 Texan households.

• Balanced Capital-structure: The company maintains a healthy capital structure, with stable asset-base and manageable debt-components. Moreover, the company’s revolving credit facilities supported by twelve unencumbered assets and 96% of the outstanding debt is fixed or hedged, indicates a stable risk profile. The company has a maturity of its revolving credit facility in 2023, which augurs well for liquidity preservation.

                 Source: Company Presentation

• Increase in dividend payout supported by elevated cash flows: Over the years, the company reported a gradual increase in its dividend payment, backed by stable growth in the cash flows, which is a key positive. Cash flow from continuing operations stood higher at CAD 157.416 million, as compared to CAD 155.207 million, a year ago. Notably, dividend distribution also increased to CAD 85.673 million for 9MFY20, higher than CAD 71.578 million in pcp.

Source: Company Presentations

Q3FY20 Financial Highlights:

• INE announced its quarterly results, wherein the company posted revenues of 162.65 million, reflecting growth of ~14% on y-o-y basis. The increase in the top line was driven by a higher electricity production of 2,021,559 MWh, significantly higher than 1,665,362 MWh in the previous corresponding period (pcp) which was supported by new acquisition and increase in production capacity.
• Adjusted EBITDA stood at CAD 108.524 million, slightly higher than CAD 107.351 million in Q3FY19, while Adjusted EBITDA margin slide to 66.7%, as compared to 75.2% in pcp. The company reported higher input costs and posted higher operating expenses (CAD 37.040 million versus CAD 24,403 million in pcp) and increase in general and administrative expenses (CAD 12,388 million versus CAD 7,731 million in pcp).
• Net earnings stood lower at CAD 7,492 million, from CAD 9,703 million in Q3FY19, due to lower earnings from joint ventures and associates (CAD 11.382 million versus CAD 16.225 million in pcp).

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company’s operation might be hindered due to lower electricity rates, lower demand, and adverse weather conditions, etc.

Valuation Methodology (Illustrative): EV to EBITDA based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The operations of INE are immune to economic cycles, which is a key positive. The company operates with a diversified portfolio of high-quality assets, which consists of interests in 75 operating facilities with an aggregate capacity of 2,742 MW (gross 3,694 MW). As the developed nations are leaning toward clean energy sources, we believe the company has upper hand as the demand increased in the coming days.. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Boralex Inc, Northland Power Inc etc. Considering the aforesaid facts, trading levels, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 30.07 on January 14, 2021.

INE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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