AltaGas Ltd

AltaGas Ltd (TSX: ALA) is a Canadian based leading energy infrastructure company that connects natural gas liquids (NGLs) and natural gas to domestic and global markets. The Group operates through two operating segments, namely Utilities and Midstream. The utility segment accounts for the majority of the revenue for the Company and serves about 1.7 million customers

Q2FY20 Financial Highlights: AltaGas Ltd. announced its quarter results, wherein the Company posted revenue of CAD 1,059 million as compared to CAD 1,174 million in the previous corresponding period (pcp). The decline was due to lower demand in the spring and summer months. Fractionation volumes stood higher during the quarter due to the expansion of North Pine and additional volumes at Townsend 2B, partially offset by lower volumes at Harmattan and Younger. Total expenses stood comparatively lower at CAD 984 million as compared to CAD 1,135 million a year ago, supported by a lower cost of sales and slightly lower depreciation and amortization while operating and administrative expense stood at par with Q2FY19. Income before taxes was reported at CAD 46 million against CAD 27 million in pcp, thanks to lower interest expense. Net income after tax stood lower at CAD 43 million as compared to CAD 60 million due to a deferred income tax recovery amounting to CAD 40 million in Q2FY19. Cash and cash equivalent stood at CAD 59 million, while total assets were reported at CAD 20,003 million.

Q2FY20 Income Statement Highlights (Source: Company reports)

Risks: Temporary closure of businesses could hamper the gas demand in the utility segment while lower NGL pricing, lower demand lower production in the Western Canada Sedimentary Basin (WCSB) could have an adverse impact on midstream business operations.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation: The stock appreciated ~21% in the last six months amidst volatility in the stock market. The company's midstream segment is underpinned by the group's unique energy export strategy and the distinct ability to handle the molecule through the entire value chain and provide access to premium-priced global markets for western Canadian producers, which is a key positive. Furthermore, the company's FY20 outlook remained unchanged at normalized EBITDA in the range of CAD 1.275 to CAD 1.325 billion, which is impressive, as most of the businesses are cutting down their estimates. This continued stability is underpinned by increasing contributions from its core businesses, lower interest expense due to lower leverage and refinancing its rolling maturities at lower interest rates which have generally offset modest headwinds due to the challenges in the economy from the global pandemic. The group intends to de-leveraging its capital structure and to operating with acute capital discipline, which would reaffirm its long-term goals. Further, higher demand within the utility segment is expected to drive higher rate base growth and resulting in a higher return through rate case settlements, which is a key positive. Also, at the last traded price, the stock was offering a dividend yield of ~5.7%, which is lucrative considering the current interest rate environment. We have valued the stock using Price to CF based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered industry (multi-line utilities) median on the next twelve months (NTM) basis. Considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 16.82 on September 15, 2020.

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

TransAlta Corporation

TransAlta Corporation (TSX: TA) operates in a portfolio of power generation assets within Canada, the United States and Australia. The Group operates via two segments, namely Generation and Energy Marketing. The Group provides clean, affordable, and reliable power to municipalities, medium and large industries, businesses and utility customers.

Q2FY20 Financial Highlights: TA declared its second-quarter results, wherein the company reported revenue of CAD 437 million, as compared to CAD 497 million in the previous corresponding period (pcp). The quarter was marked by a decline in the production and power prices across the Canadian Coal and US Coal segments due to the planned outage at Sheerness and lower demand resulting on account of COVID-19 pandemic. Meanwhile, the company reported higher revenues from the Wind and Solar segment aided by wind resources and Big Level and Antrim operations. Gross margin, during the quarter, stood at CAD 286 million versus CAD 320 million in Q2FY19 due to a lower income, partially offset by lower fuel, carbon compliance and purchased power. The company reported operating loss of CAD 19 million as compared to an operating income of CAD 51 million in pcp, due to lower gross margin, increase in depreciation & amortization costs, and inclusion of the asset impairment cost, while lower operations, maintenance and administration costs supported the business. Net loss stood at CAD 35 million as compared to net earnings of CAD 26 million in Q2FY19. The company reported funds from operations of CAD 159 million, as compared to CAD 155 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to ongoing COVID -19 pandemic, the company may face a supply chain disruption which could increase the input cost. Also, as the businesses are temporarily closed, the group might face counterparty risk where the payment collection can be delayed. Further, delays in the completion of construction projects on account of labor shortage might hinder expected cash flows.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation: The stock of TA corrected ~12% so far this year. The company operates within the utility space, and the sector is deemed to be an essential service provider and is immune to the economic cycle. However, a fall in the overall demand and price realization could dampen the company's cash-flow for a while. The company strategize on investing across a wide range of businesses like renewable segments such as wind, hydro, solar, battery and thermal, which produce electricity for industrial customers and communities. The group received regulatory approval from the Alberta Utilities Commission for the repowering of Sundance Unit 5 and Keephills Unit 1 into combined-cycle units, during the quarter, which is a key positive. On the project front, Construction for Windcharger, Alberta's first battery storage project, is in its final stages and would achieve its commercial operations date in August 2020. Construction activities on the Windrise Wind Project continue to advance; however, the construction schedule has been modified to reflect a COVID-19-related delay in the delivery of the wind turbine components and the company plans to complete construction and commissioning in the second half of 2021. The company has revised its FY20 outlook and expects Comparable EBITDA within CAD 925 million to CAD 1,000 million, while free cash flow is targeted within the range of CAD 325 million to CAD 375 million. The company is targeting an annualized dividend of CAD 0.17 per common share, which is impressive looking at the current downturn. We have valued the stock using Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Capital Power Corp, Northland Power Inc etc. Hence, we recommend a 'Buy' rating on the stock at the closing market price of CAD 8.13 on September 15, 2020.

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

Disclaimer

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