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: ALA declared its second-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 Company reported a mild downfall within the utilities segment, while the midstream segment showed improved performance as compared to the previous corresponding quarter. Total expenses stood comparatively lower at CAD 984 million as compared to CAD 1,135 million a year ago, thanks to lower cost of sales and slightly lower depreciation and amortization while operating and administrative expense stood at par with the previous corresponding quarter. Income before taxes stood higher at CAD 46 million as compared to 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.

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/CF Based (Illustrative)

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

Stock Recommendation: The Company’s Midstream strategy is designed to leverage the industry-leading export capability to access premium pricing in Asia, which is a key positive. The Group is well-positioned to address significant organic growth opportunities within both of the segments, and the Company would remain focused on maintaining a strong balance sheet. The Group intends to de-leveraging its capital structure and to operating with acute capital discipline, which would reaffirm its long-term goals. The group reported strong propane sales during the quarter, amidst an ongoing demand destruction scenario, which is encouraging. Propane volumes exported to Asia stood at 41,460 Bbls/day compared to 31,723 Bbls/ day in Q2FY20 coupled with a higher number of shipments as compared to the previous corresponding quarter. The Company reaffirmed its 2020 outlook, with anticipated normalized EBITDA in the range of CAD 1.275 – CAD 1.325 billion and normalized EPS of CAD 1.20 – CAD 1.30. 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. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like Canadian Utilities Ltd., CenterPoint Energy Inc, Black Hills Corp etc. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 17.58 on August 04, 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: TransAlta Corporation announced its second quarter results, wherein the Company posted revenue of CAD 437 million as compared to CAD 497 million in the previous corresponding period (pcp). The decline was majorly attributed to a lower production and power prices within the Canadian Coal and US Coal segments on account of planned outage at Sheerness and lower demand resulting from the COVID-19 pandemic and the impact of low oil prices on the Alberta economy. However, the Company reported higher revenues from the Wind and Solar segment as a result of higher wind resources and Big Level and Antrim operations. Gross margin stood lower at CAD 286 million against CAD 320 million in Q2FY19, primarily attributable to lower revenue, 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 the prior corresponding quarter, due to lower gross margin, higher depreciation & amortization, and the inclusion of asset impairment, partially offset by a lower operations, maintenance and administration costs. Net loss stood at CAD 35 million as compared to net earnings of CAD 26 million in Q2FY19. The Company ended the quarter with cash and cash equivalents of CAD 257 million, while total assets stood at CAD 9,370 million. The Company declared a quarterly dividend of CAD 0.0425 per common share payable on October 1, 2020.

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/CF Based (Illustrative)

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

Stock Recommendation: The stock of TA stood resilient in the recent past and appreciated ~8% and 6% in the last nine months and one year, respectively. 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. The segments catered by the company are categorized as 'essentials' and is immune to the economic cycle. 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. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like Public Service Enterprise Group Inc, AES Corp, Korea Electric Power Corp etc. Hence, considering the aforesaid facts, current price movement, we recommend a 'Buy' rating on the stock at the closing market price of CAD 8.56 on August 04, 2020.

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

Disclaimer

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