Innergex Renewable Energy Inc.

Innergex Renewable Energy Inc. (TSX: INE) is a leading renewable power producer. Innergex operates a large portfolio of hydro, solar, and wind energy facilities in Canada, the United States, Chile, and France. The company has interests in 68 operating facilities (including 37 hydro facilities, 26 wind farms, and Six solar farms) with a net installed capacity of 2,656 MW.

The company would disclose its second quarter results on August 5, 2020.

Q1FY20 Financial Highlights: INE declared its quarterly results, wherein the company reported production of 1,679,598 MWh, significantly higher than 1,308,505 MWh in the previous corresponding quarter. Revenues stood higher at CAD 132.116 million as compared to CAD 126.419 million in the previous corresponding period (pcp). The increase was driven by higher revenues from France wind farms and higher contribution of the Foard City wind farm in Texas. The top-line was further supported by higher production across several geographies while lower realization prices remained a drag. Adjusted EBITDA Margin reported a fall from 73.8% to 68.4%, primarily due to lower margin attributable to projects that were commissioned in 2019 and lower production at the Quebec wind facilities, partly offset by higher production at the France facilities. Adjusted EBITDA stood at CAD 90.419 million, lower than CAD 93.243 million in pcp. The company reported a net loss of CAD 46.931 million, as compared to CAD 0.854 million in Q1FY19. The decline was majorly attributable to lower adjusted EBITDA, unfavorable change in fair value of financial instruments, higher depreciation and amortization costs and an increase in finance costs.

Q1FY20 Income Financial Highlights (Source: Company Reports)

Valuation Methodology: EV to EBITDA based Relative Valuation (illustrative)

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

Risks: Due to COVID-19 restriction measures, the group might face a delay in projects, which would hamper the financial performance. The group has a significant amount of debt in its balance sheet, which might pose a challenge.

Stock Recommendation: The stock has remained resilient in the recent past and reported a solid gain of ~33% and ~48% in the last nine months and one year, respectively. The business is categorized under ‘essential products and services’ and is immune to the economic cycle. The company reported higher revenues from the France wind farm and improved income from British Columbia underpinned positive net favorable impact of higher production over lower average selling prices at some facilities. Further, the company is developing 200 MW Hillcrest solar photovoltaic project in Brown County, Ohio. The project is expected to produce a long-term average of 413.3 GWh and CAD 15.1 million of adjusted EBITDA on average for the first five years of operation. Further, the company acquired six operating wind farms in the US recently. The group stated that it would continue to look for strategic investment opportunities, which could boost growth further. At the last traded price, the stock was offering a dividend yield of 3.27%, which is attractive considering the current interest rate environment. We have valued the stock using EV to EBITDA based relative valuation method and considered peers like Boralex Inc (TSX: BLX), Algonquin Power & Utilities Corp (TSX: AQN), and Brookfield Renewable Partners LP (TSX: BEP.UN) etc., and arrived at the potential upside in lower single-digit (in percentage terms). Hence, considering the afford mentioned facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 22.0 on July 22, 2020.

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

Brookfield Renewable Partners LP

Brookfield Renewable Partners LP (TSX: BEP.UN) operates in renewable power platforms traded publicly. The Group’s portfolio consists of 5,288 generating facilities located in Asia, South America, Europe and North America with a capacity of around 19,300 MW. The Company’s investment objective is to deliver annualized total returns between 12% to 15% for long-term.

Financial Highlights – Q1 Financial Year 2020 (31 March 2020, USD, million)

(Source: Quarterly Report, Company Website)

In the first quarter of the financial year 2020, long-term average generation increased to 6,717 GWh (Q1 FY2019: 6,698 GWh). The revenue stood at USD 792 million in the first quarter of the financial year 2020 (Q1 FY2019: USD 825 million), reflecting a decline in revenue from hydropower, wind and storage & other. Due to an increase in the operating expenses and non-operating expenses, the net income declined to USD 120 million in the first quarter of the financial year 2020 (Q1 FY2019: USD 153 million). The basic and diluted earnings per share stood at $ 0.06 in the first quarter of the financial year 2020 (Q1 FY2019: $ 0.14). The cash balance increased to USD 294 million as on 31 March 2020 (31 December 2019: USD 115 million). The total assets decreased to USD 32,663 million as on 31 March 2020 (31 December 2019: USD 35,691 million). The cash flow from operating activities stood at USD 355 million in the Q1 FY2020 (Q1 FY2019: USD 367 million).

Share Price Performance

Daily Chart as of 22 July 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Brookfield Renewable Partners LP shares closed at CAD 74.91 at the time of writing after the market close on 22 July 2020. Stock's 52 weeks High is CAD 76.80 and Low is CAD 43.74.

Key Risks

The Company’s overall business could be impacted due to changes in government policies  and regulations. Risks related to environment and climate change could hamper the operations of the Group. The market conditions in which the company operates is full of challenges and might impact the operational performance and reduce financial performance as well.

Conclusion

The Company has shown a decline in financial performance in the first quarter of the financial year 2020. Both the revenue, the bottom-line performance have declined, with a decline in profitability for the period. The Group needs to manage its operating expenses unless it results in further deterioration in financial performance in the coming years. The revenue from core operations have declined during the period, but the Company managed to increase its liquidity position for the period. The Group has merged Terraform Power into Brookfield Renewable, which will simplify the structure, diversify holdings and will further strengthen business in Europe and North America and attract new shareholders. The Company completed the commissioning of development projects in China, Europe and North America. BEP.UN continued construction of pumped storage, rooftop solar, wind and hydroelectric development projects and is expected to generate FPO of USD 21 million between 2020 and 2022. Presently, the company is trading near its 52-week high, raising doubts at its upside potential at current prices.

Based on the above rationale, we have given a “Hold” recommendation at the closing price of CAD 74.91 (as on 22 July 2020).

*Please be aware that dividends are variable and not guaranteed.

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.