Northland Power Inc

Northland Power Inc (TSX: NPI) is an operator of power-producing facilities. These facilities generate electricity from natural gas or use renewable sources, such as wind and solar power. Most of the electricity produced by Northland Power is derived from its thermal facilities. 

Key Highlights

• Strong Financial Performance: The corporation provides utility services and is immune to economic cycles. The company reported strong growth in its adjusted EBITDA and free cash flows, which has strengthened the company’s financial position and liquidity position. During FY15 to FY19, the company reported a growth of ~145% in its Adjusted EBITDA while free cash flow witnessed a growth of ~75%, which reflects a solid business model and competitive advantages.

Historical Trends (Source: Company Presentations)

• Ample Liquidity levels: The company has strong liquidity levels with CAD 704 million of cash and liquidity, comprising CAD 125 million of corporate cash in hand and CAD 579 million of liquidity available under its syndicated revolving facility. We believe, with the above liquidity, the company would likely to meet its working capital needs and funds its capital investments.

Q3FY20 Financial Highlights:

• NPI announced its third-quarter results, wherein the company posted revenue of CAD 470.867 million, higher than CAD 378.437 million in the previous corresponding period (pcp). The increase was primarily driven by higher income from electricity and related products coupled with additional income from Regulated electricity segment.
• During the quarter, the company sold 2,045 GWh of energy volumes, slightly lower than 2,058 GWh, a year ago.
• Gross profit stood at CAD 418.4 million, higher than CAD 355.9 million in Q3FY19, supported by higher revenue, while an increase in the cost of sales remained a drag.
• Operating income stood at CAD 179.477 million, at par with CAD 176.900 million in pcp, primarily attributable to significantly higher operating costs (CAD 78.992 million versus CAD 51.064 million in Q3FY19) along with higher depreciation of property, plant and equipment expense.
• Net income stood marginally low at CAD 108.964 million, as compared to CAD 110.621 million in pcp.

Q3FY20 Financial Snapshot (Source: Company Reports)

Risks:  The company has increased its debt levels, which has led to an increase in the finance expense and subsequently, a decline in profitability. A Higher debt contribution can pose some balance sheet risks for the company.

Valuation Methodology: P/CF Based (Illustrative)

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

Stock Recommendation: The company has continued to develop the Hai Long 2B and Hai Long 3 sub-projects, which would provide 744 MW of energy volumes under auction and expects to execute their respective offtake agreements in FY21. Furthermore, the company has extended its presence across the U.S. renewables market with the acquisition of New York Onshore Wind Projects with an additional capacity of 300 megawatts. We believe the above strategies are likely to enhance the company’s overall business prospects in the foreseeable future. The stock of NPI appreciated ~63% in the past one year, as investors are leaning towards stable businesses. We have valued the stock using 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 Emera Inc, Hydro One Ltd etc. Hence, considering the aforesaid facts, current price movements, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 43.86 on November 12, 2020.

NPI Daily Technical Chart. Source: Refinitiv, Thomson Reuters.

Innergex Renewable Energy Inc

Innergex Renewable Energy Inc (TSX: INE) is a Canada-based independent renewable power producer that develops, acquires, owns, and operates hydroelectric facilities, wind farms, and solar farms. The company has a portfolio of approximately 75 operating facilities with a net installed capacity of over 2,656 MW (gross 3,488 MW), including around 37 hydroelectric facilities, 32 wind farms, and six solar farms.

Key highlights

• Acquired six wind farms in Idaho, United States: On July 15, 2020, the Company completed the acquisition of all Class B shares of a portfolio of six operating wind farms in Elmore County, Idaho in the United States for a purchase price of CAD 77.3 million with total installed capacity of 138 MW. The Company expects to generate adjusted EBITDA of CAD 28.1 million for FY2021 from this acquisition.
• Increased dividend income:the company declared a dividend of CAD 0.180 on common shares in Q3 2020, an increase of 3% against CAD 0.175 in Q3 2019.

Source: Company

• Increase in Cash Flows from Operating Activities: In Q3 2020, the company reported an increase of CAD 28.4 million to CAD 64.9 million on Y-o-Y basis in Cash flows from operating activities, primarily driven by a CAD 18.6 million decrease in finance costs paid.

Financial overview of Q3 2020 (Fig. in 000 except per share data)

Source: Company

• The company presented some incredible numbers in Q3 2020 with revenues registered a growth of 14% to CAD 162.7 million, against CAD 142.8 million on Y-o-Y basis. All the segments of the company reported an increase in revenues on a Y-o-Y basis.

Source: Company

• The adjusted EBITDA in Q3 2020 reported by the company has shown a muted growth of only 1% to CAD 108.5 million as compared to CAD 107.4 million in the previous corresponding period.

Source: Company

• Net income posted by the company in Q3 2020 was down by 23% to CAD 7.5 million as compared to CAD 9.7 million on Y-o-Y basis, due to a rise in income tax expense.

Risk associated with investment

The company is exposed to various market risks in the ordinary course of operations that could impact its earnings and cash flows. Some important risk factors include lower demand, lower production, adverse weather conditions etc. There is also a risk that its contract counterparties could fail to meet their obligations. 

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company is engaged in the electricity generation business, which is immune to the business cycles, as it comes under the essentials. The company continues to have its financial position in excellent shape. Recently the company acquired six wind farms in Idaho, United States for CAD 77.3 million with total installed capacity of 138 MW. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 23.89 on November 12, 2020 with a single-digit upside potential. We have considered Canadian Utilities Ltd, Algonquin Power & Utilities Corp, Boralex Inc etc. as the peer group for the comparison.

INE daily technical chart. Source: Refinitiv (Thomson Reuters)

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.