TransAlta Renewables Inc.

TransAlta Renewables Inc. (TSX: RNW) is a Canada-based company that owns a portfolio of renewable and natural gas power generation facilities and other infrastructure assets. The Company owns and operates approximately 13 hydro facilities, 20 wind farms and seven gas facilities.

Key highlights 

• The most significant player in the segment:Being a leading player in the generation of wind power, the company holds one of the largest wind portfolios in North America. Presently, the group has 100% of generation contracted with an average capacity weighted contract life of 11 years. The group has added five wind farms and a solar farm in the US over the last five years, 1+ GW of US wind projects in the development pipeline. The current pipeline under evaluation is of 2,000 MW.

Source: Company Presentation 

• Diversified assets base: The Company remains highly diversified with facilities that are fully contracted and located in various geographies. The group made their presence into almost all renewable segment, though wind and natural gas segments generate the most significant chunk of cash flows.

Source: Company Filing

• Healthy dividend pay-out:The company has a healthy practice of dividend pay-out; this translates in an essential factor for regular income-seeking investors with a long-term horizon. During the current quarter, management announced a dividend of CAD 0.23 per common share. Further, the company is offering a dividend yield of 5.51%, which is significantly higher amid the lower interest rate environment.

Source: Company Filing

Financial overview

Source: Company 

• The company’s renewable energy production increased by 158 GWh to 864 GWh in Q3 2020, compared to 706 GWh in the previous corresponding period. This change was mainly due to higher contribution from wind and hydro resource in Canada as well as higher production at US Wind and Solar plants.

• Comparable EBITDA reported by the company in Q3 2020, was CAD96 million, increased by CAD10 million or 12% compared to CAD89 million in Q3 2019.

• Adjusted funds from operations reported by the company in Q3 2020, was CAD76 million, increased by CAD7 million or 10% compared to CAD69 million in Q3 2019.

• The company reported Net earnings of CAD 6 million, decreased by CAD18 million in Q3 2020, compared to CAD24 million in the previous corresponding period, due to an increase in unrealized losses regarding the change in the fair value of financial assets.

Risk 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): Price to Book Value

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation: The company’s cash flows have been relatively unaffected in the quarter due to the high contractedness of various asset portfolio and financial strength of customers. At present, the company continue to have a strong balance sheet with ample liquidity of CAD 507 million to provide added flexibility during this challenging time. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 17.05 on November 13, 2020 with a single-digit upside potential. We have considered Capital Power Corp, Emera Inc, Algonquin Power & Utilities Corp, Northland Power Inc etc. as the peer group for the comparison.

1-Year Price Chart (as on November 13, 2020). Source: Refinitiv (Thomson Reuters)

Boralex Inc

Boralex Inc (TSX: BLX) is an electric utility company that develops, constructs, and operates renewable energy power facilities across, Canada, the United States, France, and the United Kingdom. Most of Boralex's plants rely on wind power, while a significant number also employ hydroelectric power.

Key highlights

• Diversified portfolio: The Company remains highly diversified with facilities that are fully contracted (98%) and located in various geographies. A significant portion of the company’s net installed capacity originates from the wind power segment, making the company largest independent producer of onshore wind power in France.

Source: Company

• Secure revenues from energy sales:The Company’s 98% of net installed capacity is under long-term indexed, fixed-price energy sales contracts. These contracts have a weighted average remaining contractual term of 13 years.

Source: Company

• Dividend: The Company declared a dividend of CAD 0.1650 per common share on November 10, 2020, to be paid on December 15, 2020, to holders with a record date of November 30, 2020. 

Financial overview of Q3 2020

Source: Company

• In Q3 2020, revenues from energy sales posted by the company were CAD 105 million, up 14% against CAD 92 million in Q3 2019. This increase was mainly attributable to a favourable volume from Canadian wind power segment.
• In Q3 2020 the company posted an Adjusted EBITDA of CAD 62 million, increased 38%, against CAD 45 million in Q3 2019, mainly driven by increased production at Canadian wind and hydroelectric facilities.
• The company posted a net loss of CAD 8 million in Q3 2020, against a loss of CAD 29 million in the previous corresponding period. 

Risk associated with investment

The Company is under 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. Foreign currency volatility risk is also associated with the Company as company is present in many geographies. 

Valuation Methodology (Illustrative): Price to Cash Flow

(Note: All forecasted figures and peers have been taken from Thomson Reuters)

Stock recommendation

The company is aiming to achieve discretionary cash flows in a range of CAD 140-150 million, with a total installed capacity of 2800MW by FY2023. The renewable energy is likely to show a substantial and sustained increase in the market share over the next decade as most of the developed nations are adopting the renewable services at mass, which is promising and augers well for the company’s long term growth. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 39.30 November 13, 2020 with a lower Single-digit upside potential. We have considered Capital Power Corp, Algonquin Power & Utilities Corp, Northland Power Inc etc. as the peer group for the comparison.

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.