TransAlta Renewables Inc.

TransAlta Renewables Inc. (TSX: RNW) is an electric utility company which owns and operates energy generation and transmission facilities. The Company has a diversified portfolio of 23 wind facilities, 13 hydroelectric facilities, seven natural gas generation facilities, one solar facility and one natural gas pipeline, representing an ownership interest of 2,527 megawatts of owned generating capacity.

The Company announced a monthly dividend of CAD 0.07833 per common share, payable on October 30, 2020.

Q2FY20 Financial Highlights: RNW declared its quarterly results, wherein the Company reported total revenue of CAD 103 million lower than CAD 111 million in the previous corresponding quarter. The Company reported total production of renewable energy of 1,098 GWh against 867 GWh in the previous corresponding quarter. The increase was underpinned by a higher wind resource in Western Canada, partially offset by lower wind resources in Eastern Canada. Gross margin came a bit lower at CAD 86 million from CAD 93 million in Q2FY19. Operating income stood at CAD 29 million as compared to CAD 39 million a year ago, due to a lower gross margin, an insurance recovery in the previous corresponding quarter. Net earnings stood stable at CAD 31 million as compared to CAD 32 million in Q2FY19, thanks to a foreign exchange gain.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Business might be impacted by regulatory changes, market dynamics and volatility in commodity prices etc. The Company has exposure in the natural gas segments, which expose the company to commodity price risk. The company is also exposed to foreign exchange risk at it has operations in the US and Australia.

Valuation Methodology: EV to EBITDA Based (Illustrative)

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

Stock Recommendation: The stock of RNW stood resilient in the recent past and appreciated 8% and 12% in the last nine months and one year, respectively, amidst a significant jolt in the financial markets on account of COVID 19 pandemic. The company is operating in the utility industry, which deemed as ‘essential services’ and is immune to the business cycles. The group’s all facilities remained fully operational to date, and the company had not experienced interruptions to service requirements. The group generated higher renewable energy production thanks to the contribution from Level and Antrim wind farms. For FY20, the company has provided a decent outlook, wherein it expects FY20 comparable EBITDA at around CAD 445 million to CAD 475 million, while Adjusted funds from operations are expected within the range between CAD 350 million to CAD 380 million. Cash available for distribution is estimated in between CAD 300 million to CAD 330 million. Further, at the last traded price, the stock was offering a dividend yield of ~6.112% on an annualized basis, which is lucrative considering the current interest rate environment. We have valued the stock using the EV to EBITDA based relative valuation approach and arrived at a target price, which suggests a lower double-digit upside potential (in % terms). For the said purpose, we have considered peers like Capital Power Corp, Northland Power Inc and Algonquin Power & Utilities Corp etc. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 15.38 on August 05, 2020.

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

Innergex Renewable Energy Inc

Innergex Renewable Energy Inc (TSX: INE) is a renewable power producer based out of Canada. The Group is engaged in the business of developing, acquiring, owning and operating solar farms, wind farms and hydroelectric facilities. The Group have operations in Canada, United States, Chile and France.

Recent News

On 15 July 2020, Innergex Renewable Energy announced the acquisition of six wind farms operating in the United States based Elmore County from Terna Energy SA for USD 56.8 million or CAD 77.3 million.

Financial Highlights – Q2 and H1 Financial Year 2020 (30 June 2020, CAD, Thousand)

(Source: Quarterly Report, Company Website) 

In the first half of the financial year 2020, the production stood at 3,865,390 MWh (H1 FY2019: 3,050,458 MWh). Driven by an increase in revenue from France and the United States, the revenue in H1 FY2020 stood at CAD 282,629 thousand (H1 FY2019: CAD 271,112 thousand), while the revenue in Q2 FY2020 increased to CAD 150,513 thousand (Q2 FY2020: CAD 144,693 thousand). The adjusted EBITDA declined to CAD 195,755 thousand in H1 FY2020 (H1 FY2019: CAD 198,491 thousand), and adjusted EBITDA in Q2 FY2020 increased to CAD 105,336 thousand (Q2 FY2019: CAD 105,248 thousand). In H1 FY2020, the Company reported a net loss of CAD 48,497 thousand (H1 FY2019: net income of CAD 6,491 thousand) and net loss in Q2 FY2020 stood at CAD 1,566 thousand (Q2 FY2019: net income of CAD 7,345 thousand). The basic and diluted loss per share stood at $0.36 in H1 FY2020 (H1 FY2019: basic and diluted earnings per share of $0.01). The cash balance as on 30 June 2020 stood at CAD 228,978 thousand (31 December 2019: CAD 156,224 thousand).

Share Price Performance

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

Innergex Renewable Energy Inc shares closed at CAD 22.68 at the time of writing after the market close on 5 August 2020. Stock's 52 weeks High is CAD 23.42 and Low is CAD 13.97.

Key Risks

The Company’s operations are negatively impacted by risks related to interest rate and Liquidity. Risks related to environment and climate change such as hurricanes, tornadoes, avalanches and rockslides etc. could hamper the operations of the Group. Any change in regulations and government policies could affect the overall business of the Company.

Conclusion

The Company has shown a decline in financial performance in the second quarter and the first half of the financial year 2020. The top-line performance has improved, while the bottom-line performance has declined, with a decline in the profitability margins for the period. Despite the lower financial performance, the production increased on reported as well as the proportionate basis, reflecting no material impact of covid-19 on electricity production. The liquidity position has increased for the period, with the well-positioned balance sheet. The Group is looking to expand its operations in the other markets and has recently the acquisition of six wind farms in the US. INE expects competition to increase due to the expansion and transformation of the industry.

Based on the above rationale, we have given a “Hold” recommendation at the closing price of CAD 22.68 (as on 5 August 2020).

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.