TransAlta Renewables Inc.

TransAlta Renewables Inc. (TSX: RNW) is an electric utility company which owns and operates energy generation and transmission facilities. The Company operates via four segments viz. Canadian Wind, Canadian Hydroelectric, and Canadian Gas.

Q1FY20 Financial Highlights: TransAlta Renewables Inc. posted its quarterly results, wherein the Company reported total revenue of CAD 110 million as compared to CAD 127 million. The decline was due to significantly lower revenue from the Canadian Gas segment, while Canadian Wind segment reported a slight decrease as compared to the previous corresponding quarter. Gross margin stood lower at CAD 93 million, as compared to CAD 98 million in pcp. The decline was majorly attributable to lower income, while partially supported by a lower fuel, royalties, and other costs. The quarter was marked by higher operations, maintenance & administration and depreciation & amortization expenses, which lead to a lower operating income of CAD 34 million, as compared to CAD 44 million, a year ago. Comparable EBITDA, during the period improved from CAD 116 million to CAD 118 million. The bottom-line declined significantly to CAD 4 million from CAD 77 million in pcp, majorly due to loss from change in fair value of financial assets combined with extended Foreign exchange loss and lower operating income. The Company reported cash and cash equivalents of CAD 40 million and total assets of CAD 3,586 million at the end of Q1FY20.

Q1FY20 Income Statement Highlight (Source: Company Reports)

Guidance: RNW expects its Comparable EBITDA for FY20, within the range of CAD 445 million to CAD 475 million, while adjusted funds from operations are targeted at around CAD 350 million to CAD 380 million.

Risks: 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 Relative Valuation (illustrative)

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

Stock Recommendation: The stock fell ~7% so far this year amid free fall in the equity market. 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 reported an increase in renewable energy production due to higher generation in Canadian Wind and higher production in the US Wind and Solar segment. The quarter was marked by the first full quarter operation of Big Level and Antrim wind farms. The company has a stable balance sheet with Long term debt to total capital ratio at 25.5%, which is lower than the industry median of 49.7%. Further, at the last traded price, the stock was offering a dividend yield of ~6.7%, which lucrative from the would income investors point of view. We have valued the stock using the EV to EBITDA based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). For the said purpose, we have considered peers like Capital Power Corp, Algonquin Power & Utilities Corp, Boralex Inc etc. Hence, considering the aforementioned factors, current price movements and risk scenario, we recommend a 'Buy' rating on the stock at the closing market price of CAD 14.0 as on July 9, 2020.

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

Hydro One Ltd

Hydro One Ltd (TSX: H) is an electricity company based out of Canada. The Company is engaged in the business of offering services related to electricity distribution and electricity transmission. The Group has divided its operations into three reportable segments being Distribution, Transmission and other.

Financial Highlights – Q1 of Financial Year 2020 (31^st March 2020)

(Source: Quarterly Report, Company Website) 

In the first quarter of the financial year 2020, driven by higher revenue from transmission business for the period, the revenue increased to CAD 1,850 million (Q1 FY2019: CAD 1,759 million). The income before financial charges and tax stood at CAD 366 million in the first quarter of the financial year 2020 (Q1 FY2019: CAD 324 million), reflecting reduction in expenses related to operation, administration and maintenance for the period. The PBT (profit before tax) increased to CAD 247 million in Q1 FY2020 (Q1 FY2019: CAD 161 million), reflecting lower financial charges for the period. The net income surged to CAD 232 million in Q1 FY 2020 (Q1 FY2019: CAD 177 million), reflecting higher revenue and operating profit. The basic and diluted earnings per share stood at $0.38 in Q1 FY2020 (Q1 FY 2019: $ 0.29). The dividend per share stood at $0.24 in the first quarter of the financial year 2020 (Q1 FY2019: $0.23). The cash balance stood at CAD 1,042 million as on 31^st March 2020 versus CAD 30 million as on 31^st December 2019. The total assets stood at CAD 28,130 million as on 31^st March 2020 versus CAD 27,061 million as on 31^st December 2019.

Share Price Performance

Daily Chart as of 9 July 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Hydro One Ltd shares closed at CAD 26.09 at the time of writing after the market close on 9 July 2020. Stock's 52 weeks High is CAD 29.53 and Low is CAD 20.25, respectively.

Key Risks

Any change in regulations and government policies could affect the overall business of the Company. The market conditions in which the Company operates is full of challenges and might impact the operational performance and reduce the financial performance as well. Liquidity and interest rate risks could affect the operations of the Company. Risks related to environment and climate change could hamper the operations of the Group. 

Conclusion

The Company has shown an increase in financial performance in the first quarter of the financial year 2020. Both the top-line and the bottom-line performance have increased, with improved profitability for the period. The performance from transmission revenue has increased for the period. The Company has extended the Winter Relief program and temporarily suspended the late fee payment to support customers during difficult times. The Group announced Pandemic Relief fund to support customer affected by covid-19 and offered financial assistance with payment flexibility. The Company returned around $5 million in security deposits, collected from new customers, to more than 4,000 commercial businesses. The liquidity position of the company has improved, and the balance sheet remained well-positioned.

Based on the above rationale, we have given a “Hold” recommendation at the closing price of CAD 26.09 (as on 9 July 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.