Raymond James analyst rates independent power producers Algonquin Power & Utilities Corp. and Boralex Inc. as “strong buys”.
If you want to light up your portfolio, Raymond James Financial analyst David Quezada would advise looking at utility stocks, especially those boasting a slate of advancing projects, working in renewable energy, and holding a record of delivering on growth plans.
Based in Vancouver, Mr. Quezada is a longtime Raymond James equity analyst, first joining the firm in 2009. He is responsible for the firm’s power and utilities stocks coverage. Before starting his career, the analyst studied at Simon Fraser University in British Columbia and is also a chartered financial analyst.
The analyst praises Algonquin Power & Utilities Corp. (TSX—AQN; NYSE—AQN) and Boralex Inc. (TSX—BLX) as “strong buys” among the companies he covers.
“Most compelling risk-to-reward” power producer
In particular, Mr. Quezada describes Algonquin as the “most compelling risk-to-reward proposition among our power and utility coverage universe today”.
“Key to our constructive thesis on Algonquin is the company’s sector-leading US$9.2-billion capital spending program and attendant EPS (earnings per share) growth of nine to 11 per cent over five years,” says the analyst. “Key parts of this plan are largely de-risked. In fact, the largest element (a 600-megawatt wind project in the US Midwest with a US$1.1 billion capital budget) is well-advanced at this point while about 80 per cent of the projects in Algonquin’s capital plan are largely de-risked.
What’s more, with 1.4 gigawatts of potential wind and solar power to be developed in the US, we see potential upside from future renewable projects as well as the recently-announced 500 megawatt renewable energy development framework with Chevron.”
Per this arrangement, Algonquin will develop four jointly-owned renewable projects on Chevron land over four years starting in 2021. Chevron will act as the buyer in the power purchase agreement (PPA) between the two parties.
Trades at a discount “materially below” its peers
The analyst concedes that Algonquin’s recent 2020 second-quarter results did not meet his or consensus expectations. The company reported total revenue of US$344 million, earnings per share (EPS) of US$0.09, and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of US$176 million.
Revenue stayed flat year-over-year, though 2019 second-quarter EPS was higher, at US$0.09, than the figure 12 months later.
Nevertheless, Mr. Quezada stresses that the company maintained its full-year 2020 guidance for EPS of US$0.65 to US$0.70.
Algonquin trades at a discount “materially below” its North American peers, which average 22 times estimated 2021 price-to-earnings (P/E). At present, the company sits at 17.8 times estimated 2021 P/E, or roughly in the middle of its historical trading range.
The company is well-funded to meet its equity needs through 2021, having raised US$824 million year-to-date, says the analyst.
Boralex EBITDA beats forecasts
As for Mr. Quezada’s second selection, his confidence in Boralex is based on, again, growth in key markets and solid return profiles on its “greenfield” (that is, all-new) developments.
Among the announcements accompanying Boralex’s 2020 second-quarter results, the company highlighted the addition of 103 megawatts, or around a four per cent increase, to its development portfolio composed of both wind and solar generating capacity.
“Boralex also appears to be enjoying solid demand from corporate off-takers (power buyers similar to Chevron in the case of the aforementioned Algonquin-Chevron deal) announcing contracts in France, with a corporate buyer covering 16 megawatts of capacity while noting discussions are ongoing for corporate PPAs with large entities in France and the US currently,” says the analyst. “We believe the company is building momentum in each of France and New York; we continue to see upside both in the company’s growth profile and valuation.” Revising the shape of its project pipeline, Boralex indicated that its “advanced” bucket of projects had increased to 441 megawatts from 357 megawatts in the first quarter of 2020. Meanwhile, early-stage projects grew to 966 megawatts (including the 103-megawatt increase noted above).
The company reported 2020 second-quarter adjusted combined EBITDA of US$107 million, higher than either Raymond James or the consensus had forecast. Mr. Quezada said the difference (he had predicted US$103 million) was due to better wind power segment performance than expected in Canada, although lower wind power in France somewhat offset the effect. The analyst acknowledges that Boralex currently trades near the high end of its historical range, but points out: “We also see potential for fund flows from sustainability-focused investors to push valuation above prior peaks.”
Mr. Quezada says the company’s pipeline of projects makes it likely to exceed its 2023 capacity target of 2,800 megawatts, compared to 2055 megawatts at present.
This is an edited version of an article that was originally published for subscribers in the September 4, 2020, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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