Algonquin Power is undervalued, says Industrial Alliance

Some potentially positive regulatory news has Industrial Alliance Securities analyst Jeremy Rosenfield feeling good about Algonquin Power’s (Algonquin Power Stock Quote, Chart, News: TSX:AQN) prospects.

On July 20, the staff of the Missouri Public Service Commission filed testimony that favoured conditional approval of AQN’s proposed acquisition of Empire District Electric Company, which is headquartered in the state.

The news follows the February 9th announcement that Algonquin would merge with Empire, and the news of June 16 that Empire shareholders had approed the arrangement to the tune of 95.5 percent of all votes cast.

“Our merger agreement with Empire represents an important step forward in the growth of our regulated utility business, and we too are pleased that the Empire shareholders voted in favour of the transaction today,” said Algonquin Power CEO Ian Robertson at the time. “We look forward to continuing our joint efforts with Empire to move through the remaining regulatory approvals as we work toward the completion of the transaction.”

Rosenfield says the conditions of approval appear to be acceptable, and expects the acquisition will be approved later this summer. He notes the proposed transaction requires approval from four state regulatory commissions, but thinks everything will be wrapped up by the first quarter of 2017.

The analyst says Algonquin’s current share price represents real value to investors looking for a combination of growth and safety.

“We view AQN as the most well-balanced investment option in the Power & Utility sector, supported by the Company’s (1) diversified business model (power & utilities), (2) leverage to favourable macroeconomic themes (e.g., the strong USD), (3) healthy near-term organic and M&A-based growth (over $4B of total investment ex-EDE, plus over $3B associated with the EDE acquisition2, forecasted to drive 8-10% EPS and FFO/share growth, and 15%+ FCF/share growth through 2020), and (4) attractive dividend growth profile (~10%/year),” says Rosenfield. “AQN continues to trade at a multi-year low relative valuation level and toward the bottom of its historical average trading range (6-8x forward EV/EBITDA), which we see as an attractive entry point for investors.”

In a research update to clients today, Rosenfield maintained his “Strong Buy” rating and one-year price target of $16.00 on Algonquin Power, implying a return of 33.9 per cent, including dividend, at the time of publication.