Algonquin Power is undervalued, Industrial Alliance says

With its joint venture and 25 per cent stake in Atlantic Yield now completed, Algonquin Power & Utilities Corp. (Algonquin Power & Utilities Corp. Stock Quote, Chart, News: TSX:AQN, NYSE:AQN) is that much more attractive, says analyst Jeremy Rosenfield of Industrial Alliance Securities, who rates the stock a “Strong Buy” with a $17.00 price target.

Renewable energy and utility distribution company Algonquin Power announced on Friday the completion of its AAGES joint venture with Seville, Spain-based Abengoa SA, which will focus on global clean energy and water infrastructure assets. The deal involves Algonquin’s purchase from Abengoa of a 25 per cent equity interest in Atlantica Yield, a clean energy owner/operator with 22 facilities worldwide.

The move puts APUC as a key player in global clean energy and water infrastructure, says Algonquin’s CEO, Ian Robertson.

“We are pleased to be partners with Abengoa in AAGES, which provides APUC with a strong and risk-balanced entry into new international markets with a long-standing and experienced partner,” Robertson says in a press release. “As well, through Atlantica, APUC benefits from having an experienced international operator for new projects developed by AAGES as well as an interest in an attractively-priced portfolio of high quality, international operating assets that is accretive to APUC’s earnings and cash flow per share.”

Rosenfield sees APUC’s strategic initiatives paying off immediately by adding to its EPS, with the analyst forecasting initial earnings accretion of ~$0.02 to $0.05 per share. Moreover, the moves will support the company’s long-term growth in international markets, he says.

“We see long-term potential upside from project development at AAGES and future asset dropdown transactions to AY,” says Rosenfield in a research update to clients on Friday. “The Company has identified ~US$600-800 million of initial investment opportunities with the next two to three years, and ~US$200 million/year thereafter.”

“In our view, AQN remains the most well-balanced investment option in the sector, supported by the Company’s (1) diversified business model (power & utilities), (2) leverage to multiple investment themes (i.e., investments regulated utilities and non- regulated power), (3) healthy near-term organic and M&A-based growth (forecasted 8-10 per cent EPS and FFO/sh growth, and 15 per cent + FCF/sh growth through 2021), and (4) attractive dividend growth (~10 per cnet/year through 2021),” the analyst writes.

The analyst thinks AQN will generate EBITDA of $897 million in 2018 and $961 in 2019. Rosenfield’s “Strong Buy” rating and $17.00 price target (representing a 36.0 per cent potential return including dividends) are unchanged.