Hydro One stock should get a boost from Ontario election, Industrial Alliance says

Hydro One’s (TSX:H) proposed acquisition of Avista Corp. (NYSE:AVA) has received approval from the Regulatory Commission of Alaska, bringing the merger one step closer to completion, says analyst Jeremy Rosenfield of Industrial Alliance Securities, who in a Tuesday update to clients reiterated his “Buy” rating and $26.00 price target for H.

An energy company with operations covering five US states (Alaska, Oregon, Montana, Idaho and Washington State), Avista was valued at $6.7 billion under the terms of the acquisition agreement, which still requires regulatory approval from utility commissions in the four remaining states.

“We are very pleased to receive this approval from the Regulatory Commission of Alaska to bring together two historic companies,” said Mayo Schmidt, President and CEO of Hydro One, in a press release. “I would like to thank the City and Borough of Juneau and the Regulatory Commission of Alaska for the thoughtful decision. We look forward to partnering with Avista and Alaska Electric Light & Power as they continue to serve your community.”

Rosenfield says the acquisition remains on track to close later this year. On Hydro One’s share price, the analyst believes that the Ontario provincial election this week will be a potential catalyst.

“We continue to believe there is currently an overhang on the shares related to election noise, and this overhang could be eliminated later this year once the next government is in place,” the analyst says. “Politics aside, the fundamental outlook for H remains healthy; we continue to forecast 4-6% average annual organic rate base growth, plus longer-term accretion from the proposed AVA acquisition.”

“We continue to view Hydro One as a defensive utility sector investment underpinned by (1) stable earnings and cash flows from its regulated utility businesses, (2) healthy organic rate base and earnings growth (4-6 per cent/year through 2021), with accretion from the proposed AVA acquisition, (3) an attractive dividend (~5 per cent yield, 70-80 per cent target payout), and (4) potential for earnings uplift from regulatory changes,” says Rosenfield.

The analyst’s $26.00 target represents a projected return of 37.8 per cent at the time of publication