Algonquin Power is a Strong Buy, says Industrial Alliance

Industrial Alliance Securities analyst Jeremy Rosenfield says he likes the new deal announced yesterday by Algonquin Power (Algonquin Power Stock Quote, Chart TSX:AQN), arguing that the acquisition of Bermudan power company Ascendant Group Limited presents a growth opportunity.

The deal, which is expected to close late in 2019, will see Algonquin’s 50 per cent owned joint venture AAGES acquire Ascendant for $365 million in cash and involves vertically integrated utility Bermuda Electric Light Company. (All figures in US dollars unless noted otherwise.)

“The acquisition of Bermuda Electric Light Company builds materially on our international growth program through the addition of this high-quality utility,” said Algonquin CEO Ian Robertson. “In addition to Ascendant customer and employee benefits coming from the scale of our existing utility operations, we are confident that our demonstrated capability in renewable energy development can help Bermuda realize on its carbon reduction aspirations.”

Rosenfield says the deal comes at an implied multiple of about 7.3x forward EV/EBITDA, which compares favourably to the general market average for regulated utility acquisitions of about 10x. AQN has said that it expects the acquisition to be immediately accretive to its 2020 EPS and that the funding will come from a combination of incremental debt of about $150 million and equity of about $215 million.

“In our view, AQN remains the most well-balanced investment option in the sector, supported by the Company’s: (1) diversified business model (regulated utilities & non- regulated power); (2) strong near-term organic growth (eight to ten per cent EPS and FFO/share growth, and plus-13 per cent FCF/share growth through 2023); (3) attractive dividend growth (~10 per cent/year through 2021); (4) international investment opportunities (via the AAGES joint venture and equity stake in AY); and (5) upside from potential additional growth initiatives, including M&A that is not included in our base-case forecast,” said Rosenfield in a client update Monday.

The analyst is maintaining his “Strong Buy” rating and C18.00 target price, which represented a 12-month return of 19.0 per cent at the time of publication.