Algonquin Power downgraded from “Strong Buy” to “Buy” at Industrial Alliance

Industrial Alliance Securities analyst Jeremy Rosenfield says that there is still more upside to Algonquin Power & Utilities Corp (Algonquin Power & Utilities Corp Stock Quote, Chart, News TSX:AQN) but due to this year’s strong performance by the stock along with the company’s recent equity offering, he is now lowering his rating from “Strong Buy” to “Buy,” as detailed in a Wednesday research update to clients.

Renewable energy generator Algonquin Power on Monday announced an approximately 21.5-million common share equity offering plus an about 3.2-million over-allotment option, with the proceeds set to be used to partially fund previously announced acquisitions (including New Brunswick Gas, which closed earlier this month), to partially fund renewable growth projects and for general corporate purposes in line with the company’s five-year $7.5-billion capital investment plan, set to run until 2023. (All figures in US dollars unless where noted otherwise.)

“With the impact of the equity offering, the recent share price performance, and now more limited upside to our price target, we are revising our rating to Buy from Strong Buy (on Algonquin Power)”

Rosenfield says Algonquin’s fundamentals continue to look strong and that the five-year plan should drive high single-digit EPS and Funds From Operations per share growth through to 2023.

AQN has had a successful year so far, with the stock up 36 per cent year-to-date. That’s better than the average gains across Canada’s utility sector at 29 per cent year-to-date and well ahead of the broader S&P/TSX Composite Index at 15 per cent year-to-date.

But Rosenfield says there’s only so far AQN will go over the next 12 months.

“AQN remains the most well-balanced growth and income investment option in our coverage universe, supported by the Company’s (1) diversified business model (regulated utilities & non-regulated power), (2) strong near-term organic growth (8-10 per cent EPS and FFO/share growth, and plus-13 per cent FCF/share growth through 2023), (3) attractive dividend growth (~10 per cent per year through 2021), (4) international investment opportunities (via the AAGES joint venture and equity stake in Atlantic Yield), and (5) upside from additional growth initiatives that are not included in forecasts,” Rosenfield writes.

“However, with the impact of the equity offering, the recent share price performance, and now more limited upside to our price target, we are revising our rating to Buy from Strong Buy,” he said.

The analyst thinks AQN will generate fiscal 2019 revenue and EBITDA of $1.820 billion and $827 million, respectively, and fiscal 2020 revenue and EBITDA of $2.535 billion and $1.011 billion, respectively. His target price remains at C$19.00, which represents a projected 12-month return of 5.5 per cent including distributions at the time of publication.

Last month, Algonquin posted its second quarter financials, which featured revenue of $343.6 million, adjusted EBITDA of $189.8 million and adjusted EPS of $0.11 per share.

Over the second quarter, Algonquin announced an agreement to buy the Bermuda Electric Light Company for $365 million. Bermuda Electric is the sole provider of electricity generation, transmission and distribution on Bermuda. Management expects the deal to close late this year, with the addition becoming immediately accretive to AQN’s 2020 EPS.