Algonquin Power gets price target raise at Industrial Alliance

Following the acquisition of an American utility, Industrial Alliance Securities analyst Jeremy Rosenfield has raised his price target on Algonquin Power and Utilities (Algonquin Power and Utilities Stock Quote,Chart, News TSX:AQN).

On Wednesday, Algonquin announced that it had entered into an agreement to purchase Merrick, New York-based American Water Works Company for (US) $608-million.

“We are thrilled to expand our customer base in the great state of New York,” said Algonquin CEO Ian Robertson. “New York State has demonstrated a commitment to ensuring regulated utilities put their customers first. We believe the state’s vision aligns with our customer-driven focus. We have experience in multiple states as a water utility operator and are known for our commitment to excellence. We are committed to partnering with our regulator and other state officials to support the affordability of water services, including reducing the burden of local taxes on New York American Water’s customers, which can account for more than half of their monthly bills. We are also excited to welcome New York American Water’s employees to our Liberty Utilities team.”

Rosenfield says the arrangement reflects the “appropriate” water premium.

“We estimate the deal valuation at 1.3-1.5x EV/rate base and ~15-17x forward P/E, which is relatively near to recent precedent transactions in the regulated utility sector,” he said.

The analyst says some equity will be required, but that the amount “could be a drop in the bucket”.

“AQN expects to finance the acquisition using a combination of debt and equity, consistent with the Company’s current investment grade credit profile,” Rosenfield notes. “Although this could create a minor near-term equity overhang, we believe AQN has ample access to capital at this time to seal the deal. Low single-digit accretion on tap. Based on our financing assumptions, we estimate that the NYAW transaction could drive modest ~2-4% accretion to our longer-term EPS estimates.”

In a research update to clients today, Rosenfield maintained his “Buy” rating on Algonquin Power but raised his one-year price target on the stock from $19.00 to $20.00, implying a return of 12.6 per cent at the time of publication.

The analyst thinks AQN will post EPS of (US) $0.62 and EBITDA of $828-million in fiscal 2019. He expects those numbers will improve to EPS of $0.69 and EBITDA of $1.01-billion the following year.

“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%/year EPS and FFO/share growth, and 13%+/year FCF/share growth through 2023), (3) attractive dividend growth (~10%/year through 2021), (4) international investment opportunities (via the AAGES joint venture and equity stake in AY), and (5) upside from additional growth initiatives that are not included in forecasts. With the NYAW acquisition, AQN continues to pursue its long-running strategy of acquiring bite-sized regulated utilities at reasonable premiums; we see modest value in the transaction, and are moving our price target accordingly,” the analyst added.