Industrial Alliance trims target on Algonquin Power, keeps “Buy” rating

Expect near-term headwinds to persist for Algonquin Power (Algonquin Power Stock Quote, Chart, News TSX:AQN) but Industrial Alliance Securities analyst Naji Baydoun still likes the name for the long term.

Baydoun delivered a research update to clients on the company Monday, where he reviewed Algonquin’s latest quarterly results, saying a diversified business model and good outlook for growth help keep AQN a “Buy”.

Oakville, Ontario-based Algonquin, a company that acquires, develops and owns and operates renewable energy projects along with water, electric and natural gas utility distribution, announced its second quarter 2020 results on August 13 after the market close.

The company posted flat revenue year-over-year at $343.6 million versus the same in 2019 with adjusted EBITDA coming in at $176.3 million compared to $190.0 million a year earlier. Adjusted net earnings fell from $0.11 a year ago to $0.09 per share. (All figures in US dollars except where noted otherwise.)

In the commentary, the company pointed to decreased demand due to the COVID-19 pandemic and resultant business suspensions and shutdowns as a cause of the lack of top and bottom line growth. At the same time, management reiterated its 2020 guidance as far as capital investment and adjusted net earnings go, calling for between $1.3 billion and $1.75 billion in capital investment and adjusted net EPS of between $0.65 and $0.70 for the 2020 year.

“We continue to execute on our 5-year $9.2-billion capital program and are making good progress on projects under construction.  We are also pleased that in line with our ESG commitment and our commercial and industrial growth strategy, we have reached a framework agreement with Chevron where APUC will seek to develop, build and operate renewable energy solutions taking advantage of Chevron's global operations to reduce their carbon footprint over the next several years,” said CEO Arun Banskota in a press release.

The Q2 numbers came in lower than expected, according to Baydoun, who was calling for adjusted EBITDA and adjusted EPS of $197 million and $0.12 per share, respectively, versus the real results of $176 million and $0.09 per share. As far as the reiterated guidance goes, Baydoun said he expects AQN to finish the year “near the lower end” of its 2020 EPS guided range.

Nevertheless, the analyst said the overall outlook is still compelling for Algonquin and its current valuation is “still attractive.”

“Despite expectations for more muted near-term performance, we continue to forecast high single-digit average annual EPS and FCF/share growth from AQN through 2024, driven by the Company’s ~$9.2-billion five-year capital investment plan (2020-24E), which should support its dividend growth target of ~10 per cent year through 2021, and more modest dividend growth over time to drive the payout ratio lower (in our view).

Furthermore, we believe that AQN’s current relative valuation represents an attractive buying opportunity for long-term investors,” Baydoun wrote.

“AQN offers investors a well-balanced mix of growth and income, with: (1) a diversified business model (regulated utilities & non-regulated power); (2) robust medium-term growth (~8-10 per cent per year EPS and FCF/share growth through 2024); (3) attractive dividend growth (~10 per cent per year through 2021); and (4) upside from additional growth initiatives (including M&A; not included in our estimates/valuation),” he wrote.

With his reiterated “Buy” rating, the analyst has dropped his target price from C$22.00 to C$21.00, which at press time represented a projected 12-month return including dividend of 20.8 per cent.