Boralex upgraded to “Strong Buy” at Industrial Alliance

Look for independent power producer Boralex (Boralex Stock Quote, Chart, News TSX:BLX) to upgrade its dividend over the near term, says Industrial Alliance analyst Naji Baydoun, who delivered an update to clients on Friday where he raised his rating on Boralex from “Buy” to “Strong Buy,” saying a recent acquisition improves the company’s outlook.

Montreal-headquartered Boralex, which has ownership interests in over two GW of installed wind, hydro, solar and gas-fired power generation capacity in France, Canada and the United States, announced on Friday a definitive agreement to acquire the full 49-per-cent equity stake held by Caisse de dépot et placement du Québec in three wind farms in Quebec.

Boralex acquired a 51-per-cent stake in the assets in 2018 and thus will become the sole owner of the three facilities (Des Moulins I, Des Moulins II and Le Plateau I) which are fully contracted with Hydro-Québec for about 12-13 more years. (The CDPQ has about a 17-per-cent ownership stake in Boralex.)

“We’re very pleased to announce our acquisition of CDPQ’s stake in high-quality wind farms that we already own 51 per cent of and have managed for over two years following our acquisition of Invenergy’s stakes in these assets. Operating these wind farms provided the expected synergies and has yielded results 10 per cent better than we had expected in 2019,” said Patrick Lemaire, Boralex’s President and CEO, in a press release.

The deal will involve $121.5 million and an additional $4 million subject to certain settlement conditions. Boralex says buying the remaining stake in the facilities will add $31 million to the company’s combined EBITDA, $62 million to EBITDA under IFRS and $10 million or $0.10 per share to cash flow, which would be an eight-per-cent increase over 2019 numbers. Management said there would be other operational and financial synergies as well.

On the transaction, Baydoun called it inexpensive, saying, “We calculate transaction multiples of (1) ~10x forward EV/EBITDA (including ~$197 million of debt), and (2) ~12-13x forward P/FCF; these multiples are (1) below BLX’s current trading multiples (~13x forward EV/EBITDA and ~27x forward P/FCF), and (2) below comparable transactions in the sector. We expect the Company to finance the transaction via proceeds from the recently completed ~$201-million equity financing.”

“We believe that the strategic consolidation of low-risk operating assets will further improve BLX’s growth profile, at a relatively inexpensive price. Furthermore, we believe that BLX’s low payout (pro forma the acquisition) supports further near-term dividend
increases,” Baydoun wrote.

Boralex has been on a good run for a couple of years now, returning 132 per cent since the start of 2019. For 2020, the stock is currently up 61 per cent with a dividend yield of about 1.7 per cent.

Boralex released its third quarter 2020 financials last week, showing energy sales of $130 million, up 15 per cent year-over-year and combined EBITDA of $83 million, up 18 per cent year-over-year. The company produced 789 GWh of electricity over the quarter, up 11 per cent from a year earlier due to more favourable conditions in the wind and solar sectors in Canada along with resumption of operations at the company’s Senneterre thermal power station. Boralex had a net loss of $13 million for the Q3 versus $44 million a year ago.

“For the second consecutive quarter, our growth in results stems from increased wind power production in Canada and operational and financial optimization initiatives put in place over the past year,” said Lemaire in a press release.

For the full 2020, Baydoun expects BLX to generate EBITDA of $502 million and free cash flow per share of $1.20 per share and for 2021 and the analyst is calling for EBITDA of $503 million and $1.41 per share, respectively.

“Overall, we view BLX as the best organic growth investment vehicle in the Canadian renewable IPP space, with (1) highly contracted operations (~13-year weighted average contract term), (2) strong FCF/share growth (~5-8 per cent/year, CAGR 2019-24E), (3) potential upside from the Company’s development pipeline (>2.5GW of prospects), (4) potential for dividend growth (~2 per cent yield, 40-60 per cent FCF payout target), and (5) potential upside from M&A (not included in our estimates/valuation). Given the improving growth profile of the Company and the recent share price pullback, we are upgrading BLX to Strong Buy (from Buy); we have adjusted our valuation to incorporate the acquisition announced [on Friday morning],” Baydoun said.

At press time, Baydoun’s $48.00 target represented a projected one-year return of 28.2 per cent.

Boralex adopted in 2019 a four-year strategic plan based on four pillars: growth in attractive power markets for renewable energy, particularly in France and select US states; diversification and increasing focus on solar; expanding its customer base including more corporate clients; and operational and financial optimization.

“The plan sets out four main strategic directions and three financial objectives and is based on a rigorous analysis of the market evolution and trends in the renewable energy sector. The plan also reflects the view that a profound and rapid transformation of the industry is under way, driven mainly by many technological innovations,” said Boralex in its Q3 press release.