Algonquin Power: Industrial Alliance remains lukewarm on the stock

Looking for a stock with both growth and income characteristics? Algonquin Power & Utilities (Algonquin Power & Utilities Stock Quote, Chart, News, Analysts, Financials TSX:AQN) should be on your radar but the stock is still a pass, says Naji Baydoun, analyst for iA Capital Markets. Baydoun delivered a research update to clients on the company on Friday, saying a new equity offering will help Algonquin with its capital investment program.

Oakville, Ontario-headquartered Algonquin Power acquires, develops, owns and operates renewable energy projects along with water, electric and natural gas utility distribution and transmission systems. Altogether, AQN has ownership interests in over two gigawatts of installed power and about $6 billion in regulated utility assets.

Algonquin announced on Friday that it has priced its upsized underwritten marketed public offering of 20 million equity units for gross proceeds of $1 billion with an option for an additional 3 million units on the same terms.

The funds are expected to go towards the company’s ongoing renewable energy growth prospects in accordance with its Green Financing Framework. Algonquin announced this past December a $9.4-billion five-year capital plan involving about $6.3 billion in regulated utilities franchises and about $3.1 billion for its non-regulated renewable power business. The plan is to add over two gigawatts of renewable energy capacity by 2025. (All figures in US dollars except where noted otherwise.)

The new equity units are to be in $50 amounts per unit with 20 million in total, with each unit consisting of a contract to purchase AQN common shares and a five-per-cent undivided beneficial ownership interest in $1,000 principal amount of AQN’s remarketable senior notes due June 14, 2026, with the units expected to yield about 7.75 per cent per year.

Commenting on the offering, Baydoun wrote, “AQN’s five-year capital investment plan (~$9.4 billion from 2021 through 2025) is expected to drive high single-digit average annual EPS and FCF/share growth over time; this growth could support mid-single-digit dividend increases within the Company’s 80-90 per cent adjusted EPS payout target range.”

“However, the narrowing growth gap with peers and current relative valuation keep us on the sidelines, and we would continue to wait for a better entry point or further strategic developments at this time,” he said.

With the update, Baydoun has maintained his “Hold” rating and C$21.00 price target, which at the time of publication represented a projected one-year return including distribution of 17.5 per cent.

Algonquin Power finished 2020 up 14 per cent, while so far in 2021 the stock is down ten per cent.

“AQN offers investors a well-balanced mix of growth and income with: (1) a diversified business model (regulated utilities & non-regulated power), (2) healthy medium-term growth (~seven to nine per cent per year EPS and FCF/share growth through 2025), (3) an attractive dividend profile (~4.5 per cent yield, ~80-90 per cent long-term Adj. EPS payout target), and (4) upside from additional growth initiatives (including M&A; not included in our estimates/valuation),” Baydoun said.

Looking ahead, Baydoun is calling for AQN to generate 2021 and 2022 revenue of $2.148 billion and $2.415 billion, respectively, and 2021 and 2022 EBITDA of $1.113 billion and $1.319 billion, respectively, with free cash flow of $448 million for 2021 and $572 million for 2022.

Algonquin last reported earnings in early May where its first quarter 2021 showed revenue up 36 per cent year-over-year to $634.5 million and adjusted EBITDA up 17 per cent to $282.9 million. At the same time, AQN approved a ten-per-cent increase in its annual dividend, saying the rise is supported in part by execution of the company’s 1,6000 megawatt renewable energy construction program.

“Nearly 1,400 MWs have already been placed in service and the remainder are on schedule for completion by year-end,” said president and CEO Arun Banskota in a May 6 press release. “This will effectively double our portfolio of owned and operated renewables, underscoring our commitment to growth, operational excellence, and sustainability.”

Over the quarter, Algonquin completed its Midwest ‘Greening the Fleet’ initiative, including 600 megawatts of wind energy in the US Midwest, now all acquired by the Empire District Electric Company. The initiative has involved the retirement of the 200 megawatt Asbury Coal facility in 2020, which Algonquin said would reduce the company’s CO2 emissions in excess of 905,000 metric tons annually.

Algonquin also achieved full commercial operations at its 492-megawatt Maverick Creek Wind facility in Texas and acquired 51-per-cent interest in three of four wind facilities from RWE Renewables Americas in Texas, with the fourth expected to reach commercial operations during the second quarter.

“The Texas Coastal Wind Facilities are located in the coastal region of south Texas and are expected to provide a complementary wind resource to the Company’s existing assets in the State,” Algonquin Power said in a press release.