Innergex Renewable has upside from here, says iA Capital

Innergex Renewable Energy (Innergex Renewable Energy Stock Quote, Chart, News TSX:INE) is down by about a third this year, but iA Capital Markets analyst Naji Baydoun is bullish on the renewable energy stock. Baydoun resumed coverage on Innergex with a “Buy” rating and a new target price of $25/share (previously $24/share) in an update to clients on Tuesday, saying the company has a high-quality, low-risk asset portfolio.

Headquartered in Longueuil, Que., and owned by Hydro Quebec, Innergex Renewable Energy is a developer, owner and operator of run-of-river hydroelectric facilities, wind energy, and solar farms in North America, with operations in Quebec, Ontario, British Columbia, and Idaho.

Baydoun’s coverage return comes after Innergex announced its intent to participate in a joint acquisition with Hydro Quebec of the Curtis Palmer hydro portfolio in New York from Atlantic Power Ltd. for approximately US$310 million (approximately $387.5 million), marking the company’s entry into the New York renewable energy market. (All figures in Canadian dollars except where noted otherwise.)

The transaction is expected to close in the fourth quarter of 2021, with the assets under contract through 2027.

“The acquisition will strategically expand INE’s hydro footprint and increase the hydro-based cash flows within the company’s portfolio, which could provide support for equity market valuation,” Baydoun said. “Furthermore, the transaction is the first joint acquisition by INE and HQ, and represents a “proof of concept” for the potential that the partnership can deliver in terms of further enhancing INE’s ability to source and execute on new growth opportunities.”

The company also announced $175 million in bought deal financing. The Curtis Palmer deal is expected to be accretive for the joint operation, with Curtis Palmer assets expected to generate approximately US$42.5 million per year in adjusted EBITDA, as well as approximately US$39.5 million per year in free cash flow through the expiry of the power purchase agreement.

“We are thrilled to announce this first joint acquisition with Hydro-Québec under the Strategic Alliance. The acquisition of Curtis Palmer represents an opportunity for Innergex to apply its 30 years of expertise in managing small run-of-river hydroelectric facilities, while leveraging Hydro-Québec’s experience in New York to get a foothold in a new market,” said Michel Letellier, President and Chief Executive Officer of Innergex in the company’s August 17 press release.

“After having been commercial partners with the State of New York for more than 100 years, we are now entering a new phase by investing directly in the State’s hydropower generation infrastructure alongside Innergex, to which we will both bring our extensive expertise. This investment clearly demonstrates our commitment to developing the share of renewables in the energy mix of North America,” added Sophie Brochu, President and CEO of Hydro Québec.

On top of the proposed acquisition, the company has remained busy in other markets, most notably in Chile, where the company acquired the remaining 50 per cent interest in renewable energy company Energía Llaima for an aggregate consideration of US$71.4 million ($89.4 million). Innergex further expanded its presence in the country by acquiring an 18 MW run-of-river hydro facility on the Licán River for US$40.5 million ($50.5 million) with an equity investment for Innergex of US$16.6 million ($20.6 million).

In the United States, the company also commissioned its Griffin Trail wind facility in Texas while increasing production at the Hillcrest solar facility in Ohio.

Innergex reported slight growth in its second quarter financial results, headlined by a three per cent year-over-year growth in proportionate revenue to $198.4 million, along with a four per cent year-over-year growth in proportionate adjusted EBITDA to $146 million

The proposed acquisition has prompted Baydoun to revise some of his financial estimates, with revenue now projected to hit $726 million instead of the original $720 million for 2021, which represents a potential year-over-year increase of 18.4 per cent. From there, Baydoun projects continued growth through 2024, where the $813 million forecast is a bump up from the initial $758 million projection, and represents a potential year-over-year increase of 1.9 per cent.

Baydoun also revised his estimates on the company’s proportionate EBITDA, with a slight bump to $572 million from $564 million in play for 2021, marking a slight increase over the $560 million reported in 2020. From there, the figure continues to ramp up through 2025, where it flattens out at $681 million instead of the initial $630 million projection.

Key trading multiples are also working in Innergex’s favour, as the consensus EV/EBITDA multiple values are projected to drop from the reported 14.3x in 2020 to a projected 14.1x in 2021, then to a projected 13.1x in 2022. The consensus P/FCF multiple tells a similar story, with a projected drop from the reported 37.9x in 2020 to a projected 31.6x in 2021, followed by another forecasted drop to 26.8x in 2022.

“We believe that the expected significant reduction in the payout ratio from this transaction should (1) alleviate investors’ concerns about the sustainability of INE’s dividend, and (2) provide additional comfort that the Company can deliver both cash flow and income growth to shareholders,” Baydoun said.

Overall, Innergex’s stock price has fallen by 26.3 per cent for the year to date, steadily declining after reaching a high point of $32.15/share on January 8. At press time, Baydoun’s $25 target represented a projected return of 25.8 per cent.