Boralex earns a target raise from iA Capital

Naji Baydoun of iA Capital Markets is buoyed by recent events involving Boralex Inc (Boralex Stock Quote, Chart, News, Analysts, Financials TSX:BLX), maintaining a “Buy” rating and raising his target price from $41/share to $44/share for a projected return of 24.8 per cent in an update to clients on Friday.

Founded in 1982 and headquartered in Kingsey Falls, Que., Boralex engages in the development, construction and operation of renewable energy power facilities primarily in Canada, France, the United Kingdom and the United States.

Baydoun’s updated analysis comes after the company announced it had signed an agreement to monetize 30 per cent of its portfolio in France.

“The attractive features of BLX’s French platform (including future potential growth) have helped the Company garner a premium valuation for the portfolio,” Baydoun said. “Overall, the transaction provides a strong data point for renewable asset valuations, with positive read-throughs for IPPs looking to execute on capital recycling initiatives.”

The agreement will see Boralex sell 30 per cent of its French portfolio to Energy Infrastructure Partners, including both operating assets and development projects in France, and is expected to be completed in the first quarter of 2022.

According to Baydoun, the French portfolio accounts for 43 per cent of Boralex’s total installed operating capacity at approximately 1.1GW, with 97 per cent of the portfolio being wind facilities, along with minimal exposure to solar projects.

Boralex also has further significant development underway in France in the form of approximately 1.3GW of development prospects (3:1 ratio between wind and solar projects), and an additional 257MW of projects that are either secured, ready to build, or under construction.

According to the company, the transaction values Boralex’s French portfolio at a multiple of approximately 20.3x 2021 EV/EBITDA, a significant premium to its own trading multiples. Though Baydoun’s own estimate is closer to 19x, he also believes the deal represents proof of value for Boralex’s French portfolio, as well as giving the company a partner to work with to support its future growth.

“We are grateful to the EIP team for the trust they’ve placed in us. We look forward to joining forces to fulfil our ambitions alongside a renowned player in our industry who knows the European renewable energy sector well and who shares our values of corporate social responsibility,” said Patrick Decostre, President and CEO of Boralex in the company’s February 24 press release. “In addition to creating significant value for our shareholders, this investment illustrates the quality of our team’s work in France and Canada and lets us showcase the leading platform we have been building for over 20 years.”

According to Baydoun, the transaction also means the company has self-funded a large chunk of its equity capital requirements through 2025, thus minimizing near-term external equity needs, particularly given that company management was exploring capital recycling initiatives as an attractive source of low-cost funds as part of its five-year capital plan, valued at between $5 billion and $6 billion.

Baydoun also sees the company’s growth continuing through his financial projections, as he forecasts the company’s adjusted EBITDA to rise from the reported $535 million in 2021 to $559 million in 2022 for a year-over-year increase of 4.5 per cent. From there, he expects a year-over-year increase of 3.2 per cent in 2023 ($577 million total) and 6.6 per cent in 2024 for a $615 million figure.

From a valuation standpoint, Baydoun forecasts the company’s EV/EBITDA multiple to drop from the reported 12.5x in 2021 to a projected 11.7x in 2022 and then to a projected 11.2x in 2023.

Baydoun also forecasts the company’s FCF/share to continue moving onward and upward from the reported $1.28/share in 2021 to a projected $1.53/share in 2022, followed by $1.68/share in 2023 and $1.78/share in 2024. Accordingly, Baydoun’s P/FCF multiple projections go down from the reported 28x in 2021 to a projected 23.4x in 2022, then to a projected 21.3x in 2023.

“Overall, we continue to like BLX’s: (1) highly contracted operations (~13-year weighted average contract term), (2) solid FCF/share growth (~6-8%/year, CAGR 2021-26E), (3) potential upside from the Company’s development pipeline (>3.0GW of prospects), (4) stable dividend (~2.0% yield, ~30-50% long-term FCF payout), and (5) potential upside from M&A (excluded from estimates/valuation),” Baydoun said.

Boralex’s stock price has traded for a loss of 18.8 per cent over the last 12 months, though the first two months of 2022 have produced a 5.1 per cent return for investors. The company began March 2021 at a 52-week high of $43.95/share, but despite a few spikes along the way, the stock was on a downward trajectory since, hitting a 52-week low of $30.25/share on January 14.