Boralex is now a Buy, says iA Capital

Higher power prices in France are giving a boost to Quebec-based renewable energy company Boralex (Boralex Stock Quote, Charts, News, Analysts, Financials TSX:BLX), and that’s good news both for shareholders and those investors looking to buy the stock. So says iA Capital Markets analyst Naji Baydoun, who in a client report on Friday raised his rating on BLX from “Hold” to “Buy,” citing the September drop in share price as creating a golden opportunity for investors.

Renewable energy-focused Independent Power Producer (IPP) Boralex owns interests in about 2.5 GW of installed wind, hydro, solar and gas-fired power generation capacity in France, Canada and the United States. The company has more than doubled its power capacity over the past five years and is currently developing four GW in wind and solar, including projects in the United Kingdom, and it’s currently France’s largest IPP of onshore wind power.

With a market cap of $4.5 billion and a dividend currently at a yield of 1.5 per cent, shares of Boralex have had a good run this year, generating a 26 per cent return year-to-date, although that number was higher as recently as late August when the stock was up 44 per cent year-to-date.

But the pullback has made Boralex all the more enticing, says Baydoun.

“BLX’s shares have declined ~15 per cent from their 52-week high in late August and about two per cent since our downgrade in mid-June, and are now trading at more attractive relative valuation multiples,” he wrote.

“Not only are the shares more attractively valued at current price levels, we also note that the Company’s excess cash position could potentially support incremental upside (not embedded in estimates/valuation at this time); by our estimate, if BLX were to deploy ~$300 million of equity capital at its target returns (into a mix of organic growth and M&A opportunities), this could translate into ten per cent+ free cash flow per share accretion compared to our current long-term forecasts,” Baydoun said.

Baydoun said Boralex’s financial results this year have benefitted from power costs in France, with an estimated $15-16 million per quarter of incremental revenues over the first half. That was when power prices were around €220-230/MWh, but Baydoun said prices are already averaging over €400/MWh so far in the third quarter and forward pricing for the fourth quarter are near an incredible €1,000/MWh and in the €300-600/MWh range for 2023-24. 

All that makes for significant upside potential to his near-term forecast for BLX, said Baydoun, who also offered that the company has already executed on a number of optimization initiatives to capitalize on the elevated power prices, such as the early termination of contracts on 58MW of capacity. 

“Although (1) we don’t expect BLX to fully capture market prices, and (2) see the proposed temporary EU price cap of ~€180/MWh on revenues as limiting some of the upside potential, we expect the Company to benefit significantly from current power price trends in France,” he wrote.

Boralex last reported its financials in early August where the company saw its power production drop by two per cent year-over-year to 1,298GW/h and revenues from energy sales and feed-in premiums reach $168 million, up 14 per cent from a year earlier. On earnings, Boralex’s Q2 adjusted EBITDA was up 15 per cent year-over-year to $133 million.

Looking ahead at the third quarter results, Baydoun is calling for adjusted EBITDA of $115 million and rising to $200 million for the fourth quarter for a year-end total of $632 million. For 2023, he is calling for $656 million in EBITDA and the same $656 million for 2024.

Baydoun said,” Overall, we continue to like BLX’s (1) highly contracted operations (~12-year weighted average contract term), (2) solid FCF/share growth (~6-8 per cent/year, CAGR 2021-26E), (3) potential upside from the Company’s development pipeline (>3.5GW of prospects), (4) stable dividend (~2.0 per cent yield, ~30-50 per cent long-term FCF payout), and (5) potential upside from M&A (excluded from estimates/valuation).”

With the “Buy” rating, Baydoun has asserted a raised target price of $48.00 (previously $45.00), which at press time represented a projected one-year return including distribution of 11.4 per cent.

In July, Boralex announced the closing of its acquisition of Infinergy’s interests in the United Kingdom, which include projects in development as well as its 50 per cent interest in a joint venture formed with Boralex in 2017. The acquisition included a portfolio of 338 MW of wind and solar power and energy storage projects, including 232 MW owned by the joint venture. 

The consolidation of its interests in the UK gives Boralex more ground on which to further develop in Europe, the company said.

“This transaction will allow us to accelerate organic growth in a high-potential market in addition to contributing to the geographic diversification of our activities, two key elements of our 2025 Strategic Plan,” said Patrick Decostre, Boralex President and CEO, in a July 4 press release.