It’s time to buy TransAlta Renewables, this Scotia advisor says

It’s still a mug’s game to be gauging a bottom amid the current market turmoil, which makes for a lot of sitting and waiting for many investors. But why wait when there are some amazingly good dividend-paying stocks out there? That’s the approach from Scotia Wealth Management advisor Greg Newman, who thinks investors are fine to be testing the equity waters with a name like Transalta Renewables (Transalta Renewables Stock Quote, Charts, News, Analysts, Financials TSX:RNW). Newman just nominated RNW to his list of Top Picks for the year ahead, saying the stock has no place being so inexpensive, even in today’s market.

“It’s down 32 per cent in one year. This is paying you a dividend of close to eight per cent and trading at around 15x 2023, with a 24 per cent growth rate that we’re modelling. Something’s wrong for the stock to get this cheap,” said Newman, senior wealth advisor at Scotia Wealth, speaking on BNN Bloomberg on Thursday.

Calgary-based TransAlta Renewables, which owns and operates power and transmission facilities in wind, hydro, solar and natural gas, had a nice buildup over 2019 and 2020 but the stock has been mostly declining over the past two years, punctuated by a recent drop of about 28 per cent where RNW went from $18 in August to now around $13.

But the downturn has been reflected across the renewables space, which hit its peak in early 2021 and brought a red-hot sector back down to earth. Newman said the renewable energy space is worth a look now, however, and for TransAlta Renewables, having the security of its parent company behind it is a bonus.

“I really like the renewable theme that [TransAlta Renewables] has, and drop-downs from the parent, TransAlta, are a really good source of growth. They just extended their Sarnia contract, as well, which alleviates a little bit of doubt that was in the stock,” he said.

TransAlta Renewables announced in August the re-contracting of its natural gas power station in Sarnia, Ontario, the Sarnia Regional Cogeneration Plant, and its Melancthon wind facility, both awarded contracts from the Ontario Independent Electricity System Operator (IESO). The new contracts will extend TransAlta’s revenues at the facilities until 2031. 

Altogether, TransAlta has interests in 26 wind facilities, 13 hydro plants, eight natural gas generation facilities, two solar production facilities, a natural gas pipeline in Australia and a battery storage project in Pincher Creek, Alberta. Currently, that puts the company’s production at 2,968 megawatts across facilities in Canada, the US and Australia.

By the numbers, TransAlta Renewables had free cash flow in 2021 of $357 million, down five per cent year-over-year, and adjusted EBITDA of $463 million, flat year-over-year. Its energy production was down slightly, going from 4,471 GWh in 2020 to 4,332 GWh in 2021. Annual revenues went from $436 million to $470 million.

More recently, the company’s second quarter 2022 saw energy production rise from 1,051 GWh for last year’s Q2 to 1,231 GWh and Adjusted EBITDA go from $97 million to $126 million. 

“Our strong second quarter’s results reflect the additions of the Windrise and North Carolina Solar facilities. These investments are great additions to our portfolio and have increased our diversification and contracted cash flow,” said Todd Stack, President of TransAlta Renewables, in an August 4 press release.

Newman said RNW is a good antidote to investment fears in the current climate.

“I think that money has just run away and individual investors are very bearish. One of the least bullish indicators that we’ve seen recently, I think, is 21 per cent [AAII Investor Sentiment Survey] bullishness [which is] a good contrarian indicator,” Newman said

“We don’t know whether we’re going to have a recession. I think if we do, it’ll probably be mild, but we don’t know. There can be all these unintended consequences,” he said. “Why not have a name that’s already pretty cheap, that’s already paying you eight per cent to wait, that’s already down 31 and that’s really not going to hurt you from here?”

“So, if you’re looking at equities, I think this is a nice place to start,” Newman said.

In terms of general market movement, Newman said he thinks the rally has already started but that there’s likely a couple of more quarters before the full correction is over.

“I think that there are a lot of people that take satisfaction in days when the market’s not up because a lot of people are really de-risked, so if you get some more up days in the market people are going to be teased back in,” he said. “Now, that’s all really fancy stuff it. I still think that we haven’t had the complete reckoning in the market. And I think that we’ll probably bottom [during] the first quarter, second quarter, but I do believe that we’re at levels now where it’s very interesting to be picking away.”