Hydro One is still a pass, says iA Capital

iA Capital Markets analyst Matthew Weekes is sticking with his “Hold” rating on Ontario electric company Hydro One (Hydro One Stock Quote, Charts, News, Analysts, Financials TSX:H) after it recently reported third quarter financials that were a modest beat of analysts’ expectations. In an update to clients on Monday, Weekes said at current levels Hydro One already has a lot of future growth built into its share price. 

Hydro One, Ontario’s largest electricity transmission and distribution provider, delivered its Q3 on Friday, showing basic EPS up two per cent year-over-year to $0.51 per share and revenues of $2,031 million compared to $1,913 million a year earlier, with the uptick coming from Ontario Energy Board (OEB)-approved rate increases and higher peak demand, although the company did have higher O&M expenses. Capital investments over the quarter were $501 million, with $401 million of new assets placed in-service, while net cash from operating activities went from $550 million for the Q3 2021 to $594 million.

“I am extremely proud to be part of an organization that is setting the standard in First Nations partnerships to an industry-leading 50-50 equity model.” said Bill Sheffield, Interim President and CEO, in a press release. “With the new partnership model, and the settlement agreement on the Joint Rate Application, Hydro One is well positioned to facilitate economic prosperity in Ontario.”

Looking at the numbers, Weekes said the $0.51 per share in earnings was a little ahead of expectations, with the iA Capital estimate as well as the consensus call at $0.49 per share. Adjusted EBITDA at $750 million was also above iA Capital’s estimate at $741 million.

Hydro One announced in October a settlement agreement with the Ontario Energy Board on its Joint Rate Application (JRAP), with a return on equity (ROE) set at 9.36 per cent with an equity thickness of 40 per cent. Weekes said that should translate into about a 65 basis point increase over the previous ROE, which should offset the impact of the currently higher interest rate environment, among other positive factors to the settlement, according to Weekes.

“With visibility for base investments under the JRAP and a supportive framework for incremental growth, H intends to put more focus on grid development. Ontario is expected to have significant long-term electrification needs driven by multiple factors, which could materially move H’s growth rate higher as the decade progresses, depending on timing. H also appears positive on the outlook for LDC consolidation following municipal elections, thus adding another growth lever,” Weekes wrote.

Weekes said the new framework along with fundamentals for grid development in Ontario make for a good backdrop for Hydro One’s medium and longer-term growth, but he maintained that “much of this strength” has already been built into the current valuation, hence his maintained “Hold” position. 

With the update, Weekes reasserted a $34.00 target price, which at press time represented a projected one-year return including dividend of three per cent.