Take a pass on Algonquin Power, says iA Capital

iA Capital Markets analyst Naji Baydoun is sticking with his “Hold” rating on Algonquin Power (Algonquin Power Stock Quote, Charts, News, Analysts, Financials TSX:AQN), saying in a Friday note to clients that the renewable power company needs to regain investor confidence through improved execution.

On Thursday, the US Federal Energy Regulatory Commission (FERC) announced that it has denied the proposed acquisition of Kentucky Power by Liberty Utilities, Algonquin’s renewable energy and regulated services business group. First announced in late 2021, the $2.6-billion deal was turned down, with FERC saying it wasn’t clear whether or not the deal would have an adverse effect on power rates.

Commenting on the news, Baydoun said it’s unlikely that Algonquin will pursue an appeal, citing a number of reasons, including: the minor upfront per share accretion Kentucky would have brought; Kentucky’s challenging underlying fundamentals and lower organic growth and financial profile relative to Algonquin’s existing utilities along with the fact that an appeal could take up another year to complete. The analyst noted that if no appeal is made, Algonquin will pay a $65 million termination fee.

Baydoun said, “Even if AQN decides to pursue the Kentucky acquisition, investors will need to recalibrate their outlook on the Company. Recall that alongside the Q3/22 results, AQN noted that it is, ‘evaluating its longer-term targets and financial expectations’; we expect the 2023 Investor Day to help reset growth expectations closer to regulated utility peers (potentially closer to ~4-6% rate base and EPS growth).”

“Overall, although the shares reacted positively to the FERC order, we continue to see significant near-term risks as AQN attempts to reposition its portfolio for more consistent per share growth and regain investor confidence via improved execution and strategic initiatives,” he said.

The analyst has revised his estimates downward on AQN due to higher costs and interest expense along with removing Kentucky Power from his model. He is now calling for Algonquin to deliver full 2022 adjusted EBITDA and EPS of $1,269 million and $0.67 per share, respectively, 2023 adjusted EBITDA and EPS of $1,321 million and $0.78 per share, respectively, and 2024 EBITDA and EPS of $1,382 million and $0.82 per share, respectively. (All figures in US dollars except where noted otherwise.)

With the changes, Baydoun has lowered his target price from C$16.00 to C$14.00, which at press time represented a projected one-year return including distribution of 51.1 per cent.