Buy Innergex on the dip, says iA Capital

Pure-play renewable power producer Innergex Renewable Energy (Innergex Renewable Energy Stock Quote, Charts, News, Analysts, Financials TSX:INE) delivered a mixed bag of news this week, according to iA Capital Markets analyst Naji Baydoun, who in a Wednesday report to clients nonetheless advised investors to take advantage of any share price weakness. 

Quebec-based Innergex develops, acquires, owns and operates hydroelectric facilities, wind farms, solar farms and energy storage facilities, with a net installed capacity of 3,634 MW in facilities in Canada, the US, France and Chile.

The company provided an operational and financial update on Wednesday, saying that it has now met all the required conditions for its flagship Boswell Springs 30-year power purchase agreement (PPA) to become effective. Last year, Innergex had renegotiated a 320 MW long-term contract for the Boswell Springs large-scale wind project in Wyoming with PacifiCorp. Innergex said project costs remain unchanged at about US$544 million, with US$41 million already invested.

“This is yet another step forward in the realization of our flagship Boswell Springs project in the United States, a wind project expected to bring important returns to Innergex and contribute to improving our payout ratio,” said Michel Letellier, President and CEO of Innergex, in a press release.

In the same release, the company said it expects weak fourth quarter 2022 results, enough to impact its previous full-year guidance. INE said it expects 2022 free cash flow (FCF) per share to come in about ten per cent lower than the previously announced $0.75 per share, citing weak hydrology in BC over the fourth quarter as well as the revised power price cap in France as factors.

“While the financial review remains ongoing, Production (in GWh) growth target is expected to increase by approximately 13 per cent compared to the 22 per cent guidance target disclosed in August 2022,” the company said.

Commenting on the news, Baydoun called the Boswell report a positive for the company and stock and the lowered guidance a negative, but he said he continues to like INE for its high-quality, low-risk asset portfolio, its solid FCF/share growth, the healthy dividend, potential upside from organic development as well as its strategic alliance with Hydro Quebec.

The takeaway is investors should buy on the dip, Baydoun said.

“We believe the weaker-than-expected 2022 financial guidance is likely to have a negative impact on INE’s shares. However, we see the additional details provided about the Boswell project financing as removing a near-term equity overhang from the stock; furthermore, we continue to see several catalysts over 2023 that could further support the stock in 2023 (e.g., Boswell permanent financing; asset sales at attractive valuations; new project announcements in Quebec; additional progress on large-scale solar development projects in the US),” Baydoun wrote.

With the update, Baydoun reiterated a “Strong Buy” rating on INE while lowering his target price from $25.00 to $24.00, which at press time represented a one-year projected return including distribution of 50.3 per cent.