iA Capital keeps Hold rating on Algonquin Power

The path ahead for Algonquin Power & Utilities (Algonquin Power Stock Quote, Charts, News, Analysts, Financials TSX:AQN) remains a little too murky for iA Capital Markets analyst Naji Baydoun, who maintained a “Hold” rating on the stock in a Friday report to clients. Baydoun said even though AQN shares are well below historical levels, he’ll need further clarity from management on the company’s strategic initiatives to right the ship.

Algonquin Power, which develops, owns and operates renewable energy projects as well as utility distribution and transmission systems, saw its share price drop further after announcing on Thursday a series of measures to improve its balance sheet and refocus its strategic priorities. First among them was a 40 per cent dividend cut aimed at bringing down the company’s payout ratio, which was well over 100 per cent prior to the reduction. AQN also announced about $1 billion in asset sales, a reduced capital plan for 2023 and onwards and a renewed commitment to pursue the acquisition of Kentucky Power.

“We have reached an inflection point and, as markets continue to evolve, we must address the challenges facing the business,” said President and CEO Arun Banskota in a press release. “Accordingly, the board of directors and management team are taking decisive actions to strengthen our financial and strategic positions. These include taking steps to realign our capital allocation, reduce capital expenditures, refocus the portfolio, and reduce the dividend in order to position the Company for sustainable, long-term growth.”

Algonquin’s share price tanked this past November when the company missed analysts’ estimates in its third quarter earnings, reported a $195-million loss and cut its financial guidance, with inflation and interest rate hikes as factors. Since then, investor confidence seems to have continued at a low ebb for AQN, with a dividend cut threatening and now being realized.

Baydoun said he’s staying cautious on the company in 2023, as delayed asset sales and further debt financings could pressure AQN’s near-term financial performance. Baydoun said he’s also skeptical about the Kentucky Power deal, which suffered a blow last month when the US Federal Energy Regulatory Commission denied the proposed $2.6-billion acquisition

Baydoun said he’ll be looking for additional clarity from management going forward.

“At this time, we expect AQN’s shares to remain under pressure and continue to trade at depressed valuations; the stock is likely to remain in the penalty box until we (1) see consistent execution on the Company’s newly announced measures, and (2) gain better visibility on further strategic initiatives that could be required to regain investor confidence and set AQN on a more sustainable growth path,” Baydoun wrote.

With his “Hold,” Baydoun dropped his target price from $14.00 to $10.00 per share, representing at press time a projected one-year return of 11.0 per cent.