Buy Innergex in renewable power sector, says iA Capital

iA Capital Markets analyst Naji Baydoun delivered an update on Friday on Innergex Renewable Energy (Innergex Renewable Energy Stock Quote, Charts, News, Analysts, Financials TSE:INE) where he reviewed the company’s just-released fourth quarter results, saying the company has a strong growth outlook and declining payout ratio. 

Quebec-headquartered Innergex, which is a pure-play renewable power generator with ownership interests in hydro, wind and solar projects in Canada, the US, France and Chile, announced on Thursday its Q4 2022 financials, coming in with revenue up one per cent year-over-year to $203.6 million and adjusted proportionate EBITDA of $145.0 million, down 11 per cent year-over-year.

The company made some notable moves over the quarter, including the acquisition of the remaining interest in two projects, a portfolio of wind facilities in France and the Mountain Air wind facilities in Idaho. Innergex also announced an agreement to acquire three solar facilities in Ontario and announced a 30-year, 320 MW power purchase agreement for the Boswell Springs wind project in Wyoming.

“More than ever, we remain committed in our strategy to create long-term, sustainable wealth by continuing to follow our four objectives to grow responsibly, build expertise, optimize operations, and diversify activities,” said Michel Letellier, President and CEO, in a press release.

“As the world rapidly evolves and climate change impacts are being increasingly experienced across the globe, we remain convinced in our mission and that Innergex will play an important role in leading the energy transition that is long overdue,” Letellier said.

Baydoun called the Q4 results mixed, as the adjusted proportionate EBITDA of $145 million was under his forecast at $159 million as well as the consensus estimate at $159 million, while free cash flow at $0.00 per share was better than his estimate at negative $0.04 per share. The analyst said the quarter benefitted from new asset additions and higher realized power prices, which were offset by lower-than-expected power generation.

He said that while management did not provide 2023 guidance, he is expecting growth this year to be driven by full-year contributions from its Chile acquisitions, performance from the newly acquired solar assets in Ontario and additional free cash flow from the recently completed consolidation of minority interests, although those are likely to be partially offset by higher interest expense and debt repayments due to higher leverage.

Baydoun did note that management is expecting the recently announced acquisitions and already identified growth projects to collectively drive about $0.24 of free cash flow per share through 2025, a good sign, the analyst said.

“This leaves only ~$0.05 of FCF/share to be sourced from new growth initiatives; in our view, this reinforces our thesis that INE will be able to beat its 2025 strategic and financial targets and deliver above-peer average FCF/share growth over the medium-term,” Baydoun wrote.

Baydoun pointed out that 2022’s strong growth helped lower INE’s payout ratio to about 100 per cent of free cash flow compared to about 122 per cent earlier.

“Based on our expectations for financial performance in 2023, we see the potential for growth in 2023 to help drive the Company’s FCF payout ratio closer to ~90 per cent,” he said.

With the update, Baydoun reiterated a “Strong Buy” rating on INE and target price of $24.00, which at press time represented a projected one-year return including distribution of 73.2 per cent.