Algonquin Power is still a pass, says iA Capital

iA Capital Markets analyst Naji Baydoun is still skeptical about Algonquin Power & Utilities (Algonquin Power & Utilities Stock Quote, Charts, News, Analysts, Financials TSX:AQN), saying in a review of the company’s latest quarterly numbers that investors should wait to see how well the utility company fares on this year’s strategic priorities.

Algonquin Power reported its fourth quarter and full 2022 financials on March 17 before the market open, coming in with adjusted EBITDA up 20 per cent year-over-year to $358.3 million and adjusted net earnings per common share of $0.22, up five per cent from a year earlier.

“We remain confident that the decisive actions previously announced by the Company to realign capital allocation will strengthen our financial and strategic foundation and position AQN for sustainable, long-term growth,” said President and CEO Arun Banskota in a press release. “AQN continues to be supported by a high-quality asset base and has the right skills and expertise to capitalize on the energy transition and deliver value for shareholders.”

Looking at the results, Baydoun said the $358 million in adjusted EBITDA was a beat of his forecast at $352 million as well as the consensus estimate at $346 million, while adjusted EPS of $0.22 was also better than his call at $0.18 per share and the Street at $0.20 per share.

Baydoun said Algonquin’s proposed $2.65 billion acquisition of regulated utility assets in Kentucky Power remains a key near-term focus for both management and investors, with further updates on the transaction expected shortly, after the company refiled with the US Federal Energy Regulatory Commission (FERC).

“Additional clarity on the outcome of this deal could provide further visibility on the ultimate path forward for AQN, and we continue to believe that the Company would be better off without this acquisition,” Baydoun wrote in a Monday report.

The analyst noted that Algonquin plans on about $1 billion in asset sales in 2023, which could help reduce equity dilution as well as improve the company’s balance sheet. Baydoun said the potential sale of Atlantica Sustainable Infrastructure could help AQN reach its $1 billion goal while also help reduce its leverage and/or fund ongoing growth initiatives.

With the update, Baydoun retained a “Hold” rating on the stock and increased his target price from $10.00 to $11.00, representing at press time a projected one-year return including distribution of 6.2 per cent.

“If AQN is successful in executing on its strategic priorities for the year, we see the potential for the Company to regain investor confidence and for the shares to benefit from valuation multiple expansion. We are slightly increasing our price target to reflect marginally higher estimates due to lower tax rate assumptions,” he said.