Algonquin Power is still a pass, says iA Capital

Nixing its plans for a major acquisition in the United States is a good move for Algonquin Power & Utilities (Algonquin Power & Utilities Stock Quote, Charts, News, Analysts, Financials TSX:AQN), according to iA Capital Markets analyst Naji Baydoun, but a still cloudy growth outlook should keep investors on the sidelines for the time being. Baydoun provided an update to clients on Tuesday where he reiterated a “Hold” rating on Algonquin while raising his target price from C$11.00 to C$12.00.

Renewable energy producer and regulated electricity utility Algonquin Power announced on Monday that it had mutually agreed with American Electric Power to terminate the pending acquisition of certain regulated utility assets in Kentucky for $2.65 billion.

First announced in October, 2021, Algonquin had planned on acquiring both Kentucky Power Company and AEP Kentucky Transmission Company, with the aim being to diversify its asset base and increase the share of regulated operations in its portfolio. But the conditions for major acquisitions, including higher interest rates, have changed dramatically over the past year and a half and that appears to have factored into AQN’s decision.

“After careful consideration and in light of the evolving macro environment, our board of directors and management team have determined that continuing with the transaction is not in the best interest of the company,” said Arun Banskota, Algonquin’s CEO, in a statement.

Commenting on the news, Baydoun called it a net positive for AQN. He said he had been cautious on the proposed acquisition, pointing to factors such as the fact that the upside associated with Algonquin’s plan to “green” Kentucky Power wouldn’t come for a number of years, that Kentucky Power’s business was fundamentally challenged, that the acquisition would have been dilutive to AQN’s rate base growth and utility earnings profile and that there were significant funding risks to the deal.

With the news, Baydoun increased his relative valuation multiple on AQN to 15x 2024 P/E from 13x and raised his target price accordingly. At press time, the new target represented a one-year projected return including distribution of 10.6 per cent.

“Overall, we see the reinforced focus on organic growth as a net positive from a risk, financing and return perspective, and expect the Company to begin delivering more stable operating and financial performance,” Baydoun wrote.

“The additional clarity on the ultimate outcome of the Kentucky transaction removes some uncertainty related to the outlook for AQN. However, we continue to wait for further strategic developments (e.g., asset sales) that could de-risk the balance sheet and reset AQN back on a path to more sustainable per-share growth,” he said.