Is AQN stock a buy? This bank says yes.

Further activist investor interest in Algonquin Power & Utilities (Algonquin Power & Utilities Stock Quote, Charts, News, Analysts, Financials TSX:AQN) should be good for current shareholders. That’s the take from iA Capital Markets analyst Naji Baydoun, who provided clients with an update on the company on Tuesday and reiterated a “Speculative Buy” rating on the stock.

Another activist investor has surfaced in connection with Algonquin Power, this time with reports saying US activist investment firm Corvex has met recently with Algonquin management. Corvex’s stake in AQN is unknown at the moment, while the news comes after reports earlier this year of other activist investor interest, including from Starboard Value LP, revealed last month.

Algonquin’s share price started tumbling last fall as the company continues to deal with an unwieldy debt load. Management cut its dividend earlier this year and last month announced the termination of a US$1.5 billion deal to buy Kentucky Power after the deal did not get approval from regulators.

Commenting on the Corvex news, Baydoun said the company has an “established track record” of successful investments in the power and utility space, pointing to its engagement with Exelon Corp in 2020, where it argued that the latter should split up its regulated utility assets from the rest of its holdings. Execlon followed up with the split in 2021.

“Since Corvex’s involvement, EXC’s shares have arguably delivered on their potential, with the stock performing well as the transformation of the entity into a pure-play business supported a relative valuation multiple expansion,” Baydoun wrote.

Baydoun also noted Corvex’s current dealings with MDU Resources Group, which owns regulated electric and gas utilities. Earlier this year, MDU signed a cooperation agreement with Corvex, who is now engaged with MDU’s Board on strategic initiatives to enhance shareholder value.

As for Algonquin, Baydoun believes that despite the companies lingering issues there is value to be unlocked in its portfolio of assets.

“Notwithstanding the fundamental value of the Company’s asset base, we see the possibility for Corvex to seek to apply its utility playbook to AQN; ultimately, the outcome of increased activist investor interest in the story should bode well for the share price,” Baydoun wrote.

“With the Kentucky transaction out of the picture, we see the potential for additional strategic developments to emerge as new players get involved with the AQN story, potentially helping to unlock shareholder value (e.g., activist shareholders or strategic investors),” he said.

With his “Speculative Buy” rating, Baydoun maintained a $13.00 target price on AQN, representing at press time a projected one-year return including distribution of 18.7 per cent.

“The uncertainties related to AQN’s overall financial performance, portfolio leverage and long-term earnings picture warrant a Speculative qualifier for now, in our view,” he said.