Innergex is a “Strong Buy,” says iA Capital

It’s been a tough two-plus years for fans of Canadian renewable energy name Innergex (Innergex Renewable Energy Stock Quote, Charts, News, Analysts, Financials TSX:INE), with the stock now down by more than half since hitting highs in early 2021. 

But there are lots of reasons to be owning Innergex at these levels, according to iA Capital Markets analyst Naji Baydoun, who provided an update to clients on the company on Tuesday where he reiterated a “Strong Buy” recommendation on the stock.

“We continue to like INE’s: (1) high-quality, low-risk asset portfolio (~3.7 GW net in operations, ~13-year weighted average contract term), (2) solid free cash flow per share growth (~6-9 per cent/year, CAGR 2022-27), (3) healthy dividend (>5 per cent yield, with a rapidly declining payout ratio), (4) potential upside from organic development (~8.9 GW of prospects) and M&A, and (5) the support of the Hydro Quebec strategic alliance,” Baydoun wrote.

Longueuil, Quebec-headquartered Innergex is a pure-play renewable power producer with ownership interests hydro, wind and solar power generation in Canada, the United States, France and Chile. 

The company recently announced a new power purchase agreement in conjunction with the Mi’gmawei Mawiomi Business Corporation (MMBC) with Hydro Quebec, one which will provide the backing to build a new wind facility. The 30-year take-or-pay deal is for electricity from the planned 102 MW Mesgi’g Ugju’s’n 2 wind project, an extension of the existing 150 MW Mesgi’g Ugju’s’n wind facility commissioned in 2016.

“With the new financial initiatives announced by the Government of Canada to foster a clean economy, we expect the Canadian market to continue to bloom with exciting new opportunities for renewable energy,” said Michel Letellier, President and Chief Executive Officer of Innergex, in a press release. 

“With projects like Mesgi’g Ugju’s’n 2, local communities, and especially Indigenous communities, are bound to benefit from this incredible future growth, as renewable energy projects are known to bring direct social and economic benefits to the region in which they are developed,” he said.

On INE’s assets in France, Baydoun said the company’s 324 MW portfolio of wind capacity consists of young facilities (about a seven-year weighted average life) that sell their output under long-term power purchase agreements, making for low-risk, operating assets. 

And the analyst argued that even with the current rising interest rate environment, private market valuations awarded to low-risk, high-quality, contracted power assets remain strong. Moreover, the cost of capital for renewables is relatively more favourable in the EU, which is good for unlocking value via capital recycling, Baydoun said.

“If INE is successful in securing a strategic partner for its French portfolio through a capital recycling initiative, it could further enhance its portfolio value by improving access to capital (via co-investments) and accelerating the build-out of its development pipeline in the country,” he said.

With the update, Baydoun reiterated a 12-month target price of $22.00, which at press time represented a projected return including distribution of 81.3 per cent.