There’s too much uncertainty about what Algonquin Power and Utilities (Algonquin Power and Utilities Stock Quote, Chart, News, Analysts, Financials NYSE:AQN) will look like in the future, says RBC analyst Nelson Ng.
As reported by the Globe and Mail on November 13, Ng cut his price target on AQN from (US) $8.00 to (US) $7.00 this morning. The analyst has maintained his “Sector Perform” rating on the stock.
The analyst says the potential sale of a core part of AQN’s business is weighing on the valuation it can currently achieve in the market.
“The focus continues to be divesting the entire renewables business rather than individual assets because management believes the platform (team and development pipeline) can attract significant value,” he wrote. “Due to the timing of the process, we believe the investment environment (interest rates and inflation expectations, and sentiment in the renewables sector) in H1/24 will determine the final price for AQN’s Renewables division.
Ng argued that it’s not as if the segment of the company’s business is flagging.
“The Renewable division continues to develop projects, and management is seeing strong demand for renewable energy. Contracted power prices and project returns are moving higher to reflect project cost inflation and a higher cost of capital,” he said. We note that management expects to spend $300 million of capex in the Renewables division in 2023 ($288 million spent in the first nine months), and we expect capex to rise in 2024. Due to the financing structure employed during construction, there is a lag between when costs are incurred and when the capex is recognized. We estimate that at the end of Q3/23, $712 million of capex incurred will eventually make its way onto AQN’s balance sheet after the projects are commissioned. We expect that tax equity will be utilized to fund a significant portion of the capex, and the company has flexibility to defer capex in the regulated division if needed.”
Ng explained the value he currently puts on the stock.
“Our $7 price target is based on 16 times (prior $8 implied 18 times) our 2025 EPS forecast. The target valuation multiple is a discount to peers, which we believe is appropriate given the uncertainty we see over the next 12 months in relation to the potential sale of the Renewables division,” he added.
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