Capital Power stock upgraded at RBC

RBC Dominion Securities analyst Maurice Choy upgraded shares of Capital Power (Capital Power Stock Quote, Chart, News, Analysts, Financials TSX:CPX) to “outperform” from “sector perform,” calling Wednesday’s 6.9% decline in the stock “unwarranted” following the release of second-quarter results.

In a report published July 30 ahead of the market open, Choy said he expects investors focused on the long-term outlook for North American power demand to benefit from rising Alberta and PJM market prices, as well as Capital Power’s continued deployment of growth capital.

He said the potential for gigawatt-scale data centres at Capital Power’s Genesee site is a positive, but not necessary for the stock to perform.

“As a base case, our stock investment thesis does not assume growth associated with landing gigawatt-scale data center customers at Genesee, or the ability for the three units on site to generate power above the 466 MW MSSC limit set by AESO,” he said.

However, he sees an emerging window of opportunity at Genesee, dependent on several factors: AESO’s upcoming long-term framework design, expected later this year; clearer electricity policy, and market signals, including the federal Clean Electricity Regulations (CER), industrial carbon tax, and Renewable Electricity Market (REM); and potential changes to MSSC limits. He added that even without large-scale data centres, smaller incremental demand from data customers should support Alberta power prices, as suggested by the outer-year forward curves, and lead to stronger EBITDA growth for Capital Power.

Choy emphasized that long-term EBITDA growth remains supported by “solid discretionary cash flow generation and favourable market fundamentals.” He also pointed to the company’s dividend increase, announced Wednesday, as another reason for investor appeal. The board approved a 6% hike to Capital Power’s annual dividend, bringing it to approximately $2.76 per share, up from $2.61. The company also reaffirmed its target of 2%–4% annual dividend growth beyond 2025.

Choy believes there may be more to come from Capital Power’s recent expansion into U.S. power markets, noting that its acquisition in the PJM market only closed in June.

“We sense that there could be more cash flow per share accretive M&A deals to come as the company builds a more meaningful and strategic platform in certain U.S. power markets,” he said.

Backed by a strong balance sheet, solid discretionary cash flow, and a recent track record of deal-making and value creation, Choy expects capital expenditure-driven EBITDA growth of at least a high single-digit CAGR, even on a self-funded equity basis. He also sees upside through the potential to recontract existing facilities at higher rates.

Choy raised his price target for Capital Power shares to $67 from $65, compared to a current Street average of $64.50.

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