Expecting lower interest rates, National Bank Financial analyst Rupert Merer thinks this year is “shaping up to be much better” for sustainable energy and clean technology stocks following a “volatile” 2023, pointing to “recession-resistant characteristics and visibility on growth initiatives across the sector.”
“The year 2023 was marked by headwinds for the renewable energy and clean tech sectors,” he said in a report released Tuesday. “Despite the global commitment to the energy transition, the industry faced a confluence of challenges. Supply chain disruptions, exacerbated by lingering effects of the pandemic and geopolitical tensions, led to shortages and increased costs for critical components. Additionally, policy and regulatory uncertainties in key markets created a hesitant investment climate. Financing challenges were further compounded by inflation and rising interest rates, which strained project economics. The stocks in our IPP coverage were down 14 per cent on average, while in the EV space, stocks were down 27 per cent on average. The materials and waste management stocks did better, up 9 per cent and 14 per cent, respectively. Yet, in the face of these obstacles, the resilience and innovation inherent in the sustainability and clean tech sector became apparent, as companies adapted to these challenges, seeking new efficiencies and sources of capital to overcome the hurdles of 2023. For 2024 and beyond, we are looking for a fully funded return to growth, with the challenges of 2023 in the rear-view mirror.”
For cleantech investors, Mr. Merer predicts a “better year with rate tailwinds and political headwinds” and feels that reversal should support stock valuations through the year.
“Not surprisingly, lower rates could be most relevant this year, as much of our coverage universe are yield-sensitive infrastructure stocks with significant leverage,” he said. “So far, the stocks have not rebounded as we might have expected on lower yields. We also see renewed confidence in growth for the sector, as last year’s challenges give way to visibility on growth for most infrastructure stocks and the earlier stage EV, H2 and materials stocks in our coverage. We also forecast more asset recycling, industry consolidation and government support for energy transition stocks. However, it could be a volatile year with an election in the U.S. and the potential for changes in political sentiment.”
After updating his target prices across the sector to account for valuation and forecast changes, Mr. Merer named three top picks for the year ahead “based largely on return to target and backed by visibility on growth.” They are:
* Innergex Renewable Energy Inc. (
) with a $17 target, up from $15.75, and “outperform” rating. The average is $14.44.
* Northland Power Inc. (
) with a $34 target, up from $32, and “outperform” rating. The average is $32.
“With sentiment on a downward spiral in 2023, investors were concerned about the ability for IPPs to create value from growth,” said Mr. Merer. “With new projects delayed by rising costs, price caps in European power markets, and equity dilution to fund growth and poor weather, earnings metrics have stalled in the last few years for the worst performing stocks, INE and NPI. The outlook for growth is improving for these companies, where we should see a return to adj. EBITDA/sh growth for the next three years. This growth is supported by fully funded capacity expansion, normalized weather conditions and inflation.”
* 5N Plus Inc. (
) with a $5.25 target, up from $4.75, and “outperform” rating. The average is $5.25.
“Visibility at VNP is improving and the company should provide 2025 guidance early in 2024,” he said. “We estimate $57-million in EBITDA for 2025E, driven by continued growth in its terrestrial and space solar businesses. Its AZUR business has a twoyear backlog, and its CdTe semiconductors should continue to see outsized demand from its growing partnership with First Solar (NASDAQ: FSLR, Not Rated), which aims to grow capacity from 12 GW in 2023E to over 22 GW by 2026E. With this improved visibility and strong growth outlook in the near term and beyond, we remain Outperform.”
Mr. Merer’s other target adjustments were:
- Algonquin Power & Utilities Corp. (AQN-N/
, “sector perform”) to US$7.25 from US$7.50. Average: US$7.21. - Altiuis Renewable Royalties Corp. (
, “outperform”) to $11 from $10. Average: $13.57. - Brookfield Renewable Partners LP (BEP-N/
, “outperform”) to US$31 from US$29. Average: US$31.06. - Exro Technologies Inc. (
, “sector perform”) to $2 from $2.25. Average: $2.25. - GFL Environmental Inc. (
, “outperform”) to $55 from $52. Average: $47.57. - Lion Electric Co. (LEV-N/LEV-T, “sector perform”) to US$2.25 from US$2.50. Average: US$3.50.