TD Downgrading to Hold Event
Algonquin reported Q3/22 results on November 11 before market open. Adjusted EPS of $0.11 was below our forecast of $0.17 and the consensus forecast of $0.16. Algonquin also reduced 2022 EPS guidance (down 9% at the midpoint) and management is reassessing long-term growth targets with a downward bias, given higher interest rates and general capital market volatility. We expect clarity on revised 5-year investment and growth plans at an Investor Day early next year.
Impact: NEGATIVE Friday’s share price reaction (down 19%) was extreme, but in our view, was warranted given deteriorating growth prospects.
Q3/22 adjusted EPS declined 27% y/y, as rising interest rates and higher effective tax rates undermined results. The latter reflects lower recognition of U.S. renewable energy tax credits.
We underestimated Algonquin's exposure to rising interest rates. Based on the current capital structure, 22% of the company’s debt has floating rates and a 100 basis point increase to reference rates affects annual net earnings by $16 million. This exposure is expected to increase as the company will utilize corporate borrowing facilities to fund a portion of the Kentucky Power acquisition in Q1/23.
2022 guidance was reduced and management is reassessing long-term growth targets. Management lowered 2022 EPS guidance to $0.66-$0.69 - at the midpoint, down 9% from the previous guidance level. The previous five-year EPS CAGR target was 7-9%. We expect that 2023 EPS will be flat y/y. We now assume that the dividend will be held flat for the foreseeable future (previous expectation was a 6% annual growth rate).
We are downgrading our rating to HOLD from Buy. Our target falls to $10.00/ share from $13.00/share to reflect more conservative NAV component multiples.
TD Investment Conclusion
After the recent share price collapse, Algonquin now trades at a pronounced valuation discount to its peers in the Canadian power and utilities sector, but, in our view, this is warranted given the lack of clarity for earnings growth prospects and the company’s funding platform. With a higher cost of capital, we expect that future funding will skew more heavily towards sales of mature assets to minimize reliance on raising equity.
I have been following this company for a short while now, dipping into the quarterly report summaries issued by TD about AQN for about 3 years now; use this board to see posts from other equity research firms, and perhaps catch some quality comments from other users. All analysts like Mr. Steurt from TD have all been pumping AQN for a while, and now look this, what a quick flip! Further proof that analysts don't have clue what they're talking about, causing retail investors to think they're making good purchases in "safe""reliable""encouraging" and other buzz word used to describe optimism for a companies like AQN. Ridiculous to think these people have such well paying jobs and face no consequences for their inaccuracies and predictions...