National Bank While rates are remaining high, valuations for Canadian renewable power producers remain “depressed and oversold,” according to National Bank Financial analyst Rupert Merer.
“Our coverage of renewable power developers has performed poorly over the last couple of years, with headwinds from higher bond yields and lower production that resulted from uncooperative weather,” he said. “With rates remaining high, we are lowering our targets to reflect higher bond yield forecasts for the next 12 months. However, we believe that the sector is more oversold now than at any time since we have started covering the stocks, with an average implied cost of equity at about 11.8 per cent, which is high relative to historical levels and relative to the market.”
In a research report released Wednesday titled Rates are staying high and IPP stocks are staying low... for now, Mr. Merer argued growth opportunities in Canada are “better than they have been for years,” bringing the potential for investor gains in the future.
“Over the last couple of years, investors in the renewable power sector had concerns for the return on investment in new renewable energy projects as inflation hit the cost of new projects. However, power prices on new contracts have also increased to compensate for higher equipment costs (power prices on offer are up 40 per cent to 60 per cent in most markets) and returns on growth have recovered. The IPPs with exposure to the Canadian market are well positioned. Canadian power demand is forecasted to double by 2050, and RFPs [request for proposals] for renewable energy and capacity in Canada’s largest provinces appear to have less competition than international markets. So far, NPI, INE and BLX have had success in recent RFPs in Ontario and Quebec for wind power and battery capacity. There are more RFPs to come in Canada, and given the operating scale and strong relationships that the Canadian companies have, we believe they should continue to be successful.”
Given that potentially fruitful backdrop, the analyst touted “attractive” returns to target prices for the companies based on upcoming catalysts.
“With an increase in our 12-month forecast for the U.S. and Canadian 10-year bond yields to 3.7 per cent and 2.9 per cent, respectively (was 3.4 per cent and 2.5 per cent), we increased our target discount rates and lowered targets,” said Mr. Merer. “With this, we moved to Sector Perform on AY. However, we believe the stocks are oversold and should recover over the next year as confidence builds in the outlook for future cash flows and growth. Our top picks on return to target are INE, NPI, PIF and BLX.”
Mr. Merer also made these other target adjustments:
- Algonquin Power & Utilities Corp. ( “sector perform”) to US$6.75 from US$7.25. The average is US$7.67.
- Boralex Inc. (BLX-T, “outperform”) to $39 from $41. Average: $39.67.
- Brookfield Renewable Partners LP (, “outperform”) to US$28 from US$31. Average: US$28.18.
- Innergex Renewable Energy Inc. (INE-T, “outperform”) to $15, remaining a Street high, from $16. Average: $11.31.
- Northland Power Inc. (NPI-T, “outperform”) to $32 from $34. Average: $31.82.
- Polaris Renewable Energy Inc. (PIF-T, “outperform”) to $19 from $20. Average: $23.