First-quarter earnings season for Canadian independent power producers is likely to be “another mixed bag for the group,” according to Desjardins Securities analyst Brent Stadler, who expects “a mostly positive tone” being set for the year ahead.
“On a total-return basis, our coverage stocks have underperformed the broader resource-heavy S&P/TSX Composite Index in the year to date by 13 per cent as treasury yields have moved quite a bit higher since the beginning of 2024 in response to the market’s expectations of rate cuts being pushed out (rate cuts could potentially start by the end of the year),” he said. “Our IPP coverage universe is generally sensitive to bond yields given its defensive nature and bond-like cash flow characteristics. While rates are in the driver’s seat and primarily affect valuations, we believe fundamentals and sectoral tailwinds remain and continue to gain momentum. We would highlight a positive environment for project returns given continued strong demand from both corporates and governments due to decarbonization objectives and energy security/independence initiatives, with more state-backed RFPs and corporate demand at record levels. Load growth is becoming a focal point of conversations and is being driven by many factors, such as electrification of the economy, onshoring manufacturing and AI/datacentres. Further, we believe a transition from El Nio could bring more favourable weather for the IPPs, which would likely be a positive tailwind for cash flows.
“Overall, we expect our coverage companies to remain relatively bullish on their outlooks on the quarterly calls. We do not expect any material capex increases or changes to project completion schedules and we expect to continue to hear that returns are elevated and reflect the current environment, which should drive solid cash flow growth. We continue to favour names with solid growth, optionality to fund pipelines and catalysts. We highlight BLX as our Top Pick and CPX as our preferred name, and we continue to see good value in INE’s operating portfolio; we maintain our Buy on NPI and EVGN.”
Mr. Stadler expects both Boralex Inc. and Innergex Renewable Energy Inc. could “handily” beat the Street’s expectations (by approximately 5 per cent), while Algonquin Power and Utilities Corp. ) could miss forecasts (by 10 per cent).
“While the pendulum on rates has swung to relatively higher levels, leading us to increase our discount rates by 50 basis points and trim our targets, we believe current valuations could prove to be attractive for those with a longer investment horizon,” he said.
His target changes are:
* Algonquin Power and Utilities Corp. (“hold”) to $5.50 (a Street-low) from $5.75. The average is US$7.29.
Analyst: “We forecast EPS of US$0.14, below (10 per cent) consensus of US$0.16. We expect higher interest expense (from rates and total debt), modestly unfavourable weather and limited growth to weigh on earnings. A resolution to the proposed renewables sales process could be forthcoming in the near term, but we believe the macro environment has potentially made a sale more challenging.”
* Brookfield Renewable Partners LP ( “hold”) to $37 from $39. Average: $39.06.
Analyst: “BEP is likely to communicate a positive outlook and that it continues to see strong opportunities to deploy capital at attractive risk-adjusted returns.”
* Boralex Inc. ( “top pick”) to $42 from $44. Average: $38.60.
Analyst: “We forecast EBITDA of $213-million, ahead (5 per cent) of consensus of $203-million as we expect solid generation, project completions and strong pricing. BLX remains our top pick in the renewables space as we view it as a lower-risk play with best-in-class growth and catalysts on the horizon.”
* Capital Power Corp. (“buy”) to $49 from $51. Average: $43.09.
Analyst: “In our view, we are in the early innings of a gas resurgence as we enter the ‘reliability era’, which should be a tailwind for its gas-weighted portfolio. CPX remains a preferred name.”
* Innergex Renewable Energy Inc. (“buy”) to $13 from $14. Average: $10.90.
Analyst: “We expect INE to provide some colour around upcoming RFPs, as well as a positive update on construction progress at the large Boswell Springs wind project; we see solid upside as weather patterns potentially transition from El Nio, which should bring more favourable weather.”
* Northland Power Inc. ( “buy”) to $27 from $29. Average: $29.75.
Analyst: “We expect updates on construction progress (likely positive), some comments on recent leadership changes and possibly future growth opportunities.”