National Bank Financial analyst Rupert Merer thinks Algonquin Power & Utilities Corp. now appears to be “attractively” valued after its shares dropped 19.3 per cent on Friday in response to the release of “weak” third-quarter results.
decr now appears to be “attractively” valued after its shares dropped 19.3 per cent on Friday in response to the release of “weak” third-quarter results.
However, he warned of “a number of moving parts and no obvious catalysts in the near-term,” leading him to reaffirm his “cautious” stance on the company.
He was one of several equity analysts to downgrade the Oakville, Ont.-based company’s shares following the underwhelming release, which included a guidance reduction.
Before the bell on Friday, Algonquin reported third-quarter adjusted earnings per share of 11 US cents, missing Mr. Merer’s projection by 7 US cents and the consensus estimate on the Street by 5 cents due largely to lower-than-anticipated generation from its Renewable Energy group and higher interest costs. It now expects full-year EPS in a range of 66-69 US cents from 72-77 US cents previously.
In a research note released shortly after the premarket quarterly release, Mr. Merer cut his recommendation for Algonquin shares to “sector perform” from “outperform, citing growth concerns and suggesting the company’s payout ratio “looks stretched.”
“Weakening outlook bring guidance and targets revision AQN highlighted that the current challenging macroeconomic environment, further exacerbated by rising interest rates (16 per cent of AQN’s debt has variable rate) and persisting inflation, has forced it to re-evaluate its long-term targets and financial expectations (AQN targets rate base CAGR [compound annual growth rate] of 15 per cent and adj. EPS CAGR of 7-9 per cent for 2022-26), starting with its 2022 financial guidance,” he said.
“With results, AQN maintained its current quarterly dividend of US$0.1808/sh. However, on the back of weak earnings and uncertain growth prospects, AQN’s payout ratio should be over 100 per cent this year. With this, the outlook for future dividend increases has declined and dividend cuts could be on the table.”
After reducing his target for Algonquin shares on Friday (to US$13.50 from $14.25), Mr. Merer made a further cut in a Monday report to US$12.50 following an update to his financial forecast. The current average target on the Street is US$14.12.
“We calibrated our model to account for Q3 results, higher interest rates as well as AQN’s revised FY’22 guidance. Our Q4 forecast includes a $50-million gain on sale of some assets in the Renewable Energy group, offset by lower recognition of tax credits, for a $28.9-million increase in EBITDA contribution.,” he said.
He’s now projecting full-year earnings per share for 2022 of 68 US cents, down 10.4 per cent from 75 US cents previously. His 2023 estimate slid 4.3 per cent to 70 US cents from 75 US cents.
Elsewhere, other analysts making recommendation changes include:
* Desjardins Securities’ Brent Stadler to “hold” from “buy” with a US$11.50 target, down from US$14.50 in a research note titled A trip to the woodshed.
“3Q missed, but this was primarily due to low wind speeds and thus was not too bad,” said Mr. Stadler. “We are obviously concerned by AQN’s commentary and have a lot of questions in general, but in particular around permanent financing given it could have US$3.6-billion drawn on its credit facility by January 2023 —this is the primary driver of our 2023 EPS decline. AQN has a lot of work to do to formulate a plan and update its growth targets ahead of its upcoming investor day.”
“An uncertain growth outlook, likely driven by a lack of balance sheet discipline, concerns around upcoming financial results, an elevated payout ratio, and questions on dividend growth and strategy, prevent us from being able to recommend the stock at this time. While the shares will likely be volatile in the coming months, we recommend investors sit on the sidelines or at least exercise caution.”
* BMO Nesbitt Burns’ Ben Pham to “market perform” from “outperform” with a US$11 target, down from US$17.50.
“After dropping almost 20 per cent on Friday following the reduction in 2022 EPS guidance (and signals around an upcoming reset of long-term 7-9-per-cent EPS CAGR), AQN shares are trading at depressed levels that offer attractive value (approximately 12.5 times P/E vs. 17x times utility peers),” said Mr. Pham. “This is despite its diversified mix of essential service utility and renewable power plants. However, there are likely increasing risks of a ‘strategic’ dividend cut and funding needs are still high. Given this balance, we are lowering our rating.”
* RBC Dominion Securities’ Nelson Ng to “sector perform” from “outperform” with a US$12 target, down from US$17.
“Management has an opportunity at its upcoming Investor Day to reset its strategy,” said Mr. Ng. “We believe Algonquin will need to cut its dividend, reduce its capital program and growth targets, explore additional asset sales, and keep equity needs to a minimum. The shares of AQN could be range-bound until there is more visibility. We are downgrading our rating to Sector Perform (from Outperform) and reducing our price target to $12 (from $17) to reflect the many uncertainties, including a potential dividend cut.”
* TD Securities’ Sean Steuart to “hold” from “buy” with a $10 (Canadian) target, down from $13.
Others analysts making changes include:
* Raymond James’ David Quezada to US$11.50 from US$18 with an “outperform” rating.
“While 3Q22 results certainly reflected some near-term challenges for Algonquin, we note that even after significant reductions to our earnings estimates and target multiple, we continue to see sufficient upside to maintain our Outperform rating. Going forward, we expect the company’s upcoming analyst day, slated for early 2023, will provide clarity on the company’s outlook and continue to see an attractive set of opportunities in front of the company,” he said.
* Scotia’s Robert Hope to US$11 from US$13 with a “sector perform” rating.
“Algonquin’s shares were very weak (down 19 per cent) following its Q3 miss, reduction in 2022 guidance, as well as the talk down of 2023 expectations,” he said.” The level of volatility in Algonquin’s earnings also caught the market by surprise. While the shares have likely overshot to the downside, we expect them to be range bound until additional longer-term clarity is provided at its Investor Day in early 2023. We lower our 2022E EPS estimate into the upper part of the new guidance range, while our 2023/2024 estimates decline 12 per cent/8 per cent largely to reflect a lower renewable contribution and some continued interest rate pressure.”
* Credit Suisse’s Andrew Kuske to US$12 from US$13 with an “outperform” rating.
“With the guidance reduction and call commentary, we reduced elements of the financial outlook and believe a restoration of confidence will be critical. Greater focus will revolve on capital recycling as recently demonstrated, the future organizational growth rate and dividend related metrics – especially ahead of a future investor day in early 2023 (shifted from a normal December timeline,” said Mr. Kuske.
ALGONQUIN PWR & UTIL
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YEAR TO DATE