Q3/20 results provide evidence that growth is accelerating from the "lost years"
focused on debt reduction and asset rationalization. As growth becomes more
visible, we believe it will highlight the attractiveness of the valuation (forward P/E
of 17.5x vs. utility peers of 18x). Combined with the potential for rate base growth to
exceed expectations and the low-risk business model (95%-plus regulated), we are
maintaining our Outperform rating, $61 target, and Top Pick designation.
Key Points
Strong Q3/20 results. Emera reported Q3/20 adjusted EPS (f.d.) of $0.67 ($0.51 in
Q3/19), above consensus of $0.65 and our $0.62. The positive variance to us was mainly
due to better-than-expected contribution from Other Electric Utilities/Caribbean ($6M
vs. our $1M) and Other (-$70M vs. our- $77M) due to improved Trading/Marketing
margins.
Thoughts on the guidance. Looking out over the next few years, it appears the
company is poised for premium growth and premium asset quality (95%-plus
regulated). The new $7.4B 2021-2023 capex plan (similar to $7.5B for 2020-2022) is
expected to support a rate base CAGR of ~7.5%. Moreover, there is $1.2B of prospective
development not in EMA's base plan (nor our valuation) that could elevate the rate
base CAGR to ~8.5%; on the call, management noted that ~30-40% of this optionality
resides at Tampa Electric, 40% related to the potential Atlantic Loop project (see
Exhibit 4), and the balance spread to all of its other utilities. The sources of funding
for 2021-2023 base plan will come from reinvested cash flow (50-55%), new debt
(25-35%), and DRIP/ATM/hybrids (15-25% or $1.11-$1.85B).
Thoughts on the stock. Growth is visible, yet the shares are still attractively valued
(17.5x P/E vs. utility group at 18x). We would accumulate ahead of key catalysts: (i)
accelerated EPS growth into 2021 with rate cases decisions, steady rate base growth,
and recovery in volumes from COVID-19; (ii) securing further projects to bolster the base
$7.4B capex plan. We view Florida as the most promising source of new growth; (iii)
delivering to the plan, including 4-5% dividend increases through 2022.
Revising estimates. We have updated our estimates to reflect Q3/20 results and the
updated capex through 2023. Our adj. EPS estimates are now $2.55 (vs. $2.56) in 2020,
$2.95 (vs. $3.01) in 2021 and $3.17 (vs. $3.18) in 2022.