RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:Dividend cut necessaryFROM TD
Innergex's (INE) share price has significantly underperformed its peers in recent months. In our view, this partly reflects investors' concern around the company's elevated dividend payout ratio. Management has a target of enhancing liquidity to support development activities. We anticipate that ongoing efforts will centre around incremental asset sell-downs and refinancing initiatives. We also believe that INE will focus on a more conservative dividend payout ratio, and now assume that the company will lower its dividend by 35% to further enhance its funding flexibility.
Impact: SLIGHTLY NEGATIVE
Given an inflated current dividend yield of 9.6%, investors have arguably already priced a dividend cut into INE's valuation. Since the recent sector peak in late August 2023, INE's share price has declined 42% — substantially outpacing the average decline of 12% for its renewable IPP peer group. A 35% reduction in the dividend would take INE's payout ratio (as a percentage of FCF, before development expenses) to 79% from 121% based on LTM results and to 48% from 73% based on our 2025 estimates.
With a robust organic growth opportunity-set — especially in Canada — augmenting flexibility is a priority. In Q4/23, INE raised capital of $369 million via the sale of a minority stake in its France platform and hydro refinancing initiatives. We anticipate that other asset sell-down initiatives are possible.
We expect a broader reset of INE growth targets and funding plans in the near-to-mid term. Management last updated its long-term targets in September 2022, which included FCF/share guidance of a $1.01 run-rate by 2025 (including prospective acquisitions). We expect more conservative revised targets.
Our lower target price (to $10.00 from $12.00) reflects tempered valuation parameters. We reiterate our BUY rating.
TD Investment Conclusion
Notwithstanding the potential for a near-term reduction in INE's dividend, we believe that the equity is attractively valued, given a broad growth opportunity-set. With eventual clarity on the company's funding platform, we see potential for INE's valuation to better reflect what we view as a compelling platform.