Cannacord = $32 Target; Nesbitt = $21.50TRANSALTA CORPORATION (TA-TSX; TAC-NYSE) KAREN TAYLOR, CFA
Rating: Underperform
Price: $23.44
Target: $21.50 á
2005A EPS: $0.88
2006E EPS: $1.06 á
2007E EPS: $1.35 á
Title: Q2/06 Slightly Higher Than Expected; Underperform Rating Maintained
Event: TransAlta reported Q2/06 EPS of $0.43 per share. After adjusting for a series of one-time items and the net margin from opportunistic natural gas sales at the Ottawa cogeneration facility, Q2/06 EPS were $0.07 per share. Our Q2/06 EPS estimate of $0.05 per share is comparable to this number; our estimates are exclusive of taxation benefits, gains from the opportunistic realization on interest rate hedges and natural gas sales at the Ottawa plant, due to the lack of sustainability of these activities. We have stated reported Q2/06 performance as $0.14 per share, inclusive of taxation benefits, interest rate hedge gains and gas sales margin from the Ottawa.
Impact: Neutral.
Forecasts: We have updated our financial model to reflect a lower effective tax rate of approximately 24% in each of 2006 and 2007 versus 28% previously. Our diluted 2006 and 2007 EPS estimates increase to $1.06 and $1.35, respectively from $0.98 and $1.25 previously.
Valuation: Our revised target price of $21.50 is 16x our diluted 2007 EPS estimate of $1.35. We do not consider yield to be a relevant valuation metric, given the at-risk nature of the company’s business model and that comparable pure-play generation companies do not typically pay a dividend. We also believe that the P/E multiple should be lower than those of regulated utilities due to the higher risk and limited EPS growth profile of the company.
Recommendation: We believe that the shares are fully valued at current levels. Our rating is Underperform.