Canaccord Has $18 Target INVESTOR DAY HIGHLIGHTS
OPERATING AND GROWTH
OBJECTIVES
Investment recommendation
TransAlta hosted its annual Investor Day in Toronto, outlining its
strategy and goals for 2013 and beyond. Management showed
conviction in being able to deliver on operational goals and key targets.
Should management be successful in delivering on its objectives, the
discount on the stock should decline. Key goals include delivering on
availability targets, minimizing escalation of operating and maintenance
costs, increasing the amount of longer-term contracts, particularly at
Centralia and in Alberta, meeting energy and trading gross margin
expectations and showing progress on contracted greenfield growth in
targeted regions. Notable was the company’s reduced target for Energy
Trading gross margins to $40-$60 million from $65-$85 million
previously. We continue to expect cash flow to be sufficient to provide
for maintenance capital spend as well as fully cover its dividend even
during trough power pricing periods. However, despite management’s
awareness of the importance of maintaining it, the level of the dividend
is ultimately a Board decision. We are maintaining our BUY rating and
C$18.00 target price on the stock.
Valuation
Our target price is based on a discounted cash flow analysis as well as
dividend discount models and a multiples approach on earnings and
cash flow relative to both historical valuations and power and pipeline
peers. Note that our valuation assumes the current level of the dividend
is maintained. While we have an C$18.00 target price, we see the value
of the stock in excess of that level on a discounted cash flow analysis;
however, until the company wins back investor confidence and
convinces the market that the dividend level is safe, the stock is unlikely
to reach its intrinsic value. Should the shares continue to languish at
current low levels, we believe there is an increased potential that
TransAlta becomes an acquisition target.