TD Securities - HOLD - Target Price Remains at 3.75 Below is a copy and paste from TD report issued today.
Valuation:
The company’s expected 2015 EV/EBITDA multiple is 10.3x, a discount to the sector average of 13.0x. We argue that a discount is warranted on the basis of Capstone’s relatively tighter liquidity position and opaque mid-term growth profile.
Justification of Target Price:
Our 12-month target price of $3.75 is derived using a 6% discount to our discounted cash flow (DCF) analysis and is backstopped by an EV/EBITDA-based sum-of-the-parts approach. Our DCF is based on a weighted average cost of capital (WACC) of 7.8% and a terminal growth rate of 0.5%.
TD Investment Conclusion:
We believe that Capstone’s valuation discount is appropriate in light of our relatively high mid-term payout ratio projections (average expected payout
ratio of 92% between 2015 and 2019) and a less transparent growth pipeline
than most of its peers. The company’s contracted Ontario wind development
projects should all be complete by the end of 2016, with some of these
projects expected to face permitting delays, owing to local opposition.
Although management appears confident that other accretive expansion
opportunities will surface, the long-term growth path for the company is
relatively opaque.