RBC Reduced Target to 13.00 but still upbeat on RNWTarget price at RBC matches TDW. Reduced by 1.00 assuming there will be no drop downs from TA and no third part acquisitions in the next 12 months. Below are the comments from RBC.
Reducing price target to $13. Given the limited visibility for new growth
projects, we have reduced our price target to $13 (from $14) to reflect
that we allocated no value for future drop-down or growth opportunities.
Our price target implies an EV / 2020 EBITDA multiple of ~10x, which is
below the peers due to the company's shorter contract profile.
Investment summary
We expect TA Renewables' shares to perform in line with our
coverage universe for the following reasons:
• Strategic relationship with TransAlta. TransAlta will be
responsible for identifying, evaluating, and executing
acquisition and development opportunities for TA
Renewables and will be the primary source of growth for
the company. We expect accretive drop-down transactions
and third-party acquisitions to drive modest growth in the
dividend.
• Sustainable dividends supported by quality operating
assets. TA Renewables’ portfolio is fully contracted under
long-term power purchase agreements (PPAs) with an
average remaining PPA term of 15 years. Many of the
PPAs are partially indexed to inflation, and the TransAlta
PPAs are fully indexed to inflation. Furthermore, the
facilities are located across Canada, so generation variances
across regions will often offset each other, minimizing the
variability of the portfolio as a whole. The combination
of fully contracted assets, an 80-90% payout ratio, and
geographic diversification, contributes to the sustainability
of the dividend.
• Limited visibility on additional drop-downs. With the
recent drop-down of three renewable energy assets,
we don't see any obvious near-term drop-downs from
TransAlta. We also believe potential third-party acquisitions
may be only modestly accretive to CAFD/share.