cibc analyst outperformer target US$15.5Q1/20 First Look: Weak Results Force Reduction In Bottom End Of Guidance Range; 10% Dividend Increase Summary. AQN reported Adj. EBITDA and Adj. EPS that were below our and consensus estimates driven by weak results at its utilities, given unfavourable weather. Due to soft Q1 results and potential headwinds from COVID-19 (lower loads), AQN has reduced the bottom end of its 2020 EPS guidance—this is not a surprise to us, as we were below the low end of the prior guidance range. Some 2020 capex has been deferred (AQN does not believe it will impact wind project economics)—the 5-year capex plans are held. As a positive offset, AQN announced a 10% dividend increase, matching its commitment to 10% annual increases until 2021. Conference Call: Friday, May 8 at 10:00 a.m. ET; 800-319-4610. Operating Results (see inside for a summary table of results): * Adj. EBITDA. Reported $242MM, which was below both our estimate of $257MM and consensus of $252MM (range: $226MM-$268MM). Operating profit for the Power segment was in line with our forecast (we had assumed below-LTA generation). The miss was driven by weak utility results because of unfavourable load and net revenues (partial offset from good cost control). * Adj. EPS. Reported $0.19 vs. our $0.21 estimate and consensus of $0.21 (range: $0.20-$0.22). The miss was driven by lower Adj. EBITDA and ahigher tax rate (likely driven by lower wind tax credits). Additional Takeaways: * Capex Deferrals; 5-Year Plan Unchanged. The Q1/20 capex was modestly below our forecast and 2020 capex could be dialed back by $100MM-$300MM. Most of the deferral comes on the power side. Some turbines at one wind project may not be in place by year-end, which could impact receipt of tax credits (AQN does believe there will be a negative impact). There is also a modest capex deferral at the utilities (likely to help manage regulatory lag). The 5-year capex plan of $9.2B was reiterated. * 2020 Guidance Update. 2020 EPS guidance was adjusted to $0.65-$0.70 from $0.68-$0.70 given soft Q1 results and provides a buffer for potential lower utility results driven by load declines during the COVID-19 pandemic. Our estimate was $0.64 and consensus is $0.68. * Dividend Increase. The annual dividend is increased 10%, matching AQN’s target of 10% annual increases to 2021. We thought the increase might be deferred given current uncertainties with COVID-19, but the increase is positive news and an offset to weaker results. * COVID-19 Impacts. Too early to quantify bad debt impacts, but they are likely modest. Lower load in April was a modest $3MM impact with some mitigation from decoupling, fixed charges and higher residential demand. * Liquidity/Funding. Liquidity was ~$1.1B at the end of Q1 and enhanced by $1.6B post quarter to help manage capital markets uncertainty and funding.
Price Target Calculation Our valuation is based on a sum-of-the-parts valuation that includes two main components, as outlined below. Adding the two components together we get a value of US$15.68. Utilities. We use a P/E valuation for utility operations applying a 19.0x multiple to our 2021 EPS estimate for the utility segment. Based on these assumptions, we calculate a value of US$9.47. Power. For the power assets (including Atlantica Yield dividends and tax equity cash payments), we use a risk-adjusted DCF valuation approach, including the current operations and identified, contracted development projects. We project these cash flows out to 2026, discounted at our estimated WACC of 5.2%. For the terminal value, we use a 9.0x multiple on our 2026 EBITDA estimate, given the mix of wind, thermal, solar and hydro asset types. Based on these assumptions, we calculate a value of US$6.22.