RE:Capital plan. 2021 -2025RBC
Algonquin Power & Utilities Corp. Growth outlook remains intact, with potential upside to EPS guidance
"Our view: We reiterate our Outperform rating and believe that the company’s large capital plan, industry-leading growth profile, and attractive ESG metrics will support a higher share price. Although the new management team presented a moderated growth profile, we see potential upside from the realization of greenfield developments and M&A.
Key points:
Modestly increasing 5-year capital plan. Algonquin updated its 5-year capital plan that totaled $9.4 billion, modestly higher than last year’s 5- year capital plan of $9.2 billion. The capital plan includes $6.7 billion in the regulated utility business and $3.1 billion in the renewable energy division. The capital plan does not include new M&A or 3.4 GW of earlier-stage greenfield developments, which would be incremental to the capital plan.
5-year 8–10% EPS growth guidance conservative in our view. Management released its 2021 EPS guidance range of $0.71–0.76, which compares to our estimate of $0.74 (unchanged). Management also guided to an 8–10% EPS CAGR for the five-year period (2021–25), which is modestly lower than last year’s 9–11% 5-year growth range. Management took a conservative approach in its guidance and expects to reach the middle to high end. The upside would mainly come from realizing projects from the greenfield development pipeline and M&A.
Pointing toward lower dividend growth rate after 2021. Management reiterated plans for a 10% dividend increase in 2021 and expects a longerterm payout ratio of 80–90%. Based on our assessment, if management achieves a 9% average EPS growth rate, a ~6% annual dividend increase starting in 2022 would lead to a payout ratio close to the midpoint of its target payout ratio range. We note that a reduction in the dividend growth rate has been anticipated by the market.
Sustainability (ESG) one of the key pillars. A key focus for the company has been achieving top-tier sustainability and ESG metrics. The company has a goal of adding 2 GW of renewable energy between 2019 and 2023, and achieving 75% of renewable generation by 2023. It also has a diverse board of directors and 38% of management is female. Furthermore, it has improved ESG disclosures, recently publishing a TCFD-aligned climate change assessment report.
Leaving our EPS forecast unchanged. We have updated our model primarily to reflect management’s updated 5-year outlook, its 2021 EPS guidance, and the agreement to acquire a 51% interest in a portfolio of four wind facilities from RWE Renewables. Net of these changes, our 2020–22 EPS estimates are unchanged.
Price target/base case
Our base case price target of $17 is derived using a sum-ofthe-parts valuation with an implied EV/EBITDA multiple to our 2022E EBITDA of roughly 14x. The implied valuation multiple is a slight premium to the peer group due to Algonquin’s attractive growth profile.
Upside scenario
Our upside scenario value of $19 assumes that Algonquin successfully builds investor support for its international investment, executes its capital plan, and announces new accretive acquisitions over the next several years. Our sum-ofthe-parts valuation implies a 15x EV/EBITDA multiple to our 2022E EBITDA.
Downside scenario
Our downside scenario value of $10 is based on the assumption that long-term interest rates increase significantly (e.g., 200–300 basis points), potentially making development projects uneconomic, and significantly capping Algonquin’s growth profile. Our sum-of-the-parts valuation implies a 10.5x EV/EBITDA multiple to our 2022E EBITDA.
Investment summary
We expect Algonquin shares to outperform peers for the following reasons:
1. The right foundations to continue growth strategy: The company has a strong development pipeline in the renewable energy sector, and it has built up a regulated utility business that can grow organically or through acquisitions. The company is actively developing renewable energy within its regulated footprint (greening generation fleet) as well as on a non-regulated basis (contracted or hedged).
2. Reasonable dividend with room to grow: The current dividend yield is approximately 4%, and the dividend has grown at 10% annually for the past ten years. We expect the future dividend increases will be in the high single digits.
3. Favourable ESG profile. The company has a large renewable energy footprint and has reduced the carbon intensity of its regulated utilities. The company also scores well on a sustainability and governance perspective, which makes the company attractive to a broad range of investors.
4. Attractive valuation: We believe the shares are attractively valued based on our price target of $17 and a dividend yield of ~4%."