TD Notes (Renewable Power) Renewable Power Sector Update and Q4/21 Earnings Preview
Q4 Renewable Output Mixed across Technologies and Regions Valuations have Retrenched to Long-term Average Levels
This note summarizes Q4/21 earnings expectations for equities in the Canadian renewable power sector. We refer readers to the larger Power & Utilities Q4/21 Preview and Sector Update industry bulletin, also published today, for a more detailed review of investment theses across our coverage universe. Besides presenting company-specific expectations for Q4/21 results, the larger report provides a review of recent equity performance and valuation trends.
Share prices of renewable power developers and operators have slumped in recent months. Since the end of September, share prices of Canadian renewable IPPs have declined 13%, on average. The sector has underperformed both Canada- listed utilities (up 5% since the end of Q3/21), as well as the broader equity indices. The S&P/TSX Composite and the S&P 500 have improved 6% and 8%, respectively, since September 2021. Altius Renewable Royalties (up 12%) was the best-performing equity in our coverage universe over that period. On average, renewable IPP equities remain 35% below the sector peak set in early-January 2021.
Our recommendations and target prices are unchanged; our sector stance remains OVERWEIGHT. We raised our Alternative Energy sector stance to OVERWEIGHT from Market Weight in mid-December 2021. In our view, average valuations have contracted to attractive levels, given the extent of most companies' advanced organic growth pipelines. Canadian renewable power IPPs have diverse growth prospects across technologies and geographies. Based on 12-month forward EV/EBITDA, the average trading multiple for our IPP coverage universe has contracted to 13.4x, equal to the long-term average and down from the January 2021 peak of 17.6x. Given this valuation retrenchment and ongoing momentum for renewable power development, we are positive on the share-price prospects of most companies in the sector. Over the mid-term, we believe that sector valuations will be supported by tailwinds resulting from global decarbonization trends. Our top risk- adjusted pick in the sector is Boralex.
Q4/21 earnings season for our coverage universe is expected to begin on February 4 with Brookfield Renewable. Quarterly reporting season is expected to conclude when Algonquin Power reports its results on March 3. In most cases, our forecasts are close to consensus expectations (typical, given contracted pricing and as most analysts base their quarterly estimates on long-term average generation levels provided by management teams).