BMOMarch 4, 2022 | 05:17 ET~
Algonquin Power & Utilities AQN-NYSE AQN-TSX
Rating Outperform Price: Mar-3 $14.60 Target $16.50 Total Rtn 18% Q4 -
In-Line Quarter Driven by Gain on Asset Sale; Maintain Outperform Rating Bottom Line: While we expect a modest negative share price reaction to the Q4/21 results, valuation remains attractive (17.5x P/E vs. 18.5x utility) and the Kentucky Power acquisition (approved mid-year) and organic growth in rate base expansion, and renewable power development should drive accelerated EPS growth through 2023.
Equity needs are also being contained through lower cost hybrids and capital recycling.
Given the potential total return of 18% to our unchanged US$16.50 target price, we are maintaining our Outperform rating.
Conf. call March 4, 10:00 a.m. ET; 1-888-330-2454 or 1-240-789-2714 (5079453).
Key Points Gain on sale supported in-line results.
AQN reported adj. EPS of US$0.21, spot on with consensus US$0.21 (BMO at US$0.22). To us, the negative variance was due to higher depreciation and an adj. EBITDA miss (US$298M vs. consensus of US$302M and BMO US$303M) mainly on milder weather at the Empire electric utility. While annual EPS delivered to guidance (US$0.71 vs. lower end of US$0.71-0.76), results benefited from ~US$29M gain on asset sale (New Market Solar sold to JV w/ Ares) or ~4c EPS. The market may view the gain as 1x and as such we would not be surprised to see a negative share price reaction.
Thoughts on the guidance. 2022 EPS guidance of US$0.72-0.77 was reaffirmed and driven by rate base expansion, renewable power development, and acquisitions (US $608M American Water closed Jan 1st and US$2.846B Kentucky Power expected midyear).
The DRIP discount will move to 3% from 5% effective Mar. 3.
Looking long-term, AQN reaffirmed its US$12.4B 2022-2026 capex program, of which US$4.34-4.68B is expected this year (virtually all utility). This program is expected to support EPS CAGR of 7-9% over similar time frame. Thoughts on the stock. While the shares could come under pressure near-term, relative valuation remains attractive (17.5x P/E vs. 18.5x utility peers) and we still see positive catalysts outweighing negative and are next focused on the following: (i) potential dividend increase next quarter; (ii) regulatory approval of Kentucky Power by mid-2022; (iii) further renewable power success; (iv) rate case decisions (esp. at Empire US$39.5M revenue increase and CalPeco US$35.7M); and (v) further monetization of renewable operating assets to contain equity requirements. Revised estimates. Our 2022 adj. EPS (f.d.) is still US$0.75 (EBITDA of US$1,372M vs