TDBEP.UN continues to be rated as Action List Buy with a US$41.00 target. GLTA
Renewable Power Sector Q4/22 Earnings Preview
Expect Below-Average Q4/22 Hydrology for Parts of North America We Anticipate Mixed Generation Trends across Other Regions
This note summarizes Q4/22 earnings expectations for equities in the Canadian renewable power sector. We refer readers to the larger Power & Utilities Q4/22 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 Q4/22 results, the larger report provides a review of recent equity performance and valuation trends.
We believe Q4/22 share-price declines for our coverage universe primarily reflected concerns regarding rising interest rates - at least until recently - and the possibility of a recession. Since the end of September, share prices of Canadian renewable IPPs have declined by 14%, on average. The sector has underperformed both large-cap Canada-listed utilities (up 5%, on average, since the end of Q3/22) and broader equity indices. Since the end of Q3/22, the S&P/ TSX Composite and S&P 500 have increased 10% and 12%, respectively. Northland Power (flat since June) was the best-performing equity in our coverage universe over this period. On average, share prices in our coverage universe are 28% below their recent highs from August 2022.
Our recommendations and target prices are unchanged; our sector stance remains OVERWEIGHT. Based on 12-month forward EV/EBITDA, the average trading multiple for our coverage universe has declined to 11.9x, from 14.2x at the end of July. This is below the long-term average of 13.5x, and well below the January 2021 peak of 17.4x. We believe average valuations remain attractive, given companies' extension of advanced organic growth pipelines, ongoing momentum for renewable power development, and the group's defensive attributes. We continue to believe that macroeconomic repercussions related to a potential recession have limited bearing on the renewable power sector's medium-to-long-term earnings prospects. Our top pick in the sector is Brookfield Renewable.
An extended Q4/22 earnings season for our coverage universe is expected to start on February 3 with Brookfield Renewable, wrapping up in mid-March with Algonquin Power & Utilities. 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).