New Rating!!!!! GLTALongsAlgonquin Power & Utilities Corp. (AQN-N, AQN-T) US$8.63 | C$11.54 Removing Kentucky Power from Estimates and Valuation
Event
We are adjusting our Algonquin estimates, valuation, and target price to exclude the proposed $2.6 billion acquisition of Kentucky Power from AEP. With the April 26 outside date for the agreement fast approaching, the proposed transaction was not included in the April 13 "Sunshine Notice" list from the U.S. Federal Energy Regulatory Commission (FERC) ahead of the next regular meeting on April 20. This does not preclude FERC from approving the acquisition outside the regular process or both parties extending the outside date pending revised valuation parameters, but we now believe the odds of the transaction progressing are low.
Impact: POSITIVE
We are raising our target price to $9.00 from $8.00 previously. The higher target price reflects a lower NAV discount (to 10% from 20%) more than offsetting long-term value accretion assumptions tied to Kentucky Power previously included. Assuming Algonquin is able to exit the Kentucky Power transaction, we believe that the company will be in a much more flexible financial position. Algonquin would be able to avoid issuing high-cost hybrid debt and will not be forced into overly aggressive non-regulated power asset sales to bridge funding requirements for Kentucky Power.
Removing Kentucky Power from our forecasts has no effect on 2023 and 2024 EPS estimates. Previously, we assumed that the acquisition would close mid-year 2023. Management had guided to mid-single-digit EPS accretion over the long run, but minimal EPS impact in the initial year of ownership. Adjusted for Q4/22 gains on asset sales, we forecast flat EPS in 2023 and 2024. Management previously cited a long-term "north star" EPS growth target of 5-8%, which we consider aspirational.
In our view, Algonquin is fairly valued. Following recent share-price strength (up 35% year-to-date), Algonquin is now trading at an expected 2024 P/E multiple of 15.1x — a modest discount to the North American utility average of 16.5x. Given a lack of clarity on mid-term earnings growth prospects, we believe that a discount is appropriate.
TD Investment Conclusion We reiterate our HOLD rating. In our view, Algonquin's valuation discount is warranted by its compromised earnings base and constraints on regaining growth momentum. Alternative Energy A