Analysts update Touting “an improved risk and payoff bet (despite remaining uncertainties),” iA Capital Markets analyst Naji Baydoun upgraded Algonquin Power & Utilities Corp. (AQN-T, AQN-N) to “speculative buy” from “hold” previously.
He said the change came after an analysis of the potential value of company’s portfolio and assets amid media reports of increased activist shareholder interest, particularly Starboard Value LP, and following its decision to abandon its acquisition of Kentucky Power.
David Berman: Algonquin walks away from Kentucky Power deal. What’s next for the stock?
“Based on various valuation methodologies applied to AQN’s businesses, we note that the Company’s current portfolio holds potential value above where the stock is,” said Mr. Baydoun. “We peg the value of AQN’s Power portfolio at approximately $9-10/share (including the Atlantica Sustainable Infrastructure stake [AY-Q, Not Rated]) and its Utility platform at $18-20/share, plus a further $5/share from organic growth. When eliminating corporate costs and net debt ($19-20/share), the remaining $13-15/share points to 15-30-per-cent upside for shareholders compared to the current share price.
“We believe that the potential value of AQN’s portfolio could be unlocked in different ways. So far this year, the Company has taken steps in the right direction to refocus its priorities on organic growth and strengthening the balance sheet (see here). With the Kentucky acquisitions now behind it, we see several potential paths forward for the Company: (1) a low but sustainable organic growth-focused capex plan, more
manageable return to shareholders, and executing on asset sales to reduce leverage (i.e., a slow turnaround); or (2) more aggressive asset monetizations to provide financial flexibility (e.g., accelerate deleveraging and/or finance growth); or (3) strategic entities get involved (activists/strategic investors) that could lead to additional strategic developments. Overall, we see a sharpened focus on stabilizing the portfolio, materially reducing leverage, and prioritizing organic growth as key near-term objectives. The potential involvement of a strategic investor could help unlock further shareholder value via improved execution and focus; although a capital injection (e.g., TA & BEP in 2019) would help reduce debt and/or fund growth, we believe that it could potentially be a net negative from a dilution standpoint (e.g., selling equity at depressed levels, or securing non-dilutive but high-cost hybrid capital – particularly as AQN has stated it does not need new equity financings through 2024) and governance perspective.”
He raised his target for Algonquin shares by $1 to $13. The average is currently $12.15.
“AQN offers investors a mix of growth and income with (1) a diversified business model (regulated utilities & non-regulated power), (2) healthy medium-term growth (5-8 per cent per year Adj. EPS and FCF/share growth potential), (3) an attractive dividend profile (5-per-cent yield, 80-90-per-cent long-term Adj. EPS payout target), and (4) upside from new growth initiatives (including M&A; excluded from estimates/valuation),” he said. ”With the Kentucky transaction out of the picture and the potential for additional strategic developments to emerge as new players get involved with the AQN story (activist shareholders or strategic investors), we have (1) updated our SOTP valuation on AQN and are increasing our price target ... We also see the potential for incremental strategic initiatives to unlock value at AQN; the remaining uncertainties related to its overall financial performance, portfolio leverage, and long-term earnings picture warrant a Speculative qualifier for now, in our view.”