GLTALongs. TD ratingAlgonquin Power & Utilities Corp. (AQN-N, AQN-T) US$8.62 | C$11.61 Q1 EPS In-line; Mulling Options for Unregulated Power Business
Event Algonquin reported Q1/23 results on May 11 before market open. Adjusted EPS of $0.17 matched both our forecast and consensus. Management reiterated the 2023 EPS guidance range and disclosed that the company has initiated a strategic review of its unregulated Renewable Energy segment. Impact: NEUTRAL
Algonquin is launching a strategic review for the unregulated power segment. This process is entirely separate from the ongoing Atlantica Sustainable Infrastructure (AY-N, not covered) strategic review; Algonquin owns 42% of Atlantica shares worth $1.3 billion at the current price. Management expects that the strategy for this segment, which could include divestitures, will be determined by August. We value Algonquin's operating non-regulated power portfolio at ~ $2.7 billion (net of allocated debt). We suspect this initiative was partly motivated by activist shareholders that have advocated for lower leverage and simplifying Algonquin's structure with a focus on the regulated segment.
Management reaffirmed its 2023 EPS target range of $0.55-$0.61. We expect relatively flat EPS in 2024 relative to 2023. Management previously cited a longterm "north star" EPS growth target of 5-8%, which we consider aspirational, given mid-term headwinds (rising effective tax rate, lower HLBV income, and share count increase related to green unit conversion mid-2024).
The core 2023 capital investment plan of $1.0 billion is unchanged even after exiting the Kentucky Power acquisition. Algonquin expects to spend $0.7 billion on regulated services (split between rate base maintenance and growth) and $0.3 billion on unregulated renewables. The portion earmarked for rate base growth (~$350 million) would represent a five-year low. The company finished Q1/23 with available liquidity of >$2.5 billion.
Our HOLD recommendation and US$9.00 target price are unchanged. We await details on the strategic review for the Renewable Power segment in three months.
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.