Worth noting from rhis morning G&M Quite positive !
While its second-quarter results came in “soft,” iA Capital Markets analyst Naji Baydoun thinks Capital Power Corp.’s (
) growth initiatives “remain on track” and sees a “healthy” outlook, leading him to raise his recommendation to “buy” from “hold” in response to recent share price depreciation.
On Tuesday before the bell, the Edmonton-based company reported quarterly EBITDA of $327-million and adjusted funds from operations per share of $1.29. Both fell short of Mr. Baydoun’s estimates ($345-million and $1.63 cents) and the consensus projections on the Street ($350-million and $1.58). The misses were attributed to “weak wind resources and lower generation and availability due to outages at Genesee and Clover Bar during a period of higher power prices in the quarter.”
“Despite Q2/23 results and the previously disclosed delays to the Genesee repowering project schedule, management reiterated that CPX is trending above the midpoint of its 2023 financial guidance ranges for both EBITDA and AFFO of $805-865-million,” he said. “CPX also announced a 6-per-cent dividend increase (as expected).
“CPX’s ongoing organic growth projects remain largely on track; alongside the Q2/23 results, the Company announced that it had cancelled the addition of ~210MW of battery storage at Genesee (no longer required to operate the units at their baseload capacity), which removes $195-million of incremental capex that was previously associated with the Genesee repowering project. Management reiterated strong expected returns for the project as the removal of the storage solution helps offset the previously disclosed project cost increases.”
Seeing a “healthy project pipeline,” Mr. Baydoun maintained a $51 target for Capital Power shares. The average on the Street is $50.15.
“CPX offers investors (1) a mix of contracted and merchant cash flows, (2) long-term leverage to the Alberta power market, (3) some growth (low single-digit FCF/share growth through 2027), (4) an attractive income profile (6-per-cent yield, 6 per cent per year dividend growth through 2025, with an 45-55-per-cent payout), and (5) a discounted relative valuation versus IPP peers,” he said. “Despite CPX’s elevated exposure to thermal assets and its lower contracted cash flow profile, the Company’s continued success on new projects and contract extensions has helped it exceed its growth targets and could potentially support an improved growth profile. We are encouraged by CPX’s success in executing on its growth initiatives and the continued near-term strength in the Alberta power market (estimates updated to reflect higher pricing); even if we continue to see limited long-term valuation multiple expansion potential at this time, the recent share price pullback has made relative valuation particularly attractive. Overall, we now see a better entry point into CPX and are upgrading the shares.”
Elsewhere, others making changes include:
* CIBC’s Mark Jarvi to $47 from $49 with a “neutral” rating.
“Softer Q2 results temper the 2023 outlook, but CPX is still well positioned to hit guidance targets (tracking above the midpoints). Further, while the Genesee repowering and CCS projects have had some delays/challenges, commissioning/FID are in sight and returns remain attractive in terms ofpotential. CPX continues to focus on development, selective M&A and has options on funding (DRIP helps),” said Mr. Jarvi.
* ATB Capital Markets’ Nate Heywood to $47 from $46 with a “sector perform” rating.
“In the near-term, we expect Capital Power to continue investing heavily in growth initiatives, with a significant focus on the Genesee 1 & 2 repowering, accompanied by recent efforts on carbon capture and renewable projects in both Canada and the U.S.; however, we remain cognizant of recent inflationary cost pressures,” said Mr. Heywood. “Additionally, management has demonstrated its appetite for natural gas generation M&A with the recent Midland Cogen acquisition, an example of acquiring midlife assets with attractive contracting profiles. The Company distributes an attractive dividend yield of 6.1 per cent, supported by a modest 2024 payout ratio of 41 per cent (below the 45-55-per-cent target range), and is targeting 6-per-cent annual dividend growth through 2025. With a 2024 estimated EV/EBITDA of 6.3 times, we note that Capital Power is trading at a discount to the peer average of 10 times, although we attribute the discount to its exposure to thermal generation – a business line that may continue to see future investment; however, CCS investment could offer modest discount relief.”
* BMO’s Ben Pham to $46 from $47 with a “market perform” rating.
“CPX shares have underperformed peers this year (down 14 per cent vs. utility index down 1 per cent) largely due to capital cost inflation at Gen 1&2 (up 6 per cent), inability to capture the strong Alberta power market environment (hedges, unplanned outages), and funding concerns,” said Mr. Pham. “We believe the reinstatement of the DRIP and opportunity for partnerships partly relieves the nearterm equity overhang; however, capex inflation still persists (ie. 26-per-cent increase to Halkirk 2 newly disclosed and likely increase to the carbon capture project if sanctioned).”
* Scotia’s Robert Hope to $50 from $52 with a “sector perform” rating.
* TD Securities’ John Mould to $51 from $52 with a “buy” rating.
CAPITAL POWER CORP
39.59-6.74 (-14.55%)