incomedreamer11 wrote: While he’s taking a “positive view” on Algonquin Power & Utilities Corp.’s (AQN-N, AQN-T) sale of its renewables business for up to $2.5-billion, Raymond James analyst David Quezada said he is “surprised by the cautious tone struck by management as to the outlook for the regulated business; where the company intends to curtail capex in the near-term while seeking to reduce regulatory lag.”
“This prompts a shift from our prior expectation of the renewables sale unlocking regulated growth,” he added. “We also believe the magnitude of the dividend cut was larger than expected. Given this uncertainty, we believe investors will ascribe a lower multiple to AQN’s remaining utility business.”
That led him to lower his rating for the Oakville, Ont.-based company to “market perform” from “outperform” on Monday.
Mr. Quezada thinks the sale to New York-based LS Power was in a price range largely expected by the Street and investors were expecting a dividend reduction. However, he thinks “the magnitude of the 40-per-cent reduction may have taken investors by surprise.”
“The company is now targeting a 60–70-per-cent payout ratio going forward, in line with most U.S. utility peers,” he added. “We believe a more modest payout ratio is a prudent move; however, we expect this weighed on AQN shares on Friday.”
Seeing the company’s results as largely “an afterthought,” he cut his target for Algonquin shares to US$7 from US$7.75. The average target on the Street is US$6.54, according to LSEG data.
Elsewhere, Wells Fargo analyst Neil Kalton lowered Algonquin to “equal weight” from “overweight” with a US$6 target, down from US$8.50.
“AQN’s conservative approach may be prudent, but, in our view, share price improvement could be a grind,” he said.
Mr. Kalton added: “It is hard to argue with the BOD’s desire to put AQN on firmer financial footing for the long-term via a sensible payout ratio (60-70 per cent of projected core EPS power) and a focus on debt reduction vs. share repurchases. However, the outcome is contrary to the prior messaging that AQN was not selling the non-regulated assets out of a position of total weakness. And that the company would not necessarily move forward with the sale if the (already reduced) dividend was at risk.
“Given the shift in the strategic messaging and the revelation that the regulated operations are in worse shape than previously thought, we think the 12.5-per-cent share price decline on 8/9 (vs. flat for the S&P Utes) is warranted. We also think the relative valuation is fair (10-per-cent P/E multiple vs. Regulated peers on our 26E EPS).”
Other analysts making target adjustments include:
* CIBC’s Mark Jarvi to US$6 from US$7 with a “neutral” rating.
“The sale of the renewables business and Atlantica stake should bring more clarity, simplicity and stability over time, while the dividend cut should provide more financial flexibility. That said, the outlook for the pro forma business is underwhelming, cloudy and warrants conservatism for now. Greater visibility on a path to improved utility earnings and more activity on a buyback could create upside,” said Mr. Jarvi.
* Desjardins Securities’ Brent Stadler to US$5.25 from US$5.50 with a “hold” rating.
“2Q results provided the anticipated conclusion to the renewables sale and a 40-per-cent dividend cut; we have reset our expectations,” he said. “In the next few years, AQN is moving to a capital-light growth model as it seeks recovery on US$1-billion of investments and completes a number of pending rate cases. On the new dividend, AQN expects the optimized portfolio run rate to be closer to a 60–70-per-cent payout, which implies EPS of US.37–0.44, potentially more, achievable in 2026–27.”