CIBCHave a $42.00 target. GLTA
EQUITY RESEARCH
October 15, 2024 Company Update
BORALEX INC. CLASS A
On The Right Path—Investor Meeting Highlights
Our Conclusion
We recently hosted institutional investor meetings with Boralex (BLX)
management, including CEO Patrick Decostre and CFO Bruno Guilmette. Our time with management and discussions affirmed our view that BLX remains one of the best-positioned companies for the long run, continues to deliver on strategy and remains a top pick in our coverage. BLX remains Outperformer rated and we highlight our key takeaways from the meetings below.
Key Points
Strengthening Organic Outlook. BLX’s share price performance in the last
couple of years doesn’t reflect the improving organic outlook, in our view.
The breadth of growth opportunities, including more regular RFPs across its
core markets (plus the expanding Corp. PPA market), should enable organic
growth to accelerate through the back half of this decade. BLX has come up
empty on some recent RFPs in NY and the U.K.—we believe criteria in
recent RFPs may have limited BLX, and future RFPs will present good
opportunities for BLX to secure more contracts. While BLX may fall short of
its 2025 target, it has likely hit on the organic growth component of is plan. In
fact, when looking out to 2030, BLX management noted that previously it
expected see a 70/30 organic/M&A driven growth mix, but now sees organic
growth likely comprising 90% of its growth. Further, returns have held and
many times BLX is exceeding its 10%-12% levered IRR target. Finally,
having all its team incentivised on AFFO/sh ensures alignment and continual
focus to optimizing existing assets (not just chase MWs and EBITDA).
M&A Potential Still There. BLX has not delivered on material M&A deals
over the last few years. Two plus years ago deals were too rich; now deals
are at more palatable valuations. However, BLX has raised its return hurdles
and doesn’t want funding of M&A to impair its ability to fund attractive organic
growth (i.e., share price and valuations have not been in a place to allow
BLX to raise equity to fund deals). In our view, investors should like that, as it
shows discipline. Nevertheless, we believe BLX continues to explore M&A
with a focus on the U.K. and the U.S., where its relative scale is small and it
could enhance its presence for long-term success.
Remains Well-positioned On Funding. BLX can fund organic growth for
12-18 months given existing and retained cash. Asset sales (like the very
well-timed sale of a 30% stake in France) could help push out that window.
Going forward, we believe asset sales will be a bigger part of the funding
solution for BLX, but it’s unclear if BLX will formalize a funding mix when it
gives an updated medium-term outlook (likely in mid-2025). If and when BLX
does issue equity, we do believe it will be to enable higher AFFO/sh growth.
Finally, corporate debt remains another medium-term funding option.
Valuation Update: BLX currently trades at 12.0x EV/EBITDA (on 2025E) vs.
a 5-year avg of 12.1x. Further, BLX trades at 0.83x P/NAV (vs. peers at
0.85x) and implied cost of equity of 10.3% (peers at 10.9%). Given the quality of the business and its growth potential, we believe BLX is undervalued.