Independent power producers are “attractive at current levels,” according to Desjardins Securities’ Brent Stadler, despite reducing his target prices for stocks in the sector ahead of third-quarter earnings season given the current macroeconomic environment.
“We are roughly in line with consensus for a majority of our coverage names,” he said. “Our best idea heading into the quarter is CPX, where estimates are up almost 25 per cent since we first communicated that 3Q would likely be another strong quarter; while consensus looks more reasonable, we believe there is still some upside potential. We also expect that NPI could beat the Street by almost 5 per cent.”
“We have increased our discount rates by 50 basis points, which is the primary driver of our targets declining by 7 per cent on average. We are aligning our discount rate with the consensus view that the US 10-year bond yield could be 3.50 per cent in 12 months’ time (from 4 per cent today). However, we continue to see assets transact at levels that imply upside vs our valuations, which could suggest that buyers are paying a lower IRR or ascribing more value to the tails or growth potential. We would be buyers in the space on (1) a likely lower US 10-year yield in 12 months, (2) continued strong demand for renewables, and (3) an ever-expanding TAM.”
Mr. Stadler’s target changes are:
* Algonquin Power & Utilities Corp. (“buy”) to US$14.50 from US$15.50. Average: US$14.33.
* Brookfield Renewable Partners LP ( “hold”) to $48 from $50. Average: $53.69.
* Boralex Inc. (“buy”) to $48 from $52. Average: $48.69.
* Capital Power Corp. ( “buy”) to $55 from $58. Average: $51.38.
* Innergex Renewable Energy Inc. (, “hold”) to $18.50 from $20.50. Average: $20.92.
* Northland Power Inc. ( “top pick”) to $49 from $54. Average: $48.71.
* TransAlta Renewables Inc. ( “hold”) to $17 from $18.50. Average: $17.35.
“We are sticking to our guns and maintaining our ratings. NPI is our Top Pick, while BLX and CPX are our preferred names. We also see AQN’s valuation as attractive,” the analyst said.