Raymond James While seeing valuations as “attractive,” Raymond James analyst David Quezada says a “shifting” rate backdrop has prompted a “tempered” view of power, energy infrastructure and sustainable energy stocks.
“With steadily moderating expectations with respect to rate cuts over the course of 2024, renewable power names have continued to languish, declining 5–20 per cent year-to-date while bouncing along at the low end of historical valuation ranges,” he said. “While sentiment remains challenging, we are yet to observe a meaningful deterioration in fundamentals with growing development pipelines, a steady flow of RFPs, and an attractive market for acquisition targets—all supporting what we consider to be a solid growth outlook across the renewable IPPs. At the same time, strong corporate demand for renewables globally continues to support rising average PPA prices, which have continued to trend higher in the US while remaining elevated in Europe. Despite these encouraging developments, we must acknowledge the shift in expectations with respect to rate cuts and the potential for a ‘higher for longer’ scenario. Reflecting this, we are moderating target prices across our coverage and generally taking a more judicious view with respect to our generally constructive stance on the space.”
In a report released Thursday, Mr. Quezada downgraded Northland Power Inc. to “outperform” from “strong buy” previously, citing the macroeconomic conditions and “uncertainty around ongoing management transitions.”
“We affirm our constructive stance on Northland Power as a function of strong potential growth based on execution of the company’s large-scale offshore wind projects,” he said. “We expect investors to remain focused on progress at each project and whether they remain on schedule/budget and see this as a focal point on the 1Q24 earnings call. Notably, a recent article in an offshore wind industry journal would appear to suggest that the Hai Long project is progressing on schedule. Of course, this constructive outlook is clouded by uncertainty with respect to senior management, with the company’s CFO role yet to be filled and CEO Mike Crawley set to depart the company by the end of September, which is consistent with the company’s recently announced management transition. In general, we believe NPI’s bench strength with respect to those directly responsible for key offshore construction projects is strong, and do not see C-suite turnover as creating challenges on this front. However, consistent with our more moderate view of valuation upside in the IPPs, a function of shifting expectations on rate cuts, as well as this lingering uncertainty in management, prompts our move.”
His target for Northland shares slid to $30 from $32. The average on the Street is $29.83.
Mr. Quezada also made these other target adjustments:
- Boralex Inc. ( “outperform”) to $38 from $40. Average: $39.
- Brookfield Infrastructure Partners LP ( “strong buy”) to US$32 from US$33. Average: US$28.35.
- Capital Power Corp. ( “market perform”) to $45 from $46. Average: $43.55.
- Polaris Renewable Energy Inc. ( “strong buy”) to $19 from $21.50. Average: $22.83.
“Among the regulated utilities in our coverage, there remains a distinct spread between companies reliant on asset sales to address stretched credit metrics (AQN, EMA) and companies with more breathing room on this front (FTS, H),” said Mr. Quezada. “Among these, we continue to highlight Fortis as a name that continues to trade at the low end of its historical valuation range while offering a highly diversified footprint, defensive attributes, and potentially incremental positive regulatory developments related to the Iowa ROFR issue and regulatory lag docket in Arizona. We also maintain a constructive stance on Altagas and see material upcoming catalysts (sale of the company’s stake in MVP and FID on the REEF LPG export facility), which we expect could prompt further upside, despite recent outperformance. Beyond this, we see each of AQN and EMA as offering a higher-return, higher-risk proposition, but we maintain a positive bias at this juncture given what appears to be increased activity around energy infrastructure M&A. We note each company has indicated news related to asset sales could arrive around mid-2024, and we see this as a key catalyst in each case and potential re-rating vs. peers, assuming valuations received are reasonable. In the case of Emera, we see potential for soft quarterly results given historically mild weather in Florida, however, we would expect news on asset sales could trump the impact of a backward looking weather-driven earnings miss.”