Innergex Renewable Energy Inc.’s (
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US$310-million joint acquisition of the 60MW Curtis Palmer hydro portfolio in New York with Hydro-Qubec “could provide support for equity market valuation,” according to iA Capital Markets analyst Naji Baydoun.
Resuming coverage following the Aug. 17 announcement of acquisition under a strategic alliance formed in 2020, Mr. Baydoun said he sees the potential for double-digit free cash flow per share accretion and a “significant” reduction in its payout ratio, emphasizing it should alleviate investor concerns about the sustainability of Innergex’s dividend and “provide additional comfort that the Company can deliver both cash flow and income growth to shareholders.
“The acquisition will strategically expand INE’s hydro footprint and increase the hydro-based cash flows within the Company’s portfolio, which could provide support for equity market valuation,” he said. “Furthermore, the transaction is the first joint acquisition by INE and HQ, and represents a ‘proof of concept’ for the potential that the partnership can deliver in terms of further enhancing INE’s ability to source and execute on new growth opportunities.”
Maintaining a “buy” recommendation, Mr. Baydoun increased his target by $1 to $25. The current average on the Street is $24.33.
“We continue to like INE’s (1) high-quality, low-risk asset portfolio (more than 3GW net in operation,14-year weighted average contract term), (2) healthy FCF/share growth (6-8 per cent per year, CAGR2021-25), (3) healthy dividend (3-per-cent yield, albeit with a greater than 80-per-cent payout over our forecast period), (4) potential upside from organic development (7GW of prospects) and M&A, and (5) the support of the HQ strategic alliance,” the analyst said. “We believe that the 4-5-per-cent intra-day share price decline following INE’s Q2/21 results is unwarranted given the unchanged long-term outlook. We are increasing our price target to incorporate the Curtis Palmer acquisition.”
Elsewhere, Scotia Capital’s Justin Strong raised his target to $26.50 from $23.50 with a “sector perform” rating, while BMO’s Ben Pham increased his target by $1 to $24 with an “outperform” recommendation.
“We view the transaction as being 13-per-cent and 22-per-cent accretive on a FCF per share basis, in 2022 and 2023, respectively,” Mr. Strong said. “As a result, our estimate for FCF payout in 2022 decreases by 13 per cent to 97 per cent. The equity raise was priced at $19.40 per share and announced on August 18. Since that time the shares have appreciated 7.5 per cent. We see the shares as having more room to run in the short term. As such, and in line with our modeled accretion from the first full year of contribution from the assets (2022), we have increased our target price."
(from The Globe and Mail (9/7/2021)