On today’s TSX Breakouts report, there are six stocks on the positive breakouts list (stocks with positive price momentum), and 52 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a defensive stock that may resurface on the positive breakouts list as its share price is just 1 per cent below its record closing high of $25.77 reached on July 5. The stock is trading at a reasonable valuation with room for multiple expansion. As such, it has nine buy recommendations and a targeted total return of over 17 per cent.
The stock provides investors with stable monthly dividends with a current dividend yield of 4.7 and a conservative payout ratio. The security highlighted today is Northland Power Inc. (NPI-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based Northland Power is an international power producer. Given its international operations, the company is exposed to currency risks.
After the market closed on Aug. 7, the company reported second-quarter financial results that were just shy of expectations. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $194-million, up 6 per cent year-over-year but slightly below the Street’s expectations of $196-million. Management continues to guide to delivering adjusted EBITDA of between $920-million and $1.01-billion in 2019, up from adjusted EBITDA of $891-million reported in 2018, and free cash flow of between $1.65 and $1.95 in 2019.
The company has an attractive growth pipeline from its various projects.
First, in 2017, the company completed two offshore wind projects in Europe (Gemini and Nordsee) and is now nearing completion of its third offshore wind farm, its Deutsche Bucht (DeBu) project located in the North Sea, Germany. This project is expected to be completed by the end of 2019 and will add 269 megawatts of wind power to the company’s portfolio. Management is forecasting this project will contribute adjusted EBITDA of between EUR 165-million and EUR-185-million in 2020.
Second, at Northland’s Hai Long offshore wind project in Taiwan, management anticipates securing PPA’s (power purchase agreements) for the full project (744 megawatts remaining) by year-end.
Third, construction continues at the company’s La Lucha solar project in Mexico, which is expected to be completed in the second half of 2020.
Lastly, in September, the company announced its plans to purchase a 99.2 per cent interest in Empresa de Energía de Boyacá (EBSA), a Colombian regulated utility.
On a conference call held on Sept. 9, the president and chief executive officer Mike Crawley said, “We expect to generate about $100 million in adjusted EBITDA in the first year of ownership based on the current exchange rate. Both the rate base and adjusted EBITDA are expected to grow at a rate in excess of inflation over the next five years and to provide us with a perpetual income-generating asset to complement our portfolio of contracted power assets.” He added, “In EBSA, we are acquiring a high-quality asset to be our first entry into the regulated utility market. EBSA is the sole electricity distribution company for the department of Boyacá, a region located near the capital, Bogotá. It is essentially a monopoly business. The area of Boyacá is rich in natural resources and has a growing economy supported by agricultural, mining and large industry. It is also highly regarded as a very affluent area with GDP per capita above the national average. EBSA serves a population of 1.3 million residents across 123 municipalities on an exclusive basis and is one of the 10 largest electricity distributors in Colombia. The customer base numbers nearly 500,000 and is primarily comprised of residential customers, which are entirely regulated and roughly split between an urban and rural customer base.” The chief financial officer Paul Bradley quantified the future financial contribution anticipated from EBSA, “We expect the acquisition to generate on average mid-single-digit free cash flow per share accretion to Northland shareholders during the current regulatory period ending 2023, and the business forecasts indicate increasing accretion over the long term.”
Dividend policy
Northland pays its shareholders a monthly dividend of 10 cents per share, or $1.20 per share yearly, equating to a current annualized dividend yield of 4.7 per cent. The dividend has been maintained at this level since the beginning of 2018.
The company has a predictable revenue stream due to its long-term power contracts. As such, the dividend appears to be well supported. For the first six months of 2019, the free cash flow payout ratio was 65 per cent.
Analysts’ recommendations
There are 12 analysts that cover this mid-cap stock, of which nine analysts have buy recommendations, one analyst has a “sector perform” recommendation, and one analyst has a “sell” recommendation (Harshit Gupta at Accountability Research), and one analyst currently does not have an official recommendation.
The 12 firms providing recent research coverage on the company are: Accountability Research, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, Industrial Alliance Securities, ISS-EVA, National Bank Financial, Raymond James, RBC Dominion Securities, TD Securities, and Veritas Investment Research.
Revised recommendations
Analysts have been making minor adjustments to their target prices – all increases.
Earlier this week, RBC’S Nelson Ng lifted his target price to $28 from $27. Bill Cabel, an analyst at Desjardins Securities, raised his target price by $1 to $30.
In Sept., BMO’s analyst Ben Pham raised his target price by $1 to $30. ISS-EVA’s Anthony Campagna upgraded his recommendation to a “buy” from a “hold.” Canaccord Genuity’s David Galison hiked his target price to $29 from $28. Jeremy Rosenfield, an analyst at Industrial Alliance Securities, bumped his target price to $32 from $31. Rupert Merer, an analyst at National Bank Financial, increased his target price to $28 from $27.
Financial forecasts
The consensus EBITDA estimate is $972-million in 2019, up from adjusted EBITDA of $891-million reported in 2018, and forecast to rise to $1.2-billion in 2020.
Over the past several months, the consensus EBITDA forecast has decreased for 2019 but increased for next year. To illustrate, three months ago, the Street was anticipating EBITDA of $983-million in 2019 and $1.17-billion in 2020.
Valuation
According to Bloomberg, shares of Northland Power are trading at an enterprise value-to-EBITDA (EV/EBITDA) multiple of 10 times the consensus 2020 estimate, at a discount to its three-year historical average multiple of approximately 12 times, and at a discount relative to its industry peers.
The consensus one-year target price is $28.83, implying a potential price return of 13 per cent and a potential total return, which includes the 4.7 per cent dividend yield, of over 17 per cent. Individual target prices provided by 10 firms are as follows in numerical order: $23 (the low of the Street is from Harshit Gupta, an analyst at Accountability Research), $24.50, two at $28, two at $29, two at $30, $30.50, and $32 (the high on the Street is from Industrial Alliance’s Jeremy Rosenfield).
Insider transaction activity
Year-to-date, only two insiders have reported trading activity in the public market.
On Sept. 13, president and chief executive officer Mike Crawley invested approximately $100,000 in shares of the company. He purchased 4,140 shares at a price per share of $24.13, initiating a position in this account (RRSP).
Between June 3 and June 24, director and the company’s former chief executive officer John Brace sold a total of 800,000 shares at an average price per share of approximately $25.23 for an account in which he has indirect ownership (Brace Investment Holdings Inc.), reducing this account’s holdings to 623,626 shares. Net proceeds, not including trading fees, totaled over $20-million. In addition, on March 6, Mr. Brace sold 40,000 shares from his personal trading account.
Chart watch
While the share price has rallied over 17 per cent year-to-date, the stock has underperformed relative to its peers. The S&P/TSX utilities index is up 30 per cent year-to-date.
Over the past few months, the share price has been hovering in the mid-$20s. Looking at key resistance and support levels, the stock price has overhead resistance around $28, and after that, around $30. Should the share price retreat, there is strong technical support around $24, at its 200-day moving average.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.