Algonquin: Hold Your Horses Now (NYSE:AQN)

Algonquin Energy & Utilities Corp. (NYSE:AQN) has outperformed the S&P 500 (SPX) (SPY) considerably since our earlier replace in January. We argued again then that dividend traders probably bailed out after the corporate introduced its 40% dividend minimize. Nonetheless, we additionally mentioned why AQN’s value motion suggests the market had probably priced it in, forcing these earnings traders to flee on the lows.

Accordingly, AQN recovered greater than 25% from its December lows (in price-performance phrases) via this week’s highs, beautiful bearish traders. We imagine it is important for traders to evaluate why we highlighted its reward/danger was engaging again in late December and January, regardless of the huge pessimism.

With a 10Y complete return CAGR of 5.8%, the restoration is critical for these bottom-fishers who appropriately anticipated a mean-reversion alternative.

Algonquin’s FQ4 release was higher than anticipated. Nonetheless, traders ought to observe that its adjusted EPS of $0.22 (Vs. Q3’s $0.11) was lifted by “positive factors on asset gross sales within the Renewable Vitality Group.”

Accordingly, Algonquin posted $277M in money proceeds on the sale of its US amenities and C$108.6M on its Blue Hill Wind Facility (leading to about $316M in complete proceeds). As such, the corporate delivered a acquire on disposition of $62.8M.

Notably, the corporate maintains that it is on observe to file asset gross sales of $1B in 2023. Nonetheless, traders ought to observe the estimated positive factors/losses on disposition in 2023 aren’t included in its midpoint adjusted EPS steering of $0.58 for FY23.

Furthermore, its midpoint steering signifies that Algonquin anticipates a 16% YoY decline in its adjusted EPS relative to final 12 months’s $0.69 metric. With that in thoughts, we imagine the corporate’s asset recycling technique will stay an ongoing part of its enterprise technique, which might result in volatility in its adjusted EPS trajectory.

Algonquin recorded complete belongings of greater than $17B as of the top of 2022. Therefore, the corporate believes it has important alternatives to unlock the worth of its belongings transferring forward. CEO Arun Banskota articulated:

[We have] over $17 billion value of belongings in our portfolio, the $1 billion [asset sales] taken in context is a reasonably small quantity. We have now fairly various completely different optionalities for that $1 billion of proceeds. As you realize, we simply introduced within the fourth quarter, the renewable asset sell-down with proceeds within the vary of $316 million. That’s a part of our ongoing technique on the renewable aspect of the enterprise. And with our acquisitive historical past over the various years, we actually have various optionalities to get to that $1 billion, and we actually will present you extra shade with time. (Algonquin FQ4’22 earnings name)

Importantly, administration highlighted that traders should wait till April 26 to get readability over its acquisition of Kentucky Energy Firm. The corporate didn’t supply extra steering over how the regulatory approval would pan out, although it filed a brand new utility with the FERC on February 15. Regardless of that, its acquisition remains to be “topic to the satisfaction or waiver of sure circumstances precedent.”

For traders, what do they should think about? Word that the corporate highlighted that its estimated CapEx is about $3.6B for 2023, together with the $2.6B acquisition of Kentucky Energy.

Administration articulated that the corporate nonetheless “has extra progress alternatives on each the regulated and renewable sides of the enterprise,” even when the approval was not granted.

Nonetheless, we imagine the uncertainty might preserve dip patrons from including extra positions from right here after a exceptional restoration from its December/January lows, normalizing its valuation.

AQN bottom-fishers astutely ignored the huge pessimism on the finish of final 12 months, because it shaped a bear entice or false draw back breakdown. It then staged a formidable restoration over the previous three months, as seen in AQN’s long-term chart above.

Its valuation has additionally normalized. Accordingly, AQN’s NTM EBITDA a number of of 11.2x is in keeping with its friends’ median of 11.3x (in accordance with S&P Cap IQ). Additionally, with the minimize in its dividend, its NTM dividend yield of 5.5% is way much less engaging now.

Its blended truthful worth estimates recommend a possible 16% undervaluation. Nonetheless, we assessed that its near-term upside is probably going mirrored in its imply reversion.

Given important uncertainty over its pending acquisition and enterprise technique, we urge traders to account for a better margin of security to account for appreciable execution dangers.

With that in thoughts, we imagine our thesis has performed out accordingly and, subsequently, is suitable for traders to contemplate transferring to the sidelines from right here.

Score: Maintain (Revised from Purchase).