Equity Research Model
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Brookfield Renewable Partners L.P. (Q4/19)
Never Failing to Deliver on the Corporate Strategy… - Target Price: C$55.67; Recommendation: Buy; Risk: Low
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(all currencies are in US$ unless otherwise noted)
Event: Brookfield Renewable Partners L.P. (“BEP.UN” or “BEP”) reported Q4/19 results on Feb 6, 2020.
Highlight: Adjusted EBITDA of US$444 million and FFO of $170 million were below Modelyze Investments forecast. Actual generation on a proportionate basis was 9% below long-term average (LTA) with lower than expected hydro generation across all regions and lower than expected wind generation in North America and Europe; solar generation however was 19% above LTA. FFO per LP unit of US$0.55 was below our forecast of $0.79. This represents a 28% increase relative to Q3/19 and a 15% decrease relative to Q4/18. On an annual basis however, 2019 FFO per unit represented a 13% increase with respect to 2018. Q4/19 was a moderate quarter from an earnings and cash flow perspective and strong from an operational efficiency and balance sheet perspective. In January 2020, BEP announced a non-binding all share proposal to acquire the outstanding shares of TerraForm Power other than the 62% owned by BEP and institutional partners to simplify the combined corporate structure. This contributes further to BEP position as one of the largest public pure-play renewable power companies in the world. BEP also closed the acquisition of X-Elio, a leading solar developer, signed agreements for acquisition of 14 solar development projects in Brazil, acquired 44 megawatts of PV solar assets in Spain through its ownership in TerraForm Power and signed an agreement to acquire 100 megawatts of solar CSP in Spain close to TerraForm CSP plants. In January 2020, BEP board of directors approved a 5% increase of 2020 quarterly distribution to an annual distribution per unit of $2.17.
Though Q4/19 generation was below LTA and revenue was 9% lower than Q4/18 numbers, overall 2019 was a positive, resilient year for BEP. With a long term perspective and a diversified portfolio of assets geographically and technologically, BEP never falls short of delivering on its corporate strategy: to turn the capital around in the business quickly and sell down interests in assets with strong cashflows to financial investors who are looking for stable, coupon like yields in public and private markets. Historically, the capital deployment at BEP has been 80% M&A and 20% development focused. This quarter, BEP continued its endeavors by completing the acquisition of X-Elio and adding 970 megawatts of operating assets and 6,000 megawatts capacity to the global construction and development pipeline, acquiring 44 megawatts of PV solar assets in Spain, and signing agreements to acquire Spanish solar assets with 100 megawatts capacity and Brazilian solar assets with 428 megawatts capacity, all of which are expected to close in 2020Q1. The stock deal proposal to acquire the 38% outstanding shares of TerraForm (“TERP”) in January 2020 is expected to create value for investors through simplification of corporate structure and creation of a larger renewable asset portfolio for the company. With successful completion of the deal, BEP will own 68% of the issued and outstanding shares of TerraForm Power. The proposal is made at a BEP-to-TERP exchange ratio of 0.36, with an 11% premium to TERP trading price as of Jan 13, 2020. The deal is announced to be immediately accretive to Brookfield Renewable shares. The sustainable 5% increase of BEP distribution for the coming quarters is a sure sign of increased earning power in the long term. BEP funding strategy for growth and further investments is reliant on BEP’s additional debt capacity, preferred shares issuance to Canadian and US markets while maintaining an investment grade balance sheet and de-risk mature asset sales at a low cost of capital. With strong marketability capabilities in Latin America and North America, BEP is expected to commercialize assets quickly. Management confidently believes company shares are too valuable to be issued for future reinvestment needs or equity raise. Though this could save investors from dilution, it could potentially be a sign of weak corporate governance. From a liquidity standpoint, BEP finished the year with $2.7 billion available liquidity, extending its debt duration to 10 years and reducing annual interest costs through securing lower rates.
Valuation: Modelyze Investments relied on intrinsic valuation accounting for BEP’s risk, growth and cash flow characteristics to arrive at a target price of US$55.67. Given the market conditions, geographical and technological diversificaition and debt characteristics of BEP, a 4.68% cost of capital up until 2025, 2.5% term growth rate and a 3.71% term cost of capital were chosen. Modelyze Investments used comprehensive analysis of North American power and utility companies with respect to their size, leverage and fundamental drivers such as risks and profit margins to arrive at the most suitable comparable companies. BEP comp group includes TransAlta Renewables, Capital Power Corp., Algonquin Power, Northland Power, Fortis Inc., Hydro One, Canadian Utilities, Emera Inc., Atco and AltaGas. BEP is currently trading at the 90th percentile of comparable EV/EBITDA multiples (enterprise value excludes long term investments to control for differences) and at a premium with respect to the group median. No other comparable company has pursued capital recycling to the extent of Brookfield Renewable Partners successfully. BEP’s successful execution and its size potentially contribute to premium valuation multiples. Modelyze Investments maintains its Buy recommendation at a LOW risk rating and target price of $55.67.
Risk to Target Price: Key risks to target price include variable generation and extreme weather events, commodity price risk, contracting risk, interest rate risk, counterparty credit risk, exchange rate risk, regulatory and political risk, acquisition and integration risks, equipment failure, inability to refinance at favorable terms, inability to commercialize assets in a timely manner at favorable rates, and ownership and control by BAM (60% ownership) contributing to corporate governance issues.
Conclusion: Modelyze Investments believes BEP has maintained its focus on sustainable distribution growth of 5% – 9%, it has lowered its distribution payout ratios in 2019 with respect to 2018 and is closer to 70% target rate, and has met the long term (over three years) total return objective of 12% – 15%. With an expectation of mid to low teen returns on asset sales, given the continued domestic and global expansion and successful capital recycling strategies, Modelyze Investments maintains a BUY recommendation at a target price of US$55.67/share with a LOW risk rating.
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