Equity Research Model

Brookfield Renewable Partners L.P. (Q3/18)

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(all currencies are in CAD$)

Event: Q3/18 Adjusted EBITDA of $494 million was above Modelyze forecast of $426 million mostly due to share of cash earnings from equity accounted investments. Actual generation on a proportionate basis was 1% above LTA with Hydro and Solar generation above and Wind generation below forecast. FFO per LP unit of $0.34 was below Modelyze forecast of $0.66. This represents a QoQ decline of 40% and YoY growth of 15%.

 

Highlight: Brookfield advanced its global portfolio in Europe by commissioning a 28 MW wind farm in Ireland, 19 MW of wind in Scotland, 49 MW of small hydro in Brazil and 60 MW of pumped storage in US. Additional advancements through permitting, contracting and acquisitions have been staged. BEP continued its capital recycling strategy with the sale of 25% interest in three Canadian hydroelectric assets as well as wind and solar portfolios in South Africa.  BEP expects to complete $1 billion of asset sales with net proceeds of $850 million by FYE 2018 of which over $500 million of the initiatives is executed. As a result of the Canadian asset sales, BEP has internalized energy marketing capabilities in North America which has led to favorable terms with respect to the power purchase price per MWH of the Ontario portfolio and eliminated the marketing fees paid to BAM.

Valuation: BEP.UN is valued using both intrinsic (DCF) and relative (comp) valuation. The purpose of a valuation dictates the best method of valuation for this company. BEP is a value stock and the company operates in the infrastructure space w/ long term assets, high depreciation, capex and leverage. Since Brookfield Renewable is considered a long term investment in a portfolio of stocks, the method that dictates the value of this company is the intrinsic approach accounting for its risk, growth and cash flow characteristics. Using a 4.83% WACC and 2.35% term growth of the general utility sector, Modelyze arrived at a target price of $46/share. From the perspective of relative valuation, the best multiple used to value this highly levered infrastructure firm is EV/EBITDA. It is advised to consider the impact of long term investments (LTI) and equity accounted investment in the value component of the multiple in the numerator by choosing (EV less LTI) to correct for this discrepancy across comparable firms. The comp group includes firms operating in the Canadian power and utility sector. Looking at the multiples across these firms, BEP.UN is clearly trading at a premium to the mean multiple (including the target firm). Brookfield Renewable is an acquisitive company and BEP.UN revenue model not only includes contracted and merchant sales, but also a capital recycling strategy in which the firm buys cheap assets and sells assets with high valuations. None of the companies in the comp group pursue such strategy; hence Modelyze applied a premium over the average (EV – LTI)/EBITDA multiple to correct for this discrepancy. In order to pick the right premium, the Implied EV arrived from intrinsic valuation is chosen as the value component of the numerator, and the premium is calculated over the mean of the comparable company multiples which includes the target company. This premium is determined at 63% for Q3/18. Under the above assumptions and an implied (EV – LTI)/EBITDA multiple of 17.9x, The forecasted target price is $46 using the intrinsic and relative valuation. Modelyze recommends a Buy for this stock as a long term investment opportunity.

Conclusion: Given the continued global expansion and successful capital recycling strategies, FIA maintains a Buy recommendation at a target price of C$46/share.

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