Equity Research Model
Brookfield Renewable Partners L.P. (Q4/18)
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(all currencies are in CAD$)
Event: Q4/18 Adjusted EBITDA of C$584 million was below Modelyze forecast of $709 million mostly due to net income to non-controlling interest. Actual generation on a proportionate basis was 10% above LTA with hydro and wind and solar generation above forecast. FFO per LP unit of $0.65 was above Modelyze forecast of $0.43. This represents a QoQ increase of 92% and YoY growth of 40%.
Highlight: Brookfield advanced its global portfolio organically in Columbia and Brazil by extending the contract profile at premium pricing and inorganically by investing $420 million in TerraForm Power for acquisition of wind and solar portfolios in Spain, commissioning development projects in Brazil and Ireland, acquiring wind facilities in northern Ireland and continuing with the construction of 151 MW of hydroelectric, pumped storage and rooftop solar development projects. On March 25, 2019 Transalta announced BEP’s $750 million investment in its assets in two tranches (2019 Tranche and 2020 Tranche) through the purchase of redeemable preferred shares with a quarterly 7% dividend rate and exchangeable debentures with an annual 7% interest rate; the exchangeable/redeemable units are convertible to equity ownership in Transalta’s Alberta Hydro Assets. Over the next two years BEP’s ownership in Translata increases from 4.8% to 9%. Modelyze’s valuation includes the realization of Translata’s investment opportunity. BEP also entered into an agreement to sell 237 MW of wind and solar facilities in South Africa, Thailand and Malaysia for $300 million that are expected to close in the first half of 2019.
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 the portfolio, the method that dictates the value of this company is the intrinsic approach accounting for its risk, growth and cash flow characteristics. Using a 3.66% WACC and 2.35% term growth of the general utility sector, Modelyze arrived at a target price of $45.17/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 power and utility sector in Canada. Looking at the multiples across these firms, BEP.UN is clearly trading at a premium to the mean multiple (including the target firm). Brookfield Renewables is an acquisitive company and BEP.UN revenue model not only includes contracted and merchant sales, but also its 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 numerator, and the premium is calculated over the mean of the comparable company multiples which includes the target company. This premium is determined at 36% for Q4/18. Under the above assumptions and an implied (EV – LTI)/EBITDA multiple of 17.25x, the forecasted target price is $45.17 using the intrinsic and relative valuation. Modelyze recommends a Buy for this stock as a long term investment opportunity.
Conclusion: Given the continued domestic and global expansion and successful capital recycling strategies, Modelyze maintains a Buy recommendation at a target price of C$45.17/share.
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