Equity Research Model

Brookfield Renewable Partners L.P. (Q1/19)

Equity Research

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(all currencies are in CAD$)

Event: Q1/19 Adjusted EBITDA of C$611 million was slightly below Modelyze forecast of $628 million. Actual generation on a proportionate basis was 8% above LTA with hydro and wind and hydro generation above forecast. FFO per LP unit of $0.73 was above Modelyze forecast of $0.5. This represents a QoQ increase of 13% and YoY growth of 18%. 2019Q1 was a strong quarter from an operational perspective.


Highlight: Brookfield continued advancing its local and global portfolio inorganically by investing in Canada and India. BEP increased its ownership in Transalta over the next two years from 5% to 9% through the purchase of redeemable preferred shares with a quarterly 7% dividend rate and exchangeable debentures with an annual 7% interest rate. This represented a $750 million investment in Transalta convertible securities in two tranches ($350 million in May 2019 and $400 million in October 2020). BEP also entered into an agreement to acquire two wind farms totalling 210 megawatts in India for $70 million. The wind farms are high quality operating assets with a 25 year power purchase agreement with credit-worthy utilities. Modelyze’s valuation includes the realisation of these investment opportunities. Organically in Brazil and Columbia, BEP has been lengthening the power contracts to take advantage of the electricity price volatility and the upside. BEP also commissioned 19 megawatt hydroelectric facility in Brazil from its development pipeline. Another 134 megawatts of hydroelectric, wind, solar and storage Projects are under construction and a further 220 megawatts of re-powering projects in regions with significant renewable energy policies such as California, New York and Hawaii is under assessment.

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 3.57% WACC and 2.35% term growth of the general utility sector, Modelyze arrived at a target price of $46.27/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 such as Transalta Renewables, Capital Power, Algonquin Power, Northland Power, and Fortis Inc. 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 Partners 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 to this extent; 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 Q1/19. Under the above assumptions and an implied (EV – LTI)/EBITDA multiple of 16.75x, the forecasted target price is $46.27 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$46.27/share.

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Brookfield Renewable Partners L.P.

(Action Note)

Contact Modelyze for an overview of the model.

(all currencies are in CAD$ unless otherwise noted)

EventOn Jul 3, 2019 Brookfield Renewable Partners together with its institutional partners and KKR announced a definitive agreement to enter into a 50/50 partnership for acquisition of one of the largest global solar independent power producers, X-Eilo in Europe. Brookfield made a total commitment of US$500MM equity (US$961.15MM enterprise value) to the joint partnership and the deal is expected to close in the fourth quarter of 2019. The transaction allows Brookfield to expand its solar footprint across the globe and further diversify its asset portfolio.

Highlight: Through acquisition of X-Eilo, Brookfield adds a meaningful growth leaver in its renewable energy business and invests in a high quality portfolio of operating assets given X-Eilo’s near term construction plans across solar markets in Spain, United States, Mexico, Chile and Japan. The partnership is keeping X-Eilo experienced management on board allowing them to further expand the operations while tapping into KKR and Brookfield’s global network, financial and operational expertise. It is well worth noticing that joint ventures are commonly used for investments in foreign and emerging countries for risk reduction and diversification purposes.

Valuation: Modelyze accounted for 50% joint ownership of X-Eilo via the equity method of accounting. Using implied forward power industry averages for EV/2019F EBITDA of 12.53 x and EV/2020F EBITDA of 11.18 x, share of earnings from equity-accounted investments over the forward eight quarters as of 2019/Q4 were adjusted, given the purchase price of US$500MM (C$653MM) and enterprise value of US$961MM (C$1,255MM). It is assumed that the earnings are distributed evenly across the annual quarters and the acquisition is financed with cash and the available credit facility. Consequently, Modelyze raised the target price to C$48.33 from C$46.27. Term growth rate and beta of th stock were also updated in this note, leading to a WACC of 4.03%.

Conclusion: Modelyze believes the partnership will further expand Brookfield’s reach in the global solar market by diversifying the renewable asset portfolio and investing into the global renewable energy transition. Given the depth of X-Eilo’s management team, its operating capacity and the developmental pipeline, the acquisition is viewed quite favorably leading to long term growth and increased shareholder returns.  

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