TAC Details

On-Track to achieve Clean Energy Transition: TransAlta Corporation (NYSE: TAC) operates as an electricity power generation company with the wind, solar and hydro assets located in Canada, the United States and Australia. TAC is in progress to achieve the 2022 milestone in reducing emission by more than 70% from levels seen in 2005. On January 31, 2021, the company announced the completion of the first of three planned phases of conversion of coal boilers to natural gas at its Sundance and Keephills power generation facilities in Alberta. Conversion significantly cut the carbon emission by about half from ~1.05 tonnes. The boiler conversion at Sundance facility attracted an investment outlay of $85 million with nearly 700 jobs being created across Canada.  TAC will complete CTG conversion at its Keephills unit-2 my mid-June 2021, followed by unit-3 by mid-December 2021.

Q3 FY20 Update: TAC reported lower production at 17,276 GWh in nine months ending September 2020 as compared to 20,918 GWh units mainly due to planned outage at Alberta Thermal for Sundance Unit 6 and Sheerness unit in the first quarter of 2020. Revenue was affected by weak pricing and lower demand owing to COVID-19. Commencement of wind and solar projects and increase in operations and maintenance costs deteriorated EBITDA margin to 35.6% in Q3 FY20 (vs. 52.3% in pcp). Diversified asset base benefited TAC with stable free cash flows at $306 million during year-to-date September 2020, an increase of 22% from pcp. Liquidity was supported by a cash balance of $270 million as of September 2020 and $1.1 billion available under various funding facilities.

Financial Highlights (Source: Company Reports)

Outlook: The company’s first three-quarters performance was in-line with the expectations. It is expecting lower power prices to prevail in Alberta due to low oil prices and the impact created by the pandemic. The management is expecting to achieve EBITDA in the lower-end range of the projected $925 million to $1,000 million for FY20. Free cash flows at the mid-point of the estimated $325 million to $375 million. The Board of TAC has approved a 6% increase in dividends for the quarter ending March 2021. The quarterly dividend payment of $0.045 per share represents an annualized dividend of $0.18 per share (an increase of $0.01 per share).

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: TAC has rallied recently with a 3-month and 6-month returns of ~+42.99% and ~+43.64%, respectively. The stock touched a new 52-week high price of $9.41 on February 16, 2021. On the technical front, TAC broke the resistance level of ~US$9.32. It has a support level of ~US$8.86. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price with a correction of high single-digit (in percentage terms). We believe that the stock might trade at a slight discount as compared to its peer average EV/Sales (NTM Trading multiple) as the company’s pricing for power is dependent on crude oil movement and influenced by regulatory intervention. For relative valuation, we have taken peers such as Orion Energy Systems Inc. (NASDAQ: OESX), First Solar Inc. (NASDAQ: FSLR), Duke Energy Corp (NYSE: DUK), to name a few. Considering the recent run-up in stock prices, decent returns, current trading levels, decline in EBITDA margins, and key risks associated with the volatile crude oil prices, we suggest investors to book profits and give a “Sell” rating on the stock at the current market price of US$9.380 on 16^th February 2021.

TAC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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