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Opinions Lyle Stein
Transalta CorpTA.TOCOMMENTDec 30, 2015
Lyle SteinStock price when the opinion was issued
As of Jun 19, 2026. Market Open.
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On the surface, it looks like they will generate a lot of free cash flow per share, but their debt is huge and they plan to spend around $3.5 billion through 2028. Can they increase their dividend? What if interest rates go up a lot in coming years? The dividend, though just increased, remains low. The PE is not cheap enough.
Excellent performance the past year given tough year with rising interest rates.
Current share price undervalued - should be $15 or $16.
Strong business that will continue to own shares in.
Renewable business roll-up not a concern.
Robert Lauzon
RNW is a yield proxy, and those have fallen, with decent yield and nice EPS growth. Parent company is taking it over, pending approval. The real question is what do you do with TA? Transaction looks slightly dilutive. Long term, bigger flow in a simplified structure, which could lead to a higher valuation.
Backdrop for TA is really supportive, solid balance sheet, compelling free cashflow yield of 15%. Could be synergies. He likes TA post-closing.
A operates as a renewable energy producer, and is now trading at 19x times' Forward P/E.
In the last five years, sales grew around 5% on average.
The balance sheet is quite leveraged, with net debt of $3.3B.
Total debt is around 3.8x times trailing twelve-month cash flow of $900M, and cash flow declined around -11% compared to $1.0B last year.
Based on consensus estimates, sales are expected to decline by -15% in 2023.
As sales and EBITDA are expected to decline in the next few years, TA is trading at quite a premium multiple to peers, we think there are better opportunities in the market such as ENB, BEP.UN.
TA has also in the past had to cut its dividend, which we never like when considering an income stock.
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Its BV has fallen from $14 per share to $2 per share. The P/E is 28.6 and the yield only 1.8% which is low for utilities. This is because they are using money for buying back stock which should be paid out to shareholders. He doesn't give management much credit. As a rule he feels that buybacks may do a good job but the BV per share goes down over the years. Editor's Note - there was some discussion on this, to be continued later.
Robert Lauzon
Brian Madden
This and its sister company Canadian Utilities (CU-T), have been hit for a variety of reasons, Alberta being the biggest. Everybody hates this one. A massive yield of 15%. He uses 5% as a sign as to when the flags go up. 6% means being very, very careful. Anything over 6% needs investigation. One of the issues they have are balance sheet questions. How can they continue to expand, how can they meet demands for working capital? The dividend is an easy thing to sacrifice in the near term. They have pushed much of their assets into Transalta Renewables (RNW-T). Analysts are saying that the value of Transalta Renewables is now equal to the price of Transalta, plus you get all the coal assets, plus you get some Hydro assets. If you can get around the dividend getting cut, the asset play looks quite interesting.