STOCKS to FOLLOW:
posted on
Apr 05, 2014 07:31PM
We may not make much money, but we sure have a lot of fun!
Analysis by
Jeremy Rosenfield
CFA, Analyst
Rating | Buy–Average Risk | |
12-month target | $15.00 | |
Symbol | BLX | |
Exchange | TSX | |
Sector | Utility & Power | |
Recent price | $13.00 | |
Potential total return |
19% | |
52-week range | $9.76-13.47 | |
Shares outstanding | 38m | |
Market capitalization | $487m | |
Year-end | Dec-31 | |
EBITDA | 2014E 2015E |
$140m $167m |
FFO per share | 2014E 2015E |
$1.70 $2.00 |
P/FFO | 2014E 2015E |
7.6x 6.5x |
FCF per share | 2014E 2015E |
$0.72 $1.00 |
Dividend per share | $0.52 | |
Dividend yield | 4.0% | |
Payout ratio | 2014E 2015E |
72.7% 52.0% |
Adjusted debt/total capital | 62.1% |
Boralex Inc. (BLX) is a fast-growing renewable power producer and project developer. The company owns and operates more than 800MW of installed wind, hydro and biomass capacity (over 600MW net owned by BLX) located in Canada, the United States and France. As a project developer, BLX is currently in the process of building an additional ~160MW (net) across seven additional sites in Canada and France.
Over 90% of the output from BLX’s power plants is sold according to long-term power purchase agreements with public utility companies. Existing contracts provide stable cash flows that fund the company’s ongoing organic growth initiatives, and the newly introduced cash dividend for common shareholders (set at $0.52/share (annualized), a 4% dividend yield). The new dividend is expected to represent a 50% payout ratio on BLX’s expected 2015 free cash flow (FCF), which includes cash generated by the recently completed milestone 272MW Seigneurie de Beaupré wind facility in Québec (a 50% joint venture with Gaz Métro/Valener). The dividend is expected to grow gradually in the coming years as BLX continues to increase its installed capacity base and generate additional free cash flows.
BLX’s shares continue to trade at a relative discount compared with its larger renewable power producer peers (eg 7x P/FFO vs ~8–9x), which is largely due to the company’s smaller size and lower share liquidity. As the company continues to grow over time, we expect the valuation gap should narrow and eventually close. Furthermore, we see additional upside potential for BLX’s shares if the company can successfully secure new contracted growth projects from its pipeline of development prospects that do not currently have contracts in place.
Risks to our recommendation include: (1) weather and hydrological risks for the wind and hydroelectric facilities, (2) foreign exchange risk, and (3) regulatory, financing and execution risk related to the company’s growth projects.
BLX is rated Buy–Average Risk with a $15.00 price target. Our target is derived from our discounted cash flow model, and a relative valuation based on a 7.5x multiple applied to our 2015 funds from operations (FFO) per share estimate ($2.00).
Analysis by
Chase Bethel
CFA, Analyst
Rating | Buy–Average Risk | |
Target | C$66.50 | |
Symbol | GIL | |
Exchange | TSX, NYSE | |
Recent prices | C$55.71 US$50.38 |
|
Total potential return | 20% | |
52-week range | C$38.95-60.30 | |
Shares outstanding | 122m | |
Market capitalization | C$6,658m | |
Year-end | Sep-30 | |
Revenue | 2013A 2014E 2015E |
US$2,184m US$2,354m US$2,475m |
EBITDA | 2013A 2014E 2015E |
US$447m US$496m US$583m |
EPS | 2013A 2014E 2015E |
US$2.69 US$3.05 US$3.43 |
P/E | 2013A 2014E 2015E |
18.7x 16.5x 14.7x |
Book value per share | US$14.29 | |
Operating ROE (last 12 months) |
21% | |
Dividend per share | US$0.43 | |
Dividend yield | 0.9% |
Gildan Activewear Inc. (Gildan) is a leading manufacturer and marketer of high-quality undecorated apparel, with a distinguished track record of success. Gildan’s earnings per share have increased by compounded annual growth rates of 12.6% and 19.6% over the past five and ten years, respectively. We highlight that three of the five named executive officers at Gildan have been with the company since its initial public offering, a level of collective tenure that we view as being rare for a public entity. Gildan continues to be led by Glenn Chamandy—one of its co-founders—who recently affirmed his intention to remain at the helm for years to come.
Gildan offers investors exposure to its attractive, multi-year organic growth plans, which have both top line and cost savings focal points. As it relates to top line revenue growth, Gildan intends to add 50m dozens of activewear and underwear capacity in Central America over the next 3–4 years. This incremental capacity will enable the company to pursue approximately US$1b of additional revenue growth across both its Printwear and Branded Apparel operating segments.
Not only is Gildan investing in order to grow its top line, it is also investing to improve product quality and reduce its costs. To date, the company has announced US$330m of investments in new and existing yarn-spinning facilities. Spinning is the single most costly step in converting cotton fibres into yarn. Whereas the company has traditionally purchased yarn from third parties, Gildan will be increasing the degree of vertical integration with the substantial investments that are being made. It will also continue to invest in energy cost savings initiatives, such as the use of biomass for steam generation. Based on the investments announced, Gildan expects to achieve US$100m in annualized cost savings by fiscal year 2017 (FY17), with initial savings beginning in FY15.
We believe that the sum of top line growth and cost savings plans in place at the company will enable it to deliver EPS growth comparable—on an organic basis—to historical rates over the medium term.
Even with the significant capital expenditures that Gildan expects to make this year and next (capital expenditure guidance of US$300–350m in FY14), the company should still generate free cash flow of US$50–100m. What’s more, Gildan entered the year with US$97m of cash on its balance sheet and no debt. Management has indicated that the main focus of its 2014 strategic planning cycle is acquisitions. Gildan’s acquisition focus notwithstanding, we believe it is likely that dividend increases and/or share buybacks will also figure into management’s plans to deploy excess cash once its strategic plan is finalized.
We rate Gildan’s shares Buy–Average Risk, with a target price of C$66.50. Our target price is based on applying an 18x multiple to our FY14 estimate of US$3.05, plus the present value of 65% of US$100m savings by FY17 (US$0.33 per share, taxed basis); we convert to Canadian dollars using US$0.90/C$1.
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