This decision brought Brookfield’s stake to 10.1%. The price recently dropped to $ 7, but should retail investors buy like Brookfield?
TransAlta generates 8,000 MW of electricity from a mixture of 73 unregulated electricity generation assets (coal, natural gas and electricity) and a 60% stake in TransAlta Renewables (wind generation assets). Its assets are located mainly in Alberta (62% of the assets), but also in other regions of Canada, the United States and Australia.
Why is Brookfield interested?
Since March 25, 2019, Brookfield has become a strategic investor in TransAlta. In an initial agreement, Brookfield injected $ 750 million in capital into TransAlta, in exchange for a convertible interest in TransAlta’s hydroelectric assets.
Brookfield Renewables (TSX: BEP.UN) (NYSE: BEP) has a diversified portfolio of hydro assets, so significant synergies are evident. The investment strengthened TransAlta’s balance sheet by providing additional capital to execute its fleet greening initiatives (converting coal to gas). Overall, TransAlta has become a true turnaround story, and so far the story looks good.
A story of a turning point in the making
First, management is committed to producing 100% clean energy by 2025, including converting its coal-fired assets to natural gas. Brookfield’s investment has been a critical impetus for this strategy. The conversion is good for the environment and good for the business as it should reduce the overall cost structure of the assets.
Second, his track record has improved. Brookfield’s investment will help TransAlta repay a bond payable in 2020 (valued at $ 400 million) without additional funding or dilution. In recent years, TransAlta has reduced its senior recourse debt by more than 50% to $ 1.2 billion. Today, this debt amounts to approximately $ 1.7 billion in cash.
Last year, TransAlta added three new highly experienced directors (two appointed by Brookfield) and management appears to be more focused on increasing shareholder value. In 2020, the company set aside $ 80 million for share buybacks, and management has pledged to distribute 10 to 15% of its operating funds (FFO) to shareholders in the form of dividends.
Third, TransAlta has great growth opportunities. In 2019, it completed and commissioned $ 340 million in wind projects. It has an additional $ 400 million in renewable projects that are expected to be completed in 2020 and 2021.
These measures will increase EBITDA by approximately $ 25 million in 2020 and by $ 40 million in 2021 and 2022. TransAlta also has 900 MW of potential projects for its current fleet, and 2,000 MW of new renewable growth projects in the region. ‘study.
A cheap stock
TransAlta is a very inexpensive stock. While it was cheap – and rightly so – a few years ago, the company is in a much better position today. Management believes that the market has significantly reduced the value of its thermal assets, although this segment still generates $ 385 million in EBITDA per year.
Likewise, TransAlta’s hydroelectric segment will see its power purchase agreements roll out at the end of 2020. As society needs cleaner energy, demand for TransAlta’s hydroelectric assets is expected to reach a price of much higher market than today. As a result, these assets may receive a significant revaluation of their value.
Buy like Brookfield
TransAlta is in a better financial and strategic position than in previous years, although it presents certain risks. Its assets in Alberta are unregulated and demand and electricity prices could be affected by the COVID crisis19.
Another unknown is the degree of recovery from the transition from coal-fired to natural gas plants. However, a large part of this uncertainty is already included in the stock. The stock is traded with a discount of 35% compared to its February price with a price / FFO ratio of 2.6 times.
Think very long term with this title – and against the market. Also think about the value. Over the next five years, you probably won’t regret having thought like Brookfield and buying TransAlta here.
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The major contributor Robin Brown owns shares of Brookfield Asset Management. The Motley Fool owns shares and recommends Brookfield Asset Management. The Motley Fool recommends BROOKFIELD ASSET MANAGEMENT INC. CL.A LV.