For Brookfield Renewable Energy Partners investors, the past few months have been no fun at all.
First, bond yields spiked, driving down shares of power producers such as BREP and other interest-sensitive sectors. Then the company, citing unfavourable market conditions, postponed an equity offering that would have brought in an estimated $400-million.
The shares, which fetched more than $31.50 in early May, closed on Tuesday at $28.21 on the Toronto Stock Exchange – down about 10 per cent from the recent peak.
So is it time to bail? Hardly. If anything, the sell-off has created a buying opportunity in the units, which sport an attractive 5.3-per-cent yield backed by a high-quality and growing portfolio of renewable power assets. (Disclosure: My kids have 200 BREP shares in their registered education savings plan.)
BREP is one of the world’s largest publicly traded renewable energy producers, with more than 80 per cent of its output generated by hydroelectric facilities in Canada, the United States and Brazil. The company, which also owns wind power assets, has the capacity to generate nearly 6,000 megawatts of electricity – enough to power more than three million homes on average.
What makes BREP, which is 65-per-cent owned by Brookfield Asset Management, attractive to income-oriented investors are its stable and predictable revenue streams. The vast majority of BREP’s electricity is sold through long-term power purchase agreements (PPAs) – the average remaining life of these contracts is 18 years – which insulates the company from short-term power price fluctuations.
While the bond-like nature of BREP’s cash flows makes the units vulnerable to rising interest rates, the risk is offset somewhat by BREP’s growing revenues from acquisitions and development projects and by its steadily rising distribution – something you don’t get with a bond paying a fixed coupon. (Note: The distribution is paid in U.S. dollars and includes a mix of Canadian and foreign dividend income, interest and return of capital.)
Over the past 10 years, BREP and its predecessor, Brookfield Renewable Power Fund, posted a compound annual total return of about 14 per cent, said Frederic Bastien, an analyst with Raymond James who rates the stock “outperform” with a target price of $34.
To the delight of income investors, the company has raised its distribution three times in the past two years, and Mr. Bastien sees the potential for a 10-per-cent hike in 2014. For its part, BREP targets annual growth of 3 to 5 per cent in the distribution while maintaining a payout ratio of 60 to 70 per cent of funds from operations.
“Certainly with this pullback, I quite like the stock right now,” Mr. Bastien said in an interview. The fact that debt-burdened governments are looking to privatize power assets plays to BREP’s strength as an acquirer, he said. What’s more, recent weather patterns have been favourable for the company’s hydroelectric facilities.
“Mother Nature has been fairly good to the operations. In the last couple of quarters you’ve seen a lot of wet weather, which is generally good for hydrology,” he said. “So I think they’re going to have strong results in the second quarter.”
Indeed, BREP – which is scheduled to announce results on Aug. 8 – indicated in a preliminary second-quarter outlook in June that total generation is expected to be up about 50 per cent compared with the second quarter of 2012 and roughly in line with long-term average levels.
Most analysts are favourable on the stock. According to Bloomberg, there are seven “buy” ratings, two “holds” and no “sells”. The average 12-month price target is $33, but take that with a grain of salt: If bond yields continue rising, achieving that number could be tough.
That said, after the recent selloff, the downside risk may be limited – particularly if BREP can continue delivering revenue and distribution growth.
“In some cases, we consider the selloff in Canadian IPP [independent power producer] equities overdone and believe that this represents an opportunity to invest in high-quality companies with diversified asset bases, healthy growth prospects and manageable payout ratios,” TD securities analyst Sean Steuart said in a recent note in which he tapped BREP as a “top pick.”