Compelling Yield From Brookfield

May.27.14 | About: Brookfield Renewable (BEP)

Summary

Q1/14 FFO results of $185 million was 14% higher than Q1/13 FFO of $162 million.

Recent completion of 3 acquisition interests to complement growth.

Highly stable cash flows to support 5.2% yield at a 65% payout ratio.

Company Description:

Brookfield Renewable is one the largest pure-play renewable power businesses in North America with full operating, development, power marketing, and investing capabilities. As of May, 2014, the company holds $17B in power assets, comprising 216 generating facilities that hold 6,000 megawatts of capacity, of which 85% is hydroelectric and 11% wind.

The Brookfield Structure:

Brookfield Renewable Energy Partners (NYSE: BEP) is 65% owned by Brookfield Asset Management (NYSE: BAM), which is a diversified asset manager with 72% interest in Brookfield Property Partners (NYSE: BPY), 28% interest Brookfield Infrastructure Partners (NYSE: BIP), and 100% interest in Brookfield Capital Partners. Brookfield Property Partners also owns majority interest in Brookfield Office Properties (NYSE: BPO). These stocks trade both on the NYSE and TSX.

Investment Rationale:

- Strong growth potential with 16% annualized returns since the launch of Great Lakes Hydro Income Fund in 1999. The management team lead by Richard Legault, has a solid track record of generating returns, complimented by access to Brookfield's worldwide network. In addition, Brookfield Renewable recently completed the following acquisitions: 1) A 33% economic and 50% voting interest in a 417 MW facility in Pennsylvania that is expected to generate 1,100 GWh annually 2) A 70 MW hydroelectric portfolio located in Maine, consisting of nine facilities which are expected to generate 400 GWh annually 3) The remaining 50% interest in a 30 MW facility in California

- Top-notch asset quality dominated by hydroelectric plants with compelling operating characteristics and return profile. As shown in the comparables exhibit, Brookfield Renewable Energy's EBITDA margin of 69% far exceeds the median of 37.5%. Given 17-20% return profiles for the development pipeline, Brookfield Renewable would expect $80-100 million of FFO increases over the next 5 years from $500 million of organic development.

- Stable cash flow derived from highly contracted cash flows from creditworthy counter-parties. 93% of cash flows are contracted with inflation-linked power purchase agreements that have a 17-year weighted average duration. Furthermore, cash flows benefit from geographic diversification among stable countries with 55% from U.S., 30% from Canada, and 15% from Brazil

Source: Brookfield Renewable Interim Report

Given BEP's rapid growth rate, which is 6x the median revenue growth rate of peers and 19x the median EBITDA growth rate, BEP should little problem maintaining its dividend payout. Thus, I believe that BEP is an excellent addition to an income focused portfolio with possibilities of capital appreciation if Brookfield Renewable is able to continue to grow at its current rate.

As a pure-play investment, Brookfield Renewable is highly expose to electricity prices, so there is a risk that sharp drops in power rates could put pressure on revenues. As an owner of renewable energy facilities, Brookfield Renewable is also indirectly exposed to oil and natural gas prices, which would affect the cost structure of competitors.

Comparables Exhibit:

Ticker NYSE: BEP NYSE: AEP NYSE: PNW NYSE: EIX NYSE: WR
Company Name: BROOKFIELD RENEWEABLE AMERICAN ELECTRIC PINNACLE WEST EDISON INTL WESTAR ENERGY
Latest Fiscal Year: 12/2013 12/2013 12/2013 12/2013 12/2013
Latest Available Period Date: 12/31/2013 3/31/2014 3/31/2014 3/31/2014 3/31/2014
52-Week High 30.02 54.64 60.33 57.70 36.35
52-Week High Date 5/28/2013 4/29/2014 7/22/2013 4/30/2014 4/28/2014
52-Week Low 24.69 41.83 51.15 44.26 29.79
52-Week Low Date 8/20/2013 9/4/2013 2/3/2014 9/5/2013 9/9/2013
Daily Volume 19,626 1,597,689 328,744 1,168,896 766,780
Current Price: 5/26/14 29.60 51.41 54.82 54.02 35.47
52-Week High % Change -1.4% -5.9% -9.1% -6.4% -2.4%
52-Week Low % Change 19.9% 22.9% 7.2% 22.1% 19.1%
Total Common Shares (NYSE:M) - 487.8 110.2 325.8 128.3
Market Capitalization 3,937.7 25,092.3 6,049.8 17,600.3 4,572.0
Total Debt 6,623.0 19,419.0 3,595.5 11,037.0 3,593.1
Preferred Stock 796.0 - - 2,023.0 -
Minority Interest 4,014.0 3.0 154.9 - 7.8
- Cash and Equivalents 203.0 602.0 103.4 149.0 9.1
Current Enterprise Value 15,167.7 43,912.3 9,696.8 30,511.3 8,163.8
Valuation Average Median
Total Revenue LFY 1,706.0 15,357.0 3,454.6 12,581.0 2,370.7 7,093.9 3,454.6
LTM 1,706.0 16,179.0 3,454.2 12,875.0 2,453.0 7,333.4 3,454.2
FY+1 1,771.6 16,730.7 3,557.5 12,860.2 2,499.9 7,484.0 3,557.5
FY+2 1,839.3 17,244.0 3,664.9 13,252.4 2,545.8 7,709.3 3,664.9
EV/Total Revenue LFY 8.63x 2.70x 2.74x 2.17x 3.25x 3.9x 2.7x
LTM 8.63x 2.69x 2.80x 2.44x 3.31x 4.0x 2.8x
FY+1 8.56x 2.62x 2.73x 2.37x 3.27x 3.9x 2.7x
FY+2 8.25x 2.55x 2.65x 2.30x 3.21x 3.8x 2.6x
EBITDA LFY 1,176.0 4,955.0 1,338.6 3,908.0 882.8 2,452.1 1,338.6
LTM 1,176.0 5,282.0 1,324.9 3,974.0 918.8 2,535.1 1,324.9
FY+1 1,305.4 5,176.1 1,301.3 4,178.7 940.4 2,580.4 1,305.4
FY+2 1,344.3 5,257.1 1,365.1 4,415.9 973.0 2,671.1 1,365.1
EV/EBITDA LFY 12.51x 8.37x 7.06x 6.99x 8.73x 8.7x 8.4x
LTM 12.90x 8.31x 7.32x 7.68x 8.89x 9.0x 8.3x
FY+1 11.62x 8.48x 7.45x 7.30x 8.68x 8.7x 8.5x
FY+2 11.28x 8.35x 7.10x 6.91x 8.39x 8.4x 8.4x
EPS LFY - 3.23 3.66 3.76 2.27 3.23 3.45
LTM - 3.58 3.58 4.36 2.40 3.48 3.58
FY+1 0.53 3.48 3.69 3.71 2.37 2.76 3.48
FY+2 0.49 3.53 3.85 3.58 2.38 2.77 3.53
P/E LFY - 14.47x 14.46x 12.31x 14.17x 13.9x 14.3x
LTM - 14.36x 15.31x 12.39x 14.78x 14.2x 14.6x
FY+1 55.85x 14.76x 14.84x 14.54x 14.94x 23.0x 14.8x
FY+2 60.41x 14.56x 14.25x 15.08x 14.93x 23.8x 14.9x
Revenue Growth 1 Year 30.3% 2.8% 4.6% 6.1% 4.8% 9.7% 4.8%
5 Year 92.9% 6.4% 2.0% 1.2% 8.5% 22.2% 6.4%
EBITDA Growth 1 Year 42.9% 1.7% 0.4% 2.3% 3.0% 10.1% 2.3%
5 Year 54.3% 3.9% 7.2% 0.4% 11.9% 15.5% 7.2%
EBITDA Margin LTM 68.93% 32.6% 38.4% 30.9% 37.5% 41.7% 37.5%
FY+1 73.69% 30.9% 36.6% 32.5% 37.6% 42.3% 36.6%
FY+2 73.09% 30.5% 37.2% 33.3% 38.2% 42.5% 37.2%
Click to enlarge

Source: Bloomberg

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.