Takeover speculation has helped drive shares of TransAlta Corp. (NYSE:TAC) higher in recent weeks, but continued earnings strength, a potential share buyback and asset sales could boost investor interest further.
Based on comments from chief executive Stephen Snyder, TransAlta could be working on a stock repurchase program that would use funds from the sale of non-core assets, Desjardins Securities analyst Daniel Shteyn told clients in a note. Mexico appears to be the most likely market slated for exit, but Australia has also been mentioned as a non-core location that could be divested in the future. The results of an auction for 2,000 megawatts of capacity in Mexico could give TransAlta reason to sell, regardless of the outcome, Mr. Shteyn said.
In terms of the buyback, the company’s relatively under levered balance sheet and free cash flow generation look adequate enough for capital expenditures and dividends, he added. So, if TransAlta leaves the Mexican market in 2008, Mr. Shteyn estimates that a share repurchase plan could boost its earnings per share by 7% to 8%.
He does not consider the electricity generator a takeover target since there does not appear to be any activist investors with large stakes and management is not likely to put the company in play. He also thinks the shares could face a sharp sell-off if the market decides to share this view. Rather than any takeover premium, it is the prospect of a stock buyback that lead Mr. Shteyn to boost his price target to $30 from $28, while maintaining a “hold” rating.
RBC Capital Markets analyst Robert Kwan meanwhile, boosted his rating on TransAlta to “sector perform” from “underperform” and his price target to C$31 from C$27 on expectations for higher power prices in Alberta.