Canaccord Analyst: Distribution Cuts a Negative for Algonquin Power

| About: Algonquin Power (AQN)
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In what might some consider a bit of understatement, Canaccord’s Bob Hastings writes in a note that the consequences of Algonquin Power Income Fund's (AGQNF.PK) decision to cut its distribution rate by 74%, to C$0.24 from C$0.92, is “very negative” for the utilities trust.

“We expect a wholesale change in investor base,” Mr. Hastings says. “Income-oriented investors are likely to switch to  higher-yielding investments.” As well, angry investors may just dump the units regardless of price, something that may have been reflected in Tuesday’s plunge in share price, to C$2.92 from C$5.53. “Suspicious investors may speculate there is more bad news coming and also dump,” he adds, while buyers will wait to see where the trust units settle.

Mr. Hastings notes that Algonquin Power is moving to a company growth model and “we suspect its units will eventually trade based on utility/pipeline valuation metrics based on earnings, payout ratios and growth.” The distribution cut was made in order for the  trust to retain capital to finance growth opportunities.

In the near term, the analyst suggests the stock will be overwhelmed by selling pressure. However, he expects the price of the units will recover to C$6. “as the trust’s growth strategy becomes proven and market valuation metrics evolve from low bear market levels, its valuation could expand materially." Mr. Hastings has put his estimates and recommendations for the trust under review.