Valener: Preliminary Analysis Of A Diversified Undervalued Dividend Play With 22% 5-Year Upside

| About: Valener, Inc. (VNRCF)


Valener derives its revenue from two key sources: investments in Gaz Métro, and investments in the Seigneurie de Beaupré wind farm.

On May 11, 2017, the company announced its intent to grow its dividend by 4% per year to 2022.

A cursory analysis shows that the company is undervalued based on the most recent fiscal year.

While compiling dividend results for a new dividend index, I came upon Valener (OTC:VNRCF). What piqued my interest in Valener was that they recently announced that they are planning to increase their dividend by 4% per year until 2022 (link). Translated, this equates to more than a 22% increase over the next 5 years, which at the very least beats inflation. This cursory analysis looks at the most recent five years of fundamentals for Valener to determine if it warrants further analysis.

From its most recent investor presentation (link):

Valener is a publicly traded company whose main assets consist of a:

  • 29.0% direct interest in Gaz Métro, providing Gaz Métro with potential access to public equity markets as required
  • 24.5% interest in the Seigneurie de Beaupré Wind Farms (340 MW contracted)

On the surface, these are two regulated, defensive, consistent revenue streams which would appear to provide a safe income stream to Valener, to pass down to shareholders.

In performing a cursory analysis of Valener, on the surface, there are concerns over the current ratio. Typically we like to see a current ratio of at least 1.50, but in the most recent year, the current ratio was 0.77 (i.e. current liabilities are greater than its current assets). At first glance, this is not necessarily a red flag; however, it would be prudent to compare Valener to its peers and to establish what the mean current ratio is its industry to establish if its current ratio is in line with its closest competitors. Otherwise, the balance sheet appears strong, with an asset to liability ratio exceeding 8x, which shows that if the firm were to shut down today, there are $8.00 in assets for every $1.00 in liabilities, which is a healthy position to be in. Viewed from another perspective, this means that in the event of a complete liquidation, there is little risk that shareholders would be locked out of their investment.

The revenue graph illustrates that over time, Valener's revenues have been increasing, with 19% compound annual growth over the past five years. EPS has also done well, with compound growth of over 21% over the same period. At the surface, this illustrates that while top line revenue has increased, bottom line profit has increased at a faster rate, which is definitely a strength for the firm. That said, the dividend has grown by only 2% annually over the same period.

Some insights into the slow dividend growth and into the recent announcement that the company is committed to increasing the dividend by 4% until 2022 can be gleaned from the following graph. The dividend payout ratio exceeded 100% (i.e. dividends paid exceeded earnings per share) until 2014, and it has been slowly dropping since then. While not illustrated, Valener has only been publicly listed since 2010, and the increase in its dividend to $1.03 in 2015 was the first increase in its dividend since it was initiated in 2010. However, with what appears to be decreasing payout ratios, the safety of the dividend becomes stronger. Putting aside the dividend, the share price itself has risen 8% per year over the past 5 years; so while dividend growth has been weak since inception, this is compensated for by capital appreciation.

When reviewing firms to establish if they warrant a deeper analysis, the preferred price-to-earnings (P/E) and price-to-book (P/BV) values should be less than 15.0 and 1.5 respectively, or combined be less than 22.5. As observed in the above table, Valener has exceeded these thresholds every year for the past five years. In 2016 alone Valener traded with a combined metric of only 17.68. In short, based on price multiples, Valener is undervalued.

Valener's margin of safety is further emphasized in the next graph. The "Graham Price" of a stock is the price that would be required to hit the combined P/E and P/BV ratio of 22.5. This hypothetical price is outlined in the following graph as the Graham Price, and it is shown against the actual market price. The blue "Overvalue Multiple" line demonstrates how much the actual market price is over or under the Graham price: values less than 1 indicate underpriced, values of 1 indicate that they are the same, and values greater than 1 indicate that the market price exceeds the Graham price (e.g. overvalued). As the graph illustrates, Valener has been consistently below the Graham price for the past five years. In fact, in 2016 the margin of safety over the hypothetical maximum one should pay exceeded 10%: the closing price for 2016 was $21.83, but the stock was really worth $24.63.

Closing remarks

A cursory analysis shows that Valener appears to be a strong company based on the past five years of fundamentals, and the market has consistently ignored this dividend payer. As of May 18, 2017, Valener was selling for $22.30, which represents a 10% margin of safety over the Graham price based on the F2016 fundamentals. Finally, as our focus is on dividend investing, the fact that Valener is committing to a 4% year over year increase until 2022 for its dividend reduces the ongoing risk of a dividend cut/freeze. That said, the crux of any deeper analysis lies in Valener's revenue generating capabilities, and its ability to widen the gap between EPS and dividends (i.e. lowering its dividend payout ratio).

Valener is certainly deserving of a deeper look into the structure of the company, its sources of revenue, etc. However, based on this cursory analysis, it is a buy.

Note: All figures in Canadian dollars.

Disclosure: I/we 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.

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