Credit Suisse cites weak power market as reason for keeping Neutral on TransAlta

Credit Suisse has kept a Neutral rating but eased its estimates for TransAlta Corporation (TA.TO) after it reported its Q3 earnings.

"TransAlta reported Q3 headline and comparable earnings of C$0.17 per share. The figure was lower than our C$0.22 estimate and that of the Street's C$0.288 consensus and below the C$0.22-C$0.32 range. The company also announced a 15MW efficiency uprate to its Sundance 3 unit that will be operational at the end of 2012 at a cost of roughly C$27m. In light of market conditions, the conference call's commentary about potential acquisitions was not surprising. Any such potential deal is interesting and may be positive for future value creation, however, the current weak power market leaves few reasons for enthusiasm in the near-term," Credit Suisse said in a morning note.

Selected highlights: "Increased plant availability from 83.9% in Q3 2009 to 91.0% is positive. Power production volumes increased from 11,610GWh to 12,742, but revenues and margins per MWh both declined. Additionally, the Balancing Pool confirmed that is has agreed with TA that the Sundance outage meets the requirements of a High Impact Low Probability event under the PPA. We note the company's view that power demand and pricing looks rather challenged in the near-term. The company stated: "While we continue to anticipate some improvements in our core markets, we still do not see a noticeable economic recovery happening until later in 2011."

Balancing offense and defense: "TA's contracted power positions provide a support level for cash flow and earnings. Positively, we have noticed some modest signs of improvement in Alberta, however, we believe it is too early to become overly enthusiastic on pricing."

Valuation: "We reduce our 2010, 2011 and 2012 estimates to C$0.95, C$1.21 and C$1.29 from the prior C$0.99, C$1.22 and C$1.30, respectively. Our C$25.00 target price and Neutral rating are obtained from multiple methods, including: 20.5x P/E multiple on 2011 earnings, comparable analysis and a discounted cash flow. We reiterate our Neutral rating."

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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