Fortis Slightly Lower Despite Credit Suisse Upgrade on Results
Earnings review: "Fortis reported Q1 2011 headline EPS (FD) of C$0.33 slightly below our C$0.34 estimate, the Street's C$0.347 view and at the bottom end of the C$0.33-C$0.36 range. Year-to-date, Fortis shares have been the weakest performer in the Canadian utility universe returning -9%. We believe Fortis delivers organic growth that is combined with a disciplined acquisition framework. In our view, the market remains somewhat concerned about deal potential and the Belize Electricity situation. Given the potential excess return, we upgrade FTS to Outperform from the previous Neutral. Our target is maintained at C$34."
Significant organic growth continues: "Fortis continues to provide a rather robust capital expenditure outlook with a reiteration of the C$1.2bn target for 2011. Additionally, Fortis increased the 5-year capex outlook to C$5.7b from C$5.5bn. Eighty-four percent of that total amount is expected to go towards utility activity that should deliver favourable risk adjusted returns."
Improving capital market conditions: "Historically, Fortis has been very adept at acquisitions. Corporate growth has benefited from the company's ability to successfully acquire and integrate selected assets. In our view, the company is well positioned in the current market for acquisition opportunities. The company stated: "We are disciplined and patient in our pursuit of electric and gas utility acquisitions in the United States and Canada that will add value for Fortis shareholders".
Valuation: "With the recent sell-off, we upgrade our FTS rating to Outperform from the previous Neutral. We also maintain our C$34 that is obtained via multiple valuation approaches, including: an 18.5x P/E multiple of 2012 earnings; a 1.7x book value multiple; and, a DCF-based valuation. We introduce our Outperform rating."
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