TransAlta (TAC, Hold) plans to build a gas power station for A$570 million (which is $536 million), after winning 25 years power purchase contracts state owned utility company Horizon Power and Fortescue Metals Group. TransAlta recently posted mixed second quarter with no major surprises. The revenue of $491 million was nearly $27 million short of consensus expectations while it fell down at least 10% compare to same period last year while EPS was nearly in-line with our estimates. The EBITDA of CAD 213 million was roughly CAD 34 million year-over-year.
The revenue fall was mainly led by lower power prices in Alberta (however we see solid electricity demand growth to boost power prices in Alberta) although partially compensated by better accessibility of company’s Canadian coal fired power plants. We see no major impacts of lower prices on plant revenue as a result of power purchase provisions and long-run hedges. Nonetheless, the lower prices did depressingly impact company’s 1) gas fired 2) hydro plants and 3) wind farms sources.
We second company’s decision to reduce its dividend to CAD 0.72 per share from CAD 1.16 per share commencing with the Q1 2014 is in the best long-run benefits of shareholders. Company announced C$0.18/share quarterly dividend, in-line with consensus estimation.
Company has decided to develop, own, and manage AUD 570 million worth 150 megawatt combined cycle natural gas fired power plant on a current industrial estate near South Hedland, Western Australia (making foremost developer of behind the fence generation for mining firms likely to be benefitted from solid export to China). The plant is likely to begin its industrial operation in 2017. The expected 10 percent after-tax IRR (internal rate of return) doesn’t depend on work at the South Hedland port led by Fortescue’s mine exports. Thus, in our view, plant to create more than company’s cost of capital throughout the span of the PPA. Additionally, the project will be the most resourceful in the area and could easily be extended to operate extra customers. We doubt on expensive capital costs versus low ongoing perks to provide needed returns on investments for a latest competing power plant in this low density area mainly controlled by mining work, which can provide an economy of scale benefits for company’s investment.
While TAC anticipates new business in Western Australia to grow to 16% of EBITDA by 2017, when the combined cycle gas power station is expected to be start, company confirmed its 2014 comparable EBITDA outlook to range in CAD 1.015 billion and 1.065 billion. We are raising target price on shares of TransAlta from C$11.00 to C$11.50 with ‘Hold’ rating on the stock.