<Results Analysis> 3Q23 results a miss, though medium-term outlook remains positive
- 3Q23 FFO missed consensus by 5%, on the back of weaker-than-expected results from hydro and storage segment
- FY23 likely to remain muted, though medium-term outlook remains positive and on track with delivering long term >10% FFO growth target
- Positive momentum in deal execution as positive catalysts, with ample of dry powder to fuel further M&As. Maintain BUY with lower TP of US$30 on the back of a lower valuation multiple amid the high interest rate environment.
3Q23 FFO a miss, with FY23 results likely to remain muted. Brookfield Renewable Partner (BEP)’s 3Q23 Funds from operations (FFO) came in at US$253m (-19% qoq, +4% yoy), which missed consensus estimates by 5%, due to weaker than expected performance from hydro and storage segments, with both segments making up c.90% of group FFO. Going forward, management has guided that BEP is well on track to delivering 10% FFO per unit growth for FY23, though post 3Q23 results, consensus has turned more conservative in their FY23F and FY24F FFO per unit estimates with a slight -2%/-4% negative revision. In terms of FFO per unit growth, FY23F/24F consensus expects FFO per unit growth at 9%/12%, with consensus expecting a miss in management’s 10% FFO growth target for FY23.
Firm performance in capital deployment and positive momentum in deal execution as positive catalysts, with ample of dry powder remaining; Reiterate long-term >10% FFO growth target. Recycling proceeds from mature assets into new growth opportunities remains one of the most value accretive levers within its business. As at 3Q23, in the last 18 months, BEP has generated approximately US$1.4bn in proceeds (~US$600 net to Brookfield Renewable) from its asset recycling program, tripling its invested capital on those assets. Going forward, M&A activities will be a key lever to driving future FFO growth. Management cited positive progress in its accretive M&A transactions, such as the recent closing of X-Elio solar acquisition and Deriva Energy renewable energy platform acquisition as well as further progress in Origin Energy deal (pending shareholder approval in Nov 2023, target close in 1Q24). BEP has also made progress in the regulatory approval process for its Westinghouse Electric acquisition, which helped to ease prior investor concerns on regulatory hurdles related to the Westinghouse deal. Aside from private market transactions, current attractive public market valuations may also lead to potential M&A of public companies according to management’s guidance. In total, going forward, BEP is expected to close transactions totalling US$9.2bn (US$1.5bn net to Brookfield Renewable) of capital which will add US$200m in incremental annual FFO (20% of FY22 FFO), which will help BEP to deliver its long-term 10%+ FFO per unit annual growth target. Following these transactions, BEP will still have US$3.5bn in liquidity (down from US$4.5bn following latest transactions), which provides ample of dry powder for further M&A. Whilst we remain optimistic on BEP’s longer term outlook on the back of its best-in-class operational track record and firm M&A pipeline, we maintain BUY with lower TP of US$30 as we peg our valuation to a lower valuation multiple amid the higher-for-longer interest rate environment. Relative to other US renewable names, BEP has little exposure to offshore wind assets, which limits downside risks relative to its peers (e.g., Orsted, Avangrid) given the ongoing challenging US offshore environment.