Expanding Asian LPG Exports Will Strengthen Future Stability

Key Takeaways

• Capitalizing on Asian LPG demand and long-term contracts could enhance revenue stability and potential growth for AltaGas.
  
• Divesting the pipeline stake may strengthen finances, enabling strategic reinvestments and future earnings growth.
  
• Regulatory changes, operational risks, and dependence on commercial agreements pose financial challenges that could affect margins and revenue growth.

Catalysts

Operates as an energy infrastructure company in North America.

• AltaGas is capitalizing on the growing demand for liquid petroleum gases (LPGs) in Asia, with record export volumes suggesting potential revenue growth from expanding their global exports platform.
  
• The company is strategically engaging in long-term tolling contracts for midstream projects, like REEF and Pipestone II, which are expected to enhance revenue stability and potentially increase net margins due to fixed-price contracts.
  
• Investments in modernization of utilities and regulatory rate base growth are likely to improve earnings by boosting operational efficiency and expanding customer base.
  
• The planned divestiture of AltaGas' stake in the Mountain Valley pipeline could improve their balance sheet, which in turn could support future earnings growth by allowing for strategic reinvestments.
  
• Leveraging data center growth opportunities in the utility segment could drive steady long-term revenue increases, given the rising demand for energy in data centers and AltaGas' strategic position to provide natural gas solutions.

AltaGas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AltaGas's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.9% today to 5.2% in 3 years time.
• Analysts expect earnings to reach CA$803.0 million (and earnings per share of CA$2.68) by about December 2027, up from CA$488.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.9x on those 2027 earnings, down from 20.2x today. This future PE is lower than the current PE for the CA Gas Utilities industry at 18.6x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.0%, as per the Simply Wall St company report.

AltaGas Future Earnings Per Share Growth

Risks

• The company faces potential challenges from regulatory changes, such as proposed gas bans in D.C. and Maryland; fighting these legally could increase costs and impact net margins.
  
• The Alberta wildfires and potential rail strikes have been highlighted as operational risks, which could incur higher onetime operating costs and affect earnings.
  
• Lower export margins and higher onetime operating costs in the midstream segment have offset volume growth, which may impact net margins if not managed effectively.
  
• Dependence on achieving commercial agreements for projects like REEF presents a risk; delays or failure to secure contracts could affect projected revenue growth.
  
• Warmer weather has negatively impacted the utilities business in areas without weather normalization, such as D.C. and Michigan, potentially reducing revenue and impacting earnings stability.

Valuation

• The analysts have a consensus price target of CA$38.2 for AltaGas based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$15.5 billion, earnings will come to CA$803.0 million, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 6.0%.
• Given the current share price of CA$33.07, the analyst's price target of CA$38.2 is 13.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.