Monday, February 3, 2014

Valener Inc.

On my other blog I am today writing about Monkeys Vs Fund Managers in index investing..continue...

I do not own this stock of Valener Inc. (TSX-VNR, OTC-VNRCF). I was looking for another utility to invest in, in 2009 and I was looking possibly at another pipeline stock. This company has natural gas pipelines in Quebec. I also recognized the name of this company because at that time it was Gaz Metro.

This company was not so bad when I first looked in 2009, but in 2010 it reorganized and made a public utility stock out of 29% of what was Gas Metro. This makes the valuation of this stock very complex. Not only do you have to look at Valener Inc. financial statements, but you have to also consider Gaz Metro's financial statements. Otherwise you might not get the whole story.

An example is debt ratios. The Liquidity Ratio for Valener is 1.16 for the 2013 financial year. This is low, but acceptable. However, the Liquidity Ratio for Gaz Metro is at 0.84. This means that the current assets cannot cover the current liabilities and this is unacceptable. The same problem is with the Debt Ratio where by the one for Valener is extremely high (and good) at 7.65 and the one for Gaz Metro is very low at 1.35.

The other complication is when Valener was spun off for private investors. It was 29% of the original company investors had invested in. This was done in 2010. It makes it very difficult to see how well this company has done over time. I generally do not invest in companies that are difficult to analyze. It is too easy to miss something important.

Dividends are not growing on this company. In fact the dividends are down by 4.2% and 2.9% per year over the past 5 and 10 years. I have dividend information going back to 1993 and dividends have fluctuated over this time. Currently they have been level since their last decline in 2011. I do not see them changing anytime soon as the Dividend Payout Ratio for earnings is just over 100%.

Return on Equity for Valener is at 5.9% a low number. However, the ROE for Gaz Metro is at much better number of 12.4%. In both cases the ROE on comprehensive income is better with the ROE on Valener at 8.7% and the ROE on Gaz Metro at 15.5%.

When I look at analysts' recommendations, I find Hold and Underperform recommendations. The consensus recommendation would be a Hold. The consensus 12 month target stock price is $16.50. This implies a total return of 8.28% with 6.52% from dividends and 1.76% from capital gain.

The 5 year median dividend yield is 6.56% and the current dividend yield at 6.52% is just below it. This stock test says that the stock price is reasonable. If you look at an historical median dividend yield, the current yield at 6.52% is some 11.5% lower than an historical yield at 7.37%. On this basis the stock price is getting expensive.

The 10 year Price/Book Value per Share Ratio is 2.01 and the current P/B Ratio is just 0.96. The current ratio is only48% of the 10 year P/B Ratio and this test says the stock is cheap. However, if you look at the share of the book value that Valener owns in Gaz Metro, the BVPS is much lower at $10.78 rather than the $15.89 value given for Valener shares in Valener's statements. However, even with the lower BVPS, the current P/B Ratio would be 1.42 and only 70% of the 10 year P/B Ratio and therefor still shows a cheap price.

I would not invest as the stock is too complex to evaluate. Also, I like dividend growth stocks and this is not one. The stock price seems to be cheap to reasonable on some basis and expensive on a more historical another basis. See my spreadsheet at vnr.htm.

Valener owns 29% of Gaz Metro and also has investments (i.e. Vermont Gas Systems & Green Mountain Power). Gaz Metro is Quebec's leading natural gas distributor. Its web site is here Valener.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.

1 comment:

  1. Hi, I have been researching the ROE allowed utilities. They seem very high (about 9.5% now) compared to so-called risk-free. Your insight that Valener's stock price not book value is going to show up on the balance sheet of the parent will be a great help to me. Funny you posted this one year ago almost to to the day that I wanted to know.