ATCO LTD. (Toronto symbols ACO.X [class I non-voting] $48 and ACO.Y [class II voting] $48; Income Portfolio, Utilities sector; Shares outstanding: 115.3 million; Market cap: $5.5 billion; Price-to-sales ratio: 1.2; Dividend yield: 1.8%; TSINetwork Rating: Above Average; www.atco.com) holds 53.2% of Canadian Utilities (see page 85). It also owns 75.5% of ATCO Structures & Logistics, which builds temporary buildings for construction and energyexploration firms; Canadian Utilities owns the remaining 24.5%.
The company recently agreed to sell its information technology subsidiaries in Canada and Australia. These businesses provide computer support, billing, payment processing and related services to ATCO’s other subsidiaries, as well as outside clients.
The buyer, Wipro Ltd., will pay $210 million when the sale closes later this year. In addition, Wipro will provide computer support and related services to ATCO under a new 10-year contract.
Alberta regulators base ATCO’s power and gas rates on its operating costs and capital investments, so selling the information technology operations will make it easier for its utility businesses to win future rate increases.
Meanwhile, ATCO’s revenue rose 3.1% in the second quarter of 2014, to $1.11 billion from $1.08 billion a year earlier. The company saw a higher contribution from Canadian Utilities, and revenue at the structures division gained 8.8%, thanks to the start-up a new project in Australia.
However, earnings fell 32.7%, to $66 million, or $0.57 a share, from $98 million, or $0.85. The decline is partly due to the writedown of a power plant in Australia and the negative impact of recent regulatory decisions.
Moreover, unusually high power prices in 2013, caused by unplanned outages at several Alberta coal-fired plants, boosted earnings in the year-earlier quarter and exaggerated the profit drop.
ATCO’s main appeal is its holding company discount. Based on current prices, you can buy an ATCO share for $48 and get roughly $47 worth of Canadian Utilities. That means you get ATCO’s structures business, which provides around 25% of its earnings, for just $1.00.
This discount also explains why ATCO has a lower p/e ratio than Canadian Utilities: it trades at 14.4 times the $3.34 a share that it will likely earn in 2014. ATCO also has lower dividend yield: its $0.86 dividend yields 1.8%.
The class I (X) non-voting shares are more liquid than the class II (Y) voting shares.
ATCO class I stock is a buy.
