According to a Wall Street Journal report, Starboard Value has acquired a notable stake (expected to be more than 5%) in Algonquin Power (TSE:AQN)(NYSE:AQN). The report highlighted that the activist hedge fund could push the management of the utility company to offload its renewable power operations, which could lead to a recovery in its stock price.
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While AQN stock is up more than 28% this year, it is still down about 38% from its 52-week high. The drop in AQN stock reflects the negative impact of renewable energy project delays and higher interest rates.
Given the challenges, Algonquin Power reduced its dividend to $0.1085 per share from $0.1808.
Starboard to Push AQN to Divest Renewable Energy Group
As higher interest rates continue to pose challenges and hurt its earnings, management announced a strategic review of its Renewable Energy group during the Q1 conference call in May. AQN’s CEO, Arun Banskota, said that its Regulated Services Group and Renewable Energy Group have gained scale, own high-quality assets, and are poised to benefit from the energy transition opportunities.
He highlighted that its assets are undervalued, and thus the company initiated a strategic review of the Renewable Energy Group. AQN is exploring alternatives to maximize shareholder value, including the separation of the two business groups. The move will also result in reducing the company’s cost of capital.
Echoing management’s view, Starboard Value believes that AQN’s regulated utilities business is undervalued. The hedge fund, which invests in deeply undervalued companies, said that the sale of the Regulated Services Group could bring significant value, and investors are not giving the due credit to the company.
Is Algonquin Power a Good Buy?
Given the near-term headwinds and pressure on earnings, analysts are cautiously optimistic about AQN stock. However, the potential sale of Regulated Services Group, the expected decline in the cost of capital, and continued strength in its regulated utilities business augur well for growth.
AQN stock has a Moderate Buy consensus rating on TipRanks, reflecting three Buy and seven Hold recommendations. Analysts’ average price target of C$12.96 implies 17.64% upside potential.
