This Gas Utility Seems Attractive at Current Levels – SWX

Jun 17, 2021 12:00 AM PDT | Team Kalkine
This Gas Utility Seems Attractive at Current Levels – SWX



Southwest Gas Holdings, Inc.

SWX Details

Southwest Gas Holdings, Inc. (NYSE: SWX) is engaged in purchasing, distributing, and transporting natural gas to its residential, commercial, and industrial customers across Arizona, Nevada, and California. The company operates in two segments, namely 1) Natural Gas Operations, which engages in distribution and transportation of natural gas 2) Utility Infrastructure Services, which comprises the company’s wholly-owned subsidiary Centuri Group Inc., an infrastructure service enterprise providing a wide range of gas and electric solutions. As of June 16, 2021, the company’s market capitalization stood at USD 3.88 billion.

Strong Dividend Growth (Source: Q1FY21 Earnings Presentation, May 07, 2021)

Financial Assistance for Customers Impacted by Arizona Wildfires: On June 15, 2021, SWX reaffirmed financial assistance to qualified individuals through its Energy Share program. It showed solidarity against the Arizona wildfires. The company further stated that customers who qualify could receive support towards paying their Southwest Gas bills and do not require to meet Federal Poverty Income Guidelines to qualify.

Q1FY21 Results: The company reported a 5.92% increase in total operating revenues to USD 885.90 million in Q1FY21 (ending March 31, 2021) compared to USD 836.32 million in Q1FY20 (ending March 31, 2020). The gas operations contributed 58.91%, while the utility infrastructure services revenue added 41.09% to the total operating revenues in Q1FY21. Operating income increased by 16.90% to USD 173.45 million in Q1FY21 compared to USD 148.37 million in Q1FY20. In addition, the company reported a surge in net income to USD 118.84 million in Q1FY21 than USD 73.00 million in Q1FY20. As of March 31, 2021, the company had 2.13 million total natural gas customers, out of which Arizona represents 1.13 million customers, Nevada represents 0.79 million, and California represents 0.20 million.

Key Risks: During FY20, the company generated 50% of its utility infrastructure services revenue from nine customers only. Any change in construction work related to these customers could affect the company’s operational health in the future. Also, excessive dependence on a small set of customers for business could hurt the company’s financial health in the future.

Outlook:  For FY21, the company expects the operating margin of its natural gas segment to grow by 6% to 8% due to an increase in customer growth, rate relief in all the three states in which the company operates, expansion projects, and infrastructure tracking equipment. Also, the estimated capital expenditure in the natural gas segment to be around USD 700 million. For the utility infrastructure segment, the company is estimating its revenues to grow by 1%-4%. Operating margin to be in the range of 5.3% to 5.8%. SWX is projecting its FY21 diluted EPS to be in the range of USD 4 to USD 4.20. 

Valuation Methodology: EV/EBITDA per share Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

SWX Daily Technical Chart

Stock Recommendation: SWX's share price has decreased by 3.81% in the past one month and is currently trading at a mid-band of the 52-week range of USD 57.00 to USD 75.00. The stock is currently trading slightly lower than its 200 DMA levels. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 78.33. Considering the market dominance of the company in Arizona and Nevada states, robust dividend yield, growth in customers, and current valuation, we recommend a "Buy” rating on the stock at the closing price of USD 66.25, down by 1.03% as of June 16, 2021.

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.