More risk,not enough yield;Initiatin coverage with a Sell

28 September 2018RatingSellValuation & RisksPrice at 25 Sep 201830.29Price target28.0052-week range33.88 - 29.42Initiation of CoverageNorth AmericaUnited StatesCompanyBrookfieldRenewableReutersBloombergExchangeTickerBEP.NBEP USNYSBEPDate28 September 2018Deutsche BankResearchMore risk, not enough yield; Initiatingcoverage with a SellInitiating coverage with $28 price target and Sell ratingFounded in 1999, Brookfield Renewable Partners (BEP) and its predecessors havea longer history as a public company than most of the current crop of US-listed,renewables-focused YieldCos. This track record, coupled with an investmentgrade balance sheet plus Brookfield as a stable sponsor helped BEP navigate the2015-2016 YieldCo stock volatility much better than most. While NEP's leadershipin the sector is unquestioned, more recently we have seen others such as AtlanticaYield (AY) and Clearway Energy (CWEN) transition to stronger sponsorship. Aswe consider this evolution, at today's levels BEP looks fundamentally expensiveto us given 1) a riskier than average asset mix; 2) distribution levels well in excessof sustainable cash flows; 3) sub-optimal governance; and 4) a growth strategybased mostly on opportunistic M&A which may move the portfolio still furtherup the risk spectrum over time. Our $28 target is based on an 8% target yield,implying 8% downside and a negative 12-month total shareholder return.Some positive differentiators; but portfolio is higher-risk by designDifferentiators for BEP include the investment grade rating, ready access tocapital, plus operating and deal sourcing capabilities from Brookfield, whichcan also offer a financial backstop when needed. The current portfolio is morediverse than some, with a heavy weighting towards hydro (75% of proportionategeneration) and the rest in wind (20%) and solar/other (4%). There is alsogeographical diversity with the largest contributions from the US (40%) andCanada (24%) along with substantial positions in Brazil (18%) and Colombia(13%). The latter two bring emerging markets currency risk, also contributing toa relatively short-dated contract tenor. Whether these exposures are viewed as apositive or a negative by the market may vary with the macro mood, but in ourview the potential for volatility should be a discount valuation factor in a groupwhere investors tend to favor stable growth and longer visibility.Weak cash flow, short hedges and governance underpin discount caseAside from portfolio mix, which is perhaps debatable, we see a number of itemssupporting our case for a discount valuation. First, a weak cash flow profile withour numbers showing FFO payout which BEP prefers to focus on staying around100%. We see the more conservative CAFD payout as close to 150% in 2019 and2020 even if we follow BEP's practice and exclude hydro debt amortization on thebasis that these assets are permanent in nature. Second, a currency mis-matchwith distributions in hard currency (US and Canadian dollars) while roughly a thirdof cash flow arises between Brazil (which BEP does not hedge due to high costs)and Colombia. Third, in addition to shorter-dated hedges in Brazil (9 years) andJonathan ArnoldResearch Analyst+1-212-250-3182Rachel Lei, CFAResearch Associate+212-250-2191Abe AzarAssociate Analyst+1-212-250-7274Price/price relativeBrookfield RenewableS&P 500 INDEX (Rebased)20162017201820304010Performance (%)1m3m12mAbsolute-5.60.4-5.4S&P 500 INDEX1.16.716.4Source: Deutsche BankStock & option liquidity dataMarket cap (USDm)9,523.6Shares outstanding (m)314.4Volume (25 Sep 2018)59,635Source: Deutsche BankDeutsche Bank Securities Inc.Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should beaware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should considerthis report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONSARE LOCATED IN APPENDIX 1. MCI (P) 091/04/2018.Distributed on: 28/09/2018 09:33:45 GMT7T2se3r0Ot6kwoPaProvided for the exclusive use of Research Research at Provisional Access on 2018-09-29T02:38+00:00. DO NOT REDISTRIBUTE 28 September 2018Colombia (2 years), some 30% of the North America hydro book rolls off contractby 2022 and we have limited granularity as to the embedded pricing. Fourth, weview the governance structure as sub-optimal with BEP's senior managementessentially answerable to Brookfield rather than BEP. The LP holders face furthercash drain from Incentive Distribution Rights currently in the high splits (25%)and a management fee which is pegged to total capitalization rather than equityor per unit value.7% FFO CAGR, 5% DPS growth with triple digit payout ratiosWe model growth in FFO from ~$660M in 2018 to ~$815M in 2021 (7%CAGR) driven by full-year contributions from the Ter