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Portfolio Update: Uranium Derivatives Outperform Post-Q2/2023 Results

DISCLAIMER: Any written content contained herein should be viewed strictly as observation, analysis & opinion and not in any way as investment advice. No compensation was received for this report. Visitors to this site are encouraged to conduct their own due diligence.

With the Q2/2023 reporting window all but complete, we highlight the relative outperformance of our equally weighted uranium peripheral portfolio relative to a basket of North American and African uranium miner/developers. Though the spot uranium price remains near the ~$57/lb level, we note that while uranium companies with Athabasca Basin exposure returned an average of +10.9% MTD (ex-Cameco, +5.0%), those with exposure to the US ISR space returned +3.8% MTD while those with exposure to Africa (weighed down by the coup in Niger) declined by -8.3% MTD. Interestingly enough, our exposure to the uranium peripheral portfolio (encompassing large-cap companies with exposure to nuclear power generation, NPP maintenance/support services and grid modernization) returned a solid +4.7% MTD.

From the uranium peripheral portfolio, Q2/2023 was particularly strong given results from Constellation Energy (CEG), SNC-Lavalin (SNCAF), Quanta Power (PWR) along with one miss from Mastec Inc (MTZ). These companies encompass exposure to nuclear power generation, Nuclear Power Plant (NPP) maintenance/support services and grid modernization)

Our power related investment focus remains three-pronged: 1) ESG power generation (zero carbon, renewable and ideally unregulated), 2) the needed fuel to power nuclear reactors (uranium miners), and finally 3) the badly needed infrastructure and electrical transmission investments needed to upgrade an extremely old grid network. This is prescient given the strains of variable renewable energy intake coupled with increased charging demand from EVs. Our favored picks over the entire value chain include the following:

As per Q2/2023 results:

Constellation Energy (CEG) reported strong quarterly figures with particular strength in the commercial business/ This lead to a solid quarterly EBITDA beat which amounted to $1.03B compared to consensus of $702M. This performance prompted the company to increase its FY/2023 EBITDA guidance by $400M (midpoint) to reach an expected new range between $3.30B-$3.70B. Being the largest nuclear generating utility in the US, Constellation continues to benefit from LT pricing stability given the IRA along with an optimized portfolio of load-serving and generating assets which benefit from continued volatility in power demand. Also of note was that the outlook for FY/2023 gross margins were also increased, now expected between $8.45B-$8.80B. Expected FY/2024 margins were increased to $9.20B, reflecting an increase of $150M. The company remains active on the M&A front, the STP acquisition (more here) is expected to close by year end. In terms of the $1.0B share buyback, half of that amount was already purchased.

SNC-Lavalin (SNCAF) delivered a strong quarter with Services EBIT of $167.1M (margins of 8.5%), ahead of expectations for $156.4M. Moreover, FY/2023 forecasts for organic segment revenue growth were updated to a range of 12.0%-15.0%, a significant increase from the previously expected range between 5.0%-7.0%. This is very bullish outlook for a segment which is driven by the Engineering Services and Nuclear Services divisions. Moreover, consolidated backlog of $12.80B was booked as of quarter-end – this represents the highest point since Q3/2021. Note that SNC has built one of the most prolific nuclear services franchise with notable exposure to Canada, the US and the UK. Services span the full nuclear cycle lifespan from design to NPP support, refurbishments and ultimately decommissioning. SNC has exclusive rights to the CANDU technology.

Quanta Services (PWR) reported Q2/2023 adjusted EPS of $1.65 which was slightly ahead of consensus estimates calling for $1.64. The beat was driven by stronger revenues ($5.049B compared to consensus for $4.707B) and stronger adjusted EBITDA ($472M compared to $446M). More importantly, the company raised its FY/2023 revenue, adj. EBITDA, adj. EPS, and FCF guidance. End of quarter backlog also topped expectations when it came in at $27.195B, with book-to-bill at 1.4x. We continue to believe that the company is well endowed to service all aspects of grid modernization to support themes of decarbonization, electrification, and extreme weather.

Mastec (MTZ) is seen as Quanta Services’ nearest peer. Though offering diversified infrastructure services (related to energy, environmental and telecommunications), grid service and power delivery (transmission) remains a key component in the company’s toolbox. Though the company reported a slight beat to Q2/2023 EBITDA, lowered FY/2023 guidance was announced. This downward revision was not due to the power business but rather due to slower communications spending as wireless carriers pause on 5G rollout. Moreover, there were announced project delays with the recently acquired IEA business. That said, though 1H/2023 FCF was weak, the company did reiterate FCF guidance for FY/2023.


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