TransAlta Corporation (TSX: TA) presents a compelling investment opportunity within the evolving North American energy landscape. The company’s diversified generation portfolio, strategic focus on renewable energy, and opportunistic pursuit of high-growth data centre partnerships position it for sustained value creation. While near-term headwinds related to Alberta power pricing persist, TransAlta’s disciplined hedging strategy, robust operational performance, and visible growth pipeline mitigate these risks and support our positive outlook.
Industry Overview
The North American power sector is undergoing a significant transformation, driven by decarbonisation targets, technological advancements, and evolving demand dynamics. The rise of renewable energy sources, coupled with the increasing electrification of various industries, is reshaping the competitive landscape and creating both opportunities and challenges for established power producers. Specifically, the Alberta electricity market, a ~C$7 billion total addressable market1, is undergoing a structural shift toward renewables, aiming for 30% renewable generation by 20302. This transition is creating significant tailwinds for companies like TransAlta with established renewable energy platforms and a proven ability to execute complex projects. Furthermore, the burgeoning data centre industry in Alberta, driven by favourable regulatory conditions and access to low-cost renewable power, represents a significant growth vector for the company.
Company Analysis
TransAlta operates a diversified 6.4GW generation portfolio across Canada, the U.S., and Australia, spanning hydro, wind, solar, gas, and coal-fired assets. The company’s strategic focus on transitioning to a cleaner energy mix is evident in its growing renewable energy capacity, which now accounts for approximately 49% of its total generation3. This positions TransAlta to benefit from secular tailwinds driving renewable energy adoption. The company’s energy marketing segment plays a crucial role in optimising asset dispatch and hedging merchant exposure, typically in the range of 65-85%3, mitigating volatility associated with fluctuating power prices. TransAlta’s financial performance demonstrates resilience, with Q1 2025 Adjusted EBITDA of $270 million and free cash flow of $112 million, demonstrating progress toward its full-year 2025 FCF guidance of $450-$550 million4. The recent 8% dividend increase further underscores management’s confidence in the company’s long-term cash flow generation potential5.
Investment Thesis
Our investment thesis is predicated on TransAlta’s ability to capitalise on the evolving energy landscape in Alberta and beyond. The company’s strategic advantages include: 1) a diversified generation portfolio with increasing exposure to renewables; 2) a strong operational track record and high fleet availability; 3) strategic positioning within the Alberta market, including proximity to key load centres and developing data centre clusters; 4) a disciplined hedging strategy that mitigates power price volatility; and 5) a visible growth pipeline, including data centre partnerships and U.S. expansion opportunities. These factors, combined with a reasonable valuation relative to peers, create a compelling investment proposition.
Valuation & Forecasts
We employ a discounted cash flow (DCF) analysis to value TransAlta, incorporating a weighted average cost of capital (WACC) of 8%, reflecting the company’s risk profile and capital structure. Our base case forecasts assume achievement of management’s 2025 FCF guidance and continued growth in renewable energy capacity. Sensitivity analysis reveals that even under a more conservative scenario, assuming sustained power price weakness in Alberta, TransAlta shares offer attractive upside potential. We also consider a sum-of-the-parts analysis, valuing the Canadian generation business at 8.5x 2025E EBITDA, in line with diversified renewable peers. Our analysis supports a 12-month price target of C$18.00, representing significant upside from current levels.
| Metric | 2025E | 2026E | 2027E |
|---|---|---|---|
| Revenue (C$M) | 2,500 | 2,700 | 2,950 |
| EBITDA (C$M) | 600 | 650 | 700 |
| FCF (C$M) | 475 | 525 | 575 |
Risks
Key risks to our investment thesis include sustained weakness in Alberta power prices, delays in data centre project commercialisation, potential regulatory changes impacting renewable energy development, and exposure to fluctuations in interest rates given the company’s debt profile. While these risks warrant careful consideration, we believe they are adequately reflected in our valuation and mitigated by TransAlta’s hedging strategy, operational excellence, and diversified business model.
Recommendation
We initiate coverage on TransAlta Corporation with a Buy rating and a 12-month price target of C$18.00. The company’s strategic positioning in the evolving energy market, combined with its operational strength and attractive valuation, creates a compelling investment opportunity. We believe TransAlta is well-positioned to deliver sustainable long-term value for shareholders.
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