On Monday, Seaport Global Securities revised its stance on SJW Corp . (NYSE:SJW), lifting the stock from Neutral to Buy with a price target (PT) of $68.00. Seaport Global's evaluation follows news of Eversource (ES) divesting its Connecticut-based Aquarion Water Company to stabilize its balance sheet after incurring losses related to offshore wind investments.
SJW Corp., through its subsidiary Connecticut Water, stands as the second-largest investor-owned water utility in Connecticut and is noted for its solid regulatory relationships with the Public Utilities Regulatory Authority (PURA). This positions SJW as a likely candidate to acquire Aquarion, with a straightforward and expedient path to obtaining the necessary regulatory approvals in Connecticut.
Eversource had originally purchased Aquarion in late 2017 for approximately 2.2 times its enterprise value (EV) to rate base. However, the value of Aquarion has since declined due to tougher utility regulations in Connecticut and a general devaluation of water stocks in the United States. As a result, the sale is expected to fetch between 1.6 and 1.7 times the 2023 EV/rate base, equating to an enterprise value of $2.1 to $2.2 billion.
To finance the potential acquisition, SJW may need to raise $1.0 to $1.1 billion in equity, a significant amount given the company's market capitalization of $1.83 billion. The management of SJW is considering various financing options, including private placement with an infrastructure fund and the issuance of mandatory convertibles, in addition to traditional equity offerings.
The timing of the deal's financing is uncertain, with estimates pointing to late 2024 or early 2025. The acquisition is projected to be over 7% accretive to Seaport Global's standalone earnings per share (EPS) estimate for SJW for 2026, potentially equalizing earnings contributions from California and Connecticut. This anticipated positive impact on SJW's financial performance is the primary reason behind Seaport Global's upgraded rating and increased price target.
InvestingPro Insights
SJW Corp.'s recent developments have caught the attention of analysts and investors alike, with Seaport Global Securities upgrading its rating to Buy and setting a price target of $68.00. In light of this, key metrics from InvestingPro provide further context on the company's financial health and market position as it considers the acquisition of Aquarion Water Company.
The company's market capitalization stands at a solid $1.83 billion, affirming its significant presence in the utility sector. Despite operating with a considerable debt load, as indicated by one of the InvestingPro Tips, SJW has demonstrated a commitment to shareholders by raising its dividend for an impressive 31 consecutive years, a testament to its financial resilience and stability. This is further underscored by the company's ability to maintain dividend payments over the last 53 years.
InvestingPro data reveals a P/E ratio of 21.32, which is considered high relative to near-term earnings growth, suggesting that investors are paying a premium for SJW's earnings. However, the company's long history of profitability, including the last twelve months, and analysts' predictions that it will remain profitable this year, provide a counterbalance to concerns about its high valuation. Moreover, SJW is trading near its 52-week low, which could present a buying opportunity for value investors, particularly if the acquisition of Aquarion proves to be accretive to earnings as projected.
For readers interested in a deeper dive into the company's prospects, there are additional InvestingPro Tips available that could aid in making a more informed investment decision. To access these insights and take advantage of a special offer, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro.
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