Northland Power Inc. TSX : NPI BUY at $ September 26 th, Global Power & Utilities Team

Transcription

1 Northland Power Inc. TSX : NPI BUY at $23.35 Global Power & Utilities Team Kaylen Barber, Associate Phone : Kaylen.Barber@mail.utoronto.ca September 26 th,

2 Company Overview Business Overview of Northland Power Inc. 52-Week Share Price Performance Northland Power Inc. is an independent power producer that focuses on clean energy including: biomass, natural gas, wind and solar energy. Founded in 1987 by James Temerty, and headquartered in Toronto, Ontario. Expanded international operations through 3 new off-shore wind farms: Gemini, Nordsee One and Deutsche Bucht. Market Equity Value of $4.054 Billion. A 35% management ownership aligns executives with company s strategy and shareholder s interest. Business Segments 11% 18% Total LTM Revenue 47% $1,430.6 M 24% Management James Temerty Chairman & Director Thermal Gemini Renewables Managed John Brace Chief Executive Officer Paul Bradley Chief Financial Officer Significant Events 5.8% -2.8% -1.2% S&P TSX Gemini offshore wind farm was completed on April 28 th, ICLN NPI S&P TSX ICLN NPI Annual net production estimated to produce 2.6GW/h, resulting in sales of $160.7 million and EBITDA of $82.5 million in Q2 alone. Nordsee One wind farm is anticipated to be completed and in commercial operation by the end of Nordsee One will provide NPI an additional 332 /h of capacity. Deutsche Bucht (DeBu) Offshore reached financial close Aug 18 th, Northland taking a 100% stake in the 252 wind farm. Construction is expected to begin 4Q17. LTM Financials $1430 M $785 M $570 M $0.87 Sales EBITDA EBIT EPS SOURCES: FactSet, Bloomberg, Thompson One 2

3 Investment Thesis Expansion outpacing competitors % 23% 7.60% % 10.50% 23% Total 2016 Operating Capacity 1700 /h % Northland Power DONG energy Global Infrastructure Partners Siemens Vattenfall Stadwerke Munchen Others Extending global footprint: Through completion of Gemini, Northland retains 23% of market share in the North Sea. It continues to assert dominance with their newest acquisition of Deutsche Bucht (DeBu) and the impending completion of Nordsee One. Strength in diversification: Northland presents a portfolio of increasing diversity across geography and thermal/renewable sources. The completion of Nordsee One will push off-shore wind to generate approx. 55% of adjusted EBITDA, overtaking their thermal business segment. Strategic negotiations: Northland is yet to trigger their contract with the government of the Netherlands in a 15 year premium purchase agreement for Gemini power. Likewise, the newest Debu project will seek to take advantage of entitled fixed-feed tariff subsidies from the German government for 13 years upon completion Superior Capital Allocation & Management Execution Committed to delivering cash flows to shareholders: Management continues to find a superior balance of reinvesting into future projects and providing dividend yield (4.6%) in line with competitors. Management is expected to increase impending dividend payments ~10% given completion of Nordsee One facility come December % 56% Free Cash Flow Margin EBITDA Margin EPS 50% 58% 55% 23% 22% 57% 56% 44% 52% 59% 57% 67% LTM NTM 2015A 2016A 2017E 2018E 2019E 80% 70% 60% 50% 40% 30% 20% 10% Dependable project management and oversight: Within the past decade every major project undertaken by Northland has finished ahead of schedule and 91% completed below budget. Improving bottom line: Free cash flows per share are on track to exceed consensus estimates and double by 2018 year end, with EBITDA Margin levels following suit at a constant 19% 3 year CAGR. This being driven by maintaining low operational costs and Nordsee One reaching full capacity by year end. 0% SOURCES: Northland Power Investor Kit, FactSet, GlobalData, RBC Capital Markets, Thompson One 3

4 Risks and Catalysts Catalysts Expansion into the Taiwan Region Taiwanese Government has designed a feed-in-tariff program supporting 20 year offshore FiT contracts to support the countries renewable energy transition Taiwan Strait 12 Nautical Mile Territory Water Depth 20-50m Pacific Ocean ajoint venture with Yushan Energy, construction is expected to begin on off-shore projects Hai Long I and III within the next 5 years; seizing the opportunity to utilize larger 8 turbines along the shallow coastline Long Term growth in the Americas Faltering Venezuelan exports are creating blackout fears across Cuba and Columbia. Presenting opportunity for energy security in renewables. Coupling a the Mexican government s commitment of 50% renewable energy by 2050, 50 GW of capacity is needed to accommodate growing demand by 2030 (40% of which is needed by 2022), making Mexico a prime target for on-shore wind acquisitions Risks -a Highly Likely Not Likely Macro Risks Low Impact Operational Risks Competitor Risks C2 C1 O1 G1 Decrease in price of crude oil (G1) G2 Wind Energy Development Barriers in Germany (G2) Variations in climate and seasonal conditions(o1) Heavy dependence on new Gemini Wind Farm (O2) O2 High Impact Decreasing costs encourage further market entrants (C1) Further technological advancements in other renewables (C2) SOURCES : Global Data, Northland Power Investor Reports, 10-K, Bloomberg, Yushan Energy 4

5 Recommendation Summary Share Price Sensitivity Conclusion Implied Share Price $80 $70 $60 $50 $40 $30 $20 $10 $0 $76 $74 $22 P/E 2018E $15 EV/Sales LTM Broker Outlook $45 EV/Sales 2017E $52 $23 EV/Sales EV/EBITDA 2018E 2017E Valuation Metric Target: $26.45 Current Share Price: $23.35 $28 $18 $10 $5 EV/EBITDA 2018E Price to Book LTM $34 $18 Discounted Cash Flow Model DCF Share Price Sensitivity BUY recommendation on NPI at a target price of $26.45 Entry Price: $23.35 (Current as of Sept 15th) Returns Analysis Current Share Price $23.35 Target Share Price $26.45 Equity Upside 13.3% Dividend Yield 4.6% 12-Month Return 17.9% 100% 80% 60% 40% 20% 0% Sell Hold Buy Target Price Actual Price $30 $26 $22 $18 $14 WACC Share Price Sensitivity Exit Multiple x 10.5x 11.0x 11.5x 12.0x 5.2% % % $ % % SOURCES: FactSet, Bloomberg, Northland Power Investor Reports 5

6 Appendix 6

7 Appendix: Comparable Companies Analysis Trading Comps Northland Power Inc. Comparable Companies Analysis ($CAD in millions, fiscal year ending December 31) Enterprise Value / EBITDA Price / Total EBITDA Sales CAGR Dividend EPS Book Debt Tickers Company name Equity Value Enterprise value LTM 2017E 2018E LTM 2017E 2018E 16E - 18E Yield LTM 2017E 2018E LTM EBITDA NPI-CA Northland Power Inc. $4,054 $10, x 14.8x 11.7x 7.5x 8.1x 7.1x 19.0% 4.7% 18.4x 21.9x 15.4x 5.9x 6.7x Median 19.8x 12.4x 11.0x 12.1x 9.8x 9.6x 8.8% 4.6% 32.3x 18.9x 17.0x 2.8x 9.4x Mean 19.9x 12.6x 11.4x 11.4x 9.5x 8.8x 9.7% 4.8% 43.7x 24.9x 20.8x 2.6x 9.4x RNW- CA TransAlta Renewables, Inc. $3,470 $4, x 9.6x 9.5x 11.0x 9.8x 11.0x 0.2% 6.2% 32.0x 17.4x 14.5x 1.2x 4.4x AQN-CA Algonquin Power & Utilities Corp. $5,057 $10, x 12.0x 11.0x 6.7x 4.9x 4.5x 8.8% 4.6% 32.3x 18.9x 17.0x 1.4x 7.2x PEGI-US Pattern Energy Group, Inc. Class A $2,254 $6, x 13.8x 12.4x 12.8x 11.4x 9.6x 12.8% 6.2% NMF 81.7x 51.1x 2.8x 9.4x BLX-CA Boralex Inc. Class A $1,642 $4, x 12.4x 10.9x 12.1x 9.6x 8.6x 10.8% 2.7% NMF 74.8x 39.6x 2.9x 12.6x INE-CA Innergex Renewable Energy Inc. $1,569 $4, x 15.2x 13.1x 14.6x 11.5x 10.1x 6.4% 4.4% 66.8x 38.3x 30.8x 4.7x 13.3x Max 24.8x 15.2x 13.1x 14.6x 11.5x 11.0x 12.8% 6.2% 66.8x 81.7x 51.1x 4.7x 13.3x Min 17.0x 9.6x 9.5x 6.7x 4.9x 4.5x 0.2% 2.7% 32.0x 17.4x 14.5x 1.2x 4.4x Commentary NPI continues to impress through its ongoing energy projects, posting the highest 3 year projected EBITDA CAGR against competitors at 19%. Currently trading at a discount across EV/Sales and P/E multiples reaching into the 2018 fiscal year. A sharp rise in EBITDA is expected come 2018, as Nordsee One and Gemini reach full capacity and long term government contracts/subsidies are triggered. Despite high leverage levels, NPI trades below median Debt to EBITDA multiples, suggesting prime capital structure has not been reached. Comparable Criteria & Selection Companies were chosen in a similar geographic area, basing their operations mainly within Canada and the US. Business segments are a major focal point in selection, chosen companies have a diversified portfolio of renewable production across several platforms (solar, wind, hydro-electric). Relative size of competitors, with regards to equity and enterprise value, was set within a relative range of B. Extreme values were excluded from Mean/Median calculations. SOURCES: FactSet, Bloomberg, Northland Power Investor Reports 7

8 Appendix: Discounted Cash Flow Analysis FCFF Projections Mid- Year Convention N Historical Period CAGR Discounted Cash Flow Inputs, Assumptions & Revenue Breakdown Enterprise Value Implied Equity Value and Share Price DCF Perpetuity Growth Method Cumulative Present Value of FCF $984.6 Enterprise Value $11,903.1 Perpetuity Growth Rate 3.5% Capital Structure Less: Total Debt (6,776.1) 2022 FCF $371.5 Debt-to-Total Capitalization 60.5% Terminal Value Less: Preferred Securities (227.6) Terminal Value 10, Equity-to-Total Capitalization 37.1% Terminal Year EBITDA (2022E) $1,333.5 Less: Noncontrolling Interest (475.0) Present value of FCF $984.6 Preferred-to-Total Capitalizat 2.4% Exit Multiple 11.0x Plus: Cash and Cash Equivalents Enterprise Value 11, Tax Rate 28.0% Terminal Value $14,722.1 Less: total Debt (6,776.1) After-tax Cost of Debt 4.3% Discount Factor 0.74 Implied Equity Value $5,019.3 Less: Noncontrolling Interest (475.0) Levered Beta 0.89 Present Value of Terminal Value $10,918.5 Plus: Cash and Cash Equivalents Cost of Equity 9.4% % of Enterprise Value 91.7% Fully Diluted Shares Outstanding Implied Equity Value 4, Cost of Pref. Equity 4.6% Shares Outstanding WACC 6.2% Enterprise Value $11,903.1 Implied Share Price $26.45 Implied DCF Share Price $25.67 Projection Period ('14 - '16) Sales $760.1 $728.1 $1, % $1,321.1 $1,552.3 $1,769.6 $1,946.6 $2,102.3 $2,196.9 % growth NA (4.2%) 50.9% 20.2% 17.5% 14.0% 10.0% 8.0% 4.5% COGS Gross Profit $469.4 $502.4 $ % $1,135.5 $1,272.9 $1,451.1 $1,557.3 $1,681.8 $1,691.6 % margin 61.8% 69.0% 82.4% 86.0% 82.0% 82.0% 80.0% 80.0% 77.0% SG&A EBITDA $349.4 $383.2 $ % $907.2 $1,019.9 $1,162.6 $1,240.0 $1,339.2 $1,333.5 % margin 46.0% 52.6% 66.1% 68.7% 65.7% 65.7% 63.7% 63.7% 60.7% Depreciation & Amortization EBIT $208.6 $238.0 $ % $581.1 $677.7 $772.6 $810.9 $875.8 $849.3 % margin 27.4% 32.7% 43.5% 44.0% 43.7% 43.7% 41.7% 41.7% 38.7% Taxes EBIAT $150.2 $171.3 $ % $418.4 $488.0 $556.3 $583.9 $630.6 $611.5 Plus: Depreciation & Amortization Less: Capital Expenditures (1860.0) (2021.0) (1623.0) (999.0) (620.9) (760.9) (837.0) (904.0) (768.9) Less: Increase in Net Working Capital. (42.5) Unlevered Free Cash Flow $166.7 $221.0 $221.7 $216.8 $371.5 WACC 6.2% Discount Period Discount Factor Present Value of Free Cash Flow $157.0 $196.1 $185.3 $170.7 $275.5 WACC Calculation SOURCES: FactSet, Bloomberg, Thompson One 8

9 Appendix: Supporting Graphs & Analysis Average Offshore Wind Turbine Capacity Canadian Electricity Demand/Rates Electric Constumption Price of Electric Power Petajoule CAD$ per Gigajoule Production and Size of Offshore Assets Cost Reduction of Off-Shore Project Elements 3 Avg. Yearly Prod. (KW/h) Platform Turbine Size # of turbines 160 Levelised cost of electricity (USD/h) Average Yearly Production (KW/h) # of turbines within facility 0 NordSee Gemini DeBu 0 SOURCES: IBISworld, International Renewable Energy Agency, Northland Power Investors Reports 9

10 Appendix: DCF Assumptions/Sensitivity Analysis Assumptions Sales (% growth) - (4.2%) 50.9% 20.2% 17.5% 14.0% 10.0% 8.0% 4.5% COGS (% sales) 38.2% 31.0% 17.6% 14.0% 18.0% 18.0% 20.0% 20.0% 23.0% SG&A (% sales) 15.8% 16.4% 16.3% 17.3% 16.3% 16.3% 16.3% 16.3% 16.3% Depreciation & Amortization (% sales 18.5% 19.9% 22.6% 24.7% 22.0% 22.0% 22.0% 22.0% 22.0% Capital Expenditures (% sales) 244.7% 277.6% 147.7% 75.6% 40.0% 43.0% 43.0% 43.0% 35.0% Tax Rate 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% Working Capital (% sales) (16.4%) (16.4%) (17.2%) (17.2%) (18.5%) Sensitivity Tables Enterprise Value Implied Equity Value Exit Multiple Exit Multiple 11, x 10.5x 11.0x 11.5x 12.0x 5, x 10.5x 11.0x 11.5x 12.0x 5.2% 11,426 11,944 12,463 12,981 13, % 4,542 5,060 5,579 6,097 6,616 WACC 5.7% 11,166 11,673 12,179 12,685 13, % 10,914 11,409 $11,903 12,398 12, % 10,669 11,152 11,635 12,118 12,601 WACC 5.7% 4,283 4,789 5,295 5,801 6, % 4,030 4,525 $5,019 5,514 6, % 3,785 4,268 4,751 5,234 5, % 10,430 10,902 11,374 11,846 12, % 3,546 4,018 4,490 4,962 5,434 Implied Perpetuity Growth Rate Implied Enterprise Value / LTM EBITDA Exit Multiple Exit Multiple x 10.5x 11.0x 11.5x 12.0x 5.2% 2.3% 2.5% 2.6% 2.7% 2.8% x 10.5x 11.0x 11.5x 12.0x 5.2% 12.6x 13.2x 13.7x 14.3x 14.9x WACC 5.7% 2.8% 2.9% 3.1% 3.2% 3.3% 6.2% 3.3% 3.4% 3.5% 3.7% 3.8% 6.7% 3.8% 3.9% 4.0% 4.1% 4.2% WACC 5.7% 12.3x 12.9x 13.4x 14.0x 14.5x 6.2% 12.0x 12.6x 13.1x 13.7x 14.2x 6.7% 11.8x 12.3x 12.8x 13.4x 13.9x 7.2% 4.3% 4.4% 4.5% 4.6% 4.7% 7.2% 11.5x 12.0x 12.5x 13.1x 13.6x SOURCES: FactSet, Bloomberg 10

11 Northland Power Inc. TSX : NPI BUY at $23.35 Global Power & Utilities Team Kaylen Barber, Associate Phone : Kaylen.Barber@mail.utoronto.ca September 26 th,