Buy Northland Power for offshore wind investment, says iA Capital

Naji Baydoun of iA Capital Markets says Northland Power (Northland Power Stock Quote, Chart, News TSX:NPI) has a robust long-term outlook. In an update to clients on Thursday, Bayoun maintained a “Strong Buy” rating and target price of $50/share for a projected return of 42.1 per cent.

Founded in 1987 and headquartered in Toronto, Northland Power develops, builds, owns and operates clean and green power projects in North America, Europe, Latin America and Asia, including offshore wind, natural gas and onshore renewables. NPI also has ownership interests in a regulated utility business in Colombia.

Baydoun’s updated analysis comes after Northland Power announced an expanded partnership with RWE Renewables GmbH to establish a joint venture (JV) through which the companies will pursue additional offshore wind projects in Germany.

“Although it is still too early to give NPI any significant value for these future projects, we believe that today’s announcement highlights the company’s ability to continue sourcing attractive, large-scale investment opportunities in the fast-growing offshore wind market via strategic partnerships,” Baydoun said.

Under the terms of the joint venture, Northland Power and RWE will work together to develop a cluster of offshore wind projects, namely the Nordsee 2 (approximately 433MW), Nordsee 3 (approximately 420MW), and Delta Nordsee (approximately 480MW) projects. These three projects have an approximate 1.3GW combined total gross capacity, and NPI will hold a roughly 49 per cent interest in the new joint venture.

Previously, Northland Power and RWE worked together on the 332MW Nordsee 1 offshore wind project in the German North Sea, with Northland holding 85 per cent ownership. 

According to Baydoun, the new joint venture is significant in that the cluster will allow the partnership to unlock development, construction and operating synergies that should enhance project returns, while enhancing commercial offtake efforts for all projects involved; the joint venture will also hold step-in rights for both the Nordsee 3 and Delta Nordsee sites.

“The formation of the cluster aligns with our offshore wind ambitions and strategy of growing our position as a global leader in offshore wind,” said Mike Crawley, President and Chief Executive Officer of Northland in the company’s January 6 press release. “We are proud to enhance our partnership with RWE to form the cluster to further strengthen our position in the North Sea. This cluster will provide us with significant size and scale and allows us to support the decarbonization efforts in Germany.”

Northland’s most recent quarterly results were released in November, headlined by eight per cent year-over-year decreases in both sales ($432 million from $471 million in 2020) and gross profit ($383 million from $418 million in 2020.)

Despite a small year-over-year dip, Northland Power’s EBITDA remains in ten figures in Baydoun’s projections, with the $1.1 billion estimate for 2021 coming in below the reported 2020 figure of $1.17 billion. However, he expects it to rebound in a big way in 2022 with a projected jump to $1.26 billion, followed by an increase to a projected $1.29 billion in 2023.

Baydoun’s projections for the company’s AFFO/share follow a similar path, dropping from the reported $4.92/share in 2020 to a projected $4.38/share in 2021, then resuming its climb with an increase to a projected $4.48/share in 2022, with another step to a projected $4.68/share in place for 2023.

Northland Power’s FCF/share projections maintain the same trajectory, with Baydoun projecting a drop from the reported $1.73/share in 2020 to a projected $1.29/share in 2021, then inching back upward in 2022 at a projected $1.44/share before climbing to a projected $1.52/share in 2023.

Baydoun foresees the company’s valuation multiples enduring a slight roller coaster in its next two fiscal years, with the EV/EBITDA multiple expected to rise from the reported 12.5x in 2020 to a projected 13.2x in 2021, then dropping back down to a projected 11.8x in 2022. The P/FCF multiple may take a bit longer, with Baydoun projecting an increase from the reported 20.8x in 2020 to a projected 27.9x in 2021, then dipping to a projected 25x in 2022.

Though expectations for near-term growth remain modest, Baydoun believes Northland Power will deliver strong long-term growth thanks to its large-scale, long-dated offshore wind investments. 

“Overall, we view NPI as the best investment vehicle for investors to gain exposure to the offshore wind investment theme,” Baydoun said. “NPI offers investors an attractive mix of stable cash flows from contracted power assets, strong potential long-term FCF/share growth primarily driven by offshore wind projects, longer-term potential upside from organic development activity and accretive M&A, and an attractive dividend profile.”

Northland Power’s stock hasn’t generated much momentum in the last year as it’s dropped by 25.3 per cent in that time, its present 52-week low of $36/share standing in contrast to the 52-week high of $50.85/share on February 5.