Northland Power opens a new growth avenue, iA Capital reports

Northland Power (Northland Power Stock Quote, Chart, News TSX:NPI) has plenty of wind in its sails, according to analyst Naji Baydoun of iA Capital Markets. Baydoun delivered an update to clients on Northland on Tuesday where he maintained a “Strong Buy” rating and target price of $50/share for a projected return of 43.9 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. Particular operating segments include offshore wind, efficient natural gas, onshore renewable and utilities.

Baydoun’s updated analysis comes after Northland Power announced that two of its applications for the Crown Estate Scotland’s ScotWind offshore wind leasing scheme were successful, with Baydoun calling the announcement as a strategic market entry.

“While there still remains a long way to go before NPI’s Scotland projects advance to financing, construction and ultimately COD, the strategic entry into a new market should enable the company to extend its growth runway via additional large-scale offshore wind investments and benefit from both geographical and technological diversification,” Baydoun said.

As part of Scotland’s stated goal of net-zero emissions by 2045, the ScotWind offshore wind seabed leasing process was launched in 2020 with the objective of supporting Scotland’s climate goals. 

After a six-month application process that began in January 2021, the results were revealed yesterday, with Northland capturing two projects and the opportunity to secure seabed leases and obtain the rights to build offshore wind farms in Scottish waters.

Northland’s projects, along with the others selected, are expected to have a total combined capacity of about 24.8GW, and the successful applicants will pay the Scottish government approximately £700 million in option fees.

Northland secured two of the lowest-cost option agreements to develop offshore wind at an approximate value of £20 million, getting the right to develop 2.34GW of offshore wind capacity in the northwest of Scotland (approximately 1.5GW of floating wind and approximately 0.84GW of fixed-bottom foundation capacity), getting solid value at approximately 8,500/MW weighted average, significantly below the £30,200/MW weighted average fee for the other 15 projects.

“As an international developer of renewable energy projects, we are drawn to Scotland for its rich natural resources and the opportunity to put down roots in some of the country’s most beautiful and entrepreneurial places,” said Nigel Slater, Northland Power’s Managing Director, Development – Europe in the company’s January 17 press release. “These are important investments for the communities where these sites are from. The social and economic benefits of offshore wind will be felt for generations and will be measured not only in terms of jobs – directly and via the supply chain – but more broadly in helping create greener and stronger economies and communities.”

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 $1.29 billion in 2023.

Baydoun’s projections for the company’s AFFO/share remain on the same 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 $4.48/share in 2022, with another step to $4.68/share in place for 2023.

Northland Power’s FCF/share projections are also unchanged from the previous analysis, 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 $1.44/share before climbing to $1.52/share in 2023.

With minimal modifications in place, Baydoun foresees the company’s valuation multiples experiencing a bit of volatility over the next two fiscal years, with the EV/EBITDA multiple expected to rise from the reported 12.3x in 2020 to a projected 13.1x in 2021 (previously 13.2x), then dropping back down to 11.7x in 2022 (previously 11.8x). The P/FCF multiple may take a bit longer, with Baydoun projecting an increase from the reported 20.6x in 2020 to a projected 27.6x (previously 27.9x) in 2021, then dipping to 24.7x (previously 25x) in 2022.

“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 22.9 per cent in that time, ending last week at a 52-week low of $35.25/share in contrast to the 52-week high of $50.85/share on February 5.