Summary
Northland’s weak 2023 results and conservative 2024 guidance
are not likely to undermine current valuations as a significant part of the company’s
long-term Free Cash Flow depends on future contributions from the three
major projects under construction and its massive post-2027 development
pipeline.
Financial closure achieved for these three projects in 2023
adds to the confidence that despite the tight coverage ratios the dividends
will remain intact until commercial operation is achieved (expected in
2025-2027).
Northland is set to significantly boost its long-term Adjusted
EBITDA by 2027 by adding Oneida, Baltic Power, and Hai Long to its portfolio.
The projects have 20-to-30-year revenue contracts. The company has proven its
capabilities to successfully build large-size offshore wind projects.
In the short term additional gains could be achieved from selling interest in other
development projects that Northland is actively pursuing.
Changes in the macroeconomic environment with a likely
decrease in interest rates this year will create a significant tailwind for the
company business and will push up the share price.
We see the current level as a good entry point as our 12-month
target of CAD 32.31, represents a 40% upside to the CAD 23.06 market price as
of the end of the trading on February 23, 2024.
Investment
case
Northland Power positions itself for substantial growth in
Adjusted EBITDA by 2027, driven by the commercial operation of its flagship
projects: Oneida, Baltic Power, and Hai Long. These projects are not only
significant due to their scale but also because they are underpinned by
long-term revenue contracts spanning 20 to 30 years, ensuring stable and
predictable cash flows.
In the lead-up to these projects becoming operational,
Northland is actively engaging in strategic sell-downs of interests in
development projects nearing financial closure. This approach not only
capitalizes on capturing development profits at key milestones but also aligns
with the company's disciplined cost control strategy. By minimizing development
expenditures, Northland ensures the focused and efficient development of its
pipeline projects post-2027.
Northland's investment appeal is further enhanced by its
contracted offtakes, which provide additional financial stability. The
company's extensive development, construction, and financing expertise enable
it to navigate complex project landscapes successfully, while geographic
diversification across its portfolio mitigates regional risks and capitalizes
on global energy transition opportunities.
Overall, Northland Power's strategic focus on construction
execution for its three flagship projects, combined with a selective approach
to project development and strong contracted revenues,
positions it well for long-term growth and makes it an attractive investment
proposition in the Canadian and global renewable energy sector.
Q4 and
annual 2023 results are relatively weak
Northland Power Inc. reported its financial results for Q4
and the full year of 2023 on February 22, 2024. The company saw a decrease in
sales and gross profit. There was a shift from net income to quarterly and
annual net loss. Adjusted EBITDA increased in Q4 2023, though full-year
Adjusted EBITDA decreased year-over-year.
Free Cash Flow per share and Adjusted Free Cash Flow per
share went up in Q4 2023 and for the year. The company achieved its Adjusted
EBITDA targets and exceeded its guidance for Adjusted Free Cash Flow and Free
Cash Flow.
Northland Power Q4 and
2023 Annual Results ($CAD million)
|
Category |
2023 |
2022 |
% Change |
|
Sales
(Q4) |
$626 |
$641 |
-2.34% |
|
Sales
(Full Year) |
$2,233 |
$2,449 |
-8.82% |
|
Gross
Profit (Q4) |
$566 |
$574 |
-1.39% |
|
Gross
Profit (Full Year) |
$2,021 |
$2,178 |
-7.21% |
|
Net
Income/Loss (Q4) |
-$268 |
$324 |
-182.72% |
|
Net
Income/Loss (Full Year) |
-$96.0 |
$955.0 |
-110.05% |
|
Adjusted
EBITDA (Q4) |
$389.0 |
$353.0 |
10.2% |
|
Adjusted
EBITDA (Full Year) |
$1,240 |
$1,398 |
-11.3% |
|
Adjusted
Free Cash Flow per Share (Q4) |
$0.75 |
$0.16 |
368.75% |
|
Adjusted
Free Cash Flow per Share (Full Year) |
$1.97 |
$1.95 |
1.03% |
|
Free
Cash Flow per Share (Q4) |
$0.75 |
$0.06 |
1150.0% |
|
Free
Cash Flow per Share (Full Year) |
$1.68 |
$1.61 |
4.35% |
Northland Power 2023 Full-Year Guidance and Results
|
Category |
2023
Target Range |
2023
Actual |
Result |
|
Adjusted
EBITDA |
Low
end: CAD 1.2 bn to CAD 1.3 bn |
CAD 1.24bn |
Achieved |
|
Free
Cash Flow per Share per Share |
Low
end: CAD 1.30 to CAD 1.50 |
CAD 1.68 |
Exceeded |
|
Adjusted
Free Cash Flow per Share |
Low
end: CAD 1.70 to CAD 1.90 |
CAD 1.97 |
Exceeded |
From the long-term perspective, Northland Power shows an expanding shareholder base and reliable return of value through dividends. However, 2023 results indicate fluctuations in revenue, operating income, and earnings.
Northland Power
2020-2023 Annual Results ($CAD million)
|
Year |
Revenue |
Operating Income |
Net Income |
Adjusted EBITDA |
Free Cash Flow |
Total Dividends |
WA Shares OS |
|
2020 |
2,061 |
857 |
485 |
1,170 |
344 |
245 |
198,774 |
|
2021 |
2,093 |
785 |
270 |
1,137 |
307 |
264 |
218,861 |
|
2022 |
2,449 |
1,051 |
955 |
1,398 |
380 |
285 |
236,157 |
|
2023 |
2,233 |
741 |
-96 |
1,240 |
424 |
303 |
252,710 |
|
Category |
2024
Target Range |
2023
Actual |
|
Adjusted
EBITDA |
CAD 1.20
bn to CAD 1.30 bn |
CAD 1.24
bn |
|
Adjusted
Free Cash Flow per Share |
CAD 1.30
to CAD 1.50 |
CAD 1.97 |
|
Free
Cash Flow per Share |
CAD 1.10
to CAD 1.30 |
CAD 1.68 |
Key drivers anticipated to have a positive impact on Adjusted EBITDA include a $30 million increase from New York Onshore Wind Projects and other onshore renewables, a $20 million rise from offshore wind assets, a $50 million reduction in development expenditures, and a $20 million uplift from EBSA due to favourable exchange rates. However, these gains are expected to be partially negated by a $110 million shortfall from the non-recurrence of 2023's sell-down gains and development expenditure recoveries related to offshore wind projects.
Decrease in forecasted Free Cash Flow and Adjusted Free Cash
Flow attributed to a $120 million drop from lower Hai Long sell-down and other
transactional and hedging gains, a $15 million decline from EBSA due to higher
financing in 2023, and a $15 million reduction in interest income. Nevertheless,
a $10 million to $15 million increase from New York Onshore Wind Projects and
other assets is expected to mitigate some of these declines.
Slowdown
in new development initiatives and lower development costs
In 2024, Northland Power anticipates development
expenditures to be around $60 million, marking a decrease from previous years
as the company prioritizes the successful construction of its three primary
projects. The reduced spending follows Northland's decision to halt development
activities in Mexico, Colombia, and Japan, concentrating instead on advancing
secured projects within its pipeline.
These include ScotWind, Korean offshore wind projects, and
onshore renewable energy opportunities in Alberta, New York, and Ontario. While
these development expenditures are expected to lower near-term free cash flow,
they are projected to contribute to long-term earnings growth and enhance free
cash flow. Additionally, corporate G&A costs are forecasted to drop by $3
million from the previous year, totaling about $75 million in 2024, further
reflecting Northland's strategic focus on efficiency and growth.
Solid development
projects pipeline and strategic selling
With over 3GW of operating capacity and a 12GW development
pipeline, including 2.4GW under construction expected by 2026-2027, Northland
is strategically positioned for the accelerating global energy transition. At
the same time, the company is strategically selling interests in specific
development projects at or before the financial close, occasionally exiting
markets or scaling down development in certain regions, aiming to remain a
long-term asset holder. Northland has a strong track record of successful joint
initiatives including partnerships with Gentari, Orlen and Mitsui.
The 2024 guidance currently does not account for any
sell-down proceeds, meaning any such proceeds will boost the reported financial
metrics if they occur. Future gains from selling ownership interests in
development assets will be included in Northland's Adjusted EBITDA, Adjusted
Free Cash Flow, and Free Cash Flow, reflecting development profits at crucial
milestones.
Future dividends
seem reliable, but payout ratios could be stretched
Northland remains dedicated to its annual dividend payout of
$1.20 per share. However, the projected payout ratio for 2024 may be close to
or exceed 100%. This is largely due to substantial investments in expansion
efforts and the equity funding secured for current projects under construction,
with cash inflows from these projects anticipated in 2026 and 2027.
Nevertheless, the risk of a decrease in dividends is minimal
because the company achieved the financial closure for all three major
construction projects in 2023. Management also indicated its commitment to the
strategy of refraining from raising new debt or equity funding.
The successful completion of Hai Long, Baltic Power, and
Oneida battery storage by 2027 will notably improve Northland's financial
metrics. It is projected to increase Adjusted EBITDA to between $570 million
and $615 million and Free Cash Flow to between $185 million and $210 million,
averaged over five years, which is expected to positively impact shareholder
value.
Valuation
and key assumptions
Key Assumptions for Base Case Valuation Scenario
|
Year |
Gross Capacity (GW) |
EBITDA |
Free Cash Flow |
|
2024e |
3.3 |
CAD 1.25 bn |
CAD 0.34 bn |
|
2027e |
5.5 |
CAD 1.8 bn |
CAD 0.49 bn |
|
2030e |
12 |
CAD 3.0 bn |
CAD 0.816 bn |
|
2034e RV |
12 |
|
CAD 22.7 bn |
In this scenario, the sum of discounted Free Cash Flow for ten years and Residual Value results in a present value of CAD8.2 bn or $32.31 per share at the end of 2024.
Key Assumptions for Worst Case Valuation Scenario (Lower
Than Projected Growth)
|
Year |
Gross Capacity (GW) |
EBITDA |
Free Cash Flow |
|
2024e |
3.3 |
CAD 1.25 bn |
CAD 0.34 bn |
|
2027e |
4.5 |
CAD 1.6 bn |
CAD 0.44 bn |
|
2030e |
8 |
CAD 2 bn |
CAD 0.54 bn |
|
2034e RV |
8 |
|
CAD 15.2 bn |
In this scenario, using the same discount rate as above, the sum of discounted Free Cash Flow for ten years and Residual Value results in the present value of CAD 5.9 bn or $23.38 per share at the end of 2024.
The difference between the results in these models shows
that currently the market (on February 23, 2024, NPI shares closed at CAD 23.06)
is somewhat skeptical regarding the company’s growth plans and remains in the “I
will pay after I see” mode.
Major
Valuation Drivers
· - Successful completion of construction milestones
for the three flagship projects: Oneida, Baltic Power, and Hai Long; The
company will hold “Investor Day” on March 5, 2024.
· - Successful strategic selling of assets that
reached the financial closure stage.
· - Future decrease of interest rates by the Bank of
Canada.
· - Strong generation and solid financial results
based on increased revenues, and cost control resulting in improved
profitability and better than guided Adjusted EBITDA, Adjusted Free Cash Flow
per share and Free Cash Flow per share.
Construction
expertise
Northland Power has demonstrated significant expertise in
the construction of wind power projects, showcasing a deep understanding of
project development, technology selection, and operational excellence. The
company’s experience includes the development and construction of both offshore
and onshore wind projects, with notable achievements in various regions
including Canada, Europe, and Asia. At the current stage, Northland’s
experience in building offshore wind is especially important as both Baltic
Power and Hai Long are offshore wind.
Northland was involved in the development of the Gemini
offshore wind park with a total capacity of 600MW, one of the largest offshore
wind projects globally at the time of construction. This project, located in
the Netherlands, exemplifies Northland's capability to undertake large-scale,
complex offshore wind projects.
In Germany, Northland successfully executed the Nordsee One
offshore wind project with a total capacity of 332MW, further solidifying its
reputation in offshore wind construction. The project achieved high
availability rates, demonstrating Northland's focus on operational excellence.
Northland's track record of delivering wind projects on time
and within budget reflects its strong project management and execution
capabilities. The company has demonstrated proficiency in managing complex
logistics, supply chains, and construction schedules.
Share
price and interest rates
The long-term performance of Northland Power's shares has
shown high sensitivity to changes in interest rates implemented by the
Government of Canada. After peaking at an all-time high of $50.85 on February
5, 2021, shares have adjusted to $23.71 on February 21, 2024. This matched with
a rise in Canada's 5-year Government Bond yield from 0.423% at the end of
January 2021 to 3.62% on February 21, 2024.
Given the inverse relationship between market valuation for dividend-paying
utility stocks like Northland Power, which currently yields around 5%, and
interest rates, any potential reduction in rates would favourably impact not
only Northland Power's share performance but also other companies in the
Canadian utility sector.
Today it seems likely that the Government of Canada will start lowering interest rates within the year. A reduction in rates would decrease the cost of borrowing for the company, potentially leading to improved returns on investments for its’ massive development projects. Consequently, the lower bond yields could enhance the attractiveness of the dividend-paying stocks to investors.
Recently, the Canadian economy started showing signs of
strain under the current interest rate regime, as evidenced by the contraction
in GDP by 0.3% in Q3 of 2023, marking the first decline since Q2 of 2021. This
downturn reflects the tangible impact of higher interest rates on economic activities.
Other macroeconomic indicators also signal a potential shift
towards lower interest rates in the coming months. With the annual inflation
rate dropping to 2.9% in January 2024, its lowest since June, and significantly
below the anticipated 3.3%, the Bank of Canada might consider loosening its
monetary policy as the cooling inflation aligns with the bank's disinflationary
objectives.
Canada's GDP Growth Rate
Conclusion
In conclusion, Northland Power's strategic initiatives and
development projects solidify its investment case based on significant Adjusted
EBITDA growth by 2027. The commercial operations of the company’s flagship
projects - Oneida, Baltic Power, and Hai Long - backed by long-term revenue
contracts, underscore a trajectory towards stable and predictable cash flows. At
the same time, the company has a strong track record of construction
capabilities for offshore wind. In addition to that massive portfolio of
development projects, post-2027 provides further support to valuations,
Despite a momentary financial stagnation in 2023, as
evidenced by a dip in sales and gross profit and a transition to net loss, as
well as a conservative outlook for 2024, the company’s proactive engagement in
strategic sell-downs and disciplined cost control measures emphasize its
commitment to efficient project development and financial stability.
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