Northland Power Inc (TSX: NPI) is a power producer dedicated to developing, building, owning and operating clean and green global power infrastructure assets in Asia, Europe, Latin America, North America and other selected global jurisdictions. Their facilities produce electricity from clean-burning natural gas and renewable resources such as wind, solar and efficient natural gas. We have a long track record of 33 years in business.

Investment Rationale

• Favorable Macro Environment: The next decade will be crucial for the power industry as the transition toward renewable energy is expected to increase. Global renewable energy transition to attract US$3.4 trillion in investments through 2030. Onshore Wind is expected to record a CAGR of 7.4%, while Offshore Wind is likely to grow at a CAGR of 12.7% till 2030. Northland is a Top 10 Incumbent in Global Offshore Wind and 4th largest company globally measured by operating capacity. We believe the company is highly poised to take advantage of these opportunities, given its strong foothold in Offshore Wind.

Data Source: Company

• Offshore Wind to Drive Growth: The group is accelerating growth with a continued focus on offshore wind and enhancing its offshore footprint. The company has identified 4 – 5 GW in development projects focused on offshore wind. Further, the group holds a strong position in offshore wind by sourcing and advancing largescale projects in key identified target markets. The group has an increased growth pipeline anchored by offshore wind, which provides a visible path to substantial growth in Adjusted EBITDA, Free Cash Flow and Adjusted Free Cash Flow.
  

• Enhanced Dispatch Contract (EDC) executed for Kirkland Lake Facility in March 2021: Northland entered into an EDC for the Kirkland Lake facility with Ontario’s Independent Electricity System Operator. The EDC is effective from the third quarter of 2021 and would succeed the existing baseload PPA for the remainder of its term to 2030. The arrangement results in reduced greenhouse gas emissions and costs savings for Ontario electricity consumers while improving economics for Northland as a result of savings from reduced costs related to greenhouse gas emissions, maintenance, natural gas and gas transportation, as well as other variable cost savings. The economic benefits of the EDC in 2021 are expected to be offset by one-time capital expenditures at the facility, but it is expected to benefit Free Cash Flow for the remaining term of the PPA.
  

• Investment Grade Credit Rating: In March 2021, Standard & Poor’s has reaffirmed Northland’s corporate credit rating of BBB (Stable). In addition, Northland’s preferred share rating was reaffirmed on Standard & Poor’s Canada scale of BB+.
  

• Robust Liquidity: Northland continues to have sufficient liquidity available to address the impact of COVID-19 while executing its growth objective. Further, the company have approximately CAD 875 million of liquidity in hand to fund growth initiatives, including its identified pipeline of offshore wind projects and other opportunities.

• Strong Competitive Advantage: The company has significantly outperformed the industry peers on various financial parameters, despite a relatively modest first quarter of fiscal 2021. This reflects the strong competitive advantage NPI’s shareholders are having against the competition.

• Stable Outlook: Despite the uncertainty with regard to the potential impact of COVID-19, the management does not anticipate a change to Northland’s 2021 financial guidance as a result of the relative stability of revenues and free cash flow profile.

• Strengthening Bullish Technical Indicators: 21-day SMA is acting as strong support for the stock as the prices are consistently taking support above it. Further, the leading momentum indicator, the MACD is rising and is likely to form a cross-over, where 12-day EMA is about to cross 26-day long-length EMA. This is a bullish indicator.

Technical Chart (as on June 04, 2021). Analysis by Kalkine Group 

• Strong Fundamentals: The group is built upon strong fundamentals and recorded a significant jump in revenue and free cash flow over the years. The below charts give a glimpse of this.

• Offering Decent Dividend Yield: At the last closing price (CAD 40.72 on June 4, 2021), NPI shares were offering a decent dividend yield of 2.95%, which is approximately 1.9 times of the US 10-Year Treasury Bond Yield and about 2.02 times of the Canada 10-Year Government Bond Yield of 1.459%. Also, the company has a track record of consistent dividend payment over the last five years. Further, its shares have handed a decent return over the last one year (up 22%). Therefore, a company with a strong fundamental, solid free cash flow position and a consistent track record of rewarding its shareholders through dividend distribution tends to remain under the investor’s radar.

• Risk Associated with Investment: With the growing scrutiny of environmental impacts of business activities, Northland faces the risk of increased costs for regulatory compliance such as carbon pricing programs for efficient natural gas facilities, maintenance of air and water quality standards, limiting greenhouse gas emissions and costs of compliance during the construction phase. Moreover, any delay in project implementation would affect the company’s financial performance. Further, the company is exposed to interest rate risk, credit spread risk, currency fluctuation risk, and commodity price risk.

Financial Highlights – 1QFY21

Source: Company

• Sales of CAD 613 million decreased 8% or CAD 55 million compared to the same quarter of 2020 primarily due to a lower wind resource in the North Sea partially offset by the effect of favourable foreign exchange rate fluctuations and positive performance across the other operating facilities.
• Gross profit of CAD 549 million decreased 11% or CAD 70 million compared to the same quarter of 2020 primarily due to lower sales at the offshore wind facilities.
• Operating costs of CAD 71 million increased 7% or CAD 5 million compared to the same quarter of 2020 primarily due to increased costs at two offshore wind facilities and a full quarter of results from EBSA compared to a partial quarter in 2020 due to its acquisition in January 2020.
• G&A costs of CAD 16 million increased 27% or CAD 3 million compared to the same quarter of 2020 primarily due to the integration of EBSA and its associated G&A costs as well as higher personnel costs to support Northland’s growth.
• Development costs of CAD 14 million decreased 29% or CAD 5 million compared to the same quarter of 2020 mainly due to the effect of the commencement of capitalization of the Hai Long project in the third quarter of 2020 and timing of acquisition costs incurred, partially offset by the increased business development and personnel costs.
• Finance costs, net (primarily interest expense) of CAD 87 million decreased 7% or CAD 6 million compared to the same quarter of 2020 primarily due to lower facility-level loan balances as a result of scheduled principal repayments. The first quarter of 2020 also included interest on the convertible debentures, which were redeemed in the second quarter of 2020.
• Net income decreased CAD 124 million for the three months ended March 31, 2021, compared to the same quarter of 2020 mainly due to the factors described above, partially offset by CAD 2 million lower tax expense.
• Adjusted EBITDA of CAD 360 million for the three months ended March 31, 2021, decreased 14% or CAD 61 million compared to the same quarter of 2020. The significant factors decreasing Adjusted EBITDA include a) CAD 25 million decrease in operating results from Gemini primarily due to low wind resource and lost revenue from the Gemini price hedge, partially offset by the effect of higher wholesale market price and b) CAD 37 million decrease in operating results from the German wind facilities primarily due to low wind resource.
• Free Cash Flow of CAD 134 million for the three months ended March 31, 2021, was 36% or CAD 77 million lower than the same quarter of 2020.

Top-10 Shareholders

Top-10 shareholders together hold 26.8% stake in the company, with Temerty (James C) and BMO Asset Management Inc. are among the large shareholders with an outstanding position of 6.67% and 4.41%, respectively. The institutional ownership in the company stood at 38.32%, whereas strategic ownership in the company stood at 6.83%.

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: Northland is committed to increasing shareholder value by creating high-quality projects underpinned by revenue arrangements that deliver predictable cash flows. The management actively seeks to invest in technologies and jurisdictions where the company can benefit from an early-mover advantage and establish a meaningful presence while striving for excellence in managing Northland’s operating facilities by enhancing their performance and value.

Also, the shareholders of NPI is having a strong competitive advantage over the competition, as NPI is generating significantly higher ROE for its investors. Return on equity is one way we can compare the business quality of different companies.

Also, from the margin standpoint, the company has consistently delivered a stable margin profile with EBITDA margin consistently above 80%, Operating margin above 40% and Net Margin above 15% over a period of time, which is uncommon for many companies. A healthy margin profile also reflects management focus on investing in quality projects which can sustain the group’s margin profile.

Technical indicators are also turning bullish, with leading momentum indicator, the Moving Average Convergence Divergence (MACD) is rising, and a potential cross over can be seen where short-length 12-day EMA is going to cross long-length 26-day EMA, which is a bullish indicator for the stocks. Also, its shares have consistently taken support near its 21-day SMA and hovering above it.

Therefore, based on the above rationale and valuation, we suggest a “Buy” recommendation on the stock at the closing price of CAD 40.72 on June 04, 2021.  

1-Year Price Chart (as on June 04, 2021). Analysis by Kalkine Group 

*The reference data in this report has been partly sourced from REFINITIV.

 

*Recommendation is valid at June 7, 2021 price as well.

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Disclaimer

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