|Shares Out. (in M):||85||P/E||35.5||15.5|
|Market Cap (in $M):||1,322||P/FCF||-||-|
|Net Debt (in $M):||1,516||EBIT||82||171|
Fortress Transportation & Infrastructure LLC is a publicly traded holding company that owns a portfolio of aviation leasing and infrastructure assets. The company’s aviation business is a leader in the engine leasing market with scale advantages in a small, niche segment that lacks competition from larger aircraft lessors and is led by a top executive in the space, Joe Adams. The company’s infrastructure assets are in various stages of development and will generate meaningfully more cash flow over the coming 1-2 years, driving significant equity upside. With the aviation business net of debt and corporate expenses valued at ~$12-$15.50 p.s., the market is ascribing little value to infrastructure assets that could be worth over $40 p.s. at maturity. For a thorough overview of FTAI’s competitive advantages in the engine leasing market and the long-term potential of the Jefferson terminal, I suggest reading Kava0822’s write-up from July 2017.
A few catalysts should drive FTAI’s stock higher over the coming quarters: (1) the sale of the CMQR railway, (2) the sale of a minority interest in the Long Ridge facility and (3) a continued ramp in storage capacity at the Jefferson terminal (along with a debt refinancing at Jefferson). Any combination of two of these catalysts will help FTAI raise the dividend—driving near-term upside to $18 p.s. (+20%)—finance its remaining infrastructure investments and generally support cash needs as infrastructure profitability ramps through 2022.
Longer-term, as infrastructure assets reach maturity and begin generating meaningful profits, the business could be worth in excess of $30 p.s. (+100%) before factoring in returns from the dividend.
Aviation Cash Cow with Growing Competitive Advantages: Joe Adams, the CEO of FTAI, has been an operator in the aircraft and engine leasing industry for decades (having previously built Aircastle and having led DLJ’s transportation industry group)(my aircraft industry channel checks on Joe have been universally positive). Understanding the challenges of competing against larger aircraft lessors and appreciating the merits of engine leasing, he focused FTAI’s strategy on the engine market and has grown the business into the second largest private, engine lessor. The company’s experience and scale in this niche market provide it with a better understanding of the maintenance needs of existing and prospective assets, lowering its overall maintenance costs. The company’s expertise also helps it identify seemingly undesirable assets that others misvalue or are incapable of servicing, contributing to FTAI’s ability to achieve 25%-30% unlevered returns on its jet engines. The aviation segment is and will continue to be a cash cow for the company.
Near-term results should show strength due to market tightness driven by the grounding of the Boeing 737 MAX; run-rate EBITDA excluding asset sales could approach $380m exiting 2019. Over the next year, the aviation segment’s prospects could improve meaningfully as the company comes to market with commercial products for use in engine repairs. Specifically, the company is 25% owner of a JV developing engine components that could materially lower FTAI’s cost of engine maintenance. This cost advantage will allow FTAI to (1) outbid competitors for engine assets and (2) offer superior economics to lessees. Finally, FTAI’s growing partnership with United Airlines provides it with privileged access to engine inventory and a captive customer for leasing assets. The company sees great potential in the growing relationship with United and believes it could be an important driver of growth in the near future.
Infrastructure Profitability Inflecting: FTAI’s three main infrastructure assets are approaching meaningful profitability inflections. The Jefferson Terminal is scaling crude and refined product storage capacity adjacent to the largest refineries in the U.S. and should generate positive EBITDA in Q4’19 and substantially more EBITDA in 2020 (potentially $50m, a $100m run-rate by mid-2020). The first phase of LNG storage and port facilities are being developed at the Repauno Port and could begin generating EBITDA in late 2020 or early 2021 ($20m EBITDA in 2020, $150m long-term). Finally, the Long Ridge power generation facility has signed a long-term contract with the US government that will generate $120m of annualized EBITDA beginning in 2022. Near-term these assets could generate $50m-$100m of EBITDA and over the next few years EBITDA could ramp to over $500m.
The table below is a simplistic view of the potential terminal value of these assets, but it captures the big picture opportunity well. Even with $500m of unforeseen cash needs and using a 12x EBITDA multiple for assets that are typically valued for 12x-18x EBITDA, the potential equity value for FTAI’s Infrastructure assets could exceed $40 p.s.