|Shares Out. (in M):||76||P/E||0||0|
|Market Cap (in $M):||764||P/FCF||0||0|
|Net Debt (in $M):||-70||EBIT||0||0|
Fortress Transportation and Infrastructure Investors LLC (“FTAI” or “Company”) owns infrastructure and transportation related assets that include:
(i) Leasing business made up of (a) airplanes and engines; (b) offshore support vessels; and (c) shipping containers (expected to be sold this year)
(ii) Infrastructure business which includes (i) a 60% stake in the Jefferson oil & refined product terminal (“Jefferson Terminal”) located in Beaumont, Texas and (ii) the Central Main & Quebec Railroad (“CMQR”).
FTAI’s leasing business provides stable and contracted cash flows that, once ramped up, should be sufficient to cover FTAI’s dividends while its infrastructure assets offer growth platforms that support bolt-on investments/acquisitions to drive its 10% annual dividend growth objective.
We believe that at $10/share (70% of FTAI’s tangible book), the market is ascribing little value to the ramp up of Jefferson Terminal (FTAI invested capital of $210 mm) or the growth optionality from our expectation that FTAI deploys $875 million of potential liquidity.
We expect the stock to re-rate and the dividend yield to compress as FTAI. (i) signs contracts for Jefferson Terminal and (ii) meaningfully deploys its available liquidity at its targeted 15-25% equity returns. Under this scenario, which is expected to unfold this year, we expect FTAI to generate $167 mm of run-rate Funds Available for Distribution (“FAD”) exiting 2017 and re-rate to our price target of $16/share. Including dividends, this represents a total return of 75% over the next 12-18 months.
FTAI is cheap due to the following:
1. Management credibility has taken a hit and investors have gotten impatient with delays in closing several contracts for Jefferson Terminal. Currently, Jefferson Terminal is only 10% utilized; hence, it’s generating negative annual cash flow of $13 mm to FTAI. FTAI has not meaningfully invested its $350 mm of cash raised in its May 2015 IPO.
2. FTAI’s current FAD does not cover its quarterly distribution of $25 mm.
3. Two offshore inspection, maintenance & repair leasing assets are off lease.
4. FTAI has an unusual mix of assets, segmented between multiple leasing assets and infrastructure assets.
5. The industries to which FTAI’s operating assets are classified into: MLP energy infrastructure, offshore energy, yield vehicles, aviation leasing have performed poorly in the stock market since its IPO.
We believe these factors are temporary and that there are upcoming catalysts to address each of them.
1. Business development activity across the oil industry stalled over the last year as a result of the severe oil price decline. According to FTAI, now that oil prices seem to have stabilized, business activity is regaining momentum. Jefferson Terminal is in the midst of securing multiple contracts across three main business opportunities: (i) Canadian crude by rail; (ii) export of refined products to Mexico; and (iii) ethanol storage and transportation. FTAI is in negotiations with several Canadian crude by rail deals to close in 2016, thereby increasing terminal utilization to 60%. At this level, Jefferson Terminal should generate $40 mm of EBITDA. We estimate the Mexico export and Ethanol deals to close over the next 6-18 months; while these projects will require additional capex, EBITDA should grow to ~$100 mm.
a. FTAI recently obtained $144 mm of tax exempt financing at 7.25%, used the proceeds to pay off $100 mm 9% debt, and kept the remainder for growth capex. This tax exempt facility can be expanded by another $156 mm for future growth initiatives.
2. Incremental aviation acquisitions ($140 mm in Q2/Q3’15, $25 mm in Q4’15, and $40 mm in Q1’16) and our estimate of an additional $365 mm of investments in this segment over the next year, should bring pro forma annual cash flows to $104 mm. At this level, FTAI would fully cover its dividend from its aviation segment alone.
3. FTAI’s Construction Support Vessel (“the Pride”) is “one [CEO] signature” away from a contract with a major oil company in Malaysia.
4. FTAI is expected to complete the divestiture of its shipping container assets at or above book value in 2016. We also expect the Company will sell its offshore support vessels next year at around book value. These exits will simplify FTAI’s story.
5. In terms of investment opportunities, FTAI’s CEO believes that “this is the best market [he] has seen since 2009 and 2010.” They are currently evaluating a variety of investment opportunities, including aircraft/engines, Jefferson Terminal growth projects, other infrastructure investments, and “discounted high yield debt or loans that offer highly attractive returns or even better entry points for equity ownership.” The Company has disclosed two potential infrastructure investments under evaluation; Repauno Port along the Delaware River and Hannibal Port in Ohio, as being close to consummation.
Valuation: We believe FTAI is worth $16/share in our base case and $9/share in our downside case.