TPI COMPOSITES INC TPIC
September 26, 2018 - 11:39am EST by
mitc567
2018 2019
Price: 28.86 EPS .15 1.93
Shares Out. (in M): 34 P/E 195 24.8
Market Cap (in $M): 1,022 P/FCF 59 16.2
Net Debt (in $M): 16 EBIT 30 99
TEV ($): 1,038 TEV/EBIT 35.2 10.5

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Description

TPI Composites (TPIC NASDAQ $28.86, “TPI”), a manufacturer of composite wind blades and bus bodies, is a stock I believe can at least double in price over the next two years.  My target price is $58 based on a 10x EV/EBITDA multiple of projected 2020 EBITDA.  TPI is a story of a quality management team driving a leading company within a growth market that has oligopolistic characteristics.  Long term contracts are in place with its customers, who act more like partners than clients. Operating margins are increasing from economies of scale and increasing efficiency of processes.  The business model is diversifying into new products funded from strong free cash flow (“FCF”). The risks include customer concentration, emerging country manufacturing facilities (China/Turkey/Mexico), large ownership by its Private Equity (“PE”) backer, supply chain commodity pricing, and exposure to the vagaries of governments’ views of wind power.  I believe these risks are mitigated by the cost of wind energy becoming increasingly competitive with traditional utility costs, environmental benefits, high barriers to entry for new competitors and TPI’s dominant market position. The wind energy market and TPI are well positioned for strong growth over the coming few years.

I believe that TPI is undiscovered by larger equity managers due to the limited float caused by the high level of PE ownership and the depressed level of current revenues and earnings due to the significant contract wins which require upfront investments in capital and employees.  These two issues are positive for small cap investors who can get comfortable with the business prospects for TPI. By 2019 TPI will begin to generate increasing revenues and cash flows which are being masked by the strong buildup in new and repurposed manufacturing lines. The stock is trading at an Enterprise Value (“EV”) to EBITDA of 10x current year, 6.7x projected 2019 and 5x projected 2020.  I see no reason this shouldn’t trade at 10x projected 2020 EV/EBITDA by late 2019 reflecting its business prospects and market leading position.

 

Overview

The company was founded in 1968 as Tillotson Pearson Inc., a high-performance composite sail and power boat manufacturer.  In 2004, TPI was acquired by Landmark Partners and TPI Management. The company had its IPO in July 2016. Composites provide a variety of advantages over metal-based structures, such as weight savings, corrosion protection, design flexibility and parts integration.  As such, with the advent of the wind energy market, TPI, with its composite manufacturing knowledge, was ideally positioned to capitalize on this growth opportunity, and began transitioning out of the boating market starting when the current CEO joined in 1999, fully exiting the boat market in 2004.  Please see timeline below.

Source: company reports

 

Today, Scottsdale, AZ based TPI Composites, Inc. is the only sizable independent global manufacturer of large scale industrial composite components, mainly wind blades and bus bodies.   Geographic location of the manufacturing plants is essential for cost efficiencies, as freight costs for shipping the up to 70-meter long blades are significant. The company operates nine wind blade manufacturing plants, and three tooling and R&D facilities across four countries. It is currently developing a new manufacturing hub in Yangzhou, China that is scheduled to open in the first half of 2019. It is designed to be state-of-the-art and will reliably and cost effectively serve the China and global onshore and offshore wind markets via land and by water from the Port of Yangzhou.  Further, in 2018, TPI is opening a new precision molding and assembly systems facility in Mexico. In the United States TPI manufacturers wind blades in Iowa, has precision molding and assembly systems used for the manufacture of wind blades in Rhode Island, and has just completed a greenfield plant for composite solutions for the transportation industry in Iowa that is currently producing bus bodies. It also has R&D facilities in Rhode Island, Massachusetts and Denmark. In Asia wind blades are made in three facilities in China. The Mexico segment manufactures wind blades from 3 facilities in Juarez. The Middle East and Africa segment manufactures wind blades with 2 plants in Izmir, Turkey.

 

Wind Market

Renewables have emerged as alternatives to fossil fuel-based supplies within the power sector. Solar, wind and grid storage are still at early stages of a rapid growth path.  Policy at the international, national, state and city levels and demand from businesses and consumers provide a strong impetus for the age of oil and gas to transition into the age of renewable energy.  An extension of the Wind Production Tax Credit (“PTC”) through 2019 for both new turbines and repowering of existing turbines along with IRS clarifications that expand PTC eligibility allowing developers 100% PTC benefit as late as 2021.  Wind energy and related segments are projected to grow at above 8% annually as highlighted below.

Image result for global market growth TPI composites

Global annual wind power capacity additions are now expected to average over 67 gigawatts between 2018 and 2027 or a 10-year CAGR of 8.3% according to MAKE Consulting (“MAKE”), which upgraded its forecast made in the 1Q’18 by 78% between 2020 and 2024. This forecast also estimates that the top 20 emerging markets will grow at a CAGR of 26.7% between 2018 and 2027. The U.S. market is expected to be robust over the next several years with expected annual installations averaging nearly 10 gigawatts through 2021 according to MAKE.  MAKE estimates 55 gigawatts of coal capacity will be retired by 2027 and the U.S. Energy Information Administration has indicated that nine nuclear plants with a combined 11 gigawatts of capacity have announced plans to retire by 2025 with an additional 9 gigawatts of capacity expected to be retired by 2050.

The New Energy Outlook report concludes a dramatic shift to 50% wind and solar by 2050, driven by cheap renewables generation and falling battery costs. Solar and wind costs are expected to drop 71% and 58% respectively by 2050 and this is expected to result in wind and solar representing 79% of all new generation capacity through 2050.  Denver has become the 73rd city in the United States to commit to a 100% renewable energy target. Utilities are using wind to grow their businesses and meet aggressive CO2 emission reduction goals.

 

Cost of Wind Energy

As you can see in the below charts, the cost of wind energy has decreased significantly from more than 60 cents per kilowatt-hour (kWh) in 1980 to about 7 cents/kWh in 2015, unsubsidized.  Further, in 2021 the cost should be lower than traditional fossil fuels according to Windpower E&D, and further backed up by the Lazard and other charts shown below.

https://3ohkdk3zdzcq1dul50oqjvvf-wpengine.netdna-ssl.com/wp-content/uploads/2016/10/Rev-now-1.jpg

Source: Windpower Engineering & Development