Recently, TPI Composites (NASDAQ: TPIC) discussed large deals with potential revenue of $2.7 billion and cut its planned capital spending for 2022. I believe most investors are not fully aware of the implied valuation of the TPI. According to my discounted cash flow model with conservative assumptions, TPI The composites could be worth around $22 per share. Yes, I don’t like the concentration of customers and potential shifts in demand typical of the industry. With that, in my opinion, the current stock valuation is too low.
TPI Composites: significant revenues
Based in Scottsdale, Arizona, TPI Composites manufactures composite wind blades for the wind energy market. We are talking about a globally diversified business model with facilities in the United States, China, Mexico, Turkey and India, as well as development centers in Denmark and Germany.
The most notable slide from the quarterly presentation is featured below. Management noted $2.7 billion in revenue from existing contracts through 2024. Taking into account that the current market capitalization does not exceed $670 million, TPI Composites becomes an object of study interesting.
Additionally, it should be noted that TPI Composites expects 2022 to deliver 80% to 85% utilization and lower capital expenditures than originally forecast. If things continue in the same direction, lower capital expenditures and higher utilization will likely lead to higher free cash flow.
Beneficial analyst expectations and positive free cash flow expected from 2023
Analysts expect TPI Composites to post 9% sales growth in 2023 and double-digit sales growth in 2024. Median sales growth is expected to be close to 7% for TPI Composites, which at in my opinion, is impressive given the industry in which TPI operates.
It should also be noted that the company’s EBITDA is expected to increase by up to 7% in 2024. Analysts also expect positive net income from 2024 and positive free cash flow from 2023. In my opinion, as soon as more investors notice the inbound results, demand for the stock will likely increase.
Balance sheet: almost no debt
As of June 30, 2022, TPI Composites reported cash worth $155.2 million, total assets worth $981 million and total liabilities of $586 million. In my opinion, the current balance sheet proves that the company’s financial situation is healthy.
The total amount of debt is small. Therefore, investors will not have to worry about interest rate increases in the market. The company’s net debt is negative, equal to -92 million dollars. Additionally, in my view, TPI could receive debt financing if needed.
My base case scenario involved a valuation of $22.3 per share
TPI Composites is globally well positioned to benefit from the decarbonisation of the electricity sector. The United States and Europe are also boosting demand for wind energy. In my opinion, if clients receive government funding, TPI’s revenue will likely increase.
We expect global demand for renewable energy, and wind energy in particular, to continue to grow over the long term due to a multitude of factors, including: the increased cost competitiveness of wind energy relative to the electricity generated from fossil fuels; increased demand from businesses and utility providers for renewable energy; and recent international policy initiatives to promote the growth of renewable energy. Source: 10-k
In addition, I believe that new wind power supply and transmission agreements and sufficient communication on the agreements already signed will bring demand for inventory. Over the past 10,000, the company has noted deals worth $3.5 billion through the end of 2024:
As of February 24, 2022, our wind power and transmission supply agreements provide for minimum total volume commitments from our customers of approximately $2.2 billion and encourage our customers to purchase additional volume up to, in total, a total contract value of approximately $3.5 billion through the end of 2024. Source: 10-k
Finally, in this scenario, I would also expect new investments in the growing offshore wind market, perhaps acquisitions and more partnerships. In my view, bankers would most likely support any acquisition given the current balance sheet.
Leverage our presence in major growing wind markets, capitalize on the continued trend towards outsourcing, evaluate the construction of wind turbine blades for the growing offshore wind market and evaluate strategic acquisitions. Source: 10-k
Under conservative conditions, I think a median sales growth of 7% from 2024 to 2033 would make sense. I also assumed an EBITDA margin of around 7% to 5.2% with an operating margin of around 2%. Results include free cash flow ranging from $24 million to $62 million and FCF/sales of approximately 1.7%.
In my opinion, most investors would use a discount close to 9.4% for TPI Composites. I wouldn’t be much different. I also assumed an exit multiple of 10x EBITDA, which is close to the industry median and lower than TPI’s current EV/EBITDA multiple. With these numbers, I got an equity valuation of $833 million and a capital per share of $22.3.
worst case scenario
In my opinion, investors need to be prepared for changes in demand, which is typical in the wind industry. Changes in oil prices, energy prices or changes in environmental legislation could lower TPI’s revenues and FCF/Sales margin. The company has discussed some of these risks in the past:
We currently expect to have transitioning manufacturing lines in 2022, which could hurt our revenue and profitability in 2022. We generally share transition costs with the customer in relation to these changing customer demands, but any Sharing is usually subject to negotiation and the amount is not always defined contractually. Source: 10-k
Regarding new government actions, management recently noted that unsubsidized, auction-based tenders could lead to lower prices and increased competition. As a result, in my view, in the long term, TPI could suffer from lower EBITDA margins or even lower revenues. In the worst-case scenario, detrimental results could drive the stock price down:
Many governments are moving from feed-in tariffs, which typically offer wind power producers favorable prices for wind power, to unsubsidized, auction-based tenders as a way to promote development and growth. renewable energy sources such as wind power. Due to this change, our wind turbine OEM customers are under intense price pressure when it comes to selling their wind turbines. Source: 10-k
Under bearish conditions, I assumed a decline of 10% in 2024 and 2030 as well as a median sales growth of 4%. Still with an EBITDA margin close to 4.5% and an operating margin of 1.5%, EBIAT 2033 would stand at nearly 25 million dollars.
If we also assume capital expenditure of around $35 million and $30 million, the FCF would be around $35 million per year. The FCF/CA would be around 1.5% and 1.75%. I believe my numbers could be reported by TPI.
If future free cash flow is added together with a 10% discount, the net present value is $172.5 million. With an exit multiple of 9.5x, the total company value would be $531 million. Now, if we divide by approximately 37.25 million shares outstanding, the fair price would be close to $12.2 per share.
Risks related to customer concentration and wind blade failures
TPI primarily supplies products to three large companies, which I believe is a significant risk. In my view, these companies may be able to negotiate TPI’s prices and reduce TPI’s free cash flow margins. Keep in mind that the management doesn’t seem to have many customers to sell their products.
Almost all of our revenue comes from three wind blade customers. Vestas (OTCPK: VWDRY), GE Wind (GE) and Nordex (OTCPK: NRDXF) represented 40.4%, 24.7% and 22.4% of our total net sales, respectively, for the year ended December 31, 2021 , and 49.7%, 23.4% and 15.3%, respectively, of our total net sales for the year ended December 31, 2020, and 46.1%, 25.7% and 16.1%, respectively, of our total net sales for the year ended December 31, 2019. Source: 10-k
In the past, the company has suffered product defects, so it may happen in the future. In my opinion, further wind blade failures could damage TPI’s reputation. Management may lose contracts with potential customers or lose existing customers. As a result, future free cash flow expectations may decrease, which could lower the stock price.
Any wind blade failure or other product defect in the future could significantly harm our relationship with our existing and potential customers. Specifically, negative publicity about the quality of the wind turbine blades we manufacture or defects in the wind turbine blades supplied to our customers could result in reduced orders for wind turbine blades, increased warranty, product liability claims and other damages or the termination of our supply contracts or business relationships with current or new customers. Any of the foregoing could materially adversely affect our business, results of operations and financial condition. Source: 10-k
Considering the total amount of potential revenue from existing contracts through 2024, TPI Composites is an attractive investment. I don’t think most market players are fully aware of FCF accelerating from 2023. Assuming conservative sales growth and TPI benefiting from the decarbonisation of the power sector, I got a valuation of more than $22 per share. In my opinion, even taking into account the risks associated with customer concentration, changes in government regulations or changes in demand, the stock price is too low at the current market price.