Northland Power Inc. (TSX:NPI, Financial) (OTCPK:NPIFF) is a renewable electricity power supplier based in Canada, but now it has grown to operate in six countries. It owns or has an economic interest in 3 gigawatts of operating generating capacity and has over 14 GW of potential capacity in various stages of development in Mexico, New York State and Colombia, as well as offshore wind projects in Taiwan and Poland.
Northland Power aims to increase shareholder value by creating high-quality projects underpinned by long-term revenue contracts while managing project risks. It has in-house development, financing and operations capabilities and a strong, seasoned management team with significant ownership. Unlike many renewable energy companies, Northland has a strong and well-managed balance sheet with a BBB credit rating from Standard and Poor's, a Piotroski F-Score of 7 out of 9 and return on invested capital (ROIC) that exceeds weighted average cost of capital (WACC), indicating value creation.
High GF Score
Northland Power has an exemplary GF Score of 82 out of 100, with its main weak point being low momentum as the stock price has been on a downtrend since reaching all-time highs in early 2021. According to a historical study by GuruFocus, stocks with high GF Scores tend to perform better than stocks with lower GF Scores.
Recent results and outlook
Following Northland Power's fourth-quarter results, Morningstar (MORN, Financial) maintained its fair value estimate of 38 Canadian dollars per share ($27.91) for the stock and considered its shares to be undervalued.
Northland exceeded its 2022 guidance for adjusted Ebitda and adjusted free cash flow per share, thanks to non-recurring items and strong European power prices. However, Morningstar's adjusted Ebitda guidance for 2023 projects a decline by approximately 10%, primarily due to the absence of 2022 tailwinds and continued investments in project development.
"We expect adjusted Ebitda to grow at a 10% annual rate through 2027, at the high end of company guidance, but emphasize growth will be lumpy given large offshore wind projects in the backlog," wrote Morningstar's Brett Castelli in a Feb. 28 note.
According to Castelli, Northland has raised over C$2 billion in equity over the past three years, equivalent to a quarter of its current market cap, and is thus well-positioned to fund its 2023 capital expenditures and longer-term growth ambitions. Castelli expects equity issuance to be limited in 2023, with asset sell downs and a potential hybrid bond issuance being the primary sources of funding.
Castelli also notes that Northland's development pipeline remains substantial, with over 13 gigawatts of identified projects, and the company intends to pursue only projects that meet its return hurdles while divesting less attractive projects. The company's near-term focus is on achieving the financial close of its 1-gigawatt Hai Long offshore wind project in Taiwan.
In its recent Investor Day, Northland said that it has big plans to quadruple its generating capacity from 3GW at present to 12GW by 2030.
Northland has a strong project pipeline at various stages in development. While Northland is primarily focused on off-shore wind for near term projects, it is active across the renewable spectrum, including solar, on-shrore wind, battery strorage and green hydrogen.
Source: Northland's investor materials
Bargain valuation
Northland's stock performance over the last 10 year has been strong, with shareholder returns growing at a CAGR of over 9% (including dividends) given the strong secular shift towards renewable power. Given that the shift is just getting started, I believe this will likely keep on going for decades.
The following chart gives Northland's revenue, earnings and owner earnings per share over the last five years. I am particularly impressed by the ramp-up of owner earnings as this is a capital intensive business. Owner earnings have increased at a ~9% CAGR over the last five years. Owner earnings is a cash flow concept introduced by Warren Buffett (Trades, Portfolio) in his 1986 Berkshire Hathaway (BRK.A)(BRK.B) letter to shareholders. At that time, companies were not required to produce a cash flow statement nor was stock based compensation such a big concern. Buffet's formulation of owner earnings removes non-cash distortions from earnings to focuses the investor's attention on how much cash they are getting as partial owners of the company at the end of the period. Buffet explained owners earnings as follows:
"Owner Earnings = (a) Net Income plus (b) depreciation, depletion, amortization, and other non-cash charges minus (c) average annual maintenance capital expenditures. Owners Earnings is similar to free cash flow, but I think a superior metric because it starts from net earnings, so takes stock-based compensation as well as maintenance capex into account."
The company is generating strong free cash flow, with a normalized five-year free cash flow yield of 10.45%. The company has a dividend yield of 3.62%. Below is a chart summarizing the stock's yearly returns in recent yearsas well as the normalized five-year yields for free cash flow and earnings per share:
| 2017-12 | 2018-12 | 2019-12 | 2020-12 | 2021-12 | 2022-12 | Average | Normalized 5-year yield | |
| Free cash flow per share | 0.189 | 3.887 | 2.443 | 5.443 | 3.285 | 5.547 | $3.47 | 10.45% |
| EPS without NRI | 0.85 | 1.46 | 1.68 | 1.85 | 0.82 | 3.46 | $1.69 | 5.09% |
| Owner Earnings per Share (TTM) | -4.37 | -2.49 | -0.99 | 1.13 | 2.71 | 5.4 | ||
| FCF Yield (last year) | 16.73% |
Conclusion
Northland Power is a strong upcoming player in the renewable power area. Wind and solar now are among the lowest cost power sources in many parts of the world and enjoy strong government and societal tailwinds. Northland has proven to be a strong operator and capital allocator in an industry where unprofitability is all too common. Operating cash flow and free cash flow are very strong and the balance sheet is in reasonable shape.
Overall, I think this is a good company selling at a good price, and it might even be a nice acquisition target for private equity or a pension fund looking for a high cash flow yielding investment vehicle.
