Completion Of Hai Long And Baltic Power Will Strengthen Global Renewable Position

Key Takeaways

• Strategic focus on offshore wind and large projects nearing completion could significantly boost future revenues due to global renewable energy demand.
  
• International diversification insulates revenue from U.S. tariffs, optimizing margins through global supply chains and diverse project locations.
  
• High reliance on large projects, market conditions, and geopolitical risks could affect Northland Power's financial stability, future earnings, and competitive positioning.

Catalysts

Operates as a power producer in Canada, the Netherlands, Germany, Colombia, Spain, the United States, and internationally.

• Northland Power's strategic focus on offshore wind and executing large projects (Hai Long, Baltic Power) nearing completion in 2025 could significantly boost future revenues and EBITDA due to their scale and global demand for renewable energy.
  
• The company's robust construction pipeline, including the Oneida large battery storage project which is expected to commence operations soon, is projected to contribute approximately CA$600 million in adjusted EBITDA upon completion, enhancing earnings stability.
  
• Financial optimization through the potential refinancing of the Baltic Power and Hai Long projects post-commercial operations could result in improved free cash flow, providing additional funds for future growth initiatives or shareholder returns.
  
• Northland's international diversification shields it from U.S. tariffs, ensuring stable revenue flows unaffected by U.S. policy changes, and optimizes net margins due to global supply chain access and geographically diverse project locations.
  
• Management's decision to end the DRIP discount and reduce dilution, while maintaining strong capital allocation towards profitable growth projects, highlights a commitment to enhance shareholder value and sustainably grow earnings per share.

Northland Power Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northland Power's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.3% today to 17.3% in 3 years time.
• Analysts expect earnings to reach CA$532.9 million (and earnings per share of CA$2.05) by about April 2028, up from CA$265.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$674 million in earnings, and the most bearish expecting CA$391 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.8x on those 2028 earnings, up from 17.5x today. This future PE is greater than the current PE for the CA Renewable Energy industry at 17.5x.
• Analysts expect the number of shares outstanding to grow by 1.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.43%, as per the Simply Wall St company report.

Northland Power Future Earnings Per Share Growth

Risks

• There are geopolitical risks, including potential changes in political environments, that Northland Power cannot control, which could impact stability and financial outcomes such as revenue and margins.
  
• The company has a markedly high reliance on a few large-scale projects for long-term financial growth, introducing project execution risks that could affect future earnings if unforeseen issues arise.
  
• The wind resource variability observed in past quarters could lead to fluctuating revenue figures, especially in closely-watched markets like Germany, where curtailments and outages have already impacted financial results.
  
• The project refinancing and optimization strategy's success is highly dependent on favorable market conditions post-construction completion around 2027, posing a risk to future cash flow and financial flexibility if conditions are suboptimal.
  
• While renewable energy demand is strong, Northland Power operates in a competitive environment with potential regulatory uncertainties and pricing pressure that could affect future revenue and net margins.

Valuation

• The analysts have a consensus price target of CA$27.821 for Northland Power based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$35.0, and the most bearish reporting a price target of just CA$23.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$3.1 billion, earnings will come to CA$532.9 million, and it would be trading on a PE ratio of 17.8x, assuming you use a discount rate of 7.4%.
• Given the current share price of CA$17.82, the analyst price target of CA$27.82 is 35.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.