This is a Z4 Research (Zman's Energy Brain ~ oil, gas, stocks, etc...) post quarter update.
Shares of wind blade maker TPI Composites are off 45% from their August 2018 and February 2019 highs. The drop from the most recent high was a function of labor issues in Mexico, the bankruptcy of a client, a power outage in the UK blamed on wind, trade war fears and slower than expected offshore project timing in the U.S. this year. The company reduced guidance with the 1Q report for 2019 and trimmed 2020 numbers with the 2Q19 report but not all of these directly impact TPIC and the Mexico and client bankruptcy issues have been resolved.
- Revenue estimates have fallen modestly since our initial piece for Seeking Alpha in February 2019. 2019 estimates are down 4% but still reflect YoY growth of 42%. For 2020, revenue consensus is down 6% showing 17% YoY growth. Despite the downward revisions both 2019 and 2020 are easily set to be record years. (see cheat sheet below).
- EBITDA estimates come off more sharply given the greater impact of fixed costs spread over less revenue. 2019 is down 35% and 2020 is down 15% vs levels in our earlier piece. 2020 EBITDA would still easily be a record and note the sub 5x multiple is a heavy discount relative to historical levels.
- Turning to the most recent quarter, 2Q19 was a significant beat. The 2Q19 report was highlighted as the 2nd strongest for blade sets sold, the highest for revenues, and it's best quarter in the last five on EBITDA margin. 2019 guidance for sales and EBITDA was not altered with the 2Q19 press release as at the time of the 1Q report we viewed management as having attempted to more than adequately account for the one time items in progress at that time (Mexico labor and the then likely filing of one of their clients). Volumes were decreased slightly but this was not a function of demand but rather timing. 2020 guidance was inched lower for sales and EBITDA (6% and 8% on mid respectively) with the 2Q19 update due to a faster than expected pace of manufacturing line transitions. Generally you can expect new lines to come with new longer term contracts that include minimum volume commitments and price increase mechanisms for clients taking less than the full output.
- Longer term guidance is intact. TPI is moving towards its long term goal of $2 B in wind blade set sales per year vs $1.5 B in terms of lines under contract now and a pipeline of additions worth $0.6 B (19 lines on the way at over $40 mm in annual sales per line (max) and 80% assumed utilization).
Other Items:
Throughput, Pricing, and Improving Margins:
Blade sets invoiced trend: Rising; MW per blade set rising (see Charts C to D1 below) and blades grow in size and efficient shape (rapid shift under way between 2018 and 2022 to significantly longer blades).
Pricing: Average Selling Price (ASP) per blade trend: Rising (see Chart E below).
Gross Margins: trend recovering after a multi-item hits in 1Q19 (now resolved) (see Chart F below),
Return Of Capital: Not yet, it's premature to expect a repurchase program other than as it relates to restricted stock awards and it is to look for a dividend. We expect something along these lines in 2021.
Balance Sheet: In good shape in terms of leverage, liquidity, and interest coverage - see cheat sheet below.
Other Items:
- Legal items: No proceedings reported.
- Short Interest: 9% of outstanding shares.
As we look ahead:
More clean and green investing in part due to coming 2020 elections is likely and wind will be in focus. They continue to be the only independent blade maker with a global footprint and strong intellectual property making them the go-to global provider of outsourced blades. They claim 14% of global blade market share and 53% of outsourced blades excluding China. Customers include Vestas (OTCPK:VWDRY) (the biggest onshore global wind name and a ZLT holding), Siemens/Gamesa (#3 global onshore wind including China), GE Wind (#4 onshore), and ENERCON (#5 onshore). The trend here is to increasingly outsource blades - it's more cost effective and efficient for the wind project managers. It should be noted that outside of the U.S. both the EU and China have strong capacity add goals by 2030 and 2020 respectively.
Wind power market growth has expanded rapidly. Wind power capacity growth has rising swiftly over the last decade (22% last 10 year CAGR) with smaller percentage gains in recent years but from a larger base; annual increases in GW are consistently near 50 GW adds of late and from 2019 to 2027, capacity growth is expected to rise to average about 69 GW per year (Wood MacKenzie) as growth benefits from more emerging markets undertaking larger projects and a small but growing wedge offshore projects.
This is not just Green Deal hopes but is aided by economics. The Levelized Cost of Energy (LCOE) of Wind now ranges in line with to even lower than new gas turbines and is competitive on a LCOE vs marginal cost basis with existing nuclear (operating the nuke but not including the cost of building it as the LCOE does include the all in cost of building and operating the turbine). And blades are the biggest cost of a wind mill and the most important driver of lower LCOE.
Other considerations:
The Production Tax Credit phaseout - as with solar, U.S. production tax credits are set to be phased out at the end of this year (with extensions and exceptions) leading to a boom in orders late this year and into next (projects need to be underway to receive the credit). The PTC is more likely than not to be retroactively extended if there (especially if there is a change of occupant in the White House in 2020). This tax credit drives year end jumps in deliveries in the States and EIA estimates 2019 will see 45% of deliveries for all of 2019 in December.
Nutshell: Slower than expected growth near term growth and some early year items have overly depressed the shares. Expect margins to recover on higher volumes in tail of 2019 and into 2020 and beyond. Long term growth looks bright. We hold an overweight core plus trading position equaling roughly 10% of the newly weighted/positioned portfolio in TPIC.
Disclosure: I am/we are long TPIC, VWDRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
