New Fortress runs a global integrated gas-to-power infrastructure business.
In my view, if management continues to make investments in LNG and power facilities, and need for LNG increases as expected, free cash flow will likely trend north.
If the Miami Liquefier really reports more operating margin, and management successfully continues its second power plant in Mexico, New Fortress’ figures will likely grow.
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New Fortress Energy Inc. (NASDAQ:NFE) announced $2-$2.5 billion in new liquidity to sustain future growth initiatives. Estimates include significant free cash flow generation from 2023 given the management noted that it may own the most valuable hydrogen business in the United States. Under my own DCF models, with conservative assumptions, I obtained a fair valuation that is significantly larger than the current market price. Even considering the risks and the total amount of debt, the future looks sweet.
New Fortress May Benefit From Previous Capital Expenditures And Future Investments In LNG Infrastructure
New Fortress runs a global integrated gas-to-power infrastructure business. The company intends to help clients reduce their energy costs and diversify their energy resources.
In my view, it is a great moment to study New Fortress' business prospects. Management will benefit from the recent increase in the price of gas. New Fortress made significant capital expenditures in 2021, and expects to invest a lot in 2022. As a result, many of the new facilities are expected to offer positive and growing free cash flow from 2023 and 2024. Those market participants who have the company under their radar and have invested in the company will most likely benefit in the next two to three years.
In my view, if management continues to make investments in LNG and power facilities, and the need for LNG increases as expected, free cash flow will likely trend north:
We look to build facilities in locations where the need for LNG is significant. We design and construct LNG and power facilities to meet the supply and demand specifications of our current and potential future customers in the applicable region. Source: 10-k
ir.newfortressenergy.com
Expectations Include Sales Growth And Significant Free Cash Flow Growth In 2023 And 2024
Analysts expect sales growth of 174% in 2022 and a median sales growth of 100% from 2020 to 2024. The EBITDA margin is also expected to stabilize somewhere around 21%-26% from 2022 to 2024. Finally, I believe that the New Fortress could become extremely interesting from 2023, as more analysts are expecting the free cash flow to turn positive.
marketscreener.com
If New Fortress Continues To Optimize Existing Assets, And Management Successfully Develops Hydrogen Hubs, Fair Price Could Reach $74
I am quite optimistic with regards to the plans of management about the optimization of its existing assets. In particular, if the Miami Liquefier really reports more operating margin, and management successfully continues its second power plant in Mexico, New Fortress' figures will likely enhance:
ir.newfortressenergy.com
Besides, under this scenario, I also expect that management would continue to invest in its portfolio of hydrogen hubs. Let's note that from 2023, the company expects to become the largest and most valuable hydrogen business in the United States. In that case scenario, the bargaining power will likely increase, which could lead to larger operating margins and free cash flow.
ir.newfortressenergy.com
With the expectations of other analysts and conservative sales growth in 2024, I obtained 2024 sales of $7.57 billion. If we also assume an EBITDA margin of around 26%, 2024 EBITDA would be $1.9 billion. Finally, using changes in working capital and capital expenditures aligned with previous financial statements, the free cash flow would grow from $247 million in 20222 to $1.3 billion in 2024:
Ycharts, And Author's Compilations
With a cost of capital of 10.9%, and using an exit multiple of 11x EBITDA, the implied stock price should be close to $74. Note that the company is currently trading somewhere close to 17x EBITDA, so I am quite conservative with my exit multiple:
Ycharts, And Author's Compilations
If The Acquisitions Of Hygo And GMLP Fail, I Obtained A Fair Price Of $10
As of December 31, 2021, goodwill represented 9% of the total amount of assets, which means that New Fortress did meaningful acquisitions in the past.
In my view, if management fails to assess the valuation of the targets, accountants may have to impair some part of the goodwill. As a result, I expect a decline in the market valuation of New Fortress. Besides, if equity researchers notice the failure of the acquisitions, revenue expected may also decline, which could justify a decline in the stock price:
The integration of these businesses is a complex, costly and time-consuming process. The success of the Mergers will depend, in part, on our ability to successfully combine each of Hygo and GMLP, which recently operated as independent companies, with our business and realize the anticipated benefits, including synergies, cost savings, innovation and operational efficiencies, from each combination. If we are unable to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits may not be realized fully, or at all, or may take longer to realize than expected and the value of our common stock may be harmed. Source: 10-k
There is also certain uncertainty about the future of New Fortress' infrastructure. Management noted that the company may build infrastructure in areas where the energy needed may be lower than expected. Finally, the company may suffer from delays imposed by authorities or any other contingencies beyond the control of New Fortress:
We may construct facilities to capture anticipated future energy consumption growth in a region in which such growth does not materialize. For example, the purchase of the project company holding the rights to develop and operate the Ireland Facility (as defined herein) is subject to several contingencies, many of which are beyond our control and could cause us not to acquire the remaining interests of the project company or cause a delay in the construction of our Ireland Facility. Source: 10-k
Under this case, I included less than expected revenue, almost 2.25% in 2022 and 5% in 2024. I also assumed an EBITDA margin of 23%, D&A close to $165-$155 million, and more capital expenditures than in the previous case scenario. As a result, the free cash flow would not grow as much as in the previous case. I obtained 2024 free cash flow of $532 million.
Author's Compilations
Under these conditions, I used an exit multiple of 7x, which is actually the median EV/EBITDA multiple for the industry. The results include an equity valuation of almost $2.05 billion, and an implied stock price of $10.
Author's Compilations
The Best-Case Scenario Includes $2-$2.5 Billion In New Liquidity And A Significant Improvement In The Credit Ratio
Under the best-case scenario, I would expect significant capital expenditures and new hydrogen hubs. I also assumed that management will successfully generate $2 billion to $2.5 billion in liquidity as management mentioned in the last presentation. With the new money, management will be able to push growth even further than in previous scenarios.
ir.newfortressenergy.com
Besides, I assumed that New Fortress will enhance its credit profile, so that the weighted average cost of equity declines substantially. As a result, the company's fair valuation will likely increase.
ir.newfortressenergy.com
Assuming sales growth of 65% y/y from 2022 to 2024, I obtained 2024 sales of more than $9.5 billion. Also, with an EBITDA margin of 30% and conservative changes in working capital and capital expenditures, 2024 FCF could stand at close to $2.05 billion. Finally, with a cost of capital of 7.5% and an exit multiple of 11.5x, the implied valuation should stay close to $135.
Author's Compilations
Balance Sheet
As of December 31, 2021, management reported $187 million in cash, $6.8 million in total assets, and total liabilities worth $4.8 billion. The total amount of assets include equity method investments worth $1.18 billion. I don't believe that I have sufficient information to assess the valuation of the company's investments. The investments come from acquisitions of business interests made by New Fortress, which may be impaired in the future:
Under the equity method of accounting, the Company's investment is recorded at cost, or in the case of equity method investments acquired as part of the Mergers, at the acquisition date fair value of the investment. The carrying amount is adjusted for the Company's share of the earnings or losses, and dividends received from the investee reduce the carrying amount of the investment. The Company allocates the difference between the fair value of investments acquired in the Mergers and the Company's proportionate share of the carrying value of the underlying assets, or basis difference, across the assets and liabilities of the investee. Source: 10-k
10-k
In my view, most investors may be a bit worried about the company's long-term debt worth $3.75 billion. Under the best-case scenario, I assumed free cash flow of more than $2 billion, which would be enough to pay a significant portion of the debt. However, there is a bit of uncertainty because management has not reported stable and positive free cash flow in the past.
10-k
Conclusion
New Fortress is expected to obtain $2 billion to $2.5 billion in liquidity in the coming months. Management also promised to establish the most valuable hydrogen business in the United States by 2023. With these intentions and analysts claiming that free cash flow growth would spike up from 2023, in my opinion, the company is a must-follow. Under my own DCF models, the stock price may increase significantly in the coming years. There are some risks, and the debt is not small. However, in my view, under the market estimates, future free cash flow will likely justify both operating and financial risks.
I am a hedge fund analyst based in Romania. I love DCF models. I started trading at 13, and also traded for one large institution. I write investment research to help retail investors.Note that I don't give financial advice. Nothing contained in my articles should be construed as investment advice. Any reference to an investment's past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.Feel free to reach out to me, via comments, on any questions you may have on my financial models.
Analyst’s Disclosure:I/we have a beneficial long position in the shares of NFE either through stock ownership, options, or other derivatives. 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.
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