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Summary
- I want to present my top pick exclusively to you, my loyal followers. I believe it could gain more than 100% over the next couple of years.
- The company is active in the offshore wind industry. It's undiscovered by the masses as it completely transitioned recently.
- It acquired a market leader in August which added a lot of expertise and credentials.
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What Others Say About Green Growth
Only Just Added With Huge Upside Potential
Originally published on Green Growth Stocks on August, 31.
Eneti (NETI) transformed heavily over the past year. It used to be Scorpio Bulkers focused on dry bulk commodity transportation. The transportation business is very cyclical which led to fluctuating results. The stock price acted accordingly.
It transitioned completely away from the dry bulk commodity transportation and sold all those vessels at good prices. It decided to put the large cash pile to work by purchasing a next-generation WTIV - wind turbine installation vessel. It recently took the next step by acquiring Seajacks.
Transition From Scorpio Bulkers To Eneti
The company announced the transition a little over a year ago on August 3, 2020. It took a couple of steps since then:
- August 3, 2020: It announced the strategy change towards a WTIV.
- September 28, 2020: The first sale of a dry bulk vessel. The other vessels follow over the next months.
- December 20, 2020: Scorpio Bulkers declares it wants to exit the dry bulk sector.
- January 6, 2021: It changes its name to Eneti which underlines the transition to offshore wind installations.
- May 11, 2021: It signed a contract for the construction of a WTIV. The vessel will be delivered in Q3, 2024.
- August 5, 2021: Eneti acquires Seajacks with a mix of shares, assumed debt, newly issued notes, and cash.
Eneti ordered one large WTIV capable of installing up to 20 MW turbines at depths up to 65 meters. This type of vessel doesn't exist yet, there are newbuilds expected and a few ships can be upgraded to install larger turbines. There is demand for these ships starting in 2024 as offshore wind turbines get larger. They decrease the cost, are less sensitive to wind variations and are more efficient at low wind speeds. Large OEM wind manufacturers like Siemens Gamesa (OTCPK:GCTAF, OTCPK:GCTAY), Vestas (OTCPK:VWDRY, OTCPK:VWSYF), and General Electric (GE) already announced 14MW+ wind turbines.
The company has an option to add another large WTIV. It's also in advanced discussion with American shipbuilders for a WTIV in compliance with the Jones Act. This means it can work in United States water which is a closed market with significant growth opportunities in offshore wind.
Seajacks: Adds Revenue And Experience
The acquisition of Seajacks furnishes a lot of credibility to the commitment of Eneti towards WTIVs. It's the largest owner of purpose-built self-propelled WTIVs globally. The acquisition immediately adds 5 active vessels. These bring $224M of projected revenue.
The experience of Seajacks is probably even more important. Seajacks sellers own 42% of Eneti. It gets two seats on the board of directors. The CEO and COO of Seajacks also joined the latest earnings call. I liked this comment from Blair Ainslie, the CEO of Seajacks:
And if you're fortunate enough at some point in time to have all your vessels contracted, then that tells you that the market conditions are right to order new vessels, and that's what we'll continue to do; always have done that.
He talked about when he expects to order a new vessel. It's a common-sense answer that worked for Seajacks in the past.
Before the acquisition, Eneti was in an odd space. It sold all dry bulk vessels and expects the new WTIV only in 2024. This would leave the company a couple of years without activity. There were also doubts about the management that remained in place. They are experienced in dry bulk transportation which seems a pretty different business from wind turbine installations. So the Seajacks adds active vessels, current revenue, and much-needed knowledge.
Eneti seems to have done a good deal with the acquisition as well. Based on the issued shares, assumed debt, and paid cash, I estimate an enterprise value of $531M for Seajacks. Seajacks' fleet is worth $600M and it expects an EBITDA of $125M. Eneti paid less than the fleet value and only 4.25x EBITDA. The sellers have a 42% stake in Eneti. So I suspect it's also a way to go public for the former Seajacks owners, reduce debt, and open up new possibilities to built new vessels.
A Strong Balance Sheet
Eneti boasts a strong balance sheet. It completely sold its dry bulk fleet which provided a lot of cash. The acquisition of Seajacks made the company assume its debt as well.
Source: Eneti Investment Presentation
The final post-transaction debt is slightly lower:
Source: 6-K Filing
The company mentions it has $41.7M in cash and cash equivalents as of August 13. It holds 2.16M shares of Scorpio Tankers (STNG) as well, which worth is currently ~$33M.
The company has a net debt position of $124M after the acquisition of Seajacks. This is very reasonable against an expected EBITDA of $125M for 2021.
Dividend Reduction
The company recently decided on a quarterly dividend of $0.01, down from $0.05. The dividend reduction makes sense as it focuses on the wind turbine installer vessels. The companies' cash flows after the acquisition aren't visible yet. It's also heavily investing in the new vessel which will only be productive in Q3 2024. The paid dividend matches the received dividend from the Scorpio Tankers shares.
Valuation
The valuation is based on current expectations after the Seajacks transaction. Eneti expects revenue of $224M. At the current market cap of $329M, it has a PS ratio of 1.47. I calculated the EV at $453 based on net debt and the current market cap. The EV/EBITDA is at just 3.62. Both metrics are low, I believe the company is cheaply valued. It's impossible to compare to the companies past valuation as it runs a different business now.
Comparison To Competitors
Cadeler (OTCPK:CADLF) is a close competitor from Norway. It makes things a bit complex on the currency side: it's a Danish company, reporting in EUR and quotes in NOK on the Norwegian stock market. The company recently raised a lot of capital. This enabled it to also order new vessels. So the comparison is mainly to value Eneti and not to evaluate Cadeler.
| PS Ratio | EV To EBITDA | |
| Eneti | 1.47 | 3.62 |
| Cadeler | 7.33 | 15.96 |
The ratios are based on both companies' outlooks. For Cadeler I took the middle of their guidance range. I assumed the EV of Cadeler is around its market cap as it had a net cash position that it just used to order two new vessels. Both companies will likely add more debt as the construction of new vessels progresses. Capital increases are possible as well to finance these.
Conclusion
Scorpio Bulkers' transition to wind turbine installation vessels was received skeptically with reason. The acquisition of Seajacks changes things. It adds knowledge, stable reference shareholders, and immediate revenues to the company. The market doesn't appreciate this acquisition yet. I feel like there is also a transition from former shareholders, interested in bulk transportation to new shareholders, interested in wind turbine installations.
Eneti looks cheaply valued, especially in comparison to Cadeler. The company has significant upside based on its outlook. I expect further dilution and additional debt as the company orders more new build vessels. I still see it as really cheap and an opportunity.
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Analyst's Disclosure: I/we have a beneficial long position in the shares of NETI 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. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I am long on all the stocks in the Green Growth Portfolio. Any change to these positions is disclosed in future articles or the chat room. Any investments you would take after an article or discussions with me are your responsibility. You should do your own due diligence before an investment.
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