X - FTAI Infrastructure: Transtar's Profitability And Growth Amidst Diverse Assets

2023-11-28 11:49:00 ET

Summary

• FTAI Infrastructure owns and operates interesting infrastructure assets in railroads, ports and terminals, and power and energy.
• The company is focusing on running all of its properties at a profit.
• So far, the railroad business is proving to be the true cash cow.

Introduction

After I started studying Warren Buffett's purchase of BNSF and how he assesses railroads I started researching the five publicly traded Class 1 railroads in North America. From here, I came across a recent spin-off linked to railroads: FTAI Infrastructure Inc. ( FIP ). Originally, it was part of FTAI Aviation Ltd. ( FTAI ). Now it is a stand-alone company with the goal of developing, acquiring and operating transportation and energy infrastructure businesses in North America. The company is still externally managed by an affiliate of Fortress Investment Group LLC .

The Company

Currently, the company operates in three sectors: railroad, ports and terminals, and power and gas. Overall, it has four main assets in its portfolio:

• Transtar in railroad.
• Jefferson Terminal and Repauno in ports and terminals.
• Long Ridge energy terminal in power and gas. The company also owns various investments under the sustainability and energy transition category, such as Aleon (developing a lithium battery recycling network across North America), Clean Planet Energy (focused on clean fuel production facilities in North America) and CarbonFree (technology provider of a proprietary modular carbon capture plant).

The capital and the company's structure are well described below. We see a debt/capital ratio of 62.8%, which makes sense. The company can borrow money to a certain extent both because infrastructures require maintenance and investments and because a company owning assets such as FTAI's can borrow against its assets.

We also see the company's structure, where it is highlighted how full ownership is only with Transtar, though in every other case FTAI has the majority.

Clearly, my main interest lies in Transtar because it is a company operating six freight transportation and rail service businesses serving several industrial markets in the East and the South.

In my past article , I focused more on one important property of Transtar: the Union Railroad Company , a class 3 carrier located in the heart of southwestern Pennsylvania. It operates a 128-mile network providing its customers with direct access to Class 1 railroads such as Norfolk Southern Corporation ( NSC ), CSX Corporation ( CSX ) and Canadian National Railway Company ( CNI ).

This time, I would like to give a snapshot of Gary Railway , another asset owned by Transtar. It is located in Gary, Indiana, on the southern shore of Lake Michigan around Gary Works, which is United States Steel Corporation's ( X ) largest manufacturing plant. Even though it operates only 71 miles of yard track, it provides interchanges with five Class 1 railroads: BNSF, Union Pacific Corporation ( UNP ), Norfolk Southern, CSX Corporation and Canadian National. In addition, it is connected with many other class 2 and 3 carriers.

This is clearly a strategic asset, even though it is tightly bound to another company - U.S. Steel - and its cycles. However, with manufacturing reshoring, we should see strong tailwinds for the supply chain linked to industrial activity.

Overall, my research on the company was fairly positive on the assets it owns and operates. Yet, apart from Transtar, the company was still running at a loss in the other businesses, with the result the overall financials don't look that good. So far, Transtar is the cash cow, while the other investments still need to unleash their profitability.

Q3 Results

When FTAI Infrastructure reported its Q3 results , these were the main financial data points:

• Total revenues for the quarter were $80.7 million (+2.7% YoY). YtD the company reported $239 million (+2.5% YoY).
• Total expenses however increase more: $94.94 million for the quarter (+8.3% YoY) and $278 million YtD (+18.5% YoY).
• Therefore, the company's net loss increase to -$50.5 million for the quarter (a 16% deterioration) and $135.5 million YtD (-16.5% YoY).
• Nonetheless, the company distributed a quarterly dividend of $0.03 per share, paying almost $16 million for the quarter and almost $46 million YtD.
• If we look at the cash flows from operating activities, the company saw a net decrease in cash of $71.7 million, which is a little less than half the cash balance at the beginning of the year.

Clearly, there is real sign of the company turning overall profitable. However, let's look at the segment highlights and how each of the four main assets are performing.

Transtar was once again profitable, with an adj. EBITDA of $17.4 million for the quarter and $55 million for the nine months ended in September. Transtar was negatively impacted by the UAW work stoppage. On an adj. EBITDA basis, Jefferson Terminal is also positive, with $7.8 million in quarterly EBITDA and $21.4 million YtD. So is Long Ridge, while Repauno is still running unprofitably.

Looking at the quarterly consolidated and combined financial statement, we see the overall picture.

Transtar also ends up with positive net income of $12 million for the quarter, while Jefferson, Repauno, and Power and Gas all end up being still unprofitable with $8.3, $5 and $10 million net losses respectively. The investments in sustainability and energy transition lost $2.4 million.

The overall loss is $44.1 million for the quarter, starting from a revenue of $78.6 million.

Railroad continues to be the cash cow. Jefferson seems promising, with new multiple contracts signed in recent months, a portion of which will contribute to Q4. As FTAI Infrastructure management said during the last earnings call :

We secured 3 new contracts at Jefferson which in total represent $20 million of long-term annual adjusted EBITDA. While the third quarter did not contain any EBITDA from these new contracts, 2 of the 3 contracts have already commenced at this stage in Q4. So we'll see the positive benefits in our Q4 results ahead.

The third contract is at our newly acquired Jefferson South site where we secured a new 15-year contract for the transloading and export of hydrogen-based clean fuels commencing in 2025. Another highlight at Jefferson is the recent return of Canadian crude volumes after almost 2 years of absence. Canadian crude handling is a very high-margin business for us, and this quarter, we'll be handling multiple unit trains of Canadian crude oil that we hope represent more consistent flow from the Canadian market as rail volumes pick up and pipelines out of the region are constrained.

Therefore, the company expects a positive 2024 for this terminal.

Repauno is narrowing its losses, but still needs to sign some important contracts in Q4.

Conclusion

Overall, I keep on believing FTAI Infrastructure owns and operates very interesting properties, whose future seems to have good and favorable prospects. However, it is not my style to invest in companies that are unprofitable because it is hard to give true multiples to their financials. For sure, the Transtar business alone, considering around $45 million of net income, can be worth around $450 million, giving it a 10 multiple on earnings. This alone is above the current market cap of the company, which is around $365 million, suggesting there is room to unlock value and grow the company's capitalization. But the other businesses still need to turn profitable to have a fuller picture. Therefore, I keep my hold rating, but will continue to closely monitor this promising company.

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