FTCI - NEXTracker: Keeping Track Off

Summary

• Nextracker Inc. is a solar tracking business being spun out from Flex.
• The company has seen a successful public debut, after the IPO market was closed for a long time.
• The Nextracker Inc. business looks interesting, but valuations look a bit rich in order to get involved.

Shares of Nextracker Inc. ( NXT ) have gone public after the IPO window has been closed for pretty much all of 2022, with exception to just a few public debuts. The strong positioning of the firm and recovery in financial markets at large opened up this opportunity for this solar tracker firm.

Solar Tracking

Nextracker Inc. is the legacy solar tracker business of Flex Ltd. ( FLEX ), which essentially spun out this business through the IPO. The company aims to become a leading energy solutions company by enabling intelligent, reliable and efficient solar power.

The company provides solar tracker and software solutions which are used in utility-scale and ground-mounted solar projects. The company claims that a majority of U.S. solar projects already use tracking technology in order to boost efficiency and output, generating up to 25% more energy than typical traditional systems which are fixed-mount.

Founded in 2013 by its current CEO Dan Shugar, the company was acquired by Flex two years later, as the acquisition enabled rapid growth. Since inception, Nextracker Inc. has installed some 70 GW of tracker systems, of which 15 GW in 2022, generating some $1.5 billion in revenues in the meantime from more than 200 active customers.

The NX Horizon is the company´s flagship solution, as the company claims superior LCOE versus other tracker systems. Some advantages of this solution are that panels are controlled through independent rows, they are mechanically balanced, they are self-powered (eliminating the need for AC power) and are embedded with connectivity.

Research firm Wood Mackenzie believes that the current tracker market measures about $4.6 billion, as half of the large scale solar projects are equipped with such solutions, indicating that Nextracker Inc. has a sizable market share in this, in fact it is widely regarded as the market leader.

Valuation & IPO Thoughts

Parent company Flex initially aimed to sell 23.3 million shares in a $20-$23 preliminary offering range, with pricing set a bit higher at $24 per share. No proceeds would benefit the business given an agreement made by the firm.

With some 145 million shares outstanding following the public offering, the company was awarded a $3.48 billion equity valuation as the firm would operate with a net debt load of approximately $100 million pro forma, the public offering giving the company essentially a near $3.6 billion enterprise valuation.

For the year ending March 2020, NEXTracker generated $1.17 billion in sales on which it posted operating earnings of $149 million. Revenues rose in a modest fashion to $1.20 billion for the year ending in March 2021 as operating profits rose to $159 million. Revenues rose to $1.46 billion for the year ending in Mach 2022, albeit that operating earnings fell in a huge way to $66 million.

For the six-month period ending in September 2022, Nextracker Inc. posted a 28% increase in first half year sales to $870 million, trending above $1.7 billion a year. Operating profits rose to $69 million, trending at a run rate of $140 million, still below the fiscal 2021 performance. Based on the preliminary third quarter results, the company sees sales at $1.38 billion in the first three quarters of the year, for a $1.8 billion run rate. Operating profits are seen at $127 million, or about $170 million a year as operating margins near 10% still come in below the low double-digit margins posted in recent years.

With Nextracker Inc. shares having risen to $30 per share on the first day of trading, the operating asset valuation rose to $4.5 billion. This is equal to about 2.5 times sales and 26-27 times operating earnings, which after taxes and modest interest expense resulted in an earnings multiple in the thirties.

And Now?

The truth is that Nextracker Inc. is regarded as a premium player in this field, which has solid long-term prospects given the continued adoption of solar but also the increased penetration levels of tracking devices.

Unfortunately in the case of NEXTracker is that some smaller peers have gone public as well in recent years, as their performance is quite mixed. One of these peers is Array Technologies ( ARRY ), which went public late in 2020 with shares trading around the $40 mark at the time, now down to $20 per share, albeit that this marks a spectacular recovery from a low around $5 per share.

Array posts sales at a similar $1.8 billion, albeit that it posts operating margins around the flat line, in contrast to NEXTracker, which is solidly profitable. The company supports a $3.7 billion enterprise valuation, including a substantial net debt load, which makes Array look quite expensive in relation to NEXTracker, albeit that Array´s recent growth is much more spectacular, amidst easy comparables.

FTC Solar ( FTCI ) has seen a similar boom-bust cycle as Array, but unlike Array it has not seen a recovery in the business, or its share price. Being influenced by of the boom-bust cycle seen by peers, and the volatile and cyclical nature of the industry, driven by subsidies, tariffs, tax, etc. I am a bit mindful to pay a big multiple.

This comes as the question is how the industry will evolve, albeit that it is clear that Nextracker Inc. is one of the front-runners of the industry. For me, Nextracker Inc. remains an interesting play to keep an eye on, but I see no reason to get involved here yet.

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