FTCI - Nextracker: Tracking Higher

2023-06-17 07:01:50 ET

Summary

• Nextracker has been doing alright since the Flex spin-off went public in February.
• This is driven by solid fourth quarter results and a convincing fiscal 2024 outlook.
• I like the operating performance, but fear that the valuations are too demanding to create a compelling risk-reward here.

When Nextracker ( NXT ) went public in February of this year, as a spin-out from Flex ( FLEX ) I concluded to keep track of the developments for the business. This came as the business had seen a successful public debut, after the IPO market at large was closed for a while.

Calling the business interesting, I found the valuation too high from the start to get involved, but at the same time I was curious to see how the cost base will evolve post a spin-out (as often corporate costs appear to be allocated to the spin-off following such an event). Amidst all this, I decided to keep an eye on the developments of the business.

The Business

Nextracker is the legacy solar tracker business of Flex, providing solar tracker hardware and software solutions which are used in utility-scale and ground-mounted solar projects. In fact, the company believes that the majority of US solar projects already includes such technologies, on average generating some 25% more energy output than fixed-mount traditional ground systems.

Founded in 2013 by CEO Dan Shugar, the business was acquired by Flex in 2015. Since inception, the company installed some 70 GW of tracker systems, driven by demand for the flagship NX Horizon solution. The company claims superiority of this software with panels controlled in independent rows, mechanically balanced, and embedded with connectivity.

After strong demand for the IPO, the public offering price was set at $24 per share, granting the business a $3.5 billion equity valuation based on 145 million shares outstanding, as this valuation excludes a very modest net debt load. For the year ending March 2020 the business generated $1.17 billion in sales and posted operating earnings of $149 million. During the pandemic year modest advancements were made with revenues up to $1.20 billion and operating profits up modestly as well to $159 million. While revenues rose in a convincing manner to $1.46 billion for the year ending March 2022, operating profits were more than cut in half to $66 million.

The company had seen solid results for the six-month period until September 2022, with sales up 28% to $870 million, trending at a $1.7 billion run rate. Operating profits of $69 million trended at $140 million, below the 2021 performance, but quite solid. With shares trading at $30 on the first day of trading, the resulting operating asset valuation of $4.5 billion was equal to 2.5 times sales and 26-27 times operating earnings, a bit too demanding in my book.

Doing Well

Since the IPO in February, shares have generally been doing alright. After trading in the lower thirties in the weeks following the offering, shares have gradually moved higher, now trading near their highs at $41 per share.

Other than some commercial updates, with agreements being signed with regard to contracts, it has been relatively quiet on the corporate front. In May, the company posted a strong set of fourth quarter results with sales up nearly 18% to $520 million. More impressive was that gross profits more than doubled to $90 million, as the company posted operating profits of $40 million and net earnings of $27 million. Annualized this works down to an earnings per share rate of $0.75, translating into sky high earnings multiples.

That was part of the story as the fiscal 2024 guidance was quite convincing. While the revenue guidance of $2.1-$2.3 billion is relatively modest, I was impressed with a GAAP earnings outlook between $175 and $205 million, with GAAP earnings seen between $1.20 and $1.40 per share.

This look solid from a fundamental point of view, although that shares trade around 30 times earnings here. This comes after margins are set to rise this year, undoubtedly aided by policies like the Inflation Reduction Act. That being said, I am fearful to extrapolate margins here given that many competitors of Nextracker have seen many moving parts as well since their IPOs (I am thinking about FTC Solar ( FTCI ) and Array Technologies ( ARRY ) , for instance, as both have undergone boom and bust cycles.

Given all this I am still deciding not to be involved, after shares have risen a third since the offering, despite a convincing 2023 outlook as valuations are still too demanding for me here.

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