Investing Ideas for a Finite Planet: Episode #3 - $TPIC
An advanced materials small-cap with global reach and huge potential in energy (and EV) 🌱✨
Welcome to my third write-up exploring growth stocks in the emerging clean, circular economy. We know the climate crisis is accelerating, and business as usual is unacceptable. At the same time, achieving financial independence has never been more important - and long-term investing in the stock market is proven to be a safe way to do this. I want to connect these two phenomena, by exploring the sustainability of companies at the head of emerging megatrends in our rapidly-changing world.
None of what you read is financial advice. Please do your own due diligence.
TPIC, founded 1968 in Scottsdale, Arizona is a designer & manufacturer of advanced composite materials to the clean energy sector, as well as clean transportation. They are the world's only wind turbine blade manufacturer operating globally, which gives them a leading position in the rapidly decarbonising energy sector, responsible for 18% of all blades installed in 2019. Wind has a rapidly growing share of renewable capacity due to its fast reducing cost base of installation, especially offshore.
The TPIC business model helps clients de-risk the upfront purchase of the blades, with long-term agreements covering production capacity investment and operating costs of facilities structured to encourage 100% of contract volume. This gives exceptional visibility to long term revenue.
TPIC is a company with decades of experience creating products for the major operators of technology at the head of the clean energy transition. There are phenomenal tailwinds for the core business of turbine blades, as well as small but growing operation providing components to a number of leading OEMs in the EV space, including Proterra, GM and Workhorse.
SUMMARY
- Key provider of tech to co's with >50% share of global wind capacity, 99% of US
- Cost of producing wind falling to comparable with solar
- only manufacturer of blades with global footprint, production & transportation facilities in 10 countries in EU/US/ASEAN/LATAM.
- Biden executive order signed ending fossil fuel subsidies and declaring a target of 2x installed wind in the US by 2030.
FUNDAMENTALS
Market Cap: $2.52B
Trailing 12m revenue: 1.62B
YoY revenue growth: 39.5%
2015-2020: CAGR 23%
Forward P/S ratio: 1.4
$149M free cash flow end Q3 ‘20
Contracted revenue from already installed capacity: ~$5.1B to 2025
INVESTMENT THESIS
ELECTRIFY EVERYTHING
As we all know, renewables are a large and growing share of energy market. There is going to be increased demand as whole industries which previously relied up oil or coal are forced by regulation or competitive pressure to electrify. Bloomberg NEF estimate that EV share of the automotive market will grow by 20% CAGR until 2025.
WIND IS GOING GLOBAL
Wind is already an important part of the energy matrix. C2ES (an energy consultancy) estimate that 5% of the world's energy was supplied by (mainly onshore) wind turbines in 2018. The Global Wind Energy Council claim 651GW installed capacity in 2020 and predict 10% CAGR in installed capacity (on & offshore) to 2025 (~15% in the optimistic or 'accelerated' case). The total share of global energy supplied by wind expected to be in the region of 26% by 2050.
Much of this increase in capacity is going to be in developing countries. In developed economies, the growth is thought to be give an additional boost by the opportunities to increase grid resilience by combining wind and the production of green hydrogen.
There is an anticipated slowdown in new capacity China because of changes in incentives but this is more than offset br increasing speed of commissioning in Europe, Japan and fast growing India, Vietnam, Latin America.
ONLY GLOBAL BLADE MANUFACTURER
Wind is a utility scale renewable tech. Its not economically viable to make wind work at mom & pop scale. We have solar at home, but the ROI even with falling prices (see below) means wind has to be done at scale. This means the number of wind operating companies is small: Siemens-Gamesa, Goldwing, % Vestas have over 50% of global share. Blade manufacturer tends to be outsourced due to size, TPI Composites produce for all of the majors. And because of size, they produce locally, so become a facilitator of global expansion for the major operators. TPIC operate a set of manufacturing hubs which allow their blades to be produced close to deployment zones.
HIGH COST OF COMPETITIVE ENTRY
- industry significant IP, more than 300 engineers, increasingly able to recruit from other industries, difficult to replicate production methods in part because of the increasing size and precision of the blades
SHARED GAIN/PAIN BUSINESS MODEL
Sharing investment burden with clients helps gain market share and invest in emerging markets with reduced risk exposure. Long term Volume based supply agreements make for predictable & visible revenue & help stabilise margins as sale price and LCOE (the measure of the cost of producing energy over the lifetime of the asset) fall.
LARGE AND GROWING MAINTENANCE REVENUE STREAM
WHAT MEGATRENDS/TAILWINDS DOES $TPIC BENEFITS FROM?
Clean energy transition - If we are to stick to 1.5C of warming, IRENA.org suggest that part of the piece will be a 3x in onshore and a 10x in offshore wind.
- Wind is getting MUCH cheaper. The costs of both onshore and offshore wind have plummeted by more than 50 per cent on average in the last five years, with prices for new-build offshore wind declining by one third from 2018 to 2019 alone, according to BloombergNEF. Driving these cost reductions are larger turbines which allow better energy capture and capex/opex savings, global supply chain efficiencies and competitive procurement mechanisms.
- Corporate commitments - over 230 leading multinationals such as GM,
Nike, Walmart, IKEA, BMW, Coca Cola and Proctor & Gamble have taken the RE100 pledge, organized by the Climate Group, to transition to 100% renewable energy
- Regional policy frameworks - European Union finalized new climate rules targeting an uplift in the share of renewable energy to 32% by 2030 with a further potential catalyst being the EU tailwind from EUR 1.85 trillion Recovery Plan. Meanwhile China is targeting 210 GW of grid-connected wind capacity by 2020
- synchronous with other grid scale technologies such as green hydrogen
IS IT A GOOD COMPANY?
The contribution of such a prominent business in the effort to decarbonise energy production and 'electrify everything' is huge. The company estimates that the blades it has installed in the past 5 years will produce the same amount of clean power consumed in fossil form by 200M cars.
The company takes ESG seriously and has conducted extensive materiality assessments to ascertain performance and priorites in core areas of its impact and operating
Blades have a functional lifespan of 20 years, and the company is actively exploring ways to incorporate waste streams from decommissioned blades into secondary products. Current 46% of the 44000T of waste went to landfill. One metric to continue to actively monitor is progress against the attempts to reduce the volume of unrecyclable waste from the manufacturing process.
It should also be noted that the company has identified its culture as critical to its success and becoming a destination for top talent.
The latest ESG accounting document can be downloaded here
RISKS
-The policy landscape is full of optimistic intentions, not least of which the Biden commitment to doubling installed offshore wind capacity. But in a number of territories there are weak signals to retire existing fossil generation capacity or prevent the construction of new capacity (eg the coal mine given approval by the UK govt which is about to host COP26), leading to a situation where wind energy is still niche
-In many markets, despite price and other advantages. There is significant friction with local populations for onshore wind, which makes the premium still paid on offshore more significant. Its still the case that
- Transmission bottlenecks, inconsistent storage capacities and dialogue around continuity of supply (eg in the wake of the Texas power-out in Feb 2021) can create drag on the uptake in certain jurisdictions.
- Policy volatility due to political cycles and the influence of incumbent interests.
VALUATION
I opened a position in late 2020 at $38 around 2% of portfolio at that time, which is currently up 84% ahead of earnings later this week. While the valuation may currently be a little stretched, I see strong future and will be adding to this position as market conditions allow.