Westport Fuel Systems: Scania and M&A could push price up

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Sakorn Sukkasemsakorn

Westport Fuel Systems Inc. (NASDAQ:WPRT) recently reported successful testing of H2 HPDI applications with a well-known corporation. As a result, in my opinion, the demand for the company’s components is likely to increase. I also believe that WPRT has a significant amount of cash, which management could use to make new acquisitions, as well as to improve revenue generation. Putting it all together, my discounted cash flow models reported a valuation that appears more significant than the current market price. In my opinion, WPRT is a action to follow.

Westport Fuel Systems

Westport Fuel Systems is a provider of advanced fuel delivery components including low carbon fuels such as natural gas, propane or hydrogen for the global transportation industry.

I think it’s worth taking a look at WPRT for the new tests announced with scania. company H2HPDI Applications It showed impressive performance with a maximum braking thermal efficiency of 51.5% supplemented by 48.7% under highway load conditions.

Source: Quarterly Presentation

Source: Quarterly Presentation

With that from the recently announced tests with Scania, it is worth mentioning that WPRT has two more projects underway. Successful information on the results of these new projects would probably push the share price higher.

Source: Quarterly Presentation

Source: Quarterly Presentation

Additionally, management recently showed significant optimism regarding the company’s operations in India. In my opinion, further internationalization of the business model is likely to lead to higher revenue growth.

Source: Quarterly Presentation

Source: Quarterly Presentation

Balance sheet: WPRT continues to report a significant amount of cash

As of September 30, 2022, cash was equal to $86 million, with property, plant and equipment valued at $56 million and total assets valued at $392 million. Even considering the decrease in cash and liquidity, WPRT seems to have enough money to do more projects and tests. In my opinion, the balance seems quite stable.

Source: Quarterly Presentation

Source: Quarterly Presentation

WPRT also reports short-term debt worth $8.7 million and long-term debt and royalties payable worth close to $49 million. With these figures, the net debt would be -$29 million.

Source: Quarterly Presentation

Source: Quarterly Presentation

Analysts see double-digit sales growth in 2023 and 2024 along with rising free cash flow

For 2024, analysts expect net sales of $414 million with net sales growth of 15%. In addition to an EBITDA of $17 million with an EBITDA margin of 4.11%, the net profit would be -$0.29 million. Finally, the estimates also include an increase in free cash flow. From 2021 to 2024, the FCF is expected to grow from -$58 million to -$8 million.

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Source: marketscreener.com

Source: marketscreener.com

Source: marketscreener.com

Source: marketscreener.com

More products, more efficiency and emerging markets could drive the fair price to $1.41 per share

Under normal conditions, I believe that WPRT’s diversified portfolio of technology and products will likely generate revenue growth. Also, if management continues to market more products or designs new components, more customers may be interested in the WPRT portfolio. Finally, I also believe that economies of scale would improve WPRT’s FCF margins.

If we include that management intends to unlock new and emerging markets like India, I would expect an increase in the company’s target markets. If we also include an eventual increase in efficiency due to new projects, I think that the demand for WPRT’s products will probably increase.

From 2022 to 2028, the global alternative fuels market size is expected to grow at a CAGR of close to 9.8%. Under normal circumstances, I think WPRT can grow at about the same sales growth.

The global Alternative Fuel market size is estimated to be worth US$118.03 billion in 2022 and a restated size of US$206.48 billion is forecast by 2028 with a CAGR of 9.8% during the forecast period 2022-2028. Font: Alternative fuels market size

With the above figures in mind, I assumed, by 2032, net sales of $836 million with net sales growth of 5%. In addition, I assumed a 2032 EBITDA of $42 million with an EBITDA margin of 5%. Additionally, free cash flow is estimated at $32 million with an FCF margin of 3.8%. I used a beta of 1.61x, which resulted in a cost of equity of 12.90%, an after-tax cost of debt of 7.40%, and a WACC of 10.80%.

Source: Bersit DCF Model

Source: Bersit DCF Model

With EV/EBITDA close to 14x, I had an exit value of $585 million with a total FCF of $617 million in 2032. Note that I am assuming free cash flow of $16 million by 2025 and an FCF of $30 million by 2031. I think my figures are quite realistic in this particular case.

Source: Bersit DCF Model

Source: Bersit DCF Model

The above figures imply an enterprise value of $213 million, an equity valuation of $242 million, and a fair price of $1.41 per share. The internal rate of return would be close to 3%-4%.

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Source: Bersit DCF Model

Source: Bersit DCF Model

my best scenario

I have seen several acquisitions executed by WPRT, so I believe that the management has experience in the M&A markets. With cash on hand, I think the company could see significant inorganic growth, which can be a catalyst for both revenue and free cash flow.

I did some research on the acquisition of Stako, which was done, in my opinion, at an attractive price. Total consideration was close to 0.7x 2021 revenues. I think new acquisitions like Stako will probably generate more interest from investors.

On May 28, 2021, the Company entered into an agreement to acquire all of the issued and outstanding shares of Stako from Worthington Industries Inc. for a total purchase price of $7,130. The transaction was completed on May 30, 2021. Source: annual report

Source: Annual Report

Source: Annual Report

In a best-case scenario, I forecast 2032 net sales of $1,135 million along with net sales growth of 5%, in addition to an EBITDA of $28 million and an EBITDA margin of 2.5%. Free cash flow would be $28 million with a 2.5% FCF margin. Finally, in this case, I used WACC of 5.70%, which is lower than the base case. Keep in mind that better numbers are very likely to generate demand for the stock, which can lower the cost of capital.

Source: Bersit DCF Model

Source: Bersit DCF Model

If we also assume 15x EV/EBITDA, the exit value would be $426 million with a FCF of $454 million. Free cash flow would accelerate slightly more than in the previous case scenario. Free cash flow would grow from $29 million in 2025 to about $38 million in 2031.

Source: Bersit DCF Model

Source: Bersit DCF Model

The above figures imply an enterprise value of about $315 million, an equity valuation of about $345 million, and a fair price of $2 per share. The internal rate of return would remain close to 5.5%.

Source: Bersit DCF Model

Source: Bersit DCF Model

Risks would include failed customer payments

Among the risks that can reduce future free cash flow is the risk of accounts receivable from customers. Management made it clear in the annual report that this risk must be taken seriously. In my opinion, if customers are unable to pay or fail to pay for any reason, WPRT may have to reduce their balance sheet, which may lead to a lower stock valuation.

As of December 31, 2021, 83% of accounts receivable is related to accounts receivable from customers. In order to minimize the risk of loss of accounts receivable from customers, the Company’s extension of credit to customers implies the review and approval by senior management, as well as the progress of payments as they are made. contracts are executed. Source: Annual Report

I also think that supply chain challenges and inflation in semiconductors could reduce the company’s production levels. As a result, investors investing in WPRT are likely to experience lower net income growth and lower free cash flow growth. In short, the stock price will most likely decline.

Although sales orders and production levels for trucks equipped with HPDI 2.0 fuel systems have increased significantly, the risk of production delays due to supply chain challenges remains. Additionally, we are experiencing supply chain challenges and high price inflation in the supply of semiconductors, raw materials and parts for our other OEM and IAM businesses. Source: Annual Report

In the worst case, I see net sales of $564 million and net sales growth of -1.5%, along with EBITDA of $14 million with its EBITDA margin of 2.5%. In addition to free cash flow of $14 million and its FCF margin of 2.5%, I anticipate a WACC of 11.50%.

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Source: Bersit DCF Model

Source: Bersit DCF Model

An EV/EBITDA of $12.5 million is estimated with an exit value of $176 million. My results would also include a total FCF of $190 million in 2032 with an FCF of around $28 million and $20 million.

Source: Bersit DCF Model

Source: Bersit DCF Model

Ultimately, I also got an implied enterprise value of $65.3 million, equity of nearly $95 million, and an implied valuation of $0.55 per share. The internal rate of return would stand at -6%.

Source: Bersit DCF Model

Source: Bersit DCF Model

Put off

WPRT recently reported successful trials with Scania of the company’s H2 HPDI applications. In my opinion, the company may receive more attention in the near future and a higher demand for these particular components. Management also reported a significant amount of liquidity, which could be used to acquire new targets. Considering previous acquisitions, in my opinion WPRT has enough experience in M&A markets to generate inorganic growth. Obviously I see risks from supply chain issues and inflation. However, in my DCF models, WPRT seems underrated.

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