Nextracker Inc. (NXT) has filed to raise $500 million in an IPO of its Class A common stock, according to an amended S-1/A registration statement.

The firm provides solar tracking systems to commercial and utility-scale solar power installations.

NXT has grown revenue, operating profit and cash flow in its most recent reporting period.

Until we learn more about the extent of the reported solar panel technology ban by the Chinese government and its effect on NXT’s trajectory, if any, I’m on Hold for the IPO.

Fremont, California-based Nextracker Inc. was founded in 2013 to develop and sell solar system tracking equipment and related software worldwide.

Management is headed by founder and CEO Dan Shugar, who has been with the firm since its inception in 2013 and was previously CEO of Solaria Corporation, a solar panel manufacturing company.

The company’s primary offerings include:

Design and supply chain services

As of September 30, 2022, Nextracker has booked fair market value investment of $603 million from parent firm of Singapore-based Flex Ltd. and its investor syndicate includes private equity firm TPG.

The company sells its single-axis tracking systems to commercial and utility operators seeking renewable energy sources for their electrification and decarbonization purposes.

Solar energy is the fastest-growing sector within the renewable energy industry as the cost of solar energy production has dropped sharply in the last decade.

Selling, G&A expenses as a percentage of total revenue have trended lower as revenues have increased, as the figures below indicate:

The Selling, G&A efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, rose to 5.2x in the most recent reporting period, as shown in the table below:

According to a 2020 market research report by Fortune Business Insights, the global market for solar trackers was an estimated $9.3 billion in 2019 and is expected to exceed $22 billion by 2027.

This represents a forecast CAGR of 12.6% from 2020 to 2027.

The main drivers for this expected growth are a continued effort by countries to reduce their carbon emissions through increasing renewable energy sources.

Also, recent history has seen a reduction in activity due to the COVID-19 pandemic's effects on supply chains.

However, below is a chart indicating the historical and projected growth rate of the solar tracker market in North America:

North America Solar Tracker Market (Fortune Business Insights)

North America Solar Tracker Market (Fortune Business Insights)

Major competitive or other industry participants include:

The company’s recent financial results can be summarized as follows:

Variable gross profit and gross margin

Fluctuating cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

As of September 30, 2022, Nextracker had $84.2 million in cash and $684.7 million in total liabilities.

Free cash flow during the twelve months ended September 30, 2022, was $65.1 million.

NXT intends to sell 23.3 million shares of Class A common stock at a proposed midpoint price of $21.50 per share for gross proceeds of approximately $500 million, not including the sale of customary underwriter options.

Potentially new shareholders Norges Bank and BlackRock have indicated non-binding interests in purchasing shares of up to a total of $100 million at the IPO price, which if consummated, would represent approximately 20% of the total shares offered.

Class A and Class B common stockholders will be entitled to one vote per share but Class B shareholders will not be entitled to economic rights.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (excluding underwriter options) would approximate $3.1 billion.

The float to outstanding shares ratio (excluding underwriter options) will be approximately 16.14%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:

We will use all of the net proceeds from this offering to purchase 23,255,814 LLC Common Units from Yuma (or 26,744,186 LLC Common Units if the underwriters exercise in full their option to purchase additional shares of Class A common stock) at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discount. We will not retain any of the net proceeds of this offering.

Management’s presentation of the company roadshow is available here until the IPO is completed.

Regarding outstanding legal proceedings, management says there are no legal proceedings against the company that it believes would have a material adverse effect on its financial condition or operations.

The listed bookrunners of the IPO are J.P. Morgan, BofA Securities and several other investment banks.

Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:

Float To Outstanding Shares Ratio

Proposed IPO Midpoint Price per Share

Free Cash Flow Yield Per Share

As a reference, a potential public comparable would be Array Technologies (ARRY); shown below is a comparison of their primary valuation metrics:

(Source - SEC and Seeking Alpha)

NXT is seeking to tap U.S. public capital markets to purchase shareholder interests.

The company’s financials have produced increasing topline revenue, fluctuating gross profit and gross margin, variable operating profit and uneven cash flow from operations.

Free cash flow for the twelve months ended September 30, 2022, was $65.1 million.

Selling, G&A expenses as a percentage of total revenue have fallen as revenue has grown; its Selling, G&A efficiency multiple rose to 5.2x in the most recent six-month period.

The firm currently plans to pay a $175 million dividend prior to the IPO to existing investors but does not foresee paying dividends 'for the foreseeable future' on Class A stock.

NXT’s trailing twelve-month CapEx Ratio was 18.2, which indicates it has spent lightly on capital expenditures as a percentage of its operating cash flow.

The market opportunity for utility-scale solar equipment is large and expected to grow at a double-digit rate of growth in the coming years, so the firm has strong industry growth dynamics in its favor.

J.P. Morgan is the lead underwriter, and IPOs led by the firm over the last 12-month period have generated an average return of 8.9% since their IPO. This is a mid-tier performance for all significant underwriters during the period.

Risks to the company’s outlook as a public company include regulatory changes in the areas in which it operates, potentially reducing government subsidies, and supply chain bottlenecks.

The solar tracking industry is still fragmented and direct competitor FTC Solar has performed poorly since its IPO in April 2021.

As for valuation, compared to competitor Array Technologies, NXT is asking investors to pay much lower multiples to its enterprise value/revenue and EV/EBITDA metrics.

Given the firm’s lower revenue growth rate, this isn’t surprising. However, NXT has generated higher earnings than Array.

The problem NXT now faces is the recently reported ban on certain solar panel technologies by the Chinese government, which could potentially hamper the firm’s future growth by reducing solar panel availability among its customers.

While the IPO appears reasonably priced, the apparent Chinese ban on certain solar panel technologies could be a risk to the company’s outlook.

Until we learn more about the extent of the solar panel technology ban by the Chinese government and its effect on NXT’s trajectory, if any, I’m on Hold for the IPO.

Expected IPO Pricing Date: February 9, 2023.

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